2001-VIL-163-ITAT-AHM
Equivalent Citation: ITD 081, 553, TTJ 073, 404,
Income Tax Appellate Tribunal AHMEDABAD
Date: 22.05.2001
UNITED PHOSPHORUS LTD.
Vs
JOINT COMMISSIONER OF INCOME TAX.
BENCH
Member(s) : B. M. KOTHARI., T. K. SHARMA.
JUDGMENT
Per Shri B.M. Kothari, Accountant Member.--These cross appeals; one by the assessee and the other by the Revenue are directed against the order dated 28-10-1999 passed by the learned CIT(A)-I, Surat for assessment year 1995-96. The assessee has also submitted Cross Objection in relation to the appeal submitted by the Revenue.
2. We first deal with the assessee's appeal being ITA No. 35/Ahd./2000 for assessment year 1995-96. Ground No. 1 raised by the assessee is reproduced below:--
I. Taxability of advance licence benefit receivable:
1.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax erred in upholding the action of the Assessing Officer in including in the total income, advance licence benefit receivable amounting to Rs.8,29,87,603.
1.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:
(a) In not appreciating the fact that no income had accrued to the appellant until the imports were made and the raw materials were consumed, which events took place in the subsequent years;
(b) In relying on the appellate orders for the earlier years wherein it was held that the advance licence benefit becomes receivable the moment export is made and accordingly, export obligation had been fulfilled before the end of the year inspite of the fact that the benefit accrued only when the raw materials were actually imported and not at the time of export;
(c) In not appreciating the fact that unlike import entitlements, the advance licence benefit was not transferable and accordingly no income could accrue to the appellant until the raw materials were actually imported.
1.3 In view of the above arounds of appeal, the appellant prays that the Assessing Officer be directed to exclude from the total income, the advance licence benefit receivable amounting to Rs.8,29,87,603 and to reduce the total income accordingly.
2.1 The assessee had shown this amount as its income in the published Audited Annual Accounts. However, in Schedule R forming part of the Balance Sheet and the P&L Account in which significant accounting policies are disclosed, contained the following facts in para (e) appearing at page 28 of the PB No. I:--
(e) Accounting of Raw Material Consumption:
Duty free imports of raw materials under Advance Licence for Imports as per the Import and Export Policy are matched with the exports made against the said licences and the net benefit is accounted by making suitable adjustments in raw materials consumption.
2.2 Note No. 6 in the same Schedule R reads as under:--
6. An amount of Rs.8,29,87,603 (Previous Year: Rs.8,02,38,750) being the net benefit under the Import and Export Policy in respect of entitlement to import duty-free raw materials as detailed in significant accounting policies above, has been accounted by way of reduction from raw material consumption. The total benefit so accounted remaining outstanding as on the date of the Balance Sheet amounts to Rs.13,46,20,598 (Previous Year: Rs.9,93,17,737), out of which the Company has since imported the said raw materials in the subsequent year representing a benefit of Rs.6,09,63,824 (Previous Year: Rs.1,89,14,093) and for the balance amount of Rs.7,36,56,774 (Previous Year: Rs.8,04,03,644) the Company is taking necessary steps for the import of the said materials.
2.3 The assessee while filing the return of income for assessment year 1995-96 claimed deduction in respect of the aforesaid amount of Rs.8,29,87,603 with reference to Note No. 10 appended with the computation of income. The said Note No. 10 is as under:--
10. Advance Licence benefit receivable--In the Accounts for the year ended 31-5-1995, an amount of Rs.8,29,87,603 being the net benefit under the import and export policy in respect of entitlement to import duty-free raw materials, has been accounted by way of reduction from raw material consumption.
In the computation of total income, the said amount has been excluded on the ground that the income has not accrued until the imports are made and the raw material is consumed. In this connection, reliance is placed upon the decision of the income-tax Appellate Tribunal, Bombay Bench "A" in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. v. IAC [1992] 41 ITD 142.
Further, in the computation of total income, while computing the deductions under sections 80-I and 80-IA, the profit of the concerned undertakings has been considered after excluding the said advance licence benefit. In case, on assessment, the said advance licence benefit is taxed, the deductions under sections 80-I and 80-IA should also be recomputed after taking into account such advance licence benefit.
2.4 The assessee also include in its income under the head "Profits and Gains of Business" a sum of Rs.4,76,84,742 as Advance Licence Benefit Utilised with reference to Note No. 6 of Notes to computation which is also reproduced below:--
6. Advance Licence benefit utilised--In the computation of total income, a sum of Rs.4,76,84,742 has been added back in respect of advance licence benefit utilised during the year. The said addition has been made in view of the fact that the advance licence benefit receivable had been excluded from the total income in the earlier assessment years. Further, in the computation of total income, while computing the deductions under sections 80-I and 80-IA, the profit of the concerned undertakings has been considered after including the said advance licence benefit utilised. It is submitted that in case the said advance licence benefit receivable is taxed in the earlier assessment years, the aforesaid amount in respect of advance licence benefit utilised ought to be excluded from the total income for the assessment year 1995-96, as otherwise it would lead to double taxation.
2.5 Such a practice was adopted by the assessee from assessment year 1992-93. Similar issues are subject-matter of pending appeals in the case of the assessee for assessment year 1992-93 and subsequent years. The assessee submitted application for grant of stay for payment of demand relating to assessment years 1995-96 and 1996-97. The ITAT Ahmedabad Bench "A" (comprising of Hon'ble Shri Vimal Gandhi, Vice-President and Shri R.K. Bali--Accountant Member) vide order dated 1-12-2000 directed the assessee to deposit part amount of the demand as specified in the said stay order and also directed the Registry to fix the hearing of these appeals out of turn. The hearing for assessment years 1995-96 and 1996-97 were accordingly fixed out of turn. The cross appeals relating to assessment year 1995-96 were heard on different dates and the matter was finally heard on 26-4-2001.
2.6 The Assessing Officer observed in para-I that the assessee has claimed deduction of Rs.8,02,38,750 (the correct figure is Rs.8,29,87,603) under the Advance Licence Benefit Receivable (in short "ALBR"). This amount was deducted from the cost of raw material in the books of account for showing less consumption of raw material in monetary value. Thus the said amount was included in its income in the Audited Annual Accounts. But while filing the income-tax return, the assessee claimed deduction in respect of the said amount on the basis of the decision of the ITAT Bombay Bench in Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd.'s case. The Assessing Officer further observed that this point has been elaborately discussed in the assessment orders for assessment years 1992-93 to 1994-95. The Department has all along been holding that the taxability of this benefit is covered by the provisions of section 28(iv) of the Act in which it has been provided that the value of any benefit or perquisite whether convertible, into money or not, arising from business or profession, is income. The assessee is entitled to a benefit by way of ALBR to import duty-free raw material only with an obligation of fulfilling certain export commitments. When the assessee has actually exported the goods, the obligation of the assessee is fully discharged and the right to import duty-free raw material becomes absolute. It is therefore clear that such a right to import duty-free raw material accrued to the assessee soon after the corresponding export commitment has been fulfilled. The assessee has accounted for the net amount of such benefit by way of ALBR at the end of the accounting year, which represents the income already accrued to the assessee. The Assessing Officer further observed that the CIT(A), Surat in his appellate order for assessment years 1992-93 and 1993-94 has confirmed the order of the Assessing Officer.
The Assessing Officer relying upon the assessment orders and the orders of the CIT (A) pertaining to assessment years 1992-93 to 1994-95 rejected the assessee's claim for grant of deduction of Rs.8,29,87,603.
2.7 It may be relevant here to refer to the Note in respect of taxability of ALBR, submitted by the assessee during the assessment proceedings, a copy whereof has been placed at pages 183 and 184 of PB-I. In the said Note, after reproducing Note No. 6 of Schedule R--Notes on Accounts appended with the Audited Balance Sheet, the assessee has submitted that the said amount of Rs.8,29,87,603 has been excluded from the total income on the ground that no income accrued until the imports are made and the raw materials are consumed, which events have taken place in the subsequent year. Reliance was placed on the decision of the ITAT Bombay Bench in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. The said Note further contained brief facts and decision of the ITAT in the above referred case, which is reproduced hereunder:--
"In the aforesaid case before the Tribunal, the company had exported certain quantity of goods manufactured by it against which it was entitled to import fibres free of import duty under the Duty Exemption Scheme. However, no fibre was actually imported during the relevant year. In the accounts for the relevant year, the company calculated that if fibres were imported, it would have been entitled to exemption from customs duty otherwise chargeable amounting to Rs.31,75,231. This amount was taken to the credit of the Profit and Loss Account by reducing the material consumption. In the return Of income, it was claimed that the company had taken into account a notional profit which it actually had not earned and which was not exigible to tax.
On the basis of the aforesaid facts, the Tribunal held as under:
'In the present case, the appellant had not imported any goods and therefore, had not received any benefit during the year. The benefit could accrue to the appellant in the form of concession in excise duty in the event the appellant were to import goods which was not done during the relevant accounting year.
Therefore, the contingency for getting exemption in respect of custom duty had not arisen during the year and in that sense no benefit had accrued to the appellant, whatever may be the entries in the books of account that might have been made by the appellant. What the appellant had accounted for in its books was a future duty benefit which it would get in respect of imports of fibre if and when such imports were to be effected. The contingency on which such benefit could be said to have accrued was the import of the fibres which the appellant could get duty free as a consequence of the exports effected by it under Duty Exemption Scheme. The fact that in the accounts it was shown as a material import entitlement did not ipso facto clothe it with the nature of income.
Moreover, from the point of view of liability to income-tax, item of duty exemption was neither income on accrual basis nor had it actually been received nor did it afford any tangible benefit to the appellant in the form of concession of duty in the year of account for the simple reason that the liability to pay duty did not exist during the relevant year since no goods were imported. Thus, the amount of Rs.31,75,231 could at the best be described as an estimated value of concession or saving in import duty that the appellant expected to earn at the time of importing raw material. Such concession or such benefit could only be accounted for in the year in which the imports were effected. No income could be said to have accrued or arisen in respect of advance licence received in the current period on the goods exported because no income in real terms had accrued. No real income had accrued to the appellant by virtue of getting or expecting to get advance licence irrespective of the fact that such estimated benefit was accounted for in the books of the appellant. This fact was not determinative of the issue of the taxability of this amount.
Therefore, the amount of Rs.31,75,231, being the value of material import entitlement receivable by the appellant, did not constitute the income of the appellant for the year under appeal since it had neither accrued nor arisen during the year of account.'
In the instant case, the facts are identical to the facts in the case before the Tribunal and accordingly the ratio of the aforesaid decision is squarely applicable particularly since the materials have been imported and consumed in the subsequent year and accordingly no income accrues for assessment year 1995-96.
It is submitted that in the assessment year 1994-95 a similar claim has been made for excluding from the total income a sum of Rs.8,02,38,750 being the net benefit under the import and export policy in respect of entitlement to import duty free raw materials which was accounted in the said year by way of reduction from raw material consumption. In the assessment order passed for the assessment year 1994-95, the said claim has been disallowed. In the return of income, out of the aforesaid amount, a sum of Rs.4,76,84,742 which has been actually received and utilised during the assessment year 1995-96 ought to be excluded since the aforesaid amount of Rs.8,02,38,750 has been taxed in the assessment year 1994-95."
3. The learned CIT (A) in para--1 of his order has observed that similar disallowance made in the earlier year was confirmed in appeal. He also relied on the decision of the ITAT Ahmedabad Bench in the case of Asstt. CITv. Pratibha Syntex Ltd. [IT Appeal Nos. 246 and 4695 (Ahd.) of 1996]. The CIT (A) confirmed the disallowance made by the Assessing Officer in respect of ALBR. Since the learned CIT (A) has not given detailed reasons in the impugned order for assessment year 1995-96 but has relied on the order passed by him in assessment year 1992-93, it may be imperative to go through the order of the CIT (A) for assessment year 1992-93. The relevant para-4 of the order of CIT (A) for assessment year 1992-93 is reproduced below:--
"4. The fourth ground taken in this appeal is the appellant's objection to the taxation of 'advance licence receipt'. The appellant has shown advance licence receivable of Rs.5,46,20,751, under the head advance licence benefit receivable and has thus, thereby shown lower consumption of raw-material. In the computation of Income, deduction under this head was claimed by the appellant, before the Assessing Officer, by relying on the decision reported in 41 ITD 142. The appellant had stated before the Assessing Officer with it's letter dated 31-1-1995, that, it applies to the Controller of Export & Import to get advance licence for import of duty-free raw-material against anticipated exports. Such licence is issued against certain export commitments, and that licence was not transferable. The appellant makes exports and also does duty-free import of raw-material against that licence, since it takes time to get raw-material imported from foreign countries, hence the appellant during that period utilizes local raw-material which costs more than duty-free imported material. This difference in cost is taken as income in accounts. It was stated by the appellant in the above mentioned letter as under:
'At the end of the year it may happen that the company has already made certain exports and not made duty-free imports. The company has used local raw-materials which is costlier and the difference is charged as income.'
The arguments of the appellant are, that the benefit to the appellant is in the form of concession in custom duty for importing goods, and the appellant may not import any goods at all in future. The benefit is therefore contingent, and it materializes only when relevant imports are made, and not earlier and therefore, it cannot be taxable prior to the time of import of material. It was also argued that when actual imports are made, the difference in local price and the price of imported material may not be wide enough to justify import. It was therefore argued that the benefit is simply on paper, and its taxability arises only when it is actually realised. It was further submitted that the benefit should not be treated as income at this stage. The appellant reiterated that the benefit does not arise immediately also, because the licence received is not transferable. The Assessing Officer has stated that the taxability of this benefit is covered by the provisions of section 28(iv) of the IT Act, 1961, in which it has been provided that the value of any benefit or perquisites whether convertible into money or not, arising from business, or of a profession, is income. The appellant gets a benefit by way of advance licence to import duty-free raw material only with an obligation of certain export commitments. When the appellant makes exports, the obligation of the appellant is fulfilled as the right becomes absolute. At the end of the year this right is a valuable asset in the hands of the latter. Period is not relevant at this stage. As off today, the appellant may not transfer the licence directly, but it may import duty free material, and that material can stand accrued to the appellant, and then only the correct picture of the performance of the company comes out. This is exactly what the appellant itself has done in the final accounts. It is therefore obvious that this benefit is a taxable benefit, and its taxability arises in the year of export, because the obligation of export has been fulfilled before the end of the year. Shri K.R. Kamdar, CA the learned counsel representing the appellant, submitted during the appellate proceedings, that, in view of the decision of the ITAT in 41 ITD 142, the benefit is not taxable since section 28(iv) of the Income-tax Act, 1961 applies only when the benefit is received or accrues to the appellant, and that no benefit accrued at the time of export, and, the time of accrual is the time, when the raw-materials are consumed. In the first instance, it is important to note that the decision relied on by the appellant relates to the assessment year 1985-86. Thereafter, amendment has been made in law, since the taxability of export incentives has been a subject-matter of litigation. In order to give finality to the view that such export incentives are of revenue nature and hence taxable, and to end all judicial controversies thereabout, the Finance Act, 1990 has inserted in section 28 of the Income-tax Act, 1961.
-- Clause (iiia) read with section 2(24)(va) (w.r.e.f 1-4-1962) so as to make the profit on the sale of import entitlement licences taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1962-63;
-- Clause (iiib) read with section 2(24)(vb) (w.r.e.f 1-4-1967) so as to make cash assistance (by whatever name called) received or receivable by any persons against exports under any scheme of the Government of India taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1967-68; and
-- Clause (iiic) read with section 2(24)(vc) (w.r.e.f 1-4-1972) so as to make any duty of customs and excise repaid or repayable as draw back to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971, taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1972-73.
The amendment in section 28(iv)(iia) thus renders the decision reported in 41 ITD 142 and relied upon by the learned counsel of the appellant, inapplicable. The Gujarat High Court in the decision cited in 166 ITR 316 has held, that if there is a nexus between the business of the appellant, and the benefit derived, then it is taxable under section 28(iv) of the Income-tax Act, 1961. For the question of year of chargeability of benefit, it is the year in which the appellant is entitled to it, since the benefits 'receivable' are also taxable, whereas the appellant has contended that the benefit 'received' is taxable. As the appellant follows the mercantile system of accounting, the benefit 'receivable' is taxable in the year in which export is made. The decisions of the Supreme Court reported in 26 ITR 271 and in 69 ITR 675 held that, in order that income may accrue to a person, it is necessary that a right to receive the same is vested, though its valuation is postponed or its materialization depends on contingency. Thus, the right to 'advance licences benefit' becomes 'receivable' at the moment the export is made. In view of the legal position, and on facts, it is therefore held, that the action of the Assessing Officer is justified, and accordingly the claim of Rs.61,99,580 rejected by Assessing Officer is confirmed. The appellant does not become entitled to get this deduction in assessment year 1992-93."
4. Shri S.N. Soparkar, learned Advocate appeared on behalf of the assessee. He drew our attention to a Chart submitted during the course of hearing and also placed reliance on various documents referred to in the said Chart. He submitted that no income accrued until the imports are made and the raw-materials are consumed, which events took place in the subsequent year. The learned counsel also reiterated the submissions made in the above referred Notes in respect of taxability of ALBR submitted during the course of assessment proceedings. He also contended that the licences for importing the raw materials granted to the assessee are not transferable. Specimen copies of import licences placed at pages 321 to 342 were also shown to us with a view to support his contention that import licences in question were not transferable.
4.1 The learned counsel also drew our attention towards the opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India as published in Compendium of Opinions Volume VII-4 on treatment of Advance Licences received for import of duty-free raw materials against export commitments but not realised in the books of account. In the said opinion, the Expert Advisory Committee has, inter alia observed as under:--
"3. With regard to considering the 'estimated future duty benefit' as an income for the period in which the Advance Licences are received or the goods are exported against File Numbers, the Committee notes that one of the major considerations governing the selection and application of accounting policies is 'prudence', according to which profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. On the basis of the facts of the query, the Committee is of the opinion that in view of uncertainty attached to future events related to the earning of the duty benefit no revenue should be recognised in respect of the Advance Licences received in the current period on the goods exported in that period as also in respect of the goods exported in the current period against File Numbers, the Advance Licences being received in a subsequent period. The Committee is further of the opinion that on the same considerations, it is not proper to defer a portion of the cost of locally purchased raw materials by accounting the difference between consumption of raw material at the local price and the international duty-free price."
4.2 Shri S.N. Soparkar, on the strength of the aforesaid opinion of the Expert Advisory Committee, submitted that according to the well accepted policy of "prudence", profits are not anticipated where there are uncertainties attached to accrual or receipt of any income. The book keeping entries made by the assessee of reducing the cost of raw materials even without importing duty-free raw material are therefore clearly contrary to the aforesaid opinion of the Export Advisory Committee. In any case, the learned counsel contended that income which is uncertain and contingent till the end of the accounting year cannot be treated as income having been accrued in the relevant year.
4.3 The learned counsel further contended that the learned CIT (A) has erred in invoking section 28(iv) while deciding the assessee's appeal for assessment year 1992-93. He pointed out that section 28(iv) applies only when the benefit is received or accrued to the appellant. In the present case, no benefit accrued to the assessee at the time of export but benefit from import of duty-free raw materials will accrue to the assessee only when raw material in question is really imported and the same is consumed in the manufacture of goods exported/sold. The provisions of section 28(iv) are therefore not applicable on the facts of the assessee's case.
4.4 The learned counsel also submitted that the CIT (A) has distinguished the decision of the Tribunal in the case Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. in view of the amendment made in section 28(iv)(iiia) of the Act. Shri Soparkar pointed out that the provisions of section 28(iv)(iiia) are applicable in respect of the profits on sale of licences granted under the Import (Control) Order, 1955 made under the Import & Export (Control) Act, 1947. The profit on sale of licence has been brought within the ambit of profits and gains of business liable to tax under section 28. In the present case, even the import licences have not been granted in some cases and there is no question of any profit derived from the sale of such licences, as the licences granted to the assessee are not transferable at all. The aforesaid amendment made in section 28 instead of supporting the case of the Revenue, in fact, supports the stand taken by the assessee that no such income can be said to have been really accrued to the assessee until the goods are actually imported and used for production.
4.5 Shri Soparkar submitted that merely because the entry was made in the books of account in the year when the exports were made, the income represented by ALBR cannot be taxed until the raw material is actually imported, which event has taken place in the subsequent year. The amount which does not represent the real income accrued to the assessee cannot be charged to tax simply on the basis of the book keeping entry made in the books of account. He placed reliance on the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The relevant extracts from the said judgment are reproduced below:--
"It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company. But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act as was pointed by Lord Russet in the case of B.S.C Footwear Ltd. [1970] 77 ITR 857, 860 (CA), the income-tax law does not march step by step in the footprints of the accountancy profession."
4.6 The learned counsel also placed reliance on the decision of the Tribunal Ahmedabad Bench "C" in the case of Core Health Care Ltd. v. Dy. CIT [2000] 70 TTJ (Ahd.) (TM) 490, a copy whereof has been placed at pages A-1 to A-76 of PB-IV. He drew our attention to para-48 and subsequent paragraphs of the said decision. The Tribunal in para-50 of the said order, relying on the decision of the Special Bench of the Tribunal Bench in the case of Dy. CIT v. Nagarjuna Investment Trust Ltd. [1998] 65 ITD 17 (Hyd.), observed that the provisions of section 145 cannot override section 5 of the Act. If an income has neither accrued nor received within the meaning of section 5 of the Act, whatever section 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognising such income which in law and on facts did not really accrue or arise or received in the previous year. Section 145 determines the mode of computing the taxable income. It does not affect the range of taxable income or ambit of taxation. Computation provisions cannot enlarge or restrict the contents of taxable income. In para-53, the Tribunal has further observed that the fact that certain entries were made or not made in a particular year of account is totally immaterial and in any event, such entries are not decisive or conclusive of the matter. In para-55, the Tribunal has observed as under:--
"55. It is clear from the principles of law enunciated in the above referred judgments that the question whether a particular deduction is allowable or not under the provisions of the Act will not depend on the existence or absence of entries in the books of account. In any case entries in the books of account cannot be treated as decisive or conclusive in relation to determination of the question relating to taxability of an expenditure under the provisions of the Act. If on a true and correct interpretation of the relevant provisions of law, the assessee is entitled to deduction of a particular expenditure, manner and mode of making an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things."
4.7 Shri Soparkar then drew our attention to the decision of the Special Bench of the ITAT Hyderabad Bench in Nagarjuna Investment Trust Ltd.'s case. The decision of the Special Bench of Hyderabad Tribunal in the above referred case has been followed by the Tribunal Ahmedabad Bench in the case of Core Health Care Ltd. It is, therefore, not necessary to once again reproduce the relevant extracts from the decision of the Special Bench.
4.8 Shri Soparkar then relied on the decision of the Tribunal Ahmedabad Bench "C" in the case of Vadilal Dairy International Ltd. v. Dy. CIT [IT Appeal NO. 500 (Ahd.) of 1997], a copy whereof has been placed at pages A-77 to A-100 of PB-IV. At page A-92, the Tribunal has observed that the entries made by the assessee in its books of account cannot be treated as sacrosanct as the question whether an item of expenditure is allowable as a deduction 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 admissibility or otherwise of the deduction.
4.9 Shri Soparkar submitted that even subsequent to the insertion of section 28(iiia) by the Finance Act, 1990 with retrospective effect from 1-4-1962, what is taxable is only the amount of profit on sale of import on licences granted by way of Export Incentives. This provision directly supports the assessee's contention as to what is sought to be taxed by section 28(iiia) is only the amount of profit on sale of licences and not the value of licences. Furthermore, the taxable event as per section 28(iiia) will take place only when the import licence received by the assessee in lieu of export is transferred or sold. The taxable event will take place in the year when the import licence is sold. On the same analogy, the value of benefit derived by the assessee as a result of duty-free import of raw materials can be taxed only when the duty-free raw material is actually imported and used in the process of manufacture and the manufactured products are sold. Therefore, it cannot be said that the income by way of ALBR has accrued to the assessee before actual import of the raw materials in question. The learned counsel contended that until the raw material is actually imported pursuant to import licences granted in lieu of exports, the benefit receivable therefrom is absolutely uncertain and contingent. It is contingent because of various factors such as the assessee may not choose to import the raw material in question pursuant to import licence granted to them because of increase in the price of such raw material in foreign country; because of fluctuation in the foreign exchange rate; because of variation in the rate of customs duty in our country and because of variation in the purchase price of raw material in the domestic market. There are several such factors which establish beyond doubt that until the goods are really imported, the benefit as a result of advance Licence Benefit receivable by the assessee would only be contingent and uncertain. The income therefore cannot be said to have accrued in favour of the assessee until the goods are actually imported.
4.10 Shri Soparkar also contended that the learned CIT (A) has grossly erred in relying on the decision of the ITAT in the case of Pratibha Syntax Ltd., which decision has nothing to do with the assessee's case. The facts of that case are clearly distinguishable with the facts of the present case.
4.11 Shri Soparkar strongly relied on the decision of the Tribunal in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. He submitted that the facts of the aforesaid decision are identical with the facts of the present case. The ITAT Bombay Bench while deciding the aforesaid case had, inter alia, relied on an earlier decision in the case of Amar Dye Chem. Ltd. [RA No. 336 (Bom.) of 1981 arising out of IT Appeal No. 3897 (Bom.) of 1974-75, dated 19-8-1981] referred to at page 148 of 41 ITD. In that case also it was held that the benefit that the assessee expected to obtain by virtue of Advance Licence to import duty-free goods would accrue to it only on the happening of an event viz., the import of the goods in question, which admittedly had not taken place during the relevant accounting year. Therefore, the benefit or income shown in the accounts in the form of import entitlement was not, in fact, an income because it had neither accrued nor had been received during the year. Reliance was also placed on the decision of the ITAT Ahmedabad Bench "B" in the case of IAC v. I.C Gandhi Silk Mills Ltd. [1986] 19 ITD 320. In that case the assessee company was engaged in export business, and was following a hybrid system of accounting, under which it was accounting for sale realizations on accrual basis and export benefits like drawback cash assistance and replenishment licences received from the Government, on cash basis. The IAC, however, took the view that all these export benefits accrued to the assessee as soon as the assessee exported the goods, as part of the transaction of sale, and that, due to non-recording of their value in the books of account on accrual basis, the profits disclosed by the assessee did not reflect the true profits. The Assessing Officer rejected the cash method adopted by the assessee, and assessed the value of these benefits on accrual basis. The CIT(A) accepted the cash method of accounting followed by the assessee in relation to export incentives. On further appeal by the Revenue, the Tribunal held that the Department could not reject the cash basis adopted by the assessee on the ground that such benefits accrued to the assessee as soon as the export was completed and cannot assess the value of such benefits on accrual basis. Shri Soparkar then relied on the decision of the Hon'ble Kerala High Court in the case of CIT v. Madhavan Nayar [1983] 35 CTR (Ker.) 81.
5. Shri Girish Dave, the learned CIT--DR represented the Department. He relied on the elaborate reasons mentioned in the assessment order as well as in the order of the CIT(A) for assessment year 1992-93 and the orders passed for subsequent years including the orders relating to year under consideration. He submitted that the assessee claimed deduction in respect of ALBR amounting to Rs.8,29,87,603 in the return of income on the basis of decision of the ITAT Bombay Bench in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. The facts of the case are clearly distinguishable. In that case the assessee-company did not import the duty-free raw material viz., fibre, which is evident from the facts recorded in the said decision. Moreover, that decision deals with the tax liability under section 28(iv) only. The taxability of the aforesaid income already accrued to the assessee by way of right to import duty-free raw materials has to be examined keeping in view the nature of such right acquired by the assessee under the Export and Import Policy announced by the Government of India. The learned CIT-DR submitted relevant extracts from the Export and Import Policy relating to the period from 1-4-1992 to 31-3-1997 in the Compilation and drew our attention to various clauses of Chapter VII dealing with Duty Exemption Scheme. Under the Duty Exemption Scheme, import of raw materials etc. required for direct use in the product to be exported may be permitted duty-free by the competent authority under the categories of licences mentioned in the said chapter. Clause 48 of the said Scheme provides that an Advance Licence is granted for the duty-free import of inputs. Such licence shall be issued in accordance with the policy and procedure in force on the date of issue of the licence and shall be subject to the fulfilment of a time-bound export obligation and value addition as may be specified. Advance Licences may be either value based or quantity based. Under a value based Advance Licence, any of the inputs specified in the licence may be imported within the CIF value indicated for those inputs. A quantity based Advance Licence shall specify the names and description of items to be imported and exported, the quantity of each item to be imported; the CIF value of imports; and the FOB value and quantity of exports. Clause 54 deals with Self-declared Pass Book Scheme. A scheme of self-certification and self-declaration under the Advance Licence Scheme will be available for some categories of exporters as specified in the said Scheme. Clause 62 provides that Exporters may apply for duty-free licences against specific export orders. Clause 63 provides that the period for fulfilment of the export obligation under a duty-free licence shall commence from the date of issue of the licence. The export obligation imposed shall be fulfilled within a period of 12 months subject to certain exceptions and extension permissible under the said Scheme. Clause 66 also permits exports in anticipation of the licence. Exports/supplies made from the date of receipt of an application may be accepted towards discharge of export obligation. If the application is approved, the licence shall be issued in accordance with the policy and procedures in force on the date of its issue. Clause 67 provides that a value or quantity based Advance Licence or the materials imported against them, may be freely transferable after the export obligation has been fulfilled, export proceeds realized and the bank guarantee/LUT redeemed. This facility shall not be available in cases were the MODVAT/Proforma Credit facility or excise relief under Rule 191B of the Central Excise Rules has been availed of.
5.1 Shri Dave, the learned CIT-DR then drew our attention to various relevant clauses relating to the procedures governing Duty Exemption Scheme. A photocopy of the relevant clauses appearing in the Hand Book of Procedures pertaining to the period from 1-5-1992 to 31-3-1997 was submitted in the Compilation. It may not be necessary to make a detailed reference of various clauses appearing in the said Hand Book of Procedures. But all these clauses were pointed out by the learned CIT-DR with a view to explain the entire Scheme relating to the import of duty free raw materials in lieu of exports which arc covered in the Duty Exemption Scheme. With this background, the learned CIT-DR proceeded to explain that the income by way of benefit receivable as a result of entitlement to import duty free raw material accrues to an assessee moment the export obligation is discharged by the exporters. The exporters acquire legal right to import raw material required for production of goods exported or to be exported by the assessee.
5.2 Shri Dave, the learned CIT-DR invited our attention to Paper 8--Indirect Taxes published by the Board of Studies--The Institute of Chartered Accountants of India. Para-12.3 of the said Paper deals with duty deferment (section 143A). The relevant extracts are reproduced below:--
"Section 143A provides the solitary exception for deferring payment of duty. It is provided that where any goods are imported against an Import Licence belonging to the category of Advance Licence subject to an obligation to export goods specified in the licence the Asstt. Commissioner may permit clearance of such imported goods without payment of duty leviable thereon. There are at present a few types of such advance licences, namely, Quantity Based Advance Licence, Value Based Advance Licence. These form part of a general package of export promotion concessions. An exporter is entitled to import necessary raw material as a part of export promotion. Normally, the import would be allowed after being satisfied that the party has effected the necessary exports. However as a further philip to export promotion, the party is allowed to import in advance, process the export goods and fulfil the export obligation.
Under this procedure, the collection of duty is deferred subject to a clear legal undertaking that the importer of the said goods will discharge his obligation by exporting requisite quantity/value of specified end products and that the import duty would be adjusted against the export duty drawback payable on the export goods.
If, the importer fails to fulfil his export obligation, the importer will become liable to pay the import duty so deferred with a simple interest at the rate of 12% per annum calculated from the date of permission of home clearance granted. This liability to be enforced in terms of the bond required to be executed at the time of clearance of import, goods."
5.3 This document was submitted by the learned CIT-DR with a view to emphasize that the only obligation of the exporter is to fulfil the export obligation for acquiring the right to import duty free raw material. Once that obligation has been fulfilled by the assessee, the right to have import licence for importing the duty free raw material becomes a vested and absolute right. Therefore, the income by way of benefit flowing from such right accrues in the year when the export obligation has been discharged by the assessee. The accounting entries made by the assessee in the present case are based on the fulfilment of the corresponding export obligation. The assessee has accounted for the net benefit receivable on the basis of exports made during the relevant accounting year. It cannot therefore be said that the income accounted for in the books of account is the income which is still contingent or uncertain. The income, in fact, has already accrued in the year under consideration.
5.4 Shri Girish Dave, the learned CIT-DR then drew our attention to para-22.1 of Publication styled as Indirect Taxes--(Law and Practice by V.S Datey--Taxmann's Publication) in which it was explained that DEEC--Advance Licence--Raw material which is required to manufacture export products can be imported without payment of customs duty. A DEEC (Duty Exemption Entitlement Certificate) Book is given to importer and hence it is popularly known as "DEEC scheme". Since the raw material can be imported before export of final products, the licences issued for this purpose are called "Quantity Based Advance Licences". The Advance Licence will be for Actual User only. The import of raw materials is on the basis of quantity based advance licence-Input-Output norms are finalised and quantity allowed to be imported will be based on quantity exported e.g. assume that there are 3 inputs A, B and C--proportion of 50:30:20 as per input-output norms prescribed in EXIM policy, the licence is available for A,B and C in that proportion only as per quantity norms. If quantity for a particular description cannot be imported within the specified value under the certificate, Commissioner of Customs can allow adjustment of individual value within the total value. These facts were explained by the learned CIT-DR with a view to emphasize that the import of specified raw material has a direct nexus with the quantity of goods exported. Therefore, once the goods have been exported, the entitlement of the specified raw material required for manufacture of goods so exported gives rise to accrual of income as a result of duty free import of raw material allowed under the said Export Promotion Scheme.
5.5 Shri Dave, then drew our attention to the audited Balance Sheet of the appellant company. He pointed out that the Notes of accounts given in Schedule R in the audited Balance Sheet gives necessary details and information which are required to be given by way of disclosure of significant Accounting Policy as required by Parts II and III of Schedule VI of the Companies Act. The auditors have given an unqualified report in relation to the aforesaid income shown by the assessee. The audited accounts, according to the audit report, disclose a true and fair position of the profits of the appellant company in the relevant year. The income of the assessee has to be computed in accordance with the method of accounting regularly employed by the assessee. It is true that the entries made in the books of account are not decisive or final, if they are inconflict with the provisions contained in the IT Act.
5.6 Shri Dave then drew our attention to the judgment of the Hon'ble Supreme Court in the case of CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703. It was held by the Supreme Court that in order to determine the question of taxability, well settled legal principle as well as principles of accounting have to be taken into account. It is a well accepted proposition that "for the purposes of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statutes". Shri Dave submitted that in the present case the entries made by the assessee-company in the relevant year under consideration, in respect of ALBR are in conformity with the ordinary principles of commercial accounting, as without taking this income into consideration, the true and fair position of profits will not be reflected in the final accounts. The duty free raw material is allowed to be imported under the Export Promotion Scheme with a view to ensure that Indian industries can survive in the global competitive market. Such raw materials required by way of input for manufacture of goods exported have a direct nexus with the exports made during the relevant accounting year and therefore it is necessary to account for the value of such benefit in the cost of raw material in the relevant accounting year itself so as to determine the correct cost of goods exported.
5.7 Shri Dave then submitted that the facts in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. heavily relied upon by the assessee are clearly distinguishable. The said decision pertains to assessment year 1985-86 when the Export Promotion Scheme was totally different. The year under consideration is assessment year 1995-96 which is governed by the Export and Import Policy relating to the period under consideration. He drew our attention to para-7 of the said decision in which various clauses of Duty Exemption Scheme relating to assessment year 1985-86 have been briefly stated. In that case the assessee had not imported the raw material viz, fibre. The criteria of inputs and exports were also different. The raw material imported by the assessee was not transferable. In the present case it is transferable under certain specified circumstances. He also pointed out that in that case the taxability of such benefit was examined only with reference to section 28(iv). However, in the present case the taxability of such benefit has to be examined from all possible angles as it forms part of the profits and gains of business according to the ordinary principles of commercial accounting.
5.8 Shri Dave then drew our attention to the judgment of the Punjab & Haryana High Court in the case of CIT v. Punjab Bone Mills [1998] 232 ITR 795. It was held by the High Court that though the cash incentive was connected with exports and was in the nature of trading receipt or a revenue receipt, it could not be said to accrue or arise unless the exporter made his claim. The date of the export would not by itself give rise to an income unless the assessee laid a claim to receive the income from the Government. The words "accrue" and "arise" have not been defined in the IT Act but they appear to be synonymous and have been used for bringing in a natural result. Strictly speaking, the word "accrue" may not be synonymous with "arise", the former would be. connoting the idea of growth or accumulation and the latter, the growth or accumulation with a tangible shape so as to receivable. It is clear that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires the right to receive the income, the income can be said to have accrued to him though it may be received later, on its being ascertained. The basic concept is that he must have acquired a right to receive the income. Shri Dave pointed out that in the present case the export incentive is available to the assessee as a result of self-certification scheme. The assessee acquires the right to receive the import licences for importing duty free raw materials in advance even prior to export of goods in question. Such a legal right becomes absolute after fulfilment of the export obligation. The right to receive such benefit/entitlement clearly accrued to the assessee in the relevant accounting year when the exports had already been made and when the assessee had already submitted an application for grant of Advance Licences under the said Scheme. The income, in fact, had accrued to the assessee in the relevant year and the accounting entries were rightly made in conformity with the provisions contained in the Companies Act as well as the provisions contained in the IT Act.
5.9 The learned CIT-DR then pointed that the learned CIT(A) has relied on the decision of the Tribunal in the case of Pratibha Syntex Ltd. The learned counsel is not right in saying that the said decision is not at all relevant to the point in issue. He drew our attention to para-4.1 at page6 of the said order. The learned CIT (A) in the aforesaid decision has held that the benefit availed of by the assessee on duty free imports satisfies all the three in built conditions of section 28(iiib). The expression "cash assistance" is amplified by the words "by whatever name called" in section 28(iiib). This qualification "by whatever name called" is added to avoid any narrow construction and thus the duty benefit derived by the assessee falls within the ambit of section 28(iiib).
5.10 In para-6, the Tribunal has incorporated the arguments advanced on behalf of the assessee that the duty saved by assessee in terms of the duty free imports cannot be termed as cash assistance. In para-6.1, the arguments advanced on behalf of the Department have been briefly stated. The Tribunal has given its findings in para-13 at pages 24 and 25 of the order. The Tribunal has observed that clause (iiib) does not mean only receipt of cash assistance direct from the Government. The words "by whatever name called" expand the meaning of the term "cash assistance". The additions of these words are not meaningless or an idle formality since such words are not found added elsewhere in the Act. Thus, it has to be held that clause (iiib) was inserted to ensure that all other reliefs given in any form to the exporters not specifically covered under clauses (iiia) and (iiic) of section 28 should not be left out. In the particular case, the duty payable to the Government of India, but not paid under the Scheme of the Government is nothing but cash assistance in the hands of the assessee and the method of accounting adopted by the assessee for identifying and counting the same in the books of account to claim the necessary deduction under section 80HHC cannot be faulted. The Tribunal further held that the duty benefit available to the exporter under any of the schemes of the Government of India falls under the provisions of section 28(iiib).
5.11 Shri Dave submitted that the aforesaid decision in the case of Pratibha Syntex Ltd. clearly goes against the assessee and the income by way of such benefit receivable by the assessee is liable to tax inter alia under section 28(iiib). Since the assessee has maintained their accounts on accrual basis is mandatorily required by the provisions of Companies Act, the value of such benefit is liable to tax on accrual basis in the year under consideration.
5.12 Shri Dave, the learned CIT-DR also drew our attention to the Publication styled as accrual system of accounting--A study by Bombay Chartered Accountants Society, Bombay. The relevant para-15 of the said publication dealing with the accounting system of import entitlement licences on accrual basis is reproduced below:--
(15) How should import entitlement licences be accounted under the accrual basis of accounting? Would the method of accounting be different if the licence can be sold in the open market--that is--should the import licences on hand or receivable at year end against exports already made be evaluated if the licences can be sold?
Answer(i) In case of import entitlement licences, the following be considered:
(a) licences issued by the Government for importing raw materials for exporting finished goods.
(b) licences received or to be received where export has already been made of finished goods manufactured either out of raw materials purchased in India or duty paid imported raw materials.
(ii) In the first instance, no accounting of import entitlement licences is required as materials on receipt will be accounted at cost and utilised for manufacturing finished goods for export.
(iii) However, in the second instance, if there is reasonable certainty as to the receipt of import licence and the measurability of future benefit:
(a) the benefit in cost i.e., the difference between the price of locally purchased raw material or the duty paid imported raw material and the international price of raw material should be adjusted in the books by reducing the cost of raw materials already utilised for exports and debiting receivable account in case the licence cannot be sold. Subsequent receipt and utilisation of licence will be a material factor to be considered whilst quantifying the benefit in cost to be accounted.
(b) in case the licence can be sold, the lower of cost or value of saleable import licence at year end should be adjusted in the books of account by crediting the profit and loss account and debiting "import licences on hand" and these should be included in current assets. Cost for this purpose would be the loss incurred in the import transaction.
(iv) The Expert Committee of the Institute has opined that export incentives, that is, cash assistance and duty drawback should be separately disclosed in the profit and loss account--refer Compendium of Opinions, Vol. VI-43.
(v) However, based on the concept of prudence and uncertainty involved, the Expert Committee of the Institute has advised that:
(a) licences even in respect of which export obligations have been fulfilled cannot be treated as "Inventories";
(b) difference in cost of locally acquired raw materials goods and imported raw materials should not be adjusted--refer Compendium of Opinions, Vol. VII-4.
(vi) It may be noted that the opinion was given in January 1987 i.e., before the accrual basis of accounting was made mandatory.
Shri Girish Dave, the learned CIT-DR thus strongly supported the order of the CIT (A) in relation to this ground.
6. At this stage of the hearing, the Bench required the learned counsel to furnish the details of income represented by Advance Licences accounted for in the books of account and the corresponding income shown in the return of income when the raw material was actually imported or the validity of the concerned import licences expired. The learned counsel furnished the following chart:--
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"Sr. Asst. Advance Licence Advance Licence Difference
No. Year Booked Utilised/Lapsed
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1. 1992-93* 6,199,580 -- 6,199,580
2. 1993-94 54,620,751** 6,199,580 48,421,171
3. 1994-95 80,238,750 35,541,764 44,696,986
4. 1995-96 82,987,603 47,684,742 35,302,861
5. 1996-97 79,237,763 116,158,672 (35,920,909)
6. 1997-98 91,777,247 146,135,678 (54,358,431)
7. 1998-99 73,987,997 62,890,307 11,097,690
8. 1999-2000 21,164,259 85,792,334 (64,628,075)
9. 2000-01 46,474,214 33,370,548 13,103,666
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Total 536,688,164 532,773,625 3,914,539
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Note: For assessment year 1995-96 licences worth US$ 3,73,999.81 have not been utilised at all and therefore lapsed and the files have been closed. The statement of licences lapsed is enclosed herewith in Annexure 1."
6.1 After perusing the aforesaid chart, the Bench required the learned representatives of both the sides to consider as to whether such a litigation from assessment years 1992-93 to 2000-2001 in relation to the aforesaid point is going to give any real gain or loss to either side. The taxability of the benefit by way of Advance Licences for importing duty free raw materials has not been disputed by the assessee but the dispute relates only to the year of taxability. The rate of tax in the cases of companies were almost uniform in different years. The learned counsel pointed out that the rejection of assessee's claim for exclusion of such income in the year when the exports were made but raw materials had not been actually imported, has resulted into levy of interest under section 234B and other provisions relating to initiation of penalty proceedings under various provisions of the Act. The Bench required the learned CIT-DR to ascertain from the learned Chief CIT as to whether interest under section 234B could be waived by him in accordance with the provisions of this Act, if the assessee agrees to the inclusion of such income in the respective years when such income was accounted for in the books of account. Both, the learned counsel of the assessee and the learned CIT-DR wanted time to seek necessary instructions. On the next date of hearing, both of them expressed their inability to accept the aforesaid suggestion.
6.2 Thereafter, the Bench required the assessee to furnish various details relevant to the Advance Licences Benefit Receivable accounted for by the assessee in the books of account and also the details as to when the concerned raw material was imported pursuant to such import licences. Various other connected details such as its impact on valuation of closing stock, the nature of entries passed in the relevant year when income was booked and also in the subsequent years when the benefit was utilised or when the licences had lapsed, were also required to be furnished.
6.3 The learned counsel in response to the aforesaid query submitted various details and documents in the Compilation marked as Volume V. A copy of this Compilation was given to the learned CIT-DR who requested for some time so that he may go through the said documents and make further submissions in relation to the aforesaid ground. Further time was accordingly granted.
6.4 Shri Girish Dave, the learned CIT-DR, on the next date of hearing submitted written submissions dated 26-4-2001 and also made oral submissions. He pointed out certain discrepancies in the various details and charts submitted in the Compilation marked as Volume V. Shri Dave pointed out that the learned counsel has argued that there are various factors on which accrual of benefit depend, viz. (i) price of raw material in International market; (ii) rate of import duty prevailing at the time of import; (iii) exchange rate at the time of import of raw material; and (iv) local price of raw material available in India. On the strength of these contingencies and uncertainties, the learned counsel argued that the benefit was notional and hypothetical in the years when the income was booked in the books of account. The real income accrued only when the duty free raw material was actually imported. He further contended that the accounting entries do not matter so long as there is no accrual of income. It was also contended that the effect of such income by way of ALBR was not reflected in the valuation of closing stock. The raw material has been valued at cost and finished goods have been valued by taking into consideration the local cost of raw material purchased. The learned CIT-DR pointed out that such a method of valuation of closing stock may lead to anomalous situation in some years as closing stock appears to have been valued at higher cost.
6.5 Shri Dave pointed out that all these uncertainties or so called contingencies pointed out by the assessee's counsel have duly been taken into consideration by the assessee while accounting for the net benefit accrued during the year under consideration. He drew our attention to the various details and charts submitted in the Compilation marked as Volume V to support this contention.
6.6 A summary statement of product-wise Advance Licence Benefit Receivable as on 31-3-1995 accrued for the year relevant to assessment year 1995-96 has been given at pages 1 and 2 of Paper Book Volume V. A photocopy of the said chart is annexed herewith and marked as Annexure-A of this order. Shri Dave pointed out that the net income accrued during the year under consideration in respect of ALBR by the assessee has been accounted for to the tune of Rs.8,29,87,602=16. This figure has been arrived at after taking into consideration the import licences for those raw materials, which have not been utilised and the time has also expired. Those figures have been shown in brackets in column "m" of the chart placed at Annexure-A. If the bracketed figures shown in column "m" of the said chart are excluded, the total of net benefit as per column "m" of Annexure-A will come to Rs.10.66 crores. The total of such bracketed items shown in column "m" of Annexure-A representing the value of licences not utilised or excess provisional income shown in the year when such income was booked, comes to Rs.1.44 crores. The difference between the positive figures and bracketed figures shown in the column "m" of Annexure-A i.e. Rs.10.66 crores--Rs.1.44 crores comes to Rs.9.22 crores. Out of this amount the assessee has further deducted 10% for contingency on entitlement. The net income accrued during the year under consideration has thus been worked out as under:--
(Rs.)
Net Benefit Accrued during the year 9,22,08,446 = 84
Less: 10% Contingency on Entitlement 92,20,844 = 68
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Net Income Accrued during the year 8,29,87,602 = 16
----------------
It is thus evident that the value of actual licences not utilised at all and which have lapsed and the files have been closed, have actually been deducted from the net benefit receivable due to grant of entitlement of Advance Licences. The excess provision of such income by way of ALBR made in the prior years has also been adjusted while determining the amount of net income accrued in the relevant year. The total figure of such amount represented by unutilised material entitlement/excess provisional income written off comes to Rs.1.44 crores on net income accrued in respect of ALBR of Rs.10.66 crores, which comes to about 13.50% of the total benefit. In addition to the aforesaid actual amount of Advance Licences unutilised/lapsed already taken into consideration while computing the net income accrued during the year, further deduction of 10% has been taken into consideration while computing the amount of such net income accrued to the tune of Rs.8,29,87,602 = 16. The assessee as a prudent trader has therefore clearly kept an adequate margin to meet all such contingencies and uncertainties while accounting for such income in the year when the exports were actually made. The income in question, therefore, cannot be regarded as contingent but it represents income actually accrued to the assessee, which has been estimated in a very systematic and rational manner by the assessee. The assessee cannot therefore contend that the benefit accounted for in the books of account represents notional or hypothetical income. It represents real income, which is also proved by the subsequent events which show that such real income was actually received by the assessee in subsequent years. The figures of Advance Licences utilised and income booked over a period of 9 (nine) years from assessment year 1992-93 to assessment year 2000-2001 clearly shows that the income booked by the assessee in the books of account and income shown in the return of income when the Advance Licences were utilised/lapsed comes to almost a similar figure, The total of income booked in the books of account over a period of nine years comes to Rs.53,66,88,164 and the amount of Advance Licences utilised/lapsed in these nine years comes to Rs.53,27,73,625. The income accounted for by the assessee in the year when the exports were made is thus based on proper and appropriate method and the same is rightly assessable on accrual basis in the year in which such income was adjusted in the books of account.
6.7 Shri Dave then relied on several decisions. Let us briefly discuss the ratio of all those judgments.
(A) In CITv. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), at page 129, the Hon'ble Supreme Court has observed as under:--
"There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e. on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment."
(B) In Indermani Jatia v. CIT [1959] 35 ITR 298 (SC), the relevant extract from the Head Note at page 299 is reproduced below:--
"It is well known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profit or gains are credited though they are not actually realised, and the entries thus made really show nothing more than an accrual or arising of the said profits at the material time. The same is the position with regard to debits made."
(C) In State Bank of Travancore v. CIT [1986] 158 ITR 102 (SC), the relevant extracts from the Head Note at pages 103 and 104 are reproduced below:
"(i) For the content of taxable income, one has to refer to the substantive provisions of the IT Act, 1961 mainly section 5 read with the other relevant sections.
(ii) In some limited fields where something which is the reality of the situation prevents the accrual of the income, then the notion of real income, i.e., making the income accrue in the real sense of the term, can be brought into play but the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication by the assessee treating amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and after the event of accrual, corroborated by appropriate entry in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about.
(iii) The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary to the postulates of the Act.
(iv) Where interest has accrued and the assessee has debited the account of the debtor, the difficulty of recovery would not make its accrual non-accrual.
(v) The following propositions emerge in relation to the theory of real income: (1) It is the income which has really accrued or arisen to the assessee that is taxable. Whether the income has really accrued or arisen to the assessee must be judged in the light of the reality of the situation. (2) The concept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry--but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee, (8) The concept of real income is certainly applicable in judging whether there has been income or not but, in every case, it must be applied with care and within well-recognised fimits."
(D) In CITv. Chunilal V Mehta & Sons (P.) Ltd. [1971] 82 ITR 54 (SC), the relevant extract from the Head Note at page 55 is reproduced below:
"(ii) that the respondent was entitled to a definite sum as liquidated damages and that sum became due to the respondent in April, 1951, though it was actually received by the respondent in December, 1955. The fact that the respondent was claiming an exorbitant sum to which it was not entitled did not convert its light into a contingent right. The respondent's right to get the compensation arose in April, 1951, and, therefore, the compensation of Rs.2,34,000 was not taxable under section 10(5A) in the assessment year 1956-57, even though the respondent actually received the amount in 1955. The fact that the respondent had included the receipt in question in its profits and loss account in the year 1955 was a wholly immaterial circumstance. The method of maintaining the accounts was one thing and the actual entries in the accounts maintained was a different thing. What was relevant was method of accountancy and not the actual entries."
(E) In Keshav Mills Ltd. v. CIT[1953] 23 ITR 230 (SC), the relevant extract from the Head Note at page 232 is reproduced below:--
"The mercantile system of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding the fact that they are not received or deemed to be received and, under that system, book profits are assessed as liable to tax. If an assessee therefore regularly adopts the mercantile system of accounting he would be liable to tax on the profits thus credited by him in his books of account subject to all deductions for bad debts as provided in section 10(2)(xi). Section 4(I)(a) has nothing to do with this basis of taxation. Section 13 which is an integral part of the computation of the total income of the assessee and is compulsory on the Income-tax authorities as well as when computing the total income does not lay down any exemption from liability. It only sets up a mode of computation of the income which is liable to assessment and imposes upon the Income-tax authorities an obligation to accept the mode of accounting regularly adopted by the assessee except in the cases where the proviso to that section comes into operation. The profits earned and credited in the books of account being thus taken as the basis of computation, the system of accounting postulates the existence of debts in so far as moneys remain due and payable by the parties to whom they have been debited and when it is realised that these debts are not recover able the assessee gets a deduction for the bad debts under section 10(2)(xi)."
(F) In CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94, the relevant extract from the Head Note at page 95 is reproduced below:--
'In dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. [CITv. Melbourne Trust Ltd. (I) referred to in (1914) AC 1001: 84 LJPC 21; 30 TLR 685]."
6.8 Shri Dave, then relied on various other decisions to explain the Judicial Thought on the concept of accrual. He submitted that the Judicial Thought under the provisions of the IT Act indicates that income accrues only when the right to receive vests in the recipient. Once the right to receive is vested, accrual of income under the IT Act is not postponed merely because its quantification depends upon subsequent events such as making up of accounts etc. He relied on the following decisions to support this contention:--
(1) CIT v. Dr. Sham Lal Narula [1972] 84 ITR 625 (Punj. & Har.)
(2) CIT v. K.R.M.T.T Thiagaraja Chetty & Co. [1953] 24 ITR 525 (SC)
(3) Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)
(4) Morvi Industries Ltd. v. CIT [1971] 82 ITR 835 (SC).
Shri Dave, then invited our attention to the following extract from his written submissions dated 26-4-2001:--
"7. Accounting thought on accrual:--
P. 117 of BCAS monograph (P AS-9-Revenue Recognition-121)
It stipulates that recognition of revenue requires that revenue is measurable. If at such relevant time, significant uncertainties exist regarding measurability or collectibility of revenue its recognition is postponed pending resolution of the significant uncertainties. Usually where the right to receive revenue has become vested in the recipient and therefore considered as accrued under the IT Act, its measurability and collectibility is not likely to be significantly uncertain. But in case its measurability and/or collectibility is significantly uncertain, its recognition is postponed under the accrual basis of accounting. Such postponement of revenue recognition is not unknown under the IT Act too which recognises in appropriate cases, the real income theory in determining income under the accrual basis of accounting. The Bombay High Court in the case of Confinance Ltd. 89 ITR 292 has observed as under:--
"In examining a transaction or situation, court would have more regard to reality and speciality of the situation rather purely theoretical or doctrinaire approach." The concept of real income is certainly applicable in judging whether there has been income or not but in every case, it must be applied with care & within well recognised limits. Besides, being in conformity with AS-9, the postponement of revenue recognition is necessary also to ensure that the books of account and the financial statements reflect a true and fair view of the state of affairs as required under sections 209 and 211 of the Companies Act--Refer Page 52 Item 7.4 of the Monograph--BCAS.
8. Propositions which emerge:--
(a) Concept of matching revenue and costs.
(b) Synthesis of above concept with basic assumptions and consideration on which financial statements are prepared namely, (i) prudence (ii) consistency (iii) materiality and (iv) substance over form, in order to give a true and fair view.
(c) Reality and speciality of a transaction/situation rather than purely hypothetical or doctrinaire approach.
(d) Measurability and collectibility of revenue.
9. Whether assessee can be allowed to change method of accounting for one item from accrual to cash basis:
1. 45 ITD 386 (Delhi) (Trib.)
2. 2 TTJ (Cochin) (Trib.) 928
3. 18 ITR 423 (Mad.)
4. 68 ITD 332 (Cal.) (Trib.)".
7. Shri S.N. Soparkar, Ld. Advocate in rejoinder to the arguments advanced by the learned CIT-DR, contended that various clauses of the Duty Exemption Scheme pointed out by the learned CIT-DR are not applicable in the case of the assessee. For instance, he pointed out that clause 54 relating to Self-Declared Pass Book Scheme is not at all applicable to the assessee. He, however pointed out that clauses 66 and 67 of the said Scheme are relevant in the assessee's case. The Scheme provides that the exporters may apply for duty free licences against specific export orders. Clauses 66 and 67 are as under:--
66. Exports/supplies made from the date of receipt of an application under this scheme by the licensing authority may be accepted towards discharge of export obligation. If the application is approved, the licence shall be issued in accordance with the policy and procedures in force on the date of its issue. The conversion of duty free shipping bills to drawback shipping bills may also be permitted by the Customs Authorities in case the application is rejected or modified by the licensing authority.
67. A value or quantity based Advance Licence (except Intermediate Advance Licence and a Special Imprest Licence) or the materials imported against them, may be freely transferable after the export obligation has been fulfilled, export proceeds realised and the bank guarantee/LUT redeemed. This facility shall not be available in cases where the MODVAT/PROFORMA Credit facility or excise relief under Rule 191B of the Central Excise Rules has been availed of.
7.1 The assessee is availing MODVAT facility and therefore the licences are not transferable in the case of the assessee. Factually also the assessee has not transferred any Advance Licence received by them. The learned counsel also drew our attention to various clauses in Hand Book of Procedures which are applicable in the case of the assessee. It may not be necessary to refer to those specific clauses contained in the Hand Book of Procedures as we have gone through all the relevant clauses in the Scheme and Hand Book of Procedures pointed out by the learned CIT-DR as well as the learned counsel.
7.2 The learned counsel further contended that the decision of the ITAT Ahmedabad Bench in the case of Pratibha Syntex Ltd. is not at all applicable to the facts of the present case. He drew our attention to the judgment of the Hon'ble Supreme Court in the case of CITv. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 in which it has been held that the observations made in any judgment have to be understood in the light of question before the Court and it could not be divorced from the context under which the said judgment was rendered. The word "accrued" or "accrual" does not find a mention in the decision in the case of Pratibha Syntex Ltd. The question was not when the income accrued but it was a case where the controversy related to the point whether such export incentive is liable to tax or not. In the present case the controversy does not relate to taxability of such benefit receivable by the assessee but the dispute relates only to the year of accrual of such income. Therefore, the decision in the case of Pratibha Syntex Ltd. does not in any manner support the Revenue's stand.
7.3 Shri Soparkar, then submitted that reliance placed by the learned DR on the judgment of the Supreme Court in the case of U.P. State Industrial Development Corpn. is not proper as the income in the present case did not accrue in the relevant year when the entries were made in the books of account. The income was uncertain and contingent until the raw material was actually imported pursuant to Advance Licence granted for duty free import. Moreover, the said judgment was rendered by the two Judges of the Supreme Court while the judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. was rendered by a Constitutional Bench comprising of three Hon'ble Judges.
7.4 Shri Soparkar submitted that reliance was also placed by the learned CIT-DR on the decision of the ITAT Calcutta Bench in the case of JCTLtd. v. Asstt. CIT[1998] 65 ITD 169. The Tribunal in that case has observed that an assessee having made entries in his books of account consistent with the method of accounting followed by him can not be permitted to seek assessment of his income for income-tax purposes on a different basis on the ground that another basis may also be permissible under the method of accounting followed by the assessee. To this extent, the entries made in the books of account are as much binding as the method of accounting itself. It is only when the entries made in the books of account are erroneous or contrary to the correct legal position that the same are not conclusive or decisive of the matter.
7.5 The ITAT Ahmedabad Bench in the case of Core Health Care Ltd. in para-66 at page 56 of the order have held that the decision of the Calcutta Bench in the case of JCT Ltd. is also clearly contrary to the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.).
7.6 Shri Soparkar submitted that the decision in Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd.'s case relied upon by the assessee has been incorrectly distinguished by the learned CIT-DR. The export incentive scheme may be different but the provisions contained in the said scheme are identical with the export incentive scheme applicable in the case of the assessee for the years under consideration. He strongly urged that the facts of the case in Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. are absolutely identical and the said decision is fully applicable on the facts and circumstances of the present case.
7.7 As regards the reliance placed by the learned CIT-DR on the judgment of the Punjab & Haryana High Court in the case of Punjab Bone Mills is concerned, the learned counsel pointed out that the Hon'ble High Court in that has held that the date of the export would not by itself give rise to an income unless the assessee laid a claim to receive the income from the Government. The income by way of cash incentive in that case was held to have accrued on the date of application filed by the assessee claiming cash incentive from the Government.
7.8 Shri Soparkar then invited our attention to the judgment of the Hon'ble Supreme Court in the case of UCO Bank v. CIT [1999] 237 ITR 889. The Hon'ble Supreme Court explained the earlier judgment in the case of State Bank of Travancore and did not follow the said judgment. In the said judgment it has been held that under the accounting practice, interest which is transferred to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular can not be considered as travelling beyond the powers of the Board under section 119 of the IT Act.
7.9 The learned counsel then drew our attention to the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT[1997] 225 ITR 746. In that case it was, inter alia, held as under:--
"Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise."
Held, reversing the decision of the High Court, that the assessee-company, being a licensee, could not ignore the direction of the State Government which was couched in the form of an advice, whereby the assessee-company was asked to maintain status quo for at least six months and not to take steps to recover the dues towards enhanced charges from the consumers during the period. Before the expiry of the period of six months, the subsequent suit had been filed by the consumers and during the pendency of the said suit the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971, and subsequently, it was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges. In the suit that was filed on May 6, 1969, challenging the enhancement in charges made in 1963, and seeking a declaration that the assessee-company was not entitled to recover more than 31 paise per unit for light and fans and 20 paise per unit for motive power the trial court, while decreeing the said suit, had given a declaration in these terms. The said declaration was not confined to the period subsequent to March 31, 1969. After the decision was taken by the assessee-company to enhance the charges, it was not able to realise the enhanced charges on account of pendency of the earlier representative suits of the consumers followed by the letter of the Under-Secretary to the Government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the management of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971, and the undertaking was subsequently transferred to the Gujarat State Electricity Board. Even though the assessee-company was following the mercantile system of accounting and had made entries in the books regarding enhanced charges for the supply made to the consumers, no real income had accrued to the assessee-company in respect of those enhanced charges. The Tribunal had rightly held that the claim at the increased rates as made by the assessee-company on the basis of which necessary entries were made, represented only hypothetical income, and the amounts in question brought to tax by the ITO did not represent income which had really accrued to the assessee-company during the relevant previous years."
7.10 Shri Soparkar then cited the judgment of the Supreme Court in the case of CITv. Bokaro Steel Ltd. [1999] 236 ITR 315. The relevant extracts from the Head Note at pages 315, 316 and 317 are reproduced below:--
"In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditures. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income."
"The assessee had, during the assessment year. 1971-72, shown in its accounts as income from interest a certain sum said to have accrued to the assessee from H for eight locomotives supplied by the assessee company to H. The assessee company, however, reversed this entry in the next year because eight new locomotives were supplied by H to the assessee. The Tribunal held that the amounts under item Nos. 1 to 4 received by the assessee had gone to reduce the cost of construction. These were in the nature of capital receipts which could be set off against the capital expenditure incurred by the assessee during the relevant assessment years. This view was upheld by the High Court. With regard to the income from H both the Tribunal as well as the High Court held that since this entry reflected only hypothetical income, it could not be brought to tax as income."
"that with regard to the, income accrued to the assessee from H the entry which was initially made as interest was reversed the next year because in fact the nature of the transaction was changed. The assessee did not receive any real income."
7.11 Shri Soparkar also placed reliance on the decision of the Tribunal in the case of Gupta Garments v. Asstt. CIT [1995] 53 ITD 362 (Mad.) to support his contention that such income by way of ALBR can be charged to tax only in the year when the duty free raw material is actually imported. The learned counsel thus strongly urged that the addition of Rs.8,29,87,603 made by the Assessing Officer and confirmed by the learned CIT(A) should be deleted.
8. We have carefully considered the submissions made by the learned representatives and have perused the relevant documents, the orders of the learned Departmental Authorities, to which our attention was drawn during the course of hearing. We have also gone through all the judgments cited by the learned representatives as well as the decisions referred to in the orders of the CIT(A) and the Assessing Officer.
9. The principles of law as enunciated by the various judgments of the Hon'ble Courts, relied upon by the learned representatives of the parties and as emerging from a plain reading of the relevant provisions of the Income-tax Act, 1961 can be briefly summarised as under.
10. Section 145(1) of the Act specifically provide that Income chargeable under the head "Profits and gains of business or profession" shall be computed in accordance with the method of accounting regularly employed by the assessee. However, the provisions of section 145 cannot override sections 4 and 5 of the Act. If an income has neither accrued nor received in the relevant year within the meaning of section 5 of the Act, whatever section 145 says, such income cannot be charged to tax even though a book keeping entry has been made recognising such income, which in law and on facts did not really accrue or arise or received in previous year. Section 145 thus does not affect the range or ambit of taxable income. Such computation provision contained in section 145 cannot enlarge or restrict the content of taxable income.
11. It is the duty of the Assessing Officer to consider in each case as to whether the assessee has employed a regular method of accounting and whether annual profits can be properly deduced from the method so employed. The Assessing Officer should also examine whether the accounts maintained are correct and complete. Once the Assessing Officer is satisfied about the regularity of the method of accounting and about the correctness and completeness of the books of account and is also convinced that true income can be properly deduced, the Assessing Officer is bound to compute the taxable income of the assessee as per section 145(1) in accordance with the books of account maintained by the assessee.
12. If an item of income has not accrued in law and on facts, it cannot be made taxable merely because a book keeping entry recognising such income has been made in the books of account. The existence or absence of entry in the books of account cannot be treated as decisive or conclusive in relation to determination of the taxability of an income under the provisions of the Act, where such entry of income in the books of account is in conflict with the ambit and range of taxation as contemplated in section 5 of the Act. The question as to whether a particular income had really accrued or arisen to the assessee in a particular year must be judged in the light of reality of the situation. One will have to look at the substance of the situation in order to decide whether income has really accrued or not in the relevant previous year.
13. Section 145 of the Act recognises a right of a taxpayer to adopt any of the recognised methods of accounting. The choice of choosing the method of accounting always remains with the taxpayer. The method of accounting adopted by the assessee-taxpayer consistently and regularly cannot be discarded by the Departmental Authorities on the view that he should have adopted a different method of keeping accounts. The method of accounting regularly employed may be discarded only if in the opinion of the Taxing Authorities income of the taxpayer cannot properly be deduced therefrom.
14. Let us examine the facts of the present case in the light of the aforesaid principles of law emerging from the various decisions and the provisions of law referred to hereinbefore:
(A) The assessee has accounted for the net income by way of Advance Licence Benefit Receivable amounting to Rs.8,29,87,603 in their books of account in the year under consideration. The taxability of such income has not been disputed by the assessee. The assessee has only disputed the year of its taxability. While finalising the books of account, the assessee has accounted for such income in the year in which they have actually exported the goods on the basis of which the import licence was granted to them for importing duty free raw materials, as import of duty free raw materials has a direct nexus with the corresponding exports made.
(B) The question which arises for our consideration is as to whether the value of such Advance Licence Benefit Receivable by the assessee can be treated as income accrued to them in the year when the exports were actually made or such income would accrue only in the year when the duty free raw material is actually imported pursuant to such import licences. The assessee has consistently followed the method of recognising such income in its books of account in the year when the exports were actually made. But while submitting the income-tax return, they claimed that such income cannot be treated as income accrued to the assessee in the year when the exports were made but it should be treated as having accrued only in the year when the duty free raw material is actually imported.
(C) The assessee has maintained their accounts on accrual basis. The various accounting standards and guidelines on accrual system of accounting relied upon by the learned representatives of the parties indicate that there are various alternative recognised methods of accounting in relation to Import Entitlement Licence etc. One of the methods is that the cost of raw material imported by the assessee will be debited in the books of account on the basis of actual cost in the year when it is actually imported. In such a case no accounting entry of import entitlement licence is required to be made. The assessee has choosen not to adopt this method. The other method can be that where there is reasonable certainty as to the receipt of import licence and the measurability of its benefit, the difference between the price of locally purchased raw material and the duty free raw material at prevailing international price should be measured at the end of the year and it should be adjusted in the books of reducing the cost of locally purchased raw materials already utilised for exports and debiting Receivable Account. Such a method can be adopted in a case where the Import Licence cannot be sold. This is precisely the system of accounting which has been consistently followed by the assessee in the present case.
(D) The assessee-company has maintained its accounts on accrual basis, which has been made mandatory by the amendment of section 209(3) of the Companies Act, 1956 with effect from 15-6-1988. The accrual basis of accounting records financial effect of the transactions, events and circumstances of an Enterprise in the period in which they occur rather than recording them in the period in which cash is received or paid by the Enterprise. The main objective of accrual basis of accounting is to relate the accomplishments (measured in the form of revenue) and the efforts (measured in terms of cost), so that the reported net income reflects true and fair position of the profit/lors of the company for the relevant period. The Accounting Standard (AS-9) issued by the Institute of Chartered Accountants of India, lays down two conditions which must be fulfilled for recognition of revenue in the course of business activities of an Enterprise:
(a) The revenue should be measurable; and
(b) It should not be unreasonable to expect ultimate collection.
Thus, where the revenue is not measurable and/or where it is unreasonable to expect ultimate collection, recognition of revenue is deferred.
15. In order to properly understand the true meaning and scope of accrual concept of accounting, it may be imperative to refer to some Publications relating to Accounting Concepts. In the Book styled as "Modern Accounting" Volume I, 1999 Edition by A. Mukherjee M. Hanif, The Accrual Concept has been explained as under:
The Accrual Concept
"Any increase in owner's equity is called a revenue, any decrease is called an expense. Income is the excess of revenue over expenses. In measuring profit for any financial period, expenses and revenues are matched in a more realistic way i.e., they concern the same goods and the same time period. The accrual concept is an accounting system which recognises revenues and expenses as they are earned or incurred respectively, without regard to the date of receipt or payment. This convention is one of the consequences of the periodicity concept. in the preparation of a Profit and Loss Account for an accounting period, revenues and expenses are recognised as they are earned or incurred respectively, not as cash received or paid. The earning of a revenue and the expenses incurred in these revenue can be accurately related to specific time periods, but the receipts and payments may not be relating to the period under consideration. The concept requires proper apportionment of expenses to time periods by the inclusion of prepayments and accrual in a Balance Sheet."
16. The Matching Concept which is an essential part of accounting has been explained in the said Publication as under:
The Matching Concept
Since the Matching Concept is an essential part of accrual accounting, these two are often used interchangeably. Like accrual concept, the matching concept also results from periodicity concept. The matching concept requires that the expenses for an accounting period should be matched against related incomes, rather than recognising revenues (is being earned at the time when cash is received or recognising expenses when cash is paid and, thereby, comparing cash receipts with cash payments. As most businesses keep accounts on accrual basis, i.e. keeping account on an income and expenditure basis, it is necessary that the accounting system should match periodically the revenues earned against expenses incurred. The result of this matching is the net income or net loss. This method requires the proper allocation of costs into appropriate periods so that relevant incomes and expenses are matched The profit of an accounting period is the revenues from transactions less expenses incurred in producing these revenues. If expenses cannot be treated to specific items of revenues, they are generally written off in the year in which they are incurred. The problem of determining which expenses are associated with particular revenues, can be solved by applying the following two steps:
(1) First, to determine whether they are to be recognised for that particular accounting period (applying realisation concept);
(2) Secondly, to determine the expenses that are associated with these revenues (applying accrual concept).
17. The Conservatism (or Prudence) Concept has been explained in the said Publication as under:
"Where there is a reasonable choice of accounting treatments, the concept of conservatism refers to early recognition of unfavourable events. This concept requires an accountant to record an event in such a way as will show a weaker state of affairs than what actually exists and thereby drawing attention to events that result in the lowest value of an income. Since this concept requires the accountant to underplay favourable prospects, it is often stated as follows: "Recognize all losses and anticipate no gains". Thus, the accountant must give the user the most pessimistic view of the firm's position. This concept requires that assets and profits should not be overstated and revenue should never be anticipated, and should only be recognised when there is reasonable certainty about their realisation. At the same time, provision must be made for all possible liabilities, whether the amount is known with certainty or is based on estimation. To illustrate, inventories are recorded at their cost or market price, whichever is less or if there is a possibility that a debt may not be realised, a specific amount is set aside from profit as a provision for doubtful debts."
18. Most of the problems of accounting measurement arise out of the periodic concept. The main difficulty arises in deciding what revenues and what expenses are to be taken into consideration for one accounting period. The concept of materiality (substance) is threshold for recognition of a transaction in accounting process. The accrual concept requires that in measuring a profit for any financial period, the expenses and revenues should be matched in a realistic way i.e., they concern the same goods and the same time period. The matching concept is therefore an essential part of accrual accounting. Even under the Conservatism Concept of accounting, the revenues should be recognized when there is reasonable certainty about their realisation.
19. In the present case, the assessee has accounted for the value of benefit receivable by way of import of duty-free raw material against specific export orders in the year in which corresponding export obligation has actually been discharged. Under the Export Promotion Scheme, the assessee is entitled to duty free import of raw material against exports made by them. The only obligation of the assessee for earning right to import such duty-free raw material is that the specified export should be made. The assessee has accounted for the value of such benefit only in the year in which the corresponding export obligation has duly been discharged. It is in consonance with the matching concept implicit in accrual system of accounting. The moment the assessee has exported the goods, it acquired a legally enforceable right to get the import licence for importing duty free raw material accounting to the norms specified in the relevant Import/Export Policy. Such a right is a valuable right, and it becomes a perfect, vested and absolute right on discharge of export obligation. It has a direct nexus with the corresponding exports already executed in the year under consideration. The benefit so receivable by way of import of duty-free raw material relates to the same goods which have been exported in the accounting period. Thus the revenue so accounted for in the books of account representing the value of Advance Licence Benefit Receivable by the assessee is matching in a more realistic way with the goods exported by the assessee. The method of accounting adopted by the assessee for booking such income in the books of account in the year in which exports have been made represents more realistic, true and fair position of profits earned during the year under consideration.
20. The contention of the learned counsel that such income was contingent and uncertain until the goods are actually imported, is not in conformity with the method of accounting of the accrual concept adopted by them in relation to accounting for of such income in the books of account after a careful consideration of all relevant facts and circumstances. It may be relevant here to refer the judgment of the Hon'ble Privy Council in the case of Maharajadhiraja Kameshwar Singh of Darbhanga At page 101, the relevant extracts are reproduced below:--
"What the officer is directed to compute is not the assessee's receipts but the assessee's income and in dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. (See per Lord Dunedin in delivering the judgment of the Board in Commissioner of Taxes v. Melbourne Trust Ltd.). The sums which the officer has brought into account from the interest register in so far as consisting of allocations from sums received in previous years have never borne tax and in their Lordships' opinion the assessee cannot complain if the officer agrees with the assessee himself in treating them as income of the year in which the assessee himself first thought fit so to regard them. Their Lordships see nothing contrary to principle in the computation of an assessee's total income for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous year which have been held in suspense and no part of which has previously been returned as income. Their Lordships do not find that the Income-tax Officer in the present case has acted in any way illegally in computing the profits of the transactions in question for the year 1332 Falsi by taking into account both actual receipts of interest in that year and sums treated by the assessee in that year as receipts of interest by their transference to the interest register from what for this purpose may be regarded as a suspense account."
21. It has been held in the aforesaid judgment that what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. The Hon'ble Supreme Court in the case of Stale Bank of Travancore has also held that the conduct of the party in treating the income in a particular manner is material evidence of the fact as to whether the income has accrued or not. We may clarify here that the conduct of the party or the manner and mode of entry made in the books of account will not be decisive and conclusive and such an entry cannot override the provisions of section 5 of the Act. If an income has not really accrued or arisen to the assessee in the relevant year, the same cannot be held to be taxable merely because the book keeping entry has been made in the books. The ITAT Special Bench in the case of Nagarjuna Investment Trust Ltd. was considering the question relating to the taxability of income received under hire purchase and lease agreements executed by the assessee with various customers. The assessee in that case adopted a system of accounting called SOD (sum of digits)/Indexing method for recognition of its income from business of hire purchase and leasing on time proportion basis taking into consideration the amount outstanding from time to time and the rate of interest applicable. The Special Bench after taking into consideration various judgments and the other material held that so far as financial income/interest income in relation to hire purchase agreement recognized on the basis of SOD method by the assessee in its books of account is concerned, the entry in the books of account represents real income accrued to the assessee in the relevant previous year. The income so recognised in the books of account on the basis of SOD method clearly comes within the ambit of charging section 5 of the Act. The assessee's claim with regard to exclusion of differential income, so far as it relates to hire purchase agreement, was held to be not sustainable. However, in respect of income by way of lease rental is concerned, the Tribunal held that only income which accrued in the relevant year is the monthly instalments specified in the respective lease agreements and in no circumstances, the income in excess of the monthly lease instalments can be said to have accrued in law. The excess income beyond the monthly lease instalments accounted for as the income on the basis of SOD method/Indexing method does not come within the ambit and range of taxable income as per the meaning and scope of charging provisions of the Act and, therefore, such excess income termed as differential income in relation to lease agreements could not be brought to tax. Likewise, the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. heavily relied upon by the learned counsel, held that the interest on surplus funds in short term deposit is always of a revenue nature and the same cannot be treated as receipt of a capital nature simply because the accounting entry has been made in the books of account setting off such interest income against the liability to pay interest on funds borrowed for purpose of purchase of plant and machinery even before commencement of the business. The Hon'ble Supreme Court thus held that a receipt of a revenue nature cannot be regarded as a receipt of capital nature simply because the book keeping entry has been made in that manner.
22. The reliance placed by the learned counsel on the decision of the Tribunal in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. does not in any manner help the assessee as that decision is distinguishable on facts. The said case relates to assessment year 1985-86. The export promotion scheme under consideration in that case was a different scheme. It is not known whether the assessee imported the relevant raw material, viz. fibre in the subsequent years. The details of benefit of duty free import of raw material made in various subsequent years was not available at the time of hearing before the Tribunal. The definition of income given in sections 2(24) and 28 had not been amended till that time, which have been amended by the Finance Act, 1990 with retrospective effect from 1-4-1962 onwards. That decision deals with the tax liability under section 28(iv). In the present case the taxability of such income is not in dispute but only the year of its taxability is in dispute, The accrual system of accounting was not mandatory according to the provisions of the Companies Act in assessment year 1985-86, which has now been made mandatory by amending the provisions of section 209(3) with effect from 15-6-1988. The learned CIT (A) has also given elaborate reasons in the order passed by him as to how the aforesaid decision is distinguishable with the facts of the present case. The various other decisions relied upon by the learned counsel are also distinguishable on facts, as is clear from the detailed discussion made hereinbefore.
23. All other decisions which have been cited by the learned counsel deal with the exceptional items which were excluded or included from the profits shown as per books of account on the ground that such items of income are in conflict with or are beyond the scope of section 5 of the Act or by invoking the proviso to section 145 as true profits could not properly be deduced from the books of account maintained by the assessees. In the present case, the income represented by the value of Advance Licence Benefit Receivable by the assessee has been accounted for in the books of account in the year when the exports have actually been made, which is in conformity with one of, the alternative recognised methods of accounting. The choice of choosing one of the recognised alternative methods of accounting rested with the assessee. The assessee has exercised that option by choosing to consistently follow such a method of accounting in relation to booking of income represented by ALBR against exports. Once that option has been exercised while finalising the accounts in accordance with the accounting system and in conformity with the provisions contained in the Companies Act, 1956, the assessee cannot thereafter contend while filing the return of income that such income should not be treated as having accrued in the year under consideration, as duty free raw material has not actually been imported till the end of the relevant year but it should be treated as income accrued in the year, when raw material had actually been imported.
24. Even under the Conservatism (or Prudence) Concept of accounting, such income should be recognised when there is reasonable certainty about their realisation. The Board of Directors while finalising the annual accounts are under an obligation to ensure that the profits/loss as per P&L Account of the relevant year should disclose a true and fair position of the profits of the year. It is expected that the Board must have taken into consideration all the relevant facts and circumstances so as to satisfy themselves about the reasonable certainty of realisation of such benefit receivable by the assessee. The term "true and fair view" connotes that the balance sheet and the P&L Account should give the true and fair presentation of the actual state-of-affairs and the working results of the company. The Directors are accountable and responsible for presenting the true and fair state-of-affairs in the balance sheet and also in respect of the profit/loss as shown in the P&L Account. The directors are also responsible for adherence to the disclosure requirements as per Schedule VI of the Companies Act. The Board of Directors must have therefore applied their serious attention to this item of income accounted for in the books of account, as is apparent from the fact that a detailed note in the "Notes of Accounts" has been given in this regard forming part of the Balance sheet authenticated by the Board of Directors. The accounts of the company have been audited by an eminent firm of Chartered Accountants M/s S.V. Ghatalia & Associates, who have not in any manner qualified their audit report in respect of the aforesaid income of Rs.8,29,87,603 accounted for in the books of account. Thus the true and fair position of the profits as per P&L Account of the company including recognition of such income on accrual basis during the relevant year has also been confirmed by a well known firm of auditors. The Annual Audited Accounts have been approved by the Company in its General Meeting.
25. The assessee acquired a legally enforceable right to import duty free raw material under the relevant Duty Exemption Scheme in the year when it discharged its obligation of exporting the goods in the year under consideration. The benefit accounted for in respect of duty free raw material has a direct nexus with the export orders executed in the relevant year. The assessee has consistently followed such method of accounting in relation to such income in various years. The test of reasonable certainty about the realisation of such income envisaged in the Conservatism Concept of accounting also stands fulfilled on the facts and circumstances of the present case. It is clear from a perusal of Duty Exemption Scheme notified in the Import and Export Policy that the exporters are allowed to grant of import licences for import of duty free raw material used for manufacture of goods exported. Such scheme was announced with a view to promote the exports and make it feasible for the exporters to survive in the global competition. Without acquiring the right to import duty free raw material, which constitutes a substantial gain, it may not perhaps be viable to export the goods in the competitive market. The substantial benefit by way of right to import duty free raw material against exports already made, was therefore not only certain but the exporter acquired legally enforceable right to receive such benefit soon after discharging his export obligation. The accrual of income in the year, when assessee acquires a legal right to receive such benefit/income is supported by various judgments of Hon'ble Supreme Court cited supra.
26. The test of reasonable certainty of realisation of such income/benefit also supports the correctness of entry of such income made in the books of account in the relevant year. The chart showing the income by way of Advance Licence booked by the appellant company in the books of account for assessment years 1992-93 to 2000-2001 and the corresponding figures of such Advance Licences benefit actually utilised in these nine years given in para-6 at page 28 shows that the quantum of income accounted for in the books of account in these nine years was Rs.53,66,88,164 against which the actual benefit utilised in these nine years was Rs.53,27,73,625. These figures of actual utilisation of Advance Licences resulting in substantial benefit to the appellant by way of reduction in cost of raw material consumed for goods exported, shows that realisation of a substantial amount of such benefit was certain. The contention of the learned counsel that such income was contingent and uncertain at the end of the relevant year, is not correct. Any person with ordinary prudence can reasonably anticipate that such substantial benefit by way of duty free import of raw material is surely and certainly receivable by the assessee in consideration of the goods exported by them. There may be some difficulty in quantification of the value of such benefit or some contingency or uncertainty about the quantum of such income at the end of the relevant accounting year. The learned counsel submitted that such income is contingent depending upon various factors such as fluctuation in the foreign market, fluctuation in foreign exchange rate, fluctuation in rate of raw material in the domestic market and other such factors. All these factors may cause some difficulty in quantification of value of such benefit at the end of the relevant year but it can not lead to the conclusion that substantial benefit receivable under the Export Promotion Scheme is totally contingent or uncertain even after discharge of the export obligation. The appellant company while accounting for such income has adopted a very rational, scientific and systematic method of estimating such income. A perusal of Annexure-A of this order gives a summary of profit by way of Advance Licence Benefit Receivable as on 31-3-1995 and accrued in the year under consideration. The appellant company has taken adequate care to provide for adequate margin arising due to all such contingencies, uncertainties and other factors which may result in some variation of the net income accrued and adjusted in the year under consideration. The value of benefit receivable from import licences granted for raw material which have not been utilised during the year and which have lapsed, have been deducted while arriving at the net figure of such income accrued to the assessee, in the year under consideration. Apart from this, the assessee has made a further deduction of 10% for other contingencies relating to this entitlement. Such deduction has been made to the tune of Rs.92,20,844 out of net income accrued for the year amounting to Rs.9,22,08,446. The figures of nine years from assessment years 1992-93 to 2000-2001 given in para-6 at page-28 also confirms the perfectness of the estimate of such income accounted for in the respective years. The total income accounted for from assessment years 1992-93 to 2000-2001, was Rs.53,66,88,164 against which the actual Advance Licence benefit utilised in these nine years comes to Rs.53,27,73,625. The difference is less than one per cent. If actual benefit received in assessment year 2001-2002 out of accrual of income adjusted in assessment year 2001-2002 is taken into consideration, the total benefit actually utilised will be more than the income accounted for on accrual basis in these nine years. This clearly indicates that the amount of such benefit accounted for by the appellant company in its books of account was based on a realistic, systematic and appropriate method.
27. After giving a deep and thoughtful consideration to the entire material, we are of the considered opinion that the CIT (A) has rightly held that the income by way of Advance Licence Benefit Receivable amounting to Rs.8,29,87,603 duly accounted for as income in the books of account maintained by the assessee in the year under consideration on accrual basis can not be excluded from the taxable income of the year under consideration. The view taken by the learned CIT (A) is therefore confirmed.
II. Ground No. II raised by the assessee reads as under:--
III. Deduction in respect of interest claimed under section 36(1)(iii) representing interest capitalised in the books of account:
2.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax in holding that the deduction claimed in respect of interest amounting to Rs.1,38,89,304 under section 36(1)(iii) being interest capitalised in the books of account in respect of the unit under construction at Jhagadia, ought to be considered as capital expenditure and accordingly disallowed.
2.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects:
(a) In not appreciating the facts that the deduction was clearly admissible under the provisions of section 36(1)(iii) since the said interest represented interest on borrowings for the purpose of expansion of the existing business;
(b) In not following the decision of the Gujarat High Court in the case of Alembic Glass Industries Ltd. inspite of the fact that the ratio of the said decision was clearly applicable as the facts were identical and the said decision was rendered by the jurisdictional High Court.
(c) In not appreciating the fact that the appellant had offered the short term capital gains in respect of the said unit at Jhagadia in the return of income for assessment year 1996-97 and accordingly the same ought to have been allowed as a deduction under section 36(1)(iii) in the said year.
2.3 In view of the above grounds of appeal, the appellant prays that the Deputy Commissioner of Income-tax be directed to allow the deduction in respect of interest claimed as a deduction under section 36(1)(iii) amounting to Rs.1,38,89,304.
II(1). The assessee claimed deduction in respect of interest on new projects capitalised in accounts to the tune of Rs.5,08,22,201 in the computation of total income with reference to Note No. 8 of notes to computation. The said Note No. 8 is reproduced below:--
"8. Interest claimed under section 36(1)(iii) in respect of interest capitalised in books of account:
In the accounts for the year ended 31st March, 1995, interest amounting to Rs.5,68,39,623 has been capitalised. In the return of income, interest amounting to Rs.5,08,22,207 excluding interest amounting to Rs.60,17,416 pertaining to plot No. 750 which is to be transferred to Search Chem Industries Limited has been claimed under section 36(1)(iii) even though the same has been capitalised in the books of account. In this connection, reliance is placed upon the decision of the Bombay High Court in the case of Addl CIT v. Aniline Dyestuff & Pharmaceuticals (P.) Ltd. (138 ITR 843) and the decision of the Gujarat High Court in the case of CITv. Alembic Glass Industries Ltd. (103 ITR 715). Further in the case of CIT v. National Peroxide Ltd. 182 ITR 411, the Supreme Court dismissed the department's special leave petition against the judgment of the Gujarat High Court whereby the High Court dismissed a reference application on the question whether interest on amounts borrowed for establishing a new unit capitalised but still claimed as a revenue expenditure in the relevant assessment year could be allowed.
It may be noted that a similar claim has been allowed in the assessment order passed under section 143(3) for the assessment year 1993-94."
II(2). The Assessing Officer held that such pre-operative expenses including expenditure incurred on interest has been correctly capitalised by the assessee in its books of account and the same represents part of the actual cost of fixed assets as explained in Explanation 8 to section 43(1). The Assessing Officer has given elaborate reason in the assessment order and has also relied on certain judgments referred to in the assessment order.
II(3). The CIT (A) in para-2.1 has observed that out of interest amount of Rs.5,08,22,201, only an amount of Rs.1,38,89,304 pertains to the new unit under construction at Jhagadia. The balance amount of interest is the normal amount of interest payable on borrowings taken for the purpose of business. The CIT (A) has specifically observed in para-2.1 of his order that it was submitted on behalf of the assessee that in the next year the appellant has transferred Jhagadia Unit to its subsidiary company and has offered to tax, the income from short term capital gains. In case, the interest for this year is capitalised, the income from short-term capital gains will be reduced in next year. The CIT (A) has further observed that the appellant has expressed no objection if this amount pertaining to Jhagadia Unit is capitalised and the income from short-term capital gains is reduced in the next year. The CIT (A) confirmed the disallowance in respect of interest pertaining to Jhagadia Unit and agreed with the Assessing Officer that it should be capitalised. He however directed the Assessing Officer to allow deduction in respect of the balance amount of interest claimed by the assessee.
II(4). Shri S.N. Soparkar, the learned counsel contended that the assessee did not concede before the CIT (A). It was only brought to the notice of the learned CIT (A) that in next year i.e. assessment year 1996-97 the company transferred its Caustic Chloride Project to Search Chem Industries Limited (SCIL) and capital gains arising on the sale of the said undertaking has been computed after reducing the amount of Rs.1,38,89,304 representing the interest capitalised in the books of account but claimed as revenue expenditure in computing the total income for assessment year 1995-96. Since this claim has been rejected in assessment year 1995-96, it was claimed in the assessment proceedings for assessment year 1996-97 that the said amount should not be taxed as capital gains in assessment year 1996-97 otherwise it would result in double taxation of the said amount.
II(4)(i). Shri Soparkar further submitted that the interest capitalised in the books of account representing interest on borrowings in connection with the expansion of the existing business of the company can be claimed as deduction under section 36(1)(iii) of the Act. He relied on the following decisions:--
(a) Alembic Glass Industries Ltd 's case
(b) AddL CIT v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843 (Bom.)
(c) Calico Dyeing & Printing Works v. CIT[1958] 34 ITR 265 (Bom.)
(d) CIT v. Insotex (P.) Ltd. [1984] 150 ITR 195 2 (Kar.)
(e) CIT v. Shah Theatres (P.) Ltd. [1988] 169 ITR 499 (Raj.)
(f) CIT v. Expanded Metal Mfrs. [1991] 189 ITR 317 (An.)
(g) CIT v. Taral Development Corpn. Ltd. [1994] 205 ITR 421 (All.)
(h) Veecumsees v. CIT [1996] 220 ITR 1856 (SC)
(i) Arvind Polycot Ltd. v. Asstt. CIT[1997] 92 Taxman 393 (Guj.)
(j) CIT v. Associated Fibre & Rubber Industries (P.) Ltd. [1999] 236 ITR 471 (SC)
(k) Core Health Care Ltd.'s case
(l) Vadilal Dairy International Ltd.'s case.
II(5). Shri Girish Dave, the learned CIT-DR assailed the said issue on two counts. Firstly he contended that the assessee had expressed its no objection in relation to this ground before the CIT (A). Therefore, the assessee is not entitled to re-agitate this issue, which he consciously waived before the CIT (A). He relied upon the decision of the ITAT Ahmedabad Bench "C" in the case of Smt. Ramilaben Ratilal Shah v. Asstt. CIT [1993] 44 ITD 403. In this case the assessee clearly stated before the CIT (A) vide letter dated 10-8-1990 that they do not want to press the ground relating to the validity of assessment made under section 147(a). It was held that such a letter constituted a conscious waiver on the part of the assessee. After having waived such a contention before the learned First Appellate Authority, the assessee could not re-agitate the same contention before the Tribunal.
II(5)(a). Shri Dave also relied upon the judgment of the Hon'ble Madras High Court in the case of Central Camera Co. (P.) Ltd. v. Government of Madras [1971] 27 STC 112 in which, inter alia, it was held that in the light of the definite attitude taken by the assessee before the Revenue giving up his claim to agitate against the inclusion of certain turnover in the assessable turnover, he cannot be allowed to re-agitate the same in a different way before the appellate authority whose jurisdiction is limited to consider the propriety, legality and regularity of the order appealed against.
II(5)(b). The learned CIT-DR also relied on the judgment of the Hon'ble Bombay High Court in the case of Jivatlal Purtapshi v. CIT[1967] 65 ITR 261 in which it was held that the department, having agreed to delete the amount from the assessment and having conceded the deletion before the AAC, cannot be held to be aggrieved by this part of the order to enable it to file an appeal to the Tribunal. Shri Dave also placed reliance on the judgment of the Hon'ble Mysore High Court in the case of M.M. Annaiah v. CIT[1970] 76 ITR 582 in which it was held that the AAC acted on the concession made by the ITO before him that the penalty had to be computed on the basis of net tax only; therefore it could not be said that the ITO was agreed by the order of the AAC with regard to the aforesaid point. Shri Dave on the strength of these judgments vehemently contended that such a concession on the part of the assessee create an estoppel against them and they are not allowed to re-agitate the same issue before the Tribunal.
II(5)(c). Even on merit, the learned CIT-DR submitted that the assessee is not entitled to grant of deduction in respect of interest pertaining to Jhagadia unit which has been transferred in the next year. He argued that the subsequent event can be taken into consideration for determining the allowability of a particular deduction. He placed reliance on the judgement of the Punjab and Haryana High Court in the case of Mst. Shanti v. Mst. Chhoto AIR 1983 Punj. & Har. 321 in which it was held that on account of subsequent events, the appeal filed on behalf of the appellants was liable to be dismissed as having become infructuous. This was a case relating to the second appeal filed by the plaintiff whose suit for the declaration was dismissed by both the lower courts. It deals with the provisions contained in TP Act and Redemption of Mortgages (Punjab) Act. On the same reasoning, Shri Dave submitted that the subsequent event which took place in the immediately next year shows that Jhagadia unit had been transferred and if that subsequent event is taken into consideration, it will be obvious that interest could not be allowed as deduction.
II(5)(d). Shri Dave drew our attention to the assessment order for assessment year 1992-93. It was observed in the said assessment order that the assessee has a number of businesses. Such businesses are relating to the manufacture of White Phosphorus, TMP etc. in an about more than 10 units. The assessee started one new line of business i.e. 2--Aminobutanol manufacturing. This is a pharmaceutical line of business. The unit at Jhagadia was a Caustic Chloride Project, It is one of the important input of the existing business. The unit was thus being set up for production of an item of backward integration. Such unit cannot be treated as part of the same business. The interest otherwise also is not allowable under the provisions of section 36(1)(iii). Shri Dave also invited our attention to the statement of interest capitalised on fixed assets placed at page 187 of the PB-I. The total interest capitalised come to Rs.5,08,22,207 out of which the following items of interest capitalised relate to Jhagadia Unit:--
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Project Name Location Total interest
Capitalised
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Jhagadia Site Ankleshwar 33,59,246
Caustic Chloride at Jhagadia Ankleshwar 94,00,436
PCL3 at Jhagadia Ankleshwar 11,05,548
Caustic Chloride at Jhagadia Ankleshwar 24,084
(ANKO100 TP)
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Shri Dave pointed out that the last item in the said chart placed at page 187 relates to the lease hold land at Jhagadia Plot No. 746. The interest of Rs.53,57,181 relating to this Plot No. 746 at Jhagadia has also been capitalised. This amount has not been taken into consideration by the CIT(A) while sustaining the disallowance out of interest to the extent of Rs.1,38,89,304. This appears to be an apparent mistake on the part of the CIT(A). The disallowance confirmed by the CIT(A) out of interest expenditure should therefore be increased while dealing with the Revenue's appeal in respect of disallowance out of interest.
II(6). Shri Soparkar, in reply submitted that the unit at Jhagadia transferred to SCIL in the next year was a unit located at Plot No. 750 at Jhagadia and not Plot No. 746, which is still with the assessee and manufacturing units are carrying on the production activities at the said leasehold land situated at Plot No. 746 at Jhagadia. Therefore, the interest capitalised in respect of that unit to the tune of Rs.53,57,181 has rightly been allowed by the CIT(A) as deduction under section 36(1)(iii). This has nothing to do with the other unit of Caustic Chloride Project at Jhagadia transferred in the next year. He also submitted that various judgments relied upon by the learned CIT-DR are not relevant on the facts of the present case; firstly because the assessee did not waive its right of appeal against the aforesaid disallowance but had simply stated that the Revenue will not stand to any gain by disallowing it in the year under consideration and granting corresponding relief of an equivalent amount while determining the short-term capital gains in the next year. There cannot be any estoppel against law. He drew out attention to the Commentary on Income-tax Law by Chaturvedi & Pithisaria at pages 4894 and 4895 to support this legal proposition.
II(7). We have carefully considered the submissions made by the learned representatives and have gone through the various judgments cited by them. We have also gone through the orders of the learned Departmental Authorities. It is well settled law that neither the principle of res judicata nor the rule of estoppel is applicable to assessment proceedings. The essential element of waiver is that there must be a voluntary and intentional relinquishment of a known right. Thus, voluntary choice is the essence of waiver for which there must have existed an opportunity for a choice between relinquishment and the conferment of the right in question. In any event, estoppel is not a basis of liability to assessment under the Income-tax Act, and therefore, the assessee cannot be assessed in respect of an item of income which is not liable to be assessed in his hands simply on the ground that he himself wanted to be assessed on the said amount. With these well settled principles relating to the waiver of estoppel, let us go through the order of the CIT(A) once again in order to find out whether the assessee had consciously waived its legal rights to contest the liability of the aforesaid amount of interest. The learned CIT(A) has simply stated in para-2.1 of his order that the assessee submitted before him that if interest for this year is capitalised, the income from short-term capital gains will be reduced in the next year. The appellant therefore has no objection if this amount pertaining to Jhagadia Unit is capitalised and the income from short-term capital gains is reduced in the next year. These observations only indicate that the assessee wanted to impress upon the CIT(A) that the shifting of the allowability of this deduction in the year under consideration and in the next year will not really result in any real gain to the Revenue. There is no specific mention in the order of the CIT(A) that the assessee did not press this ground before him or had consciously waived its right to contest the said issue before him. On the facts of the present case, we are of the view that the assessee can validly contest the deductibility of the interest amounting to Rs.1,38,89,304 pertaining to new unit constructed at Jhagadia.
II(8). It is an uncontroverted fact that the new unit under construction at Jhagadia related to Caustic Chloride Project. This was a unit which was being set up for manufacture of one of the important input of existing products manufactured by the appellant company. The appellant company had set up various new units at different locations which were part of the expansion of the existing business. The company started manufacturing of items which were towards backward integration or forward integration of the existing line of business. The CIT(A) has allowed deduction in respect of the interest capitalised by the assessee in relation to the various other projects, the details of which have been given at page 187 of the paper book. Since the Caustic Chloride Project at Jhagadia was also a part of the expansion of the existing business, the interest pertaining to this unit, though capitalised in the books of account, was clearly allowable as a deduction under section 36(1)(iii) in view of the various judgments relied upon by the learned counsel for the assessee. The allowability of such deduction is fully supported by the judgment of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. The Tribunal in the case of Core Health Care Ltd. to which one of us (Accountant Member) was a party, has held that deduction in respect of amount of interest paid on capital borrowed for purpose of
business is allowable under section 36(1)(iii) irrespective of the fact that such capital borrowed by the assessee has been utilised for acquiring capital assets. Section 36(1)(iii) does not draw a distinction between capital borrowed for acquiring a capital asset and capital borrowed for meeting requirements of working capital. The Tribunal has followed the judgment of the Gujarat High Court in the case of Alembic Glass Industries Ltd. and the judgment of the Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT [1966] 60 ITR 52. The Tribunal in para 68 of their order has also specifically held that the interest paid on funds borrowed for business purpose including for the purpose of setting up of a new unit of existing running business, qualifies for grant of deduction under section 36(1)(iii), irrespective of the fact whether such new unit has commenced production or not in the year under consideration. Such a view is fully supported by the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries Ltd. and also the judgment of the Supreme Court in the case of India Cement Ltd.
II(9). The assessee submitted a note in respect of allowability of deduction in respect of interest expenditure under section 36(1)(iii) before the Departmental Authorities, a copy whereof has been submitted at pages 185 to 187 of the paper book. Reliance was placed on the following judgments in the said note:--
Alembic Glass Industries' Ltd.'s case
Aniline Dyestuffs & Pharmaceuticals (P.) Ltd.'s case
The learned Departmental Authorities have not controverted the facts stated on behalf of the assessee before them that the interest on borrowings have been paid in connection with the expansion of the existing business of the company.
II(10). In view of the aforesaid facts and judgment of the Hon'ble jurisdictional High Court and the judgment of the Hon'ble Supreme Court as well as the decision of the Tribunal Ahmedabad Benches referred to above, we are of the considered opinion that the CIT(A) ought to have allowed deduction in respect of interest pertaining to unit at Jhagadia to the tune of Rs.1,38,89,304 in the year under consideration, as claimed by the assessee. We accordingly direct the Assessing Officer to allow the said deduction. It may however be relevant to mention here that the aforesaid amount of interest of Rs.1,38,89,304 allowed as deduction under section 36(1)(iii) should not be included in the cost of the undertaking transferred to SCIL in assessment year 1996-97 for computing the short-term capital gains arising on sale of the said undertaking to SCIL in assessment year 1996-97. The Assessing Officer is therefore directed to recompute the amount of capital gains arising on sale of the said undertaking at Jhagadia in assessment year 1996-97 while allowing deduction in respect of interest in the year under consideration.
III. Ground No. III raised by the assessee in their appeal is reproduced below:--
III. Deduction in respect of amount paid as premium on leasehold land Rs.11,01,70,905:
3.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax (Appeals) erred in upholding the action of the Assessing Officer and not allowing the claim in respect of deduction of a sum of Rs.11,01,70,905 paid to GIDC as premium on leasehold land.
3.2 In doing so, the CIT (A) erred in the following respects:
(a) In not appreciating the fact that the lease premium mentioned in the lease agreement actually represented advance rent in view of the fact that the yearly rent was nominal and could not be termed as economic rent;
(b) In not appreciating that the facts in the instant case were identical to the facts before the Karnataka High Court in the case of CITv. HMT Ltd. [1993] 203 ITR 820 and accordingly the said decision ought to have been followed;
(c) In not appreciating the fact that just because the appellant was allowed to construct a factory building on the said land and had to pay all rates, taxes and charges, it could not be said that the payment of lease premium was a capital expenditure;
(d) In not appreciating the fact that it is not form, but the substance of the transaction that matters and since the annual rent fixed was nominal and it could not in any manner be termed as economic rent and the said figure was mentioned in the agreement only for the purpose of retaining the character of transfer of property as a lease and if the substance of the transaction is noted instead of the form, it would be apparent that the said premium represented advance rent.
3.3 In view of the above ground of appeal, the appellant prays that the Assessing Officer be directed to allow deduction in respect of premium on leasehold land amounting to Rs.11,01,70,905.
III(1). The assessee has also raised certain additional grounds of appeal. One of the additional grounds raised by the assessee relates to the assessee's claim for grant of proportionate deduction in respect of premium on leasehold land. Since that additional ground is connected with Ground No. III raised in the assessee's appeal, the same is reproduced below:--
II. Proportionate deduction in respect of premium on leasehold land:
2.1 On the facts and in the circumstances of the case and in law, as iterated in Ground No. IV above, the appellant submits that deduction of the proportionate premium in respect of leasehold land acquired in the assessment year 1993-94, also ought to be considered for allowance in case deduction in respect of the entire premium in the respective year is not allowed.
2.2 The appellant submits that relying on the ratio of the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT[1997] 225 ITR 802 the proportionate premium ought to be allowed as a deduction over the period of the lease in case the entire premium is not allowed as a deduction in the year in which the liability arose.
2.3 In view of the above, the appellant prays that the Assessing Officer be directed to allow deduction in respect of the proportionate premium on leasehold land in case the disallowance of the claim for the entire premium is sustained.
III(2). It may be relevant here to reproduce Ground No. IV in assessee's appeal which is also connected with the aforesaid alternative prayer made on behalf of the assessee.
IV. Proportionate deduction in respect of premium on leasehold land:
4.1 Without prejudice to Ground No. III above and in the alternative, the appellant submits that the CIT (A) erred in holding that the claim for deduction of the proportionate premium of Rs.11,12,837 in respect of premium paid on leasehold land in the assessment years 1992-93 and 1995-96, is not allowable as per law.
4.2 In doing so, the CIT (A) failed to appreciate that since the entire premium is not allowed as a deduction in the year in which the liability arises the proportionate premium ought to be allowed as a deduction over the period of the lease as per the ratio of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd.
4.3 In view of the above, the appellant prays that the Assessing Officer be directed to allow the proportionate premium paid on leasehold land in case the disallowance of the claim for the entire premium is sustained.
III(3). The assessee claimed deduction in respect of the amount paid as premium for acquiring the leasehold rights to the tune of Rs.11,01,70,905. The aforesaid deduction was claimed with reference to the Note No. 13 of Notes to Computation of total income, a copy whereof has been placed at pages 45 and 46 of the paper book. The relevant Note No. 13 is reproduced below:--
"13. Premium in respect of leasehold land:
In the accounts for the year ended 31-3-1995, additions to leasehold land amount to Rs.17,08,02,560. As per the agreement with GIDC the company is required to construct a building thereon within a specified period. Thereafter, the company is entitled to use and occupy the property with the building thereon for a period of 99 years upon payment of a nominal rent.
In the computation of total income, a sum of Rs.11,01,70,905 excluding Rs.6,06,31,655 representing premium in respect of Plot No. 750 which is to be transferred to Search Chem Industries Limited, has been claimed as a business expenditure relying on the decision of the Karnataka High Court in the case of CIT v. HMT Ltd. [1993] 203 ITR 820. It may be further noted that the facts in the instant case are identical to the facts in the above mentioned decision."
III(4). The assessee submitted a Note in respect of claim for aforesaid deduction during the assessment proceedings, a copy whereof has been placed at page 190 of the paper book. The said Note is reproduced below:--
"During the year ended 31-3-1995, a sum of Rs.11,01,70,905 has been paid to Gujarat Industrial Development Corporation (GIDC) as premium for leasehold land at Ankleshwar as per the agreement dated, .... a copy of which is enclosed herewith. As per the terms of the said agreement the company is required to construct a factory building and works thereon within the specified period. Further, as per Clause (9) of the said agreement, the lease is for a term of 99 years from the date of possession at the yearly rent as may be fixed by the licenser from time to time. The said yearly rent has been fixed at Rs ..... per annum.
In the computation of total income the said payment of Rs.11,01,70,905 has been claimed as a revenue expenditure relying upon the decision of the Karnataka High Court in the case of CITv. HMT Ltd. [1993] 203 ITR 820.
In the said case, the assessee entered into a lease agreement with MIDC for granting lease of a plot of land. Under the terms of the agreement, the assessee was required to construct a building thereon within a period of 2 years. Thereafter, the assessee was entitled to use and occupy the property with the building thereon for a period of 95 years upon payment of rent of Re. 1 per annum. After the expiry of the lease period, the plot together with the building thereon had to be surrendered to MIDC. Under the said agreement, the assessee had paid a sum of Rs.12,09,200 as premium for acquiring the leasehold. The assessee claimed that the said amount, although stated as premium, was nothing but rent paid in advance. The lower authorities held that the said expenditure was for the sole purpose of the assessee's business and was eligible for deduction.
On the said facts, the Karnataka High Court held that the Tribunal had found, as a fact, that what was paid by the assessee in a lump sum to MIDC was the future rent payable by it and which the assessee had to pay periodically. This was evident from the fact that the assessee was paying Re. 1 per annum which was obviously for the purpose of retaining the character of the transfer of property as a lease and not for any other purpose. It was held that the Tribunal was justified in law in holding that the sum of Rs.12,09,200 representing lease premium should be allowed as business expenditure.
As per the ratio of the aforesaid decision, the question whether the payment of lease premium is in fact payment of advance rent would depend upon the quantum of yearly rent. As stated above since the yearly rent amounts to Rs ..... per annum, which under any circumstances cannot represent economic rent, the payment of lease premium in fact represents payment of advance and the ratio of the aforesaid decision of the Karnataka High Court is squarely applicable as the facts are identical."
III(5). A copy of letter of allotment of Plot/Shed No. 746 at Jhagadia Industrial Estate, the relevant licence agreement executed between the appellant company and the GIDC have been submitted at pages 193 to 206 of the Compilation. The Assessing Officer rejected the claim for grant of deduction in respect of the aforesaid sum of Rs.11,01,70,905. He relied on the judgment of the Hon'ble Assam High Court in the case of Panbari Tea Co. Ltd. v. CIT [1961] 42 ITR 672, the judgments of the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT[1955] 27 ITR 3 4 and CITv. CIBA of India Ltd [1968] 69 ITR 692 (SC); Dalmia Jain & Co. Ltd. v. CIT [1971] 81 ITR 754 (SC) as well as V. Jagan mohan Rao v. CIT [1970] 75 ITR 375 (SC). The Assessing Officer held that the assessee has correctly treated this amount as capital expenditure in its books of account. The claim of the assessee for grant of deduction in respect of premium on leasehold land was accordingly rejected.
III(6). The CIT (A) confirmed the action of the Assessing Officer. He, inter alia, observed that the assessee has purchased the land on lease basis. The CIT (A) while confirming the action of the Assessing Officer agreed with the reasons given by him in his appellate order passed in the case of the assessee for earlier years. The CIT (A) also rejected the alternative claim made by the assessee for deduction even in respect of proportionate amount of such premium for acquiring leasehold rights in the Industrial land.
III(7). Shri S.N. Soparkar, the learned counsel contended that deduction in respect of the amount paid as premium on leasehold land is clearly allowable as such premium represents payment of advance rent. The assessee is paying nominal annual rent fixed by the GIDC. Therefore, the amount of premium should be treated as advance rent payable by the assessee to GIDC. He placed reliance on the following judgments to support his claim:--
"(A) CITv. HMT Ltd. [1993] 203 ITR 820 (Kar.): The relevant extracts from the Head at pages 820 and 821 are reproduced below:
'The assessee had entered into a lease agreement with MIDC on 24-11-1980, granting lease of a plot of land. Under the terms of the agreement, the assessee was required to construct a building thereon within a period of two years. Thereafter, the assessee was entitled to use and occupy the property with the building thereon for a period of 95 years upon payment of rent of Re. 1 per annum. After the expiry of the lease period, the plot together with the building thereon had to be surrendered to the MIDC. Under the said agreement, the assessee had paid a sum of Rs.12,09,200 as premium for acquiring the leasehold. The assessee claimed that the said amount, although stated as premium, was nothing but rent paid in advance. Both the IAC and the CIT (A) held that this was a capital expenditure. In second appeal, the Tribunal held that the expenditure was for the sole purpose of the assessee's business and, as such, eligible for deduction.'
(ii) that, in the instant case, the Tribunal had found as a fact that what was paid by the assessee in a lump sum to MIDC was the future rent payable by it and which the assessee had to pay periodically. This was evident from the fact that the assessee was paying Re. 1 per annum which was obviously for the purpose of retaining the character of the transfer of property as a lease and not for any other purpose. The Tribunal was justified in law in holding that the sum of Rs.12,09,200 representing lease premium should be allowed as business expenditure."
(B) He also placed reliance on the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. v. Dy. CIT [ITA No. 359 (Ahd.) 1997]. In this case the assessee paid Rs.48,02,616 to GIDC for acquiring lease of land at Panoli. The Tribunal Ahmedabad Bench relying on the judgment of the Karnataka High Court in the case of HMT Limited and the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 and the judgment in the case of Empire Jute Co. Ltd. (124 ITR 1) and the judgment in the case of CIT v. Kirkend Coal Co. [1970] 77 ITR 530 as well as the decision in the case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, directed the Assessing Officer to allow the deduction in respect of the said sum of Rs.48,02,616.
(C) The learned counsel also relied on the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. The assessee in the aforesaid case, had obtained lease rights over the premises situated at Bangalore for a period of 39 years commencing from 1-1-1966. Under the terms and conditions of the lease, the lessee (assessee) had the right to demolish at its own expenses the existing premises and appropriate to itself all the material thereof without paying to the lessor any compensation and construct a new building thereon to suit the purposes of their business as per the plan approved by the lessors. The lessee was required to pay a rent of Rs.1000 per month for the first fifteen years, Rs.1500 per month for the next ten years, Rs.1650 per month for the next ten years and Rs.2000 per month for the remaining years. Acting under the lease agreement, the assessee invested a sum of Rs.1,62,835 in assessment year 1968-69 and Rs.50,937 in the succeeding year in constructing a new building on the said land. The assessee claimed before the Assessing Officer the expenditure on the said sum of Rs.1,62,835 and Rs.50,937 in the relevant assessment years as business expenditure. On these facts the Supreme Court held as under:
"Held, dismissing the appeal, that right from inception, the building was of the ownership of the lessor. Therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The High Court had, therefore, rightly considered this as obtaining a business advantage. The expenditure was, therefore, to be treated as revenue expenditure."
III(8). Shri Soparkar submitted that in view of the sole judgment of the Karnataka High Court in the case of HMT Ltd. and the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. v. Dy. CIT (IT Appeal No. 359 (Ahd.) of 1997], the Tribunal is bound by the aforesaid judgments. He placed reliance on the judgment in the cases of CIT v. Smt. Godavaridevi Saraf [1978] 113 ITR 589 (Bom.) and CIT v. Maganlal Mohanlal Panchal (HUF) [1994] 210 ITR 580 (Guj.) to support this contention.
III(9). Shri Soparkar submitted that the liability to pay the premium amounting to Rs.11,01,70,905 accrued at the time of entering into lease agreement although the said liability was to be discharged by payment in instalments. He relied on the following judgments to support this contention:--
1. Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC)
2. Addl CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.).
Shri Soparkar also contended that the new plant set up on the concerned plot were part and parcel of the existing business and accordingly there is no question of commencement of new business. Hence the lease rent cannot be regarded as capital expenditure. Reliance was placed on the following judgments:
1. Alembic Glass Industries Ltd.'s case
2. Anilien Dyestuffs & Pharmaceuticals (P.) Ltd's case.
III(10) Shri Soparkar submitted that in case the amount of premium paid for acquiring the leasehold rights in the Industrial plot is not allowed as a deduction in the relevant year, then at least proportionate amount of premium paid for leasehold land should be allowed as deduction. The lease of land was acquired from GIDC for a period of 99 years. Therefore, 1/99th amount of premium paid for acquiring leasehold rights was claimed as alternative deduction in respect of proportionate premium of lease hold land. The learned counsel has claimed deduction in respect of proportionate premium on leasehold rent to the tune of Rs.11,94,255 in the chart submitted during the course of hearing, the details of which are as under:--
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Asstt. Year 1992-93: Rs. 58,300
Asstt. Year 1995-96: Rs. 11,12,837
Additional Ground No. II
Asstt. Year 1993-94: Rs. 23,117
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The learned counsel also placed reliance on the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. to support their claim for grant of deduction in respect of 1/99th proportionate amount of premium paid for acquiring the leasehold rights in industrial plot of land. The Hon'ble Supreme Court in the aforesaid case has dealt with the issue relating to the grant of deduction in respect of discount on debentures. The relevant extracts from the Head Note are reproduced below:--
"When a company issues debentures at a discount, it incurs a liability to pay a larger amount than what it was borrowed. The liability to pay the discounted amount over and above the amount received for the debentures, is a liability which has been incurred by the company for the purposes of its business in order to generate funds for its business activities. The amounts so obtained by issue of debentures are used by the company for the purposes of its business. This would, therefore, be expenditure.
Section 37(1) further requires 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 application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure.
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 number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing, years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures.
Held, reversing the decision of the High Court, that the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purposes of its business in order to generate funds for its business activities. It was, therefore, expenditure. The appellant-company had, in its return, correctly claimed a deduction only in respect of the proportionate part of discount of Rs.12,500 over the relevant accounting period in question. This was also in conformity with the accounting practice of showing the discount in the "discount on the debentures account" which was written off over the period of the debentures. The appellant-company was entitled to deduct a sum of Rs.12,500 out of the discount of Rs.3,00,000 in the relevant asst. year. The balance expenditure of Rs.2,87,500 could not be deducted in the asst. year 1968-69."
III(11). Shri Soparkar also drew our attention to a note in respect of such an alternative claim made in relation to the premium paid on leasehold land, a copy whereof has been placed at page 207 of the paper book. In the said note it has been submitted that without prejudice to the assessee's claim for grant of deduction of the entire sum of Rs.11,01,70,905 payable by way of premium for acquiring leasehold land, and in the alternative the assessee claims that in case the aforesaid expenditure is not allowed as a deduction in its entirety in assessment year 1995-96, then at least proportionate premium ought to be allowed as deduction. Reliance was placed on the aforesaid judgment of the Apex Court in the case of Madras Industrial Investment Corpn. Ltd. Shri Soparkar strongly urged that the deduction in respect of the aforesaid amount of premium on leasehold rent should be allowed and in the alternative proportionate deduction should be allowed as stated hereinabove.
