TaxTMI 
TaxTMI 
2005 (12) TMI 453
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....es are common in the appeals of the respective parties as well as in different years. Therefore, we proceed to take up the issue in dispute in seriatim. 2. Before taking up the issue on merit it is pertinent to note that cross objection of assessee in assessment years 1998-99 and 1999-2000 are time-barred by 3 yrs. 101 days and 2 yrs. 217 days respectively, therefore, first we deal with the petition for condonation of delay in filing the cross objection. 3. In order to explain the delay assessee has submitted that the ground set out in the memorandum of cross objections are similar to the issue involved in earlier years forming part of the consolidated appeals pending before the Tribunal, i.e., whether interest expenditure incurred on the borrowed funds for financing of expansion of existing business is allowable or not. In these assessment years ld. CIT(A) had allowed such expenses partly for some of the units, however, disallowed with regard to Aluminium Smelter Projects at Orissa and Paper Project at Vyara. It has also been pleaded that assessee was under bona fide belief that such a relief can be claimed by invoking rule 27 of the ITAT rules and therefore, cross objection....
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....was not very much far from what a litigant would broadly do. Of course, it may be said that he should have been more vigilant by visiting his advocate at short intervals to check up the progress of the litigation. But during these days when everybody is fully occupied with his own avocation of life an omission to adopt such extra vigilance need not be used as ground to depict him as a litigant not aware of his responsibilities, and to visit him with drastic consequences. 9. It is axiomatic that condonation of delay is a matter of discretion of the Court. Section 5 of the Limitation Act does not say that such discretion can be exercised only if the delay is within a certain limit. Length of delay is no matter, acceptability of the explanation is the only criterion. Sometimes delay of the shortest range may be uncondonable due to a want of acceptable explanation, whereas in certain other cases, delay of a very long range can be condoned as the explanation thereof is satisfactory. Once the Court accepts the explanation as sufficient, it is the result of positive exercise of discretion and normally the superior Court should not disturb such finding, much less in revisional jurisdict....
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.... delay. In fact, he runs a serious risk. 6.It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to so. Making a justice-oriented approach from this perspective; there was sufficient cause for condoning the delay in the institution of the appeal. The fact that it was the "State" which was seeking condonation and not a private party was altogether irrelevant. In the case of Nand Kishroe v. State of Punjab [1995] Vol. 6 SCC 614 the Hon'ble Supreme Court has condoned the delay of 31 years almost under the similar circumstances. There the petitioner has joined service in the erstwhile Patiala State in May 1941. On the formation of Pepsu State he was taken as an Assistant w.e.f. 1-9-1956. Subsequently Pepsu State was merged with State of Punjab. He was integrated as assistant in the Punjab Civil Secretariat at Chandigarh in the Food Distribution Branch. He completed 10 years qualifying service. However, he was compulsorily retired on 6-1-1961. He challenged this order of retirement by way of writ petition in the Punjab & Haryana High Court. The writ pe....
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....als are as under :- (I) Disallowance under rule 6B of the Income-tax Act, 1961 : A.Y. 1989-90 : Rs. 19,248 : Ground No. (I) : Assessee's appeal A.Y. 1991-92 : Rs. 73,420 : Ground No. (II) : Assessee's appeal A.Y. 1993-94 : Rs. 14,779 : Ground No. (3) : Department's Appeal A.Y. 1995-96 : Rs. 1,96,403 : Ground No. (4) : Department's Appeal A.Y. 1997-98 : Rs. 4,47,452 : Ground No. (4) : Department's Appeal 8. Ld. counsel for the assessee at the very outset submitted that presented articles did not carry the logo or name of the assessee's business, therefore, the Assessing Officer ought to have not made any disallowance. He further pointed out that in assessment years 1993-94, 1995-96 and 1997-98 the assessee relied upon the decision of Hon'ble Bombay High Court in the case of CIT v. Allana Sons [1995] 216 ITR 690 the ld. CIT(A) deleted the addition. He further submitted that ITA Nos. 3692 & 3857/B/94 in assessee's own case in assessment year 1990-91 such addition was deleted and the issue has been decided in favour of the assessee. Ld. D.R. on the other hand, could not controvert the contention of the ld. counsel for the assessee. 9. We have duly consider....
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....e have duly considered the rival contention. No doubt specific details were not available with the assessee indicating specific amounts spent on employees as well as outsiders. Under such circumstances disallowance upheld by the Tribunal upto 75% of the expenses in assessment year 1990-91 is the best guiding factor for us, therefore, respectfully following the Tribunal's order in assessment year 1990-91, we direct the Assessing Officer to grant a deduction of Rs. 75,930 out of expenses of Rs. 3,03,722 incurred on sales promotion. This ground in assessment year 1989-90 is partly allowed. 13. The next ground relates to addition of the Modvat Credit of Excise Duty in the value of closing stock. The following details will indicate the amounts involved as well as the grievance of the respective side (III) Modvat Credit of Excise Duty : A.Y. 1989-90 : Rs. 32,11,059 : Ground No. (III) : Assessee's appeal A.Y. 1991-92 : Rs. 30,25,184 : Ground No. (4) : Department's Appeal A.Y. 1993-94 : Rs. 59,60,000 : Ground No. (2) : Department's Appeal A.Y. 1994-95 : Rs. 25,12,618 : Ground No. (2) : Department's Appeal A.Y. 1995-96 : Rs. 21,37,110 : Ground No. (2) : Department's App....
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....of the facts and circumstances as well as the ratio of law decided by the Hon'ble Supreme Court in the case of Indo Nippon Chemical Co., wherein it has been held that if an assessee valuing raw material on purchase price minus Modvat Credit and valuing unconsumed raw material and work-in-progress at the end of year at net method, then it is a proper method, we are of the view that no addition on account of Modvat Credit is required to be made in the value of the closing stock. Thus the ground of appeal of the assessee in assessment year 1989-90 is allowed and those of revenue in 1991-92 to 1997-98 are rejected. 17. The next dispute relates to depreciation in investment allowance on technical know-how. This issue is involved in assessment year 1989-90 only and assessee is in appeal. 18. Ld. counsel for the assessee at the very outset submitted that he is not pressing for grant of depreciation on the asset, therefore, the ground with regard to grant of depreciation on the technical know how is rejected. His alternative submission was that investment allowance be granted to the assessee. 19. The brief facts of the case are that assessee had acquired technical know-how and cap....
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....to raise the production that technical know-how is a plant. (ii) CIT v. Baker Mercer India P. Ltd. 196 ITR 667 - In this case the relevant observations of Hon'ble Jurisdictional High Court are as under : "Question No. 4 relates to investment allowance under section 32A of the Income-tax Act, 1961, in respect of technical know-how. Our High Court in the case of CIT v. Emco Electro Pvt. Ltd. [1979] 118 ITR 864 , considered the meaning of the word "Plant" for the purpose of depreciation and development rebate. It said that "plant" is a word of wide import and must be broadly construed. It held that "Plant" would include technical know-how also. The Supreme Court, in the case of Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86, also held that for the purposes of depreciation, the term "Plant" is wide enough to include technical know- how and documentation such as drawings, designs, plant, processing data etc." In the case of CIT v. ASEA Ltd. the question referred to the High Court was as under : (i )Whether on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the Commissioner of Income-tax (A) allowing inve....
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....ould not be admissible to the assessee. This ground of appeal is partly allowed for assessment year 1989-90. 22. In assessment year 1989-90 the next dispute relates to computation of income under section 115J of the Act. 23. The adumbrated facts of the case are that the assessee used to close its accounts every year on the 30th of June. However, from the assessment year 1989-90, it became mandatory, as per the Income-tax Act, 1961, to close the accounts on 31-3-1989. Thus for the purposes of the Income-tax Act, for the assessment year 1989-90, the previous year of the assessee comprised of 21 months i.e., from 1-7-1987 to 31-3-1989. However for the purposes of the Companies Act, the assessee continued to close its accounts on the 30th of June (Companies accounts). For the purpose of the section 115J of the Act, the assessee for the period of 21 months relevant to the assessment year 1989-90, prepared its P&L account (115J accounts) for the year ending 31st March and in such computation it claimed depreciation as per the Income-tax Act on w.d.v. method. In the accounts thus prepared, a net loss of Rs. 64,58,711 was declared. This P&L account was duly prepared in accordance ....
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....nd had window dressed to pay no tax under section 115J which it would have to pay if the book profit would be arrived at as per the Companies Act which the assessee was doing for the shareholders and the Registrar of Companies. 25. The Assessing Officer has also stated that the assessee cannot have two different opening w.d.v. of the assets on the same day i.e., 1-7-1987. Here it was stated by the Assessing Officer that the w.d.v. of the assets as on 1-7-1987 was to be shown as per the Schedule VI of the Companies Act which was done correctly for the purpose of the shareholders and the Registrar of Companies but which was different for the I.T. purpose. The Assessing Officer thus alleged that assets showing different opening w.d.v. as per Schedule VI was nothing but a sham technique adopted to avoid the tax under section 115J of the Act. The Assessing Officer on the basis of the above thus recalculated the book profit under section 115J of the Act as follows : Computation of income under section 115J of the Act : Net Loss as per P&L account (Rs. 64,58,711) Add :Depreciation debited to the P&L account by the assessee Rs. 4,90,78,552 (calculated as per the Income....
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....), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 (hereafter in this section referred to as the relevant previous year); is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of the Schedule VI to the Companies Act, 1956 (1 of 1956)....." A plain and simple reading of the section as quoted above makes it amply clear that for purpose of working out the book profit under section 115J, the only condition laid down by the section vide sub-section (1A) was that an assessee is under an obligation to prepare a profit and loss account in accordance with Parts II and III of the Schedule VI to the Companies Act, 1956. Thus it is broadly laid out that the accounts prepared for the purpose of the section 115J of the Act (i.e., t....
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....ethod of providing depreciation from straight line to written down value. According to the Hon'ble High Court in the Kinetic Motors case, both methods are permissible, and therefore, Assessing Officer cannot make any adjustment. The head note of both the judgments read as under :- u "Kinetic Motor Co. Ltd. v. Deputy Commissioner of Income-tax 262 ITR 330 (Bom.) Company - Book profits - Assessment under section 115J - No power in Assessing Officer to make adjustments - Change in method of providing depreciation from straight line to written down value - Both methods permissible under Companies Act - Depreciation actually debited to profit and loss account prepared in accordance with provisions of Companies Act and certified by auditors - Assessing Officer cannot make adjustments to it - Income-tax Act, 1961, section 115J. The assessee was a public limited company engaged in the business of manufacture and sale of two wheelers. For the assessment year 1990-91 in the books of account maintained for the statutory previous year (i.e., financial year) April 1, 1989 to March 31, 1990, the assessee debited an amount of Rs. 6,32,65,430 on account of depreciation. This depreciation ....
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.... account of the company. u Apollo Tyres Ltd. v. Commissioner of Income-tax ( 255 ITR 273 ) S.C. Commissioner of Income-tax v. Apollo Tyres Ltd. Company - Tax on basis of "book profits" - New profits in profit and loss account prepared in accordance with Parts II and III of Schedule VI to Companies Act - Accounts scrutinised and certified by statutory auditors - Assessing Officer has no power to scrutinise except as provided in Explanation - Income-tax Act, 1961, section 115J. The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words "in accordance with the provisions of Parts II and III of Schedule V....
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....g, therefore, it is rejected in all the three assessment years. 32. The next ground relates to disallowance under section 43B of the Act. The amount and the year in which such dispute arose are as under : A.Y. 1991-92 : Rs. 45,288 : Ground No. (III) : Assessee's appeal A.Y. 1992-93 : Rs. 53,356 : Ground No. (VI) : Assessee's appeal A.Y. 1993-94 : Rs. 58,240 : Ground No. (V) : Assessee's appeal 33. The brief facts of the case are that the above sums whose deduction was claimed by the assessee relates to PF/EPF and ESIC liabilities. In assessment year 1991-92 the Assessing Officer has made the disallowance and ld. CIT(A) has confirmed the disallowance on the basis of the reasoning given in assessment year 1990-91. Similar view has been followed in the subsequent years. Ld. assessee in the written submission contended that this issue was considered by the Tribunal ITA Nos. 3692 & 3850/B/94, wherein issue has been set aside to the file of Assessing Officer for fresh adjudication. He placed on record copy of the Tribunal order. Ld. D.R. on the other hand, relied upon the orders of the revenue authorities below. However he could not controvert the submission of the assesse....
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....see's appeal (XI) Claim under section 80HHC : A.Y. 1991-92 : Rs. 53,72,345 : Ground No. (VI) : Assessee's appeal A.Y. 1992-93 : Rs. 53,72,345 : Ground No. (V) : Assessee's appeal 36. Ld. counsel for the assessee at the very outset did not press the grounds of appeal raised by the assessee and where relief has been granted to the assessee he did not contest the ground of appeal raised by the revenue. In view of his stand assessee's grounds of appeal are rejected, whereas the ground of appeal raised by the revenue in assessment year 1993-94 regarding pre-operative expenses is allowed. 37. The next dispute relates to charging of interest under section 234B & 234C of the Act. 38. As far as the charging of interest under section 234B is concerned ld. counsel for the assessee did not press this ground of appeal. With regard to levy of interest under section 234C is concerned he submitted that interest under section 234C is leviable on the shortfall of advance tax as compared to the tax due on returned income. With regard to assessment year 1992-93 the tax on returned income as per revised return was Rs. 15,39,100 as against assessee has a TDS credit of Rs. 27,53,293, th....
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....ent year 1991-92. 44. The next dispute relates to disallowance of capital subsidy from cost of the assets. Ld. counsel for the assessee at the very outset submitted that this issue is squarely covered by the decision of Hon'ble Supreme Court rendered in the case of CIT v. P.J. Chemicals [1994] 210 ITR 83 , wherein it has been held that where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the "actual cost". The expression "actual cost" in section 43(1) of the Income-tax Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from "actual cost". The amount of subsidiary is not to be deducted from the "actual cost" under section 43(1) for the purpose of calculation of depreciation, etc. Thus respectfully following the decision of Hon'ble Supreme Court this ground of revenue's ap....
