M/S Arvind Mills Ltd, Ahmedabad v. The Joint Cit Sr-I, Ahmedabad

ITA 216/AHD/2001 | 1994-1995
Pronouncement Date: 30-07-2010 | Result: Partly Allowed

Appeal Details

RSA Number 21620514 RSA 2001
Assessee PAN YEARS1991A
Bench Ahmedabad
Appeal Number ITA 216/AHD/2001
Duration Of Justice 8 year(s) 9 month(s) 11 day(s)
Appellant M/S Arvind Mills Ltd, Ahmedabad
Respondent The Joint Cit Sr-I, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-07-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted D
Tribunal Order Date 30-07-2010
Date Of Final Hearing 13-05-2010
Next Hearing Date 13-05-2010
Assessment Year 1994-1995
Appeal Filed On 19-10-2001
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH BEFORE S/SHRI G. D. AGARWAL VP AND BHAVNESH SAINI J.M. ITA NO.216/AHD/2001 A. Y.: 1994-95 THE ARVIND MILLS LIMITED NARODA ROAD AHMEDABAD 380 025 VS THE J. C. I. T. (ASSTT.) SPECIAL RANGE-1 AHMEDABAD PAN NO. 31-005-CX-2619 (APPELLANT) (RESPONDENT) ITA NO.275/AHD/2001 A. Y.: 1994-95 THE J. C. I. T. (ASSTT.) SPECIAL RANGE-1 AHMEDABAD VS THE ARVIND MILLS LIMITED NARODA ROAD AHMEDABAD 380 025 PAN NO. 31-005-CX-2619 (APPELLANT) (RESPONDENT) FOR ASSESSEE: SHRI S. N. SOPARKAR AND P. M. MEHTA AR FOR DEPARTMENT: SHRI B. S. SANDHU D R O R D E R PER SHRI BHAVNESH SAINI J.M . BOTH THE CROSS APPEALS ARE DIRECTED AGAINST ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XII AHMEDABAD DATED 14-11-2000 FOR ASSES SMENT YEAR 1994-95.BOTH THE APPEALS ARE DISPOSED OF THROUGH TH IS COMMON ORDER. 2 2. WE HAVE HEARD LEARNED REPRESENTATIVES OF BOTH TH E PARTIES PERUSED THE FINDINGS OF AUTHORITIES BELOW AND CONSI DERED THE MATERIAL AVAILABLE ON RECORD. ITA NO.216/AHD/2001 (BY ASSESSEE) 3. GROUNDS NO.1 AND 3 . ON THESE GROUNDS ASSESSEE CHALLENGED THE ORDERS OF AUTHORITIES BELOW IN REJEC TING THE CLAIM OF ASSESSEE UNDER THE PROVISIONS OF SECTION 3 5AB AND 80M OF THE IT ACT. THE LEARNED COUNSEL FOR THE ASSE SSEE DID NOT PRESS THESE GROUNDS OF APPEAL OF THE ASSESS EE. SAME ARE ACCORDINGLY DISMISSED BEING NOT PRESSED 4. GROUND NO.2. ON THIS GROUND ASSESSEE CHALLENGED THE ORDER OF LEARNED CIT (A) IN HOLDING THAT THE A O WAS JUSTIFIED IN DISALLOWING THE ASSESSEES CLAIM OF RS.14 48 82 053/- ARISING ON ACCOUNT OF ADJUSTMENT MADE TO THE OPENING STOCK IN THE SUCCEEDING YEAR AND WHICH HAS TO BE CONSIDERED AS CLOSING STOCK OF THE YEAR UNDER CONSIDERATION. THE A O HAS DISCUSSED THIS CLAIM IN PARA 14 OF THE ASSESSMENT ORDER. ASSESSEE HAD CLAIMED ABOVE DEDUCTION DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS. THE A O DID NOT ACCEPT THE CLAIM BECAU SE SAME WAS DEVOID OF MERIT. THE EFFECT OF CHANGE OF M ETHOD OF VALUATION OF CLOSING STOCK HAD NOT BEEN GIVEN IN THE ASSESSMENT YEAR 1994-95 UNDER APPEAL AND THE POSITI ON OF EFFECT IN VALUATION OF OPENING AND CLOSING STOCK HA D BEEN GIVEN IN ACCOUNTS FOR ASSESSMENT YEAR 1995-96. THE A O 3 STATED THAT ASHOKA MILLS MERGED WITH ARVIND MILLS L TD. (ASSESSEE) WITH EFFECT FROM 1-4-1994 AND ADJUSTMENT FOR CHANGE IN VALUATION OF STOCK OF ASHOKA MILLS HAD NO BASIS. THE A O ALSO STATED THAT THIS CLAIM WAS NOT MADE EV EN IN THE REVISED RETURNS. ACCORDING TO A O THE ASSESSEE HAD ALREADY PRESSED ADJUSTMENT OF THIS AMOUNT IN THE ASSESSMENT YEAR 1995-96 AND THEREFORE THERE WAS NO REASON FOR PRESSING THIS CLAIM IN THE ASSESSMENT YE AR UNDER APPEAL. THE ISSUE WAS AGITATED BEFORE LEARNED CIT ( A) AND IT WAS CONTENDED THAT ASSESSEE CAN MAKE CLAIM FOR DEDUCTION IN THE ASSESSMENT YEAR UNDER APPEAL. THE ASSESSEE IN THE FINANCIAL YEAR 1994-95 CHANGED THE METHOD OF ACCOUNTING WHICH COULD BE WITH REFERENCE TO THE CLOSING STOCK FOR THAT YEAR ONLY BUT IN THE ACCOUNTS THE EF FECT OF THE CHANGE WAS MADE IN THE OPENING STOCK FOR THAT YEAR. IT WAS SUBMITTED THAT SUCH OPENING STOCK HAS TO BE GIVEN E FFECT BY WAY OF CLOSING STOCK FOR THIS YEAR. IN ALTERNATE CO NTENTION IT WAS CONTENDED THAT IF EFFECT TO THE CHANGE OF VALUA TION IS NOT GIVEN IN THIS YEAR A O MAY BE DIRECTED TO CONS IDER THE CLOSING STOCK VALUATION FOR ASSESSMENT YEAR 1994-95 AS THE OPENING STOCK VALUATION FOR THE ASSESSMENT YEAR 199 5-96 IGNORING THE ACCOUNTING EFFECT GIVEN TO SUCH VALUAT ION IN THE NEXT ASSESSMENT YEAR 1995-96. THE LEARNED CIT (A) CONSIDERING THE ABOVE NOTED THAT THE EFFECT IN VALU ATION OF OPENING STOCK HAS BEEN GIVEN IN ACCOUNTS FOR THE ASSESSMENT YEAR 1995-96. THE LEARNED CIT (A) ALSO N OTED THAT IT IS UNDISPUTED FACT THAT THE ASSESSEE HAS AL READY 4 PRESSED ADJUSTMENT OF THIS ACCOUNT IN THE ASSESSMEN T YEAR 1995-96; THEREFORE THERE IS NO REASON TO ALLOW CLA IM IN ASSESSMENT YEAR UNDER APPEAL. ADDITION WAS CONFIRME D. HOWEVER IT WAS DIRECTED THAT THE ISSUE IN ASSESSME NT YEAR 1995-96 IS AN OPEN PROPOSITION AND WILL BE DECIDED ACCORDINGLY IN THE RELEVANT YEAR. 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT CLOSING STOCK OF THIS YEAR I.E. UNDER APPEAL 1994-9 5 WILL BE OPENING STOCK OF THE NEXT YEAR THEREFORE EFFECT M AY BE GIVEN IN THE SUBSEQUENT ASSESSMENT YEAR 1995-96. LE ARNED D R HOWEVER RELIED UPON ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT METHOD CHANGED IN THE NEXT YEAR SO NO INTERFERENCE IS CALLED FOR. 7. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE FI ND THAT THE ASSESSEE DID NOT DISPUTE THE FINDINGS OF AUTHOR ITIES BELOW ON THIS ISSUE BECAUSE NO CLAIM WAS MADE IN TH E RETURN OF INCOME AND THE ACCOUNTS IN THE ASSESSMENT YEAR 1994-95. THE ASSESSEE HAD ALREADY PRESSED THIS CLAI M IN THE SUBSEQUENT ASSESSMENT YEAR 1995-96. EVEN THE LE ARNED CIT (A) CONSIDERING SUBMISSIONS OF THE ASSESSEE NOT ED THAT THIS CLAIM IS PRESSED FOR ADJUSTMENT IN THE SUBSEQU ENT ASSESSMENT YEAR 1995-96. THEREFORE IN PRINCIPLE T HE ASSESSEE DID NOT DISPUTE ADDITION IN THE ASSESSMENT YEAR UNDER APPEAL. HOWEVER IT IS CLEAR THAT ONCE ADDITI ON IS MADE ON ACCOUNT OF CLOSING STOCK VALUATION IN THE 5 ASSESSMENT YEAR 1994-95 UNDER APPEAL IT WILL BE OP ENING STOCK IN THE SUBSEQUENT ASSESSMENT YEAR 1995-96. THEREFORE THE CLAIM OF THE ASSESSEE FOR ADJUSTMENT IN THE NEXT ASSESSMENT YEAR IS JUSTIFIED. LEARNED CIT (A) ALSO NOTED THAT SUCH CLAIM WILL BE CONSIDERED IN THE REL EVANT YEAR. THE SUBMISSION OF THE LEARNED COUNSEL FOR THE ASSESSEE IS ALSO SAME THAT EFFECT OF THE ADDITION M AY BE GIVEN IN THE ASSESSMENT YEAR 1995-96. WE ACCORDINGL Y CONFIRM THE FINDINGS OF THE AUTHORITIES BELOW. HOWE VER A O IS DIRECTED TO CONSIDER THE CLAIM OF THE ASSESSEE F OR GIVING EFFECT TO THE CLOSING STOCK VALUATION IN THE SUBSEQ UENT ASSESSMENT YEAR 1995-96 BECAUSE THE VALUATION OF CL OSING STOCK FOR THE ASSESSMENT YEAR 1994-95 WILL BE OPENI NG STOCK IN THE SUBSEQUENT ASSESSMENT YEAR 1995-96. TH E ALTERNATE CONTENTION RAISED BY THE ASSESSEE BEFORE LEARNED CIT (A) GETS ACCEPTED. IN VIEW OF THE ABOVE FINDING AND DIRECTIONS GROUND NO.2 OF THE APPEAL OF THE ASSESS EE STANDS DISPOSED OF. 8. GROUND NO.4. ON THIS GROUND ASSESSEE CHALLENGED THE LEVY OF INTEREST U/S 234B OF THE IT ACT. LEARNED CO UNSEL FOR THE ASSESSEE SUBMITTED THAT CHARGING OF INTEREST IS CONSEQUENTIAL IN NATURE AND WOULD NOT PRESS THE SAM E. ACCORDINGLY THIS GROUND IS ALSO DISMISSED BEING CONSEQUENTIAL IN NATURE. 9. AS A RESULT APPEAL OF THE ASSESSEE IS PARTLY AL LOWED. 6 ITA NO.275/AHD/2001(DEPARTMENTAL APPEAL) 10. GROUND NO.1 . ON THIS GROUND REVENUE CHALLENGED THE DELETION OF ADDITION OF FOREIGN EXCHANGE OF RS.1 76 58 910/- . THE LEARNED CIT (A) NOTED THE BRIEF FACTS IN THE IMPUGNED ORDER ON THIS ISSUE THAT THE A O DISCUSSED THIS ISS UE IN PARA 4 OF THE ASSESSMENT ORDER. THE RELEVANT FACTS ARE T HAT THE ASSESSEE IN ITS COMPUTATION OF INCOME FILED EXCLUD ED THE EXCHANGE RATE GAIN OF RS. L 76 58 910/- FROM COMPUTATION O F INCOME ALTHOUGH THE SAME WAS TAKEN IN AUDITED ACCOUNTS FINALIZED AS 'REVENUE RECEIPT ' (OTHER INCOME). THE CONTENTION OF THE ASSESSEE WA S THAT THE SURPLUS OF RS.1 76 58.910/- WAS ATTRIBUTABLE TO 12 06 35 58 3 DOLLARS WHICH WAS RECEIVED AS CAPITAL EURO ISSUE AND IT WAS A CAP ITAL ACCRETION. THE SAME WAS NEITHER RELATED TO TRADING OPERATION OR ST OCK-IN-TRADE. ASSESSEE'S CLAIM IS DULY REPRODUCED IN PARA 4.2 OF THE ASSESSMENT ORDER. THE CRUX WAS THAT THE FOREIGN EXCHANGE EARNE D ON CONVERSION OF FOREIGN CURRENCY WAS RELATED TO RETENTION OF MON IES OBTAINED ON ISSUE OF CAPITAL ON CAPITAL ACCOUNT AND THE EXCHANG E RATE DIFFERENCES EARNED IN SUCH PROCEEDINGS WAS A CAPITAL RECEIPT AN D WAS THEREFORE NOT EXIGIBLE TO INCOME-TAX. THE CLAIM WAS SUPPORTED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS TATA LOCOMOTIVE ENGG. CO. LTD. (60 ITR 405). RELIANCE WAS ALSO PLACED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF SU TLEJ COTTON MILLS VS CIT (116 ITR 1). THE RELEVANT DETAILS OF THE EUR O ISSUE ARE INCORPORATED IN PARA 4.3 OF THE ASSESSMENT ORDER. SUBSEQUENT QUERY OF THE ASSESSING OFFICER WAS AS TO WHETHER CAPITALI ZATION OF SUCH INCOME IN THE BOOKS OF ACCOUNTS WAS IN ACCORDANCE W ITH THE 7 ACCEPTED PRINCIPLES OF COMMERCIAL ACCOUNTING OR NOT . ASSESSEE'S REPLY ON THE SAME FINDS PLACE IN PARA 4.5 OF THE AS SESSMENT ORDER. THEREAFTER THE ASSESSING OFFICER SOUGHT VERSION OF THE AUDITORS REGARDING CAPITALIZATION OF THE AFORESAID ITEM OF F OREIGN EXCHANGE. THE AUDITORS CONTENDED THAT THEY HAD RELIED ON ACCO UNTING STANDARD 11 ON ACCOUNTING FOR THE EFFECTS OF CHANGES IN FORE IGN EXCHANGE RATES AS ISSUED BY ICAI. ACCORDING TO PARA 9 OF THE STANDARD EXCHANGE DIFFERENCE ARISING ON FOREIGN CURRENCY TRA NSACTIONS WAS TO BE RECOGNIZED AS INCOME OR AS EXPENSES IN THE PERIO D IN WHICH THEY ARISE EXCEPT AS STATED IN PARAGRAPH 10 AND 11. THE DETAILED SUBMISSION OF THE AUDITORS IN THIS REGARD FINDS PLA CE IN PARA 4.7 OF THE ASSESSMENT ORDER. WHEN FURTHER ASKED TO OFFER COMME NTS ON THE CLARIFICATION ISSUED BY THE AUDITORS THE ASSESSEE INVITED ATTENTION TO MADRAS HIGH COURT'S DECISION IN THE CASE OF EID PA RRY LTD. VS CIT (174 ITR 11). IN SPITE OF THAT THIS DECISION IF T HE ASSESSING OFFICER AT STILL CONSIDERED THAT RS.1 76 CRORES WAS EXIGIBLE T O INCOME-TAX THE REQUEST OF THE ASSESSEE WAS THAT THE AMOUNT SPENT FOR EARNING THE SAME I.E. CAPITAL RAISING EXPENDITURE ON GDR EQUITY ISSUE SHOULD BE ALLOWED AS EXPENDITURE. IT WAS ON RECORD THAT THE EXPENDITURE INCURRED ON GDR ISSUE WAS RS.8.34 CRORES AND THE AS SESSEE HAD NOT CLAIMED THE SAME AS EXPENSES. 11. THE ASSESSING OFFICER DID NOT AGREE WITH THE VERSION OF THE ASSESSEE AND WENT ON TO DISTINGUISH THE FACTS OF TA TA LOCOMOTIVE & ENGG. CO. LTD. FROM THE FACTS OF THE PRESENT CASE. IT WAS ALSO HELD THAT RELIANCE OF THE ASSESSEE ON THE CASE OF CIT VS CANARA BANK LTD. (53 ITRTR 328) (SC) WAS ALSO PLACED. THE ASSESSING OFFICER WENT ON 8 TO ANALYZE THE JUDGMENT OF SUTLEJ COTTON MILLS LTD. (SUPRA) AND HELD THAT THE SAME ALSO DID NOT ADVANCE ASSESSEES CASE IN ANY WAY. THE ASSESSING OFFICER ALSO DISTINGUISHED THE DECISION O F HONBLE MADRAS HIGH COURT IN THE CASE OF EID PARRY LTD. THE ASSESS ING OFFICER RELIED ON THE CASE OF CIT VS V. S. DEMPO & CO. ( P ) LTD.: (206 ITR 291) (BOMBAY). RELIANCE WAS ALSO PLACED BY THE ASSESSING OFFICER ON THE CASE OF CIT VAS SANDOZ (I) LTD. (206 ITR 599). IT WAS ACCORDINGLY HELD THAT ONCE CAPITAL IS RAISED WHETHER BY WAY OF EURO ISSUE OR BY PUBLIC ISSUE IN INDIA ANY FURTHER INCOME DERIVED F ROM SUCH FUNDS RAISED WOULD BE REVENUE IN CHARACTER AS OWNERSHIP O VER THESE FUNDS BECOMES THAT OF THE COMPANY AND ONCE THE FUNDS ARE RAISED THEY NO LONGER RETAIN THE CHARACTER OF FIXED CAPITAL. IN TH E CASE OF THE ASSESSEE ALSO WHAT HAS BEEN GAINED BY WAY OF EXCHAN GE RATE FLUCTUATION AND ONCE SUCH FUNDS WERE AVAILABLE THEY WERE PART OF THE CIRCULATING CAPITAL OF THE ASSESSEE BEING RAISED I N CONNECTION WITH THE BUSINESS OF THE ASSESSEE AND THERE IS NO REASON WHY THE SAME SHOULD NOT BE HELD TO BE TAXABLE. ACCORDINGLY THE AMOUNT OF GAIN OF FOREIGN EXCHANGE FLUCTUATION WAS HELD TO BE INCOME CHARGEABLE TO TAX. 12. THE ASSESSEE CHALLENGED THE FINDINGS OF TH E A O BEFORE LEARNED CIT (A). IT WAS SUBMITTED THAT WHEN A COMPA NY ISSUES SHARES IN FOREIGN CURRENCY AS CAPITAL IT RECEIVES FOREIGN CURRENCY WHICH IS REMITTED TO INDIA. WHAT IS RECEIVED IN INDIA IS AN EQUITY CAPITAL AND NOT CIRCULATING CAPITAL. THEREFORE IT WAS SUBMITTED TH AT THE VERY PREMISES ON WHICH THE ASSESSING OFFICER HAS BASED HIS DECISI ON THAT IT WAS A CIRCULATING CAPITAL IS ABSENT ON THE FACTS. THE AS SESSING OFFICER HAS 9 RELIED UPON THE TREATMENT GIVEN BY THE ASSESSEE COM PANY IN ITS BOOKS OF ACCOUNT BECAUSE THE FOREIGN EXCHANGE GAIN WAS CREDITED IN THE PROFIT AND LOSS ACCOUNT AS OTHER INCOME. IT W AS SUBMITTED THAT THE TREATMENT GIVEN BY THE ASSESSEE SHOULD NOT BE C ONSIDERED AS DETERMINATIVE OR CONCLUSIVE AS HAS BEEN HELD BY BO MBAY HIGH COURT IN THE CASE OF SANDOZ (I) LTD.(SUPRA). IN THE CASE OF V. S. DEMPO (SUPRA) RELIED UPON BY THE ASSESSING OFFICER IT IS HELD AS UNDER: 'THE WAY IN WHICH THE ENTRIES ARE MADE BY AN ASSESS EE IN THE BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS. WHAT IS NECESSARY TO BE CONSIDER ED IS THE TRUE NATURE OF THE TRANSACTION AND WHETHER IN F ACT IT HAS RESULTED IN PROFIT OR LOSS TO THE ASSESSEE.' THE ASSESSEE COMPANY HAS ALSO RELIED UPON THE DECIS ION OF HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS (1 16 ITR 1). THE ASSESSEE QUOTES FROM THE CASE OF SUTLEJ COTTON MILL S AS UNDER: 'THE LAW MAY THEREFORE NOW BE TAKEN TO BE WELL SE TTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOR EIGN CURRENCY HELD BY HIM ON CONVERSION INTO ANOTHER CURRENCY SUCH PROFIT OR LOSS WOULD ORDINARILY BE T RADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY T HE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET O R AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINES S. BUT IF ON THE OTHER HAND THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL SUCH PROFIT OR L OSS WOULD BE OF CAPITAL NATURE.' THE ASSESSEE ALSO QUOTES FROM THE CASE OF EID PARRY (SUPRA): 10 'IN THE PRESENT CASE IT IS NOT IN DISPUTE THAT THE AMOUNT KEPT IN THE U.K AROSE OUT OF SUBSCRIPTION MONIES RE CEIVED FOR ALLOTMENT OF SHARES AND THERE WAS NO QUESTION O F ANY SALE OF STOCK IN TRADE. THE ISSUE OF SHARES WAS IT SELF FOR THAT EXPRESS PURPOSE OF EXPANSION OF THE ASSASSEE'S FERTILISER FACTORY AT ENNORE. THERE IS NO DISPUTE T HAT A PART OF THE AMOUNT WAS UTILISED FOR PURCHASE OF PLANT AN D MACHINERY IN U . K . AND THE OTHER PART WAS REPATRIATED TO INDIA TO BE UTILISED FOR THE PURPOSES FOR WHICH IT WAS COLLECTED. THE TRIBUNAL HAS FOUND THAT THERE IS NO DIRECT RELATION BETWEEN THE EXCESS AMOUNT AND THE BUSINESS OF THE ASSESSEE. HENCE THE FINDING OF THE TRIBUNAL TH AT THE AMOUNT CANNOT BE HELD TO BE A REVENUE RECEIPT IS CO RRECT ON THE FACTS OF THE CASE. WE DO NOT AGREE WITH THE CONTENTIONS URGED BY LEARNED COUNSEL FOR THE REVENU E THAT THE AMOUNT WAS ONLY A CASH BALANCE AND THAT IT WAS A CIRCULATING CAPITAL. ON THE FINDINGS OF FACT GIVEN BY THE TRIBUNAL THERE CAN BE NO DOUBT THAT THE AMOUNT IN QUESTION IS NOT A REVENUE RECEIPT.' THE ASSESSEE ACCORDINGLY SUBMITTED THAT IN VIEW OF DIRECT DECISION OF MADRAS HIGH COURT IN THE CASE OF EID PARRY (SUPRA) AND THE DECISION OF THE HONBLE SUPREME COURT AS REFERRED ABOVE IT MAY BE HELD THAT AMOUNT OF FOREIGN EXCHANGE GAIN OF RS.L 76 58 910/- IS NOT A REVENUE RECEIPT BUT IS A CAPITAL RECEIPT WHICH IS S UBSCRIBED IN FOREIGN CURRENCY AND IT IS RECEIVED IN INDIA. IT WAS FURTHE R EMPHASIZED THAT THE ACCOUNTING ENTRIES DO NOT DETERMINE CHARACTER OF TA XABILITY OF A PARTICULAR TRANSACTION OF INCOME OR ALLOWABILITY OF A PARTICULAR EXPENDITURE. THE TAXABILITY HAS TO BE DETERMINED AS PER THE PROVISIONS OF INCOME-TAX ACT. IT WAS ALSO SUBMITTED THAT EVEN THE ACCOUNTING STANDARD REFERRED TO BY THE AUDITORS OR BY THE ASSE SSING OFFICER WAS NOT SPECIFIC WITH REFERENCE TO THE NATURE OF RECEIP T OF THE ASSESSEE. IT WAS ALSO HIGHLIGHTED THAT THE AMOUNT OF RS. 176.59 LAKHS WAS IN 11 CONNECTION WITH THE CAPITAL ISSUE. IN THIS CONNECTI ON THE ASSESSEE FURTHER REFERRED TO THE STIPULATION CONTAINED IN T HE DOCUMENT PREPARED FOR GDR ISSUE WHEREIN IT EXPLAINED AS UNDER: 'CAPITAL EXPANSION: ARVIND IS IN THE PROCESS OF IMPLEMENTING AN EXPANSI ON PROGRAM THAT UPON COMPLETION WOULD DOUBLE ITS CUR RENT DENIM PRODUCTION CAPACITY. SEE 'DESCRIPTION OF BUS INESS' AND 'MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANC IAL CONDITION AND RESULTS OF OPERATIONS.' TIMELY COMPLE TION OF SUCH EXPANSION PLANS DEPENDS ON A NUMBER OF FACT ORS OUTSIDE OF ARVIND'S CONTROL INCLUDING AMONG OTHER THINGS RECEIPT OF NECESSARY GOVERNMENTAL APPROVALS WITH RE SPECT OF SUCH EXPANSION PLANS. ALTHOUGH ARVIND BELIEVES T HAT IT WILL COMPLETE ITS EXPANSION PROGRAM ON SCHEDULE AND ON BUDGET THERE CAN BE NO ASSURANCE THAT IT WILL BE A BLE TO DO SO.' THEN JUST BELOW THAT NOTE THE MAIN HEAD 'USE OF PROCEEDS APPEARS AS THE FOLLOWING: 'USE OF PROCEEDS THE NET PROCEEDS FROM THE OFFERINGS OF 196.0 MILLIO N (AFTER DEDUCTION OF UNDERWRITING DISCOUNTS AND ESTIMATED OFFERING EXPENSES AND ASSUMING NO EXERCISE OF THE PURCHASERS' OVER-ALLOTMENT OPTION) ARE CURRENTLY E XPECTED TO BE USED FOR GENERAL CORPORATE PURPOSES INCLUDI NG THE PURCHASE OF PROPERTY PLANT AND EQUIPMENT IN CONNEC TION WITH THE COMPANY'S CAPITAL EXPANSION PLANS AND THE REPAYMENT OF SHORT-TERM DEBT ' IT WAS SUBMITTED THAT CAPITAL EXPANSION WAS ENVISAG ED AND THE PROCEEDS WERE TO BE UTILIZED FOR AUGMENTING THE FUN DS OF THE COMPANY EXACTLY AS PROCEEDS OF ADDITIONAL EQUITY CA PITAL ARE NORMALLY EARMARKED OR UTILIZED. SO THERE IS NO DOUBT THAT TH E PROCEEDS OF THE 12 GDR ISSUE WERE CLEARLY ON CAPITAL ACCOUNT. HENCE I T WAS FURTHER SUBMITTED THAT ANY ACCRETION TO THOSE PROCEEDS WOUL D ALSO BE CLEARLY ON THE CAPITAL ACCOUNT. IT WAS FURTHER HIGHLIGHTED THAT VARIOUS DECISIONS RELIED UPON BY THE ASSESSING OFFICER ARE ON FACTS NOT APPLICABLE TO THIS CASE. IN THOSE CASES THE SURPL US HAD ARISEN OUT OF THE BUSINESS TRANSACTIONS AND THEREFORE IT WAS HEL D THAT SUCH SURPLUS WAS LIABLE TO TAX AS REVENUE INCOME. IN THE ASSESS EE'S CASE THERE WAS NO BUSINESS TRANSACTION. THE SURPLUS HAS ARISEN ON RAISING CAPITAL BY GDR ISSUE AND THEREFORE IT IS CAPITAL IN NATURE. SIMPL Y BY PRESUMPTION ONE CANNOT SAY THAT IT WAS DOMINATING C HARACTER OF CIRCULATING CAPITAL. IN ASSESSEE'S SUBMISSION CIRC ULATING CAPITAL IS IN THE NATURE OF CURRENT ASSETS AND LIABILITIES WHEREA S IN THE ASSESSEE'S CASE IT WAS ON ACCOUNT OF ISSUE OF SHARE CAPITAL. T HE SHARE CAPITAL SO RAISED IN FOREIGN COUNTRIES IS CAPITAL OF THE COMPA NY AND ANY SURPLUS TO BRING SUCH CAPITAL TO INDIA IS OF CAPITAL NATURE . WITHOUT PREJUDICE TO THE ABOVE CONTENTIONS IT WAS SUBMITTED THAT EVEN I F IT IS PRESUMED THAT THE AMOUNT OF RS.176.59 LAKHS IS TAXABLE IN TH E HANDS OF THE ASSESSEE THE EXPENDITURE INCURRED BY THE ASSESSEE AMOUNTING TO RS.8.35 CRORES FOR GDR ISSUE MAY BE HELD TO BE ADMI SSIBLE AGAINST THE TOTAL INCOME BECAUSE SUCH EXPENDITURE WAS ACTU ALLY INCURRED WITH REFERENCE ISSUE OF CAPITAL AND THE SAME HAS RE SULTED INTO EARNING OF SUCH EXCHANGE DIFFERENCE. 13. THE LEARNED CIT (A) CONSIDERING SUBMISSIONS OF THE ASSESSEE AND MATERIAL ON RECORD DELETED THE ENTIRE ADDITION AND HELD THAT THE SURPLUS AS ARISING ON RAISING CAPITAL BY GDR ISSUE IS CAPITAL IN NATURE. 13 HIS FINDINGS IN PARA 14 TO 19 IN THE IMPUGNED ORDER ARE REPRODUCED AS UNDER: 14. I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMIS SIONS ON THE ISSUE INVOLVED. BEFORE THE MAIN ISSUE AS SUCH I S DECIDED IT IS NECESSARY TO DECIDE AS TO WHETHER EN TRIES MADE BY THE ASSESSEE IN ITS BOOKS OF ACCOUNT DETERM INED THE NATURE OF A CLAIM OR THE CLAIM HAS TO BE DECIDE D IN ACCORDANCE WITH THE PROVISIONS OF LAW. I AM OF THE OPINION THAT THE DECISION OF THE ASSESSING OFFICER TREATING THE ENTRIES MADE BY THE ASSESSEE IN ITS BOOKS OF ACCOUN T AS SACROSANCT IS NOT CORRECT IN LAW BECAUSE WHETHER AN ITEM OF RECEIPT/EXPENDITURE IS TAXABLE/ALLOWABLE IN THE COMPUTATION OF INCOME OF AN ASSESSEE WILL HAVE TO B E DECIDED IN ACCORDANCE WITH THE PROVISIONS OF LAW AN D NOT THE VIEW WHICH THE ASSESSEE TAKES WITH REGARD TO TH E RECEIPT/EXPENDITURE AS THE AS THE CASE MAY BE. IN THIS REGARD FOLLOWING OBSERVATIONS OF SUPREME COURT IN THE CASE OF KEDARNATH JUTE MANUFACTURING LTD. VS CIT (82 XTR 363) ARE ABSOLUTELY RELEVANT. 'WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF L AW RELATING THERETO AND NOT ON THE VIEW WHICH THE ASSE SSEE MIGHT TAKE OF HIS RIGHTS NOR CAN THE EXISTENCE OR ABSENCE OF ENTRIES IN HIS BOOKS OF ACCOUNT BE DECISIVE OR CONCLUSIVE IN THE MATTER.' 15. TO SIMILAR EFFECT ARE THE OBSERVATIONS OF THE SUPREME COURT IN THE CASE OF ERR VS CHUNILAL V. MEH TA & SONS (P) LTD. (82 ITR 54). 'THE METHOD OF MAINTAINING THE ACCOUNTS WAS ONE THING AND ACTUAL ENTRIES IN THE ACCOUNT MAINTAINED WAS A DIFFERENT THING. WHAT WAS RELEVANT WAS THE ME THOD OF ACCOUNTANCY AND NOT THE ACTUAL ENTRIES. 16. IN VIEW OF THE ABOVE MENTIONED VERY APT JUDGMENTS OF THE SUPREME COURT IT IS TO BE HELD TH AT 14 EVERY CLAIM OF THE ASSESSEE HAS TO BE ADJUDICATED I N ACCORDANCE WITH THE PROVISIONS OF LAW RELATING TO A ND NOT ON THE VIEW WHICH THE ASSESSEE OR THE ASSESSING OFF ICER MIGHT TAKE WITH REGARD TO THAT CLAIM WITH REFERENCE TO THE ENTRIES MADE IN THE BOOKS OF ACCOUNT. THE WAY IN WH ICH THE ENTRIES ARE MADE BY THE ASSESSEE IN THE BOOKS O F ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHE R THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS . WHAT IS VITAL TO BE CONSIDERED IS THE TRUE NATURE O F THE TRANSACTION AND WHETHER IN FACT ANY PROFIT OR LOSS HAS RESULTED TO THE ASSESSEE. THOUGH THE BOOK TREATMENT CANNOT BE ALSO LIGHTLY BRUSHED ASIDE YET THE FACT W ILL REMAIN THAT WHAT IS TO BE ALLOWED/DISALLOWED IS AS PER LAW AND NOT AS PER BOOK TREATMENT GIVEN. 