1. These four appeals comprised of three appeals filed by the assessee on 2-2-2000, 12-6-2001 and 28-3-2002 against the orders of the learned CIT (Ap-peals)-XXII, New Delhi, dated 30-11-1991 and 28-2-2001 and the order of the learned CIT (Appeals)-XIV New Delhi, dated 28-1-2002 in the case of the assessee in relation to assessment order under Section 143(3) for assessment year 1996-97, assessment order under Section 143(3) read with Section 147 for assessment year 1995-96 and assessment order under Section 143(3) for assessment year 1998-99. The fourth appeal ITA No. 3250(Del.)/2002 has been filed by the revenue on 12-8-2002 against the order of the learned CIT (Appeals)-XIV, New Delhi, dated 23-5-2002 made under Section 154 for rectifying the order of his predecessor dated 30-11-1999 for assessment year 1996-97.
2. The first ground in the assessee's appeal is general and covered by subsequent grounds of appeal. Ground of appeal No. 2 is that the learned CIT (Appeals) erred in confirming the disallowance of expenditure of Rs. 11,59,82,000 claimed by the assessee in connection with the swapping of foreign currency fund for augmenting the rupee fund. During the course of hearing before us the learned Counsel for the assessee pointed out that identical issue had arisen in the case of the assessee for assessment year 1995-96 and the ITAT, Delhi Bench "A", New Delhi by its order dated 31-5-2005 in ITA No. 1563(Del.)/99 decided this issue in paragraph 17 in the following words:- 17. In the result, having regard to the aforesaid discussion, the claim of the assessee for allowance of expenditure of Rs. 67,06,33,245 incurred in connection with swapping of foreign currency funds for augmenting the rupee funds required by it for its business is to be allowed in the year of incurrence of the same i.e., during the current assessment year itself. The assessee succeeds on this ground.
Respectfully following the aforesaid order of the Tribunal, we direct that the assessee be allowed deduction of expenditure incurred in connection with swapping of foreign currency fund to the extent incurred during the previous year relevant to assessment year 1996-97 against the assessee's income for assessment year 1996-97.
3. The assessee's ground of appeal No. 3 is directed against the learned CIT (Appeals) confirming the disallowance of Rs. 144,77,62,262 claimed as revenue expenditure in connection with the issue of Bonds and by way of discount on issue of CDs. During the course of hearing of this appeal, the learned AR of the assessee stated that the assessee was not interested in pressing this ground of appeal in view of the order under Section 154 subsequently made by the learned CIT (Appeals).
We, therefore, reject this ground of appeal as withdrawn.
4. Ground of appeal No. 4 is directed against the order of the learned CIT (Appeals) not allowing the assessee's claim of deduction of Rs. 50 crores. Similarly, ground of appeal No. 5 is directed against the order of the learned CIT (Appeals) that the assessee's claim for bad and doubtful debts be reduced from the amount of Rs. 5.70 crores. Facts of the case leading to these grounds of appeal briefly are that as per Schedule II of the balance-sheet, the position of Special Reserve 36(1)(viii) is as under:- As per the revised return filed by the assessee deduction was claimed at Rs. 118,19,69,148 only on account of the ceiling limit of 40 per cent on account of amendment in Section 46(1)(viii) w.e.f. 1-4-1996.
The learned Assessing Officer held that effectively the assessee had created a fresh reserve of Rs. 7,906.18 lakhs only. He asked the assessee to explain as to why the assessee's claim of deduction under Section 46(1)(viii) may not be reduced accordingly. The assessee replied that transfer of Rs. 50 crores was for creating provision against bad and doubtful loans and, therefore, there was no reversal of reserve of Rs. 129.0618 crores created during the year. The assessee argued that provisions of Section 41(4A) were inserted by the Finance Act, 1997 w.e.f. 1-4-1998 only. The learned Assessing Officer held that by merely showing first the amount of Rs. 12,906.18 lakhs transferred to reserve under Section 46(1)(viii) and then transferring Rs. 5,000 lakhs out of the same, the assessee could not override the substantial provision of law and the reality that only Rs. 7,906.18 lakhs was transferred to Special Reserve under Section 46(1)(viii). The learned Assessing Officer found that the amount of Rs. 5,000 lakhs had been directly shown under the head 'Provision for bad and doubtful loans'.
The argument of the assessee that the provisions of Section 41(4A) were introduced only w.e.f. 1-4-1998 was misplaced because it was not a case of utilization of reserve, but in fact a direct provision of Rs. 50 crores was created and only an amount of Rs. 79.0618 crores was created as Reserve under Section 46(1)(viii).
5. Without prejudice, the learned Assessing Officer argued that even if it was held that reserve created under Section 46(1)(viii) was Rs. 129.0618 crores, the question arose whether the assessee was entitled to withdraw the sum of Rs. 50 crores. The intention of the law that reserve under Section 46(1)(viii) should remain intact was evident from the fact that deduction under Section 46(i)(viii) was available till the reserve created was double of the paid-up capital. The learned Assessing Officer emphasized that in the case of the assessee there was no actual utilization of any amount from reserve under Section 46(1)(viii) for any bad debts written off during the year.
6. The learned Assessing Officer noticed that during the year the position of provision for bad and doubtful loans was as follows:-Provision as on 1-4-1995 Rs. 25,012.14 lakhsAdd: Provision transferred from@ 5% of gross total income Rs. 570 lakhs Rs. 5,570 lakhsProvision as on 31-3-1996 Rs. 30,582.14 lakhs 7. The learned Assessing Officer further noted that during the year the assessee had claimed deduction for bad debts written off amounting to Rs. 18,624.61 lakhs and again Rs. 570 lakhs on the basis of provision for bad and doubtful debts under Section 46(1)(viiia)(c) with reference to 5 per cent of gross total income. The learned Assessing Officer referred to the proviso to Section 46(1)(vii) and held that the assessee should have claimed deduction for bad debts written off reduced by the amount of Rs. 570 lakhs. As per Section 46(2)(v) the assessee should have claimed deduction for bad debts written off only after debiting the amount to the provision for bad and doubtful debts account under Section 46(1)(viia)(c). The learned Assessing Officer noticed that the assessee had created provision under Section 46(1)(viia)(c) in earlier years as well and the total provision created till 31 -3-1996 was Rs. 34,31,90,547. Although the assessee had claimed deduction for provision under Section 46(1)(viia)(c) of Rs. 570 lakhs only, the fact remained that aggregate balance was Rs. 34,31,90,547.
The learned Assessing Officer, therefore, held that out of bad debt of Rs. 18,624.61 lakhs written off and claimed under Section 46(1)(vii), the assessee was not entitled to deduction to the extent of Rs. 34,31,90,547 because the assessee had already claimed deduction of that amount under the provisions of Section 46(1)(viia)(c). As to the allowability of remaining amount of Rs. 151,92,70,453 the learned Assessing Officer held that there was provision of Rs. 27,150.23 lakhs after excluding the provision created by the assessee under Section 46(1)(viia)(c). During the year, the assessee had transferred a sum of Rs. 50 crores from Special Reserve under Section 46(1)(viii). In the preceding year also the assessee had transferred a sum of Rs. 175 crores in the similar manner. If the assessee's claim of deduction under Section 46(1)(viii) on gross amount of Rs. 12,906.18 lakhs was to be allowed, the reserve of Rs. 50 crores and Rs. 175 crores in the preceding year remained. If the intention of the assessee to transfer Rs. 50 crores during the year and Rs. 175 crores in the preceding year was to utilize the transferred amount for bad and doubtful loan, the assessee had to utilize the said amount for bad debts actually written off during the year. Thus, assessee's claim of deduction on account of bad debt written off was required to be reduced by the sum of Rs. 225 crores as well as to the extent of provision under Section 46(1)(viia)(c) amounting to Rs. 34,31,90,547. On the basis of this position, the learned Assessing Officer held that the assessee's claim on account of bad debt written off was required to be reduced by the sum of Rs. 34,31,90,547 created as provision under Section 46(1)(viia)(c). Secondly, either the assessee's claim of amounts transferred to provision for bad and doubtful loans ie., Rs. 50 crores during the assessment year under consideration and Rs. 175 crores in preceding year was required to be disallowed or the deduction for bad debt written off was further required to be reduced to that extent. The assessee was not entitled to claim deduction twice. The learned Assessing Officer, therefore, did not allow any deduction to the assessee on account of bad debt actually written off to the extent of Rs. 18,624.61 lakhs on the ground that provision forbad and doubtful loan under Section 46(1)(viia)(c) of Rs. 34,31,90,547 and provision for bad and doubtful loan of Rs. 225 crores created by way of transfer from Special Reserve under Section 46(1)(viii) exceeded the total amount of bad debt written off. The learned Assessing Officer also held that otherwise the assessee was entitled to deduction under Section 46(1)(viii) to the extent of Rs. 7,906.18 lakhs and not Rs. 12,906.18 lakhs as claimed by the assessee. In the computation of total income the learned Assessing Officer accordingly did not allow the assessee any deduction on account of bad debt actually written off, while allowing the assessee deduction under Section 46(1)(viia)(c) of Rs. 570 lakhs and deduction under Section 66(1)(viii) of Rs. 12,906.18 lakhs.
8. During the course of hearing before the learned CIT (Appeals), the assessee submitted that as far as the amount of provision 36(1)(viia)(c), the assessee had already adjusted the amount of provision against bad debts written off while filing the return of income for assessment year 1998-99. The provision of law in that regard had come into effect from assessment year 1998-99 only. As regards the utilization of Special Reserve under Section 46(1)(viii), the assessee argued that during the year there was no provision for the retention of the amounts created as special reserve. Therefore, the assessee could transfer the balances from special reserve to general reserve at any time after the end of the year in which the special reserve was created. The CBDT had also clarified that such special reserve could be utilized for the purpose for which it was created. The assessee placed reliance on CBDT Circular No. 763 dated 18-2-1998 para 21.3 in support of the contention that amendments were effective from assessment year 1998-99 only. The assessee also referred to the provision of reserve under Sections 32A, 33AC, 80HHD and 80HHC and argued that wherever the Legislature so desired specific conditions had been laid down for utilization of special reserves created for specified purposes. As there was no condition prescribed for utilization of the special reserve under Section 46(1)(viii) up to assessment year 1997-98, the assessee was entitled to utilize the amount of reserve for its business purposes. Furthermore, there was no provision for withdrawing the benefit granted in earlier years if the amount was withdrawn from reserve in a subsequent year.
