TMI Blog2003 (3) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... said fixed assets, had been capitalised in the books of account of the appellant prepared for the relevant previous year. 1. This sum of Rs. 8,25,01,104 represents interest on loan taken from financial institutions and Banks and capitalized during the relevant accounting year. This amount of interest is capitalized to plant machinery and capital work-in-progress in respect of Triveni Tissues Divisions and paper packaging and printing divisions of the assessee's company. For the income tax purpose, the assessee has claimed deduction of Rs. 8,25,01,104 a portion of expenditure of Rs. 16,13,52,102 not debited to profit loss account but claimed as allowable under sections 30, 31, 36 37 of I.T. Act in the computation of income under section 36(1)(iii) of I.T. Act. This amount consists of two parts i.e. Rs. 4,95,06,235 pertaining to plant machinery purchased during the year and a sum of Rs. 3,29,94,869 relating to capital working progress. This claim was made by the assessee on three grounds namely 1, 2 3 : "1. Interest paid on borrowings made for the purpose of business is eligible for deduction under section 36(1)(iii) of the I.T. Act. 2. For the purpose of computing d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essing Officer also mentioned in his order that in earlier year similar disallowances have been made by the Assessing Officer. The CIT(A) while confirming the order of Assessing Officer has observed: "The Assessing Officer has relied on CBDT's Circular No. 461 dated 9-7-1986. It clearly and categorically states that the interest paid on borrowings for investment in capital asset may be capitalised only relating to the period prior to the asset coming into production that is relating to the erection stage of the asset. In that circular department relied on the case of CIT v. J.K. Cotton Mills 98 ITR 153. It is accepted principle that interest paid on moneys borrowed to acquire a capital asset, is to be capitalized, till the asset is put to use for making commercial production. In my opinion Assessing Officer has taken a reasonable view. His action does not call for any intervention, since the machineries have been acquired during the year but not put to use for commercial production, the Assessing Officer is also justified in disallowing depreciation claimed on the capital value of the asset." 4. Before us, the Ld. DR has relied on the orders of Assessing Officer CIT(A). The L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Gujarat High Court heavily relied by the Learned A/R are very old cases much earlier to the CBDT circular No. 461 dated 9-7-1986 relied upon by the department and they decided the matter as per law as it existed during that period. Though the case Associated Fibre Rubber Industries (P.) Ltd. was decided by the Supreme Court on 3-2-1999 but it pertained to assessment year 1972-73. The case decided by the Bench of this Tribunal cited by the Leaned A/R in his own case for assessment year 1991-92 is also of no help to the assessee as the issue involved is different. In that case issue involved was not whether the asset purchased out of borrowed money was put to use or not. The Assessing Officer in this case has simply followed the CBDT's Circular and CIT(A) has also confirmed the order of the Assessing Officer on the same basis. As it has been held by the courts that CBDT circulars are binding on the revenue authorities and in the absence of any jurisdictional High Court or Apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed. Ground No. II.--The ground taken by the assessee is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant period appellant incurred an expenditure of Rs. 9.13 crores. Insurance Company reimbursed Rs. 1.25 crores of its fixed expenses and for the loss of profit. The balance of Rs. 7,87,88,198 was claimed as a revenue expenditure. Assessee filed details in page 41 of the paper book. It includes repair to building of Rs. 18,62,000 repair to machinery of Rs. 19,06,000, Advertisement of Rs. 71,25,000, Sales Promotion of Rs. 22,75,000, Depreciation of Rs. 1,21,93,000 and other expenditures as well. Assessee has taken the insurance policy to cover the fixed expenses and loss of profit. It is not known under what circumstances, the insurance company reimbursed Rs. 1.25 crores. It is not out of place to mention that the expenditure of the assessee under the head Insurance Rates Taxes, Auditors expenses, amounted to Rs. 2,67,12,000. Since the claim is pending and it has not been finalised, it is too premature to claim the amount of Rs. 7,87,88,198 as revenue expenditure. It is not out of place to mention that assessee's insurance policy not only covered fixed expenditure but also loss of profit. In my opinion Assessing Officer has taken a reasonable view. I have no mind to interfere h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... records available. From the details of the expenditure available at page 26 of paper book, we do not find any expenditure of capital nature. The Assessing Officer has not given a clear finding that any fresh construction was done. In the absence of any such finding to say that the expenditure was capital in nature is not correct. The CIT(A) was also not correct when he says that this expenditure cannot be allowed since the claim of the assessee's pending before the Insurance Company. We feel that once such expenditure are allowed in the relevant assessment year any amount of insurance salvage, the receipt subsequent to the end of relevant previous year shall be subject to tax under section 41(1) of the Act in such subsequent year. We have also gone through relevant case laws cited by the Learned A/R and are of the view that these expenses should be allowed as revenue expenditure. So, we set-aside the order of the CIT(A) on this point. This ground is allowed. Ground No. III(a)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing an amount of Rs. 5,00,00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contention before the CIT(A). He drew the attention of the Bench to pages 4 5 of the statement of facts filed with the Learned CIT(A). It was also argued before us that assessee's company is a separate juristic entity and any expenditure incurred for maintenance of residential accommodation provided by it to the employees cannot be held to be a personal expenditure of the assessee. He also cited various decisions delivered by the various Benches of this Hon'ble Tribunal where it has been held that expenditure incurred by a Limited company in providing benefits to it's employees cannot be held to be personal expenses and the same are allowable as deduction. 