TaxTMI 
TaxTMI 
2006 (1) TMI 186
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....ction 2(24)(iv). The Commissioner of Income-tax (Appeals) in fact during the course of hearing of the appeal had required the appellant to advance arguments only with reference to the provisions of section 2(24)(iv) and at no point of time during the hearing of the appeal which lasted over a period of 3 months did she indicate her intention of invoking section 2(24). (B) The Commissioner of Income-tax (Appeals) erred in involving section 2(24) without giving necessary opportunity to the appellant to advance its arguments and in this view of the matter there has been a violation of the principles of natural justice. On this ground itself, the addition is liable to be deleted. (C) The Commissioner of Income-tax (Appeals) has erred in placing reliance on 2 letters the first dated 30-6-2000 written by Escorts Heart Institute & Research Centre Ltd., Chandigarh to the Registrar of Societies, Chandigarh and the other to the Assessing Officer by the appellant in the course of assessment proceedings for assessment year 2001-02 and drawing adverse inference against the appellant while ignoring relevant material on record. (D) The Commissioner of Income-tax (Appeals....
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....more particularly on Cardiology, Cardia-vascular and Thoracic Surgery in all its various aspects; (b) the objective of launching activities for relief of the poor, education, other medical relief and advancement of any other object of public utility not involving the carrying on of any activity for profit; (c) that it was a charitable society not started with a view to earn any profit and that all income of the society shall be utilized towards the promotion of the aims and objects of the society. The income of this Society was exempt from tax under section 10(21) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"). This Society had obtained the approval of Central Government under section 35(1)(ii) of the Act. During the previous year relevant to assessment year 1982-83, the assessee had made a payment of Rs. 60 lakhs to this Society and claimed deduction in respect of such payment, which was allowed by the Assessing Officer. The assessee and its group companies were the subscribers to the Memorandum of Association of the society at the time of its formation. This Society will hereafter be referred to as "the Delhi Society". 6. Another society by the same name of....
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....lhi Society, issued 16,00,000 equity shares of Rs. 10 each in the share capital of Chandigarh Society, to the assessee. This constituted 80 per cent of the share capital of the paid up capital of Chandigarh Society. The authorised share capital of the Society was 25,00,000 shares of Rs. 10 each. A cheque for Rs. 1,60,00,000 dated 27-5-2000, drawn on Deutsche Bank, had been issued by the assessee, in favour of the Chandigarh Society, a copy of the same is placed at page 81 of assessee's paper book. This cheque was presented for payment only on 20-7-2000. The Bank Statement of the assessee with Deutsche Bank for the period from 1-5-2000 to 20-7-2000, has been filed before us to show that at all material time from the date of issue of cheque till its realization, the assessee had to the credit of its Bank account with Deutsche Bank, balance which was far in excess of Rs. 1,60,00,000. The case of the assessee is that though the cheque was encashed only on 20-7-2000, the same relates back to the date of issuance of the cheque, viz., 27-5-2000. 10. On the above facts, which are not in dispute, the Assessing Officer was of the view that the amalgamation of the Delhi Society with th....
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....eceived only assets worth Rs. 7,000 from the Chandigarh Society. If that were the reality then there was no reason for the assessee to have contributed a sum of Rs. 1.6 crores to the share capital of the Chandigarh Society. The Chandigarh Society had no assets of its own whereas the Delhi Society had assets worth several crores. Therefore the assessee would not contribute to share capital of the Chandigarh Society unless the assets of the Delhi Society stood vested in the Chandigarh Society. (e) The provisions of section 12 permitting merger / amalgamation of two societies, is subject to the condition, that the fundamental purpose of a society should not stand altered by reason of the amalgamation, unless such a power is specifically permitted by the memorandum or rules and regulations of the Society. In the case of the assessee, the Assessing Officer found that the Delhi Society with a charitable purpose got merged with the Chandigarh Society, which was a non-charitable society. 11. From the above conclusions drawn by the Assessing Officer, he was of the view that the merger of the Delhi Society with the Chandigarh Society was only for the purpose of using the Chandiga....
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....visions of IT Act, aims of the charitable society. (b) The next contention of the assessee was that it merely became a shareholder in M/s. EHIRC Ltd., by contribution to 80 per cent of its paid up share capital and it cannot be said that allotment of shares was a return on investment. On this plea, the Assessing Officer held that the entire share capital of M/s. EHIRC Ltd., was held by the assessee and its group companies and by contribution a meagre sum of Rs. 2 crores, they obtained control over assets worth more than Rs. 100 crores of the Delhi Society. (c) The next contention of the assessee was that the merger of the two societies was within the framework of law. That section 13 of the SR Act, 1860, was not violated since neither Government nor the Income-tax Department was a member or a contributor nor otherwise interest in the Delhi Society. That Mr. Anil Nanda was not a member of the Delhi Society in his personal capacity but was representing M/s. Goetze India Ltd., which was a member and that due notice was given to M/s. Goetze India Ltd. Hence, even the provisions of section 12 of the SR Act, 1860, were not violated. The Assessing Officer rejected this p....
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.... assets of the Delhi Society with a view to reap the benefits of its investments of Rs. 60 lakhs in the year 1982. Thereafter, the Assessing Officer gave his final conclusions which we feel, is better to reproduce as under:- "Thus, the assessee devoted time, money and effort to achieve its end of obtaining control over the assets of charitable society at Delhi. It can, therefore, be said that the assessee was engaged in a vocation which ultimately gave huge returns to the assessee. Since only Rs. 60 lakhs were originally invested in the Delhi Society and subsequently the assessee subscribed to 16,00,000 shares at the rate of only Rs. 10 per share of the Chandigarh Society whereas looking at the net assets (at book value of Rs. 110,14,12,937) the value per share of the Society and later on the company Escorts Heart Institute & Research Centre Ltd. works out to Rs. 550 per share. In this way, the assessee has gained tremendously. The Hon'ble Madras High Court in the case of CIT v. Varadarajan (224 ITR 9) has held that the benefit of capital nature is also taxable as income under clause (iv) of section 2(24) of the Income-tax Act. Since assessee was having 80 per cent sha....
