Income Tax Appellate Tribunal - Ahmedabad
Gujarat Narmada Valley Fertilizer ... vs Assessee on 28 December, 2011
-1-
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "D"
BEFORE SHRI G C GUPTA - VICE-PRESIDENT
& SHRI B P JAIN - ACCOUNTANT MEMBER
ITA nos.1463, 1464, 4007/A/07 & 2400/Ahd/2008
Assessment Years:-2000-01, 2003-04, 2004-05 & 2005-06
AND
ITA no.3111/Ahd/2008
Assessment Years:-2000-01
Gujarat Narmada Valley V/s The Deputy Commissioner
Fertilizers Co. Ltd., P.O. of Income-tax, Bharuch
Narmada Nagar, Bharuch Circle, Bharuch
PAN: AAACG 8372 Q
[Appellant] [Respondent]
AND
ITA nos.1373, 3993/A/07 & 2401/Ahd/2008
Assessment Years:-2003-04, 2004-05 & 2005-06
The Deputy V/s Gujarat Narmada Valley
Commissioner of Income- Fertilizers Co. Ltd., P.O.
tax, Bharuch Circle, Narmada Nagar, Bharuch
Bharuch
[Appellant] [Respondent]
Assessee by :- Shri M P Sarda, AR
Revenue by:- Shri S S Parida, CIT - DR
Date of Hearing:- 28-12-2011
Date of Pronouncement:- 30-12-2011
ORDER
2 PER B P JAIN (AM):- These cross appeals of the assessee and the Revenue arise out of different orders of learned CIT(A) as per details below:-
Sr Appeal no. Appeal no. Date of Asst. Year
No. By Assessee By Revenue Order of
CIT(A)
1 1463/A/2007 - 30-01-2007 2000-01
2 1464/A/2007 1373/A/2007 30-01-2007 2003-04
3 4007/A/2007 3993/A/2007 31-08-2007 2004-05
4 2400/A/2007 2401/A/2007 30-04-2008 2005-06
5 3111/A/2008 - 02-06-2008 2000-01
2 First of all, we take up the appeal of the assessee in ITA
no.1464/Ahd/2007 for Assessment Year 2003-04 for the sake of convenience. The assessee has raised as many as 16 grounds of appeal in this appeal.
3 Ground no.1 of the assessee's appeal is general in nature and therefore does not require any adjudication.
4 Ground nos.2.1, 2.2 and 2.3 of the assessee's appeal are not pressed, therefore, the same are dismissed, as not pressed. Ground nos.3.1 and 3.2 as well as Ground nos.6 and 7 of the assessee's appeal are also not pressed and hence the same are dismissed, as not pressed. Remaining Ground nos.4, 5, 8 to 16 are as under:-
[4] In law and in the facts and circumstances of the appellant's case, the Ld. CIT (A) has erred in confirming the disallowance of Rs.10.50 lakhs incurred on feasibility study to convert molten Ammonium Nitrate Melt manufactured by the appellant in to prill form. While doing so, he has not appreciated that the appellant is already engaged in the business of fertilizers and 3 chemicals and therefore, conversion of molten Ammonium Nitrate Melt manufactured in to prill form is not a new business and that it is expansion of existing business. In this connection, the appellant relied on the decision of CIT(A) in its own case in A.Y. 1986-87 and following decisions:
i. CIT v. Jyoti Electric Motors Ltd. [2002] 255-ITR-345 (GUJ) ii. CIT v. Graphite India Ltd. [1996] 221-ITR-420 (CAL) iii. Hindustan Milkfood Manufacturers Ltd. v. CIT [1989] 179-ITR-302 (P&H) iv Asiatic Oxygen Ltd. v. CIT [1991] 190-ITR-328 (CAL) [5] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in confirming the disallowance of the deduction u/s. 80HHC by upholding the disallowance of 90% of the Fertilizer subsidy from the computation of profit for the purpose of deduction u/s. 80HHC.
[8] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in directing the Assessing Officer to rework the depreciation amount by considering the rotor assembly, gas chromotograph, impeller assembly and relay &. control panel board as expenditure of capital nature, out of Repairs and Maintenance expenditure disallowance of Rs.3,33,73,434/-. He has erred in reaching the conclusion that the said items are independent items and are capable of providing enduring benefit. He has erred in reaching the said conclusion without analyzing any difference between the said items and other items of expenditure in repairs and maintenance.
[9] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in confirming the disallowance of Premium of Rs.1,02,34,103/- paid on prepayment of loan and allowing the deduction over the term of loan. While doing so, he has failed to appreciate that revenue expenditure which is incurred wholly and exclusively for the purpose of business must be fully allowed in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written off in its books over number, of years. In 4 this connection, he has failed to follow the decisions in the following cases:
i. Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82-ITR-363 (SC) ii. Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227-ITR-172 (SC) iii. CIT v. Madras Auto Service (P) Ltd., Etc. [1998] 233-
ITR-468 (SC) iv. CIT v. Bhor Industries Ltd. [2003] 264-ITR-180 (BOM) [10] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in confirming the deduction u/s. 35D to the extent of Rs.13,50,000/- as against the claim of Rs.87,73,000/- made by the appellant. He has erred in upholding the views of the Assessing Officer and not appreciating that the GDR issue made by the appellant was mainly for the purpose of capital expenditure in connection with the expansion plan of the appellant and since there was some time to commence expansion/extension of projects, the appellant had temporarily deployed part of proceeds of GDR issue in the units of UTI.
[11.1] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in confirming the disallowance of Rs.900,10,279/-being the amount of deduction claimed u/s. 36(1) (iii) in respect of money borrowed for expansion of existing business. While doing so, he has also erred in not following the order of CIT(A) in the case of the appellant for the A.Y. 1998-99 and the decision of the Gujarat High Court in the case of Core Healthcare Ltd. (251-ITR-61) (Guj) and Alembic Glass Industries Ltd. (103-ITR-715) (Guj) [11.2] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in reaching the conclusion that the amendment to section 36(1) (iii) is applicable retrospectively and therefore, applicable to the period prior to the A.Y. 2004-05 as well.
[11.3] Without prejudice to above, In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has 5 erred in not dealing with the appellant claim regarding additional depreciation as per 3rd proviso to section 32(l)(iia) in respect of interest disallowed and capitalized amounting to Rs.9,00,10,279/-.
[12.1 In law and in the facts and circumstances of the appellant's case, the Ld. CIT (A) has erred in confirming the disallowance of depreciation of Rs.1,61,23,149/- claimed on certain assets given on lease. While doing so, he has erred in reaching to the conclusion that the lease transaction is a mere financial arrangement, without appreciating the facts of the case.
[12.2] Without prejudice to above, the Ld. CIT (A) has erred in not dealing with the appellant's claim that the principal portion of lease rent should be excluded from the income of the appellant and only the interest portion should be included in the income of the appellant.
[13] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in not directing the Assessing Officer to allow an amount of Rs.1,38,743/- due from Gujarat Narmada Finance & Investment Co. Ltd. , which has been written off in the books of account.
[14] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in dismissing the ground relating to the initiation of penalty proceedings u/s. 271(l)(c) of the Income Tax Act, 1961.
[15] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in not dealing with the grounds relating to levying interest u/s. 234B, 234C and 234D of the Income Tax Act, 1961.
[16] The appellant craves leave to add, alter, amend and/or withdraw any of the grounds or ground either before or at the time of appeal hearing.
65 The Revenue has raised the following grounds of appeal in ITA no.1373/Ahd/2007 for AY 2003-04:-
[1(a)] On the facts and in the circumstances of the case, the CIT(A) erred in deleting the disallowance of Rs.8,00,14,405/- made out of the interest claimed u/s 36(1)(iii) on account of diversion of borrowed funds to subsidiary and associate concerns, by merely relying on the appellate orders for earlier years (which have been contested by the Department)m, without appreciating that each year's income-tax proceedings are independent and the matter had to be decided on merits in the light of the principles settled by authoritative jurisdictional pronouncements.
[1(b)] The CIT(A) failed to appreciate the legal principles, that onus u/s 36(1)(iii) lies on the assessee to prove that each loan is used for the purposes of the business and there is no presumption in law that it is own capital or surplus funds that were diverted for non-business purposes, as settled in the case of Kishanchand Chellaram vs. CIT 114 ITR 654 (Bom), R Dalmia vs. CIT 133 ITR 169 (Delhi), CIT vs. M S Venkateshwaran 222 ITR 163 (Mad), K Somasundaram & Brothers vs. CIT 238 ITR 939 (Mad) and CIT vs. Motor General Finance Ltd. 254 ITR 449 (Delhi) which was confirmed in principle by the Supreme Court in the case of Motor General Finance vs. CIT 267 ITR 381 (SC).
[2(a)] On the facts and in the circumstances of the case, the CIT(A) erred in allowing the expenses of Rs.38,32,725/- on protecting the assets of M/s Gujara Narmada Auto Ltd. (GNAL), a sister concern of the assessee, without appreciating the legal position that a subsidiary company is a separate legal entity and the business of the subsidiary cannot be considered to the business of the assessee as settled in the case of Phaltan Sugar Works Ltd. vs. CWT 208 ITR 989, 993 (Bom) followed in 215 ITR 582 (Bom) and 216 ITR 479, 481 (Bom).
[2(b)] Without prejudice, the CIT(A) erre3d in not considering the fact that a liquidator was appointed by the High Court who was in actual possession of the assets of GNAL and was responsible for protecting the same and hence there was no obligation on the assessee to incur such expenditure.
7[3] On the facts and in the circumstances of the case, the CIT(A) erred in deleting to the extent of Rs.30,68,890/- out of repairs and maintenance expenses made on account of giving a new and different advantage, by holding the same as replacement of existing parts, without appreciating that renewal or restoration are not covered by 'current repairs' referred to in section 31(i) and are of capital nature as settled in the case of Ballimal Naval Kishore vs. CIT 224 ITR 414 (SC).
[4] On the facts and in the circumstances of the case, the CIT(A) erred in allowing deduction of Rs.20,00,000/- being payment for Information and Technology Related Services paid to M/s Infinium (India) Ltd., treated as expenses deriving benefit of enduring nature.
[5] On the facts and in the circumstances of the case, the CIT(A) erred in directing that to exclude sales tax and excise duty as part of total turnover while working out the deduction u/s 80HHC.
[6] The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
Relief claimed in appeal:-
The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the AO be restored.
6 As regards Ground no.4, the brief facts are that the assessee claimed an expenditure of Rs.10.50 lakhs incurred towards preparing feasibility report for setting up of 200 MTD Prilled Ammonium Nitrate Project. On detailed study, the Project was found to be not viable and it was decided not to pursue the project and expenditure of Rs.10.50 lakhs so incurred was claimed as revenue expenditure. The AO did not accept the explanation of the assessee for the reason that the assessee had engaged private firms to explore possibility of new business and 8 the advantage available to the assessee company could have been of enduring nature and cannot be said to be of revenue in nature.
The AO, relying upon decisions of various courts of law, disallowed the claim of the assessee and added Rs.10.50 lakhs to the income of the assessee.
7 The learned CIT(A) confirmed the action of the AO.
8 Before us, the learned counsel for the assessee, Mr. M P Sarda, argued that one of the products manufactured by the assessee is Ammonium Nitrate which is in liquid form. To have value addition in the existing unit, it was decided to carry out feasibility study to convert Molten Ammonium Nitrate melt into Prilled Form with additional investment. M/s Tata Economic Consultancy Services (Mumbai) was appointed to carry out market feasibility and M/s Uhde India Ltd. was appointed to prepare techno economic feasibility report for the said project. Both the parties completed their respective assignments and reports were submitted. The project was not found viable since the profit margin was very low and it was decided not to pursue the project. Since the assessee is already manufacturing Ammonium Nitrate in the liquid form and feasibility study for manufacturing Prilled Ammonium Nitrate is nothing but expenditure for extension of existing business and therefore allowable as revenue expenditure. On similar issue in assessee's own case for AY 1986-87, the ITAT Ahmedabad Bench has allowed the claim of expenditure incurred by the assessee.
99 The learned DR, on the other hand, relied upon the order of the learned CIT(A).
10 We have heard the rival contentions and perused the facts of the case. The learned CIT(A) vide para 9.3 of his order specifically relied upon the order of the learned CIT(A) in assessee's own case for AY 2001-02 with regard to PET Project, the said order of the learned CIT(A) in assessee's own case has been reversed by the ITAT Ahmedabad Bench in ITA nos.1350 & 1351/Ahd/2005, dated 30-09-2008 i.e. the appeal of the assessee has been allowed on the similar issue by the ITAT Ahmedabad Bench mentioned hereinabove. In view of the decision of the ITAT Ahmedabad Bench on the similar issue and in the absence of contrary decision available on record, we have no reason to deviate from the stand taken by the Tribunal. Consequently, we direct the AO to allow the expenditure so claimed by the assessee. Thus, Ground no.4 of the assessee's appeal is allowed.
11 As regards Ground no.5 of the assessee's appeal, the brief facts are that the AO made a disallowance of 90% of Fertilizer Subsidy from the computation of profit for the purpose of deduction u/s 80HHC of the Act. The learned CIT(A) confirmed the action of the AO.
12 Before us, the learned counsel for the assessee argued that the Government sets the price at which the fertilizer is sold to the farmers and also sets retention price i.e. the realization that the manufacturer is entitled. The difference between the two is the subsidy but for the Government policy, the assessee would have 10 sold the fertilizer at market price and, therefore, the subsidy is nothing but reimbursement of sale price not charged to the farmers. Accordingly, it is a part of the total turnover which cannot be excluded as other income while computing the deduction u/s 80HHC of the Act. The learned counsel for the assessee relied upon the decision of the Hon'ble Supreme Court in the case of Sahaney Steel and Press Works Ltd. vs. CIT (1997) 228 ITR 253.
13 The learned DR, on the other hand, relied upon the decision of the ITAT D-Bench in the assessee's own case for AYs 1998-99 and 2002-03 in ITA Nos.1009, 1010 and 1293/Ahd/2006, dated 12-12-2008 with specific reference to para-18 of the order in which it has been held that the receipts constituting independent income having no nexus with exports were required to be deducted from business profit under clause (baa). Therefore, in the said order the Tribunal has upheld the order of the lower authorities in excluding 90% under clause (baa) of section 80HHC of the Act on the gross receipts from interest income of rent, hire charges, interest on bonds and debentures and fertilizers and urea subsidy received from the Government of India. The learned DR accordingly supported the orders of both the authorities below.
14 We have heard the rival contentions and perused the facts of the case. As regards the decision of the Hon'ble Supreme Court in the case of Sahaney Steel and Press Works Ltd. (supra) where it has been mentioned that the payments in the nature of subsidy from public funds, if made to the assessee to assist him 11 to carry on the trade or business, they are trade receipts. If the purpose is to assist the assessee in carrying out the business operations, such subsidy must be treated as assistance for the purpose of the trade and are of revenue in nature and would have to be taxed accordingly. The facts in the case of Sahaney Steel & Press Works Ltd. (supra) are not applicable in the present case. In the present case, even if the decision in the case of Sahaney Steel and Press Works (supra) is followed, there is no dispute to the fact that the subsidy is not of revenue nature and is the assistance for the purpose of trade. But in the present case, the issue before us is allowability of deduction u/s 80HHC of the Act. The Tribunal in assessee's own case has already decided the issue in ITA nos.1009, 1010 and 1293/Ahd/2006, dated 12-12- 2008 vide para 18 of his order. Para-18 of the Tribunal's order mentioned hereinabove is reproduced for the sake of clarity:-
"18. Having heard the rival contentions and going through the facts and circumstances of the case, it is seen that the issue is squarely covered by the decision of Hon'ble Apex Court in the case of K. Ravindranathan Nair (supra), wherein the Hon'ble Apex Court has held that clause (baa) of explanation stated that 90 per cent of the incentive profits or receipts by way of brokerage, commission, interest, rent charges or any other receipt of like nature included in business profits shave to be deducted from business profits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). A bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out the formula and in order to avoid distortion in arriving at the export profit? clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of the gross total income, they had to be excluded from gross total income because such 12 receipts had no nexus with the export turnover. Processing charges, which are part of gross total income, form an item of independent income like rent, commission, brokerage, etc., and, therefore, 90 per cent of the processing charges has also to be reduced from the gross total income to arrive at the business profits and, therefore, it has also to be included in the total turnover in the formula for arriving at the business profits in terms of clause (baa) of the Explanation to section 80HC(3). While arriving at the export profits under section 80HHC(3) as it stood in the assessment year 19930-94 processing charges are to be included in the total turnover. In this view, we uphold the order of the lower authorities in excluding 90% under clause (baa) of Section 80HHC of the Act on these gross receipts from interest income of rent, hire charges interest on bonds and debentures and fertilizers & urea subsidy received from the Govt. of India. However, we are in full agreement with the alternative contention of the assessee that only the net amount of the above receipts should be excluded under clause (baa) of Section 80HHC of the Act and not the gross receipts in view of the decision of Hon'ble Delhi High Court in the case of CIT v. Shri Ram Honda Power Equipments and Others (2007) 289 ITR 475 (Del).
Accordingly,"this issue of the assessee's appeal is partly allowed."
In the circumstances and facts of the case and following the order of the Tribunal mentioned hereinabove, we dismiss Ground no.5 of the assessee's appeal.
15 As regards Ground no.8 of the assessee's appeal, the facts are that the assesses company had claimed expenditure of Rs.3400.90 lakhs on account of consumption and replacement of stores and spares. On verification of these details it was noticed by the Assessing Officer that certain expenditures were capital in nature. Expenditure to the tune of Rs.2,65,39,230/- relating to Rotor Assembly and Relay and Control Panel Board were held to be capital in nature as per para 9.1 of the assessment order for the reasons that these items were self contained machinery items amenable to independent use and providing enduring benefits. In 13 respect of other expenditure on items of Rs.68,34,204/- which were replacement/ repairs of plant were also held to be self contained machinery items and being capital in nature. After allowing for depreciation net addition of Rs.2,58,84,351/- was effected to the total income.
16 The learned has CIT(A) confirmed the action of the AO.
17 It was argued by the learned counsel for the assessee that these items were not independent items but part and parcel of the machinery and without it, the entire system cannot function. The expenditure incurred on repairs and replacement was necessitated due to continuous uses of equipments. The learned AR had relied upon the decision in its own case by the Tribunal Ahmedabad Bench-C in ITA no.1455/Ahd/2001 dated 10-11-2006.
18 The learned DR, on the other hand, invited our attention at page-17 of AO's order in para-9.1 and argued that these replacements parts are not parts but independent turbine and, therefore, enduring benefit will arise to the assessee.
19 We have heard the rival contentions and perused the facts of the case. On perusal of the assessment order in which it has been written that Rotor Assembly is a part of X-701 Turbine, was broken and was required to be replaced by new Rotor to run Turbine. Its justification was given before the AO also. Similarly, that the gas chromatograph, the matter requires examination whether the parts so replaced are independent machine or are parts which require to be fitted in place of broken parts of the Turbine. The clear findings are required to be given 14 by the AO which are not available in the order of the AO Therefore, it will be in the fitness of justice if the matter is remanded to the file of the AO who will examine the issue and decide the same de novo but by affording reasonable opportunity of being heard to the assessee. Thus, Ground no.8 of the assessee's appeal is allowed for statistical purpose.
20 As regards Ground no.9 of the assessee's appeal, the brief facts are that the assessee company has claimed deduction of Rs.1,02,34,103/- towards incidental expenditure incurred on substitution of high interest cost NCDs, as deduction u/s 37(1) of the Act in the statement of total income, although it treated the said expenditure as deferred revenue expenditure in its books of account over a period of 5 (five) years thereby debiting Rs.67,48,391/- to the P&L Account for the previous year. The assessee submitted the explanation which was not accepted by the AO and accordingly disallowed the claim of the assessee. This action of the AO was confirmed by the learned CIT(A).
21 It was argued by the learned counsel for the assessee that the company had incurred Rs.1,02,34,103/- towards pre-payment of premium expenses of 16.54% term loan of Rs.73.50 crores from IDBI for its Synthesis Gas Generation Unit (SGGU). The assessee had claimed interest on such loan till date as deduction u/s. 36(1)(iii) of the Income tax Act which had been allowed also. It was added that as there was a general reduction in the interest rates on borrowings in the market, the assessee felt that the rate of interest payable to the IDBI was more than the prevailing market rate. In order to reduce the heavy interest 15 burden, the assessee negotiated with the IDBI to roll over the same term loan at lower interest rate which would reflect the rates prevailing in the debt market. The IDBI agreed to the rolling over the loan at 14.5% per annum from the earlier contracted rate f 16.54% per annum. As per the terms of loan agreement dated 5 June 997 entered by the assessee with IDBI, the assessee was required to pay premium of Rs.1,47,01,785 in A.Y. 2000-01 for prepayment of loan. In the books of account the said premium was considered as deferred revenue expenses, which had been amortized over a period of 5 years However, in view of further reduction in rate of interest in debt market, assessee negotiated with IDBI to further roll over the said term loan at lower interest rate which would reflect the rates prevailing in the debt market. IDBI agreed to the rolling over the loan at 12.50% per annum from the earlier contracted rate of 14.50 % per annum. As per the terms of loan agreement dated 5- 6-1997 entered by the assessee with IDBI, for the term loan the assessee was required to pay premium of Rs.78,54,102 for prepayment of loan. The said premium for repayment is in the nature of financing charge, which has arisen pursuant to the agreement entered into and has also been paid to IDBI during the year on 15-3-2000. Further it is stated that the assessee had also issued 10,00,000 redeemable debentures of Rs.666.70 lakhs to Unit Trust of India (UTI) in 1998. As per the clause No 15 of the Debenture Trust Deed, the assessee had an option to repurchase the debentures prior to the date of its redemption. During the previous yea- the assessee has exercised its option of repurchasing the debenture and paid premium of Rs.23,80,000 to 16 UTI on 27-5-2003. It was further submitted that since the premium paid to IDBI and UTI are in relation to the loans borrowed for the purpose of business, the premium of Rs. 1,02,34,103 [IDBI Rs.76,54,102 plus UTI Rs.23,80,000] has been claimed and is allowable as deduction under section 36(1)(iii)/37(l) of the Act. It was further submitted that in the books of accounts of F.Y. 1999-2000 and F.Y. 2002-03 relevant to A.Y. 2000-01 and A.Y. 2003-04 respectively, the said premium of Rs.1,02,34,103 was considered as revenue expenditure and was amortized over a remaining period payment, commencing from the previous year in which payment was i.e. A.Y. 2000-2001 and A.Y. 2003-04. As the said premium has n claimed in the respective assessment years, Rs.67,48,391 (Rs.29,4,0,357 in respect of A.Y. 2000-01 plus Rs.38,08,034 of A.Y. 2003-04) debited to P&L Account has been added to the total income. As the said premium for repayment was in the nature of financing charges and was incurred for the purpose of business, the entire amount of the premium was claimed by the assessee as business expenditure u/s. 36(1)(iii)/37(l) of the Income tax Act although the same had been amortized in the books of account over a period of 5 years. It was further argued that the facts in the present case are different to the facts in the decisions relied upon by the AO.
22 The learned DR, on the other hand, argued that the incidental expenditure incurred on substitution high interest cost and payment towards premium is a liability for the future years 17 and cannot be allowed in the impugned year. He relied upon the decisions of various courts of law as referred in the AO's order.
23 We have heard the rival contentions and perused the facts of the case. The assessee as a part of that debt restructuring program has incurred expenditure towards pre-payment of premises expenses for restructuring loan at lower interest rate. Such pre-payment of the amount which is an act for borrowing money and was incidental to carry on the assessee's business. As a matter of fact, the assessee had already obtained the loan which cannot be treated as an asset or advantage of enduring nature, and the expenditure has been incurred to secure money at lower interest for certain period. Therefore, the said expenditure is allowable as business expenditure. These views find support from the decision of the Hon'ble Supreme Court in the case of India Cements Ltd. vs. CIT 60 ITR 52. The decisions relied upon by the CIT - DR and the AO in his order are on different facts and cannot be of any benefit to the Revenue. In the circumstances and facts of the case, we direct the AO to allow the claim of the assessee. Thus, Ground no.9 of the assessee's appeal is allowed.
24 As regards Ground no.10 of the assessee's appeal, the assessee has claimed deduction u/s 35D amounting to Rs.87,73,000/- which was restricted to Rs.13,50,000/- by the AO. The brief facts are that during the previous year relevant to AY 1995-96 the company made an Euro Issue of the Global Depository Receipts (GDRs) for its Acetic Acid Expansion Project and collected Rs.191.72 crores inclusive of premium. The company incurred expenditure of Rs.8.77 crores for this issue. It 18 was submitted by the assessee in assessment proceedings that subscribed and paid up capital of the company increased to Rs.146.48 crores and that coupled with debenture and long term borrowings of Rs.583.77 crores the total capital employed was Rs.730.25 crores and 2.5 % of such capital employed is Rs.18.26 crores. It was further stated that the cost of project of Ascetic Acid Expansion project was Rs.188.31 crores and that the said project was commissioned on 30.5.1995. It was stated that the expenditure of Rs.8.77 crores was less than 2.5 % of the cost of the project and capital employed and thus the assessee was entitled to deduction of Rs.87.7 lakhs as claimed u/s. 35D. The Assessing Officer was of the view that GDR issue was admittedly in connection with the extension of industrial undertaking and only the incremental capital employed which is attributable to the new project should be considered as capital employed. The increase in share capital and debenture between 31.3.1994 and 31.3.1995 was Rs.37.53 crores and thus 2.5% of such capital employed was Rs.93.82 lacs. Further it was stated that cost of Acetic Acid Expansion Project was Rs.188.31 crores whereas the net proceeds of GDR issue was Rs.182.95 crores (191.72 crores being gross proceeds - 8.77 crores being expenses). Further from the proceedings for A.Y. 2001-02 it was noticed that Rs.128.93 crores was invested in UTI Unit 65 scheme out of the GDR issue proceeds and since this investment was 70% of the GDR issue process, 70% of the expenses of Rs.87.73 lacs written off in that year by the assessee amounting to Rs.62 lacs was disallowed u/s. 14A as the dividend income in respect of UTI was exempt under the Act. It is mentioned by the Assessing Officer that excluding 19 the investment in UTI the amount invested towards the cost of project is Rs.54.02 crores ( 182.95 crores - Rs.128.93 crores) and 2.5% of such cost works out to Rs.1.35 crores. Therefore 10 % of this amount of Rs.1.35 crores at Rs.13.5 lacs was allowed by the Assessing Officer under section 35D.
25 The learned CIT(A) confirmed the action of the AO.
26 The learned counsel for the assessee argued that the assessee has been allowed the identical claim since 1995-96 by the Income-tax Department and it is only in the impugned year where the Department has doubted its decision when there is no change of the facts and circumstances of the case.
27 The learned DR, on the other hand, argued that res judicata does not apply.
28 We have heard the rival contentions and perused the facts of the case. From the reading of the provisions contained in section 35D and the arguments of both the parties, we are of the view that there are no change in the facts as in the last 7 years and, therefore, relying upon the decision of the Hon'ble Supreme Court in the case of Radha Soami Satsang vs. CIT 193 ITR 321, it would not be at all appropriate to allow the position to be changed in a subsequent year. Therefore, in the circumstances and facts of the case, we direct the AO to allow the claim of the assessee and accordingly the order of the learned CIT(A) is reversed. Thus, Ground no.10 of the assessee' appeal is allowed.
2029 As regards Ground no.11 of the assessee's appeal, the brief facts of the case are that the assessee company had claimed interest of Rs.9,00,10,279/- as deduction u/s. 36(1)(iii) in respect of money borrowed for expansion of business for the acetic acid plant expansion which had commenced production during the year i.e. 1.11.2002. It is mentioned that the assessee company had capitalized this interest in its books of account but claimed the same as revenue expenditure as per the statement of income. In assessment proceedings it was submitted that there was complete interlacing, interdependence and interconnection between the existing business operation and new plant and that in earlier years i.e. AY 1998-99 Department had allowed such deduction. The AO relying upon the decisions of various courts of law, was of the view that the amendment to section 36(1)(iii) is clarificatory in nature and is applicable to the impugned assessment year 2003-04 also. Accordingly, the interest of Rs.9,00,10,279/- capitalized in the books of account was disallowed and depreciation of Rs.1,12,51,285/- at the rate of 12.5% was allowed leading to net addition of Rs.7,87,58,994/-.
30 The learned CIT(A) confirmed the action of the AO.
31 The issue in hand is directly covered by the decision of the Hon'ble Supreme Court in the case of DCIT vs. Core Health Care Ltd. (2008) 298 ITR 194 in which it has been held that -
"Section 36(1)(iii) of the Income-tax Act, 1961, has to be read on its own terms: It is a code by itself. It makes no distinction between 21 money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrow capital and the purpose of the borrowing must be for business which is carried on by the assessee in the year of account. Unlike section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasizes the user of the capital and not the user of the asset which come into existence as a result of the borrowed capital. The Legislature has, therefore, made no distinction in section 36(1)(iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. "Actual cost" of asset has no relevancy in relation to section 36(1)(iii).
The proviso inserted in section 36(1)(iii) by the Finance Act, 2003, with effect from April 1, 2004, will operate prospectively.
Held accordingly, that the assessee was entitled to deduction under section 36(1)(iii) prior to its amendment by the Finance Act, 2003, in relation to money borrowed for purchase of machinery even though the assessee had not used the machinery in the year of borrowing."
Therefore, in view of the decision of the Hon'ble Supreme Court hereinabove, the AO is not justified in disallowing the claim of the assessee. He is directed to allow the claim of the assessee and accordingly the order of the learned CIT(A) is reversed. Thus, Ground no.11 of the assessee's appeal is allowed.
32 As regards Ground no.12 of the assesese's appeal, the facts are that the assessee claimed depreciation of Rs.1,61,23,149/- on certain assets which were given on lease basis. The AO did not accept the explanation of the assessee and accordingly added the said amount to the income of the assessee. This action of the AO was confirmed by the learned CIT(A).
2233 It was submitted before the AO as under:-
"The company had acquired the following assets as per details given below and the same has been given on lease;
Assets particulars FY Amount Rs.
1 Wagons 1995-96 93937200
2 Captive power plant 1999-00 312990556
3 Plant & machinery 1998-99 26333260
incinerator
4 Plant & Machinery -SAT & 1998-99 54679889
NOX unit
During the year, the company earned the lease rent of Rs.12,51,30,606/-, which has been credited to the Profit and loss account and shown as income. Further, as per accounting guidance note, an amount of Rs.1,21,41,524 being lease equalization amount has been debited to the profit & loss account. The company is maintaining the lease equalization account for the assets given on lease in order to comply with the accounting standard and guidance note issued by the Institute of chartered Accountant of India"
In order the justify its claim of depreciation the assessee raised various contentions which are summarized as under:
i. the company is authorized by its Memorandum of Association to do lease business and thus leasing is one of the business, of the company ii. The company has purchased the assets viz. Railway Wagons and Captive Power Plant which are given on lease to Western Railway and Narmada Chematur Petrochemicals Co. Ltd. (NCPL) respectively in the course of its business and therefore depreciation has been 23 claimed as assessee is the owner of the assets which has been used for its business iii. As regard specific circumstances under which the assets were given on lease, the assessee stated during the reassessment proceedings for A. Y. 2000-01 as under:
"Indian Railways was facing acute shortage of railway wagons in general and for movement of fertilizers in particulars. Thus in order to get priority allotment of wagons for movement of fertilizers, manufactured by the company, under guaranteed clearance of traffic, as per the own your wagon scheme of railways, company had given on lease 34 wagons to western railways. Further in order to prevent substantial loss due to power dips as well as to achieve economy on power cost, NCPL, a subsidiary of GNFC Ltd., decided install captive power plant (CPP). However, since production at NCPL had not established till that time, NCPL was not in a position to finance the cost of proposed CPP. GNFC purchased the equipments for CPP for NCPL and the same was given on lease basis to NCPL. CNFC accounted lease rent for these assets during respective assessment years and credited it to the profit & loss account- and consequently included in total income."
It was argued by the learned counsel for the assessee that the Income-tax Department had allowed depreciation on leased assets to the assessee since AY 1996-97 till AY 2002-03 in the assessment made u/s 143(3) of the Act in the case of assets leased to Western Railways. The wagons so leased were purchased by the assessee lessor. The wagons were identifiable and were having identification numbers. The primary period was for 10 years as per clause 2(iii). The lease charges will not be payable for a number of days the wagons remained unutilized. The lessee on behalf of the lessor will ensure the equipments. It was further argued by the learned counsel for the assessee that the assets so leased will return back to the lessor assessee and the lessee will not have any right. The assets so leased thereafter will 24 be used by the assessee for its own purpose. The allegations made by the AO at pages 43 and 44 of his order are without any basis and had been written in the order on conjectures and surmises. Though the assets had been duly acquired on the specification of the lessee. It cannot be said that it will not be used for the purpose and use of the assessee i.e. the lessor. The insurance has been taken by the lessee on behalf of the lessor. It is not a finance lease since the period of lease does not start from the date of finance of the assets but at a later date.
34 On the other hand, the learned DR relied upon the order of the AO as pages 43 and 44 and in specific relied upon the decision of the Hon'ble Supreme Court in the case of Asea Brown Boveri Ltd. vs. Industrial Finance Corporation, dated 27-10-2004 which has been placed on record.
35 We have heard the rival contentions and perused the facts of the case. As regards reliance on the decision of the Hon'ble Supreme Court in the case of Asea Brown Boveri Ltd. (supra) by the learned DR, the arguments of the learned DR that the assessee had purchased the equipments for the economic life of the plant itself and not more than that. As a matter of fact, it is not a case, as is appearing from different clauses of the lease deed that the equipments leased will be returned back to the lessor after the expiry of the lease. Nothing has been brought to disapprove the said clauses of the lease deed by any of the authorities below or by the learned DR. The learned DR could not prove that in fact the assessee is only a financer and is not interested in the assets and therefore, it cannot be said as full 25 payout lease. Therefore, in the circumstances and facts of the case, the arguments made by the learned DR cannot be accepted and following the rule of consistency, the assessee deserves to be allowed the claim and we direct the AO accordingly to allow the claim of the assessee. The order of the learned CIT(A) is reversed. Thus, Ground no.12 of the assessee's appeal is allowed.
36 As regards Ground no.13, the facts are that the assessee has written off an amount of Rs.1,38,743/- and has claimed as an expenditure. The AO did not allow the same, which action of the AO was confirmed by the learned CIT(A).
37 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) that the assessee has not submitted the details of such debts and also the fact that this was actually a trade debt. In the absence of details, the assessee could not be justified in debiting as a trade debt and therefore in the circumstances and facts of the case, we find no infirmity in the order of the learned CIT(A). Thus, Ground no.13 of the assessee's appeal is dismissed.
38 In the result, the appeal of the assessee in ITA no.1464/Ahd/2007 for AY 2003-04 is partly allowed.
39 Now, we take up the Departmental appeal in ITA no.1373/Ahd/2007 for AY 2003-04. In Ground no.1, the brief facts are that the AO disallowed the interest of Rs.8,00,14,405/- claimed u/s 36(1)(iii) of the Act on the ground that the borrowings were utilized for non-business purpose.
2640 The learned CIT(A) vide para 5.3 of his order allowed the claim of the assessee since the assessee had been allowed in earlier years the claim on identical matters and therefore it is a covered matter.
41 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) and the decision of the Tribunal Ahmedabad Bench in assessee's own case for AY 1995-96 as referred to in the order of the learned CIT(A) vide para 5.2.3 and therefore we find no infirmity in the order of the learned CIT(A). Thus, Ground no.1 of the Revenue's appeal is dismissed.
42 As regards Ground no.2 of the Revenue's appeal, the facts are that the AO made a disallowance of Rs.38,32,725/- being the expenditure incurred for protecting the assets of wholly owned subsidiary i.e. M/s Gujarat Narmada Auto Ltd. The learned CIT(A) deleted the addition made by the AO. Since on identical issue for AYs 1996-97 to 2002-03, the disallowance was deleted by the learned CIT(A) in assessee's own case.
43 We have heard the rival contentions and perused the facts of the case. It was pointed out by the learned counsel for the assessee that the present issue is covered by the decision of the Tribunal Ahmedabad Bench in assessee's own case for AY 2002-
03. 44 After hearing both the parties, we are of the view that the issue in hand is covered by the decision of the Tribunal 27 Ahmedabad Bench in the assessee's own case referred hereinabove. Therefore, we find no infirmity in the order of the learned CIT(A) who has rightly allowed the claim of the assessee. Thus, Ground no.2 of the Revenue's appeal is dismissed.
45 As regards Ground no.3 of the Revenue's appeal, the brief facts are that the AO has treated certain expenditure on account of pump wheating and Volute Casing at Rs.16,83,630/- and Rs.13,85,260/- respectively. The AO treated the said expenditure as independent expenditure of enduring in nature and disallowed the claim of the assessee allowed the depreciation only.
46 The learned CIT(A) vide para 13.3.2 of his order treated them as revenue expenditure and allowed the claim of the assessee.
47 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) that the expenditure on the said items does not result in new self contained items and therefore the same is revenue in nature. Moreover, the expenditure on such items does not give any enduring benefit to the assessee. In the circumstances and facts of the case, we find no infirmity in the order of the learned CIT(A) who has rightly allowed the claim of the assessee. Thus, Ground no.3 of the Revenue's appeal is dismissed.
48 As regards Ground no.4 of the Revenue's appeal, the brief facts are that the assessee has incurred expenses on salary and 28 other expenses for the information and technology business. The assessee has entered into a verbal agreement with Infinium (India) Ltd. and M/s TIW-USA. As per this agreement, they jointly and equally finance the capital, operating costs and share the revenues of alliance business activities related to V-sat & International Gateway. The AO observed that the assessee had to share 50% of such expenses with Infinium (India) Ltd. which the assessee had not considered to have incurred as salary of the employees. Therefore, the AO added Rs.18.5 lacs to the income of the assessee being the amount not recovered from Infinium (India) Ltd. The AO made further addition of Rs.1.5 lacs in respect of incidental expenses recoverable from Infinium (India) Ltd.
49 The learned CIT(A) by accepting the explanation of the assessee, deleted the addition made by the AO.
50 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) that the AO was not justified in presuming that such expenses were not recovered by the assessee from Infinium (India) Ltd. In the absence of any claim by Infinium (India) Ltd., the AO was not justified in making the lump sum disallowance. Therefore, we find no infirmity in the order of the learned CIT(A) who has rightly deleted the addition made by the AO. Thus, Ground no.4 of the Revenue's appeal is dismissed.
51 As regards Ground no.5 of the Revenue's appeal, the facts are that the AO did not allow deduction of Rs.15,287/- claimed 29 u/s 80HHC of the Act, which action of the AO was reversed by the learned CIT(A) vide para 10.3 of his order.
52 We have heard the rival contentions and perused the facts of the case. The issue at present is covered by the decision of the Special Bench of ITAT Calcutta in the case of IFB Agro Industries 83 ITD 96 wherein it has been held that deduction u/s 80HHC on export profit should be computed on the basis of the export turnover and total turnover exclusive of the receipt of Excise Duty and Sales-tax. This issue is also covered by the decision of the Hon'ble Bombay High Court in the case of Sudarshan Chemicals Ltd. 245 ITR 769. Therefore, in view of the decision of the Hon'ble Bombay High Court and the Special Bench of the ITAT referred to hereinabove, we find no infirmity in the order of the learned CIT(A). Thus, Ground no.5 of the Revenue's appeal is dismissed.
53 As regards Ground no.6 of the Revenue's appeal, the brief facts are that the AO disallowed Rs.2 lacs as expenditure incurred on earning tax free dividend. The learned CIT(A) allowed the claim of the assessee vide para 12.2 to 12.3 of his order for the reasons mentioned therein.
54 We have heard the rival contentions and perused the facts of the case. In view of the decisions of the ITAT Delhi in the cases of Maruti Udyog Ltd. vs. DCIT 92 ITD 119 and ACIT vs. Eicher Ltd. 101 TTJ 369, no notional disallowance can be made in respect of expenditure for the purpose of section 14A. Accordingly, we find no infirmity in the order of the learned 30 CIT(A) who has rightly deleted the addition on the same basis. Thus, Ground no.6 of the Revenue's appeal is dismissed.
55 In the result, the appeal of the Revenue in ITA no.1373/Ahd/2007 for AY 2003-04 is dismissed.
ITA no.1463/Ahd/2007 for AY 2000-01:-
56 Now, we take up the appeal of the assessee in ITA no.1463/Ahd/2007 for AY 2000-01. Ground nos.3, 9 and 10 were not pressed by the learned AR appearing for the assessee. Therefore, the same are dismissed, as not pressed.
57 Ground no.11 in this appeal is general in nature and therefore does not require any adjudication. As regards Ground no.8 which is with respect to initiation of penalty proceedings and, therefore, does not arise from the impugned order of the learned CIT(A) and accordingly, does not require any adjudication. The other grounds i.e. Ground nos.1, 2, 4 to 7 are reproduced as under:-
[1] In law and in the facts and circumstances of the appellant's case, the Learned CIT (A) has erred in holding that the Assessing officer was justified in reopening the assessment u/s. 147 of the Income Tax Act, 1961.
[2] In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in confirming the disallowance of deduction u/s. 80HHC by upholding the disallowance of 90% of the Fertilizer subsidy from the computation of profit for the purpose of deduction u/s. 80HHC.
[4] In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in confirming the disallowance of 31 Rs.5,99,23,697/- being the amount of deduction claimed u/s. 36(1)(iii) in respect of money borrowed for expansion of various projects. While doing so, he has also erred in not following the order of CIT(A) in the case of the appellant for the A.Y. 1998-99 and the decision of the Gujarat High Court in the case of Core Healthcare Ltd. (251-ITR-61) (Guj) and Alembic Glass Industries Ltd. (103-ITR-715) (Guj) [4.1] In law and in the facts and circumstances of the appellant's case, the Ld. CIT(A) has erred in reaching the conclusion that the amendment to section 36(1) (iii) is applicable retrospectively and therefore, applicable to the period prior to the A.Y. 2004-05 as well.
[5] In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in confirming the disallowance of Premium of Rs.1,47,01,785/- paid on prepayment of loan and allowing the deduction over the term of loan. While doing so, he has failed to appreciate that revenue expenditure which is incurred wholly and exclusively for the purpose of business must be fully allowed in the year in which it is incurred and it cannot be spread over a number of years even though the assessee has written off in its books over number of years. In this connection, he has failed to follow the decisions in the following cases:
i. Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82-ITR-363 (SC) ii. Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227-ITR-172 (SC) iii. CIT v. Madras Auto Service (P) Ltd., Etc. [1998] 233-
ITR-468 (SC) iv. CIT v. Bhor Industries Ltd. [2003] 264-ITR-180 (BOM) [6] In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in confirming the deduction u/s. 35D to the extent of Rs.13,50,000/- as against the claim of Rs.87,73,000/- made by the appellant. He has erred in upholding the views of the Assessing Officer and not appreciating that the GDR issue made by the appellant was mainly for the purpose of capital expenditure in connection with the expansion plan of the appellant and since there was some 32 time to commence expansion/extension of projects, the appellant had temporarily deployed part of proceeds of GDR issue in the units of UTI.
[7] In law and in the facts and circumstances of the appellant's case, the Learned CIT (A) has erred in confirming the disallowance of depreciation of Rs.14,91,87,864/- claimed on certain assets given on lease. While doing so, he has erred in reaching to the conclusion that the lease transaction is a mere financial arrangement, without appreciating the facts of the case.
[7.1] Without prejudice to above, the Learned CIT (A) has erred in not directing the Assessing Officer to exclude the principal portion of lease rent from the income of the appellant and include only the interest portion in the income of the appellant.
58 As regards Ground no.1 in assessee's appeal, the facts are that the assessee is company engaged in the business of manufacturing of fertilizers, various chemicals for industrial use and in information technology business. Original return of income was filed on 29.11.2000 declaring total income of Rs.10,08,83,801/- which was subsequently revised on 22.10.2001 declaring total income at Rs.8,61,73,817/-. The return was processed u/s. 143(3) accepting the returned income. Assessment u/s. 143(3) was finalized on 31-3-2003 determining total income at Rs.30,25,19,600/-. The assessee filed an appeal before CIT(A) and as a result of appellant order the total income was recomputed at Rs.9,02,17,377/- and as income of Rs.19,48,15,517/- worked out u/s. 115JA of the Act was more than total income computed in accordance with the other provisions of the I.T. Act this income was considered for the purpose of taxability. Subsequently the assessment was reopened vide issue of notice u/s. 148 dated 31-3-2005 after recording the 33 reasons for the same. In response to notice u/s. 148 the assessee company filed its return of income on 28.4.2005 wherein the total income was declared at Rs.9,02,17,380/- and book profit u/s 115JA at Rs.19,48,15,516/-. Reassessment u/s 143(3) r.w.s. 147 was completed on a total income of Rs.31,24,66,240/-. The reasons recorded for reopening the assessment are reproduced as under:-
"In this case, return of income declaring total income of Rs.10,08,83,801/- was filed on 29.11.2000 claiming deduction u/s. 80HHC of Rs.2,97,902/-. The assessment u/s. 143(3) of the Act was completed on 31.3.2003 at the total income of Rs.30,25,19,600/-, accepting the deduction u/s. 80HHC as claimed by the assessee company.
As it appears from the 24th Annual Report, 1999-2000 that the assessee has received subsidy of Rs.24979.01 lacs which remained to be considered while working the deduction u/s. 80HHC of the I.T. Act which is not eligible. Therefore, the assessment for A.Y. 2000-01 is escaped assessment to the tune of Rs.2,97,902/- being wrong claim u/s. 80HHC of the Act.
I have therefore, reason to believe that the income chargeable to tax has escaped to the tune of Rs.2,97,902/-. It is a fit case for issue of notice u/s. 148 of the I.T. Act."
59 It was submitted before the AO that the assessee had disclosed fully and truly all material facts necessary for the assessment. The sale comprised of sale of goods and services inclusive of Excise Duty and includes claims preferred on the Government of India for retention price reimbursement on dispatches of fertilizers and admissible claims for change in retention price on account of variation in the cost. The AO has 34 examined all the details u/s 80HHC and then restricted the deduction after making above adjustment. Therefore, no income chargeable to tax has escaped assessment and the re-assessment proposed based on the change of opinion on same set of facts available at the time of passing the order u/s 143(3), is not warranted. The learned AR made similar submissions before the learned CIT(A) as well. Both the authorities did not appreciate the submissions of the assessee. Accordingly, the learned CIT(A) confirmed the action of the AO in reopening the assessment.
60 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) who has relied upon decisions of various courts of law with specific reference to the decision of the Hon'ble Gujarat High Court in the case of Praful Chunilal Patel vs. ACIT 236 ITR 832 in which it has been held that where the AO had overlooked something at the first assessment, there can in our opinion be no question of any change of opinion when the income was chargeable to tax is actually taxed as it ought to have been under the law but was not due to an error committed at the first assessment. Similar observations were found in other cases relied upon by the learned CIT(A) in paras 4.3.3 and 4.3.4. of his order. Accordingly, relying upon the decisions of various courts of law referred to in the order of the learned CIT(A), we find no infirmity in the order of the learned CIT(A). Thus, Ground no.1 of the assessee's appeal is dismissed.
61 As regards Ground no.2 of the assessee's appeal, the brief facts are that the AO made a disallowance of deduction u/s 35 80HHC by holding the disallowance of the Fertilizer subsidy from the computation of profit for the purpose of deduction u/s 80HHC.
62 The learned CIT(A) confirmed the action of the AO vide para 5.3 of his order.
63 We have heard the rival contentions and perused the facts of the case. The facts are identical to the facts in assessee's own case for AY 2003-04 where the issue has been decided by us in Ground no.5 in ITA no.1464/Ahd/2007 hereinabove. Following the same, Ground no.2 of the assessee's appeal is dismissed.
64 As regards Ground no.4, the brief facts are that the AO made a disallowance of Rs.5,99,23,697/- being the amount of deduction claimed u/s 36(1)(iii) in respect of money borrowed for expansion of various projects. The learned CIT(A) confirmed the action of the AO.
65 We have heard the rival contentions and perused the facts of the case. The facts are identical to the facts in assessee's own case for AY 2003-04 where the issue has been decided by us in Ground no.11 in ITA no.1464/Ahd/2007 hereinabove. Following the same, Ground no.2 of the assessee's appeal is allowed.
66 As regards Ground no.5 of the assessee's appeal, the brief facts are that the AO made a disallowance of premium of Rs.1,47,01,785/- paid on pre-payment of loan and allowing the deduction over the term of loan. The learned CIT(A) confirmed the action of the AO.
3667 We have heard the rival contentions and perused the facts of the case. The facts are identical to the facts in assessee's own case for AY 2003-04 where the issue has been decided by us in Ground no.9 in ITA no.1464/Ahd/2007 hereinabove. Following the same, Ground no.2 of the assessee's appeal is allowed.
68 As regards Ground no.6 of the assessee's appeal, the brief facts are that the assessee has claimed deduction u/s 35D amounting to Rs.87,73,000/- which was restricted to Rs.13,50,000/- by the AO. The learned CIT(A) confirmed the action of the AO.
69 We have heard the rival contentions and perused the facts of the case. The facts are identical to the facts in assessee's own case for AY 2003-04 where the issue has been decided by us in Ground no.10 in ITA no.1464/Ahd/2007 hereinabove. Following the same, Ground no.2 of the assessee's appeal is allowed.
70 As regards Ground no.7 of the assessee's appeal, the facts are that the AO made a disallowance of depreciation of Rs.14,91,87,864/- claimed on certain assets given on lease. The learned CIT(A) confirmed the action of the AO.
71 We have heard the rival contentions and perused the facts of the case. The facts are identical to the facts in assessee's own case for AY 2003-04 where the issue has been decided by us in Ground no.12 in ITA no.1464/Ahd/2007 hereinabove. Following the same, Ground no.2 of the assessee's appeal is allowed.
3772 In the result, the appeal of the assessee in ITA no.1463/Ahd/2007 is partly allowed.
ITA no.3111/Ahd/2008 for AY 2000-01:-
73 Now, we take up the appeal of the assessee for AY 2000-01 in ITA no.3111/Ahd/2008, which is arising from the order of the learned CIT(A)-VI, Baroda dated 02-06-2009 against the order passed by the AO u/s 154 of the Act. The assessee has raised the following grounds of appeal:-
[1] In law and in the facts and circumstances of the appellant's case, the Learned CIT (A) has erred in holding that the there was no error in the order of the Assessing Officer.
[2] In law and in the facts and circumstances of the appellant's case, the Learned CIT (A) has erred in not directing the Assessing Officer to exclude capital component out of lease rent income offered to tax as depreciation on leased assets was not allowed by the Assessing Officer.
[3] In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in observing that the right forum against the order of the CIT(A) is ITAT.
[4] The appellant craves leave to add, alter, amend and/or withdraw any of the grounds or ground either before or at the time of appeal hearing.
74 The brief facts are that the assessee moved a rectification application u/s 154 of the Act before the AO. The assessee had given certain assets on lease to Western Railways and NCPL, for which depreciation was claimed. The depreciation was disallowed by the AO terming the same as finance lease and not operating lease. Concurrently, the AO has also not excluded 38 capital component of Rs.1,55,51,381/-. In short, Rs.2,19,79,400/- being interest portion only ought to be included in assessee's income. The AO rejected the application u/s 154 of the Act, since the disallowance of depreciation on leased assets have been confirmed by the learned CIT(A).
75 The learned CIT(A) confirmed the action of the AO.
76 We have heard the rival contentions and perused the facts of the case. Since the AO in the present case has rejected the application u/s 154 of the Act for the reason that the depreciation has been disallowed by the learned CIT(A) with regard to the lease of Railway Wagons and Captive Power Plant which were given on lease to Western Railways and NCPL. Since the issue of the lease to Western Railways and NCPL has already been adjudicated by us in assessee's appeal in ITA no.1463/Ahd/2007 hereinabove and the appeal of the assessee has been allowed. Therefore, the AO is directed to decide the issue de novo after considering our decision in ITA no.1463/Ahd/2007 hereinabove but by affording adequate opportunity of being heard to the assessee. Thus, the appeal of the assessee is allowed for statistical purpose.
ITA no.4007/Ahd/2007 for AY 2004-05:-
77 Now, we take up the appeal of the assessee in ITA no.4007/Ahd/2007 for AY 2004-05. Ground no.9 in this appeal is general in nature and does not require any adjudication. The remaining grounds are as under:-
39[1.1] In law and in the facts and circumstances of the appellant's case, the Learned CIT(A) has erred in up-holding the addition made by the Learned A. 0. in respect of notional interest income of Rs.3,58,19,000/- on loan given to Gujarat State Investment Ltd. [GSIL for short]. The addition was up-held on the assumption that a right to receive that interest from GSIL to whom the appellant had advanced a loan during the A.Y. 1994-95, had accrued to the appellant this year. The Learned CIT(A) has erred in not appreciating the fact that no interest income has been accrued or earned by the appellant during the year and no interest is therefore, to be taxed.
[1.2] Without prejudice to the foregoing, in law and in facts and circumstances of the appellant's case, the Learned CIT(A) has erred in arriving at the quantum of the interest income allegedly earned by the appellant on the aforesaid loan this year.
[1.3] Without prejudice to the foregoing, in law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in ordering for an alternative "disallowance" of the same amount of Rs.3,58,19,000 out of the Interest Expense incurred by the appellant for somehow or anyhow enhancing the appellant's returned income by that amount, no matter that his stand vis-a-vis accrual of income in the form of interest of that amount on the loan to GSIL comes to be disapproved. The learned CIT(A) ought to have appreciated that he had no jurisdiction to make such alternative disallowance/addition -- once based on the suggestion that income of a certain amount had accrued to the appellant and, failing that, on the other suggestion, that the appellant deserved to be disallowed expenditure to that very extent. He ought further to have appreciated that even on the utterly untenable stand of Learned A.O., there could be no question for him to adopt the same measure of 17% per annum for disallowing interest expenditure which, as he very well knew, was the rate of interest originally applicable to the loan granted to GSIL and which rate was admittedly considerably higher than the average rate of interest on the appellant's borrowings this year.
[2] In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in disallowing deduction 40 of Rs.1,456 claimed by the appellant u/s. 80HHC of the Income-tax Act, 1961.
[3] In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in making an ad hoc disallowance of Rs.2,00,000 out of expenditure debited to the appellant's Profit and Loss Account on the assumption that the same must have been incurred in relation to income not included in the appellant's total income.
[4] The Learned CIT(A) has erred in not directing the Learned AO to allow repairs and maintenance expenses of Rs.1,36,71,288/- incurred on the plant and machinery as revenue expenditure.
[5] In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in restricting the deduction on account of GDR Issue Expenses of Rs.87,73,000 claimed by the appellant u/s. 35D,to only Rs.13,50,000, thereby disallowing deduction for Rs.74,23,000 out of the same.
[6] In law and in the facts and circumstances of toe appellant's case, the learned CIT(A) has grossly erred in disallowing deduction of depreciation amounting to Rs.1,20,92,362 on the assets leased by the appellant to Western Railways and Narmada Chematur Petrochemicals Ltd.
[7] The Learned CIT(A) has erred in upholding the action of the Learned A.O. in disallowing Rs.1,48,541 being bad debts written off irrevocably in the books of account.
[8] The Learned CIT(A) has erred in directing the Learned A.O. to disallow of donation given out of interest bearing funds. The CIT(A) has erred in not appreciating the fact of the case that these C donations were given considering the business expediency and as a socially responsible corporate.
[9] The appellant craves leave to add, alter, amend and/or withdraw any ground or grounds of appeal either before or at the time of hearing of the appeal.41
78 As regards Ground nos. 1.1, 1.2 and 1.3, the brief facts are that the assessee company had advanced interest bearing loan to Gujarat State Investments Ltd.(GSIL) in A.Y. 1994-95 carrying interest @ 17%. The appellant had been accounting for and offering in its return of income the full amount of interest year after year right from A.Y. 1994-95 till A.Y. 2002-03. However GSIL had disputed the interest liability and not paid any interest after 30.9.1994. The balance outstanding as on 31.3.2004 was Rs21.07 crores. In response to show cause as to why the accrued interest for A.Y. 2004-05 was not disclosed in the return, it was submitted by the assessee that till A.Y. 2002-03 the assessee company had expectation of receiving the interest from GSIL. However considering the fact that no interest was received from GSIL the board of directors resolved not to accrue the interest. Without prejudice it was submitted that an arbitration proceeding was filed against GSIL towards recovery of and the arbitrator has directed GSIL to make payment of interest assessee company @ 11.5 % as against 17%. It is claimed that as against 11.5% the assessee company had been offering interest @ 17% A.Y. 2002- 03 and it had already offered more interest to tax that actually receivable. The company felt that no interest amount be taxed for A.Y. 2004-05. Decision of ITAT in its own case for A.Y. 1992- 93 to 1994-95 and the decision of Supreme Court in the case of CIT vs. M/s. Shoorji Vallabhdas & Co. - 46 ITR 144 and Godhra Electricity Co. Ltd. vs. CIT -225 ITR 746 were relied upon. The Assessing Officer on the other hand was of the view that the interest accrued to assessee during the year under consideration as the assessee is following mercantile system of accounting and 42 further as per section 5 income which is received or deemed to have been received in India or deemed to accrue or arise in India forms part of total income of previous year. It is claimed that the assessee had the right to receive the income thus the amount is said to have accrued to the assessee. Assessing Officer relied on following decisions.
i. D.E. Sassoon & Co. Ltd. vs. CIT - 26 ITR 27(SC) ii. Morvi Industries Ltd. vs. CIT - (1971) 82 ITR(SC) iii. S.M.S. Investment Corporation P. Ltd. vs. CIT 203 ITR 1001 (Raj) iv. Western India Oil Distribution co. Ltd. vs. CIT 206 ITR 359(Bom) v. Swadeshi Cloth Dealers - 187 ITR 620(AII) vi. CIT vs. Shiv Prakash Janakraj & Co. Pvt. Ltd. 222 ITR 589(SC) vii. CIT vs. Girishchandraharidas & Others - 196 ITR 833(ker) It was also indicated that the copy of award of the sole arbitrator Shri B.M. Oza was dated 30.9.2006 which is subsequent to the end previous year. Accordingly it is held that the interest income of Rs.3,58,19,000 was to the assessee and was added to the total income.
79 The learned CIT(A) for the reasons mentioned in his order held that the interest income of Rs.3,58,19,000/- was accrued to the assessee and therefore observed that the AO was justified in bringing to tax the accrued interest income of Rs.3,58,19,000/-.
80 We have heard the rival contentions and perused the facts of the case. There is no dispute to the fact that the Award of the Arbitrator was passed in the present case in September, 2006. The arguments made by the learned AR before the learned 43 CIT(A) and before us that the interest accrued upto the end of the impugned year has already been provided in the books of account upto 30 t h September, 2004 and the balance was outstanding as on 31-03-2004 was Rs.21.07 crores. Therefore, the more interest had been shown as accrued in the books of account taking into account the interest accrued during the year. This is also not in dispute that the Award had been passed only on 30 t h September, 2006. Therefore, it cannot be said that the interest had not been accrued to the assessee company in the preceding year especially in the impugned year. But at the same time the assessee has already offered the income for taxation in the earlier years and the assessee cannot be taxed again on such income. Therefore, it will be in the interest of justice if the arguments made by the assessee before us are examined by the AO from the records produced by the assessee that the interest upto the end of the impugned year has already been provided / accrued in excess, then no interest income is required to be accrued during the year. The AO is directed to decide the issue de novo as directed above but by affording opportunity of being heard to the assessee. Thus, Ground no.1 of the assessee's appeal is allowed for statistical purpose.
81 As regards Ground no.2 of the assessee's appeal, the brief facts are that the AO disallowed deduction of Rs.1456/- claimed by the assessee u/s 80HHC of the Act. This action of the AO was confirmed by the learned CIT(A).
82 We have heard the rival contentions and perused the facts of the case. On similar facts, an identical issue has been decided 44 by us in assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 hereinabove vide Ground no.5 therein. Following the same, Ground no.2 of this appeal of the assessee is dismissed.
83 As regards Ground no.3 of the assessee's appeal was not pressed by the learned AR of the assessee at the time of hearing. The same is therefore dismissed, as not pressed.
84 As regards Ground no.4 of the assessee's appeal, the brief facts are that the AO did not allow repairs and maintenance expenses of Rs.1,36,71,288/- incurred on the plant and machinery as revenue expenditure. The learned CIT(A) confirmed the action of the AO.
85 We have heard the rival contentions and perused the facts of the case. The identical issue has been decided by us in assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 in Ground no.8 in the said appeal. Following the same, this Ground no.4 of the assessee's appeal is allowed for statistical purpose.
86 As regards Ground no.5 of the assessee's appeal, the brief facts are that the AO disallowed the claim of the assessee u/s 35D on account of GDR Issue Expenses of Rs.87,73,000/-. The learned CIT(A) restricted the same at Rs.13,50,000/-.
87 We have heard the rival contentions and perused the facts of the case. Similar issue has arisen in the assessee's own case for AY 2003-04 where identical issue has been decided by us in 45 ITA No.1464/Ahd/2007 vide Ground no.10 hereinabove. Following the same, Ground no.5 in this appeal is allowed.
88 As regards Ground no.6 of the assessee's appeal, the brief facts are that the AO made a disallowance of deduction of depreciation of Rs.1,20,92,362/- on the assets leased by the assessee to Western Railways and Narmada Chematur Petrochemicals Ltd. The learned CIT(A) confirmed the action of the AO.
89 We have heard the rival contentions and perused the facts of the case. The identical issue has arisen in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 and vide Ground no.12, the issue has been decided by us hereinabove in the said appeal. Following the same, the order of the learned CIT(A) is reversed. Thus, Ground no.6 of the assessee's appeal is allowed.
90 As regards Ground no.7 of the assessee's appeal, the brief facts are that the AO disallowed Rs.1,48,541/- being bad debts written off irrevocably in the books of account. The learned CIT(A) confirmed the action of the AO.
91 We have heard the rival contentions and perused the facts of the case. The identical issue has arisen in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove vide Ground no.13 therein. Following the same, we find no infirmity in the order of the learned CIT(A). Thus, Ground no.7 of the assessee's appeal is dismissed.
4692 In Ground no.8 of the assessee's appeal, the brief facts of the case are that the it is noted by Assessing Officer that donations amounting to Rs.1,21,00,000 was made by the appellant and the appellant was asked to furnish details of source of such donations. In response thereto the assessee has submitted that donations were made to various parties out of his own fund and profit generated during the year. Since the copy of bank statement was not furnished the Assessing Officer concluded that interest bearing funds has been utilized for giving donations and interest @ 10% on such donations amounting to Rs.12,10,000 was disallowed.
93 The learned CIT(A) confirmed the action of the AO.
94 We have heard the rival contentions and perused the facts of the case. We find no infirmity in the order of the learned CIT(A). There are two issues which merit attention in regard to this ground mere is no dispute that the donations were made by the appellant during the previous year in 80G approved funds and the Assessing Officer also allowed the deduction to the extent of Rs.55 lacs. In the language of section 80G there is no mention that the donation paid should be out of the income of the assessee for the relevant assessment year. Regarding the second issue as to whether sufficient funds were available for making these donations the moot point is that if the donations are paid out of the borrowed funds the interest on these borrowed fund is certainly not an allowable expenditure as doing charity is mutually exclusive to business expediency. It is also noted that despite specific requests to furnish the cash flow or bank 47 statement to elicit that sufficient funds were available for making the donations or not, the details were not furnished before the Assessing Officer. Accordingly the appellant is directed to produce before the Assessing Officer the cash flow statement and on verification by Assessing Officer to the extent the own funds are available on various dates of donation the same would stand allowed. And if the borrowed funds are found to be utilized for making donations, the disallowance of 10% interest cost for appropriate period on such funds would stand confirmed. Thus, Ground no.8 of this appeal is dismissed.
94 In the result, the appeal of the assessee in ITA no.4007/Ahd/2007 is partly allowed.
ITA no.3993/Ahd/2007 for AY 2004-05:-
95 Now, we take up the appeal of the Revenue in ITA no.3993/Ahd/2007 for AY 2004-05. The grounds raised by the Revenue are as under:-
[1.(a)] On the facts and in the circumstances of the case, the CIT(A) erred in deleting the disallowance of Rs.4,33,13,600/- made out of the interest claimed u/s. 36(1)(iii) on account of diversion of borrowed funds to subsidiary and associate concerns, by merely relying on the appellate orders for earlier years (which have been contested by the Department), without appreciating that each year's income-tax proceedings are independent and the matter had to be decided on merits in the light of the principles settled by authoritative jurisdictional pronouncements.
[1.(b)] The CIT(A) failed to appreciate the legal principle, that onus u/s. 36(1)(iii) lies on the assessee to prove that each 48 loan is used for the purposes of the business and there is no presumption in law that it is own capital or surplus funds that were diverted for non-business purposes, as settled in the case of Kishanchand Chellaram V/s. CIT 114 ITR 654 (Bom.), R.Dalmia V/s. CIT 133 ITR 169 (Del), CIT V/s. M.S. Venkateshwaran 222 ITR 163 (Mad), K. Somasundaram & Brothers V/s. CIT 238 ITR 939 (Mad.) and CIT V/s. Motor General Finance Ltd. 254 ITR 449 (Del), which was confirmed in principle by the Supreme Court in the case of Motor General Finance V/s.
CIT 267 ITR 381 (SC).
[2.(a)] On the facts and in the circumstances of the case, the CIT(A) erred in allowing the expenses of Rs.14,63,659/- on protecting the assets of M/s. Gujarat Narmada Auto Ltd. (GNAL), a sister concern of the assessee, without appreciating the legal position that a subsidiary company is a separate legal entity and the business of the subsidiary cannot be considered to the business of the assessee as settled in the case of Phaltan Sugar Works Ltd. V/s. CWT 208 ITR 989, 993 (Bom.) followed in 215 ITR 582 (Bom.) and 216 ITR 479, 481 (Bom,).
[2.(b)] Without prejudice, the CIT(A) erred in not considering the fact that a I liquidator was appointed by the High Court who was in actual possession of the assets of GNAL and was responsible for protecting the same and hence there was no obligation on the assessee to incur such expenditure.
[3] On the facts and in the circumstances of the case, the CIT(A) erred in deleting to the extent of Rs.1,55,04,597/- out of repairs and maintenance expenses made on account of giving a new and different advantage, by holding the same as replacement of existing parts, without appreciating that renewal or restoration are not covered by 'current repairs' referred to in section 31 (i) and are of capital nature as settled in the case of Ballimal Naval Kishore V/s. CIT 224 ITR 414 (SC).
[4] On the facts and in the circumstances of the case, the CIT(A) erred in allowing deduction of Rs.25,00,000/- being payment for Information Technology Related Services paid to M/s.
49Infinium (India) Ltd., treated as expenses deriving benefit of enduring nature.
[5] On the facts and in the circumstances of the case, the CIT(A) erred in directing to exclude sales tax and excise duty as part of total turnover while working out the deduction u/s. 80HHC.
[6] The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
RELIEF CLAIMED IN APPEAL :
The order of the CIT(A) on the issues raised in the aforesaid grounds be set aside and that of the A.O. be restored.
96 As regards Ground nos.1(a) and 1(b), the brief facts of the case are that the AO made a disallowance of Rs.4,33,13,600/- out of interest claimed u/s 36(1)(iii) on account of diversion of borrowed funds to subsidiary and associate concerns. The learned CIT(A) after appreciating the facts and submissions made by the learned AR of the assessee, allowed the claim of the assessee.
97 We have heard the rival contentions and perused the facts of the case. Similar issue has arisen in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove. The relevant para 41 reads as under:-
"41. We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) and the decision of the Tribunal Ahmedabad Bench in assessee's own for AY 1995-96 as referred to in the order of the learned CIT(A) vide para 5.2.3 and therefore we find no infirmity in the order of the learned CIT(A). Thus, Ground no.1 of the Revenue's appeal is dismissed."50
Therefore, following the aforesaid order, we dismiss Ground no.1 of the Revenue's appeal.
98 As regards Ground no.2 of the Revenue's appeal, the brief facts are that the AO made a disallowance of Rs.14,63,659/- being the expenditure incurred on protecting the assets of wholly owned subsidiary i.e. M/s Gujarat Narmada Auto Ltd. The learned CIT(A) deleted the addition made by the AO, since on identical issue for AYs 1996-97 to 2002-03, the disallowance was deleted by the learned CIT(A) in assessee's own case.
99 We have heard the rival contentions and perused the facts of the case. It was pointed out by the learned counsel for the assessee that the present issue is covered by the decision of the Tribunal Ahmedabad Bench in assessee's own case for AY 2002-
03. 100 After hearing both the parties, we are of the view that the issue in hand is covered by the decision of the Tribunal Ahmedabad Bench in the assessee's own case referred to hereinabove. Therefore, we find no infirmity in the order of the learned CIT(A) who has rightly allowed the claim of the assessee. Thus, Ground no.2 of the Revenue's appeal is dismissed.
101 As regards Ground no.3 of the Revenue's appeal, the brief facts are that the AO has treated certain expenditure on account of repairs and maintenance by holding the same as replacement of existing parts. The AO treated the said expenditure as 51 independent expenditure of enduring in nature and disallowed Rs.1,55,04,597/- and allowed the depreciation only.
102 The learned CIT(A) after appreciating the facts of the case and the submissions made by the learned AR of the assessee, allowed the claim of the assessee.
103 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) and do not find any infirmity in the order of the learned CIT(A). We uphold the order of the learned CIT(A). Thus, Ground no.3 of the Revenue's appeal is dismissed.
104 As regards Ground no.4 of the Revenue's appeal, the brief facts are that the AO disallowed deduction of Rs.25,00,000/- being payment for Information and Technology Related Services paid to M/s Infinium (India) Ltd. treating as expenses deriving benefit of enduring nature. The learned CIT(A) by accepting the explanation of the assessee, deleted the addition made by the AO.
105 We have heard the rival contentions and perused the facts of the case. The identical issue has arisen in the assessee's own case for AY 2003-04 in ITA No.1464/Ahd/2007 which has been decided by us vide Ground no.4 in the said appeal hereinabove. Therefore, following the same, we find no infirmity in the order of the learned CIT(A) who has rightly deleted the addition made by the AO. Thus, Ground no.4 of the Revenue's appeal is dismissed.
52106 As regards Ground no.5 of the Revenue's appeal, the facts are that the AO did not allow deduction u/s 80HHC. The learned CIT(A) directed the AO to exclude sales tax and excise duty as part of turn turnover while working out the deduction u/s 80HHC of the Act.
107 We have heard the rival contentions and perused the facts of the case. The issue at present is covered by the decision of the Special Bench of ITAT Calcutta in the case of IFB Agro Industries 83 ITD 96 wherein it has been held that deduction u/s 80HHC on export profit should be computed on the basis of the export turnover and total turnover exclusive of the receipt of Excise Duty and Sales-tax. This issue is also covered by the decision of the Hon'ble Bombay High Court in the case of Sudarshan Chemicals Ltd. 245 ITR 769. Therefore, in view of the decision of the Hon'ble Bombay High Court and the Special Bench of the ITAT referred to hereinabove, we find no infirmity in the order of the learned CIT(A). Thus, Ground no.5 of the Revenue's appeal is dismissed.
108 Ground no.6 in the Revenue's appeal is general and does not require any adjudication.
109 In the result, the appeal filed by the Revenue in ITA no.3993/Ahd/2007 for AY 2004-05 is dismissed.
ITA no.2400/Ahd/2008 for AY 2005-06:-
110 Now, we take up the appeal of the assessee in ITA no.2400/Ahd/2008 for AY 2005-06. Ground no.1 is general in 53 nature and does not require any adjudication. Ground no.3 has not been pressed by the learned counsel for the assessee and therefore the same is dismissed, as not pressed. The remaining grounds i.e. Ground nos.2, 4, 5, 6 and 7 of the appeal are as under:-
[2] The learned CIT(A) has erred in upholding the additions of Rs.2,75,61,076/- in respect of interest receivable from GSIL. It is submitted that on the facts and circumstances of the appellant's case the CIT(A) ought to have deleted the same. It is submitted it be so held now.
Without prejudice to above, if interest on accrual basis is held to be taxable then it may be directed to be allowed as deduction in the years of it's write off.
[4] In law and in the facts of the circumstances of the appellant's case the learned CIT(A) has erred in confirming disallowance of Rs.1,96,43,453/- out of consumption of stores and spares on the ground that the same was capital in nature. It is submitted that the expenditure incurred was revenue in nature. It is submitted that it be so held now.
[5] In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has erred in confirming disallowance of depreciation amounting to Rs.90,69,271/- on the assets leased by the appellant to Western Railways and Narmdara Chematur Petrochemicals Ltd. It is submitted that on the facts and circumstances of the case, the CIT(A) ought to have allowed depreciation as claimed by the appellant. It is submitted that it be so held now.
Without prejudice to above, in the event of depreciation is ultimately held to be not allowable on leased assets then capital component needs to be excluded and only interest portion out of lease rent is required to be taxed.
[6] In law and in facts & circumstances of the appellant's case, the learned CIT(A) ought to have deleted the disallowance made in 54 respect of interest expenses amounting to Rs.4,26,548/-, on the ground that donation was given out of borrowed funds. It is submitted that it be so held now.
[7] In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in confirming the disallowance of advances written off amounting to Rs.9,38,376/-. In the facts & circumstances of the case it is submitted that the CIT(A) ought to have allowed the same under section 28 / 37 of the Act. It is submitted it be so held now.
111 As regards Ground no.2 in the appeal, the brief facts are that the AO made an addition of Rs.2,75,61,076/- in respect of interest receivable from GSIL and the action of the AO was confirmed by the learned CIT(A).
112 We have heard the rival contentions and perused the facts of the case. The identical issue has been dealt with by us in assessee's own casse for AY 2004-05 in ITA no.4007/Ahd/2007 hereinabove. Therefore, our order in ITA no.4007/Ahd/2007 will apply on the present issue and accordingly Ground no.2 is allowed for statistical purpose.
113 In Ground no.4, the brief facts are that the AO made a disallowance of Rs.1,96,43,453/- out of consumption of stores and spares on the ground that the same are of capital in nature. The learned CIT(A) confirmed the action of the AO.
114 We have heard the rival contentions and perused the facts of the case. The issue at present is identical to the issue in assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove. Our order in ITA 55 no.1464/Ahd/2007 will be applicable on the present issue and accordingly the ground is allowed for statistical purpose.
115 As regards Ground no.5, the brief facts are that the AO made a disallowance of depreciation amounting to Rs.90,69,271/- on the assets leased by the assessee to Western Railways and NCPL, which action of the AO was confirmed by the learned CIT(A).
116 We have heard the rival contentions and perused the facts of the case. The identical issue has arisen in assessee's own case for AY 2003-04 which has been dealt with by us hereinabove in ITA no.1464/Ahd/2007. The order hereinabove shall be applicable in the present ground of the assessee. Accordingly, Ground no.5 of the assessee is allowed.
117 As regards Ground no.6, the brief facts are that the AO made a disallowance in respect of interest expenses amounting to Rs.4,26,548/- on the ground that the donation was given out of borrowed funds, which action of the AO was confirmed by the learned CIT(A).
118 We have heard the rival contentions and perused the facts of the case. The identical issue has arisen in the assessee's own case in ITA no.4007/Ahd/2007 hereinabove. Our order therein shall be applicable in the present case and accordingly Ground no.6 is dismissed.
119 As regards Ground no.7, the brief facts are that the company had written off advances given to following parties:-
56 (1) Citric India Ltd. Rs. 81,494
(2) Mardia Chemicals Ltd. Rs.8,56,882
---------------
Rs.9,38,376
The assessee was asked to explain the reasons for write off of advances as bad debts. It was submitted in assessment proceedings that company had made 100% advance payment for purchase of Citric Acid from Citric India Ltd. and the material supplied by them was of substandard quality and thus rejected by the assessee company. However, the supplier had not accepted the claim of assessee and thus civil suit was filed. Court had issued a decree in favour of the assessee and the assessee company tried to execute the decree of the Court. However, it was noticed that the supplier M/s Citric India Ltd. has closed down its business since 1990 and thus the decree could not be executed. Since there was no hope of recovery of the advances the same were written of as bad debts. Similarly in the case of Mardia Chemicals also the assessee had made advance payment for purchase of material and as the material supplied by them was of substandard quality, the company had to sell it in the market at a lower price then given to Mardia Chemicals. Mardia Chemicals did not accept the claim of the company and had not paid back the excess payment made to them in spite of repeated attempts by the assessee company. Since Mardia Chemicals has closed down their business and was referred to BIFR and also in April, 2004 the Hon'ble Supreme Court had allowed the ICICI Bank to sell the assets of Mardia Chemicals to recover their due the assessee company had no hope of recovering the advances 57 paid to them and thus was written off. The AO did not accept the contention of the assessee and was of the view that as the assessee had filed legal cases against these parties and there is still hope of recovery of the advances and thus it cannot be said that the advances are irrecoverable. He thus added Rs.9,38,376/- to the total income.
120 The learned CIT(A) confirmed the action of the AO.
121 We have heard the rival contentions and perused the facts of the case. We concur with the views of the learned CIT(A) that both the amounts written off by the assessee are not in the nature of bad debts but could be categorized as business loss but the business loss has not crystallized yet. The business loss could be ascertainable only after the decision of the Court / BIFR. Though in case of Mardia Chemicals it is mentioned that Supreme Court has directed ICICI to sell the assets, it is not clear as to what was actual recovery for the assessee. The business loss would be allowable only in the assessment year in which the recovered amount is determined. There is a distinction in allowability of bad debts and business loss. The bad debt is allowable if all the conditions as stipulated in section 36(1)(vii) are satisfied. On the other hand, conditions for allowability of business loss have not been laid down in the Act and in our view the business loss could be allowed in the year in which the quantum is finally ascertained. Therefore, the advances written off are not allowable in the instant assessment year. Therefore, in the circumstances and facts of the case, we find no infirmity in the order of the 58 learned CIT(A). Thus, the ground i.e. Ground no.7 of the assessee's appeal is dismissed.
122 In the result, the appeal filed by the assessee in ITA no.2400/Ahd/2008 is partly allowed.
ITA no.2401/Ahd/2008 for AY 2005-06:-
123 Now, we take up the appeal of the Revenue for AY 2005-06 in ITA no.2401/Ahd/2008. The grounds raised by the Revenue are as under:-
[1(a)] On the facts and in fie circumstances of the case the CIT(A) erred in deleting the disallowance of Rs.4,33,07,100/- made out of the interest claimed u/s 36(1)(iii) on account of diversion of borrowed funds to subsidiary and associate concerns, by merely relying on the appellate orders for earlier years (which have been contested by the Department), without appreciating that each year's income-tax proceedings are independent and the matter had to be decided on merits in the light of the principles settled by authoritative jurisdictional pronouncements.
[1(b)] The CIT(A) failed to appreciate the legal principle, that onus u/s 36(l)(iii) lies on the assessee to prove the that each loan is used for the purposes of the business and there is no presumption in law that it is own capital or surplus funds that were diverted for non-business purposes. as settled in the case of Kishanchand Chellaram vs CIT 114 ITR 654 (Bom), R Dalmia vs. CIT 133 ITR 169 (Mad), CIT vs. M S Venkateshwaran 222 ITR 163 (Mad), K Somasundaram & Brothers vs. CIT 238 ITR 939 (Mad) and CIT vs. Motor General Finance Ltd. 254 ITR 449 (Del) which was confirmed in principle by the Supreme Court in the case of Motor General Finance vs. CIT 267 ITR 381 (SC).59
2(a) On the facts and in the circumstances of the case, the CIT(A) erred in allowing the expenses of Rs.5,46,794/- on protecting the assets of M/s. Gujarat Narmada Auto Ltd, (GNAL) a sister concern of the assessee, without appreciating the legal posit company is a separate legal that a subsidiary company is a separate legal entity and the business of the subsidiary cannot be considered to the business of the assessee as settled in the case of Phaltan Sugar Works Ltd. vs. CWT 208 ITR 989, 993 (Bom) followed in 215 ITR 582 (Bom) and 216 ITR 479, 481 (Bom).
2(b) Without prejudice, the CIT(A) erred in not considering the fact that a liquidator was appointed by the High Court who was in actual possession of the assets of GNAL and was responsible for protecting the same and hence; there was no obligation on the assessee to incur such expenditure.
[3] On the facts and in the circumstances of the case, the CIT(A) erred in deleting the addition to the extent of Rs.1,59,73,789/-, from the total disallowance of Rs.2,99,40,437/- made out of repairs and maintenance expenses treating the same as capital expenditure. The CIT(A) has erred in not appreciating the replacement of existing parts or restoration are not covered by 'current repairs' referred to in section 31(i) and are of capital nature as settled in the case of Ballimal Naval Kishore vs. CIT 224 ITR 414 (SC).
[4] On the facts and in the circumstances of the case, the CIT(A) erred in allowing deduction of Rs.6,25,000/- being payment for information Technology Related Services paid to M/s. Infinium (India) Ltd.; treated as expenses deriving benefit of enduring nature.
[5] On the facts and in the circumstances of th in deleting the addition of Rs.45,54,465/- which is covered u/s 14A of the Act.
[6] The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
60124 As regards Ground nos.l(a) and 1(b), the brief facts are that the AO made a disallowance of Rs.4,33,07,100/- out of the interest claimed u/s 36(1)(iii) on account of diversion of borrowed funds to subsidiary and associate concerns. The learned CIT(A) deleted the addition for the reasons mentioned in his order.
125 We have heard the rival contentions and perused the facts of the case. Similar issue has arisen in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove vide Ground no.1 in the said appeal. Therefore, following the same, we dismiss Ground no.1 of the Revenue's appeal.
126 As regards Ground no.2 in the Revenue's appeal, the brief facts are that the AO disallowed expenses of Rs.5,46,794/- on protecting the assets of M/s Gujarat Narmada Auto Ltd., sister concern of the assesese. The learned CIT(A) deleted the addition for the reasons mentioned in his order.
127 We have heard the rival contentions and perused the facts of the case. Similar issue has arisen in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove vide Ground no.2 in the said appeal. Therefore, following the same, we dismiss Ground no.2 of the Revenue's appeal.
128 As regards Ground no.3 in the Revenue's appeal, the brief facts are that the AO made a disallowance of Rs.2,99,40,437/-
61out of repairs and maintenance treating the same as capital expenditure. The learned CIT(A) deleted the addition to the extent of Rs.1,59,73,789/- for the reasons mentioned in his order.
129 We have heard the rival contentions and perused the facts of the case. The identical issue came up in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove vide Ground no.3 in the said appeal. Therefore, following the same, we dismiss Ground no.3 of the Revenue's appeal.
130 In Ground no.4 of the Revenue's appeal, the brief facts are that the AO did not allow deduction of Rs.6,25,000/- being payment for Information and Technology Related Services paid to M/s Infinium (India) Ltd. treating the same as deriving benefit of enduring nature. The learned CIT(A) allowed the claim for the reasons mentioned in his order.
131 We have heard the rival contentions and perused the facts of the case. The identical issue came up in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove vide Ground no.4 in the said appeal. Therefore, following the same, we dismiss Ground no.4 of the Revenue's appeal.
133 In Ground no.5 of the Revenue's appeal, the brief facts are that the AO made a disallowance of Rs.45,54,465/- u/s 14A of the Act. The learned CIT(A) allowed the same for the reasons mentioned in his order.
62133 We have heard the rival contentions and perused the facts of the case. The identical issue came up in the assessee's own case for AY 2003-04 in ITA no.1464/Ahd/2007 which has been decided by us hereinabove vide Ground no.6 in the said appeal. Therefore, following the same, we dismiss Ground no.5 of the Revenue's appeal. Thus, the appeal filed by the Revenue in ITA no.2401/Ahd/2008 is dismissed.
134 In the result, the appeals of the assessee in -
(i) ITA no.1463/Ahd/2007 Partly allowed
(ii) ITA no.1464/Ahd/2007 Partly allowed
(iii) ITA no.3111/Ahd/2008 Allowed for statistical
purpose
(iv) ITA no.4007/Ahd/2007 Partly allowed
(v) ITA no.2400/Ahd/2007 Partly allowed
and appeals of the Revenue in -
(i) ITA no.1373/Ahd/2007 Dismissed
(ii) ITA no.3993/Ahd/2007 Dismissed
(iii) ITA no.2401/Ahd/2007 Dismissed
Order pronounced in the court today on 30-12-2011 Sd/- Sd/-
(G C GUPTA) (B P J AIN)
VICE-PRESIDENT ACCOUNTANT MEMBER
Date : 30-12-2011
Copy of the order forwarded to:
63
1. Gujarat Narmada Valley Fertilizers Co. Ltd., P.O. Narmada Nagar, Bharuch
2. The Deputy Commissioner of Income-tax, Bharuch Circle, Bharuch
3. CIT concerned
4. CIT(A)-VI, Baroda
5. DR, ITAT, Ahmedabad Bench-D, Ahmedabad
6. Guard File BY ORDER Deputy Registrar Assistant Registrar ITAT, AHMEDABAD