Vildirect: IncomeTax-caselaws-2013-VIL-669-ALH-DT

2013-VIL-669-ALH-DT

Equivalent Citation: [2014] 360 ITR 82

ALLAHABAD HIGH COURT

Income Tax Appeal No. - 211 of 2011

Date: 18.09.2013

THE COMMISSIONER OF INCOME TAX AND ANOTHER

THE DHAMPUR SUGAR MILLS LTD.

BENCH

Hon'ble Sunil Ambwani And Hon'ble Surya Prakash Kesarwani,JJ.

JUDGMENT

1. We have heard Shri Shambhu Chopra, learned counsel appearing for the Income Tax department. Shri R.R. Agarwal and Shri Suyash Agarwal appear for the respondent-assessee.

2. This Income Tax Appeal filed under Section 260-A of the Income Tax Act arises from an order of Income Tax Appellate Tribunal, Delhi Bench "C", New Delhi dated 31.8.2008 in ITA No.409/Del/2002 (Asst. Commissioner of IT (A) Najibabad, Distt. Bijnor (UP) vs. the Dhampur Sugar Mills Ltd, Dhampur, District Bijnor (UP)) for assessment year 1998-99.

3. On 2.1.2013 the appeal was admitted on substantial question of law nos. 2 to 7 framed in the memo of appeal. Our findings on these issues are discussed as follows:-

4. Question no.2

"(2 ) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in upholding the order of the CIT (A) who allowed the relief of Rs.16,21,58,151/- out of addition made for undervaluation of closing stock?

5. The ITAT has recorded finding on the issue in paragraphs 5 and 6, as follows:-

"5. Next common ground of the revenue's appeal relate to deletion of addition on account of under valuation of closing stock of free sugar in sugar unit at Dhampur and Rauzagaon. We have considered the rival contentions and found that exactly similar issue has been decided in favour of the company vide ITAT order dated 17.2.2003 in I.T.A. No.4125/Del/93 for the assessment year 1990-91 vide paras 3-6 on pages 4-7. Similarly, decided in favour of the company in I.T.A. No.7779/Del/92 vide paras 15-18 on pages 6-12 of the order for the assessment year 1989-90. Similarly, decided in favour of the company in I.T.A. No.6662/Del/94 vide para 7 on pages 203 of the order for the assessment year 1991-92. Similarly, decided in favour of the company in I.T.A. No.57/Del/96 - departmental appeal - for the assessment year 1992-93 vide paras 5 & 5.1 on pages 5-7 of the order.

6. We have carefully gone through the order of the ITAT for the assessment year 1992-93 wherein at para 5.1, the issue has been dealt with as follows and the additions were deleted:

"The brief history relevant for adjudication of this ground of appeal is as follows:

In assessment year 1998-89, the assessee was valuing the closing stock by including certain items of expenditure like interest on borrowings, administrative expenses, legal expenses, bank charges, director's travelling, insurance etc. In assessment year 1989-90 the assessee changed the method of accounting and excluded certain items of expenditure relating to selling and distribution, general administration, R & D and interest on loan, while valuing the closing stock. The reason for doing so was that these items did not form part of the manufacturing cost of sugar. The Assessing Officer did not agree with this plea of the assessee and he enhanced the value of closing stock and made an addition. Similarly in this assessment year also the Assessing Officer made a similar addition. In assessment year 1989-90 this issue had come up for consideration before the Tribunal in I.T.A. Nos. 7199 and 7779/Del/92 and after considering the issue extensively the Tribunal in para 18 of its order concluded that the change in method of valuing the closing stock adopted by the assessee was a recognized method and that it had been consistently followed in the subsequent assessment years. The Tribunal also held that the changed method of accounting does not have the effect of avoiding any tax payment. The changed method was thus recognized by the Tribunal. In the light of the decision of the Tribunal referred to above, we are of the view that the order of the CIT (Appeals) deleting the addition made by the Assessing Officer is just and proper and calls for no interference. The third ground of appeal of the revenue is accordingly dismissed.

6. The ITAT has consistently held for the years 1991-92 to 1997-98 that the changed method of accounting was more scientific and did not result any evasion of payment of tax. The question was considered and decided by the Madras High Court in CIT vs. Carborandum Universal Ltd (1984) 149 ITR 759 (Mad), the reasoning of which has been upheld by the Supreme Court on 5.11.2009 in SLP (Civil) No.6410 of 1995.

