This appeal by the assessee is directed against the order of the Commissioner of Income-tax (Appeals)-XII, New Delhi, dated 2-9-2002 for the assessment year 1995-96 in an appeal against assessment framed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act).
3. The first ground of appeal is against disallowance of rent, repairs and depreciation as per section 37(4) of the Act.
4. At the time of hearing, the learned counsel for the assessee Shri Ajay Vohra fairly submitted that the issue is decided against the assessee in view of the decision of Hon’ble Supreme court in the case of Britannia Industries Ltd. v. CIT (2005) 278 ITR 546 (SC) : (2005) 148 Taxman 468 (SC) : (2006) 191 Taxation 419 (SC) and therefore, this ground is not pressed. This ground is dismissed for want of prosecution.
5. Ground No. 2 is as under :-
“That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of deduction under section 43B in respect of excise duty paid during the year represented PLA balance in respect of :
|Amount / Rs.|
Industrial Synthetic Division
Industrial Fabrics Division
6. During the year, the assessee claimed deduction under section 43B of the Act on payment basis with respect to amount of Rs. 25,25,139 deposited through Personal Ledger Account (PLA), in accordance with rule 173G of the Central Excise Rules, 1944, which requires maintenance of sufficient balance in such current account as to cover the duty due on goods intended to be removed at any time. The Central Excise Rules further stipulate that the amount once deposited cannot be withdrawn without prior consent of CCE. The assessing officer has disallowed the deduction claimed by the assessee on the ground that the impugned payment made in advance, without accrual of liability, is not deductible under section 43B of the Act. The Commissioner (Appeals) has sustained the action of the assessing officer.
7. At the time of hearing both the counsels agreed that the impugned issue is covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. (2007) 18 (II) ITCL 78 (Chd-Trib) : (2008) 299 ITR (AT) 1 (Chd-Trib) : (2007) 107 ITD 343 (Chd.)(SB). Following decisions are also to the same effect:
(i) Raj & Sandeep Ltd. v. Asstt. CIT (IT Appeal No. 1853/Chd. of 1992, dated 18-2-1993) – This decision of Chandigarh Bench of the Tribunal has been affirmed by the Hon’ble Punjab & Haryana High Court in CIT v. Raj & San Deeps Ltd. (2007) 17 (I) ITCL 476 (P&H-HC) : (2007) 293 ITR 12(P&H);
(ii) Modipon Ltd. v. IAC (1995) 52 TTJ (Del) 477;
(iii) Honda Siel Power Products Ltd. v. Dy. CIT (2001) 77 ITD 123 (Del-Trib);
(iv) DCM Shriram Industries Ltd. v. Dy. CIT (IT Appeal No. 296 (Delhi-Trib) of 2003).
8. We find that Special Bench of Tribunal in the case of Glaxo Smithkline Consumer Healthcare Ltd. (supra) held that in respect of expenditure stated in section 43B which are allowable only on actual payment, for claiming deduction in respect of such expenses which also includes payment of excise duty, it is not necessary that liability to pay duty must be incurred first and only thereafter payment of such duty is to be made for the purpose of allowance thereof. It was held that deduction for tax, excise duty etc. is allowable under section 43B on payment basis even before incurring liability to pay such amount. Since in the present case the amount is already paid by way of excise duty, though lying in PLA balance, yet the same is payment towards excise duty and hence allowable in terms of section 43B of the Act.
9. Ground Nos. 3, 3.1 and 3.2 are as under :
“3. That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of sum of Rs. 29,60,806 as prior period expenses despite of the facts that liability has been crystallized settled during the year.
3.1 Without prejudice to the above, the Commissioner (Appeals) erred in not allowing expenses debited under the head “Prior Period Expenses” in the year in which the expenses pertains.
3.2 That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of Rs. 20,07,569 being expenditure incurred in previous year but not debited to the Profit and Loss Account.”
10. During the year the assessee claimed miscellaneous expenses on account of tour and travel expenses of employees, internal audit fee, electrical repair fee etc. relating to preceding years that were not booked in earlier years. The particulars of the expenses claimed are given in Schedule 22 of the Tax Audit Report placed at pages 31-32 of the Paper Book.
