Case Law Details

Case Name : Havells India Ltd vs ACIT (ITAT Delhi)
Appeal Number : ITA No. 4695/DEL/2012
Date of Judgement/Order : 10/11/2020
Related Assessment Year : 2008-09

Havells India Ltd vs ACIT (ITAT Delhi)

Facts of the case

  • The appellant company is engaged in the business of manufacturing of switchgears, energy meters, cables & wires, electrical fans, compact fluorescent lamp and related components and trading luminaries, lighting fixtures and exhaust
  • During the Financial Year (FY) 2007-08, corresponding to Assessment Year (AY) 2008-09, the taxpayer (amongst others) had invested in the shares of one its overseas subsidiary company. Some of the shares were redeemed at par in the same year e. FY 2007-08.

The taxpayer had realized foreign exchange gain on redemption of shares in the said foreign subsidiary. Since the gain was not on account of increase in value of the shares, as shares were redeemed at par value, but merely on account of repatriation of proceeds received on exchange fluctuation , the appellant company treated the gain as capital receipt, not eligible to tax in the income-tax return for the relevant AY 2008-09.

  • During assessment proceedings, the Assessing Officer (AO) held that since the gain arose  on sale or redemption of shares, the same was taxable as capital gains in terms of section 45 of the Income-tax Act, 1961 (ITA).
  • In appeal before CIT(A), the CIT(A) confirmed the addition made by the Assessing Officer.
  • In appeal proceedings, the matter reached the Delhi Bench of the Income-tax Appellate Tribunal (ITAT).

Decision of the ITAT:

The ITAT observed the following:

– It was an undisputed fact that investment made by the taxpayer in shares of its overseas subsidiary was made in Euro and redemption of such shares were also made in Euro. Thus, actual profit or loss on sale / redemption of such shares were to be computed in Euro only and thereafter, converted to INR for the purposes of Section 45 of the Income Tax Act.

– In other words, the cost of acquisition of shares and consideration received thereon was to be considered in Euro and the resultant gain / loss thereon was thereafter to be converted into INR at the prevailing market (refer Rule 115 of Income Tax Rules, 1962).

– In the present case, the net gain / loss on redemption of shares was Nil, since the shares were redeemed at par value and thereby there was no capital gains taxable under section 45 of the Income Tax Act, 1961.

– As per section 45 of the Income Tax Act, 1961 for taxation of any profits or gains arising from the transfer of a capital asset, only gains accruing as a result of transfer of the asset could be taxed. In the present case, there was no ‘gain’ on transfer / redemption of the shares in so far as the shares were redeemed at par

– The said contention was supported by Rule 115 of the Income Tax Rules, 1962 , as per which capital gain in rupee was determined as being equal to capital gain in foreign currency (which in the present case was Nil) x applicable rate of exchange = Nil. In the present case, since capital gains in Euro was Nil, the resultant gain in Indian Rupees was

– The exchange gain was only a consequence of repatriation of the consideration received in Euro to INR and could not be construed to be part of consideration received on redemption of

In view of the above, the ITAT held that section 45 of the Income Tax Act, 1961 did not apply in the facts stated above.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the assessee against the order dated 03/07/2012 passed by the CIT(A)-LTU, New Delhi for Assessment Year 2008-09.

2. The grounds of appeal are as under:-

“1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in affirming the disallowance of Rs.5,68,856 under section 40(a)(i) of the Income-tax Act, 1961 (‘the Act’) paid to a foreign entity as testing /certification fees outside India.

1.1 That the Commissioner of Income-tax (Appeals) failed to appreciate that testing/ certification fees paid outside India was not chargeable to tax under the provisions of the Act read with the overriding provisions of the applicable DTAA and therefore, there was no default in not deducting tax at source.

1.2 Without prejudice, that the Commissioner of Income-tax (Appeals) further failed to appreciate that disallowance under section 40(a)(ia) of the Act was, in any case, not warranted, since: (a) no amount was payable as on the last date of the previous year; and (b) non-deduction of tax was on account of bona fide view taken by the appellant.

2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not only confirming but also enhancing the disallowance of provision made for sales incentive in respect of “Shahenshah Sales Incentive Scheme”.

2.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the provision made by the appellant under the aforesaid scheme was not being made on a scientific or logical basis and therefore, the entire provision, is not allowable as deduction.

2.2 That the Commissioner of Income-tax (Appeals) erred on facts and in law in restricting the amount of provision allowable as deduction to the extent of 15% on an “ad-hoc” basis and in consequently, enhancing the amount of disallowance by Rs. 29,56,344.

2.3  That the Commissioner of Income-tax (Appeals) exceeded his jurisdiction in enhancing the disallowance of provision, that too, without issue notice of enhancement under section 251 of the Act.

2.4 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not following the binding decisions of the CIT(A) in the appellant’s own case for the earlier assessment years 2006-07 and 2007-08, in gross violation of principles of judicial discipline.

2.5 Without prejudice, that the assessing officer may be directed to allow deduction under section 80IC of the Act on the amount disallowed and added to the taxable income of the appellant.

3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in affirming the action of the assessing officer in reducing adjusted/ absorbed losses of the earlier » year(s) in respect of Baddi Unit-2 and Haridwar Unit against the eligible profits of those units, on a notional basis, while computing and allowing deduction under section 80IC of the Act.

3.1That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the losses of the earlier year(s) in respect of Baddi Unit-2 and Haridwar Unit had already been set off against profits/ income of the other unit(s)/ businesses and, therefore, no part of losses remained to be set off against the profits of the eligible units.

4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding the foreign exchange gain of Rs. 2,55,82,186 realized on remittance of amount received on redemption of shares in a foreign subsidiary (i.e. M/s. Havells Holding Limited) as taxable “income” as against the appellants claim to treat the same as capital receipt not liable to tax.

4.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not appreciating that the foreign exchange gain of Rs. 2,55,82,186 arose on account of remittance of a capital account transaction and consequently, the said gain was a capital receipt not liable to tax.

5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not directing the assessing officer to allow deduction of education cess and secondary higher education cess of Rs.54,21,514.

5.1. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not adjudicating the claim of allowance of deduction of Rs.54,21,514 on the ground that the claim was not made by filing a revised return, without appreciating that the embargo/ prohibition contained in the case of Goetze India Limited: 284 ITR 323 (SC) do not apply to the powers of the appellate authority to entertain any fresh/ new claim.

6. That the Commissioner of Income-tax (Appeals) erred on facts and in law in not directing the assessing officer to allow deduction of excess provision of bad debts written back of Rs. 2,58,164.