17. HAVING SO OPINED WITH SPECIFIC REFERENCE TO THE FACTS OF THE PRESENT ISSUE. IT IS HELD THAT EXCHANG E EARNED ON CONVERSION OF FOREIGN CURRENCY WAS RELATED TO RE TENTION OF MONIES OBTAINED ON ISSUE OF CAPITAL ON CAPITAL A CCOUNT AND THE EXCHANGE RATE DIFFERENCE EARNED IN THIS CAS E WAS A CAPITAL RECEIPT AND WAS ACCORDINGLY NOT TAXABLE. WHEN THE ASSESSEE COMPANY IN THE FACTS AND CIRCUMSTANCE S OF THIS CASE ISSUED SHARES IN FOREIGN CURRENCY AS CAP ITAL WHAT IT ACTUALLY RECEIVED IN INDIA WAS AN EQUITY CA PITAL AND NOT CIRCULATING CAPITAL. DIFFERENT JUDGMENTS HAVE B EEN CITED BY RIVAL PARTIES BUT NONE OF THESE ARE STRICT LY APPLICABLE TO THE FACTS OF THE PRESENT CASE. THE O NLY DECISION OF MADRAS HIGH COURT IN THE CASE OF EID PA RRY LTD. VS CIT (174 ITR 11) IS THE JUDGMENT WHICH STEM S FULLY RELEVANT TO THE FACTS OF THE CASE. LIKE IED P ARRY CASE IN THE PRESENT CASE ALSO IT IS NOT IN DISPUTE THAT THE AMOUNT KEPT OVERSEAS AROSE OUT OF SUBSCRIPTION MONI ES RECEIVED FOR ALLOTMENT OF SHARES. LIKEWISE IN THIS CASE TOO THERE WAS NO QUESTION OF ANY SALE OF STOCK IN TRADE. AGAIN LIKE BID PARRY THE ISSUE OF SHARES WAS ITSE LF FOR THE EXPRESS PURPOSE OF COMPANY'S EXTENSION OF PLANT AS HIGHLIGHTED ABOVE. THERE IS NO WAY TO HOLD THAT THE AMOUNT WAS IN THE NATURE OF CIRCULATING CAPITAL. IN THE FACTS AND CIRCUMSTANCES OF THE CASE THERE IS NO DO UBT THAT THE AMOUNT IN QUESTION IS NOT A REVENUE RECEIP T. 15 18. HON'BLE SUPREME COURT'S DECISION IN THE C ASE OF SUTLEJ COTTON MILLS (116 XTR 1) PERHAPS STATES THE CORRECT POSITION OF LAW ON THE ISSUE INVOLVED. THE CLEAR RA TIO OF THE JUDGMENT IS THAT PROFIT OR LOSS ARISING TO AN ASSES SEE ON ACCOUNT OF APPRECIATION OFF DEPRECIATION WOULD IN T HE VALUE OF FOREIGN CURRENCY WOULD BE TRADING PROFIT O R LOSS IF FOREIGN CURRENCY IS HELD ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL* IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE THE FOREIGN CURRENCY LA HELD NEITHER ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL. THIS IS HELD ONLY ON CAPITAL ACCOUNT AND THE SUBSEQUENT ACCRETION THEREOF IS CLEARLY ON THE CAPITAL ACCOUNT . IN THE APPELLANT'S CASE AGAIN THERE IS NO BUSINESS TRANSAC TION INVOLVED AND THAT SURPLUS AS ARISING ON RAISING CAP ITAL BY GDR ISSUE AND THE SAME IS CLEARLY CAPITAL IN NATURE . ACCORDINGLY IT IS HELD THAT THE AMOUNT OF FOREIGN EXCHANGE GAIN OF RS.1 76.58 910/- IS FACTUALLY AND LEGALLY N OT THE REVENUE RECEIPT AND LA ACCORDINGLY NOT TAXABLE. THI S GROUND OF APPEAL IS THEREFORE DECIDED IN FAVOUR OF THE ASSESSEE. 19. AS REFERRED ABOVE THE CONTENTION OF THE ASSESSEE BEFORE THE ASSESSING OFFICER AND BEFORE ME ALSO WAS THAT IF IT WAS CONSIDERED THAT RS. 1.76 CRORES WAS EXIGI BLE TO INCOME-TAX* THE AMOUNT SPENT FOR EARNING THE SAME SHOULD BE ALLOWED AS EXPENDITURE* EXPENDITURE INCUR RED ON ODR ISSUE WAS TO.8.30 CRORES AND THE ASSESSEE HA D NOT CLAIMED THE SAME AS EXPENSES. IT IS POINTED OU T THAT THE ASSESSING OFFICER HAD NOT ADJUDICATED THIS ALTE RNATE PLEA AT ALL. SINCE I HAVE ALREADY DECIDED THE ISSUE INVOLVED IN FAVOUR OF THE ASSESSEE THIS ALTERNATE PLEA IS NOT FURTHER TAKEN UP FOR ADJUDICATION . 14. THE LEARNED D R SUBMITTED THAT IF INTEREST ALSO INCLUDES IN THE ABOVE AMOUNT IT WOULD BE TAXABLE A S INCOME. LEARNED D R RELIED UPON ORDER OF THE A O. O N THE OTHER HAND THE LEARNED COUNSEL FOR THE ASSESSEE RE ITERATED 16 THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW A ND SUBMITTED THAT IT IS NOT IN DISPUTE THAT ASSESSEE C OMPANY ISSUED SHARES IN FOREIGN CURRENCY AS CAPITAL AND RE CEIVED FOREIGN CURRENCY WHICH IS REMITTED TO INDIA. THE AM OUNT RECEIVED IN INDIA WAS AN EQUITY CAPITAL AND NOT CIR CULATING CAPITAL. HE HAS SUBMITTED THAT SINCE THE AMOUNT WAS HELD AS CAPITAL RECEIPT THEREFORE ANY ACCRETION TO THESE P ROCEEDS WOULD ALSO BE ON ACCOUNT OF CAPITAL. HE HAS SUBMITT ED THAT NO INTEREST IS INCLUDED IN THE AFORESAID AMOUNT. HE HAS RELIED UPON DECISION OF HON'BLE SUPREME COURT IN TH E CASE OF CIT VS WOODWARD GOVERNOR INDIA PVT. LTD. 312 ITR 254 IN WHICH IT WAS HELD THAT THE UN-AMENDED SECTION 43 A NOWHERE REQUIRED AS CONDITION PRECEDENT FOR MAKING NECESSARY ADJUSTMENT IN THE CARRYING AMOUNT OF THE FIXED ASSETS THAT THERE SHOULD BE ACTUAL PAYMENT OF THE INCREASED/DECREASED LIABILITY AS A CONSEQUENCE OF T HE EXCHANGE VARIATION. THE WORDS USED IN THE UN-AMENDE D SECTION 43A WERE FOR MAKING PAYMENT AND NOT ON PAYMENT WHICH IS NOW BROUGHT IN BY AMENDMENT TO SE CTION 43A VIDE THE FINANCE ACT 2002. THE LEARNED COUNSEL FOR THE ASSESSEE THEREFORE SUBMITTED THAT THE LEARNED CIT (A) CORRECTLY DELETED THE ADDITION. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND TH E MATERIALS AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE ASSESSEE COMPANY ISSUED SHARES IN FOREIGN CURRENCY AS CAPITAL AND RECEIVED FOREIGN CURRENCY IN INDIA ON A CCOUNT OF 17 EQUITY CAPITAL. IT WAS SUBMITTED BEFORE LEARNED CIT (A) THAT THE AMOUNT IN QUESTION WAS RECEIVED IN CONNECTION W ITH THE CAPITAL ISSUE AND THE SAME WAS SUPPORTED BY THE DOCUMENTS PREPARED FOR GDR ISSUE. IT WAS SPECIFICAL LY STATED THAT THE AMOUNT IN QUESTION WAS RECEIVED ON ACCOUNT OF EQUITY SHARES AND THE PROCEEDS WERE TO BE USED I N CONNECTION WITH THE CAPITAL EXPANSION PLANS OF THE ASSESSEE COMPANY. THE ASSESSEE PROVED BEFORE LEARNED CIT (A) THAT THE PROCEEDS OF THE GDR ISSUE WERE CLEARLY ON CAPIT AL ACCOUNT. MOREOVER THE AMOUNT RECEIVED ON ACCOUNT O F ISSUE OF THE SHARES COULD NOT BE TREATED AS INCOME. THE ASSESSEE THUS PROVED THAT THERE WAS NO BUSINESS TRANSACTION OUT OF THAT MONEY. THE SURPLUS HAS ARIS EN ON RAISING CAPITAL BY GDR ISSUE. THE SHARE CAPITAL SO RAISED IN FOREIGN CURRENCY WAS THUS CAPITAL OF THE ASSESSEE C OMPANY AND WAS RIGHTLY HELD TO BE CAPITAL IN NATURE. THE L EARNED CIT (A) ON PROPER APPRECIATION OF LAW RIGHTLY HELD THAT EVERY CLAIM OF THE ASSESSEE HAS TO BE ADJUDICATED IN ACCO RDANCE WITH THE PROVISIONS OF LAW RELATING TO AND NOT ON T HE VIEW WHICH THE ASSESSEE OR THE A O MIGHT TAKE WITH REGAR D TO THAT CLAIM WITH REFERENCE TO THE ENTRIES MADE IN TH E BOOKS OF ACCOUNTS. THE ENTRIES MADE IN THE BOOKS OF ACCOUNT ARE NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR LOSS. THE TRUE NATURE OF THE T RANSACTION SHALL HAVE TO BE CONSIDERED IN VIEW OF THE FACTS OF THE CASE. THE A O HAS NOT BROUGHT ANY EVIDENCE ON RECORD THAT THE AMOUNT IN QUESTION WAS IN THE NATURE OF CIRCULATING CAPITAL 18 OR IF ASSESSEE DID ANY BUSINESS TRANSACTION OUT OF THAT MONEY. THE LEARNED D R MERELY RELIED UPON ORDER OF THE A O WITHOUT POINTING OUT ANY INFIRMITY IN THE ORDER O F THE LEARNED CIT (A). THE LEARNED D R SUBMITTED THAT IF ANY INTEREST INCLUDES IN THE ABOUT AMOUNT IT IS TAXABL E. HOWEVER NO EVIDENCE IS BROUGHT ON RECORD IF ANY IN TEREST WAS INCLUDED IN THE AFORESAID AMOUNT. THE A O MADE ADDITION ON ACCOUNT OF THE AMOUNT RECEIVED AS CAPIT AL ISSUE AND CAPITAL ACCRETION. THEREFORE THERE IS NO QUEST ION OF INCLUDING ANY INTEREST THEREON. THE LEARNED CIT (A) ON PROPER APPRECIATION OF FACTS AND THE LAW RIGHTLY HE LD THAT THERE IS NO BUSINESS TRANSACTION INVOLVED IN THIS C ASE AND THE SURPLUS AS ARISING ON RAISING CAPITAL BY GDR IS SUE IS CLEARLY CAPITAL IN NATURE. WE THEREFORE DO NOT FI ND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A). WE C ONFIRM HIS FINDINGS AND DISMISS THIS GROUND OF APPEAL OF THE R EVENUE. 16. GROUND NO.2 AND 3: ON GROUND NO.2 T HE REVENUE CHALLENGED THE DELETION OF ADDITION OF RS.21.07 LAC S BEING SURPLUS ON EARLY REDEMPTION OF DEBENTURES AND ON GR OUND NO.3 CHALLENGED THE DELETION OF ADDITION ON ACCOUNT OF PROFIT ON FORFEITURE OF DEBENTURES AMOUNTING TO RS.42.52 L ACS. LEARNED REPRESENTATIVES OF BOTH THE PARTIES SUBMITT ED THAT BOTH THE GROUNDS ARE CONNECTED. THEREFORE BOTH ARE DISPOSED OF TOGETHER. 19 17. THE FACTS ON GROUND NO.2 ARE THAT IN THE COMPUT ATION OF INCOME THE ASSESSEE HAD EXCLUDED AN AMOUNT OF RS.2 1 07 350/- BELNG SURPLUS ON REDEMPTION OF DEBENTURES UNDER THE HEAD INCOME TREATED SEPARATELY. THIS AMOUNT WAS NOT OFFERED FOR TAXATION. FURTHER THE ASSESSEE OFFERED AN AMOUNT O F RS.8.70 000/- U/S. 41(L) OF THE ACT BEING REDEMPTIO N OF DEBENTURES PROVIDED IN THE BOOKS AND CLAIMED IN RESPECTIVE YEA RS NOW OFFERED U/S. 4L(L) OF THE ACT. THE ASSESSEE COMPANY HAD BORROWED MONIES BY ISSUE OF 14% NON-CONVERTIBLE DEB ENTURES PRIVATELY PLACED WITH INFRASTRUCTURE LEASING & FINANCE COMPAN Y. THE ASSESSEE COMPANY RECEIVED AS LOAN AN AMOUNT OF AN AMOUNT OF RS. 5 CRORES. THE DEBENTURES WERE FOR A PERIOD OF 7 YEAR S. INFRASTRUCTURE L EASING & FINANCE CO. REQUESTED THE ASSESSEE COMPANY TO PRE-PONE THE REPAYMENT OF THE LOAN AMOUN T RAISED BY WAY OF DEBENTURES. IT WAS DECIDED THAT AGAINST TO 3 CRORES RECEIVED BY WAY OF LOAN RS.4 73 75 000/- BE PAID TOWARDS PR INCIPLE AMOUNT AND AN AMOUNT OF RS.13 87 650/- BE PAID BY WAY OF PREMIUM ON REDEMPTION. THE COMPANY HAD MADE PROVISION FOR PREM IUM ON REDEMPTION AT RS.8 70 OOO/- AGAINST WHICH THE PREMI UM OF RS.13 87 650/- BECAME PAYABLE. THE NET EFFECT WAS SURPLUS ON REDEMPTION OF DEBENTURES. ASSESSEE'S CLAIM WAS TH AT EXCESS OF RS.26 25 000/- IS CAPITAL RECEIPT IN THE FORM OF R EDUCTION IN THE LIABILITY OF THE LOAN BEING DIFFERENCE BETWEEN RS.5 CRORES AN D RS. 4 73 75 000/- PAID TOWARDS THE PRINCIPLE AMOUNT . THE PREMIUM ON REDEMPTION OF RS.13 87 650/- WAS ADMISSIBLE EXPENDI TURE IN RESPECT OF THE BORROWING AGAINST WHICH PROVISION OF RS.8 70 000/- WAS MADE. ACCORDING TO THE ASSESSEE THEREFORE AN AMOUNT OF RS.5 17 650/- 20 WAS ADMISSIBLE AS DIFFERENCE BETWEEN THE PREMIUM PR OVIDED AND THE PREMIUM ACTUALLY PAID. DEBENTURE REDEMPTION ACCOUNT IS REPRODUCED IN PARA 5.3 OF THE ASSESSMENT ORDER. THIS AMOUNT OF RS.21 07 LAKHS WAS TREATED AS REVENUE INCOME BY THE ASSESSEE IN IT S PUBLISHED A/CS IN SCHEDULE 11 'OTHER INCOME' . DURING THE COURSE OF ASSESSMENT THE AUDITORS OF THE ASSESSEE WERE ASKED TO CLARIFY THE ACCOUNTING TREATMENT AS GIVEN. THE AUDITORS' VERSION WAS THAT AS PER ACCEPTED ACCOUNTING POLICY ANY GAIN OR LOSS ON REDEMPTION OF A LIABILITY IS TO BE ACCOUNTED THROUGH THE PROFIT AND LOSS ACCOUNT AND A CCORDINGLY THIS AMOUNT HAS BEEN SHOWN AS 'OTHER INCOME' IN THE PROF IT AND LOSS ACCOUNT. ASSESSEE'S VERSION DID NOT FIND FAVOUR WIT H THE ASSESSING OFFICER WHO HELD THAT IT WAS DIFFICULT TO APPRECIAT E THAT THE SURPLUS IS CAPITAL RECEIPT AND MORE SO WHEN THIS SURPLUS HAD A RISEN IN THE COURSE OF CONTINUING BUSINESS PROCESS OF THE ASSESS EE. ASSESSING OFFICER'S CONTENTION WAS THAT ANYTHING WHICH CAN BE DESCRIBED AS INCOME IS TAXABLE UNDER THE ACT UNLESS IT IS EXEMPT ED UNDER ONE OR OTHER PROVISIONS OF THE ACT. RELIANCE WAS PLACED IN THIS REGARD ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS G. R. KARTHIKEYAN (201 JTR 866). FINALLY IT WAS CONCLUDED THAT THE ASSESSEE'S CONTENTION REGARDING SURPLUS ARISING FRO M EARLIER REDEMPTION OF DEBENTURES WHICH WERE VERY MUCH PART AND PARCEL OF THE ON-GOING BUSINESS TRANSACTIONS AND PROCESS OF T HE ASSESSEE WERE NOT REVENUE IN CHARACTER AND WERE NOT ASSESSAB LE AS SUCH HOLDS NO WATER. AT THE APPELLATE STAGE BEFORE THE LEARNED CIT (A) IS WAS ARGUED THAT THE ASSESSING OFFICER HAS RELIED UPON SEVERAL DECISIONS WHICH EXPLAIN THE MEANING OF 'INCOME' AND DEFINITION OF ' INCOME'. NONE OF 21 THE DECISIONS RELIED UPON BY THE ASSESSING OFFICER APPLIES IN THE PRESENT CASE ON THE FACTS OF THE CASE. IT IS SUBMI TTED THAT IT IS NOT A TRADING SURPLUS. IT IS POINTED OUT THAT KERALA HIG H COURT IN THE CASE OF WESTERN (INDIA) PLYWOOD LTD. VS CIT (38 ITR 533) HA S HELD THAT AMOUNT RECEIVED ON ISSUE OF DEBENTURES IS CAPITAL R ECEIPT. ASSESSEE QUOTES AS UNDER: 'THE RAISING OF MONEY BY DEBENTURES OR MORTGAGE CAN NOT BE REGARDED AS AN ORDINARY INCIDENT IN CARRYING ON THE BUSINESS OR BE TREATED AS ON A PAR WITH TRADING OR BANKING FACI LITIES BUT MUST PRIMA FACIE AND IN THE ABSENCE OF OTHER INDICA TIONS BE CONSIDERED TO AFFECT THE CAPITAL OF THE CONCERN AND ITS PROFIT- MAKING STRUCTURE.' THE ASSESSEE ALSO REFERS TO BOMBAY HIGH COURT DECISION IN THE CASE OF CIT VS MAHINDRA & MAHINDRA LTD. (95 ITR 130 ). THE ASSESSEE QUOTES AS UNDER: 'IT IS WELL SETTLED THAT A RECEIPT IS NOT TAXABLE W HEN IT IS A FIXED CAPITAL. IT IS TAXABLE AS A REVENUE ITEM WHEN IT I S REFERABLE TO CIRCULATING CAPITAL OR STOCK-IN-TRADE AT THE COST OF REPETITION IT IS ONCE AGAIN SUBMITT ED THAT OBTAINING LOANS AND SETTLING THE SAME FOR LESSER AM OUNT IS NOT THE BUSINESS OF THE APPELLANT COMPANY NOR THERE IS ANY FINDING THAT THIS IS THE BUSINESS OF THE APPELLANT COMPANY . IT WAS FURTHER POINTED OUT THAT DURING THE YEAR T HERE WAS NO RECEIPT OF ANY INCOME. WHAT WAS RECEIVED WAS BORROW ING IN THE PAST WHEN DEBENTURES WERE ISSUED. REPAYMENT OF LIABILITY DOES NOT CAUSE ACCRUAL OF INCOME. THE SECOND LIMB OF THE GROUND OF APPEAL WAS THAT THE ASSESSING OFFICER OUGHT TO HAVE ALLOWED PREMIUM PAID ON DEBENTURES TO THE TUNE OF RS.13 87 650/-. NO COGENT REASONS HAVE 22 BEEN ADVANCED BY THE ASSESSING OFFICER FOR REJECTIN G THE CLAIM OF THE APPELLANT COMPANY. THE PREMIUM HAS BEEN DISCHARGED DURING THE YEAR UNDER CONSIDERATION AND IN VIEW OF THE I.T.A.T DECISION IN THE CASE OF RALLIS INDIA LTD. (24 ITD 496) AND ALSO ITAT'S DECISION IN THE CASE OF ARVIND HILLS LTD IN ITA NO.4800 IT WAS SUB MITTED THAT THIS WAS ALLOWABLE EXPENDITURE. THE ASSESSEE ALSO RELIES ON THE DECISION OF SUPREME COURT IN THE CASE OF INDIA CEMENTS LTD. (60 ITR 52) FOR ITS SUBMISSIONS AND CALCUTTA HIGH COURT'S DECISION IN T UNGABHADRA INDS. LTD. (207 ITR 553). IT WAS POINTED OUT THAT SUPREM E COURT HAS HELD IN THE CASE OF CHHAGANLAL MANGALDAS & CO. (39 ITR 8) THAT BOOK ENTRIES ARE NOT CONCLUSIVE EVIDENCE. THE HYPOTHETIC AL INCOME IS NOT AN INCOME FOR THE PURPOSE OF LEVY OF TAX TINDER THE INCOME-TAX ACT. THE ASSESSEE ALSO REFERS TO THE DECISION OF SUPREME COURT IN THE CASE OF SHOORJI VALLABHDAS 6 CO. (46 ITR 144) WHERE IN IT HAS BEEN HELD THAT ACCOUNTING ENTRY CANNOT BECOME INCOME UNL ESS INCOME HAS ACTUALLY RESULTED. IT WAS CONCLUDED BY ARGUING THA T OBTAINING OF LOAN AND SETTLING THE SAME FOR LESSER AMOUNT IS NOT THE BUSINESS OF THE COMPANY. DURING THE YEAR UNDER CONSIDERATION THERE IS NO RECEIPT OF INCOME BUT WHAT WAS RECEIVED BY ISSUE OF DEBENTURE S IN THE PAST WAS REPAID AND IT DONS NOT AMOUNT TO ACCRUAL OF INC OME. CONSIDERING THESE SUBMISSIONS IT WAS REQUESTED TO HOLD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TAXING THE AMOUNT OF RS.21.07 LAKHS BEING SURPLUS ON EARLY REDEMPTION OF DEBENTURES. 18. THE LEARNED CIT (A) CONSIDERING THE FACTS OF TH E CASE AND SUBMISSIONS OF THE PARTIES DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. 23 HIS FINDINGS IN PARA 24 OF THE APPELLATE ORDER ARE REPRODUCED AS UNDER: 24. AFTER CONSIDERING THE RIVAL SUBMISSIONS IT IS HELD THAT IN VIEW OF THE FACT AND CIRCUMSTANCE OF THE CA SE THERE WAS NO ACTUAL RECEIPT OF ANY INCOME. WHAT WAS RECEIVED ACTUALLY WAS IN THE NATURE OF BORROWINGS I N THE PAST WHEN DEBENTURES WERE ISSUED THIS IS ONLY THE CASE OF REPAYMENT OF A LIABILITY WHICH IN ANY WAY CANNOT BE CONSIDERED TO CAUSE ANY ACCRUAL OF INCOME. IT IS A SETTLED PROPOSITION OF LAW THAT AN ACCOUNTING ENTRY CANNOT BY ITSELF BECOME INCOME UNLESS THE INCOME HAS ACTUALLY RESULT ED. IT MUST BE KEPT IN MIND THAT OBTAINING OF LOAN AND SETTLING THE SAME WITH LESSER AMOUNT IS NOT THE BUSINESS OF THE COMPANY. DURING THE YEAR UNDER REVIEW THERE WAS NO RECEIPT OF INCOME AS ALLEGED BY THE A. O. SINCE WH AT WAS RECEIVED BY ISSUE OF DEBENTURES IN THE PAST WAS ON LY REPAID AND THIS DID NOT AMOUNT TO ACCRUAL OF ANY IN COME. ASSESSING OFFICERS CONTENTION THAT ANY INCOME CAN BE DESCRIBED AS INCOME UNDER THE ACT UNLESS IT IS EXEM PTED IS NOT THE CORRECT POSITION AT ALL. THE DECISIONS Q UOTED BY THE ASSESSING OFFICER TO SUPPORT THIS VIEW DO NOT A PPLY ON THE FACT OF THE PRESENT CASE. MAY BE AT THE COAT O F REPETITION IS HAS TO BE EMPHASIZED AGAIN THAT OBTAI NING LOAN AND SETTLING THE SAME WITH LEASER AMOUNT LA NO T THE BUSINESS OF THE APPELLANT COMPANY AND THERE LA NO F INDING IN THE ASSESSMENT ORDER ALSO THAT THIS IS THE BUSIN ESS OF THE APPELLANT COMPANY. IT LA ALSO HIGHLIGHTED AGAI N THAT THE PRESENCE OF BOOK ENTRIES IN ONE FORM OR THE OTH ER WILL NOT CONCLUDE THE ISSUE BY ITSELF SINCE BOOK ENTRIES ARE NOT CONCLUSIVE EVIDENCE WITH REGARD TO THE NATURE OF A CLAIM. THIS PROPOSITION HAS BEEN DISCUSSED AT LENGTH IN GR OUND N O . 2 ABOVE AND THE SAME IS NOT REPEATED AGAIN. IN THE FACTS AND CIRCUMSTANCES OF THE ISSUE INVOLVED IT I S HELD THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN TAX ING THE AMOUNT OF RS.21 07 LAKHS BEING SURPLUS ON EARLY REDEMPTION OF DEBENTURES. THIS GROUND OF APPEAL IS ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSEE. 24 19. THE FACTS OF THE 3RD GROUND OF APPEAL ARE THAT THE ASSESSEE HAD CREDITED TO CAPITAL RESERVE PROFIT ON RE-ISSUE OF F ORFEITURE OF SHARES AMOUNTING TO RS.7.46 LAKHS AND PROFIT ON FORFEITURE OF DEBENTURES AMOUNTING TO RS.42.52 LAKHS. THE ASSESSEE WAS REQUI RED TO CLARIFY AS TO WHY THE PROFIT ON FORFEITURE ON DEBENTURES SHOUL D NOT BE TREATED AS INCOME LIABLE TO TAX. IN COMPLIANCE THE ASSESSEE C ONTENDED THAT DURING THE YEAR UNDER CONSIDERATION THERE WAS FORF EITURE OF EQUITY SHARES ON ACCOUNT OF NON-RECEIPT OF CALL MONEY SIM ILARLY 0% FCD S WERE ALSO FORFEITED ON ACCOUNT OF NON-RECEIPT OF CA LL MONEY. IT WAS CONTENDED THAT THOUGH THE DEFINITION OF THE WORD ON E WAS INCLUSIVE YET THE SAME COULD BE MADE APPLICABLE PROVIDED NATURE O F RECEIPT WAS REVENUE. RELIANCE IN SUPPORT WAS PLACED ON THE JUDG MENT OF HONBLE SUPREME COURT IN THE CASE OF SUTLEJ COTTON MILLS LT D. VS CIT (116 ITR 1) AND THAT OF TATA LOCOMOTIVE COMPANY LTD. (60 ITR 405). IT WAS CONTENDED THAT THE FORFEITURE AMOUNT WAS A CAPITAL RECEIPT NOT EXIGIBLE TO TAX. AS FAR AS PROFIT ON FORFEITURE OF EQUITY SH ARES WAS CONCERNED THE SAME BEING DIRECTLY RELATABLE TO SHARE CAPITAL ASSESSEES CONTENTION WAS FOUND TO BE ACCEPTABLE. A S PER ASSESSING OFFICER EQUITY STOOD AT DIFFERENT FOOTING FROM THAT OF DEBE NTURES. IN VIEW OF THE DETAILED REASONS AS GIVEN ABOVE IN CONNECTION WITH THE TAXABILITY OF SURPLUS ON REDEMPTION ON DEBENTURES AND APPLYING TH E SAME ANALOGY THE SURPLUS RECEIVED BY THE ASSESSEE ON FORFEITURE OF DEBENTURES WAS HELD TO BE REVENUE IN NATURE AND TAXABLE AS SUCH. 20. AT THE APPELLATE STAGE BEFORE LEARNED CI T (A) IT WAS SUBMITTED THAT THE SUBMISSIONS MADE IN RESPECT OF G ROUND NO . 2 ABOVE WERE SQUARELY APPLICABLE IN THIS CASE AND SIN CE THE PROFIT WAS 25 EARNED ON ACCOUNT OF FORFEITURE OF DEBENTURES. IT W AS OF CAPITAL NATURE WHICH HAS BEEN CORRECTLY CREDITED TO CAPITAL RESERV E ACCOUNT AND THE ACCOUNTING TREATMENT GIVEN ALSO SUPPORTS THE CASE O F THE ASSESSEE COMPANY. IN THIS VIEW OF THE MATTER THE ASSESSING OFFICER WAS REQUIRED TO DELETE THE ADDITION OF RS. 42. 52 LAKHS. 21. THE LEARNED CIT (A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND MATERIAL ON RECORD DELETED THE ENTIRE ADDITION. HIS FINDINGS IN PARA 27 ARE REPRODUCED AS UNDER: 27. AFTER CONSIDERATION IT IS FELT THAT THE A.O. HAS NOT PERHAPS FULLY APPRECIATED THE ENTIRE FACTS RELATING TO THE F FORFEITURE OF SHARES AND DEBENTUR ES. AS NOTED IN THE ASSESSMENT ORDER SURPLUS AROSE ON TWO ITEMS OF FORFEITURE DURING THE YEAR. ONE WAS ON THE EQUITY SHARES AND THE OTHER WAS IN RESPECT OF DEBENTURES. THE ORDER TREATS THE FORMER AS ON CAPITAL ACCOUNT BUT THE LATER AS INCOME. IT IS POIN TED OUT BY THE APPELLANT THAT IN ASSESSEE'S OWN CASE FO R A.Y. 1992-93 AND 93-94 PCD/FCD ISSUE EXPENSES WERE HELD AS CAPITAL EXPENSES BY CIT(A) AND THE CLAIM WAS ALLOWED AS L/10TH EVERY YEAR FOR 10 YEARS . IT IS POINTED OUT BY THE APPELLANT THAT EVEN THOSE DEBENTURES WERE 0% FULLY CONVERTIBLE DEBENTURES MEANING THEREBY THAT NO INTEREST WAS PAYABLE ON THEM AND THEY WERE TO BE FULLY CONVERTED INTO EQUIT Y SHARES WITHOUT DOING ANY ACT BY THE DEBENTURE HOLDERS. THE FIRST PART WAS CONVERTIBLE INTO EQUITY SHARES ON APRIL 1993 I.E. ON THE FIRST DAY OF THE PREVIOUS YEAR RELEVANT TO THIS APPEAL AND THE SECOND PART WAS CONVERTIBLE ON THE FIRST DAY OF THE PREVIOUS YEAR IMMEDIATELY SUCCEEDING THE PREVIOUS YEAR RELEVANT TO THIS APPEAL THAT IS AT THE BEGINN ING OF THE IMMEDIATELY SUCCEEDING YEAR WHICH IS AS GOOD AS THE END OF THE PREVIOUS YEAR RELEVANT TO TH IS APPEAL. THE POINT IS THAT THE SURPLUS WAS ON THOSE FCDS WHICH WERE CONVERTIBLE FULLY INTO EQUITY SHARE S 26 PARTLY IN THE BEGINNING OF THE PREVIOUS YEAR RELEVA NT TO THIS APPEAL AND PARTLY ON THE FIRST DATE OF THE SUCCEEDING PREVIOUS YEAR. THUS GOOD PART HAD ALREADY BECOME CONVERTIBLE IN THE BEGINNING OF THE PREVIOUS YEAR AND THE REMAINING PART WAS CONVERTIBLE ON THE DATE IMMEDIATELY SUCCEEDING THE END OF THE PREVIOUS YEAR RELEVANT TO THIS APPEAL. THOSE FCDS WERE CONCEPTUALLY AND QUALITATIVELY AS GOOD OR BAD AS EQUITY SHARES THEMSELVES. OBVIOUSLY FOR THE FACILITY OF ACCOUNTING AND IDENTIFICATION THEY WERE CONTINUED TO BE TERMED AND DEALT WITH AS FCDS. SO THE LOGIC AND REASONING FOLLOWED IN THE ASSESSMENT ORDER FOR NOT TAXING THE SURPLUS ON FORFEITURE OF EQUITY SHARES APPLIES VERY SUBSTANTIALLY TO THE SURPLUS ARISING ON THE FORFEIT URE OF THESE FCDS ALSO HENCE THE SAME IS HELD TO BE NOT TAXABLE. IT IS ALSO HELD THAT ISSUE OF DEBENTU RES IS ALSO ON CAPITAL ACCOUNT AND HENCE THE AMOUNT RECEIVED ON FORFEITURE IS ALSO ON CAPITAL ACCOUNT. APART FROM THIS HE ISSUE OF DEBENTURES AND FORFEITU RE THEREOF HAS NOT ARISEN OUT OF ANY BUSINESS DEAL BUT IT HAS ARISEN WITH REFERENCE TO THE CAPITAL OF THE COMPANY OR OUT OF THE TRANSACTION OF BORROWING OF DEBENTURES. ACCORDINGLY IT COULD NEVER BE CONSIDERED AS ON REVENUE ACCOUNT. IN VIEW OF THIS DISCUSSION THE ADDITION BEING UNJUSTIFIED IS DIREC TED TO BE DELETED. 