TMI Blog2003 (8) TMI 181X X X X Extracts X X X X X X X X Extracts X X X X ..... terial on record reveals that the assessee has placed only a copy of account at its paper book p. 53. The learned CIT(A) vide para 2.2 of the order has observed that the assessee has not filed any evidence to show that this liability has been ascertained during the year under consideration. Since the liability to pay these amounts were incurred in the earlier years and assessee maintained its accounts on mercantile basis as also for lack of any evidence to support the assessee s contention we do not find any infirmity in the decision taken by the learned CIT(A). Disallowance so made is upheld. 6. In ground 1(b) the assessee has challenged sustenance of disallowance of Rs. 1,11,875 stating that the amount represents various amounts written off by the assessee during the year as the same has become irrecoverable. Details are placed in assessee s paper book 54 to 57 where the learned CIT(A) out of various debts written off for earlier years sustained disallowance for the amount of debts created in the year under appeal though the same have been taken as income of the year and written off as irrecoverable in the accounts. Likewise in ground 1(c) the petty amounts from staff which cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of goods purchased though the same reached the factory of the assessee in the earlier year yet this was liable to be allowed in the year under consideration. 9. On the other hand the learned Departmental Representative relied on the order of authorities below. 10. We have perused the material on record. The AO disallowed the claim for the reason that the assessee was not able to prove with any documentary evidence that there existed any dispute about the supply/receipt of goods by him. The assessee has also not supported his contention of ascertainment of the liability in the year under appeal with any material. Under such circumstances we do not find any error in sustenance of disallowance by the learned CIT(A). Ground raised by the assessee stands rejected. 11. In ground 1(e) the assessee has challenged disallowance of Rs. 60,302 on account of freight charges. This is comprised of Rs. 56,000 paid to East India Transport Agency for which bills are claimed to have not been received earlier. It is only on reconciliation of account and after the claim were reconciled, the payment was released. Another amount of Rs. 4,302 which were paid to Union Roadways Corpn. is cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given. 16. Ground 1(g) relates to the disallowance of raw material and stores amounting to Rs. 4,19,395. This amount also includes two amounts of Rs. 20,559 and Rs. 12,457. These were earlier debited to capital expenses but later on proper reconciliation it was found that these were not incurred for modernization of plants but were a part of the repair and maintenance and therefore were transferred from capital expense to revenue expenses during the year under consideration. The balance expenditure of Rs. 3,86,339 is stated to be pertaining to battery division of the assessee which was located in Secundrabad, District Bullandshar, Uttar Pradesh whereas its head office was inNew Delhiwhere books of account were maintained and wherefrom the payment was released to the suppliers. It was contended that the bills of suppliers were withheld in earlier years because the defective supplies and were accepted during the period under consideration after the defects were removed. The auditors however identified these expenses as prior period expenses on the basis of invoice of the suppliers and receipt of material in the factory though the material was not approved at the time of receipt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duced. The learned CIT(A) did not agree with the contention of the assessee for the reason that the AO has examined each and every voucher and allowed all such expenses which crystallized during the year under consideration. The impugned disallowance was not found crystallized during the year under consideration. For the failure to supply any cogent material to support his contention, learned CIT(A) cannot be said to have erred. Ground of the assessee therefore stands rejected. 21. Ground 1(j) relates to sustenance of disallowance of Rs. 2,95,130 on account of stores and supplies. Assessee s counsel has contended that this amount consists of stores issued in the earlier year for modernization of the plant but when during the period under consideration necessary statement was received from the plant, it was found that the stores were used for repairs and maintenance and accordingly claimed as revenue expenses. The auditor however classified the same as prior period expenses merely because they were issued in the preceding year from the stores to the plant without considering that its actual consumption could be in the year under consideration. 22. We have heard the parties with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a legal liability in respect of advertisement expense in the earlier years. Merely because the amount have actually been disbursed in the year under consideration, the deduction thereof cannot be allowed in the year under consideration, more so when no dispute existed between the assessee and the parties who provided such services or material to them. This view finds support from the principle laid down on mercantile system of accounting as explained by the apex Court in the case of Keshav Mill Ltd. vs. CIT (1953) 23 ITR 230 (SC). We therefore, do not find any merit in the claim of the assessee. Disallowance of Rs. 1,16,976 sustained by the learned CIT(A) does not call for any interference. Likewise another expense of Rs. 10,846 on account of rent cannot be treated as an expenditure of the year under consideration. The balance of Rs. 20,973 claimed to have been debited by the Punjab National Bank for short collection charges to the account of the assessee was found to have been charged by the banks in the earlier years. If the assessee did not carry out the bank reconciliation in his accounts or failed to make entries in his books, it cannot be held that there existed any dispute b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sum of Rs. 16,959 on account of payment made to clubs by way of subscription/membership fee for various employees of the company. 31. We have heard the parties. It was necessary for the assessee to have membership of clubs in the name of its employees for the purpose of his business. In catena of cases various Benches of Tribunal are allowing such expenditure as necessary business expenditure. A reference is available in ITO vs. Bright Bros. Ltd. (1984) 18 TTJ (Bom) 377 and also in H.J. Industries vs. ITO (1988) 26 ITD 259 (Bom). Accordingly the AO is directed to allow the deduction of Rs. 16,959. The assessee s ground stands allowed. 32. In ground 5 of the assessee, the challenge is for sustaining the disallowance of Rs. 1,45,572 towards guest house expenses which included Rs. 25,000 on account of telephone, depreciation, etc. while Department in their appeal in grounds 1 and 2 has challenged the relief of Rs. 24,064 given in respect of holiday home in contravention of provisions of s. 37(5) of the Act and also on account of depreciation, electricity charges, water, telephone, etc. on guest house/holiday home by giving relief of Rs. 75,000 out of the disallowance of Rs. 1,00,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t been denied. Past history also shows that such expenditure was included in the advertisement and publicity expenses. That being so a further disallowance of Rs. 50,000 made by the AO is found to be reasonable. No interference is called for in the order of the learned CIT(A). Assessee s ground stands rejected. 37. In ground No. 7 the assessee has challenged disallowance of depreciation of Rs. 6,54,723 on generator installed for the purpose of business though the same was purchased in the books of sugar division of the company. 38. The assessee contends that the claim was disallowed because the generator was purchased by making payment in the name of sugar division of the assessee which were under installation. This has been so done without confronting the assessee and also because such a disallowance was made in summary assessment and stood confirmed by the learned CIT(A). However the fact remains that the Tribunal has already adjudicated on this issue and deleted the disallowance. It was also submitted that the said generator was recorded in the books of sugar division but the appellant used the same in the existing business and was thus eligible for deduction. 39. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble as revenue expenditure under s. 86(1)(iii) of the Act. The AO did not accept the claim of the assessee for the reason that the assessee had three separate divisions which are separate businesses having factories at different places, the divisional offices having administrative and other control are also at different places, separate books of account are there, bank account are also separate, the accounts are audited separately but are consolidated for the purpose of income-tax purposes and thus there was no inter-connection, inter-linking, inter-dependence as claimed by the assessee. The sugar division was found to be still under installation and the interest on capital invested in sugar division therefore was not to be allowed as a revenue expenditure. Out of the total interest payment of Rs. 2,50,81,124 the assessee had incurred interest expenditure on the bridge loan taken from the financial institutions and the amount of such interest of Rs. 1,46,86,096 which was incurred on the bridge loan was found partly utilized in the jute division and the battery division who have paid interest of Rs. 10,68,255 and Rs. 91,94,319 aggregating to Rs. 1,02,62,574. The balance of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division by the sugar division and this interest was credited as income in the jute division. This consisted of two parts, Rs. 28,46,686 which was the interest pertaining to last year and Rs. 67,07,466 which pertains to the year under consideration. The jute division paid a total interest of Rs. 77,81,073 to the bank on the funds borrowed from the banks by the jute division. In the P L a/c of the jute division, interest payment of Rs. 10,79,606 was only claimed because the total payment of Rs. 77,81,073 was reduced by the interest of Rs. 67,01,466 receivable from the sugar division. All these entries were passed by transfer entries in the books. The AO has not allowed the payment of this interest on the ground that the payment of interest by the sugar division has to be capitalized. On the other hand, the payment of interest by the jute division is not allowable because the jute division has not utilized the funds borrowed for its own business purpose, but has been transferred to the sugar division and, therefore, this interest paid by the jute division is also not allowable. A number of decisions have been reported from both the sides in support. 11.12. As far as the interconne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 31st March, 1993 against which the cash credit limits were Rs. 1,80,54,469 and Rs. 2,20,41,541, respectively. The jute division made a book profit of Rs. 2.21 crores during the year and the total amount given to the sugar division as at the end of the year was Rs. 3,93,33,573 which included a sum of Rs. 2,93,28,669 as on 1st April, 1992 and thus a title over Rs. 1 crore was given by the jute division to the sugar division and I agree with the submission of the learned counsel that interest amounting to Rs. 95 lakhs or Rs. 67 lakhs could not become due for this year as on Rs. 1 crore. This amount given to the sugar division in earlier years is stated to be out of the income accrual of the jute division as it has a reserve amounting to Rs. 4.13 crores besides capital investment of Rs. 10.11 crores. The jute division is stated to have borrowed a sum of Rs. 3.47 crores from the State Bank ofIndiaon1st April, 1991, when even the construction of the sugar plant did not commence. 11.14. Keeping these facts in view, as far as the jute division is concerned, it has shown interest income from sugar division amounting to Rs. 95,48,152. In the P L a/c it has debited interest expenses at R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has been in business as a manufacturer since inception in 1976. He was manufacturing automotive batteries and jute goods earlier. From asst. yr. 1991-92, it started installation of sugar factory. There was a common management and all the activities were controlled from one place. The fund borrowed were also used for all the units. Bridge loans raised during the year against the debentures to be issued were also not secured against the assets of the sugar division but were secured against personal guarantee of directors for which reference is borne at assessee s paper book p. 123 in the notes of account. The bridge loan was also used for all the units of the assessee and no dispute has been raised by the AO on this fact. The AO also did not say that different directors were in charge of different units of the company nor that these units were not being managed by the common board of directors. Merely to have separate books of account by each of the factories/units due to local sales-tax laws, excise laws, etc. or by treating separate P L a/c for each of the units for the purpose of appreciation of working of these units it cannot be said that there was not a common management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re duly audited and correctness was not in doubt at any stage. The addition has been deleted merely for asking by the assessee and actual utilization of funds on the basis of which the interest liability has been credited has not been appreciated by the learned CIT(A). A relief of Rs. 67,07,466 so given by the learned CIT(A) needs to be set aside and a prayer was made to restore the order of the AO. 45. We have heard the parties with reference to material on record and precedents relied upon by them and also taken ourselves through the orders of both the authorities. 46. The first issue which is relevant for consideration is as to whether the observations of the Tribunal in ITA No. 1502/Del/1995, dt. March, 2001 for the same assessment year where one of us, the learned JM, was a party to the order are conclusive and binding to the issue under consideration as to whether several units constituted one and the same business or not. We have perused this order of the Tribunal carefully. This issue before the Tribunal in the assessee s case was regarding prima facie adjustment in processing the return under s. 143(1)(a) of the Act on account of bad debts written off and depreciation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r-connection and inter-dependence of each unit and various businesses constituted one business. What the Tribunal said or observed was in a different context and the same shall not constitute a precedent nor a fact found by it. The Hon ble Supreme Court in the case of State of Punjab vs. Baldev Singh (1999) 6 SCC 172 a Bench comprising of five Hon ble Judges has laid down that everything said in a decision does not constitute a precedent. A decision has to considered in the context in which it was rendered. In this view of the matter and as observed hereinbefore what the Tribunal in its order at para 6 on the issue of composite business has said shall not bind us and on the issue, the Tribunal shall be at liberty to arrive at its own conclusion. 48. The AO has found as a matter of fact that the assessee is having separate factories at different places, the divisional offices of the manufacturing units of all these factories where different products are to be/being manufactured are also having different divisional offices at different places. It was held that the business are separate distinct businesses because the batteries are manufactured at Secunderabad with its divisional he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be debited the moment a legal liability has been incurred and before it is actually disbursed. Such a system has also been explained by the apex Court in the case of Keshav Mills Ltd. vs. CIT. In respect of the amount of Rs. 28,46,686 the assessee incurred liability in the earlier year. The disallowance thereof so made is therefore upheld. 50. Another amount of interest expenditure which was treated as capital in nature by the AO but the learned CIT(A) reversed his decision is for Rs. 67,07,466. The assessee borrowed funds on interest in his jute business. The total interest paid was Rs. 77,81,073. He however charged Rs. 10,79,606 as expenditure in the P L a/c of jute business and balance amount of Rs. 67,07,466 was shown as recoverable from the sugar division. The assessee s claim for deduction of the entire amount of interest as revenue expenditure was not accepted and a disallowance of Rs. 67,07,466 included in the total disallowance of the interest was treated as a capital expenditure as the funds to the tune of Rs. 3,93,33,573 were invested in the sugar division from its jute business which was still under construction stage. The learned CIT(A) however did not agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee did create a legal obligation on him. This has also been laid down in the case of CIT vs. Thanthi Trust (1999) 156 CTR (SC) 605 : (1999) 239 ITR 502 (SC). Once the funds were found not utilized for the purpose of earning income in jute business and stood diverted or utilized in the sugar business the interest so paid in jute division was essentially to be a part of income of sugar business and the same could not have been charged for reducing the profit/income of the jute business. The sugar business was undergoing construction activities. The interest liability so incurred in the sugar business though the funds were raised in jute business were necessarily to be capitalized. This action of the AO was a justified action. Once the funds were got mixed the reasons taken by the learned CIT(A) did not have any sanctity for allowing deduction to the assessee. We are therefore, satisfied that the learned CIT(A) has erred in allowing the deduction of Rs. 67,07,466 as revenue expenditure. His decision is therefore set aside and the decision of the AO stands restored inter alia allowing capitalization of the interest amount of Rs. 67,07,466 in the sugar division. With this the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising capital for the new sugar project which was still under construction and as such the expenditure so incurred was treated as a capital expenditure. Since the expenditure was capital in nature it was also considered outside the purview of deduction allowable under s. 37(1) of the Act. 58. Before the learned CIT(A) the assessee vehemently argued that the issue for raising the debenture was for the purpose of the business of the assessee and the expenses incurred thereon were for the purpose of business and an allowable deduction under s. 37(1) of the Act. Reliance was placed on various decisions as referred in para 12.2 of his order inter alia decision in India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC), CIT vs. Oswal Spinning Weaving Mills Ltd. (1986) 53 CTR (P H) 172 : (1986) 160 ITR 426 (P H), Premier Automobiles Ltd. vs. CIT (1971) 80 ITR 415 (Bom), Warner Hindustan Ltd. vs. CIT (1988) 171 ITR 224 (AP), CIT vs. Kisenchand Chellaram (India) (P) Ltd. (1980) 16 CTR (Mad) 248 : (1981) 130 ITR 385 (Mad), Orissa Cement Ltd. vs. CIT (1969) 73 ITR 14 (Del) and CIT vs. Modi Industries (1993) 109 CTR (Del) 9 : (1993) 200 ITR 341 (Del). It was also submitted before the learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced at assessee s paper book pp. 12 and 13. Reference was also made to the decision of Supreme Court in India Cement Ltd. vs. CIT. It was also contended that the object with which the loan was raised and the period for which it is held are not material for allowing the deduction. In this view of the matter it was contended that the learned CIT(A) has erred in upholding the disallowance. 61. The learned Departmental Representative however supports the facts and findings recorded by the authorities below. The expenditure incurred for issue of debentures was stated to be of capital in nature as the assessee had undertaken to convert fully all such debentures into shares which decision was taken at the time of issuing prospectus itself and before receiving any money from such persons who had an assurance of receiving shares from the company. These were to be treated as share issue expenses in the garb of debenture issue expenses and thus are not deductible as revenue expenditure on any account. 62. We have heard the parties with reference to material brought on record and case laws relied upon. The assessee incurred an aggregate expenditure of Rs. 1,11,12,423. Under the head deb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or consideration before Delhi Bench of the Tribunal in Sona Steering System Ltd. vs. Dy. CIT (2003) 78 TTJ (Del) 213 and also in Network Ltd. vs. Dy. CIT (2003) 78 TTJ (Del)(TM) 98 as also in Banco Products (India) Ltd. vs. Dy. CIT (1997) 59 TTJ (Ahd) 387 : (1997) 63 ITD 370 (Ahd). We therefore, hold that the fully convertible debentures issued by the assessee which had characteristics of equity shares cannot be termed as a debt incurred and were augmentation of equity base of the company for which share capital was to be issued by automatic method of conversion and as such any expenditure incurred thereon was a capital expenditure. The same therefore, was not deductible under s. 37 of the Act. 63. The assessee however in the grounds before us has made an alternate plea for allowing deduction under s. 35D of the Act. The learned CIT(A) is found to have rejected the plea of deduction under s. 35D for the reason that the assessee neither claimed the deduction in the IT return nor raised the same before the AO during the course of assessment proceedings. Also there was no ground before him. He therefore, declined to adjudicate the issue for the first time at the stage of hearing. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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