TaxTMI 
TaxTMI 
2001 (5) TMI 134
X X X X Extracts X X X X
X X X X Extracts X X X X
....cts: (a) In not appreciating the fact that no income had accrued to the appellant until the imports were made and the raw materials were consumed, which events took place in the subsequent years; (b) In relying on the appellate orders for the earlier years wherein it was held that the advance licence benefit becomes receivable the moment export is made and accordingly, export obligation had been fulfilled before the end of the year inspite of the fact that the benefit accrued only when the raw materials were actually imported and not at the time of export; (c) In not appreciating the fact that unlike import entitlements, the advance licence benefit was not transferable and accordingly no income could accrue to the appellant until the raw materials were actually imported. 1.3 In view of the above arounds of appeal, the appellant prays that the Assessing Officer be directed to exclude from the total income, the advance licence benefit receivable amounting to Rs.8,29,87,603 and to reduce the total income accordingly. 2.1 The assessee had shown this amount as its income in the published Audited Annual Accounts. However, in Schedule R forming part of the Balance Sheet and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsidered after excluding the said advance licence benefit. In case, on assessment, the said advance licence benefit is taxed, the deductions under sections 80-I and 80-IA should also be recomputed after taking into account such advance licence benefit. 2.4 The assessee also include in its income under the head "Profits and Gains of Business" a sum of Rs.4,76,84,742 as Advance Licence Benefit Utilised with reference to Note No. 6 of Notes to computation which is also reproduced below:-- 6. Advance Licence benefit utilised--In the computation of total income, a sum of Rs.4,76,84,742 has been added back in respect of advance licence benefit utilised during the year. The said addition has been made in view of the fact that the advance licence benefit receivable had been excluded from the total income in the earlier assessment years. Further, in the computation of total income, while computing the deductions under sections 80-I and 80-IA, the profit of the concerned undertakings has been considered after including the said advance licence benefit utilised. It is submitted that in case the said advance licence benefit receivable is taxed in the earlier assessment years, the aforesa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....discharged and the right to import duty-free raw material becomes absolute. It is therefore clear that such a right to import duty-free raw material accrued to the assessee soon after the corresponding export commitment has been fulfilled. The assessee has accounted for the net amount of such benefit by way of ALBR at the end of the accounting year, which represents the income already accrued to the assessee. The Assessing Officer further observed that the CIT(A), Surat in his appellate order for assessment years 1992-93 and 1993-94 has confirmed the order of the Assessing Officer. The Assessing Officer relying upon the assessment orders and the orders of the CIT (A) pertaining to assessment years 1992-93 to 1994-95 rejected the assessee's claim for grant of deduction of Rs.8,29,87,603. 2.7 It may be relevant here to refer to the Note in respect of taxability of ALBR, submitted by the assessee during the assessment proceedings, a copy whereof has been placed at pages 183 and 184 of PB-I. In the said Note, after reproducing Note No. 6 of Schedule R--Notes on Accounts appended with the Audited Balance Sheet, the assessee has submitted that the said amount of Rs.8,29,87,603 has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ility to income-tax, item of duty exemption was neither income on accrual basis nor had it actually been received nor did it afford any tangible benefit to the appellant in the form of concession of duty in the year of account for the simple reason that the liability to pay duty did not exist during the relevant year since no goods were imported. Thus, the amount of Rs.31,75,231 could at the best be described as an estimated value of concession or saving in import duty that the appellant expected to earn at the time of importing raw material. Such concession or such benefit could only be accounted for in the year in which the imports were effected. No income could be said to have accrued or arisen in respect of advance licence received in the current period on the goods exported because no income in real terms had accrued. No real income had accrued to the appellant by virtue of getting or expecting to get advance licence irrespective of the fact that such estimated benefit was accounted for in the books of the appellant. This fact was not determinative of the issue of the taxability of this amount. Therefore, the amount of Rs.31,75,231, being the value of material import entitl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....decision reported in 41 ITD 142. The appellant had stated before the Assessing Officer with it's letter dated 31-1-1995, that, it applies to the Controller of Export & Import to get advance licence for import of duty-free raw-material against anticipated exports. Such licence is issued against certain export commitments, and that licence was not transferable. The appellant makes exports and also does duty-free import of raw-material against that licence, since it takes time to get raw-material imported from foreign countries, hence the appellant during that period utilizes local raw-material which costs more than duty-free imported material. This difference in cost is taken as income in accounts. It was stated by the appellant in the above mentioned letter as under: 'At the end of the year it may happen that the company has already made certain exports and not made duty-free imports. The company has used local raw-materials which is costlier and the difference is charged as income.' The arguments of the appellant are, that the benefit to the appellant is in the form of concession in custom duty for importing goods, and the appellant may not import any goods at all in future. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t relates to the assessment year 1985-86. Thereafter, amendment has been made in law, since the taxability of export incentives has been a subject-matter of litigation. In order to give finality to the view that such export incentives are of revenue nature and hence taxable, and to end all judicial controversies thereabout, the Finance Act, 1990 has inserted in section 28 of the Income-tax Act, 1961. -- Clause (iiia) read with section 2(24)(va) (w.r.e.f 1-4-1962) so as to make the profit on the sale of import entitlement licences taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1962-63; -- Clause (iiib) read with section 2(24)(vb) (w.r.e.f 1-4-1967) so as to make cash assistance (by whatever name called) received or receivable by any persons against exports under any scheme of the Government of India taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1967-68; and -- Clause (iiic) read with section 2(24)(vc) (w.r.e.f 1-4-1972) so as to make any duty of customs and excise repaid or repayable as draw back to any person against exports under the Customs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....icences in question were not transferable. 4.1 The learned counsel also drew our attention towards the opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India as published in Compendium of Opinions Volume VII-4 on treatment of Advance Licences received for import of duty-free raw materials against export commitments but not realised in the books of account. In the said opinion, the Expert Advisory Committee has, inter alia observed as under:-- "3. With regard to considering the 'estimated future duty benefit' as an income for the period in which the Advance Licences are received or the goods are exported against File Numbers, the Committee notes that one of the major considerations governing the selection and application of accounting policies is 'prudence', according to which profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. On the basis of the facts of the query, the Committee is of the opinion that in view of uncertainty attached to future events related to the earning of the duty benefit no revenue should be recognised in respect of the Advance Licences received in the curren....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 28. In the present case, even the import licences have not been granted in some cases and there is no question of any profit derived from the sale of such licences, as the licences granted to the assessee are not transferable at all. The aforesaid amendment made in section 28 instead of supporting the case of the Revenue, in fact, supports the stand taken by the assessee that no such income can be said to have been really accrued to the assessee until the goods are actually imported and used for production. 4.5 Shri Soparkar submitted that merely because the entry was made in the books of account in the year when the exports were made, the income represented by ALBR cannot be taxed until the raw material is actually imported, which event has taken place in the subsequent year. The amount which does not represent the real income accrued to the assessee cannot be charged to tax simply on the basis of the book keeping entry made in the books of account. He placed reliance on the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The relevant extracts from the said judgment are reproduced below:-- "It is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... books of account cannot be treated as decisive or conclusive in relation to determination of the question relating to taxability of an expenditure under the provisions of the Act. If on a true and correct interpretation of the relevant provisions of law, the assessee is entitled to deduction of a particular expenditure, manner and mode of making an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things." 4.7 Shri Soparkar then drew our attention to the decision of the Special Bench of the ITAT Hyderabad Bench in Nagarjuna Investment Trust Ltd.'s case. The decision of the Special Bench of Hyderabad Tribunal in the above referred case has been followed by the Tribunal Ahmedabad Bench in the case of Core Health Care Ltd. It is, therefore, not necessary to once again reproduce the relevant extracts from the decision of the Special Bench. 4.8 Shri Soparkar then relied on the decision of the Tribunal Ahmedabad Bench "C" in the case of Vadilal Dairy International Ltd. v. Dy. CIT [IT Appeal NO. 500 (Ahd.) of 1997], a copy whereof has been placed at pages A-77 to A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ngent and uncertain. The income therefore cannot be said to have accrued in favour of the assessee until the goods are actually imported. 