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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’: NEW DELHI
Before: SHRI J.S. REDDY, & SHRI CHANDRA MOHAN GARG.
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER
The above two cross appeals by the Revenue as well as the assessee are directed against the order of the CIT(A), Bareilly, dated 10/07/2003 for A.Y 1998-99 passed in first appeal No. 945/MBD/2003-04.
Assessee’s appeal ITA No. 4307/Del/2003
At the very outset, the ld. Counsel for the assessee submitted that except for Ground Nos. 1 and 2, the assessee does not want to press Ground Nos. 3 to 11. Therefore, Ground Nos. 3 to 11 stand dismissed as not pressed.
Ground Nos 1 and 2 read as under:
“1. That the ld. CIT(A) has erred on facts and in law in not holding that the assessment order passed by the AO was bad in law.
2. That the ld. CIT(A) has erred on facts and in law in confirming a disallowance of Rs. 19,88,753/- out of total disallowance of Rs. 22,83,200/- made by the AO from legal and consultancy expense.”
We have heard the arguments of both the sides and carefully perused the relevant material placed on record before us.
The ld. Counsel for the assessee submitted that during the relevant previous year, the assessee incurred legal and consultancy expenses amounting to Rs. 97,22,819/- and the AO disallowed a sum of Rs. 22,83,200/- out of legal and consultancy expenses by holding that the same was covered u/s 35AB(1) of the Income-tax Act, 1961 ['the Act' for short]. The ld. Counsel further pointed out that the ld. CIT(A) confirmed the part disallowance to the extent of Rs. 19,88,753/- and allowed balance amount of Rs. 2,94,447/- which has been challenged by the assessee. The ld. Counsel vehemently contended that the impugned expenses related to consultancy services in relation to application of technical services in relation to application of technical know-how and are not lumpsum payments made for acquiring know how. The expenditure was of revenue nature incurred in the day to day running of the business. Provisions of Sec. 35AB of the Act have been wrongly applied by the AO. The Hon'ble Supreme Court in the case of C1T v. Swaraj Engines 309 ITR 443 (SC) in the context of applicability of section 35AB of the Act held that the said provisions apply only if the expenditure is of capital in nature and the AO or ld. CIT(A) has not brought out any allegation against the assessee that claim of expenditure was capital in nature. The ld. AR further pointed out that the AO invoked and applied provisions of section 35AB of the Act on incorrect premise and the ld. CIT(A) has erroneously upheld the disallowance in view of the fact that the first appellate authority I para 14 at page 17 of the impugned order has noted that Rs. 19,88,753/-has not been incurred for the purpose of technical know how.
Per contra, the ld. CIT-DR strongly supporting the action of the AO as well as the impugned order submitted that the assessee acquired technical know-how by making claimed expenditure and therefore the AO was right in invoking provisions of section 35AB of the Act. The ld. CIT-DR pointed out that the benefit of ratio of decision of Hon'ble Supreme Court in the case of Swaraj Engines [supra] is only available for the assessee when the assessee established that the expenses claimed by the assessee are of Revenue in nature and the assessee miserably failed to establish the same.
Placing rejoinder to the contention of the ld. DR, the ld. AR has drawn our attention towards para 11 at pages 19 to 21 of the assessment order and submitted that the AO has not brought out any allegation against the assessee that the impugned amount of disallowance was incurred towards acquiring technical know how and the ld. CIT(A) in para 14 of the impugned appellate order noted that the amount of confirmed disallowance has not been incurred for the purpose of technical know how, then in this situation, the provisions of section 35AB of the Act cannot be invoked and the claim of the assessee is allowable as business expenditure u/s 37 of the Act.
8. On careful consideration of the above rival submissions of both the sides, firstly, from the relevant operative part of the first appellate authority, the ld. CIT(A) upheld the part disallowance to the tune of Rs. 19,88,753/- by observing as under: “The 7th ground of appeal
is that the AO erred on facts and in law in making a disallowance of Rs. 22,83,200/- out of legal and consultancy expenses. The Assessing officer in the order has mentioned that a sum of Rs. 22,83,200/- was disallowed as these expenses were covered under section 35. AB(1) of the IT Act. The assessment has been set aside and during the reassessment proceeding the assessee appellant simply submitted that, disallowance has been made without properly appreciating the provisions of law and is therefore liable to be deleted. The AO further mentioned that no new facts were brought to notice therefore the AO disallowed Rs. 22,83,200/-. The AR in appeal furnished the details of expenses and stated that out of the sum of Rs. 22,83,200/- the amount of 22,61,330/- was not incurred for acquisition of technical know how likely to assist in manufacturing or processing of goods. He further stated that acquisition of technical know -how is covered by section 35 AB. From the details given it is noticed that following payment were not made for acquisition of technical know how but paid for consultancy as under:
Payment to person International USA for consultancy on technical know how 2,03,166 Paid to crown Berger for consultancy charges 6,63,152 TDS 1,65,600 Paid to Ravthen towards consultancy 5,38,720/- Paid to D rid towards report on various time for pyridine product 4,13,115/- 19 88 753/-
Thus looking into the circumstances of the case the disallowance made by the AO is restricted to the tune of Ps. 19,83,753/- as against 22,83,200/-. The appellant shall get relief of Rs. 2,94,447/ only on this score.”