The assessing officer disallowed the expenses for the reason that since the assessee is maintaining its books of account on mercantile system and hence deduction in respect of expenses which do not pertain to the year cannot be allowed. The learned Commissioner (Appeals) noted that the expenses are in the nature of day-to-day running expenses pertaining to the business, the same are allowable only in the year in which the liability was incurred and hence not allowable for this year.
11. The learned counsel for the assessee Shri Ajay Vohra submitted that the liability to pay these expenses crystallized only in the previous year relevant to the assessment year under consideration on receipt of bills, travel claims etc. The liability was incurred/accrued in the year under consideration, since it was quantified/became known for the first time in the concerned previous year. In such circumstances, the expenditure cannot be disallowed as prior period expenditure merely because the same relate to earlier years. Reliance in this regard is placed on the decision of Hon’ble Gujarat High Court in the case of Saurashtra Cement and Chemical Industries Ltd. v. CIT (1995) 213 ITR 523(Guj).
Further, without prejudice to the aforesaid, it is submitted that having held that the expense did not pertain to the year under consideration, the Commissioner (Appeals) should have directed allowance of the interest expense in the year(s) to which the same pertained. Reliance in this regard is placed on the following decisions :
1. Jt. CIT v. HMA Udyog Ltd. (IT Appeal No. 2230 (Delhi) of 1999;
2. Perfect Equipments v. Dy. CIT (2003) 85 ITD 50 (Ahd-Trib).
Further, the assessee claimed deduction of Rs. 20,07,569 being expenditure relating to the previous year under consideration but debited to the Profit and Loss Account for the year ended 31-3-1996 relevant to assessment year 1996-97, which was added back in the return of income for that year. The Commissioner (Appeals) has not dealt with this issue specifically raised vide ground of appeal No. 12.2.
12. The learned Department Representative on the other hand, relied upon the appellate order.
13. We have considered the rival submissions. We find that the assessee is a body corporate. It has a set system for approving the payment of expenditure. The assessee therefore, accounts for the expenses when same is approved by prescribed authority within the organization. The fact being admitted by the learned Commissioner (Appeals) is that the expenses pertaining to business for day-to-day running. Since the bills or claims were made during the year, it can be said that the liability became known for the first time when such claim was made. Accordingly, the same is allowable in the year in which the liability got crystallized. Similar view has been adopted by the Hon’ble Gujarat High Court in the case of Saurashtra Cement & Chemical Industries Ltd. (supra). We therefore, direct the assessing officer to examine whether such expenses are incurred wholly and exclusively for the purpose of business and if so found, allow the same irrespective of the year in which it pertains as the liability in regard to these expenses got crystallized during the relevant previous year.
As regards expenses pertaining to the year under appeal but debited to the profit & loss account of subsequent assessment year i.e., assessment year 1996-97, the assessee has raised specific ground in this regard which has not been disposed of by the Commissioner (Appeals). We, therefore, direct the Commissioner (Appeals) to decide this ground after affording reasonable opportunity of being heard to the assessee. The assessee shall place necessary material as to when the liability got crystallized so that the expenses may be allowed in appropriate assessment year.
14. Ground Nos. 4 and 4.3 are as under :
“4. That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of set off/carry forward of sum of Rs. 1,954 lakhs being unabsorbed depreciation and business loss of erstwhile Flowmore Polyesters Limited, since merged with the appellant with effect from 1-4-1994.
4.3 That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in not appreciating that in an amalgamation sanctioned by BIFR, benefits under section 72A have to be allowed in view of the decision of Hon’ble Supreme Court in the case of India Shaving Products v. BIFT 218 ITR 140 (SC).”
15. At the time of hearing the learned counsel for the assessee submitted that these grounds are not pressed. For want of prosecution, these grounds are dismissed.
