Income Tax Appellate Tribunal - Kolkata
Assistant Commissioner Of Income-Tax vs Paharpur Cooling Towers (P.) Ltd. on 9 November, 1992
Equivalent citations: [1993]44ITD540(KOL)
ORDER
D.S. Meenakshisundaram, Vice President
1. This appeal by the Revenue arises out of the income-tax assessment of M/s. Paharpur Cooling Towers Pvt.. Ltd., the assessee herein. The assessment year is 1985-86 forwhich the previous year commenced on 2-1-1984 and ended on 31-3-1985, i.e., a period of 15 months.
2. The first objection in the appeal is that the C.I.T. (Appeals) erred in holding that the business of Sahibabad Unit was set up during the period ending on 31-3-1985 relevant for the assessment year 1985-86 and thereby allowing the assessee's claim for depreciation, additional depreciation, investment allowance and pre-operative expenses. In its return of income for this year, the assessee had claimed that it had set up a new industrial unit, viz., Paharpur Plastics at Sahibabad, U.P. for the purpose of manufacturing plastic bags, that this new unit was subjected to trial run during the last month of the previous year, i.e. March 1985 and that the unit had made trial production. It was also stated that there was no commercial production started in this year and that the entire trial production had gone into waste. On the basis of this trial run in its new plastic unit at Sahibabad, the assessee had claimed the following items of expenditure and allowances as deduction in the computation of its business income for this year :
(1) Expenses incurred for trial run including pre-commissioning expenses Rs. 19 ,26,081 (2) Depreciation on
(a) Building Rs. 6,38,086
(b) Office equipments & furniture Rs. 2,183
(c) Plant & Machinery Normal depreciation Rs. 1,10,27,026 Additional Rs. 44,10,810 Total : Rs. 1,60,78,015 (3) Investment allowance of Rs. 1,46,98,738 The details of the trial run expenses claimed by the assessee were asfollows:
1. Raw Material consumed Rs. 8,21,296.13
2. Wages/Establishment Rs. 42,865.75
3. Bank Charges Rs. 56,294.27
4. Transport Charges Rs. 4,42,456.07
5. Brokerage & Commission Rs. 4,10,000.00
6. Office expenses Rs. 1,641.66
7. Insurance Charges Rs. 77,501.00
8. Advertisement Rs. 56,000.87
9. Rates & Taxes & Licence Fees Rs. 11,795.00
10. Printing & Stationery Rs. 2,690.92
11. Repairs & Maintenance Rs. 3,539.25 Rs. 19,26,080.92
3. The I.T.O. found on an examination of the trial run expenses set out above that they did not include any expenses on account of power or fuel consumption in the plastic unit. He held that the trial run of the unit during the previous year would have required a heavy consumption of power for running a number of heavy and small machineries of the unit and that the assessee had no explanation to offer or clarification to submit as to how so many power-based machineries were run during the process of trial production in which the raw materials worth over Rs. 8 lakhs were consumed without the consumption of any power or fuel. He also held that even in a trial run, some final products would be manufactured but, in the assessee's case there was no such product. The I.T.O., therefore, concluded that obviously no machineries were used during the previous year and so there was no trial run conducted during the year. He was of the view that the assessee made a false and bogus claim of conducting a trial run with the sole intention of claiming huge amounts of depreciation and investment allowance on the plants and machinery and other machineries of the plastic unit. The I.T.O. pointed out that as per the provisions of Income-tax Act, no depreciation or investment allowance could be allowed on any item of the plastic unit even if the assessee would have actually conducted the trial run, that Section 32(l)(a) and Section 32A(1) clearly say that the depreciation and investment allowance would be allowable only on those items of machineries which have been used during the previous year for the purposes of business, that Section 32A(2)(b)(ii) further clarified that the plant and machinery must have been used in any industrial undertaking for the purposes of business of construction, manufacture or production of any article or thing and that in the case of the present assessee, there was no manufacture of production of any article or thing. The I.T.O. also held that the purpose of any business could not be other than earning a profit, and that there could not be any profit from an industrial undertaking until there was commercial production of some items which could be sold in the market and that in the case of the present assessee, even during the so called trial run, there was no commercial production of any item. The I.T.O., therefore, held that the plant and machinery could not be considered to have been used for the purpose of business in such a trial run and that no depreciation or investment allowance was allowable on such basis. According to the I.T.O., the assessee had not conducted even the trial run and the plant and machinery were not utilised at all and that, therefore, the assessee's claim for depreciation allowance and investment allowance in respect of its plastic unit at Sahibabad could not be allowed as deductions.
4. Regarding the expenditure of Rs. 19,26,081, the I.T.O. held that it comprised of various items of expenditure, such as, pre-commissioning and trial run expenses, that as he had held that there was no trial run conducted during the year and so the expenses claimed on this account were completely false and bogus and that further the expenses of the nature of pre-commissioning expenditure were also not allowable before the commencement of the actual production. He, therefore, disallowed the entire expenses of Rs. 19,26,081.
5. The assessee objected to these disallowances made by the I.T.O. in respect of its new plastic unit at Sahibabad and contended that the I.T.O. was justified in making these disallowances ignoring the materials and evidence already on record which clearly established that there was trial production in the new unit during the previous year, even though there was no commercial production as such which took place in the next accounting year. The assessee's authorised representative referred to the various pieces of evidence that were placed before the assessing officer in support of the assessee's claim and also relied on the decisions of the Calcutta High Court in the case of CIT v. Incheck Tyres Ltd. [1983] 141 ITR 937 and of the Madras High Court in the case of V. Ramakrishna & Sons Ltd. v. CIT [1984] 149 ITR 554.
6. The C.I.T. (Appeals) after setting out the assessee's contentions in detail in paragraphs 3 and 4 of his order, held that the assessee's claim for these deductions in respect of its Sahibabad unit was very well-founded both on facts and in law. He pointed out that the two decisions of the Calcutta and Madras High Courts supported the assessee's stand that once the business had been set up, the expenses incurred thereafter but even before commercial production, are admissible as proper deduction. He pointed out that it was not the case of the I.T.O. that there was no trial production but there was only installation of the machinery and purchase of the raw materials. The I.T.O. held that should that be so, then on the ratio of the Madras High Court decision without there being no commencement of the business, the expenses would not be allowable as Revenue expenses vide K. Sampath Kumar v. CIT [1986] 158 ITR 25 (Mad.). The Commissioner next referred to the recent decision of the Calcutta High Court in the case of CIT v. Kanoria General Dealers (P.) Ltd. [1986] 159 ITR 524 where it had been held that once the business is set up, the assessee would be entitled to depreciation on the assets even if the same were not employed in commercial production as in the instant case. The Commissioner, therefore, held that the judicial pronouncements were thus weighted in favour of the assessee's stand that once the business had been set up during a particular assessment year, even though there could be no commencement of commercial production, still the entitlement of the taxpayer to expenses incurred after setting up of business but before the commercial production as well as the deductions by way of depreciation, additional depreciation and investment allowance on the assets used in trial production of industrial unit, could not be denied during the said assessment year. The Commissioner held that in law, therefore, the assessee had to succeed in regard to the aforesaid claims of reliefs/deductions and also the expenses incurred on trial run of the plastic unit. In other words, the Commissioner held that the assessee would be eligible for relief by way of depreciation, additional depreciation and investment allowance on the assets of such unit employed in such trial production during the assessment year 1985-86. The Commissioner also agreed with the contention of the assessee's counsel that the plastic unit was after all a part of assessee's business which had several business activities, that it was an indivisible part of single business and was in the nature of diversification of existing business and that even if there be no profit from the extended business, still the expenses incurred in connection therewith including the trial run expenses could not but be regarded as expenses incurred wholly and exclusively for the purpose of the assessee's business within the meaning of Section 37(1) of the Act. For this proposition of law, the Commissioner relied on the decision of the Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715.
7. The Commissioner thereafter examined the factual position in great detail in paragraphs 7 and 8 of his order and came to the conclusion that there was nothing to controvert the assessee's claim that it had commenced its trial production in its plastic unit at Sahibabad during March 1985 relevant for the assessment year 1985-86; that on the only reason given by the I.T.O. for doubting the commencement of trial production, viz., the absence of expenses by way of fuel charges for operating the plant at Sahibabad also, it had been already found that such an assumption made by the I.T.O. was contrary to facts and evidence produced by the assessee in the course of the hearing of the appeal and verified by him and the I.T.O. In view of this position, the Commissioner (Appeals) directed the I.T.O. to allow the assessee's claim for depreciation, additional depreciation and investment allowance in respect of the value of the assets of the plastic woven sacks unit used in trial production as claimed by the assessee subject to verification of the arithmetical accuracy of the deduction claimed by the assessee, the admissible rate of depreciation, additional depreciation and investment allowance claimed and the satisfaction of the conditions like creation of necessary reserve for investment allowance. As regards the expenses on trial production, the Commissioner held that all the expenses incurred after setting up of the business but prior to commercial production would be allowed as deduction, except the loss due to shortage in transit of raw materials. This is being objected to by the revenue in ground No. 1 before the Tribunal.
