1. These cross-appeals by the assessee and the revenue are directed against the order of 30-3-2003 of Commissioner (Appeals) for the assessment year 2000-01. These appeals which were heard together are being disposed of by a single consolidated order for the sake of convenience.
2. We first take up the appeal by the assessee in ITA No.3711/Del/2003. In this appeal, the assessee has raised disputes on five different grounds, which have been dealt with in the succeeding paras.
2.1 Ground No. 1 of the dispute raised by the assessee relates to disallowance of depreciation on the increased liability of Rs. 3,77,933 in respect of purchase of the asset, on account of fluctuation in foreign exchange rate. The assessing officer did not allow the claim after observing that additional liability could arise only in the year when the amount on account of exchange rate fluctuation was actually paid. Commissioner (Appeals) confirmed the disallowance following the decision of the Tribunal on the same issue in assessee's own case in assessment years 1990-91 and 1991-92. Aggrieved by the said decision, the assessee is in appeal before the Tribunal.
2.1.1 We have heard both the parties, perused the records and considered the matter carefully. We find that though the similar claim had been disallowed by the Tribunal in assessment years 1990-91 and 1991-92, but subsequently, in the order dated 10-9-2003, in miscellaneous application filed by the assessee, the Tribunal had allowed the claim. We also notice that the Tribunal has already allowed similar claim in favour of the assessee vide their orders in ITA Nos.
2852 and 3144/Del/1999 for assessment year 1995-96 (reported as Honda Siel Power Products Ltd. v. Dy. CIT (2007) 112 TTJ (Del) 702Ed.).
Similar view has been taken by the Tribunal in assessment years 1992-93 and 1993-94 also. Further, the learned Authorised Representative has brought to our notice that Hon'ble High Court of Delhi recently in case of CIT v. Woodward Governor India (P) Ltd. (2007) 162 Taxman 60 (Del) have held that increase in liability on account of foreign exchange fluctuation on the last day of financial year is not notional or contingent and has therefore, to be adjusted in the actual cost of the asset. On perusal of the various orders aforesaid, it is clear that the issue is covered in favour of the assessee. Respectfully following the said judgments we reverse the order of Commissioner (Appeals) and allow the claim of the assessee.
2.2 The ground No. 2 is regarding the decision of the assessing officer including the excise duty and sales-tax as part of the total turnover while computing deduction under Section 80HHC. The assessing officer included the excise duty of Rs. 18.57crores and sales-tax of Rs. 6.79 crores in the value of total turnover in the computation of deduction under Section 80HHC. Commissioner (Appeals) following the decision of his predecessor in assessment years 1995-96 and 1998-99, confirmed the order of the assessing officer aggrieved by which the assessee is in appeal before the Tribunal.
2.2.1 We have heard both the parties, perused the records and considered the matter carefully. The learned Authorised Representative pointed out that the issue was covered in favour of the assessee by the judgment of Hon'ble Supreme Court in case of CIT v. Lakshmi Machine Works . It was also pointed out that the Tribunal in the assessee's own case in assessment year 1995-96 (ITA Nos. 2852 and 3144/Del/1999) (supra) and in assessment year 1997-98 (ITA Nos. 4412 and 4462/Del/2000) have held that sales-tax and excise duty are not part of total turnover for the purpose of computation of deduction under Section 80HHC. The learned Commissioner Departmental Representative appearing for the revenue fairly conceded that the issue was covered in favour of the assessee. We, therefore, reverse the order of Commissioner (Appeals) and allow the claim of the assessee respectfully following the decisions aforesaid.
2.3 The ground No. 3 is regarding disallowance of Rs. 13,03,259 being non-recoverable amount paid by the assessee for development of die and tools. The assessee had to source various components required for the manufacturing of products from different vendors for which tools and dies had got to be developed and for this purpose the assessee had made advance payments to the parties. Both the assessing officer and Commissioner (Appeals) have held that the advance paid by the assessee was towards development of capital assets, which was not allowable as deduction. However, they have allowed depreciation on such payments by capitalizing the same. Aggrieved, the assessee is in appeal before the Tribunal. After hearing both the parties, we find that this issue is also covered in favour of the assessee by the decision of the Tribunal in assessee's own case for assessment years 1992-93 to 1996-97. The learned Authorised Representative also pointed out that Hon'ble High Court of Delhi in assessee's own case in assessment year 1992-93 CIT v.Honda Siel Power Products Ltd. (2007) 212 CTR (Del) 314 have held that the payment of advance made by the assessee for manufacturing tools and dies which continued to remain the property of the manufacturer would be allowable as revenue expenditure. Respectfully, following these decisions, we set aside the order of Commissioner (Appeals) and allow the claim of the assessee.
2.4 The dispute raised in ground No. 4 relates to the allocation of head office expenses to the manufacturing unit at Pondichary while computing deduction under Section 80-IB. The assessee had claimed a sum of Rs. 5,65,38,078 as deduction under Section 80-IB in respect of the eligible profit of the industrial undertaking at Pondichary. While computing the said deduction, the assessee had allocated net head office expenses of Rs. 3,339.38 lacs in the proportion of sales of the respective units. The net head office expenses had been worked out after reducing from the gross head office expenses the following items aggregating to Rs. 248.84 lacs: 2.4.1 The assessing officer deducted only the sum of Rs. 73.37 lacs i.e. the provision for services since the said amount was directly related to expenditure charged to the Pondichary unit. In respect of other items, the assessing officer observed that sum of Rs. 9.23 lacs had been written off on account of excess provision made for warranty in the earlier year and, therefore, could not be considered in the current year. The miscellaneous expenses of Rs. 30.96 lacs related to export benefits, incentives received on investment, unclaimed balances written back, insurance claim and premium on sale of import licenses, which the assessing officer noted were not the items for income derived from Pondichary unit. Similarly, the interest of Rs. 135.28 lacs included the FDR interest of Rs. 46.01 lacs, interest on inter-corporate deposits of Rs. 77.83 lacs, interest on overdue payments of Rs. 11.07 lacs, and certain other miscellaneous interests received on NSC and loans given to employees. The assessing officer observed that only the interest received on overdue payments in respect of credit sales could be said to have been derived from Pondichary unit. He, therefore, deducted only a sum of Rs. 11.07 lacs while computing the net expenditure of Pondichary unit. Thus, the assessing officer deducted only a sum of Rs. 73.37 lacs and Rs. 11.07 lacs while determining the net expenditure of head office for the purpose of allocation. This was disputed by the assessee.
2.4.2 In appeal, the assessee submitted before Commissioner (Appeals) that there was no dispute that provision for warranty services written back and the miscellaneous income were part of the business income and the interest income had been held by the Tribunal in the assessee's own case, to be business income. These were all items of general income, which must be set off against general expenses. Commissioner (Appeals) was however not satisfied. It was observed by him that if the items of income under consideration were set off against the head office expenses and only net expenses are allocated, it will have effect of part of the income shown in head office being allocated to the Pondichary unit which in fact, was not the income derived from that unit and deduction to that extent under Section 80-IB would be incorrect. He accordingly confirmed the decision of the assessing officer against which the present appeal has been filed.
2.4.3 Before us, the learned Authorised Representative for the assessee reiterated the submissions made before the lower authorities. It was submitted that head office was a support office and the manufacturing work had been done at the Pondichary unit. It was argued that while allocating the expenses of head office to the Pondichary unit, the income shown in the head office had to be deducted. It was pointed out that the issue was not whether the income shown in the head office was derived from the Pondichary unit but the issue was regarding allocation of expenses and only the net expenses could be allocated. The learned Commissioner Departmental Representative on the other hand strongly supported the order of Commissioner (Appeals) and placed reliance on the findings given in his order. She also referred to the judgment of Hon'ble High Court of Delhi in case of Honda Siel Power Products 289 ITR 435 (Del) (sic) to argue that the onus was on the assessee to prove nexus before the expenses could be netted.
2.4.4 We have perused the records and considered the rival contentions carefully. The assessee has a manufacturing unit at Pondichary profit from which is eligible for deduction under Section 80-IB. The assessee also has a head office in which common expenses have been incurred. In the head office, the assessee has shown certain income such as provision for warranty written back, miscellaneous income in the nature of export benefits, insurance claim etc. and interest income. There is no dispute that nature of such income is business income and that these items of income are not the income derived from the industrial undertaking at Pondichary. The dispute is whether these items of income should be deducted from the expenditure claimed in the head office and only the net expenditure should be allocated to the Pondichary unit in the proportion of sales made therein. In our view, the approach adopted by the assessee is not correct. It is not the income, which is required to be set off against the expenditure. It is expenditure incurred having nexus with earning of these items of income which has to be deducted from the gross expenditure claimed and the onus for proving the nexus between expenditure incurred and the different items of income under consideration will be on the assessee. We accordingly hold that only the expenditure of head office having nexus with earning of different items of income under consideration has to be deducted after necessary verification from the gross expenditure for the purpose of allocation of expenditure of head office to the Pondichary unit. We, therefore, restore this issue to the file of the assessing officer for necessary computation in the light of observations made above after allowing opportunity of being heard to the assessee.
2.5 The ground No. 5 raised by the assessee is in relation to charge of interest under Section 234B. At the time of hearing of appeal the learned Authorised Representative did not press this ground before us.
This ground, therefore, is dismissed as not pressed.
3. Appeal by the revenue in ITA No. 3997/Del/2003. The revenue in this appeal has raised disputes on three different grounds, which have been dealt with in the succeeding paras.
3.1 The ground No.1 is regarding deduction of unutilized balance of excise duty amounting to Rs. 76,47,779 consisting of personal ledger account (PLA) balance of Rs. 1,04,212 and RG-23 balance of Rs. 75,43,567. The PLA balance represents the amount deposited by the assessee to cover the excise duty of goods intended to be removed at any time whereas the RG-23 balance represents the unutilized modvat credit on account of excise duty paid on components and raw material as well as capital goods. These had been claimed by the assessee as deduction under Section 43B; this claim had been made by the assessee during the course of assessment proceedings but the same was not considered by the assessing officer. In appeal, Commissioner (Appeals) following the decision of the Tribunal in assessee's own case for assessment year 1995-96 allowed the claim aggrieved by which the revenue is in appeal.
3.1.1 After hearing both the parties, we find that the issue raised in this ground of appeal is covered by the decision of Special Bench of the Tribunal at Chandigarh in case of Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. (2007) 110 TTJ (Chd)(SB) 183 : (2007) 107 ITD 343 (Chd)(SB). The Special Bench has held that balance in the PLA account maintained with the excise authorities at the end of the year represented payment of excise duty deductible in terms of Section 43B of the Act. The Special Bench also held that unutilized modvat credit did not amount to payment of excise duty and therefore, was not deductible under Section 43B. Respectfully following the said decision, we confirm the order of Commissioner (Appeals) to the extent of PLA balance of Rs. 1,04,212 and the balance amount of Rs. 75,43,567 representing the RG-23 balance is held not to be allowable as deduction. The appeal of the revenue is thus partly allowed on this ground.
3.2 The ground No. 2 is regarding the deduction under Section 80HHC in respect of interest income. The assessee had shown interest income of Rs. 1,36,04,106 and had also incurred interest expenditure of Rs. 82,04,268. The assessing officer while computing deduction under Section 80HHC deducted 90 per cent of gross interest from the profit of business in terms of Explanation (baa). In appeal, Commissioner (Appeals) held that 90 per cent of only net interest after setting off the interest expenditure of Rs. 82,04,268 will be deducted from the profit of business. Aggrieved by the said decision, the revenue is in appeal.
3.2.1 We have heard both the parties, perused the records and considered the matter carefully. The issue raised is whether 90 per cent of gross interest or 90 per cent of net interest has to be considered for deduction from the profit of business as per Explanation (baa) of Section 80HHC. This issue has already been considered by the Special Bench of the Tribunal in case of Lalsons Enterprises v. Dy. CIT (2004) 82 TTJ (Del)(SB) 1048 in which it has been held that only 90 per cent of net interest income has to be deducted after setting off the expenses incurred having nexus with the earning of interest income. The decision by the Special Bench has recently been upheld by the Hon'ble High Court of Delhi in case of the assessee itself reported in CIT v.Shri Ram Honda Power Equip . However, we find that the nexus issue has not been examined by the lower authorities. The learned Authorised Representative agreed that the issue may be restored to the assessing officer for finding out the nexus. We accordingly set aside the order of Commissioner (Appeals) on this issue and restore the matter back to the assessing officer for a fresh decision in the light of aforesaid judgment after allowing opportunity to the assessee.
3.3 The ground No. 3 is regarding disallowance of Rs. 32,77,592 claimed as revenue expenses incurred relating to a new pressure die casting plant being set up at Noida. The assessee submitted before the assessing officer that in connection with manufacture of portable generator sets, the assessee was required to procure certain aluminium die cast components from outside vendors. In order to overcome the problems of irregular supplies and inconsistent quality, the assessee decided to set up its own pressure die casting plant and during the year had incurred expenditure of Rs. 32,77,592 on salaries, rent, travelling, etc. in relation to this project. It was also submitted that the new project was an extension of the existing business and there was complete unity of control, common management and funds as well as interlacing of the business. The assessee had not taken any loan and the entire payment had been made from the common funds. The assessing officer however noted from the director's report that the new plant commenced production only in the next year and in addition to meeting the captive requirement, it was also supplying some critical parts to an associate company. The assessing officer accordingly held that the new plant was not merely a captive plant or a measure of backward integration but it was a distinct and new unit having capacity to undertake business on its own. As the commercial production had not commenced, the expenses claimed were not allowed as revenue expenses.
This was disputed by the assessee.
3.3.1 In appeal, the assessee reiterated the stand taken before the assessing officer that new plant was part of the existing business. It was submitted that the decisive test to find out whether the two businesses were the same or different is the unity of control, which is indicated by interfacing, interdependence and interconnection between the two businesses. The nature of business was not a material factor.
The assessee placed reliance on the judgment of Hon'ble High Court of Delhi in case of CIT v. Modi Industries and the judgment of Hon'ble High Court of Bombay in case of CIT v. Tata Chemicals Ltd. . The Hon'ble High Court of Delhi in case of Modi Industries (supra), following the judgment of Hon'ble Supreme Court in case of CIT v. Prithvi Insurance Co. Ltd. had held that in considering whether two businesses run by the assessee are the same business, what is of importance is unity of control and interlacing of the two businesses and not the nature of business. The Hon'ble High Court of Bombay in case of Tata Chemicals (supra) had held that such interlacing could be shown to exist by reason of common management, common administration, common fund and a common place of business. It was further submitted that merely because some parts produced by the unit in the subsequent year were supplied to a third party, it could not be concluded that the plant constituted a new and separate business particularly when there were several facts on record indicating unity of management and control and interlacing of funds. Commissioner (Appeals) was satisfied by the explanation given and respectfully following the authorities cited, he held that the new plant was only an extension of business and accordingly allowed the claim of expenses. Aggrieved lay the said decision, the revenue is in appeal before the Tribunal.
3.3.2 Before us, the learned Commissioner Departmental Representative assailed the order of Commissioner (Appeals) and strongly supported the decision of the assessing officer. It was argued that the new plant was producing new products, which were being sold to the other parties also. It was therefore, an independent business and the expenses incurred before the commencement of business had rightly been disallowed. It was pointed out that while considering whether the new plant was a new business or not, the entirety of facts and circumstances has to be considered and no single test was decisive as held by Hon'ble Supreme Court in case of Waterfall Estates Ltd. v. CIT (1996) 219 ITR 563 (SC). The new plant it was submitted had given the assessee an enduring advantage and, therefore, the expenditure incurred could not be allowed as revenue expenditure. Reference was made to the judgment of Hon'ble Supreme Court in case of Alembic Chemical Works Co.
Ltd. v. CIT . the judgment in case of Ballimal Naval Kishore v. CIT and some other cases.
3.3.3 The learned Authorised Representative on the other hand supported the order of Commissioner (Appeal). It was submitted that tests for deciding whether the two businesses are same or different, are well settled by the judgments of Hon'ble Supreme Court and the jurisdictional High Court. The relevant tests are the unity of control, common management of funds and the interlacing of the two businesses and not the nature of business. Reference was made to the judgment of Hon'ble jurisdictional High Court in case of Modi Industries (supra) and the judgment of Hon'ble Supreme Court in case of Veecumsees v. CIT . He also placed reliance on the judgment of jurisdictional High Court in case of CIT v. Relaxo Footwears Ltd. IT Appeal No. 387 of 2000 in which claim of similar expenses had been allowed as deduction. He also referred to the judgment of Delhi High Court in case of CIT v. Usha Iron & Ferro Metal Corpn. Ltd. (2007) 163 Taxman 256 (Del) in which identical issue had been considered by the Hon'ble High Court. The assessee in that case, was a manufacturer of different types of iron rods and had decided to set up a steel melting shop for manufacture of raw material on its own. The expenses incurred in connection with the setting of a new unit had been claimed as revenue expenditure. The Hon'ble High Court held that the expenditure had been incurred for expanding or extending its existing business. The manufacture of raw material was for improving the existing business and it did not amount to setting up of a new business. The order of Tribunal allowing the claim was accordingly upheld.3.3.4 We have perused the records and considered the rival contentions carefully. The assessee is in the business of manufacture of portable generator sets. For this purpose, the assessee was procuring aluminium die cast components, which were used in the process of manufacture, from outside vendors. In order to overcome the problem of irregular supplies and inconsistent quality of components, the assessee during the year decided to set up its own pressure die casting plant, which became operational during the next year. The assessee during this year incurred expenditure of Rs. 32,77,592 on salaries, rent, travelling, etc. in relation to this project, which was claimed as the revenue expenditure on the ground that the new project was part of the same business as a measure of backward integration. The assessing officer disallowed the same as a capital expenditure holding that the new plant was an independent unit, which was also supplying some of its parts to other concerns. The Commissioner (Appeal) held that the new project was a part of the existing business as there was unity of control, common management, common funds and interlacing of two businesses, following the judgment of Hon'ble High Court of Delhi in case of Modi Industries (supra) and the judgment of Hon'ble High Court of Bombay in case of Tata Chemicals (supra). Hon'ble High Court of Delhi in case of Modi Industries (supra) following the judgment of Hon'ble Supreme Court in case of Prithvi Insurance Co. (supra) have held that in considering whether two businesses run by the assessee are the same business, what is of importance is unity of control and interlacing of two businesses and not the nature of business. The learned Commissioner Departmental Representative has referred to the judgment of Hon'ble Supreme Court in case of Waterfall Estates Ltd. (supra) in which the Hon'ble Supreme Court held that in order to determine whether various activities constitute same business or separate business, no single test could be devised as universal and conclusive and that the question has to be decided on a consideration of all the relevant facts and circumstances.
In that case, the decision of the Tribunal that the different businesses carried on by the assessee were not the same business, had been upheld by the Hon'ble Supreme Court. One of the factors considered by the Tribunal in arriving at the conclusion that the two businesses were different was that closure of one unit did not affect the activities of the other unit. This principle was however not upheld by the Hon'ble Supreme Court in the subsequent judgment in case of Veecumsees (supra) in which the Hon'ble Supreme Court following the earlier judgment in case of B.R. Ltd. v. V.P. Gupta, CIT noted that the fact that one business could not be conveniently carried out after the closure of the other, may furnish a strong indication that the two businesses constituted the same business but no decisive inference could be drawn from the fact that after the closure of one business, another may or may not conveniently be carried on. Thus, the test laid down by the Hon'ble Supreme Court in case of Prithvi Insurance Co. (supra), which was followed by the Hon'ble High Court of Delhi in case of Modi Industries Ltd. (supra) i.e. unity of control and interlacing of the two businesses as important factors in understanding whether the two businesses are the same or different still holds good. In this case, the finding of Commissioner (Appeals) is that there was unity of control, common management, common funds and interlacing of the two businesses and nothing has been placed on record by the revenue before us to controvert the said finding. In this case, additionally, the closure of one unit would also affect the working of the other unit because the new unit manufactures raw material which is essential for smooth working of manufacturing of generator sets.
Considering the entirety of the facts and circumstances and the rulings on the subject, we see no infirmity in the decision of Commissioner (Appeals) holding that the new project was expansion or extension of the existing business and not a new business.
3.3.5 Now the only thing to be decided is whether the expenses incurred during the year on salaries, rent, travelling, etc. in relation to the new project, which is nothing but a part of the same business can be allowed as revenue expenditure. The new project is for manufacture of raw material to be used in the existing business and therefore, the new project will definitely help the existing business to be carried on more efficiently and profitably as smooth supply of quality raw material can be ensured. The nature of expenditure incurred is also not such which results in creation of any enduring assets. A similar situation had been considered by the Hon'ble High Court of Delhi in ease of Usha Iron & Ferro Metal Corpn. Ltd. (supra) in which case also the assessee, a manufacturer of different types of rods had decided to set up steel melting shop for manufacture of raw material on its own.
The expenses incurred in connection with the new unit had been allowed by the Hon'ble High Court as revenue expenditure after observing that manufacture of raw material was for improving of the existing business and it did not amount to setting up of a new business. Following the said judgment we hold that the expenses claimed by the assessee incurred in connection with the new project have to be allowed as revenue expenditure. The order of Commissioner (Appeals) allowing the claim is accordingly upheld.4. In the result, the appeal of the assessee in ITA No. 3711/Del/2003 and that of the revenue in ITA No. 3977/Del/2003 both are partly allowed.