Income Tax Appellate Tribunal - Jaipur
Deputy Commissioner Of Income Tax vs Modern Syntex (India) Ltd. on 24 March, 2005
Equivalent citations: (2005)95TTJ(JP)161
ORDER
B.L. Khatri, A.M.
1. The abovementioned appeals have been filed by the Revenue as well as by the assessee against two different orders of the learned CIT(A), dt. 30th March, 1998, and 1st July, 1998, for the asst. yrs. 1994-95 and 1995-96, respectively. Since, these appeals pertain to the same assessee, we have decided to dispose of these appeals as under through a common order for the sake of convenience.
ITA No. 309/Jp/1998--Asst yr. 1994-95 (Revenue)Ground No. 1 : Reducing the disallowance made under Section 40A(3) from Rs. 56,051 to Rs. 44,041 (in fact, deletion of disallowance of Rs. 44,041).
2. The AO had discussed this issue at pp. 5 to 6 of his order and the learned CIT(A) had discussed this issue at p. 4 of his order. The brief facts of the case are that the Revenue is aggrieved against the deletion of disallowance of cash payment exceeding Rs. 10,000 made in violation of Section 40A(3) of the IT Act in respect of the following amounts :
S. No. Details Rs.
(i) Salary to Mukesh Bhargava 12,117
(ii) Salary to Rajeev Sisodia 16,924
(iii) Misc. Expenses 15,000
(iv) Medical bill of Maheshwari 12,000 confirmed by the CIT(A)
Total : 56,041
Thus, the learned CIT(A) deleted the disallowances mentioned at serial Nos. (i) to (iv). The Revenue is aggrieved against deletion of disallowance mentioned at serial Nos. (i) to (iii).
3. As regards the amounts paid to the employees, the learned CIT(A) observed at p. 4 of his order that the amounts were not paid by way of salary but by way of adjustment with the advance given earlier with the current salary. In respect of miscellaneous expenses, it was stated that individual items of expenditure are below Rs. 10,000 each. Actual payment is not covered by Section 40A(3) of the Act.
4. We have heard the rival submissions and perused the materials available on record. As regards the payments to the employees in violation of provisions contained in Section 40A(3) of the Act, the AO opined that such payments in cash are not covered by the exception provided in Rule 6DD(j) whereas the learned CIT(A) held otherwise. In this connection, it is considered pertinent to refer to Board Circular No. 220, dt. 31st May, 1977 (1977) 108 ITR (St) 8]. Clause (j) of Rule 6DD of the IT Rules, 1962, provides that no disallowance under Section 40A(3) of the IT Act, 1961, shall be made where the assessee satisfies the ITO that the payment could not be made by way of a crossed cheque drawn on a bank or by a crossed draft-
(a) due to exception or unavoidable circumstances; or
(b) because payment in the manner aforesaid was not practicable, or would have caused genuine difficulty to the payee, having regard to the nature of the transaction and the necessity for expeditious settlement thereof;
and also furnishes evidence to the satisfaction of the ITO as to the genuineness of the payment and the identity of the payee.
5. After perusal of the record, we find that the assessee could not explain before the AO or before us as to how payments in cash to the employees were covered by the abovequoted circular of the Board or by Rule 6DD(j) of the IT Rules. Therefore, the order of the learned CIT(A), as regards the payment of salary in cash, is reversed and that of the AO is restored.
6. As regards the cash payment of miscellaneous expenses amounting to Rs. 15,000, no disallowance can be made under Section 40A(3) of the Act as learned CIT(A) rightly held that individual items of expenditure are below Rs. 10,000 each. As such, these expenses are not in violation of Section 40A(3) of the Act. Thus, we find no infirmity in the order of the learned CIT(A) on this issue and the same is sustained.
Ground No. 2 : Reducing the disallowance of Rs. 14,30,87,000 being expenses incurred on issue of debentures compulsorily convertible into shares.
7. The AO discussed this issue at pp. 7 to 14 of his order and the learned CIT(A) discussed this issue at pp. 5 to 22 of his order. The brief facts of the case are that the assessee-company issued 1,52,67,350 secured fully convertible debentures (FCDs for short) at Rs. 120 each at par, aggregating to Rs. 183.20 crores. The debentures consisted of 2 parts of Rs. 60 each. Part A of the FCD was to be compulsorily and automatically converted into shares of Rs. 10 each at a premium of Rs. 20 each after six months and likewise Part B of the FCD was also to be converted into 2 shares of Rs. 10 each at a premium of Rs. 20 each after 18 months. The relevant details about fully convertible debentures issued by the assessee-company during the relevant previous year are as follows :
S. No. Particulars Date Chart 1. Public issue of FCD opened on 31-1-1994 2. Issue closed on 7-2-1994 3. First conversion 50 per cent 5-10-1994 4. Second conversion 50 per cent 5-10-1995 (a) in asst. yr. 1994-95, there is no conversion. (b) First conversion in asst. yr. 1995-96,
The assessee-company incurred an expenditure of Rs. 14,30,87,000 on various items in relation to the public issue of debentures in the asst. yr. 1994-95 and another sum of about Rs. 14.25 crores in the next year, i.e., asst. yr. 1995-96.
8. In the accounts of the company, this expenditure was not debited to the P&L a/c but was shown in the balance sheet under the heading "Pre-operative expenses". However, in the computation of income filed with the return of income for this year, the entire expenditure of Rs. 14,30,87,000 had been claimed as revenue expenditure.
9. The AO had disallowed the claim of deduction of Rs. 14,30,87,000 for the reason that such expenditure could be amortized only under Section 35D of the Act and should not be allowed as revenue expenditure. Such amortization was, however, held to be allowable from the previous year in which the unit started commercial production. The CBDT Circular No. 56, dt. 19th March, 1971, was not applicable to the facts of the case. The amount represents raising of share capital since the FCDs were fully convertible to shares after six months and 18 months, respectively, and, as such, other expenditure was of capital in nature and hence, not allowable.
10. The learned CIT(A) allowed the claim of the assessee-company holding that (i) the provision of Section 35D of the Act had no application to the impugned expenditure and (ii) the said expenditure was incurred on issue of debentures and the fact that the same were convertible into shares after a period of time and would not make any difference to deductibility thereof.
11. The learned Departmental Representative relied upon the order of the AO and particularly referred to paras (5) to (9) from pp. 11 to 13 of his order. He reiterated his arguments regarding Section 35D and Board's Circular No. 56, dt. 19th March, 1971, as it was mentioned by the AO in his order.
12. The learned Departmental Representative further made the following submissions :
The assessee-company set up a new POY plant incurring total cost of Rs. 513 crores for mobilizing the resources. The assessee issued the convertible debentures. The assessee had shown the expenditure incurred in respect of convertible debentures as preoperative expenses in the books of account but claimed as revenue expenditure under Section 37(1) in the return of income, relying on the Hon'ble Supreme Court decision in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), as there was backward integration for manufacture of basic raw material for yarn which assessee was manufacturing. The assessee also relied upon the Circular No. 56, dt. 19th March, 1971, according to which Section 35D will not apply if expenditure is allowable under any other provision if assessee claims so, in view of the decision of Hon'ble Supreme Court in India Cements Ltd. v. CIT (supra). The assessee further contended that the nature of expenses should be seen at the time of its incurrence and in the case of the assessee the expenditure was incurred for convertible debentures not for share capital. The assessee also relied upon the cases of Dy. CIT v. A.T.V. Projects India Ltd. (2003) 79 TTJ (Mumbai) 1010 : (2003) 84 ITD 470 (Mumbai) (ITA No. 50/Mumbai/1996 date of order 6th May, 1996) and Produce Exchange Corpn. Ltd. v. CIT (1970) 77 ITR 739 (SC). After considering the submissions and facts of the case, the AO held that the facts of the assessee are different from India Cements Ltd. (supra) and the Board's Circular No. 56 was not applicable as Hon'ble Supreme Court's decision was delivered in 1966 when the provision of Section 35D was not on statute. The AO has given distinguishing factors of the case on p. 10 in para 2 of his order. Secondly, the AO held that fully convertible debentures cannot be equated with simple loan transaction. The fully convertible debentures are issued only for raising the share capital. Hence, expenses thereof are covered by Section 35D for the year in