Income Tax Appellate Tribunal - Pune
Bharat Forge Ltd. vs Deputy Commissioner Of Income-Tax on 21 February, 1995
Equivalent citations: [1995]53ITD575(PUNE)
ORDER
Chander Singh, Accountant Member
1. These cross-appeals by the assessee and the revenue for assessment year 1990-91 have been directed against the order of the learned CIT(A).
2. For the year under consideration, the assessee-company was engaged in the business of steel forgings and finish machined crankshafts and was also trading in the automotive components. The assessee, an existing public limited company, had undertaken modernisation of the forging department at the same premises. For the modernisation, the assessee-company had incurred a considerable cost, mainly out of borrowings from financial institutions. The major expenses incurred by the assessee were on actual cost of capital asset such as acquiring new Weingarten Forging Press, Crankshaft grinding machines, construction of a building for the modernised forge, building for crankshaft division, extension to the Czech Press shop: For this purpose, which is disputed before us, a sum of Rs. 82,84,330 was incurred. These expenses were described as "Forge Modernisation Pre-operative Expenses". The sum of Rs. 82,84,330 constituted the following expenditure :
(i) Interest Rs. 34,98,485
(ii) Foreign travel Rs. 9,81,482
(iii) Salary and other
costs Rs. 38,04,363
3. The assessee filed a return of income on 28-12-1990 in which these expenses were treated as capital expenditure and no deduction was accordingly claimed. However, before the assessment could be finalised, the assessee filed a revised return on 15-7-1991 and claimed as deduction the interest of Rs. 34,98,485 paid to financial institutions. In the revised return under reference/the assessee has also claimed as deduction as revenue expenditure of salary and other costs of Rs. 38,04,363. It is essential to mention that a sum of Rs. 9,81,482 being the foreign travel in connection with the acquisition of capital asset was not claimed as deduction before the Assessing Officer and was also not disputed before the learned CIT(A). Before us, however, the assessee had sought deduction of Rs. 9,81,482 on foreign travel which will be dealt with by us latter. Several arguments were advanced by the assessee before the Assessing Officer. Relying on the judicial decisions adverted to by the assessee before the Assessing Officer, a finding was given that the assessee was entitled to the deduction of interest of Rs. 34,98,485 paid to the financial institutions. The Assessing Officer, however, was of the view that the salary and other costs of Rs. 38,04,363 incurred during the course of business for the purpose of modernising the forging department was not admissible as deduction as it was capital expenditure. He framed the assessment accordingly.
4. The assessee, amongst others, raised the issue of deduction of salary and other costs of Rs. 38,04,363 before the learned CIT(A). The CIT(A) examined the issue at length and was of the view that the expenditure of Rs. 38,04,363 was in the nature of capital expenditure and accordingly, she upheld the order of the Assessing Officer. In addition, the learned CIT(A) was also of the view that the deduction of interest of Rs. 34,98,485 has wrongly been allowed by the Assessing Officer. For this purpose, the learned CIT(A) took recourse to Explanation (8) of Section 43(1) of the Act and was of the view that the payment of interest is a capital expenditure. Said interest was paid in connection with the acquisition of asset. For the purpose of'actual cost' under Explanation (8) of Section 43(J), the interest of Rs. 34,98,485 should have been added to the cost of machinery acquired for the purpose of modernisation. She also heavily relied upon the decision of the Suprem Court in the case of Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167. She however, fairly noted that the decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) was applicable to newly started companies. She was, however, of the view that the retrospective amendment by way of Explanation (8) to Section 43(1) did not make any distinction between the newly started company and an existing business.
5. The learned CIT(A) after considering the facts, submissions and judicial decisions on the issue, came to the conclusion that the impugned interest should not have been allowed as a deduction as it was the capital expenditure. For this proposition, she has heavily relied upon the decision of the Calcutta High Court in the case of CIT v. India Steamship Co. Ltd. [1992] 196 ITR 917. For these reasons, after issuing the enhancement notice, the learned CIT(A) directed the Assessing Officer to withdraw the allowance of interest of Rs. 34,98,485 and treat it as capital expenditure. Being aggrieved, the assessee has come up in appeal before us.
6. Ground Nos. 1, 5 and 6 raised before us deal with the interest, salary and other costs and foreign travel, details of which, we have mentioned above. The learned counsel for the assessee, Shri N.A. Dalvi, took us through the facts of the case and pointed out that with a view to shift to better technique for manufacture, the assessee-company undertook the modernisation-cum-expansion of the existing line of business at the same premises. The modernisation was undertaken for the purpose of achieving better quality of production, better utilisation of raw-materials and reduce the energy consumption. The plant and machinery was acquired in the course of business for carrying out the said modernisation-cum-expansion programme. As regards the payment of interest, the learned counsel pointed out that the said interest related to the foreign currency loans specifically taken for acquisition of plant and machinery. He also pointed out that the business organisation, administration and fund of the aforesaid expansion and existing unit was common. There is only one company which controls the administration of both the existing and modernised-cum-expanded facilities which supplies the staff and which manages the whole of business organisation of both the units. Thus, there is complete inter-connection, inter-dependence and inter-lacing of funds and control, which is the main basis to determine whether the new undertaking along with the old undertaking constitutes the same business. The assessee is a running concern and the modernisation-cum-expansion programme does not amount to any new business but is a part of the same on-going business. The loan taken for the purpose of purchase of plant and machinery is not a capital asset and any expenditure in connection with borrowings is revenue expenditure even if borrowing is for acquisition of capital asset in the case of a running concern. Viewed from this angle, the expenditure should have been held as revenue in nature and hence deductible in computing the income of the assessee. The CIT(A) thus erred in enhancing the assessment by treating the interest paid on loans used for acquiring the machineries in the course of modernisation and expansion of facilities of existing and running business capital expenditure. She failed to appreciate that the distinction between the capital and revenue is relevant for a claim under Section 37 and not for the purpose of Section 36(1)(iii) of the Act. As a matter of fact, the claim of the assessee is admissible under the provisions of Section 36(1)(iii) of the Act. In this regard, the learned counsel has drawn our attention to the decision of the Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52. He pointed out that as per the facts of that case, the assessee had obtained a loan of Rs. 40 lakhs from the Industrial Finance Corporation secured by a charge on its fixed assets. In connection therewith the assessee spent certain amount towards stamp duty, registration fees, lawyer's fees etc. and claimed this amount as business expenditure. On these facts, the Apex Court had held that the amount spent was not in the nature of capital expenditure as it was laid out or expended wholly and exclusively for the purpose of business of the assessee. The learned counsel, specifically drew our attention to the ratio of the decision in which the Hon'ble Supreme Court has laid down that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained. [Emphasis supplied]. Where there is no express prohibition, an outgoing, by means of which an assessee procures the use of a thing by which he makes a profit, is deductible from the receipts of the business to ascertain the taxable income.
7. The learned counsel has also placed reliance on the decision of the Bombay High Court in the case of Addl. CIT v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843. In the said decision, the Hon'ble High Court has laid down that interest on borrowed capital in connection with expansion of existing unit is an allowable deduction. On the facts of that case, he pointed out that it was held that the assessee's business was not separate and entirely a new undertaking - a totally independent venture, unconnected with its existing business and therefore, the interest on borrowed capital was revenue in nature and should be allowed as deduction.
8. The learned counsel has also placed reliance on the decision of the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715. He pointed out that the facts of the assessee's case are similar with the facts examined by the Gujarat High Court in the aforesaid decision. M/s Alembic Glass Industries Ltd. was a company manufacturing glass at Baroda from 1947. During the accounting period, the company incurred certain expenditure for establishing a new glass manufacturing unit at Bangalore. The unit at Bangalore did not go into production during the relevant assessment year and therefore, during the course of assessment, the Assessing Officer disallowed the payment of interest. The Assessing Officer also held that the Bangalore unit was not a branch of assessee's factory and was therefore, a new business. Since this was a new business and production had not started, the payment of interest was held to be inadmissible by the Assessing Officer. On these facts, the Hon'ble High Court held that it could not be disputed that the business organisation, administration and fund of both the units of the assessee, viz., unit at Baroda and a unit at Bangalore were common. There was one company which controlled the administration of both the units and which managed the whole of the business organisation for both the units. The production of both the units was considered as production of the assessee-company itself. The Hon'ble High Court thus found that there was complete inter-connection, inter-lacing and inter-dependence of both the units. It was therefore, held that the interest was deductible. The learned counsel pointed out that the case of the assessee is even better than the case before the Hon'ble Gujarat High Court. In the case of the assessee, the modernisation-cum-expansion was undertaken by the assessee on the same premises. There was total inter-lacing, interconnection and inter-dependence between the existing business and the modernised and expanded unit. The staff was also common and the business of the new unit as a whole unit was one and the same.
9. The assessee also took us through Explanation (8) to Section 43(1) of the Act and pointed out that the said Explanation was only clarificatory in nature and its scope was limited to the period after the asset is put to use. As a matter of fact, the said Explanation had no application to the assessee's case.
10. The learned counsel also pointed out that the decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) has wrongly been applied by the revenue. The said decision is applicable to the new business and cannot be applied mutatis mutandis to the facts of the assessee's case. As a matter of fact, the assessee's case is fully covered by the decision of the Supreme Court in the case of India Cements Ltd. (supra).
11. The learned counsel has also drawn our attention to the notice under Section 263 of the Act issued by the Commissioner for assessment year 1990-91. The said notice is placed on page 81 of the material papers. The Commissioner was of the view that the deduction of interest of Rs. 34,98,485 was wrongly allowed by the Assessing Officer as revenue expenditure. The Commissioner, therefore, assumed jurisdiction under Section 263 of the Act. The learned counsel pointed out that the assessee represented the matter before the Commissioner and pointed out to him that the expenditure on interest was revenue in nature and was therefore, rightly allowed by the Assessing Officer. On considering the facts of the case, the Commisioner dropped the proceedings under Section 263 vide his order dated 23-3-1992. The Commissioner's order had been placed at page 93 of the paper book. The learned counsel pointed out that the revenue has thus applied their mind and the Assessing Officer as well as the Commissioner under Section 263 had come to the conclusion that the interest amount was admissible deduction as revenue expenditure. In the light of these facts, the learned counsel pointed out that the enhancement notice by the Commissioner (Appeals) and further disallowance of interest was not justified on the facts of the case. He therefore, prayed that the order of the CIT (A) should be vacated.
12. Regarding the salary and other costs, the learned counsel more or less advanced the similar arguments. He pointed out that the distinction between the new business and existing business must be kept in mind. If expenses are incurred in connection with setting up of a new business such expenses will be on capital account but where the setting up does not amount to start a new business but expansion or extension of the business has already been carried on by the assessee, expenses in connection with such expansion or extension can be held to be deductible as revenue expenses. The revenue failed to note the complete inter-lacing, interconnection and inter-dependence between the modernised and expanded unit with the existing unit and therefore, even the salary and other costs should have been held as deductible. In this regard, the learned counsel has placed reliance on the decision of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845. He pointed out that the assessee before the Calcutta High Court incurred some miscellaneous expenditure and legal charges in connection with a proposed factory in Rajasthan and claimed it as business expenditure. The Hon'ble High Court had held that such expenditure was deductible. The case of the assessee, therefore, in the opinion of the learned counsel, is fully supported by the aforesaid decision of the Calcutta High Court in the case of Kesoram Industries & Cotton Mills Ltd. (supra). The revenue, it is thus prayed, was in error in treating the salary and other costs as the capital expenditure.
13. Regarding foreign travel, the learned counsel fairly conceded that such a claim was not made either before the Assessing Officer or before the CIT(A). The assessee has raised this issue for the first time before the Tribunal. The foreign travel expenses of Rs. 9,81,482 were incurred by the company on training Engineers of the company abroad under its modernisation and expansion programme. This expenditure in the opinion of the learned counsel is also an admissible deduction as revenue expenditure. By drawing our attention to the decision of the Gujarat High Court in the case of Shahibag Enterpreneurs (P.) Ltd. v. CIT [1994] 210 ITR 998, the learned counsel pointed out that the expenditure on foreign travel of new units alone will be capital expenditure. However, the foreign travel expenses for an existing business, even if incurred for the acquisition of capital asset would be allowable as a deduction as the revenue expenses.
14. On being informed by the Bench that the issues does not arise out of the order of the CIT(A), the learned counsel took us through the powers of the Tribunal and pointed out that the basic purpose of appeal in income-tax matter is to ascertain the correct tax liability of the assessee in accordance with law. Therefore, at both the stages either before the first appellate authority or before the Appellate Tribunal, the issue can be raised on the basis of material already on record. The appellate authority has jurisdiction to deal with the issue if further findings of facts are not essential. In this regard, the learned counsel has relied on the decision of the Bombay High Court (Full Bench) in the case of Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351. He also pointed out that the full details of expenditure on foreign travel were before the Assessing Officer as well as the CIT(A). The expenditure was revenue in nature and therefore, deductible as such. The learned counsel, therefore, concluded that even the expenditure on foreign travel should be allowed as deduction as the revenue expenditure.
15. On the other hand, the learned Senior Departmental Representative Dr. Sunil Pathak strongly controverted the arguments of the assessee-company. As far as the interest on the borrowed funds is concerned, the learned departmental representative adopted the arguments of the CIT(A). He also placed reliance on the decision of the Calcutta High Court in the case of India Steamship Co. Ltd. (supra). He pointed out that the funds were borrowed by the assessee for the purpose of acquiring the capital asset and therefore, for the purpose of arriving at the actual cost under Explanatioin (8) to Section 43(1) of the Act, the interest should have been capitalised.
16. Regarding salary and other costs of Rs. 38,04,363 the learned Senior Departmental Representative pointed out that the expenditure is apparently a capital expenditure. Similar is the position with foreign travel of Rs. 9,81,482. These expenses related to and connecting with the acquisition of a capital asset and, therefore, have to be necessarily capitalised by the assessee. As a matter of fact, while filing the original return of income, the assessee himself had capitalised the expenses under these two heads and it was only a change of mind in the revised return to claim these expenses as revenue in nature. The learned Departmental representative pointed out that the issue is fairly covered in favour of the revenue by the decision of the Bombay High Court in the case of Ciba of India Ltd. v. CIT. To establish the similarity of facts, the learned departmental representative pointed out that in the case of Ciba of India Ltd. (supra), the assessee had set up a new plant at Bhandup for manufacturing additional pharmaceutical goods. In that connection, the assessee had incurred travelling expenses. Some expenses were also incurred on account of the visit of one Mr. E. Candolif who visited India for training the staff of the assessee for starting production at the plant at Bhandup. The assessee claimed deduction of the said expenditure as revenue expenditure on the ground that it was incurred in the course of its business and the said plant at Bhandup was merely for manufacturing the additional goods in the same line of business so far carried on by the assessee. On these facts, the Hon'ble High Court had held that the travelling expenses and the training expenses of the staff were in the nature of capital expenditure. The facts of the assessee's case, it is pointed out by the learned departmental representative, are identical with the facts of Ciba of India Ltd. and, therefore, there is no reason to depart from the principles laid down by the jurisdictional High Court.
17. The learned departmental representative has also drawn our attention to yet another decision of the Bombay High Court in the case of CIT v. Belapur Co. Ltd. [1986] 161 ITR 516. In this case, the Assessing Officer disallowed the claim for the deduction of certain expenditure incurred by the assessee-company in connection with the foreign tour undertaken by certain officers and directors for the purchase of a capital asset as also for the study of diffuser working before its purchase on the ground that the expenditure was capital in nature. The Appellate Asstt. Commissioner affirmed the order of the ITO but directed the ITO to capitalise the expenditure for the purpose of depreciation and development rebate. The Tribunal upheld the order of the A.A.C. On these facts, it was held by the Hon'ble High Court affirming the decision of the Tribunal that the entire expenditure on the foreign tour Was incurred in connection with the purchase of a capital asset, and, therefore, the expenditure was to be capitalised for the purpose of allowing depreciation and development rebate thereoon.
18. By drawing our attention to another decision of the Bombay High Court in the case of CIT v. J.K. Chemicals Ltd. [1994] 207 ITR 985, the learned departmental representative argued that the expenditure on salary and other costs and foreign travel incurred in connection with the acquisition of capital asset has to be treated as the capital expenditure. The learned departmental representative pointed out that the issue is also supported in favour of the revenue by the decision of the Gujarat High Court in the case of McGaw Rauindra Laboratories v. CIT [1994] 207 ITR 239.
19. In addition, the learned departmental representative has also placed reliance on the ratio of the following decisions:
(a) Trade Wings Ltd. v. CIT [1990] 185 ITR 267 (Bom.);
(b) Shahibag Enterpreneurs (P.) Ltd.'s case (supra);
(c) McGaw Ravindra Laboratories' case (supra);
(d) Indian Oxygen Ltd. v. CIT [1987] 164 ITR 466 (Cal.);
(e) Ashoke Marketing Ltd. v. CIT [1994] 208 ITR 941 (Cal.).
20. As far as the foreign travel expenses are concerned, he draws our attention to the decision of the Tribunal in the assessee's own case in I.T.A. No. 124/(PN)/1981 for assessment year 1976-77, dated 22nd March, 1982. It is also pointed out that on the identical facts, the Tribunal had held that such expenditure were capital in nature and hence not deductible while computing the profits of the assessee. The learned departmental representative, thus concluded that the salary and other costs and foreign travel are capital expenses and the CIT(A) was justified in treating them as such. No interference by the Tribunal with the order of the CIT(A) in this regard is therefore, called for.
21. In rejoinder, the learned counsel for the assessee urged that the fact should not be lost sight of that in the case of the assessee, it was a case of modernisation and expansion of the existing business. The decision in the case of Ciba of India Ltd. (supra) was rendered by the jurisdictional High Court is distinguishable inasmuch as it was the case of separate business. In the case of the assessee, there was no separate business and therefore, the ratio of this decision should not determine the character of the expenditure. Similarly, the decision in the case of Belapur Co. Ltd. (supra) also can be distinguished, inasmuch as, the issue of capital or revenue was not before the Hon'ble Bombay High Court. The learned counsel has also distinguished the Bombay High Court judgment in the case of J.K. Chemicals Ltd. (supra) and pointed out that the said decision applies only to a project report.
22. Regarding the decision of the Tribunal in the assessee's own case for assessment year 1976-77, the learned counsel argued that the said decision was rendered by the Hon'ble Tribunal before the decision of the Bombay High Court in the case of Bralco Metal Industries (P.) Ltd. v. CIT [1994] 206 ITR 477. In this regard, he has drawn our attention to the facts of the case reproduced by the Hon'ble High Court on page 481 of the decision.
23. Alternatively, the learned counsel urged that the salary and other costs included the commitment chages which, at least, should be allowed. The learned counsel reiterated that the expenses under the head interest, foreign travel and salary and other costs are revenue in nature and hence deductible in computing the profits of the assessee.
24. We have heard the rival submissions in the light of judicial precedence relied upon by the parties to the dispute. We first take up the issue regarding the. interest of Rs. 34,98,485. This expenditure has been claimed by the assessee under Section 36(1)(iii) of the Act. The interest on monies borrowed for the purpose of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under Section 36(1)(iii), all that is necessary is that, firstly, the money, that is capital must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and thirdly, the assessee must have paid interest on1 the borrowed amounts. If all the requisite conditions for allowance are fulfilled, it is not possible to make a part disallowance unless there is a finding that a part of the capital borrowed was not used for the purpose of the business. This leads us to examine the implications and scope of the words "for the purpose of business". The expression "for the purpose of business" in Section 36(1)(iii) is wider in its scope than the expression "for the purpose of making or earning" in Section 57(iii) of the Act. Therefore, the scope for allowing deduction under Section 36(1)(iii) would be much wider than the one available under Section 57(iii) of the Act. The purpose may be to acquire a capital asset or stock-in-trade, as also to pay off a trading debt or loss. Capital borrowed to pay off such a debt is capital borrowed for the purpose of the business. If the test of "the purpose of the business" is satisfied in respect of the capital borrowed on which the amount of interest is earned, the same has to be allowed as deduction while computing the income of the assessee.
25. In the case of the assessee, a submission was put forward by the revenue that the new machineries for modernisation and expansion acquired by the assessee were not used in the relevant accounting year. In this connection, we have mentioned that under Section 36(1)(iii) it is not necessary that the assessee must have used the acquired asset for doing business in the relevant account year itself. Mere acquisition for the purpose of business in the relevant account year is sufficient to claim deduction for the amount of interest paid. In this regard, our views are strengthened by the decisions in the cases of C.T. Desai v. CIT [1979] 120 ITR 240 (Kar.), Addl. CIT v. Southern Founders [1979] 120 ITR 37 (Kar.) and Calico Dyeing & Printing Works v. CIT [1958] 34 ITR 265 (Bom.).
26. The issue as regards interest, as a matter of fact, is fully covered by the decision of the Supreme Court in the case of India Cements Ltd. (supra). The Hon'ble Apex Court has gone even to the extent of mentioning that it was irrelevant, to consider the object for which the loan was obtained. In our view, so long the borrowings must have been used for the purpose of business of the assessee, the interest paid thereon has to be treated as the revenue expenditure even if the borrowed money was utilised for purchasing the machinery.
27. The controversy regarding the capital or revenue in regard to interest on the borrowed funds is irrelevant. In our opinion, as already mentioned the interest on the borrowed funds has to be deducted under Section 36(1)(iii) of the Act. The provisions of Section 37 are not applicable to the interest paid on the borrowed funds. The expenditure under Section 37(1) is deductible which is not in the nature of expenditure described in Sections 30 to 36. The controversy of revenue versus capital is relevant under Section 37(1) and therefore, cannot be taken into account while considering the deduction under Sections 30 to 36 of the Act. Since the interest on the borrowed fund is held deductible under Section 36(1)(iii) of the Act, the CIT(A) should not have examined the said expenditure under Section 37(1) of the Act.
28. The learned CIT(A), while treating the payment of interest as capital expenditure has heavily relied upon the decision of the Calcutta High Court in the case of India Steamships Co. Ltd. (supra). The said decision is, however, distinguishable. Reference to the said decision was made at the instance of the revenue. The assessee had capitalised the interest payment on loan for the purpose of development rebate. The Hon'ble High Court had followed the decision of the Supreme Court in the case of Challapalli Sugars Ltd. (supra) and had held that the expenditure should be included in the actual cost of the ships acquired. Thus, the facts of that case are not with pari materia with the facts before us. We are therefore, of the view that the assessee is entitled to the deduction of interest under Section 36(1)(iii) of the Act. We therefore, direct the revenue to exclude the sum of Rs. 34,98,485.
29. Coming to the foreign travel and salary and other costs, we consider it necessary to examine the expression 'capital expenditure' which is not defined in the Act. The said expression, however, connotes permanency and capital expenditure is, therefore, closely akin to the concept of securing something, tangible or intangible property or corporeal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. In other words, the word 'capital' ordinarily means an asset which has an element of permanency about it and which is capable of being a source of income and the capital expenditure must therefore, generally, mean the acquisition of an asset and the asset must be intended to be a lasting or enduring benefit. Judged from this general principle, it would appear that the expenses on foreign travel incurred by the assessee for purchasing the machinery have to be held as the capital expenditure. In other words, all expenditure necessary to bring capital assets into existence and to put them in working condition will form part of the cost. It is wholly irrelevant whether the asset was acquired prior to the commencement of the business or subsequent to such commencement. It is also fallacious to say that it is still at the option of the assessee to capitalise or not to capitalise the expenses directly incidental to the acquisition of such assets. This view of ours finds support from the jurisdictional Bombay High Court decision in the case of Belapur Co. Ltd. (supra). Basically, the expenditure would be attributable to capital, if it is made with a view to bring a profit-making asset or a business asset or an enduring advantage into the business. One has to take into account all the circumstances of the case while deciding whether the expenditure can be considered as revenue expenditure or capital expenditure.
30. The facts before us are similar to the facts before the Bombay High Court in the case of Ciba of India Ltd. (supra). In that case the said assessee-company was carrying on business of manufacture and sale of pharmaceutical goods. The said company had set up a new plant at Bhandup for manufacturing additional pharmaceutical goods. Thus, the assessee was a running concern. For the new unit, the assessee incurred expenditure on freight and transport of new machinery and thereafter also on the travel of a foreign technician who came to India to train assessee's technicians on operation of a new plant. In this context, the Bombay High Court held that all these expenses on transport and foreign technician who was engaged for training assessee's technicians as to how to operate the new plant were to be capitalised. Thus, the expenses relating to the new machinery are to be capitalised not only up to the time of acquisition but till such time the machinery is actually put to use. This is the ratio in a nutshell of the above referred decision. On these facts, the Bombay High Court held that the expenses were capital in nature and hence not deductible while computing the profits of the assessee. Before us also, the foreign travel and salary and other costs, other than the commitment charges to which we will come later, relate to the acquisition and installation of a new unit. In short, they are preoperative expenses of a new unit which the assessee has set up. Relying upon the Bombay High Court decision in the case of Ciba of India Ltd. (supra), these expenses therefore, have to be capitalised to the new unit account. We may also mention that a similar issue was examined by us in the case of Pudumjee Pulp & Paper Mills Ltd. in I.T. Appeal Nos. 316 to 319 and 357 to 360 (Pune) of 1989, dated 7th January, 1994. On identical facts, a finding was given that the foreign travel and other expenses were capital in nature.
31. We are however, confronted by the learned counsel for the assessee with the decision of the Bombay High Court in the case of Bralco Metal Industries (P.) Ltd. (supra). We have very carefully gone through the said decision. The facts of this case are not very clear and therefore, the ratio of this decision could not be easily imported and applied to the facts before us.
32. The other decision of the Bombay High Court mentioned by us is directly on the issue which we respectfully follow.
33. The details of salary and other charges are placed on page 80 of the paper book. From these details, we find that a sum of Rs. 38,04,362 includes a sum of Rs. 17,36,571 being the commitment charges. As per the details, the assessee had paid the commitment charges as follows:
Name of the party Amount
Rs.
(a) Commitment charges
paid to ICICI 99,428.00
(b) Commitment charges
paid to IFCI 2,14,415.00
(c) Commitment charges
from 1-11-1989 to
4-12-1989 paid to
ICICI 69,147.00
(d) Provision for
commitment charges
on Rupee
and F.C. loan 13,53,581.00
------------
17,36,571.00
------------
These commitment charges, in our view, are allowable deduction. In this regard, we refer to the Board Circular No. 2P(XI-6) of 1965, dated 23-8-1965 which has laid down that the expenditure by way of payment of commitment charges is the expenditure laid out wholly and exclusively for the purpose of business. The commitment charges are akin to the interest as defined under Section 2(28A) of the Act. As we have already held that interest on borrowings, even though pertaining to a new unit, is to be allowed as a revenue expenditure, commitment charges, also being of the nature of interest, are to be allowed as a revenue expenditure.
This issue, as a matter of fact, is fully covered by the decision of our Bench in the case of Pudumjee Pulp & Paper Mills Ltd. (supra). Following the reasons recorded in the aforesaid decision, we direct the revenue to treat the commitment charges as the revenue expenditure.
34. With the result, foreign tour expenses of Rs. 9,81,482 and salary and other costs to the extent of Rs. 20,67,792 would be treated as the capital expenditure and the commitment charges of Rs. 17,36,571 would be allowed as the revenue expenditure.
35. Ground No. 2 in the assessee's appeal and ground No. 2 in the departmental appeal relate to the disallowance under Section 37(2A) of the Act. During the year under consideration, the assessee had claimed a sum of Rs. 19,94,496 as expenditure which is in the nature of entertainment expenditure within the meaning of Section 37(2A) of the Act. The assessee contended before the Assessing Officer that the total expenditure incurred by the assessee was also related to the expenses on employees accompanying the guests which under the provisions of Section 37(2A) should not be considered as entertainment expenditure. The assessee had filed the following details before the Assessing Officer :
Head of Total Amount on Amount on
expenditure amount guests employees
Rs. Rs. Rs.
Entertainment
expenses 18,50,815 13,88,111 4,62,704
Foreign travel 1,43,681 71,841 71,840
19,94,496 14,59,952 5,34,544
The assessee, therefore, pointed out that for the purpose of disallowance under Section 37(2A) only an amount of Rs. 14,59,952 should be taken into account. The sum of Rs. 5,34,544 should be considered to have been spent on the employees of the company. The Assessing Officer, however, did not accept the contention of the assessee as a result of which, the addition of Rs. 5,34,544 was made.
36. The CIT(A) examined the issue and found out, as a matter of fact, that in the earlier years in the assessee's own case, the CIT(A) had considered 20% of the expenditure as having been incurred on the employees and hence deductible. The CIT(A) followed the order of her perdecessor and directed the Assessing Officer to allow 20% of the expenditure as having been incurred for the employees. On this count, she gave relief to the assessee to the extent of Rs. 3,70,163. The amount of Rs. 71,840 being the foreign travel was considered by the CIT(A) as the business expenditure and therefore, she allowed the relief of Rs. 4,42,003 as against the addition of Rs. 5,34,544. Against this, both the revenue as well as the assessee have come up in appeals before us.
37. In the assessee's appeal it has been contended that the CIT(A) was not justified in restricting the relief to Rs. 4,42,003. The entire expenditure of Rs. 5,34,544 should have been allowed as the deduction. In this regard, the assessee has drawn our attention to the decision of the Delhi High Court in the case of CIT v. Expo Machinery Ltd. [1991] 190 ITR 576. It has been contended that the entertainment expenditure excludes food or beverages provided by the assessee to its own employees in office, factory or any other place of duty. When the employees of the assessee accompanied the guests, the place of taking the food etc. became their place of work and duty and therefore, the assessee was entitled to the full deduction.
38. On the other hand, the revenue was of the view that the entire claim of the assessee was not admissible and the part relief given by the CIT(A) to the extent of Rs. 4,42,003 was not justified. Thus, it is pleaded by the revenue that the CIT(A)'s order on this count should be reversed.
39. We have considered the rival submissions. It is not denied by the assessee or the revenue that 20% of the expenditure was allowed to be deducted in past as having been spent on the employees. The assessee has filed the details and, therefore, we are of the view that the CIT(A) was justified in following the past practice. She was also justified in allowing 20% of the expenditure as having been incurred on the employees which do not fall under the provisions of Section 37(2A) of the Act. We therefore, uphold the order of the CIT(A). On this ground, both the assessee as well as revenue fail.
40. Ground No. 3 is also common to the assessee as well as the revenue and is regarding deduction of expenses relating to presentation and gift articles. The Assessing Officer disallowed the expenditure of Rs. 7,80,262 representing such presentation and gift articles. The Assessing Officer was of the view that the presentation and gift articles costing above Rs. 50 each given to business associates and customers of the assessee-company as a gesture of goodwill was a subtle form of advertisement to which Rule 6B was applicable. He was therefore, of the view that the expenditure was admissible under the said Rule as a result of which, he made addition of Rs. 7,80,262.
41. The issue was examined by the CIT(A). The CIT(A) was of the view that the element of personal expenditure on account of presentation and gift articles to maintain personal relations and goodwill cannot be ruled out. The CIT(A) also made a reference to the past practice in the assessee's own case. The CIT(A) was of the view that the deduction on this count only to the extent of 10% was reasonable. She therefore, directed the Assessing Officer to allow the deduction of Rs. 78,026. She however, confirmed the addition of balance 90% to the extent of Rs. 7,02,236.
42. The assessee before us has pleaded that the presentation articles given to the customers to maintain personal relations and goodwill did not bear the name or logo of the company. The expenses therefore, did not fall under Rule 6B of the Income-tax Rules. In this regard, the learned counsel has placed reliance on the decision of the Delhi High Court in the case of CIT v. Indian Aluminium Cables Ltd. (No. 2) [1990] 183 ITR 611 and the decision of the Bombay High Court in the case of CIT v. Allana Sons (P.) Ltd.
43. On the other hand, the learned departmental representative in the assessee's appeal and in departmental appeal has pleaded that the presentation articles and gifts costing above Rs. 50 each was in the nature of advertisement and hence Rule 6B of the Rules was applicable.
44. We have heard the rival submissions. In the assessee's appeal, the CIT(A) has disallowed 90% of the total claim of the assessee for which no cogent reasons have been given. It is nowhere mentioned either by the ITO or by the CIT(A) that the gifted articles had the logo or a name of the assessee. In such circumstances, the case of the assessee is covered by the decision of the Bombay High Court and Delhi High Court referred to above. In our view, therefore, the disallowance was not called for. However, the personal element of the expenditure of such magnitude cannot be ruled. We are of the view that at least some part of the expenditure must be in the nature of personal expenses of the Directors. Taking the overall view of the matter, we are of the view that 90% of the expenditure should be allowed as deduction and the disallowance should be restricted only to 10%. We therefore, modify the order of the CIT(A) to this extent. With the result, assessee's ground of appeal is partly allowed and the departmental ground is dismissed.
45. Ground No. 4 in assessee's appeal has not been pressed and as such dismissed as infructuous.
46. The next issue in the assessee's appeal is regarding the disallowance of guarantee commission as capital expenditure of Rs. 9,54,951. During the year under consideration, the assessee had paid the guarantee commission of Rs. 21,24,005 on which the commission amounting to Rs. 9,54,951 directly related to purchase of capital goods. The guarantee commission paid by the assessee for the year under consideration has been treated as capital expenditure both by the Assessing Officer as well as by the CIT(A).
47. Before us, the learned counsel strongly urged that the guarantee commission should be considered as the revenue expenditure and hence deductible in computing the profit of the assessee-company. He pointed out that the issue of guarantee commission was examined at length by the Tribunal in assessee's own case for earlier years. On the similar facts, it was held by the Tribunal that the guarantee commission was the revenue expenditure and since the facts of account year relevant to the assessment year under appeal are similar, there is no warrant to depart from the past practice. The learned counsel also urged that unless compelling circumstances are, the decision rendered in the assessee's own case should be followed in the subsequent year. He also pointed out that the expenditure in the form of guarantee commission is post-acquisition of the assets and therefore, has to be considered as having been spent wholly and exclusively for the purpose of business. The assessee is, therefore, entitled to the deduction of guarantee commission for the year under consideration.
48. On the other hand, the learned departmental representative has placed reliance on the decision of the Gujarat High Court in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. He pointed out that the Tribunal while dealing with the case of the assessee for the earlier years did not take into account the decision of the Gujarat High Court referred to above. He also took us through the said decision and pointed out that the Hon'ble Gujarat High Court had also considered the decision of the Supreme Court in the case of India Cements Ltd. (supra). The learned departmental representative also pointed out that in the recent past, the Tribunal has been consistently holding that the guarantee commission is capital in nature. In this regard, he has drawn our attention to the decision in the case of Pudumjee Pulp & Paper Mills Ltd. (supra). He therefore, argued that the decision of the CIT(A) should be maintained.
49. We have considered the rival submissions. It is true that in the assessee's case, the guarantee commission was considered by the Tribunal as revenue expenditure in the previous years. However, the decision of the Gujarat High Court in the case of Vallabh Glass Works Ltd. (supra) was not brought to the notice of the Tribunal. The decision of the Gujarat High Court has been examined by the Tribunal in a number of cases in recent past and a finding has been given that the guarantee commission is capital in nature. On this issue, we have given our serious consideration and are of the opinion that the assessee cannot escape the fact that the guarantee commission expenditure was incurred for acquisition of capital asset. As a matter of fact, if there was no bank guarantee, the assessee, perhaps, would not have acquired the loan as a result of which, the acquisition of capital asset was not possible. This was also examined by the Board in Circular F. No. 7/33/62-II(A-I), dated 28-8-1963. It was laid down by the Board in the said circular that the commission payable to bank for furnishing the guarantee regarding deferred payment for import of plant and machinery was a capital expenditure and hence not deductible.
50. The Gujarat High Court in the case of Vallabh Glass Works Ltd. (supra) had elaborately discussed this issue and has applied the test of determining whether particular expenditure is capital or revenue in nature. On examining the facts of the case, it was held that the payment of guarantee commission to the bank was necessary item of expenditure to bring the machinery, capital asset into existence and to put them in working condition. This item of expenditure was incurred as an integral part of payment of the cost price of the machineries and formed part of the cost of acquisition of the capital assets. Taking into account the totality of circumstances and following our own decision in the case of Pudumjee Pulp & Paper Mills Ltd. (supra), we hold that the expenses of guarantee commission are in the nature of capital expenditure. We therefore, reject the contention of the assessee and uphold the order of the CIT(A).
51. With the result, the assessee's appeal is partly allowed.
52. Coming to the appeal from revenue, the first issue raised is regarding the deduction of Rs. 32,000 allowed by the CIT(A) under the provisions of Section 40A(12) of the Act. During the account year relevant for the assessment year under appeal, the assessee-company had paid an amount of Rs. 97,000 as fees to consultant for services in connection with tax matters. The Assessing Officer allowed the deduction of Rs. 10,000 under Section 40A(12) which resulted in the disallowance of Rs. 87,000. The assessee, however, explained that an amount of Rs. 97,000 included Rs. 2,000 paid out of pocket expenses and hence was not in the nature of fees so as to be disallowed under Section 40A(12) of the Act. Further, it also included an amount of Rs. 60,000 paid to the consultant for various matters including taxation. The pro rota amount of above taken at 50%, as it appears from the facts of the case, had been approved by the CIT(A) in earlier years. Hence, the disallowance in the case of the assessee was worked out as under :
Rs.
Total fees paid 97,000
Less: Out of pocket expenses 2,000
------
95,000
Less: 50% of fees of Rs. 60,000
considered for services
other than under the Income
-tax Act 30,000
------
65,000
Less : Disallowance under
Section 40A(12) 10,000
------
55,000
------
The CIT(A) found, as a matter of fact, that the total disallowance under this Section should have been Rs. 55,000 as against Rs. 87,000 made by the Assessing Officer.
53. After hearing the parties to the dispute, we find from the facts of the case that the assessee had paid a sum of Rs. 60,000 to Shri P.D. Kunte for advice and consultation of Taxation, Company Law, M.R.T.P., FERA, Industrial Law etc. These payments, would therefore, not fully form part of disallowance under the provisions of Section 40A(12) of the Act. After careful consideration of the facts of the case, we do not find any material to depart from the view taken by the CIT(A). We accordingly uphold the order of the CIT(A).
54. The next issue in the departmental appeal is regarding the adjustment of set off of capital loss. During the year, the assessee had transferred one of the marketing divisions marketing electronic items to M/s. Kalyani Sharp India Ltd. Under the transfer agreement, various assets and liabilities were agreed to be transferred to the transferee-company at an agreed value for each specific asset" Amongst transferred assets, there were sundry debtors and other advances recoverable from the various parties. All the debtors and advances arose because of sales-effected which were fully accounted as income. However, while transferring these debts, the assessee-company considered that the full price will not be realisable. Therefore, bad debts were ascertained at Rs. 20,95,119 and warranty claimed were ascertained at Rs. 8,38,000. The total claim of the assessee was, therefore, of Rs. 29,33,119 which was later on revised to Rs. 31,73,123. This sum of Rs. 31,73,123 was claimed by the assessee as a business loss permissible as deduction under Section 28 of the Act. Alternatively, it was pleaded that the said loss should be considered as the short-term capital loss and allowed to be set off. The Assessing Officer for the reasons recorded by him in his assessment order negatived the assessee's claim on both aspects. Aggrieved, the assessee filed an appeal before the CIT(A), who dealt with the issue in the following manner:
The Assessing Officer, however, was not right in not treating the transfer as of capital assets. It is clear from the discussion above that the transfer has been of trade debts or accounts receivables on a devalued price. The transfer is of capital assets, since the definition of capital assets under Section 2(14) of the I.T. Act, includes property of any kind whether or not connected with business or profession, but excludes stock-in-trade, consumable stores, raw-materials etc. held for the purpose of business, personal effects etc. In the present trade debts are definitely capital assets within the definition. Further more, trade debts are short-term capital assets, since it is stated by the appellant that the debts have not been held for more than 3 years as they pertain to the preceding 1 or 2 years only. The transfer of current assets on a devalued price is, therefore, resulted in transfer of short-term capital assets, resulting in short-term capital loss. This short-term capital loss is to be adjusted/set off as per the provisions of I.T. Act. The Assessing Officer is directed to do the necessary set off, as per the Act.
55. We have carefully considered the arguments of the parties to the dispute. The loss on transfer of the marketing division, in our view, is incidental and therefore, admissible as deduction. As a matter of fact, the facts of the case suggest that it could even be the business loss. However, the CIT(A) has treated the said loss as the short-term capital loss with which we have no dispute. The CIT(A) has in an effective and detailed manner, dealt with this issue which we do not consider it necessary to reproduce in full. It is sufficient to say that we fully agree with the reasons given by her in support of her decision. We therefore, have no material to depart from the findings given by the CIT(A). We therefore, uphold the order of the CIT(A) on this issue.
56. The last ground in the departmental appeal deals with the additions deleted by the CIT(A) in respect of maintenance of guest house. During the year under consideration, the assessee-company had incurred an expen-ditureofRs. 3,87,021 on the maintenance of the guest house. This amount consisted of Rs. 70,716 as the rent and the balance was incurred by the assessee on the maintenance of guest house. The assessee company had claimed before the Assessing Officer a sum of Rs. 70,716 representing rent as deduction under the provisions of Sections 30 and 31 of the Act. The assessee had also claimed a sum of Rs. 1,58,153 being 50% of the other expenses on guest house as the guest house was stated to have been maintained and used for business meeting of the employees. For the deduction of rent of Rs. 70,716 the assessee had relied on the decision of the Bombay High Court in the case of CIT v. Chase Bright Steel Ltd. (No. 1) [1989] 177 ITR 124. In connection with the deduction of depreciation on the guest house, the assessee had placed reliance on the decision of the Bombay High Court in the case of Century Spg. & Mfg. Co. Ltd. v. CIT [1991] 189 ITR 660. To sum up, the assessee had claimed deduction in respect of guest house as under :
(a) Rent Rs. 70,716
(b) 50% of maintenance
expenses for employees Rs. 1,58,153
(c) Depreciation on guest
house and assets therein Rs. 2,13,232
57. The Assessing Officer examined the issue and was of the view that under the provisions of Section 37(4) no deduction on the maintenance of guest house was admissible to the assessee. He therefore, added an amount to the total income disclosed.
58. The CIT(A) examined the issue and was of the view that the loss of Rs. 70,716 was admissible to the assessee in view of the decision of the Bombay High Court in the case of Chase Bright Steel Ltd. (supra). She was also of the view that the assessee was entitled to depreciation of Rs. 2,13,232 on account of other decisions of the Bombay High Court referred to above. The CIT(A) therefore, deleted the amount on both these counts to the extent of Rs. 2,83,948. Against this order of the CIT(A), the revenue has come up in appeal before us.
59. The learned departmental representative has argued that there is a specific provision against the deduction of expenditure for the maintenance of guest house. The Section itself has provided that even the depreciation will not be allowed. The learned departmental representative therefore, contended that the CIT(A) was in error in allowing the rent, as well as the depreciation.
60. The learned counsel for the assessee, on the other hand, pointed out that the rent and taxes are deductible under Section 30 of the Act and therefore, the provisions of Section 37(4) of the Act have no application. The issue is also covered by the decision of the Bombay High Court referred to above.
61. Regarding the depreciation on guest house, the learned counsel pointed out that the Bombay High Court in the case of Century Spinning & Manufacturing Co. (supra) has held that Sub-section (4) of Section 37 of the Act is of non obstante clause vis-a-vis Sub-section (1) and Sub-section (3) of Section 37 only. If the expenditure or allowance is allowable under other Sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee. In the opinion of the learned counsel, the CIT(A) was therefore, justified in deleting both the additions.
62. We have considered the rival submissions. As far as the deduction of rent of Rs. 70,716 is concerned, we have no quarrel with the decision of the CIT(A). The rent, rates and taxes etc. are admissible deduction under Section 30 of the Act and therefore, cannot be considered for the disallowance under Section 37(4) of the Act. On this issue, therefore, we uphold the order of the CIT(A).
63. However, as far as the issue of depreciation on the maintenance and guest house is concerned, we find that there is specific prohibition for the allowance of depreciation on guest house in the Income-tax Act itself. We are, however, aware that the Bombay High Court has held the depreciation as admissible deduction. We, however, come across a latter decision of the Bombay High Court in the case of CIT v. Ocean Carriers (P.) Ltd. delivered on 15-11-1994. In point of time, this decision is later than the decision in the case of Century Spg. & Mfg. Co. Ltd. (supra). In the latter decision on similar facts, it has been held that the assessee was not entitled to any allowance under Section 37(4) in respect of any expenditure on maintenance after 28-2-1970 nor to any depreciation allowance. Thus, the Hon'ble High Court has laid down that the depreciation on the guest house is not an admissible deduction under Section 37(4) of the Act. We respectfully follow the latter decision of the jurisdic-tional High Court and to this extent, vacate the order of the CIT(A) and restore the order of the Assessing Officer. This ground of the revenue therefore, partly succeeds.
64. With the result, assessee's appeal as well as the revenue's appeal are partly allowed.