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.... of Hon'ble Gujarat High Court we allow this ground of appeal and delete the disallowance. 49. The next dispute relates to disallowance of Rs. 3,549 towards capital expenditure debited to revenue account. The Assessing Officer has held that from the Tax Audit Report it was evident that a sum of Rs. 17,131 which was in the nature of capital expenditure was debited to the P&L account by the assessee. On these grounds the Assessing Officer disallowed the same. 50. On appeal ld. CIT(A) has limited the disallowance to Rs. 3,549 being the expenditure incurred by the assessee on the purchase of the following : Carpet : Rs. 1,808 Brief case : Rs. 1,038 Suitcase : Rs. 703 The CIT(A) held the carpet to be a part of the furniture and fittings on which depreciation was to be allowed accordingly. With respect of the brief case and the suitcase he held that they appeared to have been presented to two members of the staff (debited to staff welfare expenses) and in the alleged absence of any justification of the said expenditure, deduction thereof was disallowed by the CIT(A). 51. Ld. counsel for the assessee submitted that the minor expenses on carpet, brief case and....
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....to section 43B to be clarificatory and held that it should be treated as retrospective in operation. In section 43B, there were two separate provisos, one for the payment relating to tax, duty, cess, fee, interest on loan etc. and other concerning the payment with regard to Provident Fund, Superannuation Fund or Gratuity Fund etc. The Finance Act, 2003 omitted 2nd proviso and the 1st proviso is made applicable with regard to all the payments including the payment for PF, Superannuation Fund, Gratuity Fund etc. The proviso when inserted was held to be clarificatory by the Hon'ble Apex Court and therefore, when the 2nd proviso is omitted and the 1st proviso is amended, the amended proviso should also be held to be clarificatory and therefore, applicable to all pending proceedings. We, accordingly, respectfully following the ratio of the decision in the case of Allied Motors (P.) Ltd. (supra) hold that the 1st proviso as modified by the Finance Act, 2003 would be applicable to all pending proceedings. As per the 1st proviso, anything contained in section 43B would not apply in relation to any sum, which is actually paid by the assessee on or before the due date for furnishing the retu....
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....ground No. 5 of departments appeal in assessment year 1995-96. It is rejected. 60. The next dispute again raised by the revenue in Ground No. 6 pertaining to assessment year 1995-96, relates to grant of capital loss of Rs. 65,900 on sale of the land. The assessee had sold the land to the sister concern at book value. The Assessing Officer was of the opinion that assessee should have transferred the land at the market value. However, ld. CIT(A) has granted the capital loss to the assessee by observing that in case assessee has transferred the land on the book value then market value has no roll to play. Even if by transferring the land at book value assessee is suffering some loss, then that has to be allowed to the assessee. We do not find any substance in this ground of appeal raised, by the revenue, therefore, it is rejected. 61. The next dispute relates to disallowance of Guest House expenses. In assessment year 1997-98 assessee and revenue are in appeal on this issue, however, ld. counsel for the assessee did not press this ground of appeal taken by the assessee did not contest the ground of appeal taken by the revenue. In view of his stand the ground of appeal taken by t....
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....s. 23,91,803 : New ground to be taken by assessee in cross objection. Assessment year 1999-2000 : Rs. 38,54,266 : New ground to be taken by assessee in cross objection. 64. Let us know examine the facts and circumstances of the present case. In order to know as to how such interest expenses are admissible to the assessee and how ld. CIT(A) has granted to the assessee in most of the years except for Sanaswadi Plant and Paper Project at Vyara and Aluminium Smelter Plant at Orissa in some of the years, ld. counsel for the assessee took us through the written submission placed on record. 65. On the strength of the written submission ld. counsel for the assessee apprised us with the background of the company at the time of arguments, its progress with the time, he pointed out that assessee-company, is one of India's leading vertically integrated, non ferrous metal and telecommunication cable companies. The Company manufactures and sells continuous Cast Copper Rods (CCR), polyethylene insulated Jelly Filled Telecommunication Cables (JFTC), Optical Fibre Cables (OFC), Optical Fibre (OF) and Aluminium Foils and Sheets. The company is the largest manufacturer in India of polyethyle....
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....me) acquired Copper Mines of Tasmania Pty Ltd., which owns the Mt Lyell copper mine. In October 1999, Monte Cello BV acquired Thalanga Copper Mines Pty Ltd. Monte Cello Corporation NV subsequently sold Monte Cello BV to Sterlite. u In July 2000, Sterlite's telecommunications cables and optical fibre business was demerged into a new company, Sterlite Optical Technologies Limited ("SOTL"). 66. On the basis of the above he contended that over the years the company has grown substantially involving not one but a series of successful integrations both backward and forward and substantial expansions. Starting with the manufacture of cables, conductors and copper wires in 1979, the assessee-company expanded in the manufacture of jelly filled telephone cables and optical fibre cables in 1988. After this, in 1990-91, it set up the unit to manufacture the copper rods from which the copper wire was drawn to be used in the cables. Then, followed the unit for the manufacture of Aluminium sheets, foils and conductors in 1992. These Aluminium sheets and foils produced were used as a cable wrap for the telephone cables already in production. The copper cathodes required to manufacture the co....
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....any. The assessee-company was one and the same and the assessment was not made unit-wise but assessee-wise. 68. The assessee-company for financing the setting up of the new projects and the expansion of its existing projects raised funds by way of Fully Convertible Bonds, Non Convertible Bonds, Euro Convertible Bonds and also by bank loans. The projects were also partly financed by internal accruals. Thus the funds raised by way of borrowings were used to part finance the expansion projects. On these borrowings interest were paid and also certain preoperative expenses of revenue character were incurred on the setting up of the various expansion units as detailed above. These expenses, being incurred on the setting up of the expansion units were claimed as deduction under section 36(1)(iii) of the Income-tax Act, 1961, from profits of the respective years. 69. Ld. Assessing Officer treated such interest expenses as capital in nature. The Assessing Officer has disallowed the claim of the assessee and capitalised the same. On appeal to the CIT(A), partial relief has been granted to the assessee. Both the side are impugning the partial retention and deletion of disallowance in di....
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.... project at Vyara and Aluminium Smelter Plant at Orissa he contended that these are all together new projects, therefore, interest expenses cannot be allowed in these projects as revenue expenses. 73. We have duly considered the rival contentions. Section 36(1)(iii) has direct bearing on the controversy in hand, therefore, it is salutary upon us to take note of this section : Section 36(1)(iii) of the Income-tax Act, 1961 reads as follows : "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28- (iii) The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Explanation.-Recurring subscriptions paid periodically by share-holders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;" From the perusal of the above it will reveal that where the assessee borrows money for expansion of its business the interest paid thereon is allowable. However, it is to be seen whet....
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....ge Corporation Ltd. v. CIT [1970] 77 ITR 739 has considered this aspect and found that common management, common administration, common fund, common accounting set up, etc. indicate unity of control and management. It be one of the decisive factor in determining whether the new business constitutes the "same business" or not as with the existing business. u In CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 (Bom.) The observation of the Hon'ble Court as summarised in the head note are worth to note, the same read as under : Interest on borrowed capital-Same business or separate business-Amalgamation of subsidiary with parent company under court order-Finding that subsidiary and parent company carried on same business-Capital borrowed for purposes of business of subsidiary-Deductible-Income-tax Act, 1961, section 36(1)(iii). A careful reading of section 260A(6) of the Income-tax Act, 1961, shows that the High Court can decide only that question which was raised but not determined by the Tribunal. The assessee was a public limited company engaged in the manufacture of chemicals, salt and detergents in its factories. One of such manufacturing units was in Gujarat. Subsequ....
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....e the borrowing for a unit of the company which was the fertilizer unit in U.P. The interest was deductible. (ii) That since the Tribunal had recorded a finding of fact that investment in tax-free bonds was a business investment it was justified in allowing deduction of interest on the capital borrowed. In the above mentioned case interest cost on a totally different line of business being the manufacture of fertilizer as against the existing line of business being the manufacture of chemicals, salt and detergents, was held to be deductible under section 36(1)(ii) as revenue expenditure since there was unity of control, management, flow of funds, accounting set up, etc. between the new unit and the existing business of the assessee-company. 76. Let us consider certain other case law on this issues. In the case of Addl. CIT v. Aniline Dyestuffs & Pharmaceuticals P. Ltd. [1982] 138 ITR 843 (Bom.). The assessee-company was engaged in the business of manufacture of dyestuffs. It started a new industrial undertaking for manufacture of dyes (intermediates) required for the manufacture of dyestuffs. These intermediates were hitherto purchased by the assessee-company in the ....
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....ansion of the existing business of the assessee. India Rare Earths Ltd. v. ITO [1984] 8 ITD 882 (Bom.) Interest expenditure incurred by a company engaged in the business of mineral separation on western coast to establish a new project in Orissa was held allowable. The proposal to set up a new mineral separation unit in Orissa was held to be only an extension of the assessee's current business and could not be described as a new business undertaking. CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.) It was held that "where an assessee borrows money for its expansion of its business the case squarely falls within the phraseology of section 36(1)(iii ) and the interest paid is allowable. Where, how, besides the existing business, money is borrowed for setting up a new activity or unit, it has first to be examined on facts, whether the new activity or unit and the existing business constitute "same business" or they are entirely separate and distinct business altogether". 77. The Assessing Officer's for all years have placed reliance on the judgment of the Hon'ble S.C. in the case of Chellapalli Sugar Ltd. v. CIT [1975] 98 ITR 167 and have stated that the t....
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.... case." 79. In the light of the above principle let us examine the facts of the case. Ld. counsel for the assessee in this connection first invited our attention towards the representative chart of the organizational structure repro-duced in the written note which read as under : STERLITE INDUSTRIES (I) LTD. Representative Chart of Organisational Structure. Board of Directors CMD Head of Jelly Filled Cables Unit Head of CCR unit Head of Aluminium Sheets & Foils Head of Copper Smelter Plant Head of Optical Fibre Unit Head of Paper Project 80. There is a common management in the assessee-company supervising all the various projects of the assessee-company. Common functions like finance; secretarial, human resources business development and taxation are handled by the corporate office. The divisional heads report to the Board of Directors, who takes the decisions affecting the working of ....
