ITA No.4 of 2009 1 IN HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No.4 of 2009 Date of decision: 17.9.2015 Commissioner of Income Tax, Faridabad Appellant M/s Nuchem Limited ..Respondent CORAM: HON BLE MR. JUSTICE AJAY KUMAR MITTAL HON BLE MR. JUSTICE RAMENDRA JAIN 1. Whether Reporters of local papers may be allowed to see judgment? 2. To be referred to Reporters or not? 3. Whether judgment should be reported in Digest? Present: Mr. Tajender K.Joshi, Advocate for appellant. Mr. P. C.Goyal, Advocate for assessee. Ajay Kumar Mittal, J. 1. This order shall dispose of ITA Nos.4 of 2009 and 898 of 2008 as according to learned counsel for parties, issues involved in both appeals are identical. However, facts are being extracted from ITA No.4 of 2009. 2. ITA No.4 of 2009 has been preferred by revenue under Section 260A of Income Tax Act, 1961 (in short, Act ) against order dated 22.2.2008, Annexure A.III passed by Income Tax Appellate Tribunal, Delhi Bench 'B' New Delhi (in short, Tribunal) in ITA No.3237/DEL/1996 for assessment year 1992-93, claiming following substantial questions of law:- 1. Whether on facts and in circumstances of case, GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 2 Hon'ble ITAT is right in law in confirming order of learned CIT(A) deleting addition of ` 11,61,00,407/- made by Assessing Officer on account of disallowance of depreciation of MDF Division, Tohana disregarding serious defects pointed out by Assessing Officer in evidence furnished by assessee to prove that commercial production had started on 30.3.1992? 2. Whether on facts and in circumstances of case, Hon'ble ITAT is right in law in confirming order of learned CIT(A) deleting addition of ` 1,13,53,888/- made by Assessing Officer on account of expenses in respect of MDF Division, Tohana disregarding serious defects pointed out by Assessing Officer in evidence furnished by assessee to prove that commercial production had started on 30.3.1992? 3. Whether on facts and in circumstances of case, Hon'ble ITAT is right in law in holding that revenue had not filed appeal before Hon'ble ITAT on same point in assessment year 1988-89 and therefore accepting findings of learned CIT(A) for said year, disregarding settled law that each assessment year is separate year? 4. Whether on facts and in circumstances of case, Hon'ble ITAT is right in law in upholding order of learned CIT(A) deleting addition made by Assessing Officer on account of interest on interest free loans amounting to ` 4,99,196/- given to sister concern or persons covered under section 40A(2) of Income Tax Act in contradiction with judgment of jurisdictional High Court in CIT, Ludhiana vs. Abhishek Industries Limited, 286 ITR 1 (P&H)? In ITA No.898 of 2008, revenue has claimed following substantial GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 3 questions of law:- 1. Whether on facts and in circumstances of case, Hon'ble ITAT is right in law in confirming learned CIT (A)'s order deleting addition of ` 12,95,645/- made by Assessing Officer on account of disallowance of huge expenses alleged to be incurred for commercial production, disregarding serious defects pointed out by Assessing Officer in evidence furnished by assessee to prove that commercial production had started on 30.3.1992? 2. Whether on facts and in circumstances of case, Hon'ble ITAT is right in law in reversing order of learned CIT(A) sustaining addition made by Assessing Officer on account of interest on interest free loans given to sister concern or persons covered under Section 40A(2) of Income Tax Act in contradiction with judgment of jurisdictional High Court in CIT, Ludhiana vs. Abhishek Industries Limited, 286 ITR 1 (P&H)? 3. few facts relevant for decision of controversy involved as narrated in ITA No.4 of 2009 may be noticed. assessee company filed its return on 31.12.1992 declaring loss of ` 12,58,75,530/- which was revised to ` 12,54,22,870/- vide revised return filed on 31.3.1993. assessee filed second revised return on 21.12.1993 declaring loss of ` 12,21,73,800/- and third revised return on 22.12.1993 declaring loss of `12,10,86,890/-. Assessment under section 143(3) of Act was completed on 30.3.1995, Annexure A.I at total income of ` 1,35,75,290/-. Assessing Officer inter alia held that commercial production in MDF Division, Tohana had not started within period relevant to assessment year and, therefore, all expenses claimed under this division were disallowed. proportionate expenses for two days debited under GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 4 various heads in respect