Income Tax Appellate Tribunal - Mumbai
Smt. Madhu Gupta vs Dy Cit, Central Circle-3 Mumbai on 27 February, 2006
Equivalent citations: [2006]8SOT691(MUM)
ORDER
K.P.T. Thangal, V.P. This appeal by the assessee is for the assessment year 2001-02.
2. The first ground of objection by the assessee is directed against the order of the Commissioner (Appeals) in confirming the addition on account of perquisite value of Rs. 12,30,149 being difference between written down value of Rs. 17,12,893 as per Companies Act and purchase price of machinery of Rs. 4,82,744 from M/s. G.G. Photo Ltd.
3. The second ground of objection by the assessee is directed against the order of the Commissioner (Appeals) in confirming the addition of Rs. 10,01,161 as interest income of M/s. Shree Chitra (proprietary concern) from four parties.
4. The third ground of objection by the assessee is directed against the order of the Commissioner (Appeals) in confirming the disallowance of Rs. 3,39,32,311 under section 80-IB of the Income Tax Act, 1961.
5. The third ground was addressed before us first by the learned counsel for the assessee.
6. The assessee filed the return on 31-10-2001, declaring income at Rs. 5,14,717. The case was selected for scrutiny. The assessee is carrying the business of making photographic films out of jumbo rolls in the style and name of "Photo Film Industry" (hereinafter referred to as 'PFI') and also manufacturing and sale of 35 mm and 16 mm cinematographic positive films used in the film industry for exhibition of movies and release of films in cinema halls. The raw materials used in jumbo rolls are imported from AGFA Belgium. The raw material imported is converted into final product through the process of tilting, slitting, perforation and packaging. According to the assessing officer, the assessee started making of cinema roll on 6-11-2000 upon the plot, which was allotted to the assessee on 6-9-2000, with Sales Tax exemption for five years. Prior to this, the business of the assessee was giving loans to various parties and making investments. The assessee changed the business all of a sudden. Incidentally, assessing officer noticed; Smt. Madhu Gupta, the assessee, was substantial shareholder in the company, M/s. G.G. Photo Limited (hereinafter referred to as 'GGPL'). Assessing Officer further noticed, GGPL was involved in identical business; the unit was set up in the year 1995 and the production was commenced on 2-11-1995 with Sales Tax exemption for a period of five years. Assessing Officer also noticed, Sales Tax exemption of GGPL expired on 22-11-2000; hence, the lease for the plot was surrendered on 30-8-2000 and that GGPL was involved in absolutely identical business, which is now conducted by the assessee. GGPL also submitted manufacturing activity during the course of their assessment vide letter dated 12-12-2003, exactly explaining the conversion from jumbo rolls into final product, consisting of four stages mentioned above, i.e. tilting, slitting, perforation and packaging.
7. There was a search action conducted in this group on 26-9-2000. The address of the concerns GGPL and PFI are one and the same, ie. B- 134/ 137, PIPDIC Industrial Area, Mettupalayam, Pondicherry-605 009, with administrative office at 42, Irish Park, JVPD Scheme, Juhu, Mumbai400 049. Assessing Officer held, the surrender of plot by GGPL and allotment of the same plot to the assessee, ie. PFI on 6-9-2000 cannot be a coincidence but intentional tax avoidance plan. The licence of GGPL was cancelled under the Factories Act, 1948, vide letter No. 3603/F/CIF&B/ 2000, dated 3-10-2000 in reference to letter dated 8-9-2000 and the licence to the assessee was granted on the same day vide letter No. 4647/CIF&B/2000, dated 3-10-2000 in response to their application dated 8-9-2000 by the same Chief inspector of Factories. Assessing Officer noticed, the following process which is exactly identical in the case of both the parties:
PHOTO FILM INDUSTRIES G. G. PHO TO L TD.
PROCESS IDENTICAL IDENTICAL Purchase Party Agfa Gevart N.V. Belgium Agfa Gevart N.V. Belgium Address of Factory Same Same Licence under Factory Act Allotted on 3-10-2000 Cancelled on 3-10-2000 Lease of same plot Allotted on 6-9-2000 Surrendered on 30-8-2000 Sales tax exemption Commenced on 6-9-2000 Expired on 22-11-2000 Production Commenced on 6- 11-2000 Closed on 30-8-2000 Statements were recorded from various employees.
8. During the search and seizure action at the factory premises of GGPL, Mettupalayam, Pondicherry, it was found that the name of the company, outside on the company board was written as "Photo Film Industry", whereas it would have been GGPL. The General Manager of GGPL, Shri Natarajan stated; PFI, a proprietary concern of Smt. Madhu Gupta, wife of Sushil Gupta, Director of GGPL is running business from the very same premises. He was asked about the plant and machinery installed with GGPL and the building constructed on the plot. He was also asked to explain, as there was no separate purchase of plot for PFI and no separate construction of building either or any installation of new machinery in the premises. Shri Natarajan confirmed that this was the very same plot, same machinery and the building used by GGPL. It was further submitted, there was no separate construction of building for PFI and there was no new purchase of machinery. He further submitted that the plot was surrendered to PIPDIC Industrial Estate and the same was re-allotted to Smt Madhu Gupta, wife of Sushil Gupta, Director of GGPL Shri Natarajan further submitted, all the infrastructure used by the assessee are the same; only name changed on paper from GGPL to PFI. The reason for change was also asked. The mere reply was that he is working on behalf of the management and the management has changed the name; that is all. He was also asked for the office address of PFI. It was given as Plot No. 2, Ajantha Apartments, Saradmbal Nagar, Pondicherry. Shri Natarajan further submitted that be was directed by the management for using the address for correspondence purpose for PFI. The extract from the statement is quoted by the assessing officer at pages 3 and 4 of his order. From the statement, assessing officer came to the conclusion that the change of name was merely to avail Sales Tax benefit, which was expiring in the case of GGPL on 22-11-2000 and to avail the same, business was started in the name of major shareholder of the company, i.e. Smt. Madhu Gupta, sole proprietress of PFI.
9. Assessing Officer further noticed, in spite of the change of proprietorship, the very same employees of GGPL continued to work with PFI. The names of the employees are also given by the assessing officer at page 4 of his order. Thus the assessing officer came to the conclusion that even all the workers, including main Manager, continued to be one and same, though the same was changed from GGPL to PFI. Assessing Officer reproduced the statement from Shri Pavan Manghnani, Accountant, under section 131 and statements from Shri V. Sudarshan, Shri S.G. Ravi, Shri K. Rajendran and Shri A. Gurumurthy under section 133A. The statements are partly reproduced vide pages 5 to 10 of assessing officer's order. From the above statements, assessing officer come to the following conclusion in regard to management & staff and machinery "4.3-1 Management& Staff:
(i) There was no change and more than 95 per cent of the skilled staff i.e. technicians, Quality Controller, Managers continued from G.G. Photo Ltd. to Photo Film Industries.
(ii) The staff continued to do the same job in Photo Film Industries as they were doing in M/s. G.G. Photo Ltd.
(iii) The process of production of chematography rolls was identical as was in the case of G.G. Photo Ltd.
(iv) The input being from only purchase party Agfa remained the same in both the concerns.
(v) The output and its process remained the same as was in the case of M/s. GG Photo Ltd.
(vi) There was practically no change but for the name of the concern from M/s. GG Photo Ltd. to Photo Film Industries.
4.3-2 Machinery
(i) All the machinery which was owned by G.G. Photo Ltd. and was lying at the Pondicherry factory premises were used by Photo Film Industries though not transferred on paper, butassuch it was a full transfer of machinery or can be called an arrangement for usage by the new concern.
(ii) There was no machinery which was moved out of the premises ever.
(iii) There were no major repair of machinery since being transferred from G.G. Photo Ltd.
(iv) There was only civil work carried out of the dark rooms during the period of transfer from G.G. Photo Ltd. to Madhu Gupta (Photo Film Industries).
(v) The machinery showed to be owned by Photo Film Industries was installed much prior to the starting of the activity of Photo Film Industries (refer B6, Answer 23).
(vi) The slitter is the main machinery required for the activity, as it is being only one which is installed and cuts the jumbo rolls and has been in very good condition throughout.
(vii) The valuation of machinery was never carried out, as they were never moved out of the dark room.
(viii) The assessee has transferred only part of the machinery on paper and continued to use all the machinery of M/s. G.G. Photo Ltd. The same was required for the production.
(ix) The part of machinery which was transferred on paper, that too at lower cost, so as to arrive at a ratio of below 20 per cent as regards old machinery to total machinery.
(x) The usage of balance machinery of G.G. Photo Ltd. (not transferred on paper) was in full but for certain machinery (being perforators not used for a long time) and were used in the production of the assessee.
(xi) All the assets including plant and machinery, building were transferred from G.G. Photo Ltd. to Photo Film Industry for its use and benefit.
(xii) M/s. Photo Film Industries bought four perforators but without slitter and other 12 perforators, the production and production level both cannot have been achieved.
(xiii) Even the value of building has to be taken into account, as dark rooms perse are required for the production of films and thereby is a plant in nature and the value of the same needs to be calculated for arriving at value of old plant and machinery.
(xiv) The party G.G. Photo Ltd. has not charged any rental income from Photo Film Industries on the usage of balance machinery & building and even if the rental/lease rental was charged, they are to be calculated and added to the value of old machinery, as they form dominant part in production activity as laid down in the case of CIT v. Suessin Textiles, Ball Bearing & Products (P.) Ltd. 118 ITR 45 (Bom.) as the dark rooms, perforators, air-conditioning plant were mandatory for production.
4.4 Conclusion - The business Photo Film Industries is a mere reconstruction of the business of M/s. G.G. Photo Ltd. which was already in existence as;
(i) The process of making the film was identical.
(ii) The management and staff at the factory premises remained identical.
(iii) The final product was identical.
(iv) The purchase party being the one remained the same i.e., Agfa Belgium in both the cases.
(v) All the machinery of M/s. G.G. Photo Ltd. was utilised by the assessee and the assessee has merely shown that the four perforators were brought but the slitter and the balance 13 perforators were already thereof G.G. Photo Ltd, (w) The new perforators were doing the same job as the earlier perforators and the new were only four in number as compared to 13 old perforators.
(vii) The slitter being the most critical was transferred from G.G. Photo Ltd.
(viii) There was no new business in the case of M/s. Photo Film Industries, it was just taken over from the business of G.G. Photo Ltd.
4.5 So in view of the elaborate facts and evidences found during the search on 26-9-2000 and survey on 8-3-2004 wherein identical facts were revealed, it is clear that business of M/s. Photo Film Industries is a reconstruction of business of M/s. G.G. Photo Ltd. and relying on the decision of CIT v. Suessin Textiles, BallBearing &Products (1979) 118 ITR 45 (Bom) and CIT v. KeralaState Cashew department Corporation (1994) 205 ITR 19 (Ker), so the requirement as per clause (i) to sub-section (2) of section 80-IB is not satisfied, so the deduction under section 80-IB to the assessee is disallowed."
10. With regard to cost of machinery also the assessing officer held that the machinery in fact was transferred to the assessee at a low cost to meet the conditions as required under section 80-IB(2)(ii), so as to keep the total value of the machinery below 20 per cent. He further held that the assessee has used all the machinery of the company, GGPL and even the factory building, which has dark rooms, and air-conditioning plant was also used. Thus assessing officer held, all the existing infrastructure of GGPL has been utilised by the assessee; the details of which is also given at page 13 of the assessment order as under :-
BLOCK OF ASSETS OF G.G. PHOTO LTD.
As per Company Act As per Income Tax Act Asset As on 1-4-2000 As on 1-4-2000 Building at Pondicherry 3,410,226.52 2,199,433 Plant & Machinery 11,117,048.13(') 4,357,093(') Air-conditions 1,181,119(') Same block of assets Generators 268,182(')
-do Machinery Parts 192,560(')
-do Tools & Equipments 75,565 29,785 Land at Pondicherry 2,550,000 2,550,000 Assessing officer held, GGPL though not charged any rental to PFI, it is a fact that the assessee is using the same from the date of commencement till the date of survey, i.e. 8-3-2004; hence, though it is not a lease agreement but a silent arrangement between the parties, who are the same family members and the assessee is a major shareholder in the company. Assessing Officer further held, though the assets leased out at Nil value; the building, dark room, air-condition ers, generators, etc. are essential to the process of making the films and without them it is impossible to work as without the building no activity can take place. The arrangement with Nil lease rental between the assessee and GGPL tantamount to transfer/ lease for the production of said goods, in view of the decision of the Hon'ble Bombay High Court in the case of CIT v. Suessin Textiles Ball Bearing & Products (P.) Ltd (1979) 118 ITR 451 (Bom), assessing officer held.
11. Vide para 6.1 of the order, assessing officer records, during the course of survey action under section 133A, a copy of the document was taken duly signed by Shri Pavan Manghnani, Chartered Accountant of the company, which shows that the WDV of the machinery as on 31-3-2000 was Rs. 43,57,094.84 and that the machinery of Rs. 18.11 lakhs should be transferred at Rs. 16 lakhs, excluding slitter and 4 perforators. Assessing Officer further noted that there was a plan to sell the slitter and perforators to a third party and buy the same or new machinery at around Rs. 45 lakhs by routing or making new purchases to arrive at the value of less than 20 per cent old machinery ratio to total machinery as per the provisions of Explanation 2 to clause (ii) of sub-section (2) of section 80-1B. Assessing Officer further records, this paper was also found during the course of survey under section 133A at Mumbai premises and made it clear that the value of machinery in total was not less than Rs. 40 lakhs as the same document was found with the assessee and also justified a sort of fair market value as per assessee group only; yet, assessee being a part of the same group, as an afterthought the machinery was transferred at Rs. 4.83 lakhs at 25 per cent of the book value by transferring only certain machinery as given vide para 6.6 of his order. He further held the GGPL transferred only certain assets on paper and did not transfer on paper the balance machinery, so as to avoid apparent transfer at very less price; whereas, in fact the whole machinery was transferred and used by the assessee. The assessee has used all the perforators of GGPL and the value of slitter as per the paper found is atleast Rs. 12,57,597.98, which was transferred at the value of Rs. 2,88,413.
12. Assessing officer further noted, assessee has bought 4 perforator machinery, which were imported on 9-10-1998 and 5-11-1999, worth Rs. 30,61,264, inclusive of customs duty etc. As per the statement of the employees, these perforators were installed during the financial year 1999-2000. The party, GGPL, has not brought any machinery in that year. Assessing Officer held, thus it is clear that these machineries were installed earlier and used by GGPL. This was evident, he held, from the statement of three employees, ie. Shri V. Sudarshan, Shri K. Rajendran and Shri A. Gurumurthy, referred to in para B4, Question No. 23. He held, the machines taken on first in first out basis of Rs. 17,71,906 presumed to have been installed and pro rata amount of duty of Rs. 1,64,483 being Rs. 1,06,611 was allocated. He held, the value of old machinery in the case of the assessee, as it was utilised by GGPL, was Rs. 18,72,517; the balance out of the block of assets of Rs. 11,88,146 which only can be called as new assets used by the assessee. So he held, the ratio of new machinery as compared to total machinery being below 30 per cent; was far below the minimum requirement of 80 per cent as per the provisions of section 80-IB of the Act.
13. Assessing Officer further records that survey under section 133A was conducted on the assessee by TDS Ward, Pondicherry and report was received along with a photocopy of the bill issued by GGPL to PFI dated 16-10-2000, As per this bill, the slitter machine Muller was to be sold at Rs. 9,49,000 to PFI; whereas as per the books the machinery was transferred at a cost of Rs. 2,88,413. He held, this is an internal arrangement to keep the price low, so as to comply with the provisions of Explanation 2 to section 80-IB(2)(ii); because otherwise the value of Rs. 9,49,000 would have changed the ratio to above 20 per cent of the old machinery to the total machinery. He further noted, the date of sale of the bill was 16-10-2000; whereas the assessee submitted the sale bill dated 1-10-2000 regarding sale of machinery at Rs. 4,83,745, inclusive of slitter. This, he held, is an afterthought and that the bill dated 1- 10-2000 does not even specify the machineries sold. On 10-3-2004 the assessee was asked as to why deduction under section 80-IB should be allowed to the assessee, in view of the following facts :-
"The provisions of section 80-IB(2)(1) and (ii) is applicable in the case of the assessee because :
(i) the manufacturing activity has not changed as it was earlier in M/s. G.G. Photo Ltd., and now the same in Photo Film Industries,
(ii) the purchase party of both has been the same,
(iii) the employees have largely remained the same as almost all the employees continued from G.G. Photo Ltd. to M/s. Photo Film Industries,
(iv) the machines used in manufacturing activity of M/s. G.G. Photo Ltd. have all been transferred to Mrs. Madhu Gupta's Photo Film industries, as found on physical verification during survey under section 133A,
(v) there is no difference in any of the manufacturing activity of M/s. G.G. Photo Ltd. and M/s. Photo Film Industries,
(vi) the transfer of business reason was mainly because of expiry of sales tax benefit of M/s. G.G. Photo Ltd., So in view of the above facts, why the same should not be taken as an arrangement and why the assessee should not be taken as ineligible for deduction under section 80-IB as it is a mere reconstruction of business.
Further, prove why the claim of partial transfer of machinery, as reported in the Balance Sheet and P&L Account should be accepted in view of the physical verification under section 133A where it has been found that all the machinery of M/s. G.G. Photo Ltd. have been used by the assessee and no machinery has ever been removed from the said premises and also the value of machinery which was transferred from M/s. G.G. Photo Ltd. has been under valued to suit the 20 per cent old machinery ratio (as per provisions of section 80-IB to sub-clause (h) as all the machinery have been transferred and utilised by the assessee and also in view of the documents found during the course of survey in page No. 65 where it has been stated that the machinery has to be transferred at Rs. 16 lakhs which has a WDV as on 31-3-2000 of Rs. 18.11 lakhs, the same paper found of which copy has been taken has been signed by Shri Pavan Manghnani on 8-3-2004 during survey under section 133A at Mumbai premises.
The above calculation does not include slitter machine etc., which were also transferred, so the assessee is requested to reply why the old machinery transferred to G.G. Photo Ltd. should be taken at transfer value."
14. There was no reply. Assessing officer held, the assessee is not eligible for deduction under section 80-IB, in view of the decision of the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT (1992) 196 ITR 188 (SC). He held that the findings of the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. (supra) is squarely applicable in the light of the facts gathered on three occasions, viz. (a) on account of search on 26-9-2000; (b) on account of TDS survey under section 133A on 14-8-2003; and (c) on account of survey under section 133A at Mumbai and Pondicherry on 8-3-2004. Hence, he disallowed the claim of the assessee.
15. The assessee, before the Commissioner (Appeals), filed written submissions, objecting the above, briefly, on the following lines :-
Copies of the statements recorded from the staff members either during the search and seizure action or action under survey, were not made available to the assessee. The findings are mainly based on the observation of the officials who carried out the search and survey. In fact, after the department carried out the search action under section 132 on 26-9-2000 in the case of members of the assessee's family, as also in the case of companies controlled and managed by the family members of the assessee, the case of the entire group were centralized in February 2001. However, the assessment proceedings in the case of the assessee for the assessment year 2001-02 were taken up only after the learned assessing officer carried out action under section 133A on 8-3-2004. The statements recorded from Shri R. Natarajan, General Manager, Shri V. Sudarshan, Shri Pavan Manghnani, Accountant; Shri S.G. Ravi, Senior Technician; Shri K. Rajendran and Shri A. Gurumurthy, Assistant Manager (Quality) were not given to the assessee.
No cross-examination opportunity was provided to the assessee. However, it was contended that the findings for denying benefit under section 80-IB were based on these documents /statements, copies of which never made available to the assessee. Even the bare facts were not communicated to the assessee. This is clear violation of principles of natural justice and non-compliance with the express mandatory provisions of section 142(3). Even otherwise, the assessing officer has referred to/reproduced only a portion of the several questions and answers. The entire text of the statements is not available even today. It was contended, it is possible that some of the answers given by the witnesses may be favourable to the assessee, which had not come at all on record even in spite of the fact that no cross-examination opportunity was given to the assessee. For example, assessee in the written submission states that Shri Pavan Manghnani has stated, though the machines having WDV of Rs. 19,34,979; the current market value is only Rs. 4,83,744 and have been transferred to PFI on 1- 10-2000 as per invoice copies submitted by him; which was definitely in favour of the assessee; but the assessing officer not cared to consider the above facts. The assessee also notes; Shri V. Sudarshan, in reply to Question No. I I has stated that three perforator machines, which belonged to GGPL, had not been used for the past three years, which is also in favour of the assessee. These facts averred by Shri Pavan Manghnani and Shri V. Sudarshan should have been taken note of. Hence, it was contended before the Commissioner (Appeals), the conclusion arrived at by the assessing officer, denying the benefit under section 80-IB is based on firstly, evidence which is inadmissible, as the same has been relied on by the assessing officer in violation of principles of natural justice and express mandatory provisions of section 142(3) of the Act; secondly, inadequate enquiries; and thirdly, on the basis of incorrect perception of facts. It was further contended; the finding of the assessing officer is based on suspicion, conjectures and surmises.
16. However, the Commissioner (Appeals) did not agree with the above contentions. He held that the assessee is a sole proprietress of the concern, PFI, and she has not set up any new industrial undertaking in a different building and location as distinct from the industrial undertaking of GGPL. She got the industrial plot No. B- 134/137, PIPDIC Industrial Estate, Mettupalayam, Pondicherry, which was allotted in her name, previously used by GGPL. The building as well the plant and machinery of GGPL was used; and the staff and workers of the earlier industrial undertaking continued to perform the same duties. The statements made by the employees of the assessee during the survey under section 133A proved that there has only been a change of name and no new industrial undertaking has come into existence. Thus, the Commissioner (Appeals) held, the provisions of section 80-IB(2) and Explanation 2 thereto has not been complied with.
17. Coming to assessee's objection that no statements of the employees were made available to the assessee for cross-examining, the Commissioner (Appeals) held, evidence was gathered during the course of survey in assessee's own case and not in any other case. Thus, the principles of natural justice have not been violated. Assessing Officer has not relied upon any evidence gathered from any other outside source but of assessee's own staff. When the persons from whom statements recorded were assessee's own employees; there is no question of any opportunity of cross-examination to the assessee. The only other evidence relied upon by the assessing officer was of Shri R. Natarajan, recorded during the course of search and seizure action in the case of GGPL on 26-9-2000. Shri Natarajan was the General Manager of the industrial undertaking of GGPL and he continued to remain so in the same position in assessee's own industrial undertaking, i.e. PFL. Thus, there is no violation of principles of natural justice. Commissioner (Appeals) further held that he has not been impressed by the arguments of the assessee that the assessee had been allotted the same industrial plot along with the factory building standing thereon by PIPDIC, Pondicherry and it is not an intentional planning. He held, the assessee cannot claim to have set up a new industrial undertaking without constructing her own factory building. The plant and machinery used in the earlier industrial undertaking, i.e. GGPL, remained in the hands of the assessee. The Commissioner (Appeals) further held, the value of the previously used plant and machinery exceeds more than 20 per cent of the total value of the plant and machinery used in the business of the industrial undertaking and thus conditions under Explanation 2 to section 80-IB(2)(ii) are not complied with. Hence, he confirmed the order of the assessing officer. Aggrieved by the above, the assessee is in appeal before the Tribunal.
18. The learned counsel for the assessee made a written submission running into 21 pages. Briefly, it is as under --
Firstly, the learned counsel submitted, assessing officer has not brought the complete picture of the facts inasmuch as the business of PFI had in fact started before GGPL shut down their factory at Pondicherry. It is evident from the following documents, which have been placed/mentioned at the following pages :
Particulars Date Paper Book Page No. Sales Tax Registration 10-2-2000 36 & 36A Excise Registration 29-3-2000 35 Provisional Registration as SSI 31-12-1999 38 Acknowledgement by Ministry of Industries 3-8-1998 83 Registration-cum-Membership Certificate from federation of Indian Export Organisation 1-9-1998 84 Letter from Gautam Gupta for use of his premises at Daman 3-6-1998 85 MoU for factory plot at High Road, Villupuram, Pondicherry 3-1-2000 96
19. The learned counsel for the assessee submitted, in the first place it is very essential to know and understand the meaning of the term "reconstruction" in the context of section 80-IB. The term "reconstruction" has not been defined in the Act. Simply because the nature of business, employees, process of production, items produced and machinery continued to be the same, it cannot be said that it is a case of reconstruction. The term "reconstruction", learned counsel submitted, for the first time has been d-efined 63, the Honble Bombay High Court in the case of CIT v. Gaekwar Foam & Rubber Co. Ltd. (1959) 35 ITR 662 (Bom), which reads as under :
"The underlying idea of a reconstruction is of a 'business already in existence': there must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to carry on the same business though in some altered or varied form. If the alterations and changes are substantial, there would be little scope for describing what emerges as a reconstruction of the business. For instance, if the ownership of a business or an undertaking changes hands not ostensibly but in reality and effectively, that would not be reconstruction. Or, if the very nature of the business is changed, that again would not be reconstruction. On the other hand, reorganization of the business on sounder lines or alterations in the mode or method or scope of the activities of the business or in its personnel or infusion of new blood in the management or control of the business which may even be by some changes in the constitution of persons interested in the undertaking would be no more than reconstruction of the business if it is substantially the same business carried on by substantially the same persons."
Learned counsel further submitted, the above view has been approved by the Hon'ble Supreme Court in the case of Textiles Machinery Corpn. Ltd. v. CIT(1977) 107 ITR 195 (SC) and also in the following cases :
(1) Hindustan Malleables & Forgings Ltd. v. ITO (1978) 112 ITR 3 89 (Pat) (2) CIT v. Simmonds MarshallLtd. (1986) 161 ITR 817 (Bom) (3) CIT v. U. Foam P. Ltd. (1987) 167 ITR 586 (AP) (4) Kerala State Cash Development Corpn. v. CIT (1994) 205 ITR 19 (Ker).
20. It is the case of the assessee that for the purpose of reconstruction, the original undertaking not to cease functioning and its identity should not be abandoned always or to be lost. In the instant case of the assessee, GGPL closed down on 30-8-2000, including the industrial undertaking at Pondicherry. The lease of the factory land was surrendered on the very same day and the factory license was also cancelled on 3-10-2000. The business of GGPL was closed down forever. Thereafter, the assessee started her own business. To start similar business, in fact, was not an overnight decision of the assessee, which is evident from the fact that she imported machinery in assessment years 1999-2000 and 2000-01, i.e. prior to starting of the industrial undertaking in the present form. The assessee thought it gainful to employ and take services of experienced employees, readily available from the closed firm of GGPL. Learned counsel submitted, it is an established position that the assessee is the best judge to pal and manage her affairs and the assessing authority cannot sit over judgment on that aspect. In this view of the matter, it cannot be considered that the firm of the assessee is reconstruction of the earlier closed business of GGPL. There is complete change of ownership. Assessee was only one of the Directors in the earlier business of GGPL; whereas PFI is the sole proprietorship business of the assessee. The change is real and not merely ostensible.
21. It is further submitted, the statement of the employee, Shri R. Natarajan recorded at the time of search and the statements of other employees recorded at the time of survey are in assessee's favour. However, it is submitted that the statements cannot be used against the assessee for the following reasons .--
Firstly, Shri R. Natarajan's statement was recorded during the search and seizure action on 26-9-2000; whereas the assessee started the production from 6-11-2000 onwards, which is evidenced at page 39 of the Paper Book and also as reflected in the assessment order itself, vide page 3. The statement of Shri, R. Natarajan was recorded before the commencement of assessee's business; that too without giving opportunity to the assessee to rebut the same.
Further more, inviting our attention to Paper Book page 69, which is installation certificate issued by Superintendent of Central Excise, Range X, Pondicherry on 1- 11-2000, learned counsel pointed out that it clearly established the fact that the machinery described therein had been installed at the premises No. 134/137, PIPDIC Industrial Estate, Mettupalayam, Pondicherry. This is clear contradiction to the statement of Shri R. Natarajan, wherein he stated that the plant and machinery in the said premises belong to GGPL and that there is no purchase and installation of new machinery for PFI. Hence, this statement- of Shri R. Natarajan had no evidentiary value and cannot be used against the assessee.
Secondly, the statements were never made available to the assessee; as also an opportunity to cross-examine such persons was ever made available to the assessee. When the matter was brought to the notice of the Commissioner (Appeals), he brushed aside the arguments, on the lines noted hereinabove. It is clearly against the principles of natural justice, as laid down by the Hon'ble Supreme Court in the case of Tin Box Co. v. CIT(2001) 249 ITR 216 (SC), wherein the Hon'ble Supreme Court held : "an assessment made without giving the assessee an opportunity of setting out his case was liable to be set aside". Similarly, in the case of Dhakeswari Cotton Mills Ltd. v. CIT(1954) 26 ITR 775 (SC), their Lordships of the Hon'ble Supreme Court held : "where these fundamental principles of natural justice were violated, the addition to be treated as invalid". The assessee further relied upon the following judgments (1) Bhogilal H. Patel v. CIT (1969) 74 ITR 692 (Bom).
(2) Gargi v. CIT ( 1974) 96 ITR 97 (All).
(3) Nagulakonda Venkata Subba Rao v. CIT ( 1957) 31 ITR 781 (AP).
(4) M.O. Thomakuttyv. CIT (1958) 34 ITR 501 (Ker).
Wherein their Lordships observed that where the assessing officer proposes to use against the assessee the result of any private enquiry, he should communicate to the assessee the substance of such information so as to put the assessee in possession of full particulars of the case he is expected to meet and further to give him opportunity to meet it. Learned counsel submitted, it is not of much relevance whether the statement was given by assessee's employee or not because the circumstances under which such statements were given is a matter not known to the assessee, which is being used against the assessee and that even the employees may not be fully aware of the facts or perhaps some of the statements which are favourable to the assessee in every likelihood, had not been brought on record by the assessing officer. Thus, the conclusion arrived at its illegal and bad in the eyes of law and needs to be quashed. Assessing Officer has only extracted statements, not even the entire text. The revenue has perhaps quoted only that part of the statement, which is in revenue's favour, which is all the more damaging.
22. Learned counsel submitted, the department has also adopted an inconsistent attitude in regard to the statements given by the employees at the time of search as well on survey. For example, the department has accepted that part of the statement, wherein the employees have stated that all machineries of old business were used in new business; but the statement of Shri Pavan Manghnani in reply to Question No. 5, reproduced at Page 7 of the assessment order, wherein he stated that machinery having WDV of Rs. 19,34,979 transferred to the assessee at the market value of Rs. 4,83,744, was completely ignored. Another inconsistency is in Answer to Question No. 11 (What are the present machinery in this premises?). Shri V. Sudarshan states at page 8 of the assessment order: " 12 perforation machines of 10 are MABA make and one is BUKO and other is AGFA machine. They were brought during the year 1996-97, prior by G.G. Photo Ltd. and they are presently with Photo Film Industries, so all the perforation machinery were transferred and came to Photo Film Industries. These are the machines in operation, further there are three machines (perforation) AGFA make which belonged to G.G. Photo Ltd. have not in use since past 3 years" and also the department did not resolve the inconsistency in Answer to Question No. 23 of Shri A. Gurumurthy, reproduced at page 10 of the assessment order, which reads as under :-
"There are total 17 perforating machines purchased by us during the last 8 years starting in 1995. The year-wise break-up is as under :
During financial year 1995-96 total 6 perforating machines including 4 Primax machine (Maba make) and two Buko make machines were purchased;
During financial year 1996-97 total 5 machines comprising of 2 Primax machine (Maba make) and two Agfa make were purchased by M/s. G.G. Photo Ltd.;
During financial year 1997-98 one Agfa machine (16 mm) and one Agfa machine (35 mm) were purchased by M/s. G.G. Photo Ltd.; and During 1999-2000 two Primax machine (Maba make) were installed by M/s. G.G. Photo Ltd. and during 2000-01 (September/ October 2000) two more Primax machine (Maba make) were installed. We are not sure whether the installation were got done by M/s. G.G. Photo Ltd. or M/s. Photo Film Industries."
The learned counsel submitted, though the assessing officer arrived at a conclusion, there is neither corroborative evidence nor the assessee nor anybody from GGPL were called for and questioned before arriving at the conclusion. The conclusion arrived at is on the basis of statements of few workers of PFI. They are not in a position to explain; they can explain only what is in their knowledge. Any information gathered has not been cross checked, which is important to come to a correct conclusion.
23. Learned counsel submitted, one of the most important aspect to be taken into consideration is that a Government body is involved in the whole process. According to the assessing officer, "the licence of GGPL was cancelled under Factories Act, 1948 by letter dated 3-10-2000 vide letter No. 3603/F/CIF&B/2000 in reference to their letter dated 8-9-2000 and the licence under the factories was granted to PFI on the same day, i.e., on 3-10-2000 vide letter No. 4647/CIF&B/2000, vide their application dated 8-9-2000 by the same Chief Inspector of Factories". The learned counsel further submitted, the letter granting licence is placed at pages 66 to 68 of the Paper Book. The land was initially allotted on lease to GGPL by PIPDIC Industrial Estate, which was surrendered on 30-8-2000. Subsequently it was allotted to the assessee on 6-9-2000. Evidence is also placed at pages 40 to 65 of the Paper Book. The Government of Pondicherry terminated the lease of the factory and also cancelled license of GGPL and subsequently granted fresh lease of land and factory license in favour of the assessee. The action of the Government cannot be considered as illegal or collusive. There is no intentional planning on the part of the assessee to avail Sales Tax exemption. In other words, the Government of Pondicherry granted lease of land and also factory license to the assessee to carry on independent business, though on the same line, at the same factory premises. Learned counsel further submitted; there is no evidence to the effect that the Government merely replaced one businessman for another. It is altogether a new industrial undertaking. There is no reconstruction of old business. Had it been so, the Government would not have allowed the benefit of Sales Tax exemption to the assessee. As such, the benefit has got to be granted to new business and only to new industry for initial period of 5 years. It is all the more inconsistent and difficult to understand that when the State Government recognises the business of the assessee as a new one and grants Sales Tax exemption accordingly; another wing of the Government, ie., Central Government, denies the Income Tax exemption to the assessee on the same circumstances and on the same set of facts.
24. Learned counsel submitted, it is incorrect to say that on closure of industrial undertaking of GGPL, the assessee stepped into the shoes by taking over the same industrial undertaking. The matters were not arranged by two interconnected parties, i.e., GGPL and the assessee; just to avail the benefit of Sales Tax exemption, as has been concluded by the assessing officer. In fact, on the other hand, the assessee herself was contemplating to set up an independent industrial undertaking on the same lines, originally at Daman; again another Union Territory. It is evident from the fact that the assessee made arrangements for purchasing imported machinery of the nature of perforating machines as early as in the financial year 1999-2000. Two invoices raised by M/s. Primax in this regard are dated 15-11-1999 (pages 71 and 72 of the Paper Book) and the address of the consignee being PFI shown therein is Kachigam, Daman. The relevant goods transport service bill is dated 21-3-2000 (page 73 of the Paper Book). This shows the recipient of the machines as PFI, Kachigam, Daman. Other documents like bill of entry, exchange control papers, etc. are also placed on record (pages 74 to 78 of the Paper Book). Documents for purchase of other imported machines are also placed on record at pages 79 and 80 of the Paper Book, which is addressed to PFI as purchaser. Again the address is Kachigam, Daman. Copy of acknowledgement dated 3-8-1998 issued by Government of India, Ministry of Industry, Secretariat for Industrial Assistance, Entrepreneurial Assistance Unit, to the proposal put forward by the assessee regarding setting up of an industrial unit, in the line of production of cinematographic negative and manufacture of positive film, show the address of the proposed industrial unit as "Industrial Area, Daman-396 210, Daman and Diu". Registration-cum-membership certificate issued by the Federation of Indian Export Orgasniation on 1-9-1998 also shows the address of the unit of the assessee to be Daman (page 84 of the Paper Book). Again, Paper Book Page 85 shows that one Gautam Gupta had agreed to allow the assessee to set up the factory at his premises situated at Shree Ganesh Industrial Estate, Village Kachigam, Daman. It is evident from the sale deed dated 2-3-1998 (pages 86 to 95 of the Paper Book) that the said premise belonged to Shri Gautam Gupta. The Superintendent of Central Excise, Pondicherry, regarding imported machinery, issued the installation certificate and it mentions that originally the machinery to be installed at Daman Industrial Area, Daman (page 69 of the Paper Book). Learned counsel submitted, all these clearly prove that the assessee, as far back as in 1998, had taken positive steps to establish her own independent industrial unit in the -line of manufacture of photographic films. Subsequently, the assessee for strategic reasons thought it better to establish the industrial unit at Pondicherry than at Daman. Even the original address at Pondicherry where the factory proposed was "No. 20 (New No. 77), Republic Street, Villupuram High Road, Reddiarpalayam, Pondicherry- 10", which was subsequently changed to "B-134-137, PIPDIC Industrial Estate, Mettupalayam, Pondicherry" i.e., the present address. Necessary corrections were made in the Registration Certificate. The Registration Certificate was issued to the assessee on 11-2-2000 by Commercial Tax Officer, Pondicerry (page 36 of the Paper Book). The Directorate of Industries, Government of Pondicherry issued Provisional Registration Certificate dated 31-1,2-1999 to the industrial unit of the assessee (page 38 of the Paper Book), showing therein at the backside the proposed location of the factory originally as "No. 20 (New No. 77), Republic Street, Villupuram High Road, Reddiarpalayam, Pondicherry-10", which was subsequently changed to present address. Thus, from any angle, it is clear that the assessee had taken positive steps and imported machineries to start a new unit. Assessee also took steps for setting up her unit at the present location, which arrangement benefited the assessee by way of getting trained staff available. There is no question of taking over of any industrial unit of GGPL, as alleged by the assessing officer and confirmed by the Commissioner (Appeals), learned counsel submitted.
25. Assailing to the alleged failure of the assessee to meet the requirement under section 80-IB(2)(ii) read with Explanation 2, learned counsel submitted as under :
According to the assessee certain machinery of GGPL was transferred to the assessee at market price of Rs. 4,83,745. The value of the machinery, other than the above machinery transferred was Rs. 30,61,264. Thus the total value ot the machinery comes to Rs. 35,45,009. Hence, the percentage of old machinery of the assessee comes to only 13.84 per cent; as such the assessee is entitled for the benefit under section 804B(2)(il). assessing officer, however, taken the value of the machinery transferred as per Companies Act at Rs. 17,12,893. If that be so, according to him, the value of the machinery transferred comes to 35 per cent, which disentitle the assessee for the benefit under section 80-IB(2)(ii).
26. The learned counsel for the assessee objected to the conclusion arrived at by the assessing officer, which reads as under :
Page 13 Para 5.2"The assessee has thereby reduced the value and transferred it to Photo Film Industry i.e. at a price of Rs. 4,83,744 thereby maintaining the ratio of old machinery to total machinery below 20 per cent."
Page 13 Para 5.4"Though the party G.G. Photo Ltd. has not charged any rental to the Photo Film Industry, it is a fact that the assessee is using the same from the date of commencement till the date of survey i.e., 8-3-2004, so thought it is not a lease agreement but a silent arrangement between the parties who are of the same family and the assessee being a major shareholder in the company. The assets though leased out at Nil value, are mandatory for the production, the building, dark room, air-conditioners, generators are essential to the process of making the films and without them, it will be virtually impossible, as without the building, no activity can take place in any which way. This arrangement with Nil lease rental between G.G. Photo Ltd. and its shareholder the assessee does tantamount to transfer/lease for the production of the said goods as per the decision of CIT v. Sussein Textiles as reported in 118 ITR 45 of Bombay High Court."
Page 13 Para 5.5~"So, on the basis of above, if the above block is added back to the assessee opening WDV, it is amply clear that the plant and machinery of the assessee of four perforation machines, though installed before production and utilised by G.G. Photo Ltd., is much below the 80 per cent requirement of new machinery for the purpose of eligibility of deduction under section 80-113, rather the cost contribution of the assets of the assessee is less than 20 per cent when compared to the building, air condition and other plant and machinery which was not transferred on record from G.G. Photo Ltd. and used by the assessee."
27. Learned counsel further submitted, the assessing officer tried to fortify his stand on the basis of the following evidences :
(a) Page 65 of the Paper Book -Paper found during survey under section 133A;
(b) New block of assets of the assessee;
(c) Report received from TDS Ward, Pondicherry; and
(d) As is where is 'machinery of GGPL used by the assessee.
Learned counsel further submitted that the assessing officer, at page 14 para 6.5, records that the paper found during the survey action under section 133A at Mumbai premises amply proves that the value of the machinery was not less than Rs. 40 lakhs as the same document was found with the assessee as well, which justified fair market value as per assessee group only. Assessing Officer further concludes: "the assessee being part of the same group, as an afterthought transferred, the machinery etc., at Rs. 4.83 lakhs at 25 per cent book value by transferring only certain machinery". He finally concludes: "M/s. G.G. Photo Ltd., thus transferred only certain assets on paper and did not even transfer the balance machinery on record, to avoid apparent transfer at a very less price whereas, in fact the whole machinery was transferred". Assessing Officer thus concluded that this is a planning to bring the value of the machinery on transfer to less than 20 per cent.
28. Learned counsel submitted, even a cursory comparison of the description along with the figures of WDV of different items of machinery mentioned in the paper (Paper marked as Annexure to the written submission) with those of different items of machinery actually purchased by the assessee from GGPL (page 82 of the Paper Book) clearly show that these two papers do not correspond and tally each other. In other words, at the stage of actual purchase of machinery by the assessee, different items purchased have been considered and narrated carefully; as such the said purchase got to be accepted, describing different items of machinery. On the other hand, the other paper does not describe the different items of machinery correctly; as such it is to be considered in the nature of merely a planning paper and need not be paid much attention. This is another reason why the Annexure to the submission attached found during the survey on 8-3-2004 cannot be considered as having any significance. Coming to the value of the assets, learned counsel submitted, following observation of the assessing officer is also erroneous and incorrect -.-
Para 7.1 - "The assessee has brought 4 perforator machines which were imported on 9-10-1998 and 6-11-1999 amounting to Rs. 30,61,264 including customs duty etc. The break-up is as under :
Primax Perforator Machine 9-10-1998 Rs. 17,71,906 Primax Perforator Machine 15-11-1999 Rs. 11,24,875 Duty etc. Rs. 1,64,883 Rs. 30,61,264 Para 7.2 - "As per the statement of employees these perforator machines were installed during financial year 1999-2000. The party M/s. G.G. Photo Ltd. has not brought any machinery in that.relevant year. It is clear that the machinery which were imported on 9-10-1998 or 15-11-1999 were installed earlier and used by M/s. G.G. Photo Ltd. As M/s. G.G. Photo Ltd. has used this machines, as evident from statement of the three employees Mr. Sudarshan, Mr. K. Rajendran and Mr. A Gurumurthy (refer to para B.4 question No. 23). The machines taken on first in first out basis of Rs. 17,71,906 is presumed to be installed and pro rata amount of duty of Rs. 1,64,483 being Rs. 1,06,611 is allocated to the same. So the value of old machinery in the case of the assessee, as it was utilised by M/s. G.G. Photo Ltd., already is Rs. 18,72,517, so the balance out of the block of assets is only Rs. 11,88,146 which can be called new machinery in the case of the assessees. So in any way the ratio of new machinery as compared to total machinery is below 30 per cent, far below the minimum requirement of 80 per cent as per the provisions of section 80-IB".
Para 7.3 - 'The above view is also obvious from the fact that the assessee was a shareholder in the concern M/s. G.G. Photo Ltd., and the same would have been utilised by the group concerns of the assessee as the machinery was imported long back".
29. Learned counsel submitted, the above observation makes one thing clear, it is a glaring example how the assessing officer tried to use every situation against the assessee. The fact that the machinery was brought by the assessee is accepted by the assessing officer. However, just because it was installed in the erstwhile factory premises of GGPL, the same has been taken as having used by GGPL. The above conclusion is arrived at by the assessing officer without any basis and without making any enquiry either. Learned counsel submitted, reply to Question No. 11 by Shri V. Sudarsan, stated at page 8 of the assessment order, makes the above facts clear. It reads as under :
"12 Perforation Machines of 10 are MABA make and one is BUKO and other is AGFA machine. They were brought during the year 1996-97, prior by G.G. Photo Ltd., and they are presently with Photo Film Industries, so all the perforation machinery were transferred and came to Photo Film Industries. These are the machines in operation, further there are three machines (perforation) AGFA make which belonged to G.G. Photo Ltd., have not in use since past 3 years".
Thus the conclusion arrived at by the assessing officer, as confirmed by the Commissioner (Appeals), is erroneous and liable to be reversed, submitted the learned counsel.
30. Again the learned counsel submitted, the allegation of the assessing officer that these machineries installed in the Pondicherry factory in 1998 and 1999 were utilised by GGPL, prior to use of the same by the assessee, is incorrect. The assessee was contemplating to set up an independent industrial unit at Daman, Union territory. For this reason only the assessee made arrangement for purchasing imported machinery in the nature of perforating machines way back in the financial year 1999-2000. As mentioned above, the invoices raised by M/s. Primax in this regard are dated 15-11-1999; address of the consignee PFI given as Kachigam, Daman" India; and that the relevant goods transport service bill dated 2 1 -3-2000 shows the recipient of the machines as "Photo Film Industries, Kachigam, Daman". Learned counsel further submitted, copies of other connected papers, viz., bill of entry/exchange control (pages 74 to 78 of the Paper Book) and purchase of other imported machines (pages 79 and 80 of Paper Book) show the address of purchaser PFI as "Kachigam, Daman". Copy of acknowledgment dated 3-8-1998 issued by the Government of India, Ministry of Industry, Secretariat for Industrial Assistance, Entrepreneurial Assistance Unit to the proposal by the assessee regarding setting up of an industrial unit for production of cinematographic negative and manufacture of positive film (page 83 of the Paper Book) shows the address of the proposed industrial unit as "Industrial Area, Daman -396 210, Daman and Diu". Registration- cum-membership certificate issued by the Federation of Indian export Organisation on 1-9-1998 (page 84 of the Paper Book) also shows the address of the unit as Daman. Learned counsel further submitted, assessee was allowed to set up her factory at the premises of Shri Gautam Gupta, as is evident from the sale deed dated 2-3-1998 (pages 85 to 95 of the Paper Book) and that the installation certificate issued by the Superintendent of Central Excise, Pondicherry regarding imported machinery also mentions that originally the machinery to be installed at Daman Industrial Area, Daman (page 69 of the Paper Book).
31. Learned counsel further submitted, another factor that weighed with the assessing officer and the Commissioner (Appeals), against the assessee, was the report received from TDS Ward, Pondicherry as a consequence of survey under section 133A conducted at Pondicherry, along with copy of bill issued by GGPL to PFI dated 16-10-2000. As per the bill, the slitter machines Muller was to be sold at Rs. 9,49,000 to PFI, whereas it was transferred at Rs. 2,88,413, which according to the assessing officer, as confirmed by the Commissioner (Appeals), is an arranged internal price to somehow comply with the provisions of Explanation 2 to section 80-IB(2)(ii). On the basis of the above facts the assessing officer held that the decision of the Hon'ble Supreme Court in the case of Bajaj Tempo (supra) is squarely applicable. The Commissioner (Appeals) concurred with the above finding.
32. However, the learned counsel objected the above finding on the following grounds :
1. As regards the building, the dark room, etc., the same is not a part of the assets belonging to GGPL. The same was a part of the plot which was surrendered by GGPL, because obviously it is not possible to surrender theplotof land by removing the building erected thereupon. The appellant received the said building as a part of lease of plot from the Government and not from GGPL. The learned assessing officer failed to consider this vital point and reached his conclusion without proper appraisal of facts.
2. There is no reason to consider the building, dark room etc. as part of the plant and machinery as the same were not claimed so by GGPL and depreciation at higher rate relevant to plant and machinery was never claimed on these items. The appellant has also not treated the building, dark room etc, as its plant and machinery.
3. The machinery of WDV Rs. 19,34,979 was transferred at Rs. 4,83,744 as the said machinery had low marketability. The details of the machinery of GGPL transferred to the appellant along with the copy of the sale bill are shown at pages 81-82 of the Paper Book. There are not very many customers for this kind of machinery. In fact there are only three manufacturers of cinematographic rolls in India namely, Agfa, Kodak and Eastman. These manufacturers would not buy old machinery from their competitors. Further, these machinery were affixed to land and dismantling them would further reduce their value. Hence, GGPL could either sell the machinery to Smt. Madhu Gupta at the price offered or sell it at scrap value. This is also evident from the statement of Shri Pavan Manghnani reproduced at page 7 of the assessment order in answer to Question No. 5. The learned assessing officer has completely ignored this part of the statement as the same was not favourbale to the department. However, at the same time, the learned assessing officer has tried to include income of the nature of 'perquisites from business'being the difference between the WDV in the books of GGPL of the machinery purchased by the appellant (Rs. 19,34,979) and the actual purchase price (Rs. 4,83,744) in the hands of the appellant. Thereby, he has acknowledged the genuineness of the purchase.
4. As regards the machinery of GGPL, lying at the said factory premises, the same cannot be taken to mean that the appellant was using them. As regards the allegation of the learned assessing officer that the statements of the employees prove that the same were being used, the appellant would like to draw the attention of Bench to page 8 of the assessment order being Answer No. II of Shri V. Sudrshan wherein he stated, "there are three machines (perforation) AGFA make which belonged to G.G. Photo Ltd., have not in use since past 3 years". This clearly shows that the findings of the learned assessing officer are without proper enquiry, based on improper verification of facts and driven by a pre-conceived notion of incorrect claim. Hence the same cannot be relied upon.
5. With regard to the above issue again, it is being argued that the essential condition for applicability of section 80-IB(2)(ii) is that the machinery or plant should be "transferred" to the new business. Transfer of an asset, as per the definition provided in section 2(47) of the Income Tax Act and also in other legal usages, required due processes of sale, exchange, lease, gift etc. In this particular case, there is no evidence anywhere that the items of machinery as spoken of by the assessing officer in this regard, were ever "transferred" to the appellant by GGPL by any of the above legal processes. Mere user (although there is no proper evidence about such user also) of an asset belonging to another does not mean that the asset has been transferred to the person making the user. Hence, the absence of any "transfer" the machinery under consideration would not come within the ambit of section 80-IB(2)(ii).
6. As regards the alleged report of the TDS department, it has got to be stated that the so-called sale bill is ' not a properly executed one and hence, should be considered as having no effect at all. The said sale bill was just an intended paper ultimatly not given effect to by the parties concerned viz. the appellant and GGPL. The price as mentioned in the said sale bill was never paid by the alleged purchaser nor received by the alleged vender. On the other hand, the price of Rs. 4,83,744 as finally determined by the parties, was duly acted upon and transacted also.
33. Learned counsel concluded, in a nutshell, the fact remains that as on 31-3-2001 the assessee had new plant and machinery purchased from outsiders at Rs. 30,61,264 and machinery of market value of Rs. 4,83,744 purchased from GGPL, which is roughly 13 per cent of the total plant and machinery. In fact, there is no evidence at all that the machinery purchased by the assessee at Rs. 30,61,264 was used earlier. The assessee, as submitted above was contemplating to set up a new industrial unit at Daman and subsequently changed the location to Pondicherry. There is no evidence that these items of machinery had been installed at Pondicherry factory, when it was under the occupation of GGPL. Therefore, the allegation of the assessing officer is without any basis. Learned counsel further submitted, in fact the machinery purchased by the assessee from GGPL is at Rs. 4,83,744 and other new machinery purchased by the assessee from the market is at Rs. 30,61,264. Hence, the old machinery purchased/ transferred is less than 20 per cent of the machinery. Thus, the condition laid down under section 80-IB(2)(ii) is clearly satisfied.
34. Learned counsel submitted, the decisions relied upon by the department in the case of Sussein Textiles, Ball Bearing & Products (P.) Ltd (supra) and in the case of Kerala State Cashew Development Corporation (supra), are not applicable in the instant case of the assessee. That was a case wherein the building also been considered and lease accepted as a type of transfer. In that case the building was positively and specifically included in the assets; which is not so in the case of the assessee.
35. Without prejudice to the above, the learned counsel further submitted as under :-
"Without prejudice to the main contention of the appellant about allowability of deduction under section 80-IB at the rate of 100 per cent of the profits and gains of the industrial undertaking of the appellant at Pondicherry, as claimed and argued about above, the appellant also wants to put forward an alternative claim in this regard. The appellant submits that if the Hon'ble ITAT agrees with the departmental contention that the industrial undertaking of the appellant is a reconstructed one and/or that the provisions of clause (i) and/or (ii) of sub-section (2) of section 80-IB are not satisfied in respect of the industrial undertaking of the appellant, in that case, the position would be that the earlier undertaking of M/s. G.G. Photo Ltd. continues to exist and operate with change of ownership to the appellant merely. As the industrial undertaking comes within the ambit of section 80-IB(4), deduction at the rate of 25 per cent of the profits and gains of the undertaking will have to be allowed for this year as well as for the next four years (hundred per cent deduction having already been made available to the profits and gains of the undertaking in the hands of M/s. G.G. Photo Ltd. for the earlier five years). It is required to be noted that the deduction under section 80-IB(4) is allowable in respect of the profits and gains of an industrial undertaking for a period of ten years irrespective of the ownership thereof. There is no condition in the relevant section that f or being eligible to the deduction, the industrial undertaking must be a'new'one in the hands of the assessee claiming the deduction. The department, while rejecting the original claim of the appellant about allowability of deduction at the rate of 100 per cent, should have allowed the deduction to the extent of 25 per cent in accordance with the provisions of the relevant section. This reveals the unreasonable and vindictive attitude of the department in dealing with thejustified claim of the assessee. Hence, in the alternative, it is claimed that deduction at least at the rate of 25 per cent of the profits and gains of the industrial undertaking of the appellant at Pondichery be directed to be allowed."
36. To the above, the learned Departmental Representative submitted, the short question is whether the assessee is eligible for deduction under section 80-IB or not. The learned Departmental Representative submitted, it is not the industry but the person is subjected to tax. It is not important whether the industry was charged earlier on the same set of circumstances. There is a difference between the industry and the individual. The learned Departmental Representative submitted, this individual has started a new business and therefore, she is liable to be taxed. The learned Departmental Representative, relying upon the findings of the learned Commissioner (Appeals) submitted, the assessee has not set up any new industrial undertaking in a different building and a different location distinct from the industrial undertaking of GGPL. The assessee got the industrial plot used by GGPL in her name with the same set of machinery and even the staff of GGPL ,continued to run the business, though the ownership changed. In fact, there is only a change in name and no new industrial undertaking has come into existence. There is no dispute that the nature of business in both the industrial undertakings has remained exactly the same. The provisions of section 80-IB(2) clearly prohibit the allowance of special deduction in such a situation. The learned Departmental Representative further submitted, assessee's undertaking is nothing but reconstruction of business already in existence and therefore the assessee is not entitled for the benefit under section 80IB(2). Further, the learned Departmental Representative submitted, the machineries used by the assessee and the earlier assessee, i.e., GGPL, one and the same. In fact, the value was not fixed by any professional. It was only an admitted estimation between the two parties; interested parties. It is an agreement between the family members. For all practical purposes the employees are6ne and the same. Therefore, the learned Departmental Representative submitted, the revenue authorities were fully justified in using the material gathered during the search and seizure and also the statements taken on oath. Since these were assessee's own employees, there was no question of giving any opportunity for cross-examination because it is virtually assessee's own statements. As far as machineries are concerned, there were only book entries. There was no actual transfer/purchase; as such the conditions for availing the benefit under section 80-IB have not been satisfied. The learned Departmental Representative supported the orders of the revenue authorities.
37. Considering the rival submissions and going through the orders of the revenue authorities and the decisions cited, we are of the view that the issue has to go in assessee's favour. First of all, the depositions of the employees of assessee's undertaking were taken without giving the assessee an opportunity to cross-examine the deponents. It is also the case of the assessee that full texts of the depositions were never supplied to the assessee. Only certain portions, which are considered by the assessing officer in the assessment order or again quoted in the Commissioner (Appeals)'s order are known to the assessee. It is one of the contentions of the assessee that some other portions, which are favourable to the assessee, either may have been overlooked or perhaps may be kept in dark. Assessee's objection was overlooked by the revenue authorities on the ground that since the assessee's own employees given the statements, it is not necessary to give/to make available to copies of such statements/depositions to the assessee. But it is to be seen that these depositions are used against the assessee. In all fairness the assessee should have been questioned as to why these depositions not be treated against the assessee. It is not done. Assessee relied on the decisions, as stated above, for the submissions that the finding arrived at without providing the assessee the copies of depositions/ evidences is not reliable to come to a conclusion against the assessee. We find; the contention of the assessee is to be accepted. In the case of Bhogilal H. Patel (supra), the Hon'ble jurisdiction High Court held that a finding arrived at without affording an opportunity to the assessee properly to cross-examine cannot be used against the assessee. This was a case wherein the finding was arrived at by the revenue authorities on the basis of inspector's report by the department. It was unilaterally obtained at the instance of Appellate Assistant Commissioner and no opportunity was afforded to the assessee to. pursue the report or to counter it. But at a later stage the counsel on behalf of the department referred to cross-examination of the assessee where this report was put to the assessee. However, Hon'ble High Court observed "counsel on behalf of the department referred to the crossexamination of the assessee where this report was put to the assessee (vide Annexure "G"), Question Nos. 32 to 35. No doubt in this cross-examination the report has been put to the assessee but we would be surprised if any assessee, muchless the present assessee, could have understood and answered the contents of that report on the spur of the moment, so to say in the witness box, when it was suddenly shown to him and he was questioned about it". In other words, the Hon'ble High Court held, even if the assessee is provided the copy, merely on the spur of the moment that should not be treated as an effective opportunity given to the assesee. In the instant case there is no such case even for the revenue. The opportunity was denied to the assessee on the ground that they are assessee's own employees.
38. In the case of Gargi Din Jwala Prasad v. CIT( 1974) 96 ITR 97 (All) Hon'ble Allahabad High Court held that permission to cross-examine the witnesses given but names of the witnesses and substance of the statements made by them not given is not a proper opportunity and on that ground the Hon'ble High Court held : "the assessment was vitiated by violation of the principles of natural justice as the permission given for cross-examination of witnesses was illusory".
39. In the case of Nagulakonda Venkata Subba Rao (supra) almost the same proposition was accepted by the Hon'ble Andhra Pradesh High Court. The Hon'ble High Court held that while estimating the income from other materials, it is the duty of the assessing officer to disclose such materials to the assessee and to give him an opportunity to rebut. For the same proposition, assessee's reliance on the decision in the case of M.O. Thomakutty (supra), we find, is to be accepted. This was a case wherein the finding of the income-tax authorities was influenced by the information gathered from the Government authority, but brought without the knowledge of the assessee and the assessee was not given an opportunity to controvert the statement obtained.
40. As we have stated, the stand of the revenue is that since the persons from whom statements/evidences obtained were assessee's own employees, it was not necessary to give the assessee an opportunity. We are unable to concur with the above view. The evidences being used against the assessee; as such it should have been brought to the knowledge of the assessee and the assessee should have been questioned. We find, assessee's contention on this point is acceptable.
41. From the arguments recorded of the learned counsel, we find, one of the arguments is that the revenue is taking an inconsistent stand, ie., to say, where the statements of the employees are in revenue's favour, they are accepted and where it is against the revenue, it is not accepted. For example, hereinabove we have noted that Sri Pavan Manghnani, at page 7 of the assessment order, has stated that machinery having WDV of Rs. 19,34,979 was transferred to the assessee at Rs. 4,83,744, as it was the market value. This statement of his is ignored. It is well -established that unless specific and clinching evidence is brought on record, the statement cannot be accepted in part where it is perverse and it can be rejected where it is not so. So also Shri V. Sudarshan stated, which is recorded at page 8 of the assessment order, that three machines (perforation) AGFA make, which belonged to GGPL, have not been used since last three years. So also the answer to Question No. 23 of Shri A. Gurumurthy, stated at page 10 of the assessment order. It is also the case of the assessee that assessing officer has not made any attempt to cross verify the above statements before coming to a conclusion and neither summoned any representative of GGPL so as to ascertained the truth. On the day of search, GGPL, strictly speaking, was not in existence but only PFI and therefore they are not in a position to explain the entire position.
42. Thirdly, the State Government gave the licence to the assessee after cancellation of the licence of GGPL by the Pondicherry Government. It is difficult to attribute any motive to the State Government's action in cancelling one licence and giving it to the other party on the basis of party's request. It is also to be seen that the assessee, prior to shifting to Pondicherry, imported machines and took steps for setting up an independent industrial unit at the Union Territory of Daman and Diu. This import was before the commencement of assessment year under consideration. We have recorded these facts in detail vide para 20 of this order. Assessee had goods transport service bill dated 21-3-2000, evidenced at page 73 of the Paper Book, which shows the recipient of the machine as "Photo Film Industries, Kachigam, Daman". The copy of acknowledgement by Government of India, Ministry of Industry, Secretariat for Industrial Assistance, Entrepreneurial Assistance Unit to the proposal put forward by the assessee for setting up of an industrial undertaking in line of production of cinematographic negative and manufacture of positive film is also evidenced at page 83 of the Paper Book. Also the registrationcummembership certificate by the Federation of Indian Export Organisation, dated 1-9-1998 gives the address of the assessee as "Kachigam, Daman". As rightly contended by the assessee, even at Pondicherry the original address is No. 20 (New No. 77), Republic Street, Villupuram High Road, Reddiarpalayam, Pondicherry- 10. Only subsequently the assessee changed for some reason or other to the present address.
43. The assessee's unit started production, even according to the revenue, from 6-11-2000 onwards. The search was conducted on 26-9-2000. Superintendent of Central Excise, Range X, Pondicherry issued the installation certificate to the assessee on 1-11-2000. Therefore, there is a clear contradiction in the statement of Shri R. Natarajan, wherein he stated that plant and machinery belongs to GGPL and there is no purchase and installation of new machinery for PFI. This fact has neither been put to the assessee nor verified, it appears from the orders of the revenue authorities.
44. It is to be seen that the Pondicherry Government allowed the benefit of Sales Tax exemption in respect of the industrial undertaking of the assessee. Such exemption is allowable to a new unit only and not to any old or reconstructed unit. Therefore, the State Government accepts that the change of ownership of the factory premises from the erstwhile owner to the assessee is real and substantive and not merely nominal as such it cannot be treated as reconstruction for the purpose of income tax to deny the benefit to the assessee under section 80-IB of the Act.
45. It is the stand of the revenue that the assessee failed to meet the requirement under section 80-IB(2)(ii) read with Explanation 2. We have recorded assessee's version that the machinery of GGPL was transferred to the assessee at market price for Rs. 4,83,745; whereas according to the assessing officer, as per the Companies Act, the value of the machinery comes to Rs. 17,12,893; thereby the true value of the machinery to the total machinery would be 35 per cent or so as against assessee's assertion that it is below 14 per cent. We have already dealt with the above issue in this order; therefore, the contention of the assessee cannot be rejected.
46. Another stand of the revenue is that during the survey action at Mumbai premises, a piece of paper (page 65 referred to at page 14 of the assessment order) was seized, which showed the value of the machinery at Rs. 40 lakhs, justifies the fair market value given by the assessing officer; particularly so, assessee being part of the same group. Assessing officer treated this as a planning to bring down the price of the machinery; so as to bring the value of the machinery transferred below 20 per cent, to avail the benefit under section 80-IB of the Act. This stand of the revenue also does not stand scrutiny for the reasons stated hereinabove in this order.
47. Assessing officer heavily relied on para 7.1, 7.2 and 7.3 to hold that the stand of the assessee is that new machinery as compared to the total machineryis farbelow the minimum requirement of 80 percentasperthe provisions of section 80-IB of the Act. It is the stand ol' the assessee that it is not disputed that Primax perforator machines were imported on 9101998 and 6-11-1999 amounting to Rs. 30,61,264 including Customs duty. Assessing officer came to the conclusion that these machines were used by GGPL. But there is nothing on record to show that an enquiry was conducted to ascertain whether it is so or not. For this, the reply of the assessee is that (Shri V. Sudarshan's answer to Question No. 11) " 12 perforation machines of 10 are MABA make, one is BUKO and the other is AGFA machine. They were brought during the year 1996-97, prior by GGPL and they are presently with PFI. All the perforation machines were transferred and came to PFI. These are the machines in operation. Further, there are three machines (perforation) AGFA make, which belonged to GGPL have not been used since past 3 years". Admittedly, the latter part of the statement that "there were machines not used for the past three years" has not been verified either. There is nothing on record to show that these machines were installed at the Pondicherry factory because no cross verification is done to counter the above submission of Shri V. Sudarshan.
48. Coming to the report received from TDS Ward, Pondicherry, during the survey action under section 133A, with photocopy of the bill issued by GGPL to PFI dated 16-10-2000; according to the assessee, the machinery was transferred at Rs. 2,88,413 instead of the real value of Rs. 9,49,000. According to the revenue authorities, this is an internal arranged price to somehow comply with the provisions of Explanation 2 to clause (ii) of section 80-IB(2), so that the value of the machinery could be brought down to 20 per cent or less. The case of the assessee is that since there were only three players in the field of this line of business, assessee was in a position to purchase the machinery for her own advantage at a lesser price. Merely because the assessee had links with GGPL, not necessarily assessing officer should reject this contention of the assessee.
49. Coming to other contention regarding building and dark room, it is the case of the assessee that same is part of the plot surrendered by GGPL and the assessee has not treated this as part of the plant and machinery and depreciation at higher rate relevant to plant and machinery.
50. Coming to the report of TDS Ward, Pondicherry regarding the sale bill came into possession, there is nothing brought on record to show ultimately that the price mentioned was received/paid. This fact has not at all been verified. On the contrary, assessee's assertion is that it was paid at a much lesser price. Therefore, this report, which was not put bef ore the assessee, does not further the revenue's case.
51. Coming to the decision relied by the revenue in the case of Kerala State Cashew Development Corpn. (supra), the facts are distinguishable. It was a case wherein in appeal for the assessment year 1975-76 the assessee placed reliance on the Explanation to section 80J (the non- applicability of which had been conceded in 1972-73 (as recorded by the Tribunal) and followed in the next two years) on the ground that total value of the building, machinery and plant had to be computed ignoring the value of the buildings taken on lease, and if so computed, the value of the machinery and plant transferred to the new business would not exceed 20 per cent of the value of the building, machinery and plant used for the business of the industrial undertaking. The Tribunal did not accept the above contention. On a reference, the Hon'ble High Court held that the lease was a recognised form of transfer. It is an accepted position that in the present case there is no lease agreement and such agreement has not been anywhere brought on record. The land and building was surrendered by GGPL to the State Government. Again Pondicherry Government allotted the same to the assessee. Therefore, strictly the decision relied by the revenue in the case of Kerala State Cashew Development Corpn. (supra) does not apply to the case of the assessee. So also the decision in thecaseof Suessin Textiles, BallBearing & Products (P) Ltd. (supra). In this case the Hon'ble Bombay High Court held that the lease taken of portion of building and portion of estate for setting up factory amounted to transfer to a new business of building previously used in any other business.
52. It is to be seen that the assessing officer has taken into consideration the business perquisite derived from GGPL in respect of difference between the WDV and actual purchase price of the items of machinery from GGPL and added back the amount of Rs. 12,30,149 under section 2(24)(iv) of the Act. It is the stand of the assessee that the WDV of the machinery purchased cannot be substituted for market value of the machinery. Coming to other items of the machinery there is nothing on record to show that the assessee has used the entire machinery at the factory premises, which was re-allotted to the assessee by the State Government. It is the assertion of the learned counsel that in this connection non-consideration of any other item by the assessing officer as business perquisite under section 2(24)(iv) proves that the assessing officer himself was not certain and does not consider that the assessee received factory building, dark room and other items of machinery from GGPL. In other words, the first objection of the assessing officer is that the machinery worth Rs. 17,12,893 had been purchased by the assessee for much a lower price of Rs. 4,83,744 as mentioned above and as a result of this the percentage of the value of the machinery used by the assessee from erstwhile GGPL has been considerably brought down. This contention, we have already rejected.
53. The next stand of the revenue is that there were some machines lying in the premises of GGPL, which were not sold but used. We find there is no evidence brought to this effect. We have already noted that three machines imported by the assessee, also lying in the same premises, which admittedly not been used for three years, even according to the assessee's employees, whose statements have been relied by the revenue. Regarding these three machines it is also to be seen that first it was imported, as evidenced hereinabove, at Daman; subsequently transferred to Pondicherry in a different place other than the present premises of the assessee; and the certificate of installation is also subsequent to the search.
54. For the above reasons, we are of the view that the conditions laid down under section 80-IB(2) read with Explanation 2 have been satisfied with. Therefore, it is not necessary for us to deal with the assessee's alternate contention that deduction under section 80-IB(4) at the rate of 25 per cent atleast should have been allowed. In any case, the contention of the assessee that she would be entitled to deduction under section 80-IB(4) atleast at the rate of 25 per cent of the profits and gains of the industrial undertaking, is well founded and to be accepted. However, since we have directed to allow deduction under section 80-IB at cent per cent of the profits and gains of the industrial undertaking of the assessee, this alternate plea of the assessee is not necessary to be adjudicated to. For the above reasons. Ground No. 3 by the assessee stands allowed.
55. Coming to the first ground, ie. addition of Rs. 12,30,149 as perquisite being difference in WDV of Rs. 17,12,893 as per Companies Act and purchase price of Rs. 4,82,744 of machinery from GGPL; the entire facts have been discussed in this order and we have already noted that WDV of the machinery is not its market value. Shri Pavan Manghnani in his statement recorded under section 131 dated 8-3-2004 stated that out of the total WDV of machinery being Rs. 29,05,012, machinery having WDV of Rs. 19,34,979 was transferred to PFI at market value, ie., Rs. 4,83,744. We have also held that in the circumstances of the case, there being only three manufacturers of cinematographic rolls in India, viz., Agfa, Kodak and Eastman, the assessee would be in a position to purchase the machinery at a price she wants, because there are no competitors in the market. However, the view taken by the assessing officer was confirmed by the Commissioner (Appeals), holding that "undisputedly, no prior valuation of the impugned assets by an approved valuer or technically competent person was got done by the assessee or GGPL before transferring them. Under these circumstances, the assessee's argument that the price paid by her to GGPL represented the real market value of the impugned assets, does not hold good."
56. We have already hereinabove, dealing with Ground No. 3, held that there is no evidence to show that the market value of the machinery purchased actually was at Rs. 17,12,893. In view of the above, there is no reason in holding that the difference is a perquisite in the hands of the assessee. Hence, this ground (Ground No. 1) by the assessee stands allowed.
57. Coming to the second ground, ie. addition of Rs. 10,01,161 being interest income of M/s. Shree Chitra from four parties, the facts have been discussed by the assessing officer as under:
During the relevant assessment year, Rs. 6,89,407 was claimed as loss from business of financing as no interest income was provided against loans advanced to the following four parties on the ground that the loans were sticky :
Name of the party Amount (Rs.) Chaudhari Enterprises 6,00,000 Mark Film International 19,99,950 Monalisa Films 26,62,027 Sap Frish Films 4,00,034
58. Assessing officer calculated the interest at the rate of 18 per cent in the case of last three parties mentioned and 15 per cent from Chaudhari Enterprises, which worked out to the impugned amount and added it against the assessee's total loss of Rs. 6,89,407.06 returned by the assessee, which was allowed to be set off. It was further held by the assessing officer that the assessee follows mercantile system of accounting and that in the mercantile system of accounting it is clear that if the assessee acquires the right to receive income, the income can be said to have accrued to him though it may be received later on. He further held, if the assessee acquires a legal right to receive the amount, the amount is to be treated as accrued to the assessee and the assessing officer relied upon the following judgments :
ED. Sassoon & Co. Ltd. v. CIT (1954) 26 ITR 27 (SC) MorviIndustries Ltd. v. CIT (1971) 82 ITR 835 (SC) SMS Investment Corpn. (P) Ltd. v. CIT (1993) 203 ITR 1001 (Raj) Western India Oil Distributing Co. Ltd. v. CIT (1994) 206 ITR 359 (Bom) Addl. CIT v. Swadeshi Cloth Dealers (1991) 187 ITR 620 (All) CIT v. Shiv Prakash Janak Raj & Co. (P) Ltd. (1996) 222 ITR 583 (SC) CIT v. Girishchandran Haridas (1992) 196 ITR 833 (Ker).
Accordingly assessing officer made the addition of Rs. 10,01,161 and the Commissioner (Appeals) confirmed it.
59. It is the case of the assessee that according to the Accounting Standard 9 published by the ICAI states that "where it is difficult to assess the ultimate collection of income with reasonable certainty at the time of raising any claim, revenue recognition should be postponed to the extent the uncertainty is removed. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made". Thus, learned counsel submitted, in accordance with this Accounting Standard, in the case of a person engaged in financing or money-lending business, revenue by way of interest income on loans advanced will have to be recognised only when there is certainty of receiving the income. In the instant case of the assessee there is no such certainty. If the recovery of principal amount itself is in doubt, there cannot be any question of certainty with regard to interest; as such there is no reason to treat it as either accrued or arising, even if the assessee follows mercantile system of accounting.
60. Learned counsel further submitted, as far as the assessee is concerned, under section 145(2) it is obligatory for the assessee to follow the Accounting Standard published by ICAI from time to time. RBI guidelines issued to Non-Banking Financial Companies (NBFC) also prohibit inclusion of non-performing assets and also notional interest on sticky loans within the account of NBFC. Learned counsel further submitted, in the case of Peerless Financial Services Ltd. (IT Appeal Nos. 1522 & 1153 (Kol) of 2004, dated 25-2-2005) (copy placed on record), the Tribunal held that Chapter 111-B of RBI Act, incorporating the guidelines has got an overriding effect on other provisions of the Act and hence these guidelines are required to be followed in considering the accounting position of NBFC. The Tribunal further held, following the decision of the Delhi Bench in the case of TEDCO Investment & Financial Services (P) Ltd. v. Dy. CIT (2003) 87 ITD 298 (Del) interest on sticky loans not to be considered as income of NBFC. It is the case of the assessee that if the assessee is sure that certain income unlikely to arise, it need not provide for such income even while following the mercantile system of accounting. In this regard, assessee relied upon the decision in the case of CIT v. Motor Credit Co. (P) Ltd. (1981) 127 ITR 572 (Mad) and in the case of CIT v. State Bank of India (2003) 262 ITR 662 (Bom). The fact that the assessee has not received any income is not controverted. What is taxed is notional income. Only the real income is to be taxed. In the case of four parties, even the receipt of principal amount was doubtful. Relying upon the decision of the Hon'ble Punjab and Haryana High Court in the case of CIT v. Ferozepur Finance (P) Ltd. (1980) 124 ITR 619 as also the decision of the Hon'ble Gauhati High Court in the case of Highways Construction Co. (P) Ltd. v. CIT (1993) 199 ITR 702 (Gau), learned counsel submitted, the Hon'ble Punjab and Haryana High Court held that even if an assessee following mercantile system of accounting makes an entry for hypothetical interest income, the same cannot be included in the total income treating it as accrued, when in fact the assessee has not received or no possibility of receiving it either.
61. The learned Departmental Representative, on the other hand, supported the orders of the revenue authorities.
62. Considering the rival submissions, we are of the view that in the light of the decision of the Hon'ble jurisdictional High Court in State Bank of India's case (supra), the issue has to go in assessee's favour. In this case the assessee credited certain amount of interest to suspense account, which was held as not taxable, following the decision of the Hon'ble Supreme Court in the case of UCO bank v. CIT (1999) 237 ITR 889 (SC) . There is no doubt, in the instant case of the assessee, the interest has not been received and it is the case of the assessee that even the principal amount is not likely to be received. The fact that the assessee has not received it, is not disputed. The decisions relied upon by the revenue authorities are distinguishable on facts. Hence, we are of the view that the appeal of the assessee on this ground (Ground No. 2) is liable to be allowed. It is allowed.
63. In the result, appeal of the assessee stands allowed.