TMI Blog2004 (12) TMI 289X X X X Extracts X X X X X X X X Extracts X X X X ..... law and on facts in confirming the disallowance of Rs. 44,52,805 of provisions for bad debts. 4. The learned CIT(A) has erred in law and on facts in confirming the disallowance of Rs. 32,02,200 out of the interest expenses on the ground that loans and advances have been given for alleged non-business purpose without charging any interest. 5. The learned CIT(A) has erred in law and on facts in confirming the disallowance of Rs. 9,94,421 claimed under s. 35D of the Act. 6. The learned CIT(A) has erred in law and on facts in not considering the additional ground of Rs. 45,38,678 being financial charges and the same has been not allowed as revenue expenditure. 7. The learned CIT(A) has erred in law and on facts in not considering the additional ground of Rs. 64,75,000 being professional charges and the same has been not allowed as revenue expenditure. 8. The learned CIT(A) has erred in law and on facts in not considering the additional ground of Rs. 80,34,352 being upfront fees and the same has been not been allowed as revenue expenditure. 9. The learned CIT(A) has erred in law and on facts in confirming the action of AO in not properly calculating deduction under s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. vs. CIT (1997) 141 CTR (SC) 387 : (1997) 227 ITR 172 (SC), wherein the Supreme Court held that interest so earned is income from other sources and is, therefore, liable to be taxed. Following the same, the AO held that the pre-operative income of Rs. 3,27,90,125 is income from other sources and addition is accordingly made to the total income of the assessee-company. Matter was carried in appeal before the first appellate authority wherein the learned counsel for the assessee submitted that the AO has confused the two issues, namely, interest income simpliciter and income alleged as interest which is, in fact, in the nature of liquidated damages recovered or recoverable from the parties to whom advances were made for carrying out construction work and/or supply of machinery. Hence, they were in the nature of liquidated damages and the entire issue is covered in favour of assessee. The learned counsel for the assessee relied on the decision of Supreme Court in the case of CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC). Further, the learned counsel for the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the parties. At the same time, the decision as relied on by the AO in the assessment order in the case of Tuticorin Alkali Chemicals Fertilizers cannot be applied to the instant case, because the interest earned in that case was income from other sources and before the commencement of its business. The decision as relied on by the assessee in the case of Bokaro Steel Ltd. is also not relevant in the assessee's case, as the facts are quite distinguishable. In that case, the work of construction of the company's factory and installation of plant was in the process of completion and the company has not started any business, whereas the fact remains that the business of the assessee is a running one. In the light of above discussion, the CIT(A) treated the amount of Rs. 3,27,90,125 as income from other sources and upheld the action of the AO. 3.1 Before us the learned counsel for the assessee submitted that the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. is still applicable as the assessee had commenced expansion of its business by setting up two new projects at Ambaliyara in Gujarat and Pondicherry. The said two new projects were planned for setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company had given capital contract to the party for supply of various capital goods, the party could not respond in time and hence the assessee had charged interest of Rs. 65,02,500. Similar is the position in respect of other advances given to the parties for supply of capital goods. The last two parties mentioned at p. 227A of the paper book were entrusted the work of construction of factory building and development of the land of two new projects which were to be set up at Ambaliyara in Gujarat and at Pondicherry. Therefore, such interest recovered from these parties for liquidated damages cannot be added to the total income of the assessee. The issue is covered in favour of the assessee by the decision of Hon'ble Gujarat High Court in the case of CIT vs. Saurashtra Cements Chemicals Industries Ltd. 3.2 The stand of Revenue is that assessee has not submitted any evidence before the AO but fresh evidence has been placed before the CIT(A) for the first time and no opportunity was given to the AO. Hence, the disallowance be confirmed. Reliance placed in the case of Saurashtra Cement Chemicals Industries Ltd. is now given different colour. Such arguments were not bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... adi and Motibhoyan. Therefore, the ratio laid down in the decision of the Hon'ble Supreme Court in the case of Bokaro Steel Ltd. is squarely applicable. The Supreme Court has further considered this issue in the case of CIT vs. Karnataka Power Corporation (2000) 162 CTR (SC) 249 : (2001) 247 ITR 268 (SC) which was considered in the context of existing business. The learned counsel for the assessee also submitted that the