TaxTMI 
TaxTMI 
2000 (6) TMI 118
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....p; Particulars Amount in Rupees ------------------------------------------------------------------------ 1. Salaries & Wages 21,80,000 2. Travelling expenses 7,40,000 3. Telephone & Telex exp. 5,06,000 4. Lease rent charges of vehicles 5,58,000 5. ....
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....000 made by the Assessing Officer. Your appellant submits that this disallowance should be deleted. (9) Regarding claim of deduction under sections 80HH and 80-1: (a) The CIT has erred in excluding gross interest receipt of Rs.99,30 lacs from income eligible for deduction under sections 80HH and 80-1. Your appellant submits that this income forms part of income derived from industrial undertaking and therefore eligible for deduction under sections 80HH and 80-1. (b) Without prejudice to what is stated in (a) above, it is submitted that the CIT has erred in deducting only Rs.1 lac as expenditure to earn the interest income on the facts and circumstances of the case. Your appellant submits that interest paid on borrowings and other expenses attributable to the earning of interest income should be deducted from the gross receipt of income and only such net income of interest that should be deducted/excluded from the income eligible for deduction under sections 80HH and 80-I. (c) The CIT(A) has erred in confirming the method of computing income eligible for deduction under section 80-1 wherein the effect of deduction under section 80HH is given first and on the balance amou....
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....rn was filed on 6-8-1993 declaring a loss of Rs.1,11,68,543. In the revised return the assessee-company has de-capitalised certain expenditure in respect of purchase and installation of new machineries and claimed its deduction as a revenue expenditure. In the note attached with the return the assessee gave the following justification for filing the revised return: "Following expenses incurred during the previous year have riot been charged to profit & loss account of the year but have been capitalised in the books of account of the company: Rs. (a) Interest 1,56,76,000 (b) Salaries & Wages 21,80,000 (c) Travelling expenses &nb....
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....------ 2,38,59,459 --------------- Out of these, following expenses are directly related to the acquisition/ installation of the capital assets: Foreign Travelling - Rs. 8,90,000 Professional fees &nbs....
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....resaid expenditure of Rs.2,02,05,459 as a revenue expenditure in the revised return filed and adjudicated the issue against the assessee by observing as under:- "The first relevant point to be considered here is whether the assessee company is entitled to file a revised return on the basis of a change in opinion? Section 139(5) provides that if any person discovers any omission or wrong submission therein, he may furnish a revised return at any time before the expiry of prescribed period of time. Such radical change in the treatment of expenditure cannot be covered by the meaning of the words "discovers any omission or any wrong statement" i.e., the assessee-company cannot revise the return on these grounds. In view of these facts, the assessee-company was asked to show cause as to why the above-mentioned expenditure of Rs.2,12,05,459 which pertains to purchase of the machinery and wrongly claimed as deduction in the revised return should not be disallowed and added to the total income of the assessee-company. Submission of the assessee-company: In response to the show-cause notice, the assessee-company vide its written submission dated 24-3-1995 has filed reply running....
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....assessee-company in the books of account is neither determinative nor conclusive. But, it is to clarify that treatment of a particular expenditure in its books of account, though neither determinative of the nature of expenditure nor conclusive one way or other cannot be regarded as irrelevant. My this conclusion is supported by the Bombay High Court decision in the case of CIT v. Sandoz India Ltd [1994] 206 ITR 599. It is an admitted fact that the assessee-company was in the process of setting up a new project during the year under consideration. Accordingly, the expenses incurred for the construction of a new unit have been rightly classified by the assessee as pre-operative expenses and rightly capitalised to the cost of the assets. (iii) The assessee is following mercantile system of accounting and as per this accounting method, only those expenses are to be deducted from the income which have incurred to earn such income. Following this basis of mercantile system of accounting, assessee has not debited pre-operative expenses in support of new machinery installed, in the profit and loss account prepared for the year under consideration. The accounting principle followed by t....
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....f the court was that of certain expenditure incurred on raising loans and hence the same is not applicable to the facts of assessee's case. The next decision quoted by the assessee is delivered by Hon. Gujarat High Court in the case of Alembic Glass Works Ltd It may be stated here that this decision of Gujarat High Court was given in 1974 when there was no clear-cut definition to the 'actual cost' of the asset was available in the statute and the said decision was pronounced with reference to assessment years 1965-66 and 1966-67, with regard to capitalisation of interest expenditure. Therefore, the ratio of the decision cannot be made applicable after insertion of various explanations below section 43(1) of the Income-tax Act, 1961. (vi) It is to further add that the assessee has de-capitalised various expenditure pertaining to new project including the expansion of its capacity. In this regard, the following submission of the assessee company is mentioned for the sake of clarification: "In connection with setting up of the new unit, certain expenses incurred were treated as cost of assets created in the books of account of the company as under: -----------------------------....
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.... 4,64,000 h. Insurance during the period of establishment of the project for building, machineries, etc. 3,61,459 --------------- Total ....
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....he price paid by assessee to vendor. In Challapalli Sugars Ltd v. CIT[1975] 98 ITR 167, the Supreme Court has explained the meaning of expression "actual cost" as under:- "It would appear from above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition." It is evident from above judgment of Hon. Supreme Court that the Legislature has used the word "cost" advisedly and not the word "price", why? Cost comprehends much more than the mere listed price of a "plant" and pre-operative interest is also included in it. The Hon. Gujarat High Court has also examined the issue of capitalisation of interest to, the cost of plant and machinery under section 43(1) in its subsequent decisions. In the case of CITv. Khzedut Sahakari Khand Udyog Mandli Ltd. [1976] 104 ITR 206, while examining the issue of capitalisation of interest to the actual cost of assets under section 43(1), the then Hon. Justice H.J. Diwan has observed as under: "We may point out that, so far as the second question is concerned, the matter is directly covered now by the decision of ....
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....orking condition may legitimately be taken into account...." [Observation of Justice Desai P.D. at page 77, 112 ITR (1978)]. It is thus proved from the above cited decisions with regard to 'actual cost' that all expenses including interest on borrowed funds, which were incurred in order to bring an asset in working condition should be capitalised to the actual cost of the asset. In fact, all the decisions of different High Courts, whenever the question regarding 'actual cost" was under consideration, not only the ratio of Challapalli Sugars Ltd. is relied upon but it is followed. This clearly indicate that the decision in the case of Challapalli Sugars Ltd. is a landmark decision on the issue of 'actual cost' which is also in accordance with the normally accepted accountancy policy and recommended by Institute of Chartered Accountants of India. The ratio of Challapalli Sugars Ltd. is followed by different High Courts, in addition to the cases cited above, in all the cases where the question of 'actual cost' was under consideration, irrespective of' the fact whether the assessee was running the business or in the process of starting a new business. In this regard, following de....
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.... deduction of Rs.2,12,05,459 as revenue expenditure is rejected and these expenditure are capitalised to the cost of assets. The assessee-company will, however, be entitled to claim depreciation when the new project is set up and machinery has actually put to use and started commercial production." 8. As already mentioned in para 6 the assessee's appeal to the CIT(A) was dismissed on this point and the CIT(A) has adjudicated this issue by passing an elaborate order after summarizing the findings of the Assessing Officer and taking into consideration the submissions of the assessee. The issue has been discussed from pages 1 to 84 of the impugned appellate order. After summarizing the order of the Assessing Officer at pages 1 to 15 of the impugned appellate order in paras 2 to 2.9, the CIT(A) endorsed the view of the Assessing Officer with regard to the action in holding that the amount of Rs.1,56,76,000 paid on account of interest was required to be capitalised in view of the decision of the Supreme Court in the case of' Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 after distinguishing the judgment of the Supreme Court in the case of India Cement.5 Ltd. v. CIT [1966] 60 ITR 5....
