Income Tax Appellate Tribunal - Mumbai
Indian Rayon & Industries Ltd, vs Assessee
1
IN THE INCOME TAX APPELLATE TRIBUNAL
"I" Bench, Mumbai
Before Shri D.K. Agarwal (JM) and Shri Rajendra Singh(AM)
ITA No.3207/M/2002
Assessment Year 1995-96
M/s.Aditya Birla Nuvo Ltd. The ACIT-3(2), Mumbai
Formerly Indian Rayon and Industries
Ltd., A-4, Aditya Birla Centre,
S.K. Ahire Marg, Worli,
Mumbai 400 030.
PAN : AAACI 1747 H
Appellant Respondent
ITA No.3614/M/2002
Assessment Year 1995-96
The ACIT -3(2), Mumbai M/s.Aditya Birla Nuvo Ltd.
Appellant Respondent
CO No.142/M/2003
Assessment Year 1995-96
M/s.Aditya Birla Nuvo Ltd. The ACIT -3(2), Mumbai
Cross Objector Appellant in appeal
Assessee by : Shri J.D.Mistry
Revenue by : Shri Satbirsingh
ORDER
PER RAJENDRA SINGH (AM) These cross appeals and the cross objection of the assessee are directed against the order dated 28.3.2002 of CIT(A) for the assessment year 1995-96. 2 As these appeals relate to the same year and were also heard together, these are being disposed off by a single consolidated order for the sake of convenience.
2. We first take up the appeal of the assessee in ITA No.3207/M/2002. In this appeal the assessee has raised disputes on 12 different grounds which have been dealt with in the succeeding paras. 2.1 The first dispute is regarding disallowance of traveling expenses of Rs.1,95,620/- under rule 6D of the Income-tax Rules. The assessee had debited total traveling expenses of Rs.5,69,43,149/- including fare, lodging and boarding and other related expenses. The AO calculated the disallowance under rule 6D at Rs.2,34,263/- with reference to each trip of the individual employees and after considering the other related expenses. In appeal CIT(A) agreed with the assessee that other expenses like telephone, local conveyance could not be considered for the purpose of rule 6D. However computation with respect to each trip of the employee was upheld and addition was confirmed at Rs.1,95,620/-. Aggrieved by the said decision the assessee is in appeal. 2.1.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding computation of disallowance under rule 6D which the AO had done with reference to each trip of the employee. The Learned AR for the assessee fairly conceded that the issue was covered against the assessee by the judgment of Hon'ble High Court of Bombay in case of CIT Vs Arrow India Ltd. (229 ITR 325) and the decision of the tribunal in the assessee's own case for assessment year 1994-95. The Hon'ble High Court in case of Arrow India Ltd. (supra) have held that ceiling laid down in rule 6D(2) 3 is on the expenditure incurred in connection with each day of the journey and if calculated in accordance with the said rule for each day of traveling it would make no difference whether the calculation of allowable expenditure is made for each trip of journey or for all the journeys in the year taken together. This supports the view taken by the authorities below. We therefore see no infirmity in the order of CIT(A) computing disallowance with reference to each trip of the employee. The order of CIT(A) is accordingly upheld. 2.2 The second dispute is regarding disallowance of traveling expenses of foreign citizens under rule 6D amounting to Rs.23,977/-. The AO had computed the disallowance under rule 6D. The computation was not disputed by the assessee. The claim of the assessee is that rule 6D will not apply in case of non employees and foreign citizens working on behalf of the appellant company. CIT(A) has not accepted the claim of the assessee and following the earlier year order has confirmed the disallowance aggrieved by which the assessee is in appeal before the tribunal.
2.2.1 We have heard both the parties, perused the records and considered the matter carefully. The Learned AR for the assessee fairly conceded that the issue was covered against the assessee by the decision of tribunal in assessee's own case in assessment year 1994-95 in ITA No.2326/M/2001. We find from perusal of the said order that the tribunal following the decision in the earlier year upheld the applicability of rule 6D to foreign citizens and thus confirmed the disallowance. Respectfully following the said decision we confirm the order of CIT(A) upholding the disallowance this year also.
42.3 The third dispute is regarding disallowance of Guest House expenses amounting to Rs.16,87,212/- under section 37(4) of the Income-tax Act. The AO had disallowed the Guest House expenses which has been upheld by the CIT(A) following the decision in the earlier year aggrieved by which the assessee is in appeal before the tribunal.
2.3.1 We have heard both the parties in the matter. We find that the issue is settled by the judgment of Hon'ble Supreme Court in case of Britannia Industries Ltd. (278 ITR 546) in which it has been held that there being a specific provision for Guest House expenses under section 37(4) (iv) all expenses relating to Guest House such as repair, depreciation, etc. will be covered by that specific provisions. The disallowance made by the authorities below is found to be in order and same is upheld.
2.4 The fourth dispute is regarding disallowance of 25% of entertainment expenses amounting to Rs.12,77,468/-. The assessee had claimed entertainment expenditure of Rs.51,09,870/- of which the AO disallowed 50%. In appeal CIT(A) following the decision in assessment year 1994-95 restricted the disallowance to 25% aggrieved by which the assessee is in appeal before the tribunal.
2.4.1 We have heard both the parties in the matter. The Learned AR for the assessee conceded that the issue was covered against the assessee by the decision of tribunal in assessee's own case in assessment year 1994-95 in ITA No.2326/M/2001. We have gone through the said order and find that the tribunal following the decision in earlier year, held that 25% of the entertainment expenditure incurred in hotels should be treated as that 5 pertaining to the employees accompanying the guests as against 50% made by the AO. Facts this year are identical. Therefore respectfully following the decision of the tribunal in assessment year 1994-95 (supra) we confirm the order of the CIT(A).
2.5 The dispute raised in ground No.5 is regarding disallowance of Rs.8,59,074/- being the expenditure incurred by the assessee towards meals for sales conference and press conference. The assessee had incurred expenditure of Rs.11,45,432/- towards meals for sales conference and press conference. The AO disallowed the claim treating the same as entertainment expenditure. In appeal CIT(A) noted that the expenditure was incurred mainly on meals in hotels during the course of sales conferences. Considering the fact that employees of the assessee company also participated in such conference CIT(A) attributed 25% of the expenditure towards employees which was allowed and balance 75% was treated as entertainment expenditure. Aggrieved by the said decision the assessee is in appeal before the tribunal. 2.5.1 We have heard both the parties perused the records and considered the matter carefully. The Learned AR for the assessee pointed out that the issue was covered in favour of the assessee by the decision of the tribunal in assessee's own case in A.Y.1994-95 in ITA No.2479/M/2000. We have perused the said order. We find that the same issue had arisen in assessment year 1994-95 in which expenditure incurred on meals during the conference was disallowed treating the same as entertainment expenditure. The tribunal however following the decision of the Special Bench in case of Lakhanpal National Ltd. Vs ITO (69 ITD 9) held that the expenditure was allowable. In earlier years also the tribunal had allowed the claim on the same reasoning. 6 Facts this year are identical. Therefore respectfully following the decision of the tribunal in assessee's own case in assessment year 1994-95 (supra) we set aside the order of CIT(A) and allowed the claim of the assessee. 2.6 The dispute raised in ground No.6 is regarding disallowance of Rs.8,02,237/- being the rural development expenditure. The claim made by the assessee was disallowed by the AO following the decision in earlier year which in appeal was confirmed by the CIT(A) aggrieved by which the assessee is in appeal.