16. Ground No. 4.1 reads as under :
“4.1 That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of sum of Rs. 1,620 lakhs under section 43B of the Act being interest on loans due to Financial Institutions (belonging to erstwhile Flowmore Polyesters Limited already disallowed under section 43B) which was actually paid by the appellant during the previous year by way of allotment of shares to the Financial Institution.”
17. The assessee claimed deduction of Rs. 1,620 lakhs as interest on loan from financial institutions paid on account of erstwhile Flowmore Polyesters Ltd., which amalgamated with the assessee during the year. Interest as per scheme of amalgamation sanctioned by BIFR, was paid by way of issue of 43,69,450 shares to the financial institutions in full and final settlement of the dues of Flow more Polyesters Ltd. The assessing officer disallowed the claim for deduction of unpaid interest of the amalgamating company discharged by the assessee amalgamated company by issue of shares, inter alia, on he following grounds :-
(i) The claim was not made at the time of filing the return or by way of revised return.
(ii) The existing liability of the amalgamating company towards interest due to financial institutions was directed by BIFR to be discharged by issue of equity shares of the assessee company. In that view of the matter, the liability had not been taken over by the assessee company and no tax benefit could accrue with respect to settlement of dues of the amalgamating company as part of the package of amalgamation.
The Commissioner (Appeals) confirmed the disallowance made by the assessing officer on the aforesaid grounds.
18. The learned counsel for the assessee submitted that the claim for deduction of interest of Rs. 1,620 lakhs in terms of section 43B of the Act was raised for the first time before the assessing officer vide letter dated 12-9-1997 (pages 39 to 41 of the Paper Book). The assessing officer observed that since the claim was not made at the time of filing the return or by way of revised return, the claim could not be entertained. The assessing officer, however, proceeded with the claim on merits, notwithstanding, the aforesaid objection.
He further submitted that although the Supreme Court in the case of Goetze (India) Ltd. v. CIT (2006) 284 ITR 323(SC) : (2007) 157 Taxman 1 (SC) has held that the assessing officer is not obliged to entertain claim not made through the revised return but by way of a letter, it has been clarified that the same does not impinge on the powers of the appellate authority to entertain an additional ground of appeal.
The aforesaid decision rendered by the Apex court has been explained in the following decisions :
1. CIT v. Jai Parabolic Springs Ltd. (2008) 22 (I) ITCL 394 (Del-HC) : (2008) 306 ITR 42 (Del) : (2008) 172 Taxman 258 (Del);
2. Jt. CIT v. Hero Honda Finlease Ltd. (2008) 115 TTJ (Del-Trib) (TM) 752;
3. SNC Lavalin/’Acres Inc. v. Asstt CIT (2007) 15 SOT 1 (Del-Trib) : (2007) 110 TTJ (Del-Trib) 13.
The learned counsel for the assessee further submitted that it has been specifically held in the case of Hero Honda Finlease Ltd. (supra) that where the assessing officer proceeded to deal with the claim on merits, the Commissioner (Appeals) could not be precluded from adjudicating the issue, despite the claim having not been made by filing of valid revised return. The liability of the amalgamating company in respect of interest due to financial institutions was taken over by the assessee amalgamated company as part of the amalgamation and was directed to be discharged by issue of shares of the assessee company. The order of the BIFR does not make available to the amalgamated company tax benefits under section 72A of the Act in respect of carried forward business losses and unabsorbed depreciation of the amalgamating company. The deduction for expenditure discharged by the assessee amalgamated company, is nowhere hit by the order of the BIFR. The amalgamated company had unpaid liability towards interest due to financial institution which had been surrendered for disallowance in earlier years. The said liability has been discharged by the assessee amalgamated company vide issue of equity shares, in terms of the order of the BIFR. The assessee company has accordingly claimed deduction for unpaid interest under the provision of section 43B(d) of the Act.
The learned counsel further submitted that Delhi Bench of the Tribunal in the case of ITO v. M.M. Acqua Technologies Ltd. (IT Appeal No. 4351 (Delhi) of 1999) has held deduction admissible for unpaid interest discharged vide issue of convertible debentures in terms of section 43B(d) of the Act. Explanation 3C to section 43B inserted by Finance Act, 2006 with retrospective effect from 1-4-1989 has no application to the present situation as further clarified by CBDT Circular No. 7, dated 17-7-2006 (Pages 74-76 of the Paper Book).
