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TMI Blog1988 (8) TMI 126X X X X Extracts X X X X X X X X Extracts X X X X ..... ome necessary in order to claim deduction in respect of gratuity paid during the year but debited to the provision account and for reasons stated at the foot of the statement of total income forming part of the revised income. Full details of such expenses pertaining to previous years have been given by the appellant on pages 12, 13 and 14 of the compilation filed at the time of the hearing. The ITO rejected the claim for deduction of these expenses because the claim for expenses was not in respect of the business which was carried on by the appellant. The appellant had also claimed brokerage of Rs. 33,854 in respect of payment made in 1976-77 although it pertained to the year 1975-76, i.e., asst. yr. 1976-77. The ITO did not allow this claim in the computation of profits for the asst. yr. 1977-78. The CIT(A) confirmed this order of the ITO. He observed that these expenses were not debited to the profit loss account but separately claimed as a deduction. He agreed with the views of the IAC contained in para 3.3 of his directions under s. 144B and disallowed these items as capital expenditure. The first ground of appeal is directed against this finding of the CIT(A). 3. Shri R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 13th Aug., 1979 would indicate that the amounts paid and claimed as deductions are in the sense part of purchase consideration and expenditure incurred on capital account and hence not allowable. 4. While meeting these objections of the learned Counsel, Shri Chitale pointed out that one of the conditions of take-over of the mills as going concerns was that the Corporation would take over the liabilities along with the assets of the two mills and in honouring such commitment, it was required to incur these expenses which were expenses incurred out of commercial expediency. They were not debited to the profit loss account because they did not form part of the expenses of the Corporation per se but they were, nevertheless, no charge on the profits of the Corporation and, therefore, they were claimed as a deduction in the revised returns. These expenses should be allowed as a revenue expenditure and as deduction in the computation of the Corporation in view of the conditions under which the ownership of the mills was transferred to the Corporation. Shri Chitale has cited several decisions in support of his proposition. He firstly relied on the decision of the Supreme Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its administration and modernisation of its machinery, it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process and assertion of hostile title; it may comprehend many other acts incidental to the carrying on of the business. Shri Chitale, therefore, argued that these expenses, though relating to the business of the companies which were taken over, had to be borne by the Corporation in terms of the two Resolutions passed by the Govt. of Maharashtra and, therefore, had to be allowed as a revenue expenditure in the computation of income of the appellant for the year under appeal. 5. Shri Keshav Prasad for the Department argued that there was no liability in the old balance-sheet of 1st April, 1976 and no evidence of any business expediency had been established. Shri Keshav Prasad, while relying on the order of the CIT(A), argued that the expenses were neither debited in the books nor did they relate to the assessee's business. They were not even claimed in the original return filed but claimed only in the revised return. The assessee had not established how it was expedient for the Corporati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e did not press. Consequently, Ground Nos. 2(a) and 2(b) are rejected. 8. The assessee pressed the points raised in Ground Nos. 2(c) and 2(d) which related to the assessee's claims for weighted deduction under s. 35B on freight amounting to Rs. 13,59,871, insurance charges of Rs. 14,051, bank charges of Rs. 63,649 and clearing charges of Rs. 67,704 and other petty expenses of Rs. 20,759. After considering the assessee's claim in this regard, we are satisfied that none of these items of expenditure qualifies for weighted deduction under s. 35B in view of the decision of the Spl. Bench in J. Hemchand Co. (1 SOT 150) as well as decision of the Madras High Court in the case of CIT vs. Southern Sea Foods (P)Ltd. (1982) 31 CTR (Mad) 23 : (1983) 140 ITR 855 (Mad). In the result, Ground Nos. 2(c) and 2(d) are also dismissed. 9. The third ground raises an important issue which requires some deliberation. It would appear that the Corporation changed its method of accounting in the accounting year relating to the asst. yr. 1976-77 from mercantile to cash. It would appear that the assessee showed loans given to various mills amounting in all to Rs. 1,49,85,697, interest in respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat if these amounts were considered good, there was no reason why the assessee should have been afraid of recovering the interest that had accrued on these various advances. In this view of the matter, the IAC held that the assessee's claim for change could not be allowed. If ultimately it was found that interest from a debtor was not recoverable along with the principal, the assessee could claim it as a bad debt. The IAC relied on the aforementioned decision of the Bombay High Court in CIT vs. Confinance Ltd. 11. The assessee took the matter in appeal. The CIT(A) dealt with this issue in para 4 of his order. He relied on the same decision of the Bombay High Court. He mentioned that when loans were advanced there was an understanding to charge interest at 11 per cent or at bank rate and the estimate made by the ITO at 11 percent could not be considered to be excessive or unreasonable. The CIT(A), therefore, sustained the estimated addition of interest on accrual basis. It is against this decision of the CIT(A) that the third ground of appeal of the assessee is directed. 12. Shri Chitale, the learned Chartered Accountant for the assessee, clarified the actual position and sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of 30th Sept., 1978 the figure of loss of this Mills was Rs. 27.91. Shri Chitale has also given details of year-wise outstanding of NTC Mills as well as other Mills and the interest which was due from them and which was not received amounting to nearly Rs. 14,50,094. He also drew our attention to an extract from Industrial Finance Corporation of India relating to loan agreement where the Corporation as well as the other mills who had taken loans had given an undertaking to the lenders whereby they took the responsibility for making satisfactory arrangements to the leaders for meeting shortfall, if any, in the resources of the borrower for completing the project and for working capital. As a part of this undertaking, it was agreed that the borrower shall not pay any interest on such unsecured loans/ deposits if at the time of such payment there is a default in the payment of instalments of principal sum of the loan and interest due and owing by the borrower to the lenders under this agreement. Shri Chitale also pointed out that an amount of Rs. 23,93,647, which was shown as outstanding against Devagiri Textile Mills Ltd. as on 31st March, 1977, represented the amount received form G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of the appellant. The Calcutta High Court in an earlier decision in CIT, West Bengal vs. Rajasthan Investment Co. (P) Ltd. (1978) 113 ITR 294 (Cal) was dealing with the case of an investment company which derived income from interest on loans and advances and which maintained its accounts on mercantile system. With effect from 1st May, 1966, the company changed its method of accounting from mercantile to cash and from 1st May, 1967 it brought into account whatever interest it actually received and not what was receivable. The ITO held that the method of accounting was intended to avoid taxes. The AAC confirmed the additions for 1968-69 to 1970-71 but held that the change-over was accepted for 1971-72. The Tribunal held that there was nothing to show that the change effected by the assessee in its method of accounting was not in good faith and that the propriety of the change adopted by the assessee had to be determined with reference to the assessee's own accounts and not the accounts of its debtors and that the change-over to the cash basis was realistic and did not involve any mala fides on the part of the assessee. On these facts, the Calcutta High Court held that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a bona fide decision taken after proper consultation with the Govt. and the financial bodies and, therefore, in our opinion, the reliance of the Revenue authorities on the decision of the Bombay High Court reported in 89 ITR 292 is not quite correct since the facts there are clearly distinguishable. 14. In the course of the hearing before us, reference was made to the decision of the Supreme Court in the case of State Bank of Travancore vs. CIT (1986) 50 CTR (SC) 290 : (1986) 158 ITR 102 (SC). The Hon'ble Supreme Court referred to the case of H.M. Kashi Parekh Co. Ltd. vs. CIT (1960) 39 ITR 706 (SC) as well as CIT vs. Birla Gwalior (P) Ltd. (1973) 89 ITR 266 (SC) and observed at page 151 of the report as under: "In that case, the accounts of the assessee company for the year 1970-71, included an amount of Rs. 8,264 from B G and Rs. 55,920 from S.P. Ltd. receivable as interest. The interest due from B G were on advances made in 1966 and that from S.P. Ltd were on advances made in 1965. The assessee was following the mercantile system of accounting and the ITO treated both the items of interest as the assessee's income for 1970-71. The assessee used to credit the int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee found itself and for a specific purpose which we have already discussed and the Revenue authorities were not justified in rejecting the assessee's claim for the asst. yr. 1977-78 that the interest in respect of these loans should not be brought to tax on accrual basis when in fact it had not received any such interest and had promised to account for it on receipt basis. The assessee is entitled to succeed on all the three counts raised by it in the third ground of appeal. The CIT(A)'s order in this regard is reversed and the addition of Rs. 17,23,344 as notional interest is deleted. 17. In the fourth ground the assessee claims that the fees paid to the Registrar of Companies for increasing the share capital of the Corporation should be allowed in full as revenue expenditure in view of the decisions of the Madras High Court in CIT vs. Kishanchand Chellarmm (India) P. Ltd. (1980) 16 CTR (Mad) 248 : (1981) 130 ITR 385 and of the Supreme Court in India Cements vs. CIT (1966) 60 ITR 52 (SC). We have carefully considered this matter. The expenditure, in our opinion, has been incurred in a capital field and not in a revenue field and therefore, the ratio of the decision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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