9. On careful consideration of the above contention of both the sides, we carefully observe that neither the AO nor the ld. CIT(A) has brought out any allegation against the assessee that the assessee incurred expenditure for the purpose of acquiring technical know how. At the same time, we observe that before the AO, the assessee vide written reply dated 21.2.2001 during the original assessment proceedings stated that the details of TDS deposited/amount paid towards legal expenses is submitted and the amount of total TDS was Rs. 2,80,140/-. Further, in para 11(ii), the AO noted that from the perusal of details of legal and professional charges, it is found that technical know how fees were paid on which TDS was deducted. From the first appellate order, we further observe that the ld. CIT(A) has further noted the contention that the amount of Rs. 22,61,330/- was not incurred for acquisition of technical know how likely to assist in manufacturing or processing of gods and only acquisition of technical know how is covered u/s 35AB of the Act. In the second part of para 14 of first appellate order, the ld. CIT(A) has noted that from the details given it is noticed that the payments were made for acquisition of technical know how paid for consultancy which goes in favour of the assessee. In this situation, when we analyse the facts and circumstances of the present case, in the light of the principles laid down by the Hon'ble Supreme Court in the case of Swaraj Engines [supra], then we find that it is pre condition for invocation of provisions of section 35AB of the Act that the AO has to bring out this allegation that the expenditure in question was of capital in nature and unless and until this fact brought out on record and established by cogent material, provisions of section 35AB of the Act cannot be invoked. In view of the above, we are inclined to hold that the AO made disallowance without any justified reason and basis and the ld. CIT(A) upheld part disallowance by observing incorrect facts and without bringing out any material to establish the fact that the expenditure was incurred by the assessee for acquiring technical know how. At this juncture, at the cost of repetition, we point out that the ld. CIT(A) himself noted that the assessee has not incurred expenditure in question for the purpose of technical know how but the claimed expenditure was incurred for consultancy services which is obviously allowable u/s 37 of the Act as being incurred for the purpose of business of the assessee. Accordingly, Ground Nos. 1 and 2 of the assessee is allowed and action of the assessee and addition made thereunder is directed to be deleted.
Departmental Appeal Ground Nos. 1 to 4
The ld. DR, supporting the assessment order, contended that the ld. CIT(A) has erred on law and on facts in directing the AO not to enhance book profit by a sum of Rs. 3,39,69,000/- which represents depreciation in revalued assets for the purpose of section 115JA(2) of the Act. The ld. DR also contended that the ld. CIT(A) grossly erred in not enhancing book profit by the amount of depreciation in revalued assets in the light of CBDT letter No. 385/96/88- IT(8) dated 31.1.89 as well as in the SLP pending before the Hon'ble Supreme Court on the issue involved therein. The ld. DR also pointed out that the ld. CIT(A) was not correct on the facts of the case in accepting assessee’s explanation that the net profit shown in the profit and loss account cannot be disturbed as per the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd VS. CIT reported in 255 ITR 273 because the facts of the present case are distinguishable with the facts of that case because in the present case the assessee transferred Rs. 339.69 lakhs from revaluation reserve account to profit and loss account for the purpose of section 115JA of the Act the book profits has to be enhanced by this amount.
The ld. CIT-DR also contended that the ld. CIT(A) has miserably failed to appreciate that the assessee claimed deduction of Rs. 3,39,69,000/- on account of transfer from revaluation reserve while computing book profit u/s 115JA which is not allowable as per Explanation (1) to section 115JA(2) of the Act since profit and loss was not credited by Rs. 3,39,69,000/-. The ld. CIT-DR vehemently contended that the decision of the Hon'ble Supreme Court in the case of Indorama Synthetics [India] Pvt. Ltd Vs. CIT reported as 330 ITR 363 [SC] has provided a dicta which in principle is applicable in favour of the revenue and relief granted by the ld. CIT(A) to the assessee has no legs to stand. Therefore, she finally prayed that the impugned order on this issue must be set aside by restoring that of the AO.