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....ed Telephone cables plant at Aurangabad. Thus the Copper Smelting and Refining project at Tuticorin set up with an objective of import substitution was nothing but a step in backward integration. The steps in the backward integration are explained as follows : u Continuous Cast Copper Rods (CCR) produced at Lonavala since 1991 - Basic raw material used is copper cathodes u Copper cathodes were initially imported u Copper Anodes produced by the Copper Smelter plant at Tuticorin u Copper anode processed to produce copper cathodes at the refinery at Tuticorin u Copper cathodes thus produced used totally by the CCR plant of the assessee u Import to the extent of captive home consumption of the copper cathodes stopped The capacity of manufacturing copper rods has increased from 30,000/MT to 1,36,000 MT. The capacity of the copper smelter to produce the copper cathodes is 1,00,000 MT only which is all used up to manufacture the copper rods in its own business. Thus entire production of the copper cathodes is used up in the assessee's own business. On the similar line assessee has demonstrated that cost of Copper Rods Plant at Chinchpada was also an integral part o....
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....on the overall aspects we are of the view that assessee is entitled to interest expenses incurred for expansion of its various extension plan. The alleged new plants are inter-dependant on the existing one, they are mere expansion of the existing business. Hence grounds of appeal taken by the assessee in assessment years 1991-92 to 1993-94 as well as ground taken in cross objection in assessment years 1998-99 to 1999-2000 are allowed, whereas the ground of appeal taken by the revenue in all the assessment years are rejected. 82. In assessment years 1998-99 and 1999-2000 the revenue has taken two more grounds of appeal. In this connection they read as under : Assessment year 1998-99 : Ground No. 4 - On the facts and in law, the ld. CIT(A)-II, Mumbai erred in allowing interest and pre-operative expenses concerning existing industrial units expansion as revenue expenditure ignoring Explanation 8 to section 43(1) of the I.T. Act and ignoring ITAT, Calcutta Bench's decision in J.C.T. Ltd. v. Asstt. CIT [1998] 65 ITD 169 (Rs. 1,83,78,95,746) Assessment year 1999-2000 : Ground No. 3 - On the facts and in the circumstances of the case and in law, the Ld. CIT(A), Mumbai erred....
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....capital or revenue account not relevant - Capital borrowed for purchase of machinery to increase production in existing business - Machinery not put to use in accounting year - Not relevant - Interest on borrowed capital is deductible - No obligation to capitalise such interest - Income-tax Act, 1961, sections 36(1)(iii), 37, 43(1), Explanation 8. Section 36(1)(iii) of the Income-tax Act, 1961, is absolutely clear. It provides that the amount of interest paid in respect of capital borrowed for the purposes of the business shall be allowed in computing the income referred to in section 28 of the Act. It is the settled legal position that interest paid/payable has to be in respect of capital borrowed for the purposes of business; the section nowhere stipulates that such borrowing has to be only on revenue account. The only requirement is that the interest must have been incurred for the purpose of capital borrowings made for the purpose of business. There is an inherent indication in the Act that any expenditure which is in the nature of capital expenditure would not be allowable as a deduction while computing the income chargeable under the head "profits and gains of business or ....
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.... cost. The Explanation nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under section 36(1)(iii). Explanation 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc., on a larger amount of actual cost. Neither in the notes on clauses nor in the memorandum explaining the provisions in the Finance Bill, 1986, is there any indication that in a converse situation interest has to be capitalised and further that such interest cannot be claimed as deduction under section 36(1)(iii) of the Act. In fact, there is no mention about the deductibility or otherwise under section 36(1)(iii). Section 36(1)(iii) does not make any distinction between the borrowing utilised to acquire a capital asset or otherwise. In fact, the phrase used in the said provision is "capital borrowed". Therefore, the distinction about the interest having been capitalised or not loses its significance, inasmuch as if the capital is borrowed for the purposes of business, the interest is allowable as a deductible item of expenditure under section 36(1)(iii) while computing the income under section....
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....Companies Act allowed the assessee maintenance of two different sets of account, one for the shareholders and the other for income computation under section 115JA of the I.T. Act with no legal basis against business ethics." 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), Mumbai erred in accepting the book results overlooking the conclusive proof in the assessment order that the accounts with the I.T. Return did not present assessee's true and fair affairs." Since there is no dispute on facts on all vital points in both the assessment years, therefore, for the facility of reference we will be referring the facts mainly from assessment year 1998-99. The following details shall depict the income returned by the assessee and assessed by the Assessing Officer in 1998-99. S. No. Total income Retuned by the assessee- company Assessed by the Assessing Officer 1. As per the provisions of section 115JA of the I.T. Act Nil Rs. 19,55,47,224 (being 30 per cent of the adjusted book profit of Rs. 65,18,24,082) 2. As per the normal provisions of the IT Act, other than section 115JA Loss of Rs. 81,83,39,809 (without claiming d....
