TMI Blog2011 (2) TMI 962X X X X Extracts X X X X X X X X Extracts X X X X ..... rt] in which it has been held that there being a specific provision for Guest House expenses under section 37(4)(iv) all expenses relating to Guest House such as repair, depreciation, etc. will be covered by that specific provisions - disallowance upheld - Decided against the assessee. Disallowance of 25 per cent of entertainment expenses - Held that:- The issue was covered against the assessee by the decision of Tribunal in assessee's own case in assessment year 1994-95 wherein held that 25 per cent of the entertainment expenditure incurred in hotels should be treated as that pertaining to the employees accompanying the guests as against 50 per cent made by the Assessing Officer. Facts this year are identical therefore respectfully following the decision of the Tribunal in assessment year 1994-95 confirm the order of the CIT(A). Regarding cash payment - disallowance u/s 40A(3) - Held that:- The assessee had not been able to establish that the payments had been made under exceptional circumstances - Decided against the assessee Regarding interest on money borrowed - Held that:- It is a settled legal position that whether the two businesses are the same business or diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssue was covered against the assessee by the judgment of Hon'ble High Court of Bombay in case of CIT v. Aorow India Ltd. [1998] 229 ITR 325 and the decision of the Tribunal in the assessee's own case for assessment year 1994-95. The Hon'ble High Court in case of Aorow India Ltd. (supra) have held that ceiling laid down in rule 6D(2) is on the expenditure incurred in connection with each day of the journey and if calculated in accordance with the said rule for each day of travelling it would make no difference whether the calculation of allowable expenditure is made for each trip of journey or for all the journeys in the year taken together. This supports the view taken by the authorities below. We therefore see no infirmity in the order of CIT(A) computing disallowance with reference to each trip of the employee. The order of CIT(A) is accordingly upheld. 2.2 The second dispute is regarding disallowance of travelling expenses of foreign citizens under rule 6D amounting to Rs. 23,977. The Assessing Officer had computed the disallowance under rule 6D. The computation was not disputed by the assessee. The claim of the assessee is that rule 6D will not apply in case of non-employees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said order and find that the Tribunal following the decision in earlier year, held that 25 per cent of the entertainment expenditure incurred in hotels should be treated as that pertaining to the employees accompanying the guests as against 50 per cent made by the Assessing Officer. Facts this year are identical. Therefore respectfully following the decision of the Tribunal in assessment year 1994-95 (supra) we confirm the order of the CIT(A). 2.5 The dispute raised in ground No. 5 is regarding disallowance of Rs. 8,59,074 being the expenditure incurred by the assessee towards meals for sales conference and press conference. The assessee had incurred expenditure of Rs. 11,45,432 towards meals for sales conference and press conference. The Assessing Officer disallowed the claim treating the same as entertainment expenditure. In appeal CIT(A) noted that the expenditure was incurred mainly on meals in hotels during the course of sales conferences. Considering the fact that employees of the assessee company also participated in such conference CIT(A) attributed 25 per cent of the expenditure towards employees which was allowed and balance 75 per cent was treated as entertainment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures had been issued for the purpose of putting up new projects as well as expansion of the existing industrial undertaking. The assessee had claimed the expenditure as revenue expenditure in assessment year 1988-89 which had been disallowed by the Assessing Officer. In appeal CIT(A) had allowed 1/9th of the expenditure on pro rata basis amounting to Rs. 44,44,444 as redemption period was for 9 years. Following the said decision CIT(A) allowed Rs. 44,44,444 this year also. Aggrieved by the said decision the assessee is in appeal. 2.7.1 We have heard both the parties in the matter. We find that the same issue had been considered by the Tribunal in assessee's own case in assessment year 1994-95 in ITA No. 2326/M/2001. In the said year the assessee had argued that entire expenditure was allowable as revenue expenditure in the year of issue i.e., assessment year 1988-89 and if not allowed in that year should be allowed in assessment year 1994-95 in which the premium was paid. Alternatively the assessee had also argued that in case the expenditure was not allowable at all the expenditure should be capitalized and depreciation should be allowed. The Tribunal referred to earlier order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etting up or formation of or as contribution to any fund/trust, company, association of persons, body of individuals, society registered under the Societies Registration Act or other institution for any purpose except where sum is so paid for the purposes and to the extent provided for under clause (iv) or clause (v) of sub-section (1) of section 36 or as required by or under any other law for the time being in force. The assessee argued that provisions of section 40A(9) were not applicable and the expenditure was allowable as revenue expenditure under section 37(1). CIT(A) however following the decision in assessment year 1994-95 confirmed the disallowance. Aggrieved by the said decision the assessee is in appeal. 2.9.1 We have heard both the parties in the matter. We find that the same issue had been considered by the Tribunal in assessee's own case in assessment year 1994-95 in ITA No. 2326/M/2001. In that year also disallowance had been made under section 40A(9) in respect of payments made to Indrayan School. The Tribunal however following the decision in assessment years 1992-93 and 1993-94 allowed the claim. Facts this year are identical. Therefore following the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on the ground that the shop keeper did not accept cheque. (ii) Rs. 13,620 paid to M/s. Gopal Fabricators towards tarpoline covering on the ground that the contractor was not having bank account. (iii) Rs. 22,112 paid to Siddlingeshwar Dal Industries for purchases of various provisions during strike period when several new workers were hired and had to be fed. It was submitted that the party had insisted on cash payments. (iv) Rs. 18,805 paid for car repairing and purchase of spare parts. It was explained the garage to whom the payments were made had to pay other shop-keepers, who accepted only cash. (v) Rs. 12,480 paid to Ajanta Publicity towards arrangement of lighting. It was explained that the party did not have bank account. (vi) Rs. 11,500 paid for car repairing. It was explained that the necessary spare parts were purchased from various shops. 2.10.5 CIT(A) thus confirmed the disallowance to the tune of Rs. 2,79,827 aggrieved by which the assessee is in appeal. 2.10.6 Before us the Learned AR for the assessee submitted that payments are made in cash under exceptional situations covered under rule 6DD(j) and therefore no disallowance should have been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sue on which no tax had been deducted at source. Assessing Officer therefore did not consider the said amount and allowed deduction under section 35 only to the tune of Rs. 1,28,752. In appeal the assessee submitted that the payments had been made for services rendered by non-resident outside India and therefore such payment was not Income-taxable in India in the hand of recipient and no TDS was therefore required. It was also submitted the payment could also not been taxed as a business profit as the non-resident did not have any permanent establishment in India. CIT(A) however did not accept the contentions raised and agreed with the Assessing Officer that payment was fees for technical services and the income had accrued or arisen in India on which tax was required to be deducted. CIT(A) accordingly confirmed the action of the Assessing Officer aggrieved by which the assessee is in appeal before the Tribunal. 2.11.1 Before us the Learned AR for the assessee at the very outset submitted that the claim was not pressed as the same had already been allowed by the Assessing Officer in assessment year 1999-2000. The ground raised by the assessee is therefore dismissed as not pressed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd and had been gone into by the lower authorities. Therefore based on such facts which were part of assessment records question of law can always be raised by the assessee before the Tribunal for the first time as held by the Hon'ble Supreme Court in case of National Thermal Power Co. Ltd. (NTPC) v. CIT [1998] 229 ITR 383. 2.13.2 The Learned DR on the other hand opposed the admission of additional ground. It was submitted that the legal ground no doubt could be raised before the Tribunal for the first time but the ground should be such which could be adjudicated on the basis of facts available on record. It was pointed out that the decision of the Special Bench in case of Reliance Industries Ltd. (supra) related to sales tax exemption scheme formulated by the Maharashtra Government whereas the sales tax incentive in the present case related to the scheme framed by the U.P. Government. Each scheme had its own features and therefore whether the decision of the Special Bench applied in the case of the assessee or not could be decided only after examination of the incentive/exemption scheme in case of the assessee which was not on record. The Learned DR referred to the judgment of H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer rather than decline to permit the assessee to raise the additional ground. The High Court allowed the case of the assessee for raising the additional ground. It was further argued that adjudicatability of the ground was different from raising of the ground. The principle was settled by the Hon'ble Supreme Court in case of NTPC Ltd. (supra) that in case the question of law arose on the basis of facts available on record which was relevant to decide the tax liability of the assessee, the same has to be allowed to be raised for the first time before the Tribunal. In case, adjudication of the ground required some further material the same could always be restored to the file of Assessing Officer, it was submitted. 2.13.4 We have perused the records and considered the rival contentions carefully. The dispute is regarding raising of additional ground for the first time before Tribunal regarding exclusion of the sales tax exemption of Rs. 1,14,51,012 provided to the assessee by the U.P. Government which was included in total sales in the computation of total income. The assessee had not claimed deduction on account of the said exemption either before the Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant facts. But on this ground, the assessee cannot be denied its right to raise the ground which arises on the basis of facts on record and which is relevant for determining the tax liability of the assessee correctly. We therefore admit the additional ground raised by the assessee. Since adjudication of the ground will require going into the incentive scheme framed by the U.P. Government which was not available before the lower authorities, the issue is restored to the file of Assessing Officer for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. 3. The appeal by the department in ITA No. 3614/M/2002. The revenue has raised disputes on seven different grounds which have been dealt with in the succeeding paras. 3.1 The ground No. 1 is regarding expenditure incurred on sales and press conference totalling Rs. 11,45,432. The Assessing Officer had disallowed the expenditure treating the same as entertainment expenditure. In appeal CIT(A) noted that the expenditure was incurred mainly on meals in hotels during the course of sales conferences. The participants of the sales conferences were stockists, dealers and agents et ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ium of Rs. 4 crores was paid in the year of redemption. CIT(A) has allowed proportionate premium during the entire period of holding which was 9 years and accordingly a sum of Rs. 44,44,444 has been allowed this year. We have already confirmed the order of CIT(A) following the decision of Tribunal in assessment year 1994-95 in the assessee's own case and in view of our said decision vide para 2.7.1 of this order the ground raised by the revenue is dismissed. 3.4 The fourth dispute is regarding addition of Rs. 39,42,289 being the value of unutilized Modvat credit. The Assessing Officer had made addition of Rs. 39,42,289 on account of Modvat credit in relation to closing stock. In appeal CIT(A) following the judgment of Hon'ble High Court of Mumbai in case of CIT v. Indo Nippon Chemicals Co. Ltd. [2000] 112 Taxman 555 deleted the addition made aggrieved by which the revenue is in appeal. 3.4.1 Before us the Learned AR for the assessee submitted that the issue was covered in favour of the assessee by the judgment of Hon'ble Supreme Court in case of CIT v. Indo Nippon Chemicals [2003] 261 ITR 275. The Learned DR fairly conceded that the issue was covered against the revenue. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the judgment of Hon'ble High Court of Mumbai in case of Modella Woollens Ltd. v. CIT [1979] 120 ITR 726. The Assessing Officer pointed out that in that case expenditure incurred for construction of a pucca approach road for factory premises was held not allowable as revenue expenditure. Assessing Officer therefore disallowed the claim as capital expenditure. In appeal CIT(A) agreed with the assessee that the new unit was a part of existing business as there was unity of control, common management, interlacing, interconnection, and interdependence between different units. CIT(A) also observed that judgment of Hon'ble High Court in case of Modella Woollens Ltd. (supra) relied upon by the Assessing Officer was distinguishable as in that case the assessee had taken existing kachha road attaching the factory premises on lease for 99 years and expenditure was incurred to make pucca road for transportation of goods to and from the factory. In the present case CIT(A) noted that the assessee was not the owner of the road constructed. CIT(A) further observed that similar expenditure incurred by the assessee in assessment years 1997-98 and 1998-99 had been allowed by the Assessing Officer a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or not. The Learned AR pointed out that this was not the ground on which addition had been made by the Assessing Officer. He however admitted that the assessee had approached the State Government for construction of the road which was linked to the new plant. The Learned DR however drew the attention of the Bench to the submissions made by the assessee before CIT(A) as mentioned at page 27 of the order of CIT(A) in which it was clearly stated that the plant started commercial production only in February 1998 and therefore during the year it was only at construction stage. The Learned AR for the assessee reiterated his earlier stand that expenditure has to be allowed even if the plant had not become operational during the year. He referred to the judgment of Hon'ble High Court of Mumbai in case of Excel Industries Ltd. (supra) in which case also it was pointed out that similar expenditure had been allowed in case of a new unit. He also referred to the judgment of Hon'ble High Court of Delhi in case of Saw Pipes Ltd. (supra) in which expenditure had been allowed under similar circumstances. The Bench however drew the attention of the Learned AR for the assessee to the earlier judgme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... once it is found that the capital has been borrowed for the purpose of business irrespective of the fact whether borrowed funds were utilized for acquisition of capital assets or construction of a new unit if the new unit is found to be part of the existing business. The position is however different in relation to allowability of expenditure other than interest under the provisions of section 37(1) as expenditure under the said section can be allowed as revenue expenditure only if the same is not for acquisition of any capital asset. 3.6.4 Whether a particular expenditure incurred for the purposes of business is a capital expenditure or revenue expenditure will depend upon facts and circumstances of each case. Lump sum payments or the test of enduring benefits is not conclusive in deciding whether a particular expenditure is revenue or capital in nature as held by Hon'ble Supreme Court in case of Empire Jute Co. Ltd. (supra). The Hon'ble Supreme Court in the said case held that the expenditure incurred is capital if it has resulted into any advantage in the capital field but if the advantage consisted merely in facilitating the assessee's business or enabling the management and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on certain judgments in support of the case which in our view was distinguishable. In case of Excel Industries Ltd. (supra) relied upon by the Learned AR, the assessee who was manufacture of chemicals had set up a new unit for manufacture of phosphorous. The unit had already been set up during the year. Since the manufacture of phosphorous needed large quantity of power, the assessee had approached the Electricity Board who agreed to provide an overhead service line free of cost up to 30 meters from the nearest distribution point. A portion of the cost was paid by the assessee but the service line remained the property of the Board. Thus the assessee had acquired the service line for getting adequate quantity of power for running the new unit which had already been set up during the year. Therefore it was held that since the assessee was not owner of the power line, the expenditure was only for efficient and more profitable working of the new unit and was thus allowable as revenue expenditure. In case of the assessee the new unit was still under construction. The case would have been different if the unit was already set up and the expenditure was incurred for efficient working of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases where the new unit had already been set up and the units/factories were working and therefore it was held that the expenditure was incurred for efficient working of the existing business. The said decision therefore cannot be applied to the facts of the present case in which the new unit was under construction. 3.6.7 In the present case as pointed out earlier the expenditure on approach road was linked to the new unit which was an addition being made to the existing profit earning apparatus of the assessee company and therefore the expenditure incurred in relation to addition/augmentation to the existing profit earning apparatus has to be considered as capital expenditure. The Learned AR for the assessee argued that these aspects had not been considered by the authorities below and therefore could not be considered by the Tribunal. We are unable to accept the accept the argument of the Learned AR that the Tribunal could not consider new aspects which were not gone into by the authorities below. The issue raised before the Tribunal is whether the expenditure was capital or revenue in nature and in deciding the issue the Tribunal has to go into all the relevant aspects and i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Hon'ble Supreme Court in case of Produce Exchange Corpn. v. CIT [1970] 77 ITR 739 in which it was held that unity of control and not nature of two lines of business was a decisive test to determine whether the two business were the same or not. 3.7.3 The above position was reiterated by the Hon'ble Supreme Court in case of B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647 in which the Hon'ble Supreme Court held as follows : "The decisive test as held by this court in Produce Exchange Corporation (1970) 77 ITR 739 (SC) is unity of control and not the nature of two lines of business." 3.7.4 In relation to the various queries of the Assessing Officer as to whether the new project was part of the existing business or a separate business the assessee submitted that there was complete interconnection, interlacing, interdependence and unity of control in relation to different units of the assessee. It was explained that all the units located at different parts of the country were under direct control and the supervision of the board of directors of the company. The assessee had a common business administration and as per the policy followed employees were transferable from on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessee disputed the decision of Assessing Officer before CIT(A) and reiterated the submissions made earlier that the new units were part of the existing business. In addition to the judgments referred to earlier the assessee placed reliance on the following judgments. (i) Hindustan Zink Ltd. v. Dy. CIT [2000] 74 ITD 25 (JP) (ii) Core Healthcare Ltd. v. Dy. CIT [2001] 78 ITD 1 (Ahd.) (TM) (iii) Dy. CIT v. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj.). 3.7.7 CIT(A) after considering all the submissions of the assessee and the cases cited agreed that the case of the assessee was similar to the case of Core Healthcare Ltd. (supra) in which the Tribunal allowed deduction on account of interest in relation to the new unit and the said decision of the Tribunal was subsequently upheld by the Hon'ble High Court of Gujarat in Core Healthcare Ltd. (supra). CIT(A) also referred to the decision of Tribunal in case of Grasim Industries Ltd. v. Dy. CIT [1999] 64 TTJ (Mum.) 357. In that case, the assessee was producing viscose, stapled fiber, rayon, pulp, caustic soda, cement, software, textile, heavy engineering machinery and chemicals. The assessee raised funds for puttin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the total income. The provisions of allowing interest on capital borrowed are contained in section 36(1)(iii). The only requirement of the said section is that the capital should be borrowed for the purpose of business and the interest expenditure should be incurred. Once these conditions are satisfied the interest has to be allowed as a revenue expenditure irrespective of the fact whether borrowed funds are used for acquisition of capital asset or for setting up of new units. Therefore, the point to be considered is whether the new unit was an independent business or part of the existing business. In case the new unit found to be part of the existing business the interest on capital borrowed has to be allowed as deduction. 3.7.10 It is a settled legal position that whether the two businesses are the same business or different business does not depend upon the nature of two businesses. The tests to be applied are whether there is interconnection, interlacing, interdependence and unity of control between the two businesses as held by Hon'ble Supreme Court in case of Prithvi Insurance Co. Ltd. (supra). The Hon'ble Supreme Court found in that case that interconnection, interlaci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal by the department. 4.1 The first ground is regarding increasing the opening stock by Rs. 12,33,176 being the amount by which the closing stock of assessment year 1994-95 had been increased by the Assessing Officer. The Learned AR however submitted that the addition made in assessment year 1994-95 on account of closing stock has since been deleted and the ground has thus become infructuous. The ground raised by the assessee is therefore dismissed as infructuous. 4.2 The ground No. 2 is regarding allowability of expenses on issue of debentures. In this ground the assessee has made an alternate claim that in case the expenses were not allowed as revenue expenses, the same should be considered under section 35D or should be capitalized on which depreciation should be allowed. The learned AR for the assessee submitted that expenses on non-convertible debentures (NCD) have already been allowed and expenses in relation to fully convertible debentures (FCD) have been allowed under section 35D. The ground raised by the assessee is therefore dismissed as infructuous. 4.3 The ground No. 3 is regarding expenditure of Rs. 8,49,13,250 incurred towards construction of access roads to th ..... 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