Income Tax Appellate Tribunal - Ahmedabad
Arvind Mills Ltd, Ahmedabad vs Assessee on 14 November, 2000
IN THE INCOME TAX APPELLATE TRIBUNAL,
AHMEDABAD "A" BENCH,
BEFORE S/SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI, J.M.
ITA No.216/AHD/2001
A. Y.: 1994-95
The Arvind Mills Limited, Vs The J. C. I. T. (Asstt.),
Naroda Road, Special Range-1,
Ahmedabad 380 025 Ahmedabad
PAN No. 31-005-CX-2619
(Appellant) (Respondent)
ITA No.275/AHD/2001
A. Y.: 1994-95
The J. C. I. T. (Asstt.), Vs The Arvind Mills
Special Range-1, Limited,
Ahmedabad Naroda Road,
Ahmedabad 380 025
PAN No. 31-005-CX-2619
(Appellant) (Respondent)
For Assessee: Shri S. N. Soparkar and P. M. Mehta, AR
For Department: Shri B. S. Sandhu, D R
ORDER
PER SHRI BHAVNESH SAINI, J.M. Both the cross appeals are
directed against order of the learned Commissioner of Income Tax (Appeals)-XII, Ahmedabad dated 14-11-2000 for assessment year 1994-95.Both the appeals are disposed of through this common order.
22. We have heard learned Representatives of both the parties, perused the findings of authorities below and considered the material available on record.
ITA No.216/Ahd/2001 (by assessee)3. Grounds No.1 and 3. On these grounds assessee challenged the orders of authorities below in rejecting the claim of assessee under the provisions of section 35AB and 80M of the IT Act. The learned Counsel for the assessee did not press these grounds of appeal of the assessee. Same are accordingly dismissed being not pressed
4. Ground No.2. On this ground assessee challenged the order of learned CIT (A) in holding that the A O was justified in disallowing the assessee's claim of Rs.14,48,82,053/- arising on account of adjustment made to the opening stock in the succeeding year and which has to be considered as closing stock of the year under consideration. The A O has discussed this claim in Para 14 of the assessment order. Assessee had claimed above deduction during the course of the assessment proceedings. The A O did not accept the claim because same was devoid of merit. The effect of change of method of valuation of closing stock had not been given in the assessment year 1994-95 under appeal and the position of effect in valuation of opening and closing stock had been given in accounts for assessment year 1995-96. The A O 3 stated that Ashoka Mills merged with Arvind Mills Ltd. (assessee) with effect from 1-4-1994 and adjustment for change in valuation of stock of Ashoka Mills had no basis. The A O also stated that this claim was not made even in the revised returns. According to A O the assessee had already pressed adjustment of this amount in the assessment year 1995-96 and therefore, there was no reason for pressing this claim in the assessment year under appeal. The issue was agitated before learned CIT (A) and it was contended that assessee can make claim for deduction in the assessment year under appeal. The assessee in the financial year 1994-95 changed the method of accounting which could be with reference to the closing stock for that year only but in the accounts the effect of the change was made in the opening stock for that year. It was submitted that such opening stock has to be given effect by way of closing stock for this year. In alternate contention, it was contended that if effect to the change of valuation is not given in this year, A O may be directed to consider the closing stock valuation for assessment year 1994-95 as the opening stock valuation for the assessment year 1995-96 ignoring the accounting effect given to such valuation in the next assessment year 1995-96. The learned CIT (A) considering the above noted that the effect in valuation of opening stock has been given in accounts for the assessment year 1995-96. The learned CIT (A) also noted that it is undisputed fact that the assessee has already 4 pressed adjustment of this account in the assessment year 1995-96; therefore, there is no reason to allow claim in assessment year under appeal. Addition was confirmed. However, it was directed that the issue in assessment year 1995-96 is an open proposition and will be decided accordingly in the relevant year.
6. The learned Counsel for the assessee submitted that closing stock of this year i.e. under appeal 1994-95 will be opening stock of the next year, therefore, effect may be given in the subsequent assessment year 1995-96. Learned D R however, relied upon orders of the authorities below and submitted that method changed in the next year, so no interference is called for.
7. On consideration of the rival submissions, we find that the assessee did not dispute the findings of authorities below on this issue because no claim was made in the return of income and the accounts in the assessment year 1994-95. The assessee had already pressed this claim in the subsequent assessment year 1995-96. Even the learned CIT (A) considering submissions of the assessee noted that this claim is pressed for adjustment in the subsequent assessment year 1995-96. Therefore, in principle, the assessee did not dispute addition in the assessment year under appeal. However, it is clear that once addition is made on account of closing stock valuation, in the 5 assessment year 1994-95 under appeal, it will be opening stock in the subsequent assessment year 1995-96. Therefore, the claim of the assessee for adjustment in the next assessment year is justified. Learned CIT (A) also noted that such claim will be considered in the relevant year. The submission of the learned Counsel for the assessee is also same that effect of the addition may be given in the assessment year 1995-96. We accordingly confirm the findings of the authorities below. However, A O is directed to consider the claim of the assessee for giving effect to the closing stock valuation in the subsequent assessment year 1995-96 because the valuation of closing stock for the assessment year 1994-95 will be opening stock in the subsequent assessment year 1995-96. The alternate contention raised by the assessee before learned CIT (A) gets accepted. In view of the above finding and directions, ground No.2 of the appeal of the assessee stands disposed of.
8. Ground No.4. On this ground assessee challenged the levy of interest u/s 234B of the IT Act. Learned Counsel for the assessee submitted that charging of interest is consequential in nature and would not press the same. Accordingly, this ground is also dismissed being consequential in nature.
9. As a result, appeal of the assessee is partly allowed.
6 ITA No.275/Ahd/2001(Departmental appeal)10. Ground No.1. On this ground, revenue challenged the deletion of addition of foreign exchange of Rs.1,76,58,910/- . The learned CIT (A) noted the brief facts in the impugned order on this issue that the A O discussed this issue in para 4 of the assessment order. The relevant facts are that the assessee in its computation of Income filed, excluded the exchange rate gain of Rs. l, 76, 58,910/- from computation of income, although the same was taken in audited accounts finalized as 'revenue receipt ' (other income). The contention of the assessee was that the surplus of Rs.1,76,58.910/- was attributable to 12,06,35,583 dollars which was received as capital Euro issue and it was a capital accretion. The same was neither related to trading operation or stock-in-trade. Assessee's claim is duly reproduced in Para 4.2 of the assessment order. The crux was that the foreign exchange earned on conversion of foreign currency was related to retention of monies obtained on issue of capital on capital account and the exchange rate differences earned in such proceedings was a capital receipt and was therefore not exigible to income-tax. The claim was supported by the decision of Hon'ble Supreme Court in the case of CIT Vs Tata Locomotive Engg. Co. Ltd. (60 ITR 405). Reliance was also placed on the judgment of Hon'ble Supreme Court in the case of Sutlej cotton Mills Vs CIT (116 ITR 1). The relevant details of the Euro Issue are Incorporated in Para 4.3 of the assessment order. Subsequent query of the Assessing Officer was as to whether capitalization of such income in the books of accounts was In accordance with the 7 accepted principles of commercial accounting or not. Assessee's reply on the same finds place in Para 4.5 of the assessment order. Thereafter, the Assessing Officer sought version of the Auditors regarding capitalization of the aforesaid Item of Foreign Exchange. The Auditors contended that they had relied on Accounting Standard 11 on accounting for the effects of changes In Foreign Exchange rates as issued by ICAI. According to Para 9 of the standard, exchange difference arising on foreign currency transactions was to be recognized as income or as expenses in the period in which they arise except as stated in paragraph 10 and 11. The detailed submission of the Auditors in this regard finds place in Para 4.7 of the assessment order. When further asked to offer comments on the clarification issued by the Auditors, the assessee invited attention to Madras High Court's decision in the case of EID Parry Ltd. Vs CIT (174 ITR 11). In spite of that this decision, if the Assessing Officer at still considered that Rs.1,76 crores was exigible to income-tax, the request of the assessee was that the amount spent for earning the same i.e. capital raising expenditure on GDR equity issue should be allowed as expenditure. It was on record that the expenditure incurred on GDR issue was Rs.8.34 crores and the assessee had not claimed the same as expenses.
11. The Assessing Officer did not agree with the version of the assessee and went on to distinguish the facts of Tata Locomotive & Engg. Co. Ltd. from the facts of the present case. It was also held that reliance of the assessee on the case of CIT Vs Canara Bank Ltd. (53 ITRTR 328) (sc) was also placed. The Assessing Officer went on 8 to analyze the judgment of Sutlej Cotton Mills Ltd. (supra) and held that the same also did not advance assessee's case in any way. The Assessing Officer also distinguished the decision of Hon'ble Madras High Court in the case of EID Parry Ltd. The Assessing Officer relied on the case of CIT Vs V. S. Dempo & Co. (P) Ltd.: (206 ITR 291) (Bombay). Reliance was also placed by the Assessing Officer on the case of CIT Vas Sandoz (I) Ltd. (206 ITR 599). It was accordingly held that once capital is raised whether by way of Euro issue or by public issue in India, any further income derived from such funds raised would be revenue in character as ownership over these funds becomes that of the company and once the funds are raised they no longer retain the character of fixed capital. In the case of the assessee also what has been gained by way of exchange rate fluctuation and once such funds were available they were part of the circulating capital of the assessee, being raised in connection with the business of the assessee and there is no reason why the same should not be held to be taxable. Accordingly, the amount of gain of foreign exchange fluctuation was held to be income chargeable to tax.
12. The assessee challenged the findings of the A O before learned CIT (A). It was submitted that when a company issues shares in foreign currency as capital, it receives foreign currency which is remitted to India. What is received in India is an equity capital and not circulating capital. Therefore, it was submitted that the very premises on which the Assessing Officer has based his decision that it was a circulating capital, is absent on the facts. The Assessing Officer has 9 relied upon the treatment given by the assessee company in its books of account because the Foreign Exchange gain was credited in the profit and loss account as "other Income." It was submitted that the treatment given by the assessee should not be considered as determinative or conclusive, as has been held by Bombay High Court in the case of Sandoz (I) Ltd.(supra). In the case of V. S. Dempo (supra) relied upon by the Assessing Officer, it is held as under:
"The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee."
The assessee company has also relied upon the decision of Hon'ble Supreme Court In the case of Sutlej Cotton Mills (116 ITR 1). The assessee quotes from the case of Sutlej Cotton Mills as under:
"The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature."
The assessee also quotes from the case of EID Parry (supra):
10"In the present case, it is not in dispute that the amount kept in the U.K arose out of subscription monies received for allotment of shares and there was no question of any sale of stock in trade. The issue of shares was itself for that express purpose of expansion of the assassee's fertiliser factory at Ennore. There is no dispute that a part of the amount was utilised for purchase of plant and machinery in U.K. and the other part was repatriated to India to be utilised for the purposes for which it was collected. The Tribunal has found that there is no direct relation between the excess amount and the business of the assessee. Hence, the finding of the Tribunal that the amount cannot be held to be a revenue receipt is correct on the facts of the case. We do not agree with the contentions urged by learned counsel for the Revenue that the amount was only a cash balance and that it was a circulating capital. On the findings of fact given by the Tribunal there can be no doubt that the amount in question is not a revenue receipt."
The assessee accordingly submitted that in view of direct decision of Madras High Court in the case of EID Parry (Supra) and the decision of the Hon'ble Supreme court as referred above, it may be held that amount of Foreign Exchange Gain of Rs.l,76,58,910/- is not a revenue receipt but is a capital receipt which is subscribed in foreign currency and it is received in India. It was further emphasized that the accounting entries do not determine character of taxability of a particular transaction of income or allowability of a particular expenditure. The taxability has to be determined as per the provisions of Income-tax Act. It was also submitted that even the Accounting Standard referred to by the Auditors or by the Assessing Officer was not specific with reference to the nature of receipt of the assessee. It was also highlighted that the amount of Rs. 176.59 lakhs was in 11 connection with the capital issue. In this connection, the assessee further referred to the stipulation, contained in the document prepared for GDR ISSUE wherein it explained as under:
"CAPITAL EXPANSION:
Arvind is in the process of implementing an expansion program that, upon completion, would double its current denim production capacity. See "Description of Business"
and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Timely completion of such expansion plans depends on a number of factors outside of Arvind's control, including, among other things, receipt of necessary governmental approvals with respect of such expansion plans. Although Arvind believes that it will complete its expansion program on schedule and on budget, there can be no assurance that it will be able to do so."
Then, just below that note, the main head 'USE OF PROCEEDS' appears as the following:
"USE OF PROCEEDS"
The net proceeds from the Offerings of 196.0 million (after deduction of underwriting discounts and estimated offering expenses and assuming no exercise of the Purchasers' over-allotment option) are currently expected to be used for general corporate purposes, including the purchase of property, plant and equipment in connection with the Company's capital expansion plans and the repayment of short-term debt,"
It was submitted that capital expansion was envisaged and the proceeds were to be utilized for augmenting the funds of the company exactly as proceeds of additional equity capital are normally earmarked or utilized. So there is no doubt that the proceeds of the 12 GDR issue were clearly on capital account. Hence, it was further submitted that any accretion to those proceeds would also be clearly on the capital account. It was further highlighted that various decisions relied upon by the Assessing Officer are on facts not applicable to this case. In those cases, the surplus had arisen out of the business transactions and therefore, it was held that such surplus was liable to tax as revenue income. In the assessee's case, there was no business transaction. The surplus has arisen on raising capital by GDR Issue and therefore, it is capital in nature. Simply by presumption one cannot say that it was dominating character of circulating capital. In assessee's submission, circulating capital is in the nature of current assets and liabilities whereas in the assessee's case it was on account of issue of share capital. The share capital so raised in foreign countries is capital of the company and any surplus to bring such capital to India is of capital nature. Without prejudice to the above contentions, it was submitted that even if it is presumed that the amount of Rs.176.59 lakhs is taxable in the hands of the assessee, the expenditure incurred by the assessee amounting to Rs.8.35 crores for GDR issue may be held to be admissible against the total income, because such expenditure was actually incurred with reference issue of capital and the same has resulted into earning of such exchange difference.
13. The learned CIT (A) considering submissions of the assessee and material on record deleted the entire addition and held that the surplus as arising on raising capital by GDR issue is capital in nature.
13His findings in Para 14 to 19 in the impugned order are reproduced as under:
"14. I have carefully considered the rival submissions on the issue involved. Before the main issue as such is decided, it is necessary to decide as to whether entries made by the assessee in its books of account determined the nature of a claim or the claim has to be decided in accordance with the provisions of law. I am of the opinion that the decision of the Assessing Officer treating the entries made by the assessee in its books of account as sacrosanct is not correct in law because whether an item of receipt/expenditure is taxable/allowable in the computation of income of an assessee will have to be decided in accordance with the provisions of law and not the view which the assessee takes with regard to the receipt/expenditure as the as the case may be. In this regard, following observations of Supreme Court in the case of Kedarnath Jute Manufacturing Ltd. Vs CIT (82 XTR 363) are absolutely relevant.
"Whether the assessee Is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter."
15. To similar effect are the observations of the supreme Court in the case of err Vs Chunilal V. Mehta & Sons (P) Ltd. (82 ITR 54).
"The method of maintaining the accounts was one thing and actual entries in the account maintained was a different thing. What was relevant was the method of accountancy and not the actual entries.
16. In view of the above mentioned very apt judgments of the supreme Court, It is to be held that 14 every claim of the assessee has to be adjudicated in accordance with the provisions of law relating to and not on the view which the assessee or the Assessing Officer might take with regard to that claim with reference to the entries made in the books of account. The way in which the entries are made by the assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is vital to be considered is the true nature of the transaction and whether in fact any profit or loss has resulted to the assessee. Though the book treatment cannot be also lightly brushed aside yet the fact will remain that what is to be allowed/disallowed is as per law and not as per book treatment given.