Shri Vohra further submitted that the BIFR order which does not make available the tax benefit in the case of amalgamation under section 72A of the Act is only in respect of carried forward business loss and unabsorbed depreciation. Therefore, there is no bar for claiming unpaid interest in respect of amalgamating company discharged by amalgamated company which is the assessee herein. The procedure of amalgamation is different than taking over the business of other unit. It is a seamless transaction. Therefore, whatever was liability of erstwhile company becomes the liability of amalgamated company. In the hands of erstwhile company the interest lability was not allowed in view of section 43B of the Act for the reason that the said liability was not paid. However, since the assessee has paid such liability by way of issue of shares at premium, it amounts to discharge of liability and hence expenditure paid by way of issue of shares is allowable expenditure. He invited our attention to provisions contained in section 36(1)(vii) read with section 36(2) in respect of allowance of the bad debts. He submitted that such amount which is written off should have been considered in the computation of income of the assessee for any earlier previous year. Hon’ble Supreme Court in the case of CIT v. T. Veerabhadra Rao, K. Koteswara Rao & Co. (1985) 155 ITR 152(SC) have held that where the assessee takes over the predecessor’s business with all its assets and liabilities and if the predecessor has accounted for such debt as income and if such debt has become bad which has been irrecoverable and written off is allowable in the successor’s hand. He submitted that applying the analogy, since expenditure by way of interest on loans from financial institutions was not allowed in the hands of amalgamating company but since the same is discharged by the amalgamated company, the same is allowable. This will be a reasonable interpretation of section 43B as otherwise it will amount to non-allowability of expenses in the hands of either company though such liability has been discharged. The rules of equitable construction has been accepted by the Hon’ble Supreme Court in the case of CIT v. J.H. Gotla (1985) 156 ITR 323(SC). Thus the interpretation should be such which leads to an equitable in law so that the party who discharges the liability, gets deduction in terms of section 43B of the Act which allows the expenditure only on actual payment. He also submitted that as held in the case of SSI Ltd. v. Dy. CIT (2004) 85 TTJ (Chennai) 1049, issuance of shares is to be treated as payment of expenses and hence the expenditure by way of interest on loans from bank is allowable in the hands of amalgamated company i.e., the assessee.
19. The learned Department Representative Shri V.K. Tiwari on the other hand, submitted that when the original company was amalgamated with the assessee company, the amalgamation was by way of taking over of the assets and liabilities. Therefore, what the assessee discharged is not liability towards interest incurred by the assessee but by way of liability taken over. Therefore, the nature of payment in the hands of the assessee is not by way of expenses towards interest but towards unpaid liability of erstwhile company. Since the assessee has not incurred the liability in respect of interest, even under section 43B, the same is not allowable. He also submitted that the assessee has merely issued shares. By issue of shares the assessee does not incur any expenditure. Explanation 3C to section 43B was inserted by the Finance Act, 2006 with retrospective effect from 1-4-1989 which provides that deduction of any sum being interest payable shall be allowed if such interest has been actually paid and any interest which has been converted into a loan or borrowing shall not be deemed to have been actually paid. Thus issuance of shares does not amount to actual payment of interest liability and hence even under section 43B, the expenses are not allowable. Reliance was placed on the decision in the case of Belpahar Refractories Ltd. v. CIT (1994) 207 ITR 144 (Ori).
