TMI Blog2011 (2) TMI 1514X X X X Extracts X X X X X X X X Extracts X X X X ..... s not specified in ninth schedule. Your appellant submits that as it fulfills all the conditions laid clown for claim of relief u/s.80-I 80-IA of the Act, the learned CIT (Appeals) ought to have granted deduction u/s.8O-I 80-IA of the I.T. Act. Your appellant submits that deduction as claimed u/s.80-I/80-IA be allowed now. 2. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of ₹ 11,07,179/- being reimbursement of 50% of interest on housing loan taken by the employees on wrong premises. Your appellant submits that it has never mentioned that in assessment year 1996-97 such disallowance has been confirmed as alleged by the learned CIT(A). On the contrary in the written submission filed before the CIT(A), your appellant has stated that disallowance has been deleted by the CIT(A) in assessment year 1996-97. Your appellant further submits that it has not given any loan to the employees, but the employees of the assessee company have taken loan from the parties other than the assessee company and the company has actually reimbursed 50 per cent of the interest paid on the loan taken by the employees. The reimbursement of interest is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reimbursed a part of the Gas connection charges of the employees. Your appellant submits that such reimbursement of Gas connection charges is actual payment and not the book adjustment as observed by the learned Commissioner (Appeals). Your further appellant submits that the expenditure has been incurred to keep healthy relations with the employees of the Company and in the nature of Staff Welfare expenses. It is submitted that the expenditure has been incurred for the purpose of business and incidental to the business and therefore, the learned Commissioner of Income-tax (Appeals) is not at all justified in confirming the disallowance. It is submitted that it be so held now and disallowance made be deleted now. 5. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of ₹ 1,98,01,130/- being interest on borrowings made for Hazira - Ankleshwar Pipeline Project (HAPi). The main business of your appellant is Natural Gas distribution through pipelines started since 1989. The assessee company has already got a 930 km long pipeline network in place starting from Ankleshwar and Bharuch and the HAPi project was merely an increase of 73 kms pi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of its case and in view of the decision of the jurisdictional High Court and the Income Tax Appellate Tribunal, Ahmedabad, the learned Commissioner of Income-tax (Appeals) ought to have allowed the claim. Your appellant submits that it be so allowed now. 7. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of ₹ 2,30,218/- out of Miscellaneous expenses of ₹ 6,79,214/- on the ground that expenses towards Family meet, LPG Day expenses, emergency work expenses for Diwali etc. are not in the nature of business expenditure. Your appellant submits that the expenses incurred by it towards Family meet, LPG Day, Emergency work expenses during Diwali period etc. are in the interest of the business and therefore, allowable u/s.37(1) of the Act. It is further submitted that when the entire expenditure of ₹ 6,79,214/- is incurred for business purposes, there is no justification in categorising an amount of ₹ 2,30,218/- as not expended for business purposes and disallowing it. Your appellant submits that in the facts and circumstances, the Commissioner of Income-tax (Appeals) is not justified in confirming the disallowance ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal. ITA No.36/Ahd/2005-AY:- 2001-02[Assessee] 1. The order passed by the Commissioner of Income-tax (Appeals) is erroneous on law and facts and therefore requires to be modified. It is submitted that it be so done now. 2. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of claim made u/s.80-I/80-IA, on the ground that activity of your appellant cannot be held as manufacture or production of article or tiling. Your appellant submits that it is engaged in manufacturing and/or producing articles not specified in Eleventh schedule. Your appellant submits that as it fulfils all the conditions laid down for claim of relief u/s.80-I/80-IA of the Act, the learned CIT (Appeals) ought to have granted deduction u/s.80-I/80-IA of the I.T. Act. Your appellant submits that deduction as claimed u/s.80-I/80-IA be allowed now. 3. The learned Commissioner of Income-tax (Appeals) erred in confirming the order of the Assessing Officer as regards non-grant of depreciation on the assets leased to Rajasthan State Electricity Board (RSEB)- (a State Government Undertaking, formed under the State Electricity Supply Act) on the ground that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rifying the position of allowability of interest payable on unpaid purchase price of Plant Machinery. Your appellant submits