2004-VIL-256-ITAT-MUM

Equivalent Citation: [2004] 3 SOT 940 (MUM.)

Income Tax Appellate Tribunal MUMBAI

IT APPEAL NOS. 646 (MUM.) OF 2002 AND 515 (MUM.) OF 2003

Date: 08.09.2004

BOROSIL GLASS WORKS LTD.

Vs

ADDITIONAL COMMISSIONER OF INCOME-TAX

BENCH

J.P. BENGRA AND DR. O.K. NARAYANAN, JJ.

JUDGMENT

Per J.P. Bengra, Vice-President. - These are two appeals by the assessee against the orders of CIT(A)-VI Mumbai pertaining to assessment years 1998-99 and 1999-2000. As common issues are involved in both the appeals, they are disposed of by a consolidated order.

2. The first common ground in both these appeals is that the CIT(A) erred in confirming the disallowance of the lease rent amounting to Rs. 1,59,47,446 for assessment year 1998-99 and Rs. 1,22,34,664 for assessment year 1999-2000. The second consequential ground in both these appeals is that the CIT(A) erred in confirming the disallowance of interest on late payment of lease rent amounting to Rs. 3,97,379 for assessment year 1998-99 and Rs. 56,867 for assessment year 1999-2000. Since the two grounds are inter connected, they are disposed of together.

3. Facts of the case briefly, are that the assessee company is a Public Limited Company incorporated on 14-12-1962. It is engaged in the business of manufacturing and trading of Borosilicate Glass, a glass with low expansion capacity. The manufacturing units are at Marol-Maroshi Road, Mumbai and the other at MM Nagar, Chennai, Tamil Nadu. The assessee company had taken plant and machinery on lease from M/s. Sundaram Finance Ltd. (SFL), M/s. Tata Finance Ltd. (TFL) & M/s. IDBI. This plant and machinery was sub-leased to its subsidiary company M/s. Gujarat Borosil Ltd. (GBL) vide agreement and arrangement in the assessment year 1994-95. The Assessing Officer noticed that the assessee paid lease rent of Rs. 2,56,47,446 for assessment year 1998-99 and Rs. 2,19,34,664 for assessment year 1999-2000, whereas it received only Rs. 97,00,000 in both the assessment years from its subsidiary company as lease rent. The assessee was asked to explain as to why the company has charged only Rs. 97,00,000 in each assessment year from the subsidiary company as the lease rent on the same plant and machinery which was taken on lease at a lease rent of Rs. 2,56,47,446 for assessment year 1998-99 and Rs. 2,19,34,664 for assessment year 1999-2000. Thus, the Assessing Officer intended to disallow the difference of Rs. 1,59,47,446 for assessment year 1998-99 and Rs. 1,22,34,664 for assessment year 1999-2000. In response to the query, the assessee company filed two letters dated 19-3-2000 and 16-1-2001 which reads as under:

Letter dated 19-3-2002

"Difference between the lease rent paid and recovered for the Plant and Machinery is not to be disallowed. The explanation as to why the difference between lease rent paid to IDBI, Sundaram Finance and ICICI and recovered from Gujarat Borosil Limited is not be considered for disallowance was submitted during the hearing for the assessment year 1998-99 vide our letter dated 16-1-2001. We however, enclose the same for your ready reference with a request not to disallow the same since the transaction was in the best interest of the company."

Submissions furnished during assessment proceedings for assessment year 1998-99 vide letter dated 16-1-2001:

"Gujarat Borosil Limited (GBL) was promoted by Borosil Glass Works Limited as its subsidiary company as green field project to manufacture sheet glass at Bharuch. During the implementation of the said project, owing to riots taking place at Bharuch, the implementation of the said project got substantially delayed, resulting into cost over-run which was partly financed by the Financial Institutions (who) asked us to pump in more finance to assist the financial arrangements. Since we had no finance to give for the new company, it was decided to take the plant and machinery on lease from (i) IDBI (ii) Tata Finance Ltd. and (iii) Sundaram Finance Ltd. and the said machinery was to be given to GBL on sub-lease.

The lease instalments paid by us to IDBI, Tata Finance Ltd. and Sundaram Finance Ltd. were as per the agreement but the sub-lease amount to be received from the subsidiary company was arrived at after a considerable discussion with financial consultants and an amount of interest @ 10% was charged on the balance lease rent. The lease rent to be received from GBL was finally fixed at Rs. 97 lacs spread over 14 years.

We have also stood Guarantor for loans given by Financial Institutions/Banks to GBL. Besides this, we have investment in GBL by way of equity participation amounting to Rs. 2005.95 lacs which is more than 50% of total GBL share. Therefore, it is in our interest to revive GBL in such a way that future losses/liabilities may be reduced and GBL starts making profits.

After consideration of all above facts and circumstances as well as our discussions with various Financial Institutions, it was decided to workout the payment of lease rent and recovery of lease rent from GBL. The working for the same was made in such a way that there should not be any loss to us which can be seen from the enclosed comparative statement of Lease Rent Paid and received from 1993-94 onwards. Your goodself will kindly appreciate that the total lease rent payable over 7 years period is Rs. 1299.72 lacs while the total recovery is to be made over a period of 14 years is Rs. 1367.50 lacs. Thus, over all there will be more recovery of Rs. 67.78 lacs and there is no loss on account of lease rent paid by our company."

In another letter dated 8-12-2000, the assessee submitted that the total recovery to be made over the period of 15 years was Rs. 1367.50 lacs and furnished the following comparative statement of lease rent paid and recovered from assessment year 1994-95 onwards:

Thus, it was contended that overall there will be more recovery of Rs. 83.33 lacs and there would be no loss on account of lease rent paid by the assessee company. The Assessing Officer did not accept this contention or the reasons that GBL is a 50% subsidiary of the assessee company. The share holding pattern of GBL as on 31-3-1995 was as under:

Besides the above, the assessee company has also given share application money of Rs. 230 lacs for allotment of shares on preferential allotment. On allotment of these shares, the holding of the assessee company would go up to 53.14% after 31-3-1998. It was also pointed out that the directors of the assessee company and GBL were common. A list of directors is given at para 5.2 of the assessment order. Thus, the Assessing Officer concluded that for the purpose of control, the assessee company’s stronghold over its subsidiary was effectively more than 50% of the voting rights. It is pointed out that for the assessability of the assessee company, these were two different entities. The difference in lease rent paid by the assessee company and received from the subsidiary company in some years are as under:

The figures of income/loss reflected by the assessee as well as by GBL is as under:

The Assessing Officer pointed out that had the total lease rent paid by the assessee company been received from the subsidiary company, the subsidiary would have been still showing losses but the assessee company would have to pay higher taxes.

Thus, the motive and the objective of the assessee behind charging of lower lease rent from the subsidiary company was only to evade taxes by making unreasonable, excessive and inflated claim of expenses. Thus, he held that there is no justification for charging the subsidiary company lower rate of lease rent than what has been paid by the assessee. If the motive and the objective of these transactions were only to assist the subsidiary company, then to protect its own investment, the assessee would have charged the same amount of lease rent from the subsidiary company. Moreover, protecting investment in other corporate body will not amount to the business being carried on by the assessee. So it is not pure commercial transaction in the ordinary course of business carried on by the assessee. The objective behind these agreements was to claim inflated expenses totally unconnected with the business carried on by the assessee company.

4. The Assessing Officer further pointed out that GBL was also not 100% subsidiary company of the assessee company and if any benefit arises to the subsidiary company whole of the sum cannot be enjoyed by the assessee company as it was holding only 53% of the shares of the subsidiary company. Therefore, the contention that these expenses were incurred in commercial expediency to protect the investment of the assessee company in the subsidiary was not accepted by the Assessing Officer.

