Income Tax Appellate Tribunal - Ahmedabad
Lakhanpal National Ltd. vs Income Tax Officer on 9 March, 1999
Equivalent citations: [1999]69ITD9(AHD), [1999]239ITR27(AHD)
ORDER
T.V. Rajagopala Rao, President
1. These are two appeals preferred by the assessee relating to asst. yrs. 1982-83 and 1983-84 against the separate orders of the CIT(A) I, Baroda, dt. 19th February, 1990, for asst. yr. 1982-83 and 28th February, 1990, for asst. yr. 1983-84.
2. While hearing these two appeals, the Division Bench, comprising of S/Shri B. M. Kothari and Jordan Kachchap, felt that in view of the conflicting decision in the matter of granting investment allowance, additional depreciation and extra shift allowance in cases where the actual cost of plant and machinery goes on increasing on account of fluctuation in foreign exchange rates vis-a-vis the Indian rupee value, especially when the plant and machinery were purchased from a foreign country in foreign currency on instalment basis and when the Indian party paying the instalments is obliged to pay the instalments in foreign currency to the foreign party, this is a fit case to be considered by a special Bench consisting of three Members of the Tribunal. By their referral order dt. 8th August, 1995, this Special Bench was constituted by the orders of the President dt. 6th March, 1997. Before dealing with the several issues involved, we have to record the general facts concerning the assessee-company.
3. The assessee is an industrial company in which the public are substantially interested. It is engaged in the business of manufacture and sale of dry cell batteries. The previous year adopted by the assessee-company is calendar year and, therefore, for the asst. yr. 1982-83 the previous year ends by 31st December, 1981, and for the asst. yr. 1983-84 the previous year ends by 31st December, 1982. The assessee maintains its books of account on mercantile basis.
4. For the asst. yr. 1982-83, the assessee filed its return of income on 24th June, 1982 showing income of Rs. 39,23,310. The return was accompanied by audited statement of P & L a/c and balance sheet, However, the return was revised on 17th Jan, 1985, showing an income of Rs. 38,00,561 on account of revised claims of depreciation, investment allowance, excise duty and deduction under s. 80-I etc., of the IT Act. The said return was treated by the AO as one filed under s. 139(5) by the assessment order dt. 15th January, 1986, passed under s. 143(3). As against the above returned income, the total income was determined at Rs. 1,75,67,930 for the asst. yr. 1982-83. For the asst. yr. 1983-84, after getting extension of time by filing Form No. 6, return of income was filed on 29th July, 1983, declaring total income of Rs. 67,38,660. A revised return was filed on 14th March, 1986, declaring income of Rs. 62,92,440. By assessment order dt. 12th March, 1987, passed under s. 143(3), the total income of the assessee was determined at Rs. 2,52,54,040. While making the assessments for the asst. yrs. 1982-83 and 1983-84, various disallowances were made which were impugned before the CIT(A). The learned CIT(A), Baroda, disposed of the appeal for the asst. yr. 1982-83 by her order dt. 19th February, 1990, partly allowing the appeal. Similarly, the learned CIT(A), by her order dt. 28th February,1990, partly allowed the appeal for the asst. yr. 1983-84. Against the disallowances confirmed by the CIT(A) for the asst. yrs. 1982-83 and 1983-84, these two appeals were filed before the Ahmedabad Benches of the Tribunal.
5. There are 9 grounds preferred by the assessee before the Tribunal for the asst. yr. 1982-83. There are 8 grounds similarly preferred for the asst. yr. 1983-84. For the asst. yr. 1983-84, ground No. 4 is sub-divided as 4.1, 4.2 and 4.3. Out of the grounds relating to asst. yrs. 1982-83 and 1983-84, there are common grounds with only variation in figures claimed as deductions during the two years under consideration.
6. The first common ground relates to the claim for weighted deduction under s. 35-C which deals with development allowance prior to the deletion of the section w.e.f. 1st April, 1989, by Direct Tax Laws (Amendment) Act, 1989. For the asst. yr., 1982-83, the assessee-company debited a sum of Rs. 59,149 under the head "agricultural development expenses" and also claimed weighted deduction at 1/5th of this amount which works out to Rs. 11,830. A clarification was furnished by the assessee-company regarding the basis of the claim in which it is stated that the names of 11 agriculturists were mentioned to whom a sum of Rs. 59,149 was said to have been reimbursed for purchase of seeds, fertilizers and pesticides, etc. A perusal of the bills produced before the AO showed that no sums were reimbursed to the farmers towards purchase of seeds, fertilizers and pesticides, etc. but they had been paid development charges @ Rs. 1.35 per kg. on the quantity of mochi rice purchased from them. One of the receipts was also extracted in the assessment order for the asst. yr. 1982-83. The AO, therefore, held that the payments claimed to have been made in the garb of development charges were nothing but the consideration for the purchase of mochi rice. The AO held that otherwise there seemed to be no reason why the development charges sought to be given to the farmers as a measure of bounty be tagged with the amount of rice purchased from them. The AO further found that some of the purchases of mochi rice had been made @ Rs. 2.40 per kg. (Rs. 1.05 towards cost of rice plus Rs. 1.35 towards development charges). He further held that splitting of the purchase bills in two parts was only an attempt to make misuse of the well intended provisions of s. 35C and thereby claiming extra relief. The AO also held that for the asst. yr. 1981-82 the disallowance made on this score was confirmed by the CIT(A). So also for the same reason, he also denied the claim for weighted deduction of Rs. 11,830 .
7. For the asst. yr. 1983-84, the sum debited towards agricultural development expenses was Rs. 58,901 and the weighted deduction claimed thereon was Rs. 11,780. The AO, for the reasons as given by him for the asst. yr. 1982-83, disallowed both the claims, i.e., the amount spent for agricultural development expenses as well as weighted deduction. The learned CIT(A) dealt with this topic in para 4 of her order. Before the CIT(A), the Tribunal's decision rendered in ITA Nos. 1437 & 1371 relating to asst. yr. 1981-82 was relied upon wherein the Tribunal had allowed weighted deduction under s. 35C in this very case of the assessee. However, the learned CIT(A), on the facts brought on record by the AO, agreed with the conclusion reached by the AO and confirmed his finding that the assessee had merely bifurcated the price of mochi rice into two parts and called it 'development charges'. Therefore, the CIT(A) held that the provisions of s. 35C had not been fulfilled by the assessee-company and, therefore, she confirmed the AO's rejection of the claim under s. 35C. Purporting to follow the appellate order for the asst. yr. 1982-83 dt. 19th February, 1990, the learned CIT(A) confirmed the disallowance of the claim of the assessee under s. 35C even for the asst. yr. 1983-84 vide para 3.1 of her order.
8. In support of the present claim, the assessee brought to our notice the order of the Tribunal dt. 27th October 1987 for the asst. yr. 1981-82, which is the immediately preceding assessment year. We find from para 4 of the said order of the Tribunal that the Tribunal had duly considered the affidavit filed by Shri Bishansingh who was the Administrative Officer of the assessee-company who claimed to have reimbursed towards the amount spent by the farmers towards seeds, fertilizers and pesticides for the mochi paddy raised in the fields of the farmers. In para 8 of the said order, the Tribunal held the following :
"8. On due consideration of the rival submissions of the parties as well as the material already brought on record, we find considerable force in the submissions made on behalf of the assessee that it was not only entitled to claim deduction of Rs. 57,792 as revenue expenditure but was also entitled to weighted deduction as contemplated under s. 35C of the Act. It may be mentioned that we have gone through the aforesaid affidavit of Shri Bishan Singh who was an Administrative Officer of the assessee as well as the details of the expenditure incurred on cultivation of mochi rice (pp. 42, 43A, 43B & 44 of the paper-book) and we are of the view that no adverse inference could be drawn against the assessee in the manner drawn by the CIT(A). We find from pp. 43A and 44B of the paper-book that the ITO himself has allowed the expenditure incurred on paddy purchased from S/Shri Harvindra Singh and Gurbux Singh. He, however, had disallowed the assessee's claim for deduction of development charges for fertilizers, pesticides, irrigation, etc. etc. In this view of the matter, we uphold the action of the CIT(A) in allowing Rs. 57,792 as business expenditure. We further direct the ITO to accept the assessee's claim for weighted deduction under s. 35C of the Act, and modify the assessment accordingly."
Since the Tribunal had already expressed a view for the immediately preceding assessment year to the assessment years under consideration holding that the assessee was entitled to weighted deduction under s. 35C, and since the procurement of mochi rice from the various farmers growing that variety of paddy in their fields remained the same, we are of the view that disallowance of the amount spent towards agricultural development expenses, as well as weighted deduction due thereon cannot be made for the two assessment years under consideration. The assessee succeeds on this ground in each of the two assessment years in question, namely, 1982-83 and 1983-84.
9. The second common ground for asst. yrs. 1982-83 and 1983-84 is with regard to the claim of the assessee under s. 35B in respect of export promotion expenses of Rs. 2,09,918 for asst. yrs. 1982-83 and Rs. 1,38,987 for asst. yr. 1983-84. However, the claim under s. 35B for asst. yr. 1983-84 was not pressed by the assessee-company. Therefore, we have to deal with s. 35B claim only for asst. yr. 1982-83. The particulars of the expenses on which weighted deduction is claimed are given in Annexure 'B' attached to the grounds which are as follows :
Details of 10% export expenses incurred during the accounting year 1981. -
Asst. yr. 1982-83
Particulars Amount (Rs.)
Paid to State Bank of India for sealing charges
for export sale to Nepal. 13
Japan Tour expenses for export promotion of
Mr. P. K. Dhawan, Dy. Sales Manager. 38,423
10% of tour expenses of Mr. M. Asahara,
Dy. Managing Director considered for export. Thus
10% of Rs. 46,186.23 4,619
Advertisement by radio Rs. 3,95,563
By English newspapers Rs. 1,55,520 5,51,083
------------
(i.e. in Times of India, Indian Express, Hindustan
Times and Illustrated Weekly)
Gift to foreign visitors 11,343
------------
6,05,481
Less : Advertisement by radio not claimed 3,95,563
------------
100% export expenses 2,09,918
Claim under s. 35B 1/3rd of Rs. 2,09,918 69,973
In support of the assessee's claim, the learned representative for the assessee, Shri R. M. Chokshi, firstly relied upon a similar claim having been allowed in the case of this very assessee-company for asst. yr. 1981-82 and he filed the Tribunal's order at p. 105 of his paper-book. We have perused the said order. The total claim made in that year under s. 35B was towards foreign tour expenses of Rs. 49,766. The ITO denied the claim. The learned CIT(A) allowed it in full and the reasons adopted by the CIT(A) to allow the claim in full for asst. yr. 1981-82 are extracted in para 24 of the Tribunal's order for asst. yr. 1981-82 and ultimately in para 26 thereof the Tribunal clearly stated that they did not find any justification to interfere with the order of the CIT(A). The particulars of the expenses in this year are already extracted above. Following the earlier order of the Tribunal, the assessee is entitled to s. 35B deduction on Rs. 38,423 and Rs. 4,619. As regards the advertisement by radio as well as the English newspapers and weekly, we do not think that the assessee is entitled to s. 35B relief. We fully agree with the reasoning given by the AO in para 9.2 of his order. There, he stated the following :
"9.2 The major claim is in regard to advertisement expenses of Rs. 5,51,083 incurred on publicity through All India Radio and in the newspapers and weekly. I fail to understand how this expenditure, which has been incurred for publicity in India, would come within the purview of sub-cl. (i) of s. 35(1)(b) when the sub-clause talks of advertisement or publicity outside India. May be through sheer change some of the listners in the neighbouring countries would have heard the advertisement made through All India Radio and some of the readers of the foreign countries might have seen the advertisement made through Indian dailies, but that would certainly not amount to publicity outside India. In fact, similar claim was made in the preceding assessment year and the learned CIT(A) had confirmed the disallowance made on this score stating that the 'claim was absolutely untenable and perhaps even fat-fetched'."
We fully agree with this reasoning while disallowing Rs. 5,51,083. However, the learned counsel for the assessee brought to our notice the Karnataka High Court decision in Chief CIT vs. H. M. T. (International) Ltd. (1993) 203 ITR 573 (Kar), a copy of which is furnished at p. 195 of the paper-book. As per the headnote of the said decision, the following is what is held :
"The assessee claimed weighted deduction under s. 35B in respect of the expenditure incurred towards the complimentaries and give-aways to foreign delegates and similarly the assessee claimed weighted deduction in respect of the expenditure on the said foreign delegates as export promotion activities. Since the claim of the assessee was not accepted by the ITO on the ground that the expenditure was incurred in India, the assessee approached the CIT(A) who accepted it. The Tribunal rejected the Revenue's appeal. On a reference :
Held, that it could not be disputed that the expenditure claimed by the assessee towards the foreign delegates was an expenditure which had direct nexus with the export activities of the assessee. The assessee was entitled to weighted deduction under s. 35B in respect of such expenditure."
Before the CIT(A), the assessee relied upon the decision of the Bombay High Court in CIT vs. Kirloskar Oil Engines Ltd. 157 ITR 762 (Bom) where it was held that expenditure involved in giving presentation articles to the assessee's foreign distributors was expenditure incurred in connection with the assessee's business and was an allowable deduction. The amount claimed is towards gifts to foreign visitors and, therefore, we feel that it is not only covered by the Bombay as well as Karnataka High Court decisions but also comprehended by s. 35B(1)(b)(ix). Thus, we hold that the assessee's claim under s. 35B is to be allowed on the following :
1. Rs. 38,423
2. Rs. 4,619
3. Rs. 11,343 the particulars of which are all given in the table given above. On these amounts, the assessee is also entitled to 1/3rd as weighted deduction. Thus, this ground is partly allowed for the asst. yr. 1982-83. The claim under s. 35B for asst. yr. 1983-84 is dismissed as not pressed.
9.1. Incidentally, we may stated here that against the allowance of foreign tour expenses and weighted deduction under s. 35B granted by the Tribunal for the asst. yr. 1981-82, the Department filed a reference before the Tribunal in R.A. No. 30/Ahd/1988. The second question in that reference was the following :
"Whether, in law and on facts, the assessee is entitled to allowance of foreign tour expenses and weighted deduction under s. 35B of the IT Act, 1961, on such foreign tour expenses ?"
This question was not referred by the Tribunal on the ground that it did not constitute a question of law, but a decision was given only on consideration of facts. As against this rejection order dt. 1st Mach, 1988, the Department went in further reference under s. 256(2) vide IT Ref. No. 159/1988 on the file of High Court of Gujarat at Ahmedabad. The Hon'ble High Court of Gujarat at Ahmedabad, by its order dt. 12th December, 1990, rejected the reference. Thus, this matter attained finality.
10. Let us deal with ground No. 3 for asst. yr. 1982-83 and ground No. 4.1, 4.2 and 4.3 for asst. yr. 1983-84. All of them deal with graded disallowances under s. 37(2A). In the P & L a/c for asst. yr. 1982-83, a sum of Rs. 96,992 has been debited under the head "communication expenses", the details of which are as follows :
Rs.