case (2000) 162 CTR (SC) 249 : (2001) 247 ITR 268 (SC) has arisen from the case CIT vs. Karnataka Power Corpn. Ltd. (1994) 205 ITR 511 (Kar), wherein it was held that the High Court has given specific finding in regard to question No. 3 for expansion of running business and in that case also it was held as capital receipt. So, the case of assessee is squarely covered by the decision of Hon'ble Gujarat High Court reported in (2002) 172 CTR (Guj) 11 : (2002) 253 ITR 373 (Guj) and as such the damage recovery in the form of interest is related to executing contract, and as such the said receipts are capital and it cannot be taxed as revenue receipt. The learned counsel for the assessee further submitted that in the course of assessment proceedings, the prospectus for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reated as a result of such expenditure. By same reasoning, if the assessee receives any amounts which are intricately linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of capital nature and cannot be taxed. Hon'ble Supreme Court in the case of CIT vs. Karnal Co-operative Sugar Mills Ltd. (2000) 161 CTR (SC) 241 : (2000) 243 ITR 2 (SC) has held that the deposit of money in present case for opening credit for purchase of machinery was directly linked with purchase of plant and machinery. Accordingly, interest was held as capital receipt which would go to reduce cost of asset. It is pertinent to mention here that in Karnal Co-op. Sugar Mills Ltd., both the decisions in the cases of Tuticorin Alkali Chemicals Fertilizers Ltd. and Bokaro Steel Ltd. have been considered. A similar decision has been rendered by Hon'ble Gujarat High Court in the case of Saurashtra Cements and Chemicals Industries Ltd., wherein the assessee had entered into an agreement with the supplier to purchase certain machinery; under the agreement, in the event of delay caused in delivery to supply the machinery it had to pay by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchases themselves suggest that these cannot be said bogus purchases. The AO, considering the submissions of assessee, observed that as per specific information received vide letter dt. 28th March, 2003, from the Dy. Commr. of Sales-tax (Enforcement), the Sai Baba Sales Corporation is a bogus entity, which was only supplying bills and just by giving truck numbers and payments by account payee cheque do not in any way controvert the findings of the ST authorities. During the course of search by ST authorities at the residence of Mr. Deepak K. Gujjar, blank printed bills of M/s Sai Baba Sales Corporation were seized. The AO treated the purchases as bogus and made an addition of Rs. 83,90,690. Matter was carried in appeal before the CIT(A) wherein the learned Authorised Representative for assessee raised various contentions and also relied on the decisions of Hon'ble Gujarat High Court in the case of CIT vs. M.K. Bros. (1986) 52 CTR (Guj) 228 : (1987) 163 ITR 249 (Guj) together with other case law, which have been discussed by CIT(A) in paras 5.2 and 5.3 of the appellate order. Considering the facts of the case and submissions of the learned Authorised Representative, the CIT(A) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved from the ST authorities. The AO has not examined Mr. Deepak K. Gujjar nor the assessee was given any opportunity of cross-examination of Shri Deepak K. Gujjar. The tax audit report filed in the paper book, particularly p. 33 at Item 9(c), wherein auditors have certified that list of books of account examined as per Annex. A at p. 40 of the compilation wherein cls. 9(b) and (c) at Sl. 7 show stock registers at pp. 38 and 39 of the paper book. Further, at item No. 28 regarding raw material particulars of which were given in Annex. P appearing at p. 65 of the paper book, wherein the auditors have clarified the quantitative details of raw material. It is not possible to work out the yield in relation to raw material because raw material used is in kilograms and finished products produced are in metres and as such it is impossible to reconcile any production ultimately. Therefore, the Department's argument is not tenable that the assessee had not given all quantitative details. Revenue has not been able to dispute the fact that GP of last year and yield have been shown. In this regard, he referred to pp. 265 to 269 of the compilation, wherein calculations for asst. yrs. 1998-99, 199 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sel for the assessee fairly conceded that this being provision made, is not pressed. Accordingly, ground No. 3 of assessee's appeal is dismissed as not pressed. 6. Ground No. 4 is regarding confirmation of disallowance of Rs. 32,02,200 out of interest expenses on the ground that loans and advances have been given for alleged non-business purpose without charging any interest. This issue has been discussed vide paras 13 to 15 of the assessment order and the CIT(A) has dealt the same vide para 7 of his appellate order. The learned counsel for the assessee drew our attention to pp. 133 to 138 of the paper book wherein the assessee has made written submission and the AO made notional addition of Rs. 32,02,200 on the ground that the assessee has not charged interest, which according to the AO, were advances to the sister concerns free of interest. The learned counsel for the assessee submitted that Shree Ram Association was given advance of Rs. 1,77,90,000 to construct corporate house - Shree Rama Centre—to a non-trading organization. Due to several specifications laid down by Ahmedabad Municipal Corporation regarding fire safety, B.U. permission, etc., the construction work has not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital expenditure, it should be required to be amortised under s. 35D of the Act. The CIT(A) confirmed the disallowance in question. 