of this division were also capitalized. Accordingly, amount of ` 11,61,00,407/- was disallowed on account of depreciation of MDF Division, Tohana and ` 1,13,53,888/- (` 1,00,58,243/- on account of deferred revenue expenses plus ` 12,95,645/- as proportionate expenses for two days of said division) on account of expenses related to MDF Division, Tohana. Besides, amount of ` 11,93,328/- was disallowed on account of interest free loans to persons specified under Section 40A(2)(b) of Act. Commissioner of Income Tax (Appeals) [CIT(A)] vide order dated 31.1.1996, Annexure A.II accepted assessee's appeal in part. Both assessee and department filed cross appeals before Tribunal. Tribunal vide combined order dated 22.2.2008, Annexure A.III allowed both appeals in part. issues on which Tribunal dismissed department's appeal are as under:- i) Assessing Officer disallowed ` 11,61,00,407/- on account of depreciation of MDF Division, Tohana by holding that no business was done by MDF Division. On appeal, CIT(A) directed Assessing Officer to allow depreciation after holding that production was started on 30.3.1992 in MDF Division. Tribunal dismissed appeal of revenue and upheld order of CIT(A) observing that discrepancies pointed out by Assessing Officer stood explained by assessee and mistake was clerical one. ii) Assessing Officer disallowed ` 1,13,53,888/- ( ` 1,00,58,243/- on account of deferred revenue expenditure + ` 72,95,645/- as proportionate expenses for two days) on account of expenses related to MDF Division by holding that no business was done by MDF Division during year under consideration. CIT(A) directed to allow GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 5 expenses on proportionate basis for period from January 1992 to March 1992. Tribunal directed Assessing Officer to allow actual expenses of two days in respect of MDF Division after commencement of commercial production as deduction after verification. iii)The Assessing Officer made disallowance of ` 11,93,328/- on account of interest on interest free loans given inter alia to M/s Southern Synthetics Limited which was worked out at ` 4,99,196/-. On appeal, CIT(A) allowed relief in respect of loan given to M/s Southern Synthetics Limited which worked out at ` 4,99,196/-. department filed further appeal before Tribunal which was dismissed. Hence instant appeals by revenue. 4. We have heard learned counsel for parties. 5. With regard to question No.3, same is general in nature and calls for no consideration because matter has been adjudicated by us on merits. 6. As regards question Nos.1 and 2, Assessing Officer disallowed ` 11,61,00,407/- on account of depreciation of MDF Division, Tohana and ` 1,13,53,888/- as expenses in respect of MDF Division, Tohana holding that no business was done by MDF Division as commercial production had not started within period relevant to assessment year. Assessing Officer recorded as under:- 8. As per director, it was alleged that commercial production was started in MDF Division on 30.3.1992 and this division was formerly inaugurated on 12.11.1992 by Shri H.R. Bhardwaj, Minister of state for Planning and Programme Ministry, Government of India. With original return of income assessee company filed certificate for GURBAX SINGH commencement of commercial production form Shri 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 6 V.S.Talwar, Chartered Accountant, vide certificate dated 10.12.1992. above certificate was given on basis of invoices, bill of Rishi Road Lines Haryana), Gate Pass for removal of goods under excise rules and material dispatched and daily production slip. From perusal of these documents following defects have been noted:- i) total weight as per invoice of 160 boards is 4.320 tonnes whereas as per Rishi Road Lines (Haryana) goods consignment note, weight is 46600 kgs. and as per audit report is 4.7 tonnes. ii) M/s Rishi Road Lines Bill No.1001 dated 31.3.1992 reveals that freight has not been stated to be billed at Tohana. This indicates that goods consignment note has been prepared some where else than Tohana on 31.3.1992. Whether goods have been actually transported on 31.3.1992 is very much doubtful. Iii) As per gate pass serial No.0001, assessee company was supposed to give serial number and date of debit entry of duty in RG 23-A-II. serial number has been given as 14 and date has been given as 31st March, 1992. As this related to first production, serial number in RG 23A-II should have been one and not 14. iv) In daily production slip serial No.1 dated 30.3.1992 RG-1, page number has not been