IN THE ITAT MUMBAI BENCH ‘C’
Assistant Commissioner of Income-tax
Essar Steel Ltd.
IT APPEAL NOS. 850A/2002 and 4214/A/2003
AND 3228 & 3229/m/2005
[ASSESSMENT YEARS 1998-99 TO 2000-01]
APRIL 4, 2012
1. Since all these appeals pertain to same assessee they were heard together. We deem it convenient to pass a consolidated order.
ITA NO.850/A/2002 (A.Y. 1998-99):
2. This is an appeal by the revenue against the order dated 7/1/2002 of CIT(A) 1,Surat relating to assessment year 1998-99. Ground No.1 raised by the revenue reads as follows:
“(1) On the facts and circumstances of the case and in law, the learned CIT(Appeals) has erred in directing to allow expenditure of Rs.2,18,11,65,893/- of HRC Plant as revenue expenses though it was shown in the balance sheet as capital work-in-progress as commercial production had not started.”
3. The assessee is a company. It is engaged in the business of manufacturing of steel. The assessee was manufacturing Hot Briquetted Sponge Iron (HBI) and started a new project for production of HRC (Hot Rolled Coil). The AO noticed that while preparing the balance sheet and P&L Account the assessee had taken the income and expense of HRC Project to capital work-in-progress because commercial production of HRC started after 31/3/1996. However, while filing the return of income the assessee had claimed as revenue expenditure a sum of Rs. 2,18,11,65,893/- According to the assessee it continued its trial production during the previous year and made substantial sales and was entitled to claim the expenses in question as deduction. It is not in dispute that in respect of identical item of expenditure the AO had treated similar expenses as capital expenses because according to the AO the business of HRC project had not commenced. That was in the A.Y 1994-95. For the reasons given in AY 94-95, the AO disallowed the claim of the assessee for deduction of the aforesaid sum.
4. On appeal by the assessee the CIT(A) directed the AO to allow the deduction by following his order in A.Y 1994-95 on the identical issue whereby it was held that HRC Project was nothing but an extension of the existing business of the assessee and that both the business of HBI and HRC were same business.
5. Aggrieved by the order of the CIT(A) the revenue has preferred ground No.1 before the Tribunal.
6. The ld. D.R relied on the order of the AO. The learned counsel for the Assessee brought to our notice that identical issue had come up for consideration before this Tribunal in A.Y. 1994-95 in ITA No.807/MDS/99 and this Tribunal held that the HRC project was an extension of the existing business and therefore revenue expenditure incurred even prior to commercial production have to be allowed as deduction.
7. We have considered the rival submissions. Identical issue had come up for consideration before this Tribunal in A.Y. 1994-95 in ITA No.807/MDS/99 and this Tribunal held as follows:
“2.1.1 Briefly stated the facts of the case are that the assessee who was in the business of production of hot briquetted sponge iron (HBI) had started a new project for production of HRC. During the year the assessee had claimed to have completed construction and erection of plant and machinery for the new project. In the return of income the assessee claimed deduction on account of the following expenses as revenue expenses.
|(ii)||Debenture issue expenses||Rs. 16,48,90,000|
|(iii)||General administrative expenses||Rs. 33,63,29,000|
2.1.2 The AO in the assessment order observed that the above expenses were in relation to the new business which had not commenced production. He therefore proposed to disallow the above expenses. The assessee explained that HBI manufactured by it was the raw material of the HRC and therefore the project for manufacture of HRC was only a expansion of the existing business. It was also submitted that both the divisions had common management, same board of directors and located at Hazira side by side. There was a financial integration, personnel integration, common managing director, common executive director for finance, common administration and procurement etc. There was thus integration inter lacing, inter-dependance and dovetailing of the two divisions which had common finance and consolidated accounts. It was accordingly argued that both the divisions were part of the same business. The assessee was in the business of steel and manufacturing of different products constituted same business. Therefore expenses incurred for the existing business should be allowed. The AO was however not convinced by the arguments advanced by the assessee. It was observed by him that the HRC project was a new and independent project, the commercial production in respect of which was yet to start. It was also observed by him that in the earlier year, heavy expense incurred had been capitalized in the books of account. The AO took the view that expenditure could allowed only in relation to the project in respect of which profit was being computed. He placed reliance on the judgment of Hon’ble High Court of Kolkata in the case of Ritz Continental Hotel (114 ITR 554). As the new project was still being set up and not ready for production at the end of the accounting year, the AO disallowed the claim of expenses mentioned above.
