TMI Blog2005 (12) TMI 453X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate authority are being impugned on 28 counts. Some of the issues are common in the appeals of the respective parties as well as in different years. Therefore, we proceed to take up the issue in dispute in seriatim . 2. Before taking up the issue on merit it is pertinent to note that cross objection of assessee in assessment years 1998-99 and 1999-2000 are time-barred by 3 yrs. 101 days and 2 yrs. 217 days respectively, therefore, first we deal with the petition for condonation of delay in filing the cross objection. 3. In order to explain the delay assessee has submitted that the ground set out in the memorandum of cross objections are similar to the issue involved in earlier years forming part of the consolidated appeals pending before the Tribunal, i.e., whether interest expenditure incurred on the borrowed funds for financing of expansion of existing business is allowable or not. In these assessment years ld. CIT(A) had allowed such expenses partly for some of the units, however, disallowed with regard to Aluminium Smelter Projects at Orissa and Paper Project at Vyara. It has also been pleaded that assessee was under bona fide belief that such a relief can be c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e warrant to castigate him as an irresponsible litigant. What he did in defending the suit was not very much far from what a litigant would broadly do. Of course, it may be said that he should have been more vigilant by visiting his advocate at short intervals to check up the progress of the litigation. But during these days when everybody is fully occupied with his own avocation of life an omission to adopt such extra vigilance need not be used as ground to depict him as a litigant not aware of his responsibilities, and to visit him with drastic consequences. 9. It is axiomatic that condonation of delay is a matter of discretion of the Court. Section 5 of the Limitation Act does not say that such discretion can be exercised only if the delay is within a certain limit. Length of delay is no matter, acceptability of the explanation is the only criterion. Sometimes delay of the shortest range may be uncondonable due to a want of acceptable explanation, whereas in certain other cases, delay of a very long range can be condoned as the explanation thereof is satisfactory. Once the Court accepts the explanation as sufficient, it is the result of positive exercise of discretion and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk. 6.It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to so. Making a justice-oriented approach from this perspective; there was sufficient cause for condoning the delay in the institution of the appeal. The fact that it was the "State" which was seeking condonation and not a private party was altogether irrelevant. In the case of Nand Kishroe v. State of Punjab [1995] Vol. 6 SCC 614 the Hon ble Supreme Court has condoned the delay of 31 years almost under the similar circumstances. There the petitioner has joined service in the erstwhile Patiala State in May 1941. On the formation of Pepsu State he was taken as an Assistant w.e.f. 1-9-1956. Subsequently Pepsu State was merged with State of Punjab. He was integrated as assistant in the Punjab Civil Secretariat at Chandigarh in the Food Distribution Branch. He completed 10 years qualifying service. However, he was compulsorily retired on 6-1-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ute in appeal of both the sides relates to disallowance u/r. 6B of the Income-tax Act. The amounts involved in respective appeals are as under : (I) Disallowance under rule 6B of the Income-tax Act, 1961 : A.Y. 1989-90 : Rs. 19,248 : Ground No. (I) : Assessee s appeal A.Y. 1991-92 : Rs. 73,420 : Ground No. (II) : Assessee s appeal A.Y. 1993-94 : Rs. 14,779 : Ground No. (3) : Department s Appeal A.Y. 1995-96 : Rs. 1,96,403 : Ground No. (4) : Department s Appeal A.Y. 1997-98 : Rs. 4,47,452 : Ground No. (4) : Department s Appeal 8. Ld. counsel for the assessee at the very outset submitted that presented articles did not carry the logo or name of the assessee s business, therefore, the Assessing Officer ought to have not made any disallowance. He further pointed out that in assessment years 1993-94, 1995-96 and 1997-98 the assessee relied upon the decision of Hon ble Bombay High Court in the case of CIT v. Allana Sons [1995] 216 ITR 690 the ld. CIT(A) deleted the addition. He further submitted that ITA Nos. 3692 3857/B/94 in assessee s own case in assessment year 1990-91 such addition was deleted and the issue has been decided in favour of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 30 out of Rs. 3,03,722 be allowed to the assessee. Ld. D.R. on the other hand, relied upon the orders of the revenue authorities below. 12. We have duly considered the rival contention. No doubt specific details were not available with the assessee indicating specific amounts spent on employees as well as outsiders. Under such circumstances disallowance upheld by the Tribunal upto 75% of the expenses in assessment year 1990-91 is the best guiding factor for us, therefore, respectfully following the Tribunal s order in assessment year 1990-91, we direct the Assessing Officer to grant a deduction of Rs. 75,930 out of expenses of Rs. 3,03,722 incurred on sales promotion. This ground in assessment year 1989-90 is partly allowed. 13. The next ground relates to addition of the Modvat Credit of Excise Duty in the value of closing stock. The following details will indicate the amounts involved as well as the grievance of the respective side (III) Modvat Credit of Excise Duty : A.Y. 1989-90 : Rs. 32,11,059 : Ground No. (III) : Assessee s appeal A.Y. 1991-92 : Rs. 30,25,184 : Ground No. (4) : Department s Appeal A.Y. 1993-94 : Rs. 59,60,000 : Ground No. (2) : Departme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r book filed in the appeal for assessment year 1989-90. Ld. D.R. on the other hand, relied upon the orders of the revenue authorities below. 16. On due consideration of the facts and circumstances as well as the ratio of law decided by the Hon ble Supreme Court in the case of Indo Nippon Chemical Co., wherein it has been held that if an assessee valuing raw material on purchase price minus Modvat Credit and valuing unconsumed raw material and work-in-progress at the end of year at net method, then it is a proper method, we are of the view that no addition on account of Modvat Credit is required to be made in the value of the closing stock. Thus the ground of appeal of the assessee in assessment year 1989-90 is allowed and those of revenue in 1991-92 to 1997-98 are rejected. 17. The next dispute relates to depreciation in investment allowance on technical know-how. This issue is involved in assessment year 1989-90 only and assessee is in appeal. 18. Ld. counsel for the assessee at the very outset submitted that he is not pressing for grant of depreciation on the asset, therefore, the ground with regard to grant of depreciation on the technical know how is rejected. His ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r : "There is no dispute that technical know-how is a "plant" as it is well established by the following decisions : ( i ) Scientific Engg. House Pvt. Ltd. v. CIT 157 ITR 86 (AP) to raise the production that technical know-how is a plant. ( ii ) CIT v. Baker Mercer India P. Ltd. 196 ITR 667 - In this case the relevant observations of Hon ble Jurisdictional High Court are as under : "Question No. 4 relates to investment allowance under section 32A of the Income-tax Act, 1961, in respect of technical know-how. Our High Court in the case of CIT v. Emco Electro Pvt. Ltd. [1979] 118 ITR 864 , considered the meaning of the word "Plant" for the purpose of depreciation and development rebate. It said that "plant" is a word of wide import and must be broadly construed. It held that "Plant" would include technical know-how also. The Supreme Court, in the case of Scientific Engineering House P. Ltd. v. CIT [1986] 157 ITR 86, also held that for the purposes of depreciation, the term "Plant" is wide enough to include technical know- how and documentation such as drawings, designs, plant, processing data etc." In the case of CIT v. ASEA Ltd. the question r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled for investment allowance. We direct the ld. Assessing Officer to grant such allowance to the assessee. As far as depreciation is concerned assessee has already submitted that it will not press for depreciation. Hence depreciation would not be admissible to the assessee. This ground of appeal is partly allowed for assessment year 1989-90. 22. In assessment year 1989-90 the next dispute relates to computation of income under section 115J of the Act. 23. The adumbrated facts of the case are that the assessee used to close its accounts every year on the 30th of June. However, from the assessment year 1989-90, it became mandatory, as per the Income-tax Act, 1961, to close the accounts on 31-3-1989. Thus for the purposes of the Income-tax Act, for the assessment year 1989-90, the previous year of the assessee comprised of 21 months i.e., from 1-7-1987 to 31-3-1989. However for the purposes of the Companies Act, the assessee continued to close its accounts on the 30th of June (Companies accounts). For the purpose of the section 115J of the Act, the assessee for the period of 21 months relevant to the assessment year 1989-90, prepared its P L account (115J account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was thus concluded by the Assessing Officer that the accounts prepared by the assessee for the purposes of the Income-tax Act were not in accordance to the requirements of section 115J(1A) and alleged that the assessee had manipulated its accounts and had window dressed to pay no tax under section 115J which it would have to pay if the book profit would be arrived at as per the Companies Act which the assessee was doing for the shareholders and the Registrar of Companies. 25. The Assessing Officer has also stated that the assessee cannot have two different opening w.d.v. of the assets on the same day i.e., 1-7-1987. Here it was stated by the Assessing Officer that the w.d.v. of the assets as on 1-7-1987 was to be shown as per the Schedule VI of the Companies Act which was done correctly for the purpose of the shareholders and the Registrar of Companies but which was different for the I.T. purpose. The Assessing Officer thus alleged that assets showing different opening w.d.v. as per Schedule VI was nothing but a sham technique adopted to avoid the tax under section 115J of the Act. The Assessing Officer on the basis of the above thus recalculated the book profit under secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reads as under : "115J. Special provisions relating to certain companies. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 (hereafter in this section referred to as the relevant previous year); is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit. (1A) Every assessee, being a company, shall, for the purposes of this section, prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of the Schedule VI to the Companies Act, 1956 (1 of 1956)....." A plain and simple reading of the section as quoted above makes it amply clear that for purpose of working out the book profit under section 115J, the only condition laid down by the section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... depreciation was claimed on the straight line method of depreciation. The Hon ble Jurisdictional High Court as well as of the Hon ble Supreme Court in 262 ITR and 255 ITR ( supra ) has considered this issue elaborately and observed that Assessing Officer has no power to make adjustments/changes in the method of providing depreciation from straight line to written down value. According to the Hon ble High Court in the Kinetic Motors case, both methods are permissible, and therefore, Assessing Officer cannot make any adjustment. The head note of both the judgments read as under : u " Kinetic Motor Co. Ltd. v. Deputy Commissioner of Income-tax 262 ITR 330 (Bom.) Company - Book profits - Assessment under section 115J - No power in Assessing Officer to make adjustments - Change in method of providing depreciation from straight line to written down value - Both methods permissible under Companies Act - Depreciation actually debited to profit and loss account prepared in accordance with provisions of Companies Act and certified by auditors - Assessing Officer cannot make adjustments to it - Income-tax Act, 1961, section 115J. The assessee was a public limited company engag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. u Apollo Tyres Ltd. v. Commissioner of Income-tax ( 255 ITR 273 ) S.C. Commissioner of Income-tax v. Apollo Tyres Ltd. Company - Tax on basis of "book profits" - New profits in profit and loss account prepared in accordance with Parts II and III of Schedule VI to Companies Act - Accounts scrutinised and certified by statutory auditors - Assessing Officer has no power to scrutinise except as provided in Explanation - Income-tax Act, 1961, section 115J. The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of ld. counsel for the assessee this ground is treated as redundant. 31. The next dispute relates to set off of unabsorbed depreciation of previous year. This ground has been raised in assessment years 1989-90, 1991-92 and 1992-93 by the assessee. However, ld. counsel for the assessee did not press this ground of appeal at the time of hearing, therefore, it is rejected in all the three assessment years. 32. The next ground relates to disallowance under section 43B of the Act. The amount and the year in which such dispute arose are as under : A.Y. 1991-92 : Rs. 45,288 : Ground No. (III) : Assessee s appeal A.Y. 1992-93 : Rs. 53,356 : Ground No. (VI) : Assessee s appeal A.Y. 1993-94 : Rs. 58,240 : Ground No. (V) : Assessee s appeal 33. The brief facts of the case are that the above sums whose deduction was claimed by the assessee relates to PF/EPF and ESIC liabilities. In assessment year 1991-92 the Assessing Officer has made the disallowance and ld. CIT(A) has confirmed the disallowance on the basis of the reasoning given in assessment year 1990-91. Similar view has been followed in the subsequent years. Ld. assessee in the written submission contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1,28,811 : Ground No. (II) : Assessee s appeal A.Y. 1997-98 : Rs. 1,77,98,128 : Ground No. (1) : Assessee s appeal A.Y. 1993-94 : Rs. 4,88,912 : Ground No. (6) : Department s Appeal (X) Disallowance of Royalty under section 40( a )( i ) A.Y. 1991-92 : Rs. 67,27,863 : Ground No. (V) : Assessee s appeal A.Y. 1992-93 : Rs. 68,74,370 : Ground No. (IV) : Assessee s appeal (XI) Claim under section 80HHC : A.Y. 1991-92 : Rs. 53,72,345 : Ground No. (VI) : Assessee s appeal A.Y. 1992-93 : Rs. 53,72,345 : Ground No. (V) : Assessee s appeal 36. Ld. counsel for the assessee at the very outset did not press the grounds of appeal raised by the assessee and where relief has been granted to the assessee he did not contest the ground of appeal raised by the revenue. In view of his stand assessee s grounds of appeal are rejected, whereas the ground of appeal raised by the revenue in assessment year 1993-94 regarding pre-operative expenses is allowed. 37. The next dispute relates to charging of interest under section 234B 234C of the Act. 38. As far as the charging of interest under section 234B is concerned ld. counsel for the assessee did not press thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the Obroi Health Club. Similarly in assessment year 1993-94 membership of Willington Club was taken by the assessee in the name of corporate entity. Therefore, taking into consideration the facts and circumstances coupled with the authoritative pronouncements we allow the assessee s ground of appeal in assessment year 1993-94 and reject the ground of appeal taken by the department in assessment year 1991-92. 44. The next dispute relates to disallowance of capital subsidy from cost of the assets. Ld. counsel for the assessee at the very outset submitted that this issue is squarely covered by the decision of Hon ble Supreme Court rendered in the case of CIT v. P.J. Chemicals [1994] 210 ITR 83 , wherein it has been held that where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy, being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the "actual cost". The expression "actual cost" in section 43(1) of the Income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase the assessee has demonstrated that some of the branches of the assessee s company were situated at very long distance and thus it became inevitable that small portion of period expenses have to be accounted in the later year. The assessee has a huge turnover and it claimed expenses in crores of rupees then it is not justifiable to doubt a sum of Rs. 46,899 only. Therefore, keeping in view the decision of Hon ble Gujarat High Court we allow this ground of appeal and delete the disallowance. 49. The next dispute relates to disallowance of Rs. 3,549 towards capital expenditure debited to revenue account. The Assessing Officer has held that from the Tax Audit Report it was evident that a sum of Rs. 17,131 which was in the nature of capital expenditure was debited to the P L account by the assessee. On these grounds the Assessing Officer disallowed the same. 50. On appeal ld. CIT(A) has limited the disallowance to Rs. 3,549 being the expenditure incurred by the assessee on the purchase of the following : Carpet : Rs. 1,808 Brief case : Rs. 1,038 Suitcase : Rs. 703 The CIT(A) held the carpet to be a part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the case of Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 and Fluid Air India Ltd. v. Dy. CIT [1997] 63 ITD 182 (Mum.). On the other hand ld. D.R. relied upon the orders of the revenue authorities below. 54. After considering the arguments of both the sides and the facts of the case, we find force in the arguments of the learned Counsel for the assessee. The Hon ble Apex Court in the case of Allied Motors (P.) Ltd. ( supra ) has held that proviso to section 43B to be clarificatory and held that it should be treated as retrospective in operation. In section 43B, there were two separate provisos, one for the payment relating to tax, duty, cess, fee, interest on loan etc. and other concerning the payment with regard to Provident Fund, Superannuation Fund or Gratuity Fund etc. The Finance Act, 2003 omitted 2nd proviso and the 1st proviso is made applicable with regard to all the payments including the payment for PF, Superannuation Fund, Gratuity Fund etc. The proviso when inserted was held to be clarificatory by the Hon ble Apex Court and therefore, when the 2nd proviso is omitted and the 1st proviso is amended, the amended proviso should also be held to be clar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ges out that Assessing Officer himself has observed that assessee is not dealing in shares and securities. He also find that shares and securities are the assessee s investment. However, in such circumstances what led the Assessing Officer to apply explanation of section 73 is not discernible from the order. Therefore, in our opinion ld. CIT(A) has rightly treated it as short-term loss and allowed the assessee to carry it forward. We do not find any merit in this ground appeal i.e. ground No. 5 of departments appeal in assessment year 1995-96. It is rejected. 60. The next dispute again raised by the revenue in Ground No. 6 pertaining to assessment year 1995-96, relates to grant of capital loss of Rs. 65,900 on sale of the land. The assessee had sold the land to the sister concern at book value. The Assessing Officer was of the opinion that assessee should have transferred the land at the market value. However, ld. CIT(A) has granted the capital loss to the assessee by observing that in case assessee has transferred the land on the book value then market value has no roll to play. Even if by transferring the land at book value assessee is suffering some loss, then that has to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1999-2000 : Rs. 16,21,17,518 : Ground No. (3) : Department s Appeal ( v )Expenditure incurred for setting up of the paper project at Vyara : Assessment year 1997-98 : Rs. 1,41,80,863 : Ground No. (2) : Assessee s appeal Assessment year 1998-99 : Rs. 77,47,990 : New ground to be taken by assessee in cross objection. Assessment year 1999-2000 : Rs. 36,21,861 : New ground to be taken by assessee in cross objection. ( vi )Expenditure on aluminium smelter plant at Orissa : Assessment year 1998-99 : Rs. 23,91,803 : New ground to be taken by assessee in cross objection. Assessment year 1999-2000 : Rs. 38,54,266 : New ground to be taken by assessee in cross objection. 64. Let us know examine the facts and circumstances of the present case. In order to know as to how such interest expenses are admissible to the assessee and how ld. CIT(A) has granted to the assessee in most of the years except for Sanaswadi Plant and Paper Project at Vyara and Aluminium Smelter Plant at Orissa in some of the years, ld. counsel for the assessee took us through the written submission placed on record. 65. On the strength of the written submission ld. counsel for the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncial restructuring and thus entered the aluminium production business in a big way. u In 1996, pursuant to the Scheme of Amalgamation of Sterlite Communications Ltd. with the assessee-company, a Paper project was transferred to the assessee-company along with an Optical Fibre Plant and a Continuous Cast Copper Rod (CCR) Plant w.e.f. 1-4-1996. u In April 1999, to source copper concentrate for the Tuticorin copper smelter, Monte Cello BV (a subsidiary of Monte Cello Corporation NV, which was wholly owned by Twin Star at that time) acquired Copper Mines of Tasmania Pty Ltd., which owns the Mt Lyell copper mine. In October 1999, Monte Cello BV acquired Thalanga Copper Mines Pty Ltd. Monte Cello Corporation NV subsequently sold Monte Cello BV to Sterlite. u In July 2000, Sterlite s telecommunications cables and optical fibre business was demerged into a new company, Sterlite Optical Technologies Limited ("SOTL"). 66. On the basis of the above he contended that over the years the company has grown substantially involving not one but a series of successful integrations both backward and forward and substantial expansions. Starting with the manufacture of cables, conductor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ands of the assessee-company. Common books of account were maintained by the assessee-company in respect to its various plants. The production of all the units were considered to be the combined production of the assessee-company and the profits earned by all the different units were considered to be the profit of the assessee-company. The ultimate gain or loss was worked out by a consolidated Profit and Loss account and Balance Sheet for the assessee-company. The combined profit thus worked out was offered to tax in the hands of the assessee-company. The assessee-company was one and the same and the assessment was not made unit-wise but assessee-wise. 68. The assessee-company for financing the setting up of the new projects and the expansion of its existing projects raised funds by way of Fully Convertible Bonds, Non Convertible Bonds, Euro Convertible Bonds and also by bank loans. The projects were also partly financed by internal accruals. Thus the funds raised by way of borrowings were used to part finance the expansion projects. On these borrowings interest were paid and also certain preoperative expenses of revenue character were incurred on the setting up of the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project at Vyara and Aluminium Smelter Plant at Orissa. 