M/S.southern Petrochemical Industriescorporation Limited97, Mount Road, Guindychennai 600 032 v. The Deputy Commissioner Of Income Taxspecial Range Vichennai

In the High Court of Judicature at Madras Dated : 17.8.2007 Coram :- The Honourable Mr.Justice K.RAVIRAJA PANDIANandThe Honourable Mrs.Justice CHITRA VENKATARAMAN Tax Case (Appeal) Nos.648 to 651 of 2007 M/s.Southern Petrochemical IndustriesCorporation Limited97, Mount Road, GuindyChennai 600 032. .. Appellant Vs The Deputy Commissioner of Income TaxSpecial Range VIChennai .. Respondent TAX CASES (APPEALS) under Section 260A of the Income Tax Act againstthe order of the Income Tax Appellate Tribunal Madras 'B' Bench dated27.1.2006 made in I.T.A.No.1204,1205,1216 & 1217/Mds/01 for the assessmentyear 1993-94, 1994-95, 1995-96 and 1996-97 respectively, against the Orderin ITA.101/96-97,477/96-97,523/97-98,46/99-2000 respectively dt.23.5.0130.5.01 7 23.5.01 on the file of the Commissioner of Income Tax (Appeals)-V, Chennai and against the Order in PAN/GIR.No.47/031-CY-0851/16-5,AAACS.4668K/16.5 respectively dt.20.3.96, 11.12.96,12.12.97 & 12.3.99 onthe file of the Dy Commissioner of Income Tax Special Range-VI, Madras-34& on the file of Joint Commissioner of Income Tax Special Range, Chennai. For Appellant : Mr.Venkatanarayanan for Ms/.Subbaraya Aiyar JUDGMENT JUDGMENT OF THE COURT WAS DELIVERED BY K.RAVIRAJA PANDIAN,JThe appeals are filed by the assessee against the order of theIncome Tax Appellate Tribunal Madras 'C' Bench made in I.T.A.Nos.1204to 1207 /Mds/2001 dated 27.1.2006 The relevant assessment years are is1993-94, 1994-95, 1995-96 and 1996-97. T.C.(A) Nos.648 and 649 of 2007: 2. As the facts are one and the same in both the appeals exceptthe figures arrived at, the facts relating to the assessment year 1993-94as culled out from the statement of facts are stated as follows:- https://hcservices.ecourts.gov.in/hcservices/ The appellant is engaged in the business of manufacture anddistribution of chemical fertilizers and heavy chemicals. For theassessment year 1993-94 the appellant filed a return of income on30.12.1993 claiming a loss of Rs.10,72,53,977/-. Regular assessment underSection 143(3) was completed on 20.3.1996 determining the loss atRs.6,86,45,961/-. While making the assessment, the assessing officerdisallowed the depreciation claimed by the appellant at 15% of the floorarea of SPIC Centre building which was leased out. The assessing officerfurther disallowed the expenditure incurred for issuance of zero bond.Aggrieved against the order of assessment, the appellant filed an appealto the Commissioner of Income Tax (Appeals) who by his order dated23.5.2001 rejected the appeal and upheld the order of assessment. Theassessee filed further appeal to the Tribunal to have an order ofconfirmation of the orders of the lower authorities. The correctness ofthe said order of the Tribunal is canvassed by filing the present appealsformulating the following two questions of law. 1. Whether on the facts and in the circumstances of the case theAppellate Tribunal was right in law in holding that the income fromexploitation of the commercial asset should be assessed as 'income fromHouse Property ' and not as "Business income' and consequentially notentitled to depreciation on the portion of the building leased out ? 2. Whether on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in holding that the expenditureincurred in issuing 'Zeor bonds' to meet the working capital is capital innature and hence entitled to only 1/10th of the deduction ? 1. Whether on the facts and in the circumstances of the case theAppellate Tribunal was right in law in holding that the income fromexploitation of the commercial asset should be assessed as 'income fromHouse Property ' and not as "Business income' and consequentially notentitled to depreciation on the portion of the building leased out ? 2. Whether on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in holding that the expenditureincurred in issuing 'Zeor bonds' to meet the working capital is capital innature and hence entitled to only 1/10th of the deduction ? 3. Learned counsel appearing for the appellant submitted that thefirst question of law is covered against the appellant by the decisionof this Court in COMMISSIONER OF INCOME-TAX VS. CHENNAI PROPERTIES ANDINVESTMENT LTD.