6.1 That the Commissioner of Income-tax (Appeals) erred on facts and in law in not adjudicating the aforesaid claim on the ground that the claim was not made by filing a revised return, without appreciating that:

(a) the decision in the case of Goetze India Limited: 284 ITR 323 (SC) had no application in case of mere enhancement of a claim of deduction; and

(b)0 the embargo/ prohibition contained in the aforesaid case do not apply to the powers of the appellate authority to entertain any fresh/ new claim. “

3. The assessee company is engaged in the business of manufacturing of switchgears, energy meters, cables & wires, Electrical fans, compact fluorescent lamp and related components and trading luminaries lighting fixtures and exhaust fans. The assessee filed e-return declaring an income of Rs. 50,72,33,272/- on 28/08/2008. Subsequently, a revised return was also filed by the assessee company declaring an income of Rs. 43,97,77,650/- on 30/09/2009. After issuance of notice u/s 143(2) of the Income Tax Act dated 4/8/2009, the Assessing Officer assessed the assessee’s income at Rs. 55,84,6,968/- after making following additions/disallowance:

S. No. Particulars Amount (in Rs.)
1 Disallowance u/s 40(a)(i) 5,68,856
2 Disallowances of Provision for Shahenshah Scheme 3,96,91,355
3 Disallowance of Claim of Deduction u/s 80IC 4,68,23,426
4 Disallowance of Exchange Gain/losses 3,99,821
5 Disallowance Pre-operative Expenses 55,63,674
6 Foreign Exchange Gain taxed as STCG 2,55,82,186

2. Being aggrieved by the assessment order, the assessee filed appeal before the CIT(A). The CIT(A) partly allowed the appeal of the assessee.

3. As regards Ground No. 1, 1.1 and 1.2 relating to addition of Rs.5,68,856/- u/s 40 (a) (i) paid to foreign entity as treaty/certification fees outside India. The Ld. AR submitted that during the previous year’s relating to the Assessment Year 2008-09, the assessee paid levy and certificate charges aggregating to Rs.5,68,856/- to M/s KEMA Quality BV, Netherlands for the purpose of certification of electrical products manufactured by the assessee. The aforesaid foreign entity was authorized for certification of products for export which is a mandatory requirement for selling products in Europe, Middle East Countries, and South African Countries. The assessee did not withhold tax at source on the aforesaid payment of Rs.5,68,856/- made to the overseas entity, since the assessee bonafidely believed that such certification fee was not liable to tax in India. The Ld. AR submitted that the aforesaid issue stands covered in favour of the assessee by the order of the Tribunal passed in the assessee’s own case for Assessment Year 2006-07 (ITA No. 4813/Del/2010) & Assessment Year 2007-08 (ITA No. 6073/Del/2010) vide order dated 30/09/2019.

4. The Ld. DR relied upon the assessment order and the order the CIT(A).

5. We have heard both the parties and perused the material available on record. It is pertinent to note that in A.Y. 2007-08, the assessee paid levy and certificate charges aggregating to Rs.5,68,856/- to M/s KEMA Quality BV, Netherland for the purpose of certification of electrical products manufactured by the assessee. The aforesaid foreign entity was authorized for certification of products for export which is a mandatory requirement for selling products in Europe, Middle East Countries, and South African Countries. The explanation given by the assessee before the Assessing Officer for not withhold tax at source on the aforesaid payment of Rs.5,68,856/- made to the overseas entity, since the assessee bonafidely believed that such certification fee was not liable to tax in India, as the same was not covered within the meaning of “ Fee for Technical Services” as provided u/s 9(1) (vii) of the Act and/or the overriding provisions of the Double Taxation Avoidance Agreements. The aforesaid issue stands covered in favour of the assessee by the order of the Tribunal passed in the assessee’s own case for Assessment Year 2006-07 (ITA No. 4813/Del/2010 & Assessment Year 2007-08 being ITA No. 6073/Del/2010). The Tribunal vide order dated 30/09/2019 passed in Assessment Year 2006-07 held that the payment made by the assessee to very same party i.e. M/s KEMA Quality BV Netherland cannot be brought to tax in India as “Fees for Technical Services” in accordance with India Netherland DTAA. In the present Assessment Year also the facts remain identical. Thus, the issue is squarely covered in assessee’s own case for Assessment Year 2006-07 & 2007-08 vide order dated 30/09/2019 passed by this Tribunal. Hence, Ground No. 1, 1.1, 1.2 are allowed.

6. As regards Ground No.2, relating to enhancing the disallowance provisions made for sales incentive in respect of Shahenshah Sales Incentive Scheme, the Ld. AR submitted that during the previous year relating to the Assessment Year 2008-09, the assessee made a provisions of Rs. 5,01,73,763/- in respect of Shahenshah Scheme towards Sales Incentives payable to its dealers and distributors. The said scheme was introduced to promote sales and ensure timely collection of payments from its customers. Out of the provisions made till date payment of Rs.1,04,82,408/- was made by the assessee during the Assessment Year under consideration. The Assessing Officer held that the provision made by the assessee is in nature of contingent liability and disallowed a sum of Rs. 3,96,91,355/-, being the difference between amount of provision created and actual payment made in making the aforesaid disallowance, the Assessing Officer stated that the provision made was without any scientific and logical basis. Further the Assessing Officer also observed that there was no right visited in the recipient and in future also visiting of right the contingent. The CIT(A) held that the provision made by the assessee under the aforesaid scheme was not being made on scientific and logical basis and, therefore, restricted the amount of provision allowable as deduction at Rs. 75,26,641/- being 15% of the total provision claim by the assessee on ad-hoc basis and disallowed the balance provisions of Rs.4, 26,47,699/-. In doing so, the CIT(A) not only confirmed the disallowance of Rs. 3,96,91,355/- made by the Assessing Officer but also enhanced the income of the assessee by Rs.29,56,344/- without issuing the notice of enhancement u/s 251 of the Act. The Ld. AR submitted that the aforesaid issue now stands covered in favour of the assessee by the order of the Tribunal in asseesse’s own case for Assessment Year 2006-07 & 2007-08 (being ITA No. 5530/Del/2010 and ITA No. 466/Del/2011 order dated 30/09/2019). The Tribunal held that the provision made by the assessee in respect of Shahenshah Scheme was on a scientific basis and, therefore, allowable deduction.

7. The Ld. DR relied upon the assessment order and the order of the CIT(A).

8. We have heard both the parties and perused the material available on record. It is pertinent to note that during the previous year Assessment Year 2007-08, the assessee made a provisions of Rs. 5,01,73,763/- in respect of Shahenshah Scheme towards Sales Incentives payable to its dealers and distributors. The said scheme was introduced to promote sales and ensure timely collection of payments from its customers. Out of the provisions made till date payment of Rs.1,04,82,408/- was made by the assessee during the Assessment Year under consideration. The Tribunal in A.Y. 2007-08 held that the provision made by the assessee in respect of Shahenshah Scheme was on a scientific basis and, therefore, allowable deduction. The facts in the present assessment year is identical, thus the issue is squarely covered in assessee’s own case for Assessment Year 2007-08. Besides this, the CIT(A) enhanced the addition without giving show cause notice and hearing to the assessee which is unjust and improper on part of the CIT(A). Hence, Ground No. 2, 2.1, 2.2, 2.3, 2.4, 2.5 are allowed.

9. As regards to Ground Nos.3 and 3.1 which are relating to losses of earlier years in respect of Baddi Unit and (ii) Haridwar Unit, the same was not allowed to be set off against profits/income of the other units/business and, therefore, no part of losses remain to be set off against the profits of the eligible units as per the contention of the Ld. AR. The Ld. AR submitted that the assessee had set-up two units at Baddi and Haridwar, which were eligible for deduction under Section 80-IC of the Act. Baddi Unit No. 1 which was set up w.e.f. 21.12.2004 for the manufacture of CFL and switchgear items and Baddi Unit No. 2 was set up with effect from 24.11.2006 which is 100% Export Oriented Undertaking (EOU) for the manufacture of Miniature Circuit Breaker (MCB)/Residual Current Curcuit (RCCB) and Residual Current Breakers with overloaded protection. Haridwar Unit was set up w.e.f. 17.10.2005 for the manufacture of fans, CFL and luminaires. In the assessment years 2006-07 and 2007-08, despite the fact that Baddi Unit-2 and Haridwar Unit were eligible for deduction under Section 80-IC of the Act, since the said unit suffered losses, no deduction was claimed in the return of income. The Ld. AR submitted that the said losses were completely set off by assessee with the taxable income for the respective assessment years and accordingly, no loss was left to be carried forward to future assessment years, including the relevant Assessment Year. The quantum of losses for the said Assessment Years was as under:-

Assessment Year Baddi Unit -I Baddi Unit -2 Haridwar
2005-06 Rs.10,02,00,466 Not Started Not Started
2006-07 Rs.32,17,95,487 Not Started (Rs. 74,70,681)
2007-08 Rs.65,04,50,969 (Rs.44,88,013) (Rs.3,75,70,429)
2008-09 Rs.77,13,11,134 Rs.9,60,51,074 Rs.14,76,48,913
Total Rs.1,84,37,58,056 Rs.9,15,63,061 Rs.10,26,07,803

For the Assessment Year under consideration (i.e. Assessment Year 2008-09), the assessee in the revised return of Income claimed deduction u/s 80IC of the Act in respect of following units:

Unit No. 1, Baddi: Rs.77,13,11,135
Unit No. 2, Baddi: Rs.9,60,51,073
Haridwar Unit : Rs.14,76,48,913

Deduction claimed Rs.101,50,11,121

The deduction so claimed under Section 80-IC of the Act was duly supported by audit report in prescribed Form No.10CCB filed along with the return of income. The Ld. AR submitted that the Assessing Officer, merely relied on the decision of ACIT vs. Goldmine Shares & Finance (P) Limited 302 ITR 208 (Ahemdabad) (SB) and without appreciating the facts of the case and correct position in law, held that in terms of section 80-IA(5) of the Act, losses of eligible undertakings viz., Baddi Unit-2 and Haridwar Unit, relating to earlier assessment years 2006-07 and 2007-08 was required to be set off on a notional basis, against profits of the said unit(s) in assessment year 2008-09 in order to determine the amount of deduction that the assessee is eligible to claim under Section 80IC of the Act. On this account, the Assessing Officer educed the claim of deduction made by the assessee under Section 80IC of the Act by Rs.4,67,99,123 by making the following adjustments:

Particulars Amount (in Rs.)
Loss at Haridwaar  Unit pertaining to Assessment Year 2006-07 (Notional) Rs. 3,75,70,429
Loss at Haridwar Unit pertaining to Assessment Year 2007-08 (Notional) Rs. 74,70,681
Total Loss at Haridwar Unit Rs.4,50,41,110
Losa at Baddi (EOU) Unit pertaining to A.Y 2007-08 (Notional) Rs. 44,88,013
Total loss t be adjusted in current year Rs. 4,95,29,123
Less: Deduction u/s 80IC wrongly adjusted with the claim u/s 35AC (Rs. 5,00,000)
Less:- Deduction under section 80IC wrongly adjusted with the claim under section 80G (Rs.22,30,000)
Net loss adjusted by A.O with current year profits (Rs.4,67,99,123)

On appeal, the CIT(A) confirmed the action of the Assessing Officer in adjusting the losses of earlier assessment years pertaining to Baddi Unit and Haridwar Unit while computing deduction under section 80-IC of the Act in the year under consideration. The Ld. AR submitted that the aforesaid action of the Assessing Officer/CIT(A) is not based on judicious appreciation of facts and position in law. The Ld. AR submitted that no deduction under Section 80-IC of the Act was claimed in respect of Baddi Unit-2 and Haridwar Unit in Assessment Year(s) 2006-07 and 2007-08 and deduction was claimed for very first time in Assessment Year 2008-09. Most importantly, the loss of earlier Assessment Year(s) 2006-07 and 2007-08, pertaining to the eligible unit(s) viz., Baddi Unit-2 and Haridwar Unit, stood actually set off against profits of non-eligible unit(s) of the assessee-company in the respective year(s) as under:-

Assessment Year Baddi Unit -I Baddi Unit -2 (EOU) Haridwar Other Units     Gross Total Income
2005-06 Rs.10,02,00,466 Not started Not started Rs.26,33,28,245 Rs.36,35,28,711
2006-07 Rs.32,17,95,487       Not started (Rs.74,70,681) Rs.36,62,56,010 Rs.68,05,80,816
2007-08 Rs.65,04,50,969 (Rs.44,88,013) (Rs.3,75,70,429) Rs.46,66,04,234 Rs.107,49,96,761
2008-09 Rs.77,13,11,134 Rs.9,60,51,074 Rs.14,76,48,913 Rs.44,25,07,648 Rs.145,75,18,769

