ITAT CHANDIGARH

ITA No.1056, 1118/Chd/2010 and ITA No.693, 687, 1116/Chd/2011

Ms. SUSHMA CHOWLA AND SHRI MEHAR SINGH, JJ.

Parikshit Aggarwal for the Assessee.
Manjit Singh, for the Revenue.

Out of these five appeals, two are cross appeals filed by the assessee and Revenue against the separate orders of Commissioner of Income Tax (Appeals), Chandigarh dated 31.5.2010 and 1.3.2011 relating to assessment years 2006- 07 and 2007- 08 against the order passed under section 143(3) of the Income Tax Act, 1961

2. The assessee is in appeal against the order of Commissioner of Income Tax (Appeals), Chandigarh dated 3.10.2011 relating to assessment year 2008- 09 against the order passed under section 143(3) of the Income Tax Act, 1961 (in short 'the Act').

3. All the five appeals relating to the same assessee on similar issues were heard together and are being disposed off by this consolidated order for the sake of convenience.

ITA No.1056/Chd/2010 :: Assessee's Appeal :: Assessment Year 2006-07 :

4. The learned A.R. for the assessee pointed out that ground Nos.1,2,5 and 6 are general in nature and hence the same are dismissed. The only effective grounds of appeal raised by the assessee in this appeal are as under:

"3. That the Ld. CIT (A), Chandigarh is not justified in not considering the correct legal position and submissions by the appellant's counsel and resultantly erroneously concurring with the orders passed by the A.O., u/s 143(3) of the Income Tax Act, 1961 and thereby confirming the action of Ld. A.O. in upholding an addition amounting to Rs. 1,23,327/- regarding payment of PF and ESIC by wrongly invoking the provisions of Section 43B of the Income Tax Act, 1961.

4. That the Ld. CIT (A), Chandigarh is not justified in not considering the correct legal position and submissions by the appellant's counsel and resultantly erroneously concurring with the orders passed by the A.O., u/s 143(3) of the Income Tax Act, 1961 and thereby confirming the action of Ld. A.O. in reducing the deduction u/s 80IC of the Income Tax Act, 1961 by partly allowing the pleas of the appellant company which findings of the Ld. CIT (A) on the said issue are perverse and thus needs to be quashed and the claim of deduction u/s 80IC be allowed in full as so claimed by the appellant company being in consonance of statute as supported by legal pronouncements."

5. The issue in ground No.3 raised by the assessee is against the disallowance made on account of employees contribution to PF and ESI amounting to Rs. 1,23,327/-.

6. The brief facts relating to the issue are that during the course of assessment proceedings the Assessing Officer noted that employees' contribution towards EPF and ESI were paid by the assessee beyond the due date. The assessee was show caused to explain as to why sum of Rs. 17, 92, 477/- being the total amount payable from April, 2005 to March, 2006 as tabulated at page 3 of the assessment order, be not disallowed. The Assessing Officer in the said table has adopted the due date of payment as 15th of each month and the dates of payments by the assessee are also tabulated in the said chart. The assessee had paid the said amount by 20th of succeeding month in respect of employees' share to PF and ESI. However, only in respect of one payment of June, the said was paid on 21.7.2005. The Assessing Officer made disallowance of Rs. 17,92,477/- in this regard under section 2(24)(x) r.w.s.36(1)(va) of the Act.

7. The CIT (Appeals) observed that the payments which were made within the grace period i.e. upto 20th of the next month are to be allowed as a deduction restricting the addition of Rs. 1,23,327/- i.e. relatable to month of June, 2005.

8. The assessee is in appeal against the said addition of Rs. 1,23,327/- We find the Revenue is in appeal against the deletion of addition of Rs. 16,06,150/- vide ground No. 2 raised in ITA No.1118/Chd/2010. The learned A.R. for the assessee pointed out that the issue stands covered by the order of the Hon'ble Punjab & Haryana High Court in CIT Vs. M/s Nuchem Ltd. in ITA No.323 of 2009 - date of decision 2.2.2010.

9. The learned D.R. for the Revenue placed reliance on the order of the Assessing Officer.

10. We have heard the rival contentions and perused the record. The issue in the present case is squarely covered by the ratio laid down by the Jurisdictional High Court in CIT Vs. Nuchem Ltd. (supra) under which it is provided that where the employees' share of contribution to ESI or PF is made before the due date of filing the return of income, no disallowance is warranted on this account. Similar is the case in respect of employers share of contribution to PF and ESI. The assessee in the present case had deposited the said amount of employees share of PF and ESI admittedly before the due date of filing the return of income and in majority of the months even within the grace period allowed under the respective Acts. Only in respect of the month of June, 2005, the said amount was paid on 21.7.2005 one day later than the grace period but before the due date of filing the return of income in the present case. In view thereof, the total amount is allowable as an expenditure in the hands of the assessee. Consequently, we direct the Assessing Officer to delete the addition of Rs. 1,23,327/- and allow ground No.3 raised by the assessee.

11. We also uphold the order of the CIT (Appeals) in allowing the claim of the assessee in respect of employees share to PF and ESI paid within the grace period. Consequently, ground No. 2 raised by the Revenue in this regard is dismissed.

12. The issue in ground No.4 raised by the assessee is in relation to the computation of deduction under section 80IC of the Act.

13. The brief facts of the case are that the assessee was in the business of manufacturing, processing and trading of all kinds of fabrics and textile products. The head office of the assessee is at Panchkula. The assessee has five manufacturing units at Dera Bassi, Gurgaon, Ludhiana, Panchkula and Baddi. The central warehouse of the goods manufactured by the assessee is at Panchkula. The assessee claims to have retail counters in all cities of northern India and also in PAN cities of whole of India. The assessee further claimed that it had maintained separate books of account in respect of Baddi unit and also maintained separate Balance Sheet and Profit & Loss Account of Baddi unit and head office but consolidated income was submitted at the close of the year. The assessee was eligible for the claim of deduction under section 80IC of the Act in respect of Baddi unit only. The assessee had claimed deduction under section 80IC of the Act amounting to Rs. 66,49,378/-.

14. During the course of assessment proceedings the Assessing Officer in order to verify the claim of the assessee under section 80IC of the Act asked the assessee to furnish various details regarding the said deduction and also to justify the extent of profits arrived from the said unit. Queries were raised by the Assessing Officer to furnish distribution and common expenses incurred by the company from its head office at Chandigarh in order to work out actual profits of Baddi unit for computing quantum of deduction under section 80IC of the Act. The claim of the assessee before the Assessing Officer was that the purchases were centralized at the head office and stock of cloth was sent to Baddi unit by the head office. The garments manufactured at Baddi unit were then sent to the head office and were distributed to various retail outlets of the company through central warehouse at Panchkula. The assessee also explained that the capital required for establishing the unit was invested by the head office. It was also brought on record that there were no debtors in the unit. The Assessing Officer vide order-sheet entry dated 8.12.2008 gave final opportunity to the assessee to furnish distribution and common expenses incurred by the company from its head office at Chandigarh so that actual profits of Baddi unit could be worked out. In response thereto the assessee furnished working which is annexed as Annexure A-3 to the assessment order. The total of the expenses debited to the head office of Rs. 9,29,04,720/- were considered for allocation between Baddi unit and the remaining business of the assessee. It was also pointed out by the assessee that the net sales of Baddi unit were 2.58% of the total sales of the company. The Assessing Officer vide para 8.2 observed as under:

"8.2. Replies of the assessee have duly been considered. From the details furnished by the assessee following points emerge:
(i) Assessee has not maintained separate accounts for the eligible unit and other units.

(ii) All purchases are centralized and related expenses are debited to head office. Then stock is transferred to Baddi unit: at cost for garment manufacturing, without taking into consideration the purchase expenses e.g. purchase commission, freight etc.

(iii) The manufactured goods from the Baddi unit are transferred to the head office after including profit margin and sales are then made by head office through its various retail outlets. No expenses relating to sales are taken into account for determining profits of the Baddi unit. The basis of profit margin has not been disclosed by the assessee. It is not known as to at what rate such items are finally sold in the market through retail outlets. Nothing has been brought on record by the assessee to show that the transaction between eligible unit and Head office are at arms length.

(iv) The source of entire capital used for Baddi unit was the head office and all financial expenses were debited to the books of Head office and no such expense was taken into consideration for working profits of the Baddi unit.

(v) No administrative expenses relating to the management & administrations of affairs of the company were taken into consideration for working the profits of the eligible unit.

(vi) Assessee has admitted that expenses to the extent of Rs. 23,96,941/- (being 2.5% of Rs. 9,29,04,720/-) debited to Head office should have been allocated to Baddi unit and to that extent profits of the Baddi unit had been overstated. This also implies that assessee has admitted that to the extent of Rs. 23,96,941/ the claim of deduction u/s 80IC was excessive."

