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TMI Blog2021 (12) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... ITAT was justified in allowing the deduction under Section 80IA when the assessee had declared loss under the head profits and gain of business? - An industry entitled to the benefit of s. 80E could have its profits wholly wiped out on adjustment against a heavy loss suffered by another industry, and thus be totally denied the relief which should have been its due by virtue of its profits. In our opinion, each industry must be considered on its own working only when adjudging its title to the deduction under s. 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. To determine the benefit under s. 80E on the basis of the net result of all the industries owned by the assessee would be, moreover, to shift the focus from the industry to the assessee. We hold that in the application of s. 80E the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. In the circumstances, we hold that the scope of deduction under Section 80IA of the Act is limited to determination of quantum of deduction by treating eligible busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing the deduction of interest when assessee failed the tests of interlacing and enter dependences unity of control and management conditions necessary for deduction u/s. 36(1) (iii)? 2. The subject matter relates to Assessment Year 1996-1997. As regards question no.1, the Assessing Officer had disallowed a sum of ₹ 6,15,40,000/- debited to advertisement and sales promotion being the amount of expenditure incurred towards foreign travel scheme for respondent s dealers and distributors. Respondent had a wide dealer network throughout the country. On 10th January 1996, respondent had devised a scheme (hereinafter referred to as FTS), whereby the distributors/ dealers would be eligible to travel to foreign country at the expense of respondent. This was announced as a sort of incentive to the dealers/distributors who had achieved a particular turnover in the last three years. On the basis of these details, a provision was made in the books of account in the sum of ₹ 6,15,40,000/- and the same was claimed as a liability deductible in the computation of business income. The Assessing Officer and the CIT (A) held that the liability has not crystallized and was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... method of mercantile system of accounting. It has been held that, mercantile system of accounting is that system which brings into credit what is due, immediately it becomes legally due and before it is actually received and it brings into debit expenditure the amount for which a legal liability has been incurred before it is actually disbursed . Even in Calcutta Co. Ltd. (Supra) the main ground of disallowance by the Revenue was that the expenditure was not actually incurred in the year of account, it was by no means certain what the actual cost would be and that there was as yet no accrued liability but only a contingent liability undertaken by the assessee. Rejecting the stand of the Revenue, the Apex Court held as under : There is no doubt that the undertaking to carry out the developments within six months from the dates of the deeds of sale was incorporated therein and that undertaking was unconditional, the appellant binding itself absolutely to carry out the same. It was not dependent on any condition being fulfilled or the happening of any event, the only condition being that it was to be carried out within six months which in view of the fact that the time was not of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent to incentivise its dealers and distributors, to discharge a liability which it had already undertaken and in our view was an accrued liability which, according to mercantile system of accounting, respondent was entitled to debit in its books of account for the Assessment Year 1996-1997. We, therefore, find that the view expressed by the ITAT that the moment the scheme was announced there arose a liability on the part of respondent to meet the expenses on the foreign tour of those dealers/distributors who were eligible, having satisfied the condition vis-a-vis achievement of sales targets during the last three years cannot be faulted. The ITAT on facts has also come to a conclusion, and we agree with that conclusion, that there being a binding contract under which respondent has undertaken to bear the liability in respect of the foreign travel expenses of the distributors/dealers under the FTS, the liability is not a contingent liability, but an ascertained or definite one or a liability in praesenti, solvendum in futuro. In the circumstances, the first question is answered in affirmative. 7. As regards the second question, it could be split into two parts (a) whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly. The seventh and last stage involves packing the seeds after weighment. It will thus be seen that the seeds are to be chemically treated to make them insect-free and tolerant to the climatic variations so that they will achieve better growth. Relying upon the judgment of the Apex Court in Commissioner of Income Tax V/s. Jalna Seeds Processing and Refrigeration Co. Ltd. 246 ITR 156 (Bom.), the ITAT came to a conclusion that a commercially different commodity is obtained after the raw seeds are processed, which was quite different from the raw seeds. Mr. Suresh Kumar submitted that if one examines the various stages through which the raw seeds go and the final product, it is clear that there is no manufacturing process involved in as much as the seeds, even after undergoing the process, remain seeds. 10. In the case at hand also a similar process, which is mentioned in Jalna Seeds Processing and Refrigeration Co. Ltd. (Supra), has been followed. Mr. Rai submitted that the processed seed is altogether a different product than the unprocessed seed and has commercial acceptance and is recognised by farmers as a seed. Seeds marketed as seeds and those marketed as food grains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he two eligible units only, i.e., Kallakal unit and Kamdod unit by way of apportioning the profit and the expenditure in respect of both these units. The Assessing Officer was of the opinion that in the absence of any profit derived from the business of the industrial undertaking, respondent was not eligible for deduction under Section 80IA of the Act. The Assessing Officer opined that nowhere it has been mentioned in Section 80IA that if there is a loss, even then the assessee is eligible for deduction to the extent of the gross total income. According to the Assessing Officer, Section 80A(2) only mentions about the aggregate amount of deductions and if the assessee is not eligible for deduction, there is no question of carrying the logic of allowing deduction to the extent of gross total income. The Assessing Officer concluded that respondent was not at all eligible for deduction and once it is not eligible for deduction it was not proper for respondent to claim any deduction. In short, the Assessing Officer rejected the claim on the following grounds : (i) The assessee has claimed a loss of ₹ 10,22,475/- under the head Business ; (ii) There is no profit from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (c)], it begins to manufacture or produce articles or things or to operate such plant or plants, at any time during the period beginning on the 1st day of April, 1991 and ending on the 31st day of March, 1995, or such further period as the Central Government may, be notification in the Official Gazette, specify with reference to any particular industrial undertaking. xxxxxxxxxxx (5) The amount referred to in sub-section (1) shall be - (i) (a) in the case of an industrial undertaking referred to in sub-clause (a) [or sub-clause (d)] of clause (iv) of sub-section 92), twenty-five per cent of the profits and gains derived from such industrial undertakings; (b) in the case of any industrial undertaking referred to in sub-clause (b) [or sub-clause (c)] of clause (iv) of sub-section (2), hundred per cent of the profits and gains derived from such industrial undertaking for the initial five assessment years and thereafter twenty-five per cent of the profits and gains derived from such industrial undertaking; Provided that where the assessee is a company, the provisions of this clause shall have effect as if for the words twenty-five per cent , the words thirty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mputed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year and to every subsequent assessment year up to and including the assessment year for which the determination is to be made (emphasis supplied). The Apex Court in Canara Workshops (P) Ltd. (Supra) has held as under : It is obvious from the object underlying the enactment of s. 80E and the terms in which it provides relief that the intention of Parliament in enacting the provision was to encourage the setting up of industries concerned with the generation or distribution of electrical and other energy and the construction, manufacture or production of articles or things specified in the list in the Fifth Schedule. The intention goes further. By making a provision for a rebate year after year on the industry making profits and gains during the year, the intention also was to provide an incentive for promoting efficiency in the industry. It is clear that the benefit was directed to the setting up and also the efficient working of the priority industries. How is the benefit to be worked out? First, it must be a company to which s. 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tally denied the relief which should have been its due by virtue of its profits. In our opinion, each industry must be considered on its own working only when adjudging its title to the deduction under s. 80E. It cannot be allowed to suffer because it keeps company with some other industry in the hands of the assessee. To determine the benefit under s. 80E on the basis of the net result of all the industries owned by the assessee would be, moreover, to shift the focus from the industry to the assessee. We hold that in the application of s. 80E the profits and gains earned by an industry mentioned in that section cannot be reduced by the loss suffered by any other industry or industries owned by the assessee. 15. In the circumstances, we hold that the scope of deduction under Section 80IA of the Act is limited to determination of quantum of deduction by treating eligible business as the only source of income. Therefore, the deduction cannot be denied because the deduction under Section 80IA has to be computed unit wise and not for the business as a whole. 16. Coming to the third question, Mr. Suresh Kumar submitted that the Revenue s stand was that deduction for interest under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Section 37 which expressly excludes an expense of a capital nature. The legislature has, therefore, made no distinction in Section 36(1)(iii) between capital borrowed for a revenue purpose and capital borrowed for a capital purpose . An assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed. Further, the words actual cost do not find place in Section 36(1)(iii) of the 1961 Act which otherwise find place in Sections 32, 32A etc of the 1961 Act. The expression actual cost is defined in Section 43(1) of the 1961 Act which is essentially a definition section which is subject to the context to the contrary. 9. In the case of Commissioner of Income-tax v. Associated Fibre and Rubber Industries (P) Ltd. (1999) 236 ITR 471 , the Division Bench of this Court held as follows: Even though the machinery has not been actually used in the business at the time when the assessment was made, the same has to be treated as a business asset as it was purchased only for business purposes. In the circumstances, the interest paid on t ..... 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