These are the cross-appeals filed by the assessee and revenue both against the common order of the Commissioner (Appeals) dated 16-12-1999, for the assessment year 1998-99.
While processing the return under section 143(1)(a) the Joint Commissioner made prima facie adjustment in respect of interest claimed as expenditure amounting to Rs. 2,26,84,848 under section 36(1)(iii) of the Act and railway siding expenditure amounting to Rs. 3,56,96,815 and charged additional tax and interest.
In the course of making prima facie adjustment, the assessing officer found that the assessee-company had claimed interest in respect of borrowed capital for its expansion project being undertaken at a cost of Rs. 80 crores. The assessee in its account has capitalised the interest as the project has not been commissioned till the closing of the accounting year, by following certain accounting guidelines. The assessee has claimed the expenditure as a revenue expenditure on the ground that money has been borrowed for companys business and is an allowable business expenditure under section 36(1)(iii) of the Income Tax Act. The assessing officer treated the claim of the assessee-company as not prima facie admissible following the provisions of section 145(1) of the Act and the Accounting Standard-10 of the Institute of Chartered Accountants of India. As per assessing officer since the new project/expansion project in respect of which interest has been capitalised in the books has not started commercial production, the interest claimed will be capital expenditure, therefore, not allowable under section 36(1)(iii). The assessing officer observed that provisions of section 36(1)(iii) specifying the admissibility of interest on borrowed capital for the purpose of business has to be interpreted as interest accrued on utilisation of borrowed capital for the purpose of business which is already in operation and such interest liability cannot be extended to a situation where borrowed fund had been utilised in a total new project/expansion project being undertaken by the assessee and which is not completed in all respects by the end of the accounting year.
As per assessing officer the assessee has claimed expenditure incurred on railway siding amounting to Rs. 3,56,96,815 as an admissible revenue expenditure on the ground that the assessee-company constructed the said siding on the land not belonging to it for facilitating moment of raw materials and finished goods and the assessee-company has no rights on the railway sidings although in the books of account the said expenditure had been capitalised and shown under fixed assets and has been written off over a period of 5 years. The assessing officer prima facie treated the aforesaid expenditure in the nature of capital expenditure on the ground that the said expenditure has resulted in the acquisition of an asset generating enduring and long-term benefits for the assessee-company. The assessing officer treated the narration in the explanatory statement annexed to the return of income, has no bearing on the issues keeping in view the Explanation 1 to section 32 of the Income Tax Act for allowance of depreciation. The assessing officer further quoted that for the purpose of depreciation on railway sidings, it is not necessary that the land should be owned by the assessee-company. The assessing officer referred to the provisions of section 145 of the Income Tax Act and keeping in view the Accounting Standard-1 notified by the Central Government concluded that where prima facie capital expenditure generate enduring benefit and accordingly treated as a capital expenditure in the financial statement, it would be inconsistent to treat such expenses as revenue expenditure in nature in computation of profit and gains of the business. The assessing officer accordingly treated the claim as prima facie inadmissible and thereby made an addition of Rs. 3,56,96,815. He, however, allowed depreciation @ 25 per cent on the railway siding treating the same as plant and machinery.
Aggrieved by the above addition, the assessee preferred an appeal to the Commissioner (Appeals) and it was contended that the additions made by the assessing officer are not prima facie inadmissible under the provisions of section 143(1)(a) of the Act specially when complete justification for the claims had been furnished in the notes forming part of the return of income filed with the Income Tax Department. The learned authorised representative further argued before the Commissioner (Appeals) that section 145 deals primarily with the method of accounting regularly employed by the assessee for computing profits and gains whereas section 29 explains as to how to compute profits and gains of the business or profession. It was stressed by the authorised representative that section 145 does not override section 29 and the Accounting Standard-10 for disallowances is not notified under section 145 of the Act.
