Direction given by the BIFR is binding on Assessing Officer

IN THE ITAT PUNE BENCH ‘A’

Kirloskar Oil Engines Ltd.

V/s.

Deputy Commissioner of Income-tax

IT APPEAL NOS. 176 & 181 (PN.) OF 2004

[ASSESSMENT YEAR 1999-2000]

JUNE 27, 2012

ORDER

R.K. Panda, Accountant Member

These are cross appeals and are directed against the order dated 24-11-2003 of the CIT(A)-III, Pune relating to Assessment Year 1999-2000. For the sake of convenience, these were heard together and are being disposed of by this common order.

ITA No. 181/PN/2004 (By Assessee) :

2. Ground of appeal No. 1 by the assessee reads as under :

1. Disallowance out of interest claimed – Rs. 68,58,000/-

The learned CIT(A) erred on facts and in circumstances of the case, in upholding disallowance of interest expenses of Rs. 68.58 lacs (out of total disallowance of Rs. 281.69 lacs made by the AO). He should have appreciated the facts fully in proper perspective, and ought to have deleted the disallowance in full.

2.1 After hearing both the sides, we find the AO disallowed an amount of Rs. 2,81,69,558/- being diversion of interest bearing funds to sister concerns without charging any interest. In Appeal the learned CIT(A) following his order for assessment year 1998-99 restricted such disallowance to Rs. 68.58 lakhs. We find that identical issue had come up before the Tribunal in assessee’s own case and the issue was restored to the file of the AO vide ITA No. 45/PN/2001 for assessment year 1997-98 and ITA No. 257/PN/2003 for assessment year 1998-99. We find the relevant portion of the order of the Tribunal in ITA No. 257/PN/2003 for assessment year 1998-99 reads as under :

“4. After carefully considering the rival submissions, we find that identical issue has been restored back to the file of the Assessing Officer in the assessee’s own case for the earlier assessment years as stated above. Following the precedent, we restore back to the file of the Assessing Officer for fresh adjudication and to ascertain as to whether the amount advanced to the various companies closely connected to the assessee were made out of the borrowed funds or otherwise and then to decide the issue as per provisions of law after providing assessee a reasonable opportunity of being heard. This Ground is decided as above”.

2.2 Respectfully following the order of the Tribunal in assessee’s own case and in absence of any contrary material brought to our notice we restore the issue back to the file of the AO with the direction to decide the issue afresh in the light of the directions of the Tribunal for earlier years and in accordance with law. This ground raised by the assessee is accordingly allowed for statistical purposes.

3. Ground of appeal No. 2 by the assessee reads as under :

2. Disallowance out of Commission expenses – Rs. 6,59,563/-

The learned CIT(A) erred in confirming disallowance made by the assessing officer of commission genuinely and actually paid to various dealers by merely relying on surmises, guesswork and conjecture. He failed to appreciate that the appellant had produced full proof of payments and details of expenses.

3.1 After hearing both the sides, we find the AO following his order for assessment year 1997-98 disallowed Commission of Rs. 6,59,563/- being 10% of the commission claimed at Rs. 65,95,636/-. In appeal, the learned CITA) upheld the disallowance made by the AO. We find that identical issue had come up before the Tribunal in assessee’s own case vide ITA No. 257/PN/2003 order dated 30-08-2011 for the assessment year 1998-99. We find the Tribunal at Para 7 of the order has discussed the issued and allowed the claim of the assessee by holding as under:

“7. After considering the submissions of both the parties, we find that this issue stands decided in favour of the assessee and against the Revenue by the decision of our co-ordinate Bench in the assessee’s own case for the assessment year 1995-96. Following the precedent, therefore, we set aside the orders of the lower authorities on this aspect and direct the Assessing Officer to delete the disallowance made on account of commission. This Ground of appeal of the assessee is allowed”.

3.2 Respectfully following the decision of the Tribunal in assessee’s own case and in absence of any contrary material brought to our notice, the ground raised by the assessee is allowed.

4. Ground of appeal No. 3 by the assessee reads as under :

3. Disallowance out of vehicle maintenance expenses – Rs. 1,52,654/-

The learned CIT(A) erred in disallowing 2% of the vehicle expenses and proportionate depreciation on motor car u/s. 38(2) on account of non-business expenditure and personal use of company’s vehicles by officers of the company. He failed to appreciate that as per the service conditions applicable to senior officers, company allows them to use company’s vehicles for office work and any incidental personal use is treated as perquisites in the hands of officers as per Income-tax Rules, 1962.