2.6.1 We have heard both the parties in the matter. We find that the issue is covered by the decision of the tribunal in assessee's own case in assessment year 1994-95 in ITA No.2326/M/2001. In that year also identical expenditure on rural development had been claimed and the tribunal following the decision in the earlier year restored the issue to the file of AO for passing a fresh order in the light of decision of tribunal in case of ACIT Vs Grassim Industries Ltd. in ITA No.3098-3099, 3100/M/1992. Facts this year are identical. Therefore respectfully following the decision of tribunal in assessment year 1994-95 we restore this issue to the file of AO for passing a fresh order after allowing opportunity of hearing to the assessee.
2.7 The seventh dispute is regarding the claim of expenditure of Rs.4 crores incurred as premium on redemption of non convertible debenture issued in the assessment year 1988-89. The debentures had been issued for the purpose of putting up new projects as well as expansion of the existing industrial undertaking. The assessee had claimed the expenditure as revenue expenditure in assessment year 1988-89 which had been disallowed by the AO. In appeal 7 CIT(A) had allowed 1/9th of the expenditure on pro-rata basis amounting to Rs.44,44,444/- as redemption period was for 9 years. Following the said decision CIT(A) allowed Rs.44,44,444/- this year also. Aggrieved by the said decision the assessee is in appeal.
2.7.1 We have heard both the parties in the matter. We find that the same issue had been considered by the tribunal in assessee's own case in assessment year 1994-95 in ITA No.2326/M/2001. In the said year the assessee had argued that entire expenditure was allowable as revenue expenditure in the year of issue i.e. A.Y.1988-89 and if not allowed in that year should be allowed in A.Y.1994-95 in which the premium was paid. Alternatively the assessee had also argued that in case the expenditure was not allowable at all the expenditure should be capitalized and depreciation should be allowed. The tribunal referred to earlier order of the tribunal in ITA No.1756/M/2001 & 993 & CO No.170/M/1993 in which the tribunal uphold the decision of CIT(A) to allow the expenditure over a period of 9 years in equal installments. Following the judgment of Hon'ble Supreme Court in case of Madras Industrial Investment Corporation Ltd. (225 ITR 802). The tribunal accordingly allowed 1/9th of the expenditure. Facts this year are identical and therefore respectfully following the decision of tribunal (supra) we confirm the order of CIT(A) allowing the expenditure at Rs.44,44,444/-.
2.8 The dispute raised in ground no.8 is regarding disallowance of club expenses of Rs.57,410/-. The assessee in the relevant year had incurred club expenses which consisted of membership and subscription of Rs.67,350/- and other expenses of Rs.57,410/- consisting of food and drinks etc. The AO had disallowed the expenses. CIT(A) however allowed the club membership 8 expenses. In relation to other expenses, the assessee argued that these expenses had already been considered for disallowance in entertainment and therefore there should not be further disallowance. CIT(A) agreed that disallowance again would amount to double disallowance and accordingly he directed the AO to delete the addition after proper verification. 2.8.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding disallowance of expenses of Rs.57,410/- consisting of food and drinks etc. in clubs. The assessee claimed that these expenses have already been considered for disallowance as part of entertainment expenses and therefore there should not be disallowance again. CIT(A) had directed the AO to verify the matter and in case these expenses have been considered as part of entertainment expenses the addition should be deleted. We see no infirmity in the order of CIT(A) and the same is therefore upheld.
2.9 The ground No.9 is regarding disallowance of Rs.19,05,496/- under section 40A (9). The said expenditure had been incurred by the assessee on payment made to schools at Veraval and Malkhed wherein the children of the employees of the company were studying. The AO disallowed the expenditure under section 40A(9). The said section provides that no deduction could be allowed in respect of any sum paid by the assessee as an employer towards setting up or formation of or as contribution to any fund/ trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution for any purpose except where sum is so paid for the purposes and to the extent provided for under clause (iv) or clause (v) of sub section (1) of section 36 or as required by or under any 9 other law for the time being in force. The assessee argued that provisions of section 40A(9) were not applicable and the expenditure was allowable as revenue expenditure under section 37(1). CIT(A) however following the decision in assessment year 1994-95 confirmed the disallowance. Aggrieved by the said decision the assessee is in appeal.
2.9.1 We have heard both the parties in the matter. We find that the same issue had been considered by the tribunal in assessee's own case in assessment year 1994-95 in ITA No.2326/M/2001. In that year also disallowance had been made under section 40A(9) in respect of payments made to Indrayan School. The tribunal however following the decision in A.Y.1992-93 and 1993-94 allowed the claim. Facts this year are identical. Therefore following the decision of the tribunal (supra) we set aside the order of CIT(A) and allowed the claim of the assessee.
2.10 The tenth dispute is regarding disallowance under section 40A(3) amounting to Rs.2,79,827/-. The assessee had made cash payment exceeding Rs.10,000/- in each case aggregating Rs.6,93,763/- as per details given below :
i) Jayashree Textilex (Flax) 2,19,058
ii) Global Export 1,60,270
iii) Rajashree Syntex 29,040
iv) Rajashree Cement 2,85,395
Total 6,93,763
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10
2.10.1 The assessee explained that payment of Rs.2,19,058/- consisting
of several items exceeding Rs.10,000/- were made to truck operators as coal transport charges/ freight charges. It was submitted that the transport operators were not having bank account at Rishra and insisted on cash payments and the case was therefore covered under the exceptional situation under rule 6DD(j). AO disallowed the claim. CIT(A) however allowed the claim holding that the same was covered under exceptional circumstances. 2.10.2 In respect of payments of Rs.1,60,270/- Global Export consisting of 3 items exceeding Rs.10,000/- each the assessee explained that the payment had been made to Aeroflot which was only airline operating flights to Moscow. It was submitted that they did not accept cheque/ drafts and the assessee had therefore to make payments in cash. CIT(A) however following the decision in assessment year 1994-95 confirmed the disallowance. 2.10.3 The payment of Rs.29,040/- to Rajashree Syntex had been made by the assessee for purchase of diesel. The assessee explained that due to power cuts the assessee had to purchase diesel from time to time and payments had to be made in cash as the petrol pumps refused to accept cheque. CIT(A) however confirmed the disallowance made by the AO on the ground that there was no evidence that the parties had insisted on cash payments.
2.10.4 Payment of Rs.2,85,395/- to Rahashree Cement consisted of 15 items each exceeding Rs.10,000/-. These payments had been made in connection with various official work. CIT(A) has accepted the explanation that 11 the payments were made under exceptional situation in respect of all items except in the following cases which were confirmed:
(i) Rs.12,000/- paid to employee towards soft furnishing on the ground that the shop keeper did not accept cheque.
(ii) Rs.13,620/- paid to M/s.Gopal Fabricators towards tarpoline covering on the ground that the contractor was not having bank account.
(iii) Rs.22,112/- paid to Siddlingeshwar Dal Industries for purchases of various provisions during strike period when several new workers were hired and had to be fed. It was submitted that the party had insisted on cash payments.
(iv) Rs.18,805/- paid for car repairing and purchase of spare parts. It was explained the garage to whom the payments were made had to pay other shop-keepers, who accepted only cash.
(v) Rs.12,480/- paid to Ajanta Publicity towards arrangement of lighting. It was explained that the party did not have bank account.
(vi) Rs.11,500/- paid for car repairing. It was explained that the necessary spare parts were purchased from various shops.
2.10.5 CIT(A) thus confirmed the disallowance to the tune of Rs.2,79,827/- aggrieved by which the assessee is in appeal. 2.10.6 Before us the Learned AR for the assessee submitted that payments are made in cash under exceptional situations covered under rule 12 6DD(j) and therefore no disallowance should have been made. The Learned DR on the other hand supported the orders of authorities below. 2.10.7 We have perused the records and considered the matter carefully. The dispute is regarding disallowance of certain items of expenditure aggregating Rs.2,79,827/- under section 40A(3) on the ground of cash payments exceeding Rs.10,000/- in each case. The assessee has explained that the cash payments were made under exceptional situation. However as per findings given by the authorities below the assessee had not substantiate the claim. For example payments of Rs.1,60,270/- had been made to Aeroflot on the ground they did not accept cheque/ draft but the assessee could not substantiate the claim. Similarly the assessee made payment of Rs.29,040/- to Rajashree Syntex in cash for purchase of diesel on the ground that the petrol pump refused to accept the cheque. The assessee however could not substantiate the claim. It is not a case for purchase of diesel for running of trucks in transit where petrol pumps do not accept cheque. The payment had been made for purchase of diesel for office. Therefore the assessee was required to produce evidence that petrol pump refused to accept cheque which had not done. Similarly there are six items of cash payment exceeding Rs.10,000/- in each case as per details given in para 2.10.4. The explanation given is that the party had either no bank account or insisted on payent by cash. However explanation is not substantiated by any evidence. Considering the entirety of facts and circumstances we are satisfied by the findings of CIT(A) that the assessee had not been able to establish that the payments had been made under exceptional circumstances. We therefore see no infirmity in the order of CIT(A) confirming the disallowance and the same is therefore upheld.
132.11 The dispute raised in ground No.11 is regarding reduction of the claim of deduction under section 35D from Rs.13,69,143/- to Rs.1,28,752/-. In assessment year 1994-95 the assessee had issued Global Depository Receipts (GDR) to finance cement expansion project and power projects at Veraval and Malkhet. The assessee had incurred expenditure of Rs.1212.26 lacs which had been claimed as deduction under section 35D over a period of 10 years. The AO noted that the expenditure included a sum of Rs.1098.25 lacs being the commission payments to foreign merchant bankers of the GDR issue on which no tax had been deducted at source. AO therefore did not consider the said amount and allowed deduction under section 35 only to the tune of Rs.1,28,752/-. In appeal the assessee submitted that the payments had been made for services rendered by non resident outside India and therefore such payment was not income taxable in India in the hand of recipient and no TDS was therefore required. It was also submitted the payment could also not been taxed as a business profit as the non resident did not have any permanent establishment in India. CIT(A) however did not accept the contentions raised and agreed with the AO that payment was fees for technical services and the income had accrued or arisen in India on which tax was required to be deducted. CIT(A) accordingly confirmed the action of the AO aggrieved by which the assessee is in appeal before the tribunal.
2.11.1 Before us the Learned AR for the assessee at the very outset submitted that the claim was not pressed as the same had already been allowed by the AO in assessment year 1999-2000. The ground raised by the assessee is therefore dismissed as not pressed.
142.12 The ground No.12 is in relation to expenditure on non convertible debentures (NCD) and fully convertible debentures (FCD). The expenditure had been incurred in assessment years 1988-89 and 1989-90. In this ground the assessee has made an alternate claim that in case the expenditure was neither allowed as revenue expenditure nor under section 35D it should be capitalized and depreciation should be allowed. The Learned AR for the assessee, however, at the time of hearing of appeal did not press this ground of appeal as NCD expenses had already been allowed and FCD expenses had been allowed under section 35D. The ground raised by the assessee is therefore dismissed as not pressed.
2.13 The assessee has also raised an additional ground vide letter dated 24.8.2007 in relation to sales tax exemption benefit amounting to Rs.1,14,51,012/-. It has been claimed that the same should be excluded from the profit. The ground raised is given as under :
"1. On the facts and circumstances of the case and in law, the Appellant prays that the ("AO") be directed to :
i. Exclude from taxable profits, the sales tax exemption benefit of Rs.1,14,51,012/- which is included in Sales and which is taxed in the assessment order as part of profits of the business; and ii. To treat the same as capital receipt not chargeable to tax. 2.13.1 The Learned AR for the assessee while arguing for the admission of the additional ground submitted that the said ground had not been raised before the lower authorities. The assessee have not claimed deduction on account of sales tax exemption benefits either before AO or before CIT(A). The 15 ground was being raised before the tribunal for the first time in view of the decision of the Special Bench of the tribunal (dated 23.10.2003) in case of DCIT Vs Reliance Industries Ltd. (88 ITD 273) in which it was held that subsidy granted by the Government to set up a new industrial unit in a specified backward area pursuant to eligibility certificate would be in the nature of capital receipt and could not be taxed as revenue receipt. The said decision of the Special Bench came after passing of order of CIT(A) and therefore the ground was raised before the tribunal. The Learned AR argued that the fact regarding the sales tax exemption benefit of Rs.1,14,51,012/- being included in the sales was available on record and had been gone into by the lower authorities.
Therefore based on such facts which were part of assessment records question of law can always be raised by the assessee before the tribunal for the first time as held by the Hon'ble Supreme Court in case of NTPC. (229 ITR 383). 2.13.2 The Learned DR on the other hand opposed the admission of additional ground. It was submitted that the legal ground no doubt could be raised before the tribunal for the first time but the ground should be such which could be adjudicated on the basis of facts available on record. It was pointed out that the decision of the Special Bench in case of DCIT Vs Reliance Industries Ltd. (supra) related to sales tax exemption scheme formulated by the Maharashtra Government whereas the sales tax incentive in the present case related to the scheme framed by the U.P. Government. Each scheme had its own features and therefore whether the decision of the Special Bench applied in the case of the assessee or not could be decided only after examination of the incentive/ exemption scheme in case of the assessee which was not on record. The Learned DR referred to the judgment of Hon'ble High Court of Andhra Pradesh in case of CIT Vs Gangappa Cables Ltd. (116 ITR 778) 16 in which it was held that additional ground could be admitted by the tribunal if there was sufficient evidence on record to support the claim. In the present case sufficient evidence was not available on record and therefore additional ground could not be admitted.
2.13.3 In reply the Learned AR for the assessee argued that the issue regarding admission of legal ground for the first time before the tribunal was settled by the judgment of Hon'ble Supreme Court in case of NTPC (supra) in which it was held that question of law arising from the facts which were on record in the assessment proceedings have to be admitted by the tribunal when it is necessary to consider that question in order to correctly assess the tax liability of the assessee. The Learned AR pointed out that facts in case of the assessee were identical to those in case of NTPC. In case of NTPC interest earned on short term deposits with the bank prior to the commencement of business had been shown by the assessee as income. The issue of non taxability of the said interest income had not been raised before the AO or CIT(A) and the assessee raised the issue for the first time before the tribunal on the basis of decisions of Special Bench of the tribunal in case of Arasan Alluminium Industries Pvt. Ltd. and Nagarjuna Steel Ltd. in which it was held that interest earned before setting up of the business was not taxable and that it would only reduce the capital cost of the plant. The raising of the issue before the tribunal for the first time was upheld by the Hon'ble Supreme Court. The facts in the case of the assessee are similar. Referring to the judgment of Hon'ble High Court of Andhra Pradesh in case of CIT Vs Gangappa Cables Ltd. (supra) relied upon by the Learned DR the Learned counsel for the assessee argued that the said judgment had been considered by the Hon'ble High Court of Delhi in case of DCM Benetton India Ltd. Vs CIT (173 Taxman 283) in which 17 case the tribunal had refused to admit the additional ground stating that the ground could not be adjudicated since facts were not before the tribunal. The assessee in that case had argued that tribunal ought to have remanded the matter to the file of AO rather than decline to permit the assessee to raise the additional ground. The High Court allowed the case of the assessee for raising the additional ground. It was further argued that adjudicatability of the ground was different from raising of the ground. The principle was settled by the Hon'ble Supreme Court in case of NTPC (supra) that in case the question of law arose on the basis of facts available on record which was relevant to decide the tax liability of the assessee, the same has to be allowed to be raised for the first time before the tribunal. In case, adjudication of the ground required some further material the same could always be restored to the file of AO, it was submitted.
2.13.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding raising of additional ground for the first time before tribunal regarding exclusion of the sales tax exemption of Rs.1,14,51,012/- provided to the assessee by the U.P.Government which was included in total sales in the computation of total income. The assessee had not claimed deduction on account of the said exemption either before the AO or before the CIT(A) and the amount was included in the sale figure of Rs.928.36 crores. The assessee raised this issue for the first time before the tribunal after the order dated 23.10.2003 of the Mumbai Special Bench of the tribunal in case of DCIT Vs Reliance Industries Ltd. (supra) as per which sales tax exemption benefit was capital receipt, not taxable was delivered. The case of the assessee is that the assessee could not have raised the ground before the AO or CIT(A) as the decision of the tribunal was available only after passing of the order by CIT(A).
182.13.5 We find that the principle relating to admission of additional ground being a legal ground for the first time before the tribunal is settled by the judgment of Hon'ble Supreme Court in case of NTPC (supra) in which the Hon'ble Supreme Court held that question of law arising from the facts which are on record in the assessment proceedings has to be allowed to be raised if it is necessary to consider the question in order to correctly assess the tax liability of the assessee. In this case the assessee had availed sales tax exemption of Rs.1,14,51,012/- which was already on record before the AO as the same was included in the total sale figure of Rs.928.36 crores. This claim of the assessee has not been controverted before us by the revenue. Therefore the fact that the assessee had availed sales tax exemption which had been shown as part of the sales was already on record before the lower authorities. In view of the decision of the Special Bench of the tribunal in case of DCIT Vs Reliance Industries Ltd. (supra) which held that sales tax subsidy granted by the State Government was of the nature of capital receipt and could not be taxed, a legal question does arise in case of the assessee whether the sales tax exemption received by the assessee from the U.P.Government was taxable or not. Such question has a direct bearing on computation of tax liability of the assessee. Therefore in our view the legal question raised by the assessee as an additional ground has to be admitted. The adjudicatability of the ground is different from the admissibility of additional ground. In case, for adjudicating a ground already admitted, some more material is required the tribunal can always restore the issue to the file of AO for passing a fresh order after considering all the relevant facts. But on this ground, the assessee cannot be denied its right to raise the ground which arises on the basis of facts on record and which is relevant for determining the tax liability of the assessee correctly. 19 We therefore admit the additional ground raised by the assessee. Since adjudication of the ground will require going into the incentive scheme framed by the U.P.Government which was not available before the lower authorities, the issue is restored to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee.
3. The appeal by the department in ITA No.3614/M/2002. The revenue has raised disputes on seven different grounds which have been dealt with in the succeeding paras.
3.1 The ground No.1 is regarding expenditure incurred on sales and press conference totaling Rs.11,45,432/-. The AO had disallowed the expenditure treating the same as entertainment expenditure. In appeal CIT(A) noted that the expenditure was incurred mainly on meals in hotels during the course of sales conferences. The participants of the sales conferences were stockists, dealers and agents etc. for the cement business. Considering the fact that employees of the assessee also participated in such conferences CIT(A) treated 25% of expenditure as pertaining to the employees and allowed the same. Aggrieved by the said decision the revenue is in appeal.
3.1.1 We have heard both the parties, perused the records and considered the matter carefully. We find that the same issue had been considered by the tribunal in assessee's own case in assessment year 1993-94 in ITA No.3792/M/1997 in which the tribunal held that 25% of expenditure incurred in hotels should be treated as pertaining to the employees and will be excluded and the balance expenditure would be considered for disallowance under section 37(2). The same decision was followed by the tribunal in assessment 20 year 1994-95. Facts this year are identical. Therefore respectfully following the decision of tribunal (supra) we confirm the order of CIT(A). 3.2 The second dispute is regarding addition of Rs.3,05,796/- on account of gifts and presentation articles in excess of Rs.1000/- per article. The assessee claimed that expenditure on articles presented in excess of Rs.1000/- per article for the purposes other than advertisement which amounted to Rs.3,05,796/- was not disallowable under rule 6B. The AO however following the decision in earlier year disallowed the same. In appeal CIT(A) following the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Allana Sons Pvt. Ltd. (70 Taxman 288) and other judgments allowed the claim of the assessee aggrieved by which the revenue is in appeal.
3.2.1 We have heard both the parties in the matter, perused the records considered the issue carefully. We find that the same issue had arisen in assessment 1993-94 and the tribunal in ITA No.3503/M/1997 allowed the claim of the assessee following the judgment of Hon'ble High Court of Mumbai in case of Allana Sons Pvt. Ltd. (supra). The same decision was followed in A.Y.1994-
95. Facts this year are identical. Therefore respectfully following the decision of tribunal (supra) we confirm the order of CIT(A).
3.3 The third dispute is regarding allowability of proportionate premium on redemption of NCD. This issue we have already dealt with while dealing the ground No.7 of the appeal of the assessee. The assessee had issued NCD in the year 1988-89 on which premium of Rs.4 crores was paid in the year of redemption. CIT(A) has allowed proportionate premium during the entire period of holding which was 9 years and accordingly a sum of Rs.44,44,444/- has 21 been allowed this year. We have already confirmed the order of CIT(A) following the decision of tribunal in assessment year 1994-95 in the assessee's own case and in view of our said decision vide para 2.7.1 of this order the ground raised by the revenue is dismissed.
3.4 The fourth dispute is regarding addition of Rs.39,42,289/- being the value of unutilized modvat credit. The AO had made addition of Rs.39,42,289/- on account of modvat credit in relation to closing stock. In appeal CIT(A) following the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Indo Nippon Chemicals Ltd. (122 Taxman 555) deleted the addition made aggrieved by which the revenue is in appeal.
3.4.1 Before us the Learned AR for the assessee submitted that the issue was covered in favour of the assessee by the judgment of Hon'ble Supreme Court in case of CIT Vs Indo Nippon Chemicals (261 ITR 275). The Learned DR fairly conceded that the issue was covered against the revenue. Therefore respectfully following the judgment of Hon'ble Supreme Court we confirm the order of CIT(A).
3.5 The ground No.5 is regarding addition made by the AO on account of club membership and subscription expenses amounting to Rs.67,350/-. CIT(A) has allowed the claim following the judgment of Hon'ble High Court of Mumbai in case of Otis Elevators Co. Ltd. (195 ITR 682). Aggrieved by the said decision the revenue is in appeal.
3.5.1 We have heard both the parties, perused the records and considered the matter carefully. The dispute is regarding allowability of expenditure incurred 22 on membership fees and annual subscription to the club. Such expenses are incurred for efficient conduct of the business and do not result into any advantage to the assessee in the capital field. There are several judgments of the High Courts including the judgment of Hon'ble High Court of Mumbai in case of Otis Elevators (supra) which support the case of the assessee. We are therefore see no infirmity in the order of CIT(A) allowing the claim and the same is upheld.
3.6 The sixth dispute is regarding addition of Rs.8,49,13,250/- being the expenditure incurred on construction of access road to the factory and laying of 132 KV electric transmission line. The said expenditure had been incurred in relation to Birla Periclase plant at Vaizag, Andhra Pradesh. The assessee explained that it was a multi product and well diversified company manufacturing rayon, grey cement, carbon blac, insulators, textiles etc. The assessee was already in the line of manufacture of cement. The Birla Periclase unit was a new line of business. However there was complete interconnection, interlacing, interdependence and unity of control by existence of common management, common business organization, common administration, common fund and common place of business. It was therefore a part of the business carried on by the assessee. Therefore the expenditure incurred was revenue in nature and it had to be allowed. The assessee placed reliance on the judgment of Hon'ble Supreme Court in case of CIT Vs Associated Cement Ltd. (172 ITR 257) and on the judgment in case of L.S.Sugar Factory and Oil Mills Pvt. Ltd. (125 ITR 293). The AO however distinguished the said cases and held that the case of the assessee was covered by the judgment of Hon'ble High Court of Mumbai in case of Modella Woollens Limited Vs CIT (120 ITR 726). The AO pointed out that in that case expenditure incurred for construction of a 23 pucca approach road for factory premises was held not allowable as revenue expenditure. AO therefore disallowed the claim as capital expenditure. In appeal CIT(A) agreed with the assessee that the new unit was a part of existing business as there was unity of control, common management, interlacing, interconnection, and interdependence between different units. CIT(A) also observed that judgment of Hon'ble High Court in case of Modella Woollens Ltd (supra) relied upon by the AO was distinguishable as in that case the assessee had taken existing kachha road attaching the factory premises on lease for 99 years and expenditure was incurred to make pucca road for transportation of goods to and from the factory. In the present case CIT(A) noted that the assessee was not the owner of the road constructed. CIT(A) further observed that similar expenditure incurred by the assessee in assessment year 1997-98 and 1998-99 had been allowed by the AO as revenue expenditure following the judgment of Hon'ble Supreme Court in case of L.S.Sugar Factory and Oil Mills Pvt. Ltd. (supra) and in case of Associated Cement Company Ltd. (supra). In those years AO himself observed that judgment of Hon'ble High Court of Mumbai in case of Modella Woollen Ltd. was not applicable to the facts of the case of the assessee. CIT(A) therefore allowed the claim of the assessee aggrieved by which the revenue is in appeal.
3.6.1 Before us the Learned AR for the assessee reiterated the submissions made before lower authorities that the assessee was not the owner of the road constructed and therefore expenditure was allowable as revenue expenditure. He also placed reliance on the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Excel Industries Ltd. (122 ITR 985) in which expenditure incurred on providing overhead lines by the electricity board which remained property of the board was allowed as revenue expenditure. He further referred 24 to the decision of the tribunal in case of Indo Gulf Corporation Ltd. Vs Additional CIT in ITA No.715/Luck/1 in which the tribunal had allowed the expenditure on water pipeline, power line, approach road etc. holding the same as revenue expenditure following the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Excel Industries Ltd. (supra) and judgments of Hon'ble Supreme Court referred to earlier. Reference was also made to the judgment of Hon'ble High Court of Delhi in case of Saw Pipes Ltd. (300 ITR 35); and judgments of Hon'ble Supreme Court in case of Associated Cement Co. Ltd. (172 ITR 257) and in case of L.H.Sugar Factory and Oil Mills (125 ITR 293). The Learned DR on the other hand supported the order of AO. It was submitted that the new plant in relation to which the expenditure was incurred represented a new and entirely different line of business and the plant was in construction stage and started commercial operations 4 years after the end of the relevant previous year and therefore the expenditure could not be allowed as revenue expenditure.
3.6.2 The bench thereafter sought clarifications from the Learned AR for the assessee as to whether the plant had become operational during the year or not. The Learned AR submitted that this was not a relevant factor to determine whether the expenditure should be considered as revenue or not. The Learned AR pointed out that this was not the ground on which addition had been made by the AO. He however admitted that the assessee had approached the state government for construction of the road which was linked to the new plant. The Learned DR however drew the attention of the bench to the submissions made by the assessee before CIT(A) as mentioned at page 27 of the order of CIT(A) in which it was clearly stated that the plant started commercial production only in February 1998 and therefore during the year it was only at construction stage. The Learned AR for the assessee reiterated his earlier stand that 25 expenditure has to be allowed even if the plant had not become operational during the year. He referred to the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Excel Industries Ltd. (supra) in which case also it was pointed out that similar expenditure had been allowed in case of a new unit. He also referred to the judgment of Hon'ble High Court of Delhi in case of Saw Pipes Ltd (supra) in which expenditure had been allowed under similar circumstances. The bench however drew the attention of the Learned AR for the assessee to the earlier judgment of Hon'ble High Court of Delhi in case of Thriveni Engineering Ltd. (232 ITR 639) in which even the expenditure on project report in connection with the new project had been held as capital expenditure even though the project had not taken off following Supreme Court judgment in case of Empire Jute Co. (124 ITR 1). The Learned AR submitted that the case of the assessee was covered by the judgment in case of Excel Industries (supra).
3.6.3 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of expenditure on construction of approach road to the new Birla Periclase plant at Vaizag in Andhra Pradesh. The approach road had been constructed during the year on the land belonging to the Government and the ownership of the road was not with the assessee. The case of the assessee is that new unit was an integral part of the existing business of the assessee comprising of several units as there was complete interconnection, interlacing, interdependence and unity of control by existence of common management, common business, organization, common administration, common funds and common place of business. The new unit was therefore part of the existing business and thus the expenditure incurred was for the purpose of business. The expenditure incurred should be allowed as revenue expenditure as the assessee had no advantage in the capital field 26 because the assessee did not own the road. The issue whether the new unit was part of the existing business or a different business has been examined by us in detail while dealing with the next ground where we have held that the new unit was part of the existing business and was not a new business. Following the same reasoning given therein we accept the claim of the assessee that Birla Periclase unit was part of the existing business. However each and every expenditure incurred for the purpose of business cannot be allowed as revenue expenditure. In the next ground we have dealt with the allowability of interest on capital borrowed for the setting up of new unit which was part of the existing business. The allowability of interest on borrowed funds under section 36(1)(iii) is different as the only requirement of that section is that the capital should be borrowed for the purpose of business. The interest is therefore to be allowed once it is found that the capital has been borrowed for the purpose of business irrespective of the fact whether borrowed funds were utilized for acquisition of capital assets or construction of a new unit if the new unit is found to be part of the existing business. The position is however different in relation to allowability of expenditure other than interest under the provisions of section 37(1) as expenditure under the said section can be allowed as revenue expenditure only if the same is not for acquisition of any capital asset.
3.6.4 Whether a particular expenditure incurred for the purposes of business is a capital expenditure or revenue expenditure will depend upon facts and circumstances of each case. Lumpsum payments or the test of enduring benefits is not conclusive in deciding whether a particular expenditure is revenue or capital in nature as held by Hon'ble Supreme Court in case of Empire Jute Co. (124 ITR 1). The Hon'ble Supreme Court in the said case held 27 that the expenditure incurred is capital if it has resulted into any advantage in the capital field but if the advantage consisted merely in facilitating the assessee's business or enabling the management and conduct of the business to be carried on more efficiently and more profitably the expenditure will be revenue in nature. The Hon'ble Supreme Court also held that in case the expenditure incurred was for operation and working of the existing profit making apparatus and there is no addition or augmentation of the profit making structure the expenditure would be revenue in nature but in case the expenditure is related to any addition or augmentation to the profit making structure the same will be capital in nature. Therefore coming to the present case even if the new unit was a part of existing business and the expenditure on the approach road was incurred for the purpose of business it is required to be seen whether the same was in connection with any addition or augmentation to the profit earning apparatus of the assessee or only for efficient working of the existing profit making apparatus. The existing profit making apparatus of the assessee consisted of the other plants which were already operating. But the approach road had no connection to the other plants which were operational. Therefore it cannot be said that the approach road to the Birla Periclase plant under construction was for efficient working of other plants. As for the Birla Periclase plant, the assessee itself submitted before CIT(A) that it became operational only in February 2008 i.e. long after end of the relevant accounting period which means that the plant was still under construction during the relevant period. The plant even if it was integral part of the existing business the construction of the new plant did result into addition or augmentation to the profit earning structure of the assessee company. Since the plant was not operational during the year, it could not be said that the approach road was for efficient working of the Birla Periclase plant. The 28 approach road was, in our view, connected to the additional profit earning apparatus being built by the assessee at the new unit as part of the expansion programme. Therefore expenditure incurred on the approach road was in connection with augmentation to the existing profit earning apparatus of the company and hence the expenditure in our view following the principle laid down by the Hon'ble Supreme Court in case of Empire Jute Co. (supra) would be capital in nature.
3.6.5 The Learned AR for the assessee had placed reliance on certain judgments in support of the case which in our view was distinguishable. In case of CIT Vs Excel Industries Ltd. (supra) relied upon by the Learned AR, the assessee who was manufacture of chemicals had set up a new unit for manufacture of phosphorous. The unit had already been set up during the year. Since the manufacture of phosphorous needed large quantity of power, the assessee had approached the Electricity Board who agreed to provide an overhead service line free of cost up to 30 meters from the nearest distribution point. A portion of the cost was paid by the assessee but the service line remained the property of the Board. Thus the assessee had acquired the service line for getting adequate quantity of power for running the new unit which had already been set up during the year. Therefore it was held that since the assessee was not owner of the power line, the expenditure was only for efficient and more profitable working of the new unit and was thus allowable as revenue expenditure. In case of the assessee the new unit was still under construction. The case would have been different if the unit was already set up and the expenditure was incurred for efficient working of the existing profit earning apparatus which is not so in the present case. The judgment of Hon'ble Supreme Court in case of L.S. Sugar Factory and Oil Mills Pvt. Ltd.(supra) is 29 also distinguishable. In that case the assessee was in the business of manufacture and sale of sugar and the business was already in existence. The assessee had contributed towards the cost of construction of road in the area around the factory under the sugar development scheme. The road facilitated the efficient working of the existing business and since the assessee was not the owner of the road it was allowable as revenue expenditure following the judgment of Hon'ble Supreme Court in case of Empire Jute Co. (supra). Similar was the position in case of Associated Cement Companies Ltd. (172 ITR 257) relied upon by the assessee. In that case the assessee who was manufacturer of cement, was running a cement factory at Sahibabad. The factory was already in existence. The factory premises had been included by the Government within the municipality area and in terms of tripartite agreement, the assessee had made payments to provide water pipelines and electricity facility to the municipality which remained the property of the Government. The expenditure however facilitated the efficient working of the factory and therefore was held as revenue expenditure as there was no advantage in the capital field and the business was already running.
3.6.6 The Learned AR for the assessee also relied on the decision of the tribunal dated 21.10.2008 in case of Indo Gulf Corporation Vs Addl.CIT in ITA No.715/Luck/1. It has been submitted that in that case also the expenditure incurred on water pipeline, power line and approach road etc which remained the property of the Government had been allowed as revenue expenditure even though the unit was new. A careful perusal of the said order however shows that the new unit was already operational as is clear from para 55 of the tribunal order in which it has been clearly mentioned that the assessee was using the service line, the approach road and the alternate forest land for 30 business which shows that the unit was already working. Secondly the tribunal had placed reliance on the judgments in case of CIT Vs Excel Industries Ltd. (supra) in case of CIT Vs Associated Cement Companies Ltd. (supra) and in case of L.S. Sugar Factory and Oil Mills Pvt. Ltd. Vs CIT (supra) which as we have pointed out earlier related to the cases where the new unit had already been set up and the units/ factories were working and therefore it was held that the expenditure was incurred for efficient working of the existing business. The said decision therefore cannot be applied to the facts of the present case in which the new unit was under construction.
3.6.7 In the present case as pointed out earlier the expenditure on approach road was linked to the new unit which was an addition being made to the existing profit earning apparatus of the assessee company and therefore the expenditure incurred in relation to addition/ augmentation to the existing profit earning apparatus has to be considered as capital expenditure. The Learned AR for the assessee argued that these aspects had not been considered by the authorities below and therefore could not be considered by the tribunal. We are unable to accept the accept the argument of the Learned AR that the tribunal could not consider new aspects which were not gone into by the authorities below. The issue raised before the tribunal is whether the expenditure was capital or revenue in nature and in deciding the issue the tribunal has to go into all the relevant aspects and if addition is justified on some other ground, it is well within the jurisdiction of the tribunal. The facts are admitted and already on record. The fact that the new unit became operational only in February, 2008 is clear from the assessee's own submission before CIT(A) as pointed out earlier. Therefore for the reasons given earlier, we 31 hold that the expenditure was capital in nature The order of CIT(A) thus set aside and disallowance made by the AO is confirmed.
3.7 The ground No.7 is regarding addition of Rs.2,73,29,413/- on account of disallowance of interest paid for the period prior to commencement of the new line of business. The AO noted that the assessee had paid interest of Rs.2,73,29,413/- on capital borrowed for its new project/ expansion viz. Rassi Cement JST (Flax), JST (RCM) and Rassi Syntex. The interest paid had been capitalized and shown under capital work-in-progress in the books. However in the computation of income, the assessee claimed the interest as deduction while computing the income under the provisions of section 36(1)(iii). The assessee explained that under the provisions of section 36(1)(iii) interest paid on capital borrowed for the purpose of business was allowable as deduction irrespective of the fact whether capital was used for acquisition of capital assets or not. Therefore issue to be considered was whether the new projects started by the assessee were part of the existing business and in case it was so, the expenditure has to be allowed.
3.7.1 It would be appropriate at this stage to refer to the judgment of Hon'ble Supreme Court in case of CIT Vs Prithvi Insurance Co. Ltd (63 ITR 632) in which Hon'be Supreme Court referred to the judgment in case of Scales V George Thomson & Co. Ltd. (13TC 83 (KB) in which it was held that interconnection, interlacing, interdependence and unity embracing the two businesses were the tests to decide whether the two businesses constituted the same business. Adopting the said test the Hon'ble Supreme Court held as under :
32
"that interconnection, interlacing, interdependence and unity which is furnish in this case by the existence of common management, common business organization, common administration, common fund and common place of business."
3.7.2 The judgment of Hon'ble Supreme Court in case of Prithvi Insurance (supra) was considered by the Hon'ble Supreme Court in case of Produce Exchange Corporation (77 ITR 739) in which it was held that unity of control and not nature of two lines of business was a decisive test to determine whether the two business were the same or not.
3.7.3 The above position was reiterated by the Hon'ble Supreme Court in case of B.R.Ltd. Vs CIT (113 ITR 647) in which the Hon'ble Supreme Court held as follows :
"The decisive test as held by this court in Produce Exchange Corporation (1970) 77 ITR 739 (SC) is unity of control and not the nature of two lines of business."
3.7.4 In relation to the various queries of the AO as to whether the new project was part of the existing business or a separate business the assessee submitted that there was complete interconnection, interlacing, interdependence and unity of control in relation to different units of the assessee. It was explained that all the units located at different parts of the country were under direct control and the supervision of the board of directors of the company. The assessee had a common business administration and as per the policy followed employees were transferable from one unit to another. 33 The funds of the company were centralized and managed by the head office which had a corporate finance cell (CFC) which was in charge of looking after accounts, finance, funds, management information, secretarial matters and taxation matters of all the units of the company. CFC had common staff for the purpose of receiving of funds for all the units and utilization of funds for different units was also decided by CFC. The company secretary and the secretariat under him controlled and supervised the activities of all the units on secretarial matters. The direct tax matters of all the units were attended by common staff. Though the accounts of the units were maintained separately and there were separate profit and loss accounts and balance sheets this was only for the sake of convenience to ensure compliance with respect to local sales tax laws, municipal tax laws, labour laws, as well as for computation of income under section 80I, 80IA, 80HHC etc. and for proper monitoring and projection of the profitability of each unit.
3.7.5 AO however did not accept the explanation given by the assessee. It was observed by him that each unit/ division had separate employees/ managers working exclusively for that unit/ division. It was not correct to state that the assessee had a common pool of funds. AO noted that the assessee had specifically raised loans by issue of debentures etc for setting up the new unit and the interest payments were also separately accounted which showed that funds were separately raised for the new unit. The separate books of accounts were also maintained and there was separate profit and loss account and balance sheet for each unit. The units were separately assessed for sales tax, excise duty etc. All new projects were set up in a new division which was managed by the executives of that particular division. Merely because board of directors were common could not be ground to hold that different units were 34 interdependent. The AO therefore concluded that there was no interdependence, interlacing and interconnection between different units of the business and therefore held that all new projects/ units were totally different and had independent commercial operations and these did not constitute the same business. AO therefore disallowed the claim of interest. 3.7.6 The assessee disputed the decision of AO before CIT(A) and reiterated the submissions made earlier that the new units were part of the existing business. In addition to the judgments referred to earlier the assessee placed reliance on the following judgments.
(i) 74 ITD 25 (JP) in case of Hindustan Jink Ltd.
(ii) 78 ITD 1 (Ahd) (TM) in case of Core Healthcare Ltd. Vs DCIT
(iii) 251 ITR 61 (Guj) DCIT Vs Core Healthcare Ltd.
3.7.7 CIT(A) after considering all the submissions of the assessee and the cases cited agreed that the case of the assessee was similar to the case of Core Healthcare Ltd. (supra) in which the tribunal allowed deduction on account of interest in relation to the new unit and the said decision of the tribunal was subsequently upheld by the Hon'ble High Court of Gujarat (251 ITR 61). CIT(A) also referred to the decision of tribunal in case of Grasim Industries Ltd. (64 TTJ 307) In that case, the assessee was producing viscose, stapled fiber, rayon, pulp, caustic soda, cement, software, textile, heavy engineering machinery and chemicals. The assessee raised funds for putting up two cement units at Raipur and Shambhupura and steel unit at Vikram Ispat salav. The tribunal after examining the facts and after considering the various judgments came to the conclusion that the assessee was carrying on the same business 35 and claim of interest was allowed. CIT(A) therefore held that all the units/ undertakings of the assessee constituted the same business since there was complete interconnection, interlacing, interdependent and unity of control by existence of common management, common business organization, common administration, common funds and common place of business and accordingly allowed the claim of the assessee. Aggrieved by the said decision the revenue is in appeal.
3.7.8 Before us the Learned AR for the assessee reiterated the submissions made before lower authorities. It was pointed out that in view of the various judgments of Hon'ble Supreme Court relied upon before lower authorities nature of business was not relevant in deciding whether the two business constituted the same business or not. What was relevant was what was important was interdependence interconnection, interlacing and unit of control. It was pointed out that the case of the assessee stood on a better footing as in this case the new projects were part of the existing cement and rayon business and no new products were involved. It was argued that the case of the assessee was similar to the facts of the case in case of Grasim Industries Ltd. (64 TTJ 357) and the case of Indo Gulf Corporation Ltd. Vs Addl. CIT in ITA no.715/Luck/1 in which claim of interest had been allowed by the tribunal after considering the various judgments on the subject. Reference was also made to the judgment of Hon'ble High Court of Mumbai in case of CIT Vs Tata Chemicals Ltd. (256 ITR 395) and judgment of Hon'ble Supreme Court in case of DCIT Vs Core Healthcare Ltd. (298 ITR 194) in support of the case.
3.7.9 We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of interest paid on funds 36 borrowed for the purpose of setting up of new projects/ units. The assessee is a diversified company producing rayon, cement etc at its various plants. The assessee had borrowed funds for the purpose of setting up of new unit. The interest paid was capitalized in the balance sheet but in the computation of income the same was claimed as deduction while computing the total income. The provisions of allowing interest on capital borrowed are contained in section 36(1)(iii). The only requirement of the said section is that the capital should be borrowed for the purpose of business and the interest expenditure should be incurred. Once these conditions are satisfied the interest has to be allowed as a revenue expenditure irrespective of the fact whether borrowed funds are used for acquisition of capital asset or for setting up of new units. Therefore the point to be considered is whether the new unit was an independent business or part of the existing business. In case the new unit found to be part of the existing business the interest on capital borrowed has to be allowed as deduction.
3.7.10 It is a settled legal position that whether the two businesses are the same business or different business does not depend upon the nature of two businesses. The tests to be applied are whether there is interconnection, interlacing, interdependence and unity of control between the two businesses as held by Hon'ble Supreme Court in case of CIT Vs Prithvi Insurance Co. (supra). The Hon'ble Supreme Court found in that case that interconnection, interlacing, interdependence and unity of control was furnished by the existence of common management, common business organization, common fund and common place of business. Subsequently the Hon'ble Supreme Court after considering the earlier judgment in case of Prithvi Insurance (supra) held in case of Produce Exchange Corporation (supra) that it was the unity of control 37 and not the nature of two businesses which was a decisive test to determining whether the two businesses are same or not. In this case we find that all the units are under the direct control and supervision of the board of directors and thus have a common business administration. Though the employees and funds are separately allocated for different units they are depended upon the head office for raising of funds and employees are transferable from one unit or another. There is also inter-transfer of funds. There is centralized finance sell for looking after accounts, finance, funds management, information, secretarial matters and taxation matters for all the unit. Though separate profit and loss account and balance sheets are prepared for different units, these are only to ensure compliance with local laws and for claim of deduction under section 80IA/ 80HHC etc which are separately allowable in respect of each unit. Similar situation has already been considered by the tribunal in case of Grasim Industries Ltd. (64 TTJ 357). In that case the assessee was producing viscose staple fibre, rayon, caustic soda, cement, textiles, heavy engineering machinery and chemicals. The assessee had raised funds for setting up of two cement units at Raipur and Shambupura and steel unit at Vikramspat Salav. The tribunal held that all the units/ undertakings constituted the same business and allowed the claim of interest. The same view has been taken by the Hon'ble High Court of Mumbai in case of CIT Vs Tata Chemicals Ltd. (256 ITR
395). Respectfully following the above decisions, we hold that the new unit being set up by the assessee was integral part of the same business and therefore interest on money borrowed has to be allowed as deduction. We therefore see no infirmity in the order of CIT(A) allowing the claim of the assessee and the same is upheld.
38
4. The cross objection of the assessee in CO No.142/M/2003. The assessee in the cross objection has raised four alternate grounds in relation to the grounds raised in the appeal by the department.
4.1 The first ground is regarding increasing the opening stock by Rs.12,33,176/- being the amount by which the closing stock of A.Y.1994-95 had been increased by the AO. The Learned AR however submitted that the addition made in assessment year 1994-95 on account of closing stock has since been deleted and the ground has thus become infructuous. The ground raised by the assessee is therefore dismissed as infructuous. 4.2 The ground No.2 is regarding allowability of expenses on issue of debentures. In this ground the assessee has made an alternate claim that in case the expenses were not allowed as revenue expenses, the same should be considered under section 35D or should be capitalized on which depreciation should be allowed. The Learned AR for the assessee submitted that expenses on non convertible debentures (NCD) have already been allowed and expenses in relation to fully convertible debentures (FCD) have been allowed under section 35D. The ground raised by the assessee is therefore dismissed as infructuous.
4.3 The ground No.3 is regarding expenditure of Rs.8,49,13,250/- incurred towards construction of access roads to the factory. The assessee has raised an alternate ground that in case the expenditure was not allowed as revenue expenditure the same should be capitalized and depreciation should be allowed. 39 We have already considered this aspect and vide para 3.6.7 have held that the expenditure has to be treated as capital in nature. The issue of depreciation was not before the authorities below. The issue is therefore restored to the AO for necessary examination and order after allowing opportunity of hearing to the assessee.
4.4 The ground No.4 in the cross objection is regarding allowability of expenditure being premium of Rs.4 crores on non convertible debentures (NCD). The assessee has raised an alternate plea that in case the expenditure was not allowed the same should be considered under section 35D. Since the expenditure has already been allowed on pro rata basis over a 9 year period the ground raised by the assessee has become infructuous and the same is dismissed as infructuous.
5. In the result both the appeals as well as cross objections are partly allowed.
6. The decision was pronounced in the open court on 28.02.2011.
Sd/- Sd/-
( D.K. AGARWAL) (RAJENDRA SINGH)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date : 28.02.2011
At :Mumbai
Copy to :
1. The Appellant
2. The Respondent
3. The CIT(A), Mumbai concerned
4. The CIT, Mumbai City concerned
5. The DR "I" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk