1. This appeal by the assessee is directed against the order of CIT(A), dt. 31st Dec, 1999 for asst. yr. 1995-96.
2. This ground relates to the disallowance of Rs. 1,19,99,224 in respect of claim for bad debts, which was upheld by the CIT(A). During the hearing of the appeal, Shri K.R. Kamdar, the learned Authorised Representative did not press this ground. The ground No. 1 is accordingly rejected.
3. This ground relates to disallowance of Rs. 24,960 representing fines and penalties which was confirmed by the CIT(A).
4. We have considered the rival submissions in the light, of material on record and the precedents cited. During the relevant year the assessee company had to pay penalties and fines as under:1. Paid to sales-tax authorities against penalty imposed by them under Section 36(4A) 1002. Paid to Consumer Forum against the notice issued by Kakinada Consumer Redressal Forum 3,0503. Paid to Dy. Inspector of Registration & Dy. Controller of Stamps for non-compliance of stamping to be done in H.P Agreement with hirers 21,810 Total 24,960 5. Shri K.R. Kamdar the learned Authorised Representative did not press the ground so far as it related to the items Nos. 1 and 2 above and therefore, the disallowance 6. The item No. 3 represents penalty levied under the Stamp Act. The assessee was found to have made a short payment of Rs. 3,84,150 in relation to as many as 4,362 hire purchase instruments and therefore the Dy. Inspector General of Registration- Bombay, vide his order dt.
22nd Dec, 1994 levied a minimum penalty of Rs. 5 for each such document aggregating to Rs. 21,810. It was contended by the learned Authorised Representative that the levy of penalty was incidental to the carrying on of the business, that it was not for a deliberate infraction of law.
We find it difficult to follow the argument. Whether the infraction of law was deliberate or not may have to be taken into consideration while deciding whether to levy the penalty or not, but once the penalty has been levied and it has been paid, one will have to accept that the payment was made for infraction of law. Any payment made for infraction of law cannot be allowed as deduction in the computation of total income. The legal position in this regard is very clear and does not require any further discussion. The ground No. 2 is accordingly rejected.
7. This ground relates to the disallowance of Rs. 1,26,915 representing additional bonus payable to employees as per the amendment to the Payment of Bonus Act. This ground was not pressed and therefore it is rejected.
8. This ground relates to the disallowance of Rs. 19,495 under Section 43B r/w Section 36(l)(va) of the Act in respect of employers and employees contribution to the Employees State Insurance Scheme (ESIC).
It was contended by the learned Authorised Representative that the provisions of Clause (b) of Section 43B were not applicable to the ESI contributions. His alternative argument was that the second proviso to Section 43B was omitted by the Finance Act 2003 w.e.f. 1st April, 2004 but this amendment had to be given retrospective effect.
8.1 We have considered the rival submissions in the light of material on record and the precedents cited. The AO and the CIT(A) held that the Clause (b) of Section 43B did apply to the ESI contributions. The learned Authorised Representative could not give any cogent reason why we should take a different view. However, we find that his alternative plea is covered by the decision of the Tribunal Pune in the case of Star Rewindexs and Electricals, Raigad v. ITO ITA No. 1343/Pune/2003 for asst. yr. -2001-02, dt. 23rd July, 2004 relying on their earlier order in the case of Indian Card Clothing Co. Ltd. (ITA No.214/Pune/1998). The Tribunal held as under: (i) The Section 43B would apply only to employers contribution while the deduction in respect of employees contribution would be governed by the provisions of Section 36(1)(va); (ii) The deduction in respect of employers contribution is to be allowed, if the payment has been made by the assessee before the due date of filing of return prescribed in his case.
(iii) in case of employees contribution, the deduction is to be allowed if the payment is made within the grace period of the due date as specified in Section 36(1)(va).
9. We respectfully follow the precedent and remit this matter back to the file of the AO for being examined in the light of the decision of the Tribunal (supra). He will pass a fresh order on this point after giving adequate opportunity of being heard to the assessee. The ground No. 4 is decided accordingly.
5.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Dy. CIT and treating the entire amount of Rs. 2,55,07,817 incurred in connection with the public issue of shares as capital expenditure.
5.2 The CIT(A) further erred in holding that interest earned on share application money, amounting to Rs. 1,67,70,691 ought not to be reduced from the expenditure incurred on public issue of shares while computing the disallowance in respect of public issue expenses.
5.3 Without prejudice to the above grounds of appeal and in the alternative, the CIT(A) erred in holding that the said expenditure treated as capital expenditure is not eligible for deduction under Section 35D. 5.4 In view of the above grounds of appeal, the appellant prays that the AO be directed to allow the aforesaid expenditure, or to reduce the interest earned on application money from the expenditure while computing the disallowance or in the alternative to allow deduction under Section 35D in respect of the said expenditure incurred for the public issue of shares.
10.1 On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding that interest income, amounting to Rs. 1,67,70,691 received on share application money in connection with the public issue of shares ought to be taxed under the head 'Income from other sources.
10.2 The CIT(A) failed to appreciate that the said interest income arose as a result of the public issue of shares undertaken to expand the business and goes to reduce the cost of the public issue and if at all the same is to be taxed it ought to have been taxed under the head 'Profits and gains of business.
10.3 In view of the above grounds of appeal, the appellant prays that the AO be directed to delete the taxability of interest income, on share application money under the head 'Income from other sources.
10. The facts in brief are as follows: The assessee company came up with a public issue of Rs. 41,75,000 equity shares of Rs. 10 each at a premium of Rs. 80 per share. The basis of allotment was finalized on 28th May, 1995. In connection with the public issue a sum of Rs. 2,55,07,817 was incurred which was claimed under Section 37(1) of the Act. The details are as under:9.
Other Expenses 9,19,338 Total 2,55,07,817 11. During the assessment proceeding before the AO, the assessee madfe an alternative plea saying that the disallowance be restricted to Rs. 87,37,126 (Rs. 2,55,07,817-Rs. 1,67,70,691). The AO relying on the decision of the Supreme Court in the case of Biooke Bond India Ltd v.CIT , treated the expenditure of Rs. 2,55,07,817 as capital expenditure. He also rejected the alternative plea, relying on the decision of the Supreme Court in the case of Tuticoiin Alkali Chemicals & Fertilizers Ltd. v. CIT 12. We find that the issue, raised through ground No. 5.1, whether the expenses aggregating to Rs. 2,55,07,817 have to be treated as expenses of revenue nature or of capital nature, is covered against the assessee by the decision of the Tribunal Pune in the assessee's own case in ITA No. 33/Pune/1998 for asst. yr. 1994-95, dt. 17th May,. 2004. The Tribunal observed in paras 6 and 7 of its order as under: 6. We find that in the case of Brooke Bond India Ltd. (supra), the question that was answered in favour of the Revenue and against the assessee by the Supreme Court was as under: Whether on the facts and in the circumstances of the case, the Tribunal was right in sustaining the disallowance of Rs. 13,99,305 being expenses incurred in connection with the issue of fresh lot of shares in 1967.
7. It is also seen that the judgment of the Bombay High Court in the case of Bombay Burmah Trading Corporation Ltd. (supra) was referred to by the Supreme Court in their judgment in the case of Brooke Bond India Ltd. (supra). The details of expenses of Rs. 3,35,813 are reproduced in para 4 above. In our opinion, all the items of expenses aggregating to Rs. 3,35,813 were incurred in connection with the issue of fresh lot of shares and are therefore, to be disallowed in view of the above judgment of the Supreme Court. The question that was answered in favour of Revenue and against the assessee by the Supreme Court in the case of Brooke Bond India Ltd. (supra) and reproduced in para 6 above applies to all the items of expenses aggregating to Rs. 3,35,813. Therefore, respectfully following the judgment of the Supreme Court in the case of Brooke Bond India Ltd. (supra), the order of the CIT(A) is upheld and the ground No. 1 is rejected.
13. It is an admitted fact that the total expenses aggregating to Rs. 2,55,07,817 were incurred in connection with the public issue of equity shares. Therefore respectfully following the precedent, the decision of the lower authorities in treating these expenses as expenses of capital nature, has to be sustained. We hold accordingly. The ground No. 5.1 is accordingly rejected.
14. The ground No. 5.2 raises an alternative plea saying that the interest income of Rs. 1,67,70,691 from the application money being deposited in a separate bank account be reduced from the expenses and,the disallowance be restricted to Rs. 87,37,126. He placed reliance on the decision of the Tribunal, Jodhpur, in the case of Neha Proteins Ltd. v. Asstt. CIT (2004) 83 TTJ (Jd) 236.
14.1 We fail to see the logic behind the above plea because the scheme of the IT Act 1961 does not permit set-off of a capital expefiditure against a revenue receipt. The total income of an assessee is chargeable to tax under Section 4 and the total income has to be computed in accordance with the provisions of the Act. Sec. 14 of the Act lays down that for the purpose of computation, income of an assessee has to be classified under five heads: 14.2 The computation of income under each of the five heads of income has to be made independently and separately. There are specific rules of deduction and allowances under each head. No deduction, adjustment or set off of any income or expenditure, one against another, can be made except as provided by the Act.Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT consideration the provisions of the IT Act 1961, the interpretation of the term 'income' given in a large number of decisions of the High Courts, the Privy council and of the apex Court observed that income attracts tax as soon as it accrues, that the application or the destination of the income has nothing to do with its accrual or taxability, that an interest receipt is always of revenue nature unless it is received by way of damages or compensation. The question that was referred by the Tribunal to the Supreme Court for decision, in two parts, was as under: Whether, on the facts and in the circumstances of the case, interest derived by the assessee from the borrowed funds which were invested in short-term deposits with banks would be chargeable to tax under the head 'Income from other sources' or would go to reduce the interest payable by the assessee on the term loans secured by the assessee from financial institutions, which would be capitalised after commencement of commercial production.
14.4 The Supreme Court answered the first part of the question in the affirmative and the second part of trie question in the negative.
14.5 What the learned Authorised Representative wants to claim through the above alternative plea is that out of the capital expenditure of Rs. 2,55,07,817 a sum of Rs. 1,67,70,691 be allowed as a deduction from the interest income of Rs. 1,67,70,691. In other words he wants to claim a deduction for a capital expenditure from a revenue receipt.
There is no provision in the IT 1961 Act, under which such a plea could be allowed. Therefore the above plea has no merit and is accordingly rejected.
14.6 The learned Authorised Representative placed reliance on the decision of the Tribunal, Jodhpur, in the case of Neha Proteins Ltd. (supra). In that case the AO had placed reliance on the decision of the Supreme Court in the case of Tuticorin Alkali Chemicals & Fertilizers Ltd. (supra) but before the Tribunal it was submitted on behalf of the assessee that the facts of the case relied upon by the AO were different and that the facts of that case were nearer to the facts in the case of CIT v. Bokaro Steel Ltd. . The Tribunal, Jodhpur, while giving its decision placed reliance on the decision of the Supreme Court in the case of Bokaro Steel Ltd. (supra).
14.7 In the case of Bokaro Steel Ltd. (supra) the issue was about the set off of capital receipts against capital expenditure. In the present case, on the other hand, the issue is about the deduction of capital expenses from revenue receipts. Manifestly, the facts of the present case are different from those in the case of Bokaro Steel Ltd. (supra), therefore for the reasons discussed in the above paras the ground No.5.2 is rejected.
15. The grounds Nos. 5.3 and 5.4 raise yet another alternative plea saying that the expenditure be considered for deduction under Section 35D. The CIT(A) has mentioned this ground in para 24 of his order, but while dismissing this ground in para 25 of his order he did not give any reason. The order of CIT(A), on this point\ is not a speaking order.
16. In ground No. 10 the assessee has raised yet another alternative ple'a challenging the AO's action of taxing the interest receipts of Rs. 1,67,70,691 under the head 'Income from other sources'. The CIT(A) has noted in para 49 of his girder that no arguments were placed before him in relation to this ground and, hence, he dismissed the ground.
17. For the reasons discussed in paras 15 and 16 above, we consider it appropriate, in the interest of justice, to remit this matter back to the file of the CIT(A) for a fresh examination of the issues raised through ground Nos. 5.3, 5.4, and 10. The CIT(A) will pass a fresh- speaking order after giving adequate opportunity of being heard to the assessee and "the AO. The ground Nos. 5.3, 5.4, and 10 are decided accordingly.
18. This ground No. 6 relates to the, disallowance of Rs. 9,399 representing 1/8th of total expenses on motor cars on grounds of personal use, which was upheld by the CIT(A).
19. This ground No. 7 relates to the disallowance of Rs. 6,432 representing 1/8th of the depreciation on the motor car given to the President of the assessee company, which was upheld by the CIT(A).
20. This ground No. 8 relates to the disallowance made in respect of 1/4th of expenditure in respect of residential telephone which was upheld by the CIT(A).
21. We have considered the matter. The assessee, a company, is an inanimate person and a distinct assessable entity and therefore ad hoc disallowances out of car and telephone expenses on grounds of personal use cannot be sustained. The Gujarat High Court, in the case of Sayaji Iron and Engg. Co. v. CIT observed as under: The assessee which is a Private limited Company, is a distinct assessable entity as per the definition of "person" under Section 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, "even if they are personally used by the directors" the vehicles are used for "personal use". The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of Section 40(c) and Section 40A(5) of the Act.
23. This ground relates to the disallowance of wealth tax payment of Rs. 60,270 under Section 40(l)(iia) which was upheld by the CIT(A).
During the hearing before us the learned Authorised Representative did not press this ground and, therefore, this is rejected.