1. This appeal by the assessee for the asst. yr. 1993-94 is directed against the order of the CIT(A) upholding certain additions and disallowances.
2. The assessee is one of the biggest Indian companies in which public is interested. It is highly diversified and largest "core industries" in India. It produces viscose, staple fibre, rayon, pulp, caustic soda, cement, software, sponge iron, textiles, heavy engineering machinery and chemicals. It employs over 25,000 persons and its plants are located at about 10 places in India.
3. In the memo of appeal, several grounds are raised, but during the course of hearing, the first objection taken by the learned counsel for the assessee related to disallowance of part of deduction claimed under s. 80M of the IT Act, 1961 out of dividend income. The assessee during the relevant period received dividends from Indian companies and returns from UTI amounting to Rs. 28.64 crores and distributed dividend approximately Rs. 25.11 crores. In its return of income, the assessee claimed deduction of the last mentioned sum in accordance with provisions of s. 80M of the Act.
4. The AO, on scrutiny of accounts, found that the assessee claimed deduction of Rs. 59.93 crores as interest paid on borrowings utilised for purposes of business. This was besides interest of Rs. 92.96 crores capitalised in books of accounts but claimed deductible in the return under s. 36(1)(iii) of the Act. The assessee claimed that funds were, on which interest of Rs. 59.93 crores was claimed, raised by way of issue of bonds and debentures. As required by various regulations, commitment made while raising funds, such funds were to be utilised for objects specified. Pending utilisation, as a matter of commercial prudence the assessee-company invested funds in securities as permitted by agreements are rules.
5. On claim of deduction under s. 80M (Ground No. 1) the AO held that a part of loans on which interest of Rs. 59.93 crores was claimed, was utilised for purposes of acquiring investments which earned dividend. This conclusion was arrived at as the assessee failed to lead direct evidence of source of investment of its own funds. The AO considered the total investment made by the assessee, the total funds of the assessee and total borrowings made and allocated Rs. 6,94 crores of Rs. 59.93 crores of interest on borrowed funds and utilised for acquiring investment as per working given below :
WORKING OF INTEREST ATTRIBUTABLE TO INVESTMENTS
(Rs. in crores)
1. Total investment in shares of units of UTI 236.77
2. Owned funds 903.64
3. Borrowed funds 1038.56 -------
4. Total funds employed 2042.20
5. Ratio of borrowed funds to total funds 50.85%
6. Interest on borrowed funds claimed in P&L a/c 59.93
7. Average incidence of allowable interest on borrowed funds 05.77%
8. Borrowed funds used for investments (1x5) 120.398
9. Investment attributable to borrowed funds used for investment = 120.398 x 5.77% 6,94,69,640
10. Interest to be allowed from "Income from other
source" from dividend under s. 57(iii) to work
out taxable dividend income 6,94,69,640
6. Consequently, the AO restricted the deduction claimed under s. 80M to Rs. 21.69 crores. The view of the AO has been upheld by the learned CIT(A). The assessee has come up in appeal before the Tribunal.
7. The learned counsel for the assessee Shri Dastur submitted that all borrowings on which interest of Rs. 59.93 crores was paid were obtained for specific purpose of business and not for any investment. He submitted that, in fact, investments in the year under consideration had come down from Rs. 330.13 crores as on 31st March, 1992 to Rs. 236.77 crores as on 31st March, 1993. He further argued that the assessee had its own funds and income to make investment in securities and the Revenue has failed to prove that the borrowed funds on which interest of Rs. 59.93 crores was paid, were used or acquiring securities.
In this connection, he stated that the assessee's profits in the year under consideration before depreciation amounted to Rs. 203 crores. It was Rs. 160 crores last year. He filed before us position of funds and profits in different years. Thus, the profits and known funds were sufficient to cover the investment. Shri Dastur argued that the AO while computing business income of various units, allowed deduction of Rs. 59.93 crores. The AO then, on estimate basis, through erroneous formula allocated Rs. 6.94 crores to borrowed funds utilised in investments and reduced dividend income and deduction under s. 80M. This was done on the ground that the assessee had a common bank account wherein all profits, sale receipts, etc. were credited and amounts withdrawn for making various investments. The AO failed to appreciate that in such a situation as per principles laid down by the Calcutta High Court in the cases of Woolcombers of India Ltd. vs. CIT (1982) 134 ITR 219 (Cal), Rackitt & Colman of India Ltd. vs. CIT (1982) 135 ITR 698 (Cal) and Indian Explosives Ltd. vs. CIT (1984) 147 ITR 392 (Cal) and approved by Hon'ble Supreme Court in the case of East India Pharmaceutical Works vs. CIT (1997) 224 ITR 627 (SC), the claim of the assessee should have been accepted. The deposits in common account representing assessee's income and funds far exceeded withdrawals made for investment and, therefore, it was to be presumed that investments were made out of assessee's income of own funds. In fact, the above factual position has not been disputed by the Revenue and no material brought on record to show that presumption was rebutted.
8. Shri Dastur further contended that the entire interest of Rs. 59.93 crores having been allowed while computing assessee's business income, it has been accepted that borrowings were taken for purposes of business. In the above situation, the matter should be taken to be fully covered by the recent decision of the Hon'ble Supreme Court in the case of the Tuticorin Alkali Chemicals vs. CIT (1997) 227 ITR 172 (SC). Interest paid on loans taken for purposes of business could not be deducted under the head 'other sources' or capitalised. Therefore, apportionment of borrowings and interest between business income and dividend income taken under the head "other sources" was not justified.
9. The learned Departmental Representative opposed the above submissions. He drew our attention to provisions of s. 80AA to contend that net amount of dividend under s. 80M was to be allowed as a deduction and expenditure incurred for earning above income were to be deducted. He relied on the decision of the Madras High Court in the case of Mir Mohd. Ali vs. CIT (1960) 38 ITR 413 (Mad). The learned Departmental Representative further cited the case of CIT vs. United Supply Agency (P) Ltd. (1985) 155 ITR 262 (Cal). The assessee, according to the learned Departmental Representative, placed no material on record to establish link of borrowings on which interest was paid and their utilisation. The AO, therefore, was justified in applying a reasonable formula. According to him, the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. CIT (supra) was no more a good law in the light of the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works vs. CIT (supra). The learned Departmental Representative accordingly supported the order of the AO.
10. Having given careful thought to the rival submissions of parties, we do not see any justification for allocating Rs. 6.94 crores as expenditure relatable to dividend income. The assessee has placed sufficient material on record to show that its income in the year under consideration (sales approximately Rs. 1,745 crores profit approximately 203 crores) as also Rs. 106 crores of last year, and its own funds of Rs. 903 crores far exceeded the investments giving dividend income. The borrowed funds on which interest of Rs. 59.93 crores was paid, were admittedly taken for purposes of business and the Revenue has led no material to show that those funds were diverted and utilized in investments. Even the AO allowed above interest against business income but subsequently allocated a part of its Rs. 6.94 crores towards dividend under the head 'other sources' on the presumption that proportionate borrowed funds could be taken as utilised for earning dividend income. Having regard to the principles laid down by the Calcutta High Court in the cases of Woolcombers of India Ltd. vs. CIT (supra); Reckitt & Colman of India Ltd. vs. CIT (supra) and other authorities and position of deposits out of profit and own funds in the common account being more than withdrawals, the investment in securities was to be presumed to be made by the assessee out of its own funds and not of borrowings. The AO wrongly placed onus on the assessee to link the investment and erroneously drew a conclusion against the assessee and allocated interest on proportionate basis. Therefore, on the consideration of material on record, we hold that allocation of interest towards earning dividend income was not justified.
11. The learned Departmental Representative had vehemently contended that the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. CIT (supra) and similar other decisions are no longer good law in view of the decision of the Hon'ble Supreme Court in the case of East India Pharmaceuticals Works vs. CIT (supra). We do not agree. Their Lordships of the Hon'ble Supreme Court made the following pertinent observation at p. 632 of the Report :
"Having considered the rival submissions at the Bar, though we find considerable force in the arguments advanced by learned counsel appearing for the appellant, but in the facts and circumstances of the present case, on going through the order of the Tribunal as well as the question referred by the Tribunal for being answered by the High Court and the arguments advanced before the Tribunal as well as in the High Court by counsel appearing for the assessee, it is not possible for us to hold that any such contention, as was advanced before this Court by the assessee had in fact been advanced either before the Tribunal or before the High Court. The question whether a presumption can be drawn that the taxes were paid out of profits of the relevant year and not out of the overdraft account for the running of the business as was drawn in Woolcombers vs. CIT (1982) 134 ITR 219 (Cal) by the Calcutta High Court and was followed in three other cases of the same High Court, would essentially depend upon the fact as to whether the entire profits had been pumped into the overdraft account, whether such profits were more than the tax amount paid for the relevant year and all other germane factors. But when the assessee never advanced the contention either before the Tribunal or before the High Court and the amplitude of the question posed before the High Court does not bring within its sweep the contention as is advanced by Mr. Bhattacharya, learned counsel in this Court, it would not be appropriate for this Court to look into the additional papers produced by the assessee for entertaining the contention and answering the same."
12. It is clear from the above that the Hon'ble Supreme Court has noted the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. CIT (supra) but did not consider applicability of above decisions to the facts of the case before them as no such arguments were advanced before the Tribunal or before the High Court. Having regarded to the position of assessee's funds, no presumption would be drawn that borrowed funds were utilised for making investment in securities on which dividend was earned and, therefore, allocation of part of interest for earning dividend was unjustified.
13. The learned Departmental Representative was also not justified in relying on the decision of the Madras High Court in the case of Mir Mohd. Ali vs. CIT (supra) which in fact supports the case of the assessee.
14. The alternative contention of the assessee that all debentures and bonds on which interests of Rs. 59,93 crores was claimed, were specifically floated for purposes of business. This is not in dispute. The AO, however, allocated a part of interest towards earning dividend income on the presumption referred to above. The action of the AO is contrary to the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals vs. CIT (supra). In the above case, capital borrowed for purposes of business was utilised in short-term deposits and interest was earned. On the question whether interest paid by the assessee on utilised borrowings, could be deducted out of interest income or capitalised as per the principle laid down by the Hon'ble Supreme Court in the case of Challapalli Sugars Ltd. vs. CIT (1975) 98 ITR 167 (SC), their Lordships held that neither the addition could be allowed out of interest income nor interest could be capitalised on the basis of accounting principles. Their Lordships specifically approved the deduction of the Hon'ble Madras High Court in the case of CIT vs. Seshasayee Paper & Boards Ltd. (1985) 156 ITR 542 (Mad) and observed as follows :
"The Court's finding in CIT vs. Seshasayee Paper & Boards Ltd. (1985) 156 ITR 542 (Mad) was that the interest earned by the assessee from the bank deposits had to be assessed under the head "other sources". Consequently, the interest paid on the borrowings for the purpose of purchase of plant and machinery could not be allowed or adjusted against this income under s. 57(iii) nor were such adjustments permissible under s. 70 or 71 of the Act because the business of the assessee had not commenced. The Madras High Court [see (1985) 156 ITR 542 (Mad)] categorically held :
"In this case, admittedly, the borrowings has not been made exclusively and solely for the purpose of earning interest in which case alone it should be taken as an income which should be deducted from the interest receipts."
It is, therefore, clear that interest on borrowings made for purposes of business could not be deducted/adjusted against income from 'other sources'. Therefore, the AO acted contrary to the decision of the Supreme Court when after allowing entire interest against business income, he apportioned a part of it towards dividend income assessed under the head "other sources". The apportionment made cannot be held to be done in accordance with law. In the light of the above discussion, we hold that apportionment of Rs. 6.94 crores towards earning of dividend income and consequent reduction of exemption under s. 80M were not justified. The entire interest of Rs. 59.53 crores was to be allowed out of business income. Consequently, deduction claimed by the assessee under s. 80M was to be allowed as claimed. The AO is directed to revise the assessment accordingly.
15. The next ground of appeal (No. 2) relates to disallowance of claim made under s. 36(1)(iii) of the IT Act. The assessee had issued non-convertible and partly convertible debentures to raise finance for its two cement units at Raipur and Sambhupura and a steel unit "Vikrant Ispat" at Salav. Interest on above borrowings amounting to Rs. 92.95 crores was capitalised in its books of account but claimed as a deduction in the return. The AO disallowed interest as, according to him, the three units had not commenced business. He also rejected the assessee's contention that the three units constituted "same business" carried on by the assessee as there was a common management, common funds, interlacing, inter-connection, inter-dependence, etc. of all units of the assessee-company. The AO held that the three units had not started business and, therefore, interest paid on monies borrowed before commencement of business was capital expenditure. The AO discussed and rejected each of the points raised by the assessee. He also relied on Expln. 8 to s. 43(1) of the Act to negative the claim. The said Explanation provides that interest paid by the assessee on capital borrowed upto the commencement of business has to be added to the cost of assets. The AO accordingly disallowed the interest.
16. The assessee impugned the assessment in appeal before the learned CIT(A) and reiterated its submissions that the three new units referred to above constituted the same business carried on by the assessee as there were interlacing, interdependence and dovetailing of funds with common control and common management. The loans raised on debentures represented monies borrowed by the assessee for purpose of business and, therefore, deductible under s. 36(1)(iii) of the Act. The assessee placed reliance on several decisions including that of Hon'ble Gujarat High Court in the case of CIT vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj). It was further argued that Expln. 8 to s. 43(1) which prohibits capitalisation of interest on borrowings after commencement of business had no application in this case. The said Explanation cannot be applied in the reverse direction to disallow interest paid on monies borrowed before commencement of business. The assessee placed reliance on the decisions in the cases of Bharat Hari Dalmia (1998) 66 ITD 355 (sic) and Bharat Forge vs. Dy. CIT (1995) 53 ITD 575 (Pune). The learned CIT(A) did not find any support for the arguments advanced on behalf of the assessee and confirmed the action of the AO. Hence, this appeal.
