TMI Blog2010 (10) TMI 1084X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income tax (Appeals) was not justified in deleting the disallowance of ₹ 15,59,046/- out of interest payments for non business purposes. The burden was on the assessee to prove the genuineness of the claim; 4. The learned Commissioner of Income tax (Appeals) erred in holding that the amount of ₹ 32,69,65,146/- being advance made to Gujarat Prestrop Electricals Ltd. [GPEL] towards the liability of financial institutions, was for business purpose and that the claim of write off of the same was admissible. The learned CIT(A) also erred in allowing write off of ₹ 4,66,20,000/- on account of reduction in the value of equity investments in the said Gujarat Prestrop Electricals Ltd. The Commissioner of Income tax (Appeals) ought to have appreciated that the assessee company had no normal business transactions with GPEL. 5. The learned Commissioner of Income tax (Appeals) erred in holding that actual payment of bonus pertaining to A.Y 2001- 02 should be allowed in A.Y 2002-03 in total disregard to provisions of sec.43B, which allow education in respect of payments which are otherwise allowable and made on or before the due date for furnishing the return lu/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome from house property. It was further noticed that no part of depreciation on corporate building and repairs and maintenance has been disallowed by the assessee. Accordingly, AO worked out the depreciation and also worked out the repair expenses and ultimately disallowed a sum of ₹ 31,66,617/-. 4. On appeal, the ld. CIT(A) adjudicated the issue vide para-4 which is as under: 4. The next ground is relating to the disallowing ₹ 3166617/- being depreciation and repairs expenses incurred in respect of a building let out by the assessee to Apollo International Ltd. in Gurgaon and ₹ 50000/- towards building let out to others. The AO s view is that the let out portion of the building is not used for assessee s own business. Since depreciation is being claimed on the basis of use wholly and exclusively for business, the assessee should not be entitled to it in proportion. The claim of the AR and appellant is that they are entitled to depreciation on the entire block of assets which constitutes the building. Under the concept of block of assets, proportionate disallowance cannot be made. There has been addition and reduction in the total block of assets under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se deed were to be borne by the assessee , i.e., lessor. The question arose whether such stamp duty charge were allowable expenditure, the Hon ble Delhi High Court observed as under:- The legislature has used the word namely in section 24 of the I.T.Act, 1961, and this shows that the heads of expenditure whereof deduction can be claimed in the computation of income from house property are exhaustive. If a particular type of expenditure is not specifically provided to be deductible, deduction thereof cannot be claimed from out of the annual value. Neither section 23 nor section 24 provides for the deduction of the expenses incurred towards stamp duty or registration in respect of the lease of the house property for a period of five years, in compiling its income from the house property . On the basis of the above observation, it was held as under:- Held accordingly, that the assessee-firm was not entitled to deduction of a half share of the stamp duty and registration charges borne by it in respect of a lease of its house property for a period of five years, in computing its income from the house property . 124. Thus from the above decision, it is clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as the Department has not filed any appeal as noted in the earlier order of the Tribunal. The relevant para 23 is as under:- The second issue is regarding disallowance of ₹ 1,68,857/- as deduction being payments made to the clubs in the interest of furthering the business of the assessee . According to the Assessing Officer an amount of ₹ 15,12,898/- was shown as expenses towards clubs. These expenses were not treated as business expenses and hence were added back. However, the assessee claimed that such expenses were admissible as they were incurred in the regular course of business and are allowable u/s. 37(1) of the Act. It was also submitted that for the assessment year 1996-97, the CIT(A) has set aside a similar disallowance to examine whether such expenses were of a personal nature or were in the nature of donation or any other contribution by the assessee. The ld. Counsel for the assessee contended that the Assessing Officer after verification had allowed the full amount for the assessment year 1996- 97. On appeal, the CIT(A) found that the break up of expenses filed by the assessee was identical in nature to the expense incurred in the assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n I.T.A.No.43/Coch/2001 and strongly relying on the order of the AO. He also submitted that since assessee has a mixed pool of funds, therefore, interest expenses have been correctly allocated on proportionate basis on the investment in tax free funds and as such rightly disallowed. 16. On the other hand, ld. counsel of the assessee submitted that these are trade assets as per the decision of the Hon'ble Supreme Court in the assessee s own case reported in 255 ITR 223 and, therefore, no interest could have been disallowed. He further submitted that the earlier decision by the Tribunal was rendered on the basis of the decision of the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. Ors. In ITA NO.8057/M/03 Ors., dated 20th October, 2008, wherein it was held that section 14A is applicable to all heads of income and Rule 8D is of retrospective nature. However, this Special Bench decision has been reversed by the Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. holding that Rule 8D does not have retrospective effect and accordingly the earlier decision of the Tribunal would not apply. He also referred to another unreported decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed for the acquisition of shares is admissible only if in trade and the assessee is engaged in trading in shares. So far as acquisition of shares in the form of investment is concerned the only benefit derived is dividend income which is not assessable under the Act, disallowance u/s.14A is squarely attracted Thus, it is clear that the earlier decision of the Tribunal is not applicable in this year because Rule 8D which was held to be retrospective in nature by the Special Bench of the Tribunal in the case of Daga Capital Management Pvt. Ltd. Ors. [supra] which was followed, has itself been reversed by the Hon'ble Bombay High Court in the case of Godrej Boyce wherein the rule was held to be not of retrospective in nature. In that case it was further held that in earlier year only a reasonable sum of expenditure which was directly related to earning exempt income could be disallowed. Secondly, the Hon'ble Kerala High Court in the case of Leena Ramchandran [supra] has clearly held that if shares are purchased on account of trade assets, then sec.14A is not attracted. However, it is not clear from the orders of the lower authorities whether the shares were purchased ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een the business operations of the assessee and that of the GPEL. He observed that GPEL was a separate entity and were liabilities created by GPEL and, therefore, those liabilities cannot become the business expenditure of the promoter/guarantor i.e. the assessee company. In this background, according to him, the loss could not be allowed u/s.28 of the Act. 19. It was submitted before the AO vide letter dated 27-12-2005 that investments in GPEL by making payment as a guarantor towards settlement of creditors of GPEL would be treated as business carried on by the assessee and in this respect reliance was placed on the decision of the Apex Court in the assessee s own case for the A.Y 1998-99 reported at 255 ITR 273. AO observed that in that case the issue was whether investment made in the units of UTI could be said to be business of the assessee or not. He further observed that investments in the units of UTI could not be equated with the repayment of creditors of other company. He also observed that any profit or loss from investments in units and shares has been treated as income from capital gains in the subsequent year and accordingly the argument that GPEL should be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 1305.69 lakhs was only credited to their P L account and the principal part of loan paid by Apollo Tyres on behalf of GPEL as per the scheme was transferred from the bank s account to the accounts of Apollo Tyres and shown in their balance sheet as an unsecured liability to Apollo Tyres Ltd. Hence, according to the accounts maintained by GPEL, the liability was not relinquished but it was shifted from the banks to the guarantor viz., Apollo Tyres. In the above background, AO denied the claim for deduction of ₹ 32,69,65,146/-. 23. On appeal, ld. CIT[A] decided the issue vide paras 11 and 12. The relevant portions of those paras are as under: 11 . But I find that the AO has not gone into the crux of the facts stated above. As far as the facts are concerned, the following situation emerge:- (i) It was an authorised and legitimate business decision. (ii) It is a joint venture by the Government of Gujrat, not an arrangement to siphon money or park funds, neither the AO has established this nor any such situation emerge from the facts. (iii) And most importantly, both the payments and reduction in value of investments was directly out of the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of GPEL because purchasing of a company cannot be business of any company. He argued that whatever was given by ATL to GPEL or its creditors was basically a contribution on account of capital to GPEL. Even the settlement was reached with its creditors by the GPEL and it cannot be said that the assessee company settled the creditors of GPEL. The role of ATL i.e. the assessee company was limited to only financing the settlement. In fact, the assessee company has made an investment and the fate of that investment would be known in future and, therefore, presently the investment made by the assessee cannot be treated as loss. 25. He also emphasized that even the Board resolution for writing off this investment was passed on 26-6-2002 i.e. much after closing the accounts and, therefore, this claim, in any case, could not have been made in this case. He also submitted that the claim cannot be entertained even as bad debt because the assessee company has not accounted for investment made in GPEL while determining the profits of the assessee company. 26. On the other hand, ld. counsel of the assessee submitted that the claim made by the assessee has to be considered as g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company had power to amalgamate or enter into partnership or start new joint venture for sharing of the profits and GPEL was established under that power. 27. He submitted that assessee company was already in the process of rehabilitation of other group companies, such as, BST Mfg. Ltd, Universal Steel and Alloyed Ltd. and such pre-rehabilitation schemes were approved by the Board of Directors of the company. He submitted that deduction on account of write off of the outstanding loans of Universal Steel and Alloyed Ltd. has already been allowed by the Tribunal in A.Y 1996-97 on the grounds of business expediency [I.T.A.No.43/Cochin2001 (copy filed)]. He submitted that the above noted background and the factual matrix would show the nature of multi dimensional activity undertaken in a regular and systematic manner by the assessee company as per the objects of the company the formation of GPEL was also a step in that direction. 28. Coming to the facts of the write off he pointed out that GPEL was incorporated in June 28, 1990 and pursuant of the grant of letter of intent by the Government of India for manufacture of copper clad laminates the assessee company entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in the case of S.A.Builders vs. CIT [288 ITR 1]. However, in the next year i.e. A.Y 1999-2000, AO himself accepted the concept of business expediency and no disallowance of interest was made for interest free loan given to GPEL. 30. He further pointed out that being main promoter of GPEL, ATL also stood guarantor for various term loans availed by GPEL from various banks and financial institutions which were duly approved by the Board of Directors, the operations of GPEL which were continuously being monitored by the assessee company, turned unsatisfactory right from inception and GPEL incurred heavy cash losses in F.Yrs. 1993-94 and 1994-95 leading to liquidity problems and working capital constrains. Ultimately, GPEL made a reference to Board for Industrial and Financial Reconstruction (for short BIFR). The BIFR at its meeting held on August 11, 1997 declared GPEL as sick industrial company and appointed IDBI as the Operating Agency to formulate a scheme for revival. A draft rehabilitation scheme dated October 8, 1999 was prepared and circulated by IDBI, copy of which has been placed at pages 188 to 202 of the paper book. This scheme was ultimately approved by the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary of the sister concern and assessee had assured the bankers that it was the policy of the assessee company that no lending institution would suffer loss in the business dealings at the behest of the assessee, then payments on account of such grants would amount to honouring the commitments of the assessee company. Therefore, following this decision, the Tribunal has already decided the issue in favour of the assessee. 32. In any case, from the above facts it becomes clear that the assessee company is the main promoter of GPEL and as a promoter of GPEL the assessee is doing business through GPEL because the promoter is basically a pre incorporate agent, whereas the managing agent is a post incorporate agent. Considering the basic reality of the situation, it could be said that the assessee company was virtually in partnership with the Government of Gujarat through GIIC for running the business of GPEL. He submitted that business as defined in sec.2(13) of the I.T.Act, would include any trade, commerce, or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. This definition is of wide import and is inclusive and not exhaustive. He argued that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would encompass even non pecuniary benefit floating from the conduct of the business activity. In this regard he read out the following observations: a) While construing the word profit as used in section 2(15) of the Act, it was observed by the Hon'ble Supreme Court in the case of Sole Trustee, Lok Shikshana Trust vs. CIT 101 ITR 234 held that- By the use of the expression profit motive it is not intended that profit must in fact be earned. Nor does the expression cover a mere desire to make some monetary gain out of transaction or even a series of transactions. It predicates a motive which pervades the whole series of transactions effected by the person in the course of his activity. In the case of CIT vs. Lahore Electric Supply Co. Ltd. (1966) 60 ITR 1 (SC), Sarkar J., speaking for the majority, observed that business as contemplated by s. 10 of the Indian Income Tax Act, 1922, is an activity capable of producing a profit which can be taxed. The Court further observed that when business activity is carried out, profit motive as a normal incident is implied unless explicitly excluded. b) In the case of Indian Chamber of Commerce vs. CIT [101 ITR 796] (S. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ering into this collaboration agreement the assessee has been able to enhance its business and, therefore, there is definitely synergy between this project and the tyre business of the assessee. 34. The ld. counsel of the assessee submitted that though GPEL cannot be called subsidiary of the assessee, but still it cannot be denied that assessee had deep interest in the affairs of this joint sector company and was also made responsible for day-to-day operations of this company. In fact, the assessee company wanted to embark on diversification of its business activities to new areas of industries and this was the step in that direction the loan and guarantee given to GPEL are thus on the basis of commercial expediency and even the write off of the same is on the basis of commercial expediency and in that sense the claim should be alternatively allowed u/s.36(1)(vii) as bade debt or as revenue expenditure u/s.37(1). In this regard he mainly relied on the decision of the Hon'ble Supreme Court in the case of S.A. Builders vs. CIT [supra]. He particularly emphasized the observation of the Supreme Court wherein it was held that the expression for the purpose of business is wider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany in which the assessee was substantially interest, the debt must be regarded as directly springing from its business activity and the connection cannot be considered to be too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman. The amount of ₹ 1,30,925 was deductible as a trading loss for the year in question. He submitted that similar view was taken by the Hon'ble Bombay High Court in the case of CIT vs. F.M.Chinoy and Co. (P) Ltd. [74 ITR 780] and CIT vs. Investa Industrial Corporation Ltd. [119 ITR 380] (Bom). Similarly, the Hon'ble Supreme Court in the case of Essen P. Ltd. vs. CIT [65 ITR 625] wherein some money was advanced to the managed company and also certain guarantees were given, the same were held to be allowable as bad debt under the old I.T.Act. Again the Hon'ble Supreme Court in the case of CIT vs. Amalgamations Pvt. Ltd. [226 ITR 188] wherein the assessee had given guarantees for loan taken by the subsidiary company and such subsidiary company having gone into liquidation, the loss was held to be allowable expenditure. Again, the Hon'ble Calcu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tablishing a foothold in the State of Gujarat, was definitely in the over all business synergy of the assessee company. In fact, starting of GPEL was not with any altruistic motive or fun or sport or pleasure. It was mainly taken up with over all business plans of the assessee company. Similarly, there is no force in the objection of the AO that loss was of capital nature because the loss has been incurred in the course of carrying on of the business of the joint venture and it was not for acquisition of any capital asset. Similarly, there is no force in the objection that assessee is not in the business of banking or money lending and by giving guarantees for a company which is not subsidiary the claim is not tenable because GPEL was promoted by the assessee company in which assessee was deeply interested. The control and management operations of GPEL were with the assessee company in terms of joint shareholders agreement and in any case starting of this project and lending money was because of the commercial expediency as observed by the Hon'ble Supreme Court in the case of S. A. Builders vs. CIT [supra]. Regarding the objection of the AO that GPEL has not gone into liquidati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as envisaged in clause III B(6) of object incidental or ancillary to the attainment of main object of the memorandum of association. In fact, the ratio of the decision of the Hon'ble Supreme Court rather supports the case of the assessee. 37. While concluding he again emphasized that the issue is basically covered by the earlier decision of the Tribunal in assessee s own case vide I.T.A.No.43/Coch/01 for A.Y 1996-97 wherein vide para-16at page 13 the Tribunal while referring to the decision of Spencer Co. [supra] and Dungan Agro Inds. [supra] allowed the write off of the loans on account of advances and bank guarantees given to revive the group company i.e. Universal Steel and Alloyed Ltd., which was also declared as a sick industrial unit. 38. In his rejoinder, the ld. CIT DR submitted that the decisions cited by the ld. counsel of the assessee are not applicable because GPEL was not a subsidiary of the assessee company. He then referred to clause-11 of the memorandum of association given at page-301 of the paper book and submitted that everything permitted by the memorandum cannot mean that assessee would have right to do business in such fields. Memorandum is basica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of entire principal term loan and 50% of the simple interest to banks and financial institutions the debenture holders were also required to waive 50% of the interest. The Government of Gujarat was required to (i) defer the payment of purchase tax on the basis of interest free deposits, (ii) to defer sales tax liability, (iii) to defer octroi duty and (iv) to defer electricity duty. The Central Government to grant (i) an exemption from sec.41(1) of the Income Tax Act, (ii) an exemption from sec.36(1) of the Act, (iii) to exempt the company from the provisions of sections 100 to 102 of the Companies Act, 1956 and (iv) to exempt the company from the applicability from the provisions of sec.81A of the Companies Act. 40. The assessee company was further exempted from compliance of sec.372 of the Companies Act and from SEBI Regulations. Even Ahmedabad Electricity Corporation was required to make minimum demand charges and penalty thereon as well as to ensure uninterrupted power supply to GPEL. The equity capital was also required to be written down by 90%. In view of this scheme, assessee company made payments in the form of guarantees and/or payment of loans and interest c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are required to find out whether assessee s claim is allowable. For this, we need to look at the proper aspect of the whole issue. The assessee is a company engaged in the manufacture and sale of tyres and tubes but at the same time it is authorised by clause IIIB(6) of objects incidental or ancillary to the attainment of the main object which reads as under: 6. To amalgamate, enter into partnership or into any arrangements for sharing profits, union of interests, co-operation, joint-adventures, or reciprocal concessions or for limiting competition with any person or company carrying on or engaged in or about to carry on or engage in or which can be carried on in conjunction therewith or which is capable of being conducted so as to directly or indirectly benefit the Company. The above clause clearly shows that to meet the aspiration of becoming a diversified company the above clause authorised it to enter into any partnership or arrangement to start any business. Therefore, for getting into the new business a letter of intent was got issued from Government of India to start new business of production and manufacture of copper clad laminates and the company known as GP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ired to exempt the company from the provisions of sections 100 to 102 of the Companies Act regarding alteration/deduction of share capital; vi. Further it was required to grant exemption from the provisions of sec.81A of the Companies Act and compliance of SEBI guidelines for issue of optional convertible debentures. vii. The government was also required to grant exemption to ATL i.e. the assessee company from compliance of provisions of sec.370A of the Companies Act; viii. The Ahmedabad Electricity Corporation was required to waive minimum demand charges and penalty from the date of discontinuation to the date of reconnection and was further directed to ensure uninterrupted power of supply. ix. The assessee company was specifically required to bring in capital of ₹ 291 lakhs towards the rehabilitation scheme. The payment made by the assessee is, in fact, towards compliance of the Rehabilitation Scheme. It clearly shows that the assessee company was trying to rehabilitate the operations of the GPEL but still the same could not be revived. Therefore, in addition to the above compulsions by the order of the BIFR, the assessee company was further require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. From the above observations it become clear that claim has to be allowed even if it is not necessary to make such payments if the payments had been made voluntarily on the grounds of commercial expediency. Further it is not necessary that such business should be that of assessee itself. In the case before us though the amounts have been made in respect of GPEL but basically assessee was trying to establish the new business through GPEL and was also trying to achieve the larger business interest by establishing further factory in the State of Gujarat and it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. The ld.Counsel for the assessee contended that the loss arising out of business activity is allowed as deduction under section 28/37 of the Act provided the loss should be incidental to the carrying on of the business and should arise from the carrying on the business. The loss should be a revenue loss and not capital loss. The assessee company had initiated steps to revive group companies like Universal Steel and alloys Ltd. (USAL) which was declared as sick industrial unit. The assessee company had advanced money to it and has also furnished corporate guarantees to the bankers of USAL on the directions of BIFR. On appeal, however, the CIT(A0 directed the Assessing Officer to examine both the items and to that extent, he restored the matter to the file of the Assessing Officer. 16. We have heard the rival submissions and perused the material available on record. The ld. Counsel for the assessee made an exhaustive interpretation of `business . For this proposition, the ld. Counsel for the assessee relied on various case laws by various High Courts and supreme court. Prominent among them is the decision of the ITAT, Chennai Bench in the case of M/s.Spencer Company L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his view it was at best a capital loss which did not come within the scope of s. 12B of the 1922 Act. In making the assessments for the years 1959-60 to 1962-63 the Income Tax Officer treated the receipts from the liquidator as income as a protective measure. The Tribunal held that the assessee- company had guaranteed the loan in the course of carrying on its own business and that the loss was clearly admissible as a deduction. But since the assessee-company had received the last of the payments from the liquidator in the previous year relevant to the assessment year 1962-63, it was held that the balance of ₹ 4,23,256 remaining unrecoverable represented the real business loss allowable for the assessment year 1962-63. This was upheld by the High Court. On appeal to the Supreme Court by the Revenue Held, dismissing the appeal, that the assessee company had incurred the loss in carrying on its own business which includes furnishing guarantees to debts borrowed by its subsidiary companies. The assessee-company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators which was received in the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue is as under: Coming to question Nos. 5 and 6, with regard to the disallowance of ₹ 15,40,264, the AO and the CIT(A) have disallowed this deduction on the ground that no material was placed before them by the assessee to establish that the amounts were irrecoverable. The Tribunal, on the other hand, has dealt with this question from two angles-firstly, that the deduction was disallowable since the assessee had shown this amount after the close of the accounting year as on 13th May, 1982; and, secondly, because the assessee was not in the business of money-lending. On both the counts, we disagree with the Tribunal for the following reasons. It is immaterial whether the bad debt is shown after the close of the accounting year or during the accounting year itself. A Division Bench of this Court, in the case of CIT vs. United Bank of India (1993) 69 Taxman 505 (Cal), has held as under: The accounts of a company are generally made up for every year after a particular date at a later point of time. A company is entitled in law to finalise later as to what was the position of its accounts up to a particular date. A company can similarly finalise its accounts for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was under any legal obligation to finance the selling agent or to guarantee any loans advanced to the selling agent by a third party. It is incomprehensible in what manner the guaranteeing of the loan advanced to the selling agent indirectly facilitated the carrying on of the assessee's business. It is equally difficult to appreciate the observations of the High Court that it was in the larger interest of the assessee's business that the guarantee was given. In our opinion the view of the Appellate Tribunal was based on a complete misapprehension of the true legal position. The High Court also fell into the same error. The allowance which was claimed did not fall within s. 10 (2)(xi). No attempt was made nor indeed could it be usefully made to claim any allowance under s. 10(2)(xi) of the Act. For the reason given above the correct answer to the question referred should be in the negative and against the assessee. The appeals are thus allowed. From the above it is clear that the claim was made only as a bad debt. No other provision was relied on. Moreover, there was no privity of contract or any legal relationship between the assessee and the selling agent. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court decision in 256 ITR 626, 222 ITR 83 and the famous McDowel decision 158 ITR 148. All these decisions held that a legitimate tax planning is allowed and cannot be disallowed unless it is established that it has been done with an ulterior motive. The overriding fact remains that there is no restrictive provisions in sec.43B that the deduction cannot be allowed in the year of payment if it has been made before the due date for filing the return for the previous year. I am, therefore, inclined to fully agree with the appellant that the claim of bonus payment is to be allowed in the current year. The appeal on this point is allowed. 53. Before us, ld. CIT DR strongly supported the order of the AO and submitted that when payment was made in the earlier year only, assessee could have easily claimed the deduction in that year. 54. On the other hand, Ld.counsel of the assessee referred to the cross objection filed by the assessee company and submitted that payment has been made in the next assessment year i.e. 2003-04 as the assessee is making payment of bonus generally on the occasion of Onam which is a big festival in Kerala. He argued that ld. CIT(A) has clearly obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the provision clearly shows that deduction on account of any of the items mentioned in sec.43B would not be allowed unless and untill the payment has been made and the same is allowable in the year in which payment has been made irrespective of the assessment year in which liability for the same has been incurred and recognised by the assessee by the method of accounting adopted by him. Therefore, it is clear that items referred to in sec.43B can be allowed only if payment has been made and the same are allowable in which payment has been made. Since assessee has been making payment on account of bonus on the occasion of Onam which is a most important festival in the State of Kerala and has been consistently claiming deduction of payment of bonus only in the year of payment. This fact becomes clear from the assessment order because no claim has been made in the A.Y 2003-04 on the basis of proviso to sec.43B. 57. The proviso to sec.43B gives further concession that if payment in respect of any of the items referred in sec.43B is made in a particular year before the due date of filing of the income tax return, then such claim can be made in the earlier year also for which re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the Asst Year 2001-02 on the following assets used at HO and its branches i. Motor Cars ₹ 1,85,29,000 ii. Computers ₹ 3,00,85,000 iii. Other office building furniture ₹ 1,53,80,000 iv. Other office assets excluding marketing Assets Gross amount ₹ 9.76 Crore Estimated at 50% ₹ 4,88,00,000 Total ₹ 33,84,83,300 Expenses attributable to Baroda Unit in the ratio of production being 45% as adopted by the assessee ₹ 15,23,17,500 Add: 1) Finance charges relating to Baroda ₹ 22,38,00,000 Unit as allocated by the assessee [41.34%] 2) Interest on term deposit received which was netted off against finance charges and assessed as income from other sources-Rs.1.2 Crores (2.89-1.69) :41.34% ₹ 49,60,800 3) Premium o redemption of debentures Not debited to P L account claimed 27.95 Lakhs 41.34% ₹ 11,55,400 Total ₹ 33,22,33,700 Expenses attributable to Power Generation Unit at Baroda @ 3.77% as stated supra ₹ 1,44,10,200 ========== 59 This issue has been adjudicated by the ld. CIT[A] vide para-15 which is as under: 15. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an work even when the Baroda unit is not working and in that re-assessment head office expenses have not been allocated and, therefore, keeping the principle of consistency factual effect in earlier year s order should be adopted in this year also. In this regard he also referred to the decision of the Hon'ble Madhya Pradesh High Court in the case of Prakash Chandra Basant Kumar 276 ITR 664 and the decision of Hon'ble AAR in the case of National Fertilizer Ltd. 142 Taxman 5. 62. He argued that for computing the profits of an undertaking eligible for deduction u/s.80IA, only the profit of the undertaking has to be computed. He argued that head office expenses would mainly be in relation to the marketing division. This will have no relevance to the production of power. Therefore, such expenditure cannot be allocated. Similarly, the other important activity carried out by the head office would be in respect of procurement of material. Issues like procurement of technology etc., are handled at the head office level which have no relevance with the production of power. Therefore, there is no rational in allocation of the head office expenses to this unit. 63. We have c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be of the common nature. It has already been observed that no allocation of interest has been made though neither AO has given any finding of fact whether power generation unit was acquired from assessee s own funds or it was financed from the borrowings. Considering the over all aspects of the case, we are of the view that the AO has allocated the sum of ₹ 15,23,17,500/- being 45% of the total expenses towards Baroda unit. As observed by us, that the major expenditure on account of marketing and procurement of material etc., may not have any relevance with the power generation unit and, therefore, allocation of these expenses on the basis of the turnover may not be appropriate. Considering the over all circumstances, we are of the view that if a sum of ₹ 10 lakhs is allocated out of the expenses of this power unit that would meet the ends of justice. However, in addition to this, interest has also to be allocated. For this purpose, we set aside the order of the ld. CIT[A] and remit the matter back to the file of the AO with a direction to ascertain whether any direct borrowings were made for the purpose of acquire the machinery for power generation unit, then such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the profit loss account for those years which was utilized in this year for meeting the liability arising from the write off of advances to GPEL could have been reduced from the profits by virtue of proviso to the said Explanation. He also referred to the decision of the Hon ble Supreme Court in the case reported in 255 ITR 273 wherein it was held that in the context of computation of book profits u/s.115J no adjustment other than provided in the statute could be made to the book profits since provisions of sections 115JA and 115JB are of similar nature. Accordingly, he rejected the claim of reduction of the sum of ₹ 32,69,65,165/- from the book profits. 66. On appeal, ld. CIT(A) allowed the claim vide para-18 of his order and the relevant portion is as under: 18 On going through these pages, however, I find that the stress applied by the AO is on allowability of this expenditure as a genuine business expenditure which has already been discussed earlier. The AO has not gone into the details as to how an amount transferred from reserves created out of the profits of earlier years can be treated as book profit for the purpose of levying tax under the MAT provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t considered while computing the book profits for A.Yrs. 1999-2000 to 2000-01 because in those years assessee suffered tax under the normal provisions. He then referred to the provisions of sec.115JB(2) and pointed out that every assessee is required to prepare the accounts in accordance with the provisions of Parts II and III of schedule VI of the Companies Act, 1956. The accounts of the company have been prepared in accordance with sec.211 of the Companies Act and as per the requirements of Schedule VI in Parts II and III the amount of ₹ 32.69 crores has been duly credited from general reserve but before that there is a write off of the sum of ₹ 32.69 crores and that is why the same has become nil, but the same is still allowed to be reduced in view of clause (i) of Explanation 1 to sec.115JB(2). He submitted that details regarding the reserve being created out of the profits were submitted before the AO and that explanation has been rejected merely on the basis that in those years the company suffered tax under normal provisions and not under the provisions of sections 115JA and 115JB. He argued that the basic purpose of enactment of sections 115J, 115JA and 115JB wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 32.70 Provision for Reduction in the value of investments Transfer from General Reserve/Investment Fluctuation Reserve (32.70) 0.00 54.75 Profit before Tax Provision for Tax Current 12.35 Profit after Current Tax 42.40 Provision for Tax Deferred (Note B-7) 5.59 Profit after Tax 36.81 The relevant note B-3 which has been given as NOTES ON ACCOUNTS in Schedule XII reads as under: Gujarat Perstrop Electronics Ltd. (GPEL ) a Company promoted by Apollo Tyres Ltd. Has been registered as a Sick Industrial Unit under the provisions of Sick Industrial Copnaies (Special Provisions) Act, 1985. The Company, as principal guarantor and main promoter has advanced ₹ 32.7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uced. However, proviso to above clause puts a restriction that such reduction is permitted only if such amounts were added back to the book profits in the earlier year. Before the AO the details of reserve created in earlier years were also filed. These general reserves were stated to be reserves which were created after debiting the profit loss account. However, AO has rejected the same on the premise that strictly speaking the same has not been added to the book profits because in those years assessee suffered tax under the normal provisions. This is not the correct way of interpreting the concept of MAT. The MAT provisions sections 115JA and 115JB were introduced in the statute because certain companies which are also known as zero tax companies were though declaring profits in the books and were also paying dividends but because of deductions prescribed under the Act not tax was being paid. To avoid that situation, minimum alternate tax what is now generally known as MAT was prescribed so that even zero tax companies paid some amount of tax. Therefore, if a company has suffered tax under the normal provisions which is naturally higher to the 30% of the book profits, then it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company. On the basis of the above, Hon ble Supreme Court held as under: Held accordingly, that while determining the book profits under section 115J, the Assessing Officer could not compute the profits in the profit loss account by excluding provisions made for arrears of depreciation. Thus, from the above, it is clear that Hon ble Supreme Court has laid down a very simple principle that normally the assessing authority is bound to assess accounts prepared as per the requirements of Parts II and III of Schedule VI of the Companies Act and the book profits declared therein cannot be tinkered with except in the circumstances prescribed under the Act. Now Explanation 1 prescribes various adjustments by which profits can be increased as well as decreased. Now when clause (i) of Explanation 1 to sec.115JB which we have already reproduced above specifically provides for reduction of the amounts withdrawn from any reserve or provision, then such amounts have to be reduced from the book profits unless it is hit by the proviso to that clause. Admittedly, the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity. A provision is not meeting any liability. It is only a reduction in carrying the amount of asset or the value of the asset. It has been so held in the assessee s own case by the Supreme Court in 255 ITR 725. I have carefully examined the facts and the legal position. Under the provisions of sec.115JB, only specific items as provided has to be added back to the book profit computed under Schedule VI to the Companies Act. One of the amounts to be added back is in explanation i.e. provision for meeting unascertained liabilities. As discussed above, this is not an unascertained liability as per the accounting standards applicable to determination of a company s book profit. The AO cannot make any adhoc disallowance. I, therefore, hold that the assessee is entitled to this deduction. The appeal on this point is allowed. 