ORDER
A.M. Sapre, J.
1. The decision rendered in this appeal shall also govern disposal of IT Appeal No. 51 of 2002 because both these appeals arise out of common impugned order, passed by Tribunal except the difference being that IT Appeal No. 49 of 2002, i.e., present appeal is filed by the assessee whereas, IT Appeal No. 51 of 2002 is filed by the Revenue (CIT). In other words, these are two cross-appeals which arise out of one impugned order.
2. This is an appeal filed by assessee under Section 260A of the IT Act against an order dt. 7th March, 2002, passed by Income-tax Appellate Tribunal, Indore Bench (for short hereinafter called “Tribunal”) in ITA No. 639/Ind/1994 and ITA No. 495/Ind/1994 [reported as Dy. CIT v. Shree Synthetics Ltd. (2004) 88 TTJ (Ind) 717-Ed.] (Annex.-A). This appeal (IT Appeal No. 49 of 2002) was admitted for final hearing on following substantial questions of law:
1. Whether the Tribunal erred in law in not allowing the deduction of expenditure incurred in asst. yr. 1990-91, in issue of debentures for raising loan for the purpose of business under Section 37, instead of treating as covered under Section 35D of the Act?
2. Whether the Tribunal erred in law in not allowing deduction of interest payment Rs. 10,99,007 against business income thereby whether further entitled to deduction under Section 80M on gross dividend income as against the net dividend income from UTI?
3. Whether the Tribunal erred in law in disallowing interest payment of Rs. 5,83,700 which is against the loan raised to purchase tax-free securities whose income is exempt and is arising in the course of one indivisible business?
4. Whether the Tribunal erred in law in not including the cost of interest in purchase price of units/tax-free securities thereby increasing the short-term capital loss under Section 45 of the IT Act, 1961 as against deduction allowed from dividend income under the head ‘Income from other sources’ under Section 56 of IT Act?
3. Facts necessary for the disposal of this appeal and for answering the aforementioned questions need to be mentioned in brief.
4. The appellant (assessee) a limited company was at all relevant time engaged in the business of manufacture of what is called synthetic fibres, yarns fabric, carbon graphite and other products. On 5th July, 1989, the board of directors of appellant-assessee (company) resolved that company would undertake in their industrial undertaking modernization-cum-balancing scheme as approved by their bankers (ICICI) for various projects including expansion and modification of polycondensation facilities, expansion of spinning line, nylon polymerization, modification and installation of DG sets, laboratory equipments and installation of power substation and installation of new polycondensation plant,
5. In order to accomplish this expansion activity in their unit, the board of directors of appellant-company, resolved to raise the money to the extent of Rs. 18.59 crores by way of issuance of partly convertible and partly non-convertible debentures. In terms of this decision, each debenture was to be valued at face value of Rs. 50 out of which convertible part consisted of Rs. 30 to be compulsorily convertible in one equity share of the face value of Rs. 10 at a premium of Rs. 20 whereas balance of Rs. 20 non-convertible.
6. The appellant/assessee in execution of this debenture issue incurred a total expenditure of Rs. 22.18 lacs in the assessment year in question, i.e., 1990-91.
7. The question arose before AO in the assessment proceedings of asst. yr. 1990-91 as to what is the true nature of this expenditure incurred by assessee. The case of assessee was that it being a revenue expenditure in nature having been incurred for raising a loan for running business of the assessee, the same, i.e., sum of Rs. 22.18 lacs spent by assessee be allowed to be claimed by way of deduction while computing the total income of assessee from the business. However, the view of AO was that the expenditure incurred by assessee in execution of debenture scheme squarely falls within the four corners of Section 35D of the Act and hence, it can be allowed by way of deduction only in accordance with the procedure specified in Section 35D but not as revenue expenditure as contended by assessee.
8. By order (Annex.-C), the AO while negativing the claim made by assessee along with other issues held that a sum of Rs. 22.18 lacs claimed by assessee as revenue expenditure should be allowed as preliminary expenses defined in Section 35D(2)(c)(iv) ibid and accordingly, benefit in the manner provided therein be given to assessee.
9. The assessee felt aggrieved against this finding of AO, filed an appeal to CIT(A) along with other issues decided by AO against the assessee and confirmed the finding by his order dt. 4th April, 1993 (Annex.-B). The assessee felt aggrieved filed further appeal to Tribunal. By impugned order, the Tribunal too upheld the aforesaid finding of AO and that of CIT(A). As a consequence, the issue insofar as it related to deduction of Rs. 22.18 lacs was concerned, the same was decided against the assessee by all the three authorities. It is against this finding, the assessee filed this appeal under Section 260A ibid and questioned other findings as well in this appeal as would be discussed infra separately. As observed supra, the appeal was admitted for final hearing on the aforesaid issue by framing question No. 1.
10. Heard Shri S.C. Goyal, learned Counsel for the appellant and Shri A.P. Patankar, learned Counsel for the respondents.
11. Reiterating the same submissions which were urged by learned Counsel for the appellant/assessee before the Tribunal, learned Counsel contended that the amount in question, i.e., Rs. 22.18 lacs spent by assessee in execution of issuance of debenture in the assessment year in question (1990-91) should have been allowed as revenue expenditure because it was admittedly incurred for running/carrying (on) the business of assessee. Learned Counsel contended that the expenditure in question does not satisfy the requirement of Section 35D(1)(ii) and hence, the same should have been allowed as revenue expenditure as a whole in one year rather than spread over in ten successive previous years as provided in Section 35D ibid. Learned Counsel maintained that there lies a distinction between the words “extension” and “expansion” and this being not a case of “extension” (a phrase used in Section 35D), it would not fall within the mischief of Section 35D. Learned Counsel further contended that at least expenditure incurred in relation to non-convertible portion of debenture by the assessee should be held to be towards borrowing of funds and accordingly, it be allowed as revenue expenditure for claiming deduction to that extent. In reply, learned Counsel for Revenue supported the impugned finding.
12. Having heard learned Counsel for the parties and having perused record of the case, we are inclined to answer question No. 1 against the assessee and in favour of Revenue thereby upholding the view of the Tribunal on the said question.
13. Section 35D(1) and 2(c)(iv) which is relevant for answering question No. 1 reads as under:
Section 35D(1) Where an assessee, being an Indian company or a person (other than a company) who is resident in India, incurs, after the 31st day of March, 1970, any expenditure specified in Sub-section (2),-
(i) before the commencement of his business, or
(ii) after the commencement of his business, in connection with the extension of his industrial undertaking or in connection with his setting up a new industrial unit,
The assessee shall, in accordance with and subject to the provisions of this section, be allowed a deduction of an amount equal to one-tenth of such expenditure for each of the ten successive previous years beginning with the previous year in which the business commences or, as the case may be, the previous year in which the extension of the industrial undertaking is completed or the new industrial unit commences production or operation:
Provided that where an assessee incurs after the 31st day of March, 1998, any expenditure specified in Sub-section (2), the provisions of this sub-section shall have effect as if for the words ‘an amount equal to one-tenth of such expenditure for each of the ten successive previous years’, the words ‘an amount equal to one-fifth of such expenditure for each of the five successive previous years’ had been substituted.
(2) The expenditure referred to in Sub-section (1) shall be the expenditure specified in any one or more of the following clauses, namely:
(a) xxxxx
(b)xxxxx
(c) where the assessee is a company, also expenditure-
(i) xxxxx
(ii) xxxxx
(iii) xxxxx
(iv) in connection with the issue, for public subscription of shares in or debentures of the company, being underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
14. In our considered view, mere reading of aforesaid section would clearly go to show that the expenditure incurred by assessee squarely falls in Sub-sections (l)(ii) and (2)(c)(iv) because it was admittedly incurred in connection with the issue for subscription of debentures of the assessee/company and secondly, it was incurred in connection with the “extension” of industrial undertaking belonging to assessee. In our view, the expression “extension” used in Clause (ii) supra includes “expansion” of any industrial undertaking.
15. In our considered opinion, in order to attract the rigour of Section 35D(i) or (ii) the expenditure specified in Sub-section (2) must be incurred by assessee either before commencement of their business or in the case of existing undertaking it must have been incurred in connection with extension of their existing business or in connection with setting up a new industrial unit. As observed supra, the word “extension” for the purpose of Section 35D includes “expansion” of any industrial undertaking. In other words, what is, therefore, required to be examined in such case is, whether assessee has incurred expenditure of the nature specified in Sub-section (2) for extending or expanding their existing business. If it is so found, then the provisions of Section 35D gets attracted.
16. As observed supra, it cannot be disputed that assessee not only resolved to expand their business by undertaking several kinds of modernization in their existing plant but actually spent money to accomplish it by issuing debentures. In these circumstances, it was a clear case attracting the rigour of Section 35D(1)(ii) and (2)(c)(iv) ibid.
17. In our considered view, when the legislature (IT Act) makes a special provision for claiming deduction in respect of specified category of expenditure incurred by the assessee in their business activity, then in that event, it excludes the applicability of general provision dealing on the subject. In other words, in such eventuality what prevails is the special provision over the general provision. Section 35D being special and is applicable only to certain types of expenditure incurred by assessee in their business activity, it will prevail over that section which applies to general category of expenditure thereby excluding its applicability.
18. We are not impressed with the submission of learned Counsel for the appellant/assessee when he contended in alternative that expenditure incurred in relation to issuance of non-convertible debenture could be treated as revenue expenditure. In our view, the use of expression “debenture” in Sub-clause (iv) would include all kinds of debentures, i.e., convertible and/or non-convertible. Had the legislature used only one specific type of debenture in Clause (iv) then in such eventuality it would have excluded all other kinds of debentures which are not mentioned in the clause. But such is not the case here. In the scheme of Companies Act and all other related corporate laws relating to company affairs, there are several kinds of debentures which are usually issued by the limited companies in the share market for public. The intention of legislature is, therefore, to include all kinds of debentures within the four corners of Section 35D irrespective of name by which they are known in market and not one kind of debenture as contended by learned Counsel for the assessee.
19. In view of foregoing discussion, in our considered view, the AO, CIT(A) and Tribunal were right in their view when they all held that expenditure incurred by assessee of Rs. 22.18 lacs towards execution of debenture issue was in the nature of preliminary expenses thereby falling within the four corners of Section 35D and hence, they have to be worked out in the manner provided in the said section, i.e., Section 35D ibid. We, thus while concurring with the view so taken, answer the question No. 1 in favour of Revenue (CIT) and against the appellant (assessee).
20. This takes us to the question No. 2 framed supra for answer. For convenience, we again reproduce the question No. 2 infra:
2. Whether the Tribunal erred in law in not allowing deduction of interest payment Rs. 10,99,007 against business income thereby whether further entitled to deduction under Section 80M on gross dividend income as against the net dividend income from UTI?
21. Facts insofar as this question is concerned are these.
22. In the assessment year in question, the appellant (assessee) made investment in securities as under:
———————————————————————————–
Type of security Total Source of funds
investment
(1) (2)
-----------------------------------------------------------------------------------
(i) 35,00,000 units of Direct out of
UTI purchased on borrowing for C.C., O.D.
2-5-1989. this purpose A/c
5,15,20,000 4,06,12,500 1,09,07,500
-----------------------------------------------------------------------------------
(ii) Tax-free
securities purchased
on 26-6-1989
13,07,82,500 4,50,90,000 8,56,92,500
-----------------------------------------------------------------------------------
Total 18,23,02,500 8,57,02,500 9,66,00,000
-----------------------------------------------------------------------------------
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Income by way of Interest paid/payable on
dividend/interest borrowed funds
-------------------------------------------------------------------
(i) (ii)
-----------------------
Direct O.D. A/c.
borrowing
-----------------------
63,00,000 10,99,007 2,95,380
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51,54,110 5,83,700 15,69,175
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Total: 1,14,54,110 16,82,707 18,64,555
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23. All the investments made in the units as also in securities (except 9 per cent tax bonds of Rs. 2,50,00,000) were sold by the assessee during the same assessment year at a loss of Rs. 1,13,53,000. As is clear from the details mentioned supra, the assessee had taken loan from the bank for making these investments. The assessee then claimed loss as also interest paid during the year in question by way of deduction and claimed exemption under Section 10(15)(iv) so far as interest income was concerned. The assessee also claimed deduction of 60 per cent under Section 80M from gross amount of dividend income.
24. The AO held that such investment being not part of assessee’s business and hence, disallowed the claim of interest while computing the business income. The AO then allocated the same against dividend and interest received and deducted under Section 80M in accordance with procedure specified by Supreme Court in the case of Distributors (Baroda) (P) Ltd. v. Union of India .
25. The assessee felt aggrieved filed appeal to CIT(A) who after appreciating the whole issue by his order dt. 4th April, 1993 (Annex.-B) held that interest payable by the assessee in their overdraft account to the extent of Rs. 18,64,553 alone is an allowable business expenditure and hence, disallowance made by AO to this extent was held unjustified. It was, accordingly, set aside by granting partial benefit to the assessee. However, so far as interest of Rs. 10,99,007 was concerned, the same was considered against the dividend income from Units and Rs. 5,83,700 against securities. It was disallowed. Accordingly, AO was directed to enhance quantum of deduction under Section 80M by Rs. 1,77,228.
26. The assessee felt aggrieved filed appeal to Tribunal. However by impugned order, the aforesaid finding of CIT(A) was upheld. It is against this finding this appeal has been filed which as stated supra was admitted for hearing amongst other issues on the substantial question No. 2, referred supra.
27. Having heard the submission of learned Counsel for the parties on the aforementioned question No. 2, we are inclined to uphold the finding of CIT(A) and that of Tribunal thereby answering the question No. 2 also against the assessee and in favour of Revenue.
28. It has come on record [see CIT(A)’s order (Annex.-B)] that assessee had taken loan from two sources for making this investment in securities. One was from American Express Bank amounting to Rs. 8,57,02,500 on which assessee paid interest amounting to Rs. 16,82,707. The other was from their regular overdraft account on which the assessee paid interest amounting to Rs. 18,64,555.
29. In our view and as rightly held by the CIT(A) and Tribunal a sum of Rs. 16,82,707 paid by the assessee by way of interest to American Express Bank was not eligible for claiming deduction as business expenditure because firstly it neither constituted any adventure in the nature of trade as contended by assessee, nor it was for business of assessee. In other words, loan was taken for making specific investment in securities by assessee. It was not taken by assessee for their regular business. In these circumstances, provisions of Section 14A would apply against the assessee insofar as claim of interest paid on this loan transaction was concerned. However, so far as payment of interest on overdraft account was concerned, it being an account meant for carrying on the business activity of assessee, the interest paid against the loan taken out of this account was rightly held as an allowable claim being in the nature of business expenditure.
30. As a consequence, the authorities were justified in calculating the deductions for Section 80M on the basis of law laid down by Supreme Court in the case of Distributors (Baroda) (P) Ltd. (supra) by taking into consideration the interest paid on direct borrowings, i.e., Rs. 10,99,007 and Rs. 5,83,700. No fault thus can be found in this approach.
31. Learned Counsel for the appellant (assessee) cited several decisions at the Bar but having gone through the same, we find that these very authorities were cited before CIT(A) and Tribunal and then impugned finding was recorded by both the authorities. Since, we have upheld the findings impugned in this appeal and hence, we do not consider it necessary to again deal with several case law cited at the Bar separately. It will only burden our order with no utility as such.
32. In view of foregoing discussion, we also answer the question No. 2 against the appellant/assessee and in favour of Revenue.
33. So far as question Nos. 3 and 4 are concerned, the learned Counsel for the appellant made a statement that he does not press question No. 3 and hence, it is answered against the assessee. As far as question No. 4 is concerned, the same, in our opinion, stands answered against the assessee once question No. 2 is answered against the assessee. Even otherwise, since we fully concur with the findings recorded by Tribunal on the questions framed and hence, no further elaborate discussion is called for.
34. As a consequence of aforesaid discussion, we find no merit in the appeal filed by assessee, i.e., IT Appeal No. 49 of 2002 (the present appeal). As a consequence, it fails and is dismissed. No costs.
35. This takes us to appeal being IT Appeal No. 51 of 2002 filed by the Revenue against the same impugned order which was subject-matter of IT Appeal No. 49 of 2002 filed by the assessee, referred supra. This appeal came to be admitted for final hearing on following question of law:
1. Whether, on facts and in law, the Hon’ble Tribunal was justified in holding that interest attributable to amounts withdrawn from CC account for the purpose of investment in the Units and bonds did not constitute a direct expenditure liable to be disallowed under Section 14A of the IT Act in spite of the fact that a clear nexus has been established between the withdrawal made from the accounts and the investment made by the company in the exempted securities?
2. Whether, on facts and in law, the Hon’ble Tribunal was justified in law in confirming the order of the CIT(A) on the issue (of) calculation of deduction under Section 80M without reducing the entire interest expense attributable to earning of dividend?
36. Heard Shri A.P. Patankar, learned Counsel for the respondents and Shri S.C. Goyal, learned Counsel for the appellant.
37. Having heard learned Counsel for the parties and having perused record of the case, we find no substance in this appeal too.
38. In our considered view, in the light of what we have held while dismissing the appeal filed by the assessee and in the light of discussion that we have made supra, we find no case to answer aforementioned questions in favour of Revenue. In our view, the Tribunal was right in its approach in answering the questions partly in favour of assessee and partly in favour of Revenue as detailed supra. In this view of the matter, we do not wish to again deal with the same issue and finding no merit in the appeal filed by Revenue, the same is also dismissed. No costs.