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....dia, the interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the asset coming into production i.e. relating to the erection stage of the asset." The CIT(A) thereafter recorded the submissions made on behalf of the assessee in paras 3 to 3.11 at pages 15 to 27 of the impugned appellate order and gave his findings in paras 4 to 4.25 and 5 to 5.14 at pages 29 to 77 of the order to the effect that the assessee is not entitled to claim the deduction of Rs.1,56,76,000 as a revenue expenditure which it has initially treated as a capital expenditure in its books of account and claimed it as a revenue expenditure only by filing a revised return as an after-thought. 9. Thereafter, the CIT(A) discussed the question relating to the deduction of expenditure of salaries, wages, travelling expenses, telephone & telex expenses, professional fees, lease rent charges of vehicles, misc. factory expenses, insurance, financial charges etc. other than interest on borrowed funds which were initially capitalised by the assessee in the books of account and which related to acquisition of three machines and puttin....
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....itted that the Assessing Officer has disallowed the claim of the assessee on the basis of reasons given in the assessment order which can be summarised as under: (i) That the interest of Rs.1,56,76,000 paid related to acquisition of new machines which was connected with the expansion of new unit. (ii) The assessee itself has capitalised the same in its books of account and showed it as capital expenditure. (iii) There was no debit of the amount of interest as well as part of other expenses relating to salaries, wages, travelling expenses, lease rent charges, telephone and telex expenses, misc. factory expenses, insurance, etc. which were claimed as a deduction in the return filed under section 139(5) in the P&L A/c. (iv) The assessee has consciously followed two methods of accounting, one for shareholders and financial institutions and the other for tax authorities which is not permissible. (v) The Assessing Officer further held that the Supreme Court decision in the case of India Cements Ltd. was distinguishable and the Gujarat High Court decision in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 would not apply in view of the insertion of Expla....
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....nguish the decision of the Gujarat High Court in the case of Alembic Glass Industries Ltd. by relying on the decision of the Supreme Court in the case of Challapalli Sugar Ltd. Shri S.E. Dastur, the learned Advocate submitted that the crux of the arguments and findings of the CIT(A) in its very lengthy order is that once the assessee has capitalised the interest in its books of account, it cease to be interest and similar is his view in relation to other related expenses incurred under other heads like salaries, wages, travelling expenses, lease rent charges, insurance, etc. 10.2 After summarizing the findings of the Assessing Officer as well as the CIT(A) which have been elaborately recorded by the Assessing Officer in 10 pages and the CIT(A) in 84 pages, Shri Dastur submitted that both of them have erred in denying the claim of deduction on account of interest and other related expenses claimed by the assessee as a revenue expenditure by filing the revised return under section 139(5). Shri Dastur further submitted that the method of accounting and the entries made in the books of account are two separate things and the provisions of section 145 are concerned only with the meth....
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....acquiring the capital asset or not. Reliance was placed on the following decisions: (i) Alembic Glass Industries Ltd.'s case (ii) Arvind Polycot Ltd. v. Asstt CIT [1996] 222 ITR 280 (Guj.) (iii) Veecumsees v. CIT [1996] 220 ITR 185 (SC) (iv) CIT v. Woodcraft Products Ltd. [1996] 217 ITR 862 (Cal.). As regards the deduction on account of expenditure other than the interest as taken in ground of appeal No. 3, Shri Dastur mainly relied on his submissions reproduced earlier in relation to ground No. 2 and reiterated that once the expenditure relates to an existing business and is not completely related with the acquisition and installation of a new asset it must be allowed as a deduction. Shri Dastur then elaborated on the concept of what is the same business and relying on the case of Alembic Glass Industries Ltd. submitted that in that case a new unit started by the company at a totally different location was also held to be the expansion of the same business. Applying the principles laid down by the Gujarat High Court, Shri Dastur submitted that in the case of the assessee it was only an expansion of the same business as it was only the capacity of the existing unit w....
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....hibition in law to treat expenditure on account of interest and other related expenditure incurred for the acquisition of additional machines and putting them into operation as capital expenditure and once having exercised the option to treat this expenditure as capital expenditure in its books of account, the assessee cannot now claim it as a revenue expenditure. Reliance was placed on the decision in Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. [1906] 2 Chancery Division 654 and the decision of the Supreme Court in the case of Challapalli Sugars Ltd. Relying on the above authorities it was submitted that the method of accounting relating to valuation/cost of assets is the price paid alongwith related expenses and the same is now clearly permissible to be capitalised under section 43(1). The learned standing counsel further relied on the following decisions: (i) CIT v. UCO Bank[1993] 200 ITR 68 (Cal.) (ii) AddL CITv. Chandravilas Hotel [1987] 165 ITR 300 (Guj.). As regards the findings of the Departmental Authorities with regard to the treatment of an expenditure other than interest which has been claimed by the assessee as a revenue expenditure by filing the re....
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....rest paid on borrowed funds for acquiring capital assets to be capitalised and once having exercised the option to capitalise the interest in relation to the funds used for acquiring capital assets the assessee cannot now claim the same as a revenue expenditure and for that reliance was placed on the decision of Supreme Court in the case of Challapalli Sugars Ltd. On the other hand, the claim of the assessee is that the entries made by the assessee in its books of account are totally irrelevant to decide as to whether the assessee is entitled to any deduction which he is legally entitled to in terms of specific provisions of Income-tax Act. For that it was pleaded by Shri Dastur, the learned counsel for the assessee that the case of the assessee was squarely covered by the decision of the Supreme Court in the case of India Cements Ltd. whereas the case of Challapalli Sugar Ltd. was distinguishable as that case related to a business which has not commenced production whereas in the case of the assessee the three new machines resulted only into expansion of existing business. In this connection, it will be useful to refer to the decision of the Supreme Court in the case of CIT v. Ind....
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....e ratio of the decision in Challapalli Sugars Ltd's case, and with a view to see how far the said ratio is harmony with the ratio of the above referred decision of the Supreme Court in India Cements Ltd.'s case, it would be necessary to state shortly the facts relating to that decision. There the assessee was a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22,1958. It had borrowed considerable sums of moneys from the Industrial Finance Corporation of India for the installation of machinery and plant. During the accounting period, the company paid Rs.2,38,614 as interest and claimed that the said payment should be treated as part of the cost of the machinery and plant installed by it, and the depreciation should be calculated accordingly. The ITO rejected this claim of the company and held that the interest paid by the company from year to year was revenue expenditure. The matter eventually went to Andhra Pradesh High Court which held that where a plant is constructed out of borrowed money, the interest on loan upto the date of commencement of the business could be capitalised or treated as part of the actual cost....
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.... follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired." Their Lordships further observed- at page 727 thus:- "Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. v. CIT that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Calico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd. were given with reference to the borrowings made for the purpose of running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. was given with reference to a borrowings which could not be treated as made for the purpose of business, as no business had vet been commenced. Thus, there is no incompatibility between these decisions. The Supreme Court itself has distinguished its earlier decision in India Cements Ltd. in the following terms in Challapalli Sugars Ltd. This case ....
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....ed to development rebate and depreciation on the amount which has been capitalised and the assessee never claimed the deduction of interest on borrowed funds under section 36(1)(iii). Therefore, respectfully following the decision of the Gujarat High Court in the case of Alembic Glass Industries Ltd. and that of the Supreme Court in the case of India Cements Ltd. we are of the opinion that the assessee is entitled to deduction of Rs.1,56,76,000 on account of interest on borrowings which is used for installation of three new machines under section 36(1)(iii). In this connection, it will be useful to refer to the decision of the Supreme Court in the case of Ambica Prasad Mishra v. State of UP [1980] 3 SCC 719 dealing with the point where it is held that under article 141 every new discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. Similar is the view of the Supreme Court in the case of Kesho Ram & Co. v. Union of India [1989] 3 SCC 151 wherein at page 160 it is held-- "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which th....