5. The assessee company made a claim of lease rent under section 37(1) of the Income-tax Act. The Assessing Officer after analyzing section 37(1) and the meaning of the words "wholly" and "exclusively" with reference to the motive, objective and purpose of the expenditure in context of the assessee company concluded that the expenditure on lease rent was not incurred wholly and exclusively for the purpose of the business of the company because the assessee company is in the manufacture of glass with low expansion capacity borosilicate glass, whereas GBL is engaged in the manufacture of glass sheets. Both the products are different. Therefore, the plant and machinery shown to have been taken on lease were not required for the purpose of the assessee’s business but for the subsidiary company. Thus, the expenditure incurred was not wholly and exclusively for the business of the assessee company. The assessee had incurred these expenses on behalf and for the business of the subsidiary company, therefore, these expenses which were laid out and expended wholly and exclusively for the business of the subsidiary company cannot be allowed under section 37(1). It was further pointed out by the Assessing Officer that the period of lease with Sundaram Finance, Tata Finance and IDBI was only for five years whereas, the assessee company had sub-leased the same to the subsidiary company for a period of fourteen years. This shows that the lease agreement with the subsidiary for the extended period of fourteen years is not a normal commercial transaction rather extra commercial transaction for the purpose of claiming higher expenses in the hands of the assessee and thereby to evade tax. He further mentioned that the quantification of benefit (if any) cannot be done in absolute terms but on the basis of the Net Present Value (NPV) of the lease rent paid and lease rent received. As per the NPV method the assessee would end up paying far more lease rent than what it would receive from the subsidiary company. In this connection, reliance was placed on the decision of Hon’ble Bombay High Court in the case of Ciba Dyes Ltd. v. CIT [1954] 25 ITR 102 stating that the expenditure incurred is not directly connected with the business of the assessee company. Reliance was also placed on the decision of Hon’ble Madras High Court in the case of CIT v. Amalgamations (P.) Ltd. [1977] 108 ITR 895 which was affirmed by Hon’ble Supreme Court reported in CIT v. Amalgamation (P.) Ltd. [1997]  226 ITR 188. The Hon’ble Supreme Court has held that the business of holding investment company and the business of the subsidiary companies are wholly separate and distinct. Thus, applying the doctrine laid down by those decisions it is stated that in the instant case the expenditure of lease rent was incurred on the plant and machinery which was required for the business of its subsidiary and was not required wholly and exclusively for the assessee’s business. Support was also taken from the decision of Hon’ble Bombay High Court in the case of Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989  which was also followed in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 (Bom.) for the same proposition. Thus, the Assessing Officer mentioned that in the instant case the assessee company incurred lease rent expenditure to provide plant and machinery to the subsidiary company for the purpose of its business which is equivalent to providing funds to the subsidiary and bearing interest cost on borrowed funds. The business of the subsidiary company cannot be considered in law as business of the holding company because the subsidiary company is a different and distinct assessable unit from the holding company. The Assessing Officer therefore, held that the expenditure incurred cannot be allowed under section 37 of the Income-tax Act. The Assessing Officer keeping in view the facts and legal position, held that the assessee is not entitled for deduction of lease rent paid for the business of the subsidiary company. However, as the assessee has credited the net amount of Rs. 97,00,000 as rent received from the subsidiary company in each assessment year; therefore, the net disallowance of Rs. 1,59,47,446 for assessment year 1998-99 and Rs. 1,22,34,664 for assessment year 1999-2000 is added to the taxable income of the assessee company.

6. The assessee company also paid interest to the financial institutions amounting to Rs. 3,97,379 for assessment year 1998-99 and Rs. 56,867 for assessment year 1999-2000 by way of interest on late payment of lease rent. The Assessing Officer was of the view that the lease rent expenditure was not incurred wholly and exclusively for conducting the business of the assessee company, therefore, interest paid on late payment of lease rent is also held as not incurred wholly and exclusively for the purpose of the business of assessee company. He therefore, disallowed these amounts also. The CIT(A) having concurred with the Assessing Officer, the assessee is in second appeal before the Tribunal.

7. The learned assessee counsel submitted that the assessee company promoted GBL and the said company was initially incorporated as Gujarat Window Glass Ltd., with the objective to manufacture sheet glass and allied products. Later, its name was changed to Gujarat Borosil Ltd. The project cost was originally estimated at Rs. 4575 lacs in 1989 which was revised to Rs. 6,487 lacs in December, 1991. The finance institutions insisted on a corporate guarantee by the promoters of the assessee company along with an undertaking from the promoters that any further cost over run would have to be financed by the promoters. In order to implement this project, the company decided to raise funds by way of Public Issue.

The commercial production was to start in April, 1993 but due to riots taking place in the month of January, 1993 consequent upon demolition of Babri-Masjid, the work was stopped and delayed since all the necessary equipments and imported machinery could not reach the factory site in time at Bharuch town, where the factory is situated. This had a cascading effect. Because of the unforeseen circumstances, the project was delayed by one year which resulted in cost over run to Rs. 10,200 lakhs. In order to meet the over run cost, the company approached the financial institutions for additional funds, who after appraisal, agreed to fund the cost over run subject to promoters of the assessee company also bringing in matching contribution by way of interest free unsecured loans to GBL to finance the cost overrun. M/s. GBL was originally scheduled to commence commercial production in April, 1993. However, the plant and machinery was delivered late in February, 1994. Thus, the production started in 1994 only. Initially, the company could not produce uniform quality sheet glass. But later it stabilized. Funding of Rs. 838 lakhs by Borosil was a condition precedent to the increase in financing provided by the financial institutions. Since BGWL did not have any surplus funds to invest, the only solution was to obtain the equipments on lease and sub-lease the same to GBL. Therefore, the assessee company obtained lease assistance from the above mentioned financial institutions. It was pointed out that the term loan was also obtained from various financial institutions. Promoters also brought interest free unsecured loans to the extent of Rs. 230 lakhs to meet a part of the cost overrun. On the basis of the note prepared by the financial institutions they conveyed to GBL that only after fulfilling and making necessary contribution by the promoters, the cost overrun would be financed by them. Though production had started in August, 1994, as highly sophisticated modern plant was used the teething troubles and fine tuning continued for another one and half years before the production stabilized. It was pointed out that owing to abolition of the industrial licensing system, another large float glass plant of 29 MSM capacity also came into production in December, 1995. Consequently, owing to the price war and consequent losses the company became sick and came under the purview of BIFR. Though the project when conceived was sound and economically viable, due to various unforeseen adverse circumstances, such as, the country facing unprecedented foreign exchange crisis in 1991-92, foreign exchange loan sanctioned by the IDBI was cancelled by them on the ground of foreign exchange shortages and curfew on account of Babri Masjid demolition resulting in delay of equipments to be delivered. These factors resulted in increase in project cost. He further pointed out that if the assessee company did not agree to help GBL the project would have been abandoned as GBL was not in a position to meet such huge liability. Since GBL did not have liquid funds to further invest, it was decided by the assessee to borrow them by way of equipment lease and sub-lease the same to GBL.

8. The Revenue authorities have stated that the lease rent paid was more than what was received by the assessee company. Therefore, the difference of lease rent paid should be disallowed ignoring the fact that during the assessment years 2001-2002 to 2008-2009 the assessee company will be paying taxes on full recovery of Rs. 97,00,000 per year, whereas there will not be any expenses claimed on this account. The learned counsel further contended that in totality the company is receiving more than what it is paying out. The only difference was the time span. If the subsidiary did not survive the corporate guarantee would be enforced which the assessee would not be able to pay as its business would be ruined. The case of the department is that the assessee had booked extra expenses to claim inflated expenses with the motive to evade taxes. The Assessing Officer was of the view that the project investment of one corporate in another body corporate could not amount to the business carried on by the assessee. Therefore, the transaction carried on by the assessee could not be described as a pure commercial transaction in the ordinary course of business. In this connection, reference was also made to the decision of Amalgamations (P.) Ltd.’s case (supra) affirmed by the Hon’ble Supreme Court in Amalgamation (P.) Ltd.’s case (supra). It was also mentioned by the Assessing Officer that the view is supported by the decision of Hon’ble Jurisdictional High Court in Phaltan Sugar Works Ltd.’s case (supra). In this connection, it is submitted that the business of the assessee company is different from that of subsidiary company. However, the consequences and conclusions reached by the revenue authorities from this statement are disputed. The learned counsel submitted that the Assessing Officer has wholly misunderstood the transaction entered into by the assessee. As pointed out the circumstances in which this transaction was entered into were that the investment made by the assessee in its subsidiary company was floundering on account of multiple factors including unforeseen competitions, delays, uncertain political situation etc. The assessee had given counter guarantees to financial institutions which were in force in respect of the investments made in the subsidiary company. The lease transactions were made having regard to the requirements of the financial institutions. The main reason given by the Assessing Officer is that there is loss in the transaction inasmuch as the lease rent received was larger than that paid. It is submitted that the transaction entailed the revenue generation for a period of fifteen years and outlay of seven years. The total revenue generated on account of the transaction was Rs. 13,67,50,000 and the total outgoing was Rs. 12,84,16,868. Therefore in the first instant, it is a factual error to say that there was a loss on the transaction. The learned counsel further contended that undoubtedly, in the year under consideration the lease rent paid is in excess of the lease rent received but there is no law that requires an assessee to enter into a transaction expecting to get profit immediately and instantly. A businessman works in his own prudence. Sometimes the transactions are entered with an eye on a stream of profits and the instant transaction is one of that kind. The observation of the Assessing Officer at para 5.10 that the net present value of the payments would exceed the net present value of the receipts, imports a concept which is alien to Income-tax Act. In the context of deductibility of expenditure it is submitted that NPV has no role to play in the deductibility of expenditure. Wherever, the Income-tax seeks to bring into play the concept of net present value a specific provisions has been incorporated into the Act. Here the learned counsel invited our attention to section 269UA(b)(1)( iii). Thus, the net present value as a concept is not unknown to the legislature in the context of Income-tax Act. However, for good reason the Income-tax Act does not take into account the net present value either in determination of income or in determination of expenditure. The basic underlying basis on which the Income-tax Act is based is that accounts are prepared on a historical basis, that is, sums are entered as received or accrued or expended or paid out at absolute values and not hypothetical ones. Therefore, the concept of net present value must be looked at, to determine, whether the transaction was at all profitable or not, is unsustainable. The learned counsel further placed reliance on the decision of Hon’ble Supreme Court in the case of Calcutta Co. Ltd. [1959] 37 ITR 1 and submitted that the Income-tax Act does not concern itself with the net present value in the context of determination of income. Further reference was invited to the Gujarat High Court decision in the case of J.R. Patel & Sons (P.) Ltd. v. CIT [1968]  69 ITR 782 at page 792. It is also pointed out that this view was further reiterated by Gujarat High Court in CIT v. Raipur Mfg. Co. Ltd. [1972] 84 ITR 508 at page 516. He further argued that there is no substance in the contention of the revenue authorities that the entire benefit was for the benefit of the subsidiary company, because they ignored the fact that even assuming for the sake of argument without admitting that such was the motive it cannot be ignored that in the bargain the assessee was benefited to the extent of Rs. 83,33,132. The learned Assessing Officer has failed to appreciate the distinction between "wholly" and "exclusively" and "necessarily". This distinction has been explained by the Hon’ble Supreme Court in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979]  118 ITR 261 . The learned counsel read out the relevant provision to emphasize the argument. It is pointed out that before the Hon’ble Supreme Court similar arguments were raised and the Hon’ble Supreme Court laid down the following principle at page 273 in the following terms :

"In order to claim deduction under section 10(2)(xv ) of the Act, an assessee has to show that the expenditure in question, (i) was not an allowance of the nature described in any of the clauses (i) to (xiv) of section 10(2), (ii) was not in the nature of the capital expenditure or personal expenses of the assessee, and (iii) had been laid out or expended wholly and exclusively for the purposes of his business, profession or vocation. Even assuming that the motive behind the payment of retrenchment compensation was that the terms of the agreement of the sale of shares should be satisfied, as long as the amount had been laid out or expended wholly and exclusively for the purpose of the business of the assessee, there appears to be no good reason for denying the benefit of section 10(2)(xv) of the Act to the company if there is no other impediment to do so."

Applying these principles the Supreme Court concluded at pages 275 and 276 that if the company felt that there was a method which would inure to its benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial considerations or expediency. Thus, it was submitted that that it is clear that deductibility of expenditure under section 37(1) must not be examined on the touchstone of necessity compelling or otherwise. The litmus test is not necessity but whether the amount can be said to have been laid out or expended wholly or exclusively for the purpose of business of the assessee whatever be the motive moving that expenditure. Reference was again made to the decision of Sassoon J. David & Co. (P.) Ltd.’s case (supra). It was submitted that the Hon’ble Bombay High Court in the case of Phaltan Sugar Works Ltd. (supra) had disallowed interest paid on loans borrowed for advancing to its subsidiary company. It was pointed out that a perusal of that judgment would indicate at page 992 placitum E that the assessee did not charge any interest to the said subsidiary company on the amount of loan in question. Thus, the crux of the matter was that in Phaltan Sugar Works Ltd.’s case (supra) there was payment of interest but no corresponding interest was received and therefore the interest was disallowed. In the instant case there is payment of lease rent alongwith corresponding receipt of lease rent and the total of the lease rent paid is far lower than the total of the lease rent received and, therefore, the question of applicability of Phaltan Sugar Works Ltd.’s case (supra) to the case of the assessee cannot arise. Reference was also invited to the decision of Hon’ble Bombay High Court in the case of CIT v. Rajaram Bandekar [1994] 208 ITR 503  at page 507 para 3. In this context it is material to note that what has been disallowed is the difference between the lease rent received and the lease rent paid. Another way of looking at the same disallowance is that the Assessing Officer has infact allowed receipt of Rs. 97,00,000 for each year (AYs 1998-99 and 1999-2000) out of the total lease rent paid. In other words, it is not the case of the Assessing Officer that the agreements for lease entered into with Tata Finance, Sundaram Finance & IDBI are sham or bogus or non-existent or fanciful. Therefore, in effect, what the Assessing Officer has done is that he has held that the expenditure incurred for obtaining the lease is reasonable to the extent of Rs. 97,00,000 and any amount paid in excess of Rs. 97,00,000 is unreasonable, unnecessary and therefore subject to disallowance. It is submitted that it is not within the power or province of the Assessing Officer to determine what lease rent is reasonable to be paid, that is the matter for the assessee to choose to pay. In this connection, reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT v. Walchand & Co. (P.) Ltd. [1967]  65 ITR 381. It is further brought to our notice that same observations were reiterated by the Hon’ble Supreme Court in the case of J.K. Woollen Manufacturers v. CIT [1969] 72 ITR 612 . These observations are modified only to the extent that if the payments were made to related parties they must also pass the test of being not greater than the market value for a similar facility or service. It is pointed out that it is no ones case that Tata Finance Ltd., Sundaram Finance Ltd. and IDBI are related parties and therefore, the question of applicability of section 40(A)(2)(b) of the Act does not arise.

9. The learned Departmental Representative basically relied on the opinion given by the Assessing Officer in paragraphs 3.3 to 5.3 of the assessment order and pointed out that the assessee was trying to reduce the tax burden by way of the lease transaction. It is further submitted that the principle of res judicata must apply and as during year there was no surplus between the lease rent received and lease rent paid the same should be disallowed. In this connection, reliance was placed on the decision of Hon’ble Supreme Court in the case of M.M. Ipoh v. CIT [1968] 67 ITR 106. Further reliance was also placed on the decision cited at S.A. Ranganathan v. CED [1963] 49 ITR (E.D.) 137 (Mad.) and H. Holck Larsen v. CIT [1972] 85 ITR 285 (Bom.). The learned Departmental Representative further submitted that the concept of discounting is not violative of the Constitution of India. Therefore, he emphasized that the NPV of the lease rent paid and lease rent received showed that the assessee would end up paying a far more lease rent than what is would receive from the subsidiary company. This expenditure is not directly connected with the business of the assessee company but the same was incurred for the business of the subsidiary company, therefore, it is not allowable. Reliance was also placed on the decisions in the case of United Breweries Ltd. v. CIT [1986] 162 ITR 527 (Kar.), British Bank of the Middle East v. CIT [1998] 233 ITR 251 (Bom.); and Mercantile Bank Ltd. v. CIT [2001] 252 ITR 225 (Bom.). It was further submitted that the object of discounting is sound principle laid down in these decisions. The learned Departmental Representative invited our attention to the assessment order and submitted that in the present case the concept of NPV is relevant and applicable. The learned Departmental Representative further submitted that the lease was for the period of five years whereas the company had sub-leased it for a period of fourteen years. The learned Departmental Representative submitted that it was not the business of the assessee to lease and to give on lease any plant and machinery or immovable asset. Therefore, the lease rent income would fall under the head "Income from other sources". The learned Departmental Representative tried to distinguish the case laws cited by the learned counsel for the assessee and pointed out relevant paragraphs from the decisions.

10. We have considered the rival submissions and have gone through the material available on record. The Assessing Officer disallowed the differ- ence between the gross lease rent paid by the assessee and the amount of Rs. 97,00,000 received from the subsidiary company in each assessment years on various grounds. Firstly, the lease rent expenses were not incurred on the ground of commercial expediency but to claim inflated expenses with a motive to evade taxes. So far as this ground is concerned, the circumstances in which these transactions were entered into have been enumerated above in the arguments of the learned counsel for the assessee. However, at the cost of repetition we would like to mention here that investments made by the assessee in the subsidiary company were floundering on account of multiple factors including unforeseen competitions, delays, uncertain political situation due to riots in the country after Babri Masjid demolition, foreign exchange crisis etc. There was also increase in the project cost owing to these factors. The assessee had given counter guarantees to financial institutions which were in force in respect of the investments made in the subsidiary company. The Assessing Officer has pointed out that the assessee paid lease rent of Rs. 2,56,47,446 for assessment year 1998-99 and Rs. 2,19,34,664 for assessment year 1999-2000, whereas it received only Rs. 97,00,000 in both the assessment years from its subsidiary company as lease rent without realizing that the transaction entailed a revenue generation for a period of fifteen years and outlay of seven years. The total revenue generated on account of the transaction was Rs. 13,67,50,000 and the total out going was Rs. 12,84,16,868. Therefore, the Assessing Officer was not right in concluding that there was a loss in the transaction. Undoubtedly, in the year under consideration the lease rent paid is in excess of the lease rent received by the assessee. But in our mind there is no law that requires an assessee to enter into a transaction expecting to get profit immediately and instantly. It is the prudence of the businessman which we have to rely upon. Often a businessman enters into a transaction with an eye on a stream of profits and the instant transaction is one of that kind.

11. The Assessing Officer has further mentioned that the quantification of the benefit, if any, cannot be done in absolute terms but on the basis of NPV of the lease rent paid and lease rent received. As per NPV method, the assessee would end up paying a far more lease rent than what it would be receiving from the subsidiary company. In the context of deductibility of expenditure NPV has no role to play in the deductibility of expenditure. Wherever, the Income-tax Act seeks to bring into play the concept of net present value a specific provision has been incorporated into the Act for example section 269UA(b)(1)( iii) specifically mentions that "....if immovable property is to be transferred by way of lease,.....and where the whole or any part of the consideration for such transfer is payable on any date or dates falling after the date of such agreement for transfer, the value of the consideration payable after such date shall be deemed to be the discounted value of such consideration, as on the date of such agreement for transfer, determined by adopting such rate of interest as may be prescribed in this behalf....". Therefore, the concept of the net present value as a concept is not unknown to the Legislature in the context of Income-tax Act. It is because the basic underlying basis on which the Income-tax Act is based is that accounts are prepared on a historical basis, that is, sums were entered as received or accrued or expended or paid out at absolute values and not hypothetical ones. The concept of net present value must be looked at to determine whether the transaction was at all profitable or not is unsustainable because of the legal proposition laid down in several cases. For instance in the case of Calcutta Co. Ltd.’s (supra) the Hon’ble Supreme Court had to consider a case where the appellant had bought land and sold them as plots for building purposes alongwith an undertaking to develop them by laying out roads, providing a drainage system, installing lights etc. These undertakings and developments were to be carried out within six months but time was not of essence to the contract. In the relevant accounting year the appellant received in cash only Rs. 29,392 in respect of all the plots of land which were undertaken to be sold at Rs. 43,692. In its return of income the appellant offered to tax the whole price of Rs. 43,692 although it had actually received only Rs. 29,392 and the balance amount of Rs. 14,300 was to be received in the future. Conversely as the assessee has undertaken to develop the plots of land it had provided for expenditure of Rs. 24,809 which again was to be expended in the future. The Assessing Officer disallowed the entire expenditure holding that the expenditure was to be incurred in the future and it had not actually been disbursed. The Supreme Court held that the expenditure was allowable in full and the income was accordingly determined. From this decision it is clear that neither in respect of income to be received in future nor in respect of expenditure to be incurred in future was any net present value taken by the assessee or by the Assessing Officer or by the Supreme Court. Therefore, the Income-tax Act does not concern itself with the net present value in the context of determination of income. The decision in the case of J.R. Patel & Sons (P.) Ltd. (supra) which was subsequently followed by the Hon’ble Gujarat High Court in the case of Raipur Mfg. Co. Ltd. (supra) has held as under:

"As has been observed in J.R. Patel and Sons Private Ltd. v. Commissioner of Income-tax the correct approach should be whether the payment was made on grounds of commercial expediency for the ultimate benefit of the assessee-company, whether that benefit is to accrue immediately or to accrue after a lapse of time, directly or indirectly. Even if the benefit, which flows to the assessee-company comes to it indirectly, that payment can be considered on grounds of commercial expediency if it is for the ultimate benefit of the assessee company."

In the case of Raipur Mfg. Co. Ltd. (supra), the Hon’ble Gujarat High Court has further referred to the decision of J.R. Patel & Sons (P.) Ltd. (supra) in the following words:

"The other decision, which has a bearing on the point, is our own decision in J.R. Patel and Sons (P.) Ltd. v. CIT, and there we held that in deciding whether a payment was made for purposes of business, the correct approach would be to see whether it was made on grounds of commercial expediency for the ultimate benefit of the business. Whether that benefit is to accrue immediately or after a lapse of time and whether directly or indirectly is immaterial. At page 787, the following principals culled out by a Division Bench of this High Court from the earlier reported cases were reproduced, with which we respectfully agree:

(1) One has not got to take an abstract or academic view of what was proper expenditure laid out or expended wholly and exclusively for the purposes of one’s business but one has got to take into consideration question of commercial expediency and the principles of ordinary commercial trading and the main consideration that has got to weigh with the court is whether the expenditure was a part of the process of profit making.

(2) The test for the purpose of deciding whether a particular amount can be allowed as deductible allowance under section 12(2) of the Act is whether the transaction is properly entered into as a part of the assessee’s legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business. If the transaction had been entered into on the ground of commercial expediency in order even indirectly to facilitate the carrying on of the business of the assessee, it would attract the provisions of section 12(2) even though the transaction might have been voluntarily entered into.

(3) If the payment was made with an indirect or improper motive for some considerations aliunde the business or out of generosity, then the payment is not liable to be regarded as one covered by the provisions of section 10(2)(xv): that the matter has to be viewed in the light of principles of commercial trading and commercial expediency and what is required is that the expenditure must be germane to the business of the assessee and not something which is de hors the business."

Therefore, the concept of net present value cannot be imported in context of the present case. The contention of the Assessing Officer that the entire motive was to benefit the subsidiary company is not correct. Even assuming for the sake of argument without admitting that such was the motive we cannot ignore that in the bargain the assessee was benefited to the extent of Rs. 83.33 lacs in the entire period.

12. Secondly, the learned Assessing Officer was of the opinion that the expenses incurred were not "wholly" and "exclusively" for the business of the assessee. The learned Assessing Officer failed to appreciate the distinction between "wholly", "exclusively" and "necessarily". This distinction has been explained by the Hon’ble Supreme Court in Sassoon J. David & Co. (P.) Ltd.’s case (supra ). In that case the Davids agreed to sell all their shares to the Tatas in the assessee-company and vide an agreement also agreed to arrange to terminate the services of all employees w.e.f. March 31, 1956 and also arrange to have all Directors resign their offices so that the Tatas would be entitled to appoint their own Directors or employees. After the take over Tatas re-employed nine out of twenty-two employees and paid compensation for termination of pension allowance and other terminal benefits which were claimed as business expenditure. The Assessing Officer concluded that the amount was not allowable because it was paid not on account of business expediency but because the purchaser of the shares made it a condition under the agreement. The matter travelled up to the Supreme Court where the same arguments were advanced and the principle on which the question must be decided were set out by the Hon’ble Supreme Court in the following words:

"In order to claim deduction under section 10(2)(xv ) of the Act, an assessee has to show that the expenditure in question, (i) was not an allowance of the nature described in any or the clauses (i) to (xiv) of section 10(2), (ii) was not in nature of the capital expenditure or personal expenses of the assessee, and (iii) had been laid out or expended wholly and exclusively for the purposes of his business, profession or vocation. Even assuming that the motive behind the payment of retrenchment compensation was that the terms of the agreement of the sale of shares should be satisfied, as long as the amount had been laid out or expended wholly and exclusively for the purpose of the business of the assessee "there appears to be no good reason for denying the benefit of section 10(2)(xv) of the Act to the company if there is no other impediment to do so."

Applying these principles the Supreme Court thereafter went into the question on facts and concluded as under:

"The next contention urged on behalf of the department was that since the Davids and Tatas were indirectly benefited by the retrenchment of the services of the employees of the company and payment of compensation to them and since there was no necessity to retrench the services of all the employees, the expenditure in question could not be treated as an expenditure laid out wholly and exclusively for business purposes of the company. It has to be observed here that expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the I.T. Act, 1961, which corresponds to section 10(2)(xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure....laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed....." The introduction of the word "necessarily" in the above section resulted in public protest. Consequently, when section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law."

"if the company felt that there was a method which would inure to its benefit, it cannot be said that the payment of compensation was made with an oblique motive and without regard to commercial considerations or expediency."

It is clear that deductibility of expenditure under section 37(1) must not be examined on the touchstone of necessity compelling or otherwise. The litmus test is not necessity but whether the amount can be said to have been laid out or expended wholly or exclusively for the purpose of business of the assessee whatever be the motive moving that expenditure. Thus, in the case of Sasson J. David & Co. (P.) Ltd. (supra) Hon’ble Supreme Court categorically laid down the following principle:

"even assuming that the motive behind the payment of retrenchment compensation was that the terms of the agreement of the sale of shares should be satisfied, as long as the amount had been laid out or expended wholly or exclusively for the purpose of business of the assessee, there appears to be no good reason for denying the benefit of section 10(2)(xv) of the Act to the company if there is no other impediment to do so."

13. Further, the Assessing Officer while disallowing the above expenditure made reference to the decision of Jurisdictional High Court in the case of Phaltan Sugar Works Ltd. (supra). However, a perusal of that judgment indicates that the assessee did not charge any interest to the said subsidiary company on the amount of loan in question. Thus, the crux of the matter was that in Phaltan Sugar Works Ltd.’s case (supra) there was payment of interest but no corresponding interest was received and, therefore, the interest was disallowed. However, in the present case there is payment of lease rent alongwith corresponding receipt of lease rent and the total of the lease rent paid is far lower than the total of the lease rent received over the period of fifteen years. Therefore, the question of applicability of Phaltan Sugar Works Ltd.’s case (supra) to the case of the assessee cannot arise. We find that this decision was referred by Bombay High Court in the case of Rajaram Bandekar (supra) wherein it has been held as under:

"The Supreme Court in the case of CIT v. Delhi Safe Deposit Co. Ltd. [1982] 133 ITR 756 has considered when expenditure can be considered as laid out on purely business consideration and wholly for the purpose of assessee’s business. The Supreme Court has observed that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity that that of a trader. The Supreme Court has observed that the question should be decided on ordinary principles of commercial trading and commercial expediency. The mere fact that, to some extent, the expenditure may ensure to a third-party’s benefit cannot, in law, defeat the effect of the finding as to the purpose of the expenditure. Such expenditure can have a wide ranging purpose. It may cover not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery. It may include measures for the preservation of the business and for the protection of its assets and properly from expropriation, coercive process or assertion of hostile title."