20. We have considered the rival submissions. The claim is in respect of interest on amount borrowed by the erstwhile company namely Flowmore Polyesters Ltd., which amalgamated with the appellant company during the year. There is no dispute to the fact that interest payable by the erstwhile company was not claimed and allowed in terms of section 43B(d) since the amount was not paid by the said company. In view of the scheme of amalgamation Flowmore Polyesters Ltd. has merged into the assessee company. Therefore, if the assessee company discharges such liability of interest, it will amount to payment thereof and hence in terms of section 43B will be allowed in computing the income of that previous year in which such sum is actually paid. It is stated that the liability for payment of interest has been discharged by way of issuance of shares. As per Explanation 3C to section 43B, if any part of interest liability is converted into a loan or a borrowing, it will not amount to actual payment thereof. Explanation 3C to section 43B has been inserted with retrospective effect from 1-4-1989 and hence is applicable to the year in appeal also. Therefore, we primarily agree with the assessee if the amount is paid by the assessee, the same will be an allowable deduction. However, in the present case it is seen that the liability is discharged by way of issuance of shares and not actual payment by way of legal tender. What is allowable under section 43B is in respect of deduction otherwise allowable under this Act. The deduction allowable under the Act is in respect of various sums referred to in sections 30 to 37 of the Act. Interest on any loan or borrowing is one such sum referred in section 36(1)(iii) of the Act. Therefore, for the purpose of allowability, the amount should be in the nature of expenditure. The word “expenditure” is not defined under the Act. Hon’ble Supreme Court in the case of Indian Molasses Co. Ltd. v. CIT (1959) 37 ITR 66 (SC) held that expenditure is equal to ‘expense’ and ‘expense’ is money laid out by calculation and intention though in many uses of the word this element may not be present, as when one speaks of a joke of another’s expense. But the idea of ‘spending’ in the sense of ‘paying out or away’ money is the primary meaning which is relevant. ‘Expenditure’ is thus, what is ‘paid out or away’ and is something which has gone irretrievably.
Once again Hon’ble Supreme Court in the case of CIT v. Nainital Bank Ltd. (1966) 62 ITR 638 (SC), held that in its normal meaning, the expression ‘expenditure’ denotes ‘spending’ or ‘paying out or away’, i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not ‘expenditure’. It is only when he satisfies the obligation by delivery of cash or property or by settlement of accounts, that there is expenditure. But expenditure does not necessarily involve actual delivery of or parting with money or property. If there are cross-claims-one by the assessee against a stranger and the other by the stranger against the assessee and as a result of accounting the balance due only is paid, the amount which is debited against the assessee in the settlement of accounts may appropriately be termed ‘expenditure’ within the meaning of section 37(1). However, a mere forbearance to realize a claim is not ‘expenditure’.
Hon’ble Delhi High Court in the case of B.K. Khanna & Co. (P.) Ltd. v. CIT (2001) 247 ITR 705(Del) held that ‘spending’ in the sense of ‘paying out or away of money is the primary meaning of ‘expenditure’. The word ‘expenditure’ means what is paid out or away and is something which is gone irretrievably.
Hon’ble Supreme Court in the case of Eimco K.C.P. Ltd. v. CIT (2000) 242 ITR 659(SC), was considering the claim of assessee towards expenditure on technical know-how. In the said case the assessee was a joint venture between an American company and an Indian company. The authorized capital of the assessee company was Rs. 100 lakhs. Each of the promoters agreed to subscribe Rs. 4,70,000 out of which each would have to pay initially a sum of Rs. 2,80,000 towards its contribution. The share of American promoter was contributed by way of technical know-how valued at a sum of Rs. 2,35,000 and in lieu of which the assessee allotted equity shares. The same was considered as capital expenditure. The Hon’ble Supreme Court held-
“That what in effect was done by the appellant in allotting equity shares of Rs. 2,80,000 to Eimco, was to reimburse the contribution by Eimco by way of know-how, which could never be treated as expenditure, much less an expenditure laid out wholly and exclusively for purposes of the business of the appellant. It was not a case where after the incorporation, the appellant-company in the course of carrying on its business, spent the said amount for acquiring any asset. The High Court had rightly concluded that allotment of equity shares by the appellant to Eimco, in the circumstances of the case, could not be termed as expenditure, much less revenue expenditure.” (Emphasis etalished in prind supplied).