17. Having so opined, with specific reference to the facts of the present issue. It is held that exchange earned on conversion of foreign currency was related to retention of monies obtained on Issue of capital on capital account and the exchange rate difference earned In this case was a capital receipt and was accordingly not taxable. When the assessee company, in the facts and circumstances of this case, issued shares in foreign currency as capital, what it actually received in India was an equity capital and not circulating capital. Different judgments have been cited by rival parties but none of these are strictly applicable to the facts of the present case. The only decision of Madras High Court in the case of EID Parry Ltd. Vs CIT (174 ITR 11) is the judgment which stems fully relevant to the facts of the case. Like IED Parry case, in the present case also, it is not in dispute that the amount kept overseas arose out of subscription monies received for allotment of shares. Likewise in this case too, there was no question of any sale of stock, in trade. Again, like BID Parry, the issue of shares was itself for the express purpose of company's extension of plant, as highlighted above. There is no way to hold that the amount was in the nature of circulating capital. In the facts and circumstances of the case, there is no doubt that the amount in question is not a revenue receipt.
1518. Hon'ble supreme court's decision in the case of Sutlej Cotton Mills (116 XTR 1) perhaps states the correct position of law on the issue involved. The clear ratio of the judgment is that profit or loss arising to an assessee on account of appreciation off depreciation would in the value of foreign currency would be trading profit or loss if foreign currency is held on revenue account or as a trading asset or as part of circulating capital* In the facts and circumstances of the present case, the foreign currency la held neither on revenue account or as a trading asset or as a part of circulating capital. This is held only on capital account and the subsequent accretion thereof is clearly on the capital account. In the appellant's case again there is no business transaction Involved and that surplus as arising on raising capital by GDR Issue and the same is clearly capital in nature. Accordingly, it is held that the amount of foreign exchange gain of Rs.1,76.58,910/- is factually and legally not the revenue receipt and la accordingly not taxable. This ground of appeal is therefore, decided in favour of the assessee.
19. As referred above, the contention of the assessee before the Assessing Officer and before me also was that if it was considered that Rs. 1.76 crores was exigible to Income-tax* the amount spent for earning the same should be allowed as expenditure* Expenditure Incurred on ODR Issue was to.8.30 crores and the assessee had not claimed the same as expenses. It is pointed out that the Assessing Officer had not adjudicated this alternate plea at all. Since I have already decided the issue involved in favour of the assessee, this alternate plea is not further taken up for adjudication".
14. The learned D R submitted that if interest also includes in the above amount, it would be taxable as income. Learned D R relied upon order of the A O. On the other hand, the learned Counsel for the assessee reiterated 16 the submissions made before the authorities below and submitted that it is not in dispute that Assessee Company issued shares in foreign currency as capital and received foreign currency which is remitted to India. The amount received in India was an equity capital and not circulating capital. He has submitted that since the amount was held as capital receipt therefore, any accretion to these proceeds would also be on account of capital. He has submitted that no interest is included in the aforesaid amount. He has relied upon decision of Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India Pvt. Ltd. 312 ITR 254 in which it was held that the un-amended section 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount of the fixed assets that there should be actual payment of the increased/decreased liability as a consequence of the exchange variation. The words used in the un-amended section 43A were "for making payment" and not "on payment" which is now brought in by amendment to section 43A vide the Finance Act 2002". The learned Counsel for the assessee, therefore, submitted that the learned CIT (A) correctly deleted the addition.
15. We have considered the rival submissions and the materials available on record. It is not in dispute that the assessee company issued shares in foreign currency as capital and received foreign currency in India on account of 17 equity capital. It was submitted before learned CIT (A) that the amount in question was received in connection with the capital issue and the same was supported by the documents prepared for GDR issue. It was specifically stated that the amount in question was received on account of equity shares and the proceeds were to be used in connection with the capital expansion plans of the assessee company. The assessee proved before learned CIT (A) that the proceeds of the GDR issue were clearly on capital account. Moreover, the amount received on account of issue of the shares could not be treated as income. The assessee thus proved that there was no business transaction out of that money. The surplus has arisen on raising capital by GDR issue. The share capital so raised in foreign currency was thus capital of the assessee company and was rightly held to be capital in nature. The learned CIT (A) on proper appreciation of law rightly held that every claim of the assessee has to be adjudicated in accordance with the provisions of law relating to and not on the view which the assessee or the A O might take with regard to that claim with reference to the entries made in the books of accounts. The entries made in the books of account are not determinative of the question whether the assessee has earned any profit or loss. The true nature of the transaction shall have to be considered in view of the facts of the case. The A O has not brought any evidence on record that the amount in question was in the nature of circulating capital 18 or if assessee did any business transaction out of that money. The learned D R merely relied upon order of the A O without pointing out any infirmity in the order of the learned CIT (A). The learned D R submitted that if any interest includes in the about amount, it is taxable. However, no evidence is brought on record if any interest was included in the aforesaid amount. The A O made addition on account of the amount received as capital issue and capital accretion. Therefore, there is no question of including any interest thereon. The learned CIT (A) on proper appreciation of facts and the law rightly held that there is no business transaction involved in this case and the surplus as arising on raising capital by GDR issue is clearly capital in nature. We, therefore, do not find any infirmity in the order of the learned CIT (A). We confirm his findings and dismiss this ground of appeal of the Revenue.
16. Ground NO.2 and 3: On ground No.2, the revenue challenged the deletion of addition of Rs.21.07 lacs being surplus on early redemption of debentures and on ground No.3 challenged the deletion of addition on account of profit on forfeiture of debentures amounting to Rs.42.52 lacs. Learned representatives of both the parties submitted that both the grounds are connected. Therefore, both are disposed of together.
1917. The facts on ground No.2 are that in the computation of income, the assessee had excluded an amount of Rs.21,07,350/- belng surplus on redemption of debentures under the head, "income treated separately". This amount was not OFFERED for taxation. Further, the assessee offered an amount of Rs.8.70,000/- u/s. 41(l) of the Act being redemption of debentures provided in the books and claimed in respective years now offered u/s. 4l(l) of the Act. The assessee company had borrowed monies by issue of 14% non-convertible debentures privately placed with Infrastructure Leasing & Finance Company. The assessee company received as loan an amount of an amount of Rs. 5 crores. The debentures were for a period of 7 years. Infrastructure Leasing & Finance Co. requested the assessee company to pre-pone the repayment of the loan amount raised by way of debentures. It was decided that against to,3 crores received by way of loan, Rs.4,73,75,000/- be paid towards principle amount and an amount of Rs.13,87,650/- be paid by way of premium on redemption. The company had made provision for premium on redemption at Rs.8,70,ooo/- against which the premium of Rs.13,87,650/- became payable. The net effect was surplus on redemption of debentures. Assessee's claim was that excess of Rs.26,25,000/- is capital receipt in the form of reduction in the liability of the loan being difference between Rs.5 Crores and Rs. 4,73,75,000/- paid towards the principle amount. The premium on redemption of Rs.13,87,650/- was admissible expenditure in respect of the borrowing against which provision of Rs.8,70,000/- was made. According to the assessee, therefore, an amount of Rs.5,17,650/-
20was admissible as difference between the premium provided and the premium actually paid. Debenture redemption account is reproduced in Para 5.3 of the assessment order. This amount of Rs.21,07 lakhs was treated as revenue income by the assessee in its published a/cs in Schedule 11 'other income'. During the course of assessment, the Auditors of the assessee were asked to clarify the accounting treatment as given. The Auditors' version was that as per accepted accounting policy any gain or loss on redemption of a liability is to be accounted through the profit and loss account and accordingly, this amount has been shown as 'other income' in the profit and loss account. Assessee's version did not find favour with the Assessing Officer who held that it was difficult to appreciate that the surplus is capital receipt and more so when this surplus had arisen in the course of continuing business process of the assessee. Assessing Officer's contention was that anything which can be described as income is taxable under the Act unless it is exempted under one or other provisions of the Act. Reliance was placed in this regard on the decision of Hon'ble Supreme Court In the case of CIT Vs G. R. Karthikeyan (201 JTR 866). Finally it was concluded that the assessee's contention regarding surplus arising from earlier redemption of debentures, which were very much part and parcel of the on-going business transactions and process of the assessee, were not revenue in character and were not assessable as such, holds no water.
At the appellate stage before the learned CIT (A), is was argued that the Assessing Officer has relied upon several decisions which explain the meaning of 'Income' and definition of 'Income'. None of 21 the decisions relied upon by the Assessing Officer applies in the present case on the facts of the case. It is submitted that it is not a trading surplus. It is pointed out that Kerala High Court In the case of western (India) Plywood Ltd. Vs CIT (38 ITR 533) has held that amount received on Issue of debentures is capital receipt. Assessee quotes as under:
"The raising of money by debentures or mortgage cannot be regarded as an ordinary incident in carrying on the business, or be treated as on a par with trading or banking facilities, but must prima facie and in the absence of other indications, be considered to affect the capital of the concern and its profit- making structure."
The assessee also refers to Bombay High Court decision In the case of CIT Vs Mahindra & Mahindra Ltd. (95 ITR 130). The assessee quotes as under:
"It is well settled that a receipt is not taxable when it is a fixed capital. It is taxable as a revenue Item when it is referable to circulating capital or stock-in-trade At the cost of repetition, it is once again submitted that obtaining loans and settling the same for lesser amount is not the business of the appellant company, nor there is any finding that this is the business of the appellant company".
It was further pointed out that during the year there was no receipt of any income. What was received was borrowing, in the past when debentures were issued. Repayment of liability does not cause accrual of income. The second limb of the ground of appeal was that the Assessing Officer ought to have allowed premium paid on debentures to the tune of Rs.13,87,650/-. No cogent reasons have 22 been advanced by the Assessing Officer for rejecting the claim of the appellant company. The premium has been discharged during the year under consideration and in view of the I.T.A.T decision in the case of Rallis India Ltd. (24 ITD 496) and also ITAT's decision in the case of Arvind Hills Ltd in ITA No.4800, it was submitted that this was allowable expenditure. The assessee also relies on the decision of Supreme Court in the case of India Cements Ltd. (60 ITR 52) for its submissions and Calcutta High court's decision in Tungabhadra Inds. Ltd. (207 ITR 553). It was pointed out that Supreme Court has held in the case of Chhaganlal Mangaldas & Co. (39 ITR 8) that book entries are not conclusive evidence. The hypothetical income is not an Income for the purpose of levy of tax tinder the Income-tax Act. The assessee also refers to the decision of Supreme Court in the case of Shoorji Vallabhdas 6 Co. (46 ITR 144) wherein it has been held that accounting entry cannot become income unless income has actually resulted. It was concluded by arguing that obtaining of loan and settling the same for lesser amount is not the business of the company. During the year under consideration, there is no receipt of Income, but what was received by issue of debentures in the past was repaid and it dons not amount to accrual of Income. Considering these submissions it was requested to hold that the Assessing Officer was not justified in taxing the amount of Rs.21.07 lakhs being surplus on early redemption of debentures.
18. The learned CIT (A) considering the facts of the case and submissions of the parties decided the issue in favour of the assessee.
23His findings in Para 24 of the appellate order are reproduced as under:
24. After considering the rival submissions, it is held that In view of the fact and circumstance of the case, there was no actual receipt of any income. What was received actually was in the nature of borrowings in the past when debentures were issued, this is only the case of repayment of a liability which in any way cannot be considered to cause any accrual of income. It is a settled proposition of law that an accounting entry cannot by itself become income unless the income has actually resulted.
It must be kept in mind that obtaining of loan and settling the same with lesser amount is not the business of the company. During the year under review, there was no receipt of income as alleged by the A. O., since what was received by issue of debentures in the past was only repaid and this did not amount to accrual of any income. Assessing Officer's contention that any income can be described as income under the Act unless it is exempted is not the correct position at all. The decisions quoted by the Assessing Officer to support this view do not apply on the fact of the present case. May be at the coat of repetition is has to be emphasized again that obtaining loan and settling the same with leaser amount la not the business of the appellant company and there la no finding in the assessment order also that this is the business of the appellant company. It la also highlighted again that the presence of book entries in one form or the other will not conclude the issue by itself since book entries are not conclusive evidence with regard to the nature of a claim. This proposition has been discussed at length in ground NO. 2 above and the same is not repeated again. In the facts and circumstances of the issue involved, it is held that the Assessing Officer was not justified in taxing the amount of Rs.21,07 lakhs being surplus on early redemption of debentures. This ground of appeal is accordingly decided in favour of the assessee.
2419. The facts of the 3rd ground of appeal are that the assessee had credited to capital reserve profit on re-issue of forfeiture of shares amounting to Rs.7.46 lakhs and profit on forfeiture of debentures amounting to Rs.42.52 lakhs. The assessee was required to clarify as to why the profit on forfeiture on debentures should not be treated as income liable to tax. In compliance, the assessee contended that during the year under consideration, there was forfeiture of equity shares on account of non-receipt of call money, similarly 0% FCDS were also forfeited on account of non-receipt of call money. It was contended that though the definition of the word one was inclusive yet the same could be made applicable provided nature of receipt was revenue. Reliance in support was placed on the judgment of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs CIT (116 ITR
1) and that of Tata Locomotive company Ltd. (60 ITR 405). It was contended that the forfeiture amount was a capital receipt not exigible to tax. As far as profit on forfeiture of equity shares was concerned, the same being directly relatable to share capital, assessee's contention was found to be acceptable. AS per Assessing Officer, equity stood at different footing from that of debentures. In view of the detailed reasons as given above in connection with the taxability of surplus on redemption on debentures and applying the same analogy the surplus received by the assessee on forfeiture of debentures was held to be revenue in nature and taxable as such.
20. At the appellate stage before learned CIT (A), it was submitted that the submissions made in respect of ground NO. 2 above were squarely applicable in this case and since the profit was 25 earned on account of forfeiture of debentures. It was of capital nature which has been correctly credited to capital reserve Account and the accounting treatment given also supports the case of the assessee company. In this view of the Matter, the Assessing officer was required to delete the addition of Rs. 42. 52 lakhs.
21. The learned CIT (A) considering the submissions of the assessee and material on record deleted the entire addition. His findings in Para 27 are reproduced as under:
27. After consideration, it is felt that the A.O. has not perhaps fully appreciated the entire facts relating to the f forfeiture of shares and debentures.
As noted in the assessment order, surplus arose on two items of forfeiture during the year. One was on the equity shares and the other was in respect of debentures. The order treats the former as on capital account but the later as income. It is pointed out by the appellant that in assessee's own case for A.Y. 1992-93 and 93-94 PCD/FCD issue expenses were held as capital expenses by CIT(A) and the claim was allowed as l/10th every year for 10 years. It is pointed out by the appellant that even those debentures were 0% fully convertible debentures, meaning thereby that no interest was payable on them and they were to be fully converted Into equity shares without doing any act by the debenture holders. The first part was convertible into equity shares on April, 1993 i.e., on the first day of the previous year relevant to this appeal and the second part was convertible on the first day of the previous year immediately succeeding the previous year relevant to this appeal, that is at the beginning of the immediately succeeding year which is as good as the end of the previous year relevant to this appeal. The point is that the surplus was on those FCDs which were convertible fully into equity shares 26 partly in the beginning of the previous year relevant to this appeal and partly on the first date of the succeeding previous year. Thus, good part had already become convertible in the beginning of the previous year and the remaining part was convertible on the date immediately succeeding the end of the previous year relevant to this appeal. Those FCDs were conceptually and qualitatively as good or bad as equity shares themselves.
Obviously, for the facility of accounting and identification they were continued to be termed and dealt with as FCDs. so the logic and reasoning followed In the assessment order for not taxing the surplus on forfeiture of equity shares applies very substantially to the surplus arising on the forfeiture of these FCDs also, hence the same is held to be not taxable. It is also held that issue of debentures is also on capital account and hence the amount received on forfeiture is also on capital account. Apart from this he issue of debentures and forfeiture thereof has not arisen out of any business deal but it has arisen with reference to the capital of the company or out of the transaction of borrowing of debentures. Accordingly, it could never be considered as on revenue account. In view of this discussion, the addition being unjustified is directed to be deleted".
22. Learned D R relied upon order of the A O. On the other hand learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the obtaining of loan and settling the same for lesser amount was not the business of the assessee. No amount was received as income, but what was received was by issue of debentures in the past was repaid and it would not amount to accrual of income. He has further submitted 27 that there was forfeiture of equity shares on account of non- receipt of call money. It was contended that forfeiture amount was a capital receipt not exigible to tax. He has relied upon order of ITAT Ahmedabad Bench in the case of DCIT Vs Brijlaxmi Leasing & Finance Ltd. 118 ITD 546.