that interest payable on unpaid purchase price of Plant Machinery after the date of commencement of business is allowable as business revenue expenditure. Your appellant submits that in the facts and circumstances of the case, the learned Commissioner of Income-tax (Appeals) is not at all justified in confirming the disallowance. Your appellant submits that it be so held now and deduction as claimed be granted now. 5. The learned Commissioner of Income-tax (Appeals) has erred in confirming the part of disallowance made by the Assessing Officer by invoking provisions of section 14A of the I.T. Act. Your appellant submits that the learned Commissioner of Income-tax (Appeals) is not justified in holding that proportionate of the following expenses should be considered for the purpose of earning the exempted dividend income u/s. 10(33) of the Act: (a) Interest on Deferred Payment Credit ₹ 1,65,352/- (b) Interest on Working Capital ₹ 19,130/- (c) Interest on delayed payment of sales-tax ₹ 84,011/- (d) Administrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and on the facts of the case in deleting the disallowance of ₹ 4,73,171/- being expenditure on account of Diwali and Festival expenses disregarding the fact that such expenditure has not been wholly and exclusively incurred for the purpose of the business. 3. The Ld. CIT(A) erred in law and on facts of the case in deleting disallowance of ₹ 64,077/- being the amount of subsidized gas connection to the employees dis regarding the fact that such expenditure has not been incurred wholly and exclusively for the purpose of the business but was paid ex-gratis. 4. The Ld. CIT(A) erred in law and on facts of the case in deleting the disallowance of claim of bad debts of ₹ 3,04,40,547/-, disregarding the fact that the assessee has not established before the AO as to the fulfillment of the conditions laid down u/s 36(2) of the IT Act, 1961 and that the amount in question is not a trade debt, but investment made for new business. 5. The Ld. CIT(A) erred in law and on facts of the case in deleting the addition of ₹ 4,84,823/- being expenditure on spares written off disregarding the fact that spares written off will have scrap value. 6. The Ld. CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three years. Therefore, the appellant has not offered any further explanation in view of the detailed discussion made in their own case in the appellate order for A.Y. 93-94. To claim deduction u/s.80I/80IA, there are conditions to be fulfilled. As per section 801(2) like the assessee should be an industrial undertaking, not formed by splitting or reconstruction of existing business, not formed by transfer of new business of plant and machinery or previously used for the purpose, the industrial undertaking manufacture or produce any article or thing not being an article or thing specified in 11th Schedule and an industrial undertaking who manufacture or produce a thing or an article having 10 or more workers where the manufacturing process is carried on with the help of power or with 20 or more workers in case of a manufacturing unit carried on without the aid of power. There is detailed discussion in their own case in the order passed by the CIT(A) for A.Y. 93-94, 94-95 95-96. Relying on the same the claim u/s.801 801A is hereby rejected. 3.1 Likewise, in the AY 2001-02, the ld. CIT(A) upheld the action of the AO. 4. The assessee is now in appeal before us against the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd pressure conditions which are of great importance in ensuring the final quality of the gas which has to confirm the quality standards. At every stage of the process, there have to be rigid quality standards and even a very minute variations or defect could render the gas totally worthless. It, therefore, follows that the assessee company is an industrial undertaking engaged in producing the decontaminated, odorized and optimally pressurized gas satisfied the condition of producing article or thing for being entitled to deduction u/s 80I/80IA. 5.1 Following the aforesaid decision, the ITAT allowed the claim in the AYs. 1994-95 to 1996-97 and in the Ay 2000-01 also. 5.2 Indisputably, since the facts obtaining in the years under consideration are similar to the facts in the aforesaid years, following the view taken by the ITAT in their aforesaid decisions in the assessee s own case for the earlier years, we have no hesitation in allowing the claim for deduction u/s 80I/80IA in the years under consideration. Therefore, ground no.1 in the appeal of the assessee for the AY 1998-99 ground no.2 in their appeal for the AY 2001-02 are allowed. 6. Ground no.2 in the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... falling under staff welfare expenses. Thus, in the reasons mentioned by the learned CIT(A) for A.Y. 96-97 in the same case and in view of the above discussion, the same is not allowed. 7.1 However, in the AY 2001-02, the ld. CIT(A) allowed the claim while referring to decision of his predecessor in the AY 1996-97. 8. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in the AY 1998-99 while the Revenue is in appeal in the AY 2001-02. The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 30-12-2008 in the assessee s own case for the AY 2002-03 in ITA no.1501/Ahd/2006 and the decision 30-01-2009 of the Tribunal for the AY 2000-01 in ITA no.3446/Ahd/2004. The learned DR, on the other hand, did not dispute these submissions of the ld. AR 9. We have heard both the parties and gone through the facts of the case as also the aforesaid decisions of the ITAT. We find that the issue is squarely covered in favour of the assessee by the decision dated 2.1.2007 of the ITAT in the assessee s own case for the AY 1995-96 1996-97 in ITA nos. 2548 2549/Ahd./2002, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) following his decision for the AY 1997-98 upheld the disallowance in the AY 1998-99 while in the AY 2001-02, claim was allowed ,following his decision for the AY 1992-93. 12. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A) in the AY 1998-99 while the Revenue is in appeal in the AY 2001-02. The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 30-01-2009 in ITA no.3446/Ahd/2004 for the AY 2000-01 in the assessee s own case. The learned DR, on the other hand, did not dispute these submissions of the ld. AR. 13. We have heard both the parties and gone through the facts of the case as also the aforesaid decision of the ITAT. We find that the ITAT vide their order dated 30-01-2009 in the assessee s own case for AY 2000-01 in ITA no.3446/Ahd/2004 held as under:- 9. Ground no. ii) relates to deletion of disallowance of an amount of ₹ 1,69,628 (not ₹ 1,63,691) on account of diwali/family meeting and gas day celebrations. The AO disallowed the claim since these expenses were not related to the business of the assessee, following his own ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the disallowance in the AY 1998-99 in the following terms:- [V] Subsidy for gas connection to staff- ₹ 33,303/-:- It is raised by the appellant that to maintain healthy relation with the employees, the company has spent on the subsidy towards the supply of gas connection to the employees. It is argued that the expenditure is for the purpose of business and incidental to the business activity, hence requested to delete the same. In this respect the appellant has relied on one factor that it is incidental to business and expenses are in the nature of staff welfare. It is seen by me that the A.R. is relying an the CIT(A)'e order in the same case for A.Y. 1996-97 where such amount is allowed. But, in the appellate order except treating the same as incidental to business, the facts of the case are not mentioned. The fact remains that as stated by the A.O. holding that the expenses are not meant for the business activity because the appellant company is already providing housing loan to their employees and reimbursed to some an extent in case of interest payment. But, providing the subsidy towards the gas connection charges is not directly related to the business expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er: 17. We have heard rival submissions and perused material available on record. It has not been disputed that reimbursement of portion of interest incurred for availing of housing loan and providing gas connection subsidy was per the general HRD policies of the Gas company. As far as assessee is concerned, this expenditure represents character of business expenditure as that was incurred on employees as per agreed HRD policies indirectly, assessee could have been given higher salaries. These reimbursements are to be taken akin to allowance/perquisites of the salaries which arc to be allowed as business expenditure in the hands of the assessee. In view thereof, we find no infirmity in' the order of CIT(A) allowing these expenses. These are grounds of Revenue's appeals are dismissed.'' Similar view has also been taken by the Tribunal in assessee's own case in ITA No.95 and 96/Ahd/2008, consolidated order dt.20-2-2008 pertaining to the AYs 2003-04 and 2004-05. 5. Respectfully following the decision of the ITAT as discussed in the foregoing paragraph, we dismiss the ground No. 1 and 3 raised by the Revenue and upheld the impugned order of the learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing in disallowance of ₹ 38,80,278/-. 