9911796707
TMI Blog2003 (3) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... period prior to the putting into use of the said fixed assets, had been capitalised in the books of account of the appellant prepared for the relevant previous year. 1. This sum of Rs. 8,25,01,104 represents interest on loan taken from financial institutions and Banks and capitalized during the relevant accounting year. This amount of interest is capitalized to plant & machinery and capital work-in-progress in respect of Triveni Tissues Divisions and paper packaging and printing divisions of the assessee's company. For the income tax purpose, the assessee has claimed deduction of Rs. 8,25,01,104 a portion of expenditure of Rs. 16,13,52,102 not debited to profit & loss account but claimed as allowable under sections 30, 31, 36 & 37 of I.T. Act in the computation of income under section 36(1)(iii) of I.T. Act. This amount consists of two parts i.e. Rs. 4,95,06,235 pertaining to plant & machinery purchased during the year and a sum of Rs. 3,29,94,869 relating to capital working progress. This claim was made by the assessee on three grounds namely 1, 2 & 3 : "1. Interest paid on borrowings made for the purpose of business is eligible for deduction under section 36(1)(iii) of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as a revenue expenditure. The Assessing Officer also mentioned in his order that in earlier year similar disallowances have been made by the Assessing Officer. The CIT(A) while confirming the order of Assessing Officer has observed: "The Assessing Officer has relied on CBDT's Circular No. 461 dated 9-7-1986. It clearly and categorically states that the interest paid on borrowings for investment in capital asset may be capitalised only relating to the period prior to the asset coming into production that is relating to the erection stage of the asset. In that circular department relied on the case of CIT v. J.K. Cotton Mills 98 ITR 153. It is accepted principle that interest paid on moneys borrowed to acquire a capital asset, is to be capitalized, till the asset is put to use for making commercial production. In my opinion Assessing Officer has taken a reasonable view. His action does not call for any intervention, since the machineries have been acquired during the year but not put to use for commercial production, the Assessing Officer is also justified in disallowing depreciation claimed on the capital value of the asset." 4. Before us, the Ld. DR has relied on the orders of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. All the cases cited and the case of Gujarat High Court heavily relied by the Learned A/R are very old cases much earlier to the CBDT circular No. 461 dated 9-7-1986 relied upon by the department and they decided the matter as per law as it existed during that period. Though the case Associated Fibre & Rubber Industries (P.) Ltd. was decided by the Supreme Court on 3-2-1999 but it pertained to assessment year 1972-73. The case decided by the Bench of this Tribunal cited by the Leaned A/R in his own case for assessment year 1991-92 is also of no help to the assessee as the issue involved is different. In that case issue involved was not whether the asset purchased out of borrowed money was put to use or not. The Assessing Officer in this case has simply followed the CBDT's Circular and CIT(A) has also confirmed the order of the Assessing Officer on the same basis. As it has been held by the courts that CBDT circulars are binding on the revenue authorities and in the absence of any jurisdictional High Court or Apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed. Ground No. II.--The grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese expenses. During the relevant period appellant incurred an expenditure of Rs. 9.13 crores. Insurance Company reimbursed Rs. 1.25 crores of its fixed expenses and for the loss of profit. The balance of Rs. 7,87,88,198 was claimed as a revenue expenditure. Assessee filed details in page 41 of the paper book. It includes repair to building of Rs. 18,62,000 repair to machinery of Rs. 19,06,000, Advertisement of Rs. 71,25,000, Sales Promotion of Rs. 22,75,000, Depreciation of Rs. 1,21,93,000 and other expenditures as well. Assessee has taken the insurance policy to cover the fixed expenses and loss of profit. It is not known under what circumstances, the insurance company reimbursed Rs. 1.25 crores. It is not out of place to mention that the expenditure of the assessee under the head Insurance Rates & Taxes, Auditors expenses, amounted to Rs. 2,67,12,000. Since the claim is pending and it has not been finalised, it is too premature to claim the amount of Rs. 7,87,88,198 as revenue expenditure. It is not out of place to mention that assessee's insurance policy not only covered fixed expenditure but also loss of profit. In my opinion Assessing Officer has taken a reasonable view. I h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and perused the records available. From the details of the expenditure available at page 26 of paper book, we do not find any expenditure of capital nature. The Assessing Officer has not given a clear finding that any fresh construction was done. In the absence of any such finding to say that the expenditure was capital in nature is not correct. The CIT(A) was also not correct when he says that this expenditure cannot be allowed since the claim of the assessee's pending before the Insurance Company. We feel that once such expenditure are allowed in the relevant assessment year any amount of insurance salvage, the receipt subsequent to the end of relevant previous year shall be subject to tax under section 41(1) of the Act in such subsequent year. We have also gone through relevant case laws cited by the Learned A/R and are of the view that these expenses should be allowed as revenue expenditure. So, we set-aside the order of the CIT(A) on this point. This ground is allowed. Ground No. III(a)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing an amo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver raised this contention before the CIT(A). He drew the attention of the Bench to pages 4 & 5 of the statement of facts filed with the Learned CIT(A). It was also argued before us that assessee's company is a separate juristic entity and any expenditure incurred for maintenance of residential accommodation provided by it to the employees cannot be held to be a personal expenditure of the assessee. He also cited various decisions delivered by the various Benches of this Hon'ble Tribunal where it has been held that expenditure incurred by a Limited company in providing benefits to it's employees cannot be held to be personal expenses and the same are allowable as deduction. 