Income Tax Appellate Tribunal - Mumbai
Lml Ltd, vs Assessee
आयकर अपील य अ धकरण "बी" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI ी डी. म मोहन, उपा य एवं ी संजय अरोड़ा, लेखा सद य के सम ।
BEFORE SHRI D. MANMOHAN, VP AND SHRI SANJAY ARORA, AM
आयकर अपील सं./I.T.A. Nos. 3545 & 4441/Mum/2002
( नधारण वष / Assessment Years: 1997-98 & 1998-99)
LML Limited, Joint Commissioner of Income Tax,
714, Raheja Chambers, Special Range-3,
बनाम/
213, Nariman Point, Aayakar Bhavan, M. K. Road,
Mumbai-400 021 Vs. Mumbai
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACL 0141 N
( नधा रती /Assessee) : (राज व / Revenue)
&
आयकर अपील सं./I.T.A. Nos. 3585, 4882 & 7222/Mum/2002
( नधारण वष / Assessment Years: 1997-98, 1998-99 & 1999 -2000) Joint Commissioner of Income Tax, LML Limited, Special Range-3, 714, Raheja Chambers, बनाम/ Aayakar Bhavan, M. K. Road, 213, Nariman Point, Mumbai Vs. Mumbai-400 021 थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. AAACL 0141 N (राज व / Revenue) : ( नधा रती /Assessee) नधा रती क ओर से / Assessee by : Shri Arvind Sonde राज व क ओर से/Revenue by : Shri Pritam Singh सनु वाई क तार ख / : 14.03.2014 Date of Hearing घोषणा क तार ख / : 12.05.2014 Date of Pronouncement 2 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited आदे श / O R D E R Per Sanjay Arora, A. M.:
This is a set of five appeals, i.e., cross-appeals by the Assessee and the Revenue for the assessment years (A.Ys.) 1997-98 and 1998-99 and the Revenue's appeal for A.Y. 1999-2000, arising out of the Orders by the Commissioner of Income Tax (Appeals)-III, Mumbai ('CIT(A)' for short), partly allowing the assessee's appeals contesting its assessments u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the relevant years. The appeals raising common issues, were taken up for hearing together and are being disposed of likewise for the sake of convenience.
Issue No.1
2. This issue is raised per ground no. 1 of the assessee's appeals for A.Ys. 1997-98 and 1998-99. The same is qua the deductibility of the sums paid to banks/financial institutions by the assessee-company as a guarantor of M/s. Vespa Car Co. Ltd. ('VCCL' for short), a joint venture (JV) company (of the assessee and its foreign technical collaborator, M/s. Piaggio Cspa) engaged in the manufacturing of two wheelers, claimed at Rs.436.15 lacs and Rs.620.67 lacs for the two consecutive years respectively.
2.1 The background facts of the case are fairly simple and undisputed. We enlist the same as follows. The assessee, an Indian company in which public is substantially interested, is engaged in two wheeler business, having set up a scooter project in technical collaboration with M/s. Piaggio Cspa, Italy in 1982-83 for manufacturing one lac scooters p.a. During the financial year 1983-84, the company received a letter of intent (LI) for manufacturing, additionally, two lac scooters as well as 30,000 three- wheelers annually. Rather than setting up a new unit or expanding its existing facilities, the company considered it prudent to form a new joint venture company with Piaggio for the purpose. This, it is stated, would ensure equity participation of Piaggio in the new project. Accordingly, a JV company, VCCL, was formed, and the LI sub-leased to it. The new company, it was thought, would also serve the strong customer base (of more than 20 lac LML scooters) expected to be built up over time inasmuch as the assessee-
3ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited company had booked scooters in that number, also having received advance there- against. The two facilities would also complement each other. The cost of the project (for the manufacture of 1.25 lac scooters p.a.), as finally envisaged for implementation, and its means of financing is as under:
COST OF THE PROJECT The estimated cost of the project is as under: (Amt in Rs. lacs) Land and site development 70.73 Buildings 313.48 Plant & Machinery 360.90 Technical know-how fees 7.50 Expenses on Foreign technicians and training of Indian technicians abroad 11.85 Miscellaneous Fixed Assets 292.30 Preliminary and Pre-Operative expenses 137.59 Contingencies 97.00 Margin Money for working capital 188.00 Total 1,479.35 SOURCE OF FINANCE:
(Rs. in lacs) Equity Lohia Machines Ltd. 153.60 Piaggio & C.S.p.A., Italy 134.40 Friends & Associates of Promoters 28.80 Public 163.20 480.00 Secured Loans Rupee Term Loans:
IFCI (In participation with IDBI and ICICI) 380.00
GIC and its subsidiaries 50.00
UTI 50.00
Banks 200.00
Foreign Currency Loan:
IFCI 25.30
705.30
Central subsidy 20.00
Unsecured loan from LML 224.70
Deferred Credit for Leasehold land
from UPSIDC 49.35
Total 1,479.35
(source: prospectus to the public offer)
4
ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2
(A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited
The share holding pattern of VCCL was as:
Assessee - 32%, Piaggio - 28% and Indian Public - 40%.
The assessee also furnished guarantees to different banks/financial institutions against extension of credit facilities to VCCL, for an aggregate of, over time, Rs.990 lacs.
The JV company (VCCL), however, did not perform well, and the said guarantee/s came to devolve on the assessee; in fact, is settled at a discount by way of a one-time settlement (OTS) entered into with the loan creditors. The assessee being under a legal obligation to honor the guarantees, accepted the OTS offer. The Revenue disallowing it as a deductible business expense/business loss in the computation of business income, the assessee is in second appeal.
We enlist the respective cases of both the sides, as culled out from the orders of the authorities below, the written submissions and the arguments advanced before us.
The assessee's case 2.2 The same is based on the premise that the assessee's action in discharging the guarantees (by accepting the OTS offer of the creditors) was guided by business consideration/s and, therefore, qualifies for deduction as revenue expenditure of it's business. The formation of the JV company was only a mode of conduct of its two wheeler business, and the guarantees furnished, as a part of the trade practice, is therefore only in the ordinary course of its business. Toward the business purpose/s, the following were cited as the various incidences that would have arisen were the guarantee/s to be invoked:
"The assessee's act was motivated with following reasons:
a) Eliminating the impediments in company obtaining enhanced working capital.
b) Avoiding additional burden on the company's assets if called upon to pay as a guarantor.
c) Avoiding cost of litigation that would ensure if the guarantee is not honored.5
ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited
d) Preserving the image and goodwill of the company which could be harmed in case default by JV company becomes a matter of public knowledge."
(Reference was made in this regard to pgs.1-13, 20, 23, 52-53 of the paper-book).
The Revenue's case The Revenue's case has two limbs to it. Firstly, it is contended that there is no direct connection or nexus of the guaranteeing of loans (by different lenders) to VCCL, which is a separate legal entity, with the assessee's business, which is of production and sale of scooters. The same, therefore, cannot be said to have been furnished for or in the ordinary course of its business or as incidental thereto. Two, the guarantee/s was given only toward and in promoting a new company for setting up a new project. The expenditure, thus, that comes to be incurred in its respect is, consequently, only on capital account. That is, the rights, if any, that the assessee stands to acquire or which may inure to it by furnishing guarantee/s are only capital in nature. Further, the consequences of the non- honoring the guarantee, as for example, the loss of reputation or of its banks not co- operating with it in extending it further working capital, etc. would not alter the character of the amount paid to VCCL to meet its loan obligation to a revenue expenditure.
Findings
3. Having heard the parties at length; perused the material on record, as well as the case law relied upon, giving our careful consideration to the matter, we find no merit in the assessee's case, whichever way one may look at it. The examination of the case and the resultant findings, which form the basis of our decision, forming the bulk of the order, are as under.
3.1 The argument that the formation of the JV company was but a manner and mode of conduct of its own business is misconceived. The assessee-company is itself a creation of (and through the process of) a statute, with a distinct legal status and personality, so that it could not own any other company, as itself, even if it were to hold the entire share capital of (voting power in) the said company. The assessee is not in the business of 6 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited promoting other companies, in which case all the sums advanced towards promotion, including furnishing guarantees, would be toward setting up the new company, as a part of its business, and in which case it would apparently have to specify its business plan/model, as where a company with a distinct business advantage is formed or otherwise acquired to be subsequently sold or hived off for a consideration. Clauses 9 and 10 of its Memorandum of Association (MOA) fall under Part B thereof, i.e., 'The objects incidental or ancillary to the attainment of the main objects'. The same are, therefore, only in the nature of enabling provisions. That is not to state or suggest that the formation of the new company could have no business angel to it or relationship with the assessee- company, which it may well have. By own admission, the assessee states that though it had enough resources to set up the new project or enhance the capacity on its own (refer reply dated 22.09.1999 at para 1.2 of the assessment order) that would not have ensured equity participation by Piaggio in the new venture. Why? It does not explain. Then, again, how is it relevant; it having only enough resources of its own? If anything, it shows a distinction between the two companies. Be that is it may, these, in any case, could be relevant considerations for the promoters in undertaking a particular project in a particular company - as it's project was considered for being implemented in the assessee-company, but certainly not the company, which is a distinct legal entity with a defined interest. It does not have a proprietary interest in the said company, or in the scooter market, so that its interest therein could only be through its' undertaking, just as that by another company defines its business interest. Further, the mutual interests are defined and regulated per the contracts, agreements or the understanding they may enter into. In the instant case, the transfer/sub-licensing for two wheelers is against royalty to Piaggio, besides separate agreements for transfer of information, license, rights, trade mark and other assistance etc. in respect of three wheelers (refer Board of Director's resolution dated 31.10.1984 - PB I/13). In any case, the interest of the company in promoting VCCL could only be considered as long-term and strategic. In fact, the company is to receive a lump-sum payment from VCCL for transfer and imparting technical information, marketing and other assistance, including technical information 7 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited and data already supplied by Piaggio to Lohia for two wheelers. All this gets summed up in one sentence when the assessee states of having formed the VCCL to take up the manufacturing of additional scooters and three wheelers.
3.2 There is no reference to the set up of the complimentary facilities, which, even if contended, would have to be shown as a fact. This would, where so, cut down the capital cost of the project for the new company, and offer a ready market to the assessee- company. The benefits are mutual, and the JV company could on that basis be equally said to have interest in the assessee-company. Such relationship could be formed with any company for that matter. Every vendor-vendee relationship is imbued with such complementary interest, and that is how the business is done and, rather, happens; business, by definition, being a trade (or exchange for a price) of comparative advantages. The servicing of the customer base is again not demonstrated in any manner. The assessee had a backlog of 15 lac scooters, necessitating its focusing on production. The new project, as we see it, is again production centric, so that the services being spoken of are perhaps, if at all, in the realm of the future.
3.3 Without doubt, however, the company is actively involved in the promotion of the new company, as a JV with Piaggio, and its equity participation as well as other arrangements unequivocally show or exhibit it as a promoter, with its interest being long term and in the capital field. There is no question of identity of interest, or of the said company being formed for pursuing the company's business. That is, the assessee- company's equity participation, funding (by way of unsecured loan for Rs.225 lacs - which, as it appears, is interest-free) and its guaranteeing loans (by different banks/FIs), the transfer of technology and sub-licensing the project - though for consideration - are toward its setting up the new project, define its role as a promoter of the said company, geared towards setting up a new project for which it held a LI. Why, the loss on the irrecoverability of debt, i.e., assuming the same as having been incurred for business purposes, would be on capital account. The ld. Authorized Representative (AR) was in fact during hearing queried directly in the matter, i.e., as to the nature of the loss 8 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited sustained if instead of furnishing the guarantee/s, the assessee-company had advanced loans, even if on interest-free basis, or had contributed by way of equity capital, and which becomes irrecoverable or unrealizable on account of investee-company incurring huge losses. This is as the as two situations are pari materia, and the nature of loss cannot but be different, i.e., whether the amount is advanced in the first instance, or is so subsequently for paying off a creditor/s who had financed the company thereat, i.e., in the first instance. Though he responded by stating that the said loss would be a deductible business loss, we are wholly unable to appreciate and, accordingly, agree therewith. In fact, this forms the principal reason and the bulk of the reason informing the impugned order. If the write off of a loan/share capital as irrecoverable could not be treated as a deductible business loss or expenditure, that arising on account of repaying the loans contracted earlier, would be on the same footing and, therefore, only a capital loss. Why, in that case the share capital and unsecured loan to VCCL must also qualify for deduction as business loss, obliterating the difference between an investment and a trade or revenue asset. The case law in the matter is legion, and toward which we may cite some celebrated decisions as under:
a) In A.V. Thomas and Co. Ltd. vs. CIT [1963] 48 ITR 67 (SC), the facts and the decision are as under:
"The memorandum of association of the assessee company authorized it "to be interested in, promote and to undertake the formation and establishment of other companies", to make investments and to assist any company financially or otherwise. At the material times T was a common director of the assessee company and another private company. The private company took up in 1948 the promotion of a textile mill and T financed that private company to the extent of Rs.6,05,072. The board of directors of the assessee company approved of the action taken by T and in September 1950, passed a resolution that the amount of Rs.6,00,000 should be shown in its accounts as an advance for the purchase of shares in the textile mill and the sum of Rs. 5,072 as sundry advances due from the promoters of the textile mill. The project of promoting the textile mill failed. The private company paid back to the assessee on December 7, 1951 the sum of Rs.2,00,000. The assessee wrote off the balance on December 31, 1951, which was the date on which its accounting year ended, and claimed the balance as a bad debt or alternatively as a business expenditure 9 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited for the assessment year 1952-53. There was evidence to show that the assessee expected to obtain the selling agency of the goods to be produced by the textile mill:
Held, (i) that the assessee company, in making the large payments, intended to acquire a capital asset for itself. In any event the amounts were spent in 1948 and not in the year of account ending December 31, 1951. They could not, therefore, be allowed as business expenditure under section 10(2)(xv) of the Income-tax Act, 1922.
(ii) That as the assessee company was neither a banker nor a money-lender, the advances paid by the assessee company to the private company to purchase the shares could not be said to be incidental to the trading activities of the assessee. A debt, for the purposes of section 10(2)(xi), was something more than a mere advance and meant something which was related to the business or resulted from it. It was an outstanding which, if recovered, would have swelled the profits, and not merely money handed over to someone for purchasing a thing which that person failed to return even though no purchase was made. The amount due from the private company could not, therefore, be described as a debt for the purpose of section 10(2)(xi) and the assessee was not entitled to claim allowance of the balance of the advances as a bad debt written off under section 10(2)(xi)."
[emphasis, by underlining, ours]
b) In Hasimara Industries Ltd. v. CIT [1998] 230 ITR 927 (SC):
In this case, the assessee deposited a sum of money with another company under a leave and license agreement, for securing a license under which the assessee could work the licensor's cotton mills. The licensor- company went into liquidation and the amount remained unpaid. On its write off as irrecoverable, the loss was held as non-deductible as a business loss, confirming the decision by the hon'ble high court; the purpose of the deposit being to acquire a profit making asset, so that the loss suffered was on capital account.
c) In Hasimara Industries Ltd vs. CIT [1998] 231 ITR 842 (SC):
In the facts of this case, again, the assessee in tea business entered into a leave and license agreement with another company with a view to acquire the operating rights for working the latter's cotton mills. A sum of Rs.20 lacs was advanced to the lessor company for modernizing the mill. Neither was the mill modernized, nor the sum repaid. The loss suffered on account of the incapacity of the lessor to repay was held as a capital loss, being for acquiring a profit making apparatus, and not deductible as a business loss. In affirming the decision of the hon'ble high court under 10 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited challenge before it, several judgments of the apex court itself were noted and distinguished by it.
d) CIT vs. Hindustan Times Ltd. [1998] 231 ITR 741 (SC) The additional commercialization charges for putting up a multi- storeyed structure after demolition of the original building was conceded to be a capital expenditure, though eligible for depreciation allowance as a part of the cost of the commercial building, being used for business purposes.
Reference in this regard may also be made to decisions, as in the case of Shahibag Enterprises Pvt. Ltd. vs. CIT [1994] 210 ITR 998 (Guj) and McGaw - Ravindra Laboratories (India) Ltd. vs. CIT [1994] 210 ITR 1002 (Guj).
Again, if the repayment of loan by VCCL would not constitute a deduction in it's hands, how could it be so in the assessee's hands. So much for the identity of interest, even as presuming so also leads to the loss being classified as a capital loss. In fact, there is no write off of the debt in accounts in the instant case, so that the loan continues to outstand, and thus cannot be considered or presumed as a case of loss arising on account of the debt becoming irrecoverable. This aspect of the matter stands discussed in greater detail in the ensuing part of this order.
3.4 We, next, consider the issue of disallowance of interest on the said loan/s, or even loss, i.e., assuming it to have been incurred, being agitated by the assessee per a separate ground (G # 2). The two disallowances being interrelated, the same, though agitated separately, have been taken up together. Further on, though the matter was argued before us as consequential, so that the same treatment and consideration, i.e., as attends or informs the decision qua the principal amount, would hold for interest thereon also, and thus apply, we are, however, not inclined to treat the matter as so. This is as it would be so only where the disallowance of the principal amount is for the reason that the same does not constitute a business loss, having not been incurred for the purpose of business, and not where the loss is held as non-deductible for being of capital nature, as a capital expenditure could well be for business purposes, as indeed it generally is. The interest expenditure on the borrowed capital financing the said expenses would not assume 11 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited capital nature, unless of course the same is toward setting up a capital asset, so that it contributes to its cost of acquisition.
3.5 We have held the disallowance of the principal sum as being, firstly, not for business purposes and, in any case, on capital account. As we have drawn a distinction in respect of the interest thereon between the two situations, the said issue would require being examined more closely, eliminating any scope for the use of the words 'in any case'. Toward this, we find the assessee's claim in respect of the JV company would require validation. It is stated that it was formed for setting up, among others, a service centre for the huge volume of its scooters that the assessee-company expected to be on road. However, there is nothing on record to substantiate the same. On the contrary, as afore-noted, having been transferred (for payment though) the license, the said company was set up with an equally rated capacity as the assessee-company itself, matching the manufacture at 2 lac scooter p.a., though actually setting up a project for manufacture of 1.25 lac scooters p.a. The assessee's next claim of business nexus is with respect to the said company being set up with complementary facilities, i.e., the assessee had surplus capacity for certain parts, which would therefore not be set up, i.e., to that extent, in the new company, while would have a higher or additional capacity for the parts for which the company perceives its capacity as in deficit. The claims are sans any details, unsubstantiated and totally unproved and, thus, only in the nature of bald claims. What, one may ask, are the internal capacities the assessee has in excess, and which therefore it deems prudent to and in fact does not install in the JV company, so as to promote complementariness. In fact, it is highly suspect that the said claim, even where not a bald one, is valid. We say so as complementariness, as afore-noted, in fact defines most business relationships without necessarily leading to an inference of a business nexus.
Rather, as we see it, it is the new company which may set up surplus capacity (after acquiring license), with a ready customer in the assessee and, thus, a business purpose in setting up the same, which is in any case not disputed. As regards the additional capacity with the assessee, the same does not entail or warrant any additional expenditure by it.
12ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited The sale of parts between the two companies would not be without consideration and, further, at prices which would sustain the same on an ongoing basis. In fact, the claim/s falls flat on face when considered in light of the fact that the assessee-company is itself engaged in enhancing its production capacity from the present 2 lac scooters p.a. to 6 lac scooters p.a.; in fact, since the financial year 1995-96, so that it would rationalize and balance its internal sub-capacities in-house, i.e., where not so. The claim/s has no basis in facts as manifest from record, besides being conceptually infirm. No wonder, we do not find much discussion or any pressing of its claim, much less substantiation thereof, by the assessee before the authorities below.
3.6 Continuing further, in our view, rather than being for a business purpose, which is in any case unproved, it is a case, to the contrary, of being just the opposite. The allegiance of a company is in the final analysis to its share-holders, and business interest
- 'business purpose' being a term of wide import - can be defined in terms of maximizing shareholder's wealth or value. The company's actions fail abysmally even when considered or viewed on this touchstone or basis. As against a risk capital of 32% (Rs.153.60 lacs), the company commits itself to, without any additional return, another Rs.1215 lacs (Rs.225 lacs by way of loan and Rs.990 lacs by way of guarantees). Contrast this to the case of Piaggio, which bears no such overload against it's risk capital of Rs.134.40 lacs. That is, the assessee-company assumes, for the same return or, rather, the same probability of return, i.e., in terms of accretion in value of its shareholding, a much higher risk of loss of capital, i.e., vis-à-vis its JV partner, the other promoter. While the same is limited to 100% of the risk capital for Piaggio, it is at 891% thereof for the assessee-company (on account of additional load of Rs.1214.70 lacs). In fact, it is even higher; the company having for the three consecutive years under reference paid, on a one-time settlement (OTS) basis, Rs.1141.81 lacs (being at Rs.1056.82 lacs for the two years in appeal), as clarified by the ld. AR during hearing. The OTS being at a discount on the outstanding liability (of VCCL), while at the same time could not exceed the amount for which the assessee was liable as a guarantor, clearly guarantees stood 13 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited executed at far in excess of the stated sum of Rs.990 lacs. How? Further, even limiting the same to Rs.1142 lacs, the sum paid by the assessee-company in OTS settlement of VCCL implies undertaking liability at Rs.1520 lacs, i.e., exceeding the project cost itself, as against a 32% equity stake therein. Put differently, assumes financial risk at about 10 times the risk capital! There is clearly also no correspondence whatsoever between the risk and the return - the fundamental basis of any investment decision. The same becomes all the more intriguing when juxtaposed with the fact that the assessee-company is itself in the midst of an expansion, increasing the capacity by 300%, and diversification programme - introducing a new series of scooters, at a project cost of Rs.204 cr., and which would also entail assuming further liabilities on a large scale. Further, even if issuing guarantees is a part of the assessee's business, of which there is no iota of evidence, the same ought to be correspondingly furnished by Piaggio - the other promoter, as well in-as-much as VCCL is a joint venture with defined shares. We have already noted that being toward setting up of a project, the same would in any case be on capital account. Our question though is what business purpose or even share-holder's interest does this serve. Rather, by eliminating any business risk to the other stake- holders in the JV company (by effectively undertaking their exposure) - the guaranteed amount in fact exceeding the entire debt finance (long-term), the company, rather than its own, it has served the interest of the shareholders of the creditor companies. If not, thus, doing a disservice to its shareholders, it certainly cannot assume business risk of others and yet claim it as its business purpose. So much for the claimed business purpose in furnishing the guarantees, which stands accordingly put paid. In fact, as contended by the ld. Departmental Representative (DR) during hearing, the assessee continued to furnish the guarantees even till much after the JV company had ceased operations and its finances deteriorated, so that it was no longer a going concern. As an example, he would point out to the execution of a deed of guarantee in favour of State Bank of India in December, 1993, even as the VCCL's unit stood closed during the year 1993 itself (PB-I, pgs.1 - 4). In whose interest, whether on revenue or capital account, we wonder, was the assessee-company working? Further, and in fact even as admitted during the course of the 14 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited hearing before the first appellate authority, the assessee-company had itself sought to classify itself as a sick company and obtain protection under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the application for which was rejected as it did not fulfill the prescribed criteria. The adverse consequence that may ensue, as in the form of interest expenditure on the said loss, assuming so, would not by itself convert a non-business expenditure into a business expenditure, or of it as being revenue in nature.
3.7 Lastly, the assessee had, and only rightly so, debited the amount paid to the account of the JV company in its accounts. The amount has been advanced for payment to the creditor/s in whose favour guarantees stand furnished by the assessee. The assessee, thus, steps into the shoes of the principal lender/s and, therefore, the same is only a debt (refer section 145 of the Indian Contract Act, 1872). The accounts of the company stand audited by an independent professional auditor. Both the management and the auditor, thus, are unanimous in their view that the amount is recoverable, reflecting the impugned sum as an asset therein, and which is certified to be representing the true state of affairs of the company as at the year-end. How could then, even not limiting the assessee's claim to s.36(1)(vii), we wonder the assessee state of having incurred a loss in respect of the amount it states in its annual accounts to represent an asset, valuing the same not below that expected to be realized in its respect. In this context, it would be pertinent to note that all the creditors whose claim stands liquidated by the assessee by availing the OTS qua VCCL are secured creditors. The assessee, therefore, by discharging the debt of the JV company's secured creditors becomes a secured creditor in respect of the sums thus advanced. It is not anybody's case that the debtor company (VCCL) has no assets or that the fair value of its assets as at the end of the relevant years is nil, while the assessee-company has treated the entire amount paid as a loss; rather, treating it as so the moment it is paid. How can it be; being in fact a contradiction in terms. The hon'ble jurisdictional high court in Lord's Dairy Farm Ltd. vs. CIT [1955] 27 ITR 700 (Bom.), speaking in the context of a loss, stated that so long as there is 15 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited possibility of recovery, the loss cannot be said to have been suffered (at pg.708). As such, looking at from any angle, the assessee's claim is not maintainable.
3.8 We, in view of the foregoing, endorsing the Revenue's stand, uphold the denial of the claim in respect of the sums advanced by the assessee-company as a guarantor towards one time settlement, as well as the interest thereon, as not deductible as business expenditure either u/s.36 or 37(1) of the Act. With regard to the principal sum, the Assessing Officer (A.O.) has (for A.Y. 1997-98), without prejudice, also stated that the amount actually paid during the year is below that being claimed (by Rs.36.65 lacs), so that the claim would have to be limited thereto. There is no finding by the ld. CIT(A) in the matter nor any arguments in its respect were made before us. Though the same does not survive in view of our said decision, the matter would in case of a different view being taken at any stage, require being restored back to the file of the ld. CIT(A) for the purpose. Again, the company also states of the interest disallowed being notional qua which again there is no finding by the first appellate authority, nor any argument in its respect assumed before us, finding mention only in the written statement which the assessee was asked to furnish at the conclusion of the hearing, so as to capsule the gist of the arguments. The claim is factual and, in any case, the rule of law is to obtain. If and to the extent the interest is notional and not actually incurred, no disallowance in its respect could obtain. The matter to this limited extent is, therefore, restored back to the file of the assessing authority for adjudication on merits after hearing both the sides per a speaking order. We decide accordingly. This answers ground nos. 1 & 2 of the assessee's appeals for the first two years (also refer para 20 of this order).
3.9 Before parting with the matter, it may also be necessary to advert to the host of case laws cited before us. We have not specifically referred thereto; having found on a perusal of the same as being not relevant or of any consequence. The disallowance both of the principal sum and the interest thereon, as would be apparent from a reading of our order, is based on clear and distinct findings of fact derived from the material on record, the same do not raise any question of law toward which various case law, in fact, by both 16 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited the sides, have been advanced before us; the matter being principally and essentially factual, to be adjudicated on the basis of the law in the matter, which is well settled, so that it requires determination as to whether the expense is incurred for business purposes and, where so, as on capital account or not. We have, as afore-stated, in any case, decided the matter on firm findings of fact, so that the said decision would have no bearing in the instant case. It is, therefore, not considered necessary to dwell on the decisions cited by the parties which though stand perused. In fact, the A.O. has himself discussed the various case law relied upon by the assessee before him, distinguishing them, to no rebuttal by the assessee, which we in any case find and confirm as valid. In all the cases where the amount stood allowed, it was where the guarantee was given as a part of or as incidental to the assessee's business. On the contrary, he has relied on the decisions, as in the case of CIT vs. Birla Brothers Pvt. Ltd. [1970] 77 ITR 751 (SC) and J. R. Mehta vs. CIT [1980] 126 ITR 476 (Bom), clearly supporting the Revenue's case. While the ld. AR would on being queried by the Bench in this regard, seek to distinguish the same, in our view, the ratio of the said decisions is squarely applicable. Where the furnishing of the guarantees or advancing of loans was not undertaken in the ordinary course of its business, the same is not a business expenditure of the assessee and, in any case of the matter, would be a case of capital expenditure.
We may though refer to the decision in the case of S. A. Builders Ltd. vs. CIT(A) [2007] 288 ITR 1 (SC), referred to by the assessee. The decision in ratio states of an advance to a sister company as being subject to the test of commercial expediency for interest thereon to be considered as admissible. An aspect which has been examined by us to be found as factually not obtaining in the instant case. Further, the said decision itself makes it abundantly clear that the same, rendered in the peculiar facts of the case, cannot be adopted as a precedent. In fact, of late, doubts have been expressed on the said decision, so that the matter stands referred to a larger bench (refer CIT vs. Tulip Stars Hotel Ltd. (in CA Nos.7138-7140 dated 30.04.2012)).
Issue No.2 17 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited
4. The next issue, which arises out of the Revenue's appeals for A.Ys. 1997-98 & 1998-99, is in respect of disallowance of pre-operative expenses incurred in relation to the expansion of manufacturing facilities by the assessee. The same, though reversed by the ld. CIT(A) (except for the travel expenditure included therein), following his predecessor's order for the earlier years (i.e., A.Ys. 1995-96 and 1996-97), stood confirmed by the tribunal.
5. Before us, the ld. AR was vehement in his castigation of the tribunal's order. The said decision, it was argued by him, based on the decision in the case of Hylam Ltd. vs. CIT [1973] 87 ITR 310 (AP), which no longer represents good law in-as-much as the same stood over-ruled by the full bench decision of Praga Tools Ltd vs. CIT [1980] 123 ITR 773 (AP) (FB), cannot be relied upon. The matter was argued at length, taking us through the said order by the tribunal passed both in the first instance (in ITA No. 3207- 08, 3182, 3236/Mum/2001 dated 31.10.2007/PB-II pgs.30 to 48) as well as in rectification proceedings (MA No.45/Mum/2008 dated 29.09.2008/PB-II, pgs.1 to 21). Reliance was placed by him principally on the following decisions:
a) Dy. CIT vs. Core Healthcare Ltd. [2001] 251 ITR 61 (Gujarat);
b) Vikram Mills Ltd. vs. Commissioner of Income-tax [2000] 242 ITR 290 (Gujarat);
c) Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464;
d) CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465; and
e) CIT vs. Havells India Ltd. (in ITA Nos. 55 & 57 of 2012 dated 21.05.2012), apart from the decisions by the tribunal. The ld. DR would, on the other hand, rely on the tribunal's order in the assessee's own case, stating the same to be well reasoned or, taking into account all the decisions cited by the assessee before us.
6. We have heard the parties, and perused the material on record, including the orders by the tribunal in the assessee's own case, to which our attention was drawn during hearing as well as the various decisions relied upon by both the sides.
6.1 To begin with, we may clarify that the A.O. has allowed the assessee's alternate claim for depreciation in respect of the impugned expenditure for the preceding years, to 18 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited the extent the same stands allocated and capitalized as cost of the relevant fixed assets; the balance amount being reflected as capital work-in-progress. As such, if and to the extent, the assessee is allowed relief at any stage, either for the preceding year or for the current year/s, it could not claim and, therefore, be allowed double relief, i.e., as revenue expenditure for the relevant years and then again as depreciation for the subsequent years. As such, irrespective of what our decision would be, we make it clear that the relief to the assessee under its alternate plea would obtain if and to the extent the assessee's claim qua the revenue expenditure is disallowed, i.e., at any stage; the ld. CIT(A) having confirmed the disallowance in respect of the travelling expenditure. Further, the onus to justify that there is no double claim shall be on the assessee.
6.2 On merits, we begin by delineating the issue before us. The background facts are that the assessee is since the previous year relevant to A.Y. 1995-96 engaged in expansion and diversification programme. The new facility, called Jhagadia unit, shall increase the company's facility from 2 lac scooters p.a. to 6 lac scooters p.a., besides three-wheeler, and is envisaged to set up at a cost of Rs.204 crores, the details of which are as under (refer para 12/pg.9 of the tribunal's order u/s.254(1) for A.Y. 1995-96 and 1996-97):
Funds proposed to be raised (Rs. in crores) Break up of cost
1. Equity Capital Rs.37.55 1. Land 1.422
2. Term Loans- 2. Site Development 1.04
Rupee Term Loan 88.00 3. Building 16.23
FC Loan 46.50 4. Plant & Mach. 85.84
3. Deferred credit 5. Know-how fees 13.38
from UPSIDC 60.64
4. Lease Finance 7.50 6. Expenses on foreign Technicians 0.80
5. Internal accruals 23.81 7. Misc. Fixed Assets 43.48
8. Dedicated Powerline 4.00
9. Preliminary Ex. 4.01
10. Pre-operative expenses 11.49
11. Contingencies 9.17
12. Margin money for working 8.14
_____ capital _____
Total Rs. 204.00 204.00
19
ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2
(A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited
It is the expenses debited under the head 'pre-operative expenses', estimated to be incurred at a total of Rs.11.49 crores, which is the subject matter of dispute between the parties.