2.1.3 The assessee disputed the decision of the AO and submitted before CIT(A) that in the business of steel, HBI was an intermediate product which was automatically carried over to HRC plant being set up by the assessee. It was pointed out that for the purpose of excise duty, the whole factory was considered as a one unit in the excise return and therefore the view taken by the AO that HBI and HRC were two different units was not correct. It was also pointed out that whether the two businesses were one and the same business would not depend upon the nature of products. He referred to the judgment of Hon’ble Supreme Court in case of Prithvi Insurance Co. Ltd. (63 ITR 632) and other judgments in which it was held that the two lines of businesses would constitute one and the same business if the following conditions were satisfied.
(i) There should be unity of control
(ii) There should be common management and administration.
(iii) There should be common organization
(iv) There should be common funds
(v) There should be common place of business.
2.1.4 In this case, it was pointed out, there was a common administration and organization, common finance, personnel and security system. There were also common facilities such as common port, gas and water pipelines power supply, administrative building etc. Therefore the two businesses should be treated as one business. The assessee also referred to the judgment of Hon’ble Supreme Court in case of Vee Cumsees (220 ITR 185). In that case the assessee was running jewellery business and constructed a theatre from borrowed funds. The theatre was closed after some time but the assessee claimed the expenditure on account of interest relating to the theatre against jewellery business. The Hon’ble Supreme Court observed that line of business may be different and what was of importance was unity of control, management and organization. In view of these factors, the claim of interest against the jewellery business was allowed.
2.1.5 As regards the point made by the AO that in the books of account the expenses were capitalized, the assessee submitted that treatment in the books of account was not decisive of the nature of transactions. Whether the assessee would be entitled to a particular deduction would depend upon the provisions of law and not on the nature of entries in the books. Reliance was placed on the judgment of Hon’ble Supreme Court in case of Kedarnath Jute Manufacturing Ltd. (82 ITR 363). CIT(A) agreed with the assessee that there was unity of management and administration in this case. Therefore he observed that even if the products manufactured by the assessee were different having different types of businesses this would constitute only one business. Accordingly, it was held by him that the new project was expansion of the existing business. He also agreed that the treatment in the books of account was not conclusive regarding nature of expenditure. It was also observed by him that for considering allowability of deduction on account of interest on borrowed funds under section 36(1)(iii) what was required to be seen was that the money must have been borrowed for business purpose. CIT(A) accordingly allowed the claim of deduction on account of interest and general administrative expenses.
2.1.6 As regards the debenture issue expenses CIT(A) observed that debentures were convertible into shares and therefore the issue of debenture amounted to extension of capital base of the assessee company. The expenditure incurred for increasing the capital base was not allowable as revenue expenditure in view of the judgment of Hon’ble Supreme Court in case of Brooke Bond India Ltd. v. CIT (225 ITR 798). CIT(A) also observed that the assessee itself had withdrawn claim of deduction amounting to Rs.17,11,000/- and the effective amount was only Rs.16,32,79,000/-. He therefore confirmed the disallowance to that extent. Aggrieved by the decision of the CIT(A) both the parties are in appeal. Whereas the assessee has challenged the decision of CIT(A) to confirm the disallowance on account of debenture issue expenses, the department is aggrieved by the relief given in respect of interest and general administrative expenses.
2.1.7 Before us the Learned AR for the assessee reiterated the submissions made before CIT(A) and the AO that the new project was a part of existing business as there was complete integration and interlacing of both the units. Therefore the expenditure incurred such as interest on borrowed funds and general administrative expense have to be allowed. As regards the debenture issue expenses it was submitted that the assessee was not pressing the claim in respect of sum of Rs.2,25,00,000 and Rs.9,62,745 being the marketing commission and other expenses relating to the NRI issue. It was argued that in respect of global depository receipts of Rs.11,49,96,700/- nothing had been converted in shares and therefore no disallowance could be made as there was no expansion of the capital. Regarding the balance amount of Rs.2,64,34,555/-, it was submitted that these expenses related to optionally convertible debentures. It was pointed out that even in respect of fully convertible debenture, expenditure incurred has to be allowed. Reliance was placed on the judgment of Hon’ble High Court of Rajasthan in case of Secure Meters (221 CTR 405) and on the Hon’ble High Court of Madras in case of South India Corporation (Agencies) Ltd. (290 ITR 217) It was also pointed out that though the decision of the Special Bench of the Tribunal in case of Ashima Synthetics (100 ITD 247) was against the assessee, the judgments of the High Courts mentioned earlier were subsequent to the decision of the special bench and have to be followed.
2.1.8 We have perused the records and considered the matter carefully. The dispute raised by the assessee is disallowance of debenture issue expenses relating to the HRC project. The assessee was already in the business of production of HBI and a new project had been taken up for production of HRC. The case of the assessee is that the new project was a part of the existing business and therefore the expenditure incurred was for the existing business and was thus allowable. The AO had treated the HRC project as a new business and accordingly did not allow the expenses on account of interest, general administration expenses and debenture issue expenses. CIT(A) however considered the HRC project as a part of the existing business and has allowed the general administrative expenses and interest expenses except the debenture issue expenses which have been disallowed on the ground that the debentures were convertible in shares and therefore the expenditure was for raising the capital base not allowable as revenue expenditure. It is a settled legal position that whether two businesses are one and the same business will not depend upon the nature of business or the product but on the fact whether there is unity of control and integration of the two businesses by common management, administration and finance etc. This view is supported by the judgment of Hon’ble Supreme Court in case of Prithvi Insurance Co. Ltd. (supra) and in case of Veecumsees (220 ITR 185) which have been relied upon by the CIT(A). In this case, there is clear finding by the CIT(A) that there was integration, interlacing, interdependence and dovetailing of the two division which has not been controverted before us. Therefore we have to hold that HRC project has to be taken as part of the existing business. In view of the above position all expenditure incurred in connection with new project which is of revenue in nature has to be allowed.
2.1.9 As regards the debenture issue expenses CIT(A) has confirmed the disallowance on the ground that the debentures were convertible in shares and thus expenditure was for expanding the capital base. We find that out of total expenditure of Rs.16,48,90,000/- the assessee did not press the claim in respect of expenditure of Rs.2,25,00,000/- and Rs.9,62,745/-relating to the NRI issue and it has been pointed out that major expenditure was in relation to global depository receipts which had not been converted into shares at all. Therefore no disallowance could be made in respect of such expenses relating to debenture issue. The balance amount was only Rs.2,64,34,555/- which related to optionally convertible debentures. It has been argued that in such cases the expenses could not be disallowed. The Learned AR has pointed out that there are judgments supporting the view that even when the debentures are fully convertible, expenditure has to be allowed. In case of Secure Meters Ltd. (221 CTR 405) Hon’ble High Court of Rajasthan have held that whether debentures have been converted into shares or not it does not mitigate against the nature of debentures as loan at the time of issue and therefore expenses incurred for raising loan have to be allowed. Similar view has been taken by the Hon’ble High Court of Madras in case of South India Corporation (Agencies) Ltd. (290 ITR 221). Though the special bench of tribunal in case of Ashima Syntex (100 ITD 245) has taken the view that the expenses incurred in connection with the fully convertible debentures is not allowable but in that case part of the debentures were convertible on date of allotment and remaining on a future date. The tribunal gave a finding that intention of the assessee was to issue shares partly on allotment and partly after 15 months. In the present case the debentures are not compulsorily convertible into shares. These were optionally convertible and therefore the conversion would depend upon option if any exercised by the debenture holders. Therefore it could not be said that intention was clearly to issue shares. Obviously the intention was to raise loan which could be converted into shares in future if any option was exercised. Therefore in our view the debenture issue expenses considering the judgments of Hon’ble High Court of Rajasthan and Hon’ble High Court of Madras (supra) have to be allowed. We therefore set aside the order of CIT(A) on this point and allow the claim of the assessee.”
Respectfully following the decision of the Tribunal referred to above we uphold the order of the CIT(A). Thus Ground No.1 raised by the revenue is dismissed.
8. Ground No.2 raised by the revenue reads as follows:
“(2) The learned CIT[A] has erred in deleting the disallowance of interest expenditure of Rs.26,62,32,317/- on the working capital of HRC Division shown by the assessee company as Deferred Revenue expenditure, though it was in the nature of capital expenditure.”
9. This ground is consequential to Ground No.1. The AO disallowed the claim of the Assessee for deduction on account of interest on working capital relating to trial production of HRC Project. Because of the conclusion that the HRC business is a new business the AO disallowed the interest expenditure. Since it has already been held that HRC project is part of the existing business of the assessee all revenue expenditure have to be allowed. In fact in A.Y 1994-95 the Tribunal has already allowed general administration expenses. Respectfully following the decision of the Tribunal in assessee’s own case referred to above we dismiss Ground No.2 raised by the revenue.
10. Ground No.3 raised by the revenue reads as follows:
“(3) The learned CIT[A] has erred in deleting the disallowance of lease rent of Rs.25.15,95,039/- though the same was claim as a separate deduction instead of debiting the same to profit and loss account, in spite of the fact that no details were given to the Assessing Officer regarding deferment of expenditure.”
11. Parties agreed before us that this issue has already been considered by the Tribunal in assessee’s own case in assessment year 1996-97. In ITA NO.1069/AHD/00 vide order dated 11/3/11, the Tribunal held on an identical issue as follows:
“19. The assessee had debited in the P&L account expenses on account of rent paid on leasing transactions. During the previous year in the books of accounts the assessee had shown rent payable in respect of leasing transactions less by Rs.25.15,95,039/-. While filing the return of income the assessee claimed this difference as a deduction. The assessee submitted before the AO that because of the long period of the lease it was of the opinion that rents payable had to be reduced and, therefore, in the books of accounts it provided for a lesser liability but while computing the income for the purpose of Income-tax it had claimed the actual liability. The AO however, was of the view that claim of the assessee was not acceptable.
20. On appeal by the assessee the CIT(A) accepted the plea of the assessee holding as follows:
“6.3 I agree with the submission made by the appellant that the lease rent is allowable fully for the year as in the earlier years relating to same assets. There is no revaluation done for purpose of deduction of same under IT Act. The change in the method of treatment of entries in the books will not alter the character of revenue expenditure. Moreover, this change in the method of treatment has not resulted in excess allowance than normally allowable. Therefore, no prejudice is caused to revenue. During the A.Y 1995-96, the entire lease rent of Rs. 8,03,49,553/- was allowed by the Assessing Officer. I delete this addition of Rs. 9,28,34,501 holding that appellant’s treatment of deferred payment will not alter the character of the expenditure.”
21. Before us ld. D.R relied on the order of the AO.
22. We are of the view that the order of the CIT(A) on this issue has to be accepted. Admittedly the deduction claimed by the assessee was in respect of its actual liability of payment of lease rent to the lessor. The treatment in the books of account will not alter the character of the expenditure when it comes to claiming deduction while computing total income under the Act. We, therefore, dismiss Ground No.4 of the revenue.”
12. The lease rent in question is the very same lease transaction considered by the Tribunal in AY 96-97 and the basis on which the AO made the disallowance is also identical. In view of the above, respectfully following the decision of the Tribunal referred to above, Ground No.3 raised by the revenue is dismissed.
13. Ground No.4 raised by the revenue reads as follows:
“(4) The learned CIT(A) has erred in deleting the addition of provision made for doubtful debts of Rs, 3,53,35,020/- to the Book Profit u/s115JA of the Act holding that it is not an provision for unascertained liability.”
14. While computing book profits the AO added Provision for Doubtful debts of Rs.3,53,35,020/- debited to the profit and loss account to the profits arrived at in the profit and loss account prepared in accordance with the provisions of Sec.115JA(2) of the Act. The question whether provision for doubtful debts and provision for doubtful advances have to be added while computing book profits u/s.115JA of the Act has to be answered in favour of the revenue and against the assessee because of the retrospective amendment introduced in Section 115JA of the said Act. By virtue of Finance (No. 2) Act, 2009, clause (g) has been inserted in the Explanation contained in Section 115JA (2). By virtue of the said amendment, the amount or amounts set aside as provision for diminution in the value of any asset, is specifically mentioned. The Supreme Court in the case of CIT v. HCL Comnet Systems & Services Ltd.  174 Taxman 118 held that provision for doubtful debts and doubtful advances did not fall within clause (c) of the said Explanation in as much as they amounted to provision in respect of diminution in the value of asset. Consequent to retrospective amendment, the question insofar as it relates to provision for doubtful debts and provision for doubtful advances, requires to be answered in favour of the revenue and against the assessee. On this ground it has been fairly admitted before us by both the parties that in view of the amendment to the provisions of Section 115JA to the Act whereby it is provided that provision made for doubtful debts which is debited to the P&L Account has to be added for arriving at the book profit, the addition made by the AO has to be restored. We, therefore, allow Ground No.4 raised by the revenue.
15. Ground No.5 raised by the revenue is with regard to lack of opportunity afforded by the CIT(A) to the AO. The learned DR could not point out as to how the AO was not afforded proper opportunity before the CIT(A). In our view the grievance projected in Gr.No.5 is not substantiated by any material and, therefore, the same is dismissed.
16. In the result, the appeal by the revenue is partly allowed.
ITA No.3228/M/05,ITA No.3229/M/08 & ITA4214/A/03:
17. ITA No.3228 is an appeal by the revenue against the order dated 24/2/2005 of CIT(A) V, Mumbai relating to A.Y 1998-99. ITA No.3229/M/05 is an appeal by the revenue against the order dated 24/2/05 of CIT(A) V, Mumbai relating to A.Y 1999-2000. ITA No.4214/A/03 is also an appeal by the revenue against the order dated 8/9/2003 of CIT(A) 1, Surat relating to the assessment year 2000-01.
18. In all these appeals by the revenue, which were admittedly filed prior to 15/5/2008 the returned income and assessed income was a loss. In assessment year 1998-99 though the income was determined under section 115JA of the Act the additions disputed by the assessee before the CIT(A) were only in respect of determination of total income under the normal provisions of the Act. The ld. Counsel for the assessee has raised the issue before us that these appeals by the revenue liable to be dismissed on the ground that the tax effect in all these appeals is only notional and, therefore, these appeals by the revenue have to be dismissed as they are filed contrary to the instructions by the CBDT with regard to filing of appeal by the revenue before the Tribunal. In this regard ld. Counsel for the assessee has brought to our notice that in assessee’s own case similar issue was considered by the Tribunal in ITA No.3227/M/05 for A.Y 1997-98 and ITA No.1656/M/01 for A.Y 1997-98 and this Tribunal held as follows:
“4. We have perused the records and considered the rival contentions carefully. The dispute is regarding maintainability of appeals only on ground of low tax effects CBDT had been issuing circulars from time to time directing revenue authorities not to file appeal before the Tribunal or High Courts in case tax effect was less than a particular amount. Instruction No.1979 dated 27.3.2000, provided that no appeal would be filed before Tribunal if the tax effect was less than Rs.1.00 lacs, and thereafter Instruction dated 17.7.2003 clarified that monetary limit/tax effect mentioned in the Circular has to be read as revenue effect which would mean tax, interest, penalty, A.Y.97-98 fine or any other sum involved. Further, vide circular dated 24.10.2005 CBDT enhanced monetary limit for filing appeal before the Tribunal to Rs.2.00 lacs and vide Instruction No.16.7.2007 it was clarified that the tax effect would mean tax only and no interest. CBDT by subsequent Instruction No.5 of 2008 dated 15.5.2008 clarified that the tax effect would also mean notional tax effect in cases of losses. Thus, for the first time, it was made clear that even notional tax effect had to be taken into account but the instruction also made it clear that it would apply only to appeals filed after 15.5.2008 and that appeals filed prior to that date would be governed by instructions which were in operation at the time of filing of appeal. Hon’ble High Court of Delhi in the case of Continental Constructions Limited (336 ITR 394), have held that though for the purpose of monetary limit, circular issued by CBDT prescribing a particular limit would apply to all pending appeals but the notional tax effect as prescribed in the Instruction dated 15.5.2008 would be prospective and would not apply to pending appeals. Following the said judgment, the Delhi Bench of the Tribunal in case of ITO vs. Speciality Coatings & Lamination Ltd. (144 TTJ 532), has held that the real tax effect and not notional tax effect has to be taken into account while computing the monetary ceiling in respect of appeals filed prior to the issue of Instruction of 15.5.2008. The case of the assessee is identical. We have therefore to follow the decision of co-ordinate Bench of the Tribunal (supra), and respectively following the same, we dismiss both the appeals filed by the revenue as non-maintainable.”
In view of the aforesaid decision of the Tribunal we are of the view that the appeals of the revenue have to be dismissed as not maintainable as the tax effect involved in these appeals were only notional as the income ultimately determined in assessment for these years was only a loss. As already observed these appeals were filed prior to 15/5/2008 from which date notional tax effect was also considered as tax effect for filing appeals. Thus these appeals are dismissed.
20. In the result, ITA No.850/A/02 is partly allowed while the other appeals are dismissed.