Judgment:
1. These two appeals, one by the Revenue being ITA No. 371/Nag/1996 and the other by the assessee-company, being ITA 505/Nag/1996 are cross-appeals directed against the order of learned CIT(A)-1, Nagpur, dt. 26th Feb., 1996, and the same are being disposed of by this consolidated order for the sake of convenience.
2. First, we may take up the Revenue's appeal, ground No. 1 of which relates to the disallowance of Rs. 1,19,81,900 on account of interest on advances made by the assessee-company to M/s A.P. Rayons Ltd. 3. At the time of hearing before us, the learned representatives of both the sides agreed that this issue is squarely covered in favour of the assessee by the decision of this Bench in assessee's own case for asst. yr. 1991-92 rendered vide its order dt. 19th March, 1997, in ITA/623/Nag/1995.
4. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue came up for consideration before this Bench in assessee's own case for asst. yr.
1991-92 and vide its aforesaid order, the Tribunal deleted the disallownace made on account of interest on advances made by the assessee-company to M/s A.P. Rayons Ltd. following its earlier order dt. 16th Feb., 1996, in ITA/566/Nag/1994 on a similar issue. As identical facts and circumstances are involved in the year under consideration, we follow the aforesaid decisions of the Tribunal in assessee's own case on a similar issue and uphold the impugned order of the CIT(A) deleting the disallowance of Rs. 1,19,81,900 made by the AO on account of interest on advances made by the assessee-company to M/s A.P. Rayons Ltd. 5. In ground No. 2, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs. 3,21,27,102 made by the AO on account of contingent liability in respect of the royalty on bamboo payable by the assessee-company to the Maharastra State Government.
6. At the time of hearing before us, the learned Departmental Representative submitted that although this issue was decided by the learned CIT(A) in favour of the assessee-company, it was admitted before the AO that this amount having been allowed in asst. yr.
1991-92, the relief allowed by CIT(A) in the asst. yr. 1992-93 need not be given effect to. In this regard, she invited our attention to a statement filed by the assessee before the AO giving the revised working of income consequent upon the impugned order passed by the learned CIT(A) and also to a copy of the order passed by the AO giving appeal effects as per the said working. The learned counsel for the assessee, on the other, hand submitted that the assessee-company having not claimed any relief on this issue before the AO while giving effects to the impugned order of the learned CIT(A), the Revenue cannot be said to have any grievance on this issue. His contention, therefore, was that this ground raised by the Revenue has become infructuous.
7. After considering the rival submissions and perusing the relevant material on record, it is observed that the decision in respect of royalty of Rs. 3,21,27,102 was allowed in full to the assessee in the asst. yr. 1991-92 by the AO and as a consequence thereof, the assessee did not claim any benefit for the said amount though allowed by the learned CIT(A) in the year under consideration, in the working filed before the AO. Accordingly, the AO has not allowed the deduction to the assessee while giving the effects to the impugned order of the learned CIT(A) vide his order dt. 21st June, 1999, passed under Section 250. In these circumstances, we find ourselves in agreement with the contention raised by the learned counsel of the assessee that the grievance of the Revenue, as projected in the ground No. 2, does not survive and this ground has become virtually infructuous. The same is accordingly dismissed.
8. In ground No. 3, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs. 19,38,236 in respect of depreciation and Rs. 23,89,222 in respect of rent paid in connection with staff/transit/guest house.
9. In the return of income, the assessee had made disallowance of Rs. 80,02,443 on account of maintenance of guest-house under Section 37(4).
However, during the course of assessment- proceedings, it was submitted on behalf of the assessee that while making the disallowance under Section 37(4); rent as well as depreciation in respect of guest-house should not be disallowed. Reliance was placed by the assessee on the decision of Hon'ble Bombay High Court in the case of CIT v. Chase Bright Steel Ltd (1989) 177 ITR 124 (Bom) in support of its stand that the deductions/expenditure covered under Sections 30 to 36 cannot be disallowed under Section 37(4). It was contended that the deductions in respect of rent and depreciation being governed by Sections 30 & 32 respectively, the same could not be denied under the provisions of Section 37(4). The AO did not accept the contention of the assessee.
According to him, the relevant provisions of Section 37(4) were quite specific in respect of guest-house depreciation and, therefore, the claim of the assessee related to the depreciation was disallowed by him under Section 37(4). As regards the rent paid for guest-house building, he was of the opinion that Section 37(4) would cover even expenditure on rent which is covered under Section 30 and accordingly he disallowed the rent also under Section 37(4). The submission made before AO was reiterated by the assessee before the learned CIT(A) and the reliance was placed on the decision of Hon'ble Bombay High Court in the case of CIT v. Century Spinning & Manufacturing Co. Ltd. (1991) 189 ITR 660 (Bom) and that of Hon'ble Gujarat High Court in the case of CIT v.Ahmedabad Manufacturing & Calico Printing Co. Ltd. (1992) 197 ITR 538 (Guj) in support. The learned CIT(A) found merits in the contention raised on behalf of the assessee before him and following the decision of Hon'ble Bombay High Court in the case of CIT v. Century Spinning & Manufacturing Co. Ltd. (supra), he deleted the disallowance made by the AO on this count.
10. Before us, the learned Departmental Representative relied on the order of AO on this issue and further submitted that the subsequent decisions of the Hon'ble Bombay High Court on this issue are in favour of the Revenue.
11. The learned counsel for the assessee submitted that the accommodation maintained at the factory premises was basically meant for the assessee's own employees visiting the factory in connection with the official work. He contended that the said accommodation, thus, was not in the nature of the guest-house and the disallowance made by AO under Section 37(4) was rightly deleted by the CIT(A). He further contended that the deductions in respect of rent and depreciation being specifically covered by the Sections 30 and 32, there was no case to make a disallowance of the same under Section 37(4).
12. We have considered the rival submissions and perused the material on record. It is observed that a similar issue arose for consideration before this Bench in the case of South Eastern Coalfields Ltd. v. Jt.
CIT [reported at (2002) 77 TTJ (Nag) 401--Ed.] in which, after considering the relevant provisions of Section 37(4) and (5) as well as the contradictory views expressed by the Hon'ble Bombay High Court on this issue in the case of CIT v. Chase Bright Steel Ltd. (supra) and in the case of Century Spinning and Manufacturing Co. Ltd. v. CIT (supra), the Tribunal preferred to follow the view expressed by the Bombay High Court in the case of Century Spinning and Manufacturing Co. Ltd. v. CIT (supra) while allowing the expenditure" incurred by the assessee on repairs in respect of guest-house and depreciation on the assets used in the guest-house which were allowable under Sections 30 and 32, vide its consolidated order dt. 28th Feb., 2002, passed in ITA 18 to 22/2/Nag/2001 holding that the deductions which were allowable to the assessee-company under the provisions of Sections 30 to 36 could not be denied under Section 37(4). Respectively following the said order, we hold that the learned CIT(A) was fully justified in deleting the disallowance made by the AO in the present case on account of depreciation and rent in respect of guest-house. His impugned order on this count is, therefore, upheld.13. In ground No. 4, the Revenue has challenged the action of the learned CIT(A) in deleting the addition made by the AO on account of tax deducted in Thailand from fee for technical services at Rs. 56,81,228.
