Income Tax Appellate Tribunal - Ahmedabad
Gujarat Narmada Valley Fertilizers Co. ... vs Dy. Cit on 4 August, 1999
Equivalent citations: (2001)73TTJ(AHD)787
ORDER
T.J. Joice, A.M. This appeal by the assessee is directed against the order of the Commissioner (Appeals) dated 23-3-1998, for the assessment year 1995-96.
2. The assessee has objected to the following disallowances upheld by the Commissioner (Appeals) in the impugned order :
Rs.
(i) Value of presentation articles disallowed under rule 6B 54,594
(ii) Guest house expenses disallowed under section 37(4) 28,84,417
(iii) Interest on advances disallowed under section 36(1)(iii) 1,61,69,397
(iv) Addition in respect of gain on cancellation of foreign exchange contracts.
36,41,856
(v) Disallowance of depreciation on Butachlor plant.
(vi) Charging of interest under section 234B.
3. The learned counsel for the assessee Shri H.P. Ranina referred to the relevant portions of the assessment order and the order of the Commissioner (Appeals) and raised objections to the impugned order on the above points. The learned counsel submitted a paper book containing the detailed submissions in this regard along with the copies of the details submitted before the lower authorities in support of his contentions. On the other hand the learned Departmental Representative Shri Vatsiayan relied on the observations of the Commissioner (Appeals) and submitted that the impugned order does not call for any interference.
4. We have considered the rival submissions and the evidence on record. We have also considered the various case laws cited by both the parties. We proceed to record our findings in respect of various issues in the ensuing paragraphs.
5. The first ground of appeal relates to disallowance of the value of presentation articles amounting to Rs. 54,594. The assessing officer has applied rule 6B for making the disallowance and the Commissioner (Appeals) confirmed the addition by relying on his order in the assessee's own case in the assessment year 1992-93.
5.1. The learned counsel for the assessee submits that the details of the articles presented, the value in respect of each item and the number of items were all furnished to the assessing officer. Similar disallowance made for the assessment year 1988-89 was disallowed by the Commissioner (Appeals). The presentation articles did not bear the name or logo of the assessee-company and accordingly could not be considered as meant for advertisement attracting the provisions of rule 6B because the articles presented did not have any advertisement value. It is pointed that the assessee is engaged in the manufacture and sale mainly of chemical fertilizers through their various marketing offices to numerous dealers. The articles presented were not advertisement of the products of the assessee- company. Reliance in this connection is placed on the following case laws :
(1) G.L. Rexroth Industries Ltd. v. Dy. CIT (1997) 59 TTJ (Ahd) 757 (2) Geetanjali Woollens (P) Ltd. v. Asstt. CIT (1994) 50 TTJ (Ahd) 19;
(3) CIT v. Allana Sons (P) Ltd. (1995) 216 ITR 690 (Bom) and (4) CIT v. Indian Aluminium Cables Ltd. (No. 2) (1990) 183 ITR 611 (Del) 5.2. On going through the details submitted and the evidence on record, we find that the ratio of the decisions cited by the learned counsel squarely applies to the facts of the case. Since the articles did not bear the logo or the name of the assessee-company, the value thereof does not call for any disallowance under rule 6B. Hence, this ground of appeal is decided in favour of the assessee.
6. The next ground of appeal relates to the disallowance of guest house expenses amounting to Rs. 28,84,417. The assessing officer without discussing the various points involved has made the disallowance by applying provisions of section 37(4) and the Commissioner (Appeals) has also summarily disposed of the matter by relying on his decision for the assessment year 1992-93 in assessee's own case.
6.1. The learned counsel for the assessee points out that the assessee maintained transit house mainly for the use of the employees while on duty at its registered office where both its factory premises and head office are situated, i.e., Narmada Nagar, Bharuch, at Bombay and New Delhi. The hostel building at Narmada Nagar is situated in a place which is in a remote corner and the employees of the assessee and the auditors stay there temporarily during the year. Bombay and New Delhi transit houses are exclusively used by the employees while on official duty. The break-up of expenses is as under :
Rs.
(a) Cost of providing meals 3,625,758
(b) Depreciation 1,26,982
(c) Repairs to equipments (only air-conditioner) 40,500 Total 3,793,240 Less : Recoveries 9,08,823 28,84,417 According to the learned counsel the hostel and transit house maintained by the assessee are not guest houses within the meaning of section 37(4) and the expenditure being in the nature of lodging and boarding mainly for the employees is necessary for the purpose of business and is allowable a such. It is further submitted that the expenditure on food and beverages at hostel building and transit house would not fall within the meaning of the word maintenance'. Reliance in this connection is placed on the following decisions :
(1) CIT v. Parshva Properties Ltd. (1987) 164 ITR 673 (Cal) ;
(2) Hindustan Lever Ltd. v. IAC (1996) 58 ITD 555 (Bom) ; and For expenses on repairs of air-conditioners.
CIT v. Maharana Mills Ltd. (1994) 208 ITR 972 (Guj) 6.2. The learned Departmental Representative on the other hand vigorously disputed the contentions of the assessee's counsel as the entire expenditure is covered by the provisions of section 37(4) of the Act.
6.3. On considering the rival submissions, we find that the decisions of the Hon'ble Gujarat High Court in (1994) 208 ITR 972 (Guj) (supra) and CIT v. Patel Bros '& Co. Ltd. (1977) 106 ITR 424 (Guj) would have to be applied to the facts of the case. No doubt sub-section (5) of section 37 introduced by Finance Act, 1983 with retrospective effect from 1-4-1979, is crystal clear to the effect that even an accommodation maintained in respect of employees is a guest house coming within the meaning of sub-section (4). However, the cost of providing meals would come specifically within the mischief of sub-section (2) of section 37 and items relating to rent, repairs and depreciation would fall within the provisions of sections 30 and 32. The Hon'ble Gujarat High Court has held that only such expenditure which falls within the parameters of section 37(1), i.e., excluding items of expenditure described in sections 30 to 36, will have to be considered for the purpose of sub-section (4) of section 37. Since the break up of the expenditure claimed by the assessee has not been properly analysed from the point of view of the binding ratio laid down by the Hon'ble Jurisdictional High Court, we consider that this matter should be restored to the file of the assessing officer for verification of the necessary details and for correct application of the relevant legal provisions. It may be mentioned in this connection that any expenditure incurred in respect of the employees for provisions of food or beverages to the employees is excluded from disallowance as per the definition given to entertainment expenditure under sub-section (2) of section 37. As indicated earlier the specific items of expenditure allowable to the assessee as per the provisions of sections 30 to 36 should be separately allowed before applying the provisions of s- 37(4). With this observation the matter is restored to the file of the assessing officer for fresh examination in accordance with law after giving an opportunity of being heard to the assessee.
7. The third ground of appeal relates to disallowance of Rs. 1,61,69,397 towards interest claimed as deduction by the assessee- company under section 36(1)(iii) According to the assessing officer, the advances made by the assessee-company to the following three concerns were out of interest bearing borrowed funds.
Therefore, out of the interest claimed by the assessee 14 per cent on the said advances has been disallowed by the assessing officer. The concerns to whom advances have been made are the following with the details of advances and interest disallowed in respect of each concern :
Name Balances of advances as on 31-3-95 per assessment order (Rs. in lakhs.) Interest disallowed in assessment order (Rs. in lakhs) Gujarat Narmada Auto Ltd. (GNAL) 4,073.66 137.77 Gujarat Narmada Finance & Investment Co. Ltd. (GNF & IC) 1.19 0.16 Narmada Education & Scientific Research Society (NE & SRS) 173.01 23.76 Total 4,247.86 161.69 7.1. The learned counsel points out that the issue of disallowance of interest under section 36(1)(iii) arose for the first time in the assessment year 1990-91 and the assessing officer followed the same pattern for the assessment years 1991-92 to 1995-96. In the appeals for the assessment years 1990-91 and 1991-92 the Commissioner (Appeals) deleted the additions. In this connection the detailed arguments of the learned counsel for the assessee are as under :
(1) Own funds exceeds interest-free advances. Net profit plus depreciation for the financial year 1994-95 relevant to assessment year 1995-96 of Rs. 12,314.02 lakhs exceeds net advances of Rs. 174.20 lakhs granted to concerns referred to in the assessment order.