7. The question is thus decided in favour of the assessee and against the revenue

8. Question no.3

"(3) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the order of the CIT (A) who deleted the addition of Rs.8,64,33,161/- made by the A.O treating the income of the assessee on account of incentives subsidy received on free sale of sugar?

9. The question is covered by the judgment of Supreme Court in Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd (2008) 306 ITR 392 (SC) in which it was held in respect of same scheme namely the Sugar Incentive Scheme based on recommendation of Sampat Committee that where the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit, then the receipt of the subsidy would be on capital account.

10. In the present case, from the orders of AO, CIT (A) and ITAT we find that the assesee was allowed additional free sale of sugar quota under the scheme for setting up or expanding the sugar unit. The benefit was given to the sugar mills to meet the capital outlay in setting up or expanding the sugar mills.

11. The Tribunal has relied on the judgment of this Court in CIT vs. Kisan Sahkari Chini Mills Ltd. 284 ITR 418, which was also followed by Uttrakhand High Court in case of CIT vs. M/s Kishan Sahkari Chini Mills Ltd in ITA NO.101 of 2006 vide its order dated 26.3.2007.

12. The question is thus decided in favour of the assessee and against the revenue.

13. Question no.4

"(4) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the order of the CIT (A) who deleted the addition of Rs.3,00,18,969/- on account of pre-operative trial run expenses treating it as revenue expenditure instead of capital expenditure.?

14. Shri Shambhu Chopra, appearing for the revenue submits that the assessee has shown these expenses as revenue expenses but has not taken them to the profit and loss account. He submits that these pre-operative trial expenses could not be treated as revenue expenses and were correctly treated by the revenue as capital expenses.

15. We find that the question is covered by the judgment in CWT v. Ramaraju Surgical Cotton Mills Ltd (1967) 63 ITR 478 (SC) as follows:-

"(a) CWT v. Ramamju Surgical Cotton Mills Ltd. :

9. In this case, the Supreme Court held that where a business unit had been set up by the assessee which was ready to commence production, the assessee was entitled to claim deduction of the expenditure which could not be disallowed on the ground that the same had been incurred prior to the commencement of the actual business of commercial production. The Supreme Court made a distinction between setting up of a unit and the operational function of the unit as a business."

16. The Calcuta High Court in CIT vs Kanoria General Dealers P. Ltd (1986) 159 ITR 0524 and Madras High Court in CIT vs. Sakthi Sugars Ltd (2011) 339 ITR 400 (Mad), also found that pre-operative expenses, including cane development expense, travelling expenses, administrative and other expenses, legal and professional charges, electricity charges, rates and taxes, insurance premium, repairs and maintenance charges for building and machinery and motor vehicle and other office equipment maintenance, financial and bank charges, freight and transport, salaries, wages, bonus etc., workmen welfare expenses, interest charges and depreciation, are to be allowed as revenue expenses.

17. In Sir Shadi Lal Sugar & Gen Mills Ltd vs. CIT 63 ITR 750 this Court held that where the erection of the plant has been completed and only a small quantity of raw materials was consumed, there was actually no turning out of the finished products, it could not be said that the business of manufacture had commended. The consumption of raw material, if any, and deduction of amount claimed as business expenditure could not be allowed. The judgment is distinguishable inasmuch in Sir Shadi Lal Sugar & Gen Mills Ltd vs. CIT (supra) there was no turning out of the finished products, hence it could not be treated to be a trial run or pre-operational expense. Though a new unit was set up but an experiment with deduction of amount claimed by itself could not be allowed as revenue expenses and had to be given treatment as capital expenses.

18. In the present case, the pre-operation expenses have been detailed in the material produced before the AO and which has been referred to in the paper book at pages 14, 15 and 17 in respect to Co-Generation Plant, Rauzagaon; Oxalic Acid, Dhampur and thus the pre-operational expenses, were revenue expenses and not capital expenses. These expenses were actually claimed as revenue expenses in the computation with the return and were to be allowed as revenue expenses.

19. The question of law is thus decided in favour of the assessee and against the revenue.

20. Question no. 5

"(5) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the order of the CIT (A) who deleted Rs.2,58,78,987/- disallowed by the A.O on account of interest paid against loan which were utilized for setting up new units treating the same as revenue expenditure instead of capital expenditure?"

21. The Tribunal has relied on previous years orders in respect of the assessee in holding that the interest paid against loans, which were utilised for setting up new units, had to be treated as revenue expenditure instead of capital expenditure.

22. The deduction is claimed under Section 36 (1) (iii) as an interest paid in respect of capital borrowed for the purpose of business and profession. The assessee treated it as revenue expenditure and then capitalised.

23. A proviso was added to Section 36 (1) (iii) by Finance Act, 2003 w.e.f. 1.4.2004 as follows:-

"Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction."

24. We find that the proviso is explanatory in nature inasmuch as in computing the income the deductions are for the purposes of business and profession. Where a new business is set up or an existing business is expanded, the amount borrowed for such purposes enures to the assessee with enduring benefit. The assessee, therefore, could not treat it on such borrowed capital as revenue expenses.

25. We do not find that the proviso, which is only explanatory in nature, is applicable prospectively. The deduction claimed under Section 36 are for the purposes of business and profession, which is existing and not from extension of existing business or profession.

26. The question is thus decided in favour of revenue and against the assessee.

27. Question No. 6

"(6) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the order of the CIT (A) who deleted Rs.1,76,01,088/- which was disallowed by the AO on account of convertible premium notes after relying upon the decision of Apex Court reported in 225 ITR 802?.

28. This question is covered by the judgment of Supreme Court in Madras Industrial Investment Corpn. Ltd v. Commissioner of Income Tax (1997) 225 ITR 0802. The business expenditure under Section 37 not being expenditure in the nature described in sections 30 to 36 exclusively for the purpose of the business or profession was held to be allowed in computing income chargeable under the head "Profits and gains of business or profession". Relying upon Section 37 it was held that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the principles of commercial trading. Ordinarily, revenue expenditure, which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years.

29. In the present case from the facts discussed by the Tribunal we find that the expenditure on Convertible Premium Notes (CPM) was spread over the period of life on CPM for six years. The year of payment was six years and on which the expenditure was incurred by paying maturity value. In this regard the Tribunal recorded the findings in para-26 as follows:-

"26. Next grievance in revenue's appeal relates to deletion of disallowance of expenses on issue of convertible premium notes which was charged to the P & L account under loan raising expenses, disallowed under Sec. 35-D as being capital expenses. Facts relating to these grounds are that the assessee company had offered 37,86,732/- convertible premium notes of Rs.110/- each for cash at par (Rs.35 payable on application and balance Rs.75 on allotment) by way of right issue to the existing shareholders of the company in the ratio of one CPN for every three shares held as per copy of letter of offer. Out of the above, the assessee company had issued 36,45,717 CPNs of Rs.110/- each at par allotted on 8.3.96. CPN holders had the option either to convert the same into one fully paid up share at the end of the three months from the date of allotment i.e. 8.3.96 or to convert the same into two shares at the end of sixth year from 8.3.96 or to receive maturity value of Rs.254.40 at the end of sixth year from 8.3.96. In the return of income the assessee had claimed Rs.3,19,44,000/- by way of note No.2 in Annexure II to the computation of income stating that though the claim of this amount would fall after six years i.e. in the year of payment, the assessee should be allowed the paid amount being proportionate premium upto 31.3.97. It was pointed out that in view of the Supreme Court judgment in the case of Madras Industrial Investment Corporation Ltd vs. CIT 225 ITR 802, the claim of the assessee is allowable as revenue expenditure in the year under consideration. The Assessing Officer worked out the calculation and after reproducing the relevant portion of CPN notes etc. he held that the amount shall be considered only in the year of payment and not in the year under consideration. In appeal the learned CIT (Appeals) has considered the issue in great detail and allowed the claim of the assessee. We have carefully considered the rival submissions and perused the material on record. We have gone through the letter of offer, a copy of which has been filed on record. The terms and conditions of the CPNs given in para 8 of letter of offer are as under:

"The Convertible Premium Notes now being offered in terms of this letter of offer are subject to the provisions of the Act, the Memorandum and Articles of Association of the company, the terms and conditions mentioned in the Letter of Offer, the Composite Application Form and the guidelines for issue and listing of securities issued by the Government of India and the Securities and Exchange Board of India.

The Convertible Premium Notes shall also be subject to such other terms and conditions, as may be incorporated in the CPN certificate letter of allotment and/or other documents in respect of these Convertible Premium Notes and the terms and conditions, as may be desired by any Government agency."

30. The expenditure in this case spread over the period for which the discount has been paid. From the order of the AO we find that the entire amount was claimed in two years namely in the year 1997-98 and 1998-99.

31. On the aforesaid facts and circumstances brought before us, we are of the view that the reasoning in the judgment in Madras Industrial Investment Corpn. Ltd v. Commissioner of Income Tax (supra) is applicable and that the expenditure had to be spread out for a period of six years, and was not allowable in the years 1997-98 and 1998-99 alone. The issue is decided in favour of revenue and against the assessee.

32. Question no.7

(7) Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in confirming the order of the CIT (A) who deleted Rs.58,40,390/- disallowed by the A.O on account loan raising expenses for technical know-how as revenue expenditure instead of capital expenditure"

33. Shri Shambhu Chopra, appearing for Income-tax department submits that on this question the ITAT has followed a judgment in respect of the assessee for assessment year 1992-93 and in which the Tribunal had set aside the order of CIT (A) by which the assessee's claim for deduction of loan raising expenditure was disallowed as capital expenditure.

34. The Tribunal found that the assessee had claimed the expenses for raising loans for setting up Barabanki division of the assessee where a new sugar unit was set up and therefore, the expenditure was of enduring nature. Following the judgment in CIT vs. India Cement Limited (1966) 60 ITR 52 (SC) it was held that allowing interest expenses and other over head expenses in connection with a new unit, which was an extension and expansion of the same business, the expense had to be allowed as deduction. Shri Chopra submits that there was no discussion on facts as to whether the Barabanki unit was the extension and expansion in the same line of business and the nature of borrowing. He submits that the matter should be remanded for consideration by the Tribunal on the question of facts. The Tribunal had erred in relying upon its judgment of assessee for the year 1992-93 without examining the facts.

35. Shri R.R. Agarwal submits that there is no dispute that the company engaged in the business of manufacture and sale of sugar. The new unit as Barabanki Division in the same line of business was also set up to manufacture and sell sugar by way of expansion of business. There was no question of treating the Barabanki unit as a new business for the purposes of denying the expenses for obtaining loan as revenue expenses. He has relied upon the judgments of Supreme Court in Prem Spinning and Weaving Mills Co. Ltd vs. Commissioner of Income-tax (1975) 098 ITR 0020 (All.) in which the questions relating to business expenditure on the new unit had come up for consideration. This Court held that the test as laid down in CIT vs. India Cement Ltd (supra) is the unity of control. In the said case the company was running a Spinning and Weaving Mill. It set up a straw-board manufacturing factory, which was a fresh undertaking with the help of surplus funds and also borrowed funds. The revenue alleged that it is a new business. This Court held that the Memorandum of Association of the assessee company specifically provided that one of the objects of the company is to manufacture straw-board. The straw board factory was set up by the assessee by utilising its existing surplus funds and borrowing. The assessee controlled both the ventures of spinning and weaving mill as well as straw board factory. The management, trading organisation, administration, funds, and the place of business were identical. It could not, therefore, be said that the setting up of the straw board factory was initiation of a different business by the assessee and on that ground the expenditure could not be disallowed. The decisive test was unity of control and not the nature of the business.

36. In the present case the assessee is engaged in manufacture and sale of sugar. The Barabanki unit was set up in the same line of business from the funds borrowed by the company. There is no material to contend that the new unit was under different management or that there is no unity of control between the assessee in respect of business of manufacture and selling sugar and the business of manufacture and sale of sugar in the new unit at Barabanki.

37. The Tribunal is the final Court of facts. We may not go into the question to record any finding or to remand the matter to consider whether there was no unity of control in the business of the assessee and the new unit to be set up at Barabanki.

38. The question of law is thus decided in favour of assessee and against the revenue.

39. The question nos. 2, 3, 4 and 7 are decided in favour of the assessee and against the revenue. The question nos. 5 and 6 are decided in favour of revenue and against the assessee.

40. The Income Tax department will proceed accordingly.

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