The J C I T (Asstt) Sr-1, Suart v. M/S Essar Steel Ltd, Surat

ITA 1069/AHD/2000 | 1996-1997
Pronouncement Date: 11-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 106919914 RSA 2000
Assessee PAN AAACE1741P
Bench Mumbai
Appeal Number ITA 1069/AHD/2000
Duration Of Justice 10 year(s) 10 month(s) 21 day(s)
Appellant The J C I T (Asstt) Sr-1, Suart
Respondent M/S Essar Steel Ltd, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 11-03-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 11-03-2011
Date Of Final Hearing 04-01-2006
Next Hearing Date 04-01-2006
Assessment Year 1996-1997
Appeal Filed On 20-04-2000
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI RAJENDRA SIN GH (A.M) ITA NO.1069/AHD/2000(A.Y. 1996-97) THE JOINT COMMISSIONER OF INCOME TAX SPECIAL RANGE -1 ROOM NO.312 AAYKAR BHAVAN MAJURAGATE SURAT GUJARAT. (APPELLANT) VS. M/S. ESSAR STEEL LTD. 27 KMS HAZIRA DIST. SURAT GUJARAT. PAN: AAACE 1741P (RESPONDENT) APPELLANT BY : SHRI NARENDRA SINGH RESPONDENT BY : SHRI VIJAY MEHTA ORDER PER N.V.VASUDEVAN J.M THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 29/12/1999 OF CIT(A) I CHENNAI RELATING TO ASSESSMENT YEAR 19 96-97. GROUND NO.1 RAISED BY THE REVENUE READS AS FOLLOWS: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN DIRECTING TO ALLOW EXPENDITURE OF RS. 615 58 31 000 OF HRC PLANT EVEN THOUGH NO COMMERCIAL PRODUCTION STAR TED. 2. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN TH E BUSINESS OF MANUFACTURING OF STEEL. THE ASSESSEE WAS MANUFACTU RING HOT BRIQUETTED SPONGE IRON (HBI) AND STARTED A NEW PROJECT FOR PRO DUCTION OF HRC (HOT ROLLED COIL). THE AO NOTICED THAT WHILE PREPARING THE BALANCE SHEET AND P&L ACCOUNT THE ASSESSEE HAD TAKEN THE INCOME AND EXPEN SE OF HRC PROJECT TO CAPITAL WORK-IN-PROGRESS BECAUSE COMMERCIAL PRODUCT ION OF HRC STARTED AFTER 31/3/1996. HOWEVER WHILE FILING THE RETURN OF INCOME THE ASSESSEE HAD CLAIMED AS REVENUE EXPENDITURE A SUM OF RS. 61 5 58 31 000/-. ITA NO.1069/AHD/2000(A.Y. 1996-97) 2 ACCORDING TO THE ASSESSEE IT CONTINUED ITS TRIAL PR ODUCTION FROM THE PREVIOUS YEAR AND MADE SUBSTANTIAL SALES AND WAS ENTITLED TO CLAIM THE EXPENSES IN QUESTION AS DEDUCTION. IT IS NOT IN DISPUTE THAT IN RESPECT OF IDENTICAL ITEM OF EXPENDITURE THE AO HAD TREATED SIMILAR EXPENSES AS CAPITAL EXPENSES BECAUSE THE BUSINESS OF HRC PROJECT HAD NOT COMMENC ED. THAT WAS IN THE A.Y 1994-95. FOR THE REASONS GIVEN IN AY 94-95 TH E AO DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AFORESAI D SUM. 3. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED TH E AO TO ALLOW THE DEDUCTION BY FOLLOWING HIS ORDER IN A.Y 1994-95 ON THE IDENTICAL ISSUE WHEREBY IT WAS HELD THAT HRC PROJECT WAS NOTHING BU T AN EXTENSION OF THE EXISTING BUSINESS OF THE ASSESSEE AND THAT BOTH THE BUSINESS OF HBI AND HRC WERE SAME BUSINESS. 4. BEFORE CIT(A) THE ASSESSEE ALSO SUBMITTED THAT THE AO WAS NOT RIGHT IN DISALLOWING RS. 615 58 31 000/- BECAUSE THE ASSESSE E HAD CLAIMED AS DEDUCTION ONLY RS.405 84 85 000/- UNDER THE ABOVE H EAD. THE CIT(A) DID NOT CONSIDER THIS STAND OF THE ASSESSEE BECAUSE HE ALLOWED THE ENTIRE EXPENSES AS REVENUE EXPENSES. 5. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENUE HAS PREFERRED GROUND NO.1 BEFORE THE TRIBUNAL. 6. THE LD. D.R RELIED ON THE ORDER OF THE AO. HE A LSO SUBMITTED THAT AO DID NOT GO INTO THE NATURE OF EXPENSES AS TO WHETHE R THEY WERE CAPITAL OR REVENUE. ACCORDING TO HIM ONLY REVENUE EXPENSES CO ULD AT THE BEST BE ALLOWED AS DEDUCTION. HE PRAYED THAT IN ANY EVENT THE MATTER MAY BE SENT BACK TO THE AO TO EXAMINE THE NATURE OF EXPENSES. ITA NO.1069/AHD/2000(A.Y. 1996-97) 3 7. THE LD. COUNSEL FOR THE ASSESSEE HOWEVER SUBMIT TED THAT THE AO HAD NEVER DISPUTED THE NATURE OF EXPENSES AND AT THIS S TAGE IT SHOULD NOT BE SENT BACK TO THE AO BECAUSE OF THE LONG PASSAGE OF TIME. HE ALSO FILED BEFORE US SCHEDULE 11 OF P&L ACCOUNT GIVING DETAILS OF CAPITA L WORK-IN-PROGRESS DURING THE TRIAL RUN. IT WAS ALSO SUBMITTED BY HIM THAT A FTER ELIMINATING EXPENDITURE OF THE CAPITAL NATURE FROM THE ABOVE TH E ASSESSEE HAD CLAIMED ONLY RS.405 84 85 000/- AS DEDUCTION BEFORE THE CIT (A). HE ALSO POINTED OUT THAT EVEN IN THE GROUNDS OF APPEAL THE REVENUE HAS NOT RAISED THE ISSUE THAT CAPITAL EXPENDITURE IS PART OF THE EXPENSES ALLOWED BY THE CIT(A). IT WAS HIS SUBMISSION THAT THE LD. D.R CANNOT SEEK TO RISE AN ISSUE WHICH WAS NEVER DISPUTED BY THE LOWER AUTHORITIES. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. IDENT ICAL ISSUE HAD COME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN A.Y. 1 994-95 IN ITA NO.807/MDS/99 AND THIS TRIBUNAL HELD AS FOLLOWS: 2.1.1 BRIEFLY STATED THE FACTS OF THE CASE ARE THA T THE ASSESSEE WHO WAS IN THE BUSINESS OF PRODUCTION OF HOT BRIQUETTED SPONGE IRON (HBI) HAD STARTED A NEW PROJECT FOR PRODUCTION OF HRC. DURING THE YEAR THE ASSESSEE HAD CLAIMED TO HAVE COMPLETED CONSTRUCTION AND ERECTION OF PLANT AND MACHINERY FOR THE NEW PROJECT. IN THE RETURN OF INC OME THE ASSESSEE CLAIMED DEDUCTION ON ACCOUNT OF THE FOLLOWING EXPEN SES AS REVENUE EXPENSES. (I) INTEREST RS.1 52 74 50 000 (II) DEBENTURE ISSUE EXPENSES RS. 16 48 90 000 (III) GENERAL ADMINISTRATIVE EXPENSES RS. 33 63 2 9 000 RS.2 02 86 69 000 2.1.2 THE AO IN THE ASSESSMENT ORDER OBSERVED THAT THE ABOVE EXPENSES WERE IN RELATION TO THE NEW BUSINESS WHICH HAD NOT COMMENCED PRODUCTION. HE THEREFORE PROPOSED TO DISALLOW THE AB OVE EXPENSES. THE ITA NO.1069/AHD/2000(A.Y. 1996-97) 4 ASSESSEE EXPLAINED THAT HBI MANUFACTURED BY IT WAS T HE RAW MATERIAL OF THE HRC AND THEREFORE THE PROJECT FOR MANUFACTURE OF HRC WAS ONLY A EXPANSION OF THE EXISTING BUSINESS. IT WAS ALSO SUB MITTED THAT BOTH THE DIVISIONS HAD COMMON MANAGEMENT SAME BOARD OF DIRE CTORS AND LOCATED AT HAZIRA SIDE BY SIDE. THERE WAS A FINANCIAL INTEGR ATION PERSONNEL INTEGRATION COMMON MANAGING DIRECTOR COMMON EXECU TIVE DIRECTOR FOR FINANCE COMMON ADMINISTRATION AND PROCUREMENT ETC. THERE WAS THUS INTEGRATION INTER LACING INTER-DEPENDANCE AND DOVE TAILING OF THE TWO DIVISIONS WHICH HAD COMMON FINANCE AND CONSOLIDATED ACCOUNTS. IT WAS ACCORDINGLY ARGUED THAT BOTH THE DIVISIONS WERE PAR T OF THE SAME BUSINESS. THE ASSESSEE WAS IN THE BUSINESS OF STEEL AND MANUF ACTURING OF DIFFERENT PRODUCTS CONSTITUTED SAME BUSINESS. THEREFORE EXPEN SES INCURRED FOR THE EXISTING BUSINESS SHOULD BE ALLOWED. THE AO WAS HOW EVER NOT CONVINCED BY THE ARGUMENTS ADVANCED BY THE ASSESSEE. IT WAS O BSERVED BY HIM THAT THE HRC PROJECT WAS A NEW AND INDEPENDENT PROJECT T HE COMMERCIAL PRODUCTION IN RESPECT OF WHICH WAS YET TO START. IT WAS ALSO OBSERVED BY HIM THAT IN THE EARLIER YEAR HEAVY EXPENSE INCURRE D HAD BEEN CAPITALIZED IN THE BOOKS OF ACCOUNT. THE AO TOOK THE VIEW THAT EXPENDITURE COULD ALLOWED ONLY IN RELATION TO THE PROJECT IN RESPECT OF WHICH PROFIT WAS BEING COMPUTED. HE PLACED RELIANCE ON THE JUDGMENT OF HONB LE HIGH COURT OF KOLKATA IN THE CASE OF RITZ CONTINENTAL HOTEL (114 I TR 554). AS THE NEW PROJECT WAS STILL BEING SET UP AND NOT READY FOR PR ODUCTION AT THE END OF THE ACCOUNTING YEAR THE AO DISALLOWED THE CLAIM OF EXPENSES MENTIONED ABOVE. 2.1.3 THE ASSESSEE DISPUTED THE DECISION OF THE AO AND SUBMITTED BEFORE CIT(A) THAT IN THE BUSINESS OF STEEL HBI WAS AN INT ERMEDIATE PRODUCT WHICH WAS AUTOMATICALLY CARRIED OVER TO HRC PLANT BE ING SET UP BY THE ASSESSEE. IT WAS POINTED OUT THAT FOR THE PURPOSE O F EXCISE DUTY THE WHOLE FACTORY WAS CONSIDERED AS A ONE UNIT IN THE EXCISE RETURN AND THEREFORE THE VIEW TAKEN BY THE AO THAT HBI AND HRC WERE TWO DIFFER ENT UNITS WAS NOT CORRECT. IT WAS ALSO POINTED OUT THAT WHETHER THE T WO BUSINESSES WERE ONE AND THE SAME BUSINESS WOULD NOT DEPEND UPON THE NAT URE OF PRODUCTS. HE REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF PRITHVI INSURANCE CO. LTD. (63 ITR 632) AND OTHER JUDGMENTS IN WHICH IT WAS HELD THAT THE TWO LINES OF BUSINESSES WOULD CONSTITUTE O NE AND THE SAME BUSINESS IF THE FOLLOWING CONDITIONS WERE SATISFIED . (I) THERE SHOULD BE UNITY OF CONTROL (II) THERE SHOULD BE COMMON MANAGEMENT AND ADMINISTRATIO N. (III) THERE SHOULD BE COMMON ORGANIZATION (IV) THERE SHOULD BE COMMON FUNDS (V) THERE SHOULD BE COMMON PLACE OF BUSINESS. 2.1.4 IN THIS CASE IT WAS POINTED OUT THERE WAS A COMMON ADMINISTRATION AND ORGANIZATION COMMON FINANCE PERSONNEL AND SEC URITY SYSTEM. THERE ITA NO.1069/AHD/2000(A.Y. 1996-97) 5 WERE ALSO COMMON FACILITIES SUCH AS COMMON PORT GA S AND WATER PIPELINES POWER SUPPLY ADMINISTRATIVE BUILDING ETC. THEREFOR E THE TWO BUSINESSES SHOULD BE TREATED AS ONE BUSINESS. THE ASSESSEE ALS O REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF VEE CU MSEES (220 ITR 185). IN THAT CASE THE ASSESSEE WAS RUNNING JEWELLE RY BUSINESS AND CONSTRUCTED A THEATRE FROM BORROWED FUNDS. THE THEA TRE WAS CLOSED AFTER SOME TIME BUT THE ASSESSEE CLAIMED THE EXPENDITURE ON ACCOUNT OF INTEREST RELATING TO THE THEATRE AGAINST JEWELLERY BUSINESS. THE HONBLE SUPREME COURT OBSERVED THAT LINE OF BUSINESS MAY BE DIFFERE NT AND WHAT WAS OF IMPORTANCE WAS UNITY OF CONTROL MANAGEMENT AND ORG ANIZATION. IN VIEW OF THESE FACTORS THE CLAIM OF INTEREST AGAINST THE JE WELLERY BUSINESS WAS ALLOWED. 2.1.5 AS REGARDS THE POINT MADE BY THE AO THAT IN THE BOOKS OF ACCOUNT THE EXPENSES WERE CAPITALIZED THE ASSESSEE SUBMITT ED THAT TREATMENT IN THE BOOKS OF ACCOUNT WAS NOT DECISIVE OF THE NATURE OF TRANSACTIONS. WHETHER THE ASSESSEE WOULD BE ENTITLED TO A PARTICU LAR DEDUCTION WOULD DEPEND UPON THE PROVISIONS OF LAW AND NOT ON THE NA TURE OF ENTRIES IN THE BOOKS. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBL E SUPREME COURT IN CASE OF KEDARNATH JUTE MANUFACTURING LTD. (82 ITR 3 63). CIT(A) AGREED WITH THE ASSESSEE THAT THERE WAS UNITY OF MANAGEMEN T AND ADMINISTRATION IN THIS CASE. THEREFORE HE OBSERVED THAT EVEN IF TH E PRODUCTS MANUFACTURED BY THE ASSESSEE WERE DIFFERENT HAVING DIFFERENT TYP ES OF BUSINESSES THIS WOULD CONSTITUTE ONLY ONE BUSINESS. ACCORDINGLY IT WAS HELD BY HIM THAT THE NEW PROJECT WAS EXPANSION OF THE EXISTING BUSIN ESS. HE ALSO AGREED THAT THE TREATMENT IN THE BOOKS OF ACCOUNT WAS NOT CONCLUSIVE REGARDING NATURE OF EXPENDITURE. IT WAS ALSO OBSERVED BY HIM THAT FOR CONSIDERING ALLOWABILITY OF DEDUCTION ON ACCOUNT OF INTEREST ON BORROWED FUNDS UNDER SECTION 36(1)(III) WHAT WAS REQUIRED TO BE SEEN WAS THAT THE MONEY MUST HAVE BEEN BORROWED FOR BUSINESS PURPOSE. CIT(A) ACC ORDINGLY ALLOWED THE CLAIM OF DEDUCTION ON ACCOUNT OF INTEREST AND GENER AL ADMINISTRATIVE EXPENSES. 2.1.6 AS REGARDS THE DEBENTURE ISSUE EXPENSES CIT( A) OBSERVED THAT DEBENTURES WERE CONVERTIBLE INTO SHARES AND THEREFO RE THE ISSUE OF DEBENTURE AMOUNTED TO EXTENSION OF CAPITAL BASE OF THE ASSESSEE COMPANY. THE EXPENDITURE INCURRED FOR INCREASING TH E CAPITAL BASE WAS NOT ALLOWABLE AS REVENUE EXPENDITURE IN VIEW OF THE JUD GMENT OF HONBLE SUPREME COURT IN CASE OF BROOKE BOND INDIA LTD. VS CIT (225 ITR 798). CIT(A) ALSO OBSERVED THAT THE ASSESSEE ITSELF HAD W ITHDRAWN CLAIM OF DEDUCTION AMOUNTING TO RS.17 11 000/- AND THE EFFEC TIVE AMOUNT WAS ONLY RS.16 32 79 000/-. HE THEREFORE CONFIRMED THE DISALL OWANCE TO THAT EXTENT. AGGRIEVED BY THE DECISION OF THE CIT(A) BOT H THE PARTIES ARE IN APPEAL. WHEREAS THE ASSESSEE HAS CHALLENGED THE DEC ISION OF CIT(A) TO CONFIRM THE DISALLOWANCE ON ACCOUNT OF DEBENTURE IS SUE EXPENSES THE ITA NO.1069/AHD/2000(A.Y. 1996-97) 6 DEPARTMENT IS AGGRIEVED BY THE RELIEF GIVEN IN RESP ECT OF INTEREST AND GENERAL ADMINISTRATIVE EXPENSES. 2.1.7 BEFORE US THE LEARNED AR FOR THE ASSESSEE REI TERATED THE SUBMISSIONS MADE BEFORE CIT(A) AND THE AO THAT THE NEW PROJECT WAS A PART OF EXISTING BUSINESS AS THERE WAS COMPLETE INT EGRATION AND INTERLACING OF BOTH THE UNITS. THEREFORE THE EXPENDITURE INCURR ED SUCH AS INTEREST ON BORROWED FUNDS AND GENERAL ADMINISTRATIVE EXPENSE H AVE TO BE ALLOWED. AS REGARDS THE DEBENTURE ISSUE EXPENSES IT WAS SUBMITT ED THAT THE ASSESSEE WAS NOT PRESSING THE CLAIM IN RESPECT OF SUM OF RS. 2 25 00 000 AND RS.9 62 745 BEING THE MARKETING COMMISSION AND OTHE R EXPENSES RELATING TO THE NRI ISSUE. IT WAS ARGUED THAT IN RESPECT OF GLOBAL DEPOSITORY RECEIPTS OF RS.11 49 96 700/- NOTHING HAD BEEN CONV ERTED IN SHARES AND THEREFORE NO DISALLOWANCE COULD BE MADE AS THERE WA S NO EXPANSION OF THE CAPITAL. REGARDING THE BALANCE AMOUNT OF RS.2 64 34 555/- IT WAS SUBMITTED THAT THESE EXPENSES RELATED TO OPTIONALLY CONVERTIBLE DEBENTURES. IT WAS POINTED OUT THAT EVEN IN RESPECT OF FULLY CONVERTIBLE DEBENTURE EXPENDITURE INCURRED HAS TO BE ALLOWED. RELIANCE WAS PLACED ON THE JUDGMENT OF HONBLE HIGH COURT OF RAJASTHAN IN C ASE OF SECURE METERS (221 CTR 405) AND ON THE HONBLE HIGH COURT OF MADRA S IN CASE OF SOUTH INDIA CORPORATION (AGENCIES) LTD. (290 ITR 217) IT WAS ALSO POINTED OUT THAT THOUGH THE DECISION OF THE SPECIAL BENCH OF TH E TRIBUNAL IN CASE OF ASHIMA SYNTHETICS (100 ITD 247) WAS AGAINST THE ASS ESSEE THE JUDGMENTS OF THE HIGH COURTS MENTIONED EARLIER WERE SUBSEQUENT TO THE DECISION OF THE SPECIAL BENCH AND HAVE TO BE FOLLOW ED. 2.1.8 WE HAVE PERUSED THE RECORDS AND CONSIDERED TH E MATTER CAREFULLY. THE DISPUTE RAISED BY THE ASSESSEE IS DISALLOWANCE OF DEBENTURE ISSUE EXPENSES RELATING TO THE HRC PROJECT. THE ASSESSEE W AS ALREADY IN THE BUSINESS OF PRODUCTION OF HBI AND A NEW PROJECT HAD BEEN TAKEN UP FOR PRODUCTION OF HRC. THE CASE OF THE ASSESSEE IS THAT THE NEW PROJECT WAS A PART OF THE EXISTING BUSINESS AND THEREFORE THE EXP ENDITURE INCURRED WAS FOR THE EXISTING BUSINESS AND WAS THUS ALLOWABLE. T HE AO HAD TREATED THE HRC PROJECT AS A NEW BUSINESS AND ACCORDINGLY DID NO T ALLOW THE EXPENSES ON ACCOUNT OF INTEREST GENERAL ADMINISTRATION EXPE NSES AND DEBENTURE ISSUE EXPENSES. CIT(A) HOWEVER CONSIDERED THE HRC P ROJECT AS A PART OF THE EXISTING BUSINESS AND HAS ALLOWED THE GENERAL A DMINISTRATIVE EXPENSES AND INTEREST EXPENSES EXCEPT THE DEBENTURE ISSUE EX PENSES WHICH HAVE BEEN DISALLOWED ON THE GROUND THAT THE DEBENTURES W ERE CONVERTIBLE IN SHARES AND THEREFORE THE EXPENDITURE WAS FOR RAISIN G THE CAPITAL BASE NOT ALLOWABLE AS REVENUE EXPENDITURE. IT IS A SETTLED L EGAL POSITION THAT WHETHER TWO BUSINESSES ARE ONE AND THE SAME BUSINES S WILL NOT DEPEND UPON THE NATURE OF BUSINESS OR THE PRODUCT BUT ON T HE FACT WHETHER