Case Law Details
CIT Vs Nirma Ltd (Gujarat High Court)
Conclusion: Expenditure incurred on soda ash project interest expenses and lab project interest was allowable and it was not pre-operative expenditure of interest by way of revenue expenditure as it was for an expansion of the existing business.
Held: AO disallowed soda ash project interest expenses and lab project interest. AO questioned the assessee on these expenses and deleted the same on two grounds, firstly that interest was paid by way pre-operative expenditure and secondly assessee had capitalized such expenditure. It was held that assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called ‘lab’ for its captive consumption for the purpose of its existing manufacturing business. It was no doubt that assessee was engaged in the business of manufacture of soap and the soda ash and ‘lab’ so produced was used by way of captive consumption. Had it been a case of entirely a new project undertaken by assessee as canvassed by Revenue, a serious question of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing was capital or revenue expenditure would be of no consequence.
FULL TEXT OF THE HIGH COURT JUDGEMENT
Revenue is in appeal against the judgment of the Income Tax Appellate Tribunal (‘the Tribunal’ for short) dated 28.2.2013 raising following questions for our consideration:
“1. Whether the Appellate Tribunal is right in law and on facts in restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with various income such as Interest on L.C. Of Rs.20,83,941/-, Misc. sales of Newspaper Rs.29,110/-, Truck hire charges of Rs.33,22,485/- Interest on Loan given to staff of Rs.55,287/-, Exchange rate difference of Rs.11,91,096/- and Insurance claim of Rs.4,04,133/- as not derived from the industrial undertaking and further directing that net income should be excluded from business profit for the purpose of allowing deductions under Section 80I, 80IA and 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded?
2. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT (A) deleting the disallowances of Rs.2,95,10,650/- made by AO on account of sale of poster papers, iron scrap, gunny bags etc. for the purpose of calculation of deduction under sections 80I, 80IA & 80HH of the IT Act and directing AO to allow the same, while relying upon its own decisions in the case of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded?
3. Whether the Appellate Tribunal is right in law and on facts in deleting the disallowances of interest from debtors of Rs.39,26,316/- made by AO for the purpose of calculation of deduction under Sections 80I, 80IA & 80HHC of the IT Act and further directing the AO to allow the same while relying upon its own decisions in the cases of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded?
4. Whether the Appellate Tribunal is right in law and on facts restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with various income such as insurance claim of Rs.72,902/-, Truck hire charges of Rs.1,40,000/-and other sales of Rs.63,08,141/- for the purpose of deduction under Section 80I, 80IA and 80HH of the Act for Trikampura Division of the assessee as not derived from and industrial undertaking and further directing that net income should be excluded from the business profit for the purpose of allowing deductions under section 80I, 80IA & 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded?
5. Whether the Appellate Tribunal is right in law and on facts restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with income of Rs.63,08,141/- out of sale of plastic waste, iron scrap, gunny bags, bardan, etc, for the purpose of deduction under Section 80I, 80IA & 80HH of the Act for Trikampura Division of the assessee as not derived from and industrial undertaking and further directing that net income should be excluded from the business profit for the purpose of allowing deductions under section 80I, 80IA & 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded?
6. Whether the Appellate Tribunal is right in law and on facts in deleting the disallowances of interest from debtors of Rs.33,63,494/-, Misc. income in respect of Printing charges recovered of Rs.45,326/- in respect of Kanpur Division, made by AO for the purpose of calculation of deduction under Sections 80I, 80IA & 80HH of the IT Act and confirmed by CIT (A) while relying upon its own decisions in the cases of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded?
7. Whether the Appellate Tribunal is right in law and on facts restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with income of Rs.57,40,830/- out of sale gunny bags, bardans for the purpose of deduction under Section 80I, 80IA & 80HH of the Act for Kanpur Division of the assessee as not derived from and industrial undertaking and further directing that net income should be excluded from the business profit for the purpose of allowing deductions under section 80I, 80IA & 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded?
8. Whether the Appellate Tribunal is right in law and on facts restoring the issue back to AO to decide for granting benefits of netting to the Assessee and further directing the AO to allow expenses after verifying nexus with various income such as Interest on Loan given to staff of Rs.583/- and Truck hire charges of Rs.90,950/- for the purpose of of deduction under Section 80I, 80IA & 80HH of the Act for Kanpur Division of the assessee as not derived from and industrial undertaking and further directing that net income should be excluded from the business profit for the purpose of allowing deductions under section 80I, 80IA & 80HH of the Act for netting purpose without considering the facts that such expenses were incurred from the business income only and not for earning incomes and hence liable to be excluded?
9. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) deleting the disallowances of interest from debtors of Rs.2,38,97,496/- and Rs.75,68,786/- made by AO on account of interest from debtors and other sales with respect to profit of Indore Division for the purpose of calculation of deduction under Sections 80I, 80IA & 80HH of the IT Act while relying upon its own decisions in the cases of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded?
10. Whether the Appellate Tribunal is right in law and on facts in confirming the order of the CIT(A) to recalculate interest expenditure of Rs.82,98,93,839/- in respect of Mandali Division, Rs.9,25,330/- in respect of Trikampura Divison, Rs.40,38,063/- in respect of Kanpur Division and Rs.4,75,178/- in respect of Indore Division from the interest income while working out the deduction u/s. 80I, 80IA and 80HH of the Act and further directing the AO to allow netting, if the Assessee is able to establish the nexus between interest expenditure and interest income?
11. Whether the Appellate Tribunal is right in law and on facts in restoring the issue back to AO to decide for granting benefits of netting aspect and to allow netting if the Assessee is able to establish the nexus between sale expenditure and sale income for the purpose of computing deduction allowable to assessee under section 80I & 80HH of the IT Act while setting aside the order of CIT (A) directing not to exclude income from sale of diesel of Rs.1,05,00,100/- while working out deduction under sections 80I & 80HH of the IT Act?
12. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) directing not to exclude sale of bardan of Rs.29,962/- while working out deduction under Sections 80IA & 80HH of the IT Act on Chhatral Division while relying upon its own decisions in the case of cases of Nirma Ltd. & Harjivandas which have not reached finality and without considering the fact that such expenses incurred from the business income only and not for earning income liable to be excluded?
13. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) deleting the disallowance of Soda Ash Project Interest Expenses of Rs.3,33,23,108/- and Rs.12,27,78,792/- Lab Project Interest expenses?
14. Whether the Appellate Tribunal is right in law and on facts in confirming the order of CIT(A) deleting the disallowance of claim of Rs.16,78,93,425/- u/s. 35AB of the Act?
15. Whether the Appellate Tribunal is right in law and on facts in holding that interest of Rs.4,48,36,000/- from debotrs is to be considered as part of sale price and hence no inclusion is called for in respect of such interest from business for the purpose of computing the deduction allowable to the Assessee u/s. 80HHC of the Act, while following its decision in the case of Nirma Industries Ltd., which has not reached to finality.”
“Insofar as question Nos.1, 4, 8, 10 and 11 are concerned, they have a common element, namely, whenever certain income is to be excluded for the purpose of deduction under section 80-I, 80-IA and 80HH, etc. gross income is to be excluded or only the net thereof is the question. In a separate order passed by us today in Tax Appeal No.810 of 2013, we have rejected the Revenue’s appeal making following observations:
“The question is when certain income of the assessee is excluded from the claim of deduction under section 80I or 80HH of the Act, should the gross income be excluded or should it be only net, that is, total receipt minus the expenditure incurred by the assessee for earning such income which should be so excluded.
Such a question in the context of deduction under section 80HHC came up for consideration before the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd v. CIT, 343 ITR 89 (SC). The Supreme Court held that for the purpose section 80HHC of the Act, it is not the entire amount received by the assessee on sale of DEPB credit, but the sale value of less the face value of the DEPB that will represent profit on transfer of DEPB credit by the assessee. Heavy reliance was placed in the case of Topman Exports v. CIT, 342 ITR 49 (SC). Extending such logic, it was further held that even other amounts, such as, interest or rent when are to be excluded for the purpose of explanation (baa) to section 80HHC of the Act. Ninety per cent of not the gross rent or gross interest, but the net thereof shall have be excluded. It was observed as under:
“If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as as expense in accordance with sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head “Profits and gains of business or profession”, ninety per cent of such quantum of the 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 the gross rent or gross interest but only the net interest or net rent, which has been included int eh profits of business of the assessee as computed under the head “Profits and gains of business or profession”, is to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business.”
In view of such decision, question No.3 raised by the Revenue gets automatically answered since the amounts referred to in the said question are to be excluded for the purpose of deduction under section 80HHC of the Act.
Learned counsel for the Revenue vehemently contended that the ratio of the decision in the case of ACG Associated Capsules Pvt. Ltd (supra) cannot be applied to a situation where the exclusion from the claim of deduction relates to section 80HH or section 80-I of the Act. He strenuously urged that the language used in both the sets of provisions are different. Section 80HHC is also vitally different and that therefore the concept of netting may not be automatically applied to deduction under section 80HH and 80-I of the Act. He submitted that number of tax appeals have been admitted by this Court on this issue and this appeal may also be likewise admitted. He drew our attention to the order dated 6.5.2013 passed by this Court in the case of Bloom Decor Ltd. in Tax Appeal No.447 of 2013 where at the instance of the assessee, similar question was not considered.
On the other hand, learned counsel Shri Soparkar for the assessee, in addition to relying on the decision in the case of ACT Associated Capsules Pvt. Ltd. (supra), also placed heavy reliance on an order dated 30.11.2013 in Tax Appeal No.213 of 2006 in the case of Rajoo Engineers Ltd. in which the Revenue’s appeal raising such a question came to be dismissed relying on the decision in the case of ACG Associated Capsules Pvt. Ltd. (supra). The counsel also relied on a decision of the Delhi High Court in the case of Essel Shyam Communication Ltd. v. Commissioner of Income tax, (2012) 28 taxmann.com 243 (Delhi), in which in detailed consideration, relying on the decision of the Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra), exclusion was approved for deduction under section 80-IA of the Act.
Having heard the learned counsel for the parties, we see no reason to entertain this tax appeal. The Supreme Court in the case of ACG Associated Capsules Pvt. Ltd. (supra) has already laid down the foundation for the logic for excluding the net profit and not the gross profit from the claim of deduction when it is found that the source of income does not quality for such deduction under section 80HHC of the Act. It is true that section 80HHC represents vastly different scheme of deduction and also provides for complex formula for deriving for the eligible profit for deduciton under different situations depending on whether the exporter is also engaged in the local business or not.
However, this distinction would not be material insofar as central question of exclusion of certain profit from the activity which is not eligible for deduction under section 80HH and 80-I are concerned. The logic being when the profit is being excluded form the claim of deduction, not the gross profit but the net thereof, that is the gross profit minus the expenditure incurred for earning such profit should be excluded. That is precisely how this Court in the case of Rajoo Engineers (supra) viewed the situation. That is how the Delhi High Court in the case of Essel Shyam Communication (supra) held referring to the decision in the case of ACG Associated Capsules Pvt. Ltd. (supra).
It is true that in the case of Bloom Decor Ltd., a question was suggested by the assessee which may have some bearing on the controversy on hand. However, the entire focus of the order of the Court was regarding applicability of the decision of the Supreme Court in the case of Topman Exports (supra) and not on the question of netting. In any case, therein, the decision in the case of ACG Associated Capsules Pvt. Ltd was not noticed.”
Insofar as question Nos.2, 5, 7 and 12 are concerned, it is an undisputed position that the issues are covered by a decision of this Court in the case of Dy.C.I.T. v. Harjivandas Juthabhai Zaveri, 258 ITR 785 in which the Court upheld the decision of the Tribunal granting benefit of deduction under section 80I of the Act on various incomes, such as, job work receipt, sale of empty soda ash bardan, sale of empty barrels and plastic waste. Such questions are, therefore not required to be considered.
So far as question Nos.3, 6, 9 and 15 are concerned, the same are stated to be covered by the decision of this Court in the case of Nirma Industries Ltd. v. Deputy CIT, 283 ITR 402 (Guj.) in which the Court upheld the assessee’s claim for deduction under section 80I of the Act on the interest received on late payment of sale consideration as amount derived from eligible business. These questions are, therefore, not required to be considered.
Coming to question No.14, we notice that the issue pertains to the assessee’s claim for deduction under section 35AB of the Act. The Tribunal has in the impugned judgment remanded the matter back to the Assessing Officer for full verification of such claim. It is clarified that the issues are kept open and shall be examined by the Assessing Officer, afresh.
The sole surviving question No.13, pertains to disallowance of soda ash project interest expenses of Rs.3.33 crores (rounded off) and lab project interest of Rs.12..27 crores (rounded off). The Assessing Officer, questioned the assessee on these expenses and deleted the same on two grounds, firstly that the interest was paid by way pre-operative expenditure and secondly the assessee had capitalized such expenditure.
The assessee carried the matter in appeal. CIT (Appeals) relying on a decision of this Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allowable.
It is this order of the CIT (Appeal) which the Tribunal upheld in the impugned judgment.
Having heard the learned counsel for the parties and having perused the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was inter- connection, inter-lacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this Court in the case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business.
If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called ‘lab’ for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and ‘lab’ so produced is used by way of captive consumption. When such facts viewed in light of the findings of the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. (supra), in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing is capital or revenue expenditure would be of no consequence
In the result, Tax Appeal is dismissed.