2. We have heard both the parties and perused the record available. We find after going through the statement of the fact filed by the assessee before the CIT(A), that there is no mention of Guest Houses or Holiday Homes. The Assessing Officer has also not said anywhere in his order that any expenses were incurred on guest houses or holiday homes for employees. We are surprised from where the CIT(A) has brought in guest houses and holiday homes in his order. We also fail to understand how any amount of these expenses can be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance was made. The Learned DR did not dispute this fact. So, respectfully following the order of Kolkata Bench of this Hon'ble Tribunal, this ground of assessee is allowed. Ground No. V(a)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in treating the total capital gains arising on the sale of undivided shares in the interest of land and building constructed thereon, as short term capital gains, when he should have accepted the claim of the appellant for assessing the capital gains arising out of sale of undivided shares in the interest of land and building constructed thereon, separately, where the capital gains on the sale of the undivided shares in the interest of the land should have been treated as long term capital gains and the capital gains on the sale of the building constructed thereon should have been treated as short term capital gains. 1. During the year under consideration the assessee's company has claimed capital loss of Rs. 9,70,26,047 for being carried forward under section 74 for set off in the succeeding assessment year against any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed price is received by the assessee, then the assessee is entitled to bifurcate the same and if a situation arises where a gain from one of the capital assets, namely the land, is a long term capital gain, while from the other, namely the building, is a short term capital gain, then the benefits attached to long term capital gains cannot be denied to the assessee. He cited following High Court decisions as under: (i) Vimal Chand Golecha's case, (ii) CIT v. Dr. D.L. Ramachandran Rao [1999] 236 ITR 51 (Mad.), (iii) CIT v. C.R. Subramanian [2000] 242 ITR 342 (Kar.). 2. The Learned DR, however, relied on the order of Assessing Officer CIT(A) and said that it is difficult to bifurcate between short term capital gain long term capital gain. 3. We have heard both the parties and peruse all the records available and legal aspects of the case. We find that the expression capital asset is defined in section 2(14) of the Act as under: "Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-- (1) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of building and at the time of the sale of the building. Since, the land was held by the assessee for a period exceeding 36 months the land cannot be regarded as a short term capital asset only by virtue of the construction of building thereon. Hence, we are unable to accept the contention of the revenue that it is not possible to bifurcate the capital asset into two and are of the opinion that it is possible to work out capital gain with reference to the sale of building and land separately. Hence, the order of the CIT(A) is set aside and the assessee's appeal is allowed on this point. Ground No. V(b)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disregarding the short term capital loss suffered by the appellant amounting to Rs. 13,99,48,746 on renunciation of rights entitlements in M/s. Bhadrachallan Paper Boards Ltd. 1. The assessee held certain shares in M/s. Bhadrachallan Paper Board Ltd., a sister concern of the assessee, on the strength of which it was entitled to subscribe to right share issued by M/s. Bhadrachallan Paper Boards Ltd. Instead ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al gain/loss, assessee took the average of two figures namely Rs. 280. Similarly, the Ex-right price of each share of M/s. Bhadrachallan Paperboard Ltd. as on 20-10-1993 fluctuated between Rs. 240 and Rs. 235. For the purpose of computation of capital gain/loss, the assessee took the average of Rs. 238. Thus, the cost of acquisition of each right entitlement comes to Rs. 42 (Rs. 280 - Rs. 238). The CIT(A), however, was not impressed by the argument of the assessee and while confirming the order of Assessing Officer observed as under: "However, before me the reference has been made to a letter issued by the Calcutta Stock Exchange Ltd., wherein it has been, written that the cumulative right varied Rs. 285 to Rs. 275. The ex-right varied between Rs. 240 to Rs. 235. Mere receipt of letter from the Calcutta Stock Exchange association is not enough. The Calcutta Stock Exchange association has also not calculated as to how they arrived at such figure. It is not known why appellant had to sale the right at the rate of Rs. 30 each. Transparency is lacking in the entire transaction. In my opinion there has been a colorable transaction. Relying on the case of McDowell Co. (154 ITR 148), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and regulations becomes redundant. To give an another example the all measures taken for security of VIPs or Government installations are of no use before a suicide attack. The point we are trying to make is that all the rules, regulations, legal provisions are made keeping in mind the normal prudent behaviour of a man. In the instant case, there is no doubt that transaction is legal, but at the same time the fact remains that it is not transparent also. We have heard the Learned A/R at length and have gone through the relevant papers referred by him in his paper book but still mystery remains as to why instead of subscribing to the rights issue a professionally managed assessee company had sold or renounced the right entitlements to other entities. It is not the case of assessee that due to mistake or inadequate professional advice they made this transaction and suffered such a huge loss. Rather they are justifying this transaction. From the assessee company it cannot be expected that they will take a decision like this and incur such a huge loss unless there was a greater motive to go ahead with this transaction. That greater motive can only be to our mind in a case of a profit- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer, we deem it fit that this issue may be restored back to the Assessing Officer for necessary verification. The appeal is allowed for statistical purpose. Ground No. VII--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing an amount of Rs. 13,00,000 being the expenditure incurred by the appellant outside India for registration of its trademarks in foreign countries, while computing the business profits for the relevant assessment year. 1. There