Case Law Details

Case Name : Assistant Commissioner of Income-tax Ahmedabad Vs Ashima Syntex Ltd. (ITAT Ahmedabad)
Appeal Number : ITA Nos. 2001 and 2002/Ahd/200l
Date of Judgement/Order : 17/10/2008
Related Assessment Year : 1997-98, 1998-99
Courts : All ITAT (4238) ITAT Ahmedabad (321)

Though the taxpayer may have written off the expenditure in its books of account over a period say of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business(Para 15)

(i) When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon’ble Supreme Court in the case of TCS.

(ii) Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.

(iii) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to software as capital in nature and the functional test as discussed above also needs to be satisfied.

(iv) Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field.(Para 15)

The expenses incurred for obtaining fixed deposits are clearly allowable as revenue expenditure(Para 15)

Assessing Officer was not justified in making disallowance of Rs. 1,56,76,000 in respect of borrowings utilised for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department(Para 20)

the total income computed under the provisions of sec. 115JA of the Act is liable to advance tax and in the event of default in relevant provisions of payment of advance tax, levy of interest u/s 234C of the Act is mandatory (Para 48)

INCOME TAX APPELLATE TRIBUNAL

AHMEDABAD BENCH “B” (SPECIAL BENCH)

(BEFORE S/Sheri R.P. Garg, Vice President, Mahavir Singh, Judicial Member and A.N. Pahuja, Accountant Member)

ITA Nos. 2001 and 2002/Ahd/200l
Asstt. Years:-1997-98 and 1998-99

Assistant Commissioner of Income-tax Ahmedabad Circle-1, Ahmedabad.

(Appellant)

Vs.

 Ashima Syntex Ltd.

(Respondent)

310, Ashima House, Ahmedabad.

[PAN: 31-059-CZ-9884]

Revenue by: Shri S.S. Panwar, DR

Taxpayer: Shri S.N. Soparkar with Shri Tushar Hemani

Date of Judgment: 17th October, 2008

O   R   D   E   R

Per Bench- These two appeals, spiraled to this Bench due to order dated 10.5.2007 of the Hon’ble President, ITAT, are directed against a common order dated 08.06.2001 of the ld. CIT-V, Ahmedabad and raise the following grounds:

ITA No. 2001/Ahd/2001

“1. The ld. CIT(A) has erred in law and on facts in allowing the expenditure of Rs.1,13,63,998/- as revenue expenditure which being preoperative expenses was capital in nature and was rightly so held by the AO.

2. The ld. CIT(A) has erred in law and on facts in holding that the interest of Rs.20,72,33,895/- was allowable u/s. 36(1)(iii) of the IT Act, although the same represents preoperative expenses and was capital in nature.

3. The ld. CIT(A) has erred in law and on facts in directing the AO not to charge interest u/s. 234C when the income is computed u/s. 115JA.”

ITA No. 2002/Ahd/2001

“1. The ld. CIT(A) has erred in law and on facts in allowing the expenditure of Rs.1,56,44,614/- as revenue expenditure which being preoperative expenses was capita! in nature and was rightly so held by the AO.

2. The ld. CIT(A) has erred in law and on facts in holding that the interest of Rs. 14,64,58,864/- was allowable u/s. 36(1) (iii) of the IT Act, although the same represents preoperative expenses and was capital in nature.

3. The ld. CIT(A) has erred in law and on facts in directing the AO not to charge interest u/s. 234C when the income is computed u/s. 115JA.

4. The ld. CIT(A) has erred in law and on facts of the case in allowing the claim of the assessee of not reducing the 90% of gross interest received of Rs. 22,94,13,676/- while working out the export profit u/s. 80HHC for the purpose of finding out the book profit u/s 115JA.”

Initially reference was made by the taxpayer to Hon’ble President, ITAT ‘for constitution of a Special Bench due to conflicting decisions of the ITAT on the following issue:

“Allowability u/s 36(1 )(iii) of interest on borrowed capital used by the assessee for acquiring plant and machinery and incurring capital expenditure in a case where the assessee is already in existence of business and acquisition of capital equipments was for extension/expansion of such existing business.”

The said issue is now settled by Hon’ble Supreme Court. Since issues involved in these appeals are inter-related, these two appeals were heard together for the sake of convenience and are being disposed of by this common order.

2. Facts, in brief, as per relevant orders are that the taxpayer filed return declaring total income, being 30% of the book profits of Rs.8,58,07,046/- in terms of provisions of section 115JA of the Income Tax Act, 1961 [hereinafter referred to as “Act’] on 30.11.1997 for the A Y 1997-98. For the assessment year 1998-99, return declaring total income being 30% of the book profits of Rs.8,24,67,851/- was filed on 30.11.98. After processing of returns for these two assessment years by the Assessing officer [AO in short] u/s 143(1) of the Act on 31.08.98 and 13.08.99 respectively, the taxpayer submitted a revised return for the AY 97-98 on 30.11.98. These returns were taken up for scrutiny with the issue of notice under section 143(2) of the Act During the course of assessment proceedings, the AO noticed, inter alia, that the taxpayer claimed deferred revenue expenditure totalling to Rs.240.97 lakhs for the AY 1997-98 and Rs.342.38 lakhs for the AY 1998-99. The break up of the expenditure for both these assessment years is as under:

 

(Rs. in lakhs)

AY 97-98

98-99

1.

Corporate advertisement

32.31

63,40,773/-

2.

Computer software expenses

0.23

5,38,267/-

3.

Public relation expenses/Cultural programme expenses

4.25

4,43,130/-

4.

Quota expenses

8.60

14,44,621/-

5.

Sales promotion expenses

10.78

10,33,611/-

6.

Fixed deposit expenses

184.80

1,37,51,366/-

7.

Exhibition expenses

6,86,140/-

Total

240.97

3,42,37,908/-

3. Out of the aforesaid expenditure, an amount of Rs.127.33 lakhs for the assessment year 97-98 and Rs.185.93 lakhs for the assessment year 98-99 was amortised. To a query by the AO, the taxpayer submitted that similar claim for deduction of expenditure was made in the assessment year 1996-97 also. Relying upon his own findings for the AYs 1995-96 and 96-97, the AO disallowed the claim on the ground that treatment given to the aforesaid expenditure in the books of accounts is in accordance with accounting principles and income has to be computed in terms of the provisions of section 145(1) of the Act. The AO further pointed out that the auditors while finalizing the accounts observed in schedule 16 to the accounts for the assessment year 1997-98 as under:

“Deferred revenue expenditure –

(a)        Stamp duty and filing fees paid in respect of increase in authorised share capital has been treated as deferred revenue expenditure and written off to revenue over a period of five years.

(b)        Corporate advertisement, sales promotion and computer software and training expenses have been deferred and are written off over a period of five years.

(c)        Fixed deposit expenses have been deferred and are written off over a period of three years.

(d)        Quota premium expenses have been deferred and are written off over a period of two years.”

4. In the light of the aforesaid note of the auditors, the AO concluded that deduction for expenditure debited in the profit and loss account of only Rs. 1,27,33,092/- would be allowed and the balance disallowed. Similarly, for the assessment year 98-99, the AO allowed the claim to the extent of Rs. 1,85,93,294/-.

5. On appeal, the ld. CIT(A) allowed the claim for deduction of aforesaid expenditure relying, inter alia, upon his own order for the assessment year 1996-97.

6. Aggrieved, the Revenue is in appeal before us. The ld. DR while carrying us through the assessment order pointed out that since the taxpayer itself debited only amortized expenses of Rs.1,27,33,092/- and Rs.185.93 lakhs in the P & L account of the respective assessment years, the ld. CIT(A) was not justified in allowing the deduction for the entire expenditure. In this connection, the Id. DR relied upon the decision of Hon’ble Supreme Court in the case of Madras Industrial Investment Corporation Limited v. CIT [225 ITR 802 (SC)].

7. On the other hand, the ld. AR on behalf of the taxpayer while rebutting the contentions of the ld, DR, relied upon the decisions of the Hon’ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Ltd. v. CIT [82 ITR 363 (SC)] and Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT 227 ITR 172 (SC)] and pointed out that the nature of expenditure is irrelevant. As regards expenses relating to fixed deposits, Id. AR relied upon the decision of Hon’ble Madras High Court in the case of CIT vs. Southern Petrochemical Industries Corporation Ltd.,301 ITR 255 (Mad) and pleaded that out of total fixed deposits of Rs.29.00 crores, Rs. 27.00 crores were for the period less than one year. He further contended that expenditure incurred in redeeming debts is always allowable while the fixed deposits can always be prematurely encashed. In respect of decision of the Hon’ble Supreme Court relied upon by the ld. DR, it was submitted that the said decision in the case of  Madras Industrial Investment Corporation Limited v. CIT [225 ITR 802 (SC) can not be ipso-facto applied to the expenses relating to the FD. It depends on terms and condition for acceptance of debentures and the fixed deposits, as the case may be. To a query by the Bench, he added that the said decision reported in Madras Industrial Investment Corporation Limited (supra) is not relevant to the facts of the case.

8. We have heard rival contentions and gone through the facts of the case. The concept of deferred revenue expenditure is essentially an accounting concept and alien to the Act. The relevant provisions of the Act recognise only capital or revenue expenditure. Deferred’ revenue expenditure denotes expenditure for which a payment has been made or a liability incurred, which is essentially revenue in nature but which for various reasons like quantum and period of expected future benefit etc., is written-off over a period of time e.g. expenditure on advertisement, sales promotion etc.. Though the nature of such expenditure is revenue, keeping in view the fact that the benefits arising therefrom are expected to be derived over a period of time, stretching sometimes over several accounting years, the taxpayers have been amortising the same over the expected time period over which the benefits are likely to accrue therefrom. Accordingly, only a proportion of such expenditure is amortised in the Profit and Loss Account but an appropriate adjustment is made in the computation of income, claiming the entire as allowable revenue expenditure in terms of provisions of section 37(1) of the Act. The expenditure which is treated as deferred revenue in the books almost in all cases comprises of items, the benefits derived wherefrom are ephemeral and transitory in nature in as much as these are incurred as a part of a continuous process and need to be expended in order to generate and increase the brand recall and sustain it in the minds of customers. Whether or not expenditure is of enduring nature, the” Hon’ble Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 has itself observed that

“The idea of “once for all” payment and “enduring benefit” are not to be treated as something akin to statutory conditions; nor are the notions of “capital” or “revenue” a judicial fetish. What is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing economic realities of business. The expression “asset or advantage of an enduring nature” was evolved to emphasise the element of a sufficient degree of durability appropriate to the context.”

9. Moreover, the deferred revenue expenditure is essentially revenue in nature and the decision to treat the same as deferred revenue only represents a management decision taken in view of the magnitude of the expenditure involved. For the purpose of allowability of any expenditure under the Act, what is material is the classification between the capital and revenue and the same does not recognise of any concept of deferred revenue expenditure. That is why AO himself allowed the amount debited in the profit and loss account. In a number of :Judgments viz. Amar Raja Batteries Ltd. v. ACIT [(2004) 91 ITD 280 (Hyd)] JCIT v. Modi Olivetti Ltd. [(2005)4 SOT 859 (Delhi)], ACIT vs. Medicamen Biotech Ltd. [(2005) 1 SOT 347 (Delhi)], Hero Honda Motors Ltd. v. Joint Commissioner of Income Tax [(2005) 3 SOT 572 (Delhi)] and Charak Pharmaceuticals v. JCIT [(2005) 4 SOT 393 (Mumbai)], it has been affirmed that where any expenditure is treated as a deferred revenue expenditure, it presupposes that the concerned expenditure, creating benefit is in the revenue field and is a revenue expenditure, but considering its enduring benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the capital field, the same is required to be treated distinctly from capital expenditure. However, where any identifiable capital asset, tangible or intangible comes into existence as a result of the amount expended, the same will have to be treated as a capital expenditure and depreciation allowable thereon as per the prescribed rules and procedures under the Income-tax Act.

10. The ld. DR placed reliance on the judgment of Hon’ble Supreme Court in the case of  Madras Industrial Investment Corporation Limited v. CIT [225 ITR 802 (SC)  wherein it has been held that deduction on account of discount on the issue of debentures is allowable on proportionate basis during the period over which these are outstanding. While putting forth such an interpretation, the Department seems to be ignoring one crucial fact in as much as the Hon’ble Supreme Court dealt with the question of issue of debentures which can be clearly and succinctly identified with and is relatable to a defined time-frame i.e. the period in which the debentures are outstanding and as such can be specifically allocated over defined periods. On the contrary, the nature of expenditure such as advertisement or exhibition, sales promotion or fixed deposit etc. is such that, although the benefit arising therefrom may extend over several accounting periods, the same cannot be clearly and definitively assigned over time since the same is intangible in nature. Moreover such expenditure did not result in creation of any capital asset, tangible or intangible, and the question of treating the same as capital expenditure does not arise. In fact, the Hon’ble Supreme Court itself while discussing the issue, in the said case, and distinguishing between various situations has observed that

“ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years”.

11. Another argument by the ld. DR is the variation and dichotomy between the accounting treatment of such expenditure in the books of account and its claim under the Act As far as the entries in the books of account are concerned, it is well settled that they do not clinch the issue either way, and are not determinative of the allowability or otherwise of the expenditure. The decisions of the Hon’ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 and in the case of CIT v. Indian Discounts Co. Ltd. [1970] 75 ITR 191 (SC) are clear on the issue. The accounting entries in the books of accounts are occasioned by a diverse set of considerations and issues such as compliance with statutory laws and mandatory accounting standards/principles and of course management decisions as to the treatment of a particular item which can be guided by considerations of reported profitability earning per share, impact on share prices etc.. The Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. Vs. CIT ((1971) 82 ITR 363) (SC) also affirmed the above view by observing that “whether the assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto and not on the view which the assessee might take of his rights nor can the existence or absence of entries in the books of account be decisive or conclusive in the matter”.

12. Subsequently the Hon’ble Court re-affirmed the said view in Sutlej Cotton Mills. Ltd. Vs. CIT, 116 ITR 1 (SC)

“But it is now well settled that the way in which entries are made by an assessee in his books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. The assessee may, by making entries which are not in conformity with the proper accountancy principles, conceal profit or show loss and the entries made by him cannot, therefore, be regarded as conclusive one way or the other. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee”

13. Likewiese, in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs. CIT 227 ITR 172(SC), Hon’ble Supreme Court held that

“It is true that this court has very often referred to accounting practice for ascertainment of profit made by a company or value of the assets of a company But when the question is whether a receipt of money is taxable or not or whether certain deductions from that receipt are permissible in law or not, the question has to be decided according to the principles of law and not in accordance with accountancy practice. Accounting practice cannot override section 56 or any other provision of the Act as was pointed out by Lord Russell in the case of B. S. C. Footwear Ltd. [1970] 77 ITR 857, 860 (CA), the income tax law does not march step by step in the footprints of the accountancy profession.”

14. To conclude, the position emerging from the above discussion can be summed up as follows:-

– the nature of the expenditure treated as a “deferred revenue expenditure in the books needs to be properly analysed before taking a view on its arrowability or otherwise under the provisions of the Act;

– where such expenditure results in the creation of any capital asset (tangible or intangible), a case can be made out to treat the same as a capital expenditure with corresponding allowability of depreciation in accordance with law;

– in cases where the nature of the revenue expenditure is such that the same can be clearly and unambiguously identified over specified future time periods (e.g. discount on issue of debentures) akin to prepaid expenses the same would be allowable over the period to which these relate proportionately, applying the matching principle.

In other cases where the same does not result in the creation of any capital asset, or where the same is not allocable over defined future time periods here can be no case for amortising the same under the Act over the expected period over which the benefit is likely to arise there from since in such cases the expenditure is essentially revenue in nature but is amortised in the books only on account of some other considerations.

15. In view of the foregoing, we may now analyse the claim of expenditure in these two assessment years

a) Corporate advertisement, Exhibition, Public relation expenses/Cultural programme expenses, quota expenses & sales promotion

The undisputed fact is that the expenditure relating to corporate advertisement, Exhibition, Public relation expenses/ Cultural programme expenses, quota expenses & sales promotion is in the revenue field. The only issue to be considered is whether the assessee can claim the entire expenditure in this year itself, even though it had written off this expenditure in the books over a period of five years. In this connection, we may refer to the decision of the Hon’ble Supreme Court in the case of Madras Industrial Investment Corpn.(supra), wjerin it was held –

“”.Section 37(1) further requires that the expenditure should not be of a capital nature. The question whether a particular expenditure is revenue expenditure incurred for the purpose of business must be determined on a consideration of all the facts and circumstances, and by the application of principles of commercial trading. The question must be viewed in the larger context of business necessity or expediency. If the outgoing or expenditure is so related to the carrying on, or conduct of the business, that it may be regarded as an integral pari of the profit making process and not for acquisition of an asset or a right of a permanent character, the possession of which is a condition of the carrying on of the business, the expenditure may be regarded as revenue expenditure. Any liability incurred for the business of obtaining a loan would be revenue expenditure.

Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purposes of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a pariicular year to spread’ and claim it over a period of ensuing years. In fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assessee has incurred the liability to pay the discount in the year of issue of debenture, the payment is to secure a benefit over a number of years. There is a continuing benefit to the business of the company over the entire period. The liability should, therefore, be spread over the period of debentures. “

This judgment relied upon by the ld. DR itself clarifies that though the taxpayer may have written off the expenditure in its books of account over a period say of five years, it must be allowed in its entirety in the year in which it was incurred, if it is revenue expenditure, and if it is wholly and exclusively incurred for the purposes of business, In the case under consideration, there is nothing to suggest that with this expenditure, any asset, tangible or intangible, has been created. There is no evidence on record regarding accrual of any specific revenue in the years under consideration or subsequently over a defined period with the incurring of said expenditure. AO himself admitted the portion of expenditure debited in the profit and loss account as revenue expenditure. In these circumstances, we do not find any justification to interfere with the findings of the Id. CIT(A),

b) Computer software:

As regards expenditure on computer software, the relevant orders do not reveal the nature of expenditure on software, The ITAT Special Bench in the case of Amway India Enterprises vs. DCIT, 111 ITD 112(SB) (Delhi) in their detailed judgment held that since software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where life of the computer software is shorter(say less than two years), it may be treated as revenue expenditure. It was further held that nature of advantage of computer software has to be seen in a commercial sense. If the advantage is in the capital field then the same would be capital expenditure. If the advantage consists merely in facilitating the assessee’s trading operations or enabling the management and conduct of the assessee’s business to be carried on more efficiently or more profitably, while leaving the fixed capital untouched, the expenditure would be on revenue account. However, if assets/advantage is part of profit earning apparatus, it is capital. Whether or not expenditure on software is in revenue filed, the Special Bench in the aforesaid case summarized their findings in following terms:

59. Our conclusions on the issue under consideration thus can be summarized as under:-

(i)         When the assessee acquires a computer software or for that matter the license to use such software, he acquires a tangible asset and becomes owner thereof as held above relying on the decision of Hon’ble Supreme Court in the case of TCS.

(ii)        Having regard to the fact that software becomes obsolete with technological innovation and advancement within a short span of time, it can be said that where the life of the computer software is shorter (say less than 2 years), it may be treated as revenue expenditure. Any software having its utility to the assessee for a period beyond two years can be considered as accrual of benefit of enduring nature. However, that by itself will not make the expenditure incurred on software as capital in nature and the functional test as discussed above also needs to be satisfied.

(iii)       Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to software as capital in nature and the functional test as discussed above also needs to be satisfied.

