M/S NIRMA LIMITED, Ahmedabad V. THE ASSTT. CIT, CEN. CIRCLE-1(1), Ahmedabad

ITA 175/AHD/2003

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 5973 (ITAT-AHMEDABAD)
• Duration Of Justice: 14 year(s) 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 30-03-2017
• Assessment Year: 1999-2000
• Appeal Filed On: 10-01-2003
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAGDISH
• Assessee Lawyers: S N SOPARKAR
• Keywords: Business expenditure; Cost of acquisition; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 260A; 80G; 28

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL, B BENCH, AHMEDABAD BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ITA NO.175/AHD/2003 &' ( )*(/ ASSTT. YEAR: 1999-2000 NIRMA LIMITED NIRMA HOUSE ASHRAM ROAD AHMEDABAD. VS. ACIT, CENT.CIR.1(1) AHMEDABAD. ( APPLICANT ) ( RESPONENT ) ASSESSEE BY : SHRI S.N. SOPARKAR, AR REVENUE BY : SHRI JAGDISH, CIT-DR / DATE OF HEARING : 30/03/2017 / DATE OF PRONOUNCEMENT: 04/05/2017 78/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: PRESENT APPEAL IS DIRECTED AT THE INSTANCE OF THE A SSESSEE AGAINST ORDER OF THE LD.CIT(A)-I DATED 8.11.2002 PASSED FOR THE A SSTT.YEAR 1999-2000. 2. IT IS PERTINENT TO MENTION THAT THIS APPEAL ALON G WITH APPEAL OF THE REVENUE I.E. ITA NO.523/AHD/2003 AND CO OF THE ASSE SSEE BEARING NO.9/AHD/2003 WERE DECIDED BY THE TRIBUNAL VIDE ITS ORDER DATED 31.7.2006. THE ASSESSEE HAD FILED MISC. APPLICATION BEARING NO .37/AHD/2009 AGAINST THE ORDER OF THE TRIBUNAL. THE ASSESSEE HAS ALREADY FI LED A TAX APPEAL BEARING NO.1220 OF 2006 BEFORE THE HONBLE HIGH COURT WHICH STANDS ADMITTED. IT APPEARS THAT THE TRIBUNAL WAS OF THE OPINION THAT S INCE APPEAL HAS BEEN ADMITTED BY THE HONBLE HIGH COURT, THEREFORE, IT W AS NOT EMPOWERED TO ITA. NO.175/AHD/2003 2 ADJUDICATE THE MA. MA CONTINUED TO BE REMAINED PEN DING. THE ASSESSEE HAD FILED A CIVIL APPLICATION (OJ) NO.657 OF 2015 IN TA X APPEAL NO.1220 OF 2006. THE HONBLE HIGH COURT HAS DECIDED THIS APPL ICATION VIDE ORDER DATED 12.10.2015 AND DIRECTED THE TRIBUNAL TO DISPOSE OF MA FILED BY THE ASSESSEE WITHOUT GETTING INFLUENCED BY PENDENCY OF APPEAL BE FORE THE HONBLE HIGH COURT. ON THE DIRECTION OF THE HONBLE HIGH COURT, TRIBUNAL HEARD THE MA ON 7.10.2016 AND DECIDED THE MA VIDE ORDER DATED 28.10 .2016. THE TRIBUNAL FOUND ITS ORDER SUFFERING FROM APPARENT ERROR QUA ADJUDICATION OF GROUND NO.7 TAKEN BY THE ASSESSEE IN THE PRESENT APPEAL. THERE FORE, THE TRIBUNAL HAS RECALLED THE ORDER TO A LIMITED EXTENT I.E. THE FIN DINGS ON GROUND NO.7 WERE RECALLED AND THAT GROUND HAS BEEN RESTORED FOR ADJU DICATION AFRESH. IN THIS WAY, WE ARE CALLED UPON TO RE-ADJUDICATE THE GROUND NO.7 TAKEN BY THE ASSESSEE IN THIS APPEAL. THE GROUND NO.7 READS AS UNDER: VII. DISALLOWANCE OF INTEREST EXPENDITURE OF RS .36,23,43,684 IN SODA ASH DIVISION AND RS.6,01,29,222 IN LAB FRONT E ND DIVISION OR ALTERNATIVELY DISALLOWANCE OF PREMIUM ON SECURED PR EMIUM NOTES (SPNS) AMOUNTING TO RS.4,504 LACS. THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN : I) NOT DEALING APPROPRIATELY WITH THE SUBMI SSION OF THE ASSESSEE THAT NO ENOUGH OPPORTUNITY HAS BEEN PROVIDED BY T HE ASSESSING OFFICER FOR HEARING AND FOR GIVING SUBMISSIONS AND IN II) HOLDING AND CONFIRMING THE ACTION OF ASSESSIN G OFFICER FOR DISALLOWANCE OF THE AFORESAID EXPENDITURE, III) HOLDING THAT THE EXPENDITURE WAS NOT FOR THE PURPOSES OF SAME BUSINESS OR EXTENSION OF BUSINESS, (IV) HOLDING MAT THE EXPENDITURE WAS OF A CAPITAL NATURE, AND MAT EVEN IF IT IS HELD TO BE OF A REVENUE NATURE, THE EXPENDITURE IN QUESTION IS WHOLLY ALLOWABLE IN THE YEAR OF COMPLETION OF THE PROJECT, (V) HOLDING THAT THE EXPENDITURE DID NOT ACCR UE DURING THE YEAR, (VI) HOLDING THAT THERE WAS NO NECESSITY OF ISS UE OF SPNS FOR THIS PROJECT AND MAT ISSUE OF SPNS WAS NOT FOR THE GENUI NE BUSINESS NEEDS, ITA. NO.175/AHD/2003 3 (VII) HOLDING THAT IT WAS FOR THE PURPOSES OF BE NEFITING THE PROMOTERS AND DIRECTORS AND NOT FOR THE PURPOSES OF BUSINESS OF THE APPELLANT COMPANY AND THEREFORE, SHAM AND COLORABLE TRANSACTI ON, (VIII) IN REFERRING TO FACTS WHICH THE CIT(A) CON SIDERED AGAINST THE ASSESSEE FOR THE FIRST TIME WITHOUT GIVING OPPORTUN ITY OF HEARING TO THE ASSESSEE IN RESPECT OF THOSE FACTS. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY. IT IS DOING BUSINESS OF MANUFACTURING DET ERGENT POWDER, DETERGENT CAKE AND TOILET SOAPS, SHAMPOO ETC. WITH BRAND NAME OF NIRMA. IT HAS FILED ITS RETURN OF INCOME FOR THE ASSTT.YEAR 1999-2000 O N 31.12.1999 DECLARING TOTAL INCOME AT RS.64,29,37,960/- AFTER CLAIMING DE DUCTION UNDER SECTION 80I, 80(IA), 80HHC, 80HH AND 80G OF THE INCOME TAX ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY ASSESSMENT AND N OTICE UNDER SECTION 143(2) DATED 4.12.2000 WAS ISSUED AND SERVED UPON THE ASSE SSEE. ON SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE AO THAT THE ASSESSEE H AS CLAIMED SODA ASH PROJECT EXPENDITURE OF RS.41,59,05,200/- WHICH INCLUDES INT EREST EXPENSES OF RS.36,23,43,684/- AS A REVENUE EXPENDITURE WHILE IN THE BOOKS OF ACCOUNTS, THE SAME IS TREATED AS CAPITAL EXPENDITURE. SIMILA RLY FOR LAB FRONT END PROJECT, IT HAS CLAIMED EXPENDITURE OF RS.6,41,87, 190/- WHICH INCLUDES INTEREST EXPENDITURE OF RS.6,01,29,222/-. THESE EX PENDITURES HAVE BEEN CAPITALIZED IN THE BOOKS OF ACCOUNTS, BUT THEY HAVE BEEN CLAIMED AS REVENUE EXPENDITURE IN THE RETURN OF INCOME. AT THIS STAGE , IT IS PERTINENT TO MENTION THAT ONLY DISALLOWANCE OF INTEREST EXPENDITURE IS B EING DISPUTED IN THIS GROUND. THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE AR E RELATED TO SECURED PROMISSORY NOTE (SPN). PUBLIC ISSUE WAS OPENED BY THE ASSESSEE ON 24.8.1996 WHICH WAS CLOSED ON 18.9.1996. BY WAY OF THIS, THE ASSESSEE HAS PROCURED FUNDS UNDER NCD/SPN. SCHEME HAS BEEN HIGH LIGHTED IN THE PROSPECTUS AND IT IS PERTINENT TO NOTE MAJOR TERMS AND CONDITIONS OF THE INSTRUMENT WHICH READS AS UNDER: ITA. NO.175/AHD/2003 4 PURSUANT TO THE RESOLUTIONS PASSED AT THE MEETING O F THE BOARD OF DIRECTORS (HEREINAFTER REFERRED TO AS THE BOARD) OF NIRMA LIMITED (HEREINAFTER REFERRED TO AS ' THE COMPANY') AND AT THE ANNUAL GENERAL MEETING BOTH HELD ON NOVEMBER 30. 1995 IT HAS BEEN DECIDED TO MAKE THE FOLLOWING OFFER TO THE EQUITY SHAREHOLDERS OF T HE COMPANY : ISSUE OF 81,41,750 - 17% SECURED NON CONVERTIBLE DE BENTURES (NCDS) AND/OR SECURED PREMIUM NOTES (SPNS) OF THE FACE VAL UE OF RS.200 EACH FOR BASH AT PAR AGGREGATING RS. 162.33,50,000 ALONG WITH FOUR DETACHABLE WARRANTS ATTACHED, TO EACH NCD/SPN TO TH E SHAREHOLDERS OF THE COMPANY ON RIGHTS BASIS IN THE RATIO OF C NE NCD / SPN FOR EVERY TWO EQUITY SHARES HELD BY THEM ON AUGUST 9, 1996 (' RECORD DATE') . XXXX PRESENT ISSUE: 81,41,750 NCD S AND/OR SPNS OF RS.200/- EACH FOR CASH AT PAR (WITH OUR DETACHABLE WARRANTS ATTACHED TO EACH OF THE NCD/SPN) TO THE SHAREHOLDERS OF THE COMPANY ON RIGHTS BASIS IN THE RATIO OF ONE NCD/SPN FOR EVERY TWO EQUITY SHARES HELD BY THEM ON AUGUST 9, 1996 (RECORD DATE) 3256.70 16283.50 XXXX 3. THE PRESENT HOLDING OF THE PROMOTERS, RELATIVES AND ASSOCIATES IN THE PAID- UP EQUITY SHARE CAPITAL OF THE COMPANY IS 75 %. THE PROMOTERS OF THE COMPANY HOLD 63.08% OF THE EQUITY CAPITAL OF NCL. UPON THE PROPOSED AMALGAMATI ON - NCL THE EMERGING SHAREHOLDING PATTERN OF THE COMPANY WOULD BE AS UNDER: CATEGORY - PRESENT SHAREHOLDING PATTERN (%) / SHAREHOLDING PATTERN AFTER AMALGAMATION WITH NCL (%) PROMOTERS PUBLIC . 75 25 71.60 28.40 4. THE COMPANY HAS ISSUED THE FOLLOWING CAPITAL TO ITS PROMOTERS ITA. NO.175/AHD/2003 5 DATE OF ALLOTMENT NO. OF SHARES ALLOTTED TYPE OF SHARES DATE WHEN SHARES BECAME FULLY PAID FEBRUARY 27, 1980 SEPTEMBER 30, 1983 DECEMBER 15, 1983 JUNE 2, 1987 OCTOBER 15, 1988 MARCH 30, 1989 20 70 10 2,12,500 80,00,000 40,00,000 EQUITY EQUITY EQUITY EQUITY EQUITY EQUITY FEBRUARY 27, 1980 SEPTEMBER 30, 1983 DECEMBER 15, 1983 JUNE 2, 1987 OCTOBER 15, 1988 MARCH 30. 1989 TOTAL 1,22,12,600 PRINICIPAL TERMS OF THE NCDS/SPNS. THE NCDS/SPNS NOW BEING OFFERED ARE SUBJECT TO THE PROVISIONS OF THE ACT AND THE TERMS AND CONDITIONS OF THIS LETTER OF OFFER, THE , CAF, THE MEMORANDUM AND ARTICLES OF ASSOCIATION OF THE COMPA NY AND THE LETTERS OF ALLOTMENT/NCD / SPN CERTIFICATES TO BE I SSUED. NCDS/SPNS SHALL ALSO BE SUBJECT TO SUCH OTHER TERMS AND CONDITIONS AS MAY BE CONTAINED IN THE TRUSTEE AGREEMENT, AND OTHE R RELEVANT (DOCUMENTS). EACH SHAREHOLDER WILL HAVE A CHOICE TO APPLY FOR NCDS OR SPNS OR A COMBINATION OF BOTH. SUBJECT AS AFORES AID THE PRINCIPAL TERMS OF THE NCDS / SPNS ARE AS UNDER: TERMS OF THE INSTRUMENTS INSTRUMENT NCD OR SPN WITH WARRANTS ATTACHED (THE SHAREHOLDER WIL L HAVE AN OPTION TO CHOOSE EITHER NCD AND/OR SPN AS PER THEIR REQUIREMENT.) FACE VALUE (RS.) RS.200 INTEREST (P.A.) ON NCD 17% PAYABLE HALF YEARLY TERMS OF PAYMENT ON APPLICATION ON ALLOTMENT ON FIRST & FINAL CALL (WITHIN A PERIOD OF 12 MONTHS FROM THE DATE OF ISSUE) RS. 50 RS. 50 RS. 100 REDEMPTION RS. ITA. NO.175/AHD/2003 6 NCD AT THE END OF 4TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 5TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 6TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 7TH YEAR FROM DATE OF ALLOTMENT 50 50 50 50 PRINCIPAL (RS.) PREMIU M (RS.) SPN AT THE END OF 4TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 5TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 6TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 7TH YEAR FROM DALE OF ALLOTMENT 50 60 50 60 50 60 50 70 WARRANTS EACH NCD / SPN WILL CARRY 4 SEPERATE DETACHABLE TRADEABLE WARRANTS EACH WARRANT IS ELIGIBLE FOR ALLOTMENT OF ONE EQUITY SHARE IN THE RESPECTIVE YEAR AS FOLLOWS: AT THE END OF 4TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 5TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 6TH YEAR FROM DATE OF ALLOTMENT AT THE END OF 7TH YEAR FROM DATE OF ALLOTMENT 1ST WARRANT LLND WARRANT ILLRD WARRANT IVTH WARRANT EXERCISE PRICE (RS.) RS. 50/- PER SHARE (RS. 10 + 40) OPTION I OPTION II BY PAYING RS. SO/- EACH IN CASH ON EXERCISE OF SUCH W ARRANTS IN RESPECTIVE YEARS. BY SURRENDERING THAT PORTION OF THE PRINCIPAL OF THE NCD / SPN WHICH IS MATURING FOR PAYMENT AT THE END OF 4TH, 5 TH , 6TH AND 7TH YEARS RESPECTIVELY SO AS TO EXERCISE THE OP TION ATTACHED TO THE RESPECTIVE WARRANTS IN LIEU OF PAYMENT BY CASH/CHEQ UE/DRAFT 4. IN THIS WAY, THE ASSESSEE-COMPANY HAS CLAIMED IN TEREST EXPENDITURE OF RS.4,224 LAKHS I.E. RS.36,23,43,684/- IN SODA-ASH D IVISION AND RS.6,01,29,222/- IN LAB FRONT END DIVISION. ON SCR UTINY OF THE ACCOUNTS, THE LD.AO FORMED AN OPINION THAT SINCE THESE EXPENDITUR ES HAVE BEEN CAPITALIZED BY THE ASSESSEE IN THE ACCOUNTS AND THE ASSESSEE CO ULD CLAIM ONLY THOSE EXPENDITURES, WHICH WERE INCURRED AS REVENUE EXPEND ITURE TO SUCH INCOME, HE ISSUED A SHOW CAUSE NOTICE INVITING EXPLANATION OF THE ASSESSEE AS TO WHY THESE EXPENDITURES SHOULD NOT BE DISALLOWED. IT WAS POINTED OUT TO THE AO THAT THE ABOVE INTEREST EXPENDITURE ARE ALLOWABLE UNDER SECTION 36(1)(III) OF THE INCOME TAX ACT BECAUSE THERE EXISTS INTERCONNECTION AND INTERLACING OF THE ITA. NO.175/AHD/2003 7 MANAGEMENT OF VARIOUS UNITS OF THE ASSESSEE-COMPANY . MANAGEMENT, ADMINISTRATION, FINANCE ARE COMMON. ACCORDINGLY, I T IS ONLY ONE BUSINESS AND THE EXPENDITURE INCURRED BY THE ASSESSEE IS OF ALLO WABLE NATURE. IT WAS ALSO CONTENDED BY THE ASSESSEE THAT ACCOUNTING MADE BY I T BY CAPITALIZING THE INTEREST EXPENDITURE, AS PER GUIDELINES OF THE INST ITUTE OF CHARTERED ACCOUNTANTS OF INDIA IS OF NO CONSEQUENCE OF ALLOWA BILTY UNDER THE INCOME TAX ACT. ASSESSEE FURTHER POINTED OUT THAT THESE E XPENDITURES WERE CLAIMED IN THE ASSTT.YEAR 1996-97, 1997-98 AND 1998-99. TH E AO HAD DISALLOWED THE CLAIM OF THE ASSESSEE, BUT DISALLOWANCE WAS DELETED BY THE LD.CIT(A)VII AND LD.CIT(A)-XI, AHMEDABAD. THE LD.AO HAS OBSERVED TH AT IN THE ASSTT.YEAR 1998-99, THIS ISSUE WAS CONSIDERED IN DETAIL BY THE AO. THE ASSESSEE HAD RAISED A CONTENTION THAT THE CIT(A) HAS DELETED THE ABOVE ADDITION WHICH WAS NOT ACCEPTED AT THE END OF THE DEPARTMENT, BECAUSE THE DEPARTMENT HAS PREFERRED FURTHER APPEAL TO THE ITAT ON THIS VERY I SSUE FOR THE ASSTT.YEAR 1996-97 AND 1997-98. THUS, BASIC FIRST REASON ASSI GNED BY THE AO WAS THAT SIMILAR DISALLOWANCE WAS MADE IN THE ASSTT.YEAR1998 -99 BY THE AO AND THE ORDER OF THE CIT(A) WAS NOT ACCEPTED BY THE DEPARTM ENT IN THE ASSTT.YEAR 1996-97 AND 1997-98 ON THE GROUND THAT THE DEPARTME NT WENT IN APPEAL AGAINST ORDERS OF THE CIT(A) IN THOSE TWO YEARS. T HE FINDING RECORDED BY THE AO IN PARA 4.4. OF THE ASSESSMENT, IN THIS CONNECTI ON, READS AS UNDER: 4.4 THE SAME ISSUE HAS BEEN ELABORATELY DISCUSSED IN THE ASSESSMENT ORDER FOR THE AY:1998-99 WHERE IN AFTER CONSIDERING ALL THE SUBMISSIONS OF THE ASSESSEE-COMPANY THE INTEREST EX PENSES CAPITLAISED IN THE BOOKS NOT CLAIMED AS REVENUE EXPENSES WERE DISALLOWED. THE ASSESSEE'S CONTENTION THAT THE CIT (A) HAS DELETED THE ABOVE ADDITION IS NOT ACCEPTABLE BECAUSE THE DEPARTMENT HAS PREFERRED APPEAL TO ITAT ON THE VERY ISSUE FOR THE AY'S 1996-97 AND 1997-98. AFTER CONSIDERING ALL THE CONTENTIONS RAISED BY THE ASSESSEE COMPANY, IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, I AM IN AGREEMENT WI TH THE VIEW TAKEN IN THE AY 1998-99 WHEREIN AFTER CONSIDERING A CATENA O F JUDICIAL ITA. NO.175/AHD/2003 8 PRONOUNCEMENTS ON THE ISSUE THE EXPENSES HAVE BEEN DISALLOWED. THUS FOLLOWING A CONSISTENT APPROACH OF THE REVENUE ON T HE ISSUE THE INTEREST EXPENSES CAPITALISED IN THE BOOKS THE EXPENSES OF 3 6,23,43,684/- OF THE SODA ASH DIV AND RS. 6,01,29,222/- OF THE LAB FRONT END PROJECT ARE DISALLOWED. 