Income Tax Appellate Tribunal - Jodhpur
Acit, Udaipur vs Hindustan Zinc Limited, Udaipur on 24 April, 2017
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM
vk;dj vihy la-@ITA No. 638/JU/2008
fu/kZkj.k o"kZ@Assessment Year : 2006-07
The Asstt. Commissioner of Income- cuke M/s Hindustan Zinc Ltd., Yasad
tax, Circle-2 Udaipur. Vs. Bhawan, Udaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAACH 7354 K
vihykFkhZ@Appellant izR;FkhZ@Respondent
vk;dj vihy la-@ITA No. 606/JU/2008
fu/kZkj.k o"kZ@Assessment Year : 2006-07
M/s Hindustan Zinc Ltd., Yasad cuke The Asstt. Commissioner of
Bhawan, Udaipur. Vs. Income-tax, Circle-2 Udaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN No. AAACH 7354 K
vihykFkhZ@Appellant izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by : Shri D. S. Kothari (CIT)
fu/kZkfjrh dh vksj ls@ Assessee by : Shri K. Sampat (C.A)
lquokbZ dh rkjh[k@ Date of Hearing : 24.03.2017.
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 24 /04/2017.
vkns'k@ ORDER
PER SHRI KUL BHARAT, JM.
These two cross appeals one by the Revenue i.e. in ITA No. 638/JU/2008, (pertaining to the assessment year 2006-07) and another by the Assessee i.e. in ITA No. 606/JU/2008, (pertaining to the assessment year 2006-07) are directed against the order of Commissioner of Income Tax (A) Udaipur, dated 05/09/2008. 2
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Both the appeals were taken up together and are being disposed of by way of consolidated order for the sake of convenience and brevity. First we take up the Revenue's appeal in ITA No. 638/JU/2008, pertaining to the Assessment year 2006-07. The Revenue has raised the following grounds of appeal.
"On the facts and in the present circumstances of the case, the ld. CIT(A) has in:-
I. Deleted the disallowance of Rs. 3,35,44,273/- out of staff welfare expenses u/s 40A(9) of the IT Act.
II. Deleted the disallowance made on account of publicity and public relation expenses amounting to Rs. 14,75,715/-
III. Deleted the disallowance made on account of depreciation claimed in respect of intangible assets in the form of right in relation to power from APGPCL amounting to Rs. 7,90,92,994/-.
IV. Deleted disallowance of depreciation in respect of assets retired from active used amounting to Rs. 39,52,820/-.
V. Deleted addition of Rs. 66,58,952/- on a/c of enabling assets written off. VI. Deleted addition made on account of Mine Development Expenses amounting to Rs. 1,90,50,000/-.
VII. Deleted the addition on a/c of undervaluation of closing stock of ore amounting to Rs. 6,87,45,564/-.
VIII. Deleted the reduction of Rs. 87,97,262/- made by the AO for the claim u/s 80IA of the Act.
IX. Directed to allow donation of Rs. 1,10,52,000/- given to Nandi Foundation as an expenditure u/s 37(1) of the act in-spite of the view taken by the AO in allowing the same u/s 80G @ 50%.
X. Deleted the addition of Rs. 8,55,50,700/- on a/c of waiver of electricity duty.
XI. Deleting the disallowance of Rs. 11,15,00,000/- as exchange rate difference on loan.
XII. Directed not to reduce the profits of the business, the amount eligible for deduction u/s 80IA of the IT Act."
2. At the time of hearing, both the ld. Representative of the parties submitted that the Ground no. 1,2,3,4,5,6 are covered by the decision of the Co-ordinate 3 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Bench of this Tribunal, in the case of the assessee, pertaining to the earlier assessment years. However, Ld. DR supported the Assessment Order. 2.1 We have heard the rival contentions, perused the material available on record and gone through the order the authorities below. We find that Ground no. 1 is covered by the decision of this Tribunal in ITA No. 612/JU/2009, wherein this Tribunal was pleased to hold as under:-
"4. Ground no. 1, it is stated by the Representatives of the parties, that the issue is covered by the decision of the Co-ordinate Bench in assesee's own case. We find that the Co-ordinate Bench in ITA No. 235/JU/2008, decided this issue in para 11.1 to 11.2 by observing as under:
"11.1 As regards ground 5 of the Revenue challenging staff welfare expense u/s 40A(9), we find that the similar issue stands decided by us in assessee's own case for the assessment year 2003-04 vide our order dated 11-03-2016 (in ITA No. 537/JU/2007-Revenue) wherein Revenue's relevant ground No. 5 has been dismissed by following observations:
"15.2 We have heard the rival contentions and perused the materials available on record. We find that Ground no. 7, 8 and 9 of the Revenue is similar to Ground no. 7,8 and 9 of the Revenue for the assessment year 2002-
03 and this issue has been decided against the Revenue by this Bench vide its order dated 09-03-2016 by following observations.
"16.1 Ground No. 7,8,and 9 as mentioned hereunder are similar in nature:-
(vii) deleting the disallowance of Rs. 3,79,96,220/- on account of staff welfare expenses u/s 40A(9) of the IT Act.
(viii) deleting disallowance of Rs. 62,90,317/- on account of contribution towards welfare fund 4 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
(ix) deleting disallowance of Rs. 1,73,43,466/- on account of other welfare expenses.
16.2 Ld. Dr relied on the order of the AO in this behalf.
16.3 The Ld. AR of the assessee contends that the above expenditure being for business purposes and falling within the parameters of relevant provisions have been rightly allowed by the ld. CIT (A) by detailed order, which is relied on.
16.4 We have heard the rival contentions and perused the materials available on record. We find merit in the order of the ld. CIT (A) who has rightly allowed the above expenditure agitated by revenue qua Ground no. 7,8, and 9. This Bench of ITAT vide its order dated 03-03-2016 has allowed similar expenses by following observations.
"13.5 we have heard the rival contentions and perused the material available on record. Assessee is a PSU governed by statutory as well as internal regulations for incurring the expenditure, its approval as per a hierarchical administrate frame work. On facts neither of the auditors i.e. statutory and tax auditors have indicated anything adverse in respect of staff welfare expenditure. It is also a fact that the staff welfare expenditure is incurred through various bodies in consultation with such staff unions. These facts coupled with findings of ld. CIT (A) that expenditure is genuine. Wholly for business purposed and allowed in various earlier years even after verification have neither been dislodged by revenue nor controverted in any manner except raising a specious plea that issue may be set aside again. Its vehemently contended that setting aside amounts to be a burden of fresh proceedings on assessee which should not be restored to be appellate authorities in routine and casual manner. Ld. Counsel contends that it amounts to reassessment proceedings and in this case after 15 years, various courts have expressed their strong displeasure on perfunctory reassessment. In our considered view the following propositions of law in the realm of tax jurisprudence as contended by ld. Counsel for the assessee deserve merit that:
(i) Principles of res Judi cata do not apply to IT proceedings
(ii) Every assessment yea is a separate and distinct unit of assessment and stands on its own facts.
(iii) What is settled should not be ordinarily unsettled unless there are justifiable reasons i.e. the principles of consistency as 5 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
enunciated by Hon'ble Supreme Court in Radha Soami Satsang (supra) It is not disputed by revenue that the expenditure on staff welfare has been allowed by AO himself in various earlier years while re-varying also in set aside fresh proceedings. From the record it emerges that no specific item of expenditure is pointed out to be not covered by sec. 40A(9), no such indication is given by auditors and ld. CIT(A)'s finding on facts and law have not been dislodged by revenue. Adverting to the plea of set aside as raised by revenue, it can be acceded as no lawful justification exists to support it. In pat so many years even after re-verification AO himself has allowed such expenditure. Such orders may have been passed after the impugned assessment order was passed respectfully following the Hon'ble Supreme Court in the case of Radha Soami Satsang we cannot gloss over the obvious legal position that revenue by its AO has allowed the staff welfare expenditure in successive assessment years after direction of Hon'ble High Court and ITAT during re-verification as proceedings of set aside assessment years. The legal propositions as canvassed by ld. Counsel deserved merit, consequently we hold that the set aside of proceedings cannot be recourse by appellate authorities in perfunctory manner and there must exist valid and justifiable reasons for subjecting the assessee to second round of proceedings. The order of ld. CIT(A) on the issue of staff welfare expenditure is upheld, this ground no. 7 of the Revenue is dismissed."
The nature of expenditure and facts and circumstance qua ground no. 7, and 9 of this year are similar. Therefore, following our decision in assessee's own case (supra) for the assessment year 2001-02, we uphold the order o the ld. CIT(A) in this behalf. Thus, Ground Nos. 7,8, and 9 of the Revenue are dismissed.
15.3 Facts and circumstances of the case being similar to earlier years and also following our own decision in the above grounds of appeal (supra), the ground no. 7,8 and 9 o the Revenue are dismissed.
11.2 Respectfully following the decision of the Co-ordinate Bench in assessee's own case(supra), the ground no. 5 of the Revenue challenging staff welfare expense u/s 40A(9) is dismissed."
4.1 Therefore, taking a consistent view, the Ground no. 1 of Revenue's appeal is dismissed."
6
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
In view of the above, the ground no. 1 of the Revenue's appeal is dismissed.
3. Apropos to ground no. 2, it is stated by the Ld. Representative of the parties, that the issue is covered by the decision of the Co-ordinate Bench in Assessee's own case. We find that the ground no. 2, is covered by the decision of this Tribunal in ITA no. 612/JU/2009, wherein the Hon'ble Tribunal decided the issue in para 5 to 5.2 as under:-
"5. Apropos to Ground no. 2 it is stated by the representative of the parties, that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case. We find that the Co-ordinate Bench in ITA No. 235/JU/2008, decided this issue in para 12.1 and 12.2 by observed as under:
"12.1 As regard ground 6 of the Revenue challenging allowability of publicity and PR expense, we find that the similar issue has been decided by us in assessee's own case for the assessment year 2003-04 vide our order dated 11- 03-2016 ( in ITA No. 537/JU/2007- Revenue) wherein Revenue's Ground no. 6 has been dismissed by following observations.
