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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 ..... . The ld. DR has also filed written submissions. We have carefully considered their arguments as well as the written submissions and now proceed to decide these 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crap material, sale of old tyres, cash rebate, R D sale, etc. The Assessing Officer made an addition to the income of the assessee under the head "Total income from 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity is cultivation and production of rubber and tea and borrowings are made by the company only for its business purposes. The assessee denied having borrowed any amount for the purpose of making investment in tax free bonds. The CIT(A) was of the opinion that the 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, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onds. The ld. CA referred to the balance sheet for the year ending 31-3-1994 which is placed at page 109 of the paper book and submitted that the assessee has acquired fixed assets amounting to Rs. 614.22 lakhs which is more than the increase in the additional borrowings made during previous year amounting to Rs. 330.55 lakhs. The ld. CA also referred to the cash-flow statement which is 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,440 182,040 185,5 Surplus as per Profit Loss Account 44,146 79,074 92,271 48,725 8,308 4,431 6,0 Total 198,884 255,880 1,883,563 1,858,370 2,179,465 2,342,561 2,349,9 Break up of Investments 55,488 100,105 90,140 84,218 412,998 585,754 590,7 From the perusal of the reserve position, it is seen that the general reserves of the assessee-company are substantial in addition to other specific reserves. We find force in the argument of the ld. CA that surplus funds were available and hence the assessee has made the said investment out of the surplus funds. On the perusal of the reserve position of the assessee-company from the assessment years 1989-90 to 1999-2000, it is seen that there is an increase in the general reserves from Rs. 12,94,40,000 to Rs. 26,55,00,000. 13. Now, section 14A is retrospective in operation and section 14A clarifies the settled 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 disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ( supra ), if the business carried on by the assessee constitutes one indivisible business, then the entire expenditure will be a permissible deduction and apportionment of the expenditure is not permissible. 12. After the judgment of the Apex Court in the case of Rajasthan State Warehousing Corpn. ( supra ), section 14A was brought on the statute book and as stated hereinabove as explained by the CBDT in its Circular, the principles for disallowance of the expenditure relating to the exempt or non-taxable income were already there, but the said position has been made clear by virtue of introduction of section 14A. It means that the principles laid down by the Apex Court in the case of Rajasthan State Warehousing Corpn. ( supra ), still hold good law in respect of the introduction of section 14A governing the disallowance of the expenditure, which is incurred for earning tax free income or in other words income which does not form part of the total income. Moreover, the ratio decidendi of Rajasthan State Warehousing Corpn. s case ( supra ) could not be nullified even after introduction of section 14A that, if the business of the assessee is indivisible one, then no disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In our opinion, the assessee is the best judge to decide the application of its funds. Moreover, it is not the case of the CIT(A) or the Assessing Officer that the assessee has made some borrowings and invested the same in tax free bonds. In our opinion, there is no justification for making the disallowance. We, therefore, delete the addition made by disallowing expenditure under section 14A and set aside the order of the CIT(A) on this issue for all the assessment years. The relevant grounds taken by the assessee are allowed. 16. The next issue is in respect of the disallowance of fees paid to M/s. R.P.G. Enterprises Ltd. ( RPGEL for short) and this issue arises in all the appeals before us. The ld. CA submitted that the assessee is engaged in multiple business activities like tea and rubber cultivation by technology, structural, civil, mechanical and electrical engineering, trading in tea, coffee, spices and export of the same estate supplies and trading, clearing and shipping, air travel and air cargo. The assessee-company has entered into an agreement dated 8-8-1994 with M/s. RPGEL to acquire the non-exclusive licence to use "RPG" Logo owned by RPGEL for the purpose of as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 82] 133 ITR 750 (SC). ( ii ) Sasoon J. David Co. Ltd. v. CIT [1979] 118 ITR 261 (SC). ( iii ) Bombay Steam Navigation Co. (1953) (P.) Ltd. v. CIT [1965] 56 ITR 52 (SC). ( iv ) CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC). 17. Per contra , the ld. DR supported the orders of the CIT(A). The ld. DR also filed written submissions on this issue. 18. We have heard the rival submissions of the parties. We have also carefully considered the written submissions as well as arguments advanced by both the parties. We have also given thoughtful consideration to the precedents relied on by both the parties. The controversy in this case is in respect of a licence fee paid by the assessee to RPGEL. The assessee has filed copy of the agreement which is placed at pages 162 to 167 of the paper book. The CIT(A) was of the opinion that as per the recital of the agreement, the only condition for use of "RPG" logo is the willingness and capability to abide by the code of conduct and to attain high standard of excellence and hence, for that no monetary payment is necessary for the use of "RPG" logo by the assessee. The CIT(A) has noted that the assessee has not cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant has no idea at all as to how the amount paid to M/s. RPGEL was determined. The appellant has not furnished any quantitative particulars of the No. of personnel deputed to M/s. RPGEL for training, of the appellant s share of the cost of training supported by verifiable particulars of the expenses, of the number of RPGEL staff who provided services to the appellant, the cost of such services, etc. The appellant has no evidence for the expenses allegedly incurred by M/s. RPGEL on behalf of the appellant, has no idea about what are the expenses for which the payments have to be made and above all does not know on what basis the payments made by the appellant have been worked out. In any case no evidence in this regard is seen in the Departmental records and neither has any evidence been produced before me in the course of the appellate proceedings. The claim of the appellant is baseless and is not in accordance with the provisions of section 37 of the Income-tax Act. Hence, the alleged expenditure of Rs. 11,50,000 paid to M/s. RPGEL is held to be not allowable on any account under section 37 of the Act." 19. The short issue before us is whether the CIT(A) is justified in hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 10(2)( xv ) of Indian Income-tax Act, 1922 does not mean "neces- sarily". Ordinarily it is for the assessee to decide, whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profit then he can claim the deduction even though there was no compelling necessity to incur such expenditure (head notes). The principles laid down by the Hon ble Supreme Court while interpreting section 10(2)( xv ) of the 1922 Act are squarely applicable to section 37(1) of 1961 Act. In our opinion, the payments made by the assessee to RPGEL is an allowable expenditure under section 37(1) of the Act. We, therefore, set aside the order of the CIT(A) on this issue in all the assessment years before us and direct the Assessing Officer to delete the additions. 23. The next issue is regarding foreign travel expenses. The ld. CA submitted that this issue is not pressed by the assessee as this issue has been decided by the ITAT, Cochin Bench against the assessee in the earlier assessment year. As this issue is not pressed by the assessee which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 and this issue arises in the assessment year 1998-99. While framing the assessment for the assessment year 1998-99, the Assessing Officer made the disallowance of the premium of Rs. 12,06,225 in the computation of Kerala tea income and another disallowance of Rs. 2,07,900 in the computation of Tamil Nadu tea income which was paid by the assessee on redemption of debentures. The Assessing Officer made the disallowance on the reason that there was no contractual liability on the part of the assessee in this regard and the said payment was in the nature of ex gratia payment. 29. We have heard the ld. CA for the assessee and the ld. DR for the revenue. The ld. CA submitted that the assessee had availed itself secured loan for its working capital requirement by allotting non-convertible debentures to GIC Mutual Fund. It is further submitted that the said debentures were redeemable at a premium of 5 per cent on the face value in three instalments commencing from 16-12-1997. During the previous year relevant to the assessment year 1998-99, the assessee had made substantial profit and hence all the debentures were redeemed in one instalment in order to save the payment of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,500 out of the total discount of Rs. 3 lakhs giving the proportionate amount of discount for the period of 6 months. In other words, the assessee itself has spread over the said expenditure proportionately for the period of 12 years which was the period of redemption. When the matter came before the Hon ble Supreme Court, it is held as under : "The Tribunal, however, held that since the entire liability to pay the discount had been incurred in the accounting year in question, the assessee was entitled to deduct the entire amount of Rs. 3,00,000 in that accounting year. This conclusion does not appear to be justified looking to the nature of the liability. It is true that the liability has been incurred in the accounting year. But the liability is a continuing liability which stretches over a period of 12 years. It is, therefore, a liability spread over a period of 12 years. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. However, the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure. As there was no supply from the farmers and distributors and if there were no chances of recovery, hence the same were written off. The ld. CA relied on the following precedents : ( i ) CIT v. Mysore Sugar Co. Ltd. [1962] 46 ITR 649 (SC); ( ii ) CIT v. Inden Biselers [1990] 181 ITR 69 (Mad.); ( iii ) I.B.M. World Trade Corpn. v. CIT [1990] 186 ITR 412 (Bom.); ( iv ) A.W. Figgies Co. (P.) Ltd. v. CIT [2002] 254 ITR 63 (Cal.). 33. Per contra , the ld. DR supported the orders of the authorities below. 34. We have heard the rival submissions of the parties. The Assessing Officer has noted that the assessee is engaged in a number of diverse activities and that includes bio-technology as one of the activities. The assessee has made the advances to various suppliers at various locations for procuring seeds in connection with the seeds business of the assessee and this fact is not disputed. The said advances were to be adjusted against the supplies made by them. The Assessing Officer was of the opinion that the written off advances cannot be treated as a bad debt and the assessee discontinued its business and the loss against the discontinued bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rice so that the growing of the crop may not suffer due to want of funds in the hands of the growers and hence, it was a loss on the revenue side. 36. In the case of Inden Biselers ( supra ), again, the issue before the Hon ble Madras High Court was whether the advance of the money by the assessee to the transport contractors to pay off his dues under the hire purchase agreement for the purchase of trucks which were to be adjusted against the freight charges was a loss. It was held that that was a trading loss incidental to the business. 37. In this case, the opinion of the CIT(A) is that the expenditure cannot be allowed in this year as the advances were made in the earlier year. We have to consider the nature of the claim of the assessee that there was non-supply of seeds by the farmers and that could be ascertained by the assessee only in the previous year relevant to the assessment year 1998-99. We are, therefore, of the opinion that as otherwise the facts are not disputed the entire claim of loss towards the advances to the farmers and distributors for procuring seeds is an allowable expenditure in the assessment year 1998-99. We, therefore, set aside the order of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preceding the assessment year 1999-2000 and that is a mandatory condition under section 36(2)( ii ) of the Act. It was, therefore, argued that the CIT(A) has rightly disallowed the expenditure. 41. We have heard the rival submissions of the parties. The facts are not in dispute. Admittedly, the assessee has made the payment on behalf of its subsidiary company Harrisons Universal Flowers Ltd. In our opinion, it cannot be treated as a bad debt as admittedly it was in the form of advance or temporary loan to the subsidiary company. For claiming the deduction under section 36(1)( vii ), the conditions specified in section 36(2)( i ) should be satisfied. In our opinion, the CIT(A) has rightly confirmed the order of the Assessing Officer on this issue. No interference is called for. We, therefore, confirm the disallowance. 42. The next issue is regarding contribution to Tea Trade Association and this issue emerges in the assessment year 1999-2000. We have heard the ld. CA for the assessee and the ld. DR for the revenue. The Assessing Officer made the disallowance of Rs. 2,06,642 being the contribution to Tea Trade Association. The argument of the ld. CA is that tea manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... long-term capital gain arising from the transfer of a long-term capital asset being bond or debenture other than capital indexed bonds issued by the Government." By adding the proviso to section 48( ii ) of the Act, the benefit of indexation for computing the long-term capital gain is taken away in respect of the bonds and debentures for computing the long-term capital gain. In our opinion, there is no force in the argument of the ld. CA that the proviso is not applicable. We, therefore, dismiss the ground taken by the assessee on this issue. 45. The assessee has also taken the issue in respect of carried forward capital loss. The ld. CA submitted that it is a consequential ground and if the ground in respect of indexation of capital gain is allowed, then only it will have a bearing on the merits of this ground. As we have dismissed the ground in respect of indexation of capital gain on the sale of IRFC bonds, this issue also does not survive. Hence, the ground taken by the assessee on this issue stands dismissed. 46. The next issue in the assessment year 1998-99 is that the CIT(A) was not justified in not allowing the capital loss in respect of 10,09,470 shares purchas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by giving the following reasons : "( ii )( b ) It is seen that as per the printed Balance Sheet as on 31-3-1997 the appellant owned 20,67,130 shares of Rs. 10 each in the company, M/s. Harrisons Agro Products Ltd. But the appellant has shown 30,76,600 shares as being owned by it as on 31-3-1998. When the appellant was asked about the increase in the number of shares owned, in the course of the appeal proceedings, the ARs of the appellant stated that the appellant had acquired 10,09,470 shares at the rate of Rs. 10 on 11-3-1998 from a foreign shareholder. It is seen that a special resolution had been passed at the extraordinary general meeting of M/s. Harrisons Agro Products Ltd. on 20-3-1998 to the effect that the nominal value of each equity share has to be reduced from Rs. 10 to Re. 0.50 because of the insufficiency of the available assets to represent the capital to the extent of Rs. 9.50 per share. It is on the basis of this resolution that the Kerala High Court had permitted reduction of equity capital for Rs. 10 to Rs. 0.50 per share. Therefore, it was considered very strange for the appellant to have acquired 10,09,470 equity shares at the rate of Rs. 10 from the foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved on 20-3-1998 that one equity share had only value of Re. 0.50. Now, the contention of the assessee is that the said equity share had been allotted by converting the loan repayable to the assessee. We find that this is a new fact brought before us. There was no occasion for the CIT(A) to consider this fact before deciding the issue. Moreover, the assessee has for the first time filed the following documents before us : ( i )Copy of register of members; ( ii )Letter from the Reserve Bank of India dated 2-9-1996; ( iii )Statement of accounts of M/s. Harrisons Agro Products Ltd. for the financial year 1997-98. We, therefore, consider it necessary to restore this issue to the file of the CIT(A) to decide the same afresh considering the new facts stated by the assessee before us. The CIT(A) should take into consideration the documents which are filed before us for deciding the issue this issue in respect of 10,09,470 shares allotted to M/s. Harrisons Agro Products Ltd. We, therefore, restore this issue to the file of the CIT(A) for fresh consideration. 51. The assessee has also taken the ground in the assessment year 1998-99 in respect of disallowance of payment made to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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