1. These are the appeal by the Revenue and Cross Objection by the assessee against the order of ld. CIT(A) dated 18th February, 2000 for the assessment year 1996-1997.
2. Ground Nos. 1 to 4 in Revenue's appeal relate to CIT(A)'s action in deleting the addition of Rs. 3,00,00,000/- made by the A.O. as short-term capital gains.
3. The brief facts of the case are that the assessee planned to set up a Cement Plant in Rajasthan for which most of the formalities like Government permission, different licences and other ancillary facilities were obtained. For getting all these permissions, etc,. the assessee spent a sum of Rs. 44.88 lakhs which was shown under the head 'Capital Work-in-progress' in the audited Balance-sheet of the assessee. During the relevant assessment year under consideration, the total scheme for setting up the Cement Plant at Rajasthan was handed-over to M/s. G.K.W. Ltd. (in short GKW) in an agreed sum of Rs. 344.88 lakhs. As per assessee, Rs. 3 crores was a capital receipt which do not represent any consideration for transfer of any capital asset.
Therefore, the same was not liable to be assessed under the head 'capital gains'. Accordingly, the assessee deducted in same from its profit. According to assessee Rs. 44.88 lakhs was received as reimbursement of expenses incurred by it.
4. Before the A.O., the assessee submitted that in order to set up the Cement Plant, the assessee has taken various measures which included obtaining a Letter of Intent dated 8th Feb., 1991 from the Industry Ministry, Government of India, obtaining sanction of Rajasthan Government for grant of mining lease for limestone, carried out detailed prospecting work under the guidance of one expert organization, applying for explosive licence and obtaining approval for electricity connection from Rajasthan State Electricity Board, establishing a Project Office at Chittorgarh, Rajasthan, etc. The assessee explained that the amount of Rs. 3 crores was received for transferring Letter of Intent obtained from Govt. of India which is not a capital asset. As no capital asset was transferred, this sum could not be treated as capital gain within the meaning of Section 45 read with Section 48 to Section 55. It was further pleaded that the value of this Letter of Intent cannot be determined and, therefore, the cost of acquisition of this Letter being nil, there cannot be any question of computation of capital gain, under Section 45 read with Section 48 to 55 of I.T. Act, 1961.
5. The A.O. observed that in addition to the various measuring being taken by the assessee, the assessee has also obtained Surface Rights in respect of 329 Hectares of land, obtained approval from the Government of Rajasthan for acquisition of 110 Hectares of Land, obtained clearance from Department of Environment and submitted a Management Plan Report regarding impact of pollution for setting up the factory and also engaged the services of experts for preparation of Feasibility Report. The A.O. also observed that as per Clause (iii) of the agreement, the assessee has "agreed to transfer a Cement Project together with the benefit of all the steps undertaken by the assessee for setting up of the said Cement Plant to M/s. G.K.W. Ltd.". As per Clause (iii) all the preliminaries required for setting up a Cement Plant have been completed by the assessee for which considerable time of GKW will be saved and can be capitalised the benefit derived by the assessee. As per agreement, the consideration of this transfer has been agreed upon at Rs. 3 crores in addition to reimburse the expenses incurred by the assessee-company in respect of Cement Project.
After discussing various Clauses of the agreement, the A.O. reached to the conclusion that this sum of Rs. 3,00,00,000/- was received not only on account of transfer of the "Letter of Intent". All the preliminary requirements for setting up the Cement Plant were completed and for all these, the assessee had incurred a sum of Rs. 44.88 lakhs. The A.O. has also observed the break-up/detail of the major heads of expenditure which comprises mainly Geological charges, Mining Plan, prospecting licence expenses, etc. The A.O., therefore, held that the amount received by the assessee over and above, the cost of acquisition of the assets, which is Rs. 44.88 lakhs, is a short-term capital gain liable to tax.
6. Aggrieved by the above order of A.O., the assessee approached to the ld. CIT(A) and submitted that the assessee has incurred expenditure for prospecting, project and feasibility report, purchase of vehicles, furniture, etc., over a period of time ranging from financial year 1992-1993 to 1994-1995. The entire expenses incurred on tangible assets were reimbursed by the buyer company and no element of profitability was envisaged in the same. It was also submitted that what was transferred by the assessee for consideration of Rs. 3.00 crores, was a bundle of intangible assets and was no cost of acquisition for acquiring these rights.
7. By the impugned order, the ld. CIT(A) observed that no doubt a completed and commissioned plant is a tangible asset. But to reach that stage, from the stage of idea of a Project, various stages have to be crossed. From inception to a certain stage, no tangible asset comes into being. The period at which this project has been transferred, no tangible capital asset has come into existence. He, further observed that only intangible assets have come into being in the form of various rights, authorisation and approvals. The respective date for this approval, authorisation and permission, even if ascertained will not constitute the date of acquisition of the capital asset, and held that the expenditure incurred did not form part of cost of acquisition. He further relied on the judgment of the Hon'ble Supreme Court in case of B.C. Srinivasa Setty (128 ITR 294), and held that the intangible capital assets transferred by the assessee are such with respect to which neither the cost can be envisaged nor the date of acquisition can be ascertained with any accuracy and, therefore, neither the charging provision nor the method of computation of capital gains can be applied. Accordingly, he deleted the amount of Rs. 3.00 crores brought to capital gains, from the computation of total income and also held that the amount of Rs. 44.88 lakhs was received by way of reimbursement of expenditure incurred in respect of the Cement Project is a revenue receipt but not chargeable being only a reimbursement.
8. Aggrieved by the above order of ld. CIT(A), the Revenue filed second appeal before the Tribunal.
9. It was argued by the ld. D.R. that all ingredients to attract the capital gain tax was very much there in the impugned transaction and that the expenditure incurred for acquisition of all the rights was disclosed in the Balance-sheet as capital work-in-progress and, therefore, the amount received on sale of such rights, over and above the cost of acquisition, was a capital gain and, therefore, profit arose on sale of short-term capital assets was correctly treated as a short-term capital gain by the A.O.10. On the other hand, the ld. Senior A.R. vehemently argued that manner of recording of any entry in the books of accounts is not conclusive and, therefore, the amount shown in the books of accounts as capital work-in-progress, will not attract capital gains provision when the cost of acquisition itself was nit. Further, the ld.A.R. reiterated the contentions on the same line as was raised before the ld.CIT(A).
11. We have heard the rival contentions, gone through the orders of the authorities below and carefully perused the paper book filed by the ld.A.R. We had also deliberated upon the judicial precedents cited by the ld. representatives of both the parties in the context of factual matrix of the case before us. From the record, we find that the assessee was planning to set up a Cement Project at Rajasthan. To achieve this object, the assessee has spent money for obtaining Letter of Intent from the Industry Ministry, Government of India, carried out detailed prospecting work under guidance of one expert organisation, obtained sanction of Rajasthan Government for grant of mining lease, obtained approval for electricity connection from Rajasthan State Electricity Board, obtained surface rights in respect of 320 Hectares of land, obtained approval from Government of Rajasthan for acquisition of 110 acrs. of land, obtained clearance from Department of Environment and submitted a Management Plan Report regarding impact of pollution for setting up the factory, engaged the services of experts for preparation of Feasibility Report(SIC).
For getting all these works done, the assessee incurred expenditure of Rs. 44.88 lakhs over the period ranging from 1992-1993 to 1994-1995.
During the relevant assessment year under consideration, the assessee entered into an agreement with GKW and agreed to transfer the various rights obtained in respect of proposed Cement Project together with the benefit of all the steps undertaken by the assessee to M/s. GKW for a total consideration of Rs. 3,00,00,000/- plus reimbursement of expenditure incurred by the assessee for obtaining all these licences, rights privileges etc. amounting to Rs. 44.88 lakhs, which stood debited to capital work-in-progress in the books of accounts of the assessee on or before 30th August, 1995. The impugned expenditure incurred by the assessee was the cost of acquisition of various rights which had been paid to various statutory authorities and Government and also for acquiring certain tangible assets like vehicles, furniture, etc. From the details of expenditure, we find that the expenditure has been mainly incurred for acquisition of leasehold rights of, even though till date of transfer, the assessee did not physically get land transferred in its name, and was incurred for Geological expenses, mining plant expenses, prospecting expenses, registration expenses, licence fee, etc. The details of expenses also included expenditure of purchase of vehicles, furniture, advances to suppliers, Mining Plan expenses, etc. All these expenses were incurred by the assessee towards implementation of its Cement Plant Project at Rajasthan and was also treated by the assessee as capital work-in-progress and accordingly shown in the Balance-sheet which were presented to the shareholders of the Company. In the relevant assessment year, the assessee has not claimed any of such expenditure as a revenue expenditure in the income-tax return filed with the Department. The assessee also incurred cost for preparing the Mining Plan for getting approval from Indian Bureau of Mines.