(iv)       Once the tests of ownership and enduring benefit are satisfied, the question whether expenditure incurred on computer software is capital or revenue has to be seen from the point of view of its utility to a businessman and how important an economic or functional role it plays in his business. In other words, the functional test becomes more important and relevant because of the peculiar nature of the computer software and its possible use in different areas of business touching either capital or revenue field or its utility to a businessman which may touch either capital or revenue field.

60. Having laid down the criteria for determining the nature of expenditure incurred on acquisition of software, whether capital or revenue, we are of the view that these criteria need to be applied to determine the exact nature of expenditure incurred by the assessees in, the present cases for acquiring different softwares. Since this exercise is required to be done in respect of each and every software independently having regard to the criteria laid down above, we are of the view that the matter needs to be restored back to the file of the Assessing Officer for doing such exercise. The Assessing Officer shall examine the question whether expenditure on computer software is capital or revenue in  the light of the criteria laid down above after giving an opportunity of being heard to the assesses. If on such examination, the Assessing Officer comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with the principles  laid down in the subsequent paragraphs.”

Since in the case under consideration nature of software is not available on records nor any material has been placed before us in respect of nature of software(s) and expenditure incurred thereon, we are of the opinion that the matter needs to be restored back to the file of the Assessing Officer for doing necessary exercise as laid down in the aforesaid decision, The Assessing Officer shall examine the question whether expenditure on computer software is capital or revenue in the light of the criteria laid down in the aforesaid decision, after allowing sufficient opportunity of being heard to the taxpayer. If on such examination, the Assessing Officer comes to the conclusion that the expenditure is capital expenditure, then the question regarding allowing depreciation will be decided in accordance with law, keeping in view the principles laid down in the aforesaid decision

c) Fixed deposit expenses:

In respect of expenses incurred in obtaining fixed deposits, Hon’ble Madras High Court held in the case of CIT Vs. Southern Petrochemical Industries Corporation Ltd.,301 ITR 255(Mad) that

“As far as the expenses relating to obtaining fixed deposits are concerned, the issue was decided as revenue expenditure by the Division Bench of this court in CIT v. Southern Petrochemical Industries Corporation Ltd reported h [2007] 292 ITR 362, wherein this court held as follows:

“..For deciding the issue that the expenses relating to obtaining fixed deposits are closely linked with the business requirement of the assessee, it is apposite to have a cursory look on the decided case law on this point. In India Cements Limited v. CIT [1966] 60 ITR 52 (SC), while deciding the nature of the amount spent towards stamps, registration fees, lawyer’s fees, etc., for obtaining loan, the Supreme Court observed as follows:

‘A loan may be intended to be used for the purchase of raw material when it is negotiated, but the company may, after raising the loan, change its mind and  spend it on securing capital assets. Is the purpose at the time the loan is negotiated to be taken into consideration or the purpose for which it is actually used? ..the purpose for which the new loan was required was Irrelevant to the consideration of the question whether the expenditure for obtaining the loan was revenue expenditure or capital expenditure.

To summa rise this part of the case, we are of the opinion that: (a) the loan obtained is not an asset or advantage of an enduring nature; (b) that the expenditure was made for securing the use of money for a certain period,’ and (c) that it is irrelevant to consider the object with which the loan was obtained. ‘

Observing so, the Supreme Court held that the act of borrowing money was incidental to the carrying on of business, the loan obtained was not an asset or an advantage of enduring nature, the expenditure was made for securing the use of money for a certain period and it was irrelevant to consider the object with which the loan was obtained and, therefore, the amount spent was not in the nature of capital expenditure and was laid out or expended wholly and exclusively for the purpose of the assessee’s business and was, therefore, allowable as a deduction. The apex court also held that obtaining capital by issue of shares is different from obtaining loan by debentures.

 In CIT v. Investment Trust of India Ltd. [2003] 264 ITR 506 this court held that the expenditure on advertisements in newspapers inviting fixed deposits from the public is allowable in the words:

‘In view of the provisions contained in section 58A of the Companies Act, 1956, the assessee-company had to advertise the notice calling for deposits and if there was any breach, the assessee was liable to be proceeded against under the relevant provisions of the 1956 Act. Section 37(3A) was introduced to curb extravagant and socially wasteful expenditure on advertisement at the cost of the exchequer. The assessee had incurred the expenditure on advertisements for collecting fixed deposits and the advertisements were statutory advertisements and, therefore, the provisions of section 37(3A) read with section 37(38) were not applicable to the said expenditure.”

Considering the ratio laid down in the abovesaid decisions, we are of the view that when the Tribunal has recorded a finding that the expenses relating to obtaining fixed deposits are closely linked with the business requirement of the assessee, such expenses are allowable expenses. We, therefore, hold that the Tribunal was right in holding that the expenses for obtaining fixed deposits from the public is revenue in nature. Accordingly, we answer the second question in the affirmative and against the Revenue. “

In the light of aforesaid decision, the expenses incurred for obtaining fixed deposits are clearly allowable as revenue expenditure.

16. In view of the foregoing, ground no. 1 in both the appeals is disposed of as indicated hereinbefore.

17. Ground No.2 relates to deduction of interest of Rs. 20,72,33,895/- for the assessment year 1997-98 and Rs. 14,64,58,864/- for the assessment year 1998-99 capitalized in the books of accounts. The AO noticed that the taxpayer made similar claim for deduction of interest expenditure, capitalized in the books of account in the assessment year 1996-97. To a query by the AO, the taxpayer explained that during the assessment year 1996-97, one of the sections of Spinfab division had been set up by way of extension of business of textiles. It was not a new business, the unit being under the same management and activity was closely connected and there is full unity of the control as far as the administration and finance were concerned. The taxpayer claimed that the division having commenced commercial production, deduction for interest was allowable. Inter alia, the taxpayer relied upon the decision of ITAT in the case of Tata Chemicals. However, the AO rejected the contentions of the taxpayer on the basis of his own findings for the assessment year 1995-96 and 96-97 and concluded that the interest capitalized in the books of account has to be added towards cost of assets. Accordingly, the claim for deduction of expenditure was disallowed and depreciation was a II owed, on the amount of, interest capitalized.

18. On appeal, the ld. CIT(A) while relying upon his own order dated 18.09.2000 for the assessment year 1996-97 allowed the claim of the taxpayer.

19. Before us, both the parties agreed that the issue is now settled by the decision of the Hon’ble Supreme Court in the case of DCIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC) and DCIT Vs. Gujrat Alkalies and Chemicals Ltd., 299 ITR 85(SC).

20. We have heard the rival contentions and gone through the facts of the case. The issue regarding claim for deduction of interest on borrowed funds has now been settled by the decision of the Hon’ble Supreme Court in the aforesaid case of Core Health Care Ltd. (supra), wherein it was held:

In the case of Challapalli Sugars Ltd. [1975] 98 ITR 167 this court observed that interest paid on the borrowing utilised to bring into existence a fixed asset which has not gone into production, goes to add to the cost of installation of that asset. It was further observed that if the said borrowing was not “for the purpose of business” inasmuch as no business had come into existence, it must follow that it was made for the purpose of acquiring an asset which could be put to use for doing business, and hence interest paid on such borrowing would go to add to the cost of the assets so acquired.

In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. [1975] 98 ITR 167 (SC). It was a case where the company had not yet started production when it borrowed the amount in _ question. The more appropriate decision applicable to the present case would be the judgment. of this court in the case of India Cements Ltd. v. CIT [1966] 60 ITR 52 in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. In our view, section 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a code by itself Section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because all that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as· the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing and Printing Works [1958] 34 ITR 265 and the judgment of the Supreme Court in India Cements Lid. [1966] 60 ITR 52 have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Lid. [1975] 98 ITR 167 was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions.

Conclusions

For the above reasons, we hold that the Assessing Officer was not justified in making disallowance of Rs. 1,56,76,000 in respect of borrowings utilised for purchase of machines. Accordingly, the above question is answered in favour of the assessee and against the Department.”

21. The aforesaid decision has subsequently been followed in JCIT Vs. United Phosphorous Ltd., 299 ITR 9(SC), ACIT Vs. Arvind Palyeat Ltd., 299 ITR 12(SC) and CIT Vs. Ishwar Buvan Hotels Ltd., 215CTR 14(SC).

22. In the light of these decisions of the Apex Court, we hold that the Assessing Officer was not justified in making ‘disallowance of interest of Rs. 20,72,33,895/- for the AY 1997-98 and Rs. 14,64,58,864/- for the AY 1998-99.There being no infirmity in the findings of ld. CIT(A), we uphold his orders for these two years. Thus, ground no. 2 in the appeals for the AY 1997 -98 and 1998-99 dismissed.

23. Ground NO.3 in the appeals for the two assessment years relates to levy of interest under section 234C of the Act while computing income in terms of provisions of section 115JA of the Act. While determining income in terms of provisions of section 115JA of the Act, inter alia, the AO charged interest under section 234C of the Act. On appeal, it was contended before the ld. CIT(A) that only on finalization of books of account, the book profit can be determined and one cannot know as to whether there will be any liability to tax in terms of provisions of section 115JA of the Act. In such circumstances, there can not be any liability under section 234B or 234C of the Act. In this connection, the ld. AR relied upon the following decisions:

i)          CIT vs. Rubamain (P) Ltd. ITAT Ahmedabad Bench ‘B’ 104 TAXMAN 83 (HD).

ii)         Dy. CIT vs. Samir Diamond Mfg. Pvt. Ltd.- 59 TTJ 1 (Ahd-Tribunal)

iii)        Steel Authority of India Ltd. vs. Dy. CIT (1991) 38 ITD 193 (Del. Tribunal)

iv)        Dy. CIT vs. Punjab Fibers Ltd. – 105 TAXMAN 109 (Delhi).

v)         Kwality Biscuits Ltd. vs. CIT (Karnataka H.C.) 234 ITR 519.

24. In the light of the aforesaid submissions, the ld. CIT(A) held as under:

“8. 1 I have considered the above submission and the various decisions of the ITAT relied upon by the appellant. The appellant itself has shown book profit u/s 115JA in the return of income. However, for the reasons that the appellant was not aware as to whether there will be any liability u/s 115JA no interest liability arises for the payment of advance tax referable to such income. The ratio for the decision of the ITAT referred to above supports the appellant’s claim. Respectfully’ following the decision of ITA T Ahmedabad Bench, the Assessmg Officer is directed not to charge interest u/s. 234C when the income is computed u/s. 115JA.”

25. Aggrieved, Revenue is in appeal before us. The ld. DR argued that in view of the decision of the Hon’ble Supreme Court in the case of CIT v. Anjum M. H. Ghaswala And Others. 252 ITR 1 (SC), levy of interest under sections 234A, 234B and 234C is mandatory, especially in view of provisions of section 115JA(4) of the Act. As regards, plea of the taxpayer before the lower authorities that liability accrues only on completion of the financial year, the ld. DR relied upon the decision of Hon’ble Karnataka High Court in the case of Jindal Thermal Power Company Ltd. Vs. DCIT & Another, 286 ITR 182(Kar). Continuing, the ld. DR further relied upon the decision of Hon’ble Madras High Court in the case of CIT v. Geetha Ramakrishna Mills (P) Ltd, 288 ITR 489 (Mad), wherein, while distinguishing the decision of the Hon’ble Supreme Court in the case of CIT v. Kwality Biscuits Ltd. 284 ITR 434 (SC), the Hon’ble Madras High Court held as under:

“Further, as pointed out by the learned senior standing counsel for the Revenue, the Bombay High Court in CIT v. Kotak Mahindra Finance Ltd. [2004] 265 ITR 119 and the Punjab and Haryana High Court in CIT v. Upper India Steel Mfg. and Engg. Co. Ltd. [2005J 279 ITR 123 also considered the judgment of the Kamataka High Court in Kwality Biscuits Ltd v. CIT [2000] 243 ITR 519 and held that where there is non-payment or short payment due to the computation of income under section 115J of the Act,. interest can be levied under sections 234B and 234C of the Act and dissented from the view taken by the Karnataka High Court in Kwality Biscuits Ltd.’s case [2000] 243 ITR 519.

 Even though it is brought to our notice that the decision of the apex court in CIT v. Kwality Biscuits Ltd. [2006J 284 ITR 434, confirming the decision of the Kamataka High Court in Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519, we find that the apex court has only dismissed the appeal. It is a settled law that dismissal simpliciter would not be a declaration of the law and it would not be a binding precedent (vide: Saurashtra Oil Mills Association v. State of Gujarat [2002] 3 SCC 202; AIR 2002 SC 1130).

As we have already observed, the Division Benches of different High’ Courts, viz., the Madras High Court, the Bombay High Court and the Punjab and Haryana High Court considered the judgment of the Karnataka ‘ High Court in Kwality Biscuits Ltd. ‘so case [2000] 243 ITR 519 and dissented from the view taken by the Karnataka High Court. Therefore, agreeing with the view expressed by this court as also other High Courts, viz., the Gauhati High Court, the Madhya Pradesh High Court, the Bombay High Court and the Punjab and Haryana High Court referred to above, we have no option except to hold that even where the assessment was made under section 115J of the Act, interest could be levied.

That apart, in view of the introduction of sections 115JA and 115JB of the Act with effect from April 1, 1997 by the Finance (No.2) Act, 1996, the question whether a company which is liable to pay tax under either of the provisions -‘-should pay advance tax does not assume much importance as specific provisions have been made in the section providing that all provisions of the Act shall apply to the assessee being a company mentioned in the said section and therefore, section 115J of the Act is no more available for the assessee for delaying the payment of advance tax in view of the inseriion of sections 115JA and 115JB of the Act.

For all these reasons, the question referred to us is answered in favour of the Revenue and against the assessee and the appeal is allowed.”

26. On the other hand, the ld. AR on behalf of the taxpayer, at the outset, submitted a copy of the decision of the Hon’ble Gujarat High Court in the case of DCIT v. Associated Crown Closures Pvt. Limited in Tax Appeal No. 391 of 1999. In the context of levy of interest u/s 234B & 234C of the Act while determining income under the provisions of sec. 115J of the Act, wherein it was held

 “5. While allowing this issue .in. favour of the assessee, the Tribunal has followed its earlier decision rendered on 08.12.1997 in ITA No. 1862/Ahd/1993 in the case of Dy. CIT V/s. Dintex Dyechem (P) Limited, wherein the issue was adjudicated in favour of the assessee and against the revenue. This issue also arose before the Karnataka High Court in the case of Kwality Biscuits Limited V/s. Commissioner of Income- Tax, 243 ITR 519. An appeal filed against this judgement by the revenue before the Apex Court has been dismissed and the said decision is reported in (2006) 284 ITR 434. It is reported therein that from the decision of the Karnataka High Court to the effect, inter alia, that interest is not leviable under sections 234B and 234C of the Income-tax Act, 1961, in the case of an assessment of a company on the basis of book profits under section 115J, since the entire exercise of computing income under section 115J can only be done at the end of the financial year, and the provisions of sections 207, 208, 209 and 210 cannot be made applicable until and unless the accounts are audited and the balance-sheet prepared. The department preferred appeals to the Hon’ble Supreme Court and the Hon’ble Supreme Court dismissed the appeals.

6. Since the decision of the Karnataka High Court has been approved by the Hon’ble Supre’:1eCourt, we decide this question in favour of the assessee and against the revenue. We are of the view that the Tribunal has correctly decided the Issue and held that interest under section 2348 & 234C is not chargeable when Income is computed under section 115J of the Act.

7. This appeal is accordingly dismissed. “

26.1 Ld. AR further pointed out that the observations of Hon’ble Madras High Court in their order in the case of CIT v. Geetha Ramakrishna Mills (P) Ltd. 288 ITR 489 (Mad) that the judgment of the Hon’ble Supreme Court reported in (2006) 284 ITR 434 is not speaking and would not be binding precedent IS fallacious argument It was not mere dismissal of SLP, but this was a case of dismissal of civil appeal, wherein the decision of the Hon’ble Karnataka High Court has been affirmed by the Hon’ble Supreme Court. In this connection, the ld. AR while referring to doctrine of merger, relied upon the decisions of the Hon’ble Supreme Court in the case of V.M. Salgaocar and Bros. Pvt. Ltd. v. CIT [243 ITR 383 (SC)], Kunhayammed and Others v. State of Kerala and Another [245 ITR 360 (SC)], and the decision of the Hon’ble Gujarat High Court in the case of Nirma Industries vs. DCIT, 283 ITR 302′ (Guj.). Proceeding further, let: AR argued in the light of the decisions of the Hon’ble Supreme Court in the case of Addl. CIT v. Akkammaba Textile Limited [227 ITR 464 (SC)] and DCIT Vs. Gujrat Alakalies and Chemicals Ltd.,299 ITR 85 (SC) that once the civil appeal is dismissed after approving the reasons, the said decision is binding .He further submitted that the provisions of sections 115J and 115JA do not operate in different fields since liability for advance tax can be determined only after the close of the year, no interest under section 234B or 234C of the Act could be charged on the income determined in pursuance to provisions of sec, 115JA of the Act. While inviting our attention to the decision of Hon’ble Supreme Court in the case of Kunhayammed and Others v. State of Kerala and Another [245 ITR 360 (SC)], Id. AR referred to following para on Page 381 of the said decision,

“Once a special leave petition has been granted, the doors for the .’ ‘exercise of appellate jurisdiction of this court have been let open. The order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter would be an appellate order, and would attract the applicability of the doctrine of merger. It would not make a difference whether the order is one of reversal or of modification or of dismissal, affirming the order appealed against. It would also not make any difference if the order is a speaking or non-speaking one. Whenever this court has felt inclined to apply its mind to the merits of the order put in issue before it though it may be inclined to affirm the same, it is customary with this court to grant leave to appeal and thereafter dismiss the appeal itself (and not merely the petition for special leave) though at times the orders granting leave to appeal and dismissing the appeal are contained in the same order and at times the orders are quite brief Nevertheless, the order shows the exercise of appellate jurisdiction and therein the merits of the order impugned having been subjected to judicial scrutiny of this court. “

In the light of the said decision, the ld. AR argued that that the decision of the Hon’ble Supreme Court in CIT v. Kwality Biscuits Ltd. [2006] 284 ITR 434(SC), is binding and no interest could be charged u/s 234C of the Act.

26.2 Continuing, the ld. AR further argued that since determination of book profits in terms of provisions of section 115JA of the Act is fictional, interest on the said fictional income cannot be levied. On the other hand, the ld DR contended that in that case no interest can be levied on the income assessed in terms of provision of sections 68, 69 and 2(22)(e) of the Act and therefore, the logic of the ld. AR cannot be accepted.

26.3 The ld. AR further relied upon the decisions of the ITAT Delhi Bench ‘E’ in the case of Amtek Auto Ltd. v. Addl. CIT 112 TTJ 464 and ITAT Ahmedabad Bench in ITA Nos. 141 and 142/Ahd/2002 dated 03.08.06 and while inviting our attention to decision of the Hon’ble Madras Court in the case of CIT v. Geetha Ramakrishna Mills (P) Ltd. (supra), argued that the decision relied upon by the Hon’ble High Court in the case of Saurashtra Oil Mills Assn. vs. State of Gujarat (2002) 3 SCC 202: AIR 2002 SC 1130 was not a decision in civil appeal, but in  SLP. Though ld. AR sought to submit a copy of the decision of Hon’ble Gujarat High Court in the context of provisions of sec. 158BH of the Act, the provisions of the said section being similar to the provisions of sec. 115JA( 4) of the Act, copy of the said decision has not been made available until the writing of this order. After the hearing, a copy of decision of the ITAT Cochin Bench in the case of Escapade Resorts P Ltd. Vs. ACIT, 303 ITR(AT) 118(Cochin) was also placed on records on 19.8.2008.