5. APART FROM THE ABOVE REASONING, THE LD.AO HAS CO NSIDERED THE ISSUE WITH ONE MORE ANGLE. HE WAS OF THE OPINION THAT TH IS WHOLE EXERCISE OF RAISING FUND THROUGH SPN IS A PRE-MEDIATED EXERCISE FOR AVOIDING PAYMENT OF TAXES. HE HIGHLIGHTED SCHEME CONTEMPLATED UNDER SP N. ACCORDING TO THE AO, FACE VALUE OF THE SCHEME WAS OF RS.200/-. AT T HE END OF FOUR YEARS, REPAYMENT WAS BEING MADE BY THE ASSESSEE AND REDEMP TION SCHEDULE WOULD BE PERIOD PRINCIPAL ADDL.AMOUNT AT THE END OF 4 TH YEAR RS.50 RS.60 AT THE END OF 5 TH YEAR RS.50 RS.60 AT THE END OF 6 TH YEAR RS.50 RS.60 AT THE END OF 7 TH YEAR RS.50 RS.70 TOTAL RS.200 RS.250 HE OBSERVED THAT TOTAL NUMBER OF 107 LAKHS SPNS. W AS ISSUED BY THE NIRMA LIMITED AND OUT OF TOTAL NUMBER OF SPNS. ISSU ED, MAJORITY OF THE SPNS. ROUGHLY 102 LAKHS WERE HELD BY THE PROMOTERS AND NO N-PROMOTERS OF NIRMA GROUP. THE ASSESSEE HAS PRE-PONED REDEMPTION DATE OF SPNS AND IT WAS FIXED ON 15.3.2000. SPN HOLDERS HAVE SOLD THESE SPNS. TO FINANCIAL INSTITUTIONS AND OFFERED CAPITAL GAIN TAX RESULTED TO THEM. SIMILAR LY, ON REDEMPTION, THE FINANCIAL INSTITUTIONS HAVE SHOWN DIFFERENCE BETWEE N COST OF ACQUISITION OF SPN AS WELL AS REDEMPTION VALUE AS THEIR INCOME. R EDEMPTION VALUE WAS FIXED AT RS.361/- PER SPN. ACCORDING TO THE AO, TH E ASSESSEE HAS CLAIMED COST ROUGHLY AROUND RS.163.57 CRORES. IT HAS CLAIM ED IT AS DEDUCTION. ITA. NO.175/AHD/2003 9 CORRESPONDING TO IT, THE INTEREST INCOME OUGHT TO H AVE RESULTED TO SPNS. HOLDER OR FINANCIAL INSTITUTION WAS NOT OFFERED FOR TAXATION. IN HIS UNDERSTANDING, THE FOLLOWING QUESTION EMERGES OUT A ND HE TOOK COGNIZANCE OF THE FOLLOWING FACTS IN RELATION TO THESE QUESTIONS: 4.12 OUT OF THE ABOVE MENTIONED DISCUSSION THE FOL LOWING QUESTIONS EMERGE 1. WHETHER THE INTEREST CLAIMED AS EXPENSE BY NIRMA LTD. ON ACCOUNT OF INTEREST OF SPN IS ALLOWABLE AS EXPENDITURE SINCE T HE WHOLE ISSUE OF SPN APPEARS TO BE ARRANGED ONE WITH A VIEW TO AVOID TAXES BY CLAIMING HUGE EXPENDITURE ON THIS ACCOUNT AS DISCUSSED ABOVE . 2. WHETHER THERE WAS NECESSITY OF ISSUING ANY INSTR UMENT LIKE SPNS SINCE SPNS WERE BASICALLY SUBSCRIBED BY THE TRUSTS AND COMPANIES OF NIRMA GROUP AND THEREFORE, THEY COULD HAVE FINANCED PROJECT OF BHAVNAGAR THROUGH THEIR OWN SURPLUS FUNDS. 3. WHEN THE GROUP HAD HUGE FUNDS AVAILABLE WITH IT, WHY THERE WAS NEED OF BRINGING PUBLIC ISSUE OF SPN. IF ONE LOOKS INTO ALL ASPECTS, THE ANSWERS WHICH CO MES OUT ARE AS FOLLOWS:- I) SPNS WERE ISSUED WITH A PRE-DETERMINED AND PRE-M EDITATED ARRANGEMENT TO CLAIM HUGE EXPENSE ON ACCOUNT OF SPN IN TERMS OF INTEREST AND NON-DISCLOSURE OF CORRESPONDING INTERE ST INCOME IN THE HANDS OF THE HOLDERS OF SPNS TRUSTS & COMPANIES OF THE GROUP. II) THEREFORE, TRUSTS & SATELLITE COMPANIES MANAGED BY KARSANBHAI PATEL, WHO IS ALSO C.M.D. OF NIRMA LTD., DID NOT DI SCLOSE ANY INTEREST INCOME (EVEN THOUGH ACCOUNTS OF TRUSTS & COMPANIES ARE IN MERCANTILE SYSTEM) THOUGH THE COMPANY DEBITED INTEREST EXPENSE S IN ITS ACCOUNTS AND CLAIMED THE AMOUNT OF INTEREST ON SPN AS REVENU E EXPENDITURE. III) IN A PRE-DETERMINED STRATEGY, THE SPNS WERE TR ANSFERRED TO THE BANKS & FINANCIAL INSTITUTIONS BY THE TRUSTS & COMP ANIES OF NIRMA GROUP, BY PAYING LONG TERM CAPITAL GAINS . ITA. NO.175/AHD/2003 10 IV) BANKS & FINANCIAL INSTITUTIONS PAID TAX OF RS. 1.4 CRORES ON INTEREST INCOME OF ABOUT RS.4 CRORES. V) THEREFORE, HOLDERS OF SPNS PAID ONLY ABOUT RS 17 CRORES AS TAXES BUT NIRMA LTD. CLAIMED INTEREST EXPENSE OF ABOUT RS.163 CRORES AND THEREFORE, SAVED TAX TO THE EXTENT OF RS.57 CRORES (AT A RATE OF 35% EXCLUDING SURCHARGE). VI) IF ADDITIONAL OUTGO ON ACCOUNT OF INTEREST TO GROUP IS SEEN ON 15-3- 2000, THERE WAS OUTGO OF RS.20 CRORES ONLY SINCE RS .367 CRORES WERE RECEIVED BY PROMOTERS ON ACCOUNT OF SALE OF SPNS AN D WERE DIRECTLY OR INDIRECTLY GIVEN BACK TO NIRMA LTD. DURING FEB MARC H 2000 BEFORE 15- 3-2000 AND RS.387 CRORES WERE OUTGO TO THE HOLDERS WHO WERE HOLDING SPNS ON REDEMPTION DATE I.E. 15-3-2000(INCLUDING TH E BANKS AND FINANCIAL INSTITUTIONS REFERRED ABOVE). THUS, ON AC COUNT OF ISSUANCE OF SPNS OF RS.205 CRORES WERE CONTRIBUTED BY TRUSTS & COMPANIES OF GROUP ON WHICH NIRMA LTD. CLAIMED EXPENSES BUT NO C ORRESPONDING INCOME IN FORM OF INTEREST INCOME WAS DISCLOSED BY THEM. FURTHER, TO AVOID PAYMENT OF TAX ON INTEREST INCOME ON THE DATE OF REDEMPTION, THESE ENTITIES SOLD SPNS & MOBILISED RS.367 CRORES AND AGAIN GAVE THE FUNDS DIRECTLY OR INDIRECTLY TO NIRMA LTD. ON 1 5-3-2000. AMOUNT OF ABOUT RS.387 CRORES WAS FINAL OUTFLOW ON A/C. OF RE DEMPTION. THEREFORE, ONLY RS.20 CRORES WAS THE OUTFLOW ON ACCOUNT OF EXP ENDITURE ON INTEREST ON SPN AT THE TIME OF REDEMPTION. IN THE WHOLE ARRA NGEMENT, THEREFORE, GROUP HAD AN INTEREST BURDEN ON RS.20 CRORES ONLY S INCE THIS WAS OUTFLOW TO ENTITIES BY AND LARGE OUT OF THE GROUP. 6. IN THIS WAY, THE LD.AO HAS DISALLOWED THE CLAIM OF THE ASSESSEE AND MADE AN ADDITION OF RS.4504 LAKHS. 7. DISSATISFIED WITH THE ADDITION, THE ASSESSEE CAR RIED THE MATTER IN APPEAL BEFORE THE LD.CIT(A). IT HAS MADE ELABORATE SUBMIS SIONS ALLEGING NON- GRANTING OF PROPER OPPORTUNITY OF HEARING AT THE EN D OF THE AO. THE LD.CIT(A) HAS REPRODUCED THE DISCUSSION MADE BY THE AO IN THE IMPUGNED ORDER. THEREAFTER, THE LD.CIT(A) HAS FORMULATED TH E FOLLOWING QUESTIONS FOR RESOLVING THIS ISSUE: ITA. NO.175/AHD/2003 11 A) WHETHER THE CAPITAL BORROWED ON WHICH INTEREST WAS PAID RELATED TO SAME BUSINESS. IF THE ANSWER IS NO, THE CLAIM CANNO T BE ALLOWED. B) WHETHER INTEREST HAS ACCRUED DURING THE YEAR OR NOT . IF INTEREST HAS NOT ACCRUED DURING THE YEAR IT CANNOT BE ALLOWED. C) WHETHER THE TRANSACTION RELATED TO SPNS WAS A COLOR ABLE TRANSACTION OR NOT AND WHETHER IT WAS FOR BUSINESS PURPOSES OR NOT. IF THE TRANSACTION IS COLOURABLE, THEN NO INTEREST CAN EVE R BE ALLOWED. HERE IT IS IMPORTANT TO POINT OUT THAT FINDINGS OF THE AO REGARDING NATURE OF TRANSACTION HAS NOT EVEN BEEN CHALLENGED BY THE APPELLANT IN GROUNDS OF APPEAL. 8. WHILE IMPUGNING ORDERS OF THE LD.REVENUE AUTHORI TIES, SHRI S.N. SOPARKAR, LD. SENIOR ADVOCATE SUBMITS THAT AS FAR Q UESTION NO.1 FORMULATED BY THE CIT(A) IS CONCERNED, THE ISSUE IN DISPUTE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE GUJARAT HIGH COURT. HE POINTED OUT THAT THIS IS THE THIRD YEAR OF CLAIM OF EXPENDI TURE. THE ISSUE WAS OPENED ON 21.8.1996. IT WAS CLOSED ON 18.9.1996. THUS, A CLAIM OF PRO-RATA EXPENDITURE WAS MADE IN THE ASSTT.YEAR 1997-98 AND 1998-99. THE AO WHILE DISALLOWING THE CLAIM OF THE ASSESSEE IN THIS YEAR HAD MADE OBSERVATION THAT IN EARLIER YEARS, DISALLOWANCE WAS DELETED BY THE LD.C IT(A), BUT IT WAS CHALLENGED BEFORE THE ITAT. SHRI SOPARKAR HAS POIN TED OUT THAT DISPUTE IN 97-98 TRAVELLED UPTO THE HONBLE HIGH COURT, AND TH E HONBLE HIGH COURT HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. HE DR EW OUR ATTENTION TOWARDS DECISION OF THE HONBLE GUJARAT HIGH COURT RENDERED IN TAX APPEAL NO.811 OF 2013 IN THE CASE OF CIT VS. NIRMA LTD. IT IS RE PORTED IN 52 TAXMANN.COM 88 (GUJ). HE PLACED ON RECORD COPY OF THE HONBLE HIGH COURT DECISION ON PAGE NO.7 OF THE PAPER BOOK. THE HONBLE HIGH COURT HAS CONCURRED WITH FINDING OF THE LOWER APPELLATE AUTHORITIES THAT THE RE WAS AN INTERCONNECTION AND INTERLACING OF MANAGEMENT OF VARIOUS UNITS OF T HE ASSESSEE-COMPANY. MANAGEMENT, ADMINISTRATION, FINANCE ARE COMMON, AND ACCORDINGLY, THE ITA. NO.175/AHD/2003 12 HONBLE HIGH COURT HAS HELD THAT IT WAS ONLY ONE BU SINESS OF THE ASSESSEE. THUS, ACCORDING TO HIM, MUCH DEBATE IS NOT REQUIRED ON QUESTION NO.1 AND 2 FORMULATED BY THE LD.CIT(A). 9. ON THE OTHER HAND, THE LD.DR FILED SYNOPSIS OF H IS CONTENTIONS. HE POINTED OUT THAT PURPOSE OF THE TRANSACTION WAS ONL Y TO RAISE SHARE CAPITAL THROUGH RIGHT ISSUE, AND HENCE EXPENDITURE RELATING THERETO AS A CAPITAL EXPENDITURE. IT HAS RIGHTLY BEEN DISALLOWED BY THE LD.REVENUE AUTHORITIES BELOW. FOR BUTTRESSING HIS CONTENTIONS, HE MADE RE FERENCE TO THE ORDER OF ITAT IN THE CASE OF ASHIMA SYNTEX, REPORTED IN 100 ITD 247. HE ALSO MADE REFERENCE TO THE DECISION OF THE HONBLE SUPREME CO URT IN THE CASE OF BROOKE BOND (INDIA) LTD., 225 ITR 798. ACCORDING TO THE L D.CIT-DR, EXPENDITURE INCURRED IN CONNECTION WITH THE ISSUE OF RIGHT SHAR ES IS NOT REVENUE EXPENDITURE AND IT CANNOT BE CLAIMED. HE ALSO MADE REFERENCE TO THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SH REE DIGVIJAY CEMENT CO., 138 ITR 45. HE FURTHER CONTENDED THAT ABOUT 50% OF THE SODA ASH PRODUCED ALL OVER THE WORLD IS USED IN GLASS INDUSTRY, 26% I S USED IN CHEMICAL AND ONLY 11% IS USED IN SOAPS AND DETERGENT UNITS. THUS, TH E ASSESSEE MIGHT HAVE NOT USED THIS SODA ASH EXCLUSIVELY FOR THE PURPOSE OF I TS BUSINESS. SODA ASH FACTORY IS SITUATED AT BHAVNAGAR WHICH IS ISOLATED FROM OTHER FACTORIES OF THE ASSESSEE. HIS CONCERN WAS THAT IT WAS A NEW BUSINE SS, AND THEREFORE, IT CANNOT BE CONSTRUED THAT THESE EXPENDITURES WERE INCURRED FOR RAISING FUNDS FOR EXPANSION OF THE EXISTING BUSINESS. WITHOUT POINTI NG OUT THE PROPOSITION INVOLVED IN A PARTICULAR CASE, CITATIONS OF LOTS OF JUDGMENTS HAVE BEEN MENTIONED IN THIS NOTE. WHETHER THEY ARE DIRECTLY ON THE ISSUE OR NOT, NOWHERE PLEADED IN THE NOTE. SIMILARLY, COPIES OF THESE DE CISIONS WERE NOT BROUGHT IN THE COURT DURING THE HEARING, AND THE PROPOSITION I NVOLVED IN THESE DECISIONS WAS NOT EXPLAINED. WE HAVE TAKEN COGNIZANCE OF THI S NOTE. ITA. NO.175/AHD/2003 13 10. APART FROM THIS NOTE, THE LD. LD.DR PUT RELIANC E UPON THE ORDER OF THE ITAT PASSED IN THE ASSTT.YEAR 2000-01. HE SUBMITTE D THAT THOUGH IN THE ASSTT.YEAR 1999-2000, THE ASSESSEE HAS MOVED AN APP LICATION FOR RECALL OF THE TRIBUNALS ORDER ON THIS ISSUE, BUT IT DID NOT FILE ANY APPLICATION IN THE ASSTT.YEAR 2000-01. A FINDING OF THE TRIBUNAL RECO RDED IN THIS ASSESSMENT YEARS WERE FOLLOWED IN THE ASSTT.YEAR 2000-01 AND T HEY STILL HOLD THE FIELD. THEREFORE, THE TRIBUNAL SHOULD NOT DEVIATE ITSELF F ROM THE FINDING OF CO- ORDINATE BENCH ON THIS VERY ISSUE IN THE SUBSEQUENT ASSESSMENT YEAR. SHRI SOPARKAR, ON THE OTHER HAND, CONTENDED THAT FOUNDAT ION OF THE FINDING IS OF THE ORDER PASSED IN THIS VERY YEAR. THE TRIBUNAL HAS CO NSIDERED THAT FINDING PASSED ON CONCEIVEMENT OF WRONG FACTS, AND THEREFOR E, RECALLED. IN OTHER WORDS, THE TRIBUNAL HAS VACATED THE FINDING, AND TH EREFORE, NO COGNIZANCE OF THAT VERY FINDING FOLLOWED IN SUBSEQUENT YEAR COULD BE TAKEN UP. 11. WE WILL DEAL WITH PROPOSITION FORMULATED BY THE LD.CIT(A) UNDER THREE DIFFERENT QUESTIONS. AT THIS STAGE, WE ARE DEALING WITH FIRST AND SECOND PROPOSITION THAT IS WHETHER CAPITAL BORROWED ON WHI CH INTEREST WAS PAID RELATED TO SAME BUSINESS OR NOT AND IF THE ANSWER I S NO, THEN CLAIM CANNOT BE ALLOWED. WE FIND THAT THE LD.CIT(A) TOOK A VIEW TH AT EXPENDITURE WAS NOT INCURRED FOR THE SAME BUSINESS OR EXPANSION OF THE EXISTING BUSINESS ON THE BASIS OF INFERENCE DRAWN ON THE RATIO OF LAW LAID I N THE JUDGMENTS REFERRED BY HIM. IT IS PERTINENT TO OBSERVE THAT SEARCH WAS CA RRIED OUT AT THE PREMISES OF THE ASSESSEE IN THE YEAR 2000. ISSUE REGARDING SPN WAS THOROUGHLY EXAMINED BY THE LD.CIT(A)-IX IN THE ASSTT.YEAR 1998-99 AND T HE LD.CIT(A) HAS ACCEPTED THE CLAIM OF THE ASSESSEE. THE LD.CIT(A) IN THE PRESENT ASSESSMENT YEAR DIFFERED WITH THAT CIT(A) FOR THE REASON THAT HE DID NOT TRY TO ASCERTAIN FACTS IN RIGHT PERSPECTIVE. WE COULD APPRECIATE TH E ENDEAVOUR MADE BY THE ITA. NO.175/AHD/2003 14 FIRST LD.CIT(A) FOR TAKING A DIFFERENT VIEW, HAD TH E LD.CIT(A) POINTED OUT CERTAIN DISTINCTIVE FEATURES OR DISTINCT FACTS. TH ERE IS NO DISCOVERY OF NEW FACTS. HE OBSERVED THAT STAFFS OF NEW UNITS ARE AT DIFFERENT PLACES. IT COULD NOT BE STATED THAT STAFF OF VARIOUS UNITS WOULD BE COMM ON AND PERSON IN-CHARGE OF THE UNIT IS SEPARATE. THESE FEATURES OR THE CIRCUM STANCES WERE AVAILABLE BEFORE THE LD.CIT(A) WHO HAS DECIDED THE APPEALS FOR THE A SSTT.YEAR 1997-98 AND 1998-99. WHEN THE DISPUTE TRAVELLED TO THE HONBLE HIGH COURT, THE HONBLE HIGH COURT HAD CONCURRED WITH THE VIEW TAKEN BY THE TRIBUNAL AS WELL AS CIT(A) IN A.Y.97-98. QUESTION FRAMED BY THE HONBL E HIGH COURT READS AS UNDER: WHETHER THE APPELLATE TRIBUNAL IS RIGHT IN LAW AND ON FACTS IN CONFIRMING THE ORDER OF THE COMMISSIONER OF INCOME- TAX (APPEALS) DELETING THE DISALLOWANCE OF SODA ASH PROJECT INTER EST EXPENSES OF RS.3,33,23,108 AND RS.12,27,78,792 LAB PROJECT INTE REST EXPENSES ? 12. HONBLE HIGH COURT HAS REPLIED THIS QUESTION AS UNDER: 6. THE SOLE SURVIVING QUESTION NO.13, PERTAINS TO DISALLOWANCE OF SODA ASH PROJECT INTEREST EXPENSES OF RS.3.33 CRORE S (ROUNDED OFF) AND LAB PROJECT INTEREST OF RS.12..27 CRORES (ROUNDED O FF). THE ASSESSING OFFICER, QUESTIONED THE ASSESSEE ON THESE EXPENSES AND DELETED THE SAME ON TWO GROUNDS, FIRSTLY THAT THE INTEREST WAS PAID BY WAY PRE-OPERATIVE EXPENDITURE AND SECONDLY THE ASSESSEE HAD CAPITALIZ ED SUCH EXPENDITURE. THE ASSESSEE CARRIED THE MATTER IN APPEAL. CIT (APP EALS) RELYING ON A DECISION OF THIS COURT IN THE CASE OF CIT V. ALEMBI C GLASS INDUSTRIES LTD., 103 ITR 715 (GUJ) HELD IN FAVOUR OF THE ASSES SEE. IN ADDITION TO COMING TO THE CONCLUSION THAT THERE WAS COMMONALITY OF BUSINESS IT WAS FURTHER HELD THAT THE EXPENDITURE WAS IN CONNECTION WITH THE EXPANSION OF THE EXISTING BUSINESS. ON SUCH GROUND, THE EXPEN DITURE WAS HELD ALLOWABLE. IT IS THIS ORDER OF THE CIT (APPEAL) WHICH THE TRIB UNAL UPHELD IN THE IMPUGNED JUDGMENT. ITA. NO.175/AHD/2003 15 HAVING HEARD THE LEARNED COUNSEL FOR THE PARTIES AN D HAVING PERUSED THE DOCUMENTS ON RECORD, WE NOTICE THAT CIT (APPEAL S) AND THE TRIBUNAL CONCURRENTLY CAME TO THE CONCLUSION THAT T HERE WAS INTER- CONNECTION, INTER-LACING AND INTER-DEPENDENCE OF TH E MANAGEMENT, FINANCIAL AND ADMINISTRATIVE CONTROL OF VARIOUS UNI TS OF NIRMA LIMITED. IT WAS ON THIS GROUND, THE TRIBUNAL HELD THAT THE B USINESS IN QUESTION IS CONTINUATION OF THE EXISTING BUSINESS AND NOT A NEW BUSINESS. IN THIS CONTEXT, THE DECISION RELIED ON BY THE AUTHORITIES BELOW OF THIS COURT IN THE CASE OF ALEMBIC GLASS INDUSTRIES LTD. (SUPRA) L AID DOWN TESTS FOR ASCERTAINING WHETHER A BUSINESS WAS PART OF EXISTIN G BUSINESS OR THE ASSESSEE WAS STARTING A NEW UNIT. IT WAS HELD THAT MERELY BECAUSE THE UNIT WAS COMING TO A DISTANT POINT BY ITSELF WOULD NOT MEAN THAT IT WAS A NEW BUSINESS. IF THE FACTS AS RECORDED BY THE CIT (APPEALS) AND T HE TRIBUNAL CAN BE SAID TO HAVE ACHIEVED FINALITY, IT WOULD EMERGE THA T THE ASSESSEE THROUGH ITS EXISTING ADMINISTRATIVE MECHANISM START ED A NEW FACILITY FOR PRODUCTION OF SODA ASH AND HAD ALSO SET UP FACILITY FOR PRODUCTION OF A MATERIAL CALLED 'LAB' FOR ITS CAPTIVE CONSUMPTION F OR THE PURPOSE OF ITS EXISTING MANUFACTURING BUSINESS. IT IS NO DOUBT THA T THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF SOAP AND THE SODA ASH AND 'LAB' SO PRODUCED IS USED BY WAY OF CAPTIVE CONSUMP TION. WHEN SUCH FACTS VIEWED IN LIGHT OF THE FINDINGS OF THE CIT (A PPEALS) AND THE TRIBUNAL, WE HAVE NO REASON TO INTERFERE WITH THE U LTIMATE CONCLUSION. HAD IT BEEN A CASE OF ENTIRELY A NEW PROJECT UNDERT AKEN BY THE ASSESSEE AS CANVASSED BY THE COUNSEL FOR THE REVENUE, A SERI OUS QUESTION OF CLAIMING PRE-OPERATIVE EXPENDITURE OF INTEREST BY W AY OF REVENUE EXPENDITURE WOULD ARISE. HOWEVER, WHEN THE AUTHORIT IES BELOW FOUND THAT IT WAS AN EXPANSION OF THE EXISTING BUSINESS, APPLYING THE TESTS LAID DOWN BY THIS COURT IN THE CASE OF ALEMBIC GLASS IND USTRIES LTD. (SUPRA), IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF DEPUTY CIT V. CORE HEALTH CARE LTD, 298 ITR 194 (SC), THE FACT WHETHER THE BORROWING IS CAPITAL OR REVENUE EXPENDITURE WOULD B E OF NO CONSEQUENCE IN THE RESULT, TAX APPEAL IS DISMISSED. 13. ON DUE CONSIDERATION OF THE FACTS AND CIRCUMSTA NCES OF THE CASE, WE ARE OF THE VIEW THAT THE ISSUE IN DISPUTE WITH REGARD T O THE FIRST QUESTION FORMED BY THE LD.CIT(A) IS COVERED BY THE DECISION OF THE HON BLE HIGH COURT. IT HAS BEEN UPHELD THAT SODA ASH AND LAB END PROJECTS ARE PART OF THE EXISTING PROJECT. THEY ARE EXPANSION OF THE ASSESSEES BUSI NESS. THEY ARE NOT SEPARATE ITA. NO.175/AHD/2003 16 ENTITIES. THE LD.CIT(A) HAS NOT DEMONSTRATED ANY N EW FACTS, RATHER LD.CIT(A)HAS REPHRASED AND RE-ARRANGED THE SAME VER Y FACTS IN A DIFFERENT MANNER BY TAKING INFERENCE OF FACTS FROM THE DECISI ON OF THE HONBLE HIGH COURT IN OTHER CASES. IT IS PERTINENT TO OBSERVE T HAT JUDGMENT IS APPLICABLE ON THE BASIS OF RATIO LAID DOWN IN IT, AND EFFORT SHOU LD NOT BE MADE TO DRAW INFERENCE OF FACTS FROM THOSE JUDGMENTS IN ORDER TO APPLY ON THE GIVEN FACTS. AS FAR AS SECOND PROPOSITION IS CONCERNED, IT IS AL SO COVERED BY THE DECISION OF HONBLE HIGH COURT, BECAUSE IN THOSE YEARS ASSESSEE CLAIMED, INTEREST EXPENDITURE ON PRO-RATA BASIS. THE HONBLE COURT U PHELD THE ALLOWANCE OF EXPENDITURE. UNDER THE SAME LOGIC INTEREST EXPEND ITURE WOULD BE ALLOWABLE IN THIS YEAR ALSO. 14. SHRI S.N. SOPARKAR WHILE IMPUGNING ORDERS OF TH E REVENUE AUTHORITIES ON THIRD PROPOSITION CANVASSED BY THE LD.CIT(A) SUB MITTED THAT BASICALLY POINTS HAVE BEEN HIGHLIGHTED BY THE AO IN THE ASSES SMENT ORDER. ACCORDING TO HIM FIRST POINT CONSIDERED BY BOTH THE REVENUE A UTHORITIES WAS THAT SPNS WERE ISSUED WITH PRE-DETERMINED AND PRE-MEDIATED AR RANGEMENT TO CLAIM HUGE EXPENDITURE ON ACCOUNT OF SPN IN ORDER TO AVOID TAX ES. REASONS ASSIGNED BY THE LD.REVENUE AUTHORITIES FOR HARPING THIS CONCEPT WAS THAT MOST OF THE SPNS. WERE HELD BY PROMOTERS AND NON-PROMOTERS OF NIRMA G ROUP. ACCORDING TO THE AO TOTAL NUMBERS OF 107 LAKHS SPNS. WERE ISSUED . OUT OF THAT, ROUGHLY 102 LAKHS WERE HELD BY THE PROMOTERS AND NON-PROMOT ES. ON THE BASIS OF THIS INFORMATION, THE AO FORMED AN OPINION THAT ONLY PRO MOTERS AND ASSOCIATE CONCERNS WERE AWARE ABOUT THIS SCHEME AND IT WAS NO T GIVEN TO THE PUBLIC. SHRI S.N. SOPARKAR TOOK US THROUGH TERMS AND CONDIT IONS MENTIONED IN THE PROSPECTUS AND POINTED OUT THAT THESE WERE OPEN FOR ALL SHAREHOLDERS. SINCE PROMOTERS WERE HOLDING 71.60% SHARES, THEREFORE, MA XIMUM INVESTMENT WAS ITA. NO.175/AHD/2003 17 AT THE END OF THE PROMOTERS. HOW THIS FACT CAN BE CONSTRUED AGAINST THE ASSESSEE. 15. THE NEXT REASON ASSIGNED BY THE AO WAS THAT WHE THER THERE WAS ANY NECESSITY OF ISSUING ANY INSTRUMENT LIKE SPN. ACCO RDING TO THE LD.COUNSEL FOR THE ASSESSEE, THE AO HAS NO JURISDICTION TO TAKE A BUSINESS DECISION. IN OTHER WORDS, IT WAS NOT FOR THE AO TO DECIDE WHETHER ISSU ING ANY INSTRUMENT LIKE SPN WOULD BE IN THE INTEREST OF THE ASSESSEES BUSI NESS OR NOT. FOR BUTTRESSING HIS CONTENTIONS, HE MADE REFERENCE TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES P.LTD., 379 ITR 34 7 WHEREIN THE HONBLE SUPREME COURT REITERATED DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIA CEMENT P.LTD., 254 ITR 377. ACCORDI NG TO THE HONBLE SUPREME COURT, ONCE IT IS ESTABLISHED THAT THERE IS A NEXUS BETWEEN EXPENDITURE AND THE PURPOSE OF BUSINESS, THE REVENU E CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN O R IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF T HE CASE. THE LD.COUNSEL FOR THE ASSESSEE FURTHER TOOK US THROUGH PARAGRAPH- 13 OF THE JUDGMENT AND POINTED OUT THAT THE HONBLE SUPREME COURT HAS FURT HER OBSERVED THAT BUSINESSMAN CANNOT BE COMPELLED TO MAXIMIZE HIS PRO FIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. HE FURTHER POINTED OUT THAT NEXT REASON ASSIGNED BY THE AO IS THAT WHEN GROUP HAS HUGE FUND S AVAILABLE TO IT, WHY THERE IS A NEED OF BRINGING PUBLIC ISSUE. ACCORDIN G TO THE LD.COUNSEL FOR THE ASSESSEE, THIS CANNOT BE JUSTIFICATION FOR DENYING BUSINESS EXPENDITURE. HE MADE REFERENCE TO THE DECISION OF HONBLE SUPREME C OURT IN THE CASE OF TAPARIA TOOLS LTD. 372 ITR 605. THE LD.COUNSEL FOR THE ASSESSEE ALSO CONTENDED THAT WITH THE HELP OF PROVISO APPENDED SECTION 36(1)(III) OF THE ACT, IT WAS CONTENDED THAT ASSETS WERE NOT PUT TO USE, A ND THEREFORE, THE ASSESSEE ITA. NO.175/AHD/2003 18 CANNOT CLAIM INTEREST EXPENDITURE ON THE BORROWED F UNDS. ACCORDING TO THE UNDERSTANDING OF THE REVENUE, THIS PROVISO WAS CLARIFICATORY IN NATURE, AND THEREFORE, IT SHOULD BE APPLIED IN THIS ASSESSMENT YEAR ALSO. HE POINTED OUT THAT THIS ASPECT HAS BEEN CONSIDERED BY THE HONBLE SUPREME COURT IN THE CASE OF DCIT VS. CORE HEALTH CARE LTD., 167 TAXMAN 206 ( SC) AND L.K. TRUST VS. CIT, 183 TAXMAN 80. IN BOTH DECISIONS, IT HAS BEEN HELD BY THE HONBLE SUPREME COURT THAT PROVISO HAS BEEN INSERTED W.E.F. 12.4.2004 AND IT IS APPLICABLE WITH PROSPECTIVE EFFECT. 16. ON THE OTHER HAND, THE LD.DR RELIED UPON THE OR DERS OF THE LD.CIT(A). HE POINTED OUT THAT SCHEME OF SPN WAS NOT DESIGNED TO MAKE ANY PAYMENT TILL THE END OF 4 TH YEAR, HENCE, PUBLIC DID NOT SUBSCRIBE IT AND CONSI DERED IT TO BE NON-PROFITABLE. ONCE THE DIRECTORS AND OTHER GR OUP CONCERNS KNEW THAT SPN WOULD BE REDEEMED AT PREMIUM AND HENCE ONLY PRO MOTERS/SISTER CONCERNS SUBSCRIBED THE SPNS. TO THE MAXIMUM EXTENT . HE POINTED OUT THAT PUBLIC WAS KEPT IN DARK. INTENTION WAS TO RAISE SH ARE CAPITAL SINCE BEGINNING BUT CLAIMED HUGE DEDUCTION ABOUT RS.163.57 CRORES. THE ASSESSEE CAMOUFLAGED TRANSACTIONS. ACCORDING TO THE LD.CIT- DR, PUBLIC MONEY WAS SIPHONED OFF BY THE PROMOTERS AND SISTER CONCERNS, WHICH IS AGAINST THE PUBLIC POLICY AND SEBI GUIDELINES. THE SCHEME OF SPN IS A DUBIOUS METHOD TO GIVE BENEFIT TO THE PROMOTERS AND SISTER CONCERNS ON ONE HAND, AND ON THE OTHER HAND AVAIL CLAIM OF EXPENDITURE. HE MADE REFERENCE TO THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. LTD. V. CIT, 154 ITR 148 AND ALSO IN THE CASE OF AZADI BACHAO ANDOLAN, 2 63 ITR 706. 17. THE LD.COUNSEL FOR THE ASSESSEE, ON THE OTHER H AND, SUBMITTED THAT IT WAS A PUBLIC ISSUE. IT WAS OPEN FOR ALL SHAREHOLDERS. NO INFORMATION WAS WITHHELD BY THE ASSESSEE FROM THE PUBLIC . SEBI OR ANY OTHER INSTITUTIONS HAS NEVER OBJECTED TO THIS SCHEME. THE AO HAS NOT RECORDED S TATEMENT OF ANY PERSON ITA. NO.175/AHD/2003 19 FOR HARPING A BELIEF THAT DIRECTORS AND GROUP CONCE RNS KNEW ABOUT THE SCHEME. INSPITE OF CARRYING OUT SEARCH AT THE PREMISES OF T HE ASSESSEE, NO EVIDENCE WAS FOUND IN SUPPORT OF THIS CONCLUSION. REFERRING TO THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF TAPARIA TOOLS LTD. (SU PRA), THE LD.COUNSEL FOR THE ASSESSEE CONTENDED THAT ONLY REQUIREMENT FOR THE RE VENUE AUTHORITIES WAS TO SEE WHETHER EXPENDITURE WAS INCURRED FOR THE PURPOS E OF BUSINESS OR NOT. THE AO HAS TO CONSIDER GENUINENESS OF THE BUSINESS BORR OWINGS. HE CANNOT TAKE INTO CONSIDERATION ILLUSORY FACTS FOR BRANDING THE TRANSACTION AS COLOURABLE. ACCORDING TO THE LD.COUNSEL FOR THE ASSESSEE FACTS IN THE CASE OF TAPARIA TOOLS LTD. (SUPRA) ARE IDENTICAL. 18. HE FURTHER CONTENDED THAT ALL THESE FACTS ARE A VAILABLE IN ASSTT.YEAR 1997-98 ALSO, AND THE LD.CIT(A) HAS ALLOWED THE EXP ENDITURE ON PRO-RATA BASIS IN THAT YEAR. THAT ORDER WAS UPHELD UPTO THE HONB LE HIGH COURT. 19. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND G ONE THROUGH THE RECORD CAREFULLY. WE FIND THAT FIRST GRIEVANCE OF THE AO WAS THAT RAISING OF FUNDS THROUGH SPN APPEARS TO BE ARRANGED WITH A VIEW TO A VOID TAX BY CLAIMING HUGE EXPENSES. THESE SPNS. WERE ISSUED WITH PRE-ME DIATED AND PRE- DETERMINED ARRANGEMENTS. WE DO NOT FIND ANY BASIS FOR HARPING SUCH A BELIEF. IT IS A JUST REPHRASING AND RE-CONSTRUING THE SAME TRANSACTION IN DIFFERENT MANNER WITH DIFFERENT PROSE. THERE IS NO DISCLOSUR E OF FACTS BY THE AO. HE HAS NOT MADE REFERENCE TO ANY INDIVIDUAL CIRCUMSTAN CES WHICH HAS COME TO HIS NOTICE ONLY IN ASSTT.YEAR 1999-2000 WHICH FORCED HI M TO DEVIATE FROM NOT FOLLOWING ORDERS OF THE CIT(A). TO OUR MIND, THERE IS NO DISPARITY OF FACTS FROM EARLIER YEAR, WHEREIN THE EXPENDITURE HAVE BEE N ALLOWED UPTO THE HONBLE HIGH COURT. IN A RECENT JUDGMENT, THE HON BLE SUPREME COURT HAS CONSIDERED ALMOST SIMILAR CIRCUMSTANCES. THE ASSES SEE, M/S.TAPARIA TOOLS LTD. HAD ISSUED A DEBENTURE WITH TWO OPTIONS VIZ. S UBSCRIBERS CAN CLAIM ITA. NO.175/AHD/2003 20 INTEREST AT THE RATE OF 18% PER ANNUM OVER A PERIOD OF FIVE YEARS OR DEBENTURE HOLDER COULD OPT FOR ONE TIME UPFRONT PAYMENT OF RS .55/- PER DEBENTURE. THERE WERE SIX APPLICANTS, WHO HAVE SUBSCRIBED THE DEBENTURES. OUT OF SIX APPLICANTS, TWO HAVE EXPRESSED THEIR WILLINGNESS TO ACCEPT UPFRONT PAYMENT OF INTEREST. THE ASSESSEE HAS SPREAD OVER THE INTERES T EXPENDITURE OVER A PERIOD OF FIVE YEARS IN THE BOOKS OF ACCOUNTS, BUT IT HAS RECOGNIZED THE EXPENDITURE ON ACCOUNT OF UPFRONT PAYMENT OF INTEREST TO APPLIC ANTS AND CLAIMED SUCH INTEREST EXPENDITURE IN THE RETURN OF INCOME. THE AO HAS DISALLOWED THE CLAIM ON THE GROUND THAT ONLY 1/5TH COULD BE ALLOWE D TO THE ASSESSEE. THIS VIEW OF THE AO MET APPROVAL UPTO THE HONBLE HIGH C OURT. THE HONBLE SUPREME COURT HAS ALLOWED THE CLAIM OF THE ASSESSEE AND DISCUSSED THE POSITION OF LAW ELABORATELY. BEFORE, WE EXAMINE TH E FACTS OF THE PRESENT APPEAL BEFORE US, WE WOULD LIKE TO APPRAISE OURSELV ES ABOUT THE POSITION OF LAW WHICH CAN GOAD SUB-ORDINATE AUTHORITY AS HOW TO APPROACH SUCH CONTROVERSY. THE DISCUSSION MADE BY THE HONBLE SU PREME COURT IN THE CASE OF TAPARIA TOOLS (SUPRA) FROM PARA 8 TO 10 IS TO BE KEPT IN MIND. IT READS AS UNDER: SECTION 36 OF THE INCOME TAX ACT, 1961 (HEREINAFTE R REFERRED TO AS THE 'ACT') IS A RESIDUAL SECTION IN T OF CERTAIN DEDUCT IONS WHICH ARE TO BE MADE FROM THE INCOME OF THE ASSESSEE WHILE ARRIVING AT THE TAXABLE INCOME. IT IS NOMENCLATURED AS 'OTHER DEDUCTIONS', AS SOME OF THE PRECEDING SECTIONS PROVIDE FOR CERTAIN DEDUCTIONS O F SPECIFIC NATURE, WITH WHICH WE ARE NOT CONCERNED IN THE PRESENT CASE . ONE OF THE DEDUCTIONS, APART FROM MANY OTHER KINDS OF DEDUCTIO NS STIPULATED IN THE SECTION, RELATES TO THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THIS IS PROVIDED IN (III) OF SUB-SECTION (1) OF SECTION 36 AND READS AS UNDER: 36. OTHER DEDUCTIONS.(1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF TH E MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO I N SECTION 28 ** *** ITA. NO.175/AHD/2003 21 (III) THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION: PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN R ESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN FOR EXTENSION OF EXI STING BUSINESS OR PROFESSION (WHETHER CAPITALISED IN THE BOOKS OF ACC OUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE TILL THE DATE ON WHICH SUCH ASSE T WAS FIRST PUT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. EXPLANATION. RECURRING SUBSCRIPTIONS PAID PERIODI CALLY BY SHAREHOLDERS OR SUBSCRIBERS IN MUTUAL BENEFIT SOCIE TIES WHICH FULFIL SUCH CONDITIONS AS MAY BE PRESCRIBED, SHALL BE DEEM ED TO BE CAPITAL BORROWED WITHIN THE MEANING OF THIS CLAUSE; ** 9). IGNORING THE PROVISO AND THE EXPLANATION IN CLA USE (III) ABOVE, WITH WHICH WE ARE ADMITTEDLY NOT CONCERNED IN THIS CASE, IT IS CLEAR THAT AS PER THE AFORESAID PROVISION ANY AMOUNT ON ACCOUNT O F INTEREST PAID BECOMES AN ADMISSIBLE DEDUCTION UNDER SECTION 36 IF THE INTEREST WAS PAID ON THE CAPITAL BORROWED BY THE ASSESSEE AND TH IS BORROWING WAS FOR THE PURPOSE OF BUSINESS OR PROFESSION. THERE IS NO QUARREL, IN THE PRESENT CASE, THAT THE MONEY RAISED ON ACCOUNT OF I SSUANCE OF THE DEBENTURES WOULD BE CAPITAL BORROWED AND THE DEBENT URES WERE ISSUED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IN SUCH A SCENARIO WHEN THE INTEREST WAS ACTUALLY INCURRED BY THE ASSESSEE, WHICH FOLLOWS THE MERCANTILE SYSTEM OF ACCOUNTING, ON THE APPLICATION OF THIS STATUTORY PROVISION, ON INCURRING OF SUCH INTEREST, THE ASSES SEE WOULD BE ENTITLED TO DEDUCTION OF FULL AMOUNT IN THE ASSESSMENT YEAR IN WHICH IT IS PAID. WHILE EXAMINING THE ALLOWABILITY OF DEDUCTION OF TH IS NATURE, THE AO IS TO CONSIDER THE GENUINENESS OF BUSINESS BORROWING A ND THAT THE BORROWING WAS FOR THE PURPOSE OF BUSINESS AND NOT A N ILLUSIONARY AND COLOURABLE TRANSACTION. ONCE THE GENUINENESS IS PRO VED AND THE INTEREST IS PAID ON THE BORROWING, IT IS NOT WITHIN THE POWE RS OF THE AO TO DISALLOW THE DEDUCTION EITHER ON THE GROUND THAT RA TE OF INTEREST IS UNREASONABLY HIGH OR THAT THE ASSESSEE HAD HIMSELF CHARGED A LOWER RATE OF INTEREST ON THE MONIES WHICH HE LENT. IN TH E INSTANT CASE, THE AO DID NOT DISPUTE THAT THE NON-CONVERTIBLE DEBENTURES WERE ISSUED AND MONEY RAISED FOR BUSINESS PURPOSES. THE AO DID NOT EVEN DISPUTE THE GENUINENESS OF CLAUSE RELATING TO UPFRONT PAYMENT O F INTEREST IN THE FIRST ITA. NO.175/AHD/2003 22 YEAR ITSELF AS PER THE OPTION TO BE EXERCISED BY TH E DEBENTURE HOLDER. IN NUTSHELL, THE AO DID NOT DISPUTE THAT THE EXPENDITU RE ON ACCOUNT OF INTEREST WAS GENUINELY INCURRED. THEREFORE', THERE IS NO DISPUTE THAT INTEREST HAS, IN FACT, BEEN 'PAID' DURING THE YEAR OF ACCOUNTING. DEFINITION OF 'PAID IS CONTAINED IN SECTION 43 (II ) OF THE ACT TO MEAN ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD O F ACCOUNTING. TO BE PRECISE, THIS DEFINITION IS COUCHED IN THE FOLLOWIN G LANGUAGE: '43. DEFINITIONS OF CERTAIN TERMS RELEVANT TO INCOM E FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN SECTIONS 28 TO 41 AND IN THIS SECTION, UNLESS THE CONTEXT OTHERWISE REQUI RES - (2) 'PAID' MEANS ACTUALLY PAID OR INCURRED ACCORDIN G TO THE METHOD OF ACCOUNTING UPON THE BASIS OF WHICH THE PR OFITS OR GAINS ARE COMPUTED UNDER THE HEAD 'PROFITS AND GAIN S OF BUSINESS OR PROFESSION'; ** ** AS PER THE AFORESAID DEFINITION, EVEN IF THE AMOUNT IS NOT ACTUALLY PAID BUT 'INCURRED', ACCORDING TO THE METHOD OF ACCOUNTI NG, THE SAME WOULD BE TREATED AS 'PAID'. SINCE THE ASSESSEE WAS FOLLOW ING MERCANTILE SYSTEM OF ACCOUNTING, THE AMOUNT OF INTEREST COULD BE CLAI MED AS DEDUCTION EVEN IF IT WAS NOT ACTUALLY PAID BUT SIMPLY 'INCURR ED'. HOWEVER, IN THE INSTANT CASE, IT IS NOT IN DISPUTE THAT THE AMOUNT OF INTEREST WAS ACTUALLY PAID AS WELL IN THE ASSESSMENT YEAR IN WHICH IT WAS CLAIMED. 10. THE ONLY REASON WHICH PERSUADED THE AO TO STAGG ER AND SPREAD THE INTEREST OVER A PERIOD OF FIVE YEARS IS THAT THE T ERM OF DEBENTURES WAS FIVE YEARS AND THAT THE ASSESSEE HAD ITSELF GIVEN T HIS VERY TREATMENT IN THE BOOKS OF ACCOUNT, VIZ, SPREADING IT OVER A PERI OD OF FIVE YEARS IN ITS FINAL ACCOUNTS BY NOT DEBITING THE ENTIRE AMOUNT IN THE FIRST YEAR TO THE PROFIT AND LOSS ACCOUNT AND IT HAS, IN FACT, DEBITE D L/5TH OF THE INTEREST PAID TO THE PROFIT AND LOSS ACCOUNT FROM THE SECOND YEAR ONWARDS. THE HIGH COURT, IN ITS IMPUGNED JUDGMENT, HAS BASED ITS REASONING ON THE SECOND ASPECT AND APPLIED THE PRINCIPLE OF 'MATCHIN G CONCEPT' TO SUPPORT THIS CONCLUSION. 20. SIMILARLY, DISCUSSION MADE BY THE HONBLE SUPRE ME COURT IN PARA 14 AND 15 IS ALSO WORTH TO NOTE. IT READS AS UNDER: ITA. NO.175/AHD/2003 23 14. THE HIGH COURT HAS ALSO OBSERVED THAT IT WAS A CASE OF DEFERRED INTEREST OPTION. HERE AGAIN, WE DO NOT AGREE WITH T HE HIGH COURT. IT HAS BEEN EXPLAINED IN VARIOUS JUDGMENTS THAT THERE IS N O CONCEPT OF DEFERRED REVENUE EXPENDITURE IN THE ACT EXCEPT UNDE R SPECIFIED SECTIONS, I.E. WHERE AMORTIZATION IS SPECIFICALLY PROVIDED, S UCH AS SECTION 35-D OF THE ACT. 15. WHAT IS TO BE BORNE IN MIND IS THAT THE MOMENT SECOND OPTION WAS EXERCISED BY THE DEBENTURE HOLDER TO RECEIVE THE PA YMENT UPFRONT, LIABILITY OF THE ASSESSEE TO MAKE THE PAYMENT IN TH AT VERY YEAR, ON EXERCISING OF THIS OPTION, HAS ARISEN AND THIS LIAB ILITY WAS TO PAY THE INTEREST @ RS. 55 PER DEBENTURE. IN BHARAT EARTH MO VERS V. CIT [2000] 245 ITR 428/112 TAXMAN 61 (SC). THIS COURT HAD CATE GORICALLY HELD THAT IF A BUSINESS LIABILITY HAS ARISEN IN THE ACCO UNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED EVEN IF SUCH A LIABILIT Y MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. FOLLOWING PASSAGE FROM THE AFORESAID JUDGMENT IS WO RTH A QUOTE: 'THE LAW IS SETTLED: IF A BUSINESS LIABILITY HAS DE FINITELY ARISEN IN THE ACCOUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED AL THOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTUR E DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SH OULD ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH TH E ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE. IF THESE REQUIR EMENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILIT Y IS IN PRAESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE ANY DIFFERENCE IF THE FUTURE DATE ON WHICH THE LIABILITY SHALL HAVE T O BE DISCHARGED IS NOT CERTAIN.' THE PRESENT CASE IS EVEN ON A STRONGER FOOTING INAS MUCH AS NOT ONLY THE LIABILITY HAD ARISEN IN THE ASSESSMENT YEAR IN QUES TION, IT WAS EVEN QUANTIFIED AND DISCHARGED AS WELL IN THAT VERY ACCO UNTING YEAR. 21. AT THIS STAGE, WE WOULD LIKE TO FURTHER MAKE RE FERENCE TO THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLE S P.LTD. (SUPRA) WHEREIN THE HONBLE COURT HAS REITERATED CONCEPT OF COMMER CIAL EXPEDIENCY PROPOUNDED IN THE JUDGMENT OF S.A. BUILDERS, 288 IT R 158 AND ALSO JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. DALMIA CEMENT P.LTD. ITA. NO.175/AHD/2003 24 TO DEMONSTRATE AS TO HOW REVENUE AUTHORITIES OUGHT NOT TO HAVE INTERFERED WITH THE DECISION MAKING PROCESS OF BUSINESSMAN WHI LE CONDUCTING ITS BUSINESS. THE DISCUSSION MADE BY THE HONBLE SUPRE ME COURT IN THIS ASPECT READS AS UNDER: 8. FURTHER APPEAL OF THE REVENUE BEFORE THE HIGH C OURT FILED UNDER SECTION 260A OF THE INCOME TAX ACT, HOWEVER, HAS BE EN ALLOWED BY THE HIGH COURT VIDE IMPUGNED JUDGMENT DATED 06.12.2006. CHALLENGING THAT JUDGMENT, SPECIAL LEAVE PETITION WAS FILED IN WHICH LEAVE WAS GRANTED AND THAT IS HOW THE PRESENT APPEAL COMES UP FOR HEARING. 9. A PERUSAL OF THE ORDER PASSED BY THE HIGH COURT WOULD REVEAL THAT THE HIGH COURT HAS NOT AT ALL DISCUSSED THE AF ORESAID FACTS WHICH WERE ESTABLISHED ON RECORD PERTAINING TO THE INTERE ST FREE ADVANCE GIVEN TO M/S. HERO FIBRES LIMITED AS WELL AS LOANS GIVEN TO ITS OWN DIRECTORS AT INTEREST AT THE RATE OF 10 PER CENT. 10. ON THE OTHER HAND, THE HIGH COURT HAS SIMPLY QU OTED FROM ITS OWN JUDGMENT IN THE CASE OF 'COMMISSIONER OF INCOME TAX-I, LUDHIANA V. M/S. ABHISHEK INDUSTRIES LIMITED, LUDHIANA' [ITA NO. 110/2005 DECIDED ON 04.08.2006]. ON THAT BASIS, IT HAS HELD THAT WHEN LOANS WERE TAKEN FROM THE BANKS AT WHICH INTEREST WAS PAID FOR THE PURPOSES OF BUSINESS, THE INTEREST THEREON COULD NOT BE CLAIMED AS BUSINESS EXPENDITURE. 11. WE ARE OF THE OPINION THAT SUCH AN APPROACH IS CLEARLY FAULTY IN LAW AND CANNOT BE COUNTENANCED. INSOFAR AS LOANS TO THE SISTER CONCERN / SUBSIDIARY COMPANY ARE CONCERNED, LAW IN THIS BEH ALF IS RECAPITULATED BY THIS COURT IN THE CASE OF 'S.A. BUILDERS LTD. V. COMMISSIONER OF INCOME TAX (APPEALS) AND ANOTHER' [2007 (288) ITR 1 (SC)]. AFTER TAKING NOTE OF AND DISCUSSING ON THE SCOPE OF COMME RCIAL EXPEDIENCY, THE COURT SUMMED UP THE LEGAL POSITION IN THE FOLLO WING MANNER: - '26. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN E XPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUD ENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS IN CURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. ITA. NO.175/AHD/2003 25 27. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979 (118) ITR 200 (SC)], IF THE BORROWED AMOUNT WAS DON ATED FOR SOME SENTIMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY, THE INTEREST THEREON COULD N OT HAVE BEEN ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. IN MAD HAV PRASAD'S CASE [1979 (118) ITR 200 (SC)], THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIEW TO COMMEMORATE THE MEMORY OF THE ASSESSEE'S DECEASED HUSBAND AFTER WHOM THE COLL EGE WAS TO BE NAMED, IT WAS HELD BY THIS COURT THAT THE INTERE ST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIA'S CASE [ 1979 (118) ITR 200 (SC)] IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMO UNT ADVANCED TO THE SISTER CONCERN WAS BY WAY OF COMMER CIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THA N THE EXPRESSION 'FOR THE PURPOSE OF EARNING PROFITS' VID E CIT V. MALAYALAM PLANTATIONS LTD. [1964 53 ITR 140 (SC), C IT V. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [1971 82 ITR 166 (SC)], ETC.' 13. IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIEW TAKEN BY THE DELHI HIGH COURT IN 'CIT V. DALMIA CEMENT (B.) LTD. ' [2002 (254) ITR 377] WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT I S ESTABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURP OSE OF BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN T HE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRE CTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITU RE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT FURTHER HELD T HAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT AND THAT TH E INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIE S MUST NOT LOOK AT ITA. NO.175/AHD/2003 26 THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. 22. IN THE LIGHT OF THESE TWO DECISIONS, IF REASONS ASSIGNED BY THE AO WHICH MET APPROVAL OF THE LD.CIT(A) ARE CONSIDERED, THEN IT WOULD REVEAL THAT BASICALLY, THE LD.AO WAS AGGRIEVED WITH THE CLAIM O F DEDUCTION WITHOUT OFFERING INTEREST INCOME IN THE HANDS OF THE SPN AP PLICANTS. THE AO OBSERVED THAT THE ASSESSEE HAS CLAIMED HUGE INTERES T EXPENSES, WHEREAS, THE APPLICANTS WHO SHOULD HAVE SHOWN INTEREST INCOME, H AVE NOT SHOWN THAT MUCH INTEREST BY WAY OF MATCHING PRINCIPLE. THE APPLICA NTS HAVE SOLD THESE SPNS. TO FINANCIAL INSTITUTION AND OFFERED CAPITAL GAIN. SIMILARLY, ON REDEMPTION, DIFFERENCE HAS BEEN OFFERED FOR TAXATION BY THE FIN ANCIAL INSTITUTIONS. THE TRANSACTION WHICH HAS TAKEN PLACE IN THIS MANNER, A CCORDING TO THE AO, WAS NOT IN ACCORDANCE WITH LAW. BUT HE FAILED TO POINT OUT WHICH PROVISION OF THE INCOME TAX ACT HAS BEEN VIOLATED BY THE ASSESSEE OR WHICH GUIDELINES OF THE SEBI HAS NOT BEEN ADHERED TO. ACCORDING TO THE ASS ESSEE, TREATMENT MADE BY THE INVESTOR IS OF NO CONSEQUENCES AS FAR AS ALLOWA NCE OF EXPENDITURE IN THE CASE OF ASSESSEE-COMPANY IS CONCERNED. AS FAR AS F ACT THAT THIS CAPITAL WAS RAISED FOR THE PURPOSE OF BUSINESS IS CONCERNED, NO BODY HAS DENIED IT BECAUSE IN EARLIER YEARS, THIS FACT HAS BEEN APPROVED BY TH E HONBLE HIGH COURT, THE AO HAS NOT DISCOVERED ANY NEW FACTS. HE CONSIDERED THIS EXERCISE AT THE END OF THE ASSESSEE AS A COLOURABLE EXERCISE ONLY UNDER THE IMPRESSION THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF INTEREST EXPENDIT URE, WHEREAS CORRESPONDING EQUAL AMOUNT WAS NOT OFFERED FOR TAX IN THE HANDS OF THE APPLICANTS. TO OUR MIND, IT CANNOT BE REASON FOR D ISALLOWING THE CLAIM OF THE ASSESSEE. IF EARNING OF EQUAL AMOUNT OF INCOME IS C ONSIDERED AS BASIC PRINCIPLE FOR ALLOWANCE OF EXPENSES, THEN NO ASSESS EE WOULD SUFFER ANY LOSS. INCIDENCE OF TAXABILITY HAS OCCURRED IN THE HANDS O F THE APPLICANTS IN A DIFFERENT MANNER. THEY WERE INVESTORS. THEY HAVE SHOWN CAPITAL GAIN ON ITA. NO.175/AHD/2003 27 THEIR INVESTMENT. THEREFORE, IF INCIDENCE OF INTER EST INCOME NOT RESULTED TO THEM CANNOT BE A GROUND TO DOUBT THE BUSINESS EXPEN DITURE OF THE ASSESSEE. 23. OTHER REASONS ASSIGNED BY THE AO AND EXTRACTED BY US IN PARA-5 OF THIS ORDER WOULD INDICATE THAT THE AO TRIED TO TAKE BUSI NESS DECISION IN THE CASE OF THE ASSESSEE. HE WAS OF THE VIEW THAT THERE WAS NO NECESSITY OF ISSUING ANY INSTRUMENT LIKE SPN, BECAUSE OTHER ASSOCIATE COMPAN IES OF THE ASSESSEE HAD THEIR OWN SURPLUS FUNDS FROM WHICH THEY CAN FINANCE BHAVNAGAR PROJECT. SIMILARLY, ACCORDING TO THE AO, CLAIM OF ISSUANCE O F SPN SHOULD NOT BE FORMULATED IN THIS MANNER. TO OUR MIND BOTH THESE REASONS ARE CONTRARY TO THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES PVT.LTD. AS WELL AS TAPARIA TOOLS LTD (SUPRA). THU S, STEPS AT THE END OF THE AO AMOUNTS TO INTERFERENCE IN TAKING BUSINESS DECIS ION, WHICH IS NOT PERMISSIBLE TO HIM. IN OTHER WORDS, THE AO CANNOT CONTEND THAT HOW MUCH FINANCE AND AT WHICH RATE WOULD BE SUFFICIENT FOR T HE ASSESSEE FOR RUNNING ITS BUSINESS. HIS AREA WOULD BE WHETHER THE ASSESSEE H AS INCURRED ANY UNDUE EXPENDITURE, WHICH WAS NOT REQUIRED FOR THE PURPOSE OF BUSINESS OR NOT. THUS IN OUR VIEW, THERE IS NO DISPARITY OF FACTS FROM TH E EARLIER YEARS, WHICH CAN PERSUADE LD.REVENUE AUTHORITY TO TAKE A DIFFERENT V IEW. ISSUE IN DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE D ECISION OF THE HONBLE HIGH COURT IN THE CASE OF THE ASSESSEE ITSELF. WE ALLOW THIS GROUND OF APPEAL AND DELETE THE DISALLOWANCE. 9. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 4 TH MAY, 2017 AT AHMEDABAD. SD/- SD/- ( MANISH BORAD ) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER AHMEDABAD; DATED 04/05/2017