III(12). Shri Girish Dave, the learned CIT-DR strongly supported the order of the CIT(A). He placed reliance on the elaborate reasons mentioned in the assessment order as well as in the order of the CIT(A). He pointed out that the Assessing Officer has relied upon the following judgments to support the conclusions arrived at by him:
(a) Panbari Tea Co. Ltd.'s case
(b) Hardiallia Chemicals Ltd. v. CIT[1996] 218 ITR 598 (Bom.)
(c) CIT v. Indian Oil Corpn. Ltd. [1996] 218 ITR 511 (Bom.)
(d) Assam Bengal Cement Co. Ltd.'s case
(e) CIBA of India Ltd's case
(f) Dalmia Jain & Co. Ltd's case
(g) V Jaganmohan Rao's case.
He submitted that all the aforesaid judgments fully support the view taken by the Assessing Officer and confirmed by the CIT (A).
III(13). Shri Dave drew our attention to the letter of allotment dated 23-9-1994 sent by GIDC to the assessee in respect of allotment of plot/shed No. 746 at Jhagadia Industrial Estate. Clause 5 of the said allotment letter was highlighted with a view to show that the assessee paid an amount of Rs.2,13,28,221 being 20% of the total price of the plot/shed. The remaining amount was payable in instalments as specified in the said allotment letter. Shri Dave pointed out that 20% amount was paid towards the purchase price of the plot/shed. The assessee acquired the lights, title and interest over the said plot of land allotted by the GIDC. He further drew our attention to the licence agreement executed between the GIDC in respect of the aforesaid industrial plot allotted by the GIDC. Shri Dave read various clauses of the said licence agreement with a view to show that the assessee paid the purchase price for acquiring the long term leasehold rights for a period of 99 years over the said industrial plot of land. The total cost as per Annexure-A of the said licence agreement relating to the plot No. 746 at Jhagadia Industrial Estate was determined as per allotment letter at the rate of Rs.195 per sq. meter which comes to Rs.10,66,41,105; 20% thereof was paid and the balance amount was payable in 40 quarterly instalments as per the details given in Annexure--A of the said licence agreement. Various clauses of the said agreement amply demonstrate that the assessee had acquired title over the said land and was authorised to transfer the said land subject to the conditions mentioned in the said agreement. Shri Dave, the learned CIT-DR relied on the following judgments:
(A) Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR (Suppl.)-10 (CA). The Head Note is reproduced below:--
"Lessees of licenced premises, under a covenant in their lease, paid annually certain sums imposed by the licensing justices as instalments of the monopoly value on the grant and renewal of the licence for three year periods. It was contended that those sums were not capital payments, but must be regarded as revenue payments and, as such, deductible for income-tax purposes:-- Held, affirming the judgment of Lawrence, J., that monopoly value payments were imposed for the term of the licence on grant or renewal, though the fact that permission was given to pay by yearly instalments gave a false appearance of periodicity. Such payments fell into same class as a premium paid on the grant of a lease, which admittedly was not deductible for income-tax. Therefore the payment in the present case must be regarded in law as out of capital, not revenue, and the claim to deduct it for income-tax failed."
(B) Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513 (PC): The relevant extract from the Head Note at page 514 is reproduced below:--
"Held, affirming the decision of the High Court at Patna (i) that salami was paid for the acquisition of the right of the lessees to enjoy the benefits granted to them by the lease and that right being a capital asset, the money paid to purchase it was a payment on capital account."
(C) Assam Bengal Cement Co. Ltd.'s case: The Head Note is reproduced below:--
"The appellant company acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, a lease of certain lime-stone quarries for a period of twenty years for certain half-yearly rents and royalties. In addition to the rents and royalties the appellant agreed to pay the lessor annually a sum of Rs.5000 during the whole period of the lease as a protection fee and in consideration of that payment the lessor under took not to grant to pay person any lease, permit or prospective licence for limestone in a group of quarries without condition that no limestone should be used for the manufacture of cement. The appellant also agreed to pay Rs.35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the appellant the sums of Rs.5,000 and Rs.35,000 paid to the lessor by the appellant could be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax authorities, the Appellate Tribunal and High Court on a reference under section 66(1) held that the amount was not an allowable deduction under section 10(2)(xv). On appeal to the Supreme Court:
Held, that the payment of Rs.40,000 was a capital expenditure and was therefore rightly disallowed as a deduction under section 10(2)(xv) of the Act."
(D) Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC): The relevant extract from the Head Note is reproduced below:--
"Held, (Per Kapur and Hidayatullah, JJ; S K Das, J. dissenting) that the assessee acquired by his long term lease the right to win stones, and the lease conveyed to him a part of land. The stones in situ were not his stock-in-trade in a business sense but a capital asset from which after extraction he converted the stones into his stock-in-trade. The payment, though periodic in fact, was neither rent nor royalty but a lump sum payment in instalments for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions."
(E) Panbari Tea Co. Ltd. v. CIT [1961] 42 ITR 672 (Assam) as affirmed by the Supreme Court in CITv. Panbari Tea Co. Ltd. [1965] 57 ITR 422: The relevant extract from the Head Note in the judgment in CITv. Panbari Tea Co. Ltd. [1965] 57 ITR 422 is reproduced below:
"By a lease deed dated 31-3-1950, the respondent-company leased out two tea estates alongwith machinery and buildings thereon for a period of 10 years from 1-1-1950 in consideration of a sum of Rs.2,25,000 as and by way of premium and an annual rent of Rs.54,000. Out of premium the sum of Rs.45,000 was payable at the time of the execution of the deed and the balance of Rs.1,80,000 was payable in 16 half-yearly instalments of Rs.11,250 each commencing from 31-1-1952. The question was whether the sum of Rs.11,250 received by the respondent towards premium in the accounting year relevant to the assessment year 1952-53 was a revenue or capital receipt:
Held, on the facts, that the sum of Rs.11,250 was a capital receipt.
The real test of a salami or premium is whether the amount paid, in a lump sum or in instalments, is the consideration paid by the tenant for being let into possession. When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital receipt and the latter are revenue receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but in helps the court, having regard to the other circumstances, to ascertain the intention of the parties."
(F) Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC): The Head Note is reproduced below:--
"The appellant, who had taken on lease certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises so as to convert it into a cinema house, after spending Rs.35,000 on some alterations, felt the necessity for having some money in order to convert the premises into a cinema house. On 23-2-1946, he entered into a lease by which the building was demised to the lessees for 30 years. The lessees agreed to pay under the lease Rs.55,200 to the appellant towards the cost of erecting the cinema house. The rent agreed to be paid was Rs.2,100 per month and it was payable from 1-6-1946. The lease did not contain any condition or stipulation from which it could be inferred that the sum of Rs.55,2OO had been paid by way of advance rent. Nor was there provision for its adjustment towards rent or for its repayment by the appellant. The lessees entered into possession after the cinema house was completed which was subsequent to the date of the lease. The Tribunal held that the receipt of the sum of Rs.55,200 was in the nature of advance payment of rent and, on a reference, the High Court held that the amount could be deemed to have been paid as an advance rent. On appeal to the Supreme Court:
Held, (i) that, in the absence of any material on record to that effect, the Tribunal and the High Court were in error in holding that the sum of Rs.55,200 was an advance payment of rent;
(ii) that the sum of Rs.55,200 paid to the appellant was in the nature of a premium or salami: it had all the characteristics of a capital payment and was not revenue.
Prima facie premium or salami is not income and it is for the income tax authorities to show that facts existed which would make it a revenue payment."
(G) V Jaganmohan Rao's case: The relevant extract from the Head Note is reproduced below:
"It is well established that where money is paid to perfect a little or as consideration for getting rid of a defect in the title or a threat of litigation the payment would be a capital payment and not a revenue payment."
(H) Dalmia Jain & Co. Ltd's case: The relevant extract from the Head note is reproduced below:
"Where litigation expenses are incurred by the assessee for the purpose of creating, curing or completing the assessee's title to the capital, then the expenses incurred must be considered as capital expenditure. But if the litigation expenses are incurred to protect the business of the assessee, they must be considered as a revenue expenditure."
(I) The learned CIT-DR cited the judgment of the Hon'ble Bombay High Court in the case of CIT v. Menora Hosiery Works (P.) Ltd. [1977] 109 ITR 714. In this case the assessee had obtained on leave and licence basis, certain property for a period of five years. The licensee incurred an expenditure for constructing the second floor in accordance with the terms settled with the licensor. The Hon'ble Bombay High Court held that the expenditure incurred by the assessee in constructing the second floor was not allowable as deduction in the computation of its business profits.
(J) CIT v. Banshidhar Sewbhagawan & Co. [1977] 109 ITR 828 (Gauhati):
The assessee in this case took on lease a tea estate by a deed of lease dated 23-3-1961, for a period of 22 years beginning from 1-1-1961. The total payment to be made during the period of 22 year% was Rs.1,48,499. The question was as to whether the amount so paid by the assessee was a capital expenditure or it represented revenue expenditure. The High Court held that the consideration had been paid for acquiring such enduring benefit and that being so, the expenditure had the real nature of capital expenditure and could not be treated as of a revenue nature because a portion of the payment had to be made by annual instalments.
(K) CITv. Project Automobiles [1984] 150 ITR 266 (Bom.): The Head Note is reproduced below:--
"The assessee was carrying on business in automobile parts, petrol pumps, etc. even prior to 1959 on land held on temporary lease, It entered into an agreement with the owners of the land in 1961 whereby the period of lease was to be thirty years. Premium was to be paid at the rate of Re. 1 per sq.ft. The lessee was also to pay economic rent calculated at the rate of 5% of the total ground rent per annum. The rent could be revised at the end of fifteen years. Under clause 9 of the agreement the owner could terminate the lease if the owner required the land for its own purpose or for a public purpose. The premium which amounted to Rs.62,500 was payable in instalments. The assessee claimed deduction of the instalment of premium paid by it but this was disallowed by the ITO. The Tribunal, however, held that the payment was of a revenue nature. On a reference:
Held, that the terms and conditions of the lease agreement had to be construed in its entirety. The lease agreement contemplated that the lessee was to be undisturbed for thirty years and the stipulated rent was also to be undisturbed for fifteen years. The assessee acquired certainty of tenure and rent as a result of the agreement and the facts that the premium was payable in instalments and that there was a provision for re-entry under clause 9 of the agreement would not make any difference to this position. There was no material to prove that the premium was payment of advance rent. The amount of Rs.62,500 represented capital expenditure and was not deductible."
(L) Bharath Earth Movers Ltd. v. CIT [2000] 244 ITR--547 (Kar.): The Head Note is reproduced below:--
"The assessee was a public sector undertaking. The assessee made a payment of Rs.26,82,462 inclusive of registration charges of Rs.4,14,569 in respect of three flats at Calcutta over which lease of 99 years was executed. The assessee was required to make a payment of Rs.5,000 for each of the flats. After the expiry of the lease term, the assessee had the option of purchasing them. The assessee claimed depreciation in respect of the flats, or in the alternative, deduction of the entire expenses as revenue expenditure. The Tribunal held (a) that the assessee was not entitled to depreciation as it held only leasehold rights and that (b) no relief could be given as the entire amount paid was premium which was capital expenditure but allowed the assessee deduction of the rent payable in respect of the three flats in the year of account. The Tribunal referred only the question relating to deduction of the expenditure and did not refer the question relating to depreciation.
Held, that although no sale deed was executed, the manner in which the payment had been made and the balance to be received giving it a colour of lease, was nothing but conferring ownership rights on the assessee. The assessee was entitled to exercise all the rights in respect of the three flats as the owner. Hence, the expenditure could not be considered to be revenue expenditure nor could the assessee claim the deduction treating the said amount as an advance rent."
(M) CIT v. Muhammad Hussain [2001] 114 Taxman 553 (J&K): The relevant extract from the Head Note is reproduced below:
"It is well settled that the premium paid by the lessee for the grant of a lease, whether payable in lump sum or in instalments over the whole period of the lease alongwith the rent, is normally a capital expenditure. The lessee purchases the term of the lease for the premium. As observed by Greene MR in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR Suppl. 10 (CA), there is no revenue quality in the payment made to acquire such an asset as a term of years. There is a clear distinction between the payment made to acquire an asset and payment made for its use. The periodical payment made for a lease is a revenue expenditure whereas the payment made to acquire the lease would be an expenditure of capital nature."
(N) Aditya Minerals (P.) Ltd. v. CIT[1999] 106 Taxman 337 (SC):
These appeals were referred to a Constitutional Bench to resolve the apparent conflict between the judgments of two Benches of the Hon'ble Apex Court, of three learned Judges each, in Pingle Industries Ltd.'s case and Gotan Lime Syndicate v. CIT [1966] 59 ITR 718. The relevant facts of the aforesaid case are as under:
The assessee obtained lease of a land for excavation and subsidiary purposes for a period of 15 years at a fixed monthly rent. As per the lease deed, the assessee-lessee had to deposit with the lessor by way of guarantee for due performance, the amount equal to rent for the full period of 15 years which was to be adjusted against rent of every month. For the year under consideration, the assessee claimed the rent amounts worked out for the years as revenue expenditure. The claim of the assessee was turned down by the authorities, the Tribunal and finally by the High Court.
On these facts, the Hon'ble Supreme Court held as under:--
"In the case before us, as indicated by the lease deed, what was to be paid by the assessee was rent for the land that was leased. It was payable at the rate of Rs. 35 per acre per month. The assessee was required to pay in advance the rent calculated at this rate for the entire period of the lease, i.e. fifteen years, in the form of a "deposit". The deposit was "by way of a guarantee for the performance of this lease deed for fifteen years", that is, towards fifteen years' rent. It was adjustable against the rent of each month and it carried no interest.
On the facts, as it appears to us, this case is on a par with Pingle Industries Ltd.'s case and, accordingly, the civil appeals must fail and are dismissed."
(O) CIT v. Mihir Textiles Ltd. [1994] 206 ITR 112 (Guj.): The Hon'ble High Court at pages 115 and 116 has held as under:
"We now come to question No. 1 referred at the assessee's instance, viz. the treatment to be given to the payment of Rs.45,000 made by the assessee for the purpose of acquiring tenancy rights in the shop in question, and as to whether the same is an expenditure of a capital nature. Even this aspect is covered by a number of decisions. The MP High Court in the case of CIT v. Lucky Bharat Garage [1988] 174 ITR 526, has held that, when the assessee in question made payment which represented the acquiring of tenancy rights, the assessee in fact acquired a right to possession which was of an enduring nature and, therefore, such expenditure incurred for the acquisition of such a right was capital in nature. A similar view has been taken by the Calcutta High Court in the case of Chloride India Ltd. v. CIT [1981] 130 ITR 61. In this decision, it has been held that, on the facts of the case, the amount was paid for acquiring a right to possession which right was a capital of enduring nature and as such the amount of payment made was to be treated as capital expenditure. This Court in the case of Rajabali Nazarali & Sons v. CIT [1987] 163 ITR 7 has considered in detail and reiterated the above principle. This decision holds that a lease creates an interest in immovable property and transfer of leasehold rights which are protected by the provisions of rent restriction statutes, is nothing but a transfer of a capital asset. The price paid to acquire such leasehold rights can only be held to be payment on capital account, there being no revenue quality attributable to the same. Therefore, any payment received, whether by way of compensation or under any other nomenclature, for parting with a capital asset, viz. the demised premises, can only be described as a capital receipt. There are a number of other decisions on the point such as the decision of the Madras High Court in Ramakrishna & Co. v. CIT [1973] 88 ITR 406, the decision of the MP High Court in CIT v. Project Automobiles [1987] 167 ITR 781 and the decision of the Calcutta High Court in CIT v. Hemraj Mahabir Prosad (P.) Ltd. [1989] 179 ITR 73. Thus, this question No. 1 at the instance of the assessee must be answered in the affirmative, i.e. the amount paid for transfer of tenancy rights in the shop is an expenditure of a capital nature."
III(14). Shri Dave pointed out that the facts of the case of HMT Ltd. relied upon by the assessee's counsel are clearly distinguishable with the facts of the present case. He drew our attention to the facts stated H.M.T Ltd.'s case at page 823. The assessee in that case was required to construct the factory building on the leased premises within a period of two years failing which the lessor viz. the MIDC had the option to resume possession of the land. There is no reference of any clause in the lease deed which empowers the assessee to assign the lease hold rights in favour of any other person. However, in the present case the terms of licence and the standard form of lease deed clearly show that the assessee is entitled to assign the rights acquired in respect of leasehold land/shed. There is no material or clause in the licence deed or standard form of lease deed by which it can be inferred that the amount paid for acquiring the leasehold rights represent advance rent paid by the assessee. The ratio of that decision can not be validly applied. Even otherwise the amount paid by the assessee represents payment of purchase price for acquiring long term leasehold rights, which by no stretch of imagination be treated as a revenue expenditure in view of the various judgments of the Hon'ble Apex Court and the Gujarat High Court cited above.
III(15). Shri Dave submitted that the decision of the Tribunal Ahmedabad Bench in the case of Sun Pharmaceuticals Industries Ltd. is based on the judgment of the Hon'ble Karnataka High Court in the case of HMT Ltd. Moreover, the clauses relating to the right of assignment or alienation of leasehold rights have not been taken into consideration in the said decision. The learned CIT-DR thus strongly urged that the claim for deduction in respect of the amount paid for acquiring the leasehold rent can not be granted and the alternative prayer made by the assessee for allowing deduction of 1/99th proportionate amount of such premium is also not allowable. There is no provision in the IT Act for amortization of such capital expenditure incurred for acquiring long-term leasehold rights in factory land/shed. The purchase price paid for acquiring lease hold rights in the land represents cost of acquisition of a capital asset. Depreciation is not allowable under the provisions of section 32 on the cost of land. The land is not a depreciable asset. Allowing 1/99th proportionate amount of premium paid for acquiring leasehold rights will be akin to grant of depreciation or allowing amortization of such capital expenditure without there being a specific provision for grant of such deduction. He therefore urged that the main ground as well as alternative ground raised by the assessee in respect of the aforesaid amount should be rejected.
III(16). We have carefully considered the submissions made by the learned representatives of the parties and have gone through the relevant documents to which our attention was drawn during the course of hearing. We have also carefully gone through all the judgments cited by the learned representatives.
III(17). The Gujarat Industrial Development Corporation Limited (GIDC) allotted Plot/Shed No. 746 at Jhagadia Industrial Estate for setting up of the specified Industrial Unit to the assessee-company vide letter dated 23-11-1994. Clause 5 of the said allotment letter clearly indicates that the assessee was required to pay total price of the aforesaid plot/shed to the tune of Rs.10,66,41,105 out of which 20% amounting to Rs.2,13,28,221 had already been paid prior to the issue of the aforesaid allotment letter. The allotment letter specifically states in para-5 that the aforesaid sum represents total price of plot/shed. Annexure-A of the said allotment letter which is placed at page 196 of the paper book gives the details of various instalments commencing from 31-12-1994 to June, 2004 during which the appellant is required to pay the balance purchase price of Rs.8,53,12,884. The appellant has also produced a copy of the licence agreement executed between the assessee and GIDC. Clause 4 of the said licence agreement provides that nothing contained in this agreement shall be construed as a demise in law of the said land so as to give the licensee any legal interest therein. The licensee shall only have the licence to enter the said land for the purpose of performing this licence agreement. The said agreement, inter alia, requires the assessee to commence the construction of factory building within six months and complete the construction within a period of three years as specified in clause 5(a). There are various other clauses relating to providing sanitations, tree plantations, payment of taxes, restrictions relating to consumption of water per day, power of the GIDC to terminate the agreement, power to enter into and inspect, power to extend time etc. However, clauses 9 and 10 of the said licence agreement clearly provide that when the Executive Engineer of the licensor certifies that the factory building and works have been erected in accordance with the terms thereof and if the licensee shall have observed all the stipulations and conditions, the licensor will grant and the licensee will accept a lease in respect of the said land for a term of 99 years from the date of possession being given to the licensee after execution of this agreement. Clause 10 further provides that the deed of lease shall be prepared in duplicate in accordance with the Form prescribed by the licensor and all costs, charges and expenses of and incidental to the execution of the lease deed and its registration shall be borne and paid by the assessee alone. It was an undisputed fact that the assessee-company has complied with all the conditions and is entitled to have the lease deed executed for a period of 99 years. Shri Soparkar had also submitted a specimen copy of the Standard Form of lease deed, which was executed by the GIDC in favour of the appellant in respect of another plot and submitted that similar lease deed will be executed in favour of the appellant in respect of plot/shed No. 746 at Jhagadia Industrial Estate. He, however, submitted that factually the lease deed had not so far been executed in respect of the aforesaid land but the assessee has complied with all the conditions mentioned in the licence agreement and is eligible for grant of such lease hold rights as per the standard form of lease deed prescribed by GIDC for allotment of such industrial plots.
III(18). A perusal of the standard form of lease deed prescribed by GIDC for allotment of industrial plot/shed indicates that the lessee is entitled to grant of leasehold rights for a period of 99 years on payment of token rent. At the end of 99 years, the lessee shall have the right to renew this lease for a further period of 99 years and in the event of the lessee exercising such option in the manner provided, the lessor shall have a right to increase the sum of yearly rent, which shall be 100% of the original sum of rent. The lease deed contains various conditions relating to the manner and mode of user of industrial plot. It inter alia provides that the allotment price of demised premises has to be paid in instalments as agreed between the parties. The outstanding balance/premium price of land/shed will be further increased by the amount of interest at the specified rate from the date of allotment and would be payable in quarterly instalments. It also provides time limit for completing the construction. There is a separate clause for payment of rent during the terms of this lease. The plot has to be utilised for the specified purposes. Certain conditions are to be observed for erecting the building. The licensee is required to pay fee, cess and taxes in respect of demised land. Clauses relating to the proper sanitations, limit for consumption of water per day etc. are also incorporated. Clause (o) specifically provides that the demised premises will be used only for the purpose of Chemical Industry and will not be used for other purpose without permission in writing of the Managing Director of GIDC. Clauses (r) and (s) deal with the assessee's rights to assign, transfer or part with the land in question subject to prior permission of the lessor, It may be imperative to reproduce clauses (r) and (s) of the lease deed:--
(r) That he will not transfer, assign, under let to part with the possession of the demised premises, or any part thereof or any interest therein without the previous permission of the lessor. For the purpose of this covenant any change in the constitution of the lessee shall be deemed to be a transfer by the lessee of his interest in the demised premises in favour of another person. Provided that where the lessee is a body corporate, a change in its Board of Directors Managing Director by whatever name called shall not be deemed to be a change in the constitution of the lessee, provided further where the, lessee, for the purpose of constructing a building on the demised premises has obtained loan from the Bank or other financial institution by mortgaging his leasehold interest in the demised premises of the lessor shall be deemed to have been subject to the conditions:--
(a) that such mortgage shall not affect the rights or powers of the lessor under this lease deed, and
(b) that the lessor before exercising his rights and power under this lease deed will consult the Bank or as the case may be the financial institution concerned.
(s) In the event of such transfer, assignment, underletting or parting with there shall be delivered by the lessee at his expense a notice thereof to the Managing Director or such officer of the Lessor as the lessor may direct within twenty days from the date on which the transfer, assignment, underletting or parting with becomes effective whether by registration thereof under the Indian Registration Act or otherwise, provided that in the event of such transfer, assignment, underletting or parting with fifty per cent for the unearned increment that may be accrued to the Lessee shall be paid by the Lessee to Managing Director of the Lessor. Provided further that the unearned increment shall be valued by the Chief Accounts Officer of the Lessor and the decision of the Chief Accounts Officer will be binding on the Lessee.
III(19). Shri Girish Dave, the learned CIT--DR submitted that a lease will have following Essential Ingredients & Features:--
1. The restrictions imposed on the enjoyment are of a nature and a degree that could be provided in a document of lease with restrictive covenants about the manner of enjoyment of the property.
2. The substance of the document must be preferred to the form.
3. Real intention of the parties whether they intended to create a lease or a licence.
4. The mere fact that the relationship is enmasked by the label of "licence" is not decisive. The make-up has to be removed and the real profile of the relationship has to be identified.
5. If the effect of the agreement is to give the exclusive right of occupation of the property, though subject to certain reservations or to a restriction of the purposes for which it may be used it is a lease.
6. If the document creates an interest in the property, it is a lease but if it only permits another to make use of the property, of which legal possession continues with the owner it is a licence.
7. Lease confers a right of possession or real property with an interest even again the landlord.
8. A lease in perpetuity at peppercorn rent may so far be akin to sale as to amount to it for all practical purposes.
III(20). Section 105 of the Transfer of Property Act defines lease as under:--
"105. A lease of immovable property is a transfer of a right to enjoy such property, made for a certain time, express or implied, or in perpetuity, in consideration of a price paid or promised, or of money, a share of crops, service or any other thing of value, to be rendered periodically or on specified occasions to the transferor by the transferee, who accept the transfer on such terms."
III(21). A careful reading of the various judgment cited by the learned representatives clearly shows that if the effect of the instrument is to give the holder an exclusive right of occupation of the land, though subject to certain reservations or restrictions as to the purpose for which it may be used, it is in law a demise of the land itself. Before the lease, the owner had the right to enjoy the possession of the land but by the lease he excludes himself during its currency from that right. A lease is therefore not a mere contract, but is a transfer of interest in land. Such interest in the land is a valuable right and constitutes capital asset in the hands of the lessee. The cardinal distinction between the lease and the licence is that in a lease there is a transfer of interest in land whereas in the case of a licence there is no transfer of interest although the licensee acquired a right to occupy the land. The substance of the document must be preferred to the form to ascertain real intention of the parties.
III(22). Let us now examine the facts of the present case in the light of the principles of law emerging from the aforementioned judgments. The assessee has acquired leasehold rights in the aforesaid plot/shed for a period of 99 years with on option to renew this lease for a further period of 99 years. The lessee can exercise such option before or at the end of 99 years. The assessee has agreed to pay total price of the aforesaid plot/shed No. 746 at Jhagadia Industrial Estate to GIDC amounting to Rs.10,66,41,105. Out of this, 20 per cent of the total price of plot amounting to Rs.2,13,28,221 has already been paid prior to the issue of allotment letter dated 28-11-1994. The balance deferred amount of purchase price was payable in quarterly instalments as specified in Annexure-A of the allotment letter dated 28-11-1994. In consideration of the aforesaid price paid or promised by the assessee, the assessee has been put in possession of the aforesaid plot/shed. The assessee has constructed the factory building thereon. The assessee is entitled to exclusive possession of the said industrial plot of land and is entitled to use the same to the exclusion of the lessor. The learned counsel appearing on behalf of the assessee candidly admitted that all the conditions prescribed in the letter of allotment issued by the GIDC or contained in the licence agreement have been fulfilled and the assessee is entitled to have the lease deed executed in the specified form in their favour by the GIDC. The assessee themselves have stated before the learned Departmental Authorities as well as in the submissions made before us that deduction is being claimed in respect of the premium on leasehold land paid/payable by the assessee. It is therefore an admitted fact that the assessee has acquired leasehold rights in respect of the aforesaid industrial plot of land. One of the significant conditions of the standard form of lease deed adopted by the GIDC for allotment of industrial plot to the entrepreneurs is that they can transfer, assign, let out or part with the leasehold land and building constructed thereon for the specified purpose subject to prior permission of the lessor. Clause 5 of the standard form of lease deed also provides that the lessee will not only be entitled to recover the purchase price paid by them but will also be entitled to enjoy the surplus amount realised on the sale/transfer/assignment of the said property subject to the condition that 50 per cent of the unearned increment that may be accrued to the lessee shall be paid by the assessee lessee to GIDC. This clause clearly proves that the assessee had acquired valuable interest or title in the land which was transferable, assignable and alienable subject to certain restrictions/conditions. The purchase price paid for acquiring such right or interest in the land by no stretch of imagination be treated as a revenue expenditure but it represents cost of acquisition of a capital asset. Such a view is clearly fortified bythe various judgments of the Hon'ble Apex Court and the jurisdictional High Court relied upon by the learned CIT-DR.
III(23). It may also be relevant here to refer to the definition of "transfer" in relation to any immovable property given in section 269UA(f). It includes transfer of immovable property by way of lease for a term of not less than 12 years. Similar provision existed in Chapter XXA relating to acquisition of immovable property, which also regarded a long term lease (i.e., to say, lease for a period of not less than 12 years) as an immovable property liable to acquisition under the said Chapter. The surplus derived on transfer of such lease right in respect of long term lease is liable to tax as capital gains under sub-section 45 read with section 2(47) of the Act. The provisions contained in section 4(8) of the Wealth-tax Act also incorporates within its ambit any transaction as referred to in section 269UA(f). It also means that a holder of a leasehold rights shall be deemed to be the owner of such interest in the immovable property.
III(24). Shri Soparkar tried to distinguish various judgments relied upon by the learned CIT-DR. He submitted that the judgment in the case of Grafton Hotel Ltd. does not deal with this point but that deals with the payment of different nature. In that case, the licensee of the licensed premises, under the terms of lease, paid monopoly value on the grant and renewal of the licence for three years period. Such payment was payable annually. The annual periodicity gave an impression as if it was yearly payment of revenue nature. The Hon'ble Court held that such payment will be regarded in law as to be of capital nature and not revenue. The ratio of the said judgment is applicable to the facts of the present case.
