Vildirect: IncomeTax-caselaws-2013-VIL-992-ITAT-ART

2013-VIL-992-ITAT-ART

Income Tax Appellate Tribunal AMRITSAR

I.T.A. No.103(Asr)/2006, I.T.A. No.78(Asr)/2006, I.T.A. No.119(Asr)/2011, I.T.A. No.151(Asr)/2011, I.T.A. No.120(Asr)/2011, I.T.A. No.152(Asr)/2011, I.T.A. No.121(Asr)/2011, I.T.A. No.153(Asr)/2011, I.T.A. No.122(Asr)/2011, I.T.A. No.154Asr)/2011, I

Date: 08.03.2013

ASSTT. COMMISSIONER OF INCOME TAX AND OTHERS

M/s . MAX INDIA LIMITED AND OTHERS

For the Petitioner : Sh. Tarsem Lal, DR
For the Respondent : Sh. Rupesh, Jain, Gaurav Jain Advocates & Sh. Dilbagh Singh Narang, Associate Director Taxation

BENCH

Sh. H. S. Sidhu And Sh. B. P. Jain, JJ.

JUDGMENT

Per Bench :

These appeals of the Revenue and the assessee arise from different orders of CIT(A), Jalandhar, as detailed hereinbelow:

S. No.	ITA No.	Asstt. Year	Arising from order of CIT(A) dated	Appeal filed by
1.	103(Asr)/2006	2001-02	Ludhiana-1, 19.01.2006	Revenue
2.	78(Asr)/2006	2001-02	-do-	Assessee
3.	119(Asr)/2011	2002-03	Jalandhar, 12.1.2011	Assessee
4.	151(Asr)/2011	2002-03	-do-	Revenue
5.	120(Asr)/2011	2003-04	-do-	Assessee
6.	152(Asr)/2011	2003-04	-do-	Revenue
7.	121(Asr)/2011	2004-05	-do-	Assessee
8.	153(Asr)/2011	2004-05	-do-	Revenue
9.	122(Asr)/2011	2005-06	-do-	Assessee
10.	154(Asr)/2011	2005-06	-do-	Revenue
11.	123(Asr)/2011	2006-07	-do-	Assessee
12.	155(Asr)/2011	2006-07	-do-	Revenue

2. In ITA No.103(Asr)/2006 for the assessment year 2001-02, the Revenue has raised following grounds of appeal:

"1. That on the facts of the case and in law, the ld. CIT(A) has erred:

a) in accepting the claim of the assessee regarding the conversion of shares from "stock-in-trade" to "Investments" to be genuine. He has not appreciated that the conversion of shares had been made with a view to circumvent the provisions of the Explanation to section 73 as the market price of the shares had gone down substantially leading to loss from dealing in them. Moreover, the shares in question had been purchased by the amalgamated company with an intention to trade in them and the subsequent change of character was only a colorable device to avoid the mischief of the Explanation to section 73.

b) in holding that the provisions relating to capital gains are applicable to the transactions relating to sale of shares as the shares were held as "Investments" and thus directing to allow the loss of Rs. 6.52 crores as capital loss. The Ld. CIT(A) has not appreciated that a part of assessee's business was speculation business within the meaning of the Explanation to section 73 of the Act.

c) in directing to allow the loss on sale of securities claimed at Rs. 3,72,56,575/- as business loss and not speculation loss.

2. The Ld. CIT(A) has erred in on the facts of the case and in law in allowing pre-operative expenses of Rs. 22.96 crores in respect of health-care division as revenue expenses treating this business as expansion of the existing business. The Ld. CIT(A) has not appreciated the fact that the assessee transferred the healthcare business in the subsequent year to a subsidiary company. The health-care business was a new line of business requiring new licenses and the expenses incurred on setting up this business could not be allowed out of the income of the assessee from its existing business.

3. The Ld. CIT(A) has erred in on the facts of the case and in law in allowing as revenue expenses pre-operative expenses pending capitalization in respect of BOPP film division ignoring the fact that the assessee itself has capitalized these expenses.

4. a) The Ld. CIT(A) while allowing the expenditure claimed on account of non-compete agreement in respect of PCB/GMF chemicals, has not appreciate that the agreement was entered into by the subsidiary company and the business in question already stood transferred to joint venture companies and the payment was made as a pre-condition for entering into joint venture and was thus not incidental to the business of the assessee.

b) The Ld. CIT(A), on the facts of the case and in law, has wrongly allowed the payment made on account of non-compete agreement in respect of betalactum and non-betalactum drugs not appreciating the fact that one of the business already stood transferred to a joint venture company and the other business was to be run by a subsidiary company.

5. The Ld. CIT(A) has erroneously allowed depreciation on medical equipment treating the same as computers ignoring the fact that even the tax auditors had not endorsed this claim in their report. On the facts of the case and in law, the medical equipment in question could not be treated as computers.

6. The Ld. CIT(A), has, on the facts of the case, erred in accepting the claim of the assessee for depreciation @ 25% on building used as Nursing Home ignoring the fact that the area which could be considered to be part and parcel of plant and machinery was nominal and rest of the building was a normal building. He has also ignored the fact that the enhanced claim was not backed by tax auditors.

7. The Ld. CIT(A) has, on facts of the case and in law, erred in reducing the disallowance out of expenses incurred in relation to income not includible in total income.

The appellant craves leave to add or amend the grounds of appeal on or before the appeal is heard and disposed of.

It is prayed that the order of the Commissioner of Income-tax (Appeals) be set aside and that of the AO be restored."

3. In ITA No.78 (Asr)/2006 for the assessment year 2001-02, the assessee has raised following grounds of appeal:

"1. On the fact and in the circumstances of the case, the ld. CIT(A) has erred both on facts and in law in upholding the order of the Assessing Officer relating to disallowance under section 14A of the Income-tax Act, 1961.

2. The appellant craves leave, to add, alter or amend the grounds of appeal at any stage."

4. In ITA No.119(Asr)/2011 for the assessment year 2002-03, the assessee has raised following grounds of appeal:

"1. That the Ld. Commissioner of Income Tax (Appeals) - Jalandhar [hereinafter referred to as Ld. CIT(A)], erred on facts and in law, in not deleting the disallowance of Rs. 1,50,00,000 made by the Ld. AO u/s 14A of the Income Tax Act, ('the Act'); instead in enhancing the amount of disallowance under the said section to Rs. 4,52,94,405/-.

1.1 That the Ld. CIT(A) further erred in law in ignoring that the Ld. AO had failed to substantiate record/establish any proximate nexus between the exempt income earned and expenditure incurred during the year for computing the alleged disallowance u/s 14A of the Act.

1.2 That the Ld. CIT(A) further erred in law in on fact and in law, in computing Rs. 4,52,94,905/- as the disallowance u/s 14A of the Act by adopting a self-worked out formula which is adhoc, arbitrary, unreasonable and not tenable.

1.2.1 That the Ld. CIT(A) further erred in law in drawing an adverse presumption that part of the interest bearing borrowed funds were used for the purpose of making investments in instruments yielding tax free income, not appreciating that the appellant had sufficient interest free funds for making investments in instruments yielding tax exempt income.

1.2.2 That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details.

1.2.3 That the Ld. CIT(A) further erred in law in drawing a nexus of the interest bearing borrowed funds with the instruments yielding exempt income solely for the reason that bank statements were not furnished b the appellant, not properly appreciating the cash/fund flow statement made available by the appellant and further alleging that the contention of the appellant that the bank statements were not readily available does not appear to be tenable.

1.2.4 That without prejudice the Ld. CIT(A) further erred in law in not appreciating that investments in instruments which did not yield tax exempt income and/or were held as stock in trade were not required to be taken into consideration for purposes of computing the percentage of borrowed funds alleged to have been used for earning tax exempt income, for the purposes of making disallowance u/s 14A of the Act.

1.3. That the Ld. CIT(A) further erred in law in holding that interest expenditure to the extent of Rs. 4,32,94,905/- incurred by the appellant during the relevant previous year had proximate nexus with the earning of tax exempt income and was disallowable u/s 14A of the Act.

1.3.1. That the Ld. CIT(A) further erred in law in not issuing a show cause notice or affording an opportunity to the appellant to rebut the formula or the basis adopted by him to compute the disallowance on account of interest expenditure u/s 14A of the Act.

1.4 That the Ld. CIT(A) erred in law in disallowing, on adhoc basis, a sum of Rs. 20,00,000/- u/s 14A of the Act, in respect of personnel and administrative expenses alleged to have been incurred for purpose of earning tax exempt income.

1.5 Without prejudice to above, that the Ld. CIT(A) further erred in law in rejecting the appellant's plea to restrict the disallowance of interest and other expenses to Rs. 10,00,000/- u/s 14A of the Act on a 'reasonable basis', as computed by the predecessor Ld. CIT(A) for the AY 2001-02 and by the Ld. AO himself for the AY 2003-04, AT 2004-05 and AT 2005-06.

2. That the ld. CIT(A) erred on facts and in law in confirming the action of the Ld. AO in not deleting the addition of Rs. 1,50,00,000/- being the amount disallowed u/s 14A, made to the net profit by the Ld. AO while computing 'book profit' u/s 115JB of the Act; instead in enhancing the said amount of addition to Rs. 4,52,94,905/-.

3. That the ld. CIT(A) erred on facts and in law in confirming the disallowance of legal and professional expenses of Rs. 1,25,27,450/- made by the AO being the retainership fees paid to MAX UK Limited for providing various business support services.

All the above grounds are independent and without prejudice to each other. "

5. In ITA No.151(Asr)/2011 for the assessment year 2002-03, the Revenue has raised following grounds of appeal:

"1. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the payment made on account of non-compete fee of Rs. 54 lacs.

2. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the expenses of Rs. 22.02 crores incurred on expansion of business of health care division which are in nature of capital expenditure.

3. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of Rs. 41.35 lac made by the A.O. being expenses incurred on expansion of MAXXON Division which are in the nature of capital expenditure.

4. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of Rs. 12.05 lacs being expenses incurred on product development expenses of Max Foil Division, Rs. 4.74 lacs being expenses incurred on expansion of Pharma Division and Rs. 57.12 lacs as the expenses incurred on project which was subsequently abandoned and Rs. 19.66 lacs incurred on foreign travel of employees when the AO treated all the expenses as capital in nature being incurred for expansion of business.

5. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in treating the assessee's transactions in listed securities to be in the nature of investment of the assessee rather than speculation income/loss.

6. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in reversing the decision of AO in taxing the consideration received on account of non-compete fee under the head of capital gains.

7. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored.

8. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

6. In ITA No.120(Asr)/2011 for the assessment year 2003-04, the assessee has raised following grounds of appeal:

"1. That the Ld. CIT(A)- Jalandhar erred on facts and in law in confirming the disallowance of legal and professional expenses of Rs. 1,544,209/- made by the Ld. A.O. being the retainership fees paid to Max UK Limited for providing various business support services.

That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

7. In ITA No.152(Asr)/2011 for the assessment year 2003-04, the Revenue has raised following grounds of appeal:

"1. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the payment made on account of non-compete fee of Rs. 35,39,483/-.

2. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of Rs. 46,05,171/- made by the AO being expenses incurred on expansion of MAXXON Division which are in the nature of capital expenditure.

3. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of Rs. 5.72 lacs being expenses incurred on project development expenses of Max Foil Division, and Rs. 6.48 lacs on expansion of pharma Division which are in the nature of capital expenditure.

4. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in treating the assessee's transactions in listed securities to be in the nature of investment of the assessee rather than speculation income/loss.

5. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored.

6. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

8. In ITA No.121(Asr)/2011 for the assessment year 2004-05, the assessee has raised following grounds of appeal:

"1. That the Ld. Commissioner of Income Tax (Appeals) - Jalandhar [hereinafter referred to as Ld. CIT(A)], erred on facts and in law, in not deleting the disallowance of Rs. 10,00,000 made by the Ld. AO u/s 14A of the Income Tax Act, ('the Act'); instead in enhancing the amount of disallowance under the said section to Rs. 5,84,00,000/-.

1.2 That the Ld. CIT(A) further erred in law in on fact and in law, in computing Rs. 5,84,00,000/- as the disallowance u/s 14A of the Act by adopting a self-worked out formula which is adhoc, arbitrary, unreasonable and not tenable.

1.3.2 That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details.

1.3 That the Ld. CIT(A) further erred in law in holding that interest expenditure to the extent of Rs. 5,64,00,000/- incurred by the appellant during the relevant previous year had proximate nexus with the earning of tax exempt income and was disallowable u/s 14A of the Act.

1.3.1 That the Ld. CIT(A) further erred in law in not issuing a show cause notice or affording an opportunity to the appellant to rebut the formula or the basis adopted by him to compute the disallowance on account of interest expenditure u/s 14A of the Act.

1.4. That the Ld. CIT(A) erred in law in disallowing, on adhoc basis, a sum of Rs. 20,00,000/- u/s 14A of the Act, in respect of personnel and administrative expenses alleged to have been incurred for purpose of earning tax exempt income.

1.5. Without prejudice to above, that the Ld. CIT(A) further erred in law in rejecting the appellant's plea to restrict the disallowance of interest and other expenses to Rs. 10,00,000/- u/s 14A of the Act on a 'reasonable basis', as computed by the predecessor Ld. CIT(A) for the AY 2001-02 and by the Ld. AO himself for the AY 2003-04, AY 2004-05 and AY 2005-06.

1.6. Without prejudice to above, that the ld. CIT(A) further erred on facts and in law, in rejecting the appellant's plea to restrict the disallowance of interest and other expenses to Rs. 10,00,000/- u/s 14A of the Act on a 'reasonable basis' as computed by the predecessor Ld. CIT(A) for the AY 2001-02 and by the Ld. AO himself for the AY 2003-04, AT 2004-05 & 2005-06.

2. That the ld. CIT(A) erred on facts and in law in confirming the action of the Ld. AO in not deleting the addition of Rs. 10,00,000/- being the amount disallowed u/s 14A, made to the net profit by the Ld. AO while computing 'book profit' u/s 115JB of the Act; instead in enhancing the said amount of addition to Rs. 5,84,00,000/-.

All the above grounds are independent and without prejudice to each other."

9. In ITA No.153(Asr)/2011 for the assessment year 2004-05, the Revenue has raised following grounds of appeal:

"1. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the payment made on account of non-compete fee of Rs. 84,27,500/-.

2. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of Rs. 54,13,045/- made by the AO being expenses incurred on expansion of MAXXON Division which are in the nature of capital expenditure.

3. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in treating the assessee's transactions in listed securities to be in the nature of investment of the assessee rather than speculation income/loss.

4. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored.

5. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

10. In ITA No.122(Asr)/2011 for the assessment year 2005-06, the assessee has raised following grounds of appeal:

1.2 That the Ld. CIT(A) further erred in law in on fact and in law, in computing Rs. 4,48,00,000/- as the disallowance u/s 14A of the Act by adopting a self-worked out formula which is adhoc, arbitrary, unreasonable and not tenable.

12.2. That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details.

1.2.3. That without prejudice the Ld. CIT(A) further erred in law in not appreciating that investments in instruments which did not yield tax exempt income and/or were held as stock in trade were not required to be taken into consideration for purposes of computing the percentage of borrowed funds alleged to have been used for earning tax exempt income, for the purposes of making disallowance u/s 14A of the Act.

1.3 That the Ld. CIT(A) further erred in law in holding that interest expenditure to the extent of Rs. 4,48,00,000/- incurred by the appellant during the relevant previous year had proximate nexus with the earning of tax exempt income and was disallowable u/s 14A of the Act.

1.5 That the Ld. CIT(A) further erred on facts and in law in rejecting the appellant's plea to allow it to withdraw its ground of appeal relating to disallowance u/s 14A of the Act or in the alternative treat it as "not pressed".

1.6. Without prejudice to above, that the Ld. CIT(A) further erred in law in rejecting the appellant's plea to restrict the disallowance of interest and other expenses to Rs. 10,00,000/- u/s 14A of the Act on a 'reasonable basis', as computed by the predecessor Ld. CIT(A) for the AY 2001-02 and by the Ld. AO himself for the AY 2003-04, AY 2004-05 and AY 2005-06.

All the above grounds are independent and without prejudice to each other."

11. In ITA No.154(Asr)/2011 for the assessment year 2005-06, the Revenue has raised following grounds of appeal:

"1. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the payment made on account of non-compete fee of Rs. 83.35lacs

2 That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored.

3. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

12. In ITA No.123(Asr)/2011 for the assessment year 2006-07, the assessee has raised following grounds of appeal:

"1. That the Ld. Commissioner of Income Tax (Appeals) - Jalandhar [hereinafter referred to as Ld. CIT(A)], erred on facts and in law, in confirming the disallowance made by the Ld. AO u/s 14A of the Income Tax Act, ('the Act'); to the extent to Rs. 3,38,00,000/-.

1.2 That the Ld. CIT(A) further erred in law in on fact and in law, in computing Rs. 3,38,00,000/- as the disallowance u/s 14A of the Act by adopting a self-worked out formula which is adhoc, arbitrary, unreasonable and not tenable.

1.2.2. That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details.

12.3. That the Ld. CIT(A) further erred in no appreciating that interest bearing funds were borrowed by the appellant for a specific business purpose and same was demonstrated by placing on record extensive documentation and details.

1.2.4. That without prejudice the Ld. CIT(A) further erred in law in not appreciating that investments in instruments which did not yield tax exempt income and/or were held as stock in trade were not required to be taken into consideration for purposes of computing the percentage of borrowed funds alleged to have been used for earning tax exempt income, for the purposes of making disallowance u/s 14A of the Act.

1.4 That the Ld. CIT(A) further erred in law in holding that interest expenditure to the extent of Rs. 3,38,00,000/- incurred by the appellant during the relevant previous year had proximate nexus with the earning of tax exempt income and was disallowable u/s 14A of the Act.

1.4. That the Ld. CIT(A) erred in law in disallowing, on adhoc basis, a sum of Rs. 30,00,000/- u/s 14A of the Act, in respect of personnel and administrative expenses alleged to have been incurred for purpose of earning tax exempt income.

All the above grounds are independent and without prejudice to each other."

13. In ITA No.155(Asr)/2011 for the assessment year 2006-07, the Revenue has raised following grounds of appeal:

"1. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the payment made on account of non-compete fee of Rs. 90 lacs.

2. Whether on the facts and the circumstances of the case, the ld. CIT(A) has erred in law in allowing the disallowance of Rs. 10.98 crores to Rs. 3.38 crores made by the AO u/s 14A of the Income Tax Act.

3. That it is prayed that the order of the Ld. CIT(A) be set aside and that of the A.O. restored.

4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed of."

14. First of all, we take up appeal of the Revenue in ITA No.103(Asr)/2006 for the assessment year 2001-02 as under: (i) The brief facts regarding first ground of Revenue, which are in three parts are that Max Corporation Limited (MCL), a wholly owned subsidiary of the assessee was incorporated on 12.09.1996 was merged with the assessee w.e.f. 1.7.1999, pursuant to a scheme of merger approved by the Hon'ble Punjab & Haryana High Court. Pursuant to merger, all assets and liabilities of Max Corporation Ltd; including various shares held by Max Corporation Ltd. as stock in trade and as investments, vested in the assessee. On 3.7.2000, as per the decision of management, shares of 11 companies, which were acquired by MCL and were held as 'stock in trade', prior to merger and which vested with the assessee post merger, were decided to be held as 'investment'. Accordingly, the said shares were converted from stock in trade to investment. On the date of conversion, the assessee claimed a loss on account of difference in market value of such shares and cost price thereof. The said loss was claimed as business deduction. Out of the aforesaid converted shares, certain shares were also sold by the assessee during the year. The assessee computed loss from the aforesaid sale, i.e. difference between the sale price and market price as on the date of conversion (3.7.2000) at Rs. 2.12 crores, which was disclosed under the head 'capital gains'. Further, during the relevant previous year, the assessee sold shares of three companies, which were as held as stock in trade and acquired from erstwhile MCL, which resulted in business loss of Rs. 3.72 crores. ii) The AO did not accept the action of conversion of shares from stock in trade to investment in the books of account on the ground that even after merger, the company was taking decisions on day to day basis on sale and purchase of shares and therefore, the shares were continued to be held as stock in trade and conversion thereof into investment was a colorable device adopted to go out of Explanation to section 73 of the Act. The AO further mentioned that the assessee company arbitrarily picked up certain shares only for conversion from stock in trade to investment. iii) The AO therefore disallowed the entire loss arising from sale of shares ( which were held as stock in trade and converted into investment), by treating the same as speculative in nature, by applying the deeming fiction contained in Explanation to section 73 of the I.T.Act, 1961 iv) On appeal, the Ld. CIT(A) decided the issue in favour of the assessee by holding that :

- the assessee was at liberty to classify shares received on amalgamation as stock in trade or investment, as per page 8 of Ld. CIT(A)'s order.

- sale of shares held as investments were not covered by the provisions of Explanation to section 73.

- The Ld. CIT(A), however, held the loss arising on conversion of shares held as stock in trade into investment as notional loss and directed the AO to allow loss arising on sale of converted shares, as capital loss, by reducing the actual cost price from sale consideration, which amounted to Rs. 6.52 crores, as per para 3 of Ld. CIT(A)'s order.

- Explanation to section 73 was not applicable to loss arising from sale of shares (held as stock in trade), claimed by the assessee as business loss. The AO was directed to allow loss of Rs. 3.72 crores arising on sale of shares as normal business loss (Refer page 15 of Ld. CIT(A's order).

15. We may point out that the assessee has accepted the order of the Ld. CIT(A) disallowing notional loss arising on conversion of stock in trade into the investments on 3.7.2000 and no appeal has been filed by the assessee against the aforesaid decision of the Ld. CIT(A).

16. The Revenue has challenged the aforesaid order of the Ld. CIT(A) accepting conversion of stock in trade into investments and allowing loss arising during the relevant previous year on sale of part shares so converted and other shares held as stock in trade.

16.1 The Ld. DR, Sh. Tarsem Lal, in support of ground of appeal filed by the Revenue stated that the assessee has adopted colourable device to evade tax by passing resolution by converting shares received from Max Corporation Ltd. as stock in trade into investments. It was stated that the said conversion was done to avoid application of Explanation to section 73 of the Act because if the conversion had not been done, the loss on sale of shares would have been a speculation loss under that Explanation and not adjustable against other income. It was further submitted that as per resolution passed by the company for conversion of shares, it was stated that the reason for such conversion was future prospects of the securities held as stock in trade, staggered requirement of funds by the company in next 3-4 years and the current volatile market conditions etc.

16.2. The Ld. DR pointed out that the company, in fact, sold 33% of the shares acquired from Max Corporation Ltd. during the relevant previous year itself, whereas object was to hold the same for 3 to 4 years. It was also submitted that shares were sold to minimise the risk of the volatile market condition and avoid further cash loss to the company on these share holdings. Such considerations as per Ld. DR were not relevant in respect of shares held as investments. In other words, as per the Ld DR shares were not actually held as investments.

16.3. The Ld. DR has also objected to the action of the Ld. CIT(A) in directing the AO to allow loss of Rs. 3,72,56,575/- arising on sale of shares as a normal business relying upon the decision of the ITAT, Delhi Bench in the case of Aman Portofolio Pvt. Ltd. vs. DCIT 92 ITD 324. As per Ld. DR, reliance placed upon the aforesaid decision by the Ld. CIT(A) is misplaced, as the said decision is in favour of the Revenue. Since it was held in that case that the explanation to section 73 can be invoked only when an assessee adopts a manipulative devise to reduce the taxable income. As per Ld. DR, in the present case, the assessee has also adopted such a devise to avoid explanation to section 73. The Ld. DR referred to the following decisions for the proposition that where a company does business of purchase and sale of shares, explanation to section 73 is attracted:

a) Easter Aviation and Industries Ltd. vs. CIT 208 ITR 1023 (Cal.)

b) Aryasthan Corporation Ltd. vs. CIT 253 ITR 401 (Cal) 25

c) CIT vs. Park View Properties Pvt. Ltd. 261 ITR 473 (Cal.)

d) CIT vs. Arvind Investment Ltd. 192 ITR 365 (Cal.)

e) Prasad Agents (P) Ltd. vs ITO 333 ITR 275 (Mumbai)

16.4. In view of the aforesaid, the Ld. DR submitted that the order of the ld. CIT(A) needs to be reversed and the order of the Assessing Officer be upheld.

17. In reply, it was submitted by the Ld. counsel for the assessee, Mr. Rupesh Jain, Advocate that it is settled legal position that an assessee can hold two portfolios i.e. (i) on trading account and (ii) on capital account. Whether the shares are held on trading account or capital account, depends upon the dominant intention of the assessee. In this regard, he referred to following decisions:

i) G. Venkateswami Naidu and Co. vs. CIT 35 ITR 594 (SC)

ii) Raja Bahadur Kamakhya Narain Singh vs. CIT 77 ITR 253 (SC)

iii) CIT vs. Associated Development Co. (P) Ltd. 82 ITR 586 (SC)

iv) Sutlej Cotton Mills Supply Agency Ltd. 100 ITR 706 (SC)

v) CBDT Circular No.4 of 2007 dated 15.6.2007.

17.1. The Ld. counsel further submitted that in the present case, since the assessee had acquired shares held by the erstwhile MCL, pursuant to amalgamation of MCL , the assessee decided to hold such shares on capital account, for which necessary Board Resolution and entry was passed in the books of account to reflect entry of conversion of same from stock in trade to investments. It was further stated that the assessee did not sell the entire converted shares in the year of conversion and sold only few shares during the year and few shares were sold in succeeding years depending upon market conditions.

17.2. The Ld. counsel for the assessee invited our attention to page 105 of the supplementary paper book to point out that shares of 36 different Companies were received from Max Corporation Ltd at the time of amalgamation out of which only 11 shares were converted into investment ( as per Board Resolution of the Company, dated 25.10.2000 appearing at PB- 47) by the assessee and even out of such 11 shares only part of which were sold during the relevant previous year. The details of the shares converted into investments is given at PB-49. It was pointed out by the Ld. counsel for the assessee that in fact the assessee had suffered loss even in relation to the shares held as stock in trade, a part whereof was sold during the relevant previous year. It was pointed out that the assessee could not have envisaged at the time of conversion of shares that the share price would go down and there would be a loss, moreso considering that the shares which were converted into investments were of large size blue chip companies which are not normally subject to steep fluctuation. According to the Ld. counsel for the assessee, the aforesaid factors demonstrate the bonafide of the assessee because if the intention had been to avoid application of Explanation-73, the assessee could have very well converted all the shares received from Max Corporation Ltd into investments sold in the relevant year. It was also submitted by the ld. counsel for the assessee that the aforesaid shares converted into investments were shown as such in the audited balance sheet, which is strong evidence to support that the shares were held on capital account. Reliance in this regard was placed on the following decisions:

i) Karam Chand Thapar & Bros (P) Ltd vs. CIT 82 ITR 899 (SC)

ii) CIT vs. N.S.S. Investment Pvt. Ltd. 277 ITR 149 (Mad.)

iii) Rewashanker A. Kothari 283 ITR 338 (Guj.)

iv) Arjun Kapur vs. DCIT 70 ITD 161 (Del)

17.3. The Ld. counsel for the assessee also referred to pages 4 to 8 of the order of the Ld. CIT(A) wherein point-wise rebuttal of various reasons given to the AO to hold that shares were converted into investments were actually being dealt in by the assessee and therefore, the loss arising therefrom was not capital loss but a speculative business loss has been given. It was also pointed out that the reasons given in the resolutions passed by the Board which have been referred to by the Ld. DR are only the factors which governed the decision of the Board to convert some of the shares into investments and hold others as stock in trade. As regards the sale of part of shares converted into investments within 4 to 5 months of conversion, it was submitted that the decision was taken to avoid further loss since the share prices had reduced unexpectedly. It was argued that the fact that shares were held for 4 to 5 months and not sold immediately in the market which shows that the assessee did not intend to deal in the same.

