ORDER
Rajpal Yadav, J.M.
1. The assessee as well as the Revenue are impugning the orders of learned first appellate authority in this bunch of 14 appeals and two cross-objections in asst. yrs. 1989-90 to 1999-2000. The learned Counsel for the assessee has placed on record a comprehensive chart exhibiting the grievances of respective parties in different years. A perusal of this chart shows that orders of the learned first appellate authority are being impugned on 28 counts. Some of the issues are common in the appeals of the respective parties as well as in different years. Therefore, we proceed to take up the issue in dispute in seriatim.
2. Before taking up the issues on merit it is pertinent to note that cross-objections of assessee in asst. yrs. 1998-99 and 1999-2000 are time-barred by 3 yrs., 101 days and 2 yrs., 217 days, respectively, therefore, first we deal with the petition for condonation of delay in filing the cross-objections.
3. In order to explain the delay assessee has submitted that the grounds set out in the memorandum of cross-objections are similar to the issues involved in earlier years forming part of the consolidated appeals pending before the Tribunal, i.e., whether interest expenditure incurred on the borrowed funds for financing of expansion of existing business is allowable or not. In these assessment years learned CIT(A) had allowed such expenses partly for some of the units, however disallowed with regard to aluminium smelter projects at Orissa and paper project at Vyara. It has also been pleaded that assessee was under bona fide belief that such a relief can be claimed by invoking Rule 27 of the ITAT Rules and, therefore, cross-objections were not filed when memorandum of Departmental appeal was received by the assessee. In support of its contention, assessee has filed the affidavit of Mr. Tarun Jain, director of the company. On the strength of such explanation learned Counsel for the assessee prayed that the delay in filing the cross-objection be condoned.
4. Learned Departmental Representative on the other hand, opposed the prayer of assessee and contended that assessee failed to give any plausible explanation for not filing the cross-objection in time.
5. We have duly considered the rival contentions. The Courts and the quasi judicial bodies are empowered to condone the delay if a litigant satisfies the Court that there were sufficient reasons for availing the remedy after expiry of the limitation. Such reasoning should be to the satisfaction of the Court. The expression “sufficient cause or reason” as provided in Sub-section (5) of Section 253 of the IT Act is used in identical position in the Limitation Act and the CPC. Such expression has also been used in other sections of the IT Act, such as, Sections 274, 273, etc. The expression “sufficient cause” within the meaning of Section 5 of the Limitation Act as well as similar other provisions, the ambit of exercise of powers thereunder has been subject-matter of consideration before the Hon’ble Supreme Court on various occasions. In the case of State of West Bengal v. The Administrator, Howrah Municipality the Hon’ble Supreme Court while considering the scope of expression “sufficient cause” for condonation of delay has held that the said expression should receive a liberal construction so as to advance the substantial justice when no negligence or inaction or want of bona fide is imputable to party.
6. In the case of N. Balakrishnan v. M. Krishnamurthy , there was a delay of 883 days in filing an application for setting aside the ex parte decree for which application for condonation of delay was filed. The trial Court having found that sufficient cause was made out for condonation of delay condoned the delay, However, the Hon’ble High Court reversed the order of the trial Court, The Hon’ble Supreme Court while restoring the order of the trial Court has observed in paras 8, 9 and 10 as under:
8. The appellant’s conduct does not on the whole warrant to castigate him as an irresponsible litigant. What he did in defending the suit was not very much far from what a litigant would broadly do. Of course, it may be said that he should have been more vigilant by visiting his advocate at short intervals to check up the progress of the litigation. But during these days when everybody is fully occupied with his own avocation of life, an omission to adopt such extra vigilance need not be used as ground to depict him as a litigant not aware of his responsibilities, and to visit him with drastic consequences.
9. It is axiomatic that condonation of delay is a matter of discretion of the Court. Section 5 of the Limitation Act does not say that such discretion can be exercised only if the delay is within a certain limit. Length of delay is no matter, acceptability of the explanation is the only criterion. Sometimes, delay of the shortest range may be uncondonable due to a want of acceptable explanation, whereas in certain other cases, delay of a very long range can be condoned as the explanation thereof is satisfactory. Once the Court accepts the explanation as sufficient, it is the result of positive exercise of discretion and normally the superior Court should not disturb such finding, much less in revisional jurisdiction, unless the exercise of discretion was on wholly untenable grounds or arbitrary or perverse. But it is a different matter when the first Court refuses to condone the delay. In such cases, the superior Court would be free to consider the cause shown for the delay afresh and in its own finding even untrammeled by the conclusion of the lower Court.
The primary function of a Court is to adjudicate the dispute between the parties and to advance substantial justice. The time-limit fixed for approaching the Court in different situations is not because on the expiry of such time a bad cause would transform into a good cause.
(Emphasis, italicised in print, added)
The Hon’ble Supreme Court further observed that rules of limitation are not meant to destroy the rights of the parties. They are meant to see that parties do not resort to dilatory tactics, but seek the remedy promptly. The Hon’ble Court further observed that refusal to condone the delay would result in foreclosing a suitor from putting forth his cause. There is no presumption that delay in approaching the Court is always deliberate. The Hon’ble Supreme Court in SLP [Civil No. 12980 of 1986, decided on 19th Feb., 1987, in the case of Collector, Land Acquisition and Ors. v. Mst. Katiji and Ors. (1987) 62 CTR (SC)(Syn) 23] has laid down the following guidelines:
1. Ordinarily, a litigant does not stand to benefit by lodging an appeal late.
2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties.
3. “Every day’s delay must be explained” does not mean that a pedantic approach should be made, why not every hour’s delay, every second’s delay. The doctrine must be applied on a rational commonsense pragmatic manner.
4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred, for the other side cannot claim to have vested right in injustice being done because of a nondeliberate delay.
5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact, he runs a serious risk.
6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.
Making a justice-oriented approach from this perspective; there was sufficient cause for condoning the delay in the institution of the appeal. The fact that it was the “State” which was seeking condonation and not a private party was altogether irrelevant.
In the case of Nand Kishore v. State of Punjab the Hon’ble Supreme Court has condoned the delay of 31 years almost under the similar circumstances. There the petitioner has joined service in the erstwhile Patiala State in May, 1941. On the formation of Pepsu State, he was taken as an assistant w.e.f. 1st Sept., 1956. Subsequently, Pepsu State was merged with State of Punjab. He was integrated as an assistant in the Punjab Civil Secretariat at Chandigarh in the food distribution branch. He completed 10 years qualifying service. However, he was compulsorily retired on 6th Jan., 1961. He challenged this order of retirement by way of writ petition in the Punjab & Haryana High Court. The writ petition was dismissed on 2nd Feb., 1962. In the writ petition the petitioner had not challenged validity of Rule 5.32 of the Punjab Civil Service Rules, Vol. II. Subsequently, this rule was challenged by some other employees and the Hon’ble Supreme Court has taken the view that it was not permissible for a State while reserving to itself the power of compulsory retirement by framing rules prescribing a proper age of superannuation to form another one giving it the power to compulsorily retire a Government servant at the end of 10 years’ service. According to the Hon’ble Supreme Court that rule cannot fall outside Article 311(2) of the Constitution. After this decision, the petitioner, Nand Kishore, filed a civil suit which travelled upto the Hon’ble Supreme Court and while hearing the appeal, the Hon’ble Court had advised the petitioner to challenge the order of the High Court passed on the writ petition in 1962. Taking into consideration the injustice to the employee the Hon’ble Court has condoned the long delay of 31 years and decided the appeal on merit. Keeping in mind the above authoritative pronouncement of the Hon’ble Supreme Court, it is an admitted position that the words “sufficient cause” appearing in Sub-section (5) of Section 253 of the Act should receive a liberal construction so as to advance substantial justice. Thus, if we advert towards the facts of the present case then it would reveal that circumstances are very close to the situation considered by the Hon’ble Supreme Court in the case of Nand Kishore (supra). It must be remembered that in every case of delay there can be some lapse of the litigant concerned. That alone is not enough to turn down the pleas and to shut the doors against him. If explanation does not smack mala fide or does not put forth as a dilatory strategy, the Court must show utmost consideration of such litigant. As observed by the Hon’ble Supreme Court in the case of N. Balakrishnan (supra), the length of delay is immaterial, it is the acceptability of the explanation and that is the only criteria for condoning the delay. Therefore, taking into consideration the overall facts and circumstances we condone the delay in filing the cross-objection and proceed to decide the controversy on merit.
7. The first dispute in appeal of both the sides relates to disallowance under Rule 6B of the IT Rules. The amounts involved in respective appeals are as under–
(I) Disallowance under Rule 6B of the IT Rules, 1962:
Asst. yr. 1989-90: Rs. 19,248: Ground No. (I): Assessee’s appeal
Asst. yr. 1991-92: Rs. 73,420: Ground No. (II): Assessee’s appeal
Asst. yr. 1993-94: Rs. 14,779: Ground No. (3): Department’s appeal
Asst. yr. 1995-96: Rs. 1,96,403: Ground No. (4): Department’s appeal
Asst. yr. 1997-98: Rs. 4,47,452: Ground No. (4): Department’s appeal
8. Learned Counsel for the assessee, at the very outset, submitted that presented articles did not carry the logo or name of the assessee’s business, therefore, the AO ought to have not made any disallowance. He further pointed out that in asst. yrs. 1993-94, 1995-96 and 1997-98, the assessee relied upon the decision of Hon’ble Bombay High Court in CIT v. Allana Sons (P) Ltd. and the learned CIT(A) deleted the addition. He further submitted that in ITA Nos. 3692 and 3857/Bom/1994 in assessee’s own case in asst. yr. 1990-91 such addition was deleted and the issue has been decided in favour of the assessee. Learned Departmental Representative on the other hand, could not controvert the contention of the learned Counsel for the assessee.
9. We have duly considered the rival contentions. It is not brought to our notice by learned Departmental Representative that presented articles were bearing logo of the assessee-company. The AO has also not recorded such finding, therefore, the decision of Hon’ble Bombay High Court reported in (1993) 114 CTR (Bom) 448: (1995) 216 ITR 690 (Bom) (supra) is fully applicable on the facts of the assessee’s case. Thus, respectfully, following the order of Hon’ble jurisdictional High Court we delete the disallowance confirmed by learned CIT(A) in asst. yrs. 1989-90 and 1991-92. Consequently, we reject the ground of appeal raised by the Revenue in asst. yrs. 1993-94, 1995-96 and 1997-98 in this regard.
10. The next dispute relates to disallowance made out of entertainment expenses. The amounts involved in different assessment years are as under:
(II) Entertainment expenses:
Asst. yr. 1989-90: Rs. 2,53,722: Ground No. (II): Assessee’s appeal
Asst. yr. 1991-92: Rs. 2,00,000: Ground No. (I): Assessee’s appeal
Asst. yr. 1992-93: Rs. 1,25,000: Ground No. (I): Assessee’s appeal
Asst. yr. 1993-94: Rs. 2,00,000: Ground No. (I): Assessee’s appeal
11. At the very outset, learned Counsel for the assessee did not press the disallowance made in asst. yrs. 1991-92 to 1993-94. Therefore, the grounds of appeal in this regard in these assessment years are rejected. Learned Counsel for the assessee only disputed the disallowance made in asst. yr. 1989-90 and submitted that assessee had incurred expenses of Rs. 3,03,722 on sales promotion. Learned AO has disallowed the total amount under Section 37(2A) of the Act. On appeal, learned CIT(A) deleted the disallowance to the extent of Rs. 50,000 and confirmed the balance. He submitted that no doubt assessee had incurred some expenditure in extending hospitability, as per business practice of the assessee to various persons as well as employees and the same were debited under the head “Sales promotion”, however, the total expenses were not incurred on outsiders. Some expenses are related to the employees. He further pointed out that under the similar situation in 1990-91 such expenses were allowed to the assessee to the extent of 25 per cent. He placed on record copy of the Tribunal order in asst. yr. 1990-91 and submitted that a sum of Rs. 75,930 out of Rs. 3,03,722 be allowed to the assessee. Learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities below.
12. We have duly considered the rival contentions. No doubt, specific details were not available with the assessee indicating specific amounts spent on employees as well as outsiders. Under such circumstances, disallowance upheld by the Tribunal upto 75 per cent of the expenses in asst. yr. 1990-91 is the best guiding factor for us, therefore, respectfully following the Tribunal’s order in asst. yr. 1990-91, we direct the AO to grant a deduction of Rs. 75,930 out of expenses of Rs. 3,03,722 incurred on sales promotion. This ground in asst. yr. 1989-90 is partly allowed.
13. The next ground relates to addition of the Modvat credit of excise duty in . the value of closing stock. The following details will indicate the amounts involved as well as the grievances of the respective side.
(III). Modvat credit of excise duty:
Asst. yr. 1989-90: Rs. 32,11,059: Ground No. (III): Assessee’s appeal
Asst. yr. 1991-92: Rs. 30,25,184: Ground No. (4): Department’s appeal
Asst. yr. 1993-94:Rs. 59,60,000:Ground No. (2): Department’s appeal
Asst. yr. 1994-95 ;Rs. 25,12,618: Ground No. (2): Department’s appeal
Asst. yr. 1995-96:Rs. 21,37,110: Ground No. (2): Department’s appeal
Asst. yr. 1996-97: Rs. 18,93,020: Ground No. (1): Department’s appeal
Asst. yr. 1997-98: Rs. 1,32,02,440: Ground No. (1): Department’s appeal
14. The brief facts of the case are that learned AO while processing the return in 1989-90 has made an addition of Rs. 32,11,059 to the value of the closing stock on the ground of undervaluation of closing stock due to non-inclusion of the Modvat element. Similar additions have been made in other assessment years but from asst. yrs. 1991-92 to 1997-98, learned CIT(A) has deleted the addition.
15. Learned Counsel for the assessee submitted that the assessee has been consistently following the method of valuing stock in trade at its net cost, i.e., gross purchase price minus the Modvat credit available thereon. The closing stock has to be valued at its net cost to the assessee and the method of accounting followed by the assessee, as stated above, resulted in the computation of the true profits of the assessee. This principle has been explained by the Tribunal in the case of S.H. Kelkar & Co. Ltd. v. Dy. CIT (1994) 49 TTJ (Mumbai) 262: (1992) 44 ITD 170 (Mumbai), in para 13 of its order, wherein it has dealt with an illustrative case and indicated the impact of including the element of Modvat credit in the valuation of closing stock. The Tribunal has clearly shown that by including the element of Modvat credit in the closing stock, the value of the stock was increased and the income earned was also increased. But in doing so, the fact that the excise duty was not charged by the assessee to the P&L a/c, was ignored. Thus, including the Modvat credit in the closing stock had the effect of increasing the income by this amount which was not actually earned by the assessee. This is the method which is also recommended by the Institute of Chartered Accountants of India and also by the esteemed Courts of law. In support of his contention, he relied upon the decision of Hon’ble Supreme Court rendered in the case of CIT v. Indo Nippon Chemical Co. Ltd He further submitted that in assessee’s own case in asst. yr. 1990-91, Tribunal had allowed relief to the assessee in this regard. He placed on record copy of the Tribunal order at. pp. 48 to 58 of the paper book filed in the appeal for asst. yr. 1989-90. Learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities below.
