TMI Blog2001 (5) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... In not appreciating the fact that no income had accrued to the appellant until the imports were made and the raw materials were consumed, which events took place in the subsequent years; (b) In relying on the appellate orders for the earlier years wherein it was held that the advance licence benefit becomes receivable the moment export is made and accordingly, export obligation had been fulfilled before the end of the year inspite of the fact that the benefit accrued only when the raw materials were actually imported and not at the time of export; (c) In not appreciating the fact that unlike import entitlements, the advance licence benefit was not transferable and accordingly no income could accrue to the appellant until the raw materials were actually imported. 1.3 In view of the above arounds of appeal, the appellant prays that the Assessing Officer be directed to exclude from the total income, the advance licence benefit receivable amounting to Rs.8,29,87,603 and to reduce the total income accordingly. 2.1 The assessee had shown this amount as its income in the published Audited Annual Accounts. However, in Schedule R forming part of the Balance Sheet and the P L Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excluding the said advance licence benefit. In case, on assessment, the said advance licence benefit is taxed, the deductions under sections 80-I and 80-IA should also be recomputed after taking into account such advance licence benefit. 2.4 The assessee also include in its income under the head "Profits and Gains of Business" a sum of Rs.4,76,84,742 as Advance Licence Benefit Utilised with reference to Note No. 6 of Notes to computation which is also reproduced below:-- 6. Advance Licence benefit utilised--In the computation of total income, a sum of Rs.4,76,84,742 has been added back in respect of advance licence benefit utilised during the year. The said addition has been made in view of the fact that the advance licence benefit receivable had been excluded from the total income in the earlier assessment years. Further, in the computation of total income, while computing the deductions under sections 80-I and 80-IA, the profit of the concerned undertakings has been considered after including the said advance licence benefit utilised. It is submitted that in case the said advance licence benefit receivable is taxed in the earlier assessment years, the aforesaid amount in res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he right to import duty-free raw material becomes absolute. It is therefore clear that such a right to import duty-free raw material accrued to the assessee soon after the corresponding export commitment has been fulfilled. The assessee has accounted for the net amount of such benefit by way of ALBR at the end of the accounting year, which represents the income already accrued to the assessee. The Assessing Officer further observed that the CIT(A), Surat in his appellate order for assessment years 1992-93 and 1993-94 has confirmed the order of the Assessing Officer. The Assessing Officer relying upon the assessment orders and the orders of the CIT (A) pertaining to assessment years 1992-93 to 1994-95 rejected the assessee's claim for grant of deduction of Rs.8,29,87,603. 2.7 It may be relevant here to refer to the Note in respect of taxability of ALBR, submitted by the assessee during the assessment proceedings, a copy whereof has been placed at pages 183 and 184 of PB-I. In the said Note, after reproducing Note No. 6 of Schedule R--Notes on Accounts appended with the Audited Balance Sheet, the assessee has submitted that the said amount of Rs.8,29,87,603 has been excluded fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax, item of duty exemption was neither income on accrual basis nor had it actually been received nor did it afford any tangible benefit to the appellant in the form of concession of duty in the year of account for the simple reason that the liability to pay duty did not exist during the relevant year since no goods were imported. Thus, the amount of Rs.31,75,231 could at the best be described as an estimated value of concession or saving in import duty that the appellant expected to earn at the time of importing raw material. Such concession or such benefit could only be accounted for in the year in which the imports were effected. No income could be said to have accrued or arisen in respect of advance licence received in the current period on the goods exported because no income in real terms had accrued. No real income had accrued to the appellant by virtue of getting or expecting to get advance licence irrespective of the fact that such estimated benefit was accounted for in the books of the appellant. This fact was not determinative of the issue of the taxability of this amount. Therefore, the amount of Rs.31,75,231, being the value of material import entitlement receivable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 41 ITD 142. The appellant had stated before the Assessing Officer with it's letter dated 31-1-1995, that, it applies to the Controller of Export Import to get advance licence for import of duty-free raw-material against anticipated exports. Such licence is issued against certain export commitments, and that licence was not transferable. The appellant makes exports and also does duty-free import of raw-material against that licence, since it takes time to get raw-material imported from foreign countries, hence the appellant during that period utilizes local raw-material which costs more than duty-free imported material. This difference in cost is taken as income in accounts. It was stated by the appellant in the above mentioned letter as under: 'At the end of the year it may happen that the company has already made certain exports and not made duty-free imports. The company has used local raw-materials which is costlier and the difference is charged as income.' The arguments of the appellant are, that the benefit to the appellant is in the form of concession in custom duty for importing goods, and the appellant may not import any goods at all in future. The benefit is ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year 1985-86. Thereafter, amendment has been made in law, since the taxability of export incentives has been a subject-matter of litigation. In order to give finality to the view that such export incentives are of revenue nature and hence taxable, and to end all judicial controversies thereabout, the Finance Act, 1990 has inserted in section 28 of the Income-tax Act, 1961. -- Clause (iiia) read with section 2(24)(va) (w.r.e.f 1-4-1962) so as to make the profit on the sale of import entitlement licences taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1962-63; -- Clause (iiib) read with section 2(24)(vb) (w.r.e.f 1-4-1967) so as to make cash assistance (by whatever name called) received or receivable by any persons against exports under any scheme of the Government of India taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1967-68; and -- Clause (iiic) read with section 2(24)(vc) (w.r.e.f 1-4-1972) so as to make any duty of customs and excise repaid or repayable as draw back to any person against exports under the Customs and Central Excise Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not transferable. 4.1 The learned counsel also drew our attention towards the opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India as published in Compendium of Opinions Volume VII-4 on treatment of Advance Licences received for import of duty-free raw materials against export commitments but not realised in the books of account. In the said opinion, the Expert Advisory Committee has, inter alia observed as under:-- "3. With regard to considering the 'estimated future duty benefit' as an income for the period in which the Advance Licences are received or the goods are exported against File Numbers, the Committee notes that one of the major considerations governing the selection and application of accounting policies is 'prudence', according to which profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. On the basis of the facts of the query, the Committee is of the opinion that in view of uncertainty attached to future events related to the earning of the duty benefit no revenue should be recognised in respect of the Advance Licences received in the current period on the goods e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, even the import licences have not been granted in some cases and there is no question of any profit derived from the sale of such licences, as the licences granted to the assessee are not transferable at all. The aforesaid amendment made in section 28 instead of supporting the case of the Revenue, in fact, supports the stand taken by the assessee that no such income can be said to have been really accrued to the assessee until the goods are actually imported and used for production. 4.5 Shri Soparkar submitted that merely because the entry was made in the books of account in the year when the exports were made, the income represented by ALBR cannot be taxed until the raw material is actually imported, which event has taken place in the subsequent year. The amount which does not represent the real income accrued to the assessee cannot be charged to tax simply on the basis of the book keeping entry made in the books of account. He placed reliance on the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The relevant extracts from the said judgment are reproduced below:-- "It is true that this court ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be treated as decisive or conclusive in relation to determination of the question relating to taxability of an expenditure under the provisions of the Act. If on a true and correct interpretation of the relevant provisions of law, the assessee is entitled to deduction of a particular expenditure, manner and mode of making an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things." 4.7 Shri Soparkar then drew our attention to the decision of the Special Bench of the ITAT Hyderabad Bench in Nagarjuna Investment Trust Ltd.'s case. The decision of the Special Bench of Hyderabad Tribunal in the above referred case has been followed by the Tribunal Ahmedabad Bench in the case of Core Health Care Ltd. It is, therefore, not necessary to once again reproduce the relevant extracts from the decision of the Special Bench. 4.8 Shri Soparkar then relied on the decision of the Tribunal Ahmedabad Bench "C" in the case of Vadilal Dairy International Ltd. v. Dy. CIT [IT Appeal NO. 500 (Ahd.) of 1997], a copy whereof has been placed at pages A-77 to A-100 of PB-IV. At page A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income therefore cannot be said to have accrued in favour of the assessee until the goods are actually imported. 4.10 Shri Soparkar also contended that the learned CIT (A) has grossly erred in relying on the decision of the ITAT in the case of Pratibha Syntax Ltd., which decision has nothing to do with the assessee's case. The facts of that case are clearly distinguishable with the facts of the present case. 4.11 Shri Soparkar strongly relied on the decision of the Tribunal in the case of Jamshri Ranjitsinghji Spg. Wvg. Mills Ltd. He submitted that the facts of the aforesaid decision are identical with the facts of the present case. The ITAT Bombay Bench while deciding the aforesaid case had, inter alia, relied on an earlier decision in the case of Amar Dye Chem. Ltd. [RA No. 336 (Bom.) of 1981 arising out of IT Appeal No. 3897 (Bom.) of 1974-75, dated 19-8-1981] referred to at page 148 of 41 ITD. In that case also it was held that the benefit that the assessee expected to obtain by virtue of Advance Licence to import duty-free goods would accrue to it only on the happening of an event viz., the import of the goods in question, which admittedly had not taken place during th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that decision deals with the tax liability under section 28(iv) only. The taxability of the aforesaid income already accrued to the assessee by way of right to import duty-free raw materials has to be examined keeping in view the nature of such right acquired by the assessee under the Export and Import Policy announced by the Government of India. The learned CIT-DR submitted relevant extracts from the Export and Import Policy relating to the period from 1-4-1992 to 31-3-1997 in the Compilation and drew our attention to various clauses of Chapter VII dealing with Duty Exemption Scheme. Under the Duty Exemption Scheme, import of raw materials etc. required for direct use in the product to be exported may be permitted duty-free by the competent authority under the categories of licences mentioned in the said chapter. Clause 48 of the said Scheme provides that an Advance Licence is granted for the duty-free import of inputs. Such licence shall be issued in accordance with the policy and procedure in force on the date of issue of the licence and shall be subject to the fulfilment of a time-bound export obligation and value addition as may be specified. Advance Licences may be either v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emption Scheme. With this background, the learned CIT-DR proceeded to explain that the income by way of benefit receivable as a result of entitlement to import duty free raw material accrues to an assessee moment the export obligation is discharged by the exporters. The exporters acquire legal right to import raw material required for production of goods exported or to be exported by the assessee. 