9911796707
TMI Blog2010 (7) TMI 1048X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. Ground No.2. On this ground assessee challenged the order of learned CIT (A) in holding that the A O was justified in disallowing the assessee's claim of ₹ 14,48,82,053/- arising on account of adjustment made to the opening stock in the succeeding year and which has to be considered as closing stock of the year under consideration. The A O has discussed this claim in Para 14 of the assessment order. Assessee had claimed above deduction during the course of the assessment proceedings. The A O did not accept the claim because same was devoid of merit. The effect of change of method of valuation of closing stock had not been given in the assessment year 1994-95 under appeal and the position of effect in valuation of opening and closing stock had been given in accounts for assessment year 1995-96. The A O stated that Ashoka Mills merged with Arvind Mills Ltd. (assessee) with effect from 1-4-1994 and adjustment for change in valuat ion of stock of Ashoka Mills had no basis. The A O also stated that this claim was not made even in the revised returns. According to A O the assessee had already pressed adjustment of this amount in the assessment year 1995-96 and therefore, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year under appeal. However, it is clear that once addition is made on account of closing stock valuation, in the assessment year 1994-95 under appeal, it will be opening stock in the subsequent assessment year 1995-96. Therefore, the claim of the assessee for adjustment in the next assessment year is justified. Learned CIT (A) also noted that such claim will be considered in the relevant year. The submission of the learned Counsel for the assessee is also same that effect of the addition may be given in the assessment year 1995-96. We accordingly confirm the findings of the authorities below. However, A O is directed to consider the claim of the assessee for giving effect to the closing stock valuation in the subsequent assessment year 1995-96 because the valuation of closing stock for the assessment year 1994-95 will be opening stock in the subsequent assessment year 1995-96. The alternate content ion raised by the assessee before learned CIT (A) gets accepted. In view of the above finding and directions, ground No.2 of the appeal of the assessee stands disposed of. 8. Ground No.4. On this ground assessee challenged the levy of interest u/s 234B of the IT Act. Learned Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange difference arising on foreign currency transactions was to be recognized as income or as expenses in the period in which they arise except as stated in paragraph 10 and 11. The detailed submission of the Auditors in this regard finds place in Para 4.7 of the assessment order. When further asked to offer comments on the clarification issued by the Auditors, the assessee invited attention to Madras High Court's decision in the case of EID Parry Ltd. Vs CIT (174 ITR 11). In spite of that this decision, if the Assessing Officer at still considered that ₹ 1,76 crores was exigible to income-tax, the request of the assessee was that the amount spent for earning the same i.e. capital raising expenditure on GDR equity issue should be allowed as expenditure. It was on record that the expenditure incurred on GDR issue was ₹ 8.34 crores and the assessee had not claimed the same as expenses. 11. The Assessing Officer did not agree with the version of the assessee and went on to distinguish the facts of Tata Locomotive & Engg. Co. Ltd. from the facts of the present case. It was also held that reliance of the assessee on the case of CIT Vs Canara Bank Ltd. (53 ITRTR 328) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee." The assessee company has also relied upon the decision of Hon'ble Supreme Court In the case of Sutlej Cotton Mills (116 ITR 1). The assessee quotes from the case of Sutlej Cotton Mills as under: "The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." The assessee also quotes from the case of EID Parry (supra): "In the present case, it is not in dispute that the amount kept in the U.K arose out of subscription monies received for allotment of shares and there was no question of any sale of stock in trade. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry governmental approvals with respect of such expansion plans. Although Arvind believes that it will complete its expansion program on schedule and on budget, there can be no assurance that it will be able to do so." Then, just below that note, the main head 'USE OF PROCEEDS' appears as the following: "USE OF PROCEEDS" The net proceeds from the Offerings of 196.0 million (after deduction of underwriting discounts and estimated offering expenses and assuming no exercise of the Purchasers' over-allotment option) are currently expected to be used for general corporate purposes, including the purchase of property, plant and equipment in connection with the Company's capital expansion plans and the repayment of short-term debt," It was submitted that capital expansion was envisaged and the proceeds were to be utilized for augmenting the funds of the company exactly as proceeds of additional equity capital are normally earmarked or utilized. So there is no doubt that the proceeds of the GDR issue were clearly on capital account. Hence, it was further submitted that any accretion to those proceeds would also be clearly on the capital account. It was furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of Supreme Court in the case of Kedarnath Jute Manufacturing Ltd. Vs CIT (82 XTR 363) are absolutely relevant. "Whether the assessee Is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not on the view which the assessee might take of his rights, nor can the existence or absence of entries in his books of account be decisive or conclusive in the matter." 15. To similar effect are the observations of the supreme Court in the case of err Vs Chunilal V. Mehta & Sons (P) Ltd. (82 ITR 54). "The method of maintaining the accounts was one thing and actual entries in the account maintained was a different thing. What was relevant was the method of accountancy and not the actual entries. 16. In view of the above mentioned very apt judgments of the supreme Court, It is to be held that every claim of the assessee has to be adjudicated in accordance with the provisions of law relating to and not on the view which the assessee or the Assessing Officer might take with regard to that claim with reference to the entries made in the books of account. The way in which the entries are made by the assessee in the books of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a trading asset or as a part of circulating capital. This is held only on capital account and the subsequent accretion thereof is clearly on the capital account. In the appellant's case again there is no business transaction Involved and that surplus as arising on raising capital by GDR Issue and the same is clearly capital in nature. Accordingly, it is held that the amount of foreign exchange gain of ₹ 1,76.58,910/- is factually and legally not the revenue receipt and la accordingly not taxable. This ground of appeal is therefore, decided in favour of the assessee. 19. As referred above, the contention of the assessee before the Assessing Officer and before me also was that if it was considered that ₹ 1.76 crores was exigible to Income-tax* the amount spent for earning the same should be allowed as expenditure* Expenditure Incurred on ODR Issue was to.8.30 crores and the assessee had not claimed the same as expenses. It is pointed out that the Assessing Officer had not adjudicated this alternate plea at all. Since I have already decided the issue involved in favour of the assessee, this alternate plea is not further taken up for adjudication". 14. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The share capital so raised in foreign currency was thus capital of the assessee company and was rightly held to be capital in nature. The learned CIT (A) on proper appreciation of law rightly held that every claim of the assessee has to be adjudicated in accordance with the provisions of law relating to and not on the view which the assessee or the A O might take with regard to that claim with reference to the entries made in the books of accounts. The entries made in the books of account are not determinative of the question whether the assessee has earned any profit or loss. The true nature of the transaction shall have to be considered in view of the facts of the case. The A O has not brought any evidence on record that the amount in question was in the nature of circulating capital or if assessee did any business transaction out of that money. The learned D R merely relied upon order of the A O without pointing out any infirmity in the order of the learned CIT (A). The learned D R submitted that if any interest includes in the about amount, it is taxable. However, no evidence is brought on record if any interest was included in the aforesaid amount. The A O made addition on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8377; 4,73,75,000/- paid towards the principle amount. The premium on redemption of ₹ 13,87,650/- was admissible expenditure in respect of the borrowing against which provision of ₹ 8,70,000/- was made. According to the assessee, therefore, an amount of ₹ 5,17,650/- was admissible as difference between the premium provided and the premium actually paid. Debenture redemption account is reproduced in Para 5.3 of the assessment order. This amount of ₹ 21,07 lakhs was treated as revenue income by the assessee in its published a/cs in Schedule 11 'other income'. During the course of assessment, the Auditors of the assessee were asked to clarify the accounting treatment as given. The Auditors' version was that as per accepted accounting policy any gain or loss on redemption of a liability is to be accounted through the profit and loss account and accordingly, this amount has been shown as 'other income' in the profit and loss account. Assessee's version did not find favour with the Assessing Officer who held that it was difficult to appreciate that the surplus is capital receipt and more so when this surplus had arisen in the course of cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer ought to have allowed premium paid on debentures to the tune of ₹ 13,87,650/-. No cogent reasons have been advanced by the Assessing Officer for rejecting the claim of the appellant company. The premium has been discharged during the year under consideration and in view of the I.T.A.T decision in the case of Rallis India Ltd. (24 ITD 496) and also ITAT's decision in the case of Arvind Hills Ltd in ITA No.4800, it was submitted that this was allowable expenditure. The assessee also relies on the decision of Supreme Court in the case of India Cements Ltd. (60 ITR 52) for its submissions and Calcutta High court's decision in Tungabhadra Inds. Ltd. (207 ITR 553). It was pointed out that Supreme Court has held in the case of Chhaganlal Mangaldas & Co. (39 ITR 8) that book entries are not conclusive evidence. The hypothetical income is not an Income for the purpose of levy of tax tinder the Income-tax Act. The assessee also refers to the decision of Supreme Court in the case of Shoorji Vallabhdas 6 Co. (46 ITR 144) wherein it has been held that accounting entry cannot become income unless income has actually resulted. It was concluded by arguing that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the issue involved, it is held that the Assessing Officer was not justified in taxing the amount of ₹ 21,07 lakhs being surplus on early redemption of debentures. This ground of appeal is accordingly decided in favour of the assessee. 19. The facts of the 3rd ground of appeal are that the assessee had credited to capital reserve profit on re-issue of forfeiture of shares amounting to ₹ 7.46 lakhs and profit on forfeiture of debentures amounting to ₹ 42.52 lakhs. The assessee was required to clarify as to why the profit on forfeiture on debentures should not be treated as income liable to tax. In compliance, the assessee contended that during the year under consideration, there was forfeiture of equity shares on account of non-receipt of call money, similarly 0% FCDS were also forfeited on account of non-receipt of call money. It was contended that though the definition of the word one was inclusive yet the same could be made applicable provided nature of receipt was revenue. Reliance in support was placed on the judgment of Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. Vs CIT (116 ITR 1) and that of Tata Locomotive company Ltd. (60 ITR 405). It wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous year relevant to this appeal, that is at the beginning of the immediately succeeding year which is as good as the end of the previous year relevant to this appeal. The point is that the surplus was on those FCDs which were convertible fully into equity shares partly in the beginning of the previous year relevant to this appeal and partly on the first date of the succeeding previous year. Thus, good part had already become convertible in the beginning of the previous year and the remaining part was convertible on the date immediately succeeding the end of the previous year relevant to this appeal. Those FCDs were conceptually and qualitatively as good or bad as equity shares themselves. Obviously, for the facility of accounting and identification they were continued to be termed and dealt with as FCDs. so the logic and reasoning followed In the assessment order for not taxing the surplus on forfeiture of equity shares applies very substantially to the surplus arising on the forfeiture of these FCDs also, hence the same is held to be not taxable. It is also held that issue of debentures is also on capital account and hence the amount received on forfeiture is also on capital acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the assessee as far as forfeiture of equity shares was concern and was treated as capital receipt but forfeiture of debenture was held to be on account of revenue receipt. The learned CIT (A) considering the previous history of the assessee and nature of the transactions held that issue of debenture is also on capital account and hence the amount receipts on forfeiture was also on capital account. ITAT Ahmedabad Bench in the case of Brijlaxmi Leasing & Finance Ltd. (supra) considering the decision of the Hon'ble Supreme Court in the case of T. V. Sundaram Iyenger & Sons Ltd. 222 ITR 344 considered the issue in which assessee claimed that since amount initially received pertain to capital receipt, forfeiture of such receipts could not be treated of revenue nature. The A O rejected the claim of the assessee. However, learned CIT (A) allowed the claim of the assessee. It was held "Whether since amount was received against the issue of shares which was not business of assessee-company, same could not be treated as receipt in normal course of business - Held, yes - Whether, moreover, since assessee had not credited forfeited amount in its profit & loss account but contradistin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to clarify the position regarding capitalization of aforesaid commitment charges paid to Ashoka Mills Ltd. Auditors' version in this regard finds place at page 66 of the assessment order. The finding of the Assessing Officer accordingly was that once the amount paid has been properly capitalized as per accounting standards of ICAI and has been approved by law as well as general share holders regarding the treatment given in published accounts, assessee has no case for asking for a different treatment for income-tax purpose. The expenditure was held to be capital in nature and assessee's claim of deduction was accordingly rejected. 26. The addition was challenged before learned Commissioner of Income Tax (Appeals) and it was pleaded that this amount was paid by the assessee to Ashoka Mills Ltd. in connection with the agreement to make available manufacturing infrastructure facilities of the said company for manufacture of yarn. The agreement was for the period of 7 years and could be terminated by giving three months' notice. Thus, there was no permanent right available to the assessee by payment of commitment charges. It was submitted that the payment of commitment c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny had paid to.46.54 lakhs to Ashoka Mills Ltd. in connection with its agreement to use manufacturing infrastructure facilities of Ashoka Mills Ltd. for manufacture of yarn. The agreement was for a fixed period and could be terminated, by the appellant company by giving three months notice. In this context, it is obvious that no permanent rights had been obtained and accordingly it could be inferred that by paying commitment charges no advantage of enduring nature had been obtained by the appellant company. If read in proper perspective the payment of commitment charges has nothing to do with the installation of plant and machinery. Commitment charges were clearly payable related to yarn manufacture with a clause of minimum payable rent. It is a matter of record that the Assessing Officer had clearly held that the business of the appellant company was manufacture of textiles. It is also undisputed that the appellant had spare weaving capacity for textiles and to make full use of the same. Infrastructure facilities of Ashoka Mills were obtained so that yarn could be manufactured to enhance the production, commitment charges were accordingly production linked expenses which were clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tries. The question of such entries being erroneous or otherwise is not relevant to the issue. In view of this discussion, it is held that the appellant company being already in textile business of manufacturing cloth, the agreement entered for obtaining infrastructure facilities would entitle the appellant company to claim the commitment charges paid under such agreement as revenue expenditure. This ground of appeal is accordingly decided in favour of the assesses, since the assessee succeeds fully with regard to this ground of appeal, the alternate ground Is not further adjudicated. 27. The learned D R relied upon order of the A O and submitted that the expenditure should be capitalized being related to period prior to commencement of production and is capital in nature. On the other hand, learned Counsel for the assessee reiterated the submissions made before authorities below and submitted that expenditure was revenue in nature because same commitment charges were production linked expenses. 28. We have considered the rival submissions and do not find any merit in this ground of appeal of the revenue. It is admitted fact that Assessee Company had paid ₹ 46.54 lacs to As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear under consideration, the assessee company had entered into an agreement with recognized union to retrench employees under Voluntary Retirement Scheme. This scheme was also approved by the C.I.T. Total expenditure incurred debited in the books of accounts and payment made during the year was ₹ 37,44 ,315/-. However, the assessee company transferred ₹ 7,58,863/- to profit and loss account and treated balance amount of ₹ 29,95,452/- as deferred expenditure. (ii) Technical audit fees Rs..72.63,386/- During the year under consideration, the assessee company had incurred expenditure for conducting technical audit by M/s. Ghersi & Co. for which they had charged ₹ 90,79,232/-. Total expenditure incurred, debited in the books of account and paid during the year was ₹ 90,79,232/-. However, the assessee company had transferred 1/5th expenditure incurred i.e. ₹ 18,15 ,846/- to profit and loss account and treated the balance amount of ₹ 72,63,386/-as deferred expenditure. (iii) Management services fees ₹ 3,66,78,466/- During the year under consideration, M/s. McKensy & Co., an international firm based in USA was employed for management c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the business or profession shall be allowed in computing the income chargeable under the head "profits and gains of business or profession." According to this section, if the following requirements are satisfied, deduction has to be allowed u/s. 37 of the Act. (i) The expenditure must have been laid out wholly and exclusively for the purpose of business of the assessee (ii) The expenditure must not be capital in nature: (iii) The expenditure must not be personal in nature It was submitted that the Assessing officer himself has allowed l/5th of the expenditure as business expenditure as he was satisfied about the three conditions stated here-in above. It was only the accounting treatment given by the assessee company which has made him not to allow 4/5th of the expenditure in the assessment year. Again, it was not the case of the Assessing Officer that the expenses were not incurred In the previous year relevant to the present assessment year. It was therefore, submitted that the A.O. ought to have allowed the balance of 4/5th of the expenditure as business expenditure either u/s.28 or 37 of the Act. It was further submitted that an assessee following mercantil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ither capital or revenue in nature. Every case has to be examined and decided on its facts and merits. The purpose for which the expenses have been incurred is always 4 relevant factors for deciding as to whether an expenditure is revenue expenditure or a capital expenditure. Generally speaking, retrenchment expenditure, technical audit fees and management services fees are in the nature of revenue expenditure. In the case of the assessee, method of accounting of the appellant company is mercantile. This system of accountancy takes into account income and expenditure on accrual basis. It is beyond doubt that all the expenses as Mentioned above had accrued in the relevant assessment year. These expenses were also paid during the relevant assessment year. The only point which has been adversely taken into account by the Assessing Officer is that in the books of a/acs, the expenses were treated as deferred revenue expenditure. But then the fact also remains that the assessee had revised its claim subsequently and what is to be allowed is the expenditure which is due and not the expenditure which has been treated differently in the books of a/cs. Various court decisions are available o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the rival submissions and the case laws cited above, we do not find any merit in the departmental appeal on this ground. It is settled law that deferred revenue expenditure is not concept recognized under Income Tax Act. The provisions of Income Tax Act shall have to apply for the purpose of allowing deduction if it is revenue expenditure in nature. The concept of deferred revenue expenditure is essentially an accounting concept and alien to IT Act. The relevant provisions of Income Tax Act recognized only capital or revenue expenditure. Therefore, even if auditors have advised the assessee not to charge the profit & loss account of this year with the whole of the expenditure and treated it as deferred revenue expenditure, it may be according to accounting principle, but certainly its deductibility has to be determined in accordance with the provisions of IT Act. Since, the assessee laid out the above expenditure wholly and exclusively for the purpose of business therefore, whole of the amount shall have to be allowed deduction in the assessment year under appeal because the assessee followed mercantile system of accounting and was entitled for deduction of the entire expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Assessing Officer for verification and allowance. The learned CIT (A) however, noted that the issue of management services fees paid to M/s. Mckensy & Co. has been decided by him in above ground and it has been held that this payment is in the nature of revenue expenditure and has to be allowed. Since the amount of ₹ 94,47,117/- is in continuation of the same payment, a similar finding has to follow. A claim in this regard had been made before the Assessing Officer who insisted on submitting a copy of the bill. The said copy was also furnished and the same was available on record. From the said copy, it is clear that expenditure of ₹ 94,47,117/- had accrued during the year in which services had also been obtained. However, in spite of the claim being on record, the Assessing Officer did not entertain the same. Learned CIT (A) therefore, noted that since the Issue has already bean decided by him in the above ground, the same finding is to be given with regard to this ground of appeal, too. In the facts and circumstances of the Issue involved, it was held that fees payable to Mckensy & Co. is allowed at ₹ 4,61,25,636/- inclusive of short provision of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible to ascertain expenses under different heads incurred by EOU and other units, it cannot be denied that certain portion of expenses might be related to EOU and a broad estimate of expenses of ₹ 68.92 lakh, (other than insurance) were attributable to EOU. He says that total expenses claimed for this year are ₹ 38 crores, as against the last years' claim of ₹ 20 crores. In Sub-Para 5 at page 77 of the assessment order, the Assessing Officer has further stated that during the assessment proceedings the assessee had stated before him that the expenses which were not specifically incurred for those units cannot be allocated there against. He referred to section 10B(8) and (9) and states that as per the said provisions if it appears to him that when the course of business is so arranged that the assessee is earning more than the ordinary profit which might be expected to arise in the business of the industrial undertakings carried on by the assessee, then the Assessing Officer shall - compute the profit and gain of the undertaking for the purpose of deduction and take the profit as may reasonably be deemed to have been derived there from. He further says tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer has made the assessee's agreeing to a basis for addition in assessment proceedings for A.Y. 1993-94, it was submitted that in that year it was agreed conditionally and to avoid litigation and just to buy peace. However, such agreement cannot be applied to this year. As regards the reference made to section 10B(8) and (9) of the income-tax Act, it was submitted that in section 10B as it stood then, sub-section (8) and (9) did not exist at all. Presumably, the assessment order intended to refer to sub-section (6) of section 10B which laid down, in effect, that the provisions of sub-section (8) and (9) of section 80-I shall apply mutatis mutandis. So, even if the assessment order intended to invoke the provisions of sub-section (8) and (9) of section 80-I, a reference to section 80-I, would reveal that sub-section (8) thereof authorizes the Department to appropriately and reasonably adjust the prices of goods transferred to and from the eligible unit to or from other units owned by the assesses. In the case of this assessee, this particular provision has not been invoked even in the assessment order. This is obvious from the fact that even in the assessment order, allocation is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that department's approach of allocating indirect expenses for newly started units whose incomes are exempt has been disapproved by the Tribunal in the case of another group company viz. B. Cibatul Ltd. for A.Y. 1989-90. The above was decided as ITA No. 3259/Ahd/1992 and the department sought reference u/s. 256(1) which was rejected in Tribunal's order RA No.1013/Ahd/1998 dated 12.4.1999. In that order of RA, the Tribunal reproduced some parts of the main order in appeal. Relevant observation (from the bottom of page 2) is as follows' " ...... The contention of the A0 that each and every Indirect expense Incurred by the assessee should be allocated to the newly industrial undertaking is not tenable because If It applied it would lead to most Illogical conclusion etc. ..." ITAT has in this case categorically held that the basic accountancy principle in such a situation ought to be found out is the expenditure of the assessee company, had the new plant been installed and had the new plant not been installed. The difference between two can only be considered to be expenditure of new industrial undertaking. It was submitted that if the department shows ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r makes a reference to section 10B (8) and (9) of the Income-tax Act. In section 10B as it stood at the relevant time, sub-section (8) and (9) did not exist at all. I am in agreement with the appellant when it is said that presumably, the assessment order Intended to refer to sub-section (6) of section 10 which laid down that the provisions of sub-section (8) and (9) of section 80-1 shall apply mutatis mutandis. Reference to section 80-1 reveals that sub-section (8) thereof authorizes the Revenue to reasonably adjust the prices of goods transferred to and from the eligible unit to or from other units owned by the assessee. Obviously in the case of the assessee, this particular provision does not stand invoked. This is obvious from the fact that allocation is attempted only for some items of indirect expenses and not of the price of transfer of goods. Similarly, sub-section (9) of 80-1 is also not of much help. Appellant's clarification in this regard has absolute merit and the same is to be relied upon. In this view of the discussion, it is held that neither section 10B nor section 801 whose some provisions are considered applicable to the EOUs covered by section 10B, contain a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the clause was to disallow a part of the allowance under that section only when the entire deduction claimed could not be regarded as being relatable to exports". Hon'ble Madras High Court in the case of CIT Vs Suresh B. Mehta 291 ITR 462 relying upon the decision in the case of Rathore Brothers held that when assessee maintain separate accounts, independent of each other business, A O calculating deduction on the basis of total turnover of all business of assessee not proper. Hon'ble Delhi High Court in the case of CIT Vs Sona Koyo Steering System Ltd. 321 ITR 463 observed that the plea of the assessee before the Tribunal was that two units were independent units and only the profit making unit should be considered eligible for the purpose of computing the deduction u/s 80 I read with provisions of section 80 I (6). The Tribunal accepted the plea of the assessee. Hon'ble High Court dismissed the departmental appeal by holding that while computing the quantum of deduction u/s 80 I (6) the A O had to treat the profit derived from an industrial undertaking as the only source of income of the assessee in order to arrive at a deduction under Chapter VI A. Considering t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der of the learned CIT (A) in deleting the disallowances. We confirm his findings and dismiss this ground of appeal of the Revenue. 42. On ground No.8: Revenue challenged the order of the learned CIT (A) in directing to delete the allocation of interest of ₹ 1,47,27,379/- on 12.5% PCD to Arvind International. 43. Briefly, the facts of the case are that it was submitted before learned CIT (A) that the Assessing Officer has erred in holding that Interest paid on 12.5% PCD is allowable to EOU, Arvind International and thereby reducing the profits of this unit by Rs. l,47,27,379/-. The issue has been discussed in para 13 of the assessment order. The A.O. has stated that the terms of issue of partly convertible debentures were examined by him and according to him it was no where stated that the proceeds of the convertible debentures were meant for Arvind International and the non-convertible part was meant for Poplin Project. A O said that merely because the charge was created for securing debentures on the Naroda unit, the interest expenses cannot be accounted for in the Poplin project at Naroda and the same were required to be accounted for in the project where the funds were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad, but it was at Khatrej, while the Poplin Project was at Naroda Road which was the main center for the assessee company. The non-convertible part was repayable after a long period and it was secured against the charge on the Naroda Road asset. Therefore, the assessee was justified in claiming that the interest on non-convertible part of PCD was fully attributable to Naroda Road project and it was not allocated to the assets of Arvind International which were of Khatrej. It was submitted that the Assessing Officer was not justified in rejecting this submission of the assessee. The point was that in the proceeding years when interest was payable on the convertible as well as nonconvertible portions, some allocation was done by the assessee itself. When the interest is payable only on the non-convertible part, the assessee's action of allocating the Interest in earlier two years should not go against it. The assessee was reasonable in allocating the interest in preceding two years because that interest pertained also to the convertible part of the PCDs. In this year interest pertains only to the non-convertible part and it was secured against the charge on Naroda Road property and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced as under: "65 I have carefully gone through the issue involved. The Assessing Officer has allocated interest amounting to Rs.l,47,27,279/- as interest allocable to Export Oriented Unit, viz. Arvind International. But this allocation is found to be not warranted either on facts or on law. It is a matter of record that the assessee company is maintaining Operate set of books of account for Arvind International and the books are duly audited. In A.Y. 1993-94, the appellant company had issued ₹ 65,44,384/- 12.5% secured redeemable partly convertible debentures of to.140/- each, aggregating to ₹ 91.62 crores. Out of this, ₹ 22,90,53 ,440/- were non-convertible Part B debentures. When the accounts were prepared and submitted in earlier year, the proceeds of convertible portion were utilized for Arvind International Project. This fact/proposition was accepted by the Revenue. The appellant company had in the earlier years capitalized the Interest portion related to conversion portion that was utilized for purchase of plant and machinery of EOU in its books of account and this too had been accepted by the Revenue. Since convertible portion was converted in capital, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmissible under the law. 47. We have considered the rival submissions and do not find any merit in the appeal of the Revenue on this issue. The assessee made specific submissions on this issue and clearly distinguished the facts of the earlier year with the facts of this year. The learned CIT (A) considering the facts and material on record gave a specific finding of fact against the revenue. The learned CIT (A) noted from record that assessee company was maintaining separate sets of books of accounts for Arvind International and books are duly audited. In preceding assessment year the assessee had issued secured redeemable partly convertible debentures out of this part were non-convertible part B debentures. When the accounts were prepared in the earlier years, the proceeds of convertible portion were utilized for Arvind Internat ional Project. The learned CIT (A) considering the facts of earlier year and this year specifically noted that hypothetical allocation is not permissible because certain proposition of law is that only the actual expenditure incurred by the assessee shall be deducted from the income. The learned CIT (A) noted that since the loan is secured on charge crea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 997 at various premises as mentioned on page 99. In this context and background, the different sale and lease back transactions are discussed as under: (A) Sale and Lease Back transaction with L & T: The Assessing Officer has discussed this issue on page 98 onwards. He has stated that the asset was re-valued at ₹ 24 Crores the date of transfer and thereafter its depreciated value was worked out to ₹ 12 crores as on the date of transfer at which value the transfer was made to the assessee. He has stated that agreement was not entered into on 29.9.1993 which is the date of the agreement. To conclude this, he has referred to statement of one Mr. B.M. Shah, Vice-President (Corporate Finance) of Arvind Mills Ltd. who was authorized to sign on behalf of the assessee company. On the basis of this statement, Mr. B. M. Shah, concluded that on 29.9.1993 he was not in Bombay whereas the agreement as dated 29.9.93 which was signed by him. The A.O. has further stated that in the statement of one Mr. Sanjay Dalal recorded by him, it was stated that the document from the Surveyor reporting that the asset was entitled to 100% depreciation was received by the office of Arvind Mills Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e fulfilled. On page 114, the Assessing Officer has referred to Explanation 3 below section 43(1). He has stated that the asset was acquired by L & T at the cost of ₹ 2.72 crores, 11 years prior to the present transaction and the book value thereof on the date of transaction was ₹ 34 only. He says that the WDV of the asset as per the Income-tax records of L&T was Rs. Nil, He says that the assets of the book value of ₹ 34 was revalued at ₹ 24 crores and therefore there is no basis for such valuation. He has stated that he had, therefore, to determine the value of the asset as per acceptable standards. He has stated that there are two methods for valuation and he was adopted higher of the two which is beneficial to the assessee as per market value of asset on the date of transfer. For this purpose, he has referred to RBI Bulletin for index and on that basis given the value of plant and machinery in 1983-84 and 1993- 94. Therefore, the value of the asset costing ₹ 2.72 crores to L&T is worked out in the same proportion at ₹ 6.22 crores. The Assessing Officer says that after considering 5% depreciation per year on the date of transfer, the depreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffect from Mr. Mayank shah was filed in the form of letter dated 21.3.97 with the Assessing Officer which has been over looked. As regards statement of Mr. Deosthalee it was stated that none of the questions and answers reproduced by the Assessing Officer suggest that the document was not signed in Sept., 1993. As regards statement of Shri Sanjay Dalal, it was stated that merely because according to the Assessing Officer, certificate regarding entitlement of 100% depreciation was received in October. 1993, it does not suggest that the document was not executed in Sept., 1993. It was further stated that the assessee has not been provided copy of his statement and any opportunity to cross examine him. It was also stated that none of the statements, are provided to the assessee for cross examination of the concerned persons and therefore, such statements could not be relied upon by the Assessing Officer as evidence against the assessee. It was further pleaded that statement of Shri Balkrlshnan referred to by the Assessing Officer clearly denied by Mr. Deosthatee and hence it cannot be relied upon by the Assessing Officer as evidence against the same. With reference to the observation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Department to prove that the main purpose of the transfer was the reduction of liability to income-tax. It was submitted that in the assessment order not a word is mentioned on this aspect of the matter, and hence, department's action for invoking the said Explanation 3 below section 43(1) is not at all in accordance with law. It was further submitted that the main purpose of transfer WAS the buy and lease back transaction. Further, assessee was bearing stamp duty of more than ₹ 48 lakhs and was also earning substantial taxable income in the form of lease rentals. Accordingly, Explanation below section 43(1) was not at all applicable. Further, the assessee submitted that the Assessing Officer is not a technical person to determine the value of the machinery and therefore, even if he wanted to invoke Explanation 3 he must have referred the valuation to the departmental valuation cell. However, he has not carried out the said process but estimated the value on his own by referring to the index price issued by RBI and also u/s. 48 of the Income-tax Act. Such index number does not indicate the market value and therefore, exercise carried out by the Assessing Officer was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In the circumstances, the Assessing Officer came to the conclusion that the rate applicable was 25% and not 100%. The Assessing Officer has for this transaction also invoked Explanation 4A below section 43(1) as in the case with the transaction with L & T. 52. The above findings were challenged before the learned CIT (A) and it was submitted that the Assessing Officer's observations are based on presumptions only. The appellant referred to the statement of Mr. B. M. Shah and contended that he has signed the document on 28.9.93 at Bombay but as the document was prepared earlier the place of signing has not been changed. This explanation cannot be denied by the Assessing Officer. The assessee has stated before him that the statement was to be signed in the office of Trikaya at Bombay. This explanation was merely brushed aside by saying that the assessee had taken a different stand. If the Assessing Officer was not satisfied with the explanation he could have made further enquiries with Raymonds and also with the office of Trikaya. Instead of doing so he has merely alleged that the statement could not be signed at A'bad by Mr. B. M. Shah when he was at Bombay on the said d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e simpliciter to the cost of fluidized bed boilers. No certificate whatsoever la necessary about the functioning of the boiler because it was not so prescribed. It was therefore, submitted that argument of the Assessing Officer that the certificate has been given without carrying out any efficiency test or visiting the plant site to verify whether the asset is still run at the required efficiency to be eligible for depreciation of 100% is irrelevant. The assessee company had also submitted certificate from Engineer Mr. Shailesh R. Shah. The same objections which were in respect of Mr. R. M. Patel were also taken in respect of Mr. Shailesh R. Shah. It was contended that there was no requirement of measuring the efficiency as has been contended by the Assessing officer. It was, therefore, submitted that in view of the clear rule prescribing 100% depreciation on fluidized bed boilers, the rate of 100% is applicable and therefore, the Assessing Officer ought to have allowed depreciation of ₹ 7.38 crores on the boilers purchased from Atul Products and given on lease to Atul Products. It was therefore, prayed that A O be directed to allow depreciation on all the transactions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctual' to the word 'cost'. This it precisely to put emphasize on the reality and the genuineness of the cost and to exclude collusive, inflated deflated or fictitious cost. Accordingly, it is not permissible to the Assessing Officer to reject the cost paid for the transfer unless the Assessing Officer is satisfied that the actual cost paid by the assessee was inflated cost by reason of fraud, collusion, subterfuge, device or false transaction made with an ulterior purpose. In the present case, there is nothing to suggest that the actual cost paid by the assessee was inflated cost by reason of any fraud etc. To my mind, the Assessing Officer in the facts and circumstances of the present case was not justified in determining the purchase price on his own. For reaching this finding I am guided by the decision of the Jaipur Tribunal In the case of Dy. CIT Vs Metalizing Equipments Company (P) Ltd. (54 TTJ 620). The relevant part is extracted below: "Any device which has the effect of reducing the incidence of tax is not necessarily a colourful device liable to be demolished by the ratio of the supreme Court's decision in McDOwell Co. Ltd. Vs CTO (1985) (154 ITR 148). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a higher, valuation by itself cannot be considered an act on the part of the assessee showing his intention to reduce the tax liability. In the present case, the provisions of Explanation 3 have been invoked without causing proper enquiry and without proving any element of fraud to deprive the revenue of its due share. In the facts and circumstances, It Is held that Assessing Officer's action for invoking the said explanation was not at all in accordance with law. The obvious purpose of transfer In this case was the buy and lease back transaction. Further, assesses was bearing stamp duty of more than ₹ 48 lakhs and was also earning substantial taxable Income In the form of lease rentals. In this context, there was nothing to prove that Explanation 3 below section 43(1) was applicable at all. In nut shell, the gist of the finding is that provisions of Explanation 3 to section 43(1) have been wrongly invoked in the case of the appellant. 88. In view of the two Issues as adjudicated above, the individual claim of depreciation in different cases Is adjudicated as under: (i) Larsen & Tubro Ltd, : The charge of the Assessing Officer is that the agreement of sale and lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pancies for which there are obvious clarifications. He has been influenced to a large extent by the alleged non-availability of the schedule which did not necessarily form part of original agreement dated 29.9.93. When the payment has been made in full and lease rentals have started from the said date, reliance on different discrepancies as pointed out was perhaps of lesser importance. The Assessing Officer was also influenced by the fact that the transfer on the date claimed could not be made In view of the charge of IDBI on the plant and machinery. The Assessing Officer felt that the sale deed was ab-initio void since the charge of IDBI was subsistent. This is not the correct legal inference since the plant could be sold with a charge subsisting and the charge was later on released by IDBI too. Simply on this account the deed could not be held to be ab-initio void. With this discussion, it is held that the agreement could have been signed on 29.9.93. No doubt, discrepancies do exist but in view of the fact that full payment has been made and clarifications with regard to the discrepancies also genuinely exist, the agreement could have been possibly signed on the date as claimed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis of literature of the boiler in question. In totality of circumstances, there is nothing which could be held against the assessee on the rate of depreciation as claimed. 90. With this discussion and in view of what is discussed earlier as above, the claim of the assesses is directed to be allowed as made. (iii) Sale & Lease back transaction with Atul Ltd.: 91. So far as this claim of the assessee is concerned, there is no reasonable basis for any dispute. The rate of depreciation in respect of such boilers is clearly 100% as has been highlighted in the submissions of the appellant as recorded above. No certificate of any kind was necessary with regard to the functioning of the boiler because it is not so prescribed. In view of the clear rule prescribing 100% depreciation on fluidized bed boilers, the rate of 100% is held to be applicable. The Assessing Officer is accordingly directed to allow the claim of depreciation as made. 92. With this discussion, this ground of appeal is decided in favour of the assessee". 56. Learned D R relied upon order of the A O. He has submitted that in the case of L & T Ltd. the WDV was nil in the books of account which was revalued at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed into with the above three parties. The assessee has received lease rental income brought to charge of tax for the six assessment years 1994-95 to 1999-2000 and received lease rental from these parties in a sum of ₹ 28,00,77,572/- as against which the assessee has claimed depreciation @100% in a sum of ₹ 20.32 Crores. Thus, taxes have been paid on surplus of about ₹ 8 Crores. The sale and lease back have benefited the Revenue and the assessee company has not derived any advantage of reduction of its tax liability. There was no motive of tax avoidance. Therefore, there was no basis for the A O to take the view against the assessee that sale and lease back transaction was a device to deprive the Revenue of taxes or to invoke the provisions of Explanation 3 to section 43 (1) of the IT Act. Details of the lease rental are filed in Annexure A which would show that assessee received lease rental income from the day one when agreement was entered into. During the year under consideration, assessee has disclosed lease rental income of ₹ 2,56,99,652/-. He has relied upon decision of the Hon'ble Gujarat High Court in the case of CIT Vs Gujarat Gas Company in whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A O therefore, assumed agreement must have been executed in October, 1993 and that transaction was not genuine as per Explanation 3 to section 43(1). Learned Counsel for the assessee by referring to the above observations of the Assessing Officer submitted that details submissions were filed before the A O which has been ignored. The assessee filed detailed submissions before the learned CIT (A) which have been rightly appreciated by him. He has submitted that Explanation 4A to section 43(1) was inserted in the Act with effect from 01- 10-1996. Therefore, it is not applicable to the case of the assessee which is also clarified by the CBDT circular No.762 dated 18-02-1998 copy of which is also filed in the paper book. The same view is taken by CIT (A) in the case of Pinacle Finance Ltd. which is confirmed by the Tribunal. Same view is taken by Hon'ble Madras High Court in the case of Om Sindhury Capital Investments Ltd. 274 ITR 427. He has submitted that Shri B. M. Shah was available in Bombay on 28-09-1993 and has signed the lease agreement on the same day. Confirmation of Mayank Shah was filed before A O who was a witness to the agreement. He has submitted that there was no i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Counsel for the assessee contended that lease agreement with Raymond Woolen Mills Ltd. was also executed similarly on 29-09-1993 and signed by Shri B. M. Shah as is considered by learned CIT (A) in the case of L & T Ltd. With regard to transaction with Atul Products Ltd., there is no dispute regarding date and only dispute is regarding rate of depreciation. Leaned CIT (A) specifically noted that 100% depreciation is allowable as per rules; therefore, no further evidence is required. He has submitted that Explanation 3 to section 43 (1) is not applicable in this case because there is no reduction in tax liability. He has submitted that the cost paid by the assessee for purchase of plant and machinery cannot be disputed therefore, learned CIT (A) was justified in holding that Explanation 3 to section 43 (1) would not apply in this case. The A O has also not made proper enquiry as per the above explanation. He has relied upon order of ITAT Ahmedabad Bench in the case of ACIT Vs Gujarat Lease Finance Ltd. 174 Taxman - Magazine 28, in which certain guidelines have been issued for genuine sale and lease back transaction which are satisfied in this case as the assessee owned the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned CIT (A) referred to the statements recorded by the A O in the impugned order. In the statement of Shri B. M. Shah it was clarified that he was in Mumbai on 28-09-1993 and since lease agreement was ready, therefore, he signed the document on 28-09-1993 in the presence of witness Shri Mayank Shah who also appended his signature to the lease deed on 28-09-1993. The confirmation of Shri Mayank Shah was filed before the authorities below (PB-95) in which he has confirmed that agreement was signed on 28-09-1993 on behalf of the assessee by Shri B. M. Shah and he had witnessed the same. It was also confirmed that Shri B. M. Shah was present in the office of L & T Ltd. on the said date. The A O did not dispute this fact. Therefore, the A O should not have ignored this vital piece of evidence and should not have presumed that the agreement was antedated later on. The statements of Shri B. M. Shah and statement of Shri Y. M. Deosthalee of L & T Ltd. would not suggest that these documents were not signed in September, 1993. The confirmation of Shri Mayank Shah, witness has not been disputed by the A O. The learned CIT (A) also recorded finding of fact, entire purchase price of plan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not owner of the plant and machinery because deed was not registered as the same has been treated immovable property by the assessee. It may be noted here that plant and machinery are movable properties, therefore, even if assessee has stated the same as immovable property, would not make it the same. The assessee has purchased plant and machinery by making payments. No other land or property is purchased; therefore, it could not be permanently attached with the land of others. Section 4 of the Sale of Goods Act provides a contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. A contract of sale may be absolute or conditional. Where under a contract of sale the property in goods is transferred from the seller to the buyer, the contract is called sale. Section 5 of the Sale of Goods Act provides a contract of sale is made by an offer to buy or sell goods for a price and the acceptance of such offer. The contract may provide for the immediate delivery of the goods or immediate payment of the price or both or for the delivery or payment by installments or that the delivery or payment or both shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details filed in Annexure A further shows that assessee started receiving lease rental income from the day one when agreements have been entered into with the parties. Hon'ble Gujarat High Court in the case of CIT Vs Gujarat Gas Company Ltd. 308 ITR 243 held as under: "The assessee entered into a lease agreement with the State Electricity Board engaged in generation of electricity. The assessee got the electrical equipment and leased out it to the Board. The assessee showed the lease rent received from the Board as its income and also the machinery purchased during the year in the audited balance-sheet. The Revenue contended that the transaction of lease was not genuine and the assessee was not entitled to depreciation. The Tribunal held that the transaction was genuine and set aside the order of the Commissioner (Appeals) and allowed depreciation. On appeal: Held, dismissing the appeal, that the lease rental paid by the Board had been found by the High Court to be an allowable deduction as the transaction was genuine. Correspondingly in the hands of he assessee, the lease rental had been taxed as business income and it had not been disturbed by the Assessing Officer despit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o reduce the tax liability; therefore, there is no need to determine the cost of the assets. Moreover, the A O has not conducted any proper enquiry into the matter to prove the above facts. Hon'ble Orissa High Court of Industrial Development Corporation of Orissa Ltd. 268 ITR 130 held that no evidence that transaction was not genuine, assets entitled to depreciation. Therefore, the learned CIT (A) was justified in holding that Explanation 3 to section 43(1) has been wrongly applied in the case of the assessee. The assessee has given full clarifications on all the discrepancies noted by the A O. 58.4 Considering the above discussions it is clear that the A O observed that the sale and lease back transactions are not genuine on finding some contradictions in the statements of various persons which in our opinion were not vital and signif icant to the matter in issue. No other evidence or materials have been brought on record against the assessee for rejecting the transactions. Therefore, learned CIT (A) on proper appreciation of materials and evidences on record rightly allowed claim of depreciation in favour of the assessee. In the result, we uphold the finding of the learned C ..... X X X X Extracts X X X X X X X X Extracts X X X X
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