(2004) 266 ITR 685). In that case, the Division Bench ofthis Court after taking stock of almost all earlier cases on that issueincluding the Constitution Bench judgment of the Supreme Court in the caseof SULTAN BROTHERS PRIVATE LIMITED VS. COMMISSIONER OF INCOME TAX((1964)51 ITR 353) and the guidelines issued by the Supreme Court in the case ofUNIVERSAL PLAST LIMITED VS. COMMISSIONER OF INCOME-TAX ((1999) 237 ITR454) has ultimately held that although it was held by the ConstitutionBench in the case of Sultan Brothers ((1964) 51 ITR 353 (SC)), thatwhether a particular letting was business has to be decided in thecircumstances of each case and that each case has to be looked at from abusinessman's point of view to find out whether the letting was the doingof a business or the exploitation of his property by an owner, in all thecases, which have come before the Courts involving commercial orresidential buildings owned by the assessees, it has been held that theincome realised by such owners by way of rental income from the building,whether a commercial building or residential house, is assessable underthe head "Income from house property". The only exceptions are caseswhere the letting of the building is inseparable from the letting of the machinery, plant and furniture. In such cases it has been held that therental would not have been realised but for the letting out of themachinery, plant or furniture along with such building and therefore therental received for the building is to be assessed under the head of"income from other sources". 4. On the facts of the present case, it is clear that theappellant being owner of the property exploited the property by leasingout the same and realised the income by way of rent and such rental incomeis liable to be assessed under the head “income from house property”.Therefore, following the decision of this Court in the case ofCOMMISSIONER OF INCOME-TAX VS. CHENNAI PROPERTIES AND INVESTMENT LTD.(2004(266) ITR 685), the first question of law is answered against theassessee. 5. In respect of the second question of law, it is contendedthat the Circular No.56 dated 19[th] March 1971 issued by the Central Boardof Director Taxes inter alia says that the expenditure incurred on theissue of debentures is an admissible deduction in the light of thedecision of the Supreme Court in INDIA CEMENTS LIMITED VS. COMMISSIONER OFINCOME-TAX, MADRAS reported in (1966) LX ITR 52. The said circular wasthe subject matter of Delhi High Court in the case of COMMISSIONER OFINCOME-TAX VS. THIRANI CHEMICALS LIMITED reported in 290 ITR 196, whereinthe Delhi High Court has held that in view of the said circular of theCentral Board of Direct Taxes, the expenditure incurred on the issue ofdebenture was a permissible deduction. On the same reasonings, theexpenditure incurred by the assessee in this case in issuing Zero Bond hasto be allowed as a permissible deduction. 6. We heard the argument of the learned counsel for the assesseeand perused the materials on record. 6. We heard the argument of the learned counsel for the assesseeand perused the materials on record. 7. India Cements case (1966) LX ITR 52 was one in which theappellant atherein obtained a loan of Rs.40 lakhs from the IndustrialFinance Corporation secured by a charge on its fixed assets. Inconnection therewith, it spent a sum of Rs.84,633/- towards stamp duty,registration fees, lawyer's fees, etc., and claimed that amount asbusiness expenditure. The Supreme Court on the said facts held that theamount spent was not in the nature of capital expenditure and was laid outor expended wholly or exclusively for the assessee's business andtherefore available as a deduction under section 10(2)(xv) of the IndianIncome-tax Act, 1922. The Court further held that the act of borrowingmoney was incidental to carry on of business, the loan obtained was notan asset or an advantage of enduring nature, the expenditure was made forsecuring the use of money for a certain period, and it was irrelevant toconsider the object with which the loan was obtained. The Court furtherheld that where there is no express prohibition, an outgoing, by means ofwhich an assessee procures the use of a thing by which he makes a profit,is deductible from the receipts of the business to ascertain the taxableincome. It was further held that obtaining capital by issue of shares is different from obtaining loan by debentures. A loan obtained cannot betreated as an asset or advantage for the enduring benefit of the businessof the assessee. 