75. Before us, ld. CIT DR submitted that any provision, even towards reduction in the value of investment, has to be considered as a provision for unascertained liability and, accordingly, should be added back to the book profits. He strongly supported the order of the AO. 76. On the other hand, ld. counsel of the assessee submitted that it is not a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity ₹ 27,24,504/- (b) Provision for leave encashment not paid ₹ 13,00,802/- subsequently (c) Provision for Gratuity reversed fully in the ₹ 72,58,101/- subsequent year due to the nonexistence of the liability Total ₹ 112,83,407 He was of the view that as for as provision for bonus is concerned, the same has already been reversed in the subsequent year due to non existence of liability which clearly shows that this provision was towards unascertained liability. Accordingly, he added back the sum of ₹ 1,12,83,407/- to the book profits of the assessee. 80. On appeal, ld. CIT[A] allowed the relief on these items vide paras 21 which is as under: 21. The same arguments holds good for ground Nos.19, 20 21 relating to adding back of ₹ 2724504/- being provision for bonus, ₹ 1300802/- being provision for leave encashment of ₹ 7258101/- being provision for gratuity. The appeals on these points are also allowed. 81. Before us, ld. CIT DR submitted that clearly these provisions have been made for unascertained liabilities. He further submitted that as far as provision for bonus is concerned, the same has been re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as definite liability in the light of the decision of the Hon'ble Supreme Court in the case of Bharat Earth Movers [supra] and should not be added back to the book profits. Otherwise AO may decide the issue in accordance with law. 84. Ground No.11: After hearing both the parties, we find that this issue is squarely covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Ekta Promoters Pvt. Ltd. 305 ITR (AT) 1 (Del) (S.B) as well as the decision of the Hon'ble Kerala High Court in the case of CIT vs. Kerala Chemicals Proteins Ltd. 323 ITR 584 wherein it was held as under: Held, that even though refund was granted while sending intimation u/s. 143(1) on June 28, 2000 and regular assessment u/s. 143(3) was completed converting the refund to demand of tax on January 22, 2004, interest could be demanded only for the period from June 1, 2003 till January 22, 2004. Since in the case before us refund was issued prior to 1-6-2003, the interest u/s.234D cannot be charged before 1-6-2003. Therefore, we find nothing wrong in the order of the CIT[A] and confirm the same. 85. In the result revenue s appeal is partly allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the rival submissions in the light of the material on record including the decisions cited by the parties. We find that there is separate undertaking and the power is being consumed by the assessee company on a captive basis in its own tyre manufacturing unit. The ld. CIT DR has emphasized that no separate undertaking has been started but It has not been denied that new DG sets were purchased by the assessee company and the same was installed after obtaining the approval of the State Electricity Board. Thus the DG sets were put up in a separate building. Therefore, the same cannot be called as a reconstruction of the old unit. The Hon ble Supreme Court in the case of Textile Machinery Corporation Ltd. vs. CIT (supra), while dealing with the issue of reconstruction, has observed as under:- Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. It is stated on behalf of the Revenue that the same company in the instant case continues to do the same business of heavy engineering no matter certain spare parts necessary as components to completion of the end product are now manufactured in the business it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any time during the period beginning on the 1st day of April 1993 and ending on the 31st day of March, 2006 will be eligible for the benefit of deduction u/s. 80-IA. In case of a captive power unit, the provisions of law is also the same. 3. There may be a case where a captive power plant is set up by an undertaking which is different from the undertaking making use of the power generated. As long as the two undertakings are distinct and separate and there is an element of commercial profit and gains by the power generating undertaking from the industrial user, the provisions of the Act with reference to the benefit of deduction u/s. 80- IA to such undertaking, would be available, within the framework of law and subject to the following:- (i) The tax holiday provisions u/s. 80-IA come into effect from the date such an undertaking begins to generate power. In a captive power plant, the date of generation may require determination by the Assessing Officer with reference to the initial date on which such captive power plant starts generation. (ii) where a captive power plant is merely hived off as a separate entity and not sold to a third party, owing to the close c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee was in the business of generation of power. Now the question is whether the assessee s claim for deduction u/s. 80IA of the Act could be denied merely on the ground that these D.G. Units were catering to the captive power requirement. As the Assessing Officer puts it, if the assessee has not realized any revenue by selling the power to outsiders, can the assessee be held to be entitled for deduction u/s. 80-IA of the Act? The Assessing Officer was of the view that it is only an inter-division transfer and there was no revenue realized by it and consequently there was no derivation of profit or income in the business of industrial undertaking. The question raised by the Assessing Officer have all been answered by the Supreme Court in the case of Orient Paper Mills Ltd. (supra). This decision of the Supreme Court does bring out the facts. It has only affirmed the decision of the Calcutta High Court in CIT vs. Orient Paper Mills Ltd. (1974)94 ITR 73. The facts could only be found in this judgment of the Calcutta High Court. The assessee in that case owned a paper mill. It set up a plant for the manufacture of caustic soda, an essential chemical for use in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight of these decisions, we are of the opinion that the claim of the as cannot be denied only on the ground that the DG sets manufactured the power only for the captive consumption of the assessee. It may be stated that the Tribunal in the assessment years 1997-98 and 1998-99 has already granted relief in respect of Unit Nos. I and II which were established for the purpose of captive consumption. Moreover, the provision of section 80I-A(8) itself says that where any goods or service of the eligible business are transferred to any other business carried on by the assessee and the consideration if any, for such transfer is recorded in the accounts of the eligible business does not correspond to the market value of such goods or services as on the date of transfer, then for the purpose of deduction under that section, the profit and gain for such transferred business shall be computed as if the transfer has been made at market value as on that date. In other words, the provisions of section 80IA themselves provide an answer and give a solution where there is a captive consumption of the finished goods of the eligible units. In the light of these discussion, the order of the CIT(A) gra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - was allowed in the assessment order passed u/s.143[3] r.w.s. 147 on 24-2-2006. The deduction u/s.80IA was reduced to ₹ 14,33,81,497/- after passing an order u/s.154 on 16-1-2007. Later on, it was decided that the assessee company has claimed deduction from the profits derived from DG Powers generation unit which were operational since A.Y 1999-2000. On going through the Annual Report and Cost Report, it was seen that power generator units 1 2 were not shown as separate units of Apollo Tyres. In fact, annexure to the Director s report for A.Y 1999-2000 mentioned the installation of DG set only as an energy conservation measure implemented at its Baroda plant. It was observed that without existence of a separate undertaking, profits cannot be materialized from such undertaking which would qualify for deduction u/s.80IA. In the instant case there was no such undertaking of income which would qualify for deduction u/s.80IA. Since the deduction was allowed for which assessee was not eligible, therefore, there was reason to believe that income chargeable to tax has escaped assessment. Proceedings u/s.147 were initiated and notice u/s.148 was issued on 25-3-2008 for reopening of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r also, details regarding computation of deduction has been filed before the lower authorities, copies of which are available at pg. 11 to 20 of the paper book From the above, it becomes clear that there is no failure on the part of the assessee to disclose full and true particulars which were necessary for claiming this deduction. This deduction has also been allowed by the AO for the same DG Power Unit for the assessment year 1999-2000. In fact before us, the ld. CIT-DR could not point out any material fact which was not disclosed to the Department. Once deduction has been allowed, the same cannot be withdrawn in the later years by reopening of the assessment. The Hon ble Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd. (supra) has clearly held that authorities were not justified in refusing the claim of tax holiday for later years once deduction was granted in the initial year. Following this decision, the Hon ble Bombay High Court in the case of CIT vs. Paul Brothers, 216 ITR 548 has held as under:- Unless deductions allowed for the assessment year 1980-81 on the same ground were withdrawn, they could not be denied in the subsequent years. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the transactions evidenced by the drafts it was for the officer to make the necessary enquiries and draw proper inference as to whether the amounts represented by the drafts could be treated as part of the total income of the appellant. This the officer did not do. It was plainly a case of oversight and it could not be said that income chargeable to tax had escaped assessment by reason of the omission or failure on the part of the appellant to disclose fully and truly all material facts. He could not, thereafter, take recourse to section 147(a) to remedy the error resulting from his own oversight. 33. Thus, it is clear that where primary facts were noted by the authorities themselves, even then it cannot be said that there was failure on the part of the assessee to disclose particular facts truly and fully and in this case, deduction has already been allowed for A.Y. 1999-2000 and for current year, all the relevant facts have been given, and even deduction was allowed but in a truncated fashion and therefore, it cannot be said that the assessee had not disclosed the relevant facts truly and fully. 34. Now let us examine how the various courts have dealt with the issu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the following observations of the Court:- The power to make assessment or reassessment within four years of the end of the relevant assessment year would be attracted even in cases where there has been a complete disclosure of all relevant facts upon which a correct assessment might have been based in the first instance, and whether it is an error of fact or law that has been discovered or found out justifying the belief required to initiate the proceedings. The words escaped assessment where the return is filed, cover the case of discovery of a mistake in the assessment caused by either an erroneous construction of the transaction or due to its non-consideration, or caused by a mistake of law applicable to such transfer or transaction even where there has been a complete disclosure of all relevant facts upon which a correct assessment could have been based . In cases where the Assessing Officer had over-looked something at the first assessment, there can be no question of any change of opinion when the income which was chargeable to tax is actually taxed as it ought to have been under the law, but was not,due to an error committed at the first assessment. The wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieve that such underassessment has resulted from non-disclosure of material facts, must co-exist before the Income-tax Officer has jurisdiction to start proceedings after the expiry of four years. The argument that the court ought not to investigate the existence of one of these conditions, viz., that the income-tax Officer has reason to believe that underassessment has resulted from non-disclosure of material facts, cannot therefore be accepted. 38. While dealing with the decision of the Hon ble Gujarat High Court in the case of Praful Chunnilal Patel (supra), it was observed at pg. 15 of the decision of Full Bench of the Hon ble Delhi High Court in the case of Kelvinator of India Ltd. 256 ITR 1 as under:- We are, with respect, unable to subscribe to the abovementioned view. If the contentionof the Revenue is accepted, the same, in our opinion, would confer an arbitrary power upon the Assessing Officer. The Assessing Officer who had passed the order of assessment or even his successor officer only on the slightest pretext or otherwise would be entitled to reopen the proceeding. Assessment proceedings may be furthermore reopened more than once. It is now trite that wher ..... X X X X Extracts X X X X X X X X Extracts X X X X
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