THERE IS UNITY OF CONTROL AND INTEGRATION OF THE TWO BUSI NESSES BY COMMON MANAGEMENT ADMINISTRATION AND FINANCE ETC. THIS VI EW IS SUPPORTED BY THE JUDGMENT OF HONBLE SUPREME COURT IN CASE OF PRI THVI INSURANCE CO. ITA NO.1069/AHD/2000(A.Y. 1996-97) 7 LTD. (SUPRA) AND IN CASE OF VEECUMSEES (220 ITR 185 ) WHICH HAVE BEEN RELIED UPON BY THE CIT(A). IN THIS CASE THERE IS C LEAR FINDING BY THE CIT(A) THAT THERE WAS INTEGRATION INTERLACING INTERDEPEN DENCE AND DOVETAILING OF THE TWO DIVISION WHICH HAS NOT BEEN CONTROVERTED BE FORE US. THEREFORE WE HAVE TO HOLD THAT HRC PROJECT HAS TO BE TAKEN AS PA RT OF THE EXISTING BUSINESS. IN VIEW OF THE ABOVE POSITION ALL EXPENDI TURE INCURRED IN CONNECTION WITH NEW PROJECT WHICH IS OF REVENUE IN NATURE HAS TO BE ALLOWED. 2.1.9 AS REGARDS THE DEBENTURE ISSUE EXPENSES CIT(A ) HAS CONFIRMED THE DISALLOWANCE ON THE GROUND THAT THE DEBENTURES WERE CONVERTIBLE IN SHARES AND THUS EXPENDITURE WAS FOR EXPANDING THE CAPITAL BASE. WE FIND THAT OUT OF TOTAL EXPENDITURE OF RS.16 48 90 000/- THE ASSES SEE DID NOT PRESS THE CLAIM IN RESPECT OF EXPENDITURE OF RS.2 25 00 000/- AND RS.9 62 745/- RELATING TO THE NRI ISSUE AND IT HAS BEEN POINTED O UT THAT MAJOR EXPENDITURE WAS IN RELATION TO GLOBAL DEPOSITORY RE CEIPTS WHICH HAD NOT BEEN CONVERTED INTO SHARES AT ALL. THEREFORE NO DIS ALLOWANCE COULD BE MADE IN RESPECT OF SUCH EXPENSES RELATING TO DEBENT URE ISSUE. THE BALANCE AMOUNT WAS ONLY RS.2 64 34 555/- WHICH RELATED TO O PTIONALLY CONVERTIBLE DEBENTURES. IT HAS BEEN ARGUED THAT IN SUCH CASES T HE EXPENSES COULD NOT BE DISALLOWED. THE LEARNED AR HAS POINTED OUT THAT THERE ARE JUDGMENTS SUPPORTING THE VIEW THAT EVEN WHEN THE DEBENTURES A RE FULLY CONVERTIBLE EXPENDITURE HAS TO BE ALLOWED. IN CASE OF SECURE ME TERS LTD. (221 CTR 405) HONBLE HIGH COURT OF RAJASTHAN HAVE HELD THAT WHETHER DEBENTURES HAVE BEEN CONVERTED INTO SHARES OR NOT IT DOES NOT MITIGATE AGAINST THE NATURE OF DEBENTURES AS LOAN AT THE TIME OF ISSUE A ND THEREFORE EXPENSES INCURRED FOR RAISING LOAN HAVE TO BE ALLOWED. SIMIL AR VIEW HAS BEEN TAKEN BY THE HONBLE HIGH COURT OF MADRAS IN CASE OF SOUTH INDIA CORPORATION (AGENCIES) LTD. (290 ITR 221). THOUGH THE SPECIAL B ENCH OF TRIBUNAL IN CASE OF ASHIMA SYNTEX (100 ITD 245) HAS TAKEN THE V IEW THAT THE EXPENSES INCURRED IN CONNECTION WITH THE FULLY CONV ERTIBLE DEBENTURES IS NOT ALLOWABLE BUT IN THAT CASE PART OF THE DEBENTUR ES WERE CONVERTIBLE ON DATE OF ALLOTMENT AND REMAINING ON A FUTURE DATE. T HE TRIBUNAL GAVE A FINDING THAT INTENTION OF THE ASSESSEE WAS TO ISSUE SHARES PARTLY ON ALLOTMENT AND PARTLY AFTER 15 MONTHS. IN THE PRESEN T CASE THE DEBENTURES ARE NOT COMPULSORILY CONVERTIBLE INTO SHARES. THESE WERE OPTIONALLY CONVERTIBLE AND THEREFORE THE CONVERSION WOULD DEPE ND UPON OPTION IF ANY EXERCISED BY THE DEBENTURE HOLDERS. THEREFORE IT CO ULD NOT BE SAID THAT INTENTION WAS CLEARLY TO ISSUE SHARES. OBVIOUSLY TH E INTENTION WAS TO RAISE LOAN WHICH COULD BE CONVERTED INTO SHARES IN FUTURE IF ANY OPTION WAS EXERCISED. THEREFORE IN OUR VIEW THE DEBENTURE ISSU E EXPENSES CONSIDERING THE JUDGMENTS OF HONBLE HIGH COURT OF RAJASTHAN AND HONBLE HIGH COURT OF MADRAS (SUPRA) HAVE TO BE ALLOWED. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) ON THIS POINT AND ALLOW THE CLAIM OF THE ASS ESSEE. ITA NO.1069/AHD/2000(A.Y. 1996-97) 8 RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE WE UPHOLD THE ORDER OF THE CIT(A). WE ALSO AGREE WITH THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESSEE THAT THE REQUEST OF THE LD . D.R FOR EXAMINATION OF THE NATURE OF EXPENSES AT THIS STAGE IS NOT CALLED FOR. IT IS NEITHER THE CASE OF THE AO NOR THE CASE OF THE REVENUE IN THE GROUND OF APPEAL THAT SOME OF THE ITEMS OF EXPENSES WERE CAPITAL IN NATURE. THUS GRO UND NO.1 RAISED BY THE REVENUE IS DISMISSED. 9. GROUND NO.2 RAISED BY THE REVENUE READS AS FOLLO WS: 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN DIRECTING TO ALLOW THE RENT PAYMENT FO R GUEST HOUSE OF RS.2 14 667/- AND DEPRECIATION OF RS.25 78 961/- AS THE SAME EXPENSES ARE RELATED TO HOSPITALITY CHARGES. 10. THE LD. COUNSEL FOR THE ASSESSEE FAIRLY ADMITTE D THAT IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F BRITANIA INDUSTRIES LTD. 278 ITR 546(SC) THIS GROUND OF APPEAL OF THE REVENU E HAS TO BE ALLOWED. IN VIEW OF THE SPECIFIC BAR CONTAINED IN THE PROVISION S OF SECTION 37(4) AS IT EXISTED DURING THE RELEVANT ASSESSMENT YEAR THESE E XPENSES CANNOT BE ALLOWED AS DEDUCTION. THUS GROUND NO.2 RAISED BY T HE REVENUE IS THEREFORE ALLOWED. 11. GROUND NO.3 RAISED BY THE REVENUE READS AS FOLL OWS: 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE CIT(A) HAS ERRED IN DIRECTING TO ALLOW LOST BELOW THE GROU ND LEVEL OF STOCKYARD. 