22. LEARNED D R RELIED UPON ORDER OF THE A O. ON TH E OTHER HAND LEARNED COUNSEL FOR THE ASSESSEE REITERATED TH E SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE OBTAINING OF LOAN AND SETTLING T HE SAME FOR LESSER AMOUNT WAS NOT THE BUSINESS OF THE ASSES SEE. NO AMOUNT WAS RECEIVED AS INCOME BUT WHAT WAS RECEIVE D WAS BY ISSUE OF DEBENTURES IN THE PAST WAS REPAID AND I T WOULD NOT AMOUNT TO ACCRUAL OF INCOME. HE HAS FURTHER SUB MITTED 27 THAT THERE WAS FORFEITURE OF EQUITY SHARES ON ACCOU NT OF NON- RECEIPT OF CALL MONEY. IT WAS CONTENDED THAT FORFEI TURE AMOUNT WAS A CAPITAL RECEIPT NOT EXIGIBLE TO TAX. H E HAS RELIED UPON ORDER OF ITAT AHMEDABAD BENCH IN THE CA SE OF DCIT VS BRIJLAXMI LEASING & FINANCE LTD. 118 ITD 54 6. 23. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MA TERIAL AVAILABLE ON RECORD. THE FACTS AS NOTED ABOVE ARE N OT IN DISPUTE. THE ASSESSEE COMPANY HAD BORROWED MONEY BY ISSUE OF DEBENTURES PRIVATELY PLACED WITH INFRASTRU CTURE LEASING & FINANCE CO. THE ABOVE PARTY REQUESTED THE ASSESSEE COMPANY TO PRE-PONE THE REPAYMENT OF LOAN AMOUNT RAISED BY WAY OF DEBENTURES. THE NET EFFECT ON REPAYMENT WAS SURPLUS ON REDEMPTION OF DEBENTURES. THEREFORE IT WAS A CASE OF REPAYMENT OF LIABILITY WHICH COULD NOT BE CONSIDERED TO CREATE ANY ACCRUAL OF IN COME. IT WAS NOT BUSINESS OF THE ASSESSEE TO OBTAIN LOAN AND SETTLE THE SAME WITH LESSER AMOUNT. SINCE WHAT WAS RECEIVE D BY ISSUE OF DEBENTURES IN THE PAST WAS ONLY REPAID WOU LD NOT AMOUNT TO ACCRUAL OF INCOME. BOOK ENTRIES ARE NOT CONCLUSIVE TO DETERMINE THE CHARACTER OF INCOME. SI MILARLY ASSESSEE PLEADED BEFORE THE AUTHORITIES BELOW THAT THERE WAS FORFEITURE OF EQUITY SHARES ON ACCOUNT OF NON-R ECEIPT OF CALL MONEY. SIMILARLY 0% FCD WAS ALSO FORFEITED ON ACCOUNT OF NON-RECEIPT OF CALL MONEY. IT WAS CONTEN DED THAT FORFEITURE AMOUNT WAS A CAPITAL RECEIPT. THE LEARNE D CIT (A) SPECIFICALLY NOTED THAT THE SURPLUS AROSE ON TWO IT EMS OF 28 FORFEITURES I.E. ONE ON EQUITY SHARES AND OTHER WAS IN RESPECT OF DEBENTURES. THE A O ACCEPTED CONTENTION OF THE ASSESSEE AS FAR AS FORFEITURE OF EQUITY SHARES WAS CONCERN AND WAS TREATED AS CAPITAL RECEIPT BUT FORFEITURE O F DEBENTURE WAS HELD TO BE ON ACCOUNT OF REVENUE RECE IPT. THE LEARNED CIT (A) CONSIDERING THE PREVIOUS HISTOR Y OF THE ASSESSEE AND NATURE OF THE TRANSACTIONS HELD THAT I SSUE OF DEBENTURE IS ALSO ON CAPITAL ACCOUNT AND HENCE THE AMOUNT RECEIPTS ON FORFEITURE WAS ALSO ON CAPITAL ACCOUNT. ITAT AHMEDABAD BENCH IN THE CASE OF BRIJLAXMI LEASING & FINANCE LTD. (SUPRA) CONSIDERING THE DECISION OF TH E HON'BLE SUPREME COURT IN THE CASE OF T. V. SUNDARAM IYENGER & SONS LTD. 222 ITR 344 CONSIDERED THE ISSUE IN WHICH ASSESSEE CLAIMED THAT SINCE AMOUNT INITIALLY RECEIV ED PERTAIN TO CAPITAL RECEIPT FORFEITURE OF SUCH RECE IPTS COULD NOT BE TREATED OF REVENUE NATURE. THE A O REJECTED THE CLAIM OF THE ASSESSEE. HOWEVER LEARNED CIT (A) ALL OWED THE CLAIM OF THE ASSESSEE. IT WAS HELD WHETHER SINCE AMOUNT WAS RECEIVED AGAINST THE ISSUE OF SHARES WHI CH WAS NOT BUSINESS OF ASSESSEE-COMPANY SAME COULD NO T BE TREATED AS RECEIPT IN NORMAL COURSE OF BUSINESS HELD YES WHETHER MOREOVER SINCE ASSESSEE HAD N OT CREDITED FORFEITED AMOUNT IN ITS PROFIT & LOSS ACCO UNT BUT CONTRADISTINCTION TO THAT IT HAD CREDITED THE S AME IN CAPITAL RESERVE ACCOUNT IMPUGNED ORDER OF COMMISSIONER (APPEALS) WAS TO BE CONFIRMED HELD YES. CONSIDERING THE FACTS AND CIRCUMSTANCES IN THE LIG HT 29 OF FINDINGS OF THE LEARNED CIT (A) AND THAT NO INFI RMITY OR ILLEGALITY HAVE BEEN POINTED OUT IN THE ORDER OF TH E LEARNED CIT (A) WE DO NOT FIND IT TO BE A FIT CASE FOR INT ERFERENCE. LEARNED CIT (A) ON PROPER APPRECIATION OF FACTS AND MATERIAL ON RECORD RIGHTLY HELD THAT NO INCOME ACCR UED TO THE ASSESSEE. WE THEREFORE DO NOT FIND ANY MERIT IN THESE GROUNDS OF APPEAL OF THE REVENUE. THE SAME ARE ACCORDINGLY DISMISSED. 24. ON GROUND NO.4 REVENUE CHALLENGED THE ORDER OF THE LEARNED CIT (A) IN DELETING THE ADDITION OF COMMITM ENT CHARGES OF RS.46 54 429/- PAID TO ASHOKA MILLS. 25. THE FACTS ON THIS GROUND OF APPEAL ARE THAT IN THE COMPUTATION OF INCOME FILED THE ASSESSEE HAD CLAIMED COMMITMENT C HARGES OF RS.46 54 429/- AS DEDUCTION AS EXPENSES U/S. 37 OF THE ACT. THESE COMMITMENT CHARGES WERE PAID TO ASHOKA MILLS LTD. IN PURSUANCE TO AGREEMENT FOR USING MANUFACTURING FACILITIES TH E CHARGE PAYABLE WAS FOR YARN MANUFACTURED IN ASHOKA MILLS L TD. THE AGREEMENT PROVIDED THAT IN CASE THE PRODUCTION OF Y ARN WAS LESS THAN THE COMMITTED PRODUCTION A MINIMUM SUM WAS PA YABLE TO ASHOKA MILLS. DURING THE COURSE OF ASSESSMENT COPY OF THE AGREEMENT ENTERED INTO WITH ASHOKA MILLS WAS PRODUC ED. AS PER SAID AGREEMENT COMMITMENT CHARGES OF RS. 17 LAKHS PER MONTH MINIMUM WERE THERE. THIS BEING THE NEW FACILITY FOR PRODUCTION IT WAS NOT POSSIBLE DURING THE YEAR TO REACH OPTIMU M CAPACITY PRESCRIBED IN THE AGREEMENT AND THEREFORE TO MAKE G OOD 30 PRODUCTION EFFICIENCY COMMITMENT CHARGES HAD TO BE PAID TO ASHOKA MILLS. THE CONTENTION OF THE ASSESSING OFFIC ER WAS THAT COMMITMENT CHARGES PAID OF RS. 46.54 LAKHS PRIMA FA CIE RELATED TO THE PERIOD PRIOR TO COMMENCEMENT OF PRODUCTION F ROM NEW MACHINES TO BE INSTALLED BY THE ASSESSEE AT THE PRE MISES OF ASHOKA MILLS. THESE EXPENSES WERE THEREFORE LIABLE TO BE TREATED AS CAPITAL EXPENSES. AS PER A. O. AGAIN T HE ASSESSEE HAD CAPITALIZED THIS AMOUNT IN ITS IN ITS BOOKS OF ACCOUNT AND AS PER DETAILS AVAILABLE ON RECORD THIS AMOUNT OF RS. 46 54 429/- WAS PAID FOR THE PERIOD PRIOR TO THE COMMENCEMENT OF THE PRODUCTION FROM THE NEW MACHINERIES INSTALLED. DURING THE COURSE OF ASSESSMENT THE AUDITORS OF THE ASSESSEE WERE ALSO ASKED TO CLARIFY THE POSITION REGARDING CAPITALIZATION OF AF ORESAID COMMITMENT CHARGES PAID TO ASHOKA MILLS LTD. AUDIT ORS' VERSION IN THIS REGARD FINDS PLACE AT PAGE 66 OF THE ASSESS MENT ORDER. THE FINDING OF THE ASSESSING OFFICER ACCORDINGLY WA S THAT ONCE THE AMOUNT PAID HAS BEEN PROPERLY CAPITALIZED AS PE R ACCOUNTING STANDARDS OF ICAI AND HAS BEEN APPROVED BY LAW AS W ELL AS GENERAL SHARE HOLDERS REGARDING THE TREATMENT GIVEN IN PUBLISHED ACCOUNTS ASSESSEE HAS NO CASE FOR ASKING FOR A DIFFERENT TREATMENT FOR INCOME-TAX PURPOSE. THE EXP ENDITURE WAS HELD TO BE CAPITAL IN NATURE AND ASSESSEE'S CLAIM OF DED UCTION WAS ACCORDINGLY REJECTED. 26. THE ADDITION WAS CHALLENGED BEFORE LEARNED COM MISSIONER OF INCOME TAX (APPEALS) AND IT WAS PLEADED THAT THIS A MOUNT WAS PAID BY THE ASSESSEE TO ASHOKA MILLS LTD. IN CONNECTION WITH THE 31 AGREEMENT TO MAKE AVAILABLE MANUFACTURING INFRASTRU CTURE FACILITIES OF THE SAID COMPANY FOR MANUFACTURE OF YARN. THE AGREE MENT WAS FOR THE PERIOD OF 7 YEARS AND COULD BE TERMINATED BY GI VING THREE MONTHS' NOTICE. THUS THERE WAS NO PERMANENT RIGHT AVAILABL E TO THE ASSESSEE BY PAYMENT OF COMMITMENT CHARGES. IT WAS SUBMITTED THAT THE PAYMENT OF COMMITMENT CHARGES HAD NO NEXUS WITH THE INSTALLATION OF PLANT AND MACHINERY. IT WAS PAID FOR MAKING AVAILA BLE FACILITIES OF AAHOKA MILLS LTD. FOR MANUFACTURE OF YARN. THE YARN HAS TO BE USED FOR UTILIZING THE WEAVING CAPACITY OF THE ASSESSEE FOR PRODUCTION OF TEXTILES. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF TEXTILES AND THEREFORE THE COMMITMENT CHARGES I NCURRED WERE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. IN THIS C ONNECTION THE ASSESSEE REPRODUCED RELEVANT PARAS OF THE AGREEMENT WITH ASHOKA MILLS LTD. DATED 10.5.1993 AS UNDER: 'CONSIDERATION: IT IS AGREED BY AND BETWEEN THE PARTIES THAT ARVIND SHALL PAY TO ASOKA THE CONVERSION CHARGES TO BE ARRIVED AT ON TH E BASIS OF THE ACTUAL COAT PLUS 10% SUBJECT TO MINIMUM OF RS.1 7 LAKHS PER MONTH OR RS.7 60 KG. OF YARN PRODUCED WHICH AVER IS HIGHER .. THE ABOVE CHARGES SHALL BE PAYABLE FRONT THE DATE O F JOB WORK ACTUALLY COMMENCES. IT HAS ALSO BEEN AGREED BY AND BETWEEN THE PARTIES THAT FROM THE DATE OF AGREEMENT TILL JO B WORK ACTUALLY COMMENCES ARVLND SHALL PAY COMMITMENT CHARGES AT T HE RATE OF FIT. 5 LAKHS PER MONTH ON PRO-RATA OR PART THERE OF. THUS RATES WERE FIXED FOR THE JOB WORK TO BE ACTUA LLY DONE. BUT UP TO THE TIME OF COMMENCEMENT OF JOB WORK SOME MINIMUM A MOUNT WAS ENVISAGED FOR THE TIME UP TO INSTALLATION AND COMMI SSIONING OF THE 32 ADDITIONAL SPINNING FACILITIES. WITHOUT PREJUDICE T O THE ABOVE CONTENTIONS IT WAS SUBMITTED THAT EVEN ON THE BASI S OF THE ASSESSING OFFICER'S ARGUMENT IF IT IS HELD THAT THE COMMITME NT CHARGES WERE CAPITAL IN NATURE AND RELATED TO INSTALLATION OF MA CHINERY THE ASSESSING OFFICER WAS NOT JUSTIFIED IN NOT ALLOWING THE DEPRECIATION ONLY ON THE GROUND THAT THE ISSUE HAS NOT REACHED T HE FINAL STAGE. ONCE HE DECIDED THAT IT WAS CAPITAL IN NATURE RELAT ED TO INSTALLATION OF MACHINERY HE WAS DUTY BOUND TO ALLOW THE DEPRECIAT ION THE SAME. ACCORDINGLY THE NECESSARY RELIEF WAS PRAYED THE MA IN GROUND AND IF THAT WAS NOT ACCEPTABLE RELIEF WAS PRAYED ON THE A LTERNATE GROUND. THE LEARNED CIT (A) CONSIDERING THE MATERIAL ON REC ORD AND SUBMISSIONS OF THE ASSESSEE HELD THAT COMMITMENT CH ARGES PAID BY THE ASSESSEE WAS REVENUE IN NATURE. THE FINDINGS OF THE LEARNED CIT (A) IN PARAS 32 TO 35 IN THE IMPUGNED ORDER ARE REP RODUCED AS UNDER: 32. I HAVE GONE THROUGH THE RIVAL SUBMISSIONS CAREFULLY. IT IS AN UNDISPUTED FACT THAT THE APPELLANT COMPANY HAD PAID TO.46.54 LAKHS TO ASHOKA MILLS LTD. IN CONNECTION WITH ITS AGREEMENT TO USE MANUFACTURING INFRASTRUCTURE FACILITIES OF ASHOKA MILLS LTD. FOR MANUFACTURE OF YARN. THE AGREEMENT WAS FOR A FIXED PERIOD AND COULD BE TERMINATED BY THE APPELLANT COMPANY BY GIVING THREE MONTHS NOTICE. IN THIS CONTEXT IT IS OBVIOUS THAT NO PERMANENT RIGHTS HAD BEEN OBTAINED AND ACCORDINGLY IT COULD BE INFERRED THAT BY PAYING COMMITMENT CHARGES NO ADVANTAGE OF ENDURING NATURE HAD BEEN OBTAINED BY THE APPELLANT COMPANY. IF READ IN PROPER PERSPECTIVE THE PAYMENT OF COMMITMENT CHARGES HAS NOTHING TO DO WITH THE INSTALLATION OF PLANT AND MACHINERY. COMMITMENT CHARGES WERE CLEARLY PAYABLE RELATED TO YARN 33 MANUFACTURE WITH A CLAUSE OF MINIMUM PAYABLE RENT. IT IS A MATTER OF RECORD THAT THE ASSESSING OFFICER HAD CLEARLY HELD THAT THE BUSINESS OF THE APPELLANT COMPANY WAS MANUFACTURE OF TEXTILES. IT IS ALSO UNDISPUTED THAT THE APPELLANT HAD SPARE WEAVING CAPACITY FOR TEXTILES AND TO MAKE FULL USE OF THE SAME. INFRASTRUCTURE FACILITIES OF ASHOKA MILLS WERE OBTAINED SO THAT YARN COULD BE MANUFACTURED TO ENHANCE THE PRODUCTION COMMITMENT CHARGES WERE ACCORDINGLY PRODUCTION LINKED EXPENSES WHICH WERE CLEARLY OF REVENUE NATURE. 33. THE MAIN REASONS GIVEN BY THE ASSESSING OFFICER FOR NOT ALLOWING THIS EXPENDITURE ARE (I) THE EXPENDITURE IS OF CAPITAL NATURE. (II) THE EXPENDITURE RELATES TO PREPUTTING TO USE OF PLANT AND MACHINERY. 34. RELIANCE HAS BEEN PLACED UPON THE HONBLE GUJARAT HIGH COURT DECISIONS IN THE CASE OF VALLABH GLASS WORKS AND SAURASHTRA CEMENTS & CHEMICALS LTD. IN VALLABH GLASS WORKS THE BUSINESS HAD NOT COMMENCED AND MACHINERY WAS BEING PUT TO USE FOR THE FIRST TIME. IN THE CASE OF SAURASHTRA CEMENT IT WAS HELD THAT A NEW ASSET WAS ACQUIRED AND THEREFORE IT WAS CAPITAL EXPENDITURE. IN NUTSHELL NONE OF THE DECISIONS RELIED UPON BY THE ASSESSING OFFICER IS APPLICABLE IN THE CASE OF APPELLANT COMPANY BECAUSE IN THE CASE OF THE ASSESSEE COMPANY BUSINESS OF TEXTILES MANUFACTURE WAS CARRIED SINCE LAST 50 YEARS. IN THIS BACKGROUND COMMITMENT CHARGES WERE PRODUCTION LINKED EXPENSES WHICH OBVIOUSLY WERE REVENUE IN NATURE. IN THIS REGARD* APPELLANT COMPANY'S RELIANCE ON CALCUTTA HIGH COURT'S DECISION IN THE CASE OF KESORAM INDUSTRIES AND 34 COTTON MILLS LTD. VS CIT (196 ITR 845) IS WELL PLACED IN WHICH IT HAS BEEN HELD THAT EXPENDITURE INCURRED IN CONNECTION WITH EXPANSION OF BUSINESS IS REVENUE EXPENDITURE. IT HAS BEEN HELD IN THIS DECISION THAT IF THE EXPENSES ARE INCURRED IN CONNECTION WITH THE SETTING UP OF A NEW BUSINESS SUCH EXPENSES WILL BE ON CAPITAL ACCOUNT. BUT WHERE THE SETTING UP DOES NOT AMOUNT TO STARTING OF A NEW BUSINESS BUT EXPANSION OR EXTENSION OF THE BUSINESS ALREADY BEEN CARRIED ON BY THE ASSESSEE EXPENSES IN CONNECTION WITH SUCH EXPANSION OR EXTENSION OF THE BUSINESS MUST BE HELD TO BE DEDUCTIBLE AS REVENUE EXPENSES. 35. WHILE DECIDING THIS ISSUE THE ASSESSING OFFICER HAS BEEN AGAIN GUIDED BY THE BOOK TREATMENT AS INITIALLY GIVEN IN THE BOOKS. IN THIS REGARD I HAVE ALREADY GIVEN A FINDING AS ABOVE THAT WHETHER A PARTICULAR EXPENDITURE IS OF REVENUE OR CAPITAL NATURE LA A QUESTION OF LAW WHICH IS TO BE DECIDED IN ACCORDANCE WITH A DECIDED CASE LAW ON THE ISSUE. ACCOUNTING STANDARDS ARE PRIMARILY GUIDING PRINCIPLES FOR MAKING ENTRIES OR WRITING THE ACCOUNTS. DESPITE ENTRIES MADE IN THE A/CS FOLLOWING SUCH RECOGNIZED ACCOUNTING STANDARDS IT IS OPEN TO THE APPELLATE AUTHORITIES AND TO THE COURTS TO EXAMINE THE CLAIM FOR DEDUCTION HAVING REGARD TO THE PROVISIONS OF LAW AND NOT MERELY ON THE BAILS OF ACCOUNTING ENTRIES. THE QUESTION OF SUCH ENTRIES BEING ERRONEOUS OR OTHERWISE IS NOT RELEVANT TO THE ISSUE. IN VIEW OF THIS DISCUSSION IT IS HELD THAT THE APPELLANT COMPANY BEING ALREADY IN TEXTILE BUSINESS OF MANUFACTURING CLOTH THE AGREEMENT ENTERED FOR OBTAINING INFRASTRUCTURE FACILITIES WOULD ENTITLE THE APPELLANT COMPANY TO CLAIM THE COMMITMENT CHARGES PAID UNDER SUCH AGREEMENT AS REVENUE EXPENDITURE. THIS GROUND OF APPEAL IS 35 ACCORDINGLY DECIDED IN FAVOUR OF THE ASSESSES SINCE THE ASSESSEE SUCCEEDS FULLY WITH REGARD TO THIS GROUND OF APPEAL THE ALTERNATE GROUND IS NOT FURTHER ADJUDICATED. 27. THE LEARNED D R RELIED UPON ORDER OF THE A O AN D SUBMITTED THAT THE EXPENDITURE SHOULD BE CAPITALIZE D BEING RELATED TO PERIOD PRIOR TO COMMENCEMENT OF PRODUCTI ON AND IS CAPITAL IN NATURE. ON THE OTHER HAND LEARNED CO UNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW AND SUBMITTED THAT EXPENDITURE WA S REVENUE IN NATURE BECAUSE SAME COMMITMENT CHARGES W ERE PRODUCTION LINKED EXPENSES. 28. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVE NUE. IT IS ADMITTED FACT THAT ASSESSEE COMPANY HAD PAID RS.46. 54 LACS TO ASHOKA MILLS LTD. AS COMMITMENT CHARGES IN CONNECTION WITH THE AGREEMENT TO USE MANUFACTURING INFRASTRUCTURE FACILITIES OF ASHOKA MILLS LTD. FOR MANUFACTURING OF YEARN. THESE FACILITIES WERE AVAIL ABLE TO THE ASSESSEE FOR A FIXED PERIOD AND COULD BE TERMIN ATED BY GIVING THREE MONTHS NOTICE. THEREFORE NO PERMANENT RIGHT WAS GIVEN TO OBTAIN BENEFITS BY PAYING COMMITMENT CHARGES; THEREFORE THE BENEFIT WAS NOT OF ENDURING IN NATURE. IT HAS NOTHING TO DO WITH THE INSTALLATION PLANT AND MACHINERIES. THE BUSINESS OF THE ASSESSEE WAS MANUFACTURE OF TEXTILES AND COMMITMENT CHARGES WERE PAYABLE RELATING TO YARN MANUFACTURING. COMMITMENT 36 CHARGES ARE THEREFORE PRODUCTION LINKED EXPENSES WHICH ARE RIGHTLY HELD TO BE REVENUE IN NATURE. NO CAPITA L WAS GENERATED ON PAYMENT OF THE COMMITMENT CHARGES. IT IS WELL SETTLED LAW THAT WHETHER THE AMOUNT IS REVENUE IN N ATURE OR CAPITAL IN NATURE IS TO BE DECIDED IN ACCORDANCE WI TH LAW AND THE BOOK ENTRIES ARE NOT DETERMINATIVE FACTOR T O DECIDE THE SAME. SINCE THE ASSESSEE WAS ALREADY IN TEXTILE BUSINESS OF MANUFACTURING CLOTHES AND OBTAINED INFRASTRUCTURE FACILITIES FOR THE PURPOSE OF BUSINE SS AS PER THE AGREEMENT THEREFORE LEARNED CIT (A) RIGHTLY HE LD THE COMMITMENT CHARGES ARE REVENUE IN NATURE. THIS GROU ND OF APPEAL OF REVENUE HAS NO MERIT THE SAME IS ACCORDIN GLY DISMISSED. 29. GROUND NO.5 REVENUE CHALLENGED DELETION OF ADDITION OF RS.3 96 01 611/- AS REVENUE EXPENDITURE . 30. THE FACTS ON THIS GROUND ARE THAT THE ASSESSEE CHALLENGED BEFORE LEARNED CIT (A) THAT THE ASSESSING OFFICER H AS ERRED IN NOT ALLOWING 4/5TH PART OF THE REVENUE EXPENDITURE 4/5 TH AMOUNTING TO RS.3 96 01 611/- (RS. 4 07 26 611 LESS RS. 11 25 00 0 OF TECHNICAL KNOW HOW) HOLDING THAT IT WAS DEFERRED REVENUE EXPE NDITURE. THIS GROUND HAS A SECOND LIMB ALSO THAT THE ASSESSING OFFICER HAS ERRED IN NOT GRANTING DEDUCTION OF RS. 13.50 LAKHS BEING FEE S PAID TOWARDS TECHNICAL KNOW HOW AS EXPENSES U/S. 37 OF THE ACT A ND INSTEAD ASSESSING OFFICER HAS ALLOWED L/6TH OF THESE EXPENS ES U/S.35AB OF THE ACT. THE FACTS ARE THAT THE ASSESSING OFFICER D ID NOT ALLOW CLAIM OF 37 RS.3 96 01 61I/- AS REVENUE EXPENDITURE BECAUSE IN THE BOOKS OF ACCOUNTS THE ASSESSEE COMPANY HAS TREATED 4/5TH OF THE EXPENDITURE AS DEFERRED REVENUE EXPENDITURE. HEAD-WISE FACTS OF EACH ITEM WERE DISCUSSED AS UNDER: (I) RETRENCHMENT EXPENDITURE RS.37 44 315/- DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE COMPANY HAD ENTERED INTO AN AGREEMENT WITH RECOGNIZ ED UNION TO RETRENCH EMPLOYEES UNDER VOLUNTARY RETIREMENT SC HEME. THIS SCHEME WAS ALSO APPROVED BY THE C.I.T. TOTAL E XPENDITURE INCURRED DEBITED IN THE BOOKS OF ACCOUNTS AND PAYME NT MADE DURING THE YEAR WAS RS. 37 44 315/-. HOWEVER THE ASSESSEE COMPANY TRANSFERRED RS.7 58 8 63/- TO PROFIT AND LOSS ACCOUNT AND TREATED BALANCE AMOUNT OF RS.29 95 452/- AS DEFERRED EXPENDITURE. (II) TECHNICAL AUDIT FEES RS..72.63 386/- DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE C OMPANY HAD INCURRED EXPENDITURE FOR CONDUCTING TECHNICAL A UDIT BY M/S. GHERSI & CO. FOR WHICH THEY HAD CHARGED RS. 9 0 79 232/-. TOTAL EXPENDITURE INCURRED DEBITED IN THE BOOKS OF ACCOUNT AND PAID DURING THE YEAR WAS RS.90 79 232/-. HOWEVER T HE ASSESSEE COMPANY HAD TRANSFERRED 1/5TH EXPENDITURE INCURRED I.E. RS.18 15 846/- TO PROFIT AND LOSS ACCOUNT AND TREATED THE BALANCE AMOUNT OF RS.72 63 386/-AS DEFERRED EXPENDI TURE. 38 (III) MANAGEMENT SERVICES FEES RS.3 66 78 466/- DURING THE YEAR UNDER CONSIDERATION M/S. MCKENSY & CO. AN INTERNATIONAL FIRM BASED IN USA WAS EMPLOYED FOR MA NAGEMENT CONSULTANCY AND THEY HAD DURING THE RELEVANT PERIOD CHARGED RS.3 66 78 466 AS THEIR FEES. THE TOTAL EXPENDIT URE INCURRED WAS DEBITED IN THE BOOKS OF ACCOUNTS AND PAYMENTS W ERE MADE. HOWEVER THE ASSESSEE COMPANY TRANSFERRED RS.73 55 688/- TO PROFIT AND LOSS ACCOUNT AND TREAT ED BALANCE AMOUNT OF RS. 2 93 42 773/- AS DEFERRED REVENUE EXP ENDITURE. DURING THE COURSE OF ASSESSMENT THE ASSESSEE WAS REQUIRED TO EXPLAIN THE CLAIM OF DIFFERENT DEDUCTIO NS FOR INCOME-TAX PURPOSES VIS-A-VIS TREATMENT GIVEN IN THE BOOKS OF ACCOUNT. OPINION OF AUDITORS IN THIS REGARD WAS ALSO OBTAINED WHICH FINDS PLACE AT PAGE 60 OF THE ASSESSMENT ORDER. WITH REGARD TO RETRE NCHMENT EXPENSES IT WAS HELD THAT WHEN RETRENCHMENT OF A NUMBER OF E MPLOYEES WAS UNDERTAKEN WITH A VIEW TO REDUCE THE EXPENDITURE T HE BENEFIT OF SUCH RETRENCHMENT WAS AVAILABLE IN MANY YEARS AND THEREF ORE SUBSTANTIAL AMOUNT PAID OF RS.37.44 LAKHS COULD NOT BE TREATED AS A NORMAL REVENUE EXPENDITURE. THE SAME WAS ADMITTEDLY HAVING BENEFIT SPREAD OVER 5 YEARS AND AS SUCH COULD NOT BE ALLOWE D AS REVENUE DEDUCTIBLE SIMILAR FINDING WAS GIVEN WITH REGARD TO TECHNICAL AUDIT FEES AND MANAGEMENT SERVICE FEES. 31. THE FINDING OF THE A O AND ADDITION WAS CHALLE NGED BEFORE LEARNED CIT (A) IT WAS CONTENDED THAT THE ASSESSI NG OFFICER HAD 39 HIMSELF TREATED VARIOUS EXPENSES AS REVENUE EXPENDI TURE BECAUSE HE HAD ALLOWED L/5TH OF THE EXPENDITURE AS DEDUCTIBLE REVENUE EXPENDITURE. IT WAS STRONGLY EMPHASIZED T HAT IT IS NOT ASSESSING OFFICER'S CASE THAT IT WAS NOT A REVENUE EXPENDITURE. IT WAS FURTHER QUOTED THAT IT WOULD BE PROPER TO RE FER TO SECTION 28 READ WITH SECTION 29 OF THE INCOME-TAX ACT 1961 WHICH DEALS WITH THE PROVISIONS REGARDING THE COMPUTATION OF IN COME FROM PROFITS AND GAINS OF BUSINESS. THE RELEVANT SECTI ON 29 READS AS UNDER: 'THE INCOME REFERRED TO IN SECTION 28 SHALL BE COMP UTED IN ACCORDANCE WITH THE PROVISIONS CONTAINED IN SECTION 30 TO 43D. THE ASSESSING OFFICER HAD IGNORED THE PROVISIONS OF SECTION 28 READ WITH OTHER SECTIONS IN NOT ALLOWING THE DEDUCT ION WHICH IS PROPERLY ALLOWANCE U/S.28 OR 37 OF THE ACT. SECTION 37(1) READS AS UNDER: '37(1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF TH E NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSES) LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTIN G THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION.' ACCORDING TO THIS SECTION IF THE FOLLOWING REQUIRE MENTS ARE SATISFIED DEDUCTION HAS TO BE ALLOWED U/S. 37 OF T HE ACT. (I) THE EXPENDITURE MUST HAVE BEEN LA ID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE 40 (II) THE EXPENDITURE MUST NOT BE CAPITAL IN NATURE: (III) THE EXPENDITURE MUST NOT BE PERSONAL IN NATURE IT WAS SUBMITTED THAT THE ASSESSING OFFICER HIMSELF HAS ALLOWED L/5TH OF THE EXPENDITURE AS BUSINESS EXPENDITURE AS HE WA S SATISFIED ABOUT THE THREE CONDITIONS STATED HERE-IN