mentioned. v) There is no documentary evidence for payment of excise duty. Moreover, if excise duty is payable as on 31.3.1992 same is not appearing in details of payments to be made before filing of return as per provisions of section 43B of IT Act, 1961. vi) There is no mention on bill of Rishi Road Lines, Haryana of any telephone number. Therefore, it is doubtful whether transporter has any office at Tohana. vii) as per details of travelling, none of GURBAX SINGH directors seems to be present on day of trial 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 7 production/first dispatch being auspicious occasion for company concerned. viii) there are no separate details of expenses under various heads but proportionate expenses for two days has been claimed and balance has been capitalized. From details available on record, there is no indication that any expense has been incurred or function has been held for commencement of trial production/production for project which is undergoing since 1988. 8.1 Considering above facts, I am of firm opinion that commercial production had not started within period relevant to this assessment year. As such all expenses claimed under this division are disallowed. proportionate expenses for two days debited under various heads will also be capitalized accordingly. 7. We proceed to examine Question Nos.(1) and (2) together as both are inter-mixed and dependent upon fact as to when commercial production was commenced. CIT(A) accepted assessee's appeal and directed Assessing officer to allow depreciation and also allow expenses on proportionate basis for period from January 1992 to March 1992 and also actual expenses of two days after holding that production was started on 30.3.1992 in MDF Division. Tribunal concurred with findings recorded by CIT(A). It was recorded as under:- 57. second ground is that CIT(Appeals) erred in allowing depreciation of ` 11,61,00,407/- in respect of MDF Division, Tohana. ground on which depreciation was denied was that assessee did not commence any commercial production in relevant accounting year in this division. It may be noted that it was on this very same ground GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 8 that Assessing Officer had disallowed proportionate expenses of ` 12,95,645/- for two days namely 30th and 31st March 1992. This disallowance formed subject matter of assessee's ground No.3. Similarly, for this reason, inter alia, Assessing Officer had also disallowed expenditure of ` 1,00,58,243/-. In respect of both these grounds, CIT(Appeals) had accepted assessee's claim that commercial production had started on 30.3.1992. However, it is while dealing with assessee's claim of depreciation in respect of assets of MDF Division that CIT(Appeals) has discussed issue quite elaborately in paragraph 6 from pages 9 to 20 of his order. Assessing Officer does not appear to have discussed this issue separately or in detail. In computation of income, however assessee's claim for depreciation has not been allowed. We may however take it that Assessing Officer has discussed this issue impliedly in para 8 of his order where he has held that commercial production did not start in year of account and that all expenses claimed under MDF Division are disallowed. Apparently, this included claim of depreciation also. We had already noticed (while discussing ground No.3 of assessee's appeal) that Assessing Officer had given eight reasons in assessment order for not allowing expenses of MDF Division including depreciation. These reasons have been dealt with elaborately by CIT(Appeals). To cut short long matter, Assessing Officer had pointed out some discrepancies in transportation bills to show that assessee could not have started commercial production as claimed. He has also pointed out some discrepancies in R.G.registers maintained under Central Excise Rules. explanation of assessee with regard to these two matters has been noted by CIT(Appeals) in paragraph 6.3 of his order. GURBAX SINGH After going through same minutely, CIT(Appeals) has 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 9 held as under:- a) As regards transportation of goods though Assessing Officer has pointed out two discrepancies in weight of goods, assessee was able to tally number of boards which tallied. weight given by transporter was only approximation; b) Central Excise department has not raised any doubt about assessee's claim on point of production. Even assessee's claim for modvat credit was allowed; c) photo copies of receipt of payment of octroi had been filed; d) transporter, namely, Rishi Roadline is still existing at Hisar Road, Tohana and Assessing Officer could have made enquiries from that company; e) From material on record, it is clear that production was commenced on 30.3.1992 and some goods were sent to dealer at Jalandhar on 31.3.1992. On basis of above findings, CIT(Appeals) has held that assessee is entitled to depreciation. 58. On careful consideration of matter, we are of view that no strong grounds have been made out to disturb findings of CIT(A). CIT(Appeals) has elaborately referred to assessee's explanation for alleged discrepancies in transportation records and central excise registers but we find that these discrepancies have been satisfactorily explained by assessee and rightly accepted by CIT(A). For instance, assessee explained discrepancy in weight of boards transported by saying that weight mentioned in consignment note of transporter, Rishi Headlines, was 46,600 Kgs. Which is same mentioned in audit report where weight is mentioned as 4.7 tons. In invoice, weight is not mentioned but only number of boards was mentioned as 160. thus, there is no discrepancy as alleged by assessing Officer. GURBAX SINGH As regards RG registers maintained by assessee, it was 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 10 pointed out that number of boards mentioned in R.G.register tallied with number mentioned in invoice. It was further pointed out that so far as alleged discrepancy in serial number in R.G.I register is concerned, assessee has been purchasing raw material since February 1992 and since goods were excisable it was entitled to modvat credit and therefore entries were made in RG 23A Part II. In this register sl.nos.1 to 13 relate to purchase of raw material from different divisions of assessee on which MDF Division was eligible for credit. entries pertaining to serial nos. 1 to 13 relate to 4.2.1992 to 28.2.1992. On these purchases, assessee was given MODVAT credit. assessee was to pay excise duty of ` 5685/- which was mentioned on debit side of register in serial no. 14. thus, there is no discrepancy in R.G. registers. only mistake committed by assessee which according to it, was only clerical mistake, was of not mentioning page number of RG 1 register. In this way, assessee has sought to clarify alleged discrepancies pointed doubt by Assessing Officer in assessment order, assessee had also raised point before CIT(Appeals) that no opportunity was given by Assessing Officer to explain defects. This was also taken note of by CIT(Appeals) while holding in favour of assessee. In this background, objection of learned CIT DR that CIT (Appeals) has not recorded clear findings does not appear to us to be accurate though there does appear to be little force therein. However, if we read submissions of assessee before CIT(Appeals) and way in which he has proceeded to record them and deal with them and in light of examination of evidence adduced by assessee, it seems to us that essential finding recorded by him was that commercial production did start on 30.3.1992 and that objections of Assessing Officer, though may afford starting point for further enquiry, are not conclusive of issue against assessee. We GURBAX SINGH are therefore satisfied that there is no serious factual or legal 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 11 infirmity in decision of CIT(Appeals) which is hereby affirmed and ground is dismissed. Nothing could be shown by learned counsel for revenue that concurrent finding of fact recorded by CIT(A) and Tribunal that commercial production was started in MDF Division, Tohana on 30.3.1992 was erroneous or perverse. It is pure finding of fact based on appreciation of material and evidence on record in which no perversity could be shown by learned counsel for revenue. Accordingly, Question Nos. 1 and 2 are answered against revenue. 8. As regards question qua addition on account of interest on interest free loans to sister concern or persons covered under section 40A(2) of Act, which is common in both appeals (i.e. Question No.4 in ITA No.4 of 2009 and Question No.2 in ITA No.898 of 2008), it may be noticed that Assessing Officer added ` 11,93,328/- as notional interest on interest free advances given by assessee. assessee contended on appeal before CIT(A) that loans were taken in earlier years and thus they could not be said to have been diverted for non business purposes during present year and no notional interest could be added. CIT (A) upheld addition to extent of ` 6,94,132/- and allowed relief of ` 4,99,196/- on account of interest free loans given to M/s Southern Synthetics Limited. revenue and assessee filed appeals to Tribunal. appeal of revenue was dismissed on this ground whereas on appeal of assessee, Tribunal further deleted interest disallowance referable to amount advanced to Novica investments since no nexus between borrowed funds and amounts advanced to GURBAX SINGH above said concern without interest was proved by department. 