TMI Blog2010 (7) TMI 1048X X X X Extracts X X X X X X X X Extracts X X X X ..... round assessee challenged the order of learned CIT (A) in holding that the A O was justified in disallowing the assessee s claim of ₹ 14,48,82,053/- arising on account of adjustment made to the opening stock in the succeeding year and which has to be considered as closing stock of the year under consideration. The A O has discussed this claim in Para 14 of the assessment order. Assessee had claimed above deduction during the course of the assessment proceedings. The A O did not accept the claim because same was devoid of merit. The effect of change of method of valuation of closing stock had not been given in the assessment year 1994-95 under appeal and the position of effect in valuation of opening and closing stock had been given in accounts for assessment year 1995-96. The A O stated that Ashoka Mills merged with Arvind Mills Ltd. (assessee) with effect from 1-4-1994 and adjustment for change in valuat ion of stock of Ashoka Mills had no basis. The A O also stated that this claim was not made even in the revised returns. According to A O the assessee had already pressed adjustment of this amount in the assessment year 1995-96 and therefore, there was no reason for pressing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, it is clear that once addition is made on account of closing stock valuation, in the assessment year 1994-95 under appeal, it will be opening stock in the subsequent assessment year 1995-96. Therefore, the claim of the assessee for adjustment in the next assessment year is justified. Learned CIT (A) also noted that such claim will be considered in the relevant year. The submission of the learned Counsel for the assessee is also same that effect of the addition may be given in the assessment year 1995-96. We accordingly confirm the findings of the authorities below. However, A O is directed to consider the claim of the assessee for giving effect to the closing stock valuation in the subsequent assessment year 1995-96 because the valuation of closing stock for the assessment year 1994-95 will be opening stock in the subsequent assessment year 1995-96. The alternate content ion raised by the assessee before learned CIT (A) gets accepted. In view of the above finding and directions, ground No.2 of the appeal of the assessee stands disposed of. 8. Ground No.4. On this ground assessee challenged the levy of interest u/s 234B of the IT Act. Learned Counsel for the assessee su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference arising on foreign currency transactions was to be recognized as income or as expenses in the period in which they arise except as stated in paragraph 10 and 11. The detailed submission of the Auditors in this regard finds place in Para 4.7 of the assessment order. When further asked to offer comments on the clarification issued by the Auditors, the assessee invited attention to Madras High Court's decision in the case of EID Parry Ltd. Vs CIT (174 ITR 11). In spite of that this decision, if the Assessing Officer at still considered that ₹ 1,76 crores was exigible to income-tax, the request of the assessee was that the amount spent for earning the same i.e. capital raising expenditure on GDR equity issue should be allowed as expenditure. It was on record that the expenditure incurred on GDR issue was ₹ 8.34 crores and the assessee had not claimed the same as expenses. 11. The Assessing Officer did not agree with the version of the assessee and went on to distinguish the facts of Tata Locomotive Engg. Co. Ltd. from the facts of the present case. It was also held that reliance of the assessee on the case of CIT Vs Canara Bank Ltd. (53 ITRTR 328) (sc) was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. The assessee company has also relied upon the decision of Hon ble Supreme Court In the case of Sutlej Cotton Mills (116 ITR 1). The assessee quotes from the case of Sutlej Cotton Mills as under: The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. The assessee also quotes from the case of EID Parry (supra): In the present case, it is not in dispute that the amount kept in the U.K arose out of subscription monies received for allotment of shares and there was no question of any sale of stock in trade. The issue of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of such expansion plans. Although Arvind believes that it will complete its expansion program on schedule and on budget, there can be no assurance that it will be able to do so. Then, just below that note, the main head 'USE OF PROCEEDS appears as the following: USE OF PROCEEDS The net proceeds from the Offerings of 196.0 million (after deduction of underwriting discounts and estimated offering expenses and assuming no exercise of the Purchasers' over-allotment option) are currently expected to be used for general corporate purposes, including the purchase of property, plant and equipment in connection with the Company's capital expansion plans and the repayment of short-term debt, It was submitted that capital expansion was envisaged and the proceeds were to be utilized for augmenting the funds of the company exactly as proceeds of additional equity capital are normally earmarked or utilized. So there is no doubt that the proceeds of the GDR issue were clearly on capital account. Hence, it was further submitted that any accretion to those proceeds would also be clearly on the capital account. It was further highlighted that various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of Kedarnath Jute Manufacturing Ltd. Vs CIT (82 XTR 363) are absolutely relevant. Whether the assessee Is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter. 15. To similar effect are the observations of the supreme Court in the case of err Vs Chunilal V. Mehta Sons (P) Ltd. (82 ITR 54). The method of maintaining the accounts was one thing and actual entries in the account maintained was a different thing. What was relevant was the method of accountancy and not the actual entries. 16. In view of the above mentioned very apt judgments of the supreme Court, It is to be held that every claim of the assessee has to be adjudicated in accordance with the provisions of law relating to and not on the view which the assessee or the Assessing Officer might take with regard to that claim with reference to the entries made in the books of account. The way in which the entries are made by the assessee in the books of account is not determina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asset or as a part of circulating capital. This is held only on capital account and the subsequent accretion thereof is clearly on the capital account. In the appellant's case again there is no business transaction Involved and that surplus as arising on raising capital by GDR Issue and the same is clearly capital in nature. Accordingly, it is held that the amount of foreign exchange gain of ₹ 1,76.58,910/- is factually and legally not the revenue receipt and la accordingly not taxable. This ground of appeal is therefore, decided in favour of the assessee. 19. As referred above, the contention of the assessee before the Assessing Officer and before me also was that if it was considered that ₹ 1.76 crores was exigible to Income-tax* the amount spent for earning the same should be allowed as expenditure* Expenditure Incurred on ODR Issue was to.8.30 crores and the assessee had not claimed the same as expenses. It is pointed out that the Assessing Officer had not adjudicated this alternate plea at all. Since I have already decided the issue involved in favour of the assessee, this alternate plea is not further taken up for adjudication . 14. The learned D R su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hare capital so raised in foreign currency was thus capital of the assessee company and was rightly held to be capital in nature. The learned CIT (A) on proper appreciation of law rightly held that every claim of the assessee has to be adjudicated in accordance with the provisions of law relating to and not on the view which the assessee or the A O might take with regard to that claim with reference to the entries made in the books of accounts. The entries made in the books of account are not determinative of the question whether the assessee has earned any profit or loss. The true nature of the transaction shall have to be considered in view of the facts of the case. The A O has not brought any evidence on record that the amount in question was in the nature of circulating capital or if assessee did any business transaction out of that money. The learned D R merely relied upon order of the A O without pointing out any infirmity in the order of the learned CIT (A). The learned D R submitted that if any interest includes in the about amount, it is taxable. However, no evidence is brought on record if any interest was included in the aforesaid amount. The A O made addition on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 4,73,75,000/- paid towards the principle amount. The premium on redemption of ₹ 13,87,650/- was admissible expenditure in respect of the borrowing against which provision of ₹ 8,70,000/- was made. According to the assessee, therefore, an amount of ₹ 5,17,650/- was admissible as difference between the premium provided and the premium actually paid. Debenture redemption account is reproduced in Para 5.3 of the assessment order. This amount of ₹ 21,07 lakhs was treated as revenue income by the assessee in its published a/cs in Schedule 11 'other income' . During the course of assessment, the Auditors of the assessee were asked to clarify the accounting treatment as given. The Auditors' version was that as per accepted accounting policy any gain or loss on redemption of a liability is to be accounted through the profit and loss account and accordingly, this amount has been shown as 'other income' in the profit and loss account. Assessee's version did not find favour with the Assessing Officer who held that it was difficult to appreciate that the surplus is capital receipt and more so when this surplus had arisen in the course of c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer ought to have allowed premium paid on debentures to the tune of ₹ 13,87,650/-. No cogent reasons have been advanced by the Assessing Officer for rejecting the claim of the appellant company. The premium has been discharged during the year under consideration and in view of the I.T.A.T decision in the case of Rallis India Ltd. (24 ITD 496) and also ITAT's decision in the case of Arvind Hills Ltd in ITA No.4800, it was submitted that this was allowable expenditure. The assessee also relies on the decision of Supreme Court in the case of India Cements Ltd. (60 ITR 52) for its submissions and Calcutta High court's decision in Tungabhadra Inds. Ltd. (207 ITR 553). It was pointed out that Supreme Court has held in the case of Chhaganlal Mangaldas Co. (39 ITR 8) that book entries are not conclusive evidence. The hypothetical income is not an Income for the purpose of levy of tax tinder the Income-tax Act. The assessee also refers to the decision of Supreme Court in the case of Shoorji Vallabhdas 6 Co. (46 ITR 144) wherein it has been held that accounting entry cannot become income unless income has actually resulted. It was concluded by arguing tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tances of the issue involved, it is held that the Assessing Officer was not justified in taxing the amount of ₹ 21,07 lakhs being surplus on early redemption of debentures. This ground of appeal is accordingly decided in favour of the assessee. 19. The facts of the 3rd ground of appeal are that the assessee had credited to capital reserve profit on re-issue of forfeiture of shares amounting to ₹ 7.46 lakhs and profit on forfeiture of debentures amounting to ₹ 42.52 lakhs. The assessee was required to clarify as to why the profit on forfeiture on debentures should not be treated as income liable to tax. In compliance, the assessee contended that during the year under consideration, there was forfeiture of equity shares on account of non-receipt of call money, similarly 0% FCDS were also forfeited on account of non-receipt of call money. It was contended that though the definition of the word one was inclusive yet the same could be made applicable provided nature of receipt was revenue. Reliance in support was placed on the judgment of Hon ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs CIT (116 ITR 1) and that of Tata Locomotive company Ltd. (60 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly succeeding the previous year relevant to this appeal, that is at the beginning of the immediately succeeding year which is as good as the end of the previous year relevant to this appeal. The point is that the surplus was on those FCDs which were convertible fully into equity shares partly in the beginning of the previous year relevant to this appeal and partly on the first date of the succeeding previous year. Thus, good part had already become convertible in the beginning of the previous year and the remaining part was convertible on the date immediately succeeding the end of the previous year relevant to this appeal. Those FCDs were conceptually and qualitatively as good or bad as equity shares themselves. Obviously, for the facility of accounting and identification they were continued to be termed and dealt with as FCDs. so the logic and reasoning followed In the assessment order for not taxing the surplus on forfeiture of equity shares applies very substantially to the surplus arising on the forfeiture of these FCDs also, hence the same is held to be not taxable. It is also held that issue of debentures is also on capital account and hence the amount received on forfeiture ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. The A O accepted contention of the assessee as far as forfeiture of equity shares was concern and was treated as capital receipt but forfeiture of debenture was held to be on account of revenue receipt. The learned CIT (A) considering the previous history of the assessee and nature of the transactions