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2007 (5) TMI 363

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.... (a) That the learned Commissioner of Income-tax (Appeals) has erred in confirming the action of the learned Assessing Officer in rejecting the claim of Rs. 1,38,23,156 being the interest on capital borrowed for acquiring the fixed assets which were purchased for the purposes of business of the company. (b) That the learned Commissioner of Income-tax (Appeals) has erred in confirming the said disallowance despite the fact that the said amount of Rs. 1,38,23,156 is an allowable deduction under section 36 (1)(iii) of the Income-tax Act. (c) That the learned Commissioner of Income-tax (Appeals) has erred in coming to a conclusion in respect of machinery which is purchased for its existing business but has not been installed, interest cannot be allowed as a deduction. In coming to such conclusion, the CIT (Appeals) has erred in brushing aside the various judicial pronouncements in favour of the assessee on this matter. 3. (a) That the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of Rs. 50,46,239 being the gratuity payments made to the approved gratuity fund during the year against provision of gratuity not allowed in earlier years. (b) Th....

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....s investment of substantial capital in setting up the said industrial undertaking, that there was earning of profits clearly attributable to the said undertaking, thereby clearly establishing that a separate and distinct industrial unit was set up. 6. (a) That the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of Rs. 2,00,000 out of expenses relatable to Bio-tech Division of the company by treating these to be excessive and for want of check and verification. (b) That the learned Commissioner of Income-tax (Appeals) has erred completely in holding that all the expenses claimed are not fully vouched and hence not open to verification without going in the facts of the case and merely on the basis of the assumptions which is unjust. The CIT (Appeals) has erred in confirming the said disallowance of Rs. 2,00,000 without identifying any specific defect in any of these expenses and without appreciating that the said disallowance has been made on an ad hoc basis which is unjust, bad in law and against the facts of the case. 7. (a) That the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of Rs. 2,00,000 out of....

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.... Income-tax (Appeals) has erred in remanding the matter to the Assessing Officer to verify the claim despite being given all the evidence showing that these amounts were never claimed as revenue expenditure as the assessee had capitalized these amounts and included these in the actual cost of fixed assets. This is apparent from the foot-notes on the schedule of fixed assets annexed to the balance sheet. 4. (a) That the learned Commissioner of Income-tax (Appeals) has erred in upholding the disallowance of Rs. 5,00,000 out of expenses relatable to Bio-tech Division of the company by treating these to be excessive and for want of check and verification. (b) That the learned Commissioner of Income-tax (Appeals) has erred completely in holding that all the expenses claimed are not fully vouched and hence not open to verification without going in the facts of the case and merely on the basis of the assumption which is unjust. The CIT (Appeals) has erred in confirming the said disallowance of Rs. 5,00,000 without identifying any specific defect in any of these expenses and without appreciating that the said disallowance has been made on an ad hoc basis which is unjust, bad in law and....

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.... impugned expenditure and, therefore, the order of the CIT(A) in this regard is set aside and the Ground No. 1 of the appeals of the assessee for both the assessment years under consideration is allowed. 8. Now we shall deal with Ground No. 2 of the appeal of the assessee for assessment year 2000-01 pertaining to the issue of the assessee's claim of deduction of Rs. 1,38,23,156 in respect of interest on the capital borrowed for acquiring the fixed assets purchased for the business purpose of the assessee-company. 9. The tax authorities below disallowed the above claim on the reasoning that the interest is directly attributable to the cost of the plant/fixed assets and any expenditure attributable to the cost of capital asset/fixed asset is capital in nature. 10. Before us, according to the learned AR for the assessee interest on amounts borrowed by a running concern in connection with its business was an allowable expenditure, irrespective of the fact that the assessee acquired a capital asset out of the same. In support thereof he relied upon the following case laws :- 1. CIT v. Dalmia Cement (Bharat) Ltd. [2000] 242 ITR 129/ 109 Taxman 363 (Delhi). 2. CIT v. Modi Industrie....

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.... scope of section 36(1)(iii) and Explanation 8 to section 43(1) are different. They operate in separate fields and though both are relatable to computing income under section 28 yet the nature of deductions are entirely distinct from each other. The concept and the meaning of "actual cost" which is the definition laid down in section 43(1) of the Act is for a limited purpose, viz., at a point of time when deduction is to be granted for the purpose of wear and tear (section 32) or an incentive for the purpose of setting up a 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 phrase "actual cost". Explanation 8 only lays down that where an amount is paid/payable as an 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 ....

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....adesh High Court in the cases of ITO v. Malwa Vanaspati & Chemical Co. Ltd. [1997] 226 ITR 253 and CIT v. Bhillai Iron Foundry (P.) Ltd. [1998] 234 ITR 661 held that the interest on loan taken for the purchase of plant and machinery was deductible under section 36(1)(iii) of Income-tax Act though no production had commenced in that case till the close of the accounting year as the assessee has borrowed funds and utilized the same in the purchase of plant and machinery for the purpose of its business. 20. Hence, in view of the ratio of the majority decisions (supra) it is clear that in case the expenditure incurred on interest on the capital borrowed for acquiring the machinery required to be used for the business of the assessee is eligible for deduction under section 36(1)(iii) of Income-tax Act irrespective of the fact whether the machinery was put to use or not in the accounting year relevant to assessment year under consideration. There-fore, following the ratio of the majority decisions, which are applicable to the issue involved in the instant case of the assessee, it is held that the CIT(A) has wrongly upheld the disallowance made by the Assessing Officer in respect of the ....