14. At the time of hearing before us, the learned representatives of both the sides agreed that this issue is squarely covered in favour of the assessee by the decision of this Bench in assessee's own case for the asst. yr. 1991-92 rendered vide its order dt. 19th March, 1997, in ITA/623/Nag/1995.
15. After considering the rival submissions and perusing the material on record, it is observed that a similar issue arose for consideration before this Bench in assessee's own case for the asst. yr. 1991-92 in which the tax was deducted in Thailand from the fee for technical services rendered by the assessee-company to the Thailand party in terms of double taxation avoidance agreement entered into between India and Thailand and the amount so deducted was held to be not includible in the income of the assessee-company by the Tribunal vide its order dt. 19th March, 1997, in ITA No. 693/Nag/1995. Respectively following the said order and considering that the identical facts and circumstances are involved in the present case, we uphold the impugned order of learned CIT(A) deleting the similar addition made by the AO in the year under consideration.
16. In ground No. 5, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs. 3,47,315 made by the AO on account of contribution made to various schools.
17. At the time of hearing before us the learned representatives of both the sides agreed that this issue is squarely covered in favour of the assessee by the decision of this Bench in assessee's own case for the asst. yr. 1989-90 rendered vide its order dt. 8th Feb., 1995, in ITA/700/Nag/1993.
18. After considering the rival submissions and perusing the material on record, it is observed that a similar issue stands decided by the Tribunal in assessee's own case for the asst. yr. 1989-90 wherein the expenditure incurred by the assessee on account of contribution made to various educational institutions was held to be deductible by the Tribunal following the decision of Bombay Bench of the Tribunal in the case of Tata Iron & Steel Co. Ltd. v. IAC (1994) 77 Taxman 93 (Bom)(Trib)(Mag). Respectfully following the said decision and considering that the identical facts are involved in the present case, we hold that there is no infirmity in the impugned order of learned CIT(A) deleting the addition of Rs. 3,47,315 made by the assessee (sic-AO) on account of contribution made to various schools. The same is, therefore, upheld on this issue.
19. In ground No. 6, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs. 14,58,290 and Rs. 5,82,483 made by the AO on account of income by way of royalty and interest.
20. During the year under consideration, the assessee-company received income by way of royalty and interest from Malaysia amounting to Rs. 14,58,290 and Rs. 5,82,483, respectively: It was claimed by the assessee that the said amount being taxable in Malaysia under the "Double Tax Avoidance Agreement" is to be excluded from the computation of income. Reference was made to Articles 12 and 13 of the said agreement to point out that both interest and royalty are taxable in the country wherefrom such income was derived i.e., source country and thus the power of the other contracting nation i.e., India to levy tax on the said income is taken away. Reliance was also placed on the decision of Hon'ble Karnataka High Court in the case of CIT v. R.M.Muthaiah (1993) 202 ITR 508 (Kar) and that of Hon'ble Madras High Court in the case of CIT v. VR. S.R.M. Firm and Ors. (1994) 208 ITR 400 (Mad) in support of the assessee's claim. This stand taken by the assessee was not accepted by the AO mainly for the reason that SLP filed by the Department against the decision of the Hon'ble Madras High Court in the case of Vr. S.R.M. Firm and Ors. v. CIT (supra) was admitted by the Supreme Court. He, therefore, added the income derived by the assessee-company from royalty and interest in the hands of the assessee. The matter was carried out before the learned CIT(A) who, however, deleted the addition made by the AO on this count keeping in view the legal position emanating from the following decisions: 2. Arabian Express Line Ltd. v. Union Bank of India (1995) 212 ITR 31, 37 (Guj) 21. The learned Departmental Representative strongly supported the order of the AO on this issue. She submitted that the decision of Hon'ble Madras High Court in the case of CIT v. VR. S.R.M. Firm and Ors. (supra), on which heavy reliance was placed by the assessee has not been accepted by the Department and SLP filed against the same stands admitted by the Hon'ble Supreme Court. Referring to the Articles 12 and 13 of the agreement for avoidance of double taxation and prevention of fiscal evasion with Malaysia ('DTAA' for short), she pointed out that the words used therein in respect of royalty and interest are "may be taxed" in other contracting State and not "shall be taxed". According to her, the Department, therefore, could tax the amount received by the assessee-company towards interest and royalty in India going by the language used in the said agreement. Further, referring to the scope of technical services specified in the agreement entered into between the assessee-company and the Malaysian firm, she contended that the royalty received by the assessee-company from the Malaysian firm was clearly in the nature of fees received for the technical services rendered by the assessee-company.
22. The learned counsel for the assessee submitted that the case of assessee is covered by the decision of the Hon'ble Karnataka High Court in the case of CIT v. R.M. Muthaiah (supra) and since no SLP against the said decision has been filed by the Department, the case of the assessee stands fully covered by the said decision of Hon'ble Karnataka High Court. He, therefore, submitted that the case of the assessee is also covered by the decision of the Hon'ble Madras High Court in the case of CIT v. VR.S.RM. Firm and Ors. (supra) and the action of the AO in not following the said decision which was squarely applicable to the assessee's case just because the SLP against the same was admitted by the Supreme Court, was not justified. He submitted that the latest status of the SLP filed by the Revenue before the Hon'ble Supreme Court is not known to the assessee and the learned Departmental Representative has also not thrown any light on this aspect. He, further, submitted that a similar issue arose for consideration before the Tribunal in assessee's own case for the asst. yr. 1991-92 and the contentions as raised by the learned Departmental Representative before the Tribunal in the present case were also raised in the asst. yr.
1991-92. Referring to the order of the Tribunal passed in that year, he pointed out that all the contentions raised by the Revenue have already been considered by the Tribunal in that case before arriving at a conclusion that the amount received by the assessee-company was in the nature of royalty and interest in terms of Articles 12 and 13 of the said agreement and the same having been approved by the Malaysian Government, they were taxable only in source country i.e., Malayasia.
As regards the contention of the learned Departmental Representative that the words "may be taxed" having been used in the DTAA with Malaysia, the Indian Government was empowered to levy tax on interest and royalty income, he pointed out that a similar expression was used in the agreement in case of CIT v. R.M. Muthaiah (supra) before the Hon'ble Karnataka High Court and still their Lordships held that the power to levy tax on royalty and interest was specifically recognized as vested in Malaysian Government and an exercise of such a power was not available to the Indian Government.
