TaxTMI 
TaxTMI 
2010 (1) TMI 852
X X X X Extracts X X X X
X X X X Extracts X X X X
....ad borrowed funds for the ongoing expansion-cum-diversification programme and had accordingly, capitalized the interest on borrowed funds in their books of account, the amount was claimed as revenue expenditure in the computation of income, relying, inter alia, on the decisions in the cases of CIT v. Alembic Glass Industries Ltd. [1979] 103 ITR 715 (Guj.) and India Cements Ltd. v. CIT [1966] 60 ITR 52 (SC). In these circumstances, relying upon his own orders for the preceding years, the Assessing Officer disallowed this expenditure, holding that expenditure capitalized in accordance with the principles of accountancy could not be treated as revenue expenditure. 2.1 On appeal, the ld. CIT(A) allowed the claim, following his own order for the assessment year 1997-98, wherein orders of the ITAT for the assessment years 1992-93 and 1993-94 were relied upon. 2.2 The revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). Both the parties agreed that issue is squarely covered by the decision of the Hon'ble Apex Court in the assessee's own case for the assessment year 1992-93, reported in Dy. CIT v. Core health Care Ltd. [2008] 298 ITR 194.....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., the Tribunal has decided the issue in favour of the assessee in its order dated 29-3-2001 in ITA No. 445/Ahd./1997 (copy filed). Respectfully following the judgments and orders cited above passed in the assessee's own case for the earlier years we affirm the decision of the CIT(A) on this point for both the years and dismiss the grounds of the department." 2.3-1 As pointed out by the ld. AR, the issue regarding claim for deduction of interest on borrowed funds has now been settled by the decision of the Hon'ble Supreme Court in the aforesaid case of Core Healthcare Ltd. (supra), wherein it was held:- "In the case of Challapalli Sugars Ltd. [1975] 98 ITR 167 this court observed that interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not "for the purpose of business" inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utilised for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department." 2.3-2 The aforesaid decision has subsequently been followed in Dy. CIT v. Gujarat Alkalies and Chemicals Ltd. [2008] 167 Taxman 203 (SC), Jt. CIT v. United Phosphorous Ltd. [2008] 299 ITR 9 (SC),Asstt.CIT v. Arvind Polycot Ltd. [2008] 299 ITR 12 (SC) and CIT v. Ishwar Buvan Hotels Ltd. [2008] 215 CTR 14 (SC). 2.4 In the light of aforesaid decisions of the Hon'ble Apex Court, we have no alternative but to uphold the findings of ld. CIT(A). Therefore, ground No. 1 in both these appeals of the revenue is dismissed. 3. Ground Nos. 2 to 7 in the appeal of the revenue for the assessment year 1996-97 and ground Nos. 2 to 5 in the appeal for the assessment year 1997-98 as also ground Nos. 2 and 3 in the C.O. pertain to disallowance of advertisement expenses, employment cost in respect of marketing staff, travelling expenditure, sales promotion expenses staff training expenses, consultancy fees and other marketing expenses besides general charges and expenditure on stationery and printing, stores and spares, lab charges, treated,....
X X X X Extracts X X X X
X X X X Extracts X X X X
.....3 We have heard both the parties and gone through the facts of the case. As pointed out by the ld. AR, a co-ordinate Bench in the assessee's own case for the assessment years 1994-95 and 1995-96 vide order dated 19-6-2009 in ITA Nos. 1492 and 1493/Ahd./2000 concluded a similar issue as under:- "10. Advertisement Expenses:- Ground No. 4 in the appeal for the assessment year 1994-95 and Ground No. 2 in the appeal for the assessment year 1995-96 relate to the disallowance of advertisement expenses. So far as the assessment year 1994-95 is concerned, there are two amounts which have been disallowed viz. Rs. 1,61,01,602 and Rs. 42,62,418. So far as Rs. 1,61,01,602 is concerned, the same was incurred on a special advertisement campaign launched by the assessee for creating a corporate image and to make the public aware about the various expansion and diversification of the projects and to protect and enhance the image of the company. In the accounts the assessee treated the expenditure as deferred revenue and debited only 1/4th of the same. In the return, the assessee claimed the entire expenditure as revenue in nature. So far as the expenditure of Rs. 42,62,418 is concerned, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business or is part of the existing business of the assessee, it is necessary to see whether there is unity of control, common finance, common administration, common staff etc. amounting to dove-tailing, interlacing and interdependence between the two activities. The annual report of the directors' of the assessee company for the year ended 31-3-1994, relevant to the assessment year 1994-95 is at page 188 of the paper book filed by the assessee. The directors have reported to the shareholders that the company was in the process of implementing a rupees 450 crores investment plan which involves manufacture of medical disposable and devices, small volume of parenterals (i.e., IV fluids), total parenterals nutrition products, renal care products and expansion of the capacity for IV fluids. They have also reported that an investment of Rs. 131.69 crores has already been made and the first phase involving increase in capacity of IV-fluids and SVPs. was already in production for quite sometime. It was further reported that the company has mobilized Rs. 98 crores through a public-cum-right issue in 1993 to part finance the Sachana project. This shows two things. Firstly it shows that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore us (paper book No. II) show that the increase of about Rs. 390 crores in the loan funds from Rs. 188.77 crores as on 31-3-1995 to Rs. 571.74 has gone to finance the gross block and work-in-progress relating to the Sachana unit, to the extent of Rs. 160 crores and Rs. 120 crores respectively. This also supports the claim that the internal accruals and funds as well as funds borrowed by the company have been used to finance the Sachana unit, showing financial dovetailing. Schedule 21 to the balance sheet as on 31-3-1996 (page 24 of paper book No. III) shows increase in the installed capacity not only in respect of the syringes and disposable plastic infusion sets manufactured by the Sachana unit from 'nil' to 2,424 lakh units and 400 lakh units as on 30-6-1996, but also in respect of the I.V. solutions already being manufactured by the assessee, from 2,012 lakh units in the earlier year to 2,403 lakh units as on 30-6-1996. This also shows that both the activity of manufacturing I. V. solutions (existing business) and the production of syringes and disposable plastic infusion sets in the Sachana unit have been treated as part of an integrated business. 19. Page 133 of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... remembered that all the items manufactured by the assessee in its various units are products of the pharmaceutical or healthcare industry. Accordingly, the expenditure incurred by the assessee was rightly allowed as deduction in computing its profits from the business for both the years. We confirm his decision. 22. The learned DR has pointed out that the order of the Tribunal for the assessment year 1993-94 on this point is against the assessee and it should not be changed. He has relied on the judgment of the Hon'ble Gujarat High Court in CIT v. Vadilal Dairy International Ltd. [2008] 7 DTR 371. A careful and respectful reading of the judgment shows that in that case neither the Assessing Officer nor the CIT(A) nor even the Tribunal had recorded any finding that common staff was employed by the assessee for both the existing unit and the new unit. The assessee was manufacturing ice-cream and the new unit was set up in Sinnar, Maharashtra, for the procurement of milk, the contention being that it was a case of backward integration and thus both the units constituted the same business. It was submitted before the Hon'ble High Court on behalf of the assessee that it had e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rent nature and complexion of the question that has arisen for decision for the years now under appeal and the additional or changed factual position as shown by the evidence adduced for the years under appeal, the grounds have to be decided in favour of the assessee. 24. We find force in the contention. As pointed out by the learned counsel for the assessee, and rightly so, the controversy before the Tribunal in the assessment year 1992-93 was whether the various items of expenditure were directly related to the erection of the three machines in that year and hence should be capitalized. There is no mention in paragraph 13 of the order of the Tribunal reported in (2001) 78 ITD 1 (TM) about the Sachana unit nor does it appear to have been argued before the Tribunal in that year that this unit was only an expansion of the existing business of the assessee and not a new or separate business. For the years under appeal, the question that was debated before us was whether the said unit can be said to constitute a separate or new business and not an expansion of the existing business. It is this question that has been decided by us to the effect that the Sachana unit is only a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mbic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 has itself observed that:- 'The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditions; nor are the notions of "capital" or "revenue" a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression "asset or advantage of an enduring nature" was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.' 3.5 Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same does not recognise any concept of deferred revenue expenditure. That is why Assessing Officer himself allowed the amount debited in the profit and loss account. In a number of judgments viz. Amar Raja....