While arguing before the Commissioner (Appeals), the learned authorised representative submitted that for prima facie admissibility of interest as per section 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed for the purpose of business is an allowable expenditure. It was emphasised that expression "for the purpose of business" Occurring in section 36(1)(iii) is wider in scope than the expression for the purpose of earning income, profit and gains occurring under section 57(3) of the Income Tax Act. It was also argued that since the assessee-company has only borrowed money for the expansion of its business, the assessing officer was not justified in treating the claim of interest as capital expenditure when specific provision for allowing the same under section 36(1)(iii) is available.
The authorised representative further submitted that the claim of interest can also be treated as debatable issue and cannot be subjected to adjustment under section 143(1)(a) of the Act.
While objecting the adjustment made by the assessing officer on railway siding expenditure, the authorised representative submitted that the expenditure incurred by the assessee-company was revenue in nature and the same cannot be treated as capital expenditure under prima facie adjustment. It was argued by the authorised representative, that the railway siding has been developed on the land not belonging to the assessee-company and the right to use is not perpetual or infinite or absolute and the expenditure incurred was only to improve the efficiency of handling the finished goods and raw materials of the company, for which the expenditure is nothing but revenue in nature.
Reliance was placed by the authorised representative on the judgment of the Honble Supreme Court in CIT v. Madras Auto Service (P) Ltd. (1988) 233 ITR 468 (SC), in which expenditure incurred for construction of property on the land not belonging to the assessee was held as a revenue expenditure. Similarly in the case of CIT v. Bongaigaon Refinery & Petro Chemicals Ltd. (1997) 91 Taxman 124 (Gau), the payment to railway for construction of railway track and siding was also held as a revenue expenditure. The learned authorised representative, therefore, argued that even though expenditure towards railway siding is capitalised in the books as per the guidelines issued by Institute of Chartered Accountants of India, the same is not relevant while allowing the deduction under the Income Tax Act. It was also argued before the Commissioner (Appeals) that the expenditure claimed as a deduction cannot be treated as prima facie disallowable when the claim has been justified in the notes forming part of the return filed with the income tax authority. It was submitted that the claim of expenditure on railway siding is a debatable issue which is beyond the scope of adjustment under section 143(1)(a) of the Act.
The learned Commissioner (Appeals) deleted the addition made in respect of interest on borrowed capital on the ground that the issue is debatable one keeping in view the provisions of section 36(1)(iii) and also various judgments of the High Courts and Apex Court. The Commissioner (Appeals) also held that more than one opinion is possible with regard to treatment of interest paid.
Regarding expenditure on railway siding, the Commissioner (Appeals) observed that the assessee-company had treated the same as capital expenditure in its books of account and taken the same as part of the fixed assets. As the assessee has also claimed depreciation on the same at a special rate, the nature of expenditure in such, apart from facilitating the business activities of the assessee-company has brought in an asset of enduring nature and it has made basic alterations in the profit earning structure of the assessee-company.
The Commissioner (Appeals) also observed that there is no specific provision under the Act to allow the said expenditure as revenue expenditure when the assessee has treated the same as capital expenditure in its books. As per Commissioner (Appeals) there is specific provision under the Act in section 37 where any expenditure which is capital in nature, is not to be allowed. The Commissioner (Appeals), therefore, held that the claim of expenditure representing railway siding is an incorrect claim and also a claim which is patently inadmissible in law, therefore, prima facie adjustment applied by the assessing officer by treating the same as capital expenditure is justified Against the above order of the Commissioner (Appeals), the assessee and the revenue both has come up in appeal and the assessee has also filed a cross-objection.
It was vehemently argued by the learned authorised representative that even though the expenditure towards railway siding is capitalised in the books as per the guidelines issued by the Institute of Chartered Accountants of India, the same is not relevant while allowing the deduction under section 37. Our attention was drawn to the Circular No.689 issued by the Central Board of Direct Taxes, dated 24-8-1994 (published at (1994) 120 CTR (St) 31) in which Professor Raja J.Chelliah has decided the prima facie disallowances shall be made only in respect of the following types of claims : "(a) an incorrect claim, if such incorrect claim is apparent from the existence of other information in the return or the accompanying accounts or documents.