12. the definition of capital assets as provided in Section 2(14) is an inclusive one, which brings within its ambit property of any kind held by the assessee, except what has been expressly excluded by Clauses (i) to (iv) thereunder, thus the expression 'capital asset' has a wide connotation. The term 'property' though has no statutory meaning but is of widest import and subject to any limitation which the context may require, it signifies every possible interest which a person can acquire, hold or enjoy. According to Stroud's judicial dictionary of the words and phrases (6th edition) 'property' is a comprehensive term indicative of every possible interest which a party can have. In view of the wide meaning of the expression 'capital asset' in Section 2(14) and 'property' is understood in its ordinary side connotation, there is no hesitation in holding that the bundle of rights/permissions, tangible and intangible assets acquired by the assessee in respect of the Cement Plant to be set up in Rajasthan was a capital asset. There is also no much substance in the contention of the ld. counsel for the assessee that conceptually there is no cost of acquisition which could be attributable to the various rights/licences, etc. acquired by the assessee. It is equally difficult to accept that the date of acquisition of various rights/privileges/licences/tangible or intangible assets is not known. The dates and cost components constituting various rights, privileges proposed to be transferred to GKW vide agreement dated 30.8.1995, are definitely known and all these costs have been properly recorded in the books of accounts and capitalised as capital work-in-progress. The question of determination of cost of acquisition is primarily a question of fact which has been determined by the A.O. in the course of assessment under Section 143(3). After verifying the details of various expenses incurred by the assessee, he has reached to the conclusion that the cost of acquisition as recorded in the books of accounts for various rights, privileges, etc. was Rs. 44.88 lakhs.
Let us now discuss the cases relied on by the ld. A.R. In the case of B.C. Srinivasa Setty (123 ITR 294) relied on by the ld. A.R., the Hon'ble Supreme Court held that goodwill generated in a newly commenced business cannot be considered an 'asset' within the terms of Section 45 and hence, the transfer of goodwill initially generated in a business does not give rise to a capital gain for the purpose of income-tax. It was further observed by the Hon'ble Supreme Court that what is contemplated in Section 45 is an asset in the acquisition of which it is possible to envisage the cost. The intent goes to the nature and character of the asset, that it is an asset which possesses the inherent quality of being available on the expenditure of money to a person seeking to acquire it. It was also observed that none of the provisions pertaining to the head 'Capital Gains' suggests that they include an asset in the acquisition of which no cost at all can be conceived. However, in the instant case, the capital assets proposed to be transferred are rights, privileges etc. for the establishment of Cement Plant for the acquisition of which the assessee has incurred expenditure and debited the same in its books of account under the head 'Capital Work-in-Progress' over years of time, the assessee is putting efforts for the same. These rights and privileges, etc. acquired by the assessee are in the nature of assets which possess the inherent quality of being available on the expenditure of money to a person seeking to acquire it, unlike the goodwill.
In the case of Suman Tea and Plywood Industries Ld. (226 ITR 34), relied on by the ld.A.R., Hon'ble jurisdictional High Court held that "trees of spontaneous growth having no cost of acquisition/improvement, sale proceeds thereof cannot be subjected to capital gains tax".
However, in the instant case, the rights, privileges, etc. acquired by the assessee are not the assets which are having spontaneous growth by nature. The acquisition of these rights also entails the cost which has actually been incurred by the assessee.
