TMI Blog1998 (6) TMI 569X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961 out of dividend income. The assessee during the relevant period received dividends from Indian companies and returns from UTI amounting to ₹ 28.64 crores and distributed dividend approximately ₹ 25.11 crores. In its return of income, the assessee claimed deduction of the last mentioned sum in accordance with provisions of section 80M of the Act. 4. The Assessing Officer , on scrutiny of accounts, found that the assessee claimed deduction of ₹ 59.93 crores as interest paid on borrowings utilised for purposes of business. This was besides interest of ₹ 92.96 crores capitalised in books of accounts but claimed deductible in the return under section 36(1)(iii) of the Act. The assessee claimed that funds were, on which interest of ₹ 59.93 crores was claimed, raised by way of issue of bonds and debentures. As required by various regulations, commitment made while raising funds, such funds were to be utilised for objects specified. Pending utilisation, as a matter of commercial prudence the assessee-company invested funds in securities as permitted by agreements are rules. 5. On claim of deduction under section 80M(Ground No.1) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment. He submitted that, in fact, investments in the year under consideration had come down from ₹ 330.13 crores as on 31st March, 1992 to ₹ 236.77 crores as on 31st March, 1993. He further argued that the assessee had its own funds and income to make investment in securities and the Revenue has failed to prove that the borrowed funds on which interest of ₹ 59.93 crores was paid, were used or acquiring securities. In this connection, he stated that the assessee's profits in the year under consideration before depreciation amounted to ₹ 203 crores. It was ₹ 160 crores last year. He filed before us position of funds and profits in different years. Thus, the profits and known funds were sufficient to cover the investment. Shri Dastur argued that the Assessing Officer while computing business income of various units, allowed deduction of ₹ 59.93 crores. The Assessing Officer then, on estimate basis, through erroneous formula allocated ₹ 6.94 crores to borrowed funds utilised in investments and reduced dividend income and deduction under section 80M. This was done on the ground that the assessee had a common bank account wherein all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer , therefore, was justified in applying a reasonable formula. According to him, the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT (supra) was no more a good law in the light of the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works v. CIT (supra). The learned Departmental Representative accordingly supported the order of the Assessing Officer . 10. Having given careful thought to the rival submissions of parties, we do not see any justification for allocating ₹ 6.94 crores as expenditure relatable to dividend income. The assessee has placed sufficient material on record to show that its income in the year under consideration (sales approximately ₹ 1,745 crores profit approximately 203 crores) as also ₹ 106 crores of last year, and its own funds of ₹ 903 crores far exceeded the investments giving dividend income. The borrowed funds on which interest of ₹ 59.93 crores was paid, were admittedly taken for purposes of business and the Revenue has led no material to show that those funds were diverted and utilized in investments. Even the Assessing Officer allowed above in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... followed in three other cases of the same High Court, would essentially depend upon the fact as to whether the entire profits had been pumped into the overdraft account, whether such profits were more than the tax amount paid for the relevant year and all other germane factors. But when the assessee never advanced the contention either before the Tribunal or before the High Court and the amplitude of the question posed before the High Court does not bring within its sweep the contention as is advanced by Mr. Bhattacharya, learned counsel in this Court, it would not be appropriate for this Court to look into the additional papers produced by the assessee for entertaining the contention and answering the same. 12.It is clear from the above that the Hon'ble Supreme Court has noted the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT (supra) but did not consider applicability of above decisions to the facts of the case before them as no such arguments were advanced before the Tribunal or before the High Court. Having regarded to the position of assessee's funds, no presumption would be drawn that borrowed funds were utilised for making in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t receipts. It is, therefore, clear that interest on borrowings made for purposes of business could not be deducted/adjusted against income from `other sources'. Therefore, the Assessing Officer acted contrary to the decision of the Supreme Court when after allowing entire interest against business income, he apportioned a part of it towards dividend income assessed under the head other sources . The apportionment made cannot be held to be done in accordance with law. In the light of the above discussion, we hold that apportionment of ₹ 6.94 crores towards earning of dividend income and consequent reduction of exemption under section 80M were not justified. The entire interest of ₹ 59.53 crores was to be allowed out of business income. Consequently, deduction claimed by the assessee under section 80M was to be allowed as claimed. The Assessing Officer is directed to revise the assessment accordingly. 15. The next ground of appeal (No. 2) relates to disallowance of claim made under section 36(1)(iii) of the Income-tax Act. The assessee had issued non-convertible and partly convertible debentures to raise finance for its two cement units at Raipur and Sambhupu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and confirmed the action of the Assessing Officer . Hence, this appeal. 17. We have heard submissions of both the parties and examined material placed on record. The learned counsel for the assessee Shri Dastur reiterated that the two cement units and one Ispat Unit were part of the same business and, therefore, interest paid on borrowings was to be deductible under section 36(1)(iii) of the Act. He emphasised that there was unity of management and control which was most important test to determine whether different ventures carried on by the assessee constituted same business or not. In this connection, the learned counsel drew our attention to pp. 2 and 3 of the compilation `B' chart showing how important decisions are taken by management committee and the Board and implemented by heads of various departments. Shri Dastur invited our attention to decision of the company to raise funds for units by issuance of PCDs and NCDs and also Euro issue of ₹ 276.29 crores. Shri Dastur made prominent reference to profit appraisal report of IDBI of these units at pp. 247-248 of compilation wherein apart from outside borrowing, the internal accrual was taken at ₹ 132.58 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 219 ITR 563 (SC); (2) L.M. Chhabda Sons v. CIT (1967) 65 ITR 638 (SC); (3) CIT v. Bharat Industrial Works (1997) 226 ITR 543 (MP); and (4) Rainbow Dyestuff Ltd. v. CIT (1995) 123 CTR (Guj) 21, to support the conclusion arrived at by the Revenue authorities. 18. On careful consideration of rival submissions of the parties, we are of the view that there is not much difference between the parties on the tests to be applied for determining whether the three units mentioned above are part of the same business carried on by the assessee and, therefore, it would be useful to refer to these tests considered by the Assessing Officer as under : A. Same business._The Assessing Officer held that as the assessee was carrying on diversified activities of manufacturing textile, staple fibre, cement, caustic soda, pulp iron, etc. at different places, the assessee was carrying different business activities and, therefore, not same business . The assessee, on the other hand, contends that as setting up of cement plants and sponge iron plant is interconnected, interdependent and being controlled by same management, it is same business. The fact that for purposes of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nits. Any step obviously taken for better or more efficient management would not affect concept of same business . A common insurance policy is taken in respect of various units as is evident from insurance policy placed at pp. 9 to 11 of the compilation `A'. There is single superannuation scheme for all employees of the assessee. It was also relevant to emphasise that the assessee was already engaged in manufacture of cement. C. Common fund employed._The Assessing Officer rejected the assessee's claim that common pool funds consisting of own funds and borrowed funds were employed for setting up and day-to-day running of various divisions/units. He held that where surplus funds were transferred inter se units or to the head office, interest was charged and separately accounted for in each unit. The assessee, on the other hand, contends that there are common funds and even for raising loans, the entire assets of the company are charged. The learned counsel drew our attention to project appraisal report carried by IDBI for financing the three projects. He also relied on p. 251 of compilation `B' to show internal funds to be utilised for setting up the units. Our a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r shown that income- tax, excise and other matters are being looked after by a common central agency. It was also pointed out that when sale is made of cement, supply can be made from any of the units. 19. After considering the above material, we are of the view that the assessee has shown that there is a common management, common funds, interlacing and interdependence of different units and, therefore, it is not correct to reject the claim that the assessee was carrying on the same business . In the case of Waterfall Estates Ltd. v. CIT (supra) their Lordships of the Hon'ble Supreme Court stated as under : We do not think it necessary to deal with the facts of each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances. Some facts may tend one way and some other than other way. An overall view has to be taken and a conclusion arrived at. Even if it is found that one or two circumstances among the several circumstances relied upon are not relevant the finding of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Department did not produce and withheld above report as according to the assessee, the said report supported the stand of the assessee. 22.The Assessing Officer refused to accept the case pleaded by the assessee. On examination of log book maintained by the assessee relating to working of the plant, the Assessing Officer noted that there was overwriting regarding maximum temperature obtained in the plant on 30th/31st March, 1993. 