Mr.Justice KS Jhaveri - By way of this appeal under section 260A of the Income-tax Act, 1961, the appellant-revenue has challenged the order of the Income-tax Appellate Tribunal (hereinafter referred to as "the Tribunal") whereby the Tribunal has dismissed the appeal preferred by the revenue and confirmed the order of the Commissioner of Income-tax (Appeals).
2. While admitting the appeal, this court has framed the following substantial questions of law:
"(A) Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) deleting the disallowance of
Rs. 34,74,045/- made under section 36(1)(iii) being interest not charged by the assessee on the advance given to the associate concern?
(B) Whether the Appellate Tribunal is right in law and on facts in restricting the disallwoance of Rs. 1,03,88,194/- to Rs. 11,87,360/- out of preoperative expenses of new business?"
3. The assessee filed its return of income on 30.11.1997. The Assessing Officer completed the assessment under section 143(3) of the Income-tax Act, 1961. While finalizing the assessment, the Assessing Officer observed that the assessee had not charged interest on the advances given to associate concerns. He further observed that the interest was not proved to have been incurred for the purpose of business in accordance with section 36(1)(iii) of the Act. He, therefore, made disallowance of the claim of the assessee. Being aggrieved by the order of the Assessing Officer, the assessee preferred appeal before the Commissioner of Incometax (Appeals) who allowed the same. The revenue carried the matter in further appeal before the Tribunal. The Tribunal dismissed the appeal of the revenue.
4. The learned counsel for the revenue has contended that the expenses which are duly capitalized in the books of account of the assessee are being claimed as revenue expenses and the assessee has given interest free loans to its sister concerns even though there was no surplus fund available with it. Further, the assessee failed to prove that the interest incurred was for the purpose of business in accordance with section 36(1)(iii). Hence the Assessing Officer has disallowed interest expenditure of Rs. 34,74,048/- under section 36(1)(iii) of the Act.
4.1 So far as claim of pre-operative expenditure is concerned, the learned counsel for the appellant has taken us to the order of the Assessing Officer, particularly, paragraph No. 7.2 of the order which is reproduced as under:
"During the course of assessment proceedings the assessee was asked to justify the claim along with quantification thereof which was in the nature of preoperative expenses in respect of certain business/divisions which had not yet become functionally operational i.e. the commercial production has not yet commenced. In the reply filed on 19.2.99, the following explanation was given.
During the year under consideration your assessee company has incurred the total expenditure of Rs. 1,03,88,194.28 as per details given herein below:
Your assessee company relies upon the following grounds in order to claim the aforesaid expenditure at sr. No. 2, 3 & 4 aggregating Rs. 99,29,639/-
(i) It is a well settled proposition that the entries passed in the books of accounts cannot determine whether the expenditure is allowable or an income is taxable. The Income-tax Act is a self contained code and the provisions and principles as provided under the Act are to be followed while determining the allowability or taxability of expenditure or income respectively.
(ii) In accordance with the provisions of 37(1), the expenditure which is of the revenue nature is allowable under the provisions of the Income-tax Act. As may be observed from the above expenses, all the expenses are of revenue nature and pertaining to business of the company. Therefore, it should be allowed.
(iii)Your kind attention is drawn to the judicial decision in the case of Hindustan Machine Tools 175 ITR 212 (Kara). In the said case, the Karnataka High Court was faced with the question whether the revenue expenditure incurred by the assessee is in connection with its new division is deductible as business expenditure. The High Court laid down the following principles.
(a) Unity of Management:
If there is a unity of management for various divisions.
(b) Unity of Finance:
If there is a complete inter-lacing, interdependence and interconnection and financial management as whole.
(C) Unity of Administration:
If there is total integration and unity with common Directors at helm of the affairs of the divisions.
In all the above cases, there is total and complete unity, interlacing, interdependence and interconnection of management, financial and administrating aspects. Therefore, all the divisions would be considered to be one business and therefore, all the expenses incurred on all the divisions would be allowable as business expenditure."
4.2 The learned counsel for the appellant contended that the Assessing Officer after considering the explanation of the assessee and various decisions as well as the provisions of the Income-tax Act, disallowed the claim of the assessee.
