THE COMMISSIONER OF INCOME TAX VIJAYAWAD V. SPARTEK CEREMICS INDIA LTD.

ITTA/57/2000

AI Insights

The case involves an appeal by the Commissioner of Income Tax, Guntur against M/s. Spartek Ceramics India Ltd. concerning various tax assessments for the year 1992-93 following the amalgamation of M/s. Spartek Ceramics India Ltd. and M/s. Spartek Granites Limited. The primary legal issues revolved around the correct treatment of interest on loans for acquiring capital assets, the applicability of foreign exchange fluctuations to asset depreciation, and the computation of relief under Sections 80HH and 80I of the Income Tax Act. The Income Tax Appellate Tribunal had earlier ruled in favor of the respondent on these issues, which the appellant contested.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 680543 (HC-HYDERABAD)
• Appeal Type: Others
• Pronouncement Date: 19-07-2013
• Assessment Year: misc
• Other Referred Cases: Challapalli Sugars Limited v. C.I.T.
• Laws Referred To: Income Tax Act, Companies Act, 1956
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Keywords: Amalgamation; Capital assets; Commercial production; Foreign exchange fluctuation; Interest on Loans; Revenue expenditure
• Section: 143(3); 143(2); 80HH; 143(1)(a); 43(1); 43A; 391; 394; 143(1)(b); 80I

Judgement Text

"THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE Ms. JUSTICE G. ROHINI INCOME TAX TRIBUNAL APPEAL NO.57 OF 2000 Dt.19.7.2013 Between: The Commissioner of Income Tax Guntur, at present, Vijayawada … Appellant And M/s. Spartek Ceramics India Ltd., Narasingapuram Chandragiri Mandal Chittoor District … Respondent THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTI SENGUPTA AND THE HON’BLE Ms. JUSTICE G. ROHINI INCOME TAX TRIBUNAL APPEAL NO.57 OF 2000 JUDGMENT: (per the Hon’ble the Chief Justice Sri K.J. Sengupta) The present appeal has been filed against the judgment and order of the Income Tax Appellate Tribunal, Hyderabad Bench ‘A’, Hyderabad, dt.20.12.1999. 2. The appeal was admitted by an order dt.16.11.2000, on the following substantial questions of law: i. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that interest amount of Rs.25,62,371/- paid on amounts borrowed for acquiring fixed assets in revenue expenditure? ii. Whether on the facts and in the circumstances of the case, the Tribunal is correct in holding that there was commercial production in the Granites Division during the previous year relevant for the assessment year? iii. Whether on the facts and circumstances of the case, the Tribunal is correct in law in holding that the additional foreign exchange liability caused during the previous year 1990-91 shall be increased to the written down value of the assets as on 31.3.1991 for the purpose of allowing the depreciation for assessment year 1992-93? iv. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in directing the Assessing Officer to workout the foreign exchange fluctuation at the market rate certified by the authorized dealer? v. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in directing the Assessing Officer to exclude the interest burden of the assessee company on the loan funds advanced to M/s.Neycer India Limited from the computation of relief to be granted under Section 80HH of the Income Tax act? 3. The short facts leading to preferring the appeal are as follows: The respondent company is a public limited company and has been engaged in the business of manufacturing ceramic tiles. The present appeal relates to the assessment year 1992-93. Another company, namely, M/s. Spartek Granites Limited, which has been manufacturing vitrified ceramic granite tiles has started its commercial production on 26.3.1991. This company closed its books of account on 31.3.1991. This company and the respondent company jointly filed applications under Section 391 read with Section 394 of the Companies Act, 1956 before this Court praying for approval of scheme for amalgamation of the two companies and also for effecting amalgamation as approved by the shareholders and secured creditors of the companies with effect from 1.4.1991, i.e., from the beginning of the financial year 1991-92, which is the previous year relevant to the assessment year 1992-93, involved in the appeal. The said Spartek Granites Limited ceased to exist and had become an unit of the respondent company, which is referred to as ‘Granites Division’. The said scheme was duly approved by this Hon’ble High Court under the Companies Act and the company has made up the consolidated account as a single entity combining the results of the two divisions, Ceramics and Granites Divisions, and filed return of income on 31.12.1992 before the Deputy Commissioner (Assessments), Special Range, Guntur, disclosing a taxable income of Rs.1,54,473/-. Thereafter, on 10.11.1993, the assessee company filed a revised return, disclosing taxable income as ‘Nil’. The said revised return was processed under Section 143(1)(a) of the Income Tax Act, (for short, ‘the Act’) on 28.7.1994, and after making certain adjustments, the taxable income was determined as ‘Nil’. Subsequently, the assessment was converted into a scrutiny assessment by issue of a notice under Section 143(2) of the Act. The assessment was finally completed by the assessing officer under Section 143(3) of the Act, by his order dt.23.3.1995 after making additions and disallowances under various heads with reference to the two units of the assessee company. 4. The assessing officer made disallowance of Rs.26,37,500/- on account of unabsorbed depreciation of the erstwhile Spartek Granites Limited carried over a sum of Rs.25,62,371/- to the accounts of the assessee company after amalgamation on account of interest payable on the loans availed for acquisition of capital assets, the amount of depreciation on additional liability provided on foreign exchange fluctuation and the amount claimed as relief under Sections 80HH and 80I of the Act. Being aggrieved by the order of the assessing officer, the respondent preferred the appeal before the Tribunal. 5. At the time of hearing of the appeal before the Tribunal, the respondent did not press issue of disallowance of Rs.26,37,500/- on account of unabsorbed depreciation of the erstwhile Spartek Granites Limited, carried over to the accounts of the assessee company after amalgamation. The appeal was heard and decided on the remaining issues. 6. The learned Tribunal held on fact that after amalgamation, the erstwhile Spartek Granites Limited was no longer in existence and had become only a division of the respondent company and this division is functioning as a part of it, which is maintaining complete unity, interlacing, interdependence and interconnection of management and control. On fact, the learned Tribunal also held that the erstwhile Spartek Granites Limited had commenced production on 26.3.1991, i.e., during the previous year relevant to the assessment year 1991-92 itself. Since commercial production has started, the interest on borrowings made for the purpose of acquiring capital assets could not be capitalized and added to the cost of the assets, but should be treated as revenue expenditure in view of the provisions contained in Explanation 8 to Section 43(1) of the Act. Therefore, the disallowance of Rs.25,62,371/- being the interest amount payable on the loans availed for acquisition of capital assets was deleted. 7. The learned Tribunal also held additional depreciation is allowable as per the provisions of Section 43A of the Act. The learned Tribunal held that the rate of foreign exchange has to be computed and ascertained at market rate and not at government rate. The learned Tribunal, however, rejected the claim for deduction of an amount of Rs.48,98,759/- received from M/s. Neycer India Limited, by way of interest income. However, the learned Tribunal allowed the corresponding expenditure of interest paid by the assessee company to procure relevant fund advanced to M/s.Neycer, under Section 80HH of the Act, in the hands of the assessee company. 8. No one appeared on behalf of the respondent assessee. 9. Learned counsel appearing for the appellant submits that the learned Tribunal was factually wrong in holding that Spartek Granites India Limited is a part and parcel of one division and unit of the respondent company. The learned Tribunal should have held that the two divisions are independent and they are independently accounted and functioning separately and independently. The learned Tribunal on fact wrongly held that the commercial production of the erstwhile Spartek Granite Ltd., started before 1.4.1991 and therefore the decision of the Hon’ble Supreme Court in the case of Challapalli Sugars Limited v. C.I.T.[1] is squarely applicable to the facts of the case. The learned Tribunal erroneously found on fact that both Granites Division as well as Ceramics Division constitute same business entity and the interest claimed by the assessee is for the period after commencing commercial production. Therefore, the learned Tribunal should not have deleted the disallowance of amount of interest on loan availed for acquisition of capital assets. 