800-850 degree was overwritten in place of 600-650 degree originally written. It is maintained by the Assessing Officer that sponge iron could not be produced at temperature less than 850 degree celsius and as above temperature was never obtained, the assessee could not and did not produce sponge iron. After examining Shri Tirumala and Shri Anil Kumar connected with production and maintenance of log books at the plant as also Shri Shenoy and Shri Chug and other people connected with management of production in the assessee's plant, the Assessing Officer concluded that the assessee fabricated evidence relating to production of sponge iron and hot briquetted iron (HBI). Accordingly to the Assessing Officer , above referred to employees admitted be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to material which mechanically satisfies the condition that plant was ready to commence business. In this connection, Shri Dastur referred to assessment order where it is not disputed that plant was mechanically set up in the accounting year. He then referred to affidavit of Shri L.R. Talwar (p. 336) wherein, on oath, process of commencement of actual production was confirmed. He also referred to letter at p. 615 wherein, on oath, it was confirmed that production had commenced. The foreign company who had set up and commissioned the plant (Davvy) had also confirmed that plant was commissioned before 31st March, 1993. Apart from the above, the learned counsel for the assessee referred to material relating to sale of production, entries in excise register and certificate from excise and sales-tax authorities, certificate from insurance and other public authorities. Evidence relating to transportation of sold material was also referred to in support of above claim. 23.1. Shri Dastur further draw our attention to entries at p. 394 of the log book where 500 ton of raw material was introduced in the reactor in the night shift of 29th March, 1993. Reference was also made to consumption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detail in letter available at p. 103 of the compilation. No further questions were put to Shri Anil Kumar after above detailed explanation. Shri Dastur also read out the statements of Shri Chug and Shri Shenoy. The claim in the statement was fully corroborated with documentary evidence whereas the Revenue placed no material in support of the conclusion drawn by the Assessing Officer . 24. Shri Dastur also explained the letter of Shri P.K. Sen dated 31st March, 1993, to Mr. Gujarat Hirel of DPGI. He drew our attention to affidavit of Shri P.K. Sen at p. 334 and emphasised that Shri P.K. Sen was not cross-examined to challenge averments on oath. The report of the directors and as also evidence of excise authorities were also relied upon. 25. Shri Dastur also stated that there were factual errors in the order of the Commissioner (Appeals) at p. 136, para 37.10. The Commissioner (Appeals) has wrongly stated that technical literature has said that sponge iron could not be produced below 800 deg. C. The technical opinion, in fact, stated that sponge iron could be produced at temperature 570 deg. C. Likewise, certain facts were wrongly attributed to Shri Shenoy as is evident from hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntained by the assessee which, according to the learned Departmental Representative, were direct evidence, clearly showed that plant was not commissioned. It was reiterated that it was not possible to produce sponge iron at temperature less than 800 deg. C. and this was admitted by the employees of the assessee in their statement on oath. Reference was made to the statements of Shri Tirumala and Shri Anil Kumar. The plant was designed to produce HBI and, therefore, unless HBI is shown to have been produced, the plant cannot be treated to put to use. According to the learned Departmental Representative, the assessee was required to show that metailisation achieved by it by 31st March, 1993, was not less than 92 per cent. Otherwise, plant cannot be said to be put to use. But facts on record i.e., log book and statements of shift-in-charge clearly showed that process gas heater (PGH) which costed ₹ 42,78,20,273 and on which depreciation of more than ₹ 8 crores was claimed was incomplete and not commissioned. The learned Departmental Representative submitted that the assessee had failed to show that computer had given wrong temperature readings and, therefore, it was necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) CIT v. Saurashtra Cement Chemical Industries Ltd. (1973) 91 ITR 170 (Guj), (3) Sarabhai Management Corporation Ltd. v. CIT (1976) 102 ITR 25 (Guj) and (4) Prem Conductors (P) Ltd. v. CIT (1977) 108 ITR 654 (Guj). Their Lordships examined the facts found by the Tribunal and observed as under : It is true that when the end product obtained during this period was sent to the analysts, Italab (P) Ltd., for analysis, it was opined by the laboratory that the sample did not comply with the prescribed standards of qualify of B.P. test 1958 with respect to non-volatile matter. As a matter of fact, even earlier some ether obtained in June, 1961, was submitted to the same analyst and an identical conclusion had been reached by them. The position then is that in August, 1961, the plant had commenced operation but the end-product was sub-standard and hence obviously not marketable. It is in this context that Mr. Joshi on behalf of Revenue has urged that even in August, 1961, the business of the assessee could not be said to have been set up, although the plant was being worked, inasmuch as a proper standard marketable end-product had not been obtained. We are afraid that if this test as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions for the setting up and not equivalent to the setting up of the business. We have applied the test propounded in this decision in a very recent decision given by this very Bench, viz., Income-tax Ref. No. 85 of 1970, CIT v. Forging Stamping (P) Ltd., decided on 29th January, 1970 [since reported in (1979) 119 ITR 616 (Bom)]. In the said case, it was held that the assessee had set up its business when it received power connection and not earlier although the machinery had been installed earlier and trials had taken place with the help of the generator. 28.4. In our opinion, the facts of the present case relating to setting up of business of production are akin to facts of the abovequoted cases and, therefore, the test referred to above is to be applied to determine whether business was set up by the assessee. We, therefore, deem it unnessary to refer to other cases cited on behalf of the parties. 29. As noted earlier, the Assessing Officer after examining log book, statements of Shri Tirumala and Shri Anil Kumar and documents impounded from the premises of DPGI, particularly letter dated 31st March, 1993, written by Shri Sen, concluded as under : On 30th 31st Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the Assessing Officer , was indirect evidence, he concluded as follows : As per excise production records, huge production was piled up till October 1993 but the same were not sold. It could be possible only in two situations : (i) Either there was no production till October, 1993 and only entries were made in excise production register; (ii) Only raw material was coming out without any metallisation which has no market. In the absence of any of the above, no one would have kept material so long to be demaged and spoiled. 29.3.The Assessing Officer held that lab-report furnished by the assessee about production of HBI was not correct. The Assessing Officer further observed as follows: lab reports which are not correct, were not given to so-called customers and, therefore, they cannot say that trucks, if any, reached their indicated places, were containing sponge iron or unreduced iron (because both look alike). Further, in their daily consumption of more than 100 MT, unreduced iron supplied by Vikram Ispat in the range of 10-20 tons, will not make any difference. So, sale invoices, excise gate passes, delivery orders, transport receipts, etc., cannot alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d erection of machinery and plant will not amount to starting of the business. Business is said to have started only when plant and machinery go into production. Similar observations have been made at several other stages, but, as noted earlier, the test to be applied is that of setting up of business. The business is said to be set up when it is ready to commence production. There might be interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business would be permissible deduction. Thus, the distinction maintained by the Hon'ble Supreme Court and by the Hon'ble Bombay High Court in the decisions cited earlier was not kept in view by the Revenue authorities. They clearly insisted upon the commencement of business for allowing depreciation and other expenses claimed by the assessee. This approach, in our view, was not correct. 30. The assessee has claimed to have set up Vikram Ispat unit, the first unit of its kind in the world manufacturing hot briquetted iron (HBI) using HYL technology. The know-how design of the plant was supplied by Davy Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss Analysis-Module 03 . At pp. 244-245 of the manual it has been stated that the reduction reactions with Co2 at temperature above 570 deg. C are as follows : First step Fe2 03 (hematite) Fe3 04 (magnetite) Second step Fe3 04 (magnetite) Fe (metallic iron) Similarly in the said manual at p. 250 it is state that the reaction for the reduction of iron oxides with H2 at temperature over 570 deg. C is as follows : 3Fe2 03 + H2 = 3Fe2 03 + H2O Fe3 + H2 = 3Fe 0 + H2O Fe 0 + H 2= Fe + H2O The temperature below 570 deg. C is as under : 3Fe2 03 + H2 = 2Fe5 04 + H2O 1/4 Fe3 04 + H2 = 3/4Fe + H 2O 30.2.Without going into great technical details, it is clear from the manual that a reduction can take place at a temperature below 570 deg. C. Again, we find from statement of Mr. A Degyves recorded by the Assessing Officer and available at pp. 39-40 of the compilation C-1. Question Nos. 55 56 are to the following effect : Q. 55 Howmuch time does the raw material take from 90 per cent or more metailisation if reactor plenum temp. is 550, 650, 750 and 850, respectively. Ans. It will depend upon several aspects like the reducibility of the used raw mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of sponge iron; and (3) lab. reports which were not correct, were not given to so- called customers and, therefore, they could not say that truck, if any, contained sponge iron or unreduced iron (because both look alike). Even in case of despatch of unreduced raw material, from the assessee's plant, the documentation (sale bills, delivery challans, etc) will be the same except the nomenclature. We are not shown any technical data to support the Assessing Officer 's conclusion that the assessee could not possibly produce sponge iron on 30th/31st March, 1993, and, therefore, entire claim of having produced and sold sponge iron was fabricated and false. In our opinion, it was necessary for the Revenue authorities to place on record opinion of some technical/competent expert to rebut the material produced by the assessee in support of its claim. But no worthwhile and reliable material to support the basic conclusion that sponge iron could not be produced at a temperature less than 800 deg. C. has been shown to us. 30.5. The Assessing Officer also placed strong reliance on letter dated 31st March, 1993, of Shri P.K. Sen. Shri Sen in the affidavit filed before the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing statements, adopted coercion and exercised undue influences. It is difficult to establish above charge. All the same, we would like to add that the Assessing Officer is a person in authority and is required to discharge quasi-judicial functions. The following questions and answers from the statement of Shri K.P. Shenoy, Senior General Manager (Production) of the unit are relevant and are reproduced below : Q. 3. I am showing you an agreement of Vikram Ispat with Davy Power Gas at 1989 which clearly indicate that DPGI was responsible till the completion of mechanical commissioning of the plant in the light of this. Why this name was not mentioned. While answering the question on 21st September, 1995 also mention the date of completion of mechanical plant. Ans. While giving statement on that day, the question asked was understood. Process commissioning of HBI Plant and hence no mention was made of DPGI who are only responsible for supervision and mechanical commissioning. Except briquetting machines and turbo generator, all major and vital plant parts completed and commissioned by 28th March, 1993. Q. 4. On 28th/29th March, 1993, PGH, Reactor and other vital parts were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of payment for the work done found and is noway connected with mechanical completion of the plant, which I once against reiterate is the responsibility of DI. The fact that you had shown your ignorance as regards certificate issued by DPGI for completion of erection and mechanical commissioning and also demand of any correspondence with various commissioning agencies. It is clear that you have deliberately given wrong statement relevant for ascertaining correct fact. Why necessary proceeding should not be initiated. (Underline by us, italicised in print, to emphasise) 30.8. It is quite clear from above that the Assessing Officer did tell the deponent that he was making a false statement and asked him as to why legal action should not be taken against him. Shri Anil Kumar and Shri Tirumala and other employees have also made similar allegations of exercise of coercion or undue influence supported by affidavits. The Assessing Officer is not only to protect interest of the Revenue, but to perform quasi-judicial functions. He is a person vested with authority and, therefore, his action should not give impression of having obtained information by exercise of undue in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hemicals (P) Ltd. (supra) and CIT v. Forging Stamping (P) Ltd. (supra) wherein the Court observed thus, even the installation of machinery simpliciter was in the special circumstances of the case regarded as part of the operation for setting up and not equivalent to setting up of the business. In the latter case, business was said to have been set up and installed when the assessee received power connection. 30.11. In the present case, the Revenue has accepted that plant was put to use to check whether production unit is in a position to work or not. They have surmised that only raw material came out without any metallisation which had no market (p. 57 of the Assessing Officer 's order). But above findings have no supporting evidence and, therefore, in the light of opinion of experts and events and statements of 15th April, 1993 unchallenged consumption of raw material and other documentary evidence referred to above, we hold that the assessee did produce sponge iron of the quantity mentioned by the assessee. The sponge iron might not have been of standard quality or requisite metallisation or marketable. The plant admittedly developed snags and was closed down on 31st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch is taken into account in computing such total income. It is therefore evident that assessed tax is the tax on the total income determined under section 143(1) or on regular assessment. It is not a tax on total income declared in the return. We , therefore, do not find any merit in the claim of the assessee and the ground is accordingly rejected. 33. Ground No. 5 is for the claim of depreciation as plant on the intake-well, telpher, acid tank, lagoon tank, effluent tank, lime storage tank and false ceiling. The assessee's claim is that all these assets except false ceiling are connected and used in the manufacturing process and plant and machinery for storage for continuous supply of water to works by intake well, of coal by telpher and of acid, lime and effluent discharge by other tanks. False ceiling is provided to control the temperature and humidity of the area where the cloth is usually processed at various stages and avoiding breakage of the fibre and yarn. The Assessing Officer treated all these items as part of the building and allowed depreciation applicable to factory building. The Commissioner (Appeals) upheld the order of the Assessing Officer except for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is to be applied. An item would not qualify as plant even if it satisfies functional test. In this case the tube-well was held to be a plant and the assessee was held entitled to development rebate on the expenditure incurred thereon. In view of the above decisions, in our opinion, the Commissioner (Appeals) was justified in allowing the claim of the assessee for depreciation and development rebate on the intake well. These observations would apply to all the tanks in issue as they are all connected and used for the continuous supply and disposal of water, acid, lime coal, etc. As regards false ceiling also, if the functional test is applied, it is not a mere ceiling of ordinary nature but a ceiling to provide control of the temperature and humidity, which is very essential to avoid breakage of the fibre and yarn. We accordingly accept the claim of the assessee and direct the Assessing Officer to allow depreciation on all these items by treating them as plant and machinery. 35. Ground No. 6 is for the depreciation on shops at Bhiwani, disallowed as the shops were not business assets of the assessee and on the guest house and rest house because of the provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal. 36. Ground No. 7 is for the disallowance of remuneration paid to certain female employees of the assessee on the ground that no services were shown to have been rendered by them. The Commissioner (Appeals) upheld the disallowance by observing in para 5.1 as under : I have considered the submissions made by the appellant. During the course of hearing, the appellant was asked to file some further particulars regarding the qualifications of the above lady employees and the specific job performed by them in the units where they are posted. I also asked the appellant to file before me the service records of the lady employees. The appellant did not file any such information before me, therefore, it is presumed that the appellant is not keeping any service records of these lady employees. In fact, these employees might not have performed any functions in the business of the company. Therefore, the expenditure incurred on them cannot be said to have been spent for the purpose of business, hence the same is not allowable. Therefore, the disallowance of ₹ 65,296 is confirmed. 37. We have heard the parties and considered the rival submissions. Smt. N.K. Jain was appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany. No interference in the order of the CIT (Appeals) is, therefore, called for. 39. Ground No. 9 is with regard to disallowance of presentation articles worth ₹ 9,04,536. The expenditure is on distribution of dry fruits, diaries, calendars, presentation items not carrying the logo of the company and also included cash gifts on marriages and other auspicious occasions of the family of the employees of ₹ 3.44 lakhs. The Assessing Officer accepted the contention of the assessee regarding the marriage gifts, but he did not agree for the other expenditure and held them to be advertisement in nature even though no logo was inscribed on the presentation articles. CIT (Appeals) upheld the disallowance but not under the head `advertisement expenditure' but by treating the expenditure as entertainment as the insertion of Explanation 2 to section 37(2A) of the Act, according to him it included presents and articles in view of the decision of the decision of Himachal Pradesh High Court in the case of CIT v. Mohan Meakin Breweries Ltd. (1991) 192 ITR 134 (HP), Karnataka High Court in the case of Karnataka State Financial Corporation v. CIT (1988) 174 ITR 212 (Kar) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred by the assessee on distribution of dry fruits, diaries, calendars, etc. would not be in the nature of entertainment within the meaning of section 37(3A) of the Act and the Commissioner (Appeals) upholding the disallowance on that ground is not right. This type of expenditure could at best be in the nature of advertisement but in view of the Bombay High Court's decision in the case of CIT v. Allana Sons (P) Ltd. (1995) 216 ITR 690 (Bom) they cannot be deemed to be expenditure in the nature of advertisement in absence of any logo inscribed on the presentation items. The disallowance is accordingly deleted. 41. The next first part of the ground (ground No. 10) is regarding the disallowance under r. 6D on per trip basis and for including the entire expenditure incurred during the course of travelling within the meaning of section 37(2A) of the Act. The first issue covered against the assessee by the decision of the Bombay High Court in the case of CIT v. Aorow India Ltd. (1998) 229 ITR 325 (Bom) and the second issue is covered against the assessee by the decision of the Special Bench of the Tribunal in the case of the Sundaram Finance Ltd. v. IAC (1984) 18 TTJ (Mad) 34 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al paper. The Saicor Mill is the single largest plant in the world for production of dissolving grade pulp. (2) Zimbabwe (10th July, 1992 to 11th July, 1992) During the return journey from South Africa, the undersigned visited Zimbabwe, Discussions were held with a prominent industrialist of the country to explore the possibility of take over the management of sick industrial units. The Government of Zimbabwe was having an intention to privatise many of the industries in the Parastatal sector. The undersigned met the Minister for Industries of Zimbabwe Government, and other officials also had discussions with the group chief executive of the Zimbabwe Banking Corporation Ltd. He also visited Hunyani Paper Packing Ltd. (3) Tanzania (12th July, 1992 to 16th July, 1992) The company has been engaged in the manufacture of viscose staple fibre (VSF), the raw material for which is pulp manufactured at Harihar and Mavoor, Presently, the indigenous availability of pulp being not sufficient, the company has to import pulp at higher cost. However, there is uncertainty in the supply of imported pulp in required quantity. The pulp industry in India is also facing acute shortage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for the purposes of business of the assessee. The disallowance of ₹ 3,02,522 in the case of Mrs. Parikh and of ₹ 91,812 in the case of Mrs. Rungta is accordingly deleted. The expenditure under item No. 5 is with regard to expenditure of ₹ 1,06,517 incurred on travelling of V.M. Sand and ₹ 1,78,492 incurred on travelling of Mr. S.G. Menon and S. Mehta. These two travellings were in respect of inspection of aircraft which was taken by the assessee on lease for 5 years from 25th September, 1993 from P.T. Indo Bharat Rayon, Jakarta as approved by the Government of India. As the expenditure is not for acquiring any capital asset but for taking an asset on lease for a short period of 5 years, the expenditure cannot be held to be capital in nature and has to be allowed as a revenue expenditure. A report of the visit is appearing at p. 118 of the paper-book, which clarifies that the purpose of the visit to these three places was for taking the aircraft on lease for 5 years. The disallowance of ₹ 1,78,106 is accordingly deleted. 45. The next expenditure under item No. 5 is ₹ 80,885 being the expenditure incurred by Shri S.K. Saboo, which was disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure was being allowed by the Commissioner (Appeals) in the appeal for assessment year 1980-81 to 1989-90 but in the year under appeal, the Commissioner (Appeals) took a different view of following the decision of the Supreme Court in the case of V. Jaganmohan Rao . v. CIT Excess Profits Tax (1970) 75 ITR 373 (SC), wherein it was held that if the payment was made to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be a capital payment and not a revenue payment. He also referred to the two other decisions of the Supreme Court in the case of Dalmia Jain Co. Ltd. v. CIT (1971) 81 ITR 754 (SC) and in the case of Ghansham Singh v. CIT, (1983) 141 ITR 601 (Mad). He also referred to the decision of the Bombay High Court in the case of Hardiallia Chemicals Ltd. v. CIT (1996) 218 ITR 598 (Bom), wherein it was held that the assessee when pays certain amount in addition to the lease consideration for evacuating the unauthorised occupants of the land, the amount would be capital in nature as it was made to perfect the interest of the assessee in the land. He also referred to another decision of the Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the words for the removal of doubts . These words, it is evident, are on a bare reading of the Explanation and we do not know from where these words have been imported by the Assessing Officer . These words are there only in Explanation 1 and Explanation 3 and not in Explanation 2. The Commissioner (Appeals) noting the fact that similar claim of the assessee has been accepted by his predecessor in the appeals for 1983-84 to 1985-86, which decision was being followed till assessment year 1988-89, took a contrary view in this year, as according to him, the said decision of the Andhra Pradesh High Court helps the Revenue and not the assessee. He also relied upon the Calcutta High Court in the case of CIT v. K.L. Tirani Co. Ltd. (1996) 218 ITR 149 (Cal). 49. We have heard the parties and considered the rival submissions. Before the introduction of Explanation 2 by the Finance Act, 1989, with retrospective effect section 43B was held to be applicable only when a particular liability had become payable during the year under consideration but was not paid. It was held to be not applicable when the amount did not become payable and the solitary decision on this issue was that of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mills Co. Ltd. v. CIT, (1980) 123 ITR 429 (SC). This very issue came up before the Jaipur Bench of the Tribunal in the case of ITO v. Gupta Traders (1996) 54 TTJ (Jp) 493 : (1995) 55 ITD 98 (Jp) and the Tribunal on the analogy of the ratio of the decision in the case of Mahalakshmi Sugar Mills Co. (supra), held that when a statutory liability has to be allowed as a deduction only on actual payment, the interest thereon for the delayed payment of the liability also will have to be allowed on actual payment only and the analogy so drawn sounds to be logical and fits into the philosophy behind the provisions of section 43B of the Act. The disallowance of interest, therefore, was rightly made by invoking the provisions of section 43B. 51. The next question, therefore, that arises is whether the surface rent and the liability for royalty is a tax, duty, cess or fee. The surface rent liability is arising in pursuance of the agreement dated 11th November, 1992 and 30th November, 1994, between the State Government of Madhya Pradesh and the assessee-company under the provisions of Mines and Minerals (Regulations Development) Act, 1957, read with Mineral Concession Rules made thereunde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 1964, the appellant was required to pay cess at the rate of 45 paise per rupee an the said imposition was with retrospective effect along with local cess surcharge under section 116 of the Act. The contention of the assessee was that the cess on royalty cannot be levied as it was beyond the constitutional power of the State Government. In paras 33-34 of the judgment, their Lordships held that royalty is directly relatable only to the minerals extracted and on the principle that the general provision is excluded by the special one, royalty would be relatable to Entries 23 and 50 of List II. In the aforesaid view of the matter, their Lordships held that royalty is a tax and such a cess on royalty being a tax on royalty is beyond the competence of State legislature because section 9 of the Central Act covers the field and the State legislature denuded of its competence under Entry 23 of List II. In any case their Lordships opined that cess on royalty cannot be sustained under Entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land. The said view was contended to be erroneous in the subsequent case of Mahalakshmi Fabrics Mills Ltd., (supra) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xminarayana Mining Co., v. Taluk Dev Board AIR 1972 Mys. 299. In that case the Court was concerned with the Mysore Village Panchayats and Local Boards Act, 1959. Under the said Act the Board had sought to levy tax on mining activities carried on by the persons holding mineral concessions. The Mysore Court had observed that once the Parliament made a declaration by law that it is expedient in the public interest to make regulation of mines and minerals development under the control of the Union to the extent to which such regulation and development is undertaken by the law made by the Parliament, the power of the State legislature under entries 23 and 50 of List II got denuded. It would, therefore, be not said that even after passing of the Central Act, the State legislature by enacting section 143 of the Act could confer power of the Taluk Board to levy tax on the mining activities carried on by the persons holding mineral concessions. The Constitution Bench then noted that at p. 306 of the report of Mysore case it was held that royalty fixed under section 9 of the Mines and Minerals Act was really a tax. It must be kept in view that this decision of the Mysore High Court was notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w projects including carbon black joint venture in Egypt. The assessee's contention that these expenses were incurred by expansion of the assessee's existing business was not accepted by the Assessing Officer on the ground that the expansion of business constitutes a new industrial undertaking and, therefore, the expenditure was capital in nature. The Commissioner (Appeals) upheld the disallowance by referring to the decision of the Kerala High Court in the case of Cochin Refineries Ltd. (1988) 173 ITR 461 (Ker), The Gujrat High Court's decision in the case of CIT v. Maniklal Industries Ltd. (1977) 107 ITR 133 (Guj) and in the case of Saurashtra Cement Chemical Industries 64 Taxman 522 , the Calcutta High Court's decision in the case of Ashoka Marketing Ltd. v. CIT (1994) 208 ITR 941 (Cal). 54. We have heard the parties and considered their rival submissions. The claim in our opinion cannot be allowed in view of the Bombay High Court's decision in the case of CIT v. J.K. Chemicals (1994) 207 ITR 985 (Bom) wherein the assessee-company was carrying on business of manufacture of fertilisers and had started a factory at Bombay where it manufactured a fertiliser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 93,740 Eastern Spg. Fruits sweets to hospital patients 24,925 Stipend and books to students 39,885 64,810 Vikram Cement Telephone registration Exps. 1,000 Chemical Divn. Sangeet Kala Kendra 5,000 1,96,767 The expenditure of ₹ 32,217 was disallowed by the Assessing Officer on the ground that the complete details of the expenditure have not been produced. It was upheld by Commissioner (Appeals) on that ground. Before us also no further details have been furnished. We, therefore, uphold the disallowance. As regards the expenditure of ₹ 72,197 on rural developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee for sundry expenses of ₹ 2,35,196 which were in the nature of contribution to local organisations. The expenditure consists of the amount contributed to various associations other than charitable donations which have been considered for the purpose of deduction under section 80G of the Income-tax Act. The claim of the assessee is that these contributions are necessary to earn the company, the goodwill of the local populace which ensured smooth working of the factories. The disallowance was made by the Assessing Officer and upheld by the Commissioner (Appeals) by stating that the expenditure was essentially in the nature of donations and since a specific provision already exists in the Act to take care of and govern the allowability of payments made in the nature of donations, only such payments which satisfy the condition laid down under section 80G can be allowed as a deduction. Admittedly, these contributions were not satisfying the conditions of deduction under section 80G. The disallowance was upheld and in our opinion rightly so as the assessee has not brought any material on record to establish any connection of these expenditure with the carrying on of the bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tters from the parties to whom the commission and brokerage was paid. Assessee failed to produce such evidence and, therefore, by implication the assessee-company accepted that the payment was not genuine. Assessee 's contention is that it had furnished necessary evidence before the Commissioner (Appeals) which was contained in pages starting from 127 to 232 of the compilation filed before him but the Commissioner (Appeals) failed to consider the same. The details have been filed before us also. 60.1 After hearing the parties we are of the opinion that the Commissioner (Appeals) was not justified in holding that disallowance by stating that assessee had not brought any evidence on record for the genuineness of the payment. Assessee had filed host of material which should have been gone through before rejecting the claim of the assessee. Looking to the facts and circumstances of the case, in our opinion it would be in the interest of justice that the order of the Commissioner (Appeals) as well as that of the Assessing Officer be set aside and the matter be remitted back to the file of the Assessing Officer for considering the details furnished/to be furnished by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the aforesaid interest granted to the assessee, the amount which has been withdrawn subsequently. We direct accordingly. 63. Next ground (No. 23) is with regard to disallowance of the claim of the assessee under section 80HHC of the Act on the ground that the assessee had not filed the required form for the company as a whole as against the certificate filed by the assessee in respect of each unit having export turnover. There is no dispute as regards the eligibility of the assessee for 80HHC deduction. There is also no dispute that assessee had furnished the required certificates in Form No. 10CC, AC. The dispute is only with regard to fact that whether the said certificate is to be furnished by taking the figures of the company as a whole or it is to be submitted with regard to each unit for which the assessee has made a claim. The assessee's request is that as per its understanding the said prescribed form is required only unitwise but if as per the Department's view if the certificate was to be obtained by the company as a whole it should have been given an opportunity to obtain the certificate. The disallowance of the claim without giving any such opportunity in o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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