Income Tax Appellate Tribunal - Kolkata
Itc Ltd. vs Deputy Commissioner Of Income Tax on 25 March, 2003
Equivalent citations: [2003]86ITD135(KOL), (2003)80TTJ(KOL)15
ORDER
D.K. Tyagi, J.M. This is assessee's appeal against the order, dt. 27th March, 1998, of CIT(A)-XV, Kolkata, for the asst. yr. 1994-95. The revised grounds of appeal have been tiled by the assessee.
Ground No. I The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in rejecting the appellant's claim for being allowed deduction under Section 36(1)(iii) of IT Act, 1961, while computing the income chargeable under the head "Profits and gains of business or profession for the relevant assessment year, for interest paid by the appellant during the relevant previous year amounting to Rs. 8,25,01,104 on loans taken to acquire fixed assets for its existing business operations, where the said sum of interest, being related to the period prior to the putting into use of the said fixed assets, had been capitalised in the books of account of the appellant prepared for the relevant previous year.
1. This sum of Rs. 8,25,01,104 represents interest on loan taken from financial institutions and banks and capitalized during the relevant accounting year. This amount of interest is capitalized to plant and machinery and capital work-in-progress in respect of Triveni Tissues divisions and paper packaging and printing divisions of the assessee's company. For the income-tax purpose, the assessee has claimed deduction of Rs. 8,25,01,104 a portion of expenditure of Rs. 16,13,52,102 not debited to P&L a/c but claimed as allowable under Sections 30, 31, 36 and 37 of IT Act in the computation of income under Section 36(1)(iii) of IT Act. This amount consists of two parts i.e., Rs. 4,95,06,235 pertaining to plant and machinery purchased during the year and a sum of Rs. 3,29,94,869 relating to capital work-in-progress. This claim was made by the assessee on three grounds namely, 1, 2 and 3 :
(1) Interest paid on borrowings made for the purpose of business is eligible for deduction under Section 36(1)(iii) of the IT Act.
(2) For the purpose of computing depreciation allowable under Section 32(1), the amount of Rs. 4,95,06,235 has not been considered as an addition to the plant and machinery.
(3) It is immaterial whether the borrowed capital is used for acquiring a capital asset and a revenue asset because the act of borrowing capital is distinct from the act of investing the capital for the purpose of acquiring an asset. In this regard reliance has been placed on the decision of the Supreme Court in India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) and the decision in the case of Calcutta Electric Supply Corporation (India) Ltd. v. IAC (1992) 196 ITR 610 (Cal) and CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj).
2. The AO while examining the claim of the assessee got some enquiries made and found that the interest payment of Rs. 8,25,01,104 related to the period when the impugned plant and machinery and capital work-in-progress were still in the erection stage and not commissioned till then. Thus, the aforesaid interest payment was in the nature of pre-operative expenditure according to him. He, therefore, was of the view that it could not assume the character of revenue expenses till the assets were put to business use. This was supported by the CBDT's Circular No. 461, dt. 9th July, 1986, which he has reproduced in his order as under :
"It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid or payable on such funds constitutes the cost of borrowing and not the cost of the asset acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specially borrowed for the purpose of a fixed asset may be capitalized only relating to the period prior to the asset coming into production i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalized. In spite of these clear guidelines, as also the consistent view of the Department in this matter, some taxpayers had accepted a contrary stand and had capitalized such interest. The first decision in favour of this stand had been referred on 13th May, 1974, in the case of CIT v. J.K. Cotton Spinning & Weaving Mills Ltd. (1975) 98 ITR 153 (All)."
3. In view of this circular the interest payment amounting to Rs. 8,25,01,104 were not allowed as a revenue expenditure. The AO also mentioned in his order that in earlier year similar disallowances have been made by the AO. The CIT(A) while confirming the order of AO has observed :
"The AO has relied on CBDT's Circular No. 461, dt. 9th July, 1986. It clearly and categorically states that the interest paid on borrowings for investment in capital asset may be capitalised only relating to the period prior to the asset coming into production that is relating to the erection stage of the asset. In that circular Department relied on the case of CIT v. J.K. Cotton Spinning & Weaving Mills Ltd. (1975) 98 ITR 153 (All). It is accepted principle that interest paid on moneys borrowed to acquire a capital asset, is to be capitalized, till the asset is put to use for making commercial production. In my opinion AO has taken a reasonable view. His action does not call for any intervention, since the machinaries have been acquired during the year but not put to use for commercial production, the AO is also justified in disallowing depreciation claimed on the capital value of the asset."
4. Before us, the learned Departmental Representative has relied on the order of AO and CIT(A). The learned authorised representative, on the other hand, vehemently argued that this interest on borrowed capital is allowable as deduction while computing the business profits under Section 36(1)(iii) of the Act. This interest has been paid by the assessee for the purpose of the business, he has cited three judgments of Supreme Court in support of his arguments. These three judgments are :
(i) India Cements Ltd. v. CIT (supra), (date of order 8th Dec., 1965):
(ii) Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC), (date of order 31st Oct., 1974); and
(iii) CIT v. Associated Fibre & Rubber Ind. (P) Ltd. (1999) 236 ITR 471 (SC), (date of order 3rd Feb., 1999).
5. He has also heavily relied on the Hon'ble Gujarat High Court's case of CIT v. Alembic Glass Industries Ltd. (supra). The main thrust of his argument was that interest paid on loans shall be allowed as deduction under Section 36(1)(iii) of the Act irrespective of whether or not the interest relates to the period prior to the putting into use of the fixed assets. If an assessee pays an interest on loan taken to acquire fixed assets for the purpose of its existing business, then the interest is to be allowed as deduction under Section 36(1)(iii) of the Act while computing the business profits, even if said interest relates to the period prior to the commencement of operation of the said fixed assets. He has also relied on his own case relating to the asst. yr. 1991-92 decided by the Hon'ble Kolkata Tribunal in ITA No. 157/Cal/97, dt. 30th April, 2001.
6. We have heard both the parties and perused all the records. We are shockingly surprised to find that the learned authorised representative in his lengthy arguments and in his written submission has not even once mentioned about the CBDT's Circular 461, dt. 9th July, 1986, relied upon by the AO and CIT(A). It appears that the learned authorised representative has nothing to say on this circular which in fact is the basis of this addition. His silence should be taken as acceptance of the applicability of the contents of the circular to the facts of the case. In fact this circular was issued by the CBDT to explain the substance of the provisions relating to direct taxes in the Finance Act, 1986. The learned authorised representative is also silent about the observation of the AO that this type of addition has been made in earlier year also. It appears the assessee has accepted the disallowance made in earlier year and wanted to do new beginning this year but failed, All the cases cited and the case of Gujarat High Court heavily relied by the learned authorised representative are very old cases much earlier to the CBDT Circular No. 461, dt. 9th July, 1986, relied upon by the Department and they decided the matter as per law as it existed during that period. Though the case CIT v. Associated Fibre & Rubber Ind. (P) Ltd. (supra) was decided by the Supreme Court on 3rd Feb., 1999, but it pertained to asst. yr. 1972-73. The case decided by the Bench of this Tribunal cited by the learned authorised representative in his own case for asst. yr. 1991-92 is also of no help to the assessee as the issue involved is different. In that case issue involved was not whether the asset purchased out of borrowed money was put to use or not. The AO in this case has simply followed the CBDT's circular, and CIT(A) has also confirmed the order of the AO on the same basis. As it has been held by the Courts that CBDT circulars are binding on the Revenue authorities and in the absence of any jurisdiction High Court or apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed.
Ground No. II.
The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in rejecting the assessee's claim for being allowed deduction, while computing the business profits for the relevant assessment year, of the expenses incurred by the assessee during the relevant previous year amounting to Rs. 6,65,95,198 in connection with its Sea-Rock Hotel situated at Mumbai, which was damaged on account of a bomb blast, where the said sum of Rs. 6,65,95,198 is net off an amount of Rs. 1,25,00,000 being the insurance salvage in this respect, which was received by the assessee during the relevant previous year.
1. The assessee's company has claimed standing charges of Rs. 7,87,88,198 as deduction on account of Hotel Sea-Rock at Mumbai. This amount was a part of the sum of Rs. 16,13,52,102 not debited to the P&L a/c but claimed a deduction at the time of computation of income. Subsequent to the bomb blast in March, 1993, the Hotel Sea-Rock had incurred expenditure worth Rs. 9.13 crores and claimed Rs. 14.73 crores as insurance on loss of profits. Since, the claim was pending with the insurance company, the expenditure incurred were not debited to the P&L a/c. Out of the sum of Rs. 9.13 crores, the assessee has actually received the sum of Rs. 1.25 crores from the Oriental Insurance Company Ltd. As insurance claim during immediately following financial year. Accordingly, assessee claimed a sum of Rs. 7.88 crores i.e., difference between the insurance claimed and insurance received as deduction. Details of standing charges of Rs. 7.88 crores were filed in the course of assessment proceedings. The AO perused the details and found out that the expenditure has been incurred in connection with the renovation of the hotel (i.e., capital in nature) after the bomb blast and the significant portion of the expenditure related to that period when the hotel was not in operation. The AO, therefore, disallowed the whole claim of the standing charges. The CIT(A) while confirming the order of the AO observed as under :
"Admittedly assessee-company took a policy to cover its fixed expenses which is called standing charges in the insurance parlance and the loss of profit. The claim was lodged with the insurance company for meeting all these expenses. During the relevant period appellant incurred an expenditure of Rs. 9.13 crores. Insurance company reimbursed Rs. 1.25 crores of its fixed expenses and for the loss of profit. The balance of Rs. 7,87,88.198 was claimed as a revenue expenditure. Assessee filed details in p. 41 of the paper book. It includes repair to building of Rs. 18,62,000, repair to machinery of Rs. 19,06,000, advertisement of Rs. 71,25,000, sales promotion of Rs. 22,75,000, depreciation of Rs. 1,21,93,000 and other expenditures as well. Assessee has taken the insurance policy to cover the fixed expenses and loss of profit. It is not known under what circumstance, the insurance company reimbursed Rs. 1.25 crores. It is not out of place to mention that the expenditure of the assessee under the head insurance rates & taxes, auditors expenses, amounted to Rs. 2,67,12,000. Since the claim is pending and it has not been finalised, it is too premature to claim the amount of Rs. 7,87,88,198 as revenue expenditure. It is not out of place to mention that assessee's insurance policy not only covered fixed expenditure but also loss of profit. In my opinion AO has taken a reasonable view. I have no mind to interfere his action."
2. Before, us the learned Departmental Representative relied on the order of AO and CIT(A). The learned authorised representative at the outset clarified that the sum of Rs. 7,87,88,198 includes an amount of Rs. 1,21,93,000 on account of book depreciation on capital assets. As this is not allowable, the claim of assessee for necessary deduction in this regard is to be restricted to Rs. 6,65,95,198 (Rs. 7,87,88,198 minus Rs. 1,21,93,000). After that he argued that AO is not factually correct when he says that these expenses were incurred for renovation of Hotel Sea-Rock, which is evident from the details available at p. 26 of the paper book. Only Rs. 18,62,000 out of the total expenses represented cost of repair to the hotel building. The balance expenses represented normal revenue expenditure incurred by the ITC Ltd. in connection with stabilising the affected operation of the Sea-Rock Hotel. This revenue expenditure is in the form of expenses on account of personnel, advertisement, sales promotion, travelling, rent, power and fuel, etc. and is fully deductible as deduction under Section 37(1) of the Act. He further argued that though the hotel always remained in operation even if it is assumed for the sake of argument that the hotel is really not in operation when the expenditure is incurred still the expenditure being otherwise revenue in nature are allowable. For his contention, he relied on the following case law :
(i) CIT v. Bhagwati Re-rolling Mills (1995) 211 ITR 227 (Raj);
(ii) CIT v. Grand Hotel (1991) 189 ITR 153 (All);
(iii) Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC); and
(iv) CIT v. Ooty Dasprakash (1999) 237 ITR 902 (Mad).
3. In reply to the contention of the CIT(A) that since the claim made by assessee before the insurance company was still pending at the end of relevant previous year, the said expenditure could not be allowed as deduction, the learned authorised representative argued that an expenditure is always allowed as deduction while computing the business profits in the year in which the same is incurred. The aforesaid expenditure having undisputedly been incurred during this year the same are to be allowed as deductions. The authorised representative has also argued, that similar issue came up for consideration before the Hon'ble Kolkata Tribunal in assessee's own case relating to the asst. yr. 1991-92 in ITA No. 157/Cal/1996.
4. We have heard the rival submissions and perused the records available. From the details of the expenditure available at p. 26 of paper book, we do not find any expenditure of capital nature. The AO has not given a clear finding that any fresh construction was done. In the absence of any such finding to say that the expenditure was capital in nature is not correct. The CIT(A) was also not correct when he says that this expenditure cannot be allowed since the claim of the assessee's pending before the insurance company. We feel that once such expenditure are allowed in the relevant assessment year and amount of insurance salvage, the receipt subsequent to the end of relevant previous year shall be subject to tax under Section 41(1) of the Act in such subsequent year. We have also gone through relevant case law cited by the learned authorised representative and are of the view that these expenses should be allowed as revenue expenditure. So, we set aside the order of the CIT(A) on this point. This ground is allowed.
Ground No. III(a) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in disallowing an amount of Rs. 5,00,000 on account of expenses incurred for upkeep of the garden situated in the factory premises of the assessee, while computing the business profits for the relevant assessment year.
1. The AO disallowed this amount on the ground that the said expenditure was not incidental to the business of assessee. The learned CIT(A) confirmed this order of the AO. Before us, the authorised representative relied on Madhya Pradesh High Court judgment in the case of Hindustan Electro Graphites Ltd. v. CIT (1996) 218 ITR 688 (MP) in support of his argument that the gardening expenditure is allowable deduction under Section 37(1) of the Act. The learned Departmental Representative however, relied on the order of AO and CIT(A). We have heard both the parties and are of the view that when there is hue and cry throughout the world against the pollution, the effort of the assessee to maintain gardens in its various factories should in fact be appreciated. And, therefore, the CIT(A)'s order is set aside. This ground is allowed.
Ground No. III(b) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in disallowing an ad hoc sum of Rs. 75,00,000 on account of expenses incurred by the assessee for maintaining the various residential premises allotted to its employees, while computing the business profits for the relevant assessment year.
1. An expenditure of Rs. 3.01 crores was made under the head 'residential expenses'. The assessee has built residential colonies for its employees. The residential expenses essentially constitutes the expenses incurred on security, colony repairs, club maintenance, electric repairs, water and seawage repairs of residential accommodation. The AO treated part of the residential expenses as personal in nature. Following his predecessors, he disallowed 1/4th of the expenditure under this head. The CIT(A) confirmed this addition saying that major part of the expenses were in the nature of maintenance of guest-houses and holiday homes for its employees. Before us, the learned authorised representative vehemently opposed, to the observation made by the CIT(A) that, the major part of the expenses were in the nature of maintenance of guest-house. He argued that, there was no finding in this regard by the AO and the assessee has never raised this contention before the CIT(A). He drew the attention of the Bench to pp. 4 and 5 of the statement of facts filed with the learned CIT(A). It has also argued before us that assessee's company is a separate juristic entity and any expenditure incurred for maintenance of residential accommodation provided by it to the employees cannot be held to be a personal expenditure of the assessee. He also cited various decisions delivered by the various Benches of this Hon'ble Tribunal where it has been held that expenditure incurred by a limited company in providing benefits to its employees cannot be held to be personal expenses and the same are allowable as deduction.
2. We have heard both the parties and perused the records available. We find after going through the statement of the fact filed by the assessee before the CIT(A), that there is no mention of guest-houses or holiday homes. The AO has also not said anywhere in his order that any expenses were incurred on guesthouses or holiday homes for employees. We are surprised from where the CIT(A) has brought in guest-houses and holiday homes in his order. We also fail to understand how any amount of these expenses can be treated as personal expenses especially in the case of company. In the light of these facts and circumstances we feel that entire expenditure for the maintenance of the residential premises allotted to the employees, may be allowed. The CIT(A)'s order is set aside on this ground and appeal is allowed.
Ground No. III(c) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in not dealing with and accordingly rejecting the contentions, inter alia, raised by the assessee in ground No. 10 in the memorandum of appeal filed with the learned CIT(A) for deleting the ad hoc disallowance of Rs. 59,50,000 made by the AO out of the expenses incurred by the assessee during the relevant previous year and debited under the head "Sundry expenses", while computing the business profits of the relevant assessment year.
At the time of hearing, this ground was not pressed by the learned authorised representative. So, it is dismissed as not pressed.
Ground No. IV The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in disallowing an amount of Rs. 1,60,12,402 on account of provision made by the appellant in the books of account of the relevant previous year for stock of cigarettes sold by the assessee to its wholesale dealers, which were damaged and for which dealers had submitted claims with the appellant during the relevant previous year itself for being allowed credit with respect to the value of the said damaged stocks, while computing the business profits for the relevant assessment year, on the alleged ground that the said stock of cigarettes were actually destroyed after the end of the relevant previous year, when the liability for allowing the wholesale dealers necessary credit for the said sum on account of damaged stock of cigarettes had actually arisen during the relevant previous year itself on the preference of the claims made by the respective wholesale dealers with the assessee for such amount during the relevant previous year.
1. At the outset, the learned authorised representative submitted that the issue in this regard has been decided in favour of assessee by the Hon'ble Kolkata Tribunal in assessee's own case relating to the asst. yrs. 1988-89 and 1989-90 being first of the two assessment years for which such disallowance was made. The learned Departmental Representative did not dispute this fact. So, respectfully following the order of Kolkata Bench of this Hon'ble Tribunal, this ground of assessee is allowed.
Ground No. V(a) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in treating the total capital gains arising on the sale of undivided shares in the interest of land and building constructed thereon, as short-term capital gains, when he should have accepted the claim of the appellant for assessing the capital gains arising out of sale of undivided shares in the interest of land and building constructed thereon, separately, where the capital gains on the sale of the undivided shares in the interest of the land should have been treated as long-term capital gains and the capital gains on the sale of the building constructed thereon should have been treated as short-term capital gains.
1. During the year under consideration the assessee's company has claimed capital loss of Rs. 9,70,26,047 for being carried forward under Section 74 for set off in the succeeding assessment year against any income under the head 'capital gains'. Among the various assets sold by the assessee's company this ground relates to sale of two floors of ITC center's building to M/s TCS Ltd. and M/s ITC Classic Finance Ltd. The assessee has bifurcated total sales consideration into two portions--(1) pertaining to the 2 floors of the building; (2) the other pertaining to the indivisible interest in land sold. In respect of the sale of a portion of ITC Center building the assessee's company has declared a short-term capital gain of Rs. 4,33,73,885 in respect of the sale of indivisible interest in land sold and the long-term capital gain of Rs. 51,40,117. The copies of agreement to sale deed of conveyance, occupancy certificate and clearance certificate in Form No. 37-I were filed at the time of assessment. As per the sale agreements, the sale of two floors of the building covered proportionate undivided share on interest in the land and it was contended before the AO that treatment of indivisible interest in land independent of the building cost is derived from the decision given by the Hon'ble Rajasthan High Court in the case of CIT v. Vimalchand Gulecha (1993) 201 ITR 442 (Raj). According to the authorised representative the Court has observed that where a consolidated price is paid for building inclusive of land, the same should be bifurcated and the capital gain arising from the value of land should be treated as long-term capital gain. The AO was of the opinion that land and the building are one composite unit and inseparable. Since the assessee received total sales consideration in respect of floor spaces sold by it there was no justification to show the said proceeds under two heads which is also not in accordance with law. The long-term capital gain offered by the assessee on the sale of individual share and land was not accepted. The AO took two floors as composite sale and recomputed the short-term capital gain which as per Section 50 was worked out at Rs. 5,02,36,237. Before the CIT(A), the learned authorised representative tried to justify the stand taken by the assessee before AO, but the CIT(A) confirmed the order of the AO. Before us, the learned authorised representative vehemently argued against the stand taken by the Revenue. He argued that in a composite transaction of transfer of both building and the land, on which such building is constructed, a consolidated price is received by the assessee, then the assessee is entitled to bifurcate the same and if a situation arises where a gain from one of the capital assets, namely, the land, is a long-term capital gain, while from the other, namely, the building, is a short-term capital gain, then the benefits attached to long-term capital gains cannot be denied to the assessee. He cited following High Court decisions as under :
(i) CIT v. Vimalchand Golecha (supra)
(ii) CIT v. Dr. D.L. Ramachandran Rao (1999) 236 ITR 51 (Mad); and
(iii) CIT v. C.R. Submmanyam (2000) 242 ITR 342 (Kar).
2. The learned Departmental Representative, however, relied on the order of AO and CIT(A) and said that it is difficult to bifurcate between short-term capital gain and long-term capital gain.
3. We have heard both the parties and perused all the records available and legal aspects of the case, We find that the expression capital asset is defined in Section 2(14) of the Act as under :
"Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include :
(1) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession, (2) agricultural land in India, etc."
4. The key words of the definition of capital asset found in Section 2(14) are "property of any kind" and the term comprehends and includes within itself any interest in property. It may be movable or immovable property or any interest therein. The term "short-term capital asset" is defined in Section 2(42A) of the Act as short-term capital asset means a capital asset held by an assessee for not more than sixty months immediately preceding the date of transfer. During the relevant period Section 2(42A) of the Act prescribed the period of thirty-six months. The emphasis that is given in Section 2(42A) is that the capital asset should be held by an assessee for a period not more than 36 months immediately preceding the date of transfer for the asset to be termed a short-term capital asset. Here also, the emphasis is given on the expression "held by an assessee". The mode of computation of the capital gain is provided under Section 48 of the Act which reads as under :
"The income chargeable under the head 'capital gains' shall be computed by deducting from the full value of the consideration received or accruing as a result of the transfer of the capital asset the following amounts, namely :
(1) expenditure incurred wholly and exclusively in connection with such transfer;
(2) the cost of acquisition of the capital asset and the cost of any improvement thereto."
5. The question that arises for consideration is whether it is possible to bifurcate the capital gains that arises on the sale of the land and building when it is sold as one unit. Insofar as the definition of the capital asset is concerned, as already seen, the definition of capital asset includes property of any kind and the land held by the assessee is a capital asset and the building held by the assessee is also a capital asset and it is possible to bifurcate the capital gain arising with reference to the sale of the land and building even if they are sold as one unit if the land was held by the assessee for a period more than that prescribed under Section 2(42A) of the Act. It is not possible to say that by construction of the building, the land which was a long-term capital asset has ceased to be a long-term capital asset. The land which is an independent and an identifiable capital asset and it continues to remain so even after construction of building and at the time of the sale of the building. Since, the land was held by the assessee for a period exceeding 36 months the land cannot be regarded as a short-term capital asset only by virtue of the construction of building thereon. Hence, we are unable to accept the contention of the Revenue that it is not possible to bifurcate the capital asset into two and are of the opinion that it is possible to work out capital gain with reference to the sale of building and land separately. Hence, the order of the CIT(A) is set aside and the assessee's appeal is allowed on this point.
Ground No. V(b) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in disregarding the short-term capital loss suffered by the appellant amounting to Rs. 13,99,48,746 on renunciation of rights entitlements in M/s Bhadrachalam Paperboards Ltd.
1. The assessee held certain shares in M/s Bhadrachallan Paperboards Ltd., a sister concern of the assessee, on the strength of which it was entitled to subscribe to right share issued by M/s Bhadrachallan Paperboards Ltd. Instead of actually subscribing to the right issue, assessee had actually sold or renounced the rights entitlement to other entities @ Rs. 30 per right entitlement. The assessee disclosed the cost of acquisition of right entitlement in respect of M/s Bhadrachallan Paperboards Ltd. at Rs. 21,76,98,906 taking the cost of acquisition of per right entitlement at Rs. 42. The sale consideration was disclosed at Rs. 7,77,49,350 taking the sale price of each rights entitlement @ Rs. 30. This resulted in a short-term capital loss of Rs. 13,99,48,746. While doing so, assessee relied on the case of Miss Dhun Dhabhoy Kapadia v. CIT (1967) 65 (sic-63) ITR 651 (SC). According to this decision, it was held that capital gains/loss arising out of sale of right entitlement would be computed in the following manner :
Rs.
Sale proceeds of right entitlement X Less :Cost of acquisition of right entitlement namely, fall in price of the shares pursuant to the right issue, i.e., (cum-right price)-(ex-right price) Y Capital gain/loss (X-Y)
2. The AO observed that the working of the cost of acquisition in accordance with the said decision was not given by the authorised representative. In the absence of details of cost of requisition, the short-term capital loss claimed in this regard was disallowed. Before the CIT(A), the assessee submitted that allegation of the AO was absolutely wrong since it had submitted the detailed working of the computation of short-term capital gain/loss in this regard along with the return of income. The assessee also submitted that a letter issued by the Calcutta Stock Exchange, dt. 25th Oct., 1994, with the AO stating the cum-right price and the ex-right price of the share of M/s Bhadrachallan Paperboard Ltd. as they appeared at the material time in the Calcutta Stock Exchange. It was also submission of assessee that it took the average of the prices of the shares of M/s Bhadrachallan Paperboard Ltd. quoted in the Calcutta Stock Exchange at the respective dates when the said shares were cum-right and ex-right. For instance, the cum-right price of each share of M/s Bhadrachallan Paperboard Ltd. as on 5th Oct., 1993, fluctuated between the Rs. 285 and Rs. 275. For the purpose of computing the capital gain/loss, assessee took the average of two figures namely, Rs. 280. Similarly, the ex-right price of each share of M/s Bhadrachallan Paperboard Ltd. as on 20th Oct., 1993, fluctuated between Rs. 240 and Rs. 235. For the purpose of computation of capital gain/loss, the assessee took the average of Rs. 238. Thus, the cost of acquisition of each right entitlement comes to Rs. 42 (Rs. 280--Rs. 238). The CIT(A), however, was not impressed by the argument of the assessee and while confirming the order of AO observed as under :
"However, before me the reference has been made to a letter issued by the Calcutta Stock Exchange Ltd., wherein it has been written that the cumulative right varied to Rs. 285 to Rs. 275. The ex-right varied between Rs. 240 to Rs. 235. Mere receipt of letter from the Calcutta Stock Exchange association is not enough. The Calcutta Stock Exchange association has also not calculated as to how they arrived at such figure. It is not known why appellant had to sale the right @ Rs. 30 each." Transparency is lacking in the entire transaction. In my opinion there has been a colorable transaction. Relying on the case of McDowell & Co. Ltd. v. CIT (1985) 154 ITR 148 (SC), I hold that the AO was justified in disallowing the capital loss."
3. Before us, the learned Departmental Representative relying on order of AO and CIT(A) argued that this transaction lacks transparency and appears to have been made to reduce the tax liability of the assessee. The learned authorised representative, however, on the other hand, vehemently argued that the calculation of short-term capital loss arising out of the sale of right entitlement is as per principle enunciated by the Hon'ble Supreme Court in the Dhun Dadabhoy Kapadia case (supra). He also said that law in this regard has been amended w.e.f. 1st April, 1995, i.e., the asst. yr. 1995-96 which provides that the cost of acquisition of right entitlement would mandatorily be take as NIL. Since the assessment year involved in the present appeal in 1994-95 prior to the change of law from the asst. yr. 1995-96, the assessee's case should be governed by the principle enunciated in this respect by the Hon'ble Supreme Court. He also argued that AO has not disputed the legality of contention of the assessee. He also opposed the contentions of the CIT(A) saying that CIT(A) should not have ignored the letter of Calcutta Stock Exchange since the shares of M/s BPL are traded in the Calcutta Stock Exchange and that is the only authentic source of information regarding the prices of such shares. He also argued that in the absence of any finding by the lower authorities that assessee has understated the sales consideration, there is no question of disregarding the sales consideration so received and disclosed by it. In this regard, he relied on the decision of Hon'ble Supreme Court in the case of K.P. Verghese v. ITO (1981) 131 ITR 597 (SC).
4. We have heard both the parties and perused all the records available. We feel that the basic instinct of a businessman is to earn profit. No prudent businessman will act in a manner which is not beneficial to him. For the sake of analogy, the basic instinct of a human being is that he loves his life, he will not do any thing at the risk of his life unless he is of unsound mind. All the traffic rules are made by keeping this basic instinct of human being in mind that nobody will violate them because he loves his own life but if a man of unsound mind or a person who wants to commit suicide and comes on the road with this intention, the whole traffic rules and regulations become redundant, To give another example all measures taken for security of VIPS or Government installations are of no use before a suicide attack. The point we are trying to make is that all the rules, regulations, legal provisions are made keeping in mind the normal prudent behaviour of a man. In the instant case, there is no doubt that transaction is legal, but at the same time the fact remains that it is not transparent also. We have heard the learned authorised representative at length and have gone through the relevant papers referred by him in his paper book but still mystery remains as to why instead of subscribing to the rights issue a professionally managed assessee-company had sold or renounced the rights entitlements to other entities. It is not the case of assessee that due to mistake or inadequate professional advice they made this transaction and suffered such a huge loss. Rather they are justifying this transaction. From the assessee-company it cannot be expected that they will take a decision like this and incur such a huge loss unless there was a greater motive to go ahead with this transaction. That greater motive can only be to our mind in a case of a profit-making company, to reduce its tax liability. Otherwise even a layman who deals in shares would not commit this type of blunder. It is a clear-cut case of tax avoidance. The case law (K.P. Verghese v. ITO (supra) cited by the learned authorised representative is of no help to the assessee as the issue before us is not that the assessee has understated the sales consideration. Issue here is whether at such a price any prudent person would have gone ahead with the transaction. So the facts of the case are totally different here. In such a situation we feel that we will be failing in our duty if we allow people to take advantage of loopholes of the legislation. We also feel that legislature also realised that people are taking undue advantage of these legal provisions and therefore, they have also changed the law from the next year i.e., asst. yr. 1995-96 as pointed out by the learned authorised representative to plug this loophole by the insertion of Sub-clause (ii) to Section 55(2)(aa) of the Act by the Finance Act, 1994 which provides that the cost of acquisition of right entitlement would mandatorily be taken at Nil. In the light of the these facts and circumstances of the case, we are of the view that the ratio laid down by the Hon'ble Supreme Court in the case of Mcdowell & Co. v. CTO (1985) 154 ITR 148 (SC) is clearly applicable and hence we uphold the order of the CIT(A). This ground of the appeal is dismissed.
Ground No. VI The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in disallowing, by invoking the provisions of Section 43B of the Act, an aggregate amount of Rs. 6,65,438 being a part of the contributions made by the appellant towards provident and other funds, for the month of March, 1994, which fell within the relevant previous year, while computing the business profits for the relevant assessment year, on the alleged ground that the appellant did not produce any evidence fortifying the actual payment of the said sum, when the AO never gave the appellant any opportunity of producing any such evidence.
1. At the time of hearing, the learned authorised representative has informed us that a copy of certificate obtained from the auditors of the company fortifying the actual payment of this sum has been enclosed at p. 219 of the paper book. Since, the 'matter has not been looked at by the AO, we deem it fit that this issue may be restored back to the AO for necessary verification. The appeal is allowed for statistical purpose.
Ground No. VII The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in disallowing an amount of Rs. 13,00,000 being the expenditure incurred by the appellant outside India for registration of its trade-marks in foreign countries, while computing the business profits for the relevant assessment year.
1. There is no dispute about the fact that these expenses were incurred on registration of trade-mark in foreign countries. We respectfully following the decision of Hon'ble Supreme Court in the case of CIT v. Finlay Mills Ltd. (1951) 20 ITR 475 (SC), allow this ground of appeal, since, the facts of the assessee's case are squarely covered by this case.
Ground No. VIII The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of AO in adding notional amounts of Rs. 7,-16,00,000 and Rs. 88,44,500 to the total income of the appellant for the relevant assessment year based on allegations on altogether different aspects contained in show-cause notices issued by the authorities under the provisions of the erstwhile Foreign Exchange Regulation Act, 1973.
1. The Enforcement Directorate conducted search and seizure operations in 1996 at the various offices and factories premises of the assessee and the residence of its directors and other officials under the provisions of Foreign Exchange Regulation Act, 1973. Several show-cause notices were served on assessee and its directors by the Enforcement Directorate. The AO has made addition for two sums namely, Rs. 7,16,00,000 and Rs. 88,44,500 to the total income of assessee based on these show-cause notices and annexures thereof. The AO after examining the documents pointed out the following ;
"(1) The show-cause notice No. 1 states that while carrying out export transaction with EST group of companies of the Chitalias in USA and M/s ITC Global Holding (P) Ltd. during the financial years 1992-93, 1993-94 and 1994-95 the assessee-company use to (sic-extend) credit to these companies for 120 to 180 days and sometimes for 304 days. As a result of this extended credit the assessee-companies has incurred losses of Rs. 160 million with respect to EST Group of companies and Rs. 54 million with respect to M/s ITC Global Holding (P) Ltd. during the said three financial years. This issue of huge losses incurred by M/s ITC Ltd. has also been highlighted in the special audit report dt. 13th July, 1995, of M/s Lovelock and Lewis. As per the annexures to the show-cause notice No. 1 appearing at p. No. 177 the loss incurred by M/s ITC Ltd. for the financial year 1993-94 on account of above transaction has been quantified at Rs. 71.60 million i.e., Rs. 7.16 crores. The authorised representative of the assessee was asked to explain this loss. In response no satisfactory explanation could be offered by him. Accordingly the loss of Rs. 7.16 crores was disallowed and added back to the appellant's income.
(2) On perusal of annexures to the show-cause-notice No. 1, it is seen that ITC Ltd. had exported cashew nuts to the EST Group of companies and in the process had extended credit of 120 to 180 days and sometimes of 304 days to the said Chitalia Group of Companies. It was noticed that the assessee-company had made agreement with the Chitalia Group of Companies to receive 3.5 per cent interest for 120 days credit i.e., equal to 10.5 per cent per annum) over the agreed market price of cashew nut, but ITC Ltd. never received interest from the Chitalias for the credit extended to the EST Group of Companies. The authorised representative was asked to explain as to why interest income at the above rate should not be computed in the hands of the assessee-company. No satisfactory explanation could be offered by the authorised representative in this regard. The total value of cashew nuts exported to the EST Group of companies in the financial year 1993-94 is found to be 3.61 million US Dollar and credit for an average period of 240 days is found to have been allowed to the EST Group of Companies during the relevant accounting year in the course of export of cashew nuts. Taking the rupee equivalent of US $ 1 at Rs; 35 for the relevant accounting year, the amount of interest which should have been received by the assessee-company from EST Group of Companies works out to Rs. 88,44,500. This sum will be added back to the assessee's income. Total disallowance under this head will thus work out to Rs. 8,04,44,500."
2. The CIT(A) has confirmed these additions by the AO. Before us, the learned Departmental Representative has relied on the order of the AO and CIT(A). The learned authorised representative on the other hand, tried to explain the assessee's position by giving details of the case and cited several cases in support of his arguments.
3. We have heard both the parties and perused all the records. We feel that since these additions have been made on the basis of show-cause notices issued by the Enforcement Directorate, the final outcome of their adjudication by the Enforcement Directorate is vital to the issues involved in this appeal as they would have made further inquiries before reaching any conclusion. Surprisingly, at the time of hearing nothing about the adjudication by the Enforcement Directorate has been said by either party. Since, Foreign Exchange Regulation Act, 1973 is rib more in force and even its sunset period of two years is over on 31st May, .2002, this matter would have definitely been finally adjudicated upon by the Enforcement Directorate by this time. So without going into the merits of the matter we deem it fit that this matter may be restored back to the file of the AO with direction that he should procure the latest finding by the Enforcement Directorate while making the fresh assessment. The AO has mentioned in his order that since the copies of show-cause notices and their annexures were obtained very late by him, he could not make thorough scrutiny thereof. Therefore, we feel that the AO will be free to make the necessary inquiries/investigations he deems fit before arriving at any conclusions on these issues. He is also directed to give proper opportunity to the assessee of being heard. In the result, the appeal on this ground is allowed for statistical purpose.
Ground No. IX(a) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of the AO in setting off the loss suffered by the assessee on export of trading goods against the profits realised by the appellant on export of manufactured goods, while computing the deduction under Section 80HHC(1) of the Act, r/w Section 80HHC(3) of the Act.
1. It was submitted before us by the learned authorised representative that the issue has been decided against the assessee by the Hon'ble High Court in the case of IPCA Lab. Ltd. v. Dy. CIT (2001) 251 ITR 401 (Bom) however, it is entitled to keep the issue alive till the matter is settled either by the Hon'ble jurisdictional High Court or the Hon'ble Supreme Court. In view of this, the CIT(A)'s order is upheld on this point. The appeal is dismissed.
Ground No. IX(b) The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in not dealing with and accordingly rejecting the contentions inter alia raised by the assessee in ground No. 24 in the memorandum of appeal filed with the learned CIT(A) for excluding the element of excise duty from the figure of total turnover for the purpose of computing the profit on export of manufactured goods, while computing the deduction under Section 80HHC(1) of the Act, read with Section 80HHC(3) of the Act.
1. Since, this ground is dependent on the ultimate outcome of ground No. 9(a), we are not taking any cognizance of this.
To summerise grounds Nos. II, III(a), III(b), (IV), V(a), VII are allowed, ground Nos. I, V(b), IX(a) and IX(b) are dismissed, ground No. III(c) is dismissed as not pressed and ground Nos. VI and VIII are allowed for statistical purposes.
Pramod Kumar, A.M.
1. I have carefully gone through the draft order authored by my learned brother, and I find myself in respectful disagreement with certain conclusions arrived therein. With the leave and consent of my learned brother, therefore, I proceed to write this separate and dissenting order on those points.
Ground No. 12. In ground No. I, the assessee is aggrieved of CIT(A)'s sustaining the disallowance of Rs. 8,25,01,104 on account of interest on loans which, though claimed by the assessee as a revenue expenditure under Section 36(1)(m) of the IT Act. 1961, was capitalized in the books of accounts.
3. The aforesaid interest of Rs. 8,15,01,104 consisted of two parts i.e., Rs. 4,95,06,235 pertaining to plant and machinery purchased during the year, and Rs. 3,29,94,869 pertaining to work-in-progress. The AO took note of assessee's reliance, in support of the claim for deduction of the interest under Section 36(1)(iii), on the judgment of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), and of Hon'ble Calcutta High Court's judgments in the cases of CESC (India) Ltd. v. IAC (1992) 196 ITR 610 (Cal) and CIT v. Alembic Glass Industries Ltd. (1976)-103 ITR 715 (Guj) and also of the assessee's submission that for the purpose of computing depreciation, the aforesaid interest of Rs. 4,95,06,235 was not considered as an addition to plant and machinery. The AO, however, declined the deduction on the ground that the interest related to a period when the plant and machinery in question was still in the erection stage, not having been commissioned upto that point of time, and, accordingly, interest was in the nature of pre-operatrve expenditure. It was also observed that the interest payment in question could not 'assume the character of revenue expenditure till the assets are put to business use'. It was in this background that the AO referred to CBDT Circular No. 461, which lays down that "the interest on money which are borrowed for the purpose of a fixed asset may be capitalized only relating to the period prior to the asset coming into production i.e., relating to erection stage, of the asset". Aggrieved, inter alia, by this action of the AO, assessee carried the matter in appeal before the CIT(A) on these related grounds :
For that the AO failed to appreciate the provisions of Section 36(1)(iii) and assumed that the interest deductible under Section 36(1)(iii) should not be capital in nature.
For that the CBDT circular quoted by the learned AO has no application to the provisions of Section 36(1)(iii).
4. The CIT(A), however, rejected the above grounds of appeal. The entire operative portion of the CIT(A)'s order, so far as the above grounds of appeal are concerned, is being reproduced below :
"It appears that before the AO appellant has quoted the case of CIT v. Alembic Industries (1976) 103 ITR 715 (Guj). In that case, Calcutta (Gujarat) High Court had an occasion to examine the issue whether the existing unit starting a new unit is a different business or only another unit of same business. In my opinion, the case of the appellant is clearly distinguishable from that of CIT v. Alembic Chemicals (1976) 103 ITR 715 (Guj). While deciding the case of Alembic Chemicals, Calcutta (sic) High Court relied on the case of Challapalli Sugar Mills Ltd. v. CIT (1975) 98 ITR 167 (SC). On the other hand, the AO has relied on CBDT Circular No. 461, dt. 9th July, 1986. It clearly and categorically states that interest paid on borrowings for investment in capital asset may be capitalised only relating to the period prior to the asset coming into production i.e., relating to the erection stage of the asset. In that circular, Department relied on the case of CIT v. J.K. Cotton Spinning & Weaning Mills Ltd. (1975) 98 ITR 153 (All). It is accepted principle that interest paid on moneys borrowed to acquire a capital assets, is to be capitalised till the asset is put to use for making commercial production. In my opinion, AO has taken a reasonable view. His action does not call for any intervention, since the machineries have been acquired during the year but not put to use for commercial production. AO, is justified in disallowing depreciation claimed on the capital value of the asset."
5. Aggrieved even by the order of the CIT(A), the assessee is in further appeal before us.
6. It was in this backdrop that my colleague, learned JM, arrived at the following conclusions :
"We have heard both the parties and perused all the records. We are shockingly surprised to find that learned authorised representative in his lengthy arguments and written submission has not even once mentioned about the CBDT Circular 461, dt. 9th July, 1986, relief upon by the AO and CIT(A). It appears that learned authorised representative has nothing to say on this circular which in fact is the basis of this addition. His silence should be taken as acceptance of the applicability of the contents of the circular to the facts of the case. In fact this circular was issued by the CBDT to explain the substance of the provisions relating to direct taxes in the Finance Act, 1986. The learned authorised representative is also silent about the observations of the AO that this type of addition has been made in earlier year also. It appears that the assessee has accepted the disallowance made in earlier years and wanted to do new beginning this year but failed. All the cases cited and the case of Gujarat High Court heavily relied by the learned authorised representative are very old cases much earlier to the CBDT Circular No. 461, dt. 9th July, 1986, relied upon by the Department and they decided the matter as per law as it existed during that period. Though the case CIT v. Associated Fibre and Rubber Ind. Ltd. was decided by the Supreme Court on 3rd Feb., 1999, but it pertained to asst. yr. 1972-73. The case cited by the Bench of this Tribunal is also of no help to the assessee as the issue is different. In case the issue involved was not whether the asset purchased out of borrowed money was put to use or not. The AO has simply followed the CBDT's circular and CIT(A) has also confirmed the order of the AO on that basis. As it has been held by the Courts that CBDT circulars are binding on the Revenue authorities and in the absence of any jurisdictional High Court or apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed."
7. Not being able to subscribe to the above views, I proceed to humbly place on record my views on the matter.
8. I first of all deem it necessary to quote entire para 18 of the CBDT Circular No. 461, dt. 9th July, 1986 [161 NR (St) 17, relevant portion at p. 30], part of which has been produced by the AO and brother JM, in their respective orders, and which has been heavily relied upon by the authorities below and indeed my brother colleague, for ready reference :
"(ix) Modification in the definition of 'Actual cost' for the purposes of depreciation, investment allowance, etc. 18.1. Under the existing provisions of Section 43(1) of the IT Act, "actual cost" means actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority. It was found that certain taxpayers, supported by some Court decisions, had resorted to a major change in the accounting practice by capitalizing the interest paid or payable in connection with acquisition of asset relatable to the period after such asset is first put to use. This capitalization implies inclusion of interest in actual cost of the asset for the purpose of claiming depreciation, investment allowance, etc. under the IT Act.
18.2. It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid nor payable on such funds constitutes the cost of borrowing and not the cost of asset acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specifically borrowed for the purpose of a fixed asset may be capitalized only relating to the period prior to the asset coming into production i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalized. In spite of these clear guidelines, as also consistent view of the Department in this matter, some taxpayers had adopted a contrary stance and had capitalized such interest. The first decision in favour of this stance had been rendered on 13th May, 1974, in the case of CIT v. J.K. Cotton Spinning and Weaving Mills Ltd. (1975) 98 ITR 153. This decision, as well as the subsequent decisions, were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the asst. yr. 1974-75 and subsequent years.
[Section 9 of the Finance Act]"
9. This only explains the background in which Expln. 8 to Section 43(1) was introduced which reads as follows :
"Explanation 8 : For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset."
10. One of the cases relied upon by the assessee, as mentioned in p. 2 of the written submission, is Dy. CIT v. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj) wherein Their Lordships of Hon'ble Gujarat High Court had an occasion to deal with the aforementioned circular. Their Lordships, after reproducing the relevant extracts from the aforesaid circular, observed that...... "As can be seen Expln. 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc. on a large amount of actual cost. Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill, we find any indication in support of Revenue's stand that in a converse situation interest has to be capitalized and further then such interest cannot be claimed as deduction under Section 36(1)(iii) of the Act. In fact, there is no mention about the deducibility or otherwise under Section 36(1)(iii) of the Act." In this view of the matter, with which I am in most respectful agreement, the Revenue's case does not derive any benefit from the contents of CBDT Circular No. 461. In my considered view, this circular is not at all relevant for the issue in this appeal before the Tribunal.
11. I may also mention that, earlier in this judgment in the case of Core Healthcare Ltd. (supra). Their Lordships had also observed that "The aforesaid Expln. 8 nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under Section 36(1)(iii) of the Act. Even if we assume, for the sake of argument, the submission of Revenue that interest paid/payable for the borrowings before an asset is first put to use is required to be capitalized, there is nothing in Expln. 8 to disentitle an assessee from making a claim of deduction under Section 36(1)(iii) of the Act. As we have already seen, the settled legal position is that interest relating to an acquisition of capital asset would also be a permissible deduction under Section 36(1)(iii) of the Act, the only requirement being that the borrowing must be for the purpose of business." It is also interesting to note that capita] expenditure, by the virtue of provision of Section 37(1) of the Act, is not normally allowed as a deduction in computation of income under the head 'income from business and profession but, as provided in Section 37(1) itself, such disallowance does not extend to the deductions permissible under Sections 30 to 36 and, therefore, even if an expenditure allowable under Sections 30 to 36 is of the capital nature, the same cannot be subjected to disallowance for the reason that the expenditure is capital in nature. The deduction for interest being covered by Section 36(1)(iii), therefore, cannot be subjected to disallowance on that ground.
12. Coming to learned brother's observations that the ratio of Hon'ble Supreme Court's judgment in the case of CIT v. Associated Fibre £ Rubber Industries (P) Ltd. (1999) 230 ITR 471 (SC) and of Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (supra) was no longer good in law because of CDDT Circular No. 461, suffice to say that Hon'ble Gujarat High Court, in the case of Core Healthcare Ltd. (supra) and after taking cognizance of the aforesaid circular as also of insertion of Expln. 8 to Section 43(1) which was dealt with by the circular, observed that "Expln. 8 does not in any way curtail the scope of Section 36(1)(jii) of the Act" and that :
"As laid down by the apex Court in the case of Ambika Prasad Mishra v. State of UP AIR 1980 SC 1762 : (1980) 3 SCC 719 (p. 1764 of AIR 1980 SC) :
"Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent... A decision does not loose its authority merely because it was badly argued, inadequately considered or fallaciously reasoned...."
Similarly, in the case of Kesho Ram & Co. v. Union of India (1989) 3 SCC 151, it was stated by the Supreme Court thus :
"The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with the reference to which the argument is advanced subsequently was actually decided in the earlier decision....."
In such a situation, we find all the contentions raised on behalf of the Revenue stand answered by the two decisions in the case of CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj) and CIT v. Associated Fibre & Rubber Industries (P) Ltd. (1999) 236ITR 471 (SC)."
Having held that the CBDT Circular No. 461 does not have any bearing on the issue in this appeal before the Tribunal and respectfully following Hon'ble Gujarat High Court's judgment referred to above, I am of the considered view that decisions in the cases of CIF v. Alembic Glass Industries Ltd. (supra) and CIT v. Associated Fibre and Rubber Industries (P) Ltd. (supra) still hold field. I leave it at that.
13. I may mention that in assessee's own case, and while dealing with the asst. yr. 1991-92, a co-ordinate Bench of this Tribunal, speaking through the Hon'ble Vice-President Shri Garg, inter alia, observed as follows :
"Insofar as interest paid to SBI of Rs. 3,84,298 which was paid on account of Chiala GL II Line Project and Rs. 39,82,499 being interest paid to HDFC for loans obtained for construction of residential complex for employees is concerned, we are in agreement with the CIT(A) that the interest could not be disallowed even if borrowed capital was utilized for the purpose of acquiring capital asset. There is no distinction made in the provisions of Section 36(1)(iii) to bifurcate the utilization of the expenses for the purpose of acquiring asset or for the purpose of meeting the expenses on day-to-day basis. What is required is that the expenses must have been incurred on the capital borrowed for the purpose of the assessee. Moreso, the expenses were incurred by the assessee for the existing business of the company."
(relevant portion at p. 6-7 of the paper book)
14. In the case of CUT v. Associated Fibre & Rubber Industries (P) Ltd. (supra), Hon'ble Supreme Court were in seisin of a situation in which the assessee had claimed deduction for interest paid on borrowings for the purpose of acquiring machineries which were admittedly not put to use in the relevant previous year. Even though claim for deduction was declined by the AO on the ground that since machineries were not used for the purpose of business, claim for deduction of interest for acquiring these machineries cannot also be allowed, and this stand was also confirmed by the first appellate authority. In second appeal, however, Tribunal deleted the disallowance on the ground that machinery being a business asset, the interest paid on the amount borrowed for the purchase of such machinery would certainly be an allowable deduction. When this dispute finally travelled to the Hon'ble Supreme Court, Their Lordships observed that 'the reasoning of the Tribunal is correct' It was further observed that :
"Even though the machinery has not been actually used in the business at the time when assessment was made, the same had been treated as a business asset and it was purchased only for the purpose of the business." Their Lordships then concluded that "In the circumstances, the interest paid on the amount borrowed for purchase of such machinery is certainly a deductible amount."
15. In the case of CIT v. Alembic Glass Industries Ltd. (supra), Hon'ble Gujarat High Court has observed that when a borrowing is made for the purpose of business, the interest paid on such borrowings is deductible under Section 36(1)(iii) of the Act, irrespective of the position as to whether such borrowings are used for capital or revenue purposes. It was, however, added that the business for which capital asset is purchased should not be separate or distinct from the business of the assessee for the purpose of which borrowing is resorted to, Their Lordships then observed that if there is no existing business with reference to which the capital is borrowed and the borrowed capital is used to purchase a new asset of enduring nature, then interest paid on such borrowing till the asset goes into production, increases the cost of installation of such asset, and hence should be treated as a capital expenditure not allowable under Section 36(1)(iii) of the Act. When we apply principles thus laid down by the Hon'ble High Court, the question that immediately needs to be addressed is whether the related loans were taken for the purpose of an existing business or for a new business. In other words, the emerging proposition is that when related loans are taken for the existing business, the interest paid on such loans is to be allowed as a deduction under Section 36(1)(iii) of the Act.
16. In the light of this legal position, I turn to the admitted facts of the case. At p, 5 of the assessment order, the, AO has observed that the impugned amount of interest relates to plant and machinery and capital work-in-progress in respect of Tribeni Tissues Division and Paper, and Packaging and Printing Divisions of the assessee-company. Earlier in the assessment order, at pp. 3 and 4 thereof, the AO has taken note of various divisions under which the assessee-company carries on its business and the names of Tribeni Tissues Division, Paper Division, and Packaging and Printing Division duly figures therein. It is thus not in dispute that the business was already being carried on in these divisions and that any of the divisions for which machineries are used constitutes 'new business'. It is not even the case of the Revenue that machineries were for the purpose of 'new business' and interest on borrowings for acquiring the machineries, for this reason, will not be an allowable deduction. The Revenue's case is that interest on borrowings for acquisition of these machines should have necessarily been capitalized for the period upto the time when the machineries were put to use. In the light of above deliberations, however, this plea is devoid of any merits. I am, accordingly, of the considered view that, in accordance with the principles laid down in the case of Alembic Glass Industries Ltd. (supra) and on the facts of this case, interest paid on borrowing to acquire machineries in question, is allowable as a deduction under Section 36(1)(iii) of the Act.
17. I may also mention that, as held in the case of India Cement Ltd. v. CIT (1966) 60 ITR 52 (SC) Hon'ble Supreme Court has observed that loan obtained is not an asset or advantage of an enduring nature and the expenditure was made for securing the use of money for a certain period and it is irrelevant to consider the object with which the loan was obtained. The interest on borrowings, for this reason, was held to be revenue expenditure irrespective of the use to which the borrowed funds were put. Accordingly, in my view, there is no substance in Revenue's plea that merely because related machines were not put to use, the interest paid on the borrowings will not be an allowable expenditure--particularly in a situation, as are the admitted facts of this case, when the loan was used for the purposes of an existing business.
18. I may also mention that Hon'ble Madras High Court, in the case of CIT v. Kasturi & Sons (2000) 241 ITR 412 (Mad) were in seisin of a situation when the assessee had, during the course of his business, borrowed moneys for the purpose of setting up a printing unit, and though it had capitalized the interest paid on such borrowings, it claimed the interest as a revenue expenditure under Section 36(1)(iii). This claim, though negated by the AO, was upheld by the CIT(A) and the Tribunal. Hon'ble Madras High Court, on the these facts, upheld that admissibility of assessee's claim for deduction under Section 36(1)(iii) of the Act. Similarly, in the case of Dy. CIT v. Core Healthcaie Ltd. (supra), Hon'ble Gujarat High Court were in seisin of a materially identical situation, i.e., when the interest on borrowings was capitalized in the books of accounts but claimed as a deduction under Section 36(1)(iii) in the income-tax, and Their Lordships of Hon'ble Gujarat High Court also upheld the assessee's claim of deduction under Section 36(1)(iii).
19. In view of the above discussions, as also bearing in mind entirety of this case, I am of the considered view that the authorities below erred in not allowing the deduction of Rs. 8,25,01,104 on account of interest on loans claimed by the assessee as a revenue expenditure under Section 36(1)(iii) of the IT Act, 1961. It is in this background that I humbly differ with the views of the learned brother and am of the considered view that the Ground No. I should succeed.
20. Ground No. I is, thus, allowed.
Ground No. V(a)
21. In ground No. V(a), the assessee is aggrieved that the CIT(A) erred in sustaining AO's action of treating entire capital gain arising on sale of part of constructed building, including undivided share in land on which the building was constructed, as short-term capital gain, and in thereby negating assessee's claim that, for the purpose of computation of capital gains, 'undivided share in land' and 'building' should have been considered separately.
22. During the relevant previous year, the assessee sold two flats, for individual consideration of Rs. 3,56,49,100 and Rs. 3,20,61,900, in its building 'ITC Center" located at 37, Chowringhee Road, Kolkata, to M/s Tata Consultancy Services and M/s Classic Financial Services and Enterprises Ltd., respectively. This building, the construction of which was completed on 30th Nov., 1993, was located on a plot which was acquired by the assessee in the financial year 1951-52. However, while computing the capital gains, the assessee took the plea that since the sale of flats includes sales of 'undivided share or interest in land over which building is constructed", the transaction is required to be segregated in two parts-one involving the transfer of share or interest in land over which building is constructed, and the other involving transfer of constructed area of two flats. The assessee thus worked out long-term capital gain on transfer of undivided share in land at Rs. 51,40,117 and short-term capital gain on transfer of building constructed at Rs. 4,33,73,825. In support of this treatment, reliance was placed on the judgment of Hon'ble Rajasthan High Court in the case of CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj), of Hon'ble Kerala High Court's judgment in the case of A.R. Transports v. CIT (1990) 185 ITR 134 (Ker) and of Hon'ble Supreme Court's judgment in the case of CIT v. Alps Theatre (1967) 65 ITR 377 (SC). However, the AO rejected the assessee's contentions by observing as follows :
"It may be mentioned that the land and building are one composite unit and inseparable. Since the assessee received total sales consideration in respect of floor space sold by it, there was no justification to show the sale proceeds under two heads which was not warranted by the assessee on the sale of indivisible share in land is not acceptable."
Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) distinguished the judicial precedents cited before him and observed that in the present case, sale of flats took place only after the building was constructed and that there could not have been any question of sale of a flat when the land was acquired. He further observed that land and building are complimentary to each other and it does not appeal to commonsense that land and building are two separable units. Learned CIT(A) concluded that the view taken by the AO is a reasonable view which does not call for any interference, Still aggrieved, the assessee is in second appeal before us.
23. It is in this background that my learned brother has arrived at the following conclusions :
"The question that arises for consideration is whether it is possible to bifurcate the capital gains that arise on the sale of land and building when it is sold as one unit. Insofar as the definition of the capital asset is concerned as already seen the definition of capital asset includes property of any kind and the land held by the assessee is a capital asset and it is possible to bifurcate the capital gain arising with reference to the sale of land and building even if they are sold as one unit if the land was held by the assessee for a period more than that prescribed under Section 2(24A) of the Act. It is not possible to say that by construction of the building, the land which was a long-term capital asset ceased to be a long-term capital asset. The land which is an independent and identifiable capital asset and it continues to remain so even after construction of building and at the time of sale of the building. Since the land was held by the assessee for a period exceeding 36 months and the land cannot be regarded as a short-term capital asset only by the virtue of the construction of building thereon. Hence, we are unable to accept the contention that it is not possible to bifurcate the capital asset into two and are of the opinion that it is possible to work out capital gains with reference to sale of building and land separately. Hence, the order of the CIT(A) is set aside and the assessee's appeal is allowed on this point."
24. Not finding myself in agreement with the conclusions arrived at by my learned brother, I proceed to humbly place on record my views on the matter.
25. I must first of all refer to p.112 of the paper book which shows the computation based on which long-term capital gain is worked out. Broadly, the computation can be summarized as below :
Undivided share or interest in land at 37, Chowinghee Road, Kolkata 1,666.45 sq. mtrs Undivided share of land transferred to Tata Consultancy Services 156.81 sq. mtrs Classical Financial Services & Enterprises 157.18 sq. mtrs Valuation as on 1-12-1993, (i.e., the date of transfer) Value as on 31-3-1990, as per valuer's report 10,07,643 per Kottah Gold prices as on 31-3-1990 3,200 Gold prices as on 31-3-1994 4,598 Hence, land value as on 31-3-1994 10,07,643x4,598 14,47,857 per Kottah 3,200 Value of land sold on 1-12-1993 156.81x2x10.76x14,47,857 720
-7,85,927...,..........(a) Valuation as on 1-4-1981 Value as on 30-6-1983 as per valuer's report Rs. 1,75,000 per Kottah Gold prices as on 1-4-1981 1,700 Gold prices as on 30-6-1983 1,800 Hence, land value as on 1-4-1981 1,75,000 x 1,800
- 1,65,278 per Kottah 1,700 Value of land sold on 1-12-1993 156.81x2xl0.76xl,65,278 720 = 7,74,638...............(b) Based on the above computations, the sale consideration of undivided share in land was taken as in (a) above and the fair market value as on 1st April, 1981, was taken as in (b) above which was further adjusted by indexing for arriving at the long-term capital gains. I may also mention that the assessee has, by way of letter dt. 10th Sept., 1997, (relevant extracts at p. 111 of the paper book), justified the above computation, inter alia, by submitting as under :
"(iii) Annexure 2 enclosed on valuation of land sold to TCS/ITC Classic with all supportings in terms of valuation reports of 1983 and 1990.
Kindly note that for the purpose of splitting the sale consideration between land and building, the latest valuation report for land as on 31st March, 1990, has been used. Thereafter, the same has been indexed on the basis of gold price index to arrive at fair market value for land for 1994.
We would like o point out that we used the gold index for arriving at the fair market value of land for splitting the consideration because :
for the concerned year i.e., 1994, there was no valuation report available.
a comparative study of the years 1983 and 1990 for which the valuation reports are available vis-a-vis the gold index reveals that whereas the land values have appreciated by 475 per cent, gold values have gone up by 77 per cent. This implies that gold index during the relevant period provides a far more conservative trend of appreciation which we have used.
For determining the cost of acquisition for long-term capital gain for land, since land was acquired prior to 1981, we have used the closest valuation report available i.e., on 30th June, 1983, which has been deflated by gold index in 1981 and thereupon the cost of inflation index as per Section 48(v) of the IT Act has been applied."
26. In the light of the above appreciation of basic facts, let us take a look at the law settled by Hon'ble Rajasthan High Court in the case of CIT v. Vimal Chand Golecha (supra) in this case, Their Lordships were in seisin of a situation in which the assessee had purchased two plots of land, constructed a bungalow on it and sold the same for a consideration of Rs. 1,30,000 within two years of completing the construction. The AO referred the matter to Valuation Officer under Section 55A of the Act who valued the land and building separately. On these facts, the question before Their Lordship was whether or not the capital gain arising on sale of land, for which separate valuation under Section 55A was available, can be treated as long-term capital gain. Their Lordships were of the considered view that "if the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same". Their Lordships further observed that, "Even for the purpose of value, the valuer and the Department have taken the value of the land the superstructure thereon separately; therefore, we are of the view that the Tribunal was justified in holding that the capital gains arising from the sale of land has to be treated as long-term capital gains". In this case, thus, value to be taken as sale consideration for sale for land was readily available. In the case before Hon'ble Gujarat High Court, sale was of land per se and not undivided share or interest in land.
27. In the present case, the value of sale consideration for sale of 'undivided share or interest in land'. As at the time of transfer of the same, is simply not available. There is no splitting of consideration in the sale agreements, copies of which have been filed before us at pp. 202 to 214 of the paper book, and since it is a case where sale consideration disclosed by the assessee is accepted, valuation under Section 55A does not come to the play. The valuation report filed by the assessee is as on 31st March, 1990, and, therefore, it is of no assistance in finding out the fair market value as at the time of transfer, leave aside the actual consideration for sale. In any event, in my considered view, save and except in a case in which the Revenue has resorted to Section 55A, and, in which therefore, separate value for land or undivided share, or interest in land is adopted on that basis, unless separate consideration for such land or undivided share or interest in land is available in the conveyance instrument itself or unless the fair market value of such undivided share in land is taken on the basis of an approved valuer's report, it is not open to the assessee to adopt the value of such consideration on the basis of other material. Of course, in appropriate cases, the AO shall have the liberty to refer the matter to the Valuation Officer under Section 55A of the Act. However, as for the computation of fair market value of land, with the help of gold price index method, such a computation method does not have the sanction of the statute and is devoid of any plausible basis at all. In any event, it is not even necessary that the prices of a particular property will move parallel to the movements in the rate of gold or, for that purpose, even in the same direction. Such sweeping generalizations are unsustainable in law. The claim for bifurcation of consideration is made by the assessee and onus is on the assessee is to give evidence in support of stated sale consideration for, what is termed as, value of undivided share or interest in land; the assessee having failed to do so, the claim is only fit to be summarily rejected. I have also taken note of the fact that the assessee does not even have the figure about fair market value of the land as on 1st April, 1981, and the notional figures for the same are also based on gold price index. This method of gold price index, as I have already stated, does not have the sanction of the statute and, therefore, the same is unacceptable. In this view of the matter, the base figure for indexation is also incorrect. The assessee has also not given the rate at which the land was originally purchased in 1951. Accordingly, in my considered view, the computation of capital gains, as made by the assessee, are unacceptable. In any event, once the assessee is unable to give consideration for sale of 'undivided share or interest in land', or the fair market value for land as on the date of transfer, the whole claim for bifurcation of consideration is devoid of any plausible basis. I am, therefore, not inclined to accept the claim of the assessee and am of the opinion that the CIT(A) was justified in sustaining AO's action of treating entire capital gain arising on sale of part of constructed building, including undivided share in land on which the building was constructed, as short-term capital gain. It is in this background that I humbly differ with the views of the learned brother and am of the considered view that the ground No. V(a) should be dismissed.
28. In the result, ground No. V(a) is dismissed.
Ground No. V(b)
29. In ground No. V(b), the assessee is aggrieved of CIT(A)'s confirming the action of the AO in disregarding the short-term capital loss of Rs. 13,99,48,786, claimed by the assessee on account of renunciation of rights entitlements in ITC Bhadrachalam Paperboards Ltd.
30. This issue lies in a narrow compass of facts. The assessee sold 'rights entitlements' in respect of 32,91,645 shares in ITC Bhadrachalam Paperboards Ltd. @ Rs. 30 each, which included sale of 7,00,000 rights sold to wholly-owned subsidiary companies which, accordingly, were not regarded as transfer in view of Section 47(v). The net consideration for the transfer of 'rights entitlements' thus received was Rs. 7,77,49,350. Out of this sale consideration of Rs. 7,77,49,350, and in accordance with the principle laid down by the Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT (1967) 65 (sic 63) ITR 651 (SC), the assessee claimed deduction of cost of acquisition which was worked out as follows :
Cost of acquisition Rs.
Cum-right price of share immediately before record date for rights issue 280 per share Ex-right price of share immediately after record date for rights issue 238 per share Fall in value of existing shares on account of rights issue 42 per share No of equity shares held as on record date 65,83,288 Less : No of equity shares in respect of which rights entitlements were transferred to subsidiary companies 14,00,000 Balance number of shares 51,83,288 Fall in value of existing shareholding on account of rights issue i.e., cost of acquisition 21,76,98,096
31. On this basis, short-term capital loss of Rs. 13,99,48,746 (i.e., Rs. 21,76,98,096 minus Rs. 7,77,49,350) was claimed by the assessee. This claim was declined by the AO on the ground that the assessee failed to give complete details of the computation of short-term capital loss claimed by the assessee. In appeal, CIT(A) took note of the details filed by the assessee but rejected letter dt. 25th Oct., 1994, issued by the Calcutta Stock Exchange Ltd. (copy at p. 98 of paper book) by observing as follows :
"However, before me the reference has been made to a letter issued by the Calcutta Stock Exchange Ltd., wherein it has been written that the cumulative right (sic) varied Rs. 285 to Rs. 275. The ex-right varied between Rs. 240 to Rs. 235. Mere receipt of letter from Calcutta Stock Exchange Association is not enough. The Calcutta Stock Exchange Association has also not calculated as to how they arrived at such figure. It is also not known why the appellant had to sale the right @ Rs. 30 each. Transparency is lacking in the entire transaction. In my opinion there has been a colourable transaction. Relying on the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). I hold that the AO was justified in disallowing the capital loss."
32. Aggrieved by the order of the CIT(A), the assessee is in second appeal before us. My learned brother, in his draft order and for the reasons set out in para V(c).4, upheld the above findings of the CIT(A). Not finding myself able to subscribe to the esteemed views of my learned brother. I proceed to place on record my views on the matter.
33. The judgment of Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT (supra) in my considered view, squarely applies to the facts of this case. I find that there is little dispute about the legal position that until the time of insertion of Section 55(2)(aa)(ii) of the Act, which specifically provided that the cost of acquisition of rights entitlements, by the virtue of holding shares or other securities, is to be taken as NIL, the cost of acquisition of rights entitlements was to be taken as equivalent to fall in value of share or security, or, in other words, as equivalent to loss suffered by way of depreciation in old shares. Loss in value of old shares as a result of issue of new shares was, accordingly, required to be deducted from amount realised from selling of right issue. I have also noticed that the details of cum-rights and ex- rights prices of related share are also placed on record, by way of certification by the Calcutta Stock Exchange Association (CSE). I see no substance in CIT(A)'s observations that mere filing of letter from CSE is not enough because after all its only CSE which is the most authentic source of information about the quoted prices of the related shares on relevant dates. In case any of the authorities below had any doubts about genuineness of the information contained in this communication, it was open to them to make such further verification as they may have considered appropriate. However, initial onus of the assessee to furnish the relevant information is duly discharged when the quoted rates duly certified by the CSE are filed by the assessee. CIT(A)'s observations about CSE not having shown the basis of calculation is also irrelevant because CSE certificate only contains factual position about the rates at which the related shares were sold on the relevant dates, and because such a factual position does not require any calculations at all. Once the factual averments in the certificate are not challenged, there is no reason to doubt the utility of certificate. As I have mentioned earlier, since the AO had not questioned genuineness of price at which 'right entitlements' were transferred and the only reason of declining the short-term capital gain was non-furnishing of 'complete details', ClT(A)'s confirming the AO's action, based on CIT(A)'s suspicions regarding reasons of selling 'rights entitlements' at Rs. 30 per share and of transaction lacking transparency, is devoid of any merits. In any event, it is not even Revenue's case that any related details requisitioned by them, or which the assessee was required to file statutorily, were not furnished by the assessee. It is difficult to comprehend as to how assessee can have the clairvoyance of filing those details which are neither statutorily required to be filed, nor requisitioned by the authorities. When the sale of 'rights entitlement' is not called into question and when there is actually a fall in value of ex-right shares after the record date vis-a-vis the value of cum-right shares before the record date, there is no reason to dub the transaction as a 'colourable device'. There is no finding by the authorities below that the sale consideration of 'rights entitlement' is understated. Under these circumstances, I find no support for CIT(A)'s reference to McDowell & Co. v. CTO (supra) and terming the transaction as a 'colourable device'. It is also fairly well settled in law that merely because a transaction results in tax saving, it cannot be termed as 'a colourable device'.
34. It is also not in dispute that the insertion of Sub-clause (ii) in Section 55(2)(aa), by the virtue of Finance Act, 1994, was effective from 1st April, 1995, and, therefore, it the assessment year before us was not covered by the amended legal provisions. It is fairly well settled that the general rule is that all statutes, other than those which are merely declaratory or procedural, are prospective and that retrospective effect is not to be given to the statute unless by express words such intention of the legislature is unambiguous. In the case of Saurashtra Agencies (P) Ltd. v. Union of India (1990) 186 ITR 634 (Cal), Hon'ble Calcutta High Court as summed up this principle as follows :
"The law is very clear that, unless provided in the statute, the law is always presumed to be prospective in nature. There cannot be any implied inference of any retrospective operation of law. The retrospective operation must be clear and unambiguous. Nothing could be inferred by any stretch of imagination."
In this view of the matter, the Revenue's case does not get any assistance from change in legislation with effect from subsequent assessment year. On the contrary, it only shows what was the mischief sought to be remedied by legislation and the fact that, in the preceding years, the legal position did admit possibility of such a mischief. In any event, the AO has not challenged the principle based on which claim was made but had rejected the claim on the ground of non-availability of relevant details even though there is no mention about any requisition of details which has not been complied with. In my view, an assessee cannot be punished for not filing those details which are neither statutorily required to be filed, nor requisitioned by the authorities. Be that as it may, it is an admitted position that the details about quoted prices of shares, duly certified by Calcutta Stock Exchange, were duly filed before the CIT(A) and a copy of the same has also been placed before us at p. 98 of the paper book.
35. Keeping in view all these facts, as also entirety of the case, I deem it fit and proper to restore the matter to the file of the AO who will adjudicate on assessee's claim for short-term capital loss of Rs. 13,99,48,746 afresh, in the light of the legal position discussed above and after obtaining such further information, or conducting such further enquiries, as may be deemed necessary. In coming to this conclusion. I have taken particular note of the fact that the details about share quotations on relevant dates were not, for whatever reasons, before the AO and authenticity of these rates have not been verified by the authorities below. It is for these elaborate reasons that I humbly differ with the views of the learned brother and am of the considered view that the ground No. V(b) should be allowed for statistical purposes.
36. In the result, ground No. V(b) is allowed for statistical purposes.
37. Save as otherwise specified above, I agree with the conclusions arrived at by my learned brother and endorse the same.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 BY THE BENCH:
1. We, the members of Kolkata D Bench of the Tribunal in the case of ITG Ltd. v. Dy. CIT, ITA No. 853/Cal/1998, have difference of opinion on the following points :
(a) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's disallowance of interest of Rs. 8,25,01,104 claimed as a deduction by the assessee under 36(1)(iii) of the IT Act, 1961, or whether the Tribunal should have deleted this disallowance ?"
(b) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's treating the entire capital gain on sale of flats to M/s Tata Consultancy Services (P) Ltd. and M/s Classic Financial Services and Enterprises Ltd. as short-term capital gains, or whether the Tribunal should have upheld assessee's claim of bifurcating the same into long-term capital gain on the sale of the undivided shares in the interest of the land and short-term capital gain on the sale of building constructed thereon?
(c) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's disregarding the short-term capital loss of Rs. 13,99,48,786 claimed by the assessee on account of renunciation of right entitlements in Bhadrachalan paperboards Ltd. as held in concluding paragraph of ground No. V(b) of JM's order or whether the Tribunal should have restored the matter to the AO with the directions as set out in para. 35 of AM's dissenting order."
Accordingly, in terms of the provisions of Section 255(4) of the IT Act, 1961, we hereby make the reference to the Hon'ble President.
V. Dongzathang, President
1. There being a difference of opinion between the Members, the following questions were referred to me under Section 255(4) of the IT Act, 1961 :
"(a) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's disallowance of interest of Rs. 8,25,01,104 claimed as a deduction by the assessee under Section 36(1)(iii) of the IT Act. 1961, or whether the Tribunal should have deleted this disallowance ?
(b) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's treating the entire capital gain on sale of flats to M/s Tata Consultancy Services (P) Ltd. and M/s Classic Financial Services and Enterprises Ltd., as short-term capital gains, or whether the Tribunal should have upheld assessee's claim of bifurcating the same into long-term capital gain on the sale of the undivided shares in the interest of the land and short-term capital gain on the sale of building constructed thereon ?
(c) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's disregarding the short-term capital loss of Rs. 13,99,48,786 claimed by the assessee on account of renunciation of right entitlements in BhadracHalan Paperboards Ltd. as held in concluding paragraph of ground No. V(b) of JM's order of whether the Tribunal should have restored the matter to the AO, with the directions as set out in para. 35 of AM's dissenting order ?"
2. With regard to the first question, the facts are that the assessee claimed deduction of interest amounting to Rs. 8,25,01,104 being interest on loan taken from financial institutions and banks. Though the interest, payable was capitalized in the books of account, the assessee claimed the same as deduction from the total income. The AO found that this amount of interest was capitalized in the plant and machinery and also in the capital work-in-progress in respect of Triveni Tissues Divisions and Paper Packaging and Printing Divisions of the assessee-company. He also found that these plant and machineries were not yet put into operation. He, therefore, held that the interest claimed was in the nature of pre-operative expenditure and, therefore, following the Circular No. 461, dt. 9th July, 1986, of the CBDT, he disallowed the claim.
3. Aggrieved by the said order, the assessee took up the matter in appeal before the CIT(A). The learned CIT(A), however, upheld the order of the AO.
4. Aggrieved by the said order, the assessee took up the matter in appeal before the Tribunal and it was submitted that interest on borrowed capital is allowable as deduction while computing the business profit under Section 36(1)(iii) of the Act. For this proposition, reliance was placed on the following decisions of the Hon'ble Supreme Court :
(i) India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC);
(ii) Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 267 (SC); and
(iii) CIT v. Associated Fibre & Rubber Industries (P) Ltd. (1999) 236 ITR 471 (SC).
Reliance was also placed on the decision of the Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj). Reference was also made to the decision of the Tribunal in assessee's own case for asst, yr. 1991-92 in ITA No. 157/Cal/97 of 30th April, 2001.
5. The learned JM, however, upheld the order of the CIT(A) observing as follows :
"6. We have heard both the parties and perused all the records. We are shockingly surprised to find that the learned authorised representative in his lengthy arguments and in his written submission has not even once mentioned about the CBDT's Circular 461, dt. 9th July, 1986, relied upon by the AO and CIT(A). It appears that the learned authorised representative has nothing to say on this circular which in fact is the basis of this addition. His silence should be taken as acceptance of the applicability of the contents of the circular to the facts of the case. In fact this circular was issued by the CBDT to explain the substance of the provisions relating to direct taxes in the Finance Act, 1986. The learned authorised representative is also silent about the observation of the AO that this type of addition has been made in earlier year also. It appears the assessee has accepted this disallowance made in earlier years and wanted to do new beginning this year but failed. All the cases cited and the case of Gujarat High Court heavily relied by the learned authorised representative are very old cases much earlier to the CBDT Circular No. 461, dt. 9th July, 1986, relied upon by the Department and they decided the matter as per law as it existed during that period. Though the case CIT v. Associated Fibre & Rubber Ind. (P) Ltd. was decided by the Supreme Court on 3rd Feb., 1999 but it pertained to asst. yr. 1972-73. The case decided by the Bench of this Tribunal cited by the learned authorised representative in his own case for asst. yr. 1991-92 is also of no help to the assessee as the issue involved is different. In that case issue involved was not whether the asset purchased out of borrowed money was put to use or not. The AO in this case has simply followed the CBDT's circular and CIT(A) hat also confirmed the order of the AO on the same basis. As it has been held by the Courts that CBDT circulars are binding on the Revenue authorities and in the absence of any jurisdictional High Court 01 apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So this ground of appeal is dismissed."
6. The learned AM, however, could not reconcile with the view taken by the learned JM. He re-examined the circular of the Board relied upon by the Revenue and the learned JM in the context of various decisions and eventually came to the conclusion that the assessee would be entitled to deduction of the said interest, observing as follows :
"8. I first of all deem it necessary to quote entire para. 18 of the CBDT Circular No. 461, dt. 9th July, 1986, (161 ITR St 17, relevant portion at p. 30), part of which has been produced by the AO and brother JM, in their respective orders, and which has been heavily relied upon by the authorities below and indeed my brother colleague, for ready reference :
'(ix) Modification in the definition of 'Actual cost' for the purposes of depreciation, investment allowance, etc. 18.1. Under the existing provisions of Section 43(1) of the IT Act, 'actual cost' means actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority. It was found that certain taxpayers, supported by some Court decisions, had resorted to a major change in the accounting practice by capitalizing the interest paid or payable in connection with acquisition of asset relatable to the period after such asset is first put to use. This capitalization implies inclusion of interest in actual cost of the asset for the purpose of claiming depreciation, investment allowance, etc., under the IT Act.
18.2. It is an accepted accounting principle that where an asset is acquired out of borrowed funds, the interest paid nor payable on such funds constitutes the cost of borrowing and not the cost of asset acquired with those funds. It is for this reason that as per the clear guidelines issued by the Institute of Chartered Accountants of India, the interest on moneys which are specifically borrowed for the purpose of a fixed asset may be capitalized only relating to the period prior to the asset coming into production i.e., relating to the erection stage of the asset. However, once the production starts, no interest on borrowings for the purchase of such assets should be capitalized. In spite of these clear guidelines, as also consistent view of the Department in this matter, some taxpayers had adopted a contrary stance and had capitalized such interest. The first decision in favour of this stance had been rendered on 13th May, 1974, in the case of CIT v. J.K. Cotton Spinning and Weaving Mills Ltd. (1975) 98 ITR 153 (All). This decision, as well as the subsequent decisions, were contrary to the legislative intent. Hence, in order to enable the Government to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision, has been made retrospectively from 1st April, 1974, and will, accordingly, apply in relation to the asst. yr. 1974-75 and subsequent years.
(Section 9 of the Finance Act)
9. This only explains the background in which Expln. 8 to Section 43(1) was introduced which reads as follows :
Explanation 8 ; For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset.
10. One of the case relied upon by the assessee, as mentioned in p. 2 of the written submission, is Dy. CIT v. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj). wherein Their Lordships of Hon'ble Gujarat High Court had an occasion to deal with the aforementioned circular. Their Lordships, after reproducing the relevant extracts from the aforesaid circular, observed that "....As can be seen Expln. 8 was inserted to counteract tax avoidance to way of claiming depreciation, investment allowance, etc., on a large amount of actual cost. Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill, we find any indication in support of Revenue's stand that in a converse situation interest has to be capitalized and further then such interest cannot be claimed as deduction under Section 36(1)(iii) of the Act. In fact, there is no mention about the deducibility or otherwise under Section 36(1)(iii) of the Act." In this view of the matter, with which I am in most respectful agreement, the Revenue's case does not derive any benefit from the contents of CBDT Circular No. 461. In my considered view, this circular is not at all relevant for the issue in this appeal before the Tribunal.
11. I may also mention that, earlier in this judgment in the case of Core Healthcare Ltd. (supra), Their Lordships had also observed that "The aforesaid Expln. 8 nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under Section 36(1)(iii) of the Act.
Even if we assume, for the sake of argument, the submission of Revenue that interest paid/payable for the borrowings before an asset is first put to use is required to be capitalized, there is nothing in Expln. 8 to disentitle an assessee from making a claim of deduction under Section 36(1)(iii) of the Act. As we have already seen, the settled legal position is that interest relating to an acquisition of capital asset would also be a permissible deduction under Section 36(1)(iii) of the Act, the only requirement being that the borrowing must be for the purpose of business." It is also interesting to note that capital expenditure, by the virtue of provision of Section 37(1) of the Act, is not normally allowed as a deduction in computation of income under the head "income from business and profession" but, as provided in Section 37(1) itself, such disallowance does not extend to the deductions permissible under Section 30 to 36 and, therefore, even if an expenditure allowable under Sections 30 to 36 is of the capital nature, the same cannot be subjected to disallowance for the reason that the expenditure is capital in nature. The deduction for interest being covered by Section 36(1)(iii), therefore, cannot be subjected to disallowance on that ground.
12. Coming to learned brother's observations that the ratio of Hon'ble Supreme Court's judgment in the case of CIT v. Associated Fibre & Rubber Industries (P) Ltd. (1999) 236 ITR 471 (SC) and of Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj) was no longer good in law because of CBDT Circular No. 461, suffice to say that Hon'ble Gujarat High Court, in the case of Core Healthcare Ltd. (supra) and after taking cognizance of the aforesaid circular as also of insertion of Expln. 8 to Section 43(1) which was dealt with by the circular, observed that "Expln. 8 does not in anyway curtail the scope of Section 36(1)(iii) of the Act" and that :
'As laid down by the apex Court in the case of Ambika Prasad Mishra v. State of UP, AIR 1980 SC 1762 : (1980) 3 SCC 719 [p. 1764 of AIR 1980 (SC)) :
'Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent....A decision does not lose its authority 'merely because it was badly argued, indequately considered or fallaciously reasoned.....' Similarly in the case of Kesho Ram & Co. v. Union of India (1989) 3 SCC 151. it was stated by the Supreme Court thus ;
The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decisions.....' In such a situation, we find all the contentions raised on behalf of the Revenue stand answered by the two decisions in the cases of CIT v. Alembic Glass Industries Ltd. (supra) and CIT v. Associated Fibre and Rubber Industries (P) Ltd. (supra).
Having held that the CBDT Circular No. 461 does not have any bearing on the issue in this appeal the Tribunal and respectfully following Hon'ble Gujarat High Court's judgment referred to above, I am of the considered view that decisions in the cases of CIT v. Alembic Glass Industries Ltd. (supra) and CIT v. Associated Fibre and Rubber Industries (P) Ltd. (supra) still hold field. I leave it at that.
13. I may mention that in assessee's own case, and while dealing with the asst. yr. 1991-92, a coordinate Bench of this Tribunal, speaking through the Hon'ble Vice President Shri Garg, inter alia, observed as follows :
'Insofar as interest paid to SBI of Rs. 3,84,298 which was paid on account of Chiala GL 11 Line Project and Rs. 39,82,499 being interest paid to HDFC for loans obtained for construction of residential complex for employees is concerned, we are in agreement with the CIT(A) that the interest could not be disallowed even if borrowed capital was utilized for the purpose of acquiring capital asset. There is no distinction made in the provisions of Section 36(1)(iii) to bifurcate the utilization of the expenses for the purpose of acquiring asset or for the purpose of meeting the expenses on day-to-day basis. What is required is that the expenses must have been incurred on the capital borrowed for the purpose of the assessee. Moreso the expenses were incurred by the assessee for the existing business of the company.' (relevant portion at pp. 6-7 of the paper book)
14. In the case of CIT v. Associated Fibre & Rubber Industries (P) Ltd. (supra), Hon'ble Supreme Court were in seisin of a situation in which the assessee had claimed deduction for interest paid on borrowings for the purpose of acquiring machineries which were admittedly not put to use in the relevant previous year. Even though claim for deduction was declined by the AO on the ground that since machineries were not used for the purpose of business, claim for deduction of interest for acquiring these machineries cannot also be allowed, and this stand was also confirmed by the first appellate authority. In second appeal, however, Tribunal deleted the disallowance on the ground that machinery being a business asset, the interest paid on the amount borrowed for the purchase of such machinery would certainly be an allowable deduction. When this dispute finally travelled to the Hon'ble Supreme Court, Their Lordships observed that 'the reasoning of the Tribunal is correct'. It was further observed that 'Even though the machinery has not been actually used in the business at the time when assessment was made, the same had been treated as a business asset and it was purchased only for the purpose of the business'. Their Lordships then concluded that 'In the circumstances, the interest paid on the amount borrowed for purchase of such machinery is certainly a deductible amount.'
15. In the case of CUT v. Alembic Glass Industries Ltd. (supra), Hon'ble Gujarat High Court has observed that when a borrowing is made for the purpose of business, the interest paid on such borrowings is deductible under Section 36(1)(iii) of the Act, irrespective of the position as to whether such borrowings are used for capital or revenue purposes. It was however added that the business for which capital asset is purchased should not be separate or distinct from the business of the assessee for the purpose of which borrowing is resorted to. Their Lordships then observed that if there is no existing business with reference to which the capital is borrowed and the borrowed capital is used to purchase a new asset of enduring nature, then interest paid on such borrowing till the asset goes into production, increases the cost of installation of such asset, and hence should be treated as a capital expenditure not allowable under Section 36(1)(iii) of the Act. When we apply principles thus laid down by the Hon'ble High Court the question that immediately needs to be addressed is whether the related loans were taken for the purpose of an existing business or for a new business. In other words, the emerging proposition is that when related loans are taken for the existing business, the interest paid on such loans is to be allowed as a deduction under Section 36(1)(iii) of the Act.
16. In the light of this legal position, I turn to the admitted facts of the case. At p. 5 of the assessment order, the AO has observed that the impugned amount of interest relates to plant and machinery and capital work-in-progress in respect of Tribeni Tissues Division and Paper, and Packaging and Printing Divisions of the assessee-company. Earlier in the assessment order, at pp. 3 and 4 thereof, the AO has taken note of various divisions under which the assessee-company carries on its business and the names of Tribeni Tissues Division, Paper Division, and Packaging and Printing Division duly figures therein. It is thus not in dispute that the business was already being carried on in these divisions and that any of the divisions for which machineries are used constitutes 'new business'. It is not even the case of the Revenue that machineries were for the purpose of 'new business' and interest on borrowings for acquiring the machineries, for this reason will not be an allowable deduction. The Revenue's case is that interest on borrowings for acquisition of these machines should have necessarily been capitalized for the period upto the time when the machineries were put to use. In the light of above deliberations, however, this plea is devoid of any 'merits. I am, accordingly, of the considered view that, in accordance with the principles laid down in the case of Alembic Glass Industries Ltd. (supra) and on the facts of this case, interest paid on borrowing to acquire machineries in question, is allowable as a deduction under Section 36(1)(iii) of the Act.
17. I may also mention that, as held in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC) Hon'ble Supreme Court has observed that loan obtained is not an asset or advantage of an enduring nature and the expenditure was made for securing the use of money for a certain period and it is irrelevant to consider the object with which the loan was obtained. The interest on borrowings, for this reason, was held to be revenue expenditure irrespective of the use to which the borrowed funds were put. Accordingly, in my view, there is no substance in Revenue's plea that merely because related machines were not put to use, the interest paid on the borrowings will not be an allowable expenditure-particularly in a situation, as are the admitted facts of this case, when the loan was used for the purpose of an existing business.
18. I may also mention that Hon'ble Madras High Court, in the case of CIT v. Kasturi & Sons (2000) 241 ITR 412 (Mad) were in seisin of a situation when the assessee had, during the course of his business, borrowed moneys for the purpose of setting up a printing unit, and though it had capitalized the interest paid on such borrowings, it claimed that interest as a revenue expenditure under Section 36(1)(iii). This claim, though negated by the AO, was upheld by the CIT(A) and the Tribunal. Hon'ble Madras High Court, on these facts, upheld the admissibility of assessee's claim for deduction under Section 36(1)(iii) of the Act. Similarly in the case of Dy. CIT v. Core Healthcare Ltd. (supra), Hon'ble Gujarat High Court were in seisin of a materially identical situation, i.e., when the interest on borrowings was capitalized in the books of accounts but claimed as a deduction under Section 36(1)(iii) in the income-tax, and Their Lordships of Hon'ble Gujarat High Court also upheld the assessee's claim of deduction under Section 36(1)(iii).
19. In view of the above discussion, as also bearing in mind entirety of this case, I am of the considered view that the authorities below erred in not allowing the deduction of Rs. 8,25,01,104 on account of interest on loans claimed by the assessee as a revenue expenditure under Section 36(1)(iii) of the IT Act, 1961. It is in this background that I humbly differ with the views of the learned brother and am of the considered view that the ground No. 1 should succeed."
7. On this difference of opinion, question No. 1 was referred to me. At the time of hearing before me, Shri R.K. Mitra, learned authorized representative, appeared for the assessee and Shri Kai Sang, learned senior Departmental Representative, appeared for the Revenue.
8. On careful consideration of the rival submissions in the light of the material on record, I am of the view that the issue is squarely covered by the decision of the Hon'ble Gujarat High Court in the case of Dy. CIT v. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj). The Hon'ble Gujarat High Court considered all the relevant decisions on the point and eventually enunciated the following principles while holding that the earlier decisions of the Hon'ble Bombay High Court in the case of Calico Dyeing and Printing Works v. CIT (1958) 34 ITR 265 (Bom) and of the Hon'ble Supreme Court in India Cements Ltd. (supra) still holds the field with equal force, even after the decision in Challapalli Sugars Ltd's v. CIT (1975) 98 ITR 367 (SC) as follows :
"(1) Where a borrowing is made for the purposes of a business, the interest paid on such a borrowing becomes eligible to deduction contemplated by Section 10(2)(iii) of the Act of 1922 or Section 36(1)(iii) of the Act of 1961.
(2) This would be so, even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset.
(3) However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed if deduction under Section 10(2)(iii) is to be allowed, (4) If there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of the installation of the said asset, and hence should be treated as capital expenditure not covered by Section 10(2)(iii) of the Act of 1922 or Section 36(1)(iii) of the Act of 1961."
9. If the above principle is applied to the facts of the case, it is clear that the assessee is already in the business of manufacture of paper used in cigarettes and packaging products. The Tribunal Tissues Division of ITC has been engaged in the business of manufacture of paper used in cigarettes and the Printing and Packaging Division of the ITC has been engaged in the business of manufacturing packaging products from the earlier years. The borrowings made by the assessee were for the purpose of the business which is already in existence. Secondly, there is no dispute that the borrowed capital was used for purchase of plant and machinery for the same business and not a separate or distinct business of the assessee.
10. The Hon'ble Delhi High Court considered the question of allowability of interest in similar circumstances in the case of CIT v. Dalmia Cement (Bharat) Ltd. (2001) 242 ITR 129 (Del) and held that the interest was paid for the borrowing for the purpose of assessees business and as such allowable as revenue expenditure. The Hon'ble Delhi High Court referred to the earlier decision in the case of CIT v. Modi Industries Ltd. (1993) 200 ITR 341 (Del) wherein it was held that in considering whether the two businesses run by an assessee are the same business, what is of importance is the unanimity of control and interlacing of the two businesses and not the nature of the businesses. Having applied the ratio of the above decisions and considering that the implications and effect of Expln. 8 to Section 43(1) of the Act have also been taken into consideration by these decisions, the issue is fully covered in favour of the assessee and there is no reason to disallow the claim of the assessee. It has to be allowed in the light of the above decisions.
11. With regard to the circular of the Board, it is an accepted principle of law that such circulars are not binding on the appellate authorities. While benevolent circulars are binding on the authorities as held by the Hon'ble Supreme Court in the case of Navnit Lal C. Javeri v. K.K. Sen (1965) 56 ITR 198 (SC) and the subsequent decision of the Hon'ble Supreme Court and the High Courts, it is also a fact that the administrative instructions cannot override the statutory provisions as held in the case of State Bank of Travancore v. CIT (1986) 158 ITR 102 (SC). In that view of the matter, the circular of the Board cannot be the basis for deciding the issue for making the disallowance. I concur with the view of the learned AM on this point.
12. With regard to the next point, the facts are that the assessee sold two floors of ITC Center Building to M/s Tata Consultancy Services Ltd. & M/s Classic Financial Services Ltd. The assessee bifurcated the total sale considerations into two portions (1) pertaining to the two floors of the building, and (2) the indivisible interest in the land sold. In respect of the sale of a portion of this building, the assessee has declared a short-term capital gain of Rs. 4,33,73,885 and in respect of the sale of individual interest in the land sold, a long-term capital gain of Rs. 51,40,117 was shown. The copies of agreement to sale deed, conveyance, occupancy certificate and clearance certificates in Form No. 371 were filed at the time of the assessment. As per the sale agreement, the sale of two floors of the building covered proportionate undivided share of interest in the land and it was contended before the AO that the treatment of indivisible interest in land independent of the building cost is permissible in the light of the decision of the Hon'ble Rajasthan High Court in the case of CIT v. Vimal Chand Golecha (1993) 201 ITR 442 (Raj). In that case, it was held that where a consolidated price is paid for building inclusive of land, the same should be bifurcated and the capital gain arising from the value of land should be treated as long-term capital gain. The AO however, held that the land and building are one composite unit and inseparable. Since the assessee received total sale consideration in respect of floor spaces sold by it, there was no justification to show the said proceeds under two heads. The long-term capital gain offered by the assessee on the sale of individual interest in the land was not acceptable. The AO, therefore, took the composite sale consideration for the two floors and recomputed the short-term capital gains at Rs, 5,02,36,237 under Section 50 of the Act.
13. The assessee took up the matter in appeal before the CIT(A) who, however, confirmed the order of the AO.
14. In the appeal before the Tribunal, the assessee reiterated the said claim as made before the Revenue authorities. The following decisions were cited in support of the claim :
(i) CIT v. Vimalchand Golecha (supra);
(ii) CIT v. Dr. D.L. Ramachandran Rao (1999) 236 ITR 51 (Mad); and
(iii) CIT v. C.R. Subramanian (2000) 242 ITR 342 (Kar).
The learned JM was of the view that the claim of the assessee was in order. Since the land was held by the assessee for a period exceeding 36 months, the land cannot be regarded as short-term capital asset only by virtue of the construction of building thereon. It was also held by him that to bifurcate the capital asset into two, is not impossible and, therefore, the capital gain should be worked out with reference to the sale of building and land separately.
15. The learned AM, however, could not subscribe to the view taken by the learned JM and preferred to confirm the view taken by the AO and the CIT(A) observing as follows :
"25 I Must first of all refer to p. 112 of the paper book wihich shows the computation based on which long-term capital gain is worked out. Broadly, the computation can be summarized as below:
Undivided share or interest inland at 37 Chowinghee Road, Kolkata 1,666.45 mtrs.
Undivided share of land transferred to Tata Consultancy Services 156.81 mtr.
Classical Financial Services "& Enterprises 157.18 mtr.
Valuation as on 1-12-1993 (i.e., the date of transfer) Value as on 31-3-1990, as per valuer's report 10,07,643 Per Kottah Gold prices as on 31-3-1990 3,200 Gold prices as on 31-3-1994 4,598 Hence, land value as on 31st March, 1994 10,07,643 x 4,598 = 14,47,857 per Kottah Value of land sold on 1-12-1993 156.81 X 10.76 X 14,47,857 = 7,85,927................ .(a) Valuation as on 1-4-1981 Value as on 30-6-1983 as per valuer's report Rs. 1,75,000 per Kottah Gold prices as on 1-4-1981 1,700 Gold prices as on 30-6-1983 1,800 Hence, land value as on 1-4-1981 1.75.000x1.800 1,700 = 1,65,278 per kottah Value of land sold on 1-12-1993 156.81 x 2 x 10.76 X 1.65.278
- 7,74,638 (b) Based on the above computations, the sale consideration of undivided share in land was taken as in (a) above and the fair market value as on 1st April, 1981, was taken as in (b) above which was further adjusted by indexing for arriving at the long-term capital gains. I may also mention that the assessee has, by way of letter, dt. 10th Sept., 1997, (relevant extracts at p. 111 of the paper book), justified the above computation, inter alia, by submitting as under :
'(iii) Annexure 2 enclosed on valuation of land sold to TCS/ITC Classic with all supportings in terms of valuation reports of 1983 and 1990.
Kindly note that for the purpose of splitting the sale consideration between land and building, the latest valuation report for land as on 31st March, 1990, has been used. Thereafter, the same has been indexed on the basis of gold price index to arrive at fair market value for land for 1994.
We would like to point out that we used the gold index for arriving at the fair market value of land for splitting the consideration because :
for the concerned year i.e., 1994, there was no valuation report available;
a comparative study of the years 1983 and 1990 for which the valuation reports are available vis-a-vis the gold index reveals that whereas the land values have appreciated by 475 per cent, gold values have gone up by 77 per cent. This implies that gold index during the relevant period provides a far more conservative trend of appreciation which we have used.
For determining the cost of acquisition for long-term capital gain for land, since land was acquired prior to 1981, we have used the closest valuation report available i.e., on 30th June, 1983, which has been deflated by gold index in 1981 and thereupon the cost of inflation index as per Section 48(v) of the IT Act has been applied.'
26. In the light of the above appreciation of basic facts, let us take a look at the law settled by Hon'ble Rajasthan High Court in the case of CIT v. Vimal Chand Golecha (supra). In this case, their Lordships were in seisin of a situation in which the assessee had purchased two plots of land, constructed a bungalow on it and sold the same for a consideration of Rs. 1,30,000 within two years of completing the construction. The AO referred the matter to Valuation Officer under Section 55A of the Act who valued the land and building separately. On these facts, the question before their Lordships was whether or not the capital gain arising on sale of land, for which separate valuation under Section 55A was available, can be treated as long-term capital gain. Their Lordships were of the considered view that 'if the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same.' Their Lordships further observed that, 'Even for the purpose of value, the valuer and the Department have taken the value of the land the superstructure thereon separately; therefore, we are of the view that the Tribunal was justified in holding that the capital gains arising from the sale of land has to be treated as long-term capital gains.' In this case, thus, value to be taken as sale consideration for sale for land was readily available. In the case before Hon'ble Gujarat High Court, sale was of land per se and not of undivided share or interest in land.
27. In the present case, the value of sale consideration for sale of 'undivided share or interest in land' as at the time of transfer of the same, is simply not available. There is no splitting of consideration in the sale agreements, copies of which have been filed before us at pp. 202 to 214 of the paper book, and since it is a case where sale consideration disclosed by the assessee is accepted, valuation under Section 55A does not come to the play. The valuation report filed by the assessee is as on 31st March, 1990, and, therefore, it is of no assistance in finding out the fair market value as at the time of transfer, leave aside the actual consideration for sale. In any event, in my considered view, save and except in a case in which the Revenue has resorted to Section 55A, and, in which therefore, separate value for land or undivided share or interest in land is adopted on that basis, unless separate consideration for such land or undivided share or interest in land is available in the conveyance instrument itself or unless the fair market value of such undivided share in land is taken on the basis of an approved valuer's report, it is not open to the assessee to adopt the value of such consideration on the basis of other material. Of course, in appropriate cases, the AO shall have the liberty to refer the matter to the Valuation Officer under Section 55A of the Act. However, as for the computation of fair market value of land, with the help of gold price index method, such a computation method does not have the sanction of the statute and is devoid of any plausible basis at all. In any event, it is not even necessary that the prices of a particular property will move parallel to the movements in the rate of gold or, for that purpose, even in the same direction. Such sweeping generalizations are unsustainable in law. The claim for bifurcation of consideration is made by the assessee and onus is on the assessee to give evidence in support of stated sale consideration for, what is termed as, value of undivided share or interest in land; the assessee having failed to do so, the claim is only fit to be summarily rejected. I have also taken note of the fact that the assessee does not even have the figure about fair market value of the land as on 1st April, 1981, and the notional figures for the same are also based on gold price index. This method of gold price index, as I have already stated, does not have the sanction of the statute and, therefore, the same is unacceptable. In this view of the matter, the base figure for indexation is also incorrect. The assessee has also not given the rate at which the land was originally purchased in 1951. Accordingly, in my considered view, the computation of capital gains, as made by the assessee, are unacceptable. In any event, once the assessee is unable to give consideration for sale of 'undivided share or interest in land', or the fair market value for land as on the date of transfer, the whole claim for bifurcation of consideration is devoid of any plausible basis. I am, therefore, not inclined to accept the claim of the assessee and am of the opinion that the CIT(A) was justified in sustaining AO's action of treating entire capital gain arising on sale of part of constructed building, including undivided share in land on which the building was constructed, as short-term capital gain. It is in this background that I humbly differ with the views of the learned brother and am of the considered view that the ground No. V(a) should be dismissed."
16. On this difference of opinion, the above question was referred to me for decision. It is a fact admitted by both the parties that the assessee constructed a multi-storeyed building called ITC Centre after demolishing the three storeyed block as per the sanction plan, dt. 11th Nov., 1987. The assessee agreed to sell 10th floor of the said multi-storeyed building with basement for 2 car parking spaces for a consideration of Rs. 3,56,49,100. The sale consideration is provided for in the agreement, dt. 28th May, 1993, at para 3 as follows :
"The Buyer agrees to purchase the said units constructed on the 10th floor of the said building and the two covered car parking spaces together with proportionate undivided share or interest in the land over which ITC Centre is constructed and the undivided share or interest in the land comprised in a portion of the said premises and in common areas and facilities together with the 'Right of Access' on a strip of land 5 feet in width bordering ITC Centre for the purpose of maintenance of the sides and rear portion of ITC Centre (without conferring any ownership right of 5 feet strip of land as aforesaid) at or for the sum of Rs. 3,56,49,100 (Rupees three crores fifty-six lacs forty-nine thousand one hundred only) and out of which Rs. 35.70 lacs (Rupees thirty-five lacs seventy thousand only) being 10 per cent approximately of the total consideration money has been paid by the buyer to the sellers (receipt of which the sellers hereby admit and acknowledge) as and by way of earnest money and the balance amount amounting to Rs. 3,20,79,100 (Rupees three crores twenty lacs seventy-nine thousand one hundred only) shall be paid by 31st July, 1993."
17. On similar terms, vide agreement dt. 31st July, 1992, the assessee sold the 9th floor and basement for car packing spaces at Rs. 3,20,61,900. The details of the sale considerations are exactly the same as in the case of TCS referred to above. The assessee, however, did not bifurcate the sale consideration for the land and the building i.e., the floors sold to these parties. At the time of assessment, the assessee, however, claimed that the undivided interest in the land on which the building stands should be assessed separately as long-term capital gains as the land was held for more than 36 months. The AO, however, did not accept the plea and assessed the entire amount as short-terms capital gains, The learned JM, however, held that the land and building being separable, the land should be assessed as long-term capital gains and the sale consideration for the floors should be assessed as short-term capital gains. The learned AM, however, held that the AO was fully justified in taking the composite sale consideration as short-term capital gains for the reasons given by him as noted above.
18. In India, separate ownership of land and building is recognized in law. A person can hold the land and another person can be owner of the building or superstructure constructed thereon. This is fully recognized under the IT Act. Section 32 of the IT Act provides for depreciation on buildings, etc. While considering the question whether building includes the land, it was held that from its very nature, land neither requires insurance against destruction nor any repair nor does it depreciate in value by use. In the case of CIT v. Alps Theatre (1967) 65 ITR 377 (SC), the Hon'ble Supreme Court held that the word 'building' in the context of s, 32 means the superstructure only and does not include land, It was further held that so long as the relevant provisions of IT Act make a distinction between the land on which a building is constructed and the building itself and allows depreciation only on the building, any item of expenditure incurred by an assessee directly referable to the land and not referable to the building as distinct from land cannot constitute a part of the cost of construction of the building for the purpose of allowance of depreciation. It was, therefore, held that depreciation is not allowable on the cost of the land on which a building is erected and allowable only on the cost of superstructure.
19. The question of valuation of plot allotted to a member of a cooperative house building society came up before Hon'ble Delhi High Court in the case of CWT v. Smt Promila Bali (1983) 141 ITR 942 (Del). It was held that the value of a plot allotted to a member of a cooperative house building society is to be determined according to the contribution made to the society towards the plot by the members as there is a total ban on transfer of such a plot to a non-member of the society. From the above and also keeping in view the decisions cited before the Tribunal, it is clear that the land and building are separate assets and in the normal course they have to be separately considered for the purpose of depreciation as also for computation of capital gains.
20. The only problem in this case is the question of bifurcating the cost of the land and the flat from the sale consideration thereof which was not done by the assessee. If the cost of the land and the sale consideration of the same is impossible (sic) and in fact if the seller and purchaser included the entire cost as a composite one, then the view taken by the learned AM is the appropriate view and justified in law. However, if it is possible to work out the cost of the land and the sale consideration of the same on the basis of material on record, it will not be justified to deny the claim of long-term capital gains on the undivided share in the land sold along, with the floors.
21. Since the question referred to me does not cover the question of computation and since the learned JM also simply directed the AO to work out capital gains with reference to the sale of building and land separately, there could not have been any debate on this direction. The nature of treatment of the sale/purchase consideration can be verified from the books of the seller and the purchasers. If however, the sale/purchase consideration is treated as composite and depreciation is also claimed and allowed and it is impossible to bifurcate the cost/sale consideration of the land from the total sale consideration, then only it has to be held as a composite sale. I, therefore, subscribe to the view taken by the learned JM on this point.
22. With regard to the third ground, the facts are that the assessee held certain shares in M/s Bhadrachalan Paperboards Ltd., a sister concern of the assessee. On the strength of the shares held by it, the assessee was entitled to subscribe to right shares issued by M/s Bhadrachalan Paperboards Ltd. Instead of actually subscribing to the right issues, the assessee sold or renounced the right entitlement in respect of 32,91,645 shares in ITC Bhadrachalam Paperboards Ltd. @ Rs. 30 each which included sale of 7,00,000 rights sold to wholly-owned subsidiary companies which were not regarded as transfer in view of Section 47(v) of the Act. The net consideration for the transfer of rights entitlement thus received was Rs. 7,77,49,350. The assessee, therefore, claimed a short-term capital loss of Rs. 13,99,48,786 in the light of the decision of the Hon'ble Supreme Court in the case of M/s Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651 (SC). This claim of loss was declined by the AO on the ground that the assessee failed to give complete details of the computation of short-term capital loss.
23. In the appeal before the CIT(A), the learned CIT(A) took not of the details filed by the assessee but rejected the letter issued by Calcutta Stock Exchange Ltd. on 25th Oct., 1994, giving the cumulative right and ex-right price of the shares of M/s Bhadrachalam Paperboards Ltd. on the relevant dates i.e., as on 5th Oct., 1993, and 20th Oct., 1993. The learned CIT(A), therefore, held that there was no reason for the assessee to sell the right shares @ 30 each. According to him transparency is lacking in the entire transaction and, therefore, it is a colourable transaction for which the decision of the Hon'ble Supreme Court in the case of McDowell & Co. v. CTO (1985) 154 ITR 148 (SC) is applicable. He accordingly upheld the order of the AO.
24. Aggrieved by the said order, the assessee took up the matter in appeal before the Tribunal and reiterated the said claim as made before the Revenue authorities. The learned JM did not find favour with submissions and upheld the order of the CIT(A) observing as follows :
"4. We have heard both the parties and perused all the records available. We feel that the basic instinct of a businessman is to earn profit. No prudent businessman will act in a manner which is not beneficial to him. For the sake of analogy, the basic instinct of a human being is that he loves his life, he will not do anything at the risk of his life unless he is of unsound mind. All the traffic rules are made by keeping this basic instinct of human being in mind that nobody will violate them because he loves his own life but if a man of unsound mind or a person who wants to commit suicide and comes on the road with this intention, the whole traffic rules and regulations become redundant. To give an another example the all measures taken for security of VIPs or Government installations are of no use before a suicide attack. The point we are trying to make is that all the rules, regulations, legal provisions are made keeping in mind the normal prudent behaviour of a man. In the instant case, there is no doubt that transaction is legal, but at the same time the fact remains that it is not transparent also. We have heard the learned authorised representative at length and have gone through the relevant papers referred by him in his paper book but still mystery remains as to why instead of subscribing to the rights issue a professionally managed assessee-company had sold or renounced the rights entitlements to other entities. It is not the case of assessee that due to mistake or inadequate professional advice they made this transaction and suffered such a huge loss. Rather they are justifying this transaction. From the assessee-company it cannot be expected that they will take a decision like this and incur such a huge loss unless there was a greater motive to go ahead with this transaction. That greater motive can only be to our mind in a case of a profit-making company, to reduce its tax liability. Otherwise even a layman who deals in shares would not commit this type of blunder. It is a clear cut case of tax avoidance. The case law K.P. Verghese v. CIT 131 ITR 597 (SC) cited by the learned authorised representative is of no help to the assessee as the issue before us is not that the assessee has understated the sale consideration. Issue here is whether at such a price any prudent person would have gone ahead with the transaction. So the facts of the case are totally different here. In such a situation we feel that we will be failing in our duty if we allow people to take advantage of loopholes of the legislation. We also feel that legislature also realized that people are taking undue advantage of these legal provisions and, therefore, they have also changed the law from the next year i.e., asst. yr. 1995-96 as pointed out by the learned authorised representative to plug this loophole by the insertion of Sub-clause (ii) to Section 55(2)(aa) of the Act by the Finance Act, 1994, which provides that the cost of acquisition of right entitlement would mandatorily be taken at NIL. In the light of these facts and circumstances of the case, we are of the view that the ratio laid down by the Hon'ble Supreme Court in the case of Mcdowell & Co. v. CTO (1985) 154 ITR 148 (SC) is clearly applicable and hence we uphold the order of the CIT(A). This ground of the appeal is dismissed."
25. The learned AM, however, held that the issue is directly covered by the decision of the Hon'ble Supreme Court in the case of Ms Dhun Dadabhoy Kapadia v. CIT (supra) as the insertion of Sub-clause (ii) to Section 55(2)(aa) of the Act by the Finance Act, 1994, is effective only from 1st April, 1995, and is not applicable to the present assessment year. He accordingly directed that the matter should go back to the AO for adjudicating the assessee's claim for short-term capital loss afresh in the light of the legal position discussed by him as follows ;
"33. The judgment of Hon'ble Supreme Court in the case, of Miss Dhun Dadabhoy Kapadia v. CIT (1967) 65 ITR 651 (SC), in my considered view, squarely applies to the facts of this case. I find that there is little dispute about the legal position that until the time of insertion of Section 55(2)(aa)(ii) of the Act, which specifically provided that the cost of acquisition of rights entitlements, by the virtue of holding shares or other securities, is to be taken as NIL, the cost of acquisition of rights entitlements was to be taken as equivalent to fall in value of share or security, or, in other words, as equivalent to loss suffered by way of depreciation in old shares. Loss in value of old shares as a result of issue of new shares was, accordingly, required to be deducted from amount realized from selling of right issue. I have also noticed that the details of cum-rights and ex-rights prices of related share are also placed on record, by way of certification by the Calcutta Stock Exchange Association (CSE). I see no substance in CIT(A)'s observations that mere filing of letter from CSE is not enough because after all its only CSE which is the most authentic source of information about the quoted prices of the related shares on relevant dates. In case any of the authorities below had any doubts about genuineness of the information contained in this communication, it was open to them to make such further verification as they may have considered appropriate. However, initial onus of the assessee to furnish the relevant information is duly discharged when the quoted rates duly certified by the CSE are filed by the assessee. CIT(A)'s observation about CSE not having shown the basis of calculation is also irrelevant because CSE certificate only contains factual position about the rates at which the related shares were sold on the relevant dates, and because such a factual position does not require any calculations at all. Once the factual averments in the certificate are not challenged, there is no reason to doubt the utility of certificate. As I have mentioned earlier, since the AO had not questioned genuineness of price at which 'right entitlements' were transferred and the only reason of declining the short-term capital gain was non-furnishing of 'complete details', CIT(A)'s confirming the AO's action, based on CIT(A)'s suspicions regarding reasons of selling 'rights entitlements' at Rs. 30 per share and of transaction lacking transparency, is devoid of any merits. In any event, it is not even Revenue's case that any related details requisitioned by them, or which the assessee was required to file statutorily, were not furnished by the assessee. It is difficult to comprehend as to how assessee can have the clairvoyance of filing; those details which are neither statutorily required to be filed, nor requisitioned by the authorities. When the sale of 'rights entitlement' is not called into question and when there is actually a fall in value of ex-right shares after the record date vis-a-vis the value of cum-right shares before the record date, there is no reason to dub the transaction as a 'colourable device'. There is no finding by the authorities below that the sale consideration of 'rights entitlement' is understated. Under these circumstances, I find no support for CIT(A)'s reference to McDowell & Co. v. CTO (1985) 154 ITR 148 (SC) and terming the transaction as a 'colourable device'. It is also fairly well settled in law that merely because a transaction results in tax saving, it cannot be termed as 'a colourable device'.
34. It is also not in dispute that the insertion of Sub-clause (ii) in Section 55(2)(aa), by the virtue of Finance Act, 1994, was effective 1st April, 1995, and, therefore, it the assessment year before us was not covered by the amended legal provisions. It is fairly well settled that the general rule is that all statutes, other than those which are merely declaratory or procedural, are prospective and that retrospective effect is not to be given to the statute unless by express words such intention of the legislature is unambiguous. In the case of Saurashtra Agencies (P) Ltd. v. Union of India and Anr. (1990) 186 ITR 634 (Cal), Hon'ble Calcutta High Court has summed up this principle as follows :
'The law is very clear that, unless provided in the statute, the law is always presumed to be prospective in nature. There cannot be an implied inference of any retrospective operation of law. The retrospective operation must be clear and unambiguous. Nothing could be inferred by any stretch of imagination.' In this view of the matter, the Revenue's case does not get any assistance from change in legislation with effect from subsequent assessment year. On the contrary, it only shows what was the mischief sought to be remedied by legislation and the fact that, in the preceding years, the legal position did admit possibility of such a mischief. In any event, the AO has not challenged the principle based on which claim was made but had rejected the claim on the ground of non-availability of relevant details even though there is no mention about any requisition of details which has not been complied with. In my view, an assessee cannot be punished for not filing these details which are neither statutorily required to be filed, nor requisitioned by the authorities. Be that as it may, it is an admitted position that the details about quoted prices of shares, duly certified by Calcutta Stock Exchange, were duly filed before the CIT(A) and a copy of the same has also been placed before us at p. 98 of the paper book.
35. Keeping in view all these facts, as also entirety of the case, I deem it fit and proper to restore the matter to the file of the AO who will adjudicate on assessee's claim for short-term capital loss of Rs. 13,99,48,746 afresh, in the light of the legal position discussed above and after obtaining such further information, or conducting such further enquiries, as may be deemed necessary. In coming to this conclusion, I have taken particular note of the fact that the details about share quotations on relevant dates were not, for whatever reasons, before the AO and authenticity of these rates have not been verified by the authorities below. It is for these elaborate reasons that I humbly differ with the views of the learned brother and am of the considered view that the ground No. V(b) should be allowed for statistical purposes."
26. On this difference of opinion, question No. (c) was referred to me for decision.
27. At the outset, I am sorry to point out that both the learned Members did not give the correct citation of the very crucial decision cited before the Bench in the case of Ms. Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651 (SC). Both the Hon'ble Members unfortunately recorded the citation as (1967) 65 ITR 651 (SC). It is, therefore, a matter of doubt whether they have really gone through the said decision. The Hon'ble Supreme Court considered identical issue in the above case. The assessee in that case was not a dealer in shares. She held by way of investment 710 ordinary shares in the Tata Iron and Steel Co. Ltd. The company made an offer to her by which she was entitled to apply for 710 new ordinary shares at a premium with an option of either taking the shares or renouncing them wholly or partly in favour of others. The assessee renounced her right of all the 710 shares on 12th June, 1956, and realized Rs. 45,262.50 When this amount was sought to be wholly taxed as a capital gain, the assessee claimed that on the issue of the new shares, the value of her old shares depreciated, since the market quotation of the old shares which was Rs. 253 per share on 1st June, 1956, fell to Rs. 198.75 on 4th June, 1956, and that as a result of this depreciation, she suffered a capital loss in the old shares to the extent of Rs. 37,630 which she was entitled to set off against the capital gain of Rs. 45,262.50. In the alternative she claimed that the right to receive the new shares was a right which was embedded in her old shares and, consequently, when she realized the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from that amount the value of the embedded right which became liquidated. The Hon'ble Supreme Court considered this issue at length and eventually held as follows :
"In order to answer the question referred to the High Court, it appears to us that the nature of the transaction, which resulted in this receipt of Rs. 45,262.50 by the appellant, must be analysed "and properly understood. The amount, it is the agreed case of the parties, was a capital gain. The capital asset which the appellant originally possessed consisted of 710 ordinary shares of the company. There was already a provision that, if the company issued any new shares, every holder of old shares would be entitled to such number of ordinary shares as the board may, by resolution, decide. This right was possessed by the appellant because of her ownership of the old 710 ordinary shares, and when the board of directors of the company passed a resolution for issue of new shares, this right of the appellant matured to the extent that she became entitled to receive 710 new shares. This right could be exercised by her by actually purchasing those shares at the prescribed rate, or by renouncing those shares in favour of another person and obtaining monetary gain in that transaction. At the time, therefore, when the appellant renounced her right to take these new shares, the capital asset which she actually possessed consisted of her old 710 shares plus this right to take 710 new shares. At the time of her transaction, her old shares were valued at Rs. 253 per share, so that the capital asset in her possession can be treated to be the cash value of 710 multiplied by Rs. 253 of the old shares plus this right to obtain new shares. After she had transferred this right to obtain new shares, the capital assets that came into her hands were the 710 old shares, which became valued at Rs. 198.75 per share, together with the sum of Rs. 45,262.50, The new capital gain or loss to the appellant obviously would be the difference between the value of the capital asset and the cash in her hands after she had renounced her right and realized the cash value in respect of it, and the value of the capital asset including the right which she possessed just before these new shares were issued and before she realized any cash in respect of the right by renouncing it in favour of some other person. As we have indicated above, the value of the capital asset, after renouncement, would be 710 multiplied by Rs. 198.75 plus the sum of Rs. 45,262.50, while the value of the asset, immediately before the renouncement, would be 710 multiplied by Rs. 253, there being no cash value at that time of the right to be taken into account. Thus, the capital gain or loss would be worked out at Rs. 45,262.50 after deducting from it the sum worked out at 710 multiplied by the difference between Rs. 253 and Rs. 198.75. This last amount comes to a little more than the sum of Rs. 37,630 which the appellant claimed should be deducted from Rs. 45,262.50 in computing her capital gain. The claim made by the appellant was thus clearly justified because the net capital gain by her in the transaction, which consisted of issue of new shares together with her renouncement of the right to receive new shares and make some money thereby, could only be properly computed in the manner indicated by us above.
In the alternative, the case can be examined in another aspect. At the time of the issue of new shares, the appellant possessed 710 old shares and she also got the right to obtain 710 new shares. When she sold this right to obtain 710 new shares and realized the sum of Rs. 45,262.50 she capitalized that right and converted it into money. The value of the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares and, consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realized on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in this manner also, it is clear that the net capital gain by her would be represented by the amount realized by her on transferring the right to receive new shares, after deducting therefrom the amount of depreciation in the value of her original shares, being the loss incurred by her in her capital asset in the transaction in which she acquired the right for which she realized the cash. This mention of looking at the transaction also leads to the same conclusion which we have indicated in the preceding paragraph."
From the above decision, it is clear that the capital gain or loss has to be computed in the manner approved by the Hon'ble Supreme Court as the said decision has not been overruled or superseded by any change in the law till 1st April, 1995. I, therefore, concur with the learned AM on this point.
28. The matter will now go before the regular Bench for decision, according to majority opinion.
Pramod Kumar, A.M.
1. On a difference of opinion between the Members originally constituting this Bench, when the appeal originally came up for hearing, following points were referred under Section 255(4) of the IT Act, 1961, for the opinion of a Third Member :
1. Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's disallowance of Rs. 8,25,01,104 claimed as a deduction under Section 36(1)(iii) of the IT Act, 1961, or whether the Tribunal should have deleted this disallowance ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's treating the entire capital gain on sale of flats to M/s Tata Consultancy Services (P) Ltd. and M/s Classic Financial Services and Enterprises Ltd. as a short-term capital gain, or whether the Tribunal should have upheld the assessee's claim of bifurcating the same into long-term capital gain on the sale of undivided shares in the interest of the land and as short-term capital gain on the sale of building constructed thereon ?
3. Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld Revenue's disregarding the short-term capital loss of RE. 13,99,48,786 claimed by the assessee on account of renunciation or rights entitlements in Bhadrachalam Paperboards Ltd. as held by concluding paragraph of ground V(b) of JM's order, or whether the Tribunal should have restored the matter to the AO, with the directions set out in para. 35 of AM's dissenting order ?
2. As regards first point of difference, Hon'ble President has, acting as a Third Member under Section 255(4) of the IT Act, 1961, concurred with the AM that Revenue's disallowance of interest of Rs. 8,25,01,104, claimed as a deduction under Section 36(1)(iii) of the Act even though capitalised in the books of accounts, was not justified. In his esteemed view, the assessee deserves to succeed on this claim for deduction. Accordingly, majority view is that the assessee's aforesaid claim of Rs. 8,25,01,104, under Section 36(1)(iii), should be allowed.
3. Ground No. 1 is thus allowed in the terms indicated above.
4. On second stated point of difference, Hon'ble Third Member has expressed the view that the assessee's claim of bifurcating the capital gain on sale of flats, into long-term capital gain, on sale of undivided interest in land, and as short-term capital gain, on the building constructed thereon, is sustainable in principle. It has been further observed that since the question before the Hon'ble Third Member did not cover the question of computation and the learned JM has simply directed the AO to work out capital gains for land and building separately, there cannot be any debate in this direction and, on this limited question before the Hon'ble Third Member, view of the JM is to be upheld. Accordingly, as per the majority view, the claim of bifurcation is upheld but the matter has to go back to the AO for re-determination in the light of this decision.
5. Ground No. V(a) is thus allowed in the terms indicated above.
6. As regards third point of difference, Hon'ble Third Member has concurred with the AM that capital gains or losses, on renunciation of rights entitlements, are to be computed in the manner approved by the Hon'ble Supreme Court in the matter of Ms Dhun Dadabhoy Kapadia v. CIT (1967) 63 ITR 651 (SC). In accordance with the majority view, therefore, the assessee's claim of loss of Rs. 13,99,48,786 is upheld in principle and the matter is restored to the file of the AO for fresh decision in the light of the above legal position and after obtaining such further information or conducting such further enquiry, as may be deemed necessary.
7. Ground No. V(b) is thus allowed for statistical purposes.
8. In the result, the appeal is partly allowed.