17.4. In view of the aforesaid, it was submitted that the order of the Ld. CIT(A) in accepting conversion of 11 shares was correct and was liable to be upheld.

18. As regards to the allegation of conversion of shares having been made to avoid application of Explanation to section 73 of the Act, it was submitted that the said Explanation is attracted where a company carries on business of purchase and sale of shares. It was submitted that the explanation is not applicable in relation to the shares held as investments. For this proposition, reference was made to the following decisions:

i) Mysore Rolling Mills (P) Ltd vs CIT 195 ITR 404 (Ker.)

ii) CIT vs. VIP Growth Fund Ltd 95 Taxman 313 (Del)

iii) Standipack (P) Ltd vs. CIT 255 CTR 197 (Cal)

iv) Trade Team (P) Ltd. vs. DCIT 54 ITD 306 (Mumbai)

v) DCIT vs. Jindal Exports Ltd. 287 ITR 172 (Del) (AT)

vi) Sterlite Industries (India) Ltd. vs. Addl. CIT 102 TTJ 53 (Mumbai)

vii) A.N.Corpn. Ltd. vs. ITO (2006) 6 sot 458 (Mum)

viii) ACIT vs. Bright Star Investment (P) Ltd. 120 TTJ 498 (Mum)

ix) ACIT vs. R.Raman (HUF) 48 SOT 28 (Chennai)

x) Krishnalakshmi Multi Trade (P) Ltd v. ACIT 130 ITD 584 (Ahd)

18.1. In view of the aforesaid, it was submitted that loss of Rs. 6.52 crores arising on sale of shares was held as investment cannot be disallowed by applying Explanation to section 73 of the Act.

19. As regards the loss in relation of shares held as stock in trade which were sold during the previous year, it was submitted that Explanation to section 73 was not applicable to such loss since composition of income derived from various sources which was considered while computing total income for the relevant previous year clearly demonstrate the income from capital gains and house property (Rs.13.66 crores) was much more than the income from business (minus Rs. 10.26 crores). It was stated that in such a situation, in view of the exclusion contained in explanation to section 73 of the Act, the said explanation to section 73 of the Act did not apply and loss cannot be treated as speculative. In support of this proposition, reliance was placed on the following decisions:

i) CIT vs. Darshan Securities (P) Ltd 341 ITR 56 (Bom)

ii) CIT vs. HSBC Securities & Capital Markets India (P) Ltd; 208 Taxman 439.(Bom.)

iii) ACIT vs. Concord Commercials (P) Ltd. 95 ITD 117 (Bom)

20. The decisions referred to by the Ld. DR were distinguished by the Ld. counsel for the assessee, Mr. Rupesh Jain on the ground that the said decisions were to the effect that for the purpose of making comparison between income from various sources, only absolute figure has to be considered and that in these cases there was no sale of investment unlike the case of the assessee.

21. The Ld. DR in the rejoinder submitted that after reducing the carried forward loss, the income of the assessee under the head capital gains/house property is nil and therefore, it cannot be said that income under those heads was higher than the business income for the case of the assessee to fall within exclusion provided in Explanation to section 73 of the Act.

22. We have heard the rival contentions and perused the facts of the case. We are of the view that conversion of part of shares acquired from Max Corporation Ltd; as stock in trade into investments cannot be said to be a device for evading the tax and such conversion cannot be rejected. It is the prerogative of the assessee as to whether it wants to hold the shares as stock in trade or as an investment or partly as stock in trade or partly as an investment. Reference is made in this regard to the decision of Hon'ble Bombay High Court in the case of CIT Vs. Yatish Trading Co. Pvt. Ltd (supra), wherein conversion of shares from stock in trade into investments in case of dealer of shares was upheld. Such decision of the assessee cannot be disregarded on hypothetical assumption that the same is the motivated by the consideration of tax evasion. Reference is made in this regard to the decision of the Hon'ble Supreme Court of India in the case of Union of India vs. Azad Bachao Andolan and Another reported in 263 ITR 706. The bonafides of the assessee are demonstrated by the fact that only 1/3rd of the shares converted into investments only part of the shares so converted were sold during the previous year and even in respect of shares held as stock in trade, there was a loss on sale of such shares during the relevant previous year also. At the time of conversion of shares, the assessee could not have known that the prices would fall subsequently.

22.1. In view of the aforesaid, the order of the Ld. CIT(A) accepting the conversion of the stock in trade into investment is upheld. Section 73 of the Act reads as under:

"Losses in speculation business.

73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.

(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and--

(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year ; and

(ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.

(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.

(4) No loss shall be carried forward under this section for more than [four] assessment years immediately succeeding the assessment year for which the loss was first computed.

[Explanation.--Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]"

22.2. The loss arising on the sale of shares held as investment is not only in any manner effected by the Explanation to section 73 of the Act, which deals in relation to shares sold in the course of business The various case laws cited by the assessee are in support of the above proposition. Accordingly, the loss of Rs. 6.52 crores arising on sale of investment has rightly been allowed as capital loss by the ld. CIT(A).

22.3. As regards the application of Explanation to section 73 of the Act to the loss of Rs. 3.72 crores arising on sale of shares by a company has held as stock in trade, we are in agreement with the ld. counsel for the assessee that in the fact of the present case the case of the assessee would fall in the exclusion contained in the said explanation since income of the assessee from sources other than business is more than the business income. As regards the contention of the ld. DR that comparison should be made after setting off of the brought forward losses, we are of view that this approach cannot be followed and would be erroneous, in the facts of the present case because we find that ultimately income assessed after setting off of the brought forward losses at nil both the under the head 'Capital Gains' and 'Business income'. This would be clear from the computation of income made by the AO as under:

Total Business Loss (-)	10,26,93,058/-
Total income under the head capital gains and income from house property	13,66,84,993/-
Set off business loss of current year (-)	10,26,93,058/-
Net capital gains (-)	3,39,91,935/-
Set off brought forward capital loss (-)	3,39,91935
Balance of capital gains	Nil

Balance under the head Business Nil In this kind of situation, no comparison can be made if the approach suggested by the Ld.DR is to be followed. We are of the view that in order to give effect to the provisions of Explanation to section 73 of the Act and the exclusion contained therein in a case like the present one, comparison has to be made between the income actually earned from various sources during the current year uninfluenced by the brought forward losses. On comparison of the aforesaid basis, we find that income of the assessee from capital gains and house property during the relevant previous year is more than the business income and therefore, the assessee's case fall within the exclusion contained in Explanation to section 73 of the Act. In view of the aforesaid, the loss arising on the sale of shares held as stock in trade has rightly been allowed by the ld. CIT(A) and accordingly we uphold the order of the ld. CIT(A) in this regard.

23. In ground No.2, the Revenue has challenged the order of the ld. CIT(A) in deleting the disallowance of pre-operative expenses of Rs. 22.96 crores incurred in respect of explanation of Health-care Division made by the AO treating the same as capital expenditure.

23.1. The facts in brief in relation to the aforesaid ground of appeal are that during the relevant previous year, the assessee company incurred revenue expenditure, amounting to Rs. 22.96 crores, in the nature of salary, wages, repair, maintenance, design and engineering fee, traveling and other expenses of administrative nature, on extension of the Healthcare Division, which were debited in the books of account under the head "Pre-operative Expenses Pending Capitalization", but were claimed revenue deduction in the computation of income. The A.O. disallowed the aforesaid expenditure by treating the same as capital expenditure on the following grounds:

i) The Healthcare Division was not expansion of existing business, since the same was a new line of activity, which was not earlier carried on by the assessee.

ii) Separate staff, especially Mr. N.S.Chawla, was appointed to look after the business of healthcare;

iii) The assessee intended to run it as a separate business in as much as the same was hived off to a new subsidiary company in the immediately succeeding assessment year.

23.2. On appeal filed by the assessee against the impugned assessment order, the ld. CIT(A) deleted the aforesaid disallowance of expenses by following the order of the Ld. CIT(A) for the assessment year 1999-2000.

23.3. In support of ground of appeal filed by the Revenue, the Ld. DR argued that the Healthcare Division set up by the assessee was not an extension of the existing business of the assessee since the Healthcare business was not being hitherto carried on by the assessee and the assessee could have commenced the same only by procuring licences from the Government. The Ld. DR also distinguished the decision of the Hon'ble Supreme Court in the case of Produce Exchange Corporation Ltd. reported at 77 ITR 739 relied upon by the assessee as also other cases laying down the tests for determining whether difference business form part of the same business or not on the ground that in the said decision nowhere held that if new business licences are required in relation to a business, the same can be treated as part of the existing/same business. The Ld. DR also pointed that the said decision cannot be applied for deciding the admissibility of an expenditure under the provisions of the Act, since the same was rendered in connection with the setting off of losses of business from the profits of a different business under section 24(2) of the Income Tax Act, 1922. The Ld. DR also argued that there was no inter-connection, inter-dependence, inter-lacing of the health care business carried on by the assessee.

23.4. The Ld. DR relying upon the decision of the Hon'ble Calcutta High Court in the case of Ashoke Marketing Ltd. vs. CIT (1994) 208 ITR 941, wherein it was held that the expenditure incurred by an assessee engaged in running small scale industry for the manufacture of instruments, in connection with setting up/ production of mini-computer, which was distinct and different from manufacturing of instruments and requiring separate industrial licence can not be allowed as revenue expenditure under section 37(1) of the Act.

23.5. The Ld. DR also strongly relied upon the findings of the AO at pages 13 & 14 in para 4.1.3 of the assessment order.

24. The Ld. counsel for the assessee submitted that the assessee commenced setting off of healthcare division i.e. by way of setting up of clinics, specialty hospital in the earlier years and incurred expenses in relation thereto beginning from the previous year relevant to assessment year 1999-2000. The business of the Healthcare division actually commenced during the relevant year i.e. from 01.03.2001 and the revenue earned from the aforesaid date was credited to the profit & loss account. It was also submitted that the assessee was engaged in multifarious businesses and the various business units including the healthcare division constituted one and the same business in as much as there was complete inter connection, interlacing, interdependence, devotailing of different activities. All major decisions including funding, HR function, critical appointment/promotions relating to various divisions were taken at the corporate level.

24.1. It was submitted that the test for determining whether different ventures constitutes same business, as has been enunciated by the Hon'ble Supreme Court in various decisions (cited infra) interconnection, interlacing, interdependence or unity embracing different ventures. The aforesaid interdependence/interlacing of different ventures can be established by existence of common management, common business organization/administration and common fund. What is relevant is unity of control and not the nature of products dealt with by the two businesses. Reference, in this regard, was made to the following decisions:

i) Produce Exchange Corporation Ltd. vs. CIT 77 ITR 739 (SC)

ii) Setabganj Sugar mills Ltd. vs. CIT 41 ITR 272 (SC)

iii) CIT vs. Prithvi Insurance Co. ltd. 63 ITR 632 (SC)

iv) Hoogly Trust (P )Ltd. vs. CIT 73 ITR 685 (SC)

v) L.M. Chhabda & Sons vs. CIT 65 ITR 638 (SC)

vi) Standard Refinery & Distillery Ltd. vs. CIT 79 ITR 589 (SC)

vii) B.R.Ltd. v. V.P. Gupta 113 ITR 647 (SC)

In the case of company the new healthcare division was under the control and supervision of the existing management of the company. The various expenses incurred towards acquisition of assets and those of revenue nature incurred in relation to the new facility, were met out of funds generated from the existing business or from funds borrowed on the strength of the assets of existing business and assurance of the existing management. Therefore, since there was common management, common administration, interlacing of funds and unity of control applying the test laid down in the aforesaid decisions, the new healthcare division was nothing but extension of the existing business. Mr. N.S. Chawla, whose services were doubted and held to be dedicated to healthcare division in the assessment order, was a full fledged director looking after the total businesses. He had no medical background. He attached various board meetings where business decisions relating to different divisions were taken. He was joint signatory to financial statements of the assessee company.

24.2. In view of the above, it was submitted that the impugned expenses, aggregating to Rs. 22.96 crores were revenue in nature and not even any indirectly related to installation of any assets were to be allowed as business deduction u/s 37(1) of the Act and cannot be said to be capital expenditure, merely because the same were incurred prior to the commencement of the healthcare division business and were shown as pre-operative expenses in the books of account.

24.3. The Ld. counsel for the assessee relied upon the following cases, wherein while following the test laid down in the aforementioned decisions rendered by the Hon'ble Supreme Court, the Courts/Tribunal have held revenue expenditure incurred in connection with the expansion of business, involving setting up of new unit, which satisfied the test of unit of control, interlacing of funds, common management etc. are allowable business deduction:

i) CIT vs. Relaxo Footwears Ltd. 293 ITR 231 (Del)

ii) Enpro Inidia Ltd. vs. DCIT 113 Taxman 132 (Del)

iii) Jay Engineering Works Ltd. vs. CIT 311 ITR 405 (Del)

iv) CIT vs. Monnet Industries Ltd. 221 CTR 266 (Del) (SLP dismissed by the Supreme Court.

v) CIT vs. Vardhman Spinning and General Mills 176 Taxman 157 (P&H).

vi) CIT vs. Havells India Ltd. 253 CTR 271 (Del)

vii) CIT vs. Tata Chemicals Ltd. 256 ITR 395 (Bom.)

viii) Addl CIT vs. Aniline Dye Stuffs & Pharmaceuticals Pvt. Ltd. 138 ITR 843 (Bom.)

ix) Kesoram Industries and Cotton Mills Ltd. vs. CIT 196 ITR 845 (Cal)

x) Hindustan Aluminium Corporation Ltd. vs. CIT 159 ITR 673 (Cal)

xi) CIT vs. Rane (Madras) India 215 CTR 250 (Chenn)

xii) Prem Spinning and Weaving Mills Co. Ltd. vs. CIT 98 ITR 20 (All.)

xiii) CIT vs. Shah Theatres P. Ltd. 169 ITR 499 (Raj)

xiv) CIT vs. Malwa Vanaspati & Chemicals Co. Ltd. 149 CTR 283 (MP)

xv) CIT vs. Kerala State Industrial Development Corporation Ltd. 182 ITR 62 (Ker.)

xvi) CCIT vs. Senapathy Whitely ltd. 101 CTR 31 (Kar.)

xvii) CCIT vs. Hindustan Machine Tools Ltd. 175 ITR 212 (Kar.)

24.4. The Ld. counsel for the assessee also pointed out that the aforesaid issue is squarely covered in favour of the assessee by the decision of this Bench of the Tribunal in assessee's own case for the assessment year 1999- 2000 in ITA No.373(Asr)/2002 dated 15.01.2010 (page 50 to 79 of PB ( at page 72) and assessment year 2000-01 in ITA No.282(Asr)/05 dated 26.02.2010 at pages 107A to 107ZW of PB and 107ZT to 107 ZU of PB wherein similar revenue expenditure in those years in relation to healthcare which was being set up was allowed after examining the facts and allegation of the AO, which has been repeated in the impugned assessment order.

24.4. The relevant observations in those orders are as under: Assessment year 1999-2000 ( page 72 of PB)

"I also find force in the ld. counsel's arguments that the AO disallowed the assessee's claim without affording any opportunity of being heard, of his view, if any, that different activities including Healthcare did not constitute the same business. It was not justified on the part of the AO to arrive at a conclusion regarding such an important factor without even a show cause addressed to the assessee, and without any discussion in the order passed as to how such a major departure was being made as compared to the past.

I have considered the rival submissions in the matter. On merits, I find that the assessee has been able to ordain well that the various businesses carried on by it (including healthcare) do constitute the SAME BUSINESS of assessee. I accordingly hold that the various businesses carried on by the assessee including Healthcare business, constitute one business only, and not separate business."

..............

"Keeping in view the aforesaid discussion by the ld. first appellate authority in the impugned order, we are of the considered opinion that the expenditure in dispute incurred by the assessee as revenue in nature and allowable as deduction because the assessee has incurred the aforesaid expenses on different business carried on by the assessee including healthcare business constituted one business only. As regards to the payment made to MacKinsey & Company the expenditure incurred was commensurate with the service rendered specially as it happened to be a world renowned firm. The ld. first appellate authority has rightly held that the observations of the AO that agreement had been entered by the MTVL with McKinsey & Company and not the assessee was incorrect as MTVL is a subsidiary company and not carrying on any business activities. The bill was raised by McKinsey & Co. in the name of the assessee. The Payment was made by the assessee only. After going through the aforesaid judgment cited by the ld. counsel for the assessee as well as the ld. CIT(A), we are of the considered opinion that no interference is called for in the well reasoned order passed by the ld. first appellate authority on this issue involving ground No.1. Therefore, this ground raised by the Revenue is dismissed."

AY 2000-01 Page 107 ZT to 107ZU of PB)

"As regards the expenditure in relation to expansion of healthcare business is concerned, it is observed that the aforesaid expenditure was of revenue nature, being expenditure incurred on salary, travel, printing, repairs and maintenance, rent advertisement etc. It is the CIT's case that the expense pertains to new line of business and this aspect of the matter has not been examined by the A.O. We may point out that the assessee had started the process of setting up healthcare division in assessment year 1999-2000 and has carried on that process in the relevant assessment year. Similar expenses as incurred in the assessment year under consideration were also incurred by the assessee in the assessment year 1999-2000. In that year, the AO disallowed the expense holding the same to be related to new line of business. The aforesaid expense also included expenses paid to Harvard Medical Institute for feasibility study, medical business process, strategies etc. The CIT(A) however, allowed the assessee's claim after detailed examination and considering plethora of judicial precedents. The department's appeal against the above order of the CIT(A) was dismissed by this Bench of the Tribunal vide order dated 1.1.2010 in ITA No.373(Asr)/2002. In paragraph 12 of the said order, the ld. CIT(A)'s finding that the healthcare business was only an expansion of the existing business of the assessee and not a new line of business was upheld and the revenue expenses were held to be allowable.

45. In view of the aforesaid, the facts in the year under consideration being the same as in the earlier years, the expenses relating to healthcare business being incurred in connection with expansion of existing business have been rightly allowed deduction by the A.O. and view taken by the A.O., therefore, was plausible view."

25. As regards the contention of the ld. DR that the healthcare division could be the extension of existing business carried on by the assessee since the same required a new licence from the Government to start the same, it was submitted that no licence was required from the Government to commence the health care business and the arguments raised by the Ld. DR for the first time before the Tribunal was factually incorrect and was not borne out of record.

26. We have heard the rival contentions and perused the facts of the case. We find that identical issue had come up for consideration before this Bench in assessee's own case for the assessment year 1999-2000 & 2000-01. In those years too the revenue expenditure incurred in relation to expansion of healthcare was disallowed by the Revenue on the ground that the same was new line of business. We find that the arguments raised by the ld. DR in the present appeal are similar to the arguments raised for the aforesaid two assessment years. The case laws referred to by the Ld. DR were also cited in those years. After considering the relevant facts and legal position, this Tribunal held that similar expenditure incurred in those years was allowable deduction. We also find that the plea raised by the ld. DR that the healthcare business is a new one and is not supported by any evidence. This is not the reason for which the AO held that the aforesaid expenditure as relatable to expansion of same business. The assessee has sated that no such license was required and it was merely the case of forward integration of pharma business being carried on by the assessee.

26.1 As regards the decision of the Hon'ble Supreme Court in the case of Produce Exchange Corporation Ltd. vs. CIT (supra) sought to be distinguished by the Ld. DR on the ground that the same pertains to the Income Tax Act, 1922, we find that the ratio of the aforesaid decision is for the purpose of determining if there is two lines of activities carried on by the assessee are part of the same business or not. The decisive test is unity and control and not nature of the two businesses has been applied by the courts in several cases rendered under the Income Tax Act, 1961 in the following cases :

i) CIT vs. Tata Chemicals Ltd. 256 ITR 395 (Bom)

ii) Kesoram Industries and Cotton Mills Ltd. vs. CIT 196 ITR 845 (Cal.)

iii) Jay Engineering Works Ltd. vs. CIT 311 ITR 405 (Del)

26.2. In view of the aforesaid discussion, we are of the view that the issue under consideration is squarely covered by the orders of this Tribunal in assessee's own case for the assessment years 1999-2000 and 2000-01. Following the said orders of the Tribunal, the order of the Ld. CIT(A) deleting the disallowance of expenditure relating to expansion of healthcare division is upheld and the ground of appeal raised by the revenue is dismissed.

27. In ground No.3, the Revenue has challenged the order of the ld. CIT(A) in allowing deductions of expenses of revenue in nature which were in relation to BOPP film division and were shown as pre-operative expenses pending capitalization in the books of account.

27.1. The facts in relation to this ground are that during the relevant previous year, the assessee incurred expenditure of Rs. 1.60 crores on expansion of its existing BOPP film division by way of putting up a second plan/second film line. Out of the aforesaid total expenditure, Rs. 0.32 crores was directly related to import of film line and, therefore, capital expenditure. In the computation of income, the assessee claimed deduction of balance of revenue expenses, amounting to Rs. 1.28 crores as business deduction, having been incurred for the purposes of the existing business.

27.2. The AO disallowed the above expenditure on the ground that that the same were related to setting up of new line of business and therefore they were of capital in nature.

27.3. The Ld. CIT(A) reversed the order of the A.O. and allowed the same for the same reasons as given hereinabove in relation to deletion of disallowance of expenses of healthcare division holding the setting up of second film line as expansion of same business.

27.4. The Ld. DR in support of his submissions, made the same submissions as were made by him relation to disallowance of expenses in respect of health care division which is subject matter of ground No.2 in this appeal.

27.5. The Ld. counsel for the assessee, Mr. Rupesh Jain also reiterated the submissions which were made by him in relation to ground No. of the present appeal.

28. We have heard the rival contentions and perused the facts of the case. We find that the assessee was already in the business of manufacture of BOPP film division. The revenue expenditure incurred in relation to second film line in relation to the expansion of the same business having regard to the legal position as discussed hereinabove in relation to the ground of appeal no.2. We are, therefore, inclined to uphold the order of the ld. CIT(A) and ground of the Revenue in this regard is dismissed.

29. As regards 4(a) & (b), the Revenue has challenged the order of the ld. CIT(A) in deleting disallowance of Rs. 54 lacs made by the AO on account of payment of Non-Compete Fee claimed by the assessee.

29.1. The facts as gathered from the assessment order, the Ld. CIT(A) order and the documents on record are that the assessee was, interlia, engaged in the business of manufacture and marketing of (i) Penicillin and non- penicillin based bulk drugs/drug intermediates' and (i) PCB/GMF Chemicals/electronic component product. Subsequently, in order to provide special focus and bring in further specialization in the aforesaid businesses, the assessee formed joint venture company alongwith foreign partners and transferred the aforesaid businesses to those companies. The penicilline business was transferred to Max-GB Ltd; vide agreement dated June 30, 1997 and electronics business was transferred to Max Atotech Ltd; vide agreement dated January 31, 1996. In terms of the aforesaid JV agreements, the assessee had its direct and indirect affiliates/subsidiaries were obliged not to carry on aforesaid businesses or any activity which could adversely affect the actual or prospective business of such JVs. Subsequently, the assessee transferred its shareholding in the aforesaid JVs to Max Telecom Venture Ltd. which was also a wholly owned subsidiary of the assessee. As a result, the restrictive covenants/obligations undertaken by the assessee under the JV agreement also devolved upon MTVL. Mr. Ashwani Windlass was in employment of the assessee since April 1, 1984 and held the position of Jt. Managing Director until resignation w.e.f. 31.7.1998. He, in his various capacities in the company, played a pivotal role in the formation of the JV companies and growth of the said businesses. Given his position, he had access to vital/confidential information relating to such business. Mr. Windlass having left the assessee company, was in a position to adversely affect the business of the JV companies and consequently defeat the restrictive obligation undertaken by the assessee company, at the time of entering into the JV agreements.

29.2. Accordingly, since at the relevant time , shareholding in the JV businesses was held by MTVL, MTVL executed two agreements dated 21.11.1998 with Mr. Ashwani Windlass (ex-employee) for placing following restrictive/negative covenants on him for a period of four years.

i) to join or seek service or carry on business in or related to the manufacture or marketing of penicillin and non-penicilline based bulk drugs/drug intermediates for the period 21.11.1998 to 20.11.2002 @ Rs. 0.27 crores per annum (PB 99 to 102)

ii) to join or seek service or carry on business in or related to the manufacture of PCB/GMF Chemicals/electronic component product for the period 21.11.98 to 20.11.2002 @ Rs. 0.27 crores per annum (PB103 to 107).

29.3. Thereafter, MTVL demerged the entire business, except telecom, business into MCL w.e.f. 09.05.1998, as per the order of High Court sanctioned on 20.03.1999. Late, MCL was merged with the assessee w.e.f. 01.07.1999. By virtue of aforesaid demerger of business by MTVL to MCL and subsequent merger of MCL with the assessee, all the assets and liabilities and businesses of the merged companies vested in the assessee and the benefits/losses from expenditure/liabilities incurred by the amalgamating company also accrued to the amalgamated company/assessee. Although, according to the agreement, total amount of non-compete fee, aggregating to Rs. 2.16 crores, was pad in lumpsum in 1998, however, since both the agreements were for a period of four years, proportionate expenditure @ 25% of the total payment of Rs. 0.54 crores per year (Rs.27 lacs each under each agreement).

30. The Assessing Officer, disallowed deduction for the non-compete fee on the following grounds:

i) The payment was not made by the assessee, but by the subsidiary company;

ii) The payment was not to protect interest of business of the assessee but to facilitate investment in JV's and to protect its interest in the capital investments.

iii) The businesses, for which the subject non-compete agreement was entered, was not carried on by the assessee but by the JV companies.

iv) Without prejudice to the above, the expenditure was in any case capital expenditure, since the same resulted in enduring benefit to the assessee over a period of four years. (based on the decision of Hon'ble Supreme Curt in CIT vs. Coal Shipments Pvt. Ltd; 82 ITR 902).

31. On appeal, the ld. CIT(A) deleted the disallowance holding that it was clear that non-compete fees was paid for protection of assessee's business interests, being payment towards restrictive covenants and the same did not result in enduring benefit to the assessee.

32. The Ld. DR in support of the appeal on the issue submitted that non- compete fee was paid as a result of an agreement entered by the subsidiary company and the business in question already stood transferred to joint venture companies and the payment was made as a pre-condition for entering into joint venture and was not incidental to the day to day running of business.

32.1. The Ld. DR further submitted that the payment was made by the subsidiary companies and the ld. CIT(A) has not appreciated the aforesaid crucial facts. It was submitted that the ld. CIT(A) has wrongly allowed the claim of the assessee on the basis of the decision of the Hon'ble Madras High Court in the cse of CIT vs. Late G.D. Naidu reported at 168 ITR 63, as the decision was not applicable in the present case.

32.2. The Ld. DR also relied upon the following decisions to contend that the deduction of non-compete fee was held as not admissible as the same was capital expenditure:

i) CIT vs. Tata Coffee Ltd. 326 ITR 214 (Karnataka)

ii) Pitney Bowes India (P) Ltd. vs. CIT 204 Taxman 333 (Del)

iii) CIT vs. United Breweries Ltd. 325 ITR 485 (Karnataka)

iv) Indo Tech electric Co. vs DCIT 49 DTR 218. 52

33. The Ld. counsel for the assessee, Mr. Rupesh Jain submitted that ¼th of the total amount payable under the agreements from non-compete fee to Mr. Ashwani Windlass claimed under the same agreement for the assessment year 2001-01 and the same was directed to be disallowed by the ld. CIT in his order dated 30.03.2005 passed u/s 263 of the Act. It was pointed out that the reasons given for disallowance by the ld. CIT(A) are identical to the reasons given on the basis of which the Ld. DR has contended that the proportionate of non-compete fee claimed during the relevant period should be disallowed. The Ld. counsel for the assessee submitted that this Bench of the Tribunal vide order dated 26.02.2010 in ITA No.282(Asr)/2005 for the assessment year 2000-01 in assessee's own case has set aside the aforesaid order of the ld. CIT(A) under section 263 of the Act both in law and facts and held that non-compete fee claimed by the assessee in those years was allowable deduction. The Ld. counsel for the assessee in this regard referred to pages 19 to 21 at PB 107S to 107U of the aforesaid order of the Tribunal, where the reasons given by the Ld. CIT(A) for disallowance of non-compete fee have been given and the findings given by the Tribunal in paragraph 41 & 42 (pages 45 & 46) of the order at PB 107-ZS & 107ZT, wherein the ITAT allowed the claim of non-compete fee.

33.1. As regards the decision of the Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd. vs. CIT (supra) referred to by the Ld. DR, it was submitted that the said decision on non-compete fee was paid pursuant to the purchase of business and the aforesaid decision is distinguishable since in the assessee's case, the non-compete fee was paid to employee leaving employment and not pursuant to purchase of any business as was the case in Pitney Bows (supra) .

33.2. The Ld. counsel for the assessee relied upon the decision of the ITAT Mumbai Bench in the case of Intervet India (P) Ltd. vs. ACIT ITA No. 315/Hyd/2003 (Mum.) dated 19.10.2012, wherein the decision of Special Bench of the Tribunal in the case of Tecumseh in which case also non- compete fee has been held disallowable as capital expenditure was distinguished by the Mumbai Bench of Tribunal on the ground that in Tecumseh case, the non-compete fee was paid in relation to purchase of business. According to the ld. counsel for the assessee, the decision of the Mumbai Bench of ITAT in the case of Intervet India (P) Ltd. vs. ACIT (supra) is squarely applicable on the facts of the assessee's case since in that case also payment of non-compete was made to the employee on leaving employment which was held to be allowable. The assessee has also referred to the decision of Hon'ble Madras High Court in the case of M/s. Carborandum Universal Limited vs. JCIT : Tax Case (Appeal) No.244 of 2006 in support of its claim wherein a different view has been taken than the view taken by the Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd. (supra). It was, therefore, submitted that that the decision of the Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd. vs CIT (supra) cannot be applied in the case of the assessee to disallow the deduction of non-compete fee. In view of the aforesaid, it was submitted by the ld. counsel for the assessee that the aforesaid order of the Tribunal in assessee's own case for the assessment year 2000-01 needs to be followed and the order of the ld. CIT(A) should be upheld.

34. We have heard the rival contention and perused the facts of the case . We find that identical issue came up for consideration before this Bench of the Tribunal in assessee's own case for the assessment year 2000-01. We also find that the arguments advanced by the Ld. DR in the present case are almost similar as the arguments advanced by the revenue in that year. The Tribunal for the assessment year 2000-01 held that the payment of non- compete fee to Mr. Ashwani Windlass is under the same agreement as is applicable in the present year was allowable as business deduction in the hands of the assessee u/s 37(1) of the Act. It was further observed as under: "It is clear on perusal of the non-compete agreements that the non-compete fee was payable by the assesse to safeguard its business interest, as a strategic investors in the various joint ventures of its obligations to the joint ventures companies that neither the assessee nor any of its employees will get into competing business with the joint venture companies. The fact that the assessee's subsidiary entered into non-compete agreement and made the payment is of little consequence, considering that the liability ultimately devolved on the assessee, in law, in view of merger of the subsidiary in the assessee.The circumstances in which the payment was made by the subsidiary were also explained in the non-compete agreement. Whether expenditure has been incurred for business purposes or not is to be viewed from the point of view of the businessman. The Hon'ble Supreme Court in the case of S.A. Builders vs. CIT 288 ITR 1 held that the expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incursfor the purpose of business. It was further observed that the expenditure may not have been incurred under any legal obligation, but yet it allowable as business expenditure if it was incurred on the grounds of commercial expediency.

42. In the present case, the assessee's business interest would have suffered if the ex-employee, who was in a senior position and was well conversant with and in fact instrumental in setting up the above business initially, would have come in competition with the joint venture companies, in which the assessee had substantial interest. The assessee may also have been liable to joint venture companies. Thus, the non-compete fee was paid on account of 'commercial expediency' and was rightly allowed revenue deduction by the A.O.

43. Both the Ld. authorized representatives and the Ld. DR have referred to several case laws as to whether payment of non-compete fee is capital or revenue expenditure. In our opinion, it is not necessary to deal with the case law cited on the above assessee and it is suffice to say that the issue whether the above expenditure is of revenue or capital in nature is at most an issue on which two opinions are possible, moreso, considering that the Ld. CIT(A) in assessee's own case for the assessment year 2001-02 allowed similar claim."

34.1. We have also perused four decisions referred to by the Ld. DR. Except for the decision of Hon'ble Delhi High Court in the case of Pitney Bowes India (P) Ltd. (supra), all other decisions deal with the issue whether the amount received as non-compete fee is a capital or revenue receipt. The said decisions are of no relevance in the present case. As regards, the decision of Pitney Bowes (supra), we agree with the ld. AR that the decisions too are not applicable in the present case since the same pertained to payment of non-compete fee in relation to transfer of business. The case of the assessee in fact is supported by the decision of the ITAT Mumbai Bench in the case of Intervet India (P) Ltd. vs. ACIT (supra) , wherein the payment of non-compete fee de-hors the purchase of business was held to be revenue expenditure. The decision of the Hon'ble Madras High Court in the case of M/s. Carborandum Universal Limited vs. JCIT (supra) also supports the case of the assessee.

34.2. In view of the aforesaid decision of the Tribunal in assessee's own case for the assessment year 2000-01 and on merit as well, we are of the view that no interference is called for the in the order of the ld. CIT(A) and accordingly the ground raised by the Revenue is dismissed.

35. In ground No.5, the Revenue has challenged the order of the Ld. CIT(A) in allowing depreciation @ 60% on medical equipment treating the same as computers. The AO held that medical equipment, though controlled by the computers cannot be said to be computer or ancillary to computer and therefore, depreciation at the normal rate applicable to plant and machinery i.e. 25% was admissible instead of higher rate of 60% applicable to computers, as applied by the assessee.

35.1. The Ld. CIT(A) held that since various medical equipments listed by the assessee were controlled by Computers, the same would fall within the meaning of computer and consequently eligible for depreciation @ 60%.

36. The Ld. DR submitted that higher depreciation is available in respect of computers but not in respect of computer controlled medical equipment. The Ld. DR referred to the definition of computer as given in the Information Technology Act to argue that in the said definition there is not even remote suggestion that any equipment controlled by the computer could be termed as computer.

37. The Ld. Counsel for the assessee, Mr. Rupesh Jain referred to the dictionary meaning of the word "Computer" as also the meaning given to the said term by the Institute of Chartered Accountants of India in its study material regarding Information Technology Paper to contend that which process data is to be considered as 'Computer'. It was submitted that medical equipment controlled by the computer processes the date which is put into the equipment and comes out with report which is output and therefore, its functions are similar to computer. Reference was made to the decision of the ITAT Jaipur Bench in the case of DCIT vs. Rajasthan Patrika (P) Ltd reported in 41 ITD 349 wherein it has been held as under:

"Having regard to the function of the 'comp set' in question it was clear that it was a computer printing machine having minicomputer brain and memory which was treated a computer and it would, therefore, fall under sub-item C(3) of sub part III of Part-1 of Appendix 1 of the Rules, for which 20% depreciation was allowable."

37.1. Reliance was also placed on the following decisions of High Court, wherein it has been held that various accessories, which can be used without computer, forms integral part of computer and are entitled to depreciation @ 60%:

i) CIT vs. BSES Rajdhani Powers Ltd. 1266/2010 (Del)\

ii) CIT vs. Orient Ceramics and Inds. Ltd. 200 Taxman 64 (Del)

iii) CIT vs. Citicorp Maruti Finance Ltd. ITA 1712 and 1714/2010 (Del.)

iv) DCIT vs. Datacraft India Ltd 133 TTJ 377 (Mum) (SB)

v) CIT vs. BSES Yamuna Powers Ltd. ( ITA No.1267/2010 (Del)

It is, therefore, submitted that since the term 'computer' is not defined in the Act, going by the meaning given by various forums and dictionaries, the same includes electronic devices with software and micro-processors and accessories. Accordingly, the Ld. CIT(A) has rightly upheld the assessee's claim of depreciation @ 60% on such medical equipments.

38. We have heard the rival contentions and perused the facts of the case. We are in agreement with the ld. DR that medical equipments even though controlled by the computer cannot by any stretch of imagination be considered as computer. In this world of modern technology several machines are controlled by computers or otherwise do processing on information. However, for that reason alone machines cannot be considered as a computer. If the arguments of the Ld. counsel for the assessee were to be accepted then the various automated machines used for manufacture could also be said to be the computer and eligible for higher depreciation. The decision of the ITAT Jaipur Bench in the case of DCIT vs. Rajasthan Patrika (P) Ltd (supra) referred to by the assessee, we find is not applicable on the facts of the present case. since in that case the depreciation at higher rate was allowed in respect of the computer printing machine and not as printed machine controlled by a computer. The computer in that case was an integral part of the printing machine which is not the case here. Thus, we find no merit in the submissions of the ld. counsel for the assessee and order of the ld. CIT(A) is set aside on the issue. Accordingly, ground No.5 of the appeal of the revenue is allowed.

39. In ground No. 6, the Revenue has challenged the order of the ld. CIT(A) in allowing the claim of the assessee for depreciation @ 25% on building used as Nursing Home treating the same as plant and machinery instead of the normal rate of 10% applicable in respect of building. The facts in relation to this ground of appeal are that the assessee claimed depreciation on the cost of building of the nursing home @ 25%, being the rate applicable to plant and machinery, on the ground that the nursing home building constituted business tool of the assessee and maximum area of the nursing home was occupied by rooms housing equipments for various medical services provided by the company; there was no space for in-house patients. The assessee relied upon the decision of the Hon'ble Supreme Court in the case of CIT vs. Dr. B. Venkata Rao 243 ITR 81 and CIT vs. Karnataka Power Corporation : 247 ITR 268.

39.1 The AO denied the depreciation claimed by the assessee at the aforesaid higher rate applicable to plant and machinery on the following grounds:

i) out of 4 floors in the total building, first 3 floors including the ground floor consisting of large waiting and reception areas, conference halls, toilets, pediatric waiting rooms, offices, executive waiting hall and rooms for examination of outdoor patients, whereas in the case of Dr. B. Venkata Rao (supra), the major portion of the nursing home was occupied by sterilization and operation theatre.

ii) The AO presumed that the area occupied by minor operation theatre room and sub-sterile room on 3rd floor was less than 5% of the total building.

iii) In view of the above, the AO held that the nursing home building of the assessee was like a normal building, entitled to depreciation @ normal rate of 10% instead of rate applicable to plant and machinery.

39.2. The ld. CIT(A) held that the lay out submitted by the assessee clearly established that substantial area of the nursing home was occupied by sophisticated medical equipments, as opposed to adverse inferences drawn by the AO, simply on surmises and conjectures. The Ld. CIT(A), therefore, held that the aforesaid decision of Hon'ble Supreme Court was squarely applicable to the facts of the present case and consequently the assessee was entitled to depreciation @ 25% on nursing home building.

40. The Ld. DR opposed the order of the ld. CIT(A) and argued that the ld. CIT(A) has no where dislodged the finding of the AO that only 5% of the building was being used as minor theatre rooms and sub-sterile room. The Ld. DR also distinguished the decision of the Hon'ble Supreme Court in the case of Dr. B. Venkata Rao (supra) on the ground that in that case the building was being used for running the nursing home and was not just any other premises utilized for that object.

40.1. In reply, it was submitted by the Ld. counsel for the assessee that the disallowance made by the AO is not based on correct appreciation of fact. Our attention was invited to letter dated 25.03.2004 submitted to the A.O. where it was stated that the maximum area of nursing home was occupied by rooms housing equipments for providing medical services. It was submitted that the AO has failed to appreciate that the assessee was in the business of providing medical services and in order to do so various other facilities such as reception, toilets, offices etc. are also to be provided. However, that cannot change the underlying character of the hospital building to be regarded as any other building. The assessee has not constructed the building for providing service of conference halls or offices; the underlying objective is to provide medical services which are specialized in nature and require specialized setting to house the medical equipments required to render such services. It is also fact on record that there were no rooms for patients in the hospital. The layout of the hospital was specially designed to house the medical equipments. This fact is further substantiated by the layout plans submitted during the assessment proceedings that certain rooms such as EEG rooms were designed to be sound proof or X-ray/various Radiology rooms were built with adequate protection to guard against exposure to radiation. In view of the above, the nursing home building, unlike any regular building constituted an apparatus or a business tool for the assessee and therefore, answers the description of 'plant'.

40.2. Reliance in this regard was also placed on the decision of the Hon'ble Supreme Court in the case of Scientific Engineering House Pvt. Ltd. vs. CIT 157 ITR 86, wherein it has been held that meaning of the term 'plant' is of the widest amplitude and would include every asset which is used by an assessee as a tool of business..

40.3. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Dr. B. Venkata Rao (supra) wherein it has been held that nursing home building constitutes plant and is eligible for depreciation at the rate applicable to plant as opposed to normal building.

40.4. It was submitted that the ld. DR has not given any cogent reason to distinguish the aforesaid decisions of the Hon'ble Supreme Court. It was therefore, submitted that the order of the Ld. CIT(A) needs to be upheld.

41. We have heard both the parties and considered the rival contentions. We are of the view that assessee's claim needs to be succeeded. The assessee had given details of various equipments being used in the various rooms at the nursing home. Also, it is accepted fact that the building was customized in a manner that it could be used as a Nursing Home. It has not been disputed as per lay out plan to which reference has been made by the AO. The aforesaid building has huge space for reception, waiting hall, general consultancy room for out-door patients, several toilets etc. The said building in the present form cannot be used for residential purposes or as office space and therefore, it would be correct to consider the building in which the nursing home is located as any other building.

41.1. We are of the view that the claim of the assessee is fully supported by the decision of the Hon'ble Supreme Court in the case of Dr. B. Venkata Rao (supra). Accordingly, the order of the ld. CIT(A) on this issue is upheld and the ground of appeal of the Revenue is dismissed.

42. As regards ground No. 7 and cross appeal of the assessee in ITA No.78(Asr)2006 for the assessment year, 2001-02, the Revenue has challenged the order of the ld. CIT(A) in reducing the disallowance u/s 14A from Rs. 1.5 crore to Rs. 10 lacs. In the cross appeal, the assessee has challenged the order of the ld. CIT(A) in upholding the disallowance u/s 14A to the extent of Rs. 10 lacs.

43. The facts in relation to the aforesaid issues are that during the relevant previous year the assessee had earned dividend income of Rs. 2.11 crores exempt u/s 10(33) of the Act. No disallowance u/s 14A was offered by the assessee in the return of income The AO made ad-hoc disallowance of Rs. 1.5 crore u/s 14A of the Act in respect of various expenses incurred by the assessee on the basis of following grounds:

i) Expenditure in relation to investments not yielding any income is not allowable;

ii) The investments included lot of strategic investments in the form of subsidiary companies and joint ventures and in these investments there ought to be much energies spent, lot of planning involved and expenses incurred for such investments, unlike investment in simple securities of other companies.

iii) Substantial time of executives, expenses like conveyance, traveling, meeting, telephone and incidental expenses would have been spent in managing investments. Reference was also made to the case of Distributors (Baroda) Pvt. Ltd vs. UOI (1985) 155 ITR 120 (SC).

44. The Ld. CIT(A) reduced the disallowance made by the AO to Rs. 10 lacs observing that the AO has not discharged the onus of proving which amount has been incurred for earning the dividend income. The Ld. CIT(A) also observed that it was not correct to link the disallowance with the amount of investment since making investment is not a regular activity. As per ld. CIT(A), the disallowance made by the A.O. was excessive considering the diversified nature of activities carried on by the assessee. The ld. CIT(A) held disallowance of Rs. 10 lacs to be proper on the facts and circumstances not accepting the contention of the assessee that in the absence of specific expenditure relatable to dividend income, no disallowance on notional or proportionate basis can be made. Reference is made to the case of CIT vs. United Collaries 49 Taxamn 271 (Cal).

45. The Ld. DR argued that the assessee had invested Rs. 361.64 crores in shares and the disallowance made by the AO on estimated basis was not excessive. It was further stated that the ld. CIT(A) has in principle upheld the disallowance u/s 14A but not given any good reason for reducing the same to Rs. 10 lacs. As per Ld. DR reduction of disallowance made by the Ld. CIT(A) was totally on adhoc basis and cannot be sustained. Ld. DR, therefore, prayed that the disallowance made by the AO under section 14A of the Act should be restored.

46. The Ld. counsel for the assessee argued that the assessee had made investments in shares which were held as either long term investments or stock in trade. It was submitted under section 14A of the Act, no deduction is admissible for an expenditure, which has proximate nexus or relation with income, which does not form part of total income under the Act or in other words, is exempt income. Reference in this regard was made to various decisions including that of Hon'ble Supreme Court in the case of CIT vs. Walfort Share & Stock Brokers 326 ITR 1 (SC) and Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. CIT 328 ITR 81. The Ld. counsel for the assessee pointed out that during the relevant previous year the assessee incurred expenses which were necessary for the regular business operations of the company carried on during the year and no expenses debited to the profit and loss account for the year was relatable to earning of dividend income from investments in shares of various companies. It was submitted that the AO without establishing the proximate nexus of any expenditure incurred during the year with investments yielding exempt income, made ad-hoc disallowance of Rs. 1.50 crores out of total expenses incurred during the year. The fact that the AO made ad-hoc disallowance only establishes that the AO could not pin point any expenditure, which had proximate nexus with investments resulting in exempt dividend income. In that view of matter it was submitted that the disallowance made by the AO needs to be deleted at the threshold on the aforesaid ground itself. That apart, even otherwise, it was submitted that there was no nexus between the dividend income earned and the various expenses incurred during the year, in the chart of issues filed by the assessee which is reproduced below:

"a. Interest expenditure

Investments as on 1.4.2000 (Rs.263.13 crores)

A.I. Investments vesting on merger of MCL - Rs. 195.48 crores

It would be pertinent to point out that the erstwhile MCL had not made investment in shares, out of borrowed funds in as much as the MCL did not had any interest bearing borrowed funds, nor any interest expenditure was debited in the profit & loss account of that company, prior to merger with the assessee.(PB-97 and 102 of supplementary PB).

Therefore, the investments to the extent of Rs. 195.48 crores, held by the assessee as on 1.4.2000 had no nexus with the borrowed funds.

A.2 Balance Investments ' Rs. 67.65 crores

A.2.1 Investments, not resulting in earning of exempt income - Rs. 36.01 crores.

As regards the balance investments, amounting to Rs. 67.65 crors (RS.263.13 crore -Rs.195.48 crores) held as on 1.4.2000, the same included investment in shares of foreign subsidiary company and other Government securities/Bonds/Mutual Funds, the income wherefrom was not exempt from tax under the provisions of the Act, aggregated to Rs. 36.01 crores. The break up of the aforesaid investments is as under(PB87-88 of supplementary PB):

Nature of investment	Amount in Rs. and crores
Foreign Subsidiaries
Max Asia Pac Ltd.	11.33
Max UK Ltd.	2.13
Max Visions Inc.	0.95
BONDS
Reliance Zero Coupon Bonds	6.10
HDFC Bonds	0.62
MTNL Ltd.	0.57
RELIANCE Petroleum	3.31
Units in Growth Scheme
Kothari Pioneer Maxima Fund	10.0
DSP Merryl Lynch Balance Fund Growth	1.0
Total	36.01

In view thereof, the interest expenditure incurred on borrowed funds, if any, attributable to the aforesaid investments, income wherefrom is not exempt under the provisions of the Act, is ousted from the application of the provisions of section 14A of the Act.

.........................

A.2.2. Remaining Investments, out of interest free funds-- R.s.31.64 crores

The break-up of balance investments, aggregating to Rs. 31.64 criers, is as under PB 87-88):

Nature of Investment	Amout in Rs. in crores.
Max Telecom Ventures Ltd. ('MTVL')	30
Alliance Capital Mutual Fund & Ors.	1.64
Total	31.64

Out of the aforesaid investments, aggregating to Rs. 31.64 crores, it would be appreciated that, major investment related to investment in shares of MTVL, amounting to Rs. 30 crores. The said total investment in shares of MTVL, it is submitted, was made in the previous year ending 31.03.1996. On perusal of the cash flow statement of the Assessee company for the year ending 31.03.1996. attached as Annexure A to this Chart, it would be noted that the Assessee had made a fresh issue of share capital at a premium, aggregating to Rs. 41.55 cr(Rs. 1.42+40.13 crores). Further, the Assessee received funds of Rs. 22.65 crores from issue of zero coupon fully convertible debentures (FCD), which did not carry any interest. In additional to above, the Assessee generated cash from operations of Rs. 6.34 crores. The aforesaid total interest free receipts, it would be appreciated, were sufficient to make investment in shares of MTVL.

That apart, in that year, the Assessee had made additional interest bearing borrowing of Rs. 40.33 crores (Refer Schedule 3 of balance sheet for year ending 31.03.1996) on account of secured redeemable non convertible debentures (NCD).

It would be pertinent to point out, that the aforesaid NCD of Rs. 40.33 cr. (carrying interest) and Zero Coupon FCD (interest free) of Rs. 22.65 cr. were issued through a same Letter of Offer, which was placed on record before Learned. CIT (A), vide submission dated September 18, 2009 (PB 251).

The object of aforesaid proceeds, as per the Letter of Offer, was to meet out the capital expenditure of the existing divisions, working capital requirements, repayment of term loans and investment in joint ventures.

However, Note.3 of the Offer Document (PB-251), stipulated that proceeds of NCD (interest bearing) were not be utilized for investment in shares of group companies of joint ventures. The aforesaid object was to be met out of the proceeds of zero coupon FCDs. The relevant portion of the aforesaid note reads as under:

"As per the SEBI guidelines for disclosure and investor protection- Clarification II, the proceeds of NCD issue cannot be utilized for acquisition of shares and/or providing loan to any company belonging to the same group.

"In line, with above, Company's requirements for investments into joint ventures in Phase I, is proposed to be met through the proceeds of FCD issue and/or preferential issue of warrants to the management group"

In view of the above, no portion of the interest bearing NCD was utilized towards investment in shares of MTVL, a group company of the Assessee.

Further, as is evident from the case flow statement of the year ending 31.03.1996, against the aforesaid aggregate interest bearing borrowing of Rs. 40.33 crores (from NCD), the Assessee had acquired fixed assets from an amount of Rs. 35.20 crores and repaid existing loans of Rs. 6.38 crores.

In that view of the matter, the investment in shares of MTVL was made of interest free funds and no portion of the interest bearing borrowed funds were utilized for making that investment, which were utilized for other business purposes of the Assessee, and, therefore, no portion of interest expenditure in any year including the assessment year 2000- 01 and onwards, had no nexus with said investment, warranting disallowance under section 14A of the Act. Furthermore, the aforesaid opening investments were accepted to be made out of interest free funds, in as much as, no portion of the interest expenditure incurred in the earlier years was ever attributed to investments in the completed Assessments of those years. Reference in this regard is made to the following decisions wherein it has been held that where no portion of the borrowed funds have been attributed to investments made as at the beginning of the relevant previous year, no part of the interest expenditure allegedly relating to such investment, can be disallowed during the relevant year by drawing nexus of outstanding borrowed funds as at the end of the relevant previous year with opening investments:

- CIT v. Sridev Enterprises: 192 ITR 165 (Kar.)

- CIT vs. Givo Ltd.: ITA No. 941/2010 (Del)

- Punjab Wool Combers Ltd. V. ACIT: (2004) 1 SOT 114 (Chandi.) 72

- Motor and General Finance Ltd. Vs. DCIT : 90 ITD 449 (ITAT, Del.)

- Meenakshi Synthetics Vs CIT: 84 ITD 563 (ITAT, Lko.)

- GR Agencies vs ITO; 79 TTJ 496 (I.T.A.T., Lko)

- Malwa Cotton Spinning Mills: 89 ITD 65 (I.T.A.T.-Chd)

- Usha Martin Industries Ltd. Vs. DCIT: 86 ITD 261 (I.T.A.T.-Cal.)

In view thereof, the aforesaid investments, aggregating to Rs. 31.64 crores, held by the Assessee as on 01.04.2000, were made out of interest free funds and no portion of the borrowed funds was utilized/attributable to such investments, warranting disallowance under Section 14A of the Act, in any of the succeeding year(s).

Investments during the period 01.04.2000 to 31.03.2001 (relevant to ASSESSMENT YEAR 2001-02)

On perusal of the cash flow statement for the previous year 2000-01, it would be noticed that, the Assessee had made incremental aggregate investment in various securities (including investment in shares of foreign companies, bonds etc., which do not result in earning of any exempt income) of Rs. 357.29 crores. As against the aforesaid investment, the Assessee realized Rs. 302.26 crores from sale of investments made in earlier year(s) and Rs. 3.44 crores from interest and dividend income, etc. The assessee also generated interest free cash from operations, aggregating to Rs. 97.63 crores, from operating activities. Furthermore, the Assessee had an opening cash balance of Rs. 20.47 crores,. The aforesaid interest free flow of funds aggregating to Rs. 423.80 crores was sufficient to make investment of Rs. 357.29 crores. Further, it would be appreciated that during the relevant year the assessee only made an incremental borrowing of Rs. 37.50 crores which was utilized for other business purposes of the Assessee, like purchase of fixed assets, aggregating to Rs. 79.08 crores (PB-66 of supplementary PB).

Reliance, in this regard, is placed on the following decisions, wherein it has been held that, where an Assessee has mixed pool of funds, a presumption should be drawn in favour of an Assessee qua utilization of interest free funds and borrowed funds:

- East India Pharmaceutical Works Ltd. Vs. CIT: 224 ITR 627 (SC)

- Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.)

- India Explosives Ltd. Vs. CIT: 147 ITR 392 (Cal)

- CIT V. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom)

- CIT V. Ashok Commercial Enterprises: I.T.Act, 1961 No. 2985 of 2009 (Bom.)

Reliance is also placed on the following decisions, wherein, while following the ratio emanating from the aforesaid decisions, disallowance of interest expenditure under Section 14A has been deleted, where the Assessee was found to have interest free funds, exceeding interest bearing funds for making investment in shares:

- Lubi Submeribles Ltd. :ITA No.868 of 2010 (Guj.) (High Court)

- CIT vs. K. Raheja Corporation Pvt Ltd: ITA No. 1260 of 2009 (Bom)

Furthermore, in the impugned Assessment order, the Ld. AO did not establish the aforesaid nexus of interest paid on borrowed funds with various investments, resulting in exempt income, and only made an ad-hoc disallowance of Rs. 1.50 crores under section 14A of the Act, which was further reduced by the Ld. CIT(A) to Rs. 0.10 crores.

In view of the above, there was no proximate nexus of borrowed funds with investment in shares, warranting disallowance under Section 14A, nor has the same been established or pointed by the Ld. AO or Ld. CIT(A).

No disallowance for shares held as stock in trade

As regards, shares held under the head 'stock in trade', amounting to Rs. 15.89 crores (as on31.03.2001) (Refer PB-55 of supplementary PB) it would be appreciated that there was net decrease in the shares held in the said category during the relevant year. As regards the shares held at the beginning of the relevant year, the entire shares vested in the Assessee on merger of MCL. As discussed (supra), considering that MCL had no interest bearing borrowing, there was, thus, no nexus of interest expenditure incurred during the year with shares held under the head 'stock in trade'.

Without Prejudice to the above, as regards, shares held as stock in trade, it is submitted that the intent behind holding the same was to earn profits from trading therein and not to earn dividend income. Dividend received, if any, on such shares is only incidental to holding of such shares. Therefore, even assuming with admitting that some expenses incurred during the year had remote nexus with such investments, no portion thereof can be attributed to earning of exempt dividend income therefrom, warranting disallowance under Section 14A of the Act.

Reliance, in this regard, is placed on the following decisions, wherein it has been held that no portion of the expenditure can be disallowed under section 14A, where the investment in shares is held as stock in trade:

- CCI Ltd. Vs. Jt. CIT: 206 Taxman 563 (Kar)

- Apoorva Patni Vs. ACIT :[2012] 24 taxmann. com 223 (Pune)

- Ethio Plastics P Ltd. [TS-882-I.T.A.T.-2012(Ahd)]

In view of the above, without prejudice to the submission that no portion of the expenditure incurred during the year can be disallowed under Section 14A, in the absence of proximate nexus of expenses with investments being established, it is submitted that no portion of the expenditure relatable to investment in shares held as stock in trade can be made and the disallowance to that extent needs to be deleted.

b. Administrative Expenses

As regards disallowance of administrative expenses under section 14A, it is submitted as under:

The aggregate amount of dividend, it is respectfully submitted, were received by a single dividend warrants. No efforts or expenses are incurred to earn the income by way of dividend from these companies. For depositing a single dividend warrants in the bank account during the financial year, the Assessee cannot be said to have incurred expenditure.

It is submitted that, in fact, no additional efforts/expenses were required to be incurred to deposit a single warrant into the bank as the same was deposited along with the other cheques in the normal course of the business of the Assessee company. Further, there was no specific employee kept by the Assessee to keep record of the dividend income. The same was recorded in the normal course of conduct of the business of the Assessee.

Further, during the relevant year, the Assessee has only earned dividend income of Rs. 2.11 crores, out of the total revenue income of Rs. 158.73 crores, earned during the year. Thus, the exempt income is only 1.33% of the total revenue income and balance revenue income is offered for tax. Further, during the year, the Assessee has earned revenue income of Rs. 41.79 crores, from investment activities, out of which exempt income was only Rs. 2.11 crores, and balance was offered for tax.

The major revenue is earned by the Assessee from manufacturing business units and the majority of expenses were incurred for that purpose.

The Assessee has an internal treasury department, which not only look after the monetary affairs of the Assessee but also of its subsidiaries (other than Max New York Life Insurance Company Limited) as the other subsidiaries do not have such specialized personnel on their individual payroll. The Assessee recovers the cost of the work done for other subsidiaries and same is reduced from the expenses debited to the profit and loss account.

The main responsibilities of treasury management are funding by way of debt and equity, advising on relations with financial institutions, providing expertise on managing short-term surpluses, financial structuring of various business proposals, providing functional expertise in the areas of financial/capital planning and maintaining an effective liaison with the various bankers, financiers and private equity players. Thus, the role and responsibilities of the treasury department is very critical and crucial and no special efforts are made at their end nor expenditure incurred at the department have any direct relation with earning of exempt dividend income, which, in fact, constitutes only 1.30 % of the total income.

In view of the above, it is submitted, that no administrative expenditure having direct or indirect relation with making investment in shares, much less for earning exempt dividend income, was incurred by the Assessee, and, therefore, the disallowance made by the Ld. AO/Ld. CIT(A) calls for being deleted.

Further without prejudice-Reduced disallowance, having regard to consistency.

Further without prejudice to the above, it is submitted, that the disallowance, if any, needs to be restricted to disallowance of Rs. 0.10 crores estimated by the Ld. CIT(A) on reasonable basis, which was even followed by the Ld. AO in the Assessment orders for the Assessment years 2003-04, 2004-05 and 2005-06 (although subsequently enhanced by the Ld. CIT(A) (Refer page 31 of CIT(A)'s order and challenged in further appeal by the Assessee before I.T.A.T.).

Therefore, on the grounds of consistency as well, in the absence of any change in facts, it is submitted, that disallowance under Section 14A of the Act, if any, needs to be restricted to Rs. 0.10 crores only.

47. The Ld. DR in the rejoinder submitted that cash flow position to support the plea that no borrowed funds were used for making investment yielding exempt income was new evidence and should not be considered.

48. We have heard the rival contentions and perused the facts of the case. The disallowance was made by the AO on ad-hoc basis, proceeding on the assumption that some expenditure must have been incurred by the assessee towards earning exempt dividend income. The order of the ld. CIT(A) also proceeds on the same basis, as the ld. CIT(A) too has reduced the disallowance on ad-hoc basis. We are of the view that no disallowance u/s 14A can be made without establishing proximate nexus on a reasonable basis between the expenditure incurred and the exempt income earned. This position is now well settled by catena of decisions. We also find that cash flow statement was part of the audited accounts filed before the lower authorities and the assessee has before us only submitted a data analysis with reference to the figures available in the audited accounts to support its claim that no part of interest expenditure could be attributed to earning of exempt income and therefore, no disallowance under section 14A of the Act was called for. On perusal of cash flow statement, it is evident that the assessee had sufficient surplus funds available with it for making investments Having regard to the various decisions cited by the Ld. AR in the case of mixed pool of funds, if the surplus funds available with the assessee on an overall basis during the financial year are sufficient to make investment, presumption needs to be drawn that surplus funds and not interest bearing funds could be said to have been used for making investments by the assessee in the financial instruments yielding exempt income. Hence, no part of interest expenditure can be considered for the purpose of computing disallowance u/s 14A of the Act. Further, in the absence of any proximate nexus having been established by the lower authorities between the administrative and other expenses and the exempt income, in our view, no disallowance u/s 14A of the Act could have been made for the assessment year under consideration.

49. In view of the above, ground raised by the assessee in this regard is dismissed and that of assessee is allowed.

50. In the result, the appeal of the Revenue in ITA No.103(Asr)/2006 is dismissed and the appeal of the assessee in ITA No. 78(Asr)/2006 is allowed.

51. Now, we take up appeal of the assessee in ITA No.119(Asr)/2011 for the assessment year 2002-03. Ground No.1 of the assessee involves the issue of disallowance of expenditure under section 14A of the Act.

51.1. The brief facts are that during the relevant previous year, the assessee had earned dividend income of Rs. 2.91 crores and interest of Rs. 0.55 crores aggregating to Rs. 3.46 crores from various investments held in shares/bonds, which is exempt under the relevant provisions of section 10 of the Act. No amount was offered for disallowance by the assessee under section 14A of the Act.

51.2. The A.O. following the assessment for the A.Y. 2001-02 made an ad- hoc disallowance of Rs. 1.50 crores out of total expenses incurred by the assessee during the year under section 14A of the Act on the ground that the assessee cannot be said to have incurred any expense in relation to earning of aforesaid exempt income from investments held in shares/bonds.

51.3. The Ld. CIT(A) enhanced the aforesaid amount of disallowance under section 14A made by the A.O from 1.50 crores to Rs. 4.52 crores. In computing the aforesaid amount of disallowance, the Ld. CIT(A) attributed the interest expenditure incurred by the assessee during the year on the basis of self devised formula which is reproduced at page 37 para 10.4 of the order of the Ld. CIT(A) towards various investments held in shares/bonds yielding exempt income and computed disallowance of Rs. 4.32 crores on account of interest expenditure . The basis of disallowance of interest expenditure debited by the Ld. CIT(A) is reproduced as under:

		Amount (Rs in cores)
		1.4.2001	1.4.2002	Average
Shareholder's funds	A	525.57	517.31	521.44
Loan Funds	B	129.15	185.72	157.94
Ratio of borrowed funds to total funds	C-Average A/(Avg.A +Avg.B)			0.23
Relaxation in ratio by 50%	D+0.5*C			0.12
Interest Expenditure	E			15.49 80
Avg. cost of funds	F=E/Avg. of B			9.81%
Specified Investments	G	301.75	448.66	379.71
Investment of borrowed funds in specified investments in specified investments	H=D*G			44.13
Intt. Expenditure on borrowed funds invested in specified investments	1=H*For the Petitioner :			4.32

The Ld. CIT(A) also held that administrative expenses incurred during the year had nexus with investments in various shares/bonds, etc. and attributed an ad-hoc amount of Rs. 0.20 crores out of the total administrative expenses is disallowable under section 14A of the Act (Refer Ld. CIT(A) order pages 37-38 para 10.5). Accordingly, the ld. CIT(A) enhanced the amount of disallowance under section 14A from Rs. 1.50 crores made by the A.O. to Rs. 4.52 crores ( as per page 38 of Ld. CIT(A) order para 10.6).

51.4. The Ld. CIT(A) essentially gave the following reasons for disallowance of interest amounting to Rs. 4.32 crores under section 14A of the Act:

i) Even if Rule 8D was not applicable in the relevant year, disallowance under section 14A of the Act had to be made on reasonable basis in respect of expenses having proximate nexus with the exempt income.

ii) No Bank statements were provided by the assessee to enable the determination of proximate nexus between use of borrowed funds for making investments yielding exempt income. The findings about utilization of funds can be made only from study of bank statement/bank book which was not produced. The Ld. CIT(A) stated that the assessee was intentionally not furnishing the bank statement and the plea of the assessee that the bank statement pertain to very old period and are not available with the assesse is without basis since bank statement even for the assessment year 2006-07 have not been submitted. In view of the same, it was stated by the Ld. CIT(A) that presumption needs to be drawn against the assessee and the borrowed funds have to be considered as having been made for the purposes of making investments. The Ld. CIT(A) referred to the decision of the Hon'ble Delhi High Court in the case of CIT vs. Orissa Cement Ltd. 258 ITR 365 wherein as regards the issue whether the interest free advances had been made out of the sale proceeds or out of borrowed funds, it was observed that such determination should be made on the basis of material on record placed by parties.

51.5. The Ld. CIT(A) also referred to the decision of the Hon'ble Punjab & Haryana High Court in the case of Shashi Kiran vs. CIT (201) 195 Taxman 332 relating to the 'burden of proof' with reference to Indian Evidence Act, wherein it was held that the onus was on the purchaser of the property to demonstrate that the assessee paid lesser amount as mentioned in the Registered Sale Deed when the seller, in the statement recorded by the AO, stated the sale price to be on a higher figure.

51.6. The Ld. CIT(A) also distinguished the decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd reported in ITA No. 331 of 2009 dated 04.11.2009 relied upon by the assessee on the ground that in that case it was established by the assessee with evidence that the borrowed funds were not used for making investments whereas in the present case, no such evidence has been produced. The aforesaid decision was held to be not applicable on the facts of the present case.

51.7. The comparison of the balance sheets as on 31.3.2001 & 31.3.2002 shows that during the financial year 2001-02, the assessee's borrowings of interest bearing loan funds increased and its net investments increased whereas shareholders funds as also the net current assets decreased, which raises presumption that increase in borrowings has gone to fund the increase in investments. Also, it has to be presumed that the share capital has first gone into acquiring fixed assets/business assets and therefore in making investments.

51.8. Only some of the loans borrowed were for specific purpose of business expansion and most of the loans were for working capital purposes. While loans borrowed for working capital are freely available for the purchase of investments, even the loans obtained for business expansion can be used acquiring investment and there may be a gap between time as disbursement of funds and time of intended utilization. Therefore, the loan documents do not help the case of the assessee.

51.9. The decision of the ITAT Delhi Bench in the case of Maruti Udyog Ltd. vs. DCIT reported in (2005) 92 ITR 119 relied upon by the assessee for the proposition that for the purpose of determination of nexus between borrowed funds and investments over all position of funds should be considered and not the bank statements, cannot be applied without examining the facts of the case. Reference was made by the Ld. CIT(A) to the decision of the Hon'ble Supreme Court in the case of East India India Pharmaceutical Works Ltd. vs. CIT 224 ITR 627 (SC) and Hon'ble Calcutta High Court in the case of Woolcomber's of India Ltd. vs. CIT 134 ITD 219 (Cal), wherein it was observed that whether a assumption can be drawn that the taxes were paid out of profits of the relevant year and not out of over- draft account, would depend depend upon the fact as to whether the entire profits had been pumped into the overdraft account and whether such profits were more than the tax amount paid for the relevant year and all other germane factors. The Ld. CIT(A), therefore, was of the view that the decision of the ITAT, Delhi Bench in the case of Maruti Udyog Ltd. vs. DCIT (surpa) was not to be preferred.

50.10 Whether cash from operations as appearing in the cash flow statement was utilized for the purchase of investments, payment of dividend, fixed assets etc. is not discernible in the absence of bank statements/bank book and presumption in favour of the assessee on the basis of cash flow statement cannot , therefore, be drawn. Also in some cases, the proceeds from sale of investment was to be used for repayment of loan funds and were not available for investments. At the best 50% of the borrowings may be considered as having been used for non investment purpose since some loan documents had stipulation that the same cannot be used for investment purposes.

50.11. The assessee had in earlier years converted shares received from Max Corpn. Ltd as investment and borrowed funds of Max Corpn. Ltd have also been taken over by the assessee on merger of Max Corpn. Ltd. with the assessee and thus there was nexus between the borrowed funds and the above investments.

50.12. As regards the disallowance u/s 14A in respect of expenses other than interest expenses, the ld. CIT(A) held that taking into account increased volume of activity relating to the purchase and sale of investment during the relevant previous year, it would be reasonable to estimate the said expenditure at Rs. 20 lacs instead of Rs. 10 lacs estimated by the Ld. CIT(A) on adhoc basis in assessee's own case for the assessment year 2001-02.

51. The assessee challenged the aforesaid order of the ld. CIT(A) in deleting disallowance of Rs. 1.50 crores made by the AO under section 14A and enhancement of the amount of disallowance under the said section by the ld. CIT(A) to Rs. 4.52 crores. In support of ground of appeal raised by the assessee, Sh. Rupesh Jain, the ld. counsel for the assessee submitted that the assessee had made investment in shares which were held as either (a) long- term investment or (b) stock in trade (including shares vested with the appellant on merger of MCL). It was submitted further with regard to section 14A of the Act that no deduction is admissible for an expenditure, which has proximate nexus or relation with income, which does not form part of total income under the Act or, in other words, is exempt income. Reference, in this regard, is made to the following decisions, wherein it has been held that disallowance u/s 14A can be made on a reasonable basis, provided there is proximate nexus between the expenditure incurred during the year and the exempt income earned, which is to be established by the A.O.

- CIT vs. Walfort Share & Stock Brorkers 326 ITR 1(SC)

- Godrej & Boyce Mfg. Co. Ltd. v. CIT 328 ITR 1 (Bom.)

- Maxopp Investment Ltd. vs. CIT 247 CTR 162 (Del.)

- CIT vs. Hero Cycles 323 ITR 518 (P&H)

- CIT vs.Metalman Auto P. Ltd. 336 ITR 434 (P&H)

- CIT v. Reliance Industries Ltd. 339 ITR 632 (Bom)

- Chemical & Mettallurgical Design Co. Ltd. ITA No.803/2008 (Delhi HC)

- CIT vs. Ms. Sushma Kapoor 319 ITR 299 (Delhi)

- ACIT vs. SIL Investment Ltd. ITA No.2431/Del/2010 (Del)

- Sipra Engineers Pvt. Lt. [TS-671-ITAT-2012 (Mum)]

51.1. The Ld. counsel for the assessee pointed out that during the relevant previous year the assessee incurred expenses which were necessary for the regular business operations of the company carried on during the year and no expenses debited to the profit and loss account for the year was relatable to earning of dividend income from investments in shares of various companies. It was submitted that the AO without establishing the proximate nexus of any expenditure incurred during the year with investments yielding exempt income, made ad-hoc disallowance of Rs. 1.50 crores out of total expenses incurred during the year. The fact that the AO made ad-hoc disallowance only establishes that the AO could not pin point any expenditure, which had proximate nexus with investments resulting in exempt dividend income. In that view of matter it was submitted that the disallowance made by the AO needs to be deleted at the threshold on the aforesaid ground itself. That apart, even other, it was submitted that there was no nexus between the dividend income earned and the various expenses incurred during the year, in the chart of issues filed by the assessee which is reproduced below:

"a. Interest expenditure

Investments as on 1.4.3000 (Rs.263.13 crores)

A.I. Investments vesting on merger of MCL - Rs. 195.48 crores

As the beginning of the previous year relevant to assessment year 2000-01 ( i.e. as on 1.4.2000), being the first year of disallowance u/s 14A, the assessee held total investment in shares/mutual funds/government securities/bonds, aggregating to Rs. 263.13 crores. Out of the aforesaid total investments, investments to the extent of Rs. 195.48 crores, vested in the assessee on merger of MCl. It would be pertinent to point out that the erstwhile MCD had not made investment in shares, out of borrowed funds in as much as the MCL did not had any interest bearing borrowed funds, nor any interest expenditure was debited to the profit & loss account of the company, prior to merger with the assessee.

Therefore, the investments to the extent of Rs. 19.5.48 crores, held by the assessee as on 1.4.2000 had no nexus with the borrowed funds.

A.2 Balance Investments 'Rs.67.65 crores' (Refer PB 87-88 of supplementary PB A.Y.2001-02).

A.2.1 Investments, does not resulting in earning of exempt income - Rs. 36.01 crores (Refer PB 87-88 of supplementary PB AY 2001- 02)

As regards the balance investments, amounting to Rs. 67.65 crors (RS.263.13 crore -Rs.195.48 crores_ held as on 1.4.2000, the same included investment in shares of foreign subsidiary company and other Government securities/Bonds/Mutual Funds, the income wherefrom was not exempt from tax under the provisions of the Act, aggregated to Rs. 36.01 crores. The break up of the aforesaid investments is as under:

Nature of investment	Amount in Rs. and crores
Foreign Subsidiaries
Max Asia Pac Ltd.	11.33
Max UK Ltd.	2.13
Max Visions Inc.	0.95
BONDS
Reliance Zero Coupon Bonds	6.10
HDFC Bonds	0.62
MTNL Ltd.	0.57
RELIANCE Petroleum	3.31
Units in Growth Scheme
Kothari Pioneer Maxima Fund	10.0
DSP Merryl Lynch Balance Fund Growth	1.0
Total	36.01

A.2.2. Remaining Investments, out of interest free funds-- R.s.31.64 crores(Refer PB 87-88 supplementary PB of AY 2001- 02).

The break-up of balance investments, aggregating to Rs. 31.64 criers, is as under:

Nature of Investment	Amout in Rs. and crores.
Max Telecom Ventures Ltd. ('MTVL')	30
Alliance Capital Mutual Fund & Ors.	1.64
Total	31.64

Out of the aforesaid investments, aggregating to Rs. 31.64 crores, it would be appreciated that, major investment related to investment in shares of MTVL, amounting to Rs. 30 crores. The said total investment in shares of MTVL, it is submitted, was made in the previous year ending 31.03.1996. On perusal of the cash flow statement of the Assessee company for the year ending 31.03.1996. On perusal of the cash flow statement of the Assessee company for the year ending 31.03.1996, attached as Annexure A to this Chart, it would be noted that the Assessee had made a fresh issue of share capital at a premium, aggregating to Rs. 41.55 cr(Rs. 1.42+40.13 crores). Further, the Assessee received funds of Rs. 22.65 crores from issue of zero coupon fully convertible debentures (FCD), which did not carry any interest. In additional to above, the Assessee generated cash from operations of Rs. 6.34 crores. The aforesaid total interest free receipts, it would be appreciated, were sufficient to make investment in shares of MTVL.

It would be pertinent to point out, that the foresaid NCD of Rs. 40.33 cr. (carrying interest) and Zero Coupon FCD (interest free) of Rs. 22.65 cr. Were issued through a same Letter of Offer, which was placed on record before Learned. CIT (A), vide submission dated September 18, 2009.

However, Note.3 of the Offer Document, stipulated that proceeds of NCD (interest bearing) were not be utilized for investment in shares of group companies of joint ventures. The aforesaid object was to be met out of the proceeds of zero coupon FCDs. The relevant portion of the aforesaid note reads as under:

In view of the above, no portion of the interest bearing NCD was utilized towards investment in shares of MTVL, a group company of the Assessee.

Furthermore, the aforesaid opening investments were accepted to be made out of interest free funds, in as much as, no portion of the interest expenditure incurred in the earlier years was ever attributed to investments in the completed Assessments of those years. Reference in this regard is made to the following decisions wherein it has been held that where no portion of the borrowed funds have been attributed to investments made as at the beginning o the relevant previous year, no part of the interest expenditure allegedly relating to such investment, can be disallowed during the relevant year by drawing nexus of outstanding borrowed funds as at the end of the relevant previous year with opening investments: - CIT v. Sridev Enterprises: 192 ITR 165 (Kar.)

- CIT vs. Givo Ltd.: ITA No. 941/2010 (Del)

- Punjab Wool Combers Ltd. V. ACIT: (2004) 1 SOT 114 (Chandi.)

- Motor and General Finance Ltd. Vs. DCIT : 90 ITD 449 (ITAT, Del.)

- Meenakshi Synthetics Vs CIT: 84 ITD 563 (ITAT, Lko.)

- GR Agencies vs ITO; 79 TTJ 496 (I.T.A.T., Lko)

- Malwa Cotton Spinning Mills: 89 ITD 65 (I.T.A.T.-Chd)

- Usha Martin Industries Ltd. Vs. DCIT: 86 ITD 261 (I.T.A.T.-Cal.)

Investments during the period 01.04.2000 to 31.03.2001 (relevant to ASSESSMENT YEAR 2001-02)

On perusal of the cash flow statement for the previous year 2000-01, it would be noticed that, the Assessee had made incremental aggregate investment in various securities (including investment in shares of foreign companies, bonds etc., which do not result in earning of any exempt income) of Rs. 357.29 crores. As against the aforesaid investment, the Assessee realized Rs. 302.26 crores from sale of investments made in earlier year(s) and Rs. 3.44 crores from interest and dividend income, etc. The assessee also generated interest free cash from operations, aggregating to Rs. 97.63 crores, from operating activities. Furthermore, the Assessee had an opening cash balance of Rs. 20.47 crores, which was utilized for other business purposes of the Assessee, like purchase of fixed assets, aggregating to Rs. 79.08 crores.

In that view of the matter, it would be appreciated that the Assessee had substantial surplus interests free funds, which were sufficient to cover additional investments in shares made during the year and, therefore, there was no nexus of interest paid on borrowed funds with the said investments in the Assessment Year 2001-02. Reliance, in this regard, is placed on the following decisions, wherein it has been held that, where an Assessee has mixed pool of funds, a presumption should be drawn in favour of an Assessee qua utilization of interest free funds and borrowed funds:

- East India Pharmaceutical Works Ltd. Vs. CIT: 224 ITR 627 (SC)

- Woolcombers of India Ltd. v. CIT: 134 ITR 219 (Cal.)

- India Explosives Ltd. Vs. CIT: 147 ITR 392 (Cal)

- CIT V. Reliance Utilities and Power Ltd.: 313 ITR 340 (Bom)

- CIT V. Ashok Commercial Enterprises: I.T.Act, 1961 No. 2985 of 2009 (Bom.)

- Lubi Submeribles Ltd. :ITA No.868 of 2010 (Guj.) (High Court)

- CIT vs. K. Raheja Corporation Pvt Ltd: ITA No. 1260 of 2009 (Bom)

51.2. The Ld. counsel for the assessee pointed out that during the relevant previous year, the assessee made investments, as detailed below:

"Investments during the period 1.4.2001 to 31.3.2002 (relevant to AY 2002-03 (Refer PB-892)

Ref; Cash flow statement:

On perusal of the cash flow statement for the relevant previous year ending 31.3.2002, it would be noticed that the assessee had made incremental aggregate investment in various securities (including investment in shares of foreign companies, bonds, etc. which do not result in earning of any exempt income) of Rs. 152.05 crores. The aforesaid aggregate investment made during the year included investment of Rs. 108.295 crores in equity shares, dividend income wherefrom is exempt from tax. The break up of aforesaid investment, which was even submitted in the course of appeal is as under:

Particulars	Amount in Cr.
Max New York Life Ins. Co. Ltd.	107.300
Max Ateev Limited	0.995
Total	108.295
Mutual Funds/Other Equity Shares (Other than strategic)	15.575
Total	123.870
Foreign Subsidiary Companies (income wherefrom not exempt from tax)
Max Asia Pac Inc.	28.180
Total	152.050

The assessee realized Rs. 117.97 crores from sale of investments made in earlier years, Rs. 6.87 crores from sale of fixed assets and Rs. 46 crores from operating activities. Furthermore, the assessee had opening cash balance of Rs. 8.90 crores. The aforesaid interest free flow of funds, aggregating to Rs. 179.74 crores was sufficient to make total investment of Rs. 152.05 crores and in any case sufficient for investment in equity shares of Rs. 108.295 crores. Further, it would be appreciated that during the relevant year, the assessee made incremental borrowing of Rs. 48.92 crores which was utilized for other business purposes, like purchase of fixed assets, amounting to Rs. 54.62 crores etc. (Refer PB-892) Ref; Purpose of loan (PB 260-270) :

Further, in the course of appeal, the assessee had also furnished loan agreements entered with various lenders, which established purpose of such loans. The purpose for which loan(s) was/were sanctioned was not investment in shares, as could be gathered from the purpose of major borrowings as per following:-

Nature of Borrowing	Loan O/S as on 31.3.2002	Purpose of loan as per agreement
Debenture
Privately Placed Debenture 12%	50.00	1) The objective of the issue is to part finance the capital expenditure of the company.
NCD 12.5% (95-96)	26.73	2) The copies of aforesaid documents are enclosed herewith at page 113 to 119 of PB- 113 to 199
Privately Placed Debenture 12.5%	25.00
Total Interest on Debenture	101.73
TERM LOAN ICICI BANK	30.00	1)The objective is to expand the manufacturing capacity of BOPP division by 5000 tpa i.e. from 3150 tpa to 8150 tpa and 2) The copy of relevant pages of sanction letter from ICICI Bank is enclosed herewith at pages 2000-208 of paper book
IDBI Foreign currency loan Karnataka Bank	19.93 5.00	The objective is to meet the working capital requirement of the company and the copy of loan document is enclosed at pg. 309-310 of PB The objective is to meet the working capital requirement of the company and the copy of loan document is enclosed at PB 309-310 of PB
ICICI Bank	3.72	The objective is to meet the working capital requirement of the company and copy of loan document is enclosed at pg 311 to 319 of paper book.
Total Term Loan	38.72
INTER CORPORATATE LOANS IL & FS Rabo India	- - 20.00	The The objective is to meet the working capital requirement of the company and the copy of loan document is enclosed at pg. 320-337 of PB
Total Corporate Loan	20.00
Acceptance	0.86	The objective is to meet the working capital requirement of the company and document are voluminous in nature
Total acceptance	0.68
Total	171.05

On perusal of the above, it would be appreciated that the objective behind aforesaid various borrowings/loans were towards regular business purposes of the assessee, like meeting working capital requirements, capital expenditure, like purchase of fixed assets for BOPP division etc. and not for making any investment in shares, including subsidiary companies, mutual funds etc. income wherefrom was exempt under the provisions of the Act.

For the aforesaid cumulative reasons, it was submitted that interest paid on funds borrowed upto the end of the relevant year had no nexus with various investments held by the assessee, resulting in earning of exempt income, such investments were made out of interest free funds, as established from the aforesaid fund flow position, commencing from 1.4.2000.

51.3 The Ld. counsel for the assessee rebutted the various allegations/contentions made by the Ld. CIT(A) while drawing adverse inferences qua nexus of borrowed funds with various investments and rejected the arguments of the assessee that the overall funds flow position and not the bank statements has to be considered for the purposes of arriving at the nexus if any between the borrowed funds and investments. The various allegations made by the Ld. CIT(A) were rebutted by the assessee during the hearing. The said rebuttal are also contained in the chart of issues filed by the assessee, relevant portion of which is reproduced as under:

"Rebuttal of Ld. CIT(A)

(i) Adverse inference on the basis of Balance Sheet In the appeal order, the ld. CIT(A) at para 9 on the basis of comparing balance sheet of the assessee as on 31.3.2002 with balance sheet as on 31.3.2001 drew adverse presumption/inference against the assessee that borrowed funds would have been utilized for making investments. In this regard, it was submitted as under: The balance sheet of a company is prepared as at the end of the relevant previous year after considering various non-cash expenses incurred during the year and debited to the profit & loss account, like depreciation, provisions for various losses, loss on sale of assets etc. The aforesaid non-cash expenditure reduces the profits/reserves and surplus of the assessee as reflected in the balance sheet at the end of the relevant previous year. Investment in shares involves deployment of actual funds and source of the same cannot, therefore, be appropriately determined with/from the balance sheet, prepared after considering non-cash expenses, as explained above. It is respectfully submitted that the determination of the source of investments, which involve deployment of cash funds, can more appropriately, correctly and completely be made on the basis of actual cash/funds available with the assessee during the year before making such investments. For instance, as per balance sheet, there is decrease in fixed assets during the year from Rs. 142.57 cr. To Rs. 110.58 cr; whereas as per the cash flow statement, the assessee had acquired new assets for Rs. 54.62 crores PB-868). The aforesaid decrease in fixed assets as per balance sheet was on account of removal/deletion of fixed assets, primarily relating to healthcare division, having cost of Rs. 56 crores, from the fixed asset schedule, which were hived off into a wholly owned subsidiary company of the assessee viz. Max Healthcare Institute Ltd; in lieu of fresh allotment of shares, without involving any cash inflow (PB 883, Note No.15).

The aforesaid adjustments, it would be appreciated, are non- cash adjustments, which despite positive cash flow of an assessee during the year, is adversely reflected in the balance sheet, prepared as at the end of the relevant year.

In view of the same, cash flow statement for the year, which excludes non-cash expenses incurred during the year, and summarizes cash flow position of a company during the year, needs to be considered for the purposes of determining the nexus of borrowed funds/interest free funds with the investments made during the year, instead of drawing such nexus on the basis of the figures in the balance sheet of the company as at the end of the relevant previous year. In the present case, considering the positive cash/fund flow position of the assessee on an year to year basis, which establishes the source of various investments, income wherefrom is exempt from tax and nexus of borrowed funds, the exercise of co- relating/matching investments on the asset side with borrowings on the left/liability side of the balance sheet is not a good guide and/or a correct method. The correct method to establish the aforesaid nexus is only through fund flow position, which provides the actual source and utilization of funds/cash by an assessee, which in the present case, as elaborated above, establishes the nexus of various investments with interest free funds

In that view of the matter, the action of the ld. CIT(A) in drawing adverse inference qua nexus borrowed funds with various investments, on the basis of balance sheet as on 31.3.2002, was not based on correct appreciation of facts, especially the fund flow position of the assessee, on an year to year basis, elaborated supra and therefore, the disallowance of interest expenditure u/s 14A of the Act calls for being deleted.

(ii) Investments acquired on merger of MCL

The Ld. CIT(A), on the basis of presumption, also observed that the assessee acquired investments on merger of MCL and therefore, would have also have been vested with interest bearing borrowings made by erstwhile MCL, which had direct nexus with investments, resulting in exempt income.

As discussed supra, MCL did not have interest bearing borrowed funds, which is evident form the profit and loss account of that company, prior to merger, in as much there is no debit on account of interest expenditure and therefore, no interest bearing borrowed funds were acquired by the assessee from MCL. The adverse inference drawn by the ld. CIT(A) against the assessee is purely based on presumption/surmises and conjectures, which needs to be ignored (Refer PB 93-106 of supplementary PB A.Y. 2001-02).

(iii) Ref; Nexus through Bank statements/cash flow statement

The Ld. CIT(A) held that the proximate nexus of borrowed funds/interest free funds with investment in shares could be established only through the bank statements and not on the basis of aforesaid macro cash flow position. In view thereof, in the absence of the bank statements being available on record, the ld. CIT(A) attributed nexus of interest expenditure with various investments on the basis of presumption and made disallowance of interest expenditure, on ad-hoc basis, u/s 14A of the Act, on the basis of formula reproduced above.

It is respectfully submitted that establishing nexus of interest free/borrowed funds and investments with reference to entries in the bank statements, is not a correct/appropriate method and leads to fallacious results/conclusion regarding the presence or absence of such nexus.

51.4 Reliance was also placed on the following decisions , wherein the courts/tribunal have held the over-all funds flow position considering the material on record is to be considered for the purpose of determination of nexus of macro funds and funds advanced to sister concern non-business purposes/investment etc.:

i) In the case of Maruti Udyog Ltd. vs. DCIT 92 ITD 119 (Delhi), the assessee paid total interest of Rs. 47,47,22,000 during the year against funds borrowed from different sources. The assessee during the year also invested a sum of Rs. 217,80,27,000 in shares of various companies, dividend income arising from which was exempt u/s 10(33) of the Act. The AO applying provisions of section 14A of the Act, disallowed interest @ 18% of the total amount of investment in shares on the ground that borrowed funds were utilized for making investments. On further appeal, the ld. CIT(A) made an effort to establish the source of funds with reference to the availability of funds on the date of each investment. On the basis of aforesaid nexus of source of funds available immediately before the date of each investment, the ld. CIT(A) found out that source of funds in each case was primarily interest bearing borrowed funds. Accordingly, the Ld. CIT(A) held that on facts there was direct nexus of borrowed funds with investment in shares and accordingly upheld the disallowance of interes expenditure made by the AO. However, the ld. CIT(A) reduced the amount of disallowance on the basis of day to day working of borrowed funds utilized for investment, as opposed to adhoc rate of 18% on the total amount of investment in mutual funds, adopted by the A.O.

On further appeal before the ITAT, the assessee inter alia submitted that the interest free funds available with the assessee far exceeded the amount of investment and therefore, no adverse inference could be drawn that investment in shares was out of borrowed funds. It was therefore, submitted that merely the fact that on the date of investment, the bank account had borrowed funds, could not be lead to the inference that borrowed moneys had been used for making investment in shares.

While adjudicating the matter in favour of the assessee, the Tribunal held that in view of surplus funds being available with the assessee during the year, the same should be presumed to have been utilized for making investments in shares. It was held that the approach following by the Ld. CIT(A) to establish nexus of investment through immediate source of funds was erroneous.

In view of the above, it is submitted that the correct method to establish source of investment would be to consider the macro funds cash flow position during the year and if the assessee had sufficient surplus funds available, presumption should be drawn in favour of the assessee that surplus funds have been utilized for making investments.

Reliance in this regard was placed on the following decisions, wherein the exercise of establishing nexus of funds on the basis of macro fund flow position has been upheld.

i) East India Pharmaceutical Works Ltd. vs. CIT 224 ITR 627 (SC)

ii) Woolcombers of India vs. CIT 134 ITR 219 (Cal.)

iii) India Explosives Ltd. vs. CIT 147 ITR 392 9Cal)

iv) CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340 (Bom.)

v) CIT vs. Ashok Commercial Enterprises ITA No. 2958 of 2009 (Bom.)

Reliance was also placed on the following decisions, wherein while following the ratio emanating from the aforesaid decisions, disallowance of interest expenditure under section 14A has been deleted, where the assessee was found to have interest free funds, exceeding interest bearing funds or making investment in shares:

- Lubi Submeribles Ltd. ITA No.868 of 2010 (Guj) (HC)

- CIT vs. K. Raheja Corporation Pvt. Ltd. ITA No.1260 of 2009 (Bom.)

51.5. The Ld. counsel for the assessee filed a chart containing various illustrations to buttress the position that approach of establishing nexus through bank statements in case of mixed pool of funds should not be followed as the same does not take into consideration the over all fund position and would lead to fallacious and misleading result . The aforesaid chart is reproduced for ready reference:

Illustration 1:

Bank statement of Mr. X

Day 1	Assume that Mr. X had an opening interest free funds of Rs. 10,00,000		Rs.10,00,000
Day 2	Mr. X borrowed funds of Rs. 20,00,000	Rs.20,00,000	Rs.30,00,000
Day 2	Mr. X invested Rs. 9 lacs in mutual funds, which yield tax free income	(Rs.9,00,0000)	Rs.11,00,000

In the aforesaid illustration, if the fund flows as per the bank statements are to be viewed in isolation, it might carry an impression as if the funds borrowed on day 2 have been used in making investments. However, since interest free funds, too, were available, the presumption, as per the court/Tribunal rulings would be that own funds have been utilized for making investment.

Bank Statement of Mr. X

Date	Particulars/Narration	Amount	Balance
Day 1	Opening Balance	0	0
Day 1	Interest free business receipt	Rs.5,00,000	Rs.5,00.000
Day 1	Interest bearing borrowed funds	Rs.15,00,000	Rs.15,00,000
Day 2	Investment in mutual funds, yielding tax free income	(Rs.14,00,000)	Rs.6,00,000

In the aforesaid illustration, if the fund flows as per the bank statements are to be viewed in isolation, it might carry an impression as if the last inflow of funds i.e. borrowed funds, aggregating to Rs. 15 lacs on day 1, have been used in making investments of Rs. 14 lacs on Day 2. However, since interest free funds of Rs. 5 lacs were also received by Mr. X on day 1, a presumption can be drawn that the aforesaid funds were also used for the purposes of making investment. The exercise of drawing nexus through bank statement, in such a situation, would be a fallacious exercise.

Illustration 3:

Bank Statements of Mr. X

Date	Particulars/Narration	Account A	Account B
Day 1	Assume that Mr. X has an overdrawn balance of Rs. 10,00,000 in A/c A and Nil balance in Account B	-Rs.10,00,000	0
Day 2	Mr. X got an interest free receipt of Rs. 9,00,000, which instead of being deposited in Account A was deposited in Account B		9,00,000
Day 3	Mr. X made an investment in mutual funds of Rs. 9,00,000 from Account B		(9,00,000)
	Balance	-Rs.10,00,000	0

In the aforesaid illustration , Mr. X had an option to deposit business receipts of Rs. 9,00,000 in Account A or Account B. In the aforesaid illustration, if nexus of funds with reference to bank statements were to be made, the investment of Rs. 9,00,000 would have to be considered as having come out of business receipts deposited in Account B, although there were borrowed funds in Account A. However, that is not the correct position, since in actuality, there is on a net basis and in reality an overdraft of Rs. 10 lacs, on account of investment of 9 lacs in mutual fund. This is the result which would have followed if the business receipts had been deposited in Account A. The position, if funds would have been deposited in Account A would be as under:

Bank Statements of Mr. X

Date	Particulars/Narration	Account A	Account B
Day 1	Assume that Mr. X has an - overdrawn balance of Rs. 10,00,000 in A/c A and Nil balance in Account B	Rs.10,00,000	-Rs.10,00,000
Day 2	Mr. X got an interest free receipt of Rs. 9,00,000, which instead of being deposited in Account A was deposited in Account B	9,00,000	(-)1,00,000
Day 3	Mr. X made an investment in mutual funds of Rs. 9,00,000 from Account B	(9,00,000)	-Rs.10,00,000

If the interest free funds are deposited in Account A (having an overdrawn balance), it could be seen that nexus of investment of Rs. 9 lacs with borrowed funds in that Account.

51.6 In view of the above, it was submitted that considering the fact that assessee had surplus interest bearing funds on the basis of over all fund flow position for making investments, the insistence of ld. CIT(A) on the basis of bank statements for establishing nexus between borrowed funds with investment was unwarranted and the adverse inference/presumption drawn against the assessee qua utilization of borrowed funds and consequently disallowance of interest expenditure on ad-hoc basis was not factually and legally tenable. It was submitted that the ld. CIT(A) relied upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Orissa Cement Ltd. 258 ITR 365 (Del) for the proposition that the issue of nexus of interest free or borrowed funds is a question of fact which needs to be determined on the basis of material on record by the parties. The Hon'ble High Court has held that as the facts in relation to the aforesaid issue are in the special knowledge of the assessee, the burden to bring material on record is that on the assessee. In that case, since there was no material on record establishing utilization of borrowed funds for specific purposes, the presumption was raised against the assessee and disallowance of interest expenditure made by the AO was upheld by the Hon'ble High Court.

51.7 The Ld. counsel for the assessee submitted that the Ld. CIT(A) had wrongly applied the aforesaid decision to the facts of the assessee for drawing adverse presumption regarding nexus of borrowed funds with investments and such decision was distinguishable. It wa pointed that in the case of CIT vs. Orissa Cement Ltd. (supra), the Hon'ble High Court has laid emphasis on material on record to establish nexus of funds and the said decision no where holds or leads to the conclusion that the bank statements can only be considered as material on record to establish nexus of funds. Further, it was pointed out that in the case of the assessee there was sufficient material on record in the form of :

i) The overall funds flow position on year to year basis forming part of audited accounts which was duly explained to the ld. CIT(A).

ii) The purpose of borrowed funds established through agreement entered with lenders, which required the presumption to be drawn in favour of the assessee. Accordingly, it was submitted that the aforesaid decision of the Hon'ble Delhi High Court does not support the case of the ld. CIT(A).

51.8 The Ld. counsel for the assessee distinguished the decision of the Hon'ble Punjab & Haryana High Court in the case of Shashi Kiran vs. CIT reported in 195 Taxman 332 referred to by the ld. CIT(A) to hold that the assessee by not submitting bank statements had failed to discharge the initial onus placed on him to establish nexus of borrowed funds. It was submitted in that case, it was held that the initial burden placed on the Revenue to establish with evidence the actual amount of consideration paid by the assessee for purchase of property stood discharged pursuant to statement of the seller. The burden, thereafter, shifted on the assessee to establish with evidence that the statement of the seller was wrong and that the purchase consideration was not more than the actual consideration. In the aforesaid case, based on the rule of evidence, onus was put on the assessee purchaser to rebut the statement of the seller which was confronted by the Revenue to the assessee by bringing evidence to contrary on record. There is no such situation in the present case.

51.9 The decision of ITAT, Delhi Bench in the case of Maruti Udyog Ltd. vs. CIT (supra) was heavily relied upon by the ld. counsel for the assessee to contend that any attempt to establish nexus of borrowed funds with the investments on the basis of bank statements would mean ignoring the overall fund position and would lead to an erroneous and fallacious conclusion.

51.10. The Ld. counsel for the assessee specifically invited our attention to the fact that in that case inspite of bank statements being available and ld. CIT(A) establishing nexus of borrowed funds with investments on the basis of such bank statements, the Tribunal reversed the decision of the ld. CIT(A), as it was of the view that the above approach of the ld. CIT(A) was not correct since it ignored the over all position of the funds available during the relevant year with the assessee.

51.11 It was submitted that the ld. CIT(A) has not been able to provide any cogent reason to distinguish the case of Maruti Udyog Ltd. (supra) as the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. (supra) and that of Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. (supra) referred to by the Ld. CIT(A) to disregard the decision of the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. (supra), was totally without any basis since the aforesaid decisions, in fact support the case of the assessee that overall funds position, has to be considered in case of mixed pool of funds and in case profits are more than the tax amount, presumption would be that tax was paid out of profits.

51.12 As regards the findings of the ld. CIT(A) regarding loan documents furnished by the assessee for establishing the purpose of loan that although specific purpose of borrowings was specified in some of the loan agreements, however, there was no stipulation/restriction on the assessee not to use such funds for other purposes, including various modes of investments. It was submitted by the Ld. counsel for the assessee in this regard that it was not that in every loan agreement, there was no stipulation/restrictive covenant on the assessee not to utilize the borrowed funds for the purposes other than the purpose of borrowing stated in the loan agreement as demonstrated below:

* For instance, as pointed above, which has even been accepted by the Ld. CIT(A), at page 33 of his order, the offer document relating to issue of 12% NCD in the year 1995-96, clearly stipulated that the proceeds of said borrowing shall not be utilized for making investment in shares. The relevant portion of the order of CIT(A) readsas under:

"Issue of Zero Coupon Fully Convertible Debentures and 12.5% Non-Convertible Debentures in 1995-96 by the assessee company. The issue was for capital expenditure as well as for making strategic investments. The offer documents mentioned that in light of the directions by SEBI, the proceeds of non- convertible debentures could not be utilized for acquisition of shares/or providing loan to any company belonging to the same group"

* It wa similarly observed by the ld. CIT(A) qua loan agreement with IDBI. The relevant observations are as under:

"Loan agreement dated 22.01.2001 between the assessee company and IDBI for grant of loan in foreign currency of approximately Rs. 18.8 crores. Though, specific utilization of loan is not mentioned, one of the special condition of the loan is that it could not be utilized for subscription or purchase of shares/debentures, repayment of dues of any subsidiary/associate companies or making any inter corporate deposit."

That part, although in certain loan agreements, there was no specific stipulation/restrictive covenant on the assessee not to utilize borrowed funds for other purposes, it is submitted that considering that borrowed funds had actually been utilized for such purposes, there was no occasion to draw an adverse inference that such borrowed funds would have been utilized for making investments, the positive fund flow statement in each year on the basis of which it could be said that sufficient interest free funds were available with the assessee to make investments and this is not so considering funds borrowed for specific purposes were not diverted for such investments.

* For instance, Term Loan of Rs. 30 crores from ICICI Bank was to be utilized for expansion of BOPP division from 3150 tpa to 8150 tpa. In this regard, it is submitted that the assessee actually utilized the aforesaid borrowing for the purpose of expansion of BOP film, which came into existence in AY 2002-03 ( as per PB 200-208).. In view of the above, adverse inference drawn by the Ld. CIT(A) that there was no embargo on the assessee to utilize funds acquired from issue of NCD for the purpose of investment in shares, is not based on correct appreciation of facts/loan documents and therefore, the same needs to be ignored.

For the aforesaid cumulative reasons, the action of the AO and the Ld. CIT(A) in making disallowance of interest expenditure on presumptive basis, needs to be reversed and the disallowance of interest expenditure u/s 14A needs to be deleted.

It was, therefore, submitted that the formula/basis adopted by the ld. CIT(A) to enhance the disallowance of interest expenditure was adhoc and not supported by law and was liable to be ignored.

51.13 As regards the disallowance out of other expenses u/s 14A, it was submitted by the ld. counsel for the assessee that the amount of dividends were received by single dividend warrant. No effort or expenses are incurred to earn the income by way of dividend from these companies. For depositing single dividend warrant(s) in the bank account during the financial year, the assessee could not be said to have incurred expenditure, as the same was deposited along with other cheques in the normal course of the business of the assessee company. Further, there was no specific employee kept by the assesee to keep record of the dividend income. The same was recorded in the normal course of conduct of the business of the assessee. During the relevant year, the assessee had earned dividend income of Rs. 3.47 crores out of the total revenue of Rs. 185.02 crores earned during the year. Thus, the exempt income was only 1.87% of the total revenue offered for tax. Further during the year, the assessee had earned revenue of Rs. 19.44 crores from investment activities, out of which exempt income was only 3.47 crores and balance was offered for tax. Major revenue was earned by the assessee form manufacturing business units, as would be clear from the details of major expenses incurred by the assessee, as follows:

		Amount (Rs in crores)
S.No.	Expenses Head	Total	Treasury Deptt.
A	Manufacturing expenses	86.54	0
1	Raw material consumed
2.	Power & Fuel
3.	Processing charges
B	Personnel Expenses	19.38	0.21
C	Administration and other expenses	33.50	1.31
1.	Rent
2.	Electricity
3	Repair and Maintenance
4.	Travel & conveyance
5.	Advertisement

The assessee has internal treasury department, which not only took the monetary affairs of the assessee but also of its subsidiaries (other than Max New York Life Insurance Company Ltd) as the other subsidiaries do not have such specialized personnel on their individual payroll. The assessee recovers the cost of the work done for other subsidiaries and same is reduced from the expenses debited to the profit and loss account.

The main responsibilities of treasury management are funding by way of debt and equity, advising on relations with financial institutions, providing expertise on managing short-term surpluses, financial structuring of various business proposals, providing functional expertise in the areas of financial/capital planning and maintaining effective liaison with the various bankers, financiers and private equity players. Thus, the role and responsibilities of the treasury department are very wide and no special efforts are made at their end nor expenditure incurred which has direct relation with earning of exempt dividend income, which in fact, constitutes only 1.87% of the total income.

Further, it needs to be appreciated that the assessee had incurred expenditure of Rs. 139.42 crores out of which major portion pertain to business units amounting to Rs. 137.90 crores and expenses of treasury department amounted to Rs. 1.52 crores only.

51.14. In view of the above, it was submitted that no administrative expenditure having direct or indirect relation with making investment in shares, much less for earning exempt dividend income, was incurred by the assessee and therefore, the disallowance made by the AO/CIT(A) calls for being deleted.

51.14.1 As regards, shares held under the head 'stock in trade', amounting to Rs. 15.89 crores (as on31.03.2001) it would be appreciated that there was net decrease in the shares held in the said category during the relevant year. As regards the shares held at the beginning of the relevant year, the entire shares vested in the Assessee on merger of MCL.

As discussed (supra), considering that MCL had no interest bearing borrowing, there was, thus, no nexus of interest expenditure incurred during the year with shares held under the head 'stock in trade'.

51.15. Without prejudice to above, it was submitted by the ld. counsel Mr. Rupesh Jain that the disallowance under section 14A cannot in any circumstances be made with respect of investments held by the assessee as stock in trade. It was submitted that intent behind holding investments as stock in trade is to earn profit from trading therein and not to earn incidental exempt dividend income therefrom, warranting disallowance u/s 14A of the Act. For the aforesaid proposition, the ld. counsel for the assessee relied upon the following decisions wherein disallowance of expenditure under section 14A of the Act in respect of shares held as stock in trade was deleted:

- CCI Ltd. vs. Jt. CIT 206 Taxman 563 (Kar)

- Apoorva Patni vs. ACIT (2012) 24 Taxman.com 223(Pune)

- Ethio Plastics P. Ltd. [TS-882-ITAT-2012 (Ahd.)

51.16. In view of the above without prejudice to the submissions that no portion of the expenditure incurred during the year warranted disallowance u/s 14A of the Act, it was submitted that no expenditure in any case, if any relatable to shares held as stock in trade can be disallowed under that section.

51.17. Further, without prejudice to the above, it was submitted that the ld. CIT(A) in his order for the assessment year 2001-02 and the A.O. for the assessment years 2004-05 & 2005-06 in assessee's own case have computed the disallowance under section 14A of the Act at Rs. 10 lacs only and therefore, having regarding to the principle of consistency in the absence of any change in nature of activities carried on by the assessee, disallowance u/s 14A needs to be restricted to Rs. 10 lacs.

52. The Ld. DCIT(DR), Mr. Tarsem Lal, heavily relied upon the order of the ld. CIT(A) and argued that the onus was on the assesse to establish that no expenditure was incurred for earning of exempt income. It was argued that the assessee had miserably failed to discharge the onus placed on him by not producing bank statement/bank book inspite of the same having been asked for by the ld. CIT(A). The Ld. DR argued that the reasons behind the assessee for not furnishing the bank statement was that if such statements had been provided, the same would have shown utilization of borrowed funds for making investments and therefore, the ld. CIT(A) was correct in drawing presumption against the assessee. The Ld. DR also argued that overall funds flow position was heavily relied upon by the assessee has no authenticity and the bank statements called for by the ld. CIT(A) was an authentic document. The Ld. DR further supported the order of the ld. CIT(A) that the loan documents furnished by the assessee for establishing the purpose behind obtaining the loans is not determinative of utilization of such funds and there is no stipulation that such funds were to be used for specified purposes only. The Ld. DR further supported the order of the Ld. CITA) to contend that the balance sheet of a company which depicts the financial position of the company and is used by the readers and users of the same is the best and correct guide to gather the financial position of assessee instead of the cash flow statement.

52.1. The Ld.DR also argued that the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. vs. CIT (supra) and the Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd.(supra) relied upon by the assessee are distinguishable since in the aforesaid cases bank statements were available on record pursuant to which the proposition regarding presumption to be drawn in favour of the assessee in case of mixed pool propounded.

52.2. The Ld. DR also relied upon the decisions of the Hon'ble Delhi High Court in the case of Orissa Cement Ltd. (supra) and Hon'ble Punjab & Haryana High Court in the case of Shashi Kiran (supra).

52.3. The Ld. DR also distinguished the decision of the Hon'ble Supreme Court in the case of Walfort Share and Stock Brokers (P) Ltd. (supra) relied upon by the assessee for the proposition that only expenditure can be disallowed u/s 14A on the ground that the same was rendered in the context of provisions of section 94(7) of the Act.

52.4. The Ld. DR relied upon the decision of the Hon'ble Bombay High Court in the case of Godrej and Boyce Co. Ltd.(supra) and argued that the disallowance u/s 14A could be made for the assessment years prior to assessment year 2008-09 on a reasonable basis.

52.5. For the aforesaid cumulative reasons, it was argued by the Ld. DR that the order of the Ld. CIT(A) needs to be upheld and the appeal filed by the assessee needs to be dismissed. Without prejudice to the same, the ld. DR argued that considering bank statements were not furnished by the assessee, the matter may be restored to the file of the A.O. to establish nexus of borrowed funds and investments with reference to the bank statements.

53. In the rejoinder, the ld. counsel for the assessee having regard to the various decisions relied upon in original submissions submitted that in the present case, the assessee having regard to over all funds flow position for the relevant previous year forming part of the audited accounts as also the loan document had discharged the onus placed on him regarding use of surplus/non-borrowed funds for investment purposes. It was pointed out that in the absence of negative funds flow position of the assessee, the insistence by the Ld. CIT(A)/DR on furnishing of bank statement by the assessee was of no consequence. The Ld. counsel for the assessee re-emphasized on the decision of ITAT Delhi Bench in the case of Maruti Udyog Ltd. (supra) wherein exercise of establishing nexus of borrowed funds by the ld. CIT(A) through bank statement was held not to be the correct approach. The Ld. counsel for the assessee pointed out that the ld. DR has not argued a single word as to how the aforesaid decision of Delhi Bench of the Tribunal is not applicable on the facts of the present case.

53.1. As to the contention of the Ld. DR that cash flow statement is not authentic, the ld. counsel pointed out that cash flow statement was part of the audited accounts and depicts actual cash flow of the assessee during the year based on audited accounts and that the said cash flow was also duly audited by the auditors. The Ld. counsel for the assessee objected to the alternate contention of the Ld. DR that the issue may be set aside to the AO for determination of nexus of borrowed funds with investments through bank statements on the ground that the aforesaid would be a futile exercise leading to the erroneous result and was not accepted by the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. (supra).

53.1.1. Further without prejudice to the above, it is submitted, that the disallowance, if any, needs to be restricted to disallowance of Rs. 0.10 crores estimated by the Ld. CIT(A) on reasonable basis, which was even followed by the Ld. AO in the Assessment orders for the Assessment years 2003-04, 2004-05 and 2005-06 (although subsequently enhanced by the Ld. CIT(A) and challenged in further appeal by the Assessee before I.T.A.T.). Therefore, on the grounds of consistency as well, in the absence of any change in facts, it is submitted, that disallowance under Section 14A of the Act, if any, needs to be restricted to Rs. 0.10 crores only.

54. We have heard the rival contentions and perused the facts of the present case. The main thrust on the order of the ld. CIT(A) in computing/enhancing the amount of disallowance of interest expenditure u/s 14A was of non-furnishing of bank statements by the assessee and drawing adverse inference regarding use regarding use of interest free funds with investments yielding exempt income on that basis. We have gone through the decisions of various courts of law and Tribunal wherein the theory of drawing presumption as regards utilization of interest free/borrowed funds in the manner most favourable to the assessee in the case of mixed pool of funds has been propounded. We have also perused the various illustrations given by the ld. counsel, which clearly demonstrate that the exercise of determination of nexus of funds used for investment purposes on the basis of bank statements would lead to misleading results and as such an exercise ignors the over all position of funds, which has a bearing on the issue under consideration. The Delhi Bench of the Tribunal in the case of Maurti Udyog Ltd (supra), in fact, dealt with the similar situation. The said decision clearly answers the issue in favour of the assessee. The said decisions has neither been distinguished by the Ld. CIT(A) nor by the Ld. DR and has been wrongly ignored by the ld. CIT(A). Reference made instead by the ld. CIT(A) to the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. (supra) and the decision of the Hon'ble Calcutta High Court in the case of Woolcomber's of India Ltd. (supra), which in fact, support the case of the assesee. Useful reference in this regard may be made to the decision of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utility and Power Ltd. [2009] 313 ITR 340, wherein the aforesaid decision of the Hon'ble Supreme Court and Hon'ble Calcutta High Court were referred to and it was observed as under:

"We have heard learned counsel for both the parties. In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the purpose of fixed assets in terms of the balance-sheet as on March 31, 1999, is fallacious. Firstly, we are not concerned with the balance-sheet as on March 31, 1999. What would be relevant would be the balance-sheet as on March 31, 2000. Apart from that, the learned counsel has been unable to point out to us from the balance-sheet that the balance-sheet as on March 31, 1999, showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance- sheet would not show whether the shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that we have noted earlier that both in the order of the Commissioner of Income-tax (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest-free funds of its own which had been generated in the course of the year commencing from April 1, 1999. Apart from that in terms of the balance-sheet there was a further availability of Rs. 398.19 crores including Rs. 180 crores of share capital. In this context, in our opinion, the finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal as to availability of interest- free funds really cannot be faulted.

If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.` s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal. "

54.1. We have also perused the decision of the Hon'ble Delhi High Court in the case of Orissa Cement (supra) relied upon the Ld. CIT(A) and the Ld. DR for the proposition that the onus is on the asseessee to establish with positive material on record about utilization of interest free/borrowed funds. The said decision nowhere says that the aforesaid nexus needs to be establish only through bank statement as is being contended by the ld. CIT(A) and the Ld. DR. Reference in that case is to the 'material on record' which in our view is of much wider term and includes within its ambit all material including overall funds position and loan documents. In our view, adverse presumption might have been drawn against the assessee for not furnishing bank statements, if as per funds flow position for the year as a whole the assessee was not able to establish the generation of availability of surplus interest free funds sufficient to cover investments made during the year but not otherwise.

54.2. We have perused the funds flow position submitted by the assessee on the basis of cash flow statement contained in the audited accounts of the financial years 1999-2000 to 2001-02. The aforesaid statements have been drawn by the assessee on the basis of audited accounts of the assessee for the year under consideration alongwith various other disclosures/notes to the accounts, which have been relied upon by the AO while accepting the books of account and completing the assessment for the impugned year. We also find that the assessee is a listed company and is required to publish its accounts and submit the same before various statutory authorities like SEBI, Stock Exchanges, shareholders and Financial Institutions etc. Under these circumstances, we do not find any merit in the contention of the ld. DR that the said fund flow statements are not authentic. We are also in agreement with the arguments advanced by the ld. counsel for the assessee that the cash flow statement is a better guide for determining the results of borrowed funds/interest funds towards investments made during the year instead drawing such nexus on the basis of figures in the balance sheet of a company as at the end of the year, since the figures in the balance sheet are arrived at after making adjustment of non cash items, whereas for cash/fund flow statement for such adjustments is not required to be made.

54.3. We have already vide our order of even date hereinabove for the assessment year 2001-02 in ITA No.103(Asr)/2006 and ITA No.78(Asr)2006 on the basis of over all funds flow position for that year have held that there was no nexus of borrowed funds and consequently that of interest expenditure with investments held by the assessee until the year ending 31.03.2001. Therefore, we have to examine the nexus of additional investments made during the year under consideration with interest free or borrowed funds available with the assessee during such year.

54.4. On perusal of the cash flow statement for the impugned year forming part of audited accounts available at PB 892, we find that total investments of Rs. 152.05 crores were made by the assessee during the year under consideration. Out of the aforesaid investments of Rs. 28.18 crores was made in shares of foreign company Max Asia Pac Inc. dividend wherefrom is taxable, leaving investment of Rs. 123.87 crores yielding exempt dividend income. The assessee realized 117.97 crores from sale of investments made in earlier years, Rs. 46 crores was generated from operating activities, Rs. 6.87 was received from sale of fixed assets and there was an opening cash balance of Rs. 8.90 crores. In all the surplus non- interest bearing funds aggregating to Rs. 179.74 crores were available with the assessee during the relevant previous year which were sufficient for making investments of Rs. 123.87 crores during such year. We have also noted that net cash generated by the assessee from financing activities comprising of proceeds from long term/short-term borrowings during the year aggregated to Rs. 24.24 crores. It is seen that the assessee had also purchased fixed assets aggregating to Rs. 54.62 crores during the year, which answer the issue of utilization of borrowed funds. The aforesaid also demonstrates that the borrowed funds have been utilized towards the purpose stated in the loan documents. We, therefore, are of the view that the assessee had sufficient interest free funds for the prose of making investments yielding exempt income. Merely because the assessee could not submit the bank statements can not be a ground to draw adverse inference regarding the nexus of borrowed funds with investments. The action of the ld. CIT(A) in drawing adverse presumption and allowing interest expenditure on an adhoc basis under section 14A being not based on proper appreciation of facts and record is hereby reversed and disallowance made on that account is deleted.

55. As regards disallowance in relation to other expenses, we find that as per material available on record in the appeal for the assessment year under consideration, the assessee had separate Treasury Division and one of the main functions of such division as explained hereinabove by the assessee was to invest the funds of the company in various financial instruments. It cannot therefore, be said that no expenditure has been incurred by the assessee for earning exempt income. As per information available on record, total expenditure incurred during the relevant previous year in relation to the Treasury Division was Rs. 1.52 crores. Considering that the assessee has manufacturing operation of BOPP films and pharmaceuticals and it was running clinics, nursing homes etc. which require incurring of substantial personnel and administrative expenses, whereas once a decision is taken to make investment, the income received therefrom is passive income not requiring much effort to earn such income. In our opinion, it would be reasonable to attribute 20% of the expenditure of treasury division as relatable to the investment activity. The disallowance in this regard on the above basis is worked to Rs. 30.40 lacs. However, considering that the Ld. CITA) has estimated the disallowance at Rs. 20 lacs and no appeal was filed by the department against the order of the ld. CIT(A) in this regard and the Tribunal does not have any power of enhancement, therefore, the disallowance to the extent of Rs. 20 lacs is sustained and the ground of appeal raised by the assessee is partly allowed.

56. As regards ground No.2 of the assessee, where the assessee has challenged the order of the ld. CIT(A) in not deleting the disallowance of Rs. 1.50 crores made on account of expenses quantified relatable to earning of exemption u/s 14A of the Act, in computing book profit for the purpose of section 115JB of the Act and instead in enhancing the disallowance u/s 115JB to Rs. 4.52 crores.

56.1. The facts leading to the aforesaid addition are that in the assessment year, the AO while computing MAT liability under section 115JB added the amount of disallowance computed under section 14A of the Act, amounting to Rs. 1.50 crores to book profits The assesse challenged the said addition made to the book profits before the ld. CIT(A) on the ground that: i) since no disallowance was called for under the provisions of section 14A of the Act, no addition was consequently liable to be made in book profits under section 115JB of the Act. ii) Even otherwise, amount computed for disallowance u/s 14A cannot be automatically adopted for the purposes of computing book profits us/115JB, since the scope of both the aforesaid provisions was different.

56.2. The Ld. CIT(A), however, confirmed the action of the AO in adopting the amount of disallowance disputed under section 14A for the purpose of computing book profits under section 115JB of the Actand substituted the aforesaid addition with the revised enhanced amount suo moto.

57. In support of the aforesaid ground of appeal, the ld. counsel for the assessee stated that having regard to the detailed submissions in ground of appeal No.1 hereinabove that no expenditure having proximate nexus with the earning of exempt income having been incurred by the assessee, nor the same having been established by the AO or the ld. CIT(A), no such expenditure was disallowable under section 14A and consequently was not liable to be added back while computing book profit u/s 115JB of the Act.

57.1 Without prejudice to the above, it was submitted that even otherwise the amount of disallowance computed under section 14A of the Act cannot be adopted for the addition to book profits under section 115JB of the Act, since the scope of disallowance of expenses relatable to earning of exempt income under the aforesaid provision was different.

57.2 It was pointed out that in clause (f) of Explanation-1 to section 115JB of the Act, the amount of expenses relatable to earning of income exempt u/s 10(38) of the Act, was not liable to be added to book profit, since the income referred to in that section is liable to taxation as part of book profit. Whereas under section 14A, the amount of disallowance of expenses is computed even with respect to income under the said section 10(38) of the Act, since the income is exempt under normal provisions of the Act. Reliance in this regard placed by the ld. counsel for the assessee on the following decisions where it was held that the amount of disallowance computed u/s 14 on adhoc basis cannot be added to the book profits under section 115JB of the Act:

i) Goetze India Ltd. vs. CIT: 32 SOT 101 (Del)

ii) Alfa Laval India Ltd. vs. DCIT: 298 ITR 333 (Pune) iv) Quippo Telecom Infrastructure Ltd. vs ACIT: ITA No.4931(Del)/2010 (Del) (ITAT).

v) Essar Teleholdings Ltd. vs. DCIT ITA No.3850/Mum/2011

vi) Nahar Capital and Financial Services Ltd. vs. ACIT: ITA No.1120/Chd/2011 (ITAT Chd).

57.3 In view of the above, the ld. counsel for the assessee submitted that the AO and the ld. CIT(A) erred in adopting the amount of disallowance computed u/s 14A of the Act, including the amount enhanced by the Ld. CIT(A) and adding the same to book profits u/s 115JB of the Act and that such addition was required to be deleted.

58. The Ld. DR, on the other hand, placed reliance on the order of the AO and the order of the Ld. CIT(A).

59. We have heard the rival contentions and perused the facts of the case. Since we have already deleted the disallowance u/s 14A in respect of interest expenditure made by the Ld. CIT(A) hereinabove, the addition to that extent is, therefore, to be deleted while comprising the book profit u/s 115JB of the Act. The issue that remains for consideration is whether the amount of disallowance computed u/s 14A of the Act towards other expenses can be adopted for the purposes of addition u/s 115JB of the Act. The plea of the assessee that since the amount of expenses relatable to income exempt u/s 10(38) of the Act, may not be considered for addition to book profit u/s 115JB, since such income is taxable u/s 115JB is not correct since the said position of law was applicable only w.e.f. assessment year 2007-08.

59.1. We have already held hat expenditure of Rs. 30.40 lacs out of expenses of other than interest can be said to have proximate nexus with the investments made but restricted the disallowance u/s 14A of the Act to Rs. 20 lacs as made by the ld. CIT(A). Since there is not material difference between the language u/s 14A and Explanation-1 (clause f) to section 115JB and considering that as per court decision proximate nexus of direct or indirect expenditure with exempt income has to be considered, accordingly, we uphold the disallowance of Rs. 20 lacs in relation to administrative expenses for the purpose of computing book profit under section 115JB of the Act. Accordingly, this ground of the assessee is partly allowed.

60. As regards ground No.3 of the assessee, where the assessee has challenged the order of the ld. CIT(A) in confirming the disallowance of legal and professional expenses of Rs. 1.25 crores paid to Max UK Limited for providing various business support services to the assessee. In this regard, the facts emanating from the order of the AO are that the assessee paid £.60,000/- equivalent to Rs. 1.25 crores to Max UK as retainership fee for availing business support services as defined in agreement dated 1.7.1999 with Max UK Limited. The services mainly related to exploring business opportunities outside India for the assessee. In the course of assessment proceedings, the AO asked the assessee to justify the claim of aforesaid expenditure. In response thereof, the assessee relied upon the agreement entered with Max UK Limited and pointed out that the assessee achieved export sales in excess of Rs. 29 crores with the help of information/services received from Max UK Ltd.. The AO , however, did not accept the submissions of the assessee and disallowed the aforesaid expenditure on the ground that the assessee could not prove with evidence that the services were actually rendered by the aforesaid foreign party.

61. The Ld. CIT(A) confirmed the action of the Assessing Officer.

62. The Ld. counsel for the assessee pointed out the impugned payment made by the assessee to Max UK was duly supported by the agreement entered into between the two parties. The services rendered by the Max UK Ltd. were mainly in the nature of liasion services. It was submitted that since the services were in the nature of liaison services, the same could not have been supported with any documentary evidence. It was submitted that the payment was made through normal banking channels and services to be provided to the assessee, were stated in the agreement entered into in this regard. It was also submitted that the assessee has been able to make export sales to the tune of Rs. 29 crores and demonstrate that the services were in fact rendered. The above expenditure, as per ld. counsel was allowable as business deduction u/s 37(1) of the Act.

63. In reply, the ld. DR supported the assessment order and order of the ld. CIT(A) and argued that no evidence of actual services being carried out by the aforesaid party, was provided by the assessee and the expenses could not therefore, be allowed.

64. We have heard the rival contentions and perused the facts of the case. We find that the impugned payment has been made pursuant to agreement entered into between the assessee and the foreign party. It is not the case of the AO and Ld. CIT(A) that the aforesaid agreement is bogus and that the payment has not been made by the assessee to the aforesaid party. The nature of services rendered by the foreign party is also supported with invoice raised by the said party and the agreement. In our view, considering that the nature of services provided by the foreign party, which were in the nature of liaison services, it is difficult for the assessee to provide evidence of rendering of such services. The assesse has, in fact, pointed out it is able to achieve the export turnover of Rs. 29 crores which prima facie demonstrate that the services were rendered by the foreign party. The AO apart from alleging that no documentary evidence could be furnished by the assessee has not provided any evidence like obtaining confirmation from the foreign party etc., before making disallowance after the initial onus placed on the assesse by bringing on record the agreement with foreign party and invoice raised by that party was discharged by the assessee.

64.1. In view of the matter for the aforesaid cumulative reasons, we reverse the action of the AO/Ld. CIT(A) in disallowing the aforesaid expenditure and accordingly, we direct the deletion of the said disallowance. Thus, ground No.3 of the assessee is allowed.

65. Now, we take up appeal of the Revenue in ITA No.151(Asr)/2011 for the assessment year 2002-03. As regards ground No.1, the Revenue has challenged the order of the Ld. CIT(A) in allowing deduction of Rs. 54 lacs claimed on proportionate basis on account of non-complete fee paid to Mr. Ashwani Windlass in earlier years.

65.1. The facts of the case are that during the relevant year , the assessee Claimed deduction of Rs. 54 lacs being proportionate amount of non- compete fee paid to Sh. Ashwani Windlass in earlier years under the agreement entered upto with Mr. Windlass.

66. Having heard both parties, that the present issue had come for consideration before this Bench of the Tribunal in the assessment year 1999-2000 to 2000-01, where we have deleted the disallowance on account of non-compete fee paid to Mr. Ashwani Windlass in earlier assessment years i.e. 2001-02 in ITA No.103(Asr)/2006 in assessee's own case following the order of the Tribunal in assessment year 1999-2000 & 2000-01. The Ld. counsel of both the parties have addressed similar arguments as made in that year. In view of their submissions for not challenging the facts and law during the relevant year as compared to earlier years, following the aforesaid orders of the Tribunal in assessee's own case, we dismiss the aforesaid ground of appeal of the Revenue.

67. As regards ground No.2 of the Revenue, where the Revenue has challenged the order of the ld. CIT(A) in allowing deduction of expenses of Rs. 22.02 crores incurred by the assessee towards expansion of heath care division.

68. This is a recurring issue which came up for consideration before us in appeal of the assessee for the assessment year 2001-02 mentioned hereinabove and also before this Tribunal in the case of the assesse for the assessment years 1999-2000 & 2000-01. We have decided the issue of allow ability of Revenue expenses incurred by the assessee towards setting up/ expansion of health care division as business deduction in appeal for the assessment year 2001-02 in ITA No.103(Asr)/2006 in favour of the assesse. Similar issue was decided in favour of the assessee by this Tribunal for the assessment years 1999-2000 & 2001-01.

68.1. In the absence of any difference in facts and law in this year as compared to earlier years and no new argument having been addressed by the parties and following our order for the assessment year 2001-02 in assessee's own case, we dismiss the aforesaid ground of appeal raised by the Revenue.

69. As regards ground No.3 of the Revenue, where the Revenue has challenged the order of the Ld. CIT(A) in allowing deduction of expenses of Rs. 41 lacs incurred by the assessee towards expansion of existing MAXXON division.

69.1. The facts of the case are that during the previous year ended 31.3.2002, the Maxxon Division of the assessee company incurred and allocated expenditure, amounting to Rs. 42 crores, towards 'Preoperative Expenses Pending Capitalizaion on account of setting up of a second Film line.

69.2. The aforesaid issue is similar to the issue of allowability of revenue expenditure incurred in connection with expansion of healthcare division decided, hereinabove. The assessee was in fact engaged in the business of BOPP Film forming part of Maxxon division since past several years.The setting up of second film line is nothing but extension of existing business only. Accordingly, for the reasons given in our order for the assessment year 2001-02 in ITA No.103(Asr)/2006 hereinabove, in assessee's own case for allowing a revenue expenditure incurred by the assessee towards healthcare division, the order of the ld. CIT(A) deleting the disallowance of above expenditure is upheld and the aforesaid ground of appeal of the Revenue is dismissed.

70. As regards ground No.4 of the Revenue, where the Revenue has challenged the order of the ld. CIT(A) in allowing deduction of expenses (i) Rs. 12.05 lacs being product development expenses incurred on MAX FOIL division (ii) Rs. 474 lacs being expenses incurred on expansion of Pharma divison, (iii) Rs. 57.12 lacs being expenses incurred on abandoned project and Rs. 19.66 lacs being expenses incurred on foreign travel of employees which were treated as capital expenditure by the A.O. on the ground that the expenses were incurred for expansion of business. The aforesaid disallowances were made separately in the assessment order and therefore each disallowance is discussed and adjudicated separately hereinbelow:

(i) Product Development expenses of Max foil division

71. The facts related to the aforesaid issues are discussed at pages 19 to 20 of AO's order. The assessee had claimed deduction of expenditure of Rs. 12.05 lacs in respect of expenses incurred on account of product development expenses in Max Foil division. The relevant note to the computation of income is at page 19 of the AO's order reads as under:

"During the previous year ended on 31.03.2002, the Max Foil Division of the assessee company (manufacturing leather finishing transfer foil) incurred and allocated a sum of Rs. 1,205,378/- for developing a new product called foil or specialty thick foil ( for shoes and accessories) as per details given below:

-Raw material imported	492,117
-Raw material indigenous	419
-Power & Fuel	466,473
-Payment of COPES INC for assisting in Development of shoe foil production	246,369
	1,205,378

Since the above expenses incurred are on revenue account being related to the products of the assessee company, and incurred wholly and exclusively for the purpose of the business of the assessee company, the same are allowable and accordingly claimed as revenue expenditure in this return of income vide Adjustment No.(3i)."

71.1 The A.O. disallowed aforesaid expenditure by treating the same to be of capital in nature on the ground that the same was incurred for a new products which were not marketed during the year under assessment.

71.2 The Ld. CIT(A) deleted the disallowance made by the AO and held that the product development expenses incurred in the existing line of business do not result in any enduring benefit to the assessee in the capital field and therefore, the same cannot be regarded as capital expenditure.

71.3. In support of the ground of appeal, the ld. DR mainly relied upon the order of the A.O. since the new product was not marketed during the year under consideration and therefore, the same should be regarded as capital in nature.

71.4. The Ld. counsel for the assessee submitted that the aforesaid issue is squarely covered in favour of the assessee by the decision of the ITAT Bench in assessee's own case for the assessment year 1991-92 reported in 105 TTJ 1002 wherein similar expenditure incurred on account of product development was held to be an allowable revenue expenditure.

72. We have heard the rival contentions and perused the facts on record. We find that the issue under appeal with regard to allowability of expenses incurred on development of new products in the existing business of an assessee was decided in favour of the assessee by this Bench of the Tribunal in assessee's own case for the assessment year 1991-92 reported in 105 TTJ 102. The relevant findings of the Tribunal in that order are as under:

"6. We have heard both the parties and carefully considered the rival contentions, examined the facts, evidence and material placed on record and referred to the relevant pages of the paper book to which our attention has been drawn. From the facts discussed above, it is clear that the assessee was already in the business of manufacture of BOPP films and its unit had started commercial production on 6.3.1990 relating to asstt. year 1990-91. This fact is admitted by the AO on page 1 of the assessment order. Page 19 of the paper book which is a copy of Director's report and page 17 of the paper book being explanatory Notes to the financial statements clearly mentioned that the expenditure incurred by the assessee related to improvement in product specification of BOPP films and also to develop new varieties of the BOPP Films. Page 19 of the paper book further mentions that the installed capacity of the unit remained at 3150 tonnes. Thus, the expenditure incurred did not result in enhancing the installed capacity of the unit. The details of the expenditure incurred are at page 31 of the paper book. The same include expenses on power and fuel at Rs. 30,82,587/-, Insurance Rs. 7,50,142/-, repair and maintenance Rs. 7,62,671/-, employees costs about Rs. 31 lacs, travel and conveyance Rs. 10,35,763/-, rent Rs. 4,95,832/-, communication costs Rs. 1,91,079/-, interest at Rs. 1,56,55,568/-, other expenses at Rs. 4,77,433/- and depreciation at Rs. 1,35,27,513/-. After excluding the depreciation from the total expenses, the expenses remained at Rs. 2,56,55,355/-. The assessee has not acquired any new plant and machinery and the expenditure falls in the category of revenue. Since the expenditure incurred related to improving and developing the new varieties of BOPP films already manufactured by the assessee, it cannot be said that the expenses related to setting up of a new unit or for expansion of the existing unit. No disallowance u/s 35D could be made for the reason that section 35D deals with the amortisation of certain preliminary expenses before the commencement of the business, or after the commencement of the business, in connection with the extension of industrial undertaking or in connection with the setting up a new industrial unit. As mentioned earlier, the expenses did not relate to the period prior to commencement of business because the unit had already been set up and had started production in the year relevant to the asstt. year 1990-91. Since the assessee was already manufacturing BOPP films and expenditure incurred on Product Development also related to the development of new varieties and improvement of the same items and there was no increase in the installed capacity of the unit, it could not be considered to relate to expansion of the industrial undertaking or for setting up of a new industrial unit. Besides, as per Board's Circular No.56 dated 19.3.1971 ( a copy placed at pages 13 to 17 of the paper book) section 35D is applicable only to expenditure which is capital in nature. In case the expenditure was otherwise allowable as revenue expenditure u/s 37(1), provisions of section 35D would not be applicable. In the present case, the expenditure incurred could not be considered to fall in the capital field. Therefore, no disallowance u/s 35D in respect of the expenditure incurred by the assessee could be made.

6.1. The A.O. has laid undue emphasis on the treatment given by the assessee for capitalizing and amortising the impugned expendiure in the books of accounts. It is settled position under the law that accounting entries are not the determinant factor in deciding whether expenditure incurred was capital or revenue in nature. Reliance in this regard is placed on the judgment of Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd; Vs. CIT (supra). The same is to be determined by looking to the nature of expenditure whether the same relates to capital or revenue filed. In the case of ACIT Vs. Medicamen Biotech Ltd; (supra), the ITAT, Delhi Bench has held that test of enduring benefit alone was not conclusive for treating any expenditure as capital and it is relevant to find out or ascertain as to whether such expenditure results into an advantage of enduring nature to assessee in capital field or revenue field so as to decide exact nature of such expenditure and allowability under the Act. In that case also, the assessee had clamed deduction of entire expenditure incurred on marketing of newly launched products amounting to Rs. 47,71,118/- though in the profit & loss account, it had debited only 1/10th of expenses by treating the same as deferred revenue expenditure. The Tribunal held that the nature of expenses incurred was such that they did not result in enduring benefit to assessee and treatment in the books of account of the assessee could not be said to be conclusive. Thus, the total expenditure incurred by the assessee amounting to Rs. 47,71,110/- was held to be revenue in nature.

6.2. As discussed above, the treatment given by the assessee in its books of account by treating the same as deferred revenue expenditure is not a conclusive or decisive factor in treating the expenditure as capital or revenue in nature. Reliance is also placed on the recent judgment of Madras High Court in the case of CIT Vs. Sakthi Soyas Ltd; reported in 283 ITR 194. In this case, the assessee had incurred expenditure of Rs. 20,36,157 towards crop development for the assessment year 1992-93 and in the return of income, the assessee claimed deduction of the same as revenue expenditure. Besides, the assessee had also incurred expenditure of Rs. 16,41,125/- towards advertisement in respect of launching of soya products and sales promotion expenses. The assessee capitalized the expenditure in its books of account. The AO disallowed the claim of the assessee and treated the expenditure capital in nature on the ground that the assessee itself had treated the same as capital expenditure in the books of account. However, the Hon'ble Madras High Court held that name given to an expenditure or a nomenclature given to an expenditure in the books of account of the assessee is not the litmus test to decide the exact nature of the expenditure for the purpose of Income-tax. The assessee may treat amount as capital expenditure in its regular books of account under the provisions of the Companies Act, in disclosing a fair view of the financial status of the company, as required by law. Capitalisation of those items of expenditure in the books of account alone was not the decisive factor in deciding whether the said expenditure was capital or revenue expenditure. The Hon'ble High Court observed that the assessee had incurred crop development expenses of Rs. 20,36,157/- for propagating a new crop among the local farmers and further incurred expenses of Rs. 16,41,125/- for advertisement through visual and print media and also for designing and printing leaflets, brochures etc. All these expenses were held to be in the nature of business expenditure entitled for deduction in computing the assessee's income.

6.3. Now whether the expenditure incurred has resulted in enduring benefit or not has to be seen in the context of today's world where changes in the technological field are taking place at rapid pace. The present time is a time of multinationals. In order to survive in the business, the industry is required to make continuous efforts on Research and Development in order to keep pace with the technological changes that are taking place every day and to strive for improvement in the existing product and also to bring new product attractive in design and better in quality. Therefore, what could be termed as a enduring benefit in the olden days may not be so in the present times. The very fact that the assessee has capitalized or amortised the expenses in the books of account for 8 years would not mean that the assessee has acquired enduring benefit for all the 8 years.Therefore, no disallowance could be made on the ground that expenditure is capital in nature when the nature of expenditure incurred show the same is revenue in nature and was incurred wholly and exclusively for the purpose of business.

6.4. The Ld. DR has relied on the decision of ITAT, Amritsar Bench for the assessment year 1992-93. The same is distinguishable on facts as in that case expenditure incurred related to expansion of existing unit. This is not a case here as the assessee has neither set up a new unit nor expended the existing unit. Therefore, ratio of this decision is not applicable to the facts of the present case.

6.5. In the light of these facts and circumstances of the case and the legal position discussed above, we are of the considered opinion that the Ld. CIT(A) was justified in allowing deduction of the impugned expenditure. We confirm his order and reject the grounds of appeal of the Revenue.

7. In the result, the appeal filed by the Revenue is dismissed."

72.1 Following the aforesaid decision of the Tribunal we decide the issue in dispute in favour of the assessee and dismiss the ground of appeal filed by the Revenue in this regard.

ii) Expenses incurred on expansion of Pharma division

73. The facts relating to the aforesaid issue are discussed at pages 19 to 20 in AO's order. The assessee had claimed deduction of Rs. 4,74,334/- towards US FDA approval and patent related expenses incurred by the existing Pharma Division in the computation of income. The relevant portion of the notes in the computation of income which is reproduced at pages 18 & 19 of the AO's order are reproduced for the sake of clarity as under:

"During the previous year ended 31.03.2002 the Max Pharma (Nanjagud) Division of the company incurred expenditure of Rs. 474,334/- towards US FDA approval and patent related expenses as details given below:

Project Development Expenses	98,720.00
US FDA related expenses	375,614.00
	474,334.00

Since the above expenses incurred are on revenue account being related to the products of the assessee company, and incurred wholly and exclusively for the purpose of the business of the Assessee Company, the same are allowable and accordingly claimed as revenue expenditure in this return of income vide Adjustment No.(3i).

73.1 The A.O. disallowed the above said expenditure on the ground that the same provided enduring benefit to the assessee and therefore, the same was capital in nature.

73.2 The Ld. CIT(A) deleted the disallowance made by the AO on the ground that the same was same was incurred in connection with carrying on of existing business of sale of pharmaceutical goods and no new unit came into existence and therefore, the same was allowable revenue expenditure.

73.2(a). The Ld. DR relied upon the AO's order and argued that the expenditure towards FDA approval and patent related expenses provided enduring benefit to the assessee and therefore, the same were clearly of capital in nature, which disallowance should have been confirmed by the Ld. CIT(A).

73.3. The Ld. counsel for the assessee argued that the aforesaid expenses towards FDA approval and patent were necessary for the assessee to sale its Pharma related products which was a existing business division, outside India and no new capital asset was required nor there was any accretion to the profit earning apparatus as a result of the said expenses. It was argued that it is well settled law that every enduring benefit accruing to the assessee as a result of increase of an expenditure cannot be regarded as capital in nature. It is only where enduring benefit accrues to the assessee in the capital field that an expenditure can be regarded as capital in nature. Reliance in this regard is placed on the decision of the Hon'ble Supreme Court in the case of Empire Jute Company Ltd. vs. CIT 124 ITR 1. It was argued that since the aforesaid expenditure did not result in enduring benefit to the assessee in the capital field , the same was wrongly reated as capital expenditure by the AO. Therefore, the order of the ld. CIT(A) needs to be upheld.

74. We have heard both the parties and perused the facts of the case. It is not in dispute that the assessee is carrying on the Pharma business and there is income derived from such business which is appearing in the audited accounts and has been offered to tax. The expenditure on account of US FDA approval and patent related expenses to existing Pharma products of the assessee did not result in acquisition of new capital asset. The said expenditure was incurred on account of commercially expediency in order to sell the products since in the absence of such approval, the assessee would not have in a position to sell Pharma Products outside India. It is well settled that every enduring benefit accruing to the assessee from an expenditure can not be treated as capital in nature. It is only when enduring benefit accrues to an assessee in the capital field that an expenditure can be treated as capital in nature. Accordingly, the reasons adopted by the AO to disallow the aforesaid expenditure was not correct. The order of the ld. CIT(A) deleting the disallowance in this regard is upheld and the Revenue's ground of appeal in this regard is dismissed.

iii) Expenses incurred on account of abandoned project:

75. The issue is discussed at page 27 of AO's order. During the relevant year, the assessee had incurred expenses of Rs. 57 lacs for setting up Dr. Max Clinic at Vasant Vihar and Golf Links, New Delhi. However, subsequently, it was decided that setting up of clinics in the aforesaid area was not commercially viable and therefore proposed projects were abandoned. Since the assessee was already in the business of healthcare, the expenditure was written off in the books of account being relating to extension of business and therefore, was claimed as revenue expenditure.

75.1 The AO treated the aforesaid expenditure as capital in nature on the ground that the same was incurred towards setting up of the new healthcare centre prior to commencement.

75.2 The Ld. CIT(A) deleted the disallowance made by the AO on the ground that since projects were abandoned, no capital asset came into existence by virtue of incurring expenses. The Ld. CIT(A) in this regard relied upon the decision of Hon'ble Delhi High court in the case of Indo Rama Synthetics (I) Ltd. vs. CIT 185 Taxman 277 (Del) and CIT vs. Priya Village Road Shows Ltd. 185 ITR 44 (Del).

75.3 The ld. DR, relied upon the order of the A.O. and argued that the ld. CIT(A) has deleted the disallowance without examining the nature of expenditure incurred in this connection.

75.4 The Ld. counsel for the assessee argued that the assessee was already engaged in healthcare business and was running Nursing Home Clinics since assessment year 2001-02. Accordingly, the expenditure incurred in connection with setting up of a new clinics was for extension of existing business, which is an allowable business deduction under the provisions of the Act. The Ld. counsel in this connection relied upon the arguments taken in ground of appeal No. 2 of this appeal relating to allowability of expenses incurred towards extension of healthcare division. In addition to this, the ld. counsel for the assessee argued that even otherwise since the decision of setting up of a new clinic in the Vasant Vihar area of Delhi was abandoned and no new clinic were set up, the impugned expenditure cannot, therefore, be said to have resulted in acquisition of new capital asset to regard the same as capital in nature. In this connection, the ld. counsel for the assessee relied upon the decisions of various courts of law as under:

i) CIT vs. Vardhman Spinning and General Mills 176 Taxman 157

ii) Indo Rama Synthetics Ltd. vs. CIT 333 ITR 18 (Del)

iii) CIT vs. Priya Village Road Shows Ltd. 185 ITR 44 (Del).

75.5 As regards the contention of the Ld. DR that the ld. CIT(A) did not examine the nature of expenses, it was pointed out by the ld. counsel for the assessee that the impugned expenses were incurred in relation to the premises taken on lease for setting up of the new clinics, facts whereof were before the AO as well as before the ld. CIT(A). Accordingly, it was argued that the order of the Ld. CIT(A) needs to be upheld and the ground of appeal raised by the revenue in this regard needs to be dismissed.

76. We have heard the rival contentions and perused the facts of the case. We find that the nature of expenses incurred by the assessee in connection with the setting up of new clinics in Delhi is not in dispute. The expenditure has been disallowed on the ground that since the same related to setting up of new clinics, the same of capital in nature. The assessee is already engaged in the healthcare business and had been running Nursing Home clinics since assessment year 2001-02. Accordingly, setting up of new clinic at different location was nothing but extension of the existing business. We have already decided the identical issue in ground of appeal No.2 for the assessment year 2001-02 in assessee's own case that the revenue expenditure incurred in connection with the extension of existing business is not a capital expenditure and is allowable business deduction. Following the aforesaid decisions, the impugned expenditure is to be allowed as business deduction and the order of the ld. CIT(A) is accordingly upheld.

76.1 Further, we find that the expenditure of revenue in nature incurred in relation to abandoned project has been held to be allowable by the Jurisdictional High Court in the case of CIT vs. Vardhman Spinning and General Mills (supra) and the Hon'ble Delhi High Court in the case of Indo Rama Synthetics Ltd. (supra). Accordingly, the disallowance cannot be sustained for the aforesaid reasons as well. In view of the above, ground of appeal of the revenue is dismissed.

(iv) Expenses incurred on foreign travel of employees

77. The aforesaid issue is discussed at page 7 to 8 of the assessment order. During the relevant previous year, the assessee had incurred expenditure of Rs. 19.66 lacs on foreign traveling of various employees under the Collaboration Agreement dated 1.3.1999 executed with Harvard Medical International, Boston, USA.

77.1 In the course of assessment proceedings, the AO sought justification of allowability of the aforesaid foreign travelling expenditure as business deduction. It was submitted by the assessee that foreign traveling was undertaken under the Collaboration Agreement to pursue quality programmes and systems, medical education, critical education and training programmes etc. to be provided by various Max Medical Centres. The AO did not find merit in the submission of the assessee and held that foreign tour expenses incurred for survey of the new methods or for purchase of machinery etc. are not allowable as revenue expenditure. The AO relied upon the following case laws:

i) Ambica Mills Ltd. v. CIT [1964] 54 ITR 167 (Guj)

ii) CIT vs. Flour & Food Ltd [1988] 70 ITR 469 (MP)

In view of the above, the AO disallowed the aforesaid foreign traveling expenditure incurred by the assessee during the relevant year.

77.2. The Ld. CIT(A) deleted the disallowance made by the AO and held that foreign travel expenditure incurred for training of employees and gathering knowledge in the existing line of business is an allowable expenditure.

77.3. The Ld. DR, relied upon the order of the A.O. and argued that foreign travel expenditure incurred in connection with the gaining of technical knowledge in the field of running medical centres, cannot be said to have been incurred for carrying on existing business of the assessee on the ground that the assessee was hitherto engaged in the business and running of medical centres/clinics constituted profession and therefore, all such expenditure cannot be said to have been incurred for extension of existing business.

77.4 The Ld. counsel for the assessee, relied upon the order of the ld. CIT(A) and the case laws in support of the proposition that foreign travel expenditure incurred for keeping abreast of new methods/technicalities/developments of the existing business is to be allowed as business deduction.

77.5.The ld. counsel for the assessee placed reliance on the decision of the Hon'ble Delhi High Court in the case CIT vs. Dr. M.S. shroff 80 ITR 687. In that case, the expenditure incurred by the assessee, a doctor on foreign travel to keep himself abreast of the technicalities of his profession was held to be allowable business expenditure. In the case of ITO vs. Dhiman Systems 100 TTJ 466 (Asr) (ITAT) , the Tribunal had held that the expenses incurred by the assessee firm in sending its partners on a foreign tour of business purposes were allowable expenditure, even if no business was transacted during the tour. To the same effect are the following decisions:

i) Omkar Textiles Mills (P) ltd vs. ITO 115 TTJ 716 (Ahd.)

ii) Cascade Enterprise vs. ACIT 101 TTJ 227 (Delhi -ITAT)

77.6 The Ld. counsel for the assessee also distinguished the decision relied upon by the AO in the assessment order. The arguments of the ld. counsel in this connection which also contained in the chart on issue filed for the present appeal is reproduced hereunder:

"In the case of Ambica Mills Ltd.(supra) the assessee company was carrying on the business of textile manufacturer. In the relevant previous year the assessee company had sent its director and superintendent on a tour to Europe to study the latest development in manufacturing, designing and processing of cloth in textile mills in Europe. After their visit to the textile mills, the assessee company imported certain new and improved machinery for United Kingdom. It was categorically observed by the Gujarat High Court that since the foreign tours undertaken by the employees of the company were for the purpose of strengthening the fixed framework of the profit making apparatus of the assessee company, i.e. textile mills and not for carrying on of business, i.e. manufacture and sale of cloth, the same amounted to capital expenditure.

It is imperative to note here that unlike the above case, in the present case, no new asset has come into existence and foreign travel of employees was directly in relation to healthcare business of assessee, which was already in operation at that time.

Further, in the case of CIT vs. Flour and Food Ltd. (supra), the assessee was in the business of manufacturing foodstuffs etc. and the managing director of the company was sent to Mauritius for advising the Mauritian Government regarding the setting up of a plant in Mauritius. The AO disallowed foreign travel expenditure on the ground that consultancy was not part of the business of the company and the foreign trip was undertaken for the initiation of new business and not for expansion of business. On further appeal by the assessee, the view of the AO was upheld by the CIT(A) and subsequently by the High Court of Madhya Pradesh.

Again, it needs to be noted here, that the above decision is wholly based on a finding that consultancy was not part of the business of assessee ( which was undertaken during foreign travel) and the foreign trip was undertaken for the initiation of new business and not for expansion of business whereas in the present case, training activities during foreign was in relation to the business in operation and no new business has come into existence by virtue of foreign travel of employees."

77.7. As regards the contention of the ld. DR that since running of medical centres constitute, the same cannot be said to be extension of business. It was pointed out by the ld. counsel that in first place even assuming running of medical centres constitutes profession since the assessee was engaged in such activities since last year, the impugned expenditure would be regarded as extension of business which is also allowable deduction u/s 37(1) of the Act. That apart from, it was submitted that the assessee was a company and not individual holding requisite degree to carry on medical profession like Doctor. Accordingly, it was argued that the arguments of the ld. DR is without any factual or legal basis.

78. We have heard the rival contentions and perused the facts of the case. We are of the view that the traveling expenditure incurred for training of employees engaged by the assessee for providing of medical services in the healthcare business carried on by the assessee is allowable revenue deduction. There are sufficient judicial authorities to support the aforesaid proposition. Reference has been made by the ld. counsel that such expenditure does not result in and was not in relation to acquisition of any capital assets and therefore, does not constitute capital expenditure. The decisions referred to by the A.O. have rightly been distinguished by the ld. counsel for the assessee since in those decisions foreign travel expenditure resulted in acquisition of new assets and/or setting up of new business. Accordingly, the order of the ld. CIT(A) is upheld and ground of appeal of the Revenue is dismissed.

79. As regards ground Revenue, No.5 of the where the revenue has challenged the order of the ld. CIT(A) in not treating the loss arising on sale of investment as speculative loss.

80. We find that this issue has come up for our consideration in assessee's own appeal for the assessment year 2001-02 in ITA No.103(Asr)/2006 hereinabove. The loss in question relates to sale of shares held as investments including those shares which were received from MCL in the year 1999-2000 and were converted into investment by the assessee in the financial year 2000-01. We have held the aforesaid conversion from stock in trade to the investment as valid and upheld the order of the ld. CIT(A) treating the loss on sale of investment arising in the assessment year 2001-02 as not speculative business loss. The Explanation to section 73 of the Act invoked by the AO was held to be not applicable in relation to sale of investments in the appeal for the A.Y. 2001-02. Therefore, being no change in the facts and position in law in the relevant previous year as compared to assessment year 2001-02 and in the absence of any new arguments having been raised by the parties, we dismiss this ground of appeal of the Revenue following our own order for the assessment year 2001-02 hereinabove.

81. As regards ground No.6 of the revenue, where the revenue has challenged the order of the ld. CIT(A) in holding that the amount received towards non-compete fee is not liable to tax under the head of capital gains.

81.1 The facts in relation to said ground of appeal are that during the relevant previous year, the assessee company divested its sharholding in Max Atotech Limited. The shares were sold on 29.6.2001 to M/s. Atotech BV, Netherlands for Rs. 13.58 crores. Alongwith the signing of the agreement for sale of shares, the assessee had undertaken negative covenants of not entering into market of plating chemicals and processes for General Metal Finishing & Electronics Plating during the period 29.6.2001 to 28.6.2004 in lieu of receipt of consideration of Rs. 1.43 crores. The same was claimed as capital receipt not liable to tax.

81.2 The AO contended that since the assessee extinguished its right to re- enter the market of plating chemicals & process for General Metal Finishing & Electronics Plating for consideration, the same amounted to 'transfer' of 'right to carry on business' and, therefore, the amount of consideration received was liable to be taxed under the head capital gains.

81.3 On appeal, the ld. CIT(A) held that undertaking a restrictive covenant to not to carry on business, without transfer of any business, is not the nature of 'right to carry on business' to be regarded as transfer of capital asset. The Ld. CIT(A) held non-compete fees received as capital receipt, not exigible to tax under the provisions of the Act. It was further held that non-compete fees had been deemed to be business income under section 28(va) of the Act w.e.f. AY 2003-04 only and therefore, the provisions of that section were not applicable to the year under consideration. The Ld. CIT(A) also observed that, even otherwise, the cost of acquisition of asset in the nature of 'right to carry on business' u/s 55(2) had also been inserted w.e.f. A.Y. 2003-04 and for that reason, too, no capital gains could be brought to tax in the hands of assessee company in the year under appeal.

81.4. The Ld. DR argued that by amendment to section 55(2)(a) by the Finance Act, 2002 w.e.f. 1.4.2003, the legislature has only prescribed that the cost of acquisition in case of 'right to carry on any business' shall be taken as Nil but that does not mean that 'right to carry on business' ceases to be a capital asset. It was further argued that merely because the cost of acquisition of such asset was treated as Nil u/s 55(2)(a) w.e.f. 1.4..2003 does not mean that prior to assessment year 2003-04 such transaction could be brought to tax u/s 45 of the Act. The Ld. DR also referred to the decision of the Hon'ble Karnataka High Court in the case of CIT vs. Tata Coffee Ltd. reported at 326 ITR 214 in support of his contentions that non-compete fee received is taxable as revenue receipt.

81.5 The Ld. counsel for the assessee, Mr. Rupesh Jain, referred to the submissions filed before us where it was stated that the assessee company was not actually carrying on the business of Max Atotech Ltd. The assessee company was only a shareholder in the company and business was actually carried on by that company. The assessee company had simply undertaken negative covenant not to carry on similar business, post transfer of its entire sharholding in Max Atotech Ltd. to Atotech BV. There was, thus, no transfer of asset or even right to carry on business. The undertaking of negative covenant, it is submitted, is different from actual/positive transfer of business, which only can be brought to tax under the head capital gains. Asset in the nature of 'right to carry on business', in our respectful submission, contemplates carrying on of business by an assessee, transfer of right to carry of capital asset, liable for taxation under the head capital gains. In the present case, the assessee had only undertaken negative covenant not to carry on business and that too for a limited period of time. There was, therefore, no transfer of capital asset, in the nature of 'right to carry on business' to be subjected to tax on capital gains. The consideration received was towards undertaking restrictive covenant, which is in the nature of a capital receipt and not income, chargeable to tax under the provisions of the Act.

81.6 Reference was also made to the following decisions wherein the aforesaid distinction between non-compete fees and consideration for transfer of right to carry on business has been examined and it has been held that non-compete fees received without any actual transfer of business/asset cannot be brought to tax as capital gains:

- John D'Souza v. CIT and Anr. 226 CTR 540 (Bom.)

- CIT v. Mediworld Publications (P) Ltd. 337 ITR 178 (Del)

- ACIT vs. B.V. Raju 114 TTJ 537 (Hyd)(SB)

- Ramesh D Tainwala v. ITO 48 SOT 324 (Mum)

- ACIT vs. R.K.B.K. Fiscal Services 138 TTJ 1 (Kol)

- Nayan C Shah v. DCIT 48 SOT 77 (Mum)(URO)

81.7. It was also pointed out that the aforesaid issue stands covered in favour of the assessee by the order of the ITAT, Amritsar in assessee's own case for the assessment year 1998-999 (112 TTJ 726). The relevant observations of the Tribunal ( as per para 47-49 at PB 576-578) are as under:

".....

47.We have heard the parties and have perused the material on record.The first dispute here is as to whether the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee, in view of the fact that as recorded in the assessment order, the assessee had not pressed the issue before the A.O. In this regard, we find that the assessee is correct when ir contends that the issue of taxability of non compete fee being a legal one, even if the assessee did not press it before the A.O., it could well have been pressed before the learned CIT(A), as was done. Further, it is also correct that all the facts being before the A.O., the Commissioner having powers co-terminus with those of the A.O., was not incorrect in not remitting the issue to the A.O. for decision. Moreover, evidently, the A.O. duly represented the case of the department before the learned CIT(A) and no objection was raised regarding the assessee having not pressed the issue before the A.O.

48.On merits, evidently, there has been no transfer of assets as envisaged under section 45 of the Act read with section 2(47) of the Act. The A.O., pertinently, had agreed that the fee in question represented a capital receipt and not a business receipt. By signing the negative covenant, the assessee undertook not to carry out manufacture or trade of the products for a period of time. That being so, this act amounted only to a self-imposed restriction and not a transfer within the meaning of the Act. It was neither the sale or exchange or relinquishment of the asset, nor was any right therein extinguishable, the right to manufacture or trade remaining intact after the period for which the negative covenants were signed. In "Saroj Kumar Poddar" (supra), which also appears at (2005) 279 ITR 573 (Cal.), besides in a host of other decisions, including the following, it has been held that non compete fee is not taxable, since there is no transfer involved in the transaction:-

1. 199 CTR 255 (Cal.) CIT Vs. A.S. Wardekar.

2. 280 ITR 331 (Delhi) CIT Vs. Milk Food Ltd.

3. (2006) 5 SOT 277 (AT)(ASR)T.S.Manocha Vs. DCIT,CC.

Further, as rightly pointed out, the amendment in section 28(va) of the Act, w.e.f. 1-4-2003 also supports the submission that before the assessment year 2003-04, non compete fee was not liable to tax. This amendment defines the intention of the legislature in this regard.

49. In view of the above, we hold that the learned CIT(A) was justified in deciding the issue on merits in favour of the assessee. Such finding of the learned CIT(A) is, therefore, hereby upheld. Ground No.4 is thus rejected."

81.8 It was also submitted that the contentions of the ld. DR are contrary to the position in law as explained in the aforesaid decision including the decision of the Tribunal in assessee's own case for the A.Y. 1998-99 (supra). It was submitted that the Hon'ble Supreme Court of India in the case of Guffic Chem (P) Ltd. vs. CIT and Anr. 332 ITR 602, had emphatically held that the receipt of non-compete fee was in the nature of capital receipt and the provisions of section 28(va) , which deem such receipt as business income, are applicable w.e.f. assessment year 2003-04 and onwards only. It was, therefore, submitted that the order of the Ld. CIT(A) needs to be upheld.

82. We have heard the rival contentions and perused the facts of the case. We find that the identical issue was considered by this Bench of the Tribunal in assessee's own case for the assessment year 1998-99 and the Tribunal in that case categorically held that taking over a restrictive obligation does not amount to transfer of right in any business and therefore, non-compete fee cannot be considered as resulting in capital gains. There are several other decisions of the Courts/Tribunal on the issue in question which have been referred to by the ld. counsel for the assessee also support the contentions of the assessee. The contention of the Ld. DR that non-compete fee has to be considered as income under the head capital gains from the transfer of right in a business is without any factual or legal basis. We find that section 55(2)(a), which is prospective in nature, is not applicable to the facts of the present case, in the absence of any capital asset being transferred by the assessee in lieu of which the assessee has received the impugned amount of non-compete fee. Our views are supported by the decision of the Special Bench of ITAT Hyderabad in the case of ACIT vs. B.V.Raju (supra).

82.1 As regards the decision of the Hon'ble Karnataka High Court referred to by the ld. DR in the case of CIT vs. Tata Coffee Ltd. (supra), we find that the said decision is in the context of non-compete fee received i.e. whether it is revenue or capital in nature, it is not the case of the A.O. that the aforesaid receipt was revenue receipt. In fact, the AO considered the non- compete fee as capital receipt but according to him the same was liable to tax as capital gains. The Ld. DR is seeking to expand the scope of appeal by going beyond the subject matter of appeal, which is not permissible. The aforesaid contention of the ld. DR, therefore, rejected. In any case, we find that the said decision was rendered in peculiar facts and circumstances and the case involving sale of one of the many businesses and no cogent proposition regarding nature of non-compete fee can be said to have been laid down in the said business. It will depend upon the facts and circumstances of each case.

82.2. In view of the aforesaid decision, we are of the view that no interference is called for in the order of the ld. CIT(A). Accordingly, the ground No. of the Revenue is dismissed.

83. In the result, the appeal of the assessee in ITA No.119((Asr)/2011 is partly allowed and that of the Revenue in ITA No.151(Asr)/2011 is dismissed.

84. Now, we take up the appeal of the assessee in ITA No.120(Asr)/2011 for the assessment year 2003-04.

85. In ground of the assessee, the assessee has challenged the order of the ld. CIT(A) in confirming the disallowance of Rs. 15 lacs on account of legal and professional fee paid to Max UK Limited.

85.1 The aforesaid ground of appeal is identical to ground of appeal No.3 in assessee's appeal for the assessment year 2002-03 where we have decided the aforesaid issue in favour of the assessee and has allowed the ground raised by the assessee in the assessment year 2002-03. Both the parties also did not address any additional argument with respect to the aforesaid ground in the present appeal and agreed that the facts of this ground are identical to the ground of appeal for the assessment year 2002-03. Accordingly, following our own order for the assessment year 2002-03 in assessee's own case decided hereinabove, the disallowance made in the assessment order is directed to be deleted. Thus, of appeal of the assessee in the present year is allowed.

86. Now we take up appeal of the Revenue in ITA No.152(Asr)/2011 for the assessment year 2003-04.

87. In ground No.1, the Revenue has challenged the order of the ld. CIT(A) in allowing deduction of Rs. 35 lacs claimed by the assessee on account of non-compete fee paid to Sh. Ashwani Windlass in earlier years. The said ground of appeal is identical to ground of appeal No.1 in Revenue's appeal for the assessment year 2002-03.

87.1. Both the parties also did not address and additional arguments with reference to the aforesaid ground in the present appeal and agreed that the facts of this ground are identical to the ground of appeal for the A.Y. 2002-03. Accordingly following our own order for the assessment year 2002-03 hereinabove, the disallowance made has rightly been deleted by the AO.

88. As regards ground No.2 of the Revenue, the revenue has challenged the order of the ld. CIT(A) in allowing deduction of expenses of Rs. 46 lacs incurred by the assessee towards expansion of existing MAXXON division. The facts of the present ground of appeal are identical to the facts in ground No.3 in the appeal of the Revenue for the assessment year 2002-03 where we have decided the aforesaid issue in favour of the assessee by dismissing the appeal of the Revenue for assessment year 2002-03 hereinabove. Both the parties also did not address any additional argument with respect to the aforesaid ground and agreed that the facts in the present ground are identical to the facts of ground of appeal for the assessment year 2002-03 decided hereinabove. Accordingly, following our own order for the assessment year 2002-03 in assessee's own case, we find that the ld. CIT(A) has rightly deleted the addition made by the AO. Thus, ground No.2 of the Revenue is dismissed.

89. In ground No.3, the Revenue has challenged order of the ld. CIT(A) in allowing expenses of Rs. 5.72 lacs incurred by the assessee towards Project Development expenses of Max Foil Division and Rs. 6.48 lacs incurred on expansion of Parhma division, which were disallowed by the AO on the ground that the same are capital in nature.

89.1. The facts of the aforesaid ground are identical to the facts of ground No.4 of Rvenue's appeal for the A.Y. 2002-03 decided by us hereinabove favour of the assessee by dismissing the appeal of the Revenue.

89.2. Both the parties have not advanced any additional argument and have agreed that the facts in the present ground are identical to the facts of ground of appeal for the assessment year 2002-03 decided hereinabove.

89.3. In view of the discussion and following our own order for the A.Y.2002-03 hereinabove, we find no infirmity in the order of the ld. CIT(A) who has rightly deleted the disallowance made by the AO. Thus, ground No.3 of the Revenue is dismissed.

90. In ground No.4, the Revenue has challenged the order of the ld. CIT(A) in not treating the loss arising on sale of investment as speculative loss. This ground of appeal is identical to ground No.5 in Revenue's appeal for the A.Y. 2002-03 with respect to the loss in question which relates to the shares held as investment, which has been decided in favour of the assessee by dismissing the ground appeal of the Revenue for the said assessment year 2002-03 mentioned hereinabove. Both the parties have not advanced any additional argument and have agreed that the facts in the present ground are identical to the facts of ground of appeal for the assessment year 2002- 03 decided hereinabove. Thus, following our order for the assessment year 2002-03, we find no infirmity in the order of the ld. CIT(A) who has rightly deleted the addition. Accordingly, ground No.4 of the Revenue is dismissed.

91. Now, we take up the appeal of the assessee for the assessment year 2004-05 in ITA No.121(Asr)/2011.

92. As regards ground No.1, the assessee has challenged the order of the ld. CIT(A) in not deleting the disallowance of Rs. 10 lacs made by the AO u/s 14A of the Act and instead enhanced the amount of disallowance under the said section to Rs. 5.84 crores.

92.1. The aforesaid ground of appeal is identical to ground No.1 of the appeal raised by the assessee in ITA No119(Asr)/2011 for the A.Y. 2002-03. In this year as well, the Ld. CIT(A) did not accept the contention of the assessee qua no nexus of borrowed funds with investment yielding exempt income on the basis of overall positive funds flow position/statement of the year. The Ld. CIT(A) on the ground of the assessee having not established the aforesaid nexus through bank statements drew adverse inference against the assessee and apportioned the interest expenditure on the basis of formula adopted in the assessment year 2002-03 for the purposes of disallowance u/s 14A of the Act.

92.2. We have decided the aforesaid issue in favour of the assessee in ground No.1 in assessee's appeal for the A.Y. 2002-03 hereinabove that in case of mixed pool of funds, the assessee can establish utilization of borrowed funds and interest free funds on the basis of overall fund flow statement for the relevant year and establishing the aforesaid nexus through bank statements in case where overall fund flow position is positive is not a correct approach. We have perused the over all cash flow of the assessee during the relevant year. The assessee had made an incremental investment of Rs. 72.78 crores during the year in the following shares:

i) Max Newyork Life Ins. Co. Ltd.	Rs.62.90 crors
ii) Max Healthstaff International Ltd.	Rs. 1.92 crores
iii) Cmax Infocom Pvt. Ltd.	Rs. 0.01 crore
iv) Comsat Max	Rs. 3.49 crore
v) Neeman Medical Intl (Asia) P.Ltd.	Rs. 4.16 crore

As against the aforesaid additional investment of Rs. 72.78 crores, the assessee received interest free funds aggregating to 131.57 crores from the following different sources:

i) Interest free Option Deposit received from New York Life International Inc.	Rs.81.60 cr.
ii) Proceeds from sales of subsidiaries	Rs. 42.47 cr
iii) Proceeds from sales of Mutual funds	Rs. 2.49 cr.
iv) Proceeds from sales of Equity Shares	Rs. 5.00 cr.

92.3. In view of the above and considering that the facts for the year under consideration are identical to the facts for the assessment year 2002-03 and that both the parties also did not address any additional argument with respect to the aforesaid ground in the present appeal, following the order for the assessment yea 2002-03, the disallowance made in the assessment order on account of interest expenditure under section 14A is directed to be deleted.

92.4. As regards the disallowance in relation to other expenses, as per information available on record, total expenditure incurred during the relevant previous year in relation to Treasury Division was Rs. 44 lacs given at PB-196. In assessee's appeal for the assessment year 2002-03 decided by us hereinabove, we have held that 20% of the expenses of Treasury Division/Department is reasonable for attribution towards activities of investments yielding exempt income carried on by the assesee. Following the same, we restrict the disallowance of other expenses in this year to 20% of Rs. 44 lacs i.e. Rs. 8.8 lacs and direct the deletion of balance disallowance confirmed by the Ld. CIT(A). Accordingly, this ground of appeal of the assessee is partly allowed.

93. As regards ground No.2, where the assessee has challenged the order of the ld. CIT(A) in not deleting disallowance of Rs. 10 lacs made on account of expenses quantified as relatable to earning of exempt income u/s 14A of the Act in computing book profit for the purpose of section 115JB and instead enhancing the disalalowance u/s 115JB to Rs. 5.84 crores.

93.1. The above said ground of the assesse is identical to ground No.2 in assessee's appeal for the A.Y. 2002-03 decided by us hereinabove. Both the parties did not address any additional argument with respect to the present ground and agreed that the identical facts in the present appeal are there as in ground of appeal for the A.Y.2002-03 mentioned hereinabove. In the assessment year 2002-03, we have held that the amount of disallowance of other expenses i.e. other than interest expenditure computed u/s 14A can be adopted for the purposes of addition to book profit u/s 115JB of the Act. Accordingly, following the order for the A.Y.2002-03, the aforesaid addition to book profit u/s 115JB is restricted to Rs. 8.8 lacs and the balance disallowance confirmed by the ld. CIT(A) is directed to be deleted. Accordingly, the present ground of appeal is partly allowed. Thus, the appeal of the assessee for the A.Y.2004-05 is partly allowed.

94. Now, we take up the appeal of the Revenue for the assessment year 2004-05 in ITA No.153(Asr)/2011.

95. As regards ground No.1 of the Revenue, where the revenue has challenged the order of the ld. CIT(A) in deleting the disallowance of deduction claimed on account of non-compete fee of Rs. 84,27,500/- paid to an ex-employee i.e. Sh. Vivek Jaitley.

95.1. In the present year, the assessee has entered into a non-compete agreement dated 28.03.2003 with an ex-employee i.e. Sh. Vivek Jaitley for placing following restrictive covenants on him for a period of two years:

i) Seek service in a business related to the setting up or managing of Information Technology, Healthcare and Insurance business which would directly compete with assessee's business.

ii) Solicit any employee of Max to leave his employment, whether or not by so doing the employee would commit a breach of contract.

95.2. The aforesaid ground of appeal is identical to ground No.1 in Revenue's appeal for the A.Y. 2002-03. Both the parties did not address any additional argument with respect to the present ground of appeal. In this appeal, the other issue raised for the A.Y. 2002-03 that the payment of non- compete fee is not made by the assessee. or is not related to business of the assessee are not there. The disallowance has been made simply on the ground that the payment of non-compete fee is capital expenditure. The aforesaid issue has been decided in favour of the assessee hereinabove by dismissing the ground of revenue for the A.Y. 2002-03. Accordingly, following our own order for the assessment year 2002-03 hereinabove, we find no infirmity in the order of the ld. CIT(A), who has rightly deleted the disallowance made by the A.O. Thus, ground of the revenue is dismissed.

96. As regards ground No.2 , the revenue has challenged the order of the Ld. CIT(A) in allowing deduction of expenditure of Rs. 54 lacs incurred by the assessee towards expansion of existing MAXXON division.

96.1. The aforesaid ground of appeal is identical to the ground of appeal of the Revenue for the assessment year 2002-03, which has been decided by us in favour of the assessee by dismissing the Revenue's for the assessment year 2002-03 hereinabove. Both the parties did not address any additional argument with respect to the present ground of appeal and agreed that the facts in the present ground are identical to the ground in the assessment year 2002-03. Accordingly, following our own order for the A.Y. 2002-03, we find no infirmity in the order of the ld. CIT(A), who has rightly allowed the ground of the assessee. Thus, this ground of the Revenue is dismissed.

97. As regards ground No.3, the revenue has challenged the order of the ld. CIT(A) in not treating the loss arising on sale of investments as speculative loss.

97.1. We find that this issue came for our consideration in the appeal of the revenue for the assessment year 2001-02 in ITA No.103(Asr)/2006 and in ground No.5, in Revenue's appeal for the A.Y.2002-03 decided by us hereinabove, the loss in question relates to sale of shares held as investment including those shares which were received from Max Corpn. Ltd. in the financial year 1999-2000 and were converted into investments by the assessee in the A.Y. 2000-01. We have held that the aforesaid conversion from stock in trade into investment as valid by upholding the order of the Ld. CIT(A) treating loss on sale of investments arising in the A.Y. 2001-02 as not speculative business loss. The explanation under section 73 of the Act invoked by the AO was held to be not applicable in relation to sale of investments in the appeal for the A.Y. 2001-02. Therefore, being no change in the facts and position in law in the relevant previous year as compared to A.Y. 2001-02 and in the absence of any new argument having been raised by the parties, we dismiss this ground of appeal of the Revenue following our own order for the A.Ys. 2001-02 & 2002-03 hereinabove. Accordingly, the appeal of the Revenue in ITA No.153(Asr)/2011 is dismissed.

98. Now, we taken up assessee's appeal in ITA No.122(Asr)/2011 for the assessment year 2005-06.

99. As regards ground No.1, the assessee has challenged the order of the ld. CIT(A) in not deleting the disallowance of Rs. 10 lacs made by the A.O. u/s 14A of the Act and instead enhancing the amount of disallowance under the said section to Rs. 4.48 crores.

99.1. The aforesaid ground of appeal is identical to ground No.1 in appeal of the assessee for the A.Y. 2002-03 decided by us hereinabove. In the present, the Ld. CIT(A) did not accept the contention of the assessee qua no nexus of borrowed funds with investment yielding exempt income on the basis of overall positive fund flow position/statement of the year. The Ld. CIT(A) on the ground of the assessee having not been established the aforesaid nexus through bank statements, drew an adverse inference against the assessee and apportioned the interest expenditure on the basis of formula adopted in the order passed for the A.Y. 2002-03 for the purposes of disallowance under section 14A of the Act.

99.2. We have decided the aforesaid issue in favour of the assessee in ground No.1 in assessee's appeal for the A.Y.2002-03 hereinabove that in a case of mixed pool of funds, the assessee can establish utilization of borrowed funds and interest free funds on the basis of overall fund flow statement in the relevant year and establishing the aforesaid nexus through bank statements in a case where over all fund flow position is positive is not a correct approach. On perusal of the cash flow statement of the relevant year at page 647 of PB, we have found that against total investment of Rs. 332.79 crores made during the year, the assessee has realized total interest free fund of Rs. 341.46 crores comprising of 203.26 crores from the sale of existing investments, Rs. 12.70 crores from the sale of investment in subsidiary companies, Rs. 81.01 crores from preferential issue of shares, Rs. 8.15 from the issue of warrants, Rs. 29 crores from receipt of option deposit from New York Life International Inc., and Rs. 7.34 crores from operations.

99.3. In view of the above, we are of the view that the facts for the assessment year under consideration are identical to the facts for the A.Y. 2002-03 and both the parties did not address any additional argument with respect to the present ground of appeal. Accordingly, following our own order for the A.Y.2002-03, the disallowance confirmed by the ld. CIT(A) is directed to be deleted on account of interest expenditure u/s 14A of the Act.

99.4 As regards the disallowance in relation to other expenses, as per information available on record, total expenditure incurred during the relevant previous year in relation to the Treasury Division was raised to Rs. 41 lacs as per PB 114 in assessee's appeal for the A.Y.2002-03 decided by us hereinabove where we have held that 20% of the expenses of Treasury Division/Department are reasonable for attribution towards activities of investment yielding exempt income carried on by it. Following the same, we restrict the disallowance of other expenses to 20% of Rs. 41 lacs i.e. Rs. 8.2 lacs and direct deletion of balance allowance confirmed by the ld. CIT(A). Accordingly, ground of the assessee is partly allowed.

100. As regards ground No.2 of the assessee, where the assessee has challenged the order of the Ld. CIT(A) in not deleting the disallowance of Rs. 10 lacs made on account of expenses quantified as relatable to earning of exempt income u/s 14A of the Act in computing book profit for the purposes of section 115JB of the Act and instead of enhancing the disallowance u/s 115JB to Rs. 4.48 crores.

100.1 The present ground of appeal is identical to ground of appeal No.2 in assessee's appeal for the A.Y.2002-03. Both the parties did not address any additional ground with respect to the present ground of appeal and have agreed to the fact that the present issue is identical to the issue in the A.Y. 2002-03 mentioned hereinabove. In appeal for the A.Y. 2002-03, we have held that the amount of disallowance of other expenditure i.e. other than interest expenditure computed u/s 14A can be adopted for the purposes of addition to book profit u/s 115JB of the Act Accordingly following the order for the A.Y. 2002-03, the aforesaid addition to book profit u/s115JB of the Act is restricted to Rs. 8.2 lacs and the balance disallowance confirmed by the Ld. CIT(A) is directed to be deleted. Thus, ground No.2 of the assessee is partly allowed. Accordingly, the appeal of the assessee for the impugned year is partly allowed.

101. Now, we take up Revenue's appeal in ITA No.154(Asr)/2011 for the A.Y.2005-06.

102. In solitary ground of Revenue, the Revenue has challenged the order of the Ld. CIT(A) in deleting the disallowance of deduction claimed on account of non-compete fee of Rs. 83 lacs paid to an ex-employee Sh. Vivek Jaitley.

102. The aforesaid ground of appeal is consequential to ground of appeal No.1 in Revenue's appeal for the A.Y. 2004-05 wherein proportionate deduction claimed in that year was also allowed. We have decided the aforesaid issue in favour of the assessee and dismissed ground No.1 raised by the Revenue for the A.Y. 2004-05. Accordingly, following our own order for the A.Y. 2004-05, we find no infirmity in the order of the ld. CIT(A) who has rightly deleted the disallowance made by the A.O. Accordingly, the appeal of the revenue for the impugned year is dismissed.

103. Now, we take up appeal of the assessee for the assessmet year 2006- 07 in ITA No.123(Asr)/2011.

104. In ground No.1 of the assessee, the assessee has challenged the order of the ld. CIT(A) in confirming the disallowance made by the A.O. u/s 14A of the Act, to the extent of Rs. 3.38 crores.

104.1. The aforesaid ground of appeal is identical to ground of appeal No.1 in assessee's appeal for the A.Y.2002-03. In this year, the AO computed disallowance under section 14A at Rs. 10.98 lacs by applying provisions of Rule 8D of the I.T. Rules.

104.2. The Ld. CIT(A) held that the provisions of Rule 8D are applicable only w.e.f. the assessment year 2008-09 and were not applicable to preceding assessment years including the assessment year under consideration. Accordingly, the Ld. CIT(A) reversed the action of the A.O. in computing disallowance u/s 14A as per Rule 8D of I.T.Rules. However, the ld. CIT(A) following his own order for the assessment year 2002-03 computed the disallowance of Rs. 3.38 crores out of which total interest expenditure incurred during the year under consideration u/s 14A on the basis of formula applied by him in the order in that year. The Ld. CIT(A) held the investments to the extent of Rs. 421.31 crores made by the assessee during the year vested with the assessee on merger of a wholly owned subsidiary company i.e. Max Telecom Ventures Limited (MTVL) which had no interest bearing borrowed funds. Accordingly, the ld. CIT(A) excluded the aforesaid investments for the purposes of computation of disallowance of interest expenditure in the formula adopted in its order for the assessment year 2002-03.

104.3. As regards other expenses, the ld. CIT(A) following the appellate order for the assessment year 2002-03 attributed an adhoc amount of Rs. 20 lacs for disallowance u/s 14A of the Act. As a result, the ld. CIT(A) restricted the impugned disallowance made by the A.O.u/s 14A from Rs. 10.98 crores to Rs. 3.38 crores. We have decided the issue of disallowance of interest expenditure incurred with investment in favour of the assessee in the appeals for the assessment year 2001-02 in ITA No.78(Asr)/2006 & in ITA No.103(Asr)/2006, A.Y. 2002-03 in ITA No.119(Asr)/2011 in A.Y. 2004-05, in ITA No.121(Asr)/2011 and in a.y. 2005-06 in ITA No.122(Asr)/2011 hereinabove. Accordingly, on the basis of our aforesaid findings, the investments held by the assessee at the beginning of the relevant year does not have any nexus with any borrowed funds. As regards the investments made during the year, the ld. CIT(A) itself has given the relief for investments made to the extent of Rs. 421.31 crores. That apart, we have also seen the cash flow statement of the year under consideration. The assessee has made investment of Rs. 69.1 crores in shares of following subsidiary companies:

i) Max Healthstaff International Ltd.	2.50 cr.
ii) Max Newyork Life Ins. Co. Ltd.	66.60 cr.

Against this, the assessee has realized interest free funds of Rs. 175.71 crores for the following different sources:

i) Proceeds from sale of subsidiary (CMAX Infocom Pvt. Ltd.	12.33 cr.
ii) Proceeds from Issue of warrant	30.00 cr.
iii) Proceeds from Issue of Share Capital	118.98 cr
iv) Option deposit received from New York Life International Inc.	14.40 cr.

104.4. In view of the above and considering that the facts for the assessment year under consideration are identical to the facts for the assessment year 2002-03, the assessee has a positive over all fund flow statement position. Both the parties did not address any additional argument with respect to the aforesaid ground in the present appeal. Accordingly, following our order for the A.Y. 2002-03, where the facts are identical to the present ground of appeal, decided by us hereinabove, we direct the deletion of disallowance of interest expenditure under section 14A confirmed by the ld. CIT(A).

104.5. As regards disallowance in relation to other expenditure as per information available on record, the total expenditure incurred during the relevant previous year in relation to the Treasury Department was Rs. 41 lacs which is given at PB-122 in assessee's appeal for the A.Y. 2002-03 decided by us hereinabove, we have held 20% of the expenses of Treasury Division/Department are reasonable attribution towards activities of investments yielding exempt income carried on by the assessee. Following our order for the A.Y. 2002-03, we restrict the disallowance of other expenses in this year too at 20% of Rs. 41 lacs i.e. Rs. 8.2 lacs and direct the deletion of the balance disallowance confirmed by the ld. CIT(A). Accordingly, assessee's ground is partly allowed.

105. As regards ground No.2 of the assessee, where the assessee has challenged the order of the ld. CIT(A) in confirming the action of the A.O. in adding the amount disallowed u/s 14A to the extent of Rs. 3.38 crores to the book profit under section 115JB of the Act.

105.1 The aforesaid ground is identical to ground No.2 for the assessment year 2002-03 decided by us hereinabove. Both the parties have agreed that the facts in the present appeal are identical to the facts in ground No.2 in assessee's appeal for the A.Y.2002-03 and did not address any change in arguments with respect to the present appeal. In the appeal for the assessment year 2002-03 in ground No.2, we have held that the amount of disallowance of other expenses i.e. other than interest expenditure computed u/s 14A can be adopted for the purposes of addition of book profit u/s 115JB of the Act. Accordingly, following our order for the assessment year 2002-03 in assessee's own case, the aforesaid addition to book profit u/s 115JB of the Act is restricted to Rs. 8.2 lacs and the balance disallowance confirmed by the ld. CIT(A) is directed to be deleted. Accordingly, ground No.2 of the assessee is partly allowed. Henc, the appeal of the assessee is partly allowed.

106. Now, we take up the appeal of the Revenue for the assessment year 2006-07 in ITA No. 155(Asr)/2011

107. In ground No.1, the Revenue has challenged the order of the ld. CIT(A) in deleting the disallowance of deduction claimed on account of non-compete fee of Rs. 90 lacs paid to ex-employee Mr. Surendra Kaul . The assessee had entered into an agreement dated 31.03.2005 with an ex- employee i.e. Sh. Surendra Kaul for placing following restrictive covenants on him for a period of one year:

i) Seek service in a business related to the setting up or managing of information technology, health care and insurance which would directly compete with assessee's business.

ii) Solicit any employee of Max to leave his employment, whether or not by so doing that employee would commit a breach of contract.

107.1. The aforesaid ground is identical to ground No.1 in Revenue's appeal for the assessment year 2002-03 which has been decided by us hereinabove and which has been agreed to by both the parties. None of the parties addressed any additional argument with respect to the present ground of appeal. In this appeal, the other issue raised in appeal for the A.Y. 2002- 03 that the payment of non-compete fee is not made by the assessee is not related to the business of the assessee are not there. The disallowance has been made simply on the ground that the payment of non-compete fee is a capital expenditure. The issue is identical to the assessee in the A.Y. 2002- 03 where the issue has been decided in favour of the assessee by dismissing the appeal of the Revenue in that year. Accordingly, following our own order for the A.Y. 2002-03, we find no infirmity in the order of the ld. CIT(A), who has rightly deleted the disallowance made by the A.O. Accordingly, ground of appeal of the Revenue is dismissed.

108. In ground No.2, the Revenue has challenged the order of the ld. CIT(A) in reducing disallowance of Rs. 10.98 crores made by the A.O. u/s 14A as per Rule 8D to Rs. 3.38 crores. As discussed in cross appeals filed by the assessee on the aforesaid issue in ITA No.123(Asr)/2011, the Ld. CIT(A) has reversed the action of the A.O. in computing disallowance u/s 14A for the impugned year as per provisions of Rule 8D on the ground that the same are not applicable to the impugned year.

108.1. We find that the Hon'ble Bombay High Court in the case of Godrej &Boyce Mfg. Co. Ltd. vs. Dy. CIT 328 ITR 81 and Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT 247 CTR 162 have held that the provisions of Rule 8D are prospective in nature and cannot be applied to assessment year prior to assessment year 2008-09. Following the same, we uphold the action of the ld. CIT(A) in reversing the order of AO in computing disallowance u/s 14A as per Rule 8D for the impugned year. Accordingly, revenue's ground is dismissed. The present appeal filed by the Revenue is dismissed.

109. In the result, the appeals of the Revenue in ITA Nos. 103(Asr)/2006, 151, 152, 153, 154 & 155)(Asr)/2011 are dismissed and appeals of the assssee in ITA Nos. 78(Asr)/2006, 119,120,121,122 & 123(Asr)/2011 are partly allowed.

Order pronounced in the open court on 8th March, 2013.

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