In the case of Voltax Ltd., relied on by the ld.A.R. ITAT, 'A' Bench, Mumbai (64 ITD 232) held that "amount received in consideration of transferring trade name which is well known all over the country and has acquired popularity amongst masses to one of its joint-owner is a capital receipt.
13. Similarly, the judgment relied on by the ld.A.R. in case of Kelkobad Byramji & Sons (179 ITR 569), the Hon'ble Supreme Court held that where the business of a firm is transferred to a Company and no goodwill account was paid on such transfer by transferee to the transferor assessee, no capital gain arises on such transaction to the transferor assessee. Whereas in the instant case, the rights, privileges, etc. have been transferred at a consideration of Rs. 344.88 lakhs. Thus all these cases relied on by the ld.A.R. are of no much help to the assessee.
14. Unlike the cases relied on by the ld.A.R. pertaining to goodwill and tenancy right in respect of which cost of acquisition/improvement was incapable of computation, in the instant case, the assessee itself has identified the cost of all these rights, privileges, etc. and debited under a separate head namely Capital Work-in-Progress. It is, therefore, not possible to agree with the ld.A.R. that all these rights, privileges, approvals, etc. have been obtained by the assessee without incurring any cost. The contention of the ld.A.R. to the effect that capitalising these expenditure in the books of accounts will not preclude the assessee from its right of claiming the same as a revenue expenditure and taking advantage of reimbursement of the same on transfer of these rights, privileges, etc. in favour of GKW. It is open to the assessee to make entry in the books of accounts as per its system of accounting and to claim the same in the return of income if any expenditure is revenue in nature. However, after the entry has been made in the books of accounts and returns for the respective years have already been filed, it is not open to the assessee after 4-5 years to change its own stand and to say that expenditure booked under the head 'Capital Work-in-Progress' was not actually capital expenditure.
15. All the cases relied upon by the assessee pertain to the intangible capital assets like goodwill and the tenancy right, in regard thereof the cost of acquisition, rate of acquisition and the cost of improvement, if any, was considered to be incapable of computation and since Sections 45 and 48 were held to be providing an integrated code and the failure of the process of computation under Section 48 was held to be sufficient to take the gains arising from sale out of the purview of Section 45. In the instant case, the capital asset sold was neither goodwill nor tenancy rights so as to attract the principles settled in the cases relied on by the ld.A.R. Here the controversy arises qua-tangible and intangible assets acquired and sold by the assessee by way of agreement dated 30th August, 1995, for a consideration of Rs. 344.88 lakhs. Just by mentioning that Rs. 3 crores was received on transfer of intangible assets and benefits arising out of various expenses incurred, and Rs. 44.88 lacs was received on actual reimbursement basis, cannot take away the case of the assessee outside the provision of Section 48 which provides mechanism for computation of capital gains. In the instant case, although the assessee in his own books of accounts and in the agreement, spelt up the price according to his convenience, one part was related to the intangible assets and their benefits, and the other part related to transfer of tangible assets and benefits arising out of various expenses incurred by the assessee on actual reimbursement basis. This mention in the agreement does not appear to be decissive of the matter in controversy. The question is not whether the parties had actually fixed a definite price for the transfer and acquisition of assets, but the question is whether the asset could be said to be one in respect of which no cost of acquisition could at all be envisaged or convinced. Unlike goodwill it is not possible to show that no cost of acquisition can at all be conceived or envisaged in respect of capital asset transferred by the assessee to GKW. Transfer of various rights, privileges, tangible and intangible assets to GKW, were the potential source for capital receipts of Rs. 344.88 lakhs. Only by incurring various expenditure as detailed in the books of accounts, the assessee has been able to obtain various permissions, licences, approvals, etc. The total consideration paid by the GKW was basically towards rights and privileges, transferred by the assessee. For acquiring all these licences, permissions, approvals, etc. the assessee has directly or indirectly incurred the cost and taking all these expenses together constituted the cost of acquisition of rights proposed to be transferred by the assessee to GKW. It is unthinkable that the assessee has got all the intangible rights without incurring any of the expenditure. Getting permission from Government or Statutory Authorities have also envisaged cost directly or indirectly. The expenditure for setting up the Cement Plant was incurred by the assessee itself, for the purpose of setting of its own Cement Plant and was not incurred on behalf of the GKW, therefore, there is no question of reimbursement of the expenses incurred on behalf of GKW, by the assessee. The assessee has got a sum of Rs. 344.88 lakhs as the sale consideration for transfer of entire bundle of rights, privileges, permissions, etc. whether tangible or intangible, acquired by it by spending a sum of Rs. 44.88 lakhs and debited in its books of accounts as capital-work-progress.