4.10 Shri Soparkar also contended that the learned CIT (A) has grossly erred in relying on the decision of the ITAT in the case of Pratibha Syntax Ltd., which decision has nothing to do with the assessee's case. The facts of that case are clearly distinguishable with the facts of the present case. 4.11 Shri Soparkar strongly relied on the decision of the Tribunal in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. He submitted that the facts of the aforesaid decision are identical with the facts of the present case. The ITAT Bombay Bench while deciding the aforesaid case had, inter alia, relied on an earlier decision in the case of Amar Dye Chem. Ltd. [RA No. 336 (Bom.) of 1981 arising out of IT Appeal No. 3897 (Bom.) of 1974-75, dated 19-8-1981] referred to at page 148 of 41 ITD. In that case also it was held that the benefit that the assessee expected to obtain by virtue of Advance Licence to import duty-free goods would accrue to it only on the happening of an event viz., the import of the goods in question, which admittedly had ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e said decision. Moreover, that decision deals with the tax liability under section 28(iv) only. The taxability of the aforesaid income already accrued to the assessee by way of right to import duty-free raw materials has to be examined keeping in view the nature of such right acquired by the assessee under the Export and Import Policy announced by the Government of India. The learned CIT-DR submitted relevant extracts from the Export and Import Policy relating to the period from 1-4-1992 to 31-3-1997 in the Compilation and drew our attention to various clauses of Chapter VII dealing with Duty Exemption Scheme. Under the Duty Exemption Scheme, import of raw materials etc. required for direct use in the product to be exported may be permitted duty-free by the competent authority under the categories of licences mentioned in the said chapter. Clause 48 of the said Scheme provides that an Advance Licence is granted for the duty-free import of inputs. Such licence shall be issued in accordance with the policy and procedure in force on the date of issue of the licence and shall be subject to the fulfilment of a time-bound export obligation and value addition as may be specified. Advance....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rc covered in the Duty Exemption Scheme. With this background, the learned CIT-DR proceeded to explain that the income by way of benefit receivable as a result of entitlement to import duty free raw material accrues to an assessee moment the export obligation is discharged by the exporters. The exporters acquire legal right to import raw material required for production of goods exported or to be exported by the assessee. 5.2 Shri Dave, the learned CIT-DR invited our attention to Paper 8--Indirect Taxes published by the Board of Studies--The Institute of Chartered Accountants of India. Para-12.3 of the said Paper deals with duty deferment (section 143A). The relevant extracts are reproduced below:-- "Section 143A provides the solitary exception for deferring payment of duty. It is provided that where any goods are imported against an Import Licence belonging to the category of Advance Licence subject to an obligation to export goods specified in the licence the Asstt. Commissioner may permit clearance of such imported goods without payment of duty leviable thereon. There are at present a few types of such advance licences, namely, Quantity Based Advance Licence, Value Based A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cture export products can be imported without payment of customs duty. A DEEC (Duty Exemption Entitlement Certificate) Book is given to importer and hence it is popularly known as "DEEC scheme". Since the raw material can be imported before export of final products, the licences issued for this purpose are called "Quantity Based Advance Licences". The Advance Licence will be for Actual User only. The import of raw materials is on the basis of quantity based advance licence-Input-Output norms are finalised and quantity allowed to be imported will be based on quantity exported e.g. assume that there are 3 inputs A, B and C--proportion of 50:30:20 as per input-output norms prescribed in EXIM policy, the licence is available for A,B and C in that proportion only as per quantity norms. If quantity for a particular description cannot be imported within the specified value under the certificate, Commissioner of Customs can allow adjustment of individual value within the total value. These facts were explained by the learned CIT-DR with a view to emphasize that the import of specified raw material has a direct nexus with the quantity of goods exported. Therefore, once the goods have been e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the relevant accounting year and therefore it is necessary to account for the value of such benefit in the cost of raw material in the relevant accounting year itself so as to determine the correct cost of goods exported. 5.7 Shri Dave then submitted that the facts in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. heavily relied upon by the assessee are clearly distinguishable. The said decision pertains to assessment year 1985-86 when the Export Promotion Scheme was totally different. The year under consideration is assessment year 1995-96 which is governed by the Export and Import Policy relating to the period under consideration. He drew our attention to para-7 of the said decision in which various clauses of Duty Exemption Scheme relating to assessment year 1985-86 have been briefly stated. In that case the assessee had not imported the raw material viz, fibre. The criteria of inputs and exports were also different. The raw material imported by the assessee was not transferable. In the present case it is transferable under certain specified circumstances. He also pointed out that in that case the taxability of such benefit was examined only with reference to sectio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on the decision of the Tribunal in the case of Pratibha Syntex Ltd. The learned counsel is not right in saying that the said decision is not at all relevant to the point in issue. He drew our attention to para-4.1 at page6 of the said order. The learned CIT (A) in the aforesaid decision has held that the benefit availed of by the assessee on duty free imports satisfies all the three in built conditions of section 28(iiib). The expression "cash assistance" is amplified by the words "by whatever name called" in section 28(iiib). This qualification "by whatever name called" is added to avoid any narrow construction and thus the duty benefit derived by the assessee falls within the ambit of section 28(iiib). 5.10 In para-6, the Tribunal has incorporated the arguments advanced on behalf of the assessee that the duty saved by assessee in terms of the duty free imports cannot be termed as cash assistance. In para-6.1, the arguments advanced on behalf of the Department have been briefly stated. The Tribunal has given its findings in para-13 at pages 24 and 25 of the order. The Tribunal has observed that clause (iiib) does not mean only receipt of cash assistance direct from the Governm....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of raw materials purchased in India or duty paid imported raw materials. (ii) In the first instance, no accounting of import entitlement licences is required as materials on receipt will be accounted at cost and utilised for manufacturing finished goods for export. (iii) However, in the second instance, if there is reasonable certainty as to the receipt of import licence and the measurability of future benefit: (a) the benefit in cost i.e., the difference between the price of locally purchased raw material or the duty paid imported raw material and the international price of raw material should be adjusted in the books by reducing the cost of raw materials already utilised for exports and debiting receivable account in case the licence cannot be sold. Subsequent receipt and utilisation of licence will be a material factor to be considered whilst quantifying the benefit in cost to be accounted. (b) in case the licence can be sold, the lower of cost or value of saleable import licence at year end should be adjusted in the books of account by crediting the profit and loss account and debiting "import licences on hand" and these should be included in current assets. Cost fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; 35,302,861 5. 1996-97 79,237,763 116,158,672 (35,920,909) 6. 1997-98 91,777,247 146,135,678 (54,358,431) 7. 1998-99 73,987,997 62,890,307 11,097,690 8. 1999-2000 21,164,259 85,792,334 (64,628,075) 9. 2000-01 46,474,214 33,370,548 13,103,666 ------------------------------------------------------------------ Total 536,688,164 532,773,625 3,914,539 ------------------------------------------------------------------ Note: For assessment year 1995-96 licences worth US$ 3,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or some time so that he may go through the said documents and make further submissions in relation to the aforesaid ground. Further time was accordingly granted. 6.4 Shri Girish Dave, the learned CIT-DR, on the next date of hearing submitted written submissions dated 26-4-2001 and also made oral submissions. He pointed out certain discrepancies in the various details and charts submitted in the Compilation marked as Volume V. Shri Dave pointed out that the learned counsel has argued that there are various factors on which accrual of benefit depend, viz. (i) price of raw material in International market; (ii) rate of import duty prevailing at the time of import; (iii) exchange rate at the time of import of raw material; and (iv) local price of raw material available in India. On the strength of these contingencies and uncertainties, the learned counsel argued that the benefit was notional and hypothetical in the years when the income was booked in the books of account. The real income accrued only when the duty free raw material was actually imported. He further contended that the accounting entries do not matter so long as there is no accrual of income. It was also contended tha....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... (Rs.) Net Benefit Accrued during the year 9,22,08,446 = 84 Less: 10% Contingency on Entitlement 92,20,844 = 68 ---------------- Net Income Accrued during the year 8,29,87,602 = 16 ---------------- It is thus evident th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... basis in the year in which such income was adjusted in the books of account. 6.7 Shri Dave then relied on several decisions. Let us briefly discuss the ratio of all those judgments. (A) In CITv. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), at page 129, the Hon'ble Supreme Court has observed as under:-- "There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e. on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment." (B) In Indermani Jatia v. CIT [1959] 35 ITR 298 (SC), the relevant extract from the Head Note at page 299 is reproduced below:-- "It is well known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even bef....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry--but taking the interest merely to a susp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me which is liable to assessment and imposes upon the Income-tax authorities an obligation to accept the mode of accounting regularly adopted by the assessee except in the cases where the proviso to that section comes into operation. The profits earned and credited in the books of account being thus taken as the basis of computation, the system of accounting postulates the existence of debts in so far as moneys remain due and payable by the parties to whom they have been debited and when it is realised that these debts are not recover able the assessee gets a deduction for the bad debts under section 10(2)(xi)." (F) In CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94, the relevant extract from the Head Note at page 95 is reproduced below:-- 'In dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. [CITv. Melbourne Trust Ltd. (I) referred to in (1914) AC 1001: 84 LJPC 21; 30 TLR 685]." 6.8 Shri Dave, then relied on various other decisions to explain the Judicial Thought on the concept of accrual. He submitted that the Judicial Thought under the provisions of the IT Act indica....
X X X X Extracts X X X X
X X X X Extracts X X X X
....graph--BCAS. 8. Propositions which emerge:-- (a) Concept of matching revenue and costs. (b) Synthesis of above concept with basic assumptions and consideration on which financial statements are prepared namely, (i) prudence (ii) consistency (iii) materiality and (iv) substance over form, in order to give a true and fair view. (c) Reality and speciality of a transaction/situation rather than purely hypothetical or doctrinaire approach. (d) Measurability and collectibility of revenue. 9. Whether assessee can be allowed to change method of accounting for one item from accrual to cash basis: 1. 45 ITD 386 (Delhi) (Trib.) 2. 2 TTJ (Cochin) (Trib.) 928 3. 18 ITR 423 (Mad.) 4. 68 ITD 332 (Cal.) (Trib.)". 7. Shri S.N. Soparkar, Ld. Advocate in rejoinder to the arguments advanced by the learned CIT-DR, contended that various clauses of the Duty Exemption Scheme pointed out by the learned CIT-DR are not applicable in the case of the assessee. For instance, he pointed out that clause 54 relating to Self-Declared Pass Book Scheme is not at all applicable to the assessee. He, however pointed out that clauses 66 and 67 of the said Scheme are relevant in the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... when the income accrued but it was a case where the controversy related to the point whether such export incentive is liable to tax or not. In the present case the controversy does not relate to taxability of such benefit receivable by the assessee but the dispute relates only to the year of accrual of such income. Therefore, the decision in the case of Pratibha Syntex Ltd. does not in any manner support the Revenue's stand. 7.3 Shri Soparkar, then submitted that reliance placed by the learned DR on the judgment of the Supreme Court in the case of U.P. State Industrial Development Corpn. is not proper as the income in the present case did not accrue in the relevant year when the entries were made in the books of account. The income was uncertain and contingent until the raw material was actually imported pursuant to Advance Licence granted for duty free import. Moreover, the said judgment was rendered by the two Judges of the Supreme Court while the judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. was rendered by a Constitutional Bench comprising of three Hon'ble Judges. 7.4 Shri Soparkar submitted that reliance was also placed by the learned CIT-DR on t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Hon'ble Supreme Court explained the earlier judgment in the case of State Bank of Travancore and did not follow the said judgment. In the said judgment it has been held that under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular can not be considered as travelling beyond the powers of the Board under section 119 of the IT Act. 7.9 The learned counsel then drew our attention to the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT[1997] 225 ITR 746. In that case it was, inter alia, held as under:-- "Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made, represented only hypothetical income, and the amounts in question brought to tax by the ITO did not represent income which had really accrued to the assessee-company during the relevant previous years." 7.10 Shri Soparkar then cited the judgment of the Supreme Court in the case of CITv. Bokaro Steel Ltd. [1999] 236 ITR 315. The relevant extracts from the Head Note at pages 315, 316 and 317 are reproduced below:-- "In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditures. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." "The assessee had, during the assessment year. 1971-72, shown in its accounts as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the assessee. However, the provisions of section 145 cannot override sections 4 and 5 of the Act. If an income has neither accrued nor received in the relevant year within the meaning of section 5 of the Act, whatever section 145 says, such income cannot be charged to tax even though a book keeping entry has been made recognising such income, which in law and on facts did not really accrue or arise or received in previous year. Section 145 thus does not affect the range or ambit of taxable income. Such computation provision contained in section 145 cannot enlarge or restrict the content of taxable income. 11. It is the duty of the Assessing Officer to consider in each case as to whether the assessee has employed a regular method of accounting and whether annual profits can be properly deduced from the method so employed. The Assessing Officer should also examine whether the accounts maintained are correct and complete. Once the Assessing Officer is satisfied about the regularity of the method of accounting and about the correctness and completeness of the books of account and is also convinced that true income can be properly deduced, the Assessing Officer is bound to compu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....B) The question which arises for our consideration is as to whether the value of such Advance Licence Benefit Receivable by the assessee can be treated as income accrued to them in the year when the exports were actually made or such income would accrue only in the year when the duty free raw material is actually imported pursuant to such import licences. The assessee has consistently followed the method of recognising such income in its books of account in the year when the exports were actually made. But while submitting the income-tax return, they claimed that such income cannot be treated as income accrued to the assessee in the year when the exports were made but it should be treated as having accrued only in the year when the duty free raw material is actually imported. (C) The assessee has maintained their accounts on accrual basis. The various accounting standards and guidelines on accrual system of accounting relied upon by the learned representatives of the parties indicate that there are various alternative recognised methods of accounting in relation to Import Entitlement Licence etc. One of the methods is that the cost of raw material imported by the assessee will b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al Concept has been explained as under: The Accrual Concept "Any increase in owner's equity is called a revenue, any decrease is called an expense. Income is the excess of revenue over expenses. In measuring profit for any financial period, expenses and revenues are matched in a more realistic way i.e., they concern the same goods and the same time period. The accrual concept is an accounting system which recognises revenues and expenses as they are earned or incurred respectively, without regard to the date of receipt or payment. This convention is one of the consequences of the periodicity concept. in the preparation of a Profit and Loss Account for an accounting period, revenues and expenses are recognised as they are earned or incurred respectively, not as cash received or paid. The earning of a revenue and the expenses incurred in these revenue can be accurately related to specific time periods, but the receipts and payments may not be relating to the period under consideration. The concept requires proper apportionment of expenses to time periods by the inclusion of prepayments and accrual in a Balance Sheet." 16. The Matching Concept which is an essential part of ac....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ated and revenue should never be anticipated, and should only be recognised when there is reasonable certainty about their realisation. At the same time, provision must be made for all possible liabilities, whether the amount is known with certainty or is based on estimation. To illustrate, inventories are recorded at their cost or market price, whichever is less or if there is a possibility that a debt may not be realised, a specific amount is set aside from profit as a provision for doubtful debts." 18. Most of the problems of accounting measurement arise out of the periodic concept. The main difficulty arises in deciding what revenues and what expenses are to be taken into consideration for one accounting period. The concept of materiality (substance) is threshold for recognition of a transaction in accounting process. The accrual concept requires that in measuring a profit for any financial period, the expenses and revenues should be matched in a realistic way i.e., they concern the same goods and the same time period. The matching concept is therefore an essential part of accrual accounting. Even under the Conservatism Concept of accounting, the revenues should be recognize....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d below:-- "What the officer is directed to compute is not the assessee's receipts but the assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. (See per Lord Dunedin in delivering the judgment of the Board in Commissioner of Taxes v. Melbourne Trust Ltd.). The sums which the officer has brought into account from the interest register in so far as consisting of allocations from sums received in previous years have never borne tax and in their Lordships' opinion the assessee cannot complain if the officer agrees with the assessee himself in treating them as income of the year in which the assessee himself first thought fit so to regard them. Their Lordships see nothing contrary to principle in the computation of an assessee's total income for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous year which have been held in suspense and no part of which has previously been returned as income. Their Lordships do not find that the Income-tax Officer in th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be not sustainable. However, in respect of income by way of lease rental is concerned, the Tribunal held that only income which accrued in the relevant year is the monthly instalments specified in the respective lease agreements and in no circumstances, the income in excess of the monthly lease instalments can be said to have accrued in law. The excess income beyond the monthly lease instalments accounted for as the income on the basis of SOD method/Indexing method does not come within the ambit and range of taxable income as per the meaning and scope of charging provisions of the Act and, therefore, such excess income termed as differential income in relation to lease agreements could not be brought to tax. Likewise, the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. heavily relied upon by the learned counsel, held that the interest on surplus funds in short term deposit is always of a revenue nature and the same cannot be treated as receipt of a capital nature simply because the accounting entry has been made in the books of account setting off such interest income against the liability to pay interest on funds borrowed for purpose of purcha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of account in the year when the exports have actually been made, which is in conformity with one of, the alternative recognised methods of accounting. The choice of choosing one of the recognised alternative methods of accounting rested with the assessee. The assessee has exercised that option by choosing to consistently follow such a method of accounting in relation to booking of income represented by ALBR against exports. Once that option has been exercised while finalising the accounts in accordance with the accounting system and in conformity with the provisions contained in the Companies Act, 1956, the assessee cannot thereafter contend while filing the return of income that such income should not be treated as having accrued in the year under consideration, as duty free raw material has not actually been imported till the end of the relevant year but it should be treated as income accrued in the year, when raw material had actually been imported. 24. Even under the Conservatism (or Prudence) Concept of accounting, such income should be recognised when there is reasonable certainty about their realisation. The Board of Directors while finalising the annual accounts are un....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... on the facts and circumstances of the present case. It is clear from a perusal of Duty Exemption Scheme notified in the Import and Export Policy that the exporters are allowed to grant of import licences for import of duty free raw material used for manufacture of goods exported. Such scheme was announced with a view to promote the exports and make it feasible for the exporters to survive in the global competition. Without acquiring the right to import duty free raw material, which constitutes a substantial gain, it may not perhaps be viable to export the goods in the competitive market. The substantial benefit by way of right to import duty free raw material against exports already made, was therefore not only certain but the exporter acquired legally enforceable right to receive such benefit soon after discharging his export obligation. The accrual of income in the year, when assessee acquires a legal right to receive such benefit/income is supported by various judgments of Hon'ble Supreme Court cited supra. 26. The test of reasonable certainty of realisation of such income/benefit also supports the correctness of entry of such income made in the books of account in the relev....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... year under consideration. The value of benefit receivable from import licences granted for raw material which have not been utilised during the year and which have lapsed, have been deducted while arriving at the net figure of such income accrued to the assessee, in the year under consideration. Apart from this, the assessee has made a further deduction of 10% for other contingencies relating to this entitlement. Such deduction has been made to the tune of Rs.92,20,844 out of net income accrued for the year amounting to Rs.9,22,08,446. The figures of nine years from assessment years 1992-93 to 2000-2001 given in para-6 at page-28 also confirms the perfectness of the estimate of such income accounted for in the respective years. The total income accounted for from assessment years 1992-93 to 2000-2001, was Rs.53,66,88,164 against which the actual Advance Licence benefit utilised in these nine years comes to Rs.53,27,73,625. The difference is less than one per cent. If actual benefit received in assessment year 2001-2002 out of accrual of income adjusted in assessment year 2001-2002 is taken into consideration, the total benefit actually utilised will be more than the income account....
X X X X Extracts X X X X
X X X X Extracts X X X X
....imed as a deduction under section 36(1)(iii) amounting to Rs.1,38,89,304. II(1). The assessee claimed deduction in respect of interest on new projects capitalised in accounts to the tune of Rs.5,08,22,201 in the computation of total income with reference to Note No. 8 of notes to computation. The said Note No. 8 is reproduced below:-- "8. Interest claimed under section 36(1)(iii) in respect of interest capitalised in books of account: In the accounts for the year ended 31st March, 1995, interest amounting to Rs.5,68,39,623 has been capitalised. In the return of income, interest amounting to Rs.5,08,22,207 excluding interest amounting to Rs.60,17,416 pertaining to plot No. 750 which is to be transferred to Search Chem Industries Limited has been claimed under section 36(1)(iii) even though the same has been capitalised in the books of account. In this connection, reliance is placed upon the decision of the Bombay High Court in the case of Addl CIT v. Aniline Dyestuff & Pharmaceuticals (P.) Ltd. (138 ITR 843) and the decision of the Gujarat High Court in the case of CITv. Alembic Glass Industries Ltd. (103 ITR 715). Further in the case of CIT v. National Peroxide Ltd. 182 IT....