5.2 Shri Dave, the learned CIT-DR invited our attention to Paper 8--Indirect Taxes published by the Board of Studies--The Institute of Chartered Accountants of India. Para-12.3 of the said Paper deals with duty deferment (section 143A). The relevant extracts are reproduced below:-- "Section 143A provides the solitary exception for deferring payment of duty. It is provided that where any goods are imported against an Import Licence belonging to the category of Advance Licence subject to an obligation to export goods specified in the licence the Asstt. Commissioner may permit clearance of such imported goods without payment of duty leviable thereon. There are at present a few types of such advance licences, namely, Quantity Based Advance Licence, Value Based Advance Licence. These for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e imported without payment of customs duty. A DEEC (Duty Exemption Entitlement Certificate) Book is given to importer and hence it is popularly known as "DEEC scheme". Since the raw material can be imported before export of final products, the licences issued for this purpose are called "Quantity Based Advance Licences". The Advance Licence will be for Actual User only. The import of raw materials is on the basis of quantity based advance licence-Input-Output norms are finalised and quantity allowed to be imported will be based on quantity exported e.g. assume that there are 3 inputs A, B and C--proportion of 50:30:20 as per input-output norms prescribed in EXIM policy, the licence is available for A,B and C in that proportion only as per quantity norms. If quantity for a particular description cannot be imported within the specified value under the certificate, Commissioner of Customs can allow adjustment of individual value within the total value. These facts were explained by the learned CIT-DR with a view to emphasize that the import of specified raw material has a direct nexus with the quantity of goods exported. Therefore, once the goods have been exported, the entitlement of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and therefore it is necessary to account for the value of such benefit in the cost of raw material in the relevant accounting year itself so as to determine the correct cost of goods exported. 5.7 Shri Dave then submitted that the facts in the case of Jamshri Ranjitsinghji Spg. Wvg. Mills Ltd. heavily relied upon by the assessee are clearly distinguishable. The said decision pertains to assessment year 1985-86 when the Export Promotion Scheme was totally different. The year under consideration is assessment year 1995-96 which is governed by the Export and Import Policy relating to the period under consideration. He drew our attention to para-7 of the said decision in which various clauses of Duty Exemption Scheme relating to assessment year 1985-86 have been briefly stated. In that case the assessee had not imported the raw material viz, fibre. The criteria of inputs and exports were also different. The raw material imported by the assessee was not transferable. In the present case it is transferable under certain specified circumstances. He also pointed out that in that case the taxability of such benefit was examined only with reference to section 28(iv). However, in the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal in the case of Pratibha Syntex Ltd. The learned counsel is not right in saying that the said decision is not at all relevant to the point in issue. He drew our attention to para-4.1 at page6 of the said order. The learned CIT (A) in the aforesaid decision has held that the benefit availed of by the assessee on duty free imports satisfies all the three in built conditions of section 28(iiib). The expression "cash assistance" is amplified by the words "by whatever name called" in section 28(iiib). This qualification "by whatever name called" is added to avoid any narrow construction and thus the duty benefit derived by the assessee falls within the ambit of section 28(iiib). 5.10 In para-6, the Tribunal has incorporated the arguments advanced on behalf of the assessee that the duty saved by assessee in terms of the duty free imports cannot be termed as cash assistance. In para-6.1, the arguments advanced on behalf of the Department have been briefly stated. The Tribunal has given its findings in para-13 at pages 24 and 25 of the order. The Tribunal has observed that clause (iiib) does not mean only receipt of cash assistance direct from the Government. The words "by whatever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia or duty paid imported raw materials. (ii) In the first instance, no accounting of import entitlement licences is required as materials on receipt will be accounted at cost and utilised for manufacturing finished goods for export. (iii) However, in the second instance, if there is reasonable certainty as to the receipt of import licence and the measurability of future benefit: (a) the benefit in cost i.e., the difference between the price of locally purchased raw material or the duty paid imported raw material and the international price of raw material should be adjusted in the books by reducing the cost of raw materials already utilised for exports and debiting receivable account in case the licence cannot be sold. Subsequent receipt and utilisation of licence will be a material factor to be considered whilst quantifying the benefit in cost to be accounted. (b) in case the licence can be sold, the lower of cost or value of saleable import licence at year end should be adjusted in the books of account by crediting the profit and loss account and debiting "import licences on hand" and these should be included in current assets. Cost for this purpose would be the loss i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th US$ 3,73,999.81 have not been utilised at all and therefore lapsed and the files have been closed. The statement of licences lapsed is enclosed herewith in Annexure 1." 6.1 After perusing the aforesaid chart, the Bench required the learned representatives of both the sides to consider as to whether such a litigation from assessment years 1992-93 to 2000-2001 in relation to the aforesaid point is going to give any real gain or loss to either side. The taxability of the benefit by way of Advance Licences for importing duty free raw materials has not been disputed by the assessee but the dispute relates only to the year of taxability. The rate of tax in the cases of companies were almost uniform in different years. The learned counsel pointed out that the rejection of assessee's claim for exclusion of such income in the year when the exports were made but raw materials had not been actually imported, has resulted into levy of interest under section 234B and other provisions relating to initiation of penalty proceedings under various provisions of the Act. The Bench required the learned CIT-DR to ascertain from the learned Chief CIT as to whether interest under section 234B could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ended that the effect of such income by way of ALBR was not reflected in the valuation of closing stock. The raw material has been valued at cost and finished goods have been valued by taking into consideration the local cost of raw material purchased. The learned CIT-DR pointed out that such a method of valuation of closing stock may lead to anomalous situation in some years as closing stock appears to have been valued at higher cost. 6.5 Shri Dave pointed out that all these uncertainties or so called contingencies pointed out by the assessee's counsel have duly been taken into consideration by the assessee while accounting for the net benefit accrued during the year under consideration. He drew our attention to the various details and charts submitted in the Compilation marked as Volume V to support this contention. 6.6 A summary statement of product-wise Advance Licence Benefit Receivable as on 31-3-1995 accrued for the year relevant to assessment year 1995-96 has been given at pages 1 and 2 of Paper Book Volume V. A photocopy of the said chart is annexed herewith and marked as Annexure-A of this order. Shri Dave pointed out that the net income accrued during the year unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of such net income accrued to the tune of Rs.8,29,87,602 = 16. The assessee as a prudent trader has therefore clearly kept an adequate margin to meet all such contingencies and uncertainties while accounting for such income in the year when the exports were actually made. The income in question, therefore, cannot be regarded as contingent but it represents income actually accrued to the assessee, which has been estimated in a very systematic and rational manner by the assessee. The assessee cannot therefore contend that the benefit accounted for in the books of account represents notional or hypothetical income. It represents real income, which is also proved by the subsequent events which show that such real income was actually received by the assessee in subsequent years. The figures of Advance Licences utilised and income booked over a period of 9 (nine) years from assessment year 1992-93 to assessment year 2000-2001 clearly shows that the income booked by the assessee in the books of account and income shown in the return of income when the Advance Licences were utilised/lapsed comes to almost a similar figure, The total of income booked in the books of account over a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into play but the notion of real income cannot be brought into play where income has accrued according to the accounts of the assessee and there is no indication by the assessee treating amount as not having accrued. Suspended animation following inclusion of the amount in the suspense account does not negate accrual and after the event of accrual, corroborated by appropriate entry in the books of account, on the mere ipse dixit of the assessee, no reversal of the situation can be brought about. (iii) The concept of reality of the income and the actuality of the situation are relevant factors which go to the making up of the accrual of income but once accrual takes place and income accrues, the same cannot be defeated by any theory of real income. The concept of real income cannot be so used as to make accrued income non-income simply because after the event of accrual, the assessee neither decides to treat it as a bad debt nor claims deduction under section 36(2) of the Act, but still enters the same with a diminished hope of recovery in the suspense account. Extension of the concept of real income to this field to negate accrual after the amount had become payable is contrary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the compensation of Rs.2,34,000 was not taxable under section 10(5A) in the assessment year 1956-57, even though the respondent actually received the amount in 1955. The fact that the respondent had included the receipt in question in its profits and loss account in the year 1955 was a wholly immaterial circumstance. The method of maintaining the accounts was one thing and the actual entries in the accounts maintained was a different thing. What was relevant was method of accountancy and not the actual entries." (E) In Keshav Mills Ltd. v. CIT[1953] 23 ITR 230 (SC), the relevant extract from the Head Note at page 232 is reproduced below:-- "The mercantile system of accounting treats profits or gains as arising or accruing at the date of the transaction notwithstanding the fact that they are not received or deemed to be received and, under that system, book profits are assessed as liable to tax. If an assessee therefore regularly adopts the mercantile system of accounting he would be liable to tax on the profits thus credited by him in his books of account subject to all deductions for bad debts as provided in section 10(2)(xi). Section 4(I)(a) has nothing to do wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If at such relevant time, significant uncertainties exist regarding measurability or collectibility of revenue its recognition is postponed pending resolution of the significant uncertainties. Usually where the right to receive revenue has become vested in the recipient and therefore considered as accrued under the IT Act, its measurability and collectibility is not likely to be significantly uncertain. But in case its measurability and/or collectibility is significantly uncertain, its recognition is postponed under the accrual basis of accounting. Such postponement of revenue recognition is not unknown under the IT Act too which recognises in appropriate cases, the real income theory in determining income under the accrual basis of accounting. The Bombay High Court in the case of Confinance Ltd. 89 ITR 292 has observed as under:-- "In examining a transaction or situation, court would have more regard to reality and speciality of the situation rather purely theoretical or doctrinaire approach." The concept of real income is certainly applicable in judging whether there has been income or not but in every case, it must be applied with care within well recognised limits. Beside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds realised and the bank guarantee/LUT redeemed. This facility shall not be available in cases where the MODVAT/PROFORMA Credit facility or excise relief under Rule 191B of the Central Excise Rules has been availed of. 7.1 The assessee is availing MODVAT facility and therefore the licences are not transferable in the case of the assessee. Factually also the assessee has not transferred any Advance Licence received by them. The learned counsel also drew our attention to various clauses in Hand Book of Procedures which are applicable in the case of the assessee. It may not be necessary to refer to those specific clauses contained in the Hand Book of Procedures as we have gone through all the relevant clauses in the Scheme and Hand Book of Procedures pointed out by the learned CIT-DR as well as the learned counsel. 7.2 The learned counsel further contended that the decision of the ITAT Ahmedabad Bench in the case of Pratibha Syntex Ltd. is not at all applicable to the facts of the present case. He drew our attention to the judgment of the Hon'ble Supreme Court in the case of CITv. Sun Engg. Works (P.) Ltd. [1992] 198 ITR 297 in which it has been held that the observations made in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of JCT Ltd. is also clearly contrary to the judgment of the Hon'ble jurisdictional High Court in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 (Guj.). 7.6 Shri Soparkar submitted that the decision in Jamshri Ranjitsinghji Spg. Wvg. Mills Ltd.'s case relied upon by the assessee has been incorrectly distinguished by the learned CIT-DR. The export incentive scheme may be different but the provisions contained in the said scheme are identical with the export incentive scheme applicable in the case of the assessee for the years under consideration. He strongly urged that the facts of the case in Jamshri Ranjitsinghji Spg. Wvg. Mills Ltd. are absolutely identical and the said decision is fully applicable on the facts and circumstances of the present case. 7.7 As regards the reliance placed by the learned CIT-DR on the judgment of the Punjab Haryana High Court in the case of Punjab Bone Mills is concerned, the learned counsel pointed out that the Hon'ble High Court in that has held that the date of the export would not by itself give rise to an income unless the assessee laid a claim to receive the income from the Government. The income by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was transferred to the Gujarat State Electricity Board and, as a result, the assessee-company was not in a position to take steps to recover the enhanced charges. In the suit that was filed on May 6, 1969, challenging the enhancement in charges made in 1963, and seeking a declaration that the assessee-company was not entitled to recover more than 31 paise per unit for light and fans and 20 paise per unit for motive power the trial court, while decreeing the said suit, had given a declaration in these terms. The said declaration was not confined to the period subsequent to March 31, 1969. After the decision was taken by the assessee-company to enhance the charges, it was not able to realise the enhanced charges on account of pendency of the earlier representative suits of the consumers followed by the letter of the Under-Secretary to the Government of Gujarat and the subsequent suit of the consumers and during the pendency of the subsequent suit the management of the undertaking of the assessee-company was taken over by the Government of Gujarat under the Defence of India Rules, 1971, and the undertaking was subsequently transferred to the Gujarat State Electricity Board. Even thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... versed the next year because in fact the nature of the transaction was changed. The assessee did not receive any real income." 7.11 Shri Soparkar also placed reliance on the decision of the Tribunal in the case of Gupta Garments v. Asstt. CIT [1995] 53 ITD 362 (Mad.) to support his contention that such income by way of ALBR can be charged to tax only in the year when the duty free raw material is actually imported. The learned counsel thus strongly urged that the addition of Rs.8,29,87,603 made by the Assessing Officer and confirmed by the learned CIT(A) should be deleted. 8. We have carefully considered the submissions made by the learned representatives and have perused the relevant documents, the orders of the learned Departmental Authorities, to which our attention was drawn during the course of hearing. We have also gone through all the judgments cited by the learned representatives as well as the decisions referred to in the orders of the CIT(A) and the Assessing Officer. 9. The principles of law as enunciated by the various judgments of the Hon'ble Courts, relied upon by the learned representatives of the parties and as emerging from a plain reading of the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r income has really accrued or not in the relevant previous year. 13. Section 145 of the Act recognises a right of a taxpayer to adopt any of the recognised methods of accounting. The choice of choosing the method of accounting always remains with the taxpayer. The method of accounting adopted by the assessee-taxpayer consistently and regularly cannot be discarded by the Departmental Authorities on the view that he should have adopted a different method of keeping accounts. The method of accounting regularly employed may be discarded only if in the opinion of the Taxing Authorities income of the taxpayer cannot properly be deduced therefrom. 14. Let us examine the facts of the present case in the light of the aforesaid principles of law emerging from the various decisions and the provisions of law referred to hereinbefore: (A) The assessee has accounted for the net income by way of Advance Licence Benefit Receivable amounting to Rs.8,29,87,603 in their books of account in the year under consideration. The taxability of such income has not been disputed by the assessee. The assessee has only disputed the year of its taxability. While finalising the books of account, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. (D) The assessee-company has maintained its accounts on accrual basis, which has been made mandatory by the amendment of section 209(3) of the Companies Act, 1956 with effect from 15-6-1988. The accrual basis of accounting records financial effect of the transactions, events and circumstances of an Enterprise in the period in which they occur rather than recording them in the period in which cash is received or paid by the Enterprise. The main objective of accrual basis of accounting is to relate the accomplishments (measured in the form of revenue) and the efforts (measured in terms of cost), so that the reported net income reflects true and fair position of the profit/lors of the company for the relevant period. The Accounting Standard (AS-9) issued by the Institute of Chartered Accountants of India, lays down two conditions which must be fulfilled for recognition of revenue in the course of business activities of an Enterprise: (a) The revenue should be measurable; and (b) It should not be unreasonable to expect ultimate collection. Thus, where the revenue is not measurable and/or where it is unreasonable to expect ultimate collection, recognition of revenue is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of costs into appropriate periods so that relevant incomes and expenses are matched The profit of an accounting period is the revenues from transactions less expenses incurred in producing these revenues. If expenses cannot be treated to specific items of revenues, they are generally written off in the year in which they are incurred. The problem of determining which expenses are associated with particular revenues, can be solved by applying the following two steps: (1) First, to determine whether they are to be recognised for that particular accounting period (applying realisation concept); (2) Secondly, to determine the expenses that are associated with these revenues (applying accrual concept). 17. The Conservatism (or Prudence) Concept has been explained in the said Publication as under: "Where there is a reasonable choice of accounting treatments, the concept of conservatism refers to early recognition of unfavourable events. This concept requires an accountant to record an event in such a way as will show a weaker state of affairs than what actually exists and thereby drawing attention to events that result in the lowest value of an income. Since this concept requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licence for importing duty free raw material accounting to the norms specified in the relevant Import/Export Policy. Such a right is a valuable right, and it becomes a perfect, vested and absolute right on discharge of export obligation. It has a direct nexus with the corresponding exports already executed in the year under consideration. The benefit so receivable by way of import of duty-free raw material relates to the same goods which have been exported in the accounting period. Thus the revenue so accounted for in the books of account representing the value of Advance Licence Benefit Receivable by the assessee is matching in a more realistic way with the goods exported by the assessee. The method of accounting adopted by the assessee for booking such income in the books of account in the year in which exports have been made represents more realistic, true and fair position of profits earned during the year under consideration. 20. The contention of the learned counsel that such income was contingent and uncertain until the goods are actually imported, is not in conformity with the method of accounting of the accrual concept adopted by them in relation to accounting for of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l not be decisive and conclusive and such an entry cannot override the provisions of section 5 of the Act. If an income has not really accrued or arisen to the assessee in the relevant year, the same cannot be held to be taxable merely because the book keeping entry has been made in the books. The ITAT Special Bench in the case of Nagarjuna Investment Trust Ltd. was considering the question relating to the taxability of income received under hire purchase and lease agreements executed by the assessee with various customers. The assessee in that case adopted a system of accounting called SOD (sum of digits)/Indexing method for recognition of its income from business of hire purchase and leasing on time proportion basis taking into consideration the amount outstanding from time to time and the rate of interest applicable. The Special Bench after taking into consideration various judgments and the other material held that so far as financial income/interest income in relation to hire purchase agreement recognized on the basis of SOD method by the assessee in its books of account is concerned, the entry in the books of account represents real income accrued to the assessee in the relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en in sections 2(24) and 28 had not been amended till that time, which have been amended by the Finance Act, 1990 with retrospective effect from 1-4-1962 onwards. That decision deals with the tax liability under section 28(iv). In the present case the taxability of such income is not in dispute but only the year of its taxability is in dispute, The accrual system of accounting was not mandatory according to the provisions of the Companies Act in assessment year 1985-86, which has now been made mandatory by amending the provisions of section 209(3) with effect from 15-6-1988. The learned CIT (A) has also given elaborate reasons in the order passed by him as to how the aforesaid decision is distinguishable with the facts of the present case. The various other decisions relied upon by the learned counsel are also distinguishable on facts, as is clear from the detailed discussion made hereinbefore. 23. All other decisions which have been cited by the learned counsel deal with the exceptional items which were excluded or included from the profits shown as per books of account on the ground that such items of income are in conflict with or are beyond the scope of section 5 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have therefore applied their serious attention to this item of income accounted for in the books of account, as is apparent from the fact that a detailed note in the "Notes of Accounts" has been given in this regard forming part of the Balance sheet authenticated by the Board of Directors. The accounts of the company have been audited by an eminent firm of Chartered Accountants M/s S.V. Ghatalia Associates, who have not in any manner qualified their audit report in respect of the aforesaid income of Rs.8,29,87,603 accounted for in the books of account. Thus the true and fair position of the profits as per P L Account of the company including recognition of such income on accrual basis during the relevant year has also been confirmed by a well known firm of auditors. The Annual Audited Accounts have been approved by the Company in its General Meeting. 25. The assessee acquired a legally enforceable right to import duty free raw material under the relevant Duty Exemption Scheme in the year when it discharged its obligation of exporting the goods in the year under consideration. The benefit accounted for in respect of duty free raw material has a direct nexus with the export ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonably anticipate that such substantial benefit by way of duty free import of raw material is surely and certainly receivable by the assessee in consideration of the goods exported by them. There may be some difficulty in quantification of the value of such benefit or some contingency or uncertainty about the quantum of such income at the end of the relevant accounting year. The learned counsel submitted that such income is contingent depending upon various factors such as fluctuation in the foreign market, fluctuation in foreign exchange rate, fluctuation in rate of raw material in the domestic market and other such factors. All these factors may cause some difficulty in quantification of value of such benefit at the end of the relevant year but it can not lead to the conclusion that substantial benefit receivable under the Export Promotion Scheme is totally contingent or uncertain even after discharge of the export obligation. The appellant company while accounting for such income has adopted a very rational, scientific and systematic method of estimating such income. A perusal of Annexure-A of this order gives a summary of profit by way of Advance Licence Benefit Receivable a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account: 2.1 On the facts and in the circumstances of the case and in law, the Commissioner of Income-tax in holding that the deduction claimed in respect of interest amounting to Rs.1,38,89,304 under section 36(1)(iii) being interest capitalised in the books of account in respect of the unit under construction at Jhagadia, ought to be considered as capital expenditure and accordingly disallowed. 2.2 In doing so, the Commissioner of Income-tax (Appeals) erred in the following respects: (a) In not appreciating the facts that the deduction was clearly admissible under the provisions of section 36(1)(iii) since the said interest represented interest on borrowings for the purpose of expansion of the existing business; (b) In not following the decision of the Gujarat High Court in the case of Alembic Glass Industries Ltd. inspite of the fact that the ratio of the said decision was clearly applicable as the facts were identical and the said decision was rendered by the jurisdictional High Court. (c) In not appreciating the fact that the appellant had offered the short term capital gains in respect of the said unit at Jhagadia in the return of income for assessment year 1996-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eferred to in the assessment order. II(3). The CIT (A) in para-2.1 has observed that out of interest amount of Rs.5,08,22,201, only an amount of Rs.1,38,89,304 pertains to the new unit under construction at Jhagadia. The balance amount of interest is the normal amount of interest payable on borrowings taken for the purpose of business. The CIT (A) has specifically observed in para-2.1 of his order that it was submitted on behalf of the assessee that in the next year the appellant has transferred Jhagadia Unit to its subsidiary company and has offered to tax, the income from short term capital gains. In case, the interest for this year is capitalised, the income from short-term capital gains will be reduced in next year. The CIT (A) has further observed that the appellant has expressed no objection if this amount pertaining to Jhagadia Unit is capitalised and the income from short-term capital gains is reduced in the next year. The CIT (A) confirmed the disallowance in respect of interest pertaining to Jhagadia Unit and agreed with the Assessing Officer that it should be capitalised. He however directed the Assessing Officer to allow deduction in respect of the balance amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1993] 44 ITD 403. In this case the assessee clearly stated before the CIT (A) vide letter dated 10-8-1990 that they do not want to press the ground relating to the validity of assessment made under section 147(a). It was held that such a letter constituted a conscious waiver on the part of the assessee. After having waived such a contention before the learned First Appellate Authority, the assessee could not re-agitate the same contention before the Tribunal. II(5)(a). Shri Dave also relied upon the judgment of the Hon'ble Madras High Court in the case of Central Camera Co. (P.) Ltd. v. Government of Madras [1971] 27 STC 112 in which, inter alia, it was held that in the light of the definite attitude taken by the assessee before the Revenue giving up his claim to agitate against the inclusion of certain turnover in the assessable turnover, he cannot be allowed to re-agitate the same in a different way before the appellate authority whose jurisdiction is limited to consider the propriety, legality and regularity of the order appealed against. II(5)(b). The learned CIT-DR also relied on the judgment of the Hon'ble Bombay High Court in the case of Jivatlal Purtapshi v. CIT[19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... butanol manufacturing. This is a pharmaceutical line of business. The unit at Jhagadia was a Caustic Chloride Project, It is one of the important input of the existing business. The unit was thus being set up for production of an item of backward integration. Such unit cannot be treated as part of the same business. The interest otherwise also is not allowable under the provisions of section 36(1)(iii). Shri Dave also invited our attention to the statement of interest capitalised on fixed assets placed at page 187 of the PB-I. The total interest capitalised come to Rs.5,08,22,207 out of which the following items of interest capitalised relate to Jhagadia Unit:-- --------------------------------------------------------------------------- Project Name Location Total interest Capitalised --------------------------------------------------------------------------- Jhagadia Site Ankleshwar 33,59,246 Caustic Chloride at Jhagadia Ankleshwar 94,00,436 PCL3 at Jhagadia Ankleshwar 11,05 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble to assessment proceedings. The essential element of waiver is that there must be a voluntary and intentional relinquishment of a known right. Thus, voluntary choice is the essence of waiver for which there must have existed an opportunity for a choice between relinquishment and the conferment of the right in question. In any event, estoppel is not a basis of liability to assessment under the Income-tax Act, and therefore, the assessee cannot be assessed in respect of an item of income which is not liable to be assessed in his hands simply on the ground that he himself wanted to be assessed on the said amount. With these well settled principles relating to the waiver of estoppel, let us go through the order of the CIT(A) once again in order to find out whether the assessee had consciously waived its legal rights to contest the liability of the aforesaid amount of interest. The learned CIT(A) has simply stated in para-2.1 of his order that the assessee submitted before him that if interest for this year is capitalised, the income from short-term capital gains will be reduced in the next year. The appellant therefore has no objection if this amount pertaining to Jhagadia Unit is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital asset and capital borrowed for meeting requirements of working capital. The Tribunal has followed the judgment of the Gujarat High Court in the case of Alembic Glass Industries Ltd. and the judgment of the Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT [1966] 60 ITR 52. The Tribunal in para 68 of their order has also specifically held that the interest paid on funds borrowed for business purpose including for the purpose of setting up of a new unit of existing running business, qualifies for grant of deduction under section 36(1)(iii), irrespective of the fact whether such new unit has commenced production or not in the year under consideration. Such a view is fully supported by the judgment of the Hon'ble jurisdictional High Court in the case of Alembic Glass Industries Ltd. and also the judgment of the Supreme Court in the case of India Cement Ltd. II(9). The assessee submitted a note in respect of allowability of deduction in respect of interest expenditure under section 36(1)(iii) before the Departmental Authorities, a copy whereof has been submitted at pages 185 to 187 of the paper book. Reliance was placed on the following judgments in the said note: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said decision ought to have been followed; (c) In not appreciating the fact that just because the appellant was allowed to construct a factory building on the said land and had to pay all rates, taxes and charges, it could not be said that the payment of lease premium was a capital expenditure; (d) In not appreciating the fact that it is not form, but the substance of the transaction that matters and since the annual rent fixed was nominal and it could not in any manner be termed as economic rent and the said figure was mentioned in the agreement only for the purpose of retaining the character of transfer of property as a lease and if the substance of the transaction is noted instead of the form, it would be apparent that the said premium represented advance rent. 3.3 In view of the above ground of appeal, the appellant prays that the Assessing Officer be directed to allow deduction in respect of premium on leasehold land amounting to Rs.11,01,70,905. III(1). The assessee has also raised certain additional grounds of appeal. One of the additional grounds raised by the assessee relates to the assessee's claim for grant of proportionate deduction in respect of premium on le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for acquiring the leasehold rights to the tune of Rs.11,01,70,905. The aforesaid deduction was claimed with reference to the Note No. 13 of Notes to Computation of total income, a copy whereof has been placed at pages 45 and 46 of the paper book. The relevant Note No. 13 is reproduced below:-- "13. Premium in respect of leasehold land: In the accounts for the year ended 31-3-1995, additions to leasehold land amount to Rs.17,08,02,560. As per the agreement with GIDC the company is required to construct a building thereon within a specified period. Thereafter, the company is entitled to use and occupy the property with the building thereon for a period of 99 years upon payment of a nominal rent. In the computation of total income, a sum of Rs.11,01,70,905 excluding Rs.6,06,31,655 representing premium in respect of Plot No. 750 which is to be transferred to Search Chem Industries Limited, has been claimed as a business expenditure relying on the decision of the Karnataka High Court in the case of CIT v. HMT Ltd. [1993] 203 ITR 820. It may be further noted that the facts in the instant case are identical to the facts in the above mentioned decision." III(4). The assessee subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng that the sum of Rs.12,09,200 representing lease premium should be allowed as business expenditure. As per the ratio of the aforesaid decision, the question whether the payment of lease premium is in fact payment of advance rent would depend upon the quantum of yearly rent. As stated above since the yearly rent amounts to Rs ..... per annum, which under any circumstances cannot represent economic rent, the payment of lease premium in fact represents payment of advance and the ratio of the aforesaid decision of the Karnataka High Court is squarely applicable as the facts are identical." III(5). A copy of letter of allotment of Plot/Shed No. 746 at Jhagadia Industrial Estate, the relevant licence agreement executed between the appellant company and the GIDC have been submitted at pages 193 to 206 of the Compilation. The Assessing Officer rejected the claim for grant of deduction in respect of the aforesaid sum of Rs.11,01,70,905. He relied on the judgment of the Hon'ble Assam High Court in the case of Panbari Tea Co. Ltd. v. CIT [1961] 42 ITR 672, the judgments of the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT[1955] 27 ITR 3 4 and CITv. CIBA of In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch, eligible for deduction.' (ii) that, in the instant case, the Tribunal had found as a fact that what was paid by the assessee in a lump sum to MIDC was the future rent payable by it and which the assessee had to pay periodically. This was evident from the fact that the assessee was paying Re. 1 per annum which was obviously for the purpose of retaining the character of the transfer of property as a lease and not for any other purpose. The Tribunal was justified in law in holding that the sum of Rs.12,09,200 representing lease premium should be allowed as business expenditure." (B) He also placed reliance on the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. v. Dy. CIT [ITA No. 359 (Ahd.) 1997]. In this case the assessee paid Rs.48,02,616 to GIDC for acquiring lease of land at Panoli. The Tribunal Ahmedabad Bench relying on the judgment of the Karnataka High Court in the case of HMT Limited and the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 and the judgment in the case of Empire Jute Co. Ltd. (124 ITR 1) and the judgment in the case of CIT v. Kirkend Coal Co. [1970] 77 ITR 530 as well as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... araf [1978] 113 ITR 589 (Bom.) and CIT v. Maganlal Mohanlal Panchal (HUF) [1994] 210 ITR 580 (Guj.) to support this contention. III(9). Shri Soparkar submitted that the liability to pay the premium amounting to Rs.11,01,70,905 accrued at the time of entering into lease agreement although the said liability was to be discharged by payment in instalments. He relied on the following judgments to support this contention:-- 1. Calcutta Co. Ltd. v. CIT[1959] 37 ITR 1 (SC) 2. Addl CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.). Shri Soparkar also contended that the new plant set up on the concerned plot were part and parcel of the existing business and accordingly there is no question of commencement of new business. Hence the lease rent cannot be regarded as capital expenditure. Reliance was placed on the following judgments: 1. Alembic Glass Industries Ltd.'s case 2. Anilien Dyestuffs Pharmaceuticals (P.) Ltd's case. III(10) Shri Soparkar submitted that in case the amount of premium paid for acquiring the leasehold rights in the Industrial plot is not allowed as a deduction in the relevant year, then at least proportionate amount of premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as an integral part of the profit making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing, years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om.) (c) CIT v. Indian Oil Corpn. Ltd. [1996] 218 ITR 511 (Bom.) (d) Assam Bengal Cement Co. Ltd.'s case (e) CIBA of India Ltd's case (f) Dalmia Jain Co. Ltd's case (g) V Jaganmohan Rao's case. He submitted that all the aforesaid judgments fully support the view taken by the Assessing Officer and confirmed by the CIT (A). III(13). Shri Dave drew our attention to the letter of allotment dated 23-9-1994 sent by GIDC to the assessee in respect of allotment of plot/shed No. 746 at Jhagadia Industrial Estate. Clause 5 of the said allotment letter was highlighted with a view to show that the assessee paid an amount of Rs.2,13,28,221 being 20% of the total price of the plot/shed. The remaining amount was payable in instalments as specified in the said allotment letter. Shri Dave pointed out that 20% amount was paid towards the purchase price of the plot/shed. The assessee acquired the lights, title and interest over the said plot of land allotted by the GIDC. He further drew our attention to the licence agreement executed between the GIDC in respect of the aforesaid industrial plot allotted by the GIDC. Shri Dave read various clauses of the said licence agreement wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The appellant company acquired from the Government of Assam, for the purpose of carrying on the manufacture of cement, a lease of certain lime-stone quarries for a period of twenty years for certain half-yearly rents and royalties. In addition to the rents and royalties the appellant agreed to pay the lessor annually a sum of Rs.5000 during the whole period of the lease as a protection fee and in consideration of that payment the lessor under took not to grant to pay person any lease, permit or prospective licence for limestone in a group of quarries without condition that no limestone should be used for the manufacture of cement. The appellant also agreed to pay Rs.35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the appellant the sums of Rs.5,000 and Rs.35,000 paid to the lessor by the appellant could be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax authorities, the Appellate Tribunal and High Court on a reference under section 66(1) held that the amount was not an allowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipts. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but in helps the court, having regard to the other circumstances, to ascertain the intention of the parties." (F) Durga Das Khanna v. CIT [1969] 72 ITR 796 (SC): The Head Note is reproduced below:-- "The appellant, who had taken on lease certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises so as to convert it into a cinema house, after spending Rs.35,000 on some alterations, felt the necessity for having some money in order to convert the premises into a cinema house. On 23-2-1946, he entered into a lease by which the building was demised to the lessees for 30 years. The lessees agreed to pay under the lease Rs.55,200 to the appellant towards the cost of erecting the cinema house. The rent agreed to be paid was Rs.2,100 per month and it was payable from 1-6-1946. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not allowable as deduction in the computation of its business profits. (J) CIT v. Banshidhar Sewbhagawan Co. [1977] 109 ITR 828 (Gauhati): The assessee in this case took on lease a tea estate by a deed of lease dated 23-3-1961, for a period of 22 years beginning from 1-1-1961. The total payment to be made during the period of 22 year% was Rs.1,48,499. The question was as to whether the amount so paid by the assessee was a capital expenditure or it represented revenue expenditure. The High Court held that the consideration had been paid for acquiring such enduring benefit and that being so, the expenditure had the real nature of capital expenditure and could not be treated as of a revenue nature because a portion of the payment had to be made by annual instalments. (K) CITv. Project Automobiles [1984] 150 ITR 266 (Bom.): The Head Note is reproduced below:-- "The assessee was carrying on business in automobile parts, petrol pumps, etc. even prior to 1959 on land held on temporary lease, It entered into an agreement with the owners of the land in 1961 whereby the period of lease was to be thirty years. Premium was to be paid at the rate of Re. 1 per sq.ft. The lessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt had been made and the balance to be received giving it a colour of lease, was nothing but conferring ownership rights on the assessee. The assessee was entitled to exercise all the rights in respect of the three flats as the owner. Hence, the expenditure could not be considered to be revenue expenditure nor could the assessee claim the deduction treating the said amount as an advance rent." (M) CIT v. Muhammad Hussain [2001] 114 Taxman 553 (J K): The relevant extract from the Head Note is reproduced below: "It is well settled that the premium paid by the lessee for the grant of a lease, whether payable in lump sum or in instalments over the whole period of the lease alongwith the rent, is normally a capital expenditure. The lessee purchases the term of the lease for the premium. As observed by Greene MR in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR Suppl. 10 (CA), there is no revenue quality in the payment made to acquire such an asset as a term of years. There is a clear distinction between the payment made to acquire an asset and payment made for its use. The periodical payment made for a lease is a revenue expenditure whereas the payment made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question made payment which represented the acquiring of tenancy rights, the assessee in fact acquired a right to possession which was of an enduring nature and, therefore, such expenditure incurred for the acquisition of such a right was capital in nature. A similar view has been taken by the Calcutta High Court in the case of Chloride India Ltd. v. CIT [1981] 130 ITR 61. In this decision, it has been held that, on the facts of the case, the amount was paid for acquiring a right to possession which right was a capital of enduring nature and as such the amount of payment made was to be treated as capital expenditure. This Court in the case of Rajabali Nazarali Sons v. CIT [1987] 163 ITR 7 has considered in detail and reiterated the above principle. This decision holds that a lease creates an interest in immovable property and transfer of leasehold rights which are protected by the provisions of rent restriction statutes, is nothing but a transfer of a capital asset. The price paid to acquire such leasehold rights can only be held to be payment on capital account, there being no revenue quality attributable to the same. Therefore, any payment received, whether by way of compensat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion. The learned CIT-DR thus strongly urged that the claim for deduction in respect of the amount paid for acquiring the leasehold rent can not be granted and the alternative prayer made by the assessee for allowing deduction of 1/99th proportionate amount of such premium is also not allowable. There is no provision in the IT Act for amortization of such capital expenditure incurred for acquiring long-term leasehold rights in factory land/shed. The purchase price paid for acquiring lease hold rights in the land represents cost of acquisition of a capital asset. Depreciation is not allowable under the provisions of section 32 on the cost of land. The land is not a depreciable asset. Allowing 1/99th proportionate amount of premium paid for acquiring leasehold rights will be akin to grant of depreciation or allowing amortization of such capital expenditure without there being a specific provision for grant of such deduction. He therefore urged that the main ground as well as alternative ground raised by the assessee in respect of the aforesaid amount should be rejected. III(16). We have carefully considered the submissions made by the learned representatives of the parties and hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of possession being given to the licensee after execution of this agreement. Clause 10 further provides that the deed of lease shall be prepared in duplicate in accordance with the Form prescribed by the licensor and all costs, charges and expenses of and incidental to the execution of the lease deed and its registration shall be borne and paid by the assessee alone. It was an undisputed fact that the assessee-company has complied with all the conditions and is entitled to have the lease deed executed for a period of 99 years. Shri Soparkar had also submitted a specimen copy of the Standard Form of lease deed, which was executed by the GIDC in favour of the appellant in respect of another plot and submitted that similar lease deed will be executed in favour of the appellant in respect of plot/shed No. 746 at Jhagadia Industrial Estate. He, however, submitted that factually the lease deed had not so far been executed in respect of the aforesaid land but the assessee has complied with all the conditions mentioned in the licence agreement and is eligible for grant of such lease hold rights as per the standard form of lease deed prescribed by GIDC for allotment of such industrial plo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be a change in the constitution of the lessee, provided further where the, lessee, for the purpose of constructing a building on the demised premises has obtained loan from the Bank or other financial institution by mortgaging his leasehold interest in the demised premises of the lessor shall be deemed to have been subject to the conditions:-- (a) that such mortgage shall not affect the rights or powers of the lessor under this lease deed, and (b) that the lessor before exercising his rights and power under this lease deed will consult the Bank or as the case may be the financial institution concerned. (s) In the event of such transfer, assignment, underletting or parting with there shall be delivered by the lessee at his expense a notice thereof to the Managing Director or such officer of the Lessor as the lessor may direct within twenty days from the date on which the transfer, assignment, underletting or parting with becomes effective whether by registration thereof under the Indian Registration Act or otherwise, provided that in the event of such transfer, assignment, underletting or parting with fifty per cent for the unearned increment that may be accrued to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he lease, the owner had the right to enjoy the possession of the land but by the lease he excludes himself during its currency from that right. A lease is therefore not a mere contract, but is a transfer of interest in land. Such interest in the land is a valuable right and constitutes capital asset in the hands of the lessee. The cardinal distinction between the lease and the licence is that in a lease there is a transfer of interest in land whereas in the case of a licence there is no transfer of interest although the licensee acquired a right to occupy the land. The substance of the document must be preferred to the form to ascertain real intention of the parties. III(22). Let us now examine the facts of the present case in the light of the principles of law emerging from the aforementioned judgments. The assessee has acquired leasehold rights in the aforesaid plot/shed for a period of 99 years with on option to renew this lease for a further period of 99 years. The lessee can exercise such option before or at the end of 99 years. The assessee has agreed to pay total price of the aforesaid plot/shed No. 746 at Jhagadia Industrial Estate to GIDC amounting to Rs.10,66,41,105. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture but it represents cost of acquisition of a capital asset. Such a view is clearly fortified bythe various judgments of the Hon'ble Apex Court and the jurisdictional High Court relied upon by the learned CIT-DR. III(23). It may also be relevant here to refer to the definition of "transfer" in relation to any immovable property given in section 269UA(f). It includes transfer of immovable property by way of lease for a term of not less than 12 years. Similar provision existed in Chapter XXA relating to acquisition of immovable property, which also regarded a long term lease (i.e., to say, lease for a period of not less than 12 years) as an immovable property liable to acquisition under the said Chapter. The surplus derived on transfer of such lease right in respect of long term lease is liable to tax as capital gains under sub-section 45 read with section 2(47) of the Act. The provisions contained in section 4(8) of the Wealth-tax Act also incorporates within its ambit any transaction as referred to in section 269UA(f). It also means that a holder of a leasehold rights shall be deemed to be the owner of such interest in the immovable property. III(24). Shri Soparkar tried to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... leasehold rights for a period of 99 years. The token rent for the aforesaid land was separately payable by the lessee to the lessor in accordance with the agreement executed with the GIDC. The payment in question therefore clearly represents cost of capital asset viz. long-term lease acquired by the assessee, which can not be allowed as revenue expenditure. III(26). The Supreme Court in Assam Bengal Cement Co. Ltd's case has held that the payment made for acquiring lease of certain limestone quarries for a period of 20 years was a capital expenditure. The Hon'ble Apex Court in the case of Pingle Industries Ltd. also held that the payment, though periodically in fact, made by the assessee for acquiring long term lease with the right to win stones was a payment made for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. In the case of Durga Das Khanna the Hon'ble Supreme Court held that the payment of Rs.55,200 agreed to be made by the lessee towards the cost of erecting cinema house in consideration of acquiring lease of certain premises for a term of 99 years with the right to assign the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crement (profit) relied on sale/transfer of land, to the lessor in the event of its transfer or assignment to other parties subject to the conditions mentioned in the lease deed. Such a clause does not find any mention in the judgment of the Karnataka High Court. Moreover, various judgments of the Apex Court and the Gujarat High Court referred to herein before were not brought to the notice of the Hon'ble Karnataka High Court. The learned counsel also placed heavy reliance on the decision of the Tribunal in the case of Sun Pharmaceuticals Industries Ltd. That case has been decided by the Tribunal on the basis of the judgment of the Karnataka High Court in the case of H.M.T Ltd. The Tribunal also therefore had not taken into consideration the various judgments of the Apex Court and the Gujarat High Court relied upon by the learned CIT-DR in the present case. III(28). On a careful consideration of the entire relevant facts, material and the legal principles emerging from the various judgments cited before us, we are of the considered opinion that the premium paid/payable by the assessee for acquiring long term leasehold rights represent cost of acquisition of leasehold rights an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred for certain specified activities. Section 35A specifically provides deduction in respect of any expenditure of a capital nature incurred on acquisition of patent rights or copyrights in the manner provided in that section. Section 35ABB also provides for grant of deduction in respect of capital expenditure incurred for acquiring right to operate telecommunication services. Section 35AB likewise provides for grant of deduction in respect of lump sum consideration paid for acquiring technical knowhow over a period of six years. It is therefore clear that wherever the Legislature intended to provide for grant of deduction in respect of capital expenditure in the year when it is incurred or by way of amortization of such expenditure over a period of several years, it expressly enacted a specific provision for grant of such deduction. In the absence of a specific provision for grant of amortization/deduction of proportionate amount out of such capital expenditure, such as the one claimed at 1/99th of the premium paid for acquiring leasehold land by the appellant in the present case, the deduction can not be validly granted. III(32). The learned counsel relied on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Supreme Court further held that ordinarily, the revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It can not be spread over a number of years even if the assessee has written it off in its books over a period of years. The Supreme Court has observed that the facts may however justify the assessee who has incurred an expenditure in a particular year to spread and claim it over a number of ensuing years. In fact, allowing entire expenditure in one year might give a very distorted picture of the profit of a year. On these facts, the Supreme Court held that the liability for such revenue expenditure should therefore be spread over the period of debentures. Thus, the spreading over in respect of deductibility of revenue expenditure was allowed by the Supreme Court in the aforesaid case. It was not a case where the Supreme Court has allowed deduction in respect of capital expenditure by spreading it over the period of several years like the one which is being claimed in the present case by asking for amortization of the cost of acquisition of leasehold rights over a period of 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the close of the previous year, is clearly allowable in the year under consideration as the legal and enforceable liability arises in the year under consideration. He relied on the written submissions made in letter dated 5-11-1998 submitted before Departmental Authorities and also on the judgment of the Apex Court in the case of Shahzada Nand Sons v. CIT[1 977] 108 ITR 358. The learned counsel also relied on the judgments of the Gujarat High Court in the cases of CIT v. Sarabhai Sons Ltd. [1983] 143 ITR 473 and Balapur Vibhag Jungle Kamdar Mandali Ltd. v. CIT [1982] 135 ITR 912. The learned CIT-DR, on the other hand, relied upon the reasons mentioned in the assessment order and in the order of the Commissioner (Appeals). He also submitted that the disallowance is justified in view of the provisions contained in section 43B(c) of the Act. V(3). We have carefully considered the submissions made by the learned representatives of the parties and have perused the relevant judgments and other documents, to which our attention was drawn during the course of hearing. The Assessing Officer has disallowed the aforesaid commission payments on the ground that the commission paid to an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iability for payment of such commission payable to the directors in accordance with the terms of agreement. The learned Departmental Authorities have not disputed the fact that services were in fact rendered by all the wholetime directors to whom such commission has been paid. The provisions of section 309 of the Companies Act permits payment of aggregate remuneration to its directors upto the extent of one per cent of the net profits of the company. The learned CIT-DR was fair enough to admit that the aggregate amount of remuneration paid to the directors including the aforesaid commission is below the said limit prescribed under section 309 of the Companies Act. The judgments relied upon by the Assessing Officer instead of supporting the revenue's stand, in fact support the assessee's claim. The provisions of section 43B(c) is not applicable to the facts of the present case. On a careful consideration of the entire relevant facts, we are of the view that the disallowance made in respect of commission payable to directors is wrong and unjustified. The Assessing Officer is directed to delete the same. VI(1). Ground No. VI is reproduced below:-- VI. Disallowances under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance made by the Assessing Officer in the assessment order. In case the Assessing Officer was of a similar view, as is now veriably pointed out by the learned DR, the Assessing Officer should have examined the concerned persons with a view to find out the business necessity of incurring such expenditure. The identity of the payee and the genuineness of the payment has not been doubted. On the other hand, the identity and genuineness of the payment are verifiable from the copies of vouchers submitted in the compilation. The assessee contended before the learned Departmental Authorities that the said payments were made to the parties with whom they did not have regular dealings and therefore the said payments were made in cash under unavoidable and exceptional circumstances. In the case of a company where the assessee has declared taxable income of Rs.3,84,97,110, the meagre cash payment of Rs.87,266 in excess of the prescribed limit ought to have been accepted as covered by exceptional circumstances as per rule 6DD(j). The disallowance so made by resorting to section 40A(3) also deserves to be cancelled in view of the above referred Circular issued by the CBDT and in view of the jud ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r cent from the balance amount of expenditure incurred in excess of Rs.10,000 for each article presented by the assessee. The learned counsel has not pointed out as to whether the said application under section 154 has been disposed of by the Assessing Officer or not. He however supported the disallowance in view of the reasons recorded in the orders of the Departmental Authorities. VII(4). We have carefully considered the submissions made by the learned representatives. During the course of hearing, the Bench, inter alia, required the learned counsel to furnish the names of the persons to whom articles costing more than Rs.10,000 were given. The assessee furnished the following details:-- ----------------------------------------------------------------------- Sr. Name of the Person Unit Item Reason No. ----------------------------------------------------------------------- 1. Mr. Ramanajeyulu 1 Scooter Sales Promotion -Dealer at Guntur Depot 2. Terrance Chen 1 Bracelet Presented when -MD Huikwng-Taiwan visited India (Overseas Custom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Assessing Officer will be at liberty to verify the details of such non-refundable deposits amounting to Rs.3,40,900 claimed to have been paid by the assessee. IX. Ground No. IX is directed against the findings given by the learned Commissioner (Appeals) in para-13 of his order conforming the action of the Assessing Officer to allow depreciation as per provisions of law, though the appellant had not made any such claim for grant of depreciation. The learned counsel contended that the assessee was entitled to exercise his option of not claiming depreciation in respect of the block of assets relating to the plant and machinery eligible for depreciation at the rate of 25 per cent. He submitted that the Assessing Officer cannot fasten such deduction by way of depreciation in a case where the assessee chooses not to claim the same. Reliance was placed on the judgment of the Supreme Court in the case of CITv. Mahendra Mills [2000] 243 ITR 56 and the decision of the ITAT in the case of Uvifort Metalizers Ltd. v. Dy. CIT IT Appeal No. 848 (Ahd.) of 1999 dated 7-1-2000, to which one of us (Judicial Member) was a party. IX(1). The learned CIT-DR relied on the amendment made in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und that the assessee is following mercantile system of accounting and therefore any expenditure which has not accrued or arisen in the relevant year cannot be allowed. The Assessing Officer has not pointed out any expenditure of a disallowable nature in the total claim amounting to Rs.16,66,207 made by the assessee. Even in the case of an assessee who is maintaining its books of account on mercantile system of accounting, deduction in respect of the liability pertaining to prior year, which in fact has crystallised during the relevant year can be claimed, in case no such deduction was claimed in the preceding year to which the liability in question pertains. The Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. has held that merely because an expenditure relates to a transaction of an earlier year, it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallised in the year in question on the basis of maintaining accounts on mercantile basis. If the allowability of the expenditure in question is not in doubt or dispute, there is no justification for disallowing the claim for suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and decide the question relating to the allowability of such deduction. In case he finds that the expenditure claimed as deduction is allowable, the year of allowability should be determined in accordance with the judgment of Hon'ble Gujarat High Court in the case of Saurashtra Cement Chemical Industries Ltd. and the Assessing Officer should also keep in mind the aforesaid observations of the Bombay High Court in the case of Nagri Mills Ltd. The order passed by the learned Commissioner (Appeals) relating to this ground is therefore set aside and the matter is restored back to the Assessing Officer for deciding the same in accordance with the aforesaid directions and in accordance with the provisions of law after providing reasonable opportunity to the assessee. XI(1). Ground No. XI relates to the assessee's claim made before the Commissioner (Appeals) that the expenditure debited in assessment year 1996-97 but pertaining to assessment year 1995-96 to the tune of Rs.1,01,89,977 should be allowed in assessment year 1995-96, as the Commissioner (Appeals) has not allowed deduction in respect of the said expenditure in assessment year 1996-97. The learned counsel at the time of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o Rs.31,08,783 as claimed by the assessee is not in dispute, the year of allowability may not be given undue significance in respect of allowability thereof in the year in which such expenditure has been debited in the books of account. The Assessing Officer will decide this point afresh in accordance with the provisions of law and in consonance with the directions given hereinbefore. The Assessing Officer should however ensure that if the allowability of the expenditure is not in dispute, the deduction must be allowed in one of the two relevant years and he should also ensure that double deduction in respect of the same expenditure is not allowed in more than one year. The issue is therefore restored back of the Assessing Officer for deciding the same afresh after providing reasonable opportunity to the assessee. XII. Ground No. XII relates to the confirmation of the action of the Assessing Officer of allowing deduction under section 80M at Rs.1,96,61,986 instead of Rs.1,98,61,986 as computed by the appellant. The learned counsel submitted that no expenditure was incurred by the appellant for earning dividend income. Hence deduction under section 80M should be allowed on gross ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In view of the substantial amount of income received by way of dividends from the Companies and UTI, the estimate of expenditure incurred for earning such income adopted by the Assessing Officer at Rs.2 lacs only cannot be said to be unreasonable or excessive in any manner. We do not find any justification to interfere with the view taken by the Assessing Officer and the Commissioner (Appeals) in relation to this ground. XIII. Ground No. XIII is reproduced below: XIII. Deduction under section 80-I and section 80-IA 13.1 On the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in confirming the computation of deduction under section 80-I and section 80-IA as computed by the Assessing Officer amounting to Rs.5,42,48,162. 13.2 In doing so, the Commissioner (Appeals) erred in the following respects: (a) In not appreciating the fact that the deductions under section 80-I and section 80-IA ought to have been allowed on the profits of the concerned industrial undertakings without restricting the total deduction to 30 per cent of the gross total income. (b) In not appreciating the fact that deductions under section 80-I and section 80- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted out that in assessment years 1992-93 and 1993-94 deduction under sections 80-I and 80-IA were granted as per working submitted during the assessment proceedings on profits of each eligible Industrial Undertaking. Subsequently in order under section 154 dated 7-12-1995 for assessment year 1992-93 the deduction was restricted to 30 per cent of the gross total income. The learned CIT-DR was required to give the basis for computing deductions under sections 80-I and 80-IA amounting to Rs.5,42,48,162. He requested for grant of time for this purpose which was granted, as desired. On the subsequent date of hearing, the learned CIT-DR submitted a copy of the order under section 154, dated 6-8-1998 passed by the Assessing Officer for assessment year 1995-96 in which deduction under sections 80-I and 80-IA was granted to the tune of Rs.7,48,68,772. The aforesaid amount was computed by the Assessing Officer as under:-- -------------------------------------------------------------------------- Income computed by the Assessing Rs. 30,25,73,619 Officer in the order under section 154, dated 6-8-1998 before allowing deduction under Chapter VI-A Less: De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Undertakings without deducting depreciation therefrom, the assessee also submitted before the Assessing Officer a certificate from Jawahar Thacker Co., CAs in relation to the computation of deduction allowable under sections 80-I and 80-IA as per the Department's stand i.e., after considering the depreciation as allowable under the provisions of the Act and taking the Advance Licence Benefit on accrual basis. A copy of such certificate given by the Chartered Accountants alongwith the details of computation of such deductions under sections 80-I and 80-IA have been furnished at pages 287 to 289 of PB-I. According to the aforesaid certificate, the claim allowable under section 80-IA comes to Rs.12,60,95,196 and deduction under section 80-I comes to Rs.1,24,35,608. The learned Assessing Officer and the Commissioner (Appeals) have not found any mistake in such a claim made by the assessee. The learned counsel submitted that the learned CIT-DR has also not pointed out any mistake or discrepancy in the claim so made by the assessee. The deduction as claimed under sections 80-I and 80-IA should therefore be allowed. The learned counsel also vehemently objected that this point should no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee. Even in the order under section 154, dated 6-8-1998 the Assessing Officer has restricted the deductions under sections 80-I and 80-IA to 30 per cent of taxable income computed after allowing deductions under sections 80G, 80HHC, 80-0 and 80M. The provisions of Chapter VI-A nowhere provide that deductions allowable under sections 80-I and 80-IA will be restricted to 30 per cent of taxable income after taking into consideration the deductions allowable under various other sections appearing under Chapter VI-A of the Act. The deductions under sections 80-I and 80-IA are allowable at the specified rates on the amount of profits or gains of eligible Industrial Undertakings. The Assessing Officer and the Commissioner (Appeals) have not pointed out any mistake or discrepancy in the claim so made by the assessee. The learned CIT-DR has also not pointed out any specific mistake or discrepancy in the claim made by the assessee for deductions under sections 80-I and 80-IA. In the absence of any valid basis given in the orders of the learned Departmental Authorities in support of the disallowance of part amount of deduction under sections 80-I and 80-IA, we do not find any justification ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t special deduction allowable under section 80HH is required to be computed on the net income and not on gross income. The provisions of sections 80AA and 80AB will apply in relation to the deduction to be made in respect of income specified under the head "C" in Chapter VI-A of the Act. This also clarifies that income will first have to be computed in accordance with the provisions contained in Chapter IV, Which necessarily implies that profits of such eligible new Industrial Undertakings will have to be deducted by the amount of depreciation attributable to depreciable assets of the respective Industrial Undertakings. XIII(8). In view of the aforesaid facts and discussion, our findings in relation to the aforesaid ground No. XIII can be summarised as under: (A) Deduction under sections 80-I and 80-IA has to be computed at 30 per cent or rate as prescribed in sections 80-I and 80-IA in the relevant year on the profits and gains derived from business of such eligible Industrial Undertakings. (B) There is no justification for restricting the deduction allowable under sections 80-I and 80-IA at 30 per cent of the gross total income. The Commissioner (Appeals) has erred in co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has been held to be taxable in the year under consideration on the basis of entries recorded in the books of account while dealing with Ground No. I of assessee's appeal. The assessee will therefore be entitled to grant of deduction under sections 80-I and 80-IA on the profits of eligible Industrial Undertakings including the corresponding amount of income accounted for in the books of account in relation to Advance Licence Benefit Receivable. (D) The assessee had submitted before the learned Departmental Authorities a copy of the certificate dated 10-6-97 issued by Jawahar Thacker Co., CAs in which they have certified that they have audited and verified the books of account of the assessee company for the year ended on 31-3-1995 and also enclosed working of P L Account for the purpose of working out the profits and gains from the eligible Industrial Undertakings enumerated in the said certificate and gave revised computation, which according to the said auditors, give true and fair view of the profits from the said Industrial Undertakings. The revised computations of deduction under sections 80-I and 80-IA have been submitted at pages 288 and 289 of the paper book. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 14.2 In doing so, the CIT(A) erred in not appreciating the fact that the term "total turnover" in the context of the said section has to be made comparable with the term "export turnover" and since export turnover does not include any excise duty, "total turnover" also ought to have been taken exclusive of excise duty. (B) Reducing 90% of the following items from the profits of the business: -------------------------------------------------------------------------- Insurance Claim Rs. 21,42,609 Refund of Sales-tax Rs. 19,600 Refund of Electricity Duty Rs. 14,54,798 Excess provision in respect of earlier years written back Rs. 64,02,452 Discount Rs. 47,55,384 Miscellaneous receipts Rs. 29,63,468 -------------------------------------------------------------------------- 14.3 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground of appeal while passing the aforesaid appellate order. 14.4 The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) has dealt with the issue relating to the deduction under section 80HHC in paras 19 and 19.1 of the order passed by him, which are reproduced below:-- "19. The next ground of appeal is against the order of the Assessing Officer treating the excise amount as part of turnover. The honourable courts have repeatedly held that the collection of sales-tax, any amount of cess, etc. has to be treated as a part of the trade receipt. Such a finding was given even in the following cases: Western India Sales Services 204 ITR 329 (HC) Shree Bhagpatia Food Industries 207 ITR 1045 (HC) 19.1 The claim of the appellant that the collection of excise duty is not a part of turnover being without any basis was rightly disallowed by the Assessing Officer. The order of the Assessing Officer on this point is upheld. XIV(2). Shri Soparkar, the learned counsel submitted that the Hon'ble Bombay High Court in the case of CITv. Sudarshan Chemicals Industries Ltd. [2000] 245 ITR 769 has held that for computation of special deduction under section 80HHC, Excise Duty and sales-tax are not includible in total turnover. No contrary judgment was pointed out by the learned CIT-DR. This point is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 80HHC of the Act," which bears to the profits of the Act. XXV(3). We therefore respectfully following the aforesaid judgment of the Bombay High Court direct the Assessing Officer to exclude the amount of Excise Duty from the figure of total turnover for the purpose of computing deduction under section 80HHC. Hence ground No. XIV(A) (Ground Nos. 14.1 and 14.2) are allowed. XIV(4). As regards ground No. XIV(B) containing Ground Nos. 14.3 and 14.4; Ground No. XIV-(C) containing Ground Nos. 14.5 to 14.8 and Ground No. XIV-(D) containing Ground Nos. 14.9 to 14.11 which are reproduced hereinabove, the learned representatives of the parties addressed detailed arguments in relation to each of those grounds but it was also admitted by the learned representative of both sides that the points raised in all these grounds have not been discussed and decided by the learned CIT(A) in the order passed by him. We, therefore, do not consider it appropriate to deal with the merits of all these grounds in the absence of findings thereon by the learned CIT(A) and we consider just and proper to restore the matter back to the CIT(A) so far as it relates to points raised in Ground Nos. XIV-B, XIV- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in respect of those additions/prima facie adjustment made in the Intimation prepared under section 143(1)(a) which have not been sustained in the assessment order passed under section 143(3) or in further appeals against the order under section 143(3). Such relief of additional tax levied with reference to prima facie adjustments deleted in the course of regular assessment or in appeals, is consequential in nature. The Assessing Officer is directed to grant such consequential relief and delete the additional tax levied under section 143(1A) in respect of prima facie adjustments/additions deleted in regular assessment under section 143(3) and/or in further appeals. XVII. The assessee has raised additional grounds during the course of hearing of these appeals. The first additional ground is reproduced below:-- I. Addition in respect of sale of white phosphorus on differential rates: 1.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in setting aside the said issue and directing the Assessing Officer to delete or reduce the addition on the basis of complete evidence that may be produced by the appellant to establish that the difference in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Gehlot Pan Bhandar v. ITO [2000] 66 TTJ (Jodh.) 482. 6. Smt. Geeta Devi v. ITO [2000] 68 TTJ (Jodh.) 729. XVII(3). The learned CIT-DR submitted that the CIT(A) has only set aside and restored back this issue to the Assessing Officer, as the assessee themselves had expressed willingness to adduce further evidence, if an opportunity is given to them. The assessee can not therefore have any grievance against the order passed by the CIT(A) granting them one more opportunity to prove their case before the Assessing Officer. He placed reliance on the decisions reported in Parshotamlal Sood Sons v. WTO [1985] 21 Taxman 37 (Delhi-Trib.), Champaklal K. Parekhv. ITO [1983] 15 TTJ (Bom.) 327 and the decision of the Madras High Court in the case of CITv. A.K. Subbaraya Chetty Sons [1980] 123 ITR 592. XVII(4). We have considered the submissions made by the learned representatives of the parties. The additional ground raised by the assessee at the time of hearing was entertained as even otherwise the assessee could raise such a ground in the cross objection submitted by them, as time limit for filing cross objection with reference to the Revenue's appeal has not expired at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Nos. III and IV. XIX. The additional ground No. III reads as under:-- III. Interest under section 234B: 3.1 On the facts and in the circumstances of the case and in law, the appellant submits that the levy of interest under section 234B amounting to Rs.3,75,13,870 in the order passed under section 143(3) of the Act without issuing any specific directions for such levy, is bad in law and ought to be deleted. 3.2 For this proposition reliance is placed upon the recent decision of the Supreme Court in the case of CIT v. Ranchi Club Ltd. [2001] 247 ITR 209 wherein the Court has upheld the decisions of the Patna High Court in the case of Ranchi Club Ltd. v. CIT[1996] 217 ITR 722 and Uday Mistanna Bhandar Complex v. CIT [1996] 222 ITR 44 wherein the High Court had directed that in the absence of any specific mention by the assessing authority in the assessment order in respect of charging interest under sections 234A and 234B, no interest could be recovered merely by way of demand notice. 3.3 In view of the grounds of appeal, the appellant prays that the Joint CIT be directed to delete the interest levied under section 234B in the assessment order passed under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by the Gujarat High Court. XIX(4). The Bench also required the learned representatives of the parties to state as to whether the assessee has submitted a petition for waiver of interest charged under section 234B before the Chief CIT as directed in the order dated 1-12-2000 passed in SP Nos. 77 and 81/2000 arising out of ITA No. 1303 and 35/Ahd/2000. The assessee submitted a reply accompanied with the copy of application dated 12-12-2000 for waiver of interest under section 234B. It could not however be ascertained as to whether the said application for waiver has been decided by the Chief CIT so far or not. XIX(5). We have carefully considered the submissions made by the learned representatives of the parties and have gone through all the judgments cited by the learned representatives of both the sides. The view taken by the Supreme Court in the case of Ranchi Club Ltd. and Patna High Court in the case of Smt. Tej Kumari v. CIT [2000] 164 CTR (Pat.)(FB) 201 will now have to be applied after examining the impact the retrospective amendment of sections 140A, 234A/B amended by the Finance Act, 2001 with retrospective effect from 1-4-1989. The Tribunal in the case of S.K. Pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue expenditure by the CIT (A) in the similar manner as was decided by him in respect of interest expenditure relating to the Jhagadia Unit. He also drew our attention to the details of such interest expenditure capitalised on fixed assets in the books of account and claimed as revenue expenditure in the income-tax return, placed at page 187 of the paper book. He invited our attention to the interest paid in respect of leasehold land at Jhagadia Plot No. 746 amounting to Rs.53,57,181 and urged that this amount also ought to have been disallowed like other interest expenditure relating to Jhagadia unit disallowed by the CIT(A), as the leasehold land at Jhagadia was transferred by the assessee to its sister concern in next year. XX(2). Shri Soparkar, the learned Advocate supported the order of the CIT(A). He submitted that Plot No. 746 at Jhagadia was not the one which was transferred in next year to its sister concern. The Plot No. 750 at Jhagadia was transferred to the sister concern in next year. The learned CIT-DR has made such a statement in oversight of this fact. The plot No. 746 at Jhagadia is still owned and used by the assessee for its industrial activities. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was confirmed by the CIT(A). The disallowance confirmed by the CIT (A) in respect of interest amounting to Rs.1,38,89,304 relating to Jhagadia Unit has been deleted by following the judgment of the Gujarat High Court in Alembic Glass Industries Ltd's case and the decision of the ITAT in the case of Core Health Care Ltd. and various other decisions referred to above. It may be relevant here to once again briefly state the facts of the case of Alembic Glass Industries Ltd. The assessee in that case was a company manufacturing glass at Baroda from 1947. During the accounting period relating to assessment years 1965-66 and 1966-67, the company incurred expenditure of Rs.7,53,084 and Rs.77,00,000 respectively for establishing a new glass manufacturing unit at Bangalore. The said unit did not go into production during the two assessment years in question, and, therefore, the ITO disallowed the payment of interest of Rs.50,000 and Rs.2,00,000 respectively in the two years on such borrowings. The Hon'ble Gujarat High Court held that the new unit at Bangalore was nothing but an expansion of the existing business. The Court observed that there was complete inter-connection, inter-lacing an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... projects/units. (5) The learned CIT (A) has also erred in allowing the above referred claims, as in view of section 143(2), no additional claim can be made by filing revised return. (6) Without prejudice to the above ground of appeal, the CIT (A) has erred in treating the interest expenditure relating to setting up of new units as par on expenditure of travelling as well as salary and wages expenses relating to setting up of new units ignoring the fact that the allowability of interest expenditure is to be considered as per the provisions of section 36(1)(iii) whereas provision of section 36(1)(iii) are not applicable for travelling and salary and wages expenditure. XXI(1). The learned CIT-DR submitted that the disallowance out of travelling and salary and wages expenses incurred in connection with the new units was made by the Assessing Officer to the tune of Rs.57,65,554 and Rs.68,23,351 respectively. The learned CIT (A) confirmed the action of the Assessing Officer to capitalise part of the travelling expenses and salary and wages expenses pertaining to Jhagadia Unit. The disallowance of expenditure to the tune of Rs.24,81,150 out of travelling expenses and Rs.29,36,363 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raised in ground Nos. (3) and (4). Shri Dave learned CIT-DR strongly urged that the disallowance made by the Assessing Officer should be confirmed. XXI(4). Shri Soparkar, the learned counsel submitted that the facts of all the cases relied upon by the learned CIT-DR are clearly distinguishable. He pointed out that the Tribunal in the case of Core Health Care Ltd. relied upon the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. which has been impliedly overruled by the Supreme Court in the cases of AddL CITv. Akkamamba Textiles Ltd. [1997] 227 ITR 464 and CITv. Siwakami Mills Ltd. [1997] 227 ITR 465. The facts of Peas Industrial Engineers (P.) Ltd 's case are also clearly distinguishable as that was a case where the assessee's business had not been started. Shri Soparkar submitted that the allowability of such expenditure is also supported by the judgment of the Gujarat High Court in the case of Alembic Glass Industries Ltd. He also brought to our notice the decision of the Tribunal in the case of Chemicoat Ltd. v. ITO [1982] 2 ITD 584 (Ahd.) (TM) where the Tribunal, following the judgment in the case of Alembic Glass Industries Ltd., held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Textiles Ltd.'s case and Siwakami Mills Ltd.'s case is not correct as that was another judgment in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389 which relate to the allowability of guarantee commission. In the judgment in Shree Vallabh Glass Works Ltd's case, the High Court held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of assets to the assessee and depreciation thereon has to be allowed by the Income-tax authorities. The assessment year under consideration was 1964-65. The construction of factory at Anand was started in the accounting year 1961-62 and the plant was commissioned and put into service from October, 1963. The expenses incurred before commencement of production amounting to Rs.4,80,873 had been capitalised and the assessee claimed depreciation thereon. On these facts the High Court held that the assessee is entitled to depreciation on such pre-production expenses. The facts of the present case are clearly distinguishable. It is a case where the assessee is carrying on its business for last several years. The expenses have been incurred in relation to setting u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of existing business. XXI(6). The allowability of such expenditure incurred by the assessee in relation to new units/projects constituting part of the same existing business of the assessee, is supported by various judgments relied upon by the learned counsel. On a careful consideration of the entire relevant facts and the judgments cited supra, we are of the opinion that the view taken by the learned Commissioner (Appeals) in relation to the allowability of travelling expenses and salary and wages expenses relating to setting up of new units forming part of the existing business of the assessee, is perfectly valid and justified. We do not find any justification to interfere with the view taken by the learned CIT (A). Hence ground Nos. (3) to (6) of Revenue's appeal are dismissed. XXI(7). As regards ground No. (7) the learned CIT-DR was fair enough to point out that the CIT (A) has set aside and restored back this issue to the Assessing Officer. He would therefore like to rely on the reasons given in the assessment order. The learned counsel supported the order of the CIT (A). He also made elaborate submissions on merits of the claim relating to the deduction of interest pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of the company is a partner and nor to any private limited company in which any of the directors of the company were director/members. Accordingly, directions ought to have been given to delete the disallowance of Rs.6,40,08,407 out of interest paid. 2.3 The CIT (A) further erred in not appreciating the fact that for the purpose of computing the disallowance, interest at a notional rate in any case cannot be charged on those advances given interest free when as a matter of fact no additional interest has been received by the respondent. 2.4 In view of the above grounds of cross-objections, the respondent prays that the Joint CIT be directed to delete the disallowance of Rs.6,40,08,407 out of interest paid. XXII(1). Shri Soparkar, the learned counsel contended that the CIT (A) should have deleted the addition of Rs.6,06,726 made in respect of sale of white phosphorus to sister concern, rather than restoring the issue back to the Assessing Officer. The provisions of section 40A(2)(b) are not applicable in respect of income, as it applies only to expenditure. He relied on the judgment in Udhoji Shrikrishnadas's case and the decision of the Tribunal in Vikshara Trading In ..... X X X X Extracts X X X X X X X X Extracts X X X X
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