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TMI Blog2007 (5) TMI 372X X X X Extracts X X X X X X X X Extracts X X X X ..... hese appeals as under. 3. The first issue which arises for our consideration is in respect of addition of the income from value added grades of rubber. This issue had come for the consideration of this Tribunal in assessee's own case for the assessment year 1994-95 in ITA No. 08 (Coch.)/2005, dated 2-2-2007. The Assessing Officer noted that rule 7 of the Income-tax Rules provides for determining the part of the income which is chargeable to income-tax in the case of an income which is partially agricultural and partially business. The Assessing Officer therefore, worked out the income from value added grades of rubber treating it partially agricultural and partially business income. The assessee has challenged the said addition by filing Writ Petition in the Hon'ble High Court of Kerala taking the contention that the assessee has paid the State agricultural income-tax and hence, the income from value added grades of rubber cannot be again subjected to income-tax under the Central Act. The Hon'ble High Court has decided the issue in favour of the assessee directing the Assessing Officer not to proceed with action in view of the Circular No. 5/2003, dated 22-5-2003 issued by the Cen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rubber". The ld. CA for the assessee submitted that the said income was earned in the rubber estate and assessed under the Kerala Agricultural Income-tax Act vide order under section 39(3) of the Kerala Agricultural Income-tax Act. The ld. CA also referred to paper book page Nos. 62, 63, 69, 70, 79, etc., wherein the copies of the assessment framed under Kerala Agricultural Income-tax Act are placed. It is further argued that the said income is already subjected to tax treating it as agricultural income under the said enactment and hence, the same cannot be brought to tax under the Central Act. He further argued that the expenses relating to the said income were also not claimed or allowed under the Central Income-tax Act and expenses relating to the said income were treated as related to agricultural income. He, therefore, submitted that the Assessing Officer was not justified in making the addition in respect of the income relating to the sale of scrape, salvage material, etc., and the same may be deleted. 6. We have heard the ld. DR on this issue and also considered the written submissions of the ld. DR. The assessee has filed paper book wherein copies of the assessment orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was not able to prove that it has not made investment from the borrowed funds. In the opinion of the CIT(A), investments have been made out of business funds and in consequence of the diversion of the business funds, has resulted in increased interest burden on the business and decreased business income. The CIT(A) was further of the opinion that if the invested funds had been utilised in paying of the loans then the assessee would have required to bear low interest on the borrowed funds and consequently, there would have been increase in the profits. The CIT(A) has also taken into consideration the decisions relied on by the assessee in the case of CIT v. Central Bank of India [2003] 264 ITR 522 (Bom.) which was in the context of section 80M. The CIT(A) placed his heavy reliance on the decision of the Hon'ble High Court of Kerala in the case of CIT v. V.I. Baby & Co. [2002] 254 ITR 248 . Finally, he held that the proportionate disallowance in respect of the interest claimed by the assessee relating to the borrowed funds should be disallowed under section 14A. After considering the income as well as investment in ITI Bonds, MTNL Bonds, NTPC Bonds and IRFC Bonds, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... placed at page 109 of the paper book. He further argued that as per proviso to section 14A, if the assessments are completed before 1-4-2001, then it should not be disturbed or amended to increase the tax liability of the assessee by invoking section 14A. He further argued that no identity is made as the CIT(A) himself admits that all the funds of the assessee are merged together in the bank account. The ld. CA vehemently submitted that from the position of the reserve with the assessee, it is clear that the assessee had substantial, funds to make the investment and moreover, no disallowance can be made if the assessee has utilised the surplus funds for making the investment. The ld. CA heavily relied on the decisions in the case of Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi) and in the case of Dhanalakshmi Bank Ltd. v. Asstt. CIT [2007] 12 SOT 625 (Cochin) and also the decision of the Hon'ble Supreme Court in the case of Sasoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 . 11. Per contra, the ld. DR has vehemently supported the order of the CIT(A) and has also made written submissions on this issue. 