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....ssessment years. Learned AR for the assessee, thus, concluding his arguments submitted that as the deduction claimed by the assessee is based on the actual payment of gratuity fund in the assessment years under consideration the same is eligible for deduction under the provisions of section 43B of the Act. In this regard he referred to the procedure of the payments being made in time on account of the general conditions stipulated by LIC in the master policy with gratuity scheme under which the payments were regulated and required to be paid within the grace period and change in due date due to the date of acceptance of the payment by LIC. Learned AR for the assessee further placed reliance on CIT v. Chandulal Venichand [1994] 209 ITR 7 (Guj.); Allied Motors (P.) Ltd. v. CIT [1997] 224 ITR 677 (SC); Kwality Milk Foods Ltd. v. Asstt. CIT [2006] 100 ITD 199 (Chennai) (SB) and Marubeni India (P.) Ltd. v. Jt. CIT [2006] 101 ITD 437 (Delhi) on the proposition that the amendments made in section 43B is curative and accordingly should be applied retrospectively. 25. On the other hand, learned DR for the revenue first submitted that in the recent decision in the case of CIT v. Synergy Fin....

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....e benefit of the community as a whole or to remove any such hardship, or any express provision in the statute that such deletion of the second proviso to section 43B of the Act would have any retrospective effect. Nor is it possible to hold that without the aid of the subsequent Finance Act, 2003, by which the second proviso to section 43B was omitted, the unamended provision of section 43B would allow the deduction of payments to provident funds, etc., when such payment was made by the assessee on or before the due date applicable for filing return. There is no material to hold that the deletion is either clarificatory or declaratory or intended for the removal of doubts to give a consequential retrospective effect to the deletion so as to make it applicable to earlier assessment years. 28. The above decision was rendered by the Hon'ble Madras High Court in the case of Synergy Financial Exchange Ltd. (supra). In this decision reliance was also placed on the case of CIT v. Udaipur Distillery Co. Ltd. [2005] 274 ITR 429 , a Division Bench of the Rajasthan High Court, wherein it was held that in order to avail of the benefits of deduction under clause (b) of section 43B in respect ....

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.... department in this regard has accepted the position because the department has not contested the same before the Tribunal in ITA No. 2179/Del/2002, so, the tax authorities below were not justified in sustaining the disallowance in the assessment year under consideration when there was no change in the facts. 33. He further submitted that in view of the rule of consistency as laid down by the High Courts in the cases of CIT v. Neo Poly Pack (P.) Ltd. [2000] 245 ITR 492 (Delhi); DIT (Exemption) v. Apparel Export Promotion Council (No. 1) [2000] 244 ITR 734 (Delhi); Radhasaomi Satsang v. CIT [1992] 193 ITR 321 (SC); and CIT v. A.R.J. Security Printers [2003] 264 ITR 276 (Delhi), the tax authorities below were not justified in disallowing the claim of the assessee in the assessment year under consideration when the same has been allowed in assessment year 1998-99 by the CIT(A) again, which the revenue did not file in appeal before the Tribunal in respect of the same issue when the facts and circumstances in the year under consideration also remained the same. Learned DR for the revenue did not oppose these submissions of learned AR for the assessee but contended that since in the app....

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....assessee for assessment year 1998-99 in ITA No. 2179/Del/2002 the issue stands covered in favour of the assessee and against the revenue wherein the Tribunal observed as under :- "5. As is evident from the aforesaid observations recorded by the learned CIT(A) in his impugned order, the objections raised by the Assessing Officer about non-maintenance of separate books of account, common control and management, common funds and non-maintenance of separate bank account were not the conclusive factors to decide that the power unit set up by the assessee was not a separate industrial undertaking for the purpose of claiming deduction under section 80-IA(2). Moreover, as pointed out by the learned counsel for the assessee before us, a separate profit and loss account in respect of power unit was prepared and furnished by the assessee before the Assessing Officer which was not accepted by the Assessing Officer as true and correct without pointing out any material and specific defects therein. On the other hand, a copy of the entire set of financial statements prepared separately for power unit has been placed on record by the learned counsel for the assessee at Page Nos. 11 to 23 of his ....

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....bio-tech division of the company by treating the same to be excessive and for want of check and verification in the assessment year under consideration. 42. In brief, the facts relating to the issue are that in the instant cases the impugned disallowances relatable to bio-tech division expenses of the company were disallowed by the Assessing Officer on ad hoc basis on the reasoning that these were excessive and the same could not be subjected to check and verification. 43. On appeal the assessee contended that since the expenses were vouched and no defect in the audited books of account were specified the Assessing Officer was not justified in making such disallowances, more so, when no such disallowances have been made in the past. The CIT(A), however, upheld the order of Assessing Officer not accepting the contentions of the assessee. 44. On considering the submissions of both the parties, perusing the records and carefully going through the order of the tax authorities below we are of the opinion that since the tax authorities below in their orders have not been able to point out any specific expenditure which could not be subjected to check and verification and, on the contr....