Income Tax Appellate Tribunal - Pune
Finolex Cables Ltd.,, Pimpri vs Assessee on 11 January, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
PUNE BENCH "A", PUNE
BEFORE SHRI I C SUDHIR, JUDICIAL MEMBER
AND SHRI G.S. PANNU, ACCOUNTANT MEMBER
S.No ITA No Asstt. Appellant Respondent
year
1 961/PN/02 98-99 Finolex Cables Ltd Addl. CIT. Range-8,
26/27, Mumbai-Pune Pune
Road, Pimpri, Pune .
PAN AAACF 26370
2 976/PN/02 98-99 Asstt. CIT, Cir.8 Pune Finolex Cables Ltd.,
Pune
3 683/PN/03 99- Finolex Cables Ltd., Pune Addl. CIT R-8, Pune
2000
4 718/PN/03 99- Dy. CIT, Cir. 8, Pune Finolex Cables Ltd.,
2000 Pune
5 1305/PN/03 2000- Finolex Cables Ltd., Pune Addl. CIT R-8, Pune
01
6 1331/PN/03 2000- Dy. CIT, Cir.8, Pune Finolex Cables
01 Ltd.,Pune
7 1157/PN/07 2003- Finolex Cables Ltd., Pune Addl. CIT R-8, Pune
04
8 1184/PN/07 2003- Asstt. CIT, Cir.9 Pune Finolex Cables Ltd.,
04 Pune
9 1421/PN/05 1997- Finolex Cables Ltd., Pune Asstt. CIT R-8,
98 Pune
Assessee by : S/Shri D P Bapat & R D Onkar
Respondent by : Shri Hareshwar Sharma
Date of hearing : 11.01.2012
Date of pronouncement : 06 .03.2012
ORDER
PER G. S. PANNU, AM:
The captioned appeals by the assessee and Revenue involve certain common issues and, therefore, they have been heard together and are being disposed of by way of a consolidated order for the sake of brevity and convenience.
2. First, we shall take up assessee's appeal vide ITA No 961/PN/2003 for the assessment year 1998-99. This appeal is directed against the order of the 2 Commissioner of Income-tax (Appeals)-III, Pune dated 26.4.2002, which in turn, has arisen from the order passed by the Assessing Officer under section 143(3) of the Income-tax Act, 1961 (in short "the Act"), pertaining to the assessment year 1998-99.
3. The Ground of Appeal No. 1 reads as under:
1. On the facts and in the circumstances of the case, and n law the ld CIT(A) erred in:
a. On facts and in the circumstances of the case and in law, the learned CIT(A) erred in upholding the action the AO in denying the set-off of loss of the amalgamating company viz. Finoram Sheets Ltd. (FSL) for the assessment year 1998-99 against the taxable income of the appellant company for the very same assessment year under appeal. b. Further, on the facts and in the circumstances of the case and in law, the learned CIT(A) erred is not recognizing and respecting the sanctity of theorder passed by the Hon. Bombay High court approving the amalgamation of FSL with the appellant company and further concluding that, fixing the date of amalgamation with effect from 1.4.1997 was merely a colorable device disregarding the fact that the entire scheme of amalgamation was approved by the High Court in terms of section 391 and 394 of the Companies Act, 1956, which provisions enjoin the Court to take into account, among others, public interest before the Scheme of Amalgamation is sanctioned."
The dispute in Ground No. 1 revolves around the disallowance of assessee's claim of set off of the losses of M/s Finorama Sheets Ltd (FSL), the amalgamating Company, while computing the total income of the assessee for the assessment year 1998-99. In this connection, the relevant facts are that for the assessment year 1998-99, the assessee Company filed a return of income originally on 27.11.1998 declaring an income of Rs 55,34,39,620/-. Subsequently, on 31.3.2000, assessee Company filed a revised return of income declaring income of Rs 43,24,00,700/-. The revised return was filed as a consequence of amalgamation of FSL with the assessee company with effect from 1.4.1997. In the revised return, assessee claimed set-off of the loss of Rs 11,69,99,261/- pertaining to FSL for the instant assessment year. This set-off of loss claimed by the assessee in the revised return has been denied by the Assessing Officer and such denial is subject matter of dispute before us. Similar is the situation in the assessment year 3 1999-2000, wherein the loss of Rs 12,21,30,200/- pertaining to FSL has been denied the set-off by the Assessing Officer.
4. Briefly put, the facts relevant to the dispute and the objections of the Revenue to the claim of the assessee can be summarized as follows. FSL was a company incorporated under the provisions of the Companies Act, 1956 engaged in the business of manufacturing of PVC Sheets and various other items. Initially, FSL was a 50:50 joint venture between assessee and M/s Paltough Ltd.,Israel and it became a subsidiary of the assessee company on 31.3.1997. It is noted by the Assessing Officer that the commercial operations of FSL started from 01.01.1997 and it incurred losses for assessment years 1998-99 and 1999-2000 of Rs 11,69,99,261/- and Rs 12,21,30,200/- respectively as per the returns of income filed by it for the two years on 30.11.98 and 30.12.99 respectively. On 25.3.1998, the Board of Directors of the assessee company approved a scheme of amalgamation in terms of which it was proposed to amalgamate FSL with the assessee company. Similar resolution was passed by the Board of Directors of FSL on 30.6.1998, by which time FSL was a 100% subsidiary of the assessee company. On 14.12.1998 an application was filed by FSL before the Hon'ble Bombay High Court seeking approval of the scheme of amalgamation which was passed in the Extraordinary general meeting of the shareholders of the assessee company on 18.1.1999. Subsequently, on 23.2.1999 a petition for sanction of the scheme was filed by FSL before the Hon'ble Bombay High Court. Similarly, on 23.2.1999 petition of the assessee company was also made before the Hon'ble Bombay High Court for sanction of the proposed scheme of amalgamation of FSL with the assessee company. The Hon'ble Bombay High Court vide its order dated 11.1.2000 sanctioned the arrangement in the scheme of amalgamation whereby FSL amalgamated with the assessee company with effect from 1.4.1997. In terms of the said order the entire 4 undertaking and business of FSL stood transferred and vested in the assessee company pursuant to the provisions of 394 of the Companies Act, 1956. Subsequent to the said sanction by the Hon'ble High Court the assessee filed revised returns for the assessment years 1998-99 and 1999- 2000 incorporating therein the losses of FSL which were hitherto declared by FSL in its respective returns of income. This claim of set-off of losses has been denied by the Assessing Officer for the following reasons- that the claim for the losses is based on the fact that the amalgamation is with effect from 1.4.1997 (i.e. the appointed date). As per the Assessing Officer, the process of amalgamation was started with passing of Board resolutions on 25.3.1998 and was finally sanctioned by the Hon'ble Bombay High Court on 23.2.1999 and therefore, the appointed date for the implementation of the scheme, i.e. with effect from 1.4.1997, which is retrospective, is arbitrary and has been done only to facilitate the set off of the losses of FSL for the two years against the positive income of the assessee; that the only purpose for which the date of amalgamation was fixed retrospectively was to escape from the conditions prescribed in section 72A of the Act which, inter-alia, require obtaining of permission from the specified authority, etc.; that fixing the date of amalgamation scheme as 1.4.1997 is a colorable device resorted to by the assessee in order to evade the payment of taxes, in view of the law laid down by the Hon'ble Supreme Court in the case of Mc Dowel & Co. v. CIT 154 ITR 148 (SC); that the fact that the scheme of amalgamation has been approved by the Hon'ble Bombay High Court does not put any fetters on the department to treat the date of implementation of the scheme as a colorable device to evade payment of due taxes, and thus as per the Assessing Officer, it can be ignored; that in any case the Hon'ble Bombay High Court in its order dated 11.1.2000 has approved the scheme of amalgamation except clause 6 dealing with the profit and losses of the amalgamating company (i.e. FSL) earned 5 between the appointed date and the effective date. Therefore, as per the Assessing Officer he was competent to deny the benefit of set off of losses of the amalgamating company for the reason that clause 6 has not been approved by the Hon'ble High Court.
5. In this case, the Assessing Officer has observed that the only purpose for fixing the appointed date of the amalgamation as 1.4.1997 was with a view to facilitate set-off of the losses of FSL for the two assessment years of 1998-99 and 1999-2000 against the positive income of the assessee. As per the Assessing Officer, the Revenue is entitled to explore and examine the scheme of Amalgamation for the possibility that fixation of the appointed date of 1.4.1997 is a colourable device adopted by the assessee company to avoid payment of taxes despite the fact that the scheme of amalgamation has the approval and sanction of the Hon'ble Bombay High Court in terms of sections 391 to 394 of the Companies Act, 1956. In this connection, the case of the Revenue is that it is entitled to do so in terms of the judgment of the Hon'ble Supreme Court the case of Marshal Sons & Co. (India) Ltd 326 ITR 809 (SC) and keeping in mind the ratio of the judgment of the Hon'ble Supreme Court in the case of Mc Dowell & Co. (supra).
6. Before we proceed to address the aforesaid controversy, we may briefly touch upon the relevant provisions of the Companies Act, 1956 in terms of which the impugned amalgamation scheme has been carried out. Sections 391 to 394 of the Companies Act, 1956 provide the mode and manner of facilitating the schemes of arrangement, reconstruction and amalgamation of companies. Every application for the sanction of a compromise or arrangement proposed between a Company and any other person (including a scheme of amalgamation of any two or more companies), is to be made to the court in terms of section 391 of the Companies Act, 1956. Sub-section (1) of 6 Section 394, inter alia, prescribes that where, inter alia, a Scheme of Amalgamation of any two or more companies involve that the whole or any part of the undertaking, property, or liabilities of any company concerned is to be transferred to another company, the Court may, ether by the order sanctioning the amalgamation or by a subsequent order make provision for all or any matters specified in the section. Such matters include transfer to the transferee company of the property or liabilities of the transferee company; allotment by the transferee company of any shares, etc. in that company which, under the arrangement are to be allotted; continuation by the transferee company of any legal proceedings pending by or against the transferor company; the dissolution of the transferor company; and, such other matters as maybe deemed necessary to secure the amalgamation is fully and effectively carried out. The first proviso to section 394(1) seeks to prescribe that no such scheme for the amalgamation of a company, which is being wound up, with any other company shall be sanctioned by the Court, unless the Court has received a report from the Registrar of Companies that the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Similarly, the second proviso to section 394(1) seeks to provide that no order for the dissolution of the transferor company shall be made unless the official liquidator has made report to the Court that affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to public interest. Sub- section (2) of sec. 394 prescribes that where an order provides for the transfer of any property or liabilities, then, by virtue of the order that property shall be transferred to and vest in, and those liabilities shall be transferred to and become the liabilities of, the transferee company. Sub-section (3) of Section 394 prescribes that after making of an order under section 394(1) a copy thereof is to be filed with the Registrar for registration. Section 394A of the 7 Companies Act, 1956 provides that the Court shall give notice of every application made under section 391 or 394 to the Central Government and the Court shall take into consideration the representations, if any made to it by the Government before passing an order under any of these sections. Pertinently, the statutory provisions contained in the Companies Act, 1956 do not provide the date of amalgamation. So, however, every amalgamation or merger has two crucial dates which are invariably stated and defined in the scheme of amalgamation, namely, 'Appointed date' and 'Effective date'. Whereas the former denotes the date on which the amalgamation takes place or in other words the property, assets and liabilities of the transferor company vests in and are transferred to the transferee company, the latter denotes the date on which the amalgamation/merger is completed in all respects after having gone through the formalities involved and the transferor company having been dissolved by the Registrar of Companies. The aforesaid two dates are critical in many respects and in so far as we are concerned, their relevance is to the assessment of income of the two companies involved in amalgamation. For the purposes of Income-tax, the 'Appointed date' is the relevant date and for the period falling after that date the two companies are liable to be assessed to income-tax as a single assessee and not as two assessees. The Hon'ble Bombay High Court in the case of CIT v Swastik Rubber Products Ltd. 140 ITR 304 (Bom) has held that the date of amalgamation for income-tax assessment purposes shall be the appointed date mentioned in the order of the Court sanctioning the Scheme since what is crucial is the date of vesting of the asset and any income accruing or arising on such asset would be that of the transferee company to be assessed in its hands, notwithstanding that the Scheme finally becomes effective on a latter date stated in the scheme. In fact, it would be appropriate at this stage to emphasize that the aforesaid proposition of the Hon'ble Bombay High Court has been approved by the 8 Hon'ble Supreme Court in the case of Marshal Sons & Co. India Ltd (supra). On this aspect, we may point out further that as per the Hon'ble Supreme Court, while sanctioning a scheme it is open for the High Court to modify the 'Appointed date' and prescribe any other date. If the Court so specifies the date, then such date would be the date of amalgamation/transfer but where the Court does not prescribe any specific date but merely sanctions the scheme presented to it, it would follow that the date of amalgamation/date of transfer is the date specified in the scheme as the transfer date or 'Appointed date'. Para 7 of the order of the Hon'ble Supreme Court is relevant in this regard, which reads as under:
"7. Every scheme of amalgamation has to necessarily provide a date with effect from which the amalgamation/transfer shall take place. The scheme concerned herein st does so provide, viz. 1 Jan., 1982. It is true that while sanctioning the scheme, it is open to the Court to modify the said date and prescribe such date of amalgamation/transfer as it thinks appropriate in the facts and circumstances of the case. If the Court so specifies a date, there is little doubt that such date would be the date of amalgamation date of transfer. But, where the Court does not prescribe any specific date but merely sanctions the scheme presented to it - as has happened in this case - it should follow that the date of amalgamation/date of transfer is the date specified in the scheme as "the transfer date". It cannot be otherwise. It must be remembered that before applying the Court under section 391(1), a scheme has to be framed and such sachem has to contain a date of amalgamation/transfer. The proceedings before the Court may take some time; indeed, they are bound to take some time because several steps provided by ss. 391 to 394A and the relevant Rules have to be followed and complied with. During the period the proceedings are pending before the Court, both the amalgamating units, i.e. the transferor company and the transferee company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. In the scheme before us, cl. 6(b) does expressly provide that with effect from the transfer date, the transferor company (subsidiary company) shall be deemed to have carried on the business for and on behalf of the transferee company (holding company) with all attendant consequences. It is equally relevant to notice that the Courts have not only sanctioned the scheme in this case but have also not specified any other date as the date of transfer/amalgamation. In such a situation, it would not be reasonable to say that the scheme of amalgamation takes effect on and from the date of the order sanctioning the scheme. We are, therefore, of the opinion that the notices issued y the ITO (impugned in the writ petition) were not warranted in law. The business carried on by the transferor company (subsidiary company) should be deemed to have been carried on for and on behalf of the transferee company. This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it. The order of the Court sanctioning the scheme, the filing of the certified copies of the orders of the Court before the Registrar of Companies, the allotment of shares, etc., may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case st would be 1 Jan. 1982. This is also the ratio of the decision of the Privy Council in Raghubar Dayal v. The Bank of Upper India Ltd. AIR 1919 PC 91."
7. Thus, in the above background, we may now proceed to examine the present scheme of amalgamation as sanctioned by the Hon'ble Bombay High 9 Court. The relevant portion of the order of the Hon'ble High Court dated 11.1.2000 in the matter of sections 391 to 394 of the Companies Act, 1956 has been placed in the Paper Book filed before us and the relevant portion is reproduced as under:
"Upon the petition of Finoram Sheets Limited, presented to this Hon'ble Court on the rd 23 day of February, 1999 for sanction of the arrangement embodied in the proposed scheme of Amalgamation of Finoram Sheets Limited, (hereinafter referred to as "the Transferor company" or "Petitioner Company") with Finolex Cables Limited, (hereinafter referred to as the Transferee Company")............................................AND UPON READING the affidavit of th R.G.D.' silva dated 16 day of March, 1999 proving publication of the Notice of the th date of hearing of the petition in the issues of "Maharastra Herald",Pune, dated 11 th day of March, 1999 and Lok Satta, Mumbai dated 11 day of March, 1999 AND UPON............................................ The Regional Director, Department of Company Affairs, Maharashtra, Mumbai AND the Official Liquidator High Court, Mumbai respectively..................................AND UPON READING the report dated th 26 day of May, 1999 of the Official Liquidator, High Court, Bombay wherein he has opined that the affairs of the Transferor Company have not been conducted in a manner prejudicial to the interest of its members or to public interest AND UPON HEARIANG......................................Mr. R.P. Singh, Company Prosecutor, for Regional Director, Department of Company Affairs, Maharastra Mumbai who submits to the Order of the Court and Mr. S.C. Gupta, Deputy Official Liquidator, High Court, Bombay who also submits to the Orders of the Court....................................THIS COURT DOTH HEREBY SANCTION the arrangement embodied in the scheme of Amalgamation of Finoram Sheets Limited, the Transferor Company with Finolex Cables Limited, the Transferee Company as set forth in Exhibit "A" to the Petition and also in the Schedule hereto AND THIS COURT DOTH HEREBY DECLARE the same to be binding on all the members of the Petitioner Company and the Transferee st Company AND THIS COURT DOTH ORDER that with effect from the 1 day of April, 1997 (hereinafter called "the Appointed Date") the entire Undertaking and business of Finoram Sheets Limited including all the properties, assets, investments, claims, powers, authorities, allotments, approvals and consents, licences, registrations, contracts, engagements, arrangements, rights, title, interests, benefits, and advantages of whatsoever nature and where so ever situate belonging to or in the ownership power or possession and in the control of or vested in or granted in favour of or enjoyed by the Transferor Company...............................................all other interests arising to the Transferor Company (hereinafter referred to as "the said assets") shall be transferred and vested in the Transferee Company pursuant to the provisions of Section 394 (2) of the Companies Act, 1956.................................AND THIS COURT DOTH FURTHER ORDER that with effect from the Appointed date all debts, liabilities, duties and obligations of Finoram Sheets Limited, the Transferor Company shall also be and stand transferred or deemed to be transferred without any further act instrument or deed to the Transferee Company so as to become as and from the Appointed date, the debts, liabilities, duties and obligations of the Transferee Company....................."