9. The learned CIT (Appeals) held that in the absence of specific provision, the Assessing Officer could not withdraw the reserve created under Section 46(1)(viia)(c) in the earlier years. Nothing prevented the Assessing Officer from considering such action as deemed fit in the respective earlier assessment years. The only issue, therefore, was as to whether the bad debts actually written off should first exhaust the provision of Rs. 570 lakhs created during the year under Section 46(1)(viia)(c). There was no ambiguity in this regard in the provisions of Section 46(1)(viia)(c). The learned CIT (Appeals), therefore, upheld the disallowance to the extent of Rs. 570 lakhs. The learned CIT (Appeals) also agreed with the learned Assessing Officer that the sum of Rs. 50 crores transferred to provision for bad and doubtful loan was required to be utilized towards writing off bad debts. However, here again the learned CIT (Appeals) held the view that the disallowance could only be made in respect of the amount transferred to provision for bad and doubtful loan during the year. He, therefore, upheld the disallowance made by the Assessing Officer to the extent of Rs. 50 crores only.
10. During the course of hearing before us the learned Counsel for the assessee argued that the assessee fully complied with the provisions of Section 46(1)(viii), inasmuch as special reserve was created in the books of account. As far as the assessment year 1996-97 was concerned, there was no further requirement that the special reserve created should be retained by the assessee and not utilized for any other purpose. As the law stood as at the end of the previous year under assessment, the assessee was required to create special reserve. The requirement that the assessee should create and maintain special reserve has been laid down by the Finance Act, 1997 w.e.f. 1 -4-1998 after inserting the words "and maintained" in the provisions of Section 46(1)(viii). Simultaneous amendment made by way of provisions of Section 41(4A) was also inserted w.e.f. 1-4-1998. These provisions could not be pressed into service by the revenue in relation to any assessment year prior to assessment year 1998-99. In support of this contention the learned AR of the assessee relied upon the judgment of Hon'ble Kerala High Court in Kerala Financial Corporation v. CIT [2003] 261 ITR 708 : 129 Taxman 365. As to the disallowance of bad debt to the extent of Rs. 570 lakhs being the amount of provision created by the assessee under the provisions of Section 46(1)(viia)(c), the learned Counsel argued that provisions of Section 46(1)(vii) and 36(1)(viia)(c) were two separate and distinct provisions of the Act independent of each other. There was nothing in law to prevent the assessee from availing of deduction in relation to both the provisions. In support of this claim the learned AR placed reliance on the judgment of Hon'ble Rajasthan High Court in CIT v. Bank of Rajasthan (P.) Ltd. .
11. The learned DR argued that amendment to the provisions of Section 46(1)(viii) and insertion of Section 41(4A) by the Finance Act, 1997 was clarificatory. From these amendments it did not follow that the legal position prior to the amendment was different. These amendments only enacted the ordinary accountancy principles in relation to provision and reserve created for a special purpose. Both special reserve under Section 46(1)(viii) and provision under Section 46(1)(viia)(c) were created in the case of a financial institution to safeguard it against bad and doubtful loans. The assessee could not claim deduction on the basis of provision as well as on the basis of actual expenditure. The principles of accountancy required that where an amount is provided for expenditure, the expenditure actually incurred subsequently has to be set off against the amount already provided for. In support of her arguments, the learned DR also placed reliance on the judgment of Hon'ble Supreme Court in Allied Motors (P.) Ltd. v. CIT 12. We have carefully considered the rival submissions. It is seen that in the impugned assessment order the learned Assessing Officer has taken several grounds to support the addition to the declared income by the sum of Rs. 50 crores transferred by the assessee from special reserve to provision for bad and doubtful loans as well as the addition of Rs. 570 lakhs being the amount of provision under Section 46(1)(viia)(c) claimed by the assessee. However, finally the assessment has been made by way of disallowance of the assessee's claim of deduction of bad debts actually written off under the provisions of Section 46(1)(vii) of the Act. The learned Assessing Officer has disallowed the assessee's claim of deduction on account of bad debts written off by a still larger amount, inasmuch as he has adjusted the opening balances also of both provision for bad and doubtful loans created by the assessee himself by way of transfer from special reserve and provision created by the assessee in respect of the amounts allowable under Section 46(1)(viia)(c). The learned CIT (Appeals) has not upheld the order of the learned Assessing Officer, in as much as he has held that the Assessing Officer should have confined himself to the provision of both kind created by the assessee during the year under assessment and he could not have taken into account the provisions created in earlier assessment years.
