TMI Blog2006 (1) TMI 186X X X X Extracts X X X X X X X X Extracts X X X X ..... iety and not EHIRC Ltd. directly. The CIT(A)'s reliance on a letter written by the counsel in the course of assessment proceedings is therefore, not acceptable as they are contrary to the fact situation on record. The reasoning of the CIT(A) for concluding that 'Income' under section 2(24) accrued to the assessee based on the presumption that the assessee purchased shares of EHIRC Ltd., directly is, therefore, without any basis. According to CIT(A) the transaction of allotment of shares in favour of the assessee by the Chandigarh Society bears all the characteristics set out in section 2(24)(iv) except for the difference that the assessee was not a director and the investee was a Society and not a company. However, the assessee was a person having substantial interest in the Chandigarh Society and the benefit of lower share prices given to the assessee by the Chandigarh Society, was a benefit which was to be taxed - The CIT(A) further supports this conclusion with the various judgments of Hon'ble Courts holding that definition of Income is not exhaustive and whatever bears the character of income should be considered as Income . This is the alternate reasoning of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her under section 2(24)(1) read with section 28(iv) of the Act. But this background is only a pointer to the fact that the assessee was never considered as being in the business of holding investments either in the past or in the assessment proceedings of the instant year. To conclude otherwise without an enquiry into the primary facts necessary for coming to such a conclusion, would not be proper. In this background, to venture to consider and hold that the assessee was in the business of holding investments would be unjustified - the new plea raised by the revenue as to whether the purchase of shares in the Chandigarh Society (after amalgamation) by the assessee at a price less than its intrinsic value would give rise of 'income' within the meaning of section 2(24) read with section 28(iv) of the Act, is declined to be adjudicated. Nature of expenditure - capital expenditure or revenue expenditure - maintenance and renovation of rented premises - HELD THAT:- A perusal of the Explantion reveals that in relation to building taken on rent by the assessee, any capital expenditure incurred has to be treated as if the building is owned by such an assessee. The expenditure envis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e construed to be incurred on capital field. Therefore, to this extent, the invoking of Explanation 1 to section 32(1) was not justified. The invoking of Explanation 1 to section 32(1) is limited to the extent of Rs. 60,14,000 - the order of the CIT(A) is set aside and the Assessing Officer is directed to rework the disallowance as above. Of course, on the amount which is considered to be falling within the purview of Explanation to section 32(1), the same shall be eligible for depreciation at the rates applicable. The CIT(A) has allowed the same and to that extent, the decision of the CIT(A) is affirmed. The Assessing Officer shall take into consideration the aforesaid while reworking the disallowance - this ground is partly allowed. Software Technology and upgradation of computerization - capital expenditure or revenue expenditure - HELD THAT:- Insofar as the factual aspect of the matter is concerned, the details of the expenditure amounting to Rs. 35,72,400 in question have been placed at pages 160 to 162 of the assessee's paper book. The major expenditure to the extent of Rs. 35,36,000 represents the cost of purchase of ERP System and the balance of the expenditure of Rs. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture - Appeal of assessee is allowed for statistical purposes. Disallowance of Rs. 21.70 lakhs out of the disallowance of Rs. 2,01,88,412 made by the Assessing Officer by invoking the provisions of section 14A of the Income-tax Act - HELD THAT:- The import of section 14A is that if a particular income is excluded from the purview of the total income under the Act, the related expenditures should not be allowed as deduction even against the income includible in the total income so as to obviate a double benefit to the assessee, viz., first by way of income being excluded from the purview of tax and secondly, by reducing the residual taxable income, if any, by the amount of expenditure related to the excluded income. Now, in order to apply the provisions of section 14A, it envisaged two steps; firstly, the incomes which do not form part of the total income under the act has to be identified. Secondly, the expenditure which is related to such income has to be identified. In the instant case, the dividend income of Rs. 8.9 crores (approximately) and interest income of Rs. 10.13 crores approximately are excludible from the purview of total income under the Act on account of sections 10( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usiness carried on by the assessee, is an admissible deduction. Admittedly, the impugned Research and Development expenditure in question has been found by the CIT(A) to be related to the business of the assessee of manufacturing agricultural tractors, agriculture machinery, etc., a fact situation not controverted by the revenue. Thus, it qualifies to be deductible under section 35(1)(iv) of the Act. We do not find anything on record to conclude differently than the CIT(A) - the expenditure has been rightly held to be deductible by the CIT(A). The appeal of the revenue is treated as dismissed. - HON'BLE N. V. VASUDEVAN., G. S. PANNU, A.M. For the Appellant : R.M. Mehta, Adv. For the Respondent : S.D. Kapila and Sangeetha Gupta, Advs. ORDER 1. ITA No. 567/Delhi/2005 is an appeal by the assessee and ITA No. 1562/Delhi/2005 is an appeal by the revenue and both these appeals are directed against the order dated 31-1-2005 of Commissioner of Income-tax (Appeals)-XIV, New Delhi relating to the assessment year 2001-02. 2. First we shall take up for consideration the assessee's appeal. The first ground of appeal of the assessee is general in nature and does not call for any specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iv) of the Income-tax Act, 1961 to Rs. 86,40,00,000 ignoring the details mentioned by the Assessing Officer in the assessment order. 4. The assessee is a company engaged in the business of manufacturing and sale of tractors, shockers, railway equipments etc., and also does other trading activities. For assessment year 200102, the assessee filed return of income declaring income of Rs. 46,60,88,916. In the course of assessment proceedings on such return of income, the Assessing Officer considered information, which he had received from the Directorate of Income Tax (Investigation), Chandigarh, regarding merger of two societies and resultant society consequent to such merger later on being converted into a limited company under the Companies Act, 1956 and the allotment of shares in the resultant society and limited company to the assessee. The Assessing Officer examined the question as to whether such allotment of shares to the assessee would give rise to income in the hands of the assessee, which can be brought to tax. 5. A Society by name Escorts Heart Institute and Research Centre, was formed and registered under the Societies Registration Act, XXI of 1860 on 21-10-1981. This Soc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in it and also take over of its liabilities by it. The necessary formalities in this regard were complied with and the Registrar of Societies, Delhi, ordered dissolution of the Delhi Society consequent to its merger with the Chandigarh Society. The date, on which the Delhi Society stood dissolved, is not mentioned in the order of the Registrar of Societies, Delhi but it is claimed that the Delhi Society stood merged with the Chandigarh Society w.e.f. 1-4-2000. 8. On 5-5-2000, the members of the Chandigarh Society resolved that it be registered as a limited company under Part-IX of the Companies Act, 1956. On 24-5-2000, the Chandigarh Society made an application with the Registrar of Companies, Chandigarh for registration of the Chandigarh Society as a limited company in this regard. On 30-5-2000, the Chandigarh Society was registered as a Company limited by shares. The certificate of Incorporation dated 30-5-2000 is placed at page 32 of Revenue's paper book No. I. The name of the Company is mentioned in this certificate as Escorts Heart Institute and Research Centre Limited. This limited company will hereafter be referred to as The EHIRC Limited . Thus the Chandigarh Society al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, neither the Government nor the Income Tax Department was informed nor consented to the dissolution, the provisions of section 13 of the SR Act, 1860 were violated. (b) Under section 12 of the SR Act, 1860, every member of the society was to be informed about any proposed merger. Mr. Anil Nanda, a member of the society had in his statement before the Directorate of Investigation, Chandigarh, stated that he was never informed about the proposed merger of the Delhi Society with the Chandigarh Society. Thus the provisions of section 12 of the SR Act, 1860, were violated. (c) The Minutes books of the Chandigarh Society found during the course of survey by the Investigation Directorate, Chandigarh, revealed that the minutes of the various meetings, as recorded in the minutes books, were not a contemporaneous record of the meetings that took place. The minutes were so recorded to camouflage passing of the assets of the Delhi Society to EHIRC Limited through the Chandigarh Society. (d) The Secretary of the Delhi Society had declared that as on 1-4-2000 all assets of the Delhi Society stood vested with the Chandigarh Society. Whereas EHIRC Ltd., in its letter dated 30-6-2000 addressed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80 per cent (being the share holding of the assessee in M/s. EHIRC Ltd.), be not treated as a return received by the assessee, on the initial investment of Rs. 60 lakhs made in assessment year 1982-83, which receipt/return was in the character of income within the meaning of section 2(24) of the Act. 13. The reply of the assessee in this regard as contained in their letters dated 18-3-2004 and 22-3-2004 and the conclusions of the Assessing Officer on the reply of the assessee are briefly as follows: (a) The assessee contended that the amount of Rs. 60 lakhs given by the assessee to the Delhi Society in the previous year relevant to assessment year 1982-83 was a donation to an approved institution under section 35(1)(ii) and the assessee had claimed exemption and was allowed exemption under the aforesaid section in assessment year 1982-83 and therefore it cannot be said that the allotment of shares was a return on investment of Rs. 60 lakhs made by the assessee in assessment year 1982-83. The Assessing Officer, however, held that the intention/ulterior motive of the assessee all along was to accumulate assets by the Delhi Society by retaining its character as a charitable society an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been held that the Revenue can ignore the corporate personality, if the economic realities and the interest of the revenue so demand. (e) The final and the very important contention of the assessee was, that in any event, no income within the meaning of section 2(24) of the Act, can be said to have accrued or arisen to the assessee. On this plea, the Assessing Officer held that the definition of income under section 2(24) of the Act, was an inclusive definition and that its scope was very wide. The Assessing Officer made reference to some case laws in this regard to highlight the legal position that the word 'income', is of widest and indefinite import and there cannot be any straitjacket formula by which one can determine the nature of receipt as to whether it is an income liable to be taxed or not. 14. Thereafter the Assessing Officer held that the value of assessee's investment in the Delhi Society over a period of 20 years (i.e., from 1981) has increased manifold and this increase in wealth is clearly taxable as income in the hands of the assessee, That the intention of the assessee throughout was to gain control over the assets of the Delhi Society therefore it in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Addition works out to Rs. 88,11,30,349. This is being held as assessee's income from other sources. 15. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the CIT(A). Before CIT(A), the assessee reiterated its plea as was put forth before the Assessing Officer. It was reiterated (a) that the Assessing Officer has no jurisdiction in law to pronounce on the validity of action taken under the Societies Registration Act, 1860 and Companies Act, 1956; (b) that M/s. EHIRC Limited in its letter dated 30-6-2000 addressed to the Registrar of Societies, Chandigarh, had referred to only the initial corpus of Rs. 7,000 contributed by members of the Chandigarh Society and no reference was made to the entire assets of the Chandigarh Society prior to its conversion as a Limited Company; (c) that no profits can in law arise from mere purchase of or subscription to shares. (d) Even if it is presumed that the intrinsic value of the shares of M/s. EHIRC Ltd. was higher than the price paid for the shares of EHIRC Ltd and that there is increase in wealth, the said increase is purely notional and cannot be assessed to tax in the hands of the assessee till the shares a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he payee of this cheque could not be said with certainty. The limited company allotted shares to the assessee on 16-6-2000 and, therefore, the assessee got shares of the limited company by paying Rs. 1.60 crores. The CIT(A) relied on a letter filed by the assessee in the course of assessment proceedings wherein there was a reference to payment entry in the Bank account of the assessee which related to payment for acquiring shares in M/s. EHIRC Ltd. The CIT(A), therefore, concluded that the assessee purchased shares of M/s. EHIRC Ltd. by paying Rs. 1.6 crores and the shares of the limited company were not issued to the assessee in lieu of its holding of shares in the Chandigarh Society. According to CIT(A), since the Chandigarh Society did not possess any assets, there was no question of the assessee paying Rs. 1.6 crores towards its capital. 19. Having concluded as above, the CIT(A) thereafter posed a question as to whether the case of the assessee fell within the ambit of section 2(24) or 2(24)(iv) of the Act. She thereafter referred to the definition of income under section 2(24) of the Act and concluded that it is an inclusive definition and not an exhaustive definition. The CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... da remained President and First Member of Board of Governors of EHIRC, Chandigarh also. EHIRC, Chandigarh got converted into EHIRC Ltd. vide the Incorporation Certificate issued by ROC from 30-5-2000. Shri Rajan Nanda remained Chairman, and first Director in EHIRC Ltd. also. The EHIRC, Chandigarh at the time of formation had assets only worth Rs. 7,000 and did not do any business till it got amalgamated with EHIRC, Delhi and even after amalgamation of EHIRC, Delhi with EHIRC, Chandigarh there was no other activity except that of EHIRC, Delhi activities which continued as it is on conversion of EHIRC, Chandigarh to EHIRC Ltd. on 30-5-2000. This sequence of events and facts clearly shows that Escorts Ltd. was controlling the affairs of EHIRC always whether it was a case of EHIRC, Chandigarh, EHIRC, Delhi or EHIRC Ltd. The allotment of shares has been done by EHIRC Ltd. to Escorts Ltd. for the reasons already discussed in para Nos. 3.5.6 and 3.5.7. There is no doubt that the 80% shares have been allotted by EHIRC Ltd. to the appellant company i.e., Escorts Ltd. at Rs. 10 per share while the value of share as per the book value of assets was Rs. 550 per share itself at the time of allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eleting the entire addition, the assessee is in appeal before the Tribunal. Aggrieved by the partial relief granted by the CIT(A), the Revenue is in appeal before the Tribunal. 23. We have heard the submissions of the ld. counsel for the assessee as well as the special counsel for the Revenue as well as the ld. CIT (DR). 24. The ld. counsel for the assessee submitted that the definition of income under section 2(24) of the Act is no doubt an inclusive definition and not an exhaustive definition but any sum sought to be taxed under the Act must bear the character of 'income' and that each and every receipt or benefit cannot be taxed as income. That the inclusive character of the term 'income' has to be understood as partaking of or sharing the same character as is available from its various sub-clauses. Referring to the categories of income as set out in section 2(24) of the Act, he submitted that there should be a receipt or a benefit or perquisite that should accrue to an assessee. In the instant case, there is no such receipt or benefit or perquisite that had accrued to the assessee, by purchase of shares alleged to have an intrinsic worth of Rs. 550 for a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the formalities required for such amalgamation are completed. The Delhi Society having agreed to the scheme of amalgamation vide special resolution passed in the meeting held on 26-2-2000, its assetswil1 vest w.e.f. 1-4-2000 with the Chandigarh Society by operation of law as per the scheme of amalgamation. 27. His further submission was that the conclusions of the CIT(A) that the assessee directly purchased shares of M/s. EHIRC Ltd. Is without any basis. In this regard he drew our attention to the cheque dated 27-5-2000 copy of which is placed at page 81 of assessee's paper book and the share certificate dated 27-5-2000 issued by the Chandigarh Society to the assessee. Our attention was also drawn to a copy of the bank statement of Deutsche Bank evidencing payment of Rs. 1.6 crores on 20-7 -2000 and the credit facility available for use by the assessee as per sanction letter dated 11-8-1997 of Deutsche Bank, sanctioning a limit of about Rs. 16 crores. According to the Ld. counsel for the assessee the issue of cheque dated 27-5-2000 in the name of the Chandigarh Society and its encashment on 20-7-2000 will only mean that the assessee purchased shares of the Chandigarh Society ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chandigarh Society (presuming that the assessee purchased shares of the Chandigarh Society after its amalgamation with the Delhi Society) to the member/chairman of the governing body of the amalgamating society (the Delhi Society) at a concessional price is a benefit or not, if yes, whether it was taxable? 30. He highlighted the fact that the assessee was President of the Delhi Society and one Mr. H.P. Nanda, in his capacity as representative of the assessee was acting as President and was also the principal promoter and a signatory to the Memorandum of Association of the Delhi Society at the time of its formation. He also highlighted the fact that the Chandigarh Society had, as its members, companies, which were under the control and management of the assessee or were its subsidiaries and was managed and controlled by the same individuals who controlled the Delhi Society. He brought to our notice the fact that the assessee has contributed over Rs. 14 crores over a period of 10 years to the Delhi Society. The assessee has, therefore, to be considered as a person having substantial interest in the Delhi Society as well as the Chandigarh Society after its amalgamation with the Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness or profession . He thus submitted that the same rules of ascertaining as to whether income accrues to a person, in the form of benefit or perquisite, by allotment of shares at a concessional price in a society in which he was a founder Member/President of the Governing body and, therefore, has a substantial interest, would equally apply. In this regard he clarified that the assessee by virtue of its being a promoter and President of the Governing body of the Delhi Society is deemed to have a substantial interest in the Chandigarh Society also after its merger with the Chandigarh Society. If the assessee is deemed to have purchased shares of EHIRC Ltd., directly then also it will be a case where such benefit is given to a person having substantial interest in the company. The reason being that the Chandigarh Society after its merger with Delhi Society was merely converted into a limited company. 31. He submitted that whenever a benefit, in the form of a concessional price, is offered to a person, income accrues to him, when the offer is made. He, therefore, submitted that the argument of the learned counsel for the assessee that even assuming that the assessee has received a be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arat Development (P.) Ltd. cannot help his case. He drew our attention to the facts of the said case, which were as follows: The assessee, a private limited company took over another private limited company by way of amalgamation and in the process surplus amount resulted which was the difference between the credit and debit entries as a result of the amalgamation. This was treated as income by the ITO. The question before the Court was, has any income accrued to the assessee by reason of amalgamation. The Division Bench dissented on the question. While Mr. Justice Ranganathan held that a trader cannot be held to make a profit just because he purchased an item of stock-in-trade for less than its market price. Mr. Justice Khanna took the view that that when the money aspect and gain thereof are by themselves plainly discernible and are not dependent on the sale that mayor may not take place, and the surplus enjoyed is clearly visible and stands accordingly credited in the books, as in the said case, it will not be correct to say that profit has still not accrued. That normally the mere purchase of merchandise does not result in income. Profit thereto arises only at the time of sale. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y allotted shares to the assessee, it was not its member. The shares were allotted only for the reason that the Chandigarh Society wanted to have persons known to them as its members instead of having strangers as its members and there was no other consideration whatsoever. In such circumstances he submitted that even assuming that there was any benefit, such benefit was received without any consideration and, therefore, if at all, it could at best be said that the assessee received a gift. He also submitted that there was no basis for the argument of the department that by virtue of the amalgamation of the Delhi Society with the Chandigarh Society, the major stackeholders in the Delhi Society are deemed to be major stakeholders of the Chandigarh Society. According to him factually, the assessee was not a major stakeholder in the Chandigarh Society either before or after its amalgamation with the Delhi Society. On the decision referred to by the learned Special Counsel in the cases of Emil Webher, Master Caurav Dalmia, D.M. Neterwalla and C.R. Karthikeyan he submitted that the propositions laid down therein were in a different context and do not the question involved in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igarh Society, in favour of the assessee. This share certificate is dated 27-5-2000. A cheque dated 27-5-2000 had been issued by the assessee towards the consideration payable for purchase of these shares. Copy of the cheque is placed at page 81 of assessee's paper book. The cheque is in the name of Escorts Heart Institute Research Centre . One thing which is clear from this cheque is that it is not in the name of the limited company viz., EHIRC Ltd. Another aspect to be noticed is that as on 27-5-2000, the Delhi Society by the very same name no longer existed as it already stood amalgamated with the Chandigarh Society. The cheque, therefore, is to be considered as issued in favour of the Chandigarh Society only. The evidence on record clearly goes to show that from the date of issue of this cheque i.e., on 27-5-2000 till it was encashed viz., on 20-7-2000. There were enough funds with the assessee so as to cover the amount of Rs. 1.60 crores throughout this period. The encashment of the cheque was, therefore, to relate back to the date of cheque. The decisions relied upon by the learned counsel for the assessee in this regard clearly support the stand of the assessee. It has, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other words, according to CIT(A), the benefit obtained by a person having substantial interest in the society has to be placed in the same position as person having substantial interest vis-a-vis a company and income has to be construed as having accrued to the assessee in the form of a benefit of allotment of shares at a concessional price. The CIT(A) further supports this conclusion with the various judgments of Hon'ble Courts holding that definition of Income is not exhaustive and whatever bears the character of income should be considered as Income . This is the alternate reasoning of the CIT(A) for brining to tax income in the hands of the assessee. 40. We now have to see if the assessee can be said to have substantial interest in the Chandigarh Society prior to issue of shares by it to the assessee. In this regard we may at the outset say that the expression Substantial Interest is defined in the Act in section 2(32) as follows: (32) 'person who has a substantial interest in the company', in relation to a company, means a person who is the beneficial owner of shares, not being shares entitled to a fixed rate of dividend whether with or without right to participat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pt of Gift . In law the concept of Income and Gift are not one and the same. 42. The Hon'ble Supreme Court has explained the definition of 'Income' as given in the Act under section 2(24). The Court expressed the view that it is not easy to define income. The definition in the Act is an inclusive one. The Court referred to the observations of Lord Wright in Raja Bahadur Kamakshya Narain Singh of Ramgarh v. CIT [1943] 11 ITR 513, 521 (PC), income is a word difficult and perhaps impossible to define in any precise general formula. It is a word of the broadest connotation . The Court also referred to the decision of the Privy Council in Maharajkumar Gopal Saran Narain Singh v. CIT [1935] 3 ITR 237,242, wherein the Privy Council pointed out that anything which can properly be described as income, is taxable under the Act unless expressly exempted . The Court also referred to the decision of the Supreme Court in Navinchandra Mafatlal v. CIT [1954] 26 ITR 758 in the context of constitutional validity of section 23 of the Income-tax Act, bringing to tax notional income from property, the Court had dwelled on the meaning of the expression Income and expressed the view that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esulted i.e., the value of the assets taken over were more than the value of liabilities taken over which was brought to tax. The question before the Court was whether the surplus was a revenue receipt chargeable to tax. The argument of the learned counsel for assessee before the High Court was that the assessee was not in the business of taking over other entities by way of amalgamation and, therefore, no income can be said to accrue at the time of purchase at a lower price. His Lordship Mr. Justice Ranganathan J., made the following observations on this issue: However, as I have already stated it is not necessary for the purposes of the present case to decide this issue as to whether the takeover of the other companies by the two present assessees can be described as business transaction or an adventure in the nature of trade, for, even assuming that it is so and that these are normal trading transactions, the assessee would still be outside the taxing net if the present case can be analogised to the illustration given earlier of a trader purchasing his stock-in-trade for less than the market value. I shall, therefore, for the purposes of the present case, proceed on the assumpti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in the form of trading activity is rarely a business adopted by people. Such equations or amalgamations of companies do not render them as commodities which are readily marketable. They cannot be termed as a normal class of stock-in-trade. Such trading activity has to be treated as a class of its own which may itself result in a plain profit if the price paid or cost involved was less than the value of the assets of those companies after deductions of their liabilities. If in these processes, substantial surplus amounts resulted in favour of the present asses sees and they were shown in the amalgamation accounts as having accrued to them, there are no reasons why those amounts should not be treated as gains and profit enjoyed from those well-planned and concerted activities. Thus, in the case of Bharat Development (P.) Ltd., the surpluses so enjoyed extended to Rs. 2,01,445 and Rs. 33,397 in the assessment years 1960-61 and 1961-62 respectively. In the case of Manav Sahyog Pvt. Ltd., the surplus so enjoyed after deduction of liabilities amounted to Rs. 4,10,415. 45. The learned Judge thereafter referred to the principle of valuation of stock-in-trade and after referring to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 's appeal, it is enough to conclude that no income can be said to have accrued or arisen to the assessee at the time of purchase of the shares at a price less than its book value. Thus it cannot be said that the assessee earned an income within the meaning of section 2(24) of the Act. This conclusion is with reference to the case as made out by the CIT(A). 47. The case made out by the Assessing Officer for bringing to tax the difference between the book value and the purchase price of the shares by the assessee, is also without any basis. The CIT(A) himself did not agree with the view of the Assessing Officer for the reasons assigned by him. The Revenue has not chosen to raise this issue in its appeal filed against the order of the CIT(A) on the very same issue. 48. Assuming that the Revenue was entitled to sustain the order of CIT(A) on a ground decided against it, we do not find any justification for interfering with the conclusions arrived at by the CIT(A). If the merger of the Delhi Society and Chandigarh Society is held to be null and void, then the consequence will be that the assets of Delhi Society, which is the main reason for the book value of the shares being valued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dividend income from the shares held in such several companies, the assessee was also being assessed on the profit or loss of business . Mostly, the result was a loss. The assessee was rendering certain common services to its subsidiaries by having: (1) a finance committee; (2) a liaison office in Delhi; (3) an export promotion department; and (4) an internal audit department. The expenditure on account of the latter three activities, viz., maintenance of a liaison office in Delhi and the departments of export promotion and the internal audit, was borne by the assessee and recovered from the subsidiaries. The Finance Committee was working in an advisory capacity to the various subsidiary companies to help them to carryon their business more efficiently. There were four directors of the assessee by name Austin, Kumar, Lund and Watts. Except Watts the rest of them were members of the Finance Committee. There were others who were neither directors of the assessee nor members of the Finance Committee. All the said persons entered into service agreements with the subsidiary companies. Kumar had a service agreement with Amalgamations; but his remuneration was being paid by Addison Paints ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of a business, that it carried on its business wholly or mainly in the dealing in or holding of investments and that the expenses were wholly and exclusively laid out for the purpose of the assessee's business. The point before the Hon'ble High Court for consideration was whether the respective amounts could be said to be expenditure incurred wholly or exclusively for the purpose of the assessee's business. The first aspect that needed to be examined was whether the assessee was carrying on any business at all. The revenue submitted that the mere holding of an investment would not constitute business. The Madras High Court after referring to several decisions of the Hon'ble Supreme Court concluded as follows: 'The Supreme Court examined this problem in the case of CIT v. Distributors (Baroda) (P.) Ltd. [1972] 83 ITR 377. In that case the assessee was a managing agent. It held shares in the managed companies. It had shares in other companies also. The income from the managing agency and the dividend income from the shares held in the managed companies were more than the income earned by it from its share dealing in the relevant years. The question before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestments and the other in holding of them and holding of investment in appropriate cases would, in the view of Parliament, equally be a business as dealing in them. The only requirement is that there must be a real substantial and systematic or organized course of activity or conduct with the set purpose of earning profit which is the test for a business. Examined in this light it would be found that the assessee is not a mere investor in a single company. It has investments in 16 companies. It had taken active interest in the business of these companies as is clear from the services that had been rendered in the shape of export promotion, liaison office at Delhi and internal audit. It also rendered consultation in respect of finance by its directors meeting every day with reference to the needs and requirements of each company. It was also stated before us that apart from the original acquisitions, the assessee-company itself was responsible for starting several engineering companies and that it held the shares in such companies which it actively promoted. Even without going into the correctness or otherwise of this submission about which the relevant facts do not appear on reco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee to the Delhi Society confirming the payment of Rs. 60 lakhs as donation in the previous year relevant to assessment year 1982-83. The ld. counsel for the revenue has filed before us the 36th Annual report of the assessee relevant to the year 1980. Similarly Annual reports of the assessee for the year 1997-98 to 2000-01 were also filed. We may at this stage mention that the Annual report for the year 2000-01 is a document, which pertains to the previous year relevant to the assessment year 2001-02. As far as the other Annual reports are concerned, the plea of the counsel for the revenue has been that they are part of the records available with the Assessing Officer relating to the assessee. 53. Our attention was drawn to page 80 of revenue's paper book No.3. This is an Annual report for the year 1997-98. In the Chairman's message to the shareholders, it has been mentioned that the assessee's investment in its group companies were to the tune of Rs. 280 crores and that the same was likely to grow up to Rs. 450 crores in 1999. It has further been stated that these investments have sound economic and business potential and are foreseen as profit making entitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to the chairman's message in these annual reports the ld. DR highlighted the fact that investments had been made by the assessee in the capital of various subsidiaries and in this regard drew our attention to the balance sheets for all the aforesaid years. He also drew our attention to the annual reports and submitted that services of employees of the assessee were being lent to the subsidiaries and the subsidiaries were reimbursing the remuneration payable to such employees to the assessee. 54. From the above, the ld. Special Counsel contends that the assessee was systematically organizing a course of activity in the matter of working for and advising its subsidiaries. It was submitted that the assessee was not making investments as a normal investor but had taken active interest in the business of various companies in which it had made investments. The assessee was not content with merely making an investment and looking for dividend. The assessee was therefore in the business of holding investments. He pointed out that the assessee had been giving loans to its subsidiaries and had also stood as guarantor for the loans availed by the subsidiaries. These activities, acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be considered for adjudication. According to him the plea is not an additional ground since the question involved in the appeal is as to whether income accrued in the hands of the assessee within the meaning of section 2(24) of the Act and what the revenue wants to contend now is nothing but bringing to the notice of the Tribunal that on the facts of the present case, it could be said that Income within the meaning of section 2(24) had in fact accrued and arisen to the assessee. According to him the Tribunal has powers to adjudicate such new plea even without the parties before it raising an additional ground of appeal. The learned Counsel for the revenue placed reliance on the following decisions to contend that the Tribunal has such powers. 1. Hukumchand Mills Ltd v. CIT [1967] 63 ITR 232 (SC) 2. CIT v. Mahalakshmi Textile Mills Ltd [1967] 66 ITR 710 (SC) 3. D.M. Neterwalla v. CIT [1980] 122 ITR 880 (Bom.) 4. Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom.)(FB). 5. National Thennal Power Co. Ltd. v. CIT [1998] 229 ITR 383 (SC). 57. The learned counsel for the assessee opposed the request of the learned counsel for revenue for adjudication of the new plea put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scheme of the Act, indicates that evidence has to be led primarily before the ITO, though additional evidence may be led before the AAC or even before the Tribunal, subject to the provisions of section 31(2), of the Act and rule 29 respectively. A.K. Babu Khan (By Legal Representative) v. CWT, A.P. 102 ITR 757 (AP) wherein it was held that it is well-settled that a party guilty of remissness and gross negligence is not entitled to indulgence being shown to adduce additional evidence. CIT v. M.P.V. Babulal Nim 47 ITR 864 (MP) wherein it was held that Affidavit filed not for the reason that Tribunal found itself unable to decide the appeal on materials before it, nor assessee prayed for being allowed to file evidence in support of his statement. In these circumstances, there was no justification for Tribunal for entertaining new case which was put forward by the assessee for the first time before it and for directing him to file an affidavit to support it. The affidavit which the assessee filed and the material which he produced before the Tribunal constituted additional evidence which the Tribunal admitted contrary to rule 29 of the Appellate Tribunal Rules, 1946. Arjun Singh v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound in the appeal filed by the other side, the relevant facts on which such ground is to be founded should be available on record. In the absence of such primary facts, in our opinion, neither the assessee nor the Department can be permitted to urge any ground other than those which are incorporate in the memorandum of appeal filed by the other party. In other words, if the assessee or the Department, without filing any appeal or a cross-objection seeks to urge a ground other than the grounds incorporated in the memorandum of appeal filed by the other side, the evidentiary facts in support of new ground must be available on record. U.P. State Road Transport Corporation v. ITAT 245 ITR 711 (All.) where it was held that in the appeal before Tribunal no ground was set up to contend that the activity of assessee was not of the nature of business and therefore section 44AB did not apply. This contention was attempted to be raised merely during the arguments on the appeal and the Tribunal justified in refusing to entertain the said contention as to whether section 44AB was applicable. CIT v. Ashok Leyland Ltd. 253 ITR 318 (Mad.) wherein it was held that for admission of additional groun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich the counsel for revenue wants to put forth before the Tribunal on the basis of the decision of a High Court confirmed by the Hon'ble Supreme Court viz., in the case of Amalagamation (P.) Ltd., would involve adjudication of a fact viz., as to whether the assessee is in the business of holding investments. The revenue authorities have never adjudicated this fact. Even assuming that the past records viz., Annual reports of earlier years are material available on record, then also, from those materials available on record, an inference cannot be drawn that the assessee is in the business of holding investments. At any rate, the assessee was not confronted with the material viz., these Annual reports and called upon to show cause as to why it should not be considered as having been engaged in the business of holding investments. According to him it would be travesty of Justice if the Revenue at this stage is permitted to put forth such a case. According to him, even in the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills Ltd., the point for consideration was mere application of a law, which was to be applied to determine the tax liability of an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons should be assigned as to why the evidence could not be produced earlier: The request should be made bona fide. (d) Additional evidence cannot be let in to fill up the gaps or lacunae in the case of a party. The party letting in additional evidence cannot in the garb of letting in additional evidence, seek to avail a fresh opportunity. More so, when the party letting in additional evidence was negligent. (e) State cannot introduce evidence in the guise of additional evidence, evidence which was available all along. Acting as a quasi-judicial authority, the Revenue is expected to display fairplay/justice. (f) It is always the discretion of the Tribunal to admit or not to admit additional evidence. Discretion to admit additional evidence should be sparingly and cautiously used and reasons should be assigned for admitting additional evidence and as to how the additional evidence is necessary to decide the case. (g) Additional evidence can be adduced for substantial cause . The expression substantial cause is equal to extraordinary circumstances. Sunder Lal Son v. Bharat Handicrafts (P.) Ltd. [1968] 1 SCR 608 and State of UP v. Manbodhan Lal Srivastava AIR 1957 SC 912. 63. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nstruction Co. v. CIT [1985] 156 ITR 459 to contend that whatever material is sought to be relied has only to be confronted to the assessee and beyond this the assessee cannot have any grievance. He strongly relied on the decision of the Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. to contend that in the said case revenue was given opportunity to explore the possibility of sustaining the action of the revenue authorities on a ground different from what was originally in dispute before the Revenue authorities. He contended that when the applicability of a legislation not relied upon or referred to in the orders of the revenue authorities to the facts of a particular case was held to be sustainable, the applicability of a judicial decision in identical circumstances, to the facts of a particular case to decide on the taxability or otherwise of an item of income can also be considered. 65. We have considered the rival submissions. The powers of the Tribunal in dealing with appeals are expressed in section 254(1) of the Act in the widest possible terms, which read as under: The Appellate Tribunal may, after giving both parties to the appeal an opportunity of being hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision of the Hon'able Supreme Court in the case of National Thermal Power Co. Ltd. The Hon'ble Supreme Court in the aforesaid decision reframed question of law for consideration as follows: Where on the facts found by the authorities below a question of law arises (though not raised before the authorities) which bears on the tax liability of the assessee, whether the Tribunal has jurisdiction to examine the same? Answering the above question, the Hon'able Supreme Court held as follows: 3. Under section 254 of the IT Act the Tribunal may after giving both the parties to the appeal an opportunity of being heard, pass such orders thereon as it thinks fit. The power of the Tribunal in dealing with appeals is thus expressed in the widest possible terms. The purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law. If, for example, as a result of a judicial decision given while the appeal is pending before the Tribunal, it is found that a non-taxable item is taxed or a permissible deduction denied, we do not see any reason why the assessee should be prevented from raising that question b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce no depreciation had been actually allowed under the Act, the original cost should be taken as the basis of allowing depreciation without taking into consideration the number of years during which the machinery had been working or the depreciation it had suffered or the written down value entered in the books. The Tribunal held that only that part of the depreciation, which entered into the computation of the taxable income of the assessee under the Act can be treated as depreciation actually allowed . It was urged before the Tribunal by the Department that although the Income-tax Officer had not considered the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950 (hereinafter referred to as the Taxation Laws Order ), the said provisions were applicable in the present case and certain amounts of depreciation which are allowed under the Industrial Tax Rules, which had the force of law in the Indore State, (prior to its becoming a part of the Indian Dominion) were required to be deducted in arriving at the written down value of the assets of the assessee. The Tribunal permitted this contention to be raised by the department. It was poi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e argument of the department in this case and to direct the Income-tax Officer to find whether any depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation should be taken into consideration for the purpose of computing the written down value. As can be seen from the facts of the aforesaid case, no fresh facts were to be ascertained. It was only to be verified as to whether the depreciation was actually allowed under the Industrial Tax Rules and whether such depreciation was to be considered as depreciation allowed as per law in force in the Indore State prior to its merger with the Indian Union by virtue of the provisions of paragraph 2 of the Taxation Laws (Part B States) (Removal of Difficulties) Order, 1950. 68. We, may, at this stage, refer to the decision of the Hon'ble Gauhati High Court in the case of Assam Company (India) Ltd. v. CIT [2002] 256 ITR 423 which has dealt with the decisions of the Hon'ble Supreme Court in the case of Hukumchand Mills Ltd. and Mahalakshmi Textile Mills Ltd., relied upon by the learned Special Counsel for the Revenue, in the context of admission of new plea for adjudication by the Tribunal for the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt in the case of Ahmedabad Electricity Co. Ltd. In the said decision, the Court after referring to several judicial pronouncements on the subject held that the Appellate Tribunal has jurisdiction to permit additional grounds to be raised before it even though these may not arise from the order of the Appellate Assistant Commissioner, so long as these grounds are in respect of the subject-matter of the entire tax proceedings. The Court has not said anything about the existence of the facts necessary for adjudication of the additional or a new ground. The preponderance of judicial opinion is that the facts necessary for adjudication of a new ground should already be available on record. Thus, on this aspect we are unable to concur with the arguments of the learned Special Counsel for the Revenue. 70. A pertinent question which arises here is as to whether it can be said that the facts necessary for adjudication of the new plea of the revenue are available on record. For this, it would be appropriate to appreciate the arguments of the learned Special Counsel for the Revenue. He wants to contend that the assessee is in the business of holding investments and in this regard wants to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the assessee was never considered as being in the business of holding investments either in the past or in the assessment proceedings of the instant year. To conclude otherwise without an enquiry into the primary facts necessary for coming to such a conclusion, would not be proper. In this background, to venture to consider and hold that the assessee was in the business of holding investments would be unjustified. Even assuming that the Annual reports of earlier years were to be considered as material available on record, but on the basis of those records alone it is not possible to conclude that the assessee was engaged in the business of holding investments. In other words, complete evidentiary facts cannot be said to be available on record to adjudicate this new plea raised on behalf of the Revenue. We therefore, decline to adjudicate on the new plea raised by the revenue as to whether the purchase of shares in the Chandigarh Society (after amalgamation) by the assessee at a price less than its intrinsic value would give rise of 'income' within the meaning of section 2(24) read with section 28(iv) of the Act. 72. In the alternative, what the revenue desires is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 37(1) of the Act. Aggrieved with the order of the Assessing Officer, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A), the assessee contended that the provision of Explanation 1 to section 32(1) was not attracted in its case, as the expenditure in question cannot be considered as a capital expenditure simplicitor. The CIT(A), after perusing and analyzing the details of expenditure, has concluded that the same is capital expenditure since it is incurred by the assessee with the objective of either to bring a new asset into existence or to obtain a new or fresh advantage . Thus, the addition has been sustained. Not being satisfied with the order of the CIT(A), the assessee is presently in appeal before us. 77. Before us, the ld. Counsel, appearing on behalf of the appellant, has reiterated the submissions made before the lower authorities. Our attention has also been invited to the details of the expenditure, which is placed in the assessee's paper book at pages 126 to 159. Referring to the details or expenditure, it was submitted that in the case of Shah House premises, Mumbai, the expenditure is in respect of repairs incurred collectiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture on renovation of the building. The details of the work carried out in this regard reveal that it involves concrete work, guniting works etc. relating to the exterior of the building and also interior work relating to structural steel reinforcement work, etc. No doubt, such an expenditure is incurred for the purposes of business, but it does result in a benefit of enduring nature and is liable to be treated as capital in nature. The expenditure is in the nature of improvement to the building and thus the provisions of Explanation 1 to section 32(1) has been rightly invoked by the Assessing Officer. To this extent, we affirm the decision of the CIT(A). Insofar as the balance expenditure of Rs. 33,47,605 is concerned, the nature of expenditure is towards payment for internal furnishings, painting and polishing work, dismantling of old false ceiling, fees for interior designing, lift maintenance, etc. All these expenses are incurred by the assessee for the purposes of its business. They can at best be considered as having been spent by the assessee on making its work place suitable and comfortable so as to carry out its business conductively. It is certainly not incurred for acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count. Alternatively, the CIT(A) should have directed allowance of depreciation. 85. The said ground relates to the treatment of expenditure of Rs. 35,72,400 incurred by the assessee on software technology upgradation and computerization. The said expenditure represented cost of ERP system, foreign travelling expenses/ conveyance expenses of executives for replacement of existing computerized system with that of ERP (i.e., Enterprises Resource Planning) system with respect to the Engineering Division of the assessee-company. The assessee claimed to have incurred the impugned expenditure for modernizing, upgrading and acquiring new technology in the place of old software system. The old system was of Oracle version 7.0. The new system installed in the Engineering Division related to production, planning, HR and pay roll planning etc. The expenditure has been claimed as revenue expenditure deductible under section 37(1) of the Act. The Assessing Officer held that the impugned expenditure resulted in enduring benefit to the assessee and therefore, was liable to be considered as a capital expenditure. He, therefore, disallowed the claim of the assessee. The CIT(A) has since sustained t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi Bench of the Tribunal in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119. The ld. DR pointed out that in the instant case, it involved a purchase of ERP system software and was not a case of upgradation and maintenance of software and, therefore, the decision of Maruti Udyog Ltd. is clearly attracted. 88. We have considered the rival submissions of the parties carefully. Insofar as the factual aspect of the matter is concerned, the details of the expenditure amounting to Rs. 35,72,400 in question have been placed at pages 160 to 162 of the assessee's paper book. The major expenditure to the extent of Rs. 35,36,000 represents the cost of purchase of ERP System and the balance of the expenditure of Rs. 36,400 is the related travelling expenditure. The expenditure of purchase is supported by the invoice of the supplier M/s. Inforgem Technology, a copy of which is also placed in the assessee's paper book. The assessee has acquired the ERP business software with unlimited user license. Therefore, in view of the aforesaid, there cannot be a dispute to the fact that the expenditure in question is incurred on an acquisition of software by way of an outright purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts of the instant case. Viewed in this light, we do not find that the ratio of the aforesaid decisions help the assessee in the instant case. The assessee accordingly fails on this ground. 90. Ground No.5 of the grounds of appeal of the assessee is as under:- The CIT(A) has erred in disallowing expenditure to the tune of Rs. 15,56,611 out of the total claim of Rs. 25,93,786 incurred towards the expansion and diversification of the company's existing business. The above ground is related to ground No.3 of the grounds of appeal of the revenue which reads as under:- On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 10,37,275 made by the Assessing Officer on account of expansion and diversification of company's business ignoring that the said expenditure resulted in imparting enduring benefits to the assessee-company and as such was of capital nature. 91. The brief facts are that the assessee-company incurred a sum of Rs. 25,93,786 on new projects towards expansion and diversification of its business. The same was claimed as a revenue expenditure under section 37(1) of the Act in the return of income. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions. The allowability of the impugned expenditure is to be considered in the light whether the projects, in connection with which the expenditure has been incurred, were in the existing line of business of the assessee or not. If it is held that the new projects were in the existing line of assessee's business, then the expenditure is allowable in terms of section 37(1) of the Act. The assessee-company is engaged in the business of manufacturing and sale of tractors, shockers, railway equipment, etc. besides certain trading activities. Broadly speaking, the assessee is inter alia in the business of manufacture of various products like automotive parts, railway equipments, etc. By way of the three projects in question, the assessee only sought to expand the range of its products manufactured. For instance, the REX LOK Project envisaged the manufacture of Rail Fastening System, the actual production started in December 2002. Admittedly, the assessee was already in the line of manufacturing of rail equipments and thus the new project was a mere extension of the existing business. The expenditure in question incurred on such project is primarily related to discussions with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 21.70 lakhs out of the disallowance of Rs. 2,01,88,412 made by the Assessing Officer by invoking the provisions of section 14A of the Income-tax Act. The allocation of administrative expenditure to the tune of Rs. 5,00,000 as also the apportionment of the personnel expenses to the tune of Rs. 16.70 lakhs to obtain a few dividend/interest warrants is not at all justified when such receipts are normally credited directly in the bank accounts of the recipients. Alternatively, disallowance is on the higher side and a token amount would meet the ends of justice. The above ground preferred by the assessee is related to ground No.7 of the grounds of appeal of the revenue which reads as under:- On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 1,80,18,412 out of total disallowance of Rs. 2,01,88,412 made by the Assessing Officer under section 14A of the Income-tax Act, 1961. 96. The facts in brief are as follows: The assessee-company had declared dividend income of Rs. 8.9 crores (approx.) and interest income of Rs. 10.13 crores (approx.), which was claimed as exempt under sections 10(33) and 10(23G) of the Act respecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the expenses on Personnel salaries, Rent, Printing and stationery, Postage, telegram and telephone and general expenses totalling to Rs. 167.41 crores. The proportionate expenses allowable to dividend and interest income was computed at Rs. 2,01,88,417. The said amount was disallowed while computing the total income of the assessee. The assessee carried the matter in appeal before the CIT(A). In appeal, the assessee contended that on facts, circumstances and legal position of the case, section 14A is not applicable. It was, inter alia, contended that no expenditure has been incurred by the assessee for earning the dividend and interest incomes. A reference was also made to the order of the Tribunal in the assessee's own case for assessment year 1981-82 where similar issue for disallowance of expenditure relating to earning of dividend income was considered and the Tribunal has decided the issue in favour of the assessee holding that no expenditure on the facts and circumstances of the case are attributable to the earning of the dividend income. After considering the pleas of the assessee the CIT(A) has held that (i) the investments made during the year have been made from ow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. According to the revenue, the apportionment of total expenses incurred by the assessee on Personnel, Rent, Printing Stationery, Postage, telegram and telephone and general expenses have been rightly made by the Assessing Officer on the basis of proportion of exempt income vis-a-vis the total income. The apportionment was sought to be justified on the basis that no detail of the expenses was submitted by the assessee. Regarding the order of the Tribunal for assessment year 1981-82, it was contended that the same was in relation to determining the amount of income for the purposes of allowing deduction under section 80M of the Act and the implication of section 14A of the Act was not considered, as the same was not on the statute at that point of time. 99. We have considered the rival submissions. Section 14A provides that if the assessee has income which does not form part of the total income under the Act, then in computing the income under any of the Heads of income mentioned in Chapter IV, no deduction shall be allowed in respect of expenditure which is incurred in relation to such excluded income. In other words, the import of section 14A is that if a particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evious year relevant to the assessment year in question, the CIT(A) in para 13.3.1 of her order concludes that it has been confirmed during the course of appellate proceedings that the investments have been made from the credit balance available in the banks and not by taking loans . This finding has not been challenged or refuted by the revenue before us. Similarly, it is factually not disputed that the interest considered exempt under section 10(23G) of the Act has been earned on loan advanced in an earlier year. Thus, it can be safely deducted that out of the interest cost incurred by the assessee during the year under consideration, nothing can be said to be related to earning of the dividend and interest income considered exempt under sections 10(33) and 10(23G) of the Act respectively. This leaves us with other indirect management and administrative expenses, which might have been incurred by the assessee for earning the impugned incomes. Ostensibly, the assessee does not have any dedicated set-up for the purposes of managing its investment portfolio. This activity is intermingled with its other activities. Thus, an estimation is required to ascertain expenditures which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ends of justice. As a result, we conclude by holding that ground No.6 of the Grounds of appeal of the assessee is partly allowed and ground No.7 of the Grounds of appeal of the revenue is dismissed. 100. The seventh ground taken by the assessee is with regard to the charging of interest under sections 234B and 234C of the Act, which is consequential in nature and the Assessing Officer shall recompute the same after considering the effect of the instant order. 101. The appeal of the assessee is thus disposed of as partly allowed. 102. This leaves us with the remaining grounds in the appeal of the revenue, which we take up in the following paragraphs. 103. Ground No.2 of the Grounds of appeal of the revenue is as under: 2. On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 7,48,00,851 made by the Assessing Officer on account of premium on redemption of SPNs.' 104. The said ground taken by the revenue is against the action of the CIT(A) in deleting the disallowance of expenditure of Rs. 7,48,00,851 being proportionate premium payable in respect of Secured Premium Notes (referred to as SPNs). The relevant facts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any finding or even an allegation by the revenue to the contrary. Thus, the liability to pay the premium amount over and above the face value of SPNs on redemption is a liability incurred by the assessee for the purposes of its business by generating funds which were utilized for its business activities. Thus, such an expenditure is an allowable expenditure. Now, with regard to year of allowability, it is evident that the payment of premium results in securing of benefit over a number of years. The benefit is spread over the entire period of 7 years. The expenditure is, therefore, allowable over the entire period of the SPNs till redemption, having regard to the parity of reasoning enunciated by the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. The assessee, therefore, correctly claimed deduction only in respect of the proportionate premium relateable to the year in question. 107. In any case, the factors considered by the Assessing Officer for making the disallowance are irrelevant and have no bearing to decide the issue on hand. We, thus, affirm the conclusion of the CIT(A) on this ground. Ground No.2 of the Grounds of appeal of revenue is thu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in deleting the disallowance of expenses of Rs. 64,95,097 made by the Assessing Officer on account of expenses claimed under the head 'commission, discount and brokerage' on sales made to Government parties ignoring the provisions of Explanation to sub-section (1) of section 37 of the Income-tax Act, 1961. 114. The facts in brief are that the assessee had incurred a sum of Rs. 21,75,81,407 under the head 'Commission, Discount Brokerage'. Out of the total expenditure a sum of Rs. 64,95,097, being commission paid to third parties relating to the Government sales, was disallowed by the Assessing Officer following his stand for an earlier year. The assessee explained that the expenditure comprised of commission/incentive to authorized dealers/stockists, commission to third parties/agents relating to sales made to various customers including Government and non-Government, trade discount, cash discount, brokerage etc. In support of its claim, the assessee filed copies of appointment letters of the agents as also the confirmation of the parties. In the appeal proceedings before the CIT(A), the assessee further submitted that the Assessing Officer wrongly observed that in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emonstrate any infirmity in the order of the CIT(A). It is evident that the claim of expenditure, being on account of incentives and commissions related to sales made by the assessee, are accepted as related to the business activity of the assessee. The claim of the assessee is in line with the expenditure incurred in the earlier assessment years. The parties who have received the commission to the extent of Rs. 64,95,097 have confirmed the receipt of payment. The details of such parties, numbering four, along with their addresses, mode of payment, income-tax particulars, confirmations etc. have been submitted by the assessee in support of the claim. The copies of the same are placed in the paper book filed before us. We do not find that the Assessing Officer has brought on record any material or evidence to contradict the aforesaid material relied upon by the assessee. Having received the confirmations from the said parties, it was open to the Assessing Officer to subject the same to the process of further verification if he had any doubt with regard to the authenticity of the same. No such effort has been made by the Assessing Officer. The entire evidence and material brought on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been deleted. The revenue is aggrieved and is presently in appeal before us. 120. We find that the fact position is that the impugned amount of loan of Rs. 38.01 crores was given to M/s. Escotrac Finance Investment Ltd. prior to the financial year 1995-96 by a company namely M/s. Escorts Tractors Ltd. M/s. Escorts Tractors Ltd. subsequently amalgamated with the assessee-company with effect from 1-4-1995 and, thus, the said loan since then has been appearing in the accounts of the assessee. The loan in question has been advanced free of interest. The plea of the revenue is that when the business of Escorts Tractors Ltd. stood merged with the assessee-company, the liabilities along with the assets were also taken over. The assets taken over would not remain static and, therefore, it was open to the assessee to have charged interest on the impugned advances. This would have led to a saving in the interest costs. The assessee has, on the other hand, borrowed moneys and was paying interest on the same. Under these facts, ld. DR submitted that had this money not been advanced free of interest to the sister concern, to that extent, it may not have been necessary for the assessee to make ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee on interest on the ground that it had made certain interest-free advances and that the absence of such interest-free advances would have enabled the assessee not to make the borrowings on which interest is paid. It is to be understood that the allowability of expenditure in the hands of the assessee is to be considered in the light of the provisions of section 36(1)(iii) of the Act. If the expenditure of interest is incurred by the assessee for the purposes of its business, the same stands expressly allowed in terms of section 36(1)(iii) of the Act. No doubt, interest on borrowings which have been diverted by the assessee for non-business, activities can certainly be disallowed. But for this purpose, a finding has to be reached that the assessee has diverted any of its interest bearing borrowings for non-business purposes. In the instant case, there is no finding to this effect. In fact, the amount of loan in dispute has been advanced in the earlier years and, therefore, its character has to be understood in the same light as taken in the earlier years. In the earlier years, indisputably, the impugned loan has been accepted as having been advanced for business purposes in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncern. Thus, the ratio of the decision of the Hon'ble Allahabad High Court in the case of HR. Sugar Factory (P.) Ltd does not help the case of the revenue. 125. In the result, ground No.6 preferred by the revenue is hereby dismissed. 126. Ground No.8 of the Grounds of appeal of the revenue is as under:- On the facts and in the circumstances of the case and in law, the CIT(A) has erred in deleting the disallowance of Rs. 41,48,896 made by the Assessing Officer on development of existing products ignoring that such expenditure imparted a benefit of enduring nature and as such was of capital nature. The CIT(A) also ignored that the assessee had separately claimed deduction under section 35(1)(iv) of Rs. 23,93,88,410 as capital R D expense and treated this expenditure of Rs. 41,48,896 only as pre-operative expense. 127. The said ground taken by the revenue is against the action of the CIT(A) in deleting the disallowance of Rs. 41,48,896 made by the Assessing Officer representing expenditure on development of existing products of the assessee-company. The facts are that the assessee had claimed in its return of income the impugned expenses on its research and development activity u ..... 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