4.1 After hearing both the sides, we find the AO disallowed an amount of Rs. 1,52,654/- being 2% of the vehicle maintenance expenses claimed at Rs. 52,95,627/-. He also disallowed 2% of the depreciation on vehicles at Rs. 46,742/. The above additions were upheld by the CIT(A). We find that identical issue had come up before the Tribunal in assessee’s own case for assessment year 1998-99 and the Tribunal vide ITA No. 257/2003 order dated 30-08-2011 has allowed the claim of the assessee by holding as under :

“10. After considering the submissions of both the parties, we find that this issue stands decided in favour of the assessee and against the Revenue by the decision of our co-ordinate Bench in the assessee’s own case for the assessment year 1995-96 and 1997-98. We further find that the Hon’ble Bombay High Court in the case of CIT v. Kirloskar Ferrous Industries Ltd., Pune in Income-tax Appeal No. 622 of 2010 dated 04.07.2011 has made a reference to the above decision of the Tribunal in the assessee’s case for assessment years 1995-96 and 1996-97 (supra) upholding the view that in a case of a limited company expenditure incurred on telephone, vehicle etc., which are certified by the auditors of the Company as also the auditors under the Income-tax Act cannot be disallowed. Following the precedent, therefore, we set aside the orders of the lower authorities on this aspect and direct the Assessing Officer to delete the disallowance made out of vehicle maintenance expenses. This Ground of appeal of the assessee is allowed”.

4.2 Respectfully following the order of the Tribunal in assessee’s own case and in absence of any contrary material brought to our notice this ground raised by the assessee is allowed.

5. Ground of appeal No.4 by the assessee reads as under :

4. Disallowance out of telephone expenses – Rs. 77,297/-

The learned CIT(A) erred in disallowing Rs. 77,297/- out of expenditure incurred on residential telephones as non-business expenditure. He failed to appreciate procedure followed by the company for reimbursement of telephone expenses and consider the submissions made in these regards. He ought to have followed executive instructions issued by the Central Board of Direct Taxes regarding use of telephones by employees.

5.1 After hearing both the sides, we find the AO disallowed an amount of Rs. 77,297/- being 10% of the residential telephone expenses claimed by the assessee at Rs. 7,72,974/-. In appeal the learned CIT(A) upheld the disallowance. We find that identical issue had come before the Tribunal in assessee’s own case for assessment year 1997-98 and the Tribunal vide ITA No. 257/2003 order dated 30-08-2011 has allowed the claim of the assessee by directing the AO to delete the addition by holding as under :

“11. The next Ground relates to disallowance out of telephone expenses of Rs. 50,568/-. Following the reasoning given in para 10 above, we set aside the order of the Commissioner of Income-tax (Appeals) on this aspect and direct the Assessing Officer to delete the disallowance made out of telephone expenses of Rs. 50,568/-“.

5.2 Respectfully following the order of the Tribunal in assessee’s own case and in absence of any contrary material brought to our notice this ground raised by the assessee is allowed.

6. Ground of appeal No.5 by the assessee reads as under :

5. Deduction u/s. 28 – Rs. 1,83,74,000/-

The learned CIT(A) erred on facts and in law in disallowing assessee’s claim u/s. 28 of the Income Tax Act, 1961 as business loss due to recoverability of advances of Rs. 1,83,74,000/-. He failed to fully appreciate the facts. He further erred in holding that the assessee has failed to establish that the loss relates to the current year.

6.1 Learned counsel for the assessee at the time of hearing did not press this ground for which the learned D.R. has no objection. Accordingly, this ground by the assessee is dismissed as not pressed.

7. Ground of appeal No. 6 by the assessee reads as under :

6. Disallowance out of Miscellaneous expenses- Rs. 2,00,000/-

The learned CIT(A) erred on facts and in law in arbitrarily disallowing Rs. 2,00,000/- out of miscellaneous expenses as non-business expenditure. He failed to appreciate remarks by the auditors as well as the Board’s circulars regarding company assessments.

7.1 After hearing both the sides, we find the AO disallowed an amount of Rs. 2 lakhs on adhoc basis out of Rs. 79,37,337/- claimed by the assessee under the head “Miscellaneous Expenses”. In appeal the learned CIT(A) upheld the addition. We find that identical issue had come up before the Tribunal in assessee’s own case for assessment year 1998-99 and the Tribunal vide ITA No. 257/2003 order dated 30-08-2011 allowed the claim of the assessee by holding as under :

“15. After hearing both the parties, we are of the considered opinion that no such ad hoc disallowance is called in the assessee’s case, which is a limited company and the expenditure incurred are certified by the auditors of the Company as also the auditors under the Income-tax Act, following the parity of reasoning laid down by the Hon’ble High Court in the case of Kirloskar Ferrous Industries Ltd. (supra). In this view of the matter, we set aside the orders of the lower authorities on this aspect and the Assessing Officer is directed to delete the ad hoc disallowance of Rs. 2,00,000/- made on this count. This Ground of appeal is accordingly allowed.

7.2 Respectfully following the order of the Tribunal in assessee’s own case and in absence of any contrary material brought to our notice this ground raised by the assessee is allowed.

8. Ground of appeal No.7 by the assessee reads as under :

7. Disallowance out of aircraft expenses – Rs. 5,79,640/-

The learned CIT(A) erred in holding that the aircraft were used for non-business purposes when it was averred before him that the aircraft are jointly owned and other companies and there is no element of personal use at all. He further erred in disallowing proportionate depreciation on aircraft under section 38(2).

