The First Substantial Question Of Law In Both The Abovementioned Appeals Has Already Been Concluded By This Court On06.08.2008 Against The Revenue In View Of Th v. Corehealthcare Ltd., And Both The Appeals Were Admitted In Respect Of Thepooja Sharma2019.11.22 10:13I Attest To The Accuracy Andintegrity Of This Document

ITA No.408 of 2006 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA|AT CHANDIGARH Date of decision : 14.11.2019 1,ITA No.408 of 2006 (O&M) Commissioner of Income Tax-I, Ludhiana ...... Appellant VerTSU M/s Mukerian Papers Ltd., G.T. Road,Dhandari Kalan, Ludhiana ...... Respondent 2.ITA No.301 of 2005 (O&M) Commissioner of Income Tax-I, Ludhiana ...... Appellant VerTSU M/s Mukerian Papers Ltd., GIT Road,Dhandari Kalan, Ludhiana ...... Respondent CORAM: HON'BLE MR.JUSTICE AJAY TEWARTHON'BLE MRS.JUSTICEALKA SARIN 111 Present :Mr. Rajesh Katoch, Sr. Standing Counsel with|Ms. Pridhi Jaswinder Sandhu, Jr. Standing Counselfor the appellant. None for the respondent. 111 AJAY TEWARI, J. (Oral) 1.|This order shall dispose of two appeals bearing ITA No.408 of 2006 ( for the assessment year 1995-96 ) and ITA No.301 of 2005 ( forthe assessment year 1997-98), as according to learned counsel for therevenue, identical issues are involved therein. ITA No.408 of 2006 (O&M) 2 |In ITA No.408 of 2006 for the assessment year 1995-96, theRevenue raised the following substantial questions of law :- (1) Whether on the facts and in the circumstances of thecase, the Hon’ble Income Tax Appellate Tribunal wasjustified in deleting the addition of Rs.3,70,98,415/- onaccount of interest on borrowedfunds paidfor pre-operativeperiod used for purchase of machinery by ignoringexplanation & ofsection 43(1) ? (ii) Whether on the facts and in the circumstances of thecase, the Hon’ble Income Tax Appellate Tribunal wasjustified in allowing expenditure relating to the public issueof debentures u/s 37(1) of the I.T.Act by ignoring the factthat such expenditure is covered u/s 35D ofthe I.T.Act ?— 3.In ITA No.301 of 2005 for the assessment year 1997-98,substantial questions of law, raised by the Revenue are as under :-| (1) Whether on the facts and in the circumstances of thecase, the Hon’ble Income Tax Appellate Tribunal wasjustified in deleting the addition of Rs.2,43,90,432/- onaccount of interest on borrowedfunds paidfor pre-operativeperiod used for purchase of machinery by ignoringexplanation & ofsection 43(1) ? (ii) Whether on the facts and in the circumstances of thecase, the Hon’ble Income Tax Appellate Tribunal wasjustified in allowing expenditure relating to the public issueof debentures u/s 37(1) of the I.T.Act by ignoring the factthat such expenditure is covered u/s 35D ofthe I.T.Act ? 4.The first substantial question of law in both the abovementioned appeals has already been concluded by this Court on06.08.2008 against the revenue in view of the judgment of Hon’bleSupreme Court in Deputy Commissioner of Income Tax Vs. CoreHealthcare Ltd., and both the appeals were admitted in respect of thePOOJA SHARMA2019.11.22 10:13I attest to the accuracy andintegrity of this document ITA No.408 of 2006 (O&M) 3 second substantial question of law. (ii) Whether on the facts and in the circumstances of thecase, the Hon’ble Income Tax Appellate Tribunal wasjustified in allowing expenditure relating to the public issueof debentures u/s 37(1) of the I.T.Act by ignoring the factthat such expenditure is covered u/s 35D ofthe I.T.Act ? 