Similar view was held by the Hon’ble Delhi High Court in the case of CIT v. Reinz Talbros (P.) Ltd. (2001) 252 ITR 637 wherein the Hon’ble Delhi High Court speaking through Shri Arijit Pasayat, Hon’ble Chief Justice (as his Lordship then was), held—
“A similar question came up before the Apex Court in Eimco K.C.P. Ltd. v. CIT (2000) 242 ITR 659(SC). It was held that where a foreign company gives a technical know-how and obtains equity shares in the new company, the amount attributable to technical know-how was not revenue expenditure under section 37 of the Act. However, it was treated to be of capital nature. It is clearly borne out from the various orders that the assessee was a new company. That being the position, the Tribunal was not justified in holding that the expenditure in question was revenue in character.”
In the present case it is seen that the liability was discharged by way of issuance of shares. When the assessee issues shares the assessee does not incur any expenditure as the assessee is not to make any payment legally towards shares issued. The shares cannot be equated with debentures, which is purely by way of loan and the same are required to be repaid on maturity. However, in respect of shares the company is under no obligation to make any payment in respect of such shares where shareholders accept payment of pro rata dividend when such dividend is declared. Thus by issuance of shares the assessee cannot be said to have incurred any expenditure and hence issuance of shares in lieu of interest liability cannot be considered to have been payment towards expenditure. Accordingly the interest liability discharged is not an allowable expenditure. This ground is accordingly dismissed.
21. Ground No. 4.2 reads as under :
“That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of sum of Rs. 4,18,31,075 unabsorbed investment allowance of erstwhile Flowmore Polyesters Limited since merged with effect from 1-4-1994.”
22. The facts that the assessee had in the return of income claimed carry forward and set off of unabsorbed investment allowance of the amalgamating company. The claim was disallowed by the assessing officer, inter alia, on the ground that the amalgamated company was entitled to set off of only unabsorbed depreciation and unabsorbed business losses of the amalgamating company in terms of section 72A of the Act, provided the condition laid down in that section were fulfilled. According to the assessing officer, the benefit of unabsorbed investment allowance of the amalgamating company could not have been claimed by the amalgamated company. The Commissioner (Appeals) upheld the findings of the assessing officer.
23. The learned counsel for the assessee submitted that section 72A of the Act enables the amalgamated company to claim carry forward and set off of the unabsorbed business losses and unabsorbed depreciation of the amalgamating company, provided the amalgamation satisfies the conditions laid down in that section. The unabsorbed investment allowance of the amalgamating company is available to the amalgamated company in terms of section 32A(6) of the Act (and not in terms of section 72A). The lower authorities have not taken note of the statutory provisions of section 32A(6) of the Act, which enables the amalgamated company to claim carry forward and set off of unabsorbed investment allowance of the amalgamating company. Necessary directions may be issued in this regard.
24. The learned Department Representative on the other hand, relied upon the appellate order.
25. We have considered the rival submissions. Section 72A contains the provision relating to carry forward and set off of accumulated loss and unabsorbed depreciation of allowance in a case of amalgamation or de-amalgamation etc. However, it does not provide for carry forward and set off of any unexplained investment allowance. Therefore, the learned Commissioner (Appeals) was incorrect in applying provision of section 72A in respect of unabsorbed investment allowance. On the contrary sub-section (6) of section 32A provides for carry forward and set off of unabsorbed investment allowance. Though the attention of the learned Commissioner (Appeals) was drawn to the provision of section 32A(6), the same has been overlooked. We, therefore, direct the assessing officer to allow the benefit of unabsorbed investment allowance of erstwhile Flowmore Polyesters Ltd. in terms of section 32A(6) of the Act and if the conditions specified in section 32A(6) are complied with, the amount of unabsorbed investment allowance be allowed in the hands of the assessee company.
26. Ground No. 5 is as under :
“That on the facts and in the circumstances of the case and in law, the Commissioner (Appeals) erred in upholding the disallowance of sum of Rs. 231.41 lakhs being expenditure of revenue nature not charged to Profit and Loss Account incurred in respect of Polyester Films Division.”
27. At the time of hearing, this ground was not pressed. For want of prosecution this ground is dismissed.
28. In the result, the appeal is partly allowed.