ORDER
A. KALYANASUNDHARAM, A.M. :
The appeal filed by the Department and the cross-objection filed by the assessee relating to the same assessment year are grouped together and are being disposed of by this common order for the sake of facility.
2. The grounds raised in the appeal filed by the Department read as under : “On the facts and in the circumstances of the case and in law the learned CIT (A) erred in –
(1) allowing depreciation of Rs. 46,86,456 for the asst. yr. 1986-87.
(2) deleting the addition of Rs. 20,995 on the ground that provision of s. 43B were inapplicable.
(3) deleting addition of Rs. 1,83,701 made by the AO on account of replacement of old crockery. He ought to have sustained addition to the extent of its scrap value or sale price on estimated basis.
(4) directing that the income of NMPL for the period 1st July, 1985 to 31st July, 1985, should be included in the hands of SIPL, on substantive basis instead of protective basis done by the AO.”
3. On the first ground the fact with which the Department is not in dispute is given hereunder. The assessee, who used to be known as Sudarshan International Pvt. Ltd., was carrying on the business of hotels and had been following the accounting year 1st of August to 31st July each year. Another company carrying on similar hotel business under the name and style of Narang Motels Pvt. Ltd., which was following the accounting period 1st of July to 30th of June each year, was to be amalgamated with the assessee. The proposal and the scheme of amalgamation had to be in accordance with the provisions of the Companies Act and needed the approval of the High Court, and in compliance with the said Act and provisions, the assessee had applied for approval of the scheme of amalgamation. The High Court vide its order dt. 8th January, 1987, approved the scheme of amalgamation and made the amalgamation effective from 1st of July, 1985. The Court directed that w.e.f. 1st July, 1985, all assets and liabilities of Narang Motels (P) Ltd. shall vest on the assessee and that the assessee will also be the recipient of all income and the expenditure thereon w.e.f. 1st July, 1985.
Pending the approval of the scheme of amalgamation the assessee had filed a return declaring a loss of Rs. 27,13,519 in relation to its business of hotel, Sudarshan International Pvt. Ltd. Soon after the receipt of the approval of the scheme of amalgamation, the assessee filed a revised return including the income from Narang Motels Pvt. Ltd. Because the assessee was following the accounting period ending with 31st July each year, the income of Narang Motels Pvt. Ltd. for one month, i.e., 1st July to 31st July, 1985, was included as part of the income of the assessee. Along with the inclusion of the income for one month of July, 1985, the assessee claimed depreciation on the assets that were taken over consequent to the amalgamation and the quantum of depreciation was claimed at Rs. 46,86,456.
The controversy in the instant case is with reference to the depreciation claim of the assessee. According to the AO, because the income of one month was calculated by dividing the income from 1st July, 1985 to 30th June, 1986, by twelve, depreciation also should have been calculated on the same basis. In fact, the AO was of the view that the assessee had included the income for one month only to claim depreciation and, therefore, the assessee was not correct in including the income for one month. He finally concluded that because the accounts of Narang Motels Pvt. Ltd. got incorporated in the accounts of the assessee for the year ending 31st July, 1986, the claim of depreciation was not justified and he rejected the same.
The CIT (A) observed that the AO had not been able to appreciate the various facts of the case and should have taken note of the fact that the assessee had chosen the previous year as ending with 31st of July, 1985, after the merger. He further noted that because the merger was effective from 1st of July, 1985, whereby not only the profit got merged but he assets also got merged, the assets having been used for the month of July in the business, the same was entitled to depreciation. He referred to the definition of the term “amalgamation” as contained in s. 2(1B) of the IT Act, 1961. He also took into consideration the tax audit report that was for 13 months, i.e., from 1st July, 1985 to 31st July, 1986, which indicated that the income and expenses of Narang Motels Pvt. Ltd. including depreciation had been incorporated in the accounts of the company. He accordingly concluded that because the fixed assets of Narang Motels Pvt. Ltd. were now the assets of the assessee as on 1st July, 1985, it was entitled to depreciation for one month ending on 31st July, 1985.
4. The Departmental Representative placed heavy reliance on the order of the AO and submitted that it is ridiculous that the income should be included for only one month, but the depreciation should be allowed for whole of the year. The learned counsel for the assessee placed heavy reliance on the order of the CIT (A).
5. The rival contentions in regard to the above have been very carefully considered. In the instant case the accepted fact is that the High Court has approved the amalgamation to be effective from 1st July, 1985, and on that particular date the assets, the liabilities and also all the income as well as the expenses would vest on the amalgamated company. The Supreme Court in Marshal Sons & Co. (I) Ltd. vs. ITO (1996) 89 Taxman 619 had on occasion to consider the date from which the amalgamation would be effective. Their Lordships observed “if the Court so specifies the date, there is little doubt that such date would be the date of amalgamation/date of transfer.
But where the Court does not prescribe any specific date, but merely sanctions the scheme presented to it as has happened in this case – it should follow that the date of amalgamation/date of transfer is the date specified in the scheme, is the transfer date …. The order of the Court sanctioning the scheme, filing of the certified copies of the orders of the Court before the Registrar of Companies, allotment of shares, etc., may have all taken place subsequent to the date of amalgamation/transfer, yet the date of amalgamation in the circumstances of this case would be 1st January, 1982″. The Supreme Court as above confirms that the date from which the amalgamation is treated to be as effective would be the date as indicated by it as the effective date. As observed earlier, the Department has accepted the position that the High Court has approved the amalgamation and has made it effective from 1st July, 1985. Sec. 3 of the IT Act defines “previous year” and gives various instances. One such Instance is that the previous year means the financial year immediately preceding the assessment year. The other one is where the business or profession is newly set up, in which case, beginning with the date of setting up and ending with the said financial year or if the accounts of the assessee have been made upto a date within the said financial year then, at the option of the assessee, ending on that date. The above has been only brought in here for appreciating the point that it is a case of a new source of income or a business being set up as far as the assessee is concerned, and, therefore, the assessee was entitled to choose the previous year for the new business and it could be ending with the said financial year. In so far as this provision is concerned, the period of the financial year need not necessarily be twelve months but it should end with the financial year. In the instant case the business of Narang Motels Pvt. Ltd. got merged with the assessee on 1st July, 1985, and in accordance with the provisions or s. 3 as above, the assessee was entitled to have the previous year in respect of the new business ending with the financial year, viz., 31st July, 1985. The objection of the AO was that the thirteen months accounts ending on 31st July, 1986, were merged and incorporated in the accounts of the assessee and it was so stated in the tax audit report. This needs to be appreciated from the point that the companies that are covered by the provisions of the Companies Act are required to get their accounts approved by the shareholders within six months from the close of the accounting period, i.e., the annual general meeting of the company wherein the accounts are approved, must be held within six months from the close of the accounting period. In order to comply with this condition, the assessee had no choice but to close its accounts as of 31st July, 1985, and get it approved before the close of 31st January, 1986. The scheme of amalgamation got approved on 8th January, 1987, and, therefore, the assessee had just the required time to incorporate the results of the business of Narang Motels Pvt. Ltd. into its books and get the same approved by the shareholders in the annual general meeting that was to be held by 31st January, 1987. Had the approval of the High Court been delayed beyond 31st January, 1987, the accounts of Narang Motels Pvt. Ltd. would have got incorporated only in the financial year ending with 31st July, 1987. Therefore, the indication in the audit report about the thirteen months pending with 31st July, 1986, being included is only for information. The profit of Narang Motels Pvt. Ltd. was included for a period of one month only on the presumption that the profit was earned uniformly over a period of one month. Therefore, the assessee was justified in including one months profit only. On the aspect of depreciation, it has to be allowed in satisfaction of the condition of ownership and usage for the purpose of business. Sec. 32 of the IT Act had not placed any limitation whatsoever in regard to the asset being in use for the entire 12 month period. There used to be a provision allowing reduced depreciation if the asset was purchased during the second half of the year. Further, the claim of depreciation is with reference to the cost of the assets and is not in relation to the period for which the income is earned or included as income. Therefore, the assessee was justified in claiming depreciation as per the table of depreciation under the IT Rules and there is very little justification to hold that depreciation should be allowed only for proportionate one month especially when the Act does not place any such limitation. This issue is accordingly decided in favour of the assessee and against the Revenue.
6. In so far as the second issue is concerned, the CIT (A) has noted that provident fund and ESIC are not covered by the provisions of s. 43B of the Act, which, in our view, is not justified, but we have only to direct the AO to allow the deduction if the deposits with the concerned authorities are made within the due dates allowed under those Acts.
7. The next issue relates to the addition of Rs. 1,83,701 as representing scrap value of crockery, that was broken and replaced. In our view, the crockery which are broken have no scrap value and rather for removal of such broken items, charges would have to be paid to the authorities. We accordingly uphold the order of the CIT (A) in deleting the addition.
8. The last issue is related to the first issue and for the reasons mentioned while dealing with the first issue, this becomes academic interest only.
9. The assessee in its cross-objection has raised five grounds. The first ground reads as under :
“The learned CIT (A) erred in confirming the disallowance of Rs. 15,000 paid to Reserve Bank of India for the alleged contravention of FERA. He erred in failing to appreciate that considering the nature of the expenditure which was incurred in the normal course of the assessees business, the same was an allowable deduction.”
The very nature in which the ground has been raised clearly goes to show that the amount was of penal in nature. The claim is accordingly rejected.
10. The second ground reads as under :
“The learned CIT (A) erred in confirming the disallowance of the following amounts under s. 43B :
Rs.
(i) Property tax
33,950
(ii) Water charges
9,835
(iii) Labour welfare charges
576
(iv) Luxury tax
1,07,405
(v) Sales-tax
13,754
He further failed to appreciate that the above items were not liable to be disallowed under s. 43B.
In regard to the above we have only to direct the AO to verify whether the amounts have been paid to the concerned authorities within the due dates and if so no disallowance is called for.
11. The third ground reads as under :
“3. (a). The learned CIT (A) erred in confirming the disallowance of Rs. 2,76,150 being the loss suffered by the assessee on account of missing assets.
(b) In any case, he, after holding that the loss was capital loss, ought to have allowed it to be brought forward to the subsequent years, according to law.
In our view, no interference is called for with the orders of the authorities below because the missing capital asset would result in a capital loss only.
12. The fourth ground reads as under :
“4. (a). The learned CIT (A) erred in confirming the disallowance of Rs. 27,530 out of interest expenditure for not charging interest on amounts due from East West Hotels Ltd.
(b) The learned CIT (A) erred in failing to appreciate that no such interest was charged to the said East West Hotels Ltd. nor any income had arisen to the assessee.
(c) The learned CIT (A) erred in holding that no conclusive evidence had been laid to prove that the amount was not receivable from the said East West Hotels Ltd.
In pages 9 and 10 of the appellate order, this issue has been considered by the CIT (A) as ground No. 15 as raised before him. The same is reproduced below for the sake of facility :
“Ground No. 15 : Disallowance out of interest expenses Rs. 2,42,000.
A sum of Rs. 24,00,000 was advanced to East West Hotels Ltd. The assessee did not charge the interest on the said amount during this year, while it did take loans and paid interest on them. According to the learned officer the said debtor was a sister concern and, hence, the present disallowance. According to the learned advocate the financial condition of the company had weakened and the same had ceased to be the subsidiary company of the assessee. That therefore, the interest on the said loan was not charged. Again, it was claimed that the interest receivable was on Rs. 27,530 and not Rs. 2,42,000. This is clear from the Note No. 12 of the auditors report. According to this report the interest of Rs. 2.69 lacs related to earlier years and Rs. 27,530 calculated @ 20 per cent per annum. According to the report the balance of the loan was only Rs. 1,37,648 as on 31st July, 1986. Therefore, the disallowance, if any, could be made for a sum of Rs. 27,530. Since no conclusive evidence has been laid to prove that the amount was not receivable, the disallowance is confirmed to the extent of Rs. 27,530 only. The ground of appeal is partly allowed.
In our view, no interference is called for and this ground is accordingly rejected.”
13. Ground No. 5 reads as under :
“The learned CIT (A) erred in not allowing investment allowance to the assessee under s. 32A in respect of new plant and machinery installed by the assessee at the hotel premises at Ambassador Pallava, Madras. He further erred in relying on the judgment of Kerala High Court in (1973) 91 HP 289 (Ker) in the case of CIT vs. Casino.”
The above issue has been considered by the CIT (A) as ground No. 17 before him and the same is reproduced below for the sake of facility :
“Ground No. 17 : Investment allowance under s. 32A
It was claimed that the assessee was entitled to the claim under s. 32A as it was an industrial company. Reliance was placed on the following judgments :
1. Orient Express Co. (P) Ltd. vs. LAC (1985) 23 TTJ (Del) 597 : (1985) 14 ITD 506 (Del);
2. Lake Palace Hotels & Motels Pvt. Ltd. vs. ITO (1989) 44 Taxman 324 (Jp);
3. Piem Hotels Ltd. vs. LAC (1987) 61 CTR (Trib) (Bom) 79.
The facts of the present case are fully covered by the facts as stated in the case at (1987) 61 CTR 79 (Bom) (TR). In this judgment the Honble Bombay E Bench of the Tribunal has considered various judgments including the Casino Pvt. Ltd. (1973) 91 ITR 289 (Ker). After considering all these judgments the orders of the CIT (A) in the said case have been set aside. In this view of the matter, and following (1973) 91 ITR 289 (Ker) the ground of appeal is not allowed. I have carefully considered the decision at (1985) 23 TTJ (Del) 597 : (1985) 14 ITD 506 (Del) and (1989) 44 Taxman 324 (Jp). The Jaipur Bench has, it is respectfully submitted, erred in following (1987) 61 CTR (Trib) (Bom) 79 as the Bombay Tribunal has not decided the issue at all. The judgment at (1985) 23 TTJ (Del) 597 : (1985) 14 ITD 506 (Del) is not followed for the reason that it gives no convincing argument to show as to where the judgment at (1973) 91 ITR 289 (Ker) has gone wrong.”
The assessee placed reliance on Fariyas Hotels Pvt. Ltd. vs. CIT (1995) 211 ITR 390 (Bom) and S. P. Jaiswal Estates Pvt. Ltd. vs. CIT (1994) 209 ITR 307 (Cal). Because the details on which the claim of investment allowance is made are not available and the orders of the authorities below are not at all clear, we are not in a position to appreciate the claim. We accordingly remand this issue back to the file of the AO for fresh adjudication. The AO shall allow the assessee sufficient opportunity and then decide the issue on merits.
14. In the result, the appeal by the Department and the cross-objection by the assessee are treated as allowed in part for statistical purposes.