72. Ld. counsel for the assessee on the basis of the detailed written submission pointed out how the assessee has expanded its existing business and how the interest expenses incurred by it, are allowable with regard to all the Plants. On the other hand ld. D.R. relied upon the orders of the revenue authorities below. He particularly pointed out that assessee itself in the books of account capitalized the interest expenses, therefore, Assessing Officer has rightly disallowed. With regard to paper project at Vyara and Aluminium Smelter Plant at Orissa he contended that these are all together new projects, therefore, interest expenses cannot be allowed in these projects as revenue expenses. 73. We have duly considered the rival contentions. Section 36(1)( iii ) has direct bearing on the controversy in hand, therefore, it is salutary upon us to take note of this section : Section 36(1)( iii ) of the Income-tax Act, 1961 reads as follows : "36. Other deductions. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preme Court. Thus, where, however, besides the expansion of the existing business, money is borrowed for setting up a new activity or unit, the decisive factor for the allowability of the interest on borrowed capital for setting up of the new unit as a revenue expenditure depends on the fact whether the new unit constitutes the same business as that of the existing unit or not. The factors essential to hold that it is the same business or not has already been laid out by the Hon ble Supreme Court in the two famous judgments in the case of CIT v. Prithvi Insurance Co. Ltd. [1967] 63 ITR 632 and Produce Exchange Corporation Ltd. v. CIT [1970] 77 ITR 739 has considered this aspect and found that common management, common administration, common fund, common accounting set up, etc. indicate unity of control and management. It be one of the decisive factor in determining whether the new business constitutes the "same business" or not as with the existing business. u In CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 (Bom.) The observation of the Hon ble Court as summarised in the head note are worth to note, the same read as under : Interest on borrowed capital Same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the decisive test is the unity of control which is indicated by interlacing, interdependence and interconnection between the businesses and dovetailing of one into the other. In the present case, it was quite clear that the amalgamation of the subsidiary was allowed by the High Court. Thereafter it was for the management of the company to manage its affairs and the benefit which would be available for the borrowings done for a unit would certainly be claimable by the company as such. Section 36(1)( iii ) which permits the amount of interest paid in respect of the capital borrowed for the purposes of the business would have to include the borrowing for a unit of the company which was the fertilizer unit in U.P. The interest was deductible. ( ii ) That since the Tribunal had recorded a finding of fact that investment in tax-free bonds was a business investment it was justified in allowing deduction of interest on the capital borrowed. In the above mentioned case interest cost on a totally different line of business being the manufacture of fertilizer as against the existing line of business being the manufacture of chemicals, salt and detergents, was held to be deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice and dal mill and the husk was the waste product of the mill, which could be utilised as a raw material for manufacturing Straw Boards. That was the reason for which the assessee decided to start a Straw Board factory in order to utilise the waste product of the mill and for this purpose the assessee borrowed capital and started constructing, erecting and installing the Straw Board factory. The factory did not commence production during the accounting year relevant to assessment year 1968-69 and assessment year 1969-70, however, interest was paid. Such interest/expenditure liability was allowed as a deductible expenditure on the ground that new activity was only an expansion of the existing business of the assessee. India Rare Earths Ltd. v. ITO [1984] 8 ITD 882 (Bom.) Interest expenditure incurred by a company engaged in the business of mineral separation on western coast to establish a new project in Orissa was held allowable. The proposal to set up a new mineral separation unit in Orissa was held to be only an extension of the assessee s current business and could not be described as a new business undertaking. CIT v. Alembic Glass Industries Ltd. [1976] 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apalli Sugar s case clearly observed as follows : "Another case to which reference has been made on behalf of the revenue is India Cement Ltd. v. CIT 60 ITR 52 ,..... This court accordingly held that the amount of Rs. 84,633 was an allowable expenditure. This case too is of no assistance to the revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not raise in that case." 79. In the light of the above principle let us examine the facts of the case. Ld. counsel for the assessee in this connection first invited our attention towards the representative chart of the organizational structure repro-duced in the written note which read as under : STERLITE INDUSTRIES (I) LTD. Representative Chart of Organisational Structure. Board of Directors CMD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 1993-94. After the Tuticorin plant is commissioned the assessee-company had stopped the import of the copper cathodes. Now the company imports copper ore/concentrates, which are used at the Tuticorin plant to manufacture copper anode. The Copper Smelter plant at Tuticorin manufactures the copper anodes which are then refined at the Refinery plant at Silvasa to produce copper