(2) No borrowings were made from bank and institution for the purpose of making such advances.
(3) Generation of profit and depreciation (after payment of dividend) is sufficient to meet interest-free advances.
(4) No facts relied on by assessing officer/Commissioner (Appeals) to show that borrowed funds were diverted for granting advances.
(5) Advances granted without interest are incidental to carrying on the business.
(6) Statement showing internal accruals in capital vis-a-vis amount of loans and advances referred to in the relevant assessment order is enclosed. (p. No. 61) Further position of our funds and advances made are given at p. No. 62 (7) GNFC had given commitment to financial institutions not to charge interest on the advances by it to GNAL. An undertaking by the GNFC given to financial institutions dated 21-3-1988 (as referred to in the assessment order for assessment year 1990-91) reads 'We also agree that the borrower shall not pay any interest on such unsecured loans, deposits if at the time of such payment there is a default in the payment of instalments, principal and/or interest due and owing by the borrower to you in respect of the said loans. "
(8) GNAL had passed through various stages of sickness and any prudent business man who had a stake in the business by way of investment of capital refrain from charging interest further on advance made as it would only just inflate its profit without any reward in real terms at a future date.
(9) GNFC had substantial interest in GNAL when advances were made.
(10) Advances were not granted to avoid taxes and so it could not also be said that the GNFC had entered into transaction of a colourable nature.
(11) Ultimately, GNAL had been declared sick for winding up by the Board for Industrial & Financial Reconstruction and honourable Gujarat High Court has by its order dated 2-8-1995, directed that the GNAL be wound up in accordance with the law and official liquidator was appointed for the said purpose.
(12) For purpose of allowing interest on the capital borrowed under section 36(1)(iii), what is relevant is that money should be borrowed for the purpose of business and utilised for business purpose. GNFC has not made advances out of borrowed funds but from internal accruals.
(13) The Commissioner (Appeals), Baroda has deleted such disallowance in assessee's own case in assessment year 1990-91 and assessment year 1991-92 after considering the facts of each such loans and advances.
(14) Judgments relied upon by Commissioner (Appeals) in assessment year 1992-93 are distinguishable on facts and not applicable.
Reliance in this connection is placed on the following case laws :
(1) Shahibag Entrepreneurs v. ITO (1994) 50 ITD 113 (Ahd).
(2) Jyoti Ltd. ITA 334/Ahd/90 (3) Durametallic India Ltd. v. IAC (1991) 38 ITD 211 (Mad);
(4) EID Parry (India) Ltd. v. Dy. CIT (1993) 46 lTD 389 (Mad);
(5) Shri Digvijay Cement Ltd. v. CIT (1982) 138 ITR 45(Guj);
(6) CIT v. Hotel Savera (1999) 102 Taxman 247 (Mad) and (7) Regal Theatre v. CIT (1998) 100 Taxman 116 (Del).
On the other hand the learned Departmental Representative strongly placed reliance on the order of the Commissioner (Appeals) and the assessing officer. He points out that the interest bearing advances have been diverted to associate concerns on interest-free basis and therefore, the disallowance of portion of the interest was justified.
7.2. We have considered the rival submissions. On going through the figures in the balance sheet of the assessee-company as on 1-4-1994 and 31-3-1995, we find that the share capital and the reserves and surplus together with the accumulated depreciation would far exceed the loans and advances made to the abovesaid three concerns. The percentage of loans and advances in relation to the own funds of the assessee- company would be 0.012 per cent as on 1-4-1994 and 0.0135 per cent as on 31-3-1995, as per details furnished on page 62 of the paper book.
In other words there were sufficient funds available with the company on which no interest was paid and out of which the loans and advances to the abovesaid concerns could be made. There is no clear evidence that the interest-bearing loans taken by the assessee-company for the purpose of its own business have been diverted for non-business purposes. No direct nexus has been proved either by the assessing officer or by the Commissioner (Appeals) between the interest bearing loans taken and the interest free advances given. In the circumstances, we find that the ratio of the decisions relied upon by the learned counsel for the assessee (vide para 7.1) (supra) is squarely applicable to the facts of the present case. In this view of the matter, we direct the assessing officer to delete the addition.
8. The fourth ground of appeal pertains to an addition in respect of gain on cancellation of foreign exchange contracts. The addition comes to Rs. 36,41,856. The ground of appeal reads as under :
"The learned Commissioner (Appeals) erred in confirming the action of the assessing officer in bringing to tax a sum of Rs. 36,41,856 being gain received on cancellation of foreign exchange contract. Without prejudice, he erred in not directing the assessing officer to reduce the said amount from the written down value of the fixed assets."
Before the assessing officer and the Commissioner (Appeals) the assessee pleaded that it was not a taxable receipt. However the assessing officer considered it as a revenue receipt. The Commissioner (Appeals), placing reliance upon his own order for the assessment year 1993-94, decided the issue against the assessee by upholding the addition in principle, though he has directed the assessing officer to verify the correctness of the figures as computed in the assessment order as the amount of Rs. 36.41,856 does not appear in the computation portion of the assessment order.
8.1. The learned counsel for the assessee clarifies that the assessee has substantial liability in foreign currency on capital account being loan taken from SBI & IFC Washington to finance purchase of plant and machinery, It is a firm liability towards instalments due in foreign currency in respect of plant and machinery purchased by the assessee. The banks, acting as authorised dealers, are permitted to enter into forward contracts for purchase and sale of permitted foreign currencies. The banks are required to ensure that the forward cover was not provided for anticipatory transactions but in a case of firm commitment only. The forward contracts could be cancelled as and when desired. The assessee had entered into such contracts in the past and also in the current year which resulted in surplus on cancellation thereof. Though the said amounts are credited to profit and loss account the same is not in the nature of income. As an alternative plea it was contended that since the gain arose on cancellation of foreign exchange cover arranged for repayments of loans obtained for acquisition of fixed assets the cost of acquisition/WDV was required to be reduced by such amount. This would result in reduction of depreciation allowable in each of the relevant assessment years. The company was required to pay instalments due in foreign currency in respect of plant & machinery purchased by it. The company entered into foreign exchange contract for purchase of permitted foreign currency. Such contracts when cancelled realised net surplus of Rs, 36,41,856 due to favourable exchange rates. In this connection reliance is placed on the following case laws :
(1) Universal Radiators v. CIT (1993) 201 ITR 800 (SC);
(2) Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC);
(3) CIT v. Tata Locomotives & Engg. Co. Ltd. (1966) 60 ITR 405 (SC); and (4) CIT v. Canara Bank Ltd. (1967) 63 ITR 328 (SC).
8.2. The learned Departmental Representative points out that the gain realised by the assessee-company in respect of foreign exchange transaction was related to the plant and machinery purchased in the earlier year and since depreciation is claimed and allowed with respect to the original cost of the plant and machinery, the gain derived by the assessee in the abovesaid transaction is to be brought to tax as a taxable receipt, as rightly done by the assessing officer.
8.3. After considering the rival submissions we do not have any hesitation in holding that the receipt by way of gain on cancellation of foreign exchange contracts is a capital receipt which is not liable to tax in view of the clear pronouncement of the Apex Court in (1993) 201 ITR 800 (SC) (supra), (1979) 116 ITR 1 (supra), CIT v. Tata Locomative & Engg Co. Ltd. (1966) 60 1TR 405 (SC) and CIT v. Canara Bank Ltd. (1967) 63 ITR 328 (SC). Since it is admitted by the assessee that the foreign exchange contracts were related to the acquisition of plant and machinery (as indicated in the alternative plea raised in the ground of appeal vide para 8 above), it is open to the assessing officer to make necessary adjustments to the cost of acquisition/written down value (WDV) of the plant and machinery to which the said receipt pertains and to make consequential adjustments to the depreciation granted. However, before doing so, the assessing officer should give the assessee a reasonable opportunity of being heard in this connection.
9. In ground No. 5, the assessee challenges the decision of the Commissioner (Appeals) in upholding the disallowance of depreciation claimed in respect of Butachlor Plant. According to the assessing officer and Commissioner (Appeals) the plant was not put to use during the relevant accounting year. However, according to the learned counsel for the assessee the plant was installed in the financial year 1988-89 and the assessee~ company produced Butachlor (Technical) and Butachlor Formulation upto the financial year 1992-93 relevant for the assessment year 1993-94. Depreciation claimed for those years was allowed by the assessing officer. However, at the end of the financial year 1992-93, the assessee-company found that the product was not economical due to unfavourable market conditions and, therefore, no production was made during the financial year 1993-94. However, the plant was kept in ready for use condition during the financial year 1993-94. The assessee-company continued to sell Butachlor during the said year and sale for financial year 1993-94 came to Rs. 93.33 lakhs. It is, therefore, pointed out that the assessee-company has tried to retain the market for its own product and waited for an opportunity to produce the item and sell it again.
9.1. The learned counsel submits that this claim made by the assessee has not been mentioned in the assessment order. Inasmuch as the plant was kept in good condition and the machinery was also ready to put to use as soon as the market revived, the assessee was entitled to depreciation on the said plant and machinery. The learned counsel placed reliance on the following case laws in support of its plea :
(1) Whittle Anderson Ltd. v. CIT (1971) 79 ITR 613 (Bom) (2) Packwell Printers v. Asstt CIT (1996) 59 ITD 340 (Jab) (3) CIT v. Vayithri Plantation Ltd. (1981) 128 ITR 675 (Mad) ; and (4) Capital Bus Service (P) Ltd. v. CIT (1980) 123 ITR 404 (Del).
9.2. On considering the rival submissions we find that the ratio of the decisions relied upon by the learned counsel for the assessee is squarely applicable to the facts of the case. In fact the various High Courts have ruled that if the plant and machinery are kept in ready condition but production could not be made on account of factors beyond the control of the assessee, depreciation should not be denied on that ground as it is presumed that the plant and machinery were put to use for the assessee's business. Respectfully following the ratio of these decisions we decide this ground of appeal in favour of the assessee and direct the assessing officer to allow the depreciation claimed on the Butachlor Plant.
10. The last ground of appeal pertains to the charge of interest under section 234B. The assessee's grievance is that the assessing officer has mechanically charged the interest without discussing the leviability of such interest. The Commissioner (Appeals) has, however, directed to recompute the interest consequential to the appellate order passed by him.
10.1. On the other hand the learned Departmental Representative points out that there is no mistake in the order of the Commissioner (Appeals) directing the assessing officer to grant consequential relief and to compute the interest under section 234B which is mandatory.
10.2. On considering the rival submissions we are of the view that apparently interest under section 234B is attracted, though recomputation of interest is to be made afresh on giving effect to the appellate order being passed by us. In case the assessing officer finds that interest under section 234B is still chargeable after giving effect to this appellate order, he should give an opportunity of being heard to the assessee with regard to the leviability and quantification of interest in view of the decisions cited below :
(1) Udaya Mistanna Bhandar & Complex v. CIT (1996) 222 ITR 44 (Pat); and (2) CIT v. Bharat Machinery & Hardware Mart (1982) 136 ITR 675 (Ker).
11. In the result, the appeal is treated as partly allowed.