15. The Assessing Officer thereafter analyzed the Annexure A - 3 and tabulated the expenses to be considered for allocation between Baddi unit and other business of the assessee. The said list of expenses as per tables 1 and 2 are tabulated at pages 25 and 26 of the assessment order. The assessee had excluded certain expenses which were relatable to other units in entirety. The Assessing Officer rejected the explanation of the assessee observing as under:

a) Various outlets of the assessee were being used for the business of entire sales of the assessee. The goods manufactured at Baddi unit were sold through various retail outlets. So the expenditure relating to the said outlets, as per the Assessing Officer, had to be taken into account for the purposes of allocation of expenses relating to selling of the goods of the eligible unit. Thus all the expenses in table-2 i.e. column-A were to be considered for the purposes of allocating of expenses to Baddi unit. The Assessing Officer accepted the pela of the assessee with regard to exclusion of sale tax of Rs.2.27 crores. The total expenses as per table-2 for allocation were thus tabulated at Rs. 10,23,54,135/-.

b) The total purchase expenses debited to head office amounting to Rs. 97,50,89,394/-, as per the Assessing Officer, included direct expenses relating to purchases which were to the tune of Rs.2.14 crores. As the purchases were being made by the head office, the said expenses, as per the Assessing Officer, were not transferred to Baddi unit during the stock transfer and hence the same were also to be included for allocation purposes.

c) The Assessing Officer also included the expenditure tabulated under table-1 on account of Directors salary and other expenses i.e. insurance, legal and professional expenses, financial expenses and depreciation totaling Rs. 4,24,05,263/- for the purposes of allocating the same to Baddi unit. Thus the total amount for allocation, as per the Assessing Officer, worked out as follows:

16. The Assessing Officer held that 2.58% of Rs. 16,51,23,343/- amounting to Rs. 42,60,180/- related to Baddi unit and profit of Baddi unit after this allocation would be Rs. 23,89,196/- instead of Rs. 66,49,378/- claimed by the assessee. The deduction under section 80IC of the Act was accordingly reduced and was allowed to the extent of Rs. 23,89,196/-. The Assessing Officer further held that profits of the company other than Baddi unit would increase by an amount of Rs. 42,60,182/-. Consequently, deduction under section 80IC of the Act was allowed at Rs. 23,89,196/-.

17. The CIT (Appeals) vide para 39 of the appellate order on considering the rival contention of the assessee observed that separate books of account and financial statement in respect of Baddi unit could not be relied upon and the profits of Baddi unit were required to be reworked. The CIT (Appeals) allowed difference in allocation of repairs and maintenance expenses as per para 41. However, CIT (Appeals) confirmed the order of the Assessing Officer in refusing the claim of deduction under section 80IC of the Act.

18. The assessee is in appeal against the order of CIT (Appeals). The learned A.R. for the assessee drew our attention to the provisions of section 80IA(5) of the Act. The explanation of the assessee against reallocation of the expenses was that no such apportionment of expenses were being made because the expenses at head office and retail out sets were taken care of by transfer of reasonable profits from goods manufactured by all units including Baddi unit. The learned A.R. for the assessee further submitted that the Head office and retail outlets sells the products received from Baddi unit and other units at higher price and makes marketing profit. From this profit, the expenses of Head Office and retail outlets are being met. Even after meeting these expenses, there were surplus in the accounts of Head office and retail outlets. So the Baddi unit was already working as a separate profit center and a separate source of income and this financial methodology of the assessee was in accordance with provisions of Section 80-IA(5) of the Act. The learned A.R. for the assessee drew our attention to page 38 of the Paper Book and pointed out that the goods were transferred from head office to retail counters. Our attention was further drawn to item No.13 which was priced at Rs. 195/-. The learned A.R. for the assessee pointed out that the said item was transferred from Badi unit to head office at the price of 150/- as is evident from the goods received note issued by the Panchkula office to Baddi unit enclosed at pages 41 and 42 of the Paper Book. The learned A.R. for the assessee further drew our attention to similar transfer of goods i.e. item No.27 at page 38 of the Paper Book and item No.20 at page 42 of the Paper Book. The explanation of the assessee in this regard was that the goods manufactured at Baddi unit were transferred to the head office at Panchkula and from there on their on to various retail outlets and the difference in the pricing in the goods on transfer was about 20%, which was attributable to the expenses incurred at head office and retail outlets on the sale of the said goods. The learned A.R. for the assessee further stated that both the head office and the retail outlets were in profits and the margin in profits retained was reflected in the hands of the head office and retail outlets. The learned A.R. for the assessee thus stated that in case apportionment of expenditure of head office and retail counter was to be made to the profits of the Baddi unit, similar exercise should be carried out in respect of the profits diverted from Baddi unit to head office and then the profits eligible for business should be computed to compute deduction under section 80IC of the Act. The learned A.R. for the assessee stressed that the manufactured items were transferred by Baddi unit to the head office at a price which in turn were sold at higher price and the reasonable profit was shared between Baddi unit and head office. The said was claimed to be in compliance of the provisions of section 80IA(5) of the Act and consequently no addition was warranted in this case.

19. The learned A.R. for the assessee further pointed out that there was anomaly in the order of the Assessing Officer vis-à-vis admissions of the assessee. The observations in para 8.1 at page 23 of the assessment order, wherein the Assessing Officer had recorded that the assessee had agreed to apportionment of expenses upto certain level, was claimed to be totally incorrect. The assessee at no stage of proceedings agreed to any apportionment of expenses or addition on this issue. On being asked to provide the details of expenses booked on account of Head Office, the assessee provided a list thereof. The AO apportioned expenses using this information provided by assessee. The assessee provided the details of Head Office expenses in a totally different perspective. The usage of this information for apportionment could be a good ground for making addition but recording a fact that the assessee agreed to this addition during assessment proceedings was totally incorrect This objection was raised before CIT (A) also, who as per Ld. AR for the assessee had also erred in recording similar findings. The learned A.R. for the assessee stressed that the assessee did not agree to any addition at the stage of assessment proceedings. The learned A.R. for the assessee further referred to the list of expenses tabulated in table-I and 2 and pointed out as under:
a) That the unit at Baddi unit was established in the second year of operation and no borrowed funds were utilized for establishing the unit;

b) The Baddi unit had no debtors whatsoever;

c) That the expenses tabulated at page 25 of the assessment order in table 2 were so tabulated at the instance of the Assessing Officer and the said tabulation was not on account of any admission made by the assessee for apportionment of any part of the said expenses of Head office to Baddi unit;

d) In the alternative, in case any apportionment of expenses was to be made then profit which had been transferred to the Head office should also be considered in the hands of Baddi unit for computing the profits of eligible business.

20. The learned A.R. for the assessee placed reliance on the ratio laid down by Mumbai Bench of the Tribunal in the case of Echjay Industries Ltd. Vs. DCIT (2004) 88 TTJ (MUM) 1089.

21. The learned D.R. for the Revenue in reply relied upon the observations of the Assessing Officer and CIT (Appeals) in this regard and pointed out that separate books of account maintained by the assessee for Baddi unit could not be relied upon because of the reasons mentioned in para 8.2 at page 23 of the assessment order and para 39 at page 23 of the appellate order.

22. The learned A.R. for the assessee in rejoinder submitted that though the assessee had furnished the details and also the list of expenses but had never admitted to the apportionment of expenses of head office to the Baddi unit and the said plea was also taken before the CIT (Appeals) as was apparent from para 36 at page 21 of the appellate order but no finding in this regard had been given by the CIT (Appeals).

23. We have heard the rival contentions and perused the record. The assessee is engaged in the business of manufacturing and trading of fabrics and garments. The head office of the assessee company was at Chandigarh and the centralized purchase and distribution centre was at Panchkula. The assessee had five manufacturing units at various locations i.e. Panchkula, Ludhiana, Baddi, Derabassi and Gurgaon. The assessee claimed that the separate books of account were being maintained at each of the units which are consolidated at the end of the year and final Balance Sheet was drawn. The assessee had claimed deduction under section 80IC of the Act on the profits of Baddi unit.

24. The assessee was found to be eligible by the Assessing Officer for claim of deduction under section 80IC of the Act in respect of Baddi unit. The assessee claimed to have drawn up the profitability statement of the Baddi unit separately and supported by the Audit Report in 10CCB, the assessee had computed quantum of deduction under section 80IC of the Act. The Assessing Officer while reworking the claim of deduction under section 80IC of the Act vide para 8.2 enlisted various points on which the assessee was found to be in-eligible for the said deduction and the same was reworked in the hands of the assessee. The first ground on which the claim of the assessee was found to be wanting was non-maintenance of separate accounts for the eligible unit and other units. We find that the CIT (Appeals) in para 39 at page 23 of the appellate order has given a finding that separate books of account have been maintained for Baddi unit. However, in view of the reasons elaborated upon by the CIT (Appeals), the said financial statement in respect of Baddi unit, as per the CIT (Appeals), could not be relied upon. The learned D.R. for the Revenue has not controverted the findings of the CIT (Appeals) in this regard. Accordingly, the conclusion of the Assessing Officer that the assessee was not maintaining separate books of account was incorrect. The assessee having prepared separate profitability statement in respect of its profits of Baddi unit could not be denied the said deduction on mere surmises.

25. The modus operandi adopted by the assessee for carrying on its business was that all the purchases were being centrally made at Panchkula and the stock of raw material was transferred to the respective units. Baddi unit was manufacturing products like shirts and trousers and finished articles were transferred to Panchkula warehouse at a notional inter-unit transfer price. The assessee in the books of Baddi unit treated the said transfer price as it sale price for computing eligible profits of the business. The manufactured items received from all units by Panchkula controlling office were transferred to various retail outlets situated across the country at a price on which the said products were to be finally sold to the end consumer. The retail outlets sold the finished products to the ultimate consumer. The element of profit embedded in sales executed by the head office to its retail outlets and finally to the end consumer was not being transferred to Baddi unit, but was retained by the head office. The assessee had placed on record purchase invoices, transfer memos and sales invoices to prove and establish its modus operandi. At pages 41 and 42 of the Paper Book, the assessee had enclosed goods receipt note issued by the warehouse at Panchkula for the goods received from the Baddi unit. Item No.6 was gents shirt fancy 1644 mix 38 @ Rs. 150/- per piece. The said garment had been transferred by the warehouse to the retails counter @ Rs. 195/- per piece as is evident from the stock transfer note placed at page 38 of the Paper Book. The said items were sold for Rs. 195/- per piece. The above said document enlists various types of garments, first being transferred from Baddi unit to warehouse and then from warehouse to the retail outlets. The assessee had also furnished manufacturing Profit & Loss Account of Baddi unit and total sales of the company at page 44 of the Paper Book. The total sales of Baddi unit were Rs.2.94 crores as against total sales of company at Rs. 116.30 crores. The percentage of the sales at Baddi unit to the total sales of the company was 2.54%, which is admitted and accepted position.
26. The Assessing Officer while computing the profits of the eligible business of the assessee of Baddi unit had recomputed the said profits because of non-allocation of expenses of head office to Baddi unit. The reasons for the said reworking of the profits of the business are as under:

(i) Assessee has not maintained separate accounts for the eligible unit and other units.

(ii) All purchases are centralized and related expenses are debited to head office. Then stock is transferred to Baddi unit: at cost for garment manufacturing, without taking into consideration the purchase expenses e.g. purchase commission, freight etc.

(iii) The manufactured goods from the Baddi unit are transferred to the head office after including profit margin and sales are then made by head office through its various retail outlets. No expenses relating to sales are taken into account for determining profits of the Baddi unit. The basis of profit margin has not been disclosed by the assessee. It is not known as to at what rate such items are finally sold in the market through retail outlets. Nothing has been brought on record by the assessee to show that the transaction between eligible unit and Head office are at arms length.

(iv) The source of entire capital used for Baddi unit was the head office and all financial expenses were debited to the books of Head office and no such expense was taken into consideration for working profits of the Baddi unit.
(v) No administrative expenses relating to the management & administrations of affairs of the company were taken into consideration for working the profits of the eligible unit.

(vi) Assessee has admitted that expenses to the extent of Rs. 23,96,941/- (being 2.5% of Rs. 9,29,04,720/-) debited to Head office should have been allocated to Baddi unit and to that extent profits of the Baddi unit had been overstated. This also implies that assessee has admitted that to the extent of Rs. 23,96,941/ the claim of deduction u/s 80IC was excessive."

27. Further in para 8.3 of the assessment order the Assessing Officer had tabulated the expenses of the head office and retail outlets for making the allocation of the expenses of the head office to the Baddi unit. Table-I is as under:
Table-1

*expenses debited to H.O. were slightly higher.
28. Table-2 referred to by the Assessing Officer is as under:
TabIe-2

Total expenses of company minus that shown for Baddi unit.

29. The claim of the assessee was that out of the total expenditure of 12.51 crores debited to the Profit & Loss Account of the head office only Rs. 5.03 crores, if necessary, should be considered for allocation to the Baddi unit. The above said chart though was prepared by the assessee but was at the instance of the Assessing Officer. The Assessing Officer, however, rejected the bifurcation proposed by the assessee and recomputed total expenditure debited to the Profit & Loss Account of head office at 12.51 crores and only excluded the amount of sales tax of Rs.2.27 crores out of the total amount of sales tax and fee of Rs.3.60 crores. Accordingly, the Assessing Officer considered Rs. 10.23 crores as per table-2 on account of other expenses for the purposes of allocation of expenses of head office to Baddi unit.

30. The issue raised in the present ground of appeal is whether any part of the head office expenditure was attributable to the Baddi unit for determining eligible profits of the Baddi unit. We are of the view that common expenditure is to be allocated between the head office and the branch office in order to determine the eligible profits of business at Baddi unit. In the facts of the present case the assessee is one composite unit consisting of five manufacturing units, one head office, one central warehousing unit and more than 100 retail outlets within India. The assessee is entitled to the benefit of deduction under section 80IC of the Act only in respect of Baddi unit. The assessee for the year under consideration had shown total turnover of Rs. 116.30 crores. The total in come declared by the assessee for the year under consideration was Rs.3.46 crores. The total turnover of Baddi unit was only Rs.2.94 crores which was 2.54% of the total turnover of the assessee. The deduction of Rs. 66,49,378/- had been claimed by the assessee against the eligible profits of Baddi unit. The said profits were declared by the assessee by following the consistent method of accounting under which it had recorded its earning i.e. the sale value of the goods sold by it at pre-determined price, which was recorded in its books of account for transfer of goods to the central warehousing unit. The goods therefrom are transferred to the retail outlets on the tag price of the goods i.e. the price to be charged from the end consumer. The difference in the sale price shown by Baddi unit and the tag price of the goods varies up to 20%. The said gross profit was reflected in the account of head office and takes care of the various expenses incurred by the head office and the retail counters in order to ultimately sell the products manufactured by the assessee. The assessee was booking its sales on the transfer of the goods to the central warehousing units at a predetermined price, irrespective of the fact that the goods are sold in the market or not. The said goods were reflected as sold at a predetermined price in the Baddi unit and the balance profits were accounted for in the books of account of the head office. The Baddi unit was no sundry Debtors. It is to be kept in mind that the consolidated profits of the company are assessed to tax in the hands of the assessee and only in respect of part of the turnover of Baddi unit, the assessee had claimed deduction under section 80IC of the Act on the net profits of the said unit. In the entiret y of the above said facts and circumstances of the case where the assessee has computed the profits of its business units not on the sale price of the goods manufactured by the unit, but at a predetermined price on which the goods are transferred to its head office, without accounting for the margin of profits, which are being reflected in the hands of the head office and retail counters, which in turn accounts for the expenses of the Head Officer & Retail Outlets, there is no merit for allocation of expenses of the head office to the Baddi unit from Table 2, especially because the head office had shown profits at the close of the year.

31. In view thereof where the assessee had declared profits of the eligible business on their transfer to warehouse, on a predetermined price and computed the income, irrespective of the fact whether the goods were sold or not, the expenses as tabulated in Table-2 are not to be taken into account for apportionment of expenses of the head office to the Baddi unit. In an y case, the amounts debited to the Profit & Loss Account of the head office were total expenses of the company i.e. all its units, manufacturing facilities and retail outlets minus the amount shown for the Baddi unit. The expenses considered in Table-2 as reproduced under para 27 of this order, are repair & maintenance, salary & wages, selling and distribution expenses, printing & stationary, staff welfare, telephone, traveling and rates taxes and fees. The above said expenditure except selling & distribution are the expenses attributable to different units being run by the assessee and no part of the said expenditure could be held to be attributable to the Baddi unit, even to the extent of its turnover to the total turnover. The direct expenses of other units, in no manner can be attributed to Baddi unit. Similarly the selling and distribution expenses are not to be considered in view of the fact that the Baddi unit is computing its income by reflecting sales of its manufactured items at predetermined price and transferring part of its margin of profits to the head office and retail units, which at the end of year had declared profits, which are assessable in the hands of assessee itself. In case these margin of profits are ex cluded from head office and included in the hands of Baddi unit, the resultant figure after debiting even the allocated expenditure on selling and distribution, would be eligible for the benefits of deduction u/s 80IC of the Act.

