9911796707
TMI Blog2013 (11) TMI 934X X X X Extracts X X X X X X X X Extracts X X X X ..... closed down did not alter the fact that the loans, when obtained had been for the purpose of the assessee’s business - CIT(A) was fully justified in allowing the claim of the assessee on interest paid on capital borrowed for the purpose of new glass factory set up by the assessee at Jambusar in Gujarat which was nothing but expansion of the assessee’s existing business - Following decision of Veecumsees v. Commissioner of Income-tax [1996 (4) TMI 6 - SUPREME Court] - Decided against Revenue. Disallowance of expenditure - Closure of factory - Held that:- Thane unit was closed by the assessee as a business necessity arising out of statutory compulsion. As further found by him, the business carried on in the said unit was not discontinued but shifted to other places. Having taken note of these facts, the ld. CIT(A) held that the ratio of the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (2000 (11) TMI 3 - SUPREME Court) was clearly applicable to the facts of the assessee’s case and accordingly he directed the A.O. to allow the deduction claimed by the assessee on account of expenses pertaining to the closed Thane factory u/s 37(1) of the Act. At the time o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bulk drugs. The return of income for the year under consideration was filed by it disclosing loss of Rs. 30.24 crores under the regular provisions of the Act and income of Rs. 15.11 crores u/s 115 JA of the Income tax Act, 1961 (the Act). In the P L account filed along with the said return, the following expenses aggregating to Rs. 15,25,73,928/- were debited by the assessee as extra ordinary expenses:- (a) VRS payments at Boehringer Mannheim India Division Rs.11,00,41,992/- (b) VRS payments at Piramal Health Care Division Rs. 1,69,33,031/- (c) Gratuity payments Rs. 1,45,80,225/- (d) Other terminal benefits Rs. 1,10,18,649/- Total Rs.15,25,73,928/- 4. During the course of assessment proceedings, the above expenses were examined by the A.O. and on such examination, he held that the payments made by the assessee company to its employees on account of gratuity and other terminal benefits not being for the single year services but pertained to the services rendered for several years, the same were not fully allowable in the year under consideration. As re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al), he deleted the disallowance made by the A.O. on account of VRS payments made by the assessee. 6. We have heard the arguments of both the sides on this issue and also perused the relevant material placed on record. It is observed that this issue is squarely covered in favour of the assessee inter alia by the decision of the Hon ble Bombay High Court in the case of Commissioner of Income-tax v. Bhor Industries Ltd. (2003) 264 ITR 180 (Bom.) wherein it has been held that payments made under the Voluntary Retirement Scheme was the expenditure incurred by the assessee to save expenses and it was not referable to any income yielding asset. It was held that the said expenditure thus should be allowed in its entirety in the year in which it was incurred and the same could not be spread over a number of years. It was also held that the expenditure incurred by the assessee relating to Voluntary Retirement Scheme as well as on account of gratuity was revenue expenditure and the same was allowable as deduction in the year in which it was actually incurred. Respectfully following the said decision of the Hon ble jurisdictional High Court, we uphold the impugned order of the ld. CIT(A) al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assets brought into existence. In view of the Explanation (8) to section 43(1) this is very clear from the Act itself. The various decisions relied on by the assessee where prior to or have not taken note of the said Explanation which is introduced with retrospective effect. As noted by the ITAT in the case of M/s. JCT Mills the interest once capitalised becomes part of the actual cost and loses the character of interest. There is no question of claiming the same u/s. 36(1)(iii). To reiterate, this is clear from Explanation 8 to section 43(1) as well as the Explanatory Notes presented in para 9.4 which clearly spell out the legislative intent. (b) In the specific facts and circumstances of the assessee s case, the claim is a clear tax avoidance device. This is because the Gujarat Glass division has been spun off as a separate company. The shareholders meeting approving such spun off was held on 20-3-1998 before the end of the previous year in question. At the time of filing the return and making the claim, the assessee was well aware that Gujarat Glass had become a separate company. The result of the assessee s claim if upheld is that the assets of the Jambusar division wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest relating to the one unit therefore was allowable as deduction in computing the business income of the assessee. The ld. CIT(A) found merit in the contentions raised on behalf of the assessee on this issue and deleted the disallowance made by the A.O. on account of interest after having satisfied that the new glass factory at Jambusar in Gujarat was nothing but expansion of the existing business of the assessee company. 10. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the interest paid by the assessee on the loan borrowed for the purpose of its new glass factory at Jambusar in Gujarat was disallowed by the A.O. for the reasons given in para 9.1 of his order which are already extracted in para No. 8 of this order. At the time of hearing before us, the ld. D.R. has strongly relied on the said reasons and submitted that the ld. CIT(A) has not properly considered and appreciated these reasons given by the A.O. while deleting the disallowance made on account of interest. However, as rightly submitted by the ld. Counsel for the assessee, elaborate submissions were made on behalf of the assessee to meet all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als Ltd. (supra) and having regard to the facts of the case, we are of the view that the ld. CIT(A) was fully justified in allowing the claim of the assessee on interest paid on capital borrowed for the purpose of new glass factory set up by the assessee at Jambusar in Gujarat which was nothing but expansion of the assessee s existing business. In that view of the matter we uphold the impugned order of the ld. CIT(A) on this issue and dismiss ground No. 2 of the Revenue s appeal. 11. Ground No. 3 4 raised by the Revenue in its appeal read as under:- 3. Erred in accepting the assessee s devise of not claiming depreciation in respect of assets taken over on amalgamation of BMIL and MPIL ignoring omission of the provisions of section 34 (1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 243 ITR 56 which pertains to the period prior the omission of the section; 4. Erred in accepting the assessee s devise of not claiming depreciation on the assets of PHL taken over on amalgamation ignoring omission of the provisions of section 34(1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y forward of depreciation which has not been claimed by the assessee in the particular year. So far as the current year s depreciation is concerned, it is for the assessee to claim the same or not to claim the same. If he does not claim it, he loses the depreciation. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes. It was further held that: what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year u/s. 32(2) of the Act. In other words, an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntion of the Revenue was that after 1st April, 1988, the condition of furnishing the particulars required by subsec. (1) and (2) of s. 34 has been done away with and that has altered the effect of the judgment in Mahendra Mills (supra). It is difficult to uphold the contention because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the AO has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars are not, if there is no claim for depreciation, it cannot be allowed by the AO. The debate, therefore, as to whether the omission of s. 34(1) and (2) and r. 5AA of the IT Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act. It is not in itself a complete code. 27. The Supreme Court has observed that even in the absence of the rule, since the return form itself prescribes particulars to be furnished in support of the claim of depreciation, the allowance can be granted on if the assessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the revenue that after the omission of subsec. (1) and (2) of s. 34 and r. 5AA w.e.f. 1st April, 1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Expln. 5 to 32 was introduced by the Finance Act, 2002 w.e.f 1-4-02 and it provides as follows: Explanation 5. For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; Thus, it can be safely said that omission of section 34 has not affected the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot claimed by the assessee. 28. In the light of the above observations of the Hon ble Supreme Court, let us see the decision of the Hon ble Bombay High Court in the case of Premier Automobiles (Supra). The question before the Hon ble Court and the circumstances under which it arose were as follows: "Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972-73?" As is evident from the question, the controversy related to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The assessee had substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year's profit in the respective years and thereafter if any profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 of the Revenue s appeal are accordingly dismissed. 14. As regards ground No. 5, it is observed that the issue involved therein relating to assessee s claim for depreciation on assets of bulk drug division of Sumitra Pharmaceuticals Chemicals Ltd. is also squarely covered in favour of the assessee by the order of the Tribunal dtd. 16-5-2012 for A.Y. 1997-98 wherein a similar issue has been considered and decided by the Tribunal in favour of the assessee following its order for A.Y. 1996-97 wherein an identical issue was decided in favour of the assessee after recording all the relevant facts, submissions of both the sides and the decision thereon as under:- 3. As regards ground No.1 brief facts of the case are that the assessee company which is engaged in the business of manufacturing of pharmaceuticals products filed its return of income on 30/11/97 declaring a loss of Rs.70,67,21,243/-. Subsequently, assessee filed a revised return of income on 30/3/98 revising the loss figure to Rs.70,66,81,323/-. During the assessment proceedings u/s. 143(3), the AO noticed that during the relevant previous year the assessee company had taken over the bulk drug unit of M/s Sumitra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eliance upon the following decisions: (a) CIT v. Solomon 1 ITR 324 [Rangoon High Court] (b) CIT vs. Groz Packert Saboo Ltd. 116 ITR 135 [S.C] (c) Francis Vallbhyar vs. CIT 40 ITR 426 [Mad] The AO, however, was not satisfied with the assessee s explanation and held that the written down value of the depreciable assets in the hands of the previous owner is to be adopted as the value of assets in the hands of the assessee for the purpose of claim of depreciation. He, accordingly, reworked the depreciation allowable on the basis of written down value at Rs.2,98,85,394/- as against the claim of the assessee of Rs.11,48,96,238/-. Aggrieved, assessee filed an appeal before the CIT[A) who allowed the same holding that the cost of appreciation of the assets of the bulk drugs unit in the hands of the assessee was the market value of the assets entered into the books of the assesee on the basis of the valuation report as approved by the High Courts of Andhra Pradesh and Bombay and also by the shareholders of both the companies and, therefore, for the purpose of allowing depreciation this valuation is to be taken. Aggrieved by the same, the revenue is in appeal before us. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Income Tax Act, 1922 or any Act repealed by that Act, or under any executive orders issued when the Indian Income Tax Act, 1886 was in force (c) In the case of any block of assets [i] in respect of any previous year relevant to the assessment year commencing on the 1 day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted. A B C Explanation 1- When in a case of succession in business or profession, an assessment is made on the successor under subsection [2] of section 170 the written down value of any asset or any block of assets shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to. Explanation 2.- Where in any previous year, any block of assets is transferred, - (a) by a holding company to its subsidiary company. or by a subsidiary company to its holding company and the conditions of clause [iv] or, as the case may be, of clause [v] of section 47 are satisfied; or (b) by the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. This observation of the AO cannot be accepted. To consider a transaction as amalgamation, there has to be a complete merger of one or more company with another company or merger of two or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating companies become the properties or liabilities of the amalgamated companies as defined In subsec.[1B) of sec.2 of the Income Tax Act. From the above it can be observed that in the case of an amalgamation the amalgamating company looses its identity and independent existence. All the assets and liabilities also have to be transferred. In the case before us, the assessee company has taken over the assets and liabilities of only one division of SPCL and SPCL has not lost its identity or independent existence. Therefore, it does not satisfy the conditions of amalgamation as laid down under sub-sec.[1B] of sec.2 of the Act. Before the takeover of the bulk drug unit there is no connection whatsoever between the two companies and the market value of the block of assets has been arrived at as per the valuation report of M/s Sabnis Co. Therefore, it cannot be said that it is not genuine or i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sation intended to be paid to retrenched employees consequent to closure of the factory, came up for consideration. The court upheld disallowance of the expenditure relying on many cases, especially the decision of the Supreme Court in the case of Gemini Cashew Sales Corporation (65 ITR 643). 18. The matter was carried before the ld. CIT(A) and it was submitted on behalf of the assessee before him that despite closure of the Thane plant, the business conducted there from had been shifted to other manufacturing units located elsewhere. It was contended that the business carried on at Thane plant thus was continued by the assessee at other places and the expenses in question, therefore, should be allowed. As regards the decision of Hon ble Supreme Court in the case of Gemini Cashew Sales Corporation (supra) relied upon by the A.O., it was submitted on behalf of the assessee that the facts involved in the said case were altogether different inasmuch as the liability to pay retrenchment compensation had arisen for the first time after the closure of the business and it did not arise during the course of carrying on of the business. It was contended that the decision of Hon ble Supre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issue and this being so as well as keeping in view the decision of Hon ble Supreme Court in the case of K. Ravindranathan Nair (supra), we find no infirmity in the order of the ld. CIT(A) giving relief to the assessee on this issue. The same is therefore upheld and ground No. 6 of Revenue s appeal is dismissed. 20. In ground No. 7, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of interest to the extent of Rs. 1,32,44,720/- made by the A.O. by holding that the same was attributable to the investment made by the assessee in tax free bonds. 21. During the year under consideration, total investment of Rs. 38.32 crores was made by the assessee in shares, mutual funds and tax free bonds. In this regard, it was noted by the A.O. that out of the total funds available with the assessee during the relevant period, 56.94% were the borrowed funds. Applying the said ratio, he worked out the utilization of borrowed funds for making the said investment at Rs. 21.82 crores. Since the assessee s average cost of borrowed funds was 6.05%, he worked out the interest attributable to the borrowed funds utilized for making tax free investment at Rs. 1,32,44,74 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... During the course of assessment proceeding, the assessee filed a further revised computation of book profit showing the same at Rs. 8,58,23,427/-. In this regard, it was noted by the A.O. that the amount of Rs. 10.60 crores transferred to debenture redemption reserve was debited by the assessee in the P L account. According to him, the said amount set aside for redeeming the debentures, which constituted loan of the assessee, was nothing but a reserve and the same therefore was liable to be added while computing the book profit being the amounts carried to any reserve by whatever name called . He held that the debentures when raised by the assessee company did not form part of its income and therefore the redemption of the same could not be allowed as deduction while computing the book profit u/s 115 JA of the Act. On appeal, the ld. CIT(A) held that the debentures was a loan liability of the assessee and any amount retained for repayment of such loan liability was not in the nature of reserve as held by the Hon ble Supreme Court in the case of National Rayon Corporation Ltd. v. Commissioner of Incometax (1997) 227 ITR 764 (SC). As regards the stand taken by the A.O. that the debe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant leases were not genuine and losses arising out of such leases therefore could not be allowed as deduction while computing the book profit. On appeal, the ld. CIT(A) held that the VRS expenses and Thane factory closure expenses were debited by the assessee to the P L account and even if they were capital in nature, the same could not be added back or disallowed while computing the book profit as per section 115JA of the Act. As regards the loss on termination of lease, the ld. CIT(A) held that even if the assessee had accepted under VDIS that the relevant lease agreements were not genuine, the loss arising on termination of such losses was real and the assessee having debited the same to the P L account, it could not be added back or disallowed while computing the profit u/s 115JA of the Act. He therefore deleted the additions made by the A.O. of the above three amounts for the purpose of computing the book profit u/s 115JA of the Act. 28. We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As agreed by the ld. representatives of both the sides, all the three issues raised in grounds No. 9,10 11 are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onfirmed by the ld. CIT(A) on account of community development expenses. 31. The following expenses incurred by the assessee during the year under consideration were claimed under the head community development expenses:- (i) Providing street lights on the road which leads to the assessee s factory Rs. 4,01,040.00 (ii) Providing ambulance for meeting medical Emergencies for residents of village Tarsadi Rs. 2,41,614.00 (iii) Cost of public garden developed Rs. 8,00,000.00 Total Rs.14,42,654.00 The above expenses claimed by the assessee were disallowed by the A.O. holding that the same could not be considered as incurred wholly and exclusively for the purpose of assessee s business. The ld. CIT(A) confirmed the said disallowances holding that there was no direct nexus between the assessee s business and the community development expenses incurred by the assessee. 32. After considering the rival submissions and perusing the relevant material on record, it is observed that the ratio of the decision of Hon ble Madras High Court in the case of Commissioner of Income-tax v. Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries made by it in the books of accounts are sufficient to show that the bad debts were written off as required by the provisions of section 36(1)(vii) of the Act. In support of this contention, he relied on the decision of Hon ble Supreme Court in the case of Vijaya Bank vs. CIT Ano., (2010) 190 Taxman 257 (SC). The ld. D.R., on the other hand, submitted that the stand of the assessee needs verification in the light of the decision of Hon ble Supreme Court in the case of Vijaya Bank (supra) and the matter therefore may be sent back to the A.O. for such verification. We find merit in the contention of the ld. D.R. Accordingly, this issue is restored to the file of the A.O. with a direction to decide the same afresh in the light of the decision of Hon ble Supreme Court in the case of Vijaya Bank (supra) after verifying the relevant facts from record. Ground No. 2 of assessee s C.O. is accordingly treated as allowed for statistical purpose. 36. The issue raised in ground No. 3 relates to disallowance of Rs. 1,72,900/- made by the A.O. and confirmed by the ld. CIT(A) on account of payments made to foreign technicians. 37. The expenditure claimed by the assessee on account of pa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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