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....was answered by them in the following manner: "In view of this we find on question No. 2 that in this case the amounts of interest are allowable as revenue expenses." From the judgment of the Gujarat High Court it is very clear that they have found even in this case only the amount of interest as allowable revenue expenditure. The other expenses including miscellaneous and travelling expenses have therefore by implication found not allowable as revenue expenditure. It appears that deductibility of the other expenses was riot even argued before the Hon'ble High Court during the course of hearing. The reasons for that are not far to seek unlike the provisions of section 36(1)(iii) the provisions of section 37 clearly and unmistakably deny any deduction of expenditure in the capital field. In this connection, reference may be made to the binding decision of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. v. CIT [1981] 127 ITR 37 and the decision in the case of CIT v. Peas Industrial Engineers (P.) Ltd. [1994] 205 ITR 447 wherein it is held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of....
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....sp; Rs. 12,20,000 Printing& Stationery Rs. 17,88,250 ----------------- Rs. 73,80,260  ....
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....nbsp; ---------- 2.5% of above is ... Rs.85.08 lakhs. ------------------------------------------------------------------------ In addition to this, the assessee has claimed other debenture issue expenses amounting to Rs.28,05,137 as deductible under section 37(1) of the Act. During the course of assessment proceedings the Assessing Officer pointed out to the assessee that the fees of Managers and Registrars to the issue claimed at Rs.12,20,000 were not covered under section 35D(2)(c)(iv) of the Act and the Assessing Officer asked the assessee to explain why the expenditure of Rs.28,05,137 which was claimed as a revenue expenditure Linder section 37(1) may not be disallowed as it is an expenditure of capital nature. In response to the above, the assessee filed written submissions dated 24-3-1994 wherein it is claimed that the total expenditure in connection with the convertible debentures was Rs.1,01,85,397 (Rs.73,80,260 plus Rs.28,05,137) and this entire expenditure should be allowed as a deduction under section 37(1). A....
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....bsp; 2.5% of Rs. 3096 lakhs-Rs.77.40 lakhs ------------------------------------------------------------------------ The Assessing Officer after considering the submissions of the assessee held that the assessee was entitled to deduction under section 35D at 2.596 of the capital employed which was calculated at Rs.1346.00 lakhs which come to Rs.33.65 lakhs and 1/10th of this viz. Rs.3,36,500 was allowed as deduction. With regard to the balance expenditure the Assessing Officer held that the expenditure claimed as a deduction under section 37(1) oin the issue of convertible debentures was not admissible as a revenue expenditure as it was for the purpose of raising equity capital by issue of convertible debentures and as such it becomes capital expenditure and was not admissible as deduction under section 37(1). 14.1 The assessee appealed and the CIT(A) discussed this issue in paras 7 to 7.13 of the impugned order and gave his findings in para 7.12 that the issue for public subscription of shares or debentures of a company are covered by the provisions of section 35D(2)(c)(iv). And the mere fact that the appellant's issue was in relation to partly convertible debentu....
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....ter has to be restored to the CIT(A) for readjudication after verifying the fact as to whether the issue of nonconvertible debentures to financial institutions amounting to Rs.2 crores was a part of the capital employed for the purpose of calculation under section 35D. 14.3 With regard to the balance expenditure of Rs.40,25,137 it was submitted that the same was clearly allowable as a deduction under section 37(1) keeping in view the fact that no shares were allotted on partial conversion of the debentures in the assessment year under consideration and the conversion of part of the debentures into equity shares took place only in the subsequent year. Accordingly it was submitted that so far as the assessment year under consideration is concerned, the expenditure was incurred in relation to the raising of loans by issue of partly convertible debentures and the same was clearly allowable as a deduction in view of the Supreme Court decision in the case of India Cements Ltd. as well as the decision of the Tribunal in the case of IAC v. K.S.B. Pumlp Ltd. [IT Appeal No, 4648 (Bom.) of 1986, dated 2-8-1989] for assessment year 1982-83, and the decision of the Tribunal in the case of IA....
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....ty has held that the entire expenditure for raising partly convertible debentures is an allowable deduction as revenue expenditure if the partly convertible debentures are not converted into equity shares in the assessment year under consideration relying on the decision of the Supreme Court in the case of India Cements Ltd. Similar is the view of the Tribunal in the case of K.S.B. Pump Ltd From the records it is not clear as to when these partly convertible debentures were converted into equity shares. Since we have restored the matter with regard to the deduction under section 35D to the file of the CIT(A) in relation to ground No. 4(b) we restore the question with regard to the allowability of the balance expenditure in connection with the issue of partly convertible debentures also to the file of the CIT(A) for reconsideration (to avoid piecemeal adjudication) in the light of the decision of the Supreme Court in the case of India Cements Ltd. as well as the decision of the Tribunal in the case of F.G.P. Ltd. and K.S.B. Pump Ltd. Accordingly ground of appeal Nos. 4 and 5 are allowed for statistical purposes. 15. Coming to ground of Appeal No. 6 which relates to the claim o....
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....t new area of ventures to be undertaken shortly and to make the people aware of the various new projects of the company and its diversification plans so that more persons can contribute to the assessee-company by way of subscription in the forthcoming public issue. Accordingly the Assessing Officer held that this special advertisement campaign was meant for future and the expenses were incurred to acquire a benefit of enduring nature and as such was in the capital field. He accordingly disallowed the entire expenditure of Rs.70,22,742. 15.1 On appeal, the CIT(A) discussed this issue in paras 8 to 8.5 of the impugned order and upheld the order of the Assessing Officer relying upon his reasoning relating to the disallowance of interest amounting to Rs.1,56,76,000 and the fact that the assessee has treated this expenditure as a Deferred Revenue Expenditure in its books of account and initially claimed only 1/4th of it as a deduction but subsequently while filing the return, entire amount was claimed as deduction treating the same as revenue expenditure. The CIT(A) held that the treatment given in the books of account of an assessee can be departed only when the treatment itself is ....
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....101 (HP). 15.3 The learned standing counsel for the department relied on the orders of the Assessing Officer as well as the CIT(A) and further submitted that after having itself treated the entire expenditure as an expenditure of Deferred Revenue nature and having charged only 1/4th of the entire expenditure to the P&L A/c., the assessee could not claim the entire expenditure as a revenue expenditure in the return filed. 15.4 We have considered the rival submissions and have gone through the orders passed by the Assessing Officer as well as the CIT(A). The conditions necessary for deduction under section 37(1) are that an expenditure incurred for the purpose of business is allowable as a deduction provided the expenditure is not in the nature of personal expenditure or is an expenditure in the capital field. The assessee being a company and considering the nature of expenditure and other fact it cannot be disputed that the expenditure is not of a personal nature. As regards the second limb of section 37 that the expenditure should not be of a capital nature it is seen that the assessee has accounted this expenditure incurred, as Deferred Revenue expenditure in the books of ac....
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.... of a sufficient degree durability appropriate to the context." For the aforesaid reasons we are of the opinion that the Departmental Authorities were not justified in disallowing the claim of Rs.70,22,742. Accordingly this issue is adjudicated in favour of the assessee and the addition made by the Departmental Authorities is directed to be deleted. 16. Coming to ground of appeal No. 7 which relates to disallowance of Rs.20,000 out of Gift Articles. The Assessing Officer has dealt with this issue in para 10 of the assessment order as under: "10. During the year under consideration, the assessee-company has incurred an expenditure under the head gift at Rs.15,50,978. Most of these expenditure pertains to gifts made by the Medical Representative of various users of the products of the assessee company. A scrutiny of the details as filed during the course of assessment proceedings has revealed that the assessee has incurred an expenditure of Rs.1,97,806 under the head 'Misc. gifts'. It is further observed that the expenditure under the head 'Misc. gifts' is not fully vouched and certain expenditure are for the personal purposes. Considering the above facts and circumstances o....
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....ing the meetings at the different centres. A scrutiny of the vouchers has revealed that some of the expenditure under the head are personal in nature and meant for catering the personal need. Some of the expenditure are not vouched fully. Considering the above facts, an amount of Rs.30,000 is disallowed under the head Marketing misc. being unverifiable in nature and not laid for the business purpose." 17.1 The CIT(A) upheld the disallowance for the reasons given in para 12 of the impugned order as under: "12. Next ground of appeal in assessment year 1992-93 relates to disallowance of a sum of Rs.30,000 out of marketing expenses. This disallowance has been ma de by the Assessing Officer on the ground that the entire expenditure is not vouched, whereas the contention of the appellant company has been that each and every expenditure has been fully vouched. Here again I hold that the estimate of disallowance as made by the Assessing Officer for want of complete verification and for possible disallowables is fair and reasonable. The same is accordingly confirmed." 17.2 Before us the learned representative of the assessee submitted that the entire expenditure under the head 'Mar....
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....3 ITR 521 (Bom.) and the decision in the case of CIT v. Hindustan Antibiotics Ltd. [1982] 137 ITR 42 (Bom.). Alternatively and in support of ground of appeal No. 9(b) it was submitted that if it is held that the amount of Rs.99.30 lakhs being the gross interest income is not the income derived from the Industrial undertaking then the interest paid on borrowings and other expenses attributable to earning of interest income should be deducted from the gross interest income and only such net income of interest then should be deducted/excluded from the income eligible for deduction under sections 80HH & 80-1. Regarding ground of appeal No. 9(c) it was submitted that the same is covered in favour of the assessee as per the decision of the High Court in the case reported in J.P. Tobacco Products (P.) Ltd. v. CIT[1998] 229 ITR 123 (MP). So far as ground No. 9(a) is concerned, it was submitted that the CIT(A) has erred in holding that B/F investment allowance and unabsorbed depreciation should be deducted for arriving at the income eligible for deduction under sections 80HH and 80-I. 19. The learned standing counsel appearing for the department submitted that in view of the dec....
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....the application money received in respect of which was parked in short term deposit with the bank from where interest income was earned, the decision is not very clear. The CIT(A) has not considered the impact of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. as the same was not available at the time when the CIT(A) passed the impugned order. Therefore it is considered fair and proper to restore the issue raised in ground Nos. 9(a) and (b) to the file of the Assessing Officer for fresh adjudication in accordance with law and in particular in the light of the Supreme Court decision in the case of Tuticorin Alkali Chemicals & Fertilizer Ltd. 20.1 As regards ground No. 9(c) the same is covered in favour of the assessee and against the revenue by the decision of the High Court in the case reported in J.P. Tobacco Products (P.) Ltd. 20.2 So far as ground No. 9(d) is concerned, the same is covered in favour of the revenue and against the assessee as per the decision of the Gujarat High Court in the case reported in the case of Paushak Ltd. 21. In the result, the appeal filed by the assessee is partly allowed. 22. Coming to the R....
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.... disbelieved the contention of the appellant company that payment in cash was made as these persons insisted on cash payments at material time. Appellant company further explained that insofar as the principal of K.M. Kundanani College of Pharmnacy to whom testing fees of Rs.32,000 was paid, it was only one time dealing. Shri Karsanbhai Rathod dealt with loading and unloading of the materials, where occasionally this kind of contingency arises. On consideration of the matter having regard to the otherwise immaculate record of the appellant company in compliance with the provisions of section 40A(3), I hold that the contention of the appellant company that they found themselves hard pressed to make payment by cash to these two persons should not be disbelieved. The disallowance made by the Assessing Officer is therefore directed to be deleted." 23.1 After hearing both the parties to the dispute we are of the opinion that the order of the CIT(A) requires no interference and we uphold his findings as recorded in para 9.1 of the impugned order which we have extracted above. This ground is accordingly adjudicated in favour of the assessee and against the revenue. 24. Ground No. 3 ....
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....he decision of the Supreme Court in the case of Camba.v Electric Supply Industrial Co. Ltd. v. CIT[1978] 113 ITR 84. 25.1 After heating the parties to the dispute, we do not find any infirmity in the order of the CIT(A) and the reasons given by the CIT(A) whose order we will uphold in this regard. 26. In the result, the appeal filed by the revenue is dismissed. Per Shri Gopal Chowdhury, Judicial Member.--I wish to record my respectful dissent with regard to the finding that the interest payment of Rs.1,56,76,000 is to be deducted under section 36(1)(iii) of the I.T. Act. 2. The fact of the case is not in dispute that the assessee company has been manufacturing Fluids viz., LVP and SVP for injections. An additional unit has been set up for manufacturing similar items where the assessee installed three new machineries for which the assessee has incurred various expenses including interest, salaries and wages, travelling expenses, telephone, telex, recruitment and other expenses. (Total Rs.2,38,59,459). The break-up has been given in para 5 of the order passed by the learned Accountant Member which includes interest payment of Rs.1,56,76,000. Admittedly in the books of acc....
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....e shall not be included, and shall be deemed never to have been included, in the actual cost of such asset." From perusal of the aforesaid provision, it is clear that the same has been inserted with a view to clarify the meaning of actual cost as provided in section 43 of the Act. According to the aforesaid provision, the amount of interest payable or paid for acquisition of an asset, so much of such amount as is relatable to any period after the asset is first put to use shall not be included in the actual cost of such asset. Meaning thereby before such asset is first put to use such interest can be included in the actual cost of such asset. The assessee had followed the aforesaid procedure provided under law which is also supported by the principles of accountancy. The assessee did not claim the expenditure as revenue expenditure in the books of account. Admittedly even according to the assessee it had not committed any mistake but since the law permits it to claim the interest as deduction under section 36 as such relief should be given to it. In my opinion, the contention of the assessee should not be accepted because the treatment originally given by the assessee in respect....
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....1)(iii) is applicable irrespective of the fact that whether the borrowings has been made for capital field or revenue field. Only it has to be seen whether the borrowings has been made for the purpose of business or not. If it is for the purpose of business, then section 36(1)(iii) is applicable according to the Alembic Glass Industries Ltd.'s case. In my opinion, in the present case before us admittedly the borrowings were made for the purpose of establishing a new unit consisting of three machines. The assessee-company might, have running business and the borrowings has not been made for the purpose of starting a new business but it has to be seen that borrowings has been made for the purpose of acquiring new plants and machineries in the new unit and the assets have not yet put to use. Therefore, the assessee had rightly capitalised the interest payment also in its books of account following the provision of Explanation 8 of section 43(1) of the I.T. Act. Therefore, in my opinion, the finding recorded by the CIT(A) on this issue should be confirmed. 5. On behalf of the assessee, two decisions of the Tribunal, Pune Bench were relied upon which are as follows:- In the case o....
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....is correct or the view of the learned Judicial Member that the interest has to be capitalised as was initially done by the assessee in its books of account, but was subsequently claimed as a revenue expenditure in the revised return filed before the Departmental Authorities, is justified?" ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Per Shri Gopal Chowdhury, Judicial Member - Since there has been a difference of opinion between the Members in one issue of the present appeals, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, ITAT in terms of section 255(4) of the Act. Accordingly, the following point of difference is referred: "Whether in the facts and in the circumstances of the case, considering the different views taken by the different Benches of the Tribunal i.e., 53 ITD 575, 62 ITD 233 (Pune Bench) and 65 ITD 169 (Calcutta Bench) and the decisions of Supreme Court and High Court discussed in the orders, the interest paid on borrowed capital which has been capitalised in the books of account as part of actual cost of the new machineries of the new unit of the assessee-company can be claimed as ....
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.... the learned Sr. Advocate, submitted that the appellant company was a manufacturer of Intravenous Injection. The products manufactured by the company have been described as "LVP" and "SVP" for bravity. The manufacturing operations of the appellant company commenced in February 1988 at Rajpur factory. During the financial year ended on 31-3-1992, the company installed three additional machines in addition to three existing machines for production of LVP and SVP. The capacity of LVP was doubled from 18 million bottles to 36 million bottles and new capacities were established for manufacture of 45 million units of SVP. Shri Dastur submitted that three addl. machines installed in the year under consideration were not for the purpose of starting a new business, but those were part of the same business as being already carried on by the assessee. Shri Dastur pointed out that a perusal of the orders proposed by the learned A.M. and learned JM and the points of difference referred by them under section 255(4) would clearly indicate that both the learned Members have unanimously held that these three Additional machines were installed by the assessee for manufacture of similar items and suc....
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....terest expenditure was incurred for the purposes of existing business. 6. Shri Dastur also invited my attention to para 15, p. 51 of the order- of the learned A.M. in which the assessee's claim for grant of deduction ill respect of expenditure on advertisement amounting to Rs.70,22,742 has been discussed. The assessee treated the above expenditure as deferred expenditure in its books of account and Director's report and claimed 1/4th of the same as deductible. However, at the time of filing the return, the assessee claimed the entire expenditure of Rs.70,22,742 as Revenue expenditure. The learned A.M. in para 15.4 has observed that 'As already held while disposing of the ground No. 2 (relating to deductibility of interest of Rs.1,56,76,000) making of accounting entries in the books of account is not determinative of the character and/or nature of claim for deduction.' The Id. A.M. has held that deduction of' the entire sum of Rs.70,22,742 should be allowed in the year under consideration. The learned J.M. has not differed with the view so taken by the A.M. in relation to this point. Therefore, there is no real difference between the learned A.M. and J.M. on the question as to wh....
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.... for purpose of determining the allowability thereof under the provisions of Income-tax Act. In fact, on this issue also, the learned counsel submitted that there is no dispute between the two learned members. If there would have been a difference of opinion between them, the learned J.M. would not have agreed for allowability of deferred revenue expenditure incurred by way of advertisement as discussed herein before. Shri Dastur drewv mv attention to the decision of the ITAT, Spl. Bench, reported in Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 (Hyd.) in which it was inter alia held as under: "That the provisions of section 145 cannot override section 5. If an income has neither accrued nor received within the meaning of section 5 whatever section 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognising such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year." He placed reliance on the following decisions to support his contention that it is irrelevant that in the books of account, the interest was capitalised and not debited in the profit and loss account....
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....0. (b) CIT v. Alembic Glass Indus. Ltd., 103 ITR 715. (c) IAC v. Coromandel Fert. Ltd 29 ITR) 455. (d) Calico Dyeing & Ptg. Works v. CIT 34 ITR 265. (e) CIT v. Associated Fibre (f) CIT v. Malwa Vanaspati & Chemicals Co. Ltd 226 ITR 253. (M.P.). (g) CIT v. Senapathy Whitely Ltd. 198 ITR 753. (h) Bharat Forge Ltd. v. DCIT[1993] 53 ITD 575 (Pune). 5. Even the test of same business is irrelevant for section 36(1)(iii) as there is no such condition of same business as found in section 72-- (a) Veecumses v. CIT220 ITR 185 (SC). (b) CIT v. Western Bengal Coal Fields Ltd 233 ITR 139 (Cal.)." 10. Shri Dastur further argued that section 36(1)(iii) draws no distinction between capital and Revenue. All that the provision requires is that amount of interest paid is in respect of capital borrowed for the purpose of the business. He drew my specific attention to Judgments reported in Arvind Polvcot Ltd.'s case, Gujarat Mineral Development Corpn.'s case, Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.), Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.), (said to be a binding judgment for Gujarat), Alembic Glass Industries L....
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....d that the various Benches of the Tribunal even after considering Explanation 8 to section 43(1) have held that interest paid in respect of borrowings made for running business/ existing business is deductible under section 36(1)(iii). He placed reliance on decisions reported in Bharat Forge Ltd. case, Kalyani Steels Ltd. 's case , Kumar Printers (P.) Ltd. v. ITO [1996] 59 ITD 370 (Delhi) decision of ITAT, Ahmedabad Bench in the case of Vadilal Dairy International [IT Appeal No. 500 (Ahd.) of 1997], CIT v. Rajaraim Bandekar [1993] 202 ITR 514 (Bom.) and Arvind Polycot Ltd.'s case The learned counsel submitted that judgments of Hon'ble Gujarat High Court reported in Arvind Polycot Ltd.'s case relates to assessment year 1993-94 and it was delivered in the year 1996. The judgment of Hon'ble Jurisdictional High Court after insertion of Explanation 8 once again confirms the earlier view expressed in Alembic Glass Industries Ltd. 's case. Therefore, the view proposed by the learned J.M. is clearly contrary to the judgment of the Hon'ble Jurisdictional High Court. 13. Shri Dastur submitted that the learned J.M. at para 3, p. 70 of his order observed that 'It appears that the applicabil....
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....ear where the assessee choses not to claim such depreciation. The learned counsel submitted that the assessee is clearly entitled to grant of deduction in respect of interest under section 36(1)(iii). 14. The learned counsel submitted that there is nothing in Explanation 8 to section 43(1) which in any way dilutes the effect of the following binding decisions: (a) India Cements Ltd's case. (b) Alembic Glass Industries Ltd.'s case. (c) Arvind Polycot Ltd.'s case. (d) LAC v. Coromandel Fertilizers Ltd [1989] 29 ITD 455 (Hyd.). (e) Vadilal Dairy International's case. (f) Kumars Printers (P.) Ltd.'s case. 15. The learned counsel thus strongly supported the order of the A.M. 16. Shri Ramkrishna Gupta, the learned Sr. D.R. supported the order of the learned J.M. He submitted that the point of difference relates to what treatment should be given to the interest paid on the borrowed funds utilised for the acquisition of new assets forming part of new unit during the pre-production period. He submitted that the dispute as to whether the new unit, where the three new machines were installed was a part of the same business is still there and there was no unanimity o....
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....on of an asset, 'so much of such amount as is relatable to any period after such asset is first put to use shall not be included and shall be deemed never to have been included' in the actual cost of such assets. The learned Sr. D.R. also drew my attention to Circular No. 461, dated 9-7-1986 explaining the provisions contained in Finance Bill, 1986 to show that Explanation 8 to section 43(1) was inserted to overcome the difficulties caused by various judgments, the first being in the case of J.K. Cotton Spg. & Wvg. Mills Ltd. This decision as well as the subsequent decisions based thereon were contrary to the legislative intent. Hence, the aforesaid Explanation was inserted with a view to remove the doubts and clarify that once the production starts, no interest on borrowings made for the purchase of such assets should be capitalised. Shri Gupta pointed out that in this Circular it is also clearly mentioned that as per the guidelines issued by the Institute of Chartered Accountants of India (ICA for short), the interest on money which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the assets coming into production....
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....eriod before such ships were delivered to the assessee was includible in the actual cost of the assets for the purposes of development rebate. However, interest for the period after delivery of the two vessels could not be capitalised for the purposes of claiming development rebate in view of Explanation 8 to section 43(1). The learned D.R., therefore, argued that even in cases where new unit or new items of plant and machinery are acquired, in the case of existing and running business, interest pertaining to the pre-production period is to be capitalised. 19. Shri Gupta then referred to the Judgment of Hon'ble Gujarat High Court in the case of Arvind Mills Ltd. This was also a case of existing/running business. The assessee runs a textile Mill. In order to expand its spinning capacity and to renovate and modernise some of the sections of the mill, the assessee negotiated to import machineries from abroad it was held that addl. liability in respect of repayment of loan borrowed by the assessee for acquiring imported machinery during the relevant previous year, which was incurred as an integral part of the original transaction can legitimately be taken into account as enhancement....
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....cost means the actual cost of assets to the assessee. What are the items of expenditure which are to be included in the actual cost has not been specifically defined in the Act. Therefore, one has to take recourse to legal pronouncement on the issue and the accounting standard issued by the ICA. He submitted that the term 'actual cost' has been defined by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. in the following words:- "As the expression actual cost has not been defined. It should be construed in the sense which no commercial man would misunderstand. For this purpose it would be necessary to ascertain the expression in accordance with normal rules of accountancy prevailing in the commerce industries the cost of which is to include all expenditure necessary to bring such assets and to put them in working condition." 22. The learned D.R. submitted that the aforesaid principle for determination of the actual cost of assets was applied by the Hon'ble Gujarat High Court in the case of Arvind Mills, Ltd. Shri Gupta submitted that inclusion of interest in the actual cost of asset is in accordance with the accounting standards issued by the ICA. The Hon'ble S....
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....ion 8 was brought in the statute to remove this limited controversy and there was no controversy whatsoever with regard to the capitalisation of interest pertaining to pre-production period or pertaining to the period prior to the date when the asset is put to use. Shri Gupta also relied upon the Judgment of the Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889 to support his contention that the contents of Circular are binding. The Circular explaining the object of insertion of Explanation 8 to section 43(1) clearly stated that interest for the reproduction period may be capitalised. Such a view ought to have been accepted by the learned A.M. 23. The learned Sr. D.R. drew my attention to section 35D of the Act relating to amortization of preliminary expenses. Such preliminary expenses include expenses incurred before the commencement of business as well as expenses incurred after the commencement of business, in connection with the expansion of industrial undertaking or in connection with setting up of a new industrial unit. Shri Gupta wanted to draw an inference from the language of section 35D that wherever Legislature so intended, they have introduced a specifi....
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....business. In fact, it was a major project and should be regarded as a new business. 25. Shri Gupta then drew my attention to various judgments on tile question as to what constitutes part of 'same business'. He referred to the judgment of Hon'ble Supreme Court in the case of Waterfall Estates Ltd. v. CIT[1996] 219 ITR 563 approving the judgment of the Hon'ble Madras High Court in the case which is reported in Waterfall Estates Ltd. v. CIT [1981] 131 ITR 223 . The learned Sr. D.R. pointed out that the onus lies on the assessee to show that the different ventures carried out by the assessee constitute part of the same business. In this case, the assessee, which had a composite estate in tea and coffee had acquired the other two coffee estates. The Hon'ble Madras High Court held that from the Speeches of the Chairman, quoted at page 220 of 131 ITR, the Tribunal has drawn the inference that the history of company's expansion itself shows that the later addition of coffee estate as well as the commissioning of the coffee curing works did not form an integral part of the original business of the assessee. The company itself has been apportioning the expenses amongst the different acti....
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....new unit is of larger dimension. Investment in the new unit is Rs.37 crores while in the old unit investment was Rs.23 crores only. The new machineries have been installed in a new building. Finances have been raised independently for the new project. All these facts viewed in the light of principles laid down by the Supreme Court in the case of Waterfall Estates Ltd. and L.M. Chhabra & Sons's case it will be clear beyond any doubt that the new unit set up by the assessee cannot be treated as part of the old business. 28. The learned Sr. D.R. submitted that the reference of decision of ITAT, Calcutta reported in JCT Ltd.'s case given by the learned J.M. in the point of difference referred under section 255(4) is perfectly valid, as the said decision only explains the legal proposition, which can be incorporated in the point of difference so referred by the learned J.M. 29. Shri Gupta also submitted that the argument advanced by Shri Dastur, the learned Sr. Advocate, based on the arguments of the Standing Council referred to at page 33 of the order of learned A.M. has to be read in the context of his main arguments. The learned Standing Council had vehemently argued that the a....
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....e to validity of proceedings initiated under section 147 and issue of notice under section 148. The same is not of any help to the assessee on the facts of the present case. Shri Gupta submitted that section 43(1) defines the term 'Actual cost'. This being the specific provision, recourse cannot be had to the general provisions under section 36(1)(iii). It is a well known principle that specific provision supersedes the general provision. He submitted that LATIN DICTUM GENERALIC SPECILBUS NON-DEROGANT was applied in the following cases:- 1. CIT v. Hindustan Electrographites Ltd. [1998] 229 ITR 585 (MP); (Regarding Harmonious construction) 2. CIT v. S. Teja Singh AIR 1959 SC 352; and 3. Pepper (Inspector of Taxes) v. Hart [1994] 210 ITR 156 (HL) (Regarding purposive interpretation). Shri Gupta also submitted that provisions of section 210 of Companies Act require the Board of Directors to lay before the annual general body, the balance-sheet and P & L account. Section 211 of the said Act requires that every balance-sheet should disclose a true and fair view of the company as at the date of balance-sheet and true and fair view of the profit/loss of the year. The acc....
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.... adjoining to the existing building, was part of the same business or whether it was a new unit of an altogether new business? (B) If the installation of three more machines in the new factory building is considered to be a part of the same business or is considered as a new unit of the existing running business, will the fact that the interest cost pertaining to pre-production period has been capitalised in the books of account make any difference with regard to allowability of the interest payment as a deduction under section 36(1)(iii) of the Act? (C) Whether interest pertaining to the pre-production period should be considered to be part of actual cost of assets within the meaning of section 43(1) read with Explanation 8 thereto and in the light of judgment of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. regardless of the fact that such new unit was part of the old and existing business or it was a new business altogether or such interest pertaining to the pre-production period should be allowed as deduction under section 36(1)(iii) or a revenue expenditure Linder section 37 in case of the new unit being a part of the old business? (D) Whether the inser....
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....ts of the present case appear to be totally different and distinguishable. In the present case, the new building has been constructed at the same location. The items manufactured by the new unit, namely, LVP is exactly the same as is manufactured by the existing unit. The only difference is that the capacity of the old unit has been doubled. One new item 'SVP'has been treated by both the Id. Members as 'similar items'. The Id. J.M. in his dissenting order at page 69 has clearly observed that the additional unit has been set up for manufacturing similar items. The new product 'SVP', is a product of similar nature and it may be an improved small size of the same product. In an existing business, one may enlarge and augment the range of its existing products to meet the requirement of modernisation in the global competitive market. The new unit in the present case is managed by same Board of Directors and most of the employees are common. This is evident from the fact as pointed out by the Id. DR himself, wherein he had pointed out on the basis of prospectus issued for the new project, in which it was inter alia mentioned that the company presently employs 729 persons and will meet a ....
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.... forms part of the same business must depend on the facts and circumstances of each case and it is for the assessee to establish that the different ventures constitute part of the same business. The facts of the present case, as already discussed above, are clearly distinguishable with the facts of L.M. Chhabra & Sons' case. 41. It may be relevant here to mention that the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd had considered the principles laid down in the case of L.M. Chhabra & Sons. At page 721 of 103 ITR, the Hon'ble Gujarat High Court has observed as under: "Reliance was placed by Shri Kaji on the decision of the Supreme Court given in LM Chhabda & Sons v. CIT. The Supreme Court has therein observed that if the assessee carries on several distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under section 10 of the Indian I.T. Act of 1922 of an outgoing attributable to the business which is closed against the income of his other business in that year. It was further observed that there is no general principle that where an assessee carried on business ventures of the sa....
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....aining two businesses; (vi) different books of account were maintained for each business and separate P & L account and balance-sheet were prepared, in respect of each business, although ultimately the accounts were consolidated into a common account; (vii) the overall control of the Board of Directors, over-all finance, common ownership of the various business, common source of finance, etc. were factors of no material importance; and (viii) in the case of a limited company, there can be different businesses, although overall control was retained by the same Board of Directors. The Gujarat High Court held as under: "Held, that the board of directors of the assessee, which was a private company, was in overall control of all the five business activities which were owned and carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied in the various business activities. The ultimate gain or loss of the business was also worked out by a consolidated profit and loss account and balance-sheet. The source of finance for running the various business was thus one and the same and there was consolidation of accounts for the purpose....
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.... evidence of inter-dependence, inter-lacing, unity of control etc. 44. The Hon'ble Gujarat High Court in the case of Arvind Polycot Ltd. also considered a similar question. In that case the assessee was engaged in the manufacturing of cloth. The new machinery was purchased for manufacturing fabrics with greater width. It was held by the Hon'ble High Court that it was clear that the business was the same, the administration was the same, funds were common, the staff was the same, persons in the management were the same and the output would be textile fabrics. Thus, it was clear that it would not be a new business. It may also be relevant here to refer to some observations made at page 288 in this case, which reads as under: "Thus it is clear that what is required to be seen is whether business is carried on by the assessee or not. In the instant case, we put a question to Mr. Shelat, the Id. counsel that if the assessee is engaged in the running of railways and if meter gauge lines are converted into broad gauge lines, would the assessee not be entitled to the benefit of section 36(1)(iii) to which Mr. Shelat stated in view of the aforesaid decision, he need not be questioned.....
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....a careful consideration of the entire relevant facts, material and evidence existing on records. I am of the considered opinion that there was complete inter-connection, interlacing, inter-dependence, unity of control, common funds and common management and the new unit, where three additional machines were installed by the assessee, in addition to the three existing machines already run by them in their existing unit, was a part of the same business. It was a new unit of the existing running business whereby the assessee expanded its production capacity of LVP and also new capacities were established for manufacture of SVP, a different variety of the same product, namely, intravenous fluids. The LVP and SVP are two different varieties on the same kind of products, namely, intravenous fluids. Both the units are, therefore, part of the same running business. 48. The next issue which is required to be determined is whether the fact that the assessee capitalised the interest cost for the pre-production period in the year under consideration in conformity with the accounting principles, accounting standards etc., will make any difference in relation to assessee's claim for deductibi....
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....e used in the Companies Act, as explained in the various accounting standards and as understood for the purpose of taxation laws in certain circumstances may have different meanings depending on the purpose of legislation, the context in which such expression has been used and on the interpretation of the terms of relevant contracts. For tax purposes, the accrual or receipt of income in the relevant previous year will have to be determined in consonance with the ambit of taxable income as per section 5 of the Act on the basis of a careful scrutiny of the terms of contract for Hire Purchase and Lease Agreements regardless of the method of accounting followed by the assessee for recognition of such income in its books of account." 51. The Hon'ble Supreme Court in the case of India Cements Ltd. held that the amount of Rs.84,633 spent by the assessee towards stamp duty, registration fees, lawyers' fees was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, though the said amount was not charged to revenue but capitalised and carried forward in the balance-sheet, but claimed as revenue expenditure for the purposes of income-tax. 52. The Hon'ble Gu....
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....t payable for acquisition of knowhow was revenue expenditure in assessment year 1967-68, although it had not debited the entire amount in its books. 55. It is clear from the principles of law enunciated in the above referred judgments that the question whether a particular deduction is allowable or not under the provisions of the Act will not depend on the existence or absence of entries in the books of account. In any case entries in the 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. 56. The Id. Sr. DR had argued that the capitalisation of interest cost for the pre-production period is in conformity with the accounting standards and accounting method and, therefore, income has to be computed as per the ....
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....ormity with the accounting principles as well as title legal principles. Shri Gupta submitted that the judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd has been applied by various High Courts in cases where the assessees were having an existing running business also. He relied upon the judgment of the Hon'ble Calcutta High Court in the case of India Steamship Co. The assessee-company had been carrying on shipping business for a long time. During the year under reference, it purchased two ships, namely, Indian Venture and Indian Valour. The assessee claimed that interest payment prior to the delivery of the ships should be capitalised for the purposes of development rebate. It also claimed that interest payment made after delivery of the ships should also be capitalised for the purposes of development rebate. The ITO rejected the claim but the Tribunal allowed it. The Hon'ble High Court held that interest for the period prior to the delivery of the ships was includible in the actual cost of the ship for the purposes of development rebate. The judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. was applied for arriving at this concl....
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.... Ltd. This judgment has been reversed by the Hon'ble Supreme Court in the case reported in CIT v. Arvind Mills Ltd. [1992] 193 ITR 255. Moreover it was a case relating to interpretation of section 43A and grant of development rebate. It was not a case relating to deductibility of interest under section 36(1)(iii). 60. Shri Gupta had also relied upon the judgment of the Gujarat High Court in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. In this case bank guarantee, commission and other necessary items of expenditure to bring the machineries, capital assets into existence was held to be capital expenditure. The Hon'ble Gujarat High Court dissented from judgment of AP High Court reported in AddL CIT v. Akkamba Textiles Ltd. [1979] 117 ITR 294 and judgment of Madras High Court. The case of Akkamba Textiles Ltd. was affirmed by the Hon'ble Supreme Court. It has been held by the Hon'ble Supreme Court that guarantee commission paid by the assessee to the banker and the insurance company for insuring deferred payment of the purchase consideration of machinery was an admissible deduction under section 37. 61. The Id. Sr. DR has also placed reliance on the judgment of....
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....terest in connection with acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall be deemed never to have formed part of the actual cost of the assets. The judgment delivered on 13-5-1974 referred to in this memorandum explaining the Finance Bill, 1986 relates to this very judgment of Hon'ble Allahabad High Court in the case of J.K. Cotton Spg. & Wvg. Mills Lid. The effect of this judgment has been undone by the aforesaid Explanation 8 to section 43(1). This judgment also does not, therefore, in any manner supports the contention of the Id. Sr. DR. 62. It may be relevant here to once again refer to the judgment of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. The Hon'ble Gujarat High Court had deeply considered the ratio of judgments of the Hon'ble Apex Court in the case of India Cements Ltd. as well as in the case of Challapalli Sugars Ltd. The relevant extracts appearing at pp. 726 and 727 of 103 ITR from the judgment of the Hon'ble Gujarat High Court in Alembic Glass Industries Ltd.'s case are reproduced below:- "Section 10(2)(iii) of the Act of 1922 allows deduction of interest on al....
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.... AM in his order at pages 38 and 39 of his order. It is, therefore, clear that the matter relating to allowability of interest for the pre-production period in a case of running business will be governed by India Cements Ltd.'s case while the judgment of Hon'ble Apex Court in the case of Challapalli Sugars Ltd. will apply in relation to interest on borrowings made for an entirely new business, for the period prior to the commencement of the business. The Hon'ble Gujarat High Court has clearly so held in the case of Alembic Glass Industries Ltd. The facts of the present case are much stronger than the case of Alembic Glass Industries Ltd. In that case, the new undertaking was set up at a distant and different place, namely, Bangalore, while the old unit was situated at Baroda. The Bangalore unit did not go into production during the two assessment years in question. The Hon'ble Gujarat High Court held that interest on borrowings made for establishing a new glass manufacturing unit at Bangalore was part of the same business and it was nothing but an expansion of existing business and, therefore, interest was clearly allowable under section 36(1)(iii) of the Act. 64. The Id. Sr. DR....
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....at deductibility of interest under such circumstances will be governed by provisions of section 36(1)(iii). 66. The facts of various other cases relied upon by the Id. Sr. DR are clearly distinguishable with the facts of the present case. In some cases, the point in issue was entirely different. I, therefore, do not consider it necessary and proper to deal with each and every judgment cited by the Id. Sr. DR. I may, however, repeat that I have gone through all the judgments relied upon by him and am of the view that none of the judgments relied upon by him would in any way dilute the applicability of the principles of law laid down by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. so far as it relates to deductibility of interest under section 36(1)(iii) in the present case is concerned. The decision of the Calcutta Bench reported in JCT Ltd.'s case is also clearly contrary to the Judgment of the Hon'ble Jurisdictional High Court in the case of Alembic Glass Industries Ltd. It is also contrary to various decisions of the Tribunal which have been referred to in the order of the Id. A.M. The impact of Explanation 8 inserted in section 43(1) will be con....
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....d to Gujarat also. Hence this judgment is binding upon the, authorities working in the State of Gujarat. The Hon'ble Bombay High Court in the aforesaid case has held as under:- "The assessee firm which carried on the business of bleaching, dyeing and printing cloth borrowed money in the year of account in order to extend its business, purchased land and erected additional plant and machinery and paid interest on the borrowed capital. In its assessment to income-tax in the relevant assessment year the claim of the assessee to deduction of the interest so paid under section 10(2)(iii) of the Indian Income-tax Act, 1922 was rejected on the ground that the plant and machinery were not used for the business, in the year of account. On a reference: Held, that the assessee was entitled to the deduction claimed even though the plant and machinery were not used in the year of account. Where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(iii) of the I.T. Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whet....
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....lly and squarely applies to the facts of the present case. C. Arvind Polycot Ltd. This is a case relating to assessment year 1993-94 and the judgment was delivered by the Hon'ble Gujarat High Court on July 10-11-1996. This judgment relates to the period after insertion of Explanation 8 to section 43(1) and the judgment was delivered by the Hon'ble Gujarat High Court much after the said Explanation 8 was inserted. Explanation 8 to section 43(1) was inserted by Finance Act, 1986 w.e.f. 1-4-1974. The Hon'ble Gujarat High Court, at page 283 of 222 ITR held as under: "The assessee is engaged in the manufacturing of cloth. It appears that a new air-jet looms were purchased with a view to manufacture fabrics having width of 36 inches to 44 inches only. As it was not possible to manufacture fabrics having width of 56 inches with old looms, new air-jet looms were purchased. It appears that this has led the Assessing Officer to believe that the assessee has purchased the machinery for the purpose of new business. It thus appears that modernisation has been considered by the Assessing Officer as a new business. It is not disputed that the assessee-company, having its manufacturing ac....
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....mstances the interest paid on the amount borrowed for purchase of such machinery was a deductible amount. Consequently, the view taken by the Tribunal was correct. No question arose for reference." F.CIT v. H.C. Shankarappa [1998] 234 ITR 15 (Kar.) In this case the assessee, an exhibitor of films was running a cinema theatre. It purchased a site and commenced construction of another cinema theatre. During assessment year 1981-82, the assessee claimed deduction of interest of Rs.56,429 paid to Karnataka Bank Ltd. Similarly, in assessment years 1982-83 to 1984-85, the assessment years under consideration, the assessee paid interest amounting to Rs.1,65,738, Rs.2,29,206 and Rs.3,97,032 and claimed the same as Revenue expenditure against its business income. The ITO disallowed the claim on the ground that borrowed amount on which interest had been paid was utilised for the construction of a new cinema bldg. and as such the payment of such interest had to be capitalised. The theatre building was still under construction and was incomplete during assessment years 1982-83 to 1984-85. The Hon'ble High Court held that the loan had been taken for expansion of business. There was an int....
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....d 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 to the cost of the fixed assets created as a result of such expenditure." The point canvassed before the Supreme Court was different from the point involved in the present case. There was no existing business with reference to which the capital was borrowed either for acquisition of a new asset or expansion of the already existing unit or business. There the capital was borrowed for installation of a new unit and interest paid on the borrowed capital was treated as capital expenditure adding to the capital cost of the asset entitling the assessee to depreciation allowance and development rebate with reference to such interest also. In the present case, the assessee had taken the loan for the new unit which was taken to be the expansion of the already existing business of the assessee. The Tribunal has proceeded on the basis that the assessee had taken loan for further expansion of his business and the interest paid by the assessee on such was deductible as revenue expenditure.' The....
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....ng the allowance of interest as revenue expenditure after the asset has been put to use. It also necessarily implies that interest pertaining to the period prior to the date when the asset has been put to use is required to be capitalised. He submitted that capitalisation of interest pertaining to the pre-production period was never in dispute before the insertion of Explanation 8 to section 43(1). This was capitalised by tax payers and added to the cost of assets in conformity with the accounting principles/legal principles. Shri Gupta also placed reliance on Circular explaining the object of inserting Explanation & He submitted that tax payers, with a view to claim higher depreciation and development rebate etc. capitalised the entire payment of interest payable on deferred payment of machinery supplied which included the interest for the post production period. This was against the legislative intention. Explanation 8 had to be inserted to remove such doubts created as a result of certain judgments, such as the one reported in J.K. Cotton Spg. & Wvg. Mills Ltd.'s case and Tensile Steel Ltd's case etc. He submitted that section 43(1) read with Explanation 8 clarifies beyond doubt....
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....clarifies that interest on moneys which are specifically borrowed for the purpose of a fixed asset may be capitalised in respect of the period prior to the asset coming into production i.e. relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such asset should be capitalised. It has also been mentioned in the said Circular that the aforesaid amendment has been made to get over the difficulty created by the decision in the case of J.K. Cotton Wvg. & Spg. Mills Ltd. as such decisions which were contrary to the legislative intent. The Id. Sr. DR also submitted that such a Circular is binding on the Departmental authorities in view of the Hon'ble Supreme Court's judgment reported in UCO Bank's case. The said Circular only gives an option to the tax payer that they may capitalise interest on moneys borrowed relating to the period prior to putting the asset to use. This Circular also does not draw any distinction between allowability of interest on expansion or extension of the existing business and interest paid for setting up of an entirely new business. The Hon'ble Gujarat High Court in the case of Alembic Glas....
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....eciation and investment allowance and the assessee is also entitled to claim entire amount of such interest as deductible under section 36(1)(iii) the provision which is more beneficial to the assessee will have to be applied. 77. It may be worthwhile here to refer to the judgment of the Hon'ble Supreme Court in the case of Mahendra Mills. At page 62, the Hon'ble Supreme Court has observed as under: "When there are two provisions under which an assessee could claim some benefit, it is for the assessee to choose one. A reference was made to a claim for medical reimbursement for the Lurrent year which is different from a claim for depreciation. This is so because depreciation is a claim on the written down value and if depreciation is not claimed in the current year, the written down value would remain the same for the following year. Prior to the amendment of section 32 business loss could be carried forward for eight years. There was no time limit for the claiming of depreciation. This is not so now. Earlier, therefore, it was always for the assessee to claim business loss first and current depreciation thereafter, if he so desired." Again at page 80, the Hon'ble Supreme C....
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....to directors among others. Of course, section 40(c) is applicable only to companies whereas section 40A(5) is applicable to employees, whether of companies or others. In the case of directors who are also employees, both the provisions will be attracted - the higher of the two ceilings has to be applied." The aforesaid judgment of the Hon'ble Apex Court clarifies that when there are two provisions under which an assessee could claim some benefit, it is for the assessee to choose one, which is more beneficial. In the present case, the assessee was therefore, clearly entitled to claim grant of deduction in respect of such interest under section 36(1)(iii). 79. Section 43 gives definitions of certain terms relevant to income from profits and gains of business or profession. Sub-section (1) of section 43 defines "actual cost" means actual cost of the assets to the assessee. . . ." Explanation 8 to section 43(1) inserted by the Finance Act, 1986 w.e.f. 1-4-1974 clarifies, for removal of doubts that interest in connection with the acquisition of an asset, as is relatable to any period after such asset is first put to use shall not be included in the actual cost of such asset. The s....
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....ants to draw a distinction between capital borrowed for acquiring a capital asset and capital borrowed for acquiring a revenue asset. Unlike section 37, which expressly excludes an expense of a capital nature, the Legislature has made no distinction in section 36(1)(iii) between capital borrowed for a revenue asset or capital asset. Here also the interpretation sought to be placed by the Id. Sr. DR would require adding of certain words in section 36(1)(iii) and he wants the said provision to be read as if it contains the words "in respect of capital borrowed for the purpose of business, provided the asset which has been acquired as a result of the borrowed capital is used in the year of account". In my view, there is no warrant to accept the submissions of the Id. Sr. DR to read the provisions of Explanation 8 to sections 43(1) and 36(1)(iii) in the manner indicated above. The provisions of Explanation 8 to section 43(1) cannot override the clear provision of section 36(1)(iii) as authoritatively interpreted by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. nor it affects the applicability of the principles of law laid down by the Honourable Gujarat Hig....