9911796707
TMI Blog1985 (10) TMI 111X X X X Extracts X X X X X X X X Extracts X X X X ..... hinery 23,78,064 ----------- 34,17,349 Less : Loans from UPFC and PICUP 15,76,000 ----------- Capital employed in project No. 2 18,41,349 ----------- The assessee claimed relief under section 80J on the above amount of Rs. 48,41,349 at Rs. 1,38,100. The claim was 7 1/2 per cent of capital employed in the project. There is no dispute about these facts before us. In order to verify the factual position, the ITO inspected the factory premises of the assessee. He found that the new plant was only a moulding plant set up parallel to the original moulding plant which manufactured steel tubes up to 2 inches diameter. The ITO also found that not only the mill compound but also the factory building was the same for both the projects. He was told that the earlier tin-shed had been extended to accommodate this new project. His inspection, however, revealed that there was only one composite structure for both the projects. 3. The ITO rejected the claim of the assessee on several grounds. His fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ken the value of the assets as on the last day of the accounting year instead of their value as on the first day of the accounting year. 5. The assessee also made a claim under section 80HH of the Act. There is no dispute that this section applies only to a case to which section 80J applies. Since the ITO had not admitted the assessee's claim under section 80J, he held that the assessee was also not entitled to claim under section 80HH, the reason being the same that it was not established that the business was not formed by the splitting up or the reconstruction of a business already in existence. These findings of the ITO were upheld by the Commissioner (Appeals). 6. The assessee is now in appeal before us. Shri C.S. Aggarwal, the learned counsel for the assessee, at first, invited our attention to the following passage appearing in the report of the directors to the shareholders : "As reported last year the company has embarked upon the expansion project for creating an additional capacity of 15,345 metric tonnes per annum on a single shift basis of higher diameter tubes and pipes. Financial arrangements have been properly tied up. In the month of March, 1981 a new tube mi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tence. He also referred to a decision of the Bombay High Court in the case of CIT v. Associated Cement Co. Ltd. [1979] 118 ITR 406. 8. We have carefully considered the submissions placed before us. In our opinion, the assessee must succeed in its claim The principles which govern the question of setting up or reconstruction of an existing business and those which go to show the existence of a new undertaking are dealt within detail by the Hon'ble Supreme Court in the case of Textile Machinery Corpn. Ltd. The Supreme Court observed that there must be a new undertaking where substantial investment of fresh capital must be made in order to enable earning of profits attributable to that new capital. The Supreme Court also observed as under : "... Manufacture or production of articles yielding additional profit attributable to the new outlay of capital in a separate and distinct unit is the heart of the matter, to earn benefit from the exemption of tax liability under section 15C. Sub-section (6) of the section also points to the same, effect, namely, production of articles. The answer in every particular case, depends upon the peculiar facts and conditions of the new industrial und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without the aid of power have been employed. Such a new industrially recognisable unit of an assessee cannot be said to be reconstruction of his old business since there is no transfer of any assets of the old business to the new undertaking which takes place when there is reconstruction of the old business. For the purpose of section 15C the industrial units set up must be new in the sense that new plants and machinery are erected for producing either the same commodities or some distinct commodities. In order to deny the benefit of section 15C the new undertaking must be formed by reconstruction of the old business. Now, in the instant case, there is no formation of any industrial undertaking out of the existing business since that can take place only when the assets of the old business are transferred substantially to the new undertaking. There is no such transfer of assets in the two cases with which we are concerned." If we examine the case of the assessee in the light of the principles enunciated above, we come to any conclusion other than the one that the assessee's new project is a new industrial unit, which is separate physically from the old one, the capital of which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of the assets has to be taken as on the first day of the computation period of the undertaking as laid down in clause (II) of section 80J(1A). Similarly, he has also to ascertain the borrowed monies and debts owed by the assessee on the first day of the computation period in terms of clause (III) of the above section. 11. The next contention in the assessee's appeal relates to the computation of the written down value of the generator sets for the purpose of allowing depreciation. The ITO found that the generating sets were purchased in the assessment years 1974-75 and 1975-76 out of loans from UPFC. As per the tripartite agreement between the assessee, UPFC and the Government of U.P., the amount of loan attributable to 25 per cent of the cost of generating set was to be paid to UPFC by the Government of UP as subsidy. It was submitted before the ITO that the subsidy could not be deducted in working out the cost of the generating sets for the purpose of depreciation as there was nothing in the scheme that it was specifically intended to meet a part of the cost of the generator. It was also submitted that besides the above, there were certain terms and conditions imposed on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b Sugar Mills Ltd., a decision of the Allahabad High Court. The Court had held that equity shares constitute the capital of the company, they are an integral part of the permanent structure of the company and are not in any manner connected with the working capital of the company, which is utilised to carry on the day-to-day operations of the business. Therefore, the expenses incurred in connection with the issue of additional equity shares is not revenue expenditure and is not deductible. The Himachal Pradesh High Court in Mohan Meakin Breweries Ltd.'s case has also given a similar finding. The Court had held that by increasing its capital the company would be enabled to hold a more extensive business than it was holding before. Therefore, the increase in the limits of its authorised capital would not only increase its capital but would also result in an advantage of enduring nature. The advantage was so enduring that it would last till the company itself was alive. The expenditure incurred to raise the share capital will, therefore, be a capital expenditure. The assessee, therefore, fails in its contention. 15. Another contention in the assessee's appeal relates to disallowance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d under section 37(2). The balance of the amount should be allowed by him. 18. The next contention in the assessee's appeal relates to charge of interest under section 139(8) and section 215 of the Act. The appeal on this point was not admitted by the Commissioner (Appeals) in view of the decisions of the Allahabad High Court in the cases of CIT v. Geeta Ram Kali Ram [1980] 121 ITR 708 (FB) and CIT v. Hind Lamps Ltd. [1980] 122 ITR 451. 19. A Full Bench of the Allahabad High Court in Geeta Ram Kali Ram had held that the grounds relating to the charge of interest under the above sections could not be entertained by the appellate authority merely because they had been taken in the appeal filed against the regular assessment order. In view of the decision of the Court, which is binding on us, we uphold the finding of the Commissioner (Appeals) denying to admit the ground. 20. The other contentions taken in the appeal were not pressed before us and are, therefore, rejected. 21. We will now take the departmental appeal. The only contention in this appeal relates to deletion of an addition of Rs. 10,78,886. The assessee had overdraft facility from Hindustan Commercial Bank. The I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tted to the bank were based on estimate. It was further submitted that on 17-11-1980 when there was highest excess of zinc in the bank statement, the stock of galvanised tubes showed in the same statement was lesser than that shown in the stock register of the assessee. 24. The ITO did not accept the above explanation. Observing that the stock register was not checked by any authority and that the figures therein were not certified by the assessee or any of his employees, and the bank stock statement was certified by the director of the company and was also accepted as a valid statement by the bank for granting overdraft, the figures in the latter had to be accepted as the correct figures. He also observed that so far as the stock of zinc was concerned, it was always more in the stock statement than that shown in the stock register. According to him, even otherwise the declaration of lesser stock was understandable if no further limit was required from the bank. In the opinion of the ITO, the declaration of larger stock, i.e., declaration of a non-existent stock was not normally conceivable. He also observed that the version of the assessee regarding declaration of zinc on estima ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on estimate and could not be relied upon for rejecting the books of account. He also did not accept the claim of the assessee that stocks of black tubes and galvanised tubes were available for pledge to the bank if there was any shortage of stock, on the ground that such a claim would not condone the incriminating fact that the excess stock was declared in zinc on the basis of which overdraft limit was obtained and that such a stock represented unaccounted goods of the assessee-company. He also did not attach any importance to the claim of the assessee that the round figures given in the stock statement to the bank went to support the theory that they were based on estimate. It was also submitted before him that the sale of the by-products of zinc stated above were fully verifiable and payments have been received by account payee cheques. The assessee also filed before the ITO a certificate from Engineering and Consultants to show that the normal wastage in the form of zinc dross, ash and blowing varied between 30 per cent to 50 per cent for which reliance was placed on a book published by the Galvanisors of London. It was also claimed before the ITO that the monthly consumption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ght every day as this involved a complicated process. The details given to the bank were also by measurement. 27. The ITO found another serious discrepancy in the maintenance of the books of account. He found that the assessee had not maintained any record of goods in process, which was rather surprising, as the entire raw material could not be converted into finished goods immediately without leaving any goods in process. From this he concluded that the stock register had not been maintained in the regular course of business and that it was prepared just in order to give semblance to the maintenance of day-to-day quantitative record. He found that the excess stock shown to the bank on 17-2-1981 was 32.22 metric tonnes. He estimated its value at Rs. 1,61,100 and treated it as the income of the assessee. Before doing so, he rejected the assessee's claim that the figures had also to be submitted to the Indian Standard Institute (ISI) on the ground that such figures had been given on the basis of stock register itself and, therefore, there was no question of any discrepancy. He found similar excess declaration to the bank in the case of galvanised steel tubes on 31-12-1980. On this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally concerned with the security which was in addition to the personal guarantee on all the directors, collateral security of property held by them and the second charge on the fixed assets of the company. It was also pointed out that this was a case of hypothecation of the goods and not pledging of the goods with the bank and, therefore, the assessee had sent mere estimated statements, particularly when the stock was much in excess of the limit to cover the cash credit facility. In this connection, the assessee also relied on a decision of the Delhi Bench of the Tribunal in IT Appeal No. 541 (Delhi) of 1984 dated 11-9-1984, in the case of Khan Sirohi Steel Rolling Mills, Bulandshahr relating to the assessment year 1979-80. It was also pointed out to the Commissioner (Appeals) that the gross profit declared by the assessee was the highest in the year under appeal as compared to the earlier two years. It was 7.7 per cent in the assessment year 1979-80, 9.4 per cent in the assessment year 1980-81 and 9.9 per cent in the year under appeal. 29. The Commissioner (Appeals) did not discuss or deal with the various issues raised by the ITO in his order which we have summarised above. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t alone gave a correct picture and that the sworn statements given to the banks were motivated. He contended that the learned Commissioner (Appeals) was bound to follow the above finding of the High Court in view of the principle laid down by the Supreme Court in Assistant Collector of Central Excise v. Dunlop India Ltd. [1985] 154 ITR 172. It was held in this case that in the hierarchical system of Courts which exists in our country, it is necessary for each lower tier to accept loyally the decision of the higher tiers. 31. Proceeding with the merits of the case, the learned departmental representative, Shri Srivastava, submitted that submission of the returns to the ISI was of no consequence as they merely certified the quality of the goods and were not concerned with the correctness of the assessee's stock register. He contended that the product of the assessee was not subject to excise duty and, therefore, there was no check by the excise authorities, that it had not maintained or was not required to maintain any prescribed registers for its raw materials or for its finished products, that the stock register was not signed by any authority, not even by any official of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sons v. CIT [1980] 18 CTR (Punj. Har.) 210. In this case also higher stocks were declared to the bank other than that shown in the books for seeking overdraft facilities. The assessee's explanation was that there was no proper verification of the stocks declared to the banks and that such declaration had always been made on estimate basis and, therefore, the certificate issued by the bank was not reliable. In the Tribunal's view, the declarations given to the bank could not be ignored. At the same time, it gave the assessee the benefit of the presumption that in making such declarations, there would normally be a tendency to over-estimate rather than otherwise. The Court confirmed the Tribunal's order as correct. 32. The learned counsel for the assessee, in reply, reiterated the submissions placed before the lower authorities including the Commissioner (Appeals). He also submitted that assuming that the stock register had not been properly maintained, the ITO could not make it the basis for finding out the discrepancies in the stock and made an addition. He further contended that the figures given in the statement to the bank were in round figures, which indicated that they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Commissioner. In the circumstances, the High Court accepted the deletion of the addition for excess stock by the Tribunal. 34. We have carefully considered the submissions placed before us. We are of the opinion that the Commissioner (Appeals) was not justified in following the decision in the case of Khan Sirohi Steel Rolling Mills, Bulandshahr without actually examining the facts of that case. In that case, the stock position as per books had been independently verified by the Central Excise Department in the course of the previous year. The sales tax authorities had also accepted the sales shown for that year. In any case, the Tribunal did not come to any bald finding that under no circumstances the statements given to the bank could be relied upon. What the Tribunal held was that the taxing authorities were not entitled to treat each and every case of over-declaration of stocks to the bank as one calling for a straight addition to the extent of the excess declaration. The Tribunal also held that the burden lay on the assessee to show that such a declaration to the bank did not reflect the correct position whereas his books did reflect the correct position. According to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to the file of the Commissioner (Appeals). We do not think the matter should again go to the ITO. The ITO has exhaustively dealt with the nature of the accounts maintained by the assessee, the defects from which they suffer and why an addition is called for. The burden obviously falls on the assessee. Once the assessee has declared excess stock to the bank, it is his duty to show that that excess stock was based on some imaginary or estimated figures and did not reflect the correct position or the availability of actual stock in its possession in the relevant dates. We agree with the finding of the ITO. The mere bald statements that bank statements were submitted on estimate, cannot be accepted. We similarly also cannot accept the claim of the department that stock register should be rejected outright as it was not signed by any authorised officer of the assessee or the bank statements should be preferred merely because they were signed by the directors and were accepted by the bank as valid statements. There is nothing on record to show that the bank at any time carried out any inspection and found that there was, in fact, excess stock, which was in conformity with the statemen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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