8. The circular on which reliance has been placed is not placedbefore this Court. On the reading of the Delhi High Court judgment inCOMMISSIONER OF INCOME-TAX VS. THIRANI CHEMICALS LIMITED reported in 290ITR 196, it could only be seen that the Circular No.56, dated 19[th] March,1971 inter alia says that the expenditure incurred on the issue ofdebentures was an admissible deduction in the light of the decision of theSupreme Court in India Cements Ltd. Vs. CIT (1966) 60 ITR 52 (SC). Thecircular extends the logic underlying the said decision to cases where theexpenditure is incurred by the assessee by issue of debentures as was theposition in the case before the Delhi High Court. It could be seen fromthe Thirani Chemicals case that the circular specifically states theexpenditure incurred on the issue of debentures would be a permissiblededuction notwithstanding the introduction of Section 35D. It is relevantto state that even in the India Cements case referred supra, the SupremeCourt has held that obtaining capital by issue of shares is differentfrom obtaining loan by debentures. On the basis of that finding only, itappears that the circular would have been issued with reference to theexpenditure incurred on the issue of debentures. In the case on hand also,the assessee claimed a sum of Rs.3,80,000/- as expenses towards issuanceof debentures. Though the assessing officer has disallowed the expenses soclaimed, that was allowed by the Commissioner of Income-tax (Appeals) infavour of the assessee. 9. The contention of the appellant cannot be accepted for thefollowing reasons also: "Zero Bond is nothing but a bond that pays no interest while theinvestor holds it. It is sold originally at a substantial discount fromits eventual maturity value, paying the investor its full face value whenit comes due, with the difference between what he paid initially and whathe finally collected representing the interest he would have received overthe years it was held."(vide P.Ramanatha Iyer's Advanced Law Lexicon, 3[rd] Edition, 2005) 9. The contention of the appellant cannot be accepted for thefollowing reasons also: "Zero Bond is nothing but a bond that pays no interest while theinvestor holds it. It is sold originally at a substantial discount fromits eventual maturity value, paying the investor its full face value whenit comes due, with the difference between what he paid initially and whathe finally collected representing the interest he would have received overthe years it was held."(vide P.Ramanatha Iyer's Advanced Law Lexicon, 3[rd] Edition, 2005) 10. The assessing officer has recorded a finding that in thecourse of assessment proceedings, it was represented on behalf of theappellant that the income by issuance of zero bonds has been obtained forimplementation of new projects and reutilise the capital for futurerequirement of working capital expenditure. The assessing officerrejected the claim as new projects are being implemented with the capital,there would be enduring benefits accruable over the period of years, notrelating only to the current assessment year and allowed 1/10th of theexpenditure incurred for the current assessment year. 11. Before the Commissioner of Income Tax (Appeals), theappellant raised additional grounds and contended that the zero bonds areakin to debenture. Zero bonds has to be treated as a revenue expenditurein the light of the Supreme Court decision in the case of INDIA CEMENTSLIMITED reported in 60 ITR 52. The Commissioner of Income-tax (Appeals)distinguished the India Cements case on the facts of the present case byexplaining that the decision of India Cements case relates to the matterof allowability of business expenditure for raising loan on mortgage onfixed assets on items towards stamps, registration fees, lawyer fees,etc., and the decision is not in any way help the assessee in claiming theexpenses incurred in issuance of zero bonds. It is pertinent to note thatthough additional grounds have been take before the Commissioner ofIncome-tax (Appeals), the circular with which reliance has been made bythe assessee before this Court has not either been placed or argued beforethe first appellate authority or before the Tribunal. A furtheradditional factor against the appellant on this point is that theappellant itself treated the expenditure incurred in issuing zero bond onthe capital field and claimed deduction under Section 35-D which wasgranted by the assessing officer. Hence, the appellant cannot claimfurther deduction as revenue expenditure. Thus, the second question of lawis also answered against the appellant. 12. In the result, the appeals are dismissed. 13. For the assessment years 1995-96 and 1996-97, the appellantformulated the following questions of law: "1. Whether on the facts an din the circumstances of the case theAppellate Tribunal was right in law in holding that the income fromexploitation of the commercial asset should be assessed 'income fromHouse Property ' and not as "Business income' and consequentially notentitled to depreciation on the portion of the building leased out? 2. Whether on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in holding that the appellant is notentitled to deduction in respect of doubtful debts and advances that havebecome irrecoverable ? 3. Whether the Appellate Tribunal was justified in not appreciatingthat the provision made in respect of Non-performing Assets if notallowable as a bad debt is allowable as a business loss?" 14. As the facts are one and the same in both the appeals except thefigures arrived at, the facts relating to the assessment year 1995-96 asculled out from the statement of facts are stated as follows:- 2. Whether on the facts and in the circumstances of the case, theAppellate Tribunal was right in law in holding that the appellant is notentitled to deduction in respect of doubtful debts and advances that havebecome irrecoverable ? 3. Whether the Appellate Tribunal was justified in not appreciatingthat the provision made in respect of Non-performing Assets if notallowable as a bad debt is allowable as a business loss?" 14. As the facts are one and the same in both the appeals except thefigures arrived at, the facts relating to the assessment year 1995-96 asculled out from the statement of facts are stated as follows:- For the above assessment year, the appellant had debited toprofit and loss account a sum of Rs.8,92,000/- towards provision for badand doubtful debts. The assessing officer disallowed the provision byrectifying the intimation on the ground that the same was not written offin the books of account and assessment order was passed to that effectunder Section 143. Having been unsuccessful in the appeals before theCommissioner of Income-tax (Appeals), the assessee filed further appealbefore the Tribunal. The Tribunal relying upon a decision of CIT VS.MICROMAX SYSTEMS P. LTD., (2005) 277 ITR 409), rejected the same. Thecorrectness of the said order is canvassed by filing the present appeals. 15. The first question of law is covered against the assesseefor reasons stated in T.C.(A) No.648 of 2007 supra. 15A. In CIT VS. MICROMAX SYSTEMS P. LTD., (2005) 277 ITR 409, bytaking note of the amendment incorporated in Section 36(1)(vii), theDivision Bench of this Court held that no doubt prior to April 1989 evenif the debt had been written off it could be allowed as a "bad debt" ifthe assessee could establish that the debt had in fact become bad.However, after the amendment with effect from April 1, 1989, there is anadditional requirement in Section 36(1)(vii) namely that the "bad debt"should be written off as irrecoverable in the accounts of the assessee forthe previous year. Hence unless it is written off as irrecoverable in theaccounts, it cannot be allowed as bad debt. In view of the statutoryrequirement and in the light of the judgment above referred to, the secondquestion of law is covered by the decision against the assessee. 16. In respect of the third question of law, the counsel forappellant fairly submits that it does not arise for consideration as nosuch ground was taken rather argued before any of the authorities below.The same is recorded and rejected as it does not arise for consideration. 17. In fine, the appeals are dismissed. krr/usk Sd/-Asst.Registrar /true copy/ Sub Asst.Registrar To, 1. The Asst.Registrar, Income-Tax Appellate Tribunal, IIIrd Floor, Rajaji Bhavan, Besant Nagar,Chennai2. The Commissioner of Income-tax (Appeals) – V 121,Mahatma Gandhi Road, Chennai-34. 3. The Deputy Commissioner of Income-tax Special Range-VI, Chennai.4. The Joint Commissioner of Income Tax, Special Rang-VI, Chennai.RA(CO)dcp/11.9Tax Case (Appeal)Nos.648 to 651 of 2007