Income Tax Appellate Tribunal - Mumbai
Dy Cit vs Uttam Steel Ltd. on 28 January, 2005
Equivalent citations: [2005]2SOT777(MUM)
ORDER
S.R. Chauhan, J.M. I.T.A. Nos. 3108 & 3962/Mum./1999 are appeals by revenue for assessment years 1995-96 and 1996-97 respectively and are directed against the order of learned CIT(A), Mumbai dated 5-31999 and 20-5-1999 respectively.
2. We have heard the arguments of both the sides and have also perused the records.
3. First we take up ITA No. 3108/Mum./1999 for A.Y. 1995-96. The revenue has raised as many as eight grounds of appeal before the Tribunal. Ground Nos. 6 to 8 are general. Ground Nos. 1 to 5 constitute single issue disputing the learned CIT(A)'s impugned order in directing the assessing officer to allow deduction of interest payment of Rs. 5,53,47,977 as revenue expenditure under section 36(1)(iii). The learned Departmental Representative has contended that the assessee had capitalized the above interest payment on borrowing made for purchase of plant and machinery etc. Referring to para 11 (c). on page 6 of assessment order, the learned Departmental Representative has contended that out of the above interest payment the assessee transferred interest payment of Rs. 1,80,10,292 to the capital work-in-progress account and no depreciation was claimed thereon; and the balance interest payment of Rs. 3,73,37,685 was transferred to plant and machinery account and factory building account and depreciation was also claimed thereon. He has contended that later on, during assessment proceedings, the assessee, vide its letter dated 27-11-1997, put forward its claim for deduction of entire interest payment of Rs. 5.53 crores as business expenditure under section 36(1)(iii). Referring to paras 18 to 23 on pages 9 to 11 of assessment order, the learned Departmental Representative has contended that after considering the contentions of assessee, the assessing officer rightly rejected the assessee's claim for deduction of the, above mentioned capitalized interest payment. He has contended that when the assessee had capitalized the interest payment in its books of account and had not claimed deduction for the same as business expenditure in the return as well, the assessee cannot turn back and claim for deduction of the said capitalized interest payment during assessment proceedings. He has relied on the following decisions.
1. ITO v. Shreyas Shipping Ltd. (2003) 86 ITD 556 (Mum.)
2. JCT Ltd. v. Asstt CIT (1998) 65 ITD 169 (Cal.)
4. As against the above, the learned Authorised Representative of assessee has contended that the assessee is engaged in the manufacturing of galvanized sheets from cold rold coils since 1988. He has contended that the assessing officer has disallowed the assessee's interest payment on borrowings made for capital assets merely because in the entries in assessee's books of account, the said interest payment has been capitalized and had claimed depreciation in the return. He has contended that during assessment proceedings, the assessee had withdrawn its claim for depreciation and claimed deduction for interest only, and so also in the subsequent assessment year 1996-97. He has contended that the assessee is not claiming both depreciation as also deduction for interest but is claiming only deduction for interest payment, and in this regard he has referred to the assessee's letter dated 10-12-1998 and 22-12-1997. He has also contended that the learned DR's citation ITO v. Shreyas Shipping Ltd. (2003) 86 ITD 556 (Mum.) is on the provision of section 143(1)(a) regarding adjustment and so the same is not relevant in the matter under consideration. He has also contended that as against DR's citation of JCT Ltd. v. Asstt. CIT (1998) 65 ITD 169 (Cal.) there is Third Member decision - Core Health Care Ltd. v. Dy. CIT (2001) 78 ITD 1 (Ahd.). He has also relied on the following decisions:
1. Dy. CIT v. Core Health Care Ltd. (2001) 251 ITR 61 (Guj.)
2. Tata Chemicals Ltd v. Dy. CIT (2000) 72 ITD 1 (Mum.)
3. CIT v. Tala Chemicals, Ltd. (2002) 256 ITR 395 (Bom.) He has contended that the Hon'ble Bombay High Court in CIT v. Tata Chemicals Ltd. (2002) 256 ITR 395 (Bom.) upheld the Tribunal's view Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mum.) and the Hon'ble Supreme Court has rejected SLP against the aforesaid judgment of Hon'ble Bombay High Court in the case of Tata Chemicals Ltd. (supra). He has also contended that now the law itself has been amended and a proviso has been inserted to section 36(1)(iii) with effect from 1-4-2004 vide the Finance Act, 2003.
5. In rejoinder, the learned Departmental Representative has contended that in ITO v. Shreyas Shipping Ltd. (2003) 86 ITD 556 (Mum.), the decision regarding 143(1)(a) is one aspect regarding adjustment under section 143(1)(a) which pertains to loss on sale of investment, and that the other part of decision was also there to the effect that the method of accounting followed by assessee in writing his books of account has to be compulsorily taken as basis of computation of income in assessment proceedings and that the assessee cannot ask for two different methods for the above two purposes. He has also contended that the issue is not covered by the judgment of Hon'ble Bombay High Court in CIT v. Tata Chemicals Ltd. (2002) 256 ITR 395 (Bom) inasmuch as the Hon'ble Bombay High Court has not given any finding on this issue and has not replied the question.
6. We have considered the rival contentions, relevant material on record as also the cited decisions. In ITO v. Shreyas Shipping Ltd. (2003) 86 ITD 556 (Mum.) it has been held that the method of accounting referred to in section 145 is the one as followed by assessee in writing his books of account and not a separate method, which the assessee may chose for filing his return of income. It has also been held that the assessee cannot adopt two different methods for the above two purposes. It has also been held that the method of accounting followed by assessee in writing his books of account has to be compulsorily taken as basis of computation of income in assessment proceedings and such method is binding on assessee. It has also been held therein that the question as to whether loss on sale of investment was a capital loss was not an issue, which could be the subject-matter of assessment under section 143(1)(a) and, consequently, no action under section 154 could be taken.
7. In JCT. Ltd. v. Asstt. CIT (1998) 65 ITD 169 (Cal.) it has been held that the assessee after having correctly capitalized the interest in his books of account in accordance with well established principles of accountancy cannot, at the same time, claim deduction of the expenditure as revenue expenditure in the income-tax assessment proceedings. It has also been held therein that such entries in books of account are as much binding on assessee as the method of accounting itself. It has also been held that there is no basis to hold that provisions of section 36(1)(iii) supercede the provisions of section 43(1) relating to 'actual cost' in so far as interest Paid on borrowings made for acquisition of capital assets is concerned.
8. In Core Health Care Ltd. v. Dy. CIT (2001) 78 ITD 1 (Ahd.) (TM) it has been held that the manner and mode of making book keeping entry will not be decisive and conclusive in relation to allowability of particular deduction. It has also been held therein that the deductibility of expenditure will depend on relevant law. It has also been held therein that the interest paid on funds borrowed for business purposes, including for the purpose of setting up of new unit of existing running business, will qualify for grant of deduction under section 36(i)(iii) irrespective of the fact as to whether such unit has commenced production or not in the year under consideration.
9. In Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mum.) it has been held that where assessee's new fertilizer business was under process of construction, it was found to be interlacing, interdependent and interconnected with old chemical business, the two businesses should be held as single and interest on borrowed capital attributable to fertilizer business should be allowed even though it has not started functioning.
10. In CIT v. Tata Chemicals Ltd. (2002) 256 ITR 395 the Hon'ble Bombay High Court upheld the decision of ITAT, Mumbai reported in Tata Chemicals Ltd v. Dy. CIT (2000) 72 ITD 1 (Bom), and thus confirmed the allowing of deduction for interest payment on borrowing made for fertilizer unit.
11. In Dy. CIT v. Core Health Care Ltd. (2001) 251 ITR 61 (Guj.) it has been held that for the purpose of allowing of interest paid in respect of capital borrowed for the purposes of business under section 36(1)(iii), it is not relevant as to whether the borrowing has been made on capital account or on revenue account. It has also been held therein that when the capital has been borrowed for purchase of machinery to increase production in existing business, it is not relevant as to whether machinery has been put to use in the accounting year. It has been held that the interest on borrowed capital is deductible and there is no obligation on assessee to capitalize such interest.
12. As discussed above in Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mum.) interest on borrowed capital, attributable to assessee's business operation of new fertilizer division, which was under process of construction and had not started functioning, was held allowable, holding that the fertilizer division was part of assessee's existing chemical business carried on in the relevant previous year. This Tata Chemicals Ltd. v. Dy. CIT (2000) 72 ITD 1 (Mom) being the decision of Mumbai Tribunal deserves to be followed by us in preference over J.C.T Ltd. v. Asstt. CIT (1998) 65 ITD 169, being a decision of Calcutta Tribunal. However, in CIT v. Tata Chemicals Ltd. (2002) 256 ITR 3951 (Bom.) the issue regarding allowability of interest as revenue expenditure when the same stood capitalized in the books was contained in question No. (a) but the Hon'ble High Court did not decide the same on merits for the reason that the same had not been raised before the Tribunal.
13. However, a view similar to that taken in Core Health Care Ltd. v. Dy. CIT (2001) 78 ITD 1 (Ahd.) (TM) has also been taken by the Hon'ble Gujarat High Court in Dy. CIT v. Core Health Care Ltd. (2001) 251 ITR 61 (Guj), as mentioned above. Besides, as regards ratio decidendi laid down in ITO v. Shreyas Shipping Ltd. (2003) 86 ITD 556 (Mum.), the same is with respect to the method of accounting; and it lays down that the assessee cannot ask for two different methods, one for writing books and another for having his tax liability. determined under the Act. 'Method' of accounting, in the, relevant context, will denote a specific/ certain system or pattern being followed for making particular entry/entries in books of account regularly or repeatedly or for a number of times as distinguished from any specific entry or entries made only once, or of one specific transaction/ event/ situation/ aspect only. Under I.T. Law now only two methods of accounting are recognized, namely the cash system and the mercantile system, though earlier a third method of accounting was also recognized, which was a hybrid system being mixed of both the cash and mercantile system. Thus, excepting the above methods of accounting, giving treatment to some expenditure /outgoing in a particular manner while making its entry/entries in the books of account will not fall within 'method' of accounting but the same may be referred to as the practice of giving treatment to some expenditure/ outgoing in a particular manner.
14. In the instant case, it is not the situation that the assessee wants to retain/maintain one practice of treatment in the books of account and other different practice for the purpose of filing return of income or otherwise for getting the I.T. liability determined, but the assessee having given a particular treatment in earlier years, but now in the current year, the assessee, having been so advised seeks to change that practice that it seeks to change the treating of the interest payment as capital expenditure to treating the same as revenue expenditure and claim deduction thereof accordingly together with withdrawing its claim of depreciation on the same. However, entries in the books of account are not decisive of the nature of expenditure or its allowability or charging of income as held in Sutlej Cotton Mills Ltd. v. CIT (1979) 116 ITR 1 (SC) and Kedarnath Jute A41g. Co. Ltd. v. CIT (1971) 82 ITR 363 (SC). That being the legal position, respectfully following Core Health Care Ltd. v. Dy. CIT (2001) 78 ITD 1 (Ahd.) (TM) and Dy. CIT v. Core Health Care Ltd. (2001) 251 ITR 61 (Guj.), we find no fault with the impugned order of learned CIT(A) in allowing deduction for the interest payment of Rs. 5,53,47,977; and so we decline to interfere with the same.
15. In the result, revenue's Appeal No. 3108/Mum./99 for assessment year 1995-96 is dismissed.
16. Now we take up ITA No. 3962/Mum./99 for assessment year 1996-97. The revenue has raised 8 grounds of appeal, similar to those raised in its appeal for assessment year 1995-96. Grounds 6 to 8 are general. Ground Nos. 1 to 5 constitute single issue identical to that raised in assessment year 1995-96. The facts, being identical, we follow our decision rendered above in assessment year 1995-96 on similar issue contained ground Nos. 1 to 5 raised therein and in turn, uphold the impugned order of learned CIT(A) in allowing deduction for interest payment of Rs. 7,78,22,167.
17. In the result, this Appeal No. 3962/Mum./1999 of revenue for assessment year 1996-97 is dismissed.