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....re realized. 16. Before the CIT(A), the assessee pleaded for opportunity to cross examine Anil P. Nanda who was a member of the Delhi Society and who had deposed before the ADIT (Investigations) that he was not given notice of the meeting in which the merger of the Delhi Society with Chandigarh Society was approved. The assessee was afforded such opportunity before the CIT(A). Besides Anil P. Nanda, one Mr. Atul U. Sood and Mr. Umesh Banerjee were also cross examined before CIT(A) on behalf of the assessee. We are not narrating those contentions for the reason that the CIT(A) proceeded to decide the issue from a different perspective, rendering the basis of assessment done by the Assessing Officer purely academic. 17. The CIT(A) held that the question of merger/amalgamation of the Delhi Society with the Chandigarh Society being in violation of the Societies Registration Act, 1860 was not relevant. The case of the Assessing Officer that a sum of Rs. 60 lakhs given by the assessee as a donation to the Delhi Society in the year 1982, was an investment by the assessee in the course of an avocation, which resulted in allotment of shares at a concessional rate and the benefit so de....
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.... the decision of the Hon'ble Supreme Court in the case of Emil Webber v. CIT [1993] 200 ITR 483 and CIT v. G.R. Karthikeyan [2003] 201 ITR 866 in this regard and concluded that any income not falling within the list of incomes specified in clauses (1) to (xii) of subsection (24) of section 2 of the Act can still be regarded as income, if the receipt partakes the nature of income. 20. Thereafter the CIT(A) posed the following question viz., when assets are transferred at WDV by a company to its Director and when such value is less than the market value, whether the difference can be said to constitute income in the hands of the Director chargeable to tax under the Act? She answered this question in the affirmative and made a reference to the decision of the Hon'ble Madras High Court in the case of CIT v. S. Varadarajan [1997] 224 ITR 93 where on a similar question, the Court held that on such facts the difference in value was chargeable to tax as income under section 2(24)(iv) of the Act as a benefit received by a director from the company. The Court also held that even if the benefit is of a capital nature, yet the same would be taxable as income. 21. Thereafter the C....
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....lotment. Therefore, at the time of allotment of shares by EHIRC Ltd. to Escorts Ltd. has resulted into net benefit passing in the hands of the appellant company of Rs. 540 per share. Whether this passing of the benefit has resulted into income? The answer to this question is Yes, as discussed above that when the share is allotted at par while its value is much more, it definitely results into passing of benefit which is assessable as income. The appeJlant company had substantial interest all through in EHIRC in all its form and the benefit which passed to Escorts Ltd. on allotment of shares by EHIRC Ltd. to Escorts Ltd. has resulted into income in the hands of Escorts Ltd. which is covered under section 2(24) of the Act, for the reasons discussed in above paras. In view of the above facts the action of the Assessing Officer is confirmed, however the difference in the value comes to Rs. 540 assessee 16,00,000 = Rs. 86,40,00,000 (cost on the basis of the assets - value at which allotted into number of shares) and not as worked out by the Assessing Officer at Rs. 88,11,30,349. Whether the benefit passed to the Escorts Ltd. On issue of shares also is taxable alternatively unde....
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....ntrinsic worth of Rs. 550 for a sum of Rs. 10. He placed heavy reliance on the decision of the Hon'ble Delhi High Court in the case of CIT v. Bharat Development (P.) Ltd [1982] 135 ITR 456 for the proposition that no income can accrue or arise at the time of purchase. According to him if at all there is some benefit to the assessee by purchase of shares at a lesser value, then it is at best only notional and illusory. The real point of accrual of income can be only when these shares acquired by the assessee are sold in future. According to him at best, the provisions of section 4(1)(a) of the Gift Tax Act, would be attracted in the case of the Chandigarh Society. Gift is not income within the meaning of section 2(24) of the Act. Gift tax is not leviable on gifts made on or after 1-10-1998. 25. His further submission was that as and when the shares are sold, the cost of acquisition of shares for computing capital gains tax would be only Rs. 10 and would bring to tax the alleged benefit which the assessee received by purchase of shares at a concessional price. According to him by taxing the notional income at the time of purchase, the Assessing Officer is attempting to prepone....
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....ssee purchased shares of the Chandigarh Society (after the Delhi Society got amalgamated with it). The shares of M/s. EHIRC Ltd. were issued on 16-6-2000 in lieu of shares held by the assessee in the Chandigarh Society. The legal submission of the ld. counsel for the assessee was that the encashment of cheque dated 27-5-2000 by the Chandigarh Society on 20-7-2000 will relate back to the date of the cheque, more so, when the assessee has established that from the date of the cheque till its encashment, there was sufficient funds available in the bank a/c of the assessee. In support of such legal proposition, he relied on the following decisions:- 1. K. Saraswathy v. PSS Somasundaram Chettiar [1989] 4 SCC 527 2. Kirloskar Bros. Ltd. v. CIT AIR 1952 Bom. 306 3. Sockalinga Tea Co. (P.) Ltd. v. Chairman, Board of Trustees [1982] 1 GLR 316 (Gauhati) 4. Felix Hadlay & Co. v. Hadley 1859 F 2704 Chancery Divn. 680. 28. His concluding submissions on this issue was that on the analogy of section 2(24)(iv) no income can be said to have accrued to the assessee under section 2(24) of the Act, since the shares were originally obtained from the Chandigarh Soc....
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.... having substantial interest in the Delhi Society as well as the Chandigarh Society after its amalgamation with the Delhi Society. According to him the major stakeholders in the Delhi Society should be deemed to be major stakeholders in Chandigarh Society also. The assessee by reason of its having such substantial interest has been allotted shares in the Chandigarh Society (after amalgamation) or EHIRC Ltd., as the case may be. The price at which the shares were allotted was much below the real worth of the shares compared to their net worth (i.e., the excess of its assets over its liabilities) of the Chandigarh Society (after amalgamation) or of EHIRC Ltd. The difference between the real worth of these shares and the price paid by the assessee for such shares was a benefit received by the assessee which was of the character of income chargeable to tax under the Act. He submitted that the definition of "Income" under the Act is very exhaustive and is not an inclusive definition. The charging section viz., section 4 of the Act, refers to the charge of income-tax being on the total income of the previous year of every person. Section 5 defines scope of total income and it speaks of i....
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....fore, submitted that the argument of the learned counsel for the assessee that even assuming that the assessee has received a benefit, the same should be taxed only when the shares are sold by the assessee, should not be accepted. Reliance was placed by the learned Special Counsel for the revenue on the decision of the Hon'ble Bombay High Court in the case of Emil Webber v. CIT [1978] 114 ITR 515, for the proposition that merely because the inclusive definition of "income" in section 2(24) mentions only certain heads of income it would not follow that any benefits received by an assessee, which are not covered by the stated heads of income, would not be assessable if they can be otherwise fairly regarded as the income of the assessee. Reliance was also placed on the decision of the Hon'ble Bombay High Court in the case of D.M. Neterwalla v. CIT [1980] 122 ITR 880 wherein in the context of the provisions of section 2(6C)(iii) of the Income-tax Act, 1922 equivalent to section 2(24)(iv) of the Act, it was held that the shares allotted to a director, notwithstanding the fact that the allotment of shares was not in his capacity as a director, was nevertheless chargeable to tax. ....
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....ll not accrued. That normally the mere purchase of merchandise does not result in income. Profit thereto arises only at the time of sale. But to purchase other companies or to embark upon amalgamations with other companies in the form of trading activity is rarely a business adopted by people. Such acquisitions or amalgamation of companies do not render them as commodities which are readily marketable. They cannot be termed as a normal class of stock-in-trade. Such trading activity has to be treated as a class of its own which may itself result in a plain profit if the price paid or cost involved was less than the value of the assets of those companies after deductions of their liabilities. If in these processes, substantial surplus amounts resulted in favour of the present assessees and they were shown in the amalgamation accounts as having accrued to them, then there are no reasons why such amounts should not be treated as gains and profit enjoyed from those well-planned and concerted activities. The Third Judge Mr. Justice Kapur D.K. however, held that difference between the credit and debit side of the balance sheet of the company which was taken over was a mere book entry that....
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....R. Karthikeyan he submitted that the propositions laid down therein were in a different context and do not the question involved in the present case. 35. We have considered the rival submissions. We shall first deal with the issue whether the assessee acquired shares of EHIRC Ltd. directly or in lieu of its holding of shares in the Chandigarh Society (after amalgamation with the Delhi Society). The CIT(A) has concluded that the assessee purchased shares of EHIRC Ltd. directly on the basis of two circumstances (a) on the basis of a letter written by the authorized representative in the course of assessment proceedings which referred to the payment by cheque dated 27-5-2000 issued by the assessee to acquire shares in EHIRC Ltd. (b) on the basis that since EHIRC Ltd., had written to the Registrar of Societies a letter dated 30-6-2000 mentioning that on conversion of the Chandigarh Society into a limited company, the limited company had received only Rs. 7,000 as contribution from members of Chandigarh Society as assets. Thus according to the CIT(A), if assets worth only Rs. 7,000 were possessed by Chandigarh Society prior to its conversion into a limited company but after its amalg....
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....to the date of cheque. The decisions relied upon by the learned counsel for the assessee in this regard clearly support the stand of the assessee. It has, therefore, to be concluded that the assessee purchased shares of the Chandigarh Society and not EHIRC Ltd. directly. The CIT(A)'s reliance on a letter written by the counsel in the course of assessment proceedings is therefore, not acceptable as they are contrary to the fact situation on record. The reasoning of the CIT(A) for concluding that 'Income' under section 2(24) accrued to the assessee based on the presumption that the assessee purchased shares of EHIRC Ltd., directly is, therefore, without any basis. 38. What now, therefore, remains for consideration is as to the alternate case of the CIT(A) that even assuming that the assessee was allotted shares of EHIRC Ltd., in lieu of its holding of shares in the Chandigarh Society (after its amalgamation) it would still be a case of income accruing to the assessee, which is taxable. The CIT(A) concluded that the assessee was controlling the Chandigarh Society and allotment of shares of Chandigarh Society at Rs. 10 when its book value was Rs. 550 resulted in passing ....
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.... company', in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without right to participate in profits, carrying not less than twenty per cent of the voting power;" 41. Thus by having "substantial interest", what is referred to is the owning of share capital. The Chandigarh Society was formed with seven subscribers to the memorandum of association. The assessee was not a signatory to the memorandum of association. Prior to the issue of 16,00,000 shares of Rs. 10 each the assessee never held any shares in the Chandigarh Society. The assessee has already explained that the Chandigarh Society wanted persons known to them to be inducted as shareholders/members and that is the reason why the Chandigarh Society had allotted shares to the assessee. In other words no other considerations like an employer-employee relationship or any other business association/considerations for offer and allotment of shares to the assessee existed. As rightly contended by the learned counsel for the assessee, the issue of shares at a concessional price to a person having substantial interest alone is co....
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....ext of constitutional validity of section 23 of the Income-tax Act, bringing to tax notional income from property, the Court had dwelled on the meaning of the expression "Income" and expressed the view that the expression has to be understood in its natural meaning. Its natural meaning embraces any profit or gain, which is actually received. The Court held that it would be a wrong approach to try to place a given receipt under one or the other sub-clause in section 2(24) and if it does not fall under any of the sub-clauses, to say that it does not constitute income. Even if a receipt does not fall within the ambit of any of the sub-clause in section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing an inclusive definition in section 2(24) is not to limit its meaning but to widen its net. The Supreme Court noted that it has repeatedly said that the word "income" is of the widest amplitude, and that it must be given its natural and grammatical meaning. 43. The charging section viz., section 4 of the Act, refers to the charge of income-tax being on the total income of the previous year of every person. Section 5 defines scope of tot....
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....g net if the present case can be analogised to the illustration given earlier of a trader purchasing his stock-in-trade for less than the market value. I shall, therefore, for the purposes of the present case, proceed on the assumption that the amalgamation with the assessee-company of other concerns is a normal transaction in the course of the trade so far as the present assessees are concerned and proceed to analyse whether even on that assumption the surplus resulting to the assessee as a result of the amalgamation can be brought to charge. Thereafter the learned Judge gave his conclusions as follows: As already stated though the transfers themselves are complicate, the sum and substance of the position is only this: A company goes into liquidation. Its assets exceed its liabilities, say, by Rs. 10,000. The assessee-company takes over the assets and liabilities but pays to the transferor-company not Rs. 10,000 but only Rs. 8,000. The surplus of Rs. 2,000 is credited to the amalgamation account. If we are correct on this then obviously the illustration given much earlier applies squarely to the facts of the case. All that has happened is that the assessee whose busine....
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....961-62 respectively. In the case of Manav Sahyog Pvt. Ltd., the surplus so enjoyed after deduction of liabilities amounted to Rs. 4,10,415. 45. The learned Judge thereafter referred to the principle of valuation of stock-in-trade and after referring to the decision of the Hon'ble Supreme Court in the case of P.M. Mohammed Meerakhan v. CIT [1969] 73 ITR 735, concluded that applying the principle of accounting of valuing stock-in-trade, the surplus on amalgamation was to be considered as income of the assessee. 46. It was thus a common view of the Hon'ble Judges that normally at the time of acquisition or purchase at a concessional price no profit (income) accrues. The only exception stated by one of the Judges was a case where purchase of other companies or amalgamations and taking over of other companies is carried out as a trading activity. The Learned Special Counsel for the department probably realized this aspect and has sought to raise a new contention before us, which we will deal with at the appropriate stage. Nevertheless, the aforesaid principle cannot be applied in the present situation. The ld. Judge noted that as a result of the amalgamation process, subst....
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....ng with the conclusions arrived at by the CIT(A). If the merger of the Delhi Society and Chandigarh Society is held to be null and void, then the consequence will be that the assets of Delhi Society, which is the main reason for the book value of the shares being valued at Rs. 550 per share, will not vest in the Chandigarh Society and consequently not with M/s. EHIRC Ltd. either. The very basis of estimation of income will vanish. The other case sought to be made out by the Assessing Officer was that the allotment of shares at a concessional price in the Chandigarh Society (after amalgamation) was a return on the investment of Rs. 60 lakhs which the assessee made in the previous year relevant to assessment year 1982-83. The fact situation is that the amount so contributed was a donation which was allowed as a deduction in the hands of the assessee under section 35(1)(ii) of the Act in assessment year 1982-83. The case of the Assessing Officer that by the process of formation of the Chandigarh Society and having it merged with the Delhi Society and thereafter converting the Chandigarh Society (after amalgamation with Delhi Society) into a company viz., EHIRC Ltd., and owning 80% of ....
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....others who were neither directors of the assessee nor members of the Finance Committee. All the said persons entered into service agreements with the subsidiary companies. Kumar had a service agreement with Amalgamations; but his remuneration was being paid by Addison Paints and Chemical (Private) Ltd. and Wheel & Rim Company of India (Private) Ltd. He was entitled to a Commission on net profits apart from the fixed remuneration from the said companies. There were other agreements between the other persons and other companies. In view of the provisions of section 198 of the Companies Act, 1956, fixing a ceiling on the overall managerial remuneration at 11% of the net profits of the company, it was not possible for the different companies to pay the contracted remuneration to the persons concerned. According to the assessee, if the said persons were not paid the contractual remuneration, it would not have been possible to retain their services in the respective companies. The directors of the assessee, therefore, considered these questions of payment of the contractual remunerations. It was found that the Company Law Administration was not agreeable to the inclusion of the commissio....
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....ld shares in the managed companies. It had shares in other companies also. The income from the managing agency and the dividend income from the shares held in the managed companies were more than the income earned by it from its share dealing in the relevant years. The question before the Supreme Court was whether the company could be said to be one, whose business consisted 'wholly or mainly in the dealing in or holding of investments'. The Supreme Court pointed out that in such a case the primary activity should be the dealing in or holding of an investment. On the facts the Supreme Court held that the assessee there was not a company whose business consisted wholly or mainly in the holding of or in dealing with investments. In the course of the judgment, the Supreme Court has referred to the decision in Bengal & Assam Investors Ltd. v. CIT [1966] 59 ITR 547 and has also gone into the question as to whether there could be any business of holding of investments. At page 383 the Supreme Court observed as follows: 'We cannot say that the Legislature did not know its own mind when it used that expression in section 23A. We must give some reasonable meaning to tha....
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....om the original acquisitions, the assessee-company itself was responsible for starting several engineering companies and that it held the shares in such companies which it actively promoted. Even without going into the correctness or otherwise of this submission about which the relevant facts do not appear on record, we consider that the assessee-company had a systematic or organised course of activity in the matter of working for and advising its subsidiaries. This is not a case where the assessee contended itself with merely making an investment and looking for the dividend. We would, therefore, hold that there was a business activity in the matter of holding of investments on the facts here." 50. It was submitted that the Hon'ble Supreme Court in the case of CIT v. Amalgamation (P.) Ltd. [1997] 226 ITR 188 has upheld the decision of the Madras High Court agreeing with the view of the Madras High Court that it was possible to conclude that the assessee was in the business of holding investments. 51. The submissions of the ld. Special Counsel is firstly that if an assessee makes investment in shares of different companies and takes active interest in the business of thes....
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....areholders, it has been mentioned that the assessee's investment in its group companies were to the tune of Rs. 280 crores and that the same was likely to grow up to Rs. 450 crores in 1999. It has further been stated that these investments have sound economic and business potential and are foreseen as profit making entities. The fact that the parent company was supporting the needs of the group company has also been acknowledged. Similar observations are made in the Chairman's message to the shareholders in the Annual report for the year 1998-99 also. Particular emphasis has been made by the ld. Counsel for the revenue on the Chairman's message to the shareholders that all our investments have been made with due considerations and that these investments had a great potential for appreciation and will yield substantial returns in the future. Our attention was drawn to the balance sheet as on 31-3-1999 wherein the details of various investments made by the assessee have been set out. The investments also contain investment made by the assessee in a company called Escorts Research and Development Ltd. Besides the above, assessee has also made investment in the equity share....
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....ts. The assessee was not content with merely making an investment and looking for dividend. The assessee was therefore in the business of holding investments. He pointed out that the assessee had been giving loans to its subsidiaries and had also stood as guarantor for the loans availed by the subsidiaries. These activities, according to him, only go to prove the fact that the assessee was carrying on a systematic and organized course of activity in the matter of working for and advising its subsidiaries. It was thus submitted by the ld. counsel for the revenue that the case of assessee squarely fits into Amalgamations (P.) Ltd. And therefore it should be concluded that the assessee was in the business of holding investments. The further conclusion which the ld. Special Counsel wants us to infer from all these circumstances is that the shares which were allotted to the assessee by the Chandigarh Society (after amalgamation) was a benefit or perquisite which the assessee derived from and out of the business of holding investments. Alternatively it is contended that whatever the assessee derived in the form of a lower share price of the Chandigarh Society (after amalgamation) was a p....