4.3 The learned counsel for the appellant-revenue has further taken us to the findings of the Commissioner of Income-tax (Appeals). In paragraph No. 12.3(i) of the order, it is observed as under:
"I do not agree with the contention of the appellant that as it had incurred an expenditure incidental to carrying on business had to be granted under section 37 of the Income-tax Act. According to commercial expediency also, it was required to be deducted under section 37. In my view, expenditure of identical nature cannot be regarded as revenue expenditure for one purpose and capital expenditure for another. If an expenditure is capital for the purpose of working out depreciation, it cannot be regarded as revenue expenditure for other purposes. An expenditure of a capital nature would remain a capital expenditure for all purposes irrespective of the claim which the appellant may make. It is also seen that what is capital expenditure and what is revenue are not eternal verities but must needs be flexible so as to respond to the changing of economic realities of business. In my view section 37 of the Income-tax Act, 1961, is required to be construed liberally. The nature of expenditure in this section should be relatable only to the purposes mentioned therein. I agree with the contentions of the authorised representative of the appellant that as the appellant had incurred expenditure incidental to carrying on business had to be granted under section 37 of the Income-tax Act.
He has further observed that whether a particular expenditure is revenue expenditure or not has to be decided on well established principles. The test to be applied for finding out whether a particular expenditure is revenue expenditure or not is to find out whether the expenditure is so related to the carrying on or conduct of the business that it may be regarded as an integral part of the profit earning process. Any expenditure incurred for the acquisition of capital asset or a right of a permanent character or a benefit or advantage of an enduring nature should be treated as a capital expenditure.
He has further observed that the appellant has incurred various expenses as mentioned above by incurring all such expenses, it is seen that these expenses have not been incurred for the acquisition of capital asset or a right of permanent character or benefit or advantage of an enduring nature. It is also seen that these expenses were incurred for carrying on the business of integral part of profit earning process. Therefore, these expenses should be treated as revenue in nature, irrespective of entries in the books of accounts. Moreover, the ratio of CIT vs. Vallabh Glass Works Ltd. (1982) 137 ITR 389 (Guj.) is directly applicable in this case, whose decision is a binding decision for the officers working in Gujarat chares.
The Commissioner (Appeals) held that the Assessing Officer was not justified in disallowing the expenditure of Rs. 1,03,88,194/-. It is observed that all other expenses except Rs. 11,87,360/-, such as Rs. 4,58,500/-,
Rs. 64,53,450/- & Rs. 22,88,829/- were incurred for expansion of original business. However, Rs. 11,87,360/- was incurred for a new business of 'telecommunication' which is altogether a different business. Therefore, the expense of Rs. 11,87,360/- should be treated as preoperative expenses of a new business and balance expenses of Rs. 88,00,834/- should be allowed as revenue expenses in view of above discussion and the same is deleted."
4.4 The learned counsel for the appellant-revenue has contended that all the expenses have been incurred for the acquisition of capital assets and though all the observations are made in favour of the department, the Commissioner (Appeals) restricted the claim to Rs. 11,87,360/- which finding the Tribunal has upheld. Therefore, the order of the Commissioner (Appeals) and that of the Tribunal are required to be reversed.
5. The learned counsel for the assessee has contended that in view of the decision of this court in the case of Commissioner of Income-tax v. Raghuvir Synthetics Ltd. reported in 354 ITR 222 interest free loan given to the sister concerns is permissible and therefore, the Commissioner (Appeals) has rightly deleted the disallowance made by the Assessing Officer under section 36(1)(iii) of the I.T. Act. So far as the the second question regarding restriction of disallowance of Rs. 1,03,88,194/- to Rs. 11,87,360/- out of preoperative expenses of new business is concerned, this issue is covered by the decisions in the case of Kedarnath Jute Manufacturing Co. Ltd. v. Commissioner of Income-tax (Central), Calcutta reported in 82 ITR 363 (SC) and in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. v. Commissioner of Income-tax reported in 227 ITR172 (SC) and the decision of this court in the case of Commissioner of Income-tax v. Nirma Ltd., reported in 229 Taxman 535 (Gujarat) where at paragraph Nos. 13, 14, 15 the court has observed as under:
"13. At this stage, it is necessary to make a mention of the submissions made by learned senior standing counsel Shri Mehta that the Question in Tax Appeal No. 811 of 2013 pertains to interest on disallowance of Soda Ash Project whereas as far as the instant case is concerned, it relates to Soda Ash Project Expenses [other than interest expenses] and therefore, reliance of the Court while deciding such an issue on the decision of CIT v. Alembic Glass Industries Limited, 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Limited, 298 ITR 194 (SC) would have no bearing.
14. Learned senior advocate Shri Soparkar has empathetically urged that both the authorities in the earlier year and in the present year had held the issue in favour of the assessee pointing out that this expenditure was in connection of expansion of the existing business. The Court on elaborate discussion had confirmed such a view of these authorities, and therefore, the interest expenses or otherwise, would get covered for the same being an expenditure in connection with expansion of the business.
15. On due consideration of rival submissions, we notice at this stage that this Court, while adjudicating the said issue, had at length discussed the same to hold that the expansion since was of an existing business, the tests applied in case of CIT v. Alembic Glass Industries Limited, 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Limited, 298 ITR 194 (SC) would have relevance and the borrowings were whether capital or revenue expenditure would be of no consequence. Profitable it would be to reproduce these observations made in this respect, which reads thus -
"The sole surviving question No. 13, pertains to disallowance of soda ash project interest expenses of Rs. 3.33 crores (rounded off) and lab project interest of Rs. 12..27 crores (rounded off). The Assessing Officer, questioned the assessee on these expenses and deleted the same on two grounds, firstly that the interest was paid by way pre-operative expenditure and secondly the assessee had capitalized such expenditure.
The assessee carried the matter in appeal. CIT (Appeals) relying on a decision of this Court in the case of CIT v. Alembic Glass Industries Ltd., 103 ITR 715 (Guj) held in favour of the assessee. In addition to coming to the conclusion that there was commonality of business it was further held that the expenditure was in connection with the expansion of the existing business. On such ground, the expenditure was held allowable.
It is this order of the CIT (Appeal) which the Tribunal upheld in the impugned judgment.
Having heard the learned counsel for the parties and having perused the documents on record, we notice that CIT (Appeals) and the Tribunal concurrently came to the conclusion that there was interconnection, interlacing and inter-dependence of the management, financial and administrative control of various units of Nirma Limited. It was on this ground, the Tribunal held that the business in question is continuation of the existing business and not a new business. In this context, the decision relied on by the authorities below of this Court in the case of Alembic Glass Industries Ltd. (supra) laid down tests for ascertaining whether a business was part of existing business or the assessee was starting a new unit. It was held that merely because the unit was coming to a distant point by itself would not mean that it was a new business. If the facts as recorded by the CIT (Appeals) and the Tribunal can be said to have achieved finality, it would emerge that the assessee through its existing administrative mechanism started a new facility for production of soda ash and had also set up facility for production of a material called lab for its captive consumption for the purpose of its existing manufacturing business. It is no doubt that the assessee is engaged in the business of manufacture of soap and the soda ash and lab so produced is used by way of captive consumption. When such facts viewed in light of the findings of the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. (supra), in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing is capital or revenue expenditure would be of no consequence."
6. We have heard learned counsel for the parties. Taking into account the contentions of both sides and considering the decision of this court in the case of Commissioner of Income-tax v. Raghuvir Synthetics Ltd.(supra), interest free advances given to the sister concerns is permissible and therefore we are in agreement with the view taken by the Tribunal. In that view of the matter, we answer the first question in favour of the assessee and against the revenue. So far as the second question regarding pre-operative expenses is concerned, entry in the books of account under the Company law is not relevant and in view of the decision of this court in the case of Commissioner of Income-tax v. Nirma Ltd. (supra), the Tribunal has rightly upheld the decision of the Commissioner (Appeal). In that view of the matter, we answer the second question in favour of the assessee and against the revenue.
7. In the result, the appeal is dismissed.