4.The first substantial question of law in both the abovementioned appeals has already been concluded by this Court on06.08.2008 against the revenue in view of the judgment of Hon’bleSupreme Court in Deputy Commissioner of Income Tax Vs. CoreHealthcare Ltd., and both the appeals were admitted in respect of thePOOJA SHARMA2019.11.22 10:13I attest to the accuracy andintegrity of this document ITA No.408 of 2006 (O&M) 3 second substantial question of law. 5For brevity, the facts are being extracted from ITA No.408 of2006 pertaining to the assessment year 1995-96. Briefly stated, theassessee Company incurred an expenditure of Rs.1.65 crore on account ofpublic issue of equity shares accompanied with the public issue ofdebentures. The assessee apportioned the total expenditure of Rs.1.65crores between equity issue and debenture issue in proportion of thevalue. While the expenses in proportion to the equity capital werecharged u/s 35D of the Income Tax Act, 1961 and only 10% of suchexpenditure was claimed during the year, the entire expenses of Rs.78.88lacs, relating to debenture issue, were claimed as revenue expenditureduring the year. The Assessing Officer held that the expenses relating tothe issue of debentures will also be governed by the provisions of section35D of the Income Tax Act, 1961 (in short “the Act’) and only 10% ofsuch expenses would be allowed during the year. Therefore out of theexpenditure of Rs.78,88,250/- relating to the debenture issue , 10%amounting to Rs.7,88,825/- was allowed under the provisions of section35D of the Act and the balance amount of Rs.70,99,425/- was disallowedby the Assessing Officer. 6.Feeling aggrieved by the order of the Assessing Officer, theassessee filed appeal before the Commissioner of Income Tax(Appeals),who in view of the judgment of the Hon’ble Supreme Court in IndiaCements Ltd. Vs. CIT (60 ITR 52 ) and one C.B.D.T’s Circular No.56,held that the expenditure relatable to the public issues of non-convertibledebentures qualifies for deduction u/s 37 of the Act and the AssessingOfficer was directed to allow such deduction. The Commissioner of ITA No.408 of 2006 (O&M) 4 Income Tax(Appeals) further held that the deduction u/s 37 of the ActShould be allowed only in respect of such expenditure which is clearlyrelated to the issue of non-convertible debentures and for the specificpurpose of examining this, the issue was restored to the file of the A.O.for reconsideration. ToFeeling aggrieved by the order of the CIT(A), the revenuefiled appeal before the Income Tax Appellate Tribunal, challenging theorder of the CIT(A) wherein it was held that the expenditure on publicissue of non-convertible debentures is admissible u/s 37 of the Act asagainst the order of the AO considering such expenditure to be allowableu/s 35D of the Act. The assessee also challenged the order of the CIT(A)of restoring the issue to the AO with direction to verify the claim.However, the order of the CIT(A), of restoring the matter to the AO forlimited purpose of verifying the assessee’s claim of expenses relating tothe debentures issue, was set aside by the ITAT holding that there was nodispute regarding the quantum of expenditure pertaining to non-convertible debentures and the issue was only with regard to theallowability of the expenditure under section 37 of the I.T.Act, 1961against under section 35 of the Act as allowed by the AO. 8.As regards the finding of the CIT(A) that the expenditurerelatable to public issue of non-convertible debentures is to be allowed asdeduction u/s 37 of the Act, the said finding was upheld by the ITAT.While affirming the finding of the CIT(A), the ITAT, in Para 5 of itsorder, has recorded as under :- 8.As regards the finding of the CIT(A) that the expenditurerelatable to public issue of non-convertible debentures is to be allowed asdeduction u/s 37 of the Act, the said finding was upheld by the ITAT.While affirming the finding of the CIT(A), the ITAT, in Para 5 of itsorder, has recorded as under :- “. We have given our careful thoughts to the rivalsubmissions made before us and have perused the orders of the tax quthorities and the material available on record asalso various case law cited before us as well as before theCIT(A). In this case, the AO has equated non-convertibledebentures with the public issue of equity shares andallowed deduction u/s 35D, whereas the case law reliedupon by the assessee in the case of India Cements Ltd. andModi Industries (supra) specifically covers the issue underconsideration, as the apex court in India Cement vs. CIThas held that obtaining capital by issue ofshares is differentfrom obtaining loan by debentures and the Delhi High Courtin the case ofModi Industries (supra) has also held that theexpenditure for debentures issue for raising funds was to beallowed as revenue expenditure as unity of control was withthe same management and the new unit was_ thexpansion/extension of the business and not a new business.Apart from this, we have also paid our attention to theBoard’s circular No.56 which also supports the plea of theassessee. We therefore, considering the case law and thecircular of the Board are of the view that the expenditurerelatable to public issue of non-convertible debentures is tobe allowed as a deduction u/s 37 as the same 1s clearly laiddown for the purpose of business and the CIT(A) wasjustified in deleting thefindings of the AO in this regard and,therefore, do notfind any merit in the ground of revenue forboth the assessment years, 1.e., 1995-96 and 1996-97 in thisregard and reject the same.” OQ.We have heard counsel for the revenue, whose contention is that the judgments of the Hon’ble Supreme Court in India Cements Ltd. Vs. Commissioner of Income Tax, [ (1966) 60 ITR 0052 | and ofCommissioner of Income Tax Vs. Modi Industries, | (1993) 200 ITR0341 | pertain to the assessment years 1950-51 and 1965-66, respectivelywhereas section 35D was inserted in the Income Tax Act, 1961 with ITA No.408 of 2006 (O&M) 6 effect from 01.04.1971 and was applicable from assessment year 1971-72onwards and therefore had rightly been applied by the AO in the presentcase which pertained to assessment year 1995-96. The Ld. Counsel forthe revenue further argued that the expenses which come under the ambitof specific provisions of section 35D of the Act cannot be allowed underthe residuary provisions of section 37 of the Act. But the counsel for therevenue was unable to point out any perversity in the Central Board ofDirect Taxes’s Circular No.56 dated 19.03.1971, ( date inadvertentlymentioned as 19.03.1997 by the CIT(A) and ITAT ) which was reliedupon by the CIT(A) and the ITAT, and contains Explanatory Notes onvarious sections of Income Tax Act, 1961, including section 35D of theAct. Para 45 of the Circular, clearly addresses the issue, as under :- “45. It may be noted that the provisions for amortizationis not intended to supersede any other provision in theincome-tax law under which the expenditure is allowable asa deduction against profits. For instance, where a companywhich 1s already in business, incurs expenditure on issue ofdebentures, and such expenditure is admissible as adeduction against profits of the year in which it 1s incurredby virtue of the decision of the Supreme Court in the case ofIndia Cements Ltd. V. CIT (SC) [1966/ 60 ITR 52, s. 35Dwill not have the effect of bringing that expenditure withinthe scope of the expenditure to be amortized against profitsover a 10-year period. As a corollary to this, where anyexpenditure has been included for the purpose ofamortization under s. 35D on a claim being made by theassessee in that behalf, such expenditure will not qualify fordeduction under any other provision of the Actfor the sameor any other assessment year vide sub-s. (6) ofs. 35D.” ITA No.408 of 2006 (O&M) 7 10.The Ld. Counsel for the revenue could not point out anyillegality or perversity in the above mentioned C.B.D.T’s Circular and thereliance thereon by the appellate authorities below, which may warrantinterference by this Court. No question of law much less a substantialquestion of law arises in these appeals. ll.Consequently, finding no merit in the appeals, the same are hereby dismissed. 12.Since the main cases have been decided, the pending CivilMisc. Applications, if any, also stand disposed of, (AJAY TEWARITJUDGE 14.11.2019pooja sharma-l ( ALKA SARIN)JUDGE Whether speaking/reasonedWhether Reportable | Yes/NoYes/No