Kalyani Steels Ltd. vs Deputy Commissioner Of Income … on 14 March, 1997

ORDER

CHANDER SINGH, A.M. :

These two appeals by the assessee for the asst. yrs. 1991-92 and 1992-93 are combined for the sake of convenience.

2. The assessee is a public limited company and is engaged in the production of steel. The assessee-company had undertaken a new project called “seamless pipes” at Baramati, which did not become functional till 31st March, 1991. The new unit of seamless pipes was considered by the assessee as part of the existing business for which the pre-operative interest of Rs. 1,04,09,776 and pre-operative expenses of Rs. 61,22,670 were claimed for the asst. yr. 1991-92. Similarly, for the asst. yr. 1992-93, the assessee had claimed the pre-operative interest of Rs. 4,56,87,651 and pre-operative expenses of Rs. 1,68,65,178. In addition, for the asst. yr. 1991-92, the assessee had also claimed the expenditure on service line for tube division amounting to Rs. 13,45,000. The AO disallowed the said expenditure by observing for the asst. yr. 1991-92 as under :

“The assessee has claimed pre-operative expenses of Rs. 1,65,32,446 as deductible business expenses in respect of its seamless tube project at Baramati. The assessees factory is at Mundhwa and its new project is at Baramati. The assessee claims that though it is at distance of over 100 miles, the new unit is only a part and parcel of the old unit at Mundhwa, as the management is the same, the funds are inter-winded and as the products of old unit become the raw material for the new unit. These claims are not acceptable. The new project at Baramati is entirely a new unit, with an entirely new product to be manufactured. The pre-operative expenses including those on interest, etc., cannot be allowed as revenue expenditure and I hold that these are properly capitalised by the assessee. The deduction of Rs. 1,65,32,446 claimed is rejected taking into account the Expln. 8 to s. 43(1) of the IT Act, 1961.”

3. On similar grounds, the AO also rejected the claim of the assessee for the payment of Rs. 13,45,000 being cost of M.S.E.B. for service connection/service line for its seamless tube project at Baramati.

4. Aggrieved, the assessee went in appeal before the CIT(A). It was urged before the CIT(A) that during the relevant previous year the assessee embarked on an expansion of its activity by going in for manufacture of seamless steel tubes which was a forward integration. For this purpose, the assessee obtained the requisite letter of intent and also acquired land at Baramati. During the year the assessee started construction of the factory and also started acquiring necessary plant and machinery for the purpose of seamless tube project. The assessee claimed the deduction as revenue expenditure on pre-operative interest as well as pre-operative expenses in respect of the seamless tube project. The assessee also asserted before the CIT(A) that although the new unit was at Baramati, it was only part and parcel of the existing business of the assessee as the management is same, funds are common, and steel produced by the factory at Mundhwa constitute raw material for seamless tubes. In this regard, the assessee made elaborate submissions before her vide 12th June, 1996, 17th June, 1996, and 26th June, 1996. All these letters have been placed by the assessee on its paper-book filed before us. In its letter dt. 28th September, 1994, the assessee justified the claim by citing various High Courts decisions and also pointed out that the test for constituting the same business is existence of common funds, existence of common management and common place of business. The assessee, therefore, tried to impress upon the CIT(A) that the tube division was part and parcel of the existing business of the assessee and, therefore, the assessee was entitled to the deduction of pre-operative interest and pre-operative expenses as well as expenses on the service line.

5. The CIT(A) examined the issue in the light of the judicial decisions brought to her notice. The CIT(A) was of the view that hardly any part of the funds of the steel unit have been used for the seamless tube project. She also opined that the requisite funds have been raised under an umbrella of the assessee-company and the funds have been subsequently used for the new steel division at Hospet.

6. As regards the common management, the CIT(A) admitted that Shri B. N. Kalyani and Shri B. B. Hattarki were whole-time directors of the assessee-company. She, however, observed that they were also directors of Kalyani Seamless Tube Ltd. (hereinafter in short referred to as KSTL), after the unit was transferred. She also noted that in 1989-90 and 1990-91, 539 and 555 persons were employed by the assessee-company. This number increased to 987 and 1043 in 1992-93 and 1993-94. When the tube division was transferred 330 employees of the assessee-company were also transferred to KSTL. She also observed that the information under s. 217(2A)(b) of the Companies Act printed under the annual accounts for 1993-94 revealed the employment of specialists for the tube project, who were subsequently transferred to KSTL. With these observations, the CIT(A) concluded that the common management is also not established.

7. The CIT(A) further held that the existing steel division has not in anyway been affected by the amputation of seamless tube division in 1994-95. She was of the view that the unit was apparently transferred to save the steel division from the embarrassment of accounting for the loss of the tube division. The CIT(A), on the facts and in the circumstances, concluded that viewed holistically, during the five years span of implementation of the seamless tube division, the nexus between the two divisions, its inseparable oneness with the steel division is not established. She also observed that the place of business was also not common, except perhaps for the head office of the company at Mundhwa. In short, the CIT(A) rejected the claim of the assessee on the following grounds :

(a) The project is entirely different from the steel being produced by the company;

(b) From the annual accounts perused for 1990-91 to 1994-95 it appears that the trial production started sometime in September, 1994;

(c) The object of the companys issue in March, 1991, was to raise funds to be utilised to meet financial requirement for the seamless tube manufacturing facility;

(d) Even before commercial production of the seamless tube started, the division was transferred to KSTL;

(e) Hardly any part of the funds of the existing steel division has been used for the seamless tube project;

(f) The information under s. 217(2A)(b) of the Companies Act printed under the annual accounts for 1993-94 revealed employment of specialists for the tube project who were subsequently transferred to KSTL; and

(g) The existing steel division has not in any way been affected by the amputation of seamless tube division in 1995.

8. On these grounds, the CIT(A) rejected the claim of the assessee by observing :

“In the present appeal also considering the overall facts the composite nature or sameness of business of steel and seamless tube division is not established by the assessee. The seamless tube division is only been fostered by the steel division during its implementation phase. The venture has been transferred even before it was ready for commercial production. Its transfer has not affected the business of the steel division. On facts of this case, it is, therefore, held that the seamless tube division is distinct business from the manufacture of steel being carried on by the assessee. The claim of commonness of business is, therefore, rejected.”

9. In this regard, the CIT(A) followed the ratio of the decisions in the cases of :

(1) L. M. Chhabda vs. CIT (1967) 65 ITR 638 (SC);

(2) CIT vs. K. Ravindranathan Nair (1985) 152 138 (Ker) and

(3) Waterfall Estates Ltd. vs. CIT (1981) 131 ITR 207 (Mad).

10. The CIT(A), while deciding the issue has also distinguished the decision of the Pune Bench in the case of Bharat Forge Ltd. vs. Dy. CIT (1995) 53 ITD 575 (Pn) on the ground that in that case the company had undertaken a modernisation-cum-expansion in the existing premises in the same line of business with the idea of shifting to better technology.

11. The CIT(A) also observed that Expln. 8 to s. 43(1) is attracted and setting up of the seamless tube division cannot be construed, but as another enduring asset and all interest prior to the operation cannot but be held as capital.

12. Aggrieved, the assessee-company has come up in appeal before us and has filed paper-book No. 1 consisting of 374 pages. The assessee has also filed the additional evidence by way of a separate paper-book No. 2 consisting of 85 pages. The learned counsel, Shri S. N. Inamdar submitted that the additional papers are in the nature of elaborating submissions on points made before the Revenue authorities. He also submitted that although primary facts were already before the Revenue authorities, certain observations of the CIT(A) suggested that inferences have been drawn without appreciating or calling for the full facts and hence, it was necessary to file additional evidence. Consequently, the learned counsel sought the permission of the Tribunal for the admission of the additional evidence under r. 29 of the ITAT Rules. The senior learned Departmental Representative, Shri Hari Krishan, also filed additional evidence in the form of agreement for transfer of seamless tube unit to KSTL. In addition, the learned senior Departmental Representative also filed paper-book No. 1 consisting of 53 pages and paper-book No. 2 consisting of 68 pages.

13. While the learned counsel of the assessee did not object to the additional evidence filed by the learned senior Departmental Representative, however, objected to the additional evidence filed by the assessee.

14. We have considered the additional evidence filed by the parties to the dispute. We find that the additional evidence filed by the assessee-company as well as the learned senior Departmental Representative is necessary to facilitate better understanding and resolving of the dispute before us. The additional evidence filed by the assessee-company and the learned senior Departmental Representative are, therefore, admitted.

15. On the main issue, the learned counsel, Shri S. N. Inamdar more or less reiterated the same arguments which were advanced before the CIT(A). He submitted that the learned CIT(A) has decided the issue without properly appreciating the facts and the submissions made before her. The learned counsel filed the rebuttal on the observations made by the CIT(A). These rebuttals are placed on record and appear at pp. 59 to 64 of the assessees paper-book No. 1. He urged that the CIT(A) failed to take note of the fact that there was a common management of the steel division as well as the tube division. The whole time director, Mr. B. N. Kalyani and joint managing director, Mr. B. B. Hattarki looked after the operations of both the units of the company. Even the former managing director, Mr. P. G. Chitale was looking after both the units of the company. The Vice-President (Human Resources), Mr. P. V. Coelho was looking after the human resources and employees administration of both the units. Similarly, Mr. S. V. Sirsikar, Vice-President (purchase) was looking after the purchases of both the units. Mr. C. G. Patankar, Vice-President (corporate finance) was looking after the finance requirements of both the units. Also Mr. A. V. Inamdar (Associate Vice-President, stores) looked after the stores department and all excise matters of both the units. Mr. G. R. Warty, company secretary was also looking after the secretarial and legal aspects of both the units. The export department of Kalyani Steel Ltd. (hereinafter referred to as KSL) was looking after the export marketing of the tube division as well. He, therefore, submitted that in view of the above, tests of common management, common business organisation and administration were satisfied.

16. As regards the common place of business, he submitted that the common head office at Mundhwa which controls affairs of both the units satisfy this test. In this regard, the learned counsel brought to our notice the decision of the Gujarat High Court in the case of CIT vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj). He submitted that all relevant tests are satisfied and the steel and the tube units constituted the same business.

17. The learned counsel continued and submitted that the accounting treatment in the books of account is not relevant for allowability of expenses under the IT Act. In this regard, he has brought to our notice the decision of the Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. vs. CIT (1970) 82 ITR 363 (SC) and India Cements Ltd. vs. CIT (1966) 60 ITR 52 (SC). The learned counsel has also drawn our attention to the decision of the Hyderabad Tribunal in the case of IAC vs. Coromandal Fertilisers Ltd. (1989) 29 ITD 455 (Hyd). He also submitted that Expln. 8 to s. 43(1) is not relevant in the present case.

18. The learned counsel has also brought to our notice the assessees letter dt. 6th October, 1994, in which it was claimed that part of the interest amounting to Rs. 47,37,947 considered as pre-operative interest of the tube project was in fact pertaining to or was attributable to use of these funds by the steel unit. The auditors of the company have clarified this amount by stating that interest of Rs. 47,37,947 attributable to the use of the borrowed funds of the steel unit is wrongly capitalised and, therefore, the profit for the year is shown at a lower figure by the same amount.

19. The learned counsel further pointed out that it is true that the tube division was transferred to a separate company, viz., Kalyani Seamless Tube Ltd. on 1st January, 1995. There were, however, legitimate business and commercial considerations for such a transfer. He pointed out that until 1992 private sector companies were barred entry into steel making directly from iron ore by using the blast furnace routs. The company had, therefore, to resort to steel-making from imported scrap through electric arc furnace route which was costlier than blast furnace route in view of the high input cost. As the assessee-company had no option of expanding its steel-making activity, it opted for the alternate growth operation of making seamless tubes from the steel billets produced by it as a forward integration programme. Seamless tubes was a value added product from steel billets produced by the company.

It was felt in September, 1990, that the seamless tube unit can be profitably and efficiently combined with the existing steel activity. Initially, the project cost was considered at Rs. 156 crores. The company being an existing listed company could raise equity at a premium while a new company was prohibited to do so as per the Controller of capital issues guidelines. Initially, therefore, it was advantageous to take up the project by the assessee-company itself.

20. Unfortunately, the project cost escalated substantially due to the devaluation of rupee and went upto Rs. 271 crores. At the same time, due to changes in Government policies and liberalisation, imports of seamless tubes were freely permitted and imports for the domestic suppliers went down due to the removal of benefits from deemed export status, etc. At the same time, steel making activity was also facing difficulties due to increase in cost of imported scrap and power and fuel cost. Moreover, entry was allowed for private sector companies in steel making directly from iron ore through blast furnace routes. It was, therefore, necessary for the company to go for steel making directly from iron ore through blast furnace route to survive competition in the steel business. At the same time, tube division was likely to incur substantial losses due to the factors mentioned above. The management felt that if the tube division was continued in the company, it could have wiped out the net worth of the assessee-company in 2-3 years time. It was, therefore, necessary to spin off the tube division into a separate company and restructure its debt and equity through the process of public issue through premium. By doing so, the interest cost could be brought down and viability of project could be improved. Simultaneously, the company decided to set up a unit for blast furnace at Hospet in Karnataka. The decision to spin off tube division was taken by the company to improve the viability of the project and also ensure survival of the company. It was also submitted that the spin off was undertaken after setting up of tube division and sales worth Rs. 28 crores were effected during the previous year 1994-95. He further submitted that the spin off of tube division was entirely due to strong business and commercial compulsions and was not even remotely connected to any taxation. In fact, purely from the tax point of view, it was advantageous for the company not to transfer the tube division as it could have availed of the benefits of substantial losses and depreciation. He further pointed out that as a matter of fact, on this issue, the case of the assessee is fully covered by the decision of the Pune Bench in the case of Bharat Forge Ltd. (supra) and in MA No. 8/PN/95, dt. 26th February, 1996.

21. The learned counsel continued and pointed out that the product manufactured by the tube division was not different from the steel produced by the assessee-company. During the course of hearing, he physically exhibited the steel rounds and seamless tubes and emphasised that seamless tubes are nothing but hollow steel rounds which are produced by the steel division. The facts of the case, therefore, clearly show that the assessee-company and its tube division in the relevant years were engaged in the same business.

22. The learned counsel has also taken us through the objects of the issue in 1991. In particular, he has drawn our attention to p. 144 of paper-book No. 1 in which it is stated that the company has received a letter of intent for the manufacture of 50,000 tonnes per annum of seamless (carbon and alloy steel) pipes in an integrated manner, including the manufacture of steel. The learned counsel also drew our attention to the additional evidence filed in the paper-book No. 2 which clearly indicates that the same top management team was looking after the affairs of both the divisions. He pointed out that same personnel manager had signed the letters for the employees working for steel and tube division. He also referred to the clause in appointment letters stating that the employees can be transferred to any division of the company. He also referred to the certificates of the chartered accountants certifying that proceeds of both 1990-91 and 1992 issues were deposited in common cash credit account and that the profits of the steel division were used for repayment of the tubes division. For this purpose, on our requisition, books of account were produced before us.

23. Finally, the learned counsel fairly pointed out that out of claim of pre-operative expenses of Rs. 61,22,670 for the asst. yr. 1991-92, an amount of Rs. 18,31,525 was incurred in the earlier previous year and had been debited to project expenses account during the previous year relevant to the asst. yr. 1991-92. He, therefore, did not press for the allowance of this amount of Rs. 18,31,525 and restricted the claim for deduction of pre-operative interest and pre-operative expenses for both the years under consideration-minus-the sum of Rs. 18,31,525 for asst. yr. 1991-92.

24. Finally, the learned counsel summed up his arguments and pointed out that the CIT(A) had erred in disallowing the claim of pre-operative interest and pre-operative expenses without properly appreciating the facts and evidence on record. He argued that on the basis of evidence on record, the tests of unity of control, commonness of management and administration and commonness of funds are fully satisfied. He claimed that there was no distinction between the steel and the tube activity. In fact, a distinction, if any, lies only in the accounts. For various propositions, the learned counsel relied on the following decisions :

(1) CIT vs. Prithvi General Insurance Co. Ltd. (1968) 68 ITR 632 (SC);

(2) Standard Refinery & Distillery Ltd. vs. CIT (1971) 79 ITR 589 (SC);

(3) B.R. Ltd. vs. V. P. Gupta, CIT (1978) 113 ITR 647 (SC);

(4) CIT vs. S. S. M. Ahmed Hussain (198 (1987) 164 ITR 525 (Mad);

(5) CIT vs. R. M. Maruthai Naidu & Sons (1991) 192 ITR 666 (Mad);

(6) Kanhiram Ramgopal vs. CIT (1988) 170 ITR 41 (MP) and

(7) Veecumsees vs. CIT (1996) 220 ITR 185 (SC).

25. The learned counsel, thus, concluded that the CIT(A) was in error in disallowing the claim of the assessee.

26. The learned senior Departmental Representative, Shri Hari Krishan, on the other hand, vehemently opposed the contention of the assessee and made elaborate and detailed submissions in support of the claim that the deduction of pre-operative interest and expenses should not be allowed. The basic framework of his argument was as under.

27. The business of seamless tubes at Baramati is not the same business as the remaining business of the assessee. Hence, the entire pre-operative expenses including interest on borrowings and other expenses including salary, travelling expenses, etc., incurred for acquisition of the capital assets and putting them into operation and the expenditure on high tension wire is capital expenditure.

28. The learned senior Departmental Representative took us through pp. 2 to 5 of the paper-book No. 1 of the Department and contended that :

(a) separate company, namely, KSTL was formed on 12th February, 1990, with the objective of manufacturing of seamless tubes. The seamless tube business was for implementation by an independent company promoted/to be promoted by Kalyani Steel Ltd. and expenses of Rs. 18.31 lakhs were shown as projected advance for the financial year 1989-90.

(b) Separate finances were raised for the business of seamless tubes.

(c) Even before the commercial production was started, tube division was transferred to a separate company.

(d) The tube division was located at Baramati which is 100 kms. from Pune.

(e) The seamless tube is a different product from steel.

(f) Interest is provided on funds of steel (tube business) utilised by the assessee.

(g) Separate independent accounts are maintained to the minutes details and separate books of account, journals, ledgers, etc., are maintained for tube division. By drawing our attention to p. 2, he pointed out that even in 1990 small things were purchased in the name of tube division. On p. 3, he has drawn our attention to the fact that cash on hand of tube division has been separately shown. Page 8 of the paper-book indicates that separate expenses for tube division have been mentioned. The rent of Bombay office of tube division has also been separately shown. Even the consultants fee has also been separately shown in the name of tube division. He also pointed out that premium on shares, debentures, etc., was also transferred by the assessee to the new company.

(h) Separate staff have been recruited for tube division.

(i) Separate office is also maintained for tube division.

29. In order to substantiate the above submissions, the learned senior Departmental Representative took us through the various pages of the paper-books of the assessee as well as the paper-books of the Department. Details of these references have elaborately been mentioned by the learned senior Departmental Representative on pp. 2 to 5 of the Departmental paper-book and need not be reproduced.

30. The learned senior Departmental Representative took us through the rebuttal filed by the assessees counsel which is placed at pp. 59 to 64 of the assessees paper-book No. 1. In reply to the arguments of the assessee-company that the assessee had tube manufacturing as one of its main objective, the learned senior Departmental Representative argued that the objects clauses of the company as mentioned in the memorandum of association are too general and too wide and cover every business under the sky. He also argued that the object of manufacturing tube is different than seamless tube.

31. As regards the argument of the assessees counsel that seamless tubes and billets are items falling in the same category of Schedule B of the Bombay ST Act, the learned senior Departmental Representative argued that this is a very general classification and it does not mean that the steel billets and seamless tubes are same business.

32. In reply to the argument of the counsel of the assessee that the proceeds of the issue in 1991 and 1992 were deposited in common cash credit account and utilised by the steel division also, the learned senior Departmental Representative argued that this was only a temporary use of the funds and separate interest of Rs. 47.37 lakhs has been provided for such use of the funds by the steel division. He claimed that this in fact makes it clear that the funds of the steel division and tube division were separate.

33. As regards the contention of the assessee regarding gains on cancellation of forward contracts, the learned senior Departmental Representative contended that these gains are adjusted from pre-operative expenses of the tube project and not declared separately as income by the assessee.

34. The learned senior Departmental Representative also disputed the claim of the company that the transfer of seamless tube division to a separate company was for assessees benefit and strong business considerations. The learned senior Departmental Representative pointed out that the entire project was transferred only at cost. The project consisted of huge plot of industrial land at Baramati and substantial investments were made in building, plant and machinery. The assessee has not received any appreciation on the value of these assets from KSTL. The assessee would also have incurred huge cost in terms of manhours and material for setting up the project. This part of the cost has also not been recovered. The assessee has not charged any interest on the outstanding consideration. In his view, therefore, the transfer was not for simple commercial considerations. He urged that the assessee had the intention of taking of the project into a separate company promoted by the assessee and the entire exercise of setting up of a project was done by the assessee to foster the project for an independent group company which has in fact become a subsidiary of the assessee-company. The whole exercise was planned to avoid capital gains tax on transfer of assets and also to claim huge revenue expenses in the hands of the assessee-company.

35. With regard to the argument of the assessee that out of project cost an amount of Rs. 21.1 crores was made out of cash accruals of steel activity, the learned senior Departmental Representative pointed out that the cash accruals are from seamless tube project itself and not from the steel activity. Without prejudice, the learned senior Departmental Representative contended that the cash accruals of Rs. 21.1 crores is a small amount as compared to the total project cost. Admittedly, the balance amount was met by specific loans and issue of shares.

36. As regards the assessees argument that the persons in the decision-making position were common, the learned senior Departmental Representative pointed out that a company can have more than one business. In every industrial groups, there are several companies and the same industrialist is chairman or a director of more than one company. This does not mean that all these companies can be regarded as having the same business.

37. In reply to the assessees argument that the marketing department was common, the learned senior Departmental Representative argued that this is not relevant as the sales of the tube division would start only after commencement of the commercial production which took place on 25th March, 1995.

38. As regards the argument of the assessee that the appointment letters of the employees of the steel and tube divisions were signed by the same person, the learned senior Departmental Representative contended that this fact alone cannot justify the claim of the assessee that the business is same. However, with respect to other argument that the appointment letters contained a clause that an employee can be transferred at any time to any project, he pointed out that this is only a standard clause in appointment letters. On the strength of this clause, he attempted to draw a conclusion that from the beginning the assessee was planning to transfer the unit to some other company.

39. As regards the assessees argument that the texture of the existing business was adversely affected after the transfer of the seamless tube division, he vehemently argued that the texture has not at all been affected. According to him, there was no loss of cash flow as commercial production of seamless tube division was not started.

40. As regards the additional manufacturing capacity created for catering tube activity rendering it idle, the learned senior Departmental Representative argued that even during the period before the seamless tube project was transferred, there was a steep decrease in the percentage of raw material supplied by the steel division. According to him, this indicates that the seamless tube project was not at all dependent on the assessee even for supply of raw material.

41. As far as the additional manpower remaining with the assessee, the learned senior Departmental Representative urged that the entire additional manpower was transferred to KSTL.

42. With reference to the argument that the equity base of the assessee-company being expanded and the assessee being required to service the same, the learned senior Departmental Representative countered the argument by saying that addition to equity base is compensated by the equity acquired by its KSTL.

43. As regards the steep fall in the market price of shares of the company, the learned senior Departmental Representative was of the view that this was only in line with the general fall in the value of the equity during the last 3-4 years.

44. As regards the assessees argument that the expenses claimed as revenue were ultimately declared as income in the asst. yr. 1995-96, the learned senior Departmental Representative urged that the assessee has only reduced the consideration from the written down value of its block of assets and there is only reduction in the claim of depreciation and thus, the assessee has tried to obtain an undue benefit by claiming deduction of pre-operative expenses.

45. The learned senior Departmental Representative has also drawn our attention to cl. 21 of the agreement to transfer the seamless tube division to KSTL and also referred to the books of account to which KSTL can have access, though they continued to belong to the assessee-company. Further, he pointed out that the agreement between the MIDC and the assessee-company specifically refers to Kalyani Steel Ltd. (tube division). Reference to the tube division is intentionally to avoid any liabilities of the tube division to come on the steel division. He further pointed out that separate office was maintained by tube division at Bombay and Pune. Separate colony and guest house was also maintained for the employees of the tube division.

46. For this and other provisions, the learned senior Departmental Representative drew our attention to the various judicial decisions placed at paper-book No. 2 of the Department at pp. 57 to 66. The important decisions relied upon by him to support his contentions are as follows :

(1) South Indian Industrial Ltd. vs. CIT (1935) 3 ITR 11 (Mad) (FB);

(2) Scales vs. George Thomson 13 Tax Cases 83;

(3) Manilal Dahyabhai vs. CIT (1959) 37 ITR 398 (Bom);

(4) Setabganj Sugar Mills Ltd. vs. CIT (1961) 41 ITR 272 (SC);

(5) CIT vs. Mani Ratnam Naidu (1966) 59 ITR 492 (Mad);

(6) Gupta Bros. (P) Ltd. vs. CIT (1966) 59 ITR 640 (All);

(7) Laxmi Ratan Cotton Mills vs. CIT (1967) 63 ITR 755 (All);

(8) L. M. Chhabda & Sons vs. CIT (supra);

(9) Blue Mountain Estates & Industries vs. CIT (1985) 151 ITR 616 (Mad);

(10) Waterfall Estates Ltd. vs. CIT (supra); and

(11) C. L. Mehra vs. ITO (1996) 59 ITD 99 (Del).

47. The last decision of the Delhi Bench of the Tribunal was relied upon by the learned senior Departmental Representative only on the issue of intention of the assessee.

48. The learned senior Departmental Representative dealt at length on the decision of the Bombay High Court in the case of Manilal Dahyabhai (supra) and other cases for the proposition that in order to constitute the same business, the separation of one business should affect the texture of the remaining business. He argued that the claim of the assessee on this ground alone requires to be rejected.

49. The learned senior Departmental Representative also referred to the judicial decisions cited by the assessee-company before the CIT(A) and also before us. He attempted to distinguish the Supreme Court decisions in Prithvi Insurance Co. Ltd. (supra), Hooghly Trust (P) Ltd. vs. CIT (1969) 73 ITR 685 (SC), Produce Exchange Corpn. Ltd. vs. CIT (1970) 77 ITR 739 (SC) on the ground that the Supreme Court has held that the test of the nature of two lines of business is not relevant in deciding whether they constitute same business. He also brought to our notice the decision of the Supreme Court in the case of Standard Refinery Ltd. (supra) in which it is held that the fact that the transactions of one activity can be separated from others is not relevant in deciding the issue of sameness of business.

50. Thereafter, the learned senior Departmental Representative took us through the decision of this Bench in the case of Bharat Forge Ltd. (supra). He pointed out that in the said decision, the Tribunal had considered the case on modernisation at the same premises of the existing business and that issue of same business was not at all considered and decided by the Tribunal.

51. The learned senior Departmental Representative also referred to Expln. 8 to s. 43(1) of the IT Act and argued that in terms of this Explanation, any interest for period before the asset is put to use must be capitalised as actual cost of the assets. In this regard, he placed reliance on the decision of the Calcutta High Court in the case of India Steamship Co. Ltd. and circular of the CBDT in (1987) 161 ITR (St.) 30.

52. In paper-book No. 2 of the Department, the learned senior Departmental Representative has also made the alternate submissions as under :

(i) Interest on borrowings for acquisition of capital assets before the assets are put into operation have to be capitalised within the provisions of Expln. 8 to s. 43(1) of the IT Act.

(ii) Other expenses including salaries, travelling, etc., incurred for acquisition of the capital assets and on putting these assets into operation is capital expenditure.

(iii) High tension cable expenses are incurred specifically for erection of plant and machinery and as such, are capital. Further, the high tension cables is an advantage of enduring nature. Without the high tension cable, the assessee would not be even able to put up its plant and machinery and operate the same.

53. In support of his alternate submissions regarding the deduction of pre-operative interest, the learned senior Departmental Representative again sought to distinguish the case of Bharat Forge Ltd. (supra) in which such expenses were allowed in the MA bearing No. 8/Pn/95. He also tried to distinguish the decision of this Bench in the case of Prav Electro-spark (P) Ltd. in ITA No. 2083/Pn/87 on the ground that it was also a case of modernisation. He also relied on the decision of the Bombay High Court in the case of CIBA of India Ltd. vs. CIT (1993) 114 CTR (Bom) 105 and in the case of CIT vs. Belapur Co. Ltd. (1987) 161 ITR 516 (Bom) for his contention that expenses of a new unit are not allowable as revenue deduction. He, therefore, pleaded that the claim of pre-operative expenses be disallowed. He, therefore, prayed that on this issue, the decision of the learned CIT(A) should be upheld.

54. In reply, the learned counsel of the assessee has filed a detailed rejoinder consisting of 41 pages. Briefly, the learned counsel pointed out that the learned senior Departmental Representative has placed great reliance on the proposition that the assessee has submitted minutest details of expenses of tube division. He pointed out that the very same argument was advanced before the Supreme Court in the case of Standard Refinery Ltd. (supra). In that case, the assessee-company was carrying on business of sugar manufacturing and distillery. The assessee claimed loss from trading in shares. The question was whether trading in shares and sugar and distillery constituted the same business. The learned counsel for the Department had also argued before the Honble Supreme Court that the transaction of share business can be easily separated from the other business of the assessee and, therefore, there was no inter-connection and equally there was no interlacing because the share transaction business did not dovetail itself into other business of the company. Further, there was no inter-dependence between the two businesses. The Supreme Court, however, rejected these arguments and concluded with approval the decision of the Supreme Court in CIT vs. Prithvi Insurance Co. Ltd. (supra) that inter-connection, interlacing and interdependence and unity were furnished by the existence of common management, common business organisation and administration, common fund and common place of business. The Supreme Court in the case of Standard Refinery Ltd. (supra) ruled that the deciding test was unity of Control and two lines of businesses. The learned counsel further pointed out that in the case of Standard Refinery Ltd. (supra), the fact that a part of overdraft of Rs. 6,80,046 taken from the bank has discharged from the income of the business was regarded as adequate evidence for satisfying the test of common funds. He clarified that in the case of the assessee-company, details were required to be maintained for the purposes for certifying the project cost incurred to the lenders, financial institutions. Even the provisions of s. 80(1A)(vii) requires the assessee to maintain details for each unit. He contended that the fact that minutest details were available for project expenses was not at all relevant in deciding the issue in dispute. According to him, what is relevant is to see as to how the various tests stipulated by the Supreme Court are fulfilled.

55. The learned counsel then proceeded to reply to the argument of the learned senior Departmental Representative regarding the intention of the assessee. He pointed out that the assertion of the learned senior Departmental Representative that the intention of the assessee-company was : (i) to treat the tube activity separately and eventually to transfer it to separate company; (ii) to claim unabsorbed deductions for pre-operative interest and expenses in the process and save tax and also save tax on capital appreciation of assets of tube project; (iii) to transfer the premium to new company have no bearing to the point at issue. As regards the intention to treat the tube activity separately and eventually to transfer the tube project, he pointed out that it is not correct to view to the various events that have happened retrospectively and draw conclusion therefrom as regards intention. In the period between 1991 to 1994, substantial changes occurred in the business world due to devaluation, liberalisation and reduction in import duties, etc. The various decisions had to be taken in the circumstance prevailing then and what is relevant is to see whether the decisions were taken at each stage for proper business and commercial considerations or not. He emphatically stated that the intention of the assessee-company was to take up the tube activity as an expansion of the existing steel activity. The assessee itself has obtained all the requisite approvals. It was advantageous to implement the project in assessee-company itself due to the following reasons, viz. :

(i) Seamless tubes are forward integration of steel produced by the assessee-company. It constitutes a value addition. Even the letter of intent issued by the Government of India stipulates that the steel and tube production shall be in an integrated manner.

(ii) In view of the Government policies then prevailing the company did not have the option of expanding steel activity by producing steel directly from iron ore through blast furnace route. Tube making was, therefore, an alternative area for growth with value addition for the company.

(iii) As per the controller of capital issues guidelines prevailing at the relevant time, new company could not raise equity at a premium. The assessee-company, being an existing listed company, could raise equity at a sizeable premium and thereby enabling a comfortable debt – equity ratio for project financing.

(iv) The assessee-company being an existing established and listed company had better borrowing potentials than a new company. It could access funds at a cheaper rate of interest than a new company. It could also offer security of its existing assets.

(v) The company could also service the loans from day one from its profits from steel activity.

56. The learned counsel, therefore, asserted that it was factually incorrect to say that since its inception, the intention was to undertake the project through a separate company. The intention was to take up the project as an expansion of the existing business of the company itself in view of the commercial reasons already pointed out. The assessee-company had approached the collaborators, Government authorities, leading financial institutions and investing public on the basis that the project shall be taken by the company itself. It has accordingly implemented the project and also started trial production in July, 1992, and has effected substantial sales running into crores of rupees till December, 1994. It is thus clear that the company had every intention of running the project itself and has represented the Government, investors, general public and lenders accordingly who accepted this position.

57. The learned counsel further pointed out that the entire case of the Department has been built up around the amputation of the tube division from the assessee-company. He pointed out that in December, 1994, the assessee-company had to take the painful decision of spinning off tube division due to bona fide and commercial reasons. The business and economic environment went through a sea change between 1991 and 1994 due to liberalisation. Due to devaluation of the rupee, the tube project cost escalated substantially. Due to change in the Government policy in 1993-94, the deemed export status of supplies to petroleum sector was withdrawn, price preference given to domestic manufacturers was reduced substantially from optimum of 35 per cent to 10 per cent and on top of it terminal excise duty was levied. As a result, the contribution margin on tubes required in petroleum sector reduced substantially and products of the company became uncompetitive especially in comparison with imported tubes. Due to reduction in customs duty, imports became cheaper and hit the prices of indigenous production.

58. The cumulative effect of all these changes was that the tube project became unviable and was bound to make losses. The changed scenario not only affected the profitability of tube activity, but also affected the steel activity of the company. Steel activity was suffering due to heavy competition from cheaper imports on one hand and escalation in cost of imported scrap and power. At the relevant time, the assessee was also exploring proposals for the joint venture. The joint venture was possible only if tube division was separated into a separate company. Through the process of spin off to a separate company and public issue of shares by it, the debt portion of the project was reduced. Consequently, the interest cost could be brought down and thereby the losses could be reduced. It was under these compelling reasons that the company had to take the decision of spinning off of tube division.

59. The learned counsel further urged that the formation of Kalyani Seamless Tube (P) Ltd. in 1990 was by one of the business associates of the assessee-company for undertaking a small value project. The learned counsel further pointed out that in fact in October, 1994, the assessee-company had filed application for forming a new company and was allotted the name “Kalyani Metal Tubes Ltd.” by the Registrar of Companies, vide letter dt. 15th November, 1994. It was, however, decided to take over KSTL from is existing shareholders merely as a matter of convenience and to save time also. The name was regarding the name of the product. In the opinion of the learned counsel, this factual position clearly establishes that the intention of the company was to take up the tube activity as its own, but the division had to be transferred due to commercial considerations and events beyond the control of the assessee-company. It was also pointed out that the fact that tube division is transferred to a separate company in a subsequent year is not a relevant consideration for allowability of interest in the year when unit was owned by the assessee-company.

60. Finally he pointed out that even if the intention were to transfer the activity to a separate activity, it is irrelevant in deciding the issue for the year under consideration. The subsequent transfer after the end of the accounting period under consideration should not make any difference for the years under consideration. In this regard, he placed reliance on the decision of the Karnataka High Court in the case of Chief CIT vs. Senapathy Whitely Ltd. 198 ITR 753 (Kar).

61. As regards the intention to save tax by claiming deduction of expenditure, the learned counsel explained that the decision to transfer the unit was taken as the project became unviable, as businessman has to take a decision based on all the business considerations and not only on tax considerations. In fact, if the tax saving was the only consideration, the assessee-company would never have transferred the tube division as after the transfer, KSTL has returned huge loss and the accumulated loss of tube division as per income-tax provisions upto 1996-97 were around Rs. 55 crores. The learned counsel also clarified that as a matter of fact the tax saving due to the claim of deduction of pre-operative expenses is only Rs. 3 crores as the assessee-company does not have much of taxable income for the asst. yr. 1993-94 and onwards even before considering the claim of pre-operative interest and expenses.

62. As regards the alleged tax saving on land transferred to KSTL, the learned counsel submitted that the value of the land was only Rs. 2.5 crores which is 1 per cent of the total project cost of Rs. 270 crores. The land is in a rural area at Baramati and there was hardly any appreciation in its value. Moreover, the land is only leasehold land and belongs to MIDC and is not owned by the assessee-company. As against this, there was the fact of loss-making potential of the division. The activity was transferred on a going concern basis. Any buyer of the assets has to take into consideration the yield on those assets which, in the present case, is negative.

63. The learned counsel further submitted that the assessee-company suffered damage to its image on account of failure of the tube project and its transfer. This is evident from the fall in market price of the shares of the assessee-company from Rs. 325 in October, 1992, to Rs. 32 in January, 1997. The fall in the share price was to the extent of 90 per cent. He submitted that no businessman will willingly allow this to happen for tax saving.

64. As regards the transfer of share premium, the learned counsel stated that it is not legally possible to transfer the share premium to another company in view of s. 78 of the Companies Act. To substantiate the point, he produced before us the annual accounts of the company for the year ended 31st March, 1995, which showed that the share premium account has not depleted.

65. The learned counsel also strongly countered the assertion of the learned senior Departmental Representative regarding “same business”. He pointed out that for constituting “same business”, the first test was unity of control. In the case of the assessee, this test is fully satisfied. It is accepted position that both the units were controlled by common board of directors and top management. The second test is that of common management and administration. According to the learned counsel, this test was also fully satisfied as top management was common. He further urged that the Supreme Court in the case of B.R. Ltd. (supra) has observed :

“Common control and common management was through the Board of Directors.”

Similarly, the Bombay High Court in the case of M. R. Joshi (HUF) vs. CIT (1979) 118 ITR 11 (Bom) at p. 16 observed that common manager of two theatres constituted “same management” even though the firms owning the two theatres were different. The common management has thus to be viewed from the top management and not lower staff. In the case of the assessee, it is established beyond any doubt that not only the managing director, but the personal manager, purchase manager, production manager and chief executive officer, finance manager and marketing manager were all common.

66. To refute the argument of the learned senior Departmental Representative and to prove his point, the learned counsel has also brought to our notice that the payment of salary of all employees was through a single salary register and was from cash credit account of the steel division. The entire salary is debited to salary account in general ledger which is common. The pro rata salary attributable to tube division was debited to project expenses account in the said common ledger through a journal entry. The learned counsel produced the bank accounts for our verification and showed the entries regarding these payments.

67. The provident fund trust, gratuity trust and superannuation trust was single and common for both the divisions. The same set of employees were also operating all the bank accounts of the company. From these factors, therefore, the test of commonness of the management is proved beyond any doubt.

68. He further pointed out that the commonness of the funds is also demonstrated by the facts on record. The equity capital raised in 1991, 1992 and 1994 was common. The issue in 1992 was to finance the requirements of both steel and tube divisions. Further, following factors also prove the commonness of the fund, namely,

(i) the debenture issue was common;

(ii) proceeds of equity and debenture issue were deposited in cash credit account of steel division. The cash credit accounts were produced before us for verification. The assessee also filed certificate of Chartered Accountants;

(iii) payment of salary is from cash credit account of steel division;

(iv) substantial payment of project expenses were met out of cash credit account of steel division;

(v) the payment of interest on debentures was made out of cash credit accounts of steel division;

(vi) same set of persons were authorised to operate all the bank accounts;

(vii) cash accrual of Rs. 21.10 crores of steel division was used as means of finance for tube project;

(viii) repayment of term loans of Rs. 23 crores of tube division were paid from profits of the steel division; and

(ix) even after the spin off, equity and share premium of Rs. 125 crores and debentures of Rs. 111 crores remained with Kalyani Steel Ltd. itself.

These factors, therefore, clearly proved that the funds of steel division and tube division were common. In this regard, the learned counsel again adverted to the decision of the Bombay High Court in the case of M. R. Joshi (HUF) (supra), Supreme Court decision in the case of Standard Refineries Ltd. (supra) and Madras High Court in the case of CIT vs. H. M. Maruthai Naidu & Sons (199 192 ITR 666 (Mad).

69. As regards commonness of place of business, the learned counsel urged that it is an accepted position in law that the head office is the place of business for the purpose of this test. The learned counsel pointed out that even the CIT(A) has accepted that the head office of both the units was at Mundhwa.

70. As regards the test of closure of one unit affecting the texture of the remaining activity, the learned counsel stated that this is not a decisive test. In this regard, the learned counsel again referred to the decisions of Prithvi Insurance Co. Ltd. (supra), Hoogly Trust (P) Ltd. (supra), B.R. Ltd. vs. V. P. Gupta, CIT (supra) and CIT vs. S. S. M. Ahmed (supra).

71. Without prejudice, the learned counsel pointed out that the existing activity of the assessee-company has been adversely affected due to transfer of tube division. Additional manpower of 174 employees had to be absorbed by the steel activity. He further urged that in the process of setting up of tube project, the equity base of the company expanded by manifolds. The expanded equity is a burden on the company as it has to service it from steel activity. The investment in KSTL would not yield any income for a long time. The capital structure of the company was thus permanently altered. He further pointed out that fees for increase in authorised capital are disallowed by Courts on the ground that capital framework is altered. Same analogy applies in the present case. Further, the enhanced equity has closed all options for the company to raise further equity capital.

72. The learned counsel continued and urged that the failure and the transfer of tube division has caused the big setback to the image of the company in business world. This is manifested by the huge fall in the market price of shares of the company from Rs. 325 in 1992 to Rs. 32 in 1997. If, on the other hand, the tube project had succeeded, it would have given a tremendous boost to the company.

73. He also urged that the enhanced capital and servicing from income of only steel activity has resulted in a sizeable fall in earning per share (EPS) and thereby again a fall in the market price of the shares. This has resulted in erosion in market capitalisation of shares in the stock exchange.

74. He also pointed out that as a result of the transfer of tube division, there has been a reduction in transfer of steel to tube project. It is true that the initial fall was due to change in product-mix by steel division to meet the challenges posed by liberalisation and tube imports. However, subsequent fall in transfer of steel was due to separation of the tube division.

75. Further, the learned counsel referred to certain observations made by the learned senior Departmental Representative to the effect that separate finances were raised for the business of seamless tube. In this regard, he pointed out that the rights issue in 1992 was a composite issue to meet the requirements of both steel and tube divisions. He also pointed out that the issue proceeds of 1991 as well as 1992 were deposited in the common cash credit account. He again drew our attention to the decision of the Delhi High Court in the case of CIT vs. Modi Industries Ltd. (1993 (1993) 200 ITR 341 (Del) and argued that raising of the loans with specific object is not relevant for deciding the issue of same business.

76. The different location of the tube division is also of no consequence and is not a decisive test to consider whether it is a same business or not. It is totally immaterial to decide whether the two units located at different places constitute the same business.

77. He further demonstrated that no interest has been provided for by tube division for use of the funds by steel division. The amount of Rs. 47.37 lakhs was determined by the statutory auditors being the interest attributable to such use by steel division for qualifying the accounts.

78. As regards the argument that separate specialists were recruited for tube division, the learned counsel pointed out that the decision of the Madras High Court in the case of Prithvi Insurance Ltd. (supra) which was subsequently confirmed by the Supreme Court, held that this fact also was not relevant to decide the issue. In any case, the commonness of management is to be viewed from the top management and the administration.

79. As regards the argument about separate offices, the learned counsel contended that there is no separate office of tube division at Pune or at Bombay. Expenses of common office were apportioned between the two divisions at the end of the year. He further stated that the fact that there is a workers colony at Baramati is not at all relevant in deciding the issue under consideration.

80. In response to the argument of the learned senior Departmental Representative that tube is entirely a different product from the steel, the learned counsel pointed out that seamless tube is nothing but a hollow steel round which is produced by steel division.

81. Thereafter, the learned counsel proceeded to deal with the judicial decisions relied upon by the learned senior Departmental Representative. With reference to the decision of the Bombay High Court in the case of Manilal Dayabhai (supra), he pointed out that this decision is not a good law as it is impliedly overruled by the Supreme Court in the case of Hooghly Trust (P) Ltd. vs. CIT (1969) 73 ITR 685 (SC). In this connection, he referred to p. 691 of the said decision of the Supreme Court.

82. The learned counsel also dealt with the decision of the Allahabad High Court in the case of Laxmi Rattan Cotton Mills vs. CIT (supra). He pointed out that in this case, the High Court has relied upon the decision of the Calcutta High Court in the case of Standard Refinery & Distillery Ltd. vs. CIT (1965) 55 ITR 139 (Cal). He brought to our notice that this decision of the Calcutta High Court has been reversed by the Honble Supreme Court in the case of Standard Refinery & Distillery Ltd. (supra)., As a consequence, the decision of the Allahabad High Court is also not a good law.

83. Referring to the decision of the Supreme Court in the case of L. M. Chhabda & sons vs. CIT (supra), he pointed out that mere fact that books of account are single is not relevant. In this decision, the Supreme Court has categorically observed that there is no evidence about the unity of control and management, interrelation of business or employment of the same staff, etc. This decision is, therefore, on specific facts and hence, not relevant to the point at issue.

84. He then referred to the decision of the Madras High Court in the case of Blue Mountain Estates & Industries (supra) and pointed out that in a subsequent decision in the case of CIT vs. S. S. M. Ahmed (1987) 164 ITR 525 (Mad) the Madras High Court itself had distinguished the said decision and held that the case of Blue Mountain Estates & Industries was decided on specific facts. This decision is, therefore, in the opinion of the learned counsel, also distinguishable.

85. The learned counsel, also distinguished the decision of the Madras High Court in the case of Waterfall Estates Ltd. (supra) which is affirmed by the Supreme Court in CIT vs. Waterfall Estates Ltd. (1996) 219 ITR 563 (SC). He stated that in the case of Waterfall Estates Ltd. the assessees contention was that since single set of books of account was maintained, different units constituted same business. The Tribunal had observed that the mere claim that single set of books is maintained is not adequate. In this regard, he drew our attention to the relevant observations (198 (1981) 131 ITR 207 (Mad) which are reproduced below :

“Therefore, the incorporation in the head office books of the financial statements sent from the different centres cannot by itself sustain the plea that a single business alone was carried on.

As regards the capital contribution, the Tribunal pointed out in para 34 of its order as follows :

“It was claimed by the learned counsel for the assessee that the funds are all supplied from the head office to the various estates. In our opinion, this is a statement which will require verification and cannot be said to be proved on the material on record since there is nothing to show whether or not this claim is correct.”

“The plea of common finance is not also established. Therefore, the assessees claim that a single business was carried on has to fail on facts.”

The learned counsel pointed out that the decision is on specific facts that common funds were not established. He also stated that the decision in the case of Waterfall Estates Ltd. (supra) is followed by the Madras High Court in Blue Mountain Estates & Industries (supra). However, the Madras High Court itself in (1987) 164 ITR 525 (Mad) and (1991) 192 ITR 666 (Mad) (supra) observed that the Blue Mountain Estates & Industries decision was on specific facts and did not apply to the above decision. The Supreme Court has merely approved the decision of the High Court which is on specific facts that evidence regarding commonness of funds and management was not on record. The decision is, therefore, not relevant.

86. The learned counsel then brought to our notice the decision of the Madras High Court in the case of CIT vs. R. M. Maruthai Naidu & Sons (supra) and pointed out that this is a case of deduction under s. 36(1)(iii) of the IT Act in respect of loans for transport business which was closed, from income from cigar business was allowed. In this case, two activities, namely, cigar and transport business were considered as same business on account of the borrowed fund between the cigar and transport business. In this case, the loans of transport business were also repaid out of funds of cigar business.

87. Finally, he referred to the decision of the Madhya Pradesh High Court in the case of Kanhiram Ramgopal vs. CIT (1988) 170 ITR 41 (MP). He contended that this case is similar on facts as the case of the assessee-company. In this case, the assessee who was carrying on business of rice and dal mill set up a factory for manufacturing strawboards by utilising the waste products of rice and dal mill. For this purpose, a loan was taken and interest was paid. It was held that the interest so paid was eligible for deduction as setting up of strawboard factory was only an expansion of the existing business and not starting a new business.

88. The learned counsel thereafter dealt with Expln. 8 to s. 43(1) and pointed out that it is not relevant and applicable in the case of the assessee. He finally concluded and urged that the assessees case is also fully covered by the decision of the Pune Bench in the case of Bharat Forge Ltd. in MA No. 8/Pn/95 and also by the case of Prav Electrospark Ltd. vs. IAC in ITA No. 2083/Pn/87. He pointed out that the Tribunal in the case of Prav Electrospark Ltd. examined the decision of the Bombay High Court in the case of CIBA of India Ltd. vs. CIT (supra) and found that it was distinguishable.

89. As regards the expenditure on high tension line, the learned counsel pointed out that the CIT(A) has accepted the expenditure on high tension lines as revenue expenditure, as ownership of these lines was with the electricity authorities and not with the assessee, but had disallowed the above claim only on the ground that high tension lines are interconnected with the setting up of a seamless tube division which was a separate business and hence, she held that the expenditure was capital in nature. The learned counsel pointed out that it is established that the seamless tube is part of the same business as steel making activity and hence, the expenditure on high tension lines was, therefore, allowable as revenue expenditure.

90. We have heard the rival submissions in the light of the judicial decisions brought to our notice by the parties to the dispute. The crux of the issue is whether the steel and tube activity of the assessee-company constituted same business. On a perusal of the facts of the case of the assessee-company as well as the judicial decisions relied upon by both the parties to the dispute, we find that this question is essentially one of facts and has to be decided on the basis of facts of each case. The study of the judicial decisions of the Honble Supreme Court and various High Courts shows that the said decisions have laid down that to decide the issue of same business, the most important tests are :

(i) Unity of control;

(ii) Existence of common management;

(iii) Common business organisation;

(iv) Common administration;

(v) Common funds; and

(vi) A common place of business.

The Supreme Court in the case of CIT vs. Prithvi Insurance Ltd. (supra) has clearly laid down the tests for deciding this issue. On pp. No. 637 and 638 of the decision, it was held :

“We are unable to agree with the Tribunal, that, because in respect of the life insurance business and general insurance business there are special methods of computation of income for the purpose of levying income-tax, they are not the same business within the meaning of s. 24(2). A fairly adequate test for determining whether the two constitute the same business is furnished by what Rowlatt, J. said in Scales vs. George Thompson & Co. Ltd. :

“Was there any interconnection, any interlacing, interdependence, any unity at all embracing these two businesses ?”

The Supreme Court quoted that :

“That inter-connection, interlacing interdependence and unity are furnished in this case by the existence of common management, common business organisation, common administration, common fund and a common place of business.”

These very tests have been repeated in a plethora of decisions on this issue. The reliance by the learned senior Departmental Representative on the decision of the Madras High Court and Supreme Court in the case of Waterfall Estates Ltd. (supra), in our view, was decided on the specific facts that the assessee had not brought on record the evidence to show the commonness of management, commonness of funds and failed to satisfy the various tests laid down by the Supreme Court. In the case of Waterfall Estates Ltd. (supra), the only argument of the assessee-company was that it was maintaining single books of account for all the ventures. The assessee, however, did not show as to how there was interlacing of funds, between the various estates. In fact, the High Court reproduced the observations of the Tribunal that the plea of common finance was not established and, therefore, the assessees claim that two lines business constituted the same business had failed on facts. In view of this, this decision does not advance the case of the Revenue that it was decided on specific facts. This decision also does not in anyway alter the tests laid down by the Supreme Court discussed earlier.

91. The same is the case of the decision of the Supreme Court in the case of L. M. Chhabda & Sons (supra) which was relied upon by the learned CIT(A) and was also cited before us by the learned senior Departmental Representative. The Supreme Court at p. 642 of the decision had observed :

“It was for the appellants to establish that different ventures constitute parts of the same business. There is in this case no evidence about unity of control and management, or interrelation of the business, or employment of the same staff to run the business, or the possibility of one theatre being closed without affecting the rest of the business.”

92. We have also examined the decision of the Madras High Court in the case of Blue Mountain Estates & Industries Ltd. (supra) relied upon by the learned senior Departmental Representative. This case was also decided on the ground that the various tests, except the test of unity of control were not established. Moreover, the Madras High Court itself has in a later decision in the case of CIT vs. S. S. M. Ahmed (supra) specifically observed that the decision in the case of Blue Mountain Estates & Industries Ltd. (supra) was on its specific facts, and in no way departed from the tests laid down by the Supreme Court. The relevant observations are as follows :

“Learned counsel appearing for the Revenue has, however, argued that from the two decisions, this Court has read the above Supreme Court decisions in a different way. He has relied on a decision of this Court in CIT vs. Blue Mountain Estates & Industries Ltd. (1985) 151 ITR 616 (SC). The decision will show that this Court adopted the test which was laid down by the Supreme Court, but on the facts reached a different conclusion. ………….

What is, however, important is that even in this decision, this Court has not in any-way departed from the test which is laid down by the Supreme Court. This decision must, therefore, be read as merely applying the test to the facts in the case which the Court was called upon to consider. The decision must be treated as one given on its own facts.”

93. We, therefore, find that the issue as to whether the steel and tube division of the assessee-company constituted the same business or not has to be decided by applying the tests laid down by the Supreme Court. We accordingly proceed to examine whether these tests are satisfied and the conditions to hold that both the units were same business are fulfilled.

94. The first test is that of unity of control. The Supreme Court in the case of Produce Exchange (supra) has held that the decisive test is of unity of control. The Supreme Court in the case of B.R. Ltd. (supra), has again reiterated that the decisive test for the purpose of ascertaining whether two lines of business constitute same business is unity of control. In this case, the Supreme Court observed that there was common control and common management of the board of directors of the company and consequently, there was dovetailing or interlacing between the two lines of business and consequently, they constituted the same business. In the case before us, there does not appear to be any serious dispute as regards the unity of control. Both the steel and tube divisions were controlled by same board of directors and whole-time managing directors. The entire top management was also the same. We, therefore, find that the test of unity of control is satisfied.

95. The second test is that of the common management, common business organisation and common administration. In the case before us, we find that not only the chairman and managing directors, but even the personnel manager, purchase manager, marketing manager, production manager, finance manager, were all common. In the paper-book No. 2 filed by the assessee-company, it has been brought to our notice that same managers were looking after the affairs of both the divisions. Few instances to emphasise the point are necessary which are as follows :

(1) Copies of appointment letters were signed by Dr. P. V. Coelho for tube division also;

(2) Copies of appointment letters were also signed by Dr. P. V. Coelho for steel division also;

(3) Copies of purchase orders of tube division were signed by Shri S. V. Sirsikar;

(4) Copies of purchase orders of steel division were also signed by the same gentleman;

(5) Copy of the letter dt. 21st November, 1990, addressed to the United Western Bank Ltd. regarding payment to M.D.H. Germany which is a technical collaborator for the tube project was signed by Shri P. G. Chitale, managing director;

(6) Copy of the letter signed by Shri P. G. Chitale, managing director addressed to the Bank of Baroda, Madras Branch, for opening of a current account with them;

(7) Copy of the contract between Kalyani Steel Ltd. and M.D.H., Germany, for supply of machinery for tube project was signed by Shri B. B. Hattarki for and on behalf of Kalyani Steel Ltd. and

(8) Copy of the letter dt. 15th September, 1992, addressed to ICICI was signed by Shri B. B. Hattarki, joint managing director for soliciting disbursement of bridge loan of Rs. 200 million. The bridge loan was in respect of the issue made in 1992.

96. We also find from the facts of the case that payment of salaries of all the employees was made through a single salary register and from a common cash-credit account. The entire salary was first debited to salaries and wages account and thereafter, pro rata salary attributable to tube division was debited to project expenses account through journal entry. In this regard, we have satisfied ourselves by examining the books of account of the assessee wherein these journal entries were made. From the perusal of the books of account and from the scrutiny of the material papers placed on the paper-book, we find that for the month of January, 1991, the journal entry was as under :

Particulars

Debit amount Rs.

Credit amount Rs.

Project expenses a/c

1,08,961.73
 

To Salary account
 

82,499.05

House rent allowance
 

4,100.00

Conveyance allowance
 

11,959.68

Ad hoc allowance
 

2,050.00

Employers P.F. trustee
 

7,636.00

Employers PPF trustee
 

717.00

1,08,961.73

1,08,961.73

97. We also find from the facts of the case that the provident fund, gratuity and superannuation was also common for the employees of both steel as well as tube division.

98. The learned senior Departmental Representatives assertion that specialists staff was recruited for tube division does not in anyway, in our view, alter the commonness of the management. Commonness of the management has to be viewed from the angle of the management and administration which involves functions such as, purchases, stores, finance and administration. It is obvious that some specialists would be required to undertake a special technical functions of each of the divisions. In fact, we find that this issue is dealt with in the case of Prithvi Insurance Co. Ltd. (supra) by the Madras High Court which was subsequently confirmed by the Supreme Court. In this case, one of the arguments was that separate specialist staff was required for two lines of insurance business, namely, life insurance and general insurance. The Madras High Court did not consider this to be relevant while deciding the issue of same business. In our view, the assessee-company has placed adequate evidence on record to show that there was commonness of management and administration. We, therefore, hold that this test is satisfied in the case before us.

99. The next important test is that of commonness of fund. To recapitulate brief, the learned senior Departmental Representative has asserted that there was no commonness of funds, except the use of the spare funds of tube division by steel division. However, we find from the evidence produced before us that commonness of funds between the two divisions is established beyond any doubt. The issue of partly convertible debentures in October, 1992, was to finance the requirements of both the steel as well as the tube division. This is clear from the copy of the prospectus at p. 157 of the paper-book No. 1 which reads as under :

“Clause IV. Particulars of the issue –

A : Objects of the issue

The company is setting up a seamless pipe project at Baramati, Distt. Pune, Maharashtra. The original project cost for the same as appraised by the Industrial Credit & Investment Corporation of India Ltd. (ICICI), was Rs. 1,560 million. The company had come out with a rights-cum-public issue of Rs. 870 million to part-finance the said project in March, 1991. The present cost of the project is Rs. 2,098 million, as appraised by ICICI.

The cost escalation of Rs. 538 million arose due to the following reasons :

(1) Due to devaluation of rupee, the cost of imported equipments went up considerably. With increase in the cost, the import duty burden on these equipments also shot up.

(2) General inflationary trend in the Indian economy increased the cost of indigenous equipment and also the pre-operative expenses.

(3) The company, in consultation with the technical collaborators, changed the specifications of certain equipment. This, together with the consequent requirement of additional balancing equipments resulted in additional cost.

Further, the validity of the present issue are to part finance the cost escalation of the seamless pipe project and end finishing facilities (API project), has been appraised by ICICI.

The objects of the present issue are to part-finance the cost escalation of the seamless pipe project, end finishing facilities, funding investment proposals, and normal capital expenditure.”

From the above clause, it could, therefore, be seen that funds were raised for both the units. It was also shown to us from the books of account that the proceeds of the issue made in 1991 and 1992 were deposited in common cash credit account of the assessee-company. In this regard, our attention has been drawn to the certificate of the Chartered Accountants, which is placed at p. 85 of the paper-book No. 2. The certificate reads as under :

“This is to certify that the issue proceeds of 14 per cent Secured Non-convertible Debentures (Fifth Series) aggregating to Rs. 196 million allotted on 16th May, 1991 and 14 per cent Secured Partly Convertible Debentures (Sixth Series) aggregating to Rs. 670 million allotted on 16th May, 1991 which were raised for the seamless tube division of Kalyani Steels Ltd. were transferred from Citibank N.A., current account No. 3220028 to the cash credit account of the company operated with Bank of Baroda, Fort University Branch, Mumbai and Subhashnagar Branch, Pune and these funds were utilised for making the following deployments :

Particulars

(Rs. in million)

(1) Transferred from Citibank N.A. to the cash credit a/c of Kalyani Steels Ltd. with Bank of Baroda, Fort University Branch, Mumbai

104.00

(2) Transferred from Citibank N.A. to the cash credit a/c of Kalyani Steels Ltd. with Bank of Baroda, Subhashnagar Branch Pune

28.00

(3) Utilised for making investments in securities

489.70

(4) The balance were utilised in meeting the issue and other expenses relating to the company.”

100. We, therefore, find from the facts of the case that payments of both steel and tube divisions were made out of common cash credit account of the assessee-company. We also find from the facts of the case that substantial payments of project expenses of tube division were met out of cash credit account of the steel division. In this regard, we have seen the relevant documents which were presented before us. The extract of the specimen entries shown to us is reproduced below :

The following is the certified extract of the cash credit bank book which was produced before the Tribunal in connection with the appeal for asst. yr. 1991-92.

Particulars

Voucher/ Cheque No. & Date

Bank of Baroda cash credit a/c subhash Nagar Branch., Pune

Canara Bank cash credit a/c, Laxmi Rs. Br., Pune

United Western bank Ltd. cash credit a/c Laxmi Road, Br., Pune

Total

Rs.

Rs.

Rs.

Rs.

(1) By Salary & wages payable (P. No. 559 of Bank book

338530/5-2-91

4,23,629.42
 
 
 

338531/5-2-91

2,02,909.20
 
 
 

338532/5-2-91

62,946.58
 
 
 

338533/5-2-91

3,08,144.51
 
 
 

338534/5-2-91

2,62,034.16
 
 
 

338535/5-2-91

43,848.48
 
 
 

13,03,512.35

2 (a) By Tube Dn. A/c

Debit Vr. No. 5301, 24-12-90
 

28,35,645.00
 
 

1,20,81,335.00
 

1,49,16,980.00

(Project expenses) Remittance to Mannesmann Demag, West Germany (p. No. 495 of Bank book)
 
 
 
 
 

2 (b) by custom duty payable by Bank chages

Debit Vr. No. 53,00, 24-12-90

36,97,374.00

3,080.00
 
 

37,00,454.00

Notes :

1. The entire salary of Rs. 13,03,512.35 of all employees is disbursed from cash-credit account with Canara Bank. The salary and wages attributable to their working for Tube Dn. is debited to project expenses account and credit to salary & wages account. A true copy of Journal voucher No. 610, dt. 31st January, 1991 is enclosed herewith.

2. The technical know-how fees of Rs. 1,49,980 for tube project is remitted to Mannesmann Demag, West Germany, out of cash credit account with the United Western Bank Ltd. The said amount is debited to Project Expenses Tube Division Account. On the same day, customs duty of Rs. 37,00,454 for imports of steel division is also paid from cash credit account with Bank of Baroda, Subhadhnagar, Pune.

3. In all the above cash credit accounts the sale proceeds/collection of steel activity are deposited.”

101. We also find from the facts of the case that the payment of interest on debentures was made out of cash credit account of the steel division. We also find from the details filed before us that out of the project cost of Rs. 156 crores considered in 1991, an amount of Rs. 21.1 crore was from cash credit account of the steel division. This fact is ascertained from us from the material papers placed at p. 133 of the paper-book No. 1.

102. We also find that repayment of the term loan of Rs. 23 crores of the tube division was made from the profits of the steel division. A certificate of the Chartered Accountant to this effect has been filed before us and is placed at p. 84 of the paper-book No. 2.

The said certificate reads as under :

“This is to certify that the repayment of the following loans taken for the purpose of the seamless tube division of Kalyani Steels Ltd. was made from the cash credit accounts with Bank of Baroda, Fort University Branch, Mumbai and Corporate Banking Branch, Pune during the period from January, 1993 to December, 1994.

(Rs. in million)

(1) ICICI Rupee Term Loan

25.00

(2) Short-term loan from Bank of Baroda

3.75

(3) ICICI short-term loan

200.00

The term loan from Union Bank of India also taken for the purpose of the seamless tube project of Kalyani Steels Ltd. aggregating Rs. 2.50 million was repaid from the cash credit account with Union Bank of India, Karve Road Branch, Pune.

The sales realisation of the steel division have been deposited in these cash credit accounts.”

103. We have also gone through the facts of the case regarding interlacing of accounts between the two divisions running nearly to Rs. 200 crores over a period of three financial years. In our view, the evidence on record clearly shows that there was a large interlacing of funds and funds were used by the assessee-company without making any distinction between the two divisions. The profits of the steel division have been used to repay the loans of tube division. In view of these, the test of commonness of fund is also satisfied in the case before us.

104. As regards the common place of business, we find that both the divisions have their head office located at Mundhwa, Pune. There was no separate office maintained by the divisions at Bombay and Pune, as alleged by the learned senior Departmental Representative. From the clarification given by the learned counsel, we find that the office at Bombay and Pune was common and only the expenses were apportioned between the steel and tube division. The fact that the head office was common at Pune is also clear from cl. 20 of the transfer agreement of the tube division to KSTL. The said clause clearly provides that the assessee-company shall continue to allow the use of its office at Mundhwa to KSTL as its registered and administrative office. We are, therefore, of the view that the test of common place of business has also not been disproved by the Revenue.

105. The learned senior Departmental Representative argued at length that the test of closure of one activity should affect the texture of the remaining activity to determine whether it is the same business or different business. According to the learned senior Departmental Representative, this was the most decisive test for deciding the issue of same business. In this regard, the learned senior Departmental Representative had placed reliance on the decision of the Bombay High Court in the case of Manilal Dayabhai (supra). We, however, find that the said decision has not been approved and in fact overruled by the Supreme Court in the case of Hooghly Trust (P) Ltd. (supra). At p. 691 of the decision, the Honble Supreme Court has observed :

“A great deal of reliance has been placed on a decision of the Bombay High Court in Manilal Dahyabhai vs. CIT (1959) 37 ITR 398 (Bom). There the claim that the businesses were the same was sought to be sustantiated on the ground that only one set of accounts was being maintained; that both the businesses were carried on in the same premises with the help of the same staff; that the capital employed was the same, the receipts in respect of one of them being utilised for the purpose of the other and that the terms of overhead and other expenses were common. It was held that the aforesaid factors did not necessarily lead to the inference that the businesses just be regarded as one and the same. It was observed that though not conclusive but an important test was whether one of the two businesses conducted by the assessee could be stopped without affecting the texture or framework of the other. However, in CIT vs. Prithvi General Insurance Co. Ltd. (1968) 68 ITR 632 (SC) this Court said : we are unable to agree with counsel for the CIT that the test, whether one of the businesses can be closed without affecting the conduct of the other businesses, is a decisive test in determining whether the two constitute the same business within the meaning of s. 24(2) ……”

In our view, therefore, the adverse effect on the texture of the business, if one of them is closed is not a decisive test.

106. In fact, the Madras High Court in the case of CIT vs. S. S. M. Ahmed (supra) has clearly laid down :

“It must now, therefore, be taken as established that the test whether the cessation of one activity will affect the texture of the other activity cannot be the test for deciding whether the businesses carried on are the same business for the purposes of s. 72 of the IT Act, 1961”.

106-1. Even assuming that the cessation of one activity should adversely affect the other, we find that the texture of Kalyani Steels Ltd. was in fact adversely affected after the transfer of the tube division to KSTL. This was on account of additional manpower of 174 employees remaining with the company, enhancement of equity base of the company, reduction in earning per share, fall in market prices of shares and also the adverse effect on the image of the company due to the transfer of the tube division.

107. The learned senior Departmental Representative has laid great emphasis on the intention of the assessee-company. According to him, the intention of the assessee-company was only to foster the claim and also claim deduction of pre-operative interest and expenses and then transfer the project to a new company. From the totality of circumstances and after hearing both the parties to the dispute in great details, we do not find any such intention. We are of the view that the Revenue gathered this impression only because of the events of over 4-5 years which were viewed retrospectively. It is, however, a fact that the assessee-company had been working on the tube project since 1987. It obtained the letter of intent on 9th March, 1990. This letter of intent categorically mentioned that the manufacture of tubes shall be in an integrated manner including manufacture of steel (refer to p. 144 of paper-book No. 1 of the assessee). The assessee has also shown that it was commercially advantageous for it to set up the project as its own activity as there was value addition to its existing products, i.e., steel. It could issue shares at premium and service the loan from day one. It had to take the step of transfer of tube division only due to the fact that the tube division faced severe difficulties on account of changes in the Government polices, such as removal of deemed export status and reduction of price preference for domestic supplies of tubes to petroleum sector and levy of excise duty. On the top of these, due to liberalisation, imports became free and cheaper. As a result, its contribution margin from tube came down drastically and the tube division went into losses. In our view, it is rather harsh to say that an assessee could visualise all these problems 4 or 5 years back and if so, the company would not in fact have set up the project itself. In our view, therefore, it is wrong to attribute any motives in this regard.

108. As regards saving of capital gains tax on land transferred to KSTL, we find that the land in Baramati is located in a rural area and was a leasehold land. It also constituted only 1 per cent of the project cost. The unit was transferred as a going concern along with its problems and potential of making substantial losses, as it is evident from the results of the subsequent years. In the light of this, the transfer value was, in our view, fair and the transfer was for valid commercial considerations. No motive of tax saving, therefore, can be attributed to the assessee-company. As a matter of fact, if tax was the only consideration, the tube division would not have been transferred as it had incurred substantial losses and substantial depreciation was to be allowed, which could be set off against the income of the assessee-company. It would, therefore, have been beneficial to the assessee-company not to spin off the tube division. It was also clarified by the learned counsel that the share premium could not be and was actually not transferred to KSTL as allegedly by the learned senior Departmental Representative.

109. The learned senior Departmental Representative also brought to our notice that in respect of the tube division minutest details were maintained by the assessee. This, in our view, is not relevant to decide the issue of same business. The assessee has perhaps maintained separate details of the two divisions to determine the cost of the project. In fact, in the case of Prithvi Insurance Ltd. (supra), it is clear from the decision of the Madras High Court that the assessee-company was statutorily required to maintain separate books of account and draw separate P&L a/c and balance sheet for the different lines of insurance business. The Court, however, held that this is not a relevant test to determine the issue of same business.

110. The learned senior Departmental Representative also raised the issue of different location of the factory of tube division. We find that this issue is covered by the decision of the Bombay High Court in the case of Addl. CIT vs. Aniline Dyestuff & Pharmaceuticals (P) Ltd. (1982) 138 ITR 843 (Bom) and the Gujarat High Court decision in the case of CIT vs. Alembic Glass Industries Ltd. (supra), wherein the locations of the two units were also different.

111. To conclude, we find that the various tests laid down by the Supreme Court in the case of Prithvi Insurance Ltd. (supra) and various other decisions are satisfied in the present case and, therefore, we hold that the steel division and tube division of the assessee-company constituted the same business.

112. The learned senior Departmental Representative had made an alternative submission that even if it is held that the steel division and tube division of the assessee-company constituted the same business, but it was a separate unit and hence, the expenditure was capital in nature. For this proposition, he relied on the following judicial decisions :

(1) CIT vs. Balapur Co. Ltd. (supra);

(2) Mc Gaw Ravindra Laboratories vs. CIT (1994) 207 ITR 239 (Guj);

(3) CIT vs. J.K. Chemicals Ltd. (1994) 207 ITR 985 (Bom);

(4) Indian Oxygen Ltd. vs. CIT (1987) 164 ITR 466 (Cal);

(5) Trade Wings Ltd. vs. CIT (1990) 185 ITR 267 (Bom);

(6) Ashoke Marketing Ltd. vs. CIT (1994) 208 ITR 941 (Cal);

(7) Shahibag Entrepreneurs (P) Ltd. vs. CIT (1994) 210 ITR 998 (Guj);

(8) CIT vs. Great Eastern Shipping Co. Ltd. (1979) 118 ITR 772 (Bom) and

(9) CIBA of India Ltd. vs. CIT (supra)

113. As regards the alternative submission of the learned senior Departmental Representative that in any case interest on borrowings for tube division relatable to the period before the assets of the tube division are put to use must be capitalised as actual cost of the assets of the tube division, in view of Expln. 8 to s. 43(1) of the IT Act, we have examined the provisions of the said Expln. 8 to s. 43(1) which reads as under :

“Explanation 8 : for the removal of doubts, it is hereby declared that where any amount is paid or is payable as 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.”

114. The Explanation was brought on statute book to prevent the mischief of capitalisation of future interest by certain classes of assessees. This is very clear from the memorandum explaining the provisions in Finance Bill, 1986, in (1986) 158 ITR (St) 116, wherein it is stated :

“It has been found that certain taxpayers (backed by some Court decisions, the first of which was rendered on 13th May, 1974) 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 IT Act.

As this was never the legislative intent nor does it conform to accepted accounting practices, with a view to counteracting tax avoidance through this method and placing the matter beyond doubt, the Bill seeks to provide that any amount paid or payable as interest in connection with the acquisition of an asset and relatable to a period after the asset is first put to use shall not form part and shall be deemed never to have formed part of the actual cost of the asset.”

115. From the plain meaning of the words used in Expln. 8, it is clear that the amount of interest paid or payable in connection with the acquisition of an asset as is relatable to a period after such asset is first put to use shall not be included in the actual cost of the asset. By implication, it cannot be said that interest paid or payable in connection with acquisition of asset as is relatable to any period before such as asset was put to use shall be included in the actual cost of the asset. The Explanation. 8 to s. 43(1) cannot, therefore, be used for disallowing the interest allowable under s. 36(1)(iii) of the IT Act. We, therefore, hold that the Expln. 8 to s. 43(1) has no relevance with respect of allowability of interest for an assessee having an existing running business. The Pune Bench has impliedly taken this view in the case of Bharat Forge Ltd. (Supra). Our view is also supported by the decision of Delhi Tribunal in the case of Dalmia Cement (Bharat) Ltd. vs. Asstt. CIT (1996) 55 TTJ (Del) 353 : (1996) 56 ITD 355 (Del) and Kumar Printers (P) Ltd. vs. ITO (1996) 59 ITD 370 (Del).

116. The other alternative submission of the learned senior Departmental Representative that even pre-operative interest is allowable under s. 36(1)(iii), separate treatment should be given for other expenses, such as salaries, travelling, etc., which may be regarded as having incurred for acquisition of capital assets and for putting these assets into operation and hence, are capital in nature has also no relevance. The learned senior Departmental Representative has tried to distinguish the decision of this Bench in the case of Bharat Forge Ltd. in M.A. (supra) and also in the case of Prav Electrospark (P) Ltd., (supra). The learned senior Departmental Representative has heavily relied on the decision of the Bombay High Court in the case of CIBA of India Ltd. (supra) and in the case of Belapur Co. Ltd. (supra). These decisions were considered by us in the case of Prav Electrospark (P) Ltd. (supra). In the said decision, we have laid down :

“We have examined the details of the expenditure available in the paper-book and have also considered other relevant facts and circumstances of the case and find that it would be only just and proper to allow whole of this expenditure as revenue expenditure. It is not disputed by the Department that the expenditure had been incurred for expansion of the existing unit. Therefore, to the facts of the present case, the ratio of the aforesaid two decisions of the Karnataka High Court squarely applies. As regards the Bombay High Court decisions, we are afraid that it cannot be pressed into service to the advantage of the Department in the instant case. In CIBA of India Ltd. vs. CIT (1993) 114 CTR (Bom) 105, the expenditure was directed to be treated as capital expenditure on the ground that it was incurred in bringing machinery from New York to Bombay. The machinery was gifted to the assessee resulting in receipt of a capital asset by the assessee. Therefore, it was but natural that the expenditure incurred for transportation of the asset from New York to Bombay should be treated as capital expenditure. The facts of that case are thus materially different from those of the present case. As regards, the Bombay High Court decision in CIT vs. Belapur Co. Ltd. (1987) 161 ITR 516 (Bom), there again, the facts of that case were materially different. The expenditure in dispute was foreign tour expenses undertaken by the officers and directors of the assessee-company. The foreign travel was undertaken for the purpose of acquisition of capital assets. In the case before us the expenditure has indisputably been incurred for expansion of the existing activities of the assessee. Therefore, whole of the expenditure was justifiably liable to be treated as revenue expenditure. We, therefore, allow this ground of appeal.”

It may be mentioned that the learned senior Departmental Representative made an attempt to distinguish the case of Prav Electrospark (P) Ltd. (supra). However, on this issue, we are of the view that the said decision supports the case of the assessee. In fact, the facts of the case before us are similar to the facts of Prav Electrospark (P) Ltd. (supra) and, therefore, we see no reason for departing from the said decision in which pre-operative expenses, such as salaries, etc., pertaining to a new unit was held to be allowable as revenue expenditure.

117. The last alternative submission of the learned senior Departmental Representative regarding the high tension cable expenses, in our view, has also no force. Even if the steel and tube divisions constituted one business, these expenses cannot be disallowed as capital expenditure. We find that the AO had disallowed these expenses only on the ground that steel and tube divisions do not constitute same business. Even the learned CIT(A) in para 22.3 of her order has accepted that the expenses on high tension lines are revenue in nature since ownership of these lines is with the MSEB and not with the assessee. She, however, negatived the claim of the assessee only on the ground that the two activities of the assessees business do not constitute the same business. Since we have given a finding that steel and tube division constitute same business, this plea of the Revenue does not survive and accordingly we hold that the expenses on high tension line is deductible as revenue expenditure. We, therefore, direct the Revenue to exclude the sum of Rs. 13,45,000 being the expenditure on high tension line as it is revenue expenditure. Similarly, the pre-operative interest of Rs. 1,04,09,776 in asst. yr. 1991-92 and Rs. 4,36,87,651 in asst. yr. 1992-93 are fully allowed. Out of pre-operative expenses of Rs. 61,22,670 for the asst. yr. 1991-92, a sum of Rs. 18,31,525 was incurred in the earlier years and hence, is not deductible while computing the income of the assessee for the asst. yr. 1991-92. However, the balance amount of pre-operative expenses of Rs. 42,91,145 for asst. yr. 1991-92 and Rs. 1,68,65.178 for the asst. yr. 1992-93 are fully allowed. The assessee, therefore, succeeds on this ground.

118. We now proceed to deal with the other grounds in these two appeals before us.

119. We first take the issue raised in the appeal for asst. yr. 1991-92 pertaining to disallowance of claim for amortisation under s. 35AB of Rs. 2,39,807.

The assessee had acquired technical know-how during the earlier assessment years the cost of which was as under :

Asst. yr.

Amount

(Rs.)

1989-90

1,04,34,056

1990-91

1,00,07,372

2.04,41,428

The relevant details of this are placed on p. 12 of the assessees paper-book.

120. During asst. yr. 1991-92, the liability for the technical know-how increased by Rs. 14,38,842 due to exchange fluctuations. The assessee has claimed amortisation of 1/6th of the amount of the cost of technical know-how of Rs. 2,04,41,428. The assessee further claimed deduction of 1/6th of the amount of Rs. 14,38,842 which was the increase in liability due to exchange fluctuation. The AO allowed the claim of 1/6th of Rs. 2,04,41,428, but disallowed the claim for deduction of Rs. 2,39,807, being 1/6th of the exchange fluctuation of Rs. 14,38,842 on the basis that there is no provision in the IT Act to allow deduction for amortisation of exchange fluctuation.

121. The assessee went in appeal before the CIT(A) against the disallowance. Before the CIT(A), the assessee relied on the decision of the Tribunal in the case of Dempo Steamships Ltd. vs. Second ITO (1985) 21 TTJ (Pune) 505 : (1985) 8 ITD 860 (Pune) and also the decision of the Bombay High Court in the case of CIT vs. Baker Mercer India (P) Ltd. (1992) 196 ITR 667 (Bom). The assessee also relied on the decision of the Madras Tribunal in the case of Teletherm Instrument Co. (P) Ltd. vs. Asstt. CIT (1994) 45 ITD 203 (Mad). The CIT(A) has discussed this issue in para 13 of her order. The CIT(A) rejected the claim of the assessee on the ground that s. 35AB provides for deduction of 1/6th of any lump-sum paid in any previous year for acquiring the know-how. She held that deduction is permissible only on the amount actually paid. In the present case, she observed that the exchange fluctuation is not on account of actual remittance, but on account of restatement/adjustment of the liability as at the end of the year. She, therefore, rejected the claim of the assessee.

122. Before us, the learned counsel of the assessee has submitted that as per the definition of the word paid under s. 43(2) of the IT Act, the same includes the amount actually paid or incurred as per the method of accounting followed by the assessee. He further argued that it is not necessary that the exchange fluctuation should be on account of actual remittance. In this regard, he brought to our notice the decision of the Bombay High Court in the case of CIT vs. Baker Mercer India (P) Ltd. (supra). He argued that in the said decision, the Bombay High Court has held that when an assessee had acquired an asset from a country outside India for the purpose of his business and in consequence of the change in the rate of exchange at any time after acquisition of such asset, there is an increase in the liability of the assessee as expressed in Indian currency for making payment towards cost of the asset or for repayment of the whole or a part of the money borrowed by him in any foreign currency specifically for the purpose of acquiring the asset, the amount by which the liability is so increased shall be added to the actual cost of the asset for the various purposes which are set out in s. 43A of the Act and the increased cost shall be the cost of acquisition of the asset. He, therefore, submitted that the deduction of 1/6th amount of exchange fluctuation is admissible to the assessee.

123. On the other hand, the learned senior Departmental Representative, relied on the order of the CIT(A).

124. After hearing the rival submissions, we find force in the submissions made by the learned counsel of the assessee. We also find that the Bombay High Court in the case of Padamjee Pulp & Paper Mills Ltd. vs. CIT (1994) 210 ITR 97 (Bom) held that where the assessee has purchased machinery on deferred payment basis from abroad, the additional liability on account of exchange fluctuation worked out with reference to the amount of loan outstanding on the last day of the accounting year at the prevailing exchange rate has to be added to the actual cost of the machinery for the purpose of computation of depreciation. In our view, the same principle will apply for deduction under s. 35AB of the IT Act. The CIT(A) has rejected the claim only on the ground that the amount is not actually remitted and, therefore, the same is not paid as required under s. 35AB of the Act. However, she does not seem to have given due weightage to the definition of the word paid under s. 43(2) of the IT Act. In the present case, the assessee has provided the amount of additional liability on account of exchange fluctuation in the books of account. The liability is thus incurred by the assessee as held by the Bombay High Court in the case of Padamjee Pulp & Paper Mills Ltd. (supra) and, hence, is paid as defined under s. 43(2) of the IT Act. Consequently, the assessee is entitled to the deduction of Rs. 2,39,807 being 1/6th of Rs. 14,38,842. This ground of the assessee is, therefore, allowed.