12. WE HAVE ALREADY SEEN THAT THE ASSESSEE IS IN TH E BUSINESS OF MANUFACTURING OF STEEL. THE RAW MATERIAL REQUIRED FOR MANUFACTURING OF ITA NO.1069/AHD/2000(A.Y. 1996-97) 9 STEEL IS IRON ORE OXIDE FINES. THE RAW MATERIAL IS STORED IN THE OPEN AND IT GETS MIXED WITH THE SOIL WHERE IT IS STORED. IT BE COMES DIFFICULT TO RETRIEVE THE IRON ORE OXIDE FINE IN PURE FORM BECAUSE IT GETS CO NTAMINATED WHEN IT MIXES WITH THE SOIL. THE PROCESS INVOLVED FOR PURIFICATI ON AND SEPARATION OF THE SOIL FROM THE RAW MATERIAL IS ALSO COSTLY AND INVOLVES E XPENSES FOR DIGGING OUT THE SOIL TRANSPORTING ETC. THE ASSESSEE THEREFORE E STIMATED THE RAW MATERIAL THAT IT WOULD HAVE LOST AT A SUM OF RS. 95 60 800/- AND CLAIMED THE SAME AS DEDUCTION IN THE P&L ACCOUNT . THE AO DISALLOWED T HE CLAIM OF THE ASSESSEE FOR DEDUCTION FOR THE REASON THAT SUCH LOSS CANNOT BE ALLOWED AND THEY WERE ALSO NOT CLAIMED IN THE PAST. 13. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED T HE AO TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION HOLDING THAT TH IS WAS A LOSS IN THE COURSE OF CARRYING ON THE BUSINESS AND HAD TO BE AL LOWED AS REVENUE EXPENSES. THE CIT(A) ALSO FOUND THAT THE CLOSING S TOCK HAD NOT BEEN DECREASED TO THE EXTENT OF LOSS CLAIMED BY THE ASSE SSE. THE CIT(A) ALSO FOUND THAT IN A.Y 1994-95 SIMILAR LOSS WAS ALLOWED BY THE AO. 14. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENU E HAS RAISED GROUND NO.3 BEFORE THE TRIBUNAL. 15. THE LD. D.R SUBMITTED THAT THE CLOSING STOCK AS DECLARED BY THE ASSESSEE IS STATED TO BE DONE AFTER PHYSICAL VERIFI CATION AND THEREFORE THIS LOSS WOULD HAVE BEEN ALREADY INCORPORATED BY REDUCI NG THE CLOSING STOCK. IT WAS HIS SUBMISSION THAT THERE WAS NOTHING TO SHOW T HAT THE CLOSING STOCK DECLARED BY THE ASSESSEE WAS EXCLUDING THE VALUE OF THIS LOSS. IT WAS SUBMITTED BY HIM THAT THE FACT THAT IN THE EARLIER YEARS THE SIMILAR DEDUCTION WAS ALLOWED WILL NOT BE CONCLUSIVE. IN THIS REGARD IT WAS ALSO SUBMITTED THAT THERE WAS NO BASIS OF CALCULATION OR OTHER EVIDENCE FILED BY THE ASSESSEE TO PROVE THE LOSS. ITA NO.1069/AHD/2000(A.Y. 1996-97) 10 16. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER H AND SUBMITTED THAT IN A.Y 1994-95 THE LOSS UNDER THIS HEAD WAS RS.4 81 3 8 000/- AND THE SAME WAS ACCEPTED BY THE AO AFTER RAISING A QUERY AND A CCEPTING THE EXPLANATION OFFERED BY THE ASSESSEE. THE LD. COUNSEL FOR THE A SSESSEE FURTHER POINTED OUT THAT THE RAW MATERIAL FINISHED GOODS AND WORK-IN- PROGRESS COMPRISED IN THE CLOSING STOCK IN THIS YEARS WAS RS. 243.79 CRORES RS. 166.14 CORES AND RS. 41.62 CRORES RESPECTIVELY. COMPARED TO THE ABOVE L OSS CLAIMED BY THE ASSESSEE THIS YEAR WAS VERY REASONABLE. IN THIS RE GARD IT WAS ALSO SUBMITTED BY HIM THAT THE ASSESSEE HAD NO REASON TO CLAIM ANY IMAGINARY LOSS BECAUSE ITS LOSS AS PER THE RETURN OF INCOME WAS ITSELF RS. 812 CRORES. IN THIS REGARD HE ALSO POINTED OUT THAT THE CLOSING STOCK WAS NOT REDUCED BY THIS VALUE AND RELIED ON THE FINDING OF THE CIT(A) IN THIS REGARD. WITH REGARD TO THE EVIDENCE REGARDING PROOF OF LOSS THE LD. COUNSEL FOR THE ASS ESSEE SUBMITTED THAT THIS WAS NOT THE CASE OF THE AO. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSION. IN OU R VIEW THE LOSS CLAIMED BY THE ASSESSEE DESERVES TO BE ACCEPTED. ADMITTEDL Y THE CLOSING STOCK WAS NOT REDUCED BY THIS QUANTITY OF STOCK AND THE CIT(A ) HAS GIVEN A FINDING TO THIS EFFECT. IN EVALUATING SUCH A CLAIM IT IS NOT CORRECT TO INSIST FOR ACTUAL PROOF AND THE NATURE OF THE BUSINESS AND THE REASON ABLENESS OF THE CLAIM MADE BY THE ASSESSEE SHOULD BE THE GUIDING FACTOR. IN THIS REGARD WE FIND THAT IN THE EARLIER ASSESSMENT YEAR THE AO AFTER DU E SCRUTINY AS ACCEPTED THE LOSS ON THIS COUNT TO THE EXTENT OF RS. 4 81 38 000 /- IT IS ALSO NOT THE CASE OF THE AO THAT THERE WAS LACK OF PROOF OF THIS LOSS. IN THESE CIRCUMSTANCES WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THI S ISSUE HAS TO BE UPHELD. CONSEQUENTLY GROUND NO.3 RAISED BY THE REVENUE IS D ISMISSED. 18. GROUND NO.4 RAISED BY THE REVENUE READS AS FOLL OWS: ITA NO.1069/AHD/2000(A.Y. 1996-97) 11 4.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE CIT(A) HAS ERRED IN DIRECTING TO ALLOW LEASE EXPENSE THOUG H THE SAME HAS CLAIMED AFTER CHANGING THE ACCOUNTING POLICY I.E. T HE SAME WAS CLAIMED AS SEPARATE DEDUCTION INSTEAD OF DEBITING THE SAME TO P&L ACCOUNT. 19. THE ASSESSEE HAD DEBITED IN THE P&L ACCOUNT EXP ENSES ON ACCOUNT OF RENT PAID ON LEASING TRANSACTIONS. DURING THE PREV IOUS YEAR IN THE BOOKS OF ACCOUNTS THE ASSESSEE HAD SHOWN RENT PAYABLE IN RES PECT OF LEASING TRANSACTIONS LESS BY RS.9 28 34 501/-. WHILE FILIN G THE RETURN OF INCOME THE ASSESSEE CLAIMED THIS DIFFERENCE AS A DEDUCTION. T HE ASSESSEE SUBMITTED BEFORE THE AO THAT BECAUSE OF THE LONG PERIOD OF TH E LEASE IT WAS OF THE OPINION THAT RENTS PAYABLE HAD TO BE REDUCED AND T HEREFORE IN THE BOOKS OF ACCOUNTS IT PROVIDED FOR A LESSER LIABILITY BUT WHI LE COMPUTING THE INCOME FOR THE PURPOSE OF INCOME-TAX IT HAD CLAIMED THE ACTUAL LIABILITY. THE AO HOWEVER WAS OF THE VIEW THAT CLAIM OF THE ASSESSEE WAS NOT ACCEPTABLE. 20. ON APPEAL BY THE ASSESSEE THE CIT(A) ACCEPTED T HE PLEA OF THE ASSESSEE HOLDING AS FOLLOWS: 6.3 I AGREE WITH THE SUBMISSION MADE BY THE APPELL ANT THAT THE LEASE RENT IS ALLOWABLE FULLY FOR THE YEAR AS IN THE EAR LIER YEARS RELATING TO SAME ASSETS. THERE IS NO REVALUATION DONE FOR PURP OSE OF DEDUCTION OF SAME UNDER IT ACT. THE CHANGE IN THE METHOD OF TRE ATMENT OF ENTRIES IN THE BOOKS WILL NOT ALTER THE CHARACTER OF REVENU E EXPENDITURE. MOREOVER THIS CHANGE IN THE METHOD OF TREATMENT HA S NOT RESULTED IN EXCESS ALLOWANCE THAN NORMALLY ALLOWABLE. THEREFOR E NO PREJUDICE IS CAUSED TO REVENUE. DURING THE A.Y 1995-96 THE ENT IRE LEASE RENT OF RS. 8 03 49 553/- WAS ALLOWED BY THE ASSESSING OFFI CER. I DELETE THIS ADDITION OF RS. 9 28 34 501 HOLDING THAT APPELLANT S TREATMENT OF DEFERRED PAYMENT WILL NOT ALTER THE CHARACTER OF TH E EXPENDITURE. 21. BEFORE US LD. D.R RELIED ON THE ORDER OF THE AO . 22. WE ARE OF THE VIEW THAT THE ORDER OF THE CIT(A) ON THIS ISSUE HAS TO BE ACCEPTED. ADMITTEDLY THE DEDUCTION CLAIMED BY THE ASSESSEE WAS IN RESPECT OF ITS ACTUAL LIABILITY OF PAYMENT OF LEASE RENT TO THE LESSOR. THE TREATMENT IN ITA NO.1069/AHD/2000(A.Y. 1996-97) 12 THE BOOKS OF ACCOUNT WILL NOT ALTER THE CHARACTER O F THE EXPENDITURE WHEN IT COMES TO CLAIMING DEDUCTION WHILE COMPUTING TOTAL I NCOME UNDER THE ACT. WE THEREFORE DISMISS GROUND NO.4 OF THE REVENUE. 23. GROUND NO.5 RAISED BY THE REVENUE READS AS FOLL OWS. 5. ON THE FACTS AND CIRCUMSTANCES OF CASE AND IN L AW THE CIT(A) HAS ERRED IN DIRECTING TO ALLOW THE CLAIM OF PREMIUM FO R REDUCING THE DEBENTURE AS THE SAME HAS BEEN CHARGED TO PREMIUM A CCOUNT AND NOT P&L ACCOUNT. 24. DURING THE PREVIOUS YEAR THE ASSESSEE HAD REDEE MED DEBENTURES IT HAD ISSUED IN THE PAST AND PAID A SUM OF RS. 85.00 LACS ON ACCOUNT OF PREMIUM ON REDEMPTION OF DEBENTURES. THE SAME WAS CLAIMED AS DEDUCTION WHILE COMPUTING THE TOTAL INCOME. THE AO HELD THAT THE E XPENDITURE WAS CAPITAL EXPENDITURE AND DID NOT ALLOW THE CLAIM FOR DEDUCTI ON. 25. THE CIT(A) HELD THAT THIS WAS A REVENUE EXPENDI TURE AND HAD TO BE ALLOWED IN THE YEAR IN WHICH THE LIABILITY HAD INCU RRED. 26. BEFORE US LD. D.R SUBMITTED THAT THE EXPENDITUR E ON ACCOUNT OF PREMIUM ON REDEMPTION OF DEBENTURES HAD TO BE SPREA D OVER FOR THE PERIOD FOR WHICH THE DEBENTURES WERE ISSUED (7 YEARS) AND IN THIS REGARD RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF PUNJAB STATE INDUSTRIAL CORPORATION 225 ITR 802(SC). 27. WE HAVE CONSIDERED HIS SUBMISSION AND ARE OF TH E VIEW THAT THE SAME IS WITHOUT ANY MERIT. IN THE CASE OF PUNJAB STAT E INDUSTRIAL CORPORATION (SUPRA) THE ASSESSEE CLAIMED A PREMIUM ON DEBENTURE S BY SPREADING IT OVER A PERIOD OF TIME AND THIS WAS ACCEPTED BY THE HONB LE SUPREME COURT. THE SAID DECISION DOES NOT BAR ALLOWING A CLAIM OF DEDU CTION OF REVENUE ITA NO.1069/AHD/2000(A.Y. 1996-97) 13 EXPENDITURE IN THE YEAR IN WHICH EXPENDITURE IS INC URRED. THE ASSESSEE HAD AN OPTION TO SPREAD IT OVER FOR THE PERIOD OF LIFE OF THE DEBENTURES OR TO CLAIM THE ENTIRE PREMIUM ON DEBENTURE IN THE YEAR IN WHIC H EXPENDITURE IS INCURRED. THE ASSESSEE HAS CHOSEN THE LATER OPTION . IN OUR VIEW THE EXPENDITURE BEING REVENUE IN NATURE THE CLAIM OF T HE ASSESSEE OUGHT TO BE ALLOWED. HOWEVER THE LIABILITY ON ACCOUNT OF PA YMENT OF PREMIUM OF REDEMPTION OF DEBENTURES CAN BE SAID TO BE INCURRE D IN THE YEAR IN WHICH THE DEBENTURE WAS ISSUED AS LAID DOWN BY THE HONBL E SUPREME COURT IN THE CASE OF PUNJAB STATE INDUSTRIAL INVESTMENT CORPORAT IONS CASE (SUPRA). THE CIT(A) ALLOWED RELIEF IN A.Y. 1996-97 BASED ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. TUNGABHA DRA INDUSTRIES LTD. 207 ITR 553 (CAL). THE PREMIUM PAYABLE IN THAT CASE WA S CONTINGENT ON THE ASSESSEE NOT PURCHASING DEBENTURES UNDER A BUY-BACK CLAUSE AND IF THERE WAS NO FURTHER ISSUE OF DEBENTURES. IT WAS BECAUSE OF THAT CLAUSE THE LIABILITY WAS CONTINGENT IN THE YEAR OF REDEMPTION. IN THE CIRCUMSTANCES WE DIRECT THE AO TO ALLOW THE DEDUCTION IN THE YEAR OF ISSUE OF DEBENTURES. CONSEQUENTLY GROUND NO.5 IS ORDERED ACCORDINGLY. 28. GROUND NO.6 RAISED BY THE REVENUE READS AS FOLL OWS: 6. ON THE FACTS AND CIRCUMSTANCES OF CASE AND IN LAW THE CIT(A) HAS ERRED IN DIRECTING TO ALLOW THE COMPENSATION PAID T O TENANTS THOUGH THE SAME WAS HELD TO BE COLLUSIVE TRANSACTION IN TH E CASE OF TENANTS NAMELY ESSAR SERVICES LTD. AND CONFIRMED BY THE CIT (A). 