23. We have considered the rival submissions and material available on record. The facts as noted above are not in dispute. The assessee Company had borrowed money by issue of debentures privately placed with Infrastructure Leasing & Finance Co. The above party requested the assessee Company to pre-pone the repayment of loan amount raised by way of debentures. The net effect on repayment was surplus on redemption of debentures. Therefore, it was a case of repayment of liability which could not be considered to create any accrual of income. It was not business of the assessee to obtain loan and settle the same with lesser amount. Since what was received by issue of debentures in the past was only repaid would not amount to accrual of income. Book entries are not conclusive to determine the character of income. Similarly, assessee pleaded before the authorities below that there was forfeiture of equity shares on account of non-receipt of call money. Similarly, 0% FCD was also forfeited on account of non-receipt of call money. It was contended that forfeiture amount was a capital receipt. The learned CIT (A) specifically noted that the surplus arose on two items of 28 forfeitures i.e. one on equity shares and other was in respect of debentures. The A O accepted contention of the assessee as far as forfeiture of equity shares was concern and was treated as capital receipt but forfeiture of debenture was held to be on account of revenue receipt. The learned CIT (A) considering the previous history of the assessee and nature of the transactions held that issue of debenture is also on capital account and hence the amount receipts on forfeiture was also on capital account. ITAT Ahmedabad Bench in the case of Brijlaxmi Leasing & Finance Ltd. (supra) considering the decision of the Hon'ble Supreme Court in the case of T. V. Sundaram Iyenger & Sons Ltd. 222 ITR 344 considered the issue in which assessee claimed that since amount initially received pertain to capital receipt, forfeiture of such receipts could not be treated of revenue nature. The A O rejected the claim of the assessee. However, learned CIT (A) allowed the claim of the assessee. It was held "Whether since amount was received against the issue of shares which was not business of assessee-company, same could not be treated as receipt in normal course of business - Held, yes - Whether, moreover, since assessee had not credited forfeited amount in its profit & loss account but contradistinction to that it had credited the same in capital reserve account, impugned order of Commissioner (appeals) was to be confirmed - Held, yes". Considering the facts and circumstances in the light 29 of findings of the learned CIT (A) and that no infirmity or illegality have been pointed out in the order of the learned CIT (A), we do not find it to be a fit case for interference. Learned CIT (A) on proper appreciation of facts and material on record rightly held that no income accrued to the assessee. We, therefore, do not find any merit in these grounds of appeal of the Revenue. The same are accordingly dismissed.
24. On ground No.4, Revenue challenged the order of the learned CIT (A) in deleting the addition of commitment charges of Rs.46,54,429/- paid to Ashoka Mills.
25. The facts on this ground of appeal are that in the computation of income filed, the assessee had claimed commitment charges of Rs.46,54,429/- as deduction as expenses u/s. 37 of the Act. These commitment charges were paid to Ashoka Mills Ltd. in pursuance to agreement for using manufacturing facilities, the charge payable was for yarn manufactured in Ashoka Mills Ltd. The agreement provided that in case the production of yarn was less than the committed production, a minimum sum was payable to Ashoka Mills. During the course of assessment copy of the agreement entered into with Ashoka Mills was produced. As per said agreement, commitment charges of Rs. 17 lakhs per month minimum were there. This being the new facility for production, it was not possible during the year to reach optimum capacity prescribed in the agreement and therefore to make good 30 production efficiency commitment charges had to be paid to Ashoka mills. The contention of the Assessing Officer was that commitment charges paid of Rs. 46.54 lakhs prima facie related to the period prior to commencement of production from new machines to be installed by the assessee at the premises of Ashoka Mills. These expenses were, therefore liable to be treated as capital expenses. As per A. O., again the assessee had capitalized this amount in its in its books of account and as per details available on record, this amount of Rs.46,54,429/- was paid for the period prior to the commencement of the production from the new machineries installed. During the course of assessment, the auditors of the assessee were also asked to clarify the position regarding capitalization of aforesaid commitment charges paid to Ashoka Mills Ltd. Auditors' version in this regard finds place at page 66 of the assessment order. The finding of the Assessing Officer accordingly was that once the amount paid has been properly capitalized as per accounting standards of ICAI and has been approved by law as well as general share holders regarding the treatment given in published accounts, assessee has no case for asking for a different treatment for income-tax purpose. The expenditure was held to be capital in nature and assessee's claim of deduction was accordingly rejected.
26. The addition was challenged before learned Commissioner of Income Tax (Appeals) and it was pleaded that this amount was paid by the assessee to Ashoka Mills Ltd. in connection with the 31 agreement to make available manufacturing infrastructure facilities of the said company for manufacture of yarn. The agreement was for the period of 7 years and could be terminated by giving three months' notice. Thus, there was no permanent right available to the assessee by payment of commitment charges. It was submitted that the payment of commitment charges had no nexus with the installation of plant and machinery. It was paid for making available facilities of Aahoka Mills Ltd. for manufacture of yarn. The yarn has to be used for utilizing the weaving capacity of the assessee for production of textiles. The assessee was engaged in the business of manufacturing of textiles and therefore, the commitment charges incurred were for the purpose of business of the assessee. In this connection, the assessee reproduced relevant Paras of the agreement with Ashoka Mills Ltd. dated 10.5.1993 as under:
"Consideration:
It is agreed by and between the parties that Arvind shall pay to Asoka the conversion charges to be arrived at on the basis of the actual coat plus 10% subject to minimum of Rs.17 lakhs per month or Rs.7,60 kg. of yarn produced which aver is higher .....
The above charges shall be payable front the date of job work actually commences. It has also been agreed by and between the parties that from the date of agreement till job work actually commences, Arvlnd shall pay commitment charges at the rate of fit. 5 lakhs per month on pro-rata or part thereof".
Thus, rates were fixed for the job work to be actually done. But up to the time of commencement of job work some minimum amount was envisaged for the time up to installation and commissioning of the 32 additional spinning facilities. Without prejudice to the above contentions, it was submitted that even on the basis of the Assessing Officer's argument, if it is held that the commitment charges were capital in nature and related to installation of machinery, the Assessing Officer was not justified in not allowing the depreciation only on the ground that the issue has not reached the final stage. Once he decided that it was capital in nature related to installation of machinery, he was duty bound to allow the depreciation the same. Accordingly, the necessary relief was prayed the main ground and if that was not acceptable, relief was prayed on the alternate ground. The learned CIT (A) considering the material on record and submissions of the assessee held that commitment charges paid by the assessee was revenue in nature. The findings of the learned CIT (A) in Paras 32 to 35 in the impugned order are reproduced as under:
32. I have gone through the rival submissions carefully. It is an undisputed fact that the appellant company had paid to.46.54 lakhs to Ashoka Mills Ltd. in connection with its agreement to use manufacturing infrastructure facilities of Ashoka Mills Ltd. for manufacture of yarn. The agreement was for a fixed period and could be terminated, by the appellant company by giving three months notice. In this context, it is obvious that no permanent rights had been obtained and accordingly it could be inferred that by paying commitment charges no advantage of enduring nature had been obtained by the appellant company. If read in proper perspective the payment of commitment charges has nothing to do with the installation of plant and machinery. Commitment charges were clearly payable related to yarn 33 manufacture with a clause of minimum payable rent. It is a matter of record that the Assessing Officer had clearly held that the business of the appellant company was manufacture of textiles.
It is also undisputed that the appellant had spare weaving capacity for textiles and to make full use of the same. Infrastructure facilities of Ashoka Mills were obtained so that yarn could be manufactured to enhance the production, commitment charges were accordingly production linked expenses which were clearly of revenue nature.
33. The main reasons given by the Assessing Officer for not allowing this expenditure are
(i) The expenditure is of capital nature.
(ii) The expenditure relates to preputting to use of Plant and Machinery.
34. Reliance has been placed upon the Hon'ble Gujarat High Court decisions in the case of Vallabh Glass Works and Saurashtra Cements & Chemicals Ltd. In Vallabh Glass Works the business had not commenced and machinery was being put to use for the first time. In the case of Saurashtra Cement, it was held that a new asset was acquired and therefore it was capital expenditure. In nutshell, none of the decisions relied upon by the Assessing Officer is applicable in the case of appellant company because In the case of the assessee company business of textiles manufacture was carried since last 50 years. In this background, commitment charges were production linked expenses which obviously were revenue in nature. In this regard* appellant company's reliance on Calcutta High Court's decision in the case of Kesoram Industries and 34 Cotton Mills Ltd. Vs CIT (196 ITR 845) is well placed, in which it has been held that expenditure incurred in connection with expansion of business is revenue expenditure. It has been held in this decision that if the expenses are incurred in connection with the setting up of a new business, such expenses will be on capital account. But where the setting up does not amount to starting of a new business but expansion or extension of the business already been carried on by the assessee, expenses in connection with such expansion or extension of the business must be held to be deductible as revenue expenses.
35. While deciding this issue, the Assessing Officer has been again guided by the book treatment as initially given in the books. In this regard, I have already given a finding as above that whether a particular expenditure is of revenue or capital nature la a question of law which is to be decided in accordance with a decided case law on the issue. Accounting standards are primarily guiding principles for making entries or writing the accounts. Despite entries made in the a/cs following such recognized accounting standards it Is open to the appellate authorities and to the courts to examine the claim for deduction having regard to the provisions of law and not merely on the bails of accounting entries. The question of such entries being erroneous or otherwise is not relevant to the issue. In view of this discussion, it is held that the appellant company being already in textile business of manufacturing cloth, the agreement entered for obtaining infrastructure facilities would entitle the appellant company to claim the commitment charges paid under such agreement as revenue expenditure. This ground of appeal is 35 accordingly decided in favour of the assesses, since the assessee succeeds fully with regard to this ground of appeal, the alternate ground Is not further adjudicated.
27. The learned D R relied upon order of the A O and submitted that the expenditure should be capitalized being related to period prior to commencement of production and is capital in nature. On the other hand, learned Counsel for the assessee reiterated the submissions made before authorities below and submitted that expenditure was revenue in nature because same commitment charges were production linked expenses.
28. We have considered the rival submissions and do not find any merit in this ground of appeal of the revenue. It is admitted fact that Assessee Company had paid Rs.46.54 lacs to Ashoka Mills Ltd. as commitment charges in connection with the agreement to use manufacturing infrastructure facilities of Ashoka Mills Ltd. for manufacturing of yearn. These facilities were available to the assessee for a fixed period and could be terminated by giving three months notice. Therefore, no permanent right was given to obtain benefits by paying commitment charges; therefore, the benefit was not of enduring in nature. It has nothing to do with the installation plant and machineries. The business of the assessee was manufacture of textiles and commitment charges were payable relating to yarn manufacturing. Commitment 36 charges are, therefore, production linked expenses which are rightly held to be revenue in nature. No capital was generated on payment of the commitment charges. It is well settled law that whether the amount is revenue in nature or capital in nature is to be decided in accordance with law and the book entries are not determinative factor to decide the same. Since the assessee was already in textile business of manufacturing clothes and obtained infrastructure facilities for the purpose of business as per the agreement therefore, learned CIT (A) rightly held the commitment charges are revenue in nature. This ground of appeal of Revenue has no merit the same is accordingly dismissed.
29. Ground No.5 - Revenue challenged deletion of addition of Rs.3,96,01,611/- as revenue expenditure.
30. The facts on this ground are that the assessee challenged before learned CIT (A) that the Assessing Officer has erred in not allowing 4/5th part of the revenue expenditure, 4/5th amounting to Rs.3,96,01,611/- (Rs. 4,07,26,611 less Rs. 11,25,000 of technical know how) holding that it was deferred revenue expenditure. This ground has a second limb also that the Assessing Officer has erred in not granting deduction of Rs. 13.50 lakhs being fees paid towards technical know how as expenses u/s. 37 of the Act and instead Assessing Officer has allowed l/6th of these expenses u/s.35AB of the Act. The facts are that the Assessing Officer did not allow claim of 37 Rs.3,96,01,61I/- as revenue expenditure because in the books of accounts, the assessee company has treated 4/5th of the expenditure as deferred revenue expenditure. Head-wise facts of each item were discussed as under:
(i) Retrenchment expenditure Rs.37,44,315/-
During the year under consideration, the assessee company had entered into an agreement with recognized union to retrench employees under Voluntary Retirement Scheme. This scheme was also approved by the C.I.T. Total expenditure incurred debited in the books of accounts and payment made during the year was Rs. 37,44 ,315/-.
However, the assessee company transferred Rs.7,58,863/- to profit and loss account and treated balance amount of Rs.29,95,452/- as deferred expenditure.
(ii) Technical audit fees Rs..72.63,386/-
During the year under consideration, the assessee company had incurred expenditure for conducting technical audit by M/s. Ghersi & Co. for which they had charged Rs. 90,79,232/-. Total expenditure incurred, debited in the books of account and paid during the year was Rs.90,79,232/-. However, the assessee company had transferred 1/5th expenditure incurred i.e. Rs.18,15 ,846/- to profit and loss account and treated the balance amount of Rs.72,63,386/-as deferred expenditure.
38(iii) Management services fees Rs.3,66,78,466/-
During the year under consideration, M/s. McKensy & Co., an international firm based in USA was employed for management consultancy and they had during the relevant period charged Rs.3,66,78,466 as their fees. The total expenditure Incurred was debited in the books of accounts and payments were made. However, the assessee company transferred Rs.73,55,688/- to profit and loss account and treated balance amount of Rs. 2,93,42,773/- as deferred revenue expenditure.
During the course of assessment, the assessee was required to explain the claim of different deductions for Income-tax purposes vis-a-vis treatment given In the books of account. Opinion of auditors in this regard was also obtained which finds place at page 60 of the assessment order. With regard to retrenchment expenses, it was held that when retrenchment of a number of employees was undertaken with a view to reduce the expenditure, the benefit of such retrenchment was available in many years and therefore substantial amount paid of Rs.37.44 lakhs, could not be treated as a normal revenue expenditure. The same was admittedly having benefit spread over 5 years and as such could not be allowed as revenue deductible, similar finding was given with regard to technical audit fees and management service fees.
31. The finding of the A O and addition was challenged before learned CIT (A), it was contended that the Assessing Officer had 39 himself treated various expenses as revenue expenditure because he had allowed l/5th of the expenditure as deductible revenue expenditure. It was strongly emphasized that it is not Assessing Officer's case that it was not a revenue expenditure. It was further quoted that it would be proper to refer to section 28 read with section 29 of the Income-tax Act, 1961 which deals with the provisions regarding the computation of income from profits and gains of business. The relevant section 29 reads as under:
"The income referred to in section 28 shall be computed in accordance with the provisions contained in section 30 to 43D."
The Assessing Officer had ignored the provisions of section 28 read with other sections in not allowing the deduction which is properly allowance u/s.28 or 37 of the Act. Section 37(1) reads as under:
"37(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assesses) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession."
According to this section, if the following requirements are satisfied, deduction has to be allowed u/s. 37 of the Act.
(i) The expenditure must have been laid out wholly and exclusively for the purpose of business of the assessee 40
(ii) The expenditure must not be capital in nature:
(iii) The expenditure must not be personal in nature It was submitted that the Assessing officer himself has allowed l/5th of the expenditure as business expenditure as he was satisfied about the three conditions stated here-in above. It was only the accounting treatment given by the assessee company which has made him not to allow 4/5th of the expenditure in the assessment year. Again, it was not the case of the Assessing Officer that the expenses were not incurred In the previous year relevant to the present assessment year. It was therefore, submitted that the A.O. ought to have allowed the balance of 4/5th of the expenditure as business expenditure either u/s.28 or 37 of the Act. It was further submitted that an assessee following mercantile system of Accountancy was entitled to deduct from the profits or gains of his business, the liability which arose during the relevant previous year.
