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TMI Blog2001 (5) TMI 134X X X X Extracts X X X X X X X X Extracts X X X X ..... that no income had accrued to the appellant until the imports were made and the raw materials were consumed, which events took place in the subsequent years; (b) In relying on the appellate orders for the earlier years wherein it was held that the advance licence benefit becomes receivable the moment export is made and accordingly, export obligation had been fulfilled before the end of the year inspite of the fact that the benefit accrued only when the raw materials were actually imported and not at the time of export; (c) In not appreciating the fact that unlike import entitlements, the advance licence benefit was not transferable and accordingly no income could accrue to the appellant until the raw materials were actually imported. 1.3 In view of the above arounds of appeal, the appellant prays that the Assessing Officer be directed to exclude from the total income, the advance licence benefit receivable amounting to Rs.8,29,87,603 and to reduce the total income accordingly. 2.1 The assessee had shown this amount as its income in the published Audited Annual Accounts. However, in Schedule R forming part of the Balance Sheet and the P&L Account in which significant accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it. In case, on assessment, the said advance licence benefit is taxed, the deductions under sections 80-I and 80-IA should also be recomputed after taking into account such advance licence benefit. 2.4 The assessee also include in its income under the head "Profits and Gains of Business" a sum of Rs.4,76,84,742 as Advance Licence Benefit Utilised with reference to Note No. 6 of Notes to computation which is also reproduced below:-- 6. Advance Licence benefit utilised--In the computation of total income, a sum of Rs.4,76,84,742 has been added back in respect of advance licence benefit utilised during the year. The said addition has been made in view of the fact that the advance licence benefit receivable had been excluded from the total income in the earlier assessment years. Further, in the computation of total income, while computing the deductions under sections 80-I and 80-IA, the profit of the concerned undertakings has been considered after including the said advance licence benefit utilised. It is submitted that in case the said advance licence benefit receivable is taxed in the earlier assessment years, the aforesaid amount in respect of advance licence benefit utilised o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comes absolute. It is therefore clear that such a right to import duty-free raw material accrued to the assessee soon after the corresponding export commitment has been fulfilled. The assessee has accounted for the net amount of such benefit by way of ALBR at the end of the accounting year, which represents the income already accrued to the assessee. The Assessing Officer further observed that the CIT(A), Surat in his appellate order for assessment years 1992-93 and 1993-94 has confirmed the order of the Assessing Officer. The Assessing Officer relying upon the assessment orders and the orders of the CIT (A) pertaining to assessment years 1992-93 to 1994-95 rejected the assessee's claim for grant of deduction of Rs.8,29,87,603. 2.7 It may be relevant here to refer to the Note in respect of taxability of ALBR, submitted by the assessee during the assessment proceedings, a copy whereof has been placed at pages 183 and 184 of PB-I. In the said Note, after reproducing Note No. 6 of Schedule R--Notes on Accounts appended with the Audited Balance Sheet, the assessee has submitted that the said amount of Rs.8,29,87,603 has been excluded from the total income on the ground that no incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crual basis nor had it actually been received nor did it afford any tangible benefit to the appellant in the form of concession of duty in the year of account for the simple reason that the liability to pay duty did not exist during the relevant year since no goods were imported. Thus, the amount of Rs.31,75,231 could at the best be described as an estimated value of concession or saving in import duty that the appellant expected to earn at the time of importing raw material. Such concession or such benefit could only be accounted for in the year in which the imports were effected. No income could be said to have accrued or arisen in respect of advance licence received in the current period on the goods exported because no income in real terms had accrued. No real income had accrued to the appellant by virtue of getting or expecting to get advance licence irrespective of the fact that such estimated benefit was accounted for in the books of the appellant. This fact was not determinative of the issue of the taxability of this amount. Therefore, the amount of Rs.31,75,231, being the value of material import entitlement receivable by the appellant, did not constitute the income of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer with it's letter dated 31-1-1995, that, it applies to the Controller of Export & Import to get advance licence for import of duty-free raw-material against anticipated exports. Such licence is issued against certain export commitments, and that licence was not transferable. The appellant makes exports and also does duty-free import of raw-material against that licence, since it takes time to get raw-material imported from foreign countries, hence the appellant during that period utilizes local raw-material which costs more than duty-free imported material. This difference in cost is taken as income in accounts. It was stated by the appellant in the above mentioned letter as under: 'At the end of the year it may happen that the company has already made certain exports and not made duty-free imports. The company has used local raw-materials which is costlier and the difference is charged as income.' The arguments of the appellant are, that the benefit to the appellant is in the form of concession in custom duty for importing goods, and the appellant may not import any goods at all in future. The benefit is therefore contingent, and it materializes only when relevant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in law, since the taxability of export incentives has been a subject-matter of litigation. In order to give finality to the view that such export incentives are of revenue nature and hence taxable, and to end all judicial controversies thereabout, the Finance Act, 1990 has inserted in section 28 of the Income-tax Act, 1961. -- Clause (iiia) read with section 2(24)(va) (w.r.e.f 1-4-1962) so as to make the profit on the sale of import entitlement licences taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1962-63; -- Clause (iiib) read with section 2(24)(vb) (w.r.e.f 1-4-1967) so as to make cash assistance (by whatever name called) received or receivable by any persons against exports under any scheme of the Government of India taxable under the head 'Profit and gains of business or profession' retrospectively for and from assessment year 1967-68; and -- Clause (iiic) read with section 2(24)(vc) (w.r.e.f 1-4-1972) so as to make any duty of customs and excise repaid or repayable as draw back to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971, taxable under the head 'Profit and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention towards the opinion of Expert Advisory Committee of the Institute of Chartered Accountants of India as published in Compendium of Opinions Volume VII-4 on treatment of Advance Licences received for import of duty-free raw materials against export commitments but not realised in the books of account. In the said opinion, the Expert Advisory Committee has, inter alia observed as under:-- "3. With regard to considering the 'estimated future duty benefit' as an income for the period in which the Advance Licences are received or the goods are exported against File Numbers, the Committee notes that one of the major considerations governing the selection and application of accounting policies is 'prudence', according to which profits are not anticipated but recognised only when realised in view of the uncertainty attached to future events. On the basis of the facts of the query, the Committee is of the opinion that in view of uncertainty attached to future events related to the earning of the duty benefit no revenue should be recognised in respect of the Advance Licences received in the current period on the goods exported in that period as also in respect of the goods exported i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there is no question of any profit derived from the sale of such licences, as the licences granted to the assessee are not transferable at all. The aforesaid amendment made in section 28 instead of supporting the case of the Revenue, in fact, supports the stand taken by the assessee that no such income can be said to have been really accrued to the assessee until the goods are actually imported and used for production. 4.5 Shri Soparkar submitted that merely because the entry was made in the books of account in the year when the exports were made, the income represented by ALBR cannot be taxed until the raw material is actually imported, which event has taken place in the subsequent year. The amount which does not represent the real income accrued to the assessee cannot be charged to tax simply on the basis of the book keeping entry made in the books of account. He placed reliance on the judgment of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1997] 227 ITR 172. The relevant extracts from the said judgment are reproduced below:-- "It is true that this court has very often referred to accounting practice for ascertainment of prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he question relating to taxability of an expenditure under the provisions of the Act. If on a true and correct interpretation of the relevant provisions of law, the assessee is entitled to deduction of a particular expenditure, manner and mode of making an entry in the books of account will not adversely affect the allowability thereof. The method of accounting and the manner of making a particular entry are two different things." 4.7 Shri Soparkar then drew our attention to the decision of the Special Bench of the ITAT Hyderabad Bench in Nagarjuna Investment Trust Ltd.'s case. The decision of the Special Bench of Hyderabad Tribunal in the above referred case has been followed by the Tribunal Ahmedabad Bench in the case of Core Health Care Ltd. It is, therefore, not necessary to once again reproduce the relevant extracts from the decision of the Special Bench. 4.8 Shri Soparkar then relied on the decision of the Tribunal Ahmedabad Bench "C" in the case of Vadilal Dairy International Ltd. v. Dy. CIT [IT Appeal NO. 500 (Ahd.) of 1997], a copy whereof has been placed at pages A-77 to A-100 of PB-IV. At page A-92, the Tribunal has observed that the entries made by the assessee in it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... until the goods are actually imported. 4.10 Shri Soparkar also contended that the learned CIT (A) has grossly erred in relying on the decision of the ITAT in the case of Pratibha Syntax Ltd., which decision has nothing to do with the assessee's case. The facts of that case are clearly distinguishable with the facts of the present case. 4.11 Shri Soparkar strongly relied on the decision of the Tribunal in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. He submitted that the facts of the aforesaid decision are identical with the facts of the present case. The ITAT Bombay Bench while deciding the aforesaid case had, inter alia, relied on an earlier decision in the case of Amar Dye Chem. Ltd. [RA No. 336 (Bom.) of 1981 arising out of IT Appeal No. 3897 (Bom.) of 1974-75, dated 19-8-1981] referred to at page 148 of 41 ITD. In that case also it was held that the benefit that the assessee expected to obtain by virtue of Advance Licence to import duty-free goods would accrue to it only on the happening of an event viz., the import of the goods in question, which admittedly had not taken place during the relevant accounting year. Therefore, the benefit or income shown in the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xability of the aforesaid income already accrued to the assessee by way of right to import duty-free raw materials has to be examined keeping in view the nature of such right acquired by the assessee under the Export and Import Policy announced by the Government of India. The learned CIT-DR submitted relevant extracts from the Export and Import Policy relating to the period from 1-4-1992 to 31-3-1997 in the Compilation and drew our attention to various clauses of Chapter VII dealing with Duty Exemption Scheme. Under the Duty Exemption Scheme, import of raw materials etc. required for direct use in the product to be exported may be permitted duty-free by the competent authority under the categories of licences mentioned in the said chapter. Clause 48 of the said Scheme provides that an Advance Licence is granted for the duty-free import of inputs. Such licence shall be issued in accordance with the policy and procedure in force on the date of issue of the licence and shall be subject to the fulfilment of a time-bound export obligation and value addition as may be specified. Advance Licences may be either value based or quantity based. Under a value based Advance Licence, any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the income by way of benefit receivable as a result of entitlement to import duty free raw material accrues to an assessee moment the export obligation is discharged by the exporters. The exporters acquire legal right to import raw material required for production of goods exported or to be exported by the assessee. 5.2 Shri Dave, the learned CIT-DR invited our attention to Paper 8--Indirect Taxes published by the Board of Studies--The Institute of Chartered Accountants of India. Para-12.3 of the said Paper deals with duty deferment (section 143A). The relevant extracts are reproduced below:-- "Section 143A provides the solitary exception for deferring payment of duty. It is provided that where any goods are imported against an Import Licence belonging to the category of Advance Licence subject to an obligation to export goods specified in the licence the Asstt. Commissioner may permit clearance of such imported goods without payment of duty leviable thereon. There are at present a few types of such advance licences, namely, Quantity Based Advance Licence, Value Based Advance Licence. These form part of a general package of export promotion concessions. An exporter is entit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icate) Book is given to importer and hence it is popularly known as "DEEC scheme". Since the raw material can be imported before export of final products, the licences issued for this purpose are called "Quantity Based Advance Licences". The Advance Licence will be for Actual User only. The import of raw materials is on the basis of quantity based advance licence-Input-Output norms are finalised and quantity allowed to be imported will be based on quantity exported e.g. assume that there are 3 inputs A, B and C--proportion of 50:30:20 as per input-output norms prescribed in EXIM policy, the licence is available for A,B and C in that proportion only as per quantity norms. If quantity for a particular description cannot be imported within the specified value under the certificate, Commissioner of Customs can allow adjustment of individual value within the total value. These facts were explained by the learned CIT-DR with a view to emphasize that the import of specified raw material has a direct nexus with the quantity of goods exported. Therefore, once the goods have been exported, the entitlement of the specified raw material required for manufacture of goods so exported gives rise ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raw material in the relevant accounting year itself so as to determine the correct cost of goods exported. 5.7 Shri Dave then submitted that the facts in the case of Jamshri Ranjitsinghji Spg. & Wvg. Mills Ltd. heavily relied upon by the assessee are clearly distinguishable. The said decision pertains to assessment year 1985-86 when the Export Promotion Scheme was totally different. The year under consideration is assessment year 1995-96 which is governed by the Export and Import Policy relating to the period under consideration. He drew our attention to para-7 of the said decision in which various clauses of Duty Exemption Scheme relating to assessment year 1985-86 have been briefly stated. In that case the assessee had not imported the raw material viz, fibre. The criteria of inputs and exports were also different. The raw material imported by the assessee was not transferable. In the present case it is transferable under certain specified circumstances. He also pointed out that in that case the taxability of such benefit was examined only with reference to section 28(iv). However, in the present case the taxability of such benefit has to be examined from all possible angles a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said decision is not at all relevant to the point in issue. He drew our attention to para-4.1 at page6 of the said order. The learned CIT (A) in the aforesaid decision has held that the benefit availed of by the assessee on duty free imports satisfies all the three in built conditions of section 28(iiib). The expression "cash assistance" is amplified by the words "by whatever name called" in section 28(iiib). This qualification "by whatever name called" is added to avoid any narrow construction and thus the duty benefit derived by the assessee falls within the ambit of section 28(iiib). 5.10 In para-6, the Tribunal has incorporated the arguments advanced on behalf of the assessee that the duty saved by assessee in terms of the duty free imports cannot be termed as cash assistance. In para-6.1, the arguments advanced on behalf of the Department have been briefly stated. The Tribunal has given its findings in para-13 at pages 24 and 25 of the order. The Tribunal has observed that clause (iiib) does not mean only receipt of cash assistance direct from the Government. The words "by whatever name called" expand the meaning of the term "cash assistance". The additions of these word ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titlement licences is required as materials on receipt will be accounted at cost and utilised for manufacturing finished goods for export. (iii) However, in the second instance, if there is reasonable certainty as to the receipt of import licence and the measurability of future benefit: (a) the benefit in cost i.e., the difference between the price of locally purchased raw material or the duty paid imported raw material and the international price of raw material should be adjusted in the books by reducing the cost of raw materials already utilised for exports and debiting receivable account in case the licence cannot be sold. Subsequent receipt and utilisation of licence will be a material factor to be considered whilst quantifying the benefit in cost to be accounted. (b) in case the licence can be sold, the lower of cost or value of saleable import licence at year end should be adjusted in the books of account by crediting the profit and loss account and debiting "import licences on hand" and these should be included in current assets. Cost for this purpose would be the loss incurred in the import transaction. (iv) The Expert Committee of the Institute has opined that export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sp; (35,920,909) 6. 1997-98 91,777,247 146,135,678 (54,358,431) 7. 1998-99 73,987,997 62,890,307 11,097,690 8. 1999-2000 21,164,259 85,792,334 (64,628,075) 9. 2000-01 46,474,214 33,370,548 13,103,666 ------------------------------------------------------------------ Total 536,688,164 532,773,625 3,914,539 ------------------------------------------------------------------ Note: For assessment year 1995-96 licences worth US$ 3,73,999.81 have not been utilised at all and therefore lapsed and the files have been closed. The statement of licences lapsed is enclosed herewith in Annexure 1." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4 Shri Girish Dave, the learned CIT-DR, on the next date of hearing submitted written submissions dated 26-4-2001 and also made oral submissions. He pointed out certain discrepancies in the various details and charts submitted in the Compilation marked as Volume V. Shri Dave pointed out that the learned counsel has argued that there are various factors on which accrual of benefit depend, viz. (i) price of raw material in International market; (ii) rate of import duty prevailing at the time of import; (iii) exchange rate at the time of import of raw material; and (iv) local price of raw material available in India. On the strength of these contingencies and uncertainties, the learned counsel argued that the benefit was notional and hypothetical in the years when the income was booked in the books of account. The real income accrued only when the duty free raw material was actually imported. He further contended that the accounting entries do not matter so long as there is no accrual of income. It was also contended that the effect of such income by way of ALBR was not reflected in the valuation of closing stock. The raw material has been valued at cost and finished goods have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs.) Net Benefit Accrued during the year 9,22,08,446 = 84 Less: 10% Contingency on Entitlement 92,20,844 = 68 ---------------- Net Income Accrued during the year 8,29,87,602 = 16 ---------------- It is thus evident that the value of actual licences not utilised at all and which have lapsed and the files have been closed, have actually been deducted from the net benefit receivable due to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e judgments. (A) In CITv. A. Krishnaswami Mudaliar [1964] 53 ITR 122 (SC), at page 129, the Hon'ble Supreme Court has observed as under:-- "There is, secondly, the mercantile system, in which entries are posted in the books of account on the date of the transaction, i.e. on the date on which rights accrue or liabilities are incurred, irrespective of the date of payment." (B) In Indermani Jatia v. CIT [1959] 35 ITR 298 (SC), the relevant extract from the Head Note at page 299 is reproduced below:-- "It is well known that the mercantile system of accounting differs substantially from the cash system of book-keeping. Under the cash system, it is only actual cash receipts and actual cash payments that are recorded as credits and debits; whereas, under the mercantile system, credit entries are made in respect of amounts due immediately they become legally due and before they are actually received; similarly, the expenditure items for which legal liability has been incurred are immediately debited even before the amounts in question are actually disbursed. Where accounts are kept on mercantile basis, the profit or gains are credited though they are not actually realised, and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ept of real income would apply where there has been a surrender of income which in theory may have accrued but in the reality of the situation, no income had resulted because the income did not really accrue. (3) Where a debt has become bad, deduction in compliance with the provisions of the Act should be claimed and allowed. (4) Where the Act applies, the concept of real income should not be so read as to defeat the provisions of the Act. (5) If there is any diversion of income at source under any statute or by overriding title, then there is no income to the assessee. (6) The conduct of the parties in treating the income in a particular manner is material evidence of the fact whether income has accrued or not. (7) Mere improbability of recovery, where the conduct of the assessee is unequivocal, cannot be treated as evidence of the fact that income has not resulted or accrued to the assessee. After debiting the debtor's account and not reversing that entry--but taking the interest merely to a suspense account cannot be such evidence to show that no real income has accrued to the assessee or has been treated as such by the assessee, (8) The concept of real income is certainly appli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iso to that section comes into operation. The profits earned and credited in the books of account being thus taken as the basis of computation, the system of accounting postulates the existence of debts in so far as moneys remain due and payable by the parties to whom they have been debited and when it is realised that these debts are not recover able the assessee gets a deduction for the bad debts under section 10(2)(xi)." (F) In CIT v. Maharajadhiraja Kameshwar Singh of Darbhanga [1933] 1 ITR 94, the relevant extract from the Head Note at page 95 is reproduced below:-- 'In dubio what the assessee himself chooses to treat as income may well be taken to be income and to arise when he so chooses to treat it. [CITv. Melbourne Trust Ltd. (I) referred to in (1914) AC 1001: 84 LJPC 21; 30 TLR 685]." 6.8 Shri Dave, then relied on various other decisions to explain the Judicial Thought on the concept of accrual. He submitted that the Judicial Thought under the provisions of the IT Act indicates that income accrues only when the right to receive vests in the recipient. Once the right to receive is vested, accrual of income under the IT Act is not postponed merely because its quantifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d namely, (i) prudence (ii) consistency (iii) materiality and (iv) substance over form, in order to give a true and fair view. (c) Reality and speciality of a transaction/situation rather than purely hypothetical or doctrinaire approach. (d) Measurability and collectibility of revenue. 9. Whether assessee can be allowed to change method of accounting for one item from accrual to cash basis: 1. 45 ITD 386 (Delhi) (Trib.) 2. 2 TTJ (Cochin) (Trib.) 928 3. 18 ITR 423 (Mad.) 4. 68 ITD 332 (Cal.) (Trib.)". 7. Shri S.N. Soparkar, Ld. Advocate in rejoinder to the arguments advanced by the learned CIT-DR, contended that various clauses of the Duty Exemption Scheme pointed out by the learned CIT-DR are not applicable in the case of the assessee. For instance, he pointed out that clause 54 relating to Self-Declared Pass Book Scheme is not at all applicable to the assessee. He, however pointed out that clauses 66 and 67 of the said Scheme are relevant in the assessee's case. The Scheme provides that the exporters may apply for duty free licences against specific export orders. Clauses 66 and 67 are as under:-- 66. Exports/supplies made from the date of receipt of an application unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble by the assessee but the dispute relates only to the year of accrual of such income. Therefore, the decision in the case of Pratibha Syntex Ltd. does not in any manner support the Revenue's stand. 7.3 Shri Soparkar, then submitted that reliance placed by the learned DR on the judgment of the Supreme Court in the case of U.P. State Industrial Development Corpn. is not proper as the income in the present case did not accrue in the relevant year when the entries were made in the books of account. The income was uncertain and contingent until the raw material was actually imported pursuant to Advance Licence granted for duty free import. Moreover, the said judgment was rendered by the two Judges of the Supreme Court while the judgment in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. was rendered by a Constitutional Bench comprising of three Hon'ble Judges. 7.4 Shri Soparkar submitted that reliance was also placed by the learned CIT-DR on the decision of the ITAT Calcutta Bench in the case of JCTLtd. v. Asstt. CIT[1998] 65 ITD 169. The Tribunal in that case has observed that an assessee having made entries in his books of account consistent with the method of accounti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the suspense account and not brought to the profit and loss account of the company is not treated as income. The question whether in a given case such "accrual" of interest is doubtful or not, may also be problematic. If, therefore, the Board has considered it necessary to lay down a general test for deciding what is a doubtful debt, and directed that all ITOs should treat such amounts as not forming part of the income of the assessee until realized, this direction by way of a circular can not be considered as travelling beyond the powers of the Board under section 119 of the IT Act. 7.9 The learned counsel then drew our attention to the judgment of the Supreme Court in the case of Godhra Electricity Co. Ltd. v. CIT[1997] 225 ITR 746. In that case it was, inter alia, held as under:-- "Income-tax is a levy on income. No doubt, the IT Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt; but the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a hypothetical income, which does not materialise." Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had really accrued to the assessee-company during the relevant previous years." 7.10 Shri Soparkar then cited the judgment of the Supreme Court in the case of CITv. Bokaro Steel Ltd. [1999] 236 ITR 315. The relevant extracts from the Head Note at pages 315, 316 and 317 are reproduced below:-- "In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditures. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income." "The assessee had, during the assessment year. 1971-72, shown in its accounts as income from interest a certain sum said to have accrued to the assessee from H for eight locomotives supplied by the assessee company to H. The assessee company, however, reversed this entry in the next year because eight new locomotives were su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cannot be charged to tax even though a book keeping entry has been made recognising such income, which in law and on facts did not really accrue or arise or received in previous year. Section 145 thus does not affect the range or ambit of taxable income. Such computation provision contained in section 145 cannot enlarge or restrict the content of taxable income. 11. It is the duty of the Assessing Officer to consider in each case as to whether the assessee has employed a regular method of accounting and whether annual profits can be properly deduced from the method so employed. The Assessing Officer should also examine whether the accounts maintained are correct and complete. Once the Assessing Officer is satisfied about the regularity of the method of accounting and about the correctness and completeness of the books of account and is also convinced that true income can be properly deduced, the Assessing Officer is bound to compute the taxable income of the assessee as per section 145(1) in accordance with the books of account maintained by the assessee. 12. If an item of income has not accrued in law and on facts, it cannot be made taxable merely because a book keeping entr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in the year when the duty free raw material is actually imported pursuant to such import licences. The assessee has consistently followed the method of recognising such income in its books of account in the year when the exports were actually made. But while submitting the income-tax return, they claimed that such income cannot be treated as income accrued to the assessee in the year when the exports were made but it should be treated as having accrued only in the year when the duty free raw material is actually imported. (C) The assessee has maintained their accounts on accrual basis. The various accounting standards and guidelines on accrual system of accounting relied upon by the learned representatives of the parties indicate that there are various alternative recognised methods of accounting in relation to Import Entitlement Licence etc. One of the methods is that the cost of raw material imported by the assessee will be debited in the books of account on the basis of actual cost in the year when it is actually imported. In such a case no accounting entry of import entitlement licence is required to be made. The assessee has choosen not to adopt this method. The other meth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es are matched in a more realistic way i.e., they concern the same goods and the same time period. The accrual concept is an accounting system which recognises revenues and expenses as they are earned or incurred respectively, without regard to the date of receipt or payment. This convention is one of the consequences of the periodicity concept. in the preparation of a Profit and Loss Account for an accounting period, revenues and expenses are recognised as they are earned or incurred respectively, not as cash received or paid. The earning of a revenue and the expenses incurred in these revenue can be accurately related to specific time periods, but the receipts and payments may not be relating to the period under consideration. The concept requires proper apportionment of expenses to time periods by the inclusion of prepayments and accrual in a Balance Sheet." 16. The Matching Concept which is an essential part of accounting has been explained in the said Publication as under: The Matching Concept Since the Matching Concept is an essential part of accrual accounting, these two are often used interchangeably. Like accrual concept, the matching concept also results from periodi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . To illustrate, inventories are recorded at their cost or market price, whichever is less or if there is a possibility that a debt may not be realised, a specific amount is set aside from profit as a provision for doubtful debts." 18. Most of the problems of accounting measurement arise out of the periodic concept. The main difficulty arises in deciding what revenues and what expenses are to be taken into consideration for one accounting period. The concept of materiality (substance) is threshold for recognition of a transaction in accounting process. The accrual concept requires that in measuring a profit for any financial period, the expenses and revenues should be matched in a realistic way i.e., they concern the same goods and the same time period. The matching concept is therefore an essential part of accrual accounting. Even under the Conservatism Concept of accounting, the revenues should be recognized when there is reasonable certainty about their realisation. 19. In the present case, the assessee has accounted for the value of benefit receivable by way of import of duty-free raw material against specific export orders in the year in which corresponding export obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elivering the judgment of the Board in Commissioner of Taxes v. Melbourne Trust Ltd.). The sums which the officer has brought into account from the interest register in so far as consisting of allocations from sums received in previous years have never borne tax and in their Lordships' opinion the assessee cannot complain if the officer agrees with the assessee himself in treating them as income of the year in which the assessee himself first thought fit so to regard them. Their Lordships see nothing contrary to principle in the computation of an assessee's total income for a particular year as consisting in part of actual receipts in that year and in part of sums carried by the assessee to income account in that year out of the receipts of previous year which have been held in suspense and no part of which has previously been returned as income. Their Lordships do not find that the Income-tax Officer in the present case has acted in any way illegally in computing the profits of the transactions in question for the year 1332 Falsi by taking into account both actual receipts of interest in that year and sums treated by the assessee in that year as receipts of interest by their trans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the monthly lease instalments can be said to have accrued in law. The excess income beyond the monthly lease instalments accounted for as the income on the basis of SOD method/Indexing method does not come within the ambit and range of taxable income as per the meaning and scope of charging provisions of the Act and, therefore, such excess income termed as differential income in relation to lease agreements could not be brought to tax. Likewise, the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. heavily relied upon by the learned counsel, held that the interest on surplus funds in short term deposit is always of a revenue nature and the same cannot be treated as receipt of a capital nature simply because the accounting entry has been made in the books of account setting off such interest income against the liability to pay interest on funds borrowed for purpose of purchase of plant and machinery even before commencement of the business. The Hon'ble Supreme Court thus held that a receipt of a revenue nature cannot be regarded as a receipt of capital nature simply because the book keeping entry has been made in that manner. 22. The reliance place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that option by choosing to consistently follow such a method of accounting in relation to booking of income represented by ALBR against exports. Once that option has been exercised while finalising the accounts in accordance with the accounting system and in conformity with the provisions contained in the Companies Act, 1956, the assessee cannot thereafter contend while filing the return of income that such income should not be treated as having accrued in the year under consideration, as duty free raw material has not actually been imported till the end of the relevant year but it should be treated as income accrued in the year, when raw material had actually been imported. 24. Even under the Conservatism (or Prudence) Concept of accounting, such income should be recognised when there is reasonable certainty about their realisation. The Board of Directors while finalising the annual accounts are under an obligation to ensure that the profits/loss as per P&L Account of the relevant year should disclose a true and fair position of the profits of the year. It is expected that the Board must have taken into consideration all the relevant facts and circumstances so as to satisfy th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h scheme was announced with a view to promote the exports and make it feasible for the exporters to survive in the global competition. Without acquiring the right to import duty free raw material, which constitutes a substantial gain, it may not perhaps be viable to export the goods in the competitive market. The substantial benefit by way of right to import duty free raw material against exports already made, was therefore not only certain but the exporter acquired legally enforceable right to receive such benefit soon after discharging his export obligation. The accrual of income in the year, when assessee acquires a legal right to receive such benefit/income is supported by various judgments of Hon'ble Supreme Court cited supra. 26. The test of reasonable certainty of realisation of such income/benefit also supports the correctness of entry of such income made in the books of account in the relevant year. The chart showing the income by way of Advance Licence booked by the appellant company in the books of account for assessment years 1992-93 to 2000-2001 and the corresponding figures of such Advance Licences benefit actually utilised in these nine years given in para-6 at pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sideration. Apart from this, the assessee has made a further deduction of 10% for other contingencies relating to this entitlement. Such deduction has been made to the tune of Rs.92,20,844 out of net income accrued for the year amounting to Rs.9,22,08,446. The figures of nine years from assessment years 1992-93 to 2000-2001 given in para-6 at page-28 also confirms the perfectness of the estimate of such income accounted for in the respective years. The total income accounted for from assessment years 1992-93 to 2000-2001, was Rs.53,66,88,164 against which the actual Advance Licence benefit utilised in these nine years comes to Rs.53,27,73,625. The difference is less than one per cent. If actual benefit received in assessment year 2001-2002 out of accrual of income adjusted in assessment year 2001-2002 is taken into consideration, the total benefit actually utilised will be more than the income accounted for on accrual basis in these nine years. This clearly indicates that the amount of such benefit accounted for by the appellant company in its books of account was based on a realistic, systematic and appropriate method. 27. After giving a deep and thoughtful consideration to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said Note No. 8 is reproduced below:-- "8. Interest claimed under section 36(1)(iii) in respect of interest capitalised in books of account: In the accounts for the year ended 31st March, 1995, interest amounting to Rs.5,68,39,623 has been capitalised. In the return of income, interest amounting to Rs.5,08,22,207 excluding interest amounting to Rs.60,17,416 pertaining to plot No. 750 which is to be transferred to Search Chem Industries Limited has been claimed under section 36(1)(iii) even though the same has been capitalised in the books of account. In this connection, reliance is placed upon the decision of the Bombay High Court in the case of Addl CIT v. Aniline Dyestuff & Pharmaceuticals (P.) Ltd. (138 ITR 843) and the decision of the Gujarat High Court in the case of CITv. Alembic Glass Industries Ltd. (103 ITR 715). Further in the case of CIT v. National Peroxide Ltd. 182 ITR 411, the Supreme Court dismissed the department's special leave petition against the judgment of the Gujarat High Court whereby the High Court dismissed a reference application on the question whether interest on amounts borrowed for establishing a new unit capitalised but still claimed as a revenue e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income for assessment year 1995-96. Since this claim has been rejected in assessment year 1995-96, it was claimed in the assessment proceedings for assessment year 1996-97 that the said amount should not be taxed as capital gains in assessment year 1996-97 otherwise it would result in double taxation of the said amount. II(4)(i). Shri Soparkar further submitted that the interest capitalised in the books of account representing interest on borrowings in connection with the expansion of the existing business of the company can be claimed as deduction under section 36(1)(iii) of the Act. He relied on the following decisions:-- (a) Alembic Glass Industries Ltd 's case (b) AddL CIT v. Aniline Dyestuffs & Pharmaceuticals (P.) Ltd. [1982] 138 ITR 843 (Bom.) (c) Calico Dyeing & Printing Works v. CIT[1958] 34 ITR 265 (Bom.) (d) CIT v. Insotex (P.) Ltd. [1984] 150 ITR 195 2 (Kar.) (e) CIT v. Shah Theatres (P.) Ltd. [1988] 169 ITR 499 (Raj.) (f) CIT v. Expanded Metal Mfrs. [1991] 189 ITR 317 (An.) (g) CIT v. Taral Development Corpn. Ltd. [1994] 205 ITR 421 (All.) (h) Veecumsees v. CIT [1996] 220 ITR 1856 (SC) (i) Arvind Polycot Ltd. v. Asstt. CIT[1997] 92 Taxman 393 (Guj.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the AAC with regard to the aforesaid point. Shri Dave on the strength of these judgments vehemently contended that such a concession on the part of the assessee create an estoppel against them and they are not allowed to re-agitate the same issue before the Tribunal. II(5)(c). Even on merit, the learned CIT-DR submitted that the assessee is not entitled to grant of deduction in respect of interest pertaining to Jhagadia unit which has been transferred in the next year. He argued that the subsequent event can be taken into consideration for determining the allowability of a particular deduction. He placed reliance on the judgement of the Punjab and Haryana High Court in the case of Mst. Shanti v. Mst. Chhoto AIR 1983 Punj. & Har. 321 in which it was held that on account of subsequent events, the appeal filed on behalf of the appellants was liable to be dismissed as having become infructuous. This was a case relating to the second appeal filed by the plaintiff whose suit for the declaration was dismissed by both the lower courts. It deals with the provisions contained in TP Act and Redemption of Mortgages (Punjab) Act. On the same reasoning, Shri Dave submitted that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; Ankleshwar 94,00,436 PCL3 at Jhagadia Ankleshwar 11,05,548 Caustic Chloride at Jhagadia Ankleshwar 24,084 (ANKO100 TP) --------------------------------------------------------------------------- Shri Dave pointed out that the last item in the said chart placed at page 187 relates to the lease hold land at Jhagadia Plot No. 746. The interest of Rs.53,57,181 relating to this Plot No. 746 at Jhagadia has also been capitalised. This amount has not been taken into consideration by the CIT(A) while sustaining the disallowance out of interest to the extent of Rs.1,38,89,304. This appears to be an apparent mistake on the part of the CIT(A). The disallowance confirmed by the CIT(A) out of interest expenditure should therefore be increased while dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce again in order to find out whether the assessee had consciously waived its legal rights to contest the liability of the aforesaid amount of interest. The learned CIT(A) has simply stated in para-2.1 of his order that the assessee submitted before him that if interest for this year is capitalised, the income from short-term capital gains will be reduced in the next year. The appellant therefore has no objection if this amount pertaining to Jhagadia Unit is capitalised and the income from short-term capital gains is reduced in the next year. These observations only indicate that the assessee wanted to impress upon the CIT(A) that the shifting of the allowability of this deduction in the year under consideration and in the next year will not really result in any real gain to the Revenue. There is no specific mention in the order of the CIT(A) that the assessee did not press this ground before him or had consciously waived its right to contest the said issue before him. On the facts of the present case, we are of the view that the assessee can validly contest the deductibility of the interest amounting to Rs.1,38,89,304 pertaining to new unit constructed at Jhagadia. II(8). It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jurisdictional High Court in the case of Alembic Glass Industries Ltd. and also the judgment of the Supreme Court in the case of India Cement Ltd. II(9). The assessee submitted a note in respect of allowability of deduction in respect of interest expenditure under section 36(1)(iii) before the Departmental Authorities, a copy whereof has been submitted at pages 185 to 187 of the paper book. Reliance was placed on the following judgments in the said note:-- Alembic Glass Industries' Ltd.'s case Aniline Dyestuffs & Pharmaceuticals (P.) Ltd.'s case The learned Departmental Authorities have not controverted the facts stated on behalf of the assessee before them that the interest on borrowings have been paid in connection with the expansion of the existing business of the company. II(10). In view of the aforesaid facts and judgment of the Hon'ble jurisdictional High Court and the judgment of the Hon'ble Supreme Court as well as the decision of the Tribunal Ahmedabad Benches referred to above, we are of the considered opinion that the CIT(A) ought to have allowed deduction in respect of interest pertaining to unit at Jhagadia to the tune of Rs.1,38,89,304 in the year under cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m represented advance rent. 3.3 In view of the above ground of appeal, the appellant prays that the Assessing Officer be directed to allow deduction in respect of premium on leasehold land amounting to Rs.11,01,70,905. III(1). The assessee has also raised certain additional grounds of appeal. One of the additional grounds raised by the assessee relates to the assessee's claim for grant of proportionate deduction in respect of premium on leasehold land. Since that additional ground is connected with Ground No. III raised in the assessee's appeal, the same is reproduced below:-- II. Proportionate deduction in respect of premium on leasehold land: 2.1 On the facts and in the circumstances of the case and in law, as iterated in Ground No. IV above, the appellant submits that deduction of the proportionate premium in respect of leasehold land acquired in the assessment year 1993-94, also ought to be considered for allowance in case deduction in respect of the entire premium in the respective year is not allowed. 2.2 The appellant submits that relying on the ratio of the decision of the Supreme Court in the case of Madras Industrial Investment Corpn. Ltd. v. CIT[1997] 225 ITR 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,905 excluding Rs.6,06,31,655 representing premium in respect of Plot No. 750 which is to be transferred to Search Chem Industries Limited, has been claimed as a business expenditure relying on the decision of the Karnataka High Court in the case of CIT v. HMT Ltd. [1993] 203 ITR 820. It may be further noted that the facts in the instant case are identical to the facts in the above mentioned decision." III(4). The assessee submitted a Note in respect of claim for aforesaid deduction during the assessment proceedings, a copy whereof has been placed at page 190 of the paper book. The said Note is reproduced below:-- "During the year ended 31-3-1995, a sum of Rs.11,01,70,905 has been paid to Gujarat Industrial Development Corporation (GIDC) as premium for leasehold land at Ankleshwar as per the agreement dated, .... a copy of which is enclosed herewith. As per the terms of the said agreement the company is required to construct a factory building and works thereon within the specified period. Further, as per Clause (9) of the said agreement, the lease is for a term of 99 years from the date of possession at the yearly rent as may be fixed by the licenser from time to time. The sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been submitted at pages 193 to 206 of the Compilation. The Assessing Officer rejected the claim for grant of deduction in respect of the aforesaid sum of Rs.11,01,70,905. He relied on the judgment of the Hon'ble Assam High Court in the case of Panbari Tea Co. Ltd. v. CIT [1961] 42 ITR 672, the judgments of the Hon'ble Supreme Court in the case of Assam Bengal Cement Co. Ltd. v. CIT[1955] 27 ITR 3 4 and CITv. CIBA of India Ltd [1968] 69 ITR 692 (SC); Dalmia Jain & Co. Ltd. v. CIT [1971] 81 ITR 754 (SC) as well as V. Jagan mohan Rao v. CIT [1970] 75 ITR 375 (SC). The Assessing Officer held that the assessee has correctly treated this amount as capital expenditure in its books of account. The claim of the assessee for grant of deduction in respect of premium on leasehold land was accordingly rejected. III(6). The CIT (A) confirmed the action of the Assessing Officer. He, inter alia, observed that the assessee has purchased the land on lease basis. The CIT (A) while confirming the action of the Assessing Officer agreed with the reasons given by him in his appellate order passed in the case of the assessee for earlier years. The CIT (A) also rejected the alternative claim made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,02,616 to GIDC for acquiring lease of land at Panoli. The Tribunal Ahmedabad Bench relying on the judgment of the Karnataka High Court in the case of HMT Limited and the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 and the judgment in the case of Empire Jute Co. Ltd. (124 ITR 1) and the judgment in the case of CIT v. Kirkend Coal Co. [1970] 77 ITR 530 as well as the decision in the case of Bombay Steam Navigation Co. (P.) Ltd. 56 ITR 52, directed the Assessing Officer to allow the deduction in respect of the said sum of Rs.48,02,616. (C) The learned counsel also relied on the judgment of the Supreme Court in the case of CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468. The assessee in the aforesaid case, had obtained lease rights over the premises situated at Bangalore for a period of 39 years commencing from 1-1-1966. Under the terms and conditions of the lease, the lessee (assessee) had the right to demolish at its own expenses the existing premises and appropriate to itself all the material thereof without paying to the lessor any compensation and construct a new building thereon to suit the purposes of their busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e regarded as capital expenditure. Reliance was placed on the following judgments: 1. Alembic Glass Industries Ltd.'s case 2. Anilien Dyestuffs & Pharmaceuticals (P.) Ltd's case. III(10) Shri Soparkar submitted that in case the amount of premium paid for acquiring the leasehold rights in the Industrial plot is not allowed as a deduction in the relevant year, then at least proportionate amount of premium paid for leasehold land should be allowed as deduction. The lease of land was acquired from GIDC for a period of 99 years. Therefore, 1/99th amount of premium paid for acquiring leasehold rights was claimed as alternative deduction in respect of proportionate premium of lease hold land. The learned counsel has claimed deduction in respect of proportionate premium on leasehold rent to the tune of Rs.11,94,255 in the chart submitted during the course of hearing, the details of which are as under:-- ----------------------------------------------------------------------- Asstt. Year 1992-93: Rs. 58,300 Asstt. Year 1995-96: &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s incurred. It cannot be spread over number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing, years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of the debentures. Held, reversing the decision of the High Court, that the liability to pay the discounted amount over and above the amount received for the debentures was a liability incurred by the company for the purposes of its business in order to generate funds for its business activities. It was, therefore, expenditure. The appellant-company had, in its return, correctly claimed a deduction only in respect of the proportionate part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Estate. Clause 5 of the said allotment letter was highlighted with a view to show that the assessee paid an amount of Rs.2,13,28,221 being 20% of the total price of the plot/shed. The remaining amount was payable in instalments as specified in the said allotment letter. Shri Dave pointed out that 20% amount was paid towards the purchase price of the plot/shed. The assessee acquired the lights, title and interest over the said plot of land allotted by the GIDC. He further drew our attention to the licence agreement executed between the GIDC in respect of the aforesaid industrial plot allotted by the GIDC. Shri Dave read various clauses of the said licence agreement with a view to show that the assessee paid the purchase price for acquiring the long term leasehold rights for a period of 99 years over the said industrial plot of land. The total cost as per Annexure-A of the said licence agreement relating to the plot No. 746 at Jhagadia Industrial Estate was determined as per allotment letter at the rate of Rs.195 per sq. meter which comes to Rs.10,66,41,105; 20% thereof was paid and the balance amount was payable in 40 quarterly instalments as per the details given in Annexure--A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imestone in a group of quarries without condition that no limestone should be used for the manufacture of cement. The appellant also agreed to pay Rs.35,000 annually for five years as a further protection fee and the lessor in consideration of that payment gave a similar undertaking in respect of the whole district. The question was whether in computing the profits of the appellant the sums of Rs.5,000 and Rs.35,000 paid to the lessor by the appellant could be deducted under section 10(2)(xv) of the Indian Income-tax Act, 1922. The Income-tax authorities, the Appellate Tribunal and High Court on a reference under section 66(1) held that the amount was not an allowable deduction under section 10(2)(xv). On appeal to the Supreme Court: Held, that the payment of Rs.40,000 was a capital expenditure and was therefore rightly disallowed as a deduction under section 10(2)(xv) of the Act." (D) Pingle Industries Ltd. v. CIT [1960] 40 ITR 67 (SC): The relevant extract from the Head Note is reproduced below:-- "Held, (Per Kapur and Hidayatullah, JJ; S K Das, J. dissenting) that the assessee acquired by his long term lease the right to win stones, and the lease conveyed to him a part of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te is reproduced below:-- "The appellant, who had taken on lease certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises so as to convert it into a cinema house, after spending Rs.35,000 on some alterations, felt the necessity for having some money in order to convert the premises into a cinema house. On 23-2-1946, he entered into a lease by which the building was demised to the lessees for 30 years. The lessees agreed to pay under the lease Rs.55,200 to the appellant towards the cost of erecting the cinema house. The rent agreed to be paid was Rs.2,100 per month and it was payable from 1-6-1946. The lease did not contain any condition or stipulation from which it could be inferred that the sum of Rs.55,2OO had been paid by way of advance rent. Nor was there provision for its adjustment towards rent or for its repayment by the appellant. The lessees entered into possession after the cinema house was completed which was subsequent to the date of the lease. The Tribunal held that the receipt of the sum of Rs.55,200 was in the nature of advance payment of rent and, on a reference, the High Court held that the amount could be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n paid for acquiring such enduring benefit and that being so, the expenditure had the real nature of capital expenditure and could not be treated as of a revenue nature because a portion of the payment had to be made by annual instalments. (K) CITv. Project Automobiles [1984] 150 ITR 266 (Bom.): The Head Note is reproduced below:-- "The assessee was carrying on business in automobile parts, petrol pumps, etc. even prior to 1959 on land held on temporary lease, It entered into an agreement with the owners of the land in 1961 whereby the period of lease was to be thirty years. Premium was to be paid at the rate of Re. 1 per sq.ft. The lessee was also to pay economic rent calculated at the rate of 5% of the total ground rent per annum. The rent could be revised at the end of fifteen years. Under clause 9 of the agreement the owner could terminate the lease if the owner required the land for its own purpose or for a public purpose. The premium which amounted to Rs.62,500 was payable in instalments. The assessee claimed deduction of the instalment of premium paid by it but this was disallowed by the ITO. The Tribunal, however, held that the payment was of a revenue nature. On a refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ium paid by the lessee for the grant of a lease, whether payable in lump sum or in instalments over the whole period of the lease alongwith the rent, is normally a capital expenditure. The lessee purchases the term of the lease for the premium. As observed by Greene MR in Henriksen (Inspector of Taxes) v. Grafton Hotel Ltd. [1943] 11 ITR Suppl. 10 (CA), there is no revenue quality in the payment made to acquire such an asset as a term of years. There is a clear distinction between the payment made to acquire an asset and payment made for its use. The periodical payment made for a lease is a revenue expenditure whereas the payment made to acquire the lease would be an expenditure of capital nature." (N) Aditya Minerals (P.) Ltd. v. CIT[1999] 106 Taxman 337 (SC): These appeals were referred to a Constitutional Bench to resolve the apparent conflict between the judgments of two Benches of the Hon'ble Apex Court, of three learned Judges each, in Pingle Industries Ltd.'s case and Gotan Lime Syndicate v. CIT [1966] 59 ITR 718. The relevant facts of the aforesaid case are as under: The assessee obtained lease of a land for excavation and subsidiary purposes for a period of 15 years a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount of payment made was to be treated as capital expenditure. This Court in the case of Rajabali Nazarali & Sons v. CIT [1987] 163 ITR 7 has considered in detail and reiterated the above principle. This decision holds that a lease creates an interest in immovable property and transfer of leasehold rights which are protected by the provisions of rent restriction statutes, is nothing but a transfer of a capital asset. The price paid to acquire such leasehold rights can only be held to be payment on capital account, there being no revenue quality attributable to the same. Therefore, any payment received, whether by way of compensation or under any other nomenclature, for parting with a capital asset, viz. the demised premises, can only be described as a capital receipt. There are a number of other decisions on the point such as the decision of the Madras High Court in Ramakrishna & Co. v. CIT [1973] 88 ITR 406, the decision of the MP High Court in CIT v. Project Automobiles [1987] 167 ITR 781 and the decision of the Calcutta High Court in CIT v. Hemraj Mahabir Prosad (P.) Ltd. [1989] 179 ITR 73. Thus, this question No. 1 at the instance of the assessee must be answered in the affirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set. Depreciation is not allowable under the provisions of section 32 on the cost of land. The land is not a depreciable asset. Allowing 1/99th proportionate amount of premium paid for acquiring leasehold rights will be akin to grant of depreciation or allowing amortization of such capital expenditure without there being a specific provision for grant of such deduction. He therefore urged that the main ground as well as alternative ground raised by the assessee in respect of the aforesaid amount should be rejected. III(16). We have carefully considered the submissions made by the learned representatives of the parties and have gone through the relevant documents to which our attention was drawn during the course of hearing. We have also carefully gone through all the judgments cited by the learned representatives. III(17). The Gujarat Industrial Development Corporation Limited (GIDC) allotted Plot/Shed No. 746 at Jhagadia Industrial Estate for setting up of the specified Industrial Unit to the assessee-company vide letter dated 23-11-1994. Clause 5 of the said allotment letter clearly indicates that the assessee was required to pay total price of the aforesaid plot/shed to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a specimen copy of the Standard Form of lease deed, which was executed by the GIDC in favour of the appellant in respect of another plot and submitted that similar lease deed will be executed in favour of the appellant in respect of plot/shed No. 746 at Jhagadia Industrial Estate. He, however, submitted that factually the lease deed had not so far been executed in respect of the aforesaid land but the assessee has complied with all the conditions mentioned in the licence agreement and is eligible for grant of such lease hold rights as per the standard form of lease deed prescribed by GIDC for allotment of such industrial plots. III(18). A perusal of the standard form of lease deed prescribed by GIDC for allotment of industrial plot/shed indicates that the lessee is entitled to grant of leasehold rights for a period of 99 years on payment of token rent. At the end of 99 years, the lessee shall have the right to renew this lease for a further period of 99 years and in the event of the lessee exercising such option in the manner provided, the lessor shall have a right to increase the sum of yearly rent, which shall be 100% of the original sum of rent. The lease deed contains vario ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case may be the financial institution concerned. (s) In the event of such transfer, assignment, underletting or parting with there shall be delivered by the lessee at his expense a notice thereof to the Managing Director or such officer of the Lessor as the lessor may direct within twenty days from the date on which the transfer, assignment, underletting or parting with becomes effective whether by registration thereof under the Indian Registration Act or otherwise, provided that in the event of such transfer, assignment, underletting or parting with fifty per cent for the unearned increment that may be accrued to the Lessee shall be paid by the Lessee to Managing Director of the Lessor. Provided further that the unearned increment shall be valued by the Chief Accounts Officer of the Lessor and the decision of the Chief Accounts Officer will be binding on the Lessee. III(19). Shri Girish Dave, the learned CIT--DR submitted that a lease will have following Essential Ingredients & Features:-- 1. The restrictions imposed on the enjoyment are of a nature and a degree that could be provided in a document of lease with restrictive covenants about the manner of enjoyment of the pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of the document must be preferred to the form to ascertain real intention of the parties. III(22). Let us now examine the facts of the present case in the light of the principles of law emerging from the aforementioned judgments. The assessee has acquired leasehold rights in the aforesaid plot/shed for a period of 99 years with on option to renew this lease for a further period of 99 years. The lessee can exercise such option before or at the end of 99 years. The assessee has agreed to pay total price of the aforesaid plot/shed No. 746 at Jhagadia Industrial Estate to GIDC amounting to Rs.10,66,41,105. Out of this, 20 per cent of the total price of plot amounting to Rs.2,13,28,221 has already been paid prior to the issue of allotment letter dated 28-11-1994. The balance deferred amount of purchase price was payable in quarterly instalments as specified in Annexure-A of the allotment letter dated 28-11-1994. In consideration of the aforesaid price paid or promised by the assessee, the assessee has been put in possession of the aforesaid plot/shed. The assessee has constructed the factory building thereon. The assessee is entitled to exclusive possession of the said industrial p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e., to say, lease for a period of not less than 12 years) as an immovable property liable to acquisition under the said Chapter. The surplus derived on transfer of such lease right in respect of long term lease is liable to tax as capital gains under sub-section 45 read with section 2(47) of the Act. The provisions contained in section 4(8) of the Wealth-tax Act also incorporates within its ambit any transaction as referred to in section 269UA(f). It also means that a holder of a leasehold rights shall be deemed to be the owner of such interest in the immovable property. III(24). Shri Soparkar tried to distinguish various judgments relied upon by the learned CIT-DR. He submitted that the judgment in the case of Grafton Hotel Ltd. does not deal with this point but that deals with the payment of different nature. In that case, the licensee of the licensed premises, under the terms of lease, paid monopoly value on the grant and renewal of the licence for three years period. Such payment was payable annually. The annual periodicity gave an impression as if it was yearly payment of revenue nature. The Hon'ble Court held that such payment will be regarded in law as to be of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Pingle Industries Ltd. also held that the payment, though periodically in fact, made by the assessee for acquiring long term lease with the right to win stones was a payment made for acquiring a capital asset of enduring benefit to his trade. The amounts were outgoings on capital account and were not allowable deductions. In the case of Durga Das Khanna the Hon'ble Supreme Court held that the payment of Rs.55,200 agreed to be made by the lessee towards the cost of erecting cinema house in consideration of acquiring lease of certain premises for a term of 99 years with the right to assign the lease and alter the structure of the premises was in the nature of a premium of salami and it had all the characteristics of a capital payment and not revenue payment. Even the payment made for perfecting a title was held to be capital payment by the Hon'ble Supreme Court in the case of V. Jaganmohan Rao. The Supreme Court in Dalmia Jain & Co. Ltd.'s case held that the expenditure incurred for creating, curing or completing the assessee's title would be of capital expenditure. The Constitutional Bench of the Hon'ble Supreme Court in Aditya Minerals (P.) Ltd.'s case once again confir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Tribunal on the basis of the judgment of the Karnataka High Court in the case of H.M.T Ltd. The Tribunal also therefore had not taken into consideration the various judgments of the Apex Court and the Gujarat High Court relied upon by the learned CIT-DR in the present case. III(28). On a careful consideration of the entire relevant facts, material and the legal principles emerging from the various judgments cited before us, we are of the considered opinion that the premium paid/payable by the assessee for acquiring long term leasehold rights represent cost of acquisition of leasehold rights and by no stretch of imagination such payment can be treated as revenue expenditure allowable under the provisions of the Income-tax Act. The view taken by the Commissioner (Appeals) of denying deduction in respect of the aforesaid amount is therefore confirmed. III(29). We will now consider the alternative prayer made by the assessee for allowing deduction of proportionate premium of leasehold land to the tune of Rs.11,94,255. Before we proceed to deal with the aforesaid point in issue on merits, we would like to observe that the additional ground sought to be raised by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gislature intended to provide for grant of deduction in respect of capital expenditure in the year when it is incurred or by way of amortization of such expenditure over a period of several years, it expressly enacted a specific provision for grant of such deduction. In the absence of a specific provision for grant of amortization/deduction of proportionate amount out of such capital expenditure, such as the one claimed at 1/99th of the premium paid for acquiring leasehold land by the appellant in the present case, the deduction can not be validly granted. III(32). The learned counsel relied on the judgment of the Supreme Court in CITv. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468 for grant of deduction of total amount paid by way of premium of leasehold land and also in relation to the alternative prayer made for grant of deduction of proportionate amount of premium paid for leasehold rent. The facts of that case are totally different. The assessee in that case had obtained lease of premises at Bangalore for a period of 39 years on rent of Rs.1000 per month for first 15 years which was liable to be increased after a gap of 10 years each as mentioned in the lease deed. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icture of the profit of a year. On these facts, the Supreme Court held that the liability for such revenue expenditure should therefore be spread over the period of debentures. Thus, the spreading over in respect of deductibility of revenue expenditure was allowed by the Supreme Court in the aforesaid case. It was not a case where the Supreme Court has allowed deduction in respect of capital expenditure by spreading it over the period of several years like the one which is being claimed in the present case by asking for amortization of the cost of acquisition of leasehold rights over a period of 99 years by way of spreading it over for the period of 99 years. Such a claim for amortization of capital expenditure of cost of acquisition of a capital asset in the absence of any express or specific provision is clearly contrary to the provisions of law. On the other hand, there is clear and specific provision contained in section 37 of the Act which prohibits grant of deduction in respect of capital expenditure. The alternative ground taken by the assessee in respect of the aforesaid payment is also therefore, not allowable. V(1). Ground No. V is reproduced below:-- V. Disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -DR, on the other hand, relied upon the reasons mentioned in the assessment order and in the order of the Commissioner (Appeals). He also submitted that the disallowance is justified in view of the provisions contained in section 43B(c) of the Act. V(3). We have carefully considered the submissions made by the learned representatives of the parties and have perused the relevant judgments and other documents, to which our attention was drawn during the course of hearing. The Assessing Officer has disallowed the aforesaid commission payments on the ground that the commission paid to an employee is not a deductible expenditure, as no evidence has been furnished by the assessee which indicates that any extra services were rendered by the employees/directors. Reliance was placed on the judgment of the Supreme Court in the case of Shahzada Nand & Sons and the judgment of the Rajasthan High Court in the case of Bombay Motors v. CIT[1995] 214 ITR 342. There is some difference in the amount of commission payable to individual directors as per the details mentioned in the assessment order and the details furnished at page 208 of the PB-I which is reproduced below: ------------------------ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rther observed that the Assessing Officer was of the opinion that even if this amount is allowable, it is allowable in the next year, as the liability to pay the said commission arose in the next year. V(4). We have considered the rival submissions. The liability quantified on the basis of profits derived by the company in the year under consideration accrued at the end of the relevant year. Merely because the liability has been quantified at the time of preparation of balance sheet and at the time when the final accounts were authenticated by the directors, will not postpone the accrual of liability for payment of such commission payable to the directors in accordance with the terms of agreement. The learned Departmental Authorities have not disputed the fact that services were in fact rendered by all the wholetime directors to whom such commission has been paid. The provisions of section 309 of the Companies Act permits payment of aggregate remuneration to its directors upto the extent of one per cent of the net profits of the company. The learned CIT-DR was fair enough to admit that the aggregate amount of remuneration paid to the directors including the aforesaid commission i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r attention to the copy of voucher dated 4-9-1994 placed at page 226 of the paper book wherein charges for hiring of car for four days for "customs" has been paid to the tune of Rs.10,984. The learned CIT-DR observed that the business purpose of such expenditure has not been explained. It appears to have been incurred in connection with the Custom Department. VI(4). We have carefully considered the submissions made by the learned representatives. The car hiring charges for four days for "customs" amounting to Rs.10,984 pointed out by the learned CIT-DR is not the basis of disallowance made by the Assessing Officer in the assessment order. In case the Assessing Officer was of a similar view, as is now veriably pointed out by the learned DR, the Assessing Officer should have examined the concerned persons with a view to find out the business necessity of incurring such expenditure. The identity of the payee and the genuineness of the payment has not been doubted. On the other hand, the identity and genuineness of the payment are verifiable from the copies of vouchers submitted in the compilation. The assessee contended before the learned Departmental Authorities that the said payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P.) Ltd. [1995] 216 ITR 690 (Bom.) (b) First ITO v. French Dyes & Chemicals (I) (P.) Ltd. [1984]/10 ITD 240 (Bom.) (SB) (c) G.L. Rexroth Industries Ltd. v. Dy. CIT[1997] 59 TTJ (Ahd.) 757 (d) Asstt. CITv. Bell Ceramics Ltd. [1999] 69 ITD 156 (Ahd.). VII(3). The learned CIT-DR relied on the reasons mentioned in the assessment order. He also submitted that the assessee has submitted an application for rectification under section 154 in which one of the prayers made by them is that the disallowance out of advertisement expenditure under rule 6B be restricted to 50 per cent from the balance amount of expenditure incurred in excess of Rs.10,000 for each article presented by the assessee. The learned counsel has not pointed out as to whether the said application under section 154 has been disposed of by the Assessing Officer or not. He however supported the disallowance in view of the reasons recorded in the orders of the Departmental Authorities. VII(4). We have carefully considered the submissions made by the learned representatives. During the course of hearing, the Bench, inter alia, required the learned counsel to furnish the names of the persons to whom articles costing mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such customary gift of cloth piece costing more than Rs.10,000 was not given in the said details. It appears from the copy of vouchers enclosed with the said details that this represents cost of cloth piece purchased from Raymond's Retail Shop for Rs.10,051. The learned counsel contended that this was presented to a person connected with the assessee's business. In any case this cannot be disallowed under rule 6B. The learned Departmental Authorities and the CIT-DR did not dispute the fact that the articles presented by the assessee did not bear the logo or the name of the company. These articles did not have any advertisement value. The allowability of such expenditure is fully supported by the various judgments relied upon by the learned counsel. On a careful consideration of the entire relevant facts and the judgments referred to above, we are of the considered opinion that the disallowance of Rs.3,43,635 made under rule 6B deserves to be deleted. The Assessing Officer is directed to delete the same. VIII. Ground No. VIII relates to the confirmation of the disallowance in respect of non-refundable deposits paid to Mahanagar Telephone Nigam Limited aggregating to Rs.3,40,900. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgments relied upon by the learned representatives. The point in issue is clearly covered in favour of the assessee by the decision of the Tribunal in the case of Uvifort Metalizers Ltd., in which the Tribunal, after taking note of the aforesaid amendment made in section 34(1), has clearly observed that claiming of depreciation by an assessee is optional. Since the assessee has chosen not to claim depreciation on the block relating to the plant and machinery, the Assessing Officer cannot fasten such a deduction by way of depreciation because an option available to the assessee to claim or not to claim depreciation, can not be converted into obligation. The Assessing Officer is directed to accept the assessee's contention in this regard. X. Ground No. X relates to the confirmation of the disallowance of Rs.16,66,207 being the prior period adjustment claimed as deduction in the year under consideration. The assessee had submitted copies of details of such prior period adjustment in Annexure-J copy whereof has been placed at pages 273 and 274 of PB-I. The learned counsel submitted that the liability in respect of the aforesaid expenditure, which consisted of several items, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years. It may be relevant here to make a useful reference to the judgment of the Bombay High Court in the case of CITv. Nagri Mills Co. Ltd. [1958] 33 ITR 681. At page 684, the relevant extract is reproduced below:-- "We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising point ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allabhdas & Co. [1962] 46 ITR 144 (SC) (b) CITv. Mogul Line Ltd. [1962] 46 ITR 590 (Bom.) (c) Kedarnath Jute Mfg. Co. Ltd.'s case (d) Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC). XI(2). This ground is similar in nature with the preceding ground. The assessee has stated in this ground that in case the amount of such expenditure debited in the books of account pertaining to assessment year 1996-97 is disallowed in that year, the same should be allowed in assessment year 1995-96, the year to which the expenditure in question relates. While dealing with Ground No. X we have already held that if the liability for payment of expenditure has been determined and crystallised in the next year and the amount has been debited in the books of account after its determination and crystallisation, the expenditure should be allowed as deduction in the year in which it has been accounted for in the books of account maintained by the assessee. Such observations have been made on the strength of the judgment of the Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. and the judgment of the Bombay High Court in Nagri Mills Co. Ltd.'s case. The or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of CIT v. United General Trust Ltd [1993] 200 ITR 488 and Distributors (Baroda) (P.) Ltd. v. Union of India [1985] 155 ITR 120. The Commissioner (Appeals) confirmed the action of the Assessing Officer. XII(1). The learned counsel submitted that the dividend has been received from 8 companies and income from units of UTI has been received by the assessee. No expenditure is required to be incurred for earning such income. The learned CIT-DR supported the order of the Commissioner (Appeals). XII(2). We have carefully considered the submissions made by the learned representatives and have gone through the judgments relied upon by the Assessing Officer in the assessment order. The Hon'ble Apex Court in the case of Distributors (Baroda) (P.) Ltd. has held that so far as deduction under section 80M(1) is concerned, the deduction required to be allowed under that provision has to be calculated with reference to the amount of dividend computed in accordance with the provisions of the Act and forming part gross total income. It was also held that section 80AA, in its retrospective operation, is merely declaratory of the law as it always was since 1-4-1988. It was theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, 1961 in respect of allowance of depreciation on the concept of "block of assets". 13.3 In view of the above grounds of appeal, the appellant prays that the Assessing Officer be directed to recompute the deduction eligible under section 80-I and section 80-IA on the profits and gains of each eligible industrial undertaking without excluding from the profits of the concerned industrial undertakings, depreciation eligible under section 32 and without restricting the same to 30 per cent of the gross total income. XIII(1). Shri S.N. Soparkar, the learned counsel submitted that the working as to how the Assessing Officer has computed deduction allowable under sections 80-I and 80-IA to the tune of Rs.5,42,48,162 has not been given in the assessment order. However, in the order dated 11-1-2000 giving effect to the order of the Commissioner (Appeals), deduction has been granted at 30 per cent of the gross total income as reduced by other deductions allowable under Chapter VI-A. He drew our attention to a copy of claim made under sections 80-I and 80-IA which have been furnished at pages 285 and 286 of the PB-I. The learned counsel contended that deductions under s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsp; Rs. 2,90,99,058 3. Deduction u/s 80-0 Rs. 15,66,500 4. Deduction u/s 80M Rs. 1,96,61,986 ----------------- --------------- Rs. 5,30,11,044 Rs. 5.30,11,044 ----------------- & ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any mistake or discrepancy in the claim made under sections 80-I and 80-IA in respect of income derived by different Industrial Undertakings owned by the assessee. The working of deduction allowable under sections 80-I and 80-IA submitted by the assessee is in conformity with the provisions of law. The Assessing Officer has not found any mistake or discrepancy in the said claim. Therefore, there is no justification for disallowing any part of the claim made as per sections 80-I and 80-IA. XIII(3). The learned counsel further submitted that without prejudice to the assessee's claim for grant of deduction under sections 80-I and 80-IA on the profits derived by the eligible Industrial Undertakings without deducting depreciation therefrom, the assessee also submitted before the Assessing Officer a certificate from Jawahar Thacker & Co., CAs in relation to the computation of deduction allowable under sections 80-I and 80-IA as per the Department's stand i.e., after considering the depreciation as allowable under the provisions of the Act and taking the Advance Licence Benefit on accrual basis. A copy of such certificate given by the Chartered Accountants alongwith the details of com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80-IA. The learned counsel thus strongly urged that deductions as claimed by the assessee under sections 80-I and 80-IA should be allowed. XIII(5). We have considered the submissions made by the learned representatives of the parties and have gone through the relevant documents submitted in the compilation. We have also gone through the orders of the learned Departmental Authorities. The Assessing Officer has not given the basis for computing the amount of deductions allowable under sections 80-I and 80-IA in the assessment order. The Assessing Officer has also not pointed out any mistake or discrepancy in the working of deductions under sections 80-I and 80-IA claimed by the assessee. Even in the order under section 154, dated 6-8-1998 the Assessing Officer has restricted the deductions under sections 80-I and 80-IA to 30 per cent of taxable income computed after allowing deductions under sections 80G, 80HHC, 80-0 and 80M. The provisions of Chapter VI-A nowhere provide that deductions allowable under sections 80-I and 80-IA will be restricted to 30 per cent of taxable income after taking into consideration the deductions allowable under various other sections appearing under Ch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Mettur Chemical & Industrial Corpn. Ltd.v. CIT [1996] 217 ITR 768 in which it was, inter alia, held that the profits and gains of an Industrial Undertaking to which section 84 of the IT Act (provisions similar to sections 80J, 80-I and 80-IA) applies have to be computed in accordance with the provisions contained in Chapter IV-D of the Act and development rebate has first to be deducted from the total income and it is only thereafter, if any profits and gains remain from to is business, that the benefit under section 84(1) would be applicable. XIII(7). The Hon'ble Supreme Court in the case of Motilal Pesticides (I) (P.) Ltd. v. CIT [2000] 243 ITR 26 2 has held that special deduction allowable under section 80HH is required to be computed on the net income and not on gross income. The provisions of sections 80AA and 80AB will apply in relation to the deduction to be made in respect of income specified under the head "C" in Chapter VI-A of the Act. This also clarifies that income will first have to be computed in accordance with the provisions contained in Chapter IV, Which necessarily implies that profits of such eligible new Industrial Undertakings will have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted on gross total income minus deduction under section 80HH inspite of the fact that section 80HH(9) gives priority in respect of special deduction under sections 80HH over 80-I. No such priority has been specified for grant of deduction under sections 80-I and 80-IA vis-a-vis the deductions allowed under sections 80G, 80HHC, 80-O and 80M, as has been erroneously done by the Assessing Officer in the present case. The view taken by the Assessing Officer and confirmed by the CIT(A) of restricting such deduction alloxvable under sections 80-I and 80-IA to 30% of gross total income is therefore patently wrong. (C) The income by way of Advance Licence Benefit Receivable by the assessee has been held to be taxable in the year under consideration on the basis of entries recorded in the books of account while dealing with Ground No. I of assessee's appeal. The assessee will therefore be entitled to grant of deduction under sections 80-I and 80-IA on the profits of eligible Industrial Undertakings including the corresponding amount of income accounted for in the books of account in relation to Advance Licence Benefit Receivable. (D) The assessee had submitted before the learned Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80-IA by the Assessing Officer should be reduced, as the Department has not raised any ground in their appeal nor they have filed any cross objection in relation to deduction allowable under sections 80-I and 80-IA. XIII(9). Ground No. XIII is disposed of as indicated above. XIV. Ground No. XIV is reproduced below: XIV. Deduction under section 80HHC: (A) Inclusion of excise duty in total turnover: 14.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Assessing Officer in including excise duty amounting to Rs.22,79,87,479 as part of total turnover while computing the deduction under section 80HHC of the Act. 14.2 In doing so, the CIT(A) erred in not appreciating the fact that the term "total turnover" in the context of the said section has to be made comparable with the term "export turnover" and since export turnover does not include any excise duty, "total turnover" also ought to have been taken exclusive of excise duty. (B) Reducing 90% of the following items from the profits of the business: -------------------------------------------------------------------------- Insurance Claim &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation (baa) of section 80HHC(4A). 14.7 In view of the above grounds of appeal, the appellant prays that the Joint CIT ought to be directed not to include the said interest income in the provisions of clause (baa) of the Explanation below section 80HHC(4A). 14.8 Without prejudice to the above and in the alternative, it is submitted that the receipts in the said Explanation (baa) below section 80HHC(4) refers only to "net receipts" and as the total amount of interest paid is greater than the interest received no amount of interest can be excluded from the "Profits of the business". (D) Netting off the negative figure of profits attributable to export of traded goods instead of considering at as "Nil": 14.9 On the facts and in the circumstances of the case and in law, the CIT(A) erred in not dealing with the aforesaid ground of appeal while passing the appellate order. 14.10 The appellant submits that profits of traded goods are negative, no deduction is available under clause (b) to sub-section (3) of section 80HHC and as the said negative figure has to be considered as nil, whereas the appellant is entitled to deduction on the profits computed under clause (a) and the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, where the assessee carried on a business as 100 per cent exporter and secondly where the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head 'Profits and gains business', the same proportion as the export turnover bears to the total turnover. The emphasis is on the words 'Profits derived from the exports'. Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even, according to accounting principles, such levies do not form part of the profit and loss acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . XV(1). After considering the submissions made by the learned representatives, we consider it proper to direct the Assessing Officer to grant credit in respect of tax deducted at source after making necessary verification. The Assessing Officer may provide an opportunity to the assessee to submit necessary evidence in support of the claim for credit in respect of tax deducted at source made by the assessee. XVI. Ground No. XVI is reproduced below: XVI. Additional tax levied under section 143(1A) not recomputed: 16.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in holding that recomputation of the additional tax levied under section 143(1A) does not arise out of the assessment order passed under section 143(3) of the Act. 16.2 In doing so, the CIT(A) failed to appreciate that as only an amount of Rs.20,38,500 out of the adjustment made in the intimation had been sustained in the assessment order passed under section 143(3) the additional tax levied ought to have been recomputed and accordingly, the said issue arises from the assessment order passed under section 143(3) of the Act. 16.3 In view of the above grounds of appeal, the appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e time of hearing, the appellant's representative submitted that the difference was on account of the fact that the sales to the sister-concerns were made in bulk containers and the containers were returned by the sister-concerns to the appellant. It was further submitted that the appellant is in a position to produce the necessary evidence and challans in support of this claim. It was requested that the claim of the appellant may be allowed. 9.1 I have considered the facts and merits of the case. Considering the facts of the case, I would direct the Assessing Officer to delete or reduce this addition on the basis of the complete evidence that may be produced by the appellant to establish that the difference in the selling price is covered by the saving in respect of containers/drums. XVII(2). The learned counsel contended that such notional income cannot be validly added in the hands of the assessee. He also vehemently contended that the provisions of section 40A(2)(b) can not be applied to income as it relates only to expenditure. He drew our attention to the relevant documents submitted at pages 300 to 316 in PB-I to justify the reasonableness of selling rates charged from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er including the contention that provisions of section 40A(2)(b) can not be invoked in relation to income, as it applies only in relation to expenditure. We therefore do not find any merit in the additional ground raised by the assessee. The same is therefore rejected. XVIII. The additional ground No. II reads as under: II. Proportionate deduction in respect of premium on leasehold land: 2.1 On the facts and in the circumstances of the case and in law, as iterated in Ground No. IV above, the appellant submits that deduction of the proportionate premium in respect of leasehold land acquired in the assessment year 1993-94 also ought to be considered for allowance in case deduction in respect of the entire premium in the respective year is not allowed. 2.2 The appellant submits that relying on the ratio of the decision of the Supreme Court in the case of Madras Industrial Corpn. Ltd. the proportionate premium ought to be allowed as a deduction over the period of the lease in case the entire premium is not allowed as a deduction in the year in which the liability arose. 2.3 In view of the above, the appellant prays that the Assessing Officer be directed to allow deduction in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT-DR produced copies of ITNS 150 Demand Notice and relied upon the decision of the Tribunal in the case of S.K. Patel Family Trust v. Asstt. CIT[2001]71 TTJ (Ahd.) 121. He also pointed out the omission of mentioning specific section 234B in the assessment order can not be treated as a fatal mistake but it is a curable one, as has been held in the case of CITv. Shah Services [1994] 73 Taxman 154 (Cal.). He also pointed out that a retrospective amendment in relation to the aforesaid section is proposed in the Finance Bill, 2001 which will soon become an Act applicable with retrospective effect. The learned DR strongly supported the levy of interest under section 234B. XIX(3). In the rejoinder, the learned counsel further submitted that the Hon'ble Gujarat High Court vide judgment dated 15-1-2001 in the case of Norma Detergent Ltd. have dismissed the appeal filed by the Revenue. A copy of the appeal under section 260A submitted by the Department has also been submitted in the compilation submitted along with the chart. In the said appeal the Revenue has proposed a specific question, said to be a question of law, arising out of the order of the Tribunal, namely, as to whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed back to the Assessing Officer with a direction to pass a fresh order in accordance with the provisions of law and after providing reasonable opportunity to the assessee, in accordance with the judgment of Hon'ble Apex Court and Hon'ble Jurisdictional High Court. XX. Now we will deal with the Revenue's appeal (ITA No. 2485/Ahd./1999). Ground Nos. 1 and 2 raised by the Revenue are reproduced below: (1) On the facts and in the circumstances of the case as well as in law, the CIT(A) has erred in holding that interest expenditure pertaining to setting up of various new units may be treated as normal interest expenditure allowable as business expenditure though the assessee on its own has capitalised the interest expenditure and even in the original return, the assessee has not made any claim on deduction of such expenditure in the computation of income. (2) The CIT(A) has erred in law and on facts by treating the interest expenditure relating to other new units/projects as allowable business expenditure, holding that interest expenditure relating to only one unit namely Jhagadia unit as capital expenditure and also without giving any reason and basis for differentiation between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpanded Metal Mfrs.'case (j) Tarai Development Corpn. Ltd.'s case (k) Veecumees' case (l) Associated Fibre & Rubber Industries (P.) Ltd's case XX(3). The learned counsel also submitted that the taxability of any particular item of income/expenditure can not be decided on the basis of entries made in the books of account but the question relating to the taxability of an income or allowabihty of an expenditure will have to be decided in accordance with the provisions of law. The provisions of section 36(1)(iii) do not draw a distinction between borrowed funds utilised in the capital field or revenue field. This has been held by the Gujarat High Court in several cases such as in the case of Alembic Glass Industries Ltd. He also relied on the judgments of the Hon'ble Supreme Court in the cases of CITv. Shoorji Vallabhdas & Co.; Kedarnath Jute Mfg. Co. Ltd.; Chowringhee Sales Bureau (P.) Ltd. as well as the decision of the Bombay High Court in the case of Mogule Line Ltd. XX(4). We have considered the submissions made by the learned representatives of the parties and have gone through the orders of the learned Departmental Authorities. We have also gone through all the judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interconnection, inter-lacing and inter-dependence are fully satisfied on the facts of the present case. We are therefore of the considered opinion that the learned CIT (A) has rightly deleted the said disallowance out of interest expenditure. We therefore do not find any merit in ground Nos. (1) and (2) of Revenue's appeal. XXI. Ground Nos. (3) to (6) relate to the disallowance out of travelling expenses and salary and wages expenses relating to setting up of new units, are reproduced below:-- (3) On the facts and in the circumstances of the case and also in law, the CIT (A) has erred in allowing the travelling expenses and salary and wages expenses relating to setting up of new unit [incurred before the commencement of the production in the new unit] as revenue expenditure [except for the Jhagadia unit] ignoring the fact that the assessee itself has rightly claimed the same in its books of account as capital expenditure and also ignoring the fact that even in the original return, the assessee has rightly not claimed these as, revenue expenditure in the computation of income. (4) The CIT (A) has erred in allowing the travelling expenditure and salary and wages expenditure re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowability of travelling and salary and wages expenses is governed by the provisions of section 37 of the Act. The learned CIT-DR drew our attention to the decision of the Tribunal in the case of Core Health Care Ltd. where interest expenditure relating to new project was allowed under section 36(1)(iii) but the disallowance made out of travelling and miscellaneous expenses relating to such new project was confirmed by following the judgment of the Gujarat High Court in the case of Shree Vallabh Glass Works Ltd. v. CIT[1981] 127 ITR 37 and in the case of CITv. Peas Industrial Engineers (P.) Ltd. [1994] 205 ITR 447. The learned CIT-DR also placed reliance on the following judgments to support the disallowance of such expenditure incurred in relation to new units made by the Assessing Officer: (a) McGaw Ravindra Laboratories (India) Ltd. v. CIT [1994] 210 ITR 1002 (Guj.). (b) Indian Oxygen Ltd. v. CIT[1987] 164 ITR 466 (Cal.). (c) Ambica Mills Ltd. V. CIT[1964] 54 ITR 167 (Guj.). (d) Dalmia Dadri Cement Co. Ltd v. CIT[1970] 77 ITR 405 (Punj. & Har.). XXI(3). Shri Dave, the learned CIT-DR did not make any submission with regard to ground No. 5 apparently because such a ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so observed that the decision in Shree Vallabh Glass Works Ltd.'s case has been imphedly overruled by the aforesaid two judgments of the Supreme Court. Shri Soparkar, the learned counsel also relied on the decisions in the cases of Shah Theatres (P.) Ltd.; Aniline Dyestuff &Pharmaceuticals (P.) Ltd. and Bralco Metal Industries (P.) Ltd. v. CIT [1994] 206 ITR 477 (Bom.). Shri Soparkar strongly supported the order of the CIT (A) in relation to the aforesaid point raised by the revenue in ground Nos. 3 to 6. XXI(5). We have considered the submissions made by the learned representatives and have gone through all the judgments cited by them. Let us first consider the applicability of various judgments relied upon by the learned CIT-DR on the facts of the present case. Shri Dave, the learned CIT-DR relied on the decision of the Tribunal in the case of Core Health Care Ltd. It is true that the Tribunal in that case has held that other expenditure including miscellaneous expenses and travelling expenses incurred in relation to new units of existing business can not be allowed as revenue expenditure as unlike provisions of section 36(1)(iii), the provisions of section 37 clearly and unmis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... turing unit in this case was to be established in Malaysia as joint venture of the assessee and Government of Malaysia or other person. It was not going to be an expansion of assessee's business which is carried on in India. There has been nothing to indicate that the business organisation, administration and funds of both the units were to be common. The High Court recorded a definite finding in this case that there was not going to be complete interconnection, inter-lacing or inter-dependence of both the units. The Court also referred to the judgment of Alembic Glass Industries Ltd. at pages 1008 and 1009 in McGaw Ravindra Laboratories (India) Ltd's case It was observed that in Alembic Glass Industries Ltd's case new unit at Bangalore was nothing but expansion of the existing business of manufacturing glass at Baroda. The Court also observed that there was complete inter-connection and inter-lacing of both the units in the case of Alembic Glass Industries Ltd., which is the test laid down for determining whether two lines of business constitute "same business". The aforesaid judgment therefore also instead of supporting the case of the Revenue, support the decision rendered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see has raised the following grounds in the cross objection:-- I. Addition under section 40A(2)(b) in respect of sale of white phosphorus on differential rates: Rs. 6,06,726 1.1 On the facts and in the circumstances of the case and in law, the CIT (A) erred in setting aside the ground of appeal in respect of addition amounting to Rs.6,06,726 made under section 40A(2)(b) of the Act. 1.2 In doing so, the CIT (A) erred in not appreciating the fact that the said section viz. 40A(2)(b) applies only to expenditure and cannot apply to a transaction of sale and accordingly, no addition can be made in respect of sale of white phosphorus at differential rates. 1.3 In view of the above grounds of appeal, the respondent prays that the addition made in respect of sale of white phosphorus under section 40A(2)(b) be deleted. II. Disallowance out of interest paid: Rs.6,40,08,407 2.1 On the facts and in the circumstances of the case and in law, the respondent submits that the CIT (A) erred in setting aside the said issue and directing the Assessing Officer to restrict the disallowance to such amount and for such period for which the said advances were made interest free and for non busin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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