Income Tax Appellate Tribunal - Jaipur
Deputy Commissioner Of Income Tax vs Mangalam Cement Ltd. on 14 October, 2004
Equivalent citations: (2005)92TTJ(JP)1
ORDER
B.R. Jain, A.M. March, 2001
1. This appeal has been preferred by the Revenue and is arising from the order of the learned CIT(A), Rajasthan-I, Jaipur for the asst. yr. 1993-94. Following two grounds have been raised :
"On the facts and in the circumstances of the case, the CIT(A), Raj-I, Jaipur has erred in :
(i) Allowing the relief of Rs. 23,905 on account of gift presentation under Rule 6B.
(ii) Allowing the claim of deduction of interest payments of Rs. 13,16,39,997 despite the fact that the amount was capitalised in the assessee's books of account.
2. Both the parties have been heard with respect to the relief of Rs. 23,905 given by the learned CIT(A) on account of gift presentation under Rule 6B. Nothing new has been brought to the notice of the Tribunal by the learned Departmental Representative. The learned CIT(A) followed the decision of the Tribunal in the case of appellant itself for earlier years. No error has been pointed out therein. Accordingly, no interference is considered necessary.
3. In ground No. 2, the dispute relates to the amount of Rs. 13,16,39,997 which the AO has treated as capital expenditure, but the same was directed to be allowed as revenue expenditure by the learned CIT(A).
4. The respondent-assessee before us has contended that in the appellant's own case in ITA No. 1584/Jp/1993 for asst. yr. 1992-93 dt. 16th June, 2000, in which one of us, the learned JM was also a party, the issue of claim of deduction of interest has been held to be covered by the decision of the Tribunal in the case of Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mumbai) and accordingly the order of the learned CIT(A) has been upheld. It was, therefore, prayed that the Tribunal may follow its own order for asst. yr. 1992-93 and uphold the order of learned CIT(A) for this year also. We, therefore, asked the learned Authorised Representative to take us to the findings of the Tribunal in the said decision and show if the Tribunal has considered the material aspect of the issue as to whether the expenditure so incurred on account of interest relates to the conduct of existing business or to the expansion of existing business of the assessee and that no part thereof has been incurred for making investment in the new business of the assessee. To this point of query, the assessee's counsel could not lay his hands on any such findings and did not satisfy the Tribunal on this crucial aspect of the matter. Accordingly, the parties were directed to argue the case on merits as well.
5. The learned Departmental Representative contends that the assessee has made investment in construction of a new unit at Kota. It has set up a new factory at Aditya Nagar having capacity of 6 lakhs tons per annum. A separate project report was prepared. New plant was erected and material facts were not considered by the Tribunal while deciding the assessee's own appeal in ITA No. 1584/Jp/1993 and the said decision cannot be applied for giving relief to the respondent-assessee. Reliance has been placed on the decision of the Hon'ble Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (1985) 155 ITR 120 (SC). It has also been contended that the activity did not amount to expansion of existing business as the assessee has started altogether a different business. The assessee has also claimed separate deduction under Section 80-1 which was not considered by the Tribunal. Since assessee did not start any production upto the close of the year, the payment of interest, therefore, was to be considered as capital expenditure in view of the decision of Challapalli Sugar Ltd. v. CIT (1975) 98 ITR 167 (SC). It is also noteworthy that the interest expenditure has been incurred for acquiring capital assets and that is why the assessee has himself capitalised the amount, though subsequently claimed it deductible. This deduction has been denied by the AO. Reliance has also been placed on the following decisions :
(i) CIT v. Aditya Mills (1990) 181 ITR 195 (Raj)
(ii) Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC)
(iii) Indian Molasses Co. (P) Ltd. v. CIT (1959) 37 ITR 66 (SC)
(iv) Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC)
6. On the other hand, the learned Authorised Representative contended that the assessee is in business since 1981. It has set up a new unit at the same place, which is adjacent to the existing unit. Management, control, funds and organisers for both the units are the same. There is complete interconnection, interlacing and interdependence between the two units. Facts of both the years are same and the Tribunal has already allowed the deduction in assessee's own case for the earlier year. Reliance has been placed on the following decisions :
(i) India Cement Ltd. v. CIT (1966) 60 ITR 52 (SC)
(ii) Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC)
(iii) Tata Chemicals Ltd. v. Dy. CIT (supra) It was, therefore, urged that the appeal of the Revenue needs to be dismissed.
7. The hearing in this case was completed on 30th Nov., 2000, and the parties were directed to furnish synopsis of their arguments. From the submissions made, it was found that both the parties have furnished further information on which certain clarifications were required. The case was accordingly re-fixed for hearing and parties were directed to furnish the material placed before the learned CIT(A) in deciding the assessee's appeal No. ITA 185/1993-94 for asst. yr. 1992-93 and any further material for substantiating their claims. The learned Departmental Representative has furnished a written note dt. 12th Dec., 2000, which reads as under :
"During the course of hearing, I was directed to clarify certain points regarding position of old unit as well as new unit and accordingly I have called for a report from Addl. CIT, Special Range, Kota (Asst.) and his report dt. 7th Dec., 2000 is enclosed herewith for your ready reference. As per this report, both the units are situated at same place but the factories of both the units are separate and there is difference of 25 yards between the two factories. Both units Mangalam Cements Ltd. (old) and Neer Shree Cements (new) are having separate excise numbers which are as under :
Mangalam Cement Ltd. (old unit) - AABCM 6602 QXM001/2/CH-25/JLR/92 Neer Shree Cement (new unit) - AABCM/6602 QXM002/1/R11/CH-25/93 These facts go to indicate that there is no interconnection and interdependence and interlacing between the two units as claimed by the assessee and accepted by the CIT(A). In fact, the assessee has constructed a new factory in the name of Neer Shree Cements which is a separate assessee in central excise Department, as is evident from separate excise numbers issued by Central Excise Department Rural-II Kota dt. 5th March, 1993 that the certificate has been issued in the name of M/s Neer Shree Cement, Aditya Nagar, Morak and not in the name of Mangalam Cements. Photocopy of this certificate is enclosed herewith for your kind reference.
The trial production in new unit was started at the fag-end of financial year i.e. 27th March, 1993 and commercial production was not started in this year. The commercial production was started on 20th April, 1994. This fact is evident from the photo copies of several letters written by the factory manager to Joint Labour Commissioner, Regional Labour Commissioner and the Dy. Chief Inspector of Factories and Boilers on 27th March, 1993, copies of which are enclosed herewith for kind perusal. Since the commercial production was not started during the accounting period relevant to this assessment year, the claim of depreciation was rightly refused by the AO and the CIT was not justified in directing that the depreciation should be allowed to the assessee. So, in view of all these facts, the CIT(A) order was not acceptable at all. The assessee itself has said at several places that they have established a new unit and new factory was constructed which has started commercial production from 20th April, 1994. The interest amounting to Rs. 13,16,39,996 relates to acquisition, erection and installation of plant and machinery for new unit which is evident from the details of interest submitted by the AO, copy of which is also enclosed. Regarding the deduction under Section 80HH and 80-I, it can be submitted that in these years the assessee was in heavy losses, therefore, no such claim was made. However, from the copy of computation of income for asst. yr. 1995-96, attached to this letter, it is evident that the assessee has claimed deduction under Section 80-IA right from asst. yrs. 1995-96 to 1999-2000.
All these facts were not considered by the Hon'ble Tribunal while deciding the appeal for asst. yr. 1992-93, because these facts might have not been brought to the notice of the Hon'ble Bench at that time. In this connection, ratio of decision of apex Court report at Distributors (Baroda) (P) Ltd. v. Union of India and Ors. (1985) 155 ITR 120 (SC) is applicable.
In view of aforesaid discussion the assessee's claim regarding interest and depreciation deserves to be rejected and the AO's order may kindly be restored."
A further note dt. 9th Jan., 2001 has also been placed by the learned Departmental Representative as under :
"Kindly refer to my earlier submission dt. 12th Dec., 2000 submitted in this case. In above connection, I want to clarify further following points for your kind consideration. I have examined the submissions of assessee submitted before CIT(A) in asst. yrs. 1992-93 and 1993-94, copies of which are enclosed herewith for your kind reference. It can be seen from the aforesaid submissions that the assessee has not brought any evidence on record before the CIT(A) which conclusively proves the interconnection, interlacing and interdependence between the two units of the assessee-company. Therefore, the decision of CIT(A) that the new unit is an extension of existing business is without any basis and not supported with good reasoning and material evidence to prove the interconnection, interlacing and interdependence between the two units. As I have already mentioned that the new unit is a totally new business having separate excise number, separate factory and staff, etc. Not only this, but the assessee has claimed deduction under Section 80-IA on the new unit in subsequent years. This claim of the assessee also goes to prove the separate entity of the new unit. Therefore, in view of these facts and the submissions made earlier, the assessee's claim deserves to be rejected. So far as the decision of Hon'ble Tribunal for asst. yr. 1992-93 is concerned in this regard I want to submit that these facts might not have been brought to the notice of the Hon'ble Tribunal while deciding the appeal for asst. yr. 1992-93. For this purpose, I rely on the decision of Hon'ble Supreme Court in Distributors Baroda v. Union of India (1985) 155 ITR 120 (SC)."
8. The learned Authorised Representative has given a counter-reply to the written note dt. 12th Dec., 2000, of the Revenue as under:
"We have received on 14th Dec., 2000 a copy of written submission filed by learned senior Departmental Representative, Tribunal, before your honour. In reply we would like to put forth the following.
The claim of interest on capital borrowed under Section 36(1)(iii) of the IT Act, 1961 requires that such interest should be for the "purpose of business or profession". Therefore what is relevant for claiming deduction under this section is that capital borrowed is for the purpose of business of the assessee, and it is irrelevant whether the business of the assessee is in the form of setting up of a new unit or for the purpose of existing unit. Thus, the existence of a new unit or separate identity of the units for the purpose of sales-tax, excise duty would not make the assessee disentitle to claim interest on borrowed capital.