(a) Payment of hotel and restaurant 56,966
(b) Tea, coffee and hotel expenses of wholesalers 6,456
(c) Reimbursement to whole-salers for conference
expenses (6500) 5,600
(d) Expenses for hiring hall, furniture, etc. 2,397
(e) Expenses of tea, coffee etc. to employees 15,065
(f) Other expenses 9,607
---------
96,992
---------
The AO held that the first two items directly come within the meaning of Expln. 2 inserted to s. 37(2A). As regards the last item of expenditure of Rs. 9,607, he states that no details have been furnished and as such deduction of this amount is also not being allowed. Therefore, addition of Rs. 73,030 (Rs. 56,966 + Rs. 6,457 + Rs. 9,607) is being made and deduction as admissible under s. 37(2A) would be separately allowed. Further, in the details given of miscellaneous. expenses, it is seen that a sum of Rs. 7,579 has been incurred in providing tea, coffee, etc., to the visitors and Rs. 13,038 (11,343+1,695) has been incurred for giving gifts to foreign visitors and business associates. The AO held that these are also in the nature of entertainment expenditure because the gifts would be covered by the words 'provision of hospitality of every kind' used in Expln. 2 to s. 37(2A). Against this disallowance of Rs. 9,607 out of total of Rs. 96,992 under the head "communication expenses account" and the disallowance of Rs. 13,038 from out of miscellaneous expenses account of Rs. 7,59,087, which was treated as entertainment expenditure and disallowed under s. 37(2A), an appeal was taken to the CIT(A). The learned CIT(A) took the view that in the absence of details about the nature of expenses amounting to Rs. 9,607, the same cannot be allowed and thus he upheld the disallowance made by the AO. However, as regards the inclusion of Rs. 13,038, the learned CIT(A), keeping in view the Bombay High Court decision in CIT vs. Kirloskar Oil Engines Ltd. (supra), held the gifts to the foreign collaborators would not amount to entertainment as envisaged under s. 37(2A). Therefore, he directed the AO to delete the addition of Rs. 13,038. Against the confirmed disallowance of Rs. 9,607, ground No. 3 for asst. yr. 1982-83 is preferred.
11. Details of communication expenses, among which the amount of Rs. 9,607 is forming part, are all given in Annexure 'C' to the ground of appeal, which is as follows :
Details of communication expenses for the accounting year 1981.
Asst. yr. 1982-83
------------------------------------------------------------------------
Sr. No. Particulars Amount (Rs.)
------------------------------------------------------------------------
1. Sales Conference and meeting expenses 65,863.22
2. Tea, coffee, cold drinks and hotel expenses incurred by wholesalers :
(a) For wholesale's, stockists and other visitors 6,456.56
(b) For employees 15,065.32
3. Other expenses 9,607.82
----------------
Total 96,992.92
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Similar disallowance under s. 37(2A) for asst. yr. 1983-84 is Rs. 94,078 (Rs. 40,725 + Rs. 53,353). It is the case of the assessee that the learned CIT(A) ought to have held that Rs. 40,725 being expenditure on sales conferences and sales staff, is not in the nature of entertainment expenses and provisions of s. 37(2A) are not applicable. Further, it is the assessee's case that the sum of Rs. 53,353 representing expenditure in respect of tea, coffee, etc., for employees ought not to have been disallowed as entertainment expenditure in view of the Expln. 2 to s. 37(2A). Regarding ground No. 4.2, it is contended that the learned CIT(A) erred in allowing only Rs. 5,000 under s. 37(2A) of the IT Act, 1961, instead of applying percentages to profits as laid down in s. 37(2A) of the Act. In ground No. 4.3, it is contended that the CIT(A) erred in disallowing the sum of Rs. 13,081 (Rs. 4,186 + Rs. 8,895) under s. 37(2A) of the Act and treating the same in the nature of entertainment expenditure. For asst. yr. 1983-84, the AO dealt with the disallowance in paras 11.1 and 11.2 of his order. Under the head "communication expenses", he considered the following three items :
Rs.
(i) Expenses for sales conference and sales staff (total expenditure) 40,725
(ii) Tea, coffee, cold drinks, Hotel expenditure incurred for employees 24,949
(iii) Tea, coffee, cold drinks, Hotel expenditure incurred for employees 53,353 Purporting to follow his assessment order for the asst. yr. 1982-83 on the above expenses, the AO held that the above expenses clearly fall in the nature of entertainment expenses within the meaning of Expln. 2 to s. 37(2A). He also held that from the details furnished of the miscellaneous expenses mentioned above, a sum of Rs. 18,592 was spent on gifts to visitors and Diwali gifts to various persons. Further, he found that a sum of Rs. 4,186 was spent on providing tea, coffee, cold drinks and hotel expenses in respect of wholesalers, stockists and other visitors and an amount of Rs. 8,895 on providing tea, coffee, etc., to employees. All these items of expenditure were also held to be in the nature of entertainment expenditure as was done by him for earlier years also. Against these two disallowances, the assessee went in appeal before the CIT(A). Before the CIT(A), in the appeal for the asst. yr. 1983-84, it was contended that the disallowance of a sum of Rs. 40,725 spent by the assessee for sales conference and sales staff and holding the same as in the nature of entertainment expenses, was not correct. Further, the disallowance of Rs. 53,353, being the expenditure incurred for tea, coffee, etc., for the assessee's employees, should not also have been treated as entertainment expenditure. After considering the submissions made, the CIT(A) held that in view of the Expln. to s. 37(2A), expenses on tea, coffee, etc., to employees outside the place of work would get covered under the provisions of s. 37(2A) and, therefore, he felt no justification to interfere with the decision of the AO in disallowing both the sums of Rs. 40,725 and Rs. 53,353 mentioned above. However, he directed the AO to allow the basic deduction of Rs. 5,000 under s. 37(2A). Regarding the disallowance Rs. 18,592 out of the total miscellaneous expenses of Rs. 31,672, the learned CIT(A) held that the AO himself admitted in para No. 11.2 of his order that the sum of Rs. 18,592 was spent on gifts to visitors and Diwali gifts to various persons. Similarly, a further sums of Rs. 4,186 and 3,496 (sic) was spent on tea and coffee and hotel expenses and Rs. 8,895 on similar ground for the employees. On behalf of the assessee, it was submitted that these expenses should not be treated as in the nature of entertainment expenditure in view of the Bombay High Court decision in the case of CIT vs. Kirloskar Oil Engines Ltd. (supra). Dealing with this submission, the learned CIT(A) felt justified in deleting Rs. 18,592 representing gifts to foreign visitors. However, with regard to Rs. 4,186 and Rs. 8,895, he felt that in view of Expln. 2 to s. 37(2A), they do not call for any interference. Thus, as against the sustained disallowances for the asst. yr. 1982-83 and 1983-84, the grounds mentioned above are raised before the Tribunal.
12. It was argued by the learned representative for the assessee that in the details of miscellaneous expenses incurred during the accounting year 1982 furnished at p. 379 of paper-book No. 2 of the assessee. Under the heading of the 'total expenditure' sum of Rs. 20,50,676.70 is given as follows :
"Details of miscellaneous expenses incurred during the accounting year 1982 (more than Rs. 1,000)".
Therefore, it was his contention that expenditure less than Rs. 1,000 was allowed by the AO for asst. yr. 1983-84. The next argument advanced by the learned representative for the assessee was that whatever that had been spent towards conference expenses should have been allowed in view of the following case law :
(1) CIT vs. Eskaps (I) P. Ltd. (1991) 191 ITR 674 (Cal);
(2) CIT vs. Kirloskar Oil Engines Ltd. (supra);
(3) CIT vs. Indo-Asian Switch Gears (P) Ltd. (1996) 222 ITR 772 (P&H);
(4) CIT vs. Andhra Sugars Ltd. (1997) 225 ITR 118 (AP); and (5) CIT vs. Expo Machinery Ltd. (1991) 190 ITR 576 (Del).
The expenditure incurred for the visitors in order to serve them with tea, etc., is an allowable expenditure, argued the learned representative for the assessee, in view of the following citations :
(1) CIT vs. Gujarat State Finance Corpn. (1992) 196 ITR 822 (Guj);
(2) Addl. ITO vs. Uttam Roadways (P) Ltd. : ITA No. 4936/Bom/1987 (p. 205 of paper-book).
(3) ITO vs. Hindustan Petroleum Corpn. Ltd. (1986) 25 TTJ (Bom) 28 : (1986) 16 ITD 574 (Bom).
13. Before going into the case law and their applicability to the facts of the case, the primary facts relating to some items of expenditure disallowed are important to bear in mind. The disallowed expenditure for the asst. yr. 1982-83 is Rs. 9,607. No doubt, it was contended before the CIT(A) that this represented items of expenditure below Rs. 1,000. Since in asst. yr. 1983-84 such expenses falling below Rs. 1,000 were all allowed, similarly, this amount should have been allowed, which appears to be the contention of the assessee; but, before putting forward any such contention, the contention itself is required to be substantiated on facts. That means, it should be shown to the Tribunal that it comprises of items each below Rs. 1,000. However, no such evidence is ever produced either before the lower authorities or before the Tribunal. Further, it is stated that in asst. yr. 1983-84 expenses below Rs. 1,000 were allowed and the same should be followed for asst. yr. 1982-83 also. However, we have gone through the assessment order for asst. yr. 1983-84. However, the reasons for allowing expenses upto Rs. 1,000 are not appearing in para 11 of the AO's order which is exclusively catered to the subject of advertisement expenses under s. 37(2A) as well as miscellaneous expenses. In view of such lack of reasoned order with reference to expenses upto Rs. 1,000, we are forced to think that while appreciating the particulars of entertainment expenses furnished, a copy of which is now provided at p. 379 of the paper-book, the noting made by the AO in the heading that the said expenses represented more than Rs. 1,000 slipped his attention and for that reason perhaps it would appear that such expenses of less than Rs. 1,000 were not at all considered by him for the asst. yr. 1983-84. Therefore, in our considered view, while disallowing entertainment expenses for asst. yr. 1983-84, the words 'entertainment expenditure' defined and inserted as Expln. 2 to s. 37(2A) by Finance Act, 1983, with retrospective effect from 1st April, 1976 were lost sight of. The words "entertainment expenditure' as per the Department's Circular No. 372 dt. 8th December, 1973, which came into force on and from 1976-77 include expenditure for provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or usage of trade. This is not kept in view by the AO. The learned representative for the assessee brought to our notice that in asst. yr. 1983-84 the following were held to be entertainment expenditure by the AO :
Rs.
(i) Expenses for the sales conference and sales staff (total expenditure) 40,725
(ii) Tea, coffee, cold drinks, hotel expenditure incurred for employees 24,949
(iii) Tea, coffee, cold drinks, hotel expenditure incurred for employees 53,353 In the appeal before the CIT(A) for asst. yr. 1983-84, disallowances of Rs. 40,725 spent by the assessee for sales conference and/or sales staff and Rs. 53,353 being expenditure for tea, coffee, etc. for the assessee-company's employees only were impugned. Disallowance of the third sum of Rs. 24,949 does not appear to have been objected. The learned CIT(A) discussed the allowability of the two items mentioned above in paras 8, 8.1 and 8.2 of his order. He held in para 8.2 of his order. He held in para 8.2 that he saw no justification for interfering with the decision of the AO in disallowing both the sums of Rs. 40,725 and Rs. 53,353. However, he directed that the basic deduction of Rs. 5,000 under s. 37(2A) should be allowed to the assessee.
14. We have already mentioned the case cited before us in support of the contention that the conference expenses are to be allowed. The first of the decisions cited was Associated Marketing Agencies vs. ITO (1992) 43 ITD 543 (Mad). The facts as well as the decision rendered as appearing in the headnote of the decision are found extracted at pp. 202 and 203 of the second paper-book filed by the assessee. It is significant that the Madras Tribunal was considering the facts relating to asst. yr. 1984-85. In that case, the assessee was deriving income as a wholesale dealer in electrical appliances and it spent certain amount for providing lunch and dinner to the delegates at the dealers' conference which was not allowed on the ground that the said expenditure would fall within the scope of sales promotion expenses under s. 37(2B). The Tribunal held that this lunch and dinner were in connection with a one-day conference of the delegates held in the hotel for the purpose of the assessee's business. It also held that the main purpose was the holding of the conference of the dealers for educating them about the products which the assessee wanted to sell. In other words, the Tribunal felt that this expenditure was really for sales promotion. Explaining the scope of Expln. 2 to s. 37(2A), the Tribunal held that it talks of expenditure on provision of hospitality, whether by way of provision of food or beverages and whether or not such provision is made by reason of any express or implied contract or customs or usage of trade. In the case before them, the provision of lunch and dinner was neither contractual nor customary. The main purpose was the conference and in order to retain the presence of the dealers throughout the conference, the assessee had perforce to provide lunch and dinner. Expln. 2 would not cover such a situation. The Tribunal further held that the retrospective operation of the Expln. 2 to s. 37(2A) could not make that expenditure an entertainment expenditure disregarding the main nature of that expenditure.
14.1. The next decision cited was the decision of the Calcutta High Court in CIT vs. Eskaps (I) P. Ltd. (supra) where the Calcutta High Court held while considering the impugned addition before them that where hospitality is undertaken solely with the object of promoting the business, the expenditure is not disqualified because the nature of the activity necessarily involves some other result, e.g., entertainment of hospitality. Therefore, the Calcutta High Court held that it is not in the nature of entertainment expenditure within the meaning of s. 37(2B) of the IT Act, 1961.
14.2. The next decision cited was the Bombay High Court decision in CIT vs. Kirloskar Oil Engines Ltd. (supra), a copy of which is provided at p. 208 of second paper-book. This is distinguishable inasmuch as the facts which arose before the Bombay High Court relate the asst. yrs. 1964-65 to 1968-69 and 1969-70 and 1970-71, whereas Explanation was inserted in Finance Act, 1983 with retrospective effect from 1976.
14.3. The next decision cited before us in CIT vs. Indo-Asian Switchgears (P) Ltd. (supra). It is significant that the facts discussed in that decision relate to asst. yr. 1975-76 as well as 1976-77. In that case, the expenditure was incurred for providing food and light refreshments to trainees and engineers by the company in that case, which was manufacturing electric switchgears, and the argument advanced before the High Court was that the main purpose for organising the conference was advertisement and publicity. The High Court held that food and light refreshment had to be served to the trainees and engineers attending the dealers' conference organised by the assessee. This expenditure could not, therefore, be treated to be in the nature of entertainment but on account of business necessity and expediency. They did not fall within the ambit of s. 37(2A) of the IT Act and could not be disallowed in the asst. yrs. 1975-76 and 1976-77. This decision clearly applies to the facts of this case while appreciating the conference expenses since the facts discussed in that case relate also to asst. yr. 1976-77.
14.4 Another decision cited before us is CIT vs. Andhra Sugars Ltd. (supra). They have specifically considered Expln. 2 to s. 37(2A) inserted by Finance Act, 1983, w.e.f. 1st April, 1976. In the facts of that case, their Lordships of the Andhra Pradesh High Court were considering the claim for deduction of expenditure incurred in providing tea, coffee, etc., to customers, staff and technicians for the asst. yr. 1976-77. The Hon'ble High Court held that the expenditure was partly on hospitality to customers and partly on employees. The expenditure was not segregated to show how much was incurred on customers and how much was spent on employees and in the very nature of things it could not be so segregated. When the expenditure was incurred on food or beverages provided by the assessee to its employees in the office, factory or other places of their work as well as to customers, such expenditure did not fall within the enlarged meaning of "entertainment expenditure" in Expln. 2 to s. 37(2A) and, therefore, the expenditure was deductible.
14.5. The next decision cited was of the Delhi High Court CIT vs. Expo Machinery Ltd. (supra). In that case also, Expln. 2 to s. 37(2A) was considered by the Delhi High Court, especially to a situation where the employees of the company were sent along with the customers and dealers to a hotel. In such a case, the question was whether the food was given to the employees at their work place, which was allowable under Expln. 2 to s. 37(2A). In the headnote of the decision, the following is held :
"Where, in the discharge of their official duties, the employees of a company have their food along with the company's customers in a hotel, they take food while at work because it is their work and duty to entertain the customers of the company. Therefore, any expenditure incurred on the food and beverages of the employees when they are discharging their duty to entertain the customers of the company is to be excluded for the purview of s. 37(2A) of the IT Act, 1961, by virtue of Expln. 2 thereto.
Held, that in the case of composite expenditure incurred in hotels in entertaining customers, it was necessary to resort to an estimate in ascertaining that part of the expense incurred on food and beverages of the employees which is excluded from the purview of s. 37(2A), and the Tribunal's estimate of such part of the expenses would be a question of fact."
Taking all the above into consideration, since it is not disputed that the amount of Rs. 40,725 was incurred for conference expenses, following the ratio of the above orders of the Tribunal as well as the High Courts, it should be allowed in full under s. 37(2A).
14.6 Similarly, since it is not disputed that the amount of Rs. 53,353 was incurred by the assessee-company for its employees towards supplying tea, coffee, etc., it is to be allowed in view of the Delhi High Court decision as well as the Andhra Pradesh High Court decisions, especially in view of the fact that it was not the case of the AO that part of the expenditure must have been spent for the visitors and clients.
14.7. It was next contended that even with regard to the disallowance of Rs. 13,081 which comprised of Rs. 4,186 spent on providing tea, coffee, cold drinks and hotel expenses in respect of wholesalers, stockists and other visitors and an amount of Rs. 8,895 spent on providing tea, coffee, etc. to employees, the expenditure is purely allowable. The learned representative for the assessee relied upon the following decisions :
CIT vs. Gujarat State Finance Corpn. (supra);
Addl. ITO vs. Uttam Roadways (P) Ltd. (supra); and ITO vs. Hindustan Petroleum Corpn. Ltd. (supra).
In the facts of that case, the Gujarat High Court was considering the facts relating to asst. yr. 1977-78. The total expenditure which had fallen for their Lordships' consideration was Rs. 57,576. Their Lordships held that the assessee had incurred expenditure in providing tea, coffee and refreshments to its staff members and constitutents or customers in the normal course of business. The finding of fact which had been recorded was to the effect that the expenditure which was incurred by the assessee was not high or lavish. The expenditure for giving any lavish parties, it could not be considered to be an expenditure incurred for entertainment. It was, therefore, an admissible deduction.
14.8. The Tribunal decision cited in this regard was the Bombay D-Bench decision in ITA No. 4936/Bom/1987, a copy of which is provided at pp. 205 to 207 of the second paper-book. The assessment year involved in that case was 1985-86. The disallowance came for consideration was Rs. 32,330. The Tribunal, following the Gujarat High Court decision in CIT vs. Patel Bros. & Co. (1977) 106 ITR 424 (Guj) and the Bombay High Court decision in the case of CIT vs. Shah Nanji Nagji (1978) 116 ITR 292 (Bom) confirmed the decision of CIT(A) to treat the expenses as business expenditure.
14.9. Another decision cited was again the Bombay Tribunal's decision in ITO vs. Hindustan Petroleum Corpn. Ltd. (supra) a copy of which is furnished at p. 209 of the paper-book. The total expenditure considered was Rs. 1,57,393. Out of it, Rs. 50,000 had been estimated by the AO as expenditure in the nature of hospitality and entertainment and the balance under dispute was Rs. 1,07,393. This was ultimately allowed by the Tribunal which held that in a company of this magnitude with a turnover of about Rs. 800 crores and disclosed income of Rs. 20 crores it was unrealistic to expect details of every item comprising of Rs. 1,57,393. Further, they took into consideration a letter addressed by the assessee-company in that case in which it was explained broadly the break-up of the expenses as spent on dealer/customer programmes, dealer/consumer meetings and conferences, etc.
15. Therefore, similarly taking into consideration the turnover of this company, we hold that a sum of Rs. 13,081 is a meagre amount which is not at all lavish in nature. Further, a mere sum of Rs. 4,186 is the amount spent on tea, coffee, cold drinks and hotel expenses in respect of whoesalers, stockists and other visitors and a sum of Rs. 8,895 is spent in providing tea, coffee, etc., to employees. Therefore, following the above decisions, we hold that the amount of Rs. 13,081 is fully allowable. Thus, the disallowances made under s. 37(2A) for asst. yr. 1982-83 are confirmed and the disallowances for asst. yr. 1983-84 so far as they are contested in the appeal are deleted.
16. The 4th ground of appeal for asst. yr. 1982-83 is directed against the CIT(A)'s order stating that he erred in not treating gratuity payment to Mr. Gulati as payment to ex-employee. Copy of details of remuneration paid to Shri Y. P. Gulati as payment to ex-employee is furnished at page 211 of the second paper-book. The gratuity payment of Rs. 23,002 was treated as part of salary paid and thus the total salary said to have been paid to Mr. Gulati was considered at Rs. 74,875. Out of that, the ceiling limit under s. 40A(5), namely, Rs. 60,000, was deducted and the excess of Rs. 14,875 was considered as excess paid over and above the limit prescribed under s. 40A(5). Before the CIT(A), the Calcutta High Court decision in Hindustan Motors Ltd. vs. CIT (1985) 156 ITR 223 (Cal) was cited for the proposition that in respect of the calculation for the purpose of the ceiling limit under s. 40A(5) it should be worked out for two periods in respect of employees who retire in the middle of a particular year. According to the assessee, he would be an employee so long as he is in service but after retirement he would become a former employee. It was also contended that the excess was worked out disregarding the provisions of s. 10(10) of the IT Act. Reliance was also placed on the Full Bench decision of the Ahmedabad Bench of the Tribunal in IAC vs. K. Ltd. (1982) 13 TTJ (Bom) 555. The learned CIT(A), after considering the submissions, agreed with the alternate plea of the assessee and he directed the AO to recalculate the disallowance under s. 40A(5) by taking the gratuity in excess of the exempted portion under s. 10(10) only as remuneration to the employee. He also found that the exempted portion would not form part of the remuneration.
17. In the arguments advanced before us, the learned representative for the assessee contends that Shri Gulati worked as an employee in the assessee-company only for a part of the year and he retired on 7th November, 1981. On his resignation he was paid gratuity of Rs. 23,002. It was contended that gratuity paid to ex-employee was outside the scope of s. 40A(5) and as such the same should not be clubbed for the purpose of applying the ceiling of (sic) as gratuity is one-time payment and it cannot be equated with salary for the purpose of s. 40A(5). Reliance was placed for this proposition on the Bombay High Court judgment in CIT vs. Colgate Palmolive (I) P. Ltd. In view of the said judgment, it was submitted that no part of the gratuity amount could be included as remuneration for the purpose of computing the ceiling under s. 40A(5). Without prejudice to the above contention, even if gratuity is to be considered for the purpose of s. 40A(5), as gratuity amount is paid to the employee after cessation of employment, it has to be considered as payment to ex-employee for which separate limit of Rs. 60,000 is laid down under s. 40A(5)(c)(i) of the IT Act. As the amount of gratuity paid to Mr. Gulati is less than the said ceiling, no part of the remuneration is disallowable under s. 40A(5). For this proposition, the assessee relied upon the Calcutta High Court decision in Hindustan Motors Ltd. vs. CIT (supra). It was further submitted, without prejudice to the above contentions, that gratuity amount, if any, in excess of the amount provided in s. 10(10) of the Act only should be considered for disallowance under s. 40A(5) as decided in the special. Bench decision of the Tribunal in IAC vs. K. Ltd. (supra). The learned representative further contended that when there are more views than one on the matter and more than one interpretation covering the issue, the decision which is favourable to the assessee should be adopted and, therefore, the Bombay High Court decision in CIT vs. Colgate-Palmolive (I) P. Ltd. is to be followed and no disallowance under s. 40A(5) should be upheld. The learned Departmental Representative merely relied upon the CIT(A)'s order.
18. The Bombay High Court in held that any payment which is not relatable to the previous year is not covered by either s. 40(c) or 40A(5). In our understanding, gratuity is a sum to be determined depending upon the length of service an employee put up under an employer and it is a one-time payment which is due to the employee at the time of his retirement under an employer. The Bombay High Court, in the said decision, also held that various lumpsum of one-time payments are excluded under various clauses of s. 10 from the definition of the term "profits in lieu of salary" and, therefore, from the definition of "salary" in view of s. 17(1)(iv). They further held that from the definition of "salary" under s. 17(1)(iv) "any gratuity" in s. 17(1)(iv), "any gratuity" in s. 17(1)(iii) will have to be considered as referring to any periodic payment received by an employee gratuitously. Even otherwise, looking at the definition of "salary" for the purposes of s. 40A(5) under the basic scheme of s. 40A(5) any one-time payment or a payment which is not relatable to any period covered by the previous year, cannot be taken into account for the computation of the ceiling prescribed under that section. The ceiling is to be calculated with reference to the period covered by the previous year. Including such one-time payment as forming a part of s. 40A(5) would render it impossible to calculate the ceiling prescribed in that section in connection with that payment. Including such a payment would make the operation of the section impossible.
18.1. The Calcutta High Court in Hindustan Motors Ltd. vs. CIT (supra) held that it is possible for a person to be an employee for a part of the relevant previous year, i.e. upto the date of his retirement. After that period, when such an employee retires, he has to be treated as a former employee and payments made to him as a former employee again ought to be deductible within the permissible limit. Any other construction of the said section under which such an employee is treated only as an "employee" or as a "former employee" in the year in question would render one part of the said section or the other nugatory.
18.2. Having regard to the above, we fully agree with the contentions of the learned representative for the assessee and hold that no part of the remuneration paid to Shri Gulati is inadmissible on the ground that it exceeds the limit prescribed under s. 40A(5).
19. Now, let us take up one of the substantial issues involved in both the appeals. Grounds No. 5.1 & 5.4 for asst. yr. 1982-83 and ground No. 5 for asst. yr. 1983-84 can be conveniently taken up together since common points are involved. These grounds are as follows :
Asst. yr. 1982-83 5.1 The learned CIT(A) erred in not allowing investment allowance, depreciation, additional depreciation and extra shift allowance on Rs. 42,61,758 (now Rs. 44,37,798) including for asst. yr. 1990-91) in respect of capitalised amount of difference in exchange, paid over a period of years, on repayment of foreign currency loans obtained for purchase of plant & machinery. Year-wise statement showing difference in exchange paid is enclosed and marked "Annexure D".
5.4 The learned CIT(A) erred in not allowing additional depreciation under s. 32(1)(iia) in respect of plant & machinery of Rs. 37,27,823 coming into contact with corrosive chemicals.
Asst. yr. 1983-84
5. The learned CIT(A) erred in not allowing investment allowance on Rs. 1,14,165 being difference in exchange paid during the assessment year on repayment of foreign currency loans obtained for purchase of plant and machinery in the earlier years."
As can be seen from the grounds extracted, first we want to address ourselves on the question of grant of investment allowance under s. 32A to the assessee. The assessee is a public limited company. It manufactures dry cell batteries in its factory at Baroda. For that purpose, the assessee imported plant and machinery for which foreign currency loan was obtained from ICICI. The agreement which the assessee entered into with ICICI is provided at pp. 216 to 237 of the paper-book. Copies of bills obtained from the Japanese company called "Matsushita Electric Trading Co. Ltd.", Japan, (hereinafter referred to as the "foreign company"), are all provided at pp. 282 to 291 of the paper-book filed by the assessee. It is an agreed case between both the parties that the plant and machinery from the foreign company were to be supplied and the price was agreed to be paid in foreign exchange (Yen in this case). ICICI undertook to pay the foreign exchange towards the purchase of plant and machinery on behalf of the assessee-company in view of the terms of agreement it had entered into with the assessee-company. The price towards purchase of plant and machinery was to be repaid to the supplier on instalment basis. The Agreement which the assessee had entered into with ICICI is dt. 16th December, 1980. The essential terms of the agreement which are germane for our purpose are the following. ICICI has agreed to lend and advance to M/s Lakhanpal National Ltd. (hereinafter referred to as "company") has agreed to borrow from ICICI a foreign currency loan of Japanese Yen 17,166.100 which is equivalent to U.S. $ 76,200 which is referred to as "Dollar Loan" and also a foreign currency loan of Japanese Yen of 96,33,000 or its equivalent in other foreign currencies to an aggregate extent of DM 76,200 ("DM Loan" for short). The Dollar Loan and the DM Loan are collectively referred to as "the loan" in the body of the agreement. The company and ICICI have agreed to the following Heads of Agreement. Clause 2 of the agreement states that the said loan together with interest, additional interest, compound/further interest in case of default, commitment charge, premium on pre-payment or on redemption, costs, charges, expenses and all other monies including any increase as a result of devaluation/revaluation/fluctuations in the rates of exchange of the foreign currencies involved as stipulated in the said Head of Agreement shall be secured by a first mortgage in a form satisfactory to ICICI on all the company's immovable properties both present and future. The loan is also agreed to be a first charge of hypothecation of immovable properties of the company enumerated in cl. 2(ii). The mortgage and charge referred to above are agreed, to rank pari passu with the mortgages and charges created and/or to be created in favour of cl. 2(ii)(a), (b) and (c) of the agreement. Clause 1 of the Heads of Agreement is the following :
"1. In pursuance of the said Heads of Agreement and in consideration of ICICI having agreed to lend and advance to the company the said Dollar and the said DM Loan, as may be determined in terms of the Euru-currency agreement between ICICI and Standard Chartered Company Limited for the purposes and on the terms and subject to the conditions contained in the said Heads of Agreement and in consideration of the premises the company both hereby covenant with ICICI that the company shall unless otherwise agreed to by ICICI repay to ICICI in Bombay the said Dollar Loan and the said DM Loan agreed to be lent and advanced by ICICI to the company as aforesaid in accordance with the following Amortization Schedules 'A' and 'B' respectively;
Amortization Schedule A
-----------------------------------------------------------------------
Date of payment Payment of principal Principal amount outstanding
due after each payment
US $ US $
-----------------------------------------------------------------------
1. 29th April, 1984 5,867 76,200
2. 29th October 1984 5,867 70,333
3. 29th April, 1985 5,867 64,466
4. 29th October 1985 5,867 58,599
5. 29th April, 1986 5,867 52,732
6. 29th October 1986 5,867 46,865
7. 29th April, 1987 5,867 40,998
8. 29th October 1987 5,867 35,131
9. 29th April, 1988 5,867 29,264
10. 29th October 1988 5,867 23,397
11. 29th April, 1989 5,867 17,570
12. 29th October 1989 5,867 11,663
13. 29th April, 1990 5,867 5,796
-----------------------------------------------------------------------
Amortization Schedule 'B'
-----------------------------------------------------------------------
Date of payment Payment of principal Principal amount
due outstanding after each
payment
DM DM
-----------------------------------------------------------------------
1. 29th April, 1984 5,867 76,200
2. 29th October 1984 5,867 70,333
3. 29th April, 1985 5,867 64,466
4. 29th October 1985 5,867 58,599
5. 29th April, 1986 5,867 52,732
6. 29th October 1986 5,867 46,865
7. 29th April, 1987 5,867 40,998
8. 29th October 1987 5,867 35,131
9. 29th April, 1988 5,867 29,264
10. 29th October 1988 5,867 23,397
11. 29th April, 1988 5,867 17,570
12. 29th October 1989 5,867 11,663
13. 29th April, 1990 5,867 5,796
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Provided that -
(I) The above-mentioned Amortization Schedules have been drawn up proportionately on the basis of corresponding obligation of ICICI to reply the amounts representing the said loan under the Euro Currency Agreement. Any differences on account of exchange fluctuations in the rates of foreign currencies involved shall be borne by or be given credit to the company."
Proviso (III) at p. 221 of paper-book is as follows :
"(III) If for any reason any excess payments are made over and above the said loan in any manner whatsoever due to foreign exchange fluctuations or otherwise, then that part so in excess of the said loan shall be repayable in the currency in which the payment is made and the amount so repayable shall be the amount paid so in excess."
Proviso (V) appears to be giving scope to revise the Amortization Schedule and it provides as follows :
"(V) During the period the said loan or any part thereof remains outstanding, ICICI and the company shall be at liberty to agree to an Amortization Schedule/Amortization Schedules different from the ones given above, in which case, notwithstanding anything to the contrary contained in the said Heads of Agreement and/or these presents the Amortization Schedule/Amortization Schedules as subsequently agreed to will be effective and the company shall repay to ICICI the said loan according to such revised Amortization Schedule/Amortization Schedules as so subsequently agreed to.
Clause 4 under the heads of agreement is very important and it is as follows :
"4. All obligations falling on the company under the said Heads of Agreement and/or these presents in respect of principle of the said loan, interest, additional interest and redemption premium, if any, shall be due and payable by the company in currencies in which the said loan is repayable and all references in the said Heads of Agreement and herein to obligations falling on the company expressed in the various foreign currencies shall, if necessary, be deemed to be replaced by references to amounts of such other currencies determined as so provided."
Clause 5, to the extent it is relevant to us, may be extracted as under :
"5. Without prejudice to any of the obligations falling on the company in terms of the said Heads of Agreement and/or these presents and notwithstanding anything contained to the contrary hereinbefore ICICI shall be entitled at its option to call upon the company at suitable intervals to make payment to ICICI whether of instalment of principal of the said loan, interest, commitment charge, or premium on redemption in equivalent rupees in lieu of the US Dollars or DM as the case may be."
Clause 5(e) is as follows :
"(e) Any difference on account of exchange fluctuations in the rates of foreign currencies involves between the date of actual payment by the borrower to ICICI and the actual cost to ICICI as reference to in sub-cl. (a) above shall be borne by or be given credit to the borrower."
20. A survey of these provisions makes the following matters clear :
(1) The foreign loan with which the machineries are to be purchased should be met by the ICICI on behalf of the company.
(2) The foreign loan thus given by ICICI has to be repaid with interest, etc. mentioned in the agreement on an Amortization Schedule as mentioned in the agreement.
(3) The Amortization Schedule may be revised on mutual agreement between the company and ICICI, in which case the revised Amortization Schedule would prevail over the Amortization Schedule mentioned in the first agreement.
(4) The incremental difference while repaying the foreign loan provided by ICICI to the assessee-company according to the instalments agreed to under the Amortization Schedule shall be borne by the company.
In fact, the first agreement was revised by three more agreements. First it was revised on 10th March, 1998 and the revised agreement was duly signed by both the ICICI as well as on behalf of the company. Under the second agreement, the foreign loan agreed to in the first agreement at "US $ 6,04,800" mentioned in sub-cl. (1) was to be substituted with "US $ 6,38,483.81. In Sch. II, for "US $ 6,04,800" mentioned in the last para, substitute "US $ 6,38,483.81". In Sch. III, for the exiting format of the Amortization Schedule the following Amortization Schedule would be substituted :
-----------------------------------------------------------------------
Date of payment Payment of principal Principal amount outstanding
due after each payment
US $ US $
-----------------------------------------------------------------------
15th August, 1982 24,883.81 6,38,483.81 15th February, 1983 27,500.00 6,13,600.00 15th August, 1983 30,000.00 5,86,100.00 15th February, 1984 32,600.00 5,56,100.00 15th August, 1984 35,100.00 5,23,500.00 15th February, 1985 38,000.00 4,88,400.00 15th August, 1985 41,200.00 4,50,200.00 15th February, 1986 45,000.00 4,09,200.00 15th August, 1986 48,800.00 3,64,200.00 15th February, 1987 53,000.00 3,15,400.00 15th August, 1987 57,500.00 2,62,400.00 15th February, 1988 62.600.00 2,04,900.00 15th August, 1988 68,300.00 1,42,300.00 15th February, 1989 74,000.00 74,000.00
-----------------------------------------------------------------------
Similarly, the Amortization Schedule in revised as far as repayment of DM Loan is concerned which is provided at p. 414 of IVth paper-book as under :
Schedule III(B)
-----------------------------------------------------------------------
Date of payment Payment of principal Principal amount outstanding
due after each payment
-----------------------------------------------------------------------
99,942.37
1. 29th April, 1984 7,697.37 92,245.00
2. 29th October 1984 7,695.00 84,550.00
3. 29th April, 1985 7,695.00 76,855.00
4. 29th October 1985 7,695.00 69,160.00
5. 29th April, 1986 7,695.00 61,465.00
6. 29th October 1986 7,695.00 53,770.00
7. 29th April, 1987 7,695.00 46,075.00
8. 29th October 1987 7,695.00 38,380.00
9. 29th April, 1988 7,695.00 30,685.00
10. 29th October 1988 7,695.00 22,990.00
11. 29th April, 1989 7,695.00 15,295.00
12. 29th October 1989 7,695.00 7,600.00
13. 29th April, 1990 7,600.00 -
-----------------------------------------------------------------------
A consolidated statement showing loan taken from ICICI for purchase of machinery purported to be for the accounting year 1981 relevant to asst. yr. 1982-83 is furnished at p. 415 of the IVth paper-book filed by the assessee, which is as follows :
LAKHANPAL NATIONAL LTD. BARODA Asst. yr. 1982-83 STATEMENT SHOWING LOAN TAKEN FROM INDUSTRIAL CREDIT & INVESTMENT CORPORATION OF INDIA LTD., FOR PURCHASE OF MACHINERY FOR THE ACCOUNTING YEAR 1981 |---|-----------------|-------------------|-------------------|----------------| |Sr.| Nature of loan | Loan amount | Loan amount | Loan | |No.| taken from | as per Original | as per | amount | | | Industrial | Agreement with | amended | in | | | Credit & | Industrial | Agreement | Japanese | | | Investment | Credit & | with | Y | | | Corporation | Investment | Industrial | | | | of India Ltd. | Corporation | Credit & | | | | | of India Ltd. | Investment | | | | | | Corporation | | | | | | of India Ltd. | | |---|-----------------|-------------------|-------------------|----------------| |1. | IBRD Loan | S 60,4800 | S. 6,38,483.81 | Y 1,35,248,900 | |2. | EVRD Loan | S 76,200 | S 82,390.69 | Y 1,71,66,100 | |3. | D.M. Loan | DM 76,200 | DM 99,942.30 | Y 96,33,000 | |---|-----------------|-------------------|-------------------|----------------| | | Total foreign | | | Y 1,630,48,000 | | | currency Loan | | | | | | in Y | | | | |---|-----------------|-------------------|-------------------|----------------| |4. | Rupee Loan | | | Y 2,31,82,000 | |---|-----------------|-------------------|-------------------|----------------| | | Total amount of| | | Y 18,62,30,000 | | | Loan from ICICI| | | | |---|-----------------|-------------------|-------------------|----------------| |-----------------|---------------------| | Invoice | Invoice | | No. of | value in | | M.E.T. | Japanese | | Co. Ltd. | Y | | Japan. | | | | | | | | | | | | | | | | | |-----------------|---------------------| |(1) SC 21112-2 | Y 1,46,55,0000 | |(2) SC 21112-2B | Y 3,96,80,000 | | | | | | | | | | | | | | | | | | | | | | | | | | Total | Y 1,862,30,000 | | | | |-----------------|---------------------| As already stated, the invoice under which the Japanese company had supplied the various items of plant and machinery are all furnished at p. 416 in order to show the purchase of plant and machinery from the foreign company. The first among the invoices is dt. 5th December, 1980 and the plant and machinery shipped thereunder reached Bombay on 22nd December, 1980. It is stated that under this invoice plant and machinery including accessories, attachments and spare for dry batteries were shipped. Their value was shown at 1,75,80,000 Yen. The plant and machinery are said to be of three sets. Under the invoice dt. 4th February, 1981, which shiptment reached Bombay on 13th February, 1981, capital goods comprising of plant and machinery for dry battery, which comprised of mixed preparation system, automatic process for UM-1 batteries, zinc can preparation system, outer jacket preparation system and testing and laboratory equipment totalling 12 sets costing 14,65,50,000 Japanese Yen were shipped under invoice dt. 5th March, 1981, which reached Bombay on 25th March, 1981, the foreign company despatched plant and machinery fit for dry battery manufacture comprising of one set of zinc pellet manufacturing system and one set of outer jacket preparation system valued at Rs. 3,96,80,000 Japanese Yen were shipped. Again, under invoice dt. 6th February, 1981, which reached Bombay on 13th February, 1981, one set of capital goods manufacturing dry cells valued at 51,89,400 Japanese. Yen were despatched. On 5th December, 1980, one set of capital goods manufacturing dry cells valued at 37,70,000 Japanese. Yen were shipped. Again, on 11th September, 1979, one set of machinery for dry battery cells valued at 25,32,600 Japnese. Yen were shipped.
20A. The claim for investment allowance made by the assessee began changing from the AO's stage upto the level of the second appeal before us. In the P&L a/c relevant for asst. yr. 1982-83, an amount of Rs. 2,03,965 had been debited under the head "difference in exchange". However, this amount had been added by the assessee-company on its own in the revised return in view of the provisions of s. 43A. The company claimed depreciation of Rs. 86,599 on the amount capitalised during the year as well as in the preceding assessment years. However, this amount was found by the AO to be in order and, according to him, the depreciation allowable worked out to Rs. 91,278 as against Rs. 86,599 claimed in the return.
21. Besides the above, the assessee had sought to capitalise the loss of Rs. 2,43,168 suffered on account of exchange fluctuation during the calendar years 1982, 1983 and 1984 and accordingly claimed depreciation of Rs. 40,340. The AO felt that this claim of the company is beyond the scope of s. 43A because, according to him, the section speaks of capitalisation in the previous year in which such a loss takes place and there is no stipulation under the section to capitalize the loss suffered in the subsequent assessment years. Consequently, the claim of depreciation of Rs. 40,340 was held to be not tenable and was rejected. For asst. yr. 1982-83, the AO states at page of his assessment order, that the assessee claimed investment allowance on Rs. 41,02,836. However, in the course of assessment proceedings, this claim is said to have been revised to Rs. 40,97,999 in terms of the company's letter dt. 2nd July, 1985. The AO pointed out from the details of the claim that investment allowance had been claimed on the loss of foreign exchange fluctuation of Rs. 2,43,168 arising to the company in the subsequent accounting periods. The AO following his finding in para 14.3 of his assessment order, where he said that s. 43A permits capitalisation only in the accounting year in which the loss took place and as such there is no case for capitalising this amount and allowing depreciation, investment allowance, etc. on it, computed the investment allowance allowable which worked out to Rs. 40,32,523 as under :
Rs. Rs.
New machinery installed during the year 68,88,876
Add : (a) 2,75,652
(b) 85,83,764 88,59,416 1,57,48,292
-------------
Electrical installations installed in plant 2,73,297
Four tour expenses capitalised in
Asst. yr. 1980-81 34,353
Asst. yr. 1981-82 74,148 1,08,501
------------- -------------
1,61,30,090
25% thereof Rs. 40,32,523
75% of reserved created : Rs. 30,24,392
Therefore, he allowed investment allowance of Rs. 40,32,523, the claim of the assessee was that the sum of Rs. 2,43,168 could not have been excluded from the cost of plant and machinery by the AO. The said sum, according to him, represents loss incurred on account of fluctuations in the rate of exchange during the years 1982, 1983 and 1984 at the time of repayment of foreign loan obtained for the purchase of plant and machinery. According to the company, the AO erred in not including the amount as cost of plant and machinery installed during the asst. yr. 1982-83 and not allowing depreciation of Rs. 40,340 thereon. The company took the plea that the loss incurred on account of difference in exchange rate forms part of cost of plant and machinery and it should be allowed depreciation (normal and extra shift and additional depreciation). Again, the company had taken a ground before the CIT(A) in the appeal from asst. yr. 1982-83 that the AO erred in not allowing investment allowance on a sum of Rs. 2,43,568, being the cost of plant and machinery on account of loss arising out of difference in rate of exchange at the time of repayment of foreign loan during the years 1982, 1983 and 1984, procured for the purchase of plant and machinery. Before the CIT(A), the sum of Rs. 2,43,168, which, according to him, represents loss incurred on account of fluctuation in the rate of exchange during the asst. yrs. 1982-83 and 1983-84, was revised and amended and an enhanced claim of Rs. 26,25,235 was substituted saying that it represents the enhanced additional cost for including the fluctuation in the rate of exchange upto 31st March, 1988. The details of difference of exchange rate paid for the asst. yrs. 1982-83 to 1988-89 on loans taken from financial institutions for purchase of machinery were furnished before the CIT(A). According to the details, the difference in exchange rate worked out to Rs. 42,61,758 upto 31st March, 1988. It was contended before him that the agreement for obtaining the foreign currency loan was entered into with ICICI in 1981 with the condition that the loan shall be repaid in instalments in the currency in which the loan was obtained. Thus, it was argued for the company that the amount paid as instalments for repayment of loan has to be in terms of the loan arrangement and as such the amount repaid in view of the fluctuation in foreign exchange dates back to the date of agreement which is prior to the date of installation of plant and machinery. It was also contended that the AO had already accepted the difference in exchange fluctuation is a capital expenditure and allowed depreciation thereon. It was submitted for the company that the repayment on account of exchange rate fluctuation was also for the acquisition of capital asset. It was further submitted that the company incurred the liability for exchange rate fluctuation when it started drawing upon the loan account to make the purchase of machinery irrespective of such liability being quantified and disbursed later. It was further submitted that such increased liability was brought into the books of the company when the liability crystallised. However, on that score, it cannot be said that the liability had not been incurred or was incurred after the purchase or installation of machinery. The learned CIT(A) has examined the claim of the company from three angles set out in his impugned order as follows :
(1) What should be considered as cost of plant and machinery on which depreciation has to be allowed for asst. yr. 1982-83.
(2) On what amount the investment allowance has to be allowed.
(3) What should the machinery on which additional depreciation is to be allowed on account of coming into contact with corrosive chemicals and further what portion of loss on account of difference in foreign exchange can be considered as attributable to the corrosive machinery in old plant and such machinery in the new plant.
He held that as far as allowance of depreciation on amounts paid in subsequent years for exchange rate fluctuation is concerned, there is no justification for such claim even for the purpose of development rebate and/or investment allowance since Courts have held that actual cost should be taken as the commercial cost to the assessee since depreciation is an actual deduction for specific year on the actual cost to the company as in that year and on the actual cost which works out to an assessee at a future date. Since income is to be ascertained at the end of each previous year, any enhancement or reduction cannot be implemented if such enhancement or reduction is an event after the end of the accounting year. Though agreeing that the term 'actual cost' may not be synonymous with the term 'price' and the cost to the assessee may be the cost accounting portion including liabilities incurred in the subsequent year, as far as investment allowance is concerned, which is a one time allowance in the year of installation, the cost has to be ascertained on that event. He further held that deduction for investment allowance has to be allowed in respect of previous year in which the asset was acquired or the machinery or plant was installed or, if the plant and machinery was first put to use in the immediately succeeding previous year, the allowance is only in respect of that previous year. According to him, actual cost has to be correlated as in the year in which the allowance is to be given and without any reference to the specified date. He relied upon Shri Subh Laxmi Mills Ltd. vs. Addl. CIT (1989) 177 ITR 193 (SC) only to highlight that for the purpose of determining the total income a specific year in question has to be determined for which the actual cost to the assessee for the purpose of investment allowance is to be ascertained. If there were no restrictions of limitations in the year in which the investment allowance could be allowed, then the claim of the company for its actual cost should be allowed to keep open in view of the totality of payments in subsequent years. However, he felt that the cost has to be ascertained in the year in which the investment allowance is to be actually allowed and not in any subsequent period. Ultimately, he felt that there was no justification in interfering with the decision of the AO. Therefore, he held as follows :
"I would uphold that since the actual cost for the year in question was only the amount which was actually ascertained and paid on account of rate fluctuation, no other amount can be taken note of for the purpose of investment allowance even if in commercial terms such amount could be considered as the actual cost to the appellant."
22. Now, let us survey the facts relating to asst. yr. 1983-84 in relation to grant of investment allowance. In para 13 of his order, the AO held while making the assessment that the assessee added back an amount of Rs. 1,14,155 as difference in exchange under s. 43A. Depreciation of Rs. 18,665 was claimed on the same which was allowed as in the past. However, regarding the claim of depreciation on loss of Rs. 2,48,168 being exchange fluctuation loss suffered during the years 1982 to 1984, he followed his order for asst. yr. 1982-83 and disposed of the claim of depreciation on the said amount and denied Rs. 1,14,165 towards depreciation based on current year's loss on account of difference in foreign exchange arising on repayment of deferred loan obtained for purchase of plant and machinery. He allowed investment allowance of Rs. 9,85,437 while ultimately determining the total income of the company at Rs. 2,52,54,040 as per his assessment order dt. 12th March, 1987 under s. 143(3). The company came in appeal before the CIT(A) and in ground No. 11 it had taken the ground that the ITO erred in not allowing investment allowance either in the current year or in the year of installation of plant and machinery, i.e., asst. yr. 1982-83, in respect of additional cost of plant and machinery of Rs. 11,48,813 arising out of loss on account of difference in foreign exchange on repayment of loans obtained for the purchase of plant and machinery installed in asst. yr. 1982-83. The case of the company as put forward in the statement of facts filed before the CIT(A) regarding this aspect (disallowance of Rs. 11,48,813) is as follows. It is the assessee's case that it had purchased plant and machinery in 1981 out of foreign exchange loans received on deferred payment basis. On repayment of instalments of the said loans, the company incurred loss on foreign exchange fluctuation as under :
Year Difference in foreign
exchange
Rs.
1982 4,664
1983 53,482
1984 1,79,602
1985 2,93,161
1986 6,17,904
The company took the ground that the AO had also not allowed investment allowance of Rs. 11,48,813 being additional cost of plant and machinery on account of loss arising due to difference in foreign exchange on repayment of instalments of foreign loan. The CIT(A) dealt with this topic in paras 13 and 13.1 of his order. The claim of Rs. 1,14,813 made in the statement of facts filed before him was subsequently substituted with a higher claim of Rs. 42,61,758 said to be arising out of loss on account of difference in foreign exchange on repayment of loans obtained for purchase of plant and machinery. The same arguments, which were advanced for the immediately preceding assessment year, were advanced before him. However, the CIT(A), following his earlier year's order (asst. yr. 1982-83), felt no justification in interfering with the order of the AO and rejected the claim of the assessee. Thus, aggrieved by the disallowances for asst. yrs. 1982-83 and 1983-84, the matter now stands for our consideration.
23. The latest claim of differential exchange paid for the years from 1982-83 to 1989-90 on loans taken from financial institutions in 1981 for purchase of machinery was explained in a tabular from at p. 8 of the first paper-book filed by the assessee and it is as follows :
-------------------------------------------------------------------
Sr. No. Accounting year Asst. yr. Amount (Rs.)
-------------------------------------------------------------------
1. 1982 1983-84 4,664**
2. 1983 1984-85 53,481
3. 1984 1985-86 1,79,602
4. 1985 1986-87 2,93,161
5. 1986 1987-88 6,17,904
6. 1987-88 1988-89 14,71,002
7. 1988-89 1989-90 16,41,944
8. 1989-90 1990-91 1,76,040
-----------
Total 44,37,798
-------------------------------------------------------------------
** Excluding difference in exchange rate of Rs. 1,09,501 for old loan taken in earlier year."
So, the claim made increased to Rs. 44,37,798, while the claim before the AO was Rs. 40,340, before the CIT(A) it was Rs. 26,25,235, whereas before the Tribunal, at the time of filing the grounds of appeal, the claim was revised at Rs. 42,61,768, and at the time of argument, it was further revised at a figure of Rs. 44,37,798 as reflected in the table given above. The assessee filed written submissions for asst. yr. 1982-83 in respect of investment allowance at two times, first on 20th July, 1995, which was received in the office on 4th June, 1997. Those written submissions were concentrated only to highlight the case of the assessee for the whole claim of investment allowance. For the second time, the written submissions were given on 2nd June, 1997, received by the Tribunal on 4th June, 1997, generally dealing with all the grounds raised before the Tribunal. In the written submissions filed, the case of the assessee appears to be as follows.
24. The company maintains its accounts on mercantile system of accounting. Its foreign collaborators are Matsushita Electric Trading Co. Ltd., Okasa, Japan, who not only have supplied technical know-how but hold 40% (now 51% of equity share capital) in the company. The company was incorporated in 1972 and it started production of dry cells in August 1973. The company was issued licence to manufacture 160 million dry cells. In 1980-81, the company was issued further additional licence to manufacture 160 million dry cells. These particulars are provided at pp. 220 of second paper-book. For the purpose of manufacturing the additional licenced capacity of 160 million dry cells, the assessee claimed to have established another unit and for setting up of that unit it had imported plant and machinery from Japan. The imported plant and machinery was financed by borrowing foreign currency from ICICI. The said foreign currency loan from ICICI was to be repaid by instalments over a period of years. The agreement dt. 16th December, 1981 which the company entered into with ICICI was provided at pp. 216 to 237 of paper-book from which we have already extracted the relevant portions above. The assessee, on account of fluctuation in the rate of exchange, had to pay additional amount of Rs. 44,37,798 over the period of repayment of loan as per Annexure 'D' appearing at p.8 of the paper-book. In view of the stipulation that the assessee shall repay the borrowed fund in the currency in which it had received, the liability to pay additional amount on account of fluctuation in the rate of exchange relates back to the date of borrowal. The liability to pay the borrowed funds in foreign currency arose on receipt of the loan amount and hence the assessee incurred additional liability arising on account of fluctuation in the rate of exchange on the date of receipt of loan. In the circumstances, the additional liability of Rs. 44,37,798 accrued to the assessee in the year 1981, the year of receipt of foreign currency loan, relevant to asst. yr. 1982-83. It is, no doubt true that the accrued liability was Rs. 44,37,798. Its quantification was made in subsequent years. The process of quantification of liability is independent of accrual of liability as the assessee maintains its account on accrual basis. The additional liability of Rs. 44,37,798 accrued on the date of receipt of the loan under the agreement to repay the same in foreign currency in asst. yr. 1982-83 itself though the same is quantified on repayment of loan instalments over a period of years. In support of this contention that the quantification has nothing to do with incurring of liability, the assessee relied upon the Supreme Court decision in Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1972) 82 ITR 363 (SC). In that case, inter alia, it is stated that although the sales-tax liability could not be enforced till quantification was effected by assessment proceedings, the liability for payment of tax was independent of the assessment. The above ratio of the Hon'ble Supreme Court was sought to be pressed into service to claim the additional liability of Rs. 44,37,798 arising on account of fluctuation in the rate of exchange on the ground that the liability arises on the date of receipt of foreign currency loan. In our opinion, the ratio is only an authority for the proposition that the liability to pay the amount agreed upon the purchase of plant and machinery arose on the date of the agreement. However, in this case, it is noteworthy that the Supreme Court was not dealing with a case of foreign exchange fluctuation and the resultant enhanced liability the company have to incur and which is to be allowed under s. 43A. Sec. 43A was also not a subject-matter before the Supreme Court.
25. The assessee also relied upon the following orders and judgments :
(1) Southern Asbestos Cement Ltd. vs. Dy. CIT (1991) 38 ITD 449 (Mad); and (2) New India Industries Ltd. vs. CIT (1993) 203 ITR 933 (Guj).
The portion relied upon in that judgment at p. 940 of 203 ITR (supra) is the following :
"....... In our opinion, when the assessee purchased assets at a price, its liability to pay the same arose simultaneously. Merely because the said liability was to be discharged in instalments it could not be said that the liability did not exist or accrue till the instalments became due and payable. ......"
Again, this is an authority for the proposition to indicate what actually is the date on which the liability arises, but it does not deal with any incremental liability due to fluctuation on account of foreign exchange rates. Therefore, in our opinion, the ratio of this case does not apply to the present case.
26. Another decision relied upon was Union Carbide India Ltd. vs. CIT (1981) 130 ITR 351 (Cal).
The portion relied upon is at p. 379 of the said decision, which is an under :
"It was linked with the actual cost of the machinery or plant to the assessee. The actual cost of the machinery or plant should be the cost on the relevant date. Therefore, on the relevant date, when the contract was entered into it was entered into with the direction to pay back in dollars and whatever was necessary to pay back must be treated as actual cost to the assessee."
We have no quarrel with the proposition but in order to find out the actual cost to the assessee, whatever was necessary to pay back in dollars was to be ascertained. In facts it is this process we have to undertake in this case and, therefore, the ratio of the Calcutta High Court decision cannot be of much use to the company.
27. The next decision cited was CIT vs. Arvind Mills Ltd. (1992) 193 ITR 255 (SC). The portion relied upon by the assessee in the said judgment is a portion appearing at p. 261 of 193 ITR of the said judgment as under :
"Reverting now to the first of the two questions posed earlier in the background of the above principles and amendments, the position appears to be that, on strict accountancy principles, the increase or decrease in liability towards the actual cost of an asset arising from exchange fluctuation can be adjusted in the accounts of the earlier year in which the asset was acquired (if necessary, by reopening the said accounts)."
However, we have gone through the whole judgment reported in (1992) 193 ITR 255 (SC) and that the portion quoted above does not reflect the full decision of the Hon'ble Supreme Court on this point of ascertainment of actual cost of an asset arising from exchange fluctuation. After the quoted portion, the Hon'ble Full Bench of the Supreme Court stated further as follows :
"In other words, in the illustration given earlier, the actual cost of Rs. 1,00,000 and the allowance based thereon shown in the accounts for the financial year 1965-66 would have to be revised to show an actual cost of Rs. 1,20,000 and allowances based on that figure. The figures of written down value and depreciation allowances for subsequent years would be also need consequential revision. However, though this is a course which is theoretically advisable or precise, its adoption may create a lot of practical difficulties. That is why the Institute of Chartered Accountants gave an option to business people to make a mention of the effect of devaluation by way of a note on the accounts for the earlier year in case the balance sheet in respect thereof has not yet been finalised but actually to give effect to the necessary adjustments in the subsequent years instead of reopening the closed accounts of the earlier year. This also appears to be in accord with the principle laid down by the Court in CIT vs. A. Gujapathy Naidu (1964) 53 ITR 114 (SC) and CIT vs. Swadeshi Cotton & Flour Mills (P) Ltd. (1964) 53 ITR 134 (SC).
This is also the principle subsequently recognised by the amendment to the Companies Act, 1956. Thus, in the illustration given earlier, the actual cost of the asset for the asst. yr. 1966-67 will be Rs. 1,00,000. The actual cost to be entered in the books, for the asst. yr. 1967-68, will, however, be Rs. 1,20,000."
Therefore, the quoted portion from the Supreme Court's judgment itself clarifies that it is beset with practical problems and the practical difficulties confronted would be got over if one gives effect to the necessary adjustments in the subsequent years instead of reopening the closed accounts of the earlier years. In facts, the view of the Hon'ble Supreme Court leaned towards the alternative method by which the practical difficulties confronted in the first method can be obviated. Our endeavour in this judgment would be to follow the alternative method suggested by the Hon'ble Supreme Court and give effect to it fully. Therefore, the portion of the Supreme Court judgment in Arvind Mills case (supra) relied on by the company does not reflect the full truth but only half truth. It does not advance the case of the assessee.
28. Another judgment relied upon by the assessee was Padamjee Pulp & Paper Mills Ltd. vs. CIT (1994) 210 ITR 97 (Bom). A portion of the judgment obtaining at page 101 of 210 ITR, which is relied upon by the company in its written arguments is extracted as under :
"In the present case, the assessee has acquired a capital asset from a country outside India for the purpose of its business by making payment in foreign currency. For this specific purpose, it borrowed moneys in foreign currency from the Industrial Finance Corporation of India and the liability in respect thereof was outstanding at the end of the relevant previous year. This liability had increased on account of change in the rate of exchange. Thus, s. 43A fully applies and the additional liability so created had to be added to the cost of acquisition."
In that case, the assessee-company was manufacturing paper and it imported machinery from a foreign company with a loan obtained from Industrial Finance Corporation of India. The question was whether the incremental liability incurred by the assessee for discharging the foreign currency loan instalments was to be considered as capital expenditure. In that very case itself (at p. 98), the Bombay High Court as per the headnote held as follows :
"(ii) That in view of s. 43A of the IT Act, 1961, the additional liability amounting to Rs. 21,36,840 and Rs. 4,89,502 on account of exchange fluctuations with reference to the amount of loan outstanding on the last day of the accounting period at the then prevailing exchange rate had to be added to the actual cost of the machinery for the purpose of computation of depreciation for that year."
Thus, it does not throw any light as to how to compute the incremental liability due to fluctuations in exchange rate under s. 43A and in which year the said incremental liability is to be added to the actual cost of plant and machinery. Therefore, the quoted portion relied on by the assessee does not help to advance its case except in the case of claim for depreciation.
29. Another decision relied on was Arvind Mills Ltd.'s vs. CIT (1978) 112 ITR 64 (Guj). What all that was held in that case was that the increased liability on account of devaluation arose as an integral part of the original arrangement between the parties. The assessee, who maintained its accounts according to the mercantile system, can be said to have incurred such liability, when it started drawing upon the loan account to make the purchase of machinery irrespective of such liability being quantified and disbursed later. We have no quarrel with this proposition but, at the same time, it only shows the liability aspect of the problem but does not throw any light how to quantify the incremental liability in discharging the instalments of the foreign loan and in which assessment year the relief under s. 43A is to be allowed to the assessee. Therefore, in our opinion, the quoted portion is neither here nor there.
30. The other decisions relied upon are the following :
(1) Dempo Steamships Ltd. vs. ITO (1985) 21 TTJ 505 (Pune) and (2) CIT vs. Century Enka Ltd. (1992) 196 ITR 447 (Cal) The assessee itself relied upon a portion of the judgment reported at p. 450 of 196 ITR in that decision which is as follows :
"It is common knowledge that the rate of exchange fluctuates every day depending on the conditions prevailing in the International Monetary Market but such fluctuation in conversion cannot be taken into account unless, at the time of actual payment of the liability in foreign currency, there has been, in fact, an additional liability. It is, therefore, necessary to ascertain in every case whether the assessee incurred any additional liability on the date of repayment or not. Only if any additional liability is incurred on the date of repayment due to change in the rate of conversion, such liability will be added to the cost of the capital asset and benefit of depreciation and investment allowance will be allowed on such added cost."
In our opinion, this is exactly on the point which we are discussing and we intend to follow the same and we also hold that the ratio of this decision is quite in accord with the Full Bench decision of the Hon'ble Supreme Court in Arvind Mills' case (supra). In fact, we are of the view that the ratio of this decision goes against the contention of the company that the whole of the incremental liability accrued to the company in repayment of foreign exchange instalments from 1982-83 to 1989-90 should all be aggregated and taken to represent part of the actual cost of plant and machinery to the assessee while giving the benefit of s. 43A of the IT Act to the company. The other decisions relied on by the assessee are the following :
(1) CIT vs. Widia (India) Ltd. (1992) 193 ITR 475 (Kar);
(2) CIT vs. Coromandel Fertilizers Ltd. (1985) 156 ITR 283 (AP);
(3) Addl. CIT vs. Kwality Spg. Mills (P) Ltd. (1977) 109 ITR 646 (Mad);
(4) CIT vs. Baker Mercer India (P) Ltd. (1992) 196 IT 667 (Bom);
(5) Maneklal Harilal Spg. & Mfg. Mills Co. Ltd. : ITA Nos. 1639 & 1640/Ahd/1984;
(6) CIT vs. Shri Dinesh Mills Ltd. : ITA No. 2575/Ahd/1984;
(7) CIT vs. Shri Ambika Mills Ltd. : (1993) 201 ITR (St.) 63 (8) CIT vs. Tarun Commercial Mills Ltd. (1992) 195 ITR (St.) 148; and It was contended that there is no bar either in s. 43A(1) or s. 43A(2) of the IT Act, 1961, for allowing investment allowance, etc. under s. 32A of the Act. As per s. 43A(1), the incremental cost arising on account of difference in rate of exchange after acquisition of capital asset is to be added/deducted from the actual cost of the asset as defined in s. 43A(1) of the Act. Now, s. 43(1) defines "actual cost" with reference to ss. 28 to 41 of the Act which naturally include s. 32A of the Act. Hence, under s. 43A(1) r/w s. 43(1) of the Act, on the incremental cost arising on account of fluctuation in the rate of exchange after the acquisition of the asset, investment allowance is allowable on the incremental cost. This view was expressed by the Madras Bench of the Tribunal in Southern Asbestos Ltd. vs. Dy. CIT (1960) 38 ITD 449 (Mad). Again, there is no quarrel with this proposition. However, this does not deal with when or in which assessment year the incremental cost is to be considered is the question for which the quoted portion of this judgment did not deal with. We agree with the proposition that investment allowance is allowable on incremental cost. We also agree with the Madras Bench decision of the Tribunal that the incremental cost occasioned by fluctuation in foreign exchange rate will go to augment the 'actual cost' of the asset under s. 43(1), We also agree with the conclusion the augmenting of actual cost by the incremental cost occasioned by fluctuations in the rate of foreign exchange contemplated by s. 43A(1) is also applicable to s. 32A which also talks of actual cost even for the purpose of computing investment allowance under s. 32A. It was further contended that s. 32A is a provision giving incentive to the business people and such provision should liberally construed and in support of that proposition the following decisions were cited :
(1) Bajaj Tempo Ltd. vs. CIT (1992) 104 ITR (SC) 116 : (1992) 196 ITR 188 (SC);
(2) CIT vs. Strawboard Mfg. Co. Ltd. (1989) 177 ITR 431 (SC);
(3) CIT vs. Satellite Engg. Ltd. (1978) 113 ITR 208 (Guj);
(4) CIT vs. Trinity Hospital (1997) 225 ITR 178 (Raj);
(5) Warner Hindustan Ltd. & Anr. vs. ITO (1982) 134 ITR 158 (AP); and (6) Gokuldas Exports vs. CIT (1993) 200 ITR 401 (Kar)
31. Without prejudice to the above contention that investment allowance, etc. should be allowed in the asst. yr. 1982-83, it was contended by the assessee as part of its written arguments that investment allowance, etc. may be allowed in respective years of actual payment of exchange. This view is supported by the following judgments :
(1) Southern Asbestos Cement Ltd. vs. CIT (supra);
(2) CIT vs. Arvind Mills Ltd. (supra);
(3) Maneklal Harilal Spg. & Mfg. Co. Ltd. vs. ITO : ITA Nos. 1639 & 1640 /Ahd/84 and (4) Shri Dinesh Mills Ltd. vs. ITO ITA No. 2575/Ahd/1984.
We entirely agree with this alternative submission and we feel that we are justified to give relief to the assessee on the lines of this alternative argument which, according to us, is fair and also represents the correct view of the law decided even by the Supreme Court. The reasons for our accepting this alternative contention may be stated briefly as under.
32. Under s. 29, business income is to be computed in accordance with the provisions of ss. 30 to 43D. Investment allowance is a one-time deduction allowable under s. 32A and it came into the statute book on and from 1st April, 1976. The portion of s. 32A which is relevant and deleting the unnecessary portions reads as follows :
Sec. 32A(1) "In respect of ....... machinery or plant specified in sub-s. (2), which is owned by the assessee and is wholly used for the purposes of the business carried on by him, there shall, in accordance with the subject to the provisions of this section, be allowed as deduction, in respect of the previous year in which ........ the machinery or plant was installed or, if the machinery or plant is first put to use in the immediately succeeding previous year, then, in respect of that previous year, of a sum by way of investment allowance equal to twenty-five per cent of the actual cost of the .......... machinery or plant to the assessee."
Thus, it is clear that investment allowance is a one-time allowance and it should be allowed either in the previous year in which plant and machinery were installed or, if the plant and machinery were put to use in the immediately succeeding previous year, then in respect of that previous year, the quantification of the investment allowance is to be made at 25% of the actual cost of the machinery or plant to the assessee. Therefore, the actual cost of the plant and machinery is to be determined with reference to the year in which the plant and machinery were installed or with reference to the previous year in which it is put to use. The other provisions of s. 32A make it abundantly clear that this deduction under s. 32A is not allowable in respect of plant and machinery for which the deduction by way of development rebate is allowable under s. 33. Under sub-s. (2) of s. 32A together with cl. (iii) which are relevant for our purpose, are extracted as under :
(2) The ........ machinery or plant referred to in sub-s. (1) shall be the following, namely :
(iii) in any other industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing, not being an article or thing specified in the list in the Eleventh Schedule."
There are some important pre-conditions prescribed before grant of investment allowance under s. 32A. They are set out in s. 32A(4) which, inter alia, states that investment allowance shall be allowed only if an amount equal to 75% of the investment allowance to be actually allowed is debited to the P&L a/c of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the "Investment Allowance Reserve Account) to be utilised -
(a) for the purposes of acquiring, before the expiry of a period of ten years next following the previous year in which the machinery or plant was installed ...... for the purpose of the business of the undertaking; and
(b) until the acquisition of a new machinery or plant as aforesaid, for the purposes of the business of the undertaking other than for distribution by way of dividends or profits or for remittance outside India as profits or for the creation of any asset outside India".
Now, as regards the fulfilment of this condition, the facts obtaining in the case before us are as follows, Detailed working showing the amount of investment allowance reserve created in the year 1982-83 and the amount of investment allowance allowed by the AO is explained in a note filed before us accompanied by a tabular statement showing the figures as under :
Rs.
(1) Investment allowances claimed in revised return of Income 41,02,830 (2) Investment allowance claim revised vide our letter dt. 2nd July, 1985 40,97,999 (3) Investment allowance granted by ITO in assessment order passed under s. 143(3) of the IT Act at p. No. 19. (on additions in plant & machinery, electrical installation installed in plant and capitalised amount of foreign tour expenses) 40,32,523 (4) Investment allowances reserve to be created @ 75% of Rs. 40,32,523 30,24,392 (5) Investment allowances reserve actually created in books 40,38,521 (6) Excess Investment allowance reserve created (5-4) 10,14,129 (7) Investment allowance on exchange ratio difference capitalised from asst. yr. 1983-84 to asst. yr. 1990-91.
(a) Amount on fluctuation of exchange rate difference from asst. yr. 1983-84 to asst.
yr. 1990-91 44,37,798
(b) Investment Allowance 926% of Rs. 44,37,798 11,09,450
(8) Investment allowance Reserve require @ 75% of
Rs. 11,09,450 8,32,087
(9) Excess Investment Allowance Reserve created as
shown in column (6) above 10,14,129
Sub-s. (1) of s. 43 defines "actual cost" for the purpose of ss. 28 to 41 as meaning the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, it any, as has been met directly or indirectly by any other person or authority. Therefore, it is obvious that s. 32A comes in between ss. 28 to 41 and the meaning of the words 'actual cost' used in s. 32A should carry the same meaning given in s. 43(1). The meaning of the word 'paid' for the purpose of ss. 28 to 41 is also defined under s. 43(2). The expression "paid" is said to mean actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under the head "Profits and gains of business or profession". In our opinion, there is clear distinction between the word 'cost' and the word 'price' and they are not synonymous to each other.
33. Sec. 43A is a special provision dealing with the consequences dues to change in rate of exchange of currency. This provision was inserted by Finance Act, 1967, w.e.f. 1st April, 1967. Sec. 43A(1) is an important provision which falls for interpretation and, therefore, it is extracted as under :
"43A(1), Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange at any time after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or a part of the cost of the asset or for repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset (being in either case the liability existing immediately before the date on which the change in the rate of exchange takes effect), the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to, or, as the case may be, deducted from, the actual cost of the asset as defined in cl. (1) of s. 43 or the amount of expenditure of a capital nature referred to in cl. (iv) of sub-s. (1) of s. 35 or in s. 35A or in cl. (ix) of sub-s. (1) of s. 36, or, in the case of a capital asset (not being a capital asset referred to in s. 50), the cost of acquisition thereof for the purposes of s. 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid."
Therefore, as can be seen from the underlined portions in s. 43A(1), it is clearly stated that the enhanced liability due to foreign exchange fluctuations, which is to be considered under s. 43A, shall be added to the actual cost of the asset as defined under s. 43(1) of the IT Act. Further, such enhanced liability should be determined during each previous year especially in a case where equivalent rupee value is to be paid towards each instalment of foreign currency loan which is liable to be repaid on every one of the instalments. Accepting that investment allowance is a one-time allowance and one-time grant, it may look hard that for determining the actual cost of the plant and machinery to the assessee under s. 43(A), the fluctuation in foreign exchange on each of the instalment dates in which the instalment is to be paid in foreign exchange is to be considered, and after all the instalments are paid, then only the actual cost is to be determined, for, there may be cases where on some instalment dates falling in accounting years relevant to each of the assessment years in which the instalment dates fall, the fluctuation may bring about profits in some years and losses in other years. It is common knowledge that the rupee value in international market is now to be computed with reference to the basket of other foreign currencies and their values in the international market. Therefore, in our considered opinion, the actual cost of plant and machinery to the assessee can exactly be determined only after payment of all the instalments and only in the last assessment year in which the last instalment date falls. However, it does not amount to saying that on the date of either setting up of the plant and machinery or the accounting year relevant to the assessment year in which the plant and machinery is first put to use the relief under s. 43(A) cannot be granted. Under 43(1), notionally, it is possible to state the actual cost of the plant and machinery in foreign exchange or foreign currency but not in Indian rupee, especially, in the face of a specific agreement with the creditor towards the cost of plant and machinery on behalf of the assessee that the foreign currency instalments can be paid in specified amounts on each of the instalment dates as per the amortization schedule. It is, no doubt, argued on behalf of the Revenue that s. 43A should be allowed on the actual cost determined under s. 43(1) and that too only in the assessment year in which the plant and machinery was purchased or it was set up or they were put to use for the first time. In view of this position, it cannot be allowed that the incremental foreign exchange liability should be taken into consideration and added to the actual cost each year till the assessment year in which the last instalment falls and then only the actual cost is to be determined. This argument is not tenable under law. Our reasoning for not accepting the above proposition can better be illustrated by the following hypothetical example. Suppose, plant and machinery was acquired from a foreign supplier and a foreign country on 1st January, 1981 for 1 crore dollars. Since the company, which is the purchaser, had no foreign currency with it, it approached ICICI to supply the foreign currency. Then, the ICICI and the company entered into an agreement in which one of the stipulations was that the total of the foreign exchange cost of the plant and machinery should be paid in 10 equal yearly instalments and it was also agreed that the first of the equal yearly instalments should fall due one year after the date of purchase. In such a case, the liability to pay foreign currency instalments on 1st January, 1982 to 1st January, 1991, and on each of these dates the foreign exchange, say dollar in this case, payable is 10 lakhs per instalment. But, due to fluctuation in foreign exchange, the rupee value equivalent to the instalment payment payable in foreign exchange on each of those dates may vary. In some years, the rupee value may gain and in some other years the rupee value may appreciate vis-a-vis the dollar. In the years in which the rupee may devalue vis-a-vis the dollar it may resulting in appreciation of liability, due to devaluation of rupee. In some years and the instalment liability may also decrease if the rupee value appreciates vis-a-vis the dollar. In the hypothetical example, the ultimate rupee value to be paid on each of the dates of instalment may be as follows :
-----------------------------------------------------------------------
Date of Instalment payment Total of the rupee value
instalment in dollar of the instalment when
converted into rupee value
on the respective dates of
instalments
-----------------------------------------------------------------------
($) Rs.
-----------------------------------------------------------------------
1-1-1982 10 lakhs 15 lakhs
1-1-1983 10 lakhs 10 lakhs
1-1-1984 10 lakhs 8 lakhs
1-1-1985 10 lakhs 7 lakhs
1-1-1986 10 lakhs 20 lakhs
1-1-1988 10 lakhs 11 lakhs
1-1-1989 10 lakhs 14 lakhs
1-1-1990 10 lakhs 9 lakhs
1-1-1991 10 lakhs 10 lakhs
------------- -----------
1 crores 1,10,00,000
-----------------------------------------------------------------------
Therefore, there is possibility to find out the actual cost of the plant and machinery to the company only in 1992-93 in which the last instalment falls and the actual cost works out to Rs. 1,10,00,000. It is significant that in cases where the plant and machinery was purchased with a stipulation to pay the cost of it in foreign currency, and if the assessee stipulates with a finance company like ICICI and comes to an understanding that the cost of the plant and machinery paid by the financier in foreign exchange in the first instance may be allowed to be repaid in 10 yearly equal instalments and if each of the yearly equal instalment payable in foreign exchange is to be purchased by equal value of rupee, then s. 43A applies. It is clear from the already extracted portion of s. 43A that if any asset from a country outside India has been acquired for the purpose of business or profession and in consequence of a change in the rate of exchange at any time after the acquisition of such asset and there is an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards the whole or part of the cost of the asset or for repayment of the whole or part of the moneys borrowed by it from any person directly or indirectly in any foreign currency specifically acquiring the asset, the amount by which the liability aforesaid is so increased or reduced during the previous year shall be added to the amount arrived at after such addition or reduction and such total amount should be taken to be the actual cost of the asset or capital asset (plant and machinery). Accordingly to the above illustration, which represents the practical working of s. 43A, it determines the actual cost, namely in asst. yr. 1992-93, as Rs. 1,10,00,000 when, in fact, it was purchased at 1 crore $ on 1st January, 1981. Therefore, in our opinion, the incremental foreign exchange liability should be added to the actual cost every year till the last payment of instalment is made. It is, no doubt, true that investment allowance is to be allowed at 25% of the plant and machinery to the assessee either in the year of purchase or in the year of setting up of plant and machinery. There may be cases where the 'actual cost' may not be found out exactly either on the date of acquisition of the plant and machinery or on the date of its setting up or putting it to use. However, that does not debar the Revenue to grant investment allowance on the basis of s. 43A, though such investment allowance is only tentative and is liable to be adjusted finally in the last of the assessment years in which the last foreign currency instalment has to be paid at the ruling official rate of exchange between the foreign currency on the one hand and the Indian rupee on the other. The case of the assessee, as we understand, is that the proceedings for asst. yr. 1982-83 are still pending before the Tribunal. The payment of foreign currency instalment from 1982-83 to 1989-90 is arrived at Rs. 44 lakhs and odd. Therefore, the whole of it should be considered to be the actual cost and 25% thereof is to be allowed as investment allowance. The purchase of plant and machinery was in accordance with the terms and conditions of the agreement dt. 16th December, 1980. The total value of the plant and machinery, for which it was purchase in Japanese Yen, is already reflected by the invoice values. In fact, in the asst. yr. 1982-83, the plant & machinery was set up. The whole of the foreign exchange (Japanese Yen in this case) for purchase of plant and machinery was supplied by ICICI in the first instance and the agreement dt. 16th December, 1980 referred to above was entered into by the company with ICICI under which the whole amount of foreign exchange supplied by the creditor ICICI is agreed or allowed to be repaid in foreign currency to the creditor by the company in instalments according to the amortization schedule first agreed to under the terms of agreement dt. 16th December, 1980 and later modified by agreement dt. 10th March, 1983 and the another date which is not clear. The revised amortization schemes schedules are furnished at pp. 413-414 of paper-book no. 4. It was also argued by the company that the excess paid or incurred by the company to the ICICI on each of the instalment dates clearly goes to augment the actual cost of the asset to the company. It was also argued that in order to do complete justice between the parties, subsequent events after the assessment is over can also be taken into consideration, and following this principle, the investment allowance should be allowed determining the total amount of Rs. 44,37,798 as the actual cost of the plant and machinery to the assessee even at the time of its purchase or at least on the date of the agreement between the company on the one hand the ICICI on the other. It was also argued that there is no perceptible difference between s. 32A and s. 33. Both of them are one time allowances and, therefore, it is not permissible to conclude the actual cost of plant and machinery every year till the last instalment is paid since such course appears to be against the spirit of s. 32A. The learned Departmental Representative, on the other, opposed the claim of the assessee and contended that at the most the incremental liability due to foreign exchange fluctuation under s. 43A is allowable to the assessee only for asst. yr. 1982-83 and on the basis of the incremental liability investment allowance can be allowed. However, the whole of Rs. 44,37,798 representing the total of the incremental liability for asst. yrs. 1982-83 to 1989-1990 cannot be allowed taking as the actual cost of plant and machinery even in asst. yr. 1982-83 itself. Assessment for each of assessment years is distinct and separate under the IT Act. For ascertaining or while determining the profits and loss for the asst. yr. 1982-83, the cumulative loss due to incremental liability in foreign exchange suffered by the assessee for a number of subsequent assessment years cannot be allowed to be aggregated and adjusted while determining the tax liability for the asst. yr. 1982-83. While considering the state of affairs of the company for the accounting year 1981 (asst. yr. 1982-83), there is scope only to know the incremental foreign exchange liability which the assessee has to meet while paying or providing for the instalment which falls due on a date falling in the accounting year under its agreement with ICICI. But, the AO has no scope even to know or ascertain similar liability, if any, which the company may be called upon the pay for each of the subsequent assessment years from the first to the last of the instalment dates. Foreign exchange rate of Indian rupee is now to be determined with reference to the value of basket of foreign currencies and one may not be knowing whether on each subsequent instalment date, loss or gain accrue or occur in payment of instalment of foreign exchange when translated into rupees. The argument that subsequent events can also be taken into consideration for the purpose of ascertaining the actual cost is against the clear wording of s. 43A r/w s. 43(1). If we allow total incremental liability for several years and consider all of them for deduction in asst. yr. 1982-83, it amounts to granting impermissible deductions and reduce the correct tax liability due from the company for the asst. yr. 1982-83 since it secures illegal advantage to the company.
34. After considering the arguments on both sides, we are inclined to accept the alternative argument advanced by the assessee reflected in para 9.1 of the written arguments : "without prejudice to the above contention and in the alternative, the assessee submits that investment allowance on difference in exchange paid in each year should be allowed in relevant previous years". According to us, this alternative contention can be supported by the ratio of the following decisions. We rely upon the decision of the Hon'ble Supreme Court in Arvind Mills Ltd. (supra) from which we have already extracted the relevant portions in the above paragraphs and there is no need to repeat them here and the relevant portions in the above paras may be referred to in this context. We also rely upon CIT vs. Century Enka Ltd. (supra). In that case, the question referred to under s. 256(1) was :
"Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the assessee was entitled to investment allowance and in directing the ITO to give the assessee opportunity of creating a reserve before allowing the investment allowance ?"
Their Lordships of the Hon'ble Calcutta High Court was considering the facts relevant to asst. yr. 1978-79 only and in that there was a incremental foreign exchange liability of Rs. 4,04,741. The question was whether investment allowance was allowable only on that figure. The Tribunal held in favour of the assessee and the same was confirmed by the Hon'ble Calcutta High Court. If the correct law was that the incremental liability of 1978-79 should not be considered for investment allowance separately but the said incremental liability should be taken to form part of actual cost as on the date of purchase of plant and machinery as on the date of purchase itself and if the incremental liability should not be separately considered for investment allowance, the Hon'ble High Court would have stated so. However, they have granted investment allowance on the incremental liability which arose for one assessment year. This alternative argument of the company was also supported by the decision of the Madras Bench of the Tribunal in Southern Asbestos Cement Ltd. vs. Dy. CIT (supra). In that case, the Tribunal was considering the incremental liability in foreign exchange for asst. yrs. 1985-86 to 1987-88. The Tribunal considered the real meaning of the concept 'actual cost' and the impact of s. 43A while determining the same. The following is what they have held :
"'Actual cost' has both a time dimension and a price dimension. Sec. 43A(1), which governs the price dimension, has this effect, namely, that the incremental cost gets added to the actual cost.
When it is said that actual cost has a time dimension, it means that, conceptually speaking, actual cost is necessarily related to the point of time at which an asset is purchased. When one is dealing with the Act, the time dimension assumes special significance.
Now the incremental cost occasioned by fluctuation in rate of exchange comes into being after depreciation/investment allowance is allowed to the assessee. Consequently, the augmenting of the actual cost by the incremental cost contemplated by s. 43(1) must necessarily relate back to the assessment year in which the allowance was granted to the assessee. Investment allowance is allowed either in the year of the installation or in the first year of user of the plant and machinery. Thus, investment allowance is a one-time allowance. Now, having regard to this special feature the question arises as to how one should go about while giving effect to s. 43A(1). Here, s. 154 readily suggests itself. But considering the fact that a bar of limitation by time is incorporated into it, that section provides, only to a limited extent, the procedural modalities for adding the incremental cost to the actual cost. Stated differently, that section cannot be invoked to add to the actual cost the incremental cost that arises after the expiry of the limitation period incorporated into that section. Sec. 155 is silent on the issue.
Again, the granting of investment allowance is, inter alia, subject to the creation by the assessee of investment allowance reserve. This would mean that, even in cases where recourse is taken to s. 154, the assessee will have to create incremental investment allowance reserve. But the difficulty here is that, the concept of reopening close accounts has no place under the Indian IT Act, 1922. Since there is nothing either in s. 43A or in s. 32A to deny the assessee the benefit of the former section in respect of investment allowance, a practical way must be found to ensure that the benefit conferred by the enactment reaches the assessee. The most practical solution would allow the assessee the benefit of investment allowance in respect of the incremental cost in the year in which the incremental cost arises provided, of course, that the assessee created a suitable reserve for this purpose. The appeal was allowed."
So also, the Ahmedabad Bench decision rendered in the case of Maneklal Harilal Spg. & Mfg. Co. Ltd. vs. ITO (ITA No. 1639-40/Ahd/1984), a copy of which is provided at p. 232 of paper-book, also supports the alternative contention. Unfortunately, at the fag end of the arguments, our attention was drawn to the latest Gujarat High Court decision in CIT vs. Windsor Foods Ltd. In that case, it is stated that the investment allowance is only a one-time allowance. It should be allowed either on the date when the plant and machinery was acquired or on the date when it was first put to use even if it is put to use in the immediately succeeding previous year. When once the investment allowance is determined with reference to the above dates. It is unalterable and it is not affected by the incremental foreign exchange liabilities under s. 43A(1). Since it is a Gujarat High Court, decision we are bound by the same and, therefore, under the circumstances, we are unable to provide relief to the assessee-company even though the alternative contention put forward by the assessee appears to be justifiable and allowable under law. We feel that at the end of the previous year relevant to asst. yr. 1982-83 it is not conceivable whether such incremental liability arises in asst. yrs. 1982-83, 1983-84, etc., which are all subsequent years. There may be incremental liability, there may not also be such liability and, on the other hand, there may be gain in rupee value vis-a-vis the foreign currency, in which case the actual cost is to be adjusted accordingly. Sec. 43A clearly ordains that the incremental liability for the relevant previous year only should be added to or, as the case may be, deducted from the actual cost of the asset. Therefore, the clear wording of s. 43A itself postulates that in a case like the one before us, there is every necessity to determine the actual cost of the plant and machinery to the company till the last instalment is paid. As far as the argument that the subsequent events which took place after the passing of the assessment order can also be taken into consideration in order to do complete justice and determining the ultimate tax liability is concerned, we feel that it is against the wording of s. 43A. If the argument of the company is to be accepted, then all the instalments paid from 1982-83 to 1989-90 are to be aggregated and they should be taken into consideration whereas s. 43A says that the incremental liability of each previous year should either reduce the actual cost of plant and machinery or augment the cost of plant and machinery. Therefore, our thinking that there is every necessity to determine the actual cost of plant and machinery for each of the assessment years is required as per the provisions of s. 43A, is correct and supportable by decided case law. The argument of the learned Departmental Representative that grant of investment allowance is not contemplated and, therefore, it should not be allowed on the incremental foreign exchange liability under s. 43A is to be stated to be rejected in view of the fact that several decisions cited on behalf of the assessee granted investment allowance. In Madras Fertilizers Ltd. vs. CIT (1994) 209 ITR 174 (Mad) the following is what is held as per part of the headnote :
"(ix) that the rate relevant for the application of s. 43A would be the rate at the beginning of the accounting year, and not at the end of the accounting year or any other rate during the interim period. The IT authorities did not consider all these aspects before applying the provisions of s. 43A of the Act. Therefore, considering all these aspects and in the absence of particulars, the Tribunal gave certain guidelines for the purpose of applying s. 43A. The guidelines were reasonable on the facts and justified in law."
Thus, the Madras High Court was of the considered opinion that the first date of the accounting year relevant to the assessment year should be taken to be the date on which the foreign exchange fluctuation is to be ascertained. The concept of 'actual cost' is relevant to determine not only investment allowance but also additional depreciation, development rebate, etc. However, the Gujarat High Court in Windsor Foods Ltd. (supra) took the view that s. 32A is a one-time allowance and it is not an allowance which is recurring, that is to say, an allowance which is required to be calculated year after year. Therefore, the actual cost of machinery or plant in the previous year in which it is installed and first put to use would be the basis of working out the investment allowance at an amount equal to 25% of the actual cost. The amount of investment allowance so worked would get crystallised in that year. The Gujarat High Court also considered in the same decision the impact of the provisions of s. 43A on the grant of investment allowance under s. 32A. The following is what they have categorically stated as per the headnote :
"The extent of additional (or reduction as the case may), to the actual cost of the asset is directly connected with the liability outstanding immediately prior to the date of fluctuation in the exchange rate. Thus, if on such date only a part of the cost of the acquired asset is outstanding for payment, the exchange rate fluctuation will be worked out in the context of only that part of the outstanding payment and the addition to the actual cost will be made accordingly in that previous year in which the change has taken place. There is, therefore, no scope for revising the cost actually met prior to the date of the fluctuation in the exchange rate. The actual cost so revised in the previous year will have relevance to the deductions which may be allowable in respect of that previous year and cannot relate back to the earlier previous year so as to retrospectively change the actual cost that prevailed in that year and could not have been altered by foreseeing any change in the exchange rate. Quantification of the amount at 25 per cent of the actual cost to be allowed by way of deduction as investment allowance got crystallised on the basis the actual cost and no change can be made therein for that previous year on the basis of any fluctuation that takes place in the exchange rate in the subsequent years which will have impact only on the liability to pay as it stands immediately prior to the date of fluctuation in such subsequent year. The fact that the investment allowance is carried forward under sub-s. (3) or that the reserve can be created in any subsequent assessment year due to insufficiency of profits in the earlier years will not alter this situation. Therefore, no question of revising the full amount of the investment allowance which was already worked out in the relevant previous year can ever arise by virtue of any subsequent fluctuation in the exchange rate which brings about a change in the liability that existed immediately before the date on which the change in rate of exchange takes effect. The Tribunal was, therefore, clearly in error in holding that the assessee was entitled to deduction of investment allowance on the amount of Rs. 80,414 being the additional liability that arose due to fluctuation in foreign exchange rate in respect of the payments of outstanding instalments of machinery. Therefore, given its full play, the provision of s. 43A(1), notwithstanding the specific provision regarding development rebate made in sub-s. (2), will not have any impact on the full amount of the investment allowance already quantified on the basis of the actual cost in the relevant previous year which was much prior to the year in which the additional liability arose due to fluctuation in the exchange rate. - CIT vs. Widia (India) Ltd. (1992) 193 ITR 475 (Kar) dissented from; CIT vs. Motor Industries Co. Ltd. (1988) 173 ITR 374 (Kar) and CIT vs. Surana Tubes (P) Ltd. (1993) 201 ITR 124 (Cal) distinguished.
There arises no doubt as regards the interpretation of the provisions of s. 32A(1) and s. 43A. The language of these provisions is clear enough to warrant the only conclusion arrived at, leaving no scope for any doubt as regards the interpretation of these provisions."
The conclusion reached by the Gujarat High Court was that the provisions of s. 43A(1) may not have any impact on the full amount of investment allowance already quantified on the basis of the actual cost in the relevant previous year which was much prior to the year in which the additional liability arose due to fluctuation in the rate of exchange. Therefore, since we are bound by this decision, as we are sitting in Ahmedabad and deciding the case, whatever may be our views expressed earlier, we cannot allow the investment allowance on the incremental foreign exchange liabilities while discharging the instalments as per the amortization schedules entered into with ICICI and also modified later. Therefore, the claim of the assessee that it is entitled to investment on the whole of Rs. 44,37,798 cannot be accepted or conceded in view of the said Gujarat High Court decision. Similarly, we should also reject a part of the alternative contention put forward by the assessee, namely, that it requested that based upon the yearly incremental foreign exchange liability, the investment allowance should be granted, in view of the binding of Gujarat High Court decision against us. Therefore, the whole ground relating to claim for investment allowance made by the assessee in these appeals has to be rejected.
35. Now, coming to depreciation, extra shift allowance and additional depreciation, we feel that the claims made with regard to those reliefs should be allowed, in view of the several decisions cited and in view of the fact that the Gujarat High Court decision does not come in the way of such claims being considered in the light of s. 43A. Since the foreign exchange difference for the asst. yr. 1982-83 and subsequent assessment years was not allowed to be taken into consideration for the purpose of computing the actual cost on which investment allowance only is allowable by the Gujarat High Court, there is no prohibition to allow the claims of depreciation, additional depreciation and extra shift allowance since the claims can be justified on the ratios revealed by the plethora of case law filed on behalf of the company before, which are already listed above.
36. For the asst. yr. 1982-83, on a sum of Rs. 37,27,823, additional depreciation under s. 32(1)(iia) was claimed on the ground that the plant and machinery came into contact with corrosive chemicals. The AO denied the claim on the ground that ammonium chloride and Zinc chloride, which chemicals were only salts, could not have corrosive effect especially when these machineries have been specifically designed as anti-corrosive and chemically resident construction. Thus, additional depreciation claimed on the machineries worth Rs. 40,03,475 for the asst. yr. 1982-83 was denied. Further, the AO stated that the following three machineries, which were also among the machineries claimed to be coming into contact with corrosive chemicals, were imported from Matsuishita Electric Trading Co. Ltd., Osaka, Japan :
Rs.
(a) Bobbin Tamping Equipment for UM-1 27,82,398
(b) Bobbin Tamping Machine for UM-3 2,85,315
(c) Agitator with special electrolyte spraying
for cooking sealing 6,60,110
----------
37,27,823
----------
As against the rejection of the claim for additional depreciation on the above plant and machinery as well as some other plant and machinery, the total value of which was Rs. 40,03,475, the matter was carried in appeal to the CIT(A). Before him, it was submitted that right from 1975-76, the higher rate of depreciation on such machineries has been given. On that, the CIT(A) directed the AO to ascertain the total machineries coming into contact with corrosive chemicals and allow the higher rate of depreciation as claimed. Therefore, there was no outright rejection of the claim of the company for additional depreciation on plant and machinery coming into contact with corrosive chemicals. The direction of the CIT(A) was only to ascertain the total of such machineries and allow higher depreciation on the total value of such machineries. We find that the direction given by the CIT(A) adequately meets the ends of justice and no interference is called for from us.
37. Now, let us come to ground No. 7 for asst. yr. 1982-83. This relates to not allowing investment allowance, additional depreciation and extra shift allowance on Rs. 83,640 out of total foreign tour expenses treated as capital expenditure for purchase of plant and machinery to the new unit. The statement of the capitalised foreign tour expenses is enclosed with the ground of appeal and marked as Annexure 'E', which is extracted below :
-----------------------------------------------------------------------
Accounting year Asst. yr. Amount of foreign Reasons of
tour capitalised capitalisation
-----------------------------------------------------------------------
1976-77 & 1977 1978-79 73,640 (a) For knowhow of
manufacturing of UM-3
pencil type cell.
(b) For import of
plant & machinery
(c) For technical
training for UM-3
cell manufacturing.
1978 1979-80 24,594 For increase in paid
up capital
1979 1980-81 10,000 For import of plant
and machinery.
-----------------------------------------------------------------------
The claim arose is the following circumstances. During the assessment proceedings for asst. yr. 1982-83, the assessee-company had claimed depreciation of Rs. 53,675 on foreign tour expenses of Rs. 2,58,468 which, according to it, were capitalised in the following assessment years :
Rs.
1976-77 7,949
1978-79 98,686
1979-80 34,353
1981-82 92,886
On verification of records while going into the merits of this claim, the AO came across records for earlier years and there he found that a sum of Rs. 24,814 was capitalised in the asst. yr. 1979-80 by relating the visit to increase the share capital and, therefore, on that ground that AO refused depreciation as, according to him, no depreciable asset had come into existence by spending the said amount. For asst. yrs. 1976-77 and 1977-78, the foreign tour expenses shown against one of the assessment years were claimed to be relating to obtaining technical know-how for the manufacture of UM-3 type of batteries and there was, in fact, a finding in the assessment order for asst. yr. 1978-79 that no depreciation, investment allowance, etc., is to be allowed on such expenses. Therefore, on that finding, the foreign tour expenses sought to be capitalised for asst. yrs. 1976-77 and 1978-79 are not permissible deductions in asst. yr. 1982-83. The AO also held that the company had been manufacturing UM-3 type dry battery cells in earlier years also and as such the user of the technical know how was made in this year. Thus, he denied the claim of capitalisation of foreign tour expenses claimed against asst. yrs. 1977-78 and 1978-79. Coming to the similar claim for asst. yr. 1981-82, the AO found that the total claim made was Rs. 92,886. He further found that out of it a sum of Rs. 18,738 had already been allowed as revenue expenditure by the CIT(A) and, therefore, the amount which requires consideration is Rs. 1,08,501 (for 1980-81 Rs. 34,353 and for 1981-82 : Rs. 74,148). These two amounts were allowed to be capitalised towards the cost of the machinery acquired and installed during the year and depreciation, investment allowance, etc., is being allowed in accordance with law. Against the short allowance and disallowance, the assessee came up in appeal before the CIT(A). This ground was raised before him by the company's letter dt. 16th April, 1988. After going through the assessment order dealing with the subject, the CIT(A) was unable to dislodge the finding of the AO and hence rejected the additional ground raised by the assessee before him.
38. Now, the assessee's contention is that for the asst. yr. 1980-81 in the case of this very company the Ahmedabad Tribunal in ITA No. 194/Ahd/1990 allowed a similar claim. In order to prove its contention, the assessee filed the order of the Tribunal at pp. 311 to 320 of the paper-book. After perusing the order, we hold that what portion of foreign tour expenses should be capitalised depends upon the facts and circumstances of each case. We find, after reading the AO's order as well as the CIT(A)'s order for asst. yr. 1982-83, that the AO had given cogent reasons for disallowing capitalisation of foreign tour expenses. In fact, for the asst. yr. 1980-81, the company had claimed Rs. 10,000 only for foreign tour expenses. However, the AO at para 14.6 of his assessment order was generous to allow Rs. 34,353 for asst. yr. 1980-81 and Rs. 74,138 for asst. yr. 1981-82 for capitalisation and it is significant that depreciation, investment allowance, etc., is being allowed on the said total sum of Rs. 1,08,501 (sic). It is also stated that the machinery was acquired and installed during the year relevant to asst. yr. 1982-83. We are unable to find any further point in favour of the assessee. We agree with the lower authorities for not considering certain foreign tour expenses as not eligible for capitalisation. In this result, this ground is rejected.
39. Now, let us take ground No. 6 in asst. yr. 1982-83. The company seems to have claimed loss of Rs. 15,153 on the demolished building but the AO, while computing the income of the assessee for asst. yr. 1982-83, allowed loss of Rs. 10,000 under s. 32(1)(iii) as resulting on building demolition and disallowed the rest of Rs. 5,153. The CIT(A) dealing with this in para 14 of her order. No arguments were advanced or produced to justify interference in the order of the AO and on that ground the CIT(A) rejected the disallowed claim.
39.1. The position remains the same even when the matter came up in second appeal before us and hence we do not see any reason to interfere with the CIT(A)'s order in this regard. This ground is rejected.
40. Ground No. 8 for asst. yr. 1982-83 dealing with deduction of sur-tax liability was not pressed and hence it is rejected.
41. Now, let us deal with the grounds peculiar to asst. yr. 1983-84. There are 8 grounds. The first ground has already been dealt with while disposing of similar ground for the asst. yr. 1982-83.
42. The second ground for the asst. yr. 1983-84 was not pressed and hence it is rejected.
43. The third ground is about application of the provisions of s. 80VV to legal and professional fees of Rs. 14,600 out of Rs. 22,381 paid in connection with filing up of income-tax returns, statement of advance-tax payable, etc. and statement of legal and professional matters which are explained in Annexure 'B' annexed to the grounds of appeal, which is as under :
1. Fees paid to R. M. Chokshi & Co., Chartered Accountants, Bombay, with filing of income-tax return, statement of advance tax payable, etc. as per separate statement attached. 14,600
2. Fees paid to J. B. Dadachandji & Co., Advocate, Supreme Court, New Delhi, following matters :
(a) For conference & discussion for tax matter 2,681
(b) Fees for appearing in Court for writ petition 1,500
(c) Fees for conference, discussion and appearing
in Court 3,600 7,781
-------- --------
22,381
--------
This ground arises only for the asst. yr. 1983-84. The AO has dealt with it at para 10 of his order. Both the above items were covered by s. 80VV being incurred in respect of proceedings before the IT authorities and in Court relating to the determination of liability under the IT Act. Therefore, he allowed only Rs. 5,000 and disallowed the rest. The CIT(A) has dealt with this ground at para 7 of his order. It was contended that the fees for discussion and preparation of return and surtax return for which a sum of Rs. 7,500 and a further sum of Rs. 1,600 for getting written opinion for payment of bonus cannot be included under the provisions of s. 80VV. It was further contended before him that the proceedings started only after filing the returns. Reliance was placed upon the Delhi Tribunal decision in K. V. Bombay vs. ITO in ITA No. 2529/Bom/1978 where it was held that consultation prior to the filing of return was not covered under s. 80VV of the Act. However, the CIT(A) held that the payment of legal advice for preparation of the return is, in any case, ultimately in respect of proceedings before the IT authority. Similar is the view with regard to legal advice for preparation of surtax return and the fees paid for that purpose. The learned representative for the assessee relied on the following decisions :
43.1. The first decision is reported in Saurashtra Cement & Chemical Industries Ltd. vs. CIT. In that case, the Gujarat High Court held, examining the scope of s. 80VV, that the expenses which are allowable under s. 80VV have nexus with any proceedings relating to the determination of any liability under the IT Act by way of tax, penalty or interest which are before the IT authorities or Tribunal or any Court.
43.2 The next decision relied upon was of Delhi Tribunal in Modipon Ltd. vs. Dy. CIT (1995) 53 TTJ (Del) 686 : (1995) 81 Taxman 27. In that case also, it was contended before the Tribunal by the assessee that the expenditure was in connection with consultation and drafting of petitions and appeals, and since these were matters prior to the argument of the actual appeals or the applications, the same was not hit by the provisions of s. 80VV. The Tribunal held that there was substantial merit in the submission of the assessee, and accepting the same, the disallowance was deleted in the view that the same was not hit by the provisions of s. 80VV which speaks of expenditure in connection with proceedings before an IT authority or the Tribunal or a Court.
43.3. The next decision relied on was of the Hon'ble Calcutta High Court in CIT vs. United Commercial Bank Ltd. (1991) 189 ITR 57 (Cal). In that case, the Hon'ble Calcutta High Court held that expenditure incurred in connection with travel and in preparation of the return and for obtaining legal advance cannot be held to be expenditure in connection with the appearance before an IT authority, the Tribunal or Court, in connection with the determination of the liability under the Act by way of tax, penalty or interest and cannot be disallowed under s. 80VV of the Act. The view of the Tribunal in that regard was upheld.
43.4. The next decision relied on was in McGax Ravindra Laboratories India Ltd. vs. CIT. In that case, it was held, examining the scope of s. 80VV, that what was hit by s. 80VV was expenditure incurred in respect of proceedings relating to the determination of any liability under the Act before IT authority or the Tribunal or any Court. The authorities below were, therefore, right in holding that the expenditure incurred in connection with surtax assessment would not be covered by s. 80VV. Similarly, any expenditure incurred in connection with any matter other than proceedings before the IT authority or the Tribunal or any Court would not be covered by the aforesaid provision, even if such matter was in connection with the Act. Thus, the Gujarat High Court went to the extent of holding that the expenditure, incurred for surtax assessment and fees paid for attending matters other than proceedings before the IT authority or the Tribunal or any Court was not hit by s. 80VV.
43.5. The next decision relied on was ITO vs. Shilpi Advertising Ltd. (1988) 31 TTJ (Ahd) 449 : (1989) 44 Taxman 363 (Ahd). The Tribunal took the view in that case that if the payment was primarily for obtaining secretarial assistance in taxation, accounting and banking matters and not for representation before the IT authorities, it would not be hit by that section.
43.6. Another decision cited was the Bombay "C" Bench of the Tribunal rendered in ITA No. 2529/Bom/1978-79 (M/s S. K. V. Bombay vs. ITO), a copy of which is furnished at No. 370 of the paper-book. In that case, the matter was argued threadbare. One of the questions which came up before the Tribunal for decision was not whether the proceedings before the IT authorities started with the filing of the return but whether it could be said that they started before the filing of the return. In that case, it was held that it was clear that the filing of an estimate of advance tax did not give rise to any proceedings before any IT authority. Advising in the matter of closing of the books of account of the assessee, preparation of the final accounts of the assessee, etc., with the object of preparing a proper return of income could be considered as work relating to the proceedings before the IT authority, and whether the services could be said to be commenced before filing the return, after examining the relevant decisions, the Tribunal held that proceedings before any IT authority had not started in the case of the assessee before the returns were filed in respect of the asst. yrs. 1971-72 to 1973-74 which were relevant to the facts with which the Tribunal was concerned in that appeal.
44. Vide the written arguments under the head "80VV professional fees", it is stated that deduction to be claimed is on Rs. 17,381 instead of Rs. 14,600. The particulars of the higher claim for Rs. 17,381 are not filed before us. Therefore, we take that the claim before the Tribunal is confined to Rs. 14,600. The particulars of Rs. 14,600 are given at p. 328 which is described as part of Annexure 'B' of paper-book. As can be seen from the particulars, fees relating to some of the items does not appear to have been paid in the course of the IT proceedings. The IT proceedings being with the filing of income-tax return. Preparation for filing income-tax return also, according to the interpretation given by the Bombay Bench of Tribunal (supra) does not become impermissible under s. 80VV. In the particulars given at p. 328 of the paper-book, the first item is with regard to a writ petitioner and that too towards consultation fees paid to Mr. Ranina. Since it is a writ petition, it cannot be said to be part of IT proceedings.
44.1. Similarly, the second item is towards attending to Supreme Court in respect of hearing regarding s. 80J. The writ has got a bearing on the determination of s. 80J relief due to the assessee. It cannot be said that it is entirely disassociated with the assessment proceedings. Therefore, in our view the second item of Rs. 4,500 for attending the Supreme Court in respect of hearing regarding 80J comes within the teeth of s. 80VV. Sec. 80VV says that in computing the total income of an assessee, there shall be allowed by way of deduction any expenditure incurred by him in the previous year in respect of any proceedings before any IT authority or the Tribunal or any Court relating to the determination of any liability under this Act, by way of tax, penalty or interest. In the proviso under that section, it is stated that no deduction shall, in any case, exceed in the aggregate Rs. 5,000. Therefore, upto Rs. 5,000, the expenditure, even if it is covered by s. 80VV, can be allowed. This matter is to be looked into by the AO, and if not allowed by the AO earlier, it should be allowed, in which case, there should not be any disallowance for Rs. 4,500.
44.2 The third item is said to have been incurred for discussion regarding the return of income and preparing the same. This expenditure was incurred prior to the filing of the income-tax return and, therefore, is not covered by s. 80VV.
44.3. The 4th item is said to be towards payment of professional fees for conference for getting written opinion from Shri V. H. Patil regarding payment of bonus to various categories of employees. It is not an expenditure incurred in IT proceedings and, therefore, it does not come within s. 80VV.
44.4. The 5th item is said to be paid for discussion and preparation of return of income for asst. yr. 1982-83. Since the proceedings did not begin and it was only for preparation, this item is also not covered by s. 80VV.
44.5. The item No. 6 is an expenditure incurred for discussion and preparation of surtax return for asst. yr. 1982-83. Since surtax and income-tax are different from each other, it is not governed by s. 80VV. Therefore, out of Rs. 14,600, except a sum of Rs. 4,500 which needs verification, the other sums cannot be disallowed by invoking the provisions of s. 80VV. Therefore, this ground should succeed.
45. Ground No. 6 in asst. yr. 1983-84 only remains to be disposed of. While computing the income for asst. yr. 1983-84 by the AO by his order dt. 12th March, 1987, he charged interest under s. 215 and he also ordered issued of notice for default under s. 273(2)(aa). While computing the tax at the end of the assessment order, he added the interest under s. 215 at Rs. 47,23,764. Against the levy of such interest, the assessee went in appeal before the CIT(A). Ground No. 14 before was taken to the effect that AO erred in charging interest of Rs. 47,23,764 under s. 215 of the Act. The CIT(A) disposed of this ground at paras 16 and 16.1 of her order. It is stated in the impugned order that the representative of the company submitted that an application had already been made before the AO under r. 40, which is still not disposed of, and a request was made before the CIT(A) that a direction may be given to the AO for early disposal of the said application. This request was acceded to and the CIT(A) held that the AO should dispose off the same at an early date and, in any case, the AO should recalculate the interest after giving effect to his order. Therefore, the CIT(A) held that the determination of interest is to be recalculated after giving effect to the order passed by her also.
46. No specific argument was advanced in this regard before the Tribunal on behalf of the company. Consequential relief with regard to levy of interest under s. 215 is to be given while implementing the order of this Tribunal. The direction of the CIT(A) that the application under r. 40 of the IT Rules, said to have been filed by the assessee, should be disposed of at an early date, but remains undisposed of by the AO, appears to us to be very reasonable and in accordance with the very prayer made by the company before the CIT(A), against which the company cannot have any complaint. Therefore, this ground is disposed of accordingly.
47. We make it very clear that there is no request for formation of Special Bench in the case of the relevant Departmental appeals for the asst. yrs. 1982-83 and 1983-84 and this Special Bench is, therefore, disposing of only the assessee's appeals for the asst. yrs. 1982-83 and 1983-84.
48. In the result, the assessee's appeals are partly allowed.