12. We have heard the rival submissions of the parties. We ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led legal position in respect of the expenditure incurred for earning exempt or tax free income which is claimed by the assessee and these principles of disallowance had already got recognition in the earlier judicial pronouncements and the same principles are only codified by introducing section 14A in the Income-tax Act. 14. An identical issue has come for the consideration in the case of Dhanalakshmi Bank Ltd. (supra) and this Tribunal has held as under :- "10. Now, before the introduction of section 14A, the Apex Court has dealt with this issue in the case of Rajasthan State Warehousing Corporation 242 ITR 450. In the said case also, the Assessing Officer had made disallowance of the expenditure which was referable to the non-taxable income being exempt under section 10(29) of the Act. The Apex Court also referred to the judgment in the case of Indian Bank Ltd. 56 ITR 77 (SC). The Apex Court has laid down the following principles :- 'In view of the above discussion, the following principles may be laid down : (i )if income of an assessee is derived from various heads of income, he is entitled to claim deduction permissible under the respective head whether or not computatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d even after introduction of section 14A that, if the business of the assessee is indivisible one, then no disallowance can be made on proportionate basis and entire expenditure is allowable. 13. In the case of the assessee bank, it is an admitted position that the assessee is having the indivisible business and considering the nature of the business of the assessee the investment in the tax free bonds or investment in the shares may be in the nature of stock-in-trade. There is no identity in respect of the funds applied for investment in the tax free bonds or shares and funds which are applied for earning taxable income. The ld. counsel submitted that the assessee bank is also having the surplus funds and reserves from which the investment is made and that makes the case of the assessee that the funds applied for investment cannot be said to be interest or cost bearing funds alone. 14. The Assessing Officer has adopted the method which is not prescribed as per the provisions of sub-section (2) of section 14A. Moreover, we find that unless the method for working out disallowance of the expenditure in case of an indivisible business is prescribed as provided in sub-section (2) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. RPGEL to acquire the non-exclusive licence to use "RPG" Logo owned by RPGEL for the purpose of assessee's business including in relation to or upon its products, label, letter-head, brochure, pamphlets and advertisement materials, etc., the ld. CA referred to the copy of agreement which is placed at pages 162 to 167 of the paper book. It is further argued that the said RPGEL has its objectives, development of code of conduct and creation of goodwill which could be suitably identified to the public mind and the logo "RPG" is having a high goodwill in the market. It is further submitted, that due to the use of the logo RPGEL provides the infrastructure for developing certain code of conduct and to operate and run the organization for promoting and monitoring standard industrial, commercial and trade practices in the pursuit of attainment of excellence in quality of their products and services. The costs of rendering the group resources were shared by the licensee companies and that enables the licensee company like the present assessee to avail the benefits of the group resources without incurring the full cost of such facilities. The total actual expenses of the corporate centre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... go by the assessee. The CIT(A) has noted that the assessee has not clarified the benefit of using a copy right logo, in a commercial transaction except by way of serving as an indication that the assessee concerned belongs to RPG group. The reasons given by the CIT(A) in coming to the conclusion that the said payment is not covered in section 32 are as under :- "(iii)I have considered the objections of the appellant. The appellant has stated that it is one of the companies attached to the RPG Group entitled to have access to the common pool of facilities and expertise developed for all its licensee companies on a mere cost sharing basis. The share of cost is said to have been absorbed by the company on the basis of periodical payments made against debit notes issued on quarterly basis by RPGEL. The appellant has attached copies of ledger extracts of payments made. It is said that sharing of cost of common facilities will result in obvious cost savings and higher profitability. I have gone through the ledger extracts filed by the appellant. It contains the extracts from the general ledger of the appellant on or about the days on which the appellant has paid licence fees to M/s. RPG ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... short issue before us is whether the CIT(A) is justified in holding that the payment made by the assessee as a licence fee to RPGEL is not an allowable expenditure under section 37. In this case the assessee is making the payment to RPGEL group for use of the logo. RPGEL is providing in addition to the use of the logo the following services which are developed as group services and which are utilised by other licensees given in the group :- (i)Training of HML executives; (ii)Recruitment of senior personnel; (iii)Negotiation with financial institutions and banks; (iv)Availing of the services of RPGEL personnel; (v)Formulation of market strategies for assessee's products, etc. 20. The authorities below have not disputed the terms of the agreement but it appears from the reasons given by the CIT(A) that the said payment was not required at all. The concept of business is changing due to globalization. The market strategies of the corporate organizations are also changing fast. If any business house is required to stand in the market, then it has to improve the quality of the products and improvement of the quality of the products as well as the market strategies will depend on l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essed by the assessee which is arising in assessment years 1995-96 to 1998-99, the relevant grounds are dismissed as not pressed. 24. The next issue is regarding expenditure on the guest house relating to rent and depreciation. The ld. CA submitted that this issue is arising in the appeals for assessment years 1995-96, 1996-97 and 1997-98 but as in view of the recent decision of the Hon'ble Supreme Court in the case of Britannia Industries Ltd. v. CIT [2005] 278 ITR 546 , this issue has to be decided against the assessee. In the decision of Hon'ble Supreme Court in the case of Britannia Industries Ltd. (supra), this issue has been decided against the assessee and respectfully following the principles laid down by the Hon'ble Supreme Court in the said decision (supra), we dismiss the relevant grounds taken by the assessee on this issue in the assessment years 1995-96 to 1997-98. 25. The next issue is regarding penalty proceedings under section 271(1)(c) of the Act. We have heard the parties. The ld. CA for the assessee submitted that the Assessing Officer has initiated penalty proceedings, but he fairly conceded that no order has been passed levying any penalty. The ld. DR submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h was very high going at 18.75 per cent. He further argued that the said debentures were allotted by the assessee on profit placement basis on 16-12-1991. The assessee has appointed State Bank of India, Securities and Services Division, Madras as a debenture trustee and it was decided to redeem the debentures in three annual instalments at the end of 6th, 7th and 8th years from the date of allotment i.e., 16-12-1991 at a premium of 5 per cent payable with the instalment of redemption from the expiry of the sixth year onwards. Though it was decided to redeem the debentures in three instalments, the assessee decided to redeem the same in one instalment to save the cost of interest payment. It is argued that though the CIT(A) has accepted the contention of the assessee that it was a contractual liability and admissible deduction under section 37(1) of the Act, but he himself interpreted the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802 and held that the assessee should have spread over the liability over the period of debentures i.e., for six years and he directed the Assessing Officer to allow 1/6th of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Thus in the case of Hindustan Aluminium Corp. Ltd. v. CIT [1983] 144 ITR 474, the Calcutta High Court upheld the claim of the assessee to spread out a lump sum payment to secure technical assistance and training over a number of years and allowed a proportionate deduction in the accounting year in question." 31. In our opinion, the interpretation given by the CIT(A) is not correct as in the case of Madras Industrial Investment Corpn. Ltd. (supra), the Hon'ble Supreme Court allowed the assessee to spread over the expenditure. We are, therefore, of the opinion that the entire premium on redemption of debentures is allowable expenditure in the assessment year 1998-99. We, therefore, set aside the order of the CIT(A) on this issue and direct the Assessing Officer to allow the entire expenditure. 32. The next issue is regarding the debt written off and this issue arises in the assessment years 1998-99 addition 1999-2000. The ld. CA submitted that in the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance of Rs. 41,63,375 in bio-tech division. In appeal, the CIT(A) was of the opinion that that the said amount had not been taken into account in computing the assessee's income in any previous year and hence, the requirements under section 36(2)(i) are not fulfilled. As far as the claim of the assessee that the same is allowable under section 37(1), the CIT(A) was of the opinion that the payment was made as advance in an earlier year for supply of seeds in future years and hence, it cannot be said to be an expenditure incurred in the relevant previous year wholly and exclusively for the existing business of the assessee and rejected the assessee's claim in respect of bad debts, as well as loss under section 37(1) also. In this case, it is not disputed that the assessee is also engaged in bio-tech activities. We will have to first examine whether it can be treated as a bad debt. As per the provisions of section 36(2)(i), the said amount should have been taken into consideration while computing the income of the assessee in the earlier year. In our opinion, the CIT(A) is right in holding that the condition for treating the said advance as bad debt is not fulfilled as admittely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imed by the assessee. 38. Now, the assessee has also claimed bad debt in the assessment year 1999-2000. The assessee has written off the bad debts amounting to Rs. 32,69,581. The assessee explained that there were old balances and debts relating to the various divisions of the company which could not be recovered from the respective debtors in spite of consistent effects made. In respect of the plantation division the assessee has written off Rs. 16,59,825 and in respect of the trading division, the assessee written off Rs. 2,88,253 which represented expenses incurred by the assessee on behalf of its subsidiary company. The Assessing Officer was of the opinion, that the conditions specified under section 36(2)(i) of the Act are not fulfilled and that the so-called debts are recoverable from the assessee's own subsidiary company, which is still operational and therefore, the debts did not become irrecoverable. The Assessing Officer, therefore, made the disallowance of Rs.19,48,178. The CIT(A) confirmed the order of the Assessing Officer as he was of the opinion that the assessee had paid the said amounts to its subsidiary company and hence, it does not satisfy the requirement of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which providers various services to its members by representing the industrial and other trade matters of its members at various Government forums. In order to have an own building for the association to effectively carry on its activities for the common benefit of its members, it was decided by the general body of the Tea Trade Association that a building fund should be constituted and as per the resolution of the general body the assessee made the contribution and that is in the context of business expediency. The contention of the ld. DR is that it cannot be treated as a business expediency and it cannot be treated as an expenditure which fulfils the conditions specified under section 37(1) of the Act. 43. We have heard the rival submissions of the parties. It is an admitted fact that tea business is one of the principal activities of the assessee. The assessee contributed the building fund in the capacity as a member of the Tea Trade Association. We have already referred to the decision of the Hon'ble Supreme Court in the case of Sasoon J. David & Co. (P.) Ltd. (supra), that the expression "wholly and exclusively" in section 37(1) does not made "necessarily". In this case a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nting to Rs. 1,92,00,056 in wholly owned subsidiary company i.e., M/s. Harrisons Agro Products Ltd. as approved by the Hon'ble High Court of Kerala by order dated 6-4-1999. The Assessing Officer noted that in the original return of income filed by the assessee it had reserved its right to claim loss of Rs. 192 lakhs representing reduction in the value of investment in wholly owned subsidiary M/s. Harrisons Agro Products Ltd. whose operations were suspended in 1996. The assessee had filed a petition before the Hon'ble High Court for reduction in value of investment and as the same was pending, it was claimed that the said claim would be made on the receipt of the order of the Hon'ble High Court. The Hon'ble High Court of Kerala as per its order dated 6-4-1999 permitted the paid up capital of the company to be reduced from Rs. 3,07,66,000 i.e., 30,76,000 equity shares of Rs. 10 each to Rs. 15,38,300 i.e., taking the value of the equity shares at Re. 0.50 each with effect from 31-3-1998. In the accounts, the assessee had written off Rs. 192 lakhs representing the value of reduction in the value of investment held in M/s. Harrisons Agro Products Ltd. The Assessing Officer has not allow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e concerned company had resolved on 20-3-1998 that one equity share had only a value of Re. 0.50. The appellant has not given any clarification in this regard. Further, the appellant was also required to clarify whether the RBI had permitted the purchase of shares at the above rate and the transfer of the purchase consideration to the foreign party. The appellant, has not clarified this point also, though the clarification by itself will not justify the genuineness of the appellant's claim in this regard. Under these circumstances, I hold that there is no basis for allowing the capital loss in respect of 10,09,470 shares purchased by the appellant on 11-3-1998. The appellant's claim for carry forward of capital loss is allowed only to the extent of capital loss in respect of 20,67,130 shares held by the appellant on 11-3-1998. The Assessing Officer is directed to determine loss in respect of these shares and carry forward the same to the subsequent assessment years as per law." 48. We have heard the ld. CA for the assessee and the ld. DR for the revenue. The ld. CA submitted that M/s. Harrisons Agro Products Ltd. ('HAPL' for short) had allotted 10,09,470 number of shares by conver ..... X X X X Extracts X X X X X X X X Extracts X X X X
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