The Ld. AR further pointed out that the entire loss was set off against profits of non-eligible units and there was no loss that was actually carried forward to Assessment Year 2008-09. The Ld. AR further submitted that the Assessing Officer has set-off notional losses of earlier years, for the purpose of computing deduction under Section 80-IC of the Act, which is legally unsustainable. Section 80-IC(7) states that provisions contained in sub-section (5) and sub­sections (7) to (12) of section 80-IA of the Act shall apply to the eligible undertaking or enterprise claiming deduction under section 80IC of the Act. The Ld. AR submitted that sub-section (5) to Section 80IC, provides that the eligible unit claiming deduction under section 80-IA of the Act would be treated as a separate source of income and deduction has to be allowed only vis-à-vis profits derived from the eligible unit unaffected by the profits/losses of other units owned by the assessee. The Ld. AR submitted that the Assessing Officer/CIT(A), in the present case, has grossly misconstrued the application of the aforesaid provisions of sub-section (5) of section 80IA of the Act. The aforesaid provisions do not provide that the losses/ depreciation of the eligible unit relating to any earlier assessment year(s) which are already absorbed against profits of other units/ other incomes in the respective year(s) should once again be notionally brought forward and adjusted against the profits of the current assessment year for computing deduction allowable u/s 80IC of the Act. The Ld. AR submitted that the effect of the deeming fiction enabled in the provisions of section 80IA(5) of the Act are that it seeks to set at rest long standing controversy, i.e., whether for computing deduction losses incurred in one eligible unit is required to be set-off against the profits of the other eligible undertaking or not. The Ld. AR pointed out that the aforesaid controversy came up for consideration before the Hon’ble Apex Court in case of CIT vs. Canara Workshops Pvt. Ltd 161 ITR 320. In that case, the Court held that in computing the profits for the purpose of deduction under section 80-E of the Act, the losses incurred by the assessee in a priority industry could not be set­off against the profits of another priority industry. The Court also referred with approval the decision of the Hon’ble Calcutta High Court in case of CIT vs. Bellis & Corcom (I) Ltd. 136 ITR 481 delivered in the context of Section 80-I of the Act wherein it was held that it is not permissible to compute the profits of the priority industry in respect of which the relief is claimed by taking into account the depreciation losses from other industries. The aforesaid provisions of sub-section (5) of Section 80-IA merely give legislative sanction/ statutory recognition to the stand taken by the assessee and subsequently approved by the Hon’ble Apex Court in case of Canara Workshops (supra) to avoid any unnecessary controversy/ debate on the issue. The said sub-section (5) of Section 80-IA of the Act, thus, gave legislative sanction/ approval to the stand taken by the assessee that profits of the eligible undertaking need not be set off against loss suffered in any other unit for computing allowable deduction. The aforesaid sub-section, provides that the eligible unit claiming deduction under Section 80-IA of the Act would be treated as a separate source of income and deduction has to be allowed only vis-à-vis profits derived from the eligible unit unaffected by the profits/losses of other units owned by the assessee. The manner of computation of deduction allowable under similar provisions of Section 80HH/ 80I of the Act had been explained with a hypothetical example by the Hon’ble Bombay High Court in CIT V. Nima Specific Family Trust 248 ITR 29. Referring to sub-section (6) of Section 80I of the Act [corresponding to sub-section (5) of Section 80IA of the Act] the Bombay High Court in the case of Synco Industries Limited V.AO: 254 ITR 608 observed that the said sub-section only requires that for computing allowable deduction losses of one division be ignored. In that case, the assessee claimed deductions under Section 80HH and Section 80-I of the Act in respect of two divisions. The assessee earned profits from the chemical division and losses in the oil division during the year. The Assessing Officer, rejected the claim of the assessee on the ground that the gross total income of the assessee, before deductions under Chapter VI-A, was “nil” and, therefore the assessee was not entitled to the benefit of deductions under Sections 80HH and 80-I of the Act. The assessee, however, contended that since for the purposes of Section 80-I each unit has got to be treated separately, in view of the deeming fiction in sub-section (6) thereof, the loss suffered by the oil division could not be adjusted against the profits of the chemical division. The assessee relied upon Section 80I(6) of the Act to contend that since the profits of an industrial undertaking were required to be computed as if such industrial undertaking was the only source of income, the profits of the chemical division were required to be treated as the only source of income. It was further contended that since sub-section (6) starts with a non obstante clause, the provisions of Section 80A(2) and Section 80B(5) could not be read while giving effect to the said provisions. Construing the provisions of sub-section (6) of Section 80I of the Act, the Hon’ble High Court observed that the said sub-section merely requires that the profits of the eligible undertaking alone are to be taken into account and losses of other eligible undertaking(s) are to be ignored. The Hon’ble High Court held that the fiction in Section 80I(6) of the Act only requires that for computing allowable deduction, losses of one division be ignored. The aforesaid decision has been confirmed by the Hon’ble Supreme Court in the case of Synco Industries Limited 299 ITR 444. The provisions of sub-section (5) of Section 80-IA of the Act, primarily seeks to provide that the eligible unit would be treated as a separate source of income, in order to settle the controversy and put the matter beyond doubt that the deduction has to be allowed only vis-à-vis profits derived from the eligible unit unaffected by the profits/losses of other units owned by an assessee. Sub­section (5) provides that for computing deduction under Section 80IA of the Act, profits of the eligible undertaking is to be taken on a stand-alone basis without being affected by losses of the other unit(s). The said sub-section cannot be read to restrict the claim of deduction under Section 80-IA/IB of the Act by notionally bringing forward the losses of earlier years of the eligible undertaking, which have already been set off against profits of other units in earlier years. Such an interpretation would be contrary to the provisions of Sections 70, 71 and 72 and inconsistent with the scheme of the Act. Had the intention of the Legislature been otherwise, viz., to require notional adjustment of already absorbed losses, the sub-section (5) of Section 80-IA would have read differently. The Ld. AR submitted that the provisions of Section 80-IA(5) of the Act do not override the entire scheme of assessment of income of an assessee under the provisions of the Act. The non-obstante clause contained in sub-section (5) of Section 80-IA of the Act has a very limited role/ application, insofar as its scope is restricted only to the purpose of determining the quantum of deduction under that section. Sub-section (5) of Section 80-IA does not override the provisions relating to set off and carry forward losses as contained in Chapter VI (including Sections 70,71 and 72) and also Section 32(2) relating to set off of unabsorbed depreciation. The aforesaid view is fortified by the following observations of the Hon’ble Bombay High Court in the case of Synco Industries (supra). On perusal of the aforesaid, the Ld. AR pointed out that the Hon’ble High Court observed that the non-obstante clause in sub-section (6) of Section 80I has limited application and does not override Section 80A of the Act. Similarly, the Ld. AR submitted that the non-obstante clause in sub-section (5) of Section 80IA has limited application and does not override the provisions relating to intra head/ inter head set off as also set off of unabsorbed losses/ deprecation to bring an altogether new concept of notional carrying forward of absorbed losses/ depreciation. The Ld. AR vehemently reiterated that set off of unabsorbed losses are governed by Chapter VI of the Act. Once in accordance with the said provisions unabsorbed losses are set off against any income, under the provisions of the Act there is no provision for notionally carrying forward such losses, which stand absorbed.