It was also contended that the concept of deferred revenue expenditure was absent under the Income-tax Act and the Assessing officer has failed to appreciate this fact. In this background, it was the prayer of the assessee company to direct the Assessing officer to allow all the above expenses in total and not in installment. There was another limb of this ground of appeal too which was with regard to technical know how fees of Rs.13,50,000/- on which assessee is in appeal on ground NO.,1 above, but it was not pressed by the learned Counsel for the assessee, therefore, the same was dismissed being not pressed. The learned CIT (A) considering the submission of the 41 assessee held that the expenditure is revenue in nature and the same is to be allowed fully to the extent of Rs.3,96,01,611/- on which revenue is in appeal. The findings of learned CIT (A) in Para 45 and 46 in the impugned order are reproduced as under:
45. I have carefully considered the version of the Assessing Officer on the issue involved. I have also gone through the contentions of the appellant. It is pointed out that the courts have in number of cases held that whether an expenditure is capital or revenue in nature is question of law. If it so, then the assessee is not bound by the treatment given in its accounts, whether the same is treated as capital or revenue or deferred revenue expenditure. The income-tax Act does not recognize deferred revenue expenditure. Even if the Auditors had though advised not to charge the profit and loss account of this year with the whole of expenditure and treated it as deferred revenue expenditure that may look consonant with recognized accounting principles but its deductibility or otherwise has to b« determined in accordance with provisions of income-tax law. In many decided cases, the principle stated la that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating to that and not on the view which the assessee may take of Its right or in other words, irrespective of the accounting treatment given by the assessee. It is a judicially settled proposition that test of universal application can be laid down for treating the expenses to be either capital or revenue in nature. Every case has to be examined and decided on its facts and merits. The purpose for which the expenses have been incurred is always 4 relevant factors for deciding as to whether an expenditure is revenue expenditure or a capital expenditure.
Generally speaking, retrenchment expenditure, technical audit fees and management services fees 42 are in the nature of revenue expenditure. In the case of the assessee, method of accounting of the appellant company is mercantile. This system of accountancy takes into account income and expenditure on accrual basis. It is beyond doubt that all the expenses as Mentioned above had accrued in the relevant assessment year. These expenses were also paid during the relevant assessment year. The only point which has been adversely taken into account by the Assessing Officer is that in the books of a/acs, the expenses were treated as deferred revenue expenditure. But then the fact also remains that the assessee had revised its claim subsequently and what is to be allowed is the expenditure which is due and not the expenditure which has been treated differently in the books of a/cs. Various court decisions are available on the subject laying down the proposition that income/expenditure which really accrued to the assesses during the previous year can be considered and taken into account irrespective of the fact that different book entries have been made. The case law as cited by the assessee duly supports this finding.
46. All the requirements of section 37 of the Act are satisfied in the case of the assessee. The expenditure has been laid out fully and exclusively for the purpose of business of the assessee. The expenditure is neither capital nor personal in nature. The Assessing Officer himself has allowed l/5th 6f the expenditure as business expenditure considering the same to be revenue. His only dispute is with regard to the book entries passed. The decision of the A.0. treating the entries made by the assesses as sacrosanct is not correct in law because an item of expenditure is an allowable deduction only when it is in accordance with the provisions of law. Since the expenditure Involved is definitely revenue in nature, the same is to be allowed fully to the extent of 43 Rs.3.96.01.61I/-. To this an extent, the assessee accordingly succeeds in its claim.
32. Learned D R relied upon the order of the A O and submitted that it was shown as deferred revenue expenditure by the auditor; therefore, A O was justified in granting part relief to the assessee. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below and relied upon decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. Vs CIT 227 ITR 172 in which it was held "Principle of Accountancy do not override provisions of tax statutes". He has submitted that concept of deferred revenue expenditure is essentially an accounting concept and alien to the Income Tax Act. The relevant provisions of the Act recognized only capital on revenue expenditure. For the purpose of allowability of any expenditure under Income Tax Act what is material is the classification between capital and revenue and the same does not recognize concept of deferred revenue expenditure. In support of the above submissions, he has relied upon order of ITAT Ahmedabad Special Bench in the case of ACIT Vs Ashima Syntex Ltd. 117 ITD (SB) 1 and order of ITAT Ahmedabad Bench in the case of ACIT Vs Core Health Care Ltd. 37 SOT 383.
33. On consideration of the rival submissions and the case laws cited above, we do not find any merit in the departmental appeal on this ground. It is settled law that deferred revenue expenditure is not concept recognized under Income Tax Act. The provisions of Income Tax Act 44 shall have to apply for the purpose of allowing deduction if it is revenue expenditure in nature. The concept of deferred revenue expenditure is essentially an accounting concept and alien to IT Act. The relevant provisions of Income Tax Act recognized only capital or revenue expenditure. Therefore, even if auditors have advised the assessee not to charge the profit & loss account of this year with the whole of the expenditure and treated it as deferred revenue expenditure, it may be according to accounting principle, but certainly its deductibility has to be determined in accordance with the provisions of IT Act. Since, the assessee laid out the above expenditure wholly and exclusively for the purpose of business therefore, whole of the amount shall have to be allowed deduction in the assessment year under appeal because the assessee followed mercantile system of accounting and was entitled for deduction of the entire expenditure. The Assessing Officer has also allowed one fifth of the expenditure would show that Assessing Officer was satisfied about the genuineness of the expenditure incurred by the assessee in the Assessment Year under appeal wholly and exclusively for the purpose of business. Therefore, provisions of section 37 of the IT Act would clearly apply in the case of the assessee. The decisions cited by learned Counsel for the assessee squarely apply in the case of the assessee. We, therefore, do not find any infirmity in the order of the learned CIT (A) in allowing the deduction fully to the extent 45 of the amount raised on this issue. This ground of appeal of the revenue is accordingly dismissed.
34. On ground No.6: The revenue challenged deletion of addition of Rs.94,47,117/- payable to Mckensy & Co. The facts on this ground are that the claim of the assessee in this regard was that the assessee company was maintaining its accounts on mercantile basis. All known expenses are provided in the books of account and certain expenses are provided on estimation basis. In the case of Mckensy & co. there was a short provisions of expenses to the tune of Rs.94,47,117/-. A claim in this regard had been made before the Assessing Officer who insisted on submitting a copy of the bill. The said copy was also furnished and the same was available on record. From the said copy it would be clear that the expenditure of Rs.94,47,l70/- had accrued during the year in which service had also been obtained. In the body of the assessment order, the Assessing Officer had preferred to remain silent on this issue. In a way, the allowability of this expenditure was not adjudicated at all. However, the claim of the assessee was that in view of the clear provisions of the Act and the method of accountancy adopted by the assessee for taxing purpose, the sum of Rs.94.47,170/- is an allowable expenditure. However, if the fees payable to Mckensy & Co. was allowed at Rs.4,61,25,636/- inclusive of short provision of Rs.97,47,170/- this ground will no survive. During the course of appellate hearing, the issue was confronted to the Assessing Officer who in his written submissions has confirmed that this amount remained unnoticed by the Assessing Officer and this was not 46 discussed at all in the assessment order. It was accordingly requested that the matter may be restored back to the Assessing Officer for verification and allowance. The learned CIT (A) however, noted that the issue of management services fees paid to M/s. Mckensy & Co. has been decided by him in above ground and it has been held that this payment is in the nature of revenue expenditure and has to be allowed. Since the amount of Rs.94,47,117/- is in continuation of the same payment, a similar finding has to follow. A claim in this regard had been made before the Assessing Officer who insisted on submitting a copy of the bill. The said copy was also furnished and the same was available on record. From the said copy, it is clear that expenditure of Rs.94,47,117/- had accrued during the year in which services had also been obtained. However, in spite of the claim being on record, the Assessing Officer did not entertain the same. Learned CIT (A) therefore, noted that since the Issue has already bean decided by him in the above ground, the same finding is to be given with regard to this ground of appeal, too. In the facts and circumstances of the Issue involved, it was held that fees payable to Mckensy & Co. is allowed at Rs.4,61,25,636/- inclusive of short provision of Rs. 97,47,117/-. This ground of appeal of the assessee was accordingly allowed.
35. The learned D R relied upon the order of the A O and submitted that the assessee obtained enduring benefit, therefore, the deduction should not be allowed in the year under consideration. On the other hand, learned Counsel for the assessee reiterated the submissions made before 47 the authorities below and submitted that the ground is part of Ground No.5 and the expenditure is revenue in nature. No capital is generated out of the same.
36. On consideration of the rival submissions we do not find any merit in this ground of appeal of the revenue. The similar ground is considered on ground No.5 in the departmental appeal on which departmental appeal has been dismissed. Since the amount in question is part of the same expenditure payable to M/s. Mckensy & Co. on which addition deleted by learned CIT (A) is confirmed by us, therefore, learned CIT (A) was justified in deleting the addition. From the copy of the bill it was found by the learned CIT (A) that expenditure in question had accrued during the year in which services had also been obtained, therefore, the learned CIT (A) was justified in holding that on mercantile system fees payable was also allowable deduction in the assessment year in question. No enduring benefit has been obtained by the assessee. No capital generated on this issue. We, therefore, do not find any infirmity in the order of the learned CIT (A) in deleting the addition. This ground of appeal of the revenue is dismissed.
37. On ground No.7: Revenue challenged deletion of addition of Rs.1.74 crores towards the two EOU.
38. It was submitted before the learned Commissioner of Income Tax (Appeals) that the Assessing Officer has erred in allocating 48 further expenses of Rs. 1.74 crores towards the two EOU for the reasons mentioned in the order. The Assessing Officer has referred to the assessment proceedings for A.Y. 1993-94 and stated that the assessee had agreed that Rs.11,74,855/- paid as insurance premium for EOU plant and machinery was not debited to the P & L account of the EOU. The assessee had for this year filed revised working and reduced the claim for insurance premium for EOU by Rs.9,06,999/-. In sub-para 3 of Para F, the Assessing Officer stated that in the assessment order for A.Y. 93-94, the assessee conceded that though it was not possible to ascertain expenses under different heads incurred by EOU and other units, it cannot be denied that certain portion of expenses might be related to EOU and a broad estimate of expenses of Rs.68.92 lakh, (other than insurance) were attributable to EOU. He says that total expenses claimed for this year are Rs.38 crores, as against the last years' claim of Rs. 20 crores. In Sub-Para 5 at page 77 of the assessment order, the Assessing Officer has further stated that during the assessment proceedings the assessee had stated before him that the expenses which were not specifically incurred for those units cannot be allocated there against. He referred to section 10B(8) and (9) and states that as per the said provisions if it appears to him that when the course of business is so arranged that the assessee is earning more than the ordinary profit which might be expected to arise in the business of the industrial undertakings carried on by the assessee, then the Assessing Officer shall - compute the profit and gain of the undertaking for the purpose of deduction and take the profit as may reasonably be deemed to have been derived there from. He further says that on commercial 49 principles also expenses which result into benefit of unit of an industry are required to be allocated expected principles so as to reveal the correct profit 'suiting there from. He has alleged that the assessee be allowed to inflate profit pertaining to export oriented units by debiting the expenses to other units where the profits are taxable and thus, inflating exempted profits of EOU and reducing the taxable income. After this discussion, on the relevant Para, he has allocated different expenses under different heads. Ultimately he had disallowed total amount of Rs.1,74,24,44O/- which is made up of the following.
Particulars Amount 1. Welfare Expanses 12,56,221/- 2.Remuneration of Senior Executive 66,907/- 3. Rates and Taxes 3,11,616/- 4. Advertisement expenses 1,93,417/- 5. Foreign travel expenses 99,63,066/- 6. Motor car expenses 17,00,000/- 7. Mckensy Report expenses 35,16,613/-
The assessee submitted that it has two export units viz Arvind Exports and Arvind International. Separate books of accounts relating to the said units are being maintained. The assessee is also having various different units, for which also, separate books are being maintained. All the receipts/income and expenses pertaining to the said units are being accounted for in the books of the respective units. Therefore, there is no justification for estimating the expenses 50 for those units out of the total expenses of the units unless the Assessing Officer is having any evidence or any reasonable proof to show that a particular expense referable to those units is debited in the books of the main unit. In the absence of any such evidence, the allocation of expenses by the Assessing Officer on his own estimate and presumption amounts to re-writing of books of the company for the units which is not permissible. It may be appreciated that assessee itself has offered the disallowance of Insurance expenses pertaining to the machinery of the units which is accounted for in the books of the main unit. However, in the other items he cannot have justification for rewriting the books. In the circumstances, entire exercise of the Assessing Officer is beyond his jurisdiction and is without reasonable cause. On this ground itself the entire addition made by him on this account which was based on the presumption requires to be deleted. As the Assessing Officer has made the assessee's agreeing to a basis for addition in assessment proceedings for A.Y. 1993-94, it was submitted that in that year it was agreed conditionally and to avoid litigation and just to buy peace. However, such agreement cannot be applied to this year.
As regards the reference made to section 10B(8) and (9) of the income-tax Act, it was submitted that in section 10B as it stood then, sub-section (8) and (9) did not exist at all. Presumably, the assessment order intended to refer to sub-section (6) of section 10B which laid down, in effect, that the provisions of sub-section (8) and (9) of section 80-I shall apply mutatis mutandis. So, even if the assessment order intended to invoke the provisions of sub-section (8) 51 and (9) of section 80-I, a reference to section 80-I, would reveal that sub-section (8) thereof authorizes the Department to appropriately and reasonably adjust the prices of goods transferred to and from the eligible unit to or from other units owned by the assesses. In the case of this assessee, this particular provision has not been invoked even in the assessment order. This is obvious from the fact that even in the assessment order, allocation is attempted only for some items of indirect expenses and not of the price of the inter se transfers of goods.Coming to sub-section (9) of section 80-I it is applicable only in regard to the transaction, with any other person meaning thereby that if there are certain transactions between EOU of the assessee on the one hand and the business etc. of some other persons on the other and they are so arranged that the profits of the EOU of the assessee are artificially or unreasonably increased then the Assessing Officer may estimate the correct profits of the EOU. It was submitted that in the assessee's case even this provision has not been invoked because the allocation is only of certain items of expenses of other undertakings of this very assessee and not of any business of any other person. It was submitted that the inference drawn on page 78 of the assessment order that the Department can make adjustment of profits of the EOU in the fashion it has been done in the assessment order is wrong. It was submitted that neither section 10B nor section 80-I whose some provisions are considered applicable to the EOU covered by section 10B contain any provision authorizing the Assessing officer to allocate indirect expenses of other undertakings of the same assessee and treat them as part of indirect expenses of the EOU. It was submitted that this is the correct position in law and 52 completely knocks out the very justification of making the allocations as done in the assessment order. It was submitted regarding finding given at page 78 itself that the assessee Company had many units and big business before the two EOU were commissioned in the years 1991 and 1993. Accounts of the EOU have been duly audited and the expenses relatable thereto are debited therein except, of course, for the mistake of expenditure of insurance premium which the assessee has duly corrected in the revised return. It was submitted that this leaves no scope or necessity of allocating further indirect expenses. The point was that those indirect expenses in any case were required to be incurred by the assessee because of the already existing vast business and big establishments. The department has not alleged let alone proved that there was some substantial increase in those expenses after the establishment of those two EOU and hence the increase may be attributed to the newly started EOU. It was submitted that department's approach of allocating indirect expenses for newly started units whose incomes are exempt has been disapproved by the Tribunal in the case of another group company viz. B. Cibatul Ltd. for A.Y. 1989-90. The above was decided as ITA No. 3259/Ahd/1992 and the department sought reference u/s. 256(1) which was rejected in Tribunal's order RA No.1013/Ahd/1998 dated 12.4.1999. In that order of RA, the Tribunal reproduced some parts of the main order in appeal. Relevant observation (from the bottom of page 2) is as follows' " ...... The contention of the A0 that each and every Indirect expense Incurred by the assessee should be allocated to the newly industrial undertaking is not 53 tenable because If It applied it would lead to most Illogical conclusion etc. ..."
ITAT has in this case categorically held that the basic accountancy principle in such a situation ought to be found out is the expenditure of the assessee company, had the new plant been installed and had the new plant not been installed. The difference between two can only be considered to be expenditure of new industrial undertaking. It was submitted that if the department shows that there has been substantial increase under some heads of indirect expenses due to the starting of new EOU, the dept. can claim that such increase is attributable to the EOU. Such is not the case here. The department cannot claim that just because EOU also started functioning, indirect expenses should be allocated to the EOU also. The point is that indirect expenses were in any case, required to be incurred even if the EOU had not been started, so allocation on the basis that some expenses should be regarded as attributable to EOU and allocated on the basis of either a number of employees or turnover etc. is not a correct approach. It is stated that Hon'ble Supreme Court's decision in the case of Rajastan Ware Housing Corporation (159 CTR 132) supports assessee's submissions herein above. In this context and background, necessary relief was prayed.