13. It will be worthwhile here to state the position as reflected in the assessee's annual accounts for the financial year 1995-96. During the year the assessee created special reserve under Section 46(1)(viii) of the Income-tax Act amounting to Rs. 12,906.18 lakhs. The assessee had an opening balance of Rs. 26,963 lakhs as at 1 -4-1995. Out of these amounts the assessee transferred a sum of Rs. 5,000 lakhs to provision for bad and doubtful loans and thus, the assessee carried forward a sum of Rs. 34,869.18 lakhs by way of special reserve under Section 46(1)(viii) of the Act. This balance appears in the annual accounts of the assessee in Schedule II under the head "Reserve & Surplus." The sum of Rs. 12,906.18 lakhs added by the assessee to special reserve has been debited by the assessee by way appropriation of profit as per profit & loss account. In the computation of income chargeable to tax this amount has been claimed as deduction under Section 46(1)(viii). As to the "Provision for bad and doubtful loans" account to which the sum of Rs. 5,000 lakhs has been transferred by the assessee from special reserve account, the assessee had an opening balance of Rs. 25,012.14 lakhs. The assessee credited thereto not only the sum of Rs. 5,000 lakhs transferred from special reserve account but also the sum of Rs. 570 lakhs provided for under the provisions of Section 46(1)(viia)(c) by way of an expenditure debited to profit & loss account. The aggregate sum of Rs. 30,582.14 lakhs as at the end of the year on 31 -3-1996 has been reduced by the assessee from outstanding loans amounting to Rs. 11,15,921.06 lakhs and only the net amount of Rs. 10,85,338.92 lakhs has been shown as loans outstanding as per Schedule V of the balance sheet. In addition to the sum of Rs. 30,582.14 lakhs adjusted to loans recoverable under the caption "Provision for bad and doubtful loans", the assessee has further written off outstanding loans by the sum of Rs. 18,624.61 lakhs being the aggregate amount of bad debts written off in the books of account of the assessee. This sum of Rs. 18,624.61 lakhs has been claimed as deduction by the assessee over and above the sum of Rs. 570 lakhs provided for under Section 46(1)(viia)(c) and the special reserve of Rs. 12906.18 lakhs created under the provisions of Section 46(1)(viii) of the Act. The sum effect is that the assessee has reduced the amount of loans by a sum of Rs. 18,624.61 lakhs by way of write off and by the sum of Rs. 30,582.14 lakhs by way of "Provision for bad and doubtful loans." 14. After a careful consideration of the relevant provisions of the Act,viz., 36(1)(vii), 36(1)(viia)(c), 36(1)(viii) and 41(4A), weare of the view that the argument of the learned Assessing Officer that the sum of Rs. 5,000 lakhs transferred by the assessee from special reserve account to provision for bad and doubtful loans account, in effect meant reduction or reversal of special reserve created by the assessee under Section 46(1)(viii) should be rejected. It is because prior to assessment year 1998-99 the law obliged the assessee to create special reserve and there is no further requirement for the retention of the amount of reserve thus created. Amendment to the provisions of Section 46(1)(viii) as well as insertion of the new provision of Section 41(4A) by the Finance Act, 1997 are w.e.f. 1-4-1998 ie., assessment year 1998-99 only and the same cannot be given retrospective effect. This is the view held by Hon'ble Kerala High Court in the case of Kerala Finance Corpn. (supra), whereby the Hon'ble High Court have reversed the decision of Cochin Bench of the Tribunal in Kerala Financial Corporation v. Addl. CIT [2000] 74 ITD 360 (Coch.). Respectfully following, the aforesaid judgment of Hon'ble Kerala High Court, we hold that the deduction to the assessee under Section 46(1)(viii) cannot be curtailed on the ground of transfer of the sum of Rs. 5,000 lakhs from special reserve account.
15. As to the argument of the revenue that the amount of bad debt actually written off during the year and claimed by the assessee as deduction under Section 46(1)(vii) of the Act should be reduced by the sum of Rs. 5,000 lakhs being the amount transferred by the assessee from special reserve to provision for bad and doubtful loans, we find the question to be difficult one. On the one hand there is the proposition that an assessee cannot claim deduction of both the provision and actual expenditure as it amounts to double deduction. On the other hand, we find that provisions of Section 46(1)(viii) are in the nature of a special deduction conferred upon the assessee for having qualified for deduction as per the requirements of the provisions of Section 46(1)(viii). There is nothing in the language of the provision of Section 46(1)(viii) to suggest any relationship between bad debts written off by an assessee and the amount credited to special reserve. It is, thus, clear that it the assessee had not transferred the sum of Rs. 5,000 lakhs from Special Reserve Account to Provision for bad and doubtful loans account, the Assessing Officer would have no occasion to reduce the amount of bad debts actually written off by the assessee and debited to profit & loss account.
Merely because the assessee transferred the amount from one head in the balance sheet to another, the assessee's claim of deduction under Section 46(1)(vii) should not be disturbed. After all what the assessee has done is mere book entry from one account to another. After a careful consideration of the arguments of both sides, we are of the view that the assessee should not be penalized merely on account of entries made by it in the books of account. As held by Hon'ble Supreme Court in their celebrated judgment in the case of Kedarnath Jute Mfg.
Co. Ltd. v. CIT , mere book entries cannot be decisive of the tax liability. We, therefore, hold that the learned CIT (Appeals) erred in upholding the disallowance of assessee's claim of deduction under Section 46(1)(vii) to the extent of Rs. 50 crores and direct deletion of the addition to the declared income to that extent.
16. At the same we see considerable force in the contention of the revenue that the assessee could not separately claim deduction of bad debt actually written off in accordance with the provisions of Section 46(1)(vii) and at the same time claim further deduction under the provisions of Section 46(1)(viia) of the Act. This position clearly emerges from the proviso to Section 46(1)(vii) as well as from the provisions of Section 46(2)(v). According to the proviso to Section 46(1)(vii) in the case of an assessee to which Clause (viia) applies, the amount of deduction under Section 46(1)(vii) shall be limited to the amount by which bad debt or any part thereof exceeds the credit balance in the provision made under Section 46(1)(viia). Similarly the provisions of Section 46(2)(v) provide that in the case of an assessee to which provisions of Section 46(1)(viia) apply, no deduction shall be allowed on account of bad debt or part thereof unless the assessee has debited the amount of such debt or part of debt in that previous year to the provision for bad and doubtful loan account made under Clause (viia) of Sub-section (1) of Section 46. We further find that the learned CIT(A) has erred in restricting the addition made by the Assessing Officer on this count to the amount of Rs. 570 lakhs only.
During the course of assessment proceedings the learned Assessing Officer found that the assessee had created provision under Section 46(1)(viia)(c) in different assessment years in the following manner:-Assessment year 1992-93 4,94,63,176 We find that the provisions of Section 46(2)(v) are some what ambivalent in this regard, but the proviso to Section 46(1)(vii) is clear and unambiguous that the amount of deduction claimed under Section 46(1)(vii) has to be limited to the amount by which bad debt actually written off during the year exceeds the credit balance in the provision for bad and doubtful loan account made under Section 46(1)(viia). The proviso speaks of credit balance and not merely the amount of provision created during a particular assessment year. For this reason we do not see much assistance to the case of the assessee from the judgment of Hon'ble Rajasthan High Court in the case of Bank of Rajasthan {supra) relied upon by the learned AR of the assessee. The matter considered in that judgment is on altogether different basis.
We, therefore, hold that the learned CIT (Appeals) was not justified in restricting the disallowance to the sum of Rs. 570 lakhs. According to the Assessing Officer the aggregate amounts of provision under Section 46(1)(vii) availed of by the assessee amounted to Rs. 34,31,90,547. It is not immediately known to us as to what are the amounts of bad debt claimed by the assessee in those assessment years under the provisions of Section 46(1)(vii). However, it is quite possible that there may be an opening balance in this account. After such adjustment it should be added to the sum of Rs. 570 lakhs so as to work out the amount of disallowance to be made in the case of the assessee in accordance with the proviso to Section 46(1)(vii). We, therefore, restore this issue to the file of the learned Assessing Officer for computation of disallowance accordingly after allowing the assessee an opportunity to place relevant facts.
17. Ground of appeal No. 6 in assessee's appeal for assessment year 1996-97 is directed against the disallowance of the assessee's claim of loss of Rs. 2,56,35,395 under the head "Investment written off". Facts of the case leading to this dispute briefly are that during the year the assessee reduced the value of its investments in snares etc. in accordance with RBI guidelines. According to the assessee a loss of Rs. 2,66,33,395 was booked in respect of various companies which had gone into liquidation or were lying closed or those who had become BIFR cases. The learned Assessing Officer found that by no stretch of imagination the provisions of Section 46(1)(vii) could be applied though the assessee had booked loss under the head "Investments written off". There was only possibility of deduction under Section 47 but that too did not apply because the amount written off did not represent revenue expenditure of the assessee. The investments in shares by the assessee was in the nature of capital expenditure and the same had been treated as capital assets held by the assessee in the balance sheet.
Under the provisions of Section 45 no capital gain or loss could be computed unless and until there was transfer of a capital asset within the meaning of the provisions of the Act. On this reasoning the learned Assessing Officer disallowed the assessee's claim of loss amounting to Rs. 2,66,33,395.
18. During the course of hearing before the learned CIT (Appeals) the assessee relied upon the judgment of Hon'ble Gujarat High Court in CIT v. Jaykrishna Harivallabhdas [1998] 231 ITR 108. The learned CIT (Appeals) found that in that case extinguishment of the right of shareholders was treated to be an allowable loss. The assessee argued that some of the companies had gone into liquidation while others had ceased their business operations. The learned CIT (Appeals) considered the judgment of Hon'ble Gujarat High Court and found that there was vast difference in the facts of the case. Whereas in the case before the Hon'ble Gujarat High Court the companies in question had already been liquidated, the assessee could not point out any company having already been liquidated. In the case of BIFR companies there was possibility of revival in due course of time. The learned CIT (Appeals), therefore, held that write off of the investments was not covered by the ratio of the decision of Hon'ble Gujarat High Court.
19. During the course of hearing before us the learned AR of the assessee reiterated the arguments as made before the authorities below.
He also argued that treatment given by the assessee to the matter was in accordance with RBI guidelines. The learned DR argued that the assessee's claim of loss was not covered by any provisions of the Act.
20. We have carefully considered the rival submissions. During the course of assessment proceedings, we pointedly asked the learned AR of the assessee as to whether any of the shares has been held by the assessee as stock-in-trade, the learned AR fairly admitted that all these were investments that had been treated as capital asset held by the assessee year after year. On these facts provisions of Section 45(1) are quite clear. No gain or loss can be assessed in any assessment year other than the previous year in which the transfer of a capital asset takes place. Provisions of Section 2(47) of the Act define transfer in a number of situations including the extinguishment of any rights or the compulsory acquisition under any law, conversion of capital asset into stock-in-trade and so on. The assessee has not claimed that any of the clauses of Section 2(47) apply. Plainly and simply, there is no transfer of a capital asset. We, therefore, hold that assessee's claim of loss has rightly been rejected by the authorities below and no interference on our part is called for. This ground of appeal is, therefore, rejected.
21. Ground of appeal No. 7 is directed against disallowance of Rs. 52,799 claimed by the assessee on account of lease rent. It is seen that similar issue had been considered by the ITAT, Delhi Bench "A", New Delhi in paragraphs 18 and 19 of their order dated 31-5-2005 in ITA No. 1563(Del.)/99. Respectfully following that order we restore the matter to the file of the Assessing Officer for passing a fresh order in accordance with the directions of the Tribunal in the case of the assessee for earlier assessment years.
22. Ground of appeal No. 8 is directed against interest charged under Sections 234B and 234C. During the course of hearing the learned AR of the assessee submitted that this ground is consequential. We, therefore, direct the Assessing Officer to revise interest levied under Sections 234B and 234C of the Act on the basis of the assessee's tax liability computed after giving effect to the present order made by us.
23. We now turn to the assessee's appeal for assessment year 1995-96.
It is seen that while completing the assessment order under Section 144(3) in the case of the assessee for assessment year 1996-97 on 26-2-1999 the Assessing Officer made substantial disallowance from out of the assessee's claim of deduction on account of bad debts actually written off under the provisions of Section 46(1)(vii) of the Act.
Though the Assessing Officer adjusted the opening balance both under Section 46(1)(viii) and under Section 46(1)(viia)(c) to the assessee's claim of deduction under Section 46(1)(vii) for assessment year 1996-97, the learned Assessing Officer found that the decision has not been accepted by the assessee and the matter had been carried over in appeal before the learned CIT (Appeals). The learned Assessing Officer also found that just as in assessment year 1996-97 the assessee had separately claimed deduction under Section 46(1)(vii) over and above the deductions claimed under Section 46(1)(viia)(c) and Section 46(1)(viii) of the Act. The learned Assessing Officer, therefore, reopened the assessment under Section 143(3) already made on 23-1-1998, for assessment year 1995-96 after recording detailed reasons in writing, by way of issue of notice under Section 148 on 19-7-1999 with a view to assess the income for assessment year 1995-96 that had escaped assessment. Thereafter the learned Assessing Officer completed assessment under Section 143(3) read with Section 147 on 29-2-2000 whereby the learned Assessing Officer made an addition of Rs. 187,34,50,934 to the income already assessed in the original assessment as revised by CIT (Appeals) order under Section 250 in relation to the original assessment. This addition made by the learned Assessing Officer comprised of two amounts viz., the sum of Rs. 17,500 lakhs transferred by the assessee from Special Reserve under Section 46(1)(viii) to provision for bad and doubtful loans and another sum of Rs 1234,5493 lakhs claimed by the assessee under the provisions of Section 46(1)(viia)(c) of the Act. On assessee's appeal the learned CIT (Appeals) following the order for assessment year 1996-97 upheld the re-assessment as made by the Assessing Officer and dismissed the assessee's appeal. Still aggrieved the assessee is in appeal before us.
24. Ground of appeal No. 1 in this appeal is general and is covered by subsequent grounds of appeal. Ground of appeal No. 2 is directed against reopening of assessment by way of initiation of proceedings under Section 147. During the course of hearing before us the learned AR of the assessee argued that the assessment had been reopened merely because the subsequent Assessing Officer had formed a different opinion on a highly debatable question. As the reopening had been done on account of mere change of opinion, the same was bad in law. In support of this contention, the learned AR relied upon the judgment of Hon'ble Delhi High Court in the case of Jindal Foto Films Ltd. v. Dy. CIT . The learned AR argued that the assessee had not withheld any facts from the Assessing Officer during the course of original assessment proceedings and, therefore, it was clearly a case of change of opinion. The learned AR relied in this respect on another judgment also of Hon'ble Delhi High Court in the case of CIT v.Kelvinator of India Ltd. [2002] 256 ITR 1 (FB) : 123 Taxman 433.
25. The learned DR argued that it was a clear case of escapement of income. The assessee had in fact claimed double deduction of the same amount. During the course of original assessment proceedings there was no application of mind on the part of the Assessing Officer to these aspects of the matter. Now under the provisions of Section 147 with effect from 1 -4-1999 the Assessing Officer has enlarged powers to take recourse to the provisions of Section 147. The proceedings for reassessment were, therefore, validly initiated.
26. We have carefully considered the rival submissions. We find that in this case the assessment has been reopened prior to expiry of four years from the end of the assessment year. As a result, proviso to Section 147 is not applicable. As a result there is no further obligation on the part of the revenue to show that there was any failure or omission on the part of the assessee to disclose fully and truly all material facts necessary for assessment for assessment year 1995-96. The validity of reopening during the period of four years mainly hinges upon "escapement of income".
27. There is some substance in the contention of the assessee that a validly completed assessment under Section 143(3) cannot be reopened under Section 147 on mere change of opinion and that condition would apply even where the assessment is reopened within the period of four years from the end of the assessment year. However, as the learned DR has succinctly put, is there really any change of opinion During the course of hearing before us we pointedly asked the learned AR of the assessee to point out any material to suggest that the question of reduction of assessee's claim of deduction under Section 46(1)(vii) on account of the deduction claimed by the assessee under Section 46(1)(viia)(c) and under Section 46(1)(viii) was as a matter of fact considered by the Assessing Officer while completing the original assessment proceedings. The learned AR could not point out any communication either from the Assessing Officer or from the assessee or even otherwise that this aspect was considered by the Assessing Officer and the Assessing Officer had formulated an opinion after due consideration. Apparently this aspect of the matter escaped consideration by the learned Assessing Officer altogether while completing original assessment proceedings under Section 143(3) resulting into no application of mind on the escapement of income referred to by the Assessing Officer while initiating re-assessment proceedings under Section 147. We, therefore, are unable to appreciate the assessee's argument against reopening of assessment based on mere change of opinion.
28. The expression "change of opinion" postulates that there was an opinion in the first instance. If earlier no opinion is formed there cannot take place any change of opinion. In the case of Delhi Glass Works (P.) Ltd. v. CIT [1971] 81 ITR 95, the Hon'ble Delhi High Court have observed as under:- All the relevant facts were available to the Income-tax Officer at the time of the original assessment. He also applied his mind to these facts but on account of the complex nature of these facts he could not comprehend their significance or arrive at a definite conclusion on the question whether the amount of Rs. 2,62,277 was assessable in the year 1955-56 or in the year 1957-58. As he could not make up his mind, he completed the assessment for 1957-58 without including the said amount in the assessment of that year.
Subsequently, after reconsidering the facts and consulting his superiors he was of the view that this amount was includible in the assessment for the year 1957-58. In our view, this does not amount to a change of opinion on the part of the Income-tax Officer as the assessee's counsel would have us believe. The Income-tax Officer had not formed any definite opinion at the stage of the original assessment which, it may be said, was changed by him subsequently.
Under these circumstances we hold that the reopening of the assessment was permissible under Section 44(1)(b) of the Act. The question referred to us is answered in the affirmative, i.e., in favour of the Revenue and against the assessee.
29. In the case of Nawabganj Sugar Mills Co. Ltdv. CIT , Hon'ble Delhi High Court have, inter alia, There is also no gainsaying that once the ITO had formed an opinion on the basis of inferences or conclusions drawn from those material facts, he was later precluded from changing that opinion by way of resort to reassessment. There should, however, be something positive to show that there was in fact such formation of opinion at the original assessment stage. If initially no opinion was formed, the question of change therein could not be said to take place. Rather the Explanation added to Section 44 made it clear that the mere production before the ITO of account books or other evidence from which material facts could with due diligence have been discovered by the ITO would not necessarily amount to disclosure within the meaning of that section. The Explanation thus plainly postulated appliance of mind by the ITO and formation of some opinion.Ess Ess Kay Engg. Co. P. Ltd. v. CIT , the similar plea was raised before Hon'ble Supreme Court. The Hon'ble Supreme Court pronounced the following judgment:- This is a case of reopening. We have perused the documents. We find there was material on the basis of which the Income-tax Officer could proceed to reopen the case, it is not a case of mere change of opinion. We are not inclined to interfere with the decision of the High Court merely because the case of the assessee was accepted as correct in the original assessment for this assessment year. It does not preclude the Income-tax Officer to reopen the assessment of an earlier year on the basis of his findings of fact made on the basis of fresh materials in the course of assessment of the next assessment: year. The appeal is dismissed. No order as to costs.
30. From the judgments cited by us in the foregoing paragraphs, it is well-settled legal position that a charge of mere change of opinion cannot be levelled merely because the earlier assessment has been completed under the provisions of Section 143(3) of the Act. If the arguments of the assessee of such kind are accepted it would amount to holding that where an assessment is completed under Section 143(3), the same cannot be reopened at all by way of recourse to the provisions of Section 147. That is not the correct position. Statute clearly lays down reopening of an assessment completed under Section 143(3) by the subsequent Assessing Officer on the ground of escapement of income. We, therefore, reject assessee's ground of appeal challenging validity of re-opening of assessment under Section 147 of the Act.
31. Grounds of appeal Nos. 3 and 4 are directed against the additions made by the Assessing Officer. Various issues relating to these two additions, on merits, have been discussed by us at length while dealing with assessee's grounds of appeal Nos. 4 and 5 for assessment year 1996-97 (supra). Following the same we direct deletion of the addition of Rs. 17,500 lakhs made by the Assessing Officer on account of transfer from special reserve created under Section 46(1)(viii) to provision for bad and doubtful loans. As to the disallowance of Rs. 12,34,50,934, we uphold the same in view of detailed reasons given by us for assessment year 1996-97.
32. Assessee's ground of appeal No. 5 is directed against the directions of the learned Assessing Officer that the balance amount of Rs. 76,82,99,000 would be chargeable to tax for assessment year 1998-99 under the provisions of Section 41(4A) of the Act. We hold that while the learned Assessing Officer has made certain observations in this regard in the assessment order, this ground of appeal does not arise in the proceedings before us. The fact of the matter is that no addition has been made of Rs. 76,82,99,000 in the assessment order under appeal.
As to the observations of the learned Assessing Officer about assessability for assessment year 1998-99, the assessee's grievance, if any, would arise only in relation to assessment order for assessment year 1998-99. We, therefore, reject assessee's ground of appeal No. 5 being merely academic and infructuous so far as the assessment year 1995-96 is concerned.
33. Ground of appeal No. 6 is directed against levy of interest under Section 234-B. During the course of hearing before us the learned AR of the assessee submitted that this ground of appeal was only consequential. We, therefore, direct the Ld. Assessing Officer to re-compute interest chargeable under Section 234B, if any, after giving effect to the present order of ours for assessment year 1995-96.
34. Ground of appeal No. 1 in this appeal is general and covered by subsequent grounds of appeal. Ground of appeal No. 2 is directed against the order of the learned CIT (Appeals) that proportionate amount of Rs. 55,565,383 out of the expenditure incurred on issue of bonds in the assessment year 1996-97 and disallowed in that year is not to be allowed in the assessment year 1998-99. During the course of hearing before us the learned AR of the assessee stated that the assessee was not interested in pressing this ground of appeal. Hence this ground of appeal is rejected as withdrawn.
35. Similarly ground of appeal No. 4 is directed against disallowance of a sum of Rs. 20 lakhs on account of administrative and management expenses. During the course of hearing before us the learned AR stated that the assessee was not interested in pressing this ground of appeal as well. Hence ground of appeal No. 4 is also rejected as withdrawn.
36. We are now left with ground of appeal No 3, that is directed against the order of the learned CIT (Appeals) rejecting the claim of the assessee for deduction of a sum of Rs. 23,997,000 under the provisions of Section 45D of the Act. Facts of the case briefly are that the assessee had during the financial year 1993-94 floated a public issue of shares worth Rs. 52,500 lakhs. The assessee claimed for assessment year 1998-99 deduction of a sum of Rs. 2,39,97,000 for the first time. The learned Assessing Officer held that as per the provisions of Section 45D share issue expenses can be allowed either prior to commencement of business or on expansion of an industrial undertaking. The assessee had already commenced business and the assessee was not an industrial undertaking. The learned Assessing Officer, therefore, held that the assessee was not entitled to any deduction under Section 45D. On assessee's appeal the learned CIT (Appeals) upheld the disallowance made by the Assessing Officer.
37. During the course of hearing before us the learned AR of the assessee traced the history of the assessee company that it was formerly a statutory corporation not entitled to issue shares for subscription by general public. Subsequently the constitution of the assessee was changed from statutory corporation to a company and thereafter the assessee-company came out with a public issue of shares.
The learned AR argued that if the provisions of Section 45D did not apply, the assessee was entitled to deduction of the entire expenditure under Section 47 of the Act. For that purpose, the assessee relied upon the judgments in CIT v. Glaxo Laboratories (India) Ltd. and Bombay Burmah Trading Corporation Ltd.v. CIT . The assessee argued that as against full deduction under Section 47, the assessee had claimed deduction of only 1/10th expenditure under Section 45D and that course was advantageous to revenue. The learned DR relied upon the orders of authorities below.
38. We have carefully considered the rival submissions. We see no force in the arguments of the assessee relating to the applicability of the provisions of Section 47(1) because share issue expenses incurred by the assessee represented an expenditure of capital nature, as held by Hon'ble Supreme Court in their judgment in the case of Brooke Bond India Ltd. v. CIT . As to the assessee's claim of deduction under Section 45D it is seen that the public issue of shares was made by the assessee during the previous year relevant to assessment year 1994-95. However, the assessee has not claimed any deduction under Section 45D for that assessment year as well as subsequent assessment year and deduction has been claimed for the first time for assessment year 1998-99. Provisions of Section 45D(1) are quite clear that the same apply in relation to either an expenditure incurred before the commencement of business or to an expenditure incurred after the commencement of business in connection with expansion of an industrial undertaking or in connection with setting up a new industrial unit. That being so, the Assessing Officer has rightly rejected the assessee's claim of deduction under Section 45D. We, therefore, reject this ground of appeal.
39. The only ground taken by the revenue in this appeal is that the learned CIT (Appeals) erred in deleting the disallowance of Rs. 32.98 crore of bonds issue expenses. In fact the revenue's appeal is directed against the order passed by the learned CIT (Appeals) to rectify under Section 154 his earlier order dated 30-11-1999. During the course of appellate proceedings the asses-see submitted that its claim of deduction of Rs. 144,77,62,262 comprised of two amounts viz, discount Rs. 116,89,17,590 and bonds issue expenses of Rs. 27,88,44,672. The assessee submitted that in the original order the sum of Rs. 27,88,44,672 had been wrongly disallowed. After consideration of the matter, the learned CIT (Appeals) held that there was error in his earlier order, in as much as, the judgment of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. v. CIT apply to discount and not to the issue expenses, such as commission, brokerage, administrative expenses etc. The learned Assessing Officer held that these expenses were entirely of revenue nature and were, therefore, allowable as deduction. The learned CIT (Appeals), therefore, directed the Assessing Officer to allow the Bond issue expenses pertaining to assessment year 1996-97 in full.
40. During the course of hearing before us the learned DR argued that the assessee had issued discount bonds and, therefore, the entire expenditure could not be allowed as deduction in a single year. The benefit of bonds issued by the assessee spread over a number of years until the maturity of the bonds issued. Hence the assessee was entitled only to the proportionate expenditure. On consideration of the matter, we do not see force in this contention of revenue. It is settled legal position after the judgment of Hon'ble Supreme Court in the ease of India Cements Ltd. v. CIT , that any expenditure incurred for obtaining loans is allowable as revenue expenditure even if the loan is intended for acquisition of a capital asset.
Respectfully following the aforesaid judgment of Hon'ble Supreme Court and a host of subsequent judgments, we uphold the order of the learned CIT (Appeals).
41. In the result, the assessee's appeals in relation to assessment years 1995-96 and 1996-97 are partly allowed; whereas assessee's appeal for assessment year 1998-99 and revenue's appeal for assessment year 1996-97 are dismissed.