Per contra, replying the contentions of the revenue, the ld. Counsel for the assessee submitted that the assessee had revalued its assets during the F.Y. relevant to A.Y 1989-90 enhancing the valuation on assets to the extent of Rs. 2045.77 lakhs and equal amount was carried to the revalued reserve. The ld. AR further explained that the assessee company claimed depreciation on revalued assets amounting to Rs. 1805.83 lakhs on the WDV of the revalued amount of assets and the assessee transferred Rs. 339.69 lakhs from the revaluation accounts to the profit and loss account, therefore, resulting in net debit of Rs. 1466.14 lakhs on the revalued amount of assets. The ld counsel of the assessee strongly pointed out that in the return of income, the assessee claimed reduction from the book profits of an amount of Rs. 339.69 lakhs representing transfer from revaluation reserve which has not been disputed by the AO.
The ld. AR further contended that the AO incorrectly held that the assessee company has wrongly claimed depreciation on the revalued assets and in calculating book profits and income u/s 115JA of the Act. The depreciation on revalued assets is not allowed as per letter No. 385/76/88- IT(8) dated 31.1.1989 wherein it was allegedly stated that the Company Law Board has, vide Circular No. 10(1)(C.L. XI/61 dated 27.9.1961 prohibited companies from taking the revalued figure from the purpose of calculation of deprecation and only WDV and not the revalued figures has to be taken in the case of revaluation of assets after 1956. The ld. AR further drew our attention towards the relevant part of the assessment order para 5 and submitted that on the above basis, the AO reduced the amount of depreciation relating to revalued assets while computing ‘book profits’ u/s 115JA of the Act. The ld. AR also submitted that the account of the assessee for claiming depreciation on revalued assets were prepared on the basis of Accounting Standard 6 issued by the Institute of Chartered Accountants of India [ICAI] and Guidance Note on ‘Treatment of Revaluation Reserve of Fixed Assets and Part II and III of Schedule VI to the Companies Act, then it was not permissible for the AO to make adjustment to the figure of deprecation in the absence of any provision in this regard. To support this contention, the ld. AR placed reliance on the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd Vs. CIT reported in 255 ITR 273 [SC]. Supporting the impugned order, the ld. Counsel pointed out that the ld. CIT(A), after considering the submissions of the assessee, deleted the enhancement of book profit made by the AO and the case of the assessee is squarely covered by the decision of the Hon'ble High Court of Allahabad in the case of CIT Vs. Rampur Distillery & Chemicals Co. Ltd 214 Taxman 483 [All], CIT Vs. Amrit Banaspati Co. Ltd 320 ITR 399 [All].
On careful consideration of the above rival submissions of both the sides and the operative part of the impugned order, we note that the ld. CIT(A) has granted relief to the assessee with the following conclusion:
“I have carefully considered the submissions of the counsel for the appellant and have perused the order of the Assessing officer and have taken into consideration the various judicial pronouncement cited by the counsel. The Assessing officer in his order relied upon a letter dated 13.1.39 of the CBDT wherein it was allegedly stated that the Company low Hoard has vide circular no. 10(1)CL.XI/61 dated 27.9.61 prohibited companies from taking the revalued figure for the purpose of calculation of depreciation and only WDV and not the revalued figures has to be taken in case of revaluation of assets after 1956. It is observed that provisions on revaluation of assets in the accounts prepared under the Companies Act is mandated by the AS 6 and guidance note on treatment of reserve created on revaluation of fixed assets issued by the Institute of Chartered Accountants of India. The position regarding provision of depreciation under the Companies Act in any case has undergone change after introduction of the Schedule XIV to the Companies Act wherein depreciation under SLM as veil as WDV method are provided. Further under Schedule XIV read with section 205 & 350 of the companies Act, there is no bar on provision of depreciation on revalued amount of assets. The letter of CBDT as relied by the AO is not applicable in the present case.
The Assessing officer has not dispute the quantum of revaluation of assets made by the appellant nor they have rejected the report of the Chartered Accountant. The manner and mode of writing off the depreciation on such revalued assets has been explained in various Guidance Notes of accounting issued by the IC&T. Further income by way of dividend is also exempt in the hands of recipient under section 10(33) of the IT Act. This being so and respectfully following the verdict of the Hon'ble Apex Court in the case of Apolo Tyres Csupra), depreciation has to be allowed on the gross amount including the amount of revaluation in order to arrive at the book profits for purposes of section 115 J of the Act. Therefore the enhancement of book profit by Rs. 3,39,69,000/- made by the Assessing officer is deleted. Similarly, dividend income shown by the appellant being exempt from taxation is reduced from the book profit. Thus the appellant succeeds in his claim.”
From the operative part of the first appellate order, we note that the ld. CIT(A) has followed the verdict of the Hon'ble Supreme Court in the case of Apollo Tyres [supra] and held that deprecation has to be allowed on the gross amount including the amount of revaluation in order to arrive at the book profit for the purpose of section 115JA of the Act and the ld. CIT(A) deleted the action of the AO which enhanced the book profit by Rs. 3,39,69,000/-. In the present case, the AO has not considered this fact that in the return of income, the assessee claimed reduction from book profit on an amount of Rs. 339.69 lakhs representing transfer from revaluation reserve and the assessee also transferred the same amount from revaluation account to profit and loss account. In the case of Apollo Tyres [supra], the Hon'ble Supreme Court held that while determining book profits u/s 115JA of the Act, the AO could not recompute the profits in the profit and loss account by excluding the provisions made for arrears of depreciation. In the case of Indo Rama Synthetics [supra] the Hon'ble Supreme Court held that the book profit is not defined in the Act and it is the income computed under the Companies Law and by virtue of Minimum Alternative Tax in the case of companies whose total income is computed under the normal provisions of the Act is less than 30% of the book profit, the total chargeable to tax will be 30% of book profits as computed. Their Lordships also held that for the purpose of section 115JA, book profits will be net profit as shown in the profit and loss account prepared in accordance with Schedule 6 of Companies Act after certain adjustments. Their Lordships noted that fixed assets the fixed assets of the assessee were revalued in the earlier assessment year 2000-01 (i.e. financial year ending 31.3.2000) and amount of enhancement in valuation was Rs. 288,58,19,000/- which was credited to the revaluation reserve. In other words, at the time of revaluation of assets, the said figure of Rs. 288,58,19,000/- was added to the historical cost of assets on the asset side of the balance sheet and in order to equalize both sides of the balance sheet the revaluation reserve to that extent was created on the liability. Their Lordships also noted that during the relevant assessment year in question, certain amount being the differential depreciation, was transferred out of the said revaluation reserve and credited to the P & L Account which the A.O. disallowed by placing reliance on the proviso to clause (i) of the explanation to Section 115JB(2) of the Act. Consequently, it was held by the Hon'ble Supreme Court that since the amount of revaluation reserve had not gone to increase book profits at ht time it was created, benefit of reduction was rightly denied to the assessee.
In the present case, the assessee transferred Rs. 339.69 lakhs from revaluation account to Profit and Loss Account resulting in net debit of Rs. 1466.14 lakhs and in the return of income, the assessee claimed reduction from book profits of an amount of Rs. 339.69 lakhs representing transfer from revaluation reserve. During the arguments, it was noticed by the Bench that the ld. CIT-DR has disputed this fact that the assessee transferred same amount from revaluation account to profit and loss account and also claimed reduction in the return of income from book profits of same amount representing transfer from revaluation reserve.
In the case of Apollo Tyres [supra] the Hon'ble Supreme Court held as follows:
For deciding this issue, it is necessary for us to examine the object of introducing Section 115-J in the IT Act which can be easily deduced from the Budget Speech of the then Hon. Finance Minister of India made in the Parliament while introducing the said Section which is as follows:
"It is only fair and proper that the prosperous should pay at least some tax. The phenomenon of so-called "zero-tax" highly profitable companies deserves attention. In 1983, a new Section 80VVA was inserted in the Act so that all profitable companies pay some tax. This does not seem to have helped and is being withdrawn. I now propose to introduce a provision whereby every company will to have to pay a "minimum corporate tax" on the profits declared by it in its own accounts. Under this new provision, a company will pay tax on at least 30% of its book profit. In other words, a domestic widely held company will pay tax of at least 15% of its book profit. This measure will yield a revenue gain of approximately Rs. 75 crores."