16. On due consideration of the facts and circumstances as well as the ratio of law decided by the Hon’ble Supreme Court in the case of Indo Nippon Chemical Co. (supra), wherein it has been held that if an assessee valuing raw material on purchase price minus Modvat credit and valuing unconsumed raw material and work-in-progress at the end of year at net method, then it is a proper method. We are of the view that no addition on account of Modvat credit is required to be made in the value of the closing stock. Thus, the grounds of appeal of the assessee in asst. yr. 1989-90 is allowed and those of Revenue in 1991-92 to 1997-98 are rejected.
17. The next dispute relates to depreciation and investment allowance on technical know-how. This issue is involved in asst. yr. 1989-90 only and assessee is in appeal.
18. Learned Counsel for the assessee at the very outset submitted that he is not pressing for grant of depreciation on the asset, therefore, the ground with regard to grant of depreciation on the technical know-how is rejected. His alternative submission was that investment allowance be granted to the assessee.
19. The brief facts of the case are that assessee had acquired technical know-how and capitalized the amount spent on acquiring technical know-how. It claimed investment allowance at 20 per cent and depreciation at 33.33 per cent for twenty one months. The AO observed that technical know-how fees came under the purview of Section 35AB of the Act and that in view of the specific Section 35AB of the Act, l/6th of the said amount was allowable as revenue expenditure. He further observed that since the technical know-how was considered as revenue expenditure under Section 35AB of the Act no investment allowance and depreciation is allowable. Accordingly, the AO disallowed the both. Appeal to the CIT(A) did not bring any relief to the assessee.
20. Learned Counsel for the assessee submitted before us that investment allowance, is in fact, a substitute for development rebate, by only a different name and it is a clear incentive for ushering in technological development. The second proviso to Section 32A(1) clearly prohibits investment allowance in the case of any machinery or plant the whole of the actual cost of which is allowed as a deduction in any one previous year. In this case the deduction of technical know-how fees is not in “one previous year”, but extends to 6 previous years, therefore, by express language of Clause (d) of second proviso to Section 32A, not only does the prohibition of allowance under Section 32A extends to such an asset but on the contrary, clear and unambiguous language of the proviso leads itself to an interpretation that where the actual cost of the item of machinery or plant is not written off in one previous year then such an item is eligible for investment allowance.
Thus, in the absence of such an express provision assessee’s entitlement under Section 32A is in no way impaired by eligibility of expenditure under Section 35AB. Learned Departmental Representative relied upon the orders of the Revenue authorities below.
21. We have duly considered the rival contentions. We find that this issue has duly been considered by the Tribunal in the case of Tata Telecom Ltd.. ITA No. 4089/Mum/1996, copy of the order has been placed on record by the assessee at page Nos. 68 to 75 of the paper book. The Tribunal while considering this dispute has observed as under:
There is no dispute that technical know-how is a ‘plant’ as it is well established by the following decisions:
(i) Scientific Engineering House (P) Ltd. v. CIT to raise the production that technical know-how is a plant.
(ii) CIT v. Baker Mercer India (P) Ltd. In this case the relevant observations of Hon’ble jurisdictional High Court are as under:
Question No. 4 relates to investment allowance under Section 32A of the IT Act, 1961, in respect of technical know-how. Our High Court in the case of CIT v. Emco Electro (P) Ltd. considered the meaning of the word ‘plant’ for the purpose of depreciation and development rebate. It said that ‘plant’ is a word of wide import and must be broadly construed. It held that ‘plant’ would include technical know-how also. The Supreme Court, in the case of Scientific Engineering House (P) Ltd. v. CIT also held that for the purposes of depreciation, the term ‘plant’ is wide enough to include technical know-how and documentation such as drawings, designs plant, processing data, etc.
In the case of CIT v. Asea Ltd. (2002) 178 CTR (Bom) 110, the question referred to the High Court was as under:
(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in confirming the order of the CIT(A) allowing investment allowance on the technical know-how fees when as per the provisions of Section 35AB technical know-how fee is allowable as revenue expenditure in six yearly equal instalments ?
As it could be seen from the question reproduced above, the controversy before us is identical. While answering to the above question, the Hon’ble jurisdictional High Court answered the question in the affirmative as per their observations at p. 410 of the Report.
We may point out that the Departmental Representative tried to distinguish the facts of the case in the case of CIT v. Asea Ltd. (supra) from the facts of the present case but as we have already pointed out that the question referred to their Lordships represented similar controversy and the question has been answers affirmatively, therefore, we find no jurisdiction in the arguments of the learned Departmental Representative that the facts of both the cases are different. In the case of Hindustan Brown Boveri Ltd. v. Dy. CIT (supra) a reference has been made to the decision of CIT v. Baker Mercer India (P) Ltd. (supra). The said decision was also not considered by the Tribunal in the case of Dy. CIT v. Garwre Plastics & Polyster Ltd. (supra).
15. There is one more aspect to this issue. The provision of Section 32A vide which investment allowance is allowed to the assessee is an incentive provision. Investment allowance is allowable over and above the depreciation. The depreciation is allowable to the extent of 100 per cent of cost of the asset. In respect of the cost being allowed by way of depreciation, investment allowance is allowable on the cost of the asset. Section 35AB can be said to be a substitute for Section 32A which is allowable in addition to depreciation.
16. In view of the abovementioned discussion, we are of the opinion that the assessee is entitled for the benefit of investment allowance as well as of claim under Section 35AB.
Thus, in view of the Tribunal’s above finding we are of the view that assessee is entitled for investment allowance. We direct the learned AO to grant such allowance to the assessee. As far as depreciation is concerned assessee has already submitted that it will not press for depreciation. Hence, depreciation would not be admissible to the assessee. This ground of appeal is partly allowed for asst. yr. 1989-90.
22. In asst. yr. 1989-90 the next dispute relates to computation of income under Section 115J of the Act.
23. The adumbrated facts of the case are that the assessee used to close its accounts every year on the 30th of June. However, from the asst. yr. 1989-90, it became mandatory, as per the IT Act, 1961, to close the accounts on 31st March, 1989. Thus, for the purposes of the IT Act, for the asst. yr. 1989-90, the previous year of the assessee comprised of 21 months, i.e., from 1st July, 1987 to 31st March, 1989. However, for the purposes of the Companies Act, the assessee continued to close its accounts on the 30th of June (Companies accounts).
For the purpose of the Section 115J of the Act, the assessee for the period of 21 months relevant to the asst. yr. 1989-90, prepared its P&L a/c ( so 115J accounts) for the year ending 31st March and in such computation it claimed depreciation as per the IT Act on WDV method. In the accounts thus prepared, a net loss of Rs. 64,58,711 was declared. This P&L a/c was duly prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956), which was as per the requirement laid down in Section 115J(1A). The accounts were also duly audited and certified to be true and fair by the auditors. Thus, in view of the loss in the P&L a/c prepared for the purpose of the Section 115J, the assessee was not liable under Section 115J of the Act. The learned AO during the assessment proceedings noticed that the assessee maintained separate set of accounts for the registrar of the companies and the shareholders on one hand, being for the year ended 30th June and a separate set of account for the IT purposes being for the year ended 31st March. He further noticed that in the accounts prepared for the purpose of the IT Act, the depreciation was claimed as per the IT Act on the WDV method whereas in the companies accounts, i.e., in the accounts prepared for the purposes of the Companies Act, depreciation was claimed at the continuing method being the straight line method of depreciation. Thus, the AO noticed that the assessee followed different methods for the computation of the depreciation claimed in the two sets of accounts. The AO alleged that the assessee had changed its method of calculation of depreciation and had done the same without recording any satisfactory reason for the change from the straight line method to the WDV method as per the IT Act in the P&L a/c.
24. The AO further, in view of the claim of depreciation as per the IT Act in the Section 115J accounts, alleged that under Section 115J, every assessee was required to prepare its P&L a/c in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956, which in fact meant as per the AO that the depreciation too had to be claimed in accordance with the rates prescribed in the Companies Act as per Schedule XIV to the Companies Act. The AO thus assumed that the Schedule VI to the Companies Act had to be read with the Schedule XIV to the Companies Act. It was thus concluded by the AO that the accounts prepared by the assessee for the purposes of the IT Act were not in accordance with the requirements of Section 115J(1A) and alleged that the assessee had manipulated its accounts and had window-dressed to pay no tax under Section 115J, which it would have to pay if the book profit would be arrived at as per the Companies Act which the assessee was doing for the shareholders and the RoC.
25. The AO has also stated that the assessee cannot have two different opening WDV of the assets on the same day, i.e., 1st July, 1987. Here it was stated by the AO that the WDV of the assets as on 1st July, 1987 was to be shown as per the Schedule VI to the Companies Act which was done correctly for the purpose of the shareholders and the RoC but which was different for the IT purpose. The AO alleged that assets showing different opening WDV as per Schedule VI was nothing but a sham technique adopted to avoid the tax under Section 115J of the Act. The AO on the basis of the above thus recalculated the book profit under Section 115J of the Act as follows:
Computation of income under Section 115J of the Act:
Net Loss as per P&L a/c (64,58,711)
Add: Depreciation debited to the P&L a/c by the assessee 4,90,78,552
____________
(calculated as per the IT Act on the WDV) 4,26,19,841
Less: Depreciation as per the Companies Act as per Schedule VI 89,40,761
____________
(read with Schedule XIV) (calculated on the straight line method) 3,36,79,125
Book Profit
____________
30% of the book profit as above 1,01,03,737
____________
Computation of income for provisions other than Section 115J of the Act:
Total Loss (after all the disallowances and additions made by 28,30,362 the AO)
The AO thus concluded that since the income computed under Section 115J was higher than the income/loss computed under the other provisions of the Act, the assessee was liable to pay the tax on the income under Section 115J of Rs. 1,01,03,737.
26. The appeal to the learned CIT(A) did not bring any relief to the assessee.
27. The learned Counsel for the assessee while impugning the finding of Revenue authorities submitted that assessee has prepared accounts for the purpose of Section 115J of the Act and claimed depreciation as per IT Act on WDV, whereas in the company accounts, i.e., accounts prepared for the purpose of Companies Act, required to be placed before the RoC and the shareholders, depreciation was claimed at the continuing method being a straight line method of depreciation. He further pointed out that proviso appended in Section 115JA by the Finance Act, 1997, was not available in asst. yr. 1989-90 vide which depreciation has to be calculated on the same method and rates which had been adopted for calculating the depreciation for the purpose of the company accounts. He further pointed out that issue is squarely covered by the decision of the Hon’ble jurisdictional High Court rendered in the case of Kinetic Motor Co. v. Dy. CIT and by the decision of Hon’ble Supreme Court rendered in the case of Apollo Tyres Ltd. v. CIT .
28. We have duly considered the rival contentions. Section 115J has direct bearing on the controversy in hand, therefore, it is salutary for us to take note of this section. It reads as under:
115J. Special provisions relating to certain companies.–(1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee being a company (other than a company engaged in the business of generation or distribution of electricity), the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1988 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(1A) Every assessee, being a company, shall, for the purposes of this section, prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956)….
A plain and simple reading of the section as quoted above make it amply clear that for the purpose of working out the book profit under Section 115J, the only condition laid down by the section vide Sub-section (1A) was that an assessee is under an obligation to prepare a P&L a/c in accordance with Parts II and III of the Schedule VI to the Companies Act, 1956. Thus, it is broadly laid out that the accounts prepared for the purpose of Section 115J of the Act, (i.e., Section 115J accounts) have to be prepared in accordance to the Companies Act, 1956. No other condition is laid out for the preparation of the Section 115J accounts. Schedule VI, Parts II and III of the Companies Act, 1956, deal with the disclosure requirements of the various items in the P&L a/c. They do not enunciate any accounting principles. The same are absolutely silent on the accounting treatments of the various P&L a/c items. Thus, the Parts II and III do not lay down any scheme of computation of book profit; they deal mainly with the requirements of disclosure in the P&L a/c. There is no prohibition in Schedule VI and no compulsion in Schedule VI in respect of any particular accounting policy, so long as following the accounting policy does not affect the disclosure of the result of the working of the company. Moreover, it is possible to comply with Parts II and III of the Schedule VI in more than one way where the assessee can adopt different acceptable accounting policies as long as he complies with the basic requirement of Schedule VI which is, as explained above, to disclose correctly the result of the working of the company.
29. It is pertinent to observe that it is an admitted fact that both the straight line method and the WDV method of computing depreciation are recognised under the Companies Act and the generally accepted accounting principles and the accounts prepared under either method would depict a true and fair picture of the company’s state of affairs. An assessee can choose to follow any particular method of providing for depreciation in its Section 115J accounts as long as the method it chooses provides a true and fair picture of the working and the profits of the company even if it is different from the method followed by the assessee in its company accounts. This is exactly what the assessee had done in its accounts for the asst. yr. 1989-90. The assessee in its Section 115J accounts claimed depreciation as per the IT Act on WDV method and arrived at a net loss of Rs. 64,58,711 whereas in the company accounts depreciation was claimed on the straight line method of depreciation. The Hon’ble jurisdictional High Court as well as the Hon’ble Supreme Court in (2004) 186 CTR (Bom) 534: (2003) 262 ITR 330 (Bom) and (2002) 174 CTR (SC) 621: (2002) 255 ITR 273 (SC) (supra) have considered this issue elaborately and observed that AO has no power to make adjustments/changes in the method of providing depreciation from straight line to WDV. According to the Hon’ble High Court in the Kinetic Motor’s case (supra), both methods are permissible and, therefore, AO cannot make any adjustment. The headnotes of both the judgments read as under:
Kinetic Motor Co. Ltd. v. Dy. CIT Company–Book profits–Assessment under Section 115J–No power in AO to make adjustments–Change in method of providing depreciation from straight line to WDV–Both methods permissible under Companies Act–Depreciation actually debited to P&L a/c prepared in accordance with provisions of Companies Act and certified by auditors–AO cannot make adjustments to it–IT Act, 1961, Section 115J.
The assessee was a public limited company engaged in the business of manufacture and sale of two wheelers. For the asst. yr. 1990-91 in the books of account maintained for the statutory previous year (i.e., financial year) 1st April, 1989, to 31st March, 1990, the assessee debited an amount of Rs. 6,32,65,430 on account of depreciation. This depreciation was calculated on the WDV method, which is one of the permissible methods under the Companies Act as well as under the IT Act, although the assessee used to provide the depreciation on the straight line method in its corporate accounts. The above treatment resulted in a book loss of Rs. 1,64,49,937. These accounts were certified to be true and fair by the auditors. The’ AO took the view that there was no justification for the assessee to change the basis of providing depreciation. The AO reworked the depreciation and arrived at a revised figure of book profit of Rs. 2,22,10,52b as against book loss of Rs. 1,64,49,937. This was confirmed by the Tribunal. On further appeal to the High Court:
Held, that it was not in dispute that under the Companies Act, both the straight line method and WDV method are recognised. Therefore, once the amount of depreciation actually debited to the P&L a/c was certified by the auditors, it was not permissible for the AO to make book adjustments.
Apollo Tyres Ltd. v. CIT Mowed.
Apollo Tyres Ltd. v. CIT
In accordance with the provisions of Parts II and III of Schedule VI to the Companies Act”, meaning of.
The use of the words ‘in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act’ in Section 115J was made for the limited purpose of empowering the AO to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.
Company–Tax on basis of ‘book profits’–Net profits in P&L a/c prepared in accordance with Parts II and III of Schedule VI to Companies Act–Accounts scrutinised and certified by statutory auditors–AO has no power to scrutinise except as provided in Explanation–IT Act, 1961, Section 115J.
The AO, while computing the book profits of a company under Section 115J of the IT Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The AO, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to Section 115J. The AO does not have the jurisdiction to go behind the net profits shown in the P&L a/c except to the extent provided in the Explanation. The use of the words in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act’ in Section 115J was made for the limited purpose of empowering the AO to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the AO has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the RoC who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of Section 115J does not empower the AO to embark upon a fresh enquiry in regard to the entries made in the books of account of the company.
Held, accordingly, that while determining the ‘book profits’ under Section 115J, the AO could not recompute the profits in the P&L a/c by excluding provisions made for arrears of depreciation.
In view of the above, we direct the AO not to make any adjustment of depreciation while computing the book profit under Section 115J of the Act. This ground of appeal is allowed.
30. The next ground of the assessee in asst. yr. 1989-90 relates to non-admission of additional ground of appeal by the learned CIT(A). Learned Counsel for the assessee submitted that it is a consequential ground of the earlier ground relating to the computation of income under Section 115J. In case it is found that adjustment is permissible in the accounts of the assessee while computing the book profit then this ground would have a bearing but now it has become an academic one and does not require any adjudication. Since we have already held that AO cannot make any adjustment in the accounts while computing the book profit, therefore, in view of the submissions of learned Counsel for the assessee this ground is treated as redundant.
31. The next dispute relates to set off of unabsorbed depreciation of previous year. This ground has been raised in asst. yrs. 1989-90, 1991-92 and 1992-93 by the assessee. However, learned Counsel for the assessee did not press this ground of appeal at the time of hearing, therefore, it is rejected in all the three assessment years.
32. The next ground relates to disallowance under Section 43B of the Act. The amount and the year in which such dispute arose are as under:
Asst. yr. 1991-92: Rs. 45,288: Ground No. (HI): Assessee’s appeal
Asst. yr. 1992-93: Rs. 53,356: Ground No. (VI): Assessee’s appeal
Asst. yr. 1993-94: Rs. 58,240: Ground No. (V): Assessee’s appeal
33. The brief facts of the case are that the above sums whose deduction was claimed by the assessee relate to PF/EPF and ESIC liabilities, In asst. yr. 1991-92 the AO has made the disallowance and learned CIT(A) has confirmed the disallowance on the basis of the reasoning given in asst. yr. 1990-91. Similar view has been followed in the subsequent years. Learned assessee in the written submissions contended that this issue was considered by the Tribunal in ITA Nos. 692 and 3850/Bom/1994, wherein issue has been set aside to the file of AO for fresh adjudication. He placed on record copy of the Tribunal order. Learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities below. However, he could not controvert the submission of the assessee that similar issue was involved and it was restored to the AO for readjudication.
34. We have duly considered the rival contentions. We find that in asst. yr. 1990-91 this issue has been considered by the Tribunal and set aside to the file of AO by observing as under:
The grievance projected in this ground is that the learned CIT(A) erred in confirming the disallowance under Section 43B of Rs. 49,219 and Rs. 2,513 in respect of PF and ESIC. Both the authorities below observed that under Section 43B expenditure is allowable only when it is paid and it accrues. It is submitted before us that the authorities below failed to appreciate that the said amounts were allowable under Section 43B, in the assessment year under appeal itself inasmuch as these amounts had been paid before their respective due dates falling in the subsequent previous year. Our attention was also drawn to Explanation to Section 43B according to which payments which are made subsequent to the year ending but within specified time frame are allowable during the relevant previous year.
5.1 In view of the above Explanation, we restore this issue to the file of the AO. He is directed to verify the claim of the assessee that the payments were made before their respective due dates falling in the subsequent previous year and thereafter readjudicate upon the issue after giving a reasonable opportunity to the assessee being heard.
Respectfully following the decision of the Tribunal in other years, we set aside the addition and restore to the file of AO for fresh adjudication according to the law.
35. The next dispute relates to pre-operative interest income and disallowance of royalties and claim made under Section 80HHC. The following amounts and the assessment years depict the grievance of the respective parties as under:
(IX) Pre-operative interest income:
Asst. yr. 1991-92: Rs. 9,40,028: Ground No. (IV): Assessee’s appeal
Asst. yr. 1992-93: Rs. 21,28,811: Ground No. (II): Assessee’s appeal
Asst. yr. 1997-98: Rs. 1,77,98,128: Ground No. (1): Assessee’s appeal
Asst. yr. 1993-94: Rs. 4,88,912: Ground No. (6): Department’s appeal
(X) Disallowance of royalty under Section 40(a)(i):
Asst. yr. 1991-92: Rs. 67,27,863: Ground No. (V): Assessee’s appeal
Asst. yr. 1992-93: Rs. 68,74,370: Ground No. (IV): Assessee’s appeal
(XI) Claim under Section 80HHC:
Asst. yr. 1991-92: Rs. 53,72,345: Ground No. (VI): Assessee’s appeal Asst. yr. 1992-93: Rs. 53,72,345: Ground No. (V): Assessee’s appeal
36. Learned Counsel for the assessee, at the very outset did not press the grounds of appeal raised by the assessee and where relief has been granted to the assessee he did not contest the ground of appeal raised by the Revenue. In view of his stand the assessee’s grounds of appeal are rejected, whereas the ground of appeal raised by the Revenue in asst. yr. 1993-94 regarding preoperative expenses is allowed.
37. The next dispute relates to charging of interest under Sections 234B and 234C of the Act.
38. As far as the charging of interest under Section 234B is concerned, learned Counsel for the assessee did not press this ground of appeal. With regard to levy of interest under Section 234C is concerned, he submitted that interest under Section 234C is leviable on the shortfall of advance tax as compared to the tax due on returned income. With regard to asst. yr. 1992-93 the tax on returned income as per revised return was Rs. 15,39,100 as against which assessee has a TDS credit of Rs. 27,53,293, therefore, no tax is due on returned income.
39. We have duly considered the contentions of the assessee as well as findings of the Revenue authorities in this connection. We find that AO has not recorded any finding on this issue. He at the end of the assessment order simply observed, charge interest under Sections 234B and 234C. Thus, we are of the view that if contentions of the assessee are true then no interest under Section 234C would be leviable. The AO shall verify the facts in this regard and readjudicate this issue.
40. The next dispute relates to disallowance made under Rule 6D.
41. The Revenue is impugning the deletion of disallowance of Rs. 20,000 and Rs. 40,000 in asst. yrs. 1991-92 and 1993-94. This disallowance was made under Rule 6D of the Act (Rules). Learned Counsel for the assessee pointed out that this issue is covered against the assessee by the decision of Hon’ble jurisdictional High Court rendered in the case of CIT v. Aorow India Ltd. and in view of this decision assessee does not contest these grounds of appeal. In view of the assessee’s submission, both these grounds are allowed.
42. The next dispute relates to allowability of fees to clubs. The amount and year of dispute can be noticed as under:
(XIV) Club fees:
Asst. yr. 1991-92: Rs. 10,800: Ground No. 2: Department’s appeal
Asst. yr. 1993-94: Rs. 5,00,000: Ground No. (II): Assessee’s appeal.
43. The Hon’ble Bombay High Court has considered this issue in Otis Elevator Co. (P) Ltd. v. CIT as well as Hon’ble Gujarat High Court has considered this issue in Gujarat State Export Corporation Ltd. v. CIT , wherein it has been observed that payment of club fees is to be considered for the promotion of the business interest and hence it is an allowable expense. As far as the factual position is concerned we find that in asst. yr. 1991-92 assessee has made payment of Rs. 10,800 on account of membership fees for the Obroi Health Club. Similarly, in asst. yr. 1993-94 membership of Willington Club was taken by the assessee in the name of corporate entity. Therefore, taking into consideration the facts and circumstances coupled with the authoritative pronouncements, we allow the assessee’s ground of appeal in asst. yr. 1993-94 and reject the ground of appeal taken by the Department in asst. yr. 1991-92.
44. The next dispute relates to disallowance of capital subsidy from cost of the assets. Learned Counsel for the assessee at the very outset submitted that this issue is squarely covered by the decision of Hon’ble Supreme Court rendered in the case of CIT v. P.J. Chemicals Ltd., Etc. , wherein it has been held that where Government subsidy is intended as an incentive to encourage entrepreneurs to move to backward areas and establish industries, the specified percentage of the fixed capital cost, which is the basis for determining the subsidy being only a measure adopted under the scheme to quantify the financial aid, is not a payment, directly or indirectly, to meet any portion of the “actual cost”. The expression “actual cost” in Section 43(1) of the IT Act, 1961, needs to be interpreted liberally. Such a subsidy does not partake of the incidents which attract the conditions for its deductibility from “actual cost”. The amount of subsidy is not to be deducted from the “actual cost” under Section 43(1) for the purpose of calculation of depreciation, etc. Thus, respectfully following the decision of Hon’ble Supreme Court this ground of Revenue’s appeal in asst. yr. 1991-92 is rejected.
45. The next ground in asst. yr. 1991-92 relates to taxability of import benefit. This dispute has been raised by the Revenue in ground No. 5 in asst. yr. 1991-92. Learned Counsel for the assessee did not contest this ground of appeal. Therefore, in view of his stand this ground of appeal is allowed.
46. The next dispute relates to disallowance of prior period expenses. The assessee in asst. yr. 1992-93 claimed deduction of certain expenses. Out of that learned AO disallowed the deduction for the expenses amounting to Rs. 46,889 on the ground that the liability for those expenses accrued during the earlier years. Since the assessee has been maintaining its accounts on mercantile system of accounting, therefore, these expenses cannot be allowed to the assessee. Appeal to the CIT(A) did not bring any relief to the assessee.
47. Learned Counsel for the assessee submitted that though assessee has been maintaining accounts on mercantile system of accounting but the bills and vouchers for the expenses were received by the assessee only in the previous year relevant to asst. yr. 1992-93, therefore, the liability has been crystallized in the accounting year relevant to this assessment year and the AO ought to have granted the deduction. On the other hand, learned Departmental Representative relied upon the orders of the Revenue authorities below.
48. We have duly considered the rival contentions. The Hon’ble Gujarat High Court in the case of Saurashtra Cement & Chemicals Industries Ltd. v. has held that expense cannot be disallowed merely on the’ ground that they related to the transactions pertaining to an earlier accounting year; even if assessee has been following mercantile system of accountancy if the liability was determined and crystallized in the year in question on the basis of the accounts then such amount would be allowed as a deduction. In the present case the assessee has demonstrated that some of the branches of the assessee’s company were situated at very long distance and thus it became inevitable that small portion of prior period expenses have to be accounted in the later year. The assessee has a huge turnover and it claimed expenses in crores of rupees then it is not justifiable to doubt a sum of Rs. 46,899 only. Therefore, keeping in view the decision of Hon’ble Gujarat High Court we allow this ground of appeal and delete the disallowance.
49. The next dispute, relates to disallowance of Rs. 3,549 towards capital expenditure debited to revenue account. The AO has held that from the Tax audit report it was evident that a sum of Rs. 17,131 which was in the nature of capital expenditure was debited to the P&L a/c by the assessee. On these grounds the AO disallowed the same.
50. On appeal, learned CIT(A) has limited the disallowance to Rs. 3,549 being the expenditure incurred by the assessee on the purchase of the following:
Carpet Rs. 1,808
Briefcase Rs. 1,038
Suitcase Rs. 703
The CIT(A) held the carpet to be a part of the furniture and fittings on which depreciation was to be allowed accordingly. With respect to the briefcase and the suitcase he held that they appeared to have been presented to two members of the staff (debited to staff welfare expenses) and in the alleged absence of any justification of the said expenditure, deduction thereof was disallowed by the CIT(A).
51. Learned Counsel for the assessee submitted that the minor expenses on carpet, briefcase and suitcase were incurred by the assessee in the routine course of its business and, therefore, were very much allowable expenditure. In particular the expenditure with respect to the carpet was very much in the nature of an expense incurred on the office maintenance and the minor gifts to the staff were in the nature of staff welfare expenses. In the alternative, in view of the proviso to the Section 32 of the Act, during the relevant year, the actual cost of any machinery or plant, if it does not exceed Rs. 5,000, shall be allowed as a deduction in respect of the previous year in which such machinery or plant is first put to use by the assessee for the purpose of its business. On the other hand, learned Departmental Representative relied upon the order of AO.
51.1 We have considered the rival contentions. Learned CIT(A) discussed the matter in detail, therefore, we do not want to interfere in his finding, more so, very small amount is in dispute.
52. The next disallowance relates to import benefit. In asst. yrs. 1992-93 and 1993-94 assessee has raised two grounds of appeal pertaining to grant of import benefit. However, at the time of hearing learned Counsel for the assessee did not press this ground of appeal hence they are rejected.
53. The next ground of appeal relates to disallowance of Rs. 42,404 under Section 43B of the Act. It is seen that assessee had made payment of this amount towards gratuity and claimed the deduction of the same. Learned AO (has) gone through the details and observed that assessee had made only provision. It was not paid within the due date and, therefore, he disallowed the same. On the other hand, learned Counsel for the assessee pointed out that amounts have duly been paid within the due date as per the proviso to Section 43B of the Act and no disallowance is to be made under Section 43B of the Act. In support of his contention he relied upon the decision of Hon’ble Supreme Court rendered in the case of Allied Motors (P) Ltd. v. CIT and Fluid Air (India) Ltd, v. Dy. CIT (1997) 63 ITD 182 (Bom). On the other hand, learned Departmental Representative relied upon the orders of the Revenue authorities below.
54. After considering the arguments of both the sides and the facts of the case, we find force in the arguments of the learned Counsel for the assessee. The Hon’ble apex Court in the case of Allied Motors (P) Ltd. (supra) has held that proviso to Section 43B to be clarificatory and held that it should be treated as retrospective in operation. In Section 43B, there were two separate provisos, one for the payment relating to tax, duty, cess, fee, interest on loan, etc. and other concerning the payment with regard to provident fund, superannuation fund or gratuity fund, etc. The Finance Act, 2003, omitted second proviso and the 1st proviso is made applicable with regard to all the payments including the payment for PF, superannuation fund, gratuity fund, etc. The proviso when inserted was held to be clarificatory by the Hon’ble apex Court and, therefore, when the 2nd proviso is omitted and the 1st proviso is amended, the amended proviso should also be held to be clarificatory and, therefore, applicable to all pending proceedings. We, accordingly, respectfully following the ratio of the decision in the case of Allied Motors (P) Ltd. (supra) hold that the 1st proviso as modified by the Finance Act, 2003, would be applicable to all pending proceedings. As per the 1st proviso, anything contained in Section 43B would not apply in relation to any sum, which is actually paid by the assessee on or before the due date for furnishing the return under Section 139(1). Admittedly, the entire sum relating to ESIC and PF is paid by the assessee before the due date for filing of the return. Therefore, the disallowance made under Section 43B is not called for in view of the above and we allow this ground of appeal and delete the disallowance.
55. The next dispute relates to grant of depreciation on furniture at guest house. Such depreciation has been granted to the assessee in asst, yrs. 1993-94 to 1995-96. The Revenue is impugning the order of learned CIT(A). At the very outset, learned Counsel for the assessee submitted that assessee is not contesting the ground of appeal raised by the Revenue. In view of the stand of the assessee this ground of appeal in all the three years is allowed.
56. The next dispute relates to allowance of loss on account of purchase and sale of shares.
57. The brief facts of the case are that in asst. yr. 1995-96 assessee has incurred a loss of Rs. 1,39,42,907 on account of purchase and sale of shares, securities/bonds, which it claimed as deduction on account of loss on sale of investment. Learned AO disallowed the loss by applying Explanation appended to Section 73 of the Act. The learned first appellate authority has allowed the loss to the assessee on the ground that assessee was not engaged in the business of purchase and sale of shares. The securities were also not shown as stock-in-trade. The assessee has clearly shown it as investment and, therefore, Explanation available in Section 73 is not applicable.
58. Before us, learned Departmental Representative relied upon the order of AO whereas learned Counsel for the assessee relied upon the order of learned CIT(A). He also invited our attention towards pp. 47 to 49 of the paper book, wherein annual accounts of the company for asst. yr. 1995-96 are available.
59. We have duly considered the rival contentions. From the record it emerges out that AO himself has observed that assessee is not dealing in shares and securities. He also find that shares and securities are the assessee’s investment. However, in such circumstances what led the AO to apply Explanation of Section 73 is not discernible from the order. Therefore, in our opinion, learned CIT(A) has rightly treated it as short-term loss and allowed the assessee to carry it forward. We do not find any merit in this ground of appeal, i.e., ground No. 5 of Department’s appeal in asst. yr. 1995-96. It is rejected.
60. The next dispute again raised by the Revenue in ground No. 6 pertaining to asst. yr. 1995-96, relates to grant of capital loss of Rs. 65,900 on sale of the land. The assessee had sold the land to the sister-concern at book value. The AO was of the opinion that assessee should have transferred the land at the market value. However, learned CIT(A) has granted the capital loss to the assessee by observing that in case assessee has transferred the land on the book value then market value has no role to play. Even if by transferring the land at book value assessee is suffering some loss, then that has to be allowed to the assessee. We do not find any substance in this ground of appeal raised by the Revenue, therefore, it is rejected.
61. The next dispute relates to disallowance of guest-house expenses. In asst. yr. 1997-98 assessee and Revenue are in appeal on this issue. However, learned Counsel for the assessee did not press this ground of appeal taken by the assessee (and) did not contest the ground of appeal taken by the Revenue. In view of his stand the ground of appeal taken by the assessee is rejected and the ground of appeal taken by the Revenue is allowed.
62. The next dispute between the parties relates to allowability of interest expenditure incurred on the borrowed funds for financing the expansion of existing business.
63. The following details would depict the amounts of interest involved in each assessment year and for the plant such expenses have been incurred.
(i) Interest on borrowed funds for setting up of aluminium sheets and foils plant at Sanaswadi:
Asst. yr. 1991-92: Rs. 40,84,756: Ground No. (IV): Assessee’s appeal
Asst. yr. 1992-93: Rs. 5,28,59,981: Ground No. (IX): Assessee’s appeal
Asst. yr. 1993-94: Rs. 4,32,90,391: Ground No. (VI): Assessee’s appeal
(ii) Interest on borrowed funds and other expenses incurred for setting up of the copper smelter plant at Tuticorin:
Asst. yr. 1993-94: Rs. 1,95,45,507: Ground No. (5): Department’s appeal
Asst. yr. 1994-95:Rs. 13,37,42,388: Ground No. (1): Department’s appeal
Asst. yr. 1995-96: Rs. 21,14,74,355: Ground No. (1): Department’s appeal
Asst. yr. 1996-97: Rs. 47,34,27,008: Ground No. (2): Department’s appeal
Asst. yr. 1997-98: Rs. 1,05,28,40,670: Ground No. (2): Department’s appeal
Asst. yr. 1998-99: Rs. 1,37,17,33,128: Ground No. (4): Department’s appeal
Asst. yr. 1999-2000: Rs. 40,63,29,258: Ground No. (3): Department’s appeal
(iii) Interest on borrowed funds relating to OCR plant at Chinchpada:
Asst. yr. 1998-99: Rs. 40,22,52,700: Ground No. (4): Department’s appeal
Asst. yr. 1999-2000: Rs. 21,11,26,333: Ground No. (3): Department’s appeal
(iv) Expenditure relating to optical fibre plant at Aurangabad:
Asst. yr. 1998-99: Rs. 6,29,09,918: Ground No. (4): Department’s appeal
Asst. yr. 1999-2000: Rs. 16,21,17,518: Ground No. (3): Department’s appeal
(v) Expenditure incurred for setting up of the paper project at Vyara:
Asst. yr. 1997-98: Rs. 1,41,80,863: Ground No. (2): Assessee’s appeal
Asst. yr. 1998-99: Rs. 77,47,990: New ground to be taken by assessee in cross-objection.
Asst. yr. 1999-2000: Rs. 36,21,861: New ground to be taken by assessee in cross-objection
(vi) Expenditure on aluminium smelter plant at Orissa:
Asst. yr. 1998-99: Rs. 23,91,803: New ground to be taken by assessee in cross-objection
Asst. yr. 1999-2000: Rs. 38,54,266: New ground, to be taken by assessee in cross-objection.
64. Let us now examine the facts and circumstances of the present case. In order to know as to how such interest expenses are admissible to the assessee and how learned CIT(A) has granted to the assessee in most of the years except for Sanaswadi plant and paper project at Vyara and aluminium smelter plant at Orissa in some of the years, learned Counsel for the assessee took us through the written submissions placed on record.
65. On the strength of the written submissions learned Counsel for the assessee apprised us with the background of the company at the time of arguments, its progress with the time. He pointed out that assessee-company, is one of India’s leading vertically integrated, non-ferrous metal and telecommunication cable companies. The company manufactures and sells continuous Cast Copper Rods (CCR), polyethylene insulated Jelly Filled Telecommunication Cables (JFTC), Optical Fibre Cables (OFC), Optical Fibre (OF) and aluminium foils and sheets. The company is the largest manufacturer in India of polyethylene insulated JFTC, and continuous CCR both in terms of production output and sales volume. The history and development of the company are traced from its inception to the current period briefly as follows:
In 1979, Mr. Anil Agarwal, through a family firm, acquired Shamsher Sterling Corporation, which manufactured polyvinyl chloride power and control cables, overhead power transmission conductors and enamelled copper wire. Subsequently, in 1986, this business was acquired by Sterlite Cables Ltd. in which the Agarwal family had a substantial interest. The name was Sterlite Industries (India) Ltd.
In 1988, Sterlite Inds. Ltd. made an initial public offering of its shares and convertible debentures to part finance its first polythene insulated jelly filled copper telephone cables plant. Thus the JFTC plant was set up which came into operation from July, 1988. (asst. yr. 1989-90).
As part of its strategy to concentrate on business with high growth potential, Sterlite discontinued production of polyvinyl chloride power and control cables and enamelled copper wires in 1990 and in 1991 established a continuous CCR plant at Lonavala.
In 1992, Sterlite commissioned a plant for the manufacture of aluminium sheets and foils. In the same year, Sterlite Communications Ltd., which was subsequently merged with Sterlite, established a plant for the manufacture of optical fibre at Aurangabad.
In 1993, a copper smelter and refining plant at tuticorin was set up in order to obtain captive sources of copper for its copper rod plant. Sterlite commissioned the first privately developed eopper smelter in India at Tuticorin in 1997.
The group in 1995 acquired an 83 per cent interest in MALCO as part of MALCO’s financial restructuring and thus entered the aluminium production business in a big way.
In 1996, pursuant to the scheme of amalgamation of Sterlite Communications Ltd. with the assessee-company, a paper project was transferred to the assessee-company along with an optical fibre plant and a continuous CCR plant w.e.f. 1st April, 1996.
In April, 1999, to source copper concentrate for the Tuticorin copper smelter, Monte Cello BV (a subsidiary of Monte Cello Corporation NV, which was wholly owned by Twin Star at that time) acquired copper mines of Tasmania (P) Ltd., which owns the MT Lyell copper mine. In October, 1999, Monte Cello BV acquired Thalanga Copper Mines (P) Ltd. Monte Cello Corporation NV subsequently sold Monte Cello BV to Sterlite.
In July, 2000, Sterlite’s telecommunications cables and optical fibre business was demerged into a new company, Sterlite Optical Technologies Ltd. (“SOTL”).
66. On the basis of the above he contended that over the years the company has grown substantially involving not one but a series of successful integrations, both backward and forward and substantial expansions. Starting with the manufacture of cables, conductors and copper wires in 1979, the assessee-company expanded in the manufacture of jelly filled telephone cables and optical fibre cables in 1988. After this, in 1990-91, it set up the unit to manufacture the copper rods from which the copper wire was drawn to be used in the cables. Then followed the unit for the manufacture of aluminium sheets, foils and conductors in 1992. These aluminium sheets and foils produced were used as a cable wrap for the telephone cables already in production. The copper cathodes required to manufacture the copper rods were initially imported for some years and then in order to achieve the objective of import substitution, the copper smelting and refining project was set up at Tuticorin in order to produce the copper cathodes required for the production of the. copper rods. The continuous expansion of the company did not stop here. Pursuant to the scheme of amalgamation of Sterlite Communications Ltd. with the assessee-company, a paper project was transferred to the assessee-company along with an optical fibre plant and a continuous CCR plant w.e.f. 1st April, 1996.
Further, in 1999, the assessee-company in its process of backward integration, purchased Monte Cello BV, a company that owns certain copper mines. This was done with a view to source the copper concentrate for the Tuticorin smelter plant from the copper mines.
67. In this way learned Counsel demonstrated that the same business of the assessee-company under one integrated business head of Sterlite Industries (India) Ltd. having common management, supervision, flow of fund, etc. expanded from one stage to another. Thus, for the manufacture and production of the various products, the assessee-company, under one business unit of Sterlite Industries (India) Ltd. has the following projects located at different places:
(1) Jelly fitted Telephone Cables (JFTC) plant at Aurangabad since 1990
(2) continuous Cast Copper Rode (CCR) at Lonavala since 1991
(3) Aluminium Sheets and Foil plant at Sanaswadi since 1992
(4) Copper Smelter and Refining plant at Tuticorin since 1993
(5) Conductor plant at Karanjwane near Pune.
(6) Paper plant at Vyara
(7) Optical Fibre plant at Aurangabad
(8) CCR plant at Chinchpada
The profits of the different units are offered for tax by the assessee-company under one combined head of “Business income” in the hands of the assessee-company. Common books of account were maintained by the assessee-company in respect to its various plants. The production of all the units were considered to be the combined production of the assessee-company and the profits earned by all the different units were considered to be the profit of the assessee-company. The ultimate gain or loss was worked out by a consolidated P&L a/c and balance sheet for the assessee-company. The combined profit thus worked out was offered to tax in the hands of the assessee-company. The assessee-company was one and the same and the assessment was not made unit-wise but assessee-wise.
68. The assessee-company for financing the setting up of the new projects and the expansion of its existing projects raised funds by way of fully convertible bonds, non-convertible bonds, euro convertible bonds and also by bank loans. The projects were also partly financed by internal accruals. Thus, the funds raised by way of borrowings were used to part finance the expansion projects. On these borrowings interests were paid and also certain pre-operative expenses of revenue character were incurred on the setting up of the various expansion units as detailed above. These expenses being incurred on the setting up of the expansion units were claimed as deduction under Section 36(1)(iii) of the IT Act, 1961, from profits of the respective years.
69. Learned AO treated such interest expenses as capital in nature. The AO has disallowed the claim of the assessee and capitalised the same. On appeal to the CIT(A), partial relief has been granted to the assessee. Both the sides are impugning the partial retention and deletion of disallowance in different years noticed above.
70. The learned AO in asst. yr. 1990-91 observed that the interest on debentures issued to part finance new project manufacturing aluminium foils and sheets at Sansawadi near Pune is required to be capitalized on the ground that this project was a new project. This view of the AO has been confirmed by the learned CIT(A). On same analogy the interest expenses on this project for asst. yrs. 1992-93 and 1993-94 have also been capitalized.
71. From asst. yr. 1993-94 to asst. yr. 1999-2000 assessee had claimed interest expenses incurred on borrowed funds used for setting up of the copper smelter plant at Tuticorin. The AO in his order held that assessee had borrowed money for the expansion of its existing unit and also for the setting up of some new units. He further observed that interest payments made by the borrowers which are used for new units are to be capitalized because the money utilized for the expansion of the existing project is necessarily to be held to be a revenue expenditure and to be debited in the P&L a/c. According to him the assessee in respect of the interest payment on the expansion project had not debited the P&L a/c with the same. However, it was contended before the AO that in the computation of income the interest payments being on the expansion projects have been claimed as revenue expenditures. Learned CIT(A) has gone through the details of the expenses and allowed such expenses to the extent it were incurred on the borrowed funds utilized for the expansion of copper smelter plant at Tuticorin. Following his earlier order with regard to Sansawadi, the learned CIT(A) disallowed the same. Similar treatment has been given in other assessment years with regard to the other projects, i.e., paper project at Vyara and aluminium smelter plant at Orissa.
72. Learned counsel for the assessee on the basis of the detailed written submissions pointed out how the assessee has expanded its existing business and how the interest expenses incurred by it, are allowable with regard to all the plants. On the other hand, learned Departmental Representative relied upon the orders of the Revenue authorities below. He particularly pointed out that assessee itself in the books of account capitalized the interest expenses, therefore, AO has rightly disallowed. With regard to paper project at Vyara and aluminium smelter plant at Orissa he contended that these are alltogether new projects, therefore, interest expenses cannot be allowed in these projects as revenue expenses.
73. We have duly considered the rival contentions. Section 36(1)(iii) has direct bearing on the controversy in hand, therefore, it is salutary upon us to take note of this section.
Section 36(1)(iii) of the IT Act, 1961 reads as follows:
36. Other deductions–(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28–
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:
Explanation: Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;
From the perusal of the above it will reveal that where the assessee borrows money for expansion of its business the interest paid thereon is allowable.
However, it is to been seen whether it is the commencement of new business or merely an extension or expansion of existing business. In order to determine whether different ventures can be set upto constitute the same business what one has to see is whether there was any inter-connection, inter-lacing, interdependence, inter-unity embracing the ventures, whether the different ventures were so interlaced and so dovetailed into each other as to make them into the same business.
74. Let us analyze the process of expansion in the case of the assessee undertaken by the establishment of various projects as series of forward and backward integration as well as the principle of law evaluated in various authoritative pronouncements.
75. Before adverting to the facts of the assessee let us first briefly take notice of the broad principle formulated by the Hon’ble Supreme Court for judging the circumstances which entitle an assessee to claim the interest expenses on expansion of its business. The Hon’ble Supreme Court in the case of Setabganj Sugar Mills Ltd. v. CIT has formulated the following broad principle:
In this case the Supreme Court listed out the following factors which would establish the unity of the business:
(i) Unity of control and management.
(ii) Conduct of business through the same agency
(iii) Integration of business
(iv) The employment of the same capital
(v) The maintenance of common books of account
(vi) Employment of the same staff to run the business
(vii) The nature of different transactions
(viii) The possibility of one being closed without affecting the texture of the other.
The above broad principles have been considered on various occasions by the Hon’ble High Courts as well by the Supreme Court. Thus, where, however, besides the expansion of the existing business, money is borrowed for setting up a new activity or unit, the decisive factor for the allowability of the interest on borrowed capital for setting up of the new unit as a revenue expenditure depends on the fact whether the new unit constitutes the same business as that of the existing unit or not. The factors essential to hold that it is the same business or not has already been laid out by the Hon’ble Supreme Court in the two famous judgments in the cases of CIT v. Prithvi Insurance Co. Ltd. and Produce Exchange Corporation Ltd. v. CIT and has considered this aspect and found that common management, common administration, common fund, common accounting set up, etc. indicates unity of control and management. It will be one of the decisive factors in determining whether the new business constitutes the ‘same business’ or not as with the existing business.
In CIT v. Tata Chemicals Ltd.
The observation of the Hon’ble Court as summarised in the headnote are worth to note. The same read as under:
Interest on borrowed capital–Same business or separate business-Amalgamation of subsidiary with parent company under Court order–Finding that subsidiary and parent company carried .on same business–Capital borrowed for purposes of business of subsidiary–Deductible–Income-tax Act, 1961, Section 36(1)(iii)
A careful reading of Section 260A(6) of the IT Act, 1961, shows that the High Court can decide only that question which was raised but not determined by the Tribunal.
The assessee was a public limited company engaged in the manufacture of chemicals, salt and detergents in its factories. One of such manufacturing units was in Gujarat. Subsequently, it set up a subsidiary fertilizer company but this subsidiary company amalgamated with the respondent under the order of the High Court passed on a company application on 7th Sept., 1989. The respondent thereafter set up a fertilizer plant in the State of UP. Certain deductions were claimed by the respondent for the asst. yr.. 1992-93. The AO disallowed some of the deductions claimed, particularly those under Section 36(1)(iii). The AO and the CIT(A) had come to the conclusion that this fertilizer unit would have to be treated as a separate unit and, therefore, the benefit under Section 36(1)(iii) could not be extended to the respondent as far as any amount of interest paid in respect of the capital borrowed for the business of the fertilizer unit was concerned. The Tribunal considered various factors such as administration of various units, flow of funds, unity of management, unity of the accounting set up as well as control coupled with various such relevant factors. The Tribunal found that the administration and management of funds of the two units were common. The Tribunal had also recorded findings of fact that there was a functional integrity between the two units. It was in these circumstances that the deduction under the particular section was held allowable.
Deduction under Section 36(1)(iii) had also been refused in respect of capital invested in the purchase of tax-free bonds. The Tribunal recorded a positive finding based on evidence that the investment in the tax-free bonds had been in the course of business. It held that the deduction was allowable. On appeal to the High Court:
Held, (i) That the Tribunal had come to the conclusion that the decisive test is the unity of control which is indicated by interlacing, inter-dependence and inter-connection between the businesses and dovetailing of one into the other. In the present case, it was quite clear that the amalgamation of the subsidiary was allowed by the High Court. Thereafter, it was for the management of the company to manage its affairs and the benefits which would be available for the borrowings done for a unit would certainly be claimable by the company as such. Section 36(1)(iii) which permits the amount of interest paid in respect of the capital borrowed for the purposes of the business would have to include the borrowing for a unit of the company which was the fertilizer unit in UP. The interest was deductible.
(ii) That since the Tribunal had recorded a finding of fact that investment in tax-free bonds was a business investment it was justified in allowing deduction of interest on the capital borrowed.
In the abovementioned case interest cost on a totally different line of business being the manufacture of fertilizer as against the existing line of business being the manufacture of chemicals, salt and detergents, was held to be deductible under Section 36(1)(iii) as revenue expenditure since there was unity of control, management, flow of funds, accounting set up, etc. between the new unit and the existing business of the assessee-company.’
76. Let us consider certain other case law on this issue.
In the case of Addl. CIT v. Aniline Dyestuffs & Pharmaceuticals (P) Ltd.
The assessee-company was engaged in the business of manufacture of dyestuffs. It started a new industrial undertaking for manufacture of dyes (intermediates) required for the manufacture of dyestuffs. These intermediates were hitherto purchased by the assessee-company in the market. The issue was the allowability of interest on the moneys borrowed for the new undertaking which had not commenced production. The Bombay High Court held that “it was not possible to hold that it was a separate and entirely new undertaking which is to be regarded as something different, a totally independent venture unconnected with the existing business of the assessee.”
Here, in the above case, since the new unit was a dependent and connected unit of the existing business, the interest expenditure on the same was allowed as revenue expenditure incurred on the expansion of the existing business.
Interest expenditure incurred by an assessee engaged in the business of film exhibition and distribution to construct a theatre was held allowable. It was held that the assessee was a businessman during the relevant year, even assuming that he was only doing the business of distribution of films. As he wanted to extend his business to exhibition field also, for that purpose, it was necessary for him to acquire a theatre and for acquiring a theatre he had to pay a sum of Rs. 3,50,000 and it was for that purpose he borrowed the money.
CIT v. Shah Theatres (P) Ltd.
Where the assessee-company carrying on business of motion pictures, borrowed money for construction of cinema theatre in the relevant accounting year, which was not brought into use in such accounting year, interest on such borrowings was allowed as revenue expenditure as the same was considered to be paid for expansion of the existing business.
Kanhiram Ramgopal v. CIT
The assessee-firm was carrying on the business of running a rice and Dal mill and the husk was the waste product of the mill, which could be utilised as a raw material for manufacturing straw boards. That was the reason for which the assessee decided to start a straw board factory in order to utilise the waste product of the mill and for this purpose the assessee borrowed capital and . started constructing, erecting and installing the straw board factory. The factory did not commence production during the accounting year relevant to asst. yr. 1968-69 and asst. yr. 1969-70, however, interest was paid. Such interest/ expenditure liability was allowed as a deductible expenditure on the ground that new activity was only an expansion of the existing business of the assessee.
Indian Rare Earths Ltd. v. ITO (1984) 8 ITD 882 (Bom)
Interest expenditure incurred by a company engaged in the business of mineral separation on western coast to establish a new project in Orissa was held allowable. The proposal to set up a new mineral separation unit in Orissa was held to be only an extension of the assessee’s current business and could not be described as a new business undertaking.
CIT v. Alembic Glass Industries Ltd.
It was held that “where an assessee borrows money for expansion of its business the case squarely falls within the phraseology of Section 36(1)(iii) and the interest paid is allowable. Where, however, besides the existing business, money is borrowed for setting up a new activity or unit, it has first to be examined on facts, whether the new activity or unit and the existing business constitute ‘same business’ or they are entirely separate and distinct businesses altogether.”
77. The AOs for all years have placed reliance on the judgment of the Hon’ble Supreme Court in the case of Challapalli Sugars Ltd. v. CIT have stated that the treatment of the interest paid before the commencement of production on the amount borrowed for the acquisition and installation of the plant and machinery is to be ascertained in accordance with the normal accountancy prevailing in commerce and industry.
78. The Supreme Court in India Cements v. CIT has considered expenses for obtaining a loan for acquisition of asset to be a revenue expenditure. Interest on such a loan cannot, therefore, be considered a capital cost of an asset.
In Challapalli Sugar’s case (supra) the Supreme Court permitted capitalization because it was a new company which had not commenced business. The interest was capitalized upto the date on which the plant was put to use. This is clarified in the facts set out by the Supreme Court in each of the appeals before them where they have observed as follows:
During the relevant year and for the period prior to the commencement of its business the assessee paid Rs. 2,38,614 as interest.
It further noted the facts of the case as under:
The refinery started work on 1st Sept., 1954, from which date depreciation began to be calculated. The assessee-company capitalized all the expenses during the period of construction, including the interest amounting to Rs. 23,53,284 which had accrued from the date of borrowing to the date of the commencement of the business on the aforesaid loan and claimed depreciation on the full amount.
The Supreme Court has clearly observed that the same principles would not apply in the case of the company like the assessee, which is a running concern. Distinguishing its decision in India Cements Ltd.’s case (supra) the Supreme Court in Challapalli Sugar’s case (supra) clearly observed as follows.:
Another case to which reference has been made on behalf of the Revenue is India Cement Ltd. v. CIT …. This Court accordingly held that the amount of Rs. 84,633 was an allowable expenditure. This case too is of no assistance to the Revenue. The appellant-company in that case at the time it raised the loan was a running concern. Unlike the assessees in the present appeals, the loan raised by the appellant-company in the cited case was not before the commencement of production but at a later stage. The question of including the interest paid on the loan before the commencement of business in the actual cost of the plant did not raise in that case.
79. In the light of the above principle, let us examine the facts of the case. Learned counsel for the assessee in this connection first invited our attention towards the representative chart of the organizational structure reproduced in the written note which reads as under:
Sterlite Industries (I) Ltd.
Representative chart of organisational structure.
board of directors
|
|
CMD
_____________________________________________________________________
| | | | | |
| | | | | |
Head of Head of Head of Head of Head of Head of
Jelly CCR Aluminium Copper Optical Paper
Filled unit Sheets Smelter Fibre Project
Cables Plant Unit
80. There is a common management in the assessee-company supervising all the various projects of the assessee-company. Common functions like finance, secretarial, human resources, business development and taxation are handled by the corporate office. The divisional heads report to the board of directors, who takes the decisions affecting the working of the organisations. Employees of the company are freely transferable between the various divisions. As and when needed, employees are transferred from one division to another. Assets are also freely transferable from one division to another. In fact, the division having surplus/unutilised assets sends a memo to all other divisions through the corporate office. Such surplus/unutilised assets are used by the other divisions. The operations of each of the projects are headed by a CCM, but reviewed/controlled by the head office. Various issues concerning payments, security arrangements, etc. are looked by the head office. There is a common department looking after the purchase of equipments/imports, etc. Thus, the business as a whole of the assessee-company is conducted through a common agency thereby implying common administration of all the units of the assessee-company.
81. As far as the products produced by the assessee are concerned and how they are inter-dependent on each other the assessee has brought to our notice the following facts and circumstances:
(1) With regard to copper smelter and refinery at Tuticorin, assessee has pointed out that the assessee-company has been manufacturing Continuous CCR at Lonavala since 1990-91. The basic raw material for the manufacture of the continuous CCR is copper cathodes which was being imported by the company. The company, therefore, decided to set up a copper smelter and refinery plant to manufacture the copper cathodes which were the raw material for the manufacture of CCR. Thus, the copper smelter plant was set up at Tuticorin and the refinery plant was set up at Silvasa in the asst. yr. 1993-94. After the Tuticorin plant was commissioned the assessee-company had stopped the import of the copper cathodes. Now the company imports copper ore/concentrates, which are used at the Tuticorin plant to manufacture copper anode. The copper smelter plant at Tuticorin manufactures the copper anodes which are then refined at the refinery plant at Silvasa to produce copper cathodes. These copper cathodes are then used by the CCR plant at Lonavala for the manufacture of the CCR. The copper cathodes manufactured were entirely for the captive consumption of the factory at Lonavala manufacturing continuous CCR. These CCRs produced at Lonavala were partly used by the jelly filled telephone cables plant at Aurangabad. Thus, the copper smelting and refining project at Tuticorin set up with an objective of import substitution was nothing but a step in backward integration. The steps in the backward integration are explained as follows:
Continuous Cast Copper Rods (CCR) produced at Lonavala since 1991–Basic raw material used is copper cathodes
Copper cathodes were initially imported
Copper anodes produced by the copper smelter plant at Tuticorin
Copper anode processed to produce copper cathodes at the refinery at Tuticorin
Copper cathodes thus produced used totally by the CCR plant of the assessee
Import to the extent of captive home consumption of the copper cathodes stopped
The capacity of manufacturing copper rods has increased from 30,000 MT to 1,36,000 MT. The capacity of the copper smelter to produce the copper cathodes is 1,00,000 MT only which is all used upto manufacture the copper rods in its own business. Thus, entire production of the copper cathodes is used up in the assessee’s own business.
On the similar line assessee has demonstrated that cost of copper rods plant at Chinchpada was also an integral part of assessee’s manufacturing copper products at different locations. It has been pointed out that at this plant assessee used to manufacture cathodes from the raw material, copper anodes. The Tuticorin plant supplied copper anodes to the Chinchpada plant, which manufactures copper cathodes and the same was used as raw material for making copper rods which in turn are used in manufacturing of jelly filled cables. This plant was set up in 1995 and commenced from April, 1998. Similarly at the optical fibre plant at Aurangabad, assessee used to manufacture optical fibres which are used in telecom industry. Earlier, assessee has been manufacturing jelly filled cables which are also used in telecom industry, hence it is diversification of the products mix but continues to carry on the same business which is manufacture of telephone cables.
As far as aluminium sheets and foils at Sanaswadi are concerned, this plant was set up for the production of aluminium foils and sheets which can be used as cable wrap for the telecommunication cables at the factory at Aurangabad. Hence, the product of this plant is useful for the assessee’s other products. It is seen that this step is a backward integration step. Hence, the conclusion of the Revenue authorities that it is a new project and not inter-connected with the assessee’s business is without any substance. As far as the paper project at Vyara and aluminium smelter project at Orissa are concerned, these projects were transferred to the assessee along with optical fibre plant and a continuous cast copper rod plant in pursuant of the scheme of amalgamation for Sterlite Communication Ltd. It is seen from the record that paper division has been funded through internal accruals of the company which were transferred from within the company to the paper division. Thus, this project duly comes within the ambit of common management, common organization, funds, etc. of the assessee and being part of the common entity the claim of the assessee is justifiable. As far as the aluminium smelter plant at Orissa is concerned, this product is being used as raw material for foil manufacturing activity carried by the assessee. Therefore, it indicates that it is backward integration of the assessee’s existing manufacturing business activity. The learned CIT(A) has wrongly excluded this plant by treating it as independent one and, therefore, taking into consideration the overall aspects we are of the view that assessee is entitled to interest expenses incurred for expansion of its various extension plan. The alleged new plants are inter-dependent on the existing one, they are mere expansion of the existing business. Hence, grounds of appeals taken by the assessee in asst. yrs. 1991-92 to 1993-94 as well as grounds taken in cross-objections in asst. yrs. 1998-99 to 1999-2000 are allowed, whereas the grounds of appeal taken by the Revenue in all the assessment years are rejected.
82. In asst. yrs. 1998-99 and 1999-2000, the Revenue has taken two more grounds of appeal. In this connection they read as under:
Asst yr. 1998-99:
Ground No. 4: On the facts and in law, the learned CIT(A)-II, Mumbai erred in allowing interest and pre-operative expenses concerning existing industrial units expansion as revenue expenditure ignoring Expln. 8 to Section 43(1) of the IT Act and ignoring Tribunal, Calcutta Bench’s decision in J.C.T. Ltd. v. Asstt. CIT (1998) 61 TTJ (Cal) 206: (1998) 65 ITD 169 (Cal).
Asst. yr. 1999-2000:
Ground No. 3: On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in allowing interest and pre-operative expenses concerning existing industrial unit’s expansion as revenue expenditure ignoring Expln. 8 to Section 43(1) of the IT Act.
83. At the very outset, learned Counsel for the assessee pointed out that in view of the latest decision of Hon’ble Gujarat High Court rendered in the case of Dy. CIT v. Core Healthcare the judgment cited by the Revenue in the grounds of appeal would not be of any assistance to the Revenue.
84. We have duly considered the rival contentions. The Tribunal in J.C.T. Ltd. v. Asstt. CIT (1998) 61 TTJ (Cal) 206: (1998) 65 ITD 169 (Cal) while deciding the controversy has made the following observation:
29, From the discussion in the foregoing paragraphs it follows that provisions of Section 36(1)(iii) do not require that the interest on loans taken for acquisition of fixed assets should necessarily be treated as revenue expenditure in every case after the business has come into existence. If the interest is capitalised in the books of account and treated part of actual cost, the provisions of Section 36(1)(iii) would not be applicable because the amount of interest paid no longer retains its separate character and existence and represents integral part of the cost of the acquisition of the assets itself. We, therefore, hold that the contentions of the learned Counsel of the assessee that in view of the provisions of Section 36(1)(iii) the amount of interest has to be allowed deduction irrespective of the treatment given in the books of account, are not legally tenable and unacceptable. The provisions of Section 36(1)(iii) are applicable on interest on borrowings. These provisions have no application on the cost of assets to the assessee which is governed by the provisions of Section 43(1) and other allied provisions pertaining to depreciation allowance, etc.
30. In view of the discussion in the foregoing paragraphs we do not see force in this ground of appeal No. 4 of the assessee seeking deduction of the sum of Rs. 11,13,819 under Section 36(1)(iii) of the Act. The same is accordingly rejected.
However, the Hon’ble Gujarat High Court in the case of Core Healthcare (supra) . considered this aspect elaborately and in the headnote of the journal the viewpoint of the Hon’ble High Court has been summarised as under:
Business expenditure–Interest on borrowed capital–Scope of Section 36(1)(iii)–Whether borrowing on capital or revenue account not relevant–Capital borrowed for purchase of machinery to increase production in existing business–Machinery not put to use in accounting year–Not relevant–Interest on borrowed capital is deductible–No obligation to capitalise such interest–IT Act, 1961, Sections 36(1)(iii), 37, 43(1), Expln. 8.
Section 36(1)(iii) of the IT Act, 1961, is absolutely clear. It provides that the amount of interest paid in respect of capital borrowed for the purposes of the business shall be allowed in computing the income referred to in Section 28 of the Act. It is the settled legal position that interest paid/payable has to be in respect of capital borrowed for the purposes of business; the section nowhere stipulates that such borrowing has to be only on revenue account. The only requirement is that the interest must have been incurred for the purpose of capital borrowings made for the purpose of business. There is an inherent indication in the Act that any expenditure which is in the nature of capital expenditure would not be allowable as a deduction while computing the income chargeable under the head ‘Profits and gains of business or profession’ as laid down in Section 37 of the Act; but in the same section the portion in parentheses lays down that such expenditure has to be ‘not being expenditure of the nature described in Sections 30 to 36’. Therefore, there is a specific provision dealing with interest paid/payable in respect of the borrowings incurred for the purposes of business and hence the general provision, viz., s, 37 of the Act cannot come into play.
Therefore, whether the interest is paid for a borrowing which is utilised for acquisition of a capital asset or which is utilised for a revenue purpose loses its distinction. The view that interest which is capitalised after the commencement of the business but before an asset is first put to use, cannot be allowed as a revenue deduction under Section 36(1)(iii) of the Act, is against the plain language of the provisions of the Act. Where the legislature wanted to restrict allowance/deduction to a particular type of expenditure a specific provision has been incorporated in the Act, as for example, the provisions of Sections 37 and 35D.
The scope of Section 36(1)(iii) and Expln. 8 to Section 43(1) are different. They operate in separate fields and though both are relatable to computing income under Section 28, yet the nature of deductions are entirely distinct from each other. The concept and the meaning of ‘actual cost’ which is the definition laid down in Section 43(1) of the Act is for a limited purpose, viz., at a point of time when deduction is to be granted for the purpose of wear and tear (Section 32) or an incentive for the purpose of setting up a specified industry (Sections 32A and 33). The term ‘actual cost’ is applicable only in relation to an asset as against the phrase ‘capital borrowed’ used in Clause (iii) of Section 36(1) of the Act. The term ‘capital borrowed’ in the said provision is of a much wider import than the phrase ‘actual cost’. Explanation 8 only lays down that where an amount is paid/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 in the actual cost of such asset. The scope and ambit of this Explanation on a plain reading are restricted to a situation whereafter the asset is first put to use, the interest which is paid/payable would never form a part of the actual cost. The Explanation nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under Section 36(1)(iii). Explanation 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc., on a larger amount of actual cost. Neither in the notes on clauses nor in the memorandum explaining the provisions in the Finance Bill, 1986, is there any indication that in a converse situation interest has to be capitalised and further that such interest cannot be claimed as deduction under Section 36(1)(iii) of the Act. In fact, there is no mention about the deductibility or otherwise under Section 36(1)(iii). Section 36(1)(iii) does not make any distinction between the borrowing utilised to acquire a capital asset or otherwise. In fact, the phrase used in the said provision is ‘capital borrowed’. Therefore, the distinction about the interest having been capitalised or not loses its significance, inasmuch as if the capital is borrowed for the purposes of business, the interest is allowable as a deductible item of expenditure under Section 36(1)(iii) while computing the income under Section 28 of the Act. There is no other prescription in the provisions.
The assessee- company was principally engaged in the business of manufacturing intravenous injections of two types–large volumes parenteral, i.e., LVP and sterile water for injection (small volumes parenteral), i.e., SVP. The commercial production had commenced in February, 1988, and the manufacturing capacity had been generally increased from time to time. During the financial year ended on 13th March, 1992, the company installed three more machines (in addition to the existing three machines) for the production of LVP and SVP resulting in substantial increase in the capacity of the manufactured products. The assessee claimed deduction of Rs. 1,56,76,000 being interest paid towards borrowings made for the purpose of acquiring the new machinery. The AO and the CIT(A) rejected the claim. The Tribunal, however, allowed the deduction on further appeal.
In view of the Hon’ble High Court decision we do not find any merit in these grounds of appeal. They are dismissed.
85. The next dispute in asst. yrs. 1998-99 and 1999-2000 relates to computation of income under Section 115JA of the Act. The grounds taken by the Revenue in its appeal read as under:
1. On the facts and in law, the learned CIT(A)-II, Mumbai, erred in holding that Sections 210 and 211 of the Companies Act allowed the assessee maintenance of two different sets of accounts, one for the shareholders and the other for income computation under Section 115JA of the IT Act with no legal basis against business ethics.
2. On the facts and in law, the learned CIT(A)-II, Mumbai, erred in holding that interest and pre-operative expenses could be debited to the P&L account prepared for the purposes of Section 115JA of the IT Act to be foregone for the net profit determined under Section 210 and Section 211 of the Companies Act.
3. On the facts and in law, the learned CIT(A)-II, Mumbai, erred in accepting the book results overlooking the conclusive proof in the assessment order that the accounts with the IT return did not present assessee’s true and fair affairs.
Asst. yr. 1999-2000:
Appeal No. ITA 4909/Mum/2001: (Departmental appeal)
1. On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in holding that Sections 210 and 211 of the Companies Act allowed the assessee maintenance of two different sets of accounts, one for the shareholders and the other for income computation under Section 115JA of the IT Act with no legal basis against business ethics.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A), Mumbai, erred in accepting the book results overlooking the conclusive proof in the assessment order that the accounts with the IT return did not present assessee’s true and fair affairs.
Since there is no dispute on facts on all vital points in both the assessment years, therefore, for the facility of reference we will be referring the facts mainly from asst. yr. 1998-99. The following details shall depict the income returned by the assessee and assessed by the AO in 1998-99:
__________________________________________________________________________
S. Total income Returned by the Assessed by the AO
No. assessee-company
__________________________________________________________________________
1. As per the provisions Nil Rs. 19,55,47,224
of Section 115JA of the (being 30% of the
IT Act. adjusted book pro
fit of Rs. 65,18,
24, 082)
__________________________________________________________________________
2. As per the normal Loss of Rs. 81,83 Rs. 56,32,31,804
provisions of the ,39,809 (without (after allowing
IT Act, other than claiming deprec- depreciation and
Section 115JA iation and deduc- deductions under
tions allowable Sections 80-Iand
under Sections 80-IA in respect
80-I and 80-IA) of the eligible
units.)
__________________________________________________________________________
Since the total income in terms of provisions of the IT Act other than Section 115JA exceeded the total income computed in terms of Section 115JA, the AO demanded tax on the total income of Rs. 56,32,31,804."
Against the loss of Rs. 81,83,39,809, the AO has determined the income at Rs. 56,32,31,804, which has been made by capitalizing the pre-operative expenses and interest which have been claimed by the assessee as revenue expenses. Such expenses are roughly amounting to Rs. 1,84,80,35,539. In the foregoing para we have already decided the admissibility of these expenses. Thus figure of Rs. 56,32,31,805 is not of much relevance for computing the taxes even under Section 115JA of the Act.
86. The issue in these grounds of appeal relates to computation of income under Section 115JA. The brief facts of the case are that the assessee-company for the purposes of Section 210 of the Companies Act follows the accounting year which is July-June, (“AGM accounts”). These accounts are prepared for presentation by the board of directors at the AGM of the company in the form of the printed annual report. These accounts are prepared for the declaration of dividend and the same are also circulated to the shareholders. The company also prepares another set of accounts for complying with the SEBI directive requiring a listed company to publish financial results. (“SEBI accounts”). A listed company is required to furnish half-yearly results in a prescribed proforma within a specified period. However, if such unaudited results substantially differ (more than 20 per cent) from the audited results of the company, then the company has to explain the reasons thereof. However w.e.f. June, 1998,- such unaudited accounts have to be submitted on quarterly basis instead of half-yearly basis. However, for income-tax purposes, the IT Act, 1961 requires a separate compilation of final account for the previous year prescribed under the IT Act which ends on the 31st of March of the previous year. This was made mandatory from the asst. yr. 1989-90, whereby it became mandatory, as per the IT Act, 1961, to close the accounts on 31st March. Thus, in consonance with the said Act, the assessee-company followed the accounting year ending on 31st March (IT accounts). This practise has been followed by the company since the asst. yr. 1989-90 and has been accepted by the AO and the GIT(A) all along. The accounts of the assessee-company were thus prepared, in the present case or me assessee, for the period 1st April, 1997 to 31st March, 1998 (for asst. yr. 1998-99) and 1st April, 1998 to 31st March, 1999 (for asst. yr. 1999-2000). For the asst. yrs. 1998-99 and 1999-2000, being the years under appeal, the assessee-company came under the purview of the newly introduced Section 115JA of the Act and was thus subjected to imposition of tax on 30 per cent of the book profits in accordance with the provisions of the Section 115JA(1) of the Act.
87. The assessee-company for the asst. yr. 1998-99 filed its return of income at a. returned loss of Rs. 81,83,39,809. The return was appended with the computation, the duly audited account statement for year ending 31st March, 1998, and also the P&L a/c of the units claiming deduction under Sections 80-I and 80-IA. The account statements filed with the return showed a loss of Rs. 116.32 crores. Evidently, because of book loss the assessee was not liable to pay taxes under Section 115JA.
The computation of income filed with the return of income by the assessee is as follows:
Amount (Rs.)
(I) Total income for the purposes of Nil
Section 115JA:
(II) Total income for provisions of
the Act other than Section 115JA of the Act:
Net loss as per the P&L a/c -1,16,32,94,136
Less: Income on tax-free bonds @ 9% on Rs. 9 crores 21,77,000
_________________
-1,16,54,71,136
Add: Depreciation not claimed now 34,69,34,339
Add: Disallowance under Section 43B 4,55,59,050
_______________
39,24,93,389
Less: 43B paid before the filing of 34,71,31,327
the return 4,53,62,062
_______________
34,71,31,327 -81,83,39,809
________________
Less: (1) Deduction under Section 80-I 91,42,599
for Waluj unit (4th year)
(30% of profit Rs. 3,04,75,331)
(2) Deduction under Section 80-IA for 86,91,52,026
JFTC unit (4th year) _______________
To be considered if necessary 87,82,94,625
_______________
Returned income Nil
Tax payable Nil
Asst. yr. 1999-2000:
The assessee-company for the asst. yr. 1999-2000 filed its return of income at a returned loss of Rs. 71,69,11,542. The return was appended with the computation, the duly audited account statement for year ending 31st March, 1998 and also the P&L a/c of the units claiming deduction under Sections 80-I and 80-IA. The account statements filed with the return showed a book loss of Rs. 85,87,30,011. Evidently, because of book loss the assessee was not liable to pay taxes under Section 115JA.
The computation of income filed with the return of income by the assessee is as follows:
Amount (Rs.)
(I) Total income for the purposes of Nil
Section 115JA:
(II) Total income for provisions of the Act other
than Section 115JA of the Act:
Net loss as per the P&L a/c -85,87,30,011
Less: Income on tax-free bonds 1,20,65,475
Add: Depreciation as per books 2,11,45,10,764 -87,07,95,846
Add: Disallowance under Section 43B 90,22,642 2,12,35,33,406
________________ ________________
1,25,27,37,920
Less: depreciation as per IT Rules
claimed to the extent of
90% of the allowable amount of 1,96,96,49,462
Rs. 2,18,84,99,402 ________________
-71,69,11,542
________________
Returned income Nil
Tax payable Nil
88. However, during the course of the assessment proceedings for both the years, the learned AO called for the printed annual reports for the years ended 30th June, 1998 and 30th June, 1999, i.e., the Companies Act accounts and on comparison of the Companies Act accounts and the income-tax accounts found the following:
Asst. yr. 1998-99: The printed P&L a/c for the year ended 30th June, 1998, declared a profit before taxation of Rs. 157.73 crores whereas the P&L a/c for the year ended 31st March, 1998, as per IT return disclosed a net loss of Rs. 116.32 crores.
Asst. yr. 1999-2000: The printed P&L a/c for the year ended 30th June, 1999, declared a profit after taxation of Rs. 160.79 crores whereas the P&L a/c for the year ended 31st March, 1999 as per IT return disclosed a net loss of Rs. 85.87 crores.
The AO observed that for both the years, the profits in the AGM accounts were mainly as a result of capitalising interest and pre-operative expenses while in Section 115JA accounts such expenditure was claimed as revenue expenditure by debiting the same to the P&L a/c. Also, depreciation had been charged in terms of Schedule XIV to the Companies Act, 1956, in the annual printed accounts whereas in the P&L a/c attached to the IT return, the depreciation was claimed in terms of the IT Act and Rules.
89. It is worth to state at the outset that AO while adopting the methodology in the computation of income under Section 115JA has dealt with various issues at length. He has basically considered the object behind the introduction of Section 115JA, the principle of accountancy and has considered the various decisions of the Hon’ble Supreme Court, High Courts and different Benches of the Tribunal. He has also considered the acceptability of the guidance note issued regarding accounting standard laid down by the ICAI. According to the AO the objective behind introduction of Section 115JA was to charge some minimum tax on prosperous dividend paying zero tax companies, As observed earlier, assessee-company closed its annual accounts in terms of the Companies Act on 30th of June, whereas for the purpose of income-tax it has to close its account on 31st March every year. In the printed annual reports for the year ending 30th June, 1997, and 30th June, 1998, the assessee showed profits mainly as a result of capitalizing interest and pre-operative expenses relating to certain projects under expansion programme. While in P&L a/c for the years ending 31st March, 1997 and 31st March, 1998, prepared for the IT purposes and appended to the IT return, such expenditure was claimed as revenue expenditure by debiting the same to the P&L a/c. According to the AO the same principle of accountancy ought to have been followed by the assessee in preparing the annual accounts for the purpose of the shareholders as well as for the purpose of IT returns. The AO was of the opinion that pre-operative expenses in question should be treated as capital expenditure and not claimed as revenue . expenditure in the computation of total income either under the provisions of Section 115JA or under the other provisions of the IT Act.
90. With the above background, learned AO has examined the issue regarding general principle of accountancy and accounting standard prescribed by ICAI, legislative intention and judicial interpretation and ultimately computed the book profit of the assessee for the purpose of Section 115JA on a different figure than the one adopted by the assessee.
91. Dissatisfied with the computation of the AO assessee took the matter in appeal before learned CIT(A). Learned CIT(A) examined the issue in detail and arrived at a conclusion that treatment given by the assessee to the interest and pre-operative expenses as revenue expenses did not violate any accounting standard prescribed by ICAI nor was it contrary to any judicial decision. Learned first appellate authority further held that possibility of following different accounting policies by the company in separate P&L a/c prepared for the Companies Act and prepared under Section 115JA of the IT Act have duly been recognized in various judgments. For fortifying his stand learned CIT(A) has relied upon the judgments of Tribunal in Asstt. CIT v. Bell Ceramics Ltd. (1999) 64 TTJ (Ahd) 771: (1999) 69 ITD 156 (Ahd), Nippon Demo Ispat Ltd. v. Dy CIT (1998) 62 TTJ (Cal) 544: (1998) 67 ITD 205 (Cal) and Modern Woollens Ltd. v. Dy. CIT (1993) 47 ITD 154 (Bom).
92. Before us, learned Departmental Representative relied upon the order of AO and contended that assessee has been preparing two separate accounts in accordance of Parts II and III of the Schedule VI to the Companies Act, i.e., one meant for the shareholders and the other for the purpose of Section 115JA of the IT Act, which is not permissible and AO has rightly computed the income of assessee under Section 115JA of the Act. On the other hand, learned Counsel for the assessee filed a detailed written submissions running into more than 70 pages, wherein statutory provisions of the Companies Act, Sections 115J, 115JA and 115JB have been incorporated. The assessee has also made a reference of the judgment reported in (2004) 186 CTR (Bom) 534: (2003) 262 ITR 330 (Bom) (supra) rendered by Hon’ble Bombay High’ Court in the case of Kinetic Motors v. Dy. CIT (supra), Nippon Demo Ispat v. Dy. CIT (supra), (1999) 64 TTJ (Ahd) 771: (1999) 69 ITD 156 (Ahd) (supra), (1993) 47 ITD 154 (Bom) (supra), which have been relied by the learned CIT(A). The gist of assessee’s submission can be noticed as under:
(i) Section 115JA(1) provides that where the total income as computed under the provisions of the Act is less than 30 per cent of the book profit, the total income chargeable to tax shall be deemed to be the amount equal to 30 per cent of such book profit.
(ii) Further, Section 115JA(2) imposes two requirements in respect of the mandatory final account to be prepared under Section 115JA which are:
1. The accounts must comply with Schedule VI, Parts II and in.
2. Insofar as depreciation is concerned, the final accounts compiled for the purpose of the IT Act must adopt the same rate and the same method as is adopted in the accounts prepared under the Companies Act.
(iii) Schedule VI, Parts II and III deal with the disclosure requirements of the various items in the P&L a/c. They do not enunciate any accounting principles. The same are absolutely silent on the accounting treatments of the various P&L a/c items.
(iv) Assessee’s accounts prepared under Section 115JA of the IT Act for asst. yr. 1998-99 clearly disclose the interest and finance charges paid by the company without making any adjustments for pre-operative expenditure, and is, as such, in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956, thereby meeting the requirements of Section 115JA of the IT Act.
(v) The accounts were thus prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956, thereby meeting the requirements of Section 115JA of the IT Act. The account statements filed with the return and also the accompanying Form 3CB were duly audited by M/s Chaturvedi & Shah and M/s Das & Prasad for the purposes of Section 44AB of the IT Act. The auditors also gave the supplementary report required under Section 44AB. The statutory auditors thus certified that provisions of Parts II and III have been adhered to in the preparation of the P&L a/c accompanying the return filed by the assessee for the purpose of this section.
(vi) In compliance with the mandatory requirements of Section 115JA and for the purpose of the Section 115JA, the assessee-company accordingly prepared its P&L a/c (“115JA accounts”) for the year ended 31st March, 1998 and 31st March, 1999. The assessee in its Section 115JA accounts claimed the interest and preoperative expenses as revenue expenditure whereas in the company accounts the same have been capitalised. This process of capitalising the said expenses in the company accounts and claiming them as revenue in the IT accounts have been followed by the assessee all through the years since 1989-90 and have been accepted by the AO and the CIT(A) as such. Thus, two separate sets of accounts were prepared by the assessee, one called the AGM/company accounts and the other being the Section 115JA accounts.
(vii) The Section 115JA itself permits, in fact requires the assessee, for the purpose of this section, preparation of a separate P&L a/c subject to the condition that it conforms to the provisions of Parts II and III of Schedule VI. The proviso to the Section 115JA lays down that the P&L a/c prepared in accordance with the provisions of Sub-section (2) need not be laid before the AGM. Thus, the section requires compulsory preparation of a P&L a/c which necessarily has to be, other than the P&L a/c prepared under the Companies Act though there is no prohibition to adopting the same if the accounting year is a common accounting year.
(viii) In respect of the P&L a/c required by Section 115JA there was no requirement about consistency in accounting policies vis-a-vis those adopted for any other P&L a/c (except for the requirement that in respect of depreciation the same method and rate have to be adopted in the accounts prepared under Section 115JA of the IT Act as the method and rate adopted for the purpose of Section 210 of the Companies Act).
(ix) The legislature was aware that different accounting policies can result in different profits. It, therefore, chose that at least in relation to depreciation the accounting policy should be constant. This was introduced by way of two provisos to Section 115JA(2). These provisos were absent in Section 115J. The objective behind the proviso requiring the companies to calculate depreciation by adopting the same method and same rate as it has adopted in the account prepared under the Companies Act is to standardize accounting policies only in the area of depreciation.
(x) The legislature has clearly chosen not to standardize accounting policies in other areas. This standardization has now been introduced through Section 115JB.
(xi) The AO has sought to distinguish this position by holding that in any case compliance with the guidance notes and standards issued by ICAI is mandatory and that this was so even prior to introduction of Section 115JB. As pointed out earlier this assumption of the AO is incorrect. Insofar as the interpretation of Section 115JA is concerned the interpretation of Section 115JB clearly brings out the position that in Section 115JA it was not necessary to standardize accounting policies other than accounting policy relating to depreciation.
(xii) Compliance with Section 145 of the IT Act was duly done by the assessee. In compliance with the above section, the accounts of the assessee are correct and complete and they follow the mercantile system of accounting as permitted by Section 145(1) of the Act. Further, the assessee has followed the accounting policies and standards in the preparation of the accounts for the years under appeal which it has been regularly following in the preparation of its accounts. In particular, the method, whereby the interest and the pre-operative expenses were claimed by the assessee as revenue expenses, has been followed by the assesee regularly for the preparation of IT accounts since the year 1989-90 onwards. In this connection it may be noted here that the assessee in its company accounts has been regularly capitalising the same expenses.
(xiii) The assessee has also followed the accounting standards notified under Section 145(2) and in particular has adopted the principle of prudence, substance over form and materiality specified in AS-1 which has been notified vide Notification No. SO 69(E), dt. 25th Jan., 1996. The assessee has also followed the fundamental accounting assumptions of going concern, consistency and accrual. Therefore, in view of the Section 145 of the Act, the action of the AO in rejecting the accounts of the assessee cannot be permitted under Section 145(3) of the Act.
(xiv) The accounting standards have been formulated for the purpose of accounts prepared under Section 210 of the Companies Act, 1956. Section 210 of the Companies Act, 1956, simply states that at every AGM of a company, the board of directors of the company shall lay before the company:
(a) Balance sheet as at the end of the period specified in Sub-section (3); and
(b) P&L a/c for that period.
The Section 210 of the Companies Act simply requires the preparation of a P&L a/c for the presentation at the AGM of the company, for circulation amongst the shareholders of the company and for the purpose of the declaration of the dividend of the company. Nothing is specified in the said section regarding the preparation of such P&L a/c and the accounting standards to be followed in the preparation of such P&L a/c to be placed before the AGM.
(xv) The reference in the Companies Act requiring compliance with the accounting standards is to be found in Section 211 of the Companies Act, 1956.
(xvi) There is no particular accounting standard prescribed by the ICAI in-regard to the interest and pre-operative expenses that the assessee can be accused of not following. It is submitted that there is a certain definite and unanimous viewpoint that interest and pre-operative expenses relating to the period prior to the commencement of production in the case of a new unit should be capitalised. This was accordingly laid down in the AS-10, correctly relied upon by the AO also. Analysing the AS-10, it is seen that the said AS deals with the accounting for the fixed assets.
(xvii) The provisions of the said sub-section do not seem to empower the AO to disturb the profit as shown by the assessee. In a case where P&L a/c is prepared in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, the AO will have no power to disturb the book profit. The language used in Sub-section (2) of the Section 115JA is simple and clear enough.
(xviii) There is no doubt that the computation of the book profit in the 115JA accounts provided a tax advantage to the assessee. It is relevant to mention that this argument of the accounts being a device for tax planning has also been considered by the Tribunal in the context of an accounting treatment which resulted in effectively reducing book profits for purposes of Section 115J. 93. Thus, the main issue for our adjudication in this appeal relates to whether assessee can prepare two separate accounts under the Companies Act, one for the purpose of AGM and the other for computation of income under Section 115JA. For appreciating the controversy it is imperative upon us to take note of Section 115JA, which reads as under:
115JA. Deemed income relating to certain companies–(1) Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company, the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997, but before the 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year), is less than thirty per cent of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.
(2) Every assessee, being a company, shall, for the purposes of this section prepare its P&L a/c for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):
Provided that while preparing P&L a/c, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the P&L a/c laid before the company at its annual general meeting in accordance with the provisions of Section 210 of the Companies Act, 1956 (1 of 1956) ;
Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956), which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.
Explanation: For the purposes of this section, ‘book profit’ means the net profit as. shown in the P&L a/c for the relevant previous year prepared under Sub-section (2), as increased by….
It is also worth to note the comparative position of Sections 115J, 115JA and 115JB as they stood at relevant time; such comparison has been propounded by the assessee in its written submissions at p. 104 and the same reads as under:
_________________________________________________________________________________________
Particulars Section 115J Section 115JA Section 115JB
_________________________________________________________________________________________
Applicable Asst yr. 1989-90 Asst. yr. 1997 98 From Asst. yr.
for to Asst. to Asst. 2001-02
yr. 1990-91 yr. 2000-01 onwards
_______________________________________________________________________________________
Preparation Every assessee, being a Every assessee, being a being Every assessee,
of company shall, for the company shall, for the company shall, for the
books of company shall, for the purpose of this section purpose of this section
account purpose of this section prepare its P&L a/c for the prepare its P&L a/c
prepare its P&L a/c for the relevant previous for the relevant previous
the relevant previous year accordance with year in accordance with
year in accordance the provisions of the provisions of Parts
with the provisions of Parts II of Schedule VI II of Schedule VI to
Parts II of Schedule VI to Companies Act. Companies Act.
to Companies Act.
_______________________________________________________________________________________
Accounting -- While preparing P&L While preparing P&L a/c,
for a/c, the depreciation the depreciation shall be
Depreciation shall be calculated on calculated on the same
the same method and method and rates which
rates which have been have been adopted for
adopted for calculating calculating the
the depreciation for the depreciation for the
purpose of preparing P&L purpose of preparing P&L
a/c laid before company a/c laid before company
in AGM in AGM
_______________________________________________________________________________________
Accounting -- -- The accounting policies
Policies and accounting
standards adopted for
preparing the accounts
shall be same as have
been adopted for the
purpose of preparing
P&L a/c laid before
company in
AGM
_______________________________________________________________________________________
94. As far as position of Section 115J as it was existing in asst. yrs. 1989-90 and 1990-91 is concerned, we have dealt with and therein following the judgment of Hon’ble Supreme Court rendered in the case of Apollo Tyres, (supra) as well as Hon’ble Bombay High Court (2004) 186 CTR (Bom) 534: (2003) 262 ITR 330 (Bom) (supra), we have observed that AO cannot make any adjustment of depreciation while computing the book profit under Section 115J of the Act. Here, we are concerned with Section 115JA of the IT Act and we find that the addition of two provisos to Section 115JA makes it entirely different than Section 115J. These provisos in Section 115JA make it abundantly clear that in all cases, i.e., whether the assessee is following the same accounting year for the purpose of the Companies Act and IT Act or different accounting years as in the present case, a separate P&L a/c. has to be prepared for the purpose of Section 115JA because otherwise the provisos to Section 115JA cannot be put to use. It is provided in the first proviso that the assessee shall adopt the same rate and method for depreciation as adopted by it in the accounts prepared for presentation in annual general meeting. The second proviso is for those companies whose accounting year as per Companies Act is different than the accounting year for IT Act as in the present case and it is provided in this proviso that in such P&L a/c, the method and rate of depreciation shall be same as adopted in AGM accounts. From the same, it is clear that the legislatures are aware that there can be difference in the profit as per AGM accounts and as per the P&L a/c prepared for the purpose of Section 115JA of the IT Act but parity has been specifically prescribed regarding depreciation only and not regarding any other aspect. This view is also supported by the subsequent provisions for the same purpose w.e.f. asst. yr. 2001-02 onwards as per which, apart from parity with AGM accounts with regard to depreciation, parity has been prescribed regarding adoption of accounting policies and accounting standards also and hence it is apparent that such parity is not prescribed in Section 115JA.
95. In view of above discussion, it is seen that with regard to Section 115JA, the requirement is that the P&L a/c prepared for the purpose of Section 115JA shall be as per Parts II and III of Schedule VI to the Companies Act, 1956, as per the provisions of Section 115JA(2) and as per the provisos to this section, the method and rate of depreciation shall be same as has been adopted by the assessee for the purpose of AGM accounts. The assessee had followed different methods for depreciation, i.e., SLM for AGM accounts and WDV for 115JA accounts but the learned CIT(A) has held that the depreciation as per AGM accounts has to be followed in 115JA accounts. This is accepted by the assessee and the difference’ in the depreciation is duly added back to the profit computed by the assessee under Section 115JA. Hence, the dispute now remains regarding accounting of interest and pre-operative expenses, which have been capitalized by the assessee in the AGM accounts but has been charged to the P&L a/c prepared for the purpose of Section 115JA. Now, we have to decide as to whether this P&L a/c prepared by the assessee under Section 115JA and approved by learned CIT(A) is legally correct or not as per the requirements of Section 115JA of the IT Act.
96. In this regard we find that as per Section 115JA(2), the requirement prescribed is that the P&L a/c shall be as per Parts II and III of Schedule VI to the Companies Act, 1956. The other requirement as per the provisos is already rectified by learned CIT(A) and accepted by the assessee. In this regard, we have gone through the Part II and Part III of Schedule VI to the Companies Act, 1956, and we find that the first para of such Part II prescribes that this part is also applicable to income and expenditure account referred to in Sub-section 210(2) of the Companies Act, 1956, as they apply to a P&L a/c and hence this para is not relevant for us in this case. The second para really prescribes the requirement regarding the profit as per the P&L a/c but the remaining paras being para Nos. 3 to 6 deal with various disclosure requirements and have no bearing on the amount of profit and/or loss as per the P&L a/c. Similarly, Part III of Schedule VI is regarding interpretation of various terms such as ‘provision’, ‘reserve’, ‘capital reserve’, ‘quoted investment’ and ‘unquoted investment’, etc., and hence the same has also no bearing on the amount of profit and/or loss as per the P&L a/c. We are, therefore, concerned with para 2 of Part II of Schedule VI and the same is reproduced below for ready reference:
The P&L a/c–
(a) shall be made out as clearly to disclose the result of the working of the company during the period covered by the accounts; and
(b) shall disclose every material feature, including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of an exceptional nature.
97. From the above, we find that as per this clause of Part II of Schedule VI to the Companies Act, 1956, the only requirement is that the P&L a/c shall be so made out as clearly to disclose the result of the working of the company during the period covered by the account. We, therefore, shall examine as to whether the P&L a/c prepared by the assessee in the present case by debiting the interest and pre-operative expenses discloses the result of working of the company during the accounting period or not. In this regard, we find that “The Institute of Chartered Accountants of India” (ICAI) has prescribed AS-16 regarding treatment of borrowing cost but this AS 16 is applicable from 1st April, 2000, and prior to that during the period relevant to the assessment years before us, this aspect was covered by AS 10 and in particular Para 9.2 which stands deleted from this date, i.e., 1st April, 2000. Para 9.2 of AS-10 reads as under:
9.2 Financing costs relating to deferred credits or to borrowed funds attributable to construction or acquisition of fixed assets for the period upto the completion of construction or acquisition of fixed assets are also sometimes included in the gross book value of the asset to which they relate. However, financing costs (including interest) on fixed assets purchased on a deferred credit basis or on monies borrowed for construction or acquisition of fixed assets are not capitalised to the extent that such costs relate to periods after such assets are ready to be put to use.
98. From the above, we find that as per this clause of AS 10, capitalisation of interest after such assets are ready to put to use is specifically denied but for the period prior to that, it is stated that such cost is sometimes included in the gross block. This means that the interest cost for the earlier period, i.e., the period prior to the assets being ready to be put to use can be capitalized also but the same is not mandatory and hence charging of interest to the P&L a/c in the present case in 115JA accounts is not against this accounting standard and, therefore, we are of the considered opinion that there is no reason or basis to hold that this P&L a/c does not disclose the working result of the assessee-company. So far, separate treatment of interest cost in the AGM accounts is concerned, we find that AS-1, i.e., disclosure of accounting policies also recognises that there may be different accounting policies with regard to various issues. Paras 14 and 15 of AS-1 deal with this aspect and we reproduce the same for ready reference:
14. The following are examples of the areas in which different accounting policies may be adopted by different enterprises:
Methods of depreciation, depletion and amortisation
Treatment of expenditure during construction
Conversion or translation of foreign currency items
Valuation of inventories
Treatment of goodwill
Valuation of investments
Treatment of retirement benefits
Recognition of profit on long-term contracts
Valuation of fixed assets
Treatment of contingent liabilities.
15. The above list of examples is not intended to be exhaustive.
99. From the above, it can be seen that there may be different accounting policies with regard to the treatment of expenditure during construction, which is the subject-matter before us, i.e., interest and pre-operative expenses incurred before the assets are ready to put to use and hence there may be different accounting policies with regard to this item also. Since AS-1 recognises existence of different accounting policies with regard to this item and AS-10 does not mandatorily prescribe capitalisation of interest incurred before the assets are ready to put to use, we are of the opinion that both the treatments are as per the accounting standards and since the Section 115JA does not prescribe parity with AGM accounts in this regard, the same cannot be rejected and has to accepted.
100. Our above view is also supported by the order of the Calcutta Bench of the Tribunal rendered in the case of Bakampur Chini Mills Ltd. as per ITA Nos. 1422 and 1588/Cal/1999, dt. 7th June, 2002, copy of which is available on pp. 223 to 231 of the paper book. It was held by the Tribunal in this case also that the assessee is entitled to have a different P&L a/c for the purposes of Section 115JA(2) and the same may be different than the AGM accounts provided. The 115JA(2) accounts are prepared as per Parts II and III of Schedule VI to the Companies Act, 1956. This Tribunal order is regarding asst. yr. 1997-98 and the similar issue was decided in favour of the assessee by the Tribunal in asst. yrs. 1998-99 and 1999-2000 and copies of these Tribunal orders are available on pp. 233 to 239 and 240 to 246 of the paper book, In view of this, we find that the order of learned CIT(A) on this issue in both years does not call for any interference from our side and we uphold the same.
101. The next dispute in asst. yr. 1998-99 as per ground No. 5 in ITA 4342/Mum/2001 and ground No. 1 in ITA No. 4908/Mum/2001 (both appeals of the Department) is regarding depreciation for the purpose of calculation of deduction under Sections 80-I and 80-IA of the IT Act, 1961.
102. In course of arguments before us, both the sides agreed that on this issue, the judgment of the Special Bench of the Tribunal on this issue should be followed and if the same is not available, the AO may be directed to decide this issue afresh in the light of the said judgment of the Special Bench of the Tribunal.
103. We have received the copy of the judgment of the Special Bench of the Tribunal rendered in the case of Vahid Paper Converters and Ors. v. ITO and Ors. as per ITA No. 1686/A/2004, dt. 9th Nov., 2005 [reported at (2006) 100 TTJ (Ahd) (SB) 532–Ed.]. In this judgment, it is held by the Special Bench of the Tribunal that for the purpose of computing deduction under Chapter VTA, depreciation, which though is allowable but not claimed in the return for normal computation of income, has to be allowed. Respectfully following this judgment, this issue is decided in favour of the Revenue. This ground of the Revenue is allowed.
104. The next dispute in asst.. yr. 1998-99 as per ground No. 2 in ITA No. 4908/Mum/2001 (appeal of the Department) is regarding charging of interest under Section 220(2) of the IT Act, 1961.
105. Briefly stated, facts are that as per intimation dt, 4th Oct., 1999, the AO allowed refund of Rs. 1371.33 lakhs but as per order under Section 143(3), the AO computed the income at a higher figure resulting into demand. The AO charged interest under Section 220(2) on such excess refund, granted as per the intimation. On appeal, learned CIT(A) in his rectification order under Section 154 stated that the AO was not justified in charging interest under Section 220(2). It is also stated that the AO has not given any reason as to why the interest under Section 220(2) was charged by him. The Revenue is in appeal before us against this order of learned CIT(A).
106. Learned Departmental Representative of the Revenue relied upon the assessment order, whereas learned Counsel of the assessee supported the order of learned CIT(A) and relied on the written submissions. In the written submissions, it is stated that as per CBDT Circular No. 7 of 2003, dt. 5th Sept., 2003 as reported in (2003) 184 CTR (St) 33: (2003) 263 ITR (St) 62, that the assessee has to pay interest for shortfall in the payment of advance tax from the 1st day of the assessment year till the date of regular assessment, nothing is chargeable from the assessee for having utilized the refund amount till the date of regular assessment. It was also submitted that keeping this in view, Section 234D was inserted in the IT Act w.e.f. 1st June, 2003, for charging of interest on excess refund granted at the time of summary assessment. It was also submitted that interest under Section 220(2) is chargeable if the demand as per notice of demand under Section 156 is not paid within 35 days of the service of such demand notice and in support of this, reliance was placed on the Tribunal order rendered in the case of Gujarat Machinery Mfrs. Ltd. v. Dy CIT (1996) 56 TTJ (Ahd) 184: (1997) 60 ITD 422 (Ahd).
107. We have considered rival submissions and perused the materials on record and have gone through the relevant provisions of law. We find that as per Section 220(2), interest is chargeable only after expiry of specified period after service of notice of demand under Section 156 if the payment is not made during the specified period and in the present case, no such delay in payment of demand raised under Section 156 is pointed out. Interest on excess refund is chargeable under Section 234D w.e.f. 1st April, 2003, and under these facts and circumstances, we find no reason to interfere in the order of learned CIT(A) on this issue and we uphold the same. This ground of Revenue is rejected.
108. We summarise the result as under:
(i) The cross-objections filed by the assessee in asst. yrs. 1998-99 and 1999-2000 are allowed.
(ii) The appeals of the assessee filed in all the assessment years are partly allowed.
(iii) All the appeals of the Department filed in 1991-92, 1993-94 to 1997-98 are partly allowed, whereas ITA Nos. 4342, 4908, 4909/Mum/2001 pertaining to asst. yrs. 1998-99 and 1999-2000 are dismissed.