held that issue of debenture is also on capital account and hence the amount receipts on forfeiture was also on capital account. ITAT Ahmedabad Bench in the case of Brijlaxmi Leasing Finance Ltd. (supra) considering the decision of the Hon'ble Supreme Court in the case of T. V. Sundaram Iyenger Sons Ltd. 222 ITR 344 considered the issue in which assessee claimed that since amount initially received pertain to capital receipt, forfeiture of such receipts could not be treated of revenue nature. The A O rejected the claim of the assessee. However, learned CIT (A) allowed the claim of the assessee. It was held Whether since amount was received against the issue of shares which was not business of assessee-company, same could not be treated as receipt in normal course of business Held, yes Whether, moreover, since assessee had not credited forfeited amount in its profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itors of the assessee were also asked to clarify the position regarding capitalization of aforesaid commitment charges paid to Ashoka Mills Ltd. Auditors' version in this regard finds place at page 66 of the assessment order. The finding of the Assessing Officer accordingly was that once the amount paid has been properly capitalized as per accounting standards of ICAI and has been approved by law as well as general share holders regarding the treatment given in published accounts, assessee has no case for asking for a different treatment for income-tax purpose. The expenditure was held to be capital in nature and assessee's claim of deduction was accordingly rejected. 26. The addition was challenged before learned Commissioner of Income Tax (Appeals) and it was pleaded that this amount was paid by the assessee to Ashoka Mills Ltd. in connection with the agreement to make available manufacturing infrastructure facilities of the said company for manufacture of yarn. The agreement was for the period of 7 years and could be terminated by giving three months' notice. Thus, there was no permanent right available to the assessee by payment of commitment charges. It was subm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an undisputed fact that the appellant company had paid to.46.54 lakhs to Ashoka Mills Ltd. in connection with its agreement to use manufacturing infrastructure facilities of Ashoka Mills Ltd. for manufacture of yarn. The agreement was for a fixed period and could be terminated, by the appellant company by giving three months notice. In this context, it is obvious that no permanent rights had been obtained and accordingly it could be inferred that by paying commitment charges no advantage of enduring nature had been obtained by the appellant company. If read in proper perspective the payment of commitment charges has nothing to do with the installation of plant and machinery. Commitment charges were clearly payable related to yarn manufacture with a clause of minimum payable rent. It is a matter of record that the Assessing Officer had clearly held that the business of the appellant company was manufacture of textiles. It is also undisputed that the appellant had spare weaving capacity for textiles and to make full use of the same. Infrastructure facilities of Ashoka Mills were obtained so that yarn could be manufactured to enhance the production, commitment charges were accordingl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of law and not merely on the bails of accounting entries. The question of such entries being erroneous or otherwise is not relevant to the issue. In view of this discussion, it is held that the appellant company being already in textile business of manufacturing cloth, the agreement entered for obtaining infrastructure facilities would entitle the appellant company to claim the commitment charges paid under such agreement as revenue expenditure. This ground of appeal is accordingly decided in favour of the assesses, since the assessee succeeds fully with regard to this ground of appeal, the alternate ground Is not further adjudicated. 27. The learned D R relied upon order of the A O and submitted that the expenditure should be capitalized being related to period prior to commencement of production and is capital in nature. On the other hand, learned Counsel for the assessee reiterated the submissions made before authorities below and submitted that expenditure was revenue in nature because same commitment charges were production linked expenses. 28. We have considered the rival submissions and do not find any merit in this ground of appeal of the revenue. It is admit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder: (i) Retrenchment expenditure ₹ 37,44,315/- During the year under consideration, the assessee company had entered into an agreement with recognized union to retrench employees under Voluntary Retirement Scheme. This scheme was also approved by the C.I.T. Total expenditure incurred debited in the books of accounts and payment made during the year was ₹ 37,44 ,315/-. However, the assessee company transferred ₹ 7,58,863/- to profit and loss account and treated balance amount of ₹ 29,95,452/- as deferred expenditure. (ii) Technical audit fees Rs..72.63,386/- During the year under consideration, the assessee company had incurred expenditure for conducting technical audit by M/s. Ghersi Co. for which they had charged ₹ 90,79,232/-. Total expenditure incurred, debited in the books of account and paid during the year was ₹ 90,79,232/-. However, the assessee company had transferred 1/5th expenditure incurred i.e. ₹ 18,15 ,846/- to profit and loss account and treated the balance amount of ₹ 72,63,386/-as deferred expenditure. (iii) Management services fees ₹ 3,66,78,466/- During the year under consideration, M/s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses of the assesses) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head profits and gains of business or profession. According to this section, if the following requirements are satisfied, deduction has to be allowed u/s. 37 of the Act. (i) The expenditure must have been laid out wholly and exclusively for the purpose of business of the assessee (ii) The expenditure must not be capital in nature: (iii) The expenditure must not be personal in nature It was submitted that the Assessing officer himself has allowed l/5th of the expenditure as business expenditure as he was satisfied about the three conditions stated here-in above. It was only the accounting treatment given by the assessee company which has made him not to allow 4/5th of the expenditure in the assessment year. Again, it was not the case of the Assessing Officer that the expenses were not incurred In the previous year relevant to the present assessment year. It was therefore, submitted that the A.O. ought to have allowed the balance of 4/5th of the expenditure as business expenditure either u/s.28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st of universal application can be laid down for treating the expenses to be either capital or revenue in nature. Every case has to be examined and decided on its facts and merits. The purpose for which the expenses have been incurred is always 4 relevant factors for deciding as to whether an expenditure is revenue expenditure or a capital expenditure. Generally speaking, retrenchment expenditure, technical audit fees and management services fees are in the nature of revenue expenditure. In the case of the assessee, method of accounting of the appellant company is mercantile. This system of accountancy takes into account income and expenditure on accrual basis. It is beyond doubt that all the expenses as Mentioned above had accrued in the relevant assessment year. These expenses were also paid during the relevant assessment year. The only point which has been adversely taken into account by the Assessing Officer is that in the books of a/acs, the expenses were treated as deferred revenue expenditure. But then the fact also remains that the assessee had revised its claim subsequently and what is to be allowed is the expenditure which is due and not the expenditure which has been tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Bench in the case of ACIT Vs Core Health Care Ltd. 37 SOT 383. 33. On consideration of the rival submissions and the case laws cited above, we do not find any merit in the departmental appeal on this ground. It is settled law that deferred revenue expenditure is not concept recognized under Income Tax Act. The provisions of Income Tax Act shall have to apply for the purpose of allowing deduction if it is revenue expenditure in nature. The concept of deferred revenue expenditure is essentially an accounting concept and alien to IT Act. The relevant provisions of Income Tax Act recognized only capital or revenue expenditure. Therefore, even if auditors have advised the assessee not to charge the profit loss account of this year with the whole of the expenditure and treated it as deferred revenue expenditure, it may be according to accounting principle, but certainly its deductibility has to be determined in accordance with the provisions of IT Act. Since, the assessee laid out the above expenditure wholly and exclusively for the purpose of business therefore, whole of the amount shall have to be allowed deduction in the assessment year under appeal because the assessee followe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessment order. It was accordingly requested that the matter may be restored back to the Assessing Officer for verification and allowance. The learned CIT (A) however, noted that the issue of management services fees paid to M/s. Mckensy Co. has been decided by him in above ground and it has been held that this payment is in the nature of revenue expenditure and has to be allowed. Since the amount of ₹ 94,47,117/- is in continuation of the same payment, a similar finding has to follow. A claim in this regard had been made before the Assessing Officer who insisted on submitting a copy of the bill. The said copy was also furnished and the same was available on record. From the said copy, it is clear that expenditure of ₹ 94,47,117/- had accrued during the year in which services had also been obtained. However, in spite of the claim being on record, the Assessing Officer did not entertain the same. Learned CIT (A) therefore, noted that since the Issue has already bean decided by him in the above ground, the same finding is to be given with regard to this ground of appeal, too. In the facts and circumstances of the Issue involved, it was held that fees payable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer stated that in the assessment order for A.Y. 93-94, the assessee conceded that though it was not possible to ascertain expenses under different heads incurred by EOU and other units, it cannot be denied that certain portion of expenses might be related to EOU and a broad estimate of expenses of ₹ 68.92 lakh, (other than insurance) were attributable to EOU. He says that total expenses claimed for this year are ₹ 38 crores, as against the last years' claim of ₹ 20 crores. In Sub-Para 5 at page 77 of the assessment order, the Assessing Officer has further stated that during the assessment proceedings the assessee had stated before him that the expenses which were not specifically incurred for those units cannot be allocated there against. He referred to section 10B(8) and (9) and states that as per the said provisions if it appears to him that when the course of business is so arranged that the assessee is earning more than the ordinary profit which might be expected to arise in the business of the industrial undertakings carried on by the assessee, then the Assessing Officer shall - compute the profit and gain of the undertaking for the purpose of deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts which is accounted for in the books of the main unit. However, in the other items he cannot have justification for rewriting the books. In the circumstances, entire exercise of the Assessing Officer is beyond his jurisdiction and is without reasonable cause. On this ground itself the entire addition made by him on this account which was based on the presumption requires to be deleted. As the Assessing Officer has made the assessee s agreeing to a basis for addition in assessment proceedings for A.Y. 1993-94, it was submitted that in that year it was agreed conditionally and to avoid litigation and just to buy peace. However, such agreement cannot be applied to this year. As regards the reference made to section 10B(8) and (9) of the income-tax Act, it was submitted that in section 10B as it stood then, sub-section (8) and (9) did not exist at all. Presumably, the assessment order intended to refer to sub-section (6) of section 10B which laid down, in effect, that the provisions of sub-section (8) and (9) of section 80-I shall apply mutatis mutandis. So, even if the assessment order intended to invoke the provisions of sub-section (8) and (9) of section 80-I, a reference to se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her indirect expenses. The point was that those indirect expenses in any case were required to be incurred by the assessee because of the already existing vast business and big establishments. The department has not alleged let alone proved that there was some substantial increase in those expenses after the establishment of those two EOU and hence the increase may be attributed to the newly started EOU. It was submitted that department's approach of allocating indirect expenses for newly started units whose incomes are exempt has been disapproved by the Tribunal in the case of another group company viz. B. Cibatul Ltd. for A.Y. 1989-90. The above was decided as ITA No. 3259/Ahd/1992 and the department sought reference u/s. 256(1) which was rejected in Tribunal's order RA No.1013/Ahd/1998 dated 12.4.1999. In that order of RA, the Tribunal reproduced some parts of the main order in appeal. Relevant observation (from the bottom of page 2) is as follows' ...... The contention of the A0 that each and every Indirect expense Incurred by the assessee should be allocated to the newly industrial undertaking is not tenable because If It applied it would lead to most Illogic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessing Officer on estimation basis is not legally permissible. It seems that the Assessing Officer was perhaps carried away by the agreed addition in the assessment year 93-94. But in this year, the assessee has very much agitated such addition and in this view of the agitation, no addition can be trusted upon the assessee in absence of any positive evidence. 59. In the assessment order, the Assessing Officer makes a reference to section 10B (8) and (9) of the Income-tax Act. In section 10B as it stood at the relevant time, sub-section (8) and (9) did not exist at all. I am in agreement with the appellant when it is said that presumably, the assessment order Intended to refer to sub-section (6) of section 10 which laid down that the provisions of sub-section (8) and (9) of section 80-1 shall apply mutatis mutandis. Reference to section 80-1 reveals that sub-section (8) thereof authorizes the Revenue to reasonably adjust the prices of goods transferred to and from the eligible unit to or from other units owned by the assessee. Obviously in the case of the assessee, this particular provision does not stand invoked. This is obvious from the fact that allocation is attempted onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d its trading receipts and profit and loss accounts separately for export sales and domestic sales and there was sufficient material supported by all the necessary documents to show that the deduction claimed was entirely due to export: Held, that there was no warrant for disallowing any portion of the export earning pro rata by invoking clause (b) of sub-section (3) of section 80 HHC of the Income-tax Act, 1961. The purpose of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports . Hon'ble Madras High Court in the case of CIT Vs Suresh B. Mehta 291 ITR 462 relying upon the decision in the case of Rathore Brothers held that when assessee maintain separate accounts, independent of each other business, A O calculating deduction on the basis of total turnover of all business of assessee not proper. Hon'ble Delhi High Court in the case of CIT Vs Sona Koyo Steering System Ltd. 321 ITR 463 observed that the plea of the assessee before the Tribunal was that two units were independent units and only the profit making unit should be considered eligible for the purpose of compu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annot presume that just because EOU had started functioning, indirect expenses should also be allocated to the EOUs. Therefore, allocation on the basis that some expenses should be regarded as attributable to EOU and allocated on the basis of either a number of employees or turnover etc. was not the correct method. Considering the facts and circumstances of the case and above decisions, we do not find any infirmity in the order of the learned CIT (A) in deleting the disallowances. We confirm his findings and dismiss this ground of appeal of the Revenue. 42. On ground No.8: Revenue challenged the order of the learned CIT (A) in directing to delete the allocation of interest of ₹ 1,47,27,379/- on 12.5% PCD to Arvind International. 43. Briefly, the facts of the case are that it was submitted before learned CIT (A) that the Assessing Officer has erred in holding that Interest paid on 12.5% PCD is allowable to EOU, Arvind International and thereby reducing the profits of this unit by Rs. l,47,27,379/-. The issue has been discussed in para 13 of the assessment order. The A.O. has stated that the terms of issue of partly convertible debentures were examined by him and accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s so because the interest was payable before conversion into equity shares of that part of PCD which was convertible. Since the funds had been used for Poplin Project as well as project of Arvind International, such allocation was necessary and justified. In the previous year, relevant to this appeal, interest was payable only on the non-convertible part. It was submitted that the project of Arvind International was not at Naroda Road, but it was at Khatrej, while the Poplin Project was at Naroda Road which was the main center for the assessee company. The non-convertible part was repayable after a long period and it was secured against the charge on the Naroda Road asset. Therefore, the assessee was justified in claiming that the interest on non-convertible part of PCD was fully attributable to Naroda Road project and it was not allocated to the assets of Arvind International which were of Khatrej. It was submitted that the Assessing Officer was not justified in rejecting this submission of the assessee. The point was that in the proceeding years when interest was payable on the convertible as well as nonconvertible portions, some allocation was done by the assessee itself. When t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res cannot be allocated even on pro rata basis to Arvind International. There was no Interest payable after the debentures were converted into shares on convertible portion during the year and as such no allocation can be made interest. Accordingly, necessary relief was prayed. 45. The learned CIT (A) considering the submissions of the assessee and material on record deleted the addition. His findings in Para 65 and 66 are reproduced as under: 65 I have carefully gone through the issue involved. The Assessing Officer has allocated interest amounting to Rs.l,47,27,279/- as interest allocable to Export Oriented Unit, viz. Arvind International. But this allocation is found to be not warranted either on facts or on law. It is a matter of record that the assessee company is maintaining Operate set of books of account for Arvind International and the books are duly audited. In A.Y. 1993-94, the appellant company had issued ₹ 65,44,384/- 12.5% secured redeemable partly convertible debentures of to.140/- each, aggregating to ₹ 91.62 crores. Out of this, ₹ 22,90,53 ,440/- were non-convertible Part B debentures. When the accounts were prepared and submitted in earli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is directed to delete the allocation of Interest of Rs. l .47,27.379/- to Arvind International . 46. Learned D R submitted that funds may be verified again with regard to allocation of the interest. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that issue of interest was relevant to the taxable unit and that hypothetical allocation of the interest is not permissible under the law. 47. We have considered the rival submissions and do not find any merit in the appeal of the Revenue on this issue. The assessee made specific submissions on this issue and clearly distinguished the facts of the earlier year with the facts of this year. The learned CIT (A) considering the facts and material on record gave a specific finding of fact against the revenue. The learned CIT (A) noted from record that assessee company was maintaining separate sets of books of accounts for Arvind International and books are duly audited. In preceding assessment year the assessee had issued secured redeemable partly convertible debentures out of this part were non-convertible part B debentures. When the accounts were prepared i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0%. It was stated by the Assessing Officer that the WDV on these assets as per income-tax records of the selling party was Nil and the same was revalued and sold to the assessee company which were leased back to the same parties. Necessary enquiries were conducted by the Assessing Officer in the third week of February, 1997 by issuing letters to the lessees. As per Assessing Officer, as per reply received, it was noticed that the transactions were not entered into in the month of Sept. 1993. The Assessing Officer thereafter, conducted survey proceedings U/S.133A on 12.3.1997 at various premises as mentioned on page 99. In this context and background, the different sale and lease back transactions are discussed as under: (A) Sale and Lease Back transaction with L T: The Assessing Officer has discussed this issue on page 98 onwards. He has stated that the asset was re-valued at ₹ 24 Crores the date of transfer and thereafter its depreciated value was worked out to ₹ 12 crores as on the date of transfer at which value the transfer was made to the assessee. He has stated that agreement was not entered into on 29.9.1993 which is the date of the agreement. To c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to finalize the proposal. In this view of the matter, according to the Assessing officer, no meeting with Arvind Mills Ltd. and L T was there before 27.9.1993. The Assessing Officer has further referred to the Board Resolution dated 29.10.93 and stated that the Board Resolution authorizing the sale of lease back transaction was only in October, 1993. After this allegation the Assessing Officer on page 114 has concluded that the claim of depreciation on the basis of the above facts can only be restricted to 50% i.e. ₹ 3.69 crores if the other conditions for allowing the same are fulfilled. On page 114, the Assessing Officer has referred to Explanation 3 below section 43(1). He has stated that the asset was acquired by L T at the cost of ₹ 2.72 crores, 11 years prior to the present transaction and the book value thereof on the date of transaction was ₹ 34 only. He says that the WDV of the asset as per the Income-tax records of L T was Rs. Nil, He says that the assets of the book value of ₹ 34 was revalued at ₹ 24 crores and therefore there is no basis for such valuation. He has stated that he had, therefore, to determine the value of the asset as per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same was applicable to all pending assessments and therefore, the value of the asset was taken by him at Rs. Nil. 50. Above finding was challenged before learned CIT (A). As regards reference made to the statement of Mr. B. M. Shah and statement of Mr. Deosthalee, it was stated that none of these statements suggest that they had not signed the agreement in Sept, 1993. It was clarified that the document was to be signed on 29.9.93 but when Mr. B. M. Shah was in Mumbai on 28.9.93 he signed document and Mr. Mayank shah had signed the same as witness. A copy of the confirmation to that effect from Mr. Mayank shah was filed in the form of letter dated 21.3.97 with the Assessing Officer which has been over looked. As regards statement of Mr. Deosthalee it was stated that none of the questions and answers reproduced by the Assessing Officer suggest that the document was not signed in Sept., 1993. As regards statement of Shri Sanjay Dalal, it was stated that merely because according to the Assessing Officer, certificate regarding entitlement of 100% depreciation was received in October. 1993, it does not suggest that the document was not executed in Sept., 1993. It was further sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered, when the payment is made and the possession of the asset has been handed over to the assessee and the lease has commenced operation, there is no reason for believing that the transaction was not completed by that date. On the contrary, there were decisions that when the payment is made and the possession of the property has been handed over, the transaction is complete. This may be further appreciated in view of the fact that asset under consideration being machinery is movable. Coming to a the merits, it was submitted that Explanation 3 below section 43(1) casts a very heavy burden on the Department to prove that the main purpose of the transfer was the reduction of liability to income-tax. It was submitted that in the assessment order not a word is mentioned on this aspect of the matter, and hence, department s action for invoking the said Explanation 3 below section 43(1) is not at all in accordance with law. It was further submitted that the main purpose of transfer WAS the buy and lease back transaction. Further, assessee was bearing stamp duty of more than ₹ 48 lakhs and was also earning substantial taxable income in the form of lease rentals. Accordingly, Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g met any person from Raymonds. The explanation of the assessee was not accepted by the Assessing Officer by relying upon his observations with reference to the transactions with L T Ltd. The Assessing Officer has further stated that the rate of depreciation of this asset is not 100%. For this he stated that the certificate of Shailesh R. shah was submitted but the said person had given the certificate on the basis of lease agreement and copy of the relevant invoices and certificate of original supplier of boiler. Therefore, according to Assessing Officer, the certificate was given without visit of the site. In the circumstances, the Assessing Officer came to the conclusion that the rate applicable was 25% and not 100%. The Assessing Officer has for this transaction also invoked Explanation 4A below section 43(1) as in the case with the transaction with L T. 52. The above findings were challenged before the learned CIT (A) and it was submitted that the Assessing Officer's observations are based on presumptions only. The appellant referred to the statement of Mr. B. M. Shah and contended that he has signed the document on 28.9.93 at Bombay but as the document was prepared e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as concluded that the asset was entitled to rate of 25%. He has further referred to Explanation 4A below section 43 with reference to this and concluded that the value in the hands of the trasnferor has to be taken as the cost of assessee. 54. It was submitted before the learned CIT (A) that the assessee had purchased from Atul Products Ltd. Fluldized Bed Boiler. The rate of depreciation in respect of such Boilers as per rule 5, Appendix I - (III) (3) (Ill) (A)(a) reproduced below is 100%. Appendix I (III) (3) (Ill) (A) (a) Ignifluid / fluidized bed boilers 100% It was submitted that the rate was applicable simpliciter to the cost of fluidized bed boilers. No certificate whatsoever la necessary about the functioning of the boiler because it was not so prescribed. It was therefore, submitted that argument of the Assessing Officer that the certificate has been given without carrying out any efficiency test or visiting the plant site to verify whether the asset is still run at the required efficiency to be eligible for depreciation of 100% is i rrelevant. The assessee company had also submitted certificate from Engineer Mr. Shailesh R. Shah. The same objections which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his explanation was not at all applicable to A.Y. 1994-95, to which this appeal relates. For coming to this conclusion, I rely on my detailed order in the case of Pinnacle Finance Ltd, as referred above. 86. Having adjudicated the first issue as above, the adjudication of the second issue framed is now taken up. It is a settled proposition of law that in order to invoke the provisions of Explanation 3, that first requirement is that the Assessing Officer must be satisfied that the main purpose of transfer of asset directly or indirectly to the assesses is the reduction of the liability to income-tax. Legislature has pre-fixed the words 'actual' to the word 'cost . This it precisely to put emphasize on the reality and the genuineness of the cost and to exclude collusive, inflated deflated or fictitious cost. Accordingly, it is not permissible to the Assessing Officer to reject the cost paid for the transfer unless the Assessing Officer is satisfied that the actual cost paid by the assessee was inflated cost by reason of fraud, collusion, subterfuge, device or false transaction made with an ulterior purpose. In the present case, there is nothing to suggest that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s is that It is Incumbent upon the Assessing Officer to establish that the device adopted by the assessee was either contrary to any law or against accounting principles or against accepted practices and by using such device, it had resulted in depriving the exchequer of its legitimate revenue. Unless these two conditions are fulfilled, the Assessing Officer la not empowered to charge the assessee the allegation of dodging the revenue. Further, In order to arrive at the satisfaction of the assessing authority. It is necessary that there must be evidence on record and an enquiry has to be made by the assessing authority. The mere transfer at a higher, valuation by itself cannot be considered an act on the part of the assessee showing his intention to reduce the tax liability. In the present case, the provisions of Explanation 3 have been invoked without causing proper enquiry and without proving any element of fraud to deprive the revenue of its due share. In the facts and circumstances, It Is held that Assessing Officer's action for invoking the said explanation was not at all in accordance with law. The obvious purpose of transfer In this case was the buy and lease back transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part/ fact in this regard Is the payment of the purchase price. It is seen from the details given that payment for ( entire consideration was made by the appellant on 29.9.93. If this aspect with due weightage is considered, the normal inference can be that the asset had been handed over to the appellant and the lease had commenced operation on 29.9.93. This position is to be appreciated, especially in view of the fact that asset under consideration was movable in nature. This aspect of full payment has not been commented upon by the A.O. at all which could have brought clarity to the issue Involved. He has just been guided perhaps by the other discrepancies for which there are obvious clarifications. He has been influenced to a large extent by the alleged non-availability of the schedule which did not necessarily form part of original agreement dated 29.9.93. When the payment has been made in full and lease rentals have started from the said date, reliance on different discrepancies as pointed out was perhaps of lesser importance. The Assessing Officer was also influenced by the fact that the transfer on the date claimed could not be made In view of the charge of IDBI on the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the present case and the related information which is available on record, to my mind the charge of the Assessing Officer is not well proved. In its absence, the claim of the assessee will have to be accepted on the facts as on record. 89. Regarding the rate of depreciation, since original supplier of the asset Thermax Ltd. had certified the efficiency of boiler supplied, it has to be held eligible to 100% depreciation. This information is already available on record and is not rebutted by the Assessing Officer in nay manner. Moreover, nothing wrong can be found with the Certificate of Mr. Shah which was merely reiterating the obvious, on the basis of literature of the boiler in question. In totality of circumstances, there is nothing which could be held against the assessee on the rate of depreciation as claimed. 90. With this discussion and in view of what is discussed earlier as above, the claim of the assesses is directed to be allowed as made. (iii) Sale Lease back transaction with Atul Ltd.: 91. So far as this claim of the assessee is concerned, there is no reasonable basis for any dispute. The rate of depreciation in respect of such b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee has received lease rental of ₹ 28 Crores in several years, but in the assessment year in appeal claimed depreciation or ₹ 20 Crores. Therefore, it was mutually beneficial transaction between the parties. Learned D R therefore, submitted that order of the learned CIT (A) may be set aside and the order of the A O may be restored. 57. On the other hand, learned Counsel for the assessee reiterated the submissions made before the authorities below. He has also filed written submission which is taken on record. He has submitted that assessee has paid taxes on lease rental income received by the assessee company on the transactions of sale and lease back transactions entered into with the above three parties. The assessee has received lease rental income brought to charge of tax for the six assessment years 1994-95 to 1999-2000 and received lease rental from these parties in a sum of ₹ 28,00,77,572/- as against which the assessee has claimed depreciation @100% in a sum of ₹ 20.32 Crores. Thus, taxes have been paid on surplus of about ₹ 8 Crores. The sale and lease back have benefited the Revenue and the assessee company has not derived any advantage o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase agreement was not signed on 29-09- 1993. The A O referred to report of surveyor and mentioned that draft report was dated 30-09-1993 whereas the final report was antedated as 17-09-1993. The A O also referred to statement of Balakrishnan who has stated that report of surveyor was antedated on the instruction of Shri Y. M. Deosthalee. However, the A O has admitted that Shri Y.M. Deosthalee denied having given any such instruction. The A O further stated that the plant and machinery was already mortgaged with IDBI. The A O also referred to the letter dated 27-09-1993 addressed to the broker conveying that they were was agreeable to sale and lease back transaction with the assessee. The A O therefore, assumed agreement must have been executed in October, 1993 and that transaction was not genuine as per Explanation 3 to section 43(1). Learned Counsel for the assessee by referring to the above observations of the Assessing Officer submitted that details submissions were filed before the A O which has been ignored. The assessee filed detailed submissions before the learned CIT (A) which have been rightly appreciated by him. He has submitted that Explanation 4A to section 43(1) was in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the same date. Therefore, finding of the A O was incorrect that transactions are not genuine. He has submitted that property under charge could be sold along with the charge. He has submitted that A O has relied upon the resolution of the Board dated 29-10-1993, but in the preamble itself it is stated that the resolution was passed in continuation with earlier resolution dated 14-08-1993 for purchase of the plant and machinery. He has therefore, submitted that learned CIT (A) rightly concluded that genuine agreement was entered into between assessee and L T Ltd. on which depreciation was rightly allowed. As regards transaction with Raymond Woolen Mills Ltd. and Atul Products Ltd., learned Counsel for the assessee contended that lease agreement with Raymond Woolen Mills Ltd. was also executed similarly on 29-09-1993 and signed by Shri B. M. Shah as is considered by learned CIT (A) in the case of L T Ltd. With regard to transaction with Atul Products Ltd., there is no dispute regarding date and only dispute is regarding rate of depreciation. Leaned CIT (A) specifically noted that 100% depreciation is allowable as per rules; therefore, no further evidence is required. He has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 06 (copy filed at PB-319). Similarly, the same provision has been explained by the CBDT circular No.762 dated 18-2-1998 copy of which is filed on record in which it was explained that this provision will apply in respect of sale and lease back transaction made on or after 01-10- 1996. The Tribunal adopted the same view in the case of Pinacle Finance Ltd. (supra) and also referred to the judgment of Hon'ble Madras High Court in the case of Om Sindhori Capital Investment Ltd. Vs JCIT 274 ITR 427 in which also same view is taken. Learned CIT (A) was therefore, justified in holding that Explanation 4A to section 43(1) will not apply to the assessment year under appeal i.e. 1994-95. 58.1 The learned CIT (A) referred to the statements recorded by the A O in the impugned order. In the statement of Shri B. M. Shah it was clarified that he was in Mumbai on 28-09-1993 and since lease agreement was ready, therefore, he signed the document on 28-09-1993 in the presence of witness Shri Mayank Shah who also appended his signature to the lease deed on 28-09-1993. The confirmation of Shri Mayank Shah was filed before the authorities below (PB-95) in which he has confirmed that agreement was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as therefore, justified in holding that genuine purchase and lease back transactions have been entered into between the parties. It may also be noted that assessee specifically pleaded that statement of surveyor and others have been recorded by the A O behind the back of the assessee and the same were not supplied to the assessee and no right to cross examination has been given to the assessee. The above statement of the assessee has not been disputed through any material on record. Therefore, such statements cannot be read in evidence against the assessee. We rely upon the decision of Hon'ble Supreme Court in the case of Kishanchand Chellaram 125 ITR 713. The A O noted that assessee was not owner of the plant and machinery because deed was not registered as the same has been treated immovable property by the assessee. It may be noted here that plant and machinery are movable properties, therefore, even if assessee has stated the same as immovable property, would not make it the same. The assessee has purchased plant and machinery by making payments. No other land or property is purchased; therefore, it could not be permanently attached with the land of others. Section 4 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed of any legitimate taxes. The assessee company has also not derived any advantage of reduction of its tax liability. Therefore, there was no motive of tax avoidance can be attributed to the assessee company. For applying Explanation 3 to section 43(1) of the IT Act, the main purpose of the transfer of the assets should be to reduce the tax liability and in such event the actual cost could be determined having regard to the circumstances of the case. The details filed on record shows that even during the assessment year under appeal assessee has received lease rental income in a sum of ₹ 2,56,99,652/- and so on received the higher lease rental income in subsequent assessment years. The details filed in Annexure A further shows that assessee started receiving lease rental income from the day one when agreements have been entered into with the parties. Hon'ble Gujarat High Court in the case of CIT Vs Gujarat Gas Company Ltd. 308 ITR 243 held as under: The assessee entered into a lease agreement with the State Electricity Board engaged in generation of electricity. The assessee got the electrical equipment and leased out it to the Board. The assessee showed the lease r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions. The crux of the matter would be that there was no dispute with respect to the physical existence of the assets which were owned by the assessee and used by the lessee. The assessee (lesser) had made the payment for purchase of the assets to the lessees and that the lessees used the assets for business purpose. The transactions are supported by the evidences, materials and payments as referred to in this order. Both the parties have acted upon the contract between them. Therefore, for a valid and genuine transaction of sale and lease back, assessee has been able to produce sufficient and cogent materials before the authorities below. The transactions would show that its main purpose was not to reduce the tax liability; therefore, there is no need to determine the cost of the assets. Moreover, the A O has not conducted any proper enquiry into the matter to prove the above facts. Hon'ble Orissa High Court of Industrial Development Corporation of Orissa Ltd. 268 ITR 130 held that no evidence that transaction was not genuine, assets entitled to depreciation. Therefore, the learned CIT (A) was justified in holding that Explanation 3 to section 43(1) has been wrongly appli ..... X X X X Extracts X X X X X X X X Extracts X X X X
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