Income Tax Appellate Tribunal - Chandigarh
Glaxo Smith Kline Consumer Healthcare ... vs Assistant Commissioner Of Income Tax on 21 March, 2007
Equivalent citations: (2007)112TTJ(CHD)94
ORDER
G.S. Pannu, A.M.
1. We find it convenient to dispose of the above four appeals by a consolidated order since they relate to the same assessee and involve certain common issues.
2. ITA No. 379/Chd/2004 is an appeal preferred by the assessee against the order of the CIT(A) dt. 27th Feb., 2004 pertaining to the asst. yr. 1998-99. In this appeal the, assessee has preferred four grounds of appeal which we shall deal in seriatim. The brief background is that the appellant is a company incorporated under the provisions of the Companies Act, 1956 and is, inter alia, engaged in the manufacture and sale of food and health care products. For the assessment year under consideration, the appellant filed its return of income declaring income of Rs. 91,84,98,160, against which assessment was completed at an income of Rs. 1,05,53,211 (sic) after making various additions/disallowances to the returned income, which have been partly deleted by the CIT(A), against which the assessee is presently in appeal before us.
3. The first issue is with regard to the disallowance of Rs. 3,21,02,870 made by the AO on the ground that the expenditure in question is capital in nature. Briefly stated, the facts are that the appellant incurred an expenditure of Rs. 3,21,02,870 on "promotional and trade marketing expenses" in relation to the existing products Rs. 1,57,81,862 and on "product development expenses for new products" Rs. 1,63,21,008 which was claimed as revenue expenditure under Section 37(1) of the Act. On being asked to justify the aforesaid claim the assessee submitted as follows. That the "promotional and trade marketing expenses" of Rs. 1,57,81,862 were incurred on existing products and included, inter alia, costs of presentation items given to customers on sale of the products, expenditure on advertisement material etc. The assessee claimed that the expense was wholly and exclusively for the purposes of business and did not result in acquisition of any capital asset. Secondly with respect the product development expenses for new products amounting to Rs. 1,63,21,003, it was contended that it is incurred for development of new products from time to time, and testing them in the market. If initial test result proved successful, the products are commercially launched in the market. Major items of expenses were development expenses on Nutribar chocolate, development expenses of Ribena soft drink, Horlicks relaunched expenses and market research and consumer analysis expenses. It was explained that all these products formed part of the assessee's existing line of business. After considering the submissions of the assessee, the AO held that the aforesaid expenditure is to be treated as capital expenses. According to the AO such expenditure resulted in providing the assessee with information on consumers' needs, taste and wants, based on which the assessee would be able to decide on the constituent of the new product, its pricing, its target, market, etc., which, in turn, would allow the assessee to build a product, brand and long-term strategy.
4. The assessee went in appeal before the CIT(A). The action of the AO has also been upheld by the CIT(A) on the ground that the expense enabled the assessee to introduce new products which can be considered as venturing into a new line of business. The CIT(A) further observed that the expenses belong to capital field and were a capital expenditure.
5. Before us the learned Counsel appearing for the appellant has contended that the lower authorities have not appreciated the facts in proper perspective and have reached at incorrect conclusion. Firstly it is submitted that the product development expenditure is a necessity for running of a fast moving consumer goods business because of cut-throat competition and continuing changes in consumer preferences. According to the learned Counsel the product development expenditure was a recurring expenditure and need not be incurred only once for all. According to the learned Counsel the impugned expenditure merely results in enabling the appellant to carry on the business more efficiently and profitably by being responsive to the changing needs and preferences of the customers and did not lead to creation of any fixed asset. The learned Counsel further submitted that the product development expenditure definitely had the potential to improve the profitability of the appellant but in this case the expenditure has increased the efficiency of the business by enabling the organization to be flexible and responsive to changing consumer preferences and does not add to the profit-earning apparatus available to the appellant. In addition the learned Counsel also argued that the lower authorities erred in assuming that the development of new product implies a new line of business. The appellant has continued its existing line of business and has only introduced newer varieties or brands of existing products like soft drinks, chocolates and energy drinks. Thus the inference of the AO that the expenditure relating to such newer varieties of existing products constitutes capital expenditure is patently erroneous. In the course of the submission the learned Counsel has relied on various decisions, viz. :
(i) Empiie Jute Co. Ltd. v. CIT ;
(ii) Alembic Chemical Works Co. Ltd. v. CIT ;
(iii) Bombay Steam Navigation Co. (P) Ltd. v. CIT ;
(iv) CIT v. Beigei Paints (India) Ltd. ;
(v) Asstt. CIT v. Medicamen Biotech Ltd. (2006) 99 TTJ (Del) 873.
6. On the other hand the learned Departmental Representative appearing on behalf of the Revenue has defended the order of the lower authorities. According to him the expenditures in question result in an advantage of enduring nature to the assessee. According to the Revenue the expenditure was a non-recurring expenditure inasmuch as once the new products are developed and established in market, similar expenditure would not be incurred subsequently. It is also pointed out that the expenditure in question had the potential to enlarge the profit yielding capacity of the assessee since the assessee was adding new products. The learned Departmental Representative pointed out that common objective of this expenditure is brand building or creation of brand consciousness among consumers which clearly was a lasting benefit to the assessee company. It is common knowledge that successful brands are built up over a considerable period of time entailing cultivation of brand loyalty leading to enhanced customer base based on goodwill and brand consciousness. The expenditure resulted in providing the assessee with information on consumers needs, tastes, wants, based on which the assessee would be able to decide on the constituent of products, its pricing, its target market etc. and to improve and diversify upon them. Hence, the expenditure was to be considered as capital in nature.
7. We have considered the submissions carefully. First of all we may refer to the details of the expenditure incurred by the assessee which have been placed in the paper book at p. 42. The details of expenditure incurred by the assessee are as follows :
Particulars Amount
(Rs.)
A. Promotional and Trade Marketing Expenses
Boost badminton rackets 53,19,600
Boost cricket bat 50,40,000
Tennis balls for Boost 21,46,001
Everfresh containers for packing Horlicks GP for Nepal 9,80,724
Printing for stickers 8,710
Purchase of Horlicks baskets 88,000
Hix glow sign board 6,48,050
Outdoor publicity 98,022
GP Packaging material 1,40,000
RSO-North Trade Mktg. 26,703
RSO-West Trade MKtg. 21,059
Souvenir advertising 6,36,993
--------------
157,81,862
B. Product development expenses
Development exp. for Nutribar chocolate 14,41,589
Nutribar stock written off 10,43,028
Nutribar trials 1,12,216
Lotus Nutribar expenses 12,97,430
Nutribar research expenses 29,23,870
Development exp. for Ribena soft drink 1,58,938
Development exp. for Ribena 42,25,539
Horlicks 3-in-l packaging expenses for free samples 7,00,620
Market research & consumer analysis for new produces viz. 15,67,281
Development exp. existing products (Horlicks relaunch) 28,50,497
---------------
1,63,21,008
Total: Rs. 3,21,02,870
8. A bare perusal of the aforesaid details of expenditure incurred by the assessee shows a fact position that the expenditure is in relation to the business of the assessee. This aspect has also not been disputed by the Revenue, as is evident from the orders of the lower authorities. Now the issue whether a particular expenditure is capital or revenue has been a subject-matter of numerous judicial pronouncements. It is also a well accepted proposition that there is no single definite criterion which by itself can determine whether a particular expenditure is capital or revenue. It is a trite law that what is relevant is to evaluate the purpose of the outgoing and its intended object and effect and considered in the light of business realities. The apex Court in the case of Alembic Chemicals Works Co. Ltd. (supra) observed that even the test of "enduring benefit" could fail while determining the true nature of expenditure. In other words what is of relevance is to appreciate the peculiar facts and circumstances of each case to determine whether a particular outgoing is capital or revenue.