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....counts on 31/03. Thus in consonance with the said Act, the assessee-company followed the accounting year ending on March 31st (IT Accounts). This practice has been followed by the company since the assessment year 1989-90 and has been accepted by the Assessing Officer and the CIT(A) all along. The accounts of the assessee-company were thus prepared, in the present case of the assessee, for the period 1-4-1997 to 31-3-1998 (for assessment year 1998-99) and 1-4-1998 to 31-3-1999 (for assessment year 1999-2000). For the assessment years 1998-99 and 1999-2000, being the years under appeal, the assessee company came under the purview of the newly introduced section 115JA of the Act and was thus subjected to imposition of tax on 30 per cent of the book profits in accordance with the provisions of the section 115JA(1) of the Act. 87. The assessee-company for the assessment year 1998-99 filed its return of income at a returned loss of Rs. 81,83,39,809. The return was appended with the computation, the duly audited account statement for year ending 31-3-1998 and also the profit and loss account of the units claiming deduction under sections 80-I and 80-IA. The account statements filed wi....
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....bsp; Add : Disallowance under section 43B 90,22,642 2,12,35,33,406 1,25,27,37,920 To be considered if necessary 87,82,94,625 Less : depreciation as per Income Tax Rules claimed to the extent of 90% of the allowable amount of Rs. 2,18,84,99,402 1,96,96,49,462 -71,69,11,542 Amount (Rs.) Returned Income Nil Tax payable Nil 88. However during the course of the assessment proceedings for both the years the Ld. Assessing Officer called for the printed annual reports for the years ended 30-6-1998 and 30-6-1999 i.e., the Companies Act accounts and on comparison of the Companies Act accounts and the Income-tax accounts found the following : Assessment year 1988-89 - The printed Profit & Loss account for the year ended 30-6-1998 declared a profit before taxation of Rs. 157.73 crs. whereas the P&L account for the year ended 31-3-1998 as per I.T. Return disclosed a net loss of Rs. 116.32 crs. Assessment year 1999-2000 - The printed Profit & Loss account for the year ended 30-6-1999 declared a profit after taxation of Rs. 160.79 crs.....
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....venue expenditure in the computation of total income either under the provisions of section 115JA or under the other provisions of the IT Act. 90. With the above background ld. Assessing Officer has examined the issue regarding general principle of accountancy and accounting standard prescribed by ICAI, legislative intention and judicial interpretation and ultimately computed the book profit of the assessee for the purpose of section 115JA on a different figure than the one adopted by the assessee. 91. Dissatisfied with the computation of the Assessing Officer assessee took the matter in appeal before ld. CIT(A). Ld. CIT(A) examined the issue in detail and arrived at a conclusion that treatment given by the assessee to the interest and pre-operative expenses as revenue expenses did not violate any accounting standard prescribed by ICAI nor was it contrary to any judicial decision. Ld. first appellate authority further held that possibility of following different accounting policies by the company in separate P&L account prepared for the Companies Act and prepared under section 115JA of the IT Act have duly been recognized in various judgments. For fortifying his stand ld. CIT....
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.... provisions of Parts II and III of Schedule VI of the Companies Act, 1956, thereby meeting the requirements of section 115JA of the I.T. Act. (v)The accounts were thus prepared in accordance with the provisos of Parts II and III of Schedule VI of the Companies Act, 1956, thereby meeting the requirements of section 115JA of the I.T. Act. The account statements filed with the return and also the accompanying Form 3CB were duly audited by M/s. Chaturvedi & Shah and M/s. Das & Prasad for the purposes of section 44AB of the I.T. Act. The auditors also gave the supplementary report required under section 44AB. The statutory auditors thus certified that provisions of Parts II and III have been adhered to in the preparation of the profit and loss account accompanying the return filed by the assessee for the purpose of this section. (vi)In compliance with the mandatory requirements of section 115JA and for the purpose of the section 115JA, the assessee-company accordingly prepared its profit and loss account ("115JA accounts") for the years ended 31-8-1998 and 31-3-1999. The assessee in its 115JA accounts claimed the interest and pre-operative expenses as revenue expenditure whereas i....
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....y holding that in any case compliance with the guidance notes and standards issued by ICAI is mandatory and that this was so even prior to introduction of section 115JB. As pointed out earlier this assumption of the Assessing Officer is incorrect. Insofar as the interpretation of section 115JA is concerned the interpretation of section 115JB clearly brings out the position that in section 115JA it was not necessary to standardize accounting policies other than accounting policy relating to depreciation. (xii)Compliance with section 145 of the I.T. Act was duly done by the assessee. In compliance with the above section, the accounts of the assessee are correct and complete and they follow the mercantile system of accounting as permitted by section 145(1) of the Act. Further the assessee has followed the accounting policies and standards in the preparation of the accounts for the years under appeal which it has been regularly following in the preparation of its accounts. In particular, the method, whereby the interest and the preoperative expenses were claimed by the assessee as revenue expenses, has been followed by the assessee regularly for the preparation of it I.T. Accounts s....
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....xvii)The provisions of the said sub-section do not seem to empower the Assessing Officer to disturb the profit as shown by the assessee. In a case where P&L account are prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, the Assessing Officer will have no power to disturb the book profit. The language used in sub-section (2) of the section 115JA is simple and clear enough. (xviii)There is no doubt that the computation of the book profit in the section 115JA accounts provided a tax advantage to the assessee. It is relevant to mention that this argument of the accounts being a device for tax planning has also been considered by ITAT in the context of an accounting treatment which resulted in effectively reducing book profits for purposes of section 115J. 93. Thus the main issue for our adjudication in this appeal relates to whether assessee can prepare two separate accounts under the Companies Act, one for the purpose of Annual General Meeting and the other for computation of income under section.115JA. For appreciating the controversy it is imperative upon us to take note of section 115JA, which read as under : "115JA. Deemed ....
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.... A.Y. 1989-90 to A.Y. 1990-91 A.Y. 1997-98 to A.Y. 2000-01 From A.Y. 2001-02 onwards Preparation of Books of Account Every assessee, being a company shall, for the purpose of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI of Companies Act. Every assessee, being a company shall, for the purpose of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI of Companies Act. Every assessee, being a company shall, for the purpose of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Part II of Schedule VI of Companies Act. Accounting for Depreciation - While preparing P&L Account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing P&L A/c laid before company in AGM While preparing P&L Account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for th....
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....ation, parity has been prescribed regarding adoption of Accounting Policies and Accounting Standards also and hence it is apparent that such parity is not prescribed in section 115JA. 95. In view of above discussion, it is seen that with regard to section 115JA, the requirement is that the Profit & Loss Account prepared for the purpose of section 115JA shall be as per Parts II and III of Schedule VI of the Companies Act, 1956 as per the provisions of section 115JA(2) and as per the provisos to this section, the method and rate of depreciation shall be same as has been adopted by the assessee for the purpose of AGM Accounts. The assessee had followed different method for depreciation, i.e. SLM for AGM Accounts and WDV for 115JA Accounts but the learned CIT(A) has held that the depreciation as per AGM accounts has to be followed in 115JA Accounts. This is accepted by the assessee and the difference in the depreciation is duly added back to the profit computed by the assessee under section 115JA. Hence the dispute now remains regarding accounting of interest and pre-operative expenses, which has been capitalized by the assessee in the AGM Accounts but has been charged to the Profit....
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....sessee in the present case by debiting the interest and preoperative expenses discloses the result of working of the company during the accounting period or not. In this regard, we find that "The Institute of Chartered Accountants of India" (ICAI) has prescribed AS-16 regarding treatment of Borrowing Cost but this AS-16 is applicable from 1-4-2000 and prior to that during the period relevant to the assessment years before us, this aspect was covered by AS-10 and in particular Para 9.2 which stands deleted from this date i.e. 1-4-2000. Para 9.2 of AS-10 reads as under :- 9.2 Financing costs relating to deferred credits or to borrowed funds attributable to construction or acquisition of fixed assets for the period up to the completion of construction or acquisition of fixed assets are also sometimes included in the gross book value of the asset to which they relate. However, financing costs (including interest) on fixed assets purchased on a deferred credit basis or on monies borrowed for construction or acquisition of fixed assets are not capitalised to the extent that such costs relate to periods after such assets are ready to be put to use. 98. From the above, we find that a....
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....egard, the same cannot be rejected and has to accepted. 100. Our above view is also supported by the order of the Calcutta Bench of the Tribunal rendered in the case of Balrampur Chini Mills Ltd. [IT Appeal Nos. 1422 and 1588 (Cal.) of 1999, dated 7-6-2002] copy of which is available on pages 223 to 231 of the paper book. It was held by the Tribunal in this case also that the assessee is entitled to have a different Profit & Loss Account for the purposes of section 115JA(2) and the same may be different than the AGM Accounts provided the 115JA(2) Accounts are prepared as per Parts II & III of Schedule VI of the Companies Act, 1956. This Tribunal order is regarding assessment year 1997-98 and the similar issue was decided in favour of the assessee by the Tribunal in assessment years 1998-99 and 1999-2000 and copy of these Tribunal orders is available on pages 233 to 239 and 240 to 246 of the paper book. In view of this, we find that the order of learned CIT(A) on this issue in both years does not call for any interference from our side and we uphold the same. 101. The next dispute in assessment year 1998-99 as per Ground No. 5 in ITA 4342/M/2001 and Ground No. 1 in ITA No. 490....