10. Learned counsel for the appellant contended that the additional liability on account of depreciation in foreign exchange fluctuation during the previous year 1990-91 should not have been allowed. The learned Tribunal should have held that the exchange fluctuation during the previous year 1991-92 would only be considered for allowing depreciation for the assessment year 1992-93. The learned Tribunal committed legal error by accepting the foreign exchange at market rate instead of official rate of exchange for buying foreign currency. The learned Tribunal should have held that there was no occasion for the assessee to buy foreign exchange at market rate since the repayment of loan was already approved and permitted by the Reserve Bank of India (RBI). The learned Tribunal erred in law in directing the assessing officer to exclude the interest burden of the assessee company on the loans advanced to M/s.Nycer India Limited from the computation of relief granted under Section 80HH of the Act and the interest received on the loan advanced to M/s.Nycer India Limited would fall under the head ‘income from other sources’. 11. We have heard the learned counsel for the appellant and gone through the impugned judgment and order of the learned Tribunal. The points which fall for consideration to decide the present appeal are:- i. Whether the erstwhile Spartek Granites Limited started commercial production before 1.4.1991 or not? ii. Whether Spartek Granites Limited even after amalgamation can be treated to be an independent and separate business entity of the respondent or not? iii. Whether the amount of interest payable on the loans acquired by the Spartek Granites Limited for acquisition of capital assets from foreign suppliers is allowable? iv. Whether the depreciation of additional liability provided on foreign exchange fluctuation is deletable under the law? v. Whether the corresponding expenditure of interest paid by the assessee company to procure relevant fund advanced to M/s.Neycer India Limited can be given benefit under Section 80HH of the Act or not? 12. It appears from the records that it is an admitted position that this Court has approved the scheme of amalgamation between the two erstwhile companies, namely, M/s. Spartek Ceramics India Limited and M/s. Spartek Granites Limited and with effect from 1.4.1991. The said scheme of amalgamation was duly sanctioned in terms of the clauses of the amalgamation by virtue of provisions of Section 394 of the Companies Act. Thus, the Spartek Granites Limited ceased to exist as it was merged with the respondent company and consequently the respondent company is deemed to have been functioning with the Ceramics Division with effect from 1.4.1991. In our view, the learned Tribunal correctly held that Spartek Granites Limited ceased to exist for all purposes and we uphold this finding. 13. We are of the view that a division within one company cannot be treated to be functionally separate assessee for the purpose of Income Tax Act. The said Granites Division may be one of the part, but such description of Granites Division does not form integral and independent part of the Respondent Company. Therefore, in law, as held by the learned Tribunal correctly, the respondent is the only assessee and there cannot be two assesses within one company. 14. The learned Tribunal, on fact, found that Spartek Granites Limited started commercial production on and from 26.3.1991. Therefore, on 1.4.1991 the respondent company is deemed to have started commercial production in Granites Division by virtue of scheme of merger. Consequently, the amount of interest of Rs.25,62,371/- payable on the loans availed for acquisition of capital assets has to be held to have been incurred when the said capital assets were utilized for commercial production, and the aforesaid amount has to be held to have been incurred for manufacturing activity, naturally. This expenditure cannot be treated to be a capital expenditure at all. The learned Tribunal has correctly applied the law on this issue by reason of the fact that explanation 8 to Section 43(1) of the Act, the interest should not be capitalized for the purpose of income tax. The said explanation 8 to Section 43(1) of the Act is set out hereunder: “43. In sections 28 to 41 and in this section, unless the context otherwise requires- (1) “actual cost” means the actual cost of the assets to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority: Explanation 8.- for removal of doubts, it is hereby declared that where any amount is paid or is payable as interest in connection with the acquisition of an asset, so much of such amount as is relatable to any period after such asset is first put to use shall not be included, and shall be deemed never to have been included, in the actual cost of such asset.” 15. Much depend upon the foreign exchange rate as there is variation between the official rate and the market rate used. The assessing officer as well as the appellate authority have accepted the contention that under Section 43A of the Act, the foreign exchange rate would be the official rate and not the market rate. The learned Tribunal has correctly interpreted the aforesaid Section 43A, which was not done by the assessing officer as well as the appellate authority. The said Section reads as follows: 43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment – (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such prevsious year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from – (i) the actual cost of the asset as defined in clause (1) of section 43; or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or (iii) the amount of expenditure of a capital nature referred to in section 35A; or (iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36; or (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment. Explanation: 1.- In this section, unless the context otherwise requires. – (a) “rate of exchange” means rate of exchange determined or recognised by the Central Government for the conversion of Indian currency into foreign currency or foreign currency into Indian currency; (emphasis supplied) (b) … … … Explanation: 2.-- … … … Explanation: 3.-“ 16. It would appear from the said Section that the rate of interest is not only determined by the Central Government, but also recognised by the Central Government. The recognition may come expressly or by necessary implication. In this case, the learned Tribunal found that recognition within the meaning of Section 43A of the Act, is deemed to have been made as could be deduced from the following facts – (i) Budget Speech of Hon’ble Finance Minister, for 1992-93, dt.29.2.1992; (ii) RBI Circular AD (MA Series) Circular No.11, dt.29.2.1992; and (iii) RBI Circular AD (MA Series) Circular No.16, dt.17.3.1992. The Budget Speech of the Hon’ble Finance Minister has been analysed by the Tribunal and it was found that the market rate was to be recognized as foreign exchange rate, in a transaction of this nature. Besides, both the RBI Circulars are also in accordance with the speech of the Hon’ble Finance Minister. The RBI has made it clear in the Circular dt.29.2.1992 that exchange rates permitted for transactions under the capital account will be at free market rate. In this case, the deferred loan scheme was approved by the RBI and while according the approval, the RBI made it clear that the exchange rates permitted for transaction under capital account are at free market rate. Thus, it is clear that during the period of the transaction, the Government has recognized the market rate. We think that the learned Tribunal has correctly upset the findings of both the authorities below and concluded that it has to be necessarily held that the market rate of interest is the rate as defined in the said Section, and therefore the foreign exchange fluctuation at the market rate which would be certified by the authorised dealer in the foreign exchange has to be accepted in order to decide the issue. This issue therefore was decided in favour of the assess correctly. 17. The next issue relates to relief under Sections 80HH and 80I of the Act. On fact, it has been established that the benefit under the aforesaid Sections is available to the assessee and this has been accepted in principle by the assessing officer as well as the appellate authority. Thus, we find no justification in law, as correctly held by the Tribunal, that why the different rate was made applicable for allowing benefits under Section 80HH and Section 80I of the Act. The order of preference is really uncalled for. Both the deductions be given concurrently and the learned Tribunal correctly done so. Moreover, the above issue was decided by the Tribunal in assessment year 1991-92 in I.T.A. No.511/Hyd/95, dt.27.2.1997, basing on the Central Board of Direct Taxes Circular in F.No.237/2/94-A&PAC-II, dt.30.5.1994. The earlier decision has been followed by the Tribunal, and this ought to have been followed by the two authorities below. 18. The remaining issue, namely, disallowance of a sum of Rs.48,98,759/-, benefit under Section 80HH of the Act on account of interest being received from M/s.Neycer India Limited, which is a newly established industrial undertaking in a backward area is concerned, the same cannot be granted and the Tribunal correctly held that this Section 80HH, if read carefully, allows benefit to a newly established undertaking itself, but not by any person who is receiving any amount or income from that industrial undertaking. Therefore, the benefit under the aforesaid Section cannot be granted to the respondent assessee under any circumstances, in respect of any receipt or money spent on account of M/s.Neycer India Limited. The interest burden of the assessee company on the loan funds advanced to M/s.Neycer India Limited cannot be excluded under Section 80HH of the Act. Therefore, this decision of the learned Tribunal is contradictory to its own finding and the appeal is allowed to that extent in deleting the aforesaid amount. 19. The appeal is dismissed substantially and allowed to the extent indicated above. ________________________ K.J. SENGUPTA, CJ _______________________ G. ROHINI, J 19.7.2013 bnr [1] 98 ITR 167 "