The Ld. AR submitted that there is no provision whatsoever for once again notionally bringing forward the already absorbed losses/depreciation for setting off the same against the profits of the eligible undertaking for computing deduction under Section 80-IA of the Act. The Ld. AR pointed out that in the earlier assessment years, viz., Assessment Years 2006-07 and 2007-08, the assessee had, in view of negative income (losses) opted out of the provisions of Section 80-IC of the Act in respect of Baddi Unit 2 and Haridwar Unit and thus, exercised the option of being governed by the normal provisions. Being so, the benefit of provisions of section 80-IC of the Act were not actually availed by the assessee in the earlier years and therefore, the losses for the said two assessment years, for which the assessee opted out of the provisions, could not be brought forward, that too, on a notional basis, for setting off against the eligible profits for the year under consideration. The Ld. AR relied upon the decision of Hon’ble Karnataka High Court in the case of CIT vs. Sh. Anil H. Lad 45 taxmann.com 98 wherein the assessee was engaged in the business of operating windmills. During the Assessment Year 2008-09, the assessee claimed deduction under Section 80-IA of the Act in respect of profits derived from a windmill which had become operational during Financial Year 2005-06. During Assessment Years 2006-07 and 2007-08, the assessee had incurred a loss from operation of the said windmill which had been adjusted against income from other business activities. The Assessing Officer denied deduction under Section 80-IA on the basis that, in view of the provisions of Section 80-IA(5) of the Act, the loss and depreciation for earlier years had to be notionally brought forward and set off against profits of eligible business in the relevant assessment year. On appeal, the CIT(A) upheld the order of the Assessing Officer on the basis that there needed to be a notional set off of preceding year’s unabsorbed depreciation and losses against the profits of eligible business. On further appeal, the Tribunal held that where depreciation and loss of earlier assessment years had already been set off against other business income of those assessment years, there was no need for notionally carrying forward and setting off the said depreciation and loss in computing the quantum of deduction under Section 80-IA in the relevant assessment year. On further appeal, the Hon’ble High Court upheld the order of the Tribunal and held that, for the purpose of determining quantum of deduction under Section 80-IA of the Act in the assessment year in which assessee put forth the claim, revenue authorities cannot take into consideration loss and depreciation from eligible business of earlier assessment years which were already set-off against income of assessee from other business activities in such assessment years. The Hon’ble Rajasthan High Court in case of CIT vs. Mewar Oil & General Mills Ltd. 271 ITR 311, while considering identical issue, observed that losses of earlier years already set off against income of previous year should not be reopened again for computing deduction under Section 80I of the Act. Thus, the Ld. AR submitted that the action of the Assessing Officer/CIT(A) in reducing the amount of deduction claimed by assessee under Section 80-IC of the Act in respect of Baddi Unit-II and Haridwar Unit, by notionally bringing forward losses already set off against income of preceding assessment years, is legally unsustainable and calls for being deleted.

10. The Ld. DR relied upon the assessment order and the order of the CIT(A).

11. We have heard both the parties and perused the material available on record. It is pertinent to note that no deduction under Section 80-IC of the Act was claimed in respect of Baddi Unit-2 and Haridwar Unit in Assessment Year(s) 2006-07 and 2007-08 and deduction was claimed for very first time in Assessment Year 2008-09. Most importantly, the loss of earlier Assessment Year(s) 2006-07 and 2007-08, pertaining to the eligible unit(s) viz., Baddi Unit-2 and Haridwar Unit, stood actually set off against profits of non-eligible unit(s) of the assessee-company in the respective year(s). The entire loss was set off against profits of non-eligible units and there was no loss that was actually carried forward to Assessment Year 2008-09. But the Assessing Officer set-off notional losses of earlier years, for the purpose of computing deduction under Section 80-IC of the Act. As per sub-section (5) to Section 80IC which provides  that the eligible unit claiming deduction under Section 80-IA of the Act would be treated as a separate source of income and deduction has to be allowed only vis-à-vis profits derived from the eligible unit unaffected by the profits/losses of other units owned by the assessee. Thus, the losses of earlier years already set off against income of previous year should not be reopened again for computing deduction under Section 80IC of the Act. The case laws relied by the Ld. AR laid down the same principle and thus, applicable in the present case as well. The Ld. DR could not controvert the fact that the entire loss was set off against profits of non-eligible units and there was no loss that was actually carried forward to Assessment Year 2008-09. Thus, the Assessing Officer was not correct in setting off notional losses of earlier years, for the purpose of computing deduction under Section 80-IC of the Act. Therefore, Ground No. 3 and 3.1 are allowed.

12. As regards Ground Nos. 4 and 4.1, relating to the foreign exchange gain of Rs. 2,55,82,186/- realized on remittance of amount received on redemption of shares in foreing subsidiary i.e. M/s Havells Holding Ltd. as taxable incoem as against the asesses’s claim to treat the same as capital receipt not liable to tax. The Ld. AR submitted that the assessee had, during the relevant assessment year 2008-09, invested in 3,55,22,067 shares of one of its subsidiary company ‘M/s. Havells Holdings Ltd’, out of which 1,54,23,053 shares were redeemed at par value in the same year. The Ld. AR submitted that since the gain was not on account of increase in value of the shares, as shares were redeemed at par value, but merely on account of repatriation of proceeds received on exchange fluctuation, such gain was treated as capital receipt, not eligible to tax in the return of income filed for the relevant Assessment Year 2008-09. The Assessing Officer held that assessee had purchased shares in a foreign company for which purchase consideration was remitted from India and further on redemption, the sale/ redemption proceeds so received in foreign currency were remitted back to India which resulted in gain. Since the gain arose on sale or redemption of shares, the same was taxable as capital gains in terms of Section 45 of the Act. On appeal, the CIT(A) confirmed the addition made by the Assessing Officer and held that investment was made by the assessee out of commercial expediency as the assessee has deep interest in its immediate subsidiary which in turn made investments in other subsidiaries in order to increase the market share both in terms of production and expanded customer base and therefore, the income would be taxable. Further, the CIT(A) also relied upon the decision of the Hon’ble Supreme Court in the case of S.A Builders vs. CIT 288 ITR 1 to draw an inference that when the investments are made out of commercial expediency, expenses incurred are allowed as revenue deduction, in the similar manner, any gains earned on such investments will also be taxable. The Ld. AR submitted that in the present case, it is undisputed fact that investment made by the assessee in shares of ‘M/s. Havells Holdings Ltd’ was made in Euro and redemption of such shares were also made in Euro. Thus, actual profit or loss on sale/redemption of such shares have to necessarily be computed in Euro only and thereafter, converted to INR for the purposes of Section 45 of the Act. In other words, the cost of acquisition of shares and consideration received thereon should necessarily be considered in Euro and the resultant gain/loss thereon should thereafter be converted into INR at the prevailing market rate. In the present case, the net gain/loss on redemption of shares was Nil since the shares were redeemed at par value and thereby there was no capital gains taxable under Section 45 of the Act. The Ld. AR submitted that Section 45 of the Act provides for taxation of any profits or gains arising from the transfer of a capital asset. Thus, what is sought to be taxed under the said section is only gains accruing as a result of transfer of the asset and nothing more. In the present case, as stated above, there was no “gain” on transfer/redemption of the shares in so far as the shares were redeemed at par value. Thus, there was no gain which accrued to the assessee as a result of redemption of such shares, since the shares were redeemed at par value. The Ld. AR submitted that the said contention is supported by Rule 115 of the Income Tax Rules, which provides the rate of exchange for conversion of income expressed in foreign currency. Clause (f) of Explanation(2) to Rule 115(1) clearly provides that “in respect of the income chargeable under the head “capital gains………… ” rate of exchanges is to be applied. To put it simply, capital gain in rupee is determined as = Capital gain in $/ GBP X applicable rate of exchange as per Rule 115 = NIL (in present case) X Rate = NIL