The above Speech shows that the income tax authorities were unable to bring certain companies within the net of income-tax because these companies were adjusting their accounts in such a manner as to attract no tax or very little tax. It is with a view to bring such of these companies within the tax net that Section 115-J was introduced in the IT Act with a deeming provision which makes the company liable to pay tax on at least 30% of its book profits as shown in its own account. For the said purpose, Section 115-J makes the income reflected int he companies books of accounts as the deemed income for the purpose of assessing the tax. If we examine the said provision in the above background, we notice that the use of the words "in accordance with the provisions of Part II and III of Schedule VI to the Companies Act" was made for the limited purpose of empowering the assessing authority to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, an assessing officer under the IT Act has to accept the authenticity of the accounts with reference to the provisions of the Companies Act which obligates the company to maintain its account in a manner provided by the Companies Act and the same to be scrutinised and certified by statutory auditors and will have to be approved by the company in its General Meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and satisfy that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Inspite of all these
procedures contemplated under the provisions of the Companies Act, we find it difficult to accept the argument of the Revenue that it is still open to the assessing officer to re-scrutinize this account and satisfy himself that these accounts have been maintained in accordance with the provisions of the Companies Act. In our opinion, reliance placed by the Revenue on Sub- section (1A) of Section 115-J of the IT Act in support of the above contention is misplaced. Sub-section (1A) of Section 115-J does not empower the assessing officer to embark upon a fresh inquiry in regard to the entries made in the books of account of the company. The said sub-section, as a matter of fact, mandates the company to maintain its account in accordance with the requirements of the Companies Act which mandate, according to us, is bodily lifted from the Companies Act into the IT Act for the limited purpose of making the said account so maintained as a basis for computing the company's income for levy of income-tax. Beyond that, we do not think that the said sub-section empowers the authority under the Income-tax Act to probe into the accounts accepted by the authorities under the Companies Act. If the statute mandates that income prepared in accordance with the Companies Act shall be deemed income for the purpose of Section 115-J of the Act, then it should be that income which is acceptable to the authorities under the Companies Act. There cannot be two incomes one for the purpose of Companies Act and another for the purpose of income tax both maintained under the same Act. If the legislature intended the assessing officer to reassess the company's income, then it would have stated in Section 115-J that "income of the company as accepted by the assessing officer". In the absence of the same and on the language of Section 115-J, it will have to held that view taken by the tribunal is correct and the High Court has erred in reversing the said view of the tribunal.
Therefore, we are of the opinion, the assessing officer while computing the income under Section 115-J has only the power of examining whether the books of account are certifies by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The assessing officer thereafter has the limited power of making increases and reductions as provided for in the Explanation to the said section. To put it differently, the assessing officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to Section 115-J.”
In view of the above, we are inclined to hold that the AO, while computing the income u/s 115JA of the Act has only power to examine whether the book of accounts are certified under the Companies Act as having been properly maintained in accordance with the Companies Act. It was also held that the AO, thereafter, has limited power of making and increasing and reducing as provided in Explanation to section 115JA of the Act. In other words, the AO does not have jurisdiction to go beyond the profits shown in profit and loss account except to the extent provided in section 115JA of the Act.
In the present case, the AO has not disputed the quantum of revaluation of asset made by the assessee nor report of the CA has not been rejected by the AO. In the guidance note of accounts, the manner and mode of writing of depreciation of such revaluation assets has been explained. The AO has not disputed this fact that the assessee transferred Rs. 339.69lakhs from the revaluation account to the profit and loss account and again, the assessee claimed deduction from the book profits by same amount representing transfer from revaluation reserves. In the case of Apollo Tyres, the assessee created reserve without disturbing the profit shown by the profit and loss account and since the amount of revaluation reserve had not gone to the book profit at the time of creation, then benefit of reduction was rightly denied to the assessee but in the present case, as per the claim of the assessee, the assessee transferred similar amount to the profit and loss account from revaluation account and thereafter, the assessee claimed reduction from the book profits of the same amount representing transfer from revaluation reserve. In this situation, the assessee was rightly held as eligible for reduction of book profits by the amount which was transferred from revaluation to profit and loss account. However, the CIT-DR has raised his dispute regarding above noted treatment claimed to have been made by the assessee. Therefore, firstly, we uphold that the assessee is eligible for reduction of amount of revaluation reserve which was transferred from revaluation account to profit and loss account. The AO is directed to verify the said claim of the assessee in the light of the decision of the Hon'ble Supreme Court in the case of CIT Vs. Apollo Tyres Ltd [supra] and Indo Rama Synthetics [supra], Ground Nos. 1 to 4 of the Revenue are deemed to be allowed for statistical purposes for limited purposes of examination and verification of the entries made by the assessee in this regard and in the manner as indicated above.
Ground Nos. 5 and 6.
Apropos Ground Nos. 5 and 6, the ld. DR has drawn our attention towards operative para 8 of the assessment order and submitted that the ld. CIT(A) erred in treating the expenses of Rs. 1,16,00000/- incurred towards installation expenses of software system as Revenue expenses while the AO correctly treated the same as capital in nature having the nature of residuary benefit for the year to come. The ld. DR also pointed out that the AO rightly added the same and allowed depreciation accordingly which finds support from the decision of the Hon'ble Rajasthan High Court reported in 259 ITR 30 [Raj] wherein the decision of the Hon'ble Supreme Court reported in 166 ITR 66 was followed.
Per contra, the ld. AR submitted that the expenditure was incurred for effective conducting of existing business of the assessee and due to rapid increase in science and technology, the computer software already in existing with the assessee required rapid upgradation and the claimed expenditure incurred was not incurred for installation of any new computer software but the expenditure incurred led to better conducting of existing business. The ld. AR, placing reliance on the judgment of the Special Bench of the ITAT, in the case of Amway India Enterprise VS. DCIT 21 SOT 1 [[SB- Tri], submitted that the life of computer software is short due to which the same has to be treated as revenue expenditure.
On careful consideration of the above submissions, at the very outset, we note that the Hon'ble Jurisdictional High Court of Delhi in the case of DCIT Vs. Amway India Enterprise 346 ITR 341 [Del] has upheld the order of the Special Bench of the ITAT in Amway India Enterprise [supra] wherein the conclusion of the Special Bench that life of the computer software is short due to which same has to be treated as revenue expenditure. In view of the dicta of the Hon'ble Jurisdictional High Court, when we logically test the conclusion of the ld. CIT(A) in paras 6 and 7 of the impugned order, then we note that the ld. CIT(A) has followed the decision of the Hon'ble Supreme Court in the case of Empire Jute Company Limited Vs. CIT reported at 124 ITR 1 [SC] wherein it was held that expenditure incurred on purchase of computer software should be treated as revenue expenditure.
The above conclusion of the first appellate authority further gets support from the judgment of the Hon'ble High Court of Delhi in the case of Amway India Enterprises [supra]. Finally, we are of the considered opinion that the conclusion of the ld. CIT(A) in this regard is quite correct and justified and there is no valid reason before us to interfere with the same. Hence, Ground Nos. 5 and 6 of the Revenue stand dismissed.
Ground No. 7
The ld. DR contended that the ld. CIT(A) has erred in deleting the disallowance of Rs. 5,70,71,122/- and Rs. 91,69,866/- made on account of interest on borrowed capital and upfront fee utilised in expansion and modification projects as per Explanation 8 to section 43(1) of the Act.
Per contra, the ld. AR submitted that the issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of DCIT Vs. Core Health Care Limited reported in 298 ITR 194.
On careful consideration of the above submissions and from the operative part of the first appellate order, we observe that the ld. CIT(A) granted relief to the assessee with the following conclusion:
“I have carefully considered the submissions of the authorised representative for the appellant and have perused the assessment order framed by the Assessing officer. It. is clear from the narration given above that, the appellant had borrowed the moneys for modernisation and improvement of productivity with reference to an existing business. The Assessing officer has not made a case that ♦‘he moneys was not utilised for modernisation and improvement of productivity rather he has mentioned that necessary certificates of concerning authority were filed. Therefore, having regard to the various decision cited by the counsel, the provisions of explanation 3 to section 43(1) could not be interpreted in the reverse order so as to capitalize the amount of interest paid on the borrowing and include the same in the actual cost of machinery. Thus the appellant was entitled to claim deduction u/s 36(1)(iii) of the interest and upfront fee. The disallowances as made by the AO on these score deleted.”
In view of the above, we observe that the AO has not controverted this fact that eh assessee had borrowed moneys for modernization and improvement of productivity with reference to an existing business. It is not the case of the AO that the borrowed money on which interest was paid were not utilized for modernization and improvement of productivity and the same were used for another purpose. At the same time, we observe that the AO has noted that the necessary circulars requiring modernization and improvement of productivity of existing business of the assessee were filed during assessment proceedings. At this juncture, it is relevant to take respectful cognizance of the decision of the Hon'ble Supreme Court in the case of DCIT Vs. Core Health Care Limited [supra] wherein it was held that the assessee was entitled to deduction u/s 36(1)(iii) of the Act prior to its amendment by the Finance Act, 2003 in relation to money borrowed for the purchase of machinery even though the assessee had not utilized the machinery in the year of borrowing. In this case, confirming the decision of the Hon'ble High Court of Gujarat, the Hon'ble Supreme Court held that the proviso inserted in section 36(1)(iii) w.e.f. 1.4.2004 will operate prospectively and the present case in hand before us is pertaining to A.Y 1998-99. Therefore, the dicta laid down by the Hon'ble Supreme Court supports the conclusion of the ld. CIT(A) and we are unable to see any valid reason to interfere with the findings of the first appellate authority and thus we uphold the same. Accordingly, Ground No. 7 of the Revenue stands dismissed.