21. On appeal, the learned CIT(A) upheld the findings of the AO in the following terms:- [VI](i.) Interest on borrowed capital of ₹ 1,98,01,130 :- It is submitted by the A.R. that since the appellant is engaged in the business of supply of gas through pipe line at Bharuch, Ankleshwar and Surat and for the purpose of expansion the appellant has borrowed loan for laying down the pipe line between Hazira Ankleshwar. Therefore, the interest on borrowed capital is for the purpose of expansion of the existing business. Therefore, allowable u/s. 36(1)(iii) of the Income-tax Act. The appellant has relied on the following decisions. - Calico Dyeing Printing Works v/s. CIT, 34 ITR 265 (Bom.) - CIT v/s. Alembic Glass Inds. Ltd., 103 ITR 716 (Guj.) - ITO v/s. Jyoti Switch Gears Ltd., 42 TTJ 579 (ITAT, A'bad) - CIT v/s. National paroxide Ltd., 182 ITR 411 (ST)(SC) - In this case the Supreme Court has rejected the special leave petition filed by the department against the judgement dated 21/10/82 of Gujarat High Court and Gujarat High Court has also dismissed the reference application on this question. - Tata C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income from other sources. Thus, the A.O. has rightly disallowed the claim of interest on borrowed capital not debited to Profit Loss Account, but claimed in the foot notes of ₹ 38,80,278/- is hereby confirmed and also considering the total interest income so earned from the borrowed fond before the commencement of the business of ₹ 1,59,20,852/- is rightly added back to the total income under the head income from other sources. Thus, both the actions of the A.O. are hereby confirmed in view of detailed discussion held for A.Y. 9798 in the order dated 25/3/2004. 22. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee while reiterating their submissions before the learned CIT(A) contended that the HAPi project was not a new line of business of the assessee company, but simply an extension of the same business undertaken with a view to increase the Gas distribution network. As the interest has been paid in connection with borrowings for laying the new pipe lines of HAPi Project - expansion of its existing business, the same is admissible as deduction u/s.36(l)(iii) of the I.T. Act. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing and Printing Works [1958] 34 ITR 265 and the judgment of the Supreme Court in India Cements Ltd. [1966] 60 ITR 52 have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. [1975] 98 ITR 167 was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not in the nature of business expenditure, having not been incurred for earning any business profit nor the assessee offered any explanation regarding purpose of expenses incurred under the head Emergency Work Expenses for Diwali , the AO disallowed a lumpsum amount of ₹ 4,00,000/- out of total amount of ₹ 6,70,944/-. 27. On appeal, the learned CIT(A) restricted the disallowance to ₹ 2,30,218/- in the following terms:- [X] Disallowance of ₹ 4,00,000/- out of Misc. expenses:- It is claimed by the ARs. that out of the total misc. expenses of ₹ 6,79,214/-, a lumpsum addition of ₹ 4,00,000/- has been made by the A.O. The entire misc. expenses includes expenses for family meet and LPG day expenses of ₹ 3,45,942/--, Gas day expenses of ₹ 1,42,212/- and distribution of sweets during Diwali and shut down expenses wrongly stated as emergency expenses of ₹ 1,82,800/-. It is stated by the A.Rs. that CIT(A) for A.Y. 96-97 has allowed the LPG day expenses and Gas day expenses and it was pointed out that the A.O. has disallowed Gas day expenses twice, once in para 4 of the assessment and secondly vide para-11 of the assessment order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amounts staff welfare measures have been taken-up and profit of the company has increased. Thus, there are no details available on the records. However, the expenses incurred during the shut down of the machinery can be allowed. Thus, in view of the same the A.O. has allowed ₹ 2,70,944/- for this purpose and other purpose of staff welfare, if any. Therefore, the addition of ₹ 4,00,000/- is hereby confirmed. But, the addition of ₹ 1,69,782/-[1,42,212/- Gas day expenses + 27,570/- Diwali expenses] are already confirmed in para 4(iv) above, so no further addition is confirmed. Thus, the net addition confirmed is ₹ 2,30,218/-(4,00,000 - 1,69,782). 28. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee submitted that the issue is squarely covered in favour of the assessee by the decision dated 6-1-2006 in the assessee s own case for the AY 1993-94 in ITA no.1895/Ahd/2002 and the decision dated 30-01-2009 for the AY 2000-01 in ITA no.3464/Ahd/2004. On the other hand, the ld. DR did not oppose these submissions on behalf of the assessee 29. We have heard both the parties and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lacement of defective old meters. To a query by the Bench, the assessee stated that they suo motu replaced defective meters and as a result revenue of the company enhanced. Since the expenditure was in the nature of repairs, the assessee argued that the same may be allowed as revenue expenditure. However, the AO rejected the submissions of the assessee on the ground that the assessee did not furnish the details of consumption of meters, its closing stock and any correspondence or receipt of replacement of meters from the users. Since meters were part and parcel of gas line while the assessee claimed depreciation on gas line, the AO concluded that the cost of meter will be capital expenditure and not revenue expenditure, resulting in. disallowance of ₹ 23,46,862/-. The AO simultaneously allowed depreciation @ 25% on ₹ 23,46,862/- i.e. ₹ 5,86,716/-. Moreover, since the assessee did not account for stock of old meters, the AO also added an amount of Rs. 2 lacs on account of sale of scrapped meters. 32. On appeal, the learned CIT(A) adjudicated the issue in the following terms:- [XI](i) Disallowance of ₹ 23,46,862/- - replacement of defective meters:- T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers. Therefore, the addition made by the AO is hereby confirmed. 32.1 As regards addition on account of scrap, the ld. CIT(A) reduced the amount to ₹ 1 lac as under: It is argued by the AR that replaced old meters have no scrap value. Therefore, requested to delete the same. Whereas, it is stated by the AO in the order that the assessee has not accounted for any scrap/replaced meters and he has estimated such scrap value at ₹ 2,00,000/- and added back to the income. (ii) I have gone through the arguments made by the AR and seen that out of the replacement of the old meters, the assessee has spent ₹ 23,46,862/- as claimed by him. However, if it is considered that old meters were purchased at half of the value which comes to ₹ 11,73,431/- and the AO has considered the scrap value at ₹ 2,00,000/- which appears to be on the higher side. Therefore, the same is considered at ₹ 1,00,000/- on estimation basis since no details are available. Thus, the assessee gets the relief of ₹ 1,00,000/- on account of this addition. 33. The assessee is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. However, the AO was of the opinion that the market survey was conducted to start a new business in new areas with the launch of new 5 kg. LPG Cylinders and therefore, it was in the nature of project expenses/capital expenses and qualified for deduction u/s 35D of the Act. The AO, accordingly, disallowed an amount of ₹ 9,05,000/- and allowed deduction u/s 35D at 1/10th of ₹ 9,05,000/- i.e. ₹ 90,500/-. 36. On appeal, the learned CIT(A) upheld the findings of the AO in the following terms:- [XII] Disallowance of ₹ 9,05,000/- market survey expenses:- It is argued by the AR that the company is engaged in bottling and marketing of LPG which has started business during the FY 95-96 with its own outlets. During the year, 5 kgs. Cylinder is launched in the market to assess the viability of new cylinder, expenses are incurred to see the effectiveness of the market. A periodic research was conducted and work was assigned to Gallup MBA India Co. and Span Associates Pvt. Ltd. Further, it is claimed that the expenses are for the sales promotion which are to be allowed u/s 37(1) of the Act relying on the case laws like CIT vs. Aluminium Inds. Ltd., 80 Taxma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AY 1999-2000 and decision of the ITAT Special Bench, Mumbai in the case of ICICI Ltd. vs. DCIT in ITA no. 3300/Mum/1997 as also the decision of the Hon ble Supreme Court in McDowell Co. vs. CTO,154 ITR 148 (SC), the AO disallowed the claim of depreciation on assets of sale and lease back transactions. 40. On appeal, the learned CIT(A) while referring to his findings in the AY 2000-01 directed in the following terms:- 7.1 Before me, the appellant's representative Shri D J Shah and Shri Anuj Mehta have submitted that in case the transaction is not held as genuine lease transaction then only the interest element in the lease rentals should be added to the income and the principal amount recovered should be excluded from the total income, 7.2 During the course of hearing, the appellant's representative has also taken up additional ground of appeal in this respect stating that deemed recovery of principal amount of ₹ 2,46,90,915/- should be ignored from the total income and only the interest portion should be brought to tax and not the entire lease rental received ₹ 2,75,37,050/-. The additional ground raised was forwarded to the A.O. i.e. DCIT Circle- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities below and also the decisions of the Tribunal and Hon ble jurisdictional High Court, relied on by the learned AR on behalf of the assessee, we find that a similar issue in this case has already been decided by the Hon ble jurisdictional High Court in the assessee s own case for the AY 1995-96 vide order dated 10.9.2008 in tax appeal no. 444 of 2008, wherein Hon ble jurisdictional High court held as under; 5. In relation to the transaction, after referring to an earlier order of the Tribunal, the Tribunal in the present case recorded the following findings: 10.9 respectfully following the aforesaid case, we find that in the case before us the invoices are in the name of the assessee as is clear(copy of these invoices appearing at page 59 to 63 of the paper book).Similar transaction was held to be genuine transaction by Hon ble Rajasthan High Court in the case of RSEB(supra),therefore, transaction in question is held to be genuine one and ,therefore, we set aside the order of the CIT(A) and direct the assessing officer to allow depreciation to the assessee. 6. With reference to decision of Rajasthan High Court as appearing in the order of Tribunal, the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration, we set aside the impugned order of the learned CIT(A) and direct the Assessing Officer to allow the depreciation as claimed by the assessee. Therefore, ground no. 3 in the appeal of the assessee is allowed. 43. Indisputably, since the facts obtaining in the year under consideration are similar to the facts in the assessment years 199596,2000-01,2003-04 2004-05, following the view taken by the Hon ble jurisdictional High Court in the assessee s own case in the AY 1995-96 and by the Hon ble Rajasthan High Court in the case of CIT vs. Rajasthan State Electricity Board(supra) as also by the ITAT in their aforesaid decisions in the assessee s own case, we have no hesitation in allowing the claim of the assessee in the year under consideration. Therefore, ground no.3 in the appeal of the assessee for the AY 2001-02 is allowed. 44. Ground no.4 in the appeal of the assessee for the AY 2001-02 relates to disallowance of ₹ 1,65,352/- on account of interest payable on unpaid purchase price of plant and machinery acquired on credit. Relying upon the decision of the Hon'ble Supreme Court in the case of Bombay Steam Navigation Co. (1953) (P) Ltd. vs. CIT (1965) 56 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest on delayed payment of sales-tax ₹ 84,011/- (d) Administrative expenses ₹ 26,30,14,000/- u/s 14A of the Act. Since the assessee claimed exemption of income of ₹ 4,31,66,098/- u/s 10(33) of the Act, referring to decision of the Hon'ble Supreme Court in the case of Rajasthan State Warehousing Corporation Ltd. vs. CIT,245 ITR 150, the AO disallowed an amount of ₹ 3,45,16,057/- as per the following working:- A Total Interest payment 108203000 B Total funds available 2804719000 C. Cost of fund (taking both borrowed fund and own fund together) A/B 0.0385789 D Investment in Shares 802876000 E Cost of fund invested in shares (A/B)*D Sales and other receipts 3205354000 F Total Receipts 3205354000 G Dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supporting evidences available in form of fixed deposit as discussed above, the AO is therefore directed to, exclude the above three items while making disallowance out of interest expenditure of ₹ 10,82,02,000/-. In respect of other items worked by the AO, the same is in conformity with the section 14A and the action of the AO is valid and upheld and the AO is directed to recompute the disallowance as above. 50. Both the assessee as well as Revenue are now in appeal before us against the aforesaid findings of the learned CIT(A). The learned AR on behalf of the assessee submitted that a similar issue was restored to the file of the AO for recomputing the disallowance in the light of provisions of sub-section (2) and (3) of section 14A of the Act read with Rule 8D of the IT Rules, 1962 in the assessee s own case for the AY 2000-01 in ITA nos. 3446 3464/Ahd/2004. While explaining the nature of interest and administrative expenses, the ld. AR relied upon the decisions in the case of Godrej and Boyce Mfg. Co. Ltd. vs. DCIT (2010) 328 ITR 81 (Bom) and Hero Cycles Ltd,178 Taxman 484(P H). The learned DR, on the other hand, supported the findings of the AO. 51. We have hea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The basic reason for insertion of section 14A is that certain incomes are not includible while computing total income as these are exempt under certain provisions of the Act. In the past, there have been cases in which deduction has been sought in respect of such incomes which in effect would mean that tax incentives to certain incomes was being used to reduce the tax payable on the non-exempt income by debiting the expenses, incurred to earn the exempt income, against taxable income. The basic principle of taxation is to tax the net income, i.e., gross income minus the expenditure. On the same analogy the exemption is also in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of ₹ 3 lakhs and no other benefit is derived from the company for the business carried on by it. The disallowance prohibited under Section 14A is expenditure incurred for earning any income which does not constitute total income of the assessee. In other words, any expenditure incurred for earning any income which is not taxable under the Act, is not an allowable expenditure. Dividend income is exempt under Section 10(33) of the Income Tax Act and so much so, dividend earned by the assessee on the shares acquired by her with borrowed funds does not constitute total income in the hands of the assessee. So much so, in our view, disallowance was rightly made by the Assessing Officer. In fact, the Tribunal itself has estimated disallowance of ₹ 2 lakhs by applying Section 14A. We do not know how the Tribunal can restrict the disallowance to ₹ 2 lakhs and allow balance above ₹ 15 lakhs when the whole borrowed funds were utilised by the assessee for purchase of shares in the company. In our view, the reasoning given by the Tribunal for disallowance of ₹ 2 lakhs i.e. by applying Section 14A, squarely applies for the interest paid on borrowed funds because i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in CIT vs. Hero Cycles Ltd.,323 ITR 518 also observed that disallowance under section 14A requires finding of incurring of expenditure and where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand. 51.5 As is apparent from the impugned order,since the ld. CIT(A) have not passed a speaking order on the issue nor had the benefit of the view taken in the aforesaid decisions, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issues raised in the ground no.5 in the appeal of the assessee as also ground no.8 in the appeal of the Revenue, afresh in accordance with law in the light of various judicial pronouncements, including those referred to above, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the issue, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act. With these observations, ground no.5 in the appeal of the assessee as also ground no.8 in the appeal of the Revenue for the AY 2001-02 are disposed of. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go by the plain reading of clause (vii), the requirement for allowing deduction on account of bad debt is that bad debt should be written off as irrecoverable. Mere debiting the amount is not sufficient. The requirement is that the assessee should also prove that the debt has become bad in that particular year. 12.3 In view of the foregoing, when the relevant details and evidence were not submitted before the AO, in the interest of justice and fair play, we vacate the findings of the Id. CIT(A) and restore the issue back to the file of the AO with the directions to allow another opportunity to the assessee to furnish the relevant details and evidence in support of their claim for deduction of bad debts in terms of provisions of sec. 36(1)(vii) of the Act and thereafter, adjudicate the matter in accordance with law after allowing sufficient opportunity to the assessee keeping in view inter alia, the aforesaid decision of Hon'ble jurisdictional High Court in the case of Dhall Enterprised and Engineers P Ltd. (supra). With these directions, ground No. v) in the appeal of the Revenue is disposed of. 55.1 Indisputably, since the facts obtaining in the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view of the facts stated above. 56.1 However, the AO did not accept the claim of the assessee, the amount having been invested for setting up a joint venture company in the name of Petroleum infrastructure Ltd. Since the said amount was not a trade debt as such and represented capital investment made by the assessee in joint venture project, the AO rejected the claim u/s 36(1)(vii) of the Act. The AO further concluded that amount written off was not deductible as a trading loss because there has not been any transaction of trade or other business deal between the assessee and said PIL. Accordingly, while relying upon decisions in A.V. Thomas Co. V. CIT 48 ITR 67(SC), K. J. Somaiya Sons Pvt. Ltd. 156 ITR 605 (Bombay) Indiquip Ltd. vs. CIT,202 ITR 417(Bombay), the AO disallowed the amount of ₹ 3,04,40,547/- 57. On appeal, the learned CIT(A) allowed the claim of the assessee in the following terms:- 10.1 Before me, the appellant s representative Shri D J Shah has furnished copy of balance sheet of Petroleum Infrastructure Limited as on 31st March, 2003. It is seen that the total shareholding of the said company was ₹ 15 crore for A.Y, 2003-04. The said co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation Limited (BPCL), in the name of Petroleum Infrastructure Ltd. (PIL) and advanced ₹ 2.90 Crore for the purpose of business and ₹ 14,40,547/- to meet the expenditure of business. The Joint Venture did not succeed and PIL was placed under creditors voluntary winding up. Therefore, the assessee wrote off the amount of ₹ 3,04,40,547/- as bad debts as per provisions of section 36(1)(vii) of the Act. Inter alia, the assessee relied upon decisions in Gobind Glass Industries reported at 110 Taxman 109(Ahd) and Girish Bhagwat Prasad reported at 256 ITR 772 allowed the deduction. Alternatively, the assessee submitted that the amount is in the nature of trading loss arose admissible as deduction in terms of decisions in CIT v. Equitorial Pvt. Ltd. (1974) Taxation 37(3)-82 and CITvs. Abdul Razak Co.,136 ITR 825 (Guj). The ld. AR added that if the bad debt is not allowed as deduction, then disallowance should be reduced by ₹ 65 Lacs, being the amount recovered against these bad debts and offered to tax in assessment year 2003-04. 