TMI Blog1981 (8) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... on are as follows. The assessee is a public limited company mainly engaged in the business of manufacture and sale of cement and asbestos cement products. It entered into an agreement with M/s. Revisione Construzione Machine of Torino, Italy (hereinafter referred to as " the suppliers "), on August 17, 1960, for supply of machinery for manufacture of asbestos cement products. Under the sub-title " Delivery " of this agreement, the suppliers agreed to deliver the machinery as set out under the shipment plan and undertook to reimburse the assessee-company with compensation for delay in delivery. There was delay in the supply of the machinery by the suppliers. The assesseecompany, therefore, claimed compensation for the delay under the aforesaid term of the agreement. This claim for compensation made by the assessee-company was settled and under all agreement dated July 12, 1963, the suppliers agreed to pay lira 74,559,725 equivalent to Rs. 5,72,216, by way of compensation for the delay, to the assessee-company. Under the agreement dated July 12, 1963, it was agreed between the parties that the assessee-company would not pay lira 74,559,725 out of the price of the machines which it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the respective delay caused due to these factors but the seller shall inform immediately to the buyers both by cable as well as by letter about such happenings. " It is clear from the above terms contained in the agreement that except for the circumstances beyond the control of the suppliers, as mentioned therein, the suppliers were liable to pay compensation to the assessee-company for delay in the delivery of the machinery. The agreement also provided for the rate at which the compensation for delay was to be paid. The assessee-company is engaged in the business of manufacturing and selling, cement and asbestos cement products. It had entered into the agreement with the suppliers for the purchase of machinery with the aid of which it was to manufacture asbestos cement products. Now, what was the object of making a provision for compensation in the agreement ? Was it made with the intention of reducing the price as sought to be urged an behalf of the Revenue ? On a plain reading of the provision set out above, it is clear that it had no relation to the cost of machinery. It is pertinent to note that the above provision or term finds place under the sub-title " Delivery ". ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery' of the agreement dated 17-8-1960, the suppliers agree that the buyers shall not pay the amount of lira 74,559,725 (lira seventy-four million five hundred and fifty-nine thousand seven hundred and twenty-five) only in the cost of machinery supplied by them as they could not ship the machinery on the scheduled dates. " It appears that the suppliers and the assessee-company had settled compensation payable for the delay in delivery of the machinery at lira 74,559,725 (Rs. 5,72,216). Clause 2 set out above merely provides for the manner in which the amount of compensation agreed to be paid by the suppliers was to be paid. It provided that out of the total price of machinery payable by the assessee-company, lira 74,559,725 were not to be paid. In other words, compensation payable by the suppliers was adjusted against the price or balance of price of the machinery payable by the assessee-company. We are, however, unable to see any force in the argument that the adjustment made in the above manner reduces the price or cost of the machinery. The argument only reflects an incorrect reading of the relevant terms of both the agreements. Clause 2 of the agreement dated July 12, 1963, c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essment to income-tax for the year 1955-56, the Special Commissioners held that the amount received and the premiums paid were receipts and payments of a capital nature and should be excluded from the computation of the losses incurred by the company which were carried forward to that year. The Chancery Division upheld the decision of the Special Commissioners. Buckley J., who delivered the judgment of the court, observed (p. 492) "...on the true view of this case, the sums secured by these policies are not in essence compensation for loss of profits, although, of course, in a sense they are associated with the fact that if due delivery is not made, the company would be deprived of profits if it then wished to take the ships into service in its business. I think they are really associated with the price which the company felt justified in paying for the services which the shipbuilders were contracting to give, and were insurances against the Possibility of the shipbuilders not providing as valuable services as by the contract they were promising to provide. " (Emphasis added). It is clear that the aforesaid decision is hemmed in by its own facts. In view of the clear provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be placed upon the terms providing for the compensation contained in the two agreements adverted to above and their effect on the actual cost of the machinery. The decisions on the question of actual cost cited before us are not of any assistance in resolving this controversy and, therefore, we do not think it necessary to refer to them or discuss them. " Actual cost " as defined in s. 43(1) means the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. The actual cost of the machinery to the assessee-company is the price at which it agreed to purchase the machinery or plant, and this price was paid by the assessee-company, subject to the adjustment of compensation payable to it for a delay as stated above. There is no dispute as to what the actual cost of machinery is, but the dispute is whether the compensation received by the assessee-company goes to reduce "the cost of machinery. Actual cost or price of the machinery and compensation payable to the assesseecompany for delay in delivery are two different and distinct things. By unnecessarily mixing up the actual co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e second question, which reads as under " Whether, on the facts and in the circumstances of the case, the Tribunal was justified in not allowing the total amount of interest paid, on borrowings made by the company, from the business income ? " The assessee-company had made investment in shares of the West Coast Paper Mills Ltd. (hereinafter referred to as " WCPM "). The investment amounted to Rs. 75.60 lakhs. The assessee-company had borrowed funds in overdraft accounts with its bankers. These overdrafts were secured by pledge of the shares of WCPM. The assessee-company paid interest on the borrowings and claimed its deduction as business expenditure in each of the years under reference, that is, assessment years 1963-64 to 1,970-71. The ITO, however, disallowed this claim. Disallowance of interest varied between Rs. 1,54,503 in the assessment year 1963-64, and Rs. 2,12,330 in the assessment year 1970-71, in the eight years under consideration. In the appeal preferred by the assessee-company, the AAC held that out of the total investment of Rs. 75.60 lakhs in WCPM shares, an amount of Rs. 27.50 lakhs had been borrowed from the bank for the purpose of acquiring the shares in W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the manner it has done is not correct. The Tribunal ought to have examined the assessee's claim on merits and given its considered decision after taking into account all the relevant facts and material instead of summarily rejecting the claim on the basis of what had happened in the past. In order to appreciate the contention of the assessee-company, it is necessary to set out the statement showing details of overdraft against the shares, investments in the equity shares of WCPM and the depreciation and reserves : Overdraft against shares Years Opening Closing Increase/Decrease Rs. Rs. Rs. 1955 - -- --- 1956 - 14,85,942 + 14,85,942 1957 14,85,942 14,46,345 (-) 39,597 1958 14,46,345 22,18,020 + 7,71,675 1959 22,18,020 43,68,877 + 21,50,857 ----------------- 43,68,877 ------------------ Investment in WCPM Equity Shares Years Opening Closing Increase/Decrease Rs. Rs. Rs. 1955 - 23,50,000 + 23,50,000 1956 23,50,000 38,99,037 + 15,49,037 1957 38,99,037 51,97,788 + 12,98,751 1958 51,97,788 51,97,788 1959 51,97,788 76,94,048 + 24,96,260 ---------------------- 76,94,048 Less: Realisation (net) from 1960 to 1962 (-) 44,52 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -company from its account with the United Commercial Bank. Amount was deposited in the United Commercial Bank from overdraft account against the shares with the State Bank of Jaipur Ltd. In 1962, i. e., assessment year 1963-64, and onwards, no interest was paid to the State Bank of Jaipur. Having regard to the above state of facts it is contended that a deduction of the entire interest payment should be allowed against the business income. One thing which clearly emerges from the material on record is that there is no warrant to reach the conclusion that any specific part of the borrowings is attributable to the investment in the shares of WCPM. In other words, no part of the borrowings can be linked with the investment in the shares. Investment in the shares is made out of the business funds. The statement set out hereinabove shows that retained earnings were available for the investment in shares. No borrowings were made in 1955. Therefore, the investment to the extent of Rs. 23.50 lakhs in the shares of WCPM in that year must have been made from the assessee-company's own resources. Borrowings were made in the subsequent years but there is no evidence to show that any part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aft account was opened against the security of shares. Interest paid on overdrafts has in fact been allowed as a deduction. At the cost of repetition, it may be stated that no part of the borrowings is specifically attributable to the investment in shares. There was a common fund in respect of the borrowings and the retained earnings and it was out of the mixed funds that the investment in shares was made in the years subsequent to the calendar year 1955. No expenditure by way of payment of interest could be said to have been incurred for making or earning income by way of dividend. There is, therefore, no reason why the interest payment should not be allowed as a deduction while computing the profits and gains from the business. In this connection, it is also important to refer to a decision of the Andhra Pradesh High Court in CIT v. Gopikrishna Muralidhar [1963] 47 ITR 469. That was a case in which the assessee, an HUF, which carried on business on an extensive scale with capital of about Rs. 20 lakhs, made large borrowings during the relevant year for the purpose of the business and paid interest amounting to Rs. 93,611. In the course of the year, moneys amounting to Rs. 1,77,98 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1966-67 and 1967-68 or under provisions of section 80M as it stood for the assessment years 1968-69 to 1970-71 should be with reference to the net amount of dividend after deduction of interest and not with reference to the gross dividend as claimed by it was correct ?" This question arises in all the assessment years, namely, assessment years 1963-64 to 1970-71. So far as the assessment years 1963-64 to 1967-68 are concerned, it is directly covered by the decision of the Supreme Court in Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. Therefore, so far as these years, namely, the assessment years 1963-64 to 1967-68 are concerned, the answer to this question shall have to be in the negative and against the Revenue. Now, so far as the assessment years 1968-69 to 1970-71 are concerned, as held by this court in Gaekwad Investment Corporation Ltd. v. CIT (ITR No 11 of 1976 decided on February 6, 1981 in view of the retrospective amendment, the net dividend income will be entitled to relief under s. 80M and not the gross dividend income. Therefore, so far as these years are concerned, following the decision of this court in Gaekwad Investment Corporation Ltd., the answer to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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