III(25). Like this, the learned counsel submitted that the cases relied upon by the learned CIT--DR either relate to the grant of mining lease or those cases are cases of lessors. The judgment of Hon'ble Gujarat High Court in the case of, Mihir Textile Ltd. is a case where the property was taken on rent and that was subject to protection under the Tenancy laws. Such distinction sought to be drawn by the assessee's counsel does not in any manner support his contention, as in that case the question related to allowability of payment of Rs.45,000 made by the assessee for the purpose of acquiring tenancy rights in shop in question. The said payment was held to be a payment made for acquiring a right to possession which was of an enduring nature and therefore the High Court held that the expenditure for the acquisition of such a right was capital in nature. In the present case, the assessee has acquired a long term lease for 99 years in consideration of purchase price more than Rs.10 crores paid/payable for acquisition of such valuable right in the property. The Revenue's case is much more stronger in the present case as compared to the case of Mihir Textiles Ltd. decided by the Hon'ble Gujarat High Court in favour of the Revenue. There is no material or evidence on record or no stipulation in any of the clauses of the allotment letter, Agreement of Licence or the standard lease agreement which may in any manner indicates that the amount of premium paid for acquiring leasehold rights for a period of 99 years represents payment of advance rent. On the other hand, the documents amply and clearly demonstrate that such payment paid/payable towards purchase price for acquiring the aforesaid leasehold rights for a period of 99 years. The token rent for the aforesaid land was separately payable by the lessee to the lessor in accordance with the agreement executed with the GIDC. The payment in question therefore clearly represents cost of capital asset viz. long-term lease acquired by the assessee, which can not be allowed as revenue expenditure.
III(26). The Supreme Court in Assam Bengal Cement Co. Ltd's case has held that the payment made for acquiring lease of certain limestone quarries for a period of 20 years was a capital expenditure. The Hon'ble Apex Court in the case of Pingle Industries Ltd. also held that the payment, though periodically in fact, made by the assessee for acquiring long term lease with the right to win stones was a payment made for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. In the case of Durga Das Khanna the Hon'ble Supreme Court held that the payment of Rs.55,200 agreed to be made by the lessee towards the cost of erecting cinema house in consideration of acquiring lease of certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises was in the nature of a premium of salami and it had all the characteristics of a capital payment and not revenue payment. Even the payment made for perfecting a title was held to be capital payment by the Hon'ble Supreme Court in the case of V. Jaganmohan Rao. The Supreme Court in Dalmia Jain & Co. Ltd.'s case held that the expenditure incurred for creating, curing or completing the assessee's title would be of capital expenditure. The Constitutional Bench of the Hon'ble Supreme Court in Aditya Minerals (P.) Ltd.'s case once again confirmed the principles laid down in the case of Pingle Industries Ltd. The judgment of the Gujarat High Court in Mihir Textiles Ltd.'s case fully supports the Revenue's stand.
III(27). The learned counsel had placed heavy reliance on the judgment of the Karnataka High Court in the case of H.M.T Ltd. In that case the assessee claimed before the Departmental Authorities as well as before the Tribunal that the payment of Rs.12,09,200 paid as premium for acquiring the leasehold rights is nothing but rent paid in advance instead of paying the rent periodically. The Tribunal in that case gave a finding of fact on the strength of the aforesaid submission that the expenditure was incurred for the purpose of assessee's business. Thus the finding of fact was given that the premium paid in that case was in fact payment of advance rent. However, in the present case there is no clause or whisper in the allotment letter issued by GIDC or in the licence agreement or standard form of lease agreement to indicate that the premium of Rs.11,01,70,905 paid/payable in instalments by the assesee represents payment of advance rent. The token lease rent is separately payable in accordance with the aforesaid agreement executed with GIDC. The payment of premium of leasehold, in fact, represents purchase price for acquisition of long term lease for 99 years, which is transferable, assignable and alienable subject to certain restrictions and conditions. The clauses of the lease deed adopted by the GIDC for such allotment inter alia provide that in the event of assignment or transfer, the lessee will be entitled to realise not only the purchase price payable by them but will also be entitled to retain 50 per cent of the profit on sale of land. The lessee will have to hand over only 50 per cent of the unearned increment (profit) relied on sale/transfer of land, to the lessor in the event of its transfer or assignment to other parties subject to the conditions mentioned in the lease deed. Such a clause does not find any mention in the judgment of the Karnataka High Court. Moreover, various judgments of the Apex Court and the Gujarat High Court referred to herein before were not brought to the notice of the Hon'ble Karnataka High Court. The learned counsel also placed heavy reliance on the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. That case has been decided by the Tribunal on the basis of the judgment of the Karnataka High Court in the case of H.M.T Ltd. The Tribunal also therefore had not taken into consideration the various judgments of the Apex Court and the Gujarat High Court relied upon by the learned CIT-DR in the present case.
III(28). On a careful consideration of the entire relevant facts, material and the legal principles emerging from the various judgments cited before us, we are of the considered opinion that the premium paid/payable by the assessee for acquiring long term leasehold rights represent
cost of acquisition of leasehold rights and by no stretch of imagination such payment can be treated as revenue expenditure allowable under the provisions of the Income-tax Act. The view taken by the Commissioner (Appeals) of denying deduction in respect of the aforesaid amount is therefore confirmed.
III(29). We will now consider the alternative prayer made by the assessee for allowing deduction of proportionate premium of leasehold land to the tune of Rs.11,94,255. Before we proceed to deal with the aforesaid point in issue on merits, we would like to observe that the additional ground sought to be raised by the assessee in respect of deduction of such proportionate premium paid in prior years, being a point of law, deserves to be entertained. The additional ground so raised by the assessee is therefore entertained.
III(30). On merits, we are of the view that the alternative prayer made by the assessee for grant of deduction of proportionate premium of leasehold to the tune of Rs.11,94,255 cannot be validly accepted. It is well settled law that no deduction in respect of capital expenditure can be allowed while computing the profits and gains of business in accordance with the provisions of the Income-tax Act, unless such a deduction is expressly allowed under a particular provision of law. The deduction in respect of cost of acquisition of capital asset or capital expenditure can be allowed only in two ways; viz. (i) by way of depreciation; and (ii) by way of amortization of capital expenditure in accordance with the specific provision made in that behalf. Interest in land by its very nature can not be treated as a depreciable asset. The provisions of section 32 provide for grant of depreciation inter alia on buildings, machinery, plant or furniture. It does not include land because the land neither requires insurance against destruction nor any repairs nor does it depreciate in value by use. It is a well settled proposition of law that the land is not a depreciable asset and no depreciation thereon can be allowed.
III(31). The provisions of section 37 specifically prohibit grant of deduction in respect of capital expenditure. The cost of acquisition of capital asset viz. long term leasehold rights is therefore not allowable under section 37. It will be relevant here to refer to some of the provisions which specifically provide for grant of deduction/amortization in relation to capital expenditure incurred for certain specified activities. Section 35A specifically provides deduction in respect of any expenditure of a capital nature incurred on acquisition of patent rights or copyrights in the manner provided in that section. Section 35ABB also provides for grant of deduction in respect of capital expenditure incurred for acquiring right to operate telecommunication services. Section 35AB likewise provides for grant of deduction in respect of lump sum consideration paid for acquiring technical knowhow over a period of six years. It is therefore clear that wherever the Legislature intended to provide for grant of deduction in respect of capital expenditure in the year when it is incurred or by way of amortization of such expenditure over a period of several years, it expressly enacted a specific provision for grant of such deduction. In the absence of a specific provision for grant of amortization/deduction of proportionate amount out of such capital expenditure, such as the one claimed at 1/99th of the premium paid for acquiring leasehold land by the appellant in the present case, the deduction can not be validly granted.
III(32). The learned counsel relied on the judgment of the Supreme Court in CITv. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 for grant of deduction of total amount paid by way of premium of leasehold land and also in relation to the alternative prayer made for grant of deduction of proportionate amount of premium paid for leasehold rent. The facts of that case are totally different. The assessee in that case had obtained lease of premises at Bangalore for a period of 39 years on rent of Rs.1000 per month for first 15 years which was liable to be increased after a gap of 10 years each as mentioned in the lease deed. The assessee invested a sum of Rs.1,62,835 in assessment year 1968-69 and Rs.50,937 in succeeding year for construction of a new building on the said land which was claimed as revenue expenditure. The Hon'ble Supreme Court has observed that right from inception, the building was of the ownership of the lessor. The assessee did not acquire any right, title or interest in the said building. It is, therefore, by spending this money, the assessee did not acquire any capital asset. The only advantage which the assessee derived by spending the money was that it got the lease of a new building at a low rent. From the business point of view, therefore, the assessee got the benefit of reduced rent. The expenditure therefore was treated as revenue expenditure. In the present case the assesee has acquired long term lease for 99 years in consideration of the purchase price paid for acquiring such capital asset. The assessee has a right of transfer, assignment, and alienation subject to certain conditions and restrictions. The payment in the present case is therefore clearly a payment made for acquiring the capital asset and the same therefore can not be treated as a revenue expenditure.
III(33). The learned counsel heavily relied upon the judgment of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. The point in issue in that case relates to deduction in respect of loss due to issue of debentures at discount. The Supreme Court observed that the liability to pay discounted amount over and above the amount received for the debentures, its a liability which has been incurred by the company for the purpose of is business in order to generate funds for its business activities. Any such liability incurred for the business of obtaining a loan would be revenue expenditure. The Supreme Court further held that ordinarily, the 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 can not be spread over a number of years even if the assessee has written it off in its books over a period of years. The Supreme Court has observed that the facts may however justify the assessee who has incurred an expenditure in a particular year to spread and claim it over a number of ensuing years. In fact, allowing entire expenditure in one year might give a very distorted picture of the profit of a year. On these facts, the Supreme Court held that the liability for such revenue expenditure should therefore be spread over the period of debentures. Thus, the spreading over in respect of deductibility of revenue expenditure was allowed by the Supreme Court in the aforesaid case. It was not a case where the Supreme Court has allowed deduction in respect of capital expenditure by spreading it over the period of several years like the one which is being claimed in the present case by asking for amortization of the cost of acquisition of leasehold rights over a period of 99 years by way of spreading it over for the period of 99 years. Such a claim for amortization of capital expenditure of cost of acquisition of a capital asset in the absence of any express or specific provision is clearly contrary to the provisions of law. On the other hand, there is clear and specific provision contained in section 37 of the Act which prohibits grant of deduction in respect of capital expenditure. The alternative ground taken by the assessee in respect of the aforesaid payment is also therefore, not allowable.
V(1). Ground No. V is reproduced below:--
V. Disallowance of commission paid to directors: Rs.25,00,000
5.1 On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of commission paid to the wholetime directors amounting to Rs.25,00,000.
5.2 In doing so, the Commissioner (Appeals) failed to appreciate that:
(a) the aforesaid amount was paid as commission to wholetime directors of the company for the services rendered by them;
(b) the said payment was as per the terms of their appointment and in accordance with the provisions of the Companies Act, 1956.
5.3 The CIT(Appeals) further erred in upholding the assertion of the Joint Commissioner of Income-tax that the alleged commission was only a prima facie provision for commission without any legal obligation or statutory liability ignoring the submission made by the appellant that the said payment had been made as a part of the remuneration on the basis of the terms and conditions of the agreements entered into by the appellant and accordingly was an allowable deduction.
5.4 In view of the above grounds of appeal, the appellant prays that the Assessing Officer be directed to delete the aforesaid disallowance of Rs.25,00,000 in respect of commission paid to wholetime directors.
V(2). Shri S.N. Soparkar, the learned counsel submitted that the company paid an aggregate commission of Rs.25,00,000 to its five wholetime directors, the details whereof has been submitted at page 208 of the PB-I. Copy of the resolution passed by the company has been placed at pages 209 to 220 of the PB-I. It was further pointed out that the commission paid to them was well within the limits prescribed in the provisions contained in the Companies Act. The amount of commission payable to the directors, though quantified after the close of the previous year, is clearly allowable in the year under consideration as the legal and enforceable liability arises in the year under consideration. He relied on the written submissions made in letter dated 5-11-1998 submitted before Departmental Authorities and also on the judgment of the Apex Court in the case of Shahzada Nand & Sons v. CIT[1 977] 108 ITR 358. The learned counsel also relied on the judgments of the Gujarat High Court in the cases of CIT v. Sarabhai Sons Ltd. [1983] 143 ITR 473 and Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT [1982] 135 ITR 912. The learned CIT-DR, on the other hand, relied upon the reasons mentioned in the assessment order and in the order of the Commissioner (Appeals). He also submitted that the disallowance is justified in view of the provisions contained in section 43B(c) of the Act.
V(3). We have carefully considered the submissions made by the learned representatives of the parties and have perused the relevant judgments and other documents, to which our attention was drawn during the course of hearing. The Assessing Officer has disallowed the aforesaid commission payments on the ground that the commission paid to an employee is not a deductible expenditure, as no evidence has been furnished by the assessee which indicates that any extra services were rendered by the employees/directors. Reliance was placed on the judgment of the Supreme Court in the case of Shahzada Nand & Sons and the judgment of the Rajasthan High Court in the case of Bombay Motors v. CIT[1995] 214 ITR 342. There is some difference in the amount of commission payable to individual directors as per the details mentioned in the assessment order and the details furnished at page 208 of the PB-I which is reproduced below:
-------------------------------------------------------------------------
S.No. Name Designation Amount as Details as per
per Asstt. pages 2-8 of
Order PB-I
-------------------------------------------------------------------------
1. R.D. Shroff Chairman & MD 5,00,000 7,00,000
2. Mrs. S.R. Shroff Joint MD 5,00,000 6,00,000
3. J.R. Shroff Director 5,00,000 4,00,000
4. Kalyan Banerji Director 5,00,000 4,00,000
5. A.C. Ashar Director 5,00,000 4,00,000
-------------------------------------------------------------------------
The Commissioner (Appeals) has confirmed the same on the basis of the reasons given in the assessment order and he has further observed that the amount was not quantified till August, 1995, i.e., in the next year. The salary certificates issued to these employees/directors in Form No. 16 do not include payments of such commission nor tax was deducted at source in the year under consideration. The Commissioner (Appeals) further observed that the Assessing Officer was of the opinion that even if this amount is allowable, it is allowable in the next year, as the liability to pay the said commission arose in the next year.
V(4). We have considered the rival submissions. The liability quantified on the basis of profits derived by the company in the year under consideration accrued at the end of the relevant year. Merely because the liability has been quantified at the time of preparation of balance sheet and at the time when the final accounts were authenticated by the directors, will not postpone the accrual of liability for payment of such commission payable to the directors in accordance with the terms of agreement. The learned Departmental Authorities have not disputed the fact that services were in fact rendered by all the wholetime directors to whom such commission has been paid. The provisions of section 309 of the Companies Act permits payment of aggregate remuneration to its directors upto the extent of one per cent of the net profits of the company. The learned CIT-DR was fair enough to admit that the aggregate amount of remuneration paid to the directors including the aforesaid commission is below the said limit prescribed under section 309 of the Companies Act. The judgments relied upon by the Assessing Officer instead of supporting the revenue's stand, in fact support the assessee's claim. The provisions of section 43B(c) is not applicable to the facts of the present case. On a careful consideration of the entire relevant facts, we are of the view that the disallowance made in respect of commission payable to directors is wrong and unjustified. The Assessing Officer is directed to delete the same.
VI(1). Ground No. VI is reproduced below:--
VI. Disallowances under section 40A(3): Rs. 87,266
6.1 On the facts and in the circumstances of the case and in law, the CIT(Appeals) erred in upholding the disallowance under section 40A(3) of a sum of Rs.87,266 being payments made in cash in excess of Rs.10,000.
6.2 The Commissioner (Appeals) failed to appreciate that the aforesaid payments were made in the circumstances envisaged in clause (j) of Rule 6DD and accordingly, the said payments ought not to have been disallowed under section 40A(3).
6.3 In view of the above grounds of appeal, the appellant prays that the said disallowance of Rs.87,266 under section 40A(3) be deleted.
VI(2). The aforesaid disallowance has been made on the basis of Tax Audit Report given by the auditors. The assessee has produced the relevant evidence before the learned Departmental Authorities as well as before us to prove that such cash payments were made for crane hiring charges professional fees etc. to one Shri M.S. Chowdhary. The details of such cash payments have been given at pages 224 and 225 of the paper book. The documentary evidence to prove genuineness of such payments have been furnished at pages 226 to 234 of the Paper Book. The assessee has also relied on the CircularNo. 220, dated 31-5-1977 issued by the CBDT in which certain illustrations have been given which are covered within the exceptional circumstances provided in rule 6DD(1). The learned counsel also placed reliance on the following decisions:
(a) CITv. Trinity Traders [1987] 163 ITR 381 (Guj.)
(b) Hasanand Pinjomal v. CIT [1978] 112 ITR 134 (Guj.)
(c) Navsari Waste Cotton Products v. CIT[1987] 163 ITR 378 (Guj.)
(d) ITO v. Patidar Ginning & Pressing Co. Ltd. [1994] 51 ITD 7 (Ahd.).
VI(3). The learned CIT-DR relied upon the reasons mentioned in the assessment order. He also drew our attention to the copy of voucher dated 4-9-1994 placed at page 226 of the paper book wherein charges for hiring of car for four days for "customs" has been paid to the tune of Rs.10,984. The learned CIT-DR observed that the business purpose of such expenditure has not been explained. It appears to have been incurred in connection with the Custom Department.
VI(4). We have carefully considered the submissions made by the learned representatives. The car hiring charges for four days for "customs" amounting to Rs.10,984 pointed out by the learned CIT-DR is not the basis of disallowance made by the Assessing Officer in the assessment order. In case the Assessing Officer was of a similar view, as is now veriably pointed out by the learned DR, the Assessing Officer should have examined the concerned persons with a view to find out the business necessity of incurring such expenditure. The identity of the payee and the genuineness of the payment has not been doubted. On the other hand, the identity and genuineness of the payment are verifiable from the copies of vouchers submitted in the compilation. The assessee contended before the learned Departmental Authorities that the said payments were made to the parties with whom they did not have regular dealings and therefore the said payments were made in cash under unavoidable and exceptional circumstances. In the case of a company where the assessee has declared taxable income of Rs.3,84,97,110, the meagre cash payment of Rs.87,266 in excess of the prescribed limit ought to have been accepted as covered by exceptional circumstances as per rule 6DD(j). The disallowance so made by resorting to section 40A(3) also deserves to be cancelled in view of the above referred Circular issued by the CBDT and in view of the judgments of Hon'ble Gujarat High Court and the decisions of the ITAT Ahmedabad Bench relied upon by the learned counsel. The Assessing Officer is directed to delete the disallowance of Rs.87,266.
VII(1). Ground No. VII is reproduced below:
VII. Disallowance under rule 6B.: Rs.3,43,635
7.1 On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of a sum of Rs.3,43,635 under the provisions of Rule 6B in respect of expenditure on presentation articles.
7.2 In doing so, the Commissioner (Appeals) failed to appreciate that the said presentation articles were given. to business associates and customers of the appellant company in the ordinary course of carrying on the business with a view to maintain cordial relations and not with a view to advertise the products of the appellant and accordingly, the provisions of section 37(3) read with Rule 6B were not applicable.
7.3 In view of the above grounds of appeal, the appellant prays that the disallowance of Rs.3,43,635 made under Rule 6B in respect of presentation articles, be deleted.
VII(2). The learned counsel invited our attention to the details of such expenses incurred for articles costing more than Rs.10,000 each presented by the assessee to persons connected with the assessee's business given in Tax Audit Report. A copy thereof has been submitted at page 237 of the paper book. The learned counsel contended that such expenditure on presentation articles can not be disallowed under Rule 6B on the ground that the presentation articles neither bear logo of the company nor carry the name of the company. The said expenditure does not represent expenditure in the nature of advertisement.
Reliance was placed on the following judgments:
(a) CITv. Allana Sons (P.) Ltd. [1995] 216 ITR 690 (Bom.)
(b) First ITO v. French Dyes & Chemicals (I) (P.) Ltd. [1984]/10 ITD 240 (Bom.) (SB)
(c) G.L. Rexroth Industries Ltd. v. Dy. CIT[1997] 59 TTJ (Ahd.) 757
(d) Asstt. CITv. Bell Ceramics Ltd. [1999] 69 ITD 156 (Ahd.).
VII(3). The learned CIT-DR relied on the reasons mentioned in the assessment order. He also submitted that the assessee has submitted an application for rectification under section 154 in which one of the prayers made by them is that the disallowance out of advertisement expenditure under rule 6B be restricted to 50 per cent from the balance amount of expenditure incurred in excess of Rs.10,000 for each article presented by the assessee. The learned counsel has not pointed out as to whether the said application under section 154 has been disposed of by the Assessing Officer or not. He however supported the disallowance in view of the reasons recorded in the orders of the Departmental Authorities.
VII(4). We have carefully considered the submissions made by the learned representatives. During the course of hearing, the Bench, inter alia, required the learned counsel to furnish the names of the persons to whom articles costing more than Rs.10,000 were given. The assessee furnished the following details:--
-----------------------------------------------------------------------
Sr. Name of the Person Unit Item Reason
No.
-----------------------------------------------------------------------
1. Mr. Ramanajeyulu 1 Scooter Sales Promotion
-Dealer at Guntur Depot
2. Terrance Chen 1 Bracelet Presented when
-MD Huikwng-Taiwan visited India
(Overseas Customer)
3. Nelson Clark 1 Earrings Presented when
-Albright & Wilson- & Set visited India
USA (Overseas Customer)
4. 1 Cloth Customary Gift
Piece
-----------------------------------------------------------------------
The name of fourth person and the amount of such customary gift of cloth piece costing more than Rs.10,000 was not given in the said details. It appears from the copy of vouchers enclosed with the said details that this represents cost of cloth piece purchased from Raymond's Retail Shop for Rs.10,051. The learned counsel contended that this was presented to a person connected with the assessee's business. In any case this cannot be disallowed under rule 6B. The learned Departmental Authorities and the CIT-DR did not dispute the fact that the articles presented by the assessee did not bear the logo or the name of the company. These articles did not have any advertisement value. The allowability of such expenditure is fully supported by the various judgments relied upon by the learned counsel. On a careful consideration of the entire relevant facts and the judgments referred to above, we are of the considered opinion that the disallowance of Rs.3,43,635 made under rule 6B deserves to be deleted. The Assessing Officer is directed to delete the same.
VIII. Ground No. VIII relates to the confirmation of the disallowance in respect of non-refundable deposits paid to Mahanagar Telephone Nigam Limited aggregating to Rs.3,40,900. After considering the relevant findings given by the learned Departmental Authorities in their respective orders and after considering the submissions made by the learned representatives, we are of the view that the assessee is clearly entitled to deduction in respect of non-refundable deposits given to Mahanagar Telephone Nigam Limited in consonance with the Instruction No. 943, dated 2-4-1976 issued by the CBDT which clarifies that the deposit under OYT Scheme for securing telephone connection should be allowed as deduction in the year of payment irrespective of the fact whether telephone has been installed or not. The Assessing Officer is accordingly directed to allow deduction in respect of non-refundable deposit paid to Mahanagar Telephone Nigam Limited. The Assessing Officer will be at liberty to verify the details of such non-refundable deposits amounting to Rs.3,40,900 claimed to have been paid by the assessee.
IX. Ground No. IX is directed against the findings given by the learned Commissioner (Appeals) in para-13 of his order conforming the action of the Assessing Officer to allow depreciation as per provisions of law, though the appellant had not made any such claim for grant of depreciation. The learned counsel contended that the assessee was entitled to exercise his option of not claiming depreciation in respect of the block of assets relating to the plant and machinery eligible for depreciation at the rate of 25 per cent. He submitted that the Assessing Officer cannot fasten such deduction by way of depreciation in a case where the assessee chooses not to claim the same. Reliance was placed on the judgment of the Supreme Court in the case of CITv. Mahendra Mills [2000] 243 ITR 56 and the decision of the ITAT in the case of Uvifort Metalizers Ltd. v. Dy. CIT IT Appeal No. 848 (Ahd.) of 1999 dated 7-1-2000, to which one of us (Judicial Member) was a party.
IX(1). The learned CIT-DR relied on the amendment made in the relevant provisions of section 34(1) with effect from 1-4-1988 dispensing with the requirement of furnishing the prescribed particulars for grant of depreciation. He submitted that granting of depreciation has now become mandatory after deletion of this condition earlier prescribed in section 34(1).
IX(2). We have considered the submissions made by the learned representatives and have perused the relevant provisions of law and the judgments relied upon by the learned representatives. The point in issue is clearly covered in favour of the assessee by the decision of the Tribunal in the case of Uvifort Metalizers Ltd., in which the Tribunal, after taking note of the aforesaid amendment made in section 34(1), has clearly observed that claiming of depreciation by an assessee is optional. Since the assessee has chosen not to claim depreciation on the block relating to the plant and machinery, the Assessing Officer cannot fasten such a deduction by way of depreciation because an option available to the assessee to claim or not to claim depreciation, can not be converted into obligation. The Assessing Officer is directed to accept the assessee's contention in this regard.
X. Ground No. X relates to the confirmation of the disallowance of Rs.16,66,207 being the prior period adjustment claimed as deduction in the year under consideration. The assessee had submitted copies of details of such prior period adjustment in Annexure-J copy whereof has been placed at pages 273 and 274 of PB-I. The learned counsel submitted that the liability in respect of the aforesaid expenditure, which consisted of several items, had crystallised during the relevant previous year and therefore those were debited as expenditure in the year under consideration. Such deduction in respect of such prior period adjustment is clearly allowable in view of the judgment of Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd v. CIT [1995] 213 ITR 523. The learned CIT-DR, on the other hand, relied on the reasons mentioned in the orders of the Departmental Authorities.
X(1). We have carefully considered the submissions made by the learned representatives and have gone through the orders of the learned Departmental Authorities as well as the details of such prior period adjustment claimed as deduction. The Assessing Officer has disallowed such claim on the ground that the assessee is following mercantile system of accounting and therefore any expenditure which has not accrued or arisen in the relevant year cannot be allowed. The Assessing Officer has not pointed out any expenditure of a disallowable nature in the total claim amounting to Rs.16,66,207 made by the assessee. Even in the case of an assessee who is maintaining its books of account on mercantile system of accounting, deduction in respect of the liability pertaining to prior year, which in fact has crystallised during the relevant year can be claimed, in case no such deduction was claimed in the preceding year to which the liability in question pertains. The Hon'ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. has held that merely because an expenditure relates to a transaction of an earlier year, it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallised in the year in question on the basis of maintaining accounts on mercantile basis. If the allowability of the expenditure in question is not in doubt or dispute, there is no justification for disallowing the claim for such expenditure which though pertains to previous year, but have been determined and crystallised and debited in the books of account in the year under consideration. If the dispute relates only to the year of allowability and not the question of its allowability altogether, the year of allowability is not of much significance in respect of such petty amount in the case of a company where the rate of tax is almost uniform in different years. It may be relevant here to make a useful reference to the judgment of the Bombay High Court in the case of CITv. Nagri Mills Co. Ltd. [1958] 33 ITR 681. At page 684, the relevant extract is reproduced below:--
"We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other."
X(2). A perusal of the detail of such prior period adjustment submitted at page 273 reveals that the total debits in this account was Rs.41,24,397=27 and the total credits were Rs.24,64,189=96. The net amount of Rs.16,60,207=31 has been claimed as deduction. Since the Assessing Officer has not examined the nature of such debits and credits and has not examined the question relating to allowability thereof, this point is restored back to the Assessing Officer with a direction to examine the nature of all the expenditure (debits) and income (credits) shown in the details of prior period adjustment and decide the question relating to the allowability of such deduction. In case he finds that the expenditure claimed as deduction is allowable, the year of allowability should be determined in accordance with the judgment of Hon'ble Gujarat High Court in the case of Saurashtra Cement& Chemical Industries Ltd. and the Assessing Officer should also keep in mind the aforesaid observations of the Bombay High Court in the case of Nagri Mills Ltd. The order passed by the learned Commissioner (Appeals) relating to this ground is therefore set aside and the matter is restored back to the Assessing Officer for deciding the same in accordance with the aforesaid directions and in accordance with the provisions of law after providing reasonable opportunity to the assessee.
XI(1). Ground No. XI relates to the assessee's claim made before the Commissioner (Appeals) that the expenditure debited in assessment year 1996-97 but pertaining to assessment year 1995-96 to the tune of Rs.1,01,89,977 should be allowed in assessment year 1995-96, as the Commissioner (Appeals) has not allowed deduction in respect of the said expenditure in assessment year 1996-97. The learned counsel at the time of hearing submitted that though the amount stated in the ground of appeal is Rs.1,01,89,977, the claim is restricted to the correct figure of Rs.31,08,783. He submitted that though such expenditure has been debited in accounts for year ended on 31-3-1996, this pertains to assessment year 1995-96 and should accordingly be allowed as deduction in assessment year 1995-96. Reliance was placed on the following judgments:
(a) CITv. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC)
(b) CITv. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.)
(c) Kedarnath Jute Mfg. Co. Ltd.'s case
(d) Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC).
XI(2). This ground is similar in nature with the preceding ground. The assessee has stated in this ground that in case the amount of such expenditure debited in the books of account pertaining to assessment year 1996-97 is disallowed in that year, the same should be allowed in assessment year 1995-96, the year to which the expenditure in question relates. While dealing with Ground No. X we have already held that if the liability for payment of expenditure has been determined and crystallised in the next year and the amount has been debited in the books of account after its determination and crystallisation, the expenditure should be allowed as deduction in the year in which it has been accounted for in the books of account maintained by the assessee. Such observations have been made on the strength of the judgment of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. and the judgment of the Bombay High Court in Nagri Mills Co. Ltd.'s case. The order passed by the learned Commissioner (Appeals) in relation to this ground is therefore set aside and the matter is restored back to the Assessing Officer for deciding this point afresh after examining the allowability of the expenditure in question. The details furnished at page 282 of the paper book shows that the total debits in the details of prior period adjustment is Rs.1,33,77,414 and the total credits is Rs.31,87,436. The balance of Rs.1,01,89,977 has been claimed as deduction in assessment year 1996-97 and alternatively in assessment year 1995-96. The assessee has restricted its claim for grant of deduction to only Rs.31,08,783 in the chart submitted at the time of hearing before us. In case the allowability of expenditure aggregating to Rs.31,08,783 as claimed by the assessee is not in dispute, the year of allowability may not be given undue significance in respect of allowability thereof in the year in which such expenditure has been debited in the books of account. The Assessing Officer will decide this point afresh in accordance with the provisions of law and in consonance with the directions given hereinbefore. The Assessing Officer should however ensure that if the allowability of the expenditure is not in dispute, the deduction must be allowed in one of the two relevant years and he should also ensure that double deduction in respect of the same expenditure is not allowed in more than one year. The issue is therefore restored back of the Assessing Officer for deciding the same afresh after providing reasonable opportunity to the assessee.
XII. Ground No. XII relates to the confirmation of the action of the Assessing Officer of allowing deduction under section 80M at Rs.1,96,61,986 instead of Rs.1,98,61,986 as computed by the appellant. The learned counsel submitted that no expenditure was incurred by the appellant for earning dividend income. Hence deduction under section 80M should be allowed on gross dividend without deducting any expenditure. The statement of dividend income earned by the assessee has been placed at pages 283 and 284 of the paper book. Copy of written submissions dated 5-11-1998 has been furnished at pages 178 and 179 of the paper book. The Assessing Officer deducted proportionate management expenditure for earning dividend income on estimated basis at Rs.2 lacs. The Assessing Officer relied on the judgment of the Apex Court in the case of CIT v. United General Trust Ltd [1993] 200 ITR 488 and Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120. The Commissioner (Appeals) confirmed the action of the Assessing Officer.
XII(1). The learned counsel submitted that the dividend has been received from 8 companies and income from units of UTI has been received by the assessee. No expenditure is required to be incurred for earning such income. The learned CIT-DR supported the order of the Commissioner (Appeals).
XII(2). We have carefully considered the submissions made by the learned representatives and have gone through the judgments relied upon by the Assessing Officer in the assessment order. The Hon'ble Apex Court in the case of Distributors (Baroda) (P.) Ltd. has held that so far as deduction under section 80M(1) is concerned, the deduction required to be allowed under that provision has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part gross total income. It was also held that section 80AA, in its retrospective operation, is merely declaratory of the law as it always was since 1-4-1988. It was therefore held that interest on borrowings for purchase of shares should also be deducted while computing the amount of deduction allowable under section 80M(1). The assessee received dividend income of Rs.3,13,969 from 8 companies where investments have been made in shares other trade investments. Apart from that, the income from units of UTI amounting to Rs.4,88,70,042 has been received on which deduction under section 80M at the rate of 40$ has been claimed without deducting any amount of expenditure. The Assessing Officer has deducted only Rs.2 lacs in respect of proportionate management expenditure of the assessee for earning such dividend income. No deduction has been made in respect of any proportionate amount of interest expenditure, if any. In view of the substantial amount of income received by way of dividends from the Companies and UTI, the estimate of expenditure incurred for earning such income adopted by the Assessing Officer at Rs.2 lacs only cannot be said to be unreasonable or excessive in any manner. We do not find any justification to interfere with the view taken by the Assessing Officer and the Commissioner (Appeals) in relation to this ground.
XIII. Ground No. XIII is reproduced below:
XIII. Deduction under section 80-I and section 80-IA
13.1 On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in confirming the computation of deduction under section 80-I and section 80-IA as computed by the Assessing Officer amounting to Rs.5,42,48,162.
13.2 In doing so, the Commissioner (Appeals) erred in the following respects:
(a) In not appreciating the fact that the deductions under section 80-I and section 80-IA ought to have been allowed on the profits of the concerned industrial undertakings without restricting the total deduction to 30 per cent of the gross total income.
(b) In not appreciating the fact that deductions under section 80-I and section 80-IA ought to have been allowed on the profits of the concerned undertakings without deducting depreciation eligible under section 32 in view of the fact that depreciation under section 32 is eligible on the basis of the "block of assets" for the company as a whole and not in respect of individual assets of the concerned industrial undertakings and accordingly depreciation cannot be allocated to the different industrial undertakings as per the scheme of the Income-tax Act, 1961 in respect of allowance of depreciation on the concept of "block of assets".
13.3 In view of the above grounds of appeal, the appellant prays that the Assessing Officer be directed to recompute the deduction eligible under section 80-I and section 80-IA on the profits and gains of each eligible industrial undertaking without excluding from the profits of the concerned industrial undertakings, depreciation eligible under section 32 and without restricting the same to 30 per cent of the gross total income.
XIII(1). Shri S.N. Soparkar, the learned counsel submitted that the working as to how the Assessing Officer has computed deduction allowable under sections 80-I and 80-IA to the tune of Rs.5,42,48,162 has not been given in the assessment order. However, in the order dated 11-1-2000 giving effect to the order of the Commissioner (Appeals), deduction has been granted at 30 per cent of the gross total income as reduced by other deductions allowable under Chapter VI-A. He drew our attention to a copy of claim made under sections 80-I and 80-IA which have been furnished at pages 285 and 286 of the PB-I. The learned counsel contended that deductions under sections 80-I and 80-IA is eligible on profits derived from new Industrial Undertakings and there is no provision which provides for restricting such deduction at 30 per cent of the gross total income, as erroneously done by the Assessing Officer. The provisions of section 80A(1) only provides that aggregate amount of deduction allowable under Chapter VI-A should not exceed the amount of gross total income. The learned counsel relied on Circular No. 58, dated 15-4-1971, the judgment in CITv. Bhoruka Investments (P.) Ltd. [1992] 198 ITR 734 (Cal.) and the decision of the ITAT in the case of CIT v. Nima Specific Family Trust [2001] 248 ITR 29 (Bom.), copy whereof has been placed at pages A121 to A141 of the PB-IV. The learned counsel pointed out that in assessment years 1992-93 and 1993-94 deduction under sections 80-I and 80-IA were granted as per working submitted during the assessment proceedings on profits of each eligible Industrial Undertaking. Subsequently in order under section 154 dated 7-12-1995 for assessment year 1992-93 the deduction was restricted to 30 per cent of the gross total income. The learned CIT-DR was required to give the basis for computing deductions under sections 80-I and 80-IA amounting to Rs.5,42,48,162. He requested for grant of time for this purpose which was granted, as desired. On the subsequent date of hearing, the learned CIT-DR submitted a copy of the order under section 154, dated 6-8-1998 passed by the Assessing Officer for assessment year 1995-96 in which deduction under sections 80-I and 80-IA was granted to the tune of Rs.7,48,68,772. The aforesaid amount was computed by the Assessing Officer as under:--
--------------------------------------------------------------------------
Income computed by the Assessing Rs. 30,25,73,619
Officer in the order under
section 154, dated 6-8-1998
before allowing deduction
under Chapter VI-A
Less: Deduction under Chapter VIA as
admissible to the assessee
--------------------------
1. Deduction u/s 80G @ 50% Rs. 26,83,500
2. Deduction u/s 80HHG Rs. 2,90,99,058
3. Deduction u/s 80-0 Rs. 15,66,500
4. Deduction u/s 80M Rs. 1,96,61,986
----------------- ---------------
Rs. 5,30,11,044 Rs. 5.30,11,044
-----------------
Rs. 24,95,62,575
----------------
5. Deduction under sections 80-I
and 80-IA @ 30% of taxable total
income before allowing deduction
under section 80-IA (30% of
Rs. 24,95,62,575 Rs. 7,48,68,772
----------------
Rs. 17,46,93,803
--------------------------------------------------------------------------
The Assessing Officer in the aforesaid order under section 154 has thus restricted the deduction under sections 80-I and 80-IA to 30 per cent of the taxable income computed after allowing deductions under sections 80G, 80HHC, 80-O and 80M. The learned CIT-DR could not explain as to on what basis the deduction allowable under sections 80-I and 80-IA has been restricted to 30 per cent of taxable income determined after allowing deductions under various other sections appearing under Chapter VI-A.
XIII(2). Shri Soparkar submitted that the Assessing Officer has not pointed out any mistake or discrepancy in the claim made under sections 80-I and 80-IA in respect of income derived by different Industrial Undertakings owned by the assessee. The working of deduction allowable under sections 80-I and 80-IA submitted by the assessee is in conformity with the provisions of law. The Assessing Officer has not found any mistake or discrepancy in the said claim. Therefore, there is no justification for disallowing any part of the claim made as per sections 80-I and 80-IA.
XIII(3). The learned counsel further submitted that without prejudice to the assessee's claim for grant of deduction under sections 80-I and 80-IA on the profits derived by the eligible Industrial Undertakings without deducting depreciation therefrom, the assessee also submitted before the Assessing Officer a certificate from Jawahar Thacker & Co., CAs in relation to the computation of deduction allowable under sections 80-I and 80-IA as per the Department's stand i.e., after considering the depreciation as allowable under the provisions of the Act and taking the Advance Licence Benefit on accrual basis. A copy of such certificate given by the Chartered Accountants alongwith the details of computation of such deductions under sections 80-I and 80-IA have been furnished at pages 287 to 289 of PB-I. According to the aforesaid certificate, the claim allowable under section 80-IA comes to Rs.12,60,95,196 and deduction under section 80-I comes to Rs.1,24,35,608. The learned Assessing Officer and the Commissioner (Appeals) have not found any mistake in such a claim made by the assessee. The learned counsel submitted that the learned CIT-DR has also not pointed out any mistake or discrepancy in the claim so made by the assessee. The deduction as claimed under sections 80-I and 80-IA should therefore be allowed. The learned counsel also vehemently objected that this point should not be restored back to the Assessing Officer because the Assessing Officer may place the assessee in a worst situation as compared to the position as of today which indicates that the Assessing Officer has allowed deductions under sections 80-I and 80-IA to the tune of Rs.7,48,68,772 as per order under section 154 dated 6-8-1998. The assessee can not be placed in a worst situation than the position which was acquired as a result of the order of the Commissioner (Appeals), in the absence of any such ground in the cross appeal or cross objection by the Department. The restricting of deductions under sections 80-I and 80-IA to 30 per cent of taxable income after allowing deductions under sections 80G, 80HHC, 80-0 and 80-M is patently wrong as such course of action is not permitted under any provisions of the Act.
XIII(4). The learned counsel also relied on the decision of the Calcutta High Court in the case of CITv. Jayajeerao Cotton Mills Ltd. [1995] 79 Taxman 51 and the decision of the Supreme Court in the case of CITv. Maharashtra Sugar Mills Ltd. [1971] 82 ITR 452 to support his contention that the depreciation should not be deducted from the profits of eligible Industrial Undertakings computed by the assessee for purpose of allowing deduction under sections 80-I and 80-IA as new scheme of depreciation of block of assets does not provide for computation of depreciation on cost of individual asset. Therefore, the depreciation allowable to the assessee on the entire business with regard to the block of assets can not be allocated between the Industrial Undertakings for computing the profits of such eligible Industrial Undertakings for grant of deductions under sections 80-I and 80-IA. The learned counsel thus strongly urged that deductions as claimed by the assessee under sections 80-I and 80-IA should be allowed.
XIII(5). We have considered the submissions made by the learned representatives of the parties and have gone through the relevant documents submitted in the compilation. We have also gone through the orders of the learned Departmental Authorities. The Assessing Officer has not given the basis for computing the amount of deductions allowable under sections 80-I and 80-IA in the assessment order. The Assessing Officer has also not pointed out any mistake or discrepancy in the working of deductions under sections 80-I and 80-IA claimed by the assessee. Even in the order under section 154, dated 6-8-1998 the Assessing Officer has restricted the deductions under sections 80-I and 80-IA to 30 per cent of taxable income computed after allowing deductions under sections 80G, 80HHC, 80-0 and 80M. The provisions of Chapter VI-A nowhere provide that deductions allowable under sections 80-I and 80-IA will be restricted to 30 per cent of taxable income after taking into consideration the deductions allowable under various other sections appearing under Chapter VI-A of the Act. The deductions under sections 80-I and 80-IA are allowable at the specified rates on the amount of profits or gains of eligible Industrial Undertakings. The Assessing Officer and the Commissioner (Appeals) have not pointed out any mistake or discrepancy in the claim so made by the assessee. The learned CIT-DR has also not pointed out any specific mistake or discrepancy in the claim made by the assessee for deductions under sections 80-I and 80-IA. In the absence of any valid basis given in the orders of the learned Departmental Authorities in support of the disallowance of part amount of deduction under sections 80-I and 80-IA, we do not find any justification for confirming any such disallowance of part amount claimed by the assessee. We will however like to observe that depreciation on notional basis will have to be deducted while computing the profits of eligible Industrial Undertakings for purpose of grant of deductions under sections 80-I and 80-IA. It may be relevant here to refer to section 80-IA(7) which starts with non obstante clause and provides that notwithstanding anything contained in any other provisions of this Act, the profits and gains of eligible business to which provisions of section 80-IA(1) apply, shall, for the purpose of determining the quantum of deduction, be computed is if such eligible business were the only source of income of the assessing during the previous year relevant to the initial assessment year and to every subsequent assessment year upto and including the assessment year for which determination is to be made. Even without such a provision, like provisions of sub-section (7) of section 80-IA, the provisions of section 80AB clearly provide that the amount of income of that nature, which is eligible for grant of deduction under any of the provisions contained in Chapter VI-A, shall be computed in accordance with the provisions of the Income-tax Act and only such income shall alone be deemed to be the amount of income of that nature, which is derived or received by the assessee and which is included in the gross total income. This necessarily implies that depreciation attributable to the profits of eligible Industrial Undertakings will have to be deducted for purpose of granting deductions under sections 80-I and 80-IA.
XIII(6). It may be relevant here to refer to the judgment of the Supreme Court in the case of Mettur Chemical & Industrial Corpn. Ltd.v. CIT [1996] 217 ITR 768 in which it was, inter alia, held that the profits and gains of an Industrial Undertaking to which section 84 of the IT Act (provisions similar to sections 80J, 80-I and 80-IA) applies have to be computed in accordance with the provisions contained in Chapter IV-D of the Act and development rebate has first to be deducted from the total income and it is only thereafter, if any profits and gains remain from to is business, that the benefit under section 84(1) would be applicable.
XIII(7). The Hon'ble Supreme Court in the case of Motilal Pesticides (I) (P.) Ltd. v. CIT [2000] 243 ITR 26 2 has held that special deduction allowable under section 80HH is required to be computed on the net income and not on gross income. The provisions of sections 80AA and 80AB will apply in relation to the deduction to be made in respect of income specified under the head "C" in Chapter VI-A of the Act. This also clarifies that income will first have to be computed in accordance with the provisions contained in Chapter IV, Which necessarily implies that profits of such eligible new Industrial Undertakings will have to be deducted by the amount of depreciation attributable to depreciable assets of the respective Industrial Undertakings.
XIII(8). In view of the aforesaid facts and discussion, our findings in relation to the aforesaid ground No. XIII can be summarised as under:
(A) Deduction under sections 80-I and 80-IA has to be computed at 30 per cent or rate as prescribed in sections 80-I and 80-IA in the relevant year on the profits and gains derived from business of such eligible Industrial Undertakings.
(B) There is no justification for restricting the deduction allowable under sections 80-I and 80-IA at 30 per cent of the gross total income. The Commissioner (Appeals) has erred in confirming the action of the Assessing Officer of restricting such deduction at 30 per cent of gross total income after taking into consideration the deductions allowable under other sections appearing in Chapter VI-A. The provisions contained in sections 80-I and 80-IA or in any other sections in Chapter VI-A, nowhere prescribe that the deduction allowable under a particular section such as sections 80-I and 80-IA will be computed on the amount of gross total income as defined in section 80B(5) and after allowing deduction under any other provisions contained in Chapter VI-A. Various sections appearing in Chapter VI-A do not provide for any priority or sequence of such deductions allowable under different provisions contained in Chapter VI-A. In some provisions, like that in section 80HH(9) it is specified that where an assessee is entitled to deduction under section 80-I or 80J in relation to the profits and gains of an Industrial Undertaking, effect shall first be given to the provisions of this section. The Hon'ble Bombay High Court in the case of Nima Specific Family Trust has held that the aforesaid sub-section (9) only deals with priority to be given to special deduction under section 80HH over deduction allowable under section 80J or 80-I but it does not refer to the quantum of special deduction allowable under section 80-I. The quantum of deduction allowable under sections 80HH and 80-I are based on profits of Industrial Undertakings and the quantum of deduction will be determined on the same amount of profits of eligible Industrial Undertakings at the rate provided in both these sections. Thus the quantum of deduction allowable under section 80-I is also not required to be computed on gross total income minus deduction under section 80HH inspite of the fact that section 80HH(9) gives priority in respect of special deduction under sections 80HH over 80-I. No such priority has been specified for grant of deduction under sections 80-I and 80-IA vis-a-vis the deductions allowed under sections 80G, 80HHC, 80-O and 80M, as has been erroneously done by the Assessing Officer in the present case. The view taken by the Assessing Officer and confirmed by the CIT(A) of restricting such deduction alloxvable under sections 80-I and 80-IA to 30% of gross total income is therefore patently wrong.
(C) The income by way of Advance Licence Benefit Receivable by the assessee has been held to be taxable in the year under consideration on the basis of entries recorded in the books of account while dealing with Ground No. I of assessee's appeal. The assessee will therefore be entitled to grant of deduction under sections 80-I and 80-IA on the profits of eligible Industrial Undertakings including the corresponding amount of income accounted for in the books of account in relation to Advance Licence Benefit Receivable.
(D) The assessee had submitted before the learned Departmental Authorities a copy of the certificate dated 10-6-97 issued by Jawahar Thacker & Co., CAs in which they have certified that they have audited and verified the books of account of the assessee company for the year ended on 31-3-1995 and also enclosed working of P&L Account for the purpose of working out the profits and gains from the eligible Industrial Undertakings enumerated in the said certificate and gave revised computation, which according to the said auditors, give true and fair view of the profits from the said Industrial Undertakings. The revised computations of deduction under sections 80-I and 80-IA have been submitted at pages 288 and 289 of the paper book. In these charts, deduction under sections 80-I and 80-IA was computed after considering depreciation as per IT Act/Rules and Advance Licence Benefit on accrual basis. The Assessing Officer has not pointed out any mistake or discrepancy in the said charts. There is no justification for disallowing any part of the amount out of the claim made under sections 80-I and 80-IA without assigning specific reasons and without pointing out any mistake in the claim so made by the assessee. We therefore in principle accept the claim made by the assessee under sections 80-I and 80-IA as per the aforesaid working made by M/s Jawahar Thacker & Co., CAs. The Assessing Officer will however be entitled to verify the correctness of the various figures given in these revised computation of deductions under sections 80-I and 80-IA prepared by M/s Jawahar Thacker & Co. CAs and which were submitted before the learned Departmental Authorities in the course of assessment proceedings. We may however clarify that the process of such verification from the material such as books of account etc. of the respective Industrial Undertakings, computation of depreciation attributable to such eligible Industrial Undertakings allowable under IT Act, verification of Advance Licence Benefit on accrual basis included in the profits of such Industrial Undertakings will be made by the Assessing Officer by providing an opportunity to the assessee to explain the correctness of the various figures appearing in the said revised computation of claim under sections 80-I and 80-IA as worked out by M/s Jawahar Thacker & Co., CAs. It is further clarified that in no case the deduction already allowed to the assessee under sections 80-I and 80-IA by the Assessing Officer should be reduced, as the Department has not raised any ground in their appeal nor they have filed any cross objection in relation to deduction allowable under sections 80-I and 80-IA.
XIII(9). Ground No. XIII is disposed of as indicated above.
XIV. Ground No. XIV is reproduced below:
XIV. Deduction under section 80HHC:
(A) Inclusion of excise duty in total turnover:
14.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Assessing Officer in including excise duty amounting to Rs.22,79,87,479 as part of total turnover while computing the deduction under section 80HHC of the Act.
14.2 In doing so, the CIT(A) erred in not appreciating the fact that the term "total turnover" in the context of the said section has to be made comparable with the term "export turnover" and since export turnover does not include any excise duty, "total turnover" also ought to have been taken exclusive of excise duty.
(B) Reducing 90% of the following items from the profits of the business:
--------------------------------------------------------------------------
Insurance Claim Rs. 21,42,609
Refund of Sales-tax Rs. 19,600
Refund of Electricity Duty Rs. 14,54,798
Excess provision in respect
of earlier years written back Rs. 64,02,452
Discount Rs. 47,55,384
Miscellaneous receipts Rs. 29,63,468
--------------------------------------------------------------------------
14.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground of appeal while passing the aforesaid appellate order.
14.4 The appellant submits that as per the provisions of clause (baa) of the Explanation below section 80HHC(4A) wherein the term "profits of the business" has been defined the aforesaid items are not being of the nature as described in the said Explanation and accordingly, 90% of the said income is not required to be so reduced.
(C) Deducting 90% of the gross interest received while computing "Profits of the business":
14.5 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground of appeal while passing the appellate order.
14.6 The appellant submits that as the interest income was received mainly as interest from customers on credit sales and was thus part of business income, such income ought not to be reduced from the "profits of the business" as per Explanation (baa) of section 80HHC(4A).
14.7 In view of the above grounds of appeal, the appellant prays that the Joint CIT ought to be directed not to include the said interest income in the provisions of clause (baa) of the Explanation below section 80HHC(4A).
14.8 Without prejudice to the above and in the alternative, it is submitted that the receipts in the said Explanation (baa) below section 80HHC(4) refers only to "net receipts" and as the total amount of interest paid is greater than the interest received no amount of interest can be excluded from the "Profits of the business".
(D) Netting off the negative figure of profits attributable to export of traded goods instead of considering at as "Nil":
14.9 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground of appeal while passing the appellate order.
14.10 The appellant submits that profits of traded goods are negative, no deduction is available under clause (b) to sub-section (3) of section 80HHC and as the said negative figure has to be considered as nil, whereas the appellant is entitled to deduction on the profits computed under clause (a) and the proviso to sub-section (3) of section 80HHC.
14.11 In view of the above grounds of appeal, the appellant prays that the Assessing Officer ought to be directed to grant deduction under section 80HHC as prayed for the hereinabove or in the alternative the CIT ought to be directed to deal with the grounds of appeal not considered in the appellate order.
XIV(1). The learned CIT(A) has dealt with the issue relating to the deduction under section 80HHC in paras 19 and 19.1 of the order passed by him, which are reproduced below:--
"19. The next ground of appeal is against the order of the Assessing Officer treating the excise amount as part of turnover. The honourable courts have repeatedly held that the collection of sales-tax, any amount of cess, etc. has to be treated as a part of the trade receipt. Such a finding was given even in the following cases:
Western India Sales & Services 204 ITR 329 (HC)
Shree Bhagpatia Food Industries 207 ITR 1045 (HC)
19.1 The claim of the appellant that the collection of excise duty is not a part of turnover being without any basis was rightly disallowed by the Assessing Officer. The order of the Assessing Officer on this point is upheld.
XIV(2). Shri Soparkar, the learned counsel submitted that the Hon'ble Bombay High Court in the case of CITv. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 has held that for computation of special deduction under section 80HHC, Excise Duty and sales-tax are not includible in total turnover. No contrary judgment was pointed out by the learned CIT-DR. This point is therefore clearly covered in favour of the assessee by the judgment of the Bombay High Court. The relevant Head Note is reproduced below:
"Under section 80HHC(1) of the Income-tax Act, 1961, it is, inter alia, provided that where an assessee is engaged in the business of export of any goods, there shall be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods. In other words, in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible. The above expression, namely, 'Profits derived from exports' also finds place in section 80HHC(3)(a). It says that where the export is of goods, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, where the assessee carried on a business as 100 per cent exporter and secondly where the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head 'Profits and gains business', the same proportion as the export turnover bears to the total turnover. The emphasis is on the words 'Profits derived from the exports'. Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even, according to accounting principles, such levies do not form part of the profit and loss account. In fact, they are shown as liability in the balance sheet. In the circumstances, the above two items cannot be included in the total turnover. Section 80HHC is a separate code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition under the Sales tax Act which is a State levy, cannot be imported into section 80HHC of the Act," which bears to the profits of the Act.
XXV(3). We therefore respectfully following the aforesaid judgment of the Bombay High Court direct the Assessing Officer to exclude the amount of Excise Duty from the figure of total turnover for the purpose of computing deduction under section 80HHC. Hence ground No. XIV(A) (Ground Nos. 14.1 and 14.2) are allowed.
XIV(4). As regards ground No. XIV(B) containing Ground Nos. 14.3 and 14.4; Ground No. XIV-(C) containing Ground Nos. 14.5 to 14.8 and Ground No. XIV-(D) containing Ground Nos. 14.9 to 14.11 which are reproduced hereinabove, the learned representatives of the parties addressed detailed arguments in relation to each of those grounds but it was also admitted by the learned representative of both sides that the points raised in all these grounds have not been discussed and decided by the learned CIT(A) in the order passed by him. We, therefore, do not consider it appropriate to deal with the merits of all these grounds in the absence of findings thereon by the learned CIT(A) and we consider just and proper to restore the matter back to the CIT(A) so far as it relates to points raised in Ground Nos. XIV-B, XIV-C and XIV-D. The learned representative of the assessee as well as the Assessing Officer will be entitled to place all relevant documents and judgments in relation to the aforesaid points before the CIT(A) who will decide these points in accordance with the provisions of law after providing reasonable and adequate opportunity to both the sides.
XV. Ground No. XIV is reproduced below:
XV. Short granting of credit in respect of tax deducted at source:
15.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground relating to short granting of credit in respect of tax deducted at source.
15.2 In view of the above, the appellant prays that the Assessing Officer be directed to grant further credit in respect of tax deducted at source amounting to Rs.3,90,338.
XV(1). After considering the submissions made by the learned representatives, we consider it proper to direct the Assessing Officer to grant credit in respect of tax deducted at source after making necessary verification. The Assessing Officer may provide an opportunity to the assessee to submit necessary evidence in support of the claim for credit in respect of tax deducted at source made by the assessee.
XVI. Ground No. XVI is reproduced below:
XVI. Additional tax levied under section 143(1A) not recomputed:
16.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that recomputation of the additional tax levied under section 143(1A) does not arise out of the assessment order passed under section 143(3) of the Act.
16.2 In doing so, the CIT(A) failed to appreciate that as only an amount of Rs.20,38,500 out of the adjustment made in the intimation had been sustained in the assessment order passed under section 143(3) the additional tax levied ought to have been recomputed and accordingly, the said issue arises from the assessment order passed under section 143(3) of the Act.
16.3 In view of the above grounds of appeal, the appellant prays that the Assessing Officer be directed to recompute the additional tax levied under section 143(1A) as prayed for herein above.
XVI(1). We have considered the submissions made by the learned representatives. It is clear from a plain reading of the relevant provisions of the Act that no additional tax under section 143(1A) can be validly sustained in respect of those additions/prima facie adjustment made in the Intimation prepared under section 143(1)(a) which have not been sustained in the assessment order passed under section 143(3) or in further appeals against the order under section 143(3). Such relief of additional tax levied with reference to prima facie adjustments deleted in the course of regular assessment or in appeals, is consequential in nature. The Assessing Officer is directed to grant such consequential relief and delete the additional tax levied under section 143(1A) in respect of prima facie adjustments/additions deleted in regular assessment under section 143(3) and/or in further appeals.
XVII. The assessee has raised additional grounds during the course of hearing of these appeals. The first additional ground is reproduced below:--
I. Addition in respect of sale of white phosphorus on differential rates:
1.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in setting aside the said issue and directing the Assessing Officer to delete or reduce the addition on the basis of complete evidence that may be produced by the appellant to establish that the difference in the selling price is covered by the saving in respect of containers/drums.
1.2 In doing so, the CIT(A) erred in not deleting the said addition made under section 40A(2)(b) ignoring the fact that the said section applied only to expenditure and cannot apply to a transaction of sale.
1.3 In view of the above grounds of appeal, the appellant prays that the addition made in respect of sale of white phosphorus under section 40A(2)(b) be deleted.
XVII(1). The learned CIT (A) has dealt with this issue in paras-9 and 9.1 of the order which are reproduced below:--
"9. The next ground of appeal is against the addition of Rs.6,06,720 under section 40A(2)(b). The Assessing Officer had made the addition as the appellant had sold white phosphorus to sister concerns at a price less than the price at which this item was sold to the others. At the time of hearing, the appellant's representative submitted that the difference was on account of the fact that the sales to the sister-concerns were made in bulk containers and the containers were returned by the sister-concerns to the appellant. It was further submitted that the appellant is in a position to produce the necessary evidence and challans in support of this claim. It was requested that the claim of the appellant may be allowed.
9.1 I have considered the facts and merits of the case. Considering the facts of the case, I would direct the Assessing Officer to delete or reduce this addition on the basis of the complete evidence that may be produced by the appellant to establish that the difference in the selling price is covered by the saving in respect of containers/drums.
XVII(2). The learned counsel contended that such notional income cannot be validly added in the hands of the assessee. He also vehemently contended that the provisions of section 40A(2)(b) can not be applied to income as it relates only to expenditure. He drew our attention to the relevant documents submitted at pages 300 to 316 in PB-I to justify the reasonableness of selling rates charged from the sister-concerns. He also placed reliance on the following judgments:
1. CITv. Udhoji Shrikrishnadas [1983] 139 ITR 827 (MP).
2. Vikshara Trading & Investment (P.) Ltd. v. Dy. CIT [1998] 61 TTJ (Ahd.) 6.
3. Hollyhock Engg. (P.) Ltd. v. Asstt. CIT [2000] 67 TTJ (Ahd.) 562.
4. Dy. CIT v. New Commercial Mills [1994] 49 ITD 506 (Ahd.).
5. Gehlot Pan Bhandar v. ITO [2000] 66 TTJ (Jodh.) 482.
6. Smt. Geeta Devi v. ITO [2000] 68 TTJ (Jodh.) 729.
XVII(3). The learned CIT-DR submitted that the CIT(A) has only set aside and restored back this issue to the Assessing Officer, as the assessee themselves had expressed willingness to adduce further evidence, if an opportunity is given to them. The assessee can not therefore have any grievance against the order passed by the CIT(A) granting them one more opportunity to prove their case before the Assessing Officer. He placed reliance on the decisions reported in Parshotamlal Sood & Sons v. WTO [1985] 21 Taxman 37 (Delhi-Trib.), Champaklal K. Parekhv. ITO [1983] 15 TTJ (Bom.) 327 and the decision of the Madras High Court in the case of CITv. A.K. Subbaraya Chetty & Sons [1980] 123 ITR 592.
XVII(4). We have considered the submissions made by the learned representatives of the parties. The additional ground raised by the assessee at the time of hearing was entertained as even otherwise the assessee could raise such a ground in the cross objection submitted by them, as time limit for filing cross objection with reference to the Revenue's appeal has not expired at the time when this issue relating to the entertaining of additional ground came up for our consideration. However, on merits, we are not inclined to accept the submissions made by the learned counsel appearing on behalf of the assessee. It is clear from the observations made in the order of the CIT(A) that the appellant's representative submitted before him that the assessee is in a position to produce necessary evidence and challans in support of their claim that the sales to sister concerns were made in bulk containers and the containers were returned by the sister concerns, which explains as to why white phosphorus was sold at a lesser price to sister concerns. The assessee can not have any grievance against the restoration of the issue back to the Assessing Officer. The assessee will be at liberty to raise all contentions before the Assessing Officer including the contention that provisions of section 40A(2)(b) can not be invoked in relation to income, as it applies only in relation to expenditure. We therefore do not find any merit in the additional ground raised by the assessee. The same is therefore rejected.
XVIII. The additional ground No. II reads as under:
II. Proportionate deduction in respect of premium on leasehold land:
2.1 On the facts and in the circumstances of the case and in law, as iterated in Ground No. IV above, the appellant submits that deduction of the proportionate premium in respect of leasehold land acquired in the assessment year 1993-94 also ought to be considered for allowance in case deduction in respect of the entire premium in the respective year is not allowed.
2.2 The appellant submits that relying on the ratio of the decision of the Supreme Court in the case of Madras Industrial Corpn. Ltd. the proportionate premium ought to be allowed as a deduction over the period of the lease in case the entire premium is not allowed as a deduction in the year in which the liability arose.
2.3 In view of the above, the appellant prays that the Assessing Officer be directed to allow deduction in respect of the proportionate premium on leasehold land in case the disallowance of the claim for the entire premium is sustained.
This additional ground No. II relating to the deduction in respect of proportionate amount of premium paid on leasehold land has already been discussed and decided hereinbefore while dealing with Ground Nos. III and IV.
XIX. The additional ground No. III reads as under:--
III. Interest under section 234B:
3.1 On the facts and in the circumstances of the case and in law, the appellant submits that the levy of interest under section 234B amounting to Rs.3,75,13,870 in the order passed under section 143(3) of the Act without issuing any specific directions for such levy, is bad in law and ought to be deleted.
3.2 For this proposition reliance is placed upon the recent decision of the Supreme Court in the case of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209 wherein the Court has upheld the decisions of the Patna High Court in the case of Ranchi Club Ltd. v. CIT[1996] 217 ITR 722 and Uday Mistanna Bhandar & Complex v. CIT [1996] 222 ITR 44 wherein the High Court had directed that in the absence of any specific mention by the assessing authority in the assessment order in respect of charging interest under sections 234A and 234B, no interest could be recovered merely by way of demand notice.
3.3 In view of the grounds of appeal, the appellant prays that the Joint CIT be directed to delete the interest levied under section 234B in the assessment order passed under section 143(3) of the Act.
XIX(1). The learned counsel apart from relying on the aforesaid judgments mentioned in the additional ground so raised, also placed reliance on the decision of the Tribunal in the case of Asstt. CIT v. Harsiddha Specific Family Trust [IT Appeal Nos. 2189 & 2442 (Ahd.) of 1994 dated 2-2-2000. The Tribunal in para-10 of the order has deleted the interest charged under section 234B in the absence of specific directions in the assessment order. He pointed out that in the present case also there is no specific direction for levy of interest under section 234B. The Assessing Officer has simply observed in the assessment order that "charge interest as per rules". The levy of interest under such circumstances have been held to be invalid by the Hon'ble Patna High Court and by the Hon'ble Supreme Court in the above referred judgments.
XIX(2). The learned CIT-DR produced copies of ITNS 150 Demand Notice and relied upon the decision of the Tribunal in the case of S.K. Patel Family Trust v. Asstt. CIT[2001]71 TTJ (Ahd.) 121. He also pointed out the omission of mentioning specific section 234B in the assessment order can not be treated as a fatal mistake but it is a curable one, as has been held in the case of CITv. Shah Services [1994] 73 Taxman 154 (Cal.). He also pointed out that a retrospective amendment in relation to the aforesaid section is proposed in the Finance Bill, 2001 which will soon become an Act applicable with retrospective effect. The learned DR strongly supported the levy of interest under section 234B.
XIX(3). In the rejoinder, the learned counsel further submitted that the Hon'ble Gujarat High Court vide judgment dated 15-1-2001 in the case of Norma Detergent Ltd. have dismissed the appeal filed by the Revenue. A copy of the appeal under section 260A submitted by the Department has also been submitted in the compilation submitted along with the chart. In the said appeal the Revenue has proposed a specific question, said to be a question of law, arising out of the order of the Tribunal, namely, as to whether the Tribunal is right in law and on facts in deleting the interest charged under section 234B. This appeal by the Revenue has been dismissed by the Gujarat High Court. Thus the order passed by the Tribunal of cancelling interest under section 234B in the absence of specific direction in the assessment order has been approved by the Gujarat High Court.
XIX(4). The Bench also required the learned representatives of the parties to state as to whether the assessee has submitted a petition for waiver of interest charged under section 234B before the Chief CIT as directed in the order dated 1-12-2000 passed in SP Nos. 77 and 81/2000 arising out of ITA No. 1303 and 35/Ahd/2000. The assessee submitted a reply accompanied with the copy of application dated 12-12-2000 for waiver of interest under section 234B. It could not however be ascertained as to whether the said application for waiver has been decided by the Chief CIT so far or not.
XIX(5). We have carefully considered the submissions made by the learned representatives of the parties and have gone through all the judgments cited by the learned representatives of both the sides. The view taken by the Supreme Court in the case of Ranchi Club Ltd. and Patna High Court in the case of Smt. Tej Kumari v. CIT [2000] 164 CTR (Pat.)(FB) 201 will now have to be applied after examining the impact the retrospective amendment of sections 140A, 234A/B amended by the Finance Act, 2001 with retrospective effect from 1-4-1989. The Tribunal in the case of S.K. PatelFamily Trust has also dealt with the similar issue and the order passed by the CIT(A) and the Assessing Officer for levy of interest under section 234B have been set aside and the matter has been restored back to the Assessing Officer for deciding the same afresh in the light of the judgments of the Hon'ble Apex Court and the Hon'ble Gujarat High Court. We would also like to observe that before the Assessing Officer decides this issue afresh, the learned Chief CIT should decide the application for waiver of interest under section 234B submitted by the appellant pursuant to the observations made by the Tribunal in order dated 1-12-2000 in SP Nos. 77 and 81/Ahd./2000. We do hope that the Chief CIT will decide the application for waiver of interest in a judicious manner. With these observations the issue relating to the levy of interest under section 234B is restored back to the Assessing Officer with a direction to pass a fresh order in accordance with the provisions of law and after providing reasonable opportunity to the assessee, in accordance with the judgment of Hon'ble Apex Court and Hon'ble Jurisdictional High Court.
XX. Now we will deal with the Revenue's appeal (ITA No. 2485/Ahd./1999). Ground Nos. 1 and 2 raised by the Revenue are reproduced below:
(1) On the facts and in the circumstances of the case as well as in law, the CIT(A) has erred in holding that interest expenditure pertaining to setting up of various new units may be treated as normal interest expenditure allowable as business expenditure though the assessee on its own has capitalised the interest expenditure and even in the original return, the assessee has not made any claim on deduction of such expenditure in the computation of income.
(2) The CIT(A) has erred in law and on facts by treating the interest expenditure relating to other new units/projects as allowable business expenditure, holding that interest expenditure relating to only one unit namely Jhagadia unit as capital expenditure and also without giving any reason and basis for differentiation between various new units/projects and ignoring the fact that both are of the same nature.
XX(1). Shri Girish Dave, the learned CIT-DR relied upon the reasons mentioned in the assessment order and submitted that in view of those reasons, the interest expenditure relating to new units/projects should not have been allowed as revenue expenditure by the CIT (A) in the similar manner as was decided by him in respect of interest expenditure relating to the Jhagadia Unit. He also drew our attention to the details of such interest expenditure capitalised on fixed assets in the books of account and claimed as revenue expenditure in the income-tax return, placed at page 187 of the paper book. He invited our attention to the interest paid in respect of leasehold land at Jhagadia Plot No. 746 amounting to Rs.53,57,181 and urged that this amount also ought to have been disallowed like other interest expenditure relating to Jhagadia unit disallowed by the CIT(A), as the leasehold land at Jhagadia was transferred by the assessee to its sister concern in next year.
XX(2). Shri Soparkar, the learned Advocate supported the order of the CIT(A). He submitted that Plot No. 746 at Jhagadia was not the one which was transferred in next year to its sister concern. The Plot No. 750 at Jhagadia was transferred to the sister concern in next year. The learned CIT-DR has made such a statement in oversight of this fact. The plot No. 746 at Jhagadia is still owned and used by the assessee for its industrial activities. Therefore such interest expenditure is of same nature and character as the other industrial units which are part and parcel of the expansion of the existing business of the company. Shri Soparkar submitted that the interest paid in respect of new units connected with the existing business of the company should are part of the same business, as there is complete unity of control, inter-connection and inter-lacing and management etc. The allowability of such interest expenditure under section 36(1)(iii) is clearly supported by the following judgments:--
(a) Alembic Glass Industries Ltd.'s case
(b) Arvind Polycot Ltd.'s case
(c) Core Health Care Ltd's case
(d) Vadilal Dairy International Ltd.'s case
(e) Aniline Dyestuff & Pharmaceuticals (P.) Ltd's case
(f) Calico Dyeing & Printing Works'case
(g) Insotex (P.) Ltd.'s case
(h) Shah Theatres (P.) Ltd.'s case
(i) Expanded Metal Mfrs.'case
(j) Tarai Development Corpn. Ltd.'s case
(k) Veecumees' case
(l) Associated Fibre & Rubber Industries (P.) Ltd's case
XX(3). The learned counsel also submitted that the taxability of any particular item of income/expenditure can not be decided on the basis of entries made in the books of account but the question relating to the taxability of an income or allowabihty of an expenditure will have to be decided in accordance with the provisions of law. The provisions of section 36(1)(iii) do not draw a distinction between borrowed funds utilised in the capital field or revenue field. This has been held by the Gujarat High Court in several cases such as in the case of Alembic Glass Industries Ltd. He also relied on the judgments of the Hon'ble Supreme Court in the cases of CITv. Shoorji Vallabhdas & Co.; Kedarnath Jute Mfg. Co. Ltd.; Chowringhee Sales Bureau (P.) Ltd. as well as the decision of the Bombay High Court in the case of Mogule Line Ltd.
XX(4). We have considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental Authorities. We have also gone through all the judgments cited by the learned representatives and the judgments referred to in the orders of the learned Departmental Authorities. We have given our findings in relation to the disallowance out of interest expenditure claimed under section 36(1)(iii) in respect of the unit under construction at Jhagadia, which was confirmed by the CIT(A). The disallowance confirmed by the CIT (A) in respect of interest amounting to Rs.1,38,89,304 relating to Jhagadia Unit has been deleted by following the judgment of the Gujarat High Court in Alembic Glass Industries Ltd's case and the decision of the ITAT in the case of Core Health Care Ltd. and various other decisions referred to above. It may be relevant here to once again briefly state the facts of the case of Alembic Glass Industries Ltd. The assessee in that case was a company manufacturing glass at Baroda from 1947. During the accounting period relating to assessment years 1965-66 and 1966-67, the company incurred expenditure of Rs.7,53,084 and Rs.77,00,000 respectively for establishing a new glass manufacturing unit at Bangalore. The said unit did not go into production during the two assessment years in question, and, therefore, the ITO disallowed the payment of interest of Rs.50,000 and Rs.2,00,000 respectively in the two years on such borrowings. The Hon'ble Gujarat High Court held that the new unit at Bangalore was nothing but an expansion of the existing business. The Court observed that there was complete inter-connection, inter-lacing and inter-dependence of both the units, which is the test laid down for determining whether two lines of businesses constitute the "same business" within the meaning of provisions contained in IT Act, 1961. Reliance was placed on the decision of the Supreme Court in the case of CIT v. Prithvi Insurance Co. Ltd. [1963] 63 ITR 632. The Gujarat High Court directed the Assessing Officer to allow deduction in respect of such interest expenditure incurred in relation to the new unit at Bangalore which did not go into production in the relevant years. The facts of the present case also clearly reveal that the new units set up by the assessee were part of expansion of the existing business carried on by the assessee. The assessee has started manufacturing of either similar items or those units were set up for manufacture of items towards backward integration or forward integration. The test of interconnection, inter-lacing and inter-dependence are fully satisfied on the facts of the present case. We are therefore of the considered opinion that the learned CIT (A) has rightly deleted the said disallowance out of interest expenditure. We therefore do not find any merit in ground Nos. (1) and (2) of Revenue's appeal.
XXI. Ground Nos. (3) to (6) relate to the disallowance out of travelling expenses and salary and wages expenses relating to setting up of new units, are reproduced below:--
(3) On the facts and in the circumstances of the case and also in law, the CIT (A) has erred in allowing the travelling expenses and salary and wages expenses relating to setting up of new unit [incurred before the commencement of the production in the new unit] as revenue expenditure [except for the Jhagadia unit] ignoring the fact that the assessee itself has rightly claimed the same in its books of account as capital expenditure and also ignoring the fact that even in the original return, the assessee has rightly not claimed these as, revenue expenditure in the computation of income.
(4) The CIT (A) has erred in allowing the travelling expenditure and salary and wages expenditure relating to other unit as revenue expenditure whereas holding that the travelling expenses and salary and wages expenses relating to Jhagadia unit is to be capitalised without giving any basis and reason for such differentiation and ignoring the fact that there is no difference between the various new projects/units.
(5) The learned CIT (A) has also erred in allowing the above referred claims, as in view of section 143(2), no additional claim can be made by filing revised return.
(6) Without prejudice to the above ground of appeal, the CIT (A) has erred in treating the interest expenditure relating to setting up of new units as par on expenditure of travelling as well as salary and wages expenses relating to setting up of new units ignoring the fact that the allowability of interest expenditure is to be considered as per the provisions of section 36(1)(iii) whereas provision of section 36(1)(iii) are not applicable for travelling and salary and wages expenditure.
XXI(1). The learned CIT-DR submitted that the disallowance out of travelling and salary and wages expenses incurred in connection with the new units was made by the Assessing Officer to the tune of Rs.57,65,554 and Rs.68,23,351 respectively. The learned CIT (A) confirmed the action of the Assessing Officer to capitalise part of the travelling expenses and salary and wages expenses pertaining to Jhagadia Unit. The disallowance of expenditure to the tune of Rs.24,81,150 out of travelling expenses and Rs.29,36,363 out of salary & wages expenses pertaining to Jhagadia unit was confirmed and those expenses were held to be capital expenditure. The assessee has not challenged the findings given by the CIT (A) of confirming the part amount of disallowance made out of travelling expenses and salary and wages expenses relating to Jhagadia Unit. The CIT (A) granted relief in respect of balance amount of such travelling expenses amounting to Rs.32,84,404 and salary and wages expenses amounting of Rs.38,86,988. The present ground therefore relates to the aforesaid amount of relief granted by the CIT (A).
XXI(2). The ld. CIT-DR submitted that the disallowance out of travelling and salary and wages expenses pertaining to Jhagadia units/projects, which had not yet commenced production, cannot be treated at Par with the interest expenditure, allowability of which is governed by section 36(1)(iii). While the allowability of travelling and salary and wages expenses is governed by the provisions of section 37 of the Act. The learned CIT-DR drew our attention to the decision of the Tribunal in the case of Core Health Care Ltd. where interest expenditure relating to new project was allowed under section 36(1)(iii) but the disallowance made out of travelling and miscellaneous expenses relating to such new project was confirmed by following the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. v. CIT[1981] 127 ITR 37 and in the case of CITv. Peas Industrial Engineers (P.) Ltd. [1994] 205 ITR 447. The learned CIT-DR also placed reliance on the following judgments to support the disallowance of such expenditure incurred in relation to new units made by the Assessing Officer:
(a) McGaw Ravindra Laboratories (India) Ltd. v. CIT [1994] 210 ITR 1002 (Guj.).
(b) Indian Oxygen Ltd. v. CIT[1987] 164 ITR 466 (Cal.).
(c) Ambica Mills Ltd. V. CIT[1964] 54 ITR 167 (Guj.).
(d) Dalmia Dadri Cement Co. Ltd v. CIT[1970] 77 ITR 405 (Punj. & Har.).
XXI(3). Shri Dave, the learned CIT-DR did not make any submission with regard to ground No. 5 apparently because such a ground raised by the Revenue is patently wrong. The assessee can make additional claim by filing revised return and the revenue can have no grievance against such a course of action adopted by the assessee. As regards, ground No. (6) the learned CIT-DR submitted that it is repetition of the point raised in ground Nos. (3) and (4). Shri Dave learned CIT-DR strongly urged that the disallowance made by the Assessing Officer should be confirmed.
XXI(4). Shri Soparkar, the learned counsel submitted that the facts of all the cases relied upon by the learned CIT-DR are clearly distinguishable. He pointed out that the Tribunal in the case of Core Health Care Ltd. relied upon the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. which has been impliedly overruled by the Supreme Court in the cases of AddL CITv. Akkamamba Textiles Ltd. [1997] 227 ITR 464 and CITv. Siwakami Mills Ltd. [1997] 227 ITR 465. The facts of Peas Industrial Engineers (P.) Ltd 's case are also clearly distinguishable as that was a case where the assessee's business had not been started. Shri Soparkar submitted that the allowability of such expenditure is also supported by the judgment of the Gujarat High Court in the case of Alembic Glass Industries Ltd. He also brought to our notice the decision of the Tribunal in the case of Chemicoat Ltd. v. ITO [1982] 2 ITD 584 (Ahd.) (TM) where the Tribunal, following the judgment in the case of Alembic Glass Industries Ltd., held that the expenditure incurred in connection with setting up of a new project which was mere expansion of assessee's existing business, was allowable as revenue expenditure. He also drew our attention to the subsequent judgment of the Gujarat High Court in the case of CITv. Rohit Mills Ltd. [1998] 150 CTR (Guj.) 211. In this case the guarantee commission paid to bank for purchase of machinery was allowed as revenue expenditure by following the judgment of the Supreme Court in the cases of Akkamamba Textiles Ltd. and Siwakami Mills Ltd. He also relied on the judgment of the Gujarat High Court in the case of Vikram Mills Ltd. v. CIT [1999] 107 Taxman 344. In this case the Gujarat High Court held that bank guarantee commission was of a revenue nature. Such a view was taken on the basis of the above referred two judgments of the Supreme Court. The Gujarat High Court in para-8 of their judgment in this case also observed that the decision in Shree Vallabh Glass Works Ltd.'s case has been imphedly overruled by the aforesaid two judgments of the Supreme Court. Shri Soparkar, the learned counsel also relied on the decisions in the cases of Shah Theatres (P.) Ltd.; Aniline Dyestuff &Pharmaceuticals (P.) Ltd. and Bralco Metal Industries (P.) Ltd. v. CIT [1994] 206 ITR 477 (Bom.). Shri Soparkar strongly supported the order of the CIT (A) in relation to the aforesaid point raised by the revenue in ground Nos. 3 to 6.
XXI(5). We have considered the submissions made by the learned representatives and have gone through all the judgments cited by them. Let us first consider the applicability of various judgments relied upon by the learned CIT-DR on the facts of the present case. Shri Dave, the learned CIT-DR relied on the decision of the Tribunal in the case of Core Health Care Ltd. It is true that the Tribunal in that case has held that other expenditure including miscellaneous expenses and travelling expenses incurred in relation to new units of existing business can not be allowed as revenue expenditure as unlike provisions of section 36(1)(iii), the provisions of section 37 clearly and unmistakably deny any deduction of expenditure in the capital field. The Tribunal had relied on the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. The learned counsel contended that the said decision has been impliedly overruled by the Supreme Court in Akkamamba Textiles Ltd.'s case and Siwakami Mills Ltd.'s case is not correct as that was another judgment in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389 which relate to the allowability of guarantee commission. In the judgment in Shree Vallabh Glass Works Ltd's case, the High Court held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of assets to the assessee and depreciation thereon has to be allowed by the Income-tax authorities. The assessment year under consideration was 1964-65. The construction of factory at Anand was started in the accounting year 1961-62 and the plant was commissioned and put into service from October, 1963. The expenses incurred before commencement of production amounting to Rs.4,80,873 had been capitalised and the assessee claimed depreciation thereon. On these facts the High Court held that the assessee is entitled to depreciation on such pre-production expenses. The facts of the present case are clearly distinguishable. It is a case where the assessee is carrying on its business for last several years. The expenses have been incurred in relation to setting up of new units which are part of the same existing business of the company. The other judgment relied upon by the Tribunal in this case is Peas Industrial Engineers (P.) Ltd. This was also a case where the claim for such expenditure was made in respect of expenses incurred between 1963 to 1966. The assessee started manufacturing activity sometime in the year 1968-69. Thus in this case also the assesee was not carrying on any existing business and the expenditure related to setting up of an altogether new business and it was not a case of setting up of a new unit of the existing business. The aforesaid decision is therefore clearly distinguishable with the facts of the present case. The learned CIT-DR then relied on the judgment of the Gujarat High Court in McGaw Ravindra Laboratories (India) Ltd's case. The facts of this case are also distinguishable with the facts of the present case. The manufacturing unit in this case was to be established in Malaysia as joint venture of the assessee and Government of Malaysia or other person. It was not going to be an expansion of assessee's business which is carried on in India. There has been nothing to indicate that the business organisation, administration and funds of both the units were to be common. The High Court recorded a definite finding in this case that there was not going to be complete interconnection, inter-lacing or inter-dependence of both the units. The Court also referred to the judgment of Alembic Glass Industries Ltd. at pages 1008 and 1009 in McGaw Ravindra Laboratories (India) Ltd's case It was observed that in Alembic Glass Industries Ltd's case new unit at Bangalore was nothing but expansion of the existing business of manufacturing glass at Baroda. The Court also observed that there was complete inter-connection and inter-lacing of both the units in the case of Alembic Glass Industries Ltd., which is the test laid down for determining whether two lines of business constitute "same business". The aforesaid judgment therefore also instead of supporting the case of the Revenue, support the decision rendered by the learned Commissioner (Appeals) on this point. Likewise the facts and all other judgments relied upon by the CIT-DR are clearly distinguishable, as all these cases relate to expenditure incurred in connection with setting up of an altogether new business and those are not cases of expansion of existing business.
XXI(6). The allowability of such expenditure incurred by the assessee in relation to new units/projects constituting part of the same existing business of the assessee, is supported by various judgments relied upon by the learned counsel. On a careful consideration of the entire relevant facts and the judgments cited supra, we are of the opinion that the view taken by the learned Commissioner (Appeals) in relation to the allowability of travelling expenses and salary and wages expenses relating to setting up of new units forming part of the existing business of the assessee, is perfectly valid and justified. We do not find any justification to interfere with the view taken by the learned CIT (A). Hence ground Nos. (3) to (6) of Revenue's appeal are dismissed.
XXI(7). As regards ground No. (7) the learned CIT-DR was fair enough to point out that the CIT (A) has set aside and restored back this issue to the Assessing Officer. He would therefore like to rely on the reasons given in the assessment order. The learned counsel supported the order of the CIT (A). He also made elaborate submissions on merits of the claim relating to the deduction of interest payment in question. In the chart the assessee's counsel has relied on several judgments in respect of this ground.
XXI(8). After considering the submissions made by the learned representatives and after going through the orders of the learned Departmental Authorities, we are of the view that on the facts and circumstances of the present case, the Revenue can have no valid grievance against setting aside and restoring back of this issue to the Assessing Officer for conducting investigation, verification and fresh decision. We do not find any merit in this ground also raised by the Revenue. Ground No. (7) is therefore, rejected. Ground No. (8) is general in nature. No arguments were addressed in respect of this ground. The same is also rejected.
XXII. We will now deal with Cross Objection No. 4/Ahd./2001 submitted by the assessee in relation to the Revenue's appeal (ITA No. 2485/Ahd./99). The assessee has raised the following grounds in the cross objection:--
I. Addition under section 40A(2)(b) in respect of sale of white phosphorus on differential rates: Rs. 6,06,726
1.1 On the facts and in the circumstances of the case and in law, the CIT (A) erred in setting aside the ground of appeal in respect of addition amounting to Rs.6,06,726 made under section 40A(2)(b) of the Act.
1.2 In doing so, the CIT (A) erred in not appreciating the fact that the said section viz. 40A(2)(b) applies only to expenditure and cannot apply to a transaction of sale and accordingly, no addition can be made in respect of sale of white phosphorus at differential rates.
1.3 In view of the above grounds of appeal, the respondent prays that the addition made in respect of sale of white phosphorus under section 40A(2)(b) be deleted.
II. Disallowance out of interest paid: Rs.6,40,08,407
2.1 On the facts and in the circumstances of the case and in law, the respondent submits that the CIT (A) erred in setting aside the said issue and directing the Assessing Officer to restrict the disallowance to such amount and for such period for which the said advances were made interest free and for non business purposes on the basis of complete evidence that may be produced by the respondent.
2.2 In doing so, the CIT (A) erred in not appreciating the fact that none of the loans and advances made had been made for non business purposes nor were they made to firms in which a director of the company is a partner and nor to any private limited company in which any of the directors of the company were director/members. Accordingly, directions ought to have been given to delete the disallowance of Rs.6,40,08,407 out of interest paid.
2.3 The CIT (A) further erred in not appreciating the fact that for the purpose of computing the disallowance, interest at a notional rate in any case cannot be charged on those advances given interest free when as a matter of fact no additional interest has been received by the respondent.
2.4 In view of the above grounds of cross-objections, the respondent prays that the Joint CIT be directed to delete the disallowance of Rs.6,40,08,407 out of interest paid.
XXII(1). Shri Soparkar, the learned counsel contended that the CIT (A) should have deleted the addition of Rs.6,06,726 made in respect of sale of white phosphorus to sister concern, rather than restoring the issue back to the Assessing Officer. The provisions of section 40A(2)(b) are not applicable in respect of income, as it applies only to expenditure. He relied on the judgment in Udhoji Shrikrishnadas's case and the decision of the Tribunal in Vikshara Trading & Investments (P.) Ltd.'s case. The learned CIT-DR, on the other hand, submitted that the matter was restored back to the Assessing Officer as the appellant itself was wining to produce further necessary evidence and challans in support of their contention that it was sold at reasonable price to sister concern.
XXII(2). We have already considered this issue while dealing with additional ground raised by the assessee in their appeal. After considering the entire facts we have confirmed the action of the CIT (A) of restoring this issue back to the Assessing Officer for deciding the same afresh after making necessary verification and inquiries. Hence this ground raised in the cross objection has no merit and is accordingly rejected.
XXII(3). Likewise ground No. II raised in the cross objection also has no merit, as this issue has also been restored back by the CIT (A) to the Assessing Officer. The assessee's representative promised before the CIT (A) to furnish necessary details before the Assessing Officer, as may be required for proper decision in relation to the aforesaid point. We therefore do not find any justification to interfere with the findings given by the CIT (A) in relation to this ground raised in the cross objection.
XXII(4). Before parting, we would like to express our feelings of appreciation for an admirable presentation of the case by the learned representatives of both sides.
XXII(5). In the result, the assessee's appeal is partly allowed. The appeal filed by the Revenue and the cross objections submitted by the assessee are dismissed.
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