X X X X Extracts X X X X
X X X X Extracts X X X X
....either way, and are not determinative of the allowability or otherwise of the expenditure. The decisions of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and in the case of CIT v. Indian Discounts Co. Ltd. [1970] 75 ITR 191 are clear on the issue. The accounting entries in the books of account are occasioned by a diverse set of considerations and issues such as compliance with statutory laws and mandatory accounting standards/principles and of course management decisions as to the treatment of a particular item which can be guided by considerations of reported profitability earning per share, impact on share prices etc. The Supreme Court in the case of Kedarnath jute Mfg. Co. Ltd. (supra), also affirmed the above view by observing that:- "whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter." 3.8 Subsequently the Hon'ble Court re-affirmed the said view in Sutlej Cotton Mills. Ltd.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s preoperative expenses of Rs. 15,82,79,182, in the light of findings of the ITAT in the assessee's own case for the assessment years 1994-95 and 1995-96 vide order dated 19-6-2009 in ITA Nos. 1492 and 1493/ Ahd./2000 and the aforesaid discussion in respect of deferred revenue expenditure, we are of the opinion that the said amount is allowable as revenue expenditure. Therefore, ground No. 2 in the CO is allowed. 4. The next ground No. 8 in the appeal for the assessment year 1996-97 and ground No. 6 in the appeal for the assessment year 1997-98 relate to disallowance of deduction under section 35D of the Act. The Assessing Officer restricted the claim for deduction under section 35D to Rs. 90,48,216 as against claim of Rs. 1,17,30,673 in these two assessment years, in the light of his findings in the assessment years 1992-93 to 1995-96. 4.1 On appeal, the ld. CIT(A) following decisions of the CIT(A)/ITAT for the assessment years 1992-93, 1993-94 and 1995-96, allowed the claim. 4.2 The revenue is now in appeal before us. Both the parties agreed that issue is squarely covered by the decision dated 19-6-2009 of the ITAT Ahmedabad "C" Bench in assessee's c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ars 1992-93 to 1995-96, especially when the Id. DR did not point out any infirmity in the findings of the ld. CIT(A), we have no alternative but to dismiss ground No. 8 in the appeal for the assessment year 1996-97 and ground No. 6 in the appeal for the assessment year 1997-98. 5. Ground No. 9 in appeal for assessment year 1996-97 pertains to addition of Rs. 32,00,792 on account of unexplained deposits. The Assessing Officer added the new unsecured loans/deposits received by the company during the year from the eleven persons mentioned in the assessment order since the assessee failed to furnish their PAN and confirmations. 5.1 On appeal, the assessee contended that the company, engaged in the business of manufacture of drugs and Pharmaceuticals, has in accordance with the marketing practice prevailing in the industry, followed the system of appointing stockists/distributors in various parts of India from whom deposits were also obtained. The ld. CIT(A) found that the amounts were received by cheques and complete addresses of all the parties have been furnished as also all these amounts were received in earlier years and not during the previous year as mentioned....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed losses, in accordance with provisions of Companies Act, 1956, the company was required to obtain approval from Central Government for the payment of remuneration. Subsequently, the Government approved remuneration and as per the approval of the Government Rs. 6,39,000 only ultimately found excess which has been recovered in March, 2001. Annexure is enclosed herewith showing year wise excess remuneration paid aggregating to Rs. 38,60,000 which has since been recovered. Amount of remuneration of Rs. 6,39,000 which has been paid in excess of amount of remuneration approved by Central Government cannot be allowed as deductible expenditure. In assessment year 1997-98 also, in my appellate order, I have confirmed such disallowance of excess amount of remuneration. I am therefore inclined to confirm disallowance to the extent of Rs. 6,39,000 only which is ultimately found to be excess as against disallowance of Rs. 39,59,000 made by the Assessing Officer." 6.2 The revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A) in reducing the disallowance while the assessee in the cross-objection is challenging disallowance to the extent of Rs. 6,39,000 up....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessing Officer on the basis of the Tax Audit report wherein it was mentioned that there were expenses in the nature of entertainment debited in the miscellaneous expenses, like office and factory miscellaneous expenses under general charges. On perusal of the details of these miscellaneous expenses showed that actually much more expenditure related to entertainment expenditure incurred in office misc. account which showed that there were amounts incurred on hotel charges for guests, dinner to guests on various occasions for Rs. 6,18,073 in total which was specifically on account of entertainment of guests and visitors. Similarly, out of staff welfare expenses of Rs. 49,60,152, there are expenditure on lunch, tea, refreshments etc. out of which some portion will necessarily would have been incurred for visitors and guests of the company also. In view of these facts of the case, it is held that there is justification on the part of the Assessing Officer in making further disallowance. However, the disallowance made by the Assessing Officer over and above the disallowance already made by the appellant is found to be on a higher side. The Assessing Officer is, therefore, directed to r....