is no dispute about the fact that these expenses were incurred on registration of trade mark in foreign countries. We respectfully following the decision of Hon'ble Supreme Court in case of CIT v. Finlay Mills Ltd. [1951] 20 ITR 475 allow this ground of appeal, since, the facts of the assessee's case are squarely covered by this case. Ground No. VIII--The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of Assessing Officer in adding notional amounts of Rs. 7,16,00,000 and Rs. 88,44,500 to the total inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Companies to receive 3.5 per cent interest for 120 days credit (i.e. equal to 10.5 per cent per annum) over the agreed market price of cashew nut, but ITC Ltd. never received interest from the Chitalias for the credit extended to the EST Group of Companies. The A/R was asked to explain as to why interest income at the above rate should not be computed in the hands of the assessee company. No satisfactory explanation could be offered by the A/R in this regard. The total value of cashew nuts exported to the EST Group of Companies in the financial year 1993-94 is found to be 3.61 million US $ and credit for an average period of 240 days is found to have been allowed to the EST Group of Companies during the relevant accounting year in the course of export of cashew nuts. Taking the rupee equivalent of US $ 1 at Rs. 35 for the relevant accounting year, the amount of interest which should have been received by the assessee company from EST Group of Companies works out to Rs. 88,44,500. This sum will be added back to the assessee's income. Total disallowance under this head will thus work out to Rs. 8,04,44,500." 2. The CIT(A) has confirmed these additions by the Assessing Officer. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 251 ITR 401 (Bom). However it is intended to keep the issue alive till the matter is settled either by the Hon'ble Jurisdictional High Court or the Hon'ble Supreme Court. In view of this, the CIT(A)'s order is upheld on this point. The appeal is dismissed. Ground No. IX(b)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in not dealing with and accordingly rejecting the contentions inter alia raised by the assessee in ground No. 24 in the memorandum of appeal filed with the learned CIT(A) for excluding the element of excise duty from the figure of total turnover for the purpose of computing the profit on export of manufactured goods, while computing the deduction under section 80HHC(1) of the Act, read with section 80HHC(3) of the Act. 1. Since, this ground is dependent on the ultimate outcome of ground No. 9(a), we are not taking any cognizance of this. To summarize ground Nos. II, III(a), 111(b), IV, V(a), VII are allowed, ground Nos. I, V(b), IX(a) IX(b) are dismissed, ground No. III(c) is dismissed as not pressed and ground Nos. VI VIII are allowed for statistical purposes. Per Pramod Kumar, A.M .-- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd assumed that the interest deductible under section 36(1)(iii) should not be capital in nature. For that the CBDT circular quoted by the learned Assessing Officer has no application to the provisions of section 36(1)(iii). 4. The CIT(A), however, rejected the above grounds of appeal. The entire operative portion of the CIT(A)'s order, so far as the above grounds of appeal are concerned, is being reproduced below: It appears that before the Assessing Officer appellant has quoted the case of CITV. Alembic Industries 103 ITR 715 (Cal.). In that case, Calcutta High Court had an occasion to examine the issue whether the existing unit starting a new unit is a different business or only another unit of same business. In my opinion, the case of the appellant is clearly distinguishable from that of Alembic Chemicals. While deciding the case of Alembic Chemicals, Calcutta High Court relied on the case of Challapalli Sugar Mills Ltd. v. CIT On the other hand, the Assessing Officer has relied on CBDT Circular No. 461 dated 9-7-1986. It clearly and categorically states that interest paid on borrowings for investment in capital asset may be capitalised only relating to the period prior to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ased out of borrowed money was put to use or not. The Assessing Officer has simply followed the CBDT's circular and CIT(A) has also confirmed the order of the Assessing Officer on that basis. As it has been held by the courts that CBDT circulars are binding on the revenue. authorities and in the absence of any jurisdictional High Court or Apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed." 7. Not being able to subscribe to the above views, I proceed to humbly place on record my views on the matter. 8. I first of all deem it necessary to quote entire paragraph 18 of the CBDT Circular No. 461 dated 9-7-1986, relevant portion at page 30), part of which has been produced by the Assessing Officer and brother judicial Member, in their respective orders, and which has been heavily relied upon by the authorities below and indeed my brother colleague, for ready reference: "(ix) Modification in the definition of "Actual cost" for the purposes of depreciation, investment allowance etc. 18.1 Under the existing provisions of section 43(1) of the Income-tax Act, "actual cost" means actual co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset. 10. One of the cases relied upon by the assessee, as mentioned in page 2 of the written submission, is Dy. CIT v. Core Health care Ltd [2001] 251 ITR 61 wherein Their Lordships of Hon'ble Gujarat High Court had an occasion to deal with the aforementioned circular. Their Lordships, after reproducing the relevant extracts from the aforesaid circular, observed that "...As can be seen Explanation 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc. on a large amount of actual cost. Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill, we find any indication in support of Revenue's stand that in a converse situation interest has to be capitalized and further than such interest cannot be claimed as deduction under section 36(1)(iii) of the Act. Infact, there is no mention about the deductibility or otherwise under section 36(1)(iii) of the Act". In this view of the matter, with which I am in most respectful agreement, the revenue's case does not derive any benefit fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down by the Apex Court in the case of Ambika Prasad Mishra v. State of U.P. AIR 1980 SC 1762; [1980] 3 SCC 719: Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent....A decision does not loose its authority merely because It was badly argued, inadequately considered or fallaciously reasoned,..." Similarly in the case of Kesho Ram Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus: "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision...." In such a situation, we find all the contentions raised on behalf of the Revenue stand answered by the two decisions in the cases of CIT v. Alembic Glass Industries Limited [1976] 103 ITR 715 (Guj) and CIT v. Associated Fibre and Rubber Industries (P.) Ltd. [1999] 236 ITR 471 (SC). Having held that the CBDT Circular No. 461 does not have any bearing on the issue in this appeal before the Tribunal and respectfully following Hon'ble Gujarat High Court's judgment refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated as a business asset and it was purchased only for the purpose of the business." Their Lordships then concluded that "In the circumstances, the interest paid on the amount borrowed for purchase of such machinery is certainly a deductible amount". 15. In the case of Alembic Glass Industries Ltd, Hon'ble Gujarat High Court has observed that when a borrowing is made for the purpose of business, the interest paid on such borrowings is deductible under section 36(1)(iii) of the Act, irrespective of the position as to whether such borrowings are used for capital or revenue purposes. It was however added that the business for which capital asset is purchased should not be separate or distinct from the business of the assessee for the purpose of which borrowing is resorted to. Their Lordships then observed that if there is no existing business with reference to which the capital is borrowed and the borrowed capital is used to purchase a new asset of enduring nature, then interest paid on such borrowing till the asset goes into production, increases the cost of installation of such asset, and hence should be treated as a capital expenditure not allowable under section 36(1)(iii) of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowings, for this reason, was held to be revenue expenditure irrespective of the use to which the borrowed funds were put. Accordingly, in my view, there is no substance in revenue's plea that merely because related machines were not put to use, the interest paid on the borrowings will not be an allowable expenditure - particularly in a situation, as are the admitted facts of this case, when the loan was used for the purpose of an existing business. 18. I may also mention that Hon'ble Madras High Court, in the case of CIT v. Kasthuri Sons [2000] 241 ITR 412 were in seisin of a situation when the assessee had, during the course of his business, borrowed moneys for the purpose of setting up a printing unit, and though it had capitalised the interest paid on such borrowings, it claimed the interest as a revenue expenditure under section 36(1)(iii). This claim, though negated by the Assessing Officer, was upheld by the CIT(A) and the Tribunal. Hon'ble Madras High Court, on these facts, upheld the admissibility of assessee's claim for deduction under section 36(1)(iii) of the Act. Similary in the case of Core Healthcare Ltd., Hon'ble Gujarat High Court were in seisin of a materiall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this treatment, reliance was placed on the judgment of Hon'ble Rajasthan High Court in the case of Vimal Chand Golecha of Hon'ble Kerala High Court's judgment in the case of A. V Transports v. CIT [1990] 185 ITR 134 and of Hon'ble Supreme Court's judgment in the case of CIT v. Alps Theatre [1967] 65 ITR 377. However, the Assessing Officer rejected the assessee's contentions by observing as follows:-- "It may be mentioned that the land and building are one composite unit and inseparable. Since the assessee received total sales consideration in respect of floor space sold by it there was no justification to show the sale proceeds under two heads which was not warranted by the assessee on the sale of indivisible share in land is not acceptable." Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) distinguished the judicial precedents cited before him and observed that in the present case, sale of flats took place only after the building was constructed and that there could not have been any question of sale of a flat when the land was acquired. He further observed that land and building are complimentary to each other and it d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Consultancy Services Classical Financial Services Enterprises 157.18 mtrs Valuation as on 1-12-1993 (i,e. the date of transfer) Value as on 31-3-90 as per valuer's report 10,07,643 per kottah Gold prices as on 31-3-1990 3,200 Gold prices as on 31-3-1994 4,598 Hence, land value as on 31-3-1994 10,07,643 X 4598 ---------------- 3200 14,47,857 per kottah Value of land sold on 1-12-1993 156.81 X 2 X 10.76 X 14,47,857 ------------------------------ 720 7,85,927 ....... (a) Valuation as on 1-4-1981 Value as on 30-6-1983 as per Valuer's report Rs. 1,75,000 per kottah Gold prices as on 1-4-1981 1,700 Gold prices as on 30-6-1983 1,800 Hence, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... land, constructed a bungalow on it and sold the same for a consideration of Rs. 1,30,000 within two years of completing the construction. The Assessing Officer referred the matter to Valuation Officer under section 55A of the Act who valued the land and building separately. On these facts, the question before Their Lordship was whether or not the capital gain arising on sale of land, for which separate valuation under section 55A was available, can be treated as long term capital gain. Their Lordships were of the considered view that "if the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same". Their Lordships further observed that, "Even for the purpose of value, the valuer and the Department have taken the value of the land the superstructure thereon separately; therefore, we are of the view that the Income-tax Appellate Tribunal was justified in holding that the capital gains arising from the sale of land has to be treated as long-term capital gains." In this case, thus, value to be taken as sale consideration for sale for land was readily available. In the case before Hon'ble Gujarat High Court, sale was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same are also based on Gold Price Index. This method of Gold Price Index, as I have already stated, does not have the sanction of the statute and, therefore, the same is unacceptable. In this view of the matter, the base figure for indexation is also incorrect. The assessee has also not given the rate at which the land was originally purchased in 1951. Accordingly, in my considered view, the computation of capital gains, as made by the assessee, are unacceptable. In any event, once the assessee is unable to give consideration for sale of 'undivided share or interest in land', or the fair market value for land as on the date of transfer, the whole claim for bifurcation of consideration is devoid of any plausible basis. I am, therefore, not inclined to accept the claim of the assessee and am of the opinion that the CIT(A) was justified in sustaining Assessing Officer's action of treating entire capital gain arising on sale of part of constructed building, including undivided share in land on which the building was constructed, as short term capital gain. It is in this background that I humbly differ with the views of the learned brother and I am of the considered view that the Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 25-10-1994 issued by the Calcutta Stock Exchange Limited by observing as follows: "However, before me the reference has been made to a letter issued by the Calcutta Stock Exchange Ltd. wherein it has been written that the cumulative right (sic) varied Rs. 285 to Rs. 275. The ex right varied between Rs. 240 to Rs. 235. Mere receipt of letter from Calcutta Stock Exchange Association is not enough. The Calcutta Stock Exchange Association has also not calculated as to how they arrived at such figure. It is also not known why the appellant had to sale the right at the rate of Rs. 30 each. Transparency is lacking in the entire transaction. In my opinion there has been a colourable transaction. Relying on the case of McDowell Co. (154 ITR 148), I hold that the Assessing Officer was justified in disallowing the capital loss." 32. Aggrieved by the order of the CIT(A), the assessee is in second appeal before us. My learned brother, in his draft order and for the reasons set out in paragraph V(e) 4, upheld the above findings of the CIT(A). Not finding myself able to subscribe to the esteemed views of my learned brother, I proceed to place on record my views on the matter. 33. The ju ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments' at Rs. 30 per share and of transaction lacking transparency, is devoid of any merits. In any event, it is not even revenue's case that any related details requisitioned by them, or which the assessee was required to file statutorily, were not furnished by the assessee. It is difficult to comprehend as to how assessee can have the clairvoyance of filing those details which arc neither statutorily required to be filed, nor requisitioned by the authorities. When the sale of 'rights entitlement' is not called into question and when there is actually a fall in value of ex right shares after the record date vis-a-vis the value of cum-right shares before the record date, there is no reason to dub the transaction as a 'colourable device'. There is no finding by the authorities below that the sale consideration of ,rights entitlement'is understated. Under these circumstances, I find no support for CIT(A)'s reference to McDowell Co. @ case (supra) and terming the transaction as a 'colourable device'. It is also fairly well settled in law that merely because a transaction results in tax saving, it cannot be termed as 'a colourable device'. 34. It is also not in dispute that the ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary. In coming to this conclusion, I have taken particular note of the fact that the details about share quotations on relevant dates were not, for whatever reasons, before the Assessing Officer and authenticity of these rates have not been verified by the authorities below. It is for these elaborate reasons that I humbly differ with the views of the learned brother and am of the considered view that the Ground No. V(b) should be allowed for statistical purposes. 36. In the result, Ground No. V(b) is allowed for statistical purposes. 37. Save as otherwise specified above, I agree with the conclusions arrived at by my learned brother and endorse the same. REFERENCE TO HON'BLE PRESIDENT UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 We, the members of Kolkata D Bench of the Income-tax Appellate Tribunal in the case of ITC Ltd v. Dy. CIT, IT Appeal No. 853 (Cal.) of 1998, have difference of opinion on the following points: (a) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld revenue's disallowance of interest of Rs. 8,25,01,104 claimed as a deduction by the assessee under section 36(1)(iii) of the Income-tax Act, 1961, o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, the Tribunal ought to have upheld revenue's disregarding the short term capital loss of Rs. 13,99,48,786 claimed by the assessee on account of renunciation of right entitlements in Bhadrachallan Paperboards Limited, as held in concluding paragraph of ground No. V(b) of judicial Member's order or whether the Tribunal should have restored the matter to the Assessing Officer, with the directions as set out in paragraph 35 of Accountant Member's dissenting order?" 2. With regard to the first question, the facts are that the assessee claimed deduction of interest amounting to Rs. 8,25,01,104 being interest on loan taken from financial institutions and banks. Though the interest payable was capitalized in the books of account, the assessee claimed the same as deduction from the total income. The Assessing Officer found that this amount of interest was capitalized in the plant and machinery and also in the capital work-in-progress in respect of Triveni Tissues Divisions and paper packaging and printing divisions of the assessee company. He also found that these plant and machineries were not yet put into operation. He, therefore, held that the interest claimed was in the nature o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT v. Associated Fibre Rubber Ind. Ltd. was decided by the Supreme Court on 3-2-1999 but it pertained to assessment year 1972-73. The case decided by the Bench of this Tribunal cited by the Learned A/R in his own case for assessment year 1991-92 is also of no help to the assessee as the issue involved is different. In that case issue involved was not whether the asset purchased out of borrowed money was put to use or not. The Assessing Officer in this case has simply followed the CBDT's Circular and CIT(A) has also confirmed the order of the Assessing Officer on the same basis. As it has been held by the Courts that CBDT circulars are binding on the revenue authorities and in the absence of any jurisdictional High Court or Apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed." 6. The learned Accountant Member, however, could not reconcile with the view taken by the learned judicial Member. He re-examined the Circular of the Board relied upon by the revenue and the learned Judicial Member in the context of various decisions and eventually came to the conclusion that the assessee would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnment to collect the tax legitimately due to it for