32. Now coming to Table-1, the expenses considered are the Directors salary, Directors traveling and conveyance expenses, insurance, legal and professional, Auditors remuneration, membership fee, financial expenses and depreciation. The plea of the assessee was that out of the total expenditure of 4.24 crores, sum of Rs.2.22 crores was attributable to the financial expenses. The learned A.R. for the assessee pointed out that no part of the borrowed funds were utilized for setting up the unit at Baddi and consequently the said financial expenses could not be apportioned between the head office and Baddi unit to compute the profits of Baddi unit. We find merit in the plea of the assessee that where no part of the borrowed funds were utilized for setting up of Baddi unit, the said financial expenditure could not be attributed to the running of Baddi unit. The Assessing Officer has failed to bring on record any evidence to the contrary. Similarly, depreciation claimed on assets which are installed at different units of the assessee and their user could not be attributed to the Baddi unit. The only expenses to be considered for allocation are Directors ' salary, Directors' traveling & conveyance, legal & professional expenses and Auditors remuneration. In view of the orders of the authorities below in accepting the contention of the assessee that the turnover of Baddi unit was 2.54% of the total turnover, we direct the Assessing Officer to recompute the disallowance under section 80IC of the Act by excluding 2.54% of the total expenditure of Directors' salary, Directors' traveling & conveyance expenses, legal & professional expenses and Auditors remuneration being attributable to Baddi unit. The balance deduction u/s 80IC is allowable in the hands of assessee. The Assessing Officer shall afford reasonable opportunity of hearing to assessee. We find no merit in the orders of authorities below, that the said addition were made on agreed basis, in view of submissions of the Ld. AR for the assessee before us and written submissions filed before CIT(A). Mere providing the details at the behest of Assessing Officer does not imply to agreed addition.

Ground No.4 raised by the assessee is thus partly allowed. This plea of the assessee is thus allowed.
ITA No.1118/Chd/2010 (Revenue's Appeal): (Assessment Year 2006-07)
33. The Revenue has raised following grounds of appeal:

1. That on the facts and circumstance of the case and in law, Ld.CIT (A) has gravely erred in deleting the addition made by the A.O. in disallowing & capitalizing interest amounting to Rs. 6,50,911/- as per provisions of section 36(i)(iii) of the Income Tax Act, 1961.

2. That on the facts and circumstances of the case and in law, Ld. CIT(A) has gravely erred in deleting the addition made by the A.O by treating employees contribution towards EPF amounting to Rs. 1792477/- as income as per provisions of section 2(24) (x) and not allowing deduction of the same as per section 36(l)(iii) of the Income Tax Act, 1961.

3. Whether of the facts and circumstances of the case CIT(A) was right in holding that assessee was not liable to deduct the TDS as there was no written or oral agreement between the alleged parties even in the light of amendment in statute w.e.f. 01-10-2004 in section 194C(3) whereby it is amended to cover instance!) where total payments made to a person during a financial year for work contract exceeds Rs. 50,000/- In such a case it will not matter whether there is single contract or multiple contract.

4. That on the facts and circumstances of the case and in law, Ld. CIT(A) has gravely erred in deleting the addition made by the A.O by disallowing proportionate interest amounting to Rs. 3,39,642/- as non business expenses out of financial expenditure claimed in relation to interest bearing loans."

34. The issue in ground No.1 raised by the Revenue is against the deletion of addition made under section 36(1)(iii) of the Act amounting to Rs. 6,50,911/-.

35. The brief facts relating to the issue are that the Assessing Officer vide para 2 noted that the assessee had made advance payment for purchase of land. The assessee was asked to explain as to whether the interest paid up to the date when the said assets were put to use had been capitalized or not. In reply, the assessee submitted that the fixed assets were purchased in connection with the existing business and were by way of expansion. Further it was explained by the assessee that the reserve and surplus of the assessee company had increased from Rs.4.82 crores to Rs.8.39 crores and also the assessee had sold commercial site for Rs. 6 crores and money was utilisied for purchase of fixed assets. The Assessing Officer observed that as the assessee had made advance payment for purchase of land but since the land was not put to use during the year under consideration, the proportionate interest was required to be capitalized. The Assessing Officer accordingly disallowed sum of Rs. 6,50,911/- under section 36(1)(iii) of the Act.

36. The CIT (Appeals) deleted the addition made by the Assessing Officer in the absence of any nexus being established between the payment made for purchase of land having direct bearing with the secured or unsecured loans obtained by the assessee.

37. The Revenue is in appeal against the order of the CIT (Appeals). The learned D.R. for the Revenue placed reliance on the order of the Assessing Officer.

38. The learned A.R. for the assessee pointed out that under the proviso to section 36(1)(iii) of the Act where the borrowed funds were utilized for the investment in the assets, and where the assets were not put to use, disallowance is to be made; but in the absence of any nexus of borrowed funds being utilized, no disallowance is warranted.

39. We have heard the rival contentions and perused the record. Under the provisions of section 36(1)(iii) of the Act, while computing the income from the profits and gains of business deduction is allowed on account of amount of interest paid in respect of capital borrowed for the purposes of business or profession. The proviso under the said sub- section further provides that the interest relatable to the capital borrowed for acquisition of assets for expansion of existing business or profusion, for any period beginning from the date of which capitals were borrowed till the date on which the said assets were put to use, shall not be allowed as deduction.

40. As per the proviso to section 36(1)(iii) of the Act, the first step to be seen is whether any capital borrowed for the acquisition of an asset for expansion of the existing business and interest paid on such borrowed funds is to be disallowed for the period up to the date on which the asset is first put to use. In the absence of any borrowed borrowals for the purchase of the land on which interest is being paid, no disallowance is warranted where no part of the borrowed funds are utilized for the purposes of investment in such assets. In the facts of the present case before us the assessee had made investment in land. The claim of the assessee was that the possession of the land was very much with the assessee company during the year under consideration and all the documents relating to the ownership and possession of land were furnished before the Assessing Officer during the course of assessment proceedings. The said land was claimed to be business asset of the assessee and was declared in the schedule of fixed asset at Sr.No.1.

41. The next plank of argument of the assessee was that it had sufficient funds of its own for the purposes of investment in the said assets. The assessee claims to have sold one commercial site in Sector 43B, Chandigarh for Rs. 6 crores during the year under consideration and the said money was said to be utilized for purchase of the fixed assets. The total investment in the land reflected by the assessee was at Rs.2.12 crores. In addition , during the year under consideration the reserve surplus of assessee company had increased from Rs.4.81 crores to Rs. 8. 39 crores implying there by generation of funds by the assessee company itself out of its business activities. The Assessing Officer has failed to bring on record any evidence to justify the disallowance under the proviso to section 36(1)(iii) of the Act. The Assessing Officer has failed to refer to any borrowed funds utilized for the purposes of investment in the said fixed asset and in the absence of the same and in view of the facts of the present case where the assessee had sufficient self generated funds, we find no merit in ground No.1 raised by the Revenue and the same is dismissed.

42. The issue in ground No.2 raised by the Revenue has been adjudicated by us alongwith ground No.3 raised by the assessee in ITA No.1956/Chd/2010 in the paras hereinabove. Following the same, we dismiss ground No.2 raised by the Revenue.

43. The issue in ground No.3 raised by the Revenue is in relation to the payment of freight in and freight out. The Assessing Officer from the details furnished by the assessee noted that payment exceeding Rs. 50,000/- were paid to two persons i.e. M/s Canter Transport Operators Union of Rs. 4,38,415/- and M/s Bharat Motors Pvt. Co. of Rs. 95,048. The assessee explained that M/s Canter Transport Operators Union was a booking agent which used to provide trucks as per requirement. The payment of freight was claimed to be made on vouchers to the truck owner and no payment to a truck owner was more Rs. 50,000/- and hence not liable to TDS. The Assessing Officer held the assessee liable to deduct tax at source on the payment related to transportation of goods and in the absence of the same the Assessing Officer disallowed a sum of Rs. 5,33,463/- under the provisions of section 40(a)(ia) of the Act.

44. The CIT (Appeals) allowed the claim of the assessee following the ratio laid down by the Hon'ble Punjab & Haryana High Court in Bhagwati Steels in ITA No.693 of 2009- date of decision 21.12010.

45. The learned D.R. for the Revenue placing reliance on the order of the Assessing Officer fairly admitted that the aforesaid amount was fully paid and nothing was payable at the close of the year.
46. The learned A.R. for the assessee placed reliance on the ratio laid down in CIT Vs. Bhagwati Steels [326 ITR 108 (P&H)] and also in CIT Vs. Truck Operators Union, ITA No.865 of the Act 2010 - date of decision 23.3.2011.

47. We have heard the rival contentions and perused the record. The assessee during the year under consideration claimed to have made freight payments directly to the truck owners, which were booked through M/s Canter Transport Operators Union, Panchkula. The said concern was a booking agent which was providing trucks as per the requirement of the assessee. However, the payment of freight amount was being paid to the truck owner and to none of the said truck owners, the cumulative payment exceeded Rs. 50,000/- during the year. The requirement of section 194C of the Act are that where the assessee has paid freight to a person totaling more than Rs. 50, 000/- in a year or more than Rs. 20,000/- per transaction, is liable to deduct tax at source. In case of non-deduction of tax at source, in view of the provisions of section 40(a)(ia) of the Act, such amount on which the assessee was liable to deduct tax at source and the same having not been deducted by the assessee, such amount is disallowable in the hands of the assessee. However, where the cumulative payment made to a particular person during the ye a r under consideration is less than Rs. 50,000/-, no disallowance is warranted for non deduction of tax at source. In the facts of the present case before us the assessee claimed that it has not violated provisions of section 194C of the Act because the total payments during the year to the individual truck owner was less than Rs. 50,000/-. We also find that in relation to the disallowance under section 40(a)(ia) of the Act, the Special Bench of Vishakhapatnam reported in ACIT Vs. Merilyn Shipping & Transports [140 TTJ 1(SB)(Vishakhapatnam)] has laid down the proposition that where the amount payable to the payee has been paid during the year under consideration itself and no amount is payable at the close of the year, no disallowance is warranted under section 40(a)(ia) of the Act for non- deduction of tax at source. In the facts of the present case and as admitted by both the authorized representatives, the total amount on account of freight has been paid during the year itself and nothing is payable at the close of the year; consequently no disallowance is warranted under section 40(a)(ia) of the Act. We dismiss ground No.3 raised by the Revenue.

48. Ground No.4 raised by the Revenue is against the deletion of addition of Rs. 3,39,642/- being interest relatable to the interest free loans and advance given by the assessee to persons under section 40A(2)(b) of the Act. The Assessing Officer noted that though the assessee had made advance to its sister concern M/s Shivam Industries and M/s Alfa Fabrics Pvt. Ltd., no interest was charged from the said concern though the assessee was utilizing interest bearing funds for running its business. The explanation of the assessee was that the said amounts were being advanced in the course of carrying on the business as the assessee was making both the purchase/sale transactions with the said concerns. The explanation of the assessee was rejected by the Assessing Officer and disallowance of Rs. 3,39,642/- was made.

49. The CIT (Appeals) allowed the claim of the assessee both on account of availability of funds and by way of increase in reserve surplus and also the Assessing Officer having failed to give credit for the amount deducted in the account of Shivam Industries on account of sale/purchase transactions.

50. The learned D.R. for the Revenue placed reliance on the order of the Assessing Officer.

51. The learned A.R. for the assessee vehemently opposed and pointed out that the said concerns were not related persons as per the provisions of section 40A(2)(b) of the Act and the amounts outstanding were in the course of regular business between the assessee and the said concerns and consequently application of provisions of section 36(1)(iii) of the Act was incorrect. The learned A.R. for the assessee placed reliance on the ratio laid down in S.A. Builders Vs CIT [288 ITR 1 (SC)] and in CIT Vs. Rockman Cycle Industries.

52. We have heard the rival contentions and perused the record. The contention of the assessee before us was that the parties were not related parties under section 40A(2)(b) of the Act and the said point had been raised during the proceedings before the authorities below and have not been considered by them. Though the plea of the assessee before the authorities below was that the advances made to the said parties were not loan accounts and the assessee was having purchase/sale transactions with these concerns during the year under consideration, the CIT (Appeals) had allowed the claim of the assessee both on account of availability of funds with the assessee and also the non-consideration of the entries debited to the account of M/s Shivam Industries. We are of the view that the issue raised by the assessee needs to be relooked by the Assessing Officer by considering the plea of the assessee and in view of the ratio laid down by the Hon'ble Supreme Court in S.A. Builders Vs. CIT (supra) that in case the advances between the assessee company and two concerns were on account of business transactions, no disallowance was warranted under section 36(1)(iii) of the Act. We remit the issue back to the file of the Assessing Officer to decide the same in accordance with law after affording reasonable opportunity of hearing to the assessee. The Assessing Officer shall also consider the plea of the assessee in respect of the entries in the respective accounts of the parties on account of purchase/sale transaction and allow credit for the same to compute the balances due between the parties. The ground of appeal No.4 raised by the Revenue is partly allowed.

ITA No.693 /Chd/2011(Assessee's Appeal):(Assessment Year 2007-08)
53. The assessee has raised following grounds of appeal:

1. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals), Chandigarh in Appeal No. 595/P/09-10 through order dated 31.03.2011 has erred in confirming the addition of Rs. 2,87,500/- made by Addl. Commissioner of Income Tax, Range - I, Chandigarh as disallowance of expenditure incurred for increase in Authorised Capital of the Company by treating the same capital expenditure instead of revenue expenditure allowable u/s 37 (1) of the Income tax Act, 1961.

2. On the facts and in the circumstances of the case and in law, the learned CIT (Appeals), Chandigarh has erred in applying the Provisions of Section 14 A, of the Income Tax Act, 1961 and confirming the addition of Rs. 2,00,750/- made by Addl. Commissioner of Income Tax, Range - I, Chandigarh as disallowance by applying Rule 8D(2)(iii).

3. On the facts and in the circumstances of the case and in law, the Learned CIT(Appeals), Chandigarh has gravely erred in confirming The addition of Rs. 1,32,02,180 out of total Revenue Expenses of Rs. 2,53,99,069/- claimed in the Return of Income by disallowing Rs. 1,07,49,5237- spent on construction of building on land taken on lease as Capital expenditure instead of Revenue Expenditure claimed in the Return and Rs. 19,99,620/- spent on Electrical Equipment, Office Equipment etc. at various retail outlets by treating it as Capital Expenditure instead of Revenue Expenditure claimed in the Return and Further disallowing Rs. 14,56,0007- spent on modification of Premises (Retail Outlets) taken on lease by treating it as Capital expenditure instead of Revenue Expenditure claimed in Return.

4. That the appellant craves to submit any additional facts/evidences in support of their grounds of appeals with the permission of the Hon'ble ITAT Chandigarh, before or at the time of hearing/final disposal of the appeal.

5. That the appellant craves to submit any additional facts/evidences in support of their grounds of appeals with the permission of the Hon'ble ITAT Chandigarh, before or at the time of hearing/final disposal of the appeal.

6. That the appellant craves to submit any additional facts/evidences in support of their grounds of appeals with the permission of the Hon'ble ITAT Chandigarh, before or at the time of hearing/final disposal of the appeal."

54. Ground No.1 raised by the Revenue is against the addition on account of expenditure incurred for the increase of various capital of the assessee company. The learned A. R. for the assessee fairly admitted that the issue is covered against the assessee by the ratio laid down in Brook Bond India Ltd. Vs. CIT [225 ITR 798 (SC)]. In view thereof, ground No.1 raised by the assessee is dismissed.

55. The alternate plea of the assessee for considering the said expenditure under section 35D of the Act is also dismissed.

56. The issue raised by the assessee vide ground No.2 is against the application of provisions of section 14A of the Act.

57. The brief facts relating to the issue are that during the course of assessment proceedings the Assessing Officer noted from the Balance Sheet that the assessee had made investment of Rs. 8,01,50,000/- as on 31.3.2007 in shares of various companies, which comprised of the investment in shares of M/s Amartex Infrastructure Ltd. of Rs. 1,50,000/- and in SBI Mutual Fund of Rs. 8 crores. The assessee was asked to furnish the details of dividend income from SBI Mutual Fund. The explanation of the assessee was that the investment in SBI Mutual Fund was made only on 30.3.2007 and no dividend income was received during t h e ye a r . In view thereof, it was pleaded that when no dividend income has been received, the provisions of section 14A of the Act are not to be applied. The Assessing Officer observed that in order to apply the provisions of section 14A of the Act it is not necessary that there should be positive exempt income. The Assessing Officer applied provisions of Rule 8D for working out the disallowance under section 14A of the Act and disallowed sum of Rs. 23,50,478/- as computed under para 3.11 at page 18 of the assessment order. The CIT (Appeals) held that only Rule 8D(2)(iii) was applicable and thus the addition under section 14A of the Act was reduced to Rs. 2,00,750/- and relief of Rs. 21,49,728/- was allowed to the assessee.

58. The assessee is in appeal against the addition of Rs. 2,00,750/-. The Revenue is in appeal against the aforesaid relief allowed by the CIT (Appeals) vide ground No.3 raised in ITA No.687/Chd/2011. 31

59. We proceed to dispose of ground No.2 raised by the assessee and ground No.3 raised by the Revenue. Disallowance under section 14A of the Act is warranted where the assessee has earned exempt income. During the year under consideration i.e. at the close of the assessment year, the assessee had made an investment of Rs. 8 crores with SBI Mutual Fund on 30.3.2007. The said investment was encashed by the assessee on 3.4.2007 and income of Rs. 1,18,507/- was offered to tax in the succeeding year. As against the said investment of four days the disallowance under section 14A of the Act was made by the Assessing Officer of Rs. 23,50,478/- in assessment year 2007- 08 and Rs. 17, 66, 255/- in assessment ye a r 2008-09. The assessee has placed on record documents relating to the investment and encashment of the SBI Mutual Fund at pages 46 to 48 of the Paper Book.

60. The Assessing Officer had applied the provisions of Rule 8D(2)(ii) on account of disallowance of interest and further the provisions of Rule 8D(2)(iii) for computing the amount disallowable on account of administrative and other expenses, in both the years i. e. assessment years 2007-08 and 2008-09. The investment was made by the assessee on 30.3.2007 and was held on 1.4.2007 and consequently the said allowance was worked out under section 14A of the Act for both the assessment years 2007- 08 and 2008- 09. The learned A.R. for the assessee at the outset pointed out that first of all in assessment year 2007-08 the provisions of Rule 8D could be applied for computing the said disallowance under section 14A of the Act in view of the ratio laid down in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT [234 CTR (Bom)1].

61. The second plea of the learned A.R. for the assessee was that there was no question of invoking provisions of section 14A of the Act as the income was offered to tax. Reliance was placed in the case of CIT Vs. Kings Exports [318 ITR 100 (P&H)] and in the case of ACIT Vs. The Punjab State Cooperative Agriculture Development Bank Ltd. (ITA No.742/Chd/2011) order dated 19.9.2011. The next plank of argument of the learned A.R. for the assessee was that the disallowance under section 14A of the Act cannot exceed the income derived from its investment i.e. Rs. 1,18,000/- as held by the Chandigarh Bench of the Tribunal in M/s Punjab State Coop. & Marketing Fed. Ltd. Vs. ACIT (ITA No.579/Chd/2011) order dated 30.9.2011. Further it was pointed out that the interest@ 12% on borrowing of Rs. 8 crores for a period of four days comes to Rs. 97, 000/- only, against which disallowance under Rule 8D has been computed at Rs. 37 lacs for two captioned assessment years. The learned A.R. for the assessee stated that no borrowed funds were utilized for the said investment.

62. The last plea of the learned A.R. for the assessee was that no administrative expenditure was incurred for investment in the said Mutual Fund and even thereof disallowance of Rs. 4 lacs in both the assessment years under appeal for investment in Mutual Funds of four days was very excessive.
63. We have heard the rival contentions and perused the record. The issue raised in cross appeals is in relation to computation of disallowance under section 14A of the Act in respect of the investment made by the assessee in SBI Mutual Funds on 30.3.2007 which was encashed on 3.4. 2007 i.e. after gap of four days . The disallowance has been computed in the hands of the assessee by applying the provisions of Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules. As held by the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (supra), the provisions of Rule 8D which were introduced by Notification dated 24.3.2008 were held to be prospective applicable from assessment year 2008- 09 onwards. In view thereof, we find no merit in the orders of the authorities below in applying the provisions of Rule 8D for computing the disallowance under section 14A of the Act in the hands of the assessee relating to assessment year 2007- 08. In any case, the investment made by the assessee was on 30.3.2007 and for a period of two days of holding, we find no merit in disallowing any part of the administrative expenses for the aforesaid investment made by the assessee, which was encashed in the subsequent assessment years and income arising therefrom was offered to tax. Consequently, ground No. 2 raised by the assessee in assessment year 2007-08 is allowed and ground No. 3 raised by the Revenue in assessment year 2007- 08 is dismissed.

64. We further address the disallowance made by the Assessing Officer in assessment year 2008 - 09 in this regard by applying provisions of Rule 8D and section 14A of the Act. Though the provisions of Rule 8D are applicable w. e. f. assessment year 2008 - 09, there is no merit in invoking the provisions of section 14A of the Act in assessment year 2008 - 09 where the income from the said investment in SBI Mutual Funds has been offered to tax. The assessee had made the investment on 30.3.2007, which was encashed on 3.4.2007 and income of Rs. 1,18,508/- was offered to tax. The provisions of section 14A of the Act are to be invoked where the assessee had earned exempt income from its investment. The assessee has not earned any exempt income from the said asset by holding it for a total of about four days and encashed the same during the assessment year 2008 - 09 and offered the income to tax. Following the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Kings Exports (supra), we hold that there is no merit in invoking the provisions of section 14A of the Act in assessment year 2008-09. We are not addressing the alternate pleas raised by the learned A.R. for the assessee in this regard in view of our holding so. Ground No. 3 raised by the assessee in assessment year 2008- 09 is thus allowed.

65. Ground No. 3 raised by the assessee in assessment year 2007- 08 is against the disallowance of Rs. 1,32,02,108/- (Rs.98,96,460/- +Rs.18,49,648/ +14,56,000/-).

66. The brief facts relating to the issue are that the assessee had claimed revenue expenditure of Rs. 2,53,99,069/-, in its computation of income. The said revenue expenditure were not claimed in the books of account by the assessee company. Out of the total expenditure of Rs.2.53 crores, sum of Rs.1.07 crores was spent on construction of plot No.365, Industrial Area, Phase-I, Panchkula, which was taken on lease from Shri Arun Grover, Managing Director of the company on nominal rent by paying him interest free deposit of Rs. 75 lacs. The assessee claimed the said expenditure on construction of building to be non- reimbursable and the same was claimed as revenue expenditure. Further no expenditure was claimed on the said cost of the plot on leasehold.

67. The second aspect of the expenditure was the amounts spent on furniture/fixtures/fittings/interiors/temporary structures at retail outlets. The expenditure incurred by the assessee was claimed to be the minimum requirement of carrying on the business by the assessee company and not creation of new asset. Sum of Rs.1.05 crores was spent on repairs of retail outlets and was claimed as revenue expenditure under section 30(a)(i) of the Act. The assessee further spent sum of Rs. 19,99,620/- on plant & machinery, electric equipment, electric installation, office equipments. The assessee had further transferred sum of Rs. 20,50,000/- from salary and wages account which was capitalized in the books of account and was claimed as revenue expenditure in the computation of income. The total expenditure claimed was Rs.2.54 crores. The Assessing Officer rejected the claim of the assessee in respect of all the items.

The expenditure on construction of the head office on leasehold land amounting to Rs.1.07 crores was held to be capital expenditure, on which depreciation @ 10% was allowed to the assessee. Similarly, the expenditure of Rs. 19, 99, 620/- on plant & machinery, electric equipment, etc. was held to be capital in nature and depreciation was allowed on the same. The assessee had spent a sum of Rs.1.05 crores on furniture, fixtures, fittings, etc. out of the total expenditure, the assessee had failed to furnish the bills or vouchers totaling Rs. 14,56,000/-, which was disallowed under section 37(1) of the Act and the balance expenditure was allowed by the Assessing Officer. Further the expenditure on salary and wages totaling Rs. 20,50,000/- debited under the head 'revenue expenditure' by the Assessing Officer. Thus after allowing depreciation on the various assets capitalized, the total disallowance was worked out to Rs. 1,32,02,180/- by the Assessing Officer.
68. The CIT (Appeals) upheld the order of the Assessing Officer on all the accounts totaling Rs. 1,32,02,190/-.

69. The assessee is in appeal against the order of the CIT (Appeals). The learned A.R. for the assessee pointed out that in respect of the expenditure of Rs. 1,07,49,523/-, the assessee had taken on lease plot of land for a period of 12 years from its Managing Director and had spent the aforesaid amount in the renovation of the lease hold property. In respect of electric equipment totaling Rs. 19,99,620/- the learned A.R. for the assessee pointed out that it had more than 100 retail counters and the above said expenditure was in the nature of replacement of bulbs, etc. as detailed at page 53 to 59 of the Paper Book. The learned A.R. for the assessee fairly admitted that no bills were available with the assessee for expenditure of Rs. 14,50,000/-.

70. The learned D.R. for the Revenue placed reliance on the orders of the Assessing Officer/CIT (Appeals).
71. We have heard the rival contentions and perused the record. The assessee during the year under consideration had debited revenue expenditure totaling Rs.2.53 crores, comprising as under:

72. The Assessing Officer disallowed the above said expenditure as under:

73. The assessee is in appeal against the above said disallowance made by the Assessing Officer which was upheld by the CIT (Appeals).

74. The first item of expenditure is the renovation expenditure incurred by the assessee. The assessee had taken on lease plot No.365, Industrial Area, Phase-I, Panchkula from its Managing Director Shri Arun Grover on nominal rent b y p a yi n g h i m R s . 7 5 l a c s and had constructed the building on the said land for its centralized controlling office. The explanation of the assessee both before the Assessing Officer and the CIT (Appeals) was as under:

During the F. Y 2003-04, the Company had taken land -- Plot No. 365, Industrial Area, Phase-I, Panchkula, on lease from Sh. Arun Grover, Managing Director of the Company on nominal Rent by paying him Rs. 75.00 lacs as interest free deposit. As the Company was expanding at a rapid pace, it was decided to establish a centralized controlling office (Head Office) Building on the leased premises.

During the year under consideration, an amount of Rs. 1,07,49,523/- has been spent on construction.

The assessee has put up construction of building on leasehold land and no building has been taken on lease. The assessee has not acquired any Capital Asset viz land but put up a building for business advantage. As the amount spent on construction of building as per lease deed is non reimbursible, the same has been claimed as revenue expenditure.

The assessee has not claimed any depreciation on Rs. 10749523/- under the Income Tax Act 1961 during the year under consideration"

75. The perusal of the above said explanation fairly establishes that the assessee had spent sum of Rs.1.07 crores on the construction of building on land taken on lease from its Managing Director. The said expenditure on the construction of the building cannot be held to be revenue expenditure in the case of the assessee. We are in conformity with the orders of the authorities below that the said expenditure incurred by the assessee is capital expenditure and the assessee is entitled to the claim of depreciation on the said assets. Reliance placed by the assessee on the ratio laid down in CIT Vs. Hi Line Pens (P) Ltd. [306 ITR 182 (Del)] is misplaced as the Hon'ble Delhi High Court had allowed the claim of the assessee on account of expenditure on repairs and renovation of rented premises, whereas in the present facts of the case before us, the assessee had incurred the said expenditure on the construction of the building itself from which it had carried on its business in the later period. Consequently, we find no merit in the claim of the assessee vis-à-vis the expenditure of Rs.1.07 crores.

76. The second item of expenditure is the amounts spent on electric equipments totaling Rs. 19,99,620/-. As referred to by us in the paras hereinabove the assessee was running more than 100 retail outlets in whole of India and the break-up of the said expenditure is as under:

77. The assessee had furnished the details of the respective expenditure under various sub-heads at pages 53 to 59 of the Paper Book. The first expenditure is on electrical equipment placed at pages 54 and 55 of the Paper Book. The assessee had purchased 80 fans for 60,000 on 12.5.2006. Further there are other bills raised for ceiling fans for different offices as find mention in the ledger account palced at pages 54 and 55 of the Paper Book. The assessee had also spent Rs. 1,54,441/- on 15.1.2007 for electric installation at Faridabad. In the totality of the nature of the expenditure incurred by the assessee we find no merit in the claim of the assessee vis-à-vis electric equipment totaling Rs. 8,43,022/-. The second item of expenditure is the office equipment totaling Rs. 76,191/-, break up of which is placed at page 56 of the Paper Book which is the expenditure on water dispenser, water cooler, water filter, etc. which are items of fittings and are in the nature of capital expenditure. The detail of expenditure on electric installation of Rs. 2,30,028/- is placed at page 58 of the Paper Book and perusal of the same reflects the purchase of exhaust fans, electric goods for different units except for the expenditure of 8500 tubes and 14677 of lights. In the totality of the facts and circumstances, we find no merit in the claim of the assessee and the same is rejected in respect of expenditure of Rs. 2,30,028/-.

78. The next head of expenditure is on Air Conditioners and coolers totaling Rs. 7,48,089/- and mobile phones totaling Rs. 1,02,297/-, placed at pages 57 and 59 of the Paper Book. The above said expenditure incurred by the assessee is purely capital expenditure and is not to be allowed as revenue expenditure, though the assessee is entitled to the claim of depreciation on the said asset. Upholding the order of the Assessing Officer in this regard we dismiss the claim of the assessee vis-à-vis expenditure of Rs. 19,99,620/-.

79. The last item of expenditure is totaling Rs. 14,56,000/- spent on modification of premises of the assessee company. The assessee failed to produce bills in respect of the said expenditure. In the absence of the same, we find no merit in the claim of the assessee and hence the same is rejected. Thus ground of appeal No.3 raised by the assessee for assessment year 2007- 08 is dismissed.

80. Ground No.4 raised by the assessee is identical to ground No.4 raised in ITA No.1056/Chd/2010 and following our reasoning given in paras hereinabove shall apply mutatis and mutandis to ground No.4 raised by the assessee and the Assessing Officer shall recomputed the deduction under section 80IC of the Act, in line with our directions.

81. Ground Nos. 5 and 6 raised by the assessee being general are dismissed as such.
ITA No.687/Chd/2011 :: Revenue's Appeal :: Assessment Year 2007-08:
82. The Revenue has raised the following grounds of appeal:

1. That on the facts and circumstances of the case and in law, Ld. CIT(A) has gravely erred in deleting the addition made by the A.O. in disallowing & capitalizing interest amounting to Rs. 6,50,911/-as per provisions of section 36(i)(iii) of the Income Tax Act, 1 961 .
2. That on the facts and circumstances of the case and in law, Ld. CIT(A) has gravely erred in deleting the addition made by the A.O. by disallowing proportionate interest amounting to Rs. 3,39,642/- as non business expenses out of financial expenditure claimed in relation to interest bearing loans.
3. That on the facts and circumstances of the case and in law, Ld. CIT(A) has gravely erred in deleting the addition made by the A.O. on the issue of applying the provisions of section 14A of the income tax Act, 1961 on investment of Rs. 8,00,00,000/- in S.B.I. Mutual Fund and disallowing proportionate interest and administrative expenses amounting to Rs. 23,50,478/- by the applying rule 8D.
4. The appellant craves to add or amend any ground any grounds of appeal before the appeal is heard or disposed off.
5. It is prayed that the order of the Ld. CIT(A) be cancelled and that of the assessing officer may be restored.

83. Ground No.3 raised by the Revenue has been decided by us along with ground No. 2 raised by the assessee in assessment year 2007-08 and following our decision in paras hereinabove ground No.3 raised by the Revenue is thus dismissed.

84. The issue in ground No.1 raised by the Revenue is against the deletion of addition on account of interest relatable to capital work in progress. The assessee had reflected capital work in progress at Rs.1.79 crores as on 31.3.2007, as against opening capital work in progress amounting to Rs.5.90 crores. The Assessing Officer was of the view that the assessee had utilized various loans funds in the creation of capital work in progress as the assessee had raised Rs. 16.80 crores on account of term loan and Rs. 16.76 crores on account of cash credit account. The total investment in the purchase of fixed asset was amounting to Rs.9.88 crores. The Assessing Officer vide the deliberation at pages 76 to 81 added back sum of Rs. 6,89,945/- being interest capitalized @ 4.34% on monthly balances of capital work in progress. The CIT (Appeals) vide para 45 to 48 at pages 37 and 38 of the appellate order allowed the claim of the assessee in view of the similar plea being allowed in assessment year 2006-07.

85. The Revenue is in appeal against the said disallowance. The learned A.R. for the assessee pointed out that no disallowance is warranted as the work in progress related to its retail outlets.

86. We find that the issue in the present case is covered by the proviso to section 36(1)(iii) of the Act which clearly provides that where borrowed funds have been utilized for investment in the fixed assets for the period from the date of utilization of the funds till the date of putting the assets to use, interest relatable to such deployment of funds is to be disallowed. We find that the Assessing Officer had applied the above said provisions to work out the disallowance of Rs. 6,89,945/- as per schedule at page 81 of the assessment order. We are in conformity with the order of the Assessing Officer and reversing the order of the CIT (Appeals) we allow ground No.1 raised by the Revenue.
87. The issue in ground No.2 raised by the Revenue is against the deletion of addition of Rs. 3,58,125/-. The Assessing Officer had invoked provisions of section 36(1)(iii) of the Act in respect of advances made to M/s Shivam Industries and disallowed a sum of Rs. 2,33,038/-. Further there was imprest account of the Directors and other related concerns of the assessee as tabulated at page 75 of the assessment order and the Assessing Officer worked out the disallowance at Rs. 1,25,087/-. The CIT (Appeals) allowed the claim of the assessee.

88. We find that the first issue of disallowance of interest relatable to the advances made to M/s Shivam Industries is identical to the issue raised vide ground No.1 in the appeal of the Revenue relating to assessment ye a r 2006-07. Following our reasoning in the paras hereinabove we confirm the order of the CIT (Appeals) in respect of the deletion of addition of Rs. 2,33,038/-.

89. The next item of disallowance of Rs. 1,25,087/- is in respect of imprest account of the Directors of the assessee company and certain advances made to other concerns. The CIT (Appeals) allowed the claim of the assessee in respect of advance made to M/s Shivam Industries being identical to the preceding year. In respect of the interest free advance made to sister concern, the CIT (Appeals) held the assessee to have sufficient funds for making the said advance. We find no merit in the said order of the CIT (Appeals) vis-à-vis interest free advances made to sister concern and to the Directors of the assessee company. Following the ratio laid down by the Hon'ble Punjab & Haryana High Court in Abhishekh Industries Vs. CIT [286 ITR 1(P&H)] we confirm the disallowance of Rs. 1,25,087/-. Ground No.2 raised by the Revenue is thus partly allowed.

ITA No.1116/Chd/2011 (Assessee's Appeal): (Assessment Year 2008-09)
90. The assessee has raised following grounds of appeal:

1. On the facts and in the circumstances of the case and in law, the Worthy CIT(A) in Appeal No. 695/10-11 dated 03.10.2011 has erred in passing that order in contravention of the provisions of Section 250(6) of the Income Tax Act, 1961.

2. That on facts, circumstances and legal position of the case, the Worthy CIT(A) vide Para 3 of his order, has erred in confirming addition of Rs. 78,97,238/- made by Ld. AO wherein he had wrongly held that Interest on Loan from India Bulls is disallowable u/s 36(l)(iii) of the Act.

3. That on facts, circumstances and legal position of the case, the Worthy CIT(A) vide Para 4 of his order, has erred in confirming addition of Rs. 17,66,255/- made by Ld. AO wherein he had wrongly held that provisions of Rule 14A are applicable over investment in SBI Mutual Funds & Others. Further he erred in making a wrong computation of quatum of disallowance u/s 14A of the Act.

4. That on facts, circumstances and legal position of the case, the Worthy CIT(A) vide Para 5 of his order, has erred in confirming addition of Rs. 6,58,853/- made by Ld. AO wherein he had restricted the deduction u/s 80-IC of the Act by notionally apportioning the un-apportionable Head office expenses to the Baddi unit of the appellant.

5. That on facts, circumstances and legal position of the case, the Worthy CIT(A) vide Para 6 of his order, has erred in confirming addition of Rs. 8,37,466/- made by Ld. AO wherein he had wrongly held that provisions of proviso to Sec 36(1) (iii) is applicable over closing work in progress of the appellant.

6. That the appellant craves leave for any addition, deletion or amendment in the grounds of appeal on or before the disposal of the same.

91. Ground Nos. 1 and 6 raised by the assessee being general are dismissed.

92. Ground No.2 raised by the assessee is against the addition of Rs. 78,97,238/- under section 36(1)(iii) of the Act. The brief facts relating to the issue are that the assessee had borrowed Rs. 500 lacs from M/s India Bulls Housing Finance Ltd. for purchase of land and interest on this land was capitalized in the books of account but was claimed as a deduction by the assessee in its computation of income. The claim of the assessee before the Assessing Officer was that the interest of Rs. 78,97,238/- was paid to M/s India Bulls Housing Finance Ltd. and the same being a business asset was so declared in the schedule of fixed asset. Further claim of the assessee was that the interest paid on the funds borrowed for investment in land for business purposes was an allowable business expenditure notwithstanding the facts that the assessee had capitalized the interest on capital borrowed to the land account, the same was allowable as an expenditure in the hands of the assessee, despite entries in the books of account. The Assessing Officer has given a finding that the loan raised form M/s India Bulls Housing Finance Ltd. was utilized for the purchase of land and consequently the nature of interest payment amounting to Rs. 78,97,238/- was capital in nature as the funds raised were utilized for creation of fixed asset. The CIT (Appeals) upheld the order of the Assessing Officer.

93. The assessee is in appeal against the aforesaid addition of Rs. 78,97,238/-. The learned A.R. for the assessee pointed out that the basis of the order of the Assessing Officer that the loan raised from M/s India Bulls Housing Finance Ltd. has been utilized for purchase of land is incorrect. The loan was taken against security of capital asset but was not utilized for the purchase of land. The learned A.R. for the assessee made reference to the written submissions furnished before the CIT (Appeals) which are reproduced under para 3.2 at page 2 of the appellate order.

94. The learned D.R. for the Revenue placed reliance on the orders of the authorities below.

95. We have heard the rival contentions and perused the record. The assessee during the year under consideration had raised loan of Rs. 500 lacs from M/s India Bulls Housing Finance Ltd. against security of SCO Site No.2, Pocket No.1, Mani Majra, U.T., Chandigarh. The claim of the assessee is that the said property was acquired from auction held on 21.1.2004 and installments were paid in assessment years 2003-04 and 2005-06. The last installment was paid during the financial year 2006-07 and the conveyance deed was executed in the financial year 2006-07. The assessee has placed on record the sanction letter of M/s India Bulls Housing Finance Ltd. at page 35 of the property under which it is stated that it is a loan against property. The amount was released in the account of Mr. Arun Gover, Managing Director, who was co-applicant on 16.3.2007 as per the document placed at pages 35 and 36 of the Paper Book. The assessee has thereafter placed on record current account of the assessee company at pages 37 onwards, under which the amount was transferred from the account of Mr. Arun Grover to the assessee company and thereafter utilized for the purpose of business. Out of the total loan received by the assessee, the last installment of Rs. 93.15 lacs was paid in financial year 2006-07 and the balance amount was utilized for running the business of the assessee. The claim of learned A.R. for the assessee is that the proviso to section 36(1)(iii) of the Act cannot be invoked in the present case as the said installment was paid in assessment year 2007- 08 and not during the year under consideration i.e. assessment year 2008-09. The said asset was business asset utilized by the assessee. Further plea of the learned A.R. for the assessee was that in view of the utilization of the amount in running the business of the assessee firm, there was no merit in disallowing any part of the interest expenditure.

96. We find from the perusal of the orders of both the authorities below that the issue has not been considered by the authorities below in proper perspective and the addition has been made merely because the loan had been raised by the assessee company. The finding of the Assessing Officer in this regard that the amount has been invested in the land account, does not come out from the documents filed by the learned A.R. for the assessee. In the interest of justice and in order to decide the issue we deem it fit to restore this issue back to the file of the Assessing Officer to decide the same de - novo after taking into consideration the various documents filed by the assessee before us and also plea of the assessee in establishing its case of expanding the same amount for the purposes of business activities of the assessee company. Reasonable opportunity of hearing shall be afforded to the assessee by the Assessing Officer. Ground No.2 raised by the assessee is allowed for statistical purposes.

97. Ground No.3 raised by the assessee is identical to ground No.2 raised by the assessee in ITA No.693/Chd/2011 and our decision in ground No.2 raised by the assessee in ITA No.693/Chd/2011 shall apply mutatis to ground No.3 raised by the assessee in ITA No.1116/Chd/2011. The Assessing Officer shall recomputed the deduction under section 80IC of the Act.

98. Ground No.4 raised by the assessee is identical to ground No.4 raised in ITA No.1056/Chd/2010 and our decision in ground No.4 raised by the assessee in ITA No.1056/Chd/2010 shall apply mutatis to ground No.4 raised by the assessee in ITA No.1116/Chd/2011. The Assessing Officer shall recomputed the deduction under section 80IC of the Act.

99. The issue in ground No.5 is against the addition of Rs. 8,37,446/- by invoking the provisions of proviso to section 36(1)(iii) of the Act on the capital work in progress. The said issue is identical to the issue raised by the Revenue vide ground No.1 in ITA No.687/Chd/2011. In view thereof, we reverse the order of the CIT (Appeals) and uphold the addition made by the Assessing Officer by applying the proviso to 47 section 36(1)(iii) of the Act. Ground No.5 raised by the assessee is thus dismissed.

100. In the result, all the three appeals of the assessee relating to assessment years 2006- 07 to 2008 - 09 are partly allowed and appeal of Revenue relating to assessment year 2006- 07 is dismissed and relating to assessment year 2007- 08 is partly allowed.