In the present case, since capital gains in GBP/ Euro was NIL, the resultant gain in Indian Rupees is NIL. The Ld. AR submitted that gain arose to the assessee on account of repatriation of foreign currency to India, which is an event separate and distinct from the event of transfer of shares of the subsidiary company. The exchange gain of Rs.2,55,82,186/- was only a consequence of repatriation of the consideration received in Euro to INR and cannot be construed to be part of consideration received on redemption of shares. The Ld. AR submitted that it is trite law that every receipt is not income. The Ld. AR relied upon the following decisions:

i) CIT vs. Shaw Wallace and Company: 2 Comp Cases 276 (SC)

ii) Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC)

iii) Cadell Weaving Mills Company Ltd vs. CIT 249 ITR 266 (Bom) [affirmed by SC in 273 ITR 1]

The Ld. AR further submitted that the nature of the foreign exchange gain shall depend upon the nature of the transaction – if the transaction of remittance is for revenue account purpose, then, exchange gain/ loss shall be revenue income/ gain, whereas if the transaction of remittance is for a capital account purpose, then, the gain/ loss is on a capital account. The Ld. AR relied upon the decision of the Hon’ble Supreme Court in case of CIT vs. Tata Locomotive and Engineering Co. Ltd. [1966] 60 ITR 405 (SC) wherein it was held that foreign exchange gain on capital account is not taxable under the Act. In that case, the assessee was carrying on business of locomotive boilers and locomotives. The assessee had, for the purpose of its manufacturing activity, to purchase plant and machinery from United States. The assessee appointed Tata Inc., New York, a company incorporated in the United States as its purchasing agent in the United States. With the sanction of the exchange control authorities, the assessee remitted a sum of $ 33,850 to Tata Inc., New York, for the purpose of purchasing capital goods and meeting other expenses. The assessee was also the selling agent of Baldwin Locomotive Works of United States for sale of their products in India and in connection with this work, the assessee incurred expenses on their behalf in India. These expenses were reimbursed to the assessee in United States by paying the amount to Tata Inc., New York. The assessee also earned a commission of $ 36,123 as selling agent of Baldwin Locomotive Works and this amount received as commission was taxed in the hands of the assessee in the relevant assessment year on accrual basis, after being converted into INR according to the then prevailing rate of exchange, and tax was paid on it by the assessee. The amounts paid by Baldwin Locomotive Works by way of reimbursement of expenses and by way of commission were not remitted by the assessee to India but were retained with Tata Inc., New York, for purchase of capital goods with the sanction of the exchange control authorities. There was balance of $ 48,572.30 in the assessee’s account with Tata Inc., New York, on 16th September, 1949, when, on devaluation of the rupee, the rate of exchange which was Rs.3.330 per dollar shot up to Rs.4.775 per dollar. Consequently, the assessee found it more expensive to buy American goods and the Government of India also imposed some restrictions on imports from United States. The assessee, therefore, with the permission of the Reserve Bank of India, repatriated $ 49,500 to India. The repatriation of this amount at the altered rate of exchange gave rise to surplus of Rs.70,147. The surplus of Rs.70,147, which was attributable to $ 36,123 received as commission from Baldwin Locomotive Works, was taxed as trading profit by the Revenue. The Hon’ble Apex Court observed that the surplus arising to be on capital account not chargeable to tax. In the aforesaid decision, the Hon’ble Supreme Court held that the act of retaining $36,123 in the United States for capital purposes after obtaining sanction of the Reserve Bank of India was not a trading transaction in the business of manufacture of locomotive boilers and locomotives, but was clearly a transaction of accumulating dollars to pay for capital goods. It was, therefore, held that surplus attributable to $ 36,123 was capital accretion and not profit taxable in the hands of the assessee. Further reliance is also placed on the decision of Hon’ble Supreme Court in case of CIT v. Canara Bank Ltd. 63 ITR 328 (SC) wherein the assessee, a public limited company carrying on banking business in India, had opened a branch in Karachi. The Karachi branch of the assessee had with it a sum of Rs.3,97,221 belonging to its head office. The assessee did not carry on any business in foreign currency in Pakistan and the amount of Rs.3,97,221 lying with the Karachi branch remained idle there and was not utilised in any banking operation even within Pakistan. The assessee remitted the amount of Rs.3,97,221 to India and owing to the difference in the rate of exchange, the assessee made a profit of Rs.1,73,817 from such remission. The question arose whether this profit of Rs.1,73,817 was a revenue receipt or a capital accretion. It was observed by the Hon’ble Supreme Court that the amount of Rs.3,97,221 was lying idle in the Karachi branch and the Karachi branch was merely keeping that money with it for the purpose of remittance to India. This money was at no material time employed, expended or used for any banking operation or for any foreign exchange business. Therefore, even if this money was originally stock-in-trade, it changed its character of stock-in-trade when it was blocked and sterilized and the increment in its value owing to the exchange fluctuation must be treated as a capital receipt. Since the sum of Rs.3,97,221 was held on capital account and not as part of the circulating capital embarked in the business of banking, it was held by the Hon’ble Supreme Court that the profit arising to the assessee on remittance of the said amount on account of alteration in the rate of exchange was not a trading profit but a capital accretion and, thus, not eligible to tax. The view taken in the above two decisions was reiterated by the Hon’ble Supreme Court while delivering judgment in the case of Sutlej Cotton Mills Limited. v. CIT 116 ITR 1, wherein the following tests was propounded to determine the character of loss/gain arising due to exchange fluctuations. It was similarly held by the Hon’ble Supreme Court in case of CIT vs. Woodward Governor India (P) Ltd. 312 ITR 254 (SC). The Ld. AR further relied upon the decision of Hon’ble Calcutta High Court in the case of Indian Leaf Tobacco Development Co. Ltd. vs. CIT 137 ITR 827 wherein the assessee-company, engaged in the business of export sales of tobacco leaf, received money on account of export sales in Indian rupee. Sometimes, the money received was more and sometimes less, depending upon the exchange rate of the relevant time, resulting in “profit on exchange” to the assessee. The assessee claimed that the “profit on exchange” was not liable to tax. However, the said claim was not accepted by the assessing officer and addition was made. On appeals, the Tribunal held that profits on exchange was an appreciation in the value received by the assessee for the export sales on account of a favourable fluctuation in the foreign exchange rates at the relevant time and therefore, liable to be taxed as the assessee’s income. In the aforesaid decision, the Court held that in case of profit resulting from fluctuation or escalation of exchange price is independent of the primary transaction and such profit can be taxed only if the assessee is a dealer in foreign exchange. The Ld. AR relied upon the decision of the Hon’ble Bombay High Court in case of Homi Mehta & Sons P. Ltd. v. CIT 222 ITR 528. In this case, the assessee company was holding certain shares in limited companies in the UK by way of investment. Dividend income earned by the assessee on these shares was kept in a current account in UK. The accumulation in the current account was utilized by the assessee for the purchase of right shares after obtaining the approval of the RBI. The balance of the accumulated amount in the current account was invested by the assessee in call deposits in the banks in the UK, when the balance in current account became sufficiently large. The interest received on call deposits was also credited to the current account and utilized for investment in rights share. During the relevant year, the assessee was compelled to repatriate the balance in the above current account as well as in the call deposit account to India at the instance of the RBI. Since the rupee had been devalued, as a result of repatriation of the above amounts, a higher sum in terms of Indian rupees was received by the assessee, the total gain on repatriation being Rs.1,72,676. The Assessing Officer taxed the entire amount as the income of the assessee, rejecting assessee’s contention that the said surplus represented capital receipt not liable to be included in the total income. The CIT(A) and the Tribunal upheld the addition made by the Assessing Officer. On further appeal, the Hon’ble High Court observed that that the amount was held by the assessee for the purpose of investment only and was not utilized for any business transaction; the amount when repatriated to India had resulted in a receipt of additional amount over and above the book value on account of devaluation of rupee which took place in the relevant previous year prior to such repatriation. Accordingly, the Hon’ble High Court held that such profit had accrued to the assessee not in the course of any trading activity or on money held for the purpose of trade but on account of appreciation in value of amount, which was held for the purpose of investment, the accretion was capital in nature. The Ld. AR further relied upon the decision of Hon’ble Madras High court in case of Addl. CIT vs. Chettinad Corporation (P) Ltd. 112 ITR 898. In that case, the profits realized by the assessee from its business in Ceylon could not be repatriated to India due to the policy of Ceylon Government. As a result of devaluation of Indian currency, on subsequent remittance of money into India after the removal of restrictions, the assessee received a larger amount resulting in exchange gain. The assessee claimed the exchange gain as capital receipt, which was negated by the Assessing Officer. In further appeal, the Tribunal allowed the appeal of the assessee and held that since the surplus sprung directly from an external cause due to devaluation after the profits had already accrued and taxed in the relevant year and hence had become part of the assessee’s capital, therefore, the gain received by the assessee was a capital receipt. The Hon’ble Madras High Court affirmed the decision of the Tribunal. The Ld. AR relied upon the following decisions:

i) Dy. CIT v. Jagatjit Industries Ltd. 191 Taxman 54 (Del. HC)

ii) Indo-Burma Petroleum Co. Ltd. v. CIT 136 ITR 25 (Calcutta HC)

iii) S. Dempo and Co. (P) Ltd. 206 ITR 291 (Bom. HC)

iv) I.D. Parry Ltd. v. CIT 174 ITR 11 (Mad. HC)

v) CIT v. PVP Ventures Ltd. 211 Taxman 554 (Mad. HC)

The Ld. AR further submitted that fluctuation arising in foreign currency resulting in increase/decrease in liabilities pertaining to purchase of capital assets was on capital account, not liable to be considered for computing taxable income. For the said contention/prepositions, the Ld. AR relied upon the following decisions:

i) Union Carbide India Ltd. vs. CIT 130 ITR 351 (Cal.).

ii) Periyar Chemicals Limited vs. CIT 162 ITR 163 (Ker.)

iii) Ashok Textiles Ltd. vs. CIT 178 ITR 94 (Ker.).

iv) CIT vs. South India Viscose Ltd. 120 ITR 451 (Mad.).

v) CIT vs. Elgi Rubber Products Ltd. 219 ITR 109 (Mad.).

vi) CIT vs. Rohit Mills Ltd. 219 ITR 228 (Guj.).

vii) CIT vs. Motor Industries Co. Ltd. 173 ITR 374 (Kar.)

viii) Hindustan Machine Tools Ltd. vs. CIT 175 ITR 220 (Kar.)

ix) Beco Engineering Company Limited vs. CIT 236 ITR 344 (P&H).

x) Apollo Tyres Ltd. vs. ACIT 89 ITD 235 (Del. Spl. Bench).

xi) Munjal Showa Ltd. vs. DCIT 147 Taxman 69 (Delhi Bench) (Mag.)

The Ld. AR submitted by applying the well settled judicial position to the facts of the instant case, since the remittance of money was on account of a capital account, gain at the time of remittance, being on account of higher consideration received, but on account of independent and separate transaction of remittance, is a capital receipt not liable to tax. Therefore, the addition on account of foreign exchange fluctuation gains made by the Assessing Officer and sustained by CIT(A) calls for being deleted in toto.

13. The Ld. DR relied upon the assessment order and the order of the CIT(A).

14. We have heard both the parties and perused the material available on record. It is pertinent to note that it is an undisputed fact that investment made by the assessee in shares of ‘M/s. Havells Holdings Ltd’ was made in Euro and redemption of such shares were also made in Euro. Thus, actual profit or loss on sale/redemption of such shares have to necessarily be computed in Euro only and thereafter, converted to INR for the purposes of Section 45 of the Act. In other words, the cost of acquisition of shares and consideration received thereon should necessarily be considered in Euro and the resultant gain/loss thereon should thereafter be converted into INR at the prevailing market rate. In the present case, the net gain/loss on redemption of shares was Nil since the shares were redeemed at par value and thereby there was no capital gains taxable under Section 45 of the Act. From the perusal of Section 45 of the Act it can be seen that for taxation of any profits or gains arising from the transfer of a capital asset, only gains accruing as a result of transfer of the asset can be taxed. In the present case, there was no “gain” on transfer/redemption of the shares in so far as the shares were redeemed at par value. Thus, there was no gain which accrued to the assessee as a result of redemption of such shares, since the shares were redeemed at par value. The said contention is supported by Rule 115 of the Income Tax Rules, which provides the rate of exchange for conversion of income expressed in foreign currency. Clause (f) of Explanation (2) to Rule 115(1) clearly provides that “in respect of the income chargeable under the head “capital gains………….. ” rate of exchanges is to be applied. To put it simply, capital gain in rupee is determined as = Capital gain in $/ GBP X applicable rate of exchange as per Rule 115 = NIL (in present case) X Rate = NIL. In the present case, since capital gains in GBP/ Euro was NIL, the resultant gain in Indian Rupees is NIL. The Ld. AR submitted that gain arose to the assessee on account of repatriation of foreign currency to India, which is an event separate and distinct from the event of transfer of shares of the subsidiary company. The exchange gain of Rs.2,55,82,186/- was only a consequence of repatriation of the consideration received in Euro to INR and cannot be construed to be part of consideration received on redemption of shares. Thus, the applicability of Section 45 does not come in picture in the present case. Therefore, the Assessing Officer was not right in applying Section 45 for making the addition. Hence, Ground No. 4 and 4.1 are allowed.

15. As regards Ground Nos. 5 and 5.1 relating to the claim of the allowance of deduction of Rs. 54,21,514/-in respect of Education Cess and Secondary Higher Education Cess, the Ld. AR submitted that in the previous year relating to the Assessment Year 2008-09, the assessee had paid the education cess and secondary higher education cess amounting to Rs.54,21,514/- in respect of income offered to tax. However, the said amount was not claimed as deduction in the return of income filed for the year under consideration. The assessee during the course of assessment proceedings filed revised computation of income vide letter dated 24/11/2010 before the Assessing Officer and claim deduction in respect of the aforesaid education and secondary higher education cess paid in the Assessment Year 2008-09. The Assessing Officer rejected the assessee’s claim by holding that the claim cannot be entertain in the light of the decision of the Hon’ble Supreme Court in the case of Goetz (India) Ltd. Vs. CIT(A) 284 ITR 323 considering that the assessee had not made such claim by filing revised return of income. Even on merits, the Assessing Officer held that the claim of the assessee was void of any merits. Since, deduction contemplated under the scheme of the Act envisages only those expenses which have been incurred to arrive at the taxable income of the assessee and not beyond the point of taxation. The CIT(A) upheld the order of the Assessing Officer thereby relying on decision of the Hon’ble Apex Court in case of Goetz (India) Ltd. (supra). The Ld. AR submitted that the aforesaid action of the Assessing Officer and the CIT(A) is not based on judicious appreciation of facts and position in law for the reasons that admittedly the claim of deduction in respect of education and higher secondary cess was not made by the assessee by filing revised return of income, but the same was made vide letter dated 24/11/2010 during the course of assessment proceedings before the Assessing Officer. The Ld. AR submitted that the above claim was not made in view of incorrect interpretation of law which was revisited during the course of assessment proceedings. Being so, the said claim could not have been made through revised return since the limitation for filing such revised return in terms of Section 139(5) of the Act had expired. The Ld. AR submitted that the decision of the Hon’ble Apex Court is distinguishable as it is a trite law that belief duty of the taxing authority to correctly assessed the tax liability of an assessee and assessed the assessee in every reasonable way particularly in the matter of claim and securing release. The Ld. AR submitted that the assessee is entitled to claim deduction of education and higher secondary cess as per Section 4 of the Act which provides that income tax is charge at the rate as an enacted in any Central Act. Every year the Finance Act provides for the rate of tax applicable for the relevant Assessment Year. The levy of education cess on Income tax is distinct from that of an income tax or surcharge since the letter to form part of part one of the first schedule which defines income tax and provides rate of levy thereof. Unlike income tax and surcharge which are levied for general purpose, Government has explained an education cess and is admittedly levied for specific purpose that is to fulfill the commitment of the government to provide quality health services and finance universalized quality basic education and secondary and higher education. Unlike surcharge which was an exclusive component of income tax, education cess as introduced vide Finance Act, 2004 was also imposed an additional levy on indirect taxes namely Customs, Excise and Service Tax. Education cess does not part take the care of being a component of income tax per say as levied under the provisions of the Act. The Ld. AR relied upon the decisions of the Hon’ble Supreme Court in case of State of West Bengal Vs. Keso Ram Industries Ltd. (2004) 10 SCC (2001) and also relied upon the decision of the Hon’ble Bombay High Court in case of Sesa Goa Ltd. Vs. JCIT 117 Taxman.com 96.

16. The Ld. DR relied upon the assessment order and the order of the CIT(A).

17. We have heard both the parties and perused the material available on record. It is pertinent to note that the levy of education cess on Income tax is distinct from that of an income tax or surcharge since the letter to form part of part one of the First Schedule which defines income tax and provides rate of levy thereof. Unlike income tax and surcharge which are levied for general purpose, Government has explained an education cess and is admittedly levied for specific purpose that is to fulfill the commitment of the government to provide quality health services and finance universalized quality basic education and secondary and higher education. Unlike surcharge which was an exclusive component of income tax, education cess as introduced vide Finance Act, 2004 was also imposed an additional levy on indirect taxes namely Customs, Excise and Service Tax. Education cess does not part take the care of being a component of income tax per say as levied under the provisions of the Act. The decision of the Hon’ble Supreme Court in case of Goetz India (supra) will not be applicable in the present case. The claim of the assessee in respect of the education cess is allowable as deduction for the purpose of computation of taxable profits under the Act as held in the Hon’ble Bombay High Court’s decision in case of Cesa Goa Ltd. (supra). Thus, Ground No. 5 and 5.1 are allowed.

18. As regards Ground No. 6 and 6.1 relating to deduction of excess provision of bad debts written back of Rs. 2,58,164/-, the Ld. AR submitted that as a matter of practice, the assessee does not claim deduction in respect of provision for bad debts and such provision is always added back to the income of the assessee for the purpose of computation of taxable income. During the Assessment Year 2008-09, the assessee credited/reversed an amount of Rs. 49,10,060/- on account of written back of excess provisions credited in respect of bad debts. Out of the said amount the assessee, in its revised return of income executed an amount of Rs. 46,51,896/- from its double income on the ground that since no deduction was claimed at the time of creation of the provision, therefore, the same was not liable to be offered to tax in the current Assessment Year when the excess provision was claimed. Subsequently, the assessee during the course of assessment proceedings realize that out of the total provision written back of Rs. 49,10,060/- in its books of accounts only amount of Rs. 46,51, 869/- had been excluded by computing taxable income and a balance amount of Rs. 2,58,164/- was wrongly offered to tax resulting in double taxation in same income. The Ld. AR submitted that the same may be remanded back to the file of the Assessing Officer for verification as the said contention of the assessee was not taken into account by the Assessing Officer after verification.

19. The Ld. DR relied upon the assessment order and the order of the CIT(A).

20. We have heard both the parties and perused the material available on record. It is pertinent to note that the Assessing Officer has not verified the proper deduction of excess provisions of bad debts written back and the contentions of the assessee during the assessment proceedings were not verified. Therefore, it will be appropriate to remand back this issue to the file of the Assessing Officer for proper adjudication and verification. Needless to say, the assessee be given opportunity of hearing by following principles of natural justice. Thus, Ground No. 6 & 6.1 are partly allowed for statistical purpose.

21. In result, the appeal of the assessee is partly allowed for statistical purpose.

Order pronounced in the Open Court on this 10th Day of November, 2020.

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