INCOME TAX APPELLATE TRIBUNAL- MUMBAI

ITA No.5020/Mum/2001 (assessment year 1998-99) and C.O. No. 120/MUM/2002.

P M Jagtap and S T M Pavalan, JJ.

Shri K C P Patnaik For the Appellant :
Shri J D Mistry, Shri Niraj Sheth & Shri Ronak G Doshi For the Respondents :

The order of the Bench was delivered by

P M Jagtap -This appeal is preferred by the Revenue against the order of the ld. CIT(A) -II, Mumbai dtd. 22-5-2001 and the same is being disposed of along with C.O. filed by the assessee.
2. In ground No. 1 raised in its appeal, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of Rs. 15,25,73,928/- made by the A.O. on account of expenses incurred by the assessee on VRS payments treating the same as of capital nature.

3. The assessee in the present case is a company engaged in the business of manufacture of pharmaceutical formulations and bulk drugs. The return of income for the year under consideration was filed by it disclosing loss of Rs. 30.24 crores under the regular provisions of the Act and income of Rs. 15.11 crores u/s 115 JA of the Income tax Act, 1961 (the Act). In the P&L account filed along with the said return, the following expenses aggregating to Rs. 15,25,73,928/- were debited by the assessee as extra ordinary expenses:-

4. During the course of assessment proceedings, the above expenses were examined by the A.O. and on such examination, he held that the payments made by the assessee company to its employees on account of gratuity and other terminal benefits not being for the single year services but pertained to the services rendered for several years, the same were not fully allowable in the year under consideration. As regards the VRS payments made by the assessee company to its employees, the A.O. held that the same were also not allowable as deduction in the year under consideration on the basis of following reasons given in the assessment order :

   (i) The VRS payment is a payment made by the employer to the employee to leave the services voluntarily. By such payments a large reduction in the wage bill in future years is effected. The extraordinary expenditure is not recovered in the year of its incurring, either by way of extra revenue or reduction in costs. What the VRS payment achieves is to make such basic alterations in the profit earning capacity of the company, or the very structure of the company, that its increased profitability for years to come is ensured. Thus this payment could be considered to be bringing into existence an asset of an enduring nature.

   (ii) The test of capital or revenue nature of expenditure is not to be judged by the test whether a capital asset has come into existence or not. An advantage of a capital nature would also mean that the expenditure to get such advantage is capital in nature.

   (iii) Even if an advantage of enduring benefit, if not an asset, is brought into existence by incurring certain expenditure, such expenditure is capital in nature……..”
The A.O. therefore disallowed the entire expenses of Rs. 15,25,73,928/- claimed by the assessee as extra ordinary expenses.

5. On appeal, the ld. CIT(A) held that the expenses incurred by the assessee on account of gratuity and other terminal benefits being revenue in nature and the same having been admittedly incurred by the assessee in the year under consideration when the concerned employees left their services, the assessee was eligible to claim the deduction thereof entirely in the year under consideration. As regards the VRS payments, the ld. CIT(A) held that the said payments did not create any advantage much less any advantage of enduring nature to the assessee as a result of the said payment since the assessee had lost the services of the employees who retired voluntarily. He held that the expenditure incurred on VRS payments thus did not result into creation of any asset or any advantage of enduring nature to the assessee and relying on the decision of Hon’ble Calcutta High Court in the case of Commissioner of Income-tax v. Assam Oil Co. Ltd. (1985) 154 ITR 647 (Cal), he deleted the disallowance made by the A.O. on account of VRS payments made by the assessee.

6. We have heard the arguments of both the sides on this issue and also perused the relevant material placed on record. It is observed that this issue is squarely covered in favour of the assessee inter alia by the decision of the Hon’ble Bombay High Court in the case of Commissioner of Income-tax v. Bhor Industries Ltd. (2003) 264 ITR 180 (Bom.) wherein it has been held that payments made under the Voluntary Retirement Scheme was the expenditure incurred by the assessee to save expenses and it was not referable to any income yielding asset. It was held that the said expenditure thus should be allowed in its entirety in the year in which it was incurred and the same could not be spread over a number of years. It was also held that the expenditure incurred by the assessee relating to Voluntary Retirement Scheme as well as on account of gratuity was revenue expenditure and the same was allowable as deduction in the year in which it was actually incurred. Respectfully following the said decision of the Hon’ble jurisdictional High Court, we uphold the impugned order of the ld. CIT(A) allowing the expenditure incurred by the assessee on VRS payments, gratuity payments and the payments on account of other terminal benefits and dismiss ground No. 1 of the Revenue’s appeal.

