Income Tax Appellate Tribunal - Ahmedabad
Gujarat Alkalies & Chemicals Ltd. vs Deputy Commissioner Of Income Tax on 25 August, 2000
Equivalent citations: [2002]82ITD135(AHD)
ORDER
T.N. Chopra, A.M.
1. These two appeals filed by the assessee relating to asst. yrs. 1994-95 and 1995-96 involve common points and are being disposed of by a single order for the sake of convenience.
2. The learned representatives on both sides made detailed submissions, written as well as oral, with regard to various grounds involved in the assessee's appeal for asst. yr, 1995-96 (ITA No. 1535/Ahd/l999) and requested that these submissions may be considered in respect of indentical grounds involved in assessee's appeal for asst. yr. 1994-95 (ITA No. 3216/Ahd/1997). We would, therefore, first take up the appeal for asst. yr. 1995-96 (ITA No. 1535/Ahd/1999).
ITA No. 1535/Ahd/1999 for asst. yr. 1995-963. Ground No. 1 is against sustaining the disallowance of Rs. 35,000 under Rule 6D of the IT Rules, 1962. This ground is not pressed and is, therefore, dismissed.
4. Ground No. 2 in this appeal (ITA No. 1535/And/1999) reads as under :
"The learned CIT(A) has erred in holding that the deduction claimed of Rs. 13,60,50,698 being payment for technical know-how fees is admissible only at 1/6th and not the full amount. The appellant submits that the technical know-how fees were paid in respect of projects which are based on existing line of products and extension of existing process, plants and for updating the process technology, energy saving and such other valid purpose to ensure efficient operations. The said fees was paid for the change in the manufacturing process of caustic soda from mercury cell to membrane cell technology and hence fees paid would be for business expenditure and the same should be allowed. It is submitted that this being the position the whole expenditure should be allowed."
In the return of income filed by the assessee-company for asst. yr. 1995-96 the assessee claimed deduction of technical know-how fees under Section 35AB amounting to Rs. 6,26,70,890. In the note enclosed with the return the assessee, however, claimed that deduction on account of technical know-how fees paid during the year amounting to Rs. 13,60,50,698 should be allowed in full since the expenditure incurred on payment of technical know-how fees represents allowable business expenditure under Section 37(1). The technical know-how fees paid during the year related to various projects as under:
Rs.
1. Membrane Ce!l-II (Commissioned) 19,42,711
2. Potassium hydroxide (Commissioned) 71,35,107
3. Phosphoric acid 49,00,000
4. Sodium hypochloride-II (Commissioned) 52,500
5. 300 TPD caustic soda 41,64,809
6. Hydrogen peroxide 11,64,69,440
7. 90 MW power project 13,86,131 Total 13,60,50,698 However, during the course of hearing before us Shri J.P. Shah, learned counsel for the assessee-company, pressed the claim for deduction of the amount of technical know-how fees in respect of the following two projects only :
Asst yr. 1994-95 Asst. yr. 1995-96 Rs.
Rs.
1. Caustic soda prills 6,03,33,334
2. Hydrogen peroxide 6,48,09,720 11,64,69,440 With regard to the technical know-how fees pertaining to other projects, the learned counsel did not press the claim for deduction of the entire payment made in the respective assessment years as revenue expenditure. We would accordingly confine ourselves to the issue of deduction of technical know-how fees in respect of the aforesaid two projects, namely, caustic soda prills and hydrogen peroxide only.
4.1. The assessee-company is a limited company in which public are substantially interested, 34 per cent of the equity is held by Gujarat Industrial Investment Corporation Limited and 33 per cent of the equity is held by financial institutions and nationalised banks and the balance equity is held by the public. The company is engaged in the business of manufacture of caustic soda, liquid chlorine, hydrochloric acid, etc. Hydrogen Peroxide Project 4.2. The company took up the project for manufacture of 11,000 MTA of hydrogen peroxide based on auto-oxidation process at the Vadodara complex where the main feed stock hydrogen is available as a bye-product from the electrolytic caustic soda process. For acquiring the technical know-how for setting up the plant the assessee entered into an agreement with Uhde GmbH, Friedrich-Uhde-Strasse 15, 4,600, Germany. Copy of the agreement dt. 18th Oct., 1993, has been placed at pp. 63 to 72 of the paper book filed by the learned Departmental Representative. Article 2 of the agreement provides for the irrevocable non-exclusive and non-transferable right to establish and operate the plant. The article contains the following recitals :
"2.1. UHDE hereby grants to GACL the irrevocable, non-exclusive and non-transferable right to establish and operate the plant and to sell hydrogen peroxide from the plant anywhere, except the Republic of Korea and Southern Africa (Africa south of latitude 10 degrees south).
UHDE undertakes for a period of three years from start up, to not grant a licence in India under terms and conditions more favourable to the licensee than the terms and conditions under the present contract.
2.2. UHDE shall perform basic engineering services, with regard to the process plant sections as mentioned in Annexure I. The scope of such engineering to be performed by UHDE is described in Annexure IV.
2.3. UHDE shall provide training to GACL's personnel in an operating hydrogen peroxide plant in South Africa and/or Republic of Korea for two batches of eight persons for a period of three weeks each."
4.3. Article 9 stipulates that the assessee undertakes to treat as strictly confidential the information and data disclosed by the UHDE. The technical information and data provided by the German company was to be used exclusively by the assessee in connection with the setting up of the plant and operating the same.
4.4. Article 4 provides that the asseseee shall pay a fee of DM 6,00,000 for grant of licence and further payment of 43,60,000 DM for the performance of services as per Article 2.2 and Article 2.3 reproduced hereinbefore.
4.5. From the aforesaid facts it would be noted that the setting up of the hydrogen peroxide plant by way of forward integration production process involving user of hydrogen gas already being manufactured by the assessee for manufacture of hydrogen peroxide. Under the agreement the assessee received irrevocable, non-exclusive and non-transferable right to set up the hydrogen peroxide plant with the technical know-how supplied under the agreement by the UHDE, the German company.
Caustic Soda Prills 4.6. The assessee-company entered into an agreement with M/s Mistry ''Prabhudas Manji Engineering (P) Ltd. for providing technical know-how for setting up 100 TPD caustic soda prilling unit, particulars of the agreement are placed at pp. 54 to 62 of the paper book filed by the learned Departmental Representative, Technology to the used in this plant was to be based on technical know-how from M/s Raytheon Engineers, USA/M/s Dowy Chemicals, USA. The payments to be made as per the agreement comprised (a) for licence and know-how Rs, 5 crores, (b) for basic engineering Rs. 3 crores. The agreement further provided that the MPM Engineering (P) Ltd. would pay the following royalty to the assessee on future caustic flaking/prilling units offered to any other party.
For conversion plants from caustic soda plaking to prills : 2.5 per cent of this order value for first three plants (each plant) For grass root prilling plants i.e. from lye to prills : 2 per cent of the order value of first three plants (each plant) 4.7. From the aforesaid facts it would be noted that payments for acquiring technical know-how have been made by the assessee-company for setting up a new unit for manufacture of caustic soda prills and the party providing the technical know-how, namely, MPM Engineering (P) Ltd. would be liable to pay royalty to the assessee is similar caustic prilling plants are offered by the said party to any other party.
4.8. The AO while making the assessments for both the asst. yrs, 1994-95 and 1995-96 held that payments made on account of technical know-how for setting up new units by the assessee are directly covered by the provisions of Section 35AB and not under Section 37. The AO placed reliance on the decision of Hon'ble Madras High Court in the case of Erone Transport (P) Ltd. v. CIT (1969) 71 ITR 283 (Mad) and held that since the expenditure has been incurred for acquiring benefit of enduring nature, provisions of Section 37 would not apply. Further placing reliance on the decision of Allahabad High Court in the case of Ramkumar Pharmaceutical v. CIT (1979) 119 ITR 33 (All), the AO held that the expenditure in question constituted capital expenditure outside the purview of Section 37. The AO accordingly allowed deduction of 1/6 of the technical know-how fees under the provisions of Section 35AB.
4.9. In appeal, the learned CIT(A) upheld the action of the AO allowing deduction equal to 1/6th of technical know-how fees paid by the assessee during the relevant year.
4.10. Shri J.P. Shah, the learned counsel for the assessee, argued that technical know-how fees in respect of hydrogen peroxide plant and caustic soda prilling plant constitute deductible revenue expenditure under Section 37 and the entire technical know-how fees claimed by the assessee in respect of these projects should be allowed by way of deduction. The learned counsel for the assessee referred to Expln. 4 to Section 32(1) of the IT Act which has been inserted w.e.f. 1st April, 1999, whereby the expression "know-how" has been defined as any industrial information or technique likely to assist in the manufacture or processing of goods. Technical know-how along with patents and copyrights are to be treated as intangible assets entitled to depreciation w.e.f. 1st April, 1999. Section 35AB has been deleted from the said date i.e.., 1st April, 1999. According to the learned counsel, the legislative intention in introducing Section 35AB by the Finance Act, 1985, w,e.f. 1st April, 1986, and thereafter substituting the same by a new provisions allowing depreciation on the intangible assets under Section 32 w.e.f. 1st April, 1999, amply demonstrates that Section 35AB applies only to capital expenditure whereby the assessee purchases technical know-how in an outright manner. The learned counsel placed reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of Sayaji Industries Ltd. v. Dy. CIT [reported at (2000) 68 TTJ (Ahd) 85--Ed.] whereby it has been held by the Tribunal vide order dt. 15th Sept., 1999, that lump sum consideration paid for use of technical know-how without acquiring ownership rights constitutes revenue expenditure under Section 37, The learned counsel further placed reliance on the following decisions :
1. CIT v. IAEC (Pumps) Ltd. (1998) 232 ITR 316 (SC);
2. CIT v. Bokaro Steel Ltd. (1999) 236 ITR 315 (SC);
3. CIT v. BPL Systems and Projects Ltd. (1997) 227 ITR 779 (Ker);
4. CIT v. Tata Engineering and Locomotive Co. (P) Ltd. (1979) 123 ITR 538 (Bom);
5. R.T. Udeshi v. CIT (1978) 114 ITR 542 (Bom); and
6. Kirloskar Pneumatic Co. Ltd. v. CIT (1982) 23 ITR (Bom) 92 : (1982) 136 ITR 746 (Bom).
The learned counsel further referred to the Third Member decision of Delhi Bench of the Tribunal in the case of Good Year India Ltd. v. ITO (2000) 68 TTJ (Del) (TM) 300 : (2000) 73 ITD 189 (Del) (TM).