the earlier years, a clarificatory amendment to this provision has been made retrospectively from 1-4-1974 and will, accordingly, apply in relation to the assessment year 1974-75 and subsequent years. (Section 9 of the Finance Act)" 9. This only explains the background in which Explanation 8 to section 43(1) was introduced which reads as follows: Explanation 8: For the removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset. 10. One of the cases relied upon by the assessee, as mentioned in page 2 of the written submission, is Dy. CIT v. Core Healthcare Limited 251 ITR 61 wherein Their Lordships of Hon'ble Gujarat High Court had an occasion to deal with the aforementioned circular. Their Lordships, after reproducing the relevant extracts from the aforesaid circular, observed that "... As can be seen Explanation 8 was inserted to counteract tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 12. Coming to learned brother's observations that the ratio of Hon'ble Supreme Court's judgment in the case of CIT v. Alembic Fibre Rubber Industries Ltd. 236 ITR 471 and of Hon'ble Gujarat High Court in the case of CIT v. Alembic Glass Industries Ltd. 103 ITR 715 was no longer good in law because of CBDT Circular No. 461, suffice to say that Hon'ble Gujarat High Court, in the case of Core Healthcare Limited and after taking cognizance of the aforesaid circular, as also of insertion of Explanation 8 to section 43(1) which was dealt with by the circular, observed that Explanation 8 does not in any way curtail the scope of section 36(1)(iii) of the Act" and that: "As laid down by the Apex Court in the case of Ambika Prasad Mishra v. State of UP AIR 1980 SC 1762; [1980] 3 SCC 719: "Every new discovery nor argumentative novelty cannot undo or compel reconsideration of a binding precedent...A decision does not loose its authority 'merely because it was badly argued, inadequately considered or fallaciously reasoned....' Similarly in the case of Kesho Ram Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus: "The binding effect of a decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urpose of business, claim for deduction of interest for acquiring these machineries cannot also be allowed and this stand was also confirmed by the first appellate authority. In second appeal, however, Tribunal deleted the disallowance on the ground that machinery being a business asset, the interest paid on the amount borrowed for the purchase of such machinery would certainly be an allowable deduction. When this dispute finally travelled to the Hon'ble Supreme Court, Their Lordships observed that the reasoning of the Tribunal is correct'. It was further observed that "Even though the machinery has not been actually used in the business at the time when assessment was made, the same had been treated as a business asset and it was purchased only for the purpose of the business". Their Lordships then concluded that on the circumstances, the interest paid on the amount borrowed for purchase of such machinery is certainly a deductible amount". 15. In the case of CIT v. Alembic Glass Industries Limited, Hon'ble Gujarat High Court has observed that when a borrowing is made for the purpose of business, the interest paid on such borrowings is deductible under section 36(1)(iii) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove deliberations, however, this plea is devoid of any merits. I am, accordingly, of the considered view that, in accordance with the principles laid down in the case of Alembic Glass Industries Limited and on the facts of this case, interest paid on borrowing to acquire machineries in question, is allowable as a deduction under section 36(1)(iii) of the Act. 17. I may also mention that, as held in the case of India Cements Ltd. v. CIT 60 ITR 52 Hon'ble Supreme Court has observed that loan obtained is not an asset or advantage of an enduring nature and the expenditure was made for securing the use of money for a certain period and it is irrelevant to consider the object with which the loan was obtained. The interest on borrowings, for this reason, was held to be revenue expenditure irrespective of the use to which the borrowed funds were put. Accordingly, in my view, there is no substance in revenue's plea that merely because related machines were not put to use, the interest paid on the borrowings will not be an allowable expenditure particularly in a situation, as are the admitted facts of this case, when the loan was used for the purpose of an existing business. 18. I may al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llapalli Sugar Ltd.'s case as follows: "1. Where a borrowing is made for the purposes of a 'business, the interest paid on such a borrowing becomes eligible to deduction contemplated by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of the Act of 1961. 2. This would be so, even if the capital is invested in order to acquire a revenue asset or a capital asset, because the act of borrowing capital is distinct from the act of investment of that capital to acquire an asset. 3. However, the business for which an asset of enduring nature is purchased with the borrowed capital should not be separate or distinct from the business for the purposes of which the capital is borrowed if deduction under section 10(2)(iii) is to be allowed. 4. If there is no existing business with reference to which the capital is borrowed and the borrowed capital is invested to purchase a new asset of enduring nature, then the interest paid on such borrowing till the asset so purchased goes into production, increases the cost of the installation of the said asset, and hence should be treated as capital expenditure not covered by section 10(2)(iii) of the Act of 1922 or section 36(1)(iii) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ular of the Board cannot be the basis for deciding the issue for making the disallowance, I concur with the view of the learned Accountant Member on this point. 12. With regard to the next point, the facts are that the assessee sold two floors of ITC Center building to M/s. Tata Consultancy Services Ltd. and M/s. Classic Financial Services Ltd. The assessee bifurcated the total sale considerations into two portions (1) pertaining to the two floors of the building, and (2) the indivisible interest in the land sold. In respect of the sale of a portion of this building, the assessee has declared a short term capital gain of Rs. 4,33,73,885 and in respect of the sale of individual interest in the land sold, a long term capital gain of Rs. 51,40,117 was shown. The copies of agreement to sale deed, conveyance, occupancy certificate and clearance certificates in form No. 37(1) were filed at the time of the assessment. As per the sale agreement, the sale of two floors of the building covered proportionate undivided share of interest in the land and it was contended before the Assessing Officer that the treatment of indivisible interest in land independent of the building cost is permissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow: Undivided share or interest in land 1,666.45 mtrs At 37 Chowinghee Road, Kolkata Undivided share of land transferred to Tata consultancy Services 156.81 mtr Classical Financial Services Enterprises 157.18 mtr Valuation as on 1-12-1993 (i.e. the date of transfer) Value as on 31-3-1990 as per valuer's report 10,07,643 per kottah Gold prices as on 31-3-1990 3,200 Gold prices as on 31-3-1994 4,598 Hence, land value as on 31-3-1994 10,07,643 X 4598 14,47,857 per kottah Value of land sold on 1-12-1993 156.81 X 10.76 X 14,47,857 7,85,927 ...... (a) Valuation as on 1-4-1981 Value as on 30-6-1983 as per Valuer's report: Rs. 1,75,000 per kottah Gold prices as on 1-4-1981 1,700 Gold prices as on 30-6-1983 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame for a consideration of Rs. 1,30,000 within two years of completing the construction. The Assessing Officer referred the matter to Valuation Officer under section 55A of the Act who valued the land and building separately. On these facts, the question before Their Lordships was whether or not the capital gain arising on sale of land, for which separate valuation under section 55A was available, can be treated as long term capital gain. Their Lordships were of the considered view that "if the price of two capital assets has been charged at one consolidated price, then the assessee is entitled to bifurcate the same." Their Lordships further observed that, "Even for the purpose of value, the valuer and the Department have taken the value of the land the superstructure thereon separately; therefore, we are of the view that the Income-tax Appellate Tribunal was justified in holding that the capital gains arising from the sale of land has to be treated as long-term capital gains." In this case, thus, value to be taken as sale consideration for sale for land was readily available. In the case before Hon'ble Gujarat High Court, sale was of land per se and not undivided share or interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thod of Gold Price Index, as I have already stated, does not have the sanction of the statute and, therefore, the same is unacceptable. In this view of the matter, the base figure for indexation is also incorrect. The assessee has also not given the rate at which the land was originally purchased in 1951. Accordingly, in my considered view, the computation of capital gains, as made by the assessee, are unacceptable. In any event, once the assessee is unable to give consideration for sale of 'undivided share or interest in land', or the fair market value for land as on the date of transfer, the whole claim for bifurcation of consideration is devoid of any plausible basis. I am, therefore, not inclined to accept the claim of the assessee and am of the opinion that the CIT(A) was justified in sustaining Assessing Officer's action of treating entire capital gain arising on sale of part of constructed building, including undivided share in land on which the building was constructed, as short term capital gain. It is in this background that I humbly differ with the views of the learned brother and am of the considered view that the Ground No. V(a) should be dismissed." 16. On this diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned Judicial Member, however, held that the land and building being separable, the land should be assessed as long term capital gains and the sale consideration for the floors should be assessed as short-term capital gains. The learned Accountant Member, however, held that the Assessing Officer was fully justified in taking the composite sale consideration as short term capital gains for the reasons given by him as noted above. 18. In India, separate ownership of land and building is recognized in law. A person can hold the land and another person can be owner of the building or superstructure constructed thereon. This is fully recognized under the Income-tax Act. Section 32 of the I.T. Act provides for depreciation on buildings etc. While considering the question whether building includes the land, it was held that from its very nature, land neither requires insurance against destruction nor any repair nor does it depreciate in value by use. In the case of ALPS Theatre, the Hon'ble Supreme Court held that the word "budding" in the context of section 32 means the superstructure only and does not include site. It was further held that so long as the relevant provisions of I.T. Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ooks of the seller and the purchasers. If however, the sale/purchase consideration is treated as composite and depreciation is also claimed and allowed and it is impossible to bifurcate the cost/sale consideration of the land from the total sale consideration, then only it has to be held as a composite sale. I, therefore, subscribe to the view taken by the learned Judicial Member on this point. 22. With regard to the third ground, the facts are that the assessee held certain shares in M/s. Bhadrachallan Paperboards Limited, a sister concern of the assessee. On the strength of the shares held by it, the assessee was entitled to subscribe to right shares issued by M/s. Bhadrachallan Paperboards Limited. Instead of actually subscribing to the right issues, the assessee sold or renounced the right entitlement in respect of 32,91,645 shares in ITC Bhadrachallan Paperboards Limited at the rate of Rs. 30 each which included sale of 7,00,000 rights sold to wholly owned subsidiary companies which were not regarded as transfer in view of section 47(v) of the Act. The net consideration for the transfer of rights entitlement thus received was Rs. 7,77,49,350. The assessee, therefore, claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s legal, but at the same time the fact remains that it is not transparent also, we have heard the ld. A/R at length and have gone through the relevant pipers referred by him in his paper book but still mystery remains as to why instead of subscribing to the rights issue a professionally managed assessee company had sold or renounced the rights entitlements to other entities. It is not the case of assessee that due to mistake or inadequate professional advice they made this transaction and suffered such a huge loss. Rather they are justifying this transaction. From the assessee company it cannot be expected that they will take a decision like this and incur such a huge loss unless there was a greater motive to go ahead with this transaction. That greater motive can only be tour mind in a case of a profit making company, to reduce its tax liability. Otherwise even a layman who deals in shares would not commit this type of blunder. It is a clear cut case of tax avoidance. The case law K.P. Verghese v. CIT 131 ITR 597 (SC) cited by the Learned A/R is of no help to the assessee as the issue before us is not that the assessee has understated the sale consideration. Issue here is whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also noticed that the details of cum-rights and ex-rights prices of related shares are also placed on record, by way of certification by the Calcutta Stock Exchange Association (CSE). I see no substance in CIT(A)'s observations that mere filing of letter from CSE is not enough because after all its only CSE which is the most authentic source of information about the quoted prices of the related shares on relevant dates. In case any of the authorities below had any doubts about genuineness of the information contained in this communication, it was open to them to make such further verification as they may have considered appropriate. However, initial onus of the assessee to furnish the relevant information is duly discharged when the quoted rates duly certified by the CSE are filed by the assessee. CIT(A)'s observation about CSE not having shown the basis of calculation is also irrelevant because CSE certificate only contains factual position about the rates at which the related shares were sold on the relevant dates, and because such a factual position does not require any calculations at all. Once the factual averments in the certificate are not challenged, there is no reason to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of any retrospective operation of law. The retrospective operation must be clear and unambiguous. Nothing could be inferred by any stretch of imagination." In this view of the matter, the revenue's case does not get any assistance from change in legislation with effect from subsequent assessment year. On the contrary, it only shows what was the mischief sought to be remedied by legislation and the fact that, in the preceding years, the legal position did admit possibility of such a mischief. In any event, the Assessing Officer has not challenged the principle based on which claim was made but had rejected the claim on the ground of non availability of relevant details even though there is no mention about any requisition of details which has not been complied with. In my view, an assessee cannot be punished for not filing those details which are neither statutorily required to be filed, nor requisitioned by the authorities. Be that; as it may, it is an admitted position that the details about quoted prices of shares, duly certified by Calcutta Stock Exchange, were duly filed before the CIT(A) and a copy of the same has also been placed before us at page 98 of the paper book. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceive the new shares was a right which was embedded in her old shares and, consequently, when she realized the sum of Rs. 45,262.50 by selling her right, the capital gain should be computed after deducting from that amount the value of the embedded right which became liquidated. The Hon'ble Supreme Court considered this issue at length and eventually held as follows: "In order to answer the question referred to the High Court, it appears to us that the nature of the transaction, which resulted in this receipt of Rs. 45,262.50P by the appellant, must be analysed and properly understood. The amount, it is the agreed case of the parties, was a capital gain. The capital asset which the appellant originally possessed consisted of 710 ordinary shares of the company. There was already a provision that, if the company issued any new shares, every holder of old shares would be entitled to such number of ordinary shares as the board may, by resolution, decide. This right was possessed by the appellant because of her ownership of the old 710 ordinary shares, and when the board of directors of the. company passed a resolution for issue of new shares, this right of the appellant matured to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case can be examined in another aspect. At the time of the issue of new shares, the appellant possessed 710 old shares and she also got the tight to obtain 710 new shares. When she sold this right to obtain 710 new shares and realised the sum of Rs. 45,262.50P she capitalized that right and converted it into money. The value of the right may be measured by setting off against the appreciation in the face value of the new shares the depreciation in the old shares and, consequently, to the extent of the depreciation in the value of her original shares, she must be deemed to have invested money in acquisition of this new right. A concomitant of the acquisition of the new right was the depreciation in the value of the old shares, and the depreciation may, in a commercial sense, be deemed to be the value of the right which she subsequently transferred. The capital gain made by her would, therefore, be represented only by the difference between the money realized on transfer of the right, and the amount which she lost in the form of depreciation of her original shares in order to acquire that right. Looked at in this manner also, it is clear that the net capital gain by her would be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the directions set out in paragraph 35 of Accountant Member's dissenting order?" 2. As regards first point of difference, Hon'ble President has, acting as a Third Member under section 255(4) of the Income-tax Act, 1961, concurred with the Accountant Member that revenue's disallowance of interest of Rs. 8,25,01,104, claimed as a deduction under section 36(1)(iii) of the Act even though capitalised in the books of account, was not justified. In his esteemed view, the assessee deserves to succeed on this claim for deduction. Accordingly, majority view is that the assessee's aforesaid claim of Rs. 8,25,01,104, under section 36(1)(iii), should be allowed. 3. Ground No. 1 is thus allowed in the terms indicated above. 4. On second stated point of difference, Hon'ble Third Member has expressed the view that the assessee's claim of bifurcating the capital gain on sale of flats, into long-term capital gain, on sale of undivided interest in land, and as short term capital gain, on the building constructed thereon, is sustainable in principle. It has been further observed that since the question before the Hon'ble Third Member did not cover the question of computation and the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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