8. Shri R.N. Tripathi, the learned Departmental Representative, relied on the findings of the I.T.O. and submitted that the C.I.T. (Appeals) was not justified in straightway accepting the assessee's claims and in directing the I.T.O. to allow depreciation, additional depreciation, investment allowance and trial production expenses as claimed by the assessee. He argued that the materials that were relied on by the C.I.T. (Appeals) were not before the I.T.O. at the time of making the assessment and that, therefore, the Commissioner (Appeals) ought to have given one more opportunity to the I.T.O. to examine whether it was possible to run Generators and the factory with the diesel purchased by the assessee. Shri Tripathi submitted that as the matter has already been restored to the I.T.O. by the Commissioner for verification of the arithmetical accuracy of the claims put forward by the assessee, no prejudice would be caused to the assessee if the I.T.O. is given one more opportunity to examine these issues afresh before the assessee's claim was allowed. He pleaded that the various materials and pieces of evidence relied on by the C.I.T. (Appeals) in support of his conclusions were only records or documents maintained by the assessee to suit its own purpose and, therefore, they were self-serving evidence and shall be of no evidentiary value. He, therefore, strenuously urged that the department should be given one more opportunity to examine the assessee's claim afresh and that the Commissioner erred in not allowing such opportunity.
9. Shri N.K. Poddar, the learned counsel for the assessee, stoutly opposed the contentions urged on behalf of the Revenue and contended that the Department could have no grievance as all the materials and evidence relied on by the assessee were already on record and were placed before the assessing officer in the course of the assessment proceedings and that what the Commissioner (Appeals) had done in his appellate order, was to highlight the various points that were urged on behalf of the assessee in support of its claim with reference to these various pieces of evidence. Shri Poddar argued that before accepting the assessee's contentions, the Commissioner (Appeals) had taken care to put all the materials to the assessing officer, who was also present at the time of hearing of the appeal and elicit his views and comments with reference to the various pieces of evidence relied on by the assessee. In fact, the Commissioner had also actually stated that he got the evidence produced by the assessee verified not only by the I.T.O. but also by himself. Shri Poddar, therefore, submitted that there was no need much less any justification for sending back the matter to the I.T.O. for further verification when the matter had been thoroughly examined both by the C.I.T. (Appeals) and the I.T.O. sitting together at the time of hearing of the appeal itself.
10. Shri Poddar then referred us to the various pieces of evidence contained in his paper book comprising of 184 pages and pointed out that these materials were all contemporaneous evidence in support of the assessee's claim for commencement of trial production in the month of March 1985 and that none of these documents could be characterised as self-serving evidence particularly when they have been accepted by other Government Deparments of the Govt. of India, such as the Ministry of Industry and of the Government of Uttar Pradesh. He further submitted that even according to the Income-tax Act, the I.T.O. has to go by the evidence in the form of books of accounts and other records regularly maintained by the assessee for making a proper assessment and that the I.T.O. is empowered to discard such evidence only if he finds any serious discrepancy which would prove that the said records are unreliable. Shri Poddar submitted that in the present case it was not the case of the I.T.O. that there was any such discrepancy noticed by him in the accounts maintained by the assessee for its trial production. He submitted that the entire reasoning of the I.T.O. to reject the assessee's claim was based on mere suspicion, surmises and conjectures, whereas the C.I.T. (Appeals) had examined the details and also put them to the I.T.O. who had nothing to say against them. He, therefore, argued that the Commissioner was fully justified in accepting the assessee's contentions and in directing the I.T.O. to allow the assessee's claim for depreciation, additional depreciation, investment allowance and trial production expenses as indicated by the C.I.T. (Appeals).
11. Shri Poddar relied on the decision of the Madras High Court in the case of V. Ramakrishna&Sons Ltd. [supra) where it was held that trial run was sufficient to allow the assessee's claim for development rebate. He further relied on the latest decision of the Calcutta High Court in Kanoria General Dealers Ltd. 's case (supra) where experimental production was held to be part of business. The learned counsel also relied on the decision of the Calcutta High Court in the case of Inchek Tyres Ltd. (supra) at pages 939 and 940. He also referred to other decisions where it had been held that actual commencement of production was not necessary to qualify for the deduction of depreciation and other allowances and also expenditure.
12. Shri Poddar, therefore, argued that the order of the C.I.T. (Appeals) was based on a correct appreciation of the facts in the light of the case law bearing on the subject and, therefore, the same should be upheld.
13. We have carefully examined the contentions set out above in the light of the materials contained in the assessee's paper book and the decisions relied on by the assessee's learned counsel.
14. The question for our consideration in the present case is whether the assessee's new plastic unit set up at Sahibabad, U.P. could be said to have commenced production in the month of March 1985 when it started trial production, as claimed by the assessee. According to the revenue, as the trial production had not resulted in any final product of a marketable quality, it could not be held that the assessee had commenced production of plastic bags in its new unit in March 1985 in order to qualify for deduction of the various allowances of expenditure and depreciation, additional depreciation and investment allowance while the assessee contends that it is sufficient compliance with requirement of law and that it is entitled to all these deductions and allowances as claimed by it.
15. The latest decision on this subject of commencement of business is the decision of the Supreme Court in CIT v. Sarahhai Management Corpn. Ltd. [1991] 192 ITR 151. In this case, the assessee-company had acquired an immovable property on 28th March, 1964, carried out repairs, rewiring, installation of lifts etc. for the purpose of converting the residential accommodation to business and storage accommodation to render the premises more serviceable to its licensees and lessees. The assessee claimed that it was in a position to offer services to licensees on and from October 1, 1964 and claimed deduction in computing its profits, of expenditure incurred by it between October 1, 1964 and March 31, 1965, comprising mainly salaries to gardeners, servants and others, repairs and rewiring, legal and stationery charges, registration, printing, stationery and conveyance charges. The Income-tax authorities and the Appellate Tribunal rejected the claim of the assessee holding that the respondent could not be said to have been ready to commence business prior to May 1, 1965, the date on which it gave on leave and licence basis, a part of the building. On a reference, the Gujarat High Court reversed the decision of the Appellate Tribunal and allowed the respondent's claim for deduction holding that from October 1, 1964, the respondent could be said to have commenced its business activity, viz., to put the building accommodation and lands and gardens into proper shape and set up the appurtenant services so that the property could be given on leave and licence basis and that, therefore, the respondent had commenced business from October 1, 1964 and the expenses incurred thereafter were allowable as business expenditure. On further appeal by the Department, the Supreme Court affirmed the decision of the Gujarat High Court, (which is Sarabhai Management Corpn. Ltd. v. CIT [1976] 102 ITR 25), in the following words at page 153 of the reports :
However, the High Court has pointed out rightly, in our opinion, that, in this case, the Tribunal has proceeded on a misapprehension regarding the nature of the assessee's business. It has analysed the various component activities of the assessee's business and pointed out that two categories of the activities of the business had been carried on during the previous year in question. The assessee had purchased a property; it was on the look out for persons to whom it could be let out; it had been able to get a customer; and it had carried out repairs, retiring, installation of lift and other steps in the process of getting the premises converted from a residential house into a business and storage accommodation conforming to the requirements of the customer. Even if, as submitted by Dr. Gauri Shankar, the first category of activity referred to by the High Court, viz., the acquisition of a property for being let out can be said to be only a preparatory stage {analogous to the acquisition of buildings, plant and machinery in a manufacturing business), the subsequent activities certainly constitute activities in the course of the carrying on of the assessee's business. It would not be correct, as rightly pointed out by the High Court, to treat the assessee as having commenced its business only when the licensee or lessee occupied the premises or started paying rent. In these circumstances, we are of the opinion that the High Court was right in interfering with the finding of the Appellate Tribunal which was based on a misdirection in law.
16. The next decision we would like to refer is the recent decision of the Calcutta High Court in Kanoria General Dealers (P.) Ltd. 's case (supra). In this decision, it has been held that where a business unit has been set up by the assessee, which is ready to commence production, the assessee will be entitled to claim deduction of expenditure and the expenditure cannot be disallowed on the ground that the same had been incurred prior to the commencement of the actual business of commercial production. The facts of this case show that the production in that case during the period relevant for the assessment year 1966-67 was only on an experimental basis. The Hon'ble Calcutta High Court upheld the decision of the Tribunal allowing the assessee's claim for depreciation and other deduction of expenditure for the assessment years 1966-67 and 1969-70 by following the decisions of the Supreme Court in the case of CWT v. Ramarqju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 and their earlier decision in the case of Incheck Tyres Ltd. {supra).
17. The decision of the Madras High Court in V. Ramakrishna & Sons Ltd, 's case (supra) is authority for the proposition that in order to obtain development rebate under Section 33 of the Income-tax Act, 1961, what is required is that the plant or machinery after installation must be used or first put to use for the purpose of the assessee's business and the section does not require that even in the very year of installation or in the year of first user, the assessee must be carrying on the said business and that it is enough that the installation and the first user are for the purpose of the assessee's business. The facts of the case showed that the factory was run by the assessee on an experimental basis and some quantity of spun pipes was actually turned out from the machines which was held to be sufficient user for the business in order to qualify for the allowance of development rebate under Section 33 in respect of the plant and machinery and also for the deduction of the expenses and losses incurred by the assessee year after year.
18. In Prem Conductors (P.) Ltd. v. CIT [1977] 108ITR654, the Gujarat High Court has held that for deciding when a company could be said to have set up its business, what the court has to consider is, in the light of the decisions in the cases of CIT v. Saurashtra Cement & Chemical Industries Ltd. [1973] 91 ITR 170 (Guj.) and Sarabhai Management Corpn. Ltd.'scase {supra), whether the business of the assessee consists of different categories and whether the activity which was started earlier than the actual commencement of the production could be said to have been an essential part of the business activity of the assessee and that the company could be said to have set up its business from the date when one of the categories of its business is started and it is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. Their Lordships held that the test to be applied is as to when a businessman would regard a business as being commenced and the approach must be from a commonsense point of view. In the case before the Gujarat High Court, the assessee had taken over the running business of another company as a going concern with all its assets including a contract dated 24-10-63 worth Rs. 60 lakhs from the Madras State Electricity Board and other similar contracts. Since selling the goods manufactured by the company is an important part of the business activity, the Gujarat High Court held that it could be said that the assessee-company commenced its business and that its business was set up when it started securing orders against further production, that one business activity may precede another and that what is required to be seen is, whether one of the essential activities for the carrying on of the business of the assessee-company as a whole was or was not commenced and that in that case, the company had commenced its business by securing orders first and going into production later on.
19. We would like to refer to one more decision, viz., that of the Bombay High Court in the case of CIT v. Industrial Solvents & Chemicals (P.) Ltd. [1979] 119 ITR 608. In this case the Department disallowed the assessee's claim for deduction of expenditure on trial production because the end-product obtained by the assessee was of sub-standard quality and was not marketable. There were two reports regarding the production process as well as the quality of the end-products. The first report was relevant for the period 9th June, 1961 to 24th June, 1961 and the report relevant to this period showed that the end-product obtained was hopelessly low in quality in securing any material result and, therefore, the said report must be read to indicate that almost nothing was obtained. It must be mentioned here that in the said case the assessee was in the business of production of ether. However, the next report for the period 19thAugust, 1961 to 11th September, 1961 gave a different picture which showed that some quantity of finished product was obtained though it was not proper standard of marketable quality. The Department argued before the Bombay High Court that this would not be sufficient to hold that the assessee had commenced production of ether in its factory. Rejecting this contention of the Department, the Bombay High Court held as follows at page 615 of the reports :
It is true that when the end-product obtained during this period was sent to the analysts, Italab Private Ltd., for analysis, it was opined by Lhe laboratory that the sample did not comply with the prescribed standards of quality of B.P. test 1958 with respect to non-volatile matter. As a matter of fact, even earlier some ether obtained in June 1961 was submitted to the same analysts and an identical conclusion had been reached by them. The position then is that in August 1961, the plant had commenced operation but the end-product was sub-standard and hence obviously not marketable. It is in this context that Mr. Joshi on behalf of the revenue has urged that even in August 1961, the business of the assessee could not be said to have been set up, although the plant was being worked, inasmuch as a proper standard marketable end-product had not been obtained. We are afraid that if this test as suggested by counsel is accepted, we would be taking an unrealistic view of the requirements of the statutory provisions.
Their Lordships ultimately held that the proper view to take would be to hold that the assessee could be regarded as having set up its business by 19th August, 1961, which would mean that it would be entitled to the expenses incurred thereafter as expenses incurred in the course of its business and that on the same basis the department should determine depreciation and development rebate admissible to the assessee-company.
20. When we examine the facts of the present case in the light of the aforesaid authorities, we find that the assessee-company in the present case has really commenced its trial production in the month of March 1985 which falls within the accounting year ended 31st March, 1985 relevant for the assessment year 1985-86. In the Director's report, it is mentioned that trial run was commenced at its woven sack factory, as could be seen from the statistical data "C-2" at page 183 of the assessee's paper book. Para 7 of Schedule "F" of the annual accounts which contained the notes annexed to and forming part of the Balance Sheet and Profit & Loss Account for the period ended 31st March, 1985, at page 181 of the compilation reads as follows:
7. During the year the company has debited its Profit and Loss Account an amount of Rs. 19,26,080.92 in respect of pre-commissioning expenses [including trial run expenditure) of its Plastic Unit and depreciation of Rs. 1,16,80,172.16 has been provided on the said Unit although the commercial production has not been started during the year resulting in understatement of profit for the year by Rs. 1,36,06,253.08. The above amount has been included under different functional heads as follows:
Thereafter the details of the expenses under the 11 heads are set out which are the same as set out in the assessment order which we have already quoted in paragraph 2 above. At page 156, the Auditors have given a qualified report and one of the items of qualification in item No. 8 reads as follows: (8) capitalisation of pre commissioning expenses (including trial expenditure) of its plastic unit and provision for depreciation on the said Unit although no commercial production has been started during the period and the consequential impact as indicated in Note 7 of Schedule F There is no dispute that all these materials, viz., Auditor's report, final accounts and notes on accounts, were filed along with the return of income by the assessee. In fact, the ITO has relied on these materials only to reject the assessee's claim to hold that there is no expenditure claimed by the assessee for fuel consumption or for energy charges for running the trial production in its new factory at Sahibabad. It is this point made by the ITO that was sought to be met by the assessee before the CIT (Appeals) by pointing out that the ITO made no such enquiry in the course of the assessment proceedings in order to call for any material in support of the same. This is clear from the following sentences in paragraph 2 of the C.I.T. (Appeals)'s order:
He did not however specifically ask the appellant to explain this matter. He also observed without prejudice to the finding of non-commencement of the trial production of the unit during the assessment year 1985-86, that trial run of a unit would not entitle the appellant to any allowance on account of depreciation, additional depcn.. and investment allowance in respect of the assets of the new unit. According to the ITO, unless there is any commercial production it cannot be accepted that the assets have been brought into use by the appellant in its business. Without such actual business and commercial production giving rise to profits, the aforesaid reliefs could not be allowed. The trial run or pre-operation expenses should also be treated as capital and not to be deducted as revenue expenses.
21. It is in the above context that the C.I.T. (Appeals) examined the various pieces of evidence that were produced before him and put the same to the Assessing Officer who was present at the time of hearing of the appeal. The first piece of evidence that is relevant for our purpose is the report of commencement of production sent by the assessee on 24-12-1985 to the Development Officer, Plastic Directorate, Directorate General of Technical Development, Udyog Bhawan, New Delhi, a copy of which appears at pages 52 to 54 of the assessee's paper book. In this letter, the assessee has stated that they had commenced trial production in the month of March 1985 and commercial production with effect from April 1985. They have also furnished the production figures monthwise from April '85 to November '85 in Appendlx-I proforrna duly filled in with the relevant details. They had requested for renewal of their DGTD registration which was valid till 6-1-1986. In the Proforrna Appendlx-I, a copy of which is at page 53 of the assessee's paper book, it is stated against the entry 6 requiring the date of commencement of production of each of the items for which registration has been granted and details of production achieved so far, the assessee has stated "March 1985, capacity level production achieved in September 1985 was 25,95,874. Production for each month from March 1985 to November 1985 is attached".
It would be noticed that the installed capacity per annum is shown as 30 million Nos. of HDPE/PP Woven Sacks against entry No. 5 which is above entry No. 6. On the next page monthwise production of bags from March 1985 to November 1985 is given. The total number of bags in March 1985 was 17,482. However, from April 1985, the production rose to 1,95,012 and thereafter gradually to 25,95,874 in September 1985. These details are referred to by the C.I.T. (Appeals) in his order. There can hardly be any dispute that these figures which have been furnished by the assessee to the Directorate General of Technical Development of the Govt. of India represent contemporaneous evidence which have been accepted by another wing of the Government of India concerned with the actual production of these plastic bags. Pages 46 and 48 of the paper book give the datewise production figures with particulars of raw materials consumed, wastage etc. from 1-3-1985 to 29-3-1985. We are unable to agree with the Revenue that these figure should not be accepted, because they are all self-serving documents. On the contrary, we find that the Department has not been able to find any discrepancy in these figures of production recorded by the assessee in its books of accounts and subsidiary records.
22. The next important piece of evidence is the E.S.I, registration and demand in respect of this plastic division at Sahibabad which shows that it has been registered from 1-3-1985. There can hardly be any dispute about the genuineness of this document. On the next page, page 51, we have a copy of the Factory Licence granted by the U.P. Government to the Sahibabad Factory with effect from 1-3-1985. On other important piece of evidence is an order received from the Fertilizer Corporation of India, Marketing Division, Jodhpur dated 25-2-1985 placing an order for 2,50,000 bags on a tender submitted by the assessee on 7-2-1985. According to this letter, the bags were to be delivered before 31-3-1985 and it is specifically stated that delivery schedule is the essence of the order. The Fertilizer Corporation has further stated in this letter that further schedules and firm purchase order shall be intimated very shortly. They had also enclosed the logo of printing matter for the bags required by them. Obviously it is in the light of this order received by them on the tender submitted to the Fertilizer Corporation of India Ltd. the assessee started expediting its production of plastic bags at its Sahibabad Unit.
23. Pages 3 to 9 of the assessee's paper book give the complete particulars of the plant and machinery of the value of Rs. 5.88 crores installed in its factory. There is no dispute that these details were filed with the I.T.O. Pages 14 to 28 of the paper book relate to commissioning of this new Plastic Unit at Sahibabad. There are four sets of production units which are commissioned one by one by Lohia Starlinger Pvt. Ltd., Kanpur, as could be seen from their letters dated 10-2-1985,20-2-1985, 10-3-1985 and 28-3-1985. These letters establish that Lohia Starlinger Pvt. Ltd. had erected the manufacturing plant machines, installed them and commissioned them, that trial runs of all the machines were also done and completed in the presence of the assessee's Engineers and they have requested the assessee to take over the plant forthwith and release all balance payments due to them.
24. At pages 13Aand 13B, the assessee has furnished the dates of receipts of the various items of machines, their trial run completion and commissioning and nothing has been said by the I.T.O. anywhere to find that these facts are incorrect or that they are not true.
25. The only objection of the I.T.O., as pointed out by the C.I.T. (Appeals), was that there was no expenditure claimed for fuel consumption or energy consumption for running these machineries. For this also, the assessee has placed materials before the C.I.T. (Appeals) to establish that it has purchased two separate Generators which were received by it on 30-10-1984 and 12-11-1984, as could be seen from the receipts of the Raj Transport Co. for transport of these Generators from Delhi to Sahibabad. On page 33 of the assessee's paper book, full and complete particulars regarding the purchase of diesel of 24,000 ltrs. for Rs. 81,360 from two suppliers, Sangam Service Centre and Chemlco (India), are furnished. There is no dispute about the genuineness of these purchases of diesel as they are properly supported by valid bills issued by the suppliers, copies of which are at pages 34 to 43 of the assessee's paper book. The assessee has also furnished separate Profit & Loss Account and Balance Sheet as at 31st March, 1985 for this plastic unit at Sahlbabad and filed the same with the I.T.O. In the course of the assessment proceedings. This is also accepted by the I.T.O., as could be seen from para 1 of the assessment order wherein the particulars taken from these separate statements of Profit & Loss Account are set out by him while considering the present claim of the assessee. In paragraph 7 of the appellate order, the C.I.T. (Appeals) has expressly stated that the details of purchases of diesel of 12,000 ltrs. during the month of March 1985 for purposes of operating the plastic unit plant with the help of Generators purchased well before March 1985 during the assessment year 1985-86 were shown to the Assessing Officer who was present at the time of hearing of the appeal and that he was satisfied with the evidence thus produced by the assessee for incurring all expenses on account of fuel for operating the plastic unit on trial run during the assessment year 1985-86. The Commissioner also held that even otherwise substantial justice required that legitimate claims of substantial magnitude are not rejected by the Assessing Officer on inadequate material without affording proper opportunities to the taxpayer to put forward its case. Thereafter, the Commissioner discussed the materials that were called for by him regarding the break-up of the expenses incurred under the trial run, the quantitative details of purchases of raw materials, the consumption thereof, the closing stock of such materials, finished products, the input-output ratio of raw materials to finished products in the month of March 1985 and April 1985 to June 1985 and after examining the same came to the conclusion that except for the shortage of 5.372 Metric Ton in the import of various polypropylene granules from Norway to Calcutta, the remaining expenses claimed by the assessee in the course of the trial production will have to be allowed and that the loss in transit of 5.372 M.T. of the raw materials could not be allowed as a deduction till the fate of the assessee's claim with the Insurance Co. was known, as held by the Supreme Court in Associated Bank Corpn. of India Ltd. v. CIT [1965] 56 ITR 1. In paragraph 8 of his order, the Commissioner then examined the reasonableness of the diesel consumption for the trial production as claimed by the assessee and found that the diesel consumption Meter showed a reading of 386.6 for March 1985 and that for 384.6 hours the theoretical consumption would be 21,538 ltrs. that there was sufficient diesel to account for the above consumption even granting that the same was not consumed wholly for plastic unit and that the diesel purchases of 24,000 ltrs. had been entered under miscellaneous items of purchases amounting in all to Rs. 2,26,498 and that the details of the same were furnished by the assessee. Again in paragraph 8, the Commissioner has specifically referred to the fact that all the materials that were produced before him by the assessee in the course of the appeal hearing were perused by the Assessing Officer as well and that they were further examined by him also. As a result of this examination of the various materials, the Commissioner came to the conclusion that there was nothing to controvert the assessee's claim that it had commenced its trial production in its plastic unit at Sahibabad during March 1985 relevant for the assessment year 1985-86, that on the only reason given by the I.T.O. for doubting the commencement of the trial production, viz., absence of expenses by way of fuel charges for operating the plant at Sahibabad also, it had been already found that such an assumption made by the Assessing Officer was contrary to facts and evidence produced by the assessee in the course of the hearing of the appeal which were verified by him and the Assessing Officer. These findings of fact recorded by the C.I.T. (Appeals) on a careful examination of the relevant evidence and materials that were placed by the assessee both before the Assessing Officer and the C.I.T. (Appeals) have not been controverted before us by the Revenue. Apart from stating that the revenue must be given another opportunity to examine the materials once again, the Department was unable to point out any fact or circumstances which were wrongly appreciated by the C.I.T. (Appeals) without affording a reasonable opportunity to the Assessing Officer as required by Rule 46A of the Rules. On the contrary, a perusal of the appellate order shows that the C.I.T. (Appeals) has scrupulously observed the requirements of law prescribed under Rule 46A by putting the materials produced by the assessee to the Assessing Officer at the time of hearing of the appeal. Not only that, the C.I.T. (Appeals) again examined them with the help of the Assessing Officer to satisfy himself about the correctness and truth of the assessee's claim. In the absence of any material or evidence or circumstance pointed out by the Revenue, we are unable to appreciate and find anything wrong in the reasoning and conclusion of the C.I.T. (Appeals) which are supported by valid materials brought on record before the Departmental authorities. In our view, there is no justification or purpose in sending the matter back to the Assessing Officer for further verification of all the materials referred to above which have already been examined by the departmental authorities, viz., the Assessing Officer and the C.I.T. (Appeals). We have also looked into the copies of those materials which are contained in the assessee's paper book and we are satisfied that the conclusions arrived at by the C.I.T. (Appeals) are correct and they do not call for any interference at our hands.
26. Shri B. Biswas for the Revenue contended that under Section 32(1) of the Act, depreciation is admissible only in respect of assets "which are used for the purpose of the business", and that mere trial production would not be sufficient to entitle the assessee to claim deduction of depreciation allowance and other allowances. For this, he relied on the decision of the Gujarat High Court in CIT v. Suhrid Geigy Ltd. [1982] 133 ITR 884. This argument of the Revenue was met by Shri Poddar, the assessee's learned counsel, by pointing out that this decision of the Gujarat High Court was contrary to the two decisions of the Calcutta High Court In the case of Incheck Tyres Ltd. (supra) and in Kanoria General Dealers (P) Ltd. (supra) and that further this decision was also contrary to other decisions of the Gujarat High Court in Hotel Alankar v. CIT [1982] 133 ITR 866 at page 877 and CIT v. Speciality Paper Ltd. [1982] 133 ITR 879. He further pointed out that the Supreme Court in the case of CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 has approved the decision of the Bombay High Court in the case of Western India Vegetable Products Ltd. v. CIT [1954] 26 ITR 151. He, therefore, argued that we should follow these decisions which are in favour of the assessee in preference to the decision of the Gujarat High Court judgment in the case of Suhrid Geigy Ltd. relied on by the learned Departmental Representative.
27. On the facts of the present case which we have discussed above, it would be clear that the assessee-company had not only set up its new plastic unit at Sahibabad during the year under appeal but had also commenced trial production in March 1985 within the accounting period. In fact, we have already referred to the statements submitted by the assessee to the Director General of Technical Development reporting the commencement of production from March 1985 and requesting for renewal of its licence which was valid up to 6-1-1986. In the light of these facts, we are of the considered view that the decision of the Gujarat High Court in the case of Suhrid Geigy Ltd. (supra) relied on by the Departmental Representative is inapplicable to the facts of the present case and is of no avail to the Revenue. On the contrary, we have the direct authority of two decisions of the jurisdictional High Court, namely, Calcutta High Court, in the case of Incheck Tyres and in the case of Kanoria General Dealers (P.) Ltd.(supra) which we have already discussed above. Apart from these two decisions of the Calcutta High Court, the Gujarat High Court has also explained in Hotel Alankar's case (supra) their earlier decision in the case of Speciality Paper Ltd. (supra) which is reported as an Appendix to the said judgment at Speciality Paper Ltd.'s case (supra).
At the bottom of page 877, Their Lordships have held as follows:
...The decision in Speciality Paper Ltd.'s case turns on its own facts which were very eloquent and which we have enumerated in our decision. The company there had gone into a trial production and in the test and trial which they had taken for purposes of deciding whether they would be able to achieve the commercial production and produce the product for which the business was set up, namely, of speciality paper, they found that the entire effort had misfired and unless some additional plant was erected and also the capacity raised, the company was not able to continue the business of production. It was in those facts that since the company could not achieve the quality or the quantity of the product for making it a commercial production that the Division Bench of this court held that in the peculiar facts and circumstances of that case the company could not have been said to have set up the business. In our opinion, therefore, that decision turns on its own facts and would not be of any assistance to the case of the revenue here.
28. In our view, this decision of the Gujarat High Court in Hotel Alankar's case fully supports the assessee's case. As rightly pointed out by the assessee's learned counsel, the decision of the Supreme Court in Ramaraju Surgical Cotton Mills Ltd. 's case (supra) fully supports the assessee's case. In this decision it has been held by the Supreme Court that a unit cannot be said to have been set up unless it is ready to discharge the function for which it is being set up and that it is only when the unit has been put into such a shape, that it can start functioning as a business or a manufacturing organisation that it can be said that the unit has been set up. Applying the above test to the facts of the present case, we are satisfied that the assessee-company had not only set up its new industrial unit for manufacturing plastic bags under the name "Paharpur Plastics" at Sahibabad in the year of account but also it commenced production of such plastic bags in the new industrial unit from March 1985 when it started its trial production in this new factory. We, therefore, respectfully follow these decisions which are in favour of the assessee and held that the CIT (Appeals) was right in directing the Assessing Officer to allow to the assessee-company depreciation, additional depreciation and investment allowance in respect of the value of the assets of the plastic woven sacks unit used in trial production as claimed by the assessee, subject to verification of the arithmetical accuracy of the deduction claimed by the assessee, the admissible rate of depreciation, additional depreciation, investment allowance claimed and the satisfaction of the conditions like creation of necessary reserve for investment allowance. We further hold that- the Commissioner was also right in holding that as regards the expenses on trial production, all the expenses incurred after setting up of business but prior to commercial production should be allowed as a deduction except the losses due to shortage and transfer of raw materials. Accordingly, we confirm the order of the CIT (Appeals) and reject ground No. 1 in the Revenue's appeal.
29. In ground No. 2, the Revenue's objection is to the decision of the CIT (Appeals) deleting the addition of Rs. 10,49,077 which was made by the ITO on account of loss of interest on loans given at concessional rates to the Directors and their relatives by the assessee-company. The ITO found that the assessee had claimed a sum of Rs. 15,08,985 as interest payments on loans borrowed for the purpose of its business. He further found that on the advances made by the company to its Managing Director and his family members, the company charged interest at 6 per cent only and that in respect of other loans and advances to certain persons, like the son-in-law and the daughter of the Managing Director and certain other associate concerns, the loans and advances were interest-free. The ITO, therefore, estimated the interest on these loans and advances made by the assessee-company at 18 per cent as a reasonable rate of interest and arrived at the figure of Rs. 10,49,077 which should have been charged by the assessee-company from these persons and to this extent there was under-charge of interest by the assessee. He, therefore, disallowed this amount as non-business expenditure out of the interest payments made by the assessee-company.
30. The CIT (Appeals) deleted this addition by following his order for the earlier years 198384 and 1984-85 wherein he had deleted similar disallowances made by the ITO on the ground that there was no nexus between the interest paid on borrowings and the interest-free or concessional rate of advances made by the assessee-company to its Directors and their close relatives and certain other concerns. The Commissioner held that the assessee-company had large reserves besides share capital and that the borrowings were much less as compared to the interest-free fund available in the business and that further the profit of the year before depreciation etc. itself was more than Four crores of rupees. The Commissioner, therefore, concluded that the advances thus had been given from interest-free funds including profits in the business and the concessional rate of interest collected thereon had no bearing on interest payments on borrowings made for business purposes. The Commissioner pointed out that under Section 36(l)(iv) of the Act, all that was necessary was to prove that there was a borrowing by the tax-payer and that the same was for the purpose of the business carried on by the assessee-company. The Commissioner held that the ITO had not found that any portion of the borrowings on which the interest had been claimed by the assessee had, in fact, been diverted for making the advances to the close relatives of the Directors of the company or the associate concerns and that, therefore, the interest as claimed by the assessee became an admissible deduction. He further held that on the advances made by the assessee to others, there is no provision for estimating any interest income that could have been earned but was not in fact earned. He, therefore, deleted the addition of Rs. 10,49,077 made by the ITO which is being objected to by the Revenue in the present ground.
31. The learned Departmental representative argued that in the assessment year 1983-84, this issue has been restored by the Tribunal to the file of the Assessing Officer with a direction that he should examine the availability of the assessee's own funds for advancing loans to Directors and their relatives and on the basis of such findings, a fresh decision should be taken in this regard. He, therefore, submitted that this matter should also be sent back to the Assessing Officer for making a similar enquiry in this year also.
32. The learned counsel, Shri N.K. Poddar, opposed these submissions of the learned Departmental Representative and submitted that there was no need for sending back the matter to the Assessing Officer in the year under appeal as the assessee had proved before the departmental authorities already that no portion of the borrowings in the year under appeal had been diverted for non-business purposes and that the CIT (Appeals) had accepted the assessee's contentions only after looking into the materials that were placed by the assessee in support of its contention. For this, the learned counsel relied on the statement at page 184 of his compilation containing the details of advances (closing balances) to Directors and associates from 1974-75 to 1984-85 accounting years and pointed out that during the year under appeal, the assessee had secured loans of Rs. 39,39,140 representing foreign exchange loan from a financial institution secured by hypothecation of imported machinery and there were unsecured loans of Rs. 1,67,539 taken by the assessee during the year. As against this, the learned counsel pointed out that the loans and advances to the Directors and other associates were Rs. 41,38,704, that these loans and advances were coming from the earlier assessment years starting from 1976-77 assessment year onwards and that the increase in these loans and advances were also due to the accrued interest debited in these accounts and not due to any fresh loans or advances made by the assessee during the year under appeal. He, therefore, submitted that there was no diversion of borrowed moneys on interest by the assessee-company for non-business purposes as assumed by the Revenue to justify the disallowance of Rs. 10,49,077 made by the ITO. The learned counsel submitted that the assessee was entitled to this deduction on the authority of the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723. He further relied on the findings of the Tribunal in paragraph 3 of the order of the Appellate Tribunal at pages 55 to 61 of his compilation in the case of two Directors of the assessee-company wherein the Tribunal had accepted the factual position that the loans and advances made to them by the company were out of its own funds and not out of borrowed funds about 15 years back and, therefore, it was held that there was no question of any perquisite allowed by the company to the Directors as held by the Calcutta High Court in the case of CIT v. P.R.S. Oberoi [1990] 183 ITR 103. Relying on these materials and decisions the learned counsel argued that there was no need or necessity for sending the matter back to the ITO in the year under appeal and that the order of the CIT (Appeals) should be upheld.
33. In Madhav PrasadJatiav. CIT[ 1979] 118 ITR 200 the Supreme Court held as follows while explaining the scope of the deduction allowable under Section 10 (2) (iii) or Section 10(2)(xv) and Section 12(2) of the Indian Income-tax Act, 1922 corresponding to Section 36(l)(iv), Section 37(1) and Section 57(iv) of the Income-tax Act, 1961, respectively, at page 208 of the Reports :
Proceeding to consider the claim for deduction made by the assessee under Section 10(2)(iii) or Section 10(2)(xv), we may point out that under Section 10(2)(tii), three conditions are required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital, namely, (a) that money (capital) must have been borrowed by the assessee, (b) that it must have been borrowed for the purpose of business, and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. As regards the claim for deduction in respect of expenditure under Section 10(2)(xv), the assessee must also satisfy three conditions, namely, (a) it (the expenditure) must not be an allowance of the nature described in Clauses (i) to (xiv), (b) it must not be in the nature of capital expenditure or personal expenses of the assessee, and (c) it must have been laid out or expended wholly and exclusively for the purpose of his business. It cannot be disputed that the expression 'for the purpose of business' occurring in Section 10(2)(iii) and also in Section 10(2)(xv) is wider in scope than the expression of the Act and, therefore, the scope for allowing a deduction under Section 10(2)(iii) or Section 10(2)(xv) would be much wider than the one available under Section 12(2) of the Act. This court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) has explained that the former expression occurring in Sub-sections 10(2)(iv) and 10(2)(xv), its range being wide, may take in not only the day-to-day running of a business but also the rationalisation of its administration and modernisation of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a pre-condition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business but, however, wide the meaning of the expression may be, its limits are implicit in it; the purpose shall be for the purpose of business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business.
34. When we examine the facts of the present case in the light of the aforesaid principles laid down by the Supreme Court, we find that no portion of the borrowed funds of the assessee-company had been utilised for non-business purposes as assumed by the ITO for the purpose of making this addition. In fact, in the assessment order, the ITO himself accepts that the payment of interest to the extent of Rs. 10,49,077 was in the interest of the business and was, therefore, for the purpose of the business. The ITO's objection is that the assessee could have easily avoided the payment of this interest if it had not advanced the various loans and advances to the Managing Director and other Directors and their close relatives and their associate concerns and thus the assessee could have avoided this expenditure for payment of interest. As rightly pointed out by the CIT (Appeals), the assessee cannot be compelled to charge interest from others if it does not want to do so, nor can any addition be made of a notional income which the assessee had not received at all, based on certain assumption of facts. No material has been placed before us by the Revenue to point out that the findings of the CIT (Appeals) in paragraph 11 of his order were incorrect and not based on any proper appreciation of the materials and evidence in the present case. On the contrary, the statement at page 184 of the assessee's paper book clearly establishes that these advances and loans were made by the assessee-company in earlier years commencing from 1-11-1974 to 31-10-1975 relevant for the assessment year 1976-77 and that no portion of the borrowed funds during the year under appeal had been advanced to the Managing Director or other Directors or their relatives or to their associate concerns. In fact, it is not the case of the ITO that he had found on an examination of the borrowings made by the assessee-company during the year under appeal, which had been specifically advanced to any of these persons as loans and advances during the year under appeal. On the other hand, the loans and advances are secured loans against purchase of machinery from abroad under foreign exchange loan from a financial institution to the extent of Rs. 39.39 lakhs while unsecured loans were Rs. 1,67,539. Therefore, there was no question of any portion of the borrowed funds which the assessee had raised on payment of interest being diverted for non-business purposes during this year to justify the disallowance made by the ITO. We have looked into the order of the Appellate Tribunal for the earlier assessment year 1983-84 relied on by the learned Departmental Representative. We find that the Tribunal had sent back the matter because the Assessing Officer had not looked into the facts correctly for that year. But so far as the present appeal is concerned, we find that the matter has been presented to us just to show that no portion of the borrowed funds had been utilised for non-business purposes. It, therefore, follows that there is no need or necessity for sending back the matter to the Assessing Officer for the year under appeal. We, therefore, agree with the reasoning and conclusion of the CIT (Appeals) and confirm his order on this point by following the ratio of the decision of the Supreme Court in Madhav Prasad Jatia's case (supra) referred to above. Accordingly, this ground is rejected.
35. In ground No. 3, the Revenue objects to the order of the CIT (Appeals) directing the ITO to allow sales-tax etc. even if those amounts were actually paid after the expiry of the relevant previous year. According to the Revenue, this decision of the CIT (Appeals) is completely against the provisions of Section 43B of the Income-tax Act, 1961. The ITO had disallowed a sum of Rs. 53,49,677 under Section 43B of the Act. This amount represented West Bengal sales-tax, Central sales-tax, turnover-tax, customs duty, Corporation tax, Bombay sales-tax, Faridabad sales-tax and excise duty as well as Provident Fund contribution amounts. The CIT (Appeals) after examining the assessee's contentions in the light of the materials produced before him, held that the assessee's objections were well-founded. In respect of statutory liabilities like West Bengal sales-tax, Central sales-tax etc., CIT (Appeals) held that if they became due for discharge beyond the accounting year relevant for the assessment year 1985-86 and had been paid accordingly in time in the subsequent year, no disallowance of such liabilities should be made during the assessment year 1985-86. So was the case with Provident Fund, E.S.I., and pension fund of the employer's contribution. He, however, confirmed the disallowance of customs duty of Rs. 5,66,337 and Corporation tax of Rs. 4,42,597 and the turnover-tax of Rs. 87,512 and there is no dispute in respect of these three items in the present appeal. Regarding the other disallowances made under Section 43B, the Commissioner directed the ITO to individually re-examine each of the items in the light of his directions and verify the actual dates of payments of such liabilities. If the liabilities had not been provided for in the accounts during the year or had been carried forward from the earlier year, they could not be disallowed during the assessment year 1985-86. He further held that the ITO would, therefore, reconsider the actual amount to be disallowed under Section 43B of the Act after giving proper opportunity to the appellant in this regard and in the light of his foregoing observations. This is being objected to by the Revenue in the present appeal in ground No. 3.
36. On behalf of the Revenue, reliance was placed on the Special Bench decision in the case of RishiRoop Chemical Co. (P.) Ltd. v. ITO [ 1991] 36ITD 35 (Delhi). On behalf of the assessee, reliance was placed on the decision of the Patna High Court in Jamshedpur Motor Accessories Stores v. Union of India [1991] 189 ITR 70 and also on the latest decision of the Calcutta High Court in the case of CIT v. Sri Jagannath Steel Corpn. [1991] 191 ITR 676. The assessee also relied on the decision of the Kerala High Court in CIT v. P. Janardhanari Pillai [1991] 189 ITR 165 as in its favour. The assessee's learned counsel further pointed out with reference to page 63 of his paper book that pursuant to the directions contained in the order of the CIT (Appeals), the Assessing Officer had examined the assessee's claim and allowed the same in respect of West Bengal sales-tax amounting to Rs. 55,225, Central sales-tax of Rs. 6,62,607, Faridabad sales-tax of Rs. 7,960, excise duty of Rs. 31,60,366 and Provident Fund of M. Swarup of Rs. 29,508 and, therefore, the Department can have no grievance on this issue. He further submitted that this order has been passed by the ITO after verifying the correctness of the assessee's claim that these amounts were paid within the statutory time limits as directed by the CIT (Appeals). On behalf of the Revenue, it was submitted by the learned Departmental Representative that as the decisions of the Calcutta and Patna High Courts have not become final, they want to keep this issue alive so that the matter can be taken up on further appeal to the Supreme Court.
37. In this ground, we are not concerned with the amount of Rs. 31,60,366 in respect of excise duty for which a separate ground is taken by the Revenue as ground No. 4 which we shall deal with separately. Regarding the other items, such as West Bengal sales-tax, Central sales-tax, Faridabad sales-tax and Provident Fund contribution of M. Swarup, the submissions of the learned counsel for the assesee are found to be correct from the order passed by the A.C.I.T. on 26-12-1988 at pages 62 to 64 of the assessee's compilation. There is no dispute that this issue is now concluded by the decision of the jurisdictional High Court in the case of CIT v. Sri Jagannath Steel Corpn. [1991] 191 ITR 676 (Cal.). Respectfully following this decision, we confirm the order of the CIT (Appeals) and reject this ground.
38. In ground No. 4, the objection of the Revenue is that the CIT (Appeals) erred in holding that the excise duty of Rs. 31,60,366 was not disallowable under Section 43B of the Act. According to the Revenue, the CIT (Appeals) did not allow any opportunity to the Assessing Officer to examine any remission particularly when no details were furnished before the Assessing Officer but were placed before the CIT (Appeals) for the first time and that, therefore, there was a contravention of Rule 46A of the Income-tax Rules, 1962. The same objection was reiterated before us by the learned Departmental Representative, but we find no force in the same. As rightly pointed out by the assessee's learned counsel, the sum of Rs. 31,60,366 represents the amounts brought forward from the earlier years, as could be seen from the particulars furnished at page 65 of the assessee's paper book. The assessee's learned counsel has also filed before us a copy of the excise duty Item 33 Fans for the accounting year ending on 1 -1 -1984 and for Item 68. Both these accounts show an opening balance of Rs: 25,13,371.94 and Rs. 6,52,412.19 as on 1-11-1982. Thus, it is clear that these Central excise amounts represent the balances carried forward from the earlier years from 1-11-1982 when Section 43 B was not in the Statute Book. Therefore, there was no question of adding back this amount of excise duty by Invoking Section 43B of the Act which is inapplicable to the same. We also hold that there was no contravention of Rule 46A by the CIT (Appeals) as all the facts are already on record and no fresh evidence or additional evidence had been admitted by the CIT (Appeals) for allowing the assessee's claim. The CIT (Appeals), therefore, rightly deleted this amount as not falling within the mischief of Section 43B of the Act. We agree with his reasoning and conclusion in paragraph 13 of the CIT (Appeals)'s order and confirm his decision. Accordingly, this ground is rejected.
39. In ground No. 5, the Revenue objects to the direction given by the CIT (Appeals) to the Assessing Officer to modify the working of disallowance of bonus for earlier assessment years 1983-84 and 1984-85 while deciding the appeal for 1985-86. The ITO had disallowed a sum of Rs. 8.50,676 out of the bonus provision made by the assessee. Before the CIT (Appeals), the assessee's counsel had filed a detailed working according to which the assessee would be actually entitled to the deduction of the current year's liability for bonus paid in the next year amounting to Rs. 10,51,324.13 which would result in a further deduction of Rs. 6,98,498.48 in the year under appeal. For this, the assessee filed a reconciliation of its bonus account for the three accounting years from 1-11-1981 to 31-10-1982 relevant for the assessment year 1983-84, from 1-11-1982 to 1-1-1984 relevant for the assessment year 1984-85 and for the previous year 2-1-1984 to 31-3-1985 relevant for the assessment year 1985-86, copies of which are available at pages 66 to 68 of the assessee's paper book. He also placed before the Commissioner a statement showing bonus payments for these three years, copies of which are available at pages 69 and 70 of the assessee's paper book. After examining these materials, the Commissioner held in paragraph 16 of his order that on the face of it the working filed b the assessee for the claim of the assessee appeared to be on the right lines and in conformity with the decisions in the appellate orders passed by him for the earlier assessment years 1983-84 and 1984-85. He pointed out that the assessee's learned counsel had arrived at the disallowable amount for the assessment year 1983-84 without disturbing the credit given for the amount written back from the earlier year's provision and from the assessment year 1984-85 he had also taken into account the amount to be adjusted in such credit, of the earlier year's provision to the extent it had already been disallowed in the assessment year 1983-84. He further held that the assessee's counsel had followed the same basis for the assessment year 1984-85 and that the assessee's counsel had no objection to modification of the disallowances as arrived at in his working for the assessment years 1983-84 to 1985-86 on verification of its correctness by the ITO. As this offer made by the assessee's learned counsel was found to be fair and also not inconsistent with the principles of the decision of the CIT (Appeals) for all the three years, the CIT (Appeals) directed the ITO, to recompute the disallowance under bonus for the assessment year 1985-86 after giving an opportunity to the assessee-company to support its working with the necessary details. He pointed out that on the basis of the computation filed before him, the disallowance would be Rs. 11,72,680 for the assessment year 1983-84; Rs. 3,76,494 for the assessment year 1984-85 and that for the assessment year 1985-86, further amount to be allowed to be Rs. 6,98,498 to make the admissible deduction at Rs. 10,51,324 overall as against the amount of Rs. 3,52,825 debited to the Profit & Loss Account. The Commissioner has also held that if the ITO was satisfied with the correctness of this working, on modification of the earlier assessment order for the assessment years 1983-84 and 1984-85 appropriately in line with the assessee's working, he would allow the further deduction under bonus for the assessment year 1985-86. It is these directions which are being objected to by the Revenue before us.
40. After hearing the learned counsel on both sides, we are unable to appreciate the objections raised by the Revenue in this ground. In fact, the directions given by the CIT (Appeals) are very fair, reasonable and just to both sides as they give full opportunity both to the Department and the assessee to arrive at the correct figure of bonus allowable in each of the three years 1983-84, 1984-85 and 1985-86 as there is no dispute about the principles on which bonus amount is to be allowed in each of these years. We, therefore, find no merit in the objections raised by the Revenue in this ground which is, accordingly, rejected.
41. In ground No. 6 the Revenue objects to the deletion of a sum of Rs. 77,830 by the CIT(A). This amount was disallowed by the ITO on the ground that it represented ex-gratia payments to the employees. The ITO held that the assessee was not under an obligation to pay this amount and, therefore, it could not be allowed as business expenditure.
42. The CIT (A) found that, the genuineness of the expenditure was not disputed, that the amount of expenditure was also not excessive or unreasonable and that the expenditure was obviously incurred with a view to facilitating the smooth conduct of the assessee's business and based on past practice. He, therefore, held that the nature of the expenditure showed that it was wholly and exclusively laid out for the business purposes of the assessee. Accordingly he deleted this addition which is to be objected to by the Revenue in this ground.
43. The learned deptt. representative contended that the expenditure in question was not admissible as it represents the ex-gratia payments and that the CIT(A) ought to have upheld the disallowance made by the ITO. The assessee's learned counsel Sri N.K. Poddar relied on the particulars of the ex-gratia payments, in the statement at pages 111 & 112 of the assessee's paper book and submitted that these payments were made to the office staff of the assessee-company to whom no bonus was paid, that this payment was made in accordance with the past practice and that these ex-gratia payments were also made depending upon the length of service of each of the staff members. He submitted that the latest decision of the Calcutta High Court in the case of CIT v. Shaw Wallace & Co. Ltd. [1991] 190 ITR 455, was directly in favour of the assessee and, therefore, the order of the CIT(A) allowing the assessee's appeal was correct and that the same should be upheld.
44. We have looked into the particulars of the ex-gratia payments contained in the statement at pages 111 & 112 of the assessee's paper book. As rightly pointed out by the CIT (Appeals) there is no dispute about the genuineness of the expenditure claimed by the assessee nor is there any dispute about its reasonableness and that it has been made in accordance with the past practice. The department also does not dispute the factual position that no bonus has been paid to any of these members of the staff and that these amounts were paid to them in accordance with the length of their services with the assessee-company. On the above facts the decision of the Calcutta High Court in the case of Shaw Wallace & Co. Ltd. (supra) is directly applicable. In fact, in this decision their Lordships of the Calcutta High Court have referred to their earlier decision in Indian Leaf Tobacco Development Co. Ltd. v. CIT [ 1982] 137 ITR 827 wherein their Lordships had held that even if the assessee makes an ex-gratia payments out of commercial expediency, such payments were allowable in working out the business income of the assessee. Respectfully following these two decisions of the Calcutta High Court we confirm the order of the CIT (Appeals) and reject this ground.
45. In the next ground the Revenue objects to the decision of the CIT (Appeals) deleting the addition of Rs. 4,61,590 which was made by the ITO on account of payment of service charges to M/s. Unifab Engineers. The ITO had disallowed this amount on the ground that the above payment was made by the assessee-company without getting any services in return and that the sole purpose of this payment in the name of labour charges made to the family concern of the directors was to divert the income from the hands of the assessee to the hands of the family members of the directors and the trusted employees and in that process reduce the quantum of tax. In other words, the ITO held that this payment was against bogus labour charges and hence could not be allowed as a deduction. The CIT (Appeals), however, disagreed with these findings of the ITO and deleted this addition for the detailed reasons discussed in paras 24 & 25 of his appellate order. This is being objected to by the Revenue before the Tribunal.
46. The learned deptt. representative relied on the findings of the ITO in the assessment order and pointed out that the assessee had failed to submit the details of the specific work/services rendered by Unifab Engineers for which it had paid these service charges during the course of assessment proceedings and that, therefore, the ITO was fully justified in disallowing this payment as bogus. He argued that the CIT (Appeals) erred in deleting this addition. He submitted that the addition made by the ITO should be restored or in the alternative the matter be sent back to the ITO for further examination in the light of the materials relied on by the assessee before the CIT (Appeals).
47. Sri N.K. Poddar, the learned counsel for the assessee opposed these contentions and submitted that the payment of service charges to this concern i.e., Unifab Engineers had been allowed in earlier years and also in later years and that only in the year under appeal the ITO had chosen to disallow this amount for reasons best known to him. In this connection the learned counsel relied on the papers at pages 113 to 123 of his paper book and pointed out that for the assessment year 1985-86 the Asstt. CIT himself has granted registration to the said firm i.e., Unifab Engineers by his order dated 15-1-1990 and the entire income derived by the firm from these service charges have also been assessed in the hands of the said firm. He further explained as to why the assessee-company engaged the services of this Unifab Engineers for the various works, with reference to the comparative costs, if the same items are to be produced in the assessee's factory as against the labour charges incurred by the assessee by getting the work done through Unifab Engineers, as could be seen from the comparative chart at page 123 of the paper book. The learned counsel therefore, argued that the entire addition made by the ITO was based on mere suspicion and surmises and was, therefore, rightly deleted by the CIT (Appeals) for the detailed reasons set out in his order and that the same should be upheld.
48. As the appeals filed by Unifab Engineers against its assessment for the assessment year 1985-86 were pending at the time when he disposed of this appeal, the CIT (Appeals) rightly held that he was not concerned in the present appeal with the genuineness of the said firm, Unifab Engineers. However, the position to-day is changed and the said firm has been recognised as a genuine firm by the ITO himself as could be seen from the assessment order dated 15-1-1990 at pages 120 to 122 of the assessee's paper book. A perusal of this order shows that the CIT (Appeals) in that case had set aside the orders passed refusing registration to the said firm and directed the ITO to re-examine the entire issue. Thereafter, the ITO had examined the genuineness of the said partnership firm and came to the conclusion that there was a genuine firm carrying on the business in the name of Unifab Engineers and that it was entitled to registration under Section 185(l)(a) of the IT Act. The ITO had also held in this assessment order that the main source of income of Unifab Engineers was from labour charges received from fabrication work done for M/s. Paharpur Cooling Towers Pvt. Ltd., the assessee herein. It is, therefore, clear that whatever objection the ITO had in his mind in this regard had been set at rest by these orders passed by the ITO in the case of Unifab Engineers. Apart from the above, as rightly held by the CIT(A) the Revenue does not dispute the fact that the assessee-company had been manufacturing the various items, such as, balancing hub, gear case, drive shaft assembly, F.C. value assembly, permatower and GRP fan cylinder. The cost of manufacture of these items in the assessee's own factory and through Unifab Engineers is given at page 123 of the assessee's compilation. A perusal of this comparative chart shows that the assessee had considerably gained by giving these works to Unifab Engineers on payment of labour charges thus avoiding the expenditure on factory overheads, Excise duty etc. The CIT(A) was, therefore, right in his conclusion that these expenses were genuinely incurred by the assessee and were rightly allowable. Even before us the Revenue does not dispute the factual position that the assessee had manufactured the various items enumerated in para 24 of the appellate order of the CIT(A) and that reasonable expenses on such manufacture should be allowed. The huge disparity in the expenses which the assessee may have to incur if required to manufacture these items in its own factory with reference to the comparative chart at page 123 of the assessee's compilation, clearly establishes that the charges paid by the assessee to Unifab Engineers cannot be held to be either excessive or unreasonable. The CIT(A) was also right in pointing out that there was nothing to show that if the work had been got done through any other stranger, the charges paid by the assessee would have been much less. We, therefore, agree with his conclusion that this addition was not justified. Accordingly we confirm his order deleting this addition of Rs. 4,61,590 and reject this ground.
49. This takes us to ground No. 8 in which objection is taken to the deletion of the addition of Rs. 47,926 made under Section 40A(3) of the Act. The ITO had disallowed this amount on the ground that the assessee failed to submit any explanation as to why these payments were made in cash in contravention of Section 40A(3) of the Act and that the assessee was entitled to the benefit of rule 6DDJ of the IT Rules. The CIT (Appeals) in para 26 of his order held that this was paid to one M/s. RK Associates by way of commission and that the identity of the party had been proved as the ITO had also verified the same. He further held that the payment was made in cash due to business exigencies and on the insistence of M/s. RK Associates. He, therefore, accepted the assessee's contentions and held that this disallowance was not supportable under Section 40A(3) read with rule 6DDJ of the Act. He, therefore, deleted this addition.
50. Before us it was argued on behalf of the Revenue that the CIT(A) had not given any concrete reasons for deleting this addition which had been made by the ITO in accordance with the provisions of Section 40A(3) of the Act in the absence of any material placed by the assessee to fulfill the conditions laid down in rule 6DD(j) of the IT Rules.
51. Sri N.K. Poddar referred us to the particulars contained at pages 124 to 145 of the assessee's paper book and pointed out that the assessee had given full particulars regarding the various payments made to the six parties in cash in excess of Rs. 2,500 and also explained the circumstances in which it had to make such payments. He further submitted that there was no dispute about the genuineness of these payments or about the identity of these parties and the compelling circumstances in which the assessee had to make these payments in cash. He, therefore, submitted that the assessee's case was squarely covered by the decision of the Calcutta High Court in the case of Girdharilal Goenkav. CIT [1989] 179 ITR 122 and that, therefore, the order of the CIT(A) should be upheld.
52. We have looked into the particulars of these payments amounting to Rs. 47,926 contained at pages 124 to 145 of the assessee's paper book. In our view the only mistake committed by the CIT(A) was in considering the first payment of Rs. 20,000 only made to RK Associates and in not dealing with five other payments made to five other parties as set out at page 124 of the assessee's compilation. It is clear from these details that the assessee had paid various amounts in cash in excess of Rs. 2,500 to sixparties and these amounts totalled to Rs. 47,926. But in respect of each of these items the assessee had given full and complete particulars regarding the identity of the recipient, the nature of the expenditure incurred as well as the circumstances in which the assessee had to pay in cash. For example, the first item of Rs. 20,000 paid in cash on 14-8-1984 to RK Associates was stated to be at the request of Sri Kaher, the proprietor of RK Associates. It is seen from the journal voucher No. 31 at page 125 and from the details of the transactions with the party, at page 126 of the paper book that the assessee is having regular transactions with RK Associates during the period from 2-1-1984 to 31-3-1985. The total payments made to this party amounted to Rs. 2,58,806. Out of these payments objection is raised only to the payment of Rs. 20,000 against cash voucher made on 14-8-1984. This Rs. 20,000 is included in the journal voucher for Rs. 1,81,146 which comprises of various items of payments made to RK Associates from 4-1-1984 to 20-3-1985. We are unable to appreciate the rationale behind this objection raised by the Revenue in regard to this payment. The assessee's explanation is that RK Associates were attending to the business of the company regarding various matters including Central Excise and that this amount was paid in cash to Sri Kaher, the proprietor of RK Associates in cash on 14-8-1984 at his request as the said Sri Kaher was to leave for Delhi on 15-8-1984 to attend the hearing of the company's matter at Delhi. Since 15th August was a National Holiday issuance of cheque would be of no avail to Sri Kaher to enable him to go to Delhi to attend the company's business. It was, therefore, explained that this payment was made out of business expediency. It is seen from the vouchers given by RK Associates that the complete address of the party is available viz., 27/1, Hindusthan Park, Calcutta-700 029. It is not the case of the ITO that he made any attempt to verify the genuineness of this payment and found the same to be non-genuine or false. As stated already, the total payments made to RK Associates are to the tune of Rs. 2,58,806. Therefore, the disallowance of this payment under Section 40A(3) was made purely on suspicion and surmises.
53. Similar is the position in regard to the next payment of Rs. 12,800 to M/s. Deshaparan Building Stores for purchase of cement on 14-8-1984. The full address of this party is available in the Bill and the assessee had to pay in cash as it had to purchase cement which was a scarce commodity at that time and as the seller insisted on payment of cash.
54. The third payment of Rs. 3,000 was to Sri Surat Hazra on 2-6-1984. He is said to be one of the employees of the assessee-company and this payment was made to him to enable him to go to Dehradun for erection of cooling towers of M/s. U.P. State Minerals. In other words it is a cash advance to an employee of the assessee-company for his travelling expenses. We are unable to see how this payment could be disallowed for invoking the provisions of Section 40A(3) particularly when the full and complete particulars were available in the vouchers produced in support of the same, copies of which are at pages 133 & 134 of the paper book.
55. The fourth item of Rs. 6,625 was for the purchase of 5 tons of cement on 29-10-1984 from M/s. Inter Dominion Trading Agency who also insisted on payment of cash. The full address of this party is available in the Bill.
56. The fifth item of Rs. 2,687-50 was paid to M/s. G.D. Dutta an employee of the assessee on 5-10-1984 for making various purchases from the market and also to meet the expenses on behalf of the assessee-company, as could be seen from the voucher rendered by him at page 138 of the compilation. We are unable to see how this item would fall within the mischief of Section 40A(3) of the Act.
57. The last item of Rs. 2,813-75 was paid for carrying out repairs and maintenance of rolling shutters in the premises of the assessee on 27-10-1984.
58. As rightly contended by the assessee's learned counsel the CIT(A) had taken a pragmatic view of the matter as held by the Calcutta High Court in the case of Girdharilal Goenka (supra). Respectfully following this decision of the Calcutta High Court we confirm the deletion of this amount of Rs. 47,926 as fully justified and accordingly confirm the order of the CIT(A) on this issue and reject this ground.
59. This takes us to the last ground in which the Revenue objects to the direction given by the CIT(A) to allow deduction under Section 80M of the Act on the gross dividend without making any deduction for expenses as was done by the ITO in the assessment order. The ITO had deducted a sum of Rs. 89,704 representing 10% of the gross dividends of Rs. 8,97,048 as reasonable expenditure which the assessee would have incurred for earning this dividend income. He, therefore, allowed 80M deduction in respect of the balance of Rs. 8,07,344. This was objected to by the assessee before the CIT(A) who found that the ITO had not specifically referred to any expenses actually incurred by the assessee for earning the dividend income to support his restriction of the relief under Section 80M to Rs. 8,07,344. He, therefore, directed the ITO to allow deduction on gross dividend of Rs. 8,97,048 treating it as net dividend for the purpose of Section 80M of the Act.
60. Before us it is contended on behalf of the Revenue that the CIT(A) was not justified in deleting this disallowance made by the ITO overlooking the fact that more than 280 dividend warrants were involved to make up the gross dividends of Rs. 8,97,048 and, therefore, the assessee-company should have incurred some expenditure for the purpose of earning this dividend income. Apart from making this submission the Revenue was unable to point out any material or circumstance, which would show that the assessee-company had actually incurred any expenditure for the purpose of earning the dividend income. In the absence of any such material or circumstances pointed out by the Revenue, we agree with the reasoning and conclusion of the CIT(A) deleting the deduction of 10% of the gross dividends as the expenditure which the assessee would have incurred for the purpose of earning this dividend. There is no warrant or justification for this assumption made by the ITO and the CIT{A) was right in accepting the assessee's contention in this regard. We, therefore, confirm the order of the CIT(A) on this issue also and reject this ground.
61. In the result, the Revenue's appeal is dismissed.