cathodes. These copper cathodes are then used by the CCR plant at Lonavala for the manufacture of the CCR. The copper cathodes manufactured were entirely for the captive consumption of the factory at Lonavala manufacturing continuous Cast Copper Rods (CCR). These CCR produced at Lonavala were partly used by the Jelly Filled Telephone cables plant at Aurangabad. Thus the Copper Smelting and Refining project at Tuticorin set up with an objective of import substitution was nothing but a step in backward integration. The steps in the backward integration are explained as follows : u Continuous Cast Copper Rods (CCR) produced at Lonavala since 1991 - Basic raw material used is copper cathodes u Copper cathodes were initially imported u Copper Anodes produced by the Copper Smelter plant at Tuticori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ision has been funded through internal accruals of the company which were transferred from within the company the paper division. Thus this project duly come within the ambit of common management, common organization funds etc. of the assessee and being part of the common entity the claim of the assessee is justifiable. As far as the Aluminium Smelter Plant at Orissa is concerned this product is being used as raw material for foil manufacturing activity carried by the assessee. Therefore, it indicate that it is backward integration of the assessee s existing manufacturing business activity. The ld. CIT(A) has wrongly excluded this plant by treating it as independent one and therefore, taking into consideration the overall aspects we are of the view that assessee is entitled to interest expenses incurred for expansion of its various extension plan. The alleged new plants are inter-dependant on the existing one, they are mere expansion of the existing business. Hence grounds of appeal taken by the assessee in assessment years 1991-92 to 1993-94 as well as ground taken in cross objection in assessment years 1998-99 to 1999-2000 are allowed, whereas the ground of appeal taken by the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ication on the cost of assets to the assessee which is governed by the provisions of section 43(1) and other allied provisions pertaining to depreciation allowance, etc. 30. In view of the discussion in the foregoing paragraphs we do not see force in this ground of appeal No. 4 of the assessee seeking deduction of the sum of Rs. 11,13,819 under section 36(1)( iii ) of the Act. The same is accordingly rejected." However, the Hon ble Gujarat High Court in the case of Core Health Care ( supra ) considered this aspect elaborately and in the head note of the journal the view point of the Hon ble High Court has been summarized as under : "Business expenditure - Interest on borrowed capital - Scope of section 36(1)( iii ) - Whether borrowing on capital or revenue account not relevant - Capital borrowed for purchase of machinery to increase production in existing business - Machinery not put to use in accounting year - Not relevant - Interest on borrowed capital is deductible - No obligation to capitalise such interest - Income-tax Act, 1961, sections 36(1)( iii ), 37, 43(1), Explanation 8. Section 36(1)( iii ) of the Income-tax Act, 1961, is absolutely clear. It provid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified industry (sections 32A and 33). The term "actual cost" is applicable only in relation to an asset as against the phrase "capital borrowed" used in clause ( iii ) of section 36(1) of the Act. The term "capital borrowed" in the said provision is of a much wider import than the phase "actual cost". Explanation 8 only lays down that where an amount is paid/payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use, shall not be included in the actual cost of such asset. The scope and ambit of this Explanation on a plain reading is restricted to a situation whereafter the asset is first put to use the interest which is paid/payable would never form a part of the actual cost. The Explanation nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under section 36(1)( iii ). Explanation 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc., on a larger amount of actual cost. Neither in the notes on clauses nor in the memorandum explaining the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against business ethics. 2. On the facts and in law, the ld. CIT(A)-II, Mumbai erred in holding that interest and pre-operative expenses could be debited to the P L account prepared for the purposes of section 115JA of the I.T. Act to be foregone for the net profit determined under section 210 and section 211 of the Companies Act. 3. On the facts and in law, the ld. CIT(A)-II, Mumbai erred in accepting the book results overlooking the conclusive proof in the assessment order that the accounts with the I.T. Return did not present assessee s true and fair affairs." Assessment year 1999-2000 : Appeal No. : ITA - 4909/M/2001 (Departmental appeal) "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), Mumbai erred in holding that sections 210 and 211 of the Companies Act allowed the assessee maintenance of two different sets of account, one for the shareholders and the other for income computation under section 115JA of the I.T. Act with no legal basis against business ethics." 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A), Mumbai erred in accepting the book results overlooking the conclusive proof i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prepares another set of accounts for complying with the SEBI directive requiring a listed company to publish financial results ("SEBI accounts"). A listed company is required to furnish half yearly results in a prescribed proforma within a specified period. However, if such unaudited results substantially differ (more than 20 per cent) from the audited results of the company, then the company has to explain the reasons thereof. However, w.e.f. June 1998, such unaudited accounts have to be submitted on quarterly basis instead of half yearly basis. However for income-tax purposes, the Income-tax Act, 1961 requires a separate compilation of final account for the previous year prescribed under the Income-tax Act which ends on 31st of March of the previous year. This was made mandatory from the assessment year 1989-90 whereby it became mandatory, as per the Income-tax Act, 1961, to close the accounts on 31/03. Thus in consonance with the said Act, the assessee-company followed the accounting year ending on March 31st (IT Accounts). This practice has been followed by the company since the assessment year 1989-90 and has been accepted by the Assessing Officer and the CIT(A) all along. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessment year 1999-2000 : The assessee-company for the assessment year 1999-2000 filed its return of income at a returned loss of Rs. 71,69,11,542. The return was appended with the computation, the duly audited account statement for year ending 31-3-1998 and also the profit and loss account of the units claiming deduction under sections 80-I and 80-IA. The account statements filed with the return showed a book loss of Rs. 85,87,30,011. Evidently, because of book loss the assessee was not liable to pay taxes under section 115JA. The Computation of income filed with the return of income by the assessee is as follows : Amount (Rs.) (I) Total income for the purposes of section 115JA : Nil (II) Total income for provisions of the Act other than section 115JA of the Act : Amount (Rs.) Net Loss as per the Profit and Loss Account -85,87,30,011 Less : Income on tax-free bonds 1,20,65,475 -87,07,95,846 Add : Depreciation as per books 2,11,45,10,764 Add : Dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... note issued regarding accounting standard laid down by the ICAI. According to the Assessing Officer the objective behind introduction of section 115JA was to charge some minimum tax on prosperous dividend paying zero tax companies. As observed earlier assessee-company closed its annual accounts in terms of the Companies Act, on 30th of June, whereas for the purpose of income-tax it has to close its account on 31st March every year. In the printed annual reports for the years ending 30-6-1997 and 30-6-1998 the assessee showed profits mainly as a result of capitalizing interest and pre-operative expenses relating to certain projects under expansion programme. While in profit and loss account for the years ending 31-3-1997 and 31-3-1998, prepared for the IT purposes and appended to the income-tax return, such expenditure was claimed as revenue expenditure by debiting the same to the P L Account. According to the Assessing Officer the same principle of account- tancy ought to have been followed by the assessee in preparing the annual accounts for the purpose of the share holders as well as for the purpose of income-tax returns. The Assessing Officer was of the opinion that pre-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( supra ), which have been relied by the ld. CIT(A). The gist of assessee s submission can be noticed as under : ( i )Section 115JA(1) provides that where the total income as computed under the provisions of the Act is less than 30 per cent of the book profit, the total income chargeable to tax shall be deemed to be the amount equal to 30 per cent of such book profit. ( ii )Further, section 115JA(2) imposes two requirements in respect of the mandatory final account to be prepared under section 115JA which are : 1.the accounts must comply with schedule VI, Parts II and III. 2.Insofar as depreciation is concerned, the final accounts complied for the purpose of the I.T. Act must adopt the same rate and the same method as is adopted in the accounts prepared under the Companies Act. ( iii )Schedule VI, Parts II and III deal with the disclose requirements of the various items in the P L A/c. They do not enunciate any accounting principles. The same are absolutely silent on the accounting treatments of the various P L A/c items. ( iv )Assessee s accounts prepared under section 115JA of the I.T. Act for assesmsent year 1998-99 clearly discloses the interest and fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prohibition to adopting the same if the accounting year is, there is a common accounting year. ( viii )In respect of the P L account required by section 115JA there was no requirement about consistency in accounting policies vis-a-vis those adopted for any other P L account (except for the requirement that in respect of depreciation the same method and rate have to be adopted in the accounts prepared under section 115JA of the Income-tax Act as the method and rate adopted for the purpose of section 210 of the Companies Act). ( ix )The Legislature was aware that different accounting polices can result in different profits. It, therefore, chose that at least in relation to depreciation the accounting policy should be constant. This was introduced by way of two provisos to section 115JA(2). These provisos were absent in section 115J. The objective behind the proviso requiring the companies to calculate depreciation by adopting the same method and same rate as it has adopted in the account prepared under the Companies Act is to standardize accounting policies only in the area of depreciation. ( x )The Legislature has clearly chosen not to standardize accounting policies i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company ( a )balance sheet as at the end of the period specified in sub-section (3); and ( b )profit and loss account for that period. The section 210 of the Companies Act simply requires the preparation of a P L account for the presentation at the A.G.M of the company, for circulation amongst the shareholders of the company and for the purpose of the declaration of the dividend of the company. Nothing is specified in the said section regarding the preparation of such P L account and the accounting standards to be followed in the preparation of such P L account to be placed before the A.G.M. ( xv )The reference in the Companies Act requiring compliance with the accounting standards is to be found in section 211 of the Companies Act, 1956. ( xvi )There is no particular accounting standard prescribed by the ICAI, in regard to the interest and pre-operative expenses that the assessee can be accused of not following. It is submitted that there is a certain definite and unanimous view point that interest and pre-operative expenses relating to the period prior to the commencement of production in the case of a new unit should be capitalised. This was accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956) : Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year. Explanation. For the purposes of this section, "book profit" means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by .............................................................................................................................................................." It is also worth to note the comparative position of sections 115J, 115JA and 115JB as they stood at relevant time, such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two provisos to section 115JA makes it entirely different than section 115J. These provisos in section 115JA makes it abundantly clear that in all cases i.e. whether the assessee is following the same accounting year for the purpose of the Companies Act and Income-tax Act or different accounting year as in the present case, a separate Profit Loss Account has to be prepared for the purpose of section 115JA because otherwise the provisos to section 115JA cannot be put to use. It is provided in the first proviso that the assessee shall adopt the same rate and method for depreciation as adopted by it in the accounts prepared for presentation in Annual General Meeting (AGM Accounts in short). The second proviso is for those companies whose accounting year as per Companies Act is different than the accounting year for Income-tax Act as in the present case and it is provided in this proviso that in such Profit Loss Account, the method and rate of depreciation shall be same as adopted in AGM Accounts. From the same, it is clear that the Legislature are aware that there can be difference in the profit as per AGM Accounts and as per the Profit Loss Account prepared for the purpose of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Companies Act, 1956 as they apply to a Profit Loss Account and hence this Para is not relevant for us in this case. The second Para really prescribes the requirement regarding the Profit as per the Profit Loss Account but the remaining Paras being Para Nos. 3 to 6 deal with various disclosure requirements and have no bearing on the amount of Profit /or Loss as per the Profit Loss Account. Similarly, Part III of Schedule VI is regarding interpretation of various terms such as "Provision", "Reserve", "Capital Reserve", "Quoted Investment" and "unquoted Investment" etc. and hence the same has also no bearing on the amount of Profit /or Loss as per the Profit Loss Account. We are therefore concerned with Para 2 of Part II of Schedule VI and the same is reproduced below for ready reference : "The Profit and Loss Account ( a )Shall be made out as clearly to disclose the result of the working of the company during the period covered by the accounts; and ( b )Shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature." 97. From the above, we find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Policies also recognises that there may be different accounting policies with regard to various issues. Paras 14 15 of AS - 1 deal with this aspect and we reproduce the same for ready reference : "14. The following are examples of the areas in which different accounting policies may be adopted by different enterprises. u Methods of depreciation, depletion and amortisation u Treatment of expenditure during construction u Conversion or translation of foreign currency items u Valuation of inventories u Treatment of goodwill u Valuation of investments u Treatment of retirement benefits u Recognition of profit on long-term contracts u Valuation of fixed assets u Treatment of contingent liabilities. 15. The above list of examples is not intended to be exhaustive." 99. From the above, it can be seen that there may be different accounting policies with regard to the treatment of expenditure during construction, which is the subject-matter before us i.e. interest and pre-operative expenses incurred before the assets are ready to put to use and hence there may be different accounting policies with regard to this item also. Since AS ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... VIA, depreciation, which is though allowable but not claimed in the return for normal computation of income, has to be allowed. Respectfully following this judgment, this issue is decided in favour of the revenue. This Ground of the revenue is allowed. 104. The next dispute in assessment year 1998-99 as per Ground No. 2 in ITA No. 4908/M/2001 (Appeal of the Department) is regarding charging of interest under section 220(2) of the Income-tax Act, 1961. 105. Briefly stated, facts are that as per intimation dated 4-10-1999, the Assessing Officer allowed refund of Rs. 1371.33 lakhs but as per order under section 143(3), the Assessing Officer computed the income at a higher figure resulting into demand. The Assessing Officer charged interest under section 220(2) on such excess refund, granted as per the intimation. On appeal, learned CIT(A) in his rectification order under section 154 stated that the Assessing Officer was not justified in charging interest under section 220(2). It is also stated that the Assessing Officer has not given any reason as to why the interest under section 220(2) was charged by him. The revenue is in appeal before us against this order of learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