17. We have heard submissions of both the parties and examined material placed on record. The learned counsel for the assessee Shri Dastur reiterated that the two cement units and one Ispat Unit were part of the same business and, therefore, interest paid on borrowings was to be deductible under s. 36(1)(iii) of the Act. He emphasised that there was unity of management and control which was most important test to determine whether different ventures carried on by the assessee constituted same business or not. In this connection, the learned counsel drew our attention to pp. 2 and 3 of the compilation 'B' chart showing how important decisions are taken by management committee and the Board and implemented by heads of various departments. Shri Dastur invited our attention to decision of the company to raise funds for units by issuance of PCDs and NCDs and also Euro issue of Rs. 276.29 crores. Shri Dastur made prominent reference to profit appraisal report of IDBI of these units at pp. 247-248 of compilation wherein apart from outside borrowing, the internal accrual was taken at Rs. 132.58 crores, 130 crores and Rs. 137 crores for sponge iron plant, Raipur plant and Sambhupura plant, respectively. Reference was also made to common bank accounts with SBI and UCO at Bombay where receipts from all units and payments of all units were made. Thus, funds for all units were common. This was also clear from correspondence exchanged for raising cash credit limits from pp. 124-129 of compilation. Shri Dastur showed that employees were frequently transferred from one unit to the other and single officer like Mr. Bagrodia was controlling more than one unit. It was also argued that closure of any of units would adversely affect the other units by increasing their liabilities. Shri Dastur, the learned counsel for the assessee, drew our attention to the following decisions :
(1) CIT vs. Prithvi Insurance Co. Ltd. (1967) 63 ITR 632 (SC);
(2) Produce Exchange Corpn. Ltd. vs. CIT (1968) 77 ITR 739 (SC);
(3) IAC vs. Coromandal Fertilisers Ltd. (1989) 29 ITD 455 (Hyd);
(4) CIT vs. Modi Industries Ltd. (1993) 200 ITR 341 (Del);
(5) CIT vs. Alembic Glass Industries Ltd. (1976) 103 ITR 715 (Guj); and
(6) CIT vs. S.S.M. Ahmed Hussain (1987) 164 ITR 525 (Mad).
The learned counsel for the assessee also distinguished the decisions cited by the Revenue authorities by pointing out that in those cases the Tribunal has recorded a finding of fact that different units were not carrying on same business and such finding was approved by various Courts. But in the present case there was sufficient material in the compilation marked 'B' to show that there was unity of control, unity of management, common funding, interlacing, interdependence, etc. of different units.
17.1. The learned Departmental Representative, on the other hand, strongly relied on the order of the AO. He argued that unless the very same business was carried on in the same year, deduction of interest was not permissible. This, in his opinion, was clear from the use of word "the" under s. 36(1)(iii) and also of word "carried on" in s. 28(1) of the IT Act. In the alternative, the learned Departmental Representative submitted that plant for sponge iron can under no circumstances be taken as expansion of business of the assessee. The learned Departmental Representative read out and relied upon the following decisions.
(1) Waterfalls Estate Ltd. vs. CIT (1996) 219 ITR 563 (SC);
(2) L. M. Chhabda & Sons vs. CIT (1967) 65 ITR 638 (SC);
(3) CIT vs. Bharat Industrial Works (1997) 226 ITR 543 (MP); and
(4) Rainbow Dyestuff Ltd. vs. CIT,
to support the conclusion arrived at by the Revenue authorities.
18. On careful consideration of rival submissions of the parties, we are of the view that there is not much difference between the parties on the tests to be applied for determining whether the three units mentioned above are part of the same business carried on by the assessee and, therefore, it would be useful to refer to these tests considered by the AO as under :
A. Same business. - The AO held that as the assessee was carrying on diversified activities of manufacturing textile, staple fibre, cement, caustic soda, pulp iron, etc. at different places, the assessee was carrying different business activities and, therefore, not "same business".
The assessee, on the other hand, contends that as setting up of cement plants and sponge iron plant is interconnected, interdependent and being controlled by same management, it is same business. The fact that for purposes of deduction under s. 80HHC the assessee had to work out profit of each industrial undertaking separately, does not make any difference to its claim. In addition to the material referred to above, the assessee has also drawn our attention to the observations of Asstt. CIT dt. 29th March, 1996, for the asst. yr. 1993-94 where the officer accepted that the assessee was carrying on the same business. In our opinion, merely because diversified activities are carried by the companies, it cannot be said that the different activities are not the "same business". On the other hand, if one sees the issue in conjunction with the tests of same management, common funds and control, they may be indicative of the proposal that it is same business.
B. Same management. - Under this heading, the AO held that all divisions of the assessee function under control and management of separate division head who is normally of the rank of Senior President or Joint President. The various divisions are like water tight compartments. In fact, delegation and decentralisation is exercised within each division.
The assessee, on the other hand, drew our attention to organisation chart under which a common management controls the working of all units. All important decisions relating to management are taken by the management committee which functions under the Board of Directors. Heads of various departments take instructions from this management committee regarding policy and functioning matters. Further, the assessee's contention is that for efficient working day-to-day functioning of different units is left to the Division Heads. The fact that Mr. M. C. Bagrodia is incharge of all units is not disputed even by the Revenue as is clear from observations of the AO in the assessment order. He has stated "merely because unit head of the new division report to Mr. M. C. Bagrodia, Senior President, along with other division heads did not make the management of the divisions interdependent". The other fact that employees from one unit are shifted to other unit is also not disputed by the Revenue. It was argued that local labour is employed and, therefore, units at different places are different. But, in our opinion, employment of local labour by the assessee at different places would not mean that there is no common unity or commonality of different units. Any step obviously taken for better or more efficient management would not affect concept of "same business". A common insurance policy is taken in respect of various units as is evident from insurance policy placed at pp. 9 to 11 of the compilation 'A'. There is single superannuation scheme for all employees of the assessee. It was also relevant to emphasise that the assessee was already engaged in manufacture of cement.
C. Common fund employed. - The AO rejected the assessee's claim that common pool funds consisting of "own funds" and "borrowed funds" were employed for setting up and day-to-day running of various divisions/units. He held that where surplus funds were transferred inter se units or to the head office, interest was charged and separately accounted for in each unit. The assessee, on the other hand, contends that there are common funds and even for raising loans, the entire assets of the company are charged. The learned counsel drew our attention to project appraisal report carried by IDBI for financing the three projects. He also relied on p. 251 of compilation 'B' to show internal funds to be utilised for setting up the units. Our attention was also drawn to common bank account with SBI and UCO. Funds needed at head office and at different units were inter se transferred frequently. Merely for accounting purposes and to know profitability of each unit, interest was charged on transferred amounts. But this in noway affected commonality of funds. In this connection, the following documents are further placed on record.
(i) Letter for partly convertible debentures of Rs. 125 crores for sponge iron project.
(ii) Letter of offer for non-convertible debentures for Rs. 115 crores for sponge iron project.
(iii) Private placement - cement unit, Shambupura - Rs. 155 crores.
(iv) Private placement - cement unit, Raipur - Rs. 130 crores.
(v) Private placement for non-convertible debentures of Rs. 80 crores sponge iron project.
(vi) Global depository shares issue for cement,
fibre and electronic data processing service and software development division.
We further fund that even the AO at p. 110 of his order has noted as under after observing that term loan was raised by issue of debentures of a particular unit.
"Further, own contribution is made by the Head Office Division which accounts for the same as balance with divisions."
This transfer of funds from the head office to a particular division for purposes of business is admitted.
D. Separate Accounts. - The AO in his order has observed "undoubtedly the assessee-company has prepared balance sheet and one P&L a/c. However, the said one balance sheet and P&L a/c are statement of assets and liabilities and the profit/loss of the company by virtue of its ownership of various business and non-business activities". The AO has recorded that separate books of accounts for each of the units are maintained by the assessee. The AO rejected the assessee's claim that separate P&L a/c and balance sheet were maintained to fulfil statutory requirements, otherwise there is a common P&L a/c and the balance sheet. The assessee has reiterated its stand before us. It is further emphasised that materials manufactured by one unit were consumed by other manufacturing unit. The assessee further pointed out to entries of books of accounts where material, funds and labour of one unit were transferred to other to show interdependence of units on each other. The assessee has further shown that income-tax, excise and other matters are being looked after by a common central agency. It was also pointed out that when sale is made of cement, supply can be made from any of the units.
19. After considering the above material, we are of the view that the assessee has shown that there is a common management, common funds, interlacing and interdependence of different units and, therefore, it is not correct to reject the claim that the assessee was carrying on the "same business". In the case of Waterfall Estates Ltd. vs. CIT (supra) their Lordships of the Hon'ble Supreme Court stated as under :
"We do not think it necessary to deal with the facts of each of the decisions for the aforesaid reason and also because the said question is essentially a question of fact. No single test can be devised as universal and conclusive. The question has to be decided on a consideration of all the relevant facts and circumstances. Some facts may tend one way and some other than other way. An overall view has to be taken and a conclusion arrived at. Even if it is found that one or two circumstances among the several circumstances relied upon are not relevant the finding of fact recorded by the Tribunal cannot be interfered with if there are other relevant circumstances which sustain the finding, as held by this Court in Shree Meenakshi Mills Ltd. vs. CIT (1957) 31 ITR 28 (SC). In the present case, there are a number of other factors - apart from what are pointed out as irrelevant (assuming for the sake of argument that they are irrelevant) - to support the finding of the Tribunal."
The above referred to observations are relevant for determining the issue before us. We do not feel it necessary to consider each of the decisions referred to by the parties to determine whether different activities would constitute same business or not. It is a finding of fact dependent upon facts and circumstances of each case. In the present case, having regard to the common management and control, common funds, interconnection and interdependence etc. of units on each other, we hold that the assessee was carrying on "same business" and, therefore, payment of interest would be a revenue expenditure. We order accordingly to allow the same as a revenue deduction.
20. The next ground of appeal (No. 3) relates to disallowance of depreciation and loss claimed on Ispat Unit titled "Vikram Ispat."
21. The facts briefly stated are that the assessee claimed to have set up an Ispat Unit at Salav in Maharashtra to produce sponge iron. It is claimed that plant and machinery viz., the reformer, CO2, removal system, the process gas heater, the reactor and ancillaries were erected, connected and put to use as an integral part before February, 1993. The plant was commissioned and 600 ton of sponge iron was produced at 2. A.M. on 31st March, 1993. Out of the above production 60 tons were sold to different parties on the same date. Copies of sale bills (pp. 469-470 to p. 518, 524), delivery challans and certificate from the purchasers were produced before the AO. The assessee also relied upon write up about commencement of new unit in Economic Times (pp. 475-476). The assessee also produced register maintained under the Excise Act, RG-1, sales-tax assessment order (p. 545) and evidence of letter written to joint directors, safety, as also New Insurance Co. (pp. 531-532). It also referred to report of the income-tax team which visited the factory on 15th April, 1993 and saw the sponge iron produced by the assessee on 31st March, 1993. The Department did not produce and withheld above report as according to the assessee, the said report supported the stand of the assessee.
22. The AO refused to accept the case pleaded by the assessee. On examination of log book maintained by the assessee relating to working of the plant, the AO noted that there was overwriting regarding maximum temperature obtained in the plant on 30th/31st March, 1993. 800-850 degree was overwritten in place of 600-650 degree originally written. It is maintained by the AO that sponge iron could not be produced at temperature less than 850 degree celsius and as above temperature was never obtained, the assessee could not and did not produce sponge iron. After examining Shri Tirumala and Shri Anil Kumar connected with production and maintenance of log books at the plant as also Shri Shenoy and Shri Chug and other people connected with management of production in the assessee's plant, the AO concluded that the assessee fabricated evidence relating to production of sponge iron and hot briquetted iron (HBI). Accordingly to the AO, above referred to employees admitted before him that no production of sponge iron was made and entries relating to production on the night between 30th and 31st March, 1993, were interpolated on 2nd April, 1993 or thereafter. The AO also referred to documents seized from M/s. Davy Power Gas India Ltd. (DPGI) who were engaged for commissioning the plant, particularly the letter written to them by Shri P.K. Sen, Vice-President of Vikram Ispat on 30th March, 1993, stating as under :
"Failure of the panel is one of the major reasons of our unsuccessful bid to commission the plant as planned."
As business had not commenced, the assessee was held to be not entitled to depreciation and other expenditure resulting in loss of Ispat Unit. The AO for his decision derived support from the decision of the Supreme Court in the case of CWT vs. Ramaraju Surgical Cotton Mills (1967) 63 ITR 478 (SC) and that of Shadilal Sugar & General Mills Ltd. vs. CIT (1967) 63 ITR 72 (All).
The assessee impugned above disallowance in appeal before the CIT(A) who after narrating the facts found and stated in the assessment order, agreed with the conclusion of the AO. Hence, this appeal by the assessee.