7.1 Before us, the learned counsel for the assessee reiterated the submissions made before the authorities below and opposed their orders. The learned counsel for the assessee submitted that total expenses incurred for public issue under s. 35D of the Act was to the tune of Rs. 10,63,81,582 and the assessee had claimed 1/5th of the total amount which amounts to Rs. 2,12,76,316. On examination of the break-up of the public issue expenses furnished by the assessee, AO found that the assessee had claimed the following expenses: (i) Conference and seminar expenses 26,82,919 (ii) Guest entertainment expenses 43.419 (iii) Travelling expenses 5,68,012 (iv) Postage and courier charges 16,77,756 Total 49,72,106 Therefore, 1/5th of the said expenditure of Rs. 49,72,106 came to Rs. 9,94,421 and the same was disallowed by AO. It was argued by the learned counsel for the assessee that all these expenses are of revenue nature and allowable under s. 35D becau ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in law in accepting the appellant's claim relating to capitalization of interest and incidental charges as per the details set out hereinafter, contrary to Expln. 8 to s. 43(1) of the Act, as also in the binding decision of the Hon'ble Gujarat High Court in the case of Dy. CIT vs. Core Healthcare Ltd. (2001) 169 CTR (Guj) 416 : (2001) 251 ITR 61 (Guj). He ought not to have accepted the claim for capitalization as made by the appellant but ought to have treated the impugned expenditure exigible to deduction in computing the total income of the appellant under s. 36(1)(iii) of the Act. (a) Interest and financial charges Rs. 3,37,84,348 (b) Legal and professional expenses Rs. 64,75,000 (c) Upfront fees Rs. 80,84,352." Copy of additional grounds along with submissions in this regard were forwarded to the AO for his comments vide letter No. CIT(A)-XIV/Report/2003-04, dt. 19th Aug., 2003. The comments of the AO have been received in CIT(A)'s office vide AO's letter dt. 3rd Nov., 2003, and the copy of the same was given to the assessee as well to get his comments/rejoinder. In response thereto, the assessee filed its reply on 12th Nov., 2003. The main issue raised by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decisions of various High Courts and Hon'ble Supreme Court as relied upon by the AO as well as the appellant. First of all, I take up the issue of admitting the additional ground raised by the appellant. The appellant has relied upon the three judgments of the Supreme Court, viz., Jute Corpn. of India Ltd. vs. CIT Anr. (1990) 88 CTR (SC) 66 : (1990) 187 ITR 688 (SC), National Thermal Power Co. Ltd. vs. (1999) 157 CTR (SC) 249 : (1998) 229 ITR 383 (SC) and CIT vs. Kanpur Coal Syndicate (1964) 53 ITR 225 (SC). In the case of Kanpur Coal Syndicate, three Judge Bench of the Supreme Court held as under: 'The AAC has plenary powers in disposing of an appeal. The scope of his power is co terminus of that of ITO. He can do all what the ITO can do and also direct him to do what he has failed to do.' The Hon'ble Supreme Court in the case of Jute Corpn. of India Ltd. vs. CIT Anr. (1990) 88 CTR (SC) 66 : (1990) 187 ITR 688 (SC) has held that additional ground could be raised before the appellate authority if the same could not have been raised before the ITO when the return was filed or when the assessment was made. There may be factors justifying the raising of additional ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 'Provided that any amount of the interest paid in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books or account or not) for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use shall not be allowed as deduction.' The facts of the appellant's case are identical the facts of the case of Core Health and the business is already going on and the money borrowed is for its business only, though meant for expansion of its existing business. The appellant, no doubt, claimed the interest expenses as capital in the return, but on account of judgment of the jurisdictional High Court the same is being claimed as revenue and the law position in the State of Gujarat is very clear on this point, that for the running business, interest on the borrowed capital for the business is to be allowed as revenue. Therefore, I do not see any hesitation in holding that interest expenses as claimed by the appellant in its additional ground of appeal are revenue expenses and the appellant deserves to be allowed the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Supreme Court in the case of India Cements Ltd. vs. CIT. Those expenses were incurred towards the fund borrowed for the purposes of business. Upfront, but one-time processing loss @ 1.5 per cent, so these amounts being revenue in nature are covered in favour of assessee by the decision of Hon'ble Supreme Court in the case of India Cements Ltd. 8.2 On the other hand, the learned Departmental Representative opposed the submissions of the learned counsel for the assessee and advanced his arguments that the Department has raised two-fold arguments that the assessee has raised additional ground for the first time and the CIT(A) should have admitted the same on merits. It was contended that in view of the finding these are legal and professional charges and upfront expenses which are not allowable as revenue expenditure under s. 37(1) of the Act. The learned Departmental Representative relied on the following decisions: (i) 207 ITR 385 (Bom) (sic) (ii) E.I.D. Parry (India) Ltd. vs. CIT (2002) 177 CTR (Mad) 563 : (2002) 257 ITR 253 (Mad) (iii) 155 ITR 535 (AP) (sic) (iv) Triveni Engineering Works Ltd. vs. CIT (1999) 152 CTR (Del) 433 : (1998) 232 ITR 639 (Del) (v) 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch the said payments are not supported by any evidence. On the contrary, as mentioned earlier, the payment is pertaining to expansion of existing business and as such the same is eligible for deduction. The principle laid down by Hon'ble Gujarat High Court the in CIT vs. Alembic Glass Industries Ltd. and Bansidhar (P) Ltd. vs. CIT (1981) 20 CTR (Guj) 90 : (1981) 127 ITR 65 (Guj) that where there is same management, same company, it is always in case of expansion and hence it is for the purpose of existing business and not for new business. Therefore, the deduction is eligible under s. 36(1) or 37(1). It was also submitted that copy of prospectus from where these facts are mentioned was also given to the AO. 8.4 After considering the rival submissions and going through the material on record, we find that the assessee has raised certain additional grounds which have rightly been admitted by the CIT(A) by relying upon various decisions as mentioned above. As far as allowability of interest and financial charges of Rs. 3,37,84,348 is concerned, it has two components. First of these two components is Rs. 2,92,45,670 pertaining to interest charged. The issue of interest expenses has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een held that the import of word "derived" is much smaller than the phrase "attributable to", as also the case of Madras High Court in the case of CIT vs. Pandian Chemicals Ltd. (1998) 147 CTR (Mad) 5 : (1998) 233 ITR 497 (Mad), wherein it has been held that "a mere connection between an income and an industrial undertaking would not be sufficient", the AO has observed that the other income amounting to Rs. 6,86,96,685 from Motibhoyan unit is not eligible for deduction under s. 80-I, as the same is not derived from the industrial undertaking and accordingly recalculated the same. The CIT(A) confirmed the same. 9.1 Before us, the learned counsel for the assessee submitted that the AO has not properly computed the deduction under s. 80-IA of the Act. For that purpose the learned counsel for the assessee drew our attention to p. 11 of the paper book wherein the working of s. 80-IA is given. Over and above, the learned counsel for the assessee relied on the note which has been submitted during the course of hearing that working of s. 80-IA should be worked out correctly on the basis mentioned in the said note, i.e., provision for doubtful debt which is clearly disallowable under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made by the AO under s. 80HHC is in order and the stand of the appellant is not acceptable, since it has been held by many benches of the Tribunal that 90 per cent of the interest is to be excluded from the income from business or profession for computation of deduction under s. 80HHC. Further, the contention of the appellant regarding benefit of netting off cannot be accepted, in view of the decision of the Madras High Court in the case of K.S. Subbiah Pillai Co. (India) (P) Ltd. vs. CIT (2003) 179 CTR (Mad) 522 : (2004) 134 Taxman 735 (Mad), wherein it has been held that there is no scope for setting off the interest income against the expenditure by way of interest before applying cl. (baa). Since the controversy regarding this issue has been settled by the above decision, the action of AO is quite justified in reducing the business profit by 90 per cent of interest income earned and no interference whatsoever is called for on this count." However, the issue for netting off the interest earned is restored to the AO with the direction to recalculate the same as per law available at relevant point of time. 11. Ground No. 14 is regarding levy of interest under ss. 234B and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion money was given to AO. Thus, assessee has made out a case that all relevant material was on record and, therefore, in view of various decisions, the additional ground may be admitted. Regarding legal position, we find that r. 11 of the Income-tax (Appellate Tribunal) Rules, 1963, is relevant on the issue, which reads as under: "Rule 11: The appellant shall not except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal in deciding the appeal, shall not be confirmed to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule: Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground." The Hon'ble Supreme Court in National Thermal Power Co. Ltd. vs. CIT has held that the Tribunal is only required to consider a question of law arising from the facts which are on record in assessment proceedings. Such question should be allowed to be raised when it is necessary to consider that question in order to correctly assess the tax liability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied. The assessee relied on the decisions of the Tribunal in the cases of Neha Proteins Ltd. vs. Asstt. CIT (2004) 83 TTJ (Jd) 236 and J.M. Shares Stock Brokers Ltd. vs. Dy. CIT (2004) 83 TTJ (Mumbai) 1052, wherein on identical facts the Tribunal has held that such interest should have been reduced from share issue expenses and cannot be treated as income from other sources. It was pointed out that the decision of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. vs. CIT has been considered in the case of Neha Proteins. On the other hand, the learned Departmental Representative opposed the submissions of assessee on facts and law. It was specifically submitted by the learned Departmental Representative that it was not clear what portion of the interest on F.D. created out of share application money relates to period after allotment and what portion was prior to allotment. He further submitted that this interest is not linked specifically or intricately in that item of share issue expenses. The learned Departmental Representative also pointed out that in the case of Brooke Bond India Ltd. vs. CIT (1997) 140 CTR (SC) 598 : (1997) 225 ITR 798 (SC), a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year as related thereto. So, in the interest of Justice, we restore this issue to the file of AO for deciding the same as per law available at relevant point of time on the issue relevant to the assessment year under consideration after providing reasonable opportunity of hearing to the assessee. ITA No. 1685/Ahd/2004 for asst. yr. 2000-01 (Revenue's appeal): 13. The Revenue has raised the following grounds in its appeal: 1. The learned CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 14,90,243 being debenture issue expenses. 2. The learned CIT(A) has also erred in law and on facts in deleting the addition amounting to Rs. 14,00,000 made in respect of stamp duty for term loan and professional fees for term loan. 3. The learned CIT(A) has also erred in law and on facts in directing the AO to allow Rs. 20,65,537 being 1/5th disallowed on account of deferred revenue expenses. 4. The learned CIT(A) has also erred in law and on facts in deleting the disallowance of interest expenses to the extent of Rs. 14,48,879 being 2 per cent of interest income charged less by the assessee. 5. The learned CIT(A) has also erred in law and on facts in dele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Supreme Court in India Cement Ltd.. In view of this discussion, we are not inclined to interfere with the findings of CIT(A) and the same are upheld. 14. The second ground of Revenue's appeal is regarding deletion of addition of Rs. 14,00,000 made in respect of stamp duty for term loan and professional fees for term loan. The learned Departmental Representative submitted that as submitted in ground No. 1 above, the debenture issue expenses is for the new project and as such it is of capital nature and the AO has rightly disallowed the same. The CIT(A) has wrongly deleted the same without appreciating the facts of the case. It may be confirmed. On the other hand, the learned counsel for the assessee has submitted that for the new project all these expenses were incurred and hence the same has to be capitalized. The learned counsel for the assessee has submitted that the CIT(A) has rightly appreciated the facts of the case and deleted the impugned addition. This issue is also covered in favour of assessee by the decision of Hon'ble Supreme Court in India Cement Ltd. 14.1 We have considered the rival submissions and gone through the material on record. We agree with the fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of appeal relates to disallowance of Rs. 1,17,97,468 out of interest expenses. The interest expenses of Rs. 1,17,97,468 consist of two parts, first, interest charged from Babubhai Patel Co. on advance on running account of Babubhai Patel Co. The AO has computed interest on running account of this party at Rs. 85,95,268 which includes an amount of Rs. 1,37,897 being interest due on short-term deposit and in the case of Shri Rama Association, on an advance of Rs. 1,77,90,000 the AO has computed Rs. 32,02,000, the total of which comes to Rs. 1,17,97,468. On a perusal of assessment order, it is noticed that the AO has charged interest on these two accounts by holding that these advances are for non-business purposes. However, during the course of appellate proceedings the appellant has submitted that Babubhai Patel Co. has been given an advance for construction of factory premises and Shri Ram Association for the construction of office premises and both these advances are given for the purposes of business. It was further submitted that in the case of Babubhai Patel Co., the interest already stands charged @ 16 per cent amounting to Rs. 71,46,389 and this is included in the i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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