2014-VIL-668-GUJ-DT

GUJARAT HIGH COURT

Tax Appeal No. 447 of 2000, Tax Appeal No. 522 of 2009, Tax Appeal No. 2033 of 2009

Date: 09.12.2014

DY. CIT (ASSTT)

Vs

GUJARAT NARMADA VALLEY FERTILIZERS CO. LTD.

For the Petitioner : Mr K M Parikh, Adv.
For the Respondent : Mr J P Shah, Adv.

BENCH

K. S. Jhaveri And K. J. Thaker,JJ.

JUDGMENT

(Per : Honourable Mr. Justice KS Jhaveri)

Tax Appeal Nos.447 of 2000 and 2033 of 2009

1. Both these appeals are filed against the decision of the tribunal whereby the tribunal has decided the appeals in favour of the assessee and against the department.

2. Short facts giving rise to Tax Appeal No.447 of 2000 are as under:

2.1 Return declaring loss of Rs. 1,79,21,14,270/- was filed on 30.6.1986. Gujarat Government and Gujarat State Fertilizers Company are holding 51% shares and rest of the share are held by others. Notices under Section 143 (2) and 142 (1) of the Income Tax Act along with detailed questionnaires were issued. With regard to the assessment, books of account and relevant documents were checked. The assessee company has written off expenditure amounting to Rs. 19,29,010/- in the profit and loss account incurred on seamless steel tube project on the plea that envisaged scheme was not finally approved by the Government of India. However, complete details regarding the scheme and how the scheme was dropped were missing. In view of this, an amount of Rs. 19,29,010/- was added back to the profits of the year. The Assessing Officer found that this amount cannot be treated as revenue expense. Such finding of the Assessing Officer is confirmed by the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal, which has given rise to Tax Appeal No.447 of 2000.

3. In the aforesaid Tax Appeal, following question of law is framed:

"Whether, the Income Tax appellate Tribunal was right in law and on facts in deleting the disallowance of Rs. 19,29,010/- being capital expenditure treating the same as revenue expenditure incurred for the expansion of existing business?"

4. Short facts giving rise to Tax Appeal No.2033 of 2009 are as under.

4.1 The assessee had filed original return of income on 29.10.2001 declaring total income of Rs. 54,30,57,988/-. In the case of the assessee, statutory notice under Section 143 (2) of the Income Tax Act was issued on 03.06.2003 fixing the hearing on 26.6.2003. Later on, notice under Section 142 (1) of the Income Tax Act along with questionnaire were issued from time to time. The claim of the assessee as regards deductions under Section 80HHC that interest paid during the year under consideration is much more than interest receipts is concerned, the interest income was also deducted 90% from the profit from business and profession. The Assessing Officer also disallowed Rs. 74.58 Lacs incurred on feasibility study. It was observed that the company engaged private firms to explore possibility of new firms and the advantage available to the assessee from the feasibility is of enduring nature and, therefore, it cannot be revenue in nature. Such findings of the Assessing Officer were confirmed by the Commissioner of Income Tax (Appeals) but the same was reversed by the Income Tax Appellate Tribunal in appeal. Therefore, present appeal is filed against the impugned order.

5. In the aforesaid Tax Appeal, following questions of law are framed:

"[1] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in allowing the expenditure of Rs. 32.05 lacs incurred on feasibility study of PET product?

[2] Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in directing the exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act, 1961?"

6. Counsel for the appellant has taken us through the order of AO and Commissioner of Income Tax (Appeals) and contended that while discussing the question of interest, the view taken by the Assessing Officer and the CIT (A) is just and proper. However, he contended that the view taken by the tribunal with regard to disallowance of capital expenditure treating the same as revenue expenditure is contrary to the decision of the Supreme Court reported in Commissioner of Income Tax, Madras v. Madras Auto Service (P) Ltd. (233 ITR 468 : AIR 1998 SC 2667), wherein the Supreme Court has held that the expenses which are incurred for expansion are to be taken in the capital account.

7. Counsel for the respondents supported the order of the tribunal and contended that the in view of the fact that the permission is not granted by the Central Government for the envisaged scheme and the same was not finally approved. In that view of the matter, these expenses are required to be shown as revenue expenses and therefore the view taken by the tribunal is just and proper.

8. We have considered the rival submissions on both the sides. While passing the order impugned in Tax Appeal No.447 of 2000, the Income Tax Appellate Tribunal has observed as under:

"9. We have heard both the sides and perused the materials on record. Both the authorities below were of the view that the Seamless Steel Tube project is a new line of business of the assessee because the assessee is basically a manufacturer of fertilizers. On that ground the expenditure was not treated as revenue expenditure. In this connection, the assessee has brought on record the memorandum of Association from which we find that the main objects of the assessee company is to carry out business of all types of fertilizers, chemicals, synthetic chemical, byproducts etc. Incidental or ancillary to the attainment of the main objects are to purchase, take on lease, mortgage or exchange hire, or otherwise acquire any movable or immovable property. In Clause C of the memorandum, the other objects have been incorporated. Item No.2 has already been quoted above by us. On perusal of the same, we find that one of such object was to manufacture, produce tubes, pipes, sheets etc. The management of the existing company and the proposed company of Seamless Steel Tube project was the same. The expenditure incurred by the assessee from the same fund of the company. There was a unity of control and common business organization, common administration by the existing Board of Directors and the present employees of the company were involved in the said project. The company's common place of business was supposed to be used to establish the Seamless Steel Tube Project. In such circumstances, it cannot be said that it is altogether a new business of the assessee company. Considering the facts involved in the present case, in our opinion, the Seamless Steel Tube Project was an expansion of the present business of the assessee which is supported by the objects mentioned in the memorandum of association. However, ultimately the project was given up by the assessee for some reason even otherwise it is a business loss of the existing company. Considering the entire circumstances of the case and the decisions which have been relied upon by the assessee, in our opinion, the Assessing Officer should have allowed the expenditure as revenue expenditure."

9. While passing the order impugned in Tax Appeal No.2033 of 2009, the Income Tax Appellate Tribunal has observed as under:

"14. Coming to the issue raised in Ground No.3, it is noticed that the CIT (A) has decided this issued in para3 of his order, which reads as under:

"10.5 I have considered the rival submission and arguments of both the sides and I find that the appellant company has incurred an expense of Rs. 32.05 Lakh on the feasibility of PET project which is a new line of business whereas a sum of Rs. 42.53 Lakhs has been incurred on power and steam unit which is for the purposes of extension of the existing business. The treatment of expenditure on both the items is different because I am of the view the Techno economic feasibility studies to identity projects that may be taken up by an assessee would be allowable as a revenue expenditure, since the expenses could be treated as facilitating trading operation for carrying on the business more efficiently giving advantage in revenue field. It was so held in CIT v. Coromandel Fertilizers, 247 ITR 417 (AP) following the decision of the Supreme Court in Empire Jute Co. Ltd. Vs. CIT, 124 ITR 1 (SC). "Once for all" payment test is inconclusive as was pointed out in Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377 (SC). Extension of assessee's business could not be treated as an activity, which will disentitle the expenditure for the purpose as was held in Kesoram Industries and Cotton Mills Ltd. v. CIT, 196 ITR 845 (Cal). It is under these circumstances expenditure incurred on CPSU amounting to Rs. 42.53 lakhs by the appellant company may be treated as revenue expenditure and allowed. Since the purpose of the study was identification of new projects for existing business rather than setting up a new business.

Whereas the position in respect of new PET business of the appellant company amounting to Rs. 32.03 lakhs is different. PET is a new product the manufacturer of which could be treated as a different business altogether. In E.I.D. Parry (India) Ltd. vs. CIT (2002) 257 ITR 253 (mad), the High Court inferred the same to be different business following the guidelines provided by the Supreme Court in Swadesh Cotton Mills Co. Ltd. Vs. CIT 63 ITR 65 (SC), where a dealer in cloth proceeded to set up a textile mill, which was however started, so that the loss got disallowed as capital loss. The High Court understood the facts in this case as comparable in that the assessee's project for manufacture of new methanol abandoned would not be allowed. Since the appellant company has incurred an expenditure for a feasibility study of a new business (PET) amounting to Rs. 32.05 lakhs, therefore, the decision of the AO is in accordance with law and accordingly addition made is confirmed."

15. Learned AR submitted that the issue is squarely covered in favour of the assessee and against the revenue as per para 2.3 of the Tribunal in assessee's own case for A.Y. 1996-97 in ITA No.2768, 2769 and 2770/Ahd/1993 order dated 8.9.1999, which reads as under:

"2.3 We have heard both the sides and perused the material on record. Both the authorities below, were of the view that Seamless Steel Tube Project is a new line of business of the assessee because the assessee is basically a manufacturer of fertilizer. On that ground the expenditure was not treated as revenue expenditure. In this connection, the assessee has brought on record the memorandum of association from which we find that the main object of the assessee company is to carry out business of all types of fertilizers, chemicals, petro chemicals, all organic and inorganic chemical, synthetic chemicals, byproducts etc. Incidental, or ancillary to the attainment of the main objects are to purchase, take on lease, mortgage or in exchange hire, or otherwise acquire any movable or immovable property. In clauseC of the memorandum, the other objects have been incorporated. Item No.2 has already been quoted above by u. On perusal of the same, we find that one of such object was to manufacture, produce, tubes, pipes, sheets etc. The management of the existing company and the proposed company of Seamless steel Tube project was same. The expenditure incurred by the assessee from the same fund of the present company. There was a unity of control and common business organization, common administration, by the existing Board of Directors and the present employees of the company were involved in the said project. The company's common place of business was supposed to be used to establish the Seamless Steel Tube Project. In such circumstances, it cannot be said that t is altogether a new business of the assessee company. Considering the facts involved in the present case, in our opinion, the Seamless Steel Tube Project was an expansion of the present business of the assessee which I supported by the objects mentioned in the memorandum of association. However, ultimately the project was given up by the assessee for some reason even otherwise it is a business loss of the existing company. Considering the entire circumstances of the case and the decisions which have been relied upon by the assessee, in our opinion, the Assessing Officer should have allowed the expenditure as revenue expenses."

16. Learned DR has supported the order of the CIT(A).

17. We have considered rival submissions, facts and circumstances of the case and the Tribunal order in assessee's own case for A.Y. 1986-87 and have noticed that similar issue was subject matter of consideration of the Tribunal and was decided in assessee's favour. Relevant part of the order of the Tribunal contained in para 2.3 was reproduced above. Since revenue has not brought any decision contrary to the decision of the Tribunal (supra), we have no reason to deviate from the stand taken by the Tribunal. Consequently, following the same we allow the assessee's claim of expenditure raised in No.3, order of the ClT(A) on this issue is accordingly reversed."

10. In view of above observations, in our view, the tribunal has rightly considered the first question in right perspective. The amount which has never materialized, i.e. the expenses incurred towards such project is rightly treated as revenue expense and not as capital expenditure. In that view of the matter, the question of law raised is answered in favour of the assessee and against the department.

11. So far as second question regarding exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act, 1961, while passing the impugned order the tribunal has confirmed the order of the CIT (A), wherein CIT (A) had observed as under:

"........ Secondly, as regards disallowance of 90% of the gross receipts under Section 80HHC (4A) is concerned, it is noted that the gross rent receipts are Rs. 31,31,697/- which are assessable under the head 'Income from House Property'. Therefore, in my view, 90% of the gross rent receipts has been correctly excluded from business income by the assessing Officer. Coming to the interest received on bonds, debentures and deposit amounting to Rs. 38,67,889 + 11,71,49,444/-, I find that the interest income has been received on the investments made by the appellant in bonds, debentures and deposits which is assessable under the head 'income from other sources'. Therefore, interest received 90% of the gross receipt has been correctly excluded from the business income by the AO. Interest paid on borrowings pertains to the business expenditure whereas the interest received is from the investment made and assessed under the head 'Income from other sources'. The Kerala High Court in CIT Vs. Jose Thromas, 253 ITR 553 has held that interest on deposits etc. does not constitute business income for the purpose of deduction under Section 80HHC of the IT Act. Therefore, in my opinion, the AO has rightly excluded 90% of the gross interest receipts of Rs. 38,67,889 + Rs. 11,71,49,444/- from the business income for calculating deduction under section 8OHHC of the IT Act. Accordingly, the decision of the A0 is confirmed on this Issue."

12. At this stage, we also deem it proper to refer to relevant observations of the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax reported in [2012] 343 ITR 89 (SC), which are as under:

"10. Under Clause (1) of Explanation (baa), ninety per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "Profits and Gains of Business or Profession". The expression "included any such profits" in clause (1) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and Gains of Business or Profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and Gains of Business or Profession", ninety per cent. of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining "profits of the business" of the assessee under Explanation (baa) to Section 80HHC.

11. For this interpretation of Explanation (baa) to Section 80HHC of the Act, we rely on the judgment of the Constitution Bench of this Court in Distributors (Baroda) P. Ltd. v. Union of India and others, (AIR 1985 SC 1585) (supra). Section 80M of the Act provided for deduction in respect of certain intercorporate dividends and it provided in subsection (1) of Section 80M that "where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, there shall, in accordance with and subject to the provisions of this Section, be allowed, in computing the total income of the assessee, a deduction from such income by way of dividends an amount equal to" a certain percentage of the income mentioned in this Section. The Constitution Bench held that the Court must construe Section 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the legislature and so construed the words "such income by way of dividends" in subsection (1) of Section 80M must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. Similarly, Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in Explanation (baa), the words "receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits" will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head "Profits and Gains of Business or Profession" referred to in the first part of the Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent. of such quantum of the receipt cannot be deducted under Explanation (baa) to Section 80HHC.

12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with Sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and Gains of Business or Profession", ninety per cent. of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent. of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining the profits of the business."

13. In view of above observations, we are of the view that the question involved in the present appeal is governed by the decision of the Supreme Court and the deduction given under Section 80(c) is required to be upheld. Therefore, the tribunal has rightly directed exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act, 1961. Accordingly, this question is also answered in favour of the assessee and against the revenue.

14. In view of above, both these Tax Appeals fail and are hereby dismissed. So far as Tax Appeal No.447 of 2000 is concerned, we hold that the Income Tax appellate Tribunal was right in law and on facts in deleting the disallowance of Rs. 19,29,010/- being capital expenditure treating the same as revenue expenditure incurred for the expansion of existing business. So far as Tax Appeal No.2033 of 2009 is concerned, we hold that the Income Tax Appellate Tribunal was right in law in allowing the expenditure of Rs. 32.05 lacs incurred on feasibility study of PET product. We also hold that the Income Tax Appellate Tribunal was right in law in directing the exclusion of 90% of net interest for calculating the deduction under section 80HHC of the Income Tax Act, 1961.

TAX APPEAL No.522 of 2009

15. This appeal is filed against the decision of the tribunal in ITA No.1227/Ahd/2005 taking a contrary view then the view taken in Income Tax Appeal No.1350 and 1351/Ahd/2005 for the assessment year 200001 and 200102.

16. At the time of admission of this appeal, following question of law is framed.

"Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was justified in law in holding the expenditure incurred on the feasibility report to be capital expenditure?"

17. Aforesaid order in Income Tax Appeal No.1350 and 1351/Ahd/2005 was the subject matter of Tax Appeal No.2033 of 2009, whereby the tribunal itself allowed these expenses. However, the tribunal has taken a different view in the present matter. Upholding the order of tribunal which was under challenge in Tax Appeal No.2033 of 2009, we are reversing the view taken by the tribunal in this appeal. Therefore, in view of above, this appeal is allowed. Accordingly, we hold that the expenditure incurred on the feasibility report is to be treated as revenue expense and the Income Tax Appellate Tribunal has committed an error in law in holding the expenditure incurred on the feasibility report to be capital expenditure.

18. All these three appeals are accordingly disposed of. All the appeals are decided in favour of the assessee and against the department.

 

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