ABOVE. IT WAS ONLY THE ACCOUNTING TREATMENT GIVEN BY THE ASSESSEE COMPANY WHICH HAS MADE HIM NOT TO ALLOW 4/5TH OF THE EXPENDITURE IN T HE ASSESSMENT YEAR. AGAIN IT WAS NOT THE CASE OF THE ASSESSIN G OFFICER THAT THE EXPENSES WERE NOT INCURRED IN THE PREVIOUS YEAR REL EVANT TO THE PRESENT ASSESSMENT YEAR. IT WAS THEREFORE SUBMITT ED THAT THE A.O. OUGHT TO HAVE ALLOWED THE BALANCE OF 4/5TH OF THE E XPENDITURE AS BUSINESS EXPENDITURE EITHER U/S.28 OR 37 OF THE ACT . IT WAS FURTHER SUBMITTED THAT AN ASSESSEE FOLLOWING MERCANTILE SYS TEM OF ACCOUNTANCY WAS ENTITLED TO DEDUCT FROM THE PROFITS OR GAINS OF HIS BUSINESS THE LIABILITY WHICH AROSE DURING THE RELE VANT PREVIOUS YEAR. IT WAS ALSO CONTENDED THAT THE CONCEPT OF DEFERRED REVENUE EXPENDITURE WAS ABSENT UNDER THE INCOME-TAX ACT AND THE ASSESSING OFFICER HAS FAILED TO APPRECIATE THIS FACT. IN THI S BACKGROUND IT WAS THE PRAYER OF THE ASSESSEE COMPANY TO DIRECT THE ASSESS ING OFFICER TO ALLOW ALL THE ABOVE EXPENSES IN TOTAL AND NOT IN IN STALLMENT. THERE WAS ANOTHER LIMB OF THIS GROUND OF APPEAL TOO WHICH WAS WITH REGARD TO TECHNICAL KNOW HOW FEES OF RS.13 50 000/- ON WHI CH ASSESSEE IS IN APPEAL ON GROUND NO. 1 ABOVE BUT IT WAS NOT PRESSE D BY THE LEARNED COUNSEL FOR THE ASSESSEE THEREFORE THE SAME WAS D ISMISSED BEING NOT PRESSED. THE LEARNED CIT (A) CONSIDERING THE S UBMISSION OF THE 41 ASSESSEE HELD THAT THE EXPENDITURE IS REVENUE IN NA TURE AND THE SAME IS TO BE ALLOWED FULLY TO THE EXTENT OF RS.3 9 6 01 611/- ON WHICH REVENUE IS IN APPEAL. THE FINDINGS OF LEARNED CIT ( A) IN PARA 45 AND 46 IN THE IMPUGNED ORDER ARE REPRODUCED AS UNDER: 45. I HAVE CAREFULLY CONSIDERED THE VERSION OF THE ASSESSING OFFICER ON THE ISSUE INVOLVED. I HAV E ALSO GONE THROUGH THE CONTENTIONS OF THE APPELLANT. IT IS POINTED OUT THAT THE COURTS HAVE IN NUMBER OF CASES HELD THAT WHETHER AN EXPENDITURE IS CAPITAL OR REVE NUE IN NATURE IS QUESTION OF LAW. IF IT SO THEN THE ASSESSEE IS NOT BOUND BY THE TREATMENT GIVEN IN ITS ACCOUNTS WHETHER THE SAME IS TREATED AS CAPITAL OR REVENUE OR DEFERRED REVENUE EXPENDITURE. THE INCOME-TAX ACT DOES NOT RECOGNIZE DEFERRED REVENUE EXPENDITURE. EVEN IF THE AUDITORS HAD THOUGH ADVISE D NOT TO CHARGE THE PROFIT AND LOSS ACCOUNT OF THIS Y EAR WITH THE WHOLE OF EXPENDITURE AND TREATED IT AS DEFERRED REVENUE EXPENDITURE THAT MAY LOOK CONSONANT WITH RECOGNIZED ACCOUNTING PRINCIPLES BUT ITS DEDUCTIBILITY OR OTHERWISE HAS TO B DETERMINED IN ACCORDANCE WITH PROVISIONS OF INCOME-TAX LAW. IN MANY DECIDED CASES THE PRINCIPLE STATED LA THAT WHETHER THE ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISIONS OF L AW RELATING TO THAT AND NOT ON THE VIEW WHICH THE ASSESSEE MAY TAKE OF ITS RIGHT OR IN OTHER WORDS IRRESPECTIVE OF THE ACCOUNTING TREATMENT GIVEN BY T HE ASSESSEE. IT IS A JUDICIALLY SETTLED PROPOSITION T HAT TEST OF UNIVERSAL APPLICATION CAN BE LAID DOWN FOR TREATING THE EXPENSES TO BE EITHER CAPITAL OR REVEN UE IN NATURE. EVERY CASE HAS TO BE EXAMINED AND DECIDE D ON ITS FACTS AND MERITS. THE PURPOSE FOR WHICH THE EXPENSES HAVE BEEN INCURRED IS ALWAYS 4 RELEVANT FACTORS FOR DECIDING AS TO WHETHER AN EXPENDITURE I S REVENUE EXPENDITURE OR A CAPITAL EXPENDITURE. GENERALLY SPEAKING RETRENCHMENT EXPENDITURE TECHNICAL AUDIT FEES AND MANAGEMENT SERVICES FEES 42 ARE IN THE NATURE OF REVENUE EXPENDITURE. IN THE C ASE OF THE ASSESSEE METHOD OF ACCOUNTING OF THE APPELLANT COMPANY IS MERCANTILE. THIS SYSTEM OF ACCOUNTANCY TAKES INTO ACCOUNT INCOME AND EXPENDITURE ON ACCRUAL BASIS. IT IS BEYOND DOUBT T HAT ALL THE EXPENSES AS MENTIONED ABOVE HAD ACCRUED IN THE RELEVANT ASSESSMENT YEAR. THESE EXPENSES WERE ALSO PAID DURING THE RELEVANT ASSESSMENT YEAR. THE ONLY POINT WHICH HAS BEEN ADVERSELY TAKEN INTO ACCOUNT BY THE ASSESSING OFFICER IS THAT IN THE BOO KS OF A/ACS THE EXPENSES WERE TREATED AS DEFERRED REVENUE EXPENDITURE. BUT THEN THE FACT ALSO REMAINS THAT THE ASSESSEE HAD REVISED ITS CLAIM SUBSEQUENTL Y AND WHAT IS TO BE ALLOWED IS THE EXPENDITURE WHICH IS DUE AND NOT THE EXPENDITURE WHICH HAS BEEN TREATED DIFFERENTLY IN THE BOOKS OF A/CS. VARIOUS COURT DECISIONS ARE AVAILABLE ON THE SUBJECT LAYING DOWN THE PROPOSITION THAT INCOME/EXPENDITURE WHICH REALL Y ACCRUED TO THE ASSESSES DURING THE PREVIOUS YEAR CA N BE CONSIDERED AND TAKEN INTO ACCOUNT IRRESPECTIVE O F THE FACT THAT DIFFERENT BOOK ENTRIES HAVE BEEN MADE . THE CASE LAW AS CITED BY THE ASSESSEE DULY SUPPORTS THIS FINDING. 46. ALL THE REQUIREMENTS OF SECTION 37 OF THE ACT ARE SATISFIED IN THE CASE OF THE ASSESSEE. THE EXPENDITURE HAS BEEN LAID OUT FULLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THE EXPENDITURE IS NEITHER CAPITAL NOR PERSONAL IN NATU RE. THE ASSESSING OFFICER HIMSELF HAS ALLOWED L/5TH 6F THE EXPENDITURE AS BUSINESS EXPENDITURE CONSIDERING THE SAME TO BE REVENUE. HIS ONLY DISPUTE IS WITH REGAR D TO THE BOOK ENTRIES PASSED. THE DECISION OF THE A. 0. TREATING THE ENTRIES MADE BY THE ASSESSES AS SACROSANCT IS NOT CORRECT IN LAW BECAUSE AN ITEM OF EXPENDITURE IS AN ALLOWABLE DEDUCTION ONLY WHEN IT IS IN ACCORDANCE WITH THE PROVISIONS OF LAW. SINCE THE EXPENDITURE INVOLVED IS DEFINITELY REVENUE IN NATUR E THE SAME IS TO BE ALLOWED FULLY TO THE EXTENT OF 43 RS.3.96.01.61I/-. TO THIS AN EXTENT THE ASSESSEE ACCORDINGLY SUCCEEDS IN ITS CLAIM. 32. LEARNED D R RELIED UPON THE ORDER OF THE A O AN D SUBMITTED THAT IT WAS SHOWN AS DEFERRED REVENUE EXPENDITURE B Y THE AUDITOR; THEREFORE A O WAS JUSTIFIED IN GRANTING PART RELIE F TO THE ASSESSEE. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSESSEE RE ITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND R ELIED UPON DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS CIT 227 ITR 172 IN WHICH IT WAS HELD PRINCIPLE OF ACCOUNTANCY DO NOT OVERRIDE PROVISION S OF TAX STATUTES. HE HAS SUBMITTED THAT CONCEPT OF DEFERRED REVENUE EXPENDITURE IS ESSENTIALLY AN ACCOUNTING CONCEPT AN D ALIEN TO THE INCOME TAX ACT. THE RELEVANT PROVISIONS OF THE ACT RECOGNIZED ONLY CAPITAL ON REVENUE EXPENDITURE. FOR THE PURPOSE OF ALLOWABILITY OF ANY EXPENDITURE UNDER INCOME TAX ACT WHAT IS MATERIAL I S THE CLASSIFICATION BETWEEN CAPITAL AND REVENUE AND THE SAME DOES NOT RECOGNIZE CONCEPT OF DEFERRED REVENUE EXPENDITURE. IN SUPPORT OF THE ABOVE SUBMISSIONS HE HAS RELIED UPON ORDER OF ITAT AHMEDABAD SPECIAL BENCH IN THE CASE OF ACIT VS ASHIMA SYNTEX LTD. 117 ITD (SB) 1 AND ORDER OF ITAT AHMEDABAD BENCH IN THE CAS E OF ACIT VS CORE HEALTH CARE LTD. 37 SOT 383. 33. ON CONSIDERATION OF THE RIVAL SUBMISSIONS AND T HE CASE LAWS CITED ABOVE WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL ON THIS GROUND. IT IS SETTLED L AW THAT DEFERRED REVENUE EXPENDITURE IS NOT CONCEPT RECOGNI ZED UNDER INCOME TAX ACT. THE PROVISIONS OF INCOME TAX ACT 44 SHALL HAVE TO APPLY FOR THE PURPOSE OF ALLOWING DED UCTION IF IT IS REVENUE EXPENDITURE IN NATURE. THE CONCEPT OF DEFERRED REVENUE EXPENDITURE IS ESSENTIALLY AN ACCOUNTING CO NCEPT AND ALIEN TO IT ACT. THE RELEVANT PROVISIONS OF INC OME TAX ACT RECOGNIZED ONLY CAPITAL OR REVENUE EXPENDITURE. THEREFORE EVEN IF AUDITORS HAVE ADVISED THE ASSESS EE NOT TO CHARGE THE PROFIT & LOSS ACCOUNT OF THIS YEAR WI TH THE WHOLE OF THE EXPENDITURE AND TREATED IT AS DEFERRED REVENUE EXPENDITURE IT MAY BE ACCORDING TO ACCOUNTING PRIN CIPLE BUT CERTAINLY ITS DEDUCTIBILITY HAS TO BE DETERMINE D IN ACCORDANCE WITH THE PROVISIONS OF IT ACT. SINCE TH E ASSESSEE LAID OUT THE ABOVE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS THEREFORE WHOLE OF THE AMOUNT SHALL HAVE TO BE ALLOWED DEDUCTION IN TH E ASSESSMENT YEAR UNDER APPEAL BECAUSE THE ASSESSEE FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING AND WAS EN TITLED FOR DEDUCTION OF THE ENTIRE EXPENDITURE. THE ASSESS ING OFFICER HAS ALSO ALLOWED ONE FIFTH OF THE EXPENDITU RE WOULD SHOW THAT ASSESSING OFFICER WAS SATISFIED ABOUT THE GENUINENESS OF THE EXPENDITURE INCURRED BY THE ASSE SSEE IN THE ASSESSMENT YEAR UNDER APPEAL WHOLLY AND EXCLUSI VELY FOR THE PURPOSE OF BUSINESS. THEREFORE PROVISIONS OF SECTION 37 OF THE IT ACT WOULD CLEARLY APPLY IN THE CASE OF THE ASSESSEE. THE DECISIONS CITED BY LEARNED COUNSE L FOR THE ASSESSEE SQUARELY APPLY IN THE CASE OF THE ASSE SSEE. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORD ER OF THE LEARNED CIT (A) IN ALLOWING THE DEDUCTION FULLY TO THE EXTENT 45 OF THE AMOUNT RAISED ON THIS ISSUE. THIS GROUND OF APPEAL OF THE REVENUE IS ACCORDINGLY DISMISSED. 34. ON GROUND NO.6: THE REVENUE CHALLENGED DELETION OF ADDITION OF RS.94 47 117/- PAYABLE TO MCKENSY & CO. THE FACTS ON THIS GROUND ARE THAT THE CLAIM OF THE ASSE SSEE IN THIS REGARD WAS THAT THE ASSESSEE COMPANY WAS MAINTAININ G ITS ACCOUNTS ON MERCANTILE BASIS. ALL KNOWN EXPENSES ARE PROVIDE D IN THE BOOKS OF ACCOUNT AND CERTAIN EXPENSES ARE PROVIDED ON ESTIMA TION BASIS. IN THE CASE OF MCKENSY & CO. THERE WAS A SHORT PROVIS IONS OF EXPENSES TO THE TUNE OF RS.94 47 117/-. A CLAIM IN THIS REGA RD HAD BEEN MADE BEFORE THE ASSESSING OFFICER WHO INSISTED ON SUBMIT TING A COPY OF THE BILL. THE SAID COPY WAS ALSO FURNISHED AND THE SAME WAS AVAILABLE ON RECORD. FROM THE SAID COPY IT WOULD BE CLEAR THAT T HE EXPENDITURE OF RS.94 47 L70/- HAD ACCRUED DURING THE YEAR IN WHICH SERVICE HAD ALSO BEEN OBTAINED. IN THE BODY OF THE ASSESSMENT ORDER THE ASSESSING OFFICER HAD PREFERRED TO REMAIN SILENT ON THIS ISSU E. IN A WAY THE ALLOWABILITY OF THIS EXPENDITURE WAS NOT ADJUDICATE D AT ALL. HOWEVER THE CLAIM OF THE ASSESSEE WAS THAT IN VIEW OF THE C LEAR PROVISIONS OF THE ACT AND THE METHOD OF ACCOUNTANCY ADOPTED BY TH E ASSESSEE FOR TAXING PURPOSE THE SUM OF RS.94.47 170/- IS AN ALL OWABLE EXPENDITURE. HOWEVER IF THE FEES PAYABLE TO MCKENS Y & CO. WAS ALLOWED AT RS.4 61 25 636/- INCLUSIVE OF SHORT PROV ISION OF RS.97 47 170/- THIS GROUND WILL NO SURVIVE. DURING THE COURSE OF APPELLATE HEARING THE ISSUE WAS CONFRONTED TO THE ASSESSING OFFICER WHO IN HIS WRITTEN SUBMISSIONS HAS CONFIRMED THAT T HIS AMOUNT REMAINED UNNOTICED BY THE ASSESSING OFFICER AND THI S WAS NOT 46 DISCUSSED AT ALL IN THE ASSESSMENT ORDER. IT WAS A CCORDINGLY REQUESTED THAT THE MATTER MAY BE RESTORED BACK TO T HE ASSESSING OFFICER FOR VERIFICATION AND ALLOWANCE. THE LEARNED CIT (A) HOWEVER NOTED THAT THE ISSUE OF MANAGEMENT SERVICES FEES PA ID TO M/S. MCKENSY & CO. HAS BEEN DECIDED BY HIM IN ABOVE GROU ND AND IT HAS BEEN HELD THAT THIS PAYMENT IS IN THE NATURE OF REV ENUE EXPENDITURE AND HAS TO BE ALLOWED. SINCE THE AMOUNT OF RS.94 47 117/- IS IN CONTINUATION OF THE SAME PAYMENT A SIMILAR FINDING HAS TO FOLLOW. A CLAIM IN THIS REGARD HAD BEEN MADE BEFORE THE ASSES SING OFFICER WHO INSISTED ON SUBMITTING A COPY OF THE BILL. THE SAID COPY WAS ALSO FURNISHED AND THE SAME WAS AVAILABLE ON RECORD. FRO M THE SAID COPY IT IS CLEAR THAT EXPENDITURE OF RS.94 47 117/- HAD ACCRUED DURING THE YEAR IN WHICH SERVICES HAD ALSO BEEN OBTAINED. HOW EVER IN SPITE OF THE CLAIM BEING ON RECORD THE ASSESSING OFFICER DI D NOT ENTERTAIN THE SAME. LEARNED CIT (A) THEREFORE NOTED THAT SINCE THE ISSUE HAS ALREADY BEAN DECIDED BY HIM IN THE ABOVE GROUND TH E SAME FINDING IS TO BE GIVEN WITH REGARD TO THIS GROUND OF APPEAL T OO. IN THE FACTS AND CIRCUMSTANCES OF THE ISSUE INVOLVED IT WAS HELD TH AT FEES PAYABLE TO MCKENSY & CO. IS ALLOWED AT RS.4 61 25 636/- INCLUS IVE OF SHORT PROVISION OF RS. 97 47 117/-. THIS GROUND OF APPEAL OF THE ASSESSEE WAS ACCORDINGLY ALLOWED. 35. THE LEARNED D R RELIED UPON THE ORDER OF THE A O AND SUBMITTED THAT THE ASSESSEE OBTAINED ENDURING BENEF IT THEREFORE THE DEDUCTION SHOULD NOT BE ALLOWED IN T HE YEAR UNDER CONSIDERATION. ON THE OTHER HAND LEARNED COU NSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BE FORE 47 THE AUTHORITIES BELOW AND SUBMITTED THAT THE GROUND IS PART OF GROUND NO.5 AND THE EXPENDITURE IS REVENUE IN NA TURE. NO CAPITAL IS GENERATED OUT OF THE SAME. 36. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE DO NOT FIND ANY MERIT IN THIS GROUND OF APPEAL OF THE REVE NUE. THE SIMILAR GROUND IS CONSIDERED ON GROUND NO.5 IN THE DEPARTMENTAL APPEAL ON WHICH DEPARTMENTAL APPEAL HA S BEEN DISMISSED. SINCE THE AMOUNT IN QUESTION IS PAR T OF THE SAME EXPENDITURE PAYABLE TO M/S. MCKENSY & CO. ON W HICH ADDITION DELETED BY LEARNED CIT (A) IS CONFIRMED BY US THEREFORE LEARNED CIT (A) WAS JUSTIFIED IN DELETIN G THE ADDITION. FROM THE COPY OF THE BILL IT WAS FOUND BY THE LEARNED CIT (A) THAT EXPENDITURE IN QUESTION HAD AC CRUED DURING THE YEAR IN WHICH SERVICES HAD ALSO BEEN OBT AINED THEREFORE THE LEARNED CIT (A) WAS JUSTIFIED IN HOL DING THAT ON MERCANTILE SYSTEM FEES PAYABLE WAS ALSO ALLOWABL E DEDUCTION IN THE ASSESSMENT YEAR IN QUESTION. NO E NDURING BENEFIT HAS BEEN OBTAINED BY THE ASSESSEE. NO CAPIT AL GENERATED ON THIS ISSUE. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT (A) IN DE LETING THE ADDITION. THIS GROUND OF APPEAL OF THE REVENUE IS D ISMISSED. 37. ON GROUND NO.7 : REVENUE CHALLENGED DELETION OF ADDITION OF RS.1.74 CRORES TOWARDS THE TWO EOU. 38. IT WAS SUBMITTED BEFORE THE LEARNED COMMISSION ER OF INCOME TAX (APPEALS) THAT THE ASSESSING OFFICER HAS ERRED IN ALLOCATING 48 FURTHER EXPENSES OF RS. 1.74 CRORES TOWARDS THE TWO EOU FOR THE REASONS MENTIONED IN THE ORDER. THE ASSESSING OFFIC ER HAS REFERRED TO THE ASSESSMENT PROCEEDINGS FOR A.Y. 1993-94 AND STATED THAT THE ASSESSEE HAD AGREED THAT RS.11 74 855/- PAID AS INS URANCE PREMIUM FOR EOU PLANT AND MACHINERY WAS NOT DEBITED TO THE P & L ACCOUNT OF THE EOU. THE ASSESSEE HAD FOR THIS YEAR FILED REVIS ED WORKING AND REDUCED THE CLAIM FOR INSURANCE PREMIUM FOR EOU BY RS.9 06 999/-. IN SUB-PARA 3 OF PARA F THE ASSESSING OFFICER STAT ED THAT IN THE ASSESSMENT ORDER FOR A.Y. 93-94 THE ASSESSEE CONCE DED THAT THOUGH IT WAS NOT POSSIBLE TO ASCERTAIN EXPENSES UNDER DIF FERENT HEADS INCURRED BY EOU AND OTHER UNITS IT CANNOT BE DENIE D THAT CERTAIN PORTION OF EXPENSES MIGHT BE RELATED TO EOU AND A B ROAD ESTIMATE OF EXPENSES OF RS.68.92 LAKH (OTHER THAN INSURANCE) W ERE ATTRIBUTABLE TO EOU. HE SAYS THAT TOTAL EXPENSES CLAIMED FOR THIS YEAR ARE RS.38 CRORES AS AGAINST THE LAST YEARS' CLAIM OF RS. 20 CRORES. IN SUB-PARA 5 AT PAGE 77 OF THE ASSESSMENT ORDER THE ASSESSING OFFICER HAS FURTHER STATED THAT DURING THE ASSESSMENT PROCEEDIN GS THE ASSESSEE HAD STATED BEFORE HIM THAT THE EXPENSES WHICH WERE NOT SPECIF ICALLY INCURRED FOR THOSE UNITS CANNOT BE ALLOCATED THERE AGAINST. HE REFERRED TO SECTION 10B(8) AND (9) AND STATES THAT AS PER TH E SAID PROVISIONS IF IT APPEARS TO HIM THAT WHEN THE COURSE OF BUSINESS IS SO ARRANGED THAT THE ASSESSEE IS EARNING MORE THAN THE ORDINARY PROFIT WHICH MIGHT BE EXPECTED TO ARISE IN THE BUSINESS OF THE INDUSTR IAL UNDERTAKINGS CARRIED ON BY THE ASSESSEE THEN THE ASSESSING OFFI CER SHALL - COMPUTE THE PROFIT AND GAIN OF THE UNDERTAKING FOR THE PURPOSE OF DEDUCTION AND TAKE THE PROFIT AS MAY REASONABLY BE DEEMED TO HAVE BEEN DERIVED THERE FROM. HE FURTHER SAYS THAT ON CO MMERCIAL 49 PRINCIPLES ALSO EXPENSES WHICH RESULT INTO BENEFIT OF UNIT OF AN INDUSTRY ARE REQUIRED TO BE ALLOCATED EXPECTED PRIN CIPLES SO AS TO REVEAL THE CORRECT PROFIT 'SUITING THERE FROM. HE H AS ALLEGED THAT THE ASSESSEE BE ALLOWED TO INFLATE PROFIT PERTAINING TO EXPORT ORIENTED UNITS BY DEBITING THE EXPENSES TO OTHER UNITS WHERE THE PROFITS ARE TAXABLE AND THUS INFLATING EXEMPTED PROFITS OF EOU AND REDUCING THE TAXABLE INCOME. AFTER THIS DISCUSSION ON THE RELEV ANT PARA HE HAS ALLOCATED DIFFERENT EXPENSES UNDER DIFFERENT HEADS. ULTIMATELY HE HAD DISALLOWED TOTAL AMOUNT OF RS.1 74 24 44O/- WHICH I S MADE UP OF THE FOLLOWING. PARTICULARS AMOUNT 1. WELFARE EXPANSES 12 56 221/- 2.REMUNERATION OF SENIOR EXECUTIVE 66 907/- 3. RATES AND TAXES 3 11 616/- 4. ADVERTISEMENT EXPENSES 1 93 417/- 5. FOREIGN TRAVEL EXPENSES 99 63 066/- 6. MOTOR CAR EXPENSES 17 00 000/- 7. MCKENSY REPORT EXPENSES 35 16 613/- THE ASSESSEE SUBMITTED THAT IT HAS TWO EXPORT UNITS VIZ ARVIND EXPORTS AND ARVIND INTERNATIONAL. SEPARATE BOOKS OF ACCOUNTS RELATING TO THE SAID UNITS ARE BEING MAINTAINED. THE ASSESSE E IS ALSO HAVING VARIOUS DIFFERENT UNITS FOR WHICH ALSO SEPARATE B OOKS ARE BEING MAINTAINED. ALL THE RECEIPTS/INCOME AND EXPENSES PE RTAINING TO THE SAID UNITS ARE BEING ACCOUNTED FOR IN THE BOOKS OF THE RESPECTIVE UNITS. THEREFORE THERE IS NO JUSTIFICATION FOR EST IMATING THE EXPENSES 50 FOR THOSE UNITS OUT OF THE TOTAL EXPENSES OF THE UN ITS UNLESS THE ASSESSING OFFICER IS HAVING ANY EVIDENCE OR ANY REA SONABLE PROOF TO SHOW THAT A PARTICULAR EXPENSE REFERABLE TO THOSE U NITS IS DEBITED IN THE BOOKS OF THE MAIN UNIT. IN THE ABSENCE OF ANY SUCH EVIDENCE THE ALLOCATION OF EXPENSES BY THE ASSESSING OFFICER ON HIS OWN ESTIMATE AND PRESUMPTION AMOUNTS TO RE-WRITING OF BOOKS OF T HE COMPANY FOR THE UNITS WHICH IS NOT PERMISSIBLE. IT MAY BE APPR ECIATED THAT ASSESSEE ITSELF HAS OFFERED THE DISALLOWANCE OF INS URANCE EXPENSES PERTAINING TO THE MACHINERY OF THE UNITS WHICH IS A CCOUNTED FOR IN THE BOOKS OF THE MAIN UNIT. HOWEVER IN THE OTHER ITEMS HE CANNOT HAVE JUSTIFICATION FOR REWRITING THE BOOKS. IN THE CIRC UMSTANCES ENTIRE EXERCISE OF THE ASSESSING OFFICER IS BEYOND HIS JUR ISDICTION AND IS WITHOUT REASONABLE CAUSE. ON THIS GROUND ITSELF THE ENTIRE ADDITION MADE BY HIM ON THIS ACCOUNT WHICH WAS BASED ON THE PRESUMPTION REQUIRES TO BE DELETED. AS THE ASSESSING OFFICER HA S MADE THE ASSESSEES AGREEING TO A BASIS FOR ADDITION IN ASSE SSMENT PROCEEDINGS FOR A.Y. 1993-94 IT WAS SUBMITTED THAT IN THAT YEAR IT WAS AGREED CONDITIONALLY AND TO AVOID LITIGATION AND JU ST TO BUY PEACE. HOWEVER SUCH AGREEMENT CANNOT BE APPLIED TO THIS Y EAR. AS REGARDS THE REFERENCE MADE TO SECTION 10B( 8) AND (9) OF THE INCOME-TAX ACT IT WAS SUBMITTED THAT IN SECTION 10 B AS IT STOOD THEN SUB-SECTION (8) AND (9) DID NOT EXIST AT ALL. PRESU MABLY THE ASSESSMENT ORDER INTENDED TO REFER TO SUB-SECTION ( 6) OF SECTION 10B WHICH LAID DOWN IN EFFECT THAT THE PROVISIONS OF SUB-SECTION (8) AND (9) OF SECTION 80-I SHALL APPLY MUTATIS MUTANDIS. SO EVEN IF THE ASSESSMENT ORDER INTENDED TO INVOKE THE PROVISIONS OF SUB-SECTION (8) 51 AND (9) OF SECTION 80-I A REFERENCE TO SECTION 80- I WOULD REVEAL THAT SUB-SECTION (8) THEREOF AUTHORIZES THE DEPARTMENT T O APPROPRIATELY AND REASONABLY ADJUST THE PRICES OF GOODS TRANSFERR ED TO AND FROM THE ELIGIBLE UNIT TO OR FROM OTHER UNITS OWNED BY THE A SSESSES. IN THE CASE OF THIS ASSESSEE THIS PARTICULAR PROVISION HA S NOT BEEN INVOKED EVEN IN THE ASSESSMENT ORDER. THIS IS OBVIOUS FROM THE FACT THAT EVEN IN THE ASSESSMENT ORDER ALLOCATION IS ATTEMPTED ON LY FOR SOME ITEMS OF INDIRECT EXPENSES AND NOT OF THE PRICE OF THE IN TER SE TRANSFERS OF GOODS.COMING TO SUB-SECTION (9) OF SECTION 80-I IT IS APPLICABLE ONLY IN REGARD TO THE TRANSACTION WITH ANY OTHER PERSON ME ANING THEREBY THAT IF THERE ARE CERTAIN TRANSACTIONS BETWEEN EOU OF TH E ASSESSEE ON THE ONE HAND AND THE BUSINESS ETC. OF SOME OTHER PERSON S ON THE OTHER AND THEY ARE SO ARRANGED THAT THE PROFITS OF THE EO U OF THE ASSESSEE ARE ARTIFICIALLY OR UNREASONABLY INCREASED THEN THE ASSESSING OFFICER MAY ESTIMATE THE CORRECT PROFITS OF THE EOU. IT WAS SUBMITTED THAT IN THE ASSESSEE'S CASE EVEN THIS PROVISION HAS NOT BEE N INVOKED BECAUSE THE ALLOCATION IS ONLY OF CERTAIN ITEMS OF EXPENSES OF OTHER UNDERTAKINGS OF THIS VERY ASSESSEE AND NOT OF ANY B USINESS OF ANY OTHER PERSON. IT WAS SUBMITTED THAT THE INFERENCE DRAWN ON PAGE 78 OF THE ASSESSMENT ORDER THAT THE DEPARTMENT CAN MAK E ADJUSTMENT OF PROFITS OF THE EOU IN THE FASHION IT HAS BEEN DONE IN THE ASSESSMENT ORDER IS WRONG. IT WAS SUBMITTED THAT NEITHER SECT ION 10B NOR SECTION 80-I WHOSE SOME PROVISIONS ARE CONSIDERED APPLICAB LE TO THE EOU COVERED BY SECTION 10B CONTAIN ANY PROVISION AUTHOR IZING THE ASSESSING OFFICER TO ALLOCATE INDIRECT EXPENSES OF OTHER UNDERTAKINGS OF THE SAME ASSESSEE AND TREAT THEM AS PART OF INDI RECT EXPENSES OF THE EOU. IT WAS SUBMITTED THAT THIS IS THE CORRECT POSITION IN LAW AND 52 COMPLETELY KNOCKS OUT THE VERY JUSTIFICATION OF MAK ING THE ALLOCATIONS AS DONE IN THE ASSESSMENT ORDER. IT WAS SUBMITTED REGARDING FINDING GIVEN AT PAGE 78 ITSELF THAT THE ASSESSEE COMPANY H AD MANY UNITS AND BIG BUSINESS BEFORE THE TWO EOU WERE COMMISSION ED IN THE YEARS 1991 AND 1993. ACCOUNTS OF THE EOU HAVE BEEN DULY AUDITED AND THE EXPENSES RELATABLE THERETO ARE DEBITED THER EIN EXCEPT OF COURSE FOR THE MISTAKE OF EXPENDITURE OF INSURANCE PREMIUM WHICH THE ASSESSEE HAS DULY CORRECTED IN THE REVISED RETU RN. IT WAS SUBMITTED THAT THIS LEAVES NO SCOPE OR NECESSITY OF ALLOCATING FURTHER INDIRECT EXPENSES. THE POINT WAS THAT THOSE INDIREC T EXPENSES IN ANY CASE WERE REQUIRED TO BE INCURRED BY THE ASSESSEE B ECAUSE OF THE ALREADY EXISTING VAST BUSINESS AND BIG ESTABLISHMEN TS. THE DEPARTMENT HAS NOT ALLEGED LET ALONE PROVED THAT TH ERE WAS SOME SUBSTANTIAL INCREASE IN THOSE EXPENSES AFTER THE ES TABLISHMENT OF THOSE TWO EOU AND HENCE THE INCREASE MAY BE ATTRIBU TED TO THE NEWLY STARTED EOU. IT WAS SUBMITTED THAT DEPARTMEN T'S APPROACH OF ALLOCATING INDIRECT EXPENSES FOR NEWLY STARTED UNIT S WHOSE INCOMES ARE EXEMPT HAS BEEN DISAPPROVED BY THE TRIBUNAL IN THE CASE OF ANOTHER GROUP COMPANY VIZ. B. CIBATUL LTD. FOR A.Y. 1989-90. THE ABOVE WAS DECIDED AS ITA NO. 3259/AHD/1992 AND THE DEPARTMENT SOUGHT REFERENCE U/S. 256(1) WHICH WAS REJECTED IN TRIBUNAL'S ORDER RA NO.1013/AHD/1998 DATED 12.4.1999. IN THAT ORDER OF RA THE TRIBUNAL REPRODUCED SOME PARTS OF THE MAIN ORDER IN APPEAL. RELEVANT OBSERVATION (FROM THE BOTTOM OF PAGE 2) IS AS FOLLO WS' ' ...... THE CONTENTION OF THE A0 THAT EACH AND EVE RY INDIRECT EXPENSE INCURRED BY THE ASSESSEE SHOULD BE ALLOCATED TO THE NEWLY INDUSTRIAL UNDERTAKING IS NO T 53 TENABLE BECAUSE IF IT APPLIED IT WOULD LEAD TO MOST ILLOGICAL CONCLUSION ETC. ...' ITAT HAS IN THIS CASE CATEGORICALLY HELD THAT THE BASIC ACCOUNTANCY PRINCIPLE IN SUCH A SITUATION OUGHT TO BE FOUND OUT IS THE EXPENDITURE OF THE ASSESSEE COMPANY HAD THE NEW PL ANT BEEN INSTALLED AND HAD THE NEW PLANT NOT BEEN INSTALLED. THE DIFFERENCE BETWEEN TWO CAN ONLY BE CONSIDERED TO BE EXPENDITUR E OF NEW INDUSTRIAL UNDERTAKING. IT WAS SUBMITTED THAT IF T HE DEPARTMENT SHOWS THAT THERE HAS BEEN SUBSTANTIAL INCREASE UNDER SOME HEADS OF INDIRECT EXPENSES DUE TO THE STARTING OF NEW EOU T HE DEPT. CAN CLAIM THAT SUCH INCREASE IS ATTRIBUTABLE TO THE EOU. SUCH IS NOT THE CASE HERE. THE DEPARTMENT CANNOT CLAIM THAT JUST BECAUSE EOU ALSO STARTED FUNCTIONING INDIRECT EXPENSES SHOULD BE AL LOCATED TO THE EOU ALSO. THE POINT IS THAT INDIRECT EXPENSES WERE IN A NY CASE REQUIRED TO BE INCURRED EVEN IF THE EOU HAD NOT BEEN STARTED S O ALLOCATION ON THE BASIS THAT SOME EXPENSES SHOULD BE REGARDED AS ATTRIBUTABLE TO EOU AND ALLOCATED ON THE BASIS OF EITHER A NUMBER O F EMPLOYEES OR TURNOVER ETC. IS NOT A CORRECT APPROACH. IT IS ST ATED THAT HONBLE SUPREME COURT'S DECISION IN THE CASE OF RAJASTAN WA RE HOUSING CORPORATION (159 CTR 132) SUPPORTS ASSESSEES SUBMISSIONS HEREIN ABOVE. IN THIS CONTEXT AND BACKGROUND NECESSARY R ELIEF WAS PRAYED. 