TMI Blog2000 (6) TMI 118X X X X Extracts X X X X X X X X Extracts X X X X ..... Amount in Rupees ------------------------------------------------------------------------ 1. Salaries Wages 21,80,000 2. Travelling expenses 7,40,000 3. Telephone Telex exp. 5,06,000 4. Lease rent charges of vehicles 5,58,000 5. Misc. Factory exps. 7,20,000 6. Recruitment expenses 4,64,000 7. Insurance 3,61,459 ------------------------------------------------------------------------------------------------ On the facts and circumstances, your appellant submits that the expenditure is fully allowable as claimed, as it is not capital expenditure. (4) Debenture issue expenses: (a) It is submitted that the statement by the CIT that it was the assessee's argument that the expenditure relating to convertible part of the debentures were only covered by section 35D is erroneous. (b) The learned CIT(A) erred in not disposing of ground No. 2(b)(i) of the appeal relating to inclusion of Rs.200 lacs of non-convertible debentures whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at brought forward investment allowance should be deducted for arriving at the income eligible for deduction under sections 80HH and 80-1. Your appellant submits that unabsorbed investment allowance of earlier years should not be deducted from the current year's income for the eligibility of deduction under sections 80HH and 80-1. 3. In ITA No. 529/Ahd./1997, which is the appeal filed by the Revenue, the following substantial grounds have been taken: "1. The Id. CIT(A) has erred in law and on facts in-- (i) directing to recompute the deduction under section 35D considering bridge loan into capital employed; (ii) deleting the disallowance of Rs.44,250 made under section 40A(3); (iii) deleting the disallowance of Rs.4,51,452 made under section 43B; (iv) directing to allow deduction under sections 80HH and 80-1 on misc. income." 4. The assessee is a domestic company in which the public are substantially interested. The company is engaged principally in the business of manufacturing Intravenous Fluids (Large Volume Parenterals i.e., LVP) and Sterrile Water for Injections (Small Volume Parenterals i.e., SVP). The manufacturing operations are carried out at its factory a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------- 2,38,59,459 --------------- Out of these, following expenses are directly related to the acquisition/ installation of the capital assets: Foreign Travelling - Rs. 8,90,000 Professional fees - Rs. 3,50,000 Trial Runs expenses - Rs. 14,14,000 ---------------- Rs. 26,54,000 ---------------- Other expenses aggregating to Rs.2,12,05,459 are of revenue nature and are fully deductible under the provisions of Income-tax Act, 1961. These expenses are of revenue nature and are incurred wholly and exclusively for the purpose of business. These are fully deductible under the provisions of Income-tax Act, 1961 and hence the same are claimed in full. It is submitted that the same be allowed in full. Subsequently, on reversal of capitalised expenditure, the depreciation has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blished for manufacture of 45 million units of SVP. (ii) It is further contended that making of accounting entries is different with determination of the character or nature of claim of deduction and relied upon the decision of Supreme Court in the case of CIT (West Bengal) v. India Discount Co. Ltd [1970] 75 ITR 191. In addition to this, various other court decisions are also quoted. (iii) It is also pleaded that the case of assessee is not covered by the Supreme Court decision in the case of Challapalli Sugars Ltd v. CIT [1975] 98 ITR 167 on the reason that the assessee-company had made investment in existing business. (iv) It is further stated that the case of assessee is covered by the decision of Hon. Gujarat High Court in the case of CITv. Alembic Glass Inds. Ltd. [1976] 103 ITR 715. (v) It is further argued that the assessee's case is covered by the Supreme Court decision in the case of India Cements Ltd v. CIT [1966] 60 ITR 52 and Bombay High Court decision in the case of Calico Dyeing Printing Works v. CIT[1958] 34 ITR 265. Determination:- I have carefully examined the above-mentioned submissions of the assessee and have observed as under: (i) It is a matter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting followed by it and as per the guidelines of ICAI. In the original return of income also, the assessee-company has computed taxable income on the basis of profit determined as per its audited accounts. Thereafter, suddenly, the assessee has revised its return of income and has come out with a claim for deduction of all the expenditure incurred for setting up of a unit for expansion of the production capacities of existing and new products and no reason is specified for this change of opinion by the assessee. If the company was rightly of the opinion that such expenditure was of revenue in nature, then it should have debited the same to the profit and loss account. (iv) It has been held by various courts that the assessee cannot follow two different methods of accounting for computing the profit one to be presented before the shareholders, bank and other purposes on one hand and another method for presenting before the revenue authorities on the other hand. As per the provisions of section 145(1) also, income chargeable under the head "Profits and Gains of Business or Profession" is to be computed as per the method of accounting regularly followed by the assessee. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pecifically import of machines has been treated as part of the cost for income-tax purposes) 7,40,000 d. Telephone and telex expenses incurred for purchase of equipments, borrowings of funds and other incidental activities for expansion project 5,06,000 e. Lease rental charges for vehicle used by project persons for going to factory and other suppliers' places, meeting bankers, etc. 5,58,000 f. Miscellaneous expenses incurred at factory in connection with setting up of expansion capacities which are not directly linked with creation of assets. 7,20,000 g. Recruitment expenses for persons to be employed for new unit. 4,64,000 h. Insurance during the period of establishment of the project for building, machineries, etc. 3,61,459 --------------- Total 2,12,05,459 ---------------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 98 ITR 167, the Supreme Court has explained the meaning of expression "actual cost" as under:- "It would appear from above that the accepted accountancy rule for determining the cost of fixed assets is to include all expenditure necessary to bring such assets into existence and to put them in working condition." It is evident from above judgment of Hon. Supreme Court that the Legislature has used the word "cost" advisedly and not the word "price", why? Cost comprehends much more than the mere listed price of a "plant" and pre-operative interest is also included in it. The Hon. Gujarat High Court has also examined the issue of capitalisation of interest to, the cost of plant and machinery under section 43(1) in its subsequent decisions. In the case of CITv. Khzedut Sahakari Khand Udyog Mandli Ltd. [1976] 104 ITR 206, while examining the issue of capitalisation of interest to the actual cost of assets under section 43(1), the then Hon. Justice H.J. Diwan has observed as under: "We may point out that, so far as the second question is concerned, the matter is directly covered now by the decision of the Supreme Court in Challapalli Sugars Ltd. v. CIT There, the Supreme Court ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustice Desai P.D. at page 77, 112 ITR (1978)]. It is thus proved from the above cited decisions with regard to 'actual cost' that all expenses including interest on borrowed funds, which were incurred in order to bring an asset in working condition should be capitalised to the actual cost of the asset. In fact, all the decisions of different High Courts, whenever the question regarding 'actual cost" was under consideration, not only the ratio of Challapalli Sugars Ltd. is relied upon but it is followed. This clearly indicate that the decision in the case of Challapalli Sugars Ltd. is a landmark decision on the issue of 'actual cost' which is also in accordance with the normally accepted accountancy policy and recommended by Institute of Chartered Accountants of India. The ratio of Challapalli Sugars Ltd. is followed by different High Courts, in addition to the cases cited above, in all the cases where the question of 'actual cost' was under consideration, irrespective of' the fact whether the assessee was running the business or in the process of starting a new business. In this regard, following decisions may be referred where the decision of Challapalli Sugars Ltd was followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capitalised to the cost of assets. The assessee-company will, however, be entitled to claim depreciation when the new project is set up and machinery has actually put to use and started commercial production." 8. As already mentioned in para 6 the assessee's appeal to the CIT(A) was dismissed on this point and the CIT(A) has adjudicated this issue by passing an elaborate order after summarizing the findings of the Assessing Officer and taking into consideration the submissions of the assessee. The issue has been discussed from pages 1 to 84 of the impugned appellate order. After summarizing the order of the Assessing Officer at pages 1 to 15 of the impugned appellate order in paras 2 to 2.9, the CIT(A) endorsed the view of the Assessing Officer with regard to the action in holding that the amount of Rs.1,56,76,000 paid on account of interest was required to be capitalised in view of the decision of the Supreme Court in the case of' Challapalli Sugars Ltd. v. CIT [1975] 98 ITR 167 after distinguishing the judgment of the Supreme Court in the case of India Cement.5 Ltd. v. CIT [1966] 60 ITR 52 relied upon by the assessee before the Assessing Officer as well as the CIT(A). The CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t may be capitalised only relating to the period prior to the asset coming into production i.e. relating to the erection stage of the asset." The CIT(A) thereafter recorded the submissions made on behalf of the assessee in paras 3 to 3.11 at pages 15 to 27 of the impugned appellate order and gave his findings in paras 4 to 4.25 and 5 to 5.14 at pages 29 to 77 of the order to the effect that the assessee is not entitled to claim the deduction of Rs.1,56,76,000 as a revenue expenditure which it has initially treated as a capital expenditure in its books of account and claimed it as a revenue expenditure only by filing a revised return as an after-thought. 9. Thereafter, the CIT(A) discussed the question relating to the deduction of expenditure of salaries, wages, travelling expenses, telephone telex expenses, professional fees, lease rent charges of vehicles, misc. factory expenses, insurance, financial charges etc. other than interest on borrowed funds which were initially capitalised by the assessee in the books of account and which related to acquisition of three machines and putting them into working condition but subsequently claimed as deduction while filing the return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asons given in the assessment order which can be summarised as under: (i) That the interest of Rs.1,56,76,000 paid related to acquisition of new machines which was connected with the expansion of new unit. (ii) The assessee itself has capitalised the same in its books of account and showed it as capital expenditure. (iii) There was no debit of the amount of interest as well as part of other expenses relating to salaries, wages, travelling expenses, lease rent charges, telephone and telex expenses, misc. factory expenses, insurance, etc. which were claimed as a deduction in the return filed under section 139(5) in the P L A/c. (iv) The assessee has consciously followed two methods of accounting, one for shareholders and financial institutions and the other for tax authorities which is not permissible. (v) The Assessing Officer further held that the Supreme Court decision in the case of India Cements Ltd. was distinguishable and the Gujarat High Court decision in the case of CIT v. Alembic Glass Industries Ltd. [1976] 103 ITR 715 would not apply in view of the insertion of Explanation 8 to section 43(1). The Assessing Officer accordingly disallowed the claim of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relying on the decision of the Supreme Court in the case of Challapalli Sugar Ltd. Shri S.E. Dastur, the learned Advocate submitted that the crux of the arguments and findings of the CIT(A) in its very lengthy order is that once the assessee has capitalised the interest in its books of account, it cease to be interest and similar is his view in relation to other related expenses incurred under other heads like salaries, wages, travelling expenses, lease rent charges, insurance, etc. 10.2 After summarizing the findings of the Assessing Officer as well as the CIT(A) which have been elaborately recorded by the Assessing Officer in 10 pages and the CIT(A) in 84 pages, Shri Dastur submitted that both of them have erred in denying the claim of deduction on account of interest and other related expenses claimed by the assessee as a revenue expenditure by filing the revised return under section 139(5). Shri Dastur further submitted that the method of accounting and the entries made in the books of account are two separate things and the provisions of section 145 are concerned only with the method of accounting. For that Shri Dastur placed reliance on the decisions which are as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... embic Glass Industries Ltd.'s case (ii) Arvind Polycot Ltd. v. Asstt CIT [1996] 222 ITR 280 (Guj.) (iii) Veecumsees v. CIT [1996] 220 ITR 185 (SC) (iv) CIT v. Woodcraft Products Ltd. [1996] 217 ITR 862 (Cal.). As regards the deduction on account of expenditure other than the interest as taken in ground of appeal No. 3, Shri Dastur mainly relied on his submissions reproduced earlier in relation to ground No. 2 and reiterated that once the expenditure relates to an existing business and is not completely related with the acquisition and installation of a new asset it must be allowed as a deduction. Shri Dastur then elaborated on the concept of what is the same business and relying on the case of Alembic Glass Industries Ltd. submitted that in that case a new unit started by the company at a totally different location was also held to be the expansion of the same business. Applying the principles laid down by the Gujarat High Court, Shri Dastur submitted that in the case of the assessee it was only an expansion of the same business as it was only the capacity of the existing unit which were expanded by tile installation of additional machines. Reliance was also placed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred for the acquisition of additional machines and putting them into operation as capital expenditure and once having exercised the option to treat this expenditure as capital expenditure in its books of account, the assessee cannot now claim it as a revenue expenditure. Reliance was placed on the decision in Hinds v. Buenos Ayres Grand National Tramways Co. Ltd. [1906] 2 Chancery Division 654 and the decision of the Supreme Court in the case of Challapalli Sugars Ltd. Relying on the above authorities it was submitted that the method of accounting relating to valuation/cost of assets is the price paid alongwith related expenses and the same is now clearly permissible to be capitalised under section 43(1). The learned standing counsel further relied on the following decisions: (i) CIT v. UCO Bank[1993] 200 ITR 68 (Cal.) (ii) AddL CITv. Chandravilas Hotel [1987] 165 ITR 300 (Guj.). As regards the findings of the Departmental Authorities with regard to the treatment of an expenditure other than interest which has been claimed by the assessee as a revenue expenditure by filing the revised return under section 139(5), the learned standing counsel relied on the orders of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcised the option to capitalise the interest in relation to the funds used for acquiring capital assets the assessee cannot now claim the same as a revenue expenditure and for that reliance was placed on the decision of Supreme Court in the case of Challapalli Sugars Ltd. On the other hand, the claim of the assessee is that the entries made by the assessee in its books of account are totally irrelevant to decide as to whether the assessee is entitled to any deduction which he is legally entitled to in terms of specific provisions of Income-tax Act. For that it was pleaded by Shri Dastur, the learned counsel for the assessee that the case of the assessee was squarely covered by the decision of the Supreme Court in the case of India Cements Ltd. whereas the case of Challapalli Sugar Ltd. was distinguishable as that case related to a business which has not commenced production whereas in the case of the assessee the three new machines resulted only into expansion of existing business. In this connection, it will be useful to refer to the decision of the Supreme Court in the case of CIT v. India Discount Co. Ltd. [1970] 75 ITR 191 at page 192 "that the receipt being one which in law co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... io is harmony with the ratio of the above referred decision of the Supreme Court in India Cements Ltd.'s case, it would be necessary to state shortly the facts relating to that decision. There the assessee was a public limited company engaged in the manufacture and sale of sugar. The company went into production on January 22,1958. It had borrowed considerable sums of moneys from the Industrial Finance Corporation of India for the installation of machinery and plant. During the accounting period, the company paid Rs.2,38,614 as interest and claimed that the said payment should be treated as part of the cost of the machinery and plant installed by it, and the depreciation should be calculated accordingly. The ITO rejected this claim of the company and held that the interest paid by the company from year to year was revenue expenditure. The matter eventually went to Andhra Pradesh High Court which held that where a plant is constructed out of borrowed money, the interest on loan upto the date of commencement of the business could be capitalised or treated as part of the actual cost of the plant. The Supreme Court rejected this view of the High Court on consideration of the question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired." Their Lordships further observed- at page 727 thus:- "Since the transaction of borrowing is not the same as the transaction of investment, the Supreme Court has observed in India Cements Ltd. v. CIT that, for considering whether payment of interest on a borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. Thus, the decisions of the Bombay High Court in Calico Dyeing and Printing Works and of the Supreme Court in India Cements Ltd. were given with reference to the borrowings made for the purpose of running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. was given with reference to a borrowings which could not be treated as made for the purpose of business, as no business had vet been commenced. Thus, there is no incompatibility between these decisions. The Supreme Court itself has distinguished its earlier decision in India Cements Ltd. in the following terms in Challapalli Sugars Ltd. This case too is of no assistance to the revenue. The appellant company in that case at the time it raised the loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aimed the deduction of interest on borrowed funds under section 36(1)(iii). Therefore, respectfully following the decision of the Gujarat High Court in the case of Alembic Glass Industries Ltd. and that of the Supreme Court in the case of India Cements Ltd. we are of the opinion that the assessee is entitled to deduction of Rs.1,56,76,000 on account of interest on borrowings which is used for installation of three new machines under section 36(1)(iii). In this connection, it will be useful to refer to the decision of the Supreme Court in the case of Ambica Prasad Mishra v. State of UP [1980] 3 SCC 719 dealing with the point where it is held that under article 141 every new discovery or argumentative novelty cannot undo or compel reconsideration of a binding precedent. Similar is the view of the Supreme Court in the case of Kesho Ram Co. v. Union of India [1989] 3 SCC 151 wherein at page 160 it is held-- "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision." In this view of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts of interest are allowable as revenue expenses." From the judgment of the Gujarat High Court it is very clear that they have found even in this case only the amount of interest as allowable revenue expenditure. The other expenses including miscellaneous and travelling expenses have therefore by implication found not allowable as revenue expenditure. It appears that deductibility of the other expenses was riot even argued before the Hon'ble High Court during the course of hearing. The reasons for that are not far to seek unlike the provisions of section 36(1)(iii) the provisions of section 37 clearly and unmistakably deny any deduction of expenditure in the capital field. In this connection, reference may be made to the binding decision of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. v. CIT [1981] 127 ITR 37 and the decision in the case of CIT v. Peas Industrial Engineers (P.) Ltd. [1994] 205 ITR 447 wherein it is held that all expenditure necessary to bring assets into existence and to put those assets in working condition is part of the actual cost of the assets to the assessee and it is in the light of that actual cost that the question o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Assessing Officer that in accordance with the provisions of section 35D, the total expenditure eligible for deduction comes to Rs.85.08 lakhs as calculated below: ------------------------------------------------------------------------ Capital employed: Rs. in Lakhs ------------------------------------------------------------------------ (a) Loans from Financial Institutions 1231.07 (b) Debentures: Non-convertible Deb. 200 Partly convertible 1857 debentures ------ 2057.00 (c) Increase in share capital 114.91 ---------- 3403.04 ---------- 2.5% of above is ... Rs.85.08 lakhs. ------------------------------------------------------------------------ In addition to this, the assessee has claimed other debenture issue expenses amounting to Rs.28,05,137 as deductible under section 37(1) of the Act. During the course of assessment proceedings the Assessing Officer pointed out to the assessee that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tures and as such it becomes capital expenditure and was not admissible as deduction under section 37(1). 14.1 The assessee appealed and the CIT(A) discussed this issue in paras 7 to 7.13 of the impugned order and gave his findings in para 7.12 that the issue for public subscription of shares or debentures of a company are covered by the provisions of section 35D(2)(c)(iv). And the mere fact that the appellant's issue was in relation to partly convertible debentures would not take same out of the purview of provisions of section 35D. The CIT(A) further held that there is force in the arguments of the learned counsel for the assessee that it is only an expenditure which are specifically enumerated in section 35D(2)(c)(iv) which are specifically covered by these provisions. Accorclinglv the expenditure to the extent of Rs.61,60,260 was held to be covered by the provisions of section 35D(iv). With regard to the balance expenditure of Rs.40,25,137 the CIT(A) directed the Assessing Officer to allow deduction to the assessee on a pro rata basis and upheld the disallowance to the extent the same can be attributed to issue of share capital on conversion of debentures. 14.2 The ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration is concerned, the expenditure was incurred in relation to the raising of loans by issue of partly convertible debentures and the same was clearly allowable as a deduction in view of the Supreme Court decision in the case of India Cements Ltd. as well as the decision of the Tribunal in the case of IAC v. K.S.B. Pumlp Ltd. [IT Appeal No, 4648 (Bom.) of 1986, dated 2-8-1989] for assessment year 1982-83, and the decision of the Tribunal in the case of IAC v. F.G.P. Ltd. [IT Appeal No. 2150 (Ahd.) of 1985, dated 24-4T-1992] for assessment year 1982-83. 14.4 The learned standing counsel for the department relied on the orders of the Assessing Officer as well as the CIT(A) and further submitted that since admittedly the expenditure was in relation to convertible debentures which have characteristic of equity shares, such debentures cannot be termed as debentures and therefore the proportionate expenditure on such debentures was for augmentation of equity base of the company and as such had to be treated as capital expenditure. Reliance was placed on the decision of the Ahmedabad Bench of the Tribunal in the case of reported in Banco Products (India) Ltd. v. Dy. CIT[1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re in connection with the issue of partly convertible debentures also to the file of the CIT(A) for reconsideration (to avoid piecemeal adjudication) in the light of the decision of the Supreme Court in the case of India Cements Ltd. as well as the decision of the Tribunal in the case of F.G.P. Ltd. and K.S.B. Pump Ltd. Accordingly ground of appeal Nos. 4 and 5 are allowed for statistical purposes. 15. Coming to ground of Appeal No. 6 which relates to the claim of deduction on account of expenditure on advertisement amounting to Rs.70,22,742, the issue has been discussed by the Assessing Officer in para 4 at page 10 of the assessment order. The Assessing Officer while examining the accounts found that the assessee has treated the above expenditure amounting to Rs.70,22,742 in its Directors' Report as Defer-red Revenue Expenditure and has claimed 1/4th of the same as deductible. However at the time of filing of the return the assessee has claimed the entire expenditure of Rs.70,22,742 as revenue expenditure. During the course of assessment proceedings the assessee furnished written submissions dated 24-3-1995 with regard to its claim of deduction of this advertisement expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of interest amounting to Rs.1,56,76,000 and the fact that the assessee has treated this expenditure as a Deferred Revenue Expenditure in its books of account and initially claimed only 1/4th of it as a deduction but subsequently while filing the return, entire amount was claimed as deduction treating the same as revenue expenditure. The CIT(A) held that the treatment given in the books of account of an assessee can be departed only when the treatment itself is found to be erroneous or improper, In the absence of that the assessment has to be made on the basis of profit resulting from the books of account. He accordingly upheld the action of the Assessing Officer. 15.2 Shri S.E. Dastur, the learned Advocate for the assessee submitted that this special advertisement campaign expenditure was incurred by the company in the assessment year under consideration on advertisements in various newspapers, periodicals and magazines in different languages all over India and the advertisements were issued with the object of raising corporate image of the company and to make known to the people at large the company's projects, its activities and its success. It was submitted that through t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diture is not in the nature of personal expenditure or is an expenditure in the capital field. The assessee being a company and considering the nature of expenditure and other fact it cannot be disputed that the expenditure is not of a personal nature. As regards the second limb of section 37 that the expenditure should not be of a capital nature it is seen that the assessee has accounted this expenditure incurred, as Deferred Revenue expenditure in the books of account but this will not change its basic character i.e. being an expenditure of revenue nature. As already held while disposing of ground No. 2 making of accounting entries in the books of account is not determinative of the character and/or nature of claim for deduction. The expenditure incurred by the assessee does not bring into existence any tangible assets and even though the expenditure incurred may bring to the assessee some benefit of an enduring nature this alone will not be sufficient to treat the expenditure as an expenditure of capital nature in view of the decision of the Supreme Court in the case of Empire Jute Co. Ltd. wherein it is held as under: "There may be cases where expenditure, even if incurred fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Medical Representative of various users of the products of the assessee company. A scrutiny of the details as filed during the course of assessment proceedings has revealed that the assessee has incurred an expenditure of Rs.1,97,806 under the head 'Misc. gifts'. It is further observed that the expenditure under the head 'Misc. gifts' is not fully vouched and certain expenditure are for the personal purposes. Considering the above facts and circumstances of the case, an amount of Rs.20,000 is disallowed out of misc. gift being unverifiable in nature and an expenditure which are not laid for the purpose of the business of the assessee-company." 16.1 The CIT(A) has upheld the action of the Assessing Officer for the reasons given in para 11 of the impugned order as under: '11. The next issue in appeal for assessment year 1992-93 is disallowance of a sum of Rs.20,000 claimed by the appellant on account of gift articles. The Assessing Officer has made the disallowance on the ground that the expenditure is not fully supported by vouchers. During the course of proceedings before me, the appellant has argued that the expenditure is fully supported by the vouchers kept in this be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture is not vouched, whereas the contention of the appellant company has been that each and every expenditure has been fully vouched. Here again I hold that the estimate of disallowance as made by the Assessing Officer for want of complete verification and for possible disallowables is fair and reasonable. The same is accordingly confirmed." 17.2 Before us the learned representative of the assessee submitted that the entire expenditure under the head 'Marketing expenses' were fully vouched and these were incurred for lodging, boarding, on marketing staff during the meetings in the different centres. It was submitted that the Assessing Officer has disallowed an ad hoc amount of Rs.30,000 on the ground that the expenditure are personal in nature and meant for catering personal needs. It was submitted that there cannot be any personal expenditure of the assessee as it is a public limited company which is only an artificial juridical person. The learned DR supported the order of the Assessing Officer as well as the CIT(A). 17.3 We have considered the rival submissions. The expenditure under the head 'marketing' are fully vouched and the Assessing Officer has not pointed out a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion of the High Court in the case reported in J.P. Tobacco Products (P.) Ltd. v. CIT[1998] 229 ITR 123 (MP). So far as ground No. 9(a) is concerned, it was submitted that the CIT(A) has erred in holding that B/F investment allowance and unabsorbed depreciation should be deducted for arriving at the income eligible for deduction under sections 80HH and 80-I. 19. The learned standing counsel appearing for the department submitted that in view of the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd. the income earned from interest on short term deposit is required to be assessed under the head "Other sources" and by implication it cannot be treated as a profit derived from Industrial undertaking. Similarly it was submitted that in this very decision the Supreme Court has not approved the contention of the assessee that the interest paid on borrowings and other expenses attributable to the earning of interest should be deducted from the gross receipt to calculate the income assessable under the head 'other sources". It was accordingly submitted that as far as ground Nos. 9(a) and (b) are concerned the same should be dismissed. Regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is covered in favour of the assessee and against the revenue by the decision of the High Court in the case reported in J.P. Tobacco Products (P.) Ltd. 20.2 So far as ground No. 9(d) is concerned, the same is covered in favour of the revenue and against the assessee as per the decision of the Gujarat High Court in the case reported in the case of Paushak Ltd. 21. In the result, the appeal filed by the assessee is partly allowed. 22. Coming to the Revenue's appeal, the first issue is with regard to the recomputation of deduction under section 35D considering bridge loan into capital employed. This ground is linked with ground Nos. 4(a) and 4(b) which we have set aside to the file of the CIT(A) for fresh adjudication in accordance with law and in particular in terms of our directions therein. As far as the merit of the controversy is concerned, we are in agreement with the findings of the CIT(A) that when the funds are borrowed from financial institutions whether they are bridge loan for a short period or for long period, the same have to be considered as a part of the capital employed as section 35D does not mention any specific time limit on the duration of loan taken. Acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns should not be disbelieved. The disallowance made by the Assessing Officer is therefore directed to be deleted." 23.1 After hearing both the parties to the dispute we are of the opinion that the order of the CIT(A) requires no interference and we uphold his findings as recorded in para 9.1 of the impugned order which we have extracted above. This ground is accordingly adjudicated in favour of the assessee and against the revenue. 24. Ground No. 3 relates to action of the CIT(A) deleting the disallowance of Rs.4,51,452 made by the Assessing Officer under section 43B. The CIT(A) has discussed this issue in para 10 of the impugned order as under: "10. Next dispute in appeal for assessment year 1992-93 relates to disallowance of Rs.4,51,452 being bonus. The Assessing Officer has made the disallowance as the amount was not paid during the previous year itself. During the course of proceedings before me the appellant explained that although this amount was not paid before the end of the previous year in question the same was paid during the months of October/November 1992, well before the expiry of the time to furnish return of income by the company within the provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been set up for manufacturing similar items where the assessee installed three new machineries for which the assessee has incurred various expenses including interest, salaries and wages, travelling expenses, telephone, telex, recruitment and other expenses. (Total Rs.2,38,59,459). The break-up has been given in para 5 of the order passed by the learned Accountant Member which includes interest payment of Rs.1,56,76,000. Admittedly in the books of account, the assessee capitalised the said expenditure obviously on the ground that the expenditure was incurred in capital field. The assessee has been maintaining its account following mercantile system of accounting. Therefore, adopted the established procedure of accounting and did not debit the aforesaid pre-operative expenses in the profit and loss account prepared for the year under consideration. In the original return the assessee has not claimed the aforesaid expenditure as revenue expenditure but thereafter the company filed a revised return claiming the entire expenditure as revenue expenditure. The Assessing Officer rejected the claim made by the assessee mainly on the grounds that (a) the assessee's case is covered by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ported by the principles of accountancy. The assessee did not claim the expenditure as revenue expenditure in the books of account. Admittedly even according to the assessee it had not committed any mistake but since the law permits it to claim the interest as deduction under section 36 as such relief should be given to it. In my opinion, the contention of the assessee should not be accepted because the treatment originally given by the assessee in respect of the interest payment for the new assets is supported by law Le. Explanation 8 to section 43(1) of I.T. Act. The original action of the assessee is not only an Act of book entry, but the same is also supported by law. it is needless to mention here that admittedly the entire expenditure has been incurred by the assessee in the capital field. Therefore, the learned Accountant Member has rightly confirmed the finding recorded by the CIT(A) with regard to the other expenditures excluding the expenditure of interest payment. 4. In my opinion, the view taken by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. covers the present issue. The other case law reported in Gujarat High Court in the case of Khedut Sahakari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies in the new unit and the assets have not yet put to use. Therefore, the assessee had rightly capitalised the interest payment also in its books of account following the provision of Explanation 8 of section 43(1) of the I.T. Act. Therefore, in my opinion, the finding recorded by the CIT(A) on this issue should be confirmed. 5. On behalf of the assessee, two decisions of the Tribunal, Pune Bench were relied upon which are as follows:- In the case of Bharat Forge Ltd. the similar issue with regard to the applicability of Explanation 8 of section 43(1) came up before the Tribunal. However, I do not find that any definite finding was recorded by the Tribunal with regard to the applicability of the aforesaid provision and the Tribunal followed the decision of Supreme Court in India Cements Ltd.'s case at paragraph 26 of the order. In a later decision of the same Bench reported in Kalyani Steels Ltd. v. Dy. CIT [1997] 62 ITD 233 (Pune), the Tribunal considered the provision of Explanation 8 but held that by implication it cannot be held that interest paid or payable in connection with acquisition of asset before such asset was put to use shall be included in the actual cost of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and in the circumstances of the case, considering the different views taken by the different Benches of the Tribunal i.e., 53 ITD 575, 62 ITD 233 (Pune Bench) and 65 ITD 169 (Calcutta Bench) and the decisions of Supreme Court and High Court discussed in the orders, the interest paid on borrowed capital which has been capitalised in the books of account as part of actual cost of the new machineries of the new unit of the assessee-company can be claimed as deduction under section 36(1)(iii) of the Income-tax Act'. THIRD MEMBER ORDER B.M. Kolhari, Accountant Member.-- These appeals were heard by the Division Bench of the Tribunal (C-Bench), Ahmedabad. The order was proposed by Shri R.K.Bali, the learned Accountant Member. The learned Judicial Member, however, did not agree with the view expressed by the learned A.M. in relation to allowability of deduction of interest payment of Rs.1,56,76,000. Since there was no unanimity in identifying the difference of opinion between the learned Members of the Division Bench, both of them have referred the following separate point of difference to the Hon'ble President, ITAT under section 255(4) of the Income-tax Act, 1961. The Point of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of starting a new business, but those were part of the same business as being already carried on by the assessee. Shri Dastur pointed out that a perusal of the orders proposed by the learned A.M. and learned JM and the points of difference referred by them under section 255(4) would clearly indicate that both the learned Members have unanimously held that these three Additional machines were installed by the assessee for manufacture of similar items and such installation is not for the purpose of starting a new business, but those were installed in a new unit of the existing business, which forms part of the same business. There is no difference of opinion between the learned Members about the fact that the setting up of the new unit of the existing business was a part of the same business, Therefore, the only issue on which they have differed is the effect of insertion of Explanation 8 to section 43(1) and whether the same affects deductibility of interest on capital borrowed for an existing business as laid down by the decisions of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. and the Judgment of the Hon'ble Supreme Court in the case of India Ceme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs.1,56,76,000) making of accounting entries in the books of account is not determinative of the character and/or nature of claim for deduction.' The Id. A.M. has held that deduction of' the entire sum of Rs.70,22,742 should be allowed in the year under consideration. The learned J.M. has not differed with the view so taken by the A.M. in relation to this point. Therefore, there is no real difference between the learned A.M. and J.M. on the question as to whether the existence or absence of book keeping entry will affect the allowability of a deduction or taxability of an income. 7. Shri Dastur then drew my attention to proposed order passed by the learned J.M. He pointed out that in para 2 on p. 69, the learned J.M. has observed that: "An addl. unit has been set up for manufacturing similar items where the assessee installed three new machines for which the assessee has incurred various expenses including interest, salaries, travelling etc. (totalling to Rs.2,38,59,459 including interest payment of Rs.1,56,76,000)." He further submitted that the learned J.M. at p. 73 has observed that ... in the present case borrowings were made for the purpose of establishing a new unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... meaning of section 5 whatever section 145 may say, such income cannot be charged to tax even though a book keeping entry has been made recognising such hypothetical income, which in law and on fact did not really accrue or arise or received in previous year." He placed reliance on the following decisions to support his contention that it is irrelevant that in the books of account, the interest was capitalised and not debited in the profit and loss account. "(a) Tuticorin Alkali Chemicals Fert. Lid v. CIT [1997] 227 ITR 172 (SC). (b) Arvind Polycot Ltd v. ACIT 222 ITR 280 (Guj.). (c) India Cements Ltd v. CIT[1966] 60 ITR 52 (SC). (d) CIT v. Guj. Mineral Development Corpn. [1981] 132 ITR 377 (Guj.). (e) Kalyani Steels Ltd 62 ITD 233. (f) IAC v. Coromandel Fertilizers Ltd 29 ITD 455. (g) Bharat Forge Ltd v. DCIT53 ITD 575 (Pune). (h) Addl. CIT v. Backau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.). (i) CITv. Chunilal V. Mehta Sons P. Ltd 82 ITR 54 (SC). (j) Kedarnath Jute Mfg. Co. Lid v. CIT [1971] 82 ITR 363 (SC) (k) Indian Rare Earths Ltd. v. ITO [1984] 8 ITD 882." 9. The learned counsel also submitted a brief synopsis of arguments in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest paid is in respect of capital borrowed for the purpose of the business. He drew my specific attention to Judgments reported in Arvind Polvcot Ltd.'s case, Gujarat Mineral Development Corpn.'s case, Addl. CIT v. Buckau Wolf New India Engg. Works Ltd. [1986] 157 ITR 751 (Bom.), Calico Dyeing Printing Works v. CIT [1958] 34 ITR 265 (Bom.), (said to be a binding judgment for Gujarat), Alembic Glass Industries Ltd.'s case, Bombay Steam Naviigation Co. (P.) Ltd. 's case, CIT v. Associated Fibre Rubber Industries (P.) Ltd. [1999] 236 ITR 471 (SC) and Tuticorin Alkali Chemicals Fertilizers Ltd.'s case. 11. Shri Dastur then submitted that the only real point of difference between the learned Members relates to the impact of insertion of Explanation 8 to section 43(1) in respect of deductibility of interest on borrowed capital as per the principles laid down by the Gujarat High Court in the case of Alembic Glass Industries Ltd. and the Judgment of Supreme Court in the case of India Cements Ltd. He submitted that section 43(1) refers to determination of 'actual cost' primarily for the purpose of grant of depreciation, development rebate, etc. thereon. The deductibility of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judgment of Hon'ble Jurisdictional High Court after insertion of Explanation 8 once again confirms the earlier view expressed in Alembic Glass Industries Ltd. 's case. Therefore, the view proposed by the learned J.M. is clearly contrary to the judgment of the Hon'ble Jurisdictional High Court. 13. Shri Dastur submitted that the learned J.M. at para 3, p. 70 of his order observed that 'It appears that the applicability of Explanation 8 to section 43(1) in relation to the meaning of actual cost has not been examined by the learned A.M." Shri Dastur pointed out that the said Explanation was specifically considered by the A.M. in his order at more than one place. At p. 20 of his order, the learned A.M. has not only considered the provisions of section 43(1) but has reproduced the relevant extracts from the Circular No. 461, dated 9-7-1986. Again at pages 32 and 33 of his order, the learned AM has specifically referred to the main reasoning of the Assessing Officer and the CIT (Appeals) that interest on moneys borrowed was rightly capitalised by the assessee in its books of account in view of Explanation 8 to section 43(1). It is, therefore, incorrect to say that the Explanation 8 to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned J.M. He submitted that the point of difference relates to what treatment should be given to the interest paid on the borrowed funds utilised for the acquisition of new assets forming part of new unit during the pre-production period. He submitted that the dispute as to whether the new unit, where the three new machines were installed was a part of the same business is still there and there was no unanimity on this point between the two learned Members. The learned J.M. has clearly held that plant and machinery has been installed in the new unit and it has not been put to use. This clearly means that the learned JM intends to say that new unit is not a part of the same business. The learned Sr. D.R. submitted that the learned A.M. has decided the aforesaid issue in favour of the assessee by placing reliance on judgment of Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. and India Cements Ltd. The Gujarat High Court decision referred to above is not applicable as when the said decision was delivered, the Hon'ble Gujarat High Court did not have an occasion to consider the scope of Fxplanation 8 to section 43(1). The Judgment of the Hon'ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owings made for the purchase of such assets should be capitalised. Shri Gupta pointed out that in this Circular it is also clearly mentioned that as per the guidelines issued by the Institute of Chartered Accountants of India (ICA for short), the interest on money which are specifically borrowed for the purchase of a fixed asset may be capitalised only relating to the period prior to the assets coming into production i.e., relating to the erection stage of the assets. The learned Sr. D.R. submitted that the capitalisation of the interest for the pre-production period was not in dispute and, therefore, there was no need of a specific mention of this fact in Explanation 8 to section 43(1). The learned D.R. also relied upon the judgments reported in Rajaram Bandekar's case and CIT v. India Pistons Ltd.[1999] 155 CTR (Mad.) 37 to support his contention that interest for post-production period cannot be capitalised. 17. Shri Gupta submitted that in various judgments where interest was paid for the period prior to commencement of production in cases of business already in existence, it has been held that interest on amount borrowed by the assessee for the acquisition and installation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s spinning capacity and to renovate and modernise some of the sections of the mill, the assessee negotiated to import machineries from abroad it was held that addl. liability in respect of repayment of loan borrowed by the assessee for acquiring imported machinery during the relevant previous year, which was incurred as an integral part of the original transaction can legitimately be taken into account as enhancement of cost of machinery purchased and it should, therefore, be taken into consideration in determining the actual cost of such machinery to the assessee for the purpose of allowing development rebate under section 33. There is no need to resort to section 43A(1) and the provisions of section 43A(2) cannot, therefore, be pressed into service to deny to the assessee the benefit which was available to it under section 33 itself. Reliance was placed on Tensile Steel Ltd's case. 20. Shri Gupta then relied upon the Judgment of Hon'ble Allahabad High Court in the case of J.K. Cotton Spg. Wvg. Mills Ltd. in which the Hon'ble Allahabad High Court held that the assessee was entitled to include all the items which had been allowed by the Tribunal in the 'actual cost' of his asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure necessary to bring such assets and to put them in working condition." 22. The learned D.R. submitted that the aforesaid principle for determination of the actual cost of assets was applied by the Hon'ble Gujarat High Court in the case of Arvind Mills, Ltd. Shri Gupta submitted that inclusion of interest in the actual cost of asset is in accordance with the accounting standards issued by the ICA. The Hon'ble Supreme Court in the case of CIT v. U.P. State Industrial Development Corpn. [1997] 225 ITR 703 has held that in order to determine the question of taxability, the well settled legal principles as well as principles of accounting have to be taken into account. It is a well accepted proposition that 'for the purpose of ascertaining profits and gains, the ordinary principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute". In the present case, the capitalisation of interest by the assessee is in conformity with the legal principles laid down by the Apex Court in the case of Challapalli Sugars Ltd. and such treatment given in the books of account is also in accordance with the principles of comme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enses. Such preliminary expenses include expenses incurred before the commencement of business as well as expenses incurred after the commencement of business, in connection with the expansion of industrial undertaking or in connection with setting up of a new industrial unit. Shri Gupta wanted to draw an inference from the language of section 35D that wherever Legislature so intended, they have introduced a specific provision in relation to grant of deduction in respect of such capital expenditure. The expenses incurred in relation to extension or expansion of existing business are part of capital expenditure known as 'preliminary expenses'. But for section 35D, no deduction will be allowable. Shri Gupta submitted that expenditure relating to extension/expansion of the existing business prior to the period when such assets are put to use arc part of the capital expenditure. Such a view has been taken by the Gujarat High Court in the decisions reported in CIT v. Ambica Mills Ltd. [1999] 236 ITR 921 and CIT v. Deepak Nitrite Ltd [2000] 108 Taxman 479. 24. Shri Gupta invited my attention to para 3 of the facts of the case presented by the assessee in the paper book, which reads as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urt held that from the Speeches of the Chairman, quoted at page 220 of 131 ITR, the Tribunal has drawn the inference that the history of company's expansion itself shows that the later addition of coffee estate as well as the commissioning of the coffee curing works did not form an integral part of the original business of the assessee. The company itself has been apportioning the expenses amongst the different activities. Same staff is not engaged in all the business of the company at various places. In fact, there was separate staff even for coffee and tea estate in Waterfall estate. The Hon'ble High Court observed that apart from the existence of Head Office, no material was placed before the Tribunal to show that the day today functioning of the various estates and the coffee curing works was inter-dependent or that there were transactions inter se of such nature so as to establish inter-lacing or inter-connection or dovetailing of one another. The facts indicate the existence of several businesses and there is no proof of the existence of a single business. The aforesaid judgment of Hon'ble Madras High Court has been affirmed by the Hon'ble Supreme Court and it has been held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal proposition, which can be incorporated in the point of difference so referred by the learned J.M. 29. Shri Gupta also submitted that the argument advanced by Shri Dastur, the learned Sr. Advocate, based on the arguments of the Standing Council referred to at page 33 of the order of learned A.M. has to be read in the context of his main arguments. The learned Standing Council had vehemently argued that the amount of interest cannot be allowed as a revenue expenditure and the same has rightly been capitalised by the assessee in conformity with the legal principles and accounting principles. 30. Shri Gupta submitted that the reliance placed by the learned counsel on the judgment of the Hon'ble Supreme Court in Indian Alumninium Co. Ltd.'s case does not in any manner support the assessee's contention, as in that case it was held that expansion of the existing business or setting up of a new unit of existing business will qualify for grant of deduction under section 15C (later section 84 and then section 80J). This in fact supports the revenue's contention that new unit set up in the course of expansion will also be treated as a new and separate unit qualifying for exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposive interpretation). Shri Gupta also submitted that provisions of section 210 of Companies Act require the Board of Directors to lay before the annual general body, the balance-sheet and P L account. Section 211 of the said Act requires that every balance-sheet should disclose a true and fair view of the company as at the date of balance-sheet and true and fair view of the profit/loss of the year. The accounting standards issued by the ICAI are mandatory for the auditors. The accounting standards issued by ICAI have a binding force of law as has been held by the Hon'ble Apex Court in the case of U.P. State Industries Development Corpn. The capitalisation of interest made by the assessee in their books of account is, therefore, perfectly in conformity with the accounting standards and the legal principles. 33. Shri Gupta also relied on judgment in the case. of CIT v. Sarangpunr Cotton Mfg. Co. Ltd. [1938] 6 ITR 36 (PC) to support his contention that inclusion of interest prior to production period in the cost of assets is as per the accounting method laid down in the accounting standard and, therefore, the Assessing Officer is bound to determine the income as per regular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court in the case of Challapalli Sugars Ltd. regardless of the fact that such new unit was part of the old and existing business or it was a new business altogether or such interest pertaining to the pre-production period should be allowed as deduction under section 36(1)(iii) or a revenue expenditure Linder section 37 in case of the new unit being a part of the old business? (D) Whether the insertion of Explanation 8 to section 43(1) adversely affect the deductibility of interest on borrowed capital as per the principles of law laid down by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. What is the impact of insertion of Explanation 8 to section 43(1) in relation to deductibility of interest under the provisions of section 36(1)(iii) of the Act? 38. The first crucial question is as to whether the new unit was an expansion of old business or a part of old existing running business of the assessee or the new unit was entirely an independent and new business. The Id. Sr. DR had relied on several judgments but the main emphasis was laid by him on the two judgments of the Hon'ble Apex Court: 1. Waterfall Estates Ltd.'s case 2. L.M. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent of modernisation in the global competitive market. The new unit in the present case is managed by same Board of Directors and most of the employees are common. This is evident from the fact as pointed out by the Id. DR himself, wherein he had pointed out on the basis of prospectus issued for the new project, in which it was inter alia mentioned that the company presently employs 729 persons and will meet a man power requirement of 300 persons for the project. The Id. Sr. DR has also observed that the new project was of a larger diamension than the old one. The number of man power required for the new project was only 300 persons as against the present strength of the old and existing business of 729 persons. This clearly shows that the persons looking after the existing business will mainly look after the new project also. Even the finance of the new project was out of the common funds, as is evident from the fact that the new project was to be financed to the extent of 697 lakhs from internal accruals also. The term loan from IFCI and PCDs and LCDs were also raised on the strength of performance and net worth of the existing business. The Hon'ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral distinct and independent businesses, and one of such businesses is closed before the previous year, he cannot claim allowance under section 10 of the Indian I.T. Act of 1922 of an outgoing attributable to the business which is closed against the income of his other business in that year. It was further observed that there is no general principle that where an assessee carried on business ventures of the same character at different places, it must be held as a matter of law that the ventures are parts of a single business: whether different ventures carried on by the assessee form part of the same business must depend on the facts and circumstances of each case, and it is for the assessee to establish that the circumstances of each case and it is for the assessee to establish that the different ventures constitute parts of the same business. In our opinion the facts of this case have no application to the facts of the case under our consideration, because in the case considered by the Supreme Court, the assessee owned two theatres at two different places. Each of these theatres had a separate and distinct business of its own, and closure of one could obviously not have affected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... carried on by the assessee. There was a common fund from which the necessary capital and working funds were supplied in the various business activities. The ultimate gain or loss of the business was also worked out by a consolidated profit and loss account and balance-sheet. The source of finance for running the various business was thus one and the same and there was consolidation of accounts for the purpose of ascertaining the ultimate working result of the business carried on by the assessee. Merely because there was a separate staff, which was not inter-transferable, the unity of control was not affected since, at the apex, there was common management and administration with an over-all control of the various business vesting in the board of directors of the assessee-company. Though some or most of the businesses were carried on at different places, the ultimate control was exercised at the regd. office of the assessee and that circumstance also did not detract from the unity of control. The emphasis on the widely different nature of the business activities though not altogether irrelevant was not by itself decisive. The fact that manufacturing business was combined with tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is whether business is carried on by the assessee or not. In the instant case, we put a question to Mr. Shelat, the Id. counsel that if the assessee is engaged in the running of railways and if meter gauge lines are converted into broad gauge lines, would the assessee not be entitled to the benefit of section 36(1)(iii) to which Mr. Shelat stated in view of the aforesaid decision, he need not be questioned. Suffice it to say that the assessee was manufacturing cloth of a particular width and if machinery is purchased for the purpose of manufacturing cloth having larger width, it cannot be said that it is a new business." 45. In the present case, the assessee is a manufacturer of intravenous injection. Most of the raw-material is stated to be common. The production and marketing is also looked after by common employees and senior executives. The apparent difference between the two types of products, namely, LVP and SVP is that the intravenous fluid being large volume parenterals has been described as LVP and Sterrile Water for Injections small volume parenterals has been described as SVP. The major difference appears to be the large volume of one product and small volume of other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enous fluids. Both the units are, therefore, part of the same running business. 