59. We have heard both the parties and gone through the facts of the case. We find that the AO disallowed the claim since the aforesai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easons forming basis for the conclusion. [Mukhtiar Singh Vs. State of Punjab,(1995)1SCC 760(SC)]. As is apparent, the impugned order suffers from lack of reasoning and is not a speaking order. In view of the foregoing, especially when the ld. CIT(A) has not passed a speaking order on the aforesaid claim of the assessee for deduction of bad debt, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to his file for deciding the issue afresh in accordance with law, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not the conditions stipulated u/s 36(1)(vii) read with sec. 36(2) of the Act are fulfilled or the amount can be allowed as trading loss. With these observations, ground no 4 in the appeal of the Revenue for the AY 2001-02 is disposed of. 60. Ground no.5 in the appeal of the Revenue for the AY 2001-02 relates to disallowance of ₹ 4,84,823/- on account of stores written off. The AO noticed that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d spares have to be properly valued and the method of valuation as prescribed by the Institute of Chartered Accountants of India as approved by various commentators on valuation of inventories. In the light of this provision, the Hon ble High Court concluded that .. a systematic reduction in valuation of the unserviceable non-moving spare parts in a scientific basis would amount to a normal business loss which could be charged against the profit in the year of such valuation as otherwise a block of revenue items would remain outside the books without being properly treated in the income and expenditure account thereby giving a wrong picture of the true income of the company over the years. There is no dispute about the fact that when the spares were purchased out of the business necessity from the collaborators as insurance spares, they were not capitalized along with plant and machinery not debited to the P L account of the year of purchase. The cost of the same has to be accounted for somewhere as expenditure and the correct method is either to debit P L account with actual cost of spares used during the year or to reduce the cost proportionate to the obsolescence suffer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y 2001-02 relates to disallowance of ₹ 3,05,030/- being expenditure incurred on gift presentation articles. The AO disallowed the claim for deduction of ₹ 3,05,030/- on account of gift and presentation articles, the expenditure having been incurred gratuitously and could not be said to have been incurred wholly and exclusively for the purpose of the business. 65. On appeal, the learned CIT(A) allowed the claim in the light of decision of his predecessor in the AY 92-93. 66. The Revenue is now in appeal before us against the aforesaid findings of the learned CIT(A). The learned DR supported the order of the AO. On the other hand, the learned AR on behalf of the assessee reiterated their submissions before the CIT(A) and relied on the decisions in Karjan Co-operative Cotton Sales Ginning and Pressing Society vs. CIT (1993) 199 ITR 17 (Guj), Core Health Care Ltd. vs. DCIT,70 TTJ (Ahd) (TM) 490 (Ahd) and Sussen Textile Bearings Ltd. vs. ITO,43 TTJ 319 (Ahd). 67. We have heard both the parties and gone through the facts of the case as also the aforecited decisions. Indisputably, the aforecited expenditure on gifts and presentation articles was not of a personal na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollowing terms:- 17.1 Before me, the appellant's representative has given details of the expenditure .and also invitation letter from M/s. B G International, Loss Prevention Department, Reading, Berks RG 6 1 PT, U.K, dated 29.03.2000 addressed to Mr. M K Sinha. Vice-President, Gujarat Gas Co. Ltd, whereby the following staff members were invited for the business meeting on 14-17 April, 2000 at Reading, Berks RG G 1 PT, U.K. (i) Mr. K D Bhojawala (ii) Mr. Shuvendu Acharya (iii) Mr. D S Lote (iv) Ms Prianka Shah (v) Ms Sunita (vi) Mr. J C Patel (vii) Mr. B D Joshi (viii) Mr. R M Gandhi 17.2 In response to the said invitation letter, the appellant's representative as per letter dated 30tn March, 2000 sponsored the above 8 persons and also Mr. Yakshesh Haldaria. It is therefore seen that the name of Mr. Yakshesh Haldaria was not there in the invitation as seen from the letter dated 29th March, 2000. However, since the employees were directed to attend the business meeting, the expenditure cannot be held to be not incurred for the business purpose. The action of the AO is therefore not correct and the expenditure is admissible an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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