TMI Blog2005 (3) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Act in respect of the following amounts: S. No. Details Rs. (i) Salary to Mukesh Bhargava 12,117 (ii) Salary to Rajeev Sisodia 16,924 (iii) Misc. Expenses 15,000 (iv) Medical bill of Maheshwari 12,000 confirmed by the CIT(A) Total : 56,041 Thus, the learned CIT(A) deleted the disallowances mentioned at serial Nos. (i) to (iv). The Revenue is aggrieved against deletion of disallowance mentioned at serial Nos. (i) to (iii). 3. As regards the amounts paid to the employees, the learned CIT(A) observed at p. 4 of his order that the amounts were not paid by way of salary but by way of adjustment with the advance given earlier with the current salary. In respect of miscellaneous expenses, it was stated that individual items of expenditure are below Rs. 10,000 each. Actual payment is not covered by s. 40A(3) of the Act. 4. We have heard the rival submissions and perused the materials available on record. As regards the payments to the employees in violation of provisions contained in s. 40A(3) of the Act, the AO opined that such payments in cash ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nverted into 2 shares of Rs. 10 each at a premium of Rs. 20 each after 18 months. The relevant details about fully convertible debentures issued by the assessee-company during the relevant previous year are as follows: S. No. Particulars Date Chart 1. Public issue of FCD opened on 31-1-1994 2. Issue closed on 7-2-1994 3. First conversion 50 per cent 5-10-1994 4. Second conversion 50 per cent 5-10-1995 (a) in asst. yr. 1994-95, there is no conversion. (b) First conversion in asst. yr. 1995-96. The assessee-company incurred an expenditure of Rs. 14,30,87,000 on various items in relation to the public issue of debentures in the asst. yr. 1994-95 and another sum of about Rs. 14.25 crores in the next year, i.e., asst. yr. 1995-96. 8. In the accounts of the company, this expenditure was not debited to the P L a/c but was shown in the balance sheet under the heading "Pre-operative expenses". However, in the computation of income filed with the return of income for this year, the entire expenditure of Rs. 14,30,87,000 had been claimed as revenue expenditure. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee the expenditure was incurred for convertible debentures not for share capital. The assessee also relied upon the cases of Dy. CIT vs. A.T.V. Projects India Ltd. (2003) 79 TTJ (Mumbai) 1010 : (2003) 84 ITD 470 (Mumbai) (ITA No. 50/Mumbai/1996 date of order 6th May, 1996) and Produce Exchange Corpn. Ltd. vs. CIT (1970) 77 ITR 739 (SC). After considering the submissions and facts of the case, the AO held that the facts of the assessee are different from India Cements Ltd. and the Board s Circular No. 56 was not applicable as Hon ble Supreme Court's decision was delivered in 1966 when the provision of s. 35D was not on statute. The AO has given distinguishing factors of the case on p. 10 in para 2 of his order. Secondly, the AO held that fully convertible debentures cannot be equated with simple loan transaction. The fully convertible debentures are issued only for raising the share capital. Hence, expenses thereof are covered by s. 35D for the year in which commercial production has started. During the year no production for new unit has started. Hence, no deduction under s. 35D is allowable. It has also been mentioned by the AO that the chartered accountant of the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court in Premier Automobiles Ltd. vs. CIT (1971) 80 ITR 415 (Bom). 14. The learned Authorised Representative submitted that insertion of s. 35 had not made any difference to the legal situation. Sec. 35D was inserted by the Taxation Laws (Amendment) Act, w.e.f. 1st April, 1971, to provide for amortization of certain preliminary expenditure specified in sub-s. (2) of that section. The said section is an enabling provision to enable amortization which is otherwise capital in nature and not intended to supersede any existing provision, under which revenue deduction is available for any expenditure. The legislative intent is clear from CBDT Circular No. 56, dt. 19th March, 1971, containing explanatory notes on the provisions of Taxation Laws (Amendment) Act, 1970. Para 45 of the said circular is relevant. A perusal of the circular would show that the provisions of s. 35D are not intended to supersede/override any existing provisions of law, nor does the same get over the ratio of the Supreme Court decision in the case of India Cements Ltd. Sec. 35D is an enabling provision which enables the assessee to obtain amortization of certain preliminary expenditure, which is otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ures, the entire expenditure has to be allowed revenue expenditure. (b) Again, whether the debentures are issued for financing expansion of existing business or for setting up of new unit, is not material to the claim for deduction of expenditure on issue of debentures as business expenditure. It has been repeatedly held by the Courts that expenditure on raising loan is allowable deduction in full, irrespective of the purpose to which the loan is put, whether for acquisition of capital assets or for defraying revenue commitment. (c) The fact that the debentures issue expenditure was capitalized as pre-operative expenditure in the balance sheet, would not determine the deductibility thereof. The Supreme Court in the following cases held that entries in the books of account do not determine deductibility or otherwise of an item of expenditure. (d) The learned CIT Departmental Representative referred to prospectus wherein M/s S.S. Kothari Co., chartered accountants, has spelt out the tax benefits available to the company. It has been opined by the chartered accountants that amortization under s. 35D of the Act would be available to the assessee-company in respect of debentur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7. Other expenses 22,51,679 Total 14,30,87,000 19. We are of the opinion that debenture is nothing more than an acknowledgement of indebtedness. It is a statement that company will pay a certain sum of money on given day and will also pay interest on the same. Debenture means a document acknowledging a loan made to the company and providing for the payment of interest on the sum borrowed until debenture is redeemed, i.e., payment of principal sum. The characteristic features of the debentures are as follows : 1. It is issued by the company and it is in the form of certain indebtedness. 2. It provides for repayment of principal and interest at specified date or dates. The debenture is nothing but another form of loan on which interest is payable. The debentures cannot be equated with the shares. There is lot of difference between debenture and share. 20. As regards convertible debenture, the company may also issue other debentures in which case the option is given to the debenture holders to convert them into equity or preferential share at stated rate of exchange after certain period. Thus, debenture conversions is also another form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affected by the new s. 35AB introduced from asst. yr. 1986-87." 24. Drawing analogy from the aforesaid decision, it is evident that s. 35D could not be regarded as a specific provision, overriding the general provision of s. 37(1) of the Act. Both, s. 35D and s. 37(1) are enabling provisions and not mutually exclusive. In this connection, it is pertinent to reproduce para 45 of the CBDT Circular No. 56, dt. 19th March, 1971, which reads as under : "45. it may be noted that the provision for amortization is not intended to supersede any other provision in the income-tax law under which the expenditure is allowable as a deduction against profits. For instance, where a company which is already in business, incurs expenditure on issue of debentures and such expenditure is admissible as a deduction against profits of the year in which it is incurred, by virtue of the decision of Supreme Court in the case of India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC), s. 35D will not have the effect of bringing that expenditure within the scope of the expenditure to be amortized against profits over a 10 year period. As a corollary to this, where any expenditure has been incurred for the purpos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Tuticorin Alkali Chemicals Fertilisers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC). In this decision, the Hon ble apex Court held that no adjustment can be allowed unless permitted by the IT Act. However desirable it may be from the point of view of equity, the accountants may have taken some other view but accountancy practice is not necessarily good law. Therefore, irrespective of the facts mentioned in the prospectus by the accountants or any entries in the books of account, we hold that deduction is allowable as per provision of law on the basis of claim made through return of income. Having regard to the facts of the case and the provisions of law, we sustain the order of the learned CIT(A) for the reasons given therein on this ground. Ground No. 3 : Reducing the disallowance of Rs. 1,22,25,000 being interest. Financial expenses as bank charges which are in the nature of capital expenditure. 28. The AO discussed this issue at pp. 14-16 of his order and the learned CIT(A) discussed this issue at pp. 23-26 of his order. In this case, the AO had disallowed these expenses for the reason that the assessee had capitalized the expenditure itself in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 67 CTR (Raj) 120 : (1988) 169 ITR 499 (Raj) (iii) CIT vs. Tarai Development Corpn. Ltd. (1994) 205 ITR 421 (All) (iv) Prem Spinning Weaving Mills Co. Ltd. vs. CIT (1975) 98 ITR 20 (All) (v) Dy. CIT vs. Core Healthcare Ltd. (2001) 169 CTR (Guj) 416 : (2001) 251 ITR 61 (Guj) affirmed decision of the Tribunal in Core Healthcare Ltd. vs. Dy. CIT (2000) 70 TTJ (Ahd)(TM) 490 : (2001) 78 ITD 1 (Ahd)(TM) (vi) Addl. CIT vs. Aniline Dye Stuffs Pharmaceuticals (P) Ltd. (1982) 138 ITR 843 (Bom) (vii) CIT vs. Hindustan Machine Tools Ltd. (1989) 175 ITR 212 (Kar) (viii) CIT vs. Modi Industries Ltd. (1993) 109 CTR (Del) 9 : (1993) 200 ITR 341 (Del) (ix) CIT vs. Malwa Vanaspati Chemicals Co. Ltd. (1998) 149 CTR (MP) 283 (x) CIT vs. Tata Chemicals Ltd. (2002) 175 CTR (Bom) 443 : (2002) 256 ITR 395 (Bom) affirmed decision of Tribunal in (2001) 70 TTJ (Mumbai) 805 : (2000) 72 ITD 1 (Mumbai). 32. We have heard the rival submissions and perused case law on the subject. In this case, the assessee was engaged in the business of manufacturing synthetic yarn for which the raw material is EOY/PFY. The assessee started a new unit at Baorda for the manufacture of PYF which is the raw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the learned CIT(A) and the same is sustained for the reasons given therein. ITA No. 555/Jp/1998 Revenue Ground No. 1 : Deleting the addition of Rs. 13,99,84,000 made by disallowing the expenses incurred on issue of debentures compulsorily converting into shares. 36. This issue has already been decided by us in ITA No. 309/Jp/1998 for the asst. yr. 1994-95. Accordingly, we sustain the order of the learned CIT(A) for the reasons given by us for the asst. yr. 1994-95. Ground No. 2 : Deleting the disallowance of Rs. 16,28,69,000 being interest which are in nature of capital expenditure. 37. This issue has already been decided by us in ITA No. 309/Jp/1998 for the asst. yr. 1994-95. Accordingly, the order of the learned CIT(A) is also sustained on this ground for the reasons given therein. Ground No. 3 : Directing the AO to assess the interest income of Rs. 9,88,09,511 as income from business as against taxed by AO under the head "Income from other sources" in view of the decision in CIT vs. Manglam Cement Ltd. (1996) 217 ITR 369 (Raj) and (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC). 38. This issue has been discussed by the AO from pp. 14 to 19 of his order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as assessable as income from business. Thus, the order of the learned CIT(A) is reversed on this ground and that of the AO is restored. ITA No. 522/Jp/1998 Assessee 42. In this appeal, the assessee is aggrieved on ground that the learned CIT(A) erred in upholding the disallowance of Rs. 14.25 lacs made by the AO towards commission and brokerage paid for the business of the company and secondly, the learned CIT(A) erred in not accepting the evidence of above expenditure at the time of hearing an appeal and without appreciating the difficulties of the assessee-company in not producing the evidence before the AO. 43. The AO had discussed this issue at pp. 12 and 13 of his order and the learned CIT(A) discussed this issue in para 5 at pp. 3 and 4 of his order. We have heard the rival submissions and perused the materials available on record. In this case the AO had disallowed the commission and brokerage expenses of Rs. 14.25 lacs on the ground that the assessee was unable to produce the details, break-up, the names of the payees and the copies of agreements. The assessee could not produce these evidences for the reason that the files relating to these concerns, namely, M/s An ..... X X X X Extracts X X X X X X X X Extracts X X X X
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