39. THE LEARNED CIT (A) CONSIDERING THE SUBMISSION OF THE ASSESSEE AND MATERIAL ON RECORD DECIDED THE ISSUE I N FAVOUR OF THE ASSESSEE AND DELETED THE ADDITION. HIS FINDINGS IN PARA 58 TO 60 ARE REPRODUCED AS UNDER: 54 58. I HAVE GONE THROUGH THE RIVAL VERSIONS CAREFULLY. IT IS A MATTER OF RECORD THAT THE APPELL ANT IS HAVING DIFFERENT UNITS FOR WHICH SEPARATE BOOKS ARE BEING MAINTAINED SIMILAR IS THE POSITION WITH REGA RD TO ITS TWO EXPORT UNITS VIZ. ARVIND EXPORTS AND AR VIND INTERNATIONAL. IT IS ALSO SUPPORTED THAT THE RECEI PTS INCOME AND EXPENSES PERTAINING TO DIFFERENT UNITS A RE BEING ACCOUNTED FOR IN THE BOOKS OF THE RESPECTIVE UNITS. IN VIEW OF THIS FACTUAL POSITION TO MY MIND THERE IS HARDLY ANY JUSTIFICATION FOR ESTIMATING TH E EXPENSES FOR THOSE UNITS OUT OF THE TOTAL EXPENSES UNLESS THE ASSESSING OFFICER IS HAVING ANY POSITIVE EVIDENCE OR PROOF TO SHOW THAT A SPECIFIC EXPENDITU RE RELATABLE TO THOSE UNITS IS DEBITED IN THE BOOKS OF THE MAIN UNIT. IT IS OBVIOUS ON RECORD THAT THERE IS NO SUCH POSITIVE FINDING OR PROOF. IN THE ABSENCE OF ANY SUCH EVIDENCE THE ALLOCATION OF EXPENSES BY THE ASSESSING OFFICER ON ESTIMATION BASIS IS NOT LEGALL Y PERMISSIBLE. IT SEEMS THAT THE ASSESSING OFFICER WA S PERHAPS CARRIED AWAY BY THE AGREED ADDITION IN THE ASSESSMENT YEAR 93-94. BUT IN THIS YEAR THE ASSESS EE HAS VERY MUCH AGITATED SUCH ADDITION AND IN THIS VI EW OF THE AGITATION NO ADDITION CAN BE TRUSTED UPON T HE ASSESSEE IN ABSENCE OF ANY POSITIVE EVIDENCE. 59. IN THE ASSESSMENT ORDER THE ASSESSING OFFICER MAKES A REFERENCE TO SECTION 10B (8) AND (9 ) OF THE INCOME-TAX ACT. IN SECTION 10B AS IT STOOD AT THE RELEVANT TIME SUB-SECTION (8) AND (9) DID NOT EXIS T AT ALL. I AM IN AGREEMENT WITH THE APPELLANT WHEN IT IS SAID THAT PRESUMABLY THE ASSESSMENT ORDER INTENDED TO REFER TO SUB-SECTION (6) OF SECTION 10 WHICH LAI D DOWN THAT THE PROVISIONS OF SUB-SECTION (8) AND (9) OF SECTION 80-1 SHALL APPLY MUTATIS MUTANDIS. REFEREN CE TO SECTION 80-1 REVEALS THAT SUB-SECTION (8) THEREO F AUTHORIZES THE REVENUE TO REASONABLY ADJUST THE PRICES OF GOODS TRANSFERRED TO AND FROM THE ELIGIBL E UNIT TO OR FROM OTHER UNITS OWNED BY THE ASSESSEE. OBVIOUSLY IN THE CASE OF THE ASSESSEE THIS PARTICU LAR PROVISION DOES NOT STAND INVOKED. THIS IS OBVIOUS 55 FROM THE FACT THAT ALLOCATION IS ATTEMPTED ONLY FOR SOME ITEMS OF INDIRECT EXPENSES AND NOT OF THE PRIC E OF TRANSFER OF GOODS. SIMILARLY SUB-SECTION (9) OF 80-1 IS ALSO NOT OF MUCH HELP. APPELLANT'S CLARIFICATION IN THIS REGARD HAS ABSOLUTE MERIT AND THE SAME IS TO B E RELIED UPON. IN THIS VIEW OF THE DISCUSSION IT IS HELD THAT NEITHER SECTION 10B NOR SECTION 801 WHOSE SOME PROVISIONS ARE CONSIDERED APPLICABLE TO THE EOUS COVERED BY SECTION 10B CONTAIN ANY PROVISION AUTHORIZING THE ASSESSING OFFICER TO ALLOCATE INDIR ECT EXPENSES OF OTHER UNDERTAKINGS OF THE SAME ASSESSEE AND TREAT THEM AS PART OF INDIRECT EXPENSES OF THE EOU. IN THIS VERY CLEAR POSITION OF LAW THERE WAS NO AUTHORITY WITH THE ASSESSING OFFICER FOR MAKING THE ALLOCATION AS DONE IN THE ASSESSMENT ORDER. 60. THE OTHER ARGUMENT OF THE ASSESSING OFFICER T HAT ON COMMERCIAL PRINCIPLES ALSO EXPENSES WERE REQUIRED TO BE ALLOCATED ON EXPECTED PRINCIPLES SO AS TO REVEAL THE CORRECT PROFIT IS NOT SOUND. THIS F ACT CANNOT BE WISHED AWAY THAT THE ASSESSEE COMPANY HAD MANY UNITS AND THE TWO EOUS WERE DULY AUDITED WHICH LEAVE NO SCOPE OR NECESSITY OF ALLOCATING FURTHER INDIRECT EXPENSES. THE DEPARTMENT HAS NOT PROVED THAT THERE WAS SOME SUBSTANTIAL INCREASE IN THOSE EXPENSES AFTER THE ESTABLISHMENT OF THOSE TWO EOUS AND THEREFORE THE INCREASE MAY BE ATTRIBUTED T O THE NEWLY STARTED EOUS. IN NUTSHELL THE DEPARTMENT CANNOT CLAIM THAT JUST BECAUSE THE EOUS ALSO STARTE D FUNCTIONING INDIRECT EXPENSES SHOULD BE ALLOCATED TO THE EOUS ALSO. WITH THIS DISCUSSION THE ADDITION A S MADE BY THE ASSESSING OFFICER IS DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE. 40. LEARNED D R RELIED UPON ORDER OF THE A O AND SUBMITTED THAT EXPENSES WERE COMMON TO ALL THE THRE E PLANTS THEREFORE THE A O WAS JUSTIFIED IN ALLOCAT ING THE 56 SAME ON TURNOVER BASIS. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THAT THE PROFIT OF THE TWO EOU WAS EXEMPT. THE ALLOCATION IS MADE AS P ER ACTUAL BASIS; THEREFORE TURNOVER METHOD WAS NOT TH E CORRECT ACTUAL METHOD. HE HAS REFERRED TO PB 35 TO 46 WHI CH IS WRITTEN SUBMISSION. 41. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERI AL AVAILABLE ON RECORD. HON'BLE MADRAS HIGH COURT IN T HE CASE OF CIT VS RATHORE BROTHERS 254 ITR 665 HELD THAT WHERE THE ASSESSEE HAD MAINTAINED SEPARATE ACCOUNTS AND I T HAD MAINTAINED ITS TRADING RECEIPTS AND PROFIT AND LOSS ACCOUNTS SEPARATELY FOR EXPORT SALES AND DOMESTIC S ALES AND THERE WAS SUFFICIENT MATERIAL SUPPORTED BY ALL THE NECESSARY DOCUMENTS TO SHOW THAT THE DEDUCTION CLAIMED WAS ENTIRELY DUE TO EXPORT: HELD THAT THER E WAS NO WARRANT FOR DISALLOWING ANY PORTION OF THE EXPOR T EARNING PRO RATA BY INVOKING CLAUSE (B) OF SUB-SECT ION (3) OF SECTION 80 HHC OF THE INCOME-TAX ACT 1961. THE PURPOSE OF THE CLAUSE WAS TO DISALLOW A PART OF THE ALLOWANCE UNDER THAT SECTION ONLY WHEN THE ENTIRE DEDUCTION CLAIMED COULD NOT BE REGARDED AS BEING RELATABLE TO EXPORTS . HON'BLE MADRAS HIGH COURT IN THE CASE OF CIT VS SURESH B. MEHTA 291 ITR 462 RELYING UPON THE DECISION IN THE CASE OF RATHORE BROTHERS HELD T HAT WHEN ASSESSEE MAINTAIN SEPARATE ACCOUNTS INDEPENDENT OF EACH 57 OTHER BUSINESS A O CALCULATING DEDUCTION ON THE BA SIS OF TOTAL TURNOVER OF ALL BUSINESS OF ASSESSEE NOT PROP ER. HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS SONA KOYO STEERING SYSTEM LTD. 321 ITR 463 OBSERVED THAT THE PLEA OF THE ASSESSEE BEFORE THE TRIBUNAL WAS THAT TWO UNITS WERE INDEPENDENT UNITS AND ONLY THE PROFIT MAKING UNIT S HOULD BE CONSIDERED ELIGIBLE FOR THE PURPOSE OF COMPUTING TH E DEDUCTION U/S 80 I READ WITH PROVISIONS OF SECTION 80 I (6). THE TRIBUNAL ACCEPTED THE PLEA OF THE ASSESSEE. HON 'BLE HIGH COURT DISMISSED THE DEPARTMENTAL APPEAL BY HOL DING THAT WHILE COMPUTING THE QUANTUM OF DEDUCTION U/S 8 0 I (6) THE A O HAD TO TREAT THE PROFIT DERIVED FROM AN IND USTRIAL UNDERTAKING AS THE ONLY SOURCE OF INCOME OF THE ASS ESSEE IN ORDER TO ARRIVE AT A DEDUCTION UNDER CHAPTER VI A. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF T HE FINDINGS OF THE LEARNED CIT (A) IT IS CLEAR THAT THE ASSESSE E IS HAVING DIFFERENT UNITS FOR WHICH SEPARATE BOOKS ARE MAINTA INED. SAME IS THE POSITION OF EXPORT UNITS WHOSE INCOME I S STATED TO BE EXEMPT. THE RECEIPTS/INCOME AND EXPENSES PERT AINING TO DIFFERENT UNITS ARE ACCOUNTED FOR IN THE BOOKS O F RESPECTIVE UNITS. THEREFORE THERE WAS NO JUSTIFICA TION FOR THE A O FOR ESTIMATING THE EXPENSES FOR THOSE UNITS OUT OF THE TOTAL EXPENSES UNLESS A O BROUGHT SUFFICIENT MA TERIAL ON RECORD AGAINST THE ASSESSEE. THE A O MERELY BY GOIN G INTO THE FINDINGS FOR PRECEDING ASSESSMENT YEAR 1993-94 MADE THE DISALLOWANCE IN THE ASSESSMENT YEAR UNDER APPEA L ALSO. THE A O TOOK THE BASIS OF PROPORTIONATE DISALLOWANC E OF THE 58 EXPENSES ON TURNOVER BASIS OR NUMBER OF EMPLOYEES. BUT THE ASSESSEE CLAIMED THAT IT HAS DEBITED THE EXPENS ES ON ACTUAL BASIS IN WHICH A O HAS NOT POINTED OUT ANY D EFECTS IN THE SUBMISSION OF THE ASSESSEE. IN THE ABSENCES OF ANY EVIDENCE THE ALLOCATION OF EXPENSES BY THE A O ON ESTIMATE BASIS IS NOT LEGALLY PERMISSIBLE. IN THE ASSESSMENT ORDER THE A O HAS MADE REFERENCE TO SECTION 10 B (8) AND (9) OF THE IT ACT BUT THE PROVISIONS CONTAINED IN SECTION 10B OF THE IT ACT AS APPLICABLE TO THE ASSESSMENT YEAR UNDER APPE AL DID NOT HAVE SUB-SECTION (8) AND (9) IN THE ACT. THEREF ORE IN THE ABSENCE OF SPECIFIC PROVISIONS OF LAW A O WAS NOT JUSTIFIED IN APPLYING THE SAID PROVISIONS. ACCORDIN G TO PROVISIONS OF SECTION 80 I (8) AND (9) OF THE ACT T HE PROFIT TO BE COMPUTED ON REASONABLE BASIS. THE A O HAS HOWEVE R NOT BROUGHT ANY REASONABLE BASIS TO COMPUTE SUCH IN COME. MOREOVER THE A O HAS NOT APPLIED THE ABOVE PROVISI ONS AGAINST THE ASSESSEE. THE A O HAS THUS FAILED TO S UPPORT HIS FINDINGS WITH RELEVANT PROVISIONS OF LAW. THE A O HAS TO SHOW THAT THERE HAD BEEN SUBSTANTIAL INCREASE UNDER SOME HEADS OF INDIRECT EXPENSES DUE TO THE STARTING OF N EW EOUS. HOWEVER NO SUCH CASE IS MADE OUT. THEREFORE THE A O CANNOT PRESUME THAT JUST BECAUSE EOU HAD STARTED FUNCTIONING INDIRECT EXPENSES SHOULD ALSO BE ALLOC ATED TO THE EOUS. THEREFORE ALLOCATION ON THE BASIS THAT S OME EXPENSES SHOULD BE REGARDED AS ATTRIBUTABLE TO EOU AND ALLOCATED ON THE BASIS OF EITHER A NUMBER OF EMPLOY EES OR TURNOVER ETC. WAS NOT THE CORRECT METHOD. CONSIDERI NG THE 59 FACTS AND CIRCUMSTANCES OF THE CASE AND ABOVE DECIS IONS WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LE ARNED CIT (A) IN DELETING THE DISALLOWANCES. WE CONFIRM HIS F INDINGS AND DISMISS THIS GROUND OF APPEAL OF THE REVENUE. 42. ON GROUND NO.8: REVENUE CHALLENGED THE ORDER OF THE LEARNED CIT (A) IN DIRECTING TO DELETE THE ALLOCATI ON OF INTEREST OF RS.1 47 27 379/- ON 12.5% PCD TO ARVIND INTERNATIONAL. 43. BRIEFLY THE FACTS OF THE CASE ARE THAT IT WAS SUBMITTED BEFORE LEARNED CIT (A) THAT THE ASSESSING OFFICER HAS ERR ED IN HOLDING THAT INTEREST PAID ON 12.5% PCD IS ALLOWABLE TO EOU ARVIND INTERNATIONAL AND THEREBY REDUCING THE PROFITS OF THIS UNIT BY RS . L 47 27 379/-. THE ISSUE HAS BEEN DISCUSSED IN PARA 13 OF THE ASSESSME NT ORDER. THE A.O. HAS STATED THAT THE TERMS OF ISSUE OF PARTLY C ONVERTIBLE DEBENTURES WERE EXAMINED BY HIM AND ACCORDING TO HI M IT WAS NO WHERE STATED THAT THE PROCEEDS OF THE CONVERTIBLE D EBENTURES WERE MEANT FOR ARVIND INTERNATIONAL AND THE NON-CONVERTI BLE PART WAS MEANT FOR POPLIN PROJECT. A O SAID THAT MERELY BECA USE THE CHARGE WAS CREATED FOR SECURING DEBENTURES ON THE NARODA U NIT THE INTEREST EXPENSES CANNOT BE ACCOUNTED FOR IN THE POPLIN PROJ ECT AT NARODA AND THE SAME WERE REQUIRED TO BE ACCOUNTED FOR IN T HE PROJECT WHERE THE FUNDS WERE ACTUALLY UTILIZED. A O HAS STATED TH AT AS PER THE STATEMENT SHOWING THE AMOUNT CAPITALIZED IN THE BOO KS AND CLAIMED AS REVENUE EXPENDITURE FOR A.Y. 1991-92 THE DEPLOY MENT OF FUNDS AGAINST 12.5% PARTLY CONVERTIBLE DEBENTURES WERE ST ATED TO BE UTILIZED 60 FOR POPLIN PROJECT AS WELL AS ARVIND INTERNATIONAL. A O SAID THAT THE DIFFERENT CONTENTION NOW TAKEN THAT THE PCD PART WA S MEANT FOR POPLIN PROJECT AND CONVERTIBLE PART WAS FOR EOU WAS A SELF SERVING TREATMENT. A O SAID THAT NO BREAK UP REGARDING DEPL OYMENT OF FUNDS FROM PCDS INTO POPLIN PROJECT AND ARVIND INTERNATIO NAL HAS BEEN MADE AVAILABLE. A O SAID THAT THE INTEREST WAS CAPI TALIZED IN THE BOOKS BETWEEN THE POPLIN PROJECT ARID ARVIND INTERN ATIONAL IN F.Y. 1991-92 AND 1992-93 IN THE RATIO OF 44 : 36. HENCE ACCORDING TO HIM THE INTEREST PAYMENT OF RS.3 27 27 509/- IS DIVIDED IN THE SAME RATIO AND ACCORDINGLY HE HAS WORKED OUT THE IN TEREST OF RS.1 47.27 379/- AS RELATABLE TO ARVIND INTERNATION AL AND DISALLOWED THE SAME. 44. THE ASSESSEE CONTENDED THAT IT HAD ISSUED 65.44.384/- 12.5% REDEEMABLE PARTLY CONVERTIBLE DEBENTURES OF R S.140/- EACH OF THE AGGREGATE AMOUNTS OF RS.91.62 CRORES. OUT OF T HIS RS.22.91 CRORES WAS NON-CONVERTIBLE PART B DEBENTURES. IN T HE EARLIER YEAR THE PROCEEDS OF THE CONVERTIBLE PORTION WERE UTILIZED F OR ARVIND INTERNATIONAL PROJECT. THE ASSESSEE FURTHER SUBMIT TED THAT EACH PCD WAS OF RS.14O/- OUT OF WHICH RS. 105/- WERE CONVER TIBLE INTO THREE EQUITY SHARES AFTER 15 MONTHS OF THE ALLOTMENT. T HUS 75 % OF THE TOTAL SUM WAS CONVERTIBLE INTO EQUITY SHARES IN F.Y . 1992-93 I.E. BEFORE THE COMMENCEMENT OF THE PREVIOUS YEAR RELEVA NT TO THIS APPEAL. SO IN F.Y. 1993-94 INTEREST PAYABLE WAS ONLY ON THE NON- CONVERTIBLE PART OF RS.35 OF EACH PCD ON A TOTAL SUM OF RUPEES LESS THAN 23 CRORES. TOTAL INTEREST WAS RS.3 27 27 507 /- AND THAT AMOUNT HAS BEEN ALLOCATED. IT WAS SUBMITTED THAT IN THE PROCEEDING YEARS 61 ALLOCATION WAS SO BECAUSE THE INTEREST WAS PAYABLE BEFORE CONVERSION INTO EQUITY SHARES OF THAT PART OF PCD W HICH WAS CONVERTIBLE. SINCE THE FUNDS HAD BEEN USED FOR POPL IN PROJECT AS WELL AS PROJECT OF ARVIND INTERNATIONAL SUCH ALLOCATION WAS NECESSARY AND JUSTIFIED. IN THE PREVIOUS YEAR RELEVANT TO THIS APPEAL INTEREST WAS PAYABLE ONLY ON THE NON-CONVERTIBLE PART. IT WAS SU BMITTED THAT THE PROJECT OF ARVIND INTERNATIONAL WAS NOT AT NARODA R OAD BUT IT WAS AT KHATREJ WHILE THE POPLIN PROJECT WAS AT NARODA ROA D WHICH WAS THE MAIN CENTER FOR THE ASSESSEE COMPANY. THE NON-CONVE RTIBLE PART WAS REPAYABLE AFTER A LONG PERIOD AND IT WAS SECURED AG AINST THE CHARGE ON THE NARODA ROAD ASSET. THEREFORE THE ASSESSE E WAS JUSTIFIED IN CLAIMING THAT THE INTEREST ON NON-CONVERTIBLE PART OF PCD WAS FULLY ATTRIBUTABLE TO NARODA ROAD PROJECT AND IT WAS NOT ALLOCATED TO THE ASSETS OF ARVIND INTERNATIONAL WHICH WERE OF KHATRE J. IT WAS SUBMITTED THAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN REJ ECTING THIS SUBMISSION OF THE ASSESSEE. THE POINT WAS THAT IN THE PROCEEDING YEARS WHEN INTEREST WAS PAYABLE ON THE CONVERTIBLE AS WELL AS NON- CONVERTIBLE PORTIONS SOME ALLOCATION WAS DONE BY T HE ASSESSEE ITSELF. WHEN THE INTEREST IS PAYABLE ONLY ON THE NON-CONVER TIBLE PART THE ASSESSEES ACTION OF ALLOCATING THE INTEREST IN EAR LIER TWO YEARS SHOULD NOT GO AGAINST IT. THE ASSESSEE WAS REASONABLE I N ALLOCATING THE INTEREST IN PRECEDING TWO YEARS BECAUSE THAT INTERE ST PERTAINED ALSO TO THE CONVERTIBLE PART OF THE PCDS. IN THIS YEAR IN TEREST PERTAINS ONLY TO THE NON-CONVERTIBLE PART AND IT WAS SECURED AGAINST THE CHARGE ON NARODA ROAD PROPERTY AND NOT AT THE KHATREJ PROPERT Y WHICH HOUSED THE PROJECT OF ARVIND INTERNATIONAL. HENCE NO PA RT OF INTEREST PAYABLE ON NON-CONVERTIBLE PART OF PCD CAN BE ALLOCATED TO THE PROJECT AT 62 KHATREJ WHICH IS OF ARVIND INTERNATIONAL. FURTHER WHEN INTEREST WAS PAYABLE ON RS.140/- THE ALLOCATION WAS DONE IN THE RATIO OF 44:36. THUS ALLOCATION TO THE POPLIN PROJECT A PROPORTION OF 44:80 I.E. 55% BUT NOW THE INTEREST IS PAYABLE ON 25% (I.E. 35 OUT OF 140) ONLY - MEANING THEREBY THAT INTEREST BURDEN ON THE POPLIN PROJECT IS LESS THAN IN THE PREVIOUS YEARS. ON THIS BASIS ALSO THERE WAS NO NECESSITY OF FURTHER REDUCING THE BURDEN OF THE POP LIN PROJECT OF NARODA ROAD BY TRANSFERRING A PART OF BURDEN TO THE EOU. THE ADDITION IN THIS REGARD DESERVES TO BE DELETED. I T WAS FURTHER SUBMITTED THAT IF FUNDS ARE USED FOR MIXED PURPOSE IT WAS PREROGATIVE OF THE ASSESSEE COMPANY TO ALLOCATE IT TO TWO UNITS . IN THIS CONNECTION THE ASSESSEE COMPANY SEEKS SUPPORT FROM BRITISH DECISION WHICH HAS BEEN REPRODUCED IN 147 ITR 404. '.. .. WHERE YOU ARE CONSIDERING THE BUSINESS OF A COMPANY WHICH HAS TWO SOURCES OF INCOME THE ONE SUBJECTED TO TAX AND THE OTHER NOT YOU ARE ENTITLE D TO ASSUME AND DEEM THAT IT HAS; PAID THE MONEY THAT IT OUGHT TO PAY ACCORDING TO THE MOST BUSINESS LIKE WA Y OF APPROPRIATING THE REVENUE TO THE EXPENSES; FURTHER EVEN THOUGH THAT HAS NOT BEEN DONE IN FACT BY ANY SEPARA TE ALLOCATION OF THE MONEY; AS WAS DONE HERE IN THE LA TER YEARS BY PUTTING IT AT A SPECIAL BANK STILL YOU AR E ENTITLED TO TREAT THE MONEY AS HAVING BEEN PAID OUT OF THE F UND WHICH IS MOST FAVOURABLE TO THE COMPANY WHICH IS IN THIS CASE THE TAX PAYERS.' IN VIEW OF THE FACT THAT LOAN IS SECURED O N CHARGE CREATED IN RESPECT OF POPLIN FACTORY IT WAS SUBMITTED THAT IT SHOULD BE HELD THAT TO THAT EXTENT THESE MONIES REASONABLY OUGHT TO BEE N CONSIDERED AS HAVING BEEN USED FOR POPLIN PROJECT AND THEREFORE. INTEREST LIABILITY ON 63 PARTLY CONVERTIBLE DEBENTURES CANNOT BE ALLOCATED E VEN ON PRO RATA BASIS TO ARVIND INTERNATIONAL. THERE WAS NO INTERES T PAYABLE AFTER THE DEBENTURES WERE CONVERTED INTO SHARES ON CONVERTIBL E PORTION DURING THE YEAR AND AS SUCH NO ALLOCATION CAN BE MADE INTE REST. ACCORDINGLY NECESSARY RELIEF WAS PRAYED. 45. THE LEARNED CIT (A) CONSIDERING THE SUBMI SSIONS OF THE ASSESSEE AND MATERIAL ON RECORD DELETED THE ADDITIO N. HIS FINDINGS IN PARA 65 AND 66 ARE REPRODUCED AS UNDER: 65 I HAVE CAREFULLY GONE THROUGH THE ISSUE INVOL VED. THE ASSESSING OFFICER HAS ALLOCATED INTEREST AMOUNT ING TO RS.L 47 27 279/- AS INTEREST ALLOCABLE TO EXPORT OR IENTED UNIT VIZ. ARVIND INTERNATIONAL. BUT THIS ALLOCATIO N IS FOUND TO BE NOT WARRANTED EITHER ON FACTS OR ON LAW. IT IS A MATTER OF RECORD THAT THE ASSESSEE COMPANY IS MAINTAINING OPERATE SET OF BOOKS OF ACCOUNT FOR ARV IND INTERNATIONAL AND THE BOOKS ARE DULY AUDITED. IN A .Y. 1993-94 THE APPELLANT COMPANY HAD ISSUED RS.65 44 384/- 12.5% SECURED REDEEMABLE PARTLY CONVERTIBLE DEBENTURES OF TO.140/- EACH AGGREGATIN G TO RS.91.62 CRORES. OUT OF THIS RS.22 90 53 440/- W ERE NON-CONVERTIBLE PART B DEBENTURES. WHEN THE ACCOUNT S WERE PREPARED AND SUBMITTED IN EARLIER YEAR THE PR OCEEDS OF CONVERTIBLE PORTION WERE UTILIZED FOR ARVIND INT ERNATIONAL PROJECT. THIS FACT/PROPOSITION WAS ACCEPTED BY THE REVENUE. THE APPELLANT COMPANY HAD IN THE EARLIER Y EARS CAPITALIZED THE INTEREST PORTION RELATED TO CONVERS ION PORTION THAT WAS UTILIZED FOR PURCHASE OF PLANT AND MACHINERY OF EOU IN ITS BOOKS OF ACCOUNT AND THIS T OO HAD BEEN ACCEPTED BY THE REVENUE. SINCE CONVERTIBL E PORTION WAS CONVERTED IN CAPITAL THERE WAS NO EXPENDITURE OF INTEREST IN RESPECT OF RS.68 71 66 3 20/- DURING THE YEAR. THE NON-CONVERTIBLE DEBENTURES WER E CONVERTED FOR POPLIN PROJECT. THIS WAS DONE ON ABSO LUTE CORRECT BASIS AS THE CHARGE CREATED FOR NON-CONVERT IBLE DEBENTURES WAS OF ASSETS SITUATED AT NARODA PREMISE S. IT 64 WAS SECURED BY WAY OF K FIRST CHARGE ON ASSETS AT N ARODA WHERE POPLIN PROJECT WAS COMMISSIONED. THIS IS A VE RY RATIONAL BASIS FOR ALLOCATING LOANS USED FOR MIXED PURPOSE OF ARVIND INTERNATIONAL AT KHATREJ AND POPLIN PROJE CT AT NARODA ROAD. THE ASSESSING OFFICER HAS HELD THAT EV ERY SECURITY DOES NOT PROVE THAT NON-CONVERTIBLE PORTIO N OF THE DEBENTURES HAS BEEN USED ONLY FOR POPLIN PROJECT. ACCORDINGLY HE HAS THEREFORE ALLOCATED INTEREST ON HYPOTHETICAL BASIS. TO MY MIND SUCH HYPOTHETICAL ALLOCATION NOT PERMISSIBLE. THE SETTLED PROPOSITION OF LAW IS THAT ONLY THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE SHALL BE DEDUCTED FROM THE INCOME AND THER E SHOULD BE NO SCOPE FOR ANY ESTIMATION OF EXPENDITUR E ON NOTIONAL BASIS. I AM ALSO IMPRESSED BY THE ARGUMENT AS GIVEN THAT IF THE FUNDS ARE USED FOR MIXED PURPOSE IT IS THE PREROGATIVE OF THE APPELLANT COMPANY TO ALLOCATE IT TO TWO UNITS. THE BRITISH DECISION AS REFERRED ABOVE IS QU ITE APT IN THIS REGARD. 66. IN VIEW OF THE DISCUSSION AS ABOVE AND IN VIEW OF THE FACT THAT LOAN IS SECURED ON CHARGE CREATED IN RESPECT OF POPLIN FACTORY IT IS HELD THAT TO THAT EXTENT T HESE MONIES ARE TO BE CONSIDERED IS HAVING BEEN USED FOR POPLIN PROJECT AND THEREFORE INTEREST LIABILITY ON PARTLY CONVERTIBLE DEBENTURES CANNOT BE ALLOCATED EVEN ON PRORATA BASI S TO ARVIND INTERNATIONAL SUBSTANTIALLY WHEN IN EARLIER YEARS INTEREST ON CONVERTIBLE DEBENTURES HAS BEEN ACCEPTE D AS CAPITAL EXPENDITURE FOR ARVIND INTERNATIONAL. THERE WAS NO INTEREST PAYABLE AFTER DEBENTURES WERE CONVERTED IN TO SHARES DURING THE YEAR AND AS SUCH NO ALLOCATION CA N BE MADE OF INTEREST. IN VIEW OF THIS FINDING THE ASS ESSING OFFICER IS DIRECTED TO DELETE THE ALLOCATION OF INT EREST OF RS. L .47 27.379/- TO ARVIND INTERNATIONAL . 46. LEARNED D R SUBMITTED THAT FUNDS MAY BE VERIFIE D AGAIN WITH REGARD TO ALLOCATION OF THE INTEREST. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSESSEE REITERATED T HE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND 65 SUBMITTED THAT ISSUE OF INTEREST WAS RELEVANT TO TH E TAXABLE UNIT AND THAT HYPOTHETICAL ALLOCATION OF THE INTERE ST IS NOT PERMISSIBLE UNDER THE LAW. 47. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND DO NOT FIND ANY MERIT IN THE APPEAL OF THE REVENUE ON THIS ISSUE. THE ASSESSEE MADE SPECIFIC SUBMISSIONS ON THIS ISSU E AND CLEARLY DISTINGUISHED THE FACTS OF THE EARLIER YEAR WITH THE FACTS OF THIS YEAR. THE LEARNED CIT (A) CONSIDERING THE FACTS AND MATERIAL ON RECORD GAVE A SPECIFIC FINDING OF F ACT AGAINST THE REVENUE. THE LEARNED CIT (A) NOTED FROM RECORD THAT ASSESSEE COMPANY WAS MAINTAINING SEPARATE SETS OF BOOKS OF ACCOUNTS FOR ARVIND INTERNATIONAL AND BOOK S ARE DULY AUDITED. IN PRECEDING ASSESSMENT YEAR THE ASSE SSEE HAD ISSUED SECURED REDEEMABLE PARTLY CONVERTIBLE DEBENTURES OUT OF THIS PART WERE NON-CONVERTIBLE PA RT B DEBENTURES. WHEN THE ACCOUNTS WERE PREPARED IN THE EARLIER YEARS THE PROCEEDS OF CONVERTIBLE PORTION WERE UTI LIZED FOR ARVIND INTERNATIONAL PROJECT. THE LEARNED CIT (A) CONSIDERING THE FACTS OF EARLIER YEAR AND THIS YEAR SPECIFICALLY NOTED THAT HYPOTHETICAL ALLOCATION IS NOT PERMISSIBLE BECAUSE CERTAIN PROPOSITION OF LAW IS T HAT ONLY THE ACTUAL EXPENDITURE INCURRED BY THE ASSESSEE SHA LL BE DEDUCTED FROM THE INCOME. THE LEARNED CIT (A) NOTED THAT SINCE THE LOAN IS SECURED ON CHARGE CREATED IN RESP ECT OF POPLIN FACTORY IT WAS HELD THAT TO THAT EXTENT THE SE MONIES ARE TO BE CONSIDERED HAVING BEEN USED FOR POPLIN PR OJECT 66 ONLY THEREFORE INTEREST LIABILITY ON PARTLY CONVE RTIBLE DEBENTURE CANNOT BE ALLOCATED EVEN ON PRO RATA BASI S TO ARVIND INTERNATIONAL. THE FINDING OF FACT RECORDED BY LEARNED CIT (A) CLEARLY PROVES THAT LEARNED CIT (A) VERIFIE D THE AVAILABILITY OF THE FUNDS AND ITS UTILIZATION WHICH HAS NO CONCERN WITH ARVIND INTERNATIONAL. LEARNED D R HAS NOT POINTED ANY INFIRMITY IN THE ORDER OF THE LEARNED C IT (A). SINCE FUNDS HAVE ALREADY BEEN VERIFIED BY THE LEARN ED CIT (A) ON THIS ISSUE AND IN THE FINDING OF THE LEARNED CIT (A) NOTHING ADVERSE HAS BEEN POINTED OUT THEREFORE TH ERE IS NO NEED OF VERIFICATION OF THE FUNDS AGAIN AS ARGUED B Y THE LEARNED D R. IN THIS VIEW OF THE MATTER WE DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LE ARNED CIT (A). WE CONFIRM HIS FINDINGS AND DISMISS THIS GROUN D OF APPEAL OF THE REVENUE. 48. ON GROUND NO.9 : REVENUE CHALLENGED THE ORDER OF THE LEARNED CIT (A) IN ALLOWING THE CLAIM OF DEPRECIATI ON ON MACHINERY AND PLANT PURCHASED FROM L & T LTD. RS. 1 2.00 CRORES RAYMOND WOOLEN MILLS LTD. RS.0.94 CRORES A TUL LTD. RS.7.38 CRORES. 49. THE A O DID NOT ALLOW THE CLAIM OF DEPRECIA TION IN RESPECT OF MACHINERIES AND PLANT PURCHASED FROM FOLLOWING PART IES: (I) LARSEN & TUBRO LTD. RS. 12.00 CRORES (II) RAYMOND WOOLEN MILLS LTD. RS. 0.94 CRORES (III)ATUL PRODUCT LTD. RS.7.38 CRORES 67 THE FACTS ARE THAT THE ASSESSEE COMPANY HAD ENTERED INTO SALE AND LEASE BACK TRANSACTIONS IN THE MONTH OF SEPT. 1993 AND THE DETAILS OF THESE TRANSACTIONS ARE GIVEN ON PAGE 97 OF THE ASSE SSMENT ORDER. THE AGGREGATE VALUE OF THE ASSETS WAS RS. 20.32 CRO RES AND THE ASSESSEE HAD CLAIMED DEPRECIATION AT THE RATE OF 100%. IT WAS STATED BY THE ASSESSING OFFICER THAT THE WDV ON THESE ASSE TS AS PER INCOME-TAX RECORDS OF THE SELLING PARTY WAS NIL AND THE SAME WAS RE- VALUED AND SOLD TO THE ASSESSEE COMPANY WHICH WERE LEASED BACK TO THE SAME PARTIES. NECESSARY ENQUIRIES WERE CONDUCTE D BY THE ASSESSING OFFICER IN THE THIRD WEEK OF FEBRUARY 19 97 BY ISSUING LETTERS TO THE LESSEES. AS PER ASSESSING OFFICER AS PER REPLY RECEIVED IT WAS NOTICED THAT THE TRANSACTIONS WERE NOT ENTERED INTO IN THE MONTH OF SEPT. 1993. THE ASSESSING OFFICER THER EAFTER CONDUCTED SURVEY PROCEEDINGS U/S.133A ON 12.3.1997 AT VARIOUS PREMISES AS MENTIONED ON PAGE 99. IN THIS CONTEXT AND BACKGROUND THE DIFFERENT SALE AND LEASE BACK TRANSACTIONS ARE DISCUSSED AS U NDER: (A) SALE AND LEASE BACK TRANSACTION WITH L & T: THE ASSESSING OFFICER HAS DISCUSSED THIS ISSUE ON P AGE 98 ONWARDS. HE HAS STATED THAT THE ASSET WAS RE-VALUED AT RS. 24 CRORES THE DATE OF TRANSFER AND THEREAFTER ITS DEPRECIATED VALUE WAS WORKED OUT TO RS.12 CRORES AS ON THE DATE OF TR ANSFER AT WHICH VALUE THE TRANSFER WAS MADE TO THE ASSESSEE. HE HAS STATED THAT AGREEMENT WAS NOT ENTERED INTO ON 29.9.1993 WHICH I S THE DATE OF THE AGREEMENT. TO CONCLUDE THIS HE HAS REFERRED TO STA TEMENT OF ONE MR. B.M. SHAH VICE-PRESIDENT (CORPORATE FINANCE) OF AR VIND MILLS LTD. 68 WHO WAS AUTHORIZED TO SIGN ON BEHALF OF THE ASSESSE E COMPANY. ON THE BASIS OF THIS STATEMENT MR. B. M. SHAH CONCLU DED THAT ON 29.9.1993 HE WAS NOT IN BOMBAY WHEREAS THE AGREEMEN T AS DATED 29.9.93 WHICH WAS SIGNED BY HIM. THE A.O. HAS FURTH ER STATED THAT IN THE STATEMENT OF ONE MR. SANJAY DALAL RECORDED BY H IM IT WAS STATED THAT THE DOCUMENT FROM THE SURVEYOR REPORTING THAT THE ASSET WAS ENTITLED TO 100% DEPRECIATION WAS RECEIVED BY THE O FFICE OF ARVIND MILLS LTD. IN OCTOBER 1993 AND COULD NOT HAVE BEEN POSSIBLY RECEIVED PRIOR TO THE DATE OF SIGNING OF THE AGREEMENT. THE SALE DEED WAS RECEIVED BY HIS OFFICE ON 12.10.1993. THE ASSESSING OFFICER SAYS THAT THE SCHEDULE TO THE AGREEMENT WAS NOT AVAILABLE BEF ORE 12.10.93 AND THEREFORE THE AGREEMENT COULD NOT HAVE POSSIBLY BE EN PREPARED PRIOR TO THAT DATE. THEREFORE ACCORDING TO THE ASSESSING OFFICER THE AGREEMENT WAS ANTE-DATED TO CLAIM 100% DEPRECIATION . THE ASSESSING OFFICER ALSO REFERRED TO THE STATEMENT OF ONE MR. Y. M. DEOSTHALEE OF L&T RECORDED BY HIM IN MARCH 1997 AN D ON THAT BASIS HE HAS CONCLUDED THAT THE AGREEMENT WAS NOT SIGNED ON 29.9.1993. THE ASSESSING OFFICER ALSO REFERRED TO THE SURVEYOR 'S REPORT ( M / S . USAPL ) AND STATED THAT THEIR DRAFT REPORT WAS DATED 30.9.9 3 TO THE EFFECT THAT THE ASSET WAS QUALIFYING FOR 100% DEPRE CIATION. THE FINAL REPORT WAS DATED 17.9.93. THE ASSESSING OFFICER ALS O REFERRED TO THE STATEMENT OF ONE MR. BALAKRLSHNAN MANAGING DIRECTO R OF USAPL RECORDED U/S.131 AND STATED THAT AS PER THE SAID ST ATEMENT THE REPORT WAS ANTEDATED AT THE INSTRUCTION OF MR. Y. M. DEOST HALEE OF L& T. AT THE SAME TIME THE ASSESSING OFFICER FURTHER STATED THAT MR. Y. M. DEOSTHALEE HAD DENIED HAVING GIVEN ANY SUCH INSTRUC TION. THE ASSESSING OFFICER HAS FURTHER OBSERVED THAT THE ASS ETS OF L & T WERE 69 MORTGAGED TO IDBI ON THE DATE OF TRANSFER AND THE S AME COULD NOT HAVE BEEN TRANSFERRED BY L & T TO THE ASSESSEE. SUC H TRANSFER BY L&T WAS THEREFORE VOID. THE ASSESSING OFFICER HAS F URTHER REFERRED TO A LETTER DATED 27.9.93 FROM L & T TO THE BROKER AND STATED THAT AS PER THE SAID LETTER THEY WERE AGREEABLE TO HAVE ARRANG EMENT WITH ARVIND MILLS SUBJECT TO THE TERMS AND CONDITIONS OF LEASE AGREEMENT AND VARIOUS APPROVALS REQUIRED IN CONNECTION THEREWITH AND THE BROKER WAS ADVISED TO FINALIZE THE PROPOSAL. IN THIS VIEW OF THE MATTER ACCORDING TO THE ASSESSING OFFICER NO MEETING WITH ARVIND MILLS LTD. AND L&T WAS THERE BEFORE 27.9.1993. THE ASSESSING O FFICER HAS FURTHER REFERRED TO THE BOARD RESOLUTION DATED 29.1 0.93 AND STATED THAT THE BOARD RESOLUTION AUTHORIZING THE SALE OF L EASE BACK TRANSACTION WAS ONLY IN OCTOBER 1993. AFTER THIS A LLEGATION THE ASSESSING OFFICER ON PAGE 114 HAS CONCLUDED THAT TH E CLAIM OF DEPRECIATION ON THE BASIS OF THE ABOVE FACTS CAN ON LY BE RESTRICTED TO 50% I.E. RS.3.69 CRORES IF THE OTHER CONDITIONS FOR ALL OWING THE SAME ARE FULFILLED. ON PAGE 114 THE ASSESSING OFFICER HAS REFERRED TO EXPLANATION 3 BELOW SECTION 43(1). HE HAS STATED TH AT THE ASSET WAS ACQUIRED BY L & T AT THE COST OF RS.2.72 CRORES 11 YEARS PRIOR TO THE PRESENT TRANSACTION AND THE BOOK VALUE THEREOF ON T HE DATE OF TRANSACTION WAS RS. 34 ONLY. HE SAYS THAT THE WDV O F THE ASSET AS PER THE INCOME-TAX RECORDS OF L&T WAS RS. NIL HE S AYS THAT THE ASSETS OF THE BOOK VALUE OF RS. 34 WAS REVALUED AT RS. 24 CRORES AND THEREFORE THERE IS NO BASIS FOR SUCH VALUATION. HE HAS STATED THAT HE HAD THEREFORE TO DETERMINE THE VALUE OF THE ASSET AS PER ACCEPTABLE STANDARDS. HE HAS STATED THAT THERE ARE TWO METHODS FOR VALUATION AND HE WAS ADOPTED HIGHER OF THE TWO WHICH IS BENEF ICIAL TO THE 70 ASSESSEE AS PER MARKET VALUE OF ASSET ON THE DATE O F TRANSFER. FOR THIS PURPOSE HE HAS REFERRED TO RBI BULLETIN FOR I NDEX AND ON THAT BASIS GIVEN THE VALUE OF PLANT AND MACHINERY IN 198 3-84 AND 1993- 94. THEREFORE THE VALUE OF THE ASSET COSTING RS. 2 .72 CRORES TO L&T IS WORKED OUT IN THE SAME PROPORTION AT RS.6.22 CRORES. THE ASSESSING OFFICER SAYS THAT AFTER CONSIDERING 5% DEPRECIATION PER YEAR ON THE DATE OF TRANSFER THE DEPRECIATED VALUE OF THE ASSE T WOULD BE RS. 3.11 CRORES. THEREAFTER HE HAD REFERRED TO SECTION 43 ( EXPLANATION 3) STATING IT TO BE VALUATION OF THE ASSET AS PER INCO ME-TAX ACT. ON THAT BASIS HE HAS REFERRED TO COST INDEX IN THE YEAR 198 3-84 AND 1993-94 AND ON THAT BASIS DETERMINED THE VALUE AT RS.2.86 C RORES. THEREAFTER THE ASSESSING OFFICER REFERRED TO THE BLOCK OF ASSE TS IN THE HANDS OF L&T AND STATED THAT THE ASSET WAS INCLUDED IN THE B LOCK OF 25%. THE A.O. SAYS THAT THE ELIGIBILITY CERTIFICATE GIVEN BY THE ASSESSEE CANNOT BE RELIED UPON. HE HAS REFERRED TO THE STATEMENT OF MANAGING DIRECTOR OF USAPL AND STATED THAT THEY HAVE GIVEN REPORT WIT HOUT VISITING THE PLANT. IN THIS MATTER THE ASSESSING OFFICER STATE D THAT THE ASSET IS ENTITLED TO DEPRECIATION AT 25%. ON PAGE 122 TO 125 THE ASSESSING OFFICER STATED THAT OWNERSHIP OF THE ASSET WAS NOT THAT OF THE ASSESSEE. HE SAYS THAT THE ASSETS HAD BEEN CONSIDER ED AS IMMOVABLE PROPERTY BY THE ASSESSEE. L&T HAS TAKEN U P THE MATTER REGARDING ASCERTAINMENT OF VALUE FOR STAMP DUTY WIT H THE COLLECTOR VIDE THEIR LETTER DATED 20.10.1993. HE SAYS THAT C ONVEYANCE DEED WAS DATED 29.9.93. HE HAS REFERRED TO THE LETTER FR OM L&T AND STATED THAT THE STAMP DUTY WAS PAID IN MARCH 1994 AND THE DOCUMENTS WERE REGISTERED ON 10.5.94. HE SAYS THAT THE OWNERSHIP O F THE PROPERTY WAS TRANSFERRED ONLY WHEN THE REGISTRATION OF THE DOCUM ENTS WAS 71 COMPLETED. THE ASSESSING OFFICER HAS FURTHER REFER RED TO EXPLANATION 4A TO SECTION 43(1) AND STATED THAT THE SAID EXPLAN ATION IS APPLICABLE RETROSPECTIVELY THOUGH IT WAS INTRODUCED BY THE FIN ANCE NO.2 ACT 1996 WITH EFFECT FROM 1.10.96. ULTIMATELY THE ASSE SSING OFFICER HAS CONCLUDED THAT EXPLANATION 4A BEING DECLARATORY AND CLARIFICATORY IN NATURE INTENDED TO CURB THE MISCHIEF OF CLAIMING HI GHER DEPRECIATION AND THE SAME WAS APPLICABLE TO ALL PENDING ASSESSME NTS AND THEREFORE THE VALUE OF THE ASSET WAS TAKEN BY HIM AT RS. NIL. 50. ABOVE FINDING WAS CHALLENGED BEFORE LEARNE D CIT (A). AS REGARDS REFERENCE MADE TO THE STATEMENT OF MR. B. M . SHAH AND STATEMENT OF MR. DEOSTHALEE IT WAS STATED THAT NON E OF THESE STATEMENTS SUGGEST THAT THEY HAD NOT SIGNED THE AGR EEMENT IN SEPT 1993. IT WAS CLARIFIED THAT THE DOCUMENT WAS TO BE SIGNED ON 29.9.93 BUT WHEN MR. B. M. SHAH WAS IN MUMBAI ON 28.9.93 HE SIGNED DOCUMENT AND MR. MAYANK SHAH HAD SIGNED THE SAME AS WITNESS. A COPY OF THE CONFIRMATION TO THAT EFFECT FROM MR. MAYANK SHAH WAS FILED IN THE FORM OF LETTER DATED 21.3.97 WITH THE ASSESS ING OFFICER WHICH HAS BEEN OVER LOOKED. AS REGARDS STATEMENT OF MR. D EOSTHALEE IT WAS STATED THAT NONE OF THE QUESTIONS AND ANSWERS REPRO DUCED BY THE ASSESSING OFFICER SUGGEST THAT THE DOCUMENT WAS NOT SIGNED IN SEPT. 1993. AS REGARDS STATEMENT OF SHRI SANJAY DALAL IT WAS STATED THAT MERELY BECAUSE ACCORDING TO THE ASSESSING OFFICER CERTIFICATE REGARDING ENTITLEMENT OF 100% DEPRECIATION WAS RECE IVED IN OCTOBER. 1993 IT DOES NOT SUGGEST THAT THE DOCUMENT WAS NOT EXECUTED IN SEPT. 1993. IT WAS FURTHER STATED THAT THE ASSESS EE HAS NOT BEEN PROVIDED COPY OF HIS STATEMENT AND ANY OPPORTUNITY TO CROSS EXAMINE 72 HIM. IT WAS ALSO STATED THAT NONE OF THE STATEMENT S ARE PROVIDED TO THE ASSESSEE FOR CROSS EXAMINATION OF THE CONCERNED PERSONS AND THEREFORE SUCH STATEMENTS COULD NOT BE RELIED UPON BY THE ASSESSING OFFICER AS EVIDENCE AGAINST THE ASSESSEE. IT WAS F URTHER PLEADED THAT STATEMENT OF SHRI BALKRLSHNAN REFERRED TO BY THE AS SESSING OFFICER CLEARLY DENIED BY MR. DEOSTHATEE AND HENCE IT CANNO T BE RELIED UPON BY THE ASSESSING OFFICER AS EVIDENCE AGAINST THE SA ME. WITH REFERENCE TO THE OBSERVATION OF PLANT AND MACHINERY CHARGED BY L&T WITH IDBI IT WAS STATED THAT TRANSFER COULD BE MAD E SUBJECT TO SUCH CHARGE AND IT DOES NOT INVALIDATE THE TRANSACTION. HOWEVER REFERENCE TO LETTER DATED 27.9.93 FROM L & T TO THE BROKER CL EARLY SHOWS THAT THE NEGOTIATIONS THROUGH BROKER WERE UNDER CONSIDERATIO N AND THE TERMS WERE ALREADY CONVEYED TO EACH OF THE PARTIES THROUG H BROKER. THEREFORE L&T HAD ON 27.7.93 AUTHORIZED THE BROKER TO FINALIZE THE DEAL. THIS ITSELF SHOWS THAT THE TRANSACTION WAS UN DER CONSIDERATION AND WAS MUTUALLY AGREED BETWEEN THE PARTIES THROUGH BROKER ON 27.9.93 AND ONLY FORMALITY OF DEED TO BE EXECUTED WAS CARRIED OUT ON 28/29.9.93. AS REGARDS THE RESOLUTION OF BOARD OF D IRECTORS DATED 29.10.93 IT WAS STATED THAT IN THE PREAMBLE OF THE RESOLUTION REFERENCE WAS MADE TO THE EARLIER RESOLUTION DATED 14.8.93 WHEREBY IT WAS REPORTED THAT THE COMPANY WAS UNDERTAKING BUSIN ESS OF LEASING AND IT HAS REPORTED THAT THE TRANSACTIONS OF LEASE WERE CARRIED OUT WITH L & T RAYMOND AND ATUL. THUS THE BUSINESS WA S APPROVED MUCH EARLIER. APART FROM THE ABOVE IT WAS STATED T HAT THE ASSESSING OFFICER IS MAINLY ALLEGING THE DATE OF AGREEMENT BU T AT THE SAME TIME HE HAS IGNORED THE FACT ABOUT THE PAYMENT OF THE PU RCHASE PRICE. THE ASSESSEE HAD DURING THE COURSE OF HEARING PROVIDED SUCH DETAILS 73 WHICH HAVE BEEN TOTALLY IGNORED. WITH REFERENCE TO TRANSACTION OF L & T THE DATE IS PRIOR TO 30.9.93. THIS INFORMATION P ERHAPS CREATED DIFFICULTY IN DISALLOWING THE CLAIM AND HENCE THE S AME HAS BEEN DISREGARDED BY THE ASSESSING OFFICER. THE COPY OF T HE LETTER SUBMITTED BEFORE THE ASSESSING OFFICER REGARDING TH E PAYMENT MADE IS PRODUCED FOR READY REFERENCE. IT CAN BE SEEN FRO M THE DETAILS THAT THE PAYMENTS WERE ON 29.9.93 TO L & T FOR THE ENTIR E CONSIDERATION. IF THIS ASPECT IS CONSIDERED WHEN THE PAYMENT IS MADE AND THE POSSESSION OF THE ASSET HAS BEEN HANDED OVER TO THE ASSESSEE AND THE LEASE HAS COMMENCED OPERATION THERE IS NO REAS ON FOR BELIEVING THAT THE TRANSACTION WAS NOT COMPLETED BY THAT DATE . ON THE CONTRARY THERE WERE DECISIONS THAT WHEN THE PAYMENT IS MADE AND THE POSSESSION OF THE PROPERTY HAS BEEN HANDED OVER TH E TRANSACTION IS COMPLETE. THIS MAY BE FURTHER APPRECIATED IN VIEW O F THE FACT THAT ASSET UNDER CONSIDERATION BEING MACHINERY IS MOVABL E. COMING TO A THE MERITS IT WAS SUBMITTED THAT EXPLANATION 3 BEL OW SECTION 43(1) CASTS A VERY HEAVY BURDEN ON THE DEPARTMENT TO PROV E THAT THE MAIN PURPOSE OF THE TRANSFER WAS THE REDUCTION OF LIABIL ITY TO INCOME-TAX. IT WAS SUBMITTED THAT IN THE ASSESSMENT ORDER NOT A WO RD IS MENTIONED ON THIS ASPECT OF THE MATTER AND HENCE DEPARTMENT S ACTION FOR INVOKING THE SAID EXPLANATION 3 BELOW SECTION 43(1) IS NOT AT ALL IN ACCORDANCE WITH LAW. IT WAS FURTHER SUBMITTED THAT THE MAIN PURPOSE OF TRANSFER WAS THE BUY AND LEASE BACK TRANSACTION. FURTHER ASSESSEE WAS BEARING STAMP DUTY OF MORE THAN RS. 48 LAKHS AND WAS ALSO EARNING SUBSTANTIAL TAXABLE INCOME IN THE FORM OF LEASE RENTALS. ACCORDINGLY EXPLANATION BELOW SECTION 43(1) WAS NO T AT ALL APPLICABLE. FURTHER THE ASSESSEE SUBMITTED THAT TH E ASSESSING 74 OFFICER IS NOT A TECHNICAL PERSON TO DETERMINE THE VALUE OF THE MACHINERY AND THEREFORE EVEN IF HE WANTED TO INVOK E EXPLANATION 3 HE MUST HAVE REFERRED THE VALUATION TO THE DEPARTME NTAL VALUATION CELL. HOWEVER HE HAS NOT CARRIED OUT THE SAID PRO CESS BUT ESTIMATED THE VALUE ON HIS OWN BY REFERRING TO THE INDEX PRIC E ISSUED BY RBI AND ALSO U/S. 48 OF THE INCOME-TAX ACT. SUCH INDEX NUM BER DOES NOT INDICATE THE MARKET VALUE AND THEREFORE EXERCISE C ARRIED OUT BY THE ASSESSING OFFICER WAS NOT AS PER PROVISIONS OF EXPL ANATION 3 WHICH REQUIRES DETERMINATION OF FAIR MARKET VALUE. WITH REGARD TO THE RATE OF DEPRECIATION IT WAS SUBMITTED THAT THE CLAIM BY L&T WAS NOT CONCLUSIVE ABOUT THE RATE OF DEPRECIATION AVAILABLE TO THE ASSESSEE. IN THIS CONNECTION THE ASSESSEE REFERRED TO THE CE RTIFICATE OF ONE MR. J. K. MEHTA WHICH WAS FILED EARLIER WHEREIN IT WAS CERTIFIED THAT THE PLANT WAS ELIGIBLE FOR 100% DEPRECIATION. THE SAID CERTIFICATE GIVES DETAILED DESCRIPTION OF THE PLANT AND ALSO SHOWS AS TO HOW THE PLANT IS ENTITLED TO 100% DEPRECIATION. AS REGARDS EXPLANAT ION 4A BELOW SECTION 43(1) INVOKED BY THE ASSESSING OFFICER IT WAS STATED THAT THE SAID EXPLANATION IS PROSPECTIVE IN NATURE. APPLICAB ILITY OF EXPLANATION 4 (A) WAS UNDER CONSIDERATION BEFORE THE CIT(A)-X II AHMEDABAD IN THE CASE OF PINNACLE FINANCE LTD. FOR AY 94-95 WHER EIN VIDE ORDER DATED 19.3.99 IT HAS BEEN HELD THAT THE SAID EXPLA NATION IS NOT APPLICABLE TO A. Y. 94-95. (B) SALE AND LEASE BACK TRANSACTION WITH RAYMOND L TD. 51. THE ASSESSEE HAD CLAIMED 100% DEPRECIATION ON THIS ASSET. THE ASSET WAS RE-VALUED ON THE DATE OF TRANSFER TO RS. 94 LAKHS WHICH 75 WAS ADOPTED FOR THE PURPOSE OF TRANSFER. THEREAFTER THE ASSESSING OFFICER HAS STATED THAT THERE WAS AN ATTEMPT TO ANT EDATE THE TRANSACTION. HE REFERRED TO THE STATEMENT OF SHRI B . M. SHAH. VICE- PRESIDENT (CORPORATE FINANCE) OF THE ASSESSEE COMPA NY AND STATED THAT ON 28. 9. 93 MR. SHAH WAS NOT PRESENT IN AHMED ABAD. HE FURTHER REFERRED TO THE STATEMENT OF MR. SANJAY DALAL AD MAINLY STRESSED THAT CERTAIN PAPERS WERE RECEIVED BY FAX MESSAGE ONLY ON 9.10.93. THE ASSESSING OFFICER SAID THAT THESE DOCUMENTS WERE TH E BASIS FOR ENTERING INTO AGREEMENT WITH RAYMOND. THE ASSESSING OFFICER FURTHER STATED THAT MR. B. M. SHAH HAD DENIED HAVING MET AN Y PERSON FROM RAYMONDS. THE EXPLANATION OF THE ASSESSEE WAS NOT A CCEPTED BY THE ASSESSING OFFICER BY RELYING UPON HIS OBSERVATIONS WITH REFERENCE TO THE TRANSACTIONS WITH L&T LTD. THE ASSESSING OFFICE R HAS FURTHER STATED THAT THE RATE OF DEPRECIATION OF THIS ASSET IS NOT 100%. FOR THIS HE STATED THAT THE CERTIFICATE OF SHAILESH R. SHAH WAS SUBMITTED BUT THE SAID PERSON HAD GIVEN THE CERTIFICATE ON THE BA SIS OF LEASE AGREEMENT AND COPY OF THE RELEVANT INVOICES AND CER TIFICATE OF ORIGINAL SUPPLIER OF BOILER. THEREFORE ACCORDING TO ASSESSI NG OFFICER THE CERTIFICATE WAS GIVEN WITHOUT VISIT OF THE SITE. IN THE CIRCUMSTANCES THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE R ATE APPLICABLE WAS 25% AND NOT 100%. THE ASSESSING OFFICER HAS FOR THI S TRANSACTION ALSO INVOKED EXPLANATION 4A BELOW SECTION 43(1) AS IN THE CASE WITH THE TRANSACTION WITH L & T. 52. THE ABOVE FINDINGS WERE CHALLENGED BEFORE THE LEARNED CIT (A) AND IT WAS SUBMITTED THAT THE ASSESSING OFFICER 'S OBSERVATIONS ARE BASED ON PRESUMPTIONS ONLY. THE APPELLANT REFERRED TO THE STATEMENT 76 OF MR. B. M. SHAH AND CONTENDED THAT HE HAS SIGNED THE DOCUMENT ON 28.9.93 AT BOMBAY BUT AS THE DOCUMENT WAS PREPARED EARLIER THE PLACE OF SIGNING HAS NOT BEEN CHANGED. THIS EXPLANA TION CANNOT BE DENIED BY THE ASSESSING OFFICER. THE ASSESSEE HAS S TATED BEFORE HIM THAT THE STATEMENT WAS TO BE SIGNED IN THE OFFICE O F TRIKAYA AT BOMBAY. THIS EXPLANATION WAS MERELY BRUSHED ASIDE B Y SAYING THAT THE ASSESSEE HAD TAKEN A DIFFERENT STAND. IF THE A SSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION HE COULD HAV E MADE FURTHER ENQUIRIES WITH RAYMONDS AND ALSO WITH THE OFFICE OF TRIKAYA. INSTEAD OF DOING SO HE HAS MERELY ALLEGED THAT THE STATEMEN T COULD NOT BE SIGNED AT A'BAD BY MR. B. M. SHAH WHEN HE WAS AT BO MBAY ON THE SAID DATE. AS REGARDS THE STATEMENT OF MR. SANJAY D ALAL IT WILL BE SEEN THAT SUCH DOCUMENTS DO NOT FORM PART OF THE LEASE A GREEMENT BUT THEY ARE THE SUPPORTING EVIDENCE FOR COMPLETION OF THE FILE. HOWEVER NON-AVAILABILITY OF SUCH DOCUMENTS ON THE DATE OF S IGNING OF AGREEMENT WOULD NOT SUGGEST THAT THE AGREEMENT WAS NOT ENTERED INTO ON THE RELEVANT DATE. APART FROM THE ABOVE AS EXPLAINED IN EARLIER TRANSACTION THE TRANSACTION WAS SUPPORTED BY PAYMENT BEFORE 30 TH SEPTEMBER AND HENCE THERE WAS NO REASON FOR THE AS SESSING OFFICER TO SUGGEST THAT THE TRANSACTION WAS ENTERED INTO AFTER THAT DATE. AS REGARDS THE RATE OF DEPRECIATION EVEN IF IT WAS A FACT THAT MR. SHAH WHO HAD CERTIFIED THAT THE DEPRECIATION AVAILA BLE IS 100% DID NOT VISIT THE SITE THE ASSESSING OFFICER HAS ACCEPTED THAT THE ORIGINAL SUPPLIER OF THE ASSET WAS THERMAX LTD. AND THEY HAD CERTIFIED THE EFFICIENCY OF BOILER SUPPLIED BY THEM AND ACCORDING LY IT WAS ELIGIBLE TO 100% DEPRECIATION. THEREFORE THE ASSESSING OFFICER CANNOT REJECT THE CLAIM OF DEPRECIATION ON THE IMPUGNED ASSET. 77 (C) SALE AND LEASE BACK TRANSACTION WITH ATUL LTD. 53. THE ASSESSING OFFICER HAS IN CONNECTION WITH THIS TRANSACTION DISPUTED THE RATE OF DEPRECIATION AVAILABLE TO THE ASSESSEE. HE HAS REFERRED TO THE SURVEY PROCEEDINGS AND STATED THAT THERE WERE TWO CERTIFICATES AVAILABLE. THE VALUER MR. R. M. PATEL WHO PREPARED THE CERTIFICATE WAS SUMMONED AND ON THE BASIS OF HIS ST ATEMENT THE ASSESSING OFFICER HAS CONCLUDED THAT THERE WAS NO B ASIS FOR DETERMINING THAT THE ASSET WAS ELIGIBLE FOR 100% DE PRECIATION. THE ASSESSEE HAD SUBMITTED CERTIFICATE OF SHRI SHAILESH R. SHAH WHICH WAS ALSO NOT ACCEPTED BY THE ASSESSING OFFICER ON T HE GROUND THAT HE HAS NOT VISITED THE ASSET CONCERNED. THEREFORE THE ASSESSING OFFICER HAS CONCLUDED THAT THE ASSET WAS ENTITLED TO RATE O F 25%. HE HAS FURTHER REFERRED TO EXPLANATION 4A BELOW SECTION 43 WITH REFERENCE TO THIS AND CONCLUDED THAT THE VALUE IN THE HANDS OF T HE TRASNFEROR HAS TO BE TAKEN AS THE COST OF ASSESSEE. 