TMI Blog2014 (10) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... nal and not actually incurred, no disallowance in its respect could obtain - The matter to this limited extent is, remitted back to the AO for adjudication – Decided partly in favour of assessee. Pre-operative expenses incurred for expansion of manufacturing facilities disallowed – Held that:- The expenditure is toward enlargement of the capital structure of the firm is not in doubt, the enhancement or improvement in fact being both in quantitative and qualitative terms inasmuch as the programme under implementation is for both expansion and diversification - the expenditure results, along with other expenditure, in creation or bringing into existence fixed assets – the profit making apparatus, to be deployed in business, is again not in doubt, having been in fact allocated by the assessee toward the relevant assets – following the decision in Assam Bengal Cement Company Limited Versus Commissioner Of Income-Tax, West Bengal [1954 (11) TMI 2 - SUPREME Court] - Chapter XIV-A of the Act provides for a procedure to avoid repetitive appeals - The plea in any case cannot be conditional, or made alternatively, concern as it does a rule of judicial precedence - the interest expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. - I.T.A. Nos. 3545 & 4441/Mum/2002, I.T.A. Nos. 3585, 4882 & 7222/Mum/2002 - - - Dated:- 12-5-2014 - Shri D. Manmohan And Shri Sanjay Arora JJ. For the Petitioner : Shri Arvind Sonde For the Respondent : Shri Pritam Singh ORDER Per Sanjay Arora, A. M. This is a set of five appeals, i.e., cross-appeals by the Assessee and the Revenue for the assessment years (A.Ys.) 1997-98 and 1998-99 and the Revenue s appeal for A.Y. 1999-2000, arising out of the Orders by the Commissioner of Income Tax (Appeals)-III, Mumbai ( CIT(A) for short), partly allowing the assessee s appeals contesting its assessments u/s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the relevant years. The appeals raising common issues, were taken up for hearing together and are being disposed of likewise for the sake of convenience. Issue No.1 2. This issue is raised per ground no. 1 of the assessee s appeals for A.Ys. 1997-98 and 1998-99. The same is qua the deductibility of the sums paid to banks/financial institutions by the assessee-company as a guarantor of M/s. Vespa Car Co. Ltd. ( VCCL for short), a joint venture (JV) company (of the assessee and its foreign t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs. in lacs) Equity Lohia Machines Ltd. 153.60 Piaggio C.S.p.A., Italy 134.40 Friends Associates of Promoters 28.80 Public 163.20 480.00 Secured Loans Rupee Term Loans: IFCI (In participation with IDBI and ICICI) 380.00 GIC and its subsidiaries 50.00 UTI 50.00 Banks 200.00 Foreign Currency Loan: IFCI 25.30 705.30 Central subsidy 20.00 Unsecured loan from LML 224.70 Deferred Credit for Leasehold land from UPSIDC 49.35 Total 1,479.35 (source: prospectus to the public offer) The share holding pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, cannot be said to have been furnished for or in the ordinary course of its business or as incidental thereto. Two, the guarantee/s was given only toward and in promoting a new company for setting up a new project. The expenditure, thus, that comes to be incurred in its respect is, consequently, only on capital account. That is, the rights, if any, that the assessee stands to acquire or which may inure to it by furnishing guarantee/s are only capital in nature. Further, the consequences of the nonhonoring the guarantee, as for example, the loss of reputation or of its banks not cooperating with it in extending it further working capital, etc. would not alter the character of the amount paid to VCCL to meet its loan obligation to a revenue expenditure. Findings 3. Having heard the parties at length; perused the material on record, as well as the case law relied upon, giving our careful consideration to the matter, we find no merit in the assessee s case, whichever way one may look at it. The examination of the case and the resultant findings, which form the basis of our decision, forming the bulk of the order, are as under. 3.1 The argument that the formation of the JV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... royalty to Piaggio, besides separate agreements for transfer of information, license, rights, trade mark and other assistance etc. in respect of three wheelers (refer Board of Director s resolution dated 31.10.1984 PB I/13). In any case, the interest of the company in promoting VCCL could only be considered as long-term and strategic. In fact, the company is to receive a lump-sum payment from VCCL for transfer and imparting technical information, marketing and other assistance, including technical information and data already supplied by Piaggio to Lohia for two wheelers. All this gets summed up in one sentence when the assessee states of having formed the VCCL to take up the manufacturing of additional scooters and three wheelers. 3.2 There is no reference to the set up of the complimentary facilities, which, even if contended, would have to be shown as a fact. This would, where so, cut down the capital cost of the project for the new company, and offer a ready market to the assesseecompany. The benefits are mutual, and the JV company could on that basis be equally said to have interest in the assessee-company. Such relationship could be formed with any company for that matte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forms the principal reason and the bulk of the reason informing the impugned order. If the write off of a loan/share capital as irrecoverable could not be treated as a deductible business loss or expenditure, that arising on account of repaying the loans contracted earlier, would be on the same footing and, therefore, only a capital loss. Why, in that case the share capital and unsecured loan to VCCL must also qualify for deduction as business loss, obliterating the difference between an investment and a trade or revenue asset. The case law in the matter is legion, and toward which we may cite some celebrated decisions as under: a) In A.V. Thomas and Co. Ltd. vs. CIT [1963] 48 ITR 67 (SC), the facts and the decision are as under: The memorandum of association of the assessee company authorized it to be interested in, promote and to undertake the formation and establishment of other companies , to make investments and to assist any company financially or otherwise. At the material times T was a common director of the assessee company and another private company. The private company took up in 1948 the promotion of a textile mill and T financed that private company to the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany went into liquidation and the amount remained unpaid. On its write off as irrecoverable, the loss was held as non-deductible as a business loss, confirming the decision by the hon ble high court; the purpose of the deposit being to acquire a profit making asset, so that the loss suffered was on capital account. c) In Hasimara Industries Ltd vs. CIT [1998] 231 ITR 842 (SC): In the facts of this case, again, the assessee in tea business entered into a leave and license agreement with another company with a view to acquire the operating rights for working the latter s cotton mills. A sum of ₹ 20 lacs was advanced to the lessor company for modernizing the mill. Neither was the mill modernized, nor the sum repaid. The loss suffered on account of the incapacity of the lessor to repay was held as a capital loss, being for acquiring a profit making apparatus, and not deductible as a business loss. In affirming the decision of the hon ble high court under challenge before it, several judgments of the apex court itself were noted and distinguished by it. d) CIT vs. Hindustan Times Ltd. [1998] 231 ITR 741 (SC) The additional commercialization charges for putting up a mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in respect of the interest thereon between the two situations, the said issue would require being examined more closely, eliminating any scope for the use of the words in any case . Toward this, we find the assessee s claim in respect of the JV company would require validation. It is stated that it was formed for setting up, among others, a service centre for the huge volume of its scooters that the assessee-company expected to be on road. However, there is nothing on record to substantiate the same. On the contrary, as afore-noted, having been transferred (for payment though) the license, the said company was set up with an equally rated capacity as the assessee-company itself, matching the manufacture at 2 lac scooter p.a., though actually setting up a project for manufacture of 1.25 lac scooters p.a. The assessee s next claim of business nexus is with respect to the said company being set up with complementary facilities, i.e., the assessee had surplus capacity for certain parts, which would therefore not be set up, i.e., to that extent, in the new company, while would have a higher or additional capacity for the parts for which the company perceives its capacity as in defi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Piaggio, which bears no such overload against it s risk capital of ₹ 134.40 lacs. That is, the assessee-company assumes, for the same return or, rather, the same probability of return, i.e., in terms of accretion in value of its shareholding, a much higher risk of loss of capital, i.e., vis- -vis its JV partner, the other promoter. While the same is limited to 100% of the risk capital for Piaggio, it is at 891% thereof for the assessee-company (on account of additional load of ₹ 1214.70 lacs). In fact, it is even higher; the company having for the three consecutive years under reference paid, on a one-time settlement (OTS) basis, ₹ 1141.81 lacs (being at ₹ 1056.82 lacs for the two years in appeal), as clarified by the ld. AR during hearing. The OTS being at a discount on the outstanding liability (of VCCL), while at the same time could not exceed the amount for which the assessee was liable as a guarantor, clearly guarantees stood executed at far in excess of the stated sum of ₹ 990 lacs. How? Further, even limiting the same to ₹ 1142 lacs, the sum paid by the assessee-company in OTS settlement of VCCL implies undertaking liability at S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y had itself sought to classify itself as a sick company and obtain protection under the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA), the application for which was rejected as it did not fulfill the prescribed criteria. The adverse consequence that may ensue, as in the form of interest expenditure on the said loss, assuming so, would not by itself convert a non-business expenditure into a business expenditure, or of it as being revenue in nature. 3.7 Lastly, the assessee had, and only rightly so, debited the amount paid to the account of the JV company in its accounts. The amount has been advanced for payment to the creditor/s in whose favour guarantees stand furnished by the assessee. The assessee, thus, steps into the shoes of the principal lender/s and, therefore, the same is only a debt (refer section 145 of the Indian Contract Act, 1872). The accounts of the company stand audited by an independent professional auditor. Both the management and the auditor, thus, are unanimous in their view that the amount is recoverable, reflecting the impugned sum as an asset therein, and which is certified to be representing the true state of affairs of the company as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent which the assessee was asked to furnish at the conclusion of the hearing, so as to capsule the gist of the arguments. The claim is factual and, in any case, the rule of law is to obtain. If and to the extent the interest is notional and not actually incurred, no disallowance in its respect could obtain. The matter to this limited extent is, therefore, restored back to the file of the assessing authority for adjudication on merits after hearing both the sides per a speaking order. We decide accordingly. This answers ground nos. 1 2 of the assessee s appeals for the first two years (also refer para 20 of this order). 3.9 Before parting with the matter, it may also be necessary to advert to the host of case laws cited before us. We have not specifically referred thereto; having found on a perusal of the same as being not relevant or of any consequence. The disallowance both of the principal sum and the interest thereon, as would be apparent from a reading of our order, is based on clear and distinct findings of fact derived from the material on record, the same do not raise any question of law toward which various case law, in fact, by both of fact, so that the said decision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in his castigation of the tribunal s order. The said decision, it was argued by him, based on the decision in the case of Hylam Ltd. vs. CIT [1973] 87 ITR 310 (AP), which no longer represents good law in-as-much as the same stood over-ruled by the full bench decision of Praga Tools Ltd vs. CIT [1980] 123 ITR 773 (AP) (FB), cannot be relied upon. The matter was argued at length, taking us through the said order by the tribunal passed both in the first instance (in ITA No. 3207- 08, 3182, 3236/Mum/2001 dated 31.10.2007/PB-II pgs.30 to 48) as well as in rectification proceedings (MA No.45/Mum/2008 dated 29.09.2008/PB-II, pgs.1 to 21). Reliance was placed by him principally on the following decisions: a) Dy. CIT vs. Core Healthcare Ltd. [2001] 251 ITR 61 (Gujarat); b) Vikram Mills Ltd. vs. Commissioner of Income-tax [2000] 242 ITR 290 (Gujarat); c) Addl. CIT v. Akkamamba Textiles Ltd. [1997] 227 ITR 464; d) CIT v. Sivakami Mills Ltd. [1997] 227 ITR 465; and e) CIT vs. Havells India Ltd. (in ITA Nos. 55 57 of 2012 dated 21.05.2012), apart from the decisions by the tribunal. The ld. DR would, on the other hand, rely on the tribunal s order in the assessee s own case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. Internal accruals 23.81 Total 204.00 (Rs. in crores) Break up of cost 1. Land 1.422 2. Site Development 1.04 3. Building 16.23 4. Plant Mach. 85.84 5. Know-how fees 13.38 6. Expenses on foreign Technicians 0.80 7. Misc. Fixed Assets 43.48 8. Dedicated Powerline 4.00 9. Preliminary Ex. 4.01 10. Pre-operative expenses 11.49 11. Contingencies 9.17 12. Margin money for working capital 8.14 Total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact list out (refer para 12 pgs.6-9 of section 254(1) of the order for A.Y. 1995-96 and 1996-97 (supra)), culling out the same from Hylam Ltd. s case (supra). However, what we find to have guided its decision is that the expenditure is toward acquiring an asset which would result in an advantage in the capital field, which it also found to be also the accounting mandate in its respect on the basis of the relevant accounting standards. The two being in agreement, the expenditure which is or in terms of its essential attributes, capital expenditure, would not become not so, or revenue expenditure, merely because it is incurred in relation to an existing business, as in relation to the expansion or diversification of the existing production capacity/capability. The impugned expenditure is, thus, in its view, definitely a capital expenditure. The assessee-company, on the other hand, does not dispute the expenditure under reference to be toward setting up and expansion and/or diversification project. All the direct cost on the acquisition of various assets, viz., land, building, plant and machinery, etc., are accounted for under the relevant account heads as a part of the project cost. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue expenditure, in which latter case only it would be deductible (pg. 45) (also refer Empire Jute Co. Ltd. vs. CIT [1980] 124 ITR 1 (SC)). It may also be relevant to extract its observations in explaining those tests, even as the discussion in the following pages (pgs.46, 47) is equally important and relevant: This synthesis attempted by the Full Bench of the Lahore High Court truly enunciates the principles which emerge from the authorities. In cases where the expenditure is made for the initial outlay or for extension of a business or a substantial replacement of the equipment, there is no doubt that it is capital expenditure. A capital asset of the business is either acquired or extended or substantially replaced and that outlay whatever be its source whether it is drawn from the capital or the income of the concern is certainly in the nature of capital expenditure. The question however arises for consideration where expenditure is incurred while the business is going on and is not incurred either for extension of the business or for the substantial replacement of its equipment. Such expenditure can be looked at either from the point of view of what is acquired or from the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the decision in the case of Hyllam Ltd. (supra). How could, we wonder, the same be disputed? 6.5 Accounting Standard (AS)-10 Accounting for fixed assets issued (in 1985) by Institute of Chartered Accountants of India (ICAI) (which is mandatory in its application u/s.211 of the Companies Act, 1956 since 01.11.1998), after an exhaustive and comprehensive examination, including the review of the international accounting standards defines fixed assets and the components of the cost as under: Accounting Standard (AS) 10 (issued 1985) Definitions 6. The following terms are used in this Statement with the meanings specified: 6.l Fixed asset is an asset held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business. 9. Components of Cost 9.1 The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irectly to the specific asset and those that are attributable to the construction activity in general and can be allocated to the specific asset. The same, it would be noted, bears a striking similarity with the principles, evolved over a long period of time so as to be accorded the status of being universally acceptable, by the hon ble courts of law, so that all costs that can reasonably be attributed to bringing an asset to its working condition for its intended use is to form part of its cost. 6.6 There is, thus, a unanimity between the accounting and statutory definition of actual cost , which (the latter) being only negatively defined in section 43(1) of the Act, would, therefore, have to be considered in the manner as explained by the higher courts of the law and in light of the accounting definition. This was observed clearly by the apex court in inter alia Challapalli Sugars Ltd. (supra), stating that the rule of accountancy is to be adopted for determining the actual cost of the assets in the absence of any statutory definition or any indication to the contrary. The question before the apex court in that case was the validity of the capitalization of interest on ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anent structure yielding produce, but only enabling its working for a longer time and, thus, primarily or essentially related to its operation in the latter case, so that the expenditure on purchase of loom hours by the assessee was held to be on revenue account. The finding in the former case, i.e., Assam Bengal Cement Co. Ltd. (supra), based on the same principles, and which must therefore be regarded as its ratio, was just the opposite; the hon ble court finding the impugned expenditure to be not toward the working of the business per se but to appreciate its existing capital structure, making it more profit yielding. The final finding, being rendered on an appreciation of the entirety of facts, thus, though informative, could well be different and of little precedent value, which is comprised in the principles on which the decision is based its ratio. 6.7 Coming back to the facts of the case, that the expenditure is toward enlargement of the capital structure of the firm is not in doubt, the enhancement or improvement in fact being both in quantitative and qualitative terms inasmuch as the programme under implementation is for both expansion and diversification. That the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well. The decision in the case of Dy. CIT vs. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj) has since been upheld by the apex court in Dy. CIT vs. Core Health Care Ltd. [2008] 298 ITR 194 (SC). The hon ble Punjab Haryana high court vide its decision in CIT vs. Vardhman Polytex Ltd. [2008] 299 ITR 152 (P H), clarified that the provision of section 36(1)(iii) and Explanation 8 to section 43(1) have to be read in conjunction and not de hors or in isolation of each other. The interest expenditure suffered on borrowed capital deployed on assets, to the extent it is for their acquisition and installation, for bringing them into working condition for their intended use, is to be capitalized, etc., even prior to the amendment to section 36(1)(iii), on a conjoint reading of section 36(1)(iii), i.e., Explanation 8 to s. 43(1). The amendment by way of proviso to section 36(1)(iii) by Finance Act, 2003 was held as only clarificatory. To the same effect and purport is a decision in the case of JCT Ltd. vs. Dy. CIT [2005] 276 ITR 115 (Cal), holding the proviso to section 36(1)(iii) to be toward abundantly clarifying the matters, and to remove the question of double deduction. It is trite law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra), as well as the decision in the case of Empire Jute Co. Ltd. (supra), found an enlargement of the permanent or the capital structure, the profit making apparatus, as a criterion in determining if the expenditure under reference is in the capital field. Whether it is for a new facility or for additional facility is of no consequence, as either amounts to an increase in the capacity or the profit making structure. The impugned expenditure is not only towards the expansion but also diversification, so that there is not only the capacity building but also the acquisition or improvement in capability. The said decisions, inter alia, equally apply in the facts of the case, apart from the decision in the case of Challapalli Sugars Ltd. (supra). Neither would the ratio of the said latter decision be limited to interest expenditure nor qua new units only, even as sought to be emphasized by the ld. AR before us. The ratio would be as to what constitutes capital expenditure. In fact, being extensively relied upon, it would be useful to extract its observations as quoted by the jurisdictional high court in the case of Ciba of India Ltd. (supra) (at pgs.12/13 of the reports): We fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business and, therefore, was an integral part of the profit making process. The proposition is undisputed. How would that, however, assist the assessee s case is not understood. There was no reference to either the said decision or in the case of Hylam Ltd. (supra) by the ld.AR while arguing the case on merits, but only toward making out the instant case as not covered thereby against the assessee, so as to be decided by us on that basis, i.e., as a covered case. We, as would be apparent, has not treated as so; rather, based our decisions on analysis of facts and first principles. The objection is, particularly in the manner raised before us, misplaced. To the same effect and purport is the assessee s reliance on the decision in the case of Addl. CIT vs. Akkamamba Textiles Ltd. [1997] 227 ITR 464 (SC) and CIT vs. Sivakami Mills Ltd. [1997] 227 ITR 465 (SC) and, following it, on Vikram Mills Ltd. vs. CIT [2000] 242 ITR 290 (Guj). The first decision is towards a shade, which being used for drying, an essential process for manufacturing of tiles, in which the assessee was engaged, was held as plant . We find no correlation of the same with the present case. The other two decisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... user or not. A decision, thus, has to be made in each case on an appreciation of the facts of the case. The tribunal has already decided against the assessee for the immediately two preceding years, and against which decision the assessee is in appeal before the hon ble high court, and which would, therefore, have a direct bearing on the instant case as well; the expenditure being on and qua the same project and purportedly of the same nature inasmuch as neither of the parties claimed differently. In fact, no different case stands made out before us. Chapter XIV-A of the Act provides for a procedure to avoid repetitive appeals. The plea in any case cannot be conditional, or made alternatively, concern as it does a rule of judicial precedence. The decision by the tribunal in the case of Core Healthcare Ltd. (supra) has found acceptance by the higher court in Dy. CIT vs. Core Healthcare Ltd. [2001] 251 ITR 61 (Guj). The said decision, inasmuch as it confirms the interest expenditure to be capital expenditure though allowable u/s.36(1)(iii), confirms the order by the tribunal in principle, inasmuch as only the revenue expenditure could be allowed u/s.37(1), which is even otherwise tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 (Bom). The ld. CIT(A) deleted the disallowance on that basis, holding that the A.O. had no power to disallow an expenditure on the ground of it being excessive or unreasonable. Aggrieved, the Revenue is in appeal vide its ground no.1. 9. Before us, while the ld. DR would rely on the order of the A.O., the ld. AR, relying on the decisions by the apex court in CIT vs. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC) and J. K. Woollen Mfg. vs. CIT [1969] 72 ITR 612 (SC), besides Godavari Sugar Mills Ltd. (supra), would submit that there is no scope for the disallowance on the ground of unreasonableness under the Act. The A.O. cannot sit in judgment in business decisions by the assessee, deciding what price was under the circumstances reasonable. There was no claim that the purchase was sham or a bogus transaction. 10. We have heard the parties, and perused the material on record, including the case law cited. 10.1 With regard to the law in the matter, the same is trite, having been also clarified per the decisions by the apex court cited at bar supra: in applying the test of commercial expediency for determining whether an expenditure is wholly or exclusively laid out for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondition of the said provision refers to the motive or the objective of incurring the expenditure, so that both the purpose, exhibiting the nature or the character of the payment, and its quantum, are relevant and, therefore, would need to be substantiated. Quantum, it is to be appreciated, may have a direct bearing or relation with the genuineness of the expenditure itself. What is proscribed though is the questioning of the decision to make the payment where otherwise made in the capacity of a trader. Again, it may also not be permissible to draw an adverse inference, i.e., as to the nature, on the basis of quantum alone, which though is a relevant consideration and could form, along with others, as well as other corroborative evidences, a reasonable and cogent basis for drawing an adverse inference in the facts of a particular case. It is not open for the assessing authority to, for example, question if the assessee travels business class or economy class, or even if he was at all required to undertake the travel where the purpose is otherwise not in doubt. He cannot, likewise, to cite another example, question if the assessee stays in an ordinary hotel or a five star hotel (say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant consideration is a part of the well-settled law, as emphasized once again by the hon ble jurisdictional high court in Ramanand Sagar vs. Dy. CIT [2002] 256 ITR 134 (Bom). In fact, the hon ble courts, as in the cases of Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 439 (SC); Steel Containers Ltd. vs. CIT [1978] 112 ITR 995 (Cal); Niemla Textile Finishing Mills (P) Ltd. vs. CIT [1975] 100 ITR 611 (Puj), have clarified that the mere existence of an agreement and payment is not sufficient and the taxing authority can, nay, is duty bound to consider the relevant facts and on the basis thereof, including the surrounding circumstances, determine the matter in consistence therewith, to conclude that the payment was not genuine. Under such circumstances, the authority does not thereby substitute his view as to how the assessee s business affairs should be managed but disallows the expenditure because the condition of its admissibility was absent. Could it be so, one may ask, without reasonableness being included as an essential element or as a basic attribute for examining the arrangement? This clarifies the position of law beyond doubt, so that rather than being outside the competence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate by no less than 10%, so that the initial onus on the Revenue gets discharged. In fact he has, apart from the market, also made enquiries from M/s. Bajaj Auto Ltd., another bulk purchaser, through the concerned A.O., which reveals the prevailing rate of the specified quality of steel at ₹ 22.50 per kg. (Ex-Pune). The assessee on being called upon to state its case has, without exhibiting so, admitted to purchasing the relevant goods at a rate higher than the market rate. It does not explain why or as to why the query or the inference drawn is not relevant, or how is the steel being purchased by it different from that being purchased by M/s. Bajaj Auto Ltd. or that available in the open market. That the parties are not related to the assessee is under the circumstances of no consequence. Further, the bills from M/s. Bhushan Steel Strips Ltd. to other parties, adduced by the assessee in support, were upon examination distinguished by the A.O. in-as-much as the same were for steel of a lesser thickness, i.e., of a different quality, which fetches a higher price in the market . Further, the same, though not irrelevant, the question is not the sale price being charged by M/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties as consequential. In fact, section 234C is levied only on the short-fall on the advance-tax reckoned with reference to the return of income, so that it is independent of the subsequently assessed income. The grounds are, accordingly, dismissed. We decide accordingly. Result 14. The assessee appeal for A.Y. 1997-98 is, accordingly, partly allowed. 15. Ground No.3(III) for A.Y. 1998-99 is in respect of disallowance of club expenses at ₹ 2,43,505/-. The assessee claimed a total sum of ₹ 5,91,505/- under the relevant head, of which ₹ 3,48,000/- was stated as disallowable u/s.40A(9) of the Act as per the Tax Audit Report u/s. 44AB furnished along with return of income (ROI), vide Annexure-F thereof. Accordingly, the balance impugned sum of ₹ 2,43,505/- stood disallowed. The same stood confirmed in appeal in the absence of any substantiation of its case by the assessee before the ld. CIT(A), with he further stating that no case for even a remand had been made before him. 16. No improvement to its case was made out before us. We, accordingly, finding no infirmity in the impugned order on this ground, confirm the same. We decide accordingly. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qually for any asset. The AS-2, not dilating in the matter, the assessee before the ld. CIT(A) relied on international accounting standard, which advocates factoring the exchange fluctuation in the cost of the purchase only when the same is in respect of a recent purchase, in the event of severe devaluation, and where there was no means of hedging the transaction. The premise is clear the exchange fluctuation is ordinarily not factored into the cost of purchase in-as-much as the same does not add value to the goods, since purchased, and neither in bringing them to their present location and condition. The insistence of the Revenue in increasing the cost of acquisition of the imported raw material is misplaced. At the same time, the liability incurred on purchase is a trade liability, so that any increase therein would be only revenue expenditure, deductible u/s. 37(1). In fact, we observe no dispute qua this aspect of the matter, and the Revenue has only made addition toward the under-valuation of the inventory for the exchange loss. Finally, though the assessee s ground mentions the impugned sum at ₹ 2,43,505/-, this appears to be by way of a mistake in-as-much as the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not provided 1999-00 1,66,86,012 not provided In fact, we observe that the AO has in working the disallowance excluded the period for which overdraft facility was not availed. The disallowance on the opening outstanding has been made by applying a flat rate of 17% per annum, and which rate again does not appear to be disputed. The Revenue in fact supports it s case by stating that the disallowance for A.Y. 1999-00 stands since accepted by the assessee. Though that may be indicative, the matter has to be finally decided on merits, by issuing clear findings of fact, separately for each year, with we having clarified that the disallowance is merited in principle, so that the issue that is open is with respect to its quantification. The initial onus toward the same is on the assessee, who may proceed by furnishing the details of the interest incurred for the year, and the period for which the same stands incurred. Funds are fungible, so that matter would have to be decided on evaluating and ascertaining the funding position as obtaining for the relevant years. Further, the funding pattern, as determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red by the decision by the apex court in Britannia Industries Ltd. vs. CIT [2005] 278 ITR 546 (SC), setting the law in the matter. We accordingly confirm the disallowance as made u/s.37(4) of the Act. We decide accordingly. 25. Ground No. 5 for A.Y. 1997-98 and ground no.4 for A.Ys.1998-99 1999-00 in the Revenue s appeals, being in respect of disallowance u/s. 40A(9) qua contributions to Lohia Officer s Club, LML Officer s Club and Worker s benevolent fund, were again claimed as covered by the order of the tribunal in the assessee s case for the immediately two preceding years (supra). Following the tribunal s order for the relevant years, we confirm the disallowance, reversing the decision by the first appellate authority in the matter. We decide accordingly. 26. Ground No. 6 for A.Y.1997-98 and ground no. 5 for A.Ys. 1998-99 1999-00 are in respect of modvat attributable to the closing stock. The issue was contended as covered in the assessee s favour by decisions as in the case of CIT vs. Mahalaxmi Glass Works P. Ltd. [2009] 318 ITR 116 (Bom); CIT vs. Indo Nippon Chemicals Co. Ltd. [2003] 261 ITR 275 (SC) and Mahavir Alluminium Ltd. [2008] 297 ITR 77 (Del), while the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of all levies, etc., so determined, that would be required to be carried over for being considered, likewise, as the value of the opening stock for the following year. As clarified by the tribunal in Hercules Pigment Industry vs. ITO (in ITA No. 271/Mum(H)/2012 dated 29.05.2013, reported at [2013] 93 DTR (Mum-Trib) 49) upon an extensive review of the matter, including the decision in Indo Nippon Chemicals Co. Ltd. (supra), that only by following scrupulously the mandate of law (section 145A), notwithstanding the claims of tax neutrality, would ensure the determination of correct income, even as the provision is mandatory. 27.3 Our decision is in fact in conformity with the decision in the case of Mahalaxmi Glass Works P. Ltd. (supra). In the facts of that case, the opening stock was directed by the first appellate authority to be valued at inclusive of excise duty, even as the closing stock for the immediately preceding year was not, and which found acceptance throughout, i.e., up to the hon ble high court. Both the opening and the closing stock for any year, it is to be appreciated, are to be valued on the same basis if the correct income for the relevant year is to be determin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee did not press the relevant ground/s before the tribunal for those years. Further, on a perusal of the impugned order, it is found that the ld. CIT(A) has actually confirmed the disallowance in view of the retrospective amendment to section 36(1)(vii) of the Act by Finance Act, 2001 w.r.e.f. 01.04.1989, i.e., by way of Explanation thereto. The said ground, thus, does not arise out of the impugned order, and is in fact misconceived. Rather, the assessee has also not pressed its additional ground which is qua this disallowance. Either way, no prejudice to the Revenue though arises. We decide accordingly. 30. The only remaining ground is Ground # 6 for A.Y. 1999-2000. The Revenue seeks exclusion of the sales tax and excise duty from the amount of total turnover in computing deduction u/s.80-HHC, relying on the decision in the case of Chowringhee Sales Bureau (P.) Ltd. vs. CIT [1973] 87 ITR 542 (SC). The said decision is rendered in the context of the same forming part of the trade receipt, since mandated by section 145A. The issue in the instant case arises in the context of computation of deduction u/s. 80-HHC, formulated to be in the ratio of export turnover to total turn ..... X X X X Extracts X X X X X X X X Extracts X X X X
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