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TMI Blog2002 (8) TMI 850X X X X Extracts X X X X X X X X Extracts X X X X ..... upholding the said disallowance, the CIT(A) erred in not appreciating the fact that the said expenses were eligible for deduction under s. 37(1) in spite of the withdrawal of s. 35CC." 4. During the year under appeal, the assessee claimed a sum of ₹ 2,15,000 on account of expenses on rural development. It was submitted before the AO that the assessee is committed to the welfare of the farmers and it had spent the amount towards helping the farmers of Kutch through a number of activities to develop and improve agriculture. It was further submitted that the expense is covered by the object of the company for carrying on business and the expense is approved by the shareholders of the company by special resolution passed on 28th March, 1978. The AO, however, rejected the assessee's claim with the following observations reproduced in para 4 of the CIT(A)'s order : "3(ii) Sec. 35CC specifically allowed the said expenses which are otherwise not an admissible deduction and with the withdrawal of the section, assessee is not justified in claiming the deduction. Acceptance of assessee's argument that the expense is approved by the shareholders would lead to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company in this direction will create a very good impact on the overall improvement of agriculture in Kutch. This will enhance the flow of various agricultural inputs more and more in this field. The farmers have already started realizing the importance of pesticides and other agricultural chemicals. It is visualized that the programmes initiated by the company will give a big boost to the use of these chemicals with more and more technology being made available to the cultivations. 8. It was further submitted that in order to run the above activities efficiently, the company incurs lot of expenditure in terms of creating infrastructure facilities, use of man power, agricultural land and other monetary and material inputs and accordingly, the flow of funds is a must to meet the recurring costs of salary, their travelling expenses, purchase of agricultural inputs and other relevant items. The learned counsel for the assessee placed reliance on the Circular No. 578 dt. 12th Sept., 1990, issued by the CBDT. He submitted that the expenditure claimed on this account was allowed in the past by the Department. 9. Shri Arun Dewan, the learned Departmental Representative, relied upon th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure incurred has direct nexus with the carrying on of business and accordingly, the same is to be allowed as business expenditure. We direct the AO to allow the same. This ground accordingly succeeds. 13. Ground No. 3 reads as under : "On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of a sum of ₹ 74,760 being rent paid for guest-house. The CIT(A) failed to appreciate that the provisions of s. 37(4) apply only to items of expenditure which are covered under s. 37(1) or s. 37(3) and as the rent paid for the guest-house was eligible for deduction under s. 30, the provisions of s. 37(4) are not applicable." 14. It has been submitted that such an expenditure has been allowed by the Tribunal in the earlier assessment years and reliance has been placed on the orders of the Tribunal, in the case of the assessee itself in ITA No. 2478/B/92 for the asst. yr. 1988-89, ITA No. 5630/Bom/1991 for the asst. yr. 1987-88, ITA No. 3540/Bom/1994 for the asst. yr. 1990-91 and ITA No. 9138/Bom/1991 for the asst. yr. 1986-87. 15. We have heard both the parties. In the case of Dy. CIT vs. The Andhra Valley P.S. Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Kar) 135: (1986) 162 ITR 562(Kar) (v) CIT vs. Ajanikumar & Co. (P) Ltd. (1997) 227 ITR 786(Raj) (vi) CIT vs. Andhra Sugars Ltd. (1997) 142 CTR (AP) 453: (1997) 225 ITR 118(AP) 20. Following the above decisions/judgments, we direct the AO to allow 1/3rd of the expenditure as having being incurred on employees. This ground accordingly succeeds in part pro tanto. 21. Ground No. 6 reads as under : "On the fats and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of project expenses written off amounting to ₹ 33,19,600. In upholding the aforesaid disallowance, the CIT(A) erred in not appreciating the fact that the write off of the said project expenses was eligible as a business loss under s. 29, since the concerned projects were a part of the existing business and the appellant had not obtained any advantage in the capital field and the decision to abandon the said project was taken during the relevant previous year on the grounds of commercial unviability." 22. The assessee had incurred a sum of ₹ 33,19,600 on two projects viz., ceramic project and high aluminium refractor cement project. The details of these expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Arun Dewan, the learned Departmental Representative, strongly supported the orders of the authorities below. He reiterated that the two projects were altogether new ones and had nothing to do with the business of the assessee and accordingly, it was a capital loss and not a revenue loss. 26. We have considered the rival submissions and perused the facts on record. It is noted that the company is manufacturing phosphorous and in the process of manufacturing this, slag is produced as co-product at the time of furnace tapping in the ratio of 1:8. In order to add substantial value to this co-product i.e., phosphorous slag, the company has developed a technology for the manufacturing of high aluminium refractory cement (HAC) which was the extension of the technology used for the development of ceramic tiles project. Thus, both the projects were conceived to utilize the bi-product i.e., phosphorous slag and accordingly, it cannot be said that the two projects were altogether new projects. In fact, the two projects were based on extension of existing business, but the projects were later on abandoned and the loss incurred, in the circumstances is a revenue loss in view of the judgments r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd sales-tax, the same are covered in favour of the assessee and against the Revenue by the decision of the Bombay High Court in the case of CIT vs. Sudarshan Chemicals Inds. Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769(Bom). As regards the other income, the matter is restored to the file of the AO with a direction to re-adjudicate in the light of the ratio laid down in Sudarshan Chemicals Inds. Ltd. (supra). 33. Ground No. 10 reads as under : "On the facts and in the circumstances of the case and in law, the CIT(A) erred in setting aside the issue regarding apportionment of expenditure towards dividend income for the purpose of granting deduction under s. 80M." 34. At the time of hearing, this ground was not present. The same is accordingly dismissed. 35. Ground No. 11 reads as under : "On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Dy. CIT in excluding items of 'other income' from the profits of the concerned undertakings for the purpose of computing deduction under s. 80HH." 36. This issue is covered in favour of the assessee by the orders of the Tribunal, Mumbai Bench, in asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction under s. 80-I." 42. Though the facts reveal that new unit was established which becomes eligible for deduction as decided by the Mumbai Bench of the Tribunal in the assessee's case for the asst. yrs. 1987-88 and 1990-91 in ITA Nos. 5630/Mum/1991 and No. 3540/Bom/1994, in view of the loss in the current year, no deduction can be allowed. This ground of appeal, therefore, is dismissed on technical ground. 43. Ground No. 15 reads as under : "On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Dy. CIT in excluding items of 'other income' from the profits of the concerned undertakings for the purpose of computing deduction under s. 80-I." 44. The assessee has filed details of 'other income' which is placed at p. 86 of the paper book. The Tribunal, Mumbai Bench, has consistently taken a favourable decision in the case of the assessee for the asst. yrs. 1986-87 to 1990-91. Copies of the relevant orders of the Tribunal are available at pp. 17 and 18 of the paper book. Respectfully following the aforesaid orders of the Tribunal, we decide this issue in favour of the assessee. Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X
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