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TMI Blog2016 (6) TMI 456X X X X Extracts X X X X X X X X Extracts X X X X ..... is appeal is that ld. CIT(A) erred in confirming the order of AO by holding the expenses incurred for business re-organization as capital in nature whereas these are revenue in nature. The assessee further alternatively claimed for the allowing of the deduction of depreciation if treated the said expenditure as capital in nature. 4. The facts in brief are that the assessee in the present case is a limited company and engaged in the manufacturing business of paints, pharmaceuticals and rubber etc. The assessee for the year under consideration has claimed cost of business re-organization of Rs. 5,23,93,000/- in the profit & loss A/c which includes the following - a) An amount of Rs. 421.24 lakhs accrued in the books of account in respect of voluntary compensation (including amounts provided for various retirement benefit fund) for certain employees who have accepted premature retirement. b) The cost of restructuring of rubber chemicals business activities at the Rishra Factory. The re-organisation expense of Rs. 102.69 lakhs comprise mainly of salary and overhead cost of personnel engaged in the restructuring exercise. The AO during assessment proceedings sought clarification f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ical with the expenses incurred in earlier years. Accordingly, the disallowance of Rs. 5,23,93,000/- stands upheld." Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. 6. Before us the ld. AR submitted the paper book which is running from pages 1 to 179 and stated that the amount of payment towards the voluntary retirement of the employees is very much covered under section 35DDA of the Act. With regard to the salary and overhead cost of the personnel involved in the business reorganization the assessee submitted that all these expenses are revenue in nature and therefore eligible for deduction. The ld. AR also alternatively submitted that in case the expenditure incurred on the business reorganization are treated as capital expenditure then the same should be eligible for the depreciation. On the other hand the ld. DR vehemently supported the order of the lower authorities. 7. From the aforesaid discussion we find that the AO has disallowed the expenses comprising of VRS, salary and other over-head cost of personnel by treating them as capital expenditure. The Ld. CIT(A) has also confirmed the disallowance made by AO. However, we find that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no.1 of the appeal of the department is allowed in part." Taking a consistent view of the Co-ordinate Bench of this Tribunal, we allow assessee's ground. With regard to the expenses incurred in connection with the re-organisation expense of Rs. 102.69 lakhs which comprise mainly salary and overhead cost of personnel engaged in the restructuring exercise, we find that all of these expenses are revenue in nature. These expenditures do not result into any fixed assets. In this connection, we rely in the judgment of Hon'ble Punjab and Haryana High Court in the case of CIT v. JCT Electronics Ltd. (2010) 188 taxman 191 (P&H), wherein head note. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2004-05 - Whether where Tribunal had treated expenditure for restructuring and viability study and preparation of restructuring proposal as revenue expenditure by recording findings of fact that expenses were incurred for purpose of business and were in conformity with provisions of section 37, no question of law arose from Tribunal's order - Held, yes Finally we hold that the VRS expenses amounting to Rs. 421.24 lacs will be allowed in five e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kol/2008 date 26.11.2010. The relevant extract ground of appeal and relevant order are reproduced below : "The assessee company claimed depreciation amounting to Rs. 24,27,86,408/- in its computation of income. This issue is also covered in earlier year's assessment. Depreciation claimed by the assessee was disallowed in earlier year based on WDV of the block of assets arrived at after adjusting sale consideration of the undertaking viz., fertilizer, old fibres, seeds, Agro chemicals etc., transferred following which depreciation as per reduced WDV adopted by the Department works out at Rs. 22,02,10,622/- as against claim of Rs. 24,27,86,408/- keeping in view the practice adopted in the past assessment years, the difference amount of depreciation (Rs.24,27,86,408/- - Rs. 22,02,10,622/-), being reduced to the extent of Rs. 2,25,75,786- against the claim of the assessee." 16. During the course of hearing, the learned DR placed reliance on the order of the AO whereas the learned AR submitted that the above issue is covered in the assessee's case for the assessment year 1994-95 reported in (2008) 23SOT 58, copy placed on record and also in the assessee's own case for assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have minutely considered the submission and contention of the AR. I have also gone through the AO's impugned order in this regard. However, I decline to support the contention of the AR of the appellant company. The said expenses were borne by the company from 11.1.2002 to 26.3.02 without getting the corresponding benefit of income for the same period. if the commercial risk after 1.1.2002 is to be assumed by the Purchaser, NPIL, it is natural and consequently both operating and revenue expenses are to be assumed by it in pursuant of assumption of commercial risk. Besides although the appellant claimed to have borne the expenses from 1.1.02 to 26.3.03 the corresponding income upto the date of actual transfer of the pharmaceutical business to NPIL has not been shown for the period. as noted by the AO, therefore, the contention of the appellant company is not maintainable in view of facts discussed above. If no earning for the above period is included no expenditure for the same period can also be not allowable either under the head business or capital gain. Accordingly, the AO's order in this regard is upheld." Being aggrieve by this order of Ld. CIT(A) assessee came in second ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n facts, it could be said that there was dovetailing or interlacing between business of import and business of export carried on by assessee and that they constituted same business - Held, yes. Respectfully following the decision of the Hon'ble Supreme Court in the case of B.R. Ltd. (supra) we allow assessee's ground. 17. The 4th issue raised in ground no. 6(a) to (f) by assessee in this appeal is that ld. CIT(A) erred for accepting the valuation of Chowringhee property on the basis of DVO report instead of taking the valuation made by the registered valuer engaged by the assessee. 18. The assessee was having the land & building located at ICI House at Chowringhee, Kolkata consisting of total area of the property 35.60 kottah. The assessee has sold its property for a composite consideration of Rs. 21 crores on dated 28th June 2001 to M/s Reliance Industries Limited. The sale price for the land was considered at Rs. 17,92,41,908/- and balance of Rs. 3,07,58,092/- was considered as sale price of the building. The assessee claimed long term loss of Rs. 12,74,78,092/- after arriving indexed cost of acquisition of Rs. 30,67,20,000/-. The assessee got the valuation of the property fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate legal authority. In spite of the submission of the appellant company, the registered valuer engaged by the company has not cited any comparable cases to come to the conclusion that the value of land per cottah at Rs. 20 lakhs as on 1.4.81 and it was based on estimate value. As the AO has found that the valuation made by the registered valuer of the company is not based on acceptable basis he has referred the matter to the DVO who after considering all the material facts and comparable cases submitted his report which was followed by the AO. As held in the aforesaid decision the valuation report of the DVO is binding on the Ao once the matter has been referred to him before completion of the assessment ordered. There is no valid material ground for holding that the valuation made by the Registered Valuer engaged by the company is more authentic and more reliable than the valuation of the DVO. I therefore find no logic and merit in the contention of the appellant company. Accordingly, the AO's finding and order in this ground is justified and hence upheld." Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us. 20. Before us Ld. AR submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtmental valuation office under section 55A and reasons recorded after order of reference for valuation of registered valuer is not substitute of pre-decisional formation of opinion - held, yes - Assessee- company sold entire land of its rice mill and got property valued by registered valuer to determine fair market value as on 1-4-1981 - However, Assessing Officer referred matter to departmental valuer to determine value of said property - Assessee submitted that reference to valuation officer was without jurisdiction as Assessing Office had not formed opinion that value claimed by assessee was less than its FMV - Whether since department had not brought any material on record that Assessing Officer had formed an opinion having regard to nature of assessee and other relevant circumstances for making reference Departmental Valuation Officer, reference was not in compliance with section 55A and it was without jurisdiction - Held, yes Taking the consistent view of Hon'ble jurisdictional High Court in the case of Umedbhai International P.Ltd. (supra) we reverse the orders of lower authorities and allow assessee's ground. 22. The fifth issue raised by assessee in this appeal is that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r issue was dismissed by the jurisdictional High Court in the case of CIT vs. M/s R.P.Sen & Brothers (P) Ltd. in GA No. 3019 of 2012 dated 04.01.2013, wherein the Hon'ble jurisdictional High Court has held as under:- "The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere." Taking a consistent view, of this Hon'ble jurisdictional High Court in the case of M/s R.P.Sen & Brothers (P) Ltd. (supra) we find no reason to interfere in the order of Ld. CIT(A). Hence, this ground of assessee's appeal is dismissed. 26. The 6th issue raised by the assessee in this appeal is that ld. CIT(A) erred in confirming the order of AO by disallowing the brought forward business loss and long term capital loss for AY 2000-01. The assessee has set off of long term brought forward capital loss of Rs. 17,23,36,729/- and business loss of Rs. 6.25 crores. The assessee has furnished the breakup of aforesaid loss which is as under:- AY 2000-01 : Long Term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estimated at Rs. 138.09 lacs in the value of the closing stock at the yearend lying in bonded warehouse. The assessee claimed that this method has been followed consistently for the valuing of the closing stock. However the assessee claimed the deduction of the custom duty by virtue of the provisions of section 43B of the Act on the payment basis. However the AO disregarded the claim of the assessee on the ground that the custom duty is liable to be included in the closing stock in terms of the provisions of section 145A of the Act. The AO also observed that in A.Y. 2001-02 addition on same issue was made which has been confirmed by the CIT(A). Accordingly the AO has made the addition of the custom duty to the total income of the assessee. 33. Aggrieved, assessee preferred an appeal to ld. CIT(A) and submitted that the act of non-inclusion of custom duty estimated at Rs. 1.38 crores has no effect on the profit and loss account as the same becomes the opening stock of the following year. The assessee has been consistently regularly following the system of stock valuation. The company has been valuing its closing stock of chemical products at its actual cost excluding customs duty o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he closing stock as required u/s. 145A of the Act. So the AO has made the disallowance. However Ld. CIT(A) has deleted the addition made by AO on the ground that assessee has been following the valuation method for its closing stock consistently without the inclusion of custom duty. Ld. CIT(A) also observed that the closing stock of one year becomes of the opening stock of the next year and therefore, if custom duty included in the valuation of the closing stock then this will only result in distortion of accounting system regularly follows by the assessee. Now the question before us for our consideration arises so as to whether custom duty incurred by assessee on the finished goods which are lying as closing stock in the bonded warehouse is to be included. At this juncture, we find important to reproduce the provision of section 145A of the Act which reads as under : "[Method of accounting in certain cases. 145A. Notwithstanding anything to the contrary contained in section 145,- (a) The valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be - (i) In a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e investment of Rs. 151,97,61,000/- in the shares of Quest International India Ltd. which is a subsidiary of the assessee company and claimed that the investment was made out of the operating activities amounting to Rs. 143.58 crore plus opening cash and bank balance was utilized for this purpose. The assessee has further submitted that no dividend has been received during the year from this investment. However the AO during assessment proceedings observed that the assessee was having the borrowings in the year ended 31.3.2001 of Rs. 35.66 crores which also found place in opening cash and bank balance. Hence the diversion of borrowed fund for aforesaid purpose is apparent even if the investment was partially met by opening cash and bank balance. It is agreed that Rs. 143 crores has been invested out of own source. However, the assessee has not been in a position to explain and substantiate regarding balance Rs. 8 crores (approx.). Hence, corresponding interest taking rate of 10% amounting to Rs. 80,00,000/- is disallowed u/s. 36(1)(iii). 37. Aggrieved assessee preferred an appeal to ld. CIT(A). whereas Ld. AR stated that this investment is out of the cash generated from the cash f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cash flow statement of the assessee was placed. Ld. AR also submitted that assessee has earned profit of Rs. 79 crores during the year under appeal. Ld. AR further demonstrated that the investment was made out of the own funds and no borrowed funds was investment in that investment, as such Ld. AR prayed for the disallowance of the addition made by AO on account of borrowed fund. From the aforesaid discussion, we find that AO has disallowed the interest expenses on account of holding that the investment was made out of the borrowed fund, however, Ld.AR before us has demonstrated that no borrowed fund was utilized in making such investment. In rejoinder, Ld. DR has not raised any objection to controvert the argument of Ld. AR. Now the question before us arises for adjudication so as to whether the borrowed fund has been utilized to make the investment in the sister concern. We find force from the submission of Ld. AR that there are sufficient funds available for the investment and as such no borrowed fund was utilized for the aforesaid investment. Therefore, in our considered view no disallowance of interest on the borrowed fund required to be disallowed as contemplated u/s 36(1)(ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tific research u/s 35 Rs. 12,96,737/- b) Weighted deduction on sums paid to scientific Research Association Rs. 20,16,598/- The assessee submitted that the deduction for capital expenditure on scientific research u/s 35(1) does not require any certificate other than tax audit report. The assessee submitted that the contribution was made to ICI R & T Centre, Thane. The extension of exemption has been forwarded to CBDT with the recommendation for extension by DIT(East), Mumbai and DGIT (East), Kolkata, however, notification for exemption is still awaited. However the AO has disallowed for the reason that the research centre is not approved for the period by the Central Govt. by notification in the Official Gazette which is a pre-requisite for weighted deduction as per Sec. 35(1)(ii) of the Income Tax Act. 41. Aggrieved assessee preferred an appeal before Ld. CIT(A) who deleted the addition made by AO by observing as under : I have also duly considered the AO's observation and finding in the impugned order. The AO has disallowed the weighted deduction of Rs. 20,16,598/- on the ground that the prescribed authority has approved ICI Research & Training Centre u/s. 35(2) for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat all the payment of employees contribution were made before the due date of filing of Income Tax Return as specified u/s.139(1) of the Act. Now, this issue stands covered in favour of assessee and against the Revenue by the decision of Hon'ble jurisdictional High Court in the case of CIT v. M/s Vijay Shree Limited vide ITAT No.245 of 2011 in GA No.2607 of 2011 dated 7th September, 2011, wherein it has been held as under:- "After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees' contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's appeal in ITA No.852/Kol/2007 for AY 03-04 50. First issue raised by assessee in Ground No.1(a) in its appeal is that Ld. CIT(A) erred in confirming the order of AO by disallowing the expenses incurred on the basis of reorganization in the form of salary and overhead cost. 51. This ground is covered in assessee's appeal in ITA No.488/Kol/2006 for AY. 2002-03, where the same issue was decided in favour of assessee, hence, we apply same view. This ground of assessee's appeal is allowed accordingly. 52. At the time of hearing Ld. AR for the assessee not pressed ground No.1(b), hence, same is dismissed as not pressed. 53. Next issue raised by assessee is that Ld. CIT(A) erred in confirming the order of AO by holding that the premium paid for premature redemption of debenture is to be capitalized. 54. The AO during the course of assessment observed that the assessee has paid premium on redemption of debenture. These debentures were issued/ allotted to meet the company's requirements of capital expenditure. The assessee had paid premium of Rs. 1,28,26000/- to the Debenture Holders during this assessment year and the same has been claimed as deduction in computing the busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2, 32A, 33 and 41-"Actual cost" of an asset has no relevancy in relation to s. 36(1)(iii)-Hence, Expln. 8 to s. 43(1) has no relevancy to s. 36(1)(iii)-Proviso to s. 36(1)(iii) inserted by the Finance Act, 2003, w.e.f. 1st April, 2004, is only prospective and would not apply to assessment years in question" Respectfully following the judgment of Hon'ble Supreme Court in the case of Core Health Care Ltd. (supra) we allow assessee's ground. 57. Next issue raised by assessee is that Ld. CIT(A) erred in confirming the order of AO by disallowing the entrance fee paid to the club. 58. The AO during the course of assessment proceeding observed that the assessee has paid Rs. 1,00,000/- to Bombay Gymkhana Club and claimed as revenue expenditure incurred wholly for the purpose of the business but failed to provide the details of member in whose favour the payment was made to the said club. The AO observed that entrance fee is generally paid for the personal benefit of an individual who enjoys the same even after leaving the job of the company. Accordingly the AO held that payment of entrance fee is for the personal benefit of the employee/member, the sum of Rs. 1,00,000/- is disallowed be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... catalyst business undertaking as a going concern for a slum price. 62. The AO during the course of assessment proceeding found the assessee sold its Catalyst business for a sale price of Rs. 155,20,58,777/- from which the assessee has claimed deductions in respect of the following:- WDV of fixed assets Rs. 16,97,74,925/- Book value of current assets Over current liability Rs. 18,38,16,406/- Transactions cost Rs. 24,30,00,000/- The AO sought clarification about the transaction cost. In reply to the said letter, it was stated that certain liabilities were taken by the assessee in connection with the sale of the aforesaid unit in terms of business transfer agreement dated 2/10/2002. These liabilities include that the assessee will make arrangement within five years from the sale of the said Catalyst business for transfer of Panki land to the purchaser and in the event of failure to do so, a sum of Rs. 15 crore would be paid to the purchaser. Similarly, a provision of Rs. 2.30 crore has been made for Panki soil contamination and ground water issues. Accordingly the AO observed that the liability for such expenditure did not crystallize in the previous year and furthermore, suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see is that Ld. CIT(A) erred in confirming the order of AO by disallowing the deduction claimed u/s. 35(1)(ii) 66. This issue has already been decided by us in ITA No.2613/Kol/2005 for A.Y 2002-03 where the same is decided against the assessee. In terms of above, this ground of assessee's appeal is dismissed. 67. Next issue regarding the deduction u/s.80HHC of the Act in this appeal of assessee is consequential in nature and does not require any adjudication. 68. Next issue regarding the levy of interest u/s 234B in this appeal of assessee is consequential in nature and does not require any adjudication. 69. In the result, assessee's appeal partly allowed. Coming to ITA 1019/Kol/2007 for AY 03-04 of Revenue. 70. First issue in this appeal of Revenue is that Ld. CIT(A) erred in deleting the addition made by AO by disallowing the expenses incurred in connection with the business re-organization. 71. At the outset, it was observed that the issue has already been decided in favour of assessee in ITA No. 488/Kol/2006 for A.Y 02-03, same will be applied in this issue also. Hence, this ground of Revenue's appeal is dismissed. 72. Next issue in this appeal of Revenue is that Ld. CI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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