Income Tax Appellate Tribunal - Mumbai
National Organic Chem Industries Ltd., ... vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "F": MUMBAI
BEFORE SHRI R V EASWAR, SENIOR VICE PRESIDENT
AND SHRI RAJENRA SINGH, ACCOUNTANT MEMBER
ITA No.1521/Mum/1999
Assessment year 1993-94
M/s.National Organic Chemical Vs The JCIT Special Range 20
Industries Ltd., Mumbai
Mafatlal House, Backbay
Reclamation,
Mumbai - 20.
PAN: 34-000 CV 0048
(Appellant) (Respondent)
ITA No.1459/Mum/1999
Assessment years 1993-94
The JCIT Special Range 20 Vs M/s.National Organic Chemical
Mumbai Industries Ltd.,,
Mafatlal House, Backbay
Reclamation,
Mumbai - 20.
PAN: 34-000 CV 0048
(Appellant) (Respondent)
For Assessee : Shri Dinesh Vyas
For Revenue : Shri Shri A.P. Singh
ORDER
PER RAJENRA SINGH, AM
1. These cross appeals are directed against the order dated 23.12.1998 of CIT (A) for the assessment year 1993-94. These cross appeals are being disposed off by a single consolidated order for the sake of convenience.
2 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999
2. Appeal of the assessee in ITA 1521/Mum/1999. In this appeal the assessee has raised disputes on 27 different grounds, which ave been dealt with in the subsequent paragraphs.
3. The disputes raised in ground No. 1 & 2 relate to disallowance of premium paid by the assessee for acquiring land on lease and alternate claim of depreciation. The AO disallowed the premium paid treating the same as capital expenditure and also did not allow depreciation which in appeal was confirmed by CIT(A) aggrieved by which the assessee is in appeal before the Tribunal.
3.1 After hearing both the parties, we find that the same issue had arisen in assessment year 1992-93 in assessee's own case in which the Tribunal in ITA no.2253/M/2006 restored the issue to the file of AO for fresh adjudication in the light of decision of Special Bench of the Tribunal in case of Mukund Ltd. (291 ITR (AT) 249). The facts this year are identical. Therefore respectfully following the decision of Tribunal in A.Y.1992-93 we restore the issue to the file of AO for fresh order in the light of decision of Special Bench in case of Mukund Ltd. (supra).
4. The third ground relates to allowability of depreciation on royalty treated as capital expenditure. This ground was not pressed before us at the time of hearing of the appeal by the Learned Authorised Representative of the assessee. This ground is, therefore, dismissed as not pressed.
5. The fourth dispute is regarding allowability of deduction on account of remuneration to employees deputed to Mupnar Films amounting to Rs 4,00,478/-. The Assessing Officer had disallowed claim of remuneration of Rs 4,00,478/- paid to Shri Bava sent on 3 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 deputation to M/s Mupnar Films following the decision taken in assessment year 1989-90, which in appeal was confirmed by the CIT (A), aggrieved by which the assessee is in appeal before the Tribunal.
5.1 After hearing both the parties, we find that this issue is covered by the decision of Tribunal in assessee's own case for assessment year 1989-90 in ITA 8499/92. In that year also similar claim on account of employee deputed to M/s Mupnar Films was made. The assessee had claimed that it was principal partner of the joint venture, M/s Mupnar Films and it had deputed the employee to look after the functioning of the said joint venture to protect the assessee's interest. The Tribunal was satisfied about the claim and following the judgment of Hon'ble Supreme Court in case of S A Builders (288 ITR
1) allowed the claim of the assessee. The decision taken in assessment year 1989-90 was followed by the Tribunal in assessment year 1992-93. Facts this year are identical. Respectfully following these decisions, we set aside the order of the CIT (A) and allow the claim of the assessee.
6. The ground No.5 is regarding the method of valuation of catylist. Till 1983, the assessee was following the method of spreading the cost of catylist over the period of estimated life ranging from 1 to 3 years. However, since assessment year 1984-85 the assessee started claiming expenses on catylist without spreading the expenditure over the estimated life. The Assessing Officer rejected the new method and made the valuation on the basis of old method, which in appeal was confirmed by the CIT (A), aggrieved by which, the assessee is in appeal.
6.1 After hearing both the parties we find that this issue is covered by the decision of the Tribunal in the assessee's own case for 4 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 assessment year 1992-93 in ITA 3250/Mum/1996. In that year, the Tribunal following the earlier decision for assessment years 1986-87 to 1989-90 restored the issue to the Assessing Officer with the direction to recompute the profit in accordance with the old method. The facts this year are identical. Therefore, respectfully following the decision of the Tribunal, we restore this issue to the file of the Assessing Officer for computing profit in accordance with the old method.
7. The ground No.6 is regarding disallowance u/s 37(2A) in respect of expenditure on tea, coffee etc. This ground was not pressed before us by the Learned Authorised Representative for the assessee. This ground is, therefore, dismissed as not pressed.
8. The ground No.7 is regarding disallowance of sole and non-moving stores and spares written off to the tune of Rs 75,88,719/-. The Learned Authorised Representative for the assessee did not press this ground before us. This ground is, therefore, dismissed as not pressed.
9. The grounds no. 8 to 14 relate to claim of deduction u/s 80HH & I in respect of Formulation Unit, MCP Plant, eypermethrin Plant and DDVP / PMN Plant.
9.1 The assessee while making claim of deduction u/s 80HH and 80I had been treating each plant as a separate industrial undertaking. The Assessing Officer, however, from assessment year 1984-85 has been treating all the four units as one industrial undertaking. The Assessing Officer noted that after deducting depreciation, administrative overheads and interest, no profit remained for allowing deduction u/s 80HH / 80I and, therefore, following the decision of the earlier years disallowed the claim. The 5 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 Assessing Officer, while computing deduction u/s 80HH / 80I, in addition to reducing current years depreciation, had also adjusted the brought forward losses and depreciation of the undertakings. The actions of the Assessing Officer were confirmed by the CIT (A) against which, the present appeal is filed, raising specific grounds relating to the separate treatment of each plant, the deduction on account of depreciation, the adjustment of brought forward losses and depreciation as well as allocation of administration overhead expenses and interest.
9.2 Before us, the Learned Authorized Representative for the assessee submitted that in the earlier year the issue of computation of deduction u/s 80HH & 80I in respect of 4 plants has been restored by the Tribunal to the file of the Assessing Officer for fresh computation on the basis of final outcome for assessment years 1984-85 to 1985-
86. Ld. D.R on the other hand, argued that current year deprecation has to be allowed whether claimed or not in view of the decision of Special Bench in case of Vahid Paper Converters (98 ITD 165). The brought forward losses and depreciation have also to be adjusted before computing deduction under section 80 HH and 80I as held by Hon'ble Supreme Court in case of Synco Industries Ltd. (299 ITR 144).
9.3 We have perused the records and considered the material carefully. We find that the Tribunal in the assessment year 1985-86 had remitted the matter to the file of the Assessing Officer for fresh decision as to whether the four plants should be treated as one unit or separate unit after examining unity of control, finance, employee etc. in the light of judgment of Hon'ble Supreme Court in case of Prithivi Insurance Co (63 ITR 632) . Following the said decision the issue whether the four plants should be treated as one unit or separate unit as well as allocation of expenses to the units is restored to the file of 6 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 A.O for fresh decision after opportunity to the assessee. We however, make it clear that depreciation as per rules will be allowed while computing the profit whether claimed or not as held by the Special Bench of the Tribunal in case of Vahid Paper Converters (98 ITD 165). We also make it clear that whether the four plants are treated as one unit or not deduction under section 80 HH and 80 I can be allowed only when there is positive gross total income and the gross total income has to be arrived at after adjusting intra head and inter head losses and after setting off brought forward losses and depreciation as held by Hon'ble Supreme Court in case of Synco Industries Ltd. (299 ITR 144). The profit of each unit will be computed separately only for the purpose of determining quantum of deduction subject to availability of GTI. The issues raised in these grounds are therefore, restored to the A.O for fresh decision in the light of observation made above and after allowing opportunity of hearing to the assessee.
10. The ground no.15 is regarding disallowance of municipal taxes and insurance of Rs 12,510/- and depreciation of Rs 2,13,215/- relating to the guest house. The Assessing Officer disallowed the expenses relating to guest house u/s 37(4), which in appeal was confirmed by the CIT (A), aggrieved by which the assessee is in appeal before the Tribunal.
10.1 After hearing both the parties, we find that the issue is covered against the assessee by the judgment of Hon'ble Supreme Court in case of Britania Industries Ltd (278 ITR 546). In the said case, Hon'ble Supreme Court held that there being a specific provision for restriction on guest house expenditure, all expenditure relating to the guest hence even if covered under some other sub-section will have to considered for disallowance u/s 37(4). Respectfully following the said judgment, we confirm the order of the CIT (A).
7 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999
11. The dispute raised in ground No.16 is regarding valuation of closing stock. The assessee changed the method of valuation of stock since 1984-85, which was not allowed by the Assessing Officer who followed the old method. In appeal, the CIT (A) confirmed the order of the Assessing Officer, aggrieved by which the assessee is in appeal before the Tribunal.
11.1 Before us, the Learned Authorized Representative for the assessee submitted that the Tribunal in assessment years 1984-85 and 1985-86 accepted the change in method of valuation of stock and following the said decision, the Assessing Officer has already passed order for this year and, therefore, the ground has become infructuous. This ground is, therefore, dismissed as having become infructuous.
12. The ground no.17 is regarding disallowance of bad debt of earlier years. The Learned Authorized Representative for the assessee submitted that the Tribunal vide order dated 22.2.2008 for the assessment year 1990-91 and vide order dated 31.12.2007 for assessment years 1987-88 and 1988-89 has allowed the claim in the earlier years and ground has therefore become infructuous. We, therefore, dismiss the ground raised as infructuous.
13. The dispute raised in ground no.18 is regarding disallowance of Rs 8 lakhs paid by assessee to Shikshan Prasarak Mandal (in short SPM). The assessee claimed expenditure as revenue expenditure on the ground that the SPM was running the school near its agro chemicals plants at Lothe and the children of the company employees were benefited from the same. The Assessing Officer disallowed the claim as not incurred wholly and exclusively for the purpose of business, following the decision in the earlier year, which in 8 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 appeal was confirmed by CIT (A). Aggrieved by the decision of CIT (A), the revenue is in appeal before the Tribunal.
13.1 After hearing both the parties we find that this issue is covered against the assessee by the decision of Tribunal in the assessee's own case for assessment year 1992-93 in ITA No.3250/Mum/1996. In that year also the assessee had claimed expenditure of Rs 1 lakhs on account of payment to SPM, which had been disallowed by the revenue authorities. In appeal, the Tribunal following the decision for assessment years 1990-91 and 1991-92 confirmed the disallowance. Facts this year are identical, therefore, respectfully following the said decision of Tribunal in assessment year 1991-92 (supra) we confirm the order of the CIT (A).
14. The ground no.19 is regarding the disallowance of expenditure incurred on proposed modernization-cum-expansion programme. The details of these expenses were as under:
"i) Foreign travel expenses 2,11,736
ii) Export deposit 41,963
iii) Consultancy fees professional
& technical fees 25,31,250
iv) Sundry fees 3,945
v) Feasibility study for Railway
sliding for open plot 2,62,957
vi) Sundry contract 2,75,163
vii) Foreign development expenditure 12,50,000
----------------
45,77,014"
=========
14.1 The assessee had claimed the above expenditure as
expenditure incidental to assessment / feasibility of proposed
modernization cum expansion programme at Thane. The Assessing
Officer held that the expenditure was to establish a huge project and 9 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 could not be allowed against the existing business. In appeal the CIT (A) confirmed the disallowance holding the same as capital expenditure. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.
14.2 After hearing both the parties we find that this issue is covered by the decision of the Tribunal in assessee's own case in assessment year 1992-93 in ITA No.3250/M/1996. In that year also similar disallowance expenditure on the proposed modernization cum expansion programme had been made. The Tribunal noted that the assessee had received letter of intent for modernization cum expansion of project at Thane and project had been cleared by the Ministry of Environment and Forest and the Tribunal, therefore, held that the expenses were for modernization / expansion of the existing project and not for any new or non-existing project. The Tribunal, accordingly, allowed the claim as revenue expenditure. Facts this year are identical; therefore, respectfully following the decision of Tribunal in assessment year 1992-93 (supra), we set aside the order of the CTI (A) and allow the claim of the assessee.
15. The grounds no.20 & 21 relate to inclusion of excise duty (Rs 79,46,68,094), sales tax (Rs 26,86,78,261) and sale of scrap (Rs 1,45,69,490) in the total turnover while computing deduction u/s 80HHC. The assessee has excluded these items of receipt from the total turnover but the Assessing Officer treated the same as part of total turnover and the order of the Assessing Officer was upheld by the CIT (A), aggrieved by which, the revenue is in appeal before the Tribunal.
15.1 After hearing both the parties we find the issue relating to excise duty and sales-tax is covered by the judgment of Hon'ble 10 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 Supreme Court in the case of Lakshmi Machine Works (290 ITR 667) in which it has been held that excise duty and sales-tax do not contain an element of turnover and, therefore, the same could not be included in the turnover. Following the said judgment, it is held that excise duty and sales-tax will not be included in the total turnover while computing deduction u/s 80HHC. As regards the sale of scrap, it is an operational income arising from the manufacturing process and therefore scrap sale has to be taken as part of total turnover while computing deduction u/s.80HHC.
16. The ground no.22 is regarding reduction of 90% of following items of income by the Assessing Officer as per Explanation (baa) while computing the deduction u/s 80HHC.
i) Profit on forward exchange contract
ii) profit on sale of current assets
iii) Recovery from transporters
iv) Insurance recovery
v) Salvage recoveries
vi) Recovery from ...asset
vii)Recovery from farm product seeds
viii)Recovery from sale from Nocil rejection programmes
ix) Sales-tax return.
16.1 The Assessing Officer treated the above items to be of same nature as brokerage, commission, etc etc, as mentioned in Explanation baa and accordingly deducted 90% of the same from the profit of the business while computing the deduction u/s 80HHC. Order of the Assessing Officer was confirmed by the CIT (A), against which the assessee is in appeal before Tribunal.
16.2 Before us, the Learned Authorised Representative for the assessee, at the very outset, pointed out that this issue has become academic, as deduction is not available to the assessee in the absence 11 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 of profit. We, therefore, dismiss the ground as having become infructuous.
17. The ground no.23 is regarding allocation of part of administrative expenses towards the dividend income while computing deduction u/s 80M. The AO had allowed deduction under section 80M on net dividend income after deducting expenditure on estimate basis. CIT(A) agreed that deduction has to be allowed on net dividend. However he restricted the deduction of expenses attributable to the dividend income to Rs.5 lacs. Aggrieved by the said decision the assessee is in appeal before the Tribunal.
17.1 After hearing both the parties we find that this issue is covered against the assessee by the decision of the Tribunal in assessee's own case in A.Y.1992-93 in ITA No.2253/M/96. The Tribunal in the said order held that deduction has to be allowed on net dividend income but the only actual expenditure incurred for the earning dividend income has to be deducted and not on estimate. However since the assessee had not given the details of expenses incurred for earning of dividend income the Tribunal upheld the decision of CIT(A) estimating such expenses at Rs.5 lacs. Facts, this year are identical. We therefore respectfully following the decision of Tribunal in A.Y.1992-93 uphold the order of CIT(A).
18. The ground no.24 which is regarding estimated disallowance of Rs 1 lakh out of miscellaneous expenses was not 12 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 pressed by the Learned Authorized Representative for the assessee.
This ground is, therefore, dismissed as not pressed.
19. The ground no.25 is regarding disallowance of expenditure of Rs 1,92,80,025 being the expenditure incurred on stamp fees / registration fees for increasing the authorized capital of the assessee company from Rs 36 crores to Rs 600 crores. The authorities below have disallowed the claim being capital in nature. The Learned Authorized Representative for the assessee fairly conceded that the issue was covered against the assessee by the judgment of Hon'ble Supreme Court in the case of Book Bond India Ltd (225 ITR 798) in which it has been held that the expenditure incurred for increasing the authorized share capital is capital in nature. Respectfully following the said judgment, we confirm the order of the CIT (A) disallowing the claim.
20. The dispute raised in ground no.26 is regarding the claim of deduction of proportionate expenditure of Rs 4,10,213/- relating to the issue of bonus shares. The authorities below had disallowed the claim as capital in nature being the expenditure incurred relating to the issue of share capital. Aggrieved by the said decision, the assessee is in appeal.
13 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 20.1 After hearing both the parties we find that this issue is covered in favour of the assessee by the judgment of Hon'ble Supreme Court in case of General Insurance Corporation Ltd (286 ITR 232) in which it has been held that the expenditure incurred for the issue of bonus shares is allowable as revenue expenditure. Hon'ble Supreme Court observed that issuance of bonus shares by the company did not result in any inflow of fresh fund or increase in the capital employed which remained the same. The issuance of the bonus shares is by capitalization of reserve which is merely reallocation of company's funds. Accordingly, claim was held allowable. Respectfully following the said judgment. We set aside the order of the CIT (A) and allow the claim of the assessee.
21. Ground no.27 is regarding the decision of the Assessing Officer treating the building and civil structure as an integral part of plant and machinery. This ground was, however, not pressed before us by the Learned Authorized Representative for the assessee. The ground is, therefore, dismissed as not pressed.
22. The appeal by the Department in ITA No.1459/Mum/1999 for assessment year 1993-94:
The revenue, in this appeal has raised dispute on eight different grounds, which have been dealt with in the succeeding paragraphs:
14 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999
23. The dispute raised in ground no.1 is regarding set off of brought forward losses and depreciation while computing deduction u/s 80HH. The Assessing Officer had adjusted the brought forward losses and depreciation against the profit of the current year while computing the deduction u/s 80HH. The revenue is aggrieved by the direction of the CIT (A) to allow deduction u/s 80HH without reducing the brought forward losses and depreciation. The Learned Authorized Representative for the assessee pointed out that the issue regarding the allowability of deduction u/s 80HH & 80I had been restored to the Assessing Officer in assessment year 1992-93, following the decision in the earlier years to be decided afresh based on the outcome of the appeal in assessment years 1984-85 and 1985-86. It was, therefore, urged that this year also the issue may be restored to the Assessing Officer for the sake of consistency. The ld. D.R on the other hand, argued that brought forward losses and depreciation have to be adjusted while computing deduction in view of the judgement of Hon'ble Supreme Court in case of Synco Industries Ltd. (supra) 23.1 We have perused the records and considered the matter carefully. In view of our decision taken in para 9.3 earlier, we hold that brought forward losses and depreciation have to be adjusted while computing deduction u/s. 80 HH & 80I in view of the judgment of Hon'ble Supreme Court in case of Synco Industries Ltd.(supra).
24. The second dispute is regarding disallowance of interest of Rs.
1.70 crores in respect of advance of Rs. 25.03 crores made in the 15 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 earlier years to M/s.Orbit Finance Pvt. Ltd. (OFPL) for construction of housing complex at Thane. The AO held that advances had been made in respect of non existent project and therefore the interest paid could not be said to have been incurred for the purpose of existing business. He also observed that own funds and borrowed funds were mixed up and no nexus had been established that own funds had been utilized for making advances. He therefore, disallowed the claim of interest. In appeal CIT(A) held after examination of previous years records that the assessee had sufficient retained earnings from the business generated from operations which were enough for making advances as well as for making investments. He therefore deleted the addition made by the AO, aggrieved by which the revenue is in appeal.
24.1 After hearing both the parties we find that this issue is covered by the decision of Tribunal in assessee's own case for A.Y 1992-93 in ITA No.2253/M/96. In that year also similar disallowances have been made on account of the same advance of Rs. 25.03 crores. The Tribunal noted that the advances had been given in terms of agreement dated 1/11/1989 for construction of building for providing housing facilitate to accommodate the skilled technicians to be recruited in connection with the proposed expansion of the company at the Thane Plant. The Tribunal also noted that OFPL had earlier entered into agreement dated 2/5/1989 with Trnsum Properties Pvt.
Ltd. As per which it had acquired the right to construct the building and the assessee had agreed to purchase such building for business 16 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 purpose. The Tribunal observed that the agreement between OFPL and Transcum Properties Pvt. Ltd. was not disputed and that OFPL was also not a related party. The advances had been made for procurement of flats for housing employees and therefore the advances had been made for the purpose of business. The Tribunal placed reliance on the judgment of Hon'ble Supreme Court in case of S.A. Builders (288 ITR 01). The Tribunal also held that the assessee had sufficient self generated interest free funds for making the advances. Considering these factors the Tribunal allowed the claim of the assessee. The facts this year are identical as the claim of interest is in relation to the same advance. Therefore respectfully following the decision of Tribunal in the assessee's own case in A.Y 1992-93(supra) we confirm the order of the CIT(A).
25. The third dispute is regarding disallowance of interest of Rs 1.70 crores in relation to the interest, fee, advances given by the assessee for development of land, purchase of flat. The AO had made the disallowance stating the same reason as in case of advance given to OFPL as discussed in the previous ground and CIT(A) following the reasons given in case of OFPL allowed the claim aggrieved by which the revenue is in appeal.
25.1 After hearing both the parties we find that the ground is identical to ground No.2 regarding disallowance of interest on account 17 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 of advance on OFPL. We also find that the same issue had arisen in A.Y.1992-93 and the Tribunal allowed the claim in ITA no.2253/M/96.
The Tribunal noted in that year that advances had been given for acquiring flats from parties for the purpose of business which did not materialize and the position was similar to the case of OFPL. The Tribunal therefore allowed the claim. The facts this year are identical.
We therefore respectfully following the decision of Tribunal in assessee's own case in A.Y.1992-93 confirm the order of CIT(A).
26. The grounds no.4a & 4b relate to adjustment of trading loss while computing the deduction u/s 80HHC in relation to export of goods. The assessee exported both trading goods as well as manufactured goods. There was loss in export of trading goods while there was profit in relation to the export of manufactured goods. The assessee had ignored the trading loss and computed the deduction u/s 80HHC in respect of the positive profit of the manufactured goods.
The Assessing Officer did not accept the claim of the assessee and while computing the claim of deduction u/s 80HHC considered both the losses as well as profit and accordingly he denied the claim as there was no net profit. In appeal, the CIT (A) allowed the claim of the assessee ignoring the loss arising from trading goods. Aggrieved by the said decision, the revenue is in appeal before the Tribunal.
18 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 26.1 After hearing both the parties, we find that this issue is covered by the judgment of Hon'ble Supreme Court in the case of IPCA Laboratory (266 ITR 521) in which it has been held that both the positive and negative income as per the various clauses of section 80HHC(3) has to be considered while computing the deduction u/s 80HHC. Respectfully following the said judgment, we set aside the order of the CIT (A) and confirmed the order of the Assessing Officer.
27. The fifth ground is regarding set off of interest received from the Income Tax Department against the interest paid to the Department. The assessee had received interest of Rs 1,29,72,900/-
from the Income-tax Department, whereas, it had paid interest to the Department amounting to Rs 2,31,69,550/-. The assessee had set off the interest income against interest paid and, therefore, did not offer any income for taxation. The Assessing Officer, however, did not set off the interest paid against the interest received and taxed the interest income of Rs 1,29,72,900/-. In appeal, the CIT (A) held that interest paid has to be set off against the interest income as both the payment and receipt of interest were for the same purpose. Aggrieved by the said decision, the revenue is in appeal.
27.1 Before us, the Learned Authorised Representative for the assessee fairly conceded that the issue raised in this ground is covered against the assessee by the judgment of Hon'ble Supreme Court in the 19 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 case of Bharat Commerce and Industries Ltd (230 ITR 733) in which it has been held that interest paid by the assessee to the Department is not allowable as expenditures. Respectfully following the said judgment, we set aside the order of the CIT (A) and confirm the order of the Assessing Officer.
28. Sixth ground is regarding deduction u/s 80M. The assessee had claimed deduction of Rs 11,99,34,110/- u/s 80M of Income-tax Act on the gross dividend income. The Assessing Officer allocated interest of Rs.3,23,65,000 and administrative expenses of Rs.47,97,364/- aggregating to Rs.3,71,62,364/- towards earning of dividend income and deducted the same from dividend income and deduction u/s 80M was allowed on the net dividend income amounting to Rs 8,27,71,746/-. In appeal, CIT (A) observed that the dividend had been earned from investments made in earlier years and mainly from investments made by the financial year 1990-91. It was also observed by him that it was established from the records that assessee had sufficient own generated funds to cover the investments.
There was no material to show any nexus between investments and borrowed funds. CIT (A), accordingly, held that no interest could be allocated towards the dividend income. The CIT (A), however, allocated a sum of Rs 5 lakhs out of the managerial expenses towards earning of dividend income and the order of the Assessing Officer was 20 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 modified accordingly. Aggrieved by the said decision, the revenue is in appeal.
28.1 After hearing both the parties, we find that this issue is covered by the decision of the Tribunal in assessee's own case in A.Y.1992-93 in ITA no.2253/M/96. In that year also similar addition had been made on account of deduction under section 80M. The Tribunal observed that, no doubt, deduction under section 80M has to be allowed on net dividend income but only the actual expenditure has to be deducted. The Tribunal after examination of record also held that the assessee had sufficient self generated funds and own capital to explain the investment in shares. The Tribunal following the judgment of Hon'ble High Court of Mumbai in case of Reliance Utilities and Power (313 ITR ........) upheld the order of CIT(A) that no interest could be allocated towards earning of dividend income. However as the assessee did not file the details of managerial expenses incurred for earning of dividend income, the Tribunal upheld the order of CIT(A) allocating such expenditure at Rs.5 lacs. The facts this year are identical and no distinguishing features have been brought to our notice by the Learned DR. Therefore respectfully following the decision of Tribunal in A.Y.1992-93 (supra) we confirm the order of CIT (A).
29. The dispute raised in the ground 7 is regarding deletion of the addition of Rs 2,67,97,950/- on account of interest pertaining to 21 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 the capital work-in-progress. The AO disallowed interest paid in relation to the investment in work-in-progress (WIP) following the decision taken in assessment year 1992-93 on the ground that the assets were not immediately used for the existing business. The Assessing Officer rejected the explanation of the assessee that WIP was in respect of expansion or extension of the existing business. In appeal, the CIT (A) held that interest was allowable as expenditure u/s 36(1)(iii) irrespective of the fact whether funds were used for acquiring stock-in-trade or any capital asset. CIT (A), accordingly, following the decision in assessment year 1992-93 allowed the claim of the assessee. Aggrieved by the said decision, the revenue is in appeal.
29.1 After hearing both the parties we find that the dispute raised in this ground stands decided by the decision of Tribunal in assessment year 1992-93 in ITA 3250/Mum/1996. The Tribunal in that year allowed the claim of the assessee following the judgment of Hon'ble Supreme Court in case of Core Health Care Ltd. (298 ITR
194). Since the CIT (A) has allowed the claim of the assessee following the decision in assessment year 1992-93, which has been upheld by the Tribunal, we see no infirmity in the order of the CIT (A) and same is, therefore, upheld.
22 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999
30. The dispute raised in ground no.8 is regarding allowability of expenditure incurred on re-routing of MIDC road pipeline etc as revenue expenditure. The assessee as per the agreement dated 3.12.1980 had acquired land measuring 3784775 square meters on lease from MIDC on payment of premium of Rs 17,03,14,700/- in addition to the lease rent of rupee one p.a. In terms of the agreement, the assessee was required to re-route the central road, MIDC pipelines and other services lines at its own cost. The assessee, had incurred expenses of Rs 4,43,54,418/- on re-routing of MIDC road and MIDC pipelines, etc and the same was claimed as revenue expenditure, which was disallowed by the Assessing Officer. In appeal, the assessee submitted that re-routing of the road and laying down of the pipelines, etc was necessary on commercial expediency to ensure movement of raw material, chemicals and finished products between various plants, which was not possible if the road and public water pipeline were to continue in the existing position Re-routing also eliminate any risk of damage to the pipelines, which might arise due to any accident. It was also submitted that it was clear from the agreement that the assessee had no ownership right in any of the assets which continued with MIDC and therefore the expenditure could not be considered as capital expenditure. CIT (A) agreed that the expenditure did not create any new assets and that the expenditure incurred as on commercial expediency for conducting the existing business more efficiently. CIT (A), accordingly allowed the 23 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 claim as revenue expenditure after referring to the judgment of Hon'ble Supreme Court in case of Empire Jute Co (124 ITR 1), the judgment in case of Madras Auto Services Ltd (233 ITR 468) and several other judgments. Aggrieved by the said decision, the revenue is in appeal before the Tribunal.
30.1 We have heard both the parties in the matter. The Learned Departmental Representative assailed the order of the CIT (A). It was argued that expenditure incurred for acquisition of leasehold rights is capital expenditure as held by the Special Bench of the Tribunal in case of Mukund Steel (291 ITR (AT) 249). Reliance was also placed on the judgment of Hon'ble Supreme Court in the case of Enterprising Enterprises (293 ITR 437). It was pointed out that the assessee had to reroute the central road as well as pipelines as part of the conditions prescribed for acquiring leasehold rights in the land, and without incurring the expenditure it was not possible to take possession of the land on lease. The expenditure incurred was thus, for acquisition of leasehold right, which in view of the decisions cited above was capital expenditure. Expenditure had therefore be rightly disallowed as capital expenditure. The Learned DR placed reliance on the following judgments in support of the case:
i) 63 Taxman 493(SC) in the case of Arivind Mills;
ii) 85 Taxman 473 (Allh) in the case of Jitendra Printing Works;
iii) 125 Taxman 104(Bom) in case of Khimlaine Pumps Ltd;
iv) 87 Taxman 108 (Bom) in case of Hardiallia Chemicals Ltd;
v) 31 SOT 286 (Mum) in case of Cyanamid Agro Ltd. 30.2 The Learned Authorised Representative of the assessee, on
the other hand, reiterated the submissions made before the CIT (A) and argued that rerouting of MIDC road and pipelines were necessary 24 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 for smooth transport of goods and the expenditure was thus for conduct of business more efficiently. It was also submitted that expenditure incurred was to remove obstacle or disability in the conduct of business and, therefore, expenditure was allowable as revenue expenditure in view of the judgment of Hon'ble Supreme Court in case of Bikaner Gypsum Ltd (187 ITR 39). It was further argued that by incurring the said expenditure, the assessee had not acquired any advantage in the capital field as the assessee had no ownership rights over the roads and pipelines. The expenditure had been incurred to conduct the business more efficiently and profitably, which was allowable as revenue expenditure. It was pointed out that similar expenditure had been allowed in assessee's own case in assessment year 1989-90 in ITA 8499/Bom/1992. He also placed reliance on the following judgments in support of the case:
i) 122 ITR 995 (Mum) in case of Excel Industries Ltd;
ii) 125 ITR 295 (SC) in case of L H Sugar Factory and oil mills P Ltd;
iii) 82 ITR 376 (SC) in case of Lakshmiji Sugar Mills Co P Ltd;
iv) 203 ITR 410(Mum) in case of National Organics and Chemicals Indus Ltd;
v) 135 ITR 546(Guj) in case of Navsari Cotton and Silk Mills Ltd;
vi) 233 ITR 468 (SC) in case of Madras Auto Service Pvt Ltd.
30.3 We have perused the records and considered the rival submissions carefully. The dispute raised is in relation to allowability of expenditure incurred by the assessee on rerouting of central road and MIDC pipelines passing through the land taken by the assessee on lease from MIDC. For acquiring the lease rights the assessee in addition to the lease rent had also paid premium of Rs 17,30,14,700/- to MIDC. The premium paid for acquisition of lease rights in the land has been disallowed as capital expenditure and there is no dispute on this issue. The assessee in terms of lease agreement also incurred expenditure of Rs 4,43,54,418/- on rerouting of MIDC road and MIDC 25 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 pipelines passing through the land. The case of the assessee is that rerouting of roads and laying down of the pipelines was necessary to ensure movement of raw materials, chemicals and finished products between various plants. The existing road and pipeline would have impeded the free movements of goods. The expenditure was thus on commercial expediency for removing obstacle or disability during the course of carrying on of the business or for smooth conduct of the business and therefore, the same was allowable as revenue expenditure. It has also been argued that by incurring the expenditure, the assessee had no advantage in the capital field as the ownership of road and the pipelines continued with MIDC. The case of the revenue is that expenditure had been incurred as per the terms and conditions of the lease agreement for acquiring the leasehold rights and, therefore, the same was capital expenditure not allowable.
30.4 We have given careful through to the arguments advanced by both the sides and have also carefully gone through the various judgments relied upon by both the parties. There cant be any dispute about the proposition that expenditure incurred during the course of carrying on of the business for the purpose of the removal of any restriction / obstruction or disability is on revenue account as the issue is settled by the judgment of Hon'ble Supreme Court in case of Bikaner Gypsum Ltd (87 ITR 39). It is also a settled legal position that criteria of lump sum payment or enduring advantage is not decisive in determining the true nature of expenditure as held by Hon'ble Supreme Court in the case of Empire Jute Co (124 ITR 01). What is required to be seen is whether the assessee has acquired any advantage in the capital field. In case, by incurring an expenditure, the assessee has not acquired any capital asset or any new source of income, the expenditure incurred cannot be considered as capital even if it may have given enduring advantages as held by Hon'ble Supreme 26 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 Court in case of Empire Jute Co (supra). However, for deciding the true nature of a particular expenditure, it is necessary to examine carefully the purpose for which the expenditure has been incurred.
30.5 In the present case, the assessee had acquired the leasehold right as per lease agreement dated 3.12.1980 with MIDC. On careful perusal of the lease agreement, it is clear that the assessee was required to perform certain stipulations for acquiring the lease hold rights. Some of the stipulations, as mentioned in sub-clause
(e),(f), (g), (h) & (k) of clause (3) which are relevant for the purpose of deciding the issue under consideration are reproduced below as a ready reference :
"(e) The existing MIDC public road (Central Road) which passes through the land agreed to be given on lease to the Licensee shall be rerouted by the Licensee along the alternate alignment as may be approved by the Chief Executive Officer of the grantor. The new road along the rerouted alignment of the stipulated width which shall then be a public road shall be constructed by the Licensee as per the IRC specifications applicable for the Highway (like Radious of curvature / super elevation, Gradient etc) to be get approved from the Chief Engineer, MIDC, and entire costs, charges and expenses of the new road as per the rerouted alignment shall be borne and paid by the Licensee alone.
(f) The existing 1590mm dia. M S Pipeline passing through the aforesaid land shall be removed by the Licensee at its own costs and expenses by the Licensee at its own costs and expenses and the same shall be hand over to the grantor free of cost. The Licensee shall, however, be further liable to lay along the new road 1800 mm.dia. M S Pipeline at its own costs according to the specifications and alignment of such new pipeline to be got approved from the Chief Engineer of the Grantor.
(g) The part of aforesaid land which falls under the existing Central Road will be handed over to the Licensee only after the reconstruction and shifting of the road and the pipeline along the alternate alignment as prescribed by the grantor is completed by the Licensee to the satisfaction of the grantor.
The work of reconstruction / shifting shall not be commenced in any manner unless and until all detailed plans and specifications for such works have been first approved by the grantor.
(h) The facilities and services / amenities such as water supply pipeline, underground electric cable, overhead HT/LT tower lines of M S E B, Naphtha pipeline, drainage lines and any other similar service lines passing through the lands to be ultimately demised shall be similarly re-routed as per the requirements of the concerned agencies at the entire and full costs and expenses of the Licensee alone and all such works will be carried out to the satisfaction of the concerned agencies.
27 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999
(k) The possession of the land under road existing Central Road i.e. admeasuring 57645 sq.mtrs would be given after the alternate road is constructed and all services and facilities are rerouted as aforesaid to the satisfaction of the Grantor.
30.6 It is clear from the above clauses is that the assessee had agreed to reroute the existing MIDC public road as part of the conditions for taking the land on lease. The assessee was also required to remove the existing MS pipelines and handed over the same to the grant or free of cost and was also required to lay along the new road, 1800 mm diameter ms Pipeline at its own cost. It is clear from sub- clause 'g' that part of the land which tell under the existing Central Road, could be handed over to assessee only after re-construction and shifting of the road and pipeline along the alternate alignment. Various service lines as mentioned sub-clause (h) were also required to be re- routed as per the requirement of governed agencies at assessee's own cost. Further, as per sub-clause 'k' the possession of the land under road existing central road could be given to the assessee only after the alternate road was constructed and all services and facilities were rerouted to the satisfaction of the grantor. It is thus clear that the assessee had to reroute the MIDC road as well as the pipelines and lay the new pipeline and other service lines as part of the stipulations provided in the lease agreement and without which the assessee could not be handed over the relevant portion of the land. The shifting of the road as well as laying down of the pipeline etc was a necessary condition for taking the land on lease. Thus, the expenditure incurred was necessary for acquisition of leasehold rights, the expenditure had not been incurred to remove an obstacle during the course of carrying on of the business as argued by the Learned Authorised Representative. It is not a case that the assessee had acquired the land on lease without any such conditions and after the acquisition of land, the assessee had to incur certain expenditure on rerouting etc for 28 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 smooth conduct of business. The position would have been different in that case. The re-routing of the road, pipelines and other service lines had to be done as per the alternate alignment prescribed by the grantor and the concerned agencies and the assessee had no choice in the matters. It cannot be said be said that re-routing etc had been done by the assessee as per its own requirement for smooth conduct of business.
30.7 The Learned AR has placed heavy reliance on the judgment of Hon'ble Supreme Court in case of Bikaner Gypsum Ltd (supra). The case, however, is distinguishable. The assessee in that case had taken land on lease for the purpose of mining gypsum for twenty years. There was railway station, yard and quarters as part of the area taken on lease. There was restriction on mining operations near area occupied by railway station. The assessee, therefore, had to pay certain amounts for shifting of railway station, yard and quarters to another area. In that case, there was no condition in the lease agreement that for acquiring the land on lease, the assessee had to shift the railway station etc. The assessee had shifted the railway station, yard etc after taking over the land on lease for smooth conduct of mining operations and not as a condition for taking the land on lease. The expenditure had been incurred during the course of carrying on of the business for removing obstacles and accordingly, it was held as revenue expenditure. In the present case, as pointed out earlier, expenditure had been incurred for acquiring the leasehold rights and not for removing any obstacles or for smooth conduct of the business.
30.8 The Learned AR has also placed heavy reliance on the judgment of Hon'ble Supreme Court in case of Madras Auto Services Pvt Ltd (233 ITR 468) and pointed out that the case of the assessee 29 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 was identical . In our view, the said case is also distinguishable. In that case, the assessee who was in the business of sale of motor parts had acquired certain premises on lease for 39 years on rent of Rs 1,000/- per month for 15 years; Rs 1,500/- for next 10 years; Rs 1,650 for next 10 years; and Rs 2,000/- for remaining period under the lease. The assessee has right to demolish premises and construct a new building to suite to its own purpose. Thus, the assessee in that case, had only right to demolish the premises and demolish of the old building and construction of new building was not a condition for leasehold premises. As is the case in the present appeal. The expenditure incurred, therefore, was not for taking the premises on lease. As the assessee had only the tenancy rights in the building and had no ownership rights in the building constructed, it was held that the expenditure incurred was revenue expenditure.
30.9 Similarly, the case of the assessee in assessment year 1989-90 on which reliance has been placed is also different. In that year expenditure had been incurred on rerouting of Naptha pipeline but there is nothing on record to show that rerouting a condition for taking the land on lease. The assessee had constructed 24.5 kms pipelines running from BPCL / HPCL, Chembur to its factory at Thane, Belapur Road. The original pipeline was laid in 1972 through Government and privately owned loans and part of it was also laid on Thane Creek bridge. At that time permission had been granted to the assessee through wish the condition that, if for any reason, the government directed to realign the pipeline, the assessee should forthwith do so at its own cost and without any compensation. The Government in the assessment year 1989-90 directed the assessee to remove the existing pipelines at there Creek bridge and directed to reroute the existing pipeline for safety reasons and as per the direction, the assessee had to reroute 3.1 of the pipeline and the 30 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999 expenditure incurred was claimed was revenue expenditure. The assessee had not acquired any advantage in the capital field by rerouting the pipeline and the expenditure, therefore, was allowed as revenue expenditure. The case of the assessee with present appeal is different as in this case rerouting is required to be done as part of the stipulations for acquiring the leasehold rights in the land for 99 years. Any expenditure incurred for acquiring long term leasehold rights in land is capital expenditure, as held earlier. The expenditure in the present case is therefore upheld in nature. The judgment of Hon'ble High Court of Mumbai in case of Hardiallia Chemicals Ltd (87 Taxman
108) relied upon by Learned Departmental Representative also supports the case of the revenue. In that case, the assessee had acquired land for 91 years. Lease from MIDC for setting-up of chemical factory. The assessee had also to pay Rs 8 lakhs to MIDC for eviction villagers who are very much in adverse possession of the land. It was held by the Hon'ble High Court that the expenditure was incurred for getting the vacant possession of the land taken on lease for setting a factory and not for carrying on the business. The expenditure was, therefore, held as capital expenditure. The other cases cited are also distinguishable as in those cases expenditure had been incurred for smooth conduct of business and not for acquiring any lease hold rights or any capital asset.
30.10 In view of the foregoing discussion we are unable to sustain the order of CIT(A) treating the expenditure as revenue expenditure. The same is therefore, set aside and the disallowance of expenditure made by AO is upheld.
31 Organic Chemical Industries Ltd ITAs 1521 & 1459/M/1999
31. In the result both the appeals are partly allowed in terms of the order above.
32. The order pronounced in the Open Court on 26th March, 2010.
Order pronounced on 26th day of March 2010.
Sd/- Sd/-
(R V EASWAR) (RAJENRA SINGH)
Sr VICE PRESIDENT ACCOUNTANT MEMBER
Mumbai, Date: 26th March, 2010.
Copy to
1. The Appellant.
2. The Respondent
4. CIT(A)-XXIV, Mumbai.
5. CIT -MC-VIII, Mumbai.
6. D R "F" Bench, Mumbai.
7. Guard File.
By Order
/ / True Copy / /
Asst. Registrar,
ITAT, Mumbai Benches
MUMBAI
*Chavan/-
32 Organic Chemical Industries Ltd
ITAs 1521 & 1459/M/1999
SNo Date Initials
1 Draft dictated on 15.03.10 Sr.P.S
2. Draft Placed before author 19-03-2010 Sr.P.S
3. Draft proposed & placed before the Second Member V.P.
4. Draft discussed/approved by Second Member A.M
5. Approved Draft comes to the Sr.PS/PS Sr.P.S
6. Kept for pronouncement on Sr.P.S
7. File sent to the Bench Clerk Sr.P.S
8. Date on which file goes to the Head Clerk
9. Date of Dispatch of Order