The expenditure under dispute would be upon including the expenditure on travel, since confirmed for disallowance by the ld. CIT(A). This amount, though, cannot be determined in the absence of the information on the amount of travel expenditure, included in the amount allocated to fixed assets. We shall, however, consider the entire amount, i.e., including the expenses on travel, inasmuch as the parties have sought to draw a distinction for travel expenditure and, in fact, as we shall presently see, also have interest expenditure, being conscious of fact that these are or may not be final.
The pre-operative expenditure would capture that incurred and sustained during and in the course of setting up the project which, as we understand, is yet to commence production. The setting up and commencing of the project is a huge and complex exercise, entailing expenditure at various levels. Engineers and Supervisors may have to be deputed at site along with the sub-ordinate staff, ever since the inception of the project. At times, in fact, this is out sourced to project consultants whose job is to deliver the project on a turnkey basis. In fact, in that case too, dialogue (communication) and interaction at each stage between the company and consultants would be required, with some personnel of the company being engaged solely and/or partly on the project, its implementation or supervision thereof, which is to be planned and executed to the minutest detail. The details of plant and machinery, down to the lowest operation, have to be specified and the vendors shortlisted, which is itself an exercise, implying crystallization of the quality and price of supply. The travel expenditure could be for visiting the site (as all the personnel may not be located threat), or even at the vendor's site where the machinery or a part of the project is under fabrication, or even for negotiation of the purchase thereof, and so on.
6.3 The premise of the tribunal's order (supra) is that the determination of whether an expenditure is a capital expenditure is essentially a matter of fact, to be decided on the 20 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited basis of the well settled legal principles, which it in fact list out (refer para 12 pgs.6-9 of section 254(1) of the order for A.Y. 1995-96 and 1996-97 (supra)), culling out the same from Hylam Ltd.'s case (supra). However, what we find to have guided its decision is that the expenditure is toward acquiring an asset which would result in an advantage in the capital field, which it also found to be also the accounting mandate in its respect on the basis of the relevant accounting standards. The two being in agreement, the expenditure which is or in terms of its essential attributes, capital expenditure, would not become not so, or revenue expenditure, merely because it is incurred in relation to an existing business, as in relation to the expansion or diversification of the existing production capacity/capability. The impugned expenditure is, thus, in its view, definitely a capital expenditure. The assessee-company, on the other hand, does not dispute the expenditure under reference to be toward setting up and expansion and/or diversification project. All the direct cost on the acquisition of various assets, viz., land, building, plant and machinery, etc., are accounted for under the relevant account heads as a part of the project cost. In fact, even the cost under the head 'pre-operative expenditure' is accounted for and booked as a 'capital work-in-progress', and finally allocated to the relevant assets, i.e., toward the creation or acquisition of which costs stand incurred. However, the said project being an expansion of an existing project, the same in its view is to be considered as revenue expenditure. The validity of this dichotomy in law is the issue that attends the instant case. That is, whether the costs, other than the direct cost of the acquisition of the relevant assets, incidental to and admittedly incurred in setting up a project, would retain the character of the capital cost of the project or be a revenue expenditure, i.e., where incurred in relation to the expansion of an existing business project.
6.4 The issue, as discerned on the reading of the orders of the authorities below and the assessee's submissions before us, was also confirmed by us from the ld. AR during hearing with reference to the decision in the case of Challapalli Sugars Ltd. vs. CIT [1975] 98 ITR 167 (SC). It was clarified by him that the expenditure, which if incurred in 21 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited relation to a new project would definitely be capital expenditure, would not be so where incurred in relation to an existing business, so that it is only an expansion or extension of the existing set up, drawing our attention to a recent decision by the hon'ble Delhi high court in the case of Havells India Ltd. (supra), also reading there-from (para 17 to 20). Whether an expenditure is capital or revenue is essentially a matter of fact, to be decided on the appreciation of the entire facts of the case, even as clarified by the apex court in Assam Bengal Cement Co. Ltd. vs. CIT [1955] 27 ITR 34 (SC), one of its earlier judgments and a locus classicus on the subject, venturing, with great circumspection, to delineate some (3 in number) broad principles, as deduced from precedents, including those under the English law, at pg.44 of the reports, finding itself in agreement with those as enunciated in Benarsidas Jagannath, In re [1947] 15 ITR 185 (Lah) (FB). The criteria, it cautioned, have to be applied one after the other from the businessman's point of view and come to a conclusion on a fair appreciation of the whole situation as to whether the expenditure incurred in a particular case is of the nature of capital expenditure or revenue expenditure, in which latter case only it would be deductible (pg. 45) (also refer Empire Jute Co. Ltd. vs. CIT [1980] 124 ITR 1 (SC)). It may also be relevant to extract its observations in explaining those tests, even as the discussion in the following pages (pgs.46, 47) is equally important and relevant:
'This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the point of view of what is the source from which the expenditure is incurred. If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it 22 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits it is a revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or a revenue expenditure. The source or the manner of the payment would then be of no consequence. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or part of its circulating capital. If it was part of the fixed capital of the business it would be of the nature of capital expenditure and if it was part of its circulating capital it would be of the nature of revenue expenditure. These tests are thus mutually exclusive and have to be applied to the facts of each particular case in the manner above indicated. It has been rightly observed that in the great diversity of human affairs and the complicated nature of business operations it is difficult to lay down a test which would apply to all situations.' (pg.45) The test as laid down in British Insulated and Helsby Cables Ltd. [1925] 10 Tax Cases 155 (HL), a leading authority on the subject, by Viscount Cave, L.c., i.e., where the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business, it is properly attributed to capital and is in the nature of the capital expenditure, found its concurrence; the apex court in fact stating of the same as being almost universally accepted (pg.39). It is the very same test that, as would be noted, that has been applied by the tribunal, drawing support from the decision in the case of Hyllam Ltd. (supra). How could, we wonder, the same be disputed?
6.5 Accounting Standard (AS)-10 'Accounting for fixed assets' issued (in 1985) by Institute of Chartered Accountants of India (ICAI) (which is mandatory in its application u/s.211 of the Companies Act, 1956 since 01.11.1998), after an exhaustive and comprehensive examination, including the review of the international accounting standards defines fixed assets and the components of the cost as under:
"Accounting Standard (AS) 10 (issued 1985) 23 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited Definitions
6. The following terms are used in this Statement with the meanings specified:
6.l Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.
9. Components of Cost 9.1 The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:
(i) site preparation;
(ii) initial delivery and handling costs;
(iii) installation cost, such as special foundations for plant; and
(iv) professional fees, for example fees of architects and engineers.
The cost of a fixed asset may undergo changes subsequent to its acquisition or construction on account of exchange fluctuations, price adjustments, changes in duties or similar factors.
9.2 Administration and other general overhead expenses are usually excluded from the cost of fixed assets because they do not relate to a specific fixed asset. However, in some circumstances, such expenses as are specifically attributable to construction of a project or to the acquisition of a fixed asset or bringing it to its working condition, may be included as part of the cost of the construction project or as a part of the cost of the fixed asset.
9.3 The expenditure incurred on start-up and commissioning of the project, including the expenditure incurred on test runs and experimental production, is usually capitalised as an indirect element of the construction cost. However, the expenditure incurred after the plant has begun commercial production, i.e., production intended for sale or captive consumption, is not capitalized and is treated as revenue expenditure even though the contract may stipulate that the plant will not be finally taken over until after the satisfactory completion of the guarantee period.
24ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited 9.4 If the interval between the date a project is ready to commence commercial production and the date at which commercial production actually begins is prolonged, all expenses incurred during this period are charged to the profit and loss statement. However, the expenditure incurred during this period is also sometimes treated as deferred revenue expenditure to be amortised over a period not exceeding 3 to 5 years after the commencement of commercial production."
The emerging principles to be followed are listed at paras 18 - 37 of the Standard. Paras 20, 21 are most relevant for our purpose, and read as under (pg.148):
"Main Principles
18. ...........
19. ............
20. The cost of a fixed asset should comprise its purchase price and any attributable cost of bringing the asset to its working condition for its intended use.
21. The cost of a self-constructed fixed asset should comprise those costs that relate directly to the specific asset and those that are attributable to the construction activity in general and can be allocated to the specific asset."
The same, it would be noted, bears a striking similarity with the principles, evolved over a long period of time so as to be accorded the status of being universally acceptable, by the hon'ble courts of law, so that all costs that can reasonably be attributed to bringing an asset to its working condition for its intended use is to form part of its cost.
6.6 There is, thus, a unanimity between the accounting and statutory definition of 'actual cost', which (the latter) being only negatively defined in section 43(1) of the Act, would, therefore, have to be considered in the manner as explained by the higher courts of the law and in light of the accounting definition. This was observed clearly by the apex court in inter alia Challapalli Sugars Ltd. (supra), stating that the rule of accountancy is to be adopted for determining the actual cost of the assets in the absence of any statutory definition or any indication to the contrary. The question before the apex court in that case was the validity of the capitalization of interest on capital borrowed for acquiring and construction of assets for the time period of their actual construction. This is significant as only that much of the interest cost could be said to be expended toward 25 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited bringing an asset into existence. The AS confirms that any abnormal time period (as on account of time slippages, interruption, etc.) is not to be included inasmuch as the same does not add value and is, therefore, not properly attributable to capital, suggesting its write off to the profit and loss account either in the year of incurring or on a deferred basis. The decision holds to date, being regularly followed, applied and relied upon by the courts across the country, including the hon'ble jurisdictional high court, with extracts there-from being quoted with abandon, including in the judgment cited before us, as in the case of CIT vs. Atul Drug House Ltd. [1993] 112 CTR (Bom) 393, CIT vs. Flexicons Ltd. [1991] 192 ITR 73 (Bom), CIT vs. Vora Exclusive Tools (P.) Ltd. [1990] 186 ITR 533 (Bom), CIT vs. Tata Chemicals Ltd. [1986] 162 ITR 662 (Bom) and, CIT vs. Inter Link Traders (P.) Ltd. [1983] 144 ITR 173 (Bom) etc. What, then, we wonder is the controversy about?
In the instant case, the expenditure under reference is admittedly incurred toward setting up a new project, leading to both, the expansion as well as diversification of the existing production capability. That fact would not operate to convert a capital expenditure into a revenue expenditure, the attributes and parameters of which are entirely different. Even as explained in Assam Bengal Cement Co. Ltd. (supra), and then time and again by the apex court, as in the case of Empire Jute Co. Ltd. (supra), that what is to be seen is as to whether the expenditure is toward the profit making structure or apparatus, which is the source of income/profit, so as to be satisfy the test of enduring benefit, i.e., in the capital field, or the same (i.e., the profit making structure or apparatus) remains untouched or unaltered, and only enables the assessee to work it more efficiently or better. As succinctly put in Assam Bengal Cement Co. Ltd. (supra) (pg.44):
'You do not use it 'for the purpose of your concern, which means, for the purpose of carrying on your concern, but you use it to acquire the concern.' There was no addition or expansion of the profit making apparatus; no enlargement of the permanent structure yielding produce, but only enabling its working for a longer time and, thus, primarily or essentially related to its operation in the latter case, so that the expenditure on purchase of loom hours by the assessee was held to be on revenue 26 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited account. The finding in the former case, i.e., Assam Bengal Cement Co. Ltd. (supra), based on the same principles, and which must therefore be regarded as its ratio, was just the opposite; the hon'ble court finding the impugned expenditure to be not toward the working of the business per se but to appreciate its existing capital structure, making it more profit yielding. The final finding, being rendered on an appreciation of the entirety of facts, thus, though informative, could well be different and of little precedent value, which is comprised in the principles on which the decision is based - its ratio.
6.7 Coming back to the facts of the case, that the expenditure is toward enlargement of the capital structure of the firm is not in doubt, the enhancement or improvement in fact being both in quantitative and qualitative terms inasmuch as the programme under implementation is for both expansion and diversification. That the said expenditure results, along with other expenditure, in creation or bringing into existence fixed assets -
the profit making apparatus, to be deployed in business, is again not in doubt, having been in fact allocated by the assessee toward the relevant assets. The expenditure is thus squarely covered by the principles as stated in Assam Bengal Cement Co. Ltd. (supra), one of which reads as follows:
"Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment" (at pg.44).
The expenditure also satisfies the accounting test, which has been clarified by the apex court in Challapalli Sugars Ltd. (supra) to be equally applicable for the purposes of the Act in the absence of any statutory definition. In fact, as we have seen, not only the accounting criteria corresponds with the principle evolved by the judicial forums; the accounting criteria is more strict and fine-tuned in-as-much as any expenditure which cannot be regarded as normal would merit exclusion in-as-much as it is not perceived as adding value, while no such exception is provided under the Act which regards the cost as actually incurred. There is in fact nothing on record to suggest nor in fact any claim that the cost under reference (or any part thereof) is an abnormal cost, not adding value, etc., so that it is not properly attributable to capital. We, accordingly, on first principles 27 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited find little merit in the assessee's case, again, looked at from any angle. The decision by the hon'ble jurisdictional high court as in the case of Ciba of India Ltd. vs. CIT [1993] 202 ITR 1 (Bom) and Koya Constructions (P.) Ltd. vs. Dy. CIT [2013] 38 taxmann.com 441 (Hyd. - Trib.), cited by the tribunal in its order, are clearly on the point and supportive, so that any expenditure attributable to bringing an asset in existence for its working for its intended use forms part of its cost. That the expenditure in both these cases was for travel, for which exception is made by the ld. CIT(A), is in our view of no moment.
6.8 We may, however, draw a distinction between the interest expenditure and other than the interest expenditure comprised in the impugned expenditure, in that the former is deductible u/s.36(1)(iii) as against 37(1) for the latter, so that, as judicially declared, may include capital expenditure as well. The decision in the case of Dy. CIT vs. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj) has since been upheld by the apex court in Dy. CIT vs. Core Health Care Ltd. [2008] 298 ITR 194 (SC). The hon'ble Punjab & Haryana high court vide its decision in CIT vs. Vardhman Polytex Ltd. [2008] 299 ITR 152 (P & H), clarified that the provision of section 36(1)(iii) and Explanation 8 to section 43(1) have to be read in conjunction and not de hors or in isolation of each other. The interest expenditure suffered on borrowed capital deployed on assets, to the extent it is for their acquisition and installation, for bringing them into working condition for their intended use, is to be capitalized, etc., even prior to the amendment to section 36(1)(iii), on a conjoint reading of section 36(1)(iii), i.e., Explanation 8 to s. 43(1). The amendment by way of proviso to section 36(1)(iii) by Finance Act, 2003 was held as only clarificatory.
To the same effect and purport is a decision in the case of JCT Ltd. vs. Dy. CIT [2005] 276 ITR 115 (Cal), holding the proviso to section 36(1)(iii) to be toward abundantly clarifying the matters, and to remove the question of double deduction. It is trite law that the Act has to be read as an organic whole, having regard to its scheme. That is, the different provisions, to the extent permissible, are to be read in conjunction and in harmony with each other. The apex court in Escorts Ltd. and Another vs. Union of India 28 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited and Others [1993] 199 ITR 343 (SC) has clarified that it is a fundamental, though unwritten, axiom that no legislation could have intended a double deduction in regard to the same business outgoing and, further, that if so intended, it will be clearly expressed. Clearly, an expenditure could not conceivably form both a part of actual cost of a capital asset u/s.43(1), eligible for depreciation allowance u/s.32, as well as be deductible u/s.36(1)(iii) on the ground that the same is not restricted to revenue expenditure alone. The apex court in Challapalli Sugars Ltd. (supra), as afore-noted, has already validated the capitalization of interest for the construction period, giving credence to the accounting principles. However, the apex court in Core Healthcare Ltd. (supra) has held otherwise. Though there is no reference therein to the foregoing decisions, that would not in any manner detract from the binding nature of the said decision; in fact, has followed it in reversing the decision by the hon'ble high court in Vardhman Polytex Ltd. vs. CIT [2012] 349 ITR 690 (SC). Accordingly, without doubt, an exception has to be made for interest expenditure, so that to the extent allocated to fixed assets, it would, notwithstanding its capital nature, be eligible for deduction u/s.36(1)(iii) (the years being prior to the amendment thereto). The actual cost u/s.43(1) would, therefore, stand to be modified to that extent.
6.9 Finally, we may discuss the assessee's reliance, to begin with, on the decision in the case of Havells India Ltd. (supra), as also its indiction of the tribunal's reliance on the decision in the case of Hylam Ltd. (supra), i.e., in the assessee's case for the preceding years. There is no discussion on the precedents by the hon'ble court in Havells India Ltd. (supra), whose findings are at para 20 of its judgment. As explained in the case of Assam Bengal Cement Co. Ltd. (supra), the question to be asked is whether it (the expenditure) is for the purpose of business or for acquiring the same. We have, with reference to first principles laid down in the case of Assam Bengal Cement Co. Ltd. (supra), as well as the decision in the case of Empire Jute Co. Ltd. (supra), found an enlargement of the permanent or the capital structure, the profit making apparatus, as a criterion in determining if the expenditure under reference is in the capital field. Whether it is for a 29 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited new facility or for additional facility is of no consequence, as either amounts to an increase in the capacity or the profit making structure. The impugned expenditure is not only towards the expansion but also diversification, so that there is not only the capacity building but also the acquisition or improvement in capability. The said decisions, inter alia, equally apply in the facts of the case, apart from the decision in the case of Challapalli Sugars Ltd. (supra). Neither would the ratio of the said latter decision be limited to interest expenditure nor qua new units only, even as sought to be emphasized by the ld. AR before us. The ratio would be as to what constitutes capital expenditure. In fact, being extensively relied upon, it would be useful to extract its observations as quoted by the jurisdictional high court in the case of Ciba of India Ltd. (supra) (at pgs.12/13 of the reports):
'We find that earlier also, the Supreme Court had occasion to explain the concept of actual cost in the context of allowance of depreciation under the Indian IT Act, 1922 in Challapalli Sugars Ltd. vs. CIT [1974] CTR (SC) 309 : (1975) 98 ITR 167 (SC). It was observed (at page 173):
"..... 'actual cost' should be interpreted in the sense which no commercial man would misunderstand".
The Supreme Court held that for this purpose it would be necessary to ascertain the connotation of the expression in accordance with the normal rules of accountancy prevailing in commerce and industry. It was observed (at page 175):
"..... the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition. In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets which have been created as a result of such expenditure....".' The reliance on the said decision by the assessee in view of the nature of the expenditure and its determinants, as explained by binding precedents, would, thus, be of no assistance to it.30
ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited The assessee also states that the tribunal's reliance on the decision in the case of Hylam Ltd. (supra) is misplaced. The tribunal per its section 254(2) order clarifies that its reliance was on the principles as culled out by the hon'ble court, forming precedence, toward providing guidance in the matter. The assessee in order to meaningfully pursue its objection was required to show any infirmity in any of the principles, or that followed by the assessee, and which resulted in the tribunal misleading itself. In fact, we find that each of the three principles cited by the apex court in Assam Bengal Cement Co. Ltd. (supra) find mention in the case of Hylam Ltd. (supra). The final decision may well not be correct, which would only imply an incorrect application of those principles or mis-
appreciation of the facts of the case, and not by itself an incorrect statement of the principles. In Praga Tools Ltd (supra), the expenditure under reference was held as revenue on the basis that it had a direct nexus or relation to the carrying on or the conduct of the business and, therefore, was an integral part of the profit making process. The proposition is undisputed. How would that, however, assist the assessee's case is not understood. There was no reference to either the said decision or in the case of Hylam Ltd. (supra) by the ld.AR while arguing the case on merits, but only toward making out the instant case as not covered thereby against the assessee, so as to be decided by us on that basis, i.e., as a covered case. We, as would be apparent, has not treated as so; rather, based our decisions on analysis of facts and first principles. The objection is, particularly in the manner raised before us, misplaced.
To the same effect and purport is the assessee's reliance on the decision in the case of Addl. CIT vs. Akkamamba Textiles Ltd. [1997] 227 ITR 464 (SC) and CIT vs. Sivakami Mills Ltd. [1997] 227 ITR 465 (SC) and, following it, on Vikram Mills Ltd. vs. CIT [2000] 242 ITR 290 (Guj). The first decision is towards a shade, which being used for drying, an essential process for manufacturing of tiles, in which the assessee was engaged, was held as 'plant'. We find no correlation of the same with the present case. The other two decisions are in respect of guarantee commission (and/or betterment charges) paid to the banker for issuing letter of credit in the assessee's favour to enable it to procure machinery on credit/deferred payment basis. Which principle, as enumerated 31 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited by the hon'ble courts, or rule of accountancy, we are unable to see, would sanction a payment arrangement as toward the cost of acquisition of an asset, much less add value to it? As explained in Assam Bengal Cement Co. Ltd. (supra), the source or the manner of payment would be of no consequence. The capitalization of interest expenditure, lest it may also be argued to be a payment arrangement, is toward the cost of the credit and, further, on the basis that the capital deployed (at a cost) requires a gestation time for the relevant asset to mature/fructify, making the acquisition complete. For example, a building is to be build, which shall consume a certain amount of time over which the funds would require being deployed, entailing interest cost. The said decision, laying down the correct proposition of law, would nevertheless be of no assistance to the assessee.
6.10 Lastly, the assessee states that the matter had to be in any case referred to the larger bench of the tribunal in view of conflicting decisions in the case of Bank of America vs. Dy. CIT [2001] 78 ITD 1 (Mum) and Kalyani Steels Ltd. vs. Dy. CIT [1997] 62 ITD 233 (Pune). We are wholly unable to appreciate the assessee's stand. The principle or the proposition of the law in the matter are well settled, with in fact the apex court cautioning in Empire Jute Co. Ltd. (supra) that even the enduring benefit test may break down in certain cases, so that it cannot be applied blindly or mechanically without regard to the particular/peculiar facts and circumstances of a given case. This again finds reiteration by the hon'ble jurisdictional high court in Standard Mills Co. Ltd. vs. CIT [1994] 209 ITR 85 (Bom). Where then is the question of reference to a larger bench, which proposition by the assessee, as we gather from record, stands unaccepted by the hon'ble President of the tribunal.
The issue arising for adjudication is whether the expenditure under reference is, in the facts and circumstances of the case, incurred in relation to the acquisition of an asset forming part of the capital structure of the business, i.e., in its working condition for the intended user or not. A decision, thus, has to be made in each case on an appreciation of the facts of the case. The tribunal has already decided against the assessee for the 32 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited immediately two preceding years, and against which decision the assessee is in appeal before the hon'ble high court, and which would, therefore, have a direct bearing on the instant case as well; the expenditure being on and qua the same project and purportedly of the same nature inasmuch as neither of the parties claimed differently. In fact, no different case stands made out before us. Chapter XIV-A of the Act provides for a procedure to avoid repetitive appeals. The plea in any case cannot be conditional, or made alternatively, concern as it does a rule of judicial precedence. The decision by the tribunal in the case of Core Healthcare Ltd. (supra) has found acceptance by the higher court in Dy. CIT vs. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj). The said decision, inasmuch as it confirms the interest expenditure to be capital expenditure though allowable u/s.36(1)(iii), confirms the order by the tribunal in principle, inasmuch as only the revenue expenditure could be allowed u/s.37(1), which is even otherwise trite law. That is, having found validation by a higher judicial forum, the two decisions by the tribunal cannot be said to have the same precedent value. The said plea is, therefore, without merit. This answers G # 3 of the Revenue's appeals for the relevant years in the affirmative, vacating the findings by the first appellate authority deleting the impugned disallowance, save the amount of interest expenditure included therein. The assessee shall though be entitled to a claim of depreciation allowances u/s.32(1) thereon, where and to the extent otherwise exigible, which in fact represents its alternate claim.
Issue No.3
7. The third principal issue arising in the instant appeals is the disallowance of Rs.228.18 lacs on account of alleged inflation in purchases, since deleted by the ld. CIT(A), so that the Revenue is in appeal. The issue arises in the Revenue's appeal for A.Y. 1999-2000 per Gd # 1.
8. The brief facts are that the assessee's purchase of steel (EDD quality CR sheet of 1 mm thickness) from two parties, i.e., Espat Industries Ltd. (Rs.10.04 cr.) and Bhushan Steel & Strips Ltd. (Rs.12.78 cr.), at Rs.22.82 crores in aggregate, was, at an average rate of Rs.25.50 per kg., found by the A.O. to be higher by about 10% with reference to the 33 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited market rate obtaining for the relevant previous year (Ex. Kanpur), i.e., Rs.23 per kg. This in his view was inconceivable considering that the assessee was a bulk purchaser in-as- much even a difference of 10 to 20 paise per kg., which margin may be considered reasonable or understandable for a standard and competitive item as the EDD quality CR sheet, would amount to a large sum. Accordingly, 10% of the total purchase as made from these two parties, i.e., Rs.2,28,17,887/-, was disallowed u/s.37(1) as being not wholly and exclusively incurred for the purpose of business.
In appeal, the assessee explained that the EDD quality steel being procured by it, an Original Equipment Manufacturer (OEM), was not available in the open market in-as- much as that the rate comparison as made by the A.O. was not valid. The assessee was purchasing goods from four different suppliers, rates for which, though different, were comparable and in each case higher than the 'market' rate as found by the A.O. Reliance was placed on the decision in the case of Godavari Sugar Mills Ltd. vs. CIT [1985] 155 ITR 306 (Bom). The ld. CIT(A) deleted the disallowance on that basis, holding that the A.O. had no power to disallow an expenditure on the ground of it being excessive or unreasonable. Aggrieved, the Revenue is in appeal vide its ground no.1.
9. Before us, while the ld. DR would rely on the order of the A.O., the ld. AR, relying on the decisions by the apex court in CIT vs. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC) and J. K. Woollen Mfg. vs. CIT [1969] 72 ITR 612 (SC), besides Godavari Sugar Mills Ltd. (supra), would submit that there is no scope for the disallowance on the ground of unreasonableness under the Act. The A.O. cannot sit in judgment in business decisions by the assessee, deciding what price was under the circumstances reasonable. There was no claim that the purchase was sham or a bogus transaction.
10. We have heard the parties, and perused the material on record, including the case law cited.
10.1 With regard to the law in the matter, the same is trite, having been also clarified per the decisions by the apex court cited at bar supra: in applying the test of commercial 34 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited expediency for determining whether an expenditure is wholly or exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. It is this legal position that represents the settled law in the matter, accepted, perhaps, as we shall presently see, universally; the hon'ble jurisdictional high court quoting from the CIT vs. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) in Voltas Ltd. vs. CIT [1994] 207 ITR 47 (Bom) as under, also noting and explaining the observations by the apex court in Sassoon J. David & Co. Pvt. Ltd. vs. CIT [1979] 118 ITR 261 (SC) at pg. 275 (at pg.52):
'. . . However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the 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. . . .' The A.O., as an assessing authority, cannot adopt his subjective standard of reasonableness, but it is well within his purview to examine that the expenditure or the liability stands incurred in the character of a trader, i.e., on business/trade considerations. The test as laid down in British Insulated and Helsby Cables Ltd. vs. Atherton [1926] AC 205 stands quoted with approval and applied by the apex court in Eastern Investments Ltd. vs. CIT [1951] 20 ITR 1 (SC) and CIT vs. Chandulal Keshavlal & Co. [1960] 38 ITR 601 (SC) (at pg.611). Reasonableness, thus, is not ousted from consideration of the A.O. but is to be examined or considered from the standpoint of the businessman and, further, based on an objective assessment of the matter. Reference in this regard may be made to the decisions in the case of CIT vs. Navsari Cotton & Silk Mills [1982] 135 ITR 546 (Guj) and Ram Bahadur Thakur Ltd. vs. CIT [2003] 261 ITR 390 (Ker) (FB), which (latter) stands rendered on an extensive review of the case law, including the decisions by the apex court referred to by the assessee, listing various tests or parameters on the anvil of which the admissibility of the expenditure u/s.37(1) is to reckoned, and which includes reasonableness as well.
It is trite law that in the expression 'wholly and exclusively' used in section 37(1), the word 'wholly' refers to the quantum of the expenditure, the sums spent, and the word 35 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited 'exclusively' occurring in the qualifying condition of the said provision refers to the motive or the objective of incurring the expenditure, so that both the purpose, exhibiting the nature or the character of the payment, and its quantum, are relevant and, therefore, would need to be substantiated. Quantum, it is to be appreciated, may have a direct bearing or relation with the genuineness of the expenditure itself. What is proscribed though is the questioning of the decision to make the payment where otherwise made in the capacity of a trader. Again, it may also not be permissible to draw an adverse inference, i.e., as to the nature, on the basis of quantum alone, which though is a relevant consideration and could form, along with others, as well as other corroborative evidences, a reasonable and cogent basis for drawing an adverse inference in the facts of a particular case. It is not open for the assessing authority to, for example, question if the assessee travels business class or economy class, or even if he was at all required to undertake the travel where the purpose is otherwise not in doubt. He cannot, likewise, to cite another example, question if the assessee stays in an ordinary hotel or a five star hotel (say) as long as the purpose of the stay is for business. However, if the assessee books expenditure for business-class, while travels economy, the same would definitely call for explanation, and a disallowance for the difference (say) follow where no satisfactory explanation is furnished and, further, it shall be no ground that the payee has duly accounted for or disclosed the receipt or is not related to the assessee, considerations which may otherwise be relevant and go into forming a view as to the genuineness of the whole expenditure, i.e., as claimed.
The burden of proving commercial expediency, it needs to be appreciated, extends to the whole of the expenditure being claimed and not to a part of it, so that, where relevant, the same would need to be established. Further, the issue of quantum, as afore- stated, falls squarely within the scope and ambit of the words 'wholly and exclusively' occurring in section 37(1), the test of which has to be satisfied. The primary onus to prove its return, and thus the claim/s preferred thereby, is only on the assessee (refer: CIT vs. Calcutta Agency Limited [1951] 19 ITR 191 (SC)). What, therefore, the assessee is being called upon to satisfy is the condition of section 37(1). Any other reading of the 36 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited law would, besides defeating its clear mandate per section 37(1), make the use of the words 'wholly and exclusively' therein otiose. An assessee could book any sum of expenditure, and which may have serious implication on its genuineness. The only limitation on the A.O., whose powers in the matter of assessment are plenary, is that he cannot step into the shoes of the businessman so as to decide what ought to be expended, how and where. He is however, at the same time, duty bound to determine that the expenditure as claimed has been expended for business purposes, viewed of course from a businessman's point of view - nothing more and nothing less. The assessee, being in the intimate know of its affairs, only could explain the purpose of expending the amount as 'actually' expended, so that the issue is essentially with regard to the reality of the expenditure (to the extent claimed). Reasonableness, it would be thus seen, is imbued in and an essential element of the assessment process, being fundamental to its objectivity and cogency, i.e., the parameters on which a valid assessment rests.
That reasonableness is a relevant consideration is a part of the well-settled law, as emphasized once again by the hon'ble jurisdictional high court in Ramanand Sagar vs. Dy. CIT [2002] 256 ITR 134 (Bom). In fact, the hon'ble courts, as in the cases of Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 439 (SC); Steel Containers Ltd. vs. CIT [1978] 112 ITR 995 (Cal); Niemla Textile Finishing Mills (P) Ltd. vs. CIT [1975] 100 ITR 611 (Puj), have clarified that the mere existence of an agreement and payment is not sufficient and the taxing authority can, nay, is duty bound to consider the relevant facts and on the basis thereof, including the surrounding circumstances, determine the matter in consistence therewith, to conclude that the payment was not genuine. Under such circumstances, the authority does not thereby substitute his view as to how the assessee's business affairs should be managed but disallows the expenditure because the condition of its admissibility was absent. Could it be so, one may ask, without reasonableness being included as an essential element or as a basic attribute for examining the arrangement? This clarifies the position of law beyond doubt, so that rather than being outside the competence/purview of an assessment under the Act, as is being in effect argued before us, the assessment process could not obtain de hors 37 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited reasonableness. In sum, the matter is principally factual even as stated explicitly in the case of Ram Bahadur Thakur Ltd. (supra) that in every case it is a question of fact whether the expenditure was incurred wholly and exclusively for the purpose of trade or business of the assessee.
10.2 Coming to the facts of the case, why, one may ask, one would expend Rs.X for a particular good which is available for Rs.0.9X in the open market. Rather, the assessee being a bulk purchaser should presumably be able to bargain a lower rate. This sums up the controversy attending the instant case, and which is being as objective as one could be. Surely, if it is not being made ex-gratia or for extra commercial consideration/s, i.e., to the extent of the difference, the assessee is bound to explain and prove the business purpose/s for the same. This is as only in that case could it validate its' claim for the whole amount, satisfying the quantum test of the provision. And, the explanation, where provided, as well as the materials in support, would have to be considered from the stand- point of a businessman/trader, again, on the touchstone of reasonableness, a factual matter, to be decided upon objectively in the facts and circumstances of the case. The foregoing would also signify the value of reasonableness. Why, but for it, what is stopping one to claim (say) Rs.1.5X, or Rs.2X or Rs.3X or even Rs.10X, as the purchase cost? Reasonableness is integral to and an essential attribute of assessment. In fact, to the rule of law itself, unless of course one argues that law itself is not 'fair' and 'reasonable'
- which attributes again go hand in hand.
There is, further, one more reason as to why we have sought to capsule the controversy arising in the manner done. This is as the initial onus to rebut what is apparent is not real is on the person who so alleges, so that the payment at the rate being recorded in the books of both the assessee-purchaser and the seller, and without doubt the goods having been bought in the quantity mentioned, has been apparently at that rate. So however, the A.O. has on the basis of the enquiries material to show that the stated rate may not be the real rate, which is lower than the recorded rate by no less than 10%, so that the initial onus on the Revenue gets discharged. In fact he has, apart from the market, 38 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited also made enquiries from M/s. Bajaj Auto Ltd., another bulk purchaser, through the concerned A.O., which reveals the prevailing rate of the specified quality of steel at Rs.22.50 per kg. (Ex-Pune). The assessee on being called upon to state its case has, without exhibiting so, admitted to purchasing the relevant goods at a rate higher than the market rate. It does not explain why or as to why the query or the inference drawn is not relevant, or how is the steel being purchased by it different from that being purchased by M/s. Bajaj Auto Ltd. or that available in the open market. That the parties are not related to the assessee is under the circumstances of no consequence. Further, the bills from M/s. Bhushan Steel & Strips Ltd. to other parties, adduced by the assessee in support, were upon examination distinguished by the A.O. in-as-much as the same were for steel of a lesser thickness, i.e., of a different quality, which fetches a higher price in the 'market'. Further, the same, though not irrelevant, the question is not the sale price being charged by M/s. Bhushan Steel & Strips Ltd. to other parties, so that the bills issued by it would ostensibly have the same sanctity as the bills issued to the assessee, but the prevailing rate of the said goods in the market at the relevant time, given the characteristics (viz. bulk, etc.) as attend the assessee's purchase, and why has the assessee paid a price higher by over 10% thereof? It could however be exhibited by the assessee that the sale rates of the two suppliers under reference are higher than the prevailing market rate, stating the reasons therefor in-as-much as presumably it could not be without an underlying reason/s or cause/s. That is, the said evidence cannot be said to be irrelevant, though the matter would require being pursued further to its logical end.
Continuing further, the findings by the A.O., as the purchase rate/s of M/s. Bajaj Auto Ltd., were, however, not confronted to the assessee, who has also stated of the payment terms as being a price determinant. The argument, though valid, would need to be backed by facts, i.e., the price range for the different payment schedules, in the absence of which the purchase rate as booked could be taken for the average credit period obtaining in its case, and a comparison made with similar payment terms or upon factoring the same.
39ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited 10.3 The issue is in view of the foregoing factually indeterminate. It is accordingly only considered fit and proper, as also in the interest of justice and fairness of procedure, that the matter is restored back to the file of the A.O. for adjudication afresh in accordance with law by issuing definite findings of fact and after allowing the assessee a proper opportunity to present its case. We decide accordingly.
11. We may now discuss the various other issues and grounds raised in the instant appeals, proceeding appellant-wise and, further, year-wise:-
Assessee's Appeals
12. Ground nos.3, 4 & 5 and the additional ground of the assessee's appeal for A.Y. 1997-98 (as well as additional ground for A.Y. 1998-99) were not pressed during the hearing. The additional ground/s was in fact not argued for its admission as well. The same are accordingly dismissed as not pressed and not admitted, as a case me be. We decide accordingly.
13. Ground No.6 for A.Y. 1997-98 (as well as ground no.5 for A.Y. 1998-99) are qua interest u/ss. 234 & 234C. The same were admitted by the parties as consequential. In fact, section 234C is levied only on the short-fall on the advance-tax reckoned with reference to the return of income, so that it is independent of the subsequently assessed income. The grounds are, accordingly, dismissed. We decide accordingly.
Result
14. The assessee appeal for A.Y. 1997-98 is, accordingly, partly allowed.
15. Ground No.3(III) for A.Y. 1998-99 is in respect of disallowance of club expenses at Rs.2,43,505/-. The assessee claimed a total sum of Rs.5,91,505/- under the relevant head, of which Rs.3,48,000/- was stated as disallowable u/s.40A(9) of the Act as per the Tax Audit Report u/s. 44AB furnished along with return of income (ROI), vide Annexure-F thereof. Accordingly, the balance impugned sum of Rs. 2,43,505/- stood disallowed. The same stood confirmed in appeal in the absence of any substantiation of 40 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited its case by the assessee before the ld. CIT(A), with he further stating that no case for even a remand had been made before him.
16. No improvement to its case was made out before us. We, accordingly, finding no infirmity in the impugned order on this ground, confirm the same. We decide accordingly.
17. Ground no.4 (IV) for A.Y. 1998-99 is qua the foreign exchange loss incurred and claimed in the sum of Rs.14,71,000/- through debit to the profit and loss for the relevant accounting year. The same being incurred in respect of a liability assumed on import of raw material, the same in the view of the AO would also find inclusion in the cost of the said raw material as at the year-end, leading to an increase in the valuation of the closing stock of the said material to that extent. The same found confirmation at the end of the ld. CIT(A) on the same basis. Aggrieved, the assessee is in second appeal.
18. We have heard the parties, and perused the material on record. The assessee before us relied on its submissions before the first appellate authority. The addition, it is to be noted, is on account of the addition to the cost of the closing inventory of the imported raw material, i.e., on account of depreciation in the Indian currency vis-à-vis the foreign exchange under which corresponding purchase liability stood denominated per the relevant contract. Accounting Standard (AS) 2 on the valuation of inventories issued by the ICAI; the assessee advancing its case on the basis of the said AS in-as-much as the same is binding on it under the Companies Act, mandates valuation at the aggregate of the cost of purchase; the cost of conversion and other costs incurred in bringing the inventory to its present location and condition. The same would hold in the absence of any specific accounting standard, i.e., on valuation of inventories, issued by CBDT u/s. 145, with AS-2 (of ICAI) only articulating the well accepted principle of commercial accounting in the matter. The purchase of the raw material stood completed on the delivery of the relevant goods to the assessee as per the relevant contract/s. Any subsequent increase (or decrease) in the corresponding purchase liability, would be 41 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited independent of the purchase cost, which gets crystallized on the date of purchase, i.e., on it being completed. That is, the same would not keep varying with each fluctuation in the exchange rate till the entire liability in respect of the purchase is liquidated. Reference in this context may be made to the decision in the case of CIT vs. Tata Iron & Steel [1998] 231 ITR 285 (SC). Though rendered in the context of cost of a capital asset, the principle in our view would apply equally for any asset. The AS-2, not dilating in the matter, the assessee before the ld. CIT(A) relied on international accounting standard, which advocates factoring the exchange fluctuation in the cost of the purchase only when the same is in respect of a recent purchase, in the event of severe devaluation, and where there was no means of hedging the transaction. The premise is clear - the exchange fluctuation is ordinarily not factored into the cost of purchase in-as-much as the same does not add value to the goods, since purchased, and neither in bringing them to their present location and condition. The insistence of the Revenue in increasing the cost of acquisition of the imported raw material is misplaced. At the same time, the liability incurred on purchase is a trade liability, so that any increase therein would be only revenue expenditure, deductible u/s. 37(1). In fact, we observe no dispute qua this aspect of the matter, and the Revenue has only made addition toward the under-valuation of the inventory for the exchange loss. Finally, though the assessee's ground mentions the impugned sum at Rs.2,43,505/-, this appears to be by way of a mistake in-as-much as the assessee contests the entire sum (of Rs.14.71 lacs) before the ld. CIT(A), who confirmed the same. Subject to no contrary finding in this regard, i.e., the quantum of the amount in dispute, by the AO, of course on the basis of the material on record after hearing the assessee, we delete the entire addition. We decide accordingly.
Result
19. In the result, the assessee's appeal for A.Y. 1998-99 is partly allowed.
Revenue's Appeals
20. Ground No.1 of the Revenue's appeals for A.Ys. 1997-98 & 1998-99 and ground no.2 for A.Y. 1999-2000, is in respect of disallowance of interest on the amount paid by 42 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited way of one-time settlement of the liability arising on the devolution (or the likely devolution) of the guarantees undertaken by the assessee in favour of various loan creditors, being banks and financial institutions, of VCCL. The same stands already considered by us while adjudicating ground nos. 1 & 2 of the assessee's appeal for the first two years, holding that the interest would stand to be disallowed. We, further, clarified that the said interest shall have to be actually incurred to be disallowed and cannot be on a notional basis. Though the ld. CIT(A) has in fact given a finding that the same is not so, having been actually incurred inasmuch as repayment of the loan amount stands financed through bank overdraft, he has given a direction that the period for which the interest is to be reckoned cannot therefore go beyond the period for which there was an overdraft, which brings the Revenue in appeal. The said direction would only be read to imply that no interest is suffered after the overdraft facility is neutralized, and not where it is so on a temporary basis. Further, if the same is advanced by incurring an interest-bearing debt (or liability), interest cost would continue to be incurred. We observe this as we find it strange that despite being a simple matter of fact, a controversy in its respect should continue to subsist, with vast difference in the amounts calculated and contested, as under, even as there is no disagreement that interest expenditure, only to the extent actually incurred, could be subject to disallowance:-
(Amount in Rs.) A.Y. Disallowance Assessee's working 1997-98 1,23,886 18,937 1998-99 1,08,24,515 not provided 1999-00 1,66,86,012 not provided In fact, we observe that the AO has in working the disallowance excluded the period for which overdraft facility was not availed. The disallowance on the opening outstanding has been made by applying a flat rate of 17% per annum, and which rate again does not appear to be disputed. The Revenue in fact supports it's case by stating that the disallowance for A.Y. 1999-00 stands since accepted by the assessee. Though that may be indicative, the matter has to be finally decided on merits, by issuing clear findings of 43 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited fact, separately for each year, with we having clarified that the disallowance is merited in principle, so that the issue that is open is with respect to its quantification. The initial onus toward the same is on the assessee, who may proceed by furnishing the details of the interest incurred for the year, and the period for which the same stands incurred. Funds are fungible, so that matter would have to be decided on evaluating and ascertaining the funding position as obtaining for the relevant years. Further, the funding pattern, as determined for one year, would hold qua the opening balance for the following year and, further, shall be subject to modification (by way of fund flows) impacting the same in the subsequent year/s. The matter is accordingly restored to the assessing authority for the purpose. We decide accordingly.
21. Ground No.2 for A.Ys.1997-98 & 1998-99, and Ground No.3 for A.Y. 1999-00, relates to the allowance of the assessee's claim by the ld. CIT(A) qua fees for transfer of technology and engineering fees u/s. 37(1), as against the same being allowed, in the proportionate sum, u/s. 35AB of the Act by the A.O.
22. Before us, it was the common contention of both the parties that the issue is squarely covered by the order by the Tribunal in the assessee's own case for A.Ys.1995- 96 and 1996-97 (in ITA Nos. 3182/M/2001 & 3236/M/2001 dated 31.10.2007, 'B' Bench) in favour of the Revenue. The tribunal, upon examining the facts of the case as well as the legal position in the matter, has held the deduction as exigible only u/s. 35AB of the Act, being in relation to substantial expansion of the existing installed capacity. No difference being brought to our notice; rather, the parties conceding to the facts being identical, we confirm the A.O.'s action in granting allowance u/s.35AB, i.e., as per the assessee's alternate claim before him. We decide accordingly.
23. Ground No. 4 of the Revenue's appeal for A.Y.1997-98 is in respect of guest house expenses. The same stood disallowed at Rs.22.27 lacs by the A.O. following the decision in CIT vs. Ocean Carriers Pvt. Ltd. [1995] 211 ITR 357 (Bom), with the ld. CIT(A) directing him to rework the disallowance as per the decision by the tribunal in the 44 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited case of Mahindra & Mahindra Ltd. vs. Dy. CIT [1997] 61 ITD 129 (Mum) (TM), so that the Revenue is in appeal.
24. The issue was again conceded as squarely covered by the tribunal's order dated 31.10.2007 in the assessee's case for A.Ys. 1995-96 & 1996-97. A perusal of the same reveals the said issue to be arising in the assessee's appeals for the said years (in ITA Nos.3207 & 3208/Mum/2001), with the relevant grounds being dismissed as not pressed by the tribunal. Surely, there is under the circumstances no question of the said issue being covered; there being no finding or decision by the tribunal on the merits of the case for the said years. So however, the issue stands covered by the decision by the apex court in Britannia Industries Ltd. vs. CIT [2005] 278 ITR 546 (SC), setting the law in the matter. We accordingly confirm the disallowance as made u/s.37(4) of the Act. We decide accordingly.
25. Ground No. 5 for A.Y. 1997-98 and ground no.4 for A.Ys.1998-99 & 1999-00 in the Revenue's appeals, being in respect of disallowance u/s. 40A(9) qua contributions to Lohia Officer's Club, LML Officer's Club and Worker's benevolent fund, were again claimed as covered by the order of the tribunal in the assessee's case for the immediately two preceding years (supra). Following the tribunal's order for the relevant years, we confirm the disallowance, reversing the decision by the first appellate authority in the matter. We decide accordingly.
26. Ground No. 6 for A.Y.1997-98 and ground no. 5 for A.Ys. 1998-99 & 1999-00 are in respect of modvat attributable to the closing stock. The issue was contended as covered in the assessee's favour by decisions as in the case of CIT vs. Mahalaxmi Glass Works P. Ltd. [2009] 318 ITR 116 (Bom); CIT vs. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 (SC) and Mahavir Alluminium Ltd. [2008] 297 ITR 77 (Del), while the ld. DR would place reliance on the AO's order.
27. We have heard the parties, and perused the relevant material on record. The assessee's case before the authorities below was that it was valuing inventories at net of 45 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited duties, levies, etc., i.e., on exclusive basis, and which therefore must be left undisturbed in-as-much as no adjustment to the value of the closing stock on account of modvat attributable thereto is required.
27.1 The issue, as we discern, would necessarily have to be bifurcated with reference to pre and post cooption of section 145A on the statute, i.e., by Finance (No. 2) Act, 1998 w.e.f. 01.04.1999, or A.Y.1999-00 onwords. For the first two years, i.e., AYs. 1997-98 and 1998-99, the only question that is relevant is if the assessee is properly accounting for the various levies, including excise, charging or, as the case may be, crediting the operating statement with the net amount of duty suffered or recovered in excess, i.e., as the case may be. We say so as a duty under the modvat (cenvat) being charged on value addition, recovery is usually in excess. No adjustment under the circumstances, to the value of the closing stock, for the amount of duty component attributable thereto, would be required to be made. Subject to this verification by the AO, so that the adjustment, if any, would be for the net expense or income on account of the levies, forming part of expense or revenue for the relevant year/s, shall ensue.
27.2 For A.Y. 1999-2000, however, the non obstante clause of section 145A will have to be given effect to. Even though the assessee may continue to follow the exclusive method in accounts, for the purpose of computation of income u/s.145A, the opening stock, purchases, sales and closing stock, would have necessarily to be valued at gross of all taxes and duties incident thereon. It is open for the assessee to argue of the provision being tax neutral, and that no adjustment, therefore, to the profit as disclosed per its operating statement shall arise. The same may well be, but is not a matter of presumption and, would need to be demonstrated. The adjustment, if any, that may result to the declared profit/loss is, it may appreciated, incidental and in fact consequential. The provision being mandatory, effect thereto is to be in any case or view of the matter given. Further, it is only the value of the closing stock, gross of all levies, etc., so determined, that would be required to be carried over for being considered, likewise, as the value of the opening stock for the following year. As clarified by the tribunal in Hercules Pigment 46 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited Industry vs. ITO (in ITA No. 271/Mum(H)/2012 dated 29.05.2013, reported at [2013] 93 DTR (Mum-Trib) 49) upon an extensive review of the matter, including the decision in Indo Nippon Chemicals Co. Ltd. (supra), that only by following scrupulously the mandate of law (section 145A), notwithstanding the claims of tax neutrality, would ensure the determination of correct income, even as the provision is mandatory.
27.3 Our decision is in fact in conformity with the decision in the case of Mahalaxmi Glass Works P. Ltd. (supra). In the facts of that case, the opening stock was directed by the first appellate authority to be valued at inclusive of excise duty, even as the closing stock for the immediately preceding year was not, and which found acceptance throughout, i.e., up to the hon'ble high court. Both the opening and the closing stock for any year, it is to be appreciated, are to be valued on the same basis if the correct income for the relevant year is to be determined and brought to tax. The principle stands explained in the judgment by the Privy Council in CIT vs. Ahmedabad New Cotton Mill Company Ltd. (reported at AIR [1930] PC 56), referred and in fact quoted by the hon'ble high court in Mahalaxmi Glass Works P. Ltd. (supra) (pg.117), which further considers the decision in the case of Mahavir Alluminium Ltd. (supra). The principle stands reiterated and clarified by the apex court, as in the case of CIT vs. British Paints India Ltd. [1991] 188 ITR 44 (SC), settling the matter, basing its decision on two fundamental principles of tax jurisprudence, i.e., it is the correct income for the year that is to be brought to tax for that year and, two, each year is an independent and self contained unit of assessment. We observe that reference has been made in the case of Mahalaxmi Glass Works P. Ltd. (supra) to the decision in the case of Melmould Corporation vs. CIT [1993] 202 ITR 789 (Bom). However, as would be apparent from a reading thereof (refer para 5/pg.792D), the hon'ble court made it clear that it was not concerned with the correctness (or otherwise) of the method (of valuation) adopted for determining the cost price, observing that that was not an issue at any stage of the proceedings, nor dealt with by the tribunal. That is, the hon'ble court clarified of proceeding on the basis of the valuation being valid and not in dispute. We have in fact also found it as so, further 47 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited clarifying that for the year for which s.145A is applicable, the same would necessarily have to be in terms of the non obstante provision, which would apply equally to all the elements/determinants of the trading profit.
28. The matter is accordingly restored back to the file of the A.O. for the purpose, before whom the assessee shall present its case, to decide the same in accordance with law, issuing definite findings of fact. We decide accordingly.
29. Ground no. 7 of the Revenue's appeal for A.Y. 1997-98 is in respect of disallowance qua provision for bad debts. The same, though stated at Rs.3,29,000/- in the relevant ground, was conceded by the ld. DR to be a typographical mistake in-as-much as the correct amount is Rs.2,39,000/-, for which amount the provision was claimed and disallowed. Further, the issue though contended as covered by the tribunal's order for the earlier years (supra), is actually not so in-as-much as the assessee did not press the relevant ground/s before the tribunal for those years. Further, on a perusal of the impugned order, it is found that the ld. CIT(A) has actually confirmed the disallowance in view of the retrospective amendment to section 36(1)(vii) of the Act by Finance Act, 2001 w.r.e.f. 01.04.1989, i.e., by way of Explanation thereto. The said ground, thus, does not arise out of the impugned order, and is in fact misconceived. Rather, the assessee has also not pressed its additional ground which is qua this disallowance. Either way, no prejudice to the Revenue though arises. We decide accordingly.
30. The only remaining ground is Ground # 6 for A.Y. 1999-2000. The Revenue seeks exclusion of the sales tax and excise duty from the amount of total turnover in computing deduction u/s.80-HHC, relying on the decision in the case of Chowringhee Sales Bureau (P.) Ltd. vs. CIT [1973] 87 ITR 542 (SC). The said decision is rendered in the context of the same forming part of the trade receipt, since mandated by section 145A. The issue in the instant case arises in the context of computation of deduction u/s. 80-HHC, formulated to be in the ratio of export turnover to total turnover. The same has since been decided by the apex court per its decision in the case of CIT vs. Laxmi Machine Works [2007] 290 ITR 667 (SC) in the assessee's favour, clarifying that a schematic 48 ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2 (A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited interpretation is to be followed, so that the levies would stand excluded from both the export and the total turnover. This position was in fact conceded to by the parties before us. We decide accordingly, confirming the impugned order.
31. In the result, the appeals by the Revenue are partly allowed.
32. Before parting with our order, we wish to bring on record an aspect of the hearing in the present case, which though took place in extenso. The same was, however, focused primarily on some issues considered debatable or contentious by the parties, i.e., the issues marked 1, 2 and 3 in this order. As regards the remaining issues, the common contention of the parties was of the same being covered by the decision by the tribunal in the assessee's own case, or in any case settled by the decisions by the higher courts. The hearing was concluded on that basis. It was later, in the absence of a proper chart explaining the position of both the parties ground-wise on record, which usually accompanies such as argument, particularly where there are as in the instant case several grounds, facilitating proper formulation of the respective cases and adjudication thereof, besides avoiding scope for error, was found difficult to adjudicate. The same warranted posting the case for hearing again, leading to further delay. The delay, though avoidable, becoming inevitable at times, the Bench expressed its willingness to release the appeals for hearing afresh in case of any reservation being entertained by the parties with regard to the disposal of the present set of appeals by the bench in view of the delay. The parties, however, unequivocally expressing their full faith in the bench, further clarifying as to entertaining no such reservation, with in fact the ld. AR stating that he had in fact been put through the ordeal a second time - the matter having been heard on an earlier occasion as well, we proceeded to conclude the hearing, and the order reserved.
33. In the result, all the appeals by the assessee and the Revenue are partly allowed.
प रणामतः नधा रती और राज व क अपील आं शक वीकृत क जाती है ।
Order pronounced in the open court on May 12, 2014
Sd/- Sd/-
(D. Manmohan) (Sanjay Arora)
उपा य / Vice President लेखा सद य / Accountant Member
49
ITA Nos. 3 5 4 5 , 4 4 4 1 , 3 5 8 5 , 4 8 8 2 & 7 2 2 2 / M /2 0 0 2
(A . Y s.1 9 9 7 - 9 8 , 9 8 - 9 9 & 9 9 - 0 0 ) LML Limited
मंब
ु ई Mumbai; दनांकDated : 12.05.2014
व. न.स./Roshani, Sr. PS, Akhilesh, PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मुंबई / DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानस
ु ार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai