TMI Blog1995 (2) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... rten Forging Press, Crankshaft grinding machines, construction of a building for the modernised forge, building for crankshaft division, extension to the Czech Press shop : For this purpose, which is disputed before us, a sum of Rs. 82,84,330 was incurred. These expenses were described as " Forge Modernisation Pre-operative Expenses ". The sum of Rs. 82,84,330 constituted the following expenditure : (i) Interest Rs. 34,98,485 (ii) Foreign travel Rs. 9,81,482 (iii) Salary and other costs Rs. 38,04,363 3. The assessee filed a return of income on 28-12-1990 in which these expenses were treated as capital expenditure and no deduction was accordingly claimed. However, before the assessment could be finalised, the assessee filed a revised return on 15-7-1991 and claimed as deduction the interest of Rs. 34,98,485 paid to financial institutions. In the revised return under reference, the assessee has also claimed as deduction as revenue expenditure of salary and other costs of Rs. 38,04,363. It is essential to mention that a sum of Rs. 9,81,482 being the foreign travel in connection with the acquisition of capital asset was not claimed as deduction before the Assessing Officer and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sition, she has heavily relied upon the decision of the Calcutta High Court in the case of CIT v. India Steamship Co. Ltd. [1992] 196 ITR 917. For these reasons, after issuing the enhancement notice, the learned CIT(A) directed the Assessing Officer to withdraw the allowance of interest of Rs. 34,98,485 and treat it as capital expenditure. Being aggrieved, the assessee has come up in appeal before us. 6. Ground Nos. 1, 5 and 6 raised before us deal with the interest, salary and other costs and foreign travel details of which, we have mentioned above. The learned counsel for the assessee, Shri N.A. Dalvi, took us through the facts of the case and pointed out that with a view to shift to better technique for manufacture, the assessee-company undertook the modernisation-cum-expansion of the existing line of business at the same premises. The modernisation was undertaken for the purpose of achieving better quality of production, better utilisation of raw-materials and reduce the energy consumption. The plant and machinery was acquired in the course of business for carrying out the said modernisation-cum-expansion programme. As regards the payment of interest, the learned counsel poin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as laid out or expended wholly and exclusively for the purpose of business of the assessee. The learned counsel, specifically drew our attention to the ratio of the decision in which the Hon'ble Supreme Court has laid down that 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 irrelevant to consider the object with which the loan was obtained. [Emphasis supplied]. 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. 7. The learned counsel has also placed reliance on the decision of the Bombay High Court in the case of Addl. CIT v. Aniline Dyestuffs Pharmaceuticals (P.) Ltd.[1982] 138 ITR 843. In the said decision, the Hon'ble High Court has laid down that interest on borrowed capital in connection with expansion of existing unit is an allowable deduction. On the facts of that case, he pointed out that it was held that the assessee's bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nation (8) to sec. 43(1) of the Act and pointed out that the said Explanation was only clarificatory in nature and its scope was limited to the period after the asset is put to use. As a matter of fact, the said Explanation had no application to the assessee's case. 10. The learned counsel also pointed out that the decision of the Supreme Court in the case of Challapalli Sugars Ltd has wrongly been applied by the revenue. The said decision is applicable to the new business and cannot be applied mutatis mutandis to the facts of the assessee's case. As a matter of fact, the assessee's case is fully covered by the decision of the Supreme Court in the case of India Cements Ltd. 11. The learned counsel has also drawn our attention to the notice under section 263 of the Act issued by the Commissioner for assessment year 1990-91. The said notice is placed on page 81 of the material papers. The Commissioner was of the view that the deduction of interest of Rs. 34,98,485 was wrongly allowed by the Assessing Officer as revenue expenditure. The Commissioner, therefore, assumed jurisdiction under section 263 of the Act. The learned counsel pointed out that the assessee represented the matt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prayed, was in error in treating the salary and other costs as the capital expenditure. 13. Regarding foreign travel, the learned counsel fairly conceded that such a claim was not made either before the Assessing Officer or before the CIT(A). The assessee has raised this issue for the first time before the Tribunal. The foreign travel expenses of Rs. 9,81,482 were incurred by the company on training Engineers of the company abroad under its modernisation and expansion programme. This expenditure in the opinion of the learned counsel is also an admissible deduction as revenue expenditure. By drawing our attention to the decision of the Gujarat High Court in the case of Shahibag Enterpreneurs (P.) Ltd. v. CIT [1994] 210 ITR 998, the learned counsel pointed out that the expenditure on foreign travel of new units alone will be capital expenditure. However, the foreign travel expenses for an existing business, even if incurred for the acquisition of capital asset would be allowable as a deduction as the revenue expenses. 14. On being informed by the Bench that the issues does not arise out of the order of the CIT(A), the learned counsel took us through the powers of the Tribunal an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ciba of India Ltd. v. CIT [1993] 114 CTR (Bom.) 105. To establish the similarity of facts, the learned departmental representative pointed out that in the case of Ciba of India Ltd. the assessee had set up a new plant at Bhandup for manufacturing additional pharmaceutical goods. In that connection, the assessee had incurred travelling expenses. Some expenses were also incurred on account of the visit of one Mr. E. Candolif who visited India for training the staff of the assessee for starting production at the plant at Bhandup. The assessee claimed deduction of the said expenditure as revenue expenditure on the ground that it was incurred in the course of its business and the said plant at Bhandup was merely for manufacturing, the additional goods in the same line of business so far carried on by the assessee. On these facts, the Hon'ble High Court had held that the travelling expenses and the training expenses of the staff were in the nature of capital expenditure. The facts of the assessee's case, it is pointed out by the learned departmental representative, are identical with the facts of Ciba of India Ltd. and, therefore, there is no reason to depart from the principles laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l had held that such expenditure were capital in nature and hence not deductible while computing the profits of the assessee. The learned departmental representative, thus concluded that the salary and other costs and foreign travel are capital expenses and the CIT(A) was justified in treating them as such. No interference by the Tribunal with the order of the CIT(A) in this regard is therefore, called for. 21. In rejoinder, the learned counsel for the assessee urged that the fact should not be lost sight of that in the case of the assessee, it was a case of modernisation and expansion of the existing business. The decision in the case of Ciba of India Ltd. was rendered by the jurisdictional High Court is distinguishable inasmuch as it was the case of separate business. In the case of the assessee, there was no separate business and therefore, the ratio of this decision should not determine the character of the expenditure. Similarly, the decision in the case of Belapur Co. Ltd. also can be distinguished, inasmuch as, the issue of capital or revenue was not before the Hon'ble Bombay High Court. The learned counsel has also distinguished the Bombay High Court judgment in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowed for the purpose of the business. If the test of " the purpose of the business " is satisfied in respect of the capital borrowed on which the amount of interest is earned, the same has to be allowed as deduction while computing the income of the assessee. 25. In the case of the assessee, a submission was put forward by the revenue that the new machineries for modernisation and expansion acquired by the assessee were not used in the relevant accounting year. In this connection, we have mentioned that under section 36(1)(iii) it is not necessary that the assessee must have used the acquired asset for doing business in the relevant account year itself. Mere acquisition for the purpose of business in the relevant account year is sufficient to claim deduction for the amount of interest paid. In this regard, our views are strengthened by the decisions in the cases of C.T. Desai v. CIT [1979] 120 ITR 240 (Kar.), Addl. CIT v. Southern Founders [1979] 120 ITR 37 (Kar.) and Calico Dyeing Printing Works v. CIT [1958] 34 ITR 265 (Bom.). 26. The issue as regards interest, as a matter of fact, is fully covered by the decision of the Supreme Court in the case of India Cements Ltd. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... something, tangible or intangible property or corporeal or incorporeal right, so that they could be of a lasting or enduring benefit to the enterprise in issue. In other words, the word 'capital' ordinarily means an asset which has an element of permanency about it and which is capable of being a source of income and the capital expenditure must therefore, generally, mean the acquisition of an asset and the asset must be intended to be a lasting or enduring benefit. Judged from this general principle, it would appear that the expenses on foreign travel incurred by the assessee for purchasing the machinery have to be held as the capital expenditure. In other words, all expenditure necessary to bring capital assets into existence and to put them in working condition will form part of the cost. It is wholly irrelevant whether the asset was acquired prior to the commencement of the business or subsequent to such commencement. It is also fallacious to say that it is still at the option of the assessee to capitalise or not to capitalise the expenses directly incidental to the acquisition of such assets. This view of ours finds support from the jurisdictional Bombay High Court decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Bombay High Court in the case of Bralco Metal Industries (P.) Ltd. We have very carefully gone through the said decision. The facts of this case are not very clear and therefore, the ratio of this decision could not be easily imported and applied to the facts before US. 32. The other decision of the Bombay High Court mentioned by us is directly on the issue which we respectfully follow. 33. The details of salary and other charges are placed on page 80 of the paper book. From these details, we find that a sum of Rs. 38,04,362 includes a sum of Rs. 17,36,571 being the commitment charges. As per the details, the assessee had paid the commitment charges as follows : Name of the party Amount Rs. (a) Commitment charges paid to ICICI 99,428.00 (b) Commitment charges paid to IFCI 2,14,415.00 (c) Commitment charges from 1-11-1989 to 4-12-1989 paid to ICICI 69,147.00 (d) Provision for commitment charges on Rupee and F.C. loan 13,53,581.00 ---------------------------- 17,36,571.00 ---------------------------- These commitment charges, in our view, are allowable deduction. In this regard, we refer to the Board Circular No. 2P(XI-6) of 1965, dated 23-8-1965 whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition of Rs. 5,34,544 was made. 36. The CIT(A) examined the issue and found out, as a matter of fact, that in the earlier years in the assessee's own case, the CIT(A) had considered 20% of the expenditure as having been incurred on the employees and hence deductible. The CIT(A) followed the order of her perdecessor and directed the Assessing Officer to allow 20% of the expenditure as having been incurred for the employees. On this count, she gave relief to the assessee to the extent of Rs. 3,70,163. The amount of Rs. 71,840 being the foreign travel was considered by the CIT(A) as the business expenditure and therefore, she allowed the relief of Rs. 4,42,003 as against the addition of Rs. 5,34,544. Against this, both the revenue as well as the assessee have come up in appeals before us. 37. In the assessee's appeal it has been contended that the CIT(A) was not justified in restricting the relief to Rs. 4,42,003. The entire expenditure of Rs. 5,34,544 should have been allowed as the deduction. In this regard, the assessee has drawn our attention to the decision of the Delhi High Court in the case of CIT v. Expo Machinery Ltd. [1991] 190 ITR 576. It has been contended that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 26. She however, confirmed the addition of balance 90% to the extent of Rs. 7,02,236. 42. The assessee before us has pleaded that the presentation articles given to the customers to maintain personal relations and goodwill did not bear the name or logo of the company. The expenses therefore, did not fall under rule 6B of the Income-tax Rules. In this regard, the learned counsel has placed reliance on the decision of the Delhi High Court in the case of CIT v. Indian Aluminium Cables Ltd. (No. 2) [1990] 183 ITR 611 and the decision of the Bombay High Court in the case of CIT v. Allana Sons (P.) Ltd. [1993] 114 CTR (Bom.) 448. 43. On the other hand, the learned departmental representative in the assessee's appeal and in departmental appeal has pleaded that the presentation articles and gifts costing above Rs. 50 each was in the nature of advertisement and hence rule 6B of the Rules was applicable. 44. We have heard the rival submissions. In the assessee's appeal, the CIT(A) has disallowed 90% of the total claim of the assessee for which no cogent reasons have been given. It is nowhere mentioned either by the ITO or by the CIT(A) that the gifted articles had the logo or a name of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of guarantee commission for the year under consideration. 48. On the other hand, the learned departmental representative has placed reliance on the decision of the Gujarat High Court in the case of CIT v. Vallabh Glass Works Ltd. [1982] 137 ITR 389. He pointed out that the Tribunal while dealing with the case of the assessee for the earlier years did not take into account the decision of the Gujarat High Court referred to above. He also took us through the said decision and pointed out that the Hon'ble Gujarat High Court had also considered the decision of the Supreme Court in the case of India Cements Ltd. The learned departmental representative also pointed out that in the recent past, the Tribunal has been consistently holding that the guarantee commission is capital in nature. In this regard, he has drawn our attention to the decision in the case of Pudumjee Pulp Paper Mills Ltd. He therefore, argued that the decision of the CIT(A) should be maintained. 49. We have considered the rival submissions. It is true that in the assessee's case, the guarantee commission was considered by the Tribunal as revenue expenditure in the previous years. However, the decision of the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 10,000 under section 40A(12) which resulted in the disallowance of Rs. 87,000. The assessee, however, explained that an amount of Rs. 97,000 included Rs. 2,000 paid out of pocket expenses and hence was not in the nature of fees so as to be disallowed under section 40A(12) of the Act. Further, it also included an amount of Rs. 60,000 paid to the consultant for various matters including taxation. The pro rata amount of above taken at 50%, as it appears from the facts of the case, had been approved by the CIT(A) in earlier years. Hence, the disallowance in the case of the assessee was worked out as under : Rs. Total fees paid 97,000 Less : Out of pocket expenses 2,000 --------------- 95,000 Less : 50% of fees of Rs. 60,000 considered for services other than under the Income-tax Act 30,000 ----------------- 65,000 Less : Disallowance under section 40A(12) 10,000 ----------------- 55,000 ----------------- The CIT(A) found, as a matter of fact, that the total disallowance under this section should have been Rs. 55,000 as against Rs. 87,000 made by the Assessing Officer. 53. After hearing the parties to the dispute, we find from the facts of the case t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of business, personal effects etc. In the present trade debts are definitely capital assets within the definition. Further more, trade debts are short-term capital assets, since it is stated by the appellant that the debts have not been held for more than 3 years as they pertain to the preceding 1 or 2 years only. The transfer of current assets on a devalued price is, therefore, resulted in transfer of short term capital assets, resulting in short-term capital loss. This short term capital loss is to be adjusted/set off as per the provisions of I.T. Act. The Assessing Officer is directed to do the necessary set off, as per the Act." 55. We have carefully considered the arguments of the parties to the dispute. The loss on transfer of the marketing division, in our view, is incidental and therefore, admissible as deduction. As a matter of fact, the facts of the case suggest that it could even be the business loss. However, the CIT(A) has treated the said loss as the short-term capital loss with which we have no dispute. The CIT(A) has in an effective and detailed manner, dealt with this issue which we do not consider it necessary to reproduce in full. It is sufficient to say that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 59. The learned departmental representative has argued that there is a specific provision against the deduction of expenditure for the maintenance of guest house. The section itself has provided that even the depreciation will not be allowed. The learned departmental representative therefore, contended that the CIT(A) was in error in allowing the rent, as well as the depreciation. 60. The learned counsel for the assessee, on the other hand, pointed out that the rent and taxes are deductible under section 30 of the Act and therefore, the provisions of section 37(4) of the Act have no application. The issue is also covered by the decision of the Bombay High Court referred to above. 61. Regarding the depreciation on guest house, the learned counsel pointed out that the Bombay High Court in the case of Century Spinning Manufacturing Co. has held that sub-section (4) of section 37 of the Act is of non obstante clause vis-a-vis sub-section (1) and sub-section (3) of section 37 only. If the expenditure or allowance is allowable under other sections of the Income-tax Act, 1961, the allowance cannot be withdrawn or denied to the assessee. In the opinion of the learned counsel, the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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