2013 (10) TMI 16 - HC - Income Tax

Addition made for undervaluation of closing stock - change in method of accounting Held that - Changed method of accounting was more scientific and did not result any evasion of payment of tax. The question was considered and decided by the Madras High Court in CIT vs. Carborandum Universal Ltd 1983 (8) TMI 39 - MADRAS High Court Decided against the Revenue. Income of the assessee on account of incentives subsidy received Subsidy received on free sale of sugar Held that - Reliance has been placed upon the judgment in the case of Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd 2008 (9) TMI 14 - SUPREME COURT in which it was held in respect of same scheme namely the Sugar Incentive Scheme based on recommendation of Sampat Committee that where the object of the assistance under the subsidy scheme is to enable the assessee to set up a new unit or to expand an existing unit, then the receipt of the subsidy would be on capital account In the present case, assesee was allowed additional free sale of sugar quota under the scheme for setting up or expanding the sugar unit. The benefit was given to the sugar mills to meet the capital outlay in setting up or expanding the sugar mills Decided against the Revenue. Pre-operative trial run expenses, a revenue expense of capital expenditure Held that - Reliance has been placed upon the judgment in the case of CIT vs Kanoria General Dealers P. Ltd 1986 (1) TMI 86 - CALCUTTA High Court In the present case, pre-operation expenses have been detailed in the material produced before the AO, in respect to Co-Generation Plant, Rauzagaon; Oxalic Acid, Dhampur and thus the pre-operational expenses, were revenue expenses and not capital expenses. These expenses were actually claimed as revenue expenses in the computation with the return and were to be allowed as revenue expenses Decided against the Revenue. Disallowance on account of convertible premium notes - Expenditure on Convertible Premium Notes (CPM) was spread over the period of life on CPM for six years. The year of payment was six years and on which the expenditure was incurred by paying maturity value Held that - Expenditure in this case spread over the period for which the discount has been paid Reliance has been placed upon the judgment in Madras Industrial Investment Corpn. Ltd v. Commissioner of Income Tax 1997 (4) TMI 5 - SUPREME Court is applicable and that the expenditure had to be spread out for a period of six years, and was not allowable in the years 1997-98 and 1998-99 alone Decided in favor of Revenue. Expenses for technical know-how as revenue expenditure instead of capital expenditure Held that - In the present case the assessee is engaged in manufacture and sale of sugar. The Barabanki unit was set up in the same line of business from the funds borrowed by the company. There is no material to contend that the new unit was under different management or that there is no unity of control between the assessee in respect of business of manufacture and selling sugar and the business of manufacture and sale of sugar in the new unit at Barabanki Decided against the Revenue.

Issues Involved:

1. Undervaluation of closing stock.
2. Income from incentives subsidy.
3. Pre-operative trial run expenses.
4. Interest paid on loans for new units.
5. Expenditure on Convertible Premium Notes.
6. Loan raising expenses for technical know-how.

Issue-wise Detailed Analysis:

1. Undervaluation of Closing Stock:

The Tribunal upheld the CIT (A)'s relief of Rs.16,21,58,151/- for undervaluation of closing stock. The ITAT referenced its consistent decisions from previous years (1990-91 to 1997-98), where it recognized the assessee's changed method of accounting as scientific and non-evasive of tax. The Madras High Court's reasoning in CIT vs. Carborandum Universal Ltd, upheld by the Supreme Court, supported the Tribunal's stance. Thus, the question was decided in favor of the assessee.

2. Income from Incentives Subsidy:

The Tribunal confirmed the CIT (A)'s deletion of Rs.8,64,33,161/- added by the AO treating the income from incentives subsidy as capital. The Supreme Court in Commissioner of Income Tax v. Ponni Sugars and Chemicals Ltd held that subsidies for setting up or expanding a unit are on capital account. The Tribunal also relied on CIT vs. Kisan Sahkari Chini Mills Ltd, which was followed by the Uttarakhand High Court. The question was decided in favor of the assessee.

3. Pre-operative Trial Run Expenses:

The Tribunal upheld the CIT (A)'s deletion of Rs.3,00,18,969/- treating pre-operative trial run expenses as revenue expenditure. The Supreme Court in CWT v. Ramaraju Surgical Cotton Mills Ltd distinguished between setting up a unit and its operational function, allowing pre-operative expenses as revenue. The Calcutta High Court in CIT vs. Kanoria General Dealers P. Ltd and Madras High Court in CIT vs. Sakthi Sugars Ltd supported this view. The question was decided in favor of the assessee.

4. Interest Paid on Loans for New Units:

The Tribunal's decision to treat interest paid on loans for new units as revenue expenditure was overturned. The proviso to Section 36 (1) (iii) clarified that interest on capital borrowed for asset acquisition until the asset is put to use should not be allowed as a deduction. The Court found this proviso explanatory and applicable to existing and expanded businesses. The question was decided in favor of the revenue.

5. Expenditure on Convertible Premium Notes:

The Tribunal's decision to allow the expenditure on Convertible Premium Notes (CPN) as spread over six years was overturned. The Supreme Court in Madras Industrial Investment Corpn. Ltd v. Commissioner of Income Tax held that revenue expenditure should be allowed in the year incurred, not spread over years. The Tribunal's approach of spreading the expenditure was incorrect. The question was decided in favor of the revenue.

6. Loan Raising Expenses for Technical Know-how:

The Tribunal upheld the CIT (A)'s deletion of Rs.58,40,390/- treating loan raising expenses as revenue expenditure. The Tribunal referenced its decision for the assessee for the year 1992-93, relying on CIT vs. India Cement Limited, which allowed such expenses for business expansion. The Court found no material to suggest a lack of unity of control between the existing and new unit. The question was decided in favor of the assessee.

Conclusion:

The High Court decided questions 2, 3, 4, and 7 in favor of the assessee and against the revenue, while questions 5 and 6 were decided in favor of the revenue and against the assessee. The Income Tax department will proceed accordingly.

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