TMI Blog2005 (12) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... he Bombay High Court decision in the case of Somaiya Orgeno Chemicals Ltd. v. CIT [1995] 216 ITR 291, before the Tribunal, and the Tribunal has also referred to this judgment in their order. It is submitted that while arriving at their conclusion, the Tribunal failed to consider the Jurisdictional High Court judgment. The Tribunal, in fact, drew support from certain Supreme Court decisions on this issue. The ld. counsel further submitted that the view adopted by the Bombay High Court in the case of Somaiya Orgeno Chemicals Ltd. has been confirmed by the Supreme Court in the case of CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397. It is pointed out that on similar issue, the decision of the Madras High Court in the case of CIT v. New Horizon Sugar Mills (P.) Ltd. [2000] 244 ITR 738 has been affirmed by the Supreme Court in the above case. The ld. counsel argued that, since the Supreme Court has endorsed the view adopted by the Bombay High Court, this issue requires reconsideration by the Tribunal. 3. Shri R.K. Rai, ld. CIT DR, opposed the arguments raised by the ld. counsel for the assessee and submitted that the Bombay High Court decision in the case of Somaiya Orgeno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Thane District subject to the following condition: That the BSES Ltd. will collect 3 ppu from its consumers only. Permission for special appropriation to BSES Ltd. should also be subject to the following conditions: (i) BSES Ltd. should take full responsibility for any consequences in the event of such an action being challenged in the Court of Law and also to refund the amount collected if any Court were to pass such an order. (ii) BSES Ltd. should deduct from the capital base the amount so collected. In the event of take over of the undertaking, the amount collected by special appropriation by the BSES Ltd. will be deducted from the amount payable to the BSES Ltd." 5. Pursuant to the abovementioned developments, the assessee company, during the previous year relevant to the. assessment year 1990-91 and also during the previous year relevant to the assessment year under appeal charged 3 paise per unit of electricity supplied to the consumer and the additional amount thus collected was transferred to the Special Appropriation Account created for financing the new project at Dahanu. The assessee claimed that the aforesaid income was not liable to the charge of income-tax a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ference. Relying strongly on the above decision, Shri Dastur has submitted that the lower authorities were not justified in treating the receipts in question as taxable receipts merely by holding that the assessee had ownership of the receipt. It was emphasized that domain over the fund was not with the assessee." Thereafter, the Tribunal drew support from the following Supreme Court decisions: (i) Associated Power Co. Ltd. v. CIT [1996] 218 ITR 195 (ii) Vellore Electric Corpn. Ltd. v. CIT [1997] 227 ITR 557 The Tribunal felt that the issue before them was squarely covered by the aforesaid two decisions of the Apex Court. In this connection, a reference may be made to Para 6 of the order which is reproduced below: "We have given careful thought to the rival submissions. Their Lordships of Hon'ble Supreme Court in the case of Associated Power Co. Ltd. (218 ITR 195) and Vellore Electric Corpn. Ltd. (227 ITR 557) have examined the nature and character of certain reserves created under the Electricity (Supply) Act, 1948 and held them to be taxable. This was done after through examination of the provisions of Electricity (Supply) Act, 1948 inclusive of the Sixth Schedule to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is particularly noteworthy that the electricity company can make good from out of the contingencies reserve even a loss of profit arising out of strikes, accidents and other circumstances over which it has no control. There can be no doubt, in the circumstances, that the monies in the contingencies reserve belong to the electricity company, and are not diverted away from it. It is the electricity company which has to invest the sums appropriated to the contingencies reserve. The investment would be in its name and it would be the owner thereof. The restriction that the investment can be made only in securities mentioned in the Indian Trusts Act makes no difference to this position. The fact that on the purchase of the undertaking the contingencies reserve has to be handed over to the purchaser and maintained as such is only to make explicit the obvious, for the reserve is for the purpose of the undertaking that is being transferred. There is nothing in the statute to suggest that the amount standing to its credit cannot be taken into consideration in arriving at the purchase price. For the purposes of sale to a State Board or Government, a different statute lays down how the price ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee carried on the business of manufacturing Rectified Spirit out of Molasses. The assessee transferred a sum of Rs. 43,633 from the sale proceeds of Rectified Spirit to the Storage Fund for Molasses and Alcohol Account as required under the Ethyl Alcohol (Price Control) Amendment Order for the creation of Storage Facilities for Molasses and Alcohol. It was held by the Born bay High Court that this amount over which the assessee had lost its domain, could not be considered as part of its real income or profit. In other words, the Bombay High Court was of the view that this was a case of diversion of income at source. It appears that similar view was taken in similar factual scenario by the Madras High Court in the case of CIT v. New Horizon Sugar Mills (P.) Ltd. [2000] 244 ITR 738 and this decision was affirmed by the Supreme Court CIT v. New Horizon Sugar Mills (P.) Ltd. [2004] 269 ITR 397. The appeal filed by the Revenue was dismissed by the Supreme Court with the following short observation: "The civil appeals are dismissed in view of the order dated 28-8-2001 in the case of CIT v. Ambur Co-op. Sugar Mills Ltd. [C.A. No. 2499 of 1998] [2004] 269 ITR 398 (Appendix)." The o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt appropriated by the assessee-company towards development reserve account. The ld. counsel appearing for the assessee was fair enough to concede that this issue is covered against the assessee by the Tribunal's order for the assessment year 1990-91 referred to. Accordingly, on this issue, the order of the ld. CIT(A) is confirmed. 7. The ground Nos. 9 and 10 pertain to confirmation by the ld. CIT(A) of disallowance of Rs. 73,73,805 being the amount appropriated by the assessee-company towards debenture redemption fund. We have heard both the sides on this issue and have gone through the facts. In our view, the order of the ld. CIT(A) on this issue does not call for any interference. The debentures issued by the assessee are in the character of advance or loan taken by the assessee-company for business purposes and income is transferred to reserve fund so as to enable the assessee to redeem such debentures. By no stretch of imagination can it be said that such income which is transferred to such reserve account is not chargeable to income-tax. The reserve has been created by the assessee for repayment of loan. We, therefore, confirm the order of the ld. CIT(A) on this issue. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim that deduction should be allowed at Rs. 32,30,681 cannot be accepted. 9. After considering the rival submissions on the technicality of admitting the revised grounds of appeal, in our view, these revised grounds directly flow from the original grounds of appeal and are inextricably connected with the relevant issue. There is no dispute that the assessee incurred liability for payment of total interest of Rs. 32,30,681. A part of the borrowed funds which were not immediately required for investment in the Dahanu project were temporarily parked by the assessee in term deposits and the assessee earned gross interest of Rs. 8,99,216. The net interest was claimed by the assessee as deductible under section 36(1)(iii) of the Act. This claim was rejected by the Revenue authorities. Thereafter, the Commissioner of Income-tax, while exercising his powers under section 263 of the Income-tax Act, set aside the assessment order on the ground that the order was erroneous and prejudicial to the interests of the Revenue as the Assessing Officer failed to bring to the charge of tax the interest income of Rs. 8,99,216. Pursuant to the setting aside, the Assessing Officer has brought to the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n further appeal before us, Shri Dastur, the ld. counsel for the assessee, has submitted that the legal expenses were incurred to preserve the establishment. The licence to distribute electricity was extended on the condition that power plant to generate electricity would be set up and in case of failure the licence was to be cancelled. In these circumstances, no new business was set up by the assessee as supply and distribution of power was an integrated business. Further, the plant was being set up with the approval of the Government. Shri Dastur relied on the decision of the Bombay High Court in the case of All India Reporter Ltd v. CIT 49 ITR 196 and also on the decision of the Supreme Court in the case of CIT v. Birla Cotton Spg. Wvg. Mills Ltd 82 ITR 166. Shri Dastur further submitted that setting up of plant cannot be said to be a new business as it had common funds and common management etc. The ld. DR has opposed to these submissions. After considering the rival submissions, we are of the view that setting up of a plant for generation of power was a condition of the licence and as per that condition the assessee was allowed to distribute the electricity. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enue purpose loses its distinction. The view that interest which is capitalized, after the commencement of the business but before an asset is first put to use cannot be allowed as a revenue deduction under section 36(1)(iii) of the Act is against the plain language of the provisions of the Act. Where the Legislature wanted to restrict allowance/deduction to a particular type of expenditure a specific provision has been incorporated in the Act, as for example, the provisions of sections 37 and 35D. The scope of section 36(1)(iii) and Explanation 8 to section 43(1) are different. They operate in separate fields and though both are relatable to computing income under section 28 yet the nature of deductions are entirely distinct from each other. The concept and the meaning of 'actual cost' which is the definition laid down in section 43(1) of the Act is for a limited purpose, viz., at a point of time when deduction is to be granted for the purpose of wear and tear (section 32) or an incentive for the purpose of setting up a specified industry (sections 32A and 33). The term 'actual cost' is applicable only in relation to an asset as against the phrase 'capital borrowed' used in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lting in substantial increase in the capacity of the manufactured products. The assessee claimed deduction of Rs. 1,56,76,000 being interest paid towards borrowings made for the purpose of acquiring the new machinery. The Assessing Officer and the CIT(A) rejected the claim. The Tribunal, however, allowed the deduction. On further appeal: Held , that the Tribunal was justified in allowing as deduction under section 36(1)(iii), interest on borrowing made for acquisition of the capital assets, though pertaining to the period prior to the commencement of production." 11. The ld. CIT DR, Shri Rai, strongly supported the orders of the Revenue authorities on this issue and contended that an entirely new line of business was set up by the assessee. The assessee was never engaged in the generation of electricity and it was doing the business of merely distributing of electricity. A new project was set up at Dahanu for generation of electricity, which cannot be said to be expansion or extension of the same business. It is submitted that the Dahanu project was still under construction during the previous year relevant to the assessment year under appeal and therefore any expenditure whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied on the Supreme Court decision in the case of CIT v. Autocast Ltd. [2001] 248 ITR 110. In this case, the Supreme Court followed the earlier decision in the case of Tutikorin Alkalies Chemicals Fertilizers Ltd v. CIT [1997] 227 ITR 172 and reversed the Kerala High Court decision. CIT v. Autocast Ltd [1998] 229 ITR 789. The ratio of this case, reproduced from the Headnote, is as under: "From the decision of the Kerala High Court (229 ITR 789) holding that where the assessee kept the moneys borrowed from the Industrial Development Bank of India for purchase of plant and machinery in short-term deposits in banks and used it in bill discounting until payment for the plant and machinery, the interest earned on the deposits was not taxable in the hands of the assessee as income from other sources but would go to reduce the actual cost of the plant and machinery, the Department took an appeal to the Supreme Court. The Supreme Court reversed the decision of the High Court holding that the interest was taxable in the hands of the assessee." 12. The ld. counsel for the assessee, in his rejoinder, submitted that the facts in the case of Vora Exclusive Tolls (P.) Ltd were entirely dif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rded as only relating to the same business. The memorandum of association of the company empowered the company to manufacture the items in which it was permitted to deal in, viz., merchandise, products, substances, commodities, articles, and the things of all kinds, and the business was essentially of the same type, the two activities being two separate stages of the same business. Therefore, the Tribunal was justified in allowing the sum of Rs. 27,159 as business expenses during the accounting year 19-1-1959 to 31-12-1959." In the case of Anyline Dye Stuffs Pharmaceuticals (P.) Ltd., the assessee-company was manufacturing dye stuffs and it set up a new industrial undertaking for manufacturing of dyes (intermediates) required for the manufacture of dye stuffs which were hitherto purchased by the assessee in the market. The assessee-company purchased land for factory building, which was under construction, and machinery which was under installation during the relevant year. The assessee claimed deduction of Rs. 21,177 being interest paid on capital borrowed for the new project. The project had not gone into production during the relevant year. The Bombay High Court held that it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficer on account of the gains on fluctuation of the rate of foreign exchange. The relevant facts are that the assessee company had a wholly owned subsidiary company in Saudi Arabia known as Bombay Sub-urban Saudi Arabia Ltd. In acquiring the shares of this company, the assessee-company invested 6,00,000 Saudi Riyals in January, 1986. The aforesaid subsidiary company went into liquidation in the month of December 1995 and on transfer of the shares held by the assessee company, it received 5,59,319 Saudi Riyals. The assessee - company thus suffered a loss of 40,681 Saudi Riyals (equivalent to Rs. 1,95,509). This was claimed as capital loss and was allowed by the Assessing Officer as such. Subsequently, during the previous year relevant to the assessment year 1991-92, the amount received by the assessee and comprising of 5,59,319 Saudi Riyals was repatriated to India and on account of change in the rate of exchange during the intervening period, the assessee earned a profit of Rs. 8,43,432, which was credited to the profit loss account. At Para 14 of his order, the Assessing Officer has stated that the sum of Rs. 8,43,432 was deducted from the computation of total income for separa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the arguments raised before us on this issue vis- -vis the relevant facts. It may be mentioned that the assessee-company had relied before the ld. CIT(A) on the Supreme Court decision in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, wherein the Supreme Court held that if the foreign currency is held as capital, any gain arising on remittance to India would be on capital account. The ld. CIT(A) held that the Supreme Court decision will not apply. Since the decision of the Supreme Court has already been referred to in the order of the ld. CIT(A), it would be appropriate to reproduce below the relevant part of the ratio of this case from the headnote: "Where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital natu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med by the assessee as deduction under section 36(1)(vii), which was disallowed by the Assessing Officer. The ld. CIT, on perusal of the record, was of the view that the interest of Rs. 8,99,216 should have been separately brought to the charge of tax by the Assessing Officer and therefore on that ground, he issued show-cause notice under section 263 to the assessee. After hearing the assessee's representative, the assessment was set aside with appropriate direction to the Assessing Officer for completing fresh assessment in the light of the CIT's order under section 263. 19. The main plank of the arguments of Shri Pardiwala, the ld. counsel for the assessee, is that this issue was duly considered by the Assessing Officer and was also the subject-matter of appeal before the CIT(A). Therefore, the Assessing Officer's order on this issue merged with the order of the ld. CIT(A) with the result that the ld. CIT has no jurisdiction to invoke his powers under section 263 of the Act. Leading us through the chronology of events, it is pointed out that the return of income was filed by the assessee on 31-12-1991 and assessment was made by the Assessing Officer under section 143(3) on 21-3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 8,99,216. Thus, when the assessee claimed deduction of the net amount only, effectively, it means that the income of Rs. 8,99,216 has been brought to the charge of tax. In any case, the Assessing Officer examined this issue and rejected the assessee's claim. The assessee filed an appeal and the CIT(A) decided the issue against the assessee. In our view, the order of the Assessing Officer on this issue has fully merged with the order of the ld. CIT(A) and therefore we hold that the Commissioner of Income-tax has no jurisdiction to invoke his powers under section 263 of the Income-tax Act. Further, the Assessing Officer's order cannot be said to be erroneous or prejudicial to the interests of the Revenue, even having regard to the cases relied upon by the ld. CIT DR. In the leading case of Malabar Industries Co. Ltd, the Supreme Court has categorically held that every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. For example, when an ITO adopted one of the courses permissible under law and it has resulted into loss of revenue or where two views are possible and the ITO has taken one view wit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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