8.1 At the time of hearing learned counsel for the assessee submitted that the above ground is decided against the assessee vide ITA Nos. 1039/PN/2000 for assessment year 1995-96, ITA No. 45/PN/2001 for assessment year 1997-98 and ITA No. 257/PN/2003 for assessment year 1998-99. In view of the above submission by the learned counsel for the assessee and in view of the consistent decision of the Tribunal in assessee’s own case this ground raised by the assessee is dismissed.

9. Ground of appeal No. 8 by the assessee reads as under :

8. Leasehold land written off – Rs. 44,416/-

The learned CIT(A) erred in disallowing Rs. 44,416/- on account of leasehold land written off. He further erred in equating the write off with the depreciation. He failed to appreciate the nature of payment. In any case he ought to have followed the judgment in CIT v. HMT Ltd. (203 ITR 820).

9.1 At the time of hearing the learned counsel for the assessee did not press this ground for which learned D.R. has no objection. Accordingly this ground raised by the assessee is dismissed.

9.2 In the result, the appeal filed by the assessee is partly allowed for statistical purposes.

ITA No. 176/2004 (By Revenue) :

10. Ground of appeal No. 1 by the revenue reads as under :

1. The learned CIT(A) erred in directing to grant reliefs as per the BIFR’s order when in the fact the department was not made party to the BIFR’s order.

10.1 Facts of the case, in brief, are that during the year there is a merger of M/s. Shivaji Works Ltd. into M/s. Kirloskar Oil Engines Ltd. During the course of assessment proceedings the assessee submitted BIFR order stating that the concessions mentioned therein, i.e. BIFR order should be allowed in the hands of M/s. Kirloskar Oil Engines Ltd. The AO referred to the order u/s. 119(2)(a) of the IT Act, 1961 dated 16-02-2000 issued by CBDT which reads as under :

“The CBDT in exercise of the powers u/s. 119(2)(a) of the IT Act, 1961 vide order dated 22-04-1991 (F. No. 225/91/99/ITA II) had directed that effect to all orders passed by Board of Industrial & Financial Reconstruction (BIFR) in an approved scheme of reconstruction/rehabilitation be given during the course of an assessment after granting all the reliefs under the IT Act, 1961 including those reliefs where the BIFR had recommended consideration of such reliefs under the IT Act by the Central Government.

In supersession of this, the CBDT now directs that wherever the order of the BIFR in an approved scheme of reconstruction/rehabilitation

(a)  directs that the reliefs be allowed under the I.T. Act, 1961 the effect to such orders be given immediately.

(b)  recommends that the reliefs under the I.T. Act, 1961 may be considered by the Central Government, the relief be allowed to the assessee if during course of the proceedings before the BIFR, the views of the I. Tax Department have been considered by the BIFR. However, if the order of BIFR has been passed without making I. Tax Department a party or without giving a chance to the I. Tax Department to submit its views the effect of BIFR recommendations is to be given only after such recommendations of the BIFR are considered by the CBDT.”

10.2 On examination of BIFR order dated 19th December 1999 the AO noted that the Income Tax Department was not a party and its views were not considered by BIFR before finalization of its proceeding. In view of the CBDT instructions (i.e., the order of the CBDT dated 16-02-2000) that in the event of Income Tax Department not being given chance of being heard, the assessing authority is constrained not to give effect to the recommendation of the BIFR before the same are considered by CBDT. There is nothing on record to show that the view of the IT Department were considered before finalization of BIFR’s proceedings. Therefore the AO did not take into account the BIFR’s order while finalizing the assessment.

10.3 Before the CIT(A) it was submitted that the AO has chosen only that portion of the order of CBDT u/s. 119(2) (a) which was convenient to her. It was submitted that the order of the Board has to be read fully and not in parts. It was submitted that wherever the BIFR directed that the reliefs should be allowed or even when the BIFR recommended that the reliefs were to be considered by the Central Government and where the department’s view had been considered by the BIFR before making such recommendations the reliefs were to be allowed to the assessee by the Assessing Officer. It was only when the BIFR recommended the relief without taking the views of the I.T. Department that it was to be considered by the CBDT before any relief was allowed by the Assessing Officer. However, whether the BIFR directed the relief has to be granted, the effect to the order of the BIFR was to be given immediately irrespective of the facts where the Income Tax Department was made or was not made a party and whether the view of the department were considered by the BIFR or not. It was submitted that in the case of the assessee in view of the sanctioned scheme of BIFR it was the directions of the BIFR in the said scheme and not merely recommendations. Such reliefs in equivocal terms were directions directing the department to grant reliefs, for instance ;

1.  On Page No. 18 of the sanctioned scheme it is stated that “On amalgamation KOEL shall be allowed to carry forward and set off losses and unabsorbed depreciation allowance of SWL under section 72A of the Income Tax Act, 1961”.

2.  On Page No. 19 “Amount advanced by KOEL to SWL, till the effective amalgamation takes place, shall be allowed as business loss u/s. 29 of the Income Tax Act, 1961 to KOEL in the year in which amalgamation takes effect”.

10.4 It was submitted that the order of BIFR used the words ‘shall be allowed’ while deciding on the reliefs. It was submitted that when ‘shall’ was used by the statute, the context in which it was used becomes an obligation or a direction. It would be an altogether case if the words ‘may’ had been used, then the context may have become a discretion or a recommendation. It was accordingly submitted that the Assessing Officer had committed a grave error in law by not following the CBDT order, which was binding upon her.

10.5 The assessee emphasised the provisions of the scheme sanctioned by the BIFR u/s. 18(4) r.w.s. 19(3) of the Sick Industrial Companies Act (SICA) which had an overriding effect on any other provisions of any other Act except the provisions of FERA 1973 and Urban Land (Ceiling & Regulation) Act, 1976. Reference was made to section 32(1) of SICA. It was also contended that the proceedings before BIFR were judicial proceedings and the BIFR was deemed to be Civil Court u/s. 14 of SICA. Once the Court passed any order, the effect of such order had to be given unless the order was modified by the same Court or any other higher judicial authority by due process of law, i.e. to stay till the order of the BIFR was modified, the existing present BIFR order was final and binding upon the tax authorities.

10.6 It was also pointed out that the Department had approached the BIFR for granting an opportunity to the Department to present its views on the tax concessions. But the BIFR had not carried out any modification in its originally sanctioned order nor it had set aside its original order and the matter was pending with the BIFR. Thus the originally sanctioned order stood as it was at present which was binding on the department. It was submitted that in fact the Assessing Officer ought to have first given effect to the BIFR order which was subsisting and valid on the date of the assessment order and then await modification of that order by BIFR, if any. The Assessing Officer was not justified in raising a demand ignoring the valid and effective order of the BIFR simply on the ground that Department was not allegedly heard by the BIFR.

11. Based on the arguments advanced by the assessee, the learned CIT(A) allowed the claim of the assessee by holding as under :

“The submissions have been considered and the provisions of section 32 of SICA as well as the order of the CBDT u/s. 19(2)(a) dated 16-02-2000 have been perused.

In my opinion, the whole purpose of SICA is to revive a sick industrial unit. As pointed out by the Hon’ble Finance Minister, while introducing sec. 72A and reported also in 218 ITR 140 (Page 147), the sickness in industry is a matter of grave national concern in as much as closure of any manufacturing unit entails social costs in terms of loss of production and unemployment as also waste of valuable capital assets. The preamble to SICA also states that the SICA was introduced in the public interest to make special provisions for detection of sick units and expeditious enforcement of the measures determined by an expert Board (i.e. BIFR) to revive such sick unit. I therefore feel that the issue is to decided in this perspective.

Section 32 of the SICA states that the provisions of any scheme made under the SICA shall have effect notwithstanding anything inconsistent therewith contained in any other law except FERA and Urban Land Ceiling Act. To my mind the plain interpretation of Section 32 is that when a scheme is sanctioned under SICA, the effect to all the provisions of the scheme will have an overriding effect even if such provisions are inconsistent with any other law. Thus if BIFR sanctions a revival scheme, the effect to such scheme which includes measures to revive a sick unit is to be given even if they are not in line with the provisions of any other applicable laws. Thus section 32 is in line with the whole purpose of the SICA for ensuring speedy revival of a sick unit.

As regards tax concessions, the CBDT has come out with an order u/s. 119(2)(a), which, incidentally recognizes the overriding powers of the BIFR granted to it u/s. 32 of the SICA. The order states that when the BIFR directs that the reliefs are to be granted, the effect of such reliefs is to be given immediately notwithstanding the fact whether the department was made a party to the hearing before BIFR. It is only when BIFR recommends that the reliefs are to be considered by the department then the issue will arise whether the department was made a party before the BIFR. Also if such recommendation is made by the BIFR after considering the department’s views, then still the effect is required to be given. It is only if the recommendation is made by the BIFR without hearing the department, then the effect is to be given after they are duly considered by the CBDT.

Thus the main issue to be decided in the present case is whether the reliefs granted by the BIFR are ‘directions’ or ‘recommendations’. The subject reliefs are mentioned on Page 18 of the scheme wherein the BIFR invariably uses the words ‘shall be allowed’. It is noteworthy that the BIFR has not used the words ‘to consider’ as is the common practice of BIFR when it intends to ‘recommend’ the reliefs. When the words ‘shall be allowed’ are used, these are nothing but ‘directions’, to my mind, and therefore the effect to the reliefs is to be granted immediately keeping in view the provisions of sec. 32 of the SICA and the order of the CBDT u/s. 119(2)(a) dated 16-02-2000.

As regards the issue of ‘date of amalgamation’ raised by the Assessing Officer during appellate proceedings, I find that the issue was not at all addressed by the Assessing Officer at the time of assessment and is sought to be raised for the first time in appellate proceedings. Even otherwise it is observed that SWL was declared as ‘Sick’ by the BIFR in March 1998. The sanctioned scheme by BIFR expressly states the date of amalgamation as 1.4.98 and that cannot be changed unless there is a motive of tax evasion, as pointed out by the Hon’ble Supreme Court in Marshall & Son’s case (223 ITR 809). In the case of appellant as the merger was effected to revive a sick company, that too under a scheme prepared by an Operating Agency and sanctioned by BIFR which is constituted for this very purpose, it would be wrong to ascribe any motive of tax evasion or tax planning without any basis. The issue is to be viewed from a proper perspective that a sick company is being revived. The healthy company takes over the burden of a sick company which involves financial investments by it and therefore the tax concessions are required. In my opinion it would be an irony to view this as a tax planning or tax evasion. It is for this reason that the facts of the present case cannot be equated with that of Finolex case on which the Assessing Officer has placed reliance. In that case, firstly no outside parties were involved. In this case, the Operating Agency in the first place explored all the avenues to revive a sick unit. It first tried to revive SWL on a stand-alone basis. When this was not found practical, it invited bids to take over the sick company and when no concrete proposals came forth, then only the amalgamation with KOEL was mooted. In Finolex case, the merger was under the Companies Act, where no such outside parties were involved in formulating the merger proposal. In that case, also the proposal was initiated much later to be effective from an earlier date. In the instant case, SWL was declared as a sick company by BIFR in March 1998, and the steps to revive it were initiated immediately, and therefore there was nothing wrong to take 1.4.98 as the effective date. The BIFR has also stated the effective date as 1.4.98, and since there are no motives of tax planning which can be ascribed to the revival scheme, the effective date, once determined by the BIFR, will have to be followed. The issue of tax evasion has been raised by the Assessing Officer without examining the issue at the original state. The query regarding date of amalgamation was made by the Assessing Officer and which was duly explained by the appellant at the assessment stage which was apparently found to be acceptable as no further enquiry was made by the Assessing Officer on this account. The Assessing Officer has also not critically analysed facts of the case in FCL (supra) and that of the appellant. In the case of FCL in the appellate order for A.Y. 1998-99 I had agreed with the Assessing Officer that the determination of the appointed date was a colourable device and the Assessing Officer’s order was confirmed in regard to the finding that the appointed date was arbitrarily fixed in order to bypass the provisions of section 72A of the I.T. Act, 1961. The facts in the case of the appellant are different from the case of the FCL. There is nothing to show that the appointed date was arbitrarily fixed or back dated and considering the facts of the case being amalgamation of a sick company under SICA and the scheme of amalgamation as passed by BIFR could be a colourable device. Holding such a view would be ridiculous and farfetched. Since as already held that in the scheme of the BIFR the reliefs are not recommendations but directions the effect to the order of the BIFR has to be given even if the department has not been made a party to the scheme. In the instant case the department has not been made a party before the BIFR. The Appellant’s Representative has also pointed out that the department had asked for the review the order of the BIFR and the BIFR had passed another order on 19-08-2003 after considering the adjournment request of the department and the bench had discharged M/s. SWL out of purview of BIFR since the amalgamation scheme sanctioned by the Board on 03-03-2000 was substantially implemented as a result of which M/s. SEL could become techno-economically, viable on long term basis. M/s. SWL was discharged from purview of BIFR with immediate effect. Thus, the present sanctioned order of the BIFR subsists as on the date and cannot be ignored until it is modified or set aside by BIFR or the higher authorities. The decision relied by the appellant in M/s. J.K. Corporation 68 ITD 240 is squarely applicable to the facts of the case of the appellant and the scheme if at all because of not following of certain procedure by the BIFR such as not making the department as a party could only make the scheme voidable and not void. In view of section 32(1) of SICA the schemes made under SICA shall be overriding effect on all other laws except the provisions of FERA and ULC Act. Unless the order of the BIFR is modified or set aside by a competent Court or a Forum it shall remain to be binding. Therefore, the issue in the present case has to be decided on the basis of the original sanctioned order. The original order of SICA unless modified/amended or rectified cannot be overlooked at the appellate stage. In that view of the matter, I find that the contentions of the Appellant’s Representative are legally tenable and therefore, the Assessing Officer is directed to grant the reliefs which are mentioned in the order of the BIFR dated 16.12.1999. However, if and when the original order dated 16.12.1999 is modified by the BIFR or Higher Authorities or by Competent Forum it would be open to the Assessing Officer to modify her order accordingly giving effect to this appellate order. The ground of the appellant is allowed subject to the observation that if the order of the BIFR is modified/set aside subsequently the order giving effect to this order shall be modified accordingly by the Assessing Officer.

12.1 Aggrieved with such order of the CIT(A) the revenue is in appeal before us.

13. The learned DR submitted that the department was not a party to the BIFR proceedings. He submitted that after sanctioned scheme was passed without the department being made a party another order was passed on 19-08-2003. Referring to Page 166 of the Paper Book the learned DR drew attention of the Bench to the draft modification to the sanctioned scheme vide order dated 13-09-2001 wherein it has been mentioned that the proposed modifications are circulated to the Income Tax Department giving 60 days time to them for conveying their consent or other views u/s. 19(2) of the SICA. Referring to Page 103 of the Paper Book the learned DR drew attention of the Bench to the circular issued by CBDT vide File No. 225/91/99/ITA-II-dated 16-02-2000 (reported in 159 CTR statute 148). Referring to Page 127 of the Paper Book the learned DR drew the attention of the Bench to provision of sub section (2) of section 19 of the Sick Industrial Companies (Special provisions) Act, 1985 according to which the scheme as per sub section (1) of section 19 shall be circulated to every person required by scheme to provide financial assistance for his consent within a period of 60 days from the date of such circulation. Referring to Page 191 of the Paper Book the learned DR submitted that as per the direction of the BIFR on amalgamation Kirloskar Oil Engines Ltd. shall be allowed to carry forward and set off of losses and unabsorbed depreciation allowance of SWL u/s. 72A of the Income Tax Act, 1961. He submitted that Question of consent comes only when the draft order is circulated to the department. Referring to Page 3 of the Assessment order he submitted that the AO has mentioned that the BIFR order dated 16-12-1999 shows that Income Tax Department was not made a party and its views were not considered by the BIFR before finalising of its proceedings. Referring to the CBDT circular No. 683 dated 08-06-1994 he submitted that unless the draft order is served on the DG it is not binding on the department. Referring to the decision of the Hon’ble Delhi High Court in the case of Government of India (Department of Revenue) v. Appellate Authority for Industrial and Financial Reconstructions ( a copy of which is placed in the Paper Book) the learned DR drew the attention of the Bench to Page 18 of the order and submitted that the nodal agency deputed to coordinate the aspect of grant of financial concessions or financial assistance to be given to Sick Industrial Company would be Director General of Income Tax (Administration). He submitted that the order of the learned CIT(A) being not based on proper appreciation of facts, should be set-aside and that of the order of the AO be restored.

14. The learned counsel for the assessee on the other hand heavily relied on the order of the CIT(A) and drew the attention of the Bench to the chronology of events which are as under :

Sr.	Date	Event
1	08-12-1999	Original order passed by BIFR
2	25-09-2000	IT Dept. Objects to BIFR order for non-opportunity
3	13-09-2001	BIFR issues notice for Draft Modification (to be replied within 60 days)
4	12-11-2001	KOEL objects to proposed draft modification
5	23-04-2002	KOEL makes further submissions
6	18-08-2003	IT Dept. Files adjournment letter
7	19-08-2003	BIFR passes final order

He submitted that the SICA is a Special Act for rehabilitation of Sick Companies. It appoints the operating agency who is the lead bank. Referring to Page 125 of the Paper Book the learned counsel for the assessee drew the attention of the Bench to section 18 of SICA which speaks of preparation and sanction of scheme. Referring to Page 130 of the Paper Book the learned counsel for the assessee drew the attention of the Bench to section 25 of SICA according to which any person aggrieved by an order of the BIFR made under this Act may, within 45 days from the date on which a copy of the order is issued to him, prefer an appeal to the appellate authority. Referring to section 32(1) of the SICA, the learned counsel for the assessee submitted that the provisions of this act and of any rules or schemes made there under shall have effect not withstanding with anything inconsistent there with contained in any law except the provisions of FERA, 1973 and the Urban Land (Ceiling and Regulation) Act, 1976. Referring to summary record of the proceedings of the hearing held on 19-08-2003, (copy of which is placed at Paper Book Pages 139 to 142) the learned counsel for the assessee drew the attention of the Bench to the same and submitted that unless the department files an appeal the order of the BIFR becomes final.

14.1 Referring to Page 104 of the Paper Book the learned counsel for the assessee drew attention of the Bench to the decision of Calcutta Bench of the Tribunal in the case of J.K. Corpn. Ltd. v. Asstt. CIT [1999] 68 ITD 240 and submitted that declaration made by the BIFR is declaration in accordance with law. No other declaration by Central Government is needed and assessee company was entitled to carry forward the losses, unabsorbed depreciation and unabsorbed investment allowances of the amalgamating company where the scheme of amalgamation has been made under the provisions of the SICA 1985 and declaration has been made by BIFR u/s. 72(A)(1) of the Income Tax Act. Referring to the certificate u/s. 72A(2)(ii) of the Income Tax Act, 1961 by BIFR dated 25-06-2003 (Paper Book Page 150) the learned counsel for the assessee submitted that the BIFR in the certificate has stated that for the assessment year 2001-02 for which set off of accumulated losses/unabsorbed depreciation is claimed by the amalgamated company M/s. Kirloskar Oil Engines Ltd. the business of the amalgamating company M/s. SWL was carried on by the former company. It has further been certified that adequate steps have been taken by the amalgamated company M/s. Kirloskar Oil Engines Ltd. for the rehabilitation or revival of the business of the amalgamating company M/s. SWL. Referring to Para 18 of the order of the CIT(A) the learned counsel for the assessee drew the attention of the Bench to the last few lines and submitted that the learned CIT(A) had taken the correct decision. He submitted that if the reliefs are denied today the department has to provide the assessee a solution as to how to undo the amalgamation. He submitted that denying the benefit now will be unjust and unfair and against the principles of natural justice as held by the Hon’ble Calcutta High Court in the case of CIT v. J.K. Corpn. [2011] 331 ITR 303/[2012] 20 taxmann.com 527. Referring to the said decision he submitted that the Hon’ble Court in the said decision has held that BIFR having sanctioned a scheme for rehabilitation of a sick industrial undertaking, by way of amalgamation/merger thereof with the assessee company by order dated 25-01-1994 giving retrospective operation to the scheme w.e.f. 01-02-1992, assessee company cannot be denied the benefit of carry forward and set off of losses of the amalgamating company for the period from 01-02-1992 to 31-03-1992 on the ground that the amalgamation could not be made operative retrospectively or that the consent of the Central Government was not taken. So far as the various decisions relied on by the learned DR he submitted that those decisions are distinguishable and not applicable to the facts of the present case. In any case since no appeal was filed by the revenue against the order of the BIFR, he submitted that the same is binding on the department. He submitted that since all the concessions given by the BIFR are as per law, therefore the order of the learned CIT(A) should be upheld.

15. The learned DR in his rejoinder submitted that in the case of J.K. Corporation there was no question of service of order. It was concerned with implementation. So far as draft modification to the sanctioned scheme dated 13-09-2001 is concerned, (a copy of which is placed at Paper Book 166 and 167) the learned DR submitted that the BIFR has not given any opportunity to the department and they have only called for objections, if any, to the proposed modification. He submitted that the certificate obtained regarding carry forward of business losses, depreciation loss was not before the AO. He submitted that only the sanctioned draft was available before AO. He accordingly submitted that the order of the AO should be upheld.

16. We have considered the rival arguments made by both the sides, perused the orders of the AO and the CIT(A) and the Paper Book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the grievance of the revenue in the impugned ground is that since the department was not made a party to the BIFR proceedings, therefore no effect can be given to the same. From the various details furnished by the assessee we find the Income Tax Department was not made a party when the original order was passed by the BIFR on 8-12-1999 for which the Income Tax Department objected to the BIFR for not giving any opportunity on 25-09-2000. On the basis of such objection the BIFR issued draft modification order dated 13-09-2001 calling for objections, if any, from the Income Tax Department. After various objections made by Kirloskar Oil Engines Ltd. to the proposed draft modification and on the basis of further submissions the BIFR fixed the case for hearing on 19-08-2003. Although the department filed petition seeking adjournment on 18-08-2003 the BIFR did not consider the same and passed the final order on 19-08-2003. Under these circumstances it has to be decided as to whether the AO is justified in not accepting the order of the BIFR.

17. Order u/s. 119(2)(a) of the Income Tax Act 1961 dated 16-02-2000 issued by CBDT has already been reproduced at Para 10.1 of the impugned order according to which wherever the order of the BIFR in an approved scheme of reconstruction/rehabilitation directs that the reliefs be allowed under the Income Tax Act the effect to such orders be given immediately. It is only when BIFR recommends that the relief under Income Tax Act, 1961 may be considered by the Central Government and the Department is not a party or no chance is given to the department to support its views, then the effect of BIFR recommendations is to be given only after such recommendations are considered by the CBDT. An examination of the BIFR order shows that the same is directory and not recommendatory in nature. Further after the original order was passed by the BIFR on 16-12-1999 the department has objected for not giving any opportunity for which the BIFR issued notice for draft modification. Despite such opportunity given the department sought adjournment which was not accepted by the BIFR and passed the final order on 19-08-2003. Therefore, it cannot be said that the department was not given any opportunity.

18. We find the provisions of section 32 of the SICA reads as under :

“32. Effect of the Act on other laws

(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1972 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act.

(2) Where there has been under any scheme under this Act an amalgamation of a sick industrial company with another company, the provisions of section 72A of the Income-tax Act, 1961 (43 of 1991), shall, subject to the modifications that the power of the Central Government under that section may be exercised by the Board without any recommendation by the specified authority referred to in that section, apply in relation to such amalgamation as they apply in relation to the amalgamation of a company owning an industrial undertaking with another company”.

In view of the above, direction given by the BIFR is binding on the Assessing Officer. The Sick Industrial Companies (Special Provisions) Act, 1985 is a Central Act having legal sanctity. It has got overriding effect on any other provisions of any other Act except the provisions of FERA, 1973 and Urban Land (Ceiling Act & Regulation) Act, 1976. Therefore, the directions of the BIFR have to be honoured and failure of such directions will bring legal disharmony. Further, we find merit in the submission of the learned counsel for the assessee that if the reliefs are denied now the department has to provide a solution to the assessee as how to undo the amalgamation. In this view of the matter and in view of the detailed order passed by the learned CIT(A) directing to grant relief as per BIFR order we find no infirmity in the same. Accordingly, the same is upheld and the ground raised by the revenue is dismissed.

19. Ground No. 2 by the revenue reads as under :

2. The learned CIT(A) erred in directing to limit the disallowance out of interest to Rs. 68.58 lakhs as against Rs. 2,61,69,558/- disallowed by the Assessing Officer.

19.1 Facts of the case, in brief, are that the Assessing Officer observed that as per schedule 11 to the printed accounts, the loans and advances given by the assessee company were to the tune of Rs. 97,60,95,000/-. The Assessing Officer asked for the details of each loan and advance and the purpose for which it had been given. The assessee filed the details of loans & advances. According to the Assessing Officer the assessee gave only a note on advances given to M/s. Mysore Kirloskar Limited and merely stated that all the advances were given out of owned funds. The Assessing Officer was of the opinion that interest on borrowed funds to the extent not utilized for business purposes was to be disallowed u/s. 36(1)(iii) and for this purpose she adopted the method of applying the ratio of own funds to the interest bearing funds, i.e., borrowed capital deployed to the advances given for non-business purposes. The Assessing Officer worked out the ratio as under :

	Opening Bal.	Closing Bal.	Average Bal. (Rs. in 000)
Own	34,75,733	29,19,462	31,97,597
Borrowed	30,82,651	25,38,656	28,10,653
Ratio			1:0.88

19.2 The Assessing Officer further treated Rs. 19,35,47,589 out of total advances of Rs. 52,70,29,000 as business advances and balance Rs. 33,34,81,411 as non-business advances. The Assessing Officer also treated Rs. 8,54,257 (being 10% of Rs. 85,42,573 other advances) as non business advances making it together to Rs. 33,43,35,668. Applying the ratio of 1:0.88, the Assessing Officer worked out advances given for non-business purposes out of borrowed funds at Rs. 15,64,97,546 and disallowed interest @18% on these which comes to Rs. 2,81,69,558.

19.3 Before CIT(A) it was submitted that in the first place the advances had gone down to Rs. 52.70 Crs. as on 31-03-99 from Rs. 128.11 Crs. as on 31-03-98. It was submitted that there were no fresh borrowings during the year and in fact the borrowings had gone down from Rs. 308.26 Crs. in the earlier years to Rs. 253.86 Crs. in the current year. It was submitted that for disallowance u/s. 36(1)(iii), what was important was the purpose for which the loans were taken. It was submitted that when no fresh borrowings were made, it was natural that the source of advances of Rs. 52.70 Crs. was as established in earlier years and it was as per department’s findings only that the borrowings of Rs. 3.07 crs. only were used for non-business purposes.

19.4 In appeal, the Ld. CIT(A) following his order for A.Y. 1998-99 restricted such disallowance to 68.58 lakhs. Aggrieved with such order of the CIT(A) the assessee is in appeal before us.

20. After hearing both the sides we find this ground is co-related to ground of appeal No. 1 by the assessee in which the assessee has challenged the order of the CIT(A) for sustaining a part of the interest. We have already decided the issue & the ground raised by the assessee have been restored to the file of the AO for fresh adjudication in the light of the order of the Tribunal for A.Y. 1998-99. Following the same ratio we restore this issue to the file of the AO for fresh adjudication. The AO shall decide the issue afresh and as per law after giving due opportunity of being heard to the assessee. We hold & direct accordingly. This ground by the revenue is accordingly allowed for statistical purposes.

21. Ground of appeal No. 3 by revenue reads as under :

3. The learned CIT(A) erred in directing to restrict the expenses incurred for earning dividend income to Rs. 50,000/- without appreciating the fact that assessee has not maintained any separate account in order to earn such tax free income.

21.1 After hearing both the sides we find the AO disallowed an amount of Rs. 20,53,048/- being 5% of the dividend income of Rs. 4,10,60,955/-. In appeal the learned CIT(A) restricted such disallowance to Rs. 50,000/- on the ground that the adhoc disallowance @5% of the dividend income is too high. It is the submission of the learned counsel for the assessee that there is no interest expenditure for earning the tax free dividend/income. Further it is also the submission of the learned counsel for the assessee that only 5 dividend cheques totalling to Rs. 4,10,60,759/- were received and therefore disallowance of 5% of the total income on estimate basis is unjustified. According to the learned counsel for the assessee since the learned CIT(A) has restricted the disallowance to Rs. 50,000/- on account of employee cost, infrastructure cost, etc. for earning the dividend income, therefore, the same being reasonable should be upheld. We find merit in the above submission of the learned counsel for the assessee. There is no finding given by the AO that assessee has incurred any expenditure on account of interest on borrowed capital for earning the tax free dividend income. Further the submission of the learned counsel for the assessee that the assessee has received only 5 dividend cheques amounting to Rs. 4.11 Crores could not be controverted by the learned DR. We, therefore, are of the opinion that disallowance of 5% of the dividend income under the facts and circumstances of the case is unjustified. In our opinion the order of the learned CIT(A) restricting the disallowance to Rs. 50,000/- on adhoc basis appears to be reasonable. We, therefore, find no infirmity in the order of the learned CIT(A) and the same is therefore upheld. Ground raised by the revenue is therefore dismissed.

22. In the result, the appeals are partly allowed for statistical purposes.