Income Tax Appellate Tribunal - Delhi
Escorts Ltd. vs Assistant Commissioner Of Income Tax on 31 January, 2006
Equivalent citations: [2007]104ITD427(DELHI), (2006)102TTJ(DELHI)522
ORDER
1. Income-tax Appeal No. 567/Del/2005 is an appeal by the assessee and ITA No. 1562/Del/2005 is an appeal by the Revenue and both these appeals are directed against the order dt. 31st Jan., 2005 of CIT(A)-XIV, New Delhi, relating to the asst. yr. 2001-02.
2. First we shall take up for consideration the assessee's appeal. The first ground of appeal of the assessee is general in nature and does not call for any specific adjudication.
Ground No. 2 of the grounds of appeal of the assessee reads as follows:
2. (A) The CIT(A) erred in invoking the provisions of Section 2(24) whereas the AO had made the addition under Section 2(24)(iv). The CIT(A) in fact during the course of hearing of the appeal had required the appellant to advance arguments only with reference to the provisions of Section 2(24)(iv) and at no point of time during the hearing of the appeal which lasted over a period of 3 months did she indicate her intention of invoking Section 2(24).
(B) The CIT(A) erred in invoking Section 2(24) without giving necessary opportunity to the appellant to advance its arguments and in this view of the matter there has been a violation of the principles of natural justice. On this ground itself, the addition is liable to be deleted.
(C) The CIT(A) has erred in placing reliance on 2 letters, the first dt. 30th June, 2000 written by Escorts Heart Institute & Research Centre Ltd., Chandigarh, to the Registrar of Societies, Chandigarh, and the other to the AO by the appellant in the course of assessment proceedings for asst, yr. 2001-02 and drawing adverse inference against the appellant. while ignoring relevant material on record.
(D) The CIT(A) erred in not disposing of the grounds pertaining to the applicability of Section 2(24)(iv) and the submissions made before her during the hearing of the appeal by treating the same as academic.
(E) Without prejudice to the earlier grounds, the provisions of Section 2(24) are in any case not applicable both on facts and in law.
(F) Without prejudice to the earlier grounds, there was no basis for the valuation of Rs. 550 per share worked out by the AO.
3. This ground of appeal can be conveniently decided along with ground No. 1 of the grounds of appeal of the Revenue which reads as follows:
1. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in reducing the addition made by the AO by assessing a sum of Rs. 88,11,30,349 being 80 per cent of the net book worth of M/s Escorts Heart Institute & Research Centre, Delhi, as on 31st March, 2000 as income of the appellant under Section 2(24)(iv) of the IT Act, 1961, to Rs. 86,40,00,000 ignoring the details mentioned by the AO in the assessment order.
4. The assessee is a company engaged in the business of manufacturing and sale of tractors, shockers, railway equipment, etc. and also does other trading activities. For asst. yr. 2001-02, the assessee filed return of income declaring income of Rs. 46,60,88,916. In the course of assessment proceedings on such return of income, the AO considered information, which he had received from the Directorate of IT (Inv. ), Chandigarh, regarding merger of two societies and the resultant society consequent to such merger later on being converted into a limited company under the Companies Act, 1956 and the allotment of shares in the resultant society and limited company to the assessee. The AO examined the question as to whether such allotment of shares to the assessee would give rise to income in the hands of the assessee, which can be brought to tax.
5. A society by name Escorts Heart Institute & Research Centre, was formed and registered under the Societies Registration Act, XXI of 1860 on 21st Oct., 1981. This society was registered with the Registrar of Societies, Delhi. This society, among other objects, had (a) the objective of undertaking development of research in any medical field, more particularly on cardiology, cardiovascular and thoracic surgery in all its various aspects; (b) the objective of launching activities for relief of the poor, education, other medical relief and advancement of any other object of public utility not involving the carrying on of any activity for profit; (c) that it was a charitable society not started with a view to earn any profit and that all income of the society shall be utilized towards the promotion of the aims and objects of the society. The income of this society was exempt from tax under Section 10(21) of the IT Act, 1961, (hereinafter referred to as "the Act"). This society had obtained the approval of Central Government under Section 35(1)(ii) of the Act. During the previous year relevant to asst. yr. 1982-83, the assessee had made a payment of Rs. 60 lakhs to this society and claimed deduction in respect of such payment, which was allowed by the AO. The assessee and its group companies were the subscribers to the memorandum of association of the society at the time of its formation. This society will hereafter be referred to as "the Delhi Society".
6. Another society by the same name of Escorts Heart Institute & Research Centre, was formed and registered under the Societies Registration Act, XXI of 1860 on 11th Nov. , 1999. This society was registered with the Registrar of Firms & Societies, UT Chandigarh. The objects of this society were identical with that of the Delhi Society except that its objects did not include the object of relief to the poor and the object of the society being a charitable society not carrying on of any activity for profit. Some of the subscribers to the memorandum of association, at the time of formation of this society, were group companies of the assessee. This society will hereafter be referred to as "the Chandigarh Society".
7. The Delhi Society proposed to amalgamate with the Chandigarh Society and the necessary resolution was passed in the meeting of its members held on 15th Jan., 2000. The Chandigarh Society had in its members meeting held on 7th Feb., 2000, resolved to accept the amalgamation of the Delhi Society with it and for the vesting of the assets of the Delhi Society in it and also takeover of its liabilities by it. The necessary formalities in this regard were complied with and the Registrar of Societies, Delhi, ordered dissolution of the Delhi Society consequent to its merger with the Chandigarh Society. The date, on which the Delhi Society stood dissolved, is not mentioned in the order of the Registrar of Societies, Delhi (copy of such order dt. 6th June, 2001 is at p. 14 of Revenue's paper book No. II) but it is claimed that the Delhi Society stood merged with the Chandigarh Society w.e.f. 1st April, 2000.
8. On 5th May, 2000, the members of the Chandigarh Society resolved that it be registered as a limited company under Part IX of the Companies Act, 1956. On 24th May, 2000, the Chandigarh Society made an application with the Registrar of Chandigarh, for registration of the Chandigarh Society as a limited company in this regard. On 30th May, 2000, the Chandigarh Society was registered as a company limited by shares. The certificate of incorporation dt. 30th May, 2000 is placed at p. 32 of Revenue's paper book No. I. The name of the company is mentioned in this certificate as Escorts Heart Institute & Research Center Ltd. This limited company will hereafter be referred to as "the EHIRC Ltd.". Thus the Chandigarh Society also ceased to exist w.e.f. 30th May, 2000.
9. Even prior to the incorporation of EHIRC Ltd., the Chandigarh Society, had on 27th May, 2000, after amalgamation of the Delhi Society, issued 16,00,000 equity shares of Rs. 10 each in the share capital of Chandigarh Society, to the assessee. This constituted 80 per cent of the share capital of the paid-up capital of Chandigarh Society. The authorised share capital of the society was 25,00,000 shares of Rs. 10 each. A cheque for Rs. 1,60,000 dt. 27th May, 2000, drawn on Deutsche Bank, had been issued by the assessee, in favour of the Chandigarh Society, a copy of the same is placed at p. 81 of assessee's paper book. This cheque was presented for payment only on 20th July, 2000. The bank statement of the assessee with Deutsche Bank for the period from 1st May, 2000 to 20th July, 2000, has been filed before us to show that at all material time from the date of issue of cheque till its realization, the assessee had to the credit of its bank account with Deutsche Bank, balance which was far in excess of Rs. 1,60,000. The case of the assessee is that though the cheque was encashed only on 20th July, 2000, the same relates back to the date of issuance of the cheque, viz., 27th May, 2000.
10. On the above facts, which are not in dispute, the AO was of the view that the amalgamation of the Delhi Society with the Chandigarh Society was not legally valid for the following reasons:
(a) The Delhi Society was a charitable society whereas the Chandigarh Society was commercial society. The Delhi Society had obtained several concessions from the Government/IT Department. The land was allotted by DDA at concessional rate to the Delhi Society for the reason that it was established for a charitable purpose. The IT Department had allowed tax exemptions under Section 35(1)(ii) as well as Sections 10(21), 80G of the Act. Section 13 of the Societies Registration Act, 1860, mandates that a society shall not be dissolved unless 3/5th of the members express a wish for dissolution, by voting in person or by proxy, in a general meeting convened for the purpose. Further, the said provisions also provide that whenever any Government is a member of, or a contributor to, or otherwise interested in any society registered under the said Act, such society shall not be dissolved without the consent of the Government of the State of registration. Since, neither the Government nor the IT Department was informed nor consented to the dissolution, the provisions of Section 13 of the Societies Registration Act, 1860 were violated.
(b) Under Section 12 of the Societies Registration Act, 1860, every member of the society was to be informed about any proposed merger. Mr. Anil Nanda, a member of the society had, in his statement before the Directorate of Investigation, Chandigarh, stated that he was never informed about the proposed merger of the Delhi Society with the Chandigarh Society. Thus the provisions of Section 12 of the Societies Registration Act, 1860, were violated.
(c) The minutes books of the Chandigarh Society found during the course of survey by the Investigation Directorate, Chandigarh, revealed that the minutes of the various meetings, as recorded in the minutes books, were not a contemporaneous record of the meetings that took place. The minutes were so recorded to camouflage passing of the assets of the Delhi Society to EHIRC Ltd. through the Chandigarh Society.
(d) The secretary of the Delhi Society had declared that as on 1st April, 2000 all assets of the Delhi Society stood vested with the Chandigarh Society. Whereas EHIRC Ltd., in its letter dt. 30th June, 2000 addressed to the Registrar of Societies, have mentioned, that on conversion of the Chandigarh Society into a limited company, it had received only assets worth Rs. 7,000 from the Chandigarh Society. If that were the reality then there was no reason for the assessee to have contributed a sum of Rs. 1.6 crores to the share capital of the Chandigarh Society. The Chandigarh Society had no assets of its own whereas the Delhi Society had assets worth several crores. Therefore, the assessee would not contribute to share capital of the Chandigarh Society unless the assets of the Delhi Society stood vested in the Chandigarh Society.
(e) The provisions of Section 12 permitting merger/amalgamation of two societies, is subject to the condition, that the fundamental purpose of a society should not stand altered by reason of the amalgamation, unless such a power is specifically permitted by the memorandum or rules and regulations of the society. In the case of the assessee, the AO found that the Delhi Society with a charitable purpose got merged with the Chandigarh Society, which was a non-charitable society.
11. From the above conclusions drawn by the AO, he was of the view that the merger of the Delhi Society with the Chandigarh Society was only for the purpose of using the Chandigarh Society as a conduit for transferring assets worth several crores from the Delhi Society to a limited company viz.; EHIRC Ltd. Even after the merger of the Delhi Society with the Chandigarh Society, the bank accounts of the Delhi Society continued to be operated in its name. M/s EHIRC Ltd., in its letter dt. 30th June, 2000, addressed to the Registrar of Societies, informed that on conversion of the Chandigarh Society to a limited company, it had received as assets of the Chandigarh Society only Rs. 7,000 as contribution from members, literature valued at Rs. 5,250 and stationery worth Rs. 745. M/s EHIRC Ltd. never mentioned about the vesting of assets worth several crores of the Delhi Society with the Chandigarh Society, whereas as per the scheme of amalgamation of the Delhi Society with the Chandigarh Society, all assets of the Delhi Society were to vest with the Chandigarh Society on amalgamation.
12. The AO after making a reference to the above conclusions, called upon the assessee to show cause as to why the assets of the Delhi Society to the extent of 80 per cent (being the shareholding of the assessee in M/s EHIRC Ltd.) be not treated as a return received by the assessee, on the initial investment of Rs. 60 lakhs made in asst. yr. 1982-83, which receipt/return was in the character of income within the meaning of Section 2(24) of the Act.
13. The reply of the assessee in this regard as contained in their letters dt. 18th March, 2004 and 22nd March, 2004 and the conclusions of the AO on the reply of the assessee are briefly as follows:
(a) The assessee contended that the amount of Rs. 60 lakhs given by the assessee to the Delhi Society in the previous year relevant to asst. yr. 1982-83 was a donation to an approved institution under Section 35(1)(ii) and the assessee had claimed exemption and was allowed exemption under the aforesaid section in asst. yr. 1982-83 and therefore it cannot be said that the allotment of shares was a return on investment of Rs. 60 lakhs made by the assessee in asst. yr. 1982-83. The AO however held that the intention/ulterior motive of the assessee all along was to accumulate assets by the Delhi Society by retaining its character as a charitable society and thereafter transfer them to persons/entities of Escort group, which was contrary to the provisions of IT Act, aims of the charitable society.
(b) The next contention of the assessee was that it merely became a shareholder in M/s EHIRC Ltd., by contribution to 80 per cent of its paid up share capital and it cannot be said that allotment of shares was a return on investment. On this plea, the AO held that the entire share capital of M/s EHIRC Ltd., was held by the assessee and its group companies and by contribution (of) a meager sum of Rs. 2 crores, they obtained control over assets worth more than Rs. 100 crores of the Delhi Society.
(c) The next contention of the assessee was that the merger of the two societies was within the framework of law. That Section 13 of the Societies Registration Act, 1860, was not violated since neither Government nor the IT Department was a member or a contributor nor otherwise interested in the Delhi Society. That Mr. Anil Nanda was not a member of the Delhi Society in his personal capacity but was representing M/s Goetze India Ltd., which was a member and that due notice was given to M/s Goetze India Ltd. Hence, even the provisions of Section 12 of the Societies Registration Act, 1860, were not violated. The AO rejected this plea also and the conclusions of the AO in this regard have already been set out above.
(d) The next contention of the assessee was that the Chandigarh Society and M/s EHIRC Ltd., had filed their returns of income after merger and conversion into a limited company and the Revenue has already accepted their existence by making assessments for asst. yrs. 2001-02 and 2002-03. On this plea, the AO held that the Delhi Society, which was set up for a charitable purpose, ultimately found its way into the hands of the persons belonging to Escorts group. The formation of the Chandigarh Society and its merger with the Delhi Society and its ultimate conversion into a limited company of M/s EHIRC Ltd., were a device adopted by the assessee to acquire control over the assets of the Delhi Society by circumventing the provisions of law, including the Act. That the corporate veil can be lifted to gather the real intention and purpose and also to ascertain the real person behind the corporate veil. The AO has referred to some decided case laws in this regard wherein it has been held that the Revenue can ignore the corporate personality, if the economic realities and the interest of the Revenue so demand.
(e) The final and the very important contention of the assessee was that in any event, no income within the meaning of Section 2(24) of the Act, can be said to have accrued or arisen to the assessee. On this plea, the AO held that the definition of income under Section 2(24) of the Act, was an inclusive definition and that its scope was very wide. The AO made reference to some case laws in this regard to highlight the legal position that the word 'income', is of widest and indefinite import and there cannot be any straitjacket formula by which one can determine the nature of receipt as to whether it is an income liable to tax or not.
14. Thereafter the AO held that the value of assessee's investment in the Delhi Society over a period of 20 years (i.e., from 1981) has increased manifold and this increase in wealth is clearly taxable as income in the hands of the assessee. That the intention of the assessee throughout was to gain control over the assets of the Delhi Society therefore, it indulged in the vocation of gaining such control over the assets of the Delhi Society with a view to reap the benefits of its investments of Rs. 60 lakhs in the year 1982. Thereafter the AO gave his final conclusions, which we feel, is better to reproduce as under:
Thus, the assessee devoted time, money and effort to achieve its end of obtaining control over the assets of charitable society at Delhi, ft can, therefore, be said that the assessee was engaged in a vocation which ultimately gave huge returns to the assessee. Since only Rs. 60 lakhs were originally invested in the Delhi Society and subsequently the assessee subscribed to 16,00,000 shares at the rate of only Rs. 10 per share of the Chandigarh Society whereas looking at the net assets (at book value of Rs. 1,10,14,12,937) the value per share of the society and later on the company Escorts Heart Institute & Research Centre Ltd. works out to Rs. 550 per share. In this way, the assessee has gained tremendously. The Hon'ble Madras High Court in the case of CIT v. S. Vaiadarajan has held that the benefit of capital nature is also taxable as income under Clause (iv) of Section 2(24) of the IT Act. Since assessee was having 80 per cent shareholding in the society and then the company, i.e. substantial interest in both of them, it can be said that the difference in the intrinsic value of shares (16,00,000 assessee @ Rs. 550) and the value paid by the assessee i.e. Rs. 1,60,00,000 was a benefit received by it within the meaning of Section 2(24)(iv) of the Act. Thus looking from this angle also the amount is taxable in the assessee's hands.
The foregoing discussion makes it indubitably clear that the entire exercise of transferring the assets of M/s Escorts Heart Institute & Research Centre, Delhi, which had been built up over the years out of tax-free income and which were meant to be used for scientific and charitable purposes into M/s Escorts Heart Institute &, Research Centre, Chandigarh, was a sham transaction and the objective all along was that M/s Escorts Ltd. and persons belonging to Escorts group should gain control over these assets. Since the market value of the assets was much more but is at the moment that in possession of the undersigned, addition to the tune of 80 per cent of the assets at book value is being made in the hands of the assessee for the time being. Addition works out to Rs. 88,11,30,349 (80 per cent of book value of Rs. 1,10,14,12,937). This is being held as assessee's income from other sources.
15. Aggrieved by the order of the AO, the assessee filed appeal before the CIT(A). Before CIT(A), the assessee reiterated its plea as was put forth before the AO. It was reiterated (a) that the AO has no jurisdiction in law to pronounce on the validity of action taken under the Societies Registration Act, 1860 and Companies Act, 1956; (b) that M/s EHIRC Ltd. in its letter dt. 30th June, 2000 addressed to the Registrar of Societies, Chandigarh, had referred to only the initial corpus of Rs, 7,000 contributed by members of the Chandigarh Society and no reference was made to the entire assets of the Chandigarh Society prior to its conversion as a limited company; (c) that no profits can in law arise from mere purchase of or subscription to shares; (d) Even if it is presumed that the intrinsic value of the shares of M/s EHIRC Ltd. was higher than the price paid for the shares of EHIRC Ltd. and that there is increase in wealth, the said increase is purely notional and cannot be assessed to tax in the hands of the assessee till the shares are actually transferred and gains are realized.
16. Before the CIT(A), the assessee pleaded for opportunity to cross-examine Anil P. Nanda who was a member of the Delhi Society and who had deposed before the ADIT (Inv. ) that he was not given notice of the meeting in which the merger of the Delhi Society with Chandigarh Society was approved. The assessee was afforded such opportunity before the CIT(A). Besides Anil P. Nanda, one Mr. Atul U. Sood and Mr. Umesh Banerjee were also cross-examined before CIT(A), on behalf of the assessee. We are not narrating those contentions for the reason that the CIT(A) proceeded to decide the issue from a different perspective, rendering the basis of assessment done by the AO purely academic.
17. The CIT(A) held that the question of the merger/amalgamation of the Delhi Society with the Chandigarh Society being in violation of the Societies Registration Act, 1860 was not relevant. The case of the AO that a sum of Rs. 60 lakhs given by the assessee as a donation to the Delhi Society in the year 1982, was an investment by the assessee in the course of an avocation, which resulted in allotment of shares at a concessional rate and the benefit so derived was income chargeable to tax, was also held by the CIT(A) to be without any basis. The CIT(A) also held that there was no provision of law either in the Act or the Societies Registration Act, 1860 which mandates obtaining of consent from DDA, IT Department or Government before merger of Delhi Society with the Chandigarh Society. We may also, at this stage itself, point out that these findings of the CIT(A), have not been challenged, since the Revenue has not raised any ground of appeal in the appeal filed by it against the order of the CIT(A) on this issue.
18, According to CIT(A), the contents of letter dt. 30th June, 2000 of M/s EHIRC Ltd. to the Registrar of Societies, Chandigarh, has to be accepted as correct and it has to be concluded that on takeover of the Chandigarh Society by M/s EHIRC Ltd., only assets worth Rs. 7,000 had come from the Chandigarh Society to the limited company, i.e. EHIRC Ltd. Though the assessee gave a cheque for Rs. 1.6 crores dt. 27th May, 2000 the same was encashed only on 20th July, 2000. According to the CIT(A), as to whether it was the Delhi Society or limited company or the Chandigarh Society which was the payee of this cheque could not be said with certainty. The limited company allotted shares to the assessee on 16th June, 2000 and, therefore, the assessee got shares of the limited company by paying Rs. 1.60 crores. The CIT(A) relied on a letter filed by the assessee in the course of assessment proceedings wherein there was a reference to payment entry in the bank account of the assessee which related to payment for acquiring shares in M/s EHIRC Ltd. The CIT(A) therefore concluded that the assessee purchased shares of M/s EHIRC Ltd. by paying Rs. 1.6 crores and the shares of the limited company were not issued to the assessee in lieu of its holding of shares in the Chandigarh Society. According to CIT(A), since the Chandigarh Society did not possess any assets, there was no question of the assessee paying Rs. 1.6 crores towards its capital.
19. Having concluded as above, the CIT(A) thereafter posed a question as to whether the case of the assessee fell within the ambit of Section 2(24) or 2(24)(iv) of the Act ? She thereafter referred to the definition of income under Section 2(24) of the Act and concluded that it is an inclusive definition and not an exhaustive definition. The CIT(A) made a reference to the decision of the Hon'ble Supreme Court in the case of Emil Webber v. CIT and CIT v. G.R. Katthikeyan in this regard and concluded that any income not falling within the list of incomes specified in Sub-Clauses (i) to (xii) of Sub-clause (24) of Section 2 of the Act can still be regarded as income, if the receipt partakes the nature of incomes.
20. Thereafter the CIT(A) posed the following question viz., when assets are transferred at WDV by a company to its director and when such value is less than the market value, whether the difference can be said to constitute income in the hands of the director chargeable to tax under the Act ? She answered this question in the affirmative and made a reference to the decision of the Hon'ble Madras High Court in the case of CIT v. S. Vaiadarajan where on a similar question, the Court held that on such facts the difference in value was chargeable to tax as income under Section 2(24)(iv) of the Act as a benefit received by a director from the company. The Court also held that even if the benefit is of a capital nature, yet the same would be taxable as income.
21. Thereafter, the CIT(A) concluded that just as a benefit is taxed in the hands of a director of a company, in terms of Section 2(24)(iv) likewise any benefit received by any person other than a director should also be taxed under Section 2(24) of the Act because the definition of income is inclusive and not exhaustive. The CIT(A) concluded on this issue as follows:
Let us now examine in reference to the above discussion whether in the case of the appellant-company allotment of 16,00,000 shares by EHIRC Ltd. at Rs. 10 against the cost of shares at book value of Rs. 550 to the appellant-company resulted into earning of any income in the hands of the appellant-company or not?
The facts of the case are M/s Escorts Ltd. in 1981 floated a society in the name of EHIRG, Delhi, by donating Rs. 60 lakhs along with donations by other companies also. Escorts Ltd. became president of EHIRC, Delhi, through Shri H.P. Nanda and later on through Shri Rajan Nanda. As per the submissions of the appellant it was felt that medical research would be better achieved if instead of society, a corporate body is formed. Probably this resulted into formation of EHIRC, Chandigarh, in April, 2000, and Shri Rajan Nanda remained president and first member of board of governors of EHIRC, Chandigarh also. EHIRC, Chandigarh, got converted into EHIRC Ltd. vide the incorporation certificate issued by RoC from 30th May, 2000. Shri Rajan Nanda remained chairman, and first director in EHIRC Ltd. also. The EHIRC, Chandigarh, at the time of formation had assets only worth Rs. 7,000 and did not do any business till it got amalgamated with EHIRC, Delhi, and even after amalgamation of EHIRC, Delhi, with EHIRC, Chandigarh, there was no other activity except that of EHIRC, Delhi activities which continued as it is on conversion of EHIRC, Chandigarh to EHIRC Ltd. on 30th May, 2000. This sequence of events and facts clearly shows that Escorts Ltd. was controlling the affairs of EHIRC always whether it was a case of EHIRC, Chandigarh, EHIRC, Delhi or EHIRC Ltd. The allotment of shares has been done by EHIRC Ltd. to Escorts Ltd. for the reasons already discussed in para Nos. 3.5,6 and 3.5.7. There is no doubt that the 80 per cent shares have been allotted by EHIRC Ltd. to the appellant-company i.e. Escorts Ltd. at Rs. 10 share while the value of shares as per the book value of assets was Rs. 550 per share itself at the time of allotment. Therefore, at the time of allotment of shares by EHIRC Ltd. to Escorts Ltd. has resulted into net benefit passing in the hands of the appellant-company of Rs. 540 per share. Whether, this passing of the benefit has resulted into income ? The answer to this question is yes, as discussed above that when the share is allotted at par while its value is much more, it definitely results into passing of benefit which is assessable as income. The appellant-company had substantial interest all through in EHIRC in all its form and the benefit which passed to Escorts Ltd. on allotment of shares by EHIRC Ltd. to Escorts Ltd. has resulted into income in the hands of Escorts Ltd. which is covered under Section 2(24) of the Act, for the reasons discussed in above paras. In view of the above facts the action of the AO is confirmed, however the difference in the value comes to Rs. 540 per share 16,00,000 = Rs. 86,40,00,000 (cost on the basis of the assets-value at which allotted into number of shares) and not as worked out by the AO at Rs. 88,11,30,349.
Whether the benefit passed to the Escorts Ltd. on issue of shares also is taxable alternatively under Section 2(24)(iv) also remains academic, as the benefit passed on allotment of shares to Escorts Ltd. for EHIRC Ltd. in any case is covered under Section 2(24) of the Act itself for the reasons discussed above.
Though it has been held that on the basis of evidence available on record the shares have been allotted for the first time by EHIRC Ltd. to Escorts Ltd., but if for a moment it is presumed that the shares had been issued by EHIRC, Chandigarh to Escorts Ltd. as claimed by the appellant-company, then also the position would remain same. The appellant-company was controlling EHIRC, Chandigarh and allotment of shares by EHIRC, Chandigarh, at Rs. 10 when the book value of shares itself was Rs. 550 per share it has resulted into passing of the benefit to M/s Escorts Ltd. of Rs. 540 per share which is taxable as income in the hands of the appellant-company for the reasons discussed above.
Therefore, the action of the AO is upheld. However, the benefit which passed to the appellant-company works out to Rs. 86,40,00,000 instead of Rs. 88,11,30,349. The action is confirmed to the extent of Rs. 86,40,00,000 and the balance is deleted.
22. Aggrieved by the order of CIT(A) in not deleting the entire addition, the assessee is in appeal before the Tribunal. Aggrieved by the partial relief granted by the CIT(A), the Revenue is in appeal before the Tribunal.
23. We have heard the submissions of the learned Counsel for the assessee as well as the special counsel for the Revenue as well as the learned CIT-Departmental Representative.
24. The learned Counsel for the assessee submitted that the definition of income under Section 2(24) of the Act is no doubt an inclusive definition and not an exhaustive definition but any sum sought to be taxed under the Act must bear the character of 'income' and that each and every receipt or benefit cannot be taxed as income. That the inclusive character of the term 'income' has to be understood as partaking of or sharing the same character as is available from its various sub-clauses. Referring to the categories of income as set out in Section 2(24) of the Act, he submitted that there should be a receipt or a benefit or perquisite that should accrue to an assessee. In the instant case, there is no such receipt or benefit or perquisite that had accrued to the assessee, by purchase of shares alleged to have an intrinsic worth of Rs. 550 for a sum of Rs. 10. He placed heavy reliance on the decision of the Hon'ble Delhi High Court in the case of CIT v. Bharat Development (P) Ltd for the proposition that no income can accrue or arise at the time of purchase. According to him if at all there is some benefit to the assessee by purchase of shares at a lesser value, then it is at best only notional and illusory. The real point of accrual of income can be only when these shares acquired by the assessee are sold in future. According to him at best, the provisions of Section 4(1)(a) of the GT Act, would be attracted in the case of the Chandigarh Society. Gift is not income within the meaning of Section 2(24) of the Act. Gift-tax is not leviable on gifts made on or after 1st Oct., 1998.
25. His further submission was that as and when the shares are sold, the cost of acquisition of shares for computing capital gains tax would be only Rs. 10 and would bring to tax the alleged benefit which the assessee received by purchase of shares at a concessional price. According to him by taxing the notional income at the time of purchase, the AO is attempting to prepone the taxable event viz., from the event of sale to the event of purchase. Reliance was placed on the decision of the Hon'ble Orissa High Court in the case of B.P.R. Construction v. CIT . Referring to the observations of the AO that the assessee's wealth had increased considerably by reason of the purchase of shares, he submitted that increase in wealth is not 'income' within the meaning of Section 2(24) of the Act.
26. With regard to the alternate case sustained by the CIT(A) that the assessee was in receipt of an income within the meaning of Section 2(24) of the Act, he submitted that the findings of the CIT(A) in this regard cannot be sustained. It was submitted by him that the findings of the CIT(A) based on the letter dt. 30th June, 2000 by M/s EHIRC Ltd. to the Registrar of Societies, Chandigarh is without any basis. According to him the scheme of amalgamation of the Delhi Society with the Chandigarh Society contemplates vesting of all assets of the Delhi Society with the Chandigarh Society and by virtue of the provisions of the Societies Registration Act, 1860, in particular Section 13 thereof the properties of the Delhi Society vest with the Chandigarh Society, the moment the formalities required for such amalgamation are completed. The Delhi Society having agreed to the scheme of amalgamation vide special resolution passed in the meeting held on 26th Feb., 2000, its assets will vest w.e.f. 1st April, 2000 with the Chandigarh Society by operation of law as per the scheme of amalgamation.
27. His further submission was that the conclusions of the CIT(A) that the assessee directly purchased shares of M/s EHIRC Ltd. is without any basis. In this regard he drew our attention to the cheque dt. 27th May, 2000 copy of which is placed at p. 81 of assessee's paper book and the share certificate dt. 27th May, 2000 issued by the Chandigarh Society to the assessee. Our attention was also drawn to a copy of the bank statement of Deutsche Bank evidencing payment of Rs. 1.6 crores on 20th July, 2000 and the credit facility available for use by the assessee as per sanction letter dt. 11th Aug., 1997 of Deutsche Bank, sanctioning a limit of about Rs. 16 crores. According to the learned Counsel for the assessee the issue of cheque dt, 27th May, 2000 in the name of the Chandigarh Society and its encashment on 20th July, 2000 will only mean that the assessee purchased shares of the Chandigarh Society (after the Delhi Society got amalgamated with it), The shares of M/s EHIRC Ltd. were issued on 16th June, 2000 in lieu of shares held by the assessee in the Chandigarh Society. The legal submission of the learned Counsel for the assessee was that the encashment of cheque dt. 27th May, 2000 by the Chandigarh Society on 20th July, 2000 will relate back to the date of the cheque, more so, when the assessee has established that from the date of the cheque till its encashment, there were sufficient funds available in the bank account of the assessee. In support of such legal proposition, he relied on the following decisions:
(1) K. Saraswathy v. P.S.S. Somasundaram Chettiar (2) Kirloskar Bros. Ltd. v. CIT (3) Sockalinga Tea Co. (P) Ltd. v. The Chairman, Board of Trustees and Ors. (1982) 1 GLR 316 (Gau) (4) Felix Hadlay & Co. v. Hadley 1859 F 2704 (Ch.D) 680
28. His concluding submission on this issue was that on the analogy of Section 2(24)(iv) no income can be said to have accrued to the assessee under Section 2(24) of the Act, since the shares were originally obtained from the Chandigarh Society in which the assessee was neither a member nor a shareholder and not from the EHIRC Ltd. The provisions of Section 2(24)(iv) will apply only when the assessee becomes a director or substantial shareholder in a company and thereafter a benefit or perquisite is obtained from such company. By receiving the shares of EHIRC Ltd. the assessee only became a substantial shareholder and thereafter it did not obtain any benefit from the company. Therefore the provisions of Section 2(24)(iv) also do not apply to the case of the assessee.
29. The learned special counsel for the Department relied on the order of the CIT(A) to the extent of his finding that income within the meaning of Section 2(24) had accrued or arisen to the assessee. He further submitted that the issue that arises for consideration in the assessee's appeal might be formulated as follows:
Whether allotment of shares of M/s EHIRC Ltd. (presuming that the assessee directly purchased shares of M/s EHIRC Ltd.), to the assessee, who at all material times had substantial interest in the Delhi Society which amalgamated with the Chandigarh Society before becoming a company called M/s EHIRC Ltd., at a concessional price is a benefit or not, if yes, whether it was taxable?
or Whether allotment of shares of the Chandigarh Society, (presuming that the assessee purchased shares of the Chandigarh Society after its amalgamation with the Delhi Society) to the member/chairman of the governing body of the amalgamating society (the Delhi Society) at a concessional price is a benefit or not, if yes, whether it was taxable?
30. He highlighted the fact that the assessee was president of the Delhi Society and one Mr. H.P. Nanda, in his capacity as representative of the assessee was acting as president and was also the principal promoter and a signatory to the memorandum of association of the Delhi Society at the time of its formation. He also highlighted the fact that the Chandigarh Society had, as its members, companies, which were under the control and management of the assessee or were its subsidiaries and was managed and controlled by the same individuals, who controlled the Delhi Society, He brought to our notice the fact that the assessee has contributed over Rs. 14 crores over a period (of) 10 years to the Delhi Society. The assessee has therefore to be considered as a person having substantial interest in the Delhi Society as well as the Chandigarh Society after its amalgamation with the Delhi Society. According to him the major stake holders in the Delhi Society should be deemed to be major stakeholders in -Chandigarh Society also. The assessee by reason of its having such substantial interest has been allotted shares in the Chandigarh Society., (after amalgamation) or EHIRC Ltd., as the case may be. The price at which the shares were allotted was much below the real worth of the shares compared to their net worth (i.e., the excess of its assets over its liabilities) of the Chandigarh Society (after amalgamation) or of EHIRC Ltd. The difference between the real worth of these shares and the price paid by the assessee for such shares was a benefit received by the assessee which was of the character of income chargeable to tax under the Act. He submitted that the definition of "income" under the Act is very exhaustive and is not an inclusive definition. The charging section viz., Section 4 of the Act, refers to the charge of income-tax being on the total income of the previous year of every person. Section 5 defines scope of total income and it speaks of income from whatever source derived which is received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. He pointed out that under Section 17(2), Clause (iiia) proviso shares allotted to an employee at a concessional price is considered as a perquisite but is charged to tax in the year in which the option is exercised by the employee. Referring to a decision of the House of Lords in the case of Abbot v. Phtibin (Inspector of Taxes) (1962) 44 ITR 144 (HL), he submitted that the House of Lords in the aforesaid decision held that a benefit accrues to an assessee employee when the option is given and not when the option is exercised. It is only because of the statutory provision in Section 17(2)(iiia) proviso that the perquisite is brought to tax when the option is exercised. The legislature in its wisdom has postponed the 'time of accrual of income, being fully conscious of the position that but for such postponement, the time of accrual of the income would be when the option is given, He also referred to the provisions of Section 28(iv) of the Act and submitted that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession is chargeable to tax under the head "Profits and gains of business or profession". He thus submitted that the same rules of ascertaining as to whether income accrues to a person, in the form of benefit or perquisite, by allotment of shares at a concessional price in a society in which he was a founder member/president of the governing body and therefore, has a substantial interest, would equally apply. In this regard, he clarified that the assessee by virtue of its being a promoter and president of the governing body of the Delhi Society is deemed to have a substantial interest in the Chandigarh Society also after its merger with the Chandigarh Society. If the assessee is deemed to have purchased shares of EHIRC Ltd., directly then also it will be a case where such benefit is given to a person having substantial interest in the company. The reason being that the Chandigarh Society after its merger with Delhi Society was merely converted into a limited company.
31. He submitted that whenever a benefit, in the form of a concessional price, is offered to a person, income accrues to him, when the offer is made. He therefore submitted that the argument of the learned Counsel for the assessee that even assuming that the assessee has received a benefit, the same should be taxed only when the shares are sold by the assessee, should not be accepted. Reliance was placed by the learned special counsel for the Revenue on the decision of the Hon'ble Bombay High Court in the case of Emil Webber v. CIT , for the proposition that merely because the inclusive definition of "income" in Section 2(24) mentions only certain heads of income it would not follow that any benefits received by an assessee, which are not covered by the stated heads of income, would not be assessable if they can be otherwise fairly regarded as the income of the assessee, Reliance was also placed on the decision of the Hon'ble Bombay High Court in the case of D.M. Neterwalla v. CIT wherein in the context of the provisions of Section 2(6C)(iii) of the IT Act, 1922 equivalent to Section 2(24)(iv) of the Act, it was held that the shares allotted to a director, notwithstanding the fact that the allotment of shares was not in his capacity as a director, was nevertheless chargeable to tax. Our attention was drawn to the decision of the Hon'ble Delhi High Court in the case of CIT v. Master Gaurav Dalmia wherein it was held that shares offered to a relative of a director was taxable as income in the hands of such director. Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of CIT v. G.R. Katthikeyan (supra) wherein it has been held by the Hon'ble Supreme Court that even if a receipt does not fall within the ambit of any of the sub-clauses of Section 2(24) it may still be income if it partakes the nature of income. The question arose in the said case as to whether winnings from All India Motor rally would constitute income of the assessee. The Court held that the rally in question was a context, if not a race. That the assessee entered the contest to win it and won the first prize. What he got was a "return" for his skill and endurance. The expression "income" must be construed in its widest sense and thus, even if a receipt does not fall within Sub-clause (ix), or for that matter, any of the sub-clauses in Section 2(24), it may yet constitute income.
32. The learned special counsel also submitted that the reliance placed by the learned Counsel for the assessee on the decision of the Hon'ble Delhi High Court in the case of Bharat Development Ltd. (supra) cannot help his case. He drew our attention to the facts of the said case, which were as follows : The assessee, a private limited company, took over another private limited company by way of amalgamation and in the process surplus amount resulted which was the difference between the credit and debit entries as a result of the amalgamation. This was treated as income by the ITO. The question before the Court was, has any income accrued to the assessee by reason of amalgamation. The Division Bench dissented on the question. While Mr. Justice Ranganathan held that a trader cannot be held to make a profit just because he purchased an item of stock-in-trade for less than its market price, Mr. Justice Khanna, took the view that when the money aspect and gain thereof are by themselves plainly discernible and are not dependent on the sale that may or may not take place, and the surplus enjoyed is clearly visible and stands accordingly credited in the books, as in the said case, it will not be correct to say that profit has still not accrued. That normally the mere purchase of merchandise does not result in income. Profit thereto arises only at the time of sale. But to purchase other companies or to embark upon amalgamations with other companies in the form of trading activity is rarely a business adopted by people. Such acquisitions or amalgamation of companies do not render them as commodities which are readily marketable. They cannot be termed as a normal class of stock-in-trade. Such trading activity has to be treated as a class of its own which may itself result in a plain profit if the price paid or cost involved was less than the value of the assets of those companies after deductions of their liabilities. If in these processes, substantial surplus amounts resulted in favour of the present assessees and they were shown in the amalgamation accounts as having accrued to them, then there are no reasons why such amounts should not be treated as gains and profit enjoyed from those well-planned and concerted activities. The third Judge Mr. Justice Kapur D.K. however held that difference between the credit and debit side of the balance sheet of the company which was taken over was a mere book entry that such entries which are under consideration, which are mere balancing entries are neither revenue receipts nor capital receipts. They would, therefore in any event, be not taxable. According to the learned Departmental Representative it cannot be said that the aforesaid decision is an authority for the proposition that no income accrues at the time of purchase at a price lesser than the market value.
33. Without prejudice to the above submissions, he also relied on the order of the AO and submitted that in any event as a respondent he was entitled to support the order of the AO on a point decided against the Revenue by the CIT(A).
34. In reply, the learned Counsel for the assessee pointed out that the question involved in the case of Abbot v. Philbin (supra) was a case, where an option to purchase shares at a concessional price had been exercised and the question was whether the date on which income in the form of perquisite accrued as on the date when the option was given or as on the date when the option was exercised. The said decision was in the context of an employer-employee relationship and in the context of rules for determining income under the head 'Salaries'. Therefore the same was considered as benefit accruing on the date when the offer was made. He pointed out that as on the date when the Chandigarh Society allotted shares to the assessee, it was not its member. The shares were allotted only for the reason that the Chandigarh Society wanted to have persons known to them as its members instead of having strangers as its members and there was no other consideration whatsoever. In such circumstances he submitted that even assuming that there was any benefit, such benefit was received without any consideration and therefore, if at all, it could at best be said that the assessee received a gift. He also submitted that there was no basis for the argument of the Department that by virtue of the amalgamation of the Delhi Society with the Chandigarh Society, the major stakeholders in the Delhi Society are deemed to be major stakeholders of the Chandigarh Society. According to him. factually, the assessee was not a major stakeholder in the Chandigarh Society either before or after its amalgamation with the Delhi Society. On the decision referred to by the learned special counsel in the case of Emil Webber (supra), Master Gauiav Dalmia (supra), Neterwalla (supra) and G.R. Karthikeyan (supra), he submitted that the propositions laid down therein were in a different context and do not involve the question involved in the present case.
35. We have considered the rival submissions. We shall first deal with the issue whether the assessee acquired shares of EHIRC Ltd. directly or in lieu of its holding of shares in the Chandigarh Society, (after amalgamation with the Delhi Society). The CIT(A) has concluded that the assessee purchased shares of EHIRC Ltd. directly on the basis of two circumstances : (a) on the basis of a letter written by the Authorised Representative in the course of assessment proceedings which referred to the payment by cheque dt. 27th May, 2000 issued by the assessee to acquire shares in EHIRC Ltd; (b) on the basis that since EHIRC Ltd. had written to the Registrar of Societies a letter dt. 30th June, 2000 mentioning that on conversion of the Chandigarh Society into a limited company, the limited company had received only Rs. 7,000 as contribution from members of Chandigarh Society as assets. Thus, according to the CIT(A), if assets worth only Rs. 7,000 were possessed by Chandigarh Society prior to its conversion into a limited company but after its amalgamation with the Delhi Society, there was no reason for the assessee to purchase Rs. 1.60 crores worth of shares in the Chandigarh Society (after amalgamation).
36. We are of the view that these findings of the CIT(A) are not correct. The scheme of amalgamation of the Delhi Society with the Chandigarh Society is placed at pp. 109-113 of Revenue's paper book-IV. As per the scheme all the assets and liabilities of the Delhi Society were to vest with the Chandigarh Society on or after the effective date of amalgamation, which is the 1st day of April, 2000, This is the scheme, which was approved by the members of the Delhi Society in the general meeting. The Registrar of Societies, Delhi, by order dt. 6th June, 2001 recognised the fact that the Delhi Society was dissolved and amalgamated with the Chandigarh Society. Copy of this order is at p. 14 of Revenue's paper book No. II. It therefore follows that the assets of the Delhi Society vested with the Chandigarh Society by operation of law and, therefore, whatever is written by EHIRC Ltd. to the Registrar of Societies in their letter dt. 30th June, 2000 is of no consequence.
37. As far as the purchase of shares by the assessee, whether of the Chandigarh Society or EHIRC Ltd., we are of the view that a share certificate (copy at p. 72 of assessee's paper book) for 16,00,000 shares of Rs. 10 each was issued by the Chandigarh Society, in favour of the assessee. This share certificate is dt. 27th May, 2000. A cheque dt. 27th May, 2000 had been issued by the assessee towards the consideration payable for purchase of these shares. Copy of the cheque is placed at p. 81 of assessee's paper book. The cheque is in the name of "Escorts Heart Institute & Research Centre". One thing which is clear from this cheque is that it is not in the name of the limited company viz., EHIRC Ltd. Another aspect to be noticed is that as on 27th May, 2000, the Delhi Society by the very same name no longer existed as it already stood amalgamated with the Chandigarh Society. The cheque, therefore, is to be considered as issued in favour of the Chandigarh Society only. The evidence on record clearly goes to show that from the date of issue of this cheque i.e., on 27th May, 2000 till it was encashed viz., on 20th July, 2000, there were enough funds with the assessee so as to cover the amount of Rs. 1.60 crores throughout this period. The encashment of the cheque was therefore to relate back to the date of cheque. The decisions relied upon by the learned Counsel for the assessee in this regard clearly support the stand of the assessee.. It has therefore to be concluded that the assessee purchased shares of the Chandigarh Society and not EHIRC Ltd. directly. The CIT(A)'s reliance on a letter written by the counsel in the course of assessment proceedings is therefore not acceptable as they are contrary to the fact situation on record. The reasoning of the CIT(A) for concluding that 'income' under Section 2(24) accrued to the assessee based on the presumption that the assessee purchased shares of EHIRC Ltd. directly is therefore without any basis.
38. What now therefore remains for consideration is as to the alternate case of the CIT(A) that even assuming that the assessee was allotted shares of EHIRC Ltd., in lieu of its holding of shares in the Chandigarh Society (after its amalgamation) it would still be a case of income accruing to the assessee, which is taxable. The CIT(A) concluded that the assessee was controlling the Chandigarh Society and allotment of shares of Chandigarh Society at Rs. 10 when its book value was Rs. 550 resulted in passing of benefit to the assessee of Rs. 540 per share which was taxable as income in the hands of the assessee for the reasons already discussed viz., that the assessee had substantial interest in the Delhi Society as well as Chandigarh Society and by the allotment of shares a benefit has arisen to a person who has a substantial interest, The CIT(A) has made a reference to the provisions of Section 2(24)(iv) of the Act, which says that "income" would include:
the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company, in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid.
39. According to CIT(A), the transaction of allotment of shares in favour of the assessee by the Chandigarh Society bears all the characteristics set out in Section 2(24)(iv) except for the difference that the assessee was not a director and the investee was a society and not a company. However, the assessee was a person having substantial interest in the Chandigarh Society and the benefit of lower share prices given to the assessee by the Chandigarh Society, was a benefit which was to be taxed. In other words, according to CIT(A), the benefit obtained by a person having substantial interest in the society has to be placed in the same position as person having substantial interest vis-a-vis a company and income has to be construed as having accrued to the assessee in the form of a benefit of allotment of shares at a concessional price. The CIT(A) further supports this conclusion with the various judgments of Hon'ble Courts holding that definition of "income" is not exhaustive and whatever bears the character of income should be considered as "income". This is the alternate reasoning of the CIT(A) for bringing to tax income in the hands of the assessee.
40. We now have to see if the assessee can be said to have substantial interest in the Chandigarh Society prior to issue of shares by it to the assessee. In this regard we may, at the outset, say that the expression "substantial interest" is defined in the Act in Section 2(32) as follows:
(32) 'person who has a substantial interest in the company', in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without right to participate in profits, carrying not less than twenty per cent of the voting power.
41. Thus by having "substantial interest", what is referred to is the owning of share capital. The Chandigarh Society was formed with seven subscribers to the memorandum of association. The assessee was not a signatory to the memorandum of association. Prior to the issue of 16,00,000 shares of Rs. 10 each the assessee never held any shares in the Chandigarh Society. The assessee has already explained that the Chandigarh Society wanted persons known to them to be inducted as shareholders/members and that is the reason why the Chandigarh Society had allotted shares to the assessee. In other words no other considerations like an employer-employee relationship or any other business association/considerations for offer and allotment of shares to the assessee existed. As rightly contended by the learned Counsel for the assessee, the issue of shares at a concessional price to a person having substantial interest alone is considered as income. The pre-existing relationship is the consideration for allotment of shares at a concessional price, which is treated as income, even in the context of Section 2(24)(iv) of the Act. The same is the case when shares are issued to an employee at a concessional price. There the pre-existing relationship of employer-employee is considered as a benefit giving rise to income. When there is no other preexisting relationship between the assessee and the Chandigarh Society, can it be said that issue of shares at a concessional price to the assessee by the Chandigarh Society, is giving a benefit which can be considered as income chargeable to tax on the analogy of Section 2(24)(iv) of the Act ? In our view, it cannot be so. In such an event, there is no consideration for allotment of shares at a concessional price and therefore if at all, it can be said that the Chandigarh Society has made a deemed gift within the meaning of Section 4(1)(a) of the GT Act, 1958. After 1st Oct., 1998, gift-tax has been abolished and therefore the transaction in question .cannot be considered taxable under the GT Act, 1958 also. If the above distinction were not made between benefit obtained from a person having some relationship with the assessee and a benefit accruing from a person not having such relationship with the assessee, it would be equating receipt of "income" with receipt of "gift". In law the concept of "income" and "gift" are not one and the same.
42. The Hon'ble Supreme Court has explained the definition of 'income' as given in the Act under Section 2(24). The Court expressed the view that it is not easy to define income, The definition in the Act is an inclusive one. The Court referred to the observations of Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT (1943) 11 ITR 513, 521 (PC), "income.... is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation". The Court also referred to the decision of the Privy Council in Maharajkumar Gopal Saran Narain Singh v. CIT (1935) 3 ITR 237, 242 (PC), wherein the Privy Council pointed out that "anything which can properly be described as income, is taxable under the Act unless expressly exempted". The Court also referred to the decision of the Supreme Court in Navinchandm Mafatial v. CIT (1954) 26 ITR 768 (SC) in the context of constitutional validity of Section 23 of the IT Act, bringing to tax notional income from property, the Court had dwelled on the meaning of the expression "income" and expressed the view that the expression has to be understood in its natural meaning. Its natural meaning embraces any profit or gain, which is actually received. The Court held that it would be a wrong approach to try to place a given receipt under one or the other Sub-clause in Section 2(24) and if it does not fall under any of the sub-clauses, to say that it does not constitute income. Even if a receipt does not fall within the ambit of any of the sub-clauses in Section 2(24), it may still be income if it partakes of the nature of the income. The idea behind providing an inclusive definition in Section 2(24) is not to limit its meaning but to widen its net. The Supreme Court noted that it has repeatedly said that the word "income" is of the widest amplitude, and that it must be given its natural and grammatical meaning.
43. The charging section viz., Section 4 of the Act, refers to the charge of income-tax being on the total income of the previous year of every person. Section 5 defines scope of total income and speaks of income from whatever source derived which is received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. The following passage from the book Law of Income-tax by Sampath Iyengar, 9th Edn. at p. 474 may be referred to in this connection:
The concept of income is not in vacuo. The income bears its quality as income only if it is received by the assessee, or it has accrued or has arisen to the assessee, or at least is fictionally deemed to be received by or is deemed to have accrued or arisen to him. If not in fact received, the assessee should at least be entitled to receive it a debitum in presenti, a solvendum in futuro. To call something income, without there being an actual receipt, there must at least be a debt owned by a third party to the assessee.
In the present case what the assessee did was to merely purchase the shares of the Chandigarh Society (after its amalgamation with the Delhi Society). A mere purchase does not give rise to any income. The decision of the Hon'ble Delhi High Court in the case of Bharat Development (P) Ltd. (supra) is not a case for the above proposition. The facts of the said case were that the assessee was a private limited company. It took over some concerns by the process of amalgamation in accordance with the provisions of Section 494 of the Companies Act. In this process surplus resulted, i.e., the value of the assets taken over were more than the value of liabilities taken over which was brought to tax. The question before the Court was whether the surplus was a revenue receipt chargeable to tax. The argument of the learned Counsel for assessee before the High Court was that the assessee was not in the business of taking over other entities by way of amalgamation and therefore no income can be said to accrue at the time of purchase at a lower price. His Lordship Mr. Justice Ranganathan J. made the following observations on this issue:
However, as I have already stated it is not necessary for the purposes of the present case to decide this issue as to whether the take over of. the other companies by the two present assessees can be described as business transaction or an adventure in the nature of trade, for, even assuming that it is so and that these are normal trading transactions, the assessee would still be outside the taxing net if the present case can be analogised to the illustration given earlier of a trader purchasing his stock-in-trade for less than the market value. I shall, therefore, for the purposes of the present case, proceed on the assumption that the amalgamation with the assessee-company of other concerns is a normal transaction in the course of the trade so far as the present assessees are concerned and proceed to analyse whether even on that assumption the surplus resulting to the assessee as a result of the amalgamation can be brought to charge.
Thereafter the learned Judge gave his conclusions as follows:
As already stated though the transfers themselves are complicate, the sum and substance of the position is only this: A company goes into liquidation. Its assets exceed its liabilities, say, by Rs. 10,000. The assessee-company takes over the assets and liabilities but pays to the transferor-company not Rs. 10,000 but only Rs. 8,000. The surplus of Rs. 2,000 is credited to the amalgamation account. If we are correct on this then obviously the illustration given much earlier applies squarely to the facts of the case. All that has happened is that the assessee whose business includes, as we have assumed, the business of taking over of other concerns has been able to take over a concern of the value of Rs. 10,000 by paying only Rs. 8,000 therefor. In other words, this is no different from the case of a dealer in motor cars being able to acquire a motor car of the market value of Rs. 20,000 for Rs. 15,000. The fact of his having made a good bargain by way of purchase only means that he has saved a sum of Rs. 5,000; at this stage he has earned no income. The income will arise and the profit embedded in the bargain will be reflected when eventually the motor car is sold. That would be the stage of realisation of profits. The position is exactly similar here and we agree with the Tribunal that the assessee cannot be said to have made a profit by acquiring these concerns at a cheaper price than what they perhaps deserved.
44. His Lordship Mr. Justice Khanna J. though delivered a dissenting judgment, nevertheless subscribed to the proposition that no income accrues at the time of purchase, but added a rider thereto that the said principle does not apply to a case where the business of the assessee itself was of amalgamating with other companies and made the following observations:
It is correct that normally the mere purchase of merchandise does not result in income. Profit thereto arises only at the time of sale. But to purchase other companies or to embark upon amalgamations with other companies in the form of trading activity is rarely a business adopted by people. Such equations or amalgamations of companies do not render them as commodities which are readily marketable. They cannot be termed as a normal class of stock-in-trade. Such trading activity has to be treated as a class of its own which may itself result in a plain profit if the price paid or cost involved was less than the value of the assets of those companies after deductions of their liabilities. If in these processes, substantial surplus amounts resulted in favour of the present assessees and they were shown in the amalgamation accounts as having accrued to them, there are no reasons why those amounts should not be treated as gains and profit enjoyed from those well-planned and concerted activities. Thus, in the case of the Bhaiat Development (P) Ltd., the surpluses so enjoyed extended to Rs. 2,01,445 and Rs. 33,397 in the asst. yrs. 1960-61 and 1961-62, respectively. In the case of Manav Sahyog (P) Ltd., the surplus so enjoyed after deduction of liabilities amounted to Rs. 4,10,415.
45. The learned Judge thereafter referred to the principle of valuation of stock-in-trade and after referring to the decision of the Hon'ble Supreme Court in the case of P.M. Mohammed Meeiakhan v. CIT , concluded that applying the principle of accounting of valuing stock-in-trade, the surplus on amalgamation was to be considered as income of the assessee.
46. It was thus a common view of the Hon'ble Judges that normally at the time of acquisition or purchase at a concessional price no profit (income) accrues. The only exception stated by one of the Judges was a case where purchase of other companies or amalgamations and taking over of other companies is carried out as a trading activity. The learned special counsel for the Department probably realized this aspect and has sought to raise a new contention before us, which we will deal with at the appropriate stage. Nevertheless, the aforesaid principle cannot be applied in the present situation. The learned Judge noted that as a result of the amalgamation process, substantial surplus, (i.e., price paid being less than the value of the assets after deduction of liabilities) resulted in favour of the assessee and it was so accounted for as having accrued and, therefore, opined it to be gains and profit from a trading activity. In other words, the reasoning weighing with the learned Judge was that surplus arising as a result of amalgamation of two companies accrues when the accounts of the companies are amalgamated and if such amalgamation is carried out as a part of well planned and concerted activity, the surplus so accruing is to be considered as a gain and profit from a trading activity. In the instant case, the Delhi Society has merged/amalgamated with the Chandigarh Society and thereafter the Chandigarh Society has converted itself into a company as per Part IX of the Companies Act, 1956. The surplus or deficit as a result of the amalgamation, if any, would be in the accounts of the amalgamated society only. That issue is certainly not before us. To repeat, the issue before us is merely with respect to the allotment of shares in the merged society and limited company to the assessee as to whether such allotment would give rise to income in the hands of the assessee, which can be brought to tax this year. In any case, therefore, the observations made by His Lordship Mr. Justice Khanna, J. cannot be applied in the instant factual situation. For the present issue that arises for consideration in the assessee's appeal, it is enough to conclude that no income can be said to have accrued or arisen to the assessee at the time of purchase of the shares at a price less than its book value. Thus it cannot be said that the assessee earned an "income" within the meaning of Section 2(24) of the Act. This conclusion is with reference to the case as made out by the CIT(A).
47. The case made out by the AO for bringing to tax the difference between the book value and the purchase price of the shares by the assessee, is also without any basis. The CIT(A) himself did not agree with the view of the AO for the reasons assigned by him. The, Revenue has not chosen to raise this issue in its appeal filed against the order of the CIT(A) on the very same issue.
48. Assuming that the Revenue was entitled to sustain the order of CIT(A) on a ground decided against it, we do not find any justification for interfering with the conclusions arrived at by the CIT(A). If the merger of the Delhi Society and Chandigarh Society is held to be null and void, then the consequence will be that the assets of Delhi Society, which is the main reason for the book value of the shares being valued at Rs. 550 per share, will not vest in the Chandigarh Society and consequently not with M/s EHIRC Ltd. either. The very basis of estimation of income will vanish. The other case sought to be made out by the AO was that the allotment of shares at a concessional price in the Chandigarh Society (after amalgamation) was a return on the investment of Rs. 60 lakhs which the assessee made in the previous year relevant to asst. yr. 1982-83. The fact situation is that the amount so contributed was a donation which was allowed as a deduction in the hands of the assessee under Section 35(1)(ii) of the Act in asst. yr. 1982-83. The case of the AO that by the process of formation of the Chandigarh Society and having it merged with the Delhi Society and thereafter converting the Chandigarh Society (after amalgamation with Delhi Society) into a company viz., EHIRC Ltd., and owning 80 per cent of share capital of the . society, is only a facade meant to gain control over the assets of Delhi Society by the assessee, is also not sustainable. It is a well understood legal proposition that by becoming a shareholder in a company, the holder of shares does not acquire a right in the property owned by the company. The above principle has been well explained by the Hon'ble Supreme Court in the case of Mrs. Bacha F. Guzdai v. CIT . Thus the basis adopted by the AO for bringing to tax income consequent to purchase of shares by the assessee cannot also be sustained. The alternative plea of the learned special counsel for the Department by placing reliance on the order of the AO, cannot also, therefore be sustained.
49. This now takes us for consideration a new plea raised by the learned special counsel for the Revenue in the course of arguments before us. According to him, on the facts and circumstances of the present case, in any event, an income within the meaning of Section 2(24)(i) read with Section 28(iv) of the Act can be said to have accrued and arisen to the assessee. The learned Counsel for the Revenue drew our 'attention to the decision of the Hon'ble Madras High Court in the case of CIT v. Amalgamations (P) Ltd. . Facts of the said case were that the assessee was a company which was a bulk shareholder in several companies totalling 16 in the relevant year. Apart from the dividend income from the shares held in such several companies, the assessee was also being assessed on the profit or loss of "business". Mostly, the result was a loss. The assessee was rendering certain common services to its subsidiaries by having : (1) a finance committee; (2) a liaison office in Delhi; (3) an export promotion department; and (4) an internal audit department. The expenditure on account of the latter three activities, viz., maintenance of a liaison office in Delhi and the departments of export promotion and the internal audit, was borne by the assessee and recovered from the subsidiaries. The finance committee was working in an advisory capacity to the various subsidiary companies to help them to carry on their business more efficiently. There were four directors of the assessee by name Austin, Kumar, Lund and Watts. Except Watts the rest of them were members of the finance committee. There were others who were neither directors of the assessee nor members of the finance committee. All the said persons entered into service agreements with the subsidiary companies. Kumar had a service agreement with Amalgamations; but his remuneration was being paid by Addison Paints & Chemicals (P) Ltd. and Wheel & Rim Company of India (P) Ltd. He was entitled to a commission on net profits apart from the fixed remuneration from the said companies. There were other agreements between the other persons and other companies. In view of the provisions of Section 198 of the Companies Act, 1956, fixing a ceiling on the overall managerial remuneration at 11 per cent of the net profits of the company, it was not possible for the different companies to pay -the contracted remuneration to the persons concerned. According to the assessee, if the said persons were not paid the contractual remuneration, it would not have been possible to retain their services in the respective companies. The directors of the assessee, therefore, considered these questions of payment of the contractual remunerations. It was found that the Company Law Administration was not agreeable to the inclusion of the commission payable to the managerial staff in the minimum (sic) remuneration provided under Section 198 of the Companies Act. It was, therefore, decided by the assessee-company that the payment in excess of what is allowable under Section 198 of the Companies Act, in each company would be met out of the resources of the assessee. The assessee accordingly passed a resolution on 23rd April, 1959, accepting the liability to pay the excess to cover the contractual remuneration out of its own funds. It paid diverse amounts to the said directors. The assessee claimed the said amounts as 'deduction under Section 10(2)(xv) of the 1922 Act for the asst. yrs. 1958-59 to 1961-62 and under Section 37(1) of the Act of 1961, for the asst. yr. 1962-63. It was argued by the assessee that though the services were rendered by them to the other companies, they should be deemed to have rendered them to the assessee in view of the nexus between the holding company and its subsidiaries. The ITO was not prepared to accept this submission. He held that the excess remuneration, over and above what was admissible under Section' 198 of the Companies Act, and. was not borne by the respective companies, could not be allowed as deduction under Section 10(2)(xv) of the Act of 1922 as expenditure wholly and exclusively incurred for the purpose of business of the assessee. The Tribunal considered the matter and came to the conclusion that the assessee's activities were in the nature of a business, that it carried on its business wholly or mainly in the dealing in or holding of investments and that the expenses were wholly and exclusively laid out for the purpose of the assessee's business. The point before the Hon'ble High Court for consideration was whether the respective amounts could be said to be expenditure incurred wholly or exclusively for the purpose of the assessee's business. The first aspect that needed to be examined was whether the assessee was carrying on any business at all. The Revenue submitted that the mere holding of an investment would not constitute business. The Madras High Court after referring to several decisions of the Hon'ble Supreme Court concluded as follows:
The Supreme Court examined this problem in the case of CIT v. Distributors (Baroda) (P) Ltd. . In that case the assessee was a managing agent. It held shares in the managed companies. It had shares in other companies also. The income from the managing agency and the dividend income from the shares held in the managed companies were more than the income earned by it from its share dealing in the relevant years. The question before the Supreme Court was whether the company could be said to be one, whose business consisted "wholly or mainly in the dealing in or holding of investments". The Supreme Court pointed out that in such a case the primary activity should be the dealing in or holding of an investment. On the facts the Supreme Court held that the assessee there was not a company whose business consisted wholly or mainly in the holding of or in dealing with investments. In the course of the judgment, the Supreme Court has referred to the decision in Bengal & Assam Investors Ltd. v. CIT and has also gone into the question as to whether there could be any business of holding of investments. At p. 383 the Supreme Court observed as follows:
We cannot say that the legislature did not know its own mind when it used that expression in Section 23A. We must give some reasonable meaning to that expression. No part of a provision of a statute can be just ignored by saying that the legislature enacted the same not knowing what it was saying. We must assume that the legislature deliberately used that expression and it intended to convey some meaning thereby. The expression 'business' is a well-known expression in income-tax law. It means, as observed by this Court in Narain Swadeshi Weaving Mills v. CEPT 'some real, substantial and systematic or organised course of activity or conduct with a set purpose'. This is also the meaning given to that expression in the earlier decisions of the High Courts and the Judicial Committee. We must, therefore, proceed on the basis that the legislature was aware of the meaning given by Courts' to that expression when it incorporated Section 23A into the Act in 1957. Hence we must hold that when the legislature speaks of the business of 'holding of investments', it refers to real, substantial and systematic or organised course of activity of investment carried on by an assessee for a set purpose such as earning profits.
The learned Counsel for the Department wanted us to confine this decision to the language of Section 23A, as in his submission, holding of investments was taken to be a business only by reason of some statutory fiction. We have looked into Section 23A and we do not find in it any words importing a fiction. It considered two kinds of businesses: one is dealing in investments and the other is holding of them and holding of investment in appropriate cases would, in the view of Parliament, equally be a business as dealing in them. The only requirement is that there must be a real substantial and systematic or organized course of activity or conduct with the set purpose of earning profit which is the test for a business.
Examined in this light it would be found that the assessee is not a mere investor in a single company. It has investments in 16 companies. It had taken active interest in the business of these companies as is clear from the services that had been rendered in the shape of export promotion, liaison office at Delhi and internal audit. It also rendered consultation in respect of finance by its directors meeting every day with reference to the needs and requirements of each company. It was also stated before us that apart from the original acquisitions, the assessee-company itself was responsible for starting several engineering companies and that it held the shares in such companies which it actively promoted. Even without going into the correctness or otherwise of this submission about which the relevant facts do not appear on record, we consider that the assessee-company had a systematic or organised course of activity in the matter of working for and advising its subsidiaries. This is not a case where the assessee contended itself with merely making an investment and looking for the dividend. We would, therefore, hold that there was a business activity in the matter of holding of investments on the facts here .
(underlined, italicised in print, for emphasis by us)
50. It was submitted that the Hon'ble Supreme Court in the case of CIT v. Amalgamation (P) Ltd. has upheld the decision of the Madras High Court agreeing with the view of the Madras High Court that it was possible to conclude that the assessee was in the business of holding investments.
51. The submission of the learned special counsel is firstly that if an assessee makes investment in shares of different companies and takes active interest in the business of these companies by rendering consultation in respect of finance of such companies through its director and where the assessee was responsible for promotion of such companies also, then it would be a case of systematic or organized course of activity and in that event the holding of investments would not be merely making investment but was a business of holding of investments. On the facts of the present case, the learned special counsel contends the assessee was in the business of holding investments and the shares which the assessee acquired from the Chandigarh Society after its amalgamation would be either profits and gains under Section 2(24)(i) of the Act from the business of holding of investments or would be a benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession as contemplated under Section 28(iv) of the Act. He thus wants to sustain the order of the CIT(A) by contending that in any event the benefit of acquiring shares of the Chandigarh Society at less than its book value was income within the meaning of Section 2(24)(i) r/w Section 28(iv) of the Act.
52. The learned Counsel for the Revenue drew our attention to the sequence of events in the matter of acquisition of shares of M/s EHIRC Ltd. It was firstly submitted that both the assessee and the Delhi Society had their office address at H-2, C.P., New Delhi-110 001. In this regard he drew our attention to p. 44 of Revenue's paper book No. II. This is a letter written by the assessee to the Delhi Society confirming the payment of Rs. 60 lakhs as donation in the previous year relevant to asst. yr. 1982-83. The learned Counsel for the Revenue has filed before us the 36th annual report of the assessee relevant to the year 1980. Similarly annual reports of the assessee for the years 1997-98 to 2000-01 were also filed. We may at this stage mention that the annual report for the year 2000-01 is a document, which pertains to the previous year relevant to the .asst. yr. 2001-02. As far as the other annual reports are concerned, the plea of the counsel for the Revenue has been that they are part of the records available with the AO relating to the assessee.
53. Our attention was drawn to p. 80 of Revenue's paper book No. 3. This is an annual report for the year 1997-98. In the chairman's message to the shareholders, it has been mentioned that the assessee's investment in its group companies were to the tune of Rs. 280 crores and that the same was likely to grow up to Rs. 450 crores in 1999. It has further been stated that these investments have sound economic and business potential and are foreseen as profit making entities. The fact that the parent company was supporting the needs of the group company has also been acknowledged. Similar observations are made in the chairman's message to the shareholders in the annual report for the year 1998-99 also. Particular emphasis has been made by the learned Counsel for the Revenue on the chairman's message to the shareholders that all our investments have been made with due considerations and that these investments had a great potential for appreciation and will yield substantial returns in the future. Our attention was drawn to the balance sheet as on 31st March, 1999 wherein the details of various investments made by the assessee have been set out. The investments also contain investment made by the assessee in a company called Escorts Research & Development Ltd, Besides the above, assessee has also made investment in the equity shares of several subsidiary companies. Our attention was also invited to the message of the chairman to the shareholders for the year 1999-2000 wherein the chairman has referred to the investment made by the assessee in subsidiaries by name Escorts Yamaha Motors Ltd., Escorts JCB Ltd., Escorts Huge Communications Ltd. The chairman has referred to the divestments in these companies and the fact that it had passed on the business management to its partners, so that the assessee could concentrate on its core business of agriculture, telecommunications, information technology and health care. The learned Counsel for the Revenue submitted that health care was also considered as core business by the assessee. A reference has also been made to the observations of the chairman regarding health care emerging as a major thrust area of the group. Similar observations had been made in the annual report for the year 2000-01. In this annual report the chairman has acknowledged the fact that the assessee's core business included health care services, which required huge investments. The fact that the assessee's group was gaining good reputation in cardiac care has been highlighted in this report. Consequently the health care business offering enormous growth opportunities to the assessee has also been highlighted in this report. A reference has been made to EHIRC Ltd. and the proposal to set up hospitals at Amritsar and Jaipur in the next two years and also extending facilities in Delhi and Faridabad. After having referred to the chairman's message in these annual reports, the learned Departmental Representative highlighted the fact that investments had been made by the assessee in the capital of various subsidiaries and in this regard drew our attention to the balance sheets for all the aforesaid years. He also drew our attention to the annual reports and submitted that services of employees of the assessee were being lent to the subsidiaries and the subsidiaries were reimbursing the remuneration payable to such employees of the assessee.
54. From the above, the learned special counsel contends that the assessee was systematically organizing a course of activity in the matter of working for and advising its subsidiaries. It was submitted that the assessee was not making investments as a normal investor but had taken active interest in the business of various companies in which it had made investments. The assessee was therefore in the business of holding investments. He pointed out that the assessee had been giving loans to its subsidiaries and had also stood as guarantor for the loans availed by the subsidiaries. These activities, according to him, only go to prove the fact that the assessee was carrying on a systematic and organized course of activity in the matter of working for and advising its subsidiaries. It was thus submitted by the learned Counsel for the Revenue that the case of assessee squarely fits into Amalgamations Ltd, (supra) and therefore it should be concluded that the assessee was in the business of holding investments. The further conclusion which the learned special counsel wants us to infer from all these circumstances is that the shares which were allotted to the assessee by the Chandigarh Society (after amalgamation) was a benefit or perquisite which the assessee derived from and out of the business of holding investments. Alternatively it is contended that whatever the assessee derived in the form of a lower share price of the Chandigarh Society (after amalgamation) was a profit and gain that arose to it in the course of business of holding investments.
55. His further submission was that the assessee could be said to be in the business of promoting entities and deriving benefit therefrom. The Delhi Society after its formation as a non-profit organization by the assessee and its subsidiaries and after successful establishment as a reputed institute, had been amalgamated with Chandigarh Society, a profit making organisation and thereafter converted into a limited company in which the assessee acquired shares at a price lesser than the intrinsic value. According to him the situation is similar to the case of a managing agency under the system of managing agents prevalent at one time under the Companies Act, 1956. In consideration of the right to manage having been lost by the assessee, it had received shares of the Chandigarh Society (after amalgamation) as compensation and such receipts were not of a capital nature and were taxable. Reliance was placed by the learned Counsel for the Revenue on the decisign of the Hon'ble Supreme' Court in the case of Kettiewett Bullen & Co. Ltd. v. , CIT .
56. On the question of adjudication of this new plea without even an application for admission of additional ground and without having raised a ground in the appeal filed by the Revenue against the order of CIT(A), the learned Counsel for the Revenue submitted that it is a legal plea which can be adjudicated on the basis of evidence already available on record and therefore should be considered for adjudication. According to him the plea is not an additional ground since the question involved in the appeal is as to whether income accrued in the hands of the assessee within the meaning of Section 2(24) of the Act and what the Revenue wants to contend now is nothing but bringing to the notice of the Tribunal that on the facts of the present case, it could be said that "income" within the meaning of Section 2(24) had in fact accrued and arisen to the assessee. According to him the Tribunal has powers to adjudicate such new plea even without the parties before it raising an additional ground of appeal. The learned Counsel for the Revenue placed reliance on the following decisions to contend, that the Tribunal has such powers:
1. Hukumchand Mills Ltd. v. CIT
2. CIT v. Mahalakshmi Textile Mills Ltd.
3. D.M. Neterwalla v. CIT (supra)
4. Ahmedabad Electricity Co. Ltd. v. CIT
5. National Thermal Power Co. Ltd. v. CIT .
57. The learned Counsel for the assessee opposed the request of the learned Counsel for Revenue for adjudication of the new plea put forth before the Tribunal. His first objection was that the annual reports for the years 1980, 1997-98, 1998-99 and 1999-2000 at pp. 1 to 215 of paper book-Ill filed by the Revenue, cannot be said to be evidence available on record before the AO. His plea was that looking into those documents to give any finding as contended on behalf of the Revenue, would amount to admitting additional evidence. He pointed out that the Revenue has not filed any application for admission of any additional evidence as contemplated by Rule 29 of the IT AT Rules. He contended that under Rule 29, it is the discretion of the Tribunal to admit or not to admit an additional evidence. Discretion to admit evidence will be exercised by the Tribunal only where additional evidence has to be considered to enable the Tribunal to pass orders or for any other substantial cause. The expression substantial cause would mean for advancing justice. He referred to the decision of the Hon'ble Bombay High Court in the case of Velji Deoraj & Co. v. CIT wherein the Hon'ble Bombay High Court has held in the context of Rule 29 of the ITAT Rules that the admission of additional evidence at the appellate stage is not referable to any right of the party to produce the evidence but is dependent solely on the requirement of the Court and it is for the Court to decide whether for pronouncing its judgment or for any other substantial cause it is necessary to admit the additional evidence before it. The mere fact that the evidence sought to be produced is vital and important does not provide a substantial cause to allow its admission at the appellate stage especially when the evidence was available to the party at the initial stage and had not been produced by him. The Court thereafter upheld the action of the Tribunal refusing to allow additional evidence. He relied on the following other decisions for the proposition that additional evidence should not be permitted to be let in at this stage.
CIT v. T.M. Bhumraddi and Anr. wherein it was held that no new ground can be raised by respondent for-the first time before Tribunal which has neither arisen on the record of assessment proceedings nor raised before lower authorities.
Keshav Mills Co. Ltd. v. CIT , wherein it was laid down that the scheme of the Act, indicates that evidence has to be led primarily before the ITO, though additional evidence may be led before the AAC or even before the Tribunal, subject to the provisions of Section 31(2), of the Act and Rule 29, respectively.
A.K. Babu Khan (By LR) v. CWT wherein it was held that it is well settled that a party guilty of renaissances and gross negligence is not entitled to indulgence being shown to adduce additional evidence.
CIT v. Babulal Nim (1963) 47 ITR 864 (MP) wherein it was held that affidavit filed not for the reason that Tribunal found itself unable to decide the appeal on materials before it, nor assessee prayed for being allowed to file evidence in support of his statement. In these circumstances, there was no justification for Tribunal for entertaining new case which was put forward by the assessee for the first time before it and for directing him to file an affidavit to support it. The affidavit which the assessee filed and the material which he produced before the Tribunal constituted additional evidence which the Tribunal admitted contrary to Rule 29 of the ITAT Rules, 1946.
Arjun Singh v. Kartar Singh and Ors. wherein it was held in the context of Order XLI Rule 27 of CPC that the discretion to admit additional evidence has to be exercised judiciously and not arbitrarily and that fresh evidence cannot be considered.
Nata Singh and Ors. v. Tax Commr. and Gujarat State Fertilisers v. Deepak Nitrate Ltd. laying down similar proposition.
58. His next submission was that the assessee was a manufacturing company and if the argument of the learned Counsel for the Revenue is accepted then the assessee would be taxed on a new source of income viz., from the business of holding investments, which is beyond the competence of the Tribunal. In this regard he relied on the decision of the Full Bench of the Hon'ble Delhi High Court in the case of CJT v. Sardati Lal & Co. (2001) 170 CTR (Del)(FB) 431 : (2001) 251 ITR 864 (Del)(FB), wherein it has been laid down that the principle laid down by Hon'ble Supreme Court in the case of CJT v. Shapoorji Pallonji Mistry and CIT v. Rai Bahadur Haidutroy Motilal Chamaria that CIT(A) has no jurisdiction to travel beyond the subject-matter of the assessment or beyond the record, i.e., the return of income and the assessment order and his power of enhancement relates only to that income which has been subjected to the process of assessment, still holds good despite the decision of the Hon'ble Supreme Court in the case of CIT v. Nirbheram Daluram . That the process of assessment includes not only taxing an income but also holding that a particular income is not taxable. That the CIT(A) cannot tax an item of income, the taxability of which had not been considered at all by the AO.
59. His next contention was that a new plea cannot be admitted if the facts which are necessary for adjudication of such a new plea are not available on record. In support of such a plea, he relied on the following decisions:
Assam Company (India) Ltd. v. CIT , where it was held that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor had filed a cross objection in the appeal filed by the other party. We must however hasten to add that in order to enable either the assessee or the Department to urge a ground in the appeal filed by the other side, the relevant facts on which such ground is to be founded should be available on record. In the absence of such primary facts, in our opinion, neither the assessee nor the Department can be permitted to urge any ground other than those which are incorporated in the memorandum of appeal filed by the other party. In other words, if the assessee or the Department, without filing any appeal or a cross-objection seeks to urge a ground other than the grounds incorporated in the memorandum of appeal filed by the other side, the evidentiary facts, in support of new ground must be available on record.
UP State Road Transport Corporation v. ITAT and Ors. where it was held that in the appeal before Tribunal no ground was set up to contend that the activity of assessee was not of the nature of business and therefore, Section 44AB did not apply. This contention was attempted to be raised merely during the arguments on the appeal and the Tribunal justified in refusing to entertain the said contention as to whether Section 44AB was applicable.
CIT v. Ashok Leyland Ltd. (2002) 253 ITR 425 (Mad) wherein it was held that for admission of additional grounds facts necessary for adjudication of the same should already be available on record.
CIT v. Eveline International laying down similar proposition.
Wilson Industries v. CIT Orissa Cements v. CIT (2001) 169 CTR (Del) 545 : (2001)250 ITR 856 (Del) Gedore Tools (P) Ltd. v. CIT where it was held that Tribunal has discretion to allow or not to allow new grounds of appeal. Where the Tribunal is only required to consider a question of law arising from facts which are on record such question should be allowed to be raised. The Court followed the ruling of Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (supra).
Maruti Udyog v. ITAT (2001) 169 CTR (Del) 366 : (2001) 252 ITR 482 (Del) where it has been held that where there are not good reasons for not raising a new plea before the Tribunal the same should not be entertained.
Ooppootil Kurien & Co. (P) Ltd. v. CIT where the Hon'ble Kerala High Court followed the ruling of the Supreme Court in the case of National Thermal Power Co. Ltd. (supra) and directed Tribunal to admit additional ground of appeal for consideration and directed the Tribunal to consider the additional ground on merits. West Coast Electric Supply Corporation v. CIT where a new plea put forth in reference before the High Court to give a finding that the assessee was in the business of holding investments was held to be not admissible.
60. The learned Counsel for the assessee further submitted that even in the decision of the Full Bench of the Bombay High Court in the case of Ahmedabad Electricity Supply Co. (supra), the Court had indicated that material should be available on record to adjudicate a new plea or an additional ground. He submitted that the plea of adjudication for additional ground raised by an assessee stands on a different footing from the one sought to be raised by the Revenue. According to him, the assessee has limited avenues to redress his grievance, viz., to raise contentions only in the appellate forums provided under the Act, The Revenue has other avenues like resorting to reassessment proceedings, Commr. setting aside erroneous orders under Section 263, etc. Therefore according to him, the pleas of an assessee for admitting additional ground of appeal or raising a new plea has to be tested on different parameters than the plea raised by the Revenue, According to him, the plea which the counsel for Revenue wants to put forth before the Tribunal on the basis of the decision of a High Court confirmed by the Hon'ble Supreme Court viz., in the case of Amalgamation (P) Ltd. (supra), would involve adjudication of a fact viz., as to whether the assessee is in the business of holding investments. The Revenue authorities have never adjudicated this fact. Even assuming that the past records viz., annual reports of earlier years are material available on record, then also, from those materials available on record, an inference cannot be drawn that the assessee is in the business of holding investments. At any rate, the assessee was not confronted with the material viz., these annual reports and called upon to show cause as to why it should not be considered as having been engaged in the business of holding investments. According to him it would be travesty of justice if the Revenue at this stage is permitted to put forth such a case. According to him, even in the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills' case (supra), the point for consideration was mere application of a law, which was to be applied to determine the tax liability of an assessee. According to him, if the Revenue is allowed to raise new plea before Tribunal based on a judicial decision, without a factual finding available on record as to applicability of judicial decision to the facts of a case, then that would lead to confusion and uncertainty in the process of levy and collection of tax in accordance with law. In short, according to him, judicial decision and legislation stand on a different footing and the attempt by the learned Counsel for the Revenue to rely on the decision in the case of Hukumchand Mills' case (supra) was not proper in the facts and circumstances of the present case.
61. The further submission of the learned Counsel for the assessee was that even these annual reports (without prejudice to his contention that they cannot be looked into) are not sufficient to come to the conclusion that the assessee was in the business of holding investments. He submitted that there was nothing unusual in having subsidiaries and giving loans and guarantees to subsidiaries. The fact that these information is provided in the annual report is only in compliance with the requirements of the Companies Act, 1956. This information by itself is not sufficient to hold that the assessee was in the business of holding of investments. He submitted that the assessee in the past had sold shares and had declared capital gain on such sale of shares under the head 'Capital gains'. The Revenue has accepted the same. Thus the shares were held by the assessee in various companies merely as an investment. The Revenue cannot now turn around and say that shares were held as stock-in-trade in the business of holding investments.
62. The learned Counsel for the assessee summed up his arguments on the new plea raised by the learned Counsel for the Revenue as follows:
(a) Additional evidence is the requirement of the Court to enable it to pass its order in appropriate manner and because of difficulty in deciding issue without the additional evidence.
(b) Fresh evidence should not be permitted at the request of the Revenue to present a new case before the Tribunal, contrary to the case of the ITO or CIT(A) or the case of the Revenue.
(c) A document which was in possession of a party cannot be relied upon at a later point of time. Additional evidence can be permitted only of those documents which come into possession of parties at a later point of time. Sound reasons should be assigned as to why the evidence could not be produced earlier. The request should be made bona fide.
(d) Additional evidence cannot be let in to fill up the gaps or lacunae in the case of a party. The party letting in additional evidence cannot in the garb of letting in additional evidence, seek to avail a fresh opportunity. More so, when the party letting in additional evidence was negligent.
(e) State cannot introduce evidence in the guise of additional evidence, evidence which was available all along. Acting as a quasi judicial authority, the Revenue is expected to display fairplay/justice.
(f) It is always the discretion of the Tribunal to admit or not to admit additional evidence. Discretion to admit additional evidence should be sparingly and cautiously used and reasons should be assigned for admitting additional evidence and as to how the additional evidence is necessary to decide the case.
(g) Additional evidence can be adduced for "substantial cause". The expression substantial cause is equal to extraordinary circumstances. Sundarlal & Sons v. Bharat Handicrafts (P) Ltd. and State of UP v. Madbodanlal .
63. The learned Counsel for the assessee also submitted that the additional evidence now sought to be put forth, even on merits, does not establish the case pleaded by the Revenue. On facts it cannot be said that the assessee can be equated with the assessee in the case of Amalgamations (P) Ltd. (supra). In the case of Amalgamations (supra), the assessee was an investment company and the question arose in the context of allowability of expenditure. It was a totally different fact situation altogether. He submitted that the assessee in the present case was a manufacturing company. He relied on the decision of the Hon'ble Supreme Court in the case of Sun Engineering Works (P) Ltd. v. CIT and submitted that one cannot pick out words and sentences from a judgment, divorced of the context in which they were used. He also distinguished the various case laws relied upon by the learned Counsel for the Revenue.
64. The learned Counsel for the Revenue sought leave of the Bench to address rejoinder to the contentions put forth by the learned Counsel for the assessee. Despite objection by the learned Counsel for the assessee, we proceeded to hear the learned Counsel for the Revenue. It was submitted by the learned Counsel for the Revenue that he need not file any application for adjudication of any additional ground and what is sought to be raised is- only a new plea, According to him, the annual report of the various years referred to by him in his arguments, were not additional evidence. He drew our attention to the provisions of Section 139(9) of the Act, and submitted that annual report of a company is statutorily required to be filed by an assessee along with the return of income. He drew our attention to the provisions of Section 143(2) and submitted that the AO under the said provision calls for further evidence to complete an assessment under Section 143(3). His contention was that the annual report is not evidence since it is part of the return of income and whatever is called for in the notice under Section 143(2) alone is evidence. He thus submitted that the Revenue relies on no additional evidence and the contention of the learned Counsel for the assessee on the presumption that the Revenue wants to let in additional evidence have all to be ignored. He relied on the decision of the Hon'ble Madhya Pradesh High Court decision in the case of Uttam Construction Co. v. CIT to contend that whatever material is sought to be relied has only to be confronted to the assessee and beyond this the assessee cannot have any grievance. He strongly relied on the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills (supra) to contend that in the said case Revenue was given opportunity to explore the possibility of sustaining the action of the Revenue authorities on a ground different from what was originally in dispute before the Revenue authorities. He contended that when the applicability of a legislation not relied upon or referred to in the orders of the Revenue authorities to the facts of a particular case was held to be sustainable, the applicability of a judicial decision in identical circumstances, to the facts of a particular case to decide on the taxability or otherwise of an item of income can also be considered.
65. We have considered the rival submissions. The powers of the Tribunal in dealing with appeals are expressed in Section 254(1) of the Act in the widest possible terms, which reads as under:
The Tribunal may, after giving both parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit.
The word "thereon", of course, restricts the jurisdiction of the Tribunal to the subject-matter of the appeal. The words "pass such orders as the Tribunal thinks fit" include all the powers (except possibly the power of enhancement) which are conferred upon the CIT(A) by Section 251 of the Act, Rule 11 of the ITAT Rules, 1963, provides as follows:
The appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal; but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule: Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground.
Rule 27 provides that:
The respondent, though he may not have appealed, may support the order appealed against on any of the grounds decided against him.
In the present case, the Revenue has also filed an appeal against the order of the CIT(A) in respect of that part of the order of CIT(A) whereby she had reduced the quantum of income liable to tax by reducing the cost of acquisition of the shares by the assessee. The Revenue has not chosen to raise an additional ground of appeal praying for sustaining the order of the Revenue authorities on the basis of this new plea. In the circumstances it was not possible for the Revenue as a respondent to raise this new plea strictly going by the language of Rule 11 or Rule 27. It has been held in the case of Hukumchand Mills (supra) that the Tribunal has sufficient power under Section 33(4) of the Act, 1922 [Section 254(1) of the Act of 1961] to entertain a new argument by the Revenue and that Rules 12 (present Rule 11 of ITAT Rules) and 27 are not exhaustive of the powers of the Tribunal. That the rules are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under Section 33(4) of the Act [Section 254(1) of Act of 1961].
66. The next question that would arise is as to whether in all cases the Revenue could be permitted to raise a new plea or whether there (are) some limitations in this regard. In this regard it would be useful to refer to the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra). The Hon'ble Supreme Court in the aforesaid decision reframed question of law for consideration as follows:
Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same ?
Answering the above question, the Hon'ble Supreme Court held as follows:
3. Under Section 254 of the IT Act, the Tribunal may, after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. We do not see any reason to restrict the power of the Tribunal under Section 254 only to decide the grounds which arise from the order of the CIT(A). Both the assessee as well as the Department have a right to file an appeal/cross-objections before the Tribunal. We fail to see why the Tribunal should be prevented from considering questions of law arising in assessment proceedings although not raised earlier.
..........Undoubtedly, the Tribunal will have the discretion to allow or not allow a new ground to be raised. But where the Tribunal is only required to consider a question of law arising from the facts which are on record in the assessment proceedings we fail to see why such a question should not be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability of an assessee.
6. The reframed question, therefore, is answered in the affirmative, i.e., the Tribunal has jurisdiction to examine a question of law which arises from the facts as found by the authorities below and having a bearing on the tax liability of the assessee.
From the aforesaid decision of the Hon'ble Supreme Court, it is clear that (a) it is the discretion of the Tribunal to admit or not to admit a new ground to be raised before it. (b) If the Tribunal is required to only consider a question of law arising from the facts which are on record in the assessment proceedings such question should be allowed to be raised, (c) That the proceedings before the tax authorities are for correctly assessing the tax liability of an assessee in accordance with law.
67. On the question of admitting a new plea raised for the first time before the Tribunal without the facts necessary for adjudication of a new ground being available on record, the learned Counsel for the Revenue strongly relied on the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills' case (supra). It would be appropriate to narrate the facts as well as the ratio in the said case. The facts of the said case was that the question that arose for determination in the assessments was the proper written down value of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under Section 10(2)(vi) of the Act. The case of the assessee was since no depreciation had been actually allowed under the Act, the original cost should be taken as the basis of allowing depreciation without taking into consideration the number of years during which the machinery had been working or the depreciation it had suffered or the written down value entered in the books. The Tribunal held that only that part of the depreciation, which entered into the computation of the taxable income of the assessee under the Act can be treated as depreciation "actually allowed". It was urged before the Tribunal by the Department that although the ITO had not considered the provisions of para 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 (hereinafter referred to as the "Taxation Laws Order"), the said provisions were applicable in the present case and certain amounts of depreciation which are allowed under the Industrial Tax Rules, which had the force of law in the Indore State prior to its becoming a part of the Indian Dominion), were required to be deducted in arriving at the written down value of the assets of the assessee. The Tribunal permitted this contention to be raised by the Department. It was pointed out on behalf of the assessee that the contention could not be entertained unless it was found as a fact that the depreciation was actually allowed under the Industrial Tax Rules to the assessee, and unless it was also further held that the Industrial Tax Rules were rules which related to income-tax or super-tax, or any law relating to tax on profits of business. In view of this submission made by the parties the Tribunal remanded the matter back to the ITO for ascertaining whether any depreciation was allowed under the Industrial Tax Rules and for considering the question whether the said rules related to income-tax or super-tax or any law relating to tax on profits of business and if he decided these questions in favour of the Department he should take into consideration such depreciation actually allowed under the said rules for the purpose of computing the written down value. The correctness of the action of the Tribunal was in challenge before the Hon'ble Supreme Court. The Court held as follows:
In the present case, the subject-matter of the appeal before the Tribunal was the question as to what should be the proper WDV of the buildings, machinery, etc., of the assessee for calculating the depreciation allowance under Section 10(2)(vi) of the Act. It was certainly open to the Department, in the appeal filed by the assessee before the Tribunal, to support the finding of the AAC with regard to the WDV on any of the grounds decided against it. It was argued on behalf of the appellant that the action of the Tribunal in remanding the case is not strictly justified by the language of Rule 27 or Rule 12. Even assuming that Rules 12 and 27 are not strictly applicable, we are of opinion that the Tribunal has got sufficient power under Section 33(4) of the Act to entertain the argument of the Department with regard to the application of para 2 of the Taxation Laws Order and remand the case to the ITO in the manner it has done. It is necessary to state that Rules 12 and 27 are not exhaustive of the powers of the Tribunal. The rules are merely procedural in character and do not, in any way, circumscribe or control the power of the Tribunal under Section 33(4) of the Act. We are accordingly of the opinion that the Tribunal had jurisdiction to entertain the argument of the Department in this case and to direct the ITO to find whether any depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation should be taken into consideration for the purpose of computing the written down value.
As can be seen from the facts of the aforesaid case, no fresh facts were to be ascertained. It was only to be verified as to whether the depreciation was actually allowed under the Industrial tax Rules and whether such depreciation was to be considered as depreciation allowed as per law in force in the Indore State prior to its merger with the Indian Union by virtue of the provisions of para 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950.
68. We may, at this stage, refer to the decision of the Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. v. CIT (supra) which has dealt with the decisions of the Hon'ble Supreme Court in the case of Hukumchand Mitts case (supra) and Mahalakshmi Mill case (supra), relied upon by the learned special counsel for the Revenue, in the context of admission of new plea for adjudication by the Tribunal for the first time. The Court also considered the decision of the Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra). The question before the Court was as to whether the Tribunal ought to have considered the plea of the applicant-company that it was entitled to the benefit of weighted deduction under Section 35B(1)(b)(iv) of the Act in the absence of any appeal or any cross-objection filed by it against the order of the CIT(A). The Court after considering the above noted and several other judicial pronouncements on the subject held as follows:
We are therefore of the view that it is permissible on the part of the Tribunal to entertain a ground beyond those incorporated in the memorandum of appeal though the party urging the said ground had neither appealed before it nor had filed a cross-objection in the appeal filed by the other party. We must however hasten to add that in order to enable either the assessee or the Department to urge a ground in the appeal filed by the other side, the relevant facts on which such ground is to be founded should be available on record. In the absence of such primary facts, in our opinion, neither the assessee nor the Department can be permitted to urge any ground other than those which are incorporated in the memorandum of appeal filed by the other party. In other words, if the assessee or the Department, without filing any appeal or a cross-objection seeks to urge a ground other than the grounds incorporated in the memorandum of appeal filed by the other side, the evidentiary facts in support of new ground must be available on record.
(underlined, italicised in print, for emphasis by us)
69. We have already referred to the several decisions relied by the learned Counsel for the assessee on this issue. In all those decisions there is an emphasis on the necessity of facts necessary for adjudication of a new plea being already available on record. In fact, our discussion in the earlier paragraphs with regard to the decision of the Supreme Court in the case of National Thermal Power Co. Ltd. (supra) clearly brings out that the Tribunal is required only to consider a question of law arising from the facts which are on record in the assessment proceedings and only such a question be allowed to be raised. The only other decision relied upon by the learned Counsel for the Revenue is the decision of the Full Bench of the Hon'ble Bombay High Court in the case of Ahmedabad Electricity Co. (supra). In the said decision, the Court after referring to several judicial pronouncements on the subject held that the Tribunal has jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the AAC, so long as these grounds are in respect of the subject-matter of the entire tax proceedings. The Court has not said anything about the existence of the facts necessary for adjudication of the additional or a new ground. The preponderance of judicial opinion is that the facts necessary for adjudication of a new ground should already be available on record. Thus, on this aspect we are unable to concur with the arguments of the learned special counsel for the Revenue.
70. A pertinent question which arises here is as to whether it can be said that the facts necessary for adjudication of the new plea of the Revenue are available on record. For this, it would be appropriate to appreciate the arguments of the learned special counsel for the Revenue. He wants to contend that the assessee is in the business of holding investments and in this regard wants to rely on the decisions of the Hon'ble Madras High Court and the Supreme Court in the case of Amalgamations (P) Ltd. (supra). In this connection he referred to the various statements in the annual report of the company, in the past, the investment pattern, the manner in which it nurtured its subsidiaries and after a while allowed them to be managed on their own, the manner in which guarantees were given by the assessee for the loans availed by the subsidiary or other companies promoted by the assessee, etc. His submission was that to conclude that an assessee is in the business of holding investments what was required to be seen is as to whether there was a real substantial and systematic or organised course of activity or conduct with the set purpose of earning profit which is the test for a business. According to him, examined in this light it would be found that the assessee was not a mere investor in a single company. It has investments in several companies and had taken active interest in the business of these companies. It had promoted several companies and that it held shares in such companies which it actively promoted.
71. In our opinion, as to whether the assessee was in the business of holding investments or not is an inferential fact which has to be deduced (not) merely on the basis of the annual reports but on the basis of several surrounding circumstances and material. The fact that the assessee is a predominantly manufacturing company and the fact that the purchase of shares is reflected as an investment in the balance sheet is not in dispute. In the past, the income on sale of investments has been declared by the assessee only under the head "Capital gains" and not under the head "Income from business", which has also been accepted by the Revenue. It is no doubt true that the Revenue authorities in a particular assessment year are free to take a different view and the principles of res judicata are not applicable to income-tax proceedings. In the present case neither the AO nor the CIT(A) deemed it plausible to hold the assessee as engaged in the business of holding investments and that the purchase of shares by it at a price less than its book value was in the course of such business giving rise to income chargeable under the Act either under Section 2(24)(i) read with Section 28(iv) of the Act. But this background is only a pointer to the fact that the assessee was never considered as being in the business of holding investments either in the past or in the assessment proceedings of the instant year. To conclude otherwise without an enquiry into the primary facts necessary for coming to such a conclusion, would not be proper. In this background, to venture, to consider and hold that the assessee was in the business of holding investments would be unjustified. Even assuming that the annual reports of earlier years were to be considered as material available on record, but on the basis of those records alone it is not possible to conclude that the assessee was engaged in the business of holding investments. In other words, complete evidentiary facts cannot be said to be available on record to adjudicate this new plea raised on behalf of the Revenue. We, therefore, decline to adjudicate on the new plea raised by the Revenue as to whether the purchase of shares in the Chandigarh Society (after amalgamation) by the assessee at a price less than its intrinsic value would give rise to 'income' within the meaning of Section 2(24) read with Section 28(iv) of the Act.
72. In the alternative, what the Revenue desires is a remand so that it may, on introduction of fresh facts, if any, examine the taxability from the above stated angle. It is not the case of the Revenue that it has come into possession of any fresh fact which has a bearing on taxability or otherwise of income in the hands of the assessee. The Revenue desires to enter upon a mere fishing inquiry hoping that it could sustain the action of the Revenue authorities bringing to tax income in the hands of the assessee. Such a course would cause considerable harassment, hardship and expenditure to the assessee and the same cannot be permitted on the mere possibility or hope that some facts may emerge by which the action of the Revenue authorities can be sustained. We, therefore, decline to remand the issue back to the AO.
73. In conclusion, we are of the view that in the facts and circumstances of the present case it would be proper not to exercise discretion permitting the Revenue to raise the new plea for the first time before the Tribunal.
74. Since, the amount in question has been held to be not taxable, we are of the view that the question of valuation of the shares as raised in the Revenue's appeal is academic. We, therefore, allow ground No. 2 of the grounds of appeal of the assessee and dismiss ground No. 1 of the grounds of appeal of the Revenue.
75. Ground No. 3 of the grounds of appeal of the assessee is as under:
The CIT(A) erred in treating the expenditure of Rs. 1,14,40,228 incurred on maintenance and renovation of rented premises as capital in nature whereas the contention of the appellant was that the expenditure is of a revenue nature.
76. The said ground taken by the assessee is against the action of the CIT(A) in sustaining the disallowance of Rs. 1,14,40,228 representing renovation expenses by treating the same as capital expenditure. During the year under consideration, the assessee has expended monies on renovation of its offices at Bhopal and Mumbai amounting to Rs. 20,78,622 and Rs. 93,61,605, respectively. The assessee claimed the same as revenue expenditure deductible under Section 37(1) of the Act. The AO noticed that the aforesaid expenditure was incurred in rented premises. According to her, since the renovation work in a rental premises is a capital expenditure and in view of Expln. 1 to s, 32(1), the same was not deductible as revenue expenditure under Section 37(1) of the Act. Aggrieved with the order of the AO, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A), the assessee contended that the provision of Expln. 1 to Section 32(1) was not attracted in its case, as the expenditure in question cannot be considered as a capital expenditure simplicitor. The CIT(A), after perusing and analyzing the details of expenditure, has concluded that the same is capital expenditure since it is incurred by the assessee with the "objective of either to bring a new asset into existence or to obtain a new or fresh advantage", Thus, the addition has been sustained. Not being satisfied with the order of the CIT(A), the assessee is presently in appeal before us.
77. Before us, the learned Counsel appearing on behalf of the appellant, has reiterated the submissions made before the lower authorities. Our attention has also been invited to the details of the expenditure, which is placed in the assessee's paper book at pp. 126 to 159. Referring to the details of expenditure, it was submitted that in the case of Shah House premises, Mumbai, the expenditure is in respect of repairs incurred collectively by the tenants of Shah House Association and it was shared by the assessee with other tenants. No additional or new asset can be said to have been created. Similarly, in relation to expenditure at Bhopal office, the expenditure was mainly on the interior work. Further, it was submitted by the learned Counsel that even if a portion of the expenditure is found to be capital in nature but since the expenditure was inseparable, the entire expenditure has to be seen as revenue expenditure deductible under Section 37(1) of the Act.
78. On the other hand, the learned Departmental Representative has relied on the orders of the lower authorities in assailing the stand of the assessee.
79. We have considered the rival submissions. First of all, it would be relevant to understand the import of Expln. 1 to Section 32(1), which the AO has invoked. The said Explanation reads as under:
Explanation 1.--Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee.
80. A perusal of the Explanation reveals that in relation to building taken on rent by the assessee, "any capital expenditure" incurred has to be treated as if the building is owned by such an assessee. The expenditure envisaged in the Explanation, inter alia, includes expenditure by way of renovation or extension of or improvement to the building, provided, of course that it is on capital account. It follows, therefore, that even an expenditure incurred on renovation and repairs is includible provided the same is of a capital in nature. Let us examine the details of the expenditure incurred by the assessee in this light. The total expense, under the impugned head, claimed with respect to Mumbai office is Rs. 93,61,605. Out of this, a sum of Rs. 60,14,000 is by way of payment made to "Shah House Tenants Association'. The assessee, being one of the tenants of the building has incurred the proportionate share of total expenditure on renovation of the building. The details of the work carried out in this regard reveal that it involves concrete work, guniting works, etc. relating to the exterior of the building and also interior work relating to structural steel reinforcement work, etc. No doubt, such an expenditure is incurred for the purposes of business, but it does result in a benefit of enduring nature and is liable to be treated as capital in nature. The expenditure is in the nature of improvement to the building and thus the provisions of Expln. 1 to Section 32(1) have been rightly invoked by the AO. To this extent, we affirm the decision of the CIT(A). Insofar as the balance expenditure of Rs. 33,47,605 is concerned, the nature of expenditure is towards payment for internal furnishings, painting and polishing work, dismantling of old false ceiling, fees for interior designing, lift maintenance, etc. All these expenses are incurred by the assessee for the purposes of its business. They can at best be considered as having been spent by the assessee on making its work place suitable and comfortable so as to carry out its business conducively. It is certainly not incurred for acquiring any asset or advantage of an enduring nature. The amount spent on such repairs and renovation cannot be considered as a capital expenditure, and is thus outside the purview of Expln. 1 to Section 32(1). To this extent, the invoking of Explanation to Section 32(1) of the Act by the AO therefore was unjustified.
81. Now, coming to the expenses incurred by the assessee at its Bhopal office amounting to Rs. 20,78,622. The nature of expenses, as revealed from the details placed in the paper book, are interior work, painting and polishing, . electrical maintenance related work, architect fee for interior decoration, etc. The expenditure incurred also relates to panelling, partition work, designing and fabricating office furniture, work stations, flooring work on kitchen, toilets and office, etc. The expenditure incurred, in our view, is clearly incurred in the course of effectuating the business of assessee inasmuch as it only seeks to maintain and set up the office infrastructure. The expenditure is mainly on the interior work in order to make the premises fit for working and none of the items can be said to have resulted in acquisition of any asset or of a work which could be construed to be incurred on capital field. Therefore, to this extent, the invoking of Expln. 1 to Section 32(1) was not justified.
82. As a result, the invoking of Expln. 1 to Section 32(1) is limited to the extent of Rs. 60,14,000. We, therefore, set aside the order of the CIT(A) and direct the AO to rework the disallowance as above. Of course, on the amount which is considered to be falling within the purview of Explanation to Section 32(1), the same shall be eligible for depreciation at the rates applicable. The CIT(A) has allowed the same and to that extent, the decision of the C1T(A) is affirmed. The AO shall take into consideration the aforesaid while reworking the disallowance.
83. As a result, this ground is partly allowed as above.
84. Ground No. 4 of the grounds of appeal of the assessee is as under:
The CIT(A) erred in treating the expenditure of Rs. 35,72,400 incurred on software technology and upgradation of computerization as capital in nature and whereas the claim of the appellant was that no asset or advantage of enduring nature had been acquired and, therefore, deduction was required to be allowed on revenue account. Alternatively, the CIT(A) should have directed allowance of depreciation.
85. The said ground relates to the treatment of expenditure of Rs. 35,72,400 incurred by the assessee on software technology upgradation and computerization. The said expenditure represented cost of ERP system, foreign travelling expenses/conveyance expenses of executives for replacement of existing computerized system with that of ERP (i.e. enterprises resource planning) system with respect to the engineering division of the assessee-company. The assessee claimed to have incurred the impugned expenditure for modernizing, upgrading and acquiring new technology in the place of old software system. The old system was of Oracle version 7.0. The new system installed in the engineering division related to production, planning, HR and payroll planning, etc. The expenditure has been claimed as revenue expenditure deductible under Section 37(1) of the Act. The AO held that the impugned expenditure resulted in enduring benefit to the assessee and therefore was liable to be considered as a capital expenditure. He, therefore, disallowed the claim of the assessee. The CIT(A) has since sustained the disallowance by placing reliance on the decision of the Rajasthan High Court in the case of CIT v. Aravali Construction Co. (P) Ltd. .
86. At the time of hearing, the learned Counsel for the assessee has vehemently submitted that the expenditure of Rs. 35,72,400 incurred on the purchase of software was a revenue expenditure. According to the learned Counsel, the assessee did not derive any enduring benefit by incurring such expenditure. In his view, the expenditure incurred was to facilitate the operations of the assessee. It was submitted that it was incurred towards purchase of a new software-ERP integrated system. According to the learned Counsel, purpose of incurring the expenditure was to replace the already existing system i.e. Oracle version 7.0 with the new ERP integrated system. According to him, as the new software provided latest techniques to meet the day-to-day requirement of the management and as such it was for the purpose of business thus, the expenditure was allowable under Section 37(1) of the Act. The learned Counsel placed reliance on the order of the Jaipur Bench of the Tribunal reported at Business Information Processing Service v. Asstt. CIT and also the decision of the apex Court in the case of Alembic Chemical Works Co. Ltd. v. CIT and Jute Corporation of India Ltd. v. CIT . Learned Counsel heavily relied on the decision of the Delhi Bench of the Tribunal in ITA No. 5308/Del/2003 Sumitomo Corporation India Ltd. v. Asstt. CIT dt. 26th July, 2004 in support of his submission that the expenditure incurred on software is to be held as revenue expenditure. Insofar as the reliance placed by the CIT(A) on the decision of the Rajasthan High Court in the case of Aravali Construction Ltd. (supra) is concerned, learned Counsel submitted that it was a case where the software was purchased for the first time and therefore, the same was held to have been a capital expenditure. As an alternative submission, the learned Counsel submitted that in case, the impugned expenditure is held to be capital in nature, the assessee be allowed depreciation in accordance with the rules.
87. On the other hand, the learned Departmental Representative has reiterated the reasoning taken by the CIT(A) and also relied upon the judgment of the Rajasthan High Court in the case of Aravali Construction (P) Ltd. (supra) as also the decision of the Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 TTD 119 (Del). The learned Departmental Representative pointed out that in the instant case, it involved a purchase of ERP system software and was not a case of upgradation and maintenance of software and, therefore, the decision of Maruti Udyog Ltd. (supra) is clearly attracted.
88. We have considered the rival submissions of the parties carefully. Insofar as the factual aspect of the matter is concerned, the details of the expenditure amounting to Rs. 35,72,400 in question have been placed at pp. 160 to 162 of the assessee's paper book. The major expenditure to the extent of Rs. 35,36,000 represents the cost of purchase of ERP system and the balance of the expenditure of Rs. 36,400 is the related travelling expenditure. The expenditure of purchase is supported by the invoice of the supplier M/s Inforgem Technology, a copy of which is also placed in the assessee's paper book. The assessee has acquired the ERP business software with unlimited user license. Therefore, in view of the aforesaid, there cannot be a dispute to the fact that the expenditure in question is incurred on an acquisition of software by way of an outright purchase. The plea of the assessee that it was a case of mere upgradation of an existing software, is not borne out from record and neither is there any finding to that effect in the orders of the lower authorities. Considered in this background, the issue for consideration is as to whether the expenditure incurred on acquisition of software is a capital expenditure or not. It is in this light, in our view, the decision of the Delhi Bench of the Tribunal in the case of Mamti Udyog Ltd. (supra) fully applicable. The Tribunal therein held that computer software by itself is a capital asset and therefore, was akin to know-how. It accordingly held, by following the decision of the Hon'ble High Court of Rajasthan in the case of Amvali Construction (P) Ltd. (supra), that the expenditure on purchase of software was capital expenditure. Respectfully concurring with the aforesaid decision, in the instant case, as the facts are identical, we hold that the expenditure of Rs. 35,72,400 is liable to be considered as a capital expenditure.
89. Insofar as reliance placed by the learned Counsel for the assessee on the Tribunal decision in the case of Sumitomo Corporation (supra) and on the decisions of the apex Court in the case of Alembic Chemical Works Ltd. (supra) and Jute Corporation Ltd. (supra) are concerned, in our view, the same is misplaced. We have perused the relevant decisions. In fact, in Sumitomo Corporation (supra), the Tribunal while discussing the issue in para 8 of its order, categorically came to the conclusion that the expenditure in question therein was "for updating, rationalizing the existing data processing system" of the assessee. It was in these circumstances that the expenditure was held allowable by the Tribunal as revenue expenditure. As we have noticed earlier, the fact situation in the instant case is that the expenditure in question was in relation to the acquisition of the ERP integrated system by way of purchase. Similarly, the case of Alembic Chemical Works Co. Ltd. (supra), the Hon'ble Court was dealing with the payments made for the use of know-how. Whereas in the instant case, it is a case of an outright purchase of software and not merely to the use of know-how to the exclusion of others. Similarly, the fact situation in the case of Jute Corporation of India Ltd. (supra) was on a different footing and, therefore, that decision is not applicable to the facts of the instant case. Viewed in this light, we do not find that the ratio of the aforesaid decisions help the assessee in the instant case. The assessee accordingly fails on this ground.
90. Ground No. 5 of the grounds of appeal of the assessee is as under:
The CIT(A) has erred in disallowing expenditure to the tune of Rs. 15,56,611 out of the total claim of Rs. 25,93,786 incurred towards the expansion and diversification of the company's existing business.
The above ground is related to ground No. 3 of the grounds of appeal of the Revenue which reads as under:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 10,37,275 made by the AO on account of expansion and diversification of company's business ignoring that the said expenditure resulted in imparting enduring benefits to the assessee-company and as such was of capital nature.
91. The brief facts are that the assessee-company incurred a sum of Rs. 25,93,786 on new projects towards expansion and diversification of its business. The same was claimed as a revenue expenditure under Section 37(1) of the Act in the return of income. The AO has disallowed the expenditure on the ground that the expenditure has resulted in imparting of enduring benefit and was thus capital in nature. In appeal before the CIT(A), the assessee contended that the expenditure was incurred only for expansion of existing business and not for starting of any independent line of business activity. The CIT(A) has since noted the details of the impugned expenditure as follows:
1. Expenses incurred in respect of Rex Lok Project Rs. 6,06,525
2. Expenses incurred in relation to Metro Rail Project, and Rs. 6,86,694
3. Kayaba Project Rs. 13,00,567 The CIT(A) has since held that the impugned expenditure was not for any new business and was thus, in principle, allowable as a revenue expenditure. However, out of total expenditure of Rs. 25,93,786, the disallowance to the extent of Rs. 15,56,511 has been sustained in the absence of evidence of details regarding nature of expenditure. The assessee is thus in appeal before us against the addition that has been sustained by the CIT(A) whereas the Revenue is in appeal against the part of addition that has been deleted by the CIT(A). The two grounds being related are being decided together.
92. Before us, the learned Counsel for the assessee submitted that the complete details of the expenditure was filed before the CIT(A) and are placed at pp. 163 to 166 of the paper book filed before us. According to him, the CIT(A) never confronted to the assessee that any further details were required to ascertain the nature of expenditure. In any case, it was subtnitted that if any further verification was required, the CIT(A) should have remanded the matter to be re-examined by the AO for this limited purpose. Insofar as the merits of the decision of CIT(A) is concerned, the learned Counsel defended the same and submitted that the decision of the Hon'ble Delhi High Court in the case of CIT v. Modi Industries Ltd. fully supports the case of the assessee. It was submitted that the existing line of business activity of the assessee-company was the business of manufacturing and the new projects were nothing but expansion of the existing line of business.
93. On the other hand, the special counsel for the Revenue as well as the learned Departmental Representative has defended the order of the AO by placing reliance on the same.
94. We have considered the rival submissions. The allowability of the impugned expenditure is to be considered in the light whether the projects, in connection with which the expenditure has been incurred, were in the existing line of business of the assessee or not. If it is held that the new projects were in the existing line of assessee's business, then the expenditure is allowable in terms ,of Section 37(1) of the Act. The assessee-company is engaged in the business of manufacturing and sale of tractors, shockers, railway equipment, etc. besides certain trading activities. Broadly speaking, the assessee is inter alia, in the business of manufacture of various products like automotive parts, railway equipments, etc. By way of the three projects in question, the assessee only sought to expand the range of its products manufactured. For instance, the Rex Lok Project envisaged the manufacture of rail fastening system, the actual production started in December, 2002. Admittedly, the assessee was already in the line of manufacturing of rail equipments and thus the new project was a mere extension of the existing business. The expenditure in question incurred on such project is primarily related to discussions with the technical collaborators. Thus, the expenditure is allowable as a revenue expenditure. The finding of the CIT(A), based on the judgment of the Hon'ble High Court of Delhi in the case of Modi Industries Ltd. (supra), is thus justified, having regard to the facts and circumstances of the case. Similarly, in relation to the other two projects in question, the nature of the same is similar to the existing business of the assessee. Thus, similar view is liable to be taken in respect of the respective expenditure. We may mention here that the Revenue, either in the order of the lower authorities or even before us has not challenged the facts that there existed unity of control, commonality of funds and management in relation to the existing business and the projects in question. Thus, in principle, the stand of the assessee is approved that the new projects are in the existing line of the business of the assessee. Now, coming to the disallowance partly sustained by the CIT(A) for want of details regarding nature of the expenses in relation to M/s Kayaba Project (to the extent of Rs. 8,69,817) and M/s Metro Rail Project (to the extent of Rs. 6,86,694) totalling to Rs. 15,56,511, we find that there is no material on record to arrive at any finding with regard to the nature of expense and neither is there any finding in the orders of the lower authorities in this regard. This aspect requires verification. Thus,' in order to verify the nature of expenditure of Rs. 15,56,511, we restore the issue to the file of the AO to carry out the aforesaid limited exercise. If the AO finds that the expenditure is on revenue account and not on capital account, the same shall be allowable as a revenue expenditure. Of course, the AO shall carry out the aforesaid exercise after allowing a reasonable opportunity to the assessee to furnish the requisite material and evidence in support of its stand. After considering the submissions of the assessee, the AO shall pass appropriate order in accordance with law and keeping in mind our above stated observations. As a result, we conclude by holding that ground No. 3 of the Revenue is dismissed and ground No. 5 of the assessee is allowed for statistical purposes.
95. Ground No. 6 of the grounds of appeal of the assessee is as under:
The CIT(A) has further erred in sustaining disallowance of Rs. 21,70 lakhs out of the disallowance of Rs. 2,01,88,412 made by the AO by invoking the provisions of Section 14A of the IT Act. The allocation of administrative expenditure to the tune of Rs. 5,00,000 as also the apportionment of the personnel expenses to the tune of Rs. 16.70 lakhs to obtain a few dividend/interest warrants credited directly in the bank accounts of the recipients. Alternatively, disallowance is on the higher side and a token amount would meet the ends of justice.
The above ground preferred by the assessee is related to ground No. 7 of the grounds of appeal of the Revenue which reads as under:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 1,80,18,412 out of total disallowance of Rs. 2,01,88,412 made by the AO under Section 14A of the IT Act, 1961.
96. The facts in brief are as follows. The assessee-company had declared dividend income of Rs. 8.9 crores (approx.) and interest income of Rs. 10.13 crores (approx.), which was claimed as exempt under Sections 10(33) and 10(23G) of the Act, respectively. The assessee was asked to show cause as to why expenses attributable to the exempt incomes may not be disallowed in view of the provisions of Section 14A of the Act. In response, the assessee submitted that the expenses incurred by the company have no nexus with earning of the dividend income; that most of the investments on which dividend is earned have been made in earlier years and are old investments except in few cases where investments are made during the year in mutual funds for short durations; that assessee-company is a large organization having common bank accounts where it deposits all receipts and all payments are made from the same; the bank accounts are jumbled where no nexus can be made with reference to any investments made by the company; that the assessee-company is a profit-making company. Thus, the investments made in earlier years as well as made in mutual funds during the year under reference are out of profits of the company and not out of borrowed funds in view of the facts explained. With respect to the interest income claimed exempt under Section 10(23G), it was-explained that the same was earned on loan advanced to a subsidiary company in earlier years; that the said loan was given out of the profits of the assessee in the earlier year and not out of borrowed funds. Thus, it was submitted that no interest cost or other expenditure was incurred by the assessee during the year which could be attributable to the loan given to the subsidiary. In this manner, the assessee submitted that no expenditure incurred by it was incidental or attributable, in terms of Section 14A of the Act, towards earning the dividend and interest income considered as exempt. However, the AO rejected the aforesaid submissions of the assessee. According to the AO, no evidence was furnished to establish that no expenses have been incurred to earn exempt income; that the assessee is entitled to claim long-term capital loss on sale of bonds on which dividend income has accrued to the appellant-company, thus, on one hand, the appellant is claiming dividend income totally exempt under Section 10(33) and at the same time, it is also getting benefited by the fact that due to earning of dividend income, the redemption price of the said bonds has gone down; it cannot be allowed to claim double benefit. The AO, - considered the expenses on personnel salaries, rent, printing and stationery, postage, telegram and telephone and general expenses totalling to Rs. 167.41 crores. The proportionate expenses allocable to dividend and interest income was computed at Rs, 2,01,88,417. The said amount as disallowed while computing the total income of the assessee. The assessee carried the matter in appeal before the CIT(A). In appeal, the assessee contended that on facts, circumstances and legal position of the case, Section 14A is not applicable. It was, inter alia, contended that no expenditure has been incurred by the assessee for earning the dividend and interest incomes. A reference was also made to the order of the Tribunal in the assessee's own case for asst, yr, 1981-82 where similar issue for disallowance of expenditure relating to earning of dividend income was considered and the Tribunal has decided the issue in favour of the assessee holding that no expenditure on the facts and circumstances of the case are attributable to the earning of the dividend income. After considering the pleas of the assessee, the CIT(A) has held that (i) the investments made during the year have been made from own funds and not by taking loans; (ii) that the proportionate disallowance out of rent, printing and stationery, postage, telegram and telephone and general expenses was not proper and instead confirmed a sum of Rs. 5 lakhs on ad hoc basis as amount sufficient to cover expenses incurred for earning exempted income; (iii) that out of personnel expenses, proportionate disallowance was to be restricted to amounts spent in relation to employees other than the manufacturing unit, thus restricting the disallowance to Rs, 16.70 lakhs. In this manner, the CIT(A) has scaled down the disallowance to Rs. 21.70 lakhs as against Rs. 2,01,88,412 made by the AO. The assessee is in appeal before us with regard to the disallowance that has been sustained by the CIT(A) whereas the Revenue is in appeal against the part of disallowance which has been deleted by the -CIT(A). The two grounds, being related, are being decided together.
97. Before us, the learned Counsel for the assessee has reiterated the submissions made before the lower authorities. Firstly, it has been contended that the dividends have been received mainly from investments made in related and group companies and our attention was invited to p. 175 of the assessee's paper book in this regard. It was submitted that no efforts were made to receive the dividend income. The only effort being the depositing of cheques in the bank. It was submitted that there was no nexus between the earning of the exempt incomes in question and the expenditure incurred, which is relatable to the activities of the assessee-company as a whole. Similar argument was made in relation to interest income considered exempt under Section 10(23G) of the Act. Reliance was also placed on the decision of the Tribunal in the assessee's own case for asst. yr. 1981-82, copy of which is placed in the assessee's paper book at pp. 176 to 179, on a similar issue. The learned Counsel also submitted that subsequent to the asst. yr. 1981-82, there has been no such disallowance, as the order of the Tribunal has since attained finality. In the alternative, it was also submitted that the disallowance sustained by the CIT(A) was on a higher side.
98. On the other hand, the learned special counsel and learned CIT-Departmental Representative appearing on behalf of the Revenue has assailed the stand of the assessee and has instead relied on the order of the AO. According to the Revenue, the apportionment of total expenses incurred by the assessee on personnel, rent, printing and stationery, postage, telegram and telephone and general expenses have been rightly made by the AO on the basis of proportion of exempt income vis-a-vis the total income. The apportionment was sought to be justified on the basis that no detail of the expenses was submitted by the assessee. Regarding the order of the Tribunal for asst. yr. 1981-82, it was contended that the same was in relation to determining the amount of income for the purposes of allowing deduction under Section 80M of the Act and the implication of Section 14A of the Act was not considered, as the same was not on the statute at that point of time. 99. We have considered the rival submissions. Section 14A provides that if the assessee has income which does not form part of the total income under the Act, then in computing the income under any of the heads of income mentioned in Chapter IV, no deduction shall be allowed in respect of expenditure which is incurred in relation to such excluded income. In other words, the import of Section 14A is that if a particular income is excluded from the purview of the total income under the Act, the related expenditures should not be allowed as deduction even against the income includible in the total income so as to obviate a double benefit to the assessee, viz. first by way of income being excluded from the purview of tax and secondly, by reducing the residual taxable income, if any, by the amount of expenditure related to the excluded income. Now, in order to apply the provisions of Section 14A, it envisages two steps : firstly, the incomes which do not form part of the total income under the Act has to be identified. Secondly, the expenditure which is related to such income has to be identified. In the instant case, the dividend income of Rs. 8.9 crores (approximately) and interest income of Rs. 10.13 crores approximately are excludible from the purview of total income under the Act on account of Sections. 10(33) and 10(23G) of the Act, respectively. The next step is to identify the expenditure, if any, which is relatable to such incomes. Broadly speaking, expenditures incurred "in relation to an income" can be of two types. First category of expenditure are those which are expended directly to earn such income. Second category is of the type, where there does not exist a direct nexus but can be said to be indirectly related to the earning of income. In the instant case, the funds have been invested by the assessee to earn dividend and interest income. If any of funds invested have come out of the interest-bearing borrowings, such interest cost would be a direct expenditure. Whereas the common managerial expenses, viz. salary of employees looking after investment portfolio, office overheads, etc. are expenses which can be considered as indirect expenses. We may now examine the facts of the instant case. The stand of the assessee is that it does not have any expenditure relatable to the impugned exempt incomes. The reasons in support of the aforesaid have been noted by us in the earlier part of our order and are not being repeated for brevity. Insofar as the interest cost on the dividend yielding investment is concerned, we do not find 'any material to negate the fact position brought out by the assessee. According to the assessee, the investments in shares and mutual funds have been predominantly made in the earlier years. In relation to the investments made during the previous year relevant to the assessment year in question, the CIT(A) in para 13.3.1 of her order concludes that "it has been confirmed during the course of appellate proceedings that the investments have been made from the credit balance available in the banks and not by taking loans". This finding has not been challenged or refuted by the Revenue before us. Similarly, it is factually not disputed that the interest considered exempt under Section 10(23G) of the Act has been earned on loan advanced in an earlier year. Thus, it can be safely deduced that out of the interest cost incurred by the assessee during the year under consideration, nothing can be said to be related to earning of the dividend and interest income considered exempt under Sections. 10(33) and 10(23G) of the Act, respectively. This leaves us with other indirect management and administrative expenses, which might have been incurred by the assessee for earning the impugned incomes. Ostensibly, the assessee does not have any dedicated setup for the purposes of managing its investment portfolio. This activity is intermingled with its other activities. Thus, an estimation is required to ascertain expenditures which have a relation to the earning of dividend and interest incomes considered exempt. In this regard, in our view, not much activity is required in earning the dividend or the interest income once the investments have been made. Nevertheless, in the absence of separate accounts by way of which the management and administrative expenditure could be segregated, estimation is inevitable. It is in this light that we have considered the orders of the lower authorities. The AO as well as the CIT(A) have made an estimation of the expenditure incurred in relation to the impugned exempted incomes. The estimation made by the AO is on a thumb-rule basis. The AO has applied percentage in the proportion of the incomes earned for arriving at the related expenditure. In our view, such an approach cannot be considered as reasonable inasmuch as it does not take into account the relevant factors. The mechanical application of such a principle would only lead to distorted picture. The CIT(A), on the other hand, has taken into consideration the realities of the situation inasmuch as not much activity is needed in earning of the dividend and interest income. In the instant, the predominant activity of the assessee is in relation to the manufacture of machinery, rail equipments, etc. and the aspect relating to earning dividend and interest income is certainly not a main focused activity. Therefore, correlating the percentages of income vis-a-vis the expenditure would be unreasonable as done by the AO. In asst. yr. 1981-82, this Tribunal in the context of Section 80M of the Act had held that there was no correlation between the expenses debited to the P&L a/c and the dividend earned by the assessee. In the present assessment year, one of the components of the exempt income is income in the form of dividend totalling Rs. 8.9 crores. The other exempt income is interest income of Rs, 10.13 crores. The assessee is in the business of manufacture of motorcycles, tractors, etc. Its business is not that of a finance company. The interest received is also in respect of a loan advanced to a subsidiary company in earlier years. Taking into consideration the above aspects, we are of the view that the addition sustained by the CIT(A) is excessive. We are of the view that an ad hoc addition of Rs. 2 lakhs would meet the ends of justice. As a result, we conclude by holding that ground No. 6 of the grounds of appeal of the assessee is partly allowed and ground No. 7 of the grounds of appeal of the Revenue is dismissed.
100. The seventh ground taken by the assessee is with regard to the charging of interest under Sections 234B and 234C of the Act, which is consequential in nature and the AO shall recomputed the same after considering the effect of the instant order.
101. The appeal of the assessee is thus disposed of as partly allowed.
102. This leaves us with the remaining grounds in the appeal of the Revenue, which we take up in the following paras.
103. Ground No. 2 of the grounds of appeal of the Revenue is as under:
2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 7,48,00,851 made by the AO on account of premium on redemption of SPNs.
104. The said ground taken by the Revenue is against the action of the CIT(A) in deleting the disallowance of expenditure of Rs. 7,48,00,851 being proportionate premium payable in respect of secured premium notes (referred to as SPNs). The relevant facts are that during an earlier financial year, i.e., 1994-95, the assessee-company issued 43,27,322 SPNs of Rs. 100 each for a value of Rs. 43.27 crores purportedly to finance the company's requirements of funds. Each SPN comprised of four parts of Rs. 25 each, which was redeemable at the end of the 4th, 5th, 6th and 7th year from the date of allotment on premium. The total premium payable on redemption of the SPNs over the period of issue was Rs. 52,36,05,962. The assessee claimed premium attributable to the instant assessment years being the 7th and last year at Rs. 7,48,00,851 on accrual basis relying on the decision of the Hon'ble Supreme Court in the case of Madras Industrial Corporation Ltd. v. CIT . The AO has, however, disallowed the claim on the ground (a) that the assessee-company was having surplus funds by way of equity and the raising of funds by way of SPNs was not required, and (b) that SPNs were raised "merely to claim the expenditure incurred on servicing such funds as allowable expenditure". On an appeal by the assessee, the CIT(A) has allowed the claim of the assessee. The Revenue is thus aggrieved and is in appeal before us.
105. We have heard the rival counsel who have placed reliance on the respective orders of the lower authorities. The learned Departmental Representative has relied on the order of the AO whereas the learned Counsel for the assessee has relied on the order of the CIT(A). In addition, the learned Counsel has drawn our attention to the paper book filed by the assessee containing the factual position regarding the disallowance. In addition to the judgment of the Hon'ble Supreme Court in the case of Madras Industrial Corpn. Ltd. (supra), reliance has been placed by the learned Counsel on the following judgments--M.P. Financial Corporation v. CIT (1986) 51 CTR (MP) 249 : (1987) 165 I-1'R 765 (MP) and CIT v. Tungabhadra Industries Ltd. .
106. Having considered the rival stands and the fact situation, the issue, in our view, is squarely covered by the decision of the Hon'ble Supreme Court in the case of Madras Industrial Corporation Ltd. (supra). The assessee has raised funds by way of issuance of SPNs which are redeemable at a premium partly at the end of 4th, 5th, 6th and 7th year. There is no dispute that the funds so raised have been utilized by the assessee for the purposes of its business as we do not find any finding or even an allegation by the Revenue to the contrary. Thus, the liability to pay the premium amount over and above the face value of SPNs on redemption is a liability incurred by the assessee for the purposes of its business by generating funds which were utilized for its business activities. Thus, such an expenditure is an allowable expenditure. Now, with regard to year of allowability, it is evident that the payment of premium results in securing of benefit over a number of years. The benefit is spread over the entire period of 7 years. The expenditure is therefore allowable over the entire period of the SPNs till redemption, having regard to the parity of reasoning enunciated by the Hon'ble Supreme Court in the case of Madras Industrial Corpn. Ltd. (supra). The assessee, therefore, correctly claimed deduction only in respect of the proportionate premium relatable to the year in question.
107. In any case, the factors considered by the AO for making the disallowance are irrelevant and have no bearing to decide the issue on hand. We, thus, affirm the conclusion of the CIT(A) on this ground. Ground No. 2 of the grounds of appeal of Revenue is thus dismissed.
108. Ground No. 4 of the grounds of appeal of the Revenue is as follows:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the addition of Rs. 36 lakhs made by the AO on account of prior period expenses ignoring that the assessee-company was following the mercantile system of accounting and as such prior period expenses could not be allowed as deduction in the computation of assessee's total income for the instant asst. yr. 2001-02.
109. The said ground taken by the Revenue is against the action of the CIT(A) in deleting the disallowance of Rs. 36 lakhs made by the AO as previous year's expenses. Briefly, the fact is that the AO disallowed previous year's expenses of Rs. 36 lakhs, which were claimed as deduction under Section 37(1) of the Act on the ground that since the assessee followed mercantile system of accounting, the expenditure pertaining to earlier years cannot be allowed during the assessment year in question. On an appeal by the assessee, the CIT(A) has since allowed the claim of the assessee on the ground that the deduction has been claimed on the basis of liabilities corresponding to the impugned expenditure having crystallized during the year.
110. Before us, the learned Departmental Representative has relied on the order of the AO.
111. On the other hand, the learned Counsel for the assessee has relied on the order of the CIT(A).
112. Having heard the rival counsel and perusing the material on record, we do not find any substance in the present ground of the Revenue. The finding of the CIT(A), that the liabilities in relation to the impugned expenditure have crystallized during the year, has neither been controverted nor assailed in any manner on the basis of any cogent material or evidence. We also find that the CIT(A) has followed the orders of the Tribunal in the assessee's own case for asst. yrs. 1982-83 and 1983-84 in deleting the impugned addition. Nothing has been brought on record by the Revenue to contradict the aforesaid. Thus, following the precedents noted above and the factual findings of the CIT(A), which remain uncontroverted, this ground of the Revenues is dismissed.
113. Ground No. 5 of the grounds of appeal of the Revenue is as under:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of expenses of Rs. 64,95,097 made by the AO on account of expenses claimed under the head commission, discount and brokerage on sales made to Government parties ignoring the provisions of Explanation to Sub-section (1) of Section 37 of the IT Act, 1961.
114. The facts in brief are that the assessee had incurred a sum of Rs. 21,75,81,407 under the head 'commission, discount and brokerage'. Out of the total expenditure a sum of Rs. 64,95,097, being commission paid to third parties relating to the Government sales, was disallowed by the AO following his stand for an earlier year. The assessee explained that the expenditure comprised of commission/incentive to authorized dealers/stockists, commission to third parties/agents relating to sales made to various customers including Government and non-Government, trade discount, cash discount, brokerage, etc. In support of its claim, the assessee filed copies of appointment letters of the agents as also the confirmation of the parties, In the appeal proceedings before the CIT(A), the assessee further submitted that the AO wrongly observed that in the preceding years the expenses have been disallowed while the fact was that the AO himself in asst. yr. 1999-2000 has allowed all the expenses.
115. The CIT(A) found that for the asst. yr, 1998-99, the only cause for disallowance by the AO was the inability of the assessee to file the confirmations of the parties before the AO and that, in any case, the CIT(A) has allowed the said claim. Further, for the asst. yr. 1999-2000, the AO himself did not make any disallowance as the necessary confirmations were filed by the assessee. Considering the fact situation in this year, where the assessee had filed complete confirmations from the parties relating to the impugned expenditure, the CIT(A) has since deleted the addition. Revenue is presently in appeal before us. The learned Departmental Representative has primarily placed reliance on the order of the AO in support of her submissions.
116. On the other hand, learned Counsel appearing on behalf of the assessee has referred to the paper book wherein various submissions along with the supporting documents, which were filed before the lower authorities have been placed, In particular, our attention was invited to pp. 68-81 of the paper book to point out that the requisite details viz. name and address of the parties, income-tax particulars, etc. were filed before the AO who has merely brushed aside the same. The CIT(A), according to the learned Counsel, has appreciated the facts in proper perspective and has deleted the addition. Referring to the grounds of appeal as preferred by the Revenue wherein a reference to the provisions of Explanation to Sub-section (1) of Section 37 of the Act has been made, the learned Counsel submitted that none of the impugned expenditure was paid to any Governmental body. Therefore, the said Explanation could not be invoked. In any case, it was submitted that the AO has not invoked the said Explanation for making the impugned disallowance. To this aspect, the learned Departmental Representative agreed that having regard to the factual aspects, the Explanation to Sub-section (1) of Section 37 would not apply.
117. Having considered the rival arguments in the light of the material available on record, we do not find any reason to interfere with the conclusions drawn by the CIT(A) inasmuch as the Revenue has not been able to demonstrate any infirmity in the order of the CIT(A). It is evident that the claim of expenditure, being on account of incentives and commissions related to sales made by the assessee, are accepted as relating to the business activity of the assessee. The claim of the assessee is in line with the expenditure incurred in the earlier assessment years. The parties who have received the commission to the extent of Rs. 64,95,097 have confirmed the receipt of payment. The details of such parties, numbering four, along with their addresses, mode of payment, income-tax particulars, confirmations, etc. have been submitted by the assessee in support of the claim. The copies of the same are placed in the paper book filed before us. We do not find that the AO has brought on record any material or evidence to contradict the aforesaid material relied upon by the assessee. Having received the confirmations from the said parties, it was open to the AO to subject the same to the process of further verification if he had any doubt with regard to the authenticity of the same. No such effort has been made by the AO. The entire evidence and material brought on record by the assessee has been simply disbelieved by the AO without advancing any cogent or sufficient reasons. Under these circumstances, having regard to the facts and the evidence on record, we do not find any infirmity in the conclusions drawn by the CIT(A) that the expenditure stood verified. The addition made by the AO has, therefore, been rightly deleted by the CIT(A). Thus, ground No. 5 of the grounds of appeal of the Revenue is dismissed.
118. Ground No. 6 of the grounds of appeal of the Revenue is as under:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 4.56 crores made by the AO on account of interest on interest-free loan given by the erstwhile Escorts Tractors Ltd. to its subsidiary company M/s Escotrac Finance Tractors Ltd. prior to its amalgamation with the assessee-company in financial year 1995-96.
119. The said ground has been taken by the Revenue against the action of the CIT(A) in deleting the addition of Rs. 4.56 crores made by the AO on account of alleged interest-free loan of Rs. 38.01 crores advanced by the erstwhile Escorts Tractors Ltd. to its subsidiary company M/s Escotrac Finance Tractors Ltd. prior to its amalgamation with the assessee-company w.e.f. 1st April, 1995. The AO noted that on one hand, the assessee was incurring expenditure on bank and finance charges whereas it had advanced interest-free loan of Rs. 38.01 crores to a group company. According to the AO, had the assessee-company utilized the said sum of Rs. 38.01 crores for its business income, it would have saved interest cost. He, accordingly" made an addition of Rs. 4.56 crores being 12 per cent rate of interest on the amount of interest-free loan of Rs. 38.01 crores. Aggrieved with the order of the AO, the assessee carried the matter before the CIT(A). In appeal, the assessee contested the addition both on facts and in law. The CIT(A) deleted the addition after taking into consideration the fact situation to the effect that there was no material or evidence to suggest that the advance made to the group company was out of any borrowed funds. The CIT(A) also noticed that the amount was not advanced by the assessee-company during the year under consideration. The addition has accordingly been deleted. The Revenue is aggrieved and is presently in appeal before us.
120. We find that the fact position is that the impugned amount of loan of Rs. 38.01 crores was given to M/s Escotrac Finance & Investment Ltd. prior to the financial year 1995-96 by a company namely, M/s Escorts Tractors Ltd. M/s Escorts Tractors Ltd. subsequently amalgamated with the assessee-company w.e.f. 1st April, 1995 and, thus, the said loan since then has been appearing in the accounts of the assessee. The loan in question has been advanced free of interest. The plea of the Revenue is that when the business of Escorts Tractors Ltd. stood merged with the assessee-company, the liabilities along with the assets were also taken over. The assets taken over would not remain static and, therefore, it was open to the assessee to have charged interest on the impugned advances. This would have led to a saving in the interest costs. The assessee has, on the other hand, borrowed moneys and was paying interest on the same. Under these facts, learned Departmental Representative submitted that had this money not been advanced free of interest to the sister-concern, to that extent, it may not have been necessary for the assessee to make interest-bearing borrowings. Thus, to that extent, the expenditure can be construed as having been spent for non-business purpose. He, therefore, has justified the addition made by the AO on this count. The learned Departmental Representative has relied upon the decision of the Hon'ble Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P) Ltd. in support of the aforesaid proposition.
121. On the other hand, the learned Counsel for the assessee, Shri R.M. Mehta has defended the orders of the CIT(A). According to the learned Counsel, the impugned loan has not been advanced during the year under consideration and that there is no material to hold that the same was advanced in the earlier years out of borrowed funds. It is further submitted that no such disallowance has been made in the assessment for any of the earlier assessment years. The learned Counsel, therefore, has argued that such a disallowance could not be made in the year under consideration. Learned Counsel has placed reliance on the decision of the Third Member (Bench) of the Tribunal in the case of Malwa Cotton Spinning Mills Ltd. v. Asstt. CIT (2004) 83 TTJ (Chd)(TM) 72 and also on CIT v. Sridev Enterprises and CIT v. Hotel Savera . It was further submitted that notwithstanding the aforesaid, any failure to charge interest on any of the debts advanced by the assessee would not justify the disallowance out of the interest expenditure incurred by the assessee on its borrowings. Reliance in this regard was placed on the decision of the Hon'ble Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom).
122. We have considered the rival submissions in the light of the relevant material which is available on record and we proceed to dispose of the issue on the following lines. The undisputed fact position is that the advance of Rs. 38.01 crores made to M/s Escotrac Finance Tractors Ltd. free of interest, has not been made during the year. The advances have been made in the earlier years, that too, not by the assessee-company but by the erstwhile M/s Escort Tractors Ltd. which has since been merged with the assessee w.e.f. 1st April, 1995. The assessee is claiming expenditure by way of interest on borrowings raised by it. The question is whether any disallowance could be made out of the expenditure so claimed by the assessee on interest on the ground that it had made certain interest-free advances and that the absence of such interest-free advances would have- enabled the assessee not to make the borrowings on which interest is paid. It is to be understood that the allowability of expenditure in the hands of the assessee is to be considered in the light of the provisions of Section 36(l)(iii) of the Act. If the expenditure of interest is incurred by the assessee for the purposes of its business, the same stands expressly allowed in terms of Section 36(1)(iii) of the Act. No doubt, interest on borrowings which have been diverted by the assessee for non-business activities can certainly be disallowed. But for this purpose, a finding has to be reached that the assessee has diverted any of its interest-bearing borrowings for non-business purposes. In the instant case, there is no finding to this effect. In fact, the amount of loan in dispute has been advanced in the earlier years and, therefore, its character has to be understood in the same light as taken in the earlier years. In the earlier years, indisputably, the impugned loan has been accepted as having been advanced for business purposes in the assessments. This is evident from the fact that no such disallowance has been made in the earlier years. On this count also, we are unable to hold this year that the advance was made for non-business purposes so as to justify the disallowance of any expenditure under Section 36(l)(iii) of the Act. It would, therefore, not be feasible to permit the Revenue to take a different stand now in respect of the said loan of Rs. 38.01 crores which has already been a subject-matter of the assessment of the preceding assessment years. The decision of the Hon'ble Karnataka High Court in the case of Sridev Enterprises (supra) fortifies the aforesaid proposition.
123. Even otherwise, we find that there is no allegation, much less an averment by the AO that there existed any nexus between the borrowed funds and the impugned interest-free advances. The fact that there was no disallowance in the earlier years also leads to the presumption that the impugned advances have been made not out of borrowed funds. Therefore, the impugned disallowance was not at all justified and has been rightly deleted by the CIT(A).
124. Insofar as the reliance placed by the learned Departmental Representative on the decision of the Allahabad High Court in the case of H.R. Sugar Factory (P) Ltd. (supra) is concerned, we have perused the same and find that the same does not help the case of the Revenue. The assessee therein was a private limited company. It borrowed money from banks @ 8 per cent and was advancing loans to its directors and charging interest @ 5 per cent. The AO held that the difference between the interest paid to the bank and interest recovered from the directors on the loans advanced to them was disallowable on the ground that it could not be said to have been incurred on capital borrowed for the purposes of the assessee's business. This disallowance was upheld by the Hon'ble Allahabad High Court. In the said decision, there was a finding of fact that the borrowed moneys had been advanced to the directors on a concessional rate of interest. Under these circumstances, it was held that the difference was disallowable whereas in the instant case, the fact situation as discussed above, stands on a totally different footing. There is no nexus established by the Revenue between the borrowings made by the assessee and the interest-free advances made to the sister-concern. Thus, the ratio of the decision of the Hon'ble Allahabad High Court in the case of H.R. Sugar Factory (P) Ltd. (supra) does not help the case of the Revenue.
125. In the result, ground No. 6 preferred by the Revenue is hereby dismissed.
126. Ground No. 8 of the grounds of appeal of the Revenue is as under:
On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 41,48,896 made by the AO on development of existing products ignoring that such expenditure imparted a benefit of enduring nature and as such was of capital nature. The CIT(A) also ignored that the assessee had separately claimed deduction under Section 35(l)(iv) of Rs. 23,93,88,410 as capital R&D expense and treated this expenditure of Rs. 41,48,896 only as pre-operative expense.
127. The said ground taken by the Revenue is against the action of the CIT(A) in deleting the disallowance of Rs. 41,48,896 made by the AO representing expenditure on development of existing products of the assessee-company. The facts are that the assessee had claimed in its return of income the impugned expenses on its R&D activity undertaken to improve the quality of its products. The AO rejected the claim and held that the expenditure was capital in nature on the ground that it resulted in imparting of enduring benefits to the assessee-company. In appeal before the CIT(A), the assessee contended that it has got R&D division which continuously undertakes research activity, and that the impugned expenditure has been incurred consistently even in the earlier assessment years. That no disallowance was made in any of the assessment years on this count. The CIT(A), after considering the facts and the pleas of the assessee, allowed the claim of the assessee for treating the impugned expenditure as revenue expenditure. The CIT(A) found that even if the expenditure was to be considered as a capital expenditure, yet the same being in the nature of R&D expenditure, it was an allowable deduction in terms of Section 35(1)(iv) of the Act. Revenue is presently in appeal against the aforesaid finding of the CIT(A).
128. Before us, the learned Departmental Representative has relied on the order of the AO in support of her submissions. The learned Counsel appearing on behalf of the assessee has defended the orders of the CIT(A) reiterating the submissions made before the lower authorities. Our attention was invited to p. 113 of the assessee's paper book with regard to the details of expenditure. It is submitted that the impugned expenditure has been incurred by the assessee in its engineering division in relation to various products being manufactured namely, tractors, agricultural machinery, etc.
129. Having considered the rival submissions and the orders of the lower authorities with reference to the material on record, in our view, the conclusion drawn by the CIT(A) is justified on facts and in law. Insofar as the nature of expenditure is concerned, there is no dispute that the same relates to the developmental activities carried out by the assessee in its R&D division. The question whether the expenditure is revenue or capital, loses its significance while considering its deductibility because the nature of expenditure is on account of Research and Development. In terms of Clause (iv) of Sub-section (1) of Section 35, any expenditure, being in the nature of capital expenditure incurred on research related to the business carried on by the assessee, is an admissible deduction. Admittedly, the impugned research and development expenditure in question has been found by the CIT(A) to be related to the business of the assessee of manufacturing agricultural tractors, agriculture machinery, etc., a fact situation not controverted by the Revenue. Thus, it qualifies to be deductible under Section 35(1)(iv) of the Act. We do not find anything on record to conclude differently than the CIT(A). Thus, the expenditure has been rightly held to be deductible by the CIT(A). The said ground of the Revenue stands accordingly dismissed.
130. In the result, the appeal of the Revenue is treated as dismissed.