2. We have heard both the parties and perused the record available. We find after going through the statement of the fact filed by the assessee before the CIT(A), that there is no mention of Guest Houses or Holiday Homes. The Assessing Officer has also not said anywhere in his order that any expenses were incurred on guest houses or holiday homes for employees. We are surprised from where the CIT(A) has brought in guest houses and holiday homes in his order. We also fail to understand how any amount of these ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich such disallowance was made. The Learned DR did not dispute this fact. So, respectfully following the order of Kolkata Bench of this Hon'ble Tribunal, this ground of assessee is allowed. Ground No. V(a)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in treating the total capital gains arising on the sale of undivided shares in the interest of land and building constructed thereon, as short term capital gains, when he should have accepted the claim of the appellant for assessing the capital gains arising out of sale of undivided shares in the interest of land and building constructed thereon, separately, where the capital gains on the sale of the undivided shares in the interest of the land should have been treated as long term capital gains and the capital gains on the sale of the building constructed thereon should have been treated as short term capital gains. 1. During the year under consideration the assessee's company has claimed capital loss of Rs. 9,70,26,047 for being carried forward under section 74 for set off in the succeeding assessment year aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsolidated price is received by the assessee, then the assessee is entitled to bifurcate the same and if a situation arises where a gain from one of the capital assets, namely the land, is a long term capital gain, while from the other, namely the building, is a short term capital gain, then the benefits attached to long term capital gains cannot be denied to the assessee. He cited following High Court decisions as under: (i) Vimal Chand Golecha's case, (ii) CIT v. Dr. D.L. Ramachandran Rao [1999] 236 ITR 51 (Mad.), (iii) CIT v. C.R. Subramanian [2000] 242 ITR 342 (Kar.). 2. The Learned DR, however, relied on the order of Assessing Officer & CIT(A) and said that it is difficult to bifurcate between short term capital gain & long term capital gain. 3. We have heard both the parties and peruse all the records available and legal aspects of the case. We find that the expression capital asset is defined in section 2(14) of the Act as under: "Capital asset means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include-- (1) any stock-in-trade, consumable stores or raw materials held for the purposes of his business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of building and at the time of the sale of the building. Since, the land was held by the assessee for a period exceeding 36 months the land cannot be regarded as a short term capital asset only by virtue of the construction of building thereon. Hence, we are unable to accept the contention of the revenue that it is not possible to bifurcate the capital asset into two and are of the opinion that it is possible to work out capital gain with reference to the sale of building and land separately. Hence, the order of the CIT(A) is set aside and the assessee's appeal is allowed on this point. Ground No. V(b)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disregarding the short term capital loss suffered by the appellant amounting to Rs. 13,99,48,746 on renunciation of rights entitlements in M/s. Bhadrachallan Paper Boards Ltd. 1. The assessee held certain shares in M/s. Bhadrachallan Paper Board Ltd., a sister concern of the assessee, on the strength of which it was entitled to subscribe to right share issued by M/s. Bhadrachallan Paper Boards Ltd. Instead of act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... achallan Paperboard Ltd. as on 20-10-1993 fluctuated between Rs. 240 and Rs. 235. For the purpose of computation of capital gain/loss, the assessee took the average of Rs. 238. Thus, the cost of acquisition of each right entitlement comes to Rs. 42 (Rs. 280 - Rs. 238). The CIT(A), however, was not impressed by the argument of the assessee and while confirming the order of Assessing Officer observed as under: "However, before me the reference has been made to a letter issued by the Calcutta Stock Exchange Ltd., wherein it has been, written that the cumulative right varied Rs. 285 to Rs. 275. The ex-right varied between Rs. 240 to Rs. 235. Mere receipt of letter from the Calcutta Stock Exchange association is not enough. The Calcutta Stock Exchange association has also not calculated as to how they arrived at such figure. It is not known why appellant had to sale the right at the rate of Rs. 30 each. Transparency is lacking in the entire transaction. In my opinion there has been a colorable transaction. Relying on the case of McDowell & Co. (154 ITR 148), I held that the Assessing Officer was justified in disallowing the capital loss." 3. Before us, the learned DR relying on order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons are of no use before a suicide attack. The point we are trying to make is that all the rules, regulations, legal provisions are made keeping in mind the normal prudent behaviour of a man. In the instant case, there is no doubt that transaction is legal, but at the same time the fact remains that it is not transparent also. We have heard the Learned A/R at length and have gone through the relevant papers referred by him in his paper book but still mystery remains as to why instead of subscribing to the rights issue a professionally managed assessee company had sold or renounced the right entitlements to other entities. It is not the case of assessee that due to mistake or inadequate professional advice they made this transaction and suffered such a huge loss. Rather they are justifying this transaction. From the assessee company it cannot be expected that they will take a decision like this and incur such a huge loss unless there was a greater motive to go ahead with this transaction. That greater motive can only be to our mind in a case of a profit-making company, to reduce its tax liability, Otherwise even a layman who deals in shares would not commit this type of blunder. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal is allowed for statistical purpose. Ground No. VII--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in confirming the action of the Assessing Officer in disallowing an amount of Rs. 13,00,000 being the expenditure incurred by the appellant outside India for registration of its trademarks in foreign countries, while computing the business profits for the relevant assessment year. 1. There is no dispute about the fact that these expenses were incurred on registration of trade mark in foreign countries. We respectfully following the decision of Hon'ble Supreme Court in case of CIT v. Finlay Mills Ltd. [1951] 20 ITR 475 allow this ground of appeal, since, the facts of the assessee's case are squarely covered by this case. Ground No. VIII--The ground taken by the assessee is that on the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the action of Assessing Officer in adding notional amounts of Rs. 7,16,00,000 and Rs. 88,44,500 to the total income of the appellant for the relevant assessment year based on allegations on altogether different aspects contained in show-cause notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ashew nut, but ITC Ltd. never received interest from the Chitalias for the credit extended to the EST Group of Companies. The A/R was asked to explain as to why interest income at the above rate should not be computed in the hands of the assessee company. No satisfactory explanation could be offered by the A/R in this regard. The total value of cashew nuts exported to the EST Group of Companies in the financial year 1993-94 is found to be 3.61 million US $ and credit for an average period of 240 days is found to have been allowed to the EST Group of Companies during the relevant accounting year in the course of export of cashew nuts. Taking the rupee equivalent of US $ 1 at Rs. 35 for the relevant accounting year, the amount of interest which should have been received by the assessee company from EST Group of Companies works out to Rs. 88,44,500. This sum will be added back to the assessee's income. Total disallowance under this head will thus work out to Rs. 8,04,44,500." 2. The CIT(A) has confirmed these additions by the Assessing Officer. Before us, the Learned DR has relied on the order of the Assessing Officer and CIT(A). The Learned A/R on the other hand tried to explain the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hon'ble Supreme Court. In view of this, the CIT(A)'s order is upheld on this point. The appeal is dismissed. Ground No. IX(b)--The ground taken by the assessee is that on the facts and in the circumstances of the case, the Learned CIT(A) erred in not dealing with and accordingly rejecting the contentions inter alia raised by the assessee in ground No. 24 in the memorandum of appeal filed with the learned CIT(A) for excluding the element of excise duty from the figure of total turnover for the purpose of computing the profit on export of manufactured goods, while computing the deduction under section 80HHC(1) of the Act, read with section 80HHC(3) of the Act. 1. Since, this ground is dependent on the ultimate outcome of ground No. 9(a), we are not taking any cognizance of this. To summarize ground Nos. II, III(a), 111(b), IV, V(a), VII are allowed, ground Nos. I, V(b), IX(a) & IX(b) are dismissed, ground No. III(c) is dismissed as not pressed and ground Nos. VI & VIII are allowed for statistical purposes. Per Pramod Kumar, A.M.--I have carefully gone through the draft order authored by my learned brother, and I find myself in respectful disagreement with certain conclusions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer has no application to the provisions of section 36(1)(iii). 4. The CIT(A), however, rejected the above grounds of appeal. The entire operative portion of the CIT(A)'s order, so far as the above grounds of appeal are concerned, is being reproduced below: It appears that before the Assessing Officer appellant has quoted the case of CITV. Alembic Industries 103 ITR 715 (Cal.). In that case, Calcutta High Court had an occasion to examine the issue whether the existing unit starting a new unit is a different business or only another unit of same business. In my opinion, the case of the appellant is clearly distinguishable from that of Alembic Chemicals. While deciding the case of Alembic Chemicals, Calcutta High Court relied on the case of Challapalli Sugar Mills Ltd. v. CIT On the other hand, the Assessing Officer has relied on CBDT Circular No. 461 dated 9-7-1986. It clearly and categorically states that interest paid on borrowings for investment in capital asset may be capitalised only relating to the period prior to the asset coming into production i.e. relating to the erection stage of the asset. In that circular, department relied on the case of CIT V. J.K. Cotton M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer on that basis. As it has been held by the courts that CBDT circulars are binding on the revenue. authorities and in the absence of any jurisdictional High Court or Apex Court ruling to the contrary, we feel that there is no need to interfere with the orders of the CIT(A). So, this ground of appeal is dismissed." 7. Not being able to subscribe to the above views, I proceed to humbly place on record my views on the matter. 8. I first of all deem it necessary to quote entire paragraph 18 of the CBDT Circular No. 461 dated 9-7-1986, relevant portion at page 30), part of which has been produced by the Assessing Officer and brother judicial Member, in their respective orders, and which has been heavily relied upon by the authorities below and indeed my brother colleague, for ready reference: "(ix) Modification in the definition of "Actual cost" for the purposes of depreciation, investment allowance etc. 18.1 Under the existing provisions of section 43(1) of the Income-tax Act, "actual cost" means actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee, as mentioned in page 2 of the written submission, is Dy. CIT v. Core Health care Ltd [2001] 251 ITR 61 wherein Their Lordships of Hon'ble Gujarat High Court had an occasion to deal with the aforementioned circular. Their Lordships, after reproducing the relevant extracts from the aforesaid circular, observed that "...As can be seen Explanation 8 was inserted to counteract tax avoidance by way of claiming depreciation, investment allowance, etc. on a large amount of actual cost. Neither in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill, we find any indication in support of Revenue's stand that in a converse situation interest has to be capitalized and further than such interest cannot be claimed as deduction under section 36(1)(iii) of the Act. Infact, there is no mention about the deductibility or otherwise under section 36(1)(iii) of the Act". In this view of the matter, with which I am in most respectful agreement, the revenue's case does not derive any benefit from the contents of CBDT Circular No. 461. In my considered view, this circular is not at all relevant for the issue in this appeal before the Tribunal. 