Enough light has been thrown on the concept of same business for the purpose of Section 36(1)(iii) in case of Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mumbai). In this case, a number of judicial pronouncements were considered and the fertiliser unit at Babrala (UP) and the chemical manufacturing unit at Mithapur (Gujarat) as well as detergent business at Pitampur (MP) were all considered to be constituted one composite or single business. In the result, interest in respect of the new unit was considered as allowable under Section 36(1)(iii). For arriving at this conclusion, the place of the units was considered to be irrelevant and concept of same business was decided on the basis of unity of control indicated by interlacing, interdependence on account of existence of common management, administration, etc. Need not to emphasise that in the aforesaid case decided by Mumbai Bench also, the identity of the units, their sales-tax registration numbers, excise registration numbers were different and distinct since the units were located in different states.
In the Jaipur Bench's decision in case of Hindustan Zinc Ltd. in ITA No. 1154/Jp/1996 and 241/Jp/1997 for asst. yr. 1991-92, order dt. 28th April, 1999 [reported at (2000) 66 TTJ (Jp) 3] also it was held that new unit set up by assessee in existing line of business was an expansion of existing business and various activities or business constituted single composite business on account of unity of control. Accordingly interest on capital borrowed for new unit was held to be allowable under Section 36(1)(iii). In this case also the unit being an additional Lead Zinc Smeltor was set up at the place Chanderia located at entirely different place but the place or separate identity of the unit was not considered relevant for deciding the issue. A number of decisions on the concept have been discussed in this case also.
Hon'ble Jaipur Bench in assessee's own case for asst. yr. 1992-93 has allowed the interest under Section 36(1)(iii) by relying upon the aforesaid two Tribunal decisions and approving the finding of facts recorded by learned CIT(A) regarding the unity of control being indicated by interlacing, interconnection and interdependence. Since the finding of facts so arrived at has become final, the claim of interest on the basis of these facts has been rightly allowed by CIT(A). As submitted, no new facts relevant for deciding the matter have been brought on record by the Department to distinguish the facts of current year with that of previous year. The separate registration of excise or sales-tax law is not relevant, material for decision in the light of reliance on (2000) 72 ITD 1 (Mumbai) and (2000) 66, TTJ (Jp) 3 (supra), where also the units have been located at different locations, obviously having different sales-tax/excise registration numbers.
As a matter of fact, the company did not claim deduction under Section 80-I in any of the years, neither it was allowed to it, but even that claim would not make any difference because parameters for deductions under Section 80-I and deduction under Section 36(1)(iii) are very different. However, in the absence of any claim or allowance by the Department under Section 80-I, it is irrelevant to consider that fact. The issue of Section 80-I has never been considered in assessment and, therefore, no finding about the same has been ever arrived at by the Department.
All the decisions considered by Mumbai Bench and Jaipur Bench are relevant for deciding the issue, specially the decision of Hon'ble Supreme Court reported at Veecumsees v. CIT (1996) 220 ITR 185 (SC) and Rajasthan High Court reported at CIT v. Shah Theatres (P) Ltd. (1988) 169 ITR 499 (Raj) should be considered.
The written submission of learned Departmental Representative is silent upon relevant facts for deciding the issue, i.e., unity of control, interlacing, interconnection, etc., on the basis of which the matter was decided earlier and is being requested to be decided now also. Therefore Hon'ble Tribunal is requested to uphold the order of CIT(A) and follow its own order for asst. yr. 1992-93."
9. Shri Sanjay Jhanwar, present on the last date of hearing on 14th Feb., 2001, has admitted that the learned Departmental Representative has placed the copy of whole of the material filed before the learned CIT(A) in assessee's appeal for asst. yr. 1992-93 and that there is no other material available with him for deciding the issue. Accordingly the appeal was treated as heard.
10. Rival submissions have been heard in the light of material placed on record and case laws referred by both the parties. The Tribunal in ITA No. 1584/Jp/1993 in respondent's case for asst. yr. 1992-93 decided the issue vide para 8 as under :
"We have heard the rival submissions of the parties and after examining the facts of the case, we are of the considered opinion that the assessee's case is covered by the recent- decision of the Tribunal in case of Tata Chemicals Ltd. v. Dy. CIT (supra), we, therefore, hold that the disallowance of interest of Rs. 1,37,14,262 by the AO is not justified and accordingly we uphold the order of the CIT(A) on this account also."
From the careful perusal of the said order and the material placed before us, we find that the assessee had not brought the complete and correct facts before the Tribunal nor did it file adequate and relevant material and that is how the Tribunal appears to have recorded no findings on the facts as to whether both the businesses of the assessee were one and the same or that the interest was paid on the amounts borrowed for making investment or acquiring assets in the existing business. It also did not uphold the findings given by the learned CIT(A) but upheld his order by considering it as covered by the decision of Tata Chemicals Ltd. rendered by Bombay Bench of the Tribunal. It even did not say that the facts of this case are identical with the facts of Tata Chemicals Ltd. Besides this, we also find that material document of registration with Central Excise Department showing the set up of business in a different name and style and the facts leading to set up of business in that name are found not placed before the Tribunal for its consideration in that appeal. Accordingly, we are not inclined to apply the said decision of the Tribunal in the present appeal and, therefore, proceed to examine the case on facts and merits as placed before.
11. A careful examination of the facts brought on record, reveals that the assessee raised funds for the purpose of setting up of the business in the name of M/s Neer Shree Cement, Aditya Nagar, Morak, District Kota. In this business, the investment of the respondent was made under the head capital work in progress, which inter alia includes buildings completed and plant and machinery installed and used for trial production, machinery in stock/under installation/in transit, construction/erection materials, advances for construction, erection and machinery and pre-operative expenses pending allocation. The assessee has disclosed accounting policies and notes on accounts for the year ended 31st March, 1993 as per Schedule 17 to the balance sheet, which forms an integral part thereof. Under the head "notes on accounts" at sl. No. 9, the assessee also disclosed that additions to capital work in progress includes the following :
Upto 31st March, 1992.
For the year ended on 31st March. 1993 Total upto 31st March, 1993 Rs.
Rs.
Rs.
Salaries, Wages and Allowances 8,10,744 25,36,812 33,47,566 Contribution to PF & Other Funds 1,01,614 2,06,222 3,07,836 Workmen & Staff welfare 39,293 2,01,520 2,40,813 Travelling expenses 11,34,747 11,82,471 23,17,218 Consultancy, professional and legalcharges 6,60,503 76,05,930 82,66,433 Share issue expenses 49,21,635 49,21,635 Power, Fuel and Electricity charges 2,21,295 23,74,865 25,96,160 Raw Material Consumed 2,19,461 2,19,461 Stores & Spares consumed 22,98,803 72,63,879 95,62,682 Other manufacturing expenses 20,475 20,475 Insurance 24,11,992 41,90,161 66,02,143 Rent 60,000 60,000 1,20,000 Rates & Taxes 3,339 1,53,592 1,56,931 Research & Development expenses 3,135 4,210 7,345 Payment to Auditor Certification work 3,700 2,600 6,200 Audit fees 26,000 25,000 Interest on fixed loans 1,37,48,623 13,69,87,069 15,07,35,692 Upfront fee & commitment charges 1,33,55,952 92,62,000 2,26,17,952 Repairs to machinery 554 554 Depreciation 26,423 1,24,241 1,50,664 Bank charges 2,55,672 25,15,936 27,71,608 Miscellaneous Expenses 3,35,722 6,21,212 9,56,934 3,54,70,957 18,04,79,735 21,59,60,692 Less : Interest received (Gross) (Tax deducted at source Rs.
9,144 (Previous year Rs. 7,903) 34,361 53,47,072 53,81,433 Rent received 1,363 28,890 30,243 Materia; in process Miscellaneous
----36,000 7,62,1411,55,610 7.62,1411,91,510 71,714 6Z.93.713 63.65,437 Net Preoperative Expense 3.63.99.243 17.41.96.022 20.95.65.265 Thus we find that the assesses has made investment in the business under the name and style of M/s Neer Shree Cement by raising loans and by contributing its own margin as well. Interest on borrowed funds for this purpose from financial institutions and banks is stated to be at Rs. 13,69,87,068, which was charged to the capital work in progress account and treated as capital expenditure by the assessee after reducing the receipt/income of interest earned by it from banks on fixed deposits and on loan contract, etc. amounting to Rs. 53,47,072. It is pertinent to note here that the said income of interest and the income on account of rent received, material in process and misc. income, etc., as per details given in the notes to accounts was not included and declared as income of the respondent-assessee in the P&L a/c prepared by it but the same was reduced from the cost of capital work in progress which is an investment account of the respondent but reflected as fixed assets in the balance sheet prepared by it. It is this net amount of Rs. 13,16,39,997 (13,69,87,068 - 53,47,072) that has been claimed as deductible under Section 36(1)(iii) of the IT Act in the computation of income filed with the return. The assessee himself is found to have stated the payment of interest for borrowings is for the purpose of new unit, which in the case is M/s Neer Shree Cement. The assessee did not say that the amount was borrowed for the purpose of existing business nor for the expansion of the existing business or even for acquiring fixed assets in the existing business.
11.1 From the copy of registration certificate issued by the Superintendent, Central Excise Rural-H, Kota on 5th March, 1993, it is found that the registration has been made in the name of M/s Neer Shree Cement under Registration No. AABCM/6602 QXM002/1/R11/CH-25/93 whereas the assessee was holding a separate registration in the name of M/s Mangalam Cement Ltd. which was its existing business under Registration No. AABCM/6602 QXM001/2/CW-25/JPR/92 with the same authority. It is thus by obtaining a separate registration the assessee has made investment in the new business so as to conveniently and independently carry on the activity of manufacturing of cement without affecting the conduct of other business in the name of M/s Mangalam Cement Ltd. Even the fixed assets and others have been transferred at cost, as is borne out from the facts disclosed by the respondent-assessee in its "significant accounting policy" in the Schedule 17 forming part of the balance sheet. The assessee thus did not consider such transfer as part of the same block of assets as held by the respondent-assessee in its block but made it a separate part of its investment under the head capital work in progress. We also find that the investment has been made for setting up of the project with a rated capacity of 6 lakhs tons per annum but the respondent did not include the said installed capacity as capacity of M/s Mangalam Cement Ltd., for which a separate note has been appended giving information that the installed capacity of 4 lakhs M.T. is exclusive of capacity of 6 lakhs MT of cement under installation (Clinker Plant installed and under trial). Similarly, the assessee, while giving information for class of goods manufactured sold and stocked--Portland cement, as mandatorily required under the Companies Act, 1956, while stating the production of 3,92,416 MT has stated that the said quantity is by excluding Clinker production of 586 MT of new cement unit. From both these information also it is clearly borne out that the assessee himself does not consider the installed capacity as well as the actual production carried out under the name of Neer Shree Cement as the capacity and production of its existing business in the name of M/s Mangalam Cement. We also find that no part of the expenditure incurred in the new business has been charged to the P&L a/c of the assessee's existing business. As a matter of fact, all expenses including expenses on salaries, wages and allowances, P.F. and other funds, workmen and staff welfare, travelling expenses, professional and legal charges, raw material consumed, stores and spares consumed, other manufacturing expenses, insurance, rents, rates and taxes, research and development expenses, auditors' remuneration, interests and fees paid, repairs of plant and machinery, bank charges and miscellaneous expenses, etc., incurred in setting up and taking trial runs of the new business have not been reflected as expenses or assets of the existing business but charged towards investment under the head capital work in progress account. The assessee even did not furnish the complete balance sheet with its all schedules and annexures including Schedules 1 to 16 forming part of the balance sheet and P&L a/c. It even did not place on record, the directors report and also the report of the auditors for either of the business, though a separate audit was got conducted for its new unit by paying Rs. 25,000 (Twenty five thousand only) separately from the payment of Rs. 50,000 (Fifth thousand only) for the audit of accounts of its existing business. This factor alone, goes to show that the assessee has maintained separate books of account for both the businesses and has not produced any audited accounts for the new unit/business nor did it produce the books of account to establish the control of account at one place. We, therefore, hold that there is no control of accounts at one place and the details of capital work in progress have been furnished in the accounts for the purpose of information only and thus accounts of both the business units are separate and independent of each other. Besides this, we also find that the amount of expenditure incurred on payment of salaries, wages and allowances is Rs. 25,36,812 and contributions to P.F. and other funds is Rs. 2,06,222 apart from expenditure on workmen & staff welfare at Rs. 2,01,520. None of these expenditure has been charged to the P&L a/c prepared for the existing business nor claimed as expenses of the assessee in the return of income filed by it. By debiting these expenses under the capital work in progress, clear intention is found that the employees of both the businesses are separate and independent of each other. Similar treatment has been given to various other administrative expenses. Details of administrative set up having not been produced by the assessee and from the limited material available on record, we find that the administrative control of the new unit/business was not dependent on the existing business but it was an independent affair. Furthermore to find out whether the business was run from the common funds, we tried to trace and find if there was any account kept in common for flow of funds in financing the activities of the new business. The assessee having not placed on record even the document of sanction of loans raised by it from the financial institution or banks and even that no statement of account from the bank was produced to show that the instalments of loans so released was not kept in separate accounts nor that they were required to be kept in a separate bank account. It also did not place the appraisal notes of these institutions or the project reports on record. We thus find that by charging interest on fixed loans at Rs. 13,69,87,069, upfront fee and commitment charges at Rs. 92,62,000 and bank charges at Rs. 25,15,936 to the capital work in progress account and not to the P&L a/c of the existing unit, the flow of funds or management thereof cannot be said to be in common for both the businesses. The learned CIT(A) also appears to have accepted the submission of the assessee that the setting up of a new manufacturing cement unit is at the same place, which was for all practical purposes, an expansion extension of the existing business and the business organisation, fund, administration and management of both the units, and production of both the units is to be considered the production of the assessee-company merely on the basis of a written note submitted by the assessee's counsel and there has been no application of mind to the correct facts for reaching to the conclusion that there is a complete interconnection, interlacing and interdependence between the two units of the assessee-company. All this appears to have been done without taking any material on record by him. The assessee even did not place the administrative set up, the flow of funds or utilisation thereof and details with respect to the management, etc., for substantiating its claim nor such details were available with the learned CIT(A) while deciding the issue in favour of the assessee for asst. yr. 1992-93. The contention of the assessee that setting up of a new cement manufacturing unit at the same place does not appear to be correct in the light of the fact that it has itself taken a separate registration under Central Excise Act, which under the law can be granted for business at a separate place but not for the business at the same place. Similarly, the assessee's submission that the production of both the units is to be considered as production of the assessee-company appears to be a gossip in view of the specific information appended to the notes given in Schedule 17 forming part of the balance sheet, wherein it has by way of information categorically mentioned that the quantities of capacity and the production are excluding of the capacity and production of new cement manufacturing unit. In the absence of availability of material details like the director's report, auditor's report, audited accounts with complete schedules, sanction letter of the loans, securities given, administrative set up, management control, business organisation, bank accounts and various other relevant factors having not been brought on record by the assessee, the learned CIT(A) could not have arrived at a correct conclusion in holding that there was a complete interlacing, interconnection and interdependence between the two units of the appellant and thereby allowing the interest on borrowed loans as a revenue expenditure admissible under Section 36(1)(iii). The Tribunal, while deciding the issue also in the case of Tata Chemicals Ltd. v. Dy. CIT (supra), has clearly held that whether two or more businesses are activities pursued by the assessee in the previous year constituted a single or composite business is a question of fact to be decided on the facts of each case and on the basis of evidence led by the assessee. It is, therefore, the Bombay Tribunal, while deciding the issue in that case, did not limit itself merely on the legal aspect of the matter but also from para 44 to 64 observed and found out various facts for coming to the conclusion that the fertilisers unit at Babrala, the chemical unit at Mithapur at Gujarat and detergent unit at Pithampur (MP) all constituted one composite or single business for holding that the disallowance of interest of Rs. 35,13,55,815 is not justified. All the activities were carried on by that assessee in the same name and style and unity of control was established beyond any doubt by noticing existence of common fund, the position with regard to administration, management and staff, which led to the satisfaction that unity of management and control was with that assessee besides accounting set up and linking of various accounts through head office account and also various aspects of the matter. But in the case before us, the assessee has failed to produce any such material from which an inference could be drawn that unity of control, interlacing, interconnection or interdependence, etc., was with the respondent-assessee for both the business or for coming to the conclusion that it was expansion of the existing business despite sufficient opportunity given to him. The burden lay on the assessee to show that both the activities constitute a single or composite activity or it was the same business. This has not been discharged. Even if the items to be manufactured in both the units were to be the same, it shall not be an appropriate test in view of the fact that same cannot be characterised as a composite business. It is thus in the absence of any material having been brought on record by the assessee, the Tribunal, while deciding the issue in the case of the assessee for asst. yr. 1992-93, did not even confirm the findings of the learned CIT(A). It, however, appears to have allowed the appeal per incuriam as the assessee had not placed the relevant facts and material and had not made out a case of dovetailing of the business before the Tribunal. Before us also no such material has been placed by the assessee. Accordingly we are not inclined to expand the scope of the decision taken by the Tribunal in the assessee's own case for asst. yr. 1992-93, as that would amount to unnecessarily expanding the scope of authority, where even no principles was evolved. Such a view is fortified by the decision of apex Court in the case of Shah v. State of Gujarat AIR 1986 SC 468, para 26 and also in Krishen v. Union of India (1990) 4 SCC 207 (Paras 19, 20) CB. We also are equally concerned on the statements of matter other than laws, for example, facts, which have no binding force as has been held by Supreme Court in the case of Municipal Committee v. Hazara AIR 1975 SC 1087, Prakash v. State of UP AIR 1960 SC 195. Accordingly, keeping in view the various decisions of the apex Court into consideration and the fact that the issue in asst. yr. 1992-93 appears to have been decided without having brought the material facts on record by the assessee, we are constrained in not following the decision taken by the Tribunal in ITA No. 1584/Jp/1993, more so that res judicata does not apply to income-tax proceedings. Keeping in view the entirety of facts and circumstances and our various observations and findings, we are of the considered view that the expenditure of Rs. 13,16,39,997 has been incurred by the assessee for the purpose of investment in the new business and not in the existing business nor for the expansion of the existing business and unity of control is also not indicated by interlacing, interdependence and interconnection between the business and dovetailing of one into another. Since the assessee did not carry on the business in the previous year for which borrowings were effected, respondent-assessee was not entitled for deduction under Section 36(1)(iii) as a revenue expenditure. The learned CIT(A) appears to have erroneously allowed the deduction to the respondent-assessee without appreciating correct and complete facts of the case. Accordingly, the decision taken by the learned CIT(A) is reversed and the AO is directed to withdraw the deduction. He shall however examine the facts for allowing depreciation on this amount and give opportunity to the assessee before allowing any depreciation claim, if any, found to have been made before him. Besides this, he shall also examine the income of Rs. 53,47,072 earned by the assessee from interest from banks etc. and loan contracts in the light of decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (supra) and bring the same to tax accordingly.
12. In the result, the appeal of the Revenue is allowed partly.
Dinesh K. Agarwal, J.M. 27th July, 2001
1. I have carefully gone through the order proposed by the learned AM, but I have not been able to pursuade myself to concur with the conclusion reached in reversing the order of the CIT(A), who has allowed the deduction of interest claimed under Section 36(1)(iii) amounting to Rs. 13,16,39,997. I would appraise the relevant facts for proper appreciation of the issue involved.
2. Briefly stated, the assessee-company is primarily engaged in the manufacturing and sale of Portland cement at Morak, District Kota (Rajasthan) and is in existence since 1981. It has set up a new factory at Aditya Nagar, Morak, District Kota, having capacity of 6 lakhs tons per annum. The assessee has claimed deduction of interest under Section 36(1)(iii) Rs. 13,16,39,997 on the capital borrowed. It was found by the AO that the assessee-company itself treated the interest as capital expenditure in the books of account and only in the computation of income, it was claimed to be revenue expenditure. The AO was of the view that as per prevalent accounting practice, the interest would form part of the fixed assets, on which depreciation is allowable. He, therefore, in view of it and keeping in view of the findings given in the assessment order for the asst. yr. 1992-93, rejected the assessee's claim.
3. The CIT(A), following the earlier order and keeping in view of the findings given therein on a similar issue, allowed the assessee's claim.
4. The Tribunal, in ITA No. 1584/Jp/1993, dt. 16th June, 2000 in the assessee's own case for asst. yr. 1992-93, has decided the similar issue in favour of the assessee vide para 8 of its order as under :
"8. We have heard the rival submissions of the parties and after examining the facts of the case, we are of the considered opinion that the assessee's case is covered by the recent decision of the Tribunal in case of Tata Chemicals Ltd. v. Dy. CIT (supra), we therefore, hold that the disallowance of interest of Rs. 1,37,14,262 by the AO is not justified and accordingly we uphold the order of the CIT(A) on this account also."
5. The learned Departmental Representative, at the out-set, submitted that the Tribunal, while deciding the assessee's own appeal in ITA No. 1584/Jp/1993, dt. 16th May, 2,000 for asst. yr. 1992-93, has not considered the material facts on the basis of which, the assessee's claim is not allowable, therefore, the said decision cannot be applied for giving relief to the assessee. Reliance has been placed on the decision of Hon'ble Supreme Court of India in the case of Distributors (Baroda) (P) Ltd. v. Union of India (1985) 155 ITR 120 (SC). It was further submitted by the learned Departmental Representative that since the assessee did not start any production upto the close of the year, the payment of interest, therefore, was to be considered as capital expenditure in view of the decision of Hon'ble Supreme Court of India in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC). It was also contended by the learned Departmental Representative that the interest expenditure has been incurred for acquiring capital assets and that is why the assessee has itself rightly capitalised the amount, though subsequently claimed as allowable under Section 36(1)(iii) of the IT Act, therefore, the disallowance of deduction of the assessee's claim under Section 36(1)(iii) should be restored. Reliance has been placed on the following decisions :
(i) CIT v. Aditya Mills (1990) 181 ITR 195 (Raj)
(ii) Assam Bengal Cement Co. Ltd. v. CIT (1955) 27 ITR 34 (SC)
(iii) Indian Molasses Co. (P) Ltd. v. CIT (1959) 37 ITR 66 (SC)
(iv) Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC).
6. On the other hand, the learned Authorised Representative submitted that the assessee is in business since 1981. It has set up a new unit at the same place, which is adjacent to the existing unit. Management, control, funds and organisers for both the units are the same. There is complete interconnection, interlacing and interdependence between the two units. Therefore, the facts of both the years are the same and the Tribunal has already allowed the deduction in the assessee's own case for the earlier year and hence the deduction of interest amounting to Rs. 13,16,39,997 under Section 36(1)(iii) is allowable in this year also. Reliance has been placed on the following decisions :
(i) Indian Cements Ltd. v. CIT (1966) 60 ITR 52 (SC)
(ii) Kedarnath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC)
(iii) Tata Chemicals Ltd. v. Dy. CIT (2002) 72 ITD 1 (Mumbai) It was, therefore, submitted that the appeal of the Revenue should be dismissed.
7. The learned Departmental Representative has further furnished written notes dt. 12th Dec., 2000 and 9th Jan., 2001, which have been reproduced by the learned AM in his order at page Nos. 4, 5 and 6, therefore, to avoid repetition, the same are not being reproduced here.
8. The learned Authorised Representative has also given counter-reply to the written submission of the Revenue dt. 12th Dec., 2000, which has also been reproduced by the learned AM in his order at Page Nos. 6 and 7, therefore, to avoid repeatation, the same is also not being reproduced here.
9. The learned Authorised Representative, on the last date of hearing, repeated the same arguments and further submits that no contrary material has been brought on record by the Revenue on the issue of unity of control, interconnection, interlacing and interdependence between the two units, management, control and funds, therefore, the Tribunal's decision for the asst. yr. 1992-93 is fully applicable in this year also and, accordingly, the Departmental appeal is liable to be dismissed.
10. I have carefully considered the rival submissions of the parties, perused the material available on record and the case laws relied upon by both the parties, I find that the ground raised by the Revenue in the grounds of appeal is only on the entries made by the assessee in its books of account, in which the assessee has capitalised the interest and, therefore, according to the Revenue, it is not allowable. After hearing the rival submissions of the parties and examining the facts, I find that the assessee has made the claim of deduction of interest Rs. 13,16,39,997 under Section 36(1)(iii) through revised return, which was not otherwise found to be invalid. It is settled principle of law that the question whether a particular deduction is allowable or not under the provisions of the Act will not depend on the existence or absence of entries in the books of account. In any case, entries in the books of account cannot be treated as decisive or conclusive in relation to determination of the question relating to taxability of an expenditure under the provisions of the Act. If on a true and correct interpretation of the relevant provisions of law, the assessee is entitled to deduction of a particular expenditure, manner and mode of making an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things. This view finds support from the decision of Hon'ble Supreme Court of India in the case of India Cement Ltd. v. CIT (supra), Kedarnath Jute Mfg. Co. Ltd. v. CIT (supra) and Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (supra) in which it was held at pp. 183-184 as under :
"It is true that this Court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override Section 56 or any other provision of the Act. As was pointed out by Lord Russell in the case of B.S. Footwear Ltd. v. Ridgway (Inspector of Taxes) (1970) 77 ITR 857 (CA), the IT Law does not march step by step in the footprints of the accounting profession."
11. In view of the above, I am of the view that the entries made in the books of account cannot be the sole criteria for disallowing the deduction of interest Rs. 13,16,39,997, claimed by the assessee under Section 36(1)(iii) of the Act, which is otherwise allowable.
12. From the assessment order, I find that the claim of the interest under Section 36(1){iii) amounting to Rs. 13,16,39,997 was also denied in view of the disallowance of such claim made in the asst. yr. 1992-93. I find that the legal position of the allowability of the claim of interest has been dealt with in detail by the Tribunal, Bombay Bench in the case of Tata Chemicals Ltd. v. Dy. CIT (supra), which is reproduced as under :
"32. In CIT v. Tarai Development Corporation Ltd. (1994) 205 ITR 421 (All): (1994) 72 Taxman 153 (All) it was held that interest paid on capital borrowed for the expansion of the existing business is allowable under Section 36(1)(iii). In CIT v. Expanded Metal Mfrs. (1991) 189 ITR 317 (All) : (1991) 55 Taxman 429 (All), the assessee was engaged in the business of expansion of iron metal. It started a new unit for the manufacture of rubber products. It raised a loan for the purpose. The rubber factory did not commence production in the previous year. It was held on these facts that the assessee is one and the . same and though it had set up a new factory, the assessment was not made unit-wise but assessee-wise. There is no rule which compels the assessee under such circumstances to capitalise the interest or to include it in the capital expenditure (relating to the new unit). In Kanhiram Ramgopal v. CIT (1988) 170 ITR 41 (MP) : (1988) 36 Taxman 305 (MP), the assessee was carrying on a rice and dhall mill and borrowed monies for setting up a factory for the manufacture of strawboards by using the waste from the rice and dhall mill. The Madhya Pradesh High Court held that it was only a case of expansion of business and the interest - paid on the monies borrowed was allowable as deduction under Section 36(1)(iii). In CIT v. Shah Theatres (P) Ltd. (1988) 169 ITR 499 (Raj) : (1988) 36 Taxman 335 (Raj) the assessee was engaged in the business of exhibition of motion pictures. During the year, it started the construction of a theatre of its own for the purpose of exhibiting films. The assessee has borrowed monies on interest for the purpose of the construction. On these facts, the Rajasthan High Court held that it was "a case of an extension of an existing business and not one of setting up a new business. The interest was directed to be allowed. In CIT v. Malwa Vanaspati & Chemicals Co. Ltd. (1997) 226 ITR 253 (MP) : (1997) 92 Taxman 262 (MP), the company was engaged in the manufacture, processing and sale of vegetable oils and chemicals. It put up a new unit for the manufacture of H.J. and Tobias acid. For purchase of machinery for the new unit, the assessee took loan from M.P. Financial Corporation and paid interest on the same. The claim was negatived by the ITO. The CIT(A) held it was a case of expansion of existing business. The Tribunal concurred and found that: (i) the new unit was put up in accordance with the objects-clause of the company; (ii) the loan was taken for expansion of the business; (iii) the assessee manufactured chemicals and the new unit was to manufacture H.J. and Tobias acid used in the dye and intermediate industries; and (iv) the funds were common, the board of directors was the same, the loan was borrowed in the name of the assessee; existing funds were also utilised for the new unit; expenditure incurred were reflected in the P&L a/c and balance sheet of the assessee-company. According to the Tribunal, the above facts showed that the business were one and the same. The High Court upheld the finding of the Tribunal."
13. Since the Tribunal, in the assessee's own case for the asst. yr. 1992-93, has allowed the assessee's claim of interest, therefore, keeping in view of the consistency and the decision of this Tribunal in the case of Hindustan Zinc Ltd. v. Dy. CIT (2000) 66 TTJ (Jp) 3, and also the decisions of other Benches of the Tribunal in Philips India Ltd. v. ITO (1996) 59 ITD 390 (Bom), Bharat Forge Ltd. v. Dy. CIT (1995) 53 ITD 575 (Pune), I am of the view that the assessee's claim of interest is allowable and, accordingly, the order passed by the CIT(A) on this account deleting the disallowance of interest is upheld.
14. It is also seen that at the time of hearing, the Bench has required certain information on the issue of unity of control, interconnection, interlacing and interdependence between the two units but in the absence of any such finding in the assessment order and in the order of the CIT(A) and also keeping in view of the fact that the assessee has made this claim through its revised return without making any entry in its books of account, I am of the view that the AO was not justified in disallowing the assessee's claim of interest under Section 36(1)(iii) amounting to Rs. 13,16,39,997 and, accordingly, the order passed by the CIT(A) on this account is upheld and the ground raised by the Revenue is rejected.
15. In Ground No. 1, I fully agree with the findings recorded by the learned AM in upholding the order of the CIT(A) on this account.
16. In the result, the appeal filed by the Revenue is dismissed.
REFERENCE UNDER SECTION 255(4) OF THE IT ACT, 1961 Dinesh K. Agarwal, J.M. 27th July, 2001
1. As there is difference of opinion between the Members in one issue of the present appeal, the same is required to be resolved by one or more Members of the Tribunal as nominated by the Hon'ble President, Tribunal, in terms of Section 255(4) of the Act. Accordingly, the following question of difference is referred :
"Whether, on the facts and in the circumstances of the case, considering the consistent view of the different Benches of the Tribunal including Jaipur Bench in other cases and in the assessee's own case for the immediately preceding year, the amount of interest of Rs. 13,16,39,997 paid on borrowed capital which has been capitalised in the books of account as part of actual cost of the new machineries of the new unit of the assessee-company, can be claimed as deduction under Section 36(1)(iii) of the IT Act."
2. We direct the registry to place the matter before the Hon'ble President, Tribunal.
B.R. Jain, A.M.
1. Following questions of difference are also referred in terms of Section 255(4) of the IT Act, 1961 for resolving the difference of opinion :
(i) "In view of the findings and fact of the matter that material facts and . documents were not placed before the Tribunal in deciding the assessee's appeal for asst. yr. 1992-93 and thus there being direction to argue the case on merit and finding arrived that Tribunal appears to have allowed the appeal in favour of assessee per incurium in asst. yr. 1992-93, was it imperative to follow such a decision for deciding the issue for the relevant year.
(ii) Whether, on examination of the facts, material and merits of the case and in view of the undisputed findings recorded in the order of the AM to the effect that there was no unity of control, interlacing, interconnection and interdependence between the two units and the assessee has not made out a case of dovetailing of the business, could it be said that the assessee's case is covered by the decision of Tribunal in the case of Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mumbai) so as to follow the order of the Tribunal in assessee's own case for asst. yr. 1992-93 for allowing the claim of interest of Rs. 13,16,39,997.
(iii) Whether the Tribunal has power to decide the controversy before it by recording its own findings even though such findings were not specifically recorded by the AO in his order for reaching the same conclusion for disallowance of claim of interest of Rs. 13,16,39,997.
(iv) Keeping in view the entirety of facts and circumstances and various observations and findings that the expenditure of Rs. 13,16,39,997 has been incurred by the assessee for the purpose of investment in the new business and not in the existing business nor for the expansion of the existing business and unity of control is also not indicated by interlacing, interdependence and interconnection between the business and dovetailing of one into another and as such the assessee was not entitled for deduction under Section 36(1)(iii) is a correct view of the AM or that the view taken by the JM that the assessee's claim of interest is allowable is a correct view."
Vimal Gandhi, President (As Third Member) 6th Oct., 2004
1. On account of difference between learned Members of the Tribunal, Jaipur, the matter has been referred to me under Section 255(4) of IT Act. The Members do not agree even on the question which would cover the difference. The learned JM has proposed the following question for reference :
"Whether, on the facts and in the circumstances of the case, considering the consistent view of the different Benches of the Tribunal including Jaipur Bench in other cases and in the assessee's own case for the immediately preceding year, the amount of interest of Rs. 13,16,39,997 paid on borrowed capital which has been capitalised in the books of account as part of actual cost of the new machineries of the new unit of the assessee-company can be claimed as deduction under Section 36(1)(iii) of the IT Act."
2. The learned AM, on the other hand, proposed the following four questions for consideration :
(i) In view of the findings and fact of the matter that material facts and documents were not placed before the Tribunal in deciding the assessee's appeal for asst. yr. 1992-93 and thus there being direction to argue the case on merit and finding arrived that Tribunal appears to have allowed the appeal in favour of assessee per incurium in asst. yr. 1992-1993, was it imperative to follow such a decision for deciding the issue for the relevant year.
(ii) Whether on examination of the facts, material and merits of the case and in view of the undisputed findings recorded in the order of the AM to the effect that there was no unity of control, interlacing, interconnection and interdependence between the two units and the assessee has not made out a case of dovetailing of the business, could it be said that the assessee's case is covered by the decision of Tribunal in the case of Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mumbai) so as to follow the order of the Tribunal in assessee's own case for asst. yr. 1992-93 for allowing the claim of interest of Rs. 13,16,39,997.
(iii) Whether the Tribunal has power to decide the controversy before it by recording its own findings even though such findings were not specifically recorded by the AO in his order for reaching the same conclusion for disallowance of claim of interest of Rs. 13,16,39,997.
(iv) Keeping in view the entirety of facts and circumstances and various observations and findings that the expenditure of Rs. 13,16,39,997 has been incurred by the assessee for the purpose of investment in new business and not in the existing business nor for the expansion of the existing business and unity of control is also not indicated by interlacing interdependence and interconnection between the business and dovetailing of one into another and as such the assessee was not entitled for deduction under Section 36(1)(iii) is a correct view of the AM or that the view taken by the JM that the assessee's claim of interest is allowable is a correct view."
3. I have gone through the relevant material. It is regrettable that the Hon'ble Members do not know what is the difference between them and how a reference is made under Section 255(4) of the IT Act. Can a Member write in the question referred that facts recorded by him and not accepted by the other Member are correct and therefore, should be the basis of the question? In my considered opinion, only the following question arises for consideration:
"Whether, on the facts and in the circumstances of the case, learned CIT(A) was justified in allowing interest of Rs. 13,16,39,997 under Section 36(1)(iii) of IT Act or his order is liable to be reversed?"
4. The facts of the case briefly stated are that assessee-company has been engaged in manufacture and sale of Portland cement at Morak, District Kota since 1981, It set up a new factory at the same place about 25 yards away from the earlier factory to enhance its production capacity by 6 lakhs tons per annum. The assessee had borrowed capital for making investment in machinery and plant on which it was liable to pay interest of Rs. 13,16,39,997. The interest was capitalised in the books of account. However, in the revised return, above interest was claimed as a revenue deduction under Section 36(1)(iii) of IT Act.
5. The AO vide his order dt. 30th Dec., 1993 negatived the claim of the assessee with the following observations :
"11. The assessee-company has claimed deduction to the tune of Rs. 13,16,39,997 in respect of interest expenditure which has been capitalised in the books of account. Scrutiny of Note No. 5 of the revised return and also the note on such expenditure filed at page No. 13 to 15 revealed that the amount is utilised for purchase of fixed assets for the company. According to the prevalent accounting practices, this interest would form part of the cost of fixed assets, on which depreciation is allowable and, therefore, this is in the nature of capital expenditure. Further, the assessee has treated the interest as capital expenditure in the books and only for computation of income, the interest has been claimed as revenue expenditure. In view of the above reasons and following my earlier findings as given in the asst. yr. 1992-93, the claim of the assessee-company is rejected and, therefore, the amount so claimed is not allowed to be deducted from the total income."
It is clear from above that he followed his order for the immediately preceding asst. yr. 1992-93.
6. The assessee impugned above disallowance in appeal and the learned CIT(A) vide order dt. 22nd Feb., 1994 allowed the interest - with the following observations :
"5.1 The grievance of the appellant is practically the same as referred to in the appellate order mentioned above and keeping in view the finding given therein on a similar issue, the claim of the appellant appears to be well in order and is directed to be allowed. (Relief Rs. 13,16,39,997)."
7. The Revenue being aggrieved, carried the matter in appeal before the Tribunal. After the oral hearing was completed on 30th Nov., 2000, the Tribunal directed the parties to furnish synopsis of their arguments. Learned Departmental Representative vide his written submissions dt. 12th Dec., 2000 -and 9th Jan., 2001 submitted that earlier order of the Tribunal for asst. yr. 1992-93 be not applied in the assessment year under consideration on account of the following reasons :
(a) The new unit was different as there was distance of 25 yards between the two factories. The two units had different names as follows :
(i) Mangalam Cement Ltd. (old unit) (ii) Neer Shree Cement (new unit).
(b) These units have separate excise numbers.
(c) There was no interconnection, interdependence or interlacing between the two units.
(d) The trial production was started at the fag end i.e. on 27th March, 1993 whereas commercial production started only on 20th April, 1994. Since commercial production was not started during the accounting period, the claim of depreciation was rightly revised.
(e) That the claim of interest in dispute relates to acquisition, erection and installation of plant and machinery of new unit.
(f) The assessee had further claimed deduction under Section 80HH and 80-I in these years.
Above facts were not considered by Tribunal for asst. yr. 1992-93 as these might not have been brought to the notice of Hon'ble Bench as that time. The Revenue relied upon decision of apex Court reported as Distributors (Baroda) (P) Ltd. v. Union of India (1985) 155 ITR 120 (SC).
In the subsequent letter dt. 9th Jan., 2001, the learned Departmental Representative drew attention of the Bench to submissions of the assessee before the CIT(A) in asst. yrs. 1992-93 and 1993-94 to contend that the assessee did not place any evidence before CIT(A) which would conclusively prove the interconnection, interlacing and interdependence between the two units of the assessee-company. Therefore, the decision of the CIT(A) that new unit is extension of existing business is without any basis and not supported with good reasoning and material. The Departmental Representative accordingly prayed that the decision of the Tribunal for asst. yr. 1992-93 be not applied.
8. The learned Authorised Representative of the assessee vide his counter-reply dt. 18th Dec., 2000 submitted as under :
(i) That claim of interest under Section 36(1)(iii) of IT Act is to be allowed as capital used for the "purpose of business or profession". Therefore only thing to be proved is whether capital was borrowed for purposes of business of the assessee. It is irrelevant whether capital was utilised for setting up of a new unit or for purposes of existing unit. The different excise number would not make any difference.
(ii) The assessee relied on the decision of Tata Chemicals Ltd. (supra) wherein after considering large number of judicial pronouncements, the Bench had held that all the units are part of the same composite and single business. The interest was allowed as a deduction. In arriving at above conclusion, the place of unit was considered to be irrelevant. It was further emphasised that in the decided cases by Mumbai Bench, identity of units, their sales-tax registration number, excise registration number were different and distinct since the units were located in different States.
The assessee further relied upon the decision of Jaipur Bench in the case of Hindustan Zinc Ltd. (ITA No. 1154/Jp/1996 and 241/Jp/1997) wherein on similar circumstances, new unit was considered as expansion of existing business and deduction under Section 36(1)(iii) was allowed to the assessee.
The assessee-company did not claim deduction under Section 80-I in any of the years neither the deduction was allowed to it, but even if such a claim was made, it would not make any difference for permitting deduction under Section 36(1)(iii) of IT Act. The assessee accordingly submitted that order for asst. yr. 1992-93 be applied in the year under consideration.
9. The learned AM, after considering facts and circumstances of the case, held that the assessee failed to bring complete and correct facts before the Tribunal nor did it file adequate and relevant material and that is how the Tribunal appears to have recorded no finding on the facts as to whether both the business of the assessee were one and the same or that interest was paid on the amount borrowed for making investment or acquiring assets in the existing business.
The learned AM further observed that the Tribunal in the asst. yr. 1992-93 did not even say that facts of the case before them were identical with the facts of Tata Chemical Ltd. (supra). He further observed that facts relating to registration with Central Excise Department and set up of business in different name and style were not placed before the Tribunal for consideration in appeal for asst. yr. 1992-93. He accordingly held that the Tribunal was not inclined to apply decision for the asst. yr. 1992-93 in the year under appeal.
On examination of relevant facts, the learned AM observed that the assessee raised funds for purposes of business in the name of M/s Neer Shree Cement, Morak, District Kota. The assessee in the new unit made investment under the head "Capital work in progress, in building, plant and machinery, etc., etc.".
The learned AM referred to Schedule 17 to the balance sheet for the year ending 31st March, 1993 and notes on accounts at sl. No. 9 and took note of comparative figures with earlier two accounting years (reproduced in para 11 of his proposed order) and came to the conclusion that the assessee had made investment in new unit by raising loans and by "contributing its own margin as well". The assessee charged interest of Rs. 13,69,87,068 to capital work in progress after deducting Rs. 53,47,072, which was interest earned by the assessee. The assessee thus admitted that payment of interest for borrowing was for purposes of new unit i.e. M/s Neer Shree Cement. It was not claimed that assessee had utilised borrowed capital for expansion of existing business or for acquiring fixed assets in such business.
The learned AM then referred to two separate registration numbers allotted by the Excise Department to two units. The learned AM further found that fixed assets were transferred at cost as was evident from the facts disclosed in "significant accounting policy" in Schedule 17 of the balance sheet. The assessee thus did not consider such a transfer as part of same block of assets as held by the respondent-assessee in its books but made it a separate head "capital work in progress". The learned AM also referred to the information given by the assessee that the new unit had additional capacity of 6 lakhs tons per annum in addition to capacity of 4 lakhs MT of M/s Mangalam Cement Ltd. The AM further found that production of Mangalam Cement Ltd. did not include Clinker production of 586 MT of new unit. From the above evidence the learned AM concluded that the assessee himself did not consider Neer Shree Cement as part of existing business in the name of M/s Mangalam Cement. The learned AM also found that no part of expenditure incurred in the new business was charged to profit and loss of the existing business. He further found fault that the assessee did not furnish complete balance sheet with all the schedules. The report of the directors as also report of the auditors for either of the businesses was not produced although Rs. 25,000 and Rs. 50,000 were paid to the auditors for getting accounts of the business audited. From the above, the learned AM concluded that the assessee maintained separate books of account for both the businesses and had not produced any audited account for new unit/business to establish control of account at one place. From details of figure of capital work in progress, he concluded that both the units were separate and independent of each other. As expenditure on payment of salary, wages and allowances and contribution to provident fund and other welfare expenses were not charged to P&L a/c of existing business, the learned AM held that new business was an independent affair. He further did not find any common flow of funds in financing activities of the new business. The assessee failed to place on record documents relating to sanctions of loan from financial institutions or bank, bank statements to show that loans were kept in separate accounts.
10. The assessee further did not place appraisal notes of financial institutions or project report on record. The learned AM further observed that by charging interest on fixed loans at Rs. 13,69,87,069, upfront fee and commitment charges at Rs. 92,62,000 and bank charges to the capital work in progress account and not to P&L a/c of the existing unit, the flow of funds or management cannot be said to be in common for both the businesses. The CIT(A) accepted that new unit was set up at the same place and was expansion of existing business and had common funds, administration and. management merely on the basis of written note of the assessee without any application of mind to correct facts. It was done without taking material on record. The assessee did not explain administrative set up or evidence of flow of funds or utilisation thereof or details of management, etc. for establishing its claim nor such details were available with the learned CIT(A) when issue in favour of assessee was decided for asst. yr. 1992-93. The learned AM further observed that assessee's submission that production of both the units was production of assessee-company appear to be a gossip in view of specific information appended to the notes given in Schedule 17 of the balance sheet. The finding of the learned CIT(A) was held by the learned AM to be factually incorrect. The Bombay Bench of the Tribunal while deciding the issue in the case of Tata Chemicals Ltd. v. Dy. CIT (supra) had considered all facts while coming to the conclusion that two units of the assessee in that case constituted one composite or single business. There all activities were carried by the assessee in the same name and style and unity of control was established beyond any doubt. But in the present case the assessee has failed to produce any such material from which an inference can be drawn that unity of control, interlacing, interconnection or interdependence, etc., was with the respondent-assessee for both the businesses. The burden that lay on the assessee was not discharged. The learned AM also observed that Tribunal while deciding the issue in the case of the assessee for the asst. yr. 1992-93, did not even confirm the findings of the CIT(A). It allowed the appeal per incurium. In the light of above observation, the learned AM held that expenditure of Rs. 13,16,39,997 was incurred by the assessee for purposes of investment in new business and, therefore, assessee was not entitled to deduction under Section 36(1)(iii).
The learned AM, further observed as under :
"He (AO) shall however, examine the facts for allowing depreciation on this amount and give opportunity to the assessee before allowing any depreciation claim, if any, found to have been made before him. Besides this, he shall also examine the income of Rs. 53,47,072 earned by the assessee from interest from banks etc. and loan contracts in the light of decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC) and bring the same to tax accordingly."
11. The learned JM did not agree with the view expressed by the learned AM. He noted facts of the case that assessee-company was manufacturing Portland cement at Morak, Distt. Kota (Rajasthan) since 1981. It has set up a new factory at the same place having capacity of 6 lakhs tons per annum. The AO did not allow claim of deduction of interest of Rs. 13,16,39,997 under Section 36(1)(iii) on the capital borrowed as according to him this was a capital expenditure and should form part of fixed assets. On appeal, the learned CIT(A) allowed the claim following earlier order on the identical facts. The learned JM also took note of order of Tribunal in the assessee's case for the asst. yr. 1992-93.
12. After considering submissions of the learned Departmental Representative that material facts were not considered by the Tribunal in assessee's case for asst. yr. 1992-93 and, therefore, above decision could not be applied to the case in the year under consideration, the learned JM noted argument of Departmental Representative that principle laid down by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167 (SC) were applicable to the case. The learned JM further considered the effect of entries made by the assessee capitalising the interest. He held that manner of making particular entry in the books of account or accounting practice was not very important and question of deduction of interest was to be decided according to principle of law. For the above proposition, learned JM drew support from decision of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC), Kedar Nath Jute Mfg. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC) and the case of Tuticorin Alkali Chemicals & Fertilisers Ltd. v. CIT (1997) 227 ITR 172 (SC). He accordingly concluded that deduction of interest claimed by the assessee could not be disallowed on account of entries made in the books of account.
From the assessment order of the year under consideration, the learned JM found that claim of deduction of Rs. 13,16,39,997 was denied as similar claim was denied in asst. yr. 1992-93. The learned JM then considered and reproduced following observation of Bombay Bench in the case of Tata Chemicals Ltd. v. Dy. CIT (supra) :
"32. In CIT v. Tarai Development Corporation Ltd. (1994)205 ITR 421 (All) : (1994) 72 Taxman 153 (All), it was held that interest paid on capital borrowed for the expansion of the existing business is allowable under Section 36(1)(iii). In CIT v. Expanded Metal Mfrs. 1991) 189 ITR 317 (All) : (19991) 55 Taxman 529 (All), the assessee was engaged in the business of expansion of iron metal. It started a new unit for the manufacture of rubber products. It raised a loan for the purpose. The rubber factory did not commence production in the previous year. It was held on these facts that the assessee is one and the same and though it had set up a new factory, the assessment was not made unit-wise but assessee-wise. There is no rule which compels the assessee under such circumstances to capitalise the interest or to include it in the capital expenditure (relating to the new unit). In Kanhiram Ramgopal v. CIT (1988) 170 ITR 41 (MP) : (1988) 36 Taxman 305 (MP), the assessee was carrying on a rice and dhall mill and borrowed monies for setting up a factory for the manufacture of straw-boards by using the waste from the rice and dhall mill. The Madhya Pradesh High Court held that it was only a case of expansion of business and the interest paid on the monies borrowed was allowable as deduction under Section 36(1)(iii). In CIT v. Shah Theatres (P) Ltd. (1988) 169 ITR 499 (Raj) : (1988) 36 Taxman 335 (Raj), the assessee was engaged in the business of exhibition of motion pictures. During the year, it started the construction of a theatre of its own for the purpose of exhibiting films. The assessee has" borrowed monies on interest for the purpose of the construction. On these facts, the Rajasthan High Court held that it was a case of an extension of an existing business and not one of setting up a new business. The interest was directed to be allowed. In CIT v. Malwa Vanaspati & Chemicals Co. Ltd. (1997) 226 ITR 253 (MP) : (1997) 92 Taxman 262 (MP), the company was engaged in the manufacture, processing and sale of vegetable oils and chemicals. It put up a new unit for the manufacture of H.J. and tobias acid. For purchase of machinery for the new unit, the assessee took loan from MP Financial Corporation and paid interest on the same. The claim was negatived by the ITO. The CIT(A) held it was a case of expansion of existing business. The Tribunal concurred and found that: (i) the new unit was put up in accordance with the objects-clause of the company; (ii) the loan was taken for expansion of the business; (iii) the assessee manufactured chemicals and the new unit was to manufacture H.J. and Tobias acid used in the dye and intermediate industries; and (iv) the funds were common, the board of directors was the same, the loan was borrowed in the name of the assessee; existing funds were also utilised for the new unit; expenditure incurred were reflected in the P&L a/c and balance sheet of the assessee-company. According to the Tribunal, the above facts showed that the business were one and the same. The High Court upheld the finding of the Tribunal."
The learned JM held that as claim of similar deduction in assessee's own case was allowed for asst. yr. 1992-93, therefore, consistent with the above view as also in the light of decision of Jaipur Bench of Tribunal in the case of Hindustan Zinc Ltd. v. Dy. CIT (2000) 66 TTJ (Jp) 3, and other decisions of Benches reproduced by him in para 13 of his proposed order, the deletion of disallowance of interest was required to be upheld. The learned JM accordingly directed that deduction of interest claimed by the assessee be allowed. He dismissed the appeal of the Revenue.
13. On account of above difference, the matter has been placed before me under Section 255(4) of the IT Act.
14. I have heard both the parties. There is no dispute that facts and circumstances in the assessment year under consideration are identical with facts in the asst. yr. 1992-93 where the matter was decided in favour of the assessee. Although relevant portion of order of Tribunal for above year has been reproduced by the respective Members in their orders, yet in order to resolve the controversy, it is desirable to reproduce that order here. The Tribunal in the order dt. 16th June, 2000 for asst. yr. 1992-93 held as under :
"8. We have heard the rival submissions of the parties and after examining the facts of the case, we are of the considered opinion that the assessee's case is covered by the recent decision of the Tribunal in the case, of Tata Chemicals Ltd. v. Dy. CIT (supra); we therefore, hold that the disallowance of interest of Rs. 1,37,14,262 by the AO is not justified and accordingly we uphold the order of the CIT(A) on this account also."
It is evident from above that the Tribunal was of the "considered opinion" that assessee's case is covered by decision of the Tribunal in the case of Tata Chemicals Ltd. v. Dy. CIT (supra).
15. The relevant portion of above decision (in the case of Tata Chemicals Ltd.) has already been reproduced above. The Bombay Bench had relied upon several decisions including decision of Allahabad High Court in the case of CIT v. Expanded Metal Mfrs. (1991) 189 ITR 317 (All). In the above case, the assessee was engaged in the business of expansion of iron metal. It started a new unit for the manufacture of rubber products. It was held that the assessee was one and the same though it had set up a new factory, the assessment was not made unit-wise but assessee-wise.
The Bench also relied on the decision of Hon'ble Madhya Pradesh High Court in the case of Kanhiram Ramgopal v. CIT (1988) 170 ITR 41 (MP). The assessee was running a rice and dhall mill and borrowed monies for setting up a factory for manufacturing of strawboards by using the waste from the rice and dhall mill. The Hon'ble High Court held that it was only a case of expansion of business and that interest paid on monies borrowed was allowable as deduction.
The Bench further relied upon and followed decision of Hon'ble Rajasthan High Court in the case of CIT v. Shah Theatres (P) Ltd. (1988) 169 ITR 499 (Raj), where assessee was engaged in the business of exhibition of motion pictures and in the year of account started construction of a theatre of its own for the purpose of exhibiting films. The assessee had borrowed money on interest for purpose of construction. On these facts, Rajasthan High Court held that it was a case of extension of an existing business and not one of setting up of a new business. Another case of Hon'ble Madhya Pradesh High Court was cited to hold that in case of extension of business, interest was to be allowed. The other circumstances, for holding that new unit was part and parcel of same business, were also noted in the cited case.
16. Thus, when the Bench held in the case of the assessee for the asst. yr. 1992-93 that the matter in the assessee's case was fully covered by the decision of the Tribunal in the case of Tata Chemicals Ltd., the Bench obviously held that the facts in the case of the assessee were identical and decision in the case of Tata Chemicals Ltd. (supra) was applicable. In the assessment order for 1993-94, the AO accepted that facts and circumstances were same and, therefore, his decision for 1992-93 was applicable. There is no submission nor there is any finding recorded by anybody that facts in the case under appeal are different from the facts involved in the case of the assessee for the asst. yr. 1992-93. In the above circumstances, in my humble opinion, the Tribunal was bound to follow with respect the decision given by the Tribunal for the asst. yr. 1992-93. The principle of consistency is applicable to income-tax proceedings. Even otherwise a decision of a co-ordinate Bench of same strength is required to be accepted by Bench of same strength.
17. The above principle is well established, yet for the guidance of those who entertain any doubt about it and feel pride in not following judicial precedents, distinguishing cases where no distinction exists, I may reproduce the following observations of Hon'ble Supreme Court in the two cases :
(1) Sundarjas Kanyalal Bhatija v. Collector, Thane, Maharashtra and Ors. (1990) 183 ITR 130 (SC)--In a multi-judge Court, the judges are bound by precedents and procedure. They could use their discretion only when there is no declared principle to be found, no rule and no authority. Judicial decorum and legal propriety demand that where a single judge or a Division Bench does not agree with the decision of a Bench of co-ordinate jurisdiction, the matter may be referred to a larger Bench. It would be subversion of judicial process not to follow this procedure. (Underlined, italicised in print, to emphasis).
(2) In the case of Union of India v. Paras Laminates (P) Ltd. (1990) 186 ITR 722 (SC), their Lordships on the functioning of the Tribunal, have observed as under :
"It is true that a Bench of two members must not lightly disregard the decision of another Bench of the same Tribunal on an identical question. This is particularly true when the earlier decision is rendered by a larger Bench. The rationale of this rule is the need for continuity, certainty and predictability in the administration of justice. Persons affected by decisions of Tribunals or Courts have a right to expect that those exercising judicial functions will follow the reason or ground of the judicial decision in the earlier cases on identical matters. Classification of particular goods adopted in earlier decisions must not be lightly disregarded in subsequent decisions, lest such judicial inconsistency should shake public confidence in the administration of justice. It is, however, equally true that it is vital to the administration of justice that those exercising judicial power must have the necessary freedom to doubt the correctness of an earlier decision if and when subsequent proceedings bring to light what is perceived by them as an erroneous decision in the earlier case. In such circumstances, it is but natural and reasonable and indeed efficacious that the case is referred to a larger Bench. This is what was done by the Bench of two members who, in their reasoned order, pointed out what they perceived to be an error of law in the earlier decision and stated the points for the President to make a reference to a larger Bench."
18. Their Lordships of the Hon'ble Supreme Court have used appropriate words like disruption of judicial discipline and subversion of judicial process. In the light of above, the Bench who took up the matter or the Member presiding over the Bench, should have been slow in not following decision of Tribunal in this case for the asst. yr. 1992-93. The learned Member did not only commit judicial impropriety by not following the decision but went a step further in asking the Departmental Representative to find out as to what was the material before the Bench deciding the case of assessee for asst. yr. 1992-93. It specifically asked the parties to produce material which they had produced in proceedings for asst. yr. 1992-93. The Hon'ble Member further went on to record that the assessee had not brought the complete and correct facts before the Tribunal (in 1992-93) nor did it file adequate and relevant material and that is how the Tribunal appears to have recorded no finding of facts as to whether both the business of the assessee were one and the same or that the "interest was paid on the amounts borrowed for making investment or acquiring assets in the existing business."
There is need to exercise judicial restraint and, therefore, nothing further need be said except observing that a co-ordinating Bench is not entitled to assume role of an appellate authority sitting over the decision for the asst. yr. 1992-93. One has to remain within the limits.
In the present case admittedly the assessee has been running a cement plant and selling cement under the name of Birla Uttam. It increased its capacity from 4 lakh MT to 10 lakh MT by adding a new plant for manufacture of cement in the same premises at less than 25 yds away from the existing one. The new plant is owned by the same company and, therefore, there can be no dispute about both the units being under the same management and control. As regards interlacing of funds, even learned AM at p. 10 of his order has written that the new plant was set up "by raising loans and by contributing its own margin as well. Where from this own margin came? Is it not common fund and thus interconnected and interlacing with the earlier unit?" The funds were raised by offering right shares to the shareholders in the existing unit. Is there no interlacing or intermingling of funds? Accounting set up is same and the industrial license clearly specifies that 6 lakhs TPA plant is effecting substantial expansion. There is no separate director nor there are separate auditors. Both the units are held by the same company and, therefore, question of having separate auditors do not arise. In the directors report, there is reference to expansion of business. Shri D.P. Maloo was the managing director. For obtaining loans also, machinery and plant of old unit has been mortgaged. Is it the case of the Revenue that there was no interlacing or interconnection between the two units? When facts were not challenged by the AO or other revenue authorities, could the Tribunal for the first time treat the case as unproved and put the burden on the assessee? In my humble opinion not.
A mountain of a molehill is attempted to be on capitalising of certain expenses. The learned JM has effectively met this obligation in his proposed order. Salary wages, upfront fee and some other charges were rightly capitalised and shown in work in progress. I see nothing wrong in the above approach. Much have been talked about excise numbers of old and new unit. These are as follows :
Old Unit - AABCM 6602Q-XM001/2/CH-25/JLR/92 New unit - AABCM/6602Q-XM002/1/RII/CH-25/JLR/93 In my humble opinion, the number is the same except 93" in place of 92 of old to put some distinction on production of new unit. However, excise is imposed on the company and not on the unit and it is impossible to hold that because of excise number, new unit can be treated as a new business. Then there is controversy about the name of the new unit as "Neer Shree". This does not make it a new business when it is also to manufacture cement to be sold under the trade name "Birla Uttam". No other significant facts have been brought on record to hold that new plant is a new business. Other circumstances mentioned are only adverse inferences drawn, which on facts and circumstances of the case, are not justified as is demonstrated from the following chart made available by the assessee :
sNo Observation of learned AM Submissions/explanations 1 Tribunal in asst yr 1992-93 did not record any finding on fact as to whether both businesses of assesses were the same or interest paid on borrowmg is for making investment or acquiring assets of existing business Tribunal in asst yr 1992-93 at para 5 recorded the fact that CIT(A) allowed the claim as loan was availed for expansion/extension of existing business, production of both units is considered as production of appellant-
company and there is complete interconnection, interlacing and interdependence between the two units. After examining these facts of the case. Tribunal at para 8 allowed the claim of assessee for which support was also drawn from Tata Chemicals case.2
Tribunal in asst. yr. 1992-93 did not uphold finding of CIT(A) but upheld his order in view of decision of Tata Chemicals.
Tribunal upheld the finding of CIT(A) by examining the facts of the case and then also relied on decision of Tata Chemicals-3
Tribunal in asst. yr. 1992-93 did not say that facts of Tata Chemical is identical to the fact of the assesses.
Tribunal held that after examining the facts of the case, it is of opinion that assessee's case is covered by decision of Tata Chemicals (Refer point no. 4).4
Assessee made investment in the business in the name and style of Neer Shree Cement by raising loan & contributing its own margin.
Neer Shree Cement is the name given to the second plant. It is a unit of the assessee -company The loans and capital by way of right issue, was raised by the company itself b Income on account of rent.
Such income is offered by the material in process and misc income etc not included & declared by assesses company under the head house property, income from other sources and treatment explained in notes to return.
6.
Assesses himself stated that payment of interest on borrowed capital is for the purpose of new unit and not for the expansion of existing business.
Assessee nowhere stated that interest on capital borrowed is not for the purpose of existing business. In note No. 5. it is specifically mentioned that assessee's cement business is running and interest on borrowed fund for the purpose of the new unit is deductible under s. 36(1)(III).
Further in note No 6, it is specified that for augmenting the production, steps to set up new unit with rated capacity of 6 lakhs TPA Is taken.
7There is separate excise license for Neer Shree Cement & Mangalam Cement Ltd.
Separate excise license has no relevance for determining the Issue of same business/New business. The excise number is the same ie. AABCM 6602Q.
Further sales-tax number is same.
8Assessee did not consider such transfer as part of same block.
This has no relevance as. till the plant is capitalised in books, it is shown in fixed assets schedule as capital work in progress of the company.
9Installed capacity/actual production of Neer Shree Cement not considered in installed capacity/actual production of Mangalam Cement Ltd.
In note no 13 of Sch. 17 which provides statistical information, license capacity is mentioned at 10 lakhs MT which includes that of the new unit but in installed capacity and actual production, new unit's information is given in bracket since plant was under trial run and not started commercial production.
10. Expenditure on workman, raw material and administration of new business not reflected as expenses of existing business.
Expenses on workmen, raw material and administration which directly relate to installation of new plant has been transferred/ allocated to capital work in progress in accordance with accounting policy followed for accounting of expenditure during construction period.
11. Complete balance sheet with schedule to accounts not furnished Complete balance sheet with schedule to accounts filed with return. Hon'ble Member never required to file the same.
12Directors/auditors report not placed on records for either of business There is no separate director/auditor's report for the alleged two businesses as both the plants are of the same company, for which question of having separate director/auditor's report does not arise. Such report for the company is filed with return
13. Separate audit of new unit conducted which shows that separate accounts of both businesses maintained but books not produced. There is no control of account at one place and thus accounts of both business/units are separate and independent.
Separate audit of new unit is not conducted Audit of the company as a whole is conducted by the statutory auditors and out of the total audit fees of Rs. 75,000 a sum of Rs 50,000 is charged to P&L a/c and sum of Rs 25,000 is considered towards pre-operative expenses of the new plant/unit. Further, maintaining separate/division/unit wise accounts would not make the business separate 14 Details of administrative set up not produced which shows that now unit's business was independent.
The administrative set up is mentioned in the annual report itself The company is managed by board of directors Shri D.P. Maloo was the managing director to whom day-to-
day activity of both the units/plants is reported There is a single company secretary, factory place registered office and head office 15 Document of sanction of loan, bank statement, appraisal note not placed on record to trace whether funds are common or separate.
No such specific requirement was made All these materials produced before the AO He specifically mentioned that the cash book, ledger, sub-ledgers, stock register, vouchers and other details were produced and verified The utilisation of the fund has been accepted by learned AM as partly by raising loans and by contributing its own margin at p 10. Further from balance sheet itself, it is evident that funds raised from right issue Rs 2553 crores. term loan of Rs. 105 23 crores and internal accrual of around Rs 10 crores were used in new plant, which shows that the funds were common The proceeds of nght issue and loan from financial institution were credited in the bank account of the company in the name of Mangalam Cement Ltd.
16By charging financial expenses to CWIP and not to P&L a/c, flow of funds cannot be said to be common This has no relevance to the issue under consideration. It is a settled law that making of entries in the books is not decisive for allowability of claim under IT Act.
17. All above details/information not placed before CIT(A) in asst.
yr. 1992-93 All above details were before AO as well as CIT(A) in asst. yr.
1992-93.
18. In Tata Chemicals on facts it was held that all activities carried at different places were carried in same name and style, there is unity of control, existence of common funds, administration and linking of accounts through head office Tata Chemicals case is fully applicable as explained in point No. 4 below.
19Even if items manufactured in both units is same, it is not appropriate test to hold it as composite business The test of composite business as held in Tata Chemicals case is fulfilled by assessee as explained in point no. 4 below.
20. Tnbunal in asst. yr. 1992-93 did not confirm finding of CIT(A) but allowed appeal per incuriam.
Tribunal after examining the facts of the case dismissed the appeal of the Department as mentioned in para 8 of the order
21. Res judicata does not apply to I tax proceedings.
Though res judicata does not apply but consistency needs to be followed as held in the case of (1992) 193 1TR 321 (SC). (1991) 192 ITR 619 (Cal) and (1956) 30 ITR 618 (Bom).
22Expenses on interest are incurred for investment in new business Assesses has only one business of cement, which is earned out since 1981. Ho new business was startedplant of. 6 lakhs TPA was installed Industrial license specifically mentions about effecting subslamial expansion. The somce of raw material lhat is limestone mines iswhich was enhanced from i2.000 KVA to 29.000 KVA from 16th April. 1993. There is no investment in new
19. Having regard to settled position of law, it is impossible to hold that a company already manufacturing and selling cement starts a new business when it sets up a new plant 25 yards away from the existing plant. In the hands of the company, it is always to be treated as expansion of business. Interest paid on loan taken in case of running business even for capital investment is a permissible deduction under Section 36(1)(iii) of IT Act. There is absolutely no justification to disallow the interest claimed by the assessee.
I may also like to add that, when matter already stood decided in favour of the assessee as per decision for asst. yr. 1992-93, the burden to show that deduction was not permissible were entirely on the Revenue. Nothing except suspicion and doubt has been brought on record without showing in any manner that it is not a case of common management, interlacing and interconnection of funds. On facts, there is no justification to disallow interest on borrowed funds. In the last para, the learned AM directed the AO to allow depreciation, if any, found to have been claimed before him. The assessee never claimed any depreciation. Therefore, one does not understand how above question could be raised and adjudicated. The depreciation can be claimed only if machinery and plant is used for purposes of business. The commercial production did not start in the period under consideration, although trial production had started. The assessee never claimed any depreciation presumably on the ground that machinery was not put to commercial use. There are certain decisions holding that even when machinery is used for trial production, the assessee is entitled to depreciation and other expenses. But contrary view is also available. This controversy was not raised and was not necessary to be considered and decided. With the above observations, I agree with the view expressed by the learned JM and hold that interest was rightly claimed as a deduction. The order of CIT(A) on this ground was liable to be confirmed.
20. With the above observations, the matter is sent back to the Bench for decision according to majority opinion.
Satish Chandra, J.M. 14th Oct., 2004
1. There was a difference of opinion between the Members of the Bench and the following question as summarised by Hon'ble President was referred to the Third Member for his opinion :
"Whether, on the facts and in the circumstances of the case, learned CIT(A) was justified in allowing interest of Rs. 13,16,39,997 under Section 36(1)(iii) of IT Act or his order is liable to be reversed?"
2. The Hon'ble President, Shri Vimal Gandhi, sitting as Third Member, vide his order dt. 6th Oct., 2004, has concurred with the view of learned JM, who has taken the view that the interest was rightly claimed by the assessee as a deduction.
3. Therefore, in accordance with the majority view, the issue is decided in favour of the assessee and the appeal filed by the Department is dismissed.