If a deduction has been claimed under the head capital gains under section 54F, and if there is information in the return of income or the accompanying accounts or documents to show that the unutilised net consideration had not been deposited in an account specified in the notified scheme as stipulated under section 54F(4), the claim is incorrect and can be disallowed as a prima facie adjustment.
(b) any claim in respect of which there is an omission of information which is required, under the specific provisions of the Act or the Rules, to be furnished along with the return to substantiate such claim.
If the audit report specified under section 80HHC(4), which is required to be filed along with the return of income is not so filed, the deduction claimed under that section can be disallowed as a prima facie adjustment. Some more examples in this regard are the non-filing of audit reports or other evidence along with the return of income as required under sections 12A(b), 33AB(2), 35E(6), 43B (first proviso), 54(2), 54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4), 80HHB(3), 80HHD(6), 80HHE(4), 80-I(7), 80-IA(8) and the like. But if evidence is subsequently furnished, rectification under section 154 should be carried out to the extent permitted by Boards Circular No. 669, dated 25-10-1993. (see (1993) 115 CTR (St) 2). No prima facie disallowance shall however be made if any evidence required to be filed along with the return of income only pursuance of the non-statutory guidance notes for filing in the return of income, is not so filed.
(c) A claim for deduction or rebate of any amount which exceeds statutory limit imposed, if such limit is expressed either as a specific mandatory amount or as a percentage, ratio or a fraction, and if the information relevant to application. If the statutory limits appear in the return or the accompanying accounts or documents.
(i) If under section 24(1)(i) the deduction in respect of repairs and collection charges is claimed in excess of 1/5th of the annual value (applicable with effect from assessment year 1993-94), such excess can be disallowed as a prima facie adjustment.
(ii) If the rebate on contribution eligible under section 88 is claimed in excess of 20 per cent of such contribution the excess can be disallowed, provided there is indication of the total amount of such contribution in the return or the accompanying accounts or documents.
Deduction of items like income-tax, wealth-tax, personal expenses, depreciation claimed on conveyances under the head salary, depreciation claimed under the head house property and the like. The items of disallowance should be such that no two opinions are possible on their inadmissibility.
3. The Board desires that no other prima facie disallowance should be made except with the previous approval of the Commissioner who will, after according approval in suitable cases, bring the same to the notice of the Board.
4. The above procedure applies to all returns pending processing under section 143(1) on the date of issue of this circular." It was argued by the learned authorised representative that the disallowance of the claim as a prima facie adjustment is not covered by any of the prima facie disallowances as enumerated in the above circular. It was submitted by the learned authorised representative that the assessee has incurred expenses for railway siding wholly and exclusively for the purpose of its business, which were neither personal expenses nor come under sections 30 to 36. As per learned authorised representative, the only question is to be seen is whether it is capital expense or revenue expense for deciding its allowability under section 37. The further question to be seen is if it is a prima facie inadmissible. As per learned authorised representative the concept of prima facie does not take such question as to whether an amount is capital or revenue expenditure, because this question is highly debatable, so much so it has been said that the answer can be settled "by the toss of a coin". If certain items are claimed as revenue expenses in the return or the documents accompanying it, it cannot be said that it is patently inadmissible. There are many tests to be applied and no test is decisive. The learned authorised representative further argued that the expenses incurred under consideration were substantial amounts, and at the same time they were revenue in nature as decided by the Supreme Court in Empire Jute Co.
Ltd. v. CIT (1980) 124 ITR 1 (SC). It was submitted that from the point of view of its financial image in the commercial world which will have a bearing on its goodwill and creditworthiness, the debiting of the whole amount in one year to the current profits would have shown the results of the year in a poor light and so on the advice of the expert, the assessee-company had decided to write off the amount in five equal instalments spread over 5 years. That has been done for the purpose of its image in the market which is the backbone of any business house. It was further argued that income tax law is different and it does not take into account how an expense is dealt with by the assessee in its own books of account. The admission or otherwise of the assessee will not alter the terms of the income tax law as decided by the Honble Supreme Court in Kedarnath Jute Mfg Co. Ltd. v. CIT (1971) 82 ITR 363 (SC).