4.11. Shri Rakesh Gupta, the learned senior Departmental Representative, on the other hand, strongly supported the orders of the tax authorities below on the issue and argued that the expenditure in question has been incurred by the assessee for acquiring technical know-how for setting up new plants for the manufacture of hydrogen peroxide as well as caustic soda prills. According to the learned Departmental Representative, expenditure incurred in the process of setting up new plants is inexplicably linked with the capital cost of the project and would clearly be outside the purview of Section 37. The learned Departmental Representative, relying upon the decision of the Hon'ble Gujarat High Court in the case of Vallabh Glass Works v. CIT (1980) 127 ITR 37 (Guj), argued that all expenditure necessary to bring capital assets into existence and to put those assets in working condition has been held by the jurisdictional High Court to the integral part of the actual cost of the assets to the assessee. The learned Departmental Representative further relied upon the following decisions in support of his contentions :
(1) Scientic Engg. House (P) Ltd v. CJT (1986) 157 ITR 87 (SC);
(2) McGaw Ravindra Laboratories v. CIT (1994) 207 ITR 239 (Guj);
(3) Jyoti Electric Motors Ltd. v. CIT (1998) 237 ITR 280 (Guj);
(4) Jonas Woodhead and Sons (India) Ltd. (1997) 224 ITR 342 (SC);
(5) CIT v. Thyristors Controls (P) Ltd. (1994) 207 ITR 317 (Guj);
(6) Raj Kumar Pharmaceutical Works v. CIT (1979) 119 ITR 33 (All); and (7) D&H Secheron Electrodes v. CIT (1981) 132 ITR 1 (MP), 4.12. The learned Departmental Representative argued that a close reading of the collaboration agreements in respect of both the projects, viz., hydrogen peroxide and caustic soda prilling project clearly bring out the fact that the expenses have been incurred for the purpose of setting up new plants for manufacture of new products by the assessee and the expenditure is, therefore, clearly of capital nature and hence outside the purview of Section 37, 4.13. The learned Departmental Representative next argued that Section 35AB is a specific section intended to rope in the expenditure on technical know-how and the general provisions contained under Section 37 would, therefore, not be applicable. The learned Departmental Representative, referring to the provisions contained under Sections 35A and 35ABB, argued that the word "capital" has been specifically used by the legislature in these sections whereas in Section 35AB there is no such word used by the legislature which clearly brings out the legislative intent that Section 35AB would extend to expenditure on technical know-how whether capital or revenue in nature.
4.14. We have carefully considered the rival submissions and have gone through the string of judicial authorities cited on behalf of both the sides before us. A question whether a particular payment made by an assessee under the terms of an agreement forms a part of capital expenditure or revenue expenditure would depend upon several factors whether the assessee obtained completely a new plant with a complete new process and completely new technology for manufacture of the product or the payment was made for the technical know-how which was intended for the betterment of the product in question which was already being produced, whether the improvision made is part and parcel of the existing business or a new plant was set up with the technical know-how for which payments were made, whether on expiry of a period of agreement the assessee is required to give back the plans and designs which were obtained. The cumulative effect on a construction of various terms and conditions of the agreement would have to be considered for ascertaining whether the assessee derived benefits in the capital field or not.
4.15. In the case of Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC) the Hon'ble Supreme Court held that the test of enduring benefit is not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowed. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of assessee's business to be carried on more efficiently and more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account even though the advantage may endure for an indefinate future.
4.16. In Alembic Chemical Works Ltd v. CIT (1989) 177 ITR 377 (SC), the Hon'ble Supreme Court held that since the expenditure had been incurred to improve the efficiency and profitability of the existing business of the assessee, the expenditure was revenue in nature.
4.17. Relying upon the aforesaid decisions of the Hon'ble Supreme Court, it has been held by the Hon'ble Gujarat High Court in the case of CIT v. Suhrid Geigy Ltd. (1996) 220 ITR 153 (Guj) that if the technical know-how is acquired for the purpose of establishing an altogether new or fresh venture or the launching of a new enterprise, the expenditure may be treated as capital and not revenue.
4.18. In the recent decision of Gujarat High Court in CIT v. Official Liquidator, Ahmedabad Mfg. and Calico Ptg. Co. Ltd. (2000) 244 ITR 156 (Guj), the aforesaid principles have been endorsed by their Lordships and it has been held that an expenditure which affects the basic framework of the profit-making apparatus of the company and is not an expenditure for operating that apparatus, such expenditure would be capital in nature.
4.19. On appraisal of the facts in the instant case before us in the backdrop of the array of judicial rulings referred to above and the basic principles enunciated therein, we have reached the conclusion that payments made for technical know-how for the purpose of setting up new units for the manufacture of hydrogen peroxide and caustic soda prills is clearly of the nature of capital expenditure which is outside the purview of Section 37(1), The expenditure in question on account of technical know-how has a close and proximate connection with the setting up of new plants for production of hydrogen peroxide and caustic soda prills. Obviously, the expenditure would contribute to augmentation and expansion of the profit-earning apparatus of the assessee-company and, therefore, clearly lies in the capital field. Since the basic frame-work of the capital structure of the business is being extended and expanded, we have no doubt in our mind that the expenditure is of capital nature. Setting up of new plants cannot by any stretch of imagination be construed as connected with the running and conduct of assessee's business.
4.20 From the terms and conditions of the collaboration agreements under which the technical know-how has been acquired by the assessee, as set out hereinabove it clearly follows that the technical know-how paid by the assessee under both the agreements is fully covered under the provisions of Section 35AB. In the case of collaboration agreement entered into with UHDE, the German company, the assessee acquired irrevocable right for setting up the manufacturing plant for manufacture of hydrogen peroxide. Such expenditure on acquiring the technical know-how is obviously an integral part of cost of plant and machinery and by virtue of the provisions of Section 35AB, 1/6th of the expenditure would be allowable for each of the assessment years under appeal. Regarding the agreement for setting up caustic soda prilling plant the technical know-how fees have been paid for setting up the project on turnkey basis and the collaborator party is liable under the agreement to pay royalty to the assessee in case similar plant is offered to any other party. These vital facts relating to the aforesaid collaboration agreements entered into by the assessee lead to the irresistible conclusion that the lump sum payments for acquiring technical know-how are covered under the provisions of Section 35AB and provisions of Section 37(1) would not apply.
4.21. Since the expenditure on account of technical know-how incurred by the assessee has been held by us to be capital in nature, we do not consider it necessary to consider and decide the alternative contentions of the Revenue that even if expenditure on technical know-how is revenue in nature, Section 35AB would override the provisions of Section 37(1).
4.22. Before parting with this ground, we may observe that the decisions cited by the learned counsel in support of his contentions have been carefully perused. by us. In our opinion these decisions render no assistance to the aseessee's case. In these decisions the basic test laid down by the Hon'ble Supreme Court for ascertaining the nature of expenditure whether capital or revenue, has been applied and if the expenditure is linked with the running and conduct of business and does not result in expansion of the profit-earning apparatus, the expenditure has been held to be revenue in nature. In CIT v. Bokaro Steels Ltd. (supra) cited by the learned counsel it was held that receipts inextricably linked with the setting up of the capital structure of the assessee-company would be capital in nature. This decision thus reiterates the principles applied by us as above.
4.23. In CIT v. BPL Systems and Projects Ltd. (supra) it has been held that the expenditure incurred for improving efficiency of the profit-earning apparatus would be revenue in nature. This decision again does not help the assessee.
4.24. The learned counsel has next cited the decision of the Hon'ble Bombay High Court in the case of CIT v. Tata Engg. and Locomotive Co. (P) Ltd. (supra). In this case the agreements entered into by the assessee were essentially for acquiring technical knowledge regarding methods of production or for use of the trade name. The expenditure was thus clearly intended to improve the efficiency of the profit-earning apparatus of the company. The expenditure was connected with the running of the business and not with the capital structure of the business. The decision, therefore, does not help the case of the assessee.
4.25. For the aforesaid reasons we uphold the order of the CIT(A) on the issue for both the assessment years i.e., asst. yrs. 1994-95 and 1995-96 and reject the common ground of appeal.
5. Ground No. 3 reads as under :
"The learned CIT(A) has erred in confirming the disallowance of Rs. 6,42,11,408 being amount of interest paid in respect of phosphoric acid, hydrogen peroxide and caustic soda prills and commitment charges in respect of hydrogen peroxide. While confirming the disallowance reliance placed in the reverse way on provisions of Section 43(1) were also misplaced. It is, therefore, submitted that the expenditure is admissible and should be allowed under Section 36(1)(iii) of the Act.
For asst. yr. 1995-96 the assessee-company has capitalised interest payment and commitment charges aggregating to Rs. 6,35,09,765 and Rs. 6,42,11,408 in the books of account in respect of the following projects :
Rs.
Interest :
(i) Phosphoric acid 4,71,86,741
(ii) Hydrogen peroxide 1,50,19,789
(iii) Caustic soda prills 12,03,236 6,35,09,765 Commitment charges :
(i) Phosphoric acid 7,01,642 Total 6,42,11,408 During the year caustic soda prills unit commenced production and depreciation has been allowed by the AO amounting to Rs. 12,03,236. The AO, however, disallowed claim of deduction amounting to Rs. 6,42,11,408 treating the same as capital expenditure on the ground that the expenditure pertains to pre-commencement period during which the machinery has not been used for production purposes. The disallowance has been upheld by the learned CIT(A) treating the expenditure as capital expenditure.
5.1. The learned counsel assailing the impugned disallowance argued that in view of the specific provisions contained under Section 36(1)(iii), interest and commitment charges incurred by the assessee for the purposes of business are liable as revenue expenditure irrespective of the object and purpose for which loans raised have been utilised. The learned counsel placed reliance on the following decisions of Ahmedabad Bench of the Tribunal :
1. Dy. CIT v. Patel Filter ITA No. 1870/Ahd/1989;
2. Vadilal Dairy ITA No. 500/Ahd/1997; and
3. Dy. CIT v. GSFC ITA No. 974/Ahd/1994.
Further reliance is placed on the following decisions of M.P. High Court :
1. CIT v. Malwa Vanaspati & Chemicals (1997) 92 Taxman 262 (MP); and
2. CIT v. Bhillai Iron and Foundry (1998) 100 Taxman 193 (MP).
The learned counsel argued that the projects being set up by the assessee-company constitute expansion of running business of the assessee inasmuch as ' the projects are part of forward integration or backward integration of assesse's manufacturing business comprising manufacture of caustic soda, liquid chlorine, hydrochloric acid and various products of chloro-methane, etc. The new projects being set up by the assessee do not constitute independent business activity since these projects are characterised by interconnection, interlacing, interdependence, and common management. The learned counsel referred to the recent decision of the Ahmedabad Bench of the Tribunal (Third Member case) in Core Health Care Ltd. v. Dy. CIT in ITA No. 444/Ahd/1997 for asst. yr. 1992-93 [reported at (2001) 70 TTJ (Ahd) (TM) 490--Ed] wherein on identical facts, interest on loans for setting up new units even though capitalised in the books of account has been held to be deductible revenue expenditure under Section 36(1)(iii). The learned counsel argued that the deduction of interest and commitment charges claimed by the assessee deserves to be allowed as revenue expenditure.
5.2. The learned Departmental Representative, on the other hand, referred to Expln. B appended to Section 43(1) and argued that there is clear stipulation that once the asset is put into use, interest on the loan raised for purchase of the asset would not be capitalised for computing the actual cost under Section 43(1). The learned Departmental Representative argued that the interest pertaining to pre-commencement period would obviously be part of actual cost of the asset as held by the Supreme Court in the case of Chellapalli Sugar Ltd. v. CIT (1975) 98 ITR 167 (SC). The learned Departmental Representative placed reliance on the decision of Calcutta Bench of the Tribunal in the case of JCT v. Asstt. CJT (1998) 61 TTJ (Cal) 206 and argued that in case the view taken earlier by the Ahmedabad Bench of the Tribunal is considered binding, the issue may be referred to a larger Bench to resolve the conflict of views between the various Benches of the Tribunal. .
5.3. We have carefully considered the rival submissions and have gone through various decisions of Hon'ble Supreme Court and High Courts cited before us. While adjudicating ground No, 2 above relating to deduction of technical know-how fees, we have held that the test to be adopted for judging the nature of an expenditure whether revenue or capital is--whether the expenditure is incurred for extension or expansion of the income-yielding apparatus of the assessee's business or whether the expenditure is connected with the running and conduct of business. Insofar as interest paid on loans taken for purchase of machinery for setting up new projects is concerned, the expenditure is undoubtedly connected with the capital structure of assessee's business. However, the express and unequivocal provisions contained under Section 36(1)(iii) carves out a clear exception to the general principle laid down above inasmuch as this section embodies the legislative intention that interest paid in respect of capital borrowed would be deducted as revenue expenditure. It is immaterial whether capital is borrowed for purchase of capital asset of the business or whether borrowing is for the purpose of conduct and running of business of the assessee. Whatever be the purpose for which capital is borrowed, interest paid thereon would be deductible provided the borrowing is "for the purposes of the business". Once the condition for deduction of interest, as stipulated under Section 36(1)(iii) is fulfilled and capital is borrowed for the purposes of business, the amount of interest would be treated as revenue expenditure.
5.4. The Revenue has heavily relied upon Expln. 8 below Section 43(1) of the Act inserted by the Finance Act, 1986, w.e.f. 1st April, 1974. The said Explanation reads as under :
"Expln. 8--For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset."
The Explanation is sought to be made by the learned Departmental Representative before us as the sheet-anchor of the Revenue's case for treating the interest pertaining to pre-commencement period as capital expenditure. In our opinion, the Explanation reproduced as above would not in any manner dilute or override the express provisions contained under Section 36(1)(iii). The legislative intention in introducing the Explanation has been spent out in Circular No. 461, dt, 9th July, 1986, wherein vide paras 18.1 and 18.2 it has been observed as under :
"18.1. Under the existing provisions of Section 43(1) of the IT Act, "actual cost" means 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. It was found that certain taxpayers supported by some Court decisions had resorted to a major change in accounting practice by capitalising the interest paid or payable to connection with acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of interest in the actual cost of the asset for the purposes of claiming depreciation, investment allowance, etc., under the IT Act.
18.1 It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowings and not the cost of the assets acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the asset coming into production, i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalised. In spite of these clear guidelines, as also the consistent view of the Department in this matter, some taxpayers had adopted a contrary stance and had capitalised such interest. The first decision in favour of the this stance had been rendered on 13th May, 1994, in the case of CIT v. J.K. Cotton Spg. and Wvg. Mills Ltd. (1975) 98 ITR 153 (AP). This decision as well as the subsequent decisions were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the asst. yr. 1974-75 and subsequent years."
From the aforesaid circular it is clear that Expln. 8 has been inserted by the legislature retrospectively for clarifying the meaning of the expression "actual cost" for purposes of claiming depreciation and investment allowance, etc. The Explanation is intended to exclude capitalisation of interest relating to the post-production period. However, the Explanation cannot be used for the purpose of denying the claim of deduction as allowed under Section 36(1)(iii). The scope and ambit of Section 36(1)(iii) is not in any manner restricted or limited by Expln. 8 appended to Section 43(1). The interpretation sought to be placed by the Revenue on the provisions of Section 36(1)(iii) and Expln. 8 is violative of the well-accepted principle on harmonious construction of statutes. Expln. 8 introduced by the legislature for cutting down the "actual cost" cannot be used to dilute or override the provisions contained under Section 36(1)(iii). The contention of the Revenue based on Expln. 8 is, therefore, rejected.
5.5. Now in the instant case the assessee-company is a running concern engaged in the business of manufacture of caustic soda, etc. and the projects which are being set up by the assessee are closely connected with the existing business of the assessee and because of the vital characteristics of interdependence, interconnection interlacing, common management and unity of control, etc. these projects do not constitute independent business of the assessee. These units in our opinion are an expansion of existing business carried on by the assessee and, therefore, the interest and commitment charges are clearly covered under Section 36(1)(iii) and would be deductible as revenue expenditure.
5.6. In support of the view taken by us above, reliance is placed on the recent decision of the Hon'ble Supreme Court in the case of CIT v. Associated Fibre and Rubber Industries (P) Ltd. (1999) 236 ITR 471 (SC). In this case it has been held that interest paid by the assessee for loans taken for purchase of machinery are an allowable deduction for asst. yrs. 1972-73 to 1974-75. The machinery in question had not been actually used in the business of the assessee till the time when the assessments were made. This decision rendered by the Hon'ble Supreme Court relates inter alia, to asst. yr. 1974-75 when Expln. 8 to Section 43(1), inserted by the Finance Act, 1986, was applicable. Expln. 8 has been introduced by the legislature retrospectively w.e.f. 1st April, 1974, and applies for asst. yr. 1974-75 onwards. The decision is, therefore, a direct authority in favour of the view taken by us. A similar view has been taken by the Hon'ble Supreme Court in the case of CIT v. Shivakami Mills Ltd. (1997) 227 ITR 465 (SC) and Addl. CIT v. Akkamamba Textiles Ltd. (1997) 227 ITR 464 (SC).
5.7. We may also refer to the decisions of jurisdictional High Court in the case of Arvind Polycot Ltd. v. Addl. CIT (1996) 222 ITR 280 (Guj) wherein it has been held by the Hon'ble Gujarat High Court relying upon its earlier decision in CIT v. Alembic Glass Industries (1976) 103 ITR 715 (Guj) that interest paid on purchase of machinery for the pre-installation period is allowable as revenue expenditure under Section 36(1)(iii).
5.8 Respectfully following the aforesaid decisions of Hon'ble Supreme Court as well as High Courts including the Hon'ble Gujarat High Court, we hold that interest and commitment charges are allowable as revenue expenditure under Section 36(1)(iii). We hold accordingly. However, the AO would withdraw the depreciation allowed in relation to the capitalised interest. Ground of appeal No. (3) in ITA No. 1535/Ahd/1999 is accordingly allowed. The AO would consequently withdraw the depreciation allowed in relation to the capitalised amount.
6. Ground No. 4 reads as under :
"The learned CIT(A) has erred in disallowing deduction on Rs, 9,90,000 being consultancy fees paid to M/s Tata Economic and Consultancy Service for obtaining feasibility study report for power generation. It is submitted that power is consumed substantially as the main raw-material is power for the production. Under the circumstances for efficiently and economically carrying on the business such exercise was taken and the amount spent for it is admissible as a deduction. It is submitted that it should be allowed as a deduction. The appellant relies on the decision in case of CIT v. Graphite India Ltd. (1952) 22 ITR 420 (Cal).
The assessee-company intended to erect a power generation of its own. A feasibility study report was obtained by the company from M/s Tata Economic Consultancy Services, Bombay, and payment of Rs. 9,90,000 was made for the said purpose. The AO treated the expenditure as capital expenditure and disallowed the same. The disallowance has been sustained by the learned CIT(A). The CIT(A) has relied upon the decision of the Gujarat High Court in the case of CIT v. SLD Industries Ltd. (1977) 107 ITR 133 (Guj).
6.1. The learned counsel for the assessee, relying upon the decision of the Calcutta Bench of the Tribunal in the case of Usha Alloys & Steels Ltd. v. Dy. CIT (1995) 55 ITD 418 (Cal) argued that the captive power plant is proposed to be set up since the availability of electricity from the Electricity Board has been quite uncertain. The learned counsel argued that the expenses for procuring feasibility study are of revenue nature and should be directed to be allowed.
6.2. After careful consideration of the matter, we are inclined to uphold the disallowance made by the AO. The basic test to be applied for ascertaining the nature of the expenditure whether capital or revenue, has already been elucidated by us while adjudicating ground No. 2 above relating to deduction of technical knowhow fees. Similar principles would apply for ascertaining whether expenses incurred for obtaining the feasibility study report for setting up the captive power plant are capital or revenue in nature. The expenditure in question is obviously connected with the capital structure of the assessee-company. The profit-earning apparatus of the company would be augmented by setting up captive power plant by the assessee. The captive power plant would obviously be capital asset for the purposes of assessee's business and the expenditure for obtaining the feasibility study report, which is inextricably linked with the setting up of the power project, is thus clearly in the capital field. The decision of Gujarat High Court in CIT v. Deepak Nitrite Ltd. (2000) 108 Taxman 479 (Guj) cited by the learned Departmental Representative directly supports the case of the Revenue. In the said case the assessee had decided to instal its own plant to produce adequate ammonia gas for its own captive use. Foreign tour expenses to study the feasibility of acquiring such a plant were held to be capital expenditure by the Hon'ble Gujarat High Court inter alia, on the ground that the expenditure was undertaken with the purpose and object of creating a capital asset. In this decision their Lordships approvingly referred to their earlier decision in the case of CIT v. Digvijay Cements Co. Ltd (1986) 159 ITR 253 (Guj).
In CIT v. Ambica Mills Ltd. (1999) 236 ITR 921 (Guj), cited by the learned Departmental Representative expenditure incurred for getting feasibility report for putting up new steel plant has been held to be capital expenditure. A similar view has been taken by the Delhi High Court in the case of Triveni Engineering Works Ltd. v. CIT (1998) 232 ITR 639 (Del) relied upon by the learned Departmental Representative before us. In this case the assessee claimed deduction of expenditure incurred for obtaining a project report for manufacturing insecticide formulation. The Court held that the expenditure attributable to coming into existence additional fixed asset was clearly of capital nature. We would accordingly uphold the action of the CIT(A) and dismiss ground No. 4.
7. Ground No. 5 is against disallowance of COFACE charges of Rs. 7,18,551 sustained by the learned CIT(A). The CIT(A) has discussed the issue vide para 16 of the impugned order. The assessee-company is establishing phosphoric acid project as an extension of its present business activities and for that purpose foreign currency loan under the line of credit established with Industrial Development Bank of India is being availed. Under the said arrangement, export of goods and services from France and extension of credit thereof is to be covered by "COFACE" requiring payment of COFACE expenses as finance charge. This charge is in addition to the cost of borrowing from the designated line of credit through Industrial Development Bank of India and such payment to COFACE is similar to the payment of interest. The disallowance has been sustained on the ground that COFACE charges paid on foreign currency loan are in the nature of interest and commitment charges. Since the charges have been paid in relation to the project of manufacturing phosphoric acid which did not commence production in the previous year, the expenses are capital in nature.
7.1. The learned counsel for the assessee heavily relied upon the decision of the Supreme Court in the case of Shivakami Mills Ltd. (supra) and argued that the expenses are clearly allowable in view of the provisions of Section 36(1)(iii) of the IT Act.
7.2. While dealing with ground No. 3 above we have held that in view of specific provisions contained under Section 36(1)(iii) amount of interest paid in respect of capital borrowed for the purpose of business is liable to be allowed as a revenue expenditure irrespective of the fact whether the expenditure has been incurred in the capital field. The Supreme Court decision cited by the learned counsel in any case fully supports the assessee's case. We would, therefore, delete the disallowance of Rs. 7,18,551 and allow ground No. 5.
8. Ground No. 6 is against the disallowance of an amount of Rs. 45,31,662 being contribution to GACL Employees' Welfare Trust and Rs. 94,549 being contribution to GACL Employees' Benevolent Fund. The claim of deduction in respect of the aforesaid contributions have been disallowed by the AO in view of the express provisions of Section 40A(9) of the IT Act. Section 40A(9) expressly prohibits deduction of any amounts paid by an assessee on account of contribution to a fund, trust or body of individuals, society, etc. except where such amounts are covered under Clause (iv) or Clause (v) of Sub-section (1) of Section 36 or as required by any other law for the time being in force. The learned counsel fairly conceded that the contributions to the fund and trust are not covered under Clause (iv) or Clause (v) of Sub-section (1) of Section 36. The disallowance made by the AO and sustained by the CIT(A) by invoking the provisions of Section 40A(2) is, therefore, clearly sustainable and no interference on our part is called for. This ground is, therefore, dismissed.
9. Ground Nos. 7, 8 and 9 are concerned with deduction under Section 80HHC. The AO has dealt with the issue vide para 17 of the assessment order and worked out deduction under Section 80HHC amounting to Rs. 40,40,318. In the synopsis of arguments submitted by the learned counsel following objections have been raised before us by the learned counsel:
Item 1. Excise duty and sales-tax included in the total turnover With regard to sales-tax, the AO relied upon the decision of the Supreme Court in the case of Chowringhee Sales Bureau (P) Ltd. v. CIT (1973) 87 ITR 542 (SC) and held that sales-tax form part of the trading receipt. With regard to excise duty, the AO placed reliance on the decision of Supreme Court in the case of McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). The learned counsel strongly argued that excise duty and sales-tax do not form part of the total turnover since export turnover used in the numerator does not include sales-tax and excise duty. In support of his contention the learned counsel placed reliance on the decision of the Ahmedabad Bench of the Tribunal in the case of Dinesh Mills Ltd. v. Asstt. CIT (2001) 72 TTJ (Ahd) 990 : (2000) 72 ITD 110 (AM). The learned Departmental Representative, on the other hand, placed reliance on the following decisions of the Tribunal in support of his contentions that sales-tax and excise duty form part of total turnover :
1. Britania Industries Ltd. v. Dy. CTT (1999) 65 TTJ (Cal) 752 : (1999) 71 ITD 14 (Cal); and
2. Ponds (India) Ltd. v. Dy. CIT (1997) 59 TTJ (Bom) 560 : (1998) 64 ITD 33 (Bom).
The learned Departmental Representative submitted that the Calcutta Bench of the Tribunal has decided the issue in favour of the Revenue in Britania Industries Ltd. (supra) in spite of an earlier decision of the Bench in the case of Chloride (India) Ltd. v. Dy. CIT (1995) 53 ITD 180 (Cal), in favour the assessee. Reliance is placed on the following decisions in support of Revenue's case :
1. McDowell and Co. Ltd. (supra);
2. Gwalior Rayon Silk Mfg. Co. Ltd. (1983) 143 ITR 590 (MP);
3. CIT v. Boots Co. (India) Ltd. (1995) 214 ITR 175 (Bom);
4. CIT v. Lok Mat News Papers (1995) 216 ITR 199 (Bom);
5. M.H. Daryani v. CIT (1993) 202 ITR 731 (Bom).
9.1. We have considered the rival submissions and we find considerable force in what has been contended on behalf of the Revenue. The assessment year involved before us is 1995-96. The expression "total turnover" has been defined in the Act in Expln. (ba) inserted below Section 80HHC(4B) by Finance (No. 2) Act, 1991, w.e.f. 1st April, 1987. Applying the ratio of the decisions cited on behalf of the Revenue and taking into consideration the definition of the term "total turnover", which is not ambiguous, we have no hesitation in holding that the amount of excise duty and sales-tax has been rightly included by the Revenue authorities in the figure of total turnover. Regarding the earlier decision of the Ahmedabad Bench of the Tribunal in the case of Dinesh Mills Ltd. (supra), we are inclined to agree with the view taken by the Bombay Bench in Ponds (India) Ltd. (supra) and Calcutta Bench in Britania Industries Ltd. (supra) since this view is in conformity with the decisions of the Hon'ble Supreme Court in McDowell and Co. Ltd. (supra) and Chowringhee Sales Bureau (P) Ltd. (supra) as well as the view of Bombay High Court in the cases referred to above.
Item 2. Insurance claim and dividend While adopting the figure of "profits of the business" as defined under Expln. (baa) appended to Section 80HHC, the AO has excluded insurance claim and dividend on the ground that the dividend is not assessable as business income. There is no discussion in the assessment order as to why insurance claim of Rs. 53,02,208 has been deducted from the business income for the purposes of Expln. (baa). The learned CIT(A) has, however, upheld the action of the AO vide para 25 of the impugned order on the basis of Expln. (baa) inserted below Sub-section (4B) of Section 80HHC. We are not inclined to agree with the learned CIT(A). Insurance receipts form part of profits of business and Expln. (baa) does not make any reference for excluding the insurance receipts while working out profits of the business. We would accordingly direct the AO to include insurance receipts while working out profits from the business under Expln. (baa).
9.2. With regard to dividend, the AO has deducted an amount of Rs. 1,34,97,701 on account of dividend while working out "profits of the business" under Expln. (baa). The dividend is obviously not assessable as business income and is covered under the head "income from other sources." The AO is, therefore, justified in excluding the dividend income for the purpose of computing profits of the business under Expln. (baa).
9.3. With regard to computation under Section 80HHC, no other grievance has been pressed before us by the learned counsel on behalf of the assessee-company. We would accordingly direct the AO to include insurance claim for working out profits of the business under Expln, (baa). The exclusion of dividend would, however, be upheld by us.
9.4. In the result the appeal by the assessee for asst. yr. 1995-96 is partly allowed as above.
ITA No. 3216/Ahd/1997 for asst. yr. 1994-9510. Now we take up the assessee's appeal for asst. yr. 1994-95. Ground No. 1 is directed against the disallowance of technical knowhow fees. We have already dealt with the issue while dealing with ground No. 2 for asst. yr. 1995-96 above. For the reasons indicated therein, this ground is dismissed.
11. Ground No. 2 is against the disallowance of expenses of Rs. 7,46,02,463 on account of interest paid on purchase of machinery in respect of new projects. The facts have been discussed by the AO vide para 9 of the assessment order. The CIT(A) has dealt with the issue vide para 9 of the impugned order. The issue is fully covered by our earlier decision while disposing of ground No. 3 for asst. yr. 1995-96 above. This ground is, therefore, allowed.
12. Ground No. 3 is against the disallowance of Rs. 1,85,000 on account of feasibility study for power generation project. Following our earlier decision upholding the disallowance vide ground No. 4 for asst. yr. 1995-96 above, we uphold this disallowance and dismiss this ground.
13. Ground No. 4 is against the disallowance of expenses of Rs. 1,01,48,959. This ground is not pressed and is, therefore, dismissed.
14. Ground No. 5 is against the disallowance of Rs. 3,30,88,553 on account of interest on surplus fund arising out of right issues. This ground is not pressed and is, therefore, dismissed.
15. Ground No. 6 is against the disallowance of Rs. 3,59,585 on account of telephone expenses at Bharuch office. The AO has discussed the facts vide para 16 of the assessment order. The CIT(A) has upheld the disallowance for the reasons contained in para 18 of the impugned order. The telephone expenses in question pertained to a new project for manufacture of phosphoric acid being set up at Dahej, in Bharuch District. Since the project was in the process of setting up and production had not commenced, the expenditure has been treated as capital expenditure. While dealing with ground No. 2 for asst. yr. 1995-96 above we have dealt at length on the primary test to be adopted for ascertaining the nature of the expenditure as capital or revenue. The expenditure in question has been incurred by the assessee in connection with an expansion of the profit-earning apparatus and, therefore, the expenditure has been rightly disallowed by the AO as capital expenditure. We accordingly uphold the disallowance and dismiss this ground of appeal.
16. Ground No. 7 is against the disallowance of COFACE charges of Rs. 1,23,41,011. Following our earlier order vide ground No. 5 for asst. yr. 1995-96 above, we delete the disallowance and allow this ground.
17. Ground No. 8 is against the direction of the CIT(A) in sustaining the inclusion of excise duty and sales-tax in the total turnover for the purposes of computing deduction under Section 80HHC. For the reasons discussed while disposing of ground Nos. 7, 8 and 9 for asst. yr. 1995-96 above, we dismiss these grounds.
18. In the result both the appeals are partly allowed.