29. THE ASSESSEE SOLD ITS OFFICE PREMISES IN 13 TH FLOOR MAKER CHAMBER-4 NARIMAN POINT MUMBAI -21 FOR A TOTAL CONSIDERATION OF RS. 17 42 00 000/-. WHILE COMPUTING THE CAPITAL GAIN AS PART OF THE COS T OF ACQUISITION THE ASSESSEE TOOK INTO CONSIDERATION A SUM OF RS. 14 CR ORES THAT IT HAD PAID TO M/S. ESSAR SERVICES LTD. WHO WAS A TENANT IN THE SA ID PREMISES FOR VACATING THE PREMISES. THE AO EXAMINED THIS CLAIM OF THE AS SESSEE AND FOUND THAT ITA NO.1069/AHD/2000(A.Y. 1996-97) 14 IN THE CASE OF M/S. ESSAR SERVICES LTD. THE CIT(A) HELD THAT IT WAS A COLLUSIVE PAYMENT IN ENRICHING M/S. ESSAR SERVICES LTD. REFE RRING TO THOSE FINDING THE AO HELD THAT THE CLAIM OF THE ASSESSEE FOR CONSIDER ING THE SUM OF RS. 14 CRORES PAID TO ESSAR SERVICES LTD. AS COST OF ACQUI SITION WHILE COMPUTING CAPITAL GAIN WAS NOT ACCEPTABLE. 30. ON APPEAL BY THE ASSESSEE THE CIT(A) DIRECTED T HE AO TO ALLOW THE CLAIM OF THE ASSESSEE BY OBSERVING AS FOLLOWS: 10. (9) DISALLOWANCE OF COMPENSATION PAID TO TENAN TS FOR VACATING THE PREMISES SOLD: REDUCTION OF COMPENSATION FROM CAPI TAL GAINS: THIS POINT CAME UP FOR MY CONSIDERATION FOR THE A. Y 1995-96 AND I DIRECTED THE ASSESSING OFFICER TO ACCEPT THE CLAIM OF THE APPELLANT. THE SAME REASONING WOULD HOLD GOOD FOR THIS ASSESSMENT YEAR. FOR THE SAKE OF CLARITY THE RELEVANT PORTION OF THAT ORDER IS REPRODUCED BELOW: DURING THE RELEVANT PREVIOUS YEAR THE APPELLANT H AD SOLD CERTAIN PROPERTIES FOR WHICH IT HAD TO PAY COMPENSA TION OF RS. 14.50 CRORES TO TENANTS OCCUPYING THOSE PROPERTIES FOR VACATING THEM TO MAKE THEM SALEABLE AT GOOD PRICE. ON GOING THROUGH THE FACTS I FIND THAT THE PROPERT IES WERE TAKEN ON RENT BY A SISTER CONCERN I.E ESSAR SERVICES LTD. WHICH CLAIMED THE ABOVE RECEIPT AS A CAPITAL RECEIPT IN THEIR HAN DS. IN THAT CASE THE ASSESSING OFFICER BROUGHT TO TAX THE ABOV E COMPENSATION AS INCOME UNDER SEC. 10(3) WHICH WAS C ONFIRMED IN APPEAL BY ME PREDECESSOR FOR THE A.Y 1994-95. I N THIS CASE THE APPELLANT ADDED THE ABOVE AMOUNT TO THE COST OF ASSET IN THE BALANCE SHEET FOR THE IMMEDIATELY PRECEDING ASSESSM ENT YEAR. IT TOOK THE VALUE OF THE ASSETS (ENHANCED WITH THE AMO UNT OF COMPENSATION) TO ARRIVE AT THE COST FOR COMPUTING T HE CAPITAL GAIN ON SALE. ON THE OTHER HAND THE ASSESSING OFF ICER TOOK THE COST OF THE PROPERTIES AT ORIGINAL COST WITHOUT ADD ING THE AMOUNT OF COMPENSATION PAID FOR VACATING THE PROPERTIES. THOUGH IT HAS BEEN HELD AS A RECEIPT IN THE HANDS OF ESSAR SERVIC ES LTD. FOR THE A.Y 1994-95. IT CANNOT GET THE TREATMENT AS REVENU E EXPENDITURE IN THE HANDS OF THE APPELLANT AS IT WAS RELATING TO PROPERTY. CONSIDERING ALL THE FACTS OF THE CASE I AM OF THE OPINION THAT THE COMPENSATION PAID FOR VACATING TH E PREMISES HAD EFFECTS IN ENHANCING THE VALUE OF PROPERTY AS C OMPARED TO ITA NO.1069/AHD/2000(A.Y. 1996-97) 15 TENANTED PROPERTY. ACCORDINGLY I DIRECT THE ASSESS ING OFFICER THAT THE AMOUNT OF COMPENSATION OF RS.14.50 CRORE B E ADDED TO THE COST OF PROPERTIES FOR PURPOSE OF COMPUTING CAP ITAL GAINS ON SALE OF THOSE PROPERTIES WITH THE SAME REASONING I DIRECT THE ASSESSING OFF ICER TO ALLOW THE CLAIM FOR THIS ASSESSMENT YEAR. 31. AGGRIEVED BY THE ORDER OF THE CIT(A) THE REVENU E HAS RAISED GROUND NO.6 BEFORE THE TRIBUNAL. 32. WE FIND THAT IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL IN A.Y. 1995-96 IN ITA NO.1098/MDS/2000 AND THIS TRIBUNAL H ELD AS FOLLOWS: 15. GROUND NO. 3 PERTAINS TO COMPENSATION PAID TO TENANTS TO VACATE THE PROPERTY SOLD. 16. DURING THE RELEVANT PREVIOUS YEAR THE ASSESSEE SOLD CERTAIN PROPERTIES FOR WHICH IT PAID A COMPENSATION OF ` 1 4.50 CRORES TO THE TENANTS FOR VACATING THEM. THIS EXPENDITURE WAS CLA IMED AS A DEDUCTION WHILE COMPUTING CAPITAL GAINS. THE ASSESS ING OFFICER DID NOT ALLOW THE EXPENDITURE STATING THAT THE TENANTS ARE GROUP CONCERNS AND RELYING THE FINDINGS IN THE CASE OF M/S. ESSAR SERV ICES LTD. WHEREIN IT WAS TREATED AS REVENUE RECEIPTS THE ASSESSING OFFI CER TREATED IT THAT THERE IS NO COMPELLING CIRCUMSTANCES TO PAY THE TEN ANTS AND HENCE THE SAME CANNOT BE ALLOWED AS A DEDUCTION WHILE COMPUTI NG CAPITAL GAINS. LEARNED CIT(A) GAVE FOLLOWING FINDINGS :- ON GOING THROUGH THE FACTS I FIND THAT THE PROPERT IES WERE TAKEN ON RENT BY A SISTER CONCERN I.E. ESSAR SERVICES LTD . WHICH CLAIMED THE ABOVE RECEIPT AS A CAPITAL RECEIPT IN THEIR HAN DS. IN THAT CASE THE ASSESSING OFFICER BROUGHT TO TAX THE ABOVE COMP ENSATION AS INCOME UNDER SECTION 10(3) WHICH WAS CONFIRMED IN A PPEAL BY MY PREDECESSOR FOR A.Y. 1994-95. IN THIS CASE THE APP ELLANT ADDED THE ABOVE AMOUNT TO THE COST OF THE ASSET IN THE BA LANCE SHEET FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. IT TOOK THE VALUE OF THE ASSETS (ENHANCED WITH THE AMOUNT OF COMPENSATIO N) TO ARRIVE AT THE COST FOR COMPUTING THE CAPITAL GAIN ON SALE. ON THE OTHER HAND THE ASSESSING OFFICER TOOK THE COST OF THE PR OPERTIES AT ORIGINAL COST WITHOUT ADDING THE AMOUNT OF COMPENSA TION PAID FOR VACATING THE PROPERTIES. THOUGH IT HAS BEEN HELD AS A RECEIPT IN THE HANDS OF ESSAR SERVICES LTD. FOR A.Y. 1994-95. IT CANNOT GET ITA NO.1069/AHD/2000(A.Y. 1996-97) 16 THE TREATMENT AS REVENUE EXPENDITURE IN THE HANDS O F THE APPELLANT AS IT WAS RELATING TO PROPERTY. CONSIDERI NG ALL THE FACTS OF THE CASE I AM OF THE OPINION THAT THE COMPENSATI ON PAID FOR VACATING THE PREMISES HAD EFFECTS IN ENHANCING THE VALUE OF PROPERTY AS COMPARED TO TENANTED PROPERTY. ACCORDIN GLY I DIRECT THE ASSESSING OFFICER THAT THE AMOUNT OF COMPENSATI ON ` 14.50 CORES BE ADDED TO THE COST OF PROPERTIES FOR PURPOS E OF COMPUTING CAPITAL GAINS ON SALE OF THOSE PROPERTIES. 17. LEARNED DR REFERRED TO THE FACTS OF OCCUPATION BY THE TENANTS AND SUBMITTED THAT THE PAYMENT IS COLLUSIVE PAYMENT AND RELIED ON THE DECISION OF HON'BLE MADRAS HIGH COURT IN THE CASE O F SMT. RUGMANI VERMA 222 ITR 357 AND HON'BLE SUPREME COURT DECISI ON IN THE CASE OF R.M. ARUNACHALAM ETC. VS. CIT 227 ITR 222. 18. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT LEARNED DR CANNOT RAISE ANY NEW ISSUE IN THE ARGUMENTS AS THE RE WAS NO ISSUE BEFORE THE ASSESSING OFFICER THAT THESE PAYMENTS AR E COLLUSIVE NATURE. SINCE THIS IS NOT THE CASE OF THE ASSESSING OFFICE R THE LEARNED DR CANNOT RAISE NEW ISSUE AND RELIED ON THE PRINCIPLES ESTABLISHED BY HON'BLE SPECIAL BENCH IN THE CASE OF MAHINDRA AND M AHINDRA 313 ITR 263 (AT)(SB). FURTHER IT WAS SUBMITTED THAT IN THE CASE OF THE TENANTS THE SAME WAS CONSIDERED AND TREATED AS CAPITAL RECE IPTS BY THE ITAT AND PLACED ON RECORD ORDER OF ITAT IN ITA NO. 241/M DS/98 IN THE CASE OF ESSAR SERVICES LIMITED. IT WAS HIS SUBMISSION TH AT THE PAYMENT OF COMPENSATION WAS NOT DOUBTED. FOLLOWING THE PRINCIP LES ESTABLISHED BY HON'BLE BOMBAY HIGH COURT IN THE CASE OF MISS PI ROJA C. PATEL 242 ITR 582 COMPENSATION PAID FOR EVICTION OF TENANTS IS TO BE CONSIDERED AS COST OF IMPROVEMENT U/S. 48(II) AND THEREFORE CL AIM IS ALLOWABLE. 19. WE HAVE CONSIDERED THE ISSUE. THERE IS NO DOUBT ABOUT THE PAYMENT OF COMPENSATION OF ` 14.50 CRORES AND RECI PIENT TREATED IT AS CAPITAL RECEIPT. THIS ISSUE IS TAKEN UP TO THE ITAT WHO SUPPORTED THE STAND OF THE ASSESSEE THEREIN. AS FAR AS THIS ASSES SEE IS CONCERNED FACTS INDICATE THAT THERE WAS TENANCY AND THE PROPE RTY WAS SOLD TO ANOTHER PARTY (MAY BE A GROUP CONCERN) AND THE AMOU NT OF ` 14.50 CRORES WAS PAID FOR VACATION OF THE TENANCY. THEREF ORE FOLLOWING THE PRINCIPLES ESTABLISHED BY HON'BLE JURISDICTIONAL HI GH COURT IN THE CASE OF MISS PIROJA C. PATEL 242 ITR 582 COMPENSATION PAID FOR EVICTION OF PAYMENT IS TO BE TREATED AS COST OF IMPROVEMENT U/S . 48(II). THE LEARNED DR RELIED ON CASE LAW WHICH ARE NOT RELEVAN T ON THE ISSUE. IN THE CASE OF SMT RUGMANI VERMA 222 ITR 357 THE ISSUE IS WITH REFERENCE TO THE CLAIM OF PAYMENTS TO SISTERS ON TH E PROPERTY ACQUIRED BY WAY OF WILL AND THE HONBLE MADRAS HIGH COURT HE LD THOSE ITA NO.1069/AHD/2000(A.Y. 1996-97) 17 PAYMENTS CAN NOT BE CONSIDERED AS COST OF ACQUISITI ON OR IMPROVEMENT. IN THE CASE OF R M ARUNACHALAM 227 ITR 222 THE AMOU NT CLAIMED WAS ESTATE DUTY PAYMENT. ON THE FACTS THE HONBLE SUPRE ME COURT HELD THAT ESTATE DUTY PAID IS NEITHER DEDUCTIBLE AS COST OF ACQUISITION NOR AS COST OF IMPROVEMENT OF THE CAPITAL ASSET. THE ISSUE ON PAYMENT OF COMPENSATION TO TENANTS IS DIRECTLY COVERED BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF MISS PIROJA PATEL (SUPRA). THE REFORE THERE IS NO NEED TO DEFER FROM THE FINDINGS OF LEARNED CIT(A) A ND ACCORDINGLY THIS GROUND IS REJECTED. FACTS AND CIRCUMSTANCES AND THE BASIS ON WHICH THE CLAIM OF THE ASSESSEE WAS REJECTED IN THE PRESENT A.Y. AND AY 94-95 BEING THE SAME RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL REFERRED TO ABOVE WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS GROUND NO.6 RAISED BY THE REVENUE. 33. IN THE RESULT THE APPEAL OF THE REVENUE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THE 11 TH DAY OF MARCH 2011. SD/- SD/- (RAJENDRA SINGH) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DATED. 11 TH MARCH.2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3 . THE CIT CITY CONCERNED 4. THE CIT(A)- CONCERNED 5. THE D.RC BENCH. (TRUE COPY) BY ORDER ASST. REGISTRAR I TAT MUMBAI BENCHES MUMBAI. VM. ITA NO.1069/AHD/2000(A.Y. 1996-97) 18 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 2/3/2011 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 3/3/2011 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. AP PROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER