DCIT RG9(2), MUMBAI V. MTZ POLYFILMS LTD, MUMBAI

ITA 5015/MUM/2009

• Counselvise Citation: 501519914 RSA 2009
• Duration Of Justice: 2 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-12-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 24-10-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 02-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P C MOURYA
• Keywords: Capital asset; Business expenditure; Scheme of amalgamation; Revenue expenditure; Capital expenditure
• Section: 43B; 142(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B : MUMBAI BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI PRAMOD KUMAR, ACCOUNTANT MEMBER ITA NO. 5015/MUM/2009 ASSESSMENT YEAR 2004-2005 D.C. RANGE 9 (2) MUMBAI 39. VS. M/S. MTZ POLYFILMS LTD. MUMBAI -39. (APPELLANT) (RESPONDENT) FOR APPELLANT : SHRI P.C. MOURYA FOR RESPONDENT : SHRI JITENDRA JAIN DATE OF HEARING : 22/12/2011 DATE OF PRONOUNCEMENT : 30/12/2011 ORDER PER SHRI N.V.VASUDEVAN, J.M. 1. THIS IS AN APPEAL BY THE REVENUE AGAINST THE OR DER DT.17.6.2009 OF CIT(A)-IX, MUMBAI, RELATING TO ASSESSMENT YEAR 2 004-05. GROUNDS OF APPEAL ORIGINALLY RAISED BY THE ASSESSEE READS AS F OLLOWS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE DISAL LOWANCE OF INTEREST OF RS.99,97,477/- (OUT OF DISALLOWANCE OF RS.1,26,48,750/- MADE BY THE ASSESSING OFFICER BEIN G INTEREST PAYABLE TO G.I.D.C. ON COST OF LAND TAKEN ON LEASE) WITHOUT APPRECIATING THE FACT THAT THE SAID AMOUNT BEING INTEREST ON BORROWINGS FROM G.I.D.C. REMAINED UNPAI D DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2004-05 AND WAS NOT ALLOWABLE AS DEDUCTION UNDER CL AUSE (D) OF SECTION 43B OF THE INCOME-TAX ACT, 1961. 2. THE ASSESSEE PRAYS THAT THE ORDER OF THE CIT (A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFI CER BE RESTORED. 2 2. THE FACTS GIVING RAISE TO THE AFORESAID GROUNDS OF APPEAL ARE AS FOLLOWS: 2.1. THE ASSESSEE IS A COMPANY ENGAGED IN THE BUS INESS OF PRODUCING POLYESTERS FILMS IN VARIOUS MICRON THICKNESSES AND SIZES IN DIFFERENT GRADES. THE ASSESSEE HAS ITS MANUFACTURING FACILITIES LOCAT ED AT PLOT NO. 757, GIDC JHAGDIA INDUSTRIAL ESTATE, NEAR TALODRA VILLAG E, JHAGADIAWALIA ROAD, DIST. BHARUC 393110, GUJARAT. IT HAS COMMENCE D ITS COMMERCIAL PRODUCTION IN OCT, 1998. THE ASSESSEE FILED ITS RET URN OF INCOME FOR THE YEAR UNDER CONSIDERATION ON 14.10.2004 DECLARING TOTAL I NCOME AT NIL AFTER SET OFF OF BROUGHT FORWARD LOSSES. THE TOTAL LOSS CARRIED FORW ARD AFTER SET OFF OF INCOME FOR THE YEAR WAS RS.1,71,11,22,797/-. THE RE TURN WAS PROCESSED U/S 143(1) ON 01.11.2004. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICE U/S 143(2) AND U/S 142(1) WERE ISSUED AND SEWED UPON TH E ASSESSEE. ONE OF THE DISALLOWANCE OF EXPENSES BY THE ASSESSING OFFIC ER IN THE COURSE OF ASSESSMENT PROCEEDINGS WAS DISALLOWANCE OF GROUN D NO.5 RELATES TO DISALLOWANCE OF LEASE INTEREST OF RS. 1,26,48,742 P AYABLE TO GUJARAT INDUSTRIAL DEVELOPMENT CORPORATION (GIDC) RELATING TO THE LAND TAKEN ON LEASE FOR SETTING UP THE FACTORY. THE ASSESSEE ENTERED IN TO A LICENSE AGREEMENT WITH GIDC ON 25 TH JULY,1995 FOR ACQUIRING A PLOT OF LAND AND IT COMMENCED ITS COMMERCIAL PRODUCTION ON 01.10.1998. THE ASSESSEE AGREED TO PAY LEASE RENT AS PER THE TERMS OF AGREEM ENT WHICH COMPRISES OF PRINCIPLE AND INTEREST. THE INTEREST COMPONENT INCL UDED IN THE LEASE RENTAL WAS CHARGED TO THE P & L A/C WHEREAS THE PRINCIPLE COMPONENT WAS DEBITED TO THE GIDC A/C TOWARDS ACQUISITION OF THE LAND DUR ING THE RELEVANT PREVIOUS YEAR THE SUM OF RS.99,97,477/- BEING INTEREST COMPO NENT INCLUDED IN THE LEASE INSTALLMENTS PAYABLE TO GIDC, HAD BEEN DEBITE D TO THE P & L A/C UNDER THE HEAD 'INTEREST AND FINANCE CHARGES' AND CLAIMED AS DEDUCTION IN COMPUTING INCOME. THE AO DISALLOWED THE INTEREST O F RS.1,26,48,742/- (AS AGAINST CORRECT AMOUNT OF RS.99,47,477/-) ON THE GR OUND THAT IT PERTAINS TO EARLIER YEARS AND IT IS CAPITAL IN NATURE AND FO R THE DETAILED REASONS STATED IN ASSESSMENT ORDER FOR THE A.Y. 2002-03. 3 2.2. THE ASSESSEE SUBMITTED BEFORE CIT (A) THAT TH E CORRECT AMOUNT OF INTEREST COMPONENT INCLUDED IN THE LEASE RENT PAYABLE TO THE GIDC FOR ACQUISITION OF LAND WAS RS.99,97,477/- AND NOT RS. 1,26,48,742/- WHICH APPARENTLY IS TAKEN BY THE AO F ROM THE ASSESSMENT ORDER FOR THE A.Y. 2002-03. 2.3. WITH REFERENCE TO DISALLOWANCE OF THE INTERES T COMPONENT OF RS.99,97,477/- INCLUDED IN THE LEASE RENT THE ASSE SSEE SUBMITTED THAT IT PERTAINS TO THE YEAR UNDER CONSIDERATION. WE HAVE S EEN PAGE 38 OF THE PAPER BOOK AND IT SHOWS THAT THE AMOUNT OF RS.99,97,477/- RELATING TO PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2004-05 TOWARDS INTERES T ON INSTALLMENTS PAYABLE TO GIDC RELATING TO ASSESSMENT YEAR 2004-05. THE AS SESSEE SUBMITTED THAT THIS LEASE INTEREST IS NOT CAPITAL IN NATURE AS THE ASSESSEE COMMENCED ITS COMMERCIAL PRODUCTION IN OCT. 1998 AND THE INTEREST PAYMENT CAN NOT BE CONSIDERED TO BE CAPITAL IN NATURE SUBSEQUENT TO THE COMMENCEM ENT OF COMMERCIAL PRODUCTION. THE ASSESSEE SUBMITTED THAT EXPLANATION 8 TO SECTIO N 43(1) OF THE ACT CATEGORICALLY PROVIDES THAT : 'EXPLANATION 8 FOR THE REMOVAL OF DOUBTS, IT IS HE REBY DECLARED THAT WHERE ANY AMOUNT IS PAID OR IS PAYABL E AS INTEREST IN CONNECTION WITH THE ACQUISITION OF AN A SSET, SO MUCH OF SUCH AMOUNT AS IS RELATABLE TO ANY PERIOD A FTER SUCH ASSET IS FIRST PUT TO US SHALL NOT BE INCLUDED , AND SHALL BE DEEMED NEVER TO HAVE BEEN INCLUDED, IN THE ACTUAL COST OF SUCH ASSET'. 2.4. IT WAS ARGUED THAT ON PLAIN READING OF THE AB OVE EXPLANATION IT WAS VERY CLEAR THAT NO PART OF THE INTEREST RELATABLE T O THE ACQUISITION OF ASSET CAN BE ALLOWED TO BE CAPITALISED SUBSEQUENT TO THE DATE ON WHICH THE ASSET IS PUT TO USE. THE LAND ACQUIRED BY THE ASSESSEE FROM THE GID C WAS PUT TO USE FOR COMMERCIAL CONSIDERATION IN OCT 1998 AND HENCE THE INTEREST PAYMENT THEREAFTER RELATABLE TO ACQUISITION OF ASSET CAN NOT BE CONSID ERED TO BE CAPITAL IN NATURE. IN THIS CONNECTION THE ASSESSEE RELIED ON THE JUDGM ENT OF THE SUPREME COURT IN THE CASE OF DCIT VS.CORE HEALTH CARE LTD. 289 ITR 1 94 (SC) WHEREIN IT HAS BEEN HELD BY THE HON'BLE SUPREME COURT THAT INTEREST ON BORROWING BY AN ASSESSEE DURING THE CONTINUANCE OF ITS BUSINESS, UTILISED FO R EXPANSION ACTIVITIES HAS TO BE TREATED AS REVENUE IN NATURE ALLOWABLE U/S 36 (1 ) (III) OF THE ACT. IT WAS ALSO 4 4 SUBMITTED THAT SINCE THE INTEREST COMPONENT INCLUDE D IN THE LEASE RENTAL IS NOT RELATED TO THE 'LOAN OR BORROWING FROM ANY PUBLIC F INANCIAL INSTITUTION OR A STATE FINANCIAL CORPORATION OR A STATE INDUSTRIAL INVESTM ENT CORPORATION' OR 'LOAN OR ADVANCES FROM A SCHEDULED BANK', THE PROVISION O F SECTION 43B CAN NOT BE APPLIED TO SUCH INTEREST PAYMENT. 2.5. THE ASSESSEE THEREFORE, SUBMITTED THAT ON THE FACTS AND CIRCUMSTANCES OF CASE, INTEREST COMPONENT OF THE LE ASE RENT PAID TO GIDC IS TO BE ALLOWED DEDUCTIBLE REVENUE EXPENDITURE. 3. THE CIT (A) HELD AS FOLLOWS: 6.3. I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS O F THE CASE, APPELLANTS SUBMISSION AS WELL AS THE A.OS CONTENT ION. ACCORDING TO THE APPELLANT THE CORRECT FIGURE OF IN TEREST INCLUDED IN THE LEASE RENTAL OF RS.99,97,477/- WHICH IS DULY SUPPORTED BY THE STATEMENT OF GIDC. IT APPEARS THAT THE FIGUR E HAS BEEN PICKED UP BY THE A.O. FROM THE ASSESSMENT ORDER FOR THE A.Y. 2002-03. THE A.O. HAS WRONGLY TAKEN THE INTEREST IN CLUDED IN THE LEASE RENTAL PAID TO GIDC AT RS.1,26,48,742/- A S AGAINST THE CORRECT AMOUNT OF RS.99,97,477/-. THE A.O. IS T HEREFORE, DIRECTED TO TAKE THE CORRECT AMOUNT OF INTEREST FOR THE YEAR UNDER CONSIDERATION AT RS.99,97,477/- SUBJECT TO VERIFICA TION OF THE AMOUNT DEBITED TO THE P/L ACCOUNT DURING THE YEAR U NDER CONSIDERATION. 6.4. I ALSO FIND MERITS IN THE APPELLANTS SUBMISSI ON THAT SUCH INTEREST COMPONENT INCLUDED IN THE LEASE RENTAL PAI D TO GIDC FOR ACQUISITION OF LAND FOR SETTING UP OF THE FACTORY C ANNOT BE CONSIDERED TO BE CAPITAL IN NATURE SUBSEQUENT TO TH E COMMENCEMENT OF PRODUCTION AT THE FACTORY PREMISES. THIS FACT HAS NOT BEEN DISPUTED THAT THE PRODUCTION WAS COMME NCED IN OCTOBER, 1998. EVEN THOUGH, LEASE RENTAL INCLUDES I NTEREST COMPONENT, THE SAME CANNOT BE CONSIDERED CAPITAL IN NATURE AFTER COMMENCEMENT OF PRODUCTION AT THE FACTORY PRE MISES LOCATED AT GIDC LAND WITH REFERENCE TO WHICH THE LE ASE RENTAL ARE PAID. I AM THEREFORE OF THE VIEW THAT SUCH INTE REST COMPONENT INCLUDED IN THE LEASE RENTAL CONSTITUTE A LLOWABLE REVENUE EXPENDITURE. BESIDES, SECTION 43B OF THE I. T. ACT ALSO HAS NO APPLICATION TO THE PAYMENT OF THE LEASE RENT TO GIDC AS THESE PAYMENTS ARE NOT WITH REFERENCE TO ANY BORROW INGS OR LOAN. THE A.O. IS THEREFORE DIRECTED TO DELETE THE ADDITION OF RS.1,26,48,742/-. THIS GROUND OF APPEAL IS PARTLY A LLOWED. 5 4. AGGRIEVED BY THE ORDER OF THE CIT(A), THE REVE NUE IS IN APPEAL BEFORE THE TRIBUNAL. WE HAVE HEARD THE SUBMISSION OF THE LEARNED D.R. WHO REITERATED THE STAND OF THE AO THAT THE PAYMENT IN QUESTION WAS FOR ACQUIRING A CAPITAL ASSET AND WAS THEREFORE CAPITAL EXPENDITURE. THE LEARNED COUNSEL FOR THE ASSESSEE BESIDES REITERATING THE ST AND OF THE ASSESSEE AS PUT FORTH BEFORE CIT(A), ALSO RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATION CO. (1953) P VT.LTD. VS. CIT 56 ITR 52 (SC) WHEREIN THE HONBLE SUPREME COURT HELD THAT INTEREST ON UNPAID SALE CONSIDERATION FOR PURCHASE OF CAPITAL ASSETS H AS TO BE ALLOWED AS REVENUE EXPENDITURE. 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE ASSESSEE WAS ALLOTTED PLOT NO.757 AT JHAGADIA ESTATE INDUSTRIAL ESTATE, BHARUCH DISTRICT, GUJARAT UNDER AN ALLOTMENT LETTER DATED 18.7.1995. THE TERMS OF THE ALLOTMENT WAS THAT A SUM OF RS.2,40,40,800 WAS TO B E PAID BY THE ASSESSEE AND THE BALANCE SALE CONSIDERATION OF RS.5,60,95,2 00/- WAS TO BE PAID IN 32 QUARTERLY INSTALMENTS. FOR THE FIRST TWO YEARS NO INSTALMENT IS PAYABLE TOWARDS REPAYMENT OF THE PRINCIPAL BUT INTEREST ON THE OUTSTANDING PRINCIPAL AMOUNT. THEREAFTER, THE ASSESSEE IS BOUND TO PAY I N 32 QUARTERLY INSTALMENTS THE OUTSTANDING SALE CONSIDERATION WITH INTEREST ON REDUCING BALANCE WITH 16% RATE OF INTEREST. THE INTEREST PA YABLE FOR THE PREVIOUS YEAR RELEVANT TO AY 04-05 HAS BEEN QUANTIFIED BY GIDC AT A SUM OF RS. 99,97,477/- AS PER ITS LETTER DATED 29.8.2001, A CO PY OF WHICH IS AT PAGE 34 AND 35 OF THE ASSESSEES PAPER BOOK. THUS IT IS CL EAR THAT THE SUM OF RS.99,97,477 IS INTEREST PERTAINING TO THE PREVIOUS YEAR AND IS PAYABLE AS INTEREST ON BALANCE SALE CONSIDERATION PAYABLE FOR ACQUIRING A CAPITAL ASSET. THE ASSESSEE HAS ALREADY COMMENCED ITS COMMERCIAL P RODUCTION AND THERE IS NO DISPUTE ON THIS ASPECT. IN THE GIVEN FACTS A ND CIRCUMSTANCES OF THE CASE, THE INTEREST EXPENDITURE WAS CLEARLY AN ALLOW ABLE EXPENDITURE. THE FACTS OF THE ASSESSEES CASE ARE IDENTICAL TO THE C ASE BEFORE THE HONBLE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATIO N CO. (1953) PVT.LTD. (SUPRA). IN THE SAID CASE THE FACTS WERE THAT PURS UANT TO A SCHEME OF AMALGAMATION BETWEEN TWO SHIPPING COMPANIES, THE AS SESSEE-COMPANY WAS 6 INCORPORATED ON AUGUST 1O, 1953, TO TAKE OVER CERTA IN PASSENGER AND FERRY SERVICES CARRIED ON BY ONE OF THE FORMER. ON AUGUST 12, 1953, THE ASSESSEE- COMPANY TOOK OVER ASSETS, WHICH WERE FINALLY VALUED AT RS. 81,55,000, AND AGREED THAT THE PRICE WAS TO BE SATISFIED PARTLY BY ALLOTMENT OF 29,990 FULLY PAID UP SHARES OF RS. 100 EACH AND THE BALANCE WAS TO BE TREATED AS A LOAN AND SECURED BY A PROMISSORY NOTE AND HYPOTHECATION OF ALL MOVABLE PROPERTIES OF THE ASSESSEE-COMPANY. THE BALANCE REM AINING UNPAID FROM TIME TO TIME WAS TO CARRY SIMPLE INTEREST AT 6 PER CENT. BY A SUPPLEMENTAL AGREEMENT THE ORIGINAL AGREEMENT WAS MODIFIED TO TH E EFFECT THAT THE BALANCE SHALL BE PAID BY THE ASSESSEE-COMPANY AND UNTIL IT WAS PAID IN FULL THE ASSESSEE-COMPANY SHALL PAY SIMPLE INTEREST AT 6 PER CENT. PER ANNUM ON SO MUCH OF THE BALANCE AS REMAINED DUE. THE BALANCE WA S ALSO TO BE SECURED BY HYPOTHECATION OF ALL THE MOVABLE PROPERTIES OF T HE ASSESSEE-COMPANY. DURING THE RELEVANT ACCOUNTING YEARS THE ASSESSEE P AID INTEREST ON THE BALANCE OUTSTANDING AND THE QUESTION WAS WHETHER TH E INTEREST PAID WAS ALLOWABLE AS A DEDUCTION UNDER SECTION 10(2)(III)) OR (XV) OF THE INDIAN INCOME-TAX ACT, 1922, IN COMPUTING ITS PROFITS. TH E ABOVE SECTIONS OF THE 1922 ACT ARE EQUIVALENT TO EQUIVALENT TO SEC.36(1)( III) OR SEC.37(1) OF THE INCOME TAX ACT, 1961. THE HONBLE SUPREME COURT HE LD THAT THE EXPRESSION 'CAPITAL ' USED IN SECTION 10(2)(III), IN THE CONTE XT IN WHICH IT OCCURRED, MEANT MONEY AND NOT ANY OTHER ASSET: THERE WAS IN TRUTH N O CAPITAL BORROWED BY THE ASSESSEE IN THIS CASE. AN AGREEMENT TO PAY THE BALANCE OF CONSIDERATION DUE BY THE PURCHASER DID NOT IN TRUTH GIVE RISE TO A LOAN. THEREFORE, THE CLAIM FOR DEDUCTION OF THE AMOUNT OF INTEREST UNDER SECTION 10(2)(III) WAS NOT ADMISSIBLE. THE HONBLE COURT FURTHER HELD THAT TH E INTEREST PAID BY THE ASSESSEE WAS BUSINESS EXPENDITURE AND WAS ALLOWABLE AS A DEDUCTION UNDER SECTION 10(2)(XV). THE TRANSACTION OF ACQUISITION O F ASSETS WAS CLOSELY RELATED TO THE COMMENCEMENT AND CARRYING ON OF THE ASSESSEE 'S BUSINESS AND INTEREST PAID ON THE UNPAID BALANCE OF THE CONSIDER ATION FOR THE ASSETS ACQUIRED HAD, IN THE NORMAL COURSE, TO BE REGARDED AS EXPENDED FOR THE PURPOSE OF THE BUSINESS WHICH WAS CARRIED ON IN THE ACCOUNTING PERIODS. 7 6. WE ARE OF THE VIEW THAT THE AMOUNT IN QUESTION IS ALLOWABLE U/S.37(1) OF THE ACT. THE VIEW EXPRESSED BY THE HO NBLE SUPREME COURT AS ABOVE ALSO SUPPORTS THE PLEA OF THE ASSESSEE THAT T HE PROVISIONS OF SEC.43-B OF THE ACT WILL NOT APPLY TO THE FACTS OF THE PRESE NT CASE, SINCE UNPAID SALE CONSIDERATION CANNOT BE SAID TO BE MONIES BORROWED. WE MAY ALSO ADD THAT THE PROVISIONS OF SEC.43-B OF THE ACT, WERE NEITHER APPLIED BY THE AO IN THIS A.Y. OR IN AY 02-03, BASED ON WHICH THE AO PASSED A SSESSMENT ORDER IN THE PRESENT A.Y 04-04. 7. FOR THE REASONS GIVEN ABOVE, WE CONFIRM THE ORD ER OF THE CIT(A) AND DISMISS THE APPEAL BY THE REVENUE. 8. IN THE RESULT THE APPEAL BY THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH DEC.2011 SD/- SD/- (PRAMOD KUMAR) (N.V.VASUDEVAN) ACCOUNTANT MEMBER JUDICIALMEMBER MUMBAI, DATE 30 TH DECEMBER, 2011 VM. COPY TO 1. D.C. RANGE 9 (2), AAYAKAR BHAVAN, R.NO.218, 2 ND FLOOR, M.K. ROAD, MUMBAI 39. 2. M/S. MTZ POLYFILMS LTD. 5 TH FLOOR, NEW INDIA CENTRE, 17, COOPERAGE ROAD, MUMBAI 39. 3. CIT(A)-IX, MUMBAI 4. CIT-IX, MUMBAI 5. DR B BENCH 6. GUARD FILE. (TRUE COPY) BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI BENCHES MUMBAI. 8 DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 26/12/11 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 27/12/11 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS/PS 7. FILE SENT TO THE BENCH CLERK SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER