Income Tax Appellate Tribunal - Ahmedabad
Gujarat Gas Co. Ltd.,, Ahmedabad vs Assessee on 25 March, 2004
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "A"
Before SHRI T K SHARMA,JM & SHRI A N P AHUJ A, AM
ITA no.2211/Ahd/2004
(Assessment Year:-1998-99)
&
ITA no.36/Ahd/2005
(Assessment Year:-2001-02)
Gujarat Gas Company V/s Assistant Commissioner of
Limited., 2, Shantisadan Income-tax, Circle-4[earlier
Society, Near Parimal Addl. Commissioner of
Garden, Ellis-bridge, Income-tax, Special Range-
Ahmedabad 8 ], Ahmedabad
PAN: AAACG 5600 M
[Appellant] [Respondent]
ITA no.134/Ahd/2005
(Assessment Year:-2001-02)
Assistant Commissioner of V/s Gujarat Gas Co. Limited., 2,
Income-tax, Circle-4, Shantisadan Society, Near
Ahmedabad Parimal Garden, Ellis-
bridge, Ahmedabad
[Appellant] [Respondent]
Assessee by :- Shri Sanjay R Shah, AR
Revenue by:- Shri Anil Kumar, DR
O R D E R
A N Pahuja: These appeals- ITA no.2211/Ahd/2004 filed by the assessee against an order dated 25-03-2004 of the ld. CIT(Appeals)- X, Ahmedabad, for the Assessment Year (AY) 1998-99 and cross appeals against an order dated 03-11-2004 of the CIT(A)-VIII, Ahmedabad, for the Assessment Year 2001-02, raise the following grounds:-
ITA nos.2211/A/04 & 36-134/A/05 ITA No.2211/ Ahd/2004- AY:- 1998-99[Assessee] "1. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of claim made u/s.80-I & 80-IA, on the ground that activity of your appellant cannot be held as manufacture or production of article or thing. Your appellant submits that it is engaged in manufacturing and/or producing articles not specified in ninth schedule.
Your appellant submits that as it fulfills all the conditions laid clown for claim of relief u/s.80-I & 80-IA of the Act, the learned CIT (Appeals) ought to have granted deduction u/s.8O-I & 80-IA of the I.T. Act. Your appellant submits that deduction as claimed u/s.80-I/80-IA be allowed now.
2. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.11,07,179/- being reimbursement of 50% of interest on housing loan taken by the employees on wrong premises. Your appellant submits that it has never mentioned that in assessment year 1996-97 such disallowance has been confirmed as alleged by the learned CIT(A). On the contrary in the written submission filed before the CIT(A), your appellant has stated that disallowance has been deleted by the CIT(A) in assessment year 1996-97. Your appellant further submits that it has not given any loan to the employees, but the employees of the assessee company have taken loan from the parties other than the assessee company and the company has actually reimbursed 50 per cent of the interest paid on the loan taken by the employees. The reimbursement of interest is actual payment and no book adjustment as observed by the learned Commissioner (Appeals). Further, the amount of interest reimbursed to the employees has been treated as part of salary and tax at source has been deducted at the appropriate rate. Your appellant further submits that the expenditure has been incurred to keep healthy relations with the employees of the company and in the nature of staff welfare expenses. It is submitted that the expenditure has been incurred for the purpose of business and incidental to the business and therefore, the learned Commissioner of Income-tax (Appeals) is not at all justified in confirming the disallowance. It is submitted that it be so held now and disallowance made be deleted now.
3. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.1,69,782/- treating it as non-business expenditure on certain assumptions and presumptions. Your appellant submits that expenditure represents the expenditure incurred on sweets distributed to the staff members on the occasion of Diwali Festival and the expenditure incurred on GAS DAY - 5th September - every year when pooja was done followed by lunch to the employees -the expenses are incurred with a view to keep good relation with the employees of the Company and are in the nature of staff welfare. It is submitted that in the facts and circumstances of the case, the learned Commissioner of Income- tax (Appeals) is not at all justified in confirming the disallowance of expenditure as non-business expenditure. It is submitted that it be so held now and disallowance made be deleted now.
2ITA nos.2211/A/04 & 36-134/A/05
4. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.33,303/- being amount spent as a subsidy given towards supply of gas connection to the employees of the company, considering the same as non-business expenditure. Your appellant submits that the learned Commissioner of Income-tax (Appeals) is not correct in observing in his order that the charges for Gas connection are not actually made available to the employees, but adjusted in the Company's account. In fact, your appellant has not made any book adjustment. The employees of the appellant company have paid Gas connection charges to a Company other than the assessee company and the assessee company - Gujarat Gas Company Limited -- have actually reimbursed a part of the Gas connection charges of the employees. Your appellant submits that such reimbursement of Gas connection charges is actual payment and not the book adjustment as observed by the learned Commissioner (Appeals). Your further appellant submits that the expenditure has been incurred to keep healthy relations with the employees of the Company and in the nature of Staff Welfare expenses. It is submitted that the expenditure has been incurred for the purpose of business and incidental to the business and therefore, the learned Commissioner of Income-tax (Appeals) is not at all justified in confirming the disallowance. It is submitted that it be so held now and disallowance made be deleted now.
5. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.1,98,01,130/- being interest on borrowings made for Hazira - Ankleshwar Pipeline Project (HAPi). The main business of your appellant is Natural Gas distribution through pipelines started since 1989. The assessee company has already got a 930 km long pipeline network in place starting from Ankleshwar and Bharuch and the HAPi project was merely an increase of 73 kms pipeline from Hazira to Ankleshwar. The HAPi project was not a new line of business of the assessee company, but simply an extension of the same business undertaken with a view to increase the Gas distribution network. As the interest has been paid in connection with borrowings made for laying the new pipe lines of HAPi Project - expansion of its existing business, the same is admissible as deduction u/s.36(l)(iii) of the I.T. Act. Your appellant submits that it be so held now and deduction as claimed be allowed now.
Without prejudice, your appellant submits that if it is held that the interest on borrowings made for Hazira-Ankleshwar Pipe Project is not admissible u/s.36(l)(iii) of the I.T. Act, then it is entitled to depreciation on the amount of interest which has been capitalized in the books of account, but no depreciation has been claimed when the project started production in subsequent assessment year. Your appellant submits that the appropriate direction be given to grant depreciation on the amount of interest claimed as deduction u/s.36(I)(iii), but disallowed as capital expenditure. It is submitted that it be so done now, 3 ITA nos.2211/A/04 & 36-134/A/05
6. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of provision for doubtful debts of Rs.45,16,000/- on certain assumptions and presumptions and without any basis. Your appellant further submits that the learned CIT(A) is not at all correct and also not justified in making certain observations while passing the order. Your appellant submits that it has purchased the assets from altogether a different company and the same assets were leased to Rajinder Steels Ltd. Your appellant further submits that the transaction with Rajinder Steels Ltd. is not a transaction of sale and lease back as alleged by the CIT(A). Further the various allegations/observations made by the CIT(A) in his order are without any basis and far from truth. The transaction entered with Rajinder Steels Ltd. was a simple lease of assets. Your appellant submits that since the amount of lease rent due from Rajinder Steels Ltd. is found to be not recoverable inspite of legal suits filed, the appellant has made the provision by debiting the amount to the Profit & Loss Account. In fact in assessment year 1999-2000 the party's account has been written off. Your appellant submits that in the facts and circumstances of its case and in view of the decision of the jurisdictional High Court and the Income Tax Appellate Tribunal, Ahmedabacl, the learned Commissioner of Income-tax (Appeals) ought to have allowed the claim. Your appellant submits that it be so allowed now.
7. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.2,30,218/- out of Miscellaneous expenses of Rs.6,79,214/- on the ground that expenses towards Family meet, LPG Day expenses, emergency work expenses for Diwali etc. are not in the nature of business expenditure. Your appellant submits that the expenses incurred by it towards Family meet, LPG Day, Emergency work expenses during Diwali period etc. are in the interest of the business and therefore, allowable u/s.37(1) of the Act. It is further submitted that when the entire expenditure of Rs.6,79,214/- is incurred for business purposes, there is no justification in categorising an amount of Rs.2,30,218/- as not expended for business purposes and disallowing it. Your appellant submits that in the facts and circumstances, the Commissioner of Income-tax (Appeals) is not justified in confirming the disallowance made by the Assessing officer. It is submitted that it be so held now.
8. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of expenditure incurred towards replacement of defective meters of Rs.23,46,862/- considering the same as capital in nature. Your appellant submits that replacement of the defective meters by new ones is nothing but repairs to the plant and machinery installed for the purpose of supplying the gas to the users. Your appellant submits that in the facts and circumstances, the expenditure incurred is allowable u/s.31/37 of the Act. Your appellant submits that the claim for deduction of Rs.23,46,862/- be directed to be allowed.
4ITA nos.2211/A/04 & 36-134/A/05
9. The learned Commissioner of Income-tax (Appeals) has erred in retaining the addition of Rs.1,00,000/- out of the addition of Rs.2,00,000/- on account of alleged sale of defective meters. Your appellant submits that neither any sale took place nor there is any sale value of defective meters. Under the facts and circumstances, there is no justification on the part of the learned Assessing Officer in estimating the income from the alleged sale of scrap. Your appellant submits that as the addition is based on presumptions and surmises, the same is ought to be deleted. It is submitted that it be so clone now.
10. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.9,05,000/- being the expenditure incurred for market survey of new area for the sale of products as well as marketing the produce in 5 Kg. Cylinders etc. Your appellant submits that marketing the L.P.G. in a smaller container of 5 Kgs. cannot be considered as launching of a new product so as to treat the expenditure as capital in nature. Similarly, expenditure incurred to explore the market position of other areas of the country can not be considered as capital expenditure. Your appellant submits that the expenditure has been incurred for the purpose of increasing the sales. In the facts and circumstances, it is submitted that the expenditure being in the nature of sales promotion expenses, the same is allowable u/s.37(1) of the Act. Your appellant submits that it be so held now and deduction as claimed be allowed now.
Your appellant prays for leave to add,alter and/or amend all or any of the grounds before the final hearing of appeal. "
ITA No.36/ Ahd/2005-AY:- 2001-02[Assessee]
1. The order passed by the Commissioner of Income-tax (Appeals) is erroneous on law and facts and therefore requires to be modified. It is submitted that it be so done now.
2. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of claim made u/s.80-I/ 80-IA, on the ground that activity of your appellant cannot be held as manufacture or production of article or tiling. Your appellant submits that it is engaged in manufacturing and/or producing articles not specified in Eleventh schedule. Your appellant submits that as it fulfils all the conditions laid down for claim of relief u/s.80-I / 80-IA of the Act, the learned CIT (Appeals) ought to have granted deduction u/s.80-I / 80-IA of the I.T. Act. Your appellant submits that deduction as claimed u/s.80-I/80-IA be allowed now.5
ITA nos.2211/A/04 & 36-134/A/05
3. The learned Commissioner of Income-tax (Appeals) erred in confirming the order of the Assessing Officer as regards non-grant of depreciation on the assets leased to Rajasthan State Electricity Board (RSEB)- (a State Government Undertaking, formed under the State Electricity Supply Act) on the ground that the agreements made with RSEB is nothing, but a device of Tax avoidance and totally incorrect. Your appellant submits that there is no justification in not granting depreciation of Rs.93,33,112/- being the depreciation on the assets leased to Rajasthan State Electricity Board (RSEB). Your appellant submits that it had purchased the various assets from Rajasthan State Electricity Board (a State Government Undertaking, formed under The State Electricity Supply Act) and leased back to the said RSEB. Your appellant has entered into lease agreement and it is regularly receiving the lease rent from Rajasthan State Electricity Board. Your appellant further submits that leasing is a modern mode of financing. Nevertheless, it remains that the ownership of the assets leased has been transferred and does not become the loan repayable. Your appellant entered into the lease agreements - genuine transactions with the independent and unrelated parties - State Government Undertakings. The transaction was entered into between the parties at arm's length and that the lease rent received has been offered to tax. Your appellant further submits that in the hands of the seller, the department accepted the transaction as sale to the appellant company and lease by us to them whereas in the hands of the appellant, the department takes exactly opposite stand. Your appellant further submits that there is no justification in stating that the transaction between the appellant company and the lessee was preordained and pre-planned and only for availing the depreciation. Your appellant submits that in the facts and circumstances, as the assets are owned and used for the purpose of the business, it is entitled to depreciation on the assets leased to Rajasthan State Electricity Board as claimed. It is submitted that it be so allowed now.
4. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.1,65,352/- being interest payable for the year on unpaid purchase price of Plant and Machinery acquired on deferred payment basis. Your appellant submits that it has purchased the Plant & Machinery on deferred payment basis and utilized the same for the purpose of business during the year. Your appellant submits that the learned Assessing Officer failed to consider the Board's Circular letter bearing F.No.10/76/82-IT(A-l) dated 13-09-1965 clarifying the position of allowability of interest payable on unpaid purchase price of Plant & Machinery. Your appellant submits that interest payable on unpaid purchase price of Plant & Machinery after the date of commencement of business is allowable as business revenue expenditure. Your appellant submits that in the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) is not at all justified in confirming the disallowance. Your appellant submits that it be so held now and deduction as claimed be granted now.6
ITA nos.2211/A/04 & 36-134/A/05
5. The learned Commissioner of Income-tax (Appeals) has erred in confirming the part of disallowance made by the Assessing Officer by invoking provisions of section 14A of the I.T. Act. Your appellant submits that the learned Commissioner of Income-tax (Appeals) is not justified in holding that proportionate of the following expenses should be considered for the purpose of earning the exempted dividend income u/s. 10(33) of the Act:
(a) Interest on Deferred Payment Credit Rs.1,65,352/-
(b) Interest on Working Capital Rs.19,130/-
(c) Interest on delayed payment of sales-tax Rs.84,011 /-
(d) Administrative expenses Rs.26,30,14,000/-
Your appellant submits that it has not incurred any expenditure as alleged for earning the exempted dividend income u/s. 10(33) of the Act. Your appellant further submits that the investments in shares have been made from its own fund and no amount has been borrowed for the purpose of investment. Therefore, there is no justification in considering the proportionate interest for the purpose of invoking provisions of section 14A of the I.T. Act. Further, your appellant submits that it had not incurred any extra administrative expenditure for earning the tax-free income. Your appellant submits that in the facts and circumstances, no disallowance should be made u/s. 14A of the Income-tax Act, 1961.
Without prejudice, your appellant submits that disallowance made by invoicing provisions of section 14A is very excessive and the same should be substantially reduced. It is submitted that it be so done now.
6. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of Rs.32,618/- being the amount of debit balances written off. Your appellant submits that the amount has been written off as the same were outstanding since long time from various parties which includes amount receivable for supply of gas, shortages, claims etc. Your appellant submits that as the amount written off and the loss arose during the course of business and incidental to business, the same should be allowed as deduction. It is submitted that in the facts and circumstances, the learned Commissioner of Income-tax (Appeals) ought to have deleted the disallowance for deduction which has been written off by making necessary entries by writing off the parties' accounts. It is submitted that it be so allowed now.
Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal"
7ITA nos.2211/A/04 & 36-134/A/05 ITA No.134/ Ahd/2005- AY:-2001-02[Revenue]
1. The Id. CIT(A) has erred in law and on facts in deleting the disallowance / addition of Rs.28,33,362/- being reimbursement of housing loans to the employees disregarding the fact that such expenditure is not incurred out of any legal or contractual obligation nor such expenditure was incurred wholly and exclusively for the purpose of the business but was paid to the employees ex gratis.
2. The Ld. CIT(A) erred in Saw and on the facts of the case in deleting the disallowance of Rs.4,73,171/- being expenditure on account of Diwali and Festival expenses disregarding the fact that such expenditure has not been wholly and exclusively incurred for the purpose of the business.
3. The Ld. CIT(A) erred in law and on facts of the case in deleting disallowance of Rs.64,077/- being the amount of subsidized gas connection to the employees dis regarding the fact that such expenditure has not been incurred wholly and exclusively for the purpose of the business but was paid ex-gratis.
4. The Ld. CIT(A) erred in law and on facts of the case in deleting the disallowance of claim of bad debts of Rs.3,04,40,547/-, disregarding the fact that the assessee has not established before the AO as to the fulfillment of the conditions laid down u/s 36(2) of the IT Act, 1961 and that the amount in question is not a trade debt, but investment made for new business.
5. The Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs.4,84,823/- being expenditure on spares written off disregarding the fact that spares written off will have scrap value.
6. The Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs.3,05,030/- being expenditure on account of gifts and presentation etc. disregarding the fact that such expenditure has not been incurred wholly and exclusively for the purpose of the business.
7. The Ld. CIT(A) erred in law and on facts of the case in deleting the addition of Rs.7,47,507/- on account of foreign travel expenses di regarding the fact that such expenditure has not been incurred
8. The Ld. CIT(A) erred in law and on facts of the case in deleting the disallowance of Rs.3,07,03,789/- made u/s 14A of the Act, disregarding the fact that the assessee company had no sufficient funds to make investment to earn dividend income but had utilized its borrowed funds for investment.
9. On the facts and in the circumstances of the case the Ld. CIT(A) ought to have upheld the order of the AO.8
ITA nos.2211/A/04 & 36-134/A/05
10. It is, therefore, prayed that the order of the Ld. CIT(A) may be set aside and that of the AO may be restored to the above extent."
2 Adverting first to ground no.1 in the appeal of the assessee for the AY 1998-99 & ground no.2 in their appeal for the AY 2001-02, facts, in brief, as per relevant orders for the AY 1998-99 are that return declaring income of Rs.35,52,11,779/- filed on 30-11-1998 by the assessee company, engaged in the business of processing and distribution of natural gas & liquefied Petroleum Gas, after being processed on 5.2.2001 u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the "Act"] was selected for scrutiny with the issue of a notice u/s 143(2) of the Act. During the course of assessment proceedings, the Assessing officer[AO in short] noticed that the assessee company claimed deduction of Rs.11,43,13,939.38 u/s 80I of the Act @ 30% & 25% of profits in respect of Surat and Ankleshwar Units respectively. Relying upon his own orders for the AYs 1993-94 and 1994-95, the AO disallowed the claim in the year under consideration.
2.1 Likewise the claim for deduction of Rs. 14,03,18,552/-u/s 80IA of the Act was disallowed in the AY 2001-02 .
3. On appeal, the learned CIT(A) upheld the action of the AO in the AY 1998-99 in the following terms:-
"4.[I] Claim u/s.801 & 80IA:- The said claim was made for A.Y. 93-94 to 95-96 and the same was disallowed by the A.O. and the CIT(A) has also confirmed for all the three years. Therefore, the appellant has not offered any further explanation in view of the detailed discussion made in their own case in the appellate order for A.Y. 93-94. To claim deduction u/s.80I/ 80IA, there are conditions to be fulfilled. As per section 801(2) like the assessee should be an industrial undertaking, not formed by splitting or reconstruction of existing business, not formed by transfer of new business of plant and machinery or previously used for the purpose, the industrial undertaking manufacture or produce any article or thing not being an article or thing specified in 11th Schedule and an industrial undertaking who manufacture or produce a thing or an article having 10 or more workers where the manufacturing process is carried on with the help of 9 ITA nos.2211/A/04 & 36-134/A/05 power or with 20 or more workers in case of a manufacturing unit carried on without the aid of power. There is detailed discussion in their own case in the order passed by the CIT(A) for A.Y. 93-94, 94-95 & 95-96. Relying on the same the claim u/s.801 & 801A is hereby rejected."
3.1 Likewise, in the AY 2001-02, the ld. CIT(A) upheld the action of the AO.
4. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in these two assessment years. The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 6- 10-2006 in the assessee's own case for the AY 1993-94 in ITA no.1895/Ahd/2002. Following this decision, the ITAT vide their order dated 2.1.2007 in ITA nos.2606 to 2608/Ahd./2002 for the AYs 1994- 95 to 1996-97 as also in order dated 30-01-2009 in ITA no.3446/Ahd/2004 for the AY 2000-01,allowed the claim of the assessee. The learned DR, on the other hand, did not dispute these submissions of the ld. AR.
5. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. W e find that the ITAT vide their order dated 6-10-2006 in ITA no.1895/Ahd/2002 for the Assessment Year 1993-94 held as under:
"2.7(vii) After examining the issue from various angles, now keeping in view all that discussion we return back to main issue whether the assessee is engaged in producing any article or thing. The natural gas is a product of oil extraction activity. This occurs in natural form along with other fossil fuel. As such the gas in this natural form is crude and cannot be used by industrial or domestic consumers. The Gas is supplied by Gas Authority of India Ltd. (GAIL) as it is extracted by ONGC from oil wells. At assessee company's stage the process of making gas consumable for industrial or domestic purposes takes place. Such process is a highly technical, controlled and regulated process as the gas is very inflammable and hazardous. For this purpose the plant is 10 ITA nos.2211/A/04 & 36-134/A/05 maintained as per American National Standard Institute and British standard. The crude gas is as much distributable but the same cannot be put to industrial commercial use. This is evident from the fact that GAIL supplies crude gas without making it decontaminated odor/zed suitable for consumption. The assessee company is processing gas for removing chemical and physical impurities such as water, dust particles and oil, odorizing and optimally pressurizing through filtration and depressurizing that makes the raw gas a sale/able commodity which has distinct functional attributes. Thus the assessee company is engaged in producing the decontaminated, odor/zed and optimally pressurized gas with the help of high precision instruments, in rigid atmospheric and pressure conditions which are of great importance in ensuring the final quality of the gas which has to confirm the quality standards. At every stage of the process, there have to be rigid quality standards and even a very minute variations or defect could render the gas totally worthless. It, therefore, follows that the assessee company is an industrial undertaking engaged in producing the decontaminated, odorized and optimally pressurized gas satisfied the condition of producing article or thing for being entitled to deduction u/s 80I/80IA."
5.1 Following the aforesaid decision, the ITAT allowed the claim in the AYs. 1994-95 to 1996-97 and in the Ay 2000-01 also .
5.2 Indisputably, since the facts obtaining in the years under consideration are similar to the facts in the aforesaid years, following the view taken by the ITAT in their aforesaid decisions in the assessee's own case for the earlier years, we have no hesitation in allowing the claim for deduction u/s 80I/80IA in the years under consideration. Therefore, ground no.1 in the appeal of the assessee for the AY 1998-99 & ground no.2 in their appeal for the AY 2001-02 are allowed.
6. Ground no.2 in the appeal of the assessee for the AY 1998-99 relates to disallowance of Rs.11,07,179/- while ground no.1 in the appeal of the Revenue for the AY 2001-02 relates to disallowance of Rs.28,33,362/-, being reimbursement of 50% of interest on housing 11 ITA nos.2211/A/04 & 36-134/A/05 loan taken by the employees. The AO noticed in the AY 1998-99 that the assessee reimbursed an amount of Rs.11,07,179/- on account of 50% of the interest on housing loan to its employees. To a query by the AO as to why the said amount should not be disallowed, the assessee while relying on their submissions in the earlier years, contended that the expenditure incurred for the purpose of business was admissible as deduction. However, the AO did not accept the submissions of the assessee and concluded that since the assessee company is also paying the interest on loan to others, the interest reimbursed to the employees cannot be said to be incurred for the purpose of business, resulting in disallowance of Rs.11,07,179/-.
6.1 Likewise in the AY 2001-02 , the AO disallowed an amount of Rs.28,33,362/- on the ground that the assessee was paying interest on loans to others.
7. On appeal, the learned CIT(A) upheld the disallowance in the AY 1998-99 with the following observations:-
"4[III] Reimbursement of 50% interest on housing loan to employees:- It is stated by the AR that the expenditure is incurred for the purpose of business to keep healthy relations with the employees. Therefore, it is in the nature of staff welfare expenses and it is also claimed that the reimbursement of the interest is treated as part of salary and perks. Therefore, it should be allowed as business expenditure. It is submitted by the assessee that in A.Y. 96-97 in their own case the CIT(A) has confirmed the disallowance made by the A.O. on the ground that the expenditure is incurred for the purpose of business arid not in the nature of staff welfare because it is book adjustment entry. Since the appellant company is sanctioned housing loan to the employees, 50% of the interest thereon is being reimbursed by the book adjustment and not by actual payment. The company is already providing loan facility at the lower rate of interest to their employees which at the best can be treated as staff welfare expenses. However, 50% interest reimbursement alone is not directly connected with the business activity' of the company and not falling under staff welfare expenses. Thus, in the reasons mentioned by the learned CIT(A) for A.Y. 96-97 in the same case and in view of the above discussion, the same is not allowed."12
ITA nos.2211/A/04 & 36-134/A/05 7.1 However, in the AY 2001-02, the ld. CIT(A) allowed the claim while referring to decision of his predecessor in the AY 1996-97.
8. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in the AY 1998-99 while the Revenue is in appeal in the AY 2001-02. The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 30-12-2008 in the assessee's own case for the AY 2002-03 in ITA no.1501/Ahd/2006 and the decision 30-01-2009 of the Tribunal for the AY 2000-01 in ITA no.3446/Ahd/2004. The learned DR, on the other hand, did not dispute these submissions of the ld. AR
9. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. W e find that the issue is squarely covered in favour of the assessee by the decision dated 2.1.2007 of the ITAT in the assessee's own case for the AY 1995-96 & 1996-97 in ITA nos. 2548 & 2549/Ahd./2002, wherein it was held
17. We have heard rival submissions and perused material on record. It has not been disputed that reimbursement of portion of interest incurred for availing housing loan and providing gas connection subsidy was as per the general HRD policies of the gas Company. As far as assessee is concerned, expenditure represents character of business expenditure as that was incurred on employees as per agreed HRD policies, indirectly, assessee could have given higher salaries. These reimbursements are to be taken akin to allowance/perquisites of the salaries which are to be allowed as business expenditure in the hands of the assessee. In view thereof, we find no infirmity in the order of CIT(A) allowing these expenses. These grounds are of revenue's appeals are dismissed."
9.1. Following the aforesaid decision, the ITAT allowed a similar claim in the AY 2000-01 in their order dated 30.1.2009 in ITA no. 3464/Ahd./2004 as also in the AY 2002-03 in their order dated 31.12.2008 in ITA no. 1501/Ahd./2006.
13ITA nos.2211/A/04 & 36-134/A/05 9.2. Indisputably, since the facts obtaining in the years under consideration are similar to the facts in the assessment years 1995- 96 ,1996-97,2000-01 & 2002-03, following the view taken by the ITAT in their aforesaid decisions in the assessee's own case , we have no hesitation in allowing the claim of the assessee in the years under consideration. Therefore, ground no.2 in the appeal of the assessee for the AY 1998-99 is allowed while ground no.1 in the appeal of the Revenue for the AY 2001-02 is dismissed.
10. Ground no.3 in the appeal of the assessee for the AY 1998- 99 relates to disallowance of expenses of Rs.1,69,782/-. on sweets distribution on Diwali & Gas Day Expenses while ground no.2 in the appeal of the Revenue for the AY 2001-02 relates to a similar disallowance of Rs.4,73,171/-. The AO noticed in the AY 1998-99 that the assessee company incurred a sum of Rs.27,570/- towards Diwali Expenses and a sum of Rs.1,42,212/- towards expenses under the head "Gas Day Expenses". Since these expenses were in no way incurred for the purpose of business of the assessee company, the AO disallowed the sum of Rs.1,69,782/-.
10.1 Following his findings in the earlier years, the AO disallowed an amount of Rs.4,73,171/- on account of diwali and festival expenses in the AY 2001-02 also.
11. On appeal, the learned CIT(A) following his decision for the AY 1997-98 upheld the disallowance in the AY 1998-99 while in the AY 2001-02,claim was allowed ,following his decision for the AY 1992-
93.
12. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in the AY 1998-99 while the Revenue is in appeal in the AY 2001-02. The learned AR on behalf of the 14 ITA nos.2211/A/04 & 36-134/A/05 assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 30-01-2009 in ITA no.3446/Ahd/2004 for the AY 2000-01 in the assessee's own case. The learned DR, on the other hand, did not dispute these submissions of the ld. AR.
13. W e have heard both the parties and gone through the facts of the case as also the aforesaid decision of the ITAT. W e find that the ITAT vide their order dated 30-01-2009 in the assessee's own case for AY 2000-01 in ITA no.3446/Ahd/2004 held as under:-
"9. Ground no. ii) relates to deletion of disallowance of an amount of Rs.1,69,628 (not Rs.1,63,691) on account of diwali / family meeting and gas day celebrations. The AO disallowed the claim since these expenses were not related to the business of the assessee, following his own orders for the preceding years. On appeal, the Id. CIT(A), following his own decision dated 21-5-2002 for the AY 96-97, allowed the claim.
9.1 The Revenue is in appeal against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered by the decision dated 2.1.2007 of the ITAT in their own case for the AYs 1994-95 to 1996-97 in ITA nos. 2547 to 2549/Ahd./2002, wherein the ITAT, relying upon their own decision dated 29.7.2005 in the assessee's own case in ITA nos. 1331/Ahd./1999 for the AY 1992-93 allowed their claim in terms of para 11 -12 of their order.
9.2 A similar claim was allowed by the ITAT in their decision dated 6.10:2006 for the AY 1993-94 in ITA no.1928/Ahd./2002 and decision dated 20.2.2008 in ITA no.95&96/ahd./2008 for the AYs. 2003-04 & 2004-
05. 9.3 In the light of aforesaid decisions, following the principles of judicial consistency, we have no hesitation in upholding the findings of the td;. CIT(A). Therefore ground no. ii) of the appeal of the Revenue is dismissed."
14. Indisputably, since the facts obtaining in the year under consideration are similar to the facts obtaining in the assessment years 1992-93 to 1996-97,2003-04 & 2004-05, following the consistent view taken by the ITAT in their aforesaid decisions in the 15 ITA nos.2211/A/04 & 36-134/A/05 assessee's own case , we have no hesitation in allowing the claim of the assessee in the years under consideration. Therefore, ground no.3 in the appeal of the assessee for the AY 1998-99 is allowed while ground no.2 in the appeal of the Revenue for the AY 2001-02 is dismissed.
.
15. Ground no.4 in the appeal of the assessee for the AY 1998-99 relates to disallowance of subsidy given towards supply of gas connection to employees-Rs.33,303/- while ground no.3 in the appeal of the Revenue for the AY 2001-02 relates to similar disallowance of Rs.64,077/-. The AO noticed in the AY 1998-99 that the assessee company reimbursed a sum of Rs.33,303/-in the AY 1998-99 & Rs.64,077/- in the AY 2001-02, being the subsidy towards gas connection charges to the employees. Though the assessee submitted that the said amount was given as per the practice followed by the assessee company, the AO, however, did not accept the submissions and disallowed the expenditure, relying upon his findings in the earlier years.
16. On appeal, the learned CIT(A) confirmed the disallowance in the AY 1998-99 in the following terms:-
"[V] Subsidy for gas connection to staff- Rs.33,303/-:- It is raised by the appellant that to maintain healthy relation with the employees, the company has spent on the subsidy towards the supply of gas connection to the employees. It is argued that the expenditure is for the purpose of business and incidental to the business activity, hence requested to delete the same. In this respect the appellant has relied on one factor that it is incidental to business and expenses are in the nature of staff welfare.
It is seen by me that the A.R. is relying an the CIT(A)'e order in the same case for A.Y. 1996-97 where such amount is allowed. But, in the appellate order except treating the same as incidental to business, the facts of the case are not mentioned. The fact remains that as stated by the A.O. holding that the expenses are not meant for the business activity because the appellant company is already providing housing loan to their 16 ITA nos.2211/A/04 & 36-134/A/05 employees and reimbursed to some an extent in case of interest payment. But, providing the subsidy towards the gas connection charges is not directly related to the business expenses. The said charges are not actually made available to the employees, but adjusted in the company's accounts. Thus, eventually it is a paper entry and not directly connected with the business activity of the company and not actually spent. Therefore, the same is being confirmed."
16.1 However, in the AY 2001-02, the ld. CIT(A) allowed the claim, following his decision in the AY 2000-01.
17 The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in the AY 1998-99 while the Revenue is in appeal in the AY 2001-02. The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 30-12-2008 in the assessee's own case for the AY 2002-03 in ITA no.1501/Ahd/2006 and the decision 30-01-2009 of the Tribunal for the AY 2000-01 in ITA no.3446/Ahd/2004. The learned DR, on the other hand, did not dispute these submissions of the ld. AR
18. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the Tribunal referred to by the learned AR on behalf of the assessee. W e find that while adjudicating a similar issue in the assessee's own case for the AY 2002-03, the Tribunal vide their order dated 30-12-2008 held as under:-
"3 At the outset, the learned AR of the assessee submitted that the issues involved in the above grounds are covered in favour of the assessee by the decision of the ITAT in ITA Nos.2547 to 2549 and 2604 to 2608/Ahd/2002 and 2672/Ahd/2002 in assessee's own case pertaining to the AYs 1992-93 to 1996-97 and ITA No.95 and 96/Ahd/2008 and CO No.48 and 49/Ahd/2008 in assessee's own case pertaining to the AYs 2003-04 and 2004-05. The learned DR, on the other hand, did not dispute the above submissions save and except supporting the impugned orders of the authorities below.17
ITA nos.2211/A/04 & 36-134/A/05
4. Having heard both the parties, we have carefully gone through the impugned orders of the authorities below and also the decisions of the
1.TAT referred to in the foregoing paragraph as relied on by the learned AR of the assessee. We find that in ITA No.2547/Ahd/2002 and others, vide consolidated order dt. 2-1-2007 in assessee's own case, while deciding the issue regarding addition o! reimbursement of interest on housing loan taken by the employees to the employees, the Tribunal vide paragraph 17 has held as under:
"17. We have heard rival submissions and perused material available on record. It has not been disputed that reimbursement of portion of interest incurred for availing of housing loan and providing gas connection subsidy was per the general HRD policies of the Gas company. As far as assessee is concerned, this expenditure represents character of business expenditure as that was incurred on employees as per agreed HRD policies indirectly, assessee could have been given higher salaries. These reimbursements are to be taken akin to allowance/perquisites of the salaries which arc to be allowed as business expenditure in the hands of the assessee. In view thereof, we find no infirmity in' the order of CIT(A) allowing these expenses. These are grounds of Revenue's appeals are dismissed.'' Similar view has also been taken by the Tribunal in assessee's own case in ITA No.95 and 96/Ahd/2008, consolidated order dt.20-2-2008 pertaining to the AYs 2003-04 and 2004-05.
5. Respectfully following the decision of the ITAT as discussed in the foregoing paragraph, we dismiss the ground No. 1 and 3 raised by the Revenue and upheld the impugned order of the learned CIT(A) in this regard. Ground No. 1 and 3 are, therefore, dismissed."
18.1 Similarly claim was allowed by the ITAT in their order dated 30-01-2009 for the AY 2000-01
19. Indisputably, since the facts obtaining in the years under consideration are similar to the facts in the assessment years 1992- 93 to 1996-97,2000-01,2002-03 to 2004-05, following the view taken by the ITAT in their aforesaid decisions in the assessee's own case, we have no hesitation in allowing the claim of the assessee in the years under consideration. Therefore, ground no.4 in the appeal of the assessee for the AY 1998-99 is allowed while ground no.3 in the appeal of the Revenue is dismissed.
18ITA nos.2211/A/04 & 36-134/A/05
20. Ground no.5 in the appeal of the assessee for the AY 1998-99 relates to disallowance of interest on borrowings for Hazira Ankleshwar Pipe Line Project- Rs.1,98,01,130/-. In the statement of total income accompanying the return, the assessee claimed that the company capitalized the interest paid / provided for in the books of accounts in respect of borrowings from various financial institutions, banks etc. by way of NCD's for the Hazira Ankleshwar Pipe Lines Project. The project was under execution as on 31-3- 1998.However,it was claimed that the interest paid during the relevant year upto date of commissioning of plant, was admissible as deduction u/s 36(1)(iii) of the Act while computing the income for the assessment year under consideration, as the expenditure had been incurred in respect of capital borrowed for the purpose of same business. Accordingly, a sum of Rs.38,80,278/- after setting off the interest earned of Rs.1,59,20,852/- on deployment of temporary / short term surplus funds out of NCD moneys was claimed as deduction in computation of total income. Inter alia, the assessee relied on decisions of various High Courts. However, the AO did not accept the submissions of the assessee on the ground the expenditure was incurred for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business and is, thus, capital in nature. The AO ,inter alia, relied upon decisions in the case of Assam Bengal Cement Co. Ltd. vs. CIT (1955) 27 ITR 34(SC) and Dalmia Jain & Co. Ltd. vs. CIT (1971) 81 ITR 754 (SC). As a result, the claim of the assessee of Rs.1,98,01,130/- in the statement of income as revenue expenditure was, rejected, resulting in disallowance of Rs.38,80,278/-.
21. On appeal, the learned CIT(A) upheld the findings of the AO in the following terms:-
"[VI](i.) Interest on borrowed capital of Rs.1,98,01,130:- It is submitted by the A.R. that since the appellant is engaged in the business of supply of 19 ITA nos.2211/A/04 & 36-134/A/05 gas through pipe line at Bharuch, Ankleshwar and Surat and for the purpose of expansion the appellant has borrowed loan for laying down the pipe line between Hazira & Ankleshwar. Therefore, the interest on borrowed capital is for the purpose of expansion of the existing business. Therefore, allowable u/s. 36(1)(iii) of the Income-tax Act. The appellant has relied on the following decisions.
- Calico Dyeing & Printing Works v/s. CIT, 34 ITR 265 (Bom.)
- CIT v/s. Alembic Glass Inds. Ltd., 103 ITR 716 (Guj.)
- ITO v/s. Jyoti Switch Gears Ltd., 42 TTJ 579 (ITAT, A'bad)
- CIT v/s. National paroxide Ltd., 182 ITR 411 (ST)(SC) - In this case the Supreme Court has rejected the special leave petition filed by the department against the judgement dated 21/10/82 of Gujarat High Court and Gujarat High Court has also dismissed the reference application on this question.
- Tata Chemicals Ltd. V/s. DCIT, 72 ITD 1 (ITAT, Mumbai)
- The order of the ICT(A) in case of Gujarat State Fertilizers & Chemicals Ltd. for A.Y. 90-91& 91-92.
(ii) It is stated by the A.O. 'that the project is under extension on 31-3-
98. It means that the assessee company hass borrowed the funds before starting of the project and claimed the interest of Rs.38,80,278/- after setting off the interest earned of Rs.1,59,20,852/- for deploying the surplus funds out of NCD money which is claimed for deduction in the computation, but not debited in the accounts. Therefore, the AO has treated that the expenses of laying of the pipe line for a long distance is of capital nature because the same gives an enduring benefit to the assessee. Since the project has not started, the same cannot be claimed as revenue expenses. Therefore, relying on the Supreme Court decision in the case of Assam Bengal Cement co. v/s. CIT 27 ITR 34 and Dalmia Jain & co. 81 ITR 754, the A.O. has decided that the expenditure is capital in nature and not a revenue expenditure. Therefore, the A.O. has also appreciated that the appellant has not debited the same in the Profit & Loss account, the claim of interest of Rs.38,80,278/-, but the same is claimed in the form of the notes. Therefore, the A.O. has disallowed the same as a revenue expenditure and has also taxed the interest earned out of idle funds deployed till the time they are utilized for the business purpose and interest thereon as income from other sources of Rs.1,59,20,852/- u/s.56 of the Income-tax Act. In doing so he has relied upon the Supreme Court j decision in the case of Tuticorin Alkali Chemicals &, Fertilizers Ltd. v/s. CIT, 227 ITR 172 that the interest on the borrowed fund prior to the commencement of the business is assessable as income u/s.56 of the Income-tax Act.
(iii) I have gone through the arguments made by the ARs and the order- passed by the A.O. and it is seen that the utilization of the funds borrowed 20 ITA nos.2211/A/04 & 36-134/A/05 before the commencement of the project is to be capitalized along with the cost of the project since the same is investment in the nature of capital expenditure. The Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v/s. CIT, referred above has held that prior to the commencement of the business any interest income earned out of borrowed fund is to be treated as income from other sources. Thus, the A.O. has rightly disallowed the claim of interest on borrowed capital not debited to Profit & Loss Account, but claimed in the foot notes of Rs.38,80,278/- is hereby confirmed and also considering the total interest income so earned from the borrowed fond before the commencement of the business of Rs.1,59,20,852/- is rightly added back to the total income under the head income from other sources. Thus, both the actions of the A.O. are hereby confirmed in view of detailed discussion held for A.Y. 97- 98 in the order dated 25/3/2004."
22. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee while reiterating their submissions before the learned CIT(A) contended that the HAPi project was not a new line of business of the assessee company, but simply an extension of the same business undertaken with a view to increase the Gas distribution network. As the interest has been paid in connection with borrowings for laying the new pipe lines of HAPi Project - expansion of its existing business, the same is admissible as deduction u/s.36(l)(iii) of the I.T. Act. Alternatively, the assessee claimed depreciation on the capitalized amount. The ld. AR added that the issue is squarely covered in favour of the assessee by the decision dated 30.1.2009 of the ITAT in the assessee's own case in ITA no.3464/Ahd/2004for the AY 2000-01.On the other hand, the ld. DR did not oppose these submissions on behalf of the assessee.
23. We have heard both the parties and gone through the facts of the case as also the decision of the ITAT. While adjudicating a similar issue, the ITAT concluded in their aforesaid decision dated 30.1.2009 in the AY 2000-01 as under:
"11. We have heard both the parties and gone through the facts of the case. The issue regarding claim for deduction of interest on borrowed funds has now 21 ITA nos.2211/A/04 & 36-134/A/05 been settled by the decision of the Hon'ble Supreme Court in the aforesaid case of Core Health Care Ltd. (supra), wherein it was held:
"In the case of Challapalli Sugars Ltd. [1975] 98 ITR 167 this court observed that interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not "for the purpose of business" inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired.
In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC). It was a case where the company had not yet started production when it borrowed the amount in question. The more appropriate decision applicable to the present case would be the judgment. of this court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. In our view, section 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a code by itself. Section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing and Printing Works [1958] 34 ITR 265 and the judgment of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52 have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. [1975] 98 ITR 167 was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions.
Conclusions 22 ITA nos.2211/A/04 & 36-134/A/05 For the above reasons, we hold that the Assessing Officer was not justified in making disallowance of Rs. 1,56,76,000 in respect of borrowings utilised for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department."
11.1. The aforesaid decision has subsequently been followed in JCIT Vs. United Phosphorous Ltd.,299 ITR 9(SC),ACIT Vs. Arvind Polycot Ltd.,299 ITR 12(SC) and CIT Vs. Ishwar Buvan Hotels Ltd.,215CTR 14(SC) .
11.2. In the light of these decisions of the Apex Court, we hold that the Assessing Officer was not justified in making disallowance of interest of Rs.1,23,03,371/- .There being no infirmity in the findings of ld. CIT(A), we uphold his order. Thus, ground no. iv) in the appeal of the Revenue is dismissed while ground no. 1 in the cross objection by the assessee is allowed. Therefore, The alternative ground no. 2 raised in the cross-objection by the assessee, does not survive for adjudication and is, accordingly dismissed..
24. Indisputably, since the facts obtaining in the year under consideration are similar to the facts & circumstances in the assessment year 2000-01, following the view taken by the ITAT in their aforesaid decision in the assessee's own case, we have no hesitation in allowing the claim of the assessee in the year under consideration. Therefore, ground no.5 in the appeal of the assessee for the AY 1998-99 is allowed while the alternative claim raised by the assessee does not survive for our adjudication.
25. Ground no.6 in the appeal of the assessee for the AY 1998- 99 relating to disallowance of Rs.45,16,000/- on account of provision for doubtful debts of Rs.45,16,000/-, was not pressed before us by the ld. AR on behalf of the assessee, the amount having been not written off in the year under consideration. Therefore, this ground is dismissed as such.
26. Ground no.7 in the appeal of the assessee for the AY 1998-99 relates to disallowance of miscellaneous expenses of Rs.6,79,214/- on account of LPG Day expenses, emergency work expenses and 23 ITA nos.2211/A/04 & 36-134/A/05 diwali etc.. The AO observed that the assessee did not offer any specific explanation in respect of nature of these expenses. Since the family meet expenses and gas day expenses etc. were not in the nature of business expenditure, having not been incurred for earning any business profit nor the assessee offered any explanation regarding purpose of expenses incurred under the head "Emergency W ork Expenses for Diwali", the AO disallowed a lumpsum amount of Rs.4,00,000/- out of total amount of Rs.6,70,944/-.
27. On appeal, the learned CIT(A) restricted the disallowance to Rs.2,30,218/- in the following terms:-
"[X] Disallowance of Rs.4,00,000/- out of Misc. expenses:- It is claimed by the ARs. that out of the total misc. expenses of Rs.6,79,214/-, a lump- sum addition of Rs.4,00,000/- has been made by the A.O. The entire misc. expenses includes expenses for family meet and LPG day expenses of Rs.3,45,942/--, Gas day expenses of Rs.1,42,212/- and distribution of sweets during Diwali and shut down expenses wrongly stated as emergency expenses of Rs.1,82,800/-. It is stated by the A.Rs. that CIT(A) for A.Y. 96-97 has allowed the LPG day expenses and Gas day expenses and it was pointed out that the A.O. has disallowed Gas day expenses twice, once in para 4 of the assessment and secondly vide para-11 of the assessment order which will amount to double addition. Further, it is argued that the distribution of sweets is nothing, but a staff welfare expenses, it also includes Boni and Presents to outsiders and expenses incurred on account of closure of machinery during Diwali festival Thus, it is in the nature of staff welfare expenses.
I have gone through the submissions made by the ARs. and seen that as claimed by them the Gas day expenses are disallowed twice, once in para- 4 of the assessment order along with the Diwali expenses of Rs.27,570/- (total Rs.1,69,789/-) and again as per para-11 of the assessment order, equal amount of Rs.1,42,212/- for Gas day expenses has been disallowed while disallowing miscellaneous expenses of Rs.4,00,000/- out of total miscellaneous expenses of Rs.6,70,944/-. The A.O. in para-4 of the assessment order has held that Gas day expenses and Diwali expenses are not connected with the business activity of the company. Similarly, while disallowing lump-sum amount of Rs.4,00,000/- out of misc. expenses of Rs.6,70,944/-, it is stated by the A.O. that no specific explanation was offered in respect of such expenses and he has 24 ITA nos.2211/A/04 & 36-134/A/05 treated the family meet expenses and Gas day expenses as non- business expenditure. However, he has disallowed lump-sum amount of Rs.4,00,000/- out of Rs.6,70,944/-. It is also seen that no detailed break-up of the expenses have been filed either before the A.O. or before me which can be seen from the body of the order, in para-11 of the assessment order. It is very difficult to arrive at a conclusion that whether such expenses are meant for business purpose or not unless a detailed verification is made in respect of each expenditure, for which no details have been filed by the appellant. However, accepting the doubtful addition of Rs.1,42,212/- in respect of Gas day expenses, one addition is directed to be deleted of Rs.1.42.212/-. Coming to the family meet expenses, LPG day expenses, Gas day expenses, distribution of sweets during Diwali and the expenses incurred during the shut down of the machinery, there is no detailed break-up and the assessee has not proved as to how these expenses are directly-indirectly connected to the business activity of the company. At the same time the assessee cannot claim the same as staff welfare expenses unless he proves that by spending such amounts staff welfare measures have been taken-up and profit of the company has increased. Thus, there are no details available on the records. However, the expenses incurred during the shut down of the machinery can be allowed. Thus, in view of the same the A.O. has allowed Rs.2,70,944/- for this purpose and other purpose of staff welfare, if any. Therefore, the addition of Rs.4,00,000/- is hereby confirmed. But, the addition of Rs.1,69,782/-[1,42,212/- Gas day expenses + 27,570/- Diwali expenses] are already confirmed in para 4(iv) above, so no further addition is confirmed. Thus, the net addition confirmed is Rs.2,30,218/-(4,00,000 - 1,69,782)."
28. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 6-1-2006 in the assessee's own case for the AY 1993-94 in ITA no.1895/Ahd/2002 and the decision dated 30-01-2009 for the AY 2000-01 in ITA no.3464/Ahd/2004. On the other hand, the ld. DR did not oppose these submissions on behalf of the assessee
29. W e have heard both the parties and gone through the facts of the case as also the aforecited decisions of the ITAT. W e find that while adjudicating a similar issue in the assessee's own case, the 25 ITA nos.2211/A/04 & 36-134/A/05 ITAT vide their dated 30-01-2009 for the AY 2000-01 in ITA no.3464/Ahd/2004,concluded as under:
"9. Ground no. ii) relates to deletion of disallowance of an amount of Rs.1,69,628 (not Rs.1,63,691) on account of diwali/family meeting and gas day celebrations. The AO disallowed the claim since these expenses were not related to the business of the assessee, following his own orders for the preceding years. On appeal, the Id. CIT(A), following his own decision dated 21-5-2002 for the AY 96-97, allowed the claim.
9.1 The Revenue is in appeal against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered by the decision dated 2.1.2007 of the ITAT in their own case for the AYs 1994-95 to 1996-97 in ITA nos. 2547 to 2549/Ahd./2002, wherein the ITAT, relying upon their own decision dated 29.7.2005 in the assessee's own case in ITA nos. 1331/Ahd./1999 for the AY 1992-93 allowed their claim in terms of para 11 -12 of their order.
9.2 A similar claim was allowed by the ITAT in their decision dated 6.10:2006 for the AY 1993-94 in ITA no.1928/Ahd./2002 and decision dated 20.2.2008 in ITA no.95&96/ahd./2008 for the AYs. 2003-04 & 2004-
05. 9.3 In the light of aforesaid decisions, following the principles of judicial consistency, we have no hesitation in upholding the findings of the td;. CIT(A). Therefore ground no. ii) of the appeal of the Revenue is dismissed."
30. Indisputably, since the facts obtaining in the year under consideration are similar to the facts in the assessment years 1992- 93 to 1996-97, 2000-01 &2003-04 to 2004-05, following the view taken by the ITAT in their aforesaid decisions in the assessee's own case, we have no hesitation in allowing the claim of the assessee in the year under consideration. Therefore, ground no.7 in the appeal of the assessee for the AY 1998-99 is allowed.
31. Ground no.8 in the appeal of the assessee for the AY 1998-99 relates to disallowance of expenses on replacement of defective meters Rs.23,46,862/- while ground no. 9 relates to addition of Rs.1 lac on sale of defective meters. The AO noticed that the assessee claimed an amount of Rs.23,46,862/- towards replacement of 26 ITA nos.2211/A/04 & 36-134/A/05 defective old meters . To a query by the Bench, the assessee stated that they suo motu replaced defective meters and as a result revenue of the company enhanced. Since the expenditure was in the nature of repairs, the assessee argued that the same may be allowed as revenue expenditure. However, the AO rejected the submissions of the assessee on the ground that the assessee did not furnish the details of consumption of meters, its closing stock and any correspondence or receipt of replacement of meters from the users. Since meters were part and parcel of gas line while the assessee claimed depreciation on gas line, the AO concluded that the cost of meter will be capital expenditure and not revenue expenditure, resulting in. disallowance of Rs.23,46,862/-. The AO simultaneously allowed depreciation @ 25% on Rs.23,46,862/- i.e. Rs.5,86,716/-.Moreover, since the assessee did not account for stock of old meters, the AO also added an amount of Rs. 2 lacs on account of sale of scrapped meters.
32. On appeal, the learned CIT(A) adjudicated the issue in the following terms:-
"[XI](i) Disallowance of Rs.23,46,862/- - replacement of defective meters:-
The ARs have relied on the following cases to consider the replacement of old meter with current meters.
- Addl.CIT v/s. Desai brothers, 108 ITR 14 z(Guj.j
- Nathumal bankatlal parikh v/s.CTI, 122 ITR 168 (A.P.)
- K.C.P. Ltd. v/s. ITO,38ITR15(Hyd.)
- I.A.C. v/s. Nuchem Plastics Ltd., 35 TTJ 559 (Delhi)
- Oswal Woolen Ltd. v/s. ITO, 27 TTJ 535
And an alternative argument has been taken up that the value of each meter is hardly Rs.1000/-, therefore, it is less than Rs.5000/- for claiming depreciation at the rate of 100%.
(ii) The A.O. in his order in Para No. 12 has stated that these meters were used to read the consumption of the gas by the customers and replacement of the old meters will not improve the revenue because this is not a part of machinery by fitting the same the efficiency of the machinery improves. However, the A.O. has disallowed the same for not filing the 27 ITA nos.2211/A/04 & 36-134/A/05 details of consumption of meters, its closing stock and corresponding receipts for the replacement from the users. It is further stated by the A.O. that without meter gas pipe line has no value. In fact such meters will increase the value of the gas pipe line. Therefore, any expenditure in the form of addition to gas pipe line by fixing the meters cannot be said as revenue expenditure. However, without accepting the statement by the appellant, the A.O. has made the addition of Rs.23,46,862/- and further allowed depreciation at the rate of 25% on the same which comes to Rs.5,86,716/-.
(iii) I have gone through the arguments made by the A.R. and seen that no detailed documentary evidences are filed before me as to how the company has purchased meters worth Rs.23,46,862/-, how the same are utilized by the company like the assessee has not filed any proof of replacement and fitting up of the new meters along with its expenses. The decision he has relied upon are in respect of revenue expenditure.
However, the appellant has not filed the basic facts like removal of old meters, purchase of new meters, fitting of new meters and sale of scrap in the form of old meters. Therefore, in the absence of any factual evidence for he entire transaction, it is very difficult to consider the same for 100% depreciation for assets below Rs.5000/-. Thus, the AR has not proved before the AO and before me the actual purchase and fitting of the meters. Therefore, the addition made by the AO is hereby confirmed."
32.1 As regards addition on account of scrap, the ld. CIT(A) reduced the amount to Rs.1 lac as under:
"It is argued by the AR that replaced old meters have no scrap value. Therefore, requested to delete the same. Whereas, it is stated by the AO in the order that the assessee has not accounted for any scrap / replaced meters and he has estimated such scrap value at Rs.2,00,000/- and added back to the income.
(ii) I have gone through the arguments made by the AR and seen that out of the replacement of the old meters, the assessee has spent Rs.23,46,862/- as claimed by him. However, if it is considered that old meters were purchased at half of the value which comes to Rs.11,73,431/-
and the AO has considered the scrap value at Rs.2,00,000/- which appears to be on the higher side. Therefore, the same is considered at Rs.1,00,000/- on estimation basis since no details are available. Thus, the assessee gets the relief of Rs.1,00,000/- on account of this addition."
33. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee while referring to their letter dated 23.2.2001 addressed to 28 ITA nos.2211/A/04 & 36-134/A/05 JCIT, Spl Range [page 131 to 138 of the PB] contended that 6000 second hand meters were imported vide bill dated 10.1.1996 @ Rs. 400 per meter and old defective meters were replaced. Therefore, the expenditure on replacement of defective meters was allowable. On the other hand , the ld. DR pointed out that since relevant details of removal of old meters, purchase of new meters, fitting of new meters and sale of scrap in the form of old meters or any evidence of replacement were not submitted before the AO or the ld. CIT(A) , the claim could not be allowed. To a query by the Bench, the ld. AR agreed to submit the relevant details and submitted that matter may be restored to the file of the AO for that purpose. The ld. DR did not oppose these submissions on behalf of the assessee .
34. W e have heard both the parties and gone through the facts of the case. W e find that the ld. CIT(A) upheld the disallowance of Rs.23,46,862/- mainly on the ground that the assessee did not furnish the relevant details of removal of old meters, purchase of new meters, fitting of new meters and sale of scrap in the form of old meters or any evidence of replacement of old meters before him or the AO . Now when the ld. AR has agreed to furnish the relevant details and evidence, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issues raised in the aforesaid ground nos. 8 &9 of the appeal relating to replacement of old meters and sale thereof as scrap, afresh in accordance with law, after allowing sufficient opportunity to the assessee. Needless to say that while redeciding the appeal, the AO shall bring out clearly as to whether or not the old meters were actually replaced and had been sold as a scrap. With these observations, ground nos. 8 & 9 in the appeal are disposed of.
35. Ground no.10 in the appeal of the assessee for the AY 1998- 99 relates to disallowance of expenditure incurred on market survey. The AO noticed that the assessee claimed an amount of Rs.9,05,000/- towards market survey for expanding market in Gujarat and Madhya Pradesh with the launch of new products i.e. 29 ITA nos.2211/A/04 & 36-134/A/05 small 5 kg. LPG Cylinders. The market survey work was handed over to M/S Span Asso. Pvt. Ltd. and Galllup MBA India Pvt. Ltd. However, the AO was of the opinion that the market survey was conducted to start a new business in new areas with the launch of new 5 kg. LPG Cylinders and therefore, it was in the nature of project expenses/capital expenses and qualified for deduction u/s 35D of the Act. The AO, accordingly, disallowed an amount of Rs.9,05,000/- and allowed deduction u/s 35D at 1/10 t h of Rs.9,05,000/- i.e. Rs.90,500/-.
36. On appeal, the learned CIT(A) upheld the findings of the AO in the following terms:-
"[XII] Disallowance of Rs.9,05,000/- market survey expenses:- It is argued by the AR that the company is engaged in bottling and marketing of LPG which has started business during the FY 95-96 with its own outlets. During the year, 5 kgs. Cylinder is launched in the market to assess the viability of new cylinder, expenses are incurred to see the effectiveness of the market. A periodic research was conducted and work was assigned to Gallup MBA India & Co. and Span Associates Pvt. Ltd. Further, it is claimed that the expenses are for the sales promotion which are to be allowed u/s 37(1) of the Act relying on the case laws like CIT vs. Aluminium Inds. Ltd., 80 Taxman 243 (Ker), Associated Marketing Agency vs. ITO 43 ITD 543 (Mad) and CIT vs. Kirloskar Engineering Ltd. 157 ITR 762 (Bom).
It is held by the AO in the order in para-13 that such expenses are in the nature of capital expenses coming u/s 35D of the IT Act. It is also stated that the details of such expenses were not available before the AO and also before me. In the absence of the details of expenditure, the same is not allowed. The appellant has not established the nexus between such expenses and the business activity of the appellant company. Therefore, the same is confirmed."
37. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee submitted that expenditure incurred in respect of addition of same product in different packing (quantity) did not mean that new product had been launched by the company. Inter alia, the learned AR relied upon decisions in CIT vs. Aluminium Industries 30 ITA nos.2211/A/04 & 36-134/A/05 Ltd. 214 ITR 541( Kerala) and Associated Marketing Agencies vs. ITO 43 ITD 543(ITAT).To a query by the Bench as to whether details of such expenses were available before the AO and the ld. CIT(A), the ld. AR submitted that matter may be restored to the file of the AO . The learned DR, on the other hand, supported the findings of the learned CIT(A).
38. W e have heard both the parties and gone through the facts of the case. W e find that the ld. CIT(A) upheld the disallowance mainly on the ground that the assessee did not furnish the relevant details of market survey or any evidence thereof before him or the AO . Now when the ld. AR has agreed to furnish the relevant details and evidence, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issues raised in ground no.10 of the appeal relating to market survey, afresh in accordance with law, after allowing sufficient opportunity to the assessee, bringing out clearly as to whether or not the claim falls within the provisions of sec. 35 D of the Act. With these observations, ground no. 10 in the appeal is disposed of.
39. Ground no.3 in the appeal of the assessee for the AY 2001-02 relates to disallowance of depreciation of Rs.93,33,112/- on plant and machinery given on lease to Rajasthan State Electricity Board [RSEB]. Relying upon his own order for the AY 1999-2000 and decision of the ITAT Special Bench ,Mumbai in the case of ICICI Ltd. vs. DCIT in ITA no. 3300/Mum/1997 as also the decision of the Hon'ble Supreme Court in McDowell & Co. vs. CTO,154 ITR 148 (SC), the AO disallowed the claim of depreciation on assets of sale and lease back transactions.
40. On appeal, the learned CIT(A) while referring to his findings in the AY 2000-01 directed in the following terms:-
"7.1 Before me, the appellant's representative Shri D J Shah and Shri Anuj Mehta have submitted that in case the transaction is not held as 31 ITA nos.2211/A/04 & 36-134/A/05 genuine lease transaction then only the interest element in the lease rentals should be added to the income and the principal amount recovered should be excluded from the total income, 7.2 During the course of hearing, the appellant's representative has also taken up additional ground of appeal in this respect stating that deemed recovery of principal amount of Rs.2,46,90,915/- should be ignored from the total income and only the interest portion should be brought to tax and not the entire lease rental received Rs.2,75,37,050/-. The additional ground raised was forwarded to the A.O. i.e. DCIT Circle-4, Ahmedabad for his comments which have been received as per teller dated 7.10.2004. The same were also forwarded to the appellant for counter comments which have been given on 2.11.2004. It has been submitted by the appellant's representative that the said ground is linked with the original ground of claim of depreciation and is not independent ground as such. Reliance is also placed on the decision of Supreme Court in the case of NTPC Ltd. vs. CIT 229 ITR 383, that taxing authorities are required to assess the correct tax liability. Reliance is also placed on the decision of Gujarat High Court in the case of New India Industries Ltd. Vs. CIT 207 ITR 1010.
7.3 After considering the submissions made before me and also the points raised by the AO, it is held that the ground raised is linked with the claim of the appellant for depreciation and in case the same is not to be allowed as such the income which is wrongly treated as income is required to be rectified. Similar directions had been given by the undersigned in earlier assessment year also including the order dated 30.9.2004 in the appellant's own case for A.Y. 2000-01 referred above. Following the said observations, the AO is directed to recompute the allowable depreciation/interest, income after excluding principal amount after verification and after giving opportunity to the appellant in this respect."
41. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee submitted that the issue squarely is covered in favour of the assessee by the order of ITAT in the assessee's own case in ITA no.2026/Ahd/2004 for the AY 1995-96 and order dated 30-01-2009 in ITA No.3446/Ahd/2004 for AY 2000-01,. The learned AR further pointed out that the Hon'ble Gujarat High Court dismissed the Tax Appeal filed by Department in assessee's own case vide order dated 10-09-2008 in Tax Appeal no.444 of 2008for the AY 1995-96. The learned DR, on the other hand, supported the findings of the ld. CIT(A).
32ITA nos.2211/A/04 & 36-134/A/05
42. W e have heard both the parties and gone through the facts of the case. W e find that while adjudicating a similar issue, the Tribunal vide order dated 30-01-2009 in the assessee's own case in ITA no.3446/Ahd/2004 for the AY 2000-01 concluded as under :-
"4.2. Having heard both the parties and perused the impugned orders of the authorities below and also the decisions of the Tribunal and Hon'ble jurisdictional High Court, relied on by the learned AR on behalf of the assessee, we find that a similar issue in this case has already been decided by the Hon'ble jurisdictional High Court in the assessee's own case for the AY 1995-96 vide order dated 10.9.2008 in tax appeal no. 444 of 2008, wherein Hon'ble jurisdictional High court held as under;
" 5. In relation to the transaction, after referring to an earlier order of the Tribunal, the Tribunal in the present case recorded the following findings:
"10.9 respectfully following the aforesaid case, we find that in the case before us the invoices are in the name of the assessee as is clear(copy of these invoices appearing at page 59 to 63 of the paper book).Similar transaction was held to be genuine transaction by Hon'ble Rajasthan High Court in the case of RSEB(supra),therefore,transaction in question is held to be genuine one and ,therefore, we set aside the order of the CIT(A) and direct the assessing officer to allow depreciation to the assessee."
6. With reference to decision of Rajasthan High Court as appearing in the order of Tribunal, the same relates to the decision reported in (2006) 204 CTR(Raj) 415 in the case of CIT Vs. Rajasthan State Electricity Board. The question before the Rajasthan High Court was in relation to disallowance of payment of lease rentals on the transaction of sale-cum-lease back agreement and Rajasthan High Court has found that the Tribunal has rightly appreciated the facts and correctly found the transaction to be genuine and such a transaction could not be treated to be perverse.
7. Admittedly, the transaction in question which the High Court of Rajasthan was called upon to deal with is the same transaction which has been found to be genuine by the Tribunal in the present case. The lease rental paid by Rajasthan State Electricity Board has been found by Rajasthan High Court to be allowable deduction as the transaction is genuine. Correspondingly, in the hands of the assessee company, the said lease rental has been taxed as business income and the same has not been disturbed by the Assessing officer despite having initiated action u/s 147 of the Act for treating the transaction as a non-genuine transaction.
33ITA nos.2211/A/04 & 36-134/A/05
8. In the aforesaid facts and circumstances of the case whether the transaction of leasing out electrical equipments to Rajasthan Electricity Board is genuine or not is based upon appreciation of evidence on record as found by the Tribunal by referring to the various documents like invoice etc..In the absence of any evidence to show anything to the contrary no legal infirmity exists in the impugned order of the Tribunal so as to give rise to any question of law, much less a substantial question of law, as proposed or otherwise. The appeal is accordingly dismissed."
4.3 Moreover, the ITAT, C Bench, Ahmedabad in assessee's own case in their decision dated.20.2.2008 in ITA Nos.95 and 96/Ahd/2008 for the AYs 2003-04 and 2004-05, following an earlier order of the Tribunal for the Assessment Year 1995-96, have upheld the order of the learned CIT(A) in allowing the claim of the assessee.
4.4 In the light of aforesaid decision of the Hon'ble jurisdictional High Court in the assessee's own case of the AY 1995-96 and decision of Hon'ble Rajasthan High Court in the case of CIT vs. Rajasthan State Electricity Board(supra) as also decision of the Tribunal for the AYs 2003-04 & 2004-05, facts and issue being admittedly similar in the assessment Year under consideration, we set aside the impugned order of the learned CIT(A) and direct the Assessing Officer to allow the depreciation as claimed by the assessee. Therefore, ground no. 3 in the appeal of the assessee is allowed.
43. Indisputably, since the facts obtaining in the year under consideration are similar to the facts in the assessment years 1995- 96,2000-01,2003-04 & 2004-05, following the view taken by the Hon'ble jurisdictional High Court in the assessee's own case in the AY 1995-96 and by the Hon'ble Rajasthan High Court in the case of CIT vs. Rajasthan State Electricity Board(supra) as also by the ITAT in their aforesaid decisions in the assessee's own case, we have no hesitation in allowing the claim of the assessee in the year under consideration. Therefore, ground no.3 in the appeal of the assessee for the AY 2001-02 is allowed.
44. Ground no.4 in the appeal of the assessee for the AY 2001-02 relates to disallowance of Rs.1,65,352/- on account of interest payable on unpaid purchase price of plant and machinery acquired on credit. Relying upon the decision of the Hon'ble Supreme Court 34 ITA nos.2211/A/04 & 36-134/A/05 in the case of Bombay Steam Navigation Co. (1953) (P) Ltd. vs. CIT (1965) 56 ITR 52, the AO observed that an agreement to pay the balance of consideration due by the purchaser does not in truth give rise to loan. Since the assessee Company is in the business of the distribution of the Natural Gas and there was no connection between the leasing resorted to by the assessee and its principal business, the AO concluded that the leasing was only a subterfuge to avoid the incidence of the taxation and the relationship between the assessee and its lessee was contrived one. Since the monies were not for the purpose of the business or profession in respect of the capital borrowed nor expenditure had been laid out or expended wholly and exclusively for the purpose of the business or profession , the AO disallowed the claim for deduction of interest on the deferred payment credit.
45. On appeal, the learned CIT(A) upheld the disallowance following his decision in the AY 2000-01 .
46. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned AR on behalf of the assessee submitted that the issue is covered in favour of the assessee by the decision dated 30-01-2009 of the ITAT in the assessee's own case for AY 2000-01 in ITA no.3446/Ahd/2004.The learned DR did not oppose these submissions on behalf of the assessee.
47. W e have heard both the parties and gone through the facts of the case. W e find that while adjudicating a similar issue in the assessee's own case for the AY 2000-01 in ITA No.3446/Ahd/2004, the Tribunal in their order dated 30-01-2009 allowed the claim of the assessee in para 6.3 of their order. Indisputably, since the facts obtaining in the year under consideration are similar to the facts & circumstances in the AY 2000-01, following the view taken by the ITAT in their aforesaid decision in the assessee's own case, we 35 ITA nos.2211/A/04 & 36-134/A/05 have no hesitation in allowing the claim of the assessee in the year under consideration. Therefore, ground no.4 in the appeal of the assessee for the AY 2001-02 is allowed.
48. Ground no.5 in this appeal of the assessee and ground no. 8 in the appeal of the Revenue for the AY 2001-02 relate to disallowance out of the following expenses:
(a) Interest on Deferred Payment Credit Rs.1,65,352/-
(b) Interest on W orking Capital Rs. 19,130/- (c) Interest on delayed payment of sales-tax Rs. 84,011/- (d) Administrative expenses Rs.26,30,14,000/-
u/s 14A of the Act. Since the assessee claimed exemption of income of Rs.4,31,66,098/- u/s 10(33) of the Act, referring to decision of the Hon'ble Supreme Court in the case of Rajasthan State W arehousing Corporation Ltd. vs. CIT,245 ITR 150, the AO disallowed an amount of Rs.3,45,16,057/- as per the following working:-
A Total Interest payment 108203000
B Total funds available 2804719000
C. Cost of fund (taking both borrowed
fund and own fund together) A/B 0.0385789
D Investment in Shares 802876000
E Cost of fund invested in shares (A/B)*D
Sales and other receipts 3205354000
F Total Receipts 3205354000
G Dividend being exempt 43166098
H Administrative and other expenses 263014000
I Amount of Disallowance (H*G)/F 3,541,976.4
Total disallowance u/s 14A E + I 3,45,16,057
36
ITA nos.2211/A/04 & 36-134/A/05
49. On appeal, the learned CIT(A) decided the issue in the following terms:-
"9.1 Before me, the appellant's representative has submitted that the AO is not justified in the computation adopted since the expenditure which has been apportioned is not co-related with the earning of the exempted income. The details of interest expenditure of Rs.10,82,02,833/- have been given before me at page 25 of the paper book in which the following interest expenditure has been deducted. .
(i) Interest on Debenture Rs.10,68,99,986/-
(ii) Interest on Deferred Payment Credit Rs. 1,65,352/-
(iii) Interest on Working Capital Rs. 19,130/-
(iv) Interest on Delayed payment of Sales Tax Rs. 84,011/-
(v) Interest provision on GIDC lease rent Rs. 6,75,729/-
(vi) Interest on customer deposits Rs. 3,58,626/-
-----------------------
Total Rs.10,82,02,833/-
9.2 The same are briefly discussed as under:
(i) Interest on Debenture: This relates to the interest expenditure on funds borrowed for Hapi Project This issue had come up in A.Y. 2000-01 also and this expenditure was directed to be excluded while working the proportionate disallowance u/s. 14A.
(ii) Interest on GIDC lease rent: Interest of Rs.6,75,729/- has been paid to GIDC and on perusing the appellant's contention that it is not co-related with the dividend earning is justified. This item is therefore not required to be excluded while working proportionate disallowance.
(iii) Interest on customer deposit: This expenses of Rs.3,58,626/- is paid to deposits of the customers and it is pleaded that the same is not linked with the earning of dividend income. The contention of the appellant is valid as held in A.Y. 2000-01 also after going through the supporting evidences available in form of fixed deposit as discussed above, the AO is therefore directed to, exclude the above three items while making disallowance out of interest expenditure of Rs.10,82,02,000/-. In respect of other items worked by the AO, the same is in conformity with the section 37 ITA nos.2211/A/04 & 36-134/A/05 14A and the action of the AO is valid and upheld and the AO is directed to recompute the disallowance as above."
50. Both the assessee as well as Revenue are now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee submitted that a similar issue was restored to the file of the AO for recomputing the disallowance in the light of provisions of sub-section (2) and (3) of section 14A of the Act read with Rule 8D of the IT Rules, 1962 in the assessee's own case for the AY 2000-01 in ITA nos. 3446& 3464/Ahd/2004. W hile explaining the nature of interest and administrative expenses, the ld. AR relied upon the decisions in the case of Godrej and Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom) and Hero Cycles Ltd,178 Taxman 484(P&H).The learned DR, on the other hand, supported the findings of the AO.
51. W e have heard both the parties and gone through the facts of the case as also the aforesaid decisions relied upon by the learned AR. We find that the AO made an estimated proportionate disallowance of aforesaid expenses since the assessee earned exempt income. The ld. CIT(A) following his decision for the AY 2000-01 reduced the disallowance. In that year, a similar issue was restored to the file of the AO by the ITAT for recomputing the disallowance in the light of provisions of sub-section (2) and (3) of section 14A of the Act read with Rule 8D of the IT Rules, 1962 in ITA nos. 3446& 3464/Ahd/2004 following the decision dated 22.10.2008 of the Special Bench of the ITAT in the case of Daga Capital Management (P) Ltd. in ITA no.8057/Mum./2003.
51.1 W e further find that recently ,Hon'ble Bombay High Court in their decision dated 12.8.2010 in case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. in the ITA no. 626/2010 while adjudicating a similar issue in the context of provisions of sec. 14A of the Act and Rule 8D of the IT Rules,1962 concluded 38 ITA nos.2211/A/04 & 36-134/A/05 that Rule 8D, inserted w.e.f 24.3.2008 cannot be regarded as retrospective because it enacts an artificial method of estimating expenditure relatable to tax- free income. It applies only w.e.f AY 2008-09. For the assessment years where Rule 8D does not apply, the AO will have to determine the quantum of disallowable expenditure by a reasonable method having regard to all facts and circumstances, the Hon'ble High Court concluded.
51.2. Hon'ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd.,326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. Hon'ble Apex Court observed in the context of provisions sec.14A of the Act in the following terms:
"17. The insertion of section 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001, dated 22-11-2001). In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in respect of net income. Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is "for the purposes of computing the total income under this Chapter" which makes it clear that various heads of income as prescribed under Chapter IV would fall within section 14A. The next phrase is, "in relation to income which does not form part of total income under the Act". It means that if an income does not form part 39 ITA nos.2211/A/04 & 36-134/A/05 of total income, then the related expenditure is outside the ambit of the applicability of section 14A. Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allowed only with, reference to income which is brought under one of the above heads and is chargeable to tax. If an income like dividend income is not a part of the total income, the expenditure/deduction though of thenature specified in sections 15 to 59 but related to the income not forming part of total income could not be allowed against other income includible in the total income for the purpose of chargeability to tax. The theory of apportionment of expenditures between taxable and non- taxable has, in principle, been now widened under section 14A. Reading section 14 in juxtaposition with sections 15 to 59, it is clear that the words "expenditure incurred" in section 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see sections 30 to
37).................."
51.3. W e also find that Hon'ble Kerala High Court in their decision dated 17.6.2010 in the case of CIT Vs. Smt. Leena Ramachandran in ITA.No. 1784 of 2009, held in the context of provisions of sec.14A of the Act as under:
" 4. On facts we find that the interest paid by the assessee during the previous year for the funds borrowed for acquisition of shares in the company was at the rate of 24% p.a. and the total interest paid in the accounting year alone is as much as Rs.17,44,310/-. It is on record that assessee had received only a dividend income of Rs.3 lakhs and no other benefit is derived from the company for the business carried on by it. The disallowance prohibited under Section 14A is expenditure incurred for earning any income which does not constitute total income of the assessee. In other words, any expenditure incurred for earning any income which is not taxable under the Act, is not an allowable expenditure. Dividend income is exempt under Section 10(33) of the Income Tax Act and so much so, dividend earned by the assessee on the shares acquired by her with borrowed funds does not constitute total income in the hands of the assessee. So much so, in our view, disallowance was rightly made by the Assessing Officer. In fact, the Tribunal itself has estimated disallowance of Rs.2 lakhs by applying Section 14A. We do not know how the Tribunal can restrict the disallowance to Rs.2 lakhs and allow balance above Rs.15 lakhs when the whole borrowed funds were utilised by the assessee for purchase of shares in the company. In our view, the reasoning given by the Tribunal for disallowance of Rs.2 lakhs i.e. by applying Section 14A, squarely applies for the interest paid on borrowed funds because it is on record that the entire funds borrowed were utilised for acquisition of shares by the assessee in the company. In fact, in our view, assessee would be entitled 40 ITA nos.2211/A/04 & 36-134/A/05 to deduction of interest under Section 36(1)(iii) of the Act on borrowed funds utilised for the acquisition of shares only if shares are held as stock in trade which arises only if the assessee is engaged in trading in shares. So far as acquisition of shares is in the form of investment and the only benefit assessee derived is dividend income which is not assessable under the Act, the disallowance under Section 14A is squarely attracted and the Assessing Officer, in our view, rightly disallowed the claim. As already pointed out, the Calcutta High Court decision which pertains to the period prior to introduction of Section 14A, has no application. The decision of the Supreme Court also does not apply because in this case apart from investment in shares of the company, there is nothing to indicate that the assessee's business was fully linked with the business of the leasing company or that assessee's business is solely dependent on the business of the leasing company. In fact, the whole transaction was a total fiasco in as much as, as against Rs.17,44,310/- paid towards interest on borrowed funds serviced at the rate of interest of 24% p.a., the dividend income received by the assessee during the previous year was a meagre sum of Rs.3 lakhs. This only shows that the business carried on by the leasing company was not very substantial to justify the assessee's investment through borrowed funds. Therefore, in our view, the principle of commercial expediency gone into by the Supreme Court does not apply to the facts of this case. Therefore, we hold that the Tribunal in principle rightly held that the utilisation of borrowed funds for acquisition of shares will not entitle the assessee for claiming deduction of interest paid on such borrowed funds. However, we hold that the Tribunal was not justified in allowing the claim in excess of Rs.2 lakhs. For the same reasoning applied by the Tribunal, the assessee is not entitled to deduction of any amount towards interest paid on funds borrowed by way of fixed deposits taken for acquisition of shares in the company, which helped the assessee only to earn some dividend. "
51.4 Hon'ble Punjab & Haryana High Court in their decision in CIT vs. Hero Cycles Ltd.,323 ITR 518 also observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand.
51.5 As is apparent from the impugned order,since the ld. CIT(A) have not passed a speaking order on the issue nor had the benefit of the view taken in the aforesaid decisions, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issues raised in the ground no.5 in the appeal of the assessee as also ground no.8 in the appeal of the Revenue, afresh in 41 ITA nos.2211/A/04 & 36-134/A/05 accordance with law in the light of various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the issue, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. With these observations, ground no.5 in the appeal of the assessee as also ground no.8 in the appeal of the Revenue for the AY 2001-02 are disposed of.
52. Ground no.6 in this appeal by the assessee for the AY 2001-02 relates to disallowance of Rs.32,618/- being the amount of debit balance written off. The AO noticed that the assessee had written off debit balances amounting to Rs.32,618/-,comprising small amounts outstanding since long from various persons. There being no other justification, the AO disallowed the said amount of Rs.32,618/-.
53. On appeal, the learned CIT(A) upheld the disallowance in the following terms:-
"Ground No.15: This relates to disallowance of Rs.32,618/- being misc. expenditure written off. No details have been given before the AO and the arguments before the AO have been reiterated before me. It is stated that these are small amounts of various defective goods, advances given, etc. In the absence of any specific details, the same cannot be allowed as business expenditure and the addition on this count is confirmed."
54. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned AR on behalf of the assessee submitted that the issue is covered in favour of the assessee by the decision dated 30-01-2009 of the ITAT in the assessee's own case for AY 2000-01 in ITA no.3446/Ahd/2004.The learned DR did not oppose these submissions on behalf of the assessee.
55. W e have heard both the parties and gone through the facts of the case. W e find that while adjudicating a similar issue in the assessee's own case for the AY 2000-01 in ITA No.3446/Ahd/2004, 42 ITA nos.2211/A/04 & 36-134/A/05 the Tribunal in their order dated 30-01-2009 had restored the matter to the file of the AO for readjudication in the following terms:
"12.2 We have heard both the parties and gone through the facts of the case, We find that despite opportunity allowed, the assessee did not furnish before the AO, the relevant details and evidence in support of debts having become bad during the year. However, before the Id. CIT(A) the Id. AR on behalf of the assessee submitted the relevant supporting evidence. Without confronting the said evidence to the AO, the Id. CIT(A) was not justified in deleting the disallowance. Even before us, merely name and amount due from the 14 parties have been placed at page 154 of the paper book. Recently in the case of Dhall Enterprised and Engineers P. Ltd. v. CIT 295 ITR 481 (Guj), Hon'ble Jurisdictional High Court held that "Even if we go by the plain reading of clause (vii), the requirement for allowing deduction on account of bad debt is that bad debt should be written off as irrecoverable. Mere debiting the amount is not sufficient. The requirement is that the assessee should also prove that the debt has become bad in that particular year."
12.3 In view of the foregoing, when the relevant details and evidence were not submitted before the AO, in the interest of justice and fair play, we vacate the findings of the Id. CIT(A) and restore the issue back to the file of the AO with the directions to allow another opportunity to the assessee to furnish the relevant details and evidence in support of their claim for deduction of bad debts in terms of provisions of sec. 36(1)(vii) of the Act and thereafter, adjudicate the matter in accordance with law after allowing sufficient opportunity to the assessee keeping in view .inter alia, the aforesaid decision of Hon'ble jurisdictional High Court in the case of Dhall Enterprised and Engineers P Ltd. (supra). With these directions, ground No. v) in the appeal of the Revenue is disposed of."
55.1 Indisputably, since the facts obtaining in the year under consideration are similar to the facts & circumstances in the AY 2000-01, following the view taken by the ITAT in their aforesaid decision in the assessee's own case, we have no hesitation in restoring the matter to the file of the AO for readjudication in the light of aforesaid directions of the ITAT in the AY 2000-01. Therefore, ground no.6 in the appeal of the assessee for the AY 2001-02 is disposed of .
56. Next ground no.4 in the appeal of the Revenue relates to disallowance of Rs.3,04,40,547/- on account of bad debts. The AO 43 ITA nos.2211/A/04 & 36-134/A/05 noticed that the assessee had written off a sum of Rs.3,04,40,547/- in the name of Petroleum Infrastructure Ltd. To a query by the AO , the assessee explained vide letter dated 20.02.2004 as under:
"In earlier assessment years to meet the growing demand for LPG and other petroleum products, the Government of India has accorded very high priority for the development of Port infrastructure facility. We have identified this as one of the growth areas for expansion of business, which is supporting to its LPG parallel marketing business. Accordingly, we set up a joint venture company with Bharat Petroleum Corporation Ltd. for development of import terminals of some existing/new ports along with suitable infrastructure. We signed a joint venture agreement with BPCL and done the necessary formalities and established a joint venture company in the name of Petroleum Infrastructure Ltd. (PIL). Each of the participating company took up 50% initial paid up equity capital of Rs.1500 lacs. We gave Rs.290,00,000/- to Petroleum Infrastructure Ltd. for the purpose of doing business and also Rs.1440547/- to meet the expenditure of business. However, ultimately the join venture could not succeed and PIL has been put under creditors voluntary winding up. During the year GGCL pursued an opportunity to sell the company as a going concern. However, the offer fell through due to extraneous reasons. There being no other alternative we have written off the amount. It is submitted that if the bad debt written off is not allowed as a bad debt within the meaning of section 36(1)(vii) then the same should be allowed as a trading toss while computing the profit u/s 28(1).
On the facts our case, the debt owed by the PIL to Gujarat Gas Co. Ltd. was a debt which sprang directly from the business of the company and was incidental to if in view of the facts stated above."
56.1 However, the AO did not accept the claim of the assessee, the amount having been invested for setting up a joint venture company in the name of Petroleum infrastructure Ltd. Since the said amount was not a trade debt as such and represented capital investment made by the assessee in joint venture project, the AO rejected the claim u/s 36(1)(vii) of the Act. The AO further concluded that amount written off was not deductible as a trading loss because there has not been any transaction of trade or other business deal between the assessee and said PIL. Accordingly, while relying upon decisions in A.V. Thomas & Co. V. CIT 48 ITR 67(SC), K. J. Somaiya & Sons Pvt. Ltd. 156 ITR 605( Bombay)& Indiquip Ltd. vs. CIT,202 ITR 417(Bombay) , the AO disallowed the amount of Rs.3,04,40,547/-
44ITA nos.2211/A/04 & 36-134/A/05
57. On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"10.1 Before me, the appellant's representative Shri D J Shah has furnished copy of balance sheet of Petroleum Infrastructure Limited as on 31st March, 2003. It is seen that the total shareholding of the said company was Rs.15 crore for A.Y, 2003-04. The said company has shown loss of Rs.151,057,266/- i.e. entire capital has been wiped off. It is therefore pleaded by the assessee that the amounts advanced to the said company have been written off as under:
Date Amount written off
22-12-2000 Rs. 14,36,397
22-12-2000 Rs.2,90,00,000
10.2 This has been done by way of two separate entries, copies of accounts of PIL for the relevant period have bean furnished at page 6 to 17 of the paper book. In view of the above factual position it is pleaded that all the necessary conditions for claim of bad debt have been satisfied.
10.3 I have carefully considered the submissions and the facts referred above which have been stated during the course of hearing, it is noted that financial condition of the said company, namely, PIL, is not good and there is little chances for recovery of the advances made to the said company and the appellant has written off the said amounts in the books of account The claim of bad debt is therefore valid as per section 36(2) of the Income Tax Act, having regard to the decision of Gujarat High Court in the case of Girish Bhagwat Prasad Vs. CIT 256 ITR 772. However, the said amounts recovered, if any in subsequent years are required to be assessed as and when if any amount is recovered from the said party. The appellant's representative Shri D J Shah has submitted that amount of Rs.65 lacs was recovered in subsequent year which is already been offered in the said year. The addition made on this count of Rs.3,04,40,547/- cannot be sustained and accordingly directed to be deleted."
58. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A).The learned DR supported the order of the AO. On the other hand, the learned AR on behalf of the assessee reiterated their submissions before the lower authorities, where in it is mentioned that in earlier assessment years, to meet the growing demand for LPG and other Petroleum products, the Govt. of India accorded very high priority to the development of port infrastructure 45 ITA nos.2211/A/04 & 36-134/A/05 facilities. As one of the growth areas for expansion of business which is supportive to its LPG parallel marketing business, it set up a joint venture company with Bharat Petroleum Corporation Limited (BPCL), in the name of Petroleum Infrastructure Ltd. (PIL) and advanced Rs.2.90 Crore for the purpose of business and Rs.14,40,547/- to meet the expenditure of business. The Joint Venture did not succeed and PIL was placed under creditors voluntary winding up. Therefore, the assessee wrote off the amount of Rs.3,04,40,547/- as bad debts as per provisions of section 36(1)(vii) of the Act. Inter alia, the assessee relied upon decisions in Gobind Glass Industries reported at 110 Taxman 109(Ahd) and Girish Bhagwat Prasad reported at 256 ITR 772 allowed the deduction. Alternatively, the assessee submitted that the amount is in the nature of trading loss arose admissible as deduction in terms of decisions in CIT v. Equitorial Pvt. Ltd. (1974) Taxation 37(3)-82 and CITvs. Abdul Razak & Co.,136 ITR 825 (Guj). The ld. AR added that if the bad debt is not allowed as deduction, then disallowance should be reduced by Rs.65 Lacs, being the amount recovered against these bad debts and offered to tax in assessment year 2003-
04.
59. W e have heard both the parties and gone through the facts of the case. W e find that the AO disallowed the claim since the aforesaid amount was admittedly capital investment in the joint venture and did not fulfill conditions stipulated u/s 36(1)(vii) read with sec. 36(2) of the Act nor the assessee submitted any evidence that the aforesaid amount had been considered as revenue receipt and offered to tax in any of the earlier years. Inter alia, the AO relied upon a number of decisions namely A.V. Thomas & Co. V. CIT 48 ITR 67(SC),K. J. Somaiya & Sons Pvt. Ltd. 156 ITR 605( Bombay)& Indiquip Ltd. vs. CIT,202 ITR 417(Bombay). The ld. CIT(A) without going in to these aspects pointed out by the AO or decisions relied upon by him, simply allowed the claim 46 ITA nos.2211/A/04 & 36-134/A/05 on the ground that the claim of bad debt is valid as per section 36(2) of the Act, having regard to the decision of Gujarat High Court in the case of Girish Bhagwat Prasad Vs. CIT 256 ITR 772. Apparently, the ld. CIT(A) did not analyse nor controverted the facts pointed out by the AO nor even brought out as to how the conditions stipulated in sec.36(1)(vii) read with sec. 36(2) of the Act were fulfilled in the instant case. Even the alternative plea on behalf of the assessee that the amount is trading loss has not been examined by him. A mere glance at the impugned order reveals that the order passed by the ld. CIT(A) is cryptic and grossly violative of one of the facets of the rules of natural justice, namely, that every judicial/quasi-judicial body/authority must pass a reasoned order, which should reflect application of mind by the concerned authority to the issues/points raised before it. The application of mind to the material facts and the arguments should manifest itself in the order. Section 250(6) of the Income Tax Act ,1961 mandates that the order of the CIT(A) while disposing of the appeal shall be in writing and shall state the points for determination, the decision thereon and the reason for the decision. The requirement of recording of reasons and communication thereof has been read as an integral part of the concept of fair procedure. The requirement of recording of reasons by the quasi-judicial authorities is an important safeguard to ensure observance of the rule of law. It introduces clarity, checks the introduction of extraneous or irrelevant considerations and minimizes arbitrariness in the decision-making process. We may reiterate that a 'decision' does not merely mean the 'conclusion'. It embraces within its fold the reasons forming basis for the conclusion.[Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)]. As is apparent, the impugned order suffers from lack of reasoning and is not a speaking order. In view of the foregoing, especially when the ld. CIT(A) has not passed a speaking order on the aforesaid claim of the assessee for deduction of bad debt, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue afresh in accordance with law, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec.
47ITA nos.2211/A/04 & 36-134/A/05 250(6) of the Act, bringing out clearly as to whether or not the conditions stipulated u/s 36(1)(vii) read with sec. 36(2) of the Act are fulfilled or the amount can be allowed as trading loss. With these observations, ground no 4 in the appeal of the Revenue for the AY 2001-02 is disposed of.
60. Ground no.5 in the appeal of the Revenue for the AY 2001-02 relates to disallowance of Rs.4,84,823/- on account of stores written off. The AO noticed that the assessee debited a sum of Rs.4,84,823/- being capital stores written off. To a query by the AO, the assessee replied the amount represented non-moving items of stores and spares, which were unused for a long time and had become obsolete. Thus, the amount had been written off. However,the AO did not allow the claim , the assessee having not established that the capital stores written off had become obsolete and non-usable.
61. On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"Ground No.13: This relates to addition of Rs.4,84,823/- being amount on spares written off. This has been discussed by the AO at page 10 of the order. It was the case of the AO that the expenditure is not admissible. On the other hand, the appellant's representative has submitted before me that spares stores and spares being very old became unusable having zero value and accordingly the same had been written off treating the value as zero and also debited the respective accounts. It is further clarified that the amount was not earlier debited in the profit and loss account. In view of the above factual position, the expenditure being incurred in the course of business is therefore admissible and no addition in this respect is called for which is accordingly deleted."
62. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR supported the order of the AO while the ld. AR relied upon the findings of the ld. CIT(A).Inter alia the ld. AR relied on the decision dated 04-05-2000 of the ITAT in the case of Gujarat State Fertilizers Co. Ltd. for AY 1987-88 in ITA 48 ITA nos.2211/A/04 & 36-134/A/05 no.623/Ahd/1991 & ITA no.727/Ahd/1991 and Karjan Co-operative Cotton Sales Ginning and Pressing Society vs. CIT (1993) 199 ITR 17 (Guj).
63. W e have heard both the parties and gone through the facts of the case as also the aforecited decisions. According to the assessee, the amount of Rs.4,84,823/- represented non-moving items of stores and spares, which were unused for long time and had become obsolete while the AO concluded that there was nothing to suggest so. W e find that the Hon'ble jurisdictional High Court in their decision in Karjan Co-operative Cotton Sales Ginning and Pressing Society vs. CIT (1993) 199 ITR 17 (Guj) observed that there is a statutory regulation under the Companies Act that unserviceable or damaged spares have to be properly valued and the method of valuation as prescribed by the Institute of Chartered Accountants of India as approved by various commentators on valuation of inventories. In the light of this provision, the Hon'ble High Court concluded that ".............. a systematic reduction in valuation of the unserviceable non-moving spare parts in a scientific basis would amount to a normal business loss which could be charged against the profit in the year of such valuation as otherwise a block of revenue items would remain outside the books without being properly treated in the income and expenditure account thereby giving a wrong picture of the true income of the company over the years. There is no dispute about the fact that when the spares were purchased out of the business necessity from the collaborators as insurance spares, they were not capitalized along with plant and machinery not debited to the P&L account of the year of purchase. The cost of the same has to be accounted for somewhere as expenditure and the correct method is either to debit P&L account with actual cost of spares used during the year or to reduce the cost proportionate to the obsolescence suffered for non- user, wear and tear or for other reasons. Since the company has followed a scientific method of the basis of technical advice and this method is in consonance with the approved accounting principles, the loss claimed on account of obsolescence has to be allowed as a business loss u/s 28. The appellant company has also brought to my notice the audited balance sheets of several companies both in public as well as private sectors to show that the same method as in the case of the appellant is being followed universally by all the companies for the purpose of charging obsolescence to the account in respect of non-moving spare parts. The names of these companies are (1) National Fertilizers Ltd., (2) Rashtriya Chemicals & Fertilizers Limited and (3) Fertilizers and Chemicals Travancore Ltd. The disallowance is, therefore, deleted."
49ITA nos.2211/A/04 & 36-134/A/05 63.1 In the instant case, the AO disallowed the claim since the assessee did not establish that the capital stores written off had become obsolete and non-usable. The ld. CIT(A) allowed the claim without recording any findings as to whether or not the assessee followed a scientific method on the basis of technical advice while writing off the obsolete stores or that the method adopted by the assessee was in consonance with the approved accounting principles. Even before us no such material has been placed in order to ascertain as to whether or not any scientific method on the basis of technical advice was followed in writing off the aforesaid amount of stores nor the ld. AR appearing before us adverted to these aspects. In the absence of complete facts as to the basis of stores written off, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue afresh in accordance with law in the light of various judicial pronouncements including the aforecited decisions, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act,bringing out clearly as to whether or not any scientific method was followed in writing of the stores. With these directions, ground no. 5 in the appeal of the Revenue for the AY 2001-02 is disposed of.
64. Ground no.6 in the appeal of the Revenue for AY 2001-02 relates to disallowance of Rs.3,05,030/- being expenditure incurred on gift & presentation articles. The AO disallowed the claim for deduction of Rs.3,05,030/- on account of gift and presentation articles ,the expenditure having been incurred gratuitously and could not be said to have been incurred wholly and exclusively for the purpose of the business.
65. On appeal, the learned CIT(A) allowed the claim in the light of decision of his predecessor in the AY 92-93 .
50ITA nos.2211/A/04 & 36-134/A/05
66. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO. On the other hand, the learned AR on behalf of the assessee reiterated their submissions before the CIT(A) and relied on the decisions in Karjan Co-operative Cotton Sales Ginning and Pressing Society vs. CIT (1993) 199 ITR 17 (Guj),Core Health Care Ltd. vs. DCIT,70 TTJ (Ahd) (TM) 490 (Ahd) and Sussen Textile Bearings Ltd. vs. ITO,43 TTJ 319 (Ahd).
67. W e have heard both the parties and gone through the facts of the case as also the aforecited decisions. Indisputably, the aforecited expenditure on gifts and presentation articles was not of a personal nature nor the expenditure incurred by the assessee brought into existence any tangible assets. Even though the expenditure incurred may bring to the assessee some benefit of an enduring nature, this alone will not be sufficient to treat the expenditure as an expenditure of capital nature. A full Bench of the Hon'ble jurisdictional High Court in Karjan Co-operative Cotton Sales Ginning and Pressing Society v. CIT [1993] 199 ITR 17 held that the true test of an expenditure laid out wholly and exclusively for the purpose of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. In the instant case, the ld. CIT(A) allowed the claim following the decision of his predecessor in the AY 1992-93. There is nothing to suggest as to whether the decision of the ld. CIT(A) in the AY 1992-93 was disputed in further appeal. There is no material on record to show that any part of the said expenditure was incurred for non-business purposes. In these cicumstances, especially when there is no material before us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore, ground no.6 in the appeal of the Revenue for the AY 2001-02 is dismissed.
51ITA nos.2211/A/04 & 36-134/A/05
68. Ground no.7 in the appeal of the Revenue for the AY 2001-02 relates to disallowance of foreign travel expenses of Rs.7,47,507/-. The AO noticed that the expenditure of Rs.7,45,507/- had been incurred on foreign travel to attend the function of B. G. Chairman Award, May, 2000. To a query by the AO, the assessee filed written submissions dated 20-02-2004 explaining that the company continued Health, S & Environment Program (HS & E] in line with B. G. Group world wide policy and the company was awarded the B. G. Group Chairman's award amongst 19 group companies world wide for HS & E performance and therefore, the company incurred expenditure of Rs.7,47,507/- on foreign travelling of nine officers and employees for accepting the award and attending the training program in U. K. However, the AO disallowed the claim on the ground that the expenditure in question had not been incurred wholly and exclusively for the purpose of the assessee.
69. On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:-
"17.1 Before me, the appellant's representative has given details of the expenditure .and also invitation letter from M/s. B G International, Loss Prevention Department, Reading, Berks RG 6 1 PT, U.K, dated 29.03.2000 addressed to Mr. M K Sinha. Vice-President, Gujarat Gas Co. Ltd, whereby the following staff members were invited for the business meeting on 14-17 April, 2000 at Reading, Berks RG G 1 PT, U.K.
(i) Mr. K D Bhojawala
(ii) Mr. Shuvendu Acharya
(iii) Mr. D S Lote
(iv) Ms Prianka Shah
(v) Ms Sunita
(vi) Mr. J C Patel
(vii) Mr. B D Joshi
(viii) Mr. R M Gandhi 17.2 In response to the said invitation letter, the appellant's representative as per letter dated 30tn March, 2000 sponsored the above 52 ITA nos.2211/A/04 & 36-134/A/05 8 persons and also Mr. Yakshesh Haldaria. It is therefore seen that the name of Mr. Yakshesh Haldaria was not there in the invitation as seen from the letter dated 29th March, 2000. However, since the employees were directed to attend the business meeting, the expenditure cannot be held to be not incurred for the business purpose. The action of the AO is therefore not correct and the expenditure is admissible and the addition made on this account is therefore directed to be deleted."
70. The Revenue is in now appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO while the learned AR on behalf of the assessee supported the findings of the ld. CIT(A).
71. W e have heard both the parties and gone through the facts of the case. Indisputably, the assessee incurred the aforesaid expenditure on foreign travelling of nine officers/employees for accepting award given by B G Group for performance in the area of Health, Safety and Environment on an invitation from M/s. B G International . In these circumstances, especially when there is no material before us so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). Therefore ground no.7 in the appeal of the Revenue for the AY 2001-02 is dismissed.
72. Ground no.1 in the appeal of the assessee for the AY 2001-02 and ground nos. 9 & 10 in the appeal of the Revenue for the AY 2001-02, being general in nature, do not require any separate adjudication while no additional ground having been raised in terms of residuary ground in the appeals of the assessee, all these grounds are dismissed.
53ITA nos.2211/A/04 & 36-134/A/05
73. In the result, appeal of the assessee for the AY 1998-99 and that of the Revenue for the AY 2001-02 are partly allowed for statistical purposes while that of the assessee for the AY 2001-02 is allowed but partly f or statistical purposes..
Order pronounced in the court today on 28-2-2011
Sd/- Sd/-
(T K SHARMA) (A N P AHUJ A)
JUDICI AL MEMBER ACCOUNTANT MEMBER
Dated : 28-2-2011
Copy of the order forwarded to:
1. Gujarat Gas Co. Limited., 2, Shantisadan Society, Near Parimal Garden, Ellis-bridge, Ahmedabad
2. Addl. Commissioner of Income-tax, Special Range-8 (Now -
ACIT, Circle-4), Ahmedabad
3. CIT concerned
4. CIT(A)-X, Ahmedabad
5. DR, ITAT, Ahmedabad Bench-A, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD 54