14. The learned counsel for the assessee has rightly pointed out that the Assessing Officer disallowed only the difference between the lease rent paid and lease rent received. In other words, it is not the case of the Assessing Officer that the agreements for lease rent entered into with Tata Finance, Sundaram Finance and IDBI were sham or bogus or non-existent or fanciful. Therefore, in effect, what the Assessing Officer has done is that he has held that the expenditure incurred for obtaining the lease is reasonable to the extent of Rs. 97,00,000 and any amount paid in excess of Rs. 97,00,000 is unreasonable, unnecessary and, therefore, subject to disallowance. The learned counsel argued that it is not within the power or province of the Assessing Officer to determine what lease rent is reasonable to be paid, that is the matter for the assessee to choose to pay. In case of Walchand & Co. (P.) Ltd. (supra) Hon’ble Supreme Court has laid down the following principles:

"In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjusted from the point of view of the businessman and not of the revenue.

It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But it is not the function of the Tribunal to determine the remuneration, which in their view should be paid to an employee of the assessee."

Similar observations were reiterated by the Hon’ble Supreme Court in the case of J.K. Woollen Manufacturers (supra). Therefore, the learned counsel rightly contended that the Assessing Officer could not disallow the claim of the assessee on this ground.

15. The learned Departmental Representative raised the issue relating to the principle of res judicata and referred to the decision in the case of M.M. Ipoh (supra) wherein it has been observed as under:

"The doctrine of res judicata does not apply so as to make a decision on a question of fact or law in a proceeding for assessment in one year binding in another year. The assessment and the facts found are conclusive only in the year of assessment; the findings on questions of fact may be good and cogent evidence in subsequent years, when the same question falls to be determined in another year, but they are not binding and conclusive."

The learned Departmental Representative contended that the principle of res adjudicata has no role to play in the present context, because the question before us is when a businessman enters into a transaction which may give him immediate loss but an overall profit cannot be challenged on the ground that he entered into a transaction which resulted in an immediate loss. Therefore, it is not as if a decision of an earlier year in the case of the assessee is being sought to be followed in the subsequent year nor is it that a decision in another case is sought to be followed in the case of the assessee. What the assessee is saying, is that when examining the transaction from the point of view of determining whether it is a commercial transaction, one must look at it holistically and not piecemeal. Another argument raised by the Departmental Representative relating to the concept of discounting is not violative of the Constitution of India, so it was rightly followed by the Assessing Officer. So far as this argument is concerned, here the case of the assessee is that the concept of discounting is alien to the concept of deduction of expenditure under the Income-tax Act. Deductibility of expenditure, assessability of income are to be determined on historical cost basis and the concept of future discounting, net present value are all to be ignored and wherever the Legislature has intended so, it has specifically provided for them. Therefore, the reference to the decision in the case of United Breweries Ltd. (supra), British Bank of the Middle East’s case (supra) and Mercantile Bank Ltd.’s case (supra) are not germane to the question at all. Therefore, this concept cannot be imported in the present case for determining the total income of the assessee.

16. The learned Departmental Representative further referred to the period of sub-lease granted to the subsidiary company. We would like to mention here that this was a commercial transaction and what the parties settle between themselves is not subject to scrutiny, for this may be one of the circumstances but not a solitary ground to reject the claim of the assessee. The learned Departmental Representative has also raised alternative plea that it was not the business of the assessee to take on lease and then sub-lease. Even if for the sake of argument if one were to accept this contention then income would fall under the head "Income from other sources" and in such a case the lease rent received would be taxable under section 56 and lease rent paid would be deductible under section 57 of the Act. Taking into consideration the totality of facts and circumstances, evidence placed on record and the case laws referred to, we are of the opinion that the revenue authorities have wrongly disallowed the claim of the assessee. Thus, ground Nos. 1 and 2 are decided in favour of the assessee for both the years.

17. Ground Nos. 3 and 4 for assessment year 1999-2000 reads as under :

"3. On the facts and in the circumstances of the case and in law, the learned Assessing Officer erred in making addition of Rs. 16,07,922 on account of Modvat Credit to the closing stock and the learned CIT(A) erred in confirming the above addition. The appellant prays that the addition of Rs. 16,07,922 may please be deleted."

4. Without prejudice to Ground No. 3 above, alternatively, it is prayed that the Modvat Credit on the beginning of the previous may please be added to the opening stock on the similar basis of adding Modvat Credit to the closing stock. The appellant prays that a suitable direction to add the Modvat Credit to Opening Stock may please be given in case Ground No. 3 is not allowed."

The assessee-company has been regularly following the system of valuation of closing stock net of Modvat and the same was accepted by the department. According to the assessee the closing stock during the year under reference was valued as net of taxes and other levies such as octroi, sales tax set off etc. Thus, it is stated by the assessee that amount of Rs. 16,07,922 at the credit side of its Modvat account represented unutilized Modvat for assessment year 1997-98. The assessee relied on the decision of Hon’ble Bombay High Court in the case of CIT v. Indo Nippon Chemical Co. Ltd. [2000] 245 ITR 384  which is also confirmed by the Hon’ble Supreme Court in CIT v. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 .

18. Before the CIT(A) it was pointed out that the Assessing Officer has wrongly mentioned the amount of Rs. 16,07,922 pertaining to assessment year 1997-98. In fact this pertains to assessment year 1999-2000. In the computation of total income the impugned amount has been mentioned against the head Modvat whereas in the body of the assessment order the amount has been mentioned as Rs. 1,01,389. In view of the factual mistake the Assessing Officer was directed to verify the correct amount relating to modvat credit to the year under appeal. On this submission the CIT(A) has mentioned that the decision of Hon’ble Bombay High Court in the case of Indo Nippon Chemical Co. Ltd. (supra) is not applicable to the assessment year 1999-2000. In that case it has been held that section 145A of the Income-tax Act, 1961 was introduced by the Finance (No. 2) Bill, 1998. Originally, the bill contemplated the proposed amendment to apply from April 1, 1986, in relation to assessment year 1986-87 and subsequent years. However, later on, when the said bill was enacted into law, the provision was made applicable form April 1, 1999, i.e., assessment year 1999-2000. This appeal was concerned with the assessment year 1989-90. In this circumstances, the provisions of section 145A could not be taken into consideration. The Hon’ble Bombay High Court has held that section 145A is applicable only from April 1, 1999 for the purpose of valuation of stock. In view of these provisions the CIT(A) has held that unutilized Modvat is to be included in the closing stock and, therefore, confirmed the addition made by the Assessing Officer. The learned CIT(A) analyzed the position with regard to the observation of Hon’ble Bombay High Court in the case of Indo Nippon Chemical Co. Ltd. (supra) viz-a-viz the provision of section 145A in paragraphs 10, 10.1 and 10.2 of the impugned order. He also referred to the decision of Hon’ble Supreme Court in the cases of CGT v. N.S. Getti Chettiar [1971] 82 ITR 599 ; CED v. Alladi Kuppuswamy [1977] 108 ITR 439; R.C. Mitter & Sons v. CIT [1959] 36 ITR 194; and CIT v. Ajax Products Ltd. [1965] 55 ITR 741 . In view of the above decisions the CIT(A) held as under :

"In view of the above cited decisions, it is held that these decisions are applicable to interpret the provisions of section 145A and the words used in this section are very precise and unambiguous as they are to be construed in the setting in which they have been used in this section. The interpretation of the provisions of section 145A clearly shows that opening stock is not to be considered for the purpose of adjustments which are only to be made in purchases and sales of goods and inventory. Hence the Assessing Officer has rightly added the unutilized modvat credit in the closing stock as on 31-3-1999. Hence, the Assessing Officer’s action is confirmed and this ground of appeal is rejected."

Aggrieved, the assessee has raised the above grounds before the Tribunal.

19. During the course of hearing the ld. Counsel for the assessee submitted that his claim may be considered in the light of the decision of Hon’ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. (supra) and the matter may be sent back to the Assessing Officer to examine the same. The learned Departmental Representative relied on the order of the learned CIT(A).

20. We have heard the parties and considered their rival submissions. We are of the opinion that this matter should go back to the file of the Assessing Officer to examine the issue afresh with reference to the decision of the Hon’ble Supreme Court in the case of Indo Nippon Chemicals Co. Ltd. (supra). These grounds are allowed for statistical purposes.

21. Ground No. 5 for assessment year 1999-2000 relates to disallowance made by the Assessing Officer of the front-end-fees amounting to Rs. 16,73,000 claimed as revenue expenditure. During the year the company obtained a loan of Rs. 400 lacs from IDBI and Rs. 1200 from ICICI Ltd. for meeting the working capital of the company, expansion and modernization of the Marol Plant and M.M. Nagar Plant. While sanctioning the loan, ICICI has stated as under :

"Borosil proposes to modernize and expand its facilities at Marol and Marai Malai Nagar in order to maintain the present operations in a competitive and cost effective manner. The cost of the modernization and expansion scheme is estimated at Rs. 211 million. The operations of the Company were affected during 1997-98 on account of strike of 4 months at its Marol Plant. Further, its working capital cycle was elongated with the increase in its debtor and inventory levels leading to liquidity constraints. Considering the above and the increased turnover levels over the next two years, the requirement of funds for the 24 month period ending March 31, 2000, is estimated at Rs. 485 million. The Company has approached ICICI for Rupee Term Loan of Rs. 120 million to meet a part of its long-term requirement of funds."

As per the terms and conditions of the agreement of loan, which was taken for running the business of the company for meeting the long-term working capital, the financial institutions charged front-end-fees @ 1.05% of the said loan amounting to Rs. 16,73,000. The case of the assessee is that the expenditure is like the processing fees, which is a part of the cost for obtaining loan for long-term requirement of working capital where no capital assets had been acquired. The Assessing Officer was of the view that the front-end-fees paid to ICICI was not allowable as the loan was obtained from the financial institution for long-term requirements. He relied on the decision of the Authority of Advance Ruling in the case of XYZ/ABC, Equity Fund, In re [2001] 250 ITR 194 , which according to him held that front-end-fees are capital in nature. This addition was confirmed by the CIT(A). The CIT(A) distinguished all the case laws relied on by the assessee mentioned at page 30 of the impugned order, and came to the conclusion that the front-end-fees paid to financial institutions for raising a loan is a capital expenditure. He has also indicated that the assessee in the grounds of appeal admitted that the loan was obtained for the expansion of the existing business. Therefore, the expenditure shall be treated as capital in nature.

22. The learned counsel submitted that the front-end-fee is like a processing charge in respect of grant of loan. In this connection, are our attention was invited to page 140 of the paper-book (Appendix I, Special Terms and Conditions). It is submitted that the principle reason given by the Assessing Officer is that the expenditure on account of front-end-fee is not allowable because the loan has been taken for long-term purposes and is therefore capital in nature. Further, the learned counsel invited our attention to the decision of Hon’ble Supreme Court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52, wherein it has been held as under:

"To summarize this part of the case, we are of the opinion that : ( a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv)."

Therefore, according to him the decision of the Authority of Advance Ruling had no bearing on this case. He has further invited our attention to question 11 set out at page 198 of the judgment and submitted that the front-end-fees was in the nature of deterrence fees to deter portfolio companies from shopping around using the information available to them through the investment advisor and the question for consideration was whether it falls within Article 22 of the Double Taxation Treaty (DTT) entered into between India and Mauritius. Our attention was also invited to Article 22 of DTT. A bare perusal of the said article indicates that the issue before the Authority of Advance Ruling did not concern itself as to whether front-end-fees were capital in nature or revenue in nature and, therefore, the observation made by the Assessing Officer is fully misplaced. Further the learned counsel invited our attention to the decision of Hon’ble Bombay High Court in the case of CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 ; Gujarat High Court decision in the case of Dy. CIT v. Core Healthcare Ltd. [2001] 251 ITR 61 wherein it has been held that expenditure incurred for obtaining a loan is revenue expenditure.

23. On the other hand, the learned Departmental Representative relied on the decision of Hon’ble Bombay High Court in the case of S.F. Engineer v. CIT [1965] 57 ITR 455 , wherein it has been observed that the expenditure incurred for obtain loan would be regarded as capital in nature. To this stand, the learned counsel contended that the decision cited by the learned Departmental Representative although correct in its conclusion, was wrong in its reasoning and it has been expressly disapproved by the Hon’ble Supreme Court in the case of India Cements Ltd. (supra).

24. We have considered the rival submissions and have gone through the material available on record. We would like to mention here that the observation of the learned CIT(A) that the loan was obtained for expansion of the existing business has been admitted by the assessee itself in grounds of appeal is "incorrect". He has taken the opening sentence of para 4 at page 12 of ‘The statement of facts’ as admission of the assessee, whereas this is an averment by ICICI. In order to determine whether the expenditure in the present case is capital or revenue, we would like to mention here the observation of the Hon’ble Supreme Court in the case of India Cements Ltd. ( supra):

"In S.F. Engineer v. Commissioner of Income-tax, the Bombay High Court held that the expenditure incurred for raising loan for the carrying on of a business cannot in all cases be regarded as an expenditure of a capital nature. On the facts of the case, they held that as construction and sale of the building was the sole business of the firm and the building was its stock-in-trade, and the loan was raised and used wholly for the purpose of acquiring this stock-in-trade and not for obtaining any fixed assets or raising any initial capital or for expansion of the assessee’s business, the expenditure incurred for the raising of loan was not an expenditure of capital nature but revenue expenditure. Although the conclusion of the High Court was correct, we are not able to agree with the principle that the nature of the expenditure incurred in raising a loan would depend upon the nature and purpose of the loan. A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may, after raising the loan, change its mind and spend it on securing capital assets. Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which its actually used? Further suppose that in the accounting year the purpose is to borrow and buy raw material but in the assessment year the company finds it unnecessary and spends it on capital assets. Will the Income-tax Officer decide the case with reference to what happened in the accounting year or what happened in the assessment year? In our opinion, it was rightly held by the Nagpur Judicial Commissioner of Income-tax that the purpose for which the new loan was required was irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure."

Thus, from the above observation it is clear that the Hon’ble Supreme Court did not agree with the principle that the nature of expenditure would depend upon the nature and purpose of loan. Secondly, we would like to refer to the observation of the Hon’ble Supreme Court in the case of India Cements Ltd. ( supra):

"To summarize this part of the case, we are of the opinion that: ( a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period; and (c) that it is irrelevant to consider the object with which the loan was obtained. Consequently, in the circumstances of the case, the expenditure was revenue expenditure within section 10(2)(xv)."

So far as the reliance on the decision of Advance Ruling Authority is concerned the question for consideration in the case is set out in question No. 11 which reads as under:

"11. Whether, on the facts and circumstances of the case, "front-end-fees" (hereinafter referred to as "deterrence fees") received on a discretionary basis by the applicant from port folio companies, not being specifically covered by any other article of the Treaty, will fall within the purview of article 22 of the Treaty?"

The discussion by the AAR is as under:

"In question No. 11, the applicant’s case is that deterrence fees are charged to deter portfolio companies from shopping around using the information available to them through the investment adviser. If the basic character of such fees is in the nature of compensation for loss of possible investment, the taxability of such fees will fall within the purview of article 22 of the Treaty.

Article-22 Other income-1. Subject to the provisions of paragraph (2) of this article, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State."

On perusal of the question No. 11 along with Article 22, we find that the issue before the AAR did not concern itself as to whether front end fees were capital in nature or revenue in nature. Therefore, the observation made by the Assessing Officer is wholly misplaced. Respectfully, following the decision of Hon’ble Supreme Court in the case of India Cements Ltd. (supra), and applying the same to the facts of the present case we are of the opinion that the front-end-fees was like processing fees for signing a loan agreement. Therefore, it is revenue expenditure. We therefore, allow this ground of appeal also.

25. Ground No. 6 relates to the disallowance of the payment amounting to Rs. 26,81,000 made to Mahanagar Gas Limited as revenue expenditure. Ground No. 7 is the alternative prayer of the assessee that in the event of determining the payment to Mahanagar Gas Ltd. as capital expenditure, depreciation as applicable to the plant and machinery may be allowed.

26. During the year under consideration, the assessee company incurred an expenditure of Rs. 26,81,000 for laying underground steel pipeline upto Marol Factory premises for supply of Natural Gas with Mahanagar Gas Ltd., a Semi-Government Undertaking. The total fuel cost of the company consists of furnace oil, light diesel oil and liquefied petroleum gas. The cost of LPG and other fuels were high as compared to the cost of natural gas. As natural gas is cheaper and sophisticated than oil, the company decided to go for conversion to natural gas and reduce substantial cost on fuel consumption. Therefore, the assessee company entered into agreement with Mahanagar Gas Ltd. (MGL) for supply of natural gas. MGL agreed to supply the gas provided the assessee bore the cost of laying the requisite pipeline from MGL’s supply plant i.e., Sakinaka to Marol Plant which is their standard practice. The original estimated cost of the gas pipeline was Rs. 23,31,000 which finally came to Rs. 26,81,000. It was a pre-condition that after the Commissioning of the supply of gas, the ownership and maintenance of the pipeline will belong to MGL. Thus, it was a pre-requisite condition that if the company wanted to obtain Natural Gas to save substantial fuel cost, it is necessary to pay the cost of laying the entire gas pipeline, the ownership of which would go to MGL. The case of the assessee is that the expenses were necessary to save substantial fuel cost which can be reflected from the Profit & Loss Account and Balance Sheet of the year under consideration and subsequent years. Substantial amounts were saved after the usage of gas as fuel. In this connection, reliance was placed by the assessee on the decision of Hon’ble Supreme Court in the case of Gotan Lime Syndicate v. CIT [1966] 59 ITR 718 to support his claim that the expenditure incurred was revenue in nature. The Assessing Officer after going through the agreement (paragraph 5.1) came to the conclusion that the expenditure was capital in nature. To support this conclusion the Assessing Officer relied on the decision of CIT v. National Machinery Manufacturers Ltd. [1991] 191 ITR 483 (Bom.) and Jaswant Trading Co. v. CIT [1995] 212 ITR 293 (Raj.). The CIT(A) confirmed the addition made by the Assessing Officer on this issue for the reasons given in his order at paragraphs 18 and 19. He has discussed various case laws relied on by the learned counsel, details of which are given at para 13 of the impugned order. The case of the assessee was that the expenses were claimed as revenue expenditure on the ground that the assessee was compelled to pay the amount of Rs. 26,81,000 for getting gas connection from MGL. The said expenditure was incurred to reduce the cost of fuel and increase the efficiency. The ownership and maintenance of pipeline etc. were with the MGL and the assessee was not entitled to get any refund on this account. Further, the expenses were necessary to obtain the supply of gas and, therefore, the said expenses were wholly and exclusively for the use of business purpose and thus, revenue in nature. The learned counsel invited our attention to clause 5 of the letter dated 5-12-1997 relating to the supply contracts and submitted two reasons for allowing the expenditure as revenue expenditure, which are as under :

"1. Even though the expenditure has been incurred on construction of a pipeline since the pipeline is owned by MGL, the expenditure is allowable as revenue in nature in the hands of the appellant.

2. In the alternative, as the expenditure has resulted in the saving of fuel cost which is revenue in nature, any expenditure incurred to save recurring revenue expenditure is itself revenue expenditure."

Reliance was also placed on the decision of Hon’ble Supreme Court in the case of CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257  and pointed out that in that case the assessee constructed certain water pipelines, the ownership and possession of which were taken over by the Shahabad Municipal Committee. Although the expenditure in connection with the pipeline was to be incurred by the assessee, in return the Municipal Corporation was to exempt the assessee from paying municipal taxes for 15 years. The Assessing Officer held that the expenditure incurred on constructing the pipeline was capital expenditure because it would obtain an advantage of enduring nature namely it would not have to pay municipal taxes for a period of 15 years. The Hon’ble Supreme Court emphasized that "If these liabilities had to be paid, the payments would have been on revenue account and hence the advantage secured was in the field of revenue and not capital". The pipelines, which might have been regarded as capital asset and which came into existence as a result of the expenditure incurred did not belong to the assessee-company but to the Municipality. In view of the principle laid down by the Hon’ble Supreme Court, the Calcutta High Court in the case of CIT v. Birla Jute Mfg. Co. Ltd. [1990] 182 ITR 497  held that electricity lines laid down at the cost of the assessee but owned by the Electricity Board was allowable as revenue expenditure. Reliance was also placed on the decision of Hon’ble Bombay High Court in the case of CIT v. Chowgule Chemicals (P.) Ltd. [1995] 216 ITR 234 , CIT v. Excel Industries Ltd. [1980] 122 ITR 995 (Bom.), CIT v. Madras Auto Services (P.) Ltd. [1998] 233 ITR 468  (SC) for the proposition that the said principle was approved by the Hon’ble Supreme Court. Thus, it is submitted that the expenditure incurred by the assessee for laying the pipeline for the supply of natural gas from MGL is revenue in nature.

27. On the other hand, the learned Departmental Representative relied on the orders of the authorities below and further placed reliance on the decision of Hon’ble Bombay High Court in the case of National Machinery Manufacturers Ltd. (supra).

28. We have considered the rival submissions and have gone through the material available on record. In the case of National Machinery Manufacturers Ltd. (supra), the principle laid down by the Hon’ble Bombay High Court in Excel Industries Ltd.’s case (supra) has been reiterated. Question No. 1 in that reference was whether a sum of Rs. 4,50,000 paid by the assessee-company to MIDC for a temporary water supply connection was allowable expenditure having regard to the fact that the pipeline belonged to MIDC. The Bombay High Court held that it was an allowable revenue expenditure applying the principle laid down by Supreme Court in Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971]  82 ITR 376 and Excel Industries Ltd.’s case (supra). It will be pertinent to mention here that in the case of Jaswant Trading Co. (supra), no material was placed to show that the water treatment plant belonged to RIICO and, therefore, the expenditure was disallowed as capital expenditure. In the present case also, even though the assessee had incurred the expenditure on construction of the pipeline, the ownership of the same was with MGL. Therefore, relying on the decision of the Hon’ble Supreme Court cited above, we are of the opinion, that the expenditure incurred by the assessee was revenue in nature.

29. In view of our decision on ground No. 6, the alternative plea taken by the assessee in ground No. 7 needs no adjudication.

30. Ground No. 8 for assessment year 1999-2000 relates to the disallowance of the expenditure on new product development amounting to Rs. 57,31,514. The assessee claimed this expenditure as revenue expenditure. The alternative plea in ground No. 8 is that if the expenditure is held as capital expenditure, depreciation at the rate applicable to the furnaces be allowed to the assessee.

31. The facts of the case, briefly, stated before the Assessing Officer is as under :

"Certain experiments had been conducted on furnace No. 2 at Marol to determine the technical parameter for production of the medium expansion which the company proposes to produce in future. The experiments, which started in January, 1999 ended in February, 1999 when the furnace was shut down, entailed the running of the furnace for an additional period of one month. Expenses relating to such experiment amounting to Rs. 57.31 lacs has been treated as deferred revenue expenditure, since the benefits of the same are of enduring nature. Rs. 1.91 lacs has been amortized in the current year and the total amount of Rs. 57.31 lacs has been shown as deduction in computing Taxable Income.

The Company is manufacturing hard Borosilicate glass having 33 × 10 C expansion. Company wanted to produce natural gas - i.e., softer glass. Though the furnace was scheduled to shut down, it was run while the experiments were conducted. During the period of experiment, the expenses incurred on the existing furnace i.e., electricity, natural gas, salary etc. - i.e., all expenses of revenue nature and have been taken under the Head "Deferred Revenue Expenditure - New Projects 1998-99".

There was no need of erecting separate factory or separate plant or separate machinery or recruiting additional manpower. The new items were to be manufactured within the same premises, will the same employees, same machinery and same raw material. Therefore, the expenses incurred were for the existing line of business with different items/shape and no assets have been created. Hence, the experimental expenses incurred for the manufacture of new items are completely allowable for deduction in full in computing the income. However, it is only for the accounting purpose, the different heading was given and the expenses were taken under the head Deferred Revenue Expenses.

It is submitted that all the expenses incurred under the above 3 heads have been capitalized for book entry purpose, but the same have been claimed as Revenue Expenses in the computation of income since the nature of expenses are of Revenue nature. In this connection, we submit that treatment of an expenditure by the assessee-company in the books of account is neither determinative or conclusive. But, it is to clarify that treatment of a particular expenditure in its books of account, though neither determinative of the nature of expenditure nor conclusive one way or other cannot be regarded as irrelevant. This conclusion is supported by the Bombay High Court decision in the case of CIT v. Sandoz India Ltd. [1994] 206 ITR 599 ."

During the assessment proceedings, it was stated that the company wanted to diversify into the production of ampules and vials required by the pharmaceutical industry and therefore experiment was conducted as to whether the same furnace can produce these pharmagrade products and that the experiment was unsuccessful. The assessee-company has given further break-up vide its letter dated 19-3-2002 which is as under :

It was submitted before the Assessing Officer that the above expenses were incurred during the continuation of business for new product development. It was further submitted that in the assessee’s line of business, it was necessary to find out new varieties, new products and new range of items. However, the Assessing Officer was not satisfied with the submissions of the assessee. He held that had the experiments not been carried out electricity, various fuels, raw material, stores and supplies etc. would not have been consumed. Also the man power utilized would have been used for other gainful purposes. He placed reliance on the decisions in the cases of CIT v. Bazpur Co-operative Sugar Factory Ltd. [1983] 142 ITR 1 (All.); Shree Digvijay Woollen Mills Ltd. v. CIT [1993] 204 ITR 398 (Guj.) and Triveni Engg. Works Ltd. v. CIT [1998]  232 ITR 639  (Delhi). Relying on the abovementioned decisions the Assessing Officer held that the expenditure of Rs. 57,31,514 is a capital expenditure and added the same to the total income of the assessee. The learned CIT(A) confirmed the addition made by the Assessing Officer.

32. The learned counsel for the assessee submitted that in the assessee’s line of business it is necessary to find out new varieties, new products and new range of items where certain experiments are necessary for expansion of their existing products. During the year under consideration, the assessee-company has made certain expenses for experiments and part of the normal expenses were allocated to new product expenses just to find out the amount of expenses required to be incurred for this type of experiments. If the experiments would not have been taken place, then most of the expenses which are in the nature of fixed expenses were required to be incurred whether furnace was run or not or whether experiments were undertaken or not. It was further submitted that during the period of experimentation, production continued and saleable glass was packed, the details of which have been submitted to the Assessing Officer. But he disallowed the expenditure without considering that the assessee had produced material income which had been included in the profit and loss account. The learned counsel further pointed out that a bare perusal of the details of the expenses given in its letter dated 19-3-2002 would indicate that the expenditure in question is a revenue expenditure. Mere fact that the expenditure which was otherwise revenue expenditure has been treated as deferred revenue expenditure in the books of the company cannot for that reason alone be disallowed in computing total income. He further placed reliance on the decision of Hon’ble Supreme Court in the case of State Bank of India v. CIT [1986] 157 ITR 67 and Hon’ble Bombay High Court decision in the case of CIT v. Mogul Line Ltd. [1962] 46 ITR 590 . On the other hand, the learned Departmental Representative relied on the orders of the authorities below.

33. We have considered the rival submissions and have perused the material placed on record. A perusal of the expenses indicates that the expenditure in question was incurred on salary, electricity, natural gas etc. The mere fact that the expenditure which was otherwise revenue expenditure has been treated as deferred revenue expenditure in the books of the company cannot for that reason alone be disallowed in computing total income. In this connection, we would like to mention the observation of Hon’ble Supreme Court in the case of State Bank of India (supra) affirming the decision of Hon’ble Bombay High Court in the case of Mogul Line Ltd. ( supra).

"The important question to be considered is the true nature of the transaction and whether in fact it had resulted in profit or loss to the assessee. In that context, it is well-settled that the way in which entries are made by the assessee in its books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee might, by making entries which were not in conformity with the proper principles of accountancy, have concealed profit or showed loss and the entries made by him could not, therefore, be regarded as conclusive one way or the other.

CIT v. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.) was a case where it was held that if a foreign fund of the assessee was allowed to remain unused where it lay, the mere circumstances that there had been fluctuation in the currency resulting in appreciation of the fund in terms of the coin of another country would not result in profit to the owner of the fund. But if the fund is utilised in the course of the business for a trading purpose, there would be realization of the profit arising on devaluation and the profit would be taxable. If, on the other hand, the fund was not utilised for a business operation or for the purposes of trade, but for a non-business operation, like payment of income-tax in the foreign country, there was no profit and the difference in the exchange value could not be assessed to income-tax. The Division Bench of the Bombay High Court further observed that the matter of taxability could not be decided on the basis of the entries which the assessee might choose to make in his account, but had to be decided in accordance with the provisions of law. What would determine the taxability is not whether the assessee has shown a particular item as a profit or loss in the accounting year, but whether the said item could be regarded either as a profit or loss under the provisions of the Act."

In view of the above decision, we are of the opinion that the expenditure is allowable as revenue expenditure and allow this ground in favour of the assessee.

34. In view of our decision on ground No. 8, the alternative plea taken by the assessee in ground No. 9 does not survive.

35. Ground No. 10 relates to the disallowance of Rs. 1,16,374 under section 43B of the Act. During the course of assessment proceedings from the details of employees and employer’s contributions towards PF filed by the assessee, the Assessing Officer noticed that the following contributions were not paid on or before the due dates :

Late payment of Employer’s contribution to ESIC :

He further mentioned that the assessee had not given any details as the month to which these payments related, their due dates and date of payment etc. The Assessing Officer further stated that the employees contribution towards PF, FPF and other welfare funds was an income in the hands of the assessee as per provisions of section 2(24)( x). However, if the contribution is credited to the respective funds on or before due date, the same is allowable as deduction under section 36(1)(va). The contribution has been credited to the respective funds beyond the due date therefore, the amount of Rs. 1,00,859 has to be treated as income in the hands of the assessee under section 2(24)( x) and no deduction is allowable under section 36(1)(va). Similarly, in the case of employer’s contribution, towards PF and ESIC is otherwise allowable deduction under section 36(1)(iv). But if the contribution is not credited to the respective funds on or before due dates, the same is liable for disallowance under section 43B read with second provision thereunder. Further the Assessing Officer observed that in the present case the assessee had not credited the employer’s contribution on or before the due date and therefore, Rs. 1,16,374 (1,00,859 + 15,515) is not allowable under section 43B.

36. The learned CIT(A) observed as under :

"29. I have considered the facts and evidences which have been discussed by the Assessing Officer and also submitted by the appellant at the time of hearing of this appeal. Having considered the facts relating to the amount and date of payment for P.F., it is found that the actual amount for the employees contribution for the month of Feb., 1999 is Rs. 44,948 and not Rs. 44,958 as mentioned by the Assessing Officer. Therefore, the Assessing Officer is directed to substitute this amount of Rs. 44,948 in place of 44,958 and the excess of Rs. 10 wrongly disallowed by the Assessing Officer is not be deleted. Actual disallowance must be of Rs. 1,00,849 and not Rs. 1,00,859. As regards the disallowance of P.F., being payment beyond due dates, it is held that the Assessing Officer has rightly made this disallowance as because the contributions for the month of February and for the month of March, 1999 have been made beyond the due dates as per the Provident Fund Act even after considering the grace period of 5 days. Therefore, this disallowance is confirmed.

30. In support of this disallowance, the decision of Hon. Andhra Pradesh High Court given in the case of Hitech (India) Pvt. Ltd. 227 ITR 446 has been cited by the Assessing Officer. As per this decision, the payments for Provident Fund are to be made within due dates prescribed in the Provident Fund Act after considering the five days grace period. Further the decision of ITAT, Mumbai Bench ‘D’, Mumbai given in ITA No. 2371/B/94 for assessment year 1990-91 in the case of DC Special Range 5, Bombay v. M/s. Navin Bharat Industries Ltd., Bombay on 5-3-2002 is relied. In this decision, the Hon. ITAT has referred to various ITAT’s decisions given on this issue. Such decisions are as under :

(i)CPEC Ltd. (ITA No. 2150/Mum./97 of ITAT, Mumbai Bench ‘C’ dated 17-8-2000

(ii) DCIT v. Udaipur Distillery 74 TTJ 193

(iii)Madras Radiators and Pressings Ltd. 59 ITD 515 (Mad.)

(iv)Fluid Air India -  63 ITD 182 (Mum.)

These decisions have been held as not applicable so far as provisions of section 43B of the Act are concerned. Instead of Hon. ITAT has followed the following decisions of various High Courts.

(1)CIT v. Synpol Products Pvt. Ltd., 217 ITR 154 (Guj.)

(2)CIT v. South India Corporation Ltd. 242 ITR 114 (Ker.)

(3)CIT v. Shree Kamakhya Tea Co. Pvt. Ltd., 199 ITR 714 (Cal.)

In these decisions the ‘due date’ has been defined before which the payments are required to be made. If payments are not made within due dates, then such payments are not allowed as deduction.

Therefore, in view of this decision of the Jurisdictional ITAT, the disallowance made by the Assessing Officer is confirmed and the decision of the ITAT, ‘C’ Bench, Ahmedabad as relied upon by the appellant, is not applicable as because the decision of the Jurisdictional ITAT will prevail upon the decision of other Income-tax Appellate Tribunals and also this issue has been decided by various High Courts as mentioned by the Assessing Officer in the assessment order itself and as mentioned by the Hon. ITAT in its decision as stated hereinabove. Therefore, Assessing Officer’s action is justified in making this disallowance. The Assessing Officer has rightly treated the employees contribution as income under the provisions of section 2(24)( x) of the Act in view of the fact that they have not been paid in the Provident Fund account as per the due date prescribed under the provisions of Explanation of section 36(1)(va) of the Act.

31. As regards the payment of Rs. 14,686 disallowed being employer’s contribution to ESIC, it is held that actual payment is of Rs. 14,636 and not Rs. 14,686. From the perusal of letter dated 29-10-1998, from ESIC Department, it is found that this payment is relating to the demand raised by the ESIC for additional ESIC contribution. Since this payment has not been made within the time limit laid down by the ESIC Act, therefore, it is not an allowable deduction to the appellant and the Assessing Officer has rightly made this disallowance as per the provisions of section 43B of the Act. The claim that this payment is for Inspection charges is not correct. Actually this amount was found as short payment on account of contribution to be made by the appellant to ESIC and, therefore, this additional payment has been raises to be paid by the appellant towards ESIC fund. Therefore, the Assessing Officer has rightly considered this amount as late payment towards ESIC contribution. Hence, this disallowance is confirmed.

32. The amount of Rs. 879 is also relating to ESIC being related to Madras Sales Office. It has also been paid late and no date of payment has been mentioned in the details filed at the time of hearing of this appeal also. Thus, this payment has rightly been disallowed by the Assessing Officer. Therefore, this ground of appeal is dismissed and the action of the Assessing Officer is confirmed."

Aggrieved, the assessee is in appeal before the Tribunal.

37. During the course hearing before us the learned counsel for the assessee admitted that the late payment of employers contribution for which no date of payment has been mentioned at para 14.2 of the assessment order amounting to Rs. 15,515 cannot be allowed. However, the other payments for which the due date and date of payments have been mentioned is allowable as per the various decisions of the Tribunal and the decision of the Hon’ble Supreme Court in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 . The learned Departmental Representative relied on the orders of the authorities below.

38. We have considered the rival submissions and have gone through the material placed on record. As admitted by the learned counsel, the amount of Rs. 15,515 representing the delayed payment of employers contribution cannot be allowed. As regards the amount of Rs. 1,00,859 we find that the Mumbai Bench of the Tribunal in the case of Fluid Air (India) (P.) Ltd. v. Dy. CIT [1997] 63 ITD 182 , has held that the provisions of section 43B and 2(24)(x) read with section 36(1)(va), so far as they are concerned with the time for making payment, should be interpreted liberally keeping in view principle of equity and legislative intent enacting such prohibitory provisions so that the injustice and the absurdity could be avoided. In view of the decision in the case of Fluid Air (India) Ltd. (supra) we direct the Assessing Officer to verify whether the contribution towards the P.F. was made by the assessee company within the reasonable grace period in the light of the decision of the Tribunal in the case of Fluid Air (India) (P.) Ltd. and give a fresh finding on this issue. This ground is partly allowed for statistical purposes.

39. In the result, the appeal in ITA 646/Mum./02 is allowed and ITA 515/Mum./00 is partly allowed for statistical purposes.

 

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