As per the aforesaid order of the Hon'ble High Court, the Appointed date for the scheme of amalgamation is 1.4.1997. It is pertinent to observe that as per the order of the Hon'ble High Court, with effect from 1.4.1997, i.e. the Appointed date, the entire undertaking and business of FSL, including all its properties and liabilities vest in and stand transferred to the assessee company. Therefore, in so far as the date of amalgamation/date of transfer is 10 concerned, the same as per the scheme sanctioned by the Hon'ble High Court is with effect from 1.4.1997. Consequently, following the ratio of the Hon'ble Bombay High Court in the case of Swastik Rubber Products Ltd (supra), it follows that for the period starting from 1.4.1997, the two companies are liable to be assessed to Income-tax as a single assessee and not as two assessees. It is in this background it is to be appreciated that in order to give effect to the order of the Hon'ble High Court dated 11.1.2000 sanctioning the scheme of amalgamation, the assessee company revised its returns of income for the assessment years 1998-99 and 1999-2000 so as to incorporate therein the income/loss of FSL for such period. FSL had filed a loss return for the assessment year 1998-99 declaring a loss of Rs 11,69,99,261/-. As a consequence of its merger with the assessee company from 1.4.1997, the loss pertaining to the previous year ending on 31.3.1998 corresponding to the assessment year 1998-99 was claimed by the assessee as set-off against its positive income for such assessment year in the revised return filed on 31.3.2000 whereby, the income was revised to Rs 43,24,00,700/- as against originally declared income of Rs 55,34,39,620/-. The said set-off has been claimed in terms of the provisions of section 70 of the Act which speak of set- off of losses from one source against income from other sources under the same head of income.
8. In so far as the determination of the Appointed date or in other words, date of amalgamation/date of transfer as 1.4.1997 is concerned, there is no dispute that it corresponds to the scheme of amalgamation as approved by the Hon'ble High Court of Bombay. So, however, the claim of set off of loss of FSL made by the assessee in its revised return has been denied by the Assessing Officer, primarily for the reason that the specification of the date of amalgamation/date of transfer as 1.4.1997 in the scheme was a device to evade payment of tax. As per the Revenue, on considering such date, 11 assessee company becomes entitled to set off of the losses for assessment years 1998-99 and 1999-2000 incurred by the transferor company, i.e. FSL against the positive income of the assessee company. As per the Revenue, the appointed date has been so fixed so as to enable the assessee company to take the benefit of set off of such losses of FSL, in terms of section 70 of the Act. The claim of the Revenue is that the process of amalgamation started with the passing of Board Resolution on 25.3.1998 and it is only thereafter the requisite petition was moved before the Hon'ble Bombay High Court, i.e. on 23.2.1999 and the scheme became effective only after the sanction by the Hon'ble High Court, vide its order dated 11.1.2000. It is contended that if the Appointed date was not fixed retrospectively, the losses of FSL were liable to be carried forward and set-off against the income of assessee only in the manner prescribed under section 72A of the Act. Section 72A of the Act prescribes for various conditions, including seeking approval of the prescribed authority, etc. and therefore, as per the Revenue, only with a view to circumvent such provisions the date of 1.4.1997 has been fixed as the date of amalgamation/date of transfer. It has further been canvassed that this amounts to a colourable device intended to evade payment of taxes.
9. It has been argued on behalf of the assessee that the provisions of the Companies Act, 1956 require giving of notice of every application made by the parties under section 391 or 394 of the Companies Act 1956 to the Central Government and in this case also, the requisite notices have been issued to the Central Government. The Hon'ble High Court has taken note of the representations made by the Central Government and it is only after taking into consideration the same, the scheme of amalgamation has been sanctioned. Therefore, it is too late in the day for the Revenue to now say that the scheme of amalgamation involves any colourable device for evasion of 12 taxes. In this connection, it has been specifically pointed out that section 394(1) of the Companies Act, 1956 requires the Registrar of Companies to report as to whether the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to the public interest. In this case, as per the order of the Hon'ble Bombay High Court dated 11.1.2000, there is no such averment on behalf of the designated authorities. It is submitted that presence of the expression "public interest" in section 394(1) of the Act is sacrosanct and would also include any colourable attempt in the scheme for evasion in the payment of taxes. It is vehemently argued that the plea of the Revenue is far-fetched to allege that the arrangement which had undergone the process of approval of shareholders in the extraordinary general meeting, creditors, Regional Director of Company Affairs representing Government of India and passing the test of 'public interest' as contained in section 394 of the Companies Act, 1956 and finally being approved by the Hon'ble High Court, could ever be construed as a colourable device for evasion of taxes. On this aspect, it has been vehemently contended by the assessee that the Assessing Officer was not empowered to raise the question of tax avoidance because the scheme of amalgamation has since been approved and sanctioned by the Hon'ble High Court in terms of Sections 391 to 394 of the Companies Act, 1956. It has been argued on behalf of the assessee that the provisions of the Companies Act, 1956 require giving notice of every application made by the parties under section 391 or 394 of the Companies Act 1956 to the Central Government and in this case also, the requisite notices have been issued to the Central Government. The Hon'ble High Court has taken note of the representations made by the Central Government and it is only after taking into consideration the same, the scheme of amalgamation has been sanctioned. Therefore, it is too late in the day for the Revenue to now say that the scheme of amalgamation involves any 13 colourable device for evasion of taxes. In this connection, it has been specifically pointed out that section 394(1) of the Companies Act, 1956 requires the Registrar of Companies to report as to whether the affairs of the company have not been conducted in a manner prejudicial to the interests of its members or to the public interest. In this case, as per the order of the Hon'ble Bombay High Court dated 11.1.2000, there is no such averment on behalf of the authorities. It is submitted that presence of the expression "public interest" in section 394(1) of the Act is sacrosanct and would also include any colourable attempt for evasion in the payment of taxes. It was, therefore, contended that the Assessing Officer was not empowered to examine the question of tax evasion in the scheme of amalgamation which has approval of the Hon'ble High Court in terms of sections 391 to 394 of the Companies Act, 1956.
10. On the contrary, as per the Revenue it is competent to examine whether fixing the date of amalgamation with effect from 1.4.1997 is a colorable device with a view to evade taxes while computing the income of the transferee assessee company despite the fact that Scheme of amalgamation has been approved by the Hon'ble Bombay High Court. In this connection, the Revenue has relied upon the following observations contained in the judgment of the Hon'ble Supreme Court in the case of Marshall Sons & Co. (India) Ltd. (supra) to justify its stand:
"10. For the above reasons, the appeals are accordingly allowed. The writ petitions filed by the appellant in the High Court shall be deemed to have been allowed. We, however, make it clear that we have not expressed any opinion on the plea of the learned counsel for the revenue that the amalgamation itself is a device designed to evade the taxes legitimately payable by the subsidiary company. If the IT authorities think that, they are entitled to raise this question in the proceedings under the IT Act, it is open to them to do so by way of a separate proceeding according to law."14
11. At this stage, without going into the controversy as to whether the Assessing Officer was empowered to raise the question of tax avoidance, we may examine the other plea of the assessee that there was no colourable attempt to evade taxes as the scheme of amalgamation was founded on commercial / economic considerations of business and that benefit of taxes, if any, was only incidental. In the subsequent paragraphs, we, therefore, proceed to examine the aforesaid proposition canvassed by the assessee.
12. In this connection, it is pointed out that FSL was promoted as a joint venture between the assessee company and M/s Paltough Ltd. Israel. FSL started commercial production in January, 1997 and for the financial years ending 31.3.1997, 31.3.1998 and 31.3.1999, it had incurred losses. FSL, as it emerges from the Directors' report for the Financial Year 1997-98 placed at page 110 of the Paper Book, did not get any further shareholding from the foreign collaborator, but instead the shareholding of the foreign collaborator was sold to the assessee company. It is pointed out that as on 31.3.1997, FSL became a fully owned subsidiary of the assessee company. It has been sought to be pointed out on behalf of the assessee that the majority of the losses suffered by FSL were indeed funded by the assessee, being its holding company, either in terms of shareholding or by way of unsecured loans and in this regard, reference was invited to the audited Financial Statements of FSL placed at pages 115 to 125 of the Paper Book. The learned Counsel explained that the overseas collaborator in FSL did not invest further in the project and decided to withdraw as a joint venture partner and FSL were incurring losses which were being funded by the assessee company, therefore in order to ensure the proper use of the capital resources of FSL, it was decided in the interest of FSL to amalgamate with the holding company, ie. assessee company. The appointed date of 1.4.1997 was chosen as the correct date from the perspective of business inasmuch as FSL became the subsidiary of 15 the assessee before 1.4.1997 and factually the cash losses suffered thereafter were majorly funded by the assessee company itself. It was under these circumstances, the date of amalgamation was chosen as 1.4.1997. It has also been contended that as a result of amalgamation not only all the assets of FSL vest in and merge with that of the assessee company but also its liabilities in the form of long term, loans from financial institutions and other business liabilities also stood transferred to the assessee company. It was therefore pointed out that the benefit of the set-off of losses of FSL cannot be seen in isolation of the overall impact of the amalgamation whereby the assessee also took over the liabilities of erstwhile FSL.
13. On the other hand, as per the Revenue, the assessee has not made out a case as to how the business of the assessee would have been adversely affected if the date of amalgamation was not fixed retrospectively. It is pointed out that in the eventuality of the amalgamation date being fixed prospectively, assessee would have lost the benefit of set-off of losses of FSL as claimed by it, because in that case in order to avail the benefit of carry forward of losses of amalgamating company, it would have been governed by the provisions of section 72A of the Act. According to the Revenue, it is only to avoid the stringent conditions of section 72A of the Act that the assessee fixed the date of amalgamation on a retrospective date and that there are no business or commercial considerations for fixing the date of amalgamation as 1.4.1997.
14. On this aspect, we have carefully considered the rival assertions. We may recapitulate what has been earlier observed by us in earlier paragraph 6 that every scheme of amalgamation/merger would have two crucial dates, namely, the 'Appointed date' and 'Effective date'. Their import and relevance in the income-tax proceedings have already being discussed by us in the earlier paragraphs and same are nor being repeated for the sake of brevity. At 16 this point it may only be appreciated that the 'Appointed date' can be understood as a date anterior to the formulation and presentation of amalgamation scheme to the Court as this is the date on which the transfer of the undertaking of the transferor company to the transferee company is stated to take place. The latter is a future date and is generally a date subsequent to the final order of the Court sanctioning the scheme of amalgamation and if one may refer to section 394(3) of the Companies Act, such date can be understood to be the date on which copy of the High Court's order sanctioning the amalgamation is filed with the Registrar of Companies. The difference between the two dates has indeed been also appreciated by the Hon'ble Supreme Court in the case of Marshal Sons & Co (India) Ltd (supra). The Hon'ble Supreme Court has noticed that even before applying to the Court under section 391(1) of the Companies Act, 1956 a scheme has to be framed and "such scheme has to contain a date of amalgamation/transfer". The proceeding before the Court may take some time inasmuch as several steps provided by sections 391 to 394A of the Companies Act, 1956 have to be followed and complied with. It is, therefore, to be understood that merely because there is a time lag between the appointed date and the effective date, the fixation of the appointed date cannot be rejected by the Revenue as a colorable device only intended with intention of avoidance of tax.
15. Nevertheless, in our considered opinion, the factual situation brought out by the assessee concerning the affairs of FSL suggest that it would be reasonable to infer that the saving in taxes for the assessment years 1998-99 and 1999-2000 resulting in the hands of the assessee on account of the losses of FSL for such years, was not the foundation head to effectuate the amalgamation. In fact, it is evident from the Balance sheet of FSL for the year ending 31.3.1998 that it had cash losses of Rs 463 lakhs which were substantially funded by the assessee company to the extent of Rs 260 lakhs, 17 by way of unsecured loans, apart from its shareholding, and this supports the plea advanced that with the exit of the joint venture partner, and assessee controlling the entire shareholding of FSL and substantially funding the cash losses by way of unsecured loans, it was assessee company which was providing financial assistance to FSL right from 1.4.1997 onwards. It is also emerging from the assertions of the assessee before the lower authorities that the viability of FSL's business operations came under pressure on account of withdrawal of further financial support from the overseas joint venture partner and in the face of the fact that FSL had accumulated losses of Rs 9.91 crores as on 31.3.1998 as against paid up share capital of Rs 13.85 crores which represented a substantial erosion of capital base. The assessee has also pointed out before the lower authorities the attempts made to revive the financial health of the operations of FSL in the subsequent years. Considering the aforesaid, in our view, there was a sound and prudent business consideration to put the date of amalgamation/date of transfer as 1.4.1997. At this juncture, we may refer to the judgment of the Hon'ble Karnataka High Court in the case of Shankaranarayana Hotels Pvt. Ltd. v Official Liquidator, Govt. of Karnataka (1992) 74 Comp. Cases 290 (Kar.). The Hon'ble Karnataka High Court was dealing with an application seeking sanction of a scheme of amalgamation and merger of the petitioner company with another company. In response to the notices issued under section 394A of the Companies Act, 1956, the Official Liquidator submitted in its report that there was a likelihood breach of the transferee company reducing its tax liability upon amalgamation and, therefore, affairs of the transferor company were said to be carried out in a manner prejudicial to its members or to the public interest and in this connection, reliance was placed on the decision of the Hon'ble Supreme Court in the case of McDowell & Co. (supra). On the aforesaid basis, the sanction of the scheme by the Hon'ble High Court was opposed by the Official Liquidator. 18 In the background of such arguments, the Hon'ble High Court formulated thee tests which the Court would ordinarily pose to itself while sanctioning a scheme of amalgamation, in the following words:
"When a scheme of compromise and/or arrangement is submitted to the court for its sanction, the court would ordinarily pose to itself three questions, viz., (i) whether the statutory provisions have been complied with or not; (ii) whether the class or classes have been fairly represented: and (iii) whether the arrangement is such as a man of business would reasonably approve."
From the aforesaid, it follows that one of the tests which is required to be applied is to whether the arrangement is such that a man of business would reasonably approve. In other words, a Court while sanctioning a scheme of amalgamation is required to be satisfied that there are justifiable business considerations on which the scheme is founded. Pertinently, it would be a safe premise to deduce in the present case that the impugned scheme of amalgamation has mustered the test of 'business prudence', as it has been duly sanctioned by the Hon'ble Bombay per sections 391 to 394 of the Companies Act, 1956. In our view, it would not be out of place to infer that the impugned scheme of amalgamation has been understood as a man of business would reasonably approve, and it stands the test of business prudence. In fact it is to be appreciated that the Hon'ble High Court while exercising its discretion under sections 391 to 394 of the Companies Act, 1956 has to see that the scheme as a whole, having regard to the general conditions, background and objects is reasonable and fair. In any case, the scheme of amalgamation as a whole has not been assailed by the Revenue as a colourable device. It is only on one leg of the scheme, namely, fixing of the Appointed date of 1.4.1997 as the date of amalgamation/date of transfer which been viewed as a device. We seriously doubt as to whether only a singular aspect of the scheme can be considered as a colourable device, especially in a case where the scheme as a whole has passed the tests of 'public interest' and 'business prudence' consequent to its sanction by the 19 Hon'ble Bombay High court. Nevertheless, in so far as the fixing of the date of 1.4.1997 as the date of amalgamation/date of transfer is concerned, we have already opined that the same was for business considerations. In our considered opinion, in view of the above discussion, the adoption of the 'Appointed date' of 1.04.1997 cannot be construed as a colourable device to evade payment of taxes, and thus, we are unable to agree with the action of the Revenue to disregard the Appointed date of 1.4.1997 as the date of amalgamation/date of transfer for the purposes of assessment of income. Thus, on this aspect we uphold the plea of the assessee to claim set off of loss of FSL for assessment year 1998-99 against the income of the assessee company because the two entities are liable to be assessed as a single unit from 1.4.1997 onwards. Therefore, on the basis of above discussion, we set aside the order of the commissioner of Income-tax 9Appeals) and direct the Assessing Officer to allow the claim of the assessee for set off of loss of FSL as claimed in its revised return filed on 31.3.2000. Thus, on this Ground, the assessee succeeds as above.
16. Ground No. 2 reads as follows:
"2. a. The learned CIT(A) further erred in upholding the action of AO in assessing a sum of Rs. 72,81,912/- earned on sale of premises as income from business as against Appellant's contention that the same is properly chargeable to tax under the head "Capital Gains".
b. Without the prejudice, the learned CIT(A) failed to take note of the appellant's contention in the alternative that the appellant converted capital asset or treated the capital asset as Stock-in-trade at the time of sale of flats to the outsiders and therefore the profit earned should be bifurcated between capital gains representing excess of market price on the date of sale over the cost of acquisition and only the balance amount should be assessed as business income."
During the course of assessment proceedings, the Assessing Officer found that the assessee had earned profit of Rs. 72,81,912/- on sale of flats constructed by it. The assessee had shown this as profit on sale of investments and was set off against the capital loss. The assessee had during 20 the assessment year 1996-97 acquired a piece of land admeasuring 19,000 sq.ft. located in Pune in an auction from the Income-tax Department for a consideration of Rs. 69,42,746/-. On this land, assessee constructed 20 flats and sold a portion of the same. After allocating cost on proportionate basis, the cost of the property was determined at Rs. 72,81,912/- in respect of flats sold. The assessee was asked by the Assessing Officer as to why the profit be not taxed under the head profits and gains of business. The assessee submitted that the construction of flats was not the main business activity of the company; that the land purchased was for the purpose of investment and in the account books it was shown as investment and not stock in trade; that the investment was also not considered as stock-in-trade before selling; that the area of land being large, it was not possible to sell the land as such and therefore, it was decided to construct flats and sell it; that this was a single transaction and not continuous and repetitive transaction and neither in the past prior to 1995, nor in future any construction activity had been carried on by it; and that at the time of purchase of the land, the company had no intention to trade in land. The above submissions did not find favour with the Assessing Officer. Referring to certain case laws, such as Mazgaon Docs Ltd. V. CIT 34 ITR 36 (SC), Upper India Chamber of Commerce V. CIT 15 ITR 163(All), Narayan Swadeshi Weaving Mills 26 ITR 765 (SC), Bhogilal H. Patel V. CIT 68 ITR 587 and Jankiran Bahadur Ran V. CIT 57 ITR 21(SC), the Assessing Officer inferred that there was an intention to launch upon an adventure in the nature of trade. Further referring to other judicial pronouncements in Gurudayal Narayandas V. CIT 50 ITR 633 (Bom), Kushan Prasad & Co. Ltd. V. CIT 27 ITR 49(SC), CIT V. British India Corporation 142 ITR 563 (All), V. Ramanathn V. CIT 51 ITR 640 (Mad), Raje J. Rameshwar Rao V. CIT 42 ITR 179 (SC), the Assessing Officer inferred that the activity of the assessee in dividing the land into plots and not selling in a single unit went 21 to establish that assessee was carrying on business in real property and it was a business venture. As per the Assessing Officer the assessee had acquired a big chunk of land in up-market area where large amount of commercial and residential complexes were being built by various builders and soon after acquiring the land, it started constructing large number of flats and sold most of them in less than three years at an exorbitant price, which indicated high quality of construction and thus it earned huge profit on selling these flats. In the view of the Assessing Officer, the activity of the assessee was characteristic of a person carrying on the business of builder and developer of land. The Assessing Officer thus held that the surplus received on sale of flats was the trading income and taxable as profits and gains of business and not capital gains. The Assessing Officer did not accept the contention of the assessee that the company was mainly engaged with business of manufacturing of cables and held that there was no bar on the assessee from carrying out any other business activity, even if it may not be the main object of the assessee company and that it was also not essential that there should be series of transactions and even a single or isolated transaction could constitute business. The assessee had constructed number of flats and had sold on various dates to various persons. Thus, it was not a case of single transaction. Further reliance was placed on the decision in Tuticorin Alkali Chemicals V. CIT 237 ITR 172 (SC) and Fort Properties Pvt. Ltd V. CIT 208 ITR 232. Considering the facts of the case as a whole, the Assessing Officer came to the conclusion that the assessee had carried on the activity of construction and sale of flats in the same manner as would be carried on by a person carrying on the business of Builder and Land Developer. The profit of Rs. 72,81,912/- on sale of flats was, therefore, held as trading receipt and assessed under the head profits and gains of business. Being aggrieved, assessee went in appeal before the Commissioner of Income-tax (Appeals). 22
17. Before the Commissioner of Income-tax (Appeals), assessee reiterated the same arguments as were made before the Assessing Officer. It was explained that the assessee's business was expanding and in order to meet the business needs, it required commercial and residential premises. The surplus cash generated was deployed considering its future business needs and also for generating adequate financial returns. Accordingly, the company decided to purchase the said land and considering the size of plot, it was felt that it could not be sold and hence assessee decided to construct apartments for residential purposes. A contractor was engaged in 1995. The construction of apartments was complete in 1997-98. Ultimately, the assessee contended that the surplus was liable for capital gains tax and not trading receipt.
18. After considering the detailed submissions of the assessee, the Commissioner of Income-tax (Appeals) affirmed the view of the Assessing Officer that the surplus of Rs. 72,81,912/- arising from sale of flats was trading receipt assessable under the head profits and gains business. The relevant findings of the Commissioner of Income-tax (Appeals) are extracted below:
"3.3. The submissions have been considered. To decide the issue, whether the receipt of surplus on sale of flats, one has to go behind what may appear to be obvious. For determining the true nature of transactions, the totality of the circumstances and facts of the case needs to be taken into consideration. The appellant acquired a large chunk of land in a prime upcoming area of Pune in auction made by It department in July 1994 for a sum of Rs. 69,42,746/- In a short period, the appellant engaged a contractor for construction of high costing flats meant for upper and rich strata people which is evident from the sale price of the flats. The very fact that in a very short period, the appellant went for construction of flats shows that the intention was not keeping the land as investments and selling it in the same for subsequently. There is not much merit in the contention that since the piece of land was large and not easily marketable according to cash needs of the company, it went for constructions of the apartments. It is not a case where a large plot of land was sold in smaller pieces. The company planned and went ahead in the same fashion as a builder in making flats. Merely that the land was shown as investment cannot be the sole factor for determine the surplus on sale of flats as capital receipt. The balance sheet also does not reflect that there was cash needs of the company, therefore it went for construction of flats.
The appellant's reserve and surplus as well as shareholder's capital was Rs. 502 crores. Approximately Rs. 200 crores of surplus funds was invested in short term inter corporate deposits. In fact it was buoyant with funds. I agree with AO that entries in the books of accounts showing the said land as investment s\would not be conclusive proof to determine the nature of surplus on sale of flats. The facts show that the appellant carried on the same operations and in the same way, as those which are characteristic of ordinary trading in the line of business of builder and developer. Relying on the decision of V. Ramanathan Vs. CIT 51 ITR 640 (Mad) it is clear that the conduct of the appellant was that of a builder and the sale of flats was 23 trading adventure. Reliance is also placed on the decision of Supreme Court in P. M. Mohammed Meerakhan Vs. CIT 73 ITR 735(SC) and Khan Bahadur Ahmed Alladin and Sons Vs. CIT 68 ITR 573(SC) to hold that the transaction of construction and sale of flats had the character of a trade. Even isolated or solitary transactions can be considered as adventure in the nature of trade if it partakes some of the elements of trade or commerce, therefore it is not necessary that there should be repetitive transactions. The subsequent activity of the appellant after the purchase of land clearly shows that it was dormant intention of the appellant to enter into the business of a builder and developer to maximize its business profit. The main business activity of the appellant which is manufacturing of cables is not a decisive factor to hold that the appellant could not have entered in a broad sense rather than in construction of luxurious flats at Aundh clearly shows systematic or organized course of activity with a set purpose of deriving profits as a builder. The appellant has worked upon the said piece of land and developed and constructed flats and sold them which was adventure in the nature of trade. The appellant has rendered all such activities which a person engaged in the business is sufficient to constitute trade or business and is not necessary to have a series of transactions. Therefore, considering all the facts and the totality of the case, I am in agreement with the conclusion of the AO that the surplus of Rs. 72,81,912/- arising from sale of flats is trading receipt of the appellant and assessable under the head profits and gains business. The appeal fails on this ground."
Aggrieved with the decision of the Commissioner of Income-tax (Appeals), the assessee is in further appeal before us.
19. Before us, the learned Counsel for the assessee has reiterated the submissions raised before the lower authorities, which we have already adverted to, in the earlier part of this order. The only other argument raised before us is that the Commissioner of Income-tax (Appeals) has not properly appreciated the factual aspect of the matter for which our attention was invited to page 50 of the Paper Book. As per the learned Counsel, out of 20 flats constructed, 4 flats have been retained for assessee's own use and 9 flats have been sold to the outsiders during the year under consideration and further 2 flats have been sold in the subsequent year and 5 flats are remaining unsold. It was pointed out that certain flats have been retained by the assessee company for its own use and that sale of surplus flats is primarily carried out as incidental to assessee's primary intention of providing flats for its own employees. Therefore, it is explained that there was no intention to acquire the land and build flats thereon with a business purpose, but was carried out only as an investment activity.
24
20. On the other hand, the learned CIT-Departmental Representative, appearing for the Revenue, pointed out that factually only a small portion of the total flats has been retained by the assessee for its own use and that the lower authorities have clearly brought out that the activity is primarily carried out as a business activity and, therefore, the income is liable to be taxed as business income. In-fact, as per the learned Departmental representative retaining of some of the flats for own use is rather incidental to the main activity of constructing the flats and selling the same as a business venture.
21. We have carefully considered the rival submissions. Ostensibly to determine as to whether an activity is an adventure in the nature of trade or is being carried out as an investment-simplicitor is an issue which has to be decided considering the entirety of facts and circumstances of the particular case. The aforesaid proposition is well settled and does not require any further elaboration. In the present case, it is clearly emerging from the orders of the authorities below that after acquiring the piece of land in 1994, assessee constructed apartments thereon. One of the findings concurrently recorded by both the authorities below is to the effect that the mode and manner of construction of apartments by the assessee is akin to an ordinary business man engaged in the activity of builder and developer. The plea sought to be made out by the appellant-assessee is that four of the 20 flats constructed by it have been retained by it for the use of its employees and, therefore, the primary object was to use the land for providing housing facility to its own employees. In our considered opinion, the aforesaid assertion of the assessee is untenable having regard to the entire conspectus of facts, inasmuch as a very small number of flats have been retained for own use by the assessee company. Presently, only 4 flats are stated to have been retained by the assessee for own use and 11 flats have been sold out of the 20 flats constructed and even with regard to the balance of 5 flats which remain, there 25 is no assertion that the same are kept for use for assessee's own purposes. We, therefore, are inclined to uphold the case made out by the lower authorities that assessee has worked upon the said piece of land and developed and constructed flats and sold them as a business activity and, therefore, profits thereon are liable to be assessed as business income and not as capital gains claimed by the assessee. Thus, on his Ground, assessee has to fail.
22. At the time of hearing before us, the learned Counsel for the assessee did not press Ground No. 2(b) and, therefore, the same is dismissed as not pressed. Resultantly, the Ground No. 2 is dismissed.
23. Ground No. 3 reads as follows:
"3. The learned CIT(A) has further erred in upholding the disallowance of pro rata provision made for premium payable redemption of debentures in the amount of Rs. 3,71,08,236/-"
The issue involved in this Ground relates to disallowance of provision made towards premium on redemption of debentures. The brief facts are that during the course of assessment proceedings, the Assessing Officer found that assessee had included Rs. 3,71,08,236/- being premium payable on redemption of debentures. According to the assessee, the sum debited was on pro rata basis linked to the tenure of debentures and the sum was an allowable deduction. The assessee relied on the decision in the case of Madras Industrial Corporation 225 ITR 802 (SC). The Assessing Officer, however, did not accept the contention of the assessee regarding the allowability of the premium on debentures and disallowed the same. In appeal, the Commissioner of Income-tax (Appeals) noticed that identical issue was decided by his predecessor against the assessee in the assessment year 1997-98 and earlier years. Following the said decision for the earlier years which was to the effect that since there was a buy back clause in the 26 debentures, the decision in the case of Tungabhadra Industries Ltd. 207 ITR 553 would apply, the Commissioner of Income-tax (Appeals) held that premium on redemption of debentures on pro-rate basis could not be allowed. Being aggrieved, assessee is in further appeal before us.
24. Before us, the learned Counsel submitted that the issue stands decided in favour of the assessee and against the Revenue by the decision of our co- ordinate Bench in assessee's case for assessment year 1997-98 vide order dated 30.3.2010 in ITA No 1014/PN/2000, copy of which is placed in Paper Book at pages 142 to 156. The learned Departmental Representative has not disputed the above fact-situation and has not brought any contrary decision to our notice.
25. After hearing both the parties and perusing the relevant orders of the Tribunal, we follow the parity of reasoning given in the order of the Tribunal dated 30.3.2010 (supra) and decide the issue in favour of the assessee. This Ground is accordingly allowed.
26. Ground No. 4 reads as follows:
4. The learned CIT(A) has further erred in upholding the disallowance of expenditure on gifts and presentation articles to the extent of Rs. 1 lac."
The brief facts are that during the course of assessment proceedings, the Assessing Officer found that the assessee had incurred expenditure of Rs. 24,56,300/- on articles like gift cheques, sweets and dry fruits boxes, articles and presents etc. and calendars and greetings. The detail of the persons to whom gifts were given was not furnished and therefore, as per the Assessing Officer, it was not possible to ascertain whether the entire expenditure had been incurred wholly and exclusively for the purpose of business. In this view of the matter, the Assessing Officer disallowed 50% of the amount debited for gifts etc. which resulted in disallowance of Rs.12,28,150/-. In appeal before the Commissioner of Income-tax (Appeals), it was contended by the assessee 27 that all such expenses were wholly and exclusively laid out for the purpose of business. The Commissioner of Income-tax (Appeals) noticed that similar disallowance was considered for the assessment year 1996-97 wherein the disallowance was restricted by his predecessor to Rs. 75,000/- and for the assessment year 1997-98 out of total expenditure of Rs. 17,84,515/- disallowance was restricted to Rs. 75,000/-. In view of this factual position, the Commissioner of Income-tax (Appeals) restricted the disallowance for the year under consideration to Rs 1,00,000/-. Still not satisfied, assessee has come up in further appeal before us.
27. Before us, the learned Counsel submitted that the issue stands decided in favour of the assessee and against the Revenue by the decision of our co- ordinate Bench dated 30.3.2010 (supra) in assessee's case for assessment year 1997-98. The learned Departmental Representative has neither disputed the above fact-situation and nor brought any contrary decision to our notice.
28. After hearing both the parties and perusing the relevant orders of the Tribunal in the assessee's own case, we follow the parity of reasoning given in the order of the Tribunal in ITA No 1014/PN/2000 dated 30.3.2010 (supra) and decide the issue in favour of the assessee and accordingly the Commissioner of Income-tax (Appeals)'s action in confirming the disallowance of Rs 1,00,000/- on gift expenses is set-aside and the claim of the assessee is allowed. This Ground is accordingly allowed.
29. Ground No. 5 reads as follows:
"5. The learned CIT(A) has further erred in upholding the action of the AO in disallowance of loss of Rs. 1,98,74,921/- representing the unrealizable portion of the inter-corporate deposits advanced to M/s. Bangur Finance Ltd. including interest accrued thereon."
The issue in this Ground relates to the disallowance of amount written off of Rs 1,98,74,291/- due from M/s Bangur Finance. The relevant facts are 28 that the assessee had written off a sum of Rs. 1,98,74,921/- being Inter Corporate Deposits (ICD), which was advanced in earlier year. Before the Assessing Officer, it was submitted by the assessee that on 5.8.1995 ICD was given to Bangur Finance Ltd., which carried interest at the rate of 18% per annum. Against the deposits, the company had taken some securities. Later on it was found that M/s Bangur Finance Ltd. was not in a position to repay the loans given and, therefore, after adjusting the securities and considering the recoveries made, balance sum of Rs. 1,98,74,921/- was written off. The sum was claimed as business expenditure by the assessee. The Assessing Officer held that the stated bad debts was not taken into account in computing the income of the previous year in which the bad debts had been written off or in the preceding years. The amount of Rs. 1,98,74,921/- represented loss of capital advanced by the assessee, and thus, the sum was not allowable as deduction under section 36(1)(vii) of the Act. According to the Assessing Officer, these sums did not represent money lent in the ordinary course of business of banking or money lending carried on by the assessee; as assessee was engaged in the business of manufacturing electrical and telephone cables and was not in the business of banking or money lending; the money was advanced as loans and non- receipt of the same was a capital loss, therefore it was not allowed as deduction under section 36(1)(vii) of the Act or as business expenditure.
30. In appeal, it was contended before the Commissioner of Income-tax (Appeals) that a part of the amount advanced to the very same concern was written off in assessment year 1997-98, which was not disallowed by the Assessing Officer. It was contended that the volume and the frequency of the total activity of investment of surplus funds of business in inter-corporate deposits were such that this activity had all the indicia of a business. Deposits had been placed to the order of Rs. 70 crores in assessment year 1995-96, 29 Rs. 63 crores in assessment year 1996-97, Rs. 126 crores in assessment year 1997-98 and Rs. 200 crores in assessment year 1998-99. According to the assessee, the fact that these deposits were kept with various corporate entities instead of Banks was indicative of the risk associated with this activity. It was sought to be highlighted as to how the deposits were kept at frequent intervals from time to time right from assessment year 1995-96 and even the Department has assessed the interest earned on these deposits as business income in earlier years as also in the year under consideration. The total amount invested was Rs. 200 crores in assessment year 1998-99, which was approximately 38% of the total shareholders' funds. Reliance was placed on the decision of the Bombay High Court in the case of CIT V. Paramount Premises P. Ltd 190 ITR 259 for the proposition that income by way of interest earned on development of surplus funds could be treated as the income arising from the very same business from which such surplus funds are generated and not from an independent activity as such. It was also contended that that to justify a claim for bad debt under sec. 36(1)(vii) in the course of money lending activity, it was not necessary that the assessee must obtain a License under the Money Lenders Act.
31. According to the Commissioner of Income-tax (Appeals), it was an admitted fact that the business of the appellant is manufacturing electrical and telephone cables. Further, the nature of business as declared in Part IV of the Income-tax return filed was as "Mfg., and selling of electrical and telecommunications cables." The Commissioner of Income-tax (Appeals) also observed that never in the return the assessee claimed that it is also engaged in the business of money lending. The main object of the appellant as per the Memorandum of Association is to manufacture certain products. One of the ancillary object to the main object was to invest the money of the company not 30 immediately required. The Commissioner of Income-tax (Appeals) noticed that assessee had huge reserve of funds which has been invested in large percentage into ICDs. It is a fact that the assessee has been putting its surplus funds in ICDs since few years. Looking into all these aspects, as per the Commissioner of Income-tax (Appeals), it could not he held that the assessee was engaged in the business of a money lender. Just investing a large percentage of surplus funds into ICDs could not be considered as business activity of the assessee. Nowhere it has been declared that the assessee is in the business of money lending. The surplus generated out of business and not required immediately had to be utilized by way of deposits, loans etc. It was observed that the ICDs appear as loans and advances in the Balance Sheet of the assessee and not as stock-in-trade. The assessee does not maintain any separate books for loans given as ICDs nor there was any separate personnel to attend to the so called different businesses of the assessee. On the basis of the above facts, the Commissioner of Income-tax (Appeals) affirmed the action of the Assessing Officer and concluded as follows:
"Therefore it is held that :-
a. the applicant is not in the business of money lending.
b. the loss of money lent was a capital loss.
c. the loans given was not in the ordinary course of business of money lending
d. the money lent was not a stock in trade of the appellant.
It is held that the write off of bad debts of Rs. 1,98,74,921/- is not allowable as business loss u/s 28 or under sec. 36(1)(vii) r.w.s. 36(2) of the IT Act. The addition of Rs. 1,98,74,921/- is therefore confirmed."
Against this order of the Commissioner of Income-tax (Appeals), assessee is in further appeal before us.
32. Before us, the learned Counsel for the assessee pointed out that both the authorities below have declined the claim of the assessee for deduction under section 36(1)(vii) of the Act on a wrong footing. It is pointed out that the 31 Memorandum and Articles of Association of the appellant company, copy of which is placed in the Paper Book at pages 72 to 82, clearly bring out that one of the main objects of the assessee is to invest and deal with the money not immediately required in such manner as the company may deem fit. In this regard, reference was made to sub-clause (43) of the Clause III of the Memorandum of Association. On this basis, it is pointed out that it was wrong to state that the assessee did not have the objects to carry on business of money lending. Notwithstanding the aforesaid, our attention was invited to pages 61 to 69 of the Paper Book where the year-wise details of ICDs given by the assessee starting from the financial year 1994-95 upto the impugned assessment year have been placed. In terms thereof, it is sought to be made out that the assessee has not only been frequently placing substantial sums of money in the ICDs but has also carried on the same as a coordinated business activity and it is not a case where the amounts have been advanced by way of ICDs as a mere investor. It is also further pointed out that all along from the assessment year 1995-96 and also during the assessment year under consideration, the interest income earned on ICDs have been offered by the assessee as business income and the same has also been assessed as such and for that purpose, reference was made to the details placed at page 71 of the Paper Book. It was pointed out that the assessee can be said to have been engaged in the business of money lending and, therefore, the impugned write-off of the amount of irrecoverable ICDs advanced to Bangur Finance Ltd. was eligible for deduction under section 36(1)(vii) of the Act. Apart therefrom, it has also been pointed out that the impugned amount was considered irrecoverable after adjusting the amount of security pledged with the assessee; and that the impugned write-off was also based on a legal advice sought by the assessee, a copy of which has been placed in the Paper Book at pages 59 to 60. It was, therefore, contended that having regard to the 32 decision of the Hon'ble Supreme Court in the case of T.R.F. LTD. v CIT (2010) 323 ITR 397 (SC) the impugned claim was an allowable deduction.
33. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the disallowance made by the Assessing Officer by placing reliance on the orders of the authorities below. The reasoning taken by the lower authorities have been reiterated before us which have already been adverted to by us in earlier part of this order and is not being repeated for the sake of brevity.
34. We have carefully considered the rival submissions. The dispute relates to an amount of Rs 1,98,74,291/- written off by the assessee as irrecoverable from M/s Bangur Finance Ltd. Initially, assessee had advanced an ICD to Bangur Finance Ltd. on 5.8.1995 for a period of 6 months carrying an interest of 18% per annum. As a security against the advancing of ICD, assessee obtained advance cheques and pledge of certain shares belonging to the borrowing group. The assessee company accounted for interest on the said ICD and offered it for taxation in the assessment year 1996-97, which has been assessed as business income. It transpires that when the assessee deposited cheques of Principal and interest, the same were dis-honoured and thereafter, the company initiated steps to recover the monies outstanding. In the year under consideration, the assessee wrote-off the sum of Rs 1,98,74,921/- after adjusting the amount recoverable on account of securities pledged with it. The said claim has been sought to be justified by the assessee under section 36(1)(vii) read with section 36(2) of the Act as 'bad debts' written- off.
35. Section 36(1)(vii) of the Act permits deduction of the amount of any debt or a part thereof which is written-off as irrecoverable in the accounts of the assessee for the previous year. The claim set-up by the Revenue is that the debt has not been created in the course of business and also that income 33 corresponding to the said debt has not been offered for tax either in the instant year or any preceding year as required by section 36(2)(i) of the Act. The counter-plea set-up by the assessee is that the aforesaid ICDs represent money lent in the ordinary course of business of money lending and, therefore, the stipulation under section 36(2)(i) pointed by the Revenue does not apply.
36. The pertinent dispute is as to whether the ICDs advanced by the assessee constitute an activity of money lending or not. For that purpose, we have examined the factual aspects brought out by the appellant-company and find that since the financial year 1994-95, the assessee has been continuously carrying on the activity of advancing ICDs to varied bodies. In the financial year 1994-95, the ICDs amounting to Rs 70 crores was given to as much as 12 companies. Similarly in the financial year 1995-96, fresh ICDs were given of as much as Rs 63,25,00,000/- and the number of borrowers totalled to 23. Even in the financial years 1996-97 and 1997-98, we find that substantial amounts have been given to as many as 15 and 21 parties respectively. The interest income on the ICDs has been assessed as business income and all these details are placed in the Paper Book at pages 61 to 71. All these support the assertions of the assessee that depositing of ICDs is being carried on as an organized activity akin to the activities carried on by a trader. In fact, the Assessing Officer even in the instant assessment year has assessed interest income on ICDs as business income and, in our view, in the face of the aforesaid, it is quite inconsistent on the part of the Revenue to canvass that the activity of giving ICDs is not a business activity. Moreover, it is also evident from the Memorandum of Association of the assessee-company that Clauses ancillary to the main Object empower the company to deal with monies not immediately required in the manner as deemed fit. In the present case, the case made out is on the basis of factual matrix of the past years that ICDs were given by the assessee to earn interest income thereon in a 34 systematic and organized manner so as to be construed as an activity of business. Therefore, under these circumstances, we are in agreement with the assessee to say that ICDs have been given by the assessee in the course of its money lending activities which constitute business and, therefore, the stipulation of section 36(2)(i) of the Act that the amount of debt should have been offered as income is not applicable. In so-far-as irrecoverability of the impugned amount is concerned, it is quite evident from the material on record that the assessee has made out its case, and considering the entirety of facts, we, therefore, find it appropriate to allow the claim of the assessee for write-off of the impugned irrecoverable amount of ICDs as a deduction within the meaning of section 36(1)(vii) of the Act.
37. Before parting, we may deal with the objection of the lower authorities that the activity of money lending has not been stated specifically in the returns of income as the business activity. While factually the Revenue may be correct in asserting the aforesaid, so, however, it is also factually evident that the income from ICDs has been offered by the assessee in the past years as business income and the same has also been assessed as such by the Revenue and similar situation continues even during the year under consideration. Therefore, the said objection of the lower authorities is hyper- technical and is unjustified having regard to the facts and circumstances of the case.
38. In this view of the matter, the order of the Commissioner of Income-tax (Appeals) is set-aside and the Assessing Officer is directed to delete the addition. This Ground of appeal is allowed.
39. Ground No. 6 reads as follows:
"6. The learned CIT(A) has further erred in upholding disallowance of sum of Rs.
2,93,33,002/- out of the provision made toward probable claim against the appellant by the Department of Telecommunications (DOT)."35
At the time of hearing before us, the learned Counsel for the assessee did not press this Ground and, therefore, the same is dismissed as not pressed.
40. Ground No. 7 reads as under:
"7. The learned CIT(A) has further erred in :
a. confirming excess allocation of certain expenses while working u/s 80-IA with reference to Urse Unit - II.
Description Amount Remarks
(Rs.)*
I. Out of Traveling Expenses
i. Local conveyance on travel
1.53,113
ii. Director's traveling allowance
38,091
iii. Travel sales - air / rail
3,15,796
fare
iv. Travel sales - hotel/ . 4,35,465
DA
5,20,941
v. Traveling others Confirmed by learned
vi. Travel there - air-rail 2,49,229 CIT(A) at Rs. 8,00,000/-
fare
2,27,681
vii. Travel other - hotel / DA
19,40,316
II Miscellaneous expenses
i. Printing and stationery 12,86,927 CIT(A) confirmed excess
allocation to the extent of
Rs. 8 lacs.
4,82,932
ii. Miscellaneous expenses CIT(A) confirmed excess
allocation to the extent of
2,23,459 Rs. 4 lacs.
CIT(A) enhanced the
iii. Entertainment expenses
allocation further by Rs. 1.50
lacs.
III Other expenses CIT(A) confirmed excess
allocation to the extent of
1. Communication expenses 45,72,914
Rs. 5 lacs.
IV Payment and provision for 30,00,000 CIT(A) confirmed excess
employees allocation to the extent of
Rs. 10 lacs.
*Excess allocation by the AO.
b. confirming excess allocation of personnel to the extent of Rs. 5 lacs while
working relief u/s 80-IA for Pimpri Unit - II.
c. Upholding the action of AO holding that income by way of interest of Rs.
20,71,51,909/- on deferred sales to DOT cannot be considered to be profit derived by the industrial undertaking in the content of allowing relief u/s 80- IA".36
41. Before us, the learned Counsel for the assessee submitted that similar issue was subject-matter of consideration before the Tribunal in assessee's own case for the assessment year 1997-98, and vide order dated 30.3.2010 (supra), our co-ordinate Bench has set aside the issues to the file of the Assessing Officer with certain directions. The learned Departmental Representative did not controvert the factual matrix.
42. In these circumstances, we follow the parity of reasoning given in the order of the Tribunal dated 30.3.2010 (supra) and set aside the captioned issues to the file of the Assessing Officer to be adjudicated afresh in the light of the directions given by the Tribunal in its order dated 30.3.2010 (supra). The Assessing Officer shall afford reasonable opportunity of being heard to the assessee and then decide the issue in accordance with the directions of the Tribunal and as per law.
43. Ground No. 8 is as under:
"8. The learned CIT(A) has further erred in confirming disallowance of Rs. 1,38,010/- representing expenses on foreign tour of Director's relative"
During the course of assessment proceedings, the Assessing Officer found a sum of Rs. 1.38,010/- was incurred on account of Mrs. M. P. Chahabria, relative of the director. The Assessing Officer held that since the above expenditure has been incurred for the relatives of director, it could not be said to be an expenditure incurred wholly and exclusively for the purpose of business. Accordingly, he disallowed the said expenditure of Rs. 1,38,010/- against which assessee went in appeal before the Commissioner of Income- tax (Appeals).
44. Before the Commissioner of Income-tax (Appeals), it was contended that the expenses was incurred for the purpose of business. As the assessee failed to provide any proof justifying the incurrence of this expenditure for the purpose of business, the Commissioner of Income-tax (Appeals) upheld the 37 action of the Assessing Officer and the addition made was confirmed. Against this action of the Commissioner of Income-tax (Appeals), assessee is in appeal before us.
45. Before us, the learned Counsel submitted that the issue stands decided against assessee and in favour of the Revenue by the decision of our co- ordinate Bench dated 30.3.2010 (supra) in assessee's case for assessment year 1997-98.
46. After hearing both the parties and perusing the relevant orders of the Tribunal, we follow the parity of reasoning given in the order of the Tribunal dated 30.3.2010 (supra) and decide the issue against the assessee. This Ground is accordingly dismissed.
47. Ground No. 9 is as follows:
"9. The learned CIT(A) has further erred in confirming disallowance of Rs.82,554/- as speculation loss though, it is representing foreign exchange fluctuation not on account of cancellation of any foreign exchange contract."
During the course of assessment proceedings, the Assessing Officer found that the loss on exchange fluctuation included net loss of Rs 82,554/- on account of cancellation of power contracts for purchase of foreign exchange. The assessee was asked why the loss be not held as speculation loss in terms of section 43(5) of the Act. The assessee submitted that the entire loss was incurred for the purpose of business and it should be allowed as a business expenditure. The Assessing Officer observed that the same issue was also involved in assessment year 1996-97 and 1997-98 where it was held that the loss on cancellation (foreclosing) of foreign exchange contracts was speculation loss in terms of section 43(5) of the Act and the appeal of the assessee on this issue was dismissed by the Commissioner of Income-tax (Appeals). Against this view of the Assessing Officer, assessee filed appeal 38 before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) following the order of his predecessor for the 1996-97 held that the loss on account of cancellation of foreign exchange contracts was speculative loss and accordingly, the order of the AO disallowing the sum of Rs. 82,554/- was confirmed. Further aggrieved, assessee is in appeal before us.
48. Before us, the learned Counsel submitted that similar issue stands decided in favour of the assessee and against the Revenue by the decision of our co-ordinate Bench in assessee's own case for assessment year 2001-02 vide ITA No 1440/PN/04 dated 24.6.2011. The learned Departmental Representative has not disputed the above fact-situation and has not brought any contrary decision to our notice.
49. After hearing both the parties and perusing the relevant orders of the Tribunal, we follow the parity of reasoning given in the order of the Tribunal dated 24.6.2011 (supra) and decide the issue in favour of the assessee. This Ground is accordingly allowed.
50. Ground No. 10 of the appeal is as follows:
"10. The learned CIT(A) has further erred in not granting relief u/s 80HHC against receipts like insurance claims, miscellaneous receipts, write-back of credit balances, discount on purchases representing 'Business income' while applying provision of Explanation (baa) of sec. 80HHC."
The issue raised in this Ground is against the action of the Assessing Officer in treating incomes from insurance claims, misc. receipts, credit balances written off, discount on purchase, etc. as forming part of 'business income' for the purposes of computing deduction under section 80HHC of the Act. The Assessing Officer observed that credit balance appropriated Rs. 4,79,694/-, miscellaneous receipts Rs. 54,28,088/-, insurance claims Rs. 8,90,364/-, discount on purchase Rs. 4,57,429/- did not have any element of 'turnover' and the same does not have any connection with export activity of 39 the assessee. He accordingly held that above receipts were covered by Explanation (baa) to section 80HHC and consequently 90% of the above receipts were to be excluded from the 'profits of the business' for the purposes of determining the deduction under section 80HHC of the Act. In appeal before the Commissioner of Income-tax (Appeals), assessee's representative submitted that none of these receipts were covered by Explanation (baa) to section 80HHC and therefore they should be considered as part of business income and 90% of such receipts should not be excluded for the purpose of computing deduction under section 80HHC of the Act.
51. The Commissioner of Income-tax (Appeals), after considering the submissions of the assessee, affirmed the view of the Assessing Officer by holding as follows:
"14.3 The submission have been considered. The AO has referred to Board Circular 621 dt. 19..2.1991 where the Board has clarified the amendment and provisions of Expln. (baa) and where it has been noted that the existing formula u/s 80HHC gave distorted figure of export profits when receipts by way of brokerage, commission, interest etc. which did not have element of turnover were included in the P&L account. Therefore Board clarified that 'profit of business ' for the purpose of sec 80HHC would not include receipts by way of brokerage commission interest rent charges or any other receipt of similar nature. Explanation (baa) provides an adhoc 10% concession in general for the reason that the part of common expenses might have been incurred on earning these incomes.
The deduction u/s 80HHC is allowable out of business profit in the same proportion as export turnover is to the total turnover. These sums which have been considered buy the AO under Expln (baa) to sec. 80HHC are not appearing as part of the total turnover however they are part of the business profit. If these sums are included in the business profit but not in the total turnover it would give distorted figure of export profit. It was with this view to eliminate the distorted figure of export profit that Expln. (baa) was introduced and which has been amply clarified by CBDTs Cir. 621 dt.
19.12.1991 that all those which are included in the P&L account but do not have element of turnover are to be excluded as per provisions of Expln. (baa). Even in the case of CIT Vs. K. K. Doshi & Company 245 ITR 849 (Bom) it was held that there should be direct nexus between profits on the one hand and export activity on the other hand. The profit earned by the assessee should have direct nexus with that of the export activities. These receipts or the sums which are included into the P&L account which goes to increase business profits of appellant have nexus with the export activity of the appellant. Therefore, in view of explanation (baa) such profits of the business which do not form part of the total turnover have to be excluded and moreover they have no direct nexus with the export activities of the appellant. Therefore, action of the AO is reducing 90% of the sums referred above out of profits of business in terms of Explanation (baa) to section 80HHC is confirmed. The appeal fails on this ground."
40
52. At the outset, the learned Counsel for the assessee submitted that in view of the judgment of the Hon'ble Bombay High Court in the case of Pfizer Ltd. 330 ITR 62 (Bom), the order of the Commissioner of Income-tax (Appeals) on this issue may be set aside and restored to his file for fresh adjudication. To this prayer of the assessee, the learned Departmental Representative has no serious objection.
53. We have carefully considered the rival submissions. We find force in the submissions of the assessee. We accordingly set-aside the order of the Commissioner of Income-tax (Appeals) on this issue and restore the matter back to his file with directions to adjudicate the same afresh in view of the judgment of the Hon'ble Bombay High Court in the case of Pfizer Ltd. (supra), after giving due opportunity of being heard to the assessee.
54. In the result, appeal, vide ITA No 961/PN/02 filed by assessee is partly allowed.
55. We shall now take up cross-appeal of the Revenue vide ITA No. 976/PN/2002 pertaining to the assessment year 1998-99.
56. Ground No. 1 of appeal is as follows:
"On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in restricting disallowance of Rs 1,00,000/- as against addition made of Rs 11,28,150/-."
This Ground is connected with Ground No. 4 of assessee's appeal vide ITA No.961/PN/02, wherein vide para 28 above, we have discussed and decided the issue in favour of the assessee and against the Revenue by following our co-ordinate Bench's decision dated 30.3.2010 in ITA No 1014PN2000. In view of this, this Ground of appeal of the Revenue is dismissed.
57. Ground Nos. 2 & 3 read as under:
41
"2. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in directing to allow depreciation on leased asset of Rs 16,81,087/- and in not appreciating the fact that the said claim was made not in the interest of commercial expediency but an attempt to unduly reduce tax liability.
3. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in allowing interest of Rs 20,01,578/- for purchase of leased asset and not appreciating the fact that the transaction of leasing was not a bona fide but a device of tax avoidance. It is not allowable in view of the ratio of Supreme Court in the case of Mcdowel & Co. v. CIT (14 ITR 148 (SC)."
The issues involved in the above Grounds are against the disallowance of depreciation on leased assets of Rs 16,81,087/- and financial cost of Rs 20,01,578/-. The Assessing Officer found that the assessee had claimed depreciation in respect of leased assets. For the reason discussed in earlier years, the depreciation of Rs 16,81,087/- was disallowed. The assessee had interest cost of Rs 20,01,578/- pertaining to interest payable on the oans raisd to finance the purchase of those assets which were bought from and leased back to Finolex industries Ltd. The Assessing Officer disallowed the finance cost of Rs 20,01,578/- by following his decision for the earlier assessment years. In appeal, the Commissioner of Income-tax (Appeals) decided the issues in favour of the assessee by following his order for earlier assessment year 1997-98.
58. Before us, the learned Counsel for the assessee submitted that similar issue was subject-matter of consideration before the Tribunal in assessee's own case for the assessment year 1997-98, and vide order dated 30.3.2010 in ITA N0 1038/PN/2000, our co-ordinate Bench has set aside the issues to the file of the Assessing Officer with certain directions. The learned Departmental Representative has not disputed the aforesaid factual matrix.
59. In these circumstances, following the parity of reasoning given in the order of the Tribunal dated 30.3.2010 (supra), we-set aside the captioned issues to the file of the Assessing Officer to decide afresh keeping in mind the directions given by the Tribunal in its order dated 30.3.2010 (supra). The 42 Assessing Officer shall afford a reasonable opportunity of being heard to the assessee and then decide the issue in accordance with the directions of the Tribunal and as per law. Thus, on these Grounds, the Revenue succeeds for statistical purposes.
60. Ground No. 4 reads as follows:
"4. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in allowing relief u/s 80IA and in directing to allocate common expenses in the ratio of sales."
Before us, the learned Counsel submitted that the issue stands decided in favour of the assessee and against the Revenue by the decision of our co- ordinate Bench in assessee's case for assessment year 1997-98 vide ITA No 1038/PN/00 dated 30.3.2010. The learned Departmental Representative has not disputed the above fact-situation.
61. Since the issue in this Ground has been a subject-matter of dispute in earlier year, and the same has been decided by the Tribunal in favour of the assessee since assessment year 1993-94 onwards, as noted in the order of the Tribunal dated 30.3.2010 (supra), following the precedent, we hereby affirm the order of the Commissioner of Income-tax (Appeals) and the Ground of appeal raised by the Revenue is dismissed.
62. Ground No. 5 reads as follows:
"5. On the facts and in the circumstances of the case, and in law the ld CIT (A) erred in directing the AO to exclude sales tax and excise duty from the total turnover for the purpose of deduction u/s 80HHC."
The issue involved in this Ground is with regard to treatment of Sales- tax and Excise duty as a part of total turnover for the purpose of calculating deduction u/s 80HHC of the Act. In view of the decision of the Hon'ble Bombay High Court in the case of Sudarshan Chemical Industries Ltd. 245 ITR 769 (Bom), the Commissioner of Income-tax (Appeals) directed the Assessing Officer to exclude Sales-tax and Excise duty collected from the 43 figure of 'total turnover' for calculating deduction under section 80HHC of the Act.
63. Before us, the learned Counsel submitted that the issue stands decided in favour of the assessee and against the Revenue by the decision of our co- ordinate Bench in assessee's case for assessment year 1997-98 order dated 30.3.2010. The learned Departmental Representative has not disputed the above fact-situation.
64. After hearing both the parties and perusing the relevant orders of the Tribunal, we find that the Tribunal for the assessment year 1997-98 has decided the issue in favour of the assessee by following the judgment of the Hon'ble Supreme Court in the case of Laxmi Machine Works 290 ITR 667 (SC) wherein it is held that excise duty and sales-tax are not includible in 'total turnover' for the purposes of applying the formula contained in section 80HHC (3) of the Act. Accordingly, we decide the issue in favour of the assessee and the Ground of appeal raised by the Revenue is accordingly dismissed.
65. In the result, ITA No 976/PN/02 filed by the Revenue is partly allowed.
66. We now take up assessee's appeal, vide ITA No 683/PN/03 for the assessment year 1999-2000, wherein Ground of Appeal No. 1 reads as follows:
1. On the facts and in the circumstances of the case, and n law the ld CIT(A) erred in:
a. in upholding the action the AO in denying the set-off of loss of the amalgamating company viz. Finoram Sheets Ltd. (FSL) for the assessment year 1999-00 against the taxable income of the appellant company for the st th very same assessment year under appeal for the period 1 April, 1998 to 30 June, 1998 comprised in the relevant previous year.
b. not recognizing and respecting the sanctity of the order passed by the Hon. Bombay High Court approving the amalgamation of FSL with the appellant company and further concluding that, fixing the date of amalgamation with effect from 1.4.1997 was merely a colorable device disregarding the fact that the entire scheme of amalgamation was approved by the High Court in terms of section 391 and 394 of the Companies Act, 1956, which provisions enjoin the Court to take into account, among others, public interest before the Scheme of Amalgamation is sanctioned."44
We have exhaustively dealt with this Ground in assessee's appeal for the assessment year 1998-99 and for the reasons assigned therein, assessee is liable to succeed herein also. We, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to rework the loss of FSL pertaining to the assessment year 1999-2000 to be set off against taxable income of the assessee for the year under consideration.
Thus, on this Ground assessee succeeds.
67. Ground No. 2 reads as follows:
"2 On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in:
a. in treating the profit on sale of property Rs 13,60,887/- under the head 'income from business' instead of 'capital gains' as claimed by the appellant".
b. not appreciating and thereby ignoring that in appellant's case it was not its business to develop property and an isolated transaction could not form part of the trade or business on the basis of established principles of law." So far as Ground No. 2 is concerned, we have exhaustively dealt with a similar issue by way of Ground No.2 in assessee's appeal for the assessment year 1998-99 and held that the lower authorities were justified in treating the impugned income as business income. Following the parity of reasoning contained in our order of assessment year 1998-99, herein also we decide the issue in favour of the Revenue and accordingly, the Ground of appeal raised by the assessee is dismissed.
68. Ground No. 3 reads as follows:
"3. The learned CIT(A) has further erred in upholding the disallowance of pro rata provision made for premium payable on redemption of debentures in the amount of Rs. 6,07,143/-"
This issue is common with the dispute raised by the assessee by way of Ground No. 3 in its appeal for assessment year 1998-99, wherein we have decided the same in favour of the assessee and against the Revenue by 45 following the decision of our co-ordinate Bench in assessee's case for assessment year 1997-98 vide order dated 30.3.2010 in ITA No 1014/PN/2000. Accordingly, on similar parity of reasoning, we decide the issue in favour of the assessee. This Ground is thus allowed.
69. Ground No. 4 reads as follows:
4. The learned CIT(A)r erred in disallowing Rs 50,000/- on ad hoc basis on account of gift expenses incurred by the appellant (out of Rs 18,54,140/-)"
This issue is common with Ground No. 4 of assessee's appeal for assessment year 1998-99, wherein we have decided the same in favour of the assessee and against the Revenue by following the decision of our co-
ordinate Bench in assessee's case for assessment year 1997-98 vide order dated 30.3.2010 (supra). Accordingly, by following the precedents, this Ground of appeal is allowed in favour of the assessee.
70. Ground No. 5 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT (A) erred in disallowing Rs 25,18,085/- representing devaluation in the value of current investments."
The dispute in this Ground taken by the assessee pertains to a disallowance of Rs 25,18,085/- which represented devaluation in the value of investments acquired from a concern which had defaulted in the repayment of an ICD The Assessing Officer noticed that the said claim was on account of fall in the value of shares of Bank of Rajasthan Ltd., which were acquired by the assessee as a security against an ICD advanced to Bangur Finance Ltd. in 1995. Since Bangur Finance Ltd. had defaulted on repayment, the aforesaid shares were appropriated against the amount outstanding from Bangur Finance Ltd. and the balance of the irrecoverable amount was written-off and claimed as a deduction in the assessment year 1998-99. The Assessing Officer disallowed the claim on the ground that it was a capital loss. As per the 46 Assessing Officer, the deduction claimed in the assessement year 1998-99 on account irrecoverable amount of Bangur Finance Ltd. was also disallowed at the time of assessment proceedings for the reason that it was in the nature of a capital loss. Therefore, according to the Assessing Officer the finding on this aspect recorded in the assessment order for the assessment year 1998-99 would also be applicable while considering the impugned claim of loss on account devaluation of an investment. In this manner, the Assessing Officer held the assessee ineligible for claim of deduction for loss on account of devaluation of investment. The CIT(A) has also upheld the stand of the Assessing Officer, against which the assessee is in appeal before us.
71. Before us, the learned Counsel for the assessee submitted that the issue is linked to the Ground raised by the assessee in the assessment year 1997-98 relating to its claim for deduction under section 36(1)(vii) of the Act on account of the amount written as irrecoverable from Bangur Finance Ltd. It is also pointed out that even if assessee was not to succeed in its Ground for the assessment year 1998-99, yet the impugned claim of the assessee is permissible. For this, it is submitted that the impugned investments have been reflected in the Balance Sheet as current investments and that the same are akin to a stock-in-trade as has been appreciated by the Accounting Standard (AS-13) issued by the Institute of Chartered Accountants of India for 'Accounting for Investments'. In terms of the said Accounting Standard, even a current investment is to be valued at the lower of cost or market value, which is also the case while valuing an item of stock-in-trade. In terms thereof, it is argued that the impugned loss in the devaluation of the value of the current investments represented by the shares of Bank of Rajasthan, is a permissible deduction and in this regard reliance has also been placed on the judgment of the Hon'ble Supreme Court CIT v Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC).
47
72. On the other hand, the learned CIT-Departmental Representative submitted that the Assessing Officer as well as the Commissioner of Income-tax (Appeals) were justified in denying the impugned claim for the reason that the impugned investments were only in substitution of an ICD which was considered as capital in nature in the assessment year 1998-99 and not as a stock-in-trade and the loss on its ir- recoverability has been disallowed as being capital in nature. Therefore, the impugned loss in this year also is required to be considered in the same light.
73. We have carefully considered the rival submissions on this aspect. As is evident, the dispute emanates from the assessment year 1998-99 wherein an ICD advanced to Bangur Finance Ltd. has been written-off as irrecoverable after making adjustment for the value of security available with the assessee in the shape of the shares of Bank of Rajasthan Ltd. The diminution in the value of such shares as on 31.3.1999, being the last day of the previous year corresponding to the assessment year 1999-2000, has been claimed as a deduction while computing the taxable income. In the appeal of the assessee for assessment year 1998- 99 (supra), it has been held by us that the advancing of ICD to Bangur Finance Ltd. was in the course of business carried on by the assessee and accordingly, the write-off of the irrecoverable amount has been held eligible as a deduction under section 36(1)(vii) read with section 36(2) of the Act. In this background of the matter, we set-aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to consider the same and allow the impugned claim of the assessee as per law. Thus, on this Ground, assessee succeeds.
74. Ground No. 6 reads as follows:
48
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in reducing the claim of 'Tax Free Interest' & 'Tax Free Dividend' by Rs 50,000/- on the assumption that, part of the administration/office/personnel cost is attributable to such income."
The issue involved in this Ground is whether the Commissioner of Income-tax (Appeals) is justified in reducing the claim of 'Tax free interest' and 'Tax free dividend' by Rs 50,000/- on the assumption that, part of the administration/office/personnel cost is attributable to such income. According to the Assessing Officer, the assessee had received interest of Rs 4,70,77,397/- and Dividend of Rs 24,61,835/-, which was claimed as exempted incomes. It was noticed by the Assessing Officer that the assessee had not claimed any expenditure for earning of such incomes. The assessee explained that the investments which have yielded tax free interest were made in financial year 1994-95 when the assessee issued Global Depository Receipts (GDR) and received a premium of Rs 252 crores. The investment in shares on which dividends have been received were gradually acquired out of own funds and, therefore, no expenses were incurred for earning the impugned exempt interest and dividend income. The Assessing Officer was not satisfied with the explanation of the assessee and estimated 5% of gross receipts as expenditure for earning the said incomes and only 95% of the gross receipts was considered as tax free. In appeal before the Commissioner of Income-tax (Appeals) while assailing the order of the Assessing Officer, assessee relied on the decision of the Hon'ble Bombay High Court in the case of General Insurance Corporation 254 ITR 203 (Bom) for the proposition that the Assessing Officer was not entitled to make any apportionment of indirect expenses of administrative nature for being set-off against income by way of interest and dividends. The Commissioner of Income-tax (Appeals) restricted the disallowance to Rs 50,000/-. Against this disallowance of Rs 50,000/- assessee is in further appeal before us. Notably, the Revenue is also in appeal 49 before us against the relief allowed by the Commissioner of Income-tax (Appeals), by way of Ground no. 6 in ITA No 718/PN/03.
75. Before us, the learned Counsel for the assessee referred to the judgment of the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v DCIT (2010) 328 ITR 81(Bom) and submitted that the assessee would be satisfied if the matter be re-examined by the Assessing Officer in the light of the said judgment.
76. On the other hand, the learned Departmental Representative submitted that since the issue did involve a substantial amount, it may not be set-aside and instead, the disallowance made by the Assessing Officer be sustained.
77. We have carefully considered the rival submissions. The sum and substance of the dispute in this Ground relates to the application of Section 14A of the Act, which provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Act. In this case, both the authorities below have estimated certain amount of expenditure as being relatable to the exempted incomes, namely, interest and dividend incomes, earned by the assessee. Quite clearly, the said approach of the lower authorities is not in line with the subsequent pronouncement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Ltd. (supra) and in this view of the matter, we find ample force in the plea of the assessee that the issue deserves to be re- examined by the Revenue authorities in the light of the said judgment. Therefore, we set-aside the order of the Commissioner of income-tax (Appeals) and restore the matter back to the file of the Assessing Officer to be adjudicated afresh in light of the judgment of Hon'ble Bombay High court in the case of Godrej & Boyce Ltd (supra). Needless to say, the Assessing Officer shall carry out the aforesaid exercise after allowing the assessee a reasonable opportunity of being heard. The Assessing officer shall consider the 50 submissions put-forth by the assessee and thereafter decide in accordance with law. Thus, on this Ground assessee succeeds for statistical purposes.
78. Ground No. 7 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT (A) erred in:
a) Confirming excess allocation of certain expenses while working relief u/s 80IA w.e.t. URSE Unit II:
b) Confirming excess allocaton of personnel cost to the extent of Rs 5 lacs while working relief u/s 80IA for Pimpri Unit-II."
This Ground is similar to Ground of appeal No. 7 raised by the assessee in assessment year 1998-99, wherein by following the reasoning given in the earlier order of the Tribunal dated 30.3.2010 (supra), we have set aside the issues to the file of the Assessing Officer to be decided afresh in the light of directions given by the Tribunal in its order dated 30.3.2010 (supra). Accordingly, in the instant year also the impugned issue is set-aside to the file of the Assessing Officer with same directions, who shall afford a reasonable opportunity of being heard to the assessee and then decide the issue in accordance with the directions of the Tribunal and as per law. Thus, on this Ground, assessee succeeds for statistical purposes.
79. In the result, assessee's appeal, vide ITA No 683/PN/03 is partly allowed.
80. We shall now take up Revenue's cross appeal in ITA No. 718/PN/03 for assessment year 1999-2000.
81. Ground No. 1 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in directing to allow set off of brought forward losses from Finoram Sheets Ltd from 1.7.98 to 31.3.99 on pro rata basis."
This Ground is connected with the outcome of Ground No. 1 of assessee's cross-appeal in ITA No 683/PN/03 for the assessment year 1999- 51 2000. By the order of even date, while disposing of Ground No. 1 of assessee's appeal in ITA No. 683/PN/03, we have allowed the stand of the assessee and for that reason, we modify the order of the Commissioner of Income-tax (Appeals) on the impugned Ground and direct the Assessing Officer to modify the order accordingly. This Ground is accordingly disposed- off.
82. Ground No. 2 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in restricting the disallowance made on account of gifts and presentation to Rs 50,000/- as against disallowance of Rs 9,27,070/- made by the AO."
This Ground is connected with Ground No. 1 of Revenue's appeal vide ITA No. 976/PN/02, wherein we have decided the issue in favour of the assessee and against the Revenue by following our co-ordinate Bench's decision dated 30.3.2010 in ITA No 1014/PN/2000. In view of this, this Ground of appeal of the Revenue is dismissed.
83. Ground Nos. 3 reads as under:
"On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in allowing interest taken for purchase of leased asset and not appreciating the fact that the transaction of leasing was not a bona fide but a device of tax avoidance, in view of the ratio of Supreme Court in the case of Mcdowel & Co. v. CIT (14 ITR 148 (SC)."
This Ground is similar to Ground No. 3 of Revenue's appeal for assessment year 1998-99, wherein the order of the Commissioner of Income- tax (Appeals) has been set-aside and the matter restored to the file of the Assessing Officer to be adjudicated afresh in the light of the directions given by the Tribunal in its order dated 30.3.2010 (supra). Following the precedents, in the instant year also, the order of the Commissioner of Income-tax (Appeals) is set-aside and the matter restored to the file of the Assessing Officer to decide the issue afresh in accordance with the directions of the Tribunal and as per law, of-course after affording a reasonable opportunity of 52 being heard to the assessee. Thus, on this Ground assessee succeeds for statistical purposes.
84. Ground No. 4 reads as follows:
"On the facts & in the circumstances of the case and in law, the ldCIT(A) erred in directing to restrict the expenses incurred for earning tax free income to Rs 50,000/- without appreciating the fact thjat assessee has not maintained any separate account in order to earn such tax free income."
This Ground is similar to Ground No. 6 of assessee's appeal in ITA No 683/PN/03, wherein we have set aside the orders of the authorities below on this issue and remitted the matter back to the file of the Assessing Officer to decide the issue afresh in accordance with the ratio of the Hon'ble Bombay High Court in the case of Godrej & Boyce (supra). Following the same, we remit this matter to the file of the Assessing Officer with similar directions. This Ground is accordingly treated as allowed for statistical purposes.
85. Ground No. 5 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in allowing deduction u/s 80IA and in directing to allocate common expenses"
This Ground is similar to Ground No. 4 of Revenue's appeal for assessment year 1998-99, wherein the issue has been decided in favour of the assessee. Accordingly, following the precedent, the issue is decided in favour of the assessee and against the Revenue, and accordingly the Ground is dismissed.
86. In the result, Revenue's appeal, vide ITA No 718/PN/03, is partly allowed.
87. We now take up assessee's appeal in ITA No 1305/PN/03 relating to assessment year 2000-01.
88. Ground No. 1 reads as follows:
1. On the facts and in the circumstances of the case, and n law the ld CIT(A) erred in disallowing set off of carried forward business loss of erstwhile Finoram Sheets Ltd., the amalgamating company, claimed by the appellant u/s 72A of the IT Act."53
This Ground is connected to Ground No. 1 of assessee's appeal in ITA No. 961/PN/02 for assessment year 1998-99, which has since being allowed in favour of the assessee. Thus, the issue now raised by the assessee in this appeal is rendered academic and is treated as dismissed for statistical purposes.
89. Ground No. 2 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 14,78,844/- representing actual payment of leave encashment."
The facts, in brief, are that during the course of assessment proceedings, by way of its letter dated 17.1.2003, assessee raised the claim regarding actual payment of leave encashment of Rs 14,78,844/-. However, the Assessing Officer failed to take into account the said claim of the assessee. In appeal before the Commissioner of Income-tax (Appeals), assessee submitted that the claim represented actual payment of leave encashment to the employees during the previous year relevant to assessment year 2000-01 on account of accumulated leave of the employees of the earlier years. The Commissioner of Income-tax (Appeals) also rejected the claim of the assessee by observing as follows:
"5.3 The submissions have been considered. The appellant's consistent stand has been to claim the leave encashment on provision basis, which has been allowed in AY 99-00. Even though in the earlier years such claim has been disallowed by the AO and the matter is before the ITAT, in view of the decision in Bharat Earth Movers the assessee's claim is to be allowed on the basis of provision made for the year based on mercantile system and not on actual payment basis. Only if the ITAT Pune holds in favour of the assessee for earlier years the consequential rectification could be made for this year. Till such time the clam of the appellant is rejected."
90. Before us, the assessee raised a limited plea to the effect that in case the claim of the assessee in assessment year 1997-98 based on the Provision made in the account books is rejected by the Assessing Officer, he be directed 54 that the impugned claim be considered in this assessment year on the basis of actual payment of leave encashment to the employees.
91. To the aforesaid plea of the assessee, the learned CIT-Departmental Representative had no serious objection.
92. We have examined the plea set up by the assessee with regard to a sum of Rs 14,78,844/- representing actual payment of leave encashment to employees which pertain to the accumulation of leave of the earlier years. The assessee made this claim during the course of assessment proceedings, as the otherwise consistent claim made in the return of income was based on the provisions made in the account books as per mercantile basis. In the assessments of the past years, the said claim of the assessee was rejected by the Assessing Officer. It has been explained that in the assessment year 1997-98 the Tribunal has set-aside the issue regarding the allowability of assessee's claim on the basis of the provision, back to the file of the Assessing Officer. In case such claim of the assessee is ultimately allowed by the Assessing Officer, the dispute in the present Ground would be rendered redundant. In case, the claim is not so allowed ultimately, then the Assessing Officer is directed to consider and allow the claim of the assessee on actual payment basis as otherwise it would lead to an anomalous situation for the assessee. It is further clarified that our aforesaid direction shall operate only if the claim of the assessee in the past years on the basis of the provision made in the account books is found to be ultimately unsustainable. Therefore, in this view of the matter, the Ground of appeal raised by the assessee is accordingly disposed of.
93. Ground No. 3 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT (A) erred in disallowing of pro rata provision made for premium payable on redemption of debentures in the amount of Rs 1,02,191/-."55
This issue is similar to Ground No. 3 of assessee's appeal for assessment year 1998-99, wherein we have decided the same in favour of the assessee and against the Revenue by following the decision of our co- ordinate Bench in assessee's case for assessment year 1997-98 vide order dated 30.3.2010 in ITA No 1014/PN/2000. Accordingly, following the precedents, in this year also the issue is decided in favour of the assessee and accordingly, the Ground is allowed.
94. Ground No. 4 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 68,23,425/- representing loss incurred on cancellation of Forward Foreign Currency Contract."
This issue is similar to Ground No. 9 of assessee's appeal for assessment year 1998-99, wherein we have decided the same in favour of the assessee and against the Revenue by following the decision of our co- ordinate Bench in assessee's case for assessment year 2001-02 dated 24.6.2011 (supra). Accordingly, we follow the reasoning given therein and decide the issue in favour of the assessee. This Ground is accordingly allowed.
95. Ground No. 5 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in reducing the claim of Tax Free Interest and Tax Free Dividend by Rs 50,000/- on the assumption that, part of the administration/office/personnel cost is attributable to such income."
This Ground is similar to Ground No. 6 of assessee's appeal in ITA No 683/PN/03 for the assessment year 1999-00, wherein we have set aside the orders of the authorities below on the point and remitted the matter back to the file of the Assessing Officer to adjudicate the issue afresh in accordance with the judgment of the Hon'ble Bombay High Court in the case of Godrej and Boyce (supra). We hold accordingly here also and remit the matter back to the 56 file of the Assessing Officer with similar directions. This Ground is disposed of accordingly.
96. Ground No. 6 reads as follows "6: On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in:
(a) Disallowing a sum of Rs 74,64,140/- being the licence fee towards SAP-R3 module (ERP) system) on the ground that it is capital expenditure.
(b) Holding that (without prejudice to ground 'a' above) depreciation should be allowed on the aforesaid expenditure @ 25% as against the appellant's claim that the correct rate of depreciation is 60%."
So far as Ground No. 6(a) is concerned, the facts, in brief, are that the assessee claimed an expenditure of Rs 74,64,140/- being license fees towards SAP-R3 module which was disallowed by the Assessing Officer treating it as a capital expenditure. According to the Assessing Officer, the impugned expenditure which required replacement of the earlier software system by a new software, resulted in acquisition of an enduring benefit by the assessee and, therefore, the expenditure was capital in nature on which he allowed depreciation @ 60%. In appeal, the Commissioner of Income-tax (Appeals) upheld the stand of the Assessing Officer, but at the same time directed the Assessing Officer to allow depreciation at the rate of 25% only. Not being satisfied, the assessee is in appeal before us.
97. Before us, the learned Counsel for the assessee contended that the issue is now fully covered in favour of the assessee by the judgment of the Hon'ble Bombay High Court in the case of CIT v. M/s Raychem RPG Ltd., vide ITA No 4176 of 2009 dated 4.7.2011, a copy of which is placed on record. On the other hand, the learned Departmental Representative supported the orders of the authorities below.
98. We have carefully considered the submissions of rival parties. In this case, the assessee claimed deduction for an amount of Rs 74,64,140/- on account of software and consultancy charges. It was noticed by the Assessing 57 Officer that in the account books the assessee had claimed it as a capital cost whereas for the purposes of income-tax, the said expenditure was claimed as revenue expenditure. The expenditure related to implementation of an Enterprises Resources Planning (ERP package). The assessee justified its claim for revenue expenditure on the ground that the software was intended to improve the quality and efficiency of the information systems. The Assessing Officer faulted the claim of the assessee on two grounds. Firstly, according to him, the capitalization of such cost in the account books by the assessee himself did not justify the claim of revenue expenditure for the purposes of income-tax. Secondly, according to the Assessing Officer, the improvement in the quality and efficiency of the information system intended by the software will ensure a long term benefit to the assessee company and therefore, it was to be seen as a capital expenditure.
99. In so far as the nature of the expenditure is concerned, in a somewhat similar situation, the Hon'ble Hon'ble Bombay High Court in the case of M/s Raychem RPG Ltd. Mumbai (supra), has approved the order of the Tribunal in holding the same to be a revenue expenditure. In the case of M/s Raychem RPG Ltd. (supra), the Tribunal found that ERP package facilitated assessee's trading operations and enabled the management to conduct business more efficiently. Thus, the said expenditure was allowed as a revenue expenditure. In the present case, there is no dispute to the assertion of the assessee that the new software was intended to benefit the quality and efficiency of the information systems and in that view of the matter, it is evident that the software would facilitate carrying on the business more efficiently or more profitably and the same cannot be reckoned as in the nature of the profit making apparatus itself. Therefore, we are unable to accept the proposition of the Revenue that the expenditure is capital in nature. The argument of the Assessing Officer that the expenditure will give 'long term benefit' to the 58 assessee is not determinative of the expenditure being capital in nature because it is quite clear that such benefit is in the revenue field, i.e. resulting in conduct of business more profitably or more efficiently. It is quite well-settled that even where benefit of an expenditure accrues over a long period of time, yet it cannot be construed as a capital expenditure so long as the benefit accrues in the revenue field and for the said proposition, a gainful reference can be made to the judgment of the Hon'ble Supreme Court in the case of Empire Jute Co. v CIT 120 ITR 1 (SC).
100. In so far as the other objection of the Assessing Officer that the amount has been capitalized in the account books is concerned, the same in our view is not relevant to decide the nature of the expenditure which is to be decided on the basis of the prevailing legal position.
101. In view of the aforesaid discussion, we therefore set-aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow the expenditure as a revenue expenditure. Therefore, on this Ground assessee succeeds.
102. Ground No. 6(b) was not pressed by the assessee and, therefore, it stands dismissed as such.
103. Ground No. 7 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 1,47,636/- being 5% of gross 'Miscellaneous Expenses' i.e. Rs 29,52,686/- on the ground that it is a non-business expenditure u/s 37(1)."
At the time of hearing, this Ground was not pressed by the learned Counsel for the assessee and, therefore, the same stands dismissed as not pressed.
104. Ground No. 8 reads as follows:
59
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 1,00,000/- on ad hoc basis on account of gift expenses incurred by the appellant (out of Rs 30,81,009/-)."
This Ground is similar to Ground No. 4 in assessee's appeal for assessment year 1998-99 vide ITA No 961/PN/02, wherein following the reasoning given in the earlier order of the Tribunal dated 30.3.2010 (supra), we have decided the issue in favour of the assessee. Accordingly, we decide this issue in favour of the assessee and the Ground is allowed.
105. Ground No. 9 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 6,63,880/- out of total expenses on running and maintenance of aircraft on the ground that the aircraft is used for personal use by the directors and employees of the company."
Before us, it was a common point between the parties that similar was a subject-matter of consideration in assessee's own case for assessment year 2001-02 in ITA No 1440/PN/04 and our co-ordinate Bench has set aside the matter to the file of the Assessing Officer with certain directions vide its order dated 24.6.2011. As a consequence, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be adjudicated in the light of the directions of the Tribunal contained in its order dated 24.6.2011 (supra) (supra). Thus, on this Ground assessee succeeds for statistical purposes.
106. Ground No. 10 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in :
(a) Confirming excess allocation of certain expenses while working relief u/s 80IA w.r.t. URSE II:
(b) Confirming excess allocation of personnel cost to the extent of Rs 5 lacs while working relief u/s 80IA for Pimpri Unit-II."
This Ground is similar to Ground No. 7 in assessee's appeal for assessment year 1998-99 vide ITA No 961/PN/02, wherein following the 60 reasoning given in the earlier order of the Tribunal dated 30.3.2010 (supra), we have set aside the issues to the file of the Assessing Officer with certain directions. Herein-also, we set aside the above issue to the file of the Assessing Officer for deciding it afresh in accordance with the directions given in the order of the Tribunal dated 30.3.2010 (supra). Thus, on this Ground assessee succeeds for statistical purposes.
107. Ground No. 11 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in including the sale of scrap in the turnover while working relief u/s 80HHC."
At the time of hearing, this Ground was not pressed and, therefore, the same stands dismissed as such.
108. In the result, appeal of the assessee, vide ITA No 1305/PN/03, is partly allowed.
109. We shall now take up Revenue's cross appeal vide ITA No 1331/PN/03 for assessment year 2000-01.
110. Ground No. 1 of the appeal is as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT (A) erred in directing to allow claim of deduction of Rs 42,50,000/- on account of premium on redemption of debentures, when no such claim was made by the assessee in its original return of income filed u/s 139(1)"
The claim of the assessee for deduction of premium of Rs 42,50,000/- was rejected by the Assessing Officer on the ground that such a claim was made only during the assessment proceedings and neither it was made in the original return of income filed under section 139(1) and nor any revised return of income was filed under section 139(5) of the Act. However, the Commissioner of Income-tax (Appeals) held that this technical objection of the Assessing Officer is not sustainable and proceeded to consider the issue on 61 merits. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to allow the claim of deduction of Rs 42,50,000/- on account of premium on redemption of debentures on payment basis. The Commissioner of Income-tax (Appeals) further held that in case the Tribunal held that the premium on debentures was to be allowed on provision basis, then the claim of deduction on payment basis would stand reversed.
111. Before us, the learned Departmental Representative defended the order of the Assessing Officer by placing reliance on the same. On the contrary, the learned Counsel for assessee submitted that the claim of the assessee has been correctly entertained by the Commissioner of Income-tax (Appeals) in view of the judgment of the Hon'ble Delhi High Court in the case of CIT v. Jai Parabolic Springs Ltd 306 ITR 42 (Del).
112. We have considered the rival stands and find no infirmity on the part of the Commissioner of Income-tax (Appeals) in entertaining the claim of the assessee with regard to a sum of Rs 42,50,000/- on account of premium on redemption of debentures, on actual payment basis. In the past years, assessee had claimed expenditure of premium on redemption of debentures, by way of a provision in the account books on a pro rata basis. The Assessing officer did not allow such claim and, therefore, in the instant year during the course of assessment proceedings, assessee made a claim for allowability of premium on redemption of debentures, on actual payment basis. The Assessing Officer faulted this claim on the ground that it was not contained in the original return of income filed under section 139(1) of the Act and no revised return was also filed making such claim. Before us, the learned CIT- Departmental Representative submitted that such claim could only have been made in the return of income and not otherwise. The Commissioner of Income-tax (Appeals) considered the background of the claim and also noticed that a similar claim on identical basis was allowed by the Assessing Officer 62 himself in the assessment for assessment year 1999-2000 and also by his predecessor Commissioner of Income-tax (Appeals) for assessment year 1994-95. In our view, there is no fetters on the powers of the Commissioner of Income-tax (Appeals) to entertain such claim having regard to the facts and circumstances of the present case. The ratio of the judgment of the Hon'ble Delhi in the case of Jai Parabolic Springs Ltd (supra), relied upon by the assessee before us, supports action of the Commissioner of Income-tax (Appeals). Therefore, we hereby affirm the action of the Commissioner of Income-tax (Appeals) on this aspect and the Revenue has to fail.
113. In so far as the merits is concerned, the Commissioner of Income-tax (Appeals) directed the Assessing Officer to add back the sum of Rs 1,02,191/- debited to the profit & Loss account as a provision and instead allow the deduction for Rs 42,50,000/- on actual payment basis. The Commissioner of Income-tax (Appeals) further observed that in case the Tribunal were to allow the assessee's plea for deduction on the basis of the provisions made, then his direction allowing deduction on payment basis would stand reversed. On this aspect, the learned CIT-Departmental Representative pointed out that in the past years the Tribunal has allowed assessee's claim on the basis of the provision and, therefore, the direction of the Commissioner of Income-tax (Appeals) to allow the claim on payment basis should be reversed. In our view, the order of the Commissioner of Income-tax (Appeals) itself is quite speaking on this aspect to the effect that deduction on payment basis is to be allowed only in case the assessee's claim for allowance on the basis of a provision is not upheld. As a result, we therefore affirm the order of the Commissioner of Income-tax (Appeals) and the Ground of appeal raised by the Revenue is dismissed.
114. Ground No. 2 reads as follows:
63
"On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in directing to allow the claim of Rs 57,89,285/- on account of premium on forward foreign exchange contracts."
The disallowance of Rs 57,89,285/- being premium on forward foreign exchange contracts was made by the Assessing Officer on the ground that such premium representing the forward cover rate and spot rate availed on the date of booking was a capital expenditure. In appeal, the Commissioner of Income-tax (Appeals) held that the impugned expenses were revenue expenditure incurred for the purpose of acquiring raw material and the said expenditure was not incurred for acquiring any capital asset or any other enduring benefit of capital nature. In this view of the matter, the Commissioner of Income-tax (Appeals) deleted the disallowance made by the Assessing Officer. Being aggrieved, Revenue is in appeal before us.
115. Before us, the learned Departmental Representative assailed the order of the Commissioner of Income-tax (Appeals) and supported the order of the Assessing Officer by placing reliance upon the same. On the other hand, the learned Counsel for the assessee supported the findings of the Commissioner of Income-tax (Appeals).
116. We have considered the rival claims on this aspect. From the orders of the authorities below an undisputed factual position which emerges is to the effect that the impugned expenditure towards premium on foreign exchange contracts relates to the import of raw material. Even before us, the said factual position continues to hold as no cogent material has been led by the Revenue to the contrary. In this background of the matter, no fault can be found with the action of the Commissioner of Income-tax (Appeals) in treating the expenditure as revenue expenditure. The Commissioner of Income-tax (Appeals) has also recorded a factual finding in para 7.3 of his order to the effect that all the forward cover contracts in question have been honoured 64 without cancellation, for making payments for purchase of raw material. Therefore, considering the factual situation in the instant case, we hold that the Commissioner of Income-tax (Appeals) correctly reversed the order of the Assessing Officer treating the expenditure as a capital expenditure. In the result, order of the Commissioner of Income-tax (Appeals) is hereby affirmed and the Ground of appeal raised by the Revenue is dismissed.
117. Ground No. 3 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in directing to restrict the expenses incurred or earning tax free income to Rs 50,000/- without appreciating the fact that assessee has not maintained any separate account in order to earn such tax free income."
This Ground is similar to Ground No. 5 of assessee's appeal in ITA No 1305/PN/03 for the assessment year 2000-01, wherein we have set aside the orders of the authorities below on the point and remitted the matter back to the file of the Assessing Officer to adjudicate the issue afresh in accordance with the guidelines given by the Hon'ble Bombay High Court in the case of Godrej and Boyce (supra). We hold accordingly here also and remit the matter back to the file of the Assessing Officer with similar directions. This Ground is disposed of accordingly.
118. Ground No. 4 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in restricting the disallowance on account of miscellaneous expenses to 5% of such expenses."
In connection with the above Ground of appeal, the background is that the Assessing Officer disallowed a sum of Rs 2,95,270/- being 10% of miscellaneous expenses on the ground that the same could not be fully verified. The Commissioner of Income-tax (Appeals) considered it reasonable to restrict the disallowance to 5% of the expense, against which the Revenue is in appeal before us.
65
119. Before us, the learned Departmental Representative assailed the order of the Commissioner of Income-tax (Appeals) and defended the order of the Assessing Officer, whereas the learned Counsel for the assessee defended the order of the Commissioner of Income-tax (Appeals).
120. Having considered the discussion in the orders of the authorities below, we find no reasons to interfere with the order of the Commissioner of Income- tax (Appeals) as the same is fair and reasonable in restricting the disallowance to 5% of the expense, for the reasons stated therein. As a result, we dismiss the Ground raised by the Revenue.
121. Ground No. 5 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in restricting the disallowance made on account of gifts and presentation to Rs 1,00,000/- as against disallowance of Rs 15,40,505/- made by the AO."
This Ground is connected with Ground No. 8 of assessee's cross- appeal in ITA No 1305/03 for assessment year 2000-01, wherein the said issue has been decided in favour of the assessee. As a consequence, this connected Ground of the Revenue stands dismissed.
122. Ground No. 6 reads as follows:
"6. On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in allowing deduction u/s 80IA and in directing to allocate common expenses."
This Ground is similar to Ground No. 4 of Revenue's appeal in ITA No 976/PN/02 for assessment year 1998-99, wherein we have decided the issue in favour of the assessee and against the Revenue by following the decision of our co-ordinate Bench in assessee's case for assessment year 1997-98 vide ITA No 1038/PN/00 dated 30.3.2010. Herein also, we follow the parity of reasoning given in the order of the Tribunal dated 30.3.3010 (supra) and 66 decide the issue in favour of the assessee. This Ground is accordingly dismissed.
123. Ground No. 7 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in deleting the interest charged u/s 115P of Rs 8,49,862/-."
The facts as emerging from the assessment order are that in the course of assessment proceedings, the Assessing Officer found that during the Annual General Meeting, assessee company declared interim dividend of Rs 25,75,34,018/- @ Rs 7.50 per equity share which was distributed by the company in May 2000 on which tax @ 10% under section 115-0 of the Act was payable by the assessee. According to the Assessing Officer, assessee failed to pay the tax within the prescribed time and, therefore, by virtue of section 115-P of the Act, interest became chargeable. He accordingly charged interest of Rs 8,59,862/- under section 115-P of the Act.
124. In appeal before the Commissioner of Income-tax (Appeals), it was contended by the assessee that primarily the event of declaration and distribution of dividend took place after the close of previous year relevant to the assessment year under consideration, which was evident from the facts discussed by the Assessing Officer in the assessment order itself. It was also submitted that there was thus no delay and even otherwise on merits also, no interest was chargeable. It was further contended that charging of interest under section 115-P cannot form part of the assessment proceedings under section 143(3) of the Act. After considering the submissions of the assessee, the Commissioner of Income-tax (Appeals) deleted the charging of interest under section 115-P of the Act by holding as under:
"16.3 The submissions have been considered. It is evident from the order of the AO itself that only in the meeting on 1.4.00 the directors approved the payment of dividend and the date of 14 days as prescribed in section 115-O started from 1.4.00.67
Therefore, this event of declaration of dividend and payment of dividend falls in next A.Y i.e. A.Y 01-02 relevant to previous year 00-01. Therefore, chargeability of interest u/s 115P could be relevant only for AY 01-02 and it is not relevant for this year. Therefore the claim of the appellant is allowed and interest of Rs 89,49,862/- u/s 115P is deleted."
Aggrieved, Revenue is in appeal before us.
125. Before us, the learned Departmental Representative assailed the order of the Commissioner of Income-tax (Appeals) on this aspect by placing reliance on the order of the Assessing Officer. On the other hand, learned Counsel for the assessee, besides reiterating the submissions as made before the Assessing Officer, relied on the order of the Commissioner of Income-tax (Appeals).
126. We have carefully considered the rival submissions. In our considered opinion, the Commissioner of Income-tax (Appeals) made no mistake in coming to a factual finding that the event of declaration of dividend and payment of dividend fell for consideration in the assessment year 2001-02 and not in the year under consideration and therefore, question of chargeability of interest under section 115-P of the Act, if any, would arise only in the assessment year 2001-02. We, therefore, do not find any ground to interfere with the order of the Commissioner of Income-tax (Appeals) on this aspect. We hereby affirm his order and, Revenue fails on this Ground.
127. Ground No. 8 is as follows:
"On the facts and in the circumstances of the case, and in law the ld CIT (A) erred in directing to exclude excise duty of Rs 71,25,46,168/-and sales tax of Rs 28,42,38,297/- from the total turnover for the purpose of deduction u/s 80HHC."
This Ground is similar to Ground No. 5 of Revenue's appeal vide ITA No 976/PN/02 for assessment year 1998-99 wherein by following the decision of our co-ordinate Bench in assessee's case for assessment year 1997-98 order dated 30.3.2010 (supra), we have decided against the Revenue and in favour of the assessee. Accordingly, following the parity of reasoning given in the order of the Tribunal dated 30.3.2010 (supra), we decide the issue in 68 favour of the assessee and the Ground of the Revenue is accordingly dismissed.
128. In the result, Revenue's appeal in ITA No 1331/PN/03 is partly allowed.
129. We now take up assessee's appeal for assessment year 2003-04, vide ITA No 1157/PN/07.
130. Ground No. 1 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 33,65,663/- towards liquidated damages being the amount representing short recovery from the customers. Among others, the CIT(A) erred in observing that the appropriate evidence was not filed in the course of proceedings."
The facts, in brief, are that during the course of assessment proceedings, the Assessing Officer observed that the assessee has claimed an amount of Rs 33,65,663/- on account of liquidated damages. On being asked to explain, assessee stated that the liquidated damages debited to Profit & Loss Account represented rate difference resulting into lesser recovery and that the entire amount of liquidated damages pertained to sales invoices which were charged to tax. The Assessing Officer rejected the plea of the assessee on the ground that assessee company did not file any evidence to show how the differences were calculated and what was the condition that was laid down in the sale agreements executed and how the rate difference had arisen. He accordingly disallowed the claim of deduction of Rs 33,65,663/- as liquidated damages. The Assessing Officer also rejected the alternative plea of the assessee that the same should be allowed as 'bad debts' on the ground that in the Schedule 13 of its Annual accounts, no figure had been mentioned against amounts written-off. According to him, since the amount had not actually been written-off as bad debt, the claim was liable to be rejected. In appeal, the assessee claimed before the Commissioner of Income-tax (Appeals) that similar claim was allowed by his predecessor in the 69 assessee's case for the assessment year 2002-03. However, the Commissioner of Income-tax (Appeals) observed that the assessee has not been able to furnish any details before him also and, therefore, according to him, the Assessing Officer was justified in disallowing the claim of the assessee. The Commissioner of Income-tax (Appeals), therefore, confirmed the disallowance of Rs 33,65,663/-. Being aggrieved, assessee is in further appeal before us.
131. Before us, the learned Counsel for the assessee has confined his arguments to the effect that impugned amount was allowable as a deduction in terms of section 36(1)(vii) of the Act as bad debts written-off. In this regard, a reference was made to pages 1 to 7 of the Paper Book which contain the details of the liquidated damages amounting to Rs 33,65,663/-. It is submitted that the same relates to various short recoveries from the Department of Telecommunications, viz. Maharashtra Circle, Kerala Circle, Uttar Pradesh Circle, Gujarat Circle, etc. By referring to the details, it is sought to be explained that for certain bills the amounts had been short recovered and the same have been debited to the account head 'liquidated damages' and such liquidated damages have been claimed as a debit in the Profit & Loss account. In this connection, our attention has been invited to Schedule 13 to the Profit & Loss account which contains the account head 'liquidated damages', copies of which have been placed on record. It was, therefore, contended that the assessee satisfies all the conditions prescribed under section 36(1)(vii) read with section 36(2) of the Act inasmuch as the impugned amount reflects short recoveries on various sale invoices raised and the amounts had actually been written-off in the books of account by debiting to the head 'liquidated damages'. The learned Counsel for the assessee placed reliance on the judgment of the Hon'ble Supreme Court in the case of TRF Ltd. (supra) in support of the claim.
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132. On the other hand, the learned CIT-Departmental Representative has pointed out that debiting of the expense head liquidated damages to the Profit & Loss account does not amount to write-off as contemplated under section 36(1)(vii) of the Act and therefore the claim of the assessee is not justified.
133. We have carefully considered the rival submissions. The amounts in question were claimed to be short recoveries from customers. The Commissioner of Income-tax (Appeals) in para 6.3 of his order agreed with the assessee in principle that short recoveries from customers was an allowable deduction. However, he denied the claim primarily on the plea that the assessee company could not file any evidence as to how the short recoveries are calculated and what were the relevant conditions of the agreement which gave rise to such short recoveries. In this connection, we have considered the details of the short recoveries which are placed in the Paper Book at pages 1 to 7. It has also been asserted that the said details were part of the record of the lower authorities. A singular fact which is emerging from the record is that the impugned amounts represent short recoveries from various Government customers. The factum of the assessee not having recovered such amounts is not at all disputed by the lower authorities at any stage. It is also not disputed that the amounts recoverable were on account of sale invoices raised by the assessee for supplies made to such customers. Under these circumstances, in our view, the same would partake the character of a 'bad debt' within the meaning of section 36(1)(vii) of the Act. Even if the manner of calculating the short recoveries for each bill has not been brought out on record, yet the same is not fatal to the factual inference that the short recoveries are on account of sale invoices raised by the assessee on its customers. With regard to the objection of the learned Departmental Representative that the debit under the account head of 'liquidated damages' in the Profit & Loss account does not amount to a write-off as contemplated under section 36(1)(vii) of the Act, the 71 same, in our view is devoid of merit. It is quite clear that the amounts due from the stated customers are no longer shown as outstanding in the account books as the same have been charged to Profit & Loss account under the head liquidated damages. Therefore, in sum and substance the amounts have been written-off and would qualify the condition prescribed under section 36(1)(vii) r.w.s 36(2) of the Act of a bad debt written-off, and such write-off of a debt as irrecoverable qualifies to be deductible under section 36(1)(vii) in terms of the judgment of the Hon'ble Supreme Court in the case off TRF Ltd (supra). For all the above reasons we uphold the plea of the assessee and the Ground is accordingly allowed.
134. Ground No. 2 is as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 16,36,787/- representing 'Buy-back' expenses."
During the course of assessment proceedings, the Assessing Officer made disallowance of the expenditure claimed by the assessee of Rs 16,36,787/- representing buy-back expenses on the ground that it was classified as 'capital expenditure' in the report of Tax auditor, even though assessee had claimed this expenditure on revenue account in the return of income.
135. In appeal before the Commissioner of Income-tax (Appeals), it was contended by the assessee that since the expenditure was incurred not for augmentation or expansion of the capital base of the company, the expenditure incurred was on revenue account. Reliance was placed on the judgment of the Hon'ble Supreme Court in the case of Punjab State industrial Development Corporation Ltd 225 ITR 792 (SC). The Commissioner of Income-tax (Appeals) did not find any merit in the submissions of the assessee. According to the Commissioner of Income-tax (Appeals), since in 72 the case of the assessee the expenditure incurred related to the capital base of the company, the same had to be treated as capital expenditure, as classified by the Auditors of the assessee-company.
136. Before us, the learned Counsel for the assessee has placed reliance n the judgment of the Hon'ble Delhi High Court in the case of CIT v. Selan Exploration Technology Ltd. 188 Taxman 1 (Del.), wherein the expenses incurred for buy-back of shares were allowed as revenue expenditure.
137. On the other hand, the learned Departmental Representative, appearing for the Revenue, has defended the disallowance by placing reliance on the orders of the authorities below.
138. We have carefully considered the rival submissions. The judgment of the Hon'ble Delhi High Court in the case of Selan Exploration Technology Ltd. (supra) pressed into service by the assessee, in our view, clearly covers the controversy in favour of the assessee. In the case before the Hon'ble High Court, assessee had incurred certain expenditure for buy-back of its shares which was disallowed by the Revenue as capital expenditure. The Hon'ble High Court, after considering the ratio of the Hon'ble Supreme Court in the case of Empire Jute Co. (supra) and Brooke Bond India Ltd v. CIT 225 ITR 798 (SC), held as under:
"It is clear from the aforesaid judgments that a fine distinction is made by the Supreme Court in classifying the expenditure under two categories:-
(a) When the expense incurred relates to the issue of fresh shares, which leads to an inflow of fresh funds into the company, such expenditure is to be treated as capital expenditure.
(b) On the other hand, where no such flow of funds or increase in the capital employed, the expenditure incurred would be revenue expenditure, as in such a case the company would not acquire benefit or addition of enduring nature.
In the present case, consultancy fee for advisory services was paid by the assessee- company for buyback of shares. Instead of increase in the share capital, it was going to result in the decrease in funds with the buyback of the shares. In these circumstances, the Tribunal rightly held that the assessee had not acquired the benefit or addition of enduring nature because after the buyback, benefit or addition of enduring nature would not rise as capital employed had, in fact, gone down. The expenditure incurred had not resulted into bringing into existence any asset. Therefore, it was rightly held to be an expense of revenue nature.
The contention of learned counsel for the Revenue that with lesser capital dividend in future payable shall be less and, therefore, it shall be treated as a 73 benefit of enduring nature cannot be accepted. We further find that in these circumstances the Tribunal rightly held that such an expenditure was allowed under section 37 of the Act as expense incurred for business purpose in the following manner:
"15. Once we decide that the impugned expenditure is not capital in nature, we have to see its allowability under section 37. In this regard, we find that the expenses were incurred by the assessee company for compliance of SEBI guidelines with regard to buyback of shares. The buyback of shares is stated to be for the purpose of providing an existing opportunity to the existing shareholders who so desire. This Tribunal is taking a consistent view that expenditure incurred with regard to AGM is business expenditure. The AGM is held by a company for the benefit of existing shareholders. On the same reasoning, the impugned expenditure which were also incurred for the benefit of existing shareholders in the ordinary course of business is also an expenditure incurred for business purpose and hence the same is allowable under section 37. We, therefore, decide this issue in favour of the assessee."
139. On this Ground, the learned Counsel for the assessee asserted that the factual matrix in the present case is pari materia with that in the case of Selan Exploration Technology Ltd. (supra). The learned CIT-Departmental Representative has not disputed the factual matrix brought out by the assessee, but has contended that the Commissioner of Income-tax (Appeals) made no mistake in treating the expenditure as capital expenditure as it related to reduction in capital base of the company.
140. We have considered the rival submissions carefully. In our view, the observations of the Hon'ble Delhi High Court extracted above clearly support the case of the assessee that the impugned expenditure is liable to be allowed as revenue expenditure. We therefore set aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to delete the impugned addition and accordingly assessee succeeds on this Ground.
141. Ground No. 3 reads as follows:
"On the facts and in the circumstances of the case and n law, the ld CIT(A) erred in disallowing Rs 30,00,000/- being provision for slow moving stock of raw materials."
At the time of hearing, this Ground was not pressed by the learned Counsel for the assessee and, therefore, the same stands dismissed as not pressed.
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142. Ground No. 4 reads as follows:
"On the facts and in the circumstances of the case and in law, the ld CIT (A) erred in disallowing Rs 27,000/- representing corporate membership of club."
The assessee had claimed an amount of Rs 33,300/- being club membership fees and Rs 8,795/- being other club expenses, which was disallowed by the assessing Officer. In appeal, the Commissioner of Income- tax (Appeals) following his order for the assessment year 2002-03 restricted the disallowance to the extent it represented the initial corporate membership fees. Against this, assessee is in appeal.
143. Before us, the learned Counsel for the assessee submitted that similar issue was subject-matter of consideration by our co-ordinate Bench in assessee's case for assessment year 2002-03 and the Tribunal vide its order dated 15.7.2011 in ITA No 102/PN/07 decided the issue in favour of the assessee by following the judgment of the Hon'ble Bombay High Court in the case of Otis Elevators (I) Ltd. 195 ITR 682 (Bom). The learned Departmental Representative did not dispute the above factual aspects. Therefore, by following the parity of reasoning given by the Tribunal in its order dated 15.7.2011 (supra), we reverse the finding of the Commissioner of Income-tax (Appeals) and delete the impugned disallowance. The assessee succeeds on this Ground.
144. Ground No. 5 reads as follows:
"On the facts and in the circumstances of the case and in law, the ld CIT (A) erred in disallowing Rs 2,05,945/- being 10% of gross 'Miscellaneous Expenses' i.e. Rs 20,59,446/- on the ground that it is a non-business expenditure u/s 37(1)."
While scrutinizing the details of 'Miscellaneous Expenses' debited to the Profit & Loss account at Rs 8,72,15,989/-, the Assessing Officer observed that it contained another head of miscellaneous expenses to the extent of Rs 20,59,446/-. The Assessing Officer disallowed 10% of amount of Rs 75 20,59,446/- for non-business purposes, as according to him it could not be verified as to whether total expenses debited under the above head were incurred for business purposes. In appeal before the Commissioner of Income-tax (Appeals), assessee could not substantiate its claim and, accordingly, the Commissioner of Income-tax (Appeals) affirmed the disallowance of 10% made by the Assessing Officer.
145. Before us, the learned Counsel for the assessee submitted that in the assessment year 2001-02 on the similar issue, the Commissioner of Income- tax (Appeals) had restricted the disallowance to 5% against 10% made by the Assessing Officer, and such action has been affirmed by the Tribunal vide its order dated 24.6.2011 in ITA No 1440/PN/047 and to that extent, the relief be allowed. The learned Departmental Representative, however, defended the orders of the lower authorities.
146. After hearing both the parties, we deem it fit and proper to set-aside the order of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to restrict the disallowance to 5% of the amount of Miscellaneous Expenses of Rs 20,59,446/-, as affirmed by the Tribunal in its order dated 24.6.2011 (supra). Thus assessee partly succeeds on this Ground.
147. Ground No. 6 reads as follows:
"On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 2,00,000/- on ad hoc basis on account of gift expenses incurred by the appellant out of total Rs 11,55,860/-."
During the course of assessment proceedings, the Assessing Officer noticed that under the sub-head gifts and presentation, assessee had claimed an amount of Rs 11,55,860/-. The Assessing Officer disallowed Rs 5,77,930/- being 50% of such expenses for the reason that some non-business relatable expenses were included in the same. In appeal, the Commissioner of Income- 76 tax (Appeals), following his order in assessee's case for the assessment year 2002-03, restricted the disallowance to Rs 2,00,000/- only.
148. On this Ground, the learned Counsel for the assessee pointed out that right from the assessment year 1993-94 onwards ad hoc disallowance of similar nature has been deleted in the appeals before the Tribunal and it is only on account of a typographical error/oversight that for the assessment year 2002-03 the Tribunal in appeal No 102/PN/07 dated 15.7.2011 has dismissed the Ground raised. It is claimed that the same has been done by mistake as in-fact the Tribunal has referred to its earlier orders in ITA Nos 1014- 1038/PN/00 for assessment year 1997-98 wherein similar issue was decided in favour of the assessee. It was therefore contended that the issue is liable to be decided in favour of the assessee in view of the past history.
149. The learned Departmental Representative has not disputed the factual matrix concerning the precedents as made out by the learned Counsel for the assessee.
150. On this aspect, we find that the Assessing Officer disallowed 50% of the expenses on gift and presentations, which resulted in an addition of Rs 5,77,930/- and the level of such disallowance corresponded to the action of the Assessing Officer in earlier year. The Commissioner of Income-tax (Appeals) noticed that in the earlier year he had restricted the disallowance to Rs 4,50,000/- out of the disallowance of Rs 12,73,925/ made by the Assessing Officer. Following his own decision of the earlier year, the Commissioner of Income-tax (Appeals) restricted the disallowance in this year to Rs 2,00,000/- out of the disallowance of Rs 5,77,930/- made by the Assessing Officer. Before us, the claim set up by the assessee is that in the earlier year of 2002- 03, the Tribunal in ITA No 102/PN/07 (supra) dismissed the Ground of the assessee in para 7 of the order, on a mistaken belief that as per the then precedents available in the assessee's own case, it was to be decided against 77 the assessee. Whereas actually in the precedents in assessee's case by way of ITA Nos. 1014-1038/PN/00 for the assessment year 1997-98, the Tribunal had allowed the claim of the assessee.
151. We have carefully examined the case set up by the assessee and have perused para 7 of the order of the Tribunal dated 15.7.2011 (supra) and find that the assertions of the assessee are borne out. Under these circumstances, we, therefore, following the earlier precedent by way of ITA Nos 1014- 1038/PN/00 for assessment year 1997-98 hold that the claim of the assessee is liable to be allowed. Therefore, we direct the Assessing Officer to delete the addition. On this Ground, the assessee succeeds.
152. Ground No. 7 is as under:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 1,24,420/- being 5% out of sales promotion expenses, employees welfare expenses, factory welfare expenses and entertainment expenses on the ground that they are personal/non-business expenditure."
The Assessing Officer made disallowance of Rs 1,24,420/- being 5% of sales promotion expenses of Rs 6,15,195/-, employee welfare expenses of Rs 10,31,724/-, factory welfare expenses Rs 3,45,975/- and entertainment expenses of Rs 4,95,511/-. In appeal, the Commissioner of Income-tax (Appeals) confirmed the disallowance made by the Assessing Officer following his order for earlier year 2002-03 in assessee's case.
153. After considering the submissions of rival parties, we find that identical issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment years 2001-02 and 2002-03, wherein the Tribunal has sustained the disallowance of Rs 1,00,000/- on similar facts and circumstances. Therefore, following the precedent, we sustain a disallowance of Rs 1,00,000/- and delete the balance addition of Rs 24,420/-. The assessee partly succeeds on this Ground.
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154. Ground No. 8 is as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 11,33,536/- out of total expenses on repairs and maintenance on the ground that they are non-business expenditure."
The Assessing Officer made disallowance of Rs 11,33,536/- out of total expenses on repairs and maintenance for the reason that the expenditure was incurred for non-business purposes. In appeal, the Commissioner of Income- tax (Appeals) confirmed the disallowance made by the Assessing Officer following his order for earlier year 2002-03 in assessee's case.
155. After considering the submissions of rival parties, we find that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment year 2002-03, wherein the Tribunal has set-aside the issue and restored the matter to the file of the Assessing Officer, vide order dated 15.7.2011 in ITA No 102/PN/07. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and findings given by the Tribunal for assessment year 2002-03. The assessee succeeds on this Ground.
156. Ground No. 9 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing a sum of Rs 20,31,916/- and directing the AO to allow deduction in accordance with the provisions of sec. 35AB and withdraw the depreciation allowed by AO."
Before us, the learned Counsel for the assessee did not press this Ground and, therefore, the same stands dismissed as not pressed.
157. Ground No. 10 is as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing a sum of Rs 1,42,322/- on account of interest from advances to the subsidiary companies."79
The Assessing Officer disallowed Rs 1,42,322/- claimed by the assessee on account of interest from advances to the subsidiary companies. In appeal, it was explained by the assessee that the company had given some interest free advances during the year to Creole Holdings Ltd. and Finolex Finance Ltd purely on temporary basis and part of the advance was repaid during the year. According to the assessee, there was no nexus whatsoever between the advances given and the amounts borrowed on interest during the year. The Commissioner of Income-tax (Appeals), however, upheld the disallowance of Rs 1,42,322/- made by the Assessing Officer.
158. After considering the submissions of rival parties, we find that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment year 2001-02, wherein the Tribunal has set-aside the issue and restored the matter to the file of the Assessing Officer, vide order dated 24.6.2011 in ITA No 1440/PN/04. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and findings given by the Tribunal for assessment year 2001-02. The assessee succeeds on this Ground.
159. Ground No. 11 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in directing the AO to follow the guidelines contained in the appellate order for Ay 2001- 02 in the matter of allocation of expenses for determination of profits u/s 80IA in respect of Pimpri Unit II which would result in ad hoc allocation of expenses unrelated to the activities of this undertaking."
It was a common point between the parties that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment years and for the assessment year 2002-03, the Tribunal has set-aside the issue and restored the matter to the file of the Assessing Officer, 80 vide order dated 15.7.2011 in ITA No 102/PN/07. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and findings given by the Tribunal for assessment year 2002-03. The assessee succeeds on this Ground.
160. Ground No. 12 reads as follows:
"On the facts and in th circumstances of the case and in law, the ld CIT(A) erred in directing the AO to follow the guidelines as contained in the appellate order for AY 2001-02 in the matter of allocation of expenses for determination of profits u/s 80IA in respect of Urs Unit II which would result in ad hoc allocation of expenses unrelated to the activities of this undertaking."
It was a common point between the parties that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment years and for the assessment year 2002-03, the Tribunal has set-aside the issue and restored the matter to the file of the Assessing Officer, vide order dated 15.7.2011 in ITA No 102/PN/07. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and findings given by the Tribunal for assessment year 2002-03. The assessee succeeds on this Ground.
161. Ground No. 13 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in disallowing Rs 1,00,000/- on ad hoc basis on account of administrative expenses attributed to earning of dividends thereby reducing the claim for deduction under section 80M by Rs 1,00,000/-."
It was a common point between the parties that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment years and for the assessment year 2002-03, the Tribunal has set-aside the issue and restored the matter to the file of the Assessing Officer, 81 vide order dated 15.7.2011 in ITA No 102/PN/07. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and findings given by the Tribunal for assessment year 2002-03. The assessee succeeds on this Ground.
162. In the result, assessee's appeal, vide ITA No 1157/PN/07 is partly allowed.
163. We shall now deal with Revenue's appeal, vide ITA No 1184/PN/07 for the assessment year 2003-04, Ground No. 1 reads as follows:
"On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in restricting the disallowance made on expenditure incurred on gift and representations upto Rs 2 lakhs as against disallowance of Rs 5,77,930/- made by the AO."
This Ground is connected with Ground No. 6 of assessee's appeal vide ITA No.1157/PN/07, wherein we have decided the issue in favour of the assessee and against the Revenue by following past precedents. In view of this, this Ground of appeal of the Revenue is dismissed.
164. Ground No. 2 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in allowing deduction u/s 80IA and in directing to allocate common expenses."
It has been asserted before us that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment years and for the assessment year 2002-03 the Tribunal has set- aside the issue and restored the matter to the file of the Assessing Officer, vide order dated 15.7.2011 in Revenue's appeal in ITA No 105/PN/07. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and 82 findings given by the Tribunal for assessment year 2002-03. The Revenue succeeds on this Ground for statistical purposes.
165. Ground No. 3 is as under:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in allowing deduction u/s 80IA on interest received/receivable in respect of sales on deferred payment terms."
It was a common point between the parties that similar issue came up for consideration before our co-ordinate Bench in assessee's case for earlier assessment years and for the assessment year 2002-03 the Tribunal has set- aside the issue and restored the matter to the file of the Assessing Officer, vide order dated 15.7.2011 in Revenue's appeal in ITA No 105/PN/07. Therefore, following the precedent, we set-aside the order of the Commissioner of Income-tax (Appeals) and restore the issue to the file of the Assessing Officer to be decided afresh in accordance with the directions and findings given by the Tribunal for assessment year 2002-03. The Revenue succeeds on this Ground for statistical purposes.
166. Ground No. 4 is as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in directing the AO to allow the deduction u/s 80IB in respect of sale of scrap generated out of manufacturing process treating the same as business income."
On this Ground also, the parties stated that similar issue came up for consideration before our co-ordinate Bench in assessee's case for assessment year 2002-03, wherein the Tribunal has decided the issue against the Revenue and in favour of the assessee, vide order dated 15.7.2011 in Revenue's appeal in ITA No 105/PN/07. Therefore, following the precedent, we decide this Ground against the Revenue. The Revenue fails this Ground.
167. Ground No. 5 reads as follows:
"On the facts & in the circumstances of the case and in law, the ld CIT(A) erred in directing the AO to restrict the expenses incurred for earning tax free income to Rs 83 1,00,000/- without appreciating the fact that the assessee has not maintained any separate account in order to earn such tax free income."
This Ground is connected with Ground No. 13 of assessee's appeal vide ITA No.1157/PN/07, wherein we have set-aside the order of the Commissioner of Income-tax (Appeals) on this issue and restored the matter back to the file of the Assessing Officer for fresh consideration with certain directions following the past precedents in the assessee's own case. In view of this, we follow the same and restore this Ground to the file of the Assessing Officer. This Ground of the Revenue is allowed for statistical purposes.
168. In the result, Revenue's appeal, vide ITA No 1184/PN/07 is partly allowed.
169. We now take up assessee's appeal vide ITA No 1421/PN/05 for assessment year 1997-98.
170. Ground No. 1 relating to re-assessment of income under section 147 of the Act was not pressed at the time of hearing and, therefore, the same stands dismissed as not pressed.
171. Ground No. 2 is as follows:
"The ld CIT(A) has further erred in upholding disallowance of Rs 1,87,67,367/- being the amount of irrecoverable advance written off in the accounts."
This Ground is connected with Ground No. 5 of assessee's appeal in ITA No 961/PN/02, wherein we have discussed the issue in detail and held the issue in favour of the assessee. Following the parity of reasoning given therein, we hereby set-aside the order of the Commissioner of income-tax (Appeals) and direct the Assessing Officer to delete the impugned addition. The assessee succeeds on this Ground of appeal.
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172. Ground No. 3 relating to levy of interest under section 234B(3) of the Act was not pressed by the learned Counsel at the time of hearing and, therefore, the same stands dismissed as not pressed.
173. In the result, assessee's appeal, vide ITA No 1421/PN/05 is partly allowed.
Decision pronounced in the open Court on 06 th Day of March, 2012.
Sd.... Sd....
(I C SUDHIR) (G.S. PANNU)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Pune Dated: 06 th March, 2012
B
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