23. We have considered the rival submissions in the light of the material available on record and the precedent cited at the Bar. As regards the nomenclature used by the assessee-company in relation to the impugned income earned by it and the character of such income, whether it is covered by the fees payable for the technical services or not, we find that this dispute is not arising from the AO's order inasmuch as the character of the same being the interest and royalty income earned by the assessee from the Malaysian party was accepted by the AO himself in para No. 10 of his order. In any case this issue stands already decided by the Tribunal in assessee's own case for the asst. yr. 1991-92 vide its order dt. 2nd Sept., 1997 in ITA/65/Nag/1996, wherein after perusing the relevant articles of the DTAA with Malaysia as well as the agreement entered into by the assessee-company with the Malaysian firm, the Tribunal upheld the nature of the said receipts as claimed by the assessee. As regards the contention raised by the learned Departmental Representative before us, relying on the words "may be taxed" used in DTAA, that tax could be levied in India also on the income earned by the assessee from the interest and royalty, it is observed that a similar contention was raised on behalf of the Revenue before the Hon'ble Madras High Court in the case of CIT v. VR. S.R.M. Film and Ors. (supra) and their Lordships held that the same cannot be countenanced as of substance or merit and further observed that such enabling form the language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it as a right to bring to assessment the income covered by such clauses in the agreement. In the case of CIT v. R.M. Muthaiah (supra), the words used in a similar agreement were also "may be taxed" in respect of taxability of income in Malaysia by the Government of Malaysia and still the Hon'ble Karnataka High Court held that when a power to tax impugned income was specifically recognized as vested in the Government of Malaysia, an exercise of such a power by the Indian Government was barred. Explaining further, their Lordships held that the said agreement by necessary implication took away the power of the Indian Government to levy the tax on the income in respect of certain categories as specified in the different articles of the said agreement. In the present case, the income from interest and royalty earned by the assessee-company was clearly taxable in Malaysia as per Articles 12 and 13 of DTAA with Malaysia and, therefore, levy of tax on the said income in India was not permissible. As such considering all the facts of the case and legal position emanating from the aforesaid judicial pronouncements, we are of the considered opinion that the AO was not justified in including the income earned by the assessee-company by way of royalty and interest in the total income of the assessee and the learned CIT(A) was right in deleting the addition made by the AO on this count. His impugned order on this issue is, therefore, upheld.24. In ground Nos. 7 and 8, the Revenue has challenged the action of the learned CIT(A) in deleting the addition of Rs. 5.6 crores made by the AO treating the surplus on redemption of debentures as revenue receipt holding that the debentures represent borrowed capital of the company and any gain on capital which is not due to business/manufacturing activity cannot be treated as revenue receipt.
25. The assessee-company has issued debentures of the value of Rs. 40 crores during the accounting year ended 31st March, 1992. The purpose of the issue of debentures was to mobilize funds for the ongoing modernising project of the company and to meet its long-term requirement of working capital. The said debentures carried a coupon rate of 14 per cent interest per annum which became less attractive due to general rise in the interest rate during the relevant period and the debenture-holders were desirous of foreclosing the tenure at discount so as to utilize the proceeds of the debentures somewhere else to fetch higher rate of interest. The company by virtue of the powers conferred on it by the debentures trust deed agreed to redeem prematurely the said debentures at discount and accordingly the Board of Directors of the assessee-company passed a resolution to redeem the debentures at a price of 34.40 crores as against the face value of Rs. 40.00 crores resulting in a surplus of Rs. 5.6 crores, The assessee-company claimed this surplus amount of Rs. 5.6 crores as capital receipt not chargeable to tax. The AO was of the opinion that the premature redemption of debentures resulted in remission of liability in respect of the said borrowings and considering that the various Courts have held the premium paid on the redemption of debentures to be a revenue expenditure, he held the surplus on the redemption of the debentures amounting to Rs. 5.6 crores as a revenue receipt chargeable to tax.
Before the learned CIT(A), it was submitted by the assessee that the AO has not appreciated the fact that the arrangements to raise the debenture capital could not be regarded as an ordinary trading contract entered into by the appellant with the debenture-holders and recession of such contract does not affect the profit-making structure. It was also submitted by the assessee that the benefit derived on such redemption resulting in extinguishment of loan liability was a capital receipt. Reliance was placed by the assessee on the decision of the Hon'ble Bombay High Court in the case of CIT v. Scindia Steam Navigation Co. Ltd. (1980) 125 ITR 118 (Bom) and also on the decision of Hon'ble Delhi High Court in the case of Dalmia Dadri Cement Ltd. v.CIT (1980) 126 ITR 851 (Del) in support of its stand. After considering the submissions made on behalf of the assessee-company before him and keeping in view the legal position emanating from the judgment pronouncements relied upon by the assessee in support, the learned CIT(A) deleted the addition of Rs. 5.6 crores made by the AO observing that any gain on capital which is not due to business/manufacturing activity cannot be treated as revenue receipt.
26. Before us, the learned Departmental Representative strongly supported the order of the AO stating that the same is well considered and well discussed on this issue. She pointed out that the purpose of issuing the debentures by the assessee-company was not to acquire any long-term assets and this vital aspect was not considered by the learned CIT(A) while allowing the relief to the assessee on this ground. She submitted that the debenture is a loan liability and not capital and, therefore, any expenditure incurred, as well as income derived in connection with the same is bound to be of revenue nature.
Relying on the decision of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT (1996) 60 ITR 52 (SC), she contended that the loans are not assets and any amount incurred in connection with the same has to be treated as revenue expenditure. She also relied on the decision of Hon'ble. Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT (1997) 225 ITR 802 (SC) wherein a discount on debentures has been held to be a revenue expenditure by the Hon'ble apex Court. She also cited the decision of Hon'ble Calcutta High Court in the case of National Engineering Industries Ltd. v. CIT (1999) 236 ITR 577 (Cal), the decision of Hon'ble Himachal Pradesh High Court in the case of Himachal Pradesh Financial Corporation Ltd. v. CIT (1998) 232 ITR 158 (HP) and that of Hon'ble Madhya Pradesh High Court in the case of M.P. Financial Corporation v. CIT (1987) 165 ITR 765 (MP) wherein it is held that discount given at the time of issue of bonds/debentures is a revenue expenditure deductible under Section 37(1). She contended that the reliance of the CIT(A) on the decision of Hon'ble Bombay High Court in the case of CIT v. Scindia Steam Navigation Company Ltd. (supra) cited by the learned counsel for the assessee before him was misplaced since in the said case, different facts were involved and the purpose of issuing the debentures was also different. She also contended that as per the recent judgments of various High Courts as well as of Hon'ble Supreme Court, the discount on debentures is treated as revenue expenditure and applying the same analogy, the surplus on redemption of debenture in the present case is to be treated as revenue receipt exigible to tax. She also placed reliance on the decision of Hon'ble Calcutta High Court in the case of CIT v. East India Hotels Ltd. (2001) 252 ITR 860 (Cal), wherein the Hon'ble apex Court has held that the expenditure incurred in connection with the issue of debentures is a revenue expenditure.
