IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A, CHANDIGARH

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1 IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES A, CHANDIGARH BEFORE Ms SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA No. 701 /Chd/2009 Assessment Year: The A.C.I.T., V. M/s Spray Engineering Devices Ltd., Circle 1(1), Plot No. 25, Chandigarh. Industrial Area, Phase-II, Chandigarh. PAN: AAICS 5252 M ITA No. 646/Chd/2009 Assessment Year: M/s Spray Engineering Devices Ltd., V. The Addl. CIT, Plot No. 25, Range 1, Industrial Area, Phase-II, Chandigarh. Chandigarh. PAN: AAICS 5252 M ITA No. 1021/Chd/2011 Assessment Year: M/s Spray Engineering Devices Ltd., V. The Addl CIT, Plot No. 25, Range 1, Indl. Area, Phase II, Chandigarh. Chandigarh. PAN: AAICS 5252 M (Appellant) (Respondent) Department By : Smt. Jyoti Kumari, CIT Assessee By: Shri Vineet Aggarwal Date of hearing: Date of pronouncement: PER SUSHMA CHOWLA, JM ORDER Out of three appeals, the cross appeals by the Revenue and the assessee are against the order of CIT(A), Chandigarh dated relating to assessment year against the order passed under section 143(3) of the

2 2 I.T. Act, The assessee has filed appeal against the order of CIT(A) dated relating to Assessment Year 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 , 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 subsection 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

3 3 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 retrospecitively. 2. Disallowance u/s 36(1)(iii) a That the ld. CIT(A) has erred in confirming the addition amounting to Rs /- 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 /-. 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.

4 4 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.

5 5 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 us/ 115 JB which was claimed as deduction as amount of profits eligible u/s 80HHC vide clause (iv) of Explanation 1 to Section 115 JB. 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.

6 6 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. made u/s 36(1)(va) of the Act on account of stipulated period amounting to Rs. 1,89,672/-. Another disallowance was ESI, EPF not paid within 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 /-. 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 for the purpose of issue of equity shares to the employees as Sweat equity. The fair

7 7 value of the equity share was adopted at Rs p 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 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. 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 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 allowed the claim of the assessee for deduction u/s 80IB/80IC of the Act following the Board Circular dated 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

8 8 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 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 , the same could not be the basis for allowing the deduction in assessment year 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 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.

9 9 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 crores and profit earned on the said goods was estimated at 15% being Rs 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 (S.C). 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 (S.C) 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

10 10 down in Brooke Bond, 225 ITR 789 (S.C). 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 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). disallowance u/s 80IB/80IC on other income. The CIT(A) also upheld the The CIT(A) also upheld the

11 11 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. 15. 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 ) 16. 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 b y 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 Vs. 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

12 12 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 perimetria. 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. 17. 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. 18. 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

13 13 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. 19. The Revenue is in appeal against the above said directions of the CIT (Appeals). 20. 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.

14 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. 22. 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). 23. The Revenue is in appeal against the aforesaid deletion of Rs.13,68,671/ 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

15 15 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. 25. 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. 26. 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 31 st 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 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, 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 31 st 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. 31 st 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". 27. 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

16 16 benefit conferred on the employees without any restrictions. The employee was not free to encash these shares. Further resolution was passed on 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 is not allowed as expenditure in Profit and Loss account". 28. 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 31 st 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 /- 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 EOGMheld on 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 10 th May, 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. Vs. DCIT [85 TTJ 1049 (Chenai)]. 30. The relevant contention of the learned A.R. for the assessee in this regard was that in the extraordinary meeting held on , the list of the

17 17 persons to whom shares were to be allotted was before the Board during the meeting and the shares were allotted thereafter. 31. 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. Vs. Addl.CIT [124 TTJ 771 (Del)}, EIMC K.C.P. Ltd. Vs. CIT [242 ITR 659 (SC) and VIP Industries Vs. DCIT [ITA No.7242/Mum/2008 date of order 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. 32. 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. 33. 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 had allotted number of equity Rs 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 Admittedly, no allotment was

18 18 done on but the facts of the case reflects that the assessee had specified the number of shares to be allotted to its employees as on 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. Vs. 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. Vs. 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. Vs. 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 Vs. 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

19 19 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. 34. 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. 35. 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. 36. 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). 37. 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 in ITA No.514/Chd/2010 where vide order dated 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 Vs. Mega Packages

20 20 in ITA No.145 of 2011 date of decision 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. 38. 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 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 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 Vs. Mega Packages (supra)

21 21 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 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 tht 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 )

22 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. 40. 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

23 23 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 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. Vs. DCIT & Another. [234 CTR (Bom) 1]. 41. 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. Vs. DCIT & Another. [328 ITR 81 (Bom)]. 42. 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

24 24 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 Vs 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 and are not retrospective. The year before us under appeal is assessment year 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