TMI Blog2010 (1) TMI 852X X X X Extracts X X X X X X X X Extracts X X X X ..... - SUPREME Court) and in the case of CIT v. India Discount Company Limited (1969 -TMI - 5158 - SUPREME Court) are clear on the issue. - Decided in favor of assessee. - IT Appeal Nos. 573/Ahd./2003 and 1195/Ahd. of 2004 and C.O. No. 88 (Ahd.) of 2008, - - - Dated:- 22-1-2010 - Mahavir Singh, A.N. Pahuja, JJ. Shelley Jindal for the Appellant S.N. Soparkar and Himanshu Shah for the Respondent ORDER A.M. Pahuja, Accountant Member:- 1. These two appeals by the revenue against an order dated 30-1-2004 for the assessment year 1996-97 and order dated 22-11-2002 for the assessment year 1997-98 of the CIT(A)-V, Ahmedabad and cross-objection by the assessee in the assessment year 1996-97, raise a number of common issues. Therefore, these appeals and the cross objection were heard simultaneously for the sake of convenience and are being disposed of through this common order. 2. Ground No. 1 in both the appeals of the revenue pertains to deduction of interest under section 36(1)(iii) of the Income-tax Act, 1961 [hereinafter referred to as the 'Act']. The Assessing Officer [A.O. in short] noticed that though the assessee had borrowed funds for the ongoing expa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ackaging unit in Rajpur, which is about 30 kilometers from Ahmedabad. The Assessing Officer has treated that this unit to be separate and a new business, quite apart from the existing business of the assessee in its Ahmedabad unit, which was that of manufacture and sale of IV fluids. The judgment of the Supreme Court in the assessee's own case relates to the assessment year 1992-93. A perusal of the judgment of the Hon'ble Gujarat High Court of that year, which was affirmed by the Supreme Court, shows that it deals with the same issue. The commercial production in the Rajpur unit had commenced in February, 1988 and the new machinery purchased during the previous year relevant to the assessment year 1992-93 were installed in Raipur where the manufacturing operations had already commenced. The High Court affirmed the order of the Tribunal allowing the interest for the period. The judgment of the Hon'ble High Court was affirmed by the Supreme Court. The Assessing Officer has stated in the assessment order for the year under appeal that the facts are the same as in the earlier years. In respect of the assessment year 1993-94, the Tribunal has decided the issue in favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing and Printing Works [1958] 34 ITR 265 and the judgment of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52 have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd[l 975] 98 ITR 167 was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions. Conclusions:- For the above reasons, we hold that the Assessing Officer was not justified in making disallowance of Rs. 1,56,76,000 in respect of borrowings utilised for purchase of machines. Accordingly, the above question is answered in favour of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (Pat.) as also decision dated 15-6-1998 of a co-ordinate Bench in the case of Vadilal Dairy International Ltd. in IT Appeal No. 500/Ahd./1997. 3.1 On appeal, the ld. CIT(A) deleted the disallowance except on account of stores and spares as also lab charges treated as deferred revenue expenditure by the Assessing Officer, following the orders of the ITAT for the assessment years 1992-93 and 1993-94 as also his own orders for the assessment years 1994-95 and 1995-96. However, the disallowance of expenditure of Rs. 15,82,79,128 treated as preoperative in the books of account was upheld by the ld. CIT(A). 3.2 The revenue is now in appeal before us. Both the parties agreed that issue is squarely covered by the decision dated 19-6-2009 of the ITAT Ahmedabad "C" Bench in assessee's case for assessment years 1994-95 and 1995-96 in ITA Nos. 1492 and 1493/Ahd./2000 as also decision of the Hon'ble jurisdictional High Court in the assessee's own case for the assessment year 1992-93, reported in Dy. CIT v. Core Healthcare Ltd. [2009] 308 ITR 263 (Guj.). 3.3 We have heard both the parties and gone through the facts of the case. As pointed out by the ld. AR, a co-ordinate Bench in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally applicable. Therefore, respectfully following the same, we confirm the decision of the CIT(A) in respect of this expenditure also. Thus Ground No. 4 in the appeal for the assessment year 1994-95 is dismissed. 12. The same issue has been raised by the department in Ground No. 2 in its appeal for the assessment year 1995-96. For this year, the advertisement expenses incurred is Rs. 3,37,62,420. In line with our decision for the assessment year 1994-95, we confirm the decision of the CIT(A) to allow the expenditure as revenue in nature and dismiss the ground." "18. Employment Cost and Other expenses:- We have carefully considered the facts and the rival submissions. We note from page-95 of the assessment order that the Assessing Officer has not connected any expenditure to any particular unit of the assessee so that it can be said that the expenditure disallowed in the assessments were incurred only with the reference to the Sachana unit. Be that as it may, in order to determine whether the Sachana unit is an entirely new business or is part of the existing business of the assessee, it is necessary to see whether there is unity of control, common finance, common administr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ls. The increase of about Rs. 255 crores compared to 31-3-1994 in the shareholders' funds has been used to finance the gross block of assets of the Sachana project to the extent of about Rs. 150 crores and towards capital work-in-progress of Rs. 50 crores. Schedule 20 to the balance sheet (page 211 of the paper book) shows that even in respect of IV sets already being manufactured in the assessee's Ahmedabad unit, the installed capacity has been increased from 400 lakh units as on 31-3-1993 to 1200 lakh units as on 31-3-1994. Thus, there is expansion of the already existing business also. Page 138 of paper book No. II contains the directors' report for the year ended 31-3-1995 where the directors have reported to the shareholders that Rs. 450 crore expansion-cum-diversification project is being financed "through leveraging and internal accruals". This is in conformity with what has been stated above and shown by the balance sheet. It shows financial interlacing and interdependence. The accounts for the year ended 31-3-1996 filed before us (paper book No. II) show that the increase of about Rs. 390 crores in the loan funds from Rs. 188.77 crores as on 31-3-1995 to Rs. 571.74 has gon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vident and other funds. No distinction is seen maintained in the profit and loss account between different units of the assessee and the staff employed therein. The additional information required to be given by the company under section 217(2A) of the Companies Act makes no distinction between the staff employed in different units. There is one Chairman and managing director, one wholetime director, one Vice-President (Project), one Marketing manager, two Vice-Presidents (Pharmaceutical), one General Manager, one Material controller etc., inter alia. They are put in charge of all the units, in their respective fields. In other words, there is, say, no material manager separately for the Ahmedabad or Raipur or Sachana units. Thus, there is common staff for the different units operated by the assessee. 21. The above facts and figures, which are not in question, do show that the various businesses and units of the assessee have to be treated as constituting a single or same business. It should also be remembered that all the items manufactured by the assessee in its various units are products of the pharmaceutical or healthcare industry. Accordingly, the expenditure incurred by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is contended that the order of the Tribunal for the assessment year 1993-94 on this point is based on the earlier order for the assessment year 1992-93 which is reported in (2001) 78 ITD 1 (TM). In paragraph 13of this order for the assessment year 1992-93, the only question, it is pointed out, that was decided was whether expenditure by way of salaries, wages, travelling expenses, telephone and telex expenses, lease rent charges, insurance premium etc. were directly linked to the erection of three new machines and if so, whether they could be allowed under section 37 as revenue expenditure. It is argued before us that the question whether the Sachana unit is a totally separate business, not forming part of the existing business of the assessee and whether the Sachana unit was only an expansion of the existing business of the assessee was not before the Tribunal and was therefore not decided. It is accordingly contended by the learned counsel for the assessee that in the light of the different nature and complexion of the question that has arisen for decision for the years now under appeal and the additional or changed factual position as shown by the evidence adduced for the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account but an appropriate adjustment is made in the computation of income, claiming the entire as allowable revenue expenditure in terms of provisions of section 37(1) of the Act. The expenditure which is treated as deferred revenue in the books almost in all cases comprises of items, the benefits derived wheref rom are ephemeral and transitory in nature inasmuch as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Whether or net expenditure is of enduring nature, the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. v. CIT [1989] 177 ITR 377 has itself observed that:- 'The idea of "once for all" payment and "enduring benefit" are not to be treated as something akin to statutory conditio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utstanding and as such can be specifically allocated over defined periods. On the contrary, the nature of expenditure such as advertisement or exhibition, sales promotion or travelling etc.is such that, although the benefit arising therefrom may extend over several accounting periods, the same cannot be clearly and definitely assigned over time since the same is intangible in nature. In fact, the Hon'ble Supreme Court itself while discussing the issue, in the said case, and distinguishing between various situations has observed that:- " ....ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years." 3.7 As far as the entries in the books of account are concerned, it is well settled that they do not clinch the issue either way, and are not determinative of the allowability or otherwise of the expenditure. The decisions of the Hon'ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and in the case of CIT v. Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fession." 3.10 In the instant case, we find that the expenditure relating to advertisements, sales promotion, travelling or other marketing and consultancy expenses is in the revenue field. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a number of years. In this connection, we may refer to the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. (supra), wherein it was held:- " ...Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral part of the profit-making process and not for acquisition of an asset or a right of a permanent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 996-97 and ground Nos. 2 to 5 in the appeal for the assessment year 1997-98. 3.13 As regards expenditure on stores and spares as also lab charges, the ld. CIT(A) upheld the disallowance, inter alia, since details and nature of expenditure of the said expenditure were not clarified before him. Even before us such details were not placed nor their nature explained. In these circumstances, in the interest of justice especially when the amount has been claimed as deferred revenue expenditure, we consider it fair and appropriate to vacate the findings of the ld. CIT(A) and restore the matter to his file with directions to allow sufficient opportunity to the assessee to clarify the nature of expenses and thereafter, dispose of the matter in accordance with law and in the light of our aforesaid findings. With these directions ground No. 3 in the CO is disposed of. 3.14 As regards preoperative expenses of Rs. 15,82,79,182, in the light of findings of the ITAT in the assessee's own case for the assessment years 1994-95 and 1995-96 vide order dated 19-6-2009 in ITA Nos. 1492 and 1493/ Ahd./2000 and the aforesaid discussion in respect of deferred revenue expenditure, we are of the opi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt in the case of Shri Synthetics Ltd. 162 ITR 819 which was followed by the Ahmedabad Bench of the Tribunal in the case of Nachmo Knites v. Dy. CIT, in ITA No. 970/Ahd./2000 dated 27-1-2006. During the year the assessee company made a public issue of 47,34,000 equity shares of Rs. 10 each for premium of Rs. 140 per share. The public issue was made in August, 1993. The allotment of shares was completed in October, 1993. Thus, the condition that there should have been a public issue of shares in the relevant previous year is also satisfied. Therefore, no fault can be found in the direction of the CIT(A) for amortization of fees paid to the ROC for increase in the authorized share capital. His direction is confirmed and the first ground is dismissed." 4.4 In the light of view taken by the ITAT in the aforesaid decisions for the assessment years 1992-93 to 1995-96, especially when the Id. DR did not point out any infirmity in the findings of the ld. CIT(A), we have no alternative but to dismiss ground No. 8 in the appeal for the assessment year 1996-97 and ground No. 6 in the appeal for the assessment year 1997-98. 5. Ground No. 9 in appeal for assessment year 1996-97 pertain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (4)/309(3) of the Companies Act, 1956, for remuneration of only Rs. 5 lakhs per month (all inclusive). Since the remuneration of Rs. 99.59 lakhs was excessive and was refundable as per provisions of section 309(5A) and 309(5B) of the Companies Act, 1956, the Assessing Officer disallowed a sum of Rs. 39.59 lakhs (Rs.99.59-60 lakhs) and added to the total income of the assessee. 6.1 On appeal, the CIT(A) while relying upon his own order for the assessment year 1997-98 restricted the disallowance to Rs. 6,39,000 in the following terms:- "11. The appellant company submitted as under:- The company had paid remuneration to Managing Director in accordance with terms approved by the Board of Directors of the company as well as members of the company in general meeting. However, as the company incurred losses, in accordance with provisions of Companies Act, 1956, the company was required to obtain approval from Central Government for the payment of remuneration. Subsequently, the Government approved remuneration and as per the approval of the Government Rs. 6,39,000 only ultimately found excess which has been recovered in March, 2001. Annexure is enclosed herewith showing year w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are dismissed. 7. Ground No. 7 in the appeal for the assessment year 1997-98 pertains to relief of Rs. 1,20,000 out of entertainment expenses granted by the ld. CIT(A). During the course of assessment proceedings, the Assessing Officer estimated total entertainment expenses of Rs. 10 lakhs out of miscellaneous and staff welfare expenses instead of an amount Rs. 3.60 lakhs estimated by the assessee. Accordingly, a disallowance of Rs. 3.20 lakhs was made after allowing deduction under section 37(2) of the Act. 7.1 On appeal, the ld. CIT(A) reduced the disallowance in following terms:- "8.1 I am not in agreement with the above contentions of the appellant. This is more particularly in view of the fact that the disallowance of further amount has been made by the Assessing Officer on the basis of the Tax Audit report wherein it was mentioned that there were expenses in the nature of entertainment debited in the miscellaneous expenses, like office and factory miscellaneous expenses under general charges. On perusal of the details of these miscellaneous expenses showed that actually much more expenditure related to entertainment expenditure incurred in office misc. account wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was of revenue nature. Since there was contradiction in the facts stated by the assessee and the facts recorded by the Assessing Officer, the ld. CIT(A) directed the Assessing Officer to verify this point and if it is found that the same is for the existing project, expenditure should be allowed as revenue expenditure under section 37(1) of the Act. 8.2 After hearing both the parties, we do not find any infirmity in the aforesaid directions of the ld. CIT(A). In this view of the matter ground No. 8 in the appeal of the revenue for the assessment year 1997-98 is dismissed. 9. Ground No. 4 in the CO relates to disallowance of deferred revenue expenditure in terms of paras 6 to 11 of the assessment order. The assessee mentioned that that addition made totals up to Rs. 16,20,78,371 as against addition of Rs. 17,49,85,046 made by the Assessing Officer, resulting in excess disallowance of Rs. 1,29,06,675. Since relevant grounds of appeal filed by the assessee are not before us nor there are any findings of the ld. CIT(A) on this aspect, apparently, issue does not arise out of the order of the ld. CIT(A). In these circumstances, ground No. 4 in the CO is dismissed. In any case, t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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