Ground Nos. 8 and 9 26. Apropos Ground Nos. 8 and 9, the ld. DR vehemently contended that the first appellate authority grossly erred in deleting the disallowance of expense of Rs. 54,01,557/- incurred on books and journals which was taken as capital expenses by the AO as assessee admitted that the books are tools for its business activities.
The ld. AR, placing reliance on the decision of the Hon'ble Supreme Court in the case of Alembic Chemical Works Co. Ltd Vs. CIT reported in 177 ITR 377, submitted that the expenditure incurred on books and journals is admissible deduction. Therefore, the conclusion of the first appellate authority may be kindly upheld. However, the ld. AR fairly submitted that the expenditure on books having long life cannot be compared with the expenditure on journals and for this purpose, this ground may be restored to the file of the AO for proper bifurcation and treatment as per the provisions of the Act.
The ld. DR submitted that the department has no serious objection if this issue is restored to the file of the AO for fresh adjudication.
In view of the above submissions of both the sides, we are of the considered opinion that the monthly and other journals cannot be equated with the books having long life and which are used for the purpose of business of the assessee for several years to come. Therefore, we are of the considered opinion that this issue needs to be examined and verified afresh at the end of the AO and the AO is directed to examine the same in the light of the observations as noted above and therefore, Ground Nos. 8 and 9 of the Revenue are deemed to be allowed for statistical purposes.
Ground No. 10
Apropos Ground No. 10, the ld. DR submitted that the ld. CIT(A) has erred in law and on the facts of the case in allowing relief of Rs. 2,94,447/- out of legal and consultancy expenses without assigning any reasons.
The ld. Counsel for the assessee pointed out that the AO made addition by invoking the provisions of section 35AB(1) of the Act wherein expenditure on capital nature is allowed in six installments and the ld. CIT(A) after appreciation of facts found that the amount of Rs. 2,94,447/- has nothing to do with the capital expenditure. Therefore, the same was allowed by granting part relief to the assessee. The ld. AR also drew our attention towards para 14 of the impugned order and supported the conclusion of the ld. CIT(A).
On careful consideration of the above submissions of the rival representatives, from the operative para 14 of the impugned order, we clearly observe that the ld. CIT(A) considered total amount of disallowance and deducting Rs. 19,88,753/-, granted part relief of Rs. 2,94,447/- to the assessee. Undisputedly, this amount was not incurred for the purpose of acquiring technical know how and from para 11 of the assessment order it is clear that the expenses were incurred for legal and consultancy charges. Therefore, the same was allowable u/s 37 of the Act. I view of the above, we are unable to see any valid reason to interfere with the ld. CIT(A) and we thus uphold the same. Finally, Ground No. 10 being devoid of merits stands dismissed.
Ground Nos. 11 to 14.
Apropos these grounds, the ld. DR argued that the first appellate authority was not justified in law and on facts in directing the AO to treat the sum of Rs. 3,85,17,571/- and Rs. 10,80,400/- as business income which was correctly assessed under the head “income from other sources”. The ld. DR further contended that the ld. CIT(A) has erred in allowing deduction u/s 980HH, 80I and 80IA of the Act on interest income which was not allowable. The ld. DR vehemently contended that the income from other sources was not derived from industrial undertaking therefore, the same was not eligible for deduction in view of the judgment of the Hon'ble Supreme Court reported in 262 ITR 278.
Replying to the above, the ld. AR submitted that interest received on fixed deposits kept in bank as margin money is taxable under the head ‘business income’ and is consequently eligible for deduction. The ld. AR placing reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Alfa Laval India Ltd reported in 295 ITR 451 wherein it has been held that interest from customers is to be included as business profits for computation of deduction u/s 80HHC of the Act. The ld. AR has relied on a catena of decisions and submitted that interest income earned on delayed or overdue payment from customers is assessable as profits and gains from business for computing deduction under Chapter VIA of the Act. The ld. AR further submitted that interest income earned on margin money, when inextricably linked with the business of the assessee will be assessable as business income.
We have heard the rival submissions and have perused the relevant material on record. On perusal of para 17 of the impugned order, we find that the ld. CIT(A) has treated the sum of Rs. 3,85,17,571/- as business income and directed the AO to allow deductions u/s 80HH, 80I and 80IA of the Act by following the decision in assessee’s own case for A.Y 1996-97. We find no infirmity in the order of the ld. CIT(A) and respectfully the dicta laid down by Hon'ble Supreme Court and various Hon'ble High Courts on this issue, we decline to interfere with the same and uphold the same. Accordingly, Ground Nos. 11 to 14 of the revenue stand dismissed.
Ground No. 15.
Vide ground No. 15, the department is aggrieved by the ld. CIT(A)’s order deleting the disallowable of Rs. 30,468/- and Rs. 50,811/- which was correctly made by the AO u/s 40A(2) of the Act on account of excessive interest paid.
Per contra, the ld. AR relying on various decisions, submitted that reasonableness is to be decided on the basis of fair market value of the goods, services or facilities. It is a settled law that reasonableness of any expenditure is to be seen from the view point of the business man and not from the view point of the revenue authorities.
On careful consideration the above rival submissions, we find that during the relevant previous year, the assessee paid interest to Anichem India Limited, Gomti Credit Limited and Enpro India Limited. The AO observed that since the interest @ 16% was paid to M/s Vam Organic Chemical Limited, whereas interest to the tune of 24% was paid to Anichem India Limited, Gomti Credit Limited and Enpro India Limited, therefore, the difference in the two rates needs to be disallowed. However, the ld. CIT(A) observing that the AO has not made out case as to show interest paid to Anichem and other parties were excessive and also that he borrowings were not for smooth business of the assessee, deleted the disallowance made by the AO. We find substance in the contention of the ld. AR that interest has been paid on the borrowings which have been utilized for the purpose of assessee’s business. Further the assessee has borrowed funds from several other unrelated concerns on which interest @ 20-21% was paid. Thus, interest @ 24% cannot be termed as excessive to attract the provisions of section 40A(2) of the Act. This fact has not been controverted by the ld. DR. Accordingly, we uphold the first appellate order on this issue and dismiss Ground No. 15 of the Revenue.
Ground No. 16
Apropos Ground No. 16, the ld. DR contested that the ld. CIT(A) failed in not rejecting the assessee’s explanation that the income and expenditure accounts of different units were filed alongwith the return of income while they were not based on individual books of accounts of different units but expenses were allocated on proportional basis of sales.
Per contra, the ld. AR supported on the orders of the first appellate authority and relied on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Bongaigon Refinery and Petrochemical Ltd reported in 349 ITR 352.
On careful consideration the above rival submissions, we find that the ld. CIT(A) has followed its order in assessee’s own case for the A.Y 1996-97. In the case of CIT Vs. Bongaigon Refinery and Petrochemical Ltd [supra, relied upon by the ld. AR, we find that the Hon'ble Supreme Court has held that there is no requirement to maintain separate books of account. We find substance in the contention of the ld. AR that in any case, the formula/method applied by the AO for computing the profits eligible for deduction u/s 80HH, 80I and 80IA is the same as that followed by the assessee viz. profits of the undertaking are apportioned in the ratio of the gross total income as per the I.T. Act to the book profits of the assessee company. This fact has not been controverted by the ld. DR. Accordingly, we uphold the first appellate order on this issue and dismiss Ground No. 16 of the Revenue.
Ground No. 17.
Vide Ground No. 17, the department is aggrieved that the ld. CIT(A) erred in directing to allow the deduction u/s 80HH, 80IA and 80I on gross total income without reducing the same by the amount of deduction u/s 80HHC as it will amount to double deduction. The ld. DR pointed out that this issue is subjudice before the Tribunal.
The ld. AR relied on the orders of the ld. CIT(A) and submitted that there is no basis in law for reducing the deduction admissible u/s 80HHC for the purpose of computing deduction u/s 80HHC, 80I and 80IA of the Act in the absence of any provision.
We have heard the rival submissions and have perused the relevant material on record. We find that following its own order for A.Y 1996-97, the ld. CIT(A) has directed to allow deduction u/s 80HH, 80I and 80IA of the Act. We find no infirmity in the order of the ld. CIT(A) in view of the fact that there is no basis in law for reducing deduction admissible u/s 80HHC for the purpose of computing deduction u/s 80HH, 80I and 80IA of the Act. Accordingly, we decline to interfere with the order of the ld. CIT(A) and dismiss ground No. 17.
Ground No. 18 is general.
In the result, the appeal of the assessee as well as the revenue are partly allowed for statistical purposes.
The order is pronounced in the open court on 22.02.2016.