48. The next issue which is required to be determined is whether the fact that the assessee capitalised the interest cost for the pre-production period in the year under consideration in conformity with the accounting principles, accounting standards etc., will make any difference in relation to assessee's claim for deductibility of the entire amount of interest under section 36(1)(iii) or under any other provision of the Income-tax Act. 49. The Id. Sr. DR had placed heavy reliance on the accounting standards issued by the ICA and contended that they are binding. The copy of guidelines, notes and accounting standards issued by the ICA, have been furnished in the compilation by the Id. Sr. DR at pp. 36 to 42. Para 15.1.3 is reproduced here under:- '15.1.3 Capitalisation of borrowing costs - Para 20 of the AS-10 'Accounting for Fixed assets' suggests that financing costs relating to deferred credit or to borrowed funds attributable to construction or acquisition of fixed assets for the period upto to the completion of construction of acquisition of fixed assets should be included in the gross boo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Cements Ltd. held that the amount of Rs.84,633 spent by the assessee towards stamp duty, registration fees, lawyers' fees was allowable as a deduction under section 10(2)(xv) of the Indian Income-tax Act, 1922, though the said amount was not charged to revenue but capitalised and carried forward in the balance-sheet, but claimed as revenue expenditure for the purposes of income-tax. 52. The Hon'ble Gujarat High Court in the case of Arvind Polycot Ltd. had considered almost a similar question. The assessee made a claim of Rs.1,27,95,596 in respect of interest stating specifically that this interest has been capitalised in the books and that being in respect of borrowed capital, it is allowable under section 36(1)(iii) of the Act, in accordance with the decision in the case of Alembic Glass Industries Ltd. The Hon'ble High Court quashed the notice of re-assessment issued under section 148 for assessment year 1993-94 and thus confirmed the allowability of such interest for pre-production period, although the interest had been capitalised in the books of account. 53. The Hon'ble Gujarat High Court in the case of Gujarat Mineral Development Corpn. at page 389 held that the quest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things. 56. The Id. Sr. DR had argued that the capitalisation of interest cost for the pre-production period is in conformity with the accounting standards and accounting method and, therefore, income has to be computed as per the regular method of accounting followed by the assessee under section 145(1). Since the assessee had capitalised the interest cost, the same cannot be claimed as a revenue exp. by filing a revised return. As already stated herein before, the Special Bench in the case of Nagarjuna Investment Trust Ltd. on the strength of various judgments referred to therein, has held that the provisions of section 145 cannot override section 5 of the Act. If an expenditure is allowable under the relevant provision of law, the deduction cannot be denied because a book keeping entry of capitalisation of such interest has been made on the basis of the recognised method of accounting and the accounting standards issued by ICA. Whenever, the accounting standards or the system of accounting or the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be capitalised for the purposes of development rebate. The ITO rejected the claim but the Tribunal allowed it. The Hon'ble High Court held that interest for the period prior to the delivery of the ships was includible in the actual cost of the ship for the purposes of development rebate. The judgment of the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. was applied for arriving at this conclusion. However, interest for the period after delivery could not be capitalised for purposes of claiming development rebate with reference to Explanation 8 to section 43(1). India Steamship Co.'s case At page 923 the Hon'ble Calcutta High Court has observed that it has not been disputed before the Hon'ble High Court, having regard to the principles laid down by the Supreme Court in the case of Challapalli Sugars Ltd that interest paid on amounts borrowed before such ships were delivered to the assessee is includible in the actual cost of ships acquired. In view of this concession made by the Revenue in favour of the assessee, before the Hon'ble High Court, it was held that interest for pre-delivery period is includible in the actual cost of ships acquired. The question in that cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as High Court. The case of Akkamba Textiles Ltd. was affirmed by the Hon'ble Supreme Court. It has been held by the Hon'ble Supreme Court that guarantee commission paid by the assessee to the banker and the insurance company for insuring deferred payment of the purchase consideration of machinery was an admissible deduction under section 37. 61. The Id. Sr. DR has also placed reliance on the judgment of Allahabad High Court in the case of JK. Cotton Spg Wvg. Mills Ltd. It was held therein that the assessee was entitled to include all the items which have been allowed by the Appellate Tribunal in the 'actual cost' of assets for purposes of depreciation and development rebate. As the entire loan from the State Government was utilised for the purpose of setting up of the factory, and became part of the cost of the factory, the interest paid for borrowing such capital was also part of the cost. The Id. Sr. DR submitted that this judgment of Hon'ble Allahabad High Court has been affirmed by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. It was a case where the assessee wanted to capitalise the interest paid to the UP Government and the foreign suppliers from whom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had deeply considered the ratio of judgments of the Hon'ble Apex Court in the case of India Cements Ltd. as well as in the case of Challapalli Sugars Ltd. The relevant extracts appearing at pp. 726 and 727 of 103 ITR from the judgment of the Hon'ble Gujarat High Court in Alembic Glass Industries Ltd.'s case are reproduced below:- "Section 10(2)(iii) of the Act of 1922 allows deduction of interest on all borrowings which are made 'for the purpose of business'. The expression 'purposes of business' is comprehensive enough to cover expenditure of revenue nature as well as of capital nature because both the types of expenditures can be incurred for business purposes. Therefore, even if a borrowing is made for incurring an expenditure of capital nature, it remains the borrowing for a business purpose. If that is so, the requirements of section 10(2)(iii) are fully satisfied and interest paid on such borrowing is entitled to deduction as revenue expenditure. The High Court of Bombay has unequivocally stated in Calico Dyeing and Printing Works that in order to attract the provisions of section 10(2)(iii) it does not matter whether the capital is borrowed in order to acquire a revenue a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angalore unit did not go into production during the two assessment years in question. The Hon'ble Gujarat High Court held that interest on borrowings made for establishing a new glass manufacturing unit at Bangalore was part of the same business and it was nothing but an expansion of existing business and, therefore, interest was clearly allowable under section 36(1)(iii) of the Act. 64. The Id. Sr. DR has also relied upon the judgment of Hon'ble Supreme Court in the case of U.P. State Industrial Development Corpn. for supporting his contention that capitalisation of interest made in conformity with accounting principles and the legal principles laid down by the Apex Court in the case of Challapalli Sugars Ltd. should be accepted for computation of taxable income of the assessee. The said judgment also clarifies that the principles of commercial accounting should be applied, so long as they do not conflict with any express provision of the relevant statute. The Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. has clearly held that interest under such circumstances is allowable under section 36(1)(iii). The book keeping entries or the system of accounting c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) in the present case is concerned. The decision of the Calcutta Bench reported in JCT Ltd.'s case is also clearly contrary to the Judgment of the Hon'ble Jurisdictional High Court in the case of Alembic Glass Industries Ltd. It is also contrary to various decisions of the Tribunal which have been referred to in the order of the Id. A.M. The impact of Explanation 8 inserted in section 43(1) will be considered in the later part of this order. The said decision is based mainly on the fact that after capitalisation of the amount of interest, it has merged into cost of assets and thus lost its original character. The interest component capitalised by the assessee has been treated as part of actual cost of the asset in view of the judgment of Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. in which it was held that the expression 'actual cost' would be inclusive of other expenses in accordance with the normal rules of accountancy. One will have to bear in mind that the method of accounting is different than the entries made in the books of account. I have already discussed hereinbefore that the manner and mode of making book keeping entry or the existence or absence of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the deduction claimed even though the plant and machinery were not used in the year of account. Where the assessee claims deduction of interest paid on capital borrowed under section 10(2)(iii) of the I.T. Act, all that the assessee has to show is that the capital which was borrowed was used for the purposes of the business of the assessee in the relevant year of account. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset. if the capital is used in the year of account, and the use is for the purpose of the business of the assessee, it is immaterial whether the user of the capital actually yielded profit or not and it is no', open to the Dept. to reject the claim of the assessee in respect of the interest paid on that capital merely because the use of the capital is unremunerative." B. Alembic Glass Industries Ltd. The Id. A.M. has reproduced the relevant findings given by the Hon'ble Gujarat High Court in the aforesaid judgment. The principles of law laid down by the Hon'ble Gujarat High Court in this case are fully applicable on the facts and circumstances of the present case. It may be relevant here to mention tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cture fabrics having width of 56 inches with old looms, new air-jet looms were purchased. It appears that this has led the Assessing Officer to believe that the assessee has purchased the machinery for the purpose of new business. It thus appears that modernisation has been considered by the Assessing Officer as a new business. It is not disputed that the assessee-company, having its manufacturing activitity at Ahmedabad, is engaged in weaving and spinning and manufacturing varieties of textile cloth. It is clear that the business is the same, the administration is the same, the funds are common, the staff is the same, persons in the management arc the same and the output would be textile fabrics. Thus, it is clear that it would not be a new business." The Hon'ble Gujarat High Court followed the judgment of the Hon'ble Supreme Court in the case of Prithvi Insurance Co. Ltd , Standard Relinery Distillery Ltd. v. CIT [1971] 79 ITR 589, judgment of the Hon'ble Gujarat High Court in Alembic Glass Industries Ltd. the judgment of Hon'ble Gujarat High Court in the case of Bansidhar (P.) Ltd. and various other judgments. After considering all the judgments it was held by the Hon'ble Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the ground that borrowed amount on which interest had been paid was utilised for the construction of a new cinema bldg. and as such the payment of such interest had to be capitalised. The theatre building was still under construction and was incomplete during assessment years 1982-83 to 1984-85. The Hon'ble High Court held that the loan had been taken for expansion of business. There was an interconnection, inter-lacing and inter-dependence between the existing business and the new business. Setting up of the new cinema hall did not constitute a new business, but was only an establishment of a new unit of an existing business, which was already carried on by the assessee. It constituted the same business. The assessee was entitled to deduct the interest as revenue expenditure, irrespective of the fact that the building in question was not actually put to use for carrying out a business during the accounting year by the assessee. The Hon'ble Karnataka High Court has also examined the applicability of principles laid down by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. at pages 19 and 20, the Hon'ble Karnataka High Court observed as under: "In Challapalli S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith reference to such interest also. In the present case, the assessee had taken the loan for the new unit which was taken to be the expansion of the already existing business of the assessee. The Tribunal has proceeded on the basis that the assessee had taken loan for further expansion of his business and the interest paid by the assessee on such was deductible as revenue expenditure.' The Hon'ble Karnataka High Court has also considered the judgment of L.M. Chhabra Sons' case in the aforesaid judgment. G. CIT v. Bhilai Iron Foundry (P.) Ltd. [1998] 234 ITR 661 (MP) The relevant Head-note is reproduced below: "Held that the Tribunal had found that capital had been borrowed for expansion of the old business. This finding had not been challenged by the Revenue. The question whether the new unit had gone into production was not relevant. The assessee was entitled to deduction of interest on the borrowed capital under section 36(1)(iii) of the I.T. Act, 1961." H. CIT v. Kasthuri Sons [2000] 241 ITR 412 (Mad.) The Hon'ble Madras High Court, in this case held that interest paid on moneys borrowed for the purpose of erecting another plant to carry on the assessee's b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inery supplied which included the interest for the post production period. This was against the legislative intention. Explanation 8 had to be inserted to remove such doubts created as a result of certain judgments, such as the one reported in J.K. Cotton Spg. Wvg. Mills Ltd.'s case and Tensile Steel Ltd's case etc. He submitted that section 43(1) read with Explanation 8 clarifies beyond doubt that interest for pre-production period is part of actual cost. Once interest merges in the cost of assets, it cannot be claimed as deductible expenditure under section 36(1)(iii) or any other provisions of law. 71. Let us once again look at the memorandum explaining the aforesaid amendment. It has been mentioned that certain tax payers backed by some court decisions, are resorting to a major change in accounting practice by capitalising the interest paid or payable in connection with the acquisition of an asset relatable to the period after such asset is first put to use. This capitalisation implies inclusion of such interest in the 'actual cost' of the asset for the purposes of claiming depreciation, investment allowance etc. under the I.T. Act. As this was never the legislative intent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gives an option to the tax payer that they may capitalise interest on moneys borrowed relating to the period prior to putting the asset to use. This Circular also does not draw any distinction between allowability of interest on expansion or extension of the existing business and interest paid for setting up of an entirely new business. The Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. after carefully considering the judgment of the Hon'ble Apex Court in the case of India Cements Ltd. and Challapalli Sugars Ltd., has drawn a very subtle and significant difference and has explained that in the case of a running business interest paid for expansion of business and for acquiring capital assets for such expansion will be allowable under section 36(1)(iii) in view of judgment of Hon'ble Supreme Court in the case of India Cements Ltd. and interest paid for setting up of an altogether new business will form part of actual cost in view of the judgment of the Supreme Court in the case of Challapalli Sugars Ltd. The Explanation 8 does in any manner, dilute the applicability of the ratio of the judgment of the Hon'ble Gujarat High Court in Alembic Glass Industries Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would remain the same for the following year. Prior to the amendment of section 32 business loss could be carried forward for eight years. There was no time limit for the claiming of depreciation. This is not so now. Earlier, therefore, it was always for the assessee to claim business loss first and current depreciation thereafter, if he so desired." Again at page 80, the Hon'ble Supreme Court has observed as under: "In the second Madras case in CIT v. Southern Petro Chemicals Industries Corpn. Ltd. (No. 2) [1998] 233 ITR 400, the assessee did claim depreciation but he withdrew the same in the revised return. On that basis, it was held that since the assessee had furnished the particulars regarding the claim of depreciation in the original return, the assessee would not be able to withdraw his claim for depreciation. It would appear that the High Court proceeded on the basis that the revised return was not a valid return under section 139(5) of the Act. The High Court followed its earlier decision in Dasaprakash Bottling Co.'s case [1980] 122 ITR 9. To us it appears that if the revised return is a valid return and the assessee has withdrawn the claim of depreciation, it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 43 defines "actual cost" means actual cost of the assets to the assessee. . . ." Explanation 8 to section 43(1) inserted by the Finance Act, 1986 w.e.f. 1-4-1974 clarifies, for removal of doubts that interest in connection with the acquisition of an asset, as is relatable to any period after such asset is first put to use shall not be included in the actual cost of such asset. The said provision do not expressly provide that interest for the pre-production period should necessarily be capitalised. The Id. Sr. DR while arguing that Explanation 8 to section 43(1) necessarily implies that interest for pre-production period should be capitalised, irrespective of the fact whether new unit is a part of the same running existing business or an altogether new business wants to add certain words and rewrite the said Explanation 8 as if it provides that interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included and shall be deemed never to have been included in the actual cost of such asset and the interest relatable to any period prior to the date when such asset is first p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation 8 to sections 43(1) and 36(1)(iii) in the manner indicated above. The provisions of Explanation 8 to section 43(1) cannot override the clear provision of section 36(1)(iii) as authoritatively interpreted by the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. nor it affects the applicability of the principles of law laid down by the Honourable Gujarat High Court in Alembic Glass Industries Ltd.'s case case on the facts of the present case. 82. In view of the aforesaid facts and discussions, I am inclined to agree with the view taken by the Id. A.M. In my view he has rightly held that the question of deduction of interest on borrowed capital is squarely covered by the decision of the Supreme Court in the case of India Cements Ltd. as well as the decision of Gujarat High Court in the case of Alembic Glass Industries Ltd. and the same is clearly deductible under section 36(1)(iii) of the I.T. Act, 1961. 83. The matter will now go back to the Division Bench in order to decide the matter according to the majority view as per section 255(4) of the I.T. Act, 1961. ORDER Per Shri R.K. Bali, Accountant Member-- These two cross appeals were h ..... X X X X Extracts X X X X X X X X Extracts X X X X
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