7. In ground No. 2, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of Rs. 21,70,43,477/- made by the A.O. on account of interest on loan taken by the assessee for its new glass factory at Jambusar in Gujarat.

8. In the year under consideration, the assessee company in addition to Pharma business and bulk drug business was also carrying on the glass business and the income from all these three activities was assessed in its hands as business income. All these three businesses were located at different places and in order to expand its glass business, the assessee company during the year under consideration set up and commissioned a new plant at Jambusar in Gujarat to manufacture glass bottles. The interest of Rs. 21.70 crores on loan taken for the investment made in the said plant up to the date of commencement of production was capitalized by the assessee in its books of account. In its computation of total income under the Income Tax Act, the said interest however was claimed by the assessee as deduction u/s 36(1)(iii) of the Act. In support of its claim, it was contended on behalf of the assessee before the A.O. that its pharma business, bulk drug business and glass business constituted a single indivisible business and since the new plant very much formed part of such a single composite business carried on by the assessee, the interest on loan taken for the said plant was allowable as revenue expenditure while computing its business income. In support of its contention, reliance was placed by the assessee inter alia on the decision of Hon’ble Supreme Court in the case of Veecumsees v. Commissioner of Income-tax (1996) 220 ITR 185 (SC) and that the Hon’ble Bombay High Court in the case of Additional Commissioner of Income-tax v. Aniline Dyestuffs & Pharmaceuticals P. Ltd (1982) 138 ITR 843 (Bom.). This contention of the assessee was not found acceptable by the A.O. and rejecting the same, he disallowed the impugned expenditure claimed by the assessee on account of interest for the following reasons given in the assessment order:-

   “(a) The interest which is capitalised in the assessee’s own books is part of the actual cost of the assets brought into existence. In view of the Explanation (8) to section 43(1) this is very clear from the Act itself. The various decisions relied on by the assessee where prior to or have not taken note of the said Explanation which is introduced with retrospective effect. As noted by the ITAT in the case of M/s. JCT Mills the interest once capitalised becomes part of the actual cost and loses the character of interest. There is no question of claiming the same u/s. 36(1)(iii). To reiterate, this is clear from Explanation 8 to section 43(1) as well as the Explanatory Notes presented in para 9.4 which clearly spell out the legislative intent.

   (b) In the specific facts and circumstances of the assessee’s case, the claim is a clear tax avoidance device. This is because the Gujarat Glass division has been spun off as a separate company. The shareholders meeting approving such spun off was held on 20-3-1998 before the end of the previous year in question. At the time of filing the return and making the claim, the assessee was well aware that Gujarat Glass had become a separate company. The result of the assessee’s claim if upheld is that the assets of the Jambusar division will come to the new company namely Gujarat Glass while the interest claim will be that Nicholas Piramal to be carried forward and set off against future profits of M/s. NPIL. This is a total anomalous and unacceptable situation.
   (c) Without prejudice to the above two factors which in my opinion are clinching and decide the issue, I would hold that there is no evidence of common management, control and intermingling of funds. As noted by the Calcutta High Court in the case of Dey’s Medical Stores Manufacturing Pvt. Ltd., the existence of the common balance sheet, common owner ship or common Board of Directors is not enough to establish the fact that the various units of the assessee company constituted the same business. The assessee has failed to establish that it meets the test of the same business. However I may reiterate this the third contention is by way of a foot note and in my opinion the first two grounds clinch the issue and the assessee is not eligible to claim the interest of Rs. 21 crores u/s. 36(1)(iii).”

9. The matter was carried before the ld. CIT(A) and it was submitted on behalf of the assessee before him that Explanation (8) to section 43(1) of the Act was not applicable to the issue involved in this case and the reliance of the A.O. on the said Explanation was clearly misplaced. It was contended that the said Explanation speaks of treatment to be given to interest paid after the asset is put to use and it was stipulated in this context that such interest should not be included in the actual cost of the asset. It was also contended that the new glass division was nothing but an expansion of the existing business of the assessee and therefore interest on loans borrowed for such expansion was allowable as deduction u/s 36(1)(iii) of the Act. It was submitted that although the Gujarat glass division was substantially spun off as a separate company and the assets of the said division went to the new company, both the old and new glass division were forming part of the existing business of the assessee during the year under consideration and interest payable in respect of the new glass division was allowable as deduction u/s 36(1)(iii) of the Act. It was also contended that there was overwhelming evidence in the case of the assessee to show that there was unity of control and management and intermingling of funds in all these units and interest relating to the one unit therefore was allowable as deduction in computing the business income of the assessee. The ld. CIT(A) found merit in the contentions raised on behalf of the assessee on this issue and deleted the disallowance made by the A.O. on account of interest after having satisfied that the new glass factory at Jambusar in Gujarat was nothing but expansion of the existing business of the assessee company.