11. I may als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do or compel reconsideration of a binding precedent....A decision does not loose its authority merely because It was badly argued, inadequately considered or fallaciously reasoned,..." Similarly in the case of Kesho Ram & Co. v. Union of India [1989] 3 SCC 151, it was stated by the Supreme Court thus: "The binding effect of a decision of this Court does not depend upon whether a particular argument was considered or not, provided the point with reference to which the argument is advanced subsequently was actually decided in the earlier decision...." In such a situation, we find all the contentions raised on behalf of the Revenue stand answered by the two decisions in the cases of CIT v. Alembic Glass Industries Limited [1976] 103 ITR 715 (Guj) and CIT v. Associated Fibre and Rubber Industries (P.) Ltd. [1999] 236 ITR 471 (SC). Having held that the CBDT Circular No. 461 does not have any bearing on the issue in this appeal before the Tribunal and respectfully following Hon'ble Gujarat High Court's judgment referred to above, I am of the considered view that decisions in the cases of Alembic Glass Industries Ltd.'s case and Associated Fibre & Rubber Industries (P.) Ltd's case stil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... borrowed for purchase of such machinery is certainly a deductible amount". 15. In the case of Alembic Glass Industries Ltd, Hon'ble Gujarat High Court has observed that when a borrowing is made for the purpose of business, the interest paid on such borrowings is deductible under section 36(1)(iii) of the Act, irrespective of the position as to whether such borrowings are used for capital or revenue purposes. It was however added that the business for which capital asset is purchased should not be separate or distinct from the business of the assessee for the purpose of which borrowing is resorted to. Their Lordships then observed that if there is no existing business with reference to which the capital is borrowed and the borrowed capital is used to purchase a new asset of enduring nature, then interest paid on such borrowing till the asset goes into production, increases the cost of installation of such asset, and hence should be treated as a capital expenditure not allowable under section 36(1)(iii) of the Act. When we apply principles thus laid down by the Hon'ble High Court, the question that immediately needs to be addressed is whether the related loans were taken for the pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue's plea that merely because related machines were not put to use, the interest paid on the borrowings will not be an allowable expenditure - particularly in a situation, as are the admitted facts of this case, when the loan was used for the purpose of an existing business. 18. I may also mention that Hon'ble Madras High Court, in the case of CIT v. Kasthuri & Sons [2000] 241 ITR 412 were in seisin of a situation when the assessee had, during the course of his business, borrowed moneys for the purpose of setting up a printing unit, and though it had capitalised the interest paid on such borrowings, it claimed the interest as a revenue expenditure under section 36(1)(iii). This claim, though negated by the Assessing Officer, was upheld by the CIT(A) and the Tribunal. Hon'ble Madras High Court, on these facts, upheld the admissibility of assessee's claim for deduction under section 36(1)(iii) of the Act. Similary in the case of Core Healthcare Ltd., Hon'ble Gujarat High Court were in seisin of a materially identical situation, i.e. when the interest on borrowings was capitalized in the books of account but claimed as a deduction under section 36(1)(iii) in the income tax, and Thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ports v. CIT [1990] 185 ITR 134 and of Hon'ble Supreme Court's judgment in the case of CIT v. Alps Theatre [1967] 65 ITR 377. However, the Assessing Officer rejected the assessee's contentions by observing as follows:-- "It may be mentioned that the land and building are one composite unit and inseparable. Since the assessee received total sales consideration in respect of floor space sold by it there was no justification to show the sale proceeds under two heads which was not warranted by the assessee on the sale of indivisible share in land is not acceptable." Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) distinguished the judicial precedents cited before him and observed that in the present case, sale of flats took place only after the building was constructed and that there could not have been any question of sale of a flat when the land was acquired. He further observed that land and building are complimentary to each other and it does not appeal to common sense that land and building are two separable units. Learned CIT(A) concluded that the view taken by the Assessing Officer is a reasonable view which does not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 598 Hence, land value as on 31-3-1994 10,07,643 X 4598 ---------------- 3200 14,47,857 per kottah Value of land sold on 1-12-1993 156.81 X 2 X 10.76 X 14,47,857 ------------------------------ 720 7,85,927 ....... (a) Valuation as on 1-4-1981 Value as on 30-6-1983 as per Valuer's report Rs. 1,75,000 per kottah Gold prices as on 1-4-1981 1,700 Gold prices as on 30-6-1983 1,800 Hence, land value as on 1-4-1981 1,75,000 X 1,800 ---------------- 1,700 1,65,278 per kottah Value of land sold on 1-12-1993 156.81 X 2 X 10.76 X 1,65,278 ----------------------------- 720 7,74,638 ...... (b) Based on the above computations, the sale consideration of undivided share in land was taken as in (a) above and the fair market value as on 1-4-1981 was taken as in (b) above which was further adjusted by indexing for arriving at the long term capital gains. I may also mention that the assessee has, by way of letter dated 10-9-1997, justified the above computation inter alia by submitting as under: "(iii) Annexure 2 enclosed on Valuation of Land sold to TCS/ITC Classic with all supportings in terms of Valuation Reports of 1983 and 1990 Kindly note that for the purpose of splitting t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the sale of land has to be treated as long-term capital gains." In this case, thus, value to be taken as sale consideration for sale for land was readily available. In the case before Hon'ble Gujarat High Court, sale was of land per se and not undivided share or interest in land. 27. In the present case, the value of sale consideration for sale of undivided share or interest in land' as at the time of transfer of the same, is simply not available. There is no splitting of consideration in the sale agreements, copies of which have been filed before us at pages 202 to 214 of the paper-book, and since it is a case where sale consideration disclosed by the assessee is accepted, valuation under section 55A does not come to the play. The valuation report filed by the assessee is as on 31-3-1990 and, therefore, it is of no assistance in finding out the f air market value as at the time of transfer, leave aside the actual consideration for sale. In any event, in my considered view, save and except in a case in which the revenue has resorted to section 55A, and, in which therefore, separate value for land or undivided share, or interest in land is adopted on that basis, unless separate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing undivided share in land on which the building was constructed, as short term capital gain. It is in this background that I humbly differ with the views of the learned brother and I am of the considered view that the Ground No. V(a) should be dismissed. 28. In the result, Ground No. V(a) is dismissed. Ground No. V(b) 29. In Ground No. V(b), the assessee is aggrieved of CIT(A)'s confirming the action of the Assessing Officer in disregarding the short term capital loss of Rs. 13,99,48,786, claimed by the assessee on account of renunciation of rights entitlements in ITC Bhadrachallan Paperboards Limited. 30. This issue lies in a narrow compass of facts. The assessee sold 'rights entitlements' in respect of 32,91,645 shares in ITC Bhadrachallan Paperboards Limited at the rate of Rs. 30 each, which included sale of 7,00,000 rights sold to wholly owned subsidiary companies which, accordingly, were not regarded as transfer in view of section 47(v). The net consideration for the transfer of 'rights entitlements' thus received was Rs. 7,77,49,350. Out of this sale consideration of Rs. 7,77,49,350, and in accordance with the principle laid down by the Hon'ble Supreme Court in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Kapadia in my considered view, squarely applies to the facts of this case, I find that there is little dispute about the legal position that until the time of insertion of section 55(2)(aa)(ii) of the Act, which specifically provided that the cost of acquisition of rights entitlements, by the virtue of holding shares or other securities, is to be taken as NIL, the cost of acquisition of rights entitlements was to be taken as equivalent to fall in value of share or security, or, in other words, as equivalent to loss suffered by way of depreciation in old shares. Loss in value of old shares as a result of issue of new shares was, accordingly, required to be deducted from amount realised from selling of right issue. I have also noticed that the details of cum-rights and ex-rights prices of related share are also placed on record, by way of certification by the Calcutta Stock Exchange Association (CSE). I see no substance in CIT(A)'s observations that mere filing of letter from CSE is not enough because after all its only CSE which is the most authentic source of information about the quoted prices of the related shares on relevant dates. In case any of the authorities below had any do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nance Act, 1994, was effective from 1-4-1995 and, therefore, if the assessment year before us was not covered by the amended legal provisions. It is fairly well settled that the general rule is that all statutes, other than those which are merely declaratory or procedural, are prospective and that retrospective effect is not to be given to the statute unless by express words such intention of the Legislature is unambiguous. In the case of Saurashtra Agencies (P.) Ltd. v. Union of India [1990] 186 ITR 634, Hon'ble Calcutta High Court has summed up this principle as follows: "The law is very clear that, unless provided in the statute, the law is always presumed to be prospective in nature. There cannot be any implied inference of any retrospective operation of law. The retrospective operation must be clear and unambiguous. Nothing could be inferred by any stretch of imagination." In this view of the matter, the revenue's case does not get any assistance from change in legislation with effect from subsequent assessment year. On the contrary, it only shows what was the mischief sought to be remedied by legislation and the fact that, in the preceding years, the legal position did admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the facts and in the circumstances of the case, the Tribunal ought to have upheld revenue's treating the entire capital gain on sale of flats to M/s. Tata Consultancy Services Pvt. Ltd. and M/s. Classic Financial Services and Enterprises Ltd. as short term capital gains, or whether the Tribunal should have upheld assessee's claim of bifurcating the same into long term capital gain on the sale of the undivided shares in the interest of the land and short term capital gain on the sale of building constructed thereon? (C) Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld revenue's disregarding the short term capital loss of Rs. 13,99,48,786 claimed by the assessee on account of renunciation of right entitlements in Bhadrachallan Paperboards Limited, as held, in concluding paragraph of ground No. V(b) of Judicial Member's order or whether the Tribunal should have restored the matter to the Assessing Officer, with the directions as set out in paragraph 35 of Accountant Member's dissenting order? Accordingly, in terms of the provisions of section 255(4) of the Income-tax Act, 1961, we hereby make the reference to the Hon'ble President. THI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Central Board of Direct Taxes, he disallowed the claim. 3. Aggrieved by the said order, the assessee took up the matter in appeal before the CIT (Appeals). The learned CIT (Appeals), however, upheld the order of the Assessing Officer. 4. Aggrieved by the said order, the assessee took up the matter in appeal before the Tribunal and it was submitted that interest on borrowed capital is allowable as deduction while computing the business profit under section 36(1)(iii) of the Act. For this proposition reliance was placed on the following decisions of the Hon'ble Supreme Court: India Cement; Ltd.'s case Challapalli Sugars Ltd.'s case Associated Fibre & Rubber Industries (P.) Ltd.'s case Reliance was also placed on the decision of the Hon'ble Gujarat High Court in the case of Alembic Glass Industries Ltd. Reference was also made to the decision of the Tribunal in assessee's own case for the assessment year 1991-92 in ITA No. 157/Cal/97 of 30-4-2001. 5. The learned Judicial Member, however, upheld the order of the CIT (Appeals) observing as follows: "6. We have heard both the parties and perused all the records. we are shockingly surprised to find that the Learned A/R in h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecessary to quote entire paragraph 18 of the CBDT Circular No. 461 dated 9-7-1986, part of which has been produced by the Assessing Officer and brother Judicial Member, in their respective orders, and which has been heavily relied upon by the authorities below and indeed my brother colleague, for ready reference: "(ix) Modification in the definition of "Actual cost" for the purposes of depreciation, investment allowance etc. 18.1 Under the existing provisions of section 43(1) of the Income-tax Act, "actual cost" means actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met, directly or indirectly, by any other person or authority. It was found that certain tax payers, supported by some court decisions, had resorted to a major change in the accounting practice by capitalizing the interest paid or payable in connection with acquisition of asset relatable to the period after such asset is first put to use. This capitalization implies inclusion of interest in actual cost of the asset for the purpose of claiming depreciation, investment allowance etc. under the Income-tax Act. 18.2 It is an accepted accounting principle that wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either in the Notes on Clauses nor in the Memorandum explaining the provisions in the Finance Bill, we find any indication in support of Revenue's stand that in a converse situation interest has to be capitalized and further than such interest cannot be claimed as deduction under section 36(1)(iii) of the Act. In fact, there is no mention about the deductibility or otherwise under section 36(1)(iii) of the Act". In this view of the matter, with which I am in most respectful agreement, the revenue's case does not derive any benefit from the contents of CBDT Circular No. 461. In my considered view, this circular is not at all relevant for the issue in this appeal before the Tribunal. 11. I may also mention that, earlier in this judgment in the case of Core Healthcare Limited, Their Lordships had also observed that "The aforesaid Explanation 8 nowhere provides that interest pertaining to a period prior to an asset being first put to use will not be allowed as a deduction under section 36(1)(iii) of the Act. Even if we assume, for the sake of argument, the submission of Revenue that interest paid/payable for the borrowings before an asset is first put to use is required to be capitali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to which the argument is advanced subsequently was actually decided in the earlier decision...." In such a situation, we find all the contentions raised on behalf of the Revenue stand answered by the two decisions in the cases of CIT v. Alembic Glass Industries Limited [1976] 103 ITR 715 (Guj) and CIT v. Associated Fibre and Rubber Industries (P.) Ltd. [1999] 236 ITR 471 (SC)." Having held that the CBDT Circular No. 461 does not have any bearing on the issue in this appeal before the Tribunal and respectfully following Hon'ble Gujarat High Court's judgment referred to above, I am of the considered view that decisions in the cases of CIT v. Alembic Glass Industries Limited and CIT v. Associated Fibre & Rubber Industries (P) Ltd. still hold field. I leave it at that. 13. I may mentioned that in assessee's own case, and while dealing with the assessment year 1991-92, a co-ordinate bench of this Tribunal, speaking through the Hon'ble Vice-President Shri Garg, inter alia observed as follows: "In so far as interest paid to a SBI of Rs. 3,84, 298 which was paid on account of Chiala GL 11 Line Project and Rs. 39,82,499 being interest paid to HDFC for loans obtained for constructi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r added that the business for which capital asset is purchased should not be separate or distinct from the business of the assessee for the purpose of which borrowing is resorted to. Their Lordships then observed that if there is no existing business with reference to which the capital is borrowed and the borrowed capital is used to purchase a new asset of enduring nature, then interest paid on such borrowing till the asset goes into production, increases the cost of installation of such asset and hence should be treated as a capital expenditure not allowable under section 36(1)(iii) of the Act. When we apply principles thus laid down by the Hon'ble High Court, the question that immediately needs to be addressed is whether the related loans were taken for the purpose of an existing business or for a new business. In other words, the emerging proposition is that when related loans are taken for the existing business, the interest paid on such loans is to be allowed as a deduction under section 36(1)(iii) of the Act. 16. In the light of this legal position, I turn to the admitted facts of the case. At page 5 of the assessment order, the Assessing Officer has observed that the impugn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... when the assessee had, during the course of his business, borrowed moneys for the purpose of setting up a printing unit, and though it had capitalized the interest paid on such borrowings, it claimed the interest as a revenue expenditure under section 36(1)(iii). This claim, though negated by the Assessing Officer, was upheld by the CIT(A) and the Tribunal, Hon'ble Madras High Court, on these facts, upheld the admissibility of assessee's claim for deduction under section 36(1)(iii) of the Act. Similarly in the case of Dy. CIT v. Core Healthcare Limited, Hon'ble Gujarat High Court were in seisin of a materially identical situation, i.e. when the interest on borrowings was capitalized in the books of account but claimed as a deduction under section 36(1)(iii) in the income-tax, and Their Lordships of Hon'ble Gujarat High Court also upheld the assessee's claim of deduction under section 36(1)(iii). 19. In view of the above discussion, as also bearing in mind entirety of this case, I am of the considered view that the authorities below erred in not allowing the deduction of Rs. 8,25,01,104 on account of interest on loans claimed by the assessee as a revenue expenditure under section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business of manufacture of paper used in cigarettes and packaging products. The Tribeni Tissues Division of ITC has been engaged in the business of manufacture of paper used in cigarettes and the printing and packaging division of the ITC has been engaged in the business of manufacturing packaging products from the earlier years. The borrowings made by the assessee were for the purpose of the business which is already in existence. Secondly, there is no dispute that the borrowed capital was used for purchase of plant and machinery for the same business and not a separate or distinct business of the assessee. 10. The Hon'ble Delhi High Court considered the question of allowability of interest in similar circumstances in the case of CIT v. Dalmia Cement (Bharat) Ltd., [2000] 242 ITR 129 and held that the interest was paid for the borrowing for the purpose of assessees business and as such allowable a revenue expenditure. The Hon'ble Delhi High Court referred to the earlier decision in the case of CIT v. Modi Industries [1993] 200 ITR 341 wherein it was held that in considering whether the two businesses run by an assessee are the same business, what is of importance is the unanimi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat where a consolidated price is paid for building inclusive of land, the same should be bifurcated and the capital gain arising from the value of land should be treated as long term capital gains. The Assessing Officer, however, held that the land and building are one composite unit and inseparable. Since the assessee received total sale consideration in respect of floor spaces sold by it, there was no justification to show the said proceeds under two heads. The long term capital gain offered by the assessee on the sale individual interest in the land was not acceptable. The Assessing Officer therefore, took the composite sale consideration for the two floors and recomputed the short term capital gains at Rs. 5,02,36,237 under section 50 the Act. 13. The assessee took up the matter in appeal before the CIT(A) who, however, confirmed the order of the Assessing Officer. 14. In the appeal before the Tribunal, the assessee reiterated the said claim as made before the revenue authorities. The following decisions were cited in support of the claim: (i) Vimal Chand Golecha's case (ii) Dr. D.L. Ramachandran Rao's case (iii) C.R. Subramanian's case The learned Judicial Member was of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on Valuation of Land sold to TCS/ITC Classic with all supporting in terms of Valuation Reports of 1983 and 1990. Kindly note that for the purpose of splitting the sale consideration between land and building, the latest valuation report for land as on 31-3-1990 has been used. Thereafter, the same has been indexed on the basis of Gold Price Index to arrive at fair market value for land for 1994. We would like to point out that we used the Gold Index for arriving at the fair market value of land for splitting the consideration because: --for the concerned year i.e. 1994, there was no valuation report available. --a comparative study of the years 1983 and 1990 for which the valuation reports are available vis-a-vis the Gold Index reveals that whereas the land values have appreciated by 475 per cent gold values have gone up by 77 per cent. This implies that Gold Index during the relevant period provides a far more conservative trend of appreciation which we have used. For determining the cost of acquisition for Long Term Capital Gain for land, since land was acquired prior to 1981, we have used the closest valuation report available i.e. on 30-6-1983 which has been deflated by gold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the revenue has resorted to section 55A, and, in which therefore, separate value for land or undivided share or interest in land is adopted on that basis, unless separate consideration for such land or undivided share or interest in land is available in the conveyance instrument itself or unless the fair market value of such undivided share in land is taken on the basis of an approved valuer's report, it is not open to the assessee to adopt the value of such consideration on the basis of other material. Of course, in appropriate cases, the Assessing Officer shall have the liberty to refer the matter to the Valuation Officer under section 55A of the Act. However, as for the computation of fair market value of land, with the help of Gold Price Index Method, such a computation method does not have the sanction of the statute and is devoid, of any plausible basis at all. In any event, it is not even necessary that the prices of a particular property will move parallel to the movements in the rate of gold or, for that purpose, even in the same direction. Such sweeping generalizations are unsustainable in law. The claim for bifurcation of consideration is made by the assessee and onu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructed and the undivided share or interest in the land comprised in a portion of the said premises and in common areas and facilities together with the "Right of Access" on a strip of land 5 feet in width bordering ITC Centre for the purpose of maintenance of the sides and rear portion of ITC Centre (without conferring any ownership right of 5 feet strip of land as aforesaid) at or for the sum of Rs. 3,56,49,100 (Rupees three crores fifty six lacs forty nine thousand--one hundred only) and out of which Rs. 35.70 lacs (Rupees thirty five lacs seventy thousand only) being 10 per cent approximately of the total consideration money has been paid by the Buyer to the sellers (receipt of which the Sellers hereby admit and acknowledge) as and by way of earnest money and the balance amount amounting to Rs. 3,20,79,100 (Rupees three crores twenty lacs seventy nine one hundred only) shall be paid by 31-7-1993." 17. On similar terms, vide agreement dated 31-7-1992, the assessee sold the 9th floor and basement for car parking spaces at Rs. 3,20,61,900. The details of the sale considerations are exactly the same as in the case of TCS referred to above. The assessee, however, did not bifurcate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that the value of a plot allotted to a member of a Co-op. House Building Society is to be determined according to the contribution made to the Society towards the plot by the members as there is a total ban on transfer of such a plot to a non-member of the Society. From the above and also keeping in view the decisions cited before the Tribunal, it is clear that the land and building are separate assets and in the normal course they have to be separately considered for the purpose of depreciation as also for computation of capital gains. 20. The only problem in this case is the question of bifurcating the cost of the land and the flat from the sale consideration thereof which was not done by the assessee. If the cost of the land and the sale consideration of the same is impossible and in fact if the seller and purchaser included the entire cost as a composite one, then the view taken by the learned Accountant Member is the appropriate view and justified in law. However, if it is possible to work out the cost of the land and the sale consideration of the same on the basis of material on record, it will not be justified to deny the claim of long term capital gains on the undi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht shares at the rate of Rs. 30 each. According to him transparency is lacking in the entire transaction and, therefore, it is a colourable transaction for which the decision of the Hon'ble Supreme Court in the case of McDowell & Co. is applicable. He accordingly upheld the order of the Assessing Officer. 24. Aggrieved by the said order, the assessee took up the matter in appeal before the Tribunal and reiterated the said claim as made before the revenue authorities. The learned Judicial Member did not find favour with the submissions and upheld the order of the CIT(A)observing as follows: "4. We have heard both the parties and perused all the records available. We feel that the basic instinct of a businessman is to earn profit. No prudent businessman will act in a manner which is not beneficial to him. For the sake of analogy, the basic instinct of a human being is that he loves his life, he will not do anything at the risk of his life unless he is of unsound mind, All the traffic rules are made by keeping this basic instinct of human being in mind that no body will violate them because he loves his own life but if a man of unsound mind or a person who wants to commit suicide an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case, we are of the view that the ratio laid down by the Hon'ble Supreme Court in the case of McDowell & Co. 154 ITR 148 is clearly applicable and hence we uphold the order of the CIT(A). This ground of the appeal is dismissed." 25. The learned Accountant Member, however, held that the issue is directly covered by the decision of the Hon'ble Supreme Court in the case of Ms. Dhun Dadabhoy Kapadia (as the insertion of sub clause (ii) to section 55(2)(aa)(ii) of the Act by the Finance Act, 1994 is effective only from 1-4-1995 and is not applicable to the present assessment year. He accordingly directed that the matter should go back to the Assessing Officer for adjudicating the assessee's claim for short term capital loss afresh in the light of the legal position discussed by him as follows: "33. The judgment of Hon'ble Supreme Court in the case of Miss Dhun Dadabhoy Kapadia v. CIT 65 ITR 651, in my considered view, squarely applies to the facts of this case. I find that there is little dispute about the legal position that until the time of insertion of section 55(2)(aa)(ii) of the Act, which specifically provided that the cost of acquisition of rights entitlements, by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing those details which are neither statutorily required to be filed, nor requisitioned by the authorities. When the sale of 'rights entitlement' is not called into question and when there is actually a fall in value of ex-right shares after the record date vis-a-vis the value of cum right shares before the record date, there is no reason to dub the transaction as a 'colourable device'. There is no finding by the authorities below that the sale consideration of 'rights entitlement' is understated. Under these circumstances, I find no support for CIT(A)'s reference to McDowell & Co. v. CTO 154 ITR 148 and terming the transaction as a 'colourable device'. It is also fairly well settled in law that merely because a transaction results in tax saving, it cannot be termed as 'a colourable device'. 34. It is also not in dispute that the insertion of sub-clause (ii) in section 55(2)(aa), by the virtue of Finance Act 1994, was effective 1-4-1995 and, therefore, if the assessment year before us was not covered by the amended legal provisions. It is fairly well settled that the general rule is that all statutes, other than those which are merely declaratory or procedural, are prospective and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rother and am of the considered view that the Ground No. V(b) should be allowed for statistical purposes." 26. On this difference of opinion, question No. (c) was referred to me for decision. 27. At the outset, I am sorry to point out that both the learned Members did not give the correct citation of the very crucial decision cited before the Bench in the case of Ms. Dhun Dadabhoy Kapadia. Both the Hon'ble Members unfortunately recorded the citation as Ms. Dhun Dadabhoy Kapadia's case. It is, therefore, a matter of doubt whether they have really gone through the said decision. The Hon'ble Supreme Court considered identical issue in the above case. The assessee in that case was not a dealer in shares. She held by way of investment 710 ordinary shares in the Tata Iron and Steel Co. Ltd. The company made an offer to her by which she was entitled to apply for 710 new ordinary shares at a premium with an option of either taking the shares or renouncing them wholly or partly in favour of others. The assessee renounced her right of all the 710 shares on 12-6-1956 and realized Rs. 45,262.50. When this amount was sought to be wholly taxed as a capital gain, the assessee claimed that on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares, the capital assets that came into her hands were the 710 old shares, which became valued at Rs. 198.75P per share, together with the sum of Rs. 45,262.50P. The net capital gain or loss to the appellant obviously would be the difference between the value of the capital asset and the cash in her hands after she had renounced her right and realized the cash value in respect of it, and the value of the capital, asset including the right which she possessed just before these new shares were issued and before she realized any cash in respect of the right by renouncing it in favour of some other person. As we have indicated above, the value of the capital and, after renouncement, would by 710 multiplied by Rs. 198.75P plus the sum of Rs. 45,262.50P., while the value of the asset, immediately before the renouncement, would be 710 multiplied by Rs. 253, there being no cash value at that time of the right to be taken into account. Thus, the capital gain or loss would be worked out at Rs. 45,262.50P after deducting from it the sum worked out at 710 multiplied by the difference between Rs. 253 and Rs. 198.75P. This last amount comes to a little more than the sum of Rs. 37,630 which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... now go before the regular Bench for decision, according to majority opinion. ORDER Per Pramod Kumar, A.M--On a difference of opinion between the members originally constituting this bench, when the appeal originally came up for hearing, following points were referred under section 255(4) of the Income-tax Act, 1961, for the opinion of a Third Member: "1. Whether, on the facts, and in the circumstances of the case, the Tribunal ought to have upheld revenue's disallowance of Rs. 8,25,01,104 claimed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, or whether the Tribunal should have deleted this disallowance? 2. Whether, on the facts and in the circumstances of the case, the Tribunal ought to have upheld revenue's treating the entire capital gain on sale of flats to M/s. Tata Consultancy Services Pvt. Ltd. and M/s. Classic Financial Services and Enterprises Ltd. as a short term capital gain, or whether the Tribunal should have upheld the assessee's claim of bifurcating the same into long term capital gain on the sale of undivided shares in the interest of the land and as short term capital gain on the sale of building constructed thereon? 3. Whether, on the f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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