ACIT, RANGE-I vs. JUBILANT ORGANOSYS LTD.,,

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.

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:

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:

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.

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 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:

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.

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.

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.

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.

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.

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.

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.