O/TAXAP/447/2000 JUDGMENT IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 447 of 2000 With TAX APPEAL NO. 522 of 2009 With TAX APPEAL NO. 2033 of 2009 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER 1 Whether Reporters of Local Papers may be allowed to see judgment? 2 To be referred to Reporter or not ? 3 Whether their Lordships wish to see fair copy of judgment ? 4 Whether this case involves substantial question of law as to interpretation of Constitution of India, 1950 or any order made thereunder? 5 Whether it is to be circulated to civil judge ? DY C I T (ASSTT) Appellant(s) Versus GUJARAT NARMADA VELLEY FERTILIZERS CO. LTD. Opponent(s) Appearance: MR KM PARIKH, ADVOCATE for Appellant(s) No. 1 MR JP SHAH, ADVOCATE for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Date : 09/12/2014 Page 1 of 16 O/TAXAP/447/2000 JUDGMENT ORAL ORDER (PER : HONOURABLE MR.JUSTICE KS JHAVERI) Tax Appeal Nos.447 of 2000 and 2033 of 2009 1. Both these appeals are filed against decision of tribunal whereby tribunal has decided appeals in favour of assessee and against department. 2. Short facts giving rise to Tax Appeal No.447 of 2000 are as under: 2.1 Return declaring loss of Rs.1,79,21,14,270/ was filed on 30.6.1986. Gujarat Government and Gujarat State Fertilizers Company are holding 51% shares and rest of share are held by others. Notices under Section 143 (2) and 142 (1) of Income Tax Act along with detailed questionnaires were issued. With regard to assessment, books of account and relevant documents were checked. assessee company has written off expenditure amounting to Rs.19,29,010/ in profit and loss account incurred on seamless steel tube project on plea that envisaged scheme was not finally approved by Government of India. However, complete details regarding scheme and how scheme was dropped were missing. In view of this, amount of Rs.19,29,010/ was added back to profits of year. Assessing Officer found that this amount cannot be treated as revenue expense. Such finding of Assessing Officer is confirmed by Commissioner of Income Tax (Appeals) as well as Income Tax Appellate Tribunal, which has given rise to Tax Appeal No.447 of 2000. Page 2 of 16 O/TAXAP/447/2000 JUDGMENT 3. In aforesaid Tax Appeal, following question of law is framed: Whether, Income Tax appellate Tribunal was right in law and on facts in deleting disallowance of Rs.19,29,010/ being capital expenditure treating same as revenue expenditure incurred for expansion of existing business? 4. Short facts giving rise to Tax Appeal No.2033 of 2009 are as under. 4.1 assessee had filed original return of income on 29.10.2001 declaring total income of Rs.54,30,57,988/ . In case of assessee, statutory notice under Section 143 (2) of Income Tax Act was issued on 03.06.2003 fixing hearing on 26.6.2003. Later on, notice under Section 142 (1) of Income Tax Act along with questionnaire were issued from time to time. claim of assessee as regards deductions under Section 80 HHC that interest paid during year under consideration is much more than interest receipts is concerned, interest income was also deducted 90% from profit from business and profession. Assessing Officer also disallowed Rs.74.58 Lacs incurred on feasibility study. It was observed that company engaged private firms to explore possibility of new firms and advantage available to assessee from feasibility is of enduring nature and, therefore, it cannot be revenue in nature. Such findings of Assessing Officer were confirmed by Commissioner of Income Tax (Appeals) but same was reversed by Income Tax Appellate Tribunal in appeal. Therefore, present appeal is filed against impugned order. Page 3 of 16 O/TAXAP/447/2000 JUDGMENT 5. In aforesaid Tax Appeal, following questions of law are framed: [1] Whether, on facts and in circumstances of case, Income Tax Appellate Tribunal was right in law in allowing expenditure of Rs.32.05 lacs incurred on feasibility study of PET product? [2] Whether, on facts and in circumstances of case, Income Tax Appellate Tribunal was right in law in directing exclusion of 90% of net interest for calculating deduction under section 80HHC of Income Tax Act, 1961? 6. Counsel for appellant has taken us through order of AO and Commissioner of Income Tax (Appeals) and contended that while discussing question of interest, view taken by Assessing Officer and CIT (A) is just and proper. However, he contended that view taken by tribunal with regard to disallowance of capital expenditure treating same as revenue expenditure is contrary to decision of Supreme Court reported in Commissioner of Income Tax, Madras v. Madras Auto Service (P) Ltd. (233 ITR 468 : AIR 1998 SC 2667), wherein Supreme Court has held that expenses which are incurred for expansion are to be taken in capital account. 7. Counsel for respondents supported order of tribunal and contended that in view of fact that permission is not granted by Central Government for envisaged scheme and same was not finally approved. In that view of matter, these expenses are required to be shown as Page 4 of 16 O/TAXAP/447/2000 JUDGMENT revenue expenses and therefore view taken by tribunal is just and proper. 8. We have considered rival submissions on both sides. While passing order impugned in Tax Appeal No.447 of 2000, Income Tax Appellate Tribunal has observed as under: 9. We have heard both sides and perused materials on record. Both authorities below were of view that Seamless Steel Tube project is new line of business of assessee because assessee is basically manufacturer of fertilizers. On that ground expenditure was not treated as revenue expenditure. In this connection, assessee has brought on record memorandum of Association from which we find that main objects of assessee company is to carry out business of all types of fertilizers, chemicals, synthetic chemical, by products etc. Incidental or ancillary to attainment of main objects are to purchase, take on lease, mortgage or exchange hire, or otherwise acquire any movable or immovable property. In Clause C of memorandum, other objects have been incorporated. Item No.2 has already been quoted above by us. On perusal of same, we find that one of such object was to manufacture, produce tubes, pipes, sheets etc. management of existing company and proposed company of Seamless Steel Tube project was same. expenditure incurred by assessee from same fund of company. There was unity of control and common business organization, common administration by existing Board of Directors and present employees of company were involved in said project. company's common place of business was supposed to be used to establish Seamless Steel Page 5 of 16 O/TAXAP/447/2000 JUDGMENT Tube Project. In such circumstances, it cannot be said that it is altogether new business of assessee company. Considering facts involved in present case, in our opinion, Seamless Steel Tube Project was expansion of present business of assessee which is supported by objects mentioned in memorandum of association. However, ultimately project was given up by assessee for some reason even otherwise it is business loss of existing company. Considering entire circumstances of case and decisions which have been relied upon by assessee, in our opinion, Assessing Officer should have allowed expenditure as revenue expenditure. 9. While passing order impugned in Tax Appeal No.2033 of 2009, Income Tax Appellate Tribunal has observed as under: 14. Coming to issue raised in Ground No.3, it is noticed that CIT (A) has decided this issued in para 3 of his order, which reads as under: 10.5 I have considered rival submission and arguments of both sides and I find that appellant company has incurred expense of Rs.32.05 Lakh on feasibility of PET project which is new line of business whereas sum of Rs.42.53 Lakhs has been incurred on power and steam unit which is for purposes of extension of existing business. treatment of expenditure on both items is different because I am of view Techno economic feasibility studies to identity projects that may be taken up by assessee would be allowable as revenue expenditure, since expenses Page 6 of 16 O/TAXAP/447/2000 JUDGMENT could be treated as facilitating trading operation for carrying on business more efficiently giving advantage in revenue field. It was so held in CIT v. Coromandel Fertilizers, 247 ITR 417 (AP) following decision of Supreme Court in Empire Jute Co. Ltd. Vs. CIT, 124 ITR 1 (SC). Once for all payment test is inconclusive as was pointed out in Alembic Chemical Works Co. Ltd. v. CIT, 177 ITR 377 (SC). Extension of assessee's business could not be treated as activity, which will disentitle expenditure for purpose as was held in Kesoram Industries and Cotton Mills Ltd. v. CIT, 196 ITR 845 (Cal). It is under these circumstances expenditure incurred on CPSU amounting to Rs.42.53 lakhs by appellant company may be treated as revenue expenditure and allowed. Since purpose of study was identification of new projects for existing business rather than setting up new business. Whereas position in respect of new PET business of appellant company amounting to Rs.32.03 lakhs is different. PET is new product manufacturer of which could be treated as different business altogether. In E.I.D. Parry (India) Ltd. vs. CIT (2002) 257 ITR 253 (mad), High Court inferred same to be different business following guidelines provided by Supreme Court in Swadesh Cotton Mills Co. Ltd. Vs. CIT 63 ITR 65 (SC), where dealer in cloth proceeded to set up textile mill, which was however started, so that loss got disallowed as capital loss. High Court understood facts in this case as comparable in that assessee's project for manufacture of new methanol abandoned Page 7 of 16 O/TAXAP/447/2000 JUDGMENT would not be allowed. Since appellant company has incurred expenditure for feasibility study of new business (PET) amounting to Rs.32.05 lakhs, therefore, decision of AO is in accordance with law and accordingly addition made is confirmed. 15. Learned AR submitted that issue is squarely covered in favour of assessee and against revenue as per para 2.3 of Tribunal in assessee's own case for A.Y. 1996 97 in ITA No.2768, 2769 and 2770/Ahd/1993 order dated 8 9 1999, which reads as under: 2.3 We have heard both sides and perused material on record. Both authorities below, were of view that Seamless Steel Tube Project is new line of business of assessee because assessee is basically manufacturer of fertilizer. On that ground expenditure was not treated as revenue expenditure. In this connection, assessee has brought on record memorandum of association from which we find that main object of assessee company is to carry out business of all types of fertilizers, chemicals, petro chemicals, all organic and inorganic chemical, synthetic chemicals, by products etc. Incidental, or ancillary to attainment of main objects are to purchase, take on lease, mortgage or in exchange hire, or otherwise acquire any movable or immovable property. In clause C of memorandum, other objects have been incorporated. Item No.2 has already been quoted above by u. On perusal of same, we find that one of such object was to manufacture, produce, tubes, pipes, sheets etc. Page 8 of 16 O/TAXAP/447/2000 JUDGMENT management of existing company and proposed company of Seamless steel Tube project was same. expenditure incurred by assessee from same fund of present company. There was unity of control and common business organization, common administration, by existing Board of Directors and present employees of company were involved in said project. company s common place of business was supposed to be used to establish Seamless Steel Tube Project. In such circumstances, it cannot be said that t is altogether new business of assessee company. Considering facts involved in present case, in our opinion, Seamless Steel Tube Project was expansion of present business of assessee which I supported by objects mentioned in memorandum of association. However, ultimately project was given up by assessee for some reason even otherwise it is business loss of existing company. Considering entire circumstances of case and decisions which have been relied upon by assessee, in our opinion, Assessing Officer should have allowed expenditure as revenue expenses. 16. Learned DR has supported order of CIT(A). 17. We have considered rival submissions, facts and circumstances of case and Tribunal order in assessee s own case for A.Y. 1986 87 and have noticed that similar issue was subject matter of consideration of Tribunal and was decided in assessee s favour. Relevant part of order of Tribunal contained in para 2.3 was reproduced above. Since Page 9 of 16 O/TAXAP/447/2000 JUDGMENT revenue has not brought any decision contrary to decision of Tribunal (supra), we have no reason to deviate from stand taken by Tribunal. Consequently, following same we allow assessee's claim of expenditure raised in No.3, order of ClT(A) on this issue is accordingly reversed. 10. In view of above observations, in our view, tribunal has rightly considered first question in right perspective. amount which has never materialized, i.e. expenses incurred towards such project is rightly treated as revenue expense and not as capital expenditure. In that view of matter, question of law raised is answered in favour of assessee and against department. 11. So far as second question regarding exclusion of 90% of net interest for calculating deduction under section 80HHC of Income Tax Act, 1961, while passing impugned order tribunal has confirmed order of CIT (A), wherein CIT (A) had observed as under: ........ Secondly, as regards disallowance of 90% of gross receipts under Section 80HHC (4A) is concerned, it is noted that gross rent receipts are Rs.31,31,697/ which are assessable under head 'Income from House Property'. Therefore, in my view, 90% of gross rent receipts has been correctly excluded from business income by assessing Of cer. Coming to interest received on bonds, debentures and deposit amounting to Rs.38,67,889 + 11,71,49,444/ , I find that interest income has been received on investments made by appellant in bonds, debentures and deposits which is assessable under head 'income from other sources'. Therefore, interest received Page 10 of 16 O/TAXAP/447/2000 JUDGMENT 90% of gross receipt has been correctly excluded from business income by AO. Interest paid on borrowings pertains to business expenditure whereas interest received is from investment made and assessed under head Income from other sources . Kerala High Court in CIT Vs. Jose Thromas, 253 ITR 553 has held that interest on deposits etc. does not constitute business income for purpose of deduction under Section 80HHC of IT Act. Therefore, in my opinion, AO has rightly excluded 90% of gross interest receipts of Rs 38,67,889 + Rs.11,71,49,444/ from business income for calculating deduction under section 8OHHC of IT Act. Accordingly, decision of A0 is confirmed on this Issue. 12. At this stage, we also deem it proper to refer to relevant observations of Supreme Court in case of ACG Associated Capsules Pvt. Ltd. v. Commissioner of Income Tax reported in [2012] 343 ITR 89 (SC), which are as under: 10. Under Clause (1) of Explanation (baa), ninety per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in any such profits are to be deducted from profits of business as computed under head "Profits and Gains of Business or Profession". expression "included any such profits" in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in profits of business as computed under head "Profits and Gains of Business or Profession". Therefore, if any quantum of receipts by way of brokerage, commission, interest, rent, charges or any other Page 11 of 16 O/TAXAP/447/2000 JUDGMENT receipt of similar nature is allowed as expenses under Sections 30 to 44D of Act and is not included in profits of business as computed under head "Profits and Gains of Business or Profession", ninety per cent. of such quantum of receipts cannot be reduced under Clause (1) of Explanation (baa) from profits of business. In other words, only ninety per cent of net amount of any receipt of nature mentioned in clause (1) which is actually included in profits of assessee is to be deducted from profits of assessee for determining "profits of business" of assessee under Explanation (baa) to Section 80HHC. 11. For this interpretation of Explanation (baa) to Section 80HHC of Act, we rely on judgment of Constitution Bench of this Court in Distributors (Baroda) P. Ltd. v. Union of India and others, (AIR 1985 SC 1585) (supra). Section 80M of Act provided for deduction in respect of certain inter corporate dividends and it provided in sub section (1) of Section 80M that "where gross total income of assessee being company includes any income by way of dividends received by it from domestic company, there shall, in accordance with and subject to provisions of this Section, be allowed, in computing total income of assessee, deduction from such income by way of dividends amount equal to" certain percentage of income mentioned in this Section. Constitution Bench held that Court must construe Section 80M on its own language and arrive at its true interpretation according to plain Page 12 of 16 O/TAXAP/447/2000 JUDGMENT natural meaning of words used by legislature and so construed words "such income by way of dividends" in sub section (1) of Section 80M must be referable not only to category of income included in gross total income but also to quantum of income so included. Similarly, Explanation (baa) has to be construed on its own language and as per plain natural meaning of words used in Explanation (baa), words "receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits" will not only refer to nature of receipts but also quantum of receipts included in profits of business as computed under head "Profits and Gains of Business or Profession" referred to in first part of Explanation (baa). Accordingly, if any quantum of any receipt of nature mentioned in clause (1) of Explanation (baa) has not been included in profits of business of assessee as computed under head "Profits and Gains of Business or Profession", ninety per cent. of such quantum of receipt cannot be deducted under Explanation (baa) to Section 80HHC. 12. If we now apply Explanation (baa) as interpreted by us in this judgment to facts of case before us, if rent or interest is receipt chargeable as profits and gains of business and chargeable to tax under Section 28 of Act, and if any quantum of rent or interest of assessee is allowable as expense in accordance with Sections 30 to 44D of Act and is Page 13 of 16 O/TAXAP/447/2000 JUDGMENT not to be included in profits of business of assessee as computed under head "Profits and Gains of Business or Profession", ninety per cent. of such quantum of receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to Section 80HHC. In other words, ninety per cent. of not gross rent or gross interest but only net interest or net rent, which has been included in profits of business of assessee as computed under head "Profits and Gains of Business or Profession", is to be deducted under clause (1) of Explanation (baa) to Section 80HHC for determining profits of business. 13. In view of above observations, we are of view that question involved in present appeal is governed by decision of Supreme Court and deduction given under Section 80(c) is required to be upheld. Therefore, tribunal has rightly directed exclusion of 90% of net interest for calculating deduction under section 80HHC of Income Tax Act, 1961. Accordingly, this question is also answered in favour of assessee and against revenue. 14. In view of above, both these Tax Appeals fail and are hereby dismissed. So far as Tax Appeal No.447 of 2000 is concerned, we hold that Income Tax appellate Tribunal was right in law and on facts in deleting disallowance of Rs.19,29,010/ being capital expenditure treating same as revenue expenditure incurred for expansion of existing business. So far as Tax Appeal No.2033 of 2009 is concerned, we hold that Income Tax Appellate Tribunal was right in law in allowing expenditure of Page 14 of 16 O/TAXAP/447/2000 JUDGMENT Rs.32.05 lacs incurred on feasibility study of PET product. We also hold that Income Tax Appellate Tribunal was right in law in directing exclusion of 90% of net interest for calculating deduction under section 80HHC of Income Tax Act, 1961. TAX APPEAL No.522 of 2009 15. This appeal is filed against decision of tribunal in ITA No.1227/Ahd/2005 taking contrary view then view taken in Income Tax Appeal No.1350 and 1351/Ahd/2005 for assessment year 2000 01 and 2001 02. 16. At time of admission of this appeal, following question of law is framed. Whether, in facts and circumstances of case, Income Tax Appellate Tribunal was justified in law in holding expenditure incurred on feasibility report to be capital expenditure? 17. Aforesaid order in Income Tax Appeal No.1350 and 1351/Ahd/2005 was subject matter of Tax Appeal No.2033 of 2009, whereby tribunal itself allowed these expenses. However, tribunal has taken different view in present matter. Upholding order of tribunal which was under challenge in Tax Appeal No.2033 of 2009, we are reversing view taken by tribunal in this appeal. Therefore, in view of above, this appeal is allowed. Accordingly, we hold that expenditure incurred on feasibility report is to be treated as revenue expense and Income Tax Appellate Tribunal has committed error in law in holding expenditure incurred on feasibility report to be Page 15 of 16 O/TAXAP/447/2000 JUDGMENT capital expenditure. 18. All these three appeals are accordingly disposed of. All appeals are decided in favour of assessee and against department. (K.S.JHAVERI, J.) (K.J.THAKER, J) *malek Page 16 of 1 Dy CIT (Asstt) v. Gujarat Narmada Velley Fertilizers Co. Ltd