39. The learned CIT (A) considering the submission of the assessee and material on record decided the issue in favour of the assessee and deleted the addition. His findings in Para 58 to 60 are reproduced as under:
54"58. I have gone through the rival versions carefully. It is a matter of record that the appellant is having different units for which separate books are being maintained, similar is the position with regard to its two export units, viz. Arvind Exports and Arvind International. It is also supported that the receipts income and expenses pertaining to different units are being accounted for in the books of the respective units. In view of this factual position, to my mind, there is hardly any justification for estimating the expenses for those units out of the total expenses unless the Assessing Officer is having any positive evidence or proof to show that a specific expenditure relatable to those units is debited In the books of the main unit. It is obvious on record that there is no such positive finding or proof. In the absence of any such evidence, the allocation of expenses by the Assessing Officer on estimation basis is not legally permissible. It seems that the Assessing Officer was perhaps carried away by the agreed addition in the assessment year 93-94. But in this year, the assessee has very much agitated such addition and in this view of the agitation, no addition can be trusted upon the assessee in absence of any positive evidence.
59. In the assessment order, the Assessing Officer makes a reference to section 10B (8) and (9) of the Income-tax Act. In section 10B as it stood at the relevant time, sub-section (8) and (9) did not exist at all. I am in agreement with the appellant when it is said that presumably, the assessment order Intended to refer to sub-section (6) of section 10 which laid down that the provisions of sub-section (8) and (9) of section 80-1 shall apply mutatis mutandis. Reference to section 80-1 reveals that sub-section (8) thereof authorizes the Revenue to reasonably adjust the prices of goods transferred to and from the eligible unit to or from other units owned by the assessee. Obviously in the case of the assessee, this particular provision does not stand invoked. This is obvious 55 from the fact that allocation is attempted only for some items of indirect expenses and not of the price of transfer of goods. Similarly, sub-section (9) of 80-1 is also not of much help. Appellant's clarification in this regard has absolute merit and the same is to be relied upon. In this view of the discussion, it is held that neither section 10B nor section 801 whose some provisions are considered applicable to the EOUs covered by section 10B, contain any provision authorizing the Assessing Officer to allocate indirect expenses of other undertakings of the same assessee and treat them as part of indirect expenses of the EOU. In this very clear position of law, there was no authority with the Assessing Officer for making the allocation as done in the assessment order.
60. The other argument of the Assessing Officer that on commercial principles also expenses were required to be allocated on expected principles so as to reveal the correct profit is not sound. This fact cannot be wished away that the assessee company had many units and the two EOUs were duly audited which leave no scope or necessity of allocating further indirect expenses. The department has not proved that there was some substantial Increase in those expenses after the establishment of those two EOUs and therefore the increase may be attributed to the newly started EOUs. In nutshell, the department cannot claim that just because the EOUs also started functioning, indirect expenses should be allocated to the EOUs also. With this discussion, the addition as made by the Assessing Officer is directed to be deleted. This ground of appeal is decided in favour of the assessee".
40. Learned D R relied upon order of the A O and submitted that expenses were common to all the three plants, therefore, the A O was justified in allocating the 56 same on turnover basis. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the profit of the two EOU was exempt. The allocation is made as per actual basis; therefore, turnover method was not the correct actual method. He has referred to PB - 35 to 46 which is written submission.
41. We have considered rival submissions and material available on record. Hon'ble Madras High Court in the case of CIT Vs Rathore Brothers 254 ITR 665 held that "Where the assessee had maintained separate accounts and it had maintained its trading receipts and profit and loss accounts separately for export sales and domestic sales and there was sufficient material supported by all the necessary documents to show that the deduction claimed was entirely due to export: Held, that there was no warrant for disallowing any portion of the export earning pro rata by invoking clause (b) of sub-section (3) of section 80 HHC of the Income-tax Act, 1961. The purpose of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports". Hon'ble Madras High Court in the case of CIT Vs Suresh B. Mehta 291 ITR 462 relying upon the decision in the case of Rathore Brothers held that when assessee maintain separate accounts, independent of each 57 other business, A O calculating deduction on the basis of total turnover of all business of assessee not proper. Hon'ble Delhi High Court in the case of CIT Vs Sona Koyo Steering System Ltd. 321 ITR 463 observed that the plea of the assessee before the Tribunal was that two units were independent units and only the profit making unit should be considered eligible for the purpose of computing the deduction u/s 80 I read with provisions of section 80 I (6). The Tribunal accepted the plea of the assessee. Hon'ble High Court dismissed the departmental appeal by holding that while computing the quantum of deduction u/s 80 I (6) the A O had to treat the profit derived from an industrial undertaking as the only source of income of the assessee in order to arrive at a deduction under Chapter VI A. Considering the facts of the case in the light of the findings of the learned CIT (A) it is clear that the assessee is having different units for which separate books are maintained. Same is the position of export units whose income is stated to be exempt. The receipts/income and expenses pertaining to different units are accounted for in the books of respective units. Therefore, there was no justification for the A O for estimating the expenses for those units out of the total expenses unless A O brought sufficient material on record against the assessee. The A O merely by going into the findings for preceding assessment year 1993-94 made the disallowance in the assessment year under appeal also. The A O took the basis of proportionate disallowance of the 58 expenses on turnover basis or number of employees. But the assessee claimed that it has debited the expenses on actual basis in which A O has not pointed out any defects in the submission of the assessee. In the absences of any evidence, the allocation of expenses by the A O on estimate basis is not legally permissible. In the assessment order the A O has made reference to section 10 B (8) and (9) of the IT Act but the provisions contained in section 10B of the IT Act as applicable to the assessment year under appeal did not have sub-section (8) and (9) in the Act. Therefore, in the absence of specific provisions of law, A O was not justified in applying the said provisions. According to provisions of section 80 I (8) and (9) of the Act the profit to be computed on reasonable basis. The A O has however, not brought any reasonable basis to compute such income. Moreover, the A O has not applied the above provisions against the assessee. The A O has thus, failed to support his findings with relevant provisions of law. The A O has to show that there had been substantial increase under some heads of indirect expenses due to the starting of new EOUs. However, no such case is made out. Therefore, the A O cannot presume that just because EOU had started functioning, indirect expenses should also be allocated to the EOUs. Therefore, allocation on the basis that some expenses should be regarded as attributable to EOU and allocated on the basis of either a number of employees or turnover etc. was not the correct method. Considering the 59 facts and circumstances of the case and above decisions, we do not find any infirmity in the order of the learned CIT (A) in deleting the disallowances. We confirm his findings and dismiss this ground of appeal of the Revenue.
42. On ground No.8: Revenue challenged the order of the learned CIT (A) in directing to delete the allocation of interest of Rs.1,47,27,379/- on 12.5% PCD to Arvind International.
43. Briefly, the facts of the case are that it was submitted before learned CIT (A) that the Assessing Officer has erred in holding that Interest paid on 12.5% PCD is allowable to EOU, Arvind International and thereby reducing the profits of this unit by Rs. l,47,27,379/-. The issue has been discussed in para 13 of the assessment order. The A.O. has stated that the terms of issue of partly convertible debentures were examined by him and according to him it was no where stated that the proceeds of the convertible debentures were meant for Arvind International and the non-convertible part was meant for Poplin Project. A O said that merely because the charge was created for securing debentures on the Naroda unit, the interest expenses cannot be accounted for in the Poplin project at Naroda and the same were required to be accounted for in the project where the funds were actually utilized. A O has stated that as per the statement showing the amount capitalized in the books and claimed as revenue expenditure for A.Y. 1991-92, the deployment of funds against 12.5% partly convertible debentures were stated to be utilized 60 for Poplin project as well as Arvind International. A O said that the different contention now taken that the PCD part was meant for Poplin Project and convertible part was for EOU was a self serving treatment. A O said that no break up regarding deployment of funds from PCDs into Poplin Project and Arvind International has been made available. A O said that the interest was capitalized in the books between the Poplin project arid Arvind International in F.Y. 1991-92 and 1992-93 in the ratio of 44 : 36. Hence, according to him, the interest payment of Rs.3,27,27,509/- is divided in the same ratio and accordingly he has worked out the interest of Rs.1,47.27,379/- as relatable to Arvind International and disallowed the same.
44. The assessee contended that it had issued 65.44.384/-, 12.5% redeemable partly convertible debentures of Rs.140/- each of the aggregate amounts of Rs.91.62 crores. Out of this, Rs.22.91 crores was non-convertible Part B debentures. In the earlier year, the proceeds of the convertible portion were utilized for Arvind International project. The assessee further submitted that each PCD was of Rs.14O/-, out of which Rs. 105/- were convertible into three equity shares after 15 months of the allotment. Thus, 75% of the total sum was convertible into equity shares in F.Y. 1992-93, i.e., before the commencement of the previous year relevant to this appeal. So, in F.Y. 1993-94, interest payable was only on the non- convertible part of Rs.35 of each PCD on a total sum of rupees less than 23 crores. Total interest was Rs.3,27,27,507/- and that amount has been allocated. It was submitted that in the proceeding years' 61 allocation was so because the interest was payable before conversion into equity shares of that part of PCD which was convertible. Since the funds had been used for Poplin Project as well as project of Arvind International, such allocation was necessary and justified. In the previous year, relevant to this appeal, interest was payable only on the non-convertible part. It was submitted that the project of Arvind International was not at Naroda Road, but it was at Khatrej, while the Poplin Project was at Naroda Road which was the main center for the assessee company. The non-convertible part was repayable after a long period and it was secured against the charge on the Naroda Road asset. Therefore, the assessee was justified in claiming that the interest on non-convertible part of PCD was fully attributable to Naroda Road project and it was not allocated to the assets of Arvind International which were of Khatrej. It was submitted that the Assessing Officer was not justified in rejecting this submission of the assessee. The point was that in the proceeding years when interest was payable on the convertible as well as non- convertible portions, some allocation was done by the assessee itself. When the interest is payable only on the non-convertible part, the assessee's action of allocating the Interest in earlier two years should not go against it. The assessee was reasonable in allocating the interest in preceding two years because that interest pertained also to the convertible part of the PCDs. In this year interest pertains only to the non-convertible part and it was secured against the charge on Naroda Road property and not at the Khatrej property which housed the project of Arvind International. Hence, no part of interest payable on non-convertible part of PCD can be allocated to the project at 62 Khatrej which is of Arvind International. Further, when interest was payable on Rs.140/-, the allocation was done in the ratio of 44:36. Thus, allocation to the Poplin project a proportion of 44:80, i.e., 55% but now, the interest is payable on 25% (i.e., 35 out of 140) only - meaning thereby that interest burden on the Poplin Project is less than in the previous years. On this basis also, there was no necessity of further reducing the burden of the Poplin Project of Naroda Road by transferring a part of burden to the EOU. The addition in this regard deserves to be deleted. It was further submitted that if funds are used for mixed purpose, it was prerogative of the assessee company to allocate it to two units. In this connection, the assessee company seeks support from British decision which has been reproduced in 147 ITR 404.
"..,,.. where you are considering the business of a company which has two sources of income, the one subjected to tax and the other not, you are entitled to assume and deem that it has; paid the money that it ought to pay according to the most business like way of appropriating the revenue to the expenses; further, even though that has not been done in fact by any separate allocation of the money; as was done here in the later years by putting it at a special bank, still you are entitled to treat the money as having been paid out of the fund which is most favourable to the company, which is, in this case, the tax payers."
In view of the fact that loan is secured on charge created in respect of Poplin factory, it was submitted that it should be held that to that extent these monies reasonably ought to been considered as having been used for Poplin project and therefore. Interest liability on 63 Partly Convertible Debentures cannot be allocated even on pro rata basis to Arvind International. There was no Interest payable after the debentures were converted into shares on convertible portion during the year and as such no allocation can be made interest. Accordingly, necessary relief was prayed.
45. The learned CIT (A) considering the submissions of the assessee and material on record deleted the addition. His findings in Para 65 and 66 are reproduced as under:
"65 I have carefully gone through the issue involved. The Assessing Officer has allocated interest amounting to Rs.l,47,27,279/- as interest allocable to Export Oriented Unit, viz. Arvind International. But this allocation is found to be not warranted either on facts or on law. It is a matter of record that the assessee company is maintaining Operate set of books of account for Arvind International and the books are duly audited. In A.Y. 1993-94, the appellant company had issued Rs.65,44,384/- 12.5% secured redeemable partly convertible debentures of to.140/- each, aggregating to Rs.91.62 crores. Out of this, Rs.22,90,53 ,440/- were non-convertible Part B debentures. When the accounts were prepared and submitted in earlier year, the proceeds of convertible portion were utilized for Arvind International Project. This fact/proposition was accepted by the Revenue. The appellant company had in the earlier years capitalized the Interest portion related to conversion portion that was utilized for purchase of plant and machinery of EOU in its books of account and this too had been accepted by the Revenue. Since convertible portion was converted in capital, there was no expenditure of interest in respect of Rs.68,71,66,320/- during the year. The non-convertible debentures were converted for poplin project. This was done on absolute correct basis as the charge created for non-convertible debentures was of assets situated at Naroda premises. It 64 was secured by way of k first charge on assets at Naroda where poplin project was commissioned. This is a very rational basis for allocating loans used for mixed purpose of Arvind International at Khatrej and Poplin project at Naroda Road. The Assessing Officer has held that every security does not prove that non-convertible portion of the debentures has been used only for poplin project. Accordingly, he has, therefore, allocated Interest on Hypothetical basis. To my mind such hypothetical allocation not permissible. The settled proposition of law is that only the actual expenditure incurred by the assessee shall be deducted from the income and there should be no scope for any estimation of expenditure on notional basis. I am also impressed by the argument as given that if the funds are used for mixed purpose, it is the prerogative of the appellant company to allocate It to two units. The British decision as referred above is quite apt in this regard.
66. In view of the discussion as above and in view of the fact that loan Is secured on charge created In respect of Poplin factory, it is held that to that extent these monies are to be considered Is having been used for Poplin project and therefore, interest liability on partly convertible debentures cannot be allocated even on prorata basis to Arvind International, substantially when in earlier years Interest on convertible debentures has been accepted as capital expenditure for Arvind International. There was no interest payable after debentures were converted into shares during the year and as such no allocation can be made of interest. In view of this finding, the Assessing Officer is directed to delete the allocation of Interest of Rs. l .47,27.379/- to Arvind International".
46. Learned D R submitted that funds may be verified again with regard to allocation of the interest. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below and 65 submitted that issue of interest was relevant to the taxable unit and that hypothetical allocation of the interest is not permissible under the law.
47. We have considered the rival submissions and do not find any merit in the appeal of the Revenue on this issue. The assessee made specific submissions on this issue and clearly distinguished the facts of the earlier year with the facts of this year. The learned CIT (A) considering the facts and material on record gave a specific finding of fact against the revenue. The learned CIT (A) noted from record that assessee company was maintaining separate sets of books of accounts for Arvind International and books are duly audited. In preceding assessment year the assessee had issued secured redeemable partly convertible debentures out of this part were non-convertible part B debentures. When the accounts were prepared in the earlier years, the proceeds of convertible portion were utilized for Arvind International Project. The learned CIT (A) considering the facts of earlier year and this year specifically noted that hypothetical allocation is not permissible because certain proposition of law is that only the actual expenditure incurred by the assessee shall be deducted from the income. The learned CIT (A) noted that since the loan is secured on charge created in respect of Poplin Factory, it was held that to that extent these monies are to be considered having been used for Poplin Project 66 only, therefore, interest liability on partly convertible debenture cannot be allocated even on pro rata basis to Arvind International. The finding of fact recorded by learned CIT (A) clearly proves that learned CIT (A) verified the availability of the funds and its utilization which has no concern with Arvind International. Learned D R has not pointed any infirmity in the order of the learned CIT (A). Since funds have already been verified by the learned CIT (A) on this issue and in the finding of the learned CIT (A) nothing adverse has been pointed out, therefore, there is no need of verification of the funds again as argued by the learned D R. In this view of the matter, we do not find any justification to interfere with the order of the learned CIT (A). We confirm his findings and dismiss this ground of appeal of the Revenue.