X X X X Extracts X X X X
X X X X Extracts X X X X
....austic Chloride Project to Search Chem Industries Limited (SCIL) and capital gains arising on the sale of the said undertaking has been computed after reducing the amount of Rs.1,38,89,304 representing the interest capitalised in the books of account but claimed as revenue expenditure in computing the total income for assessment year 1995-96. Since this claim has been rejected in assessment year 1995-96, it was claimed in the assessment proceedings for assessment year 1996-97 that the said amount should not be taxed as capital gains in assessment year 1996-97 otherwise it would result in double taxation of the said amount. II(4)(i). Shri Soparkar further submitted that the interest capitalised in the books of account representing interest on borrowings in connection with the expansion of the existing business of the company can be claimed as deduction under section 36(1)(iii) of the Act. He relied on the following decisions:-- (a) Alembic Glass Industries Ltd 's case (b) AddL CIT v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843 (Bom.) (c) Calico Dyeing & Printing Works v. CIT[1958] 34 ITR 265 (Bom.) (d) CIT v. Insotex (P.) Ltd. [1984] 150 ITR 195 2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o placed reliance on the judgment of the Hon'ble Mysore High Court in the case of M.M. Annaiah v. CIT[1970] 76 ITR 582 in which it was held that the AAC acted on the concession made by the ITO before him that the penalty had to be computed on the basis of net tax only; therefore it could not be said that the ITO was agreed by the order of the AAC with regard to the aforesaid point. Shri Dave on the strength of these judgments vehemently contended that such a concession on the part of the assessee create an estoppel against them and they are not allowed to re-agitate the same issue before the Tribunal. II(5)(c). Even on merit, the learned CIT-DR submitted that the assessee is not entitled to grant of deduction in respect of interest pertaining to Jhagadia unit which has been transferred in the next year. He argued that the subsequent event can be taken into consideration for determining the allowability of a particular deduction. He placed reliance on the judgement of the Punjab and Haryana High Court in the case of Mst. Shanti v. Mst. Chhoto AIR 1983 Punj. & Har. 321 in which it was held that on account of subsequent events, the appeal filed on behalf of the appellants was liabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dia Site Ankleshwar 33,59,246 Caustic Chloride at Jhagadia Ankleshwar 94,00,436 PCL3 at Jhagadia Ankleshwar 11,05,548 Caustic Chloride at Jhagadia Ankleshwar 24,084 (ANKO100 TP) --------------------------------------------------------------------------- Shri Dave pointed out that the last item in the said chart placed at page 187 relates to the lease hold land at Jhagadia Plot No. 746. The interest of Rs.53,57,181 relating to this Plot No. 746 at Jhagadia has also b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....der the Income-tax Act, and therefore, the assessee cannot be assessed in respect of an item of income which is not liable to be assessed in his hands simply on the ground that he himself wanted to be assessed on the said amount. With these well settled principles relating to the waiver of estoppel, let us go through the order of the CIT(A) once again in order to find out whether the assessee had consciously waived its legal rights to contest the liability of the aforesaid amount of interest. The learned CIT(A) has simply stated in para-2.1 of his order that the assessee submitted before him that if interest for this year is capitalised, the income from short-term capital gains will be reduced in the next year. The appellant therefore has no objection if this amount pertaining to Jhagadia Unit is capitalised and the income from short-term capital gains is reduced in the next year. These observations only indicate that the assessee wanted to impress upon the CIT(A) that the shifting of the allowability of this deduction in the year under consideration and in the next year will not really result in any real gain to the Revenue. There is no specific mention in the order of the CIT(A) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s borrowed for business purpose including for the purpose of setting up of a new unit of existing running business, qualifies for grant of deduction under section 36(1)(iii), irrespective of the fact whether such new unit has commenced production or not in the year under consideration. Such a view is fully supported by the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries Ltd. and also the judgment of the Supreme Court in the case of India Cement Ltd. II(9). The assessee submitted a note in respect of allowability of deduction in respect of interest expenditure under section 36(1)(iii) before the Departmental Authorities, a copy whereof has been submitted at pages 185 to 187 of the paper book. Reliance was placed on the following judgments in the said note:-- Alembic Glass Industries' Ltd.'s case Aniline Dyestuffs & Pharmaceuticals (P.) Ltd.'s case The learned Departmental Authorities have not controverted the facts stated on behalf of the assessee before them that the interest on borrowings have been paid in connection with the expansion of the existing business of the company. II(10). In view of the aforesaid facts and judgme....
X X X X Extracts X X X X
X X X X Extracts X X X X
....saction that matters and since the annual rent fixed was nominal and it could not in any manner be termed as economic rent and the said figure was mentioned in the agreement only for the purpose of retaining the character of transfer of property as a lease and if the substance of the transaction is noted instead of the form, it would be apparent that the said premium represented advance rent. 3.3 In view of the above ground of appeal, the appellant prays that the Assessing Officer be directed to allow deduction in respect of premium on leasehold land amounting to Rs.11,01,70,905. III(1). The assessee has also raised certain additional grounds of appeal. One of the additional grounds raised by the assessee relates to the assessee's claim for grant of proportionate deduction in respect of premium on leasehold land. Since that additional ground is connected with Ground No. III raised in the assessee's appeal, the same is reproduced below:-- II. Proportionate deduction in respect of premium on leasehold land: 2.1 On the facts and in the circumstances of the case and in law, as iterated in Ground No. IV above, the appellant submits that deduction of the proportionate premium....
X X X X Extracts X X X X
X X X X Extracts X X X X
....-3-1995, additions to leasehold land amount to Rs.17,08,02,560. As per the agreement with GIDC the company is required to construct a building thereon within a specified period. Thereafter, the company is entitled to use and occupy the property with the building thereon for a period of 99 years upon payment of a nominal rent. In the computation of total income, a sum of Rs.11,01,70,905 excluding Rs.6,06,31,655 representing premium in respect of Plot No. 750 which is to be transferred to Search Chem Industries Limited, has been claimed as a business expenditure relying on the decision of the Karnataka High Court in the case of CIT v. HMT Ltd. [1993] 203 ITR 820. It may be further noted that the facts in the instant case are identical to the facts in the above mentioned decision." III(4). The assessee submitted a Note in respect of claim for aforesaid deduction during the assessment proceedings, a copy whereof has been placed at page 190 of the paper book. The said Note is reproduced below:-- "During the year ended 31-3-1995, a sum of Rs.11,01,70,905 has been paid to Gujarat Industrial Development Corporation (GIDC) as premium for leasehold land at Ankleshwar as per the agre....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s cannot represent economic rent, the payment of lease premium in fact represents payment of advance and the ratio of the aforesaid decision of the Karnataka High Court is squarely applicable as the facts are identical." III(5). A copy of letter of allotment of Plot/Shed No. 746 at Jhagadia Industrial Estate, the relevant licence agreement executed between the appellant company and the GIDC have been submitted at pages 193 to 206 of the Compilation. The Assessing Officer rejected the claim for grant of deduction in respect of the aforesaid sum of Rs.11,01,70,905. He relied on the judgment of the Hon'ble Assam High Court in the case of Panbari Tea Co. Ltd. v. CIT [1961] 42 ITR 672, the judgments of the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT[1955] 27 ITR 3 4 and CITv. CIBA of India Ltd [1968] 69 ITR 692 (SC); Dalmia Jain & Co. Ltd. v. CIT [1971] 81 ITR 754 (SC) as well as V. Jagan mohan Rao v. CIT [1970] 75 ITR 375 (SC). The Assessing Officer held that the assessee has correctly treated this amount as capital expenditure in its books of account. The claim of the assessee for grant of deduction in respect of premium on leasehold land was accordingl....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the transfer of property as a lease and not for any other purpose. The Tribunal was justified in law in holding that the sum of Rs.12,09,200 representing lease premium should be allowed as business expenditure." (B) He also placed reliance on the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. v. Dy. CIT [ITA No. 359 (Ahd.) 1997]. In this case the assessee paid Rs.48,02,616 to GIDC for acquiring lease of land at Panoli. The Tribunal Ahmedabad Bench relying on the judgment of the Karnataka High Court in the case of HMT Limited and the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 and the judgment in the case of Empire Jute Co. Ltd. (124 ITR 1) and the judgment in the case of CIT v. Kirkend Coal Co. [1970] 77 ITR 530 as well as the decision in the case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, directed the Assessing Officer to allow the deduction in respect of the said sum of Rs.48,02,616. (C) The learned counsel also relied on the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. The assessee in the aforesaid case, had obtained le....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... following judgments to support this contention:-- 1. Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC) 2. Addl CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.). Shri Soparkar also contended that the new plant set up on the concerned plot were part and parcel of the existing business and accordingly there is no question of commencement of new business. Hence the lease rent cannot be regarded as capital expenditure. Reliance was placed on the following judgments: 1. Alembic Glass Industries Ltd.'s case 2. Anilien Dyestuffs & Pharmaceuticals (P.) Ltd's case. III(10) Shri Soparkar submitted that in case the amount of premium paid for acquiring the leasehold rights in the Industrial plot is not allowed as a deduction in the relevant year, then at least proportionate amount of premium paid for leasehold land should be allowed as deduction. The lease of land was acquired from GIDC for a period of 99 years. Therefore, 1/99th amount of premium paid for acquiring leasehold rights was claimed as alternative deduction in respect of proportionate premium of lease hold land. The learned counsel has claimed deduction in respect of proportionate premium on leas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over 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 the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....am Bengal Cement Co. Ltd.'s case (e) CIBA of India Ltd's case (f) Dalmia Jain & Co. Ltd's case (g) V Jaganmohan Rao's case. He submitted that all the aforesaid judgments fully support the view taken by the Assessing Officer and confirmed by the CIT (A). III(13). Shri Dave drew our attention to the letter of allotment dated 23-9-1994 sent by GIDC to the assessee in respect of allotment of plot/shed No. 746 at Jhagadia Industrial Estate. Clause 5 of the said allotment letter was highlighted with a view to show that the assessee paid an amount of Rs.2,13,28,221 being 20% of the total price of the plot/shed. The remaining amount was payable in instalments as specified in the said allotment letter. Shri Dave pointed out that 20% amount was paid towards the purchase price of the plot/shed. The assessee acquired the lights, title and interest over the said plot of land allotted by the GIDC. He further drew our attention to the licence agreement executed between the GIDC in respect of the aforesaid industrial plot allotted by the GIDC. Shri Dave read various clauses of the said licence agreement with a view to show that the assessee paid the purchase price for acquiring the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....se of carrying on the manufacture of cement, a lease of certain lime-stone quarries for a period of twenty years for certain half-yearly rents and royalties. In addition to the rents and royalties the appellant agreed to pay the lessor annually a sum of Rs.5000 during the whole period of the lease as a protection fee and in consideration of that payment the lessor under took not to grant to pay person any lease, permit or prospective licence for limestone in a group of quarries without condition that no limestone should be used for the manufacture of cement. The appellant also agreed to pay Rs.35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the appellant the sums of Rs.5,000 and Rs.35,000 paid to the lessor by the appellant could be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax authorities, the Appellate Tribunal and High Court on a reference under section 66(1) held that the amount was not an allowable deduction under section 10(2)(xv). On appeal to the Supreme Court: He....