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....e Mills Ltd [1967] 66 ITR 710 (SC) 3. D.M. Neterwalla v. CIT [1980] 122 ITR 880 (Bom.) 4. Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom.)(FB). 5. National Thennal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC). 57. The learned counsel for the assessee opposed the request of the learned counsel for revenue for adjudication of the new plea put forth before the Tribunal. His first objection was that the annual reports for the years 1980, 1997-98, 1998-99 and 1999-2000 at pages 1 to 215 of paper book-III filed by the revenue, cannot be said to be evidence available on record before the Assessing Officer. His plea was that looking into those documents to give any finding as contended on behalf of the revenue, would amount to admitting additional evidence. He pointed out that the revenue has not filed any application for admission of any additional evidence as contemplated by rule 29 of the Appellate Tribunal Rules. He contended that under rule 29, it is the discretion of the Tribunal to admit or not to admit an additional evidence. Descretion to admit evidence will be exercised by the Tribunal only where additional evidence has to be consider....
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....stification for Tribunal for entertaining new case which was put forward by the assessee for the first time before it and for directing him to file an affidavit to support it. The affidavit which the assessee filed and the material which he produced before the Tribunal constituted additional evidence which the Tribunal admitted contrary to rule 29 of the Appellate Tribunal Rules, 1946. Arjun Singh v. Kartar Singh AIR 1951 SC 193 wherein it was held in the context of Order XLI Rule 27 of C.P.C. that the discretion to admit additional evidence has to be exercised judiciously and not arbitrarily and that fresh evidence cannot be considered. Nata Singh v. Tax Commissioner 1976 (3) SCC 28 and Gujarat State Pertilisers v. Deepak Nitrate Ltd. AIR 1979 (Guj.) 83 laying down similar proposition." 58. His next submission was that the assessee was a manufacturing company and if the argument of the learned counsel for the Revenue is accepted then the assessee would be taxed on a new source of income viz., from the business of holding' investments, which is beyond the competence of the ITAT. In this regard he relied on the decision of the Full Bench of the Hon'ble Delhi High Co....
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.... was set up to contend that the activity of assessee was not of the nature of business and therefore section 44AB did not apply. This contention was attempted to be raised merely during the arguments on the appeal and the Tribunal justified in refusing to entertain the said contention as to whether section 44AB was applicable. CIT v. Ashok Leyland Ltd. 253 ITR 318 (Mad.) wherein it was held that for admission of additional grounds facts necessary for adjudication of the same should already be available on record. CIT v. Eveline International 243 ITR 493 (P&H) laying down similar proposition. 259 ITR 318 (Mad.) Wilson Industries v. CIT 250 ITR 856 (Delhi) Orissa Cements v. CIT Gedore Tools (P.) Ltd. v. CIT 238 ITR 268 (Delhi) where it was held that Tribunal has discretion to allow or not to allow new grounds of appeal. Where the Tribunal is only required to consider a question of law arising from facts which are on record such question should be allowed to be raised. The Court followed the ruling of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT [1998] 229 ITR 383. 252 ITR 482 (Delhi) Maruti Udyog v. ITAT Where it has been held that where th....
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....cause as to why it should not be considered as having been engaged in the business of holding investments. According to him it would be travesty of Justice if the Revenue at this stage is permitted to put forth such a case. According to him, even in the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills Ltd., the point for consideration was mere application of a law, which was to be applied to determine the tax liability of an assessee. According to him, if the Revenue is allowed to raise new plea before Tribunal based on a judicial decision, without a factual finding available on record as to applicability of judicial decision to the facts of a case then that would lead to confusion and uncertainty in the process of levy and collection of tax in accordance with law. In short, according to him, judicial decision and legislation stand on a different footing and the attempt by the learned counsel for the Revenue to rely on the decision in the case of Hukumchand Mills Ltd. was not proper in the facts and circumstances of the present case. 61. The further submission of the learned counsel for the assessee was that even these Annual Reports (without prejudice t....
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....not to admit additional evidence. Discretion to admit additional evidence should be sparingly and cautiously used and reasons should be assigned for admitting additional evidence and as to how the additional evidence is necessary to decide the case. (g) Additional evidence can be adduced for "substantial cause". The expression substantial cause is equal to extraordinary circumstances. Sunder Lal & Son v. Bharat Handicrafts (P.) Ltd. [1968] 1 SCR 608 and State of UP v. Manbodhan Lal Srivastava AIR 1957 SC 912. 63. The learned counsel for the assessee also submitted that the additional evidence now sought to be put forth, even on merits, does not establish the case pleaded by the Revenue. On facts it cannot be said that the assessee can be equated with the assessee in the case of Amalgamations (P.) Ltd. In the case of Amalgamations (P.) Ltd., the assessee was an Investment Company and the question arose in the context of allow ability of expenditure. It was a totally different fact situation altogether. He submitted that the assessee in the present case was a manufacturing company. He relied on the decision of the Hon'able Supreme Court in the case of CIT v. Sun Engg.....
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....es to the facts of a particular case was held to be sustainable, the applicability of a judicial decision in identical circumstances, to the facts of a particular case to decide on the taxability or otherwise of an item of income can also be considered. 65. We have considered the rival submissions. The powers of the Tribunal in dealing with appeals are expressed in section 254(1) of the Act in the widest possible terms, which read as under: "The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit," The word "thereon", of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the Commissioner of Income-tax (Appeals) by section 251 of the Act. Rule 11 of the Appellate Tribunal Rules, 1963, provides as follows: "The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall n....
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....o the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under section 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier. ... Undoubtedly, the Tribunal will have the discretion to....
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.... that although the Income-tax Officer had not considered the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 (hereinafter referred to as the "Taxation Laws Order"), the said provisions were applicable in the present case and certain amounts of depreciation which are allowed under the Industrial Tax Rules, which had the force of law in the Indore State, (prior to its becoming a part of the Indian Dominion) were required to be deducted in arriving at the written down value of the assets of the assessee. The Tribunal permitted this contention to be raised by the department. It was pointed out on behalf of the assessee that the contention could not be entertained unless it was found as a fact that the depreciation was actually allowed under the Industrial Tax Rules to the assessee and unless it was also further held that the Industrial Tax Rules were rules which related to income-tax or super-tax, or any law relating to tax on profits of business. In view of this submission made by the parties the Tribunal remanded the matter back to the Income-tax Officer for ascertaining whether any depreciation was allowed under the Industrial Tax....
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....ation allowed as per law in force in the Indore State prior to its merger with the Indian Union by virtue of the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950. 68. We, may, at this stage, refer to the decision of the Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. v. CIT [2002] 256 ITR 423 which has dealt with the decisions of the Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. and Mahalakshmi Textile Mills Ltd., relied upon by the learned Special Counsel for the Revenue, in the context of admission of new plea for adjudication by the Tribunal for the first time. The Court also considered the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. The question before the Court was as to whether the Tribunal ought to have considered the plea of the applicant company that it was entitled to the benefit of weighted deduction under section 35B(1)(b)(iv) of the Act in the absence of any appeal or any cross-objection filed by it against the order of the Commissioner of Income-tax (Appeals). The Court after considering the abovenoted and several other judicial....
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.... additional or a new ground. The preponderance of judicial opinion is that the facts necessary for adjudication of a new ground should already be available on record. Thus, on this aspect we are unable to concur with the arguments of the learned Special Counsel for the Revenue. 70. A pertinent question which arises here is as to whether it can be said that the facts necessary for adjudication of the new plea of the revenue are available on record. For this, it would be appropriate to appreciate the arguments of the learned Special Counsel for the Revenue. He wants to contend that the assessee is in the business of holding investments and in this regard wants to rely on the decision of the Hon'ble Madras High Court and the Supreme Court in the case of Amalgamations (P) Ltd. In this connection he referred to the various statements in the Annual report of the Company in the past, the investment pattern, the manner in which it nurtured its subsidiaries and after a while allowed them to be managed on their own, the manner in which guarantees were given by the assessee for the loans availed by the subsidiary or other companies promoted by the assessee, etc. His submission was that....
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....ailable on record, but on the basis of those records alone it is not possible to conclude that the assessee was engaged in the business of holding investments. In other words, complete evidentiary facts cannot be said to be available on record to adjudicate this new plea raised on behalf of the Revenue. We therefore, decline to adjudicate on the new plea raised by the revenue as to whether the purchase of shares in the Chandigarh Society (after amalgamation) by the assessee at a price less than its intrinsic value would give rise of 'income' within the meaning of section 2(24) read with section 28(iv) of the Act. 72. In the alternative, what the revenue desires is a remand so that it may, on introduction of fresh facts, if any, examine the taxability from the above stated angle. It is not the case of the revenue that it has come into possession of any fresh fact which has a bearing on taxability or otherwise of income in the hands of the assessee. The Revenue desires to enter upon a mere fishing inquiry hoping that it could sustain the action of the revenue authorities bringing to tax income in the hands of the assessee. Such a course would cause considerable harassment,....
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....curred by the assessee with the "objective of either to bring a new asset into existence or to obtain a new or fresh advantage". Thus, the addition has been sustained. Not being satisfied with the order of the CIT(A), the assessee is presently in appeal before us. 77. Before us, the ld. Counsel, appearing on behalf of the appellant, has reiterated the submissions made before the lower authorities. Our attention has also been invited to the details of the expenditure, which is placed in the assessee's paper book at pages 126 to 159. Referring to the details or expenditure, it was submitted that in the case of Shah House premises, Mumbai, the expenditure is in respect of repairs incurred collectively by the tenants of Shah House Association and it was shared by the assessee with other tenants. No additional or new asset can be said to have been created. Similarly, in relation to expenditure, at Bhopal office, the expenditure was mainly on the interior work. Further, it was submitted by the ld. Counsel that even if a portion of the expenditure is found to be capital in nature but since the expenditure was inseparable, the entire expenditure has to be seen as revenue expenditure....
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....ure of improvement to the building and thus the provisions of Explanation 1 to section 32(1) has been rightly invoked by the Assessing Officer. To this extent, we affirm the decision of the CIT(A). Insofar as the balance expenditure of Rs. 33,47,605 is concerned, the nature of expenditure is towards payment for internal furnishings, painting and polishing work, dismantling of old false ceiling, fees for interior designing, lift maintenance, etc. All these expenses are incurred by the assessee for the purposes of its business. They can at best be considered as having been spent by the assessee on making its work place suitable and comfortable so as to carry out its business conductively. It is certainly not incurred for acquiring any asset or advantage of an enduring nature. The amount spent on such repairs; and renovation cannot be considered as a capital expenditure, and is thus outside the purview of Explanation 1 to section 32(1). To this extent, the invoking of Explanation to section 32(1) of the Act by the Assessing Officer therefore was unjustified. 81. Now, coming to the expenses incurred by the assessee at its Bhopal Office amounting to Rs. 20,78,622. The nature of expen....
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....esource Planning) system with respect to the Engineering Division of the assessee-company. The assessee claimed to have incurred the impugned expenditure for modernizing, upgrading and acquiring new technology in the place of old software system. The old system was of Oracle version 7.0. The new system installed in the Engineering Division related to production, planning, HR and pay roll planning etc. The expenditure has been claimed as revenue expenditure deductible under section 37(1) of the Act. The Assessing Officer held that the impugned expenditure resulted in enduring benefit to the assessee and therefore, was liable to be considered as a capital expenditure. He, therefore, disallowed the claim of the assessee. The CIT(A) has since sustained the disallowance by placing reliance on the decision of the Rajasthan High Court in the case of CIT v. Arawali Constructions Co. (P.) Ltd. [2003] 259 ITR 30. 86. At the time of hearing, the ld. counsel for the assessee has vehemently submitted that the expenditure of Rs. 35,72,400 incurred on the purchase of software was a revenue expenditure. According to the ld. counsel, the assessee did not derive any enduring benefit by incurring ....
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....tter is concerned, the details of the expenditure amounting to Rs. 35,72,400 in question have been placed at pages 160 to 162 of the assessee's paper book. The major expenditure to the extent of Rs. 35,36,000 represents the cost of purchase of ERP System and the balance of the expenditure of Rs. 36,400 is the related travelling expenditure. The expenditure of purchase is supported by the invoice of the supplier M/s. Inforgem Technology, a copy of which is also placed in the assessee's paper book. The assessee has acquired the ERP business software with unlimited user license. Therefore, in view of the aforesaid, there cannot be a dispute to the fact that the expenditure in question is incurred on an acquisition of software by way of an outright purchase. The plea of the assessee that it was a case of mere upgradation of an existing software, is not borne out from record and neither is there any finding to that effect in the orders of the lower authorities. Considered in this background, the issue for consideration is as to whether the expenditure incurred on acquisition of software is a capital expenditure or not. It is in this light, in our view, the decision of the Delhi ....
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....and diversification of the company's existing business." The above ground is related to ground No.3 of the grounds of appeal of the revenue which reads as under:- "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 10,37,275 made by the Assessing Officer on account of expansion and diversification of company's business ignoring that the said expenditure resulted in imparting enduring benefits to the assessee-company and as such was of capital nature." 91. The brief facts are that the assessee-company incurred a sum of Rs. 25,93,786 on new projects towards expansion and diversification of its business. The same was claimed as a revenue expenditure under section 37(1) of the Act in the return of income. The Assessing Officer has disallowed the expenditure on the ground that the expenditure has resulted in imparting of enduring benefit and was thus capital in nature. In appeal before the CIT(A), the assessee contended that the expenditure was incurred only for expansion of existing business and not for starting of any independent line of business activity. The CIT(A) has since noted the details ....
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....in terms of section 37(1) of the Act. The assessee-company is engaged in the business of manufacturing and sale of tractors, shockers, railway equipment, etc. besides certain trading activities. Broadly speaking, the assessee is inter alia in the business of manufacture of various products like automotive parts, railway equipments, etc. By way of the three projects in question, the assessee only sought to expand the range of its products manufactured. For instance, the REX LOK Project envisaged the manufacture of Rail Fastening System, the actual production started in December 2002. Admittedly, the assessee was already in the line of manufacturing of rail equipments and thus the new project was a mere extension of the existing business. The expenditure in question incurred on such project is primarily related to discussions with the technical collaborators. Thus, the expenditure is allowable as a revenue expenditure. The finding of the CIT(A), based on the judgment of the Hon'ble High Court of Delhi in the case of Modi Industries, is thus justified, having regard to the facts and circumstances of the case. Similarly, in relation to the other two projects in question, the nature....
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....arrants is not at all justified when such receipts are normally credited directly in the bank accounts of the recipients. Alternatively, disallowance is on the higher side and a token amount would meet the ends of justice." The above ground preferred by the assessee is related to ground No.7 of the grounds of appeal of the revenue which reads as under:- "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 1,80,18,412 out of total disallowance of Rs. 2,01,88,412 made by the Assessing Officer under section 14A of the Income-tax Act, 1961." 96. The facts in brief are as follows: The assessee-company had declared dividend income of Rs. 8.9 crores (approx.) and interest income of Rs. 10.13 crores (approx.), which was claimed as exempt under sections 10(33) and 10(23G) of the Act respectively. The assessee was asked to show cause as to why expenses attributable to the exempt incomes may not be disallowed in view of the provisions of section 14A of the Act. In response, the assessee submitted that the expenses incurred by the company have no nexus with earning of the dividend income; that most of the investm....
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....he assessee. The assessee carried the matter in appeal before the CIT(A). In appeal, the assessee contended that on facts, circumstances and legal position of the case, section 14A is not applicable. It was, inter alia, contended that no expenditure has been incurred by the assessee for earning the dividend and interest incomes. A reference was also made to the order of the Tribunal in the assessee's own case for assessment year 1981-82 where similar issue for disallowance of expenditure relating to earning of dividend income was considered and the Tribunal has decided the issue in favour of the assessee holding that no expenditure on the facts and circumstances of the case are attributable to the earning of the dividend income. After considering the pleas of the assessee the CIT(A) has held that (i) the investments made during the year have been made from own funds and not by taking loans; (ii) that the proportionate disallowance out of rent, printing and stationery, postage, telegram and telephone and general expenses was not proper and instead confirmed a sum of Rs. 5 lakhs on ad hoc basis as amount sufficient to cover expenses incurred for earning exempted income; (iii) tha....
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....e. The apportionment was sought to be justified on the basis that no detail of the expenses was submitted by the assessee. Regarding the order of the Tribunal for assessment year 1981-82, it was contended that the same was in relation to determining the amount of income for the purposes of allowing deduction under section 80M of the Act and the implication of section 14A of the Act was not considered, as the same was not on the statute at that point of time. 99. We have considered the rival submissions. Section 14A provides that if the assessee has income which does not form part of the total income under the Act, then in computing the income under any of the Heads of income mentioned in Chapter IV, no deduction shall be allowed in respect of expenditure which is incurred in relation to such excluded income. In other words, the import of section 14A is that if a particular income is excluded from the purview of the total income under the Act, the related expenditures should not be allowed as deduction even against the income includible in the total income so as to obviate a double benefit to the assessee, viz., first by way of income being excluded from the purview of tax and se....
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....allenged or refuted by the revenue before us. Similarly, it is factually not disputed that the interest considered exempt under section 10(23G) of the Act has been earned on loan advanced in an earlier year. Thus, it can be safely deducted that out of the interest cost incurred by the assessee during the year under consideration, nothing can be said to be related to earning of the dividend and interest income considered exempt under sections 10(33) and 10(23G) of the Act respectively. This leaves us with other indirect management and administrative expenses, which might have been incurred by the assessee for earning the impugned incomes. Ostensibly, the assessee does not have any dedicated set-up for the purposes of managing its investment portfolio. This activity is intermingled with its other activities. Thus, an estimation is required to ascertain expenditures which have a relation to the earning of dividend and interest incomes considered exempt. In this regard, in our view, not such activity is required in earning the dividend or the interest income once the investments have been made. Nevertheless, in the absence of separate accounts by way of which the management and adminis....
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....and 234C of the Act, which is consequential in nature and the Assessing Officer shall recompute the same after considering the effect of the instant order. 101. The appeal of the assessee is thus disposed of as partly allowed. 102. This leaves us with the remaining grounds in the appeal of the revenue, which we take up in the following paragraphs. 103. Ground No.2 of the Grounds of appeal of the revenue is as under: "2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 7,48,00,851 made by the Assessing Officer on account of premium on redemption of SPNs.' 104. The said ground taken by the revenue is against the action of the CIT(A) in deleting the disallowance of expenditure of Rs. 7,48,00,851 being proportionate premium payable in respect of Secured Premium Notes (referred to as SPNs). The relevant facts are that during an earlier financial year i.e., 1994-95, the assessee-company issued 43,27,322 SPNs of Rs. 100 each for a value of Rs. 43.27 crores purportedly to finance the company's requirements of funds. Each SPN comprised of four parts of Rs. 25 each, which was redeemable at the ....
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....or its business activities. Thus, such an expenditure is an allowable expenditure. Now, with regard to year of allowability, it is evident that the payment of premium results in securing of benefit over a number of years. The benefit is spread over the entire period of 7 years. The expenditure is, therefore, allowable over the entire period of the SPNs till redemption, having regard to the parity of reasoning enunciated by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. The assessee, therefore, correctly claimed deduction only in respect of the proportionate premium relateable to the year in question. 107. In any case, the factors considered by the Assessing Officer for making the disallowance are irrelevant and have no bearing to decide the issue on hand. We, thus, affirm the conclusion of the CIT(A) on this ground. Ground No.2 of the Grounds of appeal of revenue is thus dismissed. 108. Ground No.4 of the Grounds of appeal of the revenue is as follows: "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 36 lakhs made by the Assessing Officer on account of prior peri....
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....ons of Explanation to sub-section (1) of section 37 of the Income-tax Act, 1961." 114. The facts in brief are that the assessee had incurred a sum of Rs. 21,75,81,407 under the head 'Commission, Discount & Brokerage'. Out of the total expenditure a sum of Rs. 64,95,097, being commission paid to third parties relating to the Government sales, was disallowed by the Assessing Officer following his stand for an earlier year. The assessee explained that the expenditure comprised of commission/incentive to authorized dealers/stockists, commission to third parties/agents relating to sales made to various customers including Government and non-Government, trade discount, cash discount, brokerage etc. In support of its claim, the assessee filed copies of appointment letters of the agents as also the confirmation of the parties. In the appeal proceedings before the CIT(A), the assessee further submitted that the Assessing Officer wrongly observed that in the preceding years the expenses have been disallowed while the fact was that the Assessing Officer himself in assessment year 1999-2000 has allowed all the expenses. 115. The CIT(A) found that for the assessment year 1998-99, ....
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....s activity of the assessee. The claim of the assessee is in line with the expenditure incurred in the earlier assessment years. The parties who have received the commission to the extent of Rs. 64,95,097 have confirmed the receipt of payment. The details of such parties, numbering four, along with their addresses, mode of payment, income-tax particulars, confirmations etc. have been submitted by the assessee in support of the claim. The copies of the same are placed in the paper book filed before us. We do not find that the Assessing Officer has brought on record any material or evidence to contradict the aforesaid material relied upon by the assessee. Having received the confirmations from the said parties, it was open to the Assessing Officer to subject the same to the process of further verification if he had any doubt with regard to the authenticity of the same. No such effort has been made by the Assessing Officer. The entire evidence and material brought on record by the assessee has been simply disbelieved by the Assessing Officer without advancing any cogent or sufficient reasons. Under these circumstances, having regard to the facts and the evidence on record, we do not fi....
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....ce & Investment Ltd. prior to the financial year 1995-96 by a company namely M/s. Escorts Tractors Ltd. M/s. Escorts Tractors Ltd. subsequently amalgamated with the assessee-company with effect from 1-4-1995 and, thus, the said loan since then has been appearing in the accounts of the assessee. The loan in question has been advanced free of interest. The plea of the revenue is that when the business of Escorts Tractors Ltd. stood merged with the assessee-company, the liabilities along with the assets were also taken over. The assets taken over would not remain static and, therefore, it was open to the assessee to have charged interest on the impugned advances. This would have led to a saving in the interest costs. The assessee has, on the other hand, borrowed moneys and was paying interest on the same. Under these facts, ld. DR submitted that had this money not been advanced free of interest to the sister concern, to that extent, it may not have been necessary for the assessee to make interest bearing borrowings. Thus, to that extent, the expenditure can be construed as having been spent for non-business purpose. He, therefore, has justified the addition made by the Assessing Offic....
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....which interest is paid. It is to be understood that the allowability of expenditure in the hands of the assessee is to be considered in the light of the provisions of section 36(1)(iii) of the Act. If the expenditure of interest is incurred by the assessee for the purposes of its business, the same stands expressly allowed in terms of section 36(1)(iii) of the Act. No doubt, interest on borrowings which have been diverted by the assessee for non-business, activities can certainly be disallowed. But for this purpose, a finding has to be reached that the assessee has diverted any of its interest bearing borrowings for non-business purposes. In the instant case, there is no finding to this effect. In fact, the amount of loan in dispute has been advanced in the earlier years and, therefore, its character has to be understood in the same light as taken in the earlier years. In the earlier years, indisputably, the impugned loan has been accepted as having been advanced for business purposes in the assessments. This is evident from the fact that no such disallowance has been made in the earlier years. On this count also, we are unable to hold this year that the advance was made for non-bu....
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....nd No.6 preferred by the revenue is hereby dismissed. 126. Ground No.8 of the Grounds of appeal of the revenue is as under:- "On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 41,48,896 made by the Assessing Officer on development of existing products ignoring that such expenditure imparted a benefit of enduring nature and as such was of capital nature. The CIT(A) also ignored that the assessee had separately claimed deduction under section 35(1)(iv) of Rs. 23,93,88,410 as capital R&D expense and treated this expenditure of Rs. 41,48,896 only as pre-operative expense." 127. The said ground taken by the revenue is against the action of the CIT(A) in deleting the disallowance of Rs. 41,48,896 made by the Assessing Officer representing expenditure on development of existing products of the assessee-company. The facts are that the assessee had claimed in its return of income the impugned expenses on its research and development activity undertaken to improve the quality of its products. The Assessing Officer rejected the claim and held that the expenditure was capital in nature on the ground that it res....