27. The learned counsel for the assessee submitted that the decision of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT cited by the learned Departmental Representative has been dealt with and distinguished by the Hon'ble Bombay High Court in the case of CIT v.Scindia Steam Navigation Company Ltd. (supra), which was cited by the assessee-company before the learned CIT(A) in support of its stand. He further submitted that in the other decisions relied upon the learned Departmental Representative, discount on debenture was held to be a revenue expenditure deductible on proportionate basis over the entire period of bonds and thus the said decisions having been rendered in a different context cannot be of any help to the Revenue's case on the issue under consideration. He submitted that the debentures were redeemed by the assessee-company prematurely in an exercise of restructuring its capital and, therefore, any loss or income arising as a result of such exercise has to be treated as capital in nature.
Reliance was placed by him on the decision of Delhi High Court in the case of CIT v. Phool Chand Jiwan Ram (1981) 131 ITR 37 (Del) wherein it is held that remission of only the trading liability which was allowed in the earlier years can be included in assessee's income in the year of remission. He contended that the remission of any liability other than the trading liability is a capital receipt and the same cannot be subjected to tax.
28. We have considered the rival submissions and perused the relevant material on record. We have also carefully perused the various cases laws cited by the learned representatives of both the sides. It is observed that the stand of the Revenue to treat the surplus on redemption of debentures as revenue receipt exigible to tax is based mainly on the proposition that such surplus assumes the similar nature and character as that of discount on debentures which has been held to be a revenue expenditure by the various Courts including the Hon'ble Supreme Court. It is pertinent here to note the proposition propounded in the various judicial pronouncements cited by the learned Departmental Representative in support of this stand which is summarized below : The discount on debentures is an allowable revenue expenditure. When a company issues debentures at a discount, it incurs a liability to pay the trading amount than what its borrowed at a future date. The liability to pay a larger amount than the amount received for the debentures is a liability which has been incurred by the company for the purpose of its business in order to generate funds for its business activities. The purpose of payment of discount is to secure a benefit over a number of years and since there is a continuing benefit to the business of the assessee-company over the entire period, the said liability should be spread over the period of the debentures.
The liability to pay debenture premium is to be spread over the years from the issue of debentures to the year of redemption. Himachal Pradesh Financial Corporation Ltd. v. CIT The amount of discount on bonds and debentures has to be spread out proportionately over the number of years for which the bonds are issued and the proportionate amount of such discount would be an allowable expenditure in the relevant assessment years.M.P. Financial Corporation v. CIT The amount of discount on bonds and debentures in effect represents deferred interest and looking it as a loss, a proportionate amount of discount can be written off out of revenue every year during the period the bonds would remain outstanding.
29. A conspectus of the aforesaid decisions goes to show that the discount at which the debentures or bonds are issued on a premium which is payable on the redemption of the bonds or debentures, is regarded as a revenue expenditure by the various Courts treating the same as akin to the additional interest payable by the assessee-company in respect of the said bonds or debentures and as such the discount or premium so payable as per the terms and conditions of the debenture or bond was considered as the cost incurred by the assessee for the purpose of its business in order to generate funds for its business activities. It is thus clear that the character of discount or premium payable on the redemption of debentures as per the agreed terms and conditions is altogether different from the surplus arising to the assessee from the redemption of debentures prematurely in the present case inasmuch as the discount/premium on debentures operates in the revenue field whereas the surplus on redemption of debentures being an integral part of the exercise of restructuring its capital operates in the capital field. We, therefore, are of the view that the discount on debentures cannot be equated with the surplus on the redemption of debentures arising to the assessee in the present case and this being so, the analogy on the basis of which the discount was .held to be revenue expenditure by the various Courts cannot be straightaway applied to the surplus on redemption in the present case to hold it as a revenue receipt. As a matter of fact, the liability on account of debentures was certainly not a trading liability and as held by the Hon'ble Delhi High Court in the case of CIT v. Phool Chand Jiwan Ram (supra) the remission of portion of such liability does not give rise to any income of revenue nature which could be subjected to tax.
30. Before the learned CIT(A), the assessee mainly relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Scindia Steam Navigation Company Ltd. (supra) and keeping in view the ratio laid down by the Hon'ble Bombay High Court in the said decision, learned CIT(A) held that the surplus on redemption of debenture could not be treated as a revenue receipt. In the said case, the decision of Hon'ble Supreme Court in the case of India Cement Ltd. v. CIT (supra) cited by the learned Departmental Representative before us, was also relied upon by the Revenue and the Hon'ble Bombay High Court found the same distinguishable on facts for the following reasons given in para No. 16 of its judgment : "Mr. Joshi on behalf of the CIT, drew our attention to the decision of the Supreme Court in India Cement Ltd. v. CIT (1996) 60 ITR 52 (SC), where distinction was made between obtaining of capital by issue of shares and obtaining loan by debentures. It is important to remember in connection with the observations to be found in the above decision that they are in the context of considering the amount spent by the assessee towards stamp duty, registration fee, lawyer's fee, etc. in connection with the loan which the assessee in the case before the Supreme Court, had obtained from the Industrial Finance Corporation and which had been secured by a charge on its fixed assets. The transactions which we are considering are of a totally different nature and it appears to us to be improper to pick out stray observations from a decision and apply them in a totally different context to a different set of facts." 31. It is observed that the facts involved in the aforesaid case before the Hon'ble Bombay High Court are identical to the facts of the present case in as much as certain amounts had accrued to the assessee in that case as a result of cancellation of the debentures by way of investment made by the company in its own debentures which were being quoted at discount. This surplus amount accrued to the assessee-company was regarded as a business profits by the AO as the company was found to be purchasing and cancelling its debentures year after year. In the appeal filed by the assessee, the first appellate authority agreed with the AO and when the matter was carried before the Tribunal in a further appeal, the Tribunal upheld the assessee's stand observing that what had been done by the assessee-company was to materially alter its capital structure and in the process the assessee had taken advantage of the favourable capital market which was essentially relatable to its capital and the benefit reaped by the assessee-company was essentially a capital benefit. The Hon'ble Bombay High Court found itself in agreement with the conclusion drawn by the Tribunal observing that it is quite clear that the accrual of surplus cannot be regarded as equivalent to profits earned out of its business activity and once that conclusion is reached, it is immaterial to consider whether the accrual of surplus by the assessee-company is of capital nature or not. In our opinion, this decision of the Hon'ble Bombay High Court is squarely applicable to the facts of the present case and respectfully following the same as well as for the reasons given above, we hold that the learned CIT(A) was fully justified in deleting the addition of Rs. 5.6 crores made by AO, holding that the same can not be treated as a revenue receipt. His impugned order on this issue is, therefore, upheld.33. Ground No. 1 relates to the addition of Rs. 32,56,442 being the differential amount of royalty and interest received from Malaysian party as a result of exchange rate fluctuation. The assessee has challenged the action of the learned CIT(A) in confirming this addition on the ground that the additional income on account of fluctuation of exchange rate bears the same character as its regular income by the royalty and interest which was not includible in the total income of the assessee in terms of Double Tax Avoidance Agreement existing between Government of India and Government of Malaysia.
34. At the time of hearing before us, the learned representatives of both the sides agreed that this issue is squarely covered in favour of the Revenue by the decision of this Bench in assessee's own case for the asst. yr. 1991-92 rendered vide its order dt. 19th March, 1997, in ITA Nos. 623 & 638/Nag/1995.
35. After considering the rival submissions and perusing the relevant material on record, it is observed that a similar issue arose for consideration before this Bench in assessee's own case for the asst.
yr. 1991-92 and vide its aforesaid order, the Tribunal upheld the action of the learned CIT(A) in confirming the addition made by the AO on this count for the following reasons given in para No. 33 of the said order: "There is no doubt that interest and royalty income was a trading receipt in the hands of the assessee. But for the Double Taxation Avoidance Agreement this would have been charged to tax in the assessee's hands. The said income was treated as exempt only because it was covered by the Double Taxation Avoidance Agreement. That agreement, however, does not cover the amounts accrued to the assessee as a result of exchange rate fluctuations. Moreover, the amount of Rs. 26,11,142 had arisen in India as the conversion took place in India. The said amount is, therefore, held to be taxable in the hands of the assessee." 36. From the perusal for the aforesaid observation of the Tribunal, it is quite evident that the issue raised by the assessee in ground No. 1 is squarely covered by the aforesaid order of the Tribunal in favour of the Revenue and against the assessee and respectfully following the same we hold that the learned CIT(A) was fully justified in confirming the addition of Rs. 32,56,442 made by the AO on account of the differential amount of royalty and interest arose to the assessee as a result of exchange rate fluctuation.
37. The next issue relating to the claim of the assessee-company for benefit in respect of unabsorbed depreciation of M/s Modern Stramit India Ltd., a company amalgamated with the assessee-company in terms of the order of the BIFR is raised in the following grounds : 2(a) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of depreciation amounting to Rs. 27,09,294 in respect of the assets of M/s Modern Stramit (I) Ltd., a company amalgamated with the appellant-company in terms of order of the BIFR. (b) That on the facts and in the circumstances of the case, the learned CIT(A) has erred in not allowing the appellant's claim towards depreciation on the value of assets of the amalgamating company not actually allowed under Sections 32, 43(6) and 72A of the IT Act since such value remained as unabsorbed depreciation in accordance with the order of the BIFR. 3. That without prejudice to the contentions in 2(a) and 2(b) above, the learned CIT(A) has erred in not allowing the benefit of unabsorbed depreciation despite the facts that the provisions of Section 72A of the IT Act r/w Sections 18 and 32(2) of the Sick Industrial Companies (Special Provisions) Act, 1985, have been complied with.
38. Modern Stramit (I) Ltd. was a sick company which had closed down its operation at the end of 198S and its case was referred to BIFR on 30th Sept., 1989. The BIFR declared the said company to be a sick industrial company and under the scheme of rehabilitation, the same was amalgamated with the assessee-company. As per the BIFR order dt. 6th May, 1992, the assessee-company was allowed to carry forward the accumulated loss and unabsorbed depreciation of M/s. Modern Strait (I) Ltd. from 1st April, 1991, as per the provisions of Section 72A of the IT Act, This benefit, however, was restricted to a maximum tax amount of Rs. 75.00 lakhs. During the year under consideration, the business of the amalgamating company i.e., M/s Modern Stramit (I) Ltd. was carried on by the amalgamated company i.e. assessee-company and certificate to that effect as required under Section 72A(2)(ii) was submitted. The tax benefit as per the aforesaid BIFR order in respect of unabsorbed depreciation and accumulated business loss under provisions of Section 72A to the extent of Rs. 75,00 lakhs was claimed by the assessee-company in its return of income for the asst. yr.
1992-93 as per the following working furnished by the assessee-company which is reproduced by AO in his order on page No. 16: 39. As shown in the above statement, the benefit in respect of the entire accumulated business loss of Rs. 1,41,40,464 was available by the assessee in accordance with the provisions of Section 72A r/w BIFR order dt. 6th May, 1992. However, the benefit in respect of unabsorbed depreciation could be availed only to the extent of Rs. 3,52,290 due to the restriction imposed by the BIFR for a maximum tax relief of Rs. 75.00 lakhs and the balance amount of Rs. 1,20,03,557 remained inadmissible due to the said restriction. During the course of assessment proceedings, the assessee-company filed a letter dt. 14th Feb., 1995, claiming that the unabsorbed depreciation of amalgamating company to the extent of Rs. 1,20,03,557 having not been actually allowed to the amalgamated company i.e., assessee-company, the same cannot be deducted from the WDV of assets of amalgamated company for depreciation allowances and as such the assessee-company is entitled for depreciation allowance of Rs. 27,09,294 on the unabsorbed depreciation of the amalgamating company to the extent it remained inadmissible because of the limitation specified in the BIFR order. The asset-wise break up of such unabsorbed depreciation which remained inadmissible and the depreciation allowance in respect of the same was furnished by the assessee as under : Total value of unabsorbed deprecn. as per Ann. B to the return for asst. yr. 1992-93 filed (Rs.) 40. In support of its above claim, heavy reliance was placed by the assessee-company on the decision of Hon'ble Bombay High Court in the case of CIT v. Hindustan Petroleum Corporation Ltd. (1991) 187 ITR 1 (Bom). The main thrust of the assessee's contention in support of this claim was that if the depreciation was not actually allowed, then the actual cost as reduced by the depreciation to the extent actually allowed should be treated as written down value for the purpose of IT Act and the benefit which was due to the assessee under Section 32(2) could not be taken away because of the limitation mentioned in the BIFR's order. The AO did not allow this claim of the assessee-company because according to him when the maximum amount of tax benefits was specified by the BIFR in its order at Rs. 75.00 lakhs, there was no way the assessee could get benefits beyond what was intended to be given by the BIFR. The AO observed that the benefits admissible to the assessee in respect of unabsorbed depreciation and accumulated business loss under Section 72A are to be read in terms of the BIFR's order dt. 6th May, 1992 and the assessee cannot go beyond the purview of the said order to claim additional depreciation. Aggrieved by the order of the AO, the assessee filed an appeal before the learned CIT(A). During the appellant proceedings before him, the submission made before the AO was reiterated on behalf of the assessee-company and it was further contended that the balance unabsorbed depreciation of Rs. 1,20,03,557 which was not actually allowed partakes the character of the cost of assets in the hands of amalgamated company in terms of the provisions of Section 43(6) r/w Section 32(2). Reference was against made to the decision of the Hon'ble jurisdictional High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) and it was submitted that the introduction of Section 72A does not in any way affect the principles laid down in the said decision. After considering the submission made by the assessee-company, the learned CIT(A) found no merits in the claim of the assessee for additional depreciation and he upheld the order of the AO rejecting the said claim observing as under : "I have considered the arguments of appellant's counsel. The decision of the Bombay High Court referred to by the authorised representative has held clearly that unabsorbed depreciation of amalgamating company cannot be allowed in the hands of amalgamated company. However, it has also held that WDV of assets in the hands of amalgamated company would be actual cost of assets to amalgamating company less depreciation actually allowed to that company. The unabsorbed depreciation which could not be set off or carried forward could not be deducted while computing WDV. Hence, according to this decision appellant is entitled to enhance. WDV of the assets of amalgamating company by Rs. 1,20,03,557 and claim depreciation thereon. However, this decision cannot be applied because it was delivered before insertion of Section 72A. Section 72A now lays down specifically as to how and in what circumstances, amalgamated company can avail the benefit of carry forward business loss and unabsorbed depreciation of amalgamating company. Pursuant to regulations of this section, BIFR has laid down condition that benefit of carry forward business loss and unabsorbed depreciation of amalgamating company should be given only to the extent of tax effect of Rs. 75.00 lakhs. The AO has accordingly allowed the carry forward business loss and unabsorbed depreciation of amalgamating company to the appellant. If appellant's claim is accepted, amalgamated company would get tax benefit of more than Rs. 75.00 lakhs because Rs. 1,20,03,557 would be allowed by way of depreciation in future years. This is against the stipulation of BIFR made under Section 72A(i)(c). Hence, appellant's claim for capitalization of Rs. 1,20,03,557 and claim of depreciation thereon is rejected." 41. Before us, the learned counsel for the assessee reiterated the submission made on behalf of the assessee-company before the authorities below. He submitted that the claim of the assessee for additional depreciation is mainly based on the principles laid down by Hon'ble Bombay High Court in the case of CIT v. Hindustan Petroleum Corporation Ltd. (supra). He also submitted that unabsorbed depreciation of the amalgamating company to the extent not allowed to the amalgamated company cannot be deducted from the WDV of assets of amalgamated company and the assessee-company, therefore, was entitled to claim the depreciation in respect of unabsorbed depreciation amounting to Rs. 1,20,03,557 which remained inadmissible because of the limitation specified in the BIFR order. He contended that the said benefit was available to the assessee even prior to the insertion of Section 72A and the introduction of the said provisions, which are beneficial in nature and the BIFR order issued under the said section, cannot take away the said benefit which was otherwise available to the assessee-company as per the principles laid down by the Hon'ble jurisdictional High Court in the case of Hindustan Petroleum Corporation Ltd. (supra). Referring to the order of this Bench dt. 29th March, 1996, passed in assessee's own case for the asst. yr. 1989-90 in ITA No. 397/Nag/1994, he submitted that a similar issue has already been considered by the Tribunal liberally in the said order and the findings given therein by the Tribunal, although in the context of the order passed by the CIT under Section 263, support the assessee's case on this issue. He also relied upon the decision of Hon'ble Supreme Court in the case of Indian Shaving Products Ltd. v. BIFR (1996) 218 ITR 140 (SC) in support of his contention that the benefit admissible to the assessee-company under Section 72A could not have been declined/restricted by BIFR.42. The learned Departmental Representative, on the other hand, strongly relied on the orders of the authorities on this issue. She submitted that the decision of Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra), on which heavy reliance has been placed by the learned counsel for the assessee, was rendered prior to insertion of Section 72A in the statute. She submitted that the provisions of Section 72A are very specific and the assessee is not entitled to claim benefits more than what were available in terms of BIFR order passed in pursuance of provisions of Section 72A. Relying on the decision of Hon'ble Madras High Court in the case of Bhavani Mills Ltd. v. Member (IT&J), CBDT (1999) 105 Taxman 335 (Mad), she contended that the provisions of Section 72A and the order of BIFR passed under the said section have overriding effects over the other provisions of the Act. She also contended that the assessee cannot claim benefit of BIFR order r/w Section 72A as well as the decision of Hon'ble Bombay High Court reported in (1991) 187 ITR 1 (Bom) (supra). As regards the order of the Tribunal passed in ITA No. 397/Nag/1994, she pointed out that the same was passed in the context of powers invoked by the CIT under Section 263 and moreover no order under Section 72A was passed in that case by the specified authority. She contended that after the insertion of Section 72A, issue relating to the unabsorbed depreciation and accumulated loss of amalgamating company in the hands of amalgamated company is to be dealt with as per the said provisions which override the other provisions of the Act and, therefore, the claim of the assessee on this issue based on the other provisions cannot be accepted. As regards the decision of Hon'ble Supreme Court in the case of Indian Shaving Products Ltd. v. BIFR (supra), she contended that the BIFR in the present case has made the declaration under Section 72A restricting the total tax benefits to the assessee-company at Rs. 75.00 lakhs and, therefore, the said case wherein no such declaration was made is clearly distinguishable on facts. She also contended that the assessee-company could seek the higher tax benefits over and above the amount Rs. 75.00 lakhs only from BIFR as held by Hon'ble Delhi High Court in the case of Mahindra & Mahindra Ltd. v.Union of India 43. We have considered the rival submissions in the light of the material available on record and precedent cited at the Bar. At the outset, we may observe that the decision of the Tribunal in assessee's own case for the asst. yr. 1989-90 in ITA No. 397/Nag/1994, dt. 29th March, 1996, is not applicable to the facts of the present case since no order was passed by BIFR in the said case involving asst. yr.
1989-90 in accordance with the provisions of Section 72A. Moreover, the order passed by the CIT under Section 263 setting aside the assessment completed by the AO on this issue was challenged by the assessee in that case and accordingly the decision was rendered by the Tribunal in that limited context, which cannot be taken as a precedent for deciding the issue under consideration on merits.
44. It is observed that in the return of income filed by the assessee-company for the year under consideration, the benefit in respect of unabsorbed depreciation and accumulated loss having a tax effect to the extent of Rs. 75.00 lakhs was claimed by the assessee and it was only in the assessment proceedings before the AO, the assessee filed a letter claiming further benefit on account of depreciation allowance in respect of unabsorbed depreciation of the amalgamating company which has remained inadmissible. The said claim was made by the assessee before the AO mainly relying on the decision of the Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) and even in the appellate proceedings before the learned CIT(A) as well as before us, heavy reliance is placed on the said judgement of Hon'ble jurisdictional High Court in support of assessee's claim for the further depreciation allowance, After carefully perusing the entire text of the said judgment as well as the relevant provisions of law including that of Section 72A and considering the facts of the present case, we are of the view that the assessee-company cannot derive any benefits from the said decision for the reasons more than one. The said judgment pertains to a period prior to the introduction of Section 72A when the benefits of accumulated loss and unabsorbed depreciation allowance of the amalgamating company were not available to the amalgamated company as per the relevant provisions prevailing at that time. Their Lordships of Hon'ble Bombay High Court, therefore, referred to the general provisions of Section 32(2) and 43(6)(b) as well as the relevant Explanations to the said sections and after considering the anomaly noticed therein, allowed the assessee's claim for adjustment of the WDV of assets of amalgamated company in order to give benefits of unabsorbed depreciation of amalgamating company which was not actually allowed. Subsequently, Section 72A was inserted in the statute containing specific provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation or demerger, etc. by the Finance No. 2 Act of 1977. By inserting the said section, the provisions relating to the carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation were relaxed by providing that where there has been an amalgamation of a company owning an industrial undertaking or ship with another company and the Central Government, on the recommendation of specified authority, is satisfied that certain conditions specified in this behalf are fulfilled, the Central Government may make a declaration to that effect and thereupon, notwithstanding anything contained in any provisions of the IT Act, the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be a loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected. It is thus clear that the provisions of Section 72A are special provisions dealing with the issue of carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation and as per the phraseology used in the said section these provisions have overriding effect on any other provisions of the Act. As already observed, prior to insertion of the Section 72A, there was certain anomaly in the other relevant provisions of Section 43(6) and Section 32(2) and on the basis of this anomaly, the Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) proceeded to allow the claim of the assessee in the absence of any specific provisions relating to the said issue. However, after the insertion of specific provisions relating to the carry forward and set off of accumulated loss and unabsorbed depreciation allowance in the case of amalgamation by Section 72A, the issue now is required to be decided in accordance with the said provisions, which being the special provisions will prevail over the other general provisions. Moreover, the language of Section 72A makes the legislative intention quite clear that the said provisions override the other provisions of the Act. The rule of construction/interpretation, as expressed in the maxim "Generalia specialibus non derogant" and further explained in the book "Craies on Statute Law" 5th edition, page No. 205, is that whenever there is a particular enactment and general enactment in the same statute, and the latter taken in its most comprehensive sense, would overrule the former, the particular enactment must be operative and the general enactment must be taken to affect only the other parts of the statute to which it may properly apply.
45. In the case of Hindustan Petroleum Corporation Ltd. (supra), the assessee had claimed the adjustment of unabsorbed depreciation of amalgamating company which was not actually allowed to be deducted from the WDV of assets of amalgamated company, on the basis of provisions contained in Section 43(6) wherein the expression "written down value" is defined to mean, in the case of assets acquired before the previous year, the actual cost to the assessee less depreciation actually allowed to him under this Act. The Revenue, on the other hand, had relied on Expln. 2A and Expln. 3 to Section 43(6) to support its case.
The said Explanations read as under : "Explanation 2A : Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company, and the amalgamated company is an Indian company, the written down value of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamated company had continued to hold the capital asset for the purposes of its business.
Explanation 3 : Any allowance in respect of any depreciation carried forward under Sub-section (2) of Section 32 shall be deemed to be depreciation 'actually allowed'." 46. The provisions of Section 43(6), especially Expln. 2A and Expln. 3 to the said subsection were considered and discussed by the Hon'ble Bombay High Court and the said discussion as it appears on pp. 9 to 11 is reproduced below : "It is pertinent to mention that Expln. 2A was inserted in Section 43(6) by the Finance (No. 2) Act, 1967, whereas Explns. 1, 2 and 3 are there from the inception of the IT Act, 1961. The main purpose of Expln. 3 appears to us to be to avoid an anomaly which would have otherwise resulted. Depreciation computed but not given effect to for paucity of funds is under Section 32(2) allowable as deduction in the case of the same assessee as the depreciation of the following year or years, as the case may be. But for Expln. 3, written down value would have been the actual cost of the assets to the assessee less depreciation actually allowed. This would have resulted in certain anomalies. For instance, when depreciation is allowed not on the straight line method but on the basis of the written down value, depreciation of necessity becomes less and less in each successive year. But, if unabsorbed depreciation carried forward under Section 32(2) is not taken into account for the purpose of computing the written down value, depreciation in the years in which carried forward depreciation remains unabsorbed for paucity of profits is likely to be the same. Secondly, when a depreciable asset is sold, discarded or destroyed, etc. in a previous year, the extent to which its scrap value falls short of the written down value is allowed under the IT Act as deduction under Section 32(1)(iii). But for Expln. 3, an assessee would be entitled to deduction under Section 32(1)(iii) on the basis of the written down value without taking into account the unabsorbed depreciation carried forward under Section 32(2), even though the assessee will be entitled to the set-off of the unabsorbed depreciation carried forward under Section 32(2). Thus, the object of Expln. 3 was to remove such anomalies.
However, this by itself does not justify the conclusion that Expln.
3 will not apply to a case of amalgamation covered by Expln. 2A. For that purpose, it would be necessary to examine the provisions of Expln. 3 closely. Expln. 3, no doubt, creates a fiction. But the fiction is not created in vacuum. The fiction operates in a particular situation. That situation is a case in which any allowance in respect of any depreciation is carried forward under Section 32(2). Depreciation allowance can be said to be carried forward under Section 32(2) when that allowance can be added to the depreciation allowance of the assessee for the following previous year and deemed to be part of that allowance and so on for the following previous years. In the present case, Lube India Ltd., being no longer in existence by reason of its amalgamation with the assessee-company, the unabsorbed depreciation allowance of Rs. 21,42,815 is not carried forward under Section 32(2). Admittedly, this amount is not allowable as depreciation of the current year under Section 32(2) in the hands of the assessee. Thus, the situation necessary for the application of the fiction in this case is not obtaining.
Independent of Expln. 3, the written down value under Section 43(6)(b) is the actual cost of the asset to an assessee less depreciation actually allowed, the expression 'actually allowed' meaning, in view of the Supreme Court decision in the case of CIT v. Dharampur Leather Co. Ltd (1966) 60 ITR 165 (SC), not including notional allowance. Read with Expln. 3, it would mean the actual cost reduced both by depreciation actually allowed and depreciation notionally allowed, i.e., carried forward under Section 32(2). As stated earlier, Expln. 3 is not attracted as such in this case.
The case is, of course, covered by Expln. 2A. But for this Explanation, the written down value of the assets taken over by the assessee during the previous year from Lube India Ltd. would have been their actual cost to the assessee. In view of Expln. 2A, however, it will be the same as it would have been if Lube India Ltd. had continued to hold the assets for its business. Thus, Expln.
2A creates a fiction where though in fact at the end of the previous year the assets are not held by Lube India Ltd., the company having been amalgamated and, thus, ceased to exist, the said company will be deemed to hold the assets for its business. However, there is no further fiction created by Expln. 2A, that unabsorbed depreciation determined to the extent of Rs. 21,42,815, though actually not carried forward under Section 32(2), will be treated to be so for the purpose of Expln. 3. Under the circumstances, application of Expln. 2A does not automatically mean application of Expln. 3, the applicability of which depends upon the existence of a particular situation in which alone unabsorbed depreciation becomes depreciation 'actually allowed'.
47. From the perusal of the aforesaid observations of Hon'ble Bombay High Court, it is evident that the fiction created by Expln. 3 was found to be applicable by their Lordships in a particular situation in which the unabsorbed depreciation allowance is carried forward under Section 32(2) and added to the depreciation allowances of the assesses for the following year/years. In the case before the Court, such a situation was not found to be in existence because M/s Lube India Ltd., the amalgamating company, was no longer in existence by the reason of its amalgamation with the assessee-company and unabsorbed depreciation allowance was not allowed to be carried forward and added to the depreciation of the current year under Section 32(2) even in the hands of the assessee-company which was amalgamated company. In these peculiar facts and circumstances of that case, the Hon'ble Bombay High Court held that the situation necessary for the application of the fiction created in Expln. 3 was not obtained in the said case. The Court, therefore, was of the opinion that the application of Expln. 3 to a case on hand, in which unabsorbed depreciation allowance was not actually allowed, is likely to cause injustice to the assessee and accordingly held that Expln. 3 is not applicable to the facts of the said case.
48. After the insertion of Section 72A by the Finance (No. 2) Act, 1977, containing special and specific provisions relating to carry forward and set off of accumulated loss and unabsorbed depreciation allowance in certain cases of amalgamation, the provision now has changed drastically inasmuch as the situation necessary for the application of fiction envisaged in Expln. 3 to Section 43(6) has become effectively operative. As explanation in the Board Circular No.229, dt. 9th Aug., 1977, Sub-section (1) of new Section 72A, provides that where there has been an amalgamation of a company owning an industrial undertaking or ship with another company and the Central Government, on the recommendation of the specified authority, is satisfied that certain conditions specified in this behalf are fulfilled, the Central Government may make a declaration to that effect and thereupon, notwithstanding anything contained in any other provisions of IT Act, the accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be the loss or, as the case may be, allowance for depreciation of the amalgamated company for the previous year in which the amalgamation was effected and the other provisions of the Act relating to carry forward and set off of loss and allowances for depreciation shall apply accordingly. As a result of introduction of the said provisions, the unabsorbed depreciation allowance of the amalgamating company is now allowed to be carried forward and added to the depreciation of the current year under Section 32(2) in the hands of the amalgamated company and once the benefit of Section 72A is availed by the amalgamated company on the recommendation of the specified authority subject to certain conditions specified in this behalf, it cannot be said that unabsorbed depreciation allowance of the amalgamating company is not available to be carried forward under Section 32(2) in the hands of the amalgamated company. It, therefore, follows that the situation necessary for the application of fiction created in Expln. 3 to Section 43(6) is very much obtained as a result of insertion of Section 72A in the statute and the anomaly mentioned by the Hon'ble . Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) stands removed. As a matter of fact, the Hon'ble Bombay High Court itself considered the effect of Section 72A inserted w.e.f. 1st April, 1978 and we find it worthwhile to reproduce the relevant observations of their Lordships appearing on page No. 11 of the report hereunder : "In this context it may not be out of place to mention that Section 72A inserted in the IT Act, 1961, by the Finance (No. 2) Act, 1977, w.e.f. 1st April, 1978. The section provides for carry forward and set off of accumulated loss and unabsorbed depreciation in certain cases of amalgamation. The result is that in cases falling under Section 72A, unabsorbed depreciation in the hands of amalgamating company will hereafter be carried forward under Section 32(2) in the hands of amalgamated company. In such a case Expln. 3 will undoubtedly apply as the precondition for the application of the fiction will then exist".
49. As observed by the Hon'ble Bombay High Court in the aforesaid portion of its order, the unabsorbed depreciation in the hands of the amalgamating company would hereafter be carried forward under Section 32(2) in the hands of the amalgamated company in a case 'falling under Section 72A' and in such a case Expln. 3 to Section 43(6) would undoubtedly apply since the precondition for the application of the fiction will then exist. It, therefore, follows that when a recourse is made to Section 72A for availing benefits in respect of accumulated loss and unabsorbed depreciation allowance of the amalgamating company in the hands of amalgamated company, the fiction created in the Expln.
3 will come into play and the benefit of the ratio laid down by the Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) will not be available.
50. In the present case, the assessee-company opted for the benefits under Section 72A and the same were allowed to it being the amalgamated company as per the BIFR order dt. 6th May, 1992, subject to the condition that the tax benefit under the provisions of Section 72A would be restricted to a maximum of Rs. 75.00 lakhs, Consequently, the assessee-company was entitled for the benefits in respect of accumulated loss and unabsorbed depreciation of the amalgamating company i.e., M/s Modem Stramit India Ltd. to the extent of maximum tax benefit amounting to Rs. 75.00 lakhs as a package deal and no other benefits either as per the decision of Hon'ble Bombay High Court in the Hindustan Petroleum Corporation Ltd. (supra) or under any other provisions of the Act were available to the assessee.
51. Before us, the learned counsel for the assessee has contended that the provisions of Section 72A are beneficial provisions and, therefore, the benefits which were available to the assessee-company as per the ratio laid down by Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) cannot be taken away by such beneficial provisions. Keeping in view the specific basis adopted by the Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) in the peculiar facts and circumstances of the said case as discussed in the foregoing portion of this order and the change in the legal position after the introduction of the special provisions of Section 72A subsequently with non-obstante clause contained therein overriding the other general provisions referred to and relied upon by the decision by the Hon'ble Bombay High Court, we find the said contention raised by the learned counsel for the assessee to be devoid of any merits and hence unacceptable. Nevertheless, even with the limitation of Rs. 75.00 lakhs in terms of tax relief, the assessee-company could have absorbed the entire unabsorbed depreciation of amalgamating company amounting to Rs. 1,23,55,847 by giving preference to it over the unabsorbed business loss. However, it chose to exhaust the business loss first which resulted in a portion of the unabsorbed depreciation to the extent of Rs. 1,20,03,557, remaining inadmissible. In these facts and circumstances, it cannot be said that the assessee-company was otherwise entitled for more benefit without the application of Section 72A and that the benefit allowed to the assessee-company as per the BIFR order issued in accordance with the provisions of Section 72A has a result of taking way any benefit which otherwise was available to the assessee.
52. Before us, the learned counsel for the assessee has contended that the BIFR cannot restrict/limit the benefits available to the assessee under Section 72A as held by Hon'ble Supreme Court in the case of Indian Shaving Products Ltd. v. BIFR (supra). In this regard, it is observed that the BIFR in the said case had declined to make a declaration under Section 72A while sanctioning a scheme of amalgamation of a sick industrial undertaking with the assessee-company and the Hon'ble apex Court held that the BIFR could not have sanctioned such scheme declining to make a declaration under Section 72A, In the present case, a declaration under Section 72A has been made by the BIFR allowing tax benefits to the assessee-company in respect of accumulated loss and unabsorbed depreciation of the amalgamating company to the extent of Rs. 75.00 lakhs and this being the undisputed position, we are of the view that the decision of the Hon'ble apex Court in the case of Indian Shaving Products Ltd. (supra) has no application to the facts of the present case. We may also observe here that if the assessee-company was of the opinion that it is entitled for higher tax benefits than allowed by the BIFR under Section 72A, such higher benefits could have been sought from the BIFR only as held by Hon'ble Delhi High Court in the case of Mahindra & Mahindra v. Union of India (supra). As such, considering all the facts and circumstances of the case and for the reasons given hereinabove, we are of the considered opinion that benefits claimed by the assessee relying on the decision of Hon'ble Bombay High Court in the case of Hindustan Petroleum Corporation Ltd. (supra) was not available to the assessee-company and the learned CIT(A) was fully justified in confirming the order of the AO disallowing the same. His impugned order on this issue is, therefore, upheld.53. In the result, the appeals of the assessee as well as that of Revenue are dismissed.