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 12 However, in absence of any evidence on behalf of assessee, disallowance in respect of other four concerns was sustained. relevant findings recorded by Tribunal read thus:- 7. Ground No.6 is directed against disallowance of interest relating to loans. Assessing Officer added ` 10,57,660/- as notional interest on interest free advances given by assessee. On appeal, CIT(Appeals) upheld addition to extent of ` 6,03,234/-. He has discussed this issue in paragraph 10 of his order. contention of assessee before us is that all loans were taken in earlier years and therefore, they cannot be said to have been diverted for non business purposes during present year and therefore, no notional interest can be added. Our attention is drawn to judgment of Karnataka High Court in CIT vs. Sridevi Enterprises 192 ITR 165 and judgment of Supreme Court in SA Builders 288 ITR 1. On other hand, learned CIT DR drew our attention to judgment of Hon'ble Delhi High Court in CIT vs. MGF 254 ITR 449 in support of disallowance. 8. We have carefully considered facts and rival contentions. As per details given in page 601 of paper book, parties to whom assessee advanced interest free loans are M/s Novica Investments, Nuchem Investments Pvt. Limited, M/s SCDC Katha Industries Pvt. Limited, M/s RCA Leasing Pvt. Limited and M/s Ratan Chand Harjas Rai. total amount of interest free advances was ` 66,10,378/-. According to Assessing Officer, assessee has charged interest from some of debtors and not from all of them. According to him, assessee had borrowed monies on interest and interest was claimed as deduction and therefore assessee cannot advance interest free monies. He estimated interest at 16% on amount advanced to above concerns, which came to ` 10,57,660/-. Before CIT(Appeals), assessee submitted that it had its own funds from share capital reserves and GURBAX SINGH surpluses which stood at ` 20,50,29,858/- as on 31.3.1991 and that 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 13 interest free advances came out of reserves and surpluses and not from interest bearing funds. As regards amounts advanced to Southern Synthetics Limited, it was stated that principal itself was doubtful of recovery and therefore, no interest can be added. 9. CIT (Appeals) accepted assessee's submission with regard to Southern Synthetics Limited but with regard to give parties named in preceding paragraph, he did not accept assessee's submission that Assessing Officer could not prove any nexus between borrowed funds and amounts advanced to these concerns without interest. He noted that assessee himself was unable to explain sources from which it advanced monies to these five concerns. As regards contention based on capital and reserves, CIT(Appeals) found that they were already invested in fixed assets and were therefore, not available to assessee for making interest free advances. He noted that assessee's interest liability was ` 4,64,33,153/- which was quite substantial which indicated that surplus funds were not available to assessee for making interest free advances. He therefore, agreed with Assessing Officer in principle but held that disallowance of interest will be restricted to amount advanced as interest free to five concerns mentioned earlier. 10. On careful consideration of matter, we find that so far as Novica Investment is concerned, Tribunal has already accepted assessee's contention that no nexus was proved by department in ITA No.7204/Del/92 for assessment year 1988-89 (paragraphs 48 to 51). Therefore, interest disallowance referable to amount advanced to Novica Investments is deleted. However, with regard to other four concerns, namely, Nuchem Investments Pvt. Limited, M/s SCDC Katha Industries Pvt. Limited, M/s RCA Leasing Pvt. Limited and M/s Ratan Chand Harjas Rai, we are unable to delete disallowance in absence of any evidence adduced on behalf of assessee to support ground. assessee was not able to displace finding of CIT(Appeals) GURBAX SINGH that share capital and reserves having been invested in fixed 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 14 assets were not available to assessee for being advanced interest free to these four concerns. availability of interest free funds including share capital and reserves,is matter to be proved on basis of facts and figures and not theoretically or in abstract. There is no material placed before us on behalf of assessee to show that interest free funds in any form were available to assessee to be advanced to these four concerns. assessee's submission based on decision of Supreme Court in S.A.Builders (supra) cannot be accepted because there is no evidence to show that amounts were advanced for purposes of assessee's business. Further, this is new plea taken before us which is required to be proved by evidence. For these reasons, we sustain disallowance of interest in respect of interest free advances given to four concerns named above. ground is thus partly allowed. Assessing Officer will rework disallowance accordingly. Nothing could be pointed out that aforesaid finding of fact recorded by CIT(A) and Tribunal was erroneous or perverse in any manner. Thus, question No.4 in ITA No.4 of 2009 and question No.2 in ITA No.898 of 2008 is answered against revenue. 9. Now adverting to Question No.1 in ITA No.898 of 2008 relating to expenses of ` 12,95,645/-, we find that Tribunal had only remitted matter back to Assessing Officer to allow actual expenses incurred by assessee in MDF Division after commencement of commercial production on 30.3.1992 as deduction with following observations:- 38. We have carefully considered rival contentions. There are two main disputes. first is that whether commercial production has started on 30th March 1992 and second is that if that is so, whether method of claiming expenses GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 15 adopted by assessee is right. Assessing Officer has raised several points. We have gone through them carefully. goods manufactured by assessee are excisable goods. assessee has maintained RG 23A-II and other registers under excise rules. These have not been found to be defective in any manner by excise authorities. Further, assessee has shown sales of ` 78,087/-. There is no clinching evidence to show that sales figures are fictitious and sales were infact not effected. On this basis, it is held that commercial production actually started on 30th March 1992. As regards question whether assessee's method of claiming manufacturing expenses is correct or not, it is seen that assessee has divided total expenses by number of days to give average expenditure per day and multiplied average by 2 so as to claim expenditure for last two days of accounting year. It is not case of Assessing Officer that expenditure claimed is not genuine. Once commercial production has started, expenditure incurred thereafter has to be allowed as deduction irrespective of quantum thereof. However, we are unable to approve of method followed by assessee in claiming expenditure. It is only actual expenditure incurred after commencement of production that can be claimed as deduction. There is no room for estimating same especially where accounts are maintained and audited. direction of he CIT(Appeals) to Assessing Officer to estimate expenditure on certain basis cannot also be approved. While therefore upholding in principle assessee's claim for deduction of expenses for two days, we set aside direction of CIT(Appeals) to Assessing Officer and direct Assessing Officer to allow only actual expenses incurred by assessee in MDF division after commencement of commercial production as deduction. For this purpose, he may call for books of GURBAX SINGH account and other evidence from assessee and decide 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh ITA No.4 of 2009 16 quantum of expenses to be allowed in accordance with law and after giving adequate opportunity of being heard to assesee. With these directions, we restore issue to file of Assessing Officer. Thus, ground taken by assessee as well as by department are deemed to be allowed for statistical purposes. Learned counsel for revenue was unable to establish that direction of Tribunal is erroneous or is legally unsustainable. Accordingly, we do not find any justification to interfere in said conclusion. 10. In view of above, substantial questions of law as claimed by revenue are answered against revenue and in favour of assessee. appeals stand dismissed. (Ajay Kumar Mittal) Judge September 17, 2015 (Ramendra Jain) 'gs' Judge GURBAX SINGH 2015.11.03 10:12 I attest to accuracy and integrity of this document High Court Chandigarh Commissioner of Income-tax, Faridabad v. M/s. Nuchem Limited