Iv.whether On The Facts And In The Circumstances Of The Case,The Tribunal Is Correct In Law In Directing The Assessingofficer To Workout The Foreign Exchange Fl v. Section 80Hh Of The Income Tax Act?

THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTISENGUPTAAND THE HON’BLE Ms. JUSTICE G. ROHINI INCOME TAX TRIBUNAL APPEAL NO.57 OF 2000 Dt.19.7.2013 Between: The Commissioner of Income Tax Guntur, at present, Vijayawada … Appellant And M/s. Spartek Ceramics India Ltd.,NarasingapuramChandragiri MandalChittoor District … Respondent THE HON’BLE THE CHIEF JUSTICE SRI KALYAN JYOTISENGUPTAANDTHE HON’BLE Ms. JUSTICE G. ROHINI INCOME TAX TRIBUNAL APPEAL NO.57 OF 2000 JUDGMENT: (per the Hon’ble the Chief Justice Sri K.J. Sengupta) The present appeal has been filed against the judgment andorder of the Income Tax Appellate Tribunal, Hyderabad Bench ‘A’,Hyderabad, dt.20.12.1999. 2. The appeal was admitted by an order dt.16.11.2000, on thefollowing substantial questions of law: i.Whether on the facts and in the circumstances of thecase, the Tribunal is correct in law in holding that interestamount of Rs.25,62,371/- paid on amounts borrowed foracquiring fixed assets in revenue expenditure? ii.Whether on the facts and in the circumstances of thecase, the Tribunal is correct in holding that there wascommercial production in the Granites Division during theprevious year relevant for the assessment year? iii.Whether on the facts and circumstances of the case, theTribunal is correct in law in holding that the additionalforeign exchange liability caused during the previous year1990-91 shall be increased to the written down value of theassets as on 31.3.1991 for the purpose of allowing thedepreciation for assessment year 1992-93? iv.Whether on the facts and in the circumstances of the case,the Tribunal is correct in law in directing the AssessingOfficer to workout the foreign exchange fluctuation at themarket rate certified by the authorized dealer? v. Whether on the facts and in the circumstances of thecase, the Tribunal is correct in law in directing the AssessingOfficer to exclude the interest burden of the assesseecompany on the loan funds advanced to M/s.Neycer IndiaLimited from the computation of relief to be granted under Section 80HH of the Income Tax act? 3. The short facts leading to preferring the appeal are as follows: iv.Whether on the facts and in the circumstances of the case,the Tribunal is correct in law in directing the AssessingOfficer to workout the foreign exchange fluctuation at themarket rate certified by the authorized dealer? v. Whether on the facts and in the circumstances of thecase, the Tribunal is correct in law in directing the AssessingOfficer to exclude the interest burden of the assesseecompany on the loan funds advanced to M/s.Neycer IndiaLimited from the computation of relief to be granted under Section 80HH of the Income Tax act? 3. The short facts leading to preferring the appeal are as follows: The respondent company is a public limited company and hasbeen engaged in the business of manufacturing ceramic tiles. Thepresent appeal relates to the assessment year 1992-93. Anothercompany, namely, M/s. Spartek Granites Limited, which has beenmanufacturing vitrified ceramic granite tiles has started its commercialproduction on 26.3.1991. This company closed its books of accounton 31.3.1991. This company and the respondent company jointly filedapplications under Section 391 read with Section 394 of theCompanies Act, 1956 before this Court praying for approval of schemefor amalgamation of the two companies and also for effectingamalgamation as approved by the shareholders and secured creditorsof the companies with effect from 1.4.1991, i.e., from the beginning ofthe financial year 1991-92, which is the previous year relevant to theassessment year 1992-93, involved in the appeal. The said SpartekGranites Limited ceased to exist and had become an unit of therespondent company, which is referred to as ‘Granites Division’. Thesaid scheme was duly approved by this Hon’ble High Court under theCompanies Act and the company has made up the consolidatedaccount as a single entity combining the results of the two divisions,Ceramics and Granites Divisions, and filed return of income on31.12.1992 before the Deputy Commissioner (Assessments), SpecialRange, Guntur, disclosing a taxable income of Rs.1,54,473/-. Thereafter, on 10.11.1993, the assessee company filed a revisedreturn, disclosing taxable income as ‘Nil’. The said revised return wasprocessed under Section 143(1)(a) of the Income Tax Act, (for short,‘the Act’) on 28.7.1994, and after making certain adjustments, thetaxable income was determined as ‘Nil’. Subsequently, theassessment was converted into a scrutiny assessment by issue of anotice under Section 143(2) of the Act. The assessment was finallycompleted by the assessing officer under Section 143(3) of the Act, by his order dt.23.3.1995 after making additions and disallowances undervarious heads with reference to the two units of the assesseecompany. 4. The assessing officer made disallowance of Rs.26,37,500/- onaccount of unabsorbed depreciation of the erstwhile Spartek GranitesLimited carried over a sum of Rs.25,62,371/- to the accounts of theassessee company after amalgamation on account of interest payableon the loans availed for acquisition of capital assets, the amount ofdepreciation on additional liability provided on foreign exchangefluctuation and the amount claimed as relief under Sections 80HH and80I of the Act. Being aggrieved by the order of the assessing officer,the respondent preferred the appeal before the Tribunal. 5. At the time of hearing of the appeal before the Tribunal, therespondent did not press issue of disallowance of Rs.26,37,500/- onaccount of unabsorbed depreciation of the erstwhile Spartek GranitesLimited, carried over to the accounts of the assessee company afteramalgamation. The appeal was heard and decided on the remainingissues. 5. At the time of hearing of the appeal before the Tribunal, therespondent did not press issue of disallowance of Rs.26,37,500/- onaccount of unabsorbed depreciation of the erstwhile Spartek GranitesLimited, carried over to the accounts of the assessee company afteramalgamation. The appeal was heard and decided on the remainingissues. 6. The learned Tribunal held on fact that after amalgamation, theerstwhile Spartek Granites Limited was no longer in existence and hadbecome only a division of the respondent company and this division isfunctioning as a part of it, which is maintaining complete unity,interlacing, interdependence and interconnection of management andcontrol. On fact, the learned Tribunal also held that the erstwhileSpartek Granites Limited had commenced production on 26.3.1991,i.e., during the previous year relevant to the assessment year 1991-92itself. Since commercial production has started, the interest onborrowings made for the purpose of acquiring capital assets could notbe capitalized and added to the cost of the assets, but should betreated as revenue expenditure in view of the provisions contained inExplanation 8 to Section 43(1) of the Act. Therefore, the disallowanceof Rs.25,62,371/- being the interest amount payable on the loans availed for acquisition of capital assets was deleted. 7. The learned Tribunal also held additional depreciation isallowable as per the provisions of Section 43A of the Act. The learnedTribunal held that the rate of foreign exchange has to be computed andascertained at market rate and not at government rate. The learnedTribunal, however, rejected the claim for deduction of an amount ofRs.48,98,759/- received from M/s. Neycer India Limited, by way ofinterest income. However, the learned Tribunal allowed thecorresponding expenditure of interest paid by the assessee companyto procure relevant fund advanced to M/s.Neycer, under Section 80HHof the Act, in the hands of the assessee company. 8. No one appeared on behalf of the respondent assessee. 9. Learned counsel appearing for the appellant submits that thelearned Tribunal was factually wrong in holding that Spartek GranitesIndia Limited is a part and parcel of one division and unit of therespondent company. The learned Tribunal should have held that thetwo divisions are independent and they are independently accountedand functioning separately and independently. The learned Tribunalon fact wrongly held that the commercial production of the erstwhileSpartek Granite Ltd., started before 1.4.1991 and therefore thedecision of the Hon’ble Supreme Court in the case of Challapalli Sugars Limited v. C.I.T.[[1]]is squarely applicable to the facts of thecase. The learned Tribunal erroneously found on fact that bothGranites Division as well as Ceramics Division constitute samebusiness entity and the interest claimed by the assessee is for theperiod after commencing commercial production. Therefore, thelearned Tribunal should not have deleted the disallowance of amountof interest on loan availed for acquisition of capital assets. 10. Learned counsel for the appellant contended that the additionalliability on account of depreciation in foreign exchange fluctuationduring the previous year 1990-91 should not have been allowed. Thelearned Tribunal should have held that the exchange fluctuation during Sugars Limited v. C.I.T.[[1]]is squarely applicable to the facts of thecase. The learned Tribunal erroneously found on fact that bothGranites Division as well as Ceramics Division constitute samebusiness entity and the interest claimed by the assessee is for theperiod after commencing commercial production. Therefore, thelearned Tribunal should not have deleted the disallowance of amountof interest on loan availed for acquisition of capital assets. 10. Learned counsel for the appellant contended that the additionalliability on account of depreciation in foreign exchange fluctuationduring the previous year 1990-91 should not have been allowed. Thelearned Tribunal should have held that the exchange fluctuation during the previous year 1991-92 would only be considered for allowingdepreciation for the assessment year 1992-93. The learned Tribunalcommitted legal error by accepting the foreign exchange at market rateinstead of official rate of exchange for buying foreign currency. Thelearned Tribunal should have held that there was no occasion for theassessee to buy foreign exchange at market rate since the repaymentof loan was already approved and permitted by the Reserve Bank ofIndia (RBI). The learned Tribunal erred in law in directing theassessing officer to exclude the interest burden of the assesseecompany on the loans advanced to M/s.Nycer India Limited from thecomputation of relief granted under Section 80HH of the Act and theinterest received on the loan advanced to M/s.Nycer India Limitedwould fall under the head ‘income from other sources’. 11. We have heard the learned counsel for the appellant and gonethrough the impugned judgment and order of the learned Tribunal. The points which fall for consideration to decide the present appealare:- i.Whether the erstwhile Spartek Granites Limited startedcommercial production before 1.4.1991 or not? ii. Whether Spartek Granites Limited even afteramalgamation can be treated to be an independent andseparate business entity of the respondent or not? iii. Whether the amount of interest payable on the loansacquired by the Spartek Granites Limited for acquisition ofcapital assets from foreign suppliers is allowable?capital assets from foreign suppliers is allowable? iv.Whether the depreciation of additional liability provided onforeign exchange fluctuation is deletable under the law? v.Whether the corresponding expenditure of interest paid bythe assessee company to procure relevant fund advanced toM/s.Neycer India Limited can be given benefit under Section80HH of the Act or not? 12. It appears from the records that it is an admitted position that this Court has approved the scheme of amalgamation between the twoerstwhile companies, namely, M/s. Spartek Ceramics India Limitedand M/s. Spartek Granites Limited and with effect from 1.4.1991. Thesaid scheme of amalgamation was duly sanctioned in terms of theclauses of the amalgamation by virtue of provisions of Section 394 ofthe Companies Act. Thus, the Spartek Granites Limited ceased toexist as it was merged with the respondent company and consequentlythe respondent company is deemed to have been functioning with theCeramics Division with effect from 1.4.1991. In our view, the learnedTribunal correctly held that Spartek Granites Limited ceased to exist forall purposes and we uphold this finding. 13. We are of the view that a division within one company cannot betreated to be functionally separate assessee for the purpose of IncomeTax Act. The said Granites Division may be one of the part, but suchdescription of Granites Division does not form integral andindependent part of the Respondent Company. Therefore, in law, asheld by the learned Tribunal correctly, the respondent is the onlyassessee and there cannot be two assesses within one company. 13. We are of the view that a division within one company cannot betreated to be functionally separate assessee for the purpose of IncomeTax Act. The said Granites Division may be one of the part, but suchdescription of Granites Division does not form integral andindependent part of the Respondent Company. Therefore, in law, asheld by the learned Tribunal correctly, the respondent is the onlyassessee and there cannot be two assesses within one company. 14. The learned Tribunal, on fact, found that Spartek GranitesLimited started commercial production on and from 26.3.1991. Therefore, on 1.4.1991 the respondent company is deemed to havestarted commercial production in Granites Division by virtue of schemeof merger. Consequently, the amount of interest of Rs.25,62,371/-payable on the loans availed for acquisition of capital assets has to beheld to have been incurred when the said capital assets were utilizedfor commercial production, and the aforesaid amount has to be held tohave been incurred for manufacturing activity, naturally. Thisexpenditure cannot be treated to be a capital expenditure at all. Thelearned Tribunal has correctly applied the law on this issue by reasonof the fact that explanation 8 to Section 43(1) of the Act, the interestshould not be capitalized for the purpose of income tax. The saidexplanation 8 to Section 43(1) of the Act is set out hereunder: “43. In sections 28 to 41 and in this section, unless the context otherwiserequires- (1) “actual cost” means the actual cost of the assets to the assessee,reduced by that portion of the cost thereof, if any, as has been met directly orindirectly by any other person or authority: Explanation 8.- for removal of doubts, it is hereby declared that whereany amount is paid or is payable as interest in connection with the acquisitionof an asset, so much of such amount as is relatable to any period after suchasset is first put to use shall not be included, and shall be deemed never tohave been included, in the actual cost of such asset.” 15. Much depend upon the foreign exchange rate as there isvariation between the official rate and the market rate used. Theassessing officer as well as the appellate authority have accepted thecontention that under Section 43A of the Act, the foreign exchange ratewould be the official rate and not the market rate. The learned Tribunalhas correctly interpreted the aforesaid Section 43A, which was notdone by the assessing officer as well as the appellate authority. The said Section reads as follows: 43A. Notwithstanding anything contained in any other provision of this Act,where an assessee has acquired any asset in any previous year from acountry outside India for the purposes of his business or profession and, inconsequence of a change in the rate of exchange during any previous yearafter the acquisition of such asset, there is an increase or reduction in theliability of the assessee as expressed in Indian currency (as compared to theliability existing at the time of acquisition of the asset) at the time of makingpayment – (a)towards the whole or a part of the cost of the asset; or (b)towards repayment of the whole or a part of the moneysborrowed by him from any person, directly or indirectly, in anyforeign currency specifically for the purpose of acquiring theasset along with interest, if any,borrowed by him from any person, directly or indirectly, in anyforeign currency specifically for the purpose of acquiring theasset along with interest, if any, the amount by which the liability as aforesaid is so increased or reducedduring such prevsious year and which is taken into account at the time ofmaking the payment, irrespective of the method of accounting adopted bythe assessee, shall be added to, or, as the case may be, deducted from – (i)the actual cost of the asset as defined in clause (1) ofsection 43; orsection 43; or (ii)the amount of expenditure of a capital nature referred to inclause (iv) of sub-section (1) of section 35; orclause (iv) of sub-section (1) of section 35; or the amount by which the liability as aforesaid is so increased or reducedduring such prevsious year and which is taken into account at the time ofmaking the payment, irrespective of the method of accounting adopted bythe assessee, shall be added to, or, as the case may be, deducted from – (i)the actual cost of the asset as defined in clause (1) ofsection 43; orsection 43; or (ii)the amount of expenditure of a capital nature referred to inclause (iv) of sub-section (1) of section 35; orclause (iv) of sub-section (1) of section 35; or (iii)the amount of expenditure of a capital nature referred to insection 35A; orsection 35A; or (iv)the amount of expenditure of a capital nature referred to inclause (ix) of sub-section (1) of section 36; orclause (ix) of sub-section (1) of section 36; or (v)the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48,and the amount arrived at after such addition or deduction shall be taken tobe the actual cost of the asset or the amount of expenditure of a capitalnature or, as the case may be, the cost of acquisition of the capital asset asaforesaid: Provided that where an addition to or deduction from the actual cost orexpenditure or cost of acquisition has been made under this section, as itstood immediately before its substitution by the Finance Act, 2002, onaccount of an increase or reduction in the liability as aforesaid, the amount tobe added to, or, as the case may be, deducted under this section from, theactual cost or expenditure or cost of acquisition at the time of making thepayment shall be so adjusted that the total amount added to, or, as the casemay be, deducted from, the actual cost or expenditure or cost of acquisition,is equal to the increase or reduction in the aforesaid liability taken intoaccount at the time of making payment. Explanation: 1.- In this section, unless the context otherwise requires. –(a)“rate of exchange” means rate of exchange determined orrecognised by the Central Government for the conversion ofIndian currency into foreign currency or foreign currency intoIndian currency;(a)“rate of exchange” means rate of exchange determined orrecognised by the Central Government for the conversion ofIndian currency into foreign currency or foreign currency intoIndian currency; (emphasis supplied) (b)… … … Explanation: 2.-- … … …Explanation: 3.-“ 16. It would appear from the said Section that the rate of interest isnot only determined by the Central Government, but also recognisedby the Central Government. The recognition may come expressly orby necessary implication. In this case, the learned Tribunal found thatrecognition within the meaning of Section 43A of the Act, is deemed tohave been made as could be deduced from the following facts – (i)Budget Speech of Hon’ble Finance Minister, for 1992-93, dt.29.2.1992;(ii) RBI Circular AD (MA Series) Circular No.11, dt.29.2.1992; and (iii)RBI Circular AD (MA Series) Circular No.16, dt.17.3.1992. TheBudget Speech of the Hon’ble Finance Minister has been analysed bythe Tribunal and it was found that the market rate was to be recognizedas foreign exchange rate, in a transaction of this nature. Besides, boththe RBI Circulars are also in accordance with the speech of theHon’ble Finance Minister. The RBI has made it clear in the Circulardt.29.2.1992 that exchange rates permitted for transactions under the capital account will be at free market rate. In this case, the deferredloan scheme was approved by the RBI and while according theapproval, the RBI made it clear that the exchange rates permitted fortransaction under capital account are at free market rate. Thus, it isclear that during the period of the transaction, the Government hasrecognized the market rate. We think that the learned Tribunal hascorrectly upset the findings of both the authorities below andconcluded that it has to be necessarily held that the market rate ofinterest is the rate as defined in the said Section, and therefore theforeign exchange fluctuation at the market rate which would becertified by the authorised dealer in the foreign exchange has to beaccepted in order to decide the issue. This issue therefore wasdecided in favour of the assess correctly. 17. The next issue relates to relief under Sections 80HH and 80I ofthe Act. On fact, it has been established that the benefit under theaforesaid Sections is available to the assessee and this has beenaccepted in principle by the assessing officer as well as the appellateauthority. Thus, we find no justification in law, as correctly held by theTribunal, that why the different rate was made applicable for allowingbenefits under Section 80HH and Section 80I of the Act. The order ofpreference is really uncalled for. Both the deductions be givenconcurrently and the learned Tribunal correctly done so. Moreover, theabove issue was decided by the Tribunal in assessment year 1991-92in I.T.A. No.511/Hyd/95, dt.27.2.1997, basing on the Central Board ofDirect Taxes Circular in F.No.237/2/94-A&PAC-II, dt.30.5.1994. Theearlier decision has been followed by the Tribunal, and this ought tohave been followed by the two authorities below.18. The remaining issue, namely, disallowance of a sum ofRs.48,98,759/-, benefit under Section 80HH of the Act on account ofinterest being received from M/s.Neycer India Limited, which is anewly established industrial undertaking in a backward area isconcerned, the same cannot be granted and the Tribunal correctly held that this Section 80HH, if read carefully, allows benefit to a newlyestablished undertaking itself, but not by any person who is receivingany amount or income from that industrial undertaking. Therefore, thebenefit under the aforesaid Section cannot be granted to therespondent assessee under any circumstances, in respect of anyreceipt or money spent on account of M/s.Neycer India Limited. Theinterest burden of the assessee company on the loan funds advancedto M/s.Neycer India Limited cannot be excluded under Section 80HHof the Act. Therefore, this decision of the learned Tribunal iscontradictory to its own finding and the appeal is allowed to that extentin deleting the aforesaid amount. 19. The appeal is dismissed substantially and allowed to the extentindicated above. ________________________ K.J. SENGUPTA, CJ 19.7.2013 _______________________ G. ROHINI, J bnr [1]98 ITR 167