27. We have heard the rival contentions and gone through the facts of the case. At the outset, we may have a look at the relevant provisions of see 115JA and provisions relating to payment of advance tax under the Act, which read as under:

“115JA Deemed income relating to certain companies.

(1)        Notwithstanding anything contained in any other provisions of this Act, where in the case of an assessee, being a company) the total income, as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but before 1st day of April, 2001 (hereafter in this section referred to as the relevant previous year) is less than thirty per cent. of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to thirty per cent of such book profit.

(2) Every assessee, being a company, shall, for the purposes of this section prepare its profit and loss account for the relevant previous year in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act, 1956 (1 of 1956):

Provided that while preparing profit and loss account, the depreciation shall be calculated on the same method and rates which have been adopted for calculating the depreciation for the purpose of preparing the profit and loss account laid before the company at its annual general meeting in accordance with the provisions of section 210 of the Companies Act, 1956 (1 of 1956):

 Provided further that where a company has adopted or adopts the financial year under the Companies Act, 1956 (1 of 1956) which is different from the previous year under the Act, the method and rates for calculation of depreciation shall correspond to the method and rates which have been adopted for calculating the depreciation for such financial year or part of such financial year falling within the relevant previous year.

Explanation.–For the purposes of this section, “book profit” means the net profit as shown in the profit and loss account for the relevant previous year prepared under sub-section (2), as increased by–

(a)        the amount of income-tax paid or payable, and the provision therefor,’ or

(b)        the amounts carried to any reserves by whatever name called; or

(c)        the amount or amounts set aside to provisions made for meeting liabilities, other than ascertained liabilities; or

(d)        the amount by way of provision for losses of subsidiary companies; or

(e)        the amount or amounts of dividends paid or proposed; or

(f)        the amount or amounts of expenditure relatable to any income to which any of the provisions of Chapter III applies;

if any amount referred to in clauses (a) to (f) is debited to the profit and loss account, and as reduced by,–

(i)         the amount withdrawn from any, reserves or provisions if any such amount is credited to the profit and loss account:

Provided that, where this section is applicable to an assessee in any previous year (including the relevant previous year), the amount withdrawn from reserves created or provisions made in a previous year relevant to the assessment year commencing on or after the 1st day of April, 1997 but ending before the 1st day of April, 2001 shall not be reduced from the book profit unless the book profit of such year has been increased by those reserves or provisions (out of which the said amount was withdrawn) under this Explanation; or

(ii)        the amount of income to which any of the provisions of Chapter III applies, if any such amount is credited to the profit and loss account; or

(iii)       the amount of loss brought forward or unabsorbed depreciation, whichever is less as per books of account.

Explanation.-For the purposes of this clause,-

(a)        the loss shall not include depreciation;

(b)        the provisions of this clause shall not apply if the amount of loss brought forward or unabsorbed depreciation, is nil; or

(iv)       the amount of profits derived by an industrial undertaking from the business of generation or generation and distribution of power; or

(v)        the amount of profits derived by an industrial undertaking located in an industrially backward State or district as referred to in sub-section (4) and sub-section (5) of section 80-18 , for the assessment years such industrial undertaking is eligible to claim a deduction of hundred per cent of the profits and gains under sub-section (4) or sub-section (5) of section 80-18 ; or

(vi)       the amount of profits derived by an industrial undertaking from the business of developing, maintaining and operating any infrastructure facility as define in the Explanation to subsection (4) of section 80-IA and subject to fulfilling the conditions laid down in that sub-section; or

(vii)      the amount of profits of sick industrial company for the assessment year commencing from the assessment year relevant to the previous year in which the said company has become a sick industrial company under sub-section (1) of section 17 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accummulated losses.

Explanation.–For the purposes of this clause, “net worth” shall have the meaning assigned to it in clause (ga) of sub-section (1) of section 3 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986); or

(viii)     the amount of profits eligible for deduction under section 80HHC, computed under clauses (a), (b) or (c) of subsection (3) or sub-section (3A) , as the case may be, of that section, and subject to the conditions specified in subsections (4) and (4A) ofthat sections;

(ix)       the amount of profits eligible for deduction under section 80HHE, computed under sub-section (3) of that section.

(3) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of sub-section (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 72 or section 73 or section 74 or sub-section (3) of section 74A.

(4)Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.

28. Relevant provisions relating to advance tax read as under:

207. Liability for payment of advance tax.

Tax shall be payable in advance during any financial year, in accordance with the provisions of sections 208 to 219 (both inclusive), in respect of the total income of the assessee which would be chargeable to tax for the assessment year immediately following that financial year, such income being hereafter in this Chapter referred to as “current income”.

208. Conditions of liability to pay advance tax.

Advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year, as computed in accordance with the provisions of this Chapter, is five thousand rupees or more.

209. Computation of advance tax.

(1)        The amount of advance tax payable by an assessee in the financial year shall, subject to the provisions of sub-sections (2) and (3), be computed as follows, namely: –

(a)        where the calculation is made by the assessee for the purposes of payment of advance tax under sub-section (1) or sub-section (2) or sub-section (5) or sub-section (6) of section 210, he shall first estimate his current income and income-tax thereon shall be calculated at the rates in force in the financial year,’

(b)        where the calculation is made by the Assessing Officer for the purpose of making an order under sub-section (3) of section 210, the total income of the latest previous year in respect of which the assessee has been assessed by way of regular assessment or the total income returned by the assessee in any return of income furnished by him for any subsequent previous year, whichever is higher, shall be taken and income-tax thereon shall be calculated at the rates in force in the financial year,’

(c)        where the calculation is made by the Assessing Officer for the purpose of making an amended order under sub- section (4) of section 210, the total income declared in the return furnished by the assessee for the later previous year, or, as the case may be, the total income in respect of which the regular assessment, referred to in that sub-section has been made, shall be taken and income-tax thereon shall be calculated at the rates in force in the financial year,’

(d)        the income-tax calculated under clause (a) or clause (b) or clause (c) shall, in each case, be reduced by the amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income (as computed before allowing any deductions admissible under this Act) which has been taken into account in computing the current income or, as the case may be, the total income aforesaid; and the amount of income-tax as so reduced shall be the advance tax payable.

29. As is evident from the aforesaid provisions of sec. 207 to 209 of the Act, every assessee has to pay advance tax on his ‘current income’ If liability for such tax exceeds Rs. 5,000.’Current income’ has to be determined in accordance with provisions of see 209 of the Act. The provisions of sec 209 (1) of the Act stipulate that the assessee shall estimate his current income for the relevant financial year. In terms of provisions of sec. 209(2) of the Act, such current income can be last assessed income or returned income, which ever is higher. In terms of these provisions, for determining liability on account of advance tax, first step is that current income has to be estimated. Sec. 209 deals with the computation of advance tax based on rates in force for the financial year, as contained in the Finance Act. The provisions of sec. 207 to 209 contemplate estimation of current income and on the basis of such estimation, the assessee is required to pay advance tax. There is nothing in these provisions that advance tax is not payable on the current income if the current income is computed under section 115JA or any other provision of the Act. That means, the expression “current income” on which advance tax is payable under the provisions of section 207 of, the Act, does not exclude the income computed under the provisions of section 115JA of the Act. In the event the taxpayer defaults in payment of advance tax on this current income, levy of interest u/s 2348 & 234C of the Act is mandatory. Such levy is automatic without any notice to the assessee as held by the Hon’ble Karnataka High Court in Union Home Products Ltd. v. Union of India [1995] 215 ITR 758. The Hon’ble High Court held:

“In the first place, the very purpose behind the introduction of sections 234A, 2348 and 234C is to take away from the authorities concerned the discretion of reducing or waiving the levy of interest which was earlier exercisable by them. In other words, the impugned provisions do not envisage the grant of any hearing or the grant of any relief to the assessees concerned in so far as the levy of interest is concerned. The levy is automatic the moment it is proved that the assessee has committed a default within the comprehension of anyone of the provisions in question. That being so it is difficult to accept the argument that the authorities must grant such a hearing and exercise the power to grant relief, the legislative intent to the contrary notwithstanding. The principles of natural justice upon which the petitioners rely do not supplant the law, they simply supplement it. These principles have no application where a statute either by express words or by necessary implication excludes the grant of a hearing to the assessee concerned. The provisions of sections 234A, 2348 and 234C are, in my opinion incapable of being interpreted to mean that the assesse-e concerned has a right of being heard against the levy which is otherwise automatic in nature. “

30. Hon’ble Punjab and Haryana High Court in Sant Lal v. Union of India [1996] 222 ITR 375, concurred with the views of the Hon’ble Karnataka High Court in the aforesaid case of Union Home Products Ltd. [1995] 215 ITR 758. The Hon’ble Bombay High Court in Umesh S. Bangera v. Union of India [2004] 268 ITR 405, also concurred with the decisions in the cases of Union Home Products Ltd. [1995] 215 ITR 758 (Karn) and Sant Lal [1996] 222 ITR 375 (P & H). In the light of these decisions it is evident that the provisions contained in sections 234A, 2348 and 234C of the Act are certainly not penal provisions but are compensatory in nature for breach of civil obligations. These provisions have been introduced to eliminate the subjective discretion of the tax authorities, ensuring uniform treatment to similarly situated persons. The provisions are mandatory and the levy thereunder is automatic, the moment it is proved that a default has been committed within the comprehension of anyone of the provisions in question. In CIT v. Anjum M.H. Ghaswala [2001] 252 ITR 1 (SC), the nature of these provisions was examined by the apex court and It was held that interest leviable under sections 234A, 2348 and 234C of the Act was mandatory in nature. At page 13, the apex court has observed as under:

“Sections 234A, 2348 and 234C in clear terms impose a mandate to collect interest at the rates stipulated therein. The expression ‘shall’ used in the said section cannot by any stretch of imagination be construed as ‘may’. There are sufficient indications in· the scheme’ of the Act to show that the expression ‘shall’ used in sections 234A, 2348 and 234C is used by the Legislature deliberately and it has not left any scope for interpreting the said expression as ‘may’. This is clear from the fact that prior to the Amendment brought about by the Finance Act, 1987, the Legislature in the corresponding section pertaining to imposition of interest used the expression ‘may’ thereby giving a discretion to the authorities concerned to either reduce or waive the interest. The change brought about by the Amending Act (Finance Act, 1987) is a clear indication of the fact that the intention of the Legislature was to make the collection of statutory interest mandatory. “

This view has further been confirmed by Hon’ble Apex Court in the case of CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449(SC) and in the case of CIT v. Sant Ram Mangat Ram Jewellers [2003] 264 ITR 5~SC).

31. The scope of sections 234B and 234C of the Act was considered by the Hon’ble Bombay High Court also in CIT v. Kotak Mahindra Finance Ltd [2004] 265 ITR 119, wherein it was held:

“It is well settled that interest under section 2348 is compensatory in character. It is not penal in nature. So also, interest under section 234C is compensatory in character. It is for this reason that section 2348 does not envisage grant of hearing in so far as levy of interest is concerned. The levy is automatic on it being proved that the assessee has committed a default as governed by section 2348. This reasoning also applies to levy of interest under section 234C. Therefore, the question of equity, rules of natural justice and justification for not making payment do not arise for determination in cases where interest is leviable under section 2348 and section 234C. “

32. From the foregoing discussion, it is clear that once a default within the meaning of sections 234B and 234C of the Act takes place, levy of such interest is automatic and there is no scope for applying the principles of equity or rules of natural justice. No hearing is required to be given to the assessee seeking any justification for not making the payment of advance tax.

33.  We, therefore, find no merit in the contention that the provisions of section 234C of the Act would not be attracted in cases where a company is assessed on the income computed under section 115JA of the Act. As already observed, the levy is automatic without any notice to the assessee.

34. The ld. AR on behalf of the taxpayer vehemently placed reliance on the decision of the Hon’ble Karnataka High Court in the case of Kwality Biscuits Ltd. [2000] 243 ITR 519, in the context of provisions of sec. 115J of the Act, which was later affirmed by the Hon’ble Supreme Court in CIT v. Kwality Biscuits Ltd. 284 ITR 434 (SC) . Hon’ble Supreme Court held in their decision that

“The appeals are dismissed”

35. Earlier, the Hon’ble Karnataka High Court in the aforesaid decision while accepting the claim of the assessee, observed:

U/s. 115J, where the total income of the company is less than 30% of its book profit, the total income of such assessee chargeable to tax for the relevant previous year shall be deemed to be an amount equal to 30% of such book profit. It is thus, by way of deeming fiction that this income has been considered to be deemed income. The profit and loss account has to be prepared in accordance with the provisions of Parts /I and 11/ of Schedule VI of the Companies Act. In the Explanation u/s. 115J(1 A), it is provided that for the purposes of this Section book profit means the net profit as shown in the Profit & Loss Account for the relevant previous year prepared under sub-section (1A) as increased by various amounts given in the Section Thus, for the purpose of assessing tax uls.115J, firstly, the profit as computed under the Income-tax Act has to be prepared, and thereafter, the book profits as contemplated by the provisions of S. 115J are to be determined and then the tax is to be levied. The liability of the assessee for payment of tax uls.115J arises if the total income as computed under the provision of the Act is less than 30% of its book profits. This exercise for determining the total income in accordance with the provisions of the Act and that of book profits can be only after the end of the relevant assessment year. It is only the deemed income for which the provisions of S. 115J have been incorporated. When a deeming fiction is brought under the statute, it is to be carried to its logical conclusion, but without creating further deeming fiction, so as to include other provisions of the Act, which are not specifically made applicable. Since the entire exercise of’ computing’ the income or that of book profits could be only at the end of the financial year, the provisions of S. 207, S. 208, S. 209 or S. 210 cannot be made applicable, until and unless the accounts are audited and the balance sheet is prepared, even the assessee may not know whether the provision of S. 115J would be applicable or not. The liability would be after the book profits are determined in accordance with the Companies Act. The words ‘for the purposes of this Section’ in the Explanation to S. 115J(1A) are relevant and cannot be construed to extend beyond the computation of liability of tax. Accordingly, we are of the view that the Income-tax Appellate Tribunal was not justified in directing to charge interest u/s. 234B and u/s.234C of the Income-tax Act. This question No.2 is therefore answered m favour of the assessee and against the Revenue. “

36. From the above, it is clear that two factors weighed with the Hon’ble High Court while granting relief to the assessee. Firstly, that the provisions of section 207 are not applicable to an income determined under section 115J and; secondly, that a hardship is caused to the assessee because the liability to pay tax on the book profits is determined only at the end of the financial year. The Hon’ble Court held that when a deeming fiction is brought under the statute, it is to be carried to its logical conclusion, but without creating further deeming fiction, so as to include other provisions of the Act, which are not specifically made applicable.

37. However, the Hon’ble Guwahati, Madras, Madhya Pradesh and Mumbai High Court which took a view that even in cases covered by section 115J of the Act, the assessees are liable to pay advance-tax. In the case of Assam Bengal Carriers Ltd. [1999] 239 ITR 862, the Hon’ble Gauhati High Court observed as under:

“Section 207 of the Act envisions that tax shall be payable in advance, during any financial year on current income in accordance with the scheme provided in sections 208 to 219 (both inclusive) in respect of the total income of the assessee that would be chargeable to tax for the assessment year immediately following that financial year. Section 215(5) of the Act spelled out what is the ‘assessed tax’, i.e., the tax determined on the basis of the regular assessment so far as such tax relates to income subject to advance tax. The evaluation of the current income as well as the determination of the assessed income accordingly, are to be made in terms of the statutory scheme comprising section 115J of the  Act. Under the setting of the statute, the levy of interest is inescapable. The scheme of the statute as referred to above, unerringly points out that an assessee under the circumstances is to pay advance tax.”

38. In the case of Kotak Mahindra Finance Ltd. [2004] 265 ITR 119 (Bom) similar contentions raised on behalf of the assessee were repelled by the Bombay High Court and levy of interest upheld in the following terms:

“In our opinion, merely because the curtain rises in the cases of companies falling under section 115J after March 31, is no ground for the assesseecompany not to pay interest under section 2348 and section 234C. Under section 115J, every assessee-company had to compute the total income under the Act and, thereafter, compare such total income with the book profits and if the total income computed under the Act was less than 30 per cent of the book profits then the total income shall be deemed to be 30 per cent. of the book profits. It is not in dispute that every such company has to prepare its profit and loss account under Schedule VI of the Companies Act after the end of the accounting year/previous year but, once it is found that the total income computed under the Act is less than 30 per cent of the book profits and consequent upon which there is non-payment or short payment of advance tax then, the provisions of sections 2348 and 234C are automatically attracted. “

39. The Bombay High Court concurred with the judgments of the Gauhati High Court in the case of Assam Bengal Carriers Ltd. [1999] 239 ITR 862 and that of the Madhya Pradesh High Court in the case of Itarsi Oils- & Flours(p.) Ltd. [2001] 250 ITR 686 and disagreed with the judgment of the Karnataka High Court in the case of Kwality Biscuits Ltd. [2000] 243 ITR 519. In the case of Itarsi Oils & Flours (P.) Ltd. [2001] 250 ITR 686, the Madhya Pradesh High Court has also held that there is no mention in sections 234B and 234C of the Act that in cases of determination of income under section 115J, the provisions of the same would not be attracted.

40. While upholding the levy of interest under section 2348 of the Act, the Hon’ble Madras High Court in the case of Holiday Travels P. Ltd [2003] 263 ITR 307 observed as under:

“It is true that for the applicability of section 115J of the Act, the starting point is the profit and loss account for the relevant previous year which should be drawn in accordance with the provisions of the Companies Act and to the net profit as shown in the profit and loss account, certain amounts which are found in the Explanation to section 115J are added to arrive at the book profit. There is no doubt that the entire exercise under section 115J of the Act is required to be made and can be made only on the basis of the profit arrived at on the basis of the profit and loss account. However, the question remains whether it is not possible for the assessee to estimate the profit of the current year. It is axiomatic that all assessee who are chargeable to Income-tax are required to estimate current income and may advance tax on the current income, The companies have all along been estimating current income prior to the insertion of section 115i of the Act and paying the advance tax on the current income. It is significant that the company assessee have been estimating the total income after providing for the deductions admissible under the Income tax Act. The shift now is that a company has to estimate its profit and pay advance tax on the basis of the estimate of the profits of the company. We are of the view, it cannot be’ regarded that it would be an impossible exercise or an insurmountable difficulty for the company assessees to estimate the profits of the company during the current year itself and there would be no difficulty at all for a company maintaining its account on the mercantile basis to estimate the profits during the current year itself and pay the advance tax on the estimated current profits. We find no logic in the view that if the company can estimate the current income after providing for all deductions that may be available under the Income-tax Act, it is not possible for the company to estimate the profits of the company of the current year.”

41. Similar view was taken by Hon’ble Madras High Court in CIT Vs. Geetha Ramakrishna Mills P. Ltd., 288 ITR 489(Mad), when it was held

 “As we have already observed, the Division Benches of different High’ Courts, viz., the Madras High Court, the Bombay High’ Court and the Punjab and Haryana High Court considered the judgment of the Karnataka’ High Court in Kwality Biscuits Ltd.’s case [2000] 243 ITR 519 and dissented from the view taken by the Karnataka High Court. Therefore, agreeing with the view expressed by this court as also other High Courts, viz., the Gauhati High Court, the Madhya Pradesh High Court, the Bombay High Court and the Punjab and Haryana High Court, referred to above, we have no option except to hold that even where the assessment was made under section 115J of the Act, interest could be levied.

That apart, in view of the introduction of sections 115JA and 115JB of the Act with effect from April 1, 1997 by the Finance (No.2) Act, 1996, the question whether a company which is liable to pay tax under either of the provisions should pay advance tax does not assume much importance as specific provisions have been made in the section providing that all provisions of the Act shall apply to the assessee being a company mentioned in the said section and therefore, section 115J of the Act is no more available for the assessee for delaying the payment of advance tax in view of the insertion of sections 115JA and 115JB of the Act.

For all these reasons, the question referred to us is answered in favour of the Revenue and against the assessee and the appeal is allowed.” .

 42. As is evident from the aforesaid decisions, in respect of levy of mandatory interest u/s 234B & 234C of the Act even in the context of provisions of sec. 115J of the Act, Hon’ble Guwahati, Madras, Madhya Pradesh and Bombay High Court have taken .a consistent view in favour of the Revenue. Only Hon’ble Karnataka and Gujrat High Court took a contrary view. On a perusal of decision of Hon’ble Karnataka High Court in Kwality Biscuits Ltd.’s case [2000] 243 ITR 519, Hon’ble High Court, inter alia, held that when a deeming fiction is brought under the statute, it is to be carried to its logical conclusion, but without creating further deeming fiction, so as to include other provisions of the Act which are not specifically made applicable.[highlighted in para 35 above]. In the case under consideration, the provisions of sec. 115JA specifically stipulate in sub-section (4) that all other provisions of the Act shall apply. Thus, even in terms of the aforesaid decision of the Hon’ble Karnataka High Court, interest u/s 2348 & 234C of the Act is leviable, since now the deeming provisions itself stipulate applicability of provisions of sec. 234B & 234C of the Act. With due respect, there is nothing to suggest in the decision in the case of Kwality Biscuits Ltd (supra) as to whether the Hon’ble High Court or Supreme Court considered that the interest under sec. 2348 & 234C of the Act is mandatory. Hon’ble Karnataka High Court itself in their earlier decision in the case of Union Home Products(supra) held that the levy of interest u/s 234B & 234C is automatic the moment it is proved that the assessee has committed a default within the comprehension of anyone of the provisions in question. Apparently, the said decision in the case of Union Home Products (supra) was not brought to their notice. As already mentioned earlier, Hon’ble Supreme Court in a number of decisions referred to above also held that levy of interest u/s 234B & 234C of the Act is· mandatory. Since, these aspects were neither considered by the Hon’ble Karnataka High Court nor Supreme Court while affirming the decision of Hon’ble Karnataka High Court or in a later decision by Hon’ble Gujrat High Court in the case of Associated Crown Closures Pvt. Ltd.(supra), rendered in the context of provisions of sec. 115J of the Act, we are of the opinion that the aforesaid decisions relied upon by the taxpayer in the, context of- provisions of Sec. 115J can not be straight away followed for deciding the issue in the present appeals in the context of provisions of sec. 115JA of the Act. The taxpayer also placed reliance on certain decisions of the ITAT, following the view taken in the case of Kwality Biscuits Ltd. With respect, we are not inclined to follow the view taken in these decisions, since these decisions did not analyse the issue in the context of aforesaid observations of Hon’ble Karnataka High Court in the case of Kwality Biscuits Ltd. and the provisions of sec. 115JA(4) of the Act. We are not inclined in favour of the view that provisions of sec.115JA (4) make no difference,

43. As regards decisions of Hon’ble Apex Court and jurisdictional High Court relied upon by the taxpayer in the context of doctrine of merger in civil appeals, we are duty bound to respect and follow these decisions in the contexts these were rendered. As already observed, these decisions can not be straight away applied without analyzing the facts and the context in which these were rendered, especially when Hon’ble Karnataka High Court in the case of Kwality Biscuits Ltd. (supra) themselves held that when a deeming fiction is brought under the statute, it is to be carried to its logical conclusion, but without creating further deeming fiction, so as to include other provisions of the Act, which are not specifically made applicable. In the context of levy of interest u/s 2348 & 234C of the Act in the case under consideration, provisions of subsection (4) of sec. 115JA specifically stipulate applicability of all other provisions of the Act. Thus, the said decision in a way supports the case of Revenue in the case under consideration. As is apparent, the aforesaid decision in the case of Kwality Biscuits Ltd. (supra) and Associated Crown Closures Pvt. Ltd (supra) were not rendered in the context of provisions of sec. 115JA of the Act nor the relevant decisions of Hon’ble Apex Court, holding levy of interest u/s 234A.234B & 234C of the Act mandatory, were brought to the notice of their Lordships. In this context, Hon’ble Supreme Court in the case of CIT Vs. Sun Engineering Works Pvt. Ltd., 198 ITR 257 observed:

“It is neither desirable nor permissible to pick out a word or a sentence from the judgment of this court, divorced from the context of the question under consideration and treat it to be the complete” law” declared by this court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before this court. A decision of this court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, the courts .must carefully try to ascertain the true principle laid down by the decision of this court and not to pick out words or sentences from the judgment, divorced from the context of the questions under consideration by this court, to support their reasonings. In Madhav Rao Jivaji Rao Scindia Bahadur v. Union of India [1971] 3 SCR 9; AIR 1971 SC 530, this court cautioned (at page 578 of AIR 1971 SC).”

Thus, reliance by the ld. AR on these decisions, which were rendered in a different context, not relevant to provisions of sec. 115JA of the Act, is misplaced.

44. As already mentioned, for the purpose of payment of advance tax, all assessees including companies, are required to make an estimate of their current income. Even before the introduction of the provisions of section 115J of the Act, companies had been estimating their total income after providing deductions admissible under the Act. In fact, all assessees who maintain books of account have to undertake this exercise for the purpose of payment of advance tax. If a profit and loss account can be drawn up on estimate basis for the purpose of the Income-tax Act, it is not understood as to why a similar profit and loss account on estimate basis under the Companies Act cannot be drawn up. The explanation of the companies that the profits under section 115JA of the Act can only be determined after the close of the year were to be accepted, then no assessee who maintains regular books of account would be liable to pay advance tax as in those cases also, income can only be determined after the close of the books of account at the end of the year. As already observed , the provisions of section 207 to 209 of the Act do not exclude the income determined under section 115JA of the Act from the purview of current income on which advance tax is payable. Similarly, there is no scope for considering the hardship of the assessee as the levy is automatic and does not require any opportunity to be given to the assessee. Section 4 of the Act envisages charge to tax the income at any rate or rates which may be prescribed by the Finance Act every year and section 207 deals with liability for payment of advance tax and section 209 deals with its computation based on the rates in force for the financial year, as are contained in the relevant Finance Act.

45. In our opinion, all other provisions of Act including the provisions relating to payment of advance tax are applicable even when the income is computed under section 115JA of the Act .Section 115JA has a specific provision in the shape of sub-section (4) which reads as under:

“Save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company, mentioned in this section.”

It is well settled that all words of a statute are to be given effect, and the legislature is presumed not to use words that are superfluous or redundant. It is also in consonance with the principle of harmoniously interpreting to make the statute workable and giving a meaning to all the provisions of the statute without making anyone of them redundant. If the interpretation as sought by Id. AR on behalf of the taxpayer is applied that would make provisions of sub-section(4) of section 115JA otiose and redundant. It is not permissible to adopt a construction which would render any expression superfluous or redundant. Therefore, the argument of the Id. AR that interest u/s 234C of the Act can not be levied on deemed book profits is not tenable since the deeming provisions of sec. 115JA specifically stipulate in sub-section (4) that all other provisions of the Act shall apply.

46. The view which we have taken finds support from the decision of Hon’ble Karnataka High Court in the case of Jindal Thermal Power Company Ltd. Vs. DCIT & Another, 286 ITR 182(Kar), wherein after considering their own decision in the case of Kwality Biscuits Ltd. v. CIT [2000] 243 ITR 519,Hon’ble High Court held in the context of levy of interest u/s 234B & 234C of the Act while computing income in terms of provisions of sec. 115JB of the Act that

“The Central Board of Direct Taxes Circular No. 13/2001 was – issued on 18 November 9, 2001, regarding the liability for payment of advance tax under the  new MAT provisions of section 115JB of the Act and it is abundantly made clear  in the said circular that the new provision of the section 115JB as introduced by  the Finance Act, 2000 is a self-contained code. Sub-section (1) lays down the manner in which income-tax payable is to be computed. Sub-section (2) provides for computation of “book profit”. Sub-section (5) specifies that save as otherwise provided in this section, all other provisions of this Act shall apply to every assessee, being a company mentioned in that section. In other words, except for  substitution of tax payable under the provision and the manner of computation of  book profits, all the provisions of the tax including the provision relating to charge, definitions, recoveries, payment assessment,. etc., would apply in respect of the provisions of this section and in view of the scheme of the Income-tax Act. Section 4 of the Act charges to tax the income at any rate or rates which may be prescribed by the Finance Act every year and section 207 deals with liability for payment of advance tax and section 209 deals with its computation based on the rates in force for the financial year, as are contained in the Finance Act and the first proviso to section 2(8) of the Finance Act, 2001, provides that the tax payable by way of advance tax in respect of income chargeable under section 115JB as introduced by the Finance Act, 2000, and consequently the provisions of sections 234B and 234C for interest on defaults in payment of advance tax and deferment of advance tax would also be applicable where the facts of the case warrant. “

47. Similarly Hon’ble Punjab & Haryana High Court in CIT Vs. Upper India Steel Manufacturing and Engg. Co, Ltd. ,279 ITR 123 (Punjab & Haryana ), in the context of levy of interest u/s 2348 & 234C of the Act while determining income in terms of provisions of sec. 115JA of the Act, held

“We fully concur with the view expressed in the aforesaid judgments. The Madras High Court has correctly pointed out that for the purpose of payment of advance tax, all assessees including companies, are required to make an estimate of their current income. Even before the introduction of the provisions of section 115J of the Act, companies had been estimating their total income after providing deductions admissible under the Act. In fact, all assessees who maintain books of account have to undertake this exercise for the purpose of payment of advance tax. If a profit and loss account can be drawn up on estimate basis for the purpose of the Income-tax Act, it is not understood as to why a similar profit and loss account on estimate basis under the Companies Act cannot be drawn up. It the explanation of the companies that the profits under section 115J of the Act can only be determined after the close of the year were to be accepted, then no assessee who maintains regular books of account would be liable to pay-advance tax as in those cases also, income can only be determined after the close of the books of account at the end of the year.

Before parting, we would like to observe that it cannot be said that even in a case of extreme hardship, the assessee is left with no remedy to seek waiver or reduction of interest leviable under section 234A, 234B or 234C of the Act. Section 119(2) of the Act confers powers upon the Board to grant relaxation of any of the provisions mentioned in the sub-section including sections 234A, 234B  and 234C of the Act. As a matter of fact, the Board in exercise of its power under  section 119(2)(a) has already issued a notification on May 23, 1996 which was subsequently partly modified on January 13, 1997, authorising the Chief Commissioner of Income-tax and Director General of Income-tax to reduce or waive  interest under these provisions under certain circumstances.

In view of the above, we are satisfied that the Tribunal was not right in holding that the assessee was not liable to pay interest under sections 234B and 234C of the Act. Accordingly, the appeals are allowed and the findings of the Tribunal are reversed. No costs,

48. In view of the foregoing, we hold that the total income computed under the provisions of sec. 115JA of the Act is liable to advance tax and in the event of default in relevant provisions of payment of advance tax, levy of interest u/s 234C of the Act is mandatory. In this view of the matter, the findings of ld. CIT(A) are vacated and the action of the AO in charging interest u/s 234C of the Act is confirmed.

49. Therefore, ground no. 3 in both the appeals is allowed.

50. Ground No. 4 in the appeal for the A Y 1998-99 relates to netting of interest for the purpose of deduction under section 80HHC of the Act while calculating book profits u/s 115JA of the Act. While working out the book profit in terms of provision of section 115JA of the Act, the AO noticed that the taxpayer did not reduce book profits by 90% of gross interest receipt of Rs. 22,94,13,876/- and the taxpayer adopted the book profit as a base for arriving the deduction on account of export profit as against the business profits computed under the Act. Inter alai, the taxpayer relied upon the CBDT circular 559 dated 04.05.1990. Accordingly, after considering the submissions of the taxpayer, the AO reduced 90% of the aforesaid gross amount of interest while working out book profits in terms of provision of section 115JA of the Act.

51 On appeal, the taxpayer contended before the ld. CIT(A) that the AO was not justified in reducing the book profits by the interest received of Rs.22.94 crores. Even if interest income has to be excluded, it is net interest and not the gross interest which should be deducted from the profit to be deducted under section 115JA of the Act. In this connection, the ld. AR relied upon the following decisions:

i)          Order of CIT (A)-V, Ahmedabad dated 4.9.1998 in the case of Jindal Worldwide Ltd. For A.Y. 1995-96 in appeal No. CIT(A)-V/DC.SR. 2/49/97-98 wherein following Supreme Court decisions have been relied upon:

a)         Distributors (Baroda) Pvt. Ltd. vs. Union of India (115 ITR 120).

b)         Keshavji Ravji & Co. vs. CIT (183 ITR 1).

ii)         ITAT Ahmedabad Bench decision in the case of Hindustan Fashion Ltd. in ITA No. 5305 & 5306/Ahd/1996 dated 06.10.1997.

 iii)        ITAT, Mumbai Bench decision in the case of Kantilal Chhotalal in Appeal No. 2045/Mum./967 decided on 30.4.1998.

iv)        ITAT Delhi Bench in the case of BHP Engineering Ltd. vs. DCIT. This is with reference to deduction u/s 801 inclusion of Misc. income, interest from’ Bank and’ Engineering service- fees.

52. In the light of the aforesaid submissions, the ld. CIT(A) held as under:

“7.3 I have considered the facts of the case and the submission made on behalf of the appellant. I have also gone through the working of the Assessing Officer. In my view while computing the deduction u/s. 80HHC only the net interest can be deducted from profit of business as per various decisions referred to by the A.R. In the present case the net interest being negative there is no question of excluding any part of the interest from the eligible profit. The Assessing Officer is accordingly directed to recompute export profit. “

53. Before us, the Id. AR relied upon the decision of the Hon’ble Delhi High Court in the case of CIT Vs. Shri Ram Honda Power Equipment, 289 ITR 475(Del.) and Lalsons Enterprises v. Deputy CIT [2004]89 ITO 25 (SB). On the other hand, the ld. DR relied upon the decision of CIT v. V. Chinapandi [2006] 282 ITR 389 (Mad) and Rani Paliwal v. CIT, 268 ITR 220 (P&H)

54. We have heard the rival contentions and gone through the facts of the case. As regards base for computing deduction u/s 80HHC of the Act while computing book profits in terms of provisions of sec. 115JA of the Act, the ITAT Special Bench, Mumbai in the case of DCIT Vs. Syncome Formulations (l) Ltd., 106 ITO 193, held

“66. The deduction under section 80HHC in a MA T scheme is from the taxable income, which is otherwise the adjusted book profit. If no deduction is available to an assessee, the gross total income itself is the taxable income of the assessee. MAT scheme does not provide for deductions. Therefore, the interpretation is that the adjusted book profit of a company itself is the gross total income of that assessee-company. The deduction under section 80HHC is in that way given out of gross total income in a case falling under MAT. This in turn means that section 80HHC should be computed on the adjusted book profit. Sections 115J, 115JA and 115JB come into operation, as the regular profits has been substituted by the book profit. Once the substitution is over, there is no way to go back to the normal computation process of statutory profit, which has already been overwhelmed by sections 115J, 115JA and 115JB. This reconciles the alleged incompatibility pointed out by the Revenue that the deduction available to an assessee under Chapter VI-A is subject to section 80AB.

Therefore, we find that the deduction under section 80HHC in a case of MAT assessment is to be worked out on the basis of the adjusted book profit and not on the basis of the profit computed under the regular provisions of law applicable to the computation of profit and gains of business or profession.”

55. Regarding netting off, the aforesaid decisions relied upon by ld. DR were considered in the case of Shri Ram Honda Power Equipment (supra) and were dissented from. The Hon’ble Delhi High Court, while approving the decision In case of Lalsons Enterprises (SB Delhi) concluded as under:

“(i)       In computing what the profits derived from exports for the purposes of section 80HHC(1) read with section 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports.

 (ii)        In the specific context of clause (baa) of the Explanation to section 80HHC, while determining the “profits of the business”, the Assessing Officer has to undertake a two-step exercise in the following sequence. He has to first “compute” the profits of the business under the head ~’Profits and gains of business or profession. ” In other words, he will have to compute business profits, in terms of the Act, by applying the provisions of sections 28 to 44 thereof.

(iii)       In arriving at profits of the business by the above method, the Assessing Officer will exclude all such incomes which partake of the character of “income from other sources” which in any event are treated under sections 56 and 57 of the Act and are therefore not to be reckoned for the purposes of section 80HHC. The Assessing Officer will apply the law as explained in the judgments of the Kerala High Court referred to above which have been affirmed by the Hon’ble Supreme Court.

(iv)       Where surplus funds are parked with the bank and interest is earned thereon it can only be categorised as income from other sources. This receipt merits separate treatment under section 56 of the Act which is outside the ring of profits and gains from business and profession. It goes entirely out of the reckoning for the purposes of section 80HHC.

(v)        Interest earned on fixed deposits for the purposes of availing of credit facilities from the bank, does not have an immediate nexus with the export business and therefore has to necessarily be treated as income from other sources and not business income.

(vi)       Once business income has been determined by applying accounting’ standards as well as the provisions contained in the Act, the assessee would be permitted to, in terms of section 37 of the Act) claim as deduction, expenditure laid out for the purposes of earning such business income.

(vii)      In the second stage, the Assessing Officer will deduct from the profits of the business computed under the head “Profits and gains of business or profession” the following sums in order to arrive at the ”profits of the business” for the purposes of section 80HHC(3);

(a)        90 per cent. of any sum referred to in clauses (iiia)) (iiib) and (iiic) of section 28 i.e.) export incentives;

(b)        90 per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and

(c)        profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.

(viii)     The word “interest” in clause (baa) of the Explanation connotes “net interest” and not “gross interest”. Therefore, in deducting such interest, the Assessing Officer will take into account the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the Income-tax Appellate Tribunal in Lalsons [2004] 89 ITD 25 (Delhi) to this effect is affirmed. In holding as above, we differ from the judgments of the Punjab and Haryana High. Court in. Rani Paliwal [2004] 268 ITR 220 and the Madras high Court in Chinnapandi [2006] 282 ITR 389 and affirm the ruling of the  Special Bench of the Income-tax Appellate Tribunal in Lalsons [2004] 89 ITD 25 (Delhi).

(ix)       Where as a result of the computation of profits and gains of business and profession the Assessing Officer treats .the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e., the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit) to draw an analogy from section 37, will require to be shown by the assessee for application of the netting principle.”

56. We are inclined to follow the conclusions of Hon’ble Delhi High Court in the aforesaid case. Since the relevant orders do not indicate as to the nature of interest nor as to whether the AO followed the steps formulated by Hon’ble Delhi High Court, we have no alternative but to restore the matter to the file of the AO with the directions to recompute the deduction u/s 80HHC of the Act in the light of aforesaid decision of Hon’ble Delhi High Court and of Special Bench in the case of Syncome Formulations (I) Ltd.(supra) for working out book profits u/s 115JA of the Act Subject to these directions, ground no. 4 of the appeal for the A Y 1998-99 is disposed of as indicated hereinbefore.

57. In the result, both the appeals are treated as partly allowed for statistical purposes.

Order pronounced in the court on 17th October, 2008

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