TMI Blog2002 (3) TMI 225X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the company at the time of making offer of debenture to public clearly stated that proceeds from the issue were required to finance various projects including expansion and modification of polycondensation facilities, therefore, the case was covered under s. 35D. 4. Before CIT(A), same contentions were reiterated and it was submitted that such expenses were not hit by the provisions of s. 35D because, firstly, the issue was not made before the commencement of business of the company and, secondly, the issue was not in connection with the extension of industrial undertaking or in connection with the setting up of a new unit. CIT(A) did not find force in the contention of the assessee because the decisions of Hon ble Supreme Court in case of India Cement Ltd. vs. CIT and Premier Automobiles Ltd. vs. CIT were not applicable because the provisions of s. 35D were not in existence when these decisions were given. He further found that sub-cl. (ii) of s. 35D(1) of the Act covers a situation where such expenditure is incurred after the commencement of business in connection with the extension of the industrial undertaking or in connection with setting up of a new unit. He also found ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2000) 72 ITD 1 (Mumbai). In that case, starting a new fertilizer unit was held to be related to same business and following the ratio of India Cement Ltd., issue expenses of non-convertible debentures were allowed as Revenue expenditure. He also relied on Grasim Industries Ltd. vs. Dy. CIT (1999) 64 TTJ (Mumbai) 357, CIT vs. Mahendra Ugine Steel Co. Ltd. (2001) 169 CTR (Bom) 191 : (2001) 250 ITR 84 (Bom), Banco Products (India) Ltd. vs. Dy. CIT (1997) 59 TTJ (Ahd) 387 : (1997) 63 ITD 370 (Ahd), CIT vs. Tunus Electric Corpn. Ltd. (1989) 78 CTR (MP) 28 : (1989) 179 ITR 219 (MP). 6. On the other hand, learned Departmental Representative submitted that deduction claimed by the assessee is not in the form of interest for borrowings. It relates to other expenditure which may fall under s. 37(1). He contended that s. 37 would come into operation only when an item does not fall between ss. 32 to 36. In this regard, he relied on the observations of M.P. High Court in the case of Malwa Vanaspati Chemicals Co. Ltd. vs. CIT (1985) 44 CTR (MP) 90 : (1985) 154 ITR 655 (MP). He further submitted that it was a composite issue and the same cannot be artificially segregated. He further submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey raised from this issue has been spent on expansion or extension of existing projects. We are unable to agree with learned authorised representative that expansion will not be covered by the word extension . In Chamber s Dictionary, the word extend has been defined to mean to enlarge, to expand....., and word expand has been defined to mean to spread out, to enlarge in bulk or surface area. Therefore, these two words have more or less same meaning. When a particular expenditure is to be allowed under a specific section, then as held by Hon ble Madhya Pradesh High Court in Malwa Vanaspati Chemical Co. Ltd. vs. CIT, there is no need to go to residuary section, i.e., s. 37 of the Act. We are also uanble to agree with the decision of Bombay Bench in Tata Chemicals Ltd. vs. Dy. CIT that starting of new unit would also constitute same business for the purpose of s. 35D because if this logic is accepted, the clear language of s. 35D would become meaningless and that provision would be rendered useless. The decision of India Cements Ltd. is also not applicable as has been rightly held by the CIT(A) that this decision was rendered when provision of s. 35D was not on statute book. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was withdrawn from CC overdraft account. It was contended that it was an adventure in the nature of trade and, therefore, entire interest should have been allowed as business expenditure. Alternatively, it was contended that such interest should be considered as part of the cost of acquisition of assets and if it was disallowed while computing business income then loss of sale of assets should have been allowed on a higher figure after increasing the returned loss by this amount. Reliance was placed on various case law for these contentions. Second alternative contention was also submitted through which it was contended that interest paid only on direct loan should be held for non-business purposes but the interest paid on withdrawals from CC account should be held to be an allowable expenditure in view of the overall position of reserves and surplus made by the company as well as profits of the year. In this regard, also reliance was placed on certain case law. Some arguments were also raised regarding amount of exempted income under s. 10(15)(iv) of the Act but CIT(A) did not look into same because according to him, the same had no bearing on the amount of total income. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of Supreme Court in the case of Distributors (Baroda) Ltd. vs. Union of India (1985) 47 CTR (SC) 349 : (1985) 155 ITR 120 (SC) and amended provisions of the Act in the form of s. 80-AA, it was held that interest amounting to Rs. 10,99,007 is to be considered against the dividend income from the units and balance of Rs. 5,83,700 against the securities, therefore, AO was accordingly directed to enhance the quantum of deduction under s. 80-M of the Act by Rs. 1,77,228. 12. CIT(A) also rejected the alternative contention of assessee regarding inclusion of amount of interest towards cost of acquisition because according to him, interest payable on acquisition of assets till such time that these remained unproductive may be considered as part of the cost but as soon as these became productive, the amount of interest is to be considered against the return. He found that securities purchased by the assessee carried a fixed rate of interest and keeping in view the past record of UTI, declaration of dividend of units soon after 30th June, 1989, was as good as certainty. If the contention of the assessee was accepted, then income by way of interest and dividend may also have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (P) Ltd. (1999) 151 CTR (Cal) 160 : (1998) 232 ITR 7 (Cal), CIT vs. Cotton Fabrics Ltd. (1981) 23 CTR (Guj) 247 : (1981) 131 ITR 99 (Guj) and CIT vs. National Grindlays Bank Ltd. (1993) 109 CTR (Cal) 264 : (1993) 202 ITR 559 (Cal). In the second alternative, he submitted that even if sale purchase of these securities is held to be on account of capital assets, then the interest should have been added to the cost of securities and higher loss should have been allowed on the loss on sale on such securities. In this regard, he relied on Addl. CIT vs. K.S. Gupta (1979) 119 ITR 372 (AP) and CIT vs. Mithlesh Kumari (1973) 92 ITR 9 (Del). Lastly, he submitted that though s. 14A has been introduced in the Act w.e.f. 1st April, 1962, but same is not applicable to the case of assessee. According to him, the rigour and hardship of this section has been diluted by the Board Circular No. 11, dt. 23rd July 2001, [(2001) 169 CTR (St) 1 : (2001) 250 ITR (St) 84]. He pointed out that this section has been placed in Chapter IV of the Act and has been specifically made in respect of incomes computed under that Chapter. 14. On the other hand, learned Departmental Representative submitted that De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e or not. In any case, it is not permissible to pick out a word or sentence from the judgment of various cases divorced from the context of question under consideration and to treat the same as complete law declared by the Courts. In this regard, he referred to the observation of Supreme Court in CIT vs. Sun Engg. Works (P) Ltd. (1992) 107 CTR (SC) 209 : (1992) 198 ITR 297 (SC). He submitted that decisions of CIT vs. Mithlesh Kumari and Addl. CIT vs. K.S. Gupta are not applicable to the case of assessee because in both these decisions, asset concerned was land and not securities. He further submitted that in terms of s. 14A, not only interest on direct borrowings but also interest on indirect borrowings has to be disallowed. He pointed out that AO has clearly proved the nexus in his assessment that whenever cheques were issued for purchase of these units and securities, overdraft in CC account went up. He contended that whole transaction was entered just to take tax advantage because interest on securities was fixed and in case of units also the rate of dividend in those days was generally known. Assessee wanted to take benefit of exemptions under various provisions and at the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26 (SC). As far as decisions relied on by the learned authorised representative are concerned, in these decisions ratio of Distributors (Baroda) (P) Ltd. vs. Union of India was not noticed so the same is not applicable to the case of the assessee. As far as contention of second alternative that interest should be included in the cost of assets and enhanced loss should be allowed, he pointed out that this is not a correct position. He argued that cost of acquisition has been defined in s. 55(2) and it would be actual cost to the assessee. In this regard he relied on decision of the Supreme Court in Challapalli Sugars Ltd. vs. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC). In this decision, it was clearly held by Supreme Court that interest paid before commencement of production on amounts borrowed by the assessee for acquisition and installation of fixed assets only would form part of actual cost. As assessee has purchased interest bearing securities and even in case of nits also it is a well-known fact that in the months of May and June, units used to be priced more because of inbuilt dividend, therefore, interest cannot be added to the cost of assets. He submitted that learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable for the incomes which are computed under Chapter XIV (sic) as this section has been placed in Chapter III only. In this regard, we agree with the very pertinent example given by senior learned Departmental Representative that expenditure incurred in relation to agricultural income cannot be allowed to be deducted elsewhere, therefore, placement of the section will not make any difference. We are also not in a position to agree with the contention that s. 14A should be held to be prospective in operation and in this regard Circular No. 11, dt. 23rd July, 2001, is also of no help. When the section has been specifically made effective from 1st April,1962, we have no power to change the operation of the section from prospective date. We also agree with the contention of learned Departmental Representative that in CIT vs. National Grindlays Bank Ltd. and CIT vs. Canodia Investment (P) Ltd. the decision of Hon ble Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India was not noticed and as far as decision of CIT vs. Cotton Fabrics Ltd. is concerned, it was rendered much before the decision of the Supreme Court in Distributors (Baroda) (P) Ltd. vs. Union of India. We ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances we find nothing wrong with the order of CIT(A) and confirm the same. 17. Through ground No. 3, assessee has challenged the impugned order of CIT(A) for not allowing Rs. 35,000 paid as fee of architect and treating the payment of Rs. 4,41,155 on upkeep of proper maintenance of Bombay office as capital expenditure. AO did not allow expenditure relating to repair and maintenance of three items which are Rs. 26,314 which was found to be incurred on making a drain at the main gate, Rs. 8,038 which was incurred for extension of car garrage, Rs. 7,10,861 which was incurred for renovation of Bombay Office. All these expenses were held to be on capital account. Revenue through ground No. 2 in its appeal has also challenged the relief of Rs. 3,04,264 allowing by CIT(A) on these items. 18. Before CIT(A), it was submitted that reliance placed by the AO in the case of Ratlam Bone Mills vs. CIT (1984) 147 ITR 148 (MP) was not correct because in that case more amount than the original cost of property was spent and that too soon after it was purchased. It was also submitted that Bombay office was purchased way back in the year 1976-77 and expenditure incurred for interior decoration at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iling and furniture, etc. which is clearly of capital nature. He strongly relied on the order of AO and CIT(A). 21. In the rejoinder, learned authorised representative relied on CIT vs. Jawahar Mills Ltd. (1997) 142 CTR (Mad) 68 : (1997) 226 ITR 230 (Mad), where Madras High Court has held that expenditure incurred on replacement of false ceiling is of revenue nature. He then referred to the decoration of office premises and expenditure on panelling of walls, etc. which has been held to be of revenue expenditure. He also referred to ITO vs. I.B.P. Co. Ltd. (1987) 28 TTJ (Cal) 400 : (1987) 20 ITD 470 (Cal), where fees paid to architect on account of addition and alteration in office premises was held to be deductible as revenue expenditure. 22. We have considered the rival submissions carefully and perused the documents filed before us as well as judgments relied on by the parties. We find force in the contention of learned authorised representative. It is clear from the bill of M/s R.P. Sawe that old interior fittings including floor tiles and false ceiling were dismantled and new interiors were fixed. Though 2-3 items relate to erection of tables and cabinets, etc. which may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es to promote their sales. If boarding and lodging is not provided, dealers may not like to attend these conferences, therefore, it is an absolutely necessary expenditure. We are of the opinion that this kind of expenditure cannot be called entertainment expenditure, therefore, we set aside the order of CIT(A) and allow this expenditure. 27. Ground No. 5. Through this ground, assessee has challenged order of CIT(A) for confirming the addition made on account of rent of guest house. AO added rent paid towards guest house amounting to Rs. 1,06,867 under s. 37. CIT(A) confirmed this addition because same was made under s. 143(1)(a) and appeal filed against that order had already been dismissed. 28. Before us, learned authorised representative relied on CIT vs. Chase Bright Steel Ltd. (1989) 75 CTR (Bom) 60 : (1989) 177 ITR 124 (Bom) where rent for guest house premises was held to be allowable deduction. He submitted that this ratio has again been followed in CIT vs. A.B. Thomas Co. Ltd. (1997) 142 CTR (Ker) 364 : (1997) 225 ITR 29 (Ker) and Hindustan Lever Ltd. vs. IAC (1996) 56 TTJ (Bom) 598 : (1996) 58 ITD 555 (Bom). 29. On the other hand, learned Departmental Representative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reak-up details of misc. expenses, therefore, the addition was confirmed. 34. Before us, learned authorised representative reiterated similar arguments. 35. On the other hand, learned Departmental Representative strongly relied on the orders of CIT(A). He further submitted that if contention of learned authorised representative is allowed then all types of donations would become business expenditure. 36. We have considered the rival submissions and we are in agreement with the contention of learned Departmental Representative because if a line is not drawn then all kinds of donations and diversion of income can be held to be business expenditure. CIT(A) was analysed this expenditure in exhaustive detail and we find nothing wrong in that order, therefore, confirm his order. 37. Through ground No. 7, assessee has challenged the order of CIT(A) for not allowing the claim on account of business loss amounting to Rs. 51,26,777. During assessment proceedings, AO found that assessee had made a claim of Rs. 51,26,777 on account of bad debts. It was noticed by him that this claim was not made in regular return but was made through notes on accounts. Upon enquiry, assessee submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he previous year relevant to the present assessment year. Because of this reason also, this claim was not allowed. 39. Before us, learned authorised representative brought to our attention p. 108 of the compilation which is copy of the notes on IT return. In note No. 6B, it has been mentioned that advance was given in respect of proposed merger/amalgamation of the Bengal Paper Mills Ltd. by the company for diversifying its activities into paper line. It has been further mentioned that as that company had gone into liquidation, the advances made to them could not be recovered and written off in the books. It is also mentioned that though the tax auditors had captioned this advance under capital expenditure and the same has been added to the total income, yet the advance made is of revenue nature and even otherwise, same should be allowed while computing total income. He then referred to p. 91 which is copy of additional agenda to be considered in the board meeting to be held on 9th Aug., 1990, where this amount was proposed to be written off. Then he referred to p. 110 which is copy of the minutes of board meeting held on 9th Aug., 1990, where after detailed discussion write off o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was given to Bengal Paper Mills for their day-to-day expenses, the same should have been allowed as business loss. 40. On the other hand, learned Departmental Representative submitted that this loss is not allowable and even assessee had knowledge of this fact. Statutory auditors of the assessee-company have very clearly classified this loss as capital loss and company had also added this item in the income of its computation. He posed the query that if company was so sure about this being business loss why the same was not claimed in the return of income. He further submitted that from p. 88 of the compilation which is copy of the minutes of board meeting held on 7th Jan., 1987, it becomes clear that idea of merger was dropped as early as January, 1987. According to him, if the proposal for merger had lost its relevance in January, 1987, then why this amount was not written off at that point of time. He submitted that action of writing off seems to be an afterthought because amount has been written off in accounts of March, 1990, whereas from p. 91 it becomes clear that action of writing off was proposed to be approved by board in the meeting to be held on 9th Aug., 1990, and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contribute Rs. 2.8 crores as promoter contribution in three years and certain loans were to be sanctioned by Banks and FIs. As banks did not sanction this limit and even after the efforts of the assessee-company no concrete help came forward, the proposal of merger was dropped. In this background, it cannot be said that this expenditure was incurred in the ordinary course of business. Even in CIT vs. Hashimara Industries Ltd., where assessee was running a tea establishment and entered into a leave and licence agreement with cotton mills, amount deposited with cotton mills was held to be a capital loan. Though expenditure on insurance premium, etc. was held to be allowed but their agreement was of leave and licence basis and that agreement was extended for three months and insurance premium, paid during those three months only was allowed to be deducted. But in the instant case, there is no leave and licence agreement. It is established case of acquisition through merger. Even in case of Hashimara Industries Ltd. vs. CIT, the Hon ble Supreme Court has clearly held that amount of advance was given not for its own purpose by way of business expenditure for modernising the mill, but as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative submitted that there is no merit in the alternative contention because Tribunal has no such powers to give directions for a year which is different than the year for which appeal relates. In this connection, he relied on ITO vs. Murlidhar Bhagwandas (1964) 52 ITR 335 (SC). He further submitted that it is a well-settled accounting principle under mercantile system of accounting that expenditure has to be matched with the revenue. As the bill related to earlier year and same was received in earlier year, assessee was duty bound to provide for the same in the earlier year only. 46. We have considered the rival submissions carefully. We have perused the material on record. From p. 126, it is apparent that a bill has been raised by the Bombay Dyeing Mfg. Co. Ltd. on 17th Aug., 1988, for Rs. 1,95,000 on account of additional prices. From p. 125, which is a letter from Bombay office to Ujjain office, it becomes clear that this bill was sent to Ujjain office and as a sum of Rs. 1,87,500 was already paid, a request was also made to arrange for the balance of Rs. 7,500. Later on, similar request was again made by Bombay office. We also find from p. 127 that the Bombay Dyeing M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany had certain claims. 50. On the other hand, learned Departmental Representative relied on the orders of authorities below. 51. We have considered the rival contentions and gone through the material on record. As far as claim of Rs. 45,000 is concerned, we agree with CIT(A) that though same was not claimed originally still it was revenue expenditure. From p. 162, which is a copy of the letter by the advocate in which he has asked for a fee of Rs. 80,000 and advance of Rs. 55,000 for action of winding up as well as filing of summary suit. It is normal practice with advocate to charge some fees in advance. It is also seen that the advocate had issued notices to opposite party on 5th Jan., 1990, and the copy of the same is placed from p. 163 to p. 170, therefore, we hold this expenditure of Rs. 45,000 as revenue expenditure and set aside the order of CIT(A) and direct the AO to allow the whole of Rs. 45,000 as Revenue expenditure. As far as other provisions are concerned, before us no material has been brought by learned authorised representative to substantiate the claims of assessee-company, therefore, we find nothing wrong with the order of CIT(A) and confirm the same. 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... because according to him, the company has not derived any profit from a newly established industrial undertaking. He further found that reliance placed by assessee on CIT vs. Ahmedabad Mfg. Calico Printing Co. Ltd. (1986) 57 CTR (Guj) 132 : (1986) 162 ITR 760 (Guj), CIT vs. Standard Motor Products India Ltd. (1980) 17 CTR (Mad) 317 : (1981) 131 ITR 300 (Mad) and CIT vs. Hindustan Motors Ltd. (1980) 19 CTR (Cal) 44 : (1981) 127 ITR 210 (Cal) was of no help because all these decisions were rendered under the old s. 80-I where the expression attributable to was used instead of the expression derived from . He further noted that Supreme Court in Cambay Electric Supply Co. Ltd. vs. CIT 1978 CTR (SC) 50 : (1978) 113 ITR 84 (SC) had observed that the expression attributable to in s. 80-E (now s. 80-I) is of wider import and since the expression of wider import has been used, it appears that legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. As the assessee has not sold its product to outside parties and the rate of Rs. 12 was taken on notional basis, therefore, no profit was derived by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee on CIT vs. Hindustan Motors Ltd., CIT vs. Ahmedabad Mfg. Calico Printing Co. Ltd. and CIT vs. Standard Motor Products of India Ltd. is not correct because all these decisions were rendered under the old provisions of s. 80-I where the expression attributable to was used. Accordingly to him, the new provisions of s. 80-I use the expression derived from and as assessee has not derived any income, the deduction under s. 80-I cannot be allowed. He also submitted that sub-s. (8) of s. 80-I does not talk of two different units but only talk about two different businesses. As the setting up of polycondensation plant cannot be called separate business, so in that sense also deduction is not allowable. 60. On the other hand, learned authorised representative reiterated the contentions raised before CIT(A). He further submitted that difference between the expressions attributable to and derived from has been used to determine whether income which is not related to industrial activity can be included in the income of industrial undertaking or not. Even the expression derived from will not lead to denial of deduction as long profits are derived from or earned from the industri ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