"16.2 We have heard the rival contentions and perused the materials available on record. We find that this issue has already been decided by this Bench vide its order dated 09-03-2016 (A.Y. 2002-03) in favour of the assessee by observing as under:-
"5.3 We have heard the rival contentions and perused the material available on record, similar issue came up in assessment year 2001-02 on the same issue i.e. Gujarat Earthquake itself. The amount provided for such relief on the call of District Collector has been allowed in assessment year 2001-02 by us by following observations.
" 5.1 Ground no. 4 for an amount of Rs. 20,000/- of the assessee deserves to be allowed as it is not disputed that it was incurred for sending Gujarat 7 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Earthquake relief in the form of a truckload of food items consequent to chittorgarh district Collectors Clarion Call. The amount being for social good and for discharge of corporate social responsibility is allowable as business expenditure u/s 37(1). This ground No. 4 of the assessee is allowed.
Following above judgment in assessee's own case for the assessment year 2001-02, the ground no. 3 of the assessee is allowed."
16.3 Facts and circumstances of the case being similar to earlier years and also following our own decision in the above ground of appeal(supra), the ground no. 10 of the Revenue is dismissed.
12.2 Respectfully following the decision of the Co-ordinate Bench in assessee's own case(supra), the ground no. 6 of the Revenue challenging allowability of publicity and PR expenses is dismissed."
5.2 The facts are identical and there is no change into the facts and circumstances pointed out by the Revenue. Therefore, taking a consistent view, this ground of the Revenue's appeal is dismissed." In view of the above, this Ground no. 2 of the Revenue's appeal is dismissed.
4. Apropos to ground no. 3, it is stated by the Ld. Representative of the Parties, that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case. We find that the ground no. 3 is covered by the decision of this Tribunal in ITA No. 612/JU/2009,wherein the Hon'ble Tribunal decided the issue in para 6 to 6.1 as under:-
" 6. Apropos to ground no. 3, it is stated by the ld. Representatives of the Parties, that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case. We find that the Co-ordinate Bench in ITA No. 8 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
235/Jodhpur/2008 decided this issue in para 10.1 to 10.2 by observed as under:-
" 10.1 As regards ground 4 of the Revenue regarding the allowability of depreciation on APGPCL shares, we find that the similar issue has been decided by us in assessee's own case for the assessment year 2003-04 vide our order dated 11-03-2016 (in ITA No. 537/JU/2007 - Revenue) wherein revenue's Ground No. 4 has been partly allowed by following observations.
"14.2 We have heard the rival contentions and perused the materials available on record. We find that Ground No. 6 of the Revenue is similar to Ground No. 6 of the Revenue for the assessment year 2002-03 and this ground is partly allowed by this Bench vide its order dated 09-03-201 by following observations.
"15.1 Apropos ground No. 6 regarding deleting disallowance of depreciation of Rs. 19,50,74,094/- on shares of APGPCL claiming it to for acquisition of intangible commercial rights for use of power generated by APGPCL at a cost. Both parties agreed that the issue is similar to AY 2001-02 and the same decision may be applied.
"15.2 We have heard the rival contentions and perused the materials available on record. Similar issue came up first time before us n assessment year 2001-02, by a detailed order we have partly upheld the order of the ld.
CIT(A) by directing that 2/3rd value of the investment in APGPCL, shares 9 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
should be attributed for acquisition of intangible rights embedded therein and depreciation should be allowed on 2/3rd value in terms of Section 32(1)(ii) thereon. Besides 1/3rd value of investment is attributable to the equity shares. Whenever shares of APGPCL are transferred the sale proceeds shall be accordingly allocated i.e. 1/3rd towards the share corresponding cost of share for computing Long-term capital gains in accordance with relevant provisions and 2/3rd towards block of assessee's intangible assets by following observations:-
"17.21 The circumstances that the declaration of lawin CIT v. Smifs Securities Ltd. [2012] 348 ITR 302/210 Taxman 428/24 taman.com 222(SC) envisions inclusion of goodwill as an asset and, therefore, entitled to depreciation, in other words does not necessarily mean that in every case the goodwill claim has to be allowed. In the present case, though termed as goodwill, what was actually parted with by STL was a commercial right, i.e. exclusively to the network which would not have been otherwise available but for the terms of the arrangement.
17.22 In both the above cases, it is to be appreciated that in case of Smifs Securities, the whole of the business was acquired and amalgamated with the assessee company and the consideration paid over and above the net book value of the assets (i.e. the tangible assets) termed as goodwill was held eligible for depreciation on intangible asset. Similarly, in the case of MIS Bharti, the assessee-company apart from paying consideration to acquire shares of company 'S', as per terms of agreement, also had to pay specific amount to transfer to get commercial right for marketing, customer support, distribution and associate set ups; otherwise such market/customer network would not have been transferred to assessee -company by company 'S'. The amount so paid to acquire the commercial rights (and not the consideration to acquire shares) was held eligible for depreciation.10
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
17.23 These facts, circumstances and judicial decisions lead us hold that in such type of business transactions, there are always some tangible assets and some intangibles assets which are sold and acquired and each case will have its own peculiarities in terms of dominant objective of such acquisition and a reasonable estimation of valuation of dominant intangible asset and other rights is to be arrived at. In the cases a discussed above, the value of intangibles are either deduced by way of a residuary methodology where consideration paid over and above the net book value has been considered as value of intangible or there could be a specific consideration agreed with the seller towards acquisition of intangibles.
17.24 In light of above discussion facts, circumstances and case laws of Smiff Securities. Bharti Teletech and others (supra) we hold that to ascribe 2/3rd value of the APGPCL investment to intangible commercial rights of cost effective power supply rights an 1/3rd value to the tangible rights a share holder will be a reasonable estimate ascribable to these constituents. The AO will accordingly word out the eligible depreciation on intangible rights u/s 32(I)(ii) on 2/3rd value of APGPCL investment and 1/3rd to share holder rights and work out the block of asset of intangible rights for depreciation and 1/3rd to value of APGPCL shares. The allowances, claim of LTCG on sale of shares whenever sold will be worked out accordingly.
17.25 In the entirety of facts, circumstances, contentions and case laws we partly upheld the assessee's claim of depreciation in this behalf u/s 32(I)(ii) in terms of para 17.24 above by holding that:-
(i) Principle of ejusdem generis a held by Hon'ble Supreme Court in Techno Shares is applicable to interpretation of sec. 32(I)(ii). Legislature did not intend to provide or depreciation only in respect of specified intangible assets but also to other categories of intangible assets as it is not possible to exhaustively enumerate each and every intangible asset or right.
(ii) In the instant case, it is the intangible asset in form of right to procure power at cost which qualified for depreciation under section 32 of the Act.
Given that there is no separate consideration for value of shares an value of such intangible rights, the assessee and AO have to come up with an appropriate methodology. On the limited issue of determining the valuation the intangible rights which otherwise qualify for depreciation u/s 32(I)(ii) of 11 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
the Act, the matter is set aside to the file of AO to examine the same after providing reasonable opportunity to the assessee.
(iii) Care shall be taking to consider the nature of intangible and tangible commercial rights acquired by assessee in a composite transaction and to ascribe reasonable valuation to respective rights.
(iv) The categories of specific intangible assets referred in Section 32(I)(ii) are not of the same kind and are clearly distinct from one another. Like wise unremunerated rights need not strictly answer the description of "knowhow, patent, trademarks, licenses or franchises" but must be of similar of nature as the specified assets. In our view the assessee's claim conform to this parameter.
(v) Intangible assets, like securing expedient and useful power supply obtained from APGPCL are invaluable for carrying on the business by the assessee.
(vi) Acquisition of such intangible assets which are whole or part of acquisition value, therefore, correspondingly comparable to a license to carry out the existing transmission and distribution business of the transferor. In this case also APGPCL got the rights of earlier allotee in favour of the assessee.
(vii) Hon'ble SC in Techno Shares and Stocks Ltd. held that intangible assets owned by the assessee and used for the business purpose which enables the assessee to access the market and has an economic and money value is a "license" or "akin to a license" which is one of the items falling in Section 32(I)(ii).
(viii) Even if strictly the rights do not amount to license, in any case they constitute another genus of other commercial rights of similar nature as envisaged by sec. 32(I)(ii).
(ix) The shares are the written means to acquire and enjoy the rights of electricity under a policy formulated by APSEB and AGPGCL under the aegis of policies of AP Govt. Therefore the rights being achieved in the form of zero dividend share certificated cannot militate aginst the real nature of transaction. Our view is fortified by Hon'ble Supreme Court judgments in the case of Kedarnath Jute Mill and Sutlej Cotton Mills (supra), Therefore, acquisition of rights being the dominant and prime motive in impugned 12 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
transaction, depreciation in terms of sec. 32(I)(ii) is to be allowed in terms of para 17.24 above.
(x) Though no adverse judgment has been cited on the interpretation and scope of sec.32(I)(ii) and the issue, assuming even that more than one interpretation is possible, even the one favourable to assessee is to be adopted in view of the Hon'ble Supreme Court judgments in the case of Vegetable Product and Vatika Township(supra) 17.26 in view of the foregoing we partly uphold the order of ld. CIT(A) on this issue on allowing impugned depreciation in terms of para 17.24 above, same is upheld. Revenue ground no. 2 is partly allowed."
15.3 In these facts and cirumstnces, following our own judgment dated 03- 03-2016 in assessee's own case for the assessment year 2001-02, the Ground No. 6 of the Revenue is accordingly partly allowed on the similar terms as mentioned above. Thus Ground no. 6 of the Revenue is partly allowed." 14.3 Facts and circumstances of the case being similar to earlier years and also following our own decision in the above grounds of appeal (supra), the Ground no. 6 of the Revenue is partly allowed."
10.2 Respectfully following the decision of the co-ordinate Bench in assessee's own case (supra) the Ground No. 4 of the Revenue regarding the claim of depreciation on APGPCL shares is partly allowed."
6.1 Therefore, taking a consistent view, this ground of the Revenue's appeal is dismissed."
In view of the above, the Ground no. 3 of the Revenue's appeal is dismissed.
13
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
5. Apropos to Ground no. 4, it is stated by the ld. Representatives of the Parties, that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case. We find that the Ground no. 4 is covered by the decision of this Tribunal in ITAT No. 612/JU/2009, wherein the Hon'ble Tribunal decided the issue in para 7 to 7.1 as under:-
"7. Ground no. 5, it is stated by the ld. Representatives of the Parties, that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case. We find that the Co-ordinate Bench in ITA No. 235/JU/2008 has decided this issue in para 16.1 to 16.2 by observed as under:-
"16.1 As regards ground 11 of the Revenue challenging claim of depreciation on assets retired from active, use we find that the similar issue has been decided by us in assessee's own case for the assessment year 2003-04 vide our order dated 11/03/2016 ( in ITA No. 537/JU/2007 - Revenue) wherein Revenue's Ground no. 11 has been dismissed by following observations.
"22.2 We have heard the rival contention and perused the materials available on record. We find that Ground no. 18 of the Revenue is similar to Ground No. 15 of the Revenue for the assessment year 2002-03 and the issue in question has been decided against the Revenue by this Bench vide its order dated 09/03/2016 by following observations.
22.7 We have heard the rival contentions and perused the materials available on record. We find that this issue is squarely covered by the 14 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
decision of Hon'ble Delhi High Court in the case of CIT vs. Yamaha Motor India(P) Ltd. (2010), 328 ITR 297 wherein it is held as under:-
"Held dismissing the appeal, that as long as the machinery was available for use, though not actually used, it feel within the expression "used for the purpose of the business" and the assessee could claim the benefit of depreciation. An actual user was not required as had been contended by the Revenue. Use and discarding were not in the same field and could not stand together. However, a harmonious reading of the expressions "used for the purpose of the business" and "discarded" it would show that "used for the purposes of the business" only means that the assessee had used the machinery for the purpose of the business in earlier years. The expression "used for the purposes of the business" as found in section 32 when used with respect to discarded machinery would mean that the user in the business was not in the relevant financial year/ previous year but in the earlier financial years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation was allowed on discarded machinery after allowing, inter alia, an adjustment for scrap value, yet, on the other hand user would be required of the discarded machinery which was not possible because of various reasons. The discarded machinery would not be actually used in the relevant previous year as long as it was used for the purposes of business in the earlier years. The Tribunal was correct in directing the assessing officer to recomputed depreciation after reducing the scrap value of the assets which had been discarded and written off in the books of account for the year under consideration from the written down value of the block of assets. Actual user of the machinery was not required with respect to discarded machinery ad the condition for eligibility for depreciation that the machinery being used for the purpose of the business would mean that the discarded machinery was used for the purpose of the business in the earlier years for which depreciation had been allowed.
[ The Supreme Court has dismissed the special leave petition filed by the Department Against this judgment : See [2010] 328 ITR (St.)10.]"
22.8 Respectfully the decision of Hon'ble Delhi High Court in the case of CIT vs. Yamaha Motor India (P) Ltd. (supra) and the decision of ITAT Jodhpur 15 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Bench in the case of DCIT vs. Udaipur Distillery Co. Ltd. (supra), we uphold the order of the ld. CIT (A) on this issue. Thus Ground No. 15 of the Revenue is dismissed."
22.3 Facts and circumstances of the case being similar to earlier years and also following our own decision in the above ground of appeal(supra), the ground no. 18 of the Revenue is dismissed."
16.2 Respectfully following the decision of the Co-ordinate Bench in assessee's own case(supra), the Ground No. 11 of the Revenue challenging claim of depreciation on assets retired from active use is dismissed."
7.1 Therefore, this ground of the revenue's appeal is dismissed." In view of the above, the Ground no. 4 of Revenue's appeal is dismissed.
6. Apropos to Ground no. 5, it is stated by the ld. Representatives of the Parties, that the issue is covered by the decision of the Co-ordinate Bench in assessee's own case. We find that the ground no. 5 is covered by the decision of this Tribunal in ITAT No. 612/JU/2009, wherein the Hon'ble Tribunal decided this issue in para 8 to 8.2 as under:-
"8. Apropos to ground no. 6, it is stated by the ld. Representatives of the Parties, and that identical issue is decided by the Co-ordinate Bench in ITA No. 235/JU/2008 in assessee's own case pertaining to the assessment year 2004-05 in para 13.1 to 13.2 has reads as under:-16
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
"13.1 As regards ground 7 of the Revenue challenging Ghosunda Damn expenses we find that the similar issue has been decided by us in assessee's own case for the assessment year 2003-04 vide our order dated 11-03-2016( in ITA No. 537/JU/2007- Revenue) wherein Revenue's Ground No. 7 has been dismissed by following observations.
"17.2 We have heard the rival contentions and perused the materials available on record. We find that Ground No. 11 of the Revenue is similar to Ground No. 10 of the Revenue for the assessment year 2002-03 and this issue has been decided against the Revenue by this Bench vide its order dated 09-
03-2016 by following observations;
"17.1 Apropos revenue Ground No. 10 regarding deleting disallowance of Rs.
4,19,12,571/- u/s 37(I) on account of enabling assets written off being expenses incurred on Gosunda Dam for procuring water.
17.2 We have heard the rival contentions and perused the materials available on record. This issue is one going one from earlier years. In assessment year 2001-02, this Bench of ITAT vide its order dated 03-03-2016 (supra) has upheld the order of the ld. CIT(A) on this issue by following observations:-
"15.1 Revenue ground no. 9 challenging allowance of Rs. 9,33,45,17/- on account of expenses incurred on Ghosunda Dam for procuring water. L. CIT(A) allowed this claim by following observation.
"11.2 During the course of appellate proceedings, the ld.AR contended that with reference to the expenditure incurred on alteration effected in the 17 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
construction of Gosunda Dam were in earlier years also and allowable u/s 37(I) of the Act but the same were not allowed by the AO. He further submitted that the expenditure incurred only enabled a more efficient and economical sate of business operation and that no new asset was created or any property acquired. In support of this the ld. AR placed reliance in the case of CIT vs. Bongaigaon refinery & Petrochemicals Ltd. 222 ITR 206 (Gau). National Organic Chemical Industries Ltd. vs. CIT203ITR 410(Bom). Bikaner Gypsum vs CIT, 187 ITR 39 (SC) and CITvs. Associated Cement Company Ltd. 172ITR 257 (SC). He further stated that similar issue has been considered in ITA No. 1106/JP/94 for AY 1991-92 and ITA No. 321/JP/96 for AY 1992-93 wherein the Hon'ble ITAT has dismissed the Departmental appeal and decided in various of the appellant. He further stated that after submitting the break up of the amount, no other information was required by the AO. The ld.AR furnished complete details of expenditure incurred for Ghosunda Dam. In view of the above, the ld. AR contended that the disallowance deserved to be deleted.
As far as the disallowance of bad debts amounting to Rs. 4,79,519/- complete details from all the units could not be filed at the time of assessment. He further stated the claim of the appellant deserve to be allowed on the basis of audited balance sheet as the amounts are audited by the auditors appointed by C & AG.
11.3 I have considered the facts of the case and also gone through the decision of Hon'ble ITAT (supra). Respectfully following the decision of the Hon'ble IT, Act in the case of the appellant cited above, I hold that the AO was not justified in disallowing the expenditure incurred on Gosunda Dam amounting to Rs. 9,3,45,17/- , the same is deleted.
With regard to other disallowances of Rs. 4,79,519/- in the appellant proceedings also, the ld. AR did not file any details. Therefore, the ascertainment is not possible. Hence, the disallowance is confirmed." 15.2 Ld. Counsel for the assessee contends that this issue is covered and settled in its favour of the assessee, ITAT allowed these claims in AYs 1991-92 and 1992-93; aggrieved revenue preferred appeals before Hon'ble Rajasthan High Court which was pleased to dismiss revenue appeals by the order dtd. 30/01/09 in ITA Nos. 52 & 78/2002 by following observations:- 18
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
"12 Adverting to the facts of the present case, admittedly, the assessee's super smelter plant requires adequate quantity of water for its operation and unless and until, water is available, the super smelter plant would not function and would not be able to produce any items. Admittedly, the Ghosunda Dam has been constructed by the State Govt. and the assessee has made expenditure for its alteration so as to ensure sharing of the water with the State Govt. without having any right or ownership in the Dam or the water.
Even the assessee's share of water is also determined by the State Govt. Thus, the expenditure incurred by the assessee for commercial expediency relates with carrying on of business and falls within such expenditure as prudent businessman may incur for the purpose of the business. The operational expenses incurred by the assessee solely intended for furtherance of the enterprise can be no means be treated as expenditure of capital nature.
13.Keeping in view the object and purpose of the expenditure and totality of the facts and circumstances of the case noticed above, in our considered opinion, the benefit received by the assessee company on account of the expenditure incurred cannot be said to be an advantage in the capital field.
We are in agreement with the view taken by the CIT(A) and affirmed by the ld.
ITAT that the object and effect of the expenditure made by the assessee is to facilitate its trade operation and enable the management to conduct business more efficiently or more profitably. Therefore, the question no. 1 (supra) 19 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
deserves to be answered in affirmative i.e. in favour of the assessee and against the revenue.
15.3 Revenue further preferred SLP which was dismissed on 18-07-11. Copies of the Orders are referred to.
15.4 Ld. DR is heard.
15.5 We have heard the rival contentions and perused the material available on record. In view of the above legal history issue in question stands settled in favor of the assessee, consequently this ground No. 9 of Revenue is dismissed."
17.3 Respectfully following our own decision in this case for the assessment year 2001-02 (supra), the Ground No. 10 of the Revenue is dismissed." 17.3 Facts and circumstances of the case being same as earlier and also following our own decision in the above ground of appeal(supra), the ground No. 11 of the Revenue is dismissed.
13.2 Respectfully following decision of the Co-ordinate Bench is assessee's own case(supra), Ground No. 7 of the Revenue challenging Ghosunda damn expenses is dismissed."
8.2. The facts are identical and taking into consistent view, this appeal of the revenue is dismissed."
In view of the above, the Ground no. 5 of the Revenue's appeal is dismissed.
7. Apropos to Ground no. 6, it is contended that this is also covered by earlier orders, i.e. in ITA No.95/JU/2007, wherein the issue is decided in para 12.1 to 12.3 as under:-
20
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
"12.1. Apropos Ground No. 3 regarding deleting the disallowance of Rs.2,53,19,060/- on account of Mines Development Expenses.
12.2. We have heard the rival contentions and perused the materials available on record. The similar issue arose in the assessment year 2001-01 and 2001-02 this issue in question has been set aside and restored to the file of the ld. CIT(A) by ITAT with following observations:-
16.5 Ld. Counsel further contends that mining operations for procuring ore is an essential and continuous process and not static one. The expenditure is incurred after setting up of business being it recurring in nature. The expenditure is incurred for Cutting Drives including Shafts, Cuts and other excavations. To make mines preparatory for development of the block for ore extraction and to make passage from surface to underground through provision of Shafts. The development of different level for approach and creating area of drilling operations create approaches for movement of mucking equipment, transportation of blasted oars in haulage levels provision of ventilation. Mine development is a continuous process to sustain production. It is not a capital expenditure and it is not incurred for exploration purposes and satisfied the claim u/s 37(1) of the Act. The claim of the assesee is allowable despite not writing off in books. The expenditure is distinguishable from expenditure incurred on mine exploration. This expenditure is allowable in view of the judgment in the case of Nayveli Lignite Corporation 120 TTJ (Chennai) 1096.
16.6. We have heard the rival contentions and perused the material available on record. There is merit in the contentions of ld. Counsel that primarily the issue is about applicability of sec 35 E or 37 (1) for allow ability of expenditure. Assessee has been canvassing its claim for allow ability of expenditure by repeatedly emphasizing that undisputedly its mining activity had commenced prior to 1/4/1970, consequently this expenditure is legally not covered by sec. 35E but u/s 37(I). Ld. Counsels raises deep concern on the fact that despite such observations which are in conformity with the facts on record, the claim is being set aside unnecessarily which is not in conformity with judicial discipline and causing the assessee deemed harassment as proposition which requires due considerations. We find substance in the contentions of ld. Counsel for the assessee about judicial discipline. However, the issue of applicability of sec. 35E or 37(I) in earlier years has been restored back. Though sympathizing with assesses repeated difficulties however in these facts and circumstances it will be desirable that following our order for AY 2000-01, the issue is restored back to ld.CIT(A), if the expenditure is allowed by ld. AO in set aside earlier years then there will be no issue, however in case of disallowance ld.21
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
CIT(A) will be free to take a decision depending on the merits and consideration of judicial position. This ground no. 10 of the revenue is accordingly allowed for statistical purposes.
12.3 Following the decision of this Bench dated 03/03/2016 in assessee's own case for the assessment year 2001-02(supra), the issue in question is restrored back to the file of the ldj. CIT(A) with a direction to decide the issue expeditiously. This ground no. 3 of the Revenue is allowed for statistical purpose.
In view of above the above, the Ground no. 6 of Revenue's appeal is allowed for statistical purpose. The issue is restored to the file of AO for deciding the same, after considering submissions of the assessee and verifying the records.
8. Apropos to ground no. 7, the ld. Departmental Representatives submitted that the CIT(A) was not justified in deleting the addition made on account of under- valuation of closing stocks. He submitted that the identical issue was raised before this Tribunal in ITA No. 612/JU/2009. He submitted that in view of the judgment of the Hon'ble Supreme Court rendered in the case of CIT vs. British Paints India Ltd. (1991) 188 ITR 44 (SC), the value of the stocks is to be adopted on cost or net realizable value. The assessee cannot adopt notional value of the closing stock of ore. Per contra ld. Counsel for the assessee opposed the submissions and submitted that the assessee has valued its stock in accordance with the accounting principles. He supported the order of the ld. CIT(A). He submitted that ore is nothing but soil. Therefore, notional value of Rs. 1 per MT is adopted by the assessee. 8.1 We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. The identical issues before this Tribunal in assessee's own case in ITA No. 612/JU/2009. There is no change into the 22 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
facts and circumstances, wherein we have decided this issue in para 9.1 by observing as under:-
"9.1 We have heard the rival contentions and perused the material available on record and gone through the orders of the authorities below. The Hon'ble Supreme Court in the case of CIT Vs British Paints India Ltd. (supra) has held as under:-
" Section 145 of the Income-tax Act, 1961, confers sufficient power upon the officer-nay it imposes a duty upon him- to make such computation in such manner as he determines for deducing the correct profits and gains. This means that where accounts are prepared without disclosing the real cost of the stock-in-trade, albeit on sound expert advice in the interest of efficient administration of the company, it is the duty of the income-tax officer to determine the taxable income by making such computation as he thinks fit.
Any system of accounting which excludes, for the valuation of the stock-in- trade, all costs other than the cost of raw materials for the goods-in- process and finished products, is likely to result in a distorted picture of the true state of the business for the purpose of computing the chargeable income. Such a system may produce a comparatively lower valuation of the opening stock and the closing stock, thus showing a comparatively low difference between the two. In a period of rising turnover and rising prices, the system adopted by the assesee, as found by the Tribunal, is apt to diminish the assessment of the taxable profit of a year. The profit of one year is likely to be shifted to another years which is an incorrect method of computing profits and gains for the purpose of assessment. Each year being a self- contained unit, and the taxes of a particular year being payable with reference to the income of that year, as computed in terms of the Act, the method adopted by the assessee has been found to be such that income cannot properly be deduced therefore,. It is therefore, not only the right but the duty of the Assessing Officer to act in exercise of his statutory power, as he has done in the instant case, for determining what, in his opinion, is the correct taxable income."23
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
We find that the ld. CIT(A) decided the issue by observing that the method of stock valuation is changed and changed is bonafide. This has been regularly adopted by the appellant and is in line with the accounting principles. Since the closing stock of the relevant year becomes the opening stock of the next year the same is revenue neutral. Thus, the accounting method of stock valuation is done by bonafide intention to arrive at true profit of the business. It is further observed by the ld. CIT(A) that in the order dated 16/03/2005 pertaining to the assessment year 2001-02 and subsequently, in 2002-03 and 2004-05 wherein it has been decide the claim of the valuation of closing stock of ore etc., is allowable. It is pointed out by the Ld. Counsel for the assessee that the issue has been decided in favour of the assessee in ITA No. 95/JU/2007, ITA No. 537/JU/2007 and ITA No. 235/JU/2008. We find that the Tribunal in ITA No. 95/JU/2007, the Tribunal has noted the fact in that year in para 20.2 as under:
"Brief of the case are that during the year under consideration, the production activities at Sargipalli and Maton Mines were discontinued. Accordingly the stores and spares stock lying at the Mines as on March 31,2002 were valued at 25% of the cost, resulting in decrease of profits by Rs. 98.63 lacs. This is as per perusal of the notes on accounts of the relevant year (scheduled-17 vide note no. 5). The AO increased the value of closing stock by Rs. 98.63 lacs mentioning that the action of asessee company in reducing the stock value by the mines was not in conformity with the accounting policy adopted by the company. Thus the AO has disallowance to the tune of Rs. 98.63 lacs."
Or decided the issue in para 2.6 as under:
" We have heard the rival contentions and perused the materials available on record. It emerges from the record that the valuation of stores and spares expenditure has been consistently followed by the assessee which should not be disturbed on the principle of consistency as held by Hon'ble Supreme Court in the case of Radhaswami Satsang vs. CIT, 193 ITR 321 (SC). Besides, similar disallowance was deleted by ITAT in assessee's own case in 24 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
earlier years. The Hon'ble Supreme Court in the case of CIT vs. Excel Industries (2013), 358 ITR 295 has held that such type of valuation based stock, additions are essentially revenue neutrals as closing stock become opening balance of the next year and reduced the profit of the next year correspondingly. In view thereof, we see no infirmity in the order of the ld. CIT(A) which is upheld on this issue. Thus Ground no. 13 of the Revenue is dismissed."
We find that the facts are not similar in that year, the issue was related to the valuation of the stocks related to spares but here is the issue is with regard to the valuation of ore, which is adopted on the basis of notional cost.
In view of the judgment of the Hon'ble Supreme Court in the case of CIT Vs. British paints (supra) we find force into the contention of the revenue that the value of stock is to be adopted either on cost ore net realizable value. The assessee has to demonstrate the value so adopted by furnishing the evidences in support thereof. In the present case, the assessee has failed to discharge this requirement of law, therefore, in order to compute the correct value this issue is restored to the file of the Assessing Officer for decision afresh. The Assessing Officer is hereby directed to make on the spot enquiry for verification of the correct value of the stocks of ore. We are unable to accept the contention of the assessee that the stock of ore is merely soil and has no realizable value. In our considered view, there has to be some basis for adopting a certain value of such stocks. Needless to say, that the Assessing Officer would afford sufficient opportunity to the assessee for furnishing of evidence in support of the value of the stocks. This ground of the Revenue's appeal is allowed for statistical purposes". 25
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
8.2 There is no change into facts and circumstances in the year under appeal. Therefore, taking a consistent view, this issue is also restored to the file of the assessing officer for decision afresh for valuing the stock. The AO would decide the issue in the light of direction given in ITA No. 612/JU/2009 pertaining to the assessment year 2005-06. Hence, the Ground no. 7 is allowed for statistical purpose.
9. Ground no. 8 is against deletion of reduction of Rs. 87,97,262/- made by the Assessing Officer for the claim u/s 80IA of the Act. The Ld. Departmental Representatives adopted the same argue as were made in ITA No. 612/JU/2009. He submitted that the assessee has not apportioned the expenses related to Head Office and CPP. He submitted that Director's fee is same for the Head Officer as well. 9.1 On the contrary, ld. Counsel for the assessee submitted that the expenses are duly apportioned and the word derived from has a wide import and be construed accordingly.
9.2 We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. The identical issue was in the ITA No. 612/JU/2009 we have decided this issue in para 10.2 by observing as under:-
"10.2 We have heard the rival contentions, perused the material available on records and gone through the orders of the authorities below. We find that the identical issue was in the year 2004-05 in ITA No. 235/JU/2008. The coordinate Bench has decided the issue in Para 17.9 holding as under:- 26
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
"17.9 We have heard the rival contention and perused the material available on record. It is settled law that when the assessee claims any allowable deduction the explanation and evidence submitted in this behalf is to be objectively considered by ld. AO. In case of any infirmity in the claim, the same should be effectively dealt and the claim should be denied by proper discharge of onus. Without effective rebuttal and objective consideration assessee's beneficial claim cannot be disallowed on assumptions and intendments. It is also settled jurisprudence that while interpreting the beneficial legislations a liberal approach should be adopted. This is so as a very strict interpretation will defeat the legislative intent of encouraging captive power plants in electricity starved nation in general and power short state of Rajasthan. Provisions of Sec. 80IA of the IT Act are undoubtedly beneficial in nature, so in case of ambiguity about its interpretation a liberal approach is mandates by settled judicial precedents. The undisputed facts which emerge from the record indicate that assessee by evidence and explanation brought on record objective material to demonstrate in this cae HO and other common assets have no proximate connection which the CPP, Debari which is an industrial undertaking eligible to deduction under section 80IA. The HO and other common assets existed even prior to installation of CPP. The alleged expenses represent general corporate expenditure which can't be allocated or assigned to an independent unit engaged in power generating activity on standalone basis. While reducing the deduction u/s 80IA, ld. AO has ignored the crucial term "derived from" used in sec. 80IA A term which became subject matter of judicial decision and settled by Hon'ble supreme Court. This crucial omission has resulted in AO's conclusion that:
(i) The proportionate depreciation of other common assets is allocable to be reduced from the profits of eligible CPP unit.
(ii) The proportionate part of the employees' remuneration and benefits, administrative and selling expense such a remuneration of managers, directors, auditors, financial advertisers, amenities and Head Officer assets is also require to be allocated to CPP Debari.
(iii) Ld. AO instead of establishing any direct of proximate relation between these unconnected proportionate expenses reduced them from eligible profits under a notion that even the remote and unconnected proportionate expenses are allocable.
(iv) The ld. AO held that HO is not a profit earning centre and Captive Power Plant, Debari, is not a standalone unit, having independent functioning and a separate profit center and on such erroneous assumption reduced the deduction u/ 80IA by aforesaid expenses of other independent and functionally different units.
Ld. Counsel has demonstrated that other units of the Company cannot use the fixed assets, like permanent residential buildings of Udaipur unit which are wholly and exclusively for the operation of Udaipur unit only; there is no basis to assume that they were even impliedly used by other operating units including CPP. Consequently there being no direct nexus between two independent industrial units the question of proportionate apportionment of their user or depreciation to CPP does not arise. Moreover, it has been demonstrated that the 27 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Udaipur based office equipment, furniture, fixtures, computers, motor vehicles etc. are also exclusively used for the day to day working of Udaipur Unit and they can in no way be supposed to be used for CPP. Since respective units retain control over their assets, they have no occasion of user by CPP. Rom the facts and circumstances emerging form the record and contentions. We observe that:
a) No allocation of Ho and other expenses is justified since such expenditure on Ho and other units was incurred even prior to setting up of eligible CPP unit.
b) The assessee is primarily engaged in the activities of mining and manufacturing of Zinc and lead metals. This business of the assessee is one and indivisible from CPP unit. In the absence of any direct nexus the apportionment is not mandated by the correct interpretation of sec 80IA.
c) It has not been rebutted that after the commencement of CPP activity there was no increase in the HO expense relatable to employee's remuneration & benefits an Administrative expense as a whole, in comparison to the earlier year. Rather HO expenses for the year under consideration have been reduced drastically. Thus there is no reason to assume any notional increase in these expenses after the commencement of CPP Debari, Consequently, the conclusion that impugned allocation of expenses has no direct nexus with eligible CPP unit, has no basis or valid justification.
d) Apropos expenses like, rates & taxes, fees to auditors, cot auditors, directors travelling, reimbursement of corporate expense as well as consultancy charges etc., such expenses were required to be incurred irrespective of the CPP Unit.
e) Eligible profits of any industrial undertaking which exits on standalone footing, according to accepted accounting the legal principles, are to be computed after taking into account all the receipts and expenditure incurred only by it and not by notionally attributing the proportionate depreciation or administrative expenses on assumptions.
f) The aforesaid expenses of salary and wages, contribution to provident fund etc. and other benefits to employee' insurance, consultancy and other administrative expense as alleged by ld. AO, have in fact, been incurred at Udaipur Office for goods manufactured i.e. zinc and lead by the appellant .
Consequently, such expenditure is deductible while computing the profit of assessee's manufacturing business of zinc and lead. Any part thereof cannot be hypothetically attributed to independent CPP unit situated at Debri. Such presumptive and notional reduction of claim u/s 80IA is arbitrary and unsustainable.
g) The words "derived from" have been used by the Legislature in the restricted sense and therefore, there must be direct nexus between the expenditure and industrial activity. Since there is no direct nexus of the alleged expense with CPP unit, neither allocation nor reduction of 80IA claim has justification. It is settled law that allocation, if any, cannot be made by demonstration of direct nexus between alleged proportions of expenses with power generation operations of PP unit situate at Debari, ld. CIT(A) has rightly deleted the reduction in 80IA claim.
i) The Legislature has used the words "derived from" in contradiction to the words "attributable to" in other sections.
28
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
a. In the case of Cambay Electric supply Co vs. CIT 1978 CTR (SC) 50: (197) 113 ITR 84 Hon'ble Supreme Court has squarely held that the Words "derived from" have been used by the legislature in restricted sense as the Words "attributable to" are much wider in meaning than the words "derived from". b. Hon'ble Supreme Court in the case of IT vs. Sterling Foods (1999) 153 ITR CTR (SC) 439: (1999) 237 ITR 579 (SC) has held that or application of the words "derived from". There must be a direct nexus between the profits and the activity of the industrial undertaking, consequently, it is by now a settled proposition that remote or indirect nexus would not be sufficient for application of the words "derived from".
c. In the case of IT vs. Strawboard Manufacturing Co Ltd. {(1989) 177 ITR 43} in the context of deduction under section 80E, Hon'ble Supreme Court held that:
"The provision for rebate has been made for the purpose of encouraging the setting up of new industries. It is necessary to remember the when a provision is made in the context of a law providing for concessional rate of tax for the purpose of encouraging an industrial activity, a liberal construction should be put upon the language of the statute.
In our view, the controversy in question stands squarely covered by the case of Zandu Pharmaceuticals Works Ltd. (supra) in favor of the assesee. In this case assessee incurred expenditure for the R & D work in the HO and there were independent manufacturing units. Assessee claimed deduction u/s 80IA without allocating any proportionate expenses of HO Ld. AO adopted the same course as in the case of this assessee. It was held that the HO was maintained for the overall benefit of the manufacturing units only and HO was not a profit earning centre; it had no income other than the manufacturing units. Therefore, R& D expense incurred for the development of new drugs were assumed to be for the benefit of all manufacturing units. On this basis, ld. AO allocated proportionate and similarly reduced them from eligible income while calculating deduction u/s 80IA. CIT(A) and ITAT upheld AO's action rejecting the appellant's contention that the R & D expense incurred by HO had nothing to do with the eligible units and proportionate expenses should not be reduced while calculating deduction u/s 80IA. Hon'ble Bomaby High Court upheld assessee's claim. Ld. CIT(A) in this case while deleting the reduction from assessee's claim u/s 80IA has applied nearly similar observation. In view thereof no infirmity can be attributed to the order of ld. CIT(A) which is upheld. In the given facts, circumstances and legal position, we hold that the said HO Expenses with the eligible industrial undertaking i.e. CPP, therefore the unrelated proportionate HO expenses cannot be reduced while computing deduction u/s 80IA. This ground no. 12 of the Revenue is dismissed."29
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
However, we find that the certain expenses which are common to both to the Head Office and Captive Power Plant has not been allocated. Therefore, the issue is restored to the file of the Assessing Officer for re-computation of reduction. The Assessing Officer would re-work allocation of the expenses related to the director's fees, auditor's fees and donation for charity. To this extent, the order of the Ld. CIT(A) is modified. This ground of the Revenue's appeal is partly allowed for statistical purposes."
9.3 There is no change into facts and circumstances. Therefore, taking a consistent view, we restore this issue to the file of the Assessing Officer for re- computing the reduction of deduction u/s 80IA. The Assessing Officer would restrict the apportionment to the extent of Director's fee, charity and donations. The Ground no. 8 is partly allowed as discussed hereinabove for statistical purpose.
10. Ground no. 9, is against allowing the donations of Rs. 1,10,52,000/- given to Nandi Foundation as an expenditure allowed under section 37(1) of the Act, in spite of the view taken by the Assessing Officer in allowing the same u/s 80G at the rate of 50%. The ld. D/R submitted that the Ld. CIT (A) was not justified in deleting the addition. He submitted that there is a specific provision under the Act, wherein such donations are allowable. He submitted that the nature of the donation is beyond the scope of section 37(1) of the Act.
10.1 On the contrary, ld. Counsel for the assessee supported the orders of the ld. CIT(A) and submitted that the issue was decided by this Tribunal in ITA No. 235/JU/2008, pertaining to the assessment year 2004-05. 30
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
10.2 We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. Ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee in ITA No. 235/JU/2008 pertaining to the assessment year 2004-05. The contention of the ld. Counsel for the assessee is that this amount is allowable u/s 37(1) if the Act, as the same has been incurred for the purpose of business. The amount was spent under the mid- day-meal scheme of the Rajasthan in the adjacent area of the assessee's mine. Ld. CIT(A) allowed the same. We have given our thoughtful consideration to the rival contentions of the parties. We do not see any merit into the contention of the ld. Counsel for the assessee that the donation of Nandi foundation for providing mid- day-meal under the Government of Rajasthan Scheme, is allowable as business expenditure. Section 37(1) operates in a different field. In our view there has to be direct nexus between the amounts spent and the business of the assessee. In the present case, there is no evidence suggesting that the expenditure is laid out or expended wholly and exclusively for the purpose of business of the assessee. Therefore, this ground of the Revenue's appeal is allowed. The finding of the Ld. CIT(A) on this issue is set aside and that the Assessing Officer is restored. Thus, Ground no. 9 of the revenue's appeal is allowed.
11. Ground no. 10 is against deletion of addition of Rs. 8,55,50,700/- made on account of waiver of electricity duty. The ld. CIT (DR) vehemently argued that ld. CIT(A) failed to appreciate the fact in right perspective. He submitted that waiver of the electricity duty is nothing but remission of liability which cannot be termed as subsidy. Subsidy is different from the waiver of electricity duty. This aspect was not 31 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
considered by the ld. CIT (A) while deciding the issue. He submitted that the case laws as relied by the ld. Counsel for the assessee do not help as those case laws relate to the subsidies. He submitted that Sahney Steels and Press Works Ltd. Vs. CIT(A) 228 ITR 253, the Hon'ble Apex Court has held that the power subsidies are of revenue nature and have to be taxed accordingly. He submitted that even if it is assumed that the waiver of electricity duty is subsidy without prejudice to the submission that same is not a subsidy even then in the light of the judgment of the Hon'ble Supreme Court in the Case of Sahney Steel and Press Works Ltd. vs. CIT(A)228 ITR 253, it would not partake character of capital. 11.1. On the contrary, the ld. Counsel for the assessee opposed the submissions of the D/R and submitted that the fact of the present case is distinguishable. He submitted that the ld. DR has not read the entire judgment of the Hon'ble Supreme Court. Even the Sahney Steel favours the assessee.
He submitted that subsequent to Sahney Steel, there are other judgment by the Hon'ble Supreme Court in the case of Ponni Sugar. The reliance is also placed on the judgment of the Special Bench of this Tribunal rendered in the case of DCIT vs. Reliance Industries Ltd. (2004) 88 ITD 273(Mum)(SB). He submitted that the purpose of notifying scheme was industrial development and to promote higher capital investment under the facts of the present case. The Assessing Officer was not justified in making the additions. He submitted that purpose test as laid by Hon'ble Apex Court if applied on the facts of the present case in that event, there would be not any iota of doubt that waiver of electricity duty is capital in nature. 32
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
11.2. We have heard the rival contentions, perused the material available on record and gone through the orders of the authorities below. The ld. CIT (A) deleted the addition, by relying upon the judgment of the Special Bench of this Tribunal rendered in the case of DCIT vs. Reliance Industries Ltd. Ld. CIT (A) decided the issue in para 47 to 50 as under:-
"Decision I have considered the facts of the case and submissions of the ld. A/R and have gone through the original notification dated 28/07/2003 issued by the govt. of Rajasthan, Finance (Tax Division) Department. The important/relevant features for the purpose of deciding the issue are as under:-
i) The notification starts with the "Heading Rajasthan Investment Promotion Policy2003". With a view to provide investors an attractive opportunity to invest in the State of Rajasthan, the following scheme is introduced in the state.
Clause-2: Operative Period :
The scheme shall come into operation with effect from 1st July, 2003 and shall remain in force upto 31st March, 2008.
Clause-3: Applicability of the scheme The scheme shall be applicable to all new investments and investments made by existing units and enterprises for modernization/diversification, subject to the condition that such units shall commence commercial production/operations owing to such investment during the operative period of the scheme.
Clause-5: Eligibility:
The benefit (subsidies as per Clause 7 and exemption as per Clause 9 under this scheme shall be available to all units, other than those covered in the list of ineligible units subject to the fulfillment of the following conditions:-
(i) To claim wage/employment subsidy the unit shall provide:-33
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
(a) Direct employment to at least then persons in case of a new unit and
(b) Twenty five percent additional direct employment subject to a minimum of ten persons in case of diversification, modernization or expansion.
(c) The unit shall be eligible for interest subsidy and/or wage/employment subsidy only if it commences first commercial production/operation during the operative period of the scheme.
Clause-7: Subsidies:
In case of new investment made, the sum total of interest subsidy and wage/employment subsidy would be subject to a maximum limit of fifty percent of the tax payable and deposited under the Rajasthan Sales tax Act, 1994, the Central Sales tax Act, 1956 and Value Added Tax Act as and when introduced in the state;
Provided that the maximum limit of 50% prescribed under clause 7(1)(a) and clause 7(i)(b) may be raised by the BIOI to sixty percent in such cases where the investments exceed Rs. 100 crore but are less than or equal to Rs. 200 crores, and this maximum limit may be raised further to seventy five percent in cases where the investments exceed Rs. 200 crore.
Exemptions:
In addition to the subsidies available in clause 7, the eligible beneficiary shall be entitled to claim the following exemption, if applicable:-
50% exemption of electricity duty for seven years.
The govt. of Rajasthan vide order dated 28/3/2005 has modified the scheme. After the existing clause 8(vi) of the Scheme the following proviso shall be inserted:-
"Provided that the new project having a total new investment as per column No. 2 of the table given below, shall be exempted from Electricity Duty, on self generated energy in respect of new investment in CPP for 7 years, to the extent a mentioned in Column No. 3 of the table.
S.No. Total New Investments Exemption of Electricity Duty on self generated Energy 1 From Rs. 100 crore upto Rs. 200 crore 60% 2 From Rs. 200 crore upto Rs. 400 crore 75% 34 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
3 Rs. 400 crore or more 100% .
48. It is a fact that the appellant had installed a CPP at Chittorgarh LZS, Chanderia during assessment year 2005-06. The company generated 83.0507 crore unit therefrom. In view of the above notification, the electricity duty was waived to the appellant extent of Rs. 8,55,50,700/-. Had there been no such waiver, the appellant would have claimed the payment of electricity duty as revenue expenditure. Further the appellant itself has routed the same through P&L account as revenue item. As per the decision cited by AO in the case of Rajaram Maize Product by the Hon'ble Supreme Court was delivered on 23/7/2001 that the power subsidy received by the respondent was of revenue nature inasmuch as it went towards reduction of the electricity bills.
49. The A/R has cited the decision of Bombay Spt. Bench ITD 273 (2004) in the case of DCIT vs. Reliance Industries Ltd. In this case the following point was to be decided; "whether on the facts and in the circumstances of the cae and in law the assessee company is justified in its claim that the sales tax incentive allowed to it during the previous year in terms of relevant government order constitute capital receipt and is not to be taken into account in computation of total income. The factual position in this case is as under:-
The assessee set up a unit in Patalganga which is a notified area and became eligible for incentive announced by the Govt. of Maharashtra, which begins commercial production in November, 1982. The incentive was in the form of exemption from liable for payment of sales tax for a period of 5 years commencing from 8-6-83 and ending on 7-6-1988. The assessee's claim was that the quantum of the sale tax liable would be claimed as deduction on the basis of that it is a capital receipt or on the basis of that it should be treated as liability under the sales tax liability. But since, it was exempted from payment of sales tax, the same should be treated a paid within the meaning of section 43B so as to adjusted against the amount of subsidy, which the assessee would have received from the statement government. In that year the assesee was exempted from the payment of purchase tax of Rs. 10,82,175/- and sales tax of Rs. 4,29,89,686/- making the total to Rs. 4,40,71,858/-. The Spl. Bench finally decided the issue in favour of the assessee. The Spl. Bench did consider the ratio laid down in the judgment of Supreme Court in Sahiney Steel and Press Works Ltd's case, which is as under:-
"If any subsidy is given, the character of the subsidy in the hands of the recipients-whether revenue or capital-will have to be determined by having regard to the purpose for which the subsidy is given. If it is given by way of assistance to the assessee in carrying on of its trade or business, it has to be treated as trading receipt. The source of the fund is quite immaterial".
50. In the appellant's case also the title of the Scheme "Rajasthan Investment Promotion Scheme, 2003(Raj. Invest 2003)" itself makes the purpose of the scheme very much clear. If further laid down that the scheme shall be applicable to all new 35 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
investments and investments made by existing units and enterprises for modernization/expansion/diversification subject to the condition that such units shall commence commercial production/operation owing to such investment during the operative period of the scheme. The scheme is operative w.e.f. 1-7-2003 and was remained in force upto 31-03-2008. Initially the exemption in clause 8 of the scheme was 50% of the electricity duty for seven years in addition to the subsidy available under clause 7 of this scheme but the appellant has not claimed any deduction mentioned in clause 7. By amendment order dated 28-03-2005 of Govt. of Rajasthan, the Finance Department (Tax Division), the scheme has been amended to the extent that the emption would be available to 100% if the total new investment is Rs. 400 crore or more in CPP. The appellant has established the CPP in 2005-06 for the first time in Chanderia Smelter Unit. The capital investment is also more than Rs. 400 crore. The CPP is established within the period from 1-7-2003 to 31-3-2008. The commercial production has also commenced in the same financial year. Thus all the terms and conditions of the scheme do clearly define that the waiver of electricity duty by the Govt. of Rajasthan was with a purpose to held the assessee to establish a new power plant and not to held in day to day operations of the power plant. Therefore, the decision of the Hon'ble Spl. Bench, Bombay in the case of Reliance Industries is fully applicable to the appellant's case. Therefore, the disallowance made by the AO is deleted. The appeal is allowed on this ground."
From above, it can be inferred that ld. CIT (A) considered all the judgments as relied by the parties and by following the decision of the Special Bench deleted the addition. In the present case, there is no dispute with regard to the fact that the waiver of electricity duty is linked with the quantum of investment made by the Assessee. The pre condition for availing such incentive is essentially investment made by the assessee. In the Sahney Steel and Press Works Ltd.(supra), the Hon'ble Supreme Court examined the issue and laid down principles on the basis of which a subsidy given to the assessee is required to be categorized. If it is an operational subsidy same would fall within the ambit of revenue and if it is a subsidy for a purpose of setting up and expansion of industry that would be within the ambit of capital. Admittedly, in the present case, it is not the case of subsidy given by the 36 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
State Government but it is a sort of incentive in the form of waiver of electricity duty but this waiver is dependent upon the investment made by the assessee and production of power. The ld. CIT(A) has followed the decision of Spl. Bench of this Tribunal rendered in the case of DCIT vs. Reliance Industries Ltd. (Supra) in that case there was incentive in the form of exemption from liability of payment of sales tax for a period of 5 years. In the present case, it is the waiver of the electricity duty. The revenue's case is that had this waiver was not given by the State Government, the payment of electricity duty would be eligible deduction as revenue's expenditure.
On the contrary, the assessee's case is that the issue is squarely covered by the decision of the Spl. Bench of this Tribunal and also there are other judgments. The Hon'ble Supreme Court rendered in the case of Ponni Sugar (supra) held as under:-
"14. In our view, the controversy in hand can be resolved if we apply the test laid down in the judgment of this Court in the case of Sahney Steel & Press Works Ltd. (supra). In that case, on behalf of the assessee, it was contended that the subsidy given was up to 10% of the capital investment calculated on the basis of the quantum of investment in capital and, therefore, receipt of such subsidy was on capital account and not on revenue account. It was also urged in that case that subsidy granted on the basis of refund of sales tax on raw material, machinery and finished goods were also of capital nature as the object of granting refund of sale tax was that the assessee could set up new business or expand his existing business. The contention of the assessee in that case was dismissed by the Tribunal and, therefore, the assessee had come to this court by way of a special leave petition. It was held by this Court on the facts of that case and on the basis of the 37 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
analyses of the scheme therein that the subsidy given was on revenue account because it was given by way of assistance in carrying on of trade or business. On the facts of that case, it was held that the subsidy given was to meet recurring expenses. It was not for acquiring the capital asset. It was not to meet part of the cost. It was not granted for production of or bringing into existence any new asset. The subsidies in that case were granted year after year only after setting up of the new industry and only after commencement of production, and therefore, such a subsidy would only be treated as assistance given for the purpose of carrying on the business of the assessee. Consequently, the contentions raised on behalf of the assessee on the facts of that case stood rejected and it was held that the subsidy received by Sahney Steel could not be regarded as anything but a Revenue receipt. Accordingly, the matter was decided against the assessee. The importance of the judgment of this Court in Sahney Steel & Press Work's Ltd.'s case(supra) lies in the fact that it has discussed any analyzed the entire case law and it has laid down the basic test to be applied in judging the character of a subsidy. The test that the character of the receipt in the hands of the assessee has to be determined with respect to the purpose for which the subsidy is given. In other words, in such cases, on has to apply the purpose test. The point of time at which the subsidy is paid is not relevant. The source is immaterial. The form of subsidy is immaterial. The main eligibility condition in the scheme with which we are concerned in this case is that the incentive must be utilized for repayment of loans taken by the assessee to set up new units or for substantial expansion of existing units. On this aspect there is not dispute. If the object of the subsidy scheme was to enable the assessee to run the business more profitably then the receipt is on revenue account. On the other hand, if the object of the assistance under the subsidy scheme was to enable the assessee to set up a new unit or to expand the existing unit then 38 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
the receipt of the subsidy was on capital account. Therefore, it is the object for which the subsidy assistance is given which determines the nature of the incentive subsidy. The form of the mechanism though which the subsidy is given is irrelevant.
15. In the decision of House of Lords in the case of Seaham Harbour Dock Co. V. Crook [1931] 16 TC 333 the Harbour Dock Co. had applied for grants from the unemployment Grants Committee from funds appropriated by Parliament. The said grants were paid as the work progressed the payment were made several times for some years. The Dock Co. had undertaken the work of extension of its docks. The extended dock was for relieving the unemployment. The main purpose was relief from unemployment. Therefore, the House of Lords held that the financial assistance given to the company for dock extension cannot be regarded as a trade receipt. It was found by the House of Lords that the assistance had nothing to do with the trading of the company because the work undertaken was dock extension. According to the House of Lords, the assistance in the form of a grant was made by the Government with the object that by its use men might be kept in employment and, therefore, its receipts was capital in nature. The importance of the judgment lies in the fact that the company had applied for financial assistance to the Unemployment Grants Committee. The Committee gave financial assistance from time to time as the work progressed and the payments were equivalent to half the interest for two years on approved expenditure met out of loans. Even though the payment was equivalent to half the interest amount payable on the loan (interest subsidy) still the House of Lords held that money received by the company was not in the course of trade but was of capital nature. The judgment of House of Lords shows that the source of payment or the form in which the subsidy is paid or the mechanism through which it is paid is immaterial and that what is relevant is the purpose for payment of assistance. Ordinarily such 39 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
payments would have been on revenue account but since the purpose of the payment was to curtain/obliterate unemployment and since the purpose was dock extension, the House of Lords held that the payment made was of capital nature.
16. one more aspect needs to be mentioned. In Sahney & Press Works Ltd.'s case (supra) this court found that the assessee was free to use the money in its business entirely as it liked. It was not obliged to spend the money for a particular purpose. In the case of Seaham Harbour Dock Co. (supra) assesee was obliged to spend the money for extension of its docks. This aspect is very important. In the present case also, receipt of subsidy was capital in nature as the assessee was obliged to utilize the subsidy only for repayment of term loans undertaken by the assessee for setting up new units/expansion of existing business.
17. Applying the above tests to the facts of the present case and keeping in mind the object behind the payment of incentive subsidy we are satisfied that such payment received by the assessee under the Scheme was not in the course of a trade but was of a trade but was of capital nature. Accordingly, the first question is answered in favour of the assessee and against the Department."
11.3 If we apply the purpose test on the facts of the present case, essentially such waiver of electricity duty is related to setting up and expansion of industry hence capital in nature as per notification issued by the State Government. Under these undisputed facts, we do not see any reason to disturb the finding of the Ld. CIT (A), same is hereby affirmed. This ground of the revenue's appeal is dismissed.
12. Next ground (ground no. 11) is against deletion of addition of Rs. 11,15,00,000/- as exchange rate difference on loan. The ld. Departmental 40 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Representatives submitted that the ld. CIT(A) was not justified in deleting the addition. Ld. Departmental Representatives submitted that the assessee had taken a commercial borrowing amounting to Rs. 552.87 crore during the financial year 2003-04. This loan was taken for expansion of Co's project as CLZS, Chanderia, Rampura Agucha Mines and CPP at Chanderia for expansion of the company for capital investment.
The company has completed the expansion during the assessment year 2006-07 and capitalized the interest payment and other incidental charges. While finalizing the balance sheet as on 31/03/2006, the appellant had devalued the quantum of principle loans amount based on exchange rate prevailing on that date and increase of liability of such amount there from had been charged to the P&L account as revenue expenditure under the head exchange rate of loan. The Assessing Officer observed that the assessee had obtained loan during the financial year 2003-04 and the same was out outstanding as liability on 31/03/2006. It implied that there was no re-payment of loan till the assessment year 2006-07. The Assessing Officer observed that the assessee provided an amount of Rs. 11.15 crore by devaluing the quantum of principles of loan based on exchange rate on close of the year. It was observed that the such loss was a notional devaluation loss just by passing a book entry. The assessee had neither incurred any expenditure as such during the year nor the liability has crystallized or finalized during the relevant assessment year. Such claim of exchange rate difference would be notional till loan was actually repaid and the liability ascertained. It was opined by the Assessing Officer that since the loan was acquired for capital purpose, any accretion to liability was necessarily a 41 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
capital in nature. The loan was a balance sheet item and held as capital liability and, therefore, any increase therein would also be logically capital in nature. Ld. DR submitted that there is no infirmity into this reasoning of the Assessing Officer. He submitted that as per section 43A of the Act, there shall be adjustment to the actual cost of the asset so imported on account of exchange rate fluctuation in the year of repayment. Section 43A speaks of loan taken specifically for acquiring the assets. Even the benefit of depreciation on increased cost of assets is allowable only in the year of repayment of loan not before that.
12.1. On the contrary, the ld. Counsel for the assessee submitted that the issue is squarely covered by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Woodward Governor (2009) 312 ITR 254 (SC) Ld. Counsel for the assessee submitted that transaction in foreign currency are recorded at the exchange rate prevailing on the date of transaction. All mandatory items denominated in foreign currency reinserted on the year and stop exchange difference of restatement or resettlement or charged to P&L account except those relating to fixed assets which are included in the cost of assets. Accordingly, the interest cost till the date of capitalization had been included in the cost of assets and capitalized in the books of account as per the accounting policy and following mandatory accounting standard AS-16 relating to borrowing cost issued by the Institute of Chartered Accountants of India. It is contended that the asset had been put to use in the relevant previous years. It is contended that in view of the improved profitability, the assessee had left with retained earnings which was temporarily invested in Mutual Funds. While, the outstanding ECB loan was Rs. 558 42 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
crore as 3/3/2006, the assessee company invested surplus funds to the extent of Rs. 1605 crore in Mutual Funds.
It is contended that after capitalization, ECB had changed its nature and assumed a new character of circulating capital. The treatment was in consonance with accepted accounting principles and accounting standards. As such the loss on account of exchange difference is a revenue charge and the same is allowable u/s 37(1) of the Act.
12.2 We have heard the rival contentions, Ld. CIT(DR) strongly urged that the ratio of the judgment of the Hon'ble Supreme Court in the case of Woodword Governor (supra) is not applicable on the facts of the present case. However, we find merit into the contention of the Ld. Counsel for the assessee that after capitalization, the ECB had changed its nature and assumed character of circulating capital. Such treatment is in consonance with the accepting accounting principles and accounting standards. As such loss on account of exchange difference is a revenue charge and is allowable deduction under section 37(1) of the Act. In view of these un rebutted facts in our considered view, the ratio of the judgment of the Hon'ble Apex Court rendered in the case of CIT vs. Woodward Governor (supra) is squarely applicable on the present case. The Hon'ble Court has held as under:-
29. To answer the controversy, we need to analyse section 43A (unamended). The period in question in the batch of civil appeal is prior to the Finance Act, 2002, therefore, we are required to consider the scope of section 43A (unamended).43
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
30. Section 43A starts with a non obstante clause. Section 43A(1) overrides the other provisions only as regards cases falling under that sub-section. For instance, in a case where the asset is acquired, or the liability to pay in foreign exchange arises, after the change in the rate of exchange, the said sub-section has no application and the general principles of law must be applied in decided where ther actual cost is increased or reduced as a result of such change. In other words, section 43A(1) applies only where as a result of change in the rate of exchange there is an increase or reduction in the liability of the assessee in terms of the India rupee to pay the price of any asset payable in foreign exchange or to repay moneys borrowed in foreign currency specifically for the purpose of acquiring the asset. Section 43A(1), therefore, has no application unless the asset is a acquired and the liability existed, before the change in the rate of exchange takes effect. In such a case, section 43A contemplates recomputation of the cost of the assets for the purposes of depreciation (section 32 and 43(1), and also as regards capital assets for scientific research (section 35(1)(iv) and also regarding patent right or copyrights (section 35A).
31. As held in Arving Mills' case (1992) 193 ITR 255 (SC) (supra) increase or decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of the fluctuation in the rate of exchange. Thus, the adjustments in the actual cost are to be made irrespective of the date of actual payment in foreign curreny made by the assessee. This position also finds place in the clarification issues by the Ministry of finance dated January 4, 1967, which, inter alia, reads as under:
"2. The Government agrees that for the purposes of the calculation of depreciation allowance, the cost of capital assets imported before the date of devaluation should be written off to the extent of the full amount of the additional rupee liability incurred on account of devaluation ad not what is actually paid 44 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
from year to year. The proposed legal provision in the matter is intended to be framed on this basis." (emphasis supplied)
32. One more aspect needs to be mentioned. Section 43(1) defines actual cost for the purpose of grant of depreciation, etc. to mean "the actual cost of the assets to the assessee". Till the insertion of the unamended section 43A there was no provision in the Income-tax Act for adjustment of the actual cost which was fixed once an for all, at the time of acquisition of the asset. Accordingly, no adjustment could be made in the actual cost of the assets for purposes of grant of depreciation for any increase/decrease of liability subsequently arising due to exchange fluctuation. Consequently, section 43A was introduced in the Act by the Finance Act, 1967, with effect from April 1, 1967, in the above terms to provide for adjustment in the actual cost of assets pursuant to change in the foreign currency exchange rates. As a consequence of the insertion of the said section, if became possible to adjust the increase/decrease in liability relating to acquisition of capital assets on account of exchange rate fluctuation, in the actual cost of the assets acquired in foreign currency and for, inter alia, depreciation to be allowed with reference to such increased/decreased cost. This position is also made clear by Circular No. 5-P dated October 9, 1967, issued by the Central Board of Direct Taxes. One more point needs to be mentioned. Section 43A (unammended) corresponds to paragraph 10 of AS-11 similarly providing for adjustment in the carrying cost of fixed assets acquired in foreign currency, due to foreign exchange fluctuation at each balance- sheet date. The relevant paragraph reads as follows:
"10. Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which carried in terms of historical cost, should be adjusted in carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as 45 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets."
33. As state above, what triggers the adjustment in the actual cost of the assets, in terms of the unamended section 43A of the 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same many be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for section 43A which corresponds to paragraph 10 of AS-11 such adjustment in the carrying amount of the fixed assets was no possible, particularly in the light of section 43(1). The unamended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed asset that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the unamended section 43A were "for making payment" and no "on payment" which is now brought in by amendment to section 43A, vide the Finance Act, 2002.
34. Lastly, we are of the view that the amendment of section 43A by the Finance Act, 2002, with effect from April 1, 2003, is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended section 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended section 43A adjustment in the actual cost is made on cash basis. This is indicated by the words "at the time of making payment". In other words, under the unamended section 43A, "actual payment" was not a condition precedent for making necessary adjustment in the carrying cost of the 46 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
fixed asset acquired in foreign currency however, under the amended section 43A with effect from April 1, 2003, such actual payment of the decreased enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in section 43A, vide the Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature.
Conclusion:
35. For the reason given hereinabove, we find no infirmity in the impugned judgments of the Delhi High Court and accordingly the civil appeals filed by the Department stand dismissed with no order as to costs." Respectfully following the same, we do not see any reason to interfere into the order of the Ld. CIT(A), same is hereby affirmed. This ground of the Revenue' appeal is dismissed.
In the Result, appeal of the Revenue is partly allowed for statistical purposes. Now, we take up Assessee's appeal in ITA No. 606/JU/2008, pertaining to the assessment year 2006-07. The assessee has raised following grounds of appeal.
"A. In not allowing deductions on account payments made as under, in determining the taxable income:-
(i) Rs. 1500000/- towards Jeeva Eduational Trust.
(ii) Rs. 286000/- towards Gram Panchayat, Jetusar
(iii) Rs. 400000/- towards Pandit Chatur Lal Memorial
(iv) Rs. 250000/- towards Dr. Cy. Mehta Rehab Centre.
(v) Rs. 150000/- towards Badhir Bal Kalyan Vikas Samiti
(vi) Rs. 150000/- towards Vikalang Kalyan Samiti
B. Above contributions are allowable u/s 37(1) of the Act also
C. The appellant craves to add, amend, alter or modify any of the ground
of appeal."
47
ITA No. 638 & 606/JU/2008
Hindustan Zinc Ltd., Udaipur.
13. In ground no. A & B are inter-related. All these relates to a allowability of donations made by the assessee to various charitable trusts, as a business expenditure under section 37(1) of the Act. Ld. Representatives of the parties submitted that the revenue has also raised ground in ITA No. 638/JU/2008, wherein donations made to Nandi Foundation was allowed as expenditure. Both the representatives have adopted the same argument, Ld. Counsel for the assessee strongly urged that these payments are in the nature of business expenditure and have been spent for the purpose of business of the assessee. He submitted that these expenditure are essentially for the promotion and maintenance of business of the assessee.
13.1 On the contrary Ld. Departmental Representatives opposed the submissions, and supported the Assessment Order.
13.2 We have heard the rival contentions, perused the material available on record. The identical issues in respect of allowability of the payment made to Nandi Foundation was under appeal in ITA No. 638/JP/2008. We have allowed the ground of the Revenue by observing as under:-
"10.2 We have heard the rival contentions, perused the material available on record and gone through the order of the authorities below. Ld. Counsel for the assessee submitted that the issue is covered in favour of the assessee in ITA No. 235/JU/2008 pertaining to the assessment year 2004-05. The contention of the ld. Counsel for the assessee is that this amount is allowable u/s 37(1) if the Act, as the same has been incurred for the purpose of business. The amount was spent under the mid-day-meal scheme of the Rajasthan in the adjacent area of the assessee's mine. Ld. CIT(A) allowed the 48 ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
same. We have given our thoughtful consideration to the rival contentions of the parties. We do not see any merit into the contention of the ld. Counsel for the assessee that the donation of Nandi foundation for providing mid-day- meal under the Government of Rajasthan, the Scheme is allowable as business expenditure. Section 37(1) operates in a different field. In our view there has to be direct nexus between the amounts spent and the business of the assessee. In the present case, there is no evidence suggesting that the expenditure is laid out or expended wholly and exclusively for the purpose of business of the assessee. Therefore, this ground of the Revenue's appeal is allowed. The finding of the Ld. CIT(A) on this issue is set aside and that the Assessing Officer is restored. Thus, Ground no. 9 of the revenue's appeal is allowed."
13.3 For the same reasoning, we do not find any merit into the contention of the Ld. Counsel for the assessee, that these payments are allowable as a business expenditure, as the legislation as provided separate provisions for deduction of such payments. Moreover the provisions under section 37(1) are clear only such expenditure which has been laid out or expended wholly and exclusively for the purpose of business of the assessee which is necessarily related to commercial elements but in respect of the expenditure made in the form of payments made to the charitable institution is essentially having an element of charity both have different field of operations and purposes. Therefore, we dismiss the grounds raised by the assessee. The appeal of the assessee is dismissed.
14. In the result, Appeal of the Revenue in ITA No. 638/JU/2008 is partly allowed for statistical purposes and appeal of the Assessee in ITA No. 606/JU/2008 is dismissed.
49
ITA No. 638 & 606/JU/2008 Hindustan Zinc Ltd., Udaipur.
Order pronounced in the open court on Monday, the 24th day of April 2017.
Sd/- Sd/-
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(VIKRAM SINGH YADAV) ( KUL BHARAT )
ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member
Jaipur
Dated:- 24 /04/2017.
Pooja/
vkns'k dh izfrfyfi vxzfs "kr@Copy of the order forwarded to:
1. The Appellant-. - The Asstt. Commissioner of Income-tax, Circle-2, Udaipur
2. The Respondent- . M/s Hindustan Zinc Ltd. yasad Bhawan, Udaipur.
3. The CIT(A).
4. The CIT,
5. The DR, ITAT, Jaipur
6. Guard File (ITA No. 638/JU/2008 & 606/JU/2008) vkns'kkuqlkj@ By order, lgk;d iathdkj@ Assistant. Registrar