48. On ground No.9: Revenue challenged the order of the learned CIT (A) in allowing the claim of depreciation on machinery and plant purchased from L & T Ltd. Rs. 12.00 crores, Raymond Woolen Mills Ltd. Rs.0.94 crores, Atul Ltd. Rs.7.38 crores.
49. The A O did not allow the claim of depreciation in respect of machineries and plant purchased from following parties:
(i) Larsen & Tubro Ltd. Rs. 12.00 crores
(ii) Raymond Woolen Mills Ltd. Rs. 0.94 crores
(iii)Atul Product Ltd. Rs.7.38 crores 67 The facts are that the assessee company had entered into sale and lease back transactions in the month of Sept., 1993 and the details of these transactions are given on page 97 of the assessment order.
The aggregate value of the assets was Rs. 20.32 Crores and the assessee had claimed depreciation at the rate of 100%. It was stated by the Assessing Officer that the WDV on these assets as per income-tax records of the selling party was Nil and the same was re- valued and sold to the assessee company which were leased back to the same parties. Necessary enquiries were conducted by the Assessing Officer in the third week of February, 1997 by issuing letters to the lessees. As per Assessing Officer, as per reply received, it was noticed that the transactions were not entered into in the month of Sept. 1993. The Assessing Officer thereafter, conducted survey proceedings U/S.133A on 12.3.1997 at various premises as mentioned on page 99. In this context and background, the different sale and lease back transactions are discussed as under:
(A) Sale and Lease Back transaction with L & T:
The Assessing Officer has discussed this issue on page 98 onwards. He has stated that the asset was re-valued at Rs. 24 Crores the date of transfer and thereafter its depreciated value was worked out to Rs.12 crores as on the date of transfer at which value the transfer was made to the assessee. He has stated that agreement was not entered into on 29.9.1993 which is the date of the agreement. To conclude this, he has referred to statement of one Mr. B.M. Shah, Vice-President (Corporate Finance) of Arvind Mills Ltd.68
who was authorized to sign on behalf of the assessee company. On the basis of this statement, Mr. B. M. Shah, concluded that on 29.9.1993 he was not in Bombay whereas the agreement as dated 29.9.93 which was signed by him. The A.O. has further stated that in the statement of one Mr. Sanjay Dalal recorded by him, it was stated that the document from the Surveyor reporting that the asset was entitled to 100% depreciation was received by the office of Arvind Mills Ltd. in October, 1993 and could not have been possibly received prior to the date of signing of the agreement. The sale deed was received by his office on 12.10.1993. The Assessing Officer says that the schedule to the agreement was not available before 12.10.93 and therefore, the agreement could not have possibly been prepared prior to that date. Therefore, according to the Assessing Officer, the agreement was ante-dated to claim 100% depreciation. The Assessing Officer also referred to the statement of one Mr. Y. M. Deosthalee of L&T recorded by him in March, 1997 and on that basis he has concluded that the agreement was not signed on 29.9.1993.
The Assessing Officer also referred to the Surveyor's report (M/S.USAPL) and stated that their draft report was dated 30.9.93 to the effect that the asset was qualifying for 100% depreciation. The final report was dated 17.9.93. The Assessing officer also referred to the statement of one Mr. Balakrlshnan, Managing Director of USAPL recorded u/s.131 and stated that as per the said statement, the report was antedated at the instruction of Mr. Y. M. Deosthalee of L& T. At the same time the Assessing Officer further stated that Mr. Y. M. Deosthalee had denied having given any such instruction. The Assessing Officer has further observed that the assets of L & T were 69 mortgaged to IDBI on the date of transfer and the same could not have been transferred by L & T to the assessee. Such transfer by L&T was therefore void. The Assessing Officer has further referred to a letter dated 27.9.93 from L & T to the broker and stated that as per the said letter, they were agreeable to have arrangement with Arvind Mills subject to the terms and conditions of lease agreement and various approvals required in connection therewith and the broker was advised to finalize the proposal. In this view of the matter, according to the Assessing officer, no meeting with Arvind Mills Ltd. and L&T was there before 27.9.1993. The Assessing Officer has further referred to the Board Resolution dated 29.10.93 and stated that the Board Resolution authorizing the sale of lease back transaction was only in October, 1993. After this allegation the Assessing Officer on page 114 has concluded that the claim of depreciation on the basis of the above facts can only be restricted to 50% i.e. Rs.3.69 crores if the other conditions for allowing the same are fulfilled. On page 114, the Assessing Officer has referred to Explanation 3 below section 43(1). He has stated that the asset was acquired by L & T at the cost of Rs.2.72 crores, 11 years prior to the present transaction and the book value thereof on the date of transaction was Rs. 34 only. He says that the WDV of the asset as per the Income-tax records of L&T was Rs. Nil, He says that the assets of the book value of Rs. 34 was revalued at Rs. 24 crores and therefore there is no basis for such valuation. He has stated that he had, therefore, to determine the value of the asset as per acceptable standards. He has stated that there are two methods for valuation and he was adopted higher of the two which is beneficial to the 70 assessee as per market value of asset on the date of transfer. For this purpose, he has referred to RBI Bulletin for index and on that basis given the value of plant and machinery in 1983-84 and 1993-
94. Therefore, the value of the asset costing Rs. 2.72 crores to L&T is worked out in the same proportion at Rs.6.22 crores. The Assessing Officer says that after considering 5% depreciation per year on the date of transfer, the depreciated value of the asset would be Rs. 3.11 crores. Thereafter, he had referred to section 43 (Explanation 3) stating it to be valuation of the asset as per income-tax Act. On that basis he has referred to cost index in the year 1983-84 and 1993-94 and on that basis determined the value at Rs.2.86 crores. Thereafter the Assessing Officer referred to the block of assets in the hands of L&T and stated that the asset was included in the block of 25%. The A.O. says that the eligibility certificate given by the assessee cannot be relied upon. He has referred to the statement of Managing Director of USAPL and stated that they have given report without visiting the plant. In this matter, the Assessing Officer stated that the asset is entitled to depreciation at 25%. On page 122 to 125, the Assessing Officer stated that ownership of the asset was not that of the assessee. He says that the assets had been considered as immovable property by the assessee. L&T has taken up the matter regarding ascertainment of value for stamp duty with the Collector vide their letter dated 20.10.1993. He says that conveyance deed was dated 29.9.93. He has referred to the letter from L&T and stated that the stamp duty was paid in March, 1994 and the documents were registered on 10.5.94. He says that the ownership of the property was transferred only when the registration of the documents was 71 completed. The Assessing Officer has further referred to Explanation 4A to section 43(1) and stated that the said Explanation is applicable retrospectively though it was introduced by the Finance No.2 Act 1996 with effect from 1.10.96. Ultimately the Assessing Officer has concluded that Explanation 4A being declaratory and clarificatory in nature intended to curb the mischief of claiming higher depreciation and the same was applicable to all pending assessments and therefore, the value of the asset was taken by him at Rs. Nil.
50. Above finding was challenged before learned CIT (A). As regards reference made to the statement of Mr. B. M. Shah and statement of Mr. Deosthalee, it was stated that none of these statements suggest that they had not signed the agreement in Sept, 1993. It was clarified that the document was to be signed on 29.9.93 but when Mr. B. M. Shah was in Mumbai on 28.9.93 he signed document and Mr. Mayank shah had signed the same as witness. A copy of the confirmation to that effect from Mr. Mayank shah was filed in the form of letter dated 21.3.97 with the Assessing Officer which has been over looked. As regards statement of Mr. Deosthalee it was stated that none of the questions and answers reproduced by the Assessing Officer suggest that the document was not signed in Sept., 1993. As regards statement of Shri Sanjay Dalal, it was stated that merely because according to the Assessing Officer, certificate regarding entitlement of 100% depreciation was received in October. 1993, it does not suggest that the document was not executed in Sept., 1993. It was further stated that the assessee has not been provided copy of his statement and any opportunity to cross examine 72 him. It was also stated that none of the statements, are provided to the assessee for cross examination of the concerned persons and therefore, such statements could not be relied upon by the Assessing Officer as evidence against the assessee. It was further pleaded that statement of Shri Balkrlshnan referred to by the Assessing Officer clearly denied by Mr. Deosthatee and hence it cannot be relied upon by the Assessing Officer as evidence against the same. With reference to the observation of plant and machinery charged by L&T with IDBI, it was stated that transfer could be made subject to such charge and it does not invalidate the transaction. However, reference to letter dated 27.9.93 from L & T to the broker clearly shows that the negotiations through broker were under consideration and the terms were already conveyed to each of the parties through broker. Therefore, L&T had on 27.7.93 authorized the broker to finalize the deal. This itself shows that the transaction was under consideration and was mutually agreed between the parties through broker on 27.9.93 and only formality of deed to be executed was carried out on 28/29.9.93. As regards the resolution of Board of Directors dated 29.10.93, it was stated that in the preamble of the resolution, reference was made to the earlier resolution dated 14.8.93 whereby it was reported that the company was undertaking business of leasing and it has reported that the transactions of lease were carried out with L & T, Raymond and Atul. Thus, the business was approved much earlier. Apart from the above, it was stated that the Assessing Officer is mainly alleging the date of agreement but at the same time he has ignored the fact about the payment of the purchase price. The assessee had during the course of hearing provided such details 73 which have been totally ignored. With reference to transaction of L & T, the date is prior to 30.9.93. This information perhaps created difficulty in disallowing the claim and hence the same has been disregarded by the Assessing Officer. The copy of the letter submitted before the Assessing Officer regarding the payment made is produced for ready reference. It can be seen from the details that the payments were on 29.9.93 to L & T for the entire consideration. If this aspect is considered, when the payment is made and the possession of the asset has been handed over to the assessee and the lease has commenced operation, there is no reason for believing that the transaction was not completed by that date. On the contrary, there were decisions that when the payment is made and the possession of the property has been handed over, the transaction is complete. This may be further appreciated in view of the fact that asset under consideration being machinery is movable. Coming to a the merits, it was submitted that Explanation 3 below section 43(1) casts a very heavy burden on the Department to prove that the main purpose of the transfer was the reduction of liability to income-tax. It was submitted that in the assessment order not a word is mentioned on this aspect of the matter, and hence, department's action for invoking the said Explanation 3 below section 43(1) is not at all in accordance with law. It was further submitted that the main purpose of transfer WAS the buy and lease back transaction. Further, assessee was bearing stamp duty of more than Rs. 48 lakhs and was also earning substantial taxable income in the form of lease rentals. Accordingly, Explanation below section 43(1) was not at all applicable. Further, the assessee submitted that the Assessing 74 Officer is not a technical person to determine the value of the machinery and therefore, even if he wanted to invoke Explanation 3 he must have referred the valuation to the departmental valuation cell. However, he has not carried out the said process but estimated the value on his own by referring to the index price issued by RBI and also u/s. 48 of the Income-tax Act. Such index number does not indicate the market value and therefore, exercise carried out by the Assessing Officer was not as per provisions of Explanation 3 which requires determination of fair market value. With regard to the rate of depreciation, it was submitted that the claim by L&T was not conclusive about the rate of depreciation available to the assessee. In this connection, the assessee referred to the certificate of one Mr. J. K. Mehta which was filed earlier wherein it was certified that the plant was eligible for 100% depreciation. The said certificate gives detailed description of the plant and also shows as to how the plant is entitled to 100% depreciation. As regards Explanation 4A below section 43(1), invoked by the Assessing Officer, it was stated that the said explanation is prospective in nature. Applicability of explanation 4 (A) was under consideration before the CIT(A)-XII, Ahmedabad in the case of Pinnacle Finance Ltd. for AY 94-95 wherein vide order dated 19.3.99, it has been held that the said explanation is not applicable to A. Y. 94-95.
(B) Sale and lease back transaction with Raymond Ltd.
51. The assessee had claimed 100% depreciation on this asset. The asset was re-valued on the date of transfer to Rs. 94 lakhs which 75 was adopted for the purpose of transfer. Thereafter, the Assessing Officer has stated that there was an attempt to antedate the transaction. He referred to the statement of Shri B. M. Shah. Vice- President (Corporate Finance) of the assessee company and stated that on 28. 9. 93 Mr. Shah Was not present in Ahmedabad. He further referred to the statement of Mr. Sanjay Dalal ad mainly stressed that certain papers were received by fax Message only on 9.10.93. The Assessing Officer said that these documents were the basis for entering into agreement with Raymond. The Assessing Officer further stated that Mr. B. M. Shah had denied having met any person from Raymonds. The explanation of the assessee was not accepted by the Assessing Officer by relying upon his observations with reference to the transactions with L&T Ltd. The Assessing Officer has further stated that the rate of depreciation of this asset is not 100%. For this he stated that the certificate of Shailesh R. shah was submitted but the said person had given the certificate on the basis of lease agreement and copy of the relevant invoices and certificate of original supplier of boiler. Therefore, according to Assessing Officer, the certificate was given without visit of the site. In the circumstances, the Assessing Officer came to the conclusion that the rate applicable was 25% and not 100%. The Assessing Officer has for this transaction also invoked Explanation 4A below section 43(1) as in the case with the transaction with L & T.
52. The above findings were challenged before the learned CIT (A) and it was submitted that the Assessing Officer's observations are based on presumptions only. The appellant referred to the statement 76 of Mr. B. M. Shah and contended that he has signed the document on 28.9.93 at Bombay but as the document was prepared earlier the place of signing has not been changed. This explanation cannot be denied by the Assessing Officer. The assessee has stated before him that the statement was to be signed in the office of Trikaya at Bombay. This explanation was merely brushed aside by saying that the assessee had taken a different stand. If the Assessing Officer was not satisfied with the explanation he could have made further enquiries with Raymonds and also with the office of Trikaya. Instead of doing so he has merely alleged that the statement could not be signed at A'bad by Mr. B. M. Shah when he was at Bombay on the said date. As regards the statement of Mr. Sanjay Dalal it will be seen that such documents do not form part of the lease agreement but they are the supporting evidence for completion of the file. However, non-availability of such documents on the date of signing of agreement would not suggest that the agreement was not entered into on the relevant date. Apart from the above, as explained in earlier transaction, the transaction was supported by payment before 30th September and hence there was no reason for the Assessing Officer to suggest that the transaction was entered into after that date. As regards the rate of depreciation, even if it was a fact that Mr. Shah who had certified that the depreciation available is 100% did not visit the site, the Assessing Officer has accepted that the original supplier of the asset was Thermax Ltd. and they had certified the efficiency of boiler supplied by them and accordingly it was eligible to 100% depreciation. Therefore, the Assessing Officer cannot reject the claim of depreciation on the impugned asset.
77(C) Sale and Lease back transaction with Atul Ltd.
53. The Assessing Officer has in connection with this transaction disputed the rate of depreciation available to the assessee. He has referred to the survey proceedings and stated that there were two certificates available. The valuer Mr. R. M. Patel who prepared the certificate was summoned and on the basis of his statement, the Assessing Officer has concluded that there was no basis for determining that the asset was eligible for 100% depreciation. The assessee had submitted certificate of Shri Shailesh R. Shah which was also not accepted by the Assessing Officer on the ground that he has not visited the asset concerned. Therefore, the Assessing Officer has concluded that the asset was entitled to rate of 25%. He has further referred to Explanation 4A below section 43 with reference to this and concluded that the value in the hands of the trasnferor has to be taken as the cost of assessee.
54. It was submitted before the learned CIT (A) that the assessee had purchased from Atul Products Ltd. Fluldized Bed Boiler. The rate of depreciation in respect of such Boilers as per rule 5, Appendix I - (III) (3) (Ill) (A)(a) reproduced below is 100%.
"Appendix I - (III) (3) (Ill) (A) (a) Ignifluid / fluidized bed boilers 100%"
It was submitted that the rate was applicable simpliciter to the cost of fluidized bed boilers. No certificate whatsoever la necessary about the functioning of the boiler because it was not so prescribed. It was therefore, submitted that argument of the Assessing Officer that the 78 certificate has been given without carrying out any efficiency test or visiting the plant site to verify whether the asset is still run at the required efficiency to be eligible for depreciation of 100% is irrelevant. The assessee company had also submitted certificate from Engineer Mr. Shailesh R. Shah. The same objections which were in respect of Mr. R. M. Patel were also taken in respect of Mr. Shailesh R. Shah. It was contended that there was no requirement of measuring the efficiency as has been contended by the Assessing officer. It was, therefore, submitted that in view of the clear rule prescribing 100% depreciation on fluidized bed boilers, the rate of 100% is applicable and therefore, the Assessing Officer ought to have allowed depreciation of Rs.7.38 crores on the boilers purchased from Atul Products and given on lease to Atul Products. It was therefore, prayed that A O be directed to allow depreciation on all the transactions of Rs. 20.32 Crores.
55. The learned CIT (A) considering the submissions of the assessee and material on record decided the issue in favour of the assessee. His findings from Para 84 to 92 of the impugned order are reproduced as under:
"84. Before this ground of appeal is finally decided, it is necessary to adjudicate the following two issues:
(i) Whether Explanation 4A to section 43 is applicable to all pending assessment proceedings and more so for A.Y, 94-95 which is the year involved in the present case.79
(ii) Whether provisions of Explanation. 3 to section 43(1) have been rightly invoked in the ease of the appellant.
So far as the first Issue- is concerned, the Assessing Officer has Interpreted Explanation 4A to section 43 being declaratory and clarlficatory in nature. It is held that this Explanation is applicable to all pending assessment proceedings, although the Explanation has been inserted with effect from 1.10.1996. The Assessing Officer has held that the WDV in the hands of the transferee company ought to be taken as the cost to the transferee company viz. the appellant company in the present case. Consequently, the cost of acquisition of the assets in the hands of the appellant company has been adopted at Nil and therefore, depreciation would be also Nil.
85. Exactly similar issue was there before me in the case of Pinnacle Finance Ltd., Ahmedabad, a group company for A.Y. 1994-95. The Issue has been discussed by me in larger details and It has been finally held that Explanation 4A below section 43(1) was applicable in respect of sale and lease back transactions made on after the first day of October, 1996. Accordingly, Explanation 4A below section 43(1) was applicable for and from A.Y. 1997-98. This explanation was not at all applicable to A.Y. 1994-95, to which this appeal relates. For coming to this conclusion, I rely on my detailed order in the case of Pinnacle Finance Ltd, as referred above.
86. Having adjudicated the first issue as above, the adjudication of the second issue framed is now taken up. It is a settled proposition of law that in order to invoke the provisions of Explanation 3, that first requirement is that the Assessing Officer must be satisfied that the main purpose of transfer of asset directly or indirectly to the assesses is the reduction of the liability to income-tax. Legislature has pre-fixed the words 'actual' to the word 'cost'. This it precisely to put emphasize on the reality and the genuineness of the cost and to exclude collusive, 80 inflated deflated or fictitious cost. Accordingly, it is not permissible to the Assessing Officer to reject the cost paid for the transfer unless the Assessing Officer is satisfied that the actual cost paid by the assessee was inflated cost by reason of fraud, collusion, subterfuge, device or false transaction made with an ulterior purpose. In the present case, there is nothing to suggest that the actual cost paid by the assessee was inflated cost by reason of any fraud etc. To my mind, the Assessing Officer in the facts and circumstances of the present case was not justified in determining the purchase price on his own. For reaching this finding I am guided by the decision of the Jaipur Tribunal In the case of Dy. CIT Vs Metalizing Equipments Company (P) Ltd. (54 TTJ 620). The relevant part is extracted below:
"Any device which has the effect of reducing the incidence of tax is not necessarily a colourful device liable to be demolished by the ratio of the supreme Court's decision in McDOwell Co. Ltd. Vs CTO (1985) (154 ITR 148).
In order to invoke the provisions of Explanation 3 to section 43(1). It is incumbent upon the Assessing Officer first to establish that the device adopted by the assessee was either contrary to any law, or against accounting principles or against accepted practices and by using such device singly or in combination with others. It had resulted in depriving the exchequer of its legitimate revenue. Unless these two conditions are fulfilled, the Assessing Officer Is not empowered to charge the assessee with the allegation of dodging the revenue."
87. The scope of Explanation 3 to section 43(1) has also been explained in CIT Vs Emery Stone Manufacturing Co. (213 ITR 843) at page 848 thus:
"Section 43(1) has defined the terra "actual cost" for the purpose of claiming depreciation and the 81 Explanation Is an exception to such definition and It empowers the assessing authority to take the actual cost different from what has been shown by the assessee.
The assessing authority has to examine as to whether the main purpose of transfer of assets directly or indirectly was to reduce the liability to tax by claiming depreciation with reference to the enhanced cost. If the assessing authority is satisfied then he has to record a finding to this effect that the main purpose of the transfer of the assets was to reduce the liability to income-tax. In order to arrive at the satisfaction of the assessing authority, it is necessary that there must be evidence on record and an enquiry has to be made by the assessing authority. The mere transfer at a higher valuation by itself cannot be considered an act on the part of the assessee showing his intention to reduce the tax liability."
The gist of both these judgments is that It is Incumbent upon the Assessing Officer to establish that the device adopted by the assessee was either contrary to any law or against accounting principles or against accepted practices and by using such device, it had resulted in depriving the exchequer of its legitimate revenue. Unless these two conditions are fulfilled, the Assessing Officer la not empowered to charge the assessee the allegation of dodging the revenue. Further, In order to arrive at the satisfaction of the assessing authority. It is necessary that there must be evidence on record and an enquiry has to be made by the assessing authority. The mere transfer at a higher, valuation by itself cannot be considered an act on the part of the assessee showing his intention to reduce the tax liability. In the present case, the provisions of Explanation 3 have been invoked without causing proper enquiry and without proving any element of fraud to deprive the revenue of its due share. In the facts and circumstances, It Is held that Assessing Officer's action for invoking the said explanation was not at all in accordance with law. The obvious purpose of transfer In this case was the buy and lease back transaction. Further, assesses was bearing stamp duty of more 82 than Rs.48 lakhs and was also earning substantial taxable Income In the form of lease rentals. In this context, there was nothing to prove that Explanation 3 below section 43(1) was applicable at all. In nut shell, the gist of the finding is that provisions of Explanation 3 to section 43(1) have been wrongly invoked in the case of the appellant.
88. In view of the two Issues as adjudicated above, the individual claim of depreciation in different cases Is adjudicated as under:
(i) Larsen & Tubro Ltd, :
The charge of the Assessing Officer is that the agreement of sale and lease back transaction with L&T was not entered into on 29.9.93 which is the date of the Agreement. To reach this finding, he has referred to different statements of S/shri B. M. Shah, Sanjay Dalal, Y. M. Deosthalee and Balakrishnan as referred above. Various discrepancies have been pointed out which have been Incorporated in the body, of the assessment order and have been highlighted above in this appellate order too. I have gone through the various observations as made by the Assessing Officer and explanation as given by the assessee in this regard. After careful consideration, the statement of Shri B. M. Shah and statement of Y. M. Deosthalee, it is found that none of these statements either suggest or conclude that the agreement had not bean signed in Sept.. 1993. A clear clarification is there that the document was to be signed on 29.9.93 but since Shri B. M. Shah was in Mumbai on 28.9.93 he did sign the document then, Mr. Mayank Shah was a person who had witnessed the agreement. Confirmation of Mr. Mayank Shah was available before the Assessing Officer which has not been found rebutted. No conclusive finding is possible from the statement as given by Mr. Deosthalee and Mr. Sanjay Dalai. It was desirable that the appellant was provided with a copy of the statement of different persons and was given opportunity of cross examination. This would have made the picture clear. Unfortunately, the A.O. went on recording statements but did not confront the same to 83 the assessee by giving its copies for proper rebuttal, with the result that the ambiguity remained, about the date of actual signing of agreement. In such circumstances perhaps, one has to go by the sequence of facts as are available on record. The most vital part/ fact in this regard Is the payment of the purchase price. It is seen from the details given that payment for (entire consideration was made by the appellant on 29.9.93. If this aspect with due weightage is considered, the normal inference can be that the asset had been handed over to the appellant and the lease had commenced operation on 29.9.93. This position is to be appreciated, especially in view of the fact that asset under consideration was movable in nature. This aspect of full payment has not been commented upon by the A.O. at all which could have brought clarity to the issue Involved. He has just been guided perhaps by the other discrepancies for which there are obvious clarifications. He has been influenced to a large extent by the alleged non-availability of the schedule which did not necessarily form part of original agreement dated 29.9.93. When the payment has been made in full and lease rentals have started from the said date, reliance on different discrepancies as pointed out was perhaps of lesser importance. The Assessing Officer was also influenced by the fact that the transfer on the date claimed could not be made In view of the charge of IDBI on the plant and machinery. The Assessing Officer felt that the sale deed was ab-initio void since the charge of IDBI was subsistent. This is not the correct legal inference since the plant could be sold with a charge subsisting and the charge was later on released by IDBI too. Simply on this account the deed could not be held to be ab-initio void. With this discussion, it is held that the agreement could have been signed on 29.9.93. No doubt, discrepancies do exist but in view of the fact that full payment has been made and clarifications with regard to the discrepancies also genuinely exist, the agreement could have been possibly signed on the date as claimed. Accordingly, it is held that the appellant was fully entitled to the claim of depreciation on rate made. To an extent, the appellant succeeds.
(ii) Sale & Lease back transaction with Raymond:
84The asset was revalued on the date of transfer to Rs.94 lakhs which was adopted for the purpose of transfer. The Assessing Officer's allegation is that there was an attempt to antedate the transaction. In this regard, it is felt that Assessing Officer's observations are such which cannot be conclusively held to be fully supported. Regarding the place of signatures of the document, Mr. B. M. Shah has given the clarification which can be held to be believable. The confusion regarding the place and date could have been avoided if the Assessing Officer had made follow up enquiries with Raymonds and with the office of Trikaya. But unfortunately, this was not done and the Assessing Officer went in a round about manner for giving the impugned finding. This finding was entirely on the basis of information as gathered by him one sided. But this finding of the Assessing Officer is not well supported at all. There is considerable weightage in the argument of the appellant when it is said that document as referred by the Assessing Officer did not form part of the lease agreement. This could be in the nature of supporting evidence for completion of the file and their absence by itself could not positively suggest that the agreement was not entered into on the relevant date. The clinching evidence in this regard to ray mind is again the payment part which is made before 30th September. This undisputed aspect by itself can help safely conclude that transaction was entered into before that date. In the facts and circumstances of the present case and the related information which is available on record, to my mind the charge of the Assessing Officer is not well proved. In its absence, the claim of the assessee will have to be accepted on the facts as on record.
89. Regarding the rate of depreciation, since original supplier of the asset Thermax Ltd. had certified the efficiency of boiler supplied, it has to be held eligible to 100% depreciation. This information is already available on record and is not rebutted by the Assessing Officer in nay manner. Moreover, nothing wrong can be found with the Certificate of Mr. Shah which was merely reiterating the obvious, on the basis of literature of the boiler in question. In totality of circumstances, there is nothing which 85 could be held against the assessee on the rate of depreciation as claimed.
90. With this discussion and in view of what is discussed earlier as above, the claim of the assesses is directed to be allowed as made.
(iii) Sale & Lease back transaction with Atul Ltd.:
91. So far as this claim of the assessee is concerned, there is no reasonable basis for any dispute. The rate of depreciation in respect of such boilers is clearly 100% as has been highlighted in the submissions of the appellant as recorded above. No certificate of any kind was necessary with regard to the functioning of the boiler because it is not so prescribed. In view of the clear rule prescribing 100% depreciation on fluidized bed boilers, the rate of 100% is held to be applicable. The Assessing Officer is accordingly directed to allow the claim of depreciation as made.
92. With this discussion, this ground of appeal is decided in favour of the assessee".
56. Learned D R relied upon order of the A O. He has submitted that in the case of L & T Ltd. the WDV was nil in the books of account which was revalued at a higher price. He has submitted that book value as per books of account of L & T was Rs. 24/- only. Therefore, WDV was nil. He has submitted that it is not explained why the property having nil value was sold to the assessee for a higher price and given on lease back transaction by the assessee to the same concern. He has submitted that statement of surveyor was recorded who explained that report was prepared at the instance of the assessee without visiting the plant. He has 86 submitted that Shri B. M. Shah, Vice President of the assessee was not in Bombay at the time of signing the agreement on 29-09-1993. The Valuer also admitted in his statement that report was obtained in October, 1993. Learned D R submitted that property in transaction was already mortgaged to IDBI on the date of sale. Therefore, the above facts create doubt in the explanation of the assessee. He has submitted that assessee has stated the plant and machinery as immovable property by registering it in 1994-95 subsequent to the assessment year in appeal. Therefore, no depreciation can be allowed unless assessee is owner of the property. Learned D R referred to page 151 of the assessment order where provisions of Explanation 4A to section 43(1) have been applied by the A O with retrospective effect. Learned D R in alternate contention submitted that Explanation 3 to section 43(1) apply to the case of the assessee and the A O has also obtained prior approval of DCIT, Central Range-I, Ahmedabad in this regard as noted at page 117 of the assessment order. Learned D R referred to similar submissions with regard to other parties. Learned D R submitted that the written submission of the assessee shows that the assessee has received lease rental of Rs.28 Crores in several years, but in the assessment year in appeal claimed depreciation or Rs.20 Crores. Therefore, it was mutually beneficial transaction between the parties. Learned D R therefore, 87 submitted that order of the learned CIT (A) may be set aside and the order of the A O may be restored.
57. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below. He has also filed written submission which is taken on record. He has submitted that assessee has paid taxes on lease rental income received by the assessee company on the transactions of sale and lease back transactions entered into with the above three parties. The assessee has received lease rental income brought to charge of tax for the six assessment years 1994-95 to 1999-2000 and received lease rental from these parties in a sum of Rs.28,00,77,572/- as against which the assessee has claimed depreciation @100% in a sum of Rs.20.32 Crores. Thus, taxes have been paid on surplus of about Rs.8 Crores. The sale and lease back have benefited the Revenue and the assessee company has not derived any advantage of reduction of its tax liability. There was no motive of tax avoidance. Therefore, there was no basis for the A O to take the view against the assessee that sale and lease back transaction was a device to deprive the Revenue of taxes or to invoke the provisions of Explanation 3 to section 43 (1) of the IT Act. Details of the lease rental are filed in Annexure A which would show that assessee received lease rental income from the day one when agreement was entered into. During the year under 88 consideration, assessee has disclosed lease rental income of Rs.2,56,99,652/-. He has relied upon decision of the Hon'ble Gujarat High Court in the case of CIT Vs Gujarat Gas Company in which it was held that once lease rental income is brought to the charge of tax as business income, depreciation claimed on the relevant asset cannot be disallowed.
57.1 He has further submitted during the year under consideration 1994-95, assessee has purchased plant and machinery from the above three parties worth Rs.20.32 Crores in the month of September, 1993 and the machineries were leased back to the same parties also in the month of September, 1993. The assessee purchased the machineries at the above value determined by qualified engineers and valuers of plant and machinery and claimed depreciation accordingly. He has submitted that in the transaction with L & T Ltd., the plant and machinery was revalued at Rs. 24 Crores and after considering depreciation, saleable value was fixed at Rs.12 Crores. The A O has stated the lease back agreement was entered on 29-09-1993 and same was signed by Shri B. M. Shah, Vice President on behalf of assessee and Shri B. M. Shah in his statement stated that on 29-09-1993 he was not in Bombay. The A O therefore, inferred that agreement was somewhere signed in the month of October and was antedated as 29- 09-1993. He has submitted that the A O has also recorded 89 statement of Sanjay Dalal who as per the A O has stated that document from the surveyor certified that asset was entitled to 100% depreciation was received in the office of the assessee in October, 1993. The A O further mentioned that the sale deed as also rescheduled to the lease agreement was received in the office of Assessee Company on 12-10-1993. The A O further referred to statement of Shri Y. M. Deosthalee of L & T Ltd. on the basis of which he concluded that lease agreement was not signed on 29-09- 1993. The A O referred to report of surveyor and mentioned that draft report was dated 30-09-1993 whereas the final report was antedated as 17-09-1993. The A O also referred to statement of Balakrishnan who has stated that report of surveyor was antedated on the instruction of Shri Y. M. Deosthalee. However, the A O has admitted that Shri Y.M. Deosthalee denied having given any such instruction. The A O further stated that the plant and machinery was already mortgaged with IDBI. The A O also referred to the letter dated 27-09-1993 addressed to the broker conveying that they were was agreeable to sale and lease back transaction with the assessee. The A O therefore, assumed agreement must have been executed in October, 1993 and that transaction was not genuine as per Explanation 3 to section 43(1). Learned Counsel for the assessee by referring to the above observations of the Assessing Officer submitted that details submissions were filed before the A O which has been ignored. The assessee filed detailed submissions 90 before the learned CIT (A) which have been rightly appreciated by him. He has submitted that Explanation 4A to section 43(1) was inserted in the Act with effect from 01- 10-1996. Therefore, it is not applicable to the case of the assessee which is also clarified by the CBDT circular No.762 dated 18-02-1998 copy of which is also filed in the paper book. The same view is taken by CIT (A) in the case of Pinacle Finance Ltd. which is confirmed by the Tribunal. Same view is taken by Hon'ble Madras High Court in the case of Om Sindhury Capital Investments Ltd. 274 ITR 427. He has submitted that Shri B. M. Shah was available in Bombay on 28-09-1993 and has signed the lease agreement on the same day. Confirmation of Mayank Shah was filed before A O who was a witness to the agreement. He has submitted that there was no illegality in signing the agreement on 28-09-1993 and the A O has completely ignored the relevant evidence. There was no basis to say that lease agreement was antedated. He has submitted that finding of the A O are based on inference and presumptions. He has submitted that learned CIT (A) rightly appreciated the fact and allowed depreciation to the assessee. Learned Counsel for the assessee submitted that the A O has recorded statements of several persons at the back of the assessee including the statement of surveyor which have not been confronted to the assessee and no right of cross examination has been given to the assessee. Therefore, the same are violative of Principle of Natural 91 Justice. He has relied upon decision of Hon'ble Calcutta High Court in the case of CIT Vs Eastern Commercial Enterprises 210 ITR 103, decision of Hon'ble Kerala High Court in the case of P. S. Abdulmazid Vs ITO 209 ITR 821 and decision of the Hon'ble Supreme Court in the case of Kishanchand Chellaram 125 ITR 713 in which it was held that if any statement of third party is to be used against the assessee, assessee must be allowed cross examination, otherwise such evidence would not be applicable against the assessee. Learned Counsel for the assessee further submitted that learned CIT (A) has recorded a fact finding that entire purchase price was paid by the assessee company on 29-09-1993 (PB -311, copy of the receipt) to show that purchase price was paid through cheque. It would show that plant and machinery was handed over to the assessee on 29-09-1993 itself and that assessee has leased back the same plant and machinery to L & T Ltd. on the same date. The lease rental has started from the same date. Therefore, finding of the A O was incorrect that transactions are not genuine. He has submitted that property under charge could be sold along with the charge. He has submitted that A O has relied upon the resolution of the Board dated 29-10-1993, but in the preamble itself it is stated that the resolution was passed in continuation with earlier resolution dated 14-08-1993 for purchase of the plant and machinery. He has therefore, submitted that learned CIT (A) rightly concluded that genuine agreement 92 was entered into between assessee and L & T Ltd. on which depreciation was rightly allowed. As regards transaction with Raymond Woolen Mills Ltd. and Atul Products Ltd., learned Counsel for the assessee contended that lease agreement with Raymond Woolen Mills Ltd. was also executed similarly on 29-09-1993 and signed by Shri B. M. Shah as is considered by learned CIT (A) in the case of L & T Ltd. With regard to transaction with Atul Products Ltd., there is no dispute regarding date and only dispute is regarding rate of depreciation. Leaned CIT (A) specifically noted that 100% depreciation is allowable as per rules; therefore, no further evidence is required. He has submitted that Explanation 3 to section 43 (1) is not applicable in this case because there is no reduction in tax liability. He has submitted that the cost paid by the assessee for purchase of plant and machinery cannot be disputed therefore, learned CIT (A) was justified in holding that Explanation 3 to section 43 (1) would not apply in this case. The A O has also not made proper enquiry as per the above explanation. He has relied upon order of ITAT Ahmedabad Bench in the case of ACIT Vs Gujarat Lease Finance Ltd. 174 Taxman - Magazine 28, in which certain guidelines have been issued for genuine sale and lease back transaction which are satisfied in this case as the assessee owned the assets and used by the lessee. The purchase money is paid. Assessee received lease rental and both the parties acted upon the lease deed. Therefore, genuine transaction in the case of 93 the assessee cannot be disputed. He has relied upon order of ITAT Chennai Bench (T M) in the case of JCIT Vs Investment Trust of India Ltd. 288 ITR (AT) 106 in which it was held that once a leasing or finance company owns machinery and leases it out to a third party and it found to have satisfied the other requirements of law, it would be entitled to depreciation. He has relied upon decision of the Hon'ble Orissa High Court in the case of Industrial Development Corporation of Orissa Vs CIT 268 ITR 139 in which it was held that in a transaction of purchase and lease back of assets, depreciation has to be allowed if there is no evidence or material to prove that the transaction was not genuine. Learned Counsel for assessee therefore, submitted that learned CIT (A) on proper appreciation of facts and material on record rightly deleted the addition by allowing depreciation.
58. We have considered the rival submissions. The A O in order to disallow the claim of depreciation applied Explanation 4A to section 43(1) of the IT Act. The learned CIT (A) recorded a finding that he has considered the identical issue in the case of Pinacle Finance Ltd. for the assessment year 1994-95 wherein it was held that aforesaid Explanation 4A do not apply to the assessment year 1994-
95. The Explanation 4A to section 43 (1) was inserted in the Act by Finance Act (2) of 1996 with effect from 01-10-1996. The view of the learned CIT (A) is confirmed by ITAT 94 Ahmedabad Bench in the same case vide order dated 20- 01-2006 (copy filed at PB-319). Similarly, the same provision has been explained by the CBDT circular No.762 dated 18-2-1998 copy of which is filed on record in which it was explained that this provision will apply in respect of sale and lease back transaction made on or after 01-10- 1996. The Tribunal adopted the same view in the case of Pinacle Finance Ltd. (supra) and also referred to the judgment of Hon'ble Madras High Court in the case of Om Sindhori Capital Investment Ltd. Vs JCIT 274 ITR 427 in which also same view is taken. Learned CIT (A) was therefore, justified in holding that Explanation 4A to section 43(1) will not apply to the assessment year under appeal i.e. 1994-95.
58.1 The learned CIT (A) referred to the statements recorded by the A O in the impugned order. In the statement of Shri B. M. Shah it was clarified that he was in Mumbai on 28-09-1993 and since lease agreement was ready, therefore, he signed the document on 28-09-1993 in the presence of witness Shri Mayank Shah who also appended his signature to the lease deed on 28-09-1993. The confirmation of Shri Mayank Shah was filed before the authorities below (PB-95) in which he has confirmed that agreement was signed on 28-09-1993 on behalf of the assessee by Shri B. M. Shah and he had witnessed the same. It was also confirmed that Shri B. M. Shah was 95 present in the office of L & T Ltd. on the said date. The A O did not dispute this fact. Therefore, the A O should not have ignored this vital piece of evidence and should not have presumed that the agreement was antedated later on. The statements of Shri B. M. Shah and statement of Shri Y. M. Deosthalee of L & T Ltd. would not suggest that these documents were not signed in September, 1993. The confirmation of Shri Mayank Shah, witness has not been disputed by the A O. The learned CIT (A) also recorded finding of fact, entire purchase price of plant and machinery in question was duly paid by the assessee company to L & T Ltd. on 29-09-1993. Copy of the receipt of payment is filed at PB-311 which proves that plant and machinery in question have been purchased by the assessee on making full payment by cheque on 29-09-1993 and that the plant and machinery have been handed over to the assessee company. This receipt is signed by Shri Sanjay Dalal on behalf of the assessee and Shri H. N. Shah on behalf of L & T Ltd. Therefore, the lease back of the same plant and machinery to L & T Ltd. on the same day cannot be disputed by the A O. The full payment of the price of the purchase would suggest that the assessee become owner on the day when possession was taken by making payment. The payment made by the assessee has also not been disputed by the A O. The assessee pleaded that it started receiving the lease rental from the same date which is also subject to tax by the A O would prove the contention of the assessee that 96 the sale and lease back transaction were completed in September, 1993 itself. It may also be noted that even if the plant and machinery were subject to charge by IDBI but the same assets would be sold and transferred along with the charge and only in the event of the default committed by L & T Ltd., they could be responsible for repayment or in the worst position the recovery could be effected by IDBI from the plant and machinery. But it would not effect the transaction between the Assessee Company and L & T Ltd. The A O also referred to resolution dated 29-10-1993 but the said resolution starts with resolution dated 14-08-1993 for purchase of plant and machinery from the above three parties. Learned CIT (A) was therefore, justified in holding that genuine purchase and lease back transactions have been entered into between the parties. It may also be noted that assessee specifically pleaded that statement of surveyor and others have been recorded by the A O behind the back of the assessee and the same were not supplied to the assessee and no right to cross examination has been given to the assessee. The above statement of the assessee has not been disputed through any material on record. Therefore, such statements cannot be read in evidence against the assessee. We rely upon the decision of Hon'ble Supreme Court in the case of Kishanchand Chellaram 125 ITR 713. The A O noted that assessee was not owner of the plant and machinery because deed was not registered as the same has been treated immovable 97 property by the assessee. It may be noted here that plant and machinery are movable properties, therefore, even if assessee has stated the same as immovable property, would not make it the same. The assessee has purchased plant and machinery by making payments. No other land or property is purchased; therefore, it could not be permanently attached with the land of others. Section 4 of the Sale of Goods Act provides a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. A contract of sale may be absolute or conditional. Where under a contract of sale the property in goods is transferred from the seller to the buyer, the contract is called sale. Section 5 of the Sale of Goods Act provides a contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both or for the delivery or payment by installments or that the delivery or payment or both shall be postponed. Subject to the provisions of any law for the time being in force, a contract of sale may be made in writing or by words of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties. The above provisions would apply to the case of the assessee. The assessee purchased plant and machinery and paid the entire consideration on 29-09-1993 and legal possession is transferred to the assessee. Therefore, 98 finding of the A O that assessee was not owner of the purchased articles or that agreement was antedated would be of no consequences. The finding of the A O thus cannot be sustained in law.
58.2 The learned Counsel for the assessee during the course of argument submitted that assessee has paid taxes on lease rental income received by the assessee company on the transactions of sale and lease back entered into with all the three parties. Details of the same are filed in Annexure A to show that total lease rental income brought to the charge of tax for six assessment years i.e. assessment year 1994-95 to 1999-2000 in respect of above referred three parties comes to Rs.28 Crores approximately as against which assessee has claimed depreciation @100% on Rs.20.32 Crores. The taxes have been paid on the surplus of Rs.8 Crores. Learned D R however, submitted that lease rental was received in six years but depreciation is claimed in one year i.e. in assessment year 1994-95. The above fact would show that earning of lease rental income of Rs.28 Crores approximately is not disputed. Thus, on the sale and lease back transactions the Revenue department has been benefited and the Revenue department was not deprived of any legitimate taxes. The assessee company has also not derived any advantage of reduction of its tax liability. Therefore, there was no motive of tax avoidance can be attributed to the assessee 99 company. For applying Explanation 3 to section 43(1) of the IT Act, the main purpose of the transfer of the assets should be to reduce the tax liability and in such event the actual cost could be determined having regard to the circumstances of the case. The details filed on record shows that even during the assessment year under appeal assessee has received lease rental income in a sum of Rs.2,56,99,652/- and so on received the higher lease rental income in subsequent assessment years. The details filed in Annexure A further shows that assessee started receiving lease rental income from the day one when agreements have been entered into with the parties. Hon'ble Gujarat High Court in the case of CIT Vs Gujarat Gas Company Ltd. 308 ITR 243 held as under:
"The assessee entered into a lease agreement with the State Electricity Board engaged in generation of electricity. The assessee got the electrical equipment and leased out it to the Board. The assessee showed the lease rent received from the Board as its income and also the machinery purchased during the year in the audited balance-sheet. The Revenue contended that the transaction of lease was not genuine and the assessee was not entitled to depreciation. The Tribunal held that the transaction was genuine and set aside the order of the Commissioner (Appeals) and allowed depreciation. On appeal:
Held, dismissing the appeal, that the lease rental paid by the Board had been found by the High Court to be an allowable deduction as the 100 transaction was genuine. Correspondingly in the hands of he assessee, the lease rental had been taxed as business income and it had not been disturbed by the Assessing Officer despite having initiated action under section 147 of the Income- tax Act, 1961, for treating the transaction as non- genuine. The Tribunal after appreciation of evidence found that the transaction of leasing out electrical equipment to the Board was genuine. No question of law arose".
Therefore, A O was not justified in applying Explanation 3 to section 43 (1) of the IT Act in this case. Learned CIT (A) on proper appreciation of the facts and material rightly held that the assessee entered into genuine transactions with the parties.
58.3 The learned CIT (A) further in the case of Raymond Woolen Mills Ltd. considered the issue and in that case payment was made before 30 t h September, 1993. In the case of Atul Products Ltd. the purchase is not in dispute. It was contended before learned CIT (A) that assessee had purchased form Atul Products Ltd. Fluidized Bed Boiler. The rate of depreciation in respect of such boilers as per IT Rules was 100%. The appendix I - (III) (3)
(iii) (A) (a) is applicable in this case in which 100% depreciation is provided on energy saving device being ignifluid /fluidized bed boilers. Therefore, there is no infirmity in the order of the learned CIT (A) in directing to grant depreciation to the assessee for which no further evidence in the shape of certificate is required. It may also 101 be noted here that all the above parties have not supported the finding of the A O and have never denied the transactions with the assessee. Shri Y. M. Deosthalee of L & T Ltd. admitted in his statement to have signed the agreement on 29-09-1993. Thus, there was no loss to the Revenue because of the lease rental income assessed by the A O on sale and lease back transactions. The crux of the matter would be that there was no dispute with respect to the physical existence of the assets which were owned by the assessee and used by the lessee. The assessee (lesser) had made the payment for purchase of the assets to the lessees and that the lessees used the assets for business purpose. The transactions are supported by the evidences, materials and payments as referred to in this order. Both the parties have acted upon the contract between them. Therefore, for a valid and genuine transaction of sale and lease back, assessee has been able to produce sufficient and cogent materials before the authorities below. The transactions would show that its main purpose was not to reduce the tax liability; therefore, there is no need to determine the cost of the assets. Moreover, the A O has not conducted any proper enquiry into the matter to prove the above facts. Hon'ble Orissa High Court of Industrial Development Corporation of Orissa Ltd. 268 ITR 130 held that no evidence that transaction was not genuine, assets entitled to depreciation. Therefore, the learned CIT (A) was justified in holding that Explanation 3 102 to section 43(1) has been wrongly applied in the case of the assessee. The assessee has given full clarifications on all the discrepancies noted by the A O. 58.4 Considering the above discussions it is clear that the A O observed that the sale and lease back transactions are not genuine on finding some contradictions in the statements of various persons which in our opinion were not vital and significant to the matter in issue. No other evidence or materials have been brought on record against the assessee for rejecting the transactions. Therefore, learned CIT (A) on proper appreciation of materials and evidences on record rightly allowed claim of depreciation in favour of the assessee. In the result, we uphold the finding of the learned CIT (A) and this ground of appeal of the Revenue is dismissed.
59. In the result, departmental appeal is dismissed.
60. In view of the above, appeal of the assessee is partly allowed and the departmental appeal is dismissed.
Order pronounced on 30-07-2010
Sd/- Sd/-
(G. D. AGARWAL) (BHAVNESH SAINI)
VICE PRESIDENT JUDICIAL MEMBER
Date : 30/07/2010
Lakshmikant/-
103
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT,
6. Guard File
BY ORDER
ूित //True Copy//
DY.R/AR, ITAT, AHMEDABAD