23. Shri Dastur, the learned counsel for the assessee, stated that wrong tests were applied by the Revenue authorities to disallow a legitimate claim of depreciation and loss of Ispat Unit. He conceded that temperature in the log book might have been changed and overwritten from 600-650 deg. C. to 800-850 deg. C., but above was not done to establish production of sponge iron. There was sufficient evidence on record to show that sponge iron could be produced at temperature approximately 570 deg. C. by various combination of gases and raw material. Therefore, the Revenue committed a technical error in holding that sponge iron could not be produced at temperature below 850 deg. C. Shri Dastur further argued that the Revenue also confused between "setting up" of business and "commencement" of business. For claiming depreciation and other expenditure it was not necessary that the business should actually commence. Once business is "ready to commence", the business is treated as "set up" and the assessee becomes entitled to all expenditure inclusive of depreciation. In this connection, he referred to oral and documentary evidence available on record. First, he referred to material which mechanically satisfies the condition that plant was ready to commence business. In this connection, Shri Dastur referred to assessment order where it is not disputed that plant was mechanically set up in the accounting year. He then referred to affidavit of Shri L. R. Talwar (p. 336) wherein, on oath, process of commencement of actual production was confirmed. He also referred to letter at p. 615 wherein, on oath, it was confirmed that production had commenced. The foreign company who had set up and commissioned the plant (Davvy) had also confirmed that plant was commissioned before 31st March, 1993. Apart from the above, the learned counsel for the assessee referred to material relating to sale of production, entries in excise register and certificate from excise and sales-tax authorities, certificate from insurance and other public authorities. Evidence relating to transportation of sold material was also referred to in support of above claim.
23.1. Shri Dastur further draw our attention to entries at p. 394 of the log book where 500 ton of raw material was introduced in the reactor in the night shift of 29th March, 1993. Reference was also made to consumption and use of gases. Shri Dastur accordingly argued that there was unassailable evidence of use of plant for production. This was not disputed even by the Revenue. Thus, test of setting up of plant was fully satisfied. He drew our attention to opinions of experts (p. 551 of the Paper-book) who confirmed that it was not necessary to have temperature of more than 800 deg. C to produce sponge iron. The desired reaction could take place between 500 and 570 deg. C. As per letter on p. 118 of the paper-book, the experts have stated that temperature, quality of raw material would ultimately affect qualify of sponge iron produced. A lower temperature would reduce production as is evident from experts' opinions available at p. 264 of the paper-book. No one test or factor could be picked up. Volume and nature of gases introduced would also affect production. The assessee produced opinions of technical persons in support of its claim whereas the Revenue produced no experts' opinions to contradict it. In fact, direct evidence collected by the Revenue also supported the assessee's claim. In this connection, Shri Dastur referred to the statement of Shri R. Kastia dt. 15th April, 1993, made before authorised officer of IT Department during his visit to the plant. The sponge iron produced on 30th/31st March, 1993, was available at the spot and was stated by Shri Kastia to have been shown to the AO. The Revenue did not cross-examine Shri Kastia nor produced factual report of the team regarding visit to the plant on 15th April, 1993. Another letter from expert (pages 605-606) was sent in support of the claim that sponge iron was produced on 30th/31st March, 1993. Without any legal justification that evidence has not been accepted, Shri Dastur further added.
23. Shri Dastur argued that the AO wrongly placed reliance on the statement of Shri Tirumala and Shri Anil Kumar. In fact, both these persons as per their statements and letters as also affidavits had explained the position and confirmed that sponge iron was produced and plant was used on 30th/31st March, 1993. In this connection, Shri Dastur referred to pp. 7 to 9 and 50 to 60 of the paper-book and read out the statement of Shri Tirumala. He also read out the statement dt. 31st October, 1995, of Shri Anil Kumar. Shri Anil Kumar has further explained the position in detail in letter available at p. 103 of the compilation. No further questions were put to Shri Anil Kumar after above detailed explanation. Shri Dastur also read out the statements of Shri Chug and Shri Shenoy. The claim in the statement was fully corroborated with documentary evidence whereas the Revenue placed no material in support of the conclusion drawn by the AO.
24. Shri Dastur also explained the letter of Shri P. K. Sen dt. 31st March, 1993, to Mr. Gujarat Hirel of DPGI. He drew our attention to affidavit of Shri P. K. Sen at p. 334 and emphasised that Shri P. K. Sen was not cross-examined to challenge averments on oath. The report of the directors and as also evidence of excise authorities were also relied upon.
25. Shri Dastur also stated that there were factual errors in the order of the CIT(A) at p. 136, para 37.10. The CIT(A) has wrongly stated that technical literature has said that sponge iron could not be produced below 800 deg. C. The technical opinion, in fact, stated that sponge iron could be produced at temperature 570 deg. C. Likewise, certain facts were wrongly attributed to Shri Shenoy as is evident from his statement at p. 46 of the paper-book. It was wrong that details asked for were not furnished by the assessee, as stated by the CIT(A) at p. 55 of his order. The amount spent on repairs in the next year was furnished. Shri Dastur also advanced an alternative argument that after amendment of s. 32 and with introduction of scheme of depreciation on "block of assets", it is no longer necessary for the assessee to prove "user" of assets for claim of depreciation. In this connection, he read out relevant provision of s. 32 and cl. (6) of s. 43, particularly sub-cl. (c) defining "written down value". In case of any block of assets, it is required to be increased by actual cost of asset added in the block during the previous year. Thus, depreciation is to be worked out on increased written down value. There is no condition prescribed that new machinery should also be used for purposes of business. Thus, the Revenue cannot insist and interject a condition which is not there in the statutory provision for permitting deduction of depreciation.
25.1. We would like to dispose of this submission here only. The Revenue opposed this submission which has been urged for the first time in this appeal. In opening part of s. 32 of the Act, the condition relating to "user" of asset is well prescribed and, therefore, it cannot be accepted that user of asset in the previous year for claiming depreciation is not necessary. We, therefore, reject this alternative submission advanced by Shri Dastur and proceed to consider the other submissions made on behalf of the assessee.
26. Shri Dastur also relied upon certain decisions of the Tribunal :
(1) K. C. P. Ltd. vs. ITO (1991) 40 TTJ (Hyd) 528 (SB) : (1991) 38 ITD 15 (Hyd)(SB);
(2) Madras Spinners Ltd. vs. Dy. CIT (1993) 47 ITD 213 (Coch); and
(3) Decision in I.T.A. No. 1413/Bom/1997 by Tribunal 'D' Bench in the case of Uniflox Cable Ltd.
27. The learned Departmental Representative, on the other hand, strongly supported the impugned order of the Revenue authorities. He argued that the assessee never produced HBI for which the plant was claimed to be set up and, therefore, no depreciation or expenditure can be allowed. It was emphasised with reference to statement of Shri Tirumala and Shri Anil Kumar that no production of sponge iron was made. These statements as also log book maintained by the assessee which, according to the learned Departmental Representative, were direct evidence, clearly showed that plant was not commissioned. It was reiterated that it was not possible to produce sponge iron at temperature less than 800 deg. C. and this was admitted by the employees of the assessee in their statement on oath. Reference was made to the statements of Shri Tirumala and Shri Anil Kumar. The plant was designed to produce HBI and, therefore, unless HBI is shown to have been produced, the plant cannot be treated to put to use. According to the learned Departmental Representative, the assessee was required to show that metailisation achieved by it by 31st March, 1993, was not less than 92%. Otherwise, plant cannot be said to be put to use. But facts on record i.e., log book and statements of shift-in-charge clearly showed that process gas heater (PGH) which costed Rs. 42,78,20,273 and on which depreciation of more than Rs. 8 crores was claimed was incomplete and not commissioned. The learned Departmental Representative submitted that the assessee had failed to show that computer had given wrong temperature readings and, therefore, it was necessary to correct them in the log book. It was a clear case of tampering with record to establish that hot briquetted iron (HBI) was produced. The learned Departmental Representative also drew our attention to the following decisions :
(1) CIT vs. Suhrid Geigy Ltd. (1982) 133 ITR 884 (Guj);
(2) Addl. CIT vs. Speciality Paper Ltd. (1982) 133 ITR 879 (Guj);
(3) CIT vs. Ramaraju Surgical Cotton Mills Ltd. (supra); and
(4) Sir Shadi Lal Sugar & General Mills Ltd. vs. CIT (supra)
27.1. It was claimed that the Revenue had made foolproof case and, therefore, the assessee was rightly denied depreciation and other expenses claimed in respect of Ispat Unit.
28. We have given careful thought to the rival submissions of the parties. The law is more or less settled that the assessee is entitled to depreciation and other expenses when business can be said to have been set up i.e., it is ready to commence production. In the case of Western India Vegetable Products Ltd. vs. CIT (1954) 26 ITR 151 (Mad) which has been recorded as a leading authority and in which the distinction between the setting up of a business and the commencement of the business was brought out by the following passage :
"It seems to us that the expression 'setting up' means as is defined in the Oxford English Dictionary 'to place on foot' or 'to establish', and in contradistinction to 'commence'. The distinction is this, that when a business is established and is ready to commence business, then it can be said of that business that it is set up. But before it is ready to commence business it is not set up. But there may be an interregnum, there may be an interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business, all expenses during the interregnum, would be permissible deductions under s. 10(2)."
28.1. The test propounded by the jurisdictional High Court was approved by the Hon'ble Supreme Court in CWT vs. Ramaraju Surgical Cotton Mills Ltd. (supra). In other case CIT vs. Industrial Solvent & Chemicals (P) Ltd. (1979) 119 ITR 608 (Bom), their Lordships of Bombay High Court considered the following four decisions of the Gujarat High Court given at p. 613 of the 119 ITR of the case, (1) CIT vs. Sarabhai Sons (P) Ltd. (1973) 90 ITR 318 (Guj), (2) CIT vs. Saurashtra Cement & Chemical Industries Ltd. (1973) 91 ITR 170 (Guj), (3) Sarabhai Management Corporation Ltd. vs. CIT (1976) 102 ITR 25 (Guj) and (4) Prem Conductors (P) Ltd. vs. CIT (1977) 108 ITR 654 (Guj). Their Lordships examined the facts found by the Tribunal and observed as under :
"It is true that when the end product obtained during this period was sent to the analysts, Italab (P) Ltd., for analysis, it was opined by the laboratory that the sample did not comply with the prescribed standards of qualify of B.P. test 1958 with respect to non-volatile matter. As a matter of fact, even earlier some ether obtained in June, 1961, was submitted to the same analyst and an identical conclusion had been reached by them. The position then is that in August, 1961, the plant had commenced operation but the end-product was sub-standard and hence obviously not marketable. It is in this context that Mr. Joshi on behalf of Revenue has urged that even in August, 1961, the business of the assessee could not be said to have been set up, although the plant was being worked, inasmuch as a proper standard marketable end-product had not been obtained. We are afraid that if this test as suggested by counsel is accepted, we would be taking an unrealistic view of the requirements of the statutory provisions.
In each case the question as to when the business can be said to be set up will be required to be answered on the facts of that case, which facts have to be found by the Tribunal and indicated in the statement of case and the supplementary statement of case submitted to us. On the facts of the case as submitted to us by the Tribunal (which are binding on us and have not been challenged by either party) we think that the proper view to take would be to hold that the assessee could be regarded as having set up its business by 19th August, 1961, which would mean that it would be entitled to the expenses incurred thereafter as expenses incurred in the course of its business."
28.2. Similar observations were made in the case of CIT vs. Forging and Stamping (P) Ltd. (1979) 119 ITR 516 (Bom) and business was taken as set up on the date on which power connection was secured by the assessee.
28.3. In Bhodilal Menghraj & Co. (P) Ltd. vs. CIT (1979) 119 ITR 968 (Bom). Their Lordships at p. 973 made the following observations :
"In CIT vs. Industrial Solvents and Chemicals (P) Ltd. the case of the assessee was that it must be deemed to have set up its business of producing industrial solvents, viz., ether, at least when the machinery was installed. However, even this submission was negatived by the Division Bench applying the test earlier propounded in Western India Vegetable Products vs. CIT (1954) 26 ITR 151 (Bom) and holding that for a manufacturing company or a unit thereof till some end-product is or can be obtained, it cannot be said that the company or unit is ready to commence production. On the facts as were found by the Tribunal it was ascertained by the High Court that although machinery had been installed in December, 1960, or January, 1961, there was no worthwhile production till August, 1961; and even though this production of August, 1961, was sub-standard, the Court found in favour of the assessee (to a limited extent) that it must be deemed to have set up its business when it could produce a limited quantity of the end-product (though a sub-standard quality) on this date. Thus, even the installation of machinery simpliciter was, in the special circumstances of the case, regarded as part of the operations for the setting up and not equivalent to the setting up of the business. We have applied the test propounded in this decision in a very recent decision given by this very Bench, viz., IT Ref. No. 85 of 1970, CIT vs. Forging & Stamping (P) Ltd., decided on 29th January, 1970 [since reported in (1979) 119 ITR 616 (Bom)]. In the said case, it was held that the assessee had set up its business when it received power connection and not earlier although the machinery had been installed earlier and trials had taken place with the help of the generator."
28.4. In our opinion, the facts of the present case relating to setting up of business of production are akin to facts of the abovequoted cases and, therefore, the test referred to above is to be applied to determine whether business was set up by the assessee. We, therefore, deem it unnessary to refer to other cases cited on behalf of the parties.
29. As noted earlier, the AO after examining log book, statements of Shri Tirumala and Shri Anil Kumar and documents impounded from the premises of DPGI, particularly letter dt. 31st March, 1993, written by Shri Sen, concluded as under :
"On 30th & 31st March, 1993, for the first time, an attempt has been made only to check whether the production unit that is the reactor is in a position to work or not. All the operations carried out on these two dates only amount to testing the various operations and parts of the reactor and reduction system and these were found to be defective, unworkable and even incomplete in terms of fabrication reference to the clear writing by the company to M/s. Davy Power Gas on 31st March, 1993 that there were designing defects in the plant hence they could not commission it. After realising this, the plant was shut down and the shutting down procedure started from 21st March, 1993 itself (the next attempt to start up the plant is only in and April, 1993) when inert gas was sent to the reactor. Yet by fabricating and manipulating the documents, the figures and test reports, there is a deliberate attempt to claim commercial production and consequently depreciation."
29.1 The above conclusion is also based on AO's view that sponge iron could not be produced at a temperature less than 800 deg. C. which was never attained by the assessee. The AO obtained report from Central Forensic Science Laboratory, C.B.I., New Delhi, and prepared the following chart of original temperature and tampered with temperature : ---------------------------------------------------------------------- "Sr. Log Book Date & Time Temperature Figures No. Page Original Tampered ----------------------------------------------------------------------
1. 204 31-3-1993/6.00 a.m. 650 deg. C 860 deg. C
2. 204 31-3-1993/6.00 675 deg. C 875 deg. C
3. 206 31-3-1993/6.00 p.m. 635/640 deg. C 885/840 deg. C
4. 206 31-3-1993/6.00 p.m. 587 deg. C 887 deg. C
5. 206 31-3-1993/6.00 587/388 deg. C 887/388 deg. C" ----------------------------------------------------------------------
29.2 AO's conclusion was that sponge iron could not be produced at the temperature found in the log book of the assessee. With reference to excise record, sale bills and other materials which, in the opinion of the AO, was indirect evidence, he concluded as follows :
"As per excise production records, huge production was piled up till October 1993 but the same were not sold. It could be possible only in two situations :
(i) Either there was no production till October, 1993 and only entries were made in excise production register;
(ii) Only raw material was coming out without any metallisation which has no market.
In the absence of any of the above, no one would have kept material so long to be demaged and spoiled."
29.3. The AO held that lab-report furnished by the assessee about production of HBI was not correct. The AO further observed as follows :
"lab reports which are not correct, were not given to so-called customers and, therefore, they cannot say that trucks, if any, reached their indicated places, were containing sponge iron or unreduced iron (because both look alike). Further, in their daily consumption of more than 100 MT, unreduced iron supplied by Vikram Ispat in the range of 10-20 tons, will not make any difference. So, sale invoices, excise gate passes, delivery orders, transport receipts, etc., cannot alter the fact that sponge iron was not produced by the assessee's plant till 31st March, 1993. Even in case of despatching unreduced raw material discharged from the assessee's plant, all above documentation will be the same except the nomenclature.
7. Senior General Manager (Marketing) termed the initial sale as "as is where is basis" which is possible only when buyers can inspect the material. But there was no material even as per the assessee's record was available before the morning of 31st March, 1993."
29.4. The following reflects conclusion of the AO :
"To sum up, documents gathered and enquiries conducted lead to the conclusion that in the last days of March, 1993, only testing of parts and plant was going on and at that stage itself plant was found to be incapable of putting into use. No finished products also as claimed by the assessee, were generated."
Thus, in the view of the AO, the plant was not put to use. The assessee was accordingly held not entitled to depreciation and other expenses. According to him the assessee failed to prove that it had commenced production of sponge iron or HBI. The view of the AO is also endorsed by the learned CIT(A) who has categorically observed that there should be production and commencement of business before the assessee can be allowed depreciation and other expenses. At p. 142, the learned CIT(A) has observed as under :
"The plant can be said to have put to use only if the business of the appellant was actually commenced. I have discussed above that the business of Vikram Ispat plant did not commence during the year and all the expenses incurred on this unit have been capitalised by the appellant and rightly so."
29.5. The learned CIT(A) at same page and little later has observed as under :
"In view of the above High Court decision, there was no substantial or systematic and organised activity in the Vikram Ispat plant, therefore, the appellant did not carry on any business so far as Vikram Ispat is concerned, hence, the question of the use of plant during the year does not arise. When an assessee does not carry on business at all, the provisions of s. 32(1) of the Act cannot be applicable because there was no occasion to use the plant and machinery for that business. Mere purchase and erection of machinery and plant will not amount to starting of the business. Business is said to have started only when plant and machinery go into production."
Similar observations have been made at several other stages, but, as noted earlier, the test to be applied is that of setting up of business. The business is said to be set up when it is ready to commence production. There might be interval between a business which is set up and a business which is commenced and all expenses incurred after the setting up of the business and before the commencement of the business would be permissible deduction. Thus, the distinction maintained by the Hon'ble Supreme Court and by the Hon'ble Bombay High Court in the decisions cited earlier was not kept in view by the Revenue authorities. They clearly insisted upon the commencement of business for allowing depreciation and other expenses claimed by the assessee. This approach, in our view, was not correct.
30. The assessee has claimed to have set up Vikram Ispat unit, the first unit of its kind in the world manufacturing hot briquetted iron (HBI) using HYL technology. The know-how design of the plant was supplied by Davy International and job of mechanical erection of the plant was entrusted to DPGI. The assessee has placed on record certificates that each of the parts like reformer section, carbon dioxide removal section, the process gas heater and all the utility items were set up much before 31st March, 1993. We find that there is no dispute on this as even the Revenue authorities in the impugned order has stated that plant and its various parts were tested by the assessee on 30th/31st March, 1993. There is further no dispute that Davy International vide its letter dt. 22nd March, 1993, had given clearance to the assessee to go ahead with start up of the plant. The main controversy between the parties is that the assessee claimed to have produced 630 tons of sponge iron whereas the Revenue, on the other hand, has held that the assessee had no intention even to commence production on the above dates but had desired to test the plant. In arriving at the above conclusion, the Revenue authorities has held that it was not possible to achieve production as claimed by the assessee on the basis of parameters available in the log book. The AO has further supported his conclusion on the basis of material found at the premises of DPGI as also on the basis of statement of the assessee's employees connected with production and management of the unit.
On careful consideration of relevant material we are of the view that the case of the Revenue is based on surmises and no authentic and reliable or supporting evidence is available on record. It is an admitted fact that a team of Revenue Department visited assessee's plant on 15th August, 1993, and recorded statement of Shri R. Kastia (the then general manager, finance) who categorically stated that sponge iron was produced on 30th/31st March, 1993. Some of the production was sold and other was available at spot. The survey team on the spot found the claim to be correct and prepared a report according to the assessee. The Revenue has not produced that report and, therefore, an inference that the same is going against the Revenue has to be drawn. The Revenue authorities are not justified in claiming that above statement and record were not of much evidentiary value.
30.1. At pp. 241 to 279 of compilation C-1, the assessee has produced extracts from HYL manual "Reduction Process Technical Fundamentals HYL III Process Analysis-Module 03". At pp. 244-245 of the manual it has been stated that the reduction reactions with Co2 at temperature above 570 deg. C are as follows :
"First step Fe2 O3 (hematite) Fe3 O4 (magnetite) Second step Fe3 O4 (magnetite) Fe O (wustite) Third step Fe O (wustite) Fe (metallic iron)
That also shows that reduction under 570 deg. C occurs in two steps which are as follows :
First step Fe3 03 (mematite) Fe3 04 (magnetite) Second step Fe3 04 (magnetite) Fe (metallic iron)
Similarly in the said manual at p. 250 it is state that the reaction for the reduction of iron oxides with H2 at temperature over 570 deg. C is as follows :
3Fe2 03 + H2 = 3Fe2 03 + H2O
Fe3 + H2 = 3Fe 0 + H2O
Fe 0 + H2= Fe + H2O
The temperature below 570 deg. C is as under :
3Fe2 03 + H2 = 2Fe5 04 + H2O
1/4 Fe3 04 + H2 = 3/4Fe + H2O
30.2. Without going into great technical details, it is clear from the manual that a reduction can take place at a temperature below 570 deg. C. Again, we find from statement of Mr. A Degyves recorded by the AO and available at pp. 39-40 of the compilation C-1. Question Nos. 55 & 56 are to the following effect :
"Q. 55 Howmuch time does the raw material take from 90% or more metailisation if reactor plenum temp. is 550, 650, 750 and 850, respectively.
Ans. It will depend upon several aspects like the reducibility of the used raw material and also the chemical process gas composition.
The reduction normal time could be as follows :
850 1 hr.
750 1.2 hr.
650 1.7 hr.
550 2.2 hr.
Q. 56. In your letter dt. 20th April, 1995 you mentioned that for producing DRI at lower temprature you require to have more gas flow. You mentioned at 930 deg. C. process gas flow may be 1800 NM3/T. Please mention the required process gas flow temprature at 850 deg. C, 750 deg. C, 650 deg. C and 550 deg. C.
Ans. In my letter I was referring to a particular case for that case the flow may be :
Temp. Process gas flow/Ton 850 2500
30.3. It is clear from the above that reaction took place even at temperature as low as 550 deg. C. That reduction reaction would take place at lower temperature is impliedly accepted in the question but it would require higher gas flow per ton. We were not shown any document or question challenging the claim made by Mr. De Gyves. There is, therefore, no good ground for not accepting the version given by the Mexican technician. The claim of the assessee is supported by other technicians as also by statement on oath of Shri R. S. Chug and by affidavit of Shri L. R. Talwar, executive president of the assessee-company. It is further corroborated by entries in the books of accounts in excise register, sales-tax register, sale and delivery of sponge iron produced and by other material referred to by the learned counsel for the assessee. There is then consumption of electricity and raw material like gases, etc. The consumption of raw material has not been challenged by the Revenue.
30.4. As against the above, the AO has concluded that the assessee did the following things :
(1) made an attempt on 30th/31st March, 1993, only to check whether production unit i.e. reactor was in a position to work or not;
(2) the assessee tested various operations and parts of the reactor and reduction system and did not commence production of sponge iron; and
(3) lab. reports which were not correct, were not given to so-called customers and, therefore, they could not say that truck, if any, contained sponge iron or unreduced iron (because both look alike). Even in case of despatch of unreduced raw material, from the assessee's plant, the documentation (sale bills, delivery challans, etc) will be the same except the nomenclature.
We are not shown any technical data to support the AO's conclusion that the assessee could not possibly produce sponge iron on 30th/31st March, 1993, and, therefore, entire claim of having produced and sold sponge iron was fabricated and false. In our opinion, it was necessary for the Revenue authorities to place on record opinion of some technical/competent expert to rebut the material produced by the assessee in support of its claim. But no worthwhile and reliable material to support the basic conclusion that sponge iron could not be produced at a temperature less than 800 deg. C. has been shown to us.
30.5. The AO also placed strong reliance on letter dt. 31st March, 1993, of Shri P. K. Sen. Shri Sen in the affidavit filed before the AO has explained that above letter was written to put pressure on DPGI to remove defects in the process. Even if above explanation is not to be accepted and letter is to be treated as admission on the part of the assessee made in a normal course, the AO misread the letter as in the letter it is clearly stated "bid to commission the plant as "planned". This letter clearly reflects the intention of the assessee to commission the plant before the end of the financial year. We do not know how from the above letter an inference that the assessee only made an attempt to check whether production unit could be drawn. The above conclusion of the AO is thus not justified and is against the document relied upon by him. The CIT(A) also at p. 157 concluded "all this indicates that there was no intention of even trial production." Another letter seized from DPGI dt. 14th April, 1993, is from Forster Wheeler to DPGI wherein it is mentioned that it was quite dangerous to operate the plant with large number of leaking gas walls. The CIT(A) writes at p. 161 as under :
"This letter is dt. 14th April, 1993, therefore, this problem must have been intimated to him much before that, most probably before 31st March, 1993. Therefore, this is a direct evidence on the issue that the plant was not in a position to operate on 31st March, 1993."
We are unable to agree with the learned CIT(A) that the letter dt. 14th April, 1993, is a direct evidence to establish that plant was not in a position to operate on 31st March, 1993. There is no nexus between the material and the conclusion drawn. Unfortunately, the orders of the Revenue authorities are full of such instances. Direct and indirect evidence have been misread.
30.6. The Revenue authorities had also heavily relied upon statements of Shri Anil Kumar and Shri Tirumala who were shift in-charge and had written the log book. On consideration of above statements, we find that these persons were not consistent.
30.7. Different officers were giving different statements. Certain portion of statements came in direct conflict with statement of their superiors. We, therefore, do not attach much weight to the oral statements of Shri Anil Kumar, Shri Tirumala and Shri Yadav, The assessee had contended that the AO while recording statements, adopted coercion and exercised undue influences. It is difficult to establish above charge. All the same, we would like to add that the AO is a person in authority and is required to discharge quasi-judicial functions. The following questions and answers from the statement of Shri K. P. Shenoy, Senior General Manager (Production) of the unit are relevant and are reproduced below :
"Q. 3. I am showing you an agreement of Vikram Ispat with Davy Power Gas at 1989 which clearly indicate that DPGI was responsible till the completion of mechanical commissioning of the plant in the light of this. Why this name was not mentioned. While answering the question on 21st September, 1995 also mention the date of completion of mechanical plant.
Ans. While giving statement on that day, the question asked was understood. Process commissioning of HBI Plant and hence no mention was made of DPGI who are only responsible for supervision and mechanical commissioning. Except briquetting machines and turbo generator, all major and vital plant parts completed and commissioned by 28th March, 1993.
Q. 4. On 28th/29th March, 1993, PGH, Reactor and other vital parts were mechanically commissioned from that day Davy Power Gas must be out of picture as far as these parts of the plant is concerned.
Ans. As far as contractual obligation of Davy Power Gas India Ltd. with respect to these main parts are concerned, it was over on 28th March, 1993. However, their persons continued to remain at sight to complete rest of the section like Briquetting, Turbo Generator till their mechanical completion.
5. You meant to say that PGH, Reactor and Reduction circuit work certified by DPGI as commissioned and handed over by them to Vikram Ispat on 28th/29th March, 1993.
Ans. I do not meant to say that Reduction Reactor was fabricated at BHPV works in Pieces brought and assembled by BHPV under supervision of DI/DPGI. As regards to processes, PGH its equipments supplied by Foster Wheeler UK/USA. These were assembled at site under the supervision of M/s. Foster Wheeler & Davy International Engineer they were assisted by DPGI Engineers. These were mechanically completed on 28th/29th March and were process commissioned under the supervision DI/Foster Wheeler Engineers.
Q. 6. You mentioned in answer to question Nos. 5 & 6 and 8 of statement dt. 21st September, 1995 that there is no certificate or correspondence made by DI/or by Vikram Ispat to Davy International and that you do not have any other records except log books. However, from the document found from the premises of DPGI reveals that large number of correspondence papers by Vikram Ispat to DI/DPGI and others and also these letters. Similarly DPGI was found to be issuing mechanical commissioning certificate of various parts of the plant. In the light of these, the statement given becomes false.
Ans. Q. No. 5 : I once again say that what I have stated earlier.
Q. No. 6 : In my recollection, there is no such certificate for total mechanical completion from Davy/DPGI.
With respect to this question at present no DI representative is at site to check this whether they had any log books. But since the plant had problems, lot of correspondence is still going on, even today which has got no relevance for first process commissioning on 28th/29th March, 1993.
The certificates you mention that DPGI had issued in certain cases is for mechanical completion/testing of individual equipments installed by contractors at site. These certificates significance is to facilitate contractors' receipt of payment for the work done found and is noway connected with mechanical completion of the plant, which I once against reiterate is the responsibility of DI.
The fact that you had shown your ignorance as regards certificate issued by DPGI for completion of erection and mechanical commissioning and also demand of any correspondence with various commissioning agencies. It is clear that you have deliberately given wrong statement relevant for ascertaining correct fact. Why necessary proceeding should not be initiated."
30.8. It is quite clear from above that the AO did tell the deponent that he was making a "false statement" and asked him as to why legal action should not be taken against him. Shri Anil Kumar and Shri Tirumala and other employees have also made similar allegations of exercise of coercion or undue influence supported by affidavits. The AO is not only to protect interest of the Revenue, but to perform quasi-judicial functions. He is a person vested with authority and, therefore, his action should not give impression of having obtained information by exercise of undue influence. A statement for purposes of judicial proceeding has to be shown to be voluntarily given without any influence and pressure. The above said test in the circumstances of the case is not satisfied and, therefore, we are of the view that it will be safe to rely upon the oral statements of the employees. Besides, Shri Anil Kumar specifically stated that they were not competent to speak on the aspect of technical process involved. These people also issued contradictory statement and gave affidavit retracting earlier statements. Certain portion of statement do not match with the position established through documentary evidence. For all these reasons, we exclude oral statements of the employees except those made on 15th April, 1993, and other claims not contradicted or challenged by the Revenue.
30.9. The AO also took into account distinction between primary and secondary evidence and applied test not known under the Indian Evidence Act. From a conclusion that no production was made on 30th/31st March, 1993, he held that sale could not be made and accordingly excise register and other documents produced, labelled as secondary evidence, were fictitious. We have already held that there is sufficient material on record to prove that production did take place on 30th/31st March, 1993. Having regard to the basic difference on factual finding, we can agree with other inferential findings of the Revenue authorities. It is not possible for us to agree that all other public authorities fabricated evidence to merely support assessee's claim. These authorities acted in discharge of their official duties. The learned representative of the assessee has admitted before us that there was overwriting and cutting in the log book regarding temperature obtained in the plant and this was visible to the naked eyes without any examination from the forensic expert of the CBI and that there is no science to determine the age of the ink and exercise was carried to dramatise the whole issue to put pressure on the assessee. We agree that reference to CBI in the given circumstances of the case was unnecessary.
30.10. Having regard to the facts and circumstances of the case and the material available on record, we are of the view that the assessee fully satisfied to test laid down by the jurisdictional High Court in the case of CIT vs. Industrial Solvents and Chemicals (P) Ltd. (supra) and CIT vs. Forging & Stamping (P) Ltd. (supra) wherein the Court observed thus, even the installation of machinery simpliciter was in the special circumstances of the case regarded as part of the operation for setting up and not equivalent to setting up of the business." In the latter case, business was said to have been set up and installed when the assessee received power connection.
30.11. In the present case, the Revenue has accepted that plant was put to use to "check whether production unit is in a position to work or not." They have surmised that only raw material came out without any metallisation which had no market (p. 57 of the AO's order). But above findings have no supporting evidence and, therefore, in the light of opinion of experts and events and statements of 15th April, 1993 unchallenged consumption of raw material and other documentary evidence referred to above, we hold that the assessee did produce sponge iron of the quantity mentioned by the assessee. The sponge iron might not have been of standard quality or requisite metallisation or marketable. The plant admittedly developed snags and was closed down on 31st March, 1993. Between April and October, 1993 it did develop problems and was shut down for long and short intervals. The detail of defects developed has been placed by the assessee on record, but from above it does not follow that plant was not set up before 31st March, 1993. It is well known that every plant has teething troubles and earlier production given is not of standard quality or marketable. But from above, it cannot be said that plant has not been set up. The setting up of a business is a stage prior to commencement of business. Therefore, when machinery has been fully installed and is ready to produce and on operation reasonable production is made the business must be taken to be set up. The machinery have been put to business use. Thus, on the basis of voluminous evidence on record, we hold that the business of the assessee was set up on 30th March, 1993, and it was entitled to depreciation on plant as also of business loss amounting to Rs. 27.54 lakhs. We order accordingly.
31. Ground No. 4 is for the levy of interest under s. 234B of the Act. Assessee's contention is that there is no default in payment of tax as per the income declared in the return. The income was enhanced due to additions and disallowances for which no interest is leviable, in view of the decision of the Patna High Court in the case of Ranchi Club Ltd. vs. CIT & Ors. (1996) 217 ITR 72 (Pat). The learned Departmental Representative supported the order of the Revenue authorities.
32. The Ranchi Club's case is primarily for the levy of interest under s. 234A of the Act which is levied on shortfall in payment of tax as per return. Sec. 234B on the contrary provides for levy of interest for shortfall of advance tax if paid less than 90 per cent of the assessed tax. It is defined in cl. (b) of Expln. 1 to s. 234B as under :
Explanation 1 : In this section, "assessed tax" means, -
(a) for the purposes of computing the interest payable under s. 140A, the tax on the total income as declared in the return referred to in that section;
(b) in any other case, the tax on the total income determined under sub-s. (1) of s. 143 or on regular assessment,
as reduced by the amount of tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income."
It is therefore evident that assessed tax is the tax on the total income determined under s. 143(1) or on regular assessment. It is not a tax on total income declared in the return. We, therefore, do not find any merit in the claim of the assessee and the ground is accordingly rejected.
33. Ground No. 5 is for the claim of depreciation as plant on the intake-well, telpher, acid tank, lagoon tank, effluent tank, lime storage tank and false ceiling. The assessee's claim is that all these assets except false ceiling are connected and used in the manufacturing process and plant and machinery for storage for continuous supply of water to works by intake well, of coal by telpher and of acid, lime and effluent discharge by other tanks. False ceiling is provided to control the temperature and humidity of the area where the cloth is usually processed at various stages and avoiding breakage of the fibre and yarn. The AO treated all these items as part of the building and allowed depreciation applicable to factory building. The CIT(A) upheld the order of the AO except for the false ceiling, which he treated as furniture/fixture.
34. We have heard the parties and considered the rival submissions. The issue of depreciation on intake well, telpher and lagoon tank came up before the Tribunal in earlier year and the assessee's claim was accepted by following the decision of the Andhra Pradesh High Court in the case of CIT vs. Warner Hindustan Ltd. (1979) 117 ITR 15 (AP), Orissa High Court decision in the case of CIT vs. Electrosteel Castings Ltd. (1981) 130 ITR 25 (Ori), Bombay High Court decision in the case of Siemens India Ltd. vs. CIT (1996) 217 ITR 622 (Bom) and the Tribunal's decisions in ITA No. 7397/Bom/1988, dt. 25th March, 1997 for asst. yr. 1973-74 for intakewell, in ITA No. 2890/Bom/1988, dt. 4th January, 1996 for asst. yr. 1972-73, for telpher in ITA No. 250/Indore/1976-77 order, dt. 10th May, 1953 for asst. yr. 1968-69 by applying the functional test. To quote from the Tribunal order for asst. yr. 1973-74 :
"We have heard the parties to the dispute and considered their rival submissions. The Andhra Pradesh High Court in CIT vs. Warner Hindustan Ltd. (1979) 117 ITR 15 (AP) had an occasion to consider a similar claim and had held that the definition of 'plant' in s. 43(3) of the Act is of wide amplitude so as to taken in even a well, provided that the well was dug for the purpose of carrying on the business of the assessee. In the instant case, admittedly, the well was dug by the assessee to meet the needs of its manufacturing process. The Orissa High Court in CIT vs. Electrosteel Castings Ltd. (1981) 130 ITR 25 (Ori) held that looking at the context in which hydraulic works, pipelines and sluices occur in Appendix. I of the IT Rules, 1962, which are not entitled for extra shift allowance, tube-wells and pipelines for the sanitary and water supply installations inside a manufacturing factory could not be termed as hydraulic works, pipelines and sluices and consequently the tube-wells and others are entitled to extra shift allowance. The Bombay High Court in Siemens India Ltd. vs. CIT (1996) 217 ITR 622 (Bom) held that for the purpose of development rebate the word "plant" means an inclusive definition. To decide whether a particular item is a plant or not, common parlance or trade or commercial parlance test or functional test is to be applied. An item would not qualify as plant even if it satisfies functional test. In this case the tube-well was held to be a plant and the assessee was held entitled to development rebate on the expenditure incurred thereon. In view of the above decisions, in our opinion, the CIT(A) was justified in allowing the claim of the assessee for depreciation and development rebate on the intake well."
These observations would apply to all the tanks in issue as they are all connected and used for the continuous supply and disposal of water, acid, lime coal, etc. As regards false ceiling also, if the functional test is applied, it is not a mere ceiling of ordinary nature but a ceiling to provide control of the temperature and humidity, which is very essential to avoid breakage of the fibre and yarn. We accordingly accept the claim of the assessee and direct the AO to allow depreciation on all these items by treating them as plant and machinery.
35. Ground No. 6 is for the depreciation on shops at Bhiwani, disallowed as the shops were not business assets of the assessee and on the guest house and rest house because of the provisions of s. 37(4) of the Act. Shops at Bhiwani were constructed by the assessee with an object of providing day-to-day necessities and provisions to the employees working in the factory there. Their letting was for the benefit of the employees. The rent has been assessed by the AO himself under the head 'business', the question of allowance of depreciation on the shops, therefore, should not have arisen. It may be stated that upto asst. yr. 1988-89, the Department itself has accepted the CIT(A)'s order allowing such claim. We accordingly direct the AO to allow the depreciation. As regards depreciation on guest house/rest house, we find that in assessee's own case for 1973-74 in ITA No. 7397/Bom/1988, dt. 25th March, 1997, the matter was decided in its favour by observing as under :
"Depreciation, in view of the Bombay High Court decision in Century Spinning & Manufacturing Co. Ltd. vs. CIT (1991) 189 ITR 660 (Bom) and of the Tribunal in Hindustan Lever Ltd. vs. IAC (1996) 56 TTJ (Bom) 598 : (1996) 58 ITD 555 (Bom) is allowable deduction irrespective of the provisions of s. 37(4) of the Act because of the non obstante clause which prohibits the allowance of the expenditure which are covered by s. 37(1) or (2) of the Act. Depreciation is not an expenditure under s. 37, but an expenditure allowable under s. 32 of the Act. The contra decisions relied upon by the Departmental Representative, viz. CIT vs. Ocean Carriers (P) Ltd. (1995) 211 ITR 357 (Bom), Raja Bahadur Motilal Poona Mills Ltd. vs. CIT (1995) 212 ITR 175 (Bom), CIT vs. Maddi Venkataratnam & Co. P. Ltd. (1996) 217 ITR 571 (AP) and CIT vs. Gaekwar Mills Ltd. (1992) 193 ITR 734 (Guj) are of no help to the Revenue. In the two decisions of the Bombay High Court relied upon by the Departmental Representative the issue with regard to non obstante provisions appearing in s. 37(4) of the Act was not discussed. We accordingly do not find any merit in the appeal filed by the Revenue on this issue and the order of the CIT(A) is accordingly upheld."
The contrary decision taken by the CIT(A) in this year is not, therefore, called for. We accordingly set aside the same and direct the AO to allow the depreciation to the assessee in the light of the earlier decision of the Tribunal.
36. Ground No. 7 is for the disallowance of remuneration paid to certain female employees of the assessee on the ground that no services were shown to have been rendered by them. The CIT(A) upheld the disallowance by observing in para 5.1 as under :
"I have considered the submissions made by the appellant. During the course of hearing, the appellant was asked to file some further particulars regarding the qualifications of the above lady employees and the specific job performed by them in the units where they are posted. I also asked the appellant to file before me the service records of the lady employees. The appellant did not file any such information before me, therefore, it is presumed that the appellant is not keeping any service records of these lady employees. In fact, these employees might not have performed any functions in the business of the company. Therefore, the expenditure incurred on them cannot be said to have been spent for the purpose of business, hence the same is not allowable. Therefore, the disallowance of Rs. 65,296 is confirmed."
37. We have heard the parties and considered the rival submissions. Smt. N. K. Jain was appointed for asst. yr. 1987-88 on a remuneration of Rs. 10,000 and only 25 per cent of salary in that year and subsequent year was disallowed. This year the entire salary of Rs. 25,000 is disallowed. As regards Smt. Taramani Mandelia Rs. 24,180 is disallowed. The Tribunal in asst. yr. 1972-73 order dt. 4th January, 1996, allowed only a sum of Rs. 15,900 out of Rs. 21,900. As regards Smt. Induben I. Parekh, a sum of Rs. 9,504 out of Rs. 47,520 and the entire payment of Rs. 6,612 to Smt. Sumitradevi Mandelia was disallowed. In asst. yr. 1972-73, the Tribunal allowed a sum of Rs. 27,000 out of Rs. 33,000 and the entire payment to Sumitradevi was allowed. In view of the aforesaid, we hold that 25 per cent salary in the case of the first three ladies alone should be disallowed and the balance amount be allowed as per the Tribunal order in asst. yr. 1972-73 and Department's own view upto 1986-87. We direct accordingly.
38. Ground No. 8 is against the disallowance of 50 per cent of the entertainment expenditure on account of tea, coffee, snacks and soft drinks of Rs. 33,21,596 incurred on customers/suppliers, Rs. 4,38,464 on company's guests and Rs. 1,28,794 on statutory/internal/cost auditors. After the insertion of Expln. 2 to sub-s. (2A) to the expenditure by an assessee on hospitality of every kind either by express or implied contract, custom, usage of trade is to be treated as expenditure on entertainment. The said Explanation reads as under :
"For the removal of doubts, it is hereby declared that for the purposes of this sub-section and sub-s. (2B), as it stood before the 1st day of April, 1977, 'entertainment expenditure' includes expenditure on provision of hospitality of every kind by the assessee to any person, whether by way of provision of food or beverages or in any other manner whatsoever and whether or not such provision is made by reason of any express or implied contract or custom or usage of trade, but does not include expenditure on food or beverages provided by the assessee to his employees in office, factory or other place of their work."
On a plain reading of the above, we hold that all the three items are covered by the definition of entertainment including that expended on tea, coffee, cold-drinks to auditors, they being not employees of the company. No interference in the order of the CIT(A) is, therefore, called for.
39. Ground No. 9 is with regard to disallowance of presentation articles worth Rs. 9,04,536. The expenditure is on distribution of dry fruits, diaries, calendars, presentation items not carrying the logo of the company and also included cash gifts on marriages and other auspicious occasions of the family of the employees of Rs. 3.44 lakhs. The AO accepted the contention of the assessee regarding the marriage gifts, but he did not agree for the other expenditure and held them to be advertisement in nature even though no logo was inscribed on the presentation articles. CIT(A) upheld the disallowance but not under the head 'advertisement expenditure' but by treating the expenditure as entertainment as the insertion of Expln. 2 to s. 37(2A) of the Act, according to him it included presents and articles in view of the decision of the decision of Himachal Pradesh High Court in the case of CIT vs. Mohan Meakin Breweries Ltd. (1991) 192 ITR 134 (HP), Karnataka High Court in the case of Karnataka State Financial Corporation vs. CIT (1988) 174 ITR 212 (Kar) and the decision of the Patna High Court in the case of Chandmull Rajgarhia vs. CIT (1987) 167 ITR 433 (Pat).
40. We have heard the parties and considered the rival submissions. These three decisions, in our opinion, have no bearing on the issue. In the case of Mohan Meakin Breweries Ltd. (supra) the Himachal Pradesh High Court was considering the inclusion of hotel bills, travelling and taxi expenses and presentation items for the assessee's guests, suppliers and customers and expenditure incurred on eating facilities incurred by the assessee to its customers and in that context their Lordships held that the legislature instead of using the word entertainment or business expenditure, has used a much wider compendious phrase like "expenditure in the nature of entertainment expenditure" and, therefore, it is this wide phrase which deserves consideration. This expression in the opinion of their Lordships would take within its scope not merely what can strictly be regarded as entertainment expenditure proper but also the expenditure of allied nature partaking of some, though not all, of the characteristics of entertainment expenditure. Presentation articles in this case as aforesaid are in the nature of diaries, dry fruits, calendars, etc. which are given in the normal course of business and not with any intention of entertaining the guests, customers or other business associates. This case, therefore, in our opinion is for no help to the Revenue.
In the case of Karnataka State Financial Corporation (supra) the Karnataka High Court has merely stated that the expenditure on entertainment was covered by the provisions of s. 37(2B) of the Act with retrospective amendment by the Finance Act, 1983 and nothing more.
In the Patna's High Court decision, the question was whether the expenditure on entertainment of foreign guests, visitors would come within the expression expenditure in the nature of entertainment and their Lordships answered it in positive. The question regarding the type of expenditure incurred on the foreign guests was not in dispute and it proceeded on the basis that the expenditure was in the nature of entertainment. The only question was whether the expenditure incurred by the assessee in entertaining the foreign guests and visitors was expenditure in the nature of entertainment. In these circumstances, in our opinion, the expenditure incurred by the assessee on distribution of dry fruits, diaries, calendars, etc. would not be in the nature of entertainment within the meaning of s. 37(3A) of the Act and the CIT(A) upholding the disallowance on that ground is not right. This type of expenditure could at best be in the nature of advertisement but in view of the Bombay High Court's decision in the case of CIT vs. Allana Sons (P) Ltd. (1995) 216 ITR 690 (Bom) they cannot be deemed to be expenditure in the nature of advertisement in absence of any logo inscribed on the presentation items. The disallowance is accordingly deleted.
41. The next first part of the ground (ground No. 10) is regarding the disallowance under r. 6D on per trip basis and for including the entire expenditure incurred during the course of travelling within the meaning of s. 37(2A) of the Act. The first issue covered against the assessee by the decision of the Bombay High Court in the case of CIT vs. Aorow India Ltd. (1998) 229 ITR 325 (Bom) and the second issue is covered against the assessee by the decision of the Special Bench of the Tribunal in the case of the Sundaram Finance Ltd. vs. IAC (1984) 18 TTJ (Mad) 348 (SB) : (1984) 7 ITD 845 (Mad)(SB). This part of the ground is accordingly rejected. Second part is regarding the disallowance of foreign travelling expenses of the following employees : Item 2 : Rs. (i) B. K. Dalmia 95,868 (ii) C. Kochukrishnan 95,868 (iii) R. M. Saboo & others 8,24,872
42. We have heard the parties and considered the rival submissions. The expenditure incurred by Sri S. K. Jain, Sri K. C. Jhanwar and Shri K. P. Venkatesh as in S. Nos. 1 & 3 of the chart is incurred for joint venture project in chemicals setting up an alluminium plant in Australia and a carbon black plant in Egypt. The expenditure in our opinion was, therefore, rightly disallowed as capital expenditure as it has no relation to the carrying on of the business by the assessee. At S. No. 2 was included a sum of Rs. 95,868 incurred by B. K. Dalmia and an equivalent amount by Sri Kochukrishnan. This was in connection with attending a conference at Bangkok to strengthen the working of the companies. As this expenditure was for the strengthening of the work of the company it cannot be said to be capital in nature. It is accordingly allowed. The balance expenditure of Rs. 8,24,872 under Item No. 2 was incurred in connection with acquisition of sick mill in South Africa, Zimbabwe, Tanzania and Kenya and this is evident from a report of visit as given at p. 91 of the paper-book, which reads as under :
"GRASIM PULP DIVISION=MAVOOR
REPORT ON VISIT TO SOUTH AFRICA, ZIMBABWE, TANZANIA AND KENYA FROM 3RD JULY, 1992 TO 17TH JULY, 1992.
(1) South Africa (3rd July, 1992 to 10th July, 1992)
The undersigned along with a team of officials from our sister unit at Harihar visited the South African Pulp and Paper Industry's (SAPPI) various mills to study the working and improvements possible in our plant. SAPPI is a vertically integrated forest products group, its activities ranging from afforestation to production of pulp and paper products. During the visit the undersigned visited the following mills of SAPPI :
(a) Godwana Mill Manufacturing Paper Pulp, Newsprint and Kraft Liner Board;
(b) Saicor Mill Manufacturing dissolving grade pulp; and
(c) Staryer Mill Manufacturing coated, tissue and mechanical paper.
The Saicor Mill is the single largest plant in the world for production of dissolving grade pulp.
(2) Zimbabwe (10th July, 1992 to 11th July, 1992)
During the return journey from South Africa, the undersigned visited Zimbabwe, Discussions were held with a prominent industrialist of the country to explore the possibility of take over the management of sick industrial units. The Government of Zimbabwe was having an intention to privatise many of the industries in the Parastatal sector. The undersigned met the Minister for Industries of Zimbabwe Government, and other officials also had discussions with the group chief executive of the Zimbabwe Banking Corporation Ltd. He also visited Hunyani Paper & Packing Ltd.
(3) Tanzania (12th July, 1992 to 16th July, 1992)
The company has been engaged in the manufacture of viscose staple fibre (VSF), the raw material for which is pulp manufactured at Harihar and Mavoor, Presently, the indigenous availability of pulp being not sufficient, the company has to import pulp at higher cost. However, there is uncertainty in the supply of imported pulp in required quantity. The pulp industry in India is also facing acute shortage of raw material.
In May 1992, National Development Corporation (NDC) Tanzania had informed the Indian High Commission that it intended to privatise Southern Paper Mills Company Ltd. (SPM), Magololo. NDC had also requested the Indian High Commissioner to furnish the names of reputable Indian companies so that NDC could invite them for joint venture or participation in the operations and running of SPM.
In the context of company's requirement of imported pulp/pulpwood, we, based on the aforesaid information, contacted NDC and they gave us an appointment for mutual discussions. Accordingly the undersigned had preliminary discussions with NDC during the period from 12th July, 1992 to 15th July, 1992 regarding the take over of SPM.
(4) Kenya (16th July, 1992 to 17th July, 1992)
The undersigned visited Kenya from 16th July, 1992 to 18th July, 1992. While at Kenya, the undersigned visited the Pan African Mills at Webuye. Discussions were also held with prominent industrialists to explore the possibilities of taking over sick industrial units.
The undersigned returned India on 17th July, 1992.
R. N. Saboo
Senior Executive President."
The expenditure there are not incurred for carrying on the business of the assessee but to acquire a new business and, therefore, cannot be allowed as an expenditure of revenue in nature. The disallowance of Rs. 8,24,872 is accordingly upheld.
43. As regards the expenditure of Shri Jajoo and family the disallowance is made on the ground that assessee has not submitted the tour report. Nothing further has been brought to our notice that the expenditure was incurred for the purposes of business. Disallowance of Rs. 4,68,189 as appearing at S. No. 4 above is accordingly upheld.
44. The next two items of expenditure which are debited under item No. 5 are the travelling expenses of Mr. I. S. Parikh and Mrs. O. P. Rungta both of whom have travelled along with their spouses and Mrs. I. S. Parikh accompanied Mr. Parikh, who was ailing from heart problem. In view of the decision of the Special Bench of the Tribunal in the case of Glaxo Laboratories (India) Ltd. vs. ITO (1986) 26 TTJ (Bom) 214 (SB) : (1986) 18 ITD 226 (Bom) (SB), we hold that the expenditure incurred by the company being on the wives of the employees is an allowable deduction, as the visits by the husbands of these two ladies was undoubtedly for the purposes of business of the assessee. The disallowance of Rs. 3,02,522 in the case of Mrs. Parikh and of Rs. 91,812 in the case of Mrs. Rungta is accordingly deleted. The expenditure under item No. 5 is with regard to expenditure of Rs. 1,06,517 incurred on travelling of V. M. Sand and Rs. 1,78,492 incurred on travelling of Mr. S. G. Menon and S. Mehta. These two travellings were in respect of inspection of aircraft which was taken by the assessee on lease for 5 years from 25th September, 1993 from P. T. Indo Bharat Rayon, Jakarta as approved by the Government of India. As the expenditure is not for acquiring any capital asset but for taking an asset on lease for a short period of 5 years, the expenditure cannot be held to be capital in nature and has to be allowed as a revenue expenditure. A report of the visit is appearing at p. 118 of the paper-book, which clarifies that the purpose of the visit to these three places was for taking the aircraft on lease for 5 years. The disallowance of Rs. 1,78,106 is accordingly deleted.
45. The next expenditure under item No. 5 is Rs. 80,885 being the expenditure incurred by Shri S. K. Saboo, which was disallowed by the AO on the ground that purpose of his visit was not known. The CIT(A) upheld that disallowance on the ground that though the purpose of visit was for export of fibre but it was not known whether this fibre was being exported for the purposes of business or the same was for the expansion of the old business. We are not in a position to understand as to what the CIT(A) wants to say. When the purpose was to export the fibre the expenditure is a revenue expenditure irrespective of the fact whether the export was from the existing business or from the expansion of the old business. The reasons given for the disallowance, in our opinion are not justified. The disallowance is accordingly deleted and the claim of the assessee is allowed. The ITO is, therefore, directed to allow the expenditure of Rs. 80,885.
46. As regards the travelling expenses by Shri C. Crasta, R. S. Rathod, Z.A. Helmot, Mr. A. V. Birla and Mrs. Birla, no arguments have been advanced by the assessee to demonstrate as to how the expenditure was incurred for the purpose of business or was an allowable deduction. The disallowance on account of travelling expenditure in these cases is accordingly upheld.
47. The next ground (ground No. 11) is with regard to disallowance out of legal and professional expenses of the following expenditure : Rs.
"Land matter (disputing claim for higher compensation) 38,870 Rock garden & DG set (in factory run on leave and licence basis) 1,750 Agreement for office premises (on lease for 3 years) 25,118 Property purchases 3,60,000 Agreement for office premises 15,000"
At the time of hearing, the assessee did not press the disallowance of the items except for the disallowance of Rs. 38,870, being the expenditure incurred disputing claim for higher compensation. The other disallowances are accordingly upheld. As regards the expenditure of Rs. 38,870 the assessee acquired a land at Harihar, (Karnataka), Mavoor (Kerala) and Khor (MP). The compensation as required under the law was paid but subsequently the land-owners have agitated for higher compensation. Similarly expenditure was being allowed by the CIT(A) in the appeal for asst. yr. 1980-81 to 1989-90 but in the year under appeal, the CIT(A) took a different view of following the decision of the Supreme Court in the case of V. Jaganmohan Rao & Ors. vs. CIT & Excess Profits Tax (1970) 75 ITR 373 (SC), wherein it was held that if the payment was made to perfect a title or as consideration for getting rid of a defect in the title or a threat of litigation, the payment would be a capital payment and not a revenue payment. He also referred to the two other decisions of the Supreme Court in the case of Dalmia Jain & Co. Ltd. vs. CIT (1971) 81 ITR 754 (SC) and in the case of Ghansham Singh vs. CIT, (1983) 141 ITR 601 (Mad). He also referred to the decision of the Bombay High Court in the case of Hardiallia Chemicals Ltd. vs. CIT (1996) 218 ITR 598 (Bom), wherein it was held that the assessee when pays certain amount in addition to the lease consideration for evacuating the unauthorised occupants of the land, the amount would be capital in nature as it was made to perfect the interest of the assessee in the land. He also referred to another decision of the Bombay High Court in the case of Standard Mills Co. Ltd. vs. CIT (1994) 209 ITR 85 (Bom) and the Allahabad High Court's decision in the case of Plastic Products Ltd. vs. CIT (1966) 62 ITR 209 (All). The expenditure is admittedly incurred by the assessee in connection with the land acquired, which is a capital asset and in view of the reasoning given by the CIT(A) aforesaid, in our opinion, expenditure cannot be allowed as deduction. We accordingly uphold the disallowance and reject the assessee's ground.
48. Next ground No. 12 is against the disallowance under s. 43B of Rs. 1,39,73,985 claimed by various divisions of the assessee. The disallowance is bifurcated as under :
In clause of s. 43B Amount (Rs.) (a) 53,72,870 (b) 1,13,875 (c) 17,95,417 (d) 66,91,823 -----------
The assessee has not disputed the disallowance under cl. (a) of Rs. 53,72,870. This disallowance is accordingly upheld. As regards the disallowance under cls. (b), (c) and (d) of s. 43B of the assessee's contention is that these liabilities have not become payable during the year and, therefore, in view of the Andhra Pradesh High Court's decision in the case of Srikakollu Subbarao & Co. & Ors. vs. Union of the India & Ors. (1988) 173 ITR 708 (AP) the disallowance cannot be made under s. 43B of the Act. According to the AO whether the amount has become payable or not, the disallowance is to be made under s. 43B of the Act by virtue of the provisions of Expln. 2 to s. 43B. This Explanation was introduced by the Finance Act, 1989, with retrospective effect from 1st April, 1984, to nullify the decision of the Andhra Pradesh High Court and it reads as under :
"Explanation 2 : For the purposes of cls. (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law."
According to the AO, this Explanation is only clarificatory and that is evident from fact that it begins with the words "for the removal of doubts". These words, it is evident, are on a bare reading of the Explanation and we do not know from where these words have been imported by the AO. These words are there only in Expln. 1 and Expln. 3 and not in Expln. 2. The CIT(A) noting the fact that similar claim of the assessee has been accepted by his predecessor in the appeals for 1983-84 to 1985-86, which decision was being followed till asst. yr. 1988-89, took a contrary view in this year, as according to him, the said decision of the Andhra Pradesh High Court helps the Revenue and not the assessee. He also relied upon the Calcutta High Court in the case of CIT vs. K. L. Tirani & Co. Ltd. (1996) 218 ITR 149 (Cal).
49. We have heard the parties and considered the rival submissions. Before the introduction of Expln. 2 by the Finance Act, 1989, with retrospective effect s. 43B was held to be applicable only when a particular liability had become payable during the year under consideration but was not paid. It was held to be not applicable when the amount did not become payable and the solitary decision on this issue was that of the Andhra Pradesh High Court. Expln. 2 was introduced to nullify the effect of that order but it was restricted to the sum payable under cl. (a) of s. 43B and not to other clauses. Therefore, its applicability has to be restricted only to those amounts which are enumerated in cl. (a) of s. 43B and not to those sums which find place in cls. (b), (c) onwards. The Andhra Pradesh High Court decision has stated in clear terms that "in order to apply the provisions of s. 43B not only should the liability to pay tax or duty be incurred in the accounting year but the amount also should be statutorily be payable in the accounting year." To say that this decision supports the case of the Revenue is doubtful or an exaggrerating. The decision of Calcutta High Court was not on the issue as to whether the sum was payable during the year or not. It only decided that the contribution to PF or superannuation fund, etc are allowable only if they are paid within the due date under the Act, or the Rules or the orders governing such contributions. We accordingly hold that Expln. 2 to s. 43B does not govern the payment of the sums referred to in cls. (b), (c) and (d) thereof and they should be considered in the light of the Andhra Pradesh High Court's decision supra. We direct accordingly.
50. Next ground No. 13 is against the disallowance under s. 43B for the interest payment liability of Rs. 20,18,996 and electricity duty and interest of Rs. 3,40,466 on the surface rent, aggregating to Rs. 23,59,662 and ground No. 18 is again against the disallowance under 43B for the liability of royalty and interest thereon aggregating to Rs. 1,25,30,502. Assessee's contention as regards the interest for late payment of duty is that it is not a duty covered by cl. (a) of s. 43B. It is an interest and, therefore, disallowance thereof by invoking the provisions of s. 43B is not warranted. The disallowance of interest on outstanding surface rent is agitated on this ground as well as on the ground that the surface rent itself was not a duty or tax, cess or fee and for the last reason the disallowance is also agitated in ground No. 18 for the late payment of royalty. The Revenue's case is that interest partakes the character of duty in view of the Supreme Court's decision in the case of Mahalakshmi Sugar Mills Co. Ltd. vs. CIT, (1980) 123 ITR 429 (SC). This very issue came up before the Jaipur Bench of the Tribunal in the case of ITO vs. Gupta Traders (1996) 54 TTJ (Jp) 493 : (1995) 55 ITD 98 (Jp) and the Tribunal on the analogy of the ratio of the decision in the case of Mahalakshmi Sugar Mills Co. (supra), held that when a statutory liability has to be allowed as a deduction only on actual payment, the interest thereon for the delayed payment of the liability also will have to be allowed on actual payment only and the analogy so drawn sounds to be logical and fits into the philosophy behind the provisions of s. 43B of the Act. The disallowance of interest, therefore, was rightly made by invoking the provisions of s. 43B.
51. The next question, therefore, that arises is whether the surface rent and the liability for royalty is a tax, duty, cess or fee. The surface rent liability is arising in pursuance of the agreement dt. 11th November, 1992 and 30th November, 1994, between the State Government of Madhya Pradesh and the assessee-company under the provisions of Mines and Minerals (Regulations & Development) Act, 1957, read with Mineral Concession Rules made thereunder. Assessee's reliance was on the decision of the Tribunal in the case of Ismail & Sons vs. ITO (1992) 43 TTJ (Jab) 81 : (1992) 40 ITD 178 (Jab). The claim of the assessee was however negatived by the Departmental authorities by referring to the decision of the Madhya Pradesh High Court in the case of CIT vs. Gorelal Dubey (1996) 89 Taxman 49 (MP) wherein the Court held "normally the concept of royalty as is understood in terms of mineral rights is that this is to be paid to the State for extraction of minerals from land viz., something as a price for the use of minerals. But the Supreme Court in the case of India Cements Ltd. vs. State of Tamilnadu (1991) 188 ITR 690 (SC) : AIR 1990 SC 85 and in the case of State of Madhya Pradesh vs. Mahalakshmi Fabrics Mills AIR 1995 (Weekly) 1621 have taken the view that such royalty is not price and it is held to be a tax and such a cess on the royalty would be a tax. Consequently the Tribunal was wrong in concluding that s. 43B was not applicable to the unpaid liability towards royalty payment, in allowing the claim of the assessee."
52. The learned counsel for the assessee submitted that royalty and tax are two separate things and are separately dealt with under the IT Act and one has to see the context in which the decision was rendered, before applying the same to the facts of a particular case.
He referred to the decision of the Supreme Court in the case of CIT vs. Sun Engineering Works (P) Ltd. (1982) 198 ITR 297 (SC). He also referred to the decision of the Tribunal reported in the case of Asstt. CIT vs. Raasi Cements Ltd. (1993) 47 ITD 610 (Hyd) and the decision of the Tribunal in the case of IAC vs. Dalmia Cement (B) Ltd. (1991) 37 ITD 335 (Del). He vehemently submitted that the two decisions of the Supreme Court relied upon by the Madhya Pradesh High Court in dealing with an issue under s. 43B are not applicable. In the case of India Cement Ltd. (supra), before the Supreme Court the facts were that the assessee-company, a public limited company at all relevant times used to manufacture cement in its factory in Salem district of Tamilnadu. The Government of Tamilnadu sanctioned the grant to the company mining lease of limestone and concur for a period of 20 years at certain rates of royalty, dead rent and surface rent. Under s. 15 of Madras Panchayat Act, as amended by the Madras Act of 1964, the appellant was required to pay cess @45 paise per rupee an the said imposition was with retrospective effect along with local cess surcharge under s. 116 of the Act. The contention of the assessee was that the cess on royalty cannot be levied as it was beyond the constitutional power of the State Government. In paras 33-34 of the judgment, their Lordships held that royalty is directly relatable only to the minerals extracted and on the principle that the general provision is excluded by the special one, royalty would be relatable to Entries 23 and 50 of List II. In the aforesaid view of the matter, their Lordships held that royalty is a tax and such a cess on royalty being a tax on royalty is beyond the competence of State legislature because s. 9 of the Central Act covers the field and the State legislature denuded of its competence under Entry 23 of List II. In any case their Lordships opined that cess on royalty cannot be sustained under Entry 49 of List II as being a tax on land. Royalty on mineral rights is not a tax on land. The said view was contended to be erroneous in the subsequent case of Mahalakshmi Fabrics Mills Ltd., (supra) and the Court reaffirmed its earlier view. Para 13 of its order reads as under :
It is true that in para 13 of the report the Constitution Bench noted the judgments of Rajasthan, Punjab and Gujarat High Court which had taken the view that royalty was not a tax and it is equally true that it is not expressly mentioned in the judgment of the Constitution Bench that these judgments were erroneous or were required to be overruled. However on a conjoint reading of paras 31 and 34 of the report, it becomes obvious that the view that royalty is not a tax as expressed by these High Courts did not find favour with the Constitution Bench of this Court which took a contrary view. Therefore, these judgments necessarily stood overruled, on this aspect. It is true that in the last line of Para 34 it is mentioned that royalty on mineral rights is not a tax on land but a payment for use of land but these observations are in connection with Entry 49 List II which deals with a tax on land. But so far as nature of royalty is concerned it is clearly rules to be a tax by the Constitution Bench, and that is the reason why the Constitution Bench reached the conclusion that any cess on the royalty would be a tax. It would be beyond legislative competence of the State legislature as Entry 50 in List II would be of no avail once the Parliament has occupied the field by enacting the Act, especially s. 9 thereof. The view of the Constitution Bench that royalty is a tax as found in para 34 of the report can also be supported from other paragraphs of the report. In para 23 of the report while agreeing with Mr. Nariman that royalty which is indirectly connected with land cannot be said to be a tax directly on land as a unit, it has been observed that no tax can be levied or leviable if no mining activities are carried on. Hence it is manifest that it is not related to land as a unit which is the only method of valuation of land under Entry 49 of List II but is relatable to minerals extracted. Royalty is payable on a proportion of the minerals extracted. These observations in Para 23 clearly indicate that in view of the Constitution Bench, royalty was a tax which had a nexus with mining activities meaning thereby it was a tax on mineral rights. Similarly in para 27 of the report, the Constitution Bench noted with approval the decision of the Division Bench of the High Court of Mysore in Laxminarayana Mining Co., vs. Taluk Dev Board AIR 1972 Mys. 299. In that case the Court was concerned with the Mysore Village Panchayats and Local Boards Act, 1959. Under the said Act the Board had sought to levy tax on mining activities carried on by the persons holding mineral concessions. The Mysore Court had observed that once the Parliament made a declaration by law that it is expedient in the public interest to make regulation of mines and minerals development under the control of the Union to the extent to which such regulation and development is undertaken by the law made by the Parliament, the power of the State legislature under entries 23 and 50 of List II got denuded. It would, therefore, be not said that even after passing of the Central Act, the State legislature by enacting s. 143 of the Act could confer power of the Taluk Board to levy tax on the mining activities carried on by the persons holding mineral concessions. The Constitution Bench then noted that at p. 306 of the report of Mysore case it was held that royalty fixed under s. 9 of the Mines and Minerals Act was really a tax. It must be kept in view that this decision of the Mysore High Court was noticed by the Constitution Bench and was not dissented from. On the other hand it got approved by it. It must, therefore, be held that royalty imposed has to be treated as tax as ruled by the Constitution Bench of this Court in India Cement vs. State of Tamilnadu (1991) 188 ITR 690 (SC) : AIR 1990 SC 85. It is no doubt true that in the later decision of this Court in Orissa Cement Ltd. etc. etc. vs. State of Orissa etc. etc. (1991) 2 SCR 105 : AIR 1991 SC 1676 a three-Judge Bench of this Court did not go into the question whether there was any typographical error in the judgment of the Constitution Bench as found in para 34 of its report when it held that royalty is a tax. But in view of what we have discussed above it becomes absolutely clear that there was no typographical error but on the contrary the said conclusion logically flew from the earlier paragraphs of the judgment referred to by us hereinabove."
These two decisions were followed by the Madhya Pradesh High Court in the case of Gorelal Dube (supra) and the disallowance of royalty was upheld under s. 43B, it being tax as held by the aforesaid two decisions of the Supreme Court. There is no contrary decision on this issue of any High Court. The decision of Madhya Pradesh High Court being the solitary decision on the issue and being based on the two judgments of the Supreme Court, wherein it was held that royalty was a tax, the provisions of s. 43B in our opinion were rightly applied by the Departmental authorities and no interference in their order is called for. The disallowance is accordingly upheld.
53. Next ground (No. 14) is with regard to upholding the disallowance of Rs. 36,03,003 claimed by the assessee as project expenses. These expenses are incurred by the assessee in various divisions and the major expenditure is in the chemical division of the assessee, which amounts to Rs. 28,75,826. It consists of retainership fee, application fee, advertisement expenditure, market survey, project profiles, etc. other office expenditure and foreign travelling expenses and legal and professional charges. This expenditure includes a sum of Rs. 4,02,016 in respect of projects which were materialised upto 31st March, 1997. The expenditure in the chemical division was in respect of certain trips undertaken to China, Japan, Korea, Australia and Egypt for the purposes of establishing new projects including carbon black joint venture in Egypt. The assessee's contention that these expenses were incurred by expansion of the assessee's existing business was not accepted by the AO on the ground that the expansion of business constitutes a new industrial undertaking and, therefore, the expenditure was capital in nature. The CIT(A) upheld the disallowance by referring to the decision of the Kerala High Court in the case of Cochin Refineries Ltd. (1988) 173 ITR 461 (Ker), The Gujrat High Court's decision in the case of CIT vs. Maniklal Industries Ltd. (1977) 107 ITR 133 (Guj) and in the case of Saurashtra Cement & Chemical Industries 64 Taxman 522, the Calcutta High Court's decision in the case of Ashoka Marketing Ltd. vs. CIT (1994) 208 ITR 941 (Cal).
54. We have heard the parties and considered their rival submissions. The claim in our opinion cannot be allowed in view of the Bombay High Court's decision in the case of CIT vs. J. K. Chemicals (1994) 207 ITR 985 (Bom) wherein the assessee-company was carrying on business of manufacture of fertilisers and had started a factory at Bombay where it manufactured a fertiliser known as single super-phosphate. The assessee contemplated setting up a unit at Rajasthan for production of a more concentrated type of same fertiliser, known as triple super-phosphate. In connection with the setting up of that unit, the assessee obtained a project report and incurred a sum of Rs. 2,50,000. It also obtained in the same connection a market survey and incurred an expenditure of Rs. 1,20,000. The Bombay High Court held that the expenditure incurred for the project was incurred by the assessee in order to decide whether to acquire some profit-making asset for the purposes of its business, which would be of enduring nature and the expenditure incurred for the project report had, therefore, to be inferred as being capital in nature. Their Lordships further held that simply because the assessee had a running business of manufacturing fertilisers it could not be said that expenses for obtaining such a project report was a part of expenses incurred by the assessee for running its business. It was clearly an expenditure incurred for ascertaining whether to acquire a new asset of some durability for the purposes of profit. As regards the market survey expenditure their Lordships remanded the matter with an observation that if it related to the existing as well as the new unit, then the expenditure would be revenue in nature and the same was exclusively to determine the marketability of triple super-phosphate the (new product), the expenditure would be capital in nature. In these circumstances in our opinion the expenditure was rightly upheld to be capital in nature. However, the assessee's request is that the expenditure of Rs. 4,02,000 included in the aforesaid sum was incurred in respect of the projects materialisted upto 31st March, 1997, the same may be capitalised and added to the cost of the assets for the purposes of allowing depreciation, etc. We direct accordingly.
55. Next ground (No. 15) is with regard to the disallowance of various business expenditure of Rs. 1,96,000 the details of which are as under :
Exp. by various other offices 32,217 Pulp/Mavoor
Rural Dev. Exp. 72,197
Int. on land compensation 21,543 93,740 Eastern Spg.
Fruits & sweets to hospital patients 24,925
Stipend and books to students 39,885 64,810 Vikram Cement
Telephone registration Exps. 1,000 Chemical Divn.
Sangeet Kala Kendra 5,000 ----------
The expenditure of Rs. 32,217 was disallowed by the AO on the ground that the complete details of the expenditure have not been produced. It was upheld by CIT(A) on that ground. Before us also no further details have been furnished. We, therefore, uphold the disallowance. As regards the expenditure of Rs. 72,197 on rural development, the assessee's claim is that such expenditure was incurred in different areas to attract the required labour force and as also for the upliftment of rural population, which includes such labour force and their relations. The disallowance was made by the AO and upheld by the CIT(A) on the ground that assessee has not produced any evidence to prove that such expenditure has been incurred for the purposes of business. Nothing further has been brought on record to suggest that the order of the CIT(A) calls for any interference. The disallowance is accordingly upheld. As regards interest on compensation for the land acquired of Rs. 21,543, in our opinion has to be allowed in view of the decision of the Supreme Court in the case of Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) and the decision of the Patna High Court in the case of CIT vs. Rohtas Industries Ltd. (1968) 67 ITR 783 (Pat). The land has been acquired for the purpose of business and, therefore, the interest paid thereof has to be allowed as a deduction. We accordingly delete the addition of Rs. 21,543. The next amount of Rs. 24,925 incurred on fruits and sweets to hospital patients and Rs. 39,885 incurred in giving stiphend and books to the students cannot be allowed as a deduction as those have no connection with the running of the business of the assessee. The disallowance is accordingly upheld. Addition of Rs. 1,000 on telephone registration expenses has not been pressed. It is accordingly rejected. The last item of expenditure of Rs. 5,000 being the payment to Sangeet Kalamandir has not been shown to have any connection with the carrying on of the business of the assessee. It is accordingly upheld.
56. Next ground (No. 16) is with regard to disallowance on literary held to journalists of Rs. 27,475. The claim of the assessee is that the help to the journalists was helpful for the expediency of the business of the assessee. But nothing has been established as to how the cordial relations with the journalists are going to help the business of the assessee. In the absence of any material on record the expenditure cannot be allowed as a deduction and it was rightly disallowed by the Departmental authorities. The ground is accordingly rejected.
57. Next ground (No. 17) if for the disallowance of the claim of the assessee for sundry expenses of Rs. 2,35,196 which were in the nature of contribution to local organisations. The expenditure consists of the amount contributed to various associations other than charitable donations which have been considered for the purpose of deduction under s. 80G of the IT Act. The claim of the assessee is that these contributions are necessary to earn the company, the goodwill of the local populace which ensured smooth working of the factories. The disallowance was made by the AO and upheld by the CIT(A) by stating that the expenditure was essentially in the nature of donations and since a specific provision already exists in the Act to take care of and govern the allowability of payments made in the nature of donations, only such payments which satisfy the condition laid down under s. 80G can be allowed as a deduction. Admittedly, these contributions were not satisfying the conditions of deduction under s. 80G. The disallowance was upheld and in our opinion rightly so as the assessee has not brought any material on record to establish any connection of these expenditure with the carrying on of the business of the assessee. The disallowance in our opinion was rightly made and is accordingly upheld.
58. Next ground (No. 19) is for disallowance of Rs. 1 lakh being the application fee for capital goods, for the import of aircraft which was taken on lease for 5 years. As the expenditure is only for taking an asset on lease and the aircraft taken on hire by the assessee could not have been brought to India unless the fee was paid to the GFT for processing the application, the expenditure would be on revenue account. It is not for acquisition of any asset or for obtaining an enduring benefit of capital nature. The Departmental authorities, in our opinion are not justified in holding that the expenditure was for acquisition of a fixed assets in view of the fact that the assessee was not acquiring the aircraft but was importing it on lease for 5 years only. In these circumstances, we delete the addition and allow the assessee's claim.
59. Next ground (No. 20) is with regard to disallowance of Rs. 3 lakh paid to Registrar of Companies for increasing the authorised capital of the assessee. In view of the Bombay High Court decision in the case of Bombay Burmah Trading Corpn. Ltd. vs. CIT (1984) 145 ITR 793 (Bom) we hold that the expenditure would be capital in nature and it was rightly disallowed by the Departmental authorities. No interference in their order is called for. The disallowance is according upheld.
60. Next ground (No. 21) is disallowance of commission/brokerage of Rs. 11,89,563 for want of confirmation, the details of which are as under : "10-Commission confirmation not filed of
M/s. Winner Impex (P) Ltd. Bombay 1,16,462 M/s. Bimber Sanyasi Grunlesi 3,17,146 M/s. Bromiden Silver & Co. 1,33,038 M/s. Itouchu Corpn. Japan 4,66,197 M/s. Texliuama Hernaker & KG 1,56,720 -----------
The disallowance was upheld by the CIT(A) observing that the AO was doubtful about the payment of commission and brokerage and, therefore, he wanted to conduct further enquiries to prove the genuineness of such payments and for that purpose he called for the confirmatory letters from the parties to whom the commission and brokerage was paid. Assessee failed to produce such evidence and, therefore, by implication the assessee-company accepted that the payment was not genuine. Assessee's contention is that it had furnished necessary evidence before the CIT(A) which was contained in pages starting from 127 to 232 of the compilation filed before him but the CIT(A) failed to consider the same. The details have been filed before us also.
60.1. After hearing the parties we are of the opinion that the CIT(A) was not justified in holding that disallowance by stating that assessee had not brought any evidence on record for the genuineness of the payment. Assessee had filed host of material which should have been gone through before rejecting the claim of the assessee. Looking to the facts and circumstances of the case, in our opinion it would be in the interest of justice that the order of the CIT(A) as well as that of the AO be set aside and the matter be remitted back to the file of the AO for considering the details furnished/to be furnished by the assessee in support of its claim and of course after affording adequate opportunity of hearing to the assessee.
61. Next ground (No. 22) is with regard to rejecting the assessee's claim for the taxability of the interest granted under s. 224(1A) of the Act of Rs. 75,21,395 and under s. 244(1)(b) of the Act of Rs. 1,75,960. The first amount of interest was allowed under s. 244(1A) on the refunds for asst. yrs. 1979-80, 1984-85 and 1985-86 on the basis of appellate orders. Assessee's claim is that an appeal against those orders have been filed by the Revenue and, therefore, the refund has not attained finality and, therefore, cannot be assessed until the appeals are decided finally. The interest of Rs. 1,75,960 has been allowed under s. 244(1)(b) on the basis of regular assessment for which the company's appeal was pending before the CIT(A) and the assessee's apprehension was that this claim could be withdrawn subsequently on orders being made in rectification or appellate proceedings, etc. Assessee's reliance on the decision of the Supreme Court in the case of CIT vs. Hindustan Housing and Land Development Trust Ltd. (1987) 167 ITR 524 (SC), Delhi High Court's decision in the case of Himland Export (P) Ltd. vs. ITAT & Ors., Andhra Pradesh High Court's decision in the case of CIT vs. Syed Khadruddin Ali Khan & Anr. (1983) 144 ITR 266 (AP) and of Gujarat High Court in the case of Addl. CIT vs. New Jehangir Vakil Mills Co. Ltd. (1979) 117 ITR 849 (AP) was held to have no bearing on the issue of taxability of interest under the IT Act. Finding that a sum of Rs. 4,51,950 was the refund which related to interest earlier charged under s. 215 was out of Rs. 17,20,134 assessed in asst. yr. 1988-89, the amount of Rs. 4,51,950 was not assessable in the year under consideration.
62. We have heard the parties and considered the rival submissions. These refunds have been granted to the assessee in the year under consideration and, therefore, they would partake the character of income of the assessee. If however, any refund has been found to be not refundable to the assessee and consequently the interest granted is withdrawn, the same would not partake the character of income. We accordingly direct the AO to reduce from the taxability of the aforesaid interest granted to the assessee, the amount which has been withdrawn subsequently. We direct accordingly.
63. Next ground (No. 23) is with regard to disallowance of the claim of the assessee under s. 80HHC of the Act on the ground that the assessee had not filed the required form for the company as a whole as against the certificate filed by the assessee in respect of each unit having export turnover. There is no dispute as regards the eligibility of the assessee for 80HHC deduction. There is also no dispute that assessee had furnished the required certificates in Form No. 10CC, AC. The dispute is only with regard to fact that whether the said certificate is to be furnished by taking the figures of the company as a whole or it is to be submitted with regard to each unit for which the assessee has made a claim. The assessee's request is that as per its understanding the said prescribed form is required only unitwise but if as per the Department's view if the certificate was to be obtained by the company as a whole it should have been given an opportunity to obtain the certificate. The disallowance of the claim without giving any such opportunity in our opinion is not in accordance with law. We accordingly set aside the order of the CIT(A) as well as that of the AO and direct the AO to allow an opportunity to the assessee to furnish the certificate in the prescribed form as required under law. We direct accordingly.
64. In the result, the appeal is partly allowed.