10. We have heard the arguments of both the sides and also perused the relevant material on record. It is observed that the interest paid by the assessee on the loan borrowed for the purpose of its new glass factory at Jambusar in Gujarat was disallowed by the A.O. for the reasons given in para 9.1 of his order which are already extracted in para No. 8 of this order. At the time of hearing before us, the ld. D.R. has strongly relied on the said reasons and submitted that the ld. CIT(A) has not properly considered and appreciated these reasons given by the A.O. while deleting the disallowance made on account of interest. However, as rightly submitted by the ld. Counsel for the assessee, elaborate submissions were made on behalf of the assessee to meet all the objections raised by the A.O. while disallowing the interest and only after having been satisfied himself with the said submissions, the ld. CIT(A) allowed the claim of the assessee for the said interest holding that the new glass factory at Jambusar in Gujarat was nothing but the expansion of the existing business of the assessee company. As specifically noted by him in his impugned order, the objections raised by the A.O. in this regard were found to be untenable by him and the judicial pronouncements relied upon by the assessee support the claim of the assessee on this issue. In one of such decisions rendered by the Hon’ble Supreme Court in the case of Veecumsees (supra), the assessee carrying on the jewellery business had commenced the business of exhibition of cinema photographic films and interest on capital borrowed for constructing cinema theatre was held to be an allowable deduction u/s 36(1)(iii) of the Act by the Hon’ble supreme Court on the ground that business of jewellery and that of exhibition of films was a composite one. It was held that the loans had been obtained for the purpose of assessee’s business and the fact that the particular portion of the business for which the loans were obtained had been transferred or closed down did not alter the fact that the loans, when obtained had been for the purpose of the assessee’s business. In the case of CIT vs. Tata Chemicals Ltd. (2002) 122 Taxman 643 cited by the ld. Counsel for the assessee, the assessee company had set up different units at different places and deduction claimed on account of interest on capital borrowed for setting up a fertilizer plant in the state of U.P. was disallowed by the A.O. on the ground that the said unit was situated at different place and there was no functional integrity, common accounts or organic unity. The Tribunal however allowed the deduction claimed by the assessee on account of interest u/s 36(1)(iii) after having found that the administrative and management of funds of all the units was common and there was a functional integrity between these units. The Hon’ble Bombay High Court upheld the decision of the Tribunal and dismissed the appeal of the Revenue on this issue. Keeping in view the ratio of the decision of Hon’ble Supreme Court in the case of Veecumsees (supra) as well as that the decision of the Hon’ble Bombay High Court in the case of Tata Chemicals Ltd. (supra) and having regard to the facts of the case, we are of the view that the ld. CIT(A) was fully justified in allowing the claim of the assessee on interest paid on capital borrowed for the purpose of new glass factory set up by the assessee at Jambusar in Gujarat which was nothing but expansion of the assessee’s existing business. In that view of the matter we uphold the impugned order of the ld. CIT(A) on this issue and dismiss ground No. 2 of the Revenue’s appeal.

11. Ground No. 3 & 4 raised by the Revenue in its appeal read as under:-
   “3. Erred in accepting the assessee’s devise of not claiming depreciation in respect of assets taken over on amalgamation of BMIL and MPIL ignoring omission of the provisions of section 34 (1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 243 ITR 56 which pertains to the period prior the omission of the section;

   4. Erred in accepting the assessee’s devise of not claiming depreciation on the assets of PHL taken over on amalgamation ignoring omission of the provisions of section 34(1) of the I.T. Act w.e.f. 1-4-1988 relying on the Supreme Court judgment in the case of Mahindra Mill reported in 243 ITR 56 which pertains to the period prior the omission of the section.”

12. After considering the rival submissions and perusing the relevant material on record, it is observed that an identical issue was involved in assessee’s own case for A.Y. 1997-98 and the Tribunal vide its order dtd. 16-05-2012 passed in ITA No. 4602/Mum/2001 has decided the same in favour of the assessee after recording all the relevant facts as well as the submissions of both the sides and decision rendered thereon in para No. 22 to 28 which read as under:-

   “22. Gr.No.2 raised by the Revenue reads as follows:
   “2. Erred in a accepting assessee’s device of not claiming depreciation ignoring omission of the provisions of Sec. 34(1) of the I.T. Act w.e.f. 01/04/1988 relying on the Hon’ble Supreme Court judgment in the case of M/s. Mahindra Mