Income Tax Appellate Tribunal - Delhi
Rajasthan Petro Synthetics Ltd. vs Deputy Commissioner Of Income-Tax on 17 January, 1997
Equivalent citations: [1997]60ITD682(DELHI)
ORDER
R. Swarup, J.M.
1. These cross-appeals by the assessee as well as the Department are directed against the orders of the CIT(Appeals) dated 28-11-1994 and 18-10-1995 respectively relating to the assessment years 1991-92 and 1992-93. Since facts are inter-connected, they were taken up together and are being disposed of by a common order for the sake of convenience.
ITA No. 3723/Del/55 - (Revenue's appeals) :Ground Nos. 1 & 2 raised in this appeal read as under :
"1. That the learned CIT(A) erred in law and on facts in holding that Unit-II should be treated as a separate unit and a new industrial undertaking for the purpose of deductions under sections 80HH and 80-I in spite of the fact that common accounts were maintained for both the units there was unity of management and interlacing of funds.
2. That the ld. CIT(A) erred in law and on facts in holding that deduction under sections 80HH & 80-I be allowed to the appellant from the profits of Unit-I without deducting loss incurred in Unit-II."
3. Briefly stated the facts of the case are that the assessee company manufactures polypropylene filament yarn. The factory in question had been set up at Udaipur (Rajasthan) notified as a backward area. In this connection it is notable that the first industrial undertaking (Unit No. 1) was set up by the assessee in May 1986 in collaboration with M/s. Cola Engineering Switzerland. During the period 1990 to March 1991 relevant for the assessment year 1991-92, under appeal, the assessee set up another plant (Unit No. 2) in collaboration with two Italian concerns M/s. STP ~Impianti, S.P.A. and M/s. Scam Engineering S.R.L. The assessee in view of the aforesaid facts claimed that Unit No. 2, set up during the previous year relevant to the assessment year 1991-92 is a separate and new industrial undertaking from Unit No. 1. However, the Assessing Officer rejected this claim and held that Unit No. 1 and Unit No. 2 formed only one industrial undertaking. Feeling aggrieved by the order of the Assessing Officer, the assessee came up in first appeal before the CIT(Appeals). The CIT(Appeals) held that Unit No. 2 is a separate and new industrial undertaking from Unit No. 2 for the purpose of deduction under sections 80HH and 80-I. Feeling aggrieved by the order of the CIT(Appeals), the Department has preferred appeal before the Tribunal.
4. The learned departmental representative relied upon the facts and legal position cited by the Assessing Officer in the assessment order and strongly contended that Unit No. 2 was not a separate industrial undertaking because both the units formed one industrial undertaking along with Unit No. 1, because it was just a case of expansion of Unit No. 1. He further emphasised that both the units were set up on the same land and no separate books of account were maintained and there was common management of the two units. In this connection he placed reliance on the ratio of decision in the case of Rustam Cavasjee Cooper v. Union of India AIR 1970 SC 564, CIT v. Modi Industries Ltd. [1993] 200 ITR 341 (Delhi). He also contended that the Assessing Officer found that the assessee had paid advance tax of Rs. 52,22,000 and therefore he inferred that the assessee was aware that it was not entitled to full exemption as claimed and therefore after considering that the plant and machinery had been installed on the land of earlier unit, the head office and other officers were common, the Assessing Officer was justified in holding that the assessee in order to take advantage of deduction of set off of loss from the so called Unit No. 2 from the Unit No. 1 and then claimed deduction under sections 80HH and 80-I on the basis of profits of the original unit, thereby reducing the income to almost Nil. He further contended that the case laws relied upon by the assessee and as mentioned on page 5 of the impugned order, are distinguishable on facts. He, therefore, contended that the CIT(Appeals) has not rightly appreciated the facts of the case and he has wrongly allowed the claim of the assessee. The learned D.R., therefore, urged that the order of the CIT(Appeals) on the issue in question may be reversed and that of the Assessing Officer restored.
5. On the other hand, the learned authorised representative of the assessee pointed out that the learned CIT(Appeals) has discussed in detail the factual and legal position in regard to the issue in question in paras 3 to 9 of the order impugned and has rightly concluded that Unit No. 2 is a separate industrial undertaking and in view of these facts this is the only conclusion which could be drawn in view of the facts and circumstances of the case. Proceeding further it was contended that even if setting up of Unit No. 2 is termed as an expansion of old Unit No. 1 yet Unit No. 2 would be entitled to be treated as a separate industrial undertaking for purposes of deduction under sections 80HH and 80-I. He also pointed out that every new creation in business is some kind of expansion and an expansion by setting up a new unit does not deprive the assessee of the said benefit. Under the facts and circumstances of the case it is to be seen whether the new Unit has been founded either by spliting up or reconstruction of the old unit. But from the facts it is clear that it was not so in the present case. It is evident from the facts that a completely new machinery was imported from new collaborators of a different country for the purpose of installing Unit No. 2. Proceeding further it was contended that the true test is whether the new unit is an independent and viable unit capable of producing goods independent of the old unit and this test was satisfied in the present case as rightly held by the CIT(Appeals) in the order impugned. The counsel for the assessee in this regard has drawn our attention to the fact that both the units were producing synthetic yarn but Unit No. 2 used different technology and was capable of producing much finer and more variety of synthetic yarn than Unit No. 1. He also argued that it is not even necessary that the new unit should produce a different commodity from the old unit. He has taken us through a note on Unit No. 1 and Unit No. 2 as to how they are separate. (Annexure at pages 14 and 15 of the paper books). These papers were also filed before the Assessing Officer and the CIT(Appeals). On the basis of these papers the CIT(Appeals) has rightly drawn the conclusion and the same is in accordance with law. In support of his contention the authorised representative has relied upon the following decisions :-
(a) Textile Machinery Corpn. Ltd. v. CIT[1977] 107 ITR 195 (SC);
(b) CIT v. Indian Aluminium Co. Ltd. [1977] 108 ITR 367 (SC); and
(c) CIT v. Associated Cement Co. Ltd. [1979] 118 ITR 406 (Bom.).
5.1 At this stage the authorised representative has also drawn our attention to the judgment of ITAT Delhi Bench in the case of ITO v. Delhi Press Samachar Patra (P.) Ltd. [1990] 32 ITD 650 (Delhi). In the case of Textile Machinery Corpn. Ltd. (supra) it was held that the second industrial unit set up by the company will not lose its separate and independent identity even though the company is already running an independent unit. The Hon'~ble Supreme Court in this case held that "new activity" launched by the assessee by establishing new plant and machinery by investing substantial funds may produce the same commodity as the old business.
5.2 In the case of Indian Aluminium Co. Ltd. (supra) the Hon'~ble Bombay High Court held that establishment of a new industrial unit as part of already existing industrial establishment may result in expansion of industry or the factory but if the new established unit is itself an integrated and independent unit in which new plant and machinery is put up and is itself independent of the old unit, capable of production of goods, then it was classified as newly established industrial undertaking. In the instant case the Unit No. 2 set up by the assessee company satisfied all the tests of a new separate industrial undertaking laid down in the said judgment. Therefore he contended that it is a separate unit. The counsel for the assessee contended that although separate accounts were not maintained for the two units, the profit had been allocated on a scientific basis, a detailed allocation report was prepared which indicated the basis of allocating each item of profit and loss account between the two units. This allocation report duly checked and certified by the auditors of the company, was filed alongwith the return of income. In view of these facts non-maintenance of separate account was not a hindrance to the term of Unit No. 2 as a separate and new industrial undertaking. The counsel for the assessee has also clarified that there are number of decisions including that of the Hon'~ble Delhi High Court and several decisions by Delhi Benches of the Tribunal to the effect that maintenance of separate account books is not necessary in this regard. In support of his contention he has placed reliance on the following decisions :
(1) CIT v. Dunlop Rubber Co. (I) Ltd. [1977] 107 ITR 182 (Cal.);
(2) CIT v. J.K Synthetics Ltd. (No. 1) [1990] 182 ITR 125 (Delhi);
(3) CIT v. Hind Lamps Ltd. [1991] 190 ITR 553/54 Taxman 320 (All.);
(4) CIT v. Hindusthan Malleables & Forgings Ltd. [1991] 191 ITR 70 (Pat.);
(5) Delhi Press Samachar Patra (P.) Ltd.'s case (supra);
(6) IAC v. Varistha Udhyog Ltd. [1990] 34 ITD 10 (Delhi);
(7) Hindustan Computers Ltd. v. ITO [1990] 38 TTJ (Delhi) 222; and (8) Associated Cement Cos. Ltd. v. CIT[1979] 118 ITR 406 (Bom.).
5.3 In view of these decisions, the counsel for the assessee further contended that any management of common facilities like, land, lamp, source of power etc. do not disentitle the new unit from being treated as a separate industrial undertaking. Reliance was placed on the decisions, as mentioned on ~pre page.
5.4 The authorised representative has further urged that the decisions relied upon by the Assessing Officer as mentioned in the assessment order and the Departmental Representative are distinguishable on facts.
6. We have considered the submissions of the parties and have gone through the entire material placed on record including the order of the CIT(Appeals) passed on 28-11-1994. From the facts and the legal position it is clear that the establishment of a new industrial undertaking/unit as a part of already existing industrial establishment may result in an expansion of industry or the factory but the fact remains that the newly established unit is itself an integrated independent unit in which new plant and machinery is put up and is itself independent of the old unit, capable of production of goods. Therefore, the CIT(Appeals) has rightly termed as newly established industrial undertaking and the Unit No. 2 set up by the assessee company satisfies all the tests of a new and separate industrial undertaking laid down by the Hon'~ble Supreme Court and High Courts and the Tribunal in the aforesaid decisions. After considering the facts, circumstances and the material on record and the ratio of decisions as referred to above, we have no hesitation in confirming the finding of the CIT(Appeals) on this issue, namely, that the Unit No. 2 is new and separate industrial undertaking for the purpose of deduction under sections 80HH and 80-I. The finding of the CIT(Appeals) in our opinion is perfectly in order and we see no justification for taking a contrary view in the matter. Ground No. 1 is accordingly decided against the Department.
7. The second ground raised in this appeal is whether the CIT(Appeals) was justified in holding that the deduction under sections 80HH and 80-I be allowed to the assessee from the profits in unit no. 1 without deducting the loss incurred in unit no. 2. The CIT(Appeals) in the order impugned held that the deduction should be allowed from the profits of unit no. 1 without deducting the same from the loss suffered in unit no. 2. The CIT(Appeals) decided the issue after taking into account all facts into consideration in favour of the assessee by holding that the deduction should be allowed from the profits of Unit No. 1 without reducing the same by the loss suffered in Unit No. 2. From the facts it is clear that this issue is directly connected with the first ground of appeal in respect of which we have already confirmed the finding of the CIT(Appeals) that unit nos. 1 and 2 are separate industrial undertakings. Consequently the profit/loss of unit no. 1 and unit no. 2 have to be computed separately. As per computation of income filed by the assessee it is clear that unit no. 1 which is entitled to deduction under sections 80HH and 80-I had earned the profit during the year while unit no. 2 has incurred a loss of around 3 crore rupees during the year under consideration. Deduction under sections 80HH and 80-I would be allowable to the assessee from the unit no. 1 without reducing it from the loss incurred in unit no. 2. This view finds support from the following case laws :
(1) CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320/27 Taxman 262 (SC); and (2) CIT v. Siddaganga Oil Extraction (P.) Ltd. [1993] 201 ITR 968 (~Kar.).
7.1 In the case of Canara Workshop (P.) Ltd. (supra) the Hon'~ble Supreme Court has held that profit or gains earned by one priority industry cannot be reduced by the loss suffered by another industry or industries owned by the assessee. Each industry must be considered on its own working only while adjudging its entitlement to the deductions it cannot be allowed to suffer because it keeps company with some industry in the hands of the assessee even though the other industry might be an priority industry.
7.2 We have considered the submissions of the parties and have gone through the orders of the authorities below and the case laws relied upon by the Assessing Officer, CIT(Appeals) and the parties. After taking into account the facts, circumstances and the entire material on record, including the ratio of decisions as referred to above we find that the order of the CIT(Appeals) is based on sound reasons and reliable evidence and supported by decisions of the Supreme Court and High Courts as referred to above. Therefore, the CIT(Appeals) was justified in directing the Assessing Officer to allow deduction under sections 80HH and 80-I from the profits of unit no. 1 without reducing the same by the loss incurred in unit no. 2 during the year. Accordingly, order of the CIT(Appeals) on the issue in question is upheld.
8. Ground no. 3 raised in this appeal reads as under :-
"that the learned CIT(Appeals) erred in law and on facts in holding that depreciation has to be allowed on an amount of Rs. 20,75,534 being the additional cost of imported plant and machinery on account of fluctuations in the rate of exchange during the year."
9. Briefly stated the facts of the case are that the assessee claimed depreciation of Rs. 5,18,831 on the sum of Rs. 20,75,534 being the additional cost of imported plant and machinery on account of fluctuations in the rate of exchange during the year resulting in increased liability of the assessee to the financial institutions from whom the assessee had taken loans in foreign currency for purchase of such plant and machinery. The claim was made under section 43A of the Act. The Assessing Officer disallowed the claim of the assessee in its entirety. On appeal, the CIT(Appeals) decided the issue in favour of the assessee thereby directing the Assessing Officer to verify the claim of the assessee and to recompute the depreciation allowable to the assessee. Feeling aggrieved by the order of the CIT(Appeals) the department has filed second appeal before us.
10. The increased liability of Rs. 20,75,534 is comprised of the following two items -
(a) Rs. 2,46,814 on the date of actual payment of instalments during the relevant previous year; and
(b) Rs. 18,28,720 closing balance of loans as on 31-3-1991.
10.1 The learned D.R. strongly placed reliance on the order of the Assessing Officer. However, he did not give any plausible reason for not allowing depreciation on increased liability of Rs. 2,46,814 on the dates of actual payment of instalments. He only disputed the allowance of depreciation on the increased liability of Rs. 18,28,720 on closing balances of loans as on 31-3-1991 i.e. the last date of the relevant previous year. He further urged that in the assessment year 1992-93 the Assessing Officer has himself allowed depreciation on the increased liability on the date of actual payment of instalment but he has disallowed depreciation on the increased liability in respect of closing balances of the loans.
11. On the other hand, the authorised representative of the assessee argued that there is nothing in the provisions of section 43A of the Act to indicate that depreciation under this Act has to allow only in respect of increased liability at the time of actual payment of instalments. He further pointed out that for the purpose of section 43A what was to be taken into account was the amount by which the liability is increased or reduced during the previous year. According to authorised representative the increased liability (during the previous year) would mean to increase liability at the time of actual payment of instalments of loans during the year as well as the increased liability in respect of balances of loans outstanding on the last date of the previous year. In this regard he has relied upon the ratio of decision in the case of CIT v. Arvind Mills Ltd. [1992] 193 ITR 255 (SC). In the aforesaid case their lordships of the Supreme Court had occasion to consider the provisions of section 43A(2) and they also examined the scope of section 43A as a whole and interpreted the proviso of section 43A(3)(i) also. The counsel of the assessee has further placed reliance on the ratio of decisions in the cases of (1) New India Industries v. CIT[1993] 203 ITR 933 (Guj.) and (2) Padam ~Jee Pulp & Paper Mills Ltd v. CIT[1994] 210 ITR 97 (Bom.).
11.1 The Hon'~ble Gujarat High Court in the case of New India Industries (supra) applying the decision of the Supreme Court in the case of Arvind Mills Ltd. (supra) held that depreciation under section 43A is allowable on the increased liability during the previous year before the date of actual payment falling in the next year. The Hon'~ble Bombay High Court in the case of Padam ~Jee Pulp & Paper Mills Ltd. (supra) has held that depreciation under section 43A is allowable on closing balances of loans.
12. We have considered the submissions of the parties and have gone through the entire material on record including the orders of the authorities below and the ratio of decisions relied upon by the parties. We are of the considered view that depreciation under section 43A is allowable only on increased liability of Rs. 20,75,534 which consisted of increased liability on dates of actual payment of instalments as well as the increased liability of the closing balances of loans as on 31-3-1991 i.e. the last date of the previous year. Under the circumstances we do not find anything wrong in the order of the CIT(Appeals) whereby he has directed the Assessing Officer to allow the claim of the assessee. Accordingly, the ground taken by the Department in view of these facts is rejected.
13. The last ground raised in this appeal is as under :
"That the learned CIT(Appeals) erred in law and on facts in allowing the claim of deduction of Rs. 25,315 relating to expenses of earlier years."
14. The learned D.R. relied upon the finding of the Assessing Officer in the assessment order whereas the authorised representative of the assessee relied upon the finding of the CIT(Appeals).
15. We have heard the rival submission of the parties and have gone through the orders of the authorities below and the relevant material available on record. We find that the sum of Rs. 25,315 comprised of small items of expenditure which related to the earlier years but in respect of which the liability was crystallised only during the current previous year. It was also pointed out before us that this is an annual feature and such petty expenses have to be debited every year so that in the ultimate analysis they are mutually cancelled out. Having considered the facts and circumstances of the case, the finding of the CIT(Appeals) is upheld and the ground taken by the Department is rejected.
16. In the result, Department's appeal is dismissed.
ITA No. 1293/Del/95 (Assessee's appeal) assessment year 1991-92 :17. This appeal by the assessee is directed against the order of CIT(Appeals) dated 28-11-1994 for the assessment year 1991-92.
18. The only ground raised in this appeal is whether the CIT(Appeals) was justified in holding that for the purpose of determining the income of unit no. 1 and unit no. 2, the administrative and other expenses should be allocated between the two units on the actual basis or by applying the production rate instead of being allocated on the basis of installed capacity ratio calculated on the basis of working of each unit which was adopted by the appellant. The DCIT did not consider this aspect of the matter because he held that unit no. 1 and unit no. 2 formed only one industrial undertaking. The learned CIT(Appeals), however, after holding that unit no. 2 is a separate industrial undertaking from unit no. 1 himself considered the allocation of profit and loss items between the two units and held that allocation of all other items was correctly done by the assessee but in regard to administrative and other expenses the allocation should be done on actual basis or on the basis of production instead of installed capacity ratio as done by the appellant. Aggrieved by this finding of the CIT(Appeals) the assessee has preferred appeal before the Tribunal.
19. The authorised representative of the assessee contended that allocation of each item of income and expenditure in the profit and loss account between Unit no. 1 and unit no. 2 was in fact done on a scientific basis. He has drawn our attention to the detailed allocation report which was prepared and duly checked and verified by the auditors and it was annexed alongwith the return. He also asserted that where ever it was possible items of income and expenditure were allocated on actual basis and several items specially those relating to manufacturing account and selling expenses were allocated on the basis of production ratio or turnover ratio. In regard to other items various other scientific ways of allocation for arriving at the correct income of the two units were adopted. The basis of allocation of each item was indicated in the last column of the allocation report, copy of which appears as Annexure '1D' of the paper book. The counsel for the assessee has further drawn our attention that in respect of administrative and other expenses, basis of installed capacity ratio calculated on the basis of period of working of each unit was adopted as this was the only correct and appropriate method to allocate those expenses. He, however, contended that in view of the detailed and appropriate allocation made by the assessee, the learned CIT(Appeals) ought to have accepted the same in its entirety including the allocation of administrative and other expenses.
19.1 Proceeding further the counsel for the assessee contended that the production ratio adopted by the CIT(Appeals) is incorrect and the basis of installed capacity ratio adopted by the assessee is scientific method and as such he stressed the point as under :
(i) the ratio of allocation between unit no. 1 and unit no. 2 on the basis of production is 74.67 : 25.33. Allocating administrative and other expenses on this basis would be very unreasonable as unit no. 2 was set up only during the year. One of its three lines worked for one month only while the other two worked for nine months. Even under normal circumstances the new unit would take some time to start working to its full capacity but would engage more attention of the administrative and technical staff in the initial stage. However, the old unit no. 1 worked to its full capacity throughout the year without any extra attention of the staff. Therefore, the assessee adopted the basis of installed capacity calculated on the basis of period of working of each unit which came to 55.17 : 44.83. The method of working of both the ratio is given in Annexure I, copy of which appears in the paper book.
(ii) The Unit no. 2 is bigger plant with three lines and installed capacity is 1750 tonnes while Unit no. 1 has two lines with installed capacity of 1000 tons. For this reason also unit no. 2 required more attention and time of the administrative and technical staff. In spite of this unit no. 2 has not been able to work in its full capacity of 1740 tons for various reasons while unit no. 1 has been producing to its full capacity of 1000 tons and sometimes more than its capacity. One of the main reason for unit no. 2 not working to its full capacity was that one of its line had been given trouble from the day of its installation. The production is much below far and is of inferior quality. Consequently, the assessee has filed claims against M/s. Scan Engineering, the Italy concern who supplied the plant. The matter is under arbitration in respect of assessee's claim totalling to Rs. 21.88 crores made against M/s. Scan Engineering for supplying a defective plant resulting in losses to the assessee.
(iii) In the assessment year 1993-94 the CIT(Appeals)-IX, New Delhi considered this detailed submission of the assessee and accepted his contention that allocation of administrative and other expenses on the basis of production radio was not correct and reasonable method. The CIT(A)-IX, however, directed for an average of two methods i.e. production ratio of and installed capacity ratio should be adopted.
19.2 The authorised representative of the assessee contended that the CIT(A)-IX came to the conclusion in the assessment year 1993-94 that the allocation of administrative and other expenses of the basis of production ratio will not be reasonable but he failed to give full relief to the assessee. He emphasised that there was no basis for the finding of the learned CIT(Appeals)-IX that average of the two methods should be adopted. He further emphasised that the basis of installation capacity ratio as applied by the assessee should be adopted.
20. The learned D.R. on the other hand strongly placed reliance on the order of the CIT(Appeals) and contended that the CIT(Appeals) was right in his decision and as such the ground taken by the assessee is untenable.
21. We have heard the rival submissions of the parties and have gone through the orders of the authorities below as well as the order of the CIT(Appeals)-IX for assessment year 1993-94 and other relevant material available on record, including the allocation report. The allocation of each item of income and expenditure of the profit and loss account between unit no. 1 and unit no. 2 has indeed been made by the assessee on a scientific and appropriate basis suitable to each such item. While the CIT(Appeals)-XIV was satisfied about the allocation of all other items of income and expenditure in view of the facts as mentioned in ~pre-paragraphs we do not find justification for him to deviate from the method of allocation adopted by the assessee for allocation of administrative and other expenses. These expenses are mainly in respect of salaries and allowances of the administrative staff at Delhi, Bombay and Madras and also senior to technical staff at Udaipur were common to both unit no. 1 and unit no. 2. Unit no. 2 being a bigger plant with more lines and having higher installed capacity of 1750 tons and being newly set up would require more attention of the common staff and also more workers and still its production is less. Further, a specific feature in the assessee's case is that one of the lines of Unit no. 2 happened to be defective and in spite of best efforts of the assessee the production was below optimum level. Consequently, arbitration proceedings are going on between the assessee and suppliers of defective plant in respect of the assessee's claim totalling Rs. 21.88 crores. Under the circumstances of the case, the allocation of administrative and other expenses on the basis of production ratio will not be reasonable and will give a distorted figure of the profit or loss of the two units. The basis of installed capacity ratio worked out by the assessee on the basis of the period of working of each unit (55.17% : 44.83%) appears to be an appropriate method in this case.
21.1 Having considered the entire factual position we are not agreed with the learned CIT(Appeals) that administrative and other expenses should be allocated between the two units on the basis of production and hold that the basis of installed capacity ratio worked out on the basis of period of working of each unit, as adopted by the appellant, is correct and appropriate method for allocating these expenses and accordingly the Assessing Officer is directed to re-calculate the income of the assessee on the basis of this finding.
22. Accordingly, appeal of the assessee stands allowed.
ITA No. 1563/Del/96 - Assessment year 1992-93 (Revenue's appeal) :23. Ground nos. 1 & 2 raised in this appeal are as under :
"1. That the learned CIT(Appeals) erred in law and on facts in directing that Unit-II should be treated as separate unit for the purpose of deduction under sections 80HH and 80-I and in further directing to verify the allocation of profits in respect of Unit-I and Unit II and allow the same by applying the allocation on actual basis or on the basis of production, following the CIT(A)'s order for assessment year 1991-92. The order of the CIT(Appeals) for assessment year 1991-92 has not been accepted by the department."
"2. That the learned CIT(Appeals) erred in law and on facts in allowing deduction under sections 80HH and 80-I of Unit-I without deduction of loss of Unit-II following the order of CIT(Appeals) for the assessment year 1991-92. The order of CIT(Appeals) has not accepted by the department."
24. We have heard the rival submissions of the parties. Identical issues as raised herein came up for consideration before us in revenue's appeal for assessment year 1991-92 being ground nos. 1 & 2 and the issue has been discussed elaborately in paras 3 to 7 of this under wherein we have confirmed the finding of the CIT(Appeals) holding that Unit no. 2 was a new and separate industrial undertaking for the purpose of deduction under sections 80HH and 80-I and that the CIT(Appeals) was justified in directing the Assessing Officer to allow deduction under sections 80HH and 80-I from the profits of Unit no. 1 without reducing the same by the loss incurred in Unit no. 2 during the year. Facts and circumstances remaining the same for assessment year 1992-93 also we confirm the finding of the CIT(Appeals) on the issues in question.
25. Ground no. 3 raised by the revenue in its appeal for assessment year 1992-93 is as under :
"That the learned CIT(Appeals) erred in law and on facts in holding that depreciation has to be allowed on increased cost of plant and machinery due to exchange rate fluctuation and in directing Assessing Officer to recompute the depreciation following the CIT(Appeal)'s order for assessment year 1991-92. The said order has not been accepted by the department."
26. We have heard the rival submissions of the parties on the issue in question. Identical ground has been dealt by us elaborately in paras 8 to 12 of this order in revenue's appeal for assessment year 1991-92 wherein we have confirmed the finding of the CIT(Appeals) by holding that depreciation under section 43A was allowable on increased liability which consisted of increased liability on dates of actual payment of instalments as well as the increased liability on the closing balances of loans as on the last date of the previous year. Facts and circumstances of the case for the year under consideration remaining the same, the order of the CIT(Appeals) on the issue in question is confirmed.
27. Ground no. 4 raised in this appeal is as under :
"That the learned CIT(Appeals) erred in law and on facts in allowing expenses of Rs. 33,408."
28. We have heard the rival submissions of the parties and have gone through the relevant material available on record. These expenses related to earlier years for which the liability has been crystallised during the current previous year. Identical issue raised by the revenue for assessment year 1991-92 has been dealt by us in paras 13 to 15 above, wherein we have confirmed the finding of the CIT(Appeals) by upholding the order of the CIT(Appeals) on the issue in question. Facts and circumstances of the case remaining the same, the order of the CIT(Appeals) for the assessment year in question is also confirmed.
29. Accordingly, revenue's appeal for assessment year 1992-93 is dismissed.
ITA No. 1271/Del/96 - Assessment year 1992-93 (Assessee's appeal) :30. Ground no. 1 raised in this appeal is as under :-
"That, having regard to the facts and circumstances of the case and the relevant provisions of law, the Learned Commissioner of Income-tax (Appeals)-XIV, New Delhi erred in holding that for the purposes of determining the income of the industrial Unit I for allowing deductions under sections 80HH and 80-I of the Income-tax Act, 1961 therefrom, the allocation of administrative and other expenses between Unit I and Unit II should be made on actual basis or on the basis of production and not on the basis of installed capacity."
31. We have heard the rival submissions of the parties on the issue in question and have gone through the relevant material available on record. Identical issue has been dealt by us in paras 18 to 21 above while dealing with assessee's appeal for assessment year 1991-92. The CIT(Appeals) for assessment year 1991-92 has directed that administrative and other expenses be allocated between the two units on the basis of production. In that year we have set aside the said finding of the CIT(Appeals) and have directed the Assessing Officer to allow administrative and other expenses by allocating installed capacity ratio worked out on the basis of period of working of each unit and re-calculate the income of the assessee on the basis of this finding. Facts and circumstances of the case for the assessment year in question remaining the same herein also we set aside the finding of the CIT(Appeals) on the issue in question and direct the Assessing Officer to re-calculate the income of the assessee in view of our finding on the issue in question, in assessee's own case for assessment year 1991-92. Order accordingly.
32. Ground No. 2 raised in this appeal is as under :
"That the learned Commissioner of Income-tax (Appeals) also erred in confirming the finding of the learned Deputy Commissioner of Income-tax, Special Range-10, New Delhi that deductions under sections 80HH and 80-I should not be allowed on the following items of income comprised in Unit I :-
(i) Lease rent Rs. 5,91,822 (ii) Job work charges Rs. 1,04,234 (iii) Technical service charges Rs. 25,378 (iv) Interest income Rs. 15,80,277 (v) Dividend income Rs. 5,56,166 (vi) Profit on sale of investment Rs. 12,380"
33. The assessee has credited these items of income under the separate head "Other sources". The authorised representative of the assessee was fair enough to concede that he was not pressing this ground of appeal in regard to job work charges = Rs. 1,04,234; dividend income = Rs. 5,56,166 and profit on sale of investment = Rs. 12,380. Accordingly, assessee's appeal in respect of the above three items is rejected as not pressed for.
34. In respect of lease rent amounting to Rs. 5,91,822 the authorised representative of the assessee contended that these are the gross receipts of lease rent and for purposes of disallowing deduction under sections 80HH and 80-I in respect thereof only net income from lease rent should be considered which, according to him, worked out to Rs. 2,89,980. However, since this ground of appeal for taking net income from lease rent was neither taken before the Assessing Officer nor before the CIT(Appeals), the assessee cannot be allowed to take this issue for the first time before the Tribunal. In view of these facts this ground is rejected.
35. As regards technical service charges amounting to Rs. 25,378 it was contended by the authorised representative of the assessee that this was not an item of income but only recovery of expenditure already debited to the profit and loss account of the industrial undertaking. Hence, he submitted that the same was received from two concerns who had done job work of carrying out crimping process on the yarn produced by the appellant. In order to maintain quality of the job work done by these concerns, the appellant's technical staff worked for some time in the factories of these concerns for guidance and supervision. Therefore, the appellant had paid job charges amounting to Rs. 5,15,734 to these two concerns. He could only recover Rs. 25,378 from them by way of salary etc. of his staff for the period of work in these two concerns. According to A.R., therefore, the assessee paid lesser job work charges to these two concerns, hence, deduction under sections 80HH and 80-I should not have been disallowed in respect of said sum of Rs. 25,378.
36. On the other hand, the learned D.R. strongly placed reliance on the order of the CIT(Appeals) on the issue in question.
37. After considering the rival submissions of the parties and having gone through the relevant material available on record we are of the opinion that the sum of Rs. 25,378 does not represent an item of income but is only recovery of expenditure which really reduced the expenditure of the industrial undertaking. Therefore, deduction under sections 80HH and 80-I should not have been disallowed by the authorities below. Accordingly, assessee's claim in this regard is allowed. The Assessing Officer will recompute the taxable income accordingly.
38. As regards interest income amounting to Rs. 15,80,277 the authorised representative of the assessee contended that the appellant had paid total interest amounting to Rs. 3,09,01,298 to banks and financial institutions on borrowed funds which had been debited to profit & loss account. Since the appellant received interest of Rs. 15,80,277 on various deposits and advances during the year, these receipts should have been debited to the interest account and thus should have been shown a net debit of Rs. 2,93,21,021 therein.
39. The authorised representative of the assessee in this connection argued that although the appellant wrongly credited interest receipts under the head "Other income", but since there was a net expenditure of over Rs. 2.93 crores under the head 'Interest', by correctly crediting interest receipt to that extent, deduction under sections 80HH and 80-I should not have been disallowed on interest receipts.
40. The learned D.R., on the other hand, strongly placed reliance on the order of the CIT(Appeals) in this regard.
41. We have considered the submissions of the parties and have gone through the entire material placed on record including the orders of the authorities below. After taking into account the factual position we are unable to find out any merit in the contention of the authorised representative. We Further find that the CIT(Appeals) has rejected the contention of the assessee because the assessee had himself credited interest receipts under the head "Other income" and had allocated the same to Unit No. 1 and Unit no. 2 alongwith other items of income. Therefore, the assessee cannot go back from its own admission. Therefore, this argument of learned authorised representative has no force and accordingly the same is rejected.
42. The learned authorised representative for the assessee has made alternative submission that the interest receipt of Rs. 15,80,277 was from the following sources :-
(a) from business on margin kept as fixed deposit for establishing letter of credits for importing raw material Rs. 8,54,703
(b) Refund of advance income-tax paid to the Income-tax Department for the assessment years 1990-91 and 1991-92 Rs. 6,48,276
(c) Trade advances to parties Rs. 42,420
(d) on security for godown taken on rent For keeping finished goods Rs. 24,520
(e) Petty other similar items Rs. 10,350
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Total Rs. 15,80,277
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It was pointed out by him that the deposits and advances on which interest has been received were necessary for complying with the statutory requirements or for carrying on the business of the assessee and therefore interest received is not taxable under the head "Income from other sources" but is part of the business profits of the industrial undertaking. In this connection he drew our attention to the ratio of the following case laws :-
(1) CIT v. Dunlop India Ltd. [1992] 197 ITR 34 (Cal.); and (2) CIT v. South India Shipping Corpn. Ltd. [1995] 216 ITR 651 (Mad.).
He, therefore, contended that it is an allowable deduction and the authorities below were not justified in disallowing the same.
43. The learned D.R., on the other hand, strongly relied upon the order of the CIT(Appeals) in this regard.
44. We have considered the rival submissions of the parties. There is some force in the argument of learned authorised representative of the assessee that since deposits like fixed deposits with Bank kept as margin for establishing letter of credit for importing raw-material or trade advances to the parties or security for godowns taken on rent are deposits necessary either for complying with statutory requirement or for carrying on of business by the assessee, interest received thereon should form part of the business profits of the industrial undertaking. However, this argument will not apply in the case of interest of Rs. 6,48,276 received as income-tax refund. We, therefore, hold that deduction under sections 80HH and 80-I are not allowable on interest of Rs. 6,48,276 received from Income-tax Department as refund of income-tax. However, the deduction is allowable in respect of the balance interest amount of Rs. 9,32,001. Accordingly, this ground of appeal in respect of interest receipt is partly allowed.
45. In ground no. 3, the assessee has contended that without prejudice to ground no. 2 the learned CIT(Appeals) should have directed that the deductions under sections 80HH and 80-I should be allowed with reference to net income in respect of each item mentioned in the ground of appeal no. 2. In view of our discussion in the preceding paragraphs relating to ground of appeal no. 2, this ground has become infructuous and is dismissed as such.
46. To sum up, revenue's appeals for both the assessment years are dismissed. Assessee's appeal for assessment year 1991-92 is allowed and for assessment year 1992-93 is partly allowed.