X X X X Extracts X X X X
X X X X Extracts X X X X
....al nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but in helps the court, having regard to the other circumstances, to ascertain the intention of the parties." (F) Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC): The Head Note is reproduced below:-- "The appellant, who had taken on lease certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises so as to convert it into a cinema house, after spending Rs.35,000 on some alterations, felt the necessity for having some money in order to convert the premises into a cinema house. On 23-2-1946, he entered into a lease by which the building was demised to the lessees for 30 years. The lessees agreed to pay under the lease Rs.55,200 to the appellant towards the cost of erecting the cinema house. The rent agreed to be paid was Rs.2,100 per month and it was payable from 1-6-1946. The lease did not contain any condition or stipulation from which it could ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. (J) CIT v. Banshidhar Sewbhagawan & Co. [1977] 109 ITR 828 (Gauhati): The assessee in this case took on lease a tea estate by a deed of lease dated 23-3-1961, for a period of 22 years beginning from 1-1-1961. The total payment to be made during the period of 22 year% was Rs.1,48,499. The question was as to whether the amount so paid by the assessee was a capital expenditure or it represented revenue expenditure. The High Court held that the consideration had been paid for acquiring such enduring benefit and that being so, the expenditure had the real nature of capital expenditure and could not be treated as of a revenue nature because a portion of the payment had to be made by annual instalments. (K) CITv. Project Automobiles [1984] 150 ITR 266 (Bom.): The Head Note is reproduced below:-- "The assessee was carrying on business in automobile parts, petrol pumps, etc. even prior to 1959 on land held on temporary lease, It entered into an agreement with the owners of the land in 1961 whereby the period of lease was to be thirty years. Premium was to be paid at the rate of Re. 1 per sq.ft. The lessee was also to pay economic rent calculated at the rate of 5% of the total....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lease, was nothing but conferring ownership rights on the assessee. The assessee was entitled to exercise all the rights in respect of the three flats as the owner. Hence, the expenditure could not be considered to be revenue expenditure nor could the assessee claim the deduction treating the said amount as an advance rent." (M) CIT v. Muhammad Hussain [2001] 114 Taxman 553 (J&K): The relevant extract from the Head Note is reproduced below: "It is well settled that the premium paid by the lessee for the grant of a lease, whether payable in lump sum or in instalments over the whole period of the lease alongwith the rent, is normally a capital expenditure. The lessee purchases the term of the lease for the premium. As observed by Greene MR in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR Suppl. 10 (CA), there is no revenue quality in the payment made to acquire such an asset as a term of years. There is a clear distinction between the payment made to acquire an asset and payment made for its use. The periodical payment made for a lease is a revenue expenditure whereas the payment made to acquire the lease would be an expenditure of capital nature." (N) A....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ghts, the assessee in fact acquired a right to possession which was of an enduring nature and, therefore, such expenditure incurred for the acquisition of such a right was capital in nature. A similar view has been taken by the Calcutta High Court in the case of Chloride India Ltd. v. CIT [1981] 130 ITR 61. In this decision, it has been held that, on the facts of the case, the amount was paid for acquiring a right to possession which right was a capital of enduring nature and as such the amount of payment made was to be treated as capital expenditure. This Court in the case of Rajabali Nazarali & Sons v. CIT [1987] 163 ITR 7 has considered in detail and reiterated the above principle. This decision holds that a lease creates an interest in immovable property and transfer of leasehold rights which are protected by the provisions of rent restriction statutes, is nothing but a transfer of a capital asset. The price paid to acquire such leasehold rights can only be held to be payment on capital account, there being no revenue quality attributable to the same. Therefore, any payment received, whether by way of compensation or under any other nomenclature, for parting with a capital asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ction in respect of the amount paid for acquiring the leasehold rent can not be granted and the alternative prayer made by the assessee for allowing deduction of 1/99th proportionate amount of such premium is also not allowable. There is no provision in the IT Act for amortization of such capital expenditure incurred for acquiring long-term leasehold rights in factory land/shed. The purchase price paid for acquiring lease hold rights in the land represents cost of acquisition of a capital asset. Depreciation is not allowable under the provisions of section 32 on the cost of land. The land is not a depreciable asset. Allowing 1/99th proportionate amount of premium paid for acquiring leasehold rights will be akin to grant of depreciation or allowing amortization of such capital expenditure without there being a specific provision for grant of such deduction. He therefore urged that the main ground as well as alternative ground raised by the assessee in respect of the aforesaid amount should be rejected. III(16). We have carefully considered the submissions made by the learned representatives of the parties and have gone through the relevant documents to which our attention was dra....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agreement. Clause 10 further provides that the deed of lease shall be prepared in duplicate in accordance with the Form prescribed by the licensor and all costs, charges and expenses of and incidental to the execution of the lease deed and its registration shall be borne and paid by the assessee alone. It was an undisputed fact that the assessee-company has complied with all the conditions and is entitled to have the lease deed executed for a period of 99 years. Shri Soparkar had also submitted a specimen copy of the Standard Form of lease deed, which was executed by the GIDC in favour of the appellant in respect of another plot and submitted that similar lease deed will be executed in favour of the appellant in respect of plot/shed No. 746 at Jhagadia Industrial Estate. He, however, submitted that factually the lease deed had not so far been executed in respect of the aforesaid land but the assessee has complied with all the conditions mentioned in the licence agreement and is eligible for grant of such lease hold rights as per the standard form of lease deed prescribed by GIDC for allotment of such industrial plots. III(18). A perusal of the standard form of lease deed prescri....
X X X X Extracts X X X X
X X X X Extracts X X X X
....where the, lessee, for the purpose of constructing a building on the demised premises has obtained loan from the Bank or other financial institution by mortgaging his leasehold interest in the demised premises of the lessor shall be deemed to have been subject to the conditions:-- (a) that such mortgage shall not affect the rights or powers of the lessor under this lease deed, and (b) that the lessor before exercising his rights and power under this lease deed will consult the Bank or as the case may be the financial institution concerned. (s) In the event of such transfer, assignment, underletting or parting with there shall be delivered by the lessee at his expense a notice thereof to the Managing Director or such officer of the Lessor as the lessor may direct within twenty days from the date on which the transfer, assignment, underletting or parting with becomes effective whether by registration thereof under the Indian Registration Act or otherwise, provided that in the event of such transfer, assignment, underletting or parting with fifty per cent for the unearned increment that may be accrued to the Lessee shall be paid by the Lessee to Managing Director of the Lesso....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd but by the lease he excludes himself during its currency from that right. A lease is therefore not a mere contract, but is a transfer of interest in land. Such interest in the land is a valuable right and constitutes capital asset in the hands of the lessee. The cardinal distinction between the lease and the licence is that in a lease there is a transfer of interest in land whereas in the case of a licence there is no transfer of interest although the licensee acquired a right to occupy the land. The substance of the document must be preferred to the form to ascertain real intention of the parties. III(22). Let us now examine the facts of the present case in the light of the principles of law emerging from the aforementioned judgments. The assessee has acquired leasehold rights in the aforesaid plot/shed for a period of 99 years with on option to renew this lease for a further period of 99 years. The lessee can exercise such option before or at the end of 99 years. The assessee has agreed to pay total price of the aforesaid plot/shed No. 746 at Jhagadia Industrial Estate to GIDC amounting to Rs.10,66,41,105. Out of this, 20 per cent of the total price of plot amounting to Rs.....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a view is clearly fortified bythe various judgments of the Hon'ble Apex Court and the jurisdictional High Court relied upon by the learned CIT-DR. III(23). It may also be relevant here to refer to the definition of "transfer" in relation to any immovable property given in section 269UA(f). It includes transfer of immovable property by way of lease for a term of not less than 12 years. Similar provision existed in Chapter XXA relating to acquisition of immovable property, which also regarded a long term lease (i.e., to say, lease for a period of not less than 12 years) as an immovable property liable to acquisition under the said Chapter. The surplus derived on transfer of such lease right in respect of long term lease is liable to tax as capital gains under sub-section 45 read with section 2(47) of the Act. The provisions contained in section 4(8) of the Wealth-tax Act also incorporates within its ambit any transaction as referred to in section 269UA(f). It also means that a holder of a leasehold rights shall be deemed to be the owner of such interest in the immovable property. III(24). Shri Soparkar tried to distinguish various judgments relied upon by the learned CIT-DR. H....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... aforesaid land was separately payable by the lessee to the lessor in accordance with the agreement executed with the GIDC. The payment in question therefore clearly represents cost of capital asset viz. long-term lease acquired by the assessee, which can not be allowed as revenue expenditure. III(26). The Supreme Court in Assam Bengal Cement Co. Ltd's case has held that the payment made for acquiring lease of certain limestone quarries for a period of 20 years was a capital expenditure. The Hon'ble Apex Court in the case of Pingle Industries Ltd. also held that the payment, though periodically in fact, made by the assessee for acquiring long term lease with the right to win stones was a payment made for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. In the case of Durga Das Khanna the Hon'ble Supreme Court held that the payment of Rs.55,200 agreed to be made by the lessee towards the cost of erecting cinema house in consideration of acquiring lease of certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises was in the nature of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the event of its transfer or assignment to other parties subject to the conditions mentioned in the lease deed. Such a clause does not find any mention in the judgment of the Karnataka High Court. Moreover, various judgments of the Apex Court and the Gujarat High Court referred to herein before were not brought to the notice of the Hon'ble Karnataka High Court. The learned counsel also placed heavy reliance on the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. That case has been decided by the Tribunal on the basis of the judgment of the Karnataka High Court in the case of H.M.T Ltd. The Tribunal also therefore had not taken into consideration the various judgments of the Apex Court and the Gujarat High Court relied upon by the learned CIT-DR in the present case. III(28). On a careful consideration of the entire relevant facts, material and the legal principles emerging from the various judgments cited before us, we are of the considered opinion that the premium paid/payable by the assessee for acquiring long term leasehold rights represent cost of acquisition of leasehold rights and by no stretch of imagination such payment can be treated as rev....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... specifically provides deduction in respect of any expenditure of a capital nature incurred on acquisition of patent rights or copyrights in the manner provided in that section. Section 35ABB also provides for grant of deduction in respect of capital expenditure incurred for acquiring right to operate telecommunication services. Section 35AB likewise provides for grant of deduction in respect of lump sum consideration paid for acquiring technical knowhow over a period of six years. It is therefore clear that wherever the Legislature intended to provide for grant of deduction in respect of capital expenditure in the year when it is incurred or by way of amortization of such expenditure over a period of several years, it expressly enacted a specific provision for grant of such deduction. In the absence of a specific provision for grant of amortization/deduction of proportionate amount out of such capital expenditure, such as the one claimed at 1/99th of the premium paid for acquiring leasehold land by the appellant in the present case, the deduction can not be validly granted. III(32). The learned counsel relied on the judgment of the Supreme Court in CITv. Madras Auto Service (P.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....diture which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It can not be spread over a number of years even if the assessee has written it off in its books over a period of years. The Supreme Court has observed that the facts may however justify the assessee who has incurred an expenditure in a particular year to spread and claim it over a number of ensuing years. In fact, allowing entire expenditure in one year might give a very distorted picture of the profit of a year. On these facts, the Supreme Court held that the liability for such revenue expenditure should therefore be spread over the period of debentures. Thus, the spreading over in respect of deductibility of revenue expenditure was allowed by the Supreme Court in the aforesaid case. It was not a case where the Supreme Court has allowed deduction in respect of capital expenditure by spreading it over the period of several years like the one which is being claimed in the present case by asking for amortization of the cost of acquisition of leasehold rights over a period of 99 years by way of spreading it over for the period of 99 years. S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....year under consideration as the legal and enforceable liability arises in the year under consideration. He relied on the written submissions made in letter dated 5-11-1998 submitted before Departmental Authorities and also on the judgment of the Apex Court in the case of Shahzada Nand & Sons v. CIT[1 977] 108 ITR 358. The learned counsel also relied on the judgments of the Gujarat High Court in the cases of CIT v. Sarabhai Sons Ltd. [1983] 143 ITR 473 and Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT [1982] 135 ITR 912. The learned CIT-DR, on the other hand, relied upon the reasons mentioned in the assessment order and in the order of the Commissioner (Appeals). He also submitted that the disallowance is justified in view of the provisions contained in section 43B(c) of the Act. V(3). We have carefully considered the submissions made by the learned representatives of the parties and have perused the relevant judgments and other documents, to which our attention was drawn during the course of hearing. The Assessing Officer has disallowed the aforesaid commission payments on the ground that the commission paid to an employee is not a deductible expenditure, as no evidence has b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nbsp; 5,00,000 4,00,000 ------------------------------------------------------------------------- The Commissioner (Appeals) has confirmed the same on the basis of the reasons given in the assessment order and he has further observed that the amount was not quantified till August, 1995, i.e., in the next year. The salary certificates issued to these employees/directors in Form No. 16 do not include payments of such commission nor tax was deducted at source in the year under consideration. The Commissioner (Appeals) further observed that the Assessing Officer was of the opinion that even if this amount is allowable, it is allowable in the next year, as the liability to pay the said commission arose in the next year. V(4). We have considered the rival submissions. The liability quantified on the basis of profits derived by the company in the year under consideration accrued at the end of the relevant year. Merely because the liability has been quantified at the time of preparation of balance sheet and at the time when the final accounts were authenticated by the directors, will not postpone the accrual of liability for payment of such commission payable....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the CBDT in which certain illustrations have been given which are covered within the exceptional circumstances provided in rule 6DD(1). The learned counsel also placed reliance on the following decisions: (a) CITv. Trinity Traders [1987] 163 ITR 381 (Guj.) (b) Hasanand Pinjomal v. CIT [1978] 112 ITR 134 (Guj.) (c) Navsari Waste Cotton Products v. CIT[1987] 163 ITR 378 (Guj.) (d) ITO v. Patidar Ginning & Pressing Co. Ltd. [1994] 51 ITD 7 (Ahd.). VI(3). The learned CIT-DR relied upon the reasons mentioned in the assessment order. He also drew our attention to the copy of voucher dated 4-9-1994 placed at page 226 of the paper book wherein charges for hiring of car for four days for "customs" has been paid to the tune of Rs.10,984. The learned CIT-DR observed that the business purpose of such expenditure has not been explained. It appears to have been incurred in connection with the Custom Department. VI(4). We have carefully considered the submissions made by the learned representatives. The car hiring charges for four days for "customs" amounting to Rs.10,984 pointed out by the learned CIT-DR is not the basis of disallowance made by the Assessing Officer in the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
....han Rs.10,000 each presented by the assessee to persons connected with the assessee's business given in Tax Audit Report. A copy thereof has been submitted at page 237 of the paper book. The learned counsel contended that such expenditure on presentation articles can not be disallowed under Rule 6B on the ground that the presentation articles neither bear logo of the company nor carry the name of the company. The said expenditure does not represent expenditure in the nature of advertisement. Reliance was placed on the following judgments: (a) CITv. Allana Sons (P.) Ltd. [1995] 216 ITR 690 (Bom.) (b) First ITO v. French Dyes & Chemicals (I) (P.) Ltd. [1984]/10 ITD 240 (Bom.) (SB) (c) G.L. Rexroth Industries Ltd. v. Dy. CIT[1997] 59 TTJ (Ahd.) 757 (d) Asstt. CITv. Bell Ceramics Ltd. [1999] 69 ITD 156 (Ahd.). VII(3). The learned CIT-DR relied on the reasons mentioned in the assessment order. He also submitted that the assessee has submitted an application for rectification under section 154 in which one of the prayers made by them is that the disallowance out of advertisement expenditure under rule 6B be restricted to 50 per cent from the balance amount of expenditur....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1 Cloth Customary Gift Piece ----------------------------------------------------------------------- The name of fourth person and the amount of such customary gift of cloth piece costing more than Rs.10,000 was not given in the said details. It appears from the copy of vouchers enclosed with the said details that this represents cost of cloth piece purchased from Raymond's Retail Shop for Rs.10,051. The learned counsel contended that this was presented to a person connected with the assessee's business. In any case this cannot be disallowed under rule 6B. The learned Departmental Authorities and the CIT-DR did not dispute the fact that the articles presented by the assessee did not bear the logo or the name of the company. These article....
X X X X Extracts X X X X
X X X X Extracts X X X X
....IT IT Appeal No. 848 (Ahd.) of 1999 dated 7-1-2000, to which one of us (Judicial Member) was a party. IX(1). The learned CIT-DR relied on the amendment made in the relevant provisions of section 34(1) with effect from 1-4-1988 dispensing with the requirement of furnishing the prescribed particulars for grant of depreciation. He submitted that granting of depreciation has now become mandatory after deletion of this condition earlier prescribed in section 34(1). IX(2). We have considered the submissions made by the learned representatives and have perused the relevant provisions of law and the judgments relied upon by the learned representatives. The point in issue is clearly covered in favour of the assessee by the decision of the Tribunal in the case of Uvifort Metalizers Ltd., in which the Tribunal, after taking note of the aforesaid amendment made in section 34(1), has clearly observed that claiming of depreciation by an assessee is optional. Since the assessee has chosen not to claim depreciation on the block relating to the plant and machinery, the Assessing Officer cannot fasten such a deduction by way of depreciation because an option available to the assessee to claim ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....counts on mercantile basis. If the allowability of the expenditure in question is not in doubt or dispute, there is no justification for disallowing the claim for such expenditure which though pertains to previous year, but have been determined and crystallised and debited in the books of account in the year under consideration. If the dispute relates only to the year of allowability and not the question of its allowability altogether, the year of allowability is not of much significance in respect of such petty amount in the case of a company where the rate of tax is almost uniform in different years. It may be relevant here to make a useful reference to the judgment of the Bombay High Court in the case of CITv. Nagri Mills Co. Ltd. [1958] 33 ITR 681. At page 684, the relevant extract is reproduced below:-- "We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two differen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ear 1995-96, as the Commissioner (Appeals) has not allowed deduction in respect of the said expenditure in assessment year 1996-97. The learned counsel at the time of hearing submitted that though the amount stated in the ground of appeal is Rs.1,01,89,977, the claim is restricted to the correct figure of Rs.31,08,783. He submitted that though such expenditure has been debited in accounts for year ended on 31-3-1996, this pertains to assessment year 1995-96 and should accordingly be allowed as deduction in assessment year 1995-96. Reliance was placed on the following judgments: (a) CITv. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC) (b) CITv. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.) (c) Kedarnath Jute Mfg. Co. Ltd.'s case (d) Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC). XI(2). This ground is similar in nature with the preceding ground. The assessee has stated in this ground that in case the amount of such expenditure debited in the books of account pertaining to assessment year 1996-97 is disallowed in that year, the same should be allowed in assessment year 1995-96, the year to which the expenditure in question relates. While dealing with Grou....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... learned counsel submitted that no expenditure was incurred by the appellant for earning dividend income. Hence deduction under section 80M should be allowed on gross dividend without deducting any expenditure. The statement of dividend income earned by the assessee has been placed at pages 283 and 284 of the paper book. Copy of written submissions dated 5-11-1998 has been furnished at pages 178 and 179 of the paper book. The Assessing Officer deducted proportionate management expenditure for earning dividend income on estimated basis at Rs.2 lacs. The Assessing Officer relied on the judgment of the Apex Court in the case of CIT v. United General Trust Ltd [1993] 200 ITR 488 and Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120. The Commissioner (Appeals) confirmed the action of the Assessing Officer. XII(1). The learned counsel submitted that the dividend has been received from 8 companies and income from units of UTI has been received by the assessee. No expenditure is required to be incurred for earning such income. The learned CIT-DR supported the order of the Commissioner (Appeals). XII(2). We have carefully considered the submissions made by the learn....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... without restricting the total deduction to 30 per cent of the gross total income. (b) In not appreciating the fact that deductions under section 80-I and section 80-IA ought to have been allowed on the profits of the concerned undertakings without deducting depreciation eligible under section 32 in view of the fact that depreciation under section 32 is eligible on the basis of the "block of assets" for the company as a whole and not in respect of individual assets of the concerned industrial undertakings and accordingly depreciation cannot be allocated to the different industrial undertakings as per the scheme of the Income-tax Act, 1961 in respect of allowance of depreciation on the concept of "block of assets". 13.3 In view of the above grounds of appeal, the appellant prays that the Assessing Officer be directed to recompute the deduction eligible under section 80-I and section 80-IA on the profits and gains of each eligible industrial undertaking without excluding from the profits of the concerned industrial undertakings, depreciation eligible under section 32 and without restricting the same to 30 per cent of the gross total income. XIII(1). Shri S.N. Soparkar, the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the Assessing Rs. 30,25,73,619 Officer in the order under section 154, dated 6-8-1998 before allowing deduction under Chapter VI-A Less: Deduction under Chapter VIA as admissible to the assessee -------------------------- 1. Deduction u/s 80G @ 50% Rs. 26,83,500 2. Deduction u/s 80HHG Rs. 2,90,99,058 3. Deduction u/s 80-0 Rs. 15,66,500 4. Deduction u/s 80M Rs. 1,96,61,986 ----------....
X X X X Extracts X X X X
X X X X Extracts X X X X
....---------------------------------------------------------------- The Assessing Officer in the aforesaid order under section 154 has thus restricted the deduction under sections 80-I and 80-IA to 30 per cent of the taxable income computed after allowing deductions under sections 80G, 80HHC, 80-O and 80M. The learned CIT-DR could not explain as to on what basis the deduction allowable under sections 80-I and 80-IA has been restricted to 30 per cent of taxable income determined after allowing deductions under various other sections appearing under Chapter VI-A. XIII(2). Shri Soparkar submitted that the Assessing Officer has not pointed out any mistake or discrepancy in the claim made under sections 80-I and 80-IA in respect of income derived by different Industrial Undertakings owned by the assessee. The working of deduction allowable under sections 80-I and 80-IA submitted by the assessee is in conformity with the provisions of law. The Assessing Officer has not found any mistake or discrepancy in the said claim. Therefore, there is no justification for disallowing any part of the claim made as per sections 80-I and 80-IA. XIII(3). The learned counsel further submitted that ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ills Ltd. [1971] 82 ITR 452 to support his contention that the depreciation should not be deducted from the profits of eligible Industrial Undertakings computed by the assessee for purpose of allowing deduction under sections 80-I and 80-IA as new scheme of depreciation of block of assets does not provide for computation of depreciation on cost of individual asset. Therefore, the depreciation allowable to the assessee on the entire business with regard to the block of assets can not be allocated between the Industrial Undertakings for computing the profits of such eligible Industrial Undertakings for grant of deductions under sections 80-I and 80-IA. The learned counsel thus strongly urged that deductions as claimed by the assessee under sections 80-I and 80-IA should be allowed. XIII(5). We have considered the submissions made by the learned representatives of the parties and have gone through the relevant documents submitted in the compilation. We have also gone through the orders of the learned Departmental Authorities. The Assessing Officer has not given the basis for computing the amount of deductions allowable under sections 80-I and 80-IA in the assessment order. The Asse....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income of that nature, which is eligible for grant of deduction under any of the provisions contained in Chapter VI-A, shall be computed in accordance with the provisions of the Income-tax Act and only such income shall alone be deemed to be the amount of income of that nature, which is derived or received by the assessee and which is included in the gross total income. This necessarily implies that depreciation attributable to the profits of eligible Industrial Undertakings will have to be deducted for purpose of granting deductions under sections 80-I and 80-IA. XIII(6). It may be relevant here to refer to the judgment of the Supreme Court in the case of Mettur Chemical & Industrial Corpn. Ltd.v. CIT [1996] 217 ITR 768 in which it was, inter alia, held that the profits and gains of an Industrial Undertaking to which section 84 of the IT Act (provisions similar to sections 80J, 80-I and 80-IA) applies have to be computed in accordance with the provisions contained in Chapter IV-D of the Act and development rebate has first to be deducted from the total income and it is only thereafter, if any profits and gains remain from to is business, that the benefit under section 84(1) wo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e case of Nima Specific Family Trust has held that the aforesaid sub-section (9) only deals with priority to be given to special deduction under section 80HH over deduction allowable under section 80J or 80-I but it does not refer to the quantum of special deduction allowable under section 80-I. The quantum of deduction allowable under sections 80HH and 80-I are based on profits of Industrial Undertakings and the quantum of deduction will be determined on the same amount of profits of eligible Industrial Undertakings at the rate provided in both these sections. Thus the quantum of deduction allowable under section 80-I is also not required to be computed on gross total income minus deduction under section 80HH inspite of the fact that section 80HH(9) gives priority in respect of special deduction under sections 80HH over 80-I. No such priority has been specified for grant of deduction under sections 80-I and 80-IA vis-a-vis the deductions allowed under sections 80G, 80HHC, 80-O and 80M, as has been erroneously done by the Assessing Officer in the present case. The view taken by the Assessing Officer and confirmed by the CIT(A) of restricting such deduction alloxvable under sections....
X X X X Extracts X X X X
X X X X Extracts X X X X
....as books of account etc. of the respective Industrial Undertakings, computation of depreciation attributable to such eligible Industrial Undertakings allowable under IT Act, verification of Advance Licence Benefit on accrual basis included in the profits of such Industrial Undertakings will be made by the Assessing Officer by providing an opportunity to the assessee to explain the correctness of the various figures appearing in the said revised computation of claim under sections 80-I and 80-IA as worked out by M/s Jawahar Thacker & Co., CAs. It is further clarified that in no case the deduction already allowed to the assessee under sections 80-I and 80-IA by the Assessing Officer should be reduced, as the Department has not raised any ground in their appeal nor they have filed any cross objection in relation to deduction allowable under sections 80-I and 80-IA. XIII(9). Ground No. XIII is disposed of as indicated above. XIV. Ground No. XIV is reproduced below: XIV. Deduction under section 80HHC: (A) Inclusion of excise duty in total turnover: 14.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Assessing ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business" has been defined the aforesaid items are not being of the nature as described in the said Explanation and accordingly, 90% of the said income is not required to be so reduced. (C) Deducting 90% of the gross interest received while computing "Profits of the business": 14.5 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground of appeal while passing the appellate order. 14.6 The appellant submits that as the interest income was received mainly as interest from customers on credit sales and was thus part of business income, such income ought not to be reduced from the "profits of the business" as per Explanation (baa) of section 80HHC(4A). 14.7 In view of the above grounds of appeal, the appellant prays that the Joint CIT ought to be directed not to include the said interest income in the provisions of clause (baa) of the Explanation below section 80HHC(4A). 14.8 Without prejudice to the above and in the alternative, it is submitted that the receipts in the said Explanation (baa) below section 80HHC(4) refers only to "net receipts" and as the total amount of interest paid is greater than the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....produced below: "Under section 80HHC(1) of the Income-tax Act, 1961, it is, inter alia, provided that where an assessee is engaged in the business of export of any goods, there shall be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods. In other words, in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible. The above expression, namely, 'Profits derived from exports' also finds place in section 80HHC(3)(a). It says that where the export is of goods, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, where the assessee carried on a business as 100 per cent exporter and secondly where the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head 'Profits and gains....
X X X X Extracts X X X X
X X X X Extracts X X X X
....elevant documents and judgments in relation to the aforesaid points before the CIT(A) who will decide these points in accordance with the provisions of law after providing reasonable and adequate opportunity to both the sides. XV. Ground No. XIV is reproduced below: XV. Short granting of credit in respect of tax deducted at source: 15.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground relating to short granting of credit in respect of tax deducted at source. 15.2 In view of the above, the appellant prays that the Assessing Officer be directed to grant further credit in respect of tax deducted at source amounting to Rs.3,90,338. XV(1). After considering the submissions made by the learned representatives, we consider it proper to direct the Assessing Officer to grant credit in respect of tax deducted at source after making necessary verification. The Assessing Officer may provide an opportunity to the assessee to submit necessary evidence in support of the claim for credit in respect of tax deducted at source made by the assessee. XVI. Ground No. XVI is reproduced below: XVI. Additional tax l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....leting the said addition made under section 40A(2)(b) ignoring the fact that the said section applied only to expenditure and cannot apply to a transaction of sale. 1.3 In view of the above grounds of appeal, the appellant prays that the addition made in respect of sale of white phosphorus under section 40A(2)(b) be deleted. XVII(1). The learned CIT (A) has dealt with this issue in paras-9 and 9.1 of the order which are reproduced below:-- "9. The next ground of appeal is against the addition of Rs.6,06,720 under section 40A(2)(b). The Assessing Officer had made the addition as the appellant had sold white phosphorus to sister concerns at a price less than the price at which this item was sold to the others. At the time of hearing, the appellant's representative submitted that the difference was on account of the fact that the sales to the sister-concerns were made in bulk containers and the containers were returned by the sister-concerns to the appellant. It was further submitted that the appellant is in a position to produce the necessary evidence and challans in support of this claim. It was requested that the claim of the appellant may be allowed. 9.1 I have conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....its, we are not inclined to accept the submissions made by the learned counsel appearing on behalf of the assessee. It is clear from the observations made in the order of the CIT(A) that the appellant's representative submitted before him that the assessee is in a position to produce necessary evidence and challans in support of their claim that the sales to sister concerns were made in bulk containers and the containers were returned by the sister concerns, which explains as to why white phosphorus was sold at a lesser price to sister concerns. The assessee can not have any grievance against the restoration of the issue back to the Assessing Officer. The assessee will be at liberty to raise all contentions before the Assessing Officer including the contention that provisions of section 40A(2)(b) can not be invoked in relation to income, as it applies only in relation to expenditure. We therefore do not find any merit in the additional ground raised by the assessee. The same is therefore rejected. XVIII. The additional ground No. II reads as under: II. Proportionate deduction in respect of premium on leasehold land: 2.1 On the facts and in the circumstances of the case and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ional ground so raised, also placed reliance on the decision of the Tribunal in the case of Asstt. CIT v. Harsiddha Specific Family Trust [IT Appeal Nos. 2189 & 2442 (Ahd.) of 1994 dated 2-2-2000. The Tribunal in para-10 of the order has deleted the interest charged under section 234B in the absence of specific directions in the assessment order. He pointed out that in the present case also there is no specific direction for levy of interest under section 234B. The Assessing Officer has simply observed in the assessment order that "charge interest as per rules". The levy of interest under such circumstances have been held to be invalid by the Hon'ble Patna High Court and by the Hon'ble Supreme Court in the above referred judgments. XIX(2). The learned CIT-DR produced copies of ITNS 150 Demand Notice and relied upon the decision of the Tribunal in the case of S.K. Patel Family Trust v. Asstt. CIT[2001]71 TTJ (Ahd.) 121. He also pointed out the omission of mentioning specific section 234B in the assessment order can not be treated as a fatal mistake but it is a curable one, as has been held in the case of CITv. Shah Services [1994] 73 Taxman 154 (Cal.). He also pointed out that a ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or levy of interest under section 234B have been set aside and the matter has been restored back to the Assessing Officer for deciding the same afresh in the light of the judgments of the Hon'ble Apex Court and the Hon'ble Gujarat High Court. We would also like to observe that before the Assessing Officer decides this issue afresh, the learned Chief CIT should decide the application for waiver of interest under section 234B submitted by the appellant pursuant to the observations made by the Tribunal in order dated 1-12-2000 in SP Nos. 77 and 81/Ahd./2000. We do hope that the Chief CIT will decide the application for waiver of interest in a judicious manner. With these observations the issue relating to the levy of interest under section 234B is restored back to the Assessing Officer with a direction to pass a fresh order in accordance with the provisions of law and after providing reasonable opportunity to the assessee, in accordance with the judgment of Hon'ble Apex Court and Hon'ble Jurisdictional High Court. XX. Now we will deal with the Revenue's appeal (ITA No. 2485/Ahd./1999). Ground Nos. 1 and 2 raised by the Revenue are reproduced below: (1) On the facts and in the ci....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l of the expansion of the existing business of the company. Shri Soparkar submitted that the interest paid in respect of new units connected with the existing business of the company should are part of the same business, as there is complete unity of control, inter-connection and inter-lacing and management etc. The allowability of such interest expenditure under section 36(1)(iii) is clearly supported by the following judgments:-- (a) Alembic Glass Industries Ltd.'s case (b) Arvind Polycot Ltd.'s case (c) Core Health Care Ltd's case (d) Vadilal Dairy International Ltd.'s case (e) Aniline Dyestuff & Pharmaceuticals (P.) Ltd's case (f) Calico Dyeing & Printing Works'case (g) Insotex (P.) Ltd.'s case (h) Shah Theatres (P.) Ltd.'s case (i) Expanded Metal Mfrs.'case (j) Tarai Development Corpn. Ltd.'s case (k) Veecumees' case (l) Associated Fibre & Rubber Industries (P.) Ltd's case XX(3). The learned counsel also submitted that the taxability of any particular item of income/expenditure can not be decided on the basis of entries made in the books of account but the question relating to the taxability of an income or allowabihty of an expenditure w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nstitute the "same business" within the meaning of provisions contained in IT Act, 1961. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. [1963] 63 ITR 632. The Gujarat High Court directed the Assessing Officer to allow deduction in respect of such interest expenditure incurred in relation to the new unit at Bangalore which did not go into production in the relevant years. The facts of the present case also clearly reveal that the new units set up by the assessee were part of expansion of the existing business carried on by the assessee. The assessee has started manufacturing of either similar items or those units were set up for manufacture of items towards backward integration or forward integration. The test of interconnection, inter-lacing and inter-dependence are fully satisfied on the facts of the present case. We are therefore of the considered opinion that the learned CIT (A) has rightly deleted the said disallowance out of interest expenditure. We therefore do not find any merit in ground Nos. (1) and (2) of Revenue's appeal. XXI. Ground Nos. (3) to (6) relate to the disallowance out of travelling expenses and sal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l expenditure. The assessee has not challenged the findings given by the CIT (A) of confirming the part amount of disallowance made out of travelling expenses and salary and wages expenses relating to Jhagadia Unit. The CIT (A) granted relief in respect of balance amount of such travelling expenses amounting to Rs.32,84,404 and salary and wages expenses amounting of Rs.38,86,988. The present ground therefore relates to the aforesaid amount of relief granted by the CIT (A). XXI(2). The ld. CIT-DR submitted that the disallowance out of travelling and salary and wages expenses pertaining to Jhagadia units/projects, which had not yet commenced production, cannot be treated at Par with the interest expenditure, allowability of which is governed by section 36(1)(iii). While the allowability of travelling and salary and wages expenses is governed by the provisions of section 37 of the Act. The learned CIT-DR drew our attention to the decision of the Tribunal in the case of Core Health Care Ltd. where interest expenditure relating to new project was allowed under section 36(1)(iii) but the disallowance made out of travelling and miscellaneous expenses relating to such new project was co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng business, was allowable as revenue expenditure. He also drew our attention to the subsequent judgment of the Gujarat High Court in the case of CITv. Rohit Mills Ltd. [1998] 150 CTR (Guj.) 211. In this case the guarantee commission paid to bank for purchase of machinery was allowed as revenue expenditure by following the judgment of the Supreme Court in the cases of Akkamamba Textiles Ltd. and Siwakami Mills Ltd. He also relied on the judgment of the Gujarat High Court in the case of Vikram Mills Ltd. v. CIT [1999] 107 Taxman 344. In this case the Gujarat High Court held that bank guarantee commission was of a revenue nature. Such a view was taken on the basis of the above referred two judgments of the Supreme Court. The Gujarat High Court in para-8 of their judgment in this case also observed that the decision in Shree Vallabh Glass Works Ltd.'s case has been imphedly overruled by the aforesaid two judgments of the Supreme Court. Shri Soparkar, the learned counsel also relied on the decisions in the cases of Shah Theatres (P.) Ltd.; Aniline Dyestuff &Pharmaceuticals (P.) Ltd. and Bralco Metal Industries (P.) Ltd. v. CIT [1994] 206 ITR 477 (Bom.). Shri Soparkar strongly supported....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunal in this case is Peas Industrial Engineers (P.) Ltd. This was also a case where the claim for such expenditure was made in respect of expenses incurred between 1963 to 1966. The assessee started manufacturing activity sometime in the year 1968-69. Thus in this case also the assesee was not carrying on any existing business and the expenditure related to setting up of an altogether new business and it was not a case of setting up of a new unit of the existing business. The aforesaid decision is therefore clearly distinguishable with the facts of the present case. The learned CIT-DR then relied on the judgment of the Gujarat High Court in McGaw Ravindra Laboratories (India) Ltd's case. The facts of this case are also distinguishable with the facts of the present case. The manufacturing unit in this case was to be established in Malaysia as joint venture of the assessee and Government of Malaysia or other person. It was not going to be an expansion of assessee's business which is carried on in India. There has been nothing to indicate that the business organisation, administration and funds of both the units were to be common. The High Court recorded a definite finding in this....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... XXI(8). After considering the submissions made by the learned representatives and after going through the orders of the learned Departmental Authorities, we are of the view that on the facts and circumstances of the present case, the Revenue can have no valid grievance against setting aside and restoring back of this issue to the Assessing Officer for conducting investigation, verification and fresh decision. We do not find any merit in this ground also raised by the Revenue. Ground No. (7) is therefore, rejected. Ground No. (8) is general in nature. No arguments were addressed in respect of this ground. The same is also rejected. XXII. We will now deal with Cross Objection No. 4/Ahd./2001 submitted by the assessee in relation to the Revenue's appeal (ITA No. 2485/Ahd./99). The assessee has raised the following grounds in the cross objection:-- I. Addition under section 40A(2)(b) in respect of sale of white phosphorus on differential rates: Rs. 6,06,726 1.1 On the facts and in the circumstances of the case and in law, the CIT (A) erred in setting aside the ground of appeal in respect of addition amounting to Rs.6,06,726 made under section 40A(2)(b) of the Act. 1.2 I....