TMI Blog1999 (12) TMI 112X X X X Extracts X X X X X X X X Extracts X X X X ..... se two companies, viz., the appellant-company, M/s. Spartek Ceramics India Ltd. and M/s. Spartek Granites Ltd. have filed petitions under section 391 read with section 394 of the Companies Act, 1956 before the Hon'ble High Court of Andhra Pradesh praying for approval of a Scheme of Amalgamation between the two and to pass an order effecting the Amalgamation as approved by the shareholders and secured creditors of the two companies. The Hon'ble High Court of Andhra Pradesh under its ordinary original civil jurisdiction passed judgment on 2nd July, 1992 approving the scheme of Amalgamation of these two companies with effect from 1-4-1991, i.e., from the beginning of the financial year 1991-92, which is the previous year relevant to the assessment year 1992-93, which is involved in the present appeal. Henceforth, M/s. Spartek Granites Ltd. ceased to exist and has become a unit of the appellant-company, generally referred to as "Granites Division". 3. On the basis of the Scheme of Amalgamation approved by the Hon'ble High Court of jurisdiction under the Companies Act, the appellant company has made up the consolidated accounts as a single entity, combining the results of the two divi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1991-92. Therefore, the appellant-company added back the unabsorbed depreciation of its Granites Division to the gross value of the assets transferred from the Granites Division on amalgamation, and claimed depreciation thereon. This was disallowed by the Assessing Officer, and his action was confirmed by the CIT(A). 5.2 Even though this issue has been raised in this appeal as ground No. 1 and exhaustive notes have been given in the written submissions filed by the assessee-company, Shri C.V.K Prasad, the learned Counsel appearing for the assessee-company submitted at the time of hearing that the appellant-company does not press this ground any more. He submitted that this ground may be treated as not pressed. 5.3 Shri C.P. Ramaswamy, the learned Departmental Representative submitted that the claim of brought forward unabsorbed depreciation cannot be allowed in view of Explanation 2(b) provided under sub-section (6) of section 43, read with section 72A of the Income-tax Act, 1961. According to the said Explanation, where in any previous year any block of assets is transferred by the amalgamating company to the amalgamated company in a Scheme of Amalgamation, the actual cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns detailed by the Assessing Officer in para-7 of his order, he treated the interest as capital expenditure and disallowed the claim made by the assessee-company. 6.3 The CIT(A) in paragraphs 5 to 7 of his order considered this issue in appeal. He also agreed to the views taken by the Assessing Officer. He held that there was no, complete unity, inter-lacing, inter-dependence and inter-connection of management between the two divisions of the appellant-company, and therefore, the case-laws relied on by the assessee were not applicable to the case in hand. He held that the two divisions are separate and independent units. He also held that the case is covered by the decision of the Hon'ble Supreme Court in Challapalli Sugars Ltd's case. Accordingly, he confirmed the disallowance. 6.4 The contention of the assessee-company is that the lower authorities are not correct in their finding. The erstwhile Spartek Granites Ltd. had commenced production on 26-3-1991, i.e., during the previous year relevant to the assessment year 1991-92 itself, and since commercial production has started, the interest on borrowings made for the purpose of acquiring capital assets could not be capitalised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 632 (SC), (c) Produce Exchange Corpn. Ltd. v. CIT [1970] 77 ITR 739 (SC), (d) Standard Refinery Distillery Ltd. v. CIT [1971] 79 ITR 9 (SC), (e) Veecumsees v. CIT[1996] 220 ITR 185 (SC), (f) IAC v. Coromandal Fertilizers Ltd. [1989] 29 ITD 455 (Hyd.). 6.7 The learned counsel further argued that it is not correct to point out that plant and machinery were not put to use for the purpose of disallowing the claim of depreciation. The erstwhile Spartek Granites Ltd. had gone into commercial production even before amalgamation, on 26-3-1991. and by virtue of Explanation 8 to section 43(1), the interest could not be capitalised for the purpose of Income-tax. 6.8 The learned Departmental Representative, on the other hand supported the findings of the lower authorities. The learned Departmental Representative invited our attention to Clause (g) of the Statement under section 393 approved by the High Court, wherein it has been stated that the merger will in no way affect the 100% Export Oriented Unit status of the Transferor-Company (i.e., Spartek Granites Ltd.), as it will continue to exist as a separate E.O.U. Division of the transferee-company. He submitted that this cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 6.13 As rightly contended by the learned counsel, the interest payable in connection with the acquisition of capital asset, so much of such amount as is relatable to any period after such asset is put to use shall not be included in the actual cost of such asset. This is provided in Explanation 8 to section 43(1) of the Income-tax Act. The necessary inference is that the post-production commencement interest has to be considered as revenue expenditure. 6.14 The above position is supported by the principles laid down by the Hon'ble Supreme Court in India Cements Ltd.'s case. As a principle, the Hon'ble Supreme Court has held as follows "The act of borrowing money was incidental to the carrying on of business. The loan obtained was not an asset or an advantage of enduring nature. The expenditure was made for securing the use of money for a certain period, and it was irrelevnt to consider the object with which the loan was obtained. Where there is no express prohibition, an outgoing by means of which an assessee procures the use of a thing by which he makes a profit is deductible from the receipts of the business to ascertain the taxable income." 6.15 The decision relied on by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed by the assessee-company is for the period after commencing commercial production. Therefore, in view of the decisions of the Supreme Court in Standard Refinery Distillery Ltd. 's case and India Cements Ltd's case and other cases relied on by the assessee, we find that the disputed interest of Rs. 25,62,371 is a revenue expenditure and eligible for deduction in the computation of taxable income. Accordingly, we direct the Assessing Officer to allow the same as an eligible deduction. At the same time, he may withdraw the differential depreciation allowed on the ground of treating the claim as capital expenditure. This issue is, thus, decided in favour of the assessee and the ground No. 2 is allowed. 7.1 The third ground raised in this appeal is regarding the disallowance of depreciation on additional liability provided on account of fluctuations in the foreign exchange rate. 7.2 Two issues are involved in this ground. First issue is the disallowance of depreciation itself. The second issue is that relating to the rate to be adopted for computing the additional liability on account of the foreign exchange rate fluctuation whether the official exchange rate pronounced by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... additional cost/liability also. 7.7 But this adjustment to cost of acquisition is available only to the amount by which the liability has increased or decreased during the previous year. Therefore, while computing the additional liability caused on account of foreign exchange fluctuation, the Written Down Value of the assets as on the beginning of the previous year (1-4-1991) has to be worked out after providing depreciation on the additional liability ascertained on the basis of foreign exchange rate fluctuation for the preceding previous year. The above position is applicable to the foreign exchange plant and machinery in the case of both divisions, viz. Ceramics Division and Granites Division. 7.8 We have come to the findings in sub-paragraphs 6 to 7 above in the light of the legal provisions contained in Explanation 7 to section 43(1), Explanation (b) to section 43(6)(c) and section 43A. 7.9 In view of the above findings, the following directions are given to the Assessing Officer in the matter of depreciation attributable to the additional liability created on account of exchange rate fluctuation and deductible from the computation of taxable income of the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l relied on the following--- (1) Budget Speech of the Hon'ble Finance Minister for 1992-93 dated 29-2-1992 --- ITR Vol. 194 St. p. 5 - Paper Book Pages 33 to 35. (2) Reserve Bank of India Circular AD(MA Series) Circular No. 11 dated 29-2-1992 --- Paper Book Pages 37 to 54. (3) Reserve Bank of India Circular AD(MA Series) Circular No. 16 dated 17-3-1992 --- Paper Book Pages 55 to 58. 7.14 We considered the issue. In his speech, the Hon'ble Finance Minister has made it clear that foreign exchange required for payment on private account, including travel, debt service payments, dividends, royalties and other remittances will have to be obtained at the market rate. As a result of partial convertibility of rupee, only 40% of the foreign exchange remittances to India will be converted at the official exchange rate and the remaining 6000 will be converted at a market determined rate. Foreign exchange at official exchange rate will be available only to meet the essential imports such as petroleum and oil products, fertilisers, defence and life-saving drugs. Both the Reserve Bank Circulars relied on by the learned counsel for the assessee are in accordance with the Budget Speech of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.5 The next issue under this head is the dispute regarding the quantification of the deduction under section 80HH. According to the assessee, an amount of Rs. 48,98,759 received from M/s. Neycer India Ltd. by way of interest is entitled for considering relief under section 80HH, as the said M/s. Neycer is a newly established industrial undertaking in a backward area entitled for section 80HH relief. 8.6 As rightly held by the learned CIT(A) in his order, the profit earned by M/s. Neycer cannot be construed as the profit 'derived' by the assessee-company. On this point, we agree with the finding and order of the learned CIT(A). Accordingly, this contention is rejected. 8.7 In the alternative, the contention advanced by the learned counsel is that if the interest received from M/s. Neycer is not considered for the relief under section 80HH, the corresponding expenditure of interest paid by the assessee-company to procure the relevant fund advanced to M/s. Neycer, need to be taken out of the purview of the computation of relief under section 80HH in the hands of the assessee's own business. This contention carries much weight. We direct the Assessing Officer to examine and work ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