The learned authorised representative has drawn our attention towards the order of the Commissioner (Appeals) in which the Commissioner (Appeals) has held that the claim of the assessee was patently inadmissible merely because the assessee has treated it as a deferred revenue expense in its books of accounts for safeguarding the image of the assessee-company.
On the other hand, the learned senior Departmental Representative vehemently argued that prima facie adjustment under section 143(1)(a) can be done on the basis of information available in the return or the accompanying accounts or the documents. The learned senior Departmental Representative has drawn our attention towards Schedule E of the Fifteenth Annual Report of the assessee-company in which railway siding was shown as advantage in the gross block of the assessee-company within 1-4-1992 to 31-3-1998. The learned senior authorised representative very nicely argued that the annual report comprising of audited balance sheets of the assessee-company with annexure of various expenses and fixed assets along with the Directors report is a liability of the assessee-company and whatever is mentioned therein duly certified by the auditors and counter-certified by the directors of the company are the basic documents accompanying the return of income filed with the Income Tax Department. As per learned senior Departmental Representative in the computation of the total income as per Annexure 3 filed with the return of income, the assessee-company has claimed expenditure on railway siding as revenue expenses. Thus as per senior Departmental Representative there is a prima facie case for the disallowance as there was apparent contradiction, on the one hand the assessee has capitalised the expenditure on railway siding in Schedule E forming part of its balance sheet and on the other hand, the assessee has claimed the same as revenue expenses in its computation of total income, Annexure 3 forming part of return, of income. Under these circumstances as per learned senior Departmental Representative, the assessing officer was well justified in making prima facie adjustment regarding the expenses claimed under the head railway siding. As per learned senior Departmental Representative even looking to the account of expenditure and its quantum, the assessing officer was justified in disallowing the same while making prima facie adjustment and the Commissioner (Appeals) was well justified in fortifying the view taken by the assessing officer. He, therefore, argued that action of the lower authorities should be confirmed.
We have heard the rival submissions, gone through the orders of the authorities below and perused the paper book filed by the learned authorised representative and gone through the decisions of Honble Supreme Court and the various High Courts as cited by the learned authorised representative and the learned senior Departmental Representative. As per Circular No. 689 issued by the Central Board of Direct Taxes the matter regarding prima facie adjustment under section 143(1)(a) was considered by the Board in the light of the recommendations of the Tax Reform Committee (1992) 197 ITR (St) 177, headed by Professor Raja J. Chelliah and it was decided that prima facie disallowances shall be made only in respect of particular types of claims which were clearly mentioned in the circular even by giving examples for the same. The disallowance of any expenditure, claimed in the computation of income as revenue expenses does not find any place under any example quoted in Circular No. 689. Even Courts are baffled by the question and have repeatedly said that the line dividing between revenue and capital expenditure is very thin and a great deal of investigation and search into the real nature of expenses has to be made before an acceptable solution can be arrived at. It clearly implies that a claim of expenses as revenue cannot be disallowed as patently disallowable expenses, Honble Supreme Court in Empire Jute Co.
Ltd. v. CIT (supra) laid down that there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessees trading operations or enabling the management and conduct of the assessees business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is, therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case. What is an outgoing of capital and what is an outgoing on account of revenue depends on what the expenditure is calculated to effect from a practical and business point of view rather than upon the juristic classification of the legal rights, if any, secured, employed or exhausted in the process. The question must be viewed in the larger context of business necessity or expediency.
In the instant case railway siding has been developed on the land not belonging to the assessee-company and the right to use was not perpetual or absolute and expenditure incurred was only to improve the efficiency of handling finished goods and raw materials for which the expenditure was nothing but revenue in nature, as claimed by the assessee-company. Honble Gauhati High Court in CIT v. Bongaigon Refinery and Petro Chemicals Ltd. (supra) held that expenditure incurred for construction of railway track and siding was revenue expenditure and not capital expenditure and, therefore, the assessee was entitled to deduction. Similarly in the case of CIT v. Bangalore Refinery and Petro Chemicals Ltd. (supra) payment to railway for construction of railway track and siding was held as a revenue expenditure. The fact that the assessee has capitalised the expenditure in its books of account as per guidelines issued by Institute of Chartered Accountants of India, the same is not relevant while allowing the deduction under the provisions of the Income Tax Act. Therefore, expenditure claimed as a deduction cannot be treated as prima facie disallowable when the claim was justified as per notes forming part of the return of income filed by the assessee-company. The claim of expenditure on railway siding is a debatable issue which is beyond the scope of adjustment under section 143(1)(a) of the Act. We, therefore, find no merit in the prima facie addition made by the assessing officer and confirmed by the Commissioner (Appeals), in view of Central Board of Direct Taxes Circular No. 689, dated 24-8-1994. Honble Supreme Court in Navnit Lal C. Javeri v. K.K. Sen, Appellate Assistant CIT (1965) 56 ITR 198 (SC) and Ellerman Lines Ltd. v. CIT (1971) 82 ITR 913 (SC) held that circular issued by the Board would be binding on all the officers employed in the execution of the Act.
Regarding prima facie adjustment on account of interest payment, the learned senior Departmental Representative drew our attention towards the directors report contained in Fifteenth Annual Report of the company in which it was stated that the expansion project was expected to be commissioned by March, 1998, within the projected cost of Rs. 80 crores, and Schedule 3 forming part of profit & loss account of annual report in which interest was shown at Rs. 3,72,88,601 and Schedule 3 of the profit & loss account in which interest debited as expenditure was shown at Rs. 1,46,03,753. On the basis of these informations the learned senior Departmental Representative argued that there was an apparent difference of Rs. 2.26 crores in the interest as shown in Schedule 3, vis-a-vis interest shown in the profit & loss account, therefore, it is a fit case for prima facie adjustment regarding claim of interest amounting to Rs. 2,26,84,848 in respect of borrowed capital for its expansion project. It was further argued that as the project was not completed as per the directors report forming part of the Fifteenth Annual Report of the assessee-company, interest payable on the project of Rs. 80 crores was not allowable as a revenue expenditure. It was, therefore, submitted that the assessing officer was justified in making prima facie adjustment by adding the interest on the project in the total income of the assessee-company. Senior learned Departmental Representative further vehemently argued that prima facie adjustment implies in a plain and simple meaning as what is on the face of the return, computation of income and other documents accompanying with the return of income and which is before the assessing officer to take into consideration while processing the return under section 143(1)(a). We are agreed with the learned Senior Departmental Representative that prima facie implies what is on the face of the record but we are also guided by the circulars and instructions issued by the Central Board of Direct Taxes while making such prima facie adjustments and processing the return under section 143(1)(a). While perusing minutely the contents of Circular No. 689, we do not find any place for the prima facie adjustment as done by the assessing officer with reference to claim of interest on the borrowed capital. The circular speaks of incorrect claim with respect to claim under the head Capital gains, claim in respect of which there is omission of information which is required under the specific provisions of the Act or the rules to be furnished along with a return to substantiate such claim, like audit report specified under section 80HHC(4), which is required to be filed along with the return of income. Deduction claimed under section 80HHC, etc. can be disallowed as a prima facie adjustment, if the audit report is not accompanied with the return of income. Some other examples as given in Circular No.689 regarding disallowance of the claims relate to non-filing of audit reports or other evidence along with the return of income as required under sections 12A(b), 33AB(2), 35E(6), 43B (first proviso), 54(2), 54B(2), 54D(2), 54F(4), 54G(2), 80HH(5), 80HHA(4), 80HHB(3), 80HHD(6), 80HHE(4), 80-I(7), 80-IA(8) and the like. It has also been provided in the circular that if evidence is subsequently furnished, rectification under section 154 should be carried out to the extent permitted by the Board Circular No. 669, dated 25-10-1993. It has also been specifically mentioned in the circular that no prima facie disallowances shall be made if any evidence required to be filed along with the return of income only in pursuance of the non-statutory guidance, notes for filing the return of income, is not so filed.
The interest claim of the assessee was also not a claim for deduction or of any amount which exceeds the statutory limits imposed as per clause (c) of Circular No. 689. Such claim for deductions has been defined in the circular as claim for repairs under section 24(1)(i), collection charges, claim in excess of 1/5th of annual value, such excess can be disallowed as a prima facie adjustment. Even under the head any claim which is patently inadmissible in law, as per Circular No. 689 has been defined as claim for income-tax, wealth-tax, personal expenses, depreciation claimed under the head house property and the like. It has also been specifically mentioned in the circular that items of disallowance should be such that no two opinions are possible on their inadmissibility. Lastly it has been categorically mentioned in the circular that the Board desires that no other prima facie disallowances should be made except with the previous approval of the Commissioner who will, after according approval in suitable cases, bring the same in the notice of the Board. In the instant case, we do not find any such approval being taken from the Commissioner before making prima facie adjustment in respect of interest claimed by the assessee-company. Furthermore Honble Bombay High Court in the case of Khatau Junkar Ltd. v. K.S. Pathania (1992) 196 ITR 55 (Bom) observed as follows : "In its literal sense, prima facie means, on the face of it. Hence, on the face of the return and the documents and accounts accompanying it, the deduction claimed must be inadmissible. Only then can it be disallowed under the proviso to section 143(1)(a). If any further enquiry is necessary or if the Income Tax Officer feels that further proof is required in connection with the claim for deduction, he will have to issue a notice under sub-section (2) of section 143. If anything more is read into the power to make adjustments under section 143(1)(a), such power would be grossly arbitrary and unreasonable and in total violation of the principles of natural justice, because section 143(1)(a) does not provide for any notice being given to the assessee, nor does it provide for any hearing being given to the assessee before disallowing the claim made by him. A genuine claim of the assessee may thus be disallowed although the assessee is entitled to it and has documentary proof in support of his claim. The law does not require the assessee to furnish with his return all documents to prove every single claim made in the return. If unilateral adjustments are permitted on the ground of absence of proof in the return, several genuine claims will be disallowed. The assessee will not be able to produce documents even in the rectification application under section 154; such an interpretation of section 143(1)(a) may violate Article 14 of the Constitution." We are, therefore, of the considered opinion that in terms of provisions of section 36(1)(iii) and also various judgments of the High Courts and the Honble Supreme Court, the interest paid on borrowed capital cannot be treated as an item of expenditure which is prima facie inadmissible. As the further inquiry was necessary in connection with the claim for deduction, the same cannot be subjected to the adjustment without detailed examination of the books of account. We also find from Schedule 3 forming part of profit & loss account of Fifteenth Annual Report of the assessee-company that a sum of Rs. 2,26,84,844 has been reduced from the total of interest on the ground of same being capitalised and net amount of interest which works out to be Rs. 1,46,03,753 has been claimed by the assessee as interest expenditure debited in the profit & loss account as per schedule.
Therefore, on the face of balance sheet itself, there is no question of any confusion. In the computation of income the assessee-company had clearly mentioned and claimed interest on expansion of the companys business at Rs. 2,26,84,848. Thus, the claim in respect of interest can neither be treated as incorrect claim without going into the details of accounts nor such claim can be treated as patently inadmissible in law.
Thus, on the facts and in the circumstances of the case, keeping in view the spirit of Circular No. 689, we are of the considered view that the claim of interest and claim of railway siding expenditure was a debatable one and it requires examination of books of accounts and other documents for determining its real nature, i.e., capital or revenue. Therefore, both the claims cannot be subjected to the prima facie adjustment, under section 143(1)(a).
In the result, assessees appeal is allowed and the revenues appeal is dismissed and the cross-objection of the assessee becomes infructuous and is dismissed.