16. In view of the above discussion, we do not find any merit in the order of the ld.CIT(A) that there was no cost of acquisition attributable to the various rights, licences, permissions, etc.
transferred by the assessee to GKW and, therefore, the provision of Section 48 cannot be invoked. However, so far as treatment of capital gains as short-term or long-term is concerned, the matter is restored back to the file of the A.O. to Decide the same afresh after taking into consideration the actual expenditure incurred by the assessee, vis-a-vis the period to which it relates, as to whether earlier than 36 months on the date of transfer of right or otherwise. However, benefit of indexation can be given only in respect of expenses where are incurred prior to 36 months from the date of sale of rights, i.e., 30-8-1995.
17. The next grievance of the Revenue relates to CIT(A)'s action in directing the A.O. to allow the amounts of Sundry Creditors balance and customers credit balance unilaterally written off.
18. We have heard the rival contentions and find from the record the A.O. has not allowed the deduction claimed in respect of liabilities written back in absence of the details. It was submitted before the A.O. that the details could not be furnished since the document were destroyed in a fire in the Office of assessee's premises. The issue is squarely covered by the order of ITAT in assessee's own case for the assessment year 1990-1991 dated 20-9-2001 and for the assessment year 1995-1996 dated 3.5.2002 in favour of the Revenue.
19. As the facts and circumstances are the same, we do not find any reason to deviate from the conclusions already arrived at by the Tribunal. Therefore, Ground Nos. 5 to 8 of the Revenue's appeal are allowed in its favour.
20. Ground Nos. 9 and 10 relate to deletion of disallowance of advance payment to Sales Tax of Rs. 3 lakhs.
21. We have heard the rival contentions and find from the record that the issue is covered by the ITAT order for the assessment year 1995-1996 dated 3rd May, 2002 in which the matter was restored back to the file of the A.O. for deciding the issue afresh. Respectfully following the order, Ground Nos. 9 & 10 are restored back to the file of the A.O. to decide the issue afresh.
20. Ground No. 11 relating to payment to Durgapur Sramik Kalyan Samity is covered in favour of the assessee by the order of Tribunal for the assessment year 1995-1996 dated 3.5.2002.
Respectfully following the same, we do not find any reason to deviate from the conclusions arrived at by the ld.CIT(A).
22. Ground No. 12 relating to contribution to Graphite Export Development Trust.
The issue is allowed by the ITAT in the assessee's own case for the assessment year 1988-1989, Order dated 5th April, 2000 and in assessment year 1989-1990, 1990-1991 and 1991-1992 by combined order dated 20th September, 2001 and in assessment year 1995-1996 vide order dated 3rd May, 2002.
23. We had gone through the order of ITAT and do not find any reason to deviate from the conclusions already arrived at. We, therefore, decline to interfere in the order of ld.CIT(A) in allowing the assessee's claim towards contribution to Graphite Export Development Trust.
24. The next grievance of the Revenue mentioning in Ground No. 13 relates to addition of excise duty payable in the valuation of closing stock amounting to Rs. 1,12,50,000/-.
25. We have heard the rival contentions and find from the record that in the audited accounts of the assessee, the auditor had mentioned by way of a Note the estimated amount of excise duty on closing stock of finished goods. As per the consistence practice followed by the assessee-company year after year, the excise duty was excluded in valuing the closing stock of finished goods, since the excise duty is accounted for only on the clearance of the goods, from the factory or warehouse. However, in the course of assessment, the A.O. has estimated this excise duty at Rs. 1,12,50,000/- and added back the same without giving any opportunity to the appellant to make any submission in relation thereto. We also find that the assessee has submitted C.A.certificate to the effect that the excise duty has been paid before the last date of filing of the return. The A.O. has not examined this certificate and neither given his any of the comments on the issue. The issue is now settled by the jurisdictional High Court in the case of General Electric Co. of India Ltd. (255 ITR 22), in which it was held that having regard to the MODVAT Scheme of Excise Duty, no addition can be made in the valuation of closing stock in respect of the excise duty payable on it.
26. In view of the above and in the interest of justice, we restore this ground to the file of the A.O. to decide the issue keeping in view the judgment of General Electric Company (supra) and also verify the C.A. certificate to the effect that excise duty was actually paid before the last date of the filing of the return. If the A.O. finds that excise duty has been paid before the last date of filing of the return, then no addition on this account is warranted.
27. Ground No. 14 relates to CIT(A)'s direction to the A.O. to give findings with regard to assessee's claim of carry forward of capital loss during the year and brought from earlier years, raised by the assessee as an additional ground during the Appellate Proceeding before the CIT(A).
28. We have heard the rival contentions and do not find any infirmity in the CIT(A)'s direction to the A.O. to give findings with regard to the assessee's claim of carry forward of capital loss.
29. Ground Nos. 15 and 16 are general in nature, therefore, do not require any specific adjudication.
30. In the result, the Revenue's appeal is allowed in part as indicated above.
31. In the Cross Objection, the ld.A.R. did not press Ground Nos. 2, 4, 5, 7 and 8 as the relief has already been given by the A.O. on remand report. According three grounds are not being adjudicated.
32. Ground No. 1 relates to the CIT(A)'s action in sustaining disallowance of entertainment expenses of Rs. 79,360/-.
33. In the course of assessment, the A.O. disallowed Rs. 1 lakh out of sales promotion expenses. As per the Tax Audit Report, Rs. 5,20,640/- was shown as entertainment expenses. The A.O. found that a further sum of Rs. 2.91 lakhs debited under the sales promotion expenses how also element of entertainment expenditure in it. No detail of expenses of Rs. 2,91,197/- was furnished on the basis of this unascertainable condition, the A.O. further disallowed Rs. 1 lakhs as entertainment expenditure. The ld.CIT(A) found that no deduction envisaged under Section 37(2), was allowed by the A.O. in the computation of taxable income. The nature of expenses also remains unestablished before the CIT(A). He, therefore, restricted the allowance under the head 'entertainment expenditure' at Rs. 6 lakhs and directed the A.O. to allow relief under Section 37(2) and thus sustained disallowance of Rs. 79,360/-.
34. After hearing the rival contentions, we are of the view that as no detailed of the expenditure of Rs. 2,91,197/- was furnished before the lower authorities, the CIT(A) was justified in giving part relief and restricting the disallowance to Rs. 79,360/-. We thus do not find any infirmity in the CIT(A)'s action.
35. (SIC) Ground No. 3 relates to restoration of the matter to the A.O.in respect of claim under Section 43B amounting to Rs. 3 lakhs being advance sales tax paid (SIC) year.
36. After hearing the rival contentions, we do not find any infirmity in the order of the ld.CIT(A) indirecting the matter back to the A.O.for fresh consideration.
37. Ground No. 6 relates to sustaining the disallowance of Rs. 47,996/- under Rule 6B of the Income Tax Rules, 1962.
38. We have heard the rival contentions and find from the record that similar issue has been restored back to the file of the A.O. int eh assessee's own case for the assessment year 1995-1996 by ITAT in its order dated 3.5.2002.
Respectfully following the same, we restore this ground to the file of the A.O. for bringing material on record to justify that the articles of presentation were having advertisement value before making any disallowance. Needless to say that sufficient opportunity to the assessee be given to present his case.
39. In Ground No. 9, the assessee has objected to the action of the ld.CIT(A) in restoring the matter to the file of the A.O.40. We have heard the rival contentions and do not find any reason to interfere in the order of the ld.CIT(A) in restoring the matter back to the file of the A.O. Needless to say that the assessee should be given due opportunity of being heard.