Appeals partially allowed, issues remanded for fresh examination, decided on precedent cases

The Tribunal partly allowed both appeals, restoring several issues to the Assessing Officer for fresh examination and deciding others based on precedent cases and legal principles. The Tribunal's order was pronounced on October 17, 2012.

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Issues Involved:
1. Disallowance of interest paid on borrowings.
2. Disallowance of deduction under section 80HHC.
3. Exclusion of excise duty, scrap sales, and turnover of overseas branches from total turnover.
4. Disallowance of interest on borrowings under section 115JA.
5. Disallowance of deduction on account of reversal of provision for leave encashment.
6. Disallowance of deduction under section 80HHC in terms of clause (a) of the Explanation.
7. Disallowance of interest attributable to debit balance of subsidiary company.
8. Disallowance of license fee paid to RPG Enterprises Ltd.
9. Disallowance of professional fee paid to McKinsey and Co.
10. Depreciation allowance.
11. Disallowance of provision for bad and doubtful debts.
12. Granting of minimum alternate tax credit.
13. Disallowance of expenditure incurred in relation to the project yet to be commenced.
14. Disallowance of voluntary retirement scheme expenditure.

Issue-wise Detailed Analysis:

1. Disallowance of Interest Paid on Borrowings:
The Assessing Officer (AO) disallowed interest related to investments in shares/mutual funds, treating 63.66% of investments as made from borrowed funds. The Commissioner of Income-tax (Appeals) [CIT(A)] provided partial relief, confirming disallowance for Rs.1,383.22 lakhs. The Tribunal restored the issue to the AO for fresh examination, noting the need for compliance with section 14A and allowing the assessee an opportunity for a hearing.

2. Disallowance of Deduction Under Section 80HHC:
The AO disallowed the deduction under section 80HHC due to net losses from manufacturing export. The CIT(A) upheld this decision, following the Bombay High Court's judgment in IPCA Laboratories Ltd. This decision was confirmed by the Tribunal, referencing the Supreme Court's ruling in IPCA Laboratory Ltd. v. Deputy CIT.

3. Exclusion of Excise Duty, Scrap Sales, and Turnover of Overseas Branches from Total Turnover:
The CIT(A) dismissed these grounds as academic, given the assessee's net losses and ineligibility for deduction under section 80HHC. The Tribunal agreed, deeming the issues infructuous.

4. Disallowance of Interest on Borrowings Under Section 115JA:
The AO adjusted the book profit under section 115JA due to disallowed interest expenditure. The Tribunal restored the issue to the AO, aligning it with the decision on the interest disallowance.

5. Disallowance of Deduction on Account of Reversal of Provision for Leave Encashment:
The assessee did not press this issue due to the small amount involved. The Tribunal dismissed this ground as not pressed.

6. Disallowance of Deduction Under Section 80HHC in Terms of Clause (a) of the Explanation:
The AO and CIT(A) denied adjustment to book profit due to net losses. The Tribunal directed the AO to compute profit eligible for deduction under section 80HHC based on adjusted book profit, following the Special Bench decision in Deputy CIT v. Syncome Formulations (I) Ltd. and the Supreme Court's ruling in CIT v. Bhari Information Tech. Sys. P. Ltd.

7. Disallowance of Interest Attributable to Debit Balance of Subsidiary Company:
The AO disallowed interest on loans to Bespoke Finvest Ltd., citing lack of evidence for interest-free funds. The CIT(A) upheld the disallowance but reduced the interest rate. The Tribunal deleted the disallowance, noting sufficient internal accruals and following its previous decision in the assessee's case for 1998-99.

8. Disallowance of License Fee Paid to RPG Enterprises Ltd.:
The AO disallowed the license fee due to lack of evidence of services rendered. The CIT(A) confirmed the disallowance. The Tribunal restored the issue to the AO for fresh examination, following its decision in the assessee's case for 1998-99.

9. Disallowance of Professional Fee Paid to McKinsey and Co.:
The AO disallowed the fee, citing incomplete contracts. The CIT(A) upheld the disallowance due to lack of agreement and final report. The Tribunal allowed the claim, recognizing the expenditure as revenue in nature and directing the AO to verify the bills and quantum of expenditure.

10. Depreciation Allowance:
The AO added depreciation to total income, contrary to the Supreme Court's decision in CIT v. Mahendra Mills Ltd. The CIT(A) confirmed this, following the Bombay High Court's ruling in Indian Rayon Corporation Ltd. v. CIT. The Tribunal upheld the CIT(A)'s decision, referencing the Full Bench judgment in Plastiblends India Ltd. v. Asst. CIT.

11. Disallowance of Provision for Bad and Doubtful Debts:
The AO disallowed the provision, citing non-compliance with section 36(1)(vii). The CIT(A) confirmed this. The Tribunal allowed the claim, following the Supreme Court's ruling in Vijaya Bank v. CIT, which accepted lump-sum reduction from debtors' balance.

12. Granting of Minimum Alternate Tax Credit:
The Tribunal directed the AO to verify and allow the credit for minimum alternate tax paid in the earlier year, as per law.

13. Disallowance of Expenditure Incurred in Relation to the Project Yet to be Commenced:
The AO disallowed pre-operative expenses for unawarded projects. The CIT(A) allowed the claim, following the decision for 1998-99. The Tribunal confirmed this, referencing its previous decision.

14. Disallowance of Voluntary Retirement Scheme Expenditure:
The AO treated VRS expenditure as capital in nature. The CIT(A) allowed the claim, following the Supreme Court's ruling in CIT v. Ashok Leyland Ltd. and the Bombay High Court's decision in CIT v. Bhor Industries Ltd. The Tribunal upheld the CIT(A)'s decision, following its previous ruling.

Conclusion:
Both appeals were partly allowed, with several issues restored to the AO for fresh examination and others decided based on precedent cases and legal principles. The Tribunal's order was pronounced on October 17, 2012.

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