54. IT WAS SUBMITTED BEFORE THE LEARNED CIT (A) THAT THE ASSESSEE HAD PURCHASED FROM ATUL PRODUCTS LTD. FLULDIZED BED BOILER. THE RATE OF DEPRECIATION IN RESPECT OF SUCH BOILERS AS PER R ULE 5 APPENDIX I - (III) (3) (ILL) ( A )(A) REPRODUCED BELOW IS 100%. 'APPENDIX I (III) (3) (ILL) (A) (A) IGNIFLUID / F LUIDIZED BED BOILERS 100% IT WAS SUBMITTED THAT THE RATE WAS APPLICABLE SIMPL ICITER TO THE COST OF FLUIDIZED BED BOILERS. NO CERTIFICATE WHATSOEVER L A NECESSARY ABOUT THE FUNCTIONING OF THE BOILER BECAUSE IT WAS NOT SO PRESCRIBED. IT WAS THEREFORE SUBMITTED THAT ARGUMENT OF THE ASSESSING OFFICER THAT THE 78 CERTIFICATE HAS BEEN GIVEN WITHOUT CARRYING OUT ANY EFFICIENCY TEST OR VISITING THE PLANT SITE TO VERIFY WHETHER THE ASSET IS STILL RUN AT THE REQUIRED EFFICIENCY TO BE ELIGIBLE FOR DEPRECIATION OF 100% IS I RRELEVANT. THE ASSESSEE COMPANY HAD ALSO SUBMITTED CERTIFICATE FROM ENGINEER MR. SHAILESH R. SHAH. THE SAME OBJECTIONS WHICH WER E IN RESPECT OF MR. R. M. PATEL WERE ALSO TAKEN IN RESPECT OF MR. S HAILESH R. SHAH. IT WAS CONTENDED THAT THERE WAS NO REQUIREMENT OF MEAS URING THE EFFICIENCY AS HAS BEEN CONTENDED BY THE ASSESSING O FFICER. IT WAS THEREFORE SUBMITTED THAT IN VIEW OF THE CLEAR RULE PRESCRIBING 100% DEPRECIATION ON FLUIDIZED BED BOILERS THE RATE OF 100% IS APPLICABLE AND THEREFORE THE ASSESSING OFFICER OUGHT TO HAVE ALLOWED DEPRECIATION OF RS.7.38 CRORES ON THE BOILERS PURCH ASED FROM ATUL PRODUCTS AND GIVEN ON LEASE TO ATUL PRODUCTS. IT WA S THEREFORE PRAYED THAT A O BE DIRECTED TO ALLOW DEPRECIATION O N ALL THE TRANSACTIONS OF RS. 20.32 CRORES. 55. THE LEARNED CIT (A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND MATERIAL ON RECORD DECIDED THE ISSUE I N FAVOUR OF THE ASSESSEE. HIS FINDINGS FROM PARA 84 TO 92 OF THE IM PUGNED ORDER ARE REPRODUCED AS UNDER: 84. BEFORE THIS GROUND OF APPEAL IS FINALLY DECIDED IT IS NECESSARY TO ADJUDICATE THE FOLLOWING TWO ISSUES: (I) WHETHER EXPLANATION 4A TO SECTION 43 IS APPLICA BLE TO ALL PENDING ASSESSMENT PROCEEDINGS AND MORE SO FOR A.Y 94-95 WHICH IS THE YEAR INVOLVED IN THE PRESENT CASE. 79 (II) WHETHER PROVISIONS OF EXPLANATION. 3 TO SECTIO N 43(1) HAVE BEEN RIGHTLY INVOKED IN THE EASE OF THE APPELLANT. SO FAR AS THE FIRST ISSUE- IS CONCERNED THE ASSESS ING OFFICER HAS INTERPRETED EXPLANATION 4A TO SECTION 4 3 BEING DECLARATORY AND CLARLFICATORY IN NATURE. IT IS HEL D THAT THIS EXPLANATION IS APPLICABLE TO ALL PENDING ASSESSMENT PROCEEDINGS ALTHOUGH THE EXPLANATION HAS BEEN INSE RTED WITH EFFECT FROM 1.10.1996. THE ASSESSING OFFICER H AS HELD THAT THE WDV IN THE HANDS OF THE TRANSFEREE COMPANY OUGHT TO BE TAKEN AS THE COST TO THE TRANSF EREE COMPANY VIZ. THE APPELLANT COMPANY IN THE PRESENT C ASE. CONSEQUENTLY THE COST OF ACQUISITION OF THE ASSETS IN THE HANDS OF THE APPELLANT COMPANY HAS BEEN ADOPTED AT NIL AND THEREFORE DEPRECIATION WOULD BE ALSO NIL. 85. EXACTLY SIMILAR ISSUE WAS THERE BEFORE ME IN THE CASE OF PINNACLE FINANCE LTD. AHMEDABAD A GROUP COMPANY FOR A.Y. 1994-95. THE ISSUE HAS BEEN DISCUS SED BY ME IN LARGER DETAILS AND IT HAS BEEN FINALLY HEL D THAT EX PLANATION 4A BELOW SECTION 43(1) WAS APPLICABLE IN RESPECT OF SALE AND LEASE BACK TRANSACTIONS MADE ON AFTER THE FIRST DAY OF OCTOBER 1996. ACCORDINGLY EXPLANATION 4A BELOW SECTION 43(1) WAS APPLICABLE F OR AND FROM A.Y. 1997-98. THIS EXPLANATION WAS NOT AT ALL APPLICABLE TO A.Y. 1994-95 TO WHICH THIS APPEAL RE LATES. FOR COMING TO THIS CONCLUSION I RELY ON MY DETAILE D ORDER IN THE CASE OF PINNACLE FINANCE LTD AS REFERRED AB OVE. 86. HAVING ADJUDICATED THE FIRST ISSUE AS ABOVE TH E ADJUDICATION OF THE SECOND ISSUE FRAMED IS NOW TAKE N UP. IT IS A SETTLED PROPOSITION OF LAW THAT IN ORDER TO INVOKE THE PROVISIONS OF EXPLANATION 3 THAT FIRST REQUIREMEN T IS THAT THE ASSESSING OFFICER MUST BE SATISFIED THAT THE MA IN PURPOSE OF TRANSFER OF ASSET DIRECTLY OR INDIRECTLY TO THE ASSESSES IS THE REDUCTION OF THE LIABILITY TO INCOM E-TAX. LEGISLATURE HAS PRE-FIXED THE WORDS 'ACTUAL' TO THE WORD 'COST. THIS IT PRECISELY TO PUT EMPHASIZE ON THE REALITY AND THE GENUINENESS OF THE COST AND TO EXCLUDE COLL USIVE 80 INFLATED DEFLATED OR FICTITIOUS COST. ACCORDINGLY IT IS NOT PERMISSIBLE TO THE ASSESSING OFFICER TO REJECT THE COST PAID FOR THE TRANSFER UNLESS THE ASSESSING OFFICER IS SA TISFIED THAT THE ACTUAL COST PAID BY THE ASSESSEE WAS INFLA TED COST BY REASON OF FRAUD COLLUSION SUBTERFUGE DEV ICE OR FALSE TRANSACTION MADE WITH AN ULTERIOR PURPOSE. IN THE PRESENT CASE THERE IS NOTHING TO SUGGEST THAT THE ACTUAL COST PAID BY THE ASSESSEE WAS INFLATED COST BY REAS ON OF ANY FRAUD ETC. TO MY MIND THE ASSESSING OFFICER IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE WAS NOT JUSTIFIED IN DETERMINING THE PURCHASE PRICE ON HIS OWN. FOR REACHING THIS FINDING I AM GUIDED BY THE DECISION O F THE JAIPUR TRIBUNAL IN THE CASE OF DY. CIT VS METALIZIN G EQUIPMENTS COMPANY (P) LTD. (54 TTJ 620). THE RELEV ANT PART IS EXTRACTED BELOW: 'ANY DEVICE WHICH HAS THE EFFECT OF REDUCING THE INCIDENCE OF TAX IS NOT NECESSARILY A COLOURFUL DEVICE LIABLE TO BE DEMOLISHED BY THE RATIO OF THE SUPREME COURT'S DECISION IN MCDOWELL CO. LTD. VS CTO (1985) (154 ITR 148). IN ORDER TO INVOKE THE PROVISIONS OF EXPLANATION 3 TO SECTION 43(1). IT IS INCUMBENT UPON THE ASSESSING O FFICER FIRST TO ESTABLISH THAT THE DEVICE ADOPTED BY THE A SSESSEE WAS EITHER CONTRARY TO ANY LAW OR AGAINST ACCOUNTI NG PRINCIPLES OR AGAINST ACCEPTED PRACTICES AND BY USI NG SUCH DEVICE SINGLY OR IN COMBINATION WITH OTHERS. I T HAD RESULTED IN DEPRIVING THE EXCHEQUER OF ITS LEGITIMA TE REVENUE. UNLESS THESE TWO CONDITIONS ARE FULFILLED THE ASSESSING OFFICER IS NOT EMPOWERED TO CHARGE THE ASSESSEE WITH THE ALLEGATION OF DODGING THE REVENUE .' 87. THE SCOPE OF EXPLANATION 3 TO SECTION 4 3(1) HAS ALSO BEEN EXPLAINED IN CIT VS EMERY STONE MANUFACTURING CO. (213 ITR 843) AT PAGE 848 THUS: 'SECTION 43(1) HAS DEFINED THE TERRA 'ACTUAL COST' FOR THE PURPOSE OF CLAIMING DEPRECIATION AND THE 81 EXPLANATION IS AN EXCEPTION TO SUCH DEFINITION AND IT EMPOWERS THE ASSESSING AUTHORITY TO TAKE THE ACTUAL COST DIFFERENT FROM WHAT HAS BEEN SHOWN BY THE ASSESSEE. THE ASSESSING AUTHORITY HAS TO EXAMINE AS TO WHETHE R THE MAIN PURPOSE OF TRANSFER OF ASSETS DIRECTLY OR INDI RECTLY WAS TO REDUCE THE LIABILITY TO TAX BY CLAIMING DEPR ECIATION WITH REFERENCE TO THE ENHANCED COST. IF THE ASSESS ING AUTHORITY IS SATISFIED THEN HE HAS TO RECORD A FIND ING TO THIS EFFECT THAT THE MAIN PURPOSE OF THE TRANSFER OF THE ASSETS WAS TO REDUCE THE LIABILITY TO INCOME-TAX. IN ORDER TO ARRIVE AT THE SATISFACTION OF THE ASSESSING AUTHORITY IT IS NECESSARY THAT THERE MUST BE EVIDENCE ON RECORD AND AN ENQUIRY HAS TO BE MADE BY THE ASSESSING AUTHORITY. THE MERE TRANSFER AT A HIGHER VALUATION BY ITSELF CANNO T BE CONSIDERED AN ACT ON THE PART OF THE ASSESSEE SHOWI NG HIS INTENTION TO REDUCE THE TAX LIABILITY.' THE GIST OF BOTH THESE JUDGMENTS IS THAT IT IS INCU MBENT UPON THE ASSESSING OFFICER TO ESTABLISH THAT THE DEVICE ADOPTED BY THE ASSESSEE WAS EITHER CONTRARY TO ANY LAW OR AGAI NST ACCOUNTING PRINCIPLES OR AGAINST ACCEPTED PRACTICES AND BY USING SUCH DEVICE IT HAD RESULTED IN DEPRIVING THE EXCHEQUER OF ITS LEGITIMATE REVENUE. UNLESS THESE TWO CONDITIONS ARE FULFILLED THE ASSESSING OFFICER LA NOT EMPOWERED TO CHARGE TH E ASSESSEE THE ALLEGATION OF DODGING THE REVENUE. FUR THER IN ORDER TO ARRIVE AT THE SATISFACTION OF THE ASSESSIN G AUTHORITY. IT IS NECESSARY THAT THERE MUST BE EVIDENCE ON RECORD AND AN ENQUIRY HAS TO BE MADE BY THE ASSESSING AUTHORITY. THE MERE TRANSFER AT A HIGHER VALUATION BY ITSELF CANNOT BE CONSIDERED AN ACT ON THE PART OF THE ASSESSEE SHOWING HIS INTENTI ON TO REDUCE THE TAX LIABILITY. IN THE PRESENT CASE THE PROVIS IONS OF EXPLANATION 3 HAVE BEEN INVOKED WITHOUT CAUSING PRO PER ENQUIRY AND WITHOUT PROVING ANY ELEMENT OF FRAUD TO DEPRIVE THE REVENUE OF ITS DUE SHARE. IN THE FACTS AND CIRCUMS TANCES IT IS HELD THAT ASSESSING OFFICER'S ACTION FOR INVOKING T HE SAID EXPLANATION WAS NOT AT ALL IN ACCORDANCE WITH LAW. THE OBVIOUS PURPOSE OF TRANSFER IN THIS CASE WAS THE BUY AND LE ASE BACK TRANSACTION. FURTHER ASSESSES WAS BEARING STAMP DU TY OF MORE 82 THAN RS.48 LAKHS AND WAS ALSO EARNING SUBSTANTIAL T AXABLE INCOME IN THE FORM OF LEASE RENTALS. IN THIS CONTEX T THERE WAS NOTHING TO PROVE THAT EXPLANATION 3 BELOW SECTION 4 3(1) WAS APPLICABLE AT ALL. IN NUT SHELL THE GIST OF THE FI NDING IS THAT PROVISIONS OF EXPLANATION 3 TO SECTION 43(1) HAVE B EEN WRONGLY INVOKED IN THE CASE OF THE APPELLANT. 88. IN VIEW OF THE TWO ISSUES AS ADJUDICATED ABOVE THE INDIVIDUAL CLAIM OF DEPRECIATION IN DIFFERENT CASES IS ADJUDICATED AS UNDER: (I) LARSEN & TUBRO LTD : THE CHARGE OF THE ASSESSING OFFICER IS THAT THE AGR EEMENT OF SALE AND LEASE BACK TRANSACTION WITH L&T WAS NOT EN TERED INTO ON 29.9.93 WHICH IS THE DATE OF THE AGREEMENT. TO R EACH THIS FINDING HE HAS REFERRED TO DIFFERENT STATEMENTS OF S/SHRI B. M. SHAH SANJAY DALAL Y. M. DEOSTHALEE AND BALAKRISHN AN AS REFERRED ABOVE. VARIOUS DISCREPANCIES HAVE BEEN POI NTED OUT WHICH HAVE BEEN INCORPORATED IN THE BODY OF THE AS SESSMENT ORDER AND HAVE BEEN HIGHLIGHTED ABOVE IN THIS APPEL LATE ORDER TOO. I HAVE GONE THROUGH THE VARIOUS OBSERVATIONS AS MADE BY THE ASSESSING OFFICER AND EXPLANATION AS GIVEN BY T HE ASSESSEE IN THIS REGARD. AFTER CAREFUL CONSIDERATIO N THE STATEMENT OF SHRI B. M. SHAH AND STATEMENT OF Y. M. DEOSTHALEE IT IS FOUND THAT NONE OF THESE STATEMEN TS EITHER SUGGEST OR CONCLUDE THAT THE AGREEMENT HAD NOT BEAN SIGNED IN SEPT.. 1993. A CLEAR CLARIFICATION IS THERE THAT THE DOCUMENT WAS TO BE SIGNED ON 29.9.93 BUT SINCE SHRI B. M. SH AH WAS IN MUMBAI ON 28.9.93 HE DID SIGN THE DOCUMENT THEN MR . MAYANK SHAH WAS A PERSON WHO HAD WITNESSED THE AGREEMENT. CONFIRMATION OF MR. MAYANK SHAH WAS AVAILABLE BEFOR E THE ASSESSING OFFICER WHICH HAS NOT BEEN FOUND REBUTTED . NO CONCLUSIVE FINDING IS POSSIBLE FROM THE STATEMENT A S GIVEN BY MR. DEOSTHALEE AND MR. SANJAY DALAI. IT WAS DESIRAB LE THAT THE APPELLANT WAS PROVIDED WITH A COPY OF THE STATEMENT OF DIFFERENT PERSONS AND WAS GIVEN OPPORTUNITY OF CROSS EXAMINAT ION. THIS WOULD HAVE MADE THE PICTURE CLEAR. UNFORTUNATELY THE A.O. WENT ON RECORDING STATEMENTS BUT DID NOT CONFRONT T HE SAME TO 83 THE ASSESSEE BY GIVING ITS COPIES FOR PROPER REBUTT AL WITH THE RESULT THAT THE AMBIGUITY REMAINED ABOUT THE DATE OF ACTUAL SIGNING OF AGREEMENT. IN SUCH CIRCUMSTANCES PERHAPS ONE HAS TO GO BY THE SEQUENCE OF FACTS AS ARE AVAILABLE ON RECORD. THE MOST VITAL PART/ FACT IN THIS REGARD IS THE PAYMENT OF THE PURCHASE PRICE. IT IS SEEN FROM THE DETAILS GIVEN THAT PAYMENT FOR ( ENTIRE CONSIDERATION WAS MADE BY THE APPELLANT ON 2 9.9.93. IF THIS ASPECT WITH DUE WEIGHTAGE IS CONSIDERED TH E NORMAL INFERENCE CAN BE THAT THE ASSET HAD BEEN HANDED OVE R TO THE APPELLANT AND THE LEASE HAD COMMENCED OPERATION ON 29.9.93. THIS POSITION IS TO BE APPRECIATED ESPECIALLY IN V IEW OF THE FACT THAT ASSET UNDER CONSIDERATION WAS MOVABLE IN NATUR E. THIS ASPECT OF FULL PAYMENT HAS NOT BEEN COMMENTED UPON BY THE A.O. AT ALL WHICH COULD HAVE BROUGHT CLARITY TO THE ISSUE INVOLVED. HE HAS JUST BEEN GUIDED PERHAPS BY THE O THER DISCREPANCIES FOR WHICH THERE ARE OBVIOUS CLARIFICA TIONS. HE HAS BEEN INFLUENCED TO A LARGE EXTENT BY THE ALLEGED NO N-AVAILABILITY OF THE SCHEDULE WHICH DID NOT NECESSARILY FORM PART OF ORIGINAL AGREEMENT DATED 29.9.93. WHEN THE PAYMENT HAS BEEN MADE IN FULL AND LEASE RENTALS HAVE STARTED FROM THE SAI D DATE RELIANCE ON DIFFERENT DISCREPANCIES AS POINTED OUT WAS PERHAPS OF LESSER IMPORTANCE. THE ASSESSING OFFICER WAS ALS O INFLUENCED BY THE FACT THAT THE TRANSFER ON THE DAT E CLAIMED COULD NOT BE MADE IN VIEW OF THE CHARGE OF IDBI ON THE PLANT AND MACHINERY. THE ASSESSING OFFICER FELT THAT THE SALE DEED WAS AB-INITIO VOID SINCE THE CHARGE OF IDBI WAS SUB SISTENT. THIS IS NOT THE CORRECT LEGAL INFERENCE SINCE THE PLANT COULD BE SOLD WITH A CHARGE SUBSISTING AND THE CHARGE WAS LATER O N RELEASED BY IDBI TOO. SIMPLY ON THIS ACCOUNT THE DEED COULD NOT BE HELD TO BE AB-INITIO VOID. WITH THIS DISCUSSION IT IS HELD THAT THE AGREEMENT COULD HAVE BEEN SIGNED ON 29.9.93. NO DOU BT DISCREPANCIES DO EXIST BUT IN VIEW OF THE FACT THAT FULL PAYMENT HAS BEEN MADE AND CLARIFICATIONS WITH REGARD TO THE DISCREPANCIES ALSO GENUINELY EXIST THE AGREEMENT C OULD HAVE BEEN POSSIBLY SIGNED ON THE DATE AS CLAIMED. ACCORD INGLY IT IS HELD THAT THE APPELLANT WAS FULLY ENTITLED TO THE C LAIM OF DEPRECIATION ON RATE MADE. TO AN EXTENT THE APPELL ANT SUCCEEDS. (II) SALE & LEASE BACK TRANSACTION WITH RAYMOND: 84 THE ASSET WAS REVALUED ON THE DATE OF TRANSFER TO R S.94 LAKHS WHICH WAS ADOPTED FOR THE PURPOSE OF TRANSFER. THE ASSESSING OFFICER'S ALLEGATION IS THAT THERE WAS AN ATTEMPT T O ANTEDATE THE TRANSACTION. IN THIS REGARD IT IS FELT THAT ASSES SING OFFICER'S OBSERVATIONS ARE SUCH WHICH CANNOT BE CONCLUSIVELY HELD TO BE FULLY SUPPORTED. REGARDING THE PLACE OF SIGNATURES OF THE DOCUMENT MR. B. M. SHAH HAS GIVEN THE CLARIFICATIO N WHICH CAN BE HELD TO BE BELIEVABLE. THE CONFUSION REGARDING T HE PLACE AND DATE COULD HAVE BEEN AVOIDED IF THE ASSESSING OFFIC ER HAD MADE FOLLOW UP ENQUIRIES WITH RAYMONDS AND WITH THE OFFICE OF TRIKAYA. BUT UNFORTUNATELY THIS WAS NOT DONE AND T HE ASSESSING OFFICER WENT IN A ROUND ABOUT MANNER FOR GIVING THE IMPUGNED FINDING. THIS FINDING WAS ENTIRELY ON THE BASIS OF INFORMATION AS GATHERED BY HIM ONE SIDED. BUT THIS FINDING OF THE ASSESSING OFFICER IS NOT WELL SUPPORTED AT ALL. THERE IS CON SIDERABLE WEIGHTAGE IN THE ARGUMENT OF THE APPELLANT WHEN IT IS SAID THAT DOCUMENT AS REFERRED BY THE ASSESSING OFFICER DID N OT FORM PART OF THE LEASE AGREEMENT. THIS COULD BE IN THE NATURE OF SUPPORTING EVIDENCE FOR COMPLETION OF THE FILE AND THEIR ABSENCE BY ITSELF COULD NOT POSITIVELY SUGGEST THAT THE AGR EEMENT WAS NOT ENTERED INTO ON THE RELEVANT DATE. THE CLINCHIN G EVIDENCE IN THIS REGARD TO RAY MIND IS AGAIN THE PAYMENT PART W HICH IS MADE BEFORE 30TH SEPTEMBER. THIS UNDISPUTED ASPECT BY IT SELF CAN HELP SAFELY CONCLUDE THAT TRANSACTION WAS ENTERED I NTO BEFORE THAT DATE. IN THE FACTS AND CIRCUMSTANCES OF THE P RESENT CASE AND THE RELATED INFORMATION WHICH IS AVAILABLE ON R ECORD TO MY MIND THE CHARGE OF THE ASSESSING OFFICER IS NOT WEL L PROVED. IN ITS ABSENCE THE CLAIM OF THE ASSESSEE WILL HAVE TO BE ACCEPTED ON THE FACTS AS ON RECORD. 89. REGARDING THE RATE OF DEPRECIATION SINCE ORIGI NAL SUPPLIER OF THE ASSET THERMAX LTD. HAD CERTIFIED THE EFFICIE NCY OF BOILER SUPPLIED IT HAS TO BE HELD ELIGIBLE TO 100% DEPREC IATION. THIS INFORMATION IS ALREADY AVAILABLE ON RECORD AND IS N OT REBUTTED BY THE ASSESSING OFFICER IN NAY MANNER. MOREOVER NOT HING WRONG CAN BE FOUND WITH THE CERTIFICATE OF MR. SHAH WHICH WAS MERELY REITERATING THE OBVIOUS ON THE BASIS OF LITERATURE OF THE BOILER IN QUESTION. IN TOTALITY OF CIRCUMSTANCES THERE IS N OTHING WHICH 85 COULD BE HELD AGAINST THE ASSESSEE ON THE RATE OF D EPRECIATION AS CLAIMED. 90. WITH THIS DISCUSSION AND IN VIEW OF WHA T IS DISCUSSED EARLIER AS ABOVE THE CLAIM OF THE ASSESSES IS DIRE CTED TO BE ALLOWED AS MADE. (III) SALE & LEASE BACK TRANSACTION WITH ATU L LTD.: 91. SO FAR AS THIS CLAIM OF THE ASSESSEE IS CONCERNED THERE IS NO REASONABLE BASIS FOR ANY DISPUTE. THE R ATE OF DEPRECIATION IN RESPECT OF SUCH BOILERS IS CLEARLY 100% AS HAS BEEN HIGHLIGHTED IN THE SUBMISSIONS OF THE APPELLAN T AS RECORDED ABOVE. NO CERTIFICATE OF ANY KIND WAS NEC ESSARY WITH REGARD TO THE FUNCTIONING OF THE BOILER BECAUSE IT IS NOT SO PRESCRIBED. IN VIEW OF THE CLEAR RULE PRESCRIBING 100% DEPRECIATION ON FLUIDIZED BED BOILERS THE RATE OF 100% IS HELD TO BE APPLICABLE. THE ASSESSING OFFICER IS ACCORDINGLY DIRECTED TO ALLOW THE CLAIM OF DEPRECIATION AS MADE. 92. WITH THIS DISCUSSION THIS GROUND OF APP EAL IS DECIDED IN FAVOUR OF THE ASSESSEE. 56. LEARNED D R RELIED UPON ORDER OF THE A O. HE HA S SUBMITTED THAT IN THE CASE OF L & T LTD. THE WDV WA S NIL IN THE BOOKS OF ACCOUNT WHICH WAS REVALUED AT A HIGHER PRICE. HE HAS SUBMITTED THAT BOOK VALUE AS PER BOOKS OF AC COUNT OF L & T WAS RS. 24/- ONLY. THEREFORE WDV WAS NIL. HE HAS SUBMITTED THAT IT IS NOT EXPLAINED WHY THE P ROPERTY HAVING NIL VALUE WAS SOLD TO THE ASSESSEE FOR A HIG HER PRICE AND GIVEN ON LEASE BACK TRANSACTION BY THE ASSESSEE TO THE SAME CONCERN. HE HAS SUBMITTED THAT STATEMENT OF SU RVEYOR WAS RECORDED WHO EXPLAINED THAT REPORT WAS PREPARED AT THE INSTANCE OF THE ASSESSEE WITHOUT VISITING THE PLANT . HE HAS 86 SUBMITTED THAT SHRI B. M. SHAH VICE PRESIDENT OF T HE ASSESSEE WAS NOT IN BOMBAY AT THE TIME OF SIGNING T HE AGREEMENT ON 29-09-1993. THE VALUER ALSO ADMITTED I N HIS STATEMENT THAT REPORT WAS OBTAINED IN OCTOBER 1993 . LEARNED D R SUBMITTED THAT PROPERTY IN TRANSACTION WAS ALREADY MORTGAGED TO IDBI ON THE DATE OF SALE. THER EFORE THE ABOVE FACTS CREATE DOUBT IN THE EXPLANATION OF THE ASSESSEE. HE HAS SUBMITTED THAT ASSESSEE HAS STATED THE PLANT AND MACHINERY AS IMMOVABLE PROPERTY BY REGIST ERING IT IN 1994-95 SUBSEQUENT TO THE ASSESSMENT YEAR IN APP EAL. THEREFORE NO DEPRECIATION CAN BE ALLOWED UNLESS AS SESSEE IS OWNER OF THE PROPERTY. LEARNED D R REFERRED TO P AGE 151 OF THE ASSESSMENT ORDER WHERE PROVISIONS OF EXPLANA TION 4A TO SECTION 43(1) HAVE BEEN APPLIED BY THE A O WITH RETROSPECTIVE EFFECT. LEARNED D R IN ALTERNATE CONT ENTION SUBMITTED THAT EXPLANATION 3 TO SECTION 43(1) APPLY TO THE CASE OF THE ASSESSEE AND THE A O HAS ALSO OBTAINED PRIOR APPROVAL OF DCIT CENTRAL RANGE-I AHMEDABAD IN THI S REGARD AS NOTED AT PAGE 117 OF THE ASSESSMENT ORDER . LEARNED D R REFERRED TO SIMILAR SUBMISSIONS WITH RE GARD TO OTHER PARTIES. LEARNED D R SUBMITTED THAT THE WRITT EN SUBMISSION OF THE ASSESSEE SHOWS THAT THE ASSESSEE HAS RECEIVED LEASE RENTAL OF RS.28 CRORES IN SEVERAL YE ARS BUT IN THE ASSESSMENT YEAR IN APPEAL CLAIMED DEPRECIATI ON OR RS.20 CRORES. THEREFORE IT WAS MUTUALLY BENEFICIAL TRANSACTION BETWEEN THE PARTIES. LEARNED D R THEREF ORE 87 SUBMITTED THAT ORDER OF THE LEARNED CIT (A) MAY BE SET ASIDE AND THE ORDER OF THE A O MAY BE RESTORED. 57. ON THE OTHER HAND LEARNED COUNSEL FOR THE ASSE SSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORIT IES BELOW. HE HAS ALSO FILED WRITTEN SUBMISSION WHICH I S TAKEN ON RECORD. HE HAS SUBMITTED THAT ASSESSEE HAS PAID TAXES ON LEASE RENTAL INCOME RECEIVED BY THE ASSESSEE COM PANY ON THE TRANSACTIONS OF SALE AND LEASE BACK TRANSACT IONS ENTERED INTO WITH THE ABOVE THREE PARTIES. THE ASSE SSEE HAS RECEIVED LEASE RENTAL INCOME BROUGHT TO CHARGE OF T AX FOR THE SIX ASSESSMENT YEARS 1994-95 TO 1999-2000 AND RECEIVED LEASE RENTAL FROM THESE PARTIES IN A SUM O F RS.28 00 77 572/- AS AGAINST WHICH THE ASSESSEE HAS CLAIMED DEPRECIATION @100% IN A SUM OF RS.20.32 CRO RES. THUS TAXES HAVE BEEN PAID ON SURPLUS OF ABOUT RS.8 CRORES. THE SALE AND LEASE BACK HAVE BENEFITED THE REVENUE AND THE ASSESSEE COMPANY HAS NOT DERIVED AN Y ADVANTAGE OF REDUCTION OF ITS TAX LIABILITY. THERE WAS NO MOTIVE OF TAX AVOIDANCE. THEREFORE THERE WAS NO BA SIS FOR THE A O TO TAKE THE VIEW AGAINST THE ASSESSEE THAT SALE AND LEASE BACK TRANSACTION WAS A DEVICE TO DEPRIVE THE REVENUE OF TAXES OR TO INVOKE THE PROVISIONS OF EXPLANATION 3 TO SECTION 43 (1) OF THE IT ACT. DETAILS OF THE LEASE RENTAL ARE FILED IN ANNEXURE A WHICH WOULD SHOW THAT ASSESSEE RECEIVED LEASE RENTAL INCOME FROM THE DAY ONE WHEN AGREEMENT WAS ENTERED INTO. DURING THE YEAR UNDER 88 CONSIDERATION ASSESSEE HAS DISCLOSED LEASE RENTAL INCOME OF RS.2 56 99 652/-. HE HAS RELIED UPON DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS GU JARAT GAS COMPANY IN WHICH IT WAS HELD THAT ONCE LEASE RE NTAL INCOME IS BROUGHT TO THE CHARGE OF TAX AS BUSINESS INCOME DEPRECIATION CLAIMED ON THE RELEVANT ASSET CANNOT B E DISALLOWED. 57.1 HE HAS FURTHER SUBMITTED DURING THE YEAR UNDE R CONSIDERATION 1994-95 ASSESSEE HAS PURCHASED PLANT AND MACHINERY FROM THE ABOVE THREE PARTIES WORTH RS.20. 32 CRORES IN THE MONTH OF SEPTEMBER 1993 AND THE MACHINERIES WERE LEASED BACK TO THE SAME PARTIES AL SO IN THE MONTH OF SEPTEMBER 1993. THE ASSESSEE PURCHASE D THE MACHINERIES AT THE ABOVE VALUE DETERMINED BY QU ALIFIED ENGINEERS AND VALUERS OF PLANT AND MACHINERY AND CL AIMED DEPRECIATION ACCORDINGLY. HE HAS SUBMITTED THAT IN THE TRANSACTION WITH L & T LTD. THE PLANT AND MACHINER Y WAS REVALUED AT RS. 24 CRORES AND AFTER CONSIDERING DEPRECIATION SALEABLE VALUE WAS FIXED AT RS.12 CRO RES. THE A O HAS STATED THE LEASE BACK AGREEMENT WAS ENTERED ON 29-09-1993 AND SAME WAS SIGNED BY SHRI B. M. SHAH VICE PRESIDENT ON BEHALF OF ASSESSEE AND SHRI B. M. SHAH IN HIS STATEMENT STATED THAT ON 29-09-1993 HE WAS NOT IN B OMBAY. THE A O THEREFORE INFERRED THAT AGREEMENT WAS SOME WHERE SIGNED IN THE MONTH OF OCTOBER AND WAS ANTEDATED AS 29- 09-1993. HE HAS SUBMITTED THAT THE A O HAS ALSO REC ORDED 89 STATEMENT OF SANJAY DALAL WHO AS PER THE A O HAS ST ATED THAT DOCUMENT FROM THE SURVEYOR CERTIFIED THAT ASSE T WAS ENTITLED TO 100% DEPRECIATION WAS RECEIVED IN THE O FFICE OF THE ASSESSEE IN OCTOBER 1993. THE A O FURTHER MENT IONED THAT THE SALE DEED AS ALSO RESCHEDULED TO THE LEASE AGREEMENT WAS RECEIVED IN THE OFFICE OF ASSESSEE CO MPANY ON 12-10-1993. THE A O FURTHER REFERRED TO STATEMEN T OF SHRI Y. M. DEOSTHALEE OF L & T LTD. ON THE BASIS OF WHICH HE CONCLUDED THAT LEASE AGREEMENT WAS NOT SIGNED ON 29 -09- 1993. THE A O REFERRED TO REPORT OF SURVEYOR AND ME NTIONED THAT DRAFT REPORT WAS DATED 30-09-1993 WHEREAS THE FINAL REPORT WAS ANTEDATED AS 17-09-1993. THE A O ALSO RE FERRED TO STATEMENT OF BALAKRISHNAN WHO HAS STATED THAT RE PORT OF SURVEYOR WAS ANTEDATED ON THE INSTRUCTION OF SHRI Y . M. DEOSTHALEE. HOWEVER THE A O HAS ADMITTED THAT SHRI Y.M. DEOSTHALEE DENIED HAVING GIVEN ANY SUCH INSTRUCTION . THE A O FURTHER STATED THAT THE PLANT AND MACHINERY WAS A LREADY MORTGAGED WITH IDBI. THE A O ALSO REFERRED TO THE L ETTER DATED 27-09-1993 ADDRESSED TO THE BROKER CONVEYING THAT THEY WERE WAS AGREEABLE TO SALE AND LEASE BACK TRAN SACTION WITH THE ASSESSEE. THE A O THEREFORE ASSUMED AGREE MENT MUST HAVE BEEN EXECUTED IN OCTOBER 1993 AND THAT TRANSACTION WAS NOT GENUINE AS PER EXPLANATION 3 TO SECTION 43(1). LEARNED COUNSEL FOR THE ASSESSEE BY REFERRIN G TO THE ABOVE OBSERVATIONS OF THE ASSESSING OFFICER SUBMITT ED THAT DETAILS SUBMISSIONS WERE FILED BEFORE THE A O WHICH HAS BEEN IGNORED. THE ASSESSEE FILED DETAILED SUBMISSIO NS 90 BEFORE THE LEARNED CIT (A) WHICH HAVE BEEN RIGHTLY APPRECIATED BY HIM. HE HAS SUBMITTED THAT EXPLANATI ON 4A TO SECTION 43(1) WAS INSERTED IN THE ACT WITH EFFEC T FROM 01- 10-1996. THEREFORE IT IS NOT APPLICABLE TO THE CAS E OF THE ASSESSEE WHICH IS ALSO CLARIFIED BY THE CBDT CIRCUL AR NO.762 DATED 18-02-1998 COPY OF WHICH IS ALSO FILED IN THE PAPER BOOK. THE SAME VIEW IS TAKEN BY CIT (A) IN TH E CASE OF PINACLE FINANCE LTD. WHICH IS CONFIRMED BY THE T RIBUNAL. SAME VIEW IS TAKEN BY HON'BLE MADRAS HIGH COURT IN THE CASE OF OM SINDHURY CAPITAL INVESTMENTS LTD. 274 IT R 427. HE HAS SUBMITTED THAT SHRI B. M. SHAH WAS AVAILABLE IN BOMBAY ON 28-09-1993 AND HAS SIGNED THE LEASE AGREE MENT ON THE SAME DAY. CONFIRMATION OF MAYANK SHAH WAS FI LED BEFORE A O WHO WAS A WITNESS TO THE AGREEMENT. HE H AS SUBMITTED THAT THERE WAS NO ILLEGALITY IN SIGNING T HE AGREEMENT ON 28-09-1993 AND THE A O HAS COMPLETELY IGNORED THE RELEVANT EVIDENCE. THERE WAS NO BASIS T O SAY THAT LEASE AGREEMENT WAS ANTEDATED. HE HAS SUBMITTE D THAT FINDING OF THE A O ARE BASED ON INFERENCE AND PRESUMPTIONS. HE HAS SUBMITTED THAT LEARNED CIT (A) RIGHTLY APPRECIATED THE FACT AND ALLOWED DEPRECIATION TO TH E ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTE D THAT THE A O HAS RECORDED STATEMENTS OF SEVERAL PERSONS AT THE BACK OF THE ASSESSEE INCLUDING THE STATEMENT OF SUR VEYOR WHICH HAVE NOT BEEN CONFRONTED TO THE ASSESSEE AND NO RIGHT OF CROSS EXAMINATION HAS BEEN GIVEN TO THE AS SESSEE. THEREFORE THE SAME ARE VIOLATIVE OF PRINCIPLE OF N ATURAL 91 JUSTICE. HE HAS RELIED UPON DECISION OF HON'BLE CAL CUTTA HIGH COURT IN THE CASE OF CIT VS EASTERN COMMERCIAL ENTERPRISES 210 ITR 103 DECISION OF HON'BLE KERALA HIGH COURT IN THE CASE OF P. S. ABDULMAZID VS ITO 209 IT R 821 AND DECISION OF THE HON'BLE SUPREME COURT IN THE CA SE OF KISHANCHAND CHELLARAM 125 ITR 713 IN WHICH IT WAS H ELD THAT IF ANY STATEMENT OF THIRD PARTY IS TO BE USED AGAINST THE ASSESSEE ASSESSEE MUST BE ALLOWED CROSS EXAMINATIO N OTHERWISE SUCH EVIDENCE WOULD NOT BE APPLICABLE AGA INST THE ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE FURT HER SUBMITTED THAT LEARNED CIT (A) HAS RECORDED A FACT FINDING THAT ENTIRE PURCHASE PRICE WAS PAID BY THE ASSESSEE COMPANY ON 29-09-1993 (PB -311 COPY OF THE RECEIPT ) TO SHOW THAT PURCHASE PRICE WAS PAID THROUGH CHEQUE. I T WOULD SHOW THAT PLANT AND MACHINERY WAS HANDED OVER TO TH E ASSESSEE ON 29-09-1993 ITSELF AND THAT ASSESSEE HAS LEASED BACK THE SAME PLANT AND MACHINERY TO L & T L TD. ON THE SAME DATE. THE LEASE RENTAL HAS STARTED FROM TH E SAME DATE. THEREFORE FINDING OF THE A O WAS INCORRECT T HAT TRANSACTIONS ARE NOT GENUINE. HE HAS SUBMITTED THAT PROPERTY UNDER CHARGE COULD BE SOLD ALONG WITH THE CHARGE. HE HAS SUBMITTED THAT A O HAS RELIED UPON THE RESOL UTION OF THE BOARD DATED 29-10-1993 BUT IN THE PREAMBLE ITS ELF IT IS STATED THAT THE RESOLUTION WAS PASSED IN CONTINUATI ON WITH EARLIER RESOLUTION DATED 14-08-1993 FOR PURCHASE OF THE PLANT AND MACHINERY. HE HAS THEREFORE SUBMITTED TH AT LEARNED CIT (A) RIGHTLY CONCLUDED THAT GENUINE AGRE EMENT 92 WAS ENTERED INTO BETWEEN ASSESSEE AND L & T LTD. ON WHICH DEPRECIATION WAS RIGHTLY ALLOWED. AS REGARDS TRANSA CTION WITH RAYMOND WOOLEN MILLS LTD. AND ATUL PRODUCTS LT D. LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT LEA SE AGREEMENT WITH RAYMOND WOOLEN MILLS LTD. WAS ALSO EXECUTED SIMILARLY ON 29-09-1993 AND SIGNED BY SHRI B. M. SHAH AS IS CONSIDERED BY LEARNED CIT (A) IN THE CAS E OF L & T LTD. WITH REGARD TO TRANSACTION WITH ATUL PRODUCT S LTD. THERE IS NO DISPUTE REGARDING DATE AND ONLY DISPUTE IS REGARDING RATE OF DEPRECIATION. LEANED CIT (A) SPEC IFICALLY NOTED THAT 100% DEPRECIATION IS ALLOWABLE AS PER RU LES; THEREFORE NO FURTHER EVIDENCE IS REQUIRED. HE HAS SUBMITTED THAT EXPLANATION 3 TO SECTION 43 (1) IS NOT APPLICA BLE IN THIS CASE BECAUSE THERE IS NO REDUCTION IN TAX LIABILITY . HE HAS SUBMITTED THAT THE COST PAID BY THE ASSESSEE FOR PU RCHASE OF PLANT AND MACHINERY CANNOT BE DISPUTED THEREFORE LEARNED CIT (A) WAS JUSTIFIED IN HOLDING THAT EXPLA NATION 3 TO SECTION 43 (1) WOULD NOT APPLY IN THIS CASE. THE A O HAS ALSO NOT MADE PROPER ENQUIRY AS PER THE ABOVE EXPLA NATION. HE HAS RELIED UPON ORDER OF ITAT AHMEDABAD BENCH IN THE CASE OF ACIT VS GUJARAT LEASE FINANCE LTD. 174 TAXM AN MAGAZINE 28 IN WHICH CERTAIN GUIDELINES HAVE BEEN ISSUED FOR GENUINE SALE AND LEASE BACK TRANSACTION WHICH A RE SATISFIED IN THIS CASE AS THE ASSESSEE OWNED THE AS SETS AND USED BY THE LESSEE. THE PURCHASE MONEY IS PAID. ASS ESSEE RECEIVED LEASE RENTAL AND BOTH THE PARTIES ACTED UP ON THE LEASE DEED. THEREFORE GENUINE TRANSACTION IN THE C ASE OF 93 THE ASSESSEE CANNOT BE DISPUTED. HE HAS RELIED UPON ORDER OF ITAT CHENNAI BENCH (T M) IN THE CASE OF JCIT VS INVESTMENT TRUST OF INDIA LTD. 288 ITR (AT) 106 IN WHICH IT WAS HELD THAT ONCE A LEASING OR FINANCE COMPANY OWN S MACHINERY AND LEASES IT OUT TO A THIRD PARTY AND IT FOUND TO HAVE SATISFIED THE OTHER REQUIREMENTS OF LAW IT WO ULD BE ENTITLED TO DEPRECIATION. HE HAS RELIED UPON DECISI ON OF THE HON'BLE ORISSA HIGH COURT IN THE CASE OF INDUSTRIAL DEVELOPMENT CORPORATION OF ORISSA VS CIT 268 ITR 13 9 IN WHICH IT WAS HELD THAT IN A TRANSACTION OF PURCHASE AND LEASE BACK OF ASSETS DEPRECIATION HAS TO BE ALLOWE D IF THERE IS NO EVIDENCE OR MATERIAL TO PROVE THAT THE TRANSA CTION WAS NOT GENUINE. LEARNED COUNSEL FOR ASSESSEE THEREFORE SUBMITTED THAT LEARNED CIT (A) ON PROPER APPRECIATI ON OF FACTS AND MATERIAL ON RECORD RIGHTLY DELETED THE AD DITION BY ALLOWING DEPRECIATION. 58. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE A O IN ORDER TO DISALLOW THE CLAIM OF DEPRECIATION APPLIED EXPLANATION 4A TO SECTION 43(1) OF THE IT ACT. THE LEARNED CIT (A) RECORDED A FINDING THAT HE HAS CONSIDERED T HE IDENTICAL ISSUE IN THE CASE OF PINACLE FINANCE LTD. FOR THE ASSESSMENT YEAR 1994-95 WHEREIN IT WAS HELD THAT AF ORESAID EXPLANATION 4A DO NOT APPLY TO THE ASSESSMENT YEAR 1994- 95. THE EXPLANATION 4A TO SECTION 43 (1) WAS INSERT ED IN THE ACT BY FINANCE ACT (2) OF 1996 WITH EFFECT FROM 01- 10-1996. THE VIEW OF THE LEARNED CIT (A) IS CONFIRMED BY ITA T 94 AHMEDABAD BENCH IN THE SAME CASE VIDE ORDER DATED 2 0- 01-2006 (COPY FILED AT PB-319). SIMILARLY THE SAME PROVISION HAS BEEN EXPLAINED BY THE CBDT CIRCULAR N O.762 DATED 18-2-1998 COPY OF WHICH IS FILED ON RECORD IN WHICH IT WAS EXPLAINED THAT THIS PROVISION WILL APPLY IN RES PECT OF SALE AND LEASE BACK TRANSACTION MADE ON OR AFTER 01 -10- 1996. THE TRIBUNAL ADOPTED THE SAME VIEW IN THE CAS E OF PINACLE FINANCE LTD. (SUPRA) AND ALSO REFERRED TO T HE JUDGMENT OF HON'BLE MADRAS HIGH COURT IN THE CASE O F OM SINDHORI CAPITAL INVESTMENT LTD. VS JCIT 274 ITR 42 7 IN WHICH ALSO SAME VIEW IS TAKEN. LEARNED CIT (A) WAS THEREFORE JUSTIFIED IN HOLDING THAT EXPLANATION 4A TO SECTION 43(1) WILL NOT APPLY TO THE ASSESSMENT YEAR UNDER A PPEAL I.E. 1994-95. 58.1 THE LEARNED CIT (A) REFERRED TO THE STATEMENT S RECORDED BY THE A O IN THE IMPUGNED ORDER. IN THE STATEMENT OF SHRI B. M. SHAH IT WAS CLARIFIED THAT HE WAS IN MUMBAI ON 28-09-1993 AND SINCE LEASE AGREEMENT WAS READY THEREFORE HE SIGNED THE DOCUMENT ON 28-09-1 993 IN THE PRESENCE OF WITNESS SHRI MAYANK SHAH WHO ALSO APPENDED HIS SIGNATURE TO THE LEASE DEED ON 28-09-1 993. THE CONFIRMATION OF SHRI MAYANK SHAH WAS FILED BEFO RE THE AUTHORITIES BELOW (PB-95) IN WHICH HE HAS CONFIRMED THAT AGREEMENT WAS SIGNED ON 28-09-1993 ON BEHALF OF THE ASSESSEE BY SHRI B. M. SHAH AND HE HAD WITNESSED TH E SAME. IT WAS ALSO CONFIRMED THAT SHRI B. M. SHAH WA S 95 PRESENT IN THE OFFICE OF L & T LTD. ON THE SAID DAT E. THE A O DID NOT DISPUTE THIS FACT. THEREFORE THE A O SHOUL D NOT HAVE IGNORED THIS VITAL PIECE OF EVIDENCE AND SHOULD NOT HAVE PRESUMED THAT THE AGREEMENT WAS ANTEDATED LATER ON. THE STATEMENTS OF SHRI B. M. SHAH AND STATEMENT OF SHRI Y. M. DEOSTHALEE OF L & T LTD. WOULD NOT SUGGEST THAT THE SE DOCUMENTS WERE NOT SIGNED IN SEPTEMBER 1993. THE CONFIRMATION OF SHRI MAYANK SHAH WITNESS HAS NOT B EEN DISPUTED BY THE A O. THE LEARNED CIT (A) ALSO RECOR DED FINDING OF FACT ENTIRE PURCHASE PRICE OF PLANT AND MACHINERY IN QUESTION WAS DULY PAID BY THE ASSESSEE COMPANY T O L & T LTD. ON 29-09-1993. COPY OF THE RECEIPT OF PAYMEN T IS FILED AT PB-311 WHICH PROVES THAT PLANT AND MACHINE RY IN QUESTION HAVE BEEN PURCHASED BY THE ASSESSEE ON MAK ING FULL PAYMENT BY CHEQUE ON 29-09-1993 AND THAT THE P LANT AND MACHINERY HAVE BEEN HANDED OVER TO THE ASSESSEE COMPANY. THIS RECEIPT IS SIGNED BY SHRI SANJAY DALA L ON BEHALF OF THE ASSESSEE AND SHRI H. N. SHAH ON BEHAL F OF L & T LTD. THEREFORE THE LEASE BACK OF THE SAME PLANT AND MACHINERY TO L & T LTD. ON THE SAME DAY CANNOT BE DISPUTED BY THE A O. THE FULL PAYMENT OF THE PRICE OF THE PURCHASE WOULD SUGGEST THAT THE ASSESSEE BECOME OWN ER ON THE DAY WHEN POSSESSION WAS TAKEN BY MAKING PAYM ENT. THE PAYMENT MADE BY THE ASSESSEE HAS ALSO NOT BEEN DISPUTED BY THE A O. THE ASSESSEE PLEADED THAT IT STARTED RECEI VING THE LEASE RENTAL FROM THE SAME DATE WHICH IS ALSO SUBJE CT TO TAX BY THE A O WOULD PROVE THE CONTENTION OF THE ASSESS EE THAT 96 THE SALE AND LEASE BACK TRANSACTION WERE COMPLETED IN SEPTEMBER 1993 ITSELF. IT MAY ALSO BE NOTED THAT E VEN IF THE PLANT AND MACHINERY WERE SUBJECT TO CHARGE BY IDBI BUT THE SAME ASSETS WOULD BE SOLD AND TRANSFERRED ALONG WIT H THE CHARGE AND ONLY IN THE EVENT OF THE DEFAULT COMMITT ED BY L & T LTD. THEY COULD BE RESPONSIBLE FOR REPAYMENT O R IN THE WORST POSITION THE RECOVERY COULD BE EFFECTED BY ID BI FROM THE PLANT AND MACHINERY. BUT IT WOULD NOT EFFECT TH E TRANSACTION BETWEEN THE ASSESSEE COMPANY AND L & T LTD. THE A O ALSO REFERRED TO RESOLUTION DATED 29-10-199 3 BUT THE SAID RESOLUTION STARTS WITH RESOLUTION DATED 14 -08-1993 FOR PURCHASE OF PLANT AND MACHINERY FROM THE ABOVE THREE PARTIES. LEARNED CIT (A) WAS THEREFORE JUSTIFIED I N HOLDING THAT GENUINE PURCHASE AND LEASE BACK TRANSACTIONS H AVE BEEN ENTERED INTO BETWEEN THE PARTIES. IT MAY ALSO BE NOTED THAT ASSESSEE SPECIFICALLY PLEADED THAT STATEMENT O F SURVEYOR AND OTHERS HAVE BEEN RECORDED BY THE A O B EHIND THE BACK OF THE ASSESSEE AND THE SAME WERE NOT SUPP LIED TO THE ASSESSEE AND NO RIGHT TO CROSS EXAMINATION HAS BEEN GIVEN TO THE ASSESSEE. THE ABOVE STATEMENT OF THE ASSESSEE HAS NOT BEEN DISPUTED THROUGH ANY MATERIAL ON RECORD. THEREFORE SUCH STATEMENTS CANNOT BE READ I N EVIDENCE AGAINST THE ASSESSEE. WE RELY UPON THE DEC ISION OF HON'BLE SUPREME COURT IN THE CASE OF KISHANCHAND CHELLARAM 125 ITR 713. THE A O NOTED THAT ASSESSEE WAS NOT OWNER OF THE PLANT AND MACHINERY BECAUSE DEED W AS NOT REGISTERED AS THE SAME HAS BEEN TREATED IMMOVABLE 97 PROPERTY BY THE ASSESSEE. IT MAY BE NOTED HERE THAT PLANT AND MACHINERY ARE MOVABLE PROPERTIES THEREFORE EV EN IF ASSESSEE HAS STATED THE SAME AS IMMOVABLE PROPERTY WOULD NOT MAKE IT THE SAME. THE ASSESSEE HAS PURCHA SED PLANT AND MACHINERY BY MAKING PAYMENTS. NO OTHER LA ND OR PROPERTY IS PURCHASED; THEREFORE IT COULD NOT BE PERMANENTLY ATTACHED WITH THE LAND OF OTHERS. SECTI ON 4 OF THE SALE OF GOODS ACT PROVIDES A CONTRACT OF SALE O F GOODS IS A CONTRACT WHEREBY THE SELLER TRANSFERS OR AGREE S TO TRANSFER THE PROPERTY IN GOODS TO THE BUYER FOR A P RICE. A CONTRACT OF SALE MAY BE ABSOLUTE OR CONDITIONAL. WH ERE UNDER A CONTRACT OF SALE THE PROPERTY IN GOODS IS T RANSFERRED FROM THE SELLER TO THE BUYER THE CONTRACT IS CALLE D SALE. SECTION 5 OF THE SALE OF GOODS ACT PROVIDES A CONTR ACT OF SALE IS MADE BY AN OFFER TO BUY OR SELL GOODS FOR A PRICE AND THE ACCEPTANCE OF SUCH OFFER. THE CONTRACT MAY PROV IDE FOR THE IMMEDIATE DELIVERY OF THE GOODS OR IMMEDIATE PA YMENT OF THE PRICE OR BOTH OR FOR THE DELIVERY OR PAYMENT BY INSTALLMENTS OR THAT THE DELIVERY OR PAYMENT OR BOT H SHALL BE POSTPONED. SUBJECT TO THE PROVISIONS OF ANY LAW FO R THE TIME BEING IN FORCE A CONTRACT OF SALE MAY BE MADE IN W RITING OR BY WORDS OF MOUTH OR PARTLY IN WRITING AND PARTLY BY WORD OF MOUTH OR MAY BE IMPLIED FROM THE CONDUCT OF THE PAR TIES . THE ABOVE PROVISIONS WOULD APPLY TO THE CASE OF THE ASSESSEE. THE ASSESSEE PURCHASED PLANT AND MACHINER Y AND PAID THE ENTIRE CONSIDERATION ON 29-09-1993 AND LEGAL POSSESSION IS TRANSFERRED TO THE ASSESSEE. THEREFOR E 98 FINDING OF THE A O THAT ASSESSEE WAS NOT OWNER OF T HE PURCHASED ARTICLES OR THAT AGREEMENT WAS ANTEDATED WOULD BE OF NO CONSEQUENCES. THE FINDING OF THE A O THUS CANNOT BE SUSTAINED IN LAW. 58.2 THE LEARNED COUNSEL FOR THE ASSESSEE DURING T HE COURSE OF ARGUMENT SUBMITTED THAT ASSESSEE HAS PAID TAXES ON LEASE RENTAL INCOME RECEIVED BY THE ASSESSEE COM PANY ON THE TRANSACTIONS OF SALE AND LEASE BACK ENTERED INTO WITH ALL THE THREE PARTIES. DETAILS OF THE SAME ARE FILE D IN ANNEXURE A TO SHOW THAT TOTAL LEASE RENTAL INCOME B ROUGHT TO THE CHARGE OF TAX FOR SIX ASSESSMENT YEARS I.E. ASSESSMENT YEAR 1994-95 TO 1999-2000 IN RESPECT OF ABOVE REFERRED THREE PARTIES COMES TO RS.28 CRORES APPROX IMATELY AS AGAINST WHICH ASSESSEE HAS CLAIMED DEPRECIATION @100% ON RS.20.32 CRORES. THE TAXES HAVE BEEN PAID ON THE SURPLUS OF RS.8 CRORES. LEARNED D R HOWEVER SUBMITTED THAT LEASE RENTAL WAS RECEIVED IN SIX YEA RS BUT DEPRECIATION IS CLAIMED IN ONE YEAR I.E. IN ASSESSM ENT YEAR 1994-95. THE ABOVE FACT WOULD SHOW THAT EARNING OF LEASE RENTAL INCOME OF RS.28 CRORES APPROXIMATELY IS NOT DISPUTED. THUS ON THE SALE AND LEASE BACK TRANSACT IONS THE REVENUE DEPARTMENT HAS BEEN BENEFITED AND THE REVEN UE DEPARTMENT WAS NOT DEPRIVED OF ANY LEGITIMATE TAXES . THE ASSESSEE COMPANY HAS ALSO NOT DERIVED ANY ADVANTAGE OF REDUCTION OF ITS TAX LIABILITY. THEREFORE THERE WA S NO MOTIVE OF TAX AVOIDANCE CAN BE ATTRIBUTED TO THE ASSESSEE 99 COMPANY. FOR APPLYING EXPLANATION 3 TO SECTION 43(1 ) OF THE IT ACT THE MAIN PURPOSE OF THE TRANSFER OF THE ASS ETS SHOULD BE TO REDUCE THE TAX LIABILITY AND IN SUCH E VENT THE ACTUAL COST COULD BE DETERMINED HAVING REGARD TO TH E CIRCUMSTANCES OF THE CASE. THE DETAILS FILED ON REC ORD SHOWS THAT EVEN DURING THE ASSESSMENT YEAR UNDER AP PEAL ASSESSEE HAS RECEIVED LEASE RENTAL INCOME IN A SUM OF RS.2 56 99 652/- AND SO ON RECEIVED THE HIGHER LEAS E RENTAL INCOME IN SUBSEQUENT ASSESSMENT YEARS. THE DETAILS FILED IN ANNEXURE A FURTHER SHOWS THAT ASSESSEE STARTED R ECEIVING LEASE RENTAL INCOME FROM THE DAY ONE WHEN AGREEMENT S HAVE BEEN ENTERED INTO WITH THE PARTIES. HON'BLE GU JARAT HIGH COURT IN THE CASE OF CIT VS GUJARAT GAS COMPAN Y LTD. 308 ITR 243 HELD AS UNDER: THE ASSESSEE ENTERED INTO A LEASE AGREEMENT WITH THE STATE ELECTRICITY BOARD ENGAGED IN GENERATION OF ELECTRICITY. THE ASSESSEE GOT THE ELECTRICAL EQUIPMENT AND LEASED OUT IT TO THE BOARD. THE ASSESSEE SHOWED THE LEASE RENT RECEIVED FROM THE BOARD AS ITS INCOME AND ALSO THE MACHINERY PURCHASED DURING THE YEAR IN THE AUDITED BALANCE-SHEET. THE REVENUE CONTENDED THAT THE TRANSACTION OF LEASE WAS NOT GENUINE AND THE ASSESSEE WAS NOT ENTITLED TO DEPRECIATION. THE TRIBUNAL HELD THAT THE TRANSACTION WAS GENUINE AND SET ASIDE THE ORDER OF THE COMMISSIONER (APPEALS) AND ALLOWED DEPRECIATION. ON APPEAL: HELD DISMISSING THE APPEAL THAT THE LEASE RENTAL PAID BY THE BOARD HAD BEEN FOUND BY THE HIGH COURT TO BE AN ALLOWABLE DEDUCTION AS THE 100 TRANSACTION WAS GENUINE. CORRESPONDINGLY IN THE HANDS OF HE ASSESSEE THE LEASE RENTAL HAD BEEN TAXED AS BUSINESS INCOME AND IT HAD NOT BEEN DISTURBED BY THE ASSESSING OFFICER DESPITE HAVING INITIATED ACTION UNDER SECTION 147 OF THE INCOME- TAX ACT 1961 FOR TREATING THE TRANSACTION AS NON- GENUINE. THE TRIBUNAL AFTER APPRECIATION OF EVIDENCE FOUND THAT THE TRANSACTION OF LEASING OUT ELECTRICAL EQUIPMENT TO THE BOARD WAS GENUINE. NO QUESTION OF LAW AROSE. THEREFORE A O WAS NOT JUSTIFIED IN APPLYING EXPLAN ATION 3 TO SECTION 43 (1) OF THE IT ACT IN THIS CASE. LEARN ED CIT (A) ON PROPER APPRECIATION OF THE FACTS AND MATERIAL RI GHTLY HELD THAT THE ASSESSEE ENTERED INTO GENUINE TRANSACTIONS WITH THE PARTIES. 58.3 THE LEARNED CIT (A) FURTHER IN THE CASE OF RAYMOND WOOLEN MILLS LTD. CONSIDERED THE ISSUE AND IN THAT CASE PAYMENT WAS MADE BEFORE 30 TH SEPTEMBER 1993. IN THE CASE OF ATUL PRODUCTS LTD. THE PURCHASE IS NOT IN DISPUTE. IT WAS CONTENDED BEFORE LEARNED CIT (A) TH AT ASSESSEE HAD PURCHASED FORM ATUL PRODUCTS LTD. FLUI DIZED BED BOILER. THE RATE OF DEPRECIATION IN RESPECT OF SUCH BOILERS AS PER IT RULES WAS 100%. THE APPENDIX I (III) (3) (III) (A) (A) IS APPLICABLE IN THIS CASE IN WHICH 1 00% DEPRECIATION IS PROVIDED ON ENERGY SAVING DEVICE BE ING IGNIFLUID /FLUIDIZED BED BOILERS. THEREFORE THERE IS NO INFIRMITY IN THE ORDER OF THE LEARNED CIT (A) IN DI RECTING TO GRANT DEPRECIATION TO THE ASSESSEE FOR WHICH NO FUR THER EVIDENCE IN THE SHAPE OF CERTIFICATE IS REQUIRED. I T MAY ALSO 101 BE NOTED HERE THAT ALL THE ABOVE PARTIES HAVE NOT S UPPORTED THE FINDING OF THE A O AND HAVE NEVER DENIED THE TRANSACTIONS WITH THE ASSESSEE. SHRI Y. M. DEOSTHAL EE OF L & T LTD. ADMITTED IN HIS STATEMENT TO HAVE SIGNED T HE AGREEMENT ON 29-09-1993. THUS THERE WAS NO LOSS TO THE REVENUE BECAUSE OF THE LEASE RENTAL INCOME ASSESSED BY THE A O ON SALE AND LEASE BACK TRANSACTIONS. THE CR UX OF THE MATTER WOULD BE THAT THERE WAS NO DISPUTE WITH RESPECT TO THE PHYSICAL EXISTENCE OF THE ASSETS WHICH WERE OWNED BY THE ASSESSEE AND USED BY THE LESSEE. THE ASSESSE E (LESSER) HAD MADE THE PAYMENT FOR PURCHASE OF THE A SSETS TO THE LESSEES AND THAT THE LESSEES USED THE ASSETS FOR BUSINESS PURPOSE. THE TRANSACTIONS ARE SUPPORTED BY THE EVIDENCES MATERIALS AND PAYMENTS AS REFERRED TO IN THIS ORDER. BOTH THE PARTIES HAVE ACTED UPON THE CONTRAC T BETWEEN THEM. THEREFORE FOR A VALID AND GENUINE TRANSACTION OF SALE AND LEASE BACK ASSESSEE HAS BE EN ABLE TO PRODUCE SUFFICIENT AND COGENT MATERIALS BEFORE T HE AUTHORITIES BELOW. THE TRANSACTIONS WOULD SHOW THAT ITS MAIN PURPOSE WAS NOT TO REDUCE THE TAX LIABILITY; T HEREFORE THERE IS NO NEED TO DETERMINE THE COST OF THE ASSET S. MOREOVER THE A O HAS NOT CONDUCTED ANY PROPER ENQU IRY INTO THE MATTER TO PROVE THE ABOVE FACTS. HON'BLE O RISSA HIGH COURT OF INDUSTRIAL DEVELOPMENT CORPORATION OF ORISSA LTD. 268 ITR 130 HELD THAT NO EVIDENCE THAT TRANSAC TION WAS NOT GENUINE ASSETS ENTITLED TO DEPRECIATION. THERE FORE THE LEARNED CIT (A) WAS JUSTIFIED IN HOLDING THAT EXPLA NATION 3 102 TO SECTION 43(1) HAS BEEN WRONGLY APPLIED IN THE CA SE OF THE ASSESSEE. THE ASSESSEE HAS GIVEN FULL CLARIFICATION S ON ALL THE DISCREPANCIES NOTED BY THE A O. 58.4 CONSIDERING THE ABOVE DISCUSSIONS IT IS CLEAR THAT THE A O OBSERVED THAT THE SALE AND LEASE BACK TRANS ACTIONS ARE NOT GENUINE ON FINDING SOME CONTRADICTIONS IN T HE STATEMENTS OF VARIOUS PERSONS WHICH IN OUR OPINION WERE NOT VITAL AND SIGNIFICANT TO THE MATTER IN ISSUE. NO OT HER EVIDENCE OR MATERIALS HAVE BEEN BROUGHT ON RECORD A GAINST THE ASSESSEE FOR REJECTING THE TRANSACTIONS. THEREF ORE LEARNED CIT (A) ON PROPER APPRECIATION OF MATERIALS AND EVIDENCES ON RECORD RIGHTLY ALLOWED CLAIM OF DEPREC IATION IN FAVOUR OF THE ASSESSEE. IN THE RESULT WE UPHOLD TH E FINDING OF THE LEARNED CIT (A) AND THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 59. IN THE RESULT DEPARTMENTAL APPEAL IS DISMISSED . 60. IN VIEW OF THE ABOVE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND THE DEPARTMENTAL APPEAL IS DISMISSED. ORDER PRONOUNCED ON 30-07-2010 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 30/07/2010 LAKSHMIKANT/- 103 COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT 6. GUARD FILE BY ORDER //TRUE COPY// DY.R/AR I TAT AHMEDABAD