which commercial production has started. During the year no production for new unit has started. Hence, no deduction under Section 35D is allowable. It has also been mentioned by the AO that the chartered accountant of the assessee-company also advised to the assessee that these are preliminary expenses which can be claimed under Section 35 of the Act. As per para 3 of the tax benefits explanation in the prospectus (p. 11, para 4), it is also advised that conversion of convertible debentures into shares shall not be transferred under Section 47 for capital gains (Para 6C of tax benefit). Hence, convertible debenture in substances is a share capital not a loan (para 5 p. 11). The AO further noticed that other group companies said that expenditure has been amortized treating convertible debentures at par with equity (para 6 of the AO). In case of expenses pertaining to NCD, the group companies have amortized the expenses pertaining to NCD. Hence, all convertible debentures should also be amortized (Para 7 of the AO). The AO further observed that as per Section 37(1), these conditions are to be fulfilled for allowance of any expenditure under that section which has not been fulfilled by the assessee. Hence, expenses are not allowable under Section 37(1) (para 8 of the AO). Lastly, the AO has also given finding that if any expenditure is allowable under Section 35D, it should be allowed in respect of Rs. 9,51,79,367 and on balance Rs. 4,79,07,633 no deduction can be allowed under Section 35D as it is an expenditure of capital nature. During the year, there is no commencement of business/production in the new unit, hence nothing is allowable under Section 35D (para 9, p. 13 of the AO). He also mentioned that as per Board's Circular No. 56, (supra), amortization is limited to 2 1/2 per cent. The learned Departmental Representative relied upon the case of assessment order and finding given by the AO. He has also mentioned in p. 6 of the prospectus under the head conditions imposed on non-payment. The learned Departmental Representative relied upon the case of Banco Projects India Ltd. v. Dy. CIT (1997) 59 TTJ (Ahd) 387 : (1997) 63 ITD 370 (Ahd),
13. The learned Authorised Representative supported the order of the learned CIT(A), inter alia on the following grounds :
(a) Expenditure on issue of debentures allowable revenue deduction per se.
Expenditure on raising of loan is allowable revenue deduction in terms of Section 36(1)(iii)/37(1) of the Act. [Refer Supreme Court decision in the case of India Cements Ltd. v. CIT (supra)].
Raising of loan through issue of debentures is different than raising of money through issue of shares. [Refer Indian Cement Ltd. v. CIT (supra) p. 61].
Expenditure on issue or debentures has been held allowable revenue deduction by the Hon'ble Bombay High Court in Premier Automobiles Ltd. v. CIT (1971) 80 ITR 415(Bom).
14. The learned Authorised Representative submitted that insertion of Section 35 had not made any difference to the legal situation.
Section 35D was inserted by the Taxation Laws (Amendment) Act, w.e.f. 1st April, 1971, to provide for amortization of certain preliminary expenditure specified in Sub-section (2) of that section. The said section is an enabling provision to enable amortization which is otherwise capital in nature and not intended to supersede any existing provision, under which revenue deduction is available for any expenditure.
The legislative intent is clear from CBDT Circular No. 56, dt. 19th March, 1971, containing explanatory notes on the provisions of Taxation Laws (Amendment) Act, 1970. Para 45 of the said circular is relevant.
A perusal of the circular would show that the provisions of Section 35D are not intended to supersede/override any existing provisions of law, nor does the same get over the ratio of the Supreme Court decision in the case of India Cements Ltd. (supra).
Section 35D is an enabling provision which enables the assessee to obtain amortization of certain preliminary expenditure, which is otherwise capital in nature and not allowable deduction. Where the expenditure is otherwise admissible as revenue deduction, with the introduction of Section 35D, an assessee has an option to claim revenue deduction for such expenditure under the existing provisions or alternatively to claim amortization thereof under the provisions of Section 35D.
In the following cases, it has been held that expenditure on issue of partly convertible debentures/and debentures is allowable revenue deduction, notwithstanding Section 35D of the Act.
(i) CIT v. East India Hotels Ltd. (2001) 252 ITR 860 (Cal) at p. 862.
(ii) Whirlpool of India Ltd. v. Dy. CIT (Delhi Bench of Tribunal in ITA No. 1904/Del/1999 (at paper book page No. 100-106--gist at pp. 100-101).
(iii) Kelvinator of India Ltd. v. Dy. CIT (Delhi Bench of Tribunal in ITA No. 7275/Del/1992 (at paper book page No. 107-112--gist at pp. 108-110).
(iv) Voltas Ltd. v. Dy. CIT (1998) 61 TTJ (Mumbai) 543 (pp.73-87 or the paper book, relevant p. 81).
(v) JM Shares & Stock Brokers Ltd. v. Dy. CIT (2004) 83 TTJ (Mumbai) 1052 (Mumbai Bench of Tribunal in ITA No. 434/Mum/1997) (pp. 88-92 of the paper book, relevant pp. 88-90).
(vi) Tata Chemicals Ltd. v. Dy. CIT (2001) 70 TTJ (Mumbai) 805 : (2000) 72 ITD 1 (Mumbai) at p. 53 para 69.
(vii) Goodyear India Ltd. v. ITO (2000) 68 TTJ (Del)(TM) 300 : (2000) 73 ITD 189 (Del)(TM).
15. The prospectus issued clearly indicates the terms of conversion. The expenditure was on issue of debentures, in other words, for raising of loan. Subsequent conversion of such debentures into shares would not make any difference to the deductibility of the expenditure on issue of such debentures.
16. In the following cases, expenditure on issue of debentures partly or fully convertible into share subsequently had been held allowable as revenue deduction :
(i) CIT v. East India Hotels Ltd. (supra).
(ii) Whirlpool of India Ltd. v. Dy. CIT (supra).
(iii) Kelvinator of India Ltd. v. Dy. CIT (supra).
17. The learned Authorised Representative distinguished the case law relied upon by the learned Departmental Representative and also refuted the arguments raised by him. The learned Authorised Representative has given the reply to the arguments of the learned Departmental Representative as under :
(a) It does not make any difference to the legal situation regarding deductibility of expenditure on issue of debentures, whether the same are partly or fully convertible. Where the conversion of debentures into shares, whether in part or as a whole, is to take place subsequent to the issue of debentures, the entire expenditure has to be allowed revenue expenditure.
(b) Again, whether the debentures are issued for financing expansion of existing business or for setting up of new unit, is not material to the claim for deduction of expenditure on issue of debentures as business expenditure.
It has been repeatedly held by the Courts that expenditure on raising loan is allowable deduction in full, irrespective of the purpose to which the loan is put, whether for acquisition of capital assets or for defraying revenue commitment.
[Refer India Cements Ltd. v. CIT (supra) and CIT v. J.K. Industries (P) Ltd. (1980) 125 ITR 218 (Cal)].
(c) The fact that the debentures issue expenditure was capitalized as pre-operative expenditure in the balance sheet, would not determine the deducibility thereof. The Supreme Court in the following cases held that entries in the books of account do not determine deducibility or otherwise of an item of expenditure (Refer Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC)].
(d) The learned CIT--Departmental Representative referred to prospectus (p. 41 of the paper book) wherein M/s S.S. Kothari & Co., chartered accountants, has spelt out the tax benefits available to the company. It has been opined by the chartered accountants that amortization under Section 35D of the Act would be available to the assessee-company in respect of debenture issue expenses. The statement contained in the prospectus is an expression of opinion of the said firm of chartered accountants and does not determine the legal nature of the said expenditure. The opinion of the professional firm is not binding either on the assessee on the Revenue.
(e) The learned CIT--Departmental Representative referred to prospectus (p. 49 of the paper book) to show that the fully convertible debentures were regarded by the assessee itself as part of equity. The disclosure at p. 49 of the paper book is with regard to Modern Suitings Ltd., (MSL), an altogether distinct and separate legal entity. Fully convertible debentures issued by that company have been treated as part of equity subsequent to conversion of the debentures into equity, as is clear from the following note appearing below the table at p. 49 of the paper book :
"Convertible debentures are as a part of equity.
Annualized and on weighted average on the enhanced equity share capital, consequent to the conversion of the fully convertible debentures issued by the company."
(f) Even if it be taken that there is diversion of judicial opinion on the issue whether expenditure on issue of fully convertible debentures is allowable in full as business expenditure or is to be amortized under Section 35D or has to be allowed in part, it is settled law that where two views are possible, the view favourable to the assessee needs to be adopted. [Refer CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC) and CIT v. J.K. Hosiery Factory (1986) 159 ITR 85 (SC)].
18. We have heard the rival submissions and relevant case law on the subject. The assessee-company is engaged in the manufacture of synthetic yarn. A new unit has also been set up at Baroda for manufacture of PFY and POY which is a raw material for the manufacture of yarn. During the year under appeal, the assessee claimed deduction for expenses of Rs. 14,30,87,000 as issue expenses for fully convertible debentures. The details of debenture issue expenses are as under as per paper book p. 5 :
S. No. Particulars Amount
1. Service charges for subscribing to debentures issue 2,18,25,150
2. Fee to lead managers & co-managers to the issue 1,83,65,000
3. Drafting & printing charges of prospectus, etc. 4,47,10,467
4. Advertisement expenses 5,04,68,900
5. Listing fee 2,52,650
6. Mailing & courier charges 52,13,154
7. Other expenses 22,51,679
Total : 14,30,87,000
19. We are of the opinion that debenture is nothing more than an acknowledgement of indebtedness, It is a statement that, company will pay a certain sum of money on given day and will also pay interest on the same. Debenture means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until debenture is redeemed, i.e., payment of principal sum. The characteristic features of the debentures are as follows :
1. It is issued by the company and it is in the form of certain indebtedness.
2. It provides for repayment of principal and interest at specified date or dates.
The debenture is nothing but another form of loan on which interest is payable. The debentures cannot be equated with the shares. There is lot of difference between debenture and share.
20. As regards convertible debenture, the company may also issue other debentures in which case the option is given to the debenture holders to convert them into equity or preferential share at stated rate of exchange after certain period. Thus, debenture conversions is also another form of loan for a specified period till they are converted into shares. Interest is payable on convertible debenture till they are converted into shares when dividend becomes payable. In other words, the interest is payable on debentures which are in the form of debt/loan and dividend is payable when debentures are converted into shares.
21. The issue whether the expenditure incurred for the purpose of making borrowings even if such borrowings are used for acquiring capital assets like plant and machinery can be allowed as revenue expenditure or not has been settled by the decision of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT (supra). The Hon'ble apex Court held in this case as under:
"To summarize this part or the case, we are or the opinion (a) that the loan obtained is not an asset of advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within Section 10(2)(xv)."
22. Section 35D provides for amortization of preliminary expenses. This section grants a deduction in respect of expenditure which may otherwise be disallowable on the ground that it is of a capital nature or is incurred prior to the setting up of the business. In other words, expenditure which is otherwise allowable as revenue expenditure (for example, debenture issue expenses) cannot be brought within the purview of this section as has already been held in the cases of CIT v. East India Hotels (supra) and CIT v. Mahindra Ugine & Steel Co. Ltd. (2001) 250 ITR 84 (Bom).
23. We agree with the view of the learned Authorised Representative that expenditures on issue of partly convertible debentures and fully convertible debentures are allowable as revenue deduction, notwithstanding the provision contained in Section 35D of the Act as held in the various orders of the Tribunal Benches. The learned Authorised Representative had rightly placed reliance on the case of Goodyear India Ltd. v. ITO (supra), wherein it was held as under;
"15.15 In view of the aforesaid facts and discussions, we are of the considered opinion that the allowability of revenue expenditure incurred for obtaining the use of the technical know-how under Section 37(1) remains unaffected by the new Section 35AB introduced from asst. yr. 1986-87."
24. Drawing analogy from the aforesaid decision, it is evident that Section 35D could not be regarded as a specific provision, overriding the general provision of Section 37(1) of the Act. Both, Section 35D and Section 37(1) are enabling provisions and not mutually exclusive. In this connection, it is pertinent to reproduce para 45 of the CBDT Circular No. 56, dt. 19th March, 1971, which reads as under :
"45. it may be noted that the provision for amortization is not intended to supersede any other provision in the income-tax law under which the expenditure is allowable as a deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures and such expenditure is admissible as a deduction against profits of the year in which it is incurred, by virtue of the decision of Supreme Court in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), Section 35D will not have the effect of bringing that expenditure within the scope of the expenditure to be amortized against profits over a 10 year period. As a corollary to this, where any expenditure has been incurred for the purpose of amortization under Section 35D, on a claim being made by the assessee in that behalf, such expenditure will not qualify for deduction under any other provision of the Act for the same or any other assessment year vide Sub-section (6) of Section 35D."
25. A perusal of the circular shows that the provisions of Section 35D are not intended to supersede/override any existing provisions of law, nor does the same get over the ratio of the Supreme Court decision in the case of India Cements Ltd. v. CIT (supra). The CBDT circular clarifies the provisions of Section 35D which was inserted in the statute in the year 1971 and are not intended to overcome the decision delivered in the abovementioned case. It was made clear that ratio of the decision of Hon'ble apex Court in the case of India Cements Ltd. (supra) would continue to be followed even after introduction of provisions of Section 35D of the Act. We have already held that convertible debentures are also in the form of loan till they are converted into shares. On convertible debentures, interest is payable and on shares dividend is payable. The learned Authorised Representative rightly cited various orders of Tribunal Benches wherein such expenses on partly or fully convertible debentures had been held allowable. Subsequently, the learned Authorised Representative placed reliance on the case of Tata Chemicals Ltd. v. Dy. CIT (supra), at p. 53, para 69. In this case, it was held that such expenses are allowable in nature. The solitary decision which is in favour of the Revenue is in the case of Banco Products (India) Ltd. v. Dy. CIT (supra). We are to follow the opinion of the majority of the Benches as held through various orders of Tribunal Benches earlier cited by us. Besides, we find that the decision of Hon'ble Calcutta High Court in the case of CIT v. East India Hotels Ltd. (supra) was not available when the decision of Tribunal, Ahemdabad, was rendered. It was held in this judgment at pp. 862-863 that expenditures incurred on convertible debentures are also allowable as revenue deduction.
26. We agree with the view of the learned counsel for the assessee that entries in the books of account do not determine the deducibility or otherwise of an item of expenditure. The learned Authorised Representative relied upon the following case law :
1. Kedar Nath Jute Mfg. Co. Mills v. CIT (supra)
2. Sutlej Cotton Mills Ltd. v. CIT (supra)
27. Reliance can also be placed on the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC). In this decision, the Hon'ble apex Court held that no adjustment can be allowed unless permitted by the IT Act. However desirable it may be from the point of view of equity, the accountants may have taken some other view but accountancy practice is not necessarily good law. Therefore, irrespective of the facts mentioned in the prospectus by the accountants or any entries in the books of account, we hold that deduction is allowable as per provision of law on the basis of claim made through return of income. Having regard to the facts of the case and the provisions of law, we sustain the order of the learned CIT(A) for the reasons given therein on this ground.
Ground No. 3 : Reducing the disallowance of Rs. 1,22,25,000 being interest.
Financial expenses as bank charges which are in the nature of capital expenditure.
28. The AO discussed this issue at pp. 14-16 of his order and the learned CIT(A) discussed this issue at pp. 23-26 of his order. In this case, the AO had disallowed these expenses for the reason that the assessee had capitalized the expenditure itself in the balance sheet, the business in relation to which the expenditure was incurred had not yet commenced and business was a new business. The interest paid before the commencement of the business is in the nature of preoperative expenses and similarly, the expenditure incurred on brokerage, documentation and management fees is also to be disallowed being capital in nature.
29. The learned CIT(A) held these expenses of revenue in nature on the ground that there was no new business. It was the expansion of the existing business. After analyzing the case law on the subject and the facts of the case, he concluded at p. 26 of his order that this being a case of backward integration, the business has to be treated as the same business. Accordingly, he held that the expenditure in question was allowable as revenue expenditure.
30. The learned Departmental Representative relied upon the order of the AO and submitted that separate units for producing entirely new products have been set up and this cannot be considered as expansion of the business.
31. The learned Authorised Representative submitted that assessee is engaged in manufacture of synthetic blended yam since last so many years. The unit at Baroda was set up to manufacture Polyester Filament Yarn (PFY) by way of backward integration since PFY is a raw material used in the manufacture of synthetic blended yarn. There is complete interlacing of funds, unity of control, common management, common administration, etc., pervading two lines of activities. Applying the tests laid down in the following decisions, it is to be held that the two lines of activities constitute one and the same business :
(i) CIT v. Prithvi Insurance Co, Ltd. (1967) 63 ITR 632 (SC)
(ii) L.M. Chhabda & Sons v. CIT (1967) 65 ITR 638 (SC)
(iii) Produce Exchange Corp. Ltd. v. CIT (1970) 77 ITR 739 (SC)
(iv) B.R. Ltd. v. CIT (1978) 113 ITR 647 (SC).
On an application of the principles laid down in the aforesaid decisions, it has been held by the Courts, including the jurisdictional High Court in the following decisions that the expenditure incurred by the existing business on expansion/setting up of a new unit is allowable revenue deduction, even if the new unit had not commenced production :
(i) Veecumsees v. CIT (1996) 220 ITR 185 (SC)
(ii) CIT v. Shah Theatres (P) Ltd. (1988) 169 ITR 499 (Raj)
(iii) CIT v. Tarai Development Corpn. Ltd. (1994) 205 ITR 421 (All)
(iv) Prem Spinning & Weaving Mills Co. Ltd. v. CIT (1975) 98 ITR 20 (All)
(v) Dy. CIT v. Core Healthcare Ltd. (2001) 251 ITR 61 (Guj)--affirmed decision of the Tribunal in Core Healthcare Ltd. v. Dy. CIT (2000) 70 TTJ (Ahd)(TM) 490 : (2001) 78 ITD 1 (Ahd)(TM)
(vi) Addl. CIT v. Aniline Dye Stuffs & Pharmaceutical (P) Ltd. (1982) 138 ITR 843 (Bom)
(vii) CIT v. Hindustan Machine Tools Ltd. (1989) 175 ITR 212 (Kar)
(viii) CIT v. Modi Industries Ltd. (1993) 200 ITR 341 (Del)
(ix) CIT v. Malwa Vanaspati & Chemicals Co. Ltd.
(x) CIT v. Tata Chemicals Ltd. (2002) 256 ITR 395 (Bom)--affirmed decision of Tribunal in (2001) 70 TTJ (Mumbai) 805 : (2000) 72 ITD 1 (Mumbai) (supra).
32. We have heard the rival submissions and perused case law on the subject. In this case, the assessee was engaged in the business of manufacturing synthetic yarn for which the raw material is EOY/PFY. The assessee started a new unit at Baorda for the manufacture of PYF which is the raw material for the manufacture of yam and, as such, it was the extension of the existing business. The total cost of the new unit was Rs. 513 crores which was financed by Fully Convertible Debentures (FCDs) of Rs. 280 crores, foreign currency loan/buyers credit of Rs. 178 crores, NCD of Rs. 48 crores and internals accruals of Rs. 6.95 crores. This shows that there was inter-mixing of the funds with the existing unit. For both the units, a common balance sheet was prepared and there was a common management for both the units. This being a case of backward integration, the business have to be treated as the same business.
33. The law as to when a business is treated as one or more than one is well-settled. In order that the two activities may constitute only a single business, such activity should be inter-related, inter-dependent with interlacing of funds, following the dictum in Scales v. George Thompson and Co. Ltd. (1927) 13 Tax Cases 83.
34. The Hon'ble Supreme Court in Setabgan] Sugar Mills Ltd. v. CIT (1961) 41 ITR 272 (SC), had laid down the test for determination if different ventures constitute the same business. Their Lordships have quoted with approval a passage from Scales v. George Thompson & Co. Ltd. (1927) 13 Tax Cases 83 (p. 274).
"...The real question is, was there any inter-connection, any interlacing, any interdependence, any unity at all embracing those two business."
This law was reiterated in Oswal Trading Co. v. CIT (1988) 233 ITR 385 (MP),
35. After having considered the catena of judgments quoted by learned Authorised Representative and also the decision of Hon'ble apex Court in the case of Setabganj Sugar Mills Ltd. v. CIT (supra), we are of the opinion that tests for determining the fact that if two ventures constitute the same business had been satisfied. The learned CIT(A) had rightly held that this is a case of expansion of the existing business and the expenditure incurred for the purpose is to be considered as revenue expenditure as has been held in the cases relied upon by the learned CIT(A) in his order. The contention of the learned Authorised Representative also finds support from the case of Dy. CIT v. Manglam Cement Ltd. (2005) 92 TTJ (Jp)(TM) 1 : (2005) 92 ITD 44 (Jp)(TM) and also from the case of CIT v. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj). Thus, we find no infirmity in the order of the learned CIT(A) and the same is sustained for the reasons given therein.
ITA No. 555/Jp/1998--RevenueGround No. 1 : Deleting the addition of Rs. 13,99,84,000 made by disallowing the expenses incurred on issue of debentures compulsorily converting into shares.
36. This issue has already been decided by us in ITA No. 309/Jp/1998 for the asst. yr. 1994-95 (supra). Accordingly, we sustain the order of the learned CIT(A) for the reasons given by us for the asst. yr. 1994-95.
Ground No. 2 : Deleting the disallowance of Rs. 16,28,69,000 being interest which are in nature of capital expenditure.
37. This issue has already been decided by us in ITA No. 309/Jp/1998 for the asst. yr. 1994-95. Accordingly, the order of the learned CIT(A) is also sustained on this ground for the reasons given therein.
Ground No. 3 : Directing the AO to assess the interest income of Rs. 9,88,09,511 as income from business as against taxed by AO under the head "Income from other sources" in view of the decision in CIT v. Manglam Cement Ltd. (1996) 217 ITR 369 (Raj) and (1997) 227 ITR 172 (SC) (supra).
38. This issue has been discussed by the AO from pp. 14 to 19 of his order and the learned CIT(A) has discussed this issue at pp. 6 to 8 of his order. In this case, the AO taxed the interest income of Rs. 9,88,09,511 as income from other sources and the assessee had shown the same income from business. The AO had taken the interest as income from other sources on the ground that the assessee-company was setting up a new unit and, as such, interest earned before the commencement of business by the new unit is to be assessed as income from other sources as per the decisions of Hon'ble Rajsthan High Court in the case of Managlam Cement Ltd. (supra) and the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (supra).
39. The learned CIT(A) had held that the decisions mentioned by the AO are not applicable to the assessee-company as it was not a case of setting up a new unit or new business but was only extension of the existing business.
40. We have heard the rival submissions and perused the materials available on record. It has already been held by us that this was the case of expansion of existing business. Even the case of the existing business is covered by the decision of Hon'ble Rajasthan High Court in the case of CIT v. Rajasthan Land Development Corporation (1995) 211 ITR 597 (Raj). In this connection, it is pertinent to reproduce the point Nos. (iii) and (iv) from the decision of the Hon'ble High Court :
(iii) interest income in respect of surplus money, not required for business and deposited in bank or person, as idle money, for safe keeping, would be assessable as income from other sources. If the income from interest is from a fund which has been brought as surplus capital, it would be assessable as income from other sources,
(iv) in respect of investment of surplus funds there is divergence of opinion between different High Courts and this Court in the case of Murli Investments Co. held that if the surplus funds are invested instead of keeping them idle, the income by way of interest should be treated as income from other sources.
41. After going through this decision of the Hon'ble jurisdictional High Court, we find that the assessee had invested the surplus fund with the bank on which interest had been earned. Therefore, this interest income of Rs. 9,88,09,511 is to be assessed as income from other sources. The learned CIT(A) has erred in holding that this income was assessable as income from business. Thus, the order of the learned CIT(A) is reversed on this ground and that of the AO is restored.
ITA No. 522/Jp/1998--Assessee42. In this appeal, the assessee is aggrieved on ground that the learned CIT(A) erred in upholding the disallowance of Rs. 14.25 lacs made by the AO towards commission and brokerage paid for the business of the company and secondly, the learned CIT(A) erred in not accepting the evidence of above expenditure at the time of hearing an appeal and without appreciating the difficulties of the assessee-company in not producing the evidence before the AO.
43. The AO had discussed this issue at pp. 12 and 13 of his order and the learned CIT(A) discussed this issue in para 5 at pp. 3 and 4 of his order. We have heard the rival submissions and perused the materials available on record. In this case the AO had disallowed the commission and brokerage expenses of Rs. 14.25 lacs on the ground that the assessee was unable to produce the details, break-up, the names of the payees and the copies of agreements. The assessee could not produce these evidences for the reason that the files relating to these concerns, namely, M/s Anand Yarn and M/s Proma Overseas, were not traceable because of the shifting of their office. The learned CIT(A) had not accepted the plea of the assessee for admission of additional evidence and he dismissed the appeal of the assessee that no evidence was produced before the AO.
44. After appreciation of the facts, we are of the opinion that assessee was prevented by the sufficient cause for not producing the evidence before the AO. In the interest of substantial justice, this issue is restored to the file of the learned CIT(A) with the direction that he should readjudicate upon this issue after admitting the fresh evidence filed by appellant-company and after allowing an opportunity of being heard to both the parties.
45. In the result, both the appeals of the Department in ITA No. 309/Jp/1998 and ITA No. 555/Jp/1998 are partly allowed and the appeal of the assessee in ITA No. 522/Jp/1998 is allowed for statistical purposes.