9. In this background we may peruse the expenses incurred by the assessee under the head 'Promotional and trade marketing expenses'. Such expenditure has been incurred on existing products of the assessee and include cost of presentation items, gifts, etc. given to the customers on the sale of the product, expenditure on advertisement material etc. The expenditure can be viewed as in actuality discount in-kind allowed to the customers and expenditure on advertisement of the existing products of the assessee. Clearly the expenses incurred are of revenue nature. The expenses in question have merely facilitated the carrying on the business of the assessee more fruitfully. The argument of the Revenue that such expenditure results in enduring benefit inasmuch as the expenditure results in enhancing of the brand, in our view cannot be taken to mean that the expenditure is capital in nature. As we have noted earlier, it is not each and every enduring benefit which is to be concluded as a capital outgoing. At this point it is pertinent to refer to the decision of the Hon'ble apex Court in the case of Empire Jute Co. Ltd. (supra). According to the Hon'ble apex Court what has to be seen is the nature and import of the expense in question in a commercial sense. In this case although we are of the view that the said expenditure does not result in any enduring benefit to the assessee yet even if one is to concede to this argument of the Revenue still it is not possible to deduce that the expenditure is capital in nature. This is for the reason that such enduring benefit is not in the capital field but is in the revenue field, thereby imbibing the said expenditure with character of a revenue expenditure. We may refer to the following observations of the Hon'ble Supreme Court in the case of Empire Jute Co. (supra) :
There may be cases where expenditure even if incurred for obtaining an advantage of- enduring benefit, may, nonetheless, be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is nature of the principle laid down in this test. What is material to consider is nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on-an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be of revenue account, even though the advantage may endure for an indefinite future.
The aforesaid decision of the Hon'ble apex Court clearly shows that the test of enduring benefit is not conclusive to judge true nature of expenditure. One has to go further and ascertain as to whether particular expenditure results into an advantage of enduring nature in the capital field or revenue field. In the instant case having regard to the nature and details of expenditure it is clear that the expenditure under the head "Promotional and trade marketing expenses" is an' expenditure which is incurred wholly and exclusively for the purposes of business and is in the revenue field. The same is allowable as a revenue expenditure.
10. Now we may examine the expenditure under the head "Product development expenses". The details of the expenditure show that the same has been incurred for introducing and developing new products. The assessee is engaged in the business of manufacture and sale of food and health care products under a well-known brand. The expenses include development expenses for new products namely Nutirbar chocolate, Ribena soft drink, Horlicks relaunch expenses. Certainly such expenditure has the potential to improve the profitability of the assessee. However the issue to, be considered is whether the expenditure seeks to enlarge the profit-yielding capacity or it increases the efficiency of the business. This aspect, in our considered opinion is to be decided in the light of the business realities under which the assessee is operating. The assessee is engaged in the business of manufacturing of fast moving consumer goods. ,The business of the assessee is subjected to volatility in consumer preferences, tastes and wants. The assessee is therefore required to perennially study the market and launch new varieties in its products line and meet the competition in the market. It is in this background one has to examine as to whether the impugned expenditure incurred on development, introduction and launching of newer products is an advantage in the revenue field or not. In our humble opinion the expenditure in question has merely enabled the assessee to remain competitive in the market and retain the customer preferences and/loyalty towards its brand of products. The said advantage certainly is not limited to the period under consideration but spills over to the future also. So however this is not conclusive to hold that the expenditure in question is a capital expenditure. The parity of reasoning laid down by the apex Court in the case of Empire Jute Co. Ltd. (supra) discussed by us in the earlier para is squarely applicable with respect to such expenditure also.
11. We may mention here the stand of Revenue that the development and introduction of new products create a new line of business for the assessee and thus expenditure related thereof is to be treated as capital expenditure. On this aspect we are unable to appreciate as to how can it be said that mere development and introduction of new varieties of products result in creation of a new line of business. Factually speaking, prior to the development and introduction of the impugned new products the assessee was in the business of manufacturing and sale of food and health care products. Even post development and introduction of new products, the business of the assessee remains that of manufacturing and sale of food and health care products. Therefore it is erroneous to conclude that the assessee acquired a new line of business by merely developing and introducing new products in the existing line of business. The new products clearly relate to the same line of business that the assessee has been hitherto carrying on. Therefore, on above consideration also the plea of the assessee that the expenditure in question is a revenue expenditure deserves to be upheld.
12. As a matter of passing we may refer to the judgment of the Hon'ble Karnataka High Court in the case of CIT v. Bharat Earth Movers Ltd. wherein it has been held that expenditure incurred on development of products is a revenue expenditure. The learned Counsel for the assessee relied upon an unreported decision of the Delhi Bench of Tribunal in the case of Honda Siel Cars India Ltd. (ITA Nos. 3688 and 3689/Del/2005) dt. 21st Feb., 2006 to argue that expenditure incurred in introduction of a new model of car by an existing car manufacture is a revenue expenditure. To the similar effect reliance has been placed on the judgment of the Amritsar Bench of the Tribunal in the case of Dy. CIT v. Max India Ltd. (2006) 105 TTJ (Asr) 1002 (ITA No. 230 (sic-239/Asr)/Agr/2000) dt. 9th July, 2006.
13. In conclusion, we hold that having regard to the aforesaid discussion the claim of the assessee for allowability of. impugned expenditure as revenue expenditure is justified. We, therefore set aside the order of the CIT(A) and direct the AO to delete the addition.
14. The second issue is with regard to the manner of calculation of deduction under Section 80HHC of the Act. The AO while computing deduction under Section 80HHC included elements of sales-tax, excise duty, freight etc. as part of the total turnover. The CIT(A) also sustained the stand of the AO by relying upon the decision of the Mumbai Bench of the Tribunal in the case of Ponds (India) Ltd. v. Dy. CIT (1997) 59 TTJ (Mumbai) 560 : (1998) 64 ITD 33 (Mumbai).
15. On this issue we find that the Tribunal in assessee's own case for asst. yrs. 1990-91 to 1995-96 has upheld the stand of the assessee and held that for the purposes of computing deduction under Section 80HHC of the Act, the elements of sales-tax, excise duty etc. do not form part of the total turnover. Moreover the decision of the Mumbai Bench of the Tribunal in the case of Ponds India Ltd. (supra) has since been overruled by the judgment of the Bombay High Court in the case of CIT v. Sudershan Chemicals Industries Ltd. . On this aspect there is no decision to the contrary brought to our notice. In the result we uphold the stand of the assessee and hereby set aside the order of the CIT(A) and direct the AO to recompute the deduction under Section 80HHC of the Act after excluding elements of sales-tax, excise duty etc. from the total turnover. In the result, on this ground assessee succeeds.
16. The third issue is with respect to the denial of deduction under Section 80-1 of the Act amounting to Rs. 9,64,82,168. The assessee had claimed the deduction under Section 80-1 of the Act in respect of industrial undertaking established in the previous years relevant to the asst. yrs. 1991-92 and 1995-96. The AO disallowed the claim of the assessee following the assessment orders for the earlier years. The CIT(A) has upheld the action of the AO.
17. On this aspect the learned Counsel for the assessee has contended that subsequent to the order of the CIT(A), the Tribunal in assessee's own case for asst. yrs. 1991-92 to 1995-96 vide orders in ITA No. 301/Chd/2001, ITA Nos. 17, 274 and 1243/Chd/1998 and ITA Mo. 233/Chd/1999 dt. 31st Jan., 2005 has allowed the claim of the assessee. It is also pointed out that the appeal of the Department on similar issue for the asst. yr. 1996-97 has been disposed of by the Tribunal vide ITA No. 345/Chd/2001, dt. 28th Feb., 2005 in favour of the assessee. The learned Departmental Representative has not disputed the aforesaid factual matrix brought out by the learned Counsel for the appellant.
18. We find from the perusal of the precedent cited above that the issue with regard to the deduction under Section 80-1 has been adjudicated by the Tribunal in favour of the appellant in the assessment years in which the new units in question were set up. The relevant assessment years in this regard are 1991-92 and 1995-96. Therefore, once it is established that the assessee is entitled to deduction under Section 80-1 of the Act in the year when the new industrial undertaking was set up it is not thereafter open to the lower authorities to question allowability of deduction in the subsequent assessment years. Following the precedents, we hereby set aside the order of the CIT(A) and direct the AO to allow deduction under Section 80-1 to the assessee accordingly succeeds on this ground.
19. In the last ground the issue is with regard to the inclusion of expenses on managerial labour and salaries of factory staff in the valuation of closing stock. The authorities have included the aforesaid elements of expenditure while valuing the closing stock on direct cost method.
20. On this issue the learned Counsel for the assessee quite fairly submitted that the Tribunal, in the case of the assessee for asst. yrs. 1982-83 to 1996-97 has decided the issue against the assessee and in favour of the Revenue. In view of the aforesaid, we hereby affirm the orders of the lower authorities and ground of the assessee is hereby dismissed.
21. In the result, appeal of the assessee is partly allowed.
22. ITA No. 534/Chd/2004 is an appeal preferred by the assessee against the order of the CIT(A), dt. 8th March, 2004 pertaining to the asst. yr. 1999-2000.
23. The first issue in this appeal is relating to the disallowance of Rs. 30,19,000 made by the AO on the ground that the expenditure in question is capital in nature. The expenditure in question related to product development expenses. On this issue, the stand of the AO and thereafter sustained by the CIT(A) is on similar footing as was in the asst. yr. 1998-99. The issue is identical to the issue considered by us by way of ground No. 1 in the Appeal No. 379/Chd/2004 pertaining to the asst. yr. 1998-99 in the preceding paras. The rival counsel, in the course of hearing agreed that the issue herein is identical to the issue raised in the appeal of the assessee for 1998-99 (supra). In this background our decision in ground No. 1 of appeal No. ITA 379/Chd/2004 (supra) on similar issue applies mutatis mutandis herein also. In the result, on this ground the assessee succeeds.
24. The second issue is with regard to the manner of computing deduction under Section 80HHC of the Act. While computing deduction under Section 80HHC the AO included sales-tax, excise duty, freight etc. as part of the total turnover. Similar issue has been dealt with by us while dealing with the appeal for asst. yr. 1998-99 in the earlier paras. Therein we have directed the AO to recompute the deduction under Section 80HHC of the Act after excluding sales-tax, excise duty etc. from the total turnover following the decision of the Bombay High Court in the case of Sudeishan Chemicals Industries Ltd. (supra). Following the same on this ground, we uphold the stand of the assessee. Accordingly, assessee succeeds on this ground.
25. The third issue is with respect to the denial of deduction under Section 80-1 of the Act amounting to Rs. 9,46,29,393. This issue is identical to ground No. 3 considered by us in the appeal of the assessee for the asst. yr. 1998-99 in the preceding paras. The issue and the circumstances leading upto the present dispute are identical to those in the asst. yr. 1998-99. Therefore , our decision in the asst. yr. 1998-99 applies mutatis mutandis herein also. Thus, on this issue the assessee succeeds.
26. In ground No. 4, the issue is with regard to the inclusion of expenses on managenal labour and salaries of factory staff in the valuation of closing stock. This issue has to be adjudicated against the assessee following the decision of the Tribunal in assessee's own case for the asst. yrs. 1982-83 to 1996-97. As a result, on this ground the assessee fails.
27. In the result, appeal of the assessee is partly allowed.
28. ITA No. 309/Chd/2005 is an appeal preferred by the assessee against the order of the CIT(A) dt. 5th Jan., 2005 pertaining to asst. yr. 2000-01.
29. The first issue is with regard to the manner of computing deduction under Section 80HHC of the Act. While computing deduction under Section 80HHC the AO included excise duty as part of the total turnover. This stand of the Revenue has been adjudicated by us while considering the appeal of the assessee for asst. yr. 1998-99 (in ITA No. 379/Chd/2004) in the earlier paras. Following our aforesaid decision, we uphold the stand of the assessee and hereby set aside the order of the CIT(A) and direct the AO to recompute the deduction under Section 80HHC of the Act after excluding the element of excise duty from the total turnover. Thus on this issue the assessee succeeds.
30. The second issue is with respect to the denial of deduction under Section 80-1 of the Act amounting to Rs. 11,72,30,053. The dispute in the present ground is similar to the dispute considered by us by way of ground No. 3 in the appeal of the assessee for asst. yr. 1998-99 (ITA No. 379/Chd/2004). In asst. yr. 1998-99 it has been held that the assessee is entitled to deduction under Section 80-1 of the Act with respect to the industrial undertaking in question. It was a common ground between the parties that the issue and the rival stands on this issue in this year are on identical footing to those considered by the Tribunal in the asst. yr. 1998-99 (supra). Following the aforesaid, our decision in assessment year 1998-99 (supra) in directing the AO to allow deduction under Section 80-1 to the assessee applies mutatis mutandis in this year too. The assessee, accordingly succeeds on this ground.
31. The third issue is with regard to disallowance of Rs. 56,94,220 under the head 'Product development expenses and Rs. 1,68,32,340 under the head 'Consumer market research expenses'. The aforesaid expenses claimed by the assessee have been disallowed on the ground that the expenditure in question is capital in nature. The details of the expenditure have been placed in the paper book at pp. 58-59. We have perused the details of the expenses. It was a common ground between the parties that the dispute relating to. allowability of similar expenditure was subject-matter of appeal for the asst. yr. 1998-99 (ITA No. 379/Chd/2004) considered by us in the earlier paras. After having perused the details of the expenses, the respective orders of the lower authorities and the rival contentions we find that the basis of disallowance of the impugned expenditure remains on the similar reasoning as taken by the AO in the asst. yr. 1998-99. The rival contentions are also on similar lines. A perusal of the details of expenditure clearly shows that the expenditure in question is related to the business of the assessee and is on revenue account. The reasoning brought out by us in the asst. yr. 1998-99 (supra) is applicable with respect to the fact position in this year too. The background and fact situation being identical to our decision on similar issue in the asst. yr. 1998-99 (supra), the same applies mutatis mutandis herein also. On this ground the assessee succeeds.
32. The fourth issue is with, regard to the action of the AO in disallowing interest amounting to Rs. 4,06,55,312 on capital borrowed for setting up a new plant. Briefly stated the facts are that the assessee incurred expenditure by way of interest payment on capital borrowed for setting up of new manufacturing plant at Sonepat. The AO noted that the assessee had claimed such interest amounting to Rs. 4,06,55,312 capitalised in the books of account as revenue expenditure. The claim of the assessee was under Section 36(1)(iii) of the Act. The contention of the assessee was that the new unit was set up for manufacturing of its existing product i.e. Horlicks and is under the same management. The AO rejected the plea of the assessee on the ground that the interest related to capital borrowed for setting up of a new plant which had not started production during the year under consideration. Secondly, the AO noted that since interest related to capital borrowed for a new plant, the same was to be treated as capital in nature. Thirdly, the AO noted that the amendment under Section 36(1)(iii) made by the Finance Act, 2003 w.e.f. 1st April, 2004 provided that interest from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction. The AO has held that the said amendment being clarificatory in nature, was to be applied retrospectively. Fourthly, the AO noted that similar expenditure on account of interest on borrowed capital pertaining to the, immediately preceding assessment year of 1999-2000 has not been claimed as revenue expenditure by the assessee itself. Therefore the claim of the assessee, to the contrary in this year was disallowable. The AO held that the amount in question of Rs. 4,06,51,312 was to be capitalised and accordingly disallowed the claim of the assessee for deduction under Section 36(1)(iii) of the Act. The CIT(A) has sustained the stand of the AO.
33. Before us the learned Counsel for the assessee has vehemently argued that the capital borrowed was utilized for setting up a new manufacturing unit at Sonepat for production of an existing product and therefore it was an expenditure incurred on the expansion of existing business. It was submitted that the new line of production was completely dependent on the existing line of business there being a unity of control, common funds and common management. The learned Counsel specifically relied upon the phraseology of Section 36(1)(iii) which provided that the amount of interest paid in respect of capital borrowed for the purpose of the business shall be allowed as deduction in computing the income. The learned Counsel also argued that the reliance placed by AO on the newly inserted proviso to Section 36(1)(iii) was untenable since the said amendment was prospective in nature and cannot be read retrospectively. In this regard reliance was placed on the judgment of the Tribunal in assessee's own case for the asst. yr. 1992-93 in ITA No. 1316/Chd/1998 dt. 31st Jan., 2005 wherein it is held that the amendment to Section 36(1)(iii) is prospective in nature. Reliance was also placed on the decision of the Tribunal in the case of Swaraj Engines Ltd. v. Jt. CIT (2005) 98 TTJ (Chd) 346 : (2005) 97 ITD 45 (Chd) besides reliance was also placed on the decision of the Rajasthan High Court in the case of CIT v. Hindustan Zinc Ltd. . Apart from the aforesaid reliance was also placed on a number of decisions :
(i) Setabganj Sugar Mills Ltd. v. CIT ;
(ii) Produce Exchange Corp. Ltd. v. CIT ;
(iii) Veecumsees v. CIT ;
(iv) Prem Spinning & Weaving Mills Co. Ltd. v. CIT ;
(v) Kashiram Ramgopal v. CIT (1998) 36 Taxman 305 (MP);
(vi) Addl. CIT v. Aniline Dyes Stuffs & Pharmaceuticals (P) Ltd. ;
(vii) CIT v. Alembic Glass Industries Ltd. ;
(viii) Chief CIT v. Senapathy Whitely Ltd. (1992) 101 CTR (Kar) 31;
(ix) Ranibow Dyestuff Ltd. v. CIT ;
(x) Dy. CIT v. Core Healthcare Ltd. .
34. On the other hand, the learned Departmental Representative has relied upon the orders of the lower authorities in support of the case of the Revenue. The learned Departmental Representative reiterated the argument of the AO that since the expenditure related to capital borrowed for setting up of a new plant which did not start production during the year under consideration, the interest expenditure in question is not an allowable expenditure. Therefore, according to the learned Departmental Representative, the plea of the assessee has been rightly rejected by the lower authorities. The learned Departmental Representative also made submission that similar issue has been considered by the Hon'ble Punjab & Haryana High Court in the case of CIT v. Vardhman Polytex Ltd. in ITA No. 1 of 2003 and vide its decision dt. 17th Aug., 2006 [reported at (2006) 205 CTR (P&H) 457-Ed.], the issue has been directed to be referred for the consideration of the Hon'ble Chief Justice for constituting a larger Bench. Therefore, according to him, the matter may be restored back to the AO with directions to follow the order of the larger Bench of the Hon'ble Punjab & Haryana High Court.
35. We have considered the rival submissions carefully. The fact position in the instant case is not in dispute. Admittedly the assessee has utilized borrowed capital for setting up of a new manufacturing unit at Sonepat for undertaking manufacture of an existing product, namely, Horlicks. The said unit has not commenced production in the year under consideration. Evidently the impugned activity of manufacture of Horlicks at Sonepat is only expansion of the existing business of the assessee, The moot question is as to whether the expenditure incurred on capital borrowed for such purpose is allowable expenditure or not. The claim of the assessee is to be examined with reference to the provisions of Section 36(1)(iii) of the Act. Section 36(1)(iii) provides that while computing the income referred to in Section 28 of the Act, the amount of interest paid in respect of capital borrowed for the purposes of business is an allowable deduction. The assessee has incurred expenditure on interest in respect of capital borrowed and utilized for expansion of its existing line of production. In this background, following the decisions of the Supreme Court in the cases of India Cement Ltd. v. CIT , Challapalli Sugars Ltd. v. CIT , CIT v. Associated Fibre & Rubber Industries (P) Ltd. and Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. (supra), it is evident that the deduction in respect of interest paid on borrowed money utilized for investment in capital assets acquired in connection with the expansion of existing business is an allowable deduction. Therefore on the basis of the aforesaid, we do not find any infirmity in the claim of the assessee that the impugned expenditure was an allowable deduction in terms of Section 36(1)(iii) of the Act. Similar proposition has also been upheld by the Tribunal in the assessee's own case for the asst. yr. 1992-93 (supra).
36. Insofar as the plea of the Revenue based on the amendment made to Section 36(1)(iii) by the Finance Act, 2003 is concerned we may refer to the decision of our co-ordinate Bench in the case of Swaraj Engines Ltd. (supra). No doubt in terms of the amendment made by the Finance Act, 2003 by way of insertion of the proviso, the impugned expenditure is disallowable. However, the disallowance can be made in the case of the assessee only after the said amendment is held to be retrospective in nature. The assessment year in question is 2000-01 whereas the amendment has been made by the Finance Act 2003 w.e.f. 1st April, 2004. The plea of the Revenue is that the said amendment was clarificatory in nature and thus to be understood as retrospective in its application. We find that identical issue has been considered by the Tribunal in the case of Swaraj Engines Ltd. (supra) wherein divergence of views of the different High Courts have been noted. The Rajasthan High Court in the case of Hindustan Zinc Ltd. (supra) held that the amendment in Section 36(1)(iii) is applicable prospectively whereas the decision of the Calcutta High Court in the case of JCT Ltd. v. Dy. CIT (2005) 194 CTR (Cal) 509 : (2005) 144 Taxman 435 (Cal) is to the contrary. Noticing the divergence of views the Tribunal relying upon the principle of law laid down by the Hon'ble Supreme Court in the case of CIT v. Vegetable Products Ltd. held that the view which is favourable to the assessee, be applied. Accordingly the Tribunal held that the proviso to Section 36(1)(iii) is applicable prospectively and not retrospectively. Respectfully concurring with the aforesaid decision of our co-ordinate Bench, we hold that the amendment to Section 36(1)(iii) is applicable prospectively. Therefore, it follows that the position of law prevailing prior to the amendment is to be applied to test efficacy of the stand of the assessee for deduction under Section 36(1)(iii) of the Act. This aspect has been considered by us in the earlier paras and it is held that the claim of the assessee for deduction under Section 36(1)(iii) of the Act is in order.
37. Now, with respect to the plea of the Revenue based on the decision of the Hon'ble Punjab & Haryana High Court in the case of Vardhman Polytex Ltd. (supra) wherein it has been recommended that the issue be referred to a larger Bench. In this regard, we have carefully perused the said decision. In the said decision, the Hon'ble Bench has not overruled its earlier decision in case of Punjab Alkalies & Chemicals Ltd. (2006) 30 ITR 247 (P&H) and neither the decision of the Tribunal in the case of Swaraj Engines Ltd. (supra) and in the assessee's own case for 1992-93 (supra) have been interfered with. Therefore, presently, there is no prevailing decision of the Hon'ble jurisdictional High Court contrary to the aforesaid decision. Therefore, our decision to uphold the plea of the assessee.
38. Another aspect on the basis of which the claim of the assessee has been disallowed is that the assessee has capitalised the interest in the books of account in the immediately preceding year as well as in the year under consideration, whereas only in this year the expenditure has been claimed as deduction under Section 36(1)(iii) in the return of income. On both these aspects, we do not find any justifiable reasons which would disentitle the assessee from the deduction which is otherwise found allowable to it under Section 36(1)(iii) of the Act. The fact that in the immediately preceding assessment year, the assessee chose not to claim the deduction cannot be understood to hold the issue against the issue (sic-assessee) if otherwise the statutory provisions support the plea of the assessee. Moreover, the treatment in the books of account is not conclusive for testing the allowability or otherwise of a claim. It is the applicable legal provisions which determine the efficacy of the claim of the assessee. For this a gainful reference can be made to the decisions of the Hon'ble Supreme Court in the case of Kedar Nath Jute Manufacturing Co. Ltd. v. CIT and Satluj Cotton Mills Ltd. v. CIT .
39. Therefore, we conclude by holding that since the impugned interest on borrowed capital is in respect of monies utilized for the purposes of assessee's business inasmuch as it was in connection with the expansion of the existing business, the said expenditure is allowable as a deduction under Section 36(1)(iii) of the Act. Therefore, we set aside the order of the CIT(A) and direct the AO to allow the impugned deduction. Thus on this ground the assessee succeeds.
40. The fifth issue is with respect to expenditure incurred by the assessee on implementation of a new ERP package amounting to Rs. 3,77,65,412. The assessee had incurred expenses on implementation of a new ERP package for recording of manufacturing and recording transactions. The AO has rejected the claim of the assessee by holding that the said expenditure was capital in nature. The conclusion of the AO is based on the reasoning that the expenditure incurred would provide assessee with enduring benefits. The CIT(A) has also upheld the stand of the assessee.
41. Before us the learned Counsel submitted that the expenditures in question were of revenue nature and that it did not result in any enduring benefit or creation of asset in the capital field and, therefore, it was to be allowed as a revenue expenditure. It was contended that the expenditure was incurred to facilitate and streamline the assessee's day-to-day management and trading operations. It was also submitted that with the rapid advancement in computer software, the technology acquired in a particular year falls into obsolescence very fast and therefore it requires continuous upgrading. Due to the rapid changing systems and technology the impugned expenses are purely revenue in nature. Reliance has been placed on various decisions viz., Empire Jute Company Ltd. (supra), CIT v. Associated Cement Companies Ltd. (1988) 70 CTR (SC) 28 : (1988) 172 LTR 257 (SC), Alembic Chemical Works Co. Ltd. (supra), CIT v. K & Company (2003) 181 CTR (Del) 378, ITC Classic Finance Ltd. v. Dy. CIT (2000) 112 Taxman 11 (Cal)(Mag), Media Video Company (2002) 122 Taxman 28 (Del)(Mag), Sumitimo Corporation India (P) Ltd. v. Addl. CIT (2005) 1 SOT 91 (Del), Ajit Kumar S. Kamdar v. Dy. CIT (2005) 1 SOT 183 (Mumbai), Naveen Projects Ltd. v. Dy. CIT (2005) 1 SOT 232 (Del). The learned Counsel further submitted that similar expenditure incurred in the immediately preceding assessment year has been allowed as a revenue expenditure by the assessing authority.
42. On the other hand, the learned Departmental Representative while defending the orders of the lower authorities has argued that the expenditure was capital in nature as it rendered enduring benefits to the assessee. For this our attention has been drawn to the discussion made by the AO in para 7 of the assessment order. The learned Departmental Representative has also, relied upon the decisions of the Delhi Bench of the Tribunal in the case of Escorts Ltd. v. Asstt. CIT (2006) 102 TTJ (Del) 522, Maruti Udyog Ltd. v. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 LTD 119 (Del). The learned Departmental Representative also submitted that the expenditure in question was incurred on a large scale and as it provided a lasting benefit to the assessee, the same has been correctly held to be a capital expenditure.
43. In reply the learned Counsel for the assessee has argued that the decisions of the Tribunal in the cases of Escoits Ltd. (supra) and Maruti Udyog Ltd. (supra) were distinguishable inasmuch as in both the cases the expenditure related to the outright acquisition of the software, whereas in the instant case the expenditure in question was incurred for the implementation of the ERP package and entire expenditure was revenue in nature. The learned Counsel has referred to pp. 60 to 62 of the paper book for the details of expenditure. Our attention has also been invited to para 6.2 of the order of the CIT(A), wherein the nature of the impugned expenditure has been noted as mainly of employee costs and other related expenses incurred in relation to the implementation and customisation of ERP package.
43.1 We have considered the rival submissions carefully. Insofar as the factual aspect of the matter is concerned, details of the expenditure in question amounting to Rs. 3,77,65,412 have been placed in the paper book at pp. 60 to 62. The assessee has implemented a new ERP package for recording of manufacturing and accounting transactions, i.e. in the field of financial and commercial activities. At p. 62 of the paper book and also as noted by the lower authorities, the new package is with regard to the recording of transactions in the field of accounting and finance, commercial transactions (i.e. sale and purchase order management, inventory management etc.). In order to implement, the new ERP system, the assessee claims to have incurred the impugned expenditure. The details of the expenditure reveal that the majority of heads of expenses are relating to salaries, employees' travelling cost, other routine business expenditure like postage, stationery, employees' training seminars, consultancy expenses etc. The first aspect is that the expenditures in question by itself do not result in acquisition of any asset in the hands of the assessee. The impugned expenditure also is not related to the actual acquisition of the ERP package and on this count, even the AO does not dispute the factual situation. The stand of the AO for treating the expenditure, as capital is that the said expenditure has brought enduring benefits to the assessee.
44. We have considered the nature of the expenditure incurred and the resultant benefits to the assessee. Evidently the business of the assessee is to carry on manufacture and sale of food and healthcare products. The activity pertaining to accounting, finance, recording of transactions relating to sales/purchases, inventories etc. are all secondary and assist in the furtherance of the main business objective of the assessee i.e. manufacturing. These secondary activities are necessary as 'aids' or 'tools' of management so as to enable the assessee to accurately and correctly ascertain the true state of affairs. An efficient and reliable recording of activities of accounting, finance, inventory management, processing of purchases, sales etc. would enable the assessee to be more efficient and profitable in carrying out its main business activity of manufacturing. What we are trying to emphasize is that where the assessee incurs expenditure to further improve and upgrade its manner of recording of accounting, finance arid other related transactions, it does have an impact on generation of income since the assessee acquires improved inputs to take business decisions. So however, it does not add to the capital apparatus of the assessee. It merely enables the assessee to take management decisions more efficiently. Therefore, the resultant benefits, in the shape of carrying on business more efficiently and smoothly, cannot be said to be an advantage accruing in the capital field. We have already referred in our earlier paras to the decision of the apex Court in the case of Empire Jute Co. Ltd. (supra) in this regard and again reiterate that the test of 'enduring benefit' may not be applicable under all circumstances. For instance, as we have seen in the instant case, there does not flow any advantage in the capital field and thus the expenditure cannot be attracted as a capital expenditure. In fact the advantage is in the Revenue field as it facilitates the assessee to carry on its business efficiently and smoothly. At this point it is also pertinent to mention that even prior to the implementation of the new ERP package, the assessee has been carrying on the impugned activities. The only change is that with the implementation of the new ERP package, the assessee seeks to carry on such activities more smoothly, efficiently and meaningfully so as to enable the assessee to take business decisions. The expenditure in question is merely incurred on implementation of the new package. Therefore, our inference that the impugned expenditure has only enabled the assessee to carry on its business efficiently and smoothly.
45. With this background we may now look at the break up of the expenditure as per the details placed at pp. 60 to 61 of the paper book. We have perused the same and find that as per the details on record, the entire expenditure fits the bill except in relation to the expenditure voice telecom circuit Rs. 19,86,581 and data/telecom circuit usage Rs. 69,16,888. With respect to the aforesaid two expenses there is no specific discussion either in the orders of the lower authorities or even before us; to gauge its nature. Therefore, while in principle, we uphold the stand of the assessee that the expenditures of the nature which have been incurred in the implementation of the new ERP package, are revenue expenditures, insofar as it relates to the aforesaid two expenditures, we deem it fit and proper to direct the AO to ascertain their nature and thereafter decide the issue. For this limited purpose, we hereby set aside the order of the CIT(A) and restore the matter to the AO to carry out the aforesaid exercise. The assessee shall provide the necessary details to the AO and also justify that the same was of revenue nature in consonance with our discussion in the aforesaid paras.
46. Before parting we may also make a mention that the AO himself has accepted similar expenditure in the immediately preceding assessment year as revenue in nature. The plea of the assessee on this aspect was before the AO as well as before the CIT(A). We do not find any rebuttal in the orders of lower authorities on this issue. Even before us, no arguments or any material whatsoever has been attempted to be brought on record by the Revenue to controvert the said factual position. Therefore, even on the principles of consistency which have been laid down by the apex Court in the case of Radhaswami Satsang v. CIT , the claim of the assessee is sustainable.
47. We may now consider the reliance placed by the learned Departmental Representative on the decisions of the Tribunal in the cases of Escorts Ltd. (supra) and Maruti Udyog Ltd. (supra) in support of the case of the Revenue. We have carefully perused the said two decisions. We find that in both the decisions the factual position stood on a different footing. In both the cases, on facts, the Tribunal came to the conclusion that the nature of expenditure involved was capital in nature. In fact the expenditure related to outright acquisition of the software in the case of Escorts Ltd. (supra). It was under such circumstances that the Tribunal concluded in the case of Escorts Ltd. (supra) that the expenditure resulted in acquisition of an asset in the hands of the assessee. To the similar effect is the decision of the Tribunal in the case of Maruti Udyog Ltd. (supra). Thus, the decisions in Maruti Udyog Ltd. (supra) and Escorts Ltd. (supra) cannot be applied in the instant case as the factual position stands on a different footing. In the instant case, as we have seen earlier, the impugned expenditure is not for acquisition of an ERP package but is claimed to be merely for implementation of the ERP package.
48. In view of the aforesaid discussion, on this ground the assessee succeeds to the above extent.
49. The sixth issue is with regard to the expenditure of Rs. 4,77,59,930 on renovation/interior decoration at the leased office premises, incurred by the assessee. The AO held that the said expenditure was a capital expenditure instead of the same being claimed as revenue expenditure by the assessee. The CTT(A) has also sustained the stand of the AO and hence the present ground of the assessee.
50. Briefly, the facts are that the assessee incurred the said expenditure on renovation of leased office premises and claimed the same as revenue expenditure. On being asked to justify the claim, the assessee submitted that the premises in question were being used by it for its own business purposes. That the expenditure incurred was in the nature of revenue expenditure and did not result in either creation of a new asset or benefit of enduring nature in the capital field. The assessee, therefore justified its claim that the same was in the nature of repairs allowable under Section 30 of the Act. The AO, however did not accept the plea of the assessee and has held that in terms of Expln. 1 appended to Section 32(1) of the Act, any expenditure incurred towards the renovation/improvement of leased building is to be held as capital in nature. Accordingly the AO has disallowed the impugned expenditure and treated the same as capital expenditure. We find that the CIT(A) has also upheld the same reasoning to decide the issue in favour of the AO.
51. Before us the learned Counsel appearing for the assessee has vehemently argued that the impugned expenditure was of revenue in nature. The learned Counsel reiterated the submissions which were made before the lower authorities in support of the claim of the assessee. Adverting to the invoking of Expln. 1 to Section 32(1) by the AO, the learned Counsel contended that it was applicable only to the expenditures incurred on undertaking structural changes to the leased premises and not on account of repairs/renovations of the nature carried out by the assessee. The learned Counsel specifically relied, upon the decision of the Delhi High Court in the case of Escorts Finance Ltd. (2006) 205 CTR (Del) 574 : (2006) 155 Taxman 559 (Del) wherein it has been held that the amount spent on wooden partition, painting of leased premises, and carrying out repairs to make the premises workable was to be considered as revenue expenditure. Similarly the learned Counsel contended that the impugned expenditure was, incurred merely to enable the business of the assessee to be carried out more efficiently and comfortably and the resultant benefit was in the Revenue field. Reliance was placed on the decision in the case of Empire Jute Co. Ltd. (supra), Instalment Supply (P) Ltd. v. CIT , ITO v. S.L. Batra (1986) 19 ITD 342 (Del), ITO v. IBP Co. Ltd. (1987) 28 TTJ (Cal) 400, Rupin Investment & Trading (P) Ltd. v. ITO (1991) 38 ITD 428 (Del), J.K. Synthetics v. TO (1990) 32 ITD 775 (Del), Nirula & Co. (P) Ltd. v. ITO (1992) 43 ITD 21 (Del)(TM), Jt. CIT v. Master Capital Services Ltd. (2004) 88 TTJ (Chd) 1025 : (2004) 88 ITD 496 (Chd). The learned Counsel has also made an alternative plea that the expenditure in question is allowable under Section 37(1) of the Act being an expenditure incurred wholly and exclusively for the purposes of business and is revenue in nature.
52. On the other hand, the learned Departmental Representative submitted that the expenditure in question could not be classified as current repairs and in fact the expenditure provided a benefit of enduring nature in the hands of the assessee. The learned Departmental Representative referred to and relied upon the decision of the Hon'ble Punjab & Haryana High Court in the case of Uttar Bharat Exchange Ltd. v. CIT and Silver Screen Enterprises v. CIT . The reliance was also placed on the decision of the Mumbai Bench of the Tribunal in the case of Asstt. CIT v. Nirmal Warehousing Agency (2001) 72 TTJ (Mumbai) 793 : (2001) 77 ITD 1 (Mumbai). The learned Departmental Representative further submitted that the plea of the assessee that the claim of the assessee be allowed under Section 37(1) of the Act was not texable since the claim has to be dealt with in accordance with the specific provisions, namely, Section 30 of the Act. For this proposition, reliance was placed on the decision of the jurisdictional High Court in the case of CIT v. Khem Chand Bahadur Chand .
53. In reply the learned Counsel for the assessee contended that the case laws relied upon by the learned Departmental Representative are not applicable as the same did not pertain to leased premises. Moreover the learned Counsel sought to place reliance on the decision of the Hon'ble Punjab & Haryana High Court in the case of Regal Theatre v. CIT in support of his case. Apart from the aforesaid, reliance was placed on the decisions in the cases of CIT v. Chowgule & Co. (P) Ltd. , CIT v. Madras Auto Service (P) Ltd. in support of the stand.
54. We have carefully considered the rival submissions. The entire case of the Revenue is built on the provisions of Expln. 1 to Section 32(1) of the Act. We therefore, deem it expedient to reproduce the same which is as under:
Where the business, or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
55. Shorn of other details, it is evident from the bare perusal of the aforesaid Explanation that it provides in relation to building taken on rent by the assessee that "any capital expenditure" incurred thereto is to be treated as if the building in question is owned by the assessee. Moreover the Explanation also refers to the expenditures on the construction of any structure or doing of any work in or in relation to and by way of renovation or extension or improvement to the building in question. In other words, Explanation is attracted in the case of an assessee who incurs expenditure of the type specified in the said Explanation on a building which is not owned by the assessee. The expenditures have been incurred on premises taken on lease by the assessee for its business purpose. This condition is evidently fulfilled by the assessee before us. The second condition which we have noted above is that this is not each and every expenditure which falls within the realm of the Explanation. It is only "any capital expenditure" which is covered within the purview of the said Explanation. Moreover, the expenditure envisaged in the Explanation, inter alia, includes expenditure by way of renovation or expansion or of improvement to the building provided of course that the same is to be of capital nature. In other words the plea of the assessee that since the impugned expenditure is incurred on renovation and repairs and is, therefore, to be treated as revenue cannot be accepted forthwith. The correct import of the Explanation is that even the expenditure incurred on renovation and repairs of a leased building is includible in the purview of the Expln. 1 provided the said expenditure is of capital nature. If it is found that the expenditure is of revenue expenditure, then notwithstanding that it is incurred on a leased building, the same will not fall within the purview of the Expln. 1 to Section 32(1) of the Act. Now therefore, it would be of utmost importance to ascertain the nature of the expenses incurred by the assessee in this regard. The details of the expenses in question have been placed at pp. 64 to 65 of the paper book. We have also perused the orders of the lower authorities and find that the AO as well as the CIT(A) had proceeded on the assumption, evidently without making any verification, that the expenses are of capital nature merely because they are incurred on a leased premises. The aspect as to whether or not the expenditure is of revenue or capital in nature is dependent on its factual contours which has not been subjected to any verification by the lower authorities. A mere perusal of the details of expenditure listed out at pp. 64 and 65 of the paper book reveals that the heads of expenditure listed out are numerous and inter alia include travel expenses, statutory expenses, shifting/installation expenses etc. which purportedly are of revenue nature. However there are other expenditure heads which would need verification of facts since the requisite details are not on record. Therefore, for this purpose we deem it fit and proper to set aside the order of the CIT(A) and direct the AO to carry out the necessary exercise in this regard. The AO shall carry out the verification exercise to ascertain which expenditures are falling within the purview of Expln. 1 to Section 32(1) out of the expenditure in question. The AO shall bear in mind that only such expenditures which are of capital nature alone are includible within the purview of Expln. 1 to Section 32(1). The assessee shall provide the necessary details in this regard and also have liberty to make such further submissions in support of the return of income on this issue. The AO shall also take into consideration the case laws adverted to by the assessee before us in determining the nature of the expenditure in question. Thus on this, aspect we conclude by holding that the assessee succeeds for statistical purposes.
56. In ground No. 7 the grievance of the assessee is that the CIT(A) erred in not accepting the contention of the appellant that in view of consistent stand taken in earlier years and in order to give full effect to the provisions of Section 43B of the Act, an amount of Rs. 45,47,228 being difference between the excise element included in the opening stock and closing stock needs to be added to the income for the previous year relevant to assessment year under appeal. The alternative prayer of the assessee is that if the excise duty paid had to be included in the valuation of the closing stock, the same has to be reduced in order to give full effect to the provisions of Section 43B of the Act.
57. In relation to this ground, the factual position is that in the earlier assessment years the assessee had valued its closing stocks by excluding therefrom the excise duty in respect of such goods. However in view of the insertion of Section 145A of the Act w.e.f. 1st April, 1999, the assessee changed its method of valuation of closing stock and started valuing its closing stock inclusive of duty paid. The plea of the assessee is that in terms consistent stand taken in the earlier years, an income of Rs. 45,47,228 being difference between the excise element including opening stock and closing stock (if the same being higher in opening stock than in closing stock), the same deserved to be considered. The AO, however did not allow the aforesaid adjustment made by the: assessee in its return of income.
58. We have considered the rival stands on this issue. The assessee has also submitted a factual note on this issue which is as under:
The assessee was upto asst. yr. 1982-83, including excise duty paid as part of valuation of closing stock. During the previous year relevant to asst. yr. 1983-84, the assessee changed the method of valuation of closing stock to exclude excise duty paid from such valuation on direct cost basis. The change was not accepted by the Tribunal.
In asst. yr. 1985-86, the assessee raised further plea that if excise duty paid had to be included in the valuation of closing stock, the same needed to be reduced in order to give full effect to the provisions of Section 43B of the IT Act, 1961 ("the Act"). The Tribunal in that year remanded the matter back to the AO to decide the same in light of the decision of the Special Bench of the Tribunal constituted in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB)604 : (1994) 206 ITR 86 (Del)(SB)(AT) as and when available.
By the time, the appeal for asst. yr. 1986-87 came to be heard by the Tribunal, the Special Bench of the Tribunal in the case of TTO v. Food Specialities Ltd. (1994) 48 TTJ (Del) 621 : (1994) 206 ITR 119 (Del)(AT) held that excise duty paid did not have to be included in the valuation of closing' stock on direct cost basis.
Another Special Bench of the Tribunal, in the case of Indian Communication Network (P)- Ltd. v. IAC (1994) 48 TTJ (Del)(SB)604 : (1994) 206 TTR 86 (Del)(SB)(AT) held that statutory duties paid and included in the valuation of closing stock had to be reduced in order to give full effect to the provisions of Section 43B of the Act. Taking into account the aforesaid decisions of the Special Benches of the Tribunal, the Tribunal in assessee's own case for asst. yr. 1986-87 upheld the exclusion of excise duty paid from the valuation of closing stock on direct cost basis and also accepted the alternate contention that even if the same were to be included in such valuation, in order to give full effect to the provisions of Section 43B of the Act, the element of excise duty paid included in the valuation of closing stock had to be necessarily excluded.
The decision of the Tribunal for asst. yr. 1986-87 has been followed thereafter by the Tribunal in the appeals upto asst. yr. 1996-97 and by the CIT(A) upto asst. yr. 1998-99.
The matter has now been settled by the decision of the Supreme Court in the case of Beiger Paints India Ltd. v. CIT wherein the Supreme Court has approved the following judgments, taking the view adopted by the Tribunal in assessee' s own case :
1. Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB)604 : (1994) 206 ITR 86 (Del)(SB)(AT);
2. Lakhanpal National Ltd. v. ITO ;
3. CIT v. Bharat Petroleum Corporation Ltd. (2001) 169 CTR (Bom) 119 : (2001) 252ITR 43 (Bom);
4. Chemicals & Plastics India Ltd. v. CIT (2003) 179 CTR (Mad) 509 : (2003) 260 ITR 193 (Mad) The assessee continued to follow the method of exclusion of excise duty paid from the valuation of closing stock on direct cost basis upto asst. yr. 1998-99. With the insertion of Section 145A w.e.f. asst. yr. 1999-2000, the assessee changed the method of valuation of closing stock to include excise duty paid thereon. The assessee, however, claimed that element of excise duty paid included in the valuation of closing stock had to be necessarily reduced in order to give full effect to the provisions of Section 43B of the Act. On that basis, the assessee added to the income for asst. yr. 2000-01, a sum of Rs. 45,47,228 arrived at on the following basis :
Excise duty element included in closing stock and claimed Rs. 6,47,89,028 as deduction under Section 43B for asst. yr. 1999-2000 (consequently, opening stock for asst. yr. 2000-01)* Excise duty element included in closing stock and claimed Rs. 6,02,41,800 as deduction under Section 43B for asst. yr. 2000-01.
Difference Rs. 45,47,228 (*On the assumption that exclusion of the same upheld by the CIT(A) in the appeal for asst. yr. 1999-2000 would be confirmed by the Tribunal by dismissing the Departmental appeal).
The AO did not add the amount of Rs. 45,47,228 offered for tax by the assessee since the AO is contesting the finding of CIT(A) allowing relief to the assessee in the earlier years.
The plea of the assessee is that if the excise duty paid is included in the valuation of the closing stock, then the same needs to be allowed the requisite deduction permissible in terms of Section 43B of the Act. We find that the said stand is sustainable in view of the following decisions :
1. Lakhanpal National Ltd. v. ITO (supra);
2. CIT v. Bharat Petroleum Corporation Ltd. (supra);
3. Chemicals & Plastics India Ltd. v. CIT (supra).
Following the same, we direct the AO to re-evauate the claim of the assessee and recompute the income of the assessee by making the necessary adjustments on this count. On this ground the assessee succeeds for statistical purposes.
59. In the result, in this appeal the assessee partly succeeds.
60. ITA No. 310/Chd/2005 is an appeal by the assessee against the order of the CIT(A) dt. 19th Jan., 2005 for asst. yr. 2001-02. The first issue, is with regard to the manner of computation of deduction under Section 80HHC of the Act. There are two limbs of the dispute. Firstly the AO, while computing deduction under Section 80HHC included excise duty as part of the total turnover. On this issue, we have already upheld the stand of the assessee in the appeal for the asst. yr. 1998-99 (supra) by following the judgment of the Bombay High Court in the case of Sudeishan Chemicals Industries Ltd. (supra). The assessee has to succeed on this aspect. We hold so.
61. Secondly the AO, while computing deduction under Section 80HHC excluded 90 per cent of gross interest income from 'profits of the business' in terms of Expln. (baa) of Section 80HHC. The stand of the assessee is that only 90 per cent of the net interest is excludible in terms of the said Explanation. On this aspect we find that the issue is liable to be decided against the assessee in view of the judgment of the Hon'ble jurisdictional High Court in the case of Rani Paliwal v. CIT . Following the same on this aspect, the assessee has to fail. Therefore, in respect of ground No. l, the assessee partly succeeds.
62. The second issue is with regard to the denial of deduction under Section 80-1 of the Act amounting to Rs. 2,35,16,765. It was a common ground between the parties that the said dispute is similar to the dispute considered by the Tribunal in the asst. yr. 1998-99 (ITA No. 379/Chd/2004) by way of ground No. 3. The facts and circumstances being identical, our decision in ground No. 3 in ITA 379/Chd/2004 is applicable mutatis mutandis herein also. Thus, on this issue the assessee succeeds.
63. In ground No. 3 the issue is with regard to the disallowance of Rs. 2,26,29,716 made by the AO on the ground that the expenditure in question is capital in nature. The expenditure in question was incurred under the head 'Consumer market research expenses'. It was a common ground between the parties that the factual matrix and the dispute in question is similar to ground No. 1 considered by us in the appeal for asst. yr. 1998-99 (ITA No. 379/Chd/2004 (supra)). Therefore, our decision in ground No. 1 of 1998-99 is squarely applicable herein also. In the result, on this ground the assessee succeeds.
64. In ground No. 4 the issue is with regard to the disallowance of interest amounting to Rs. 10,32,90,873 incurred by the assessee on capital borrowed for setting up of a new plant at Sonepat. The Revenue disallowed the expenditure on the plea that the same was capital in nature. Similarly, expenditure pertaining to assessment year 2000-01 (ITA No. 309/Chd/2005) has been dealt with by us in the earlier paras In terms thereof the impugned ground of the assessee is liable to be decided against the Revenue. In the result assessee succeeds on this ground.
65. In ground No. 5 the dispute is with regard to the expenses incurred on implementation and customisation of ERP package amounting to Rs. 8,57,899 disallowed by the AO on the ground that the same was capital in nature. Similar issue has been considered and dealt with by us by way of ground No. 5 in the assessee's appeal for asst. yr. 2000-01 (ITA No. 309/Chd/2005) in the earlier paras. Our decision therein applies mutatis mutandis herein also. In the result, on this ground the assessee succeeds.
66. Similarly in ground No. 6 the dispute is in relation to the expenditure of Rs. 47,41,242 incurred on renovation/interior decoration at the leased office premises. Similar dispute was considered by us by way of ground No. 6 in the appeal of the assessee for asst. yr. 2000-01 (ITA No. 309/Chd/2005). Our decision therein applies mutatis mutandis herein also. In the result, the order of the CIT(A) is set aside and the AO is directed to re-adjudicate the issue keeping in mind the discussion of the Tribunal in relation to this aspect in asst. yr. 2000-01 (supra). On this ground the assessee succeeds for statistical purposes.
67. Similarly ground No. 7 is with regard to the adjustment sought by the assessee go give effect to the provisions of Section 43B of the Act with respect to the difference between the excise duty element included in the opening stock and closing stock of the year under appeal. Similar issue has been considered by us as ground No. 7 in the appeal of the assessee for asst. yr. 2000-01. Our decision therein applies mutatis mutandis herein also. In the result, on this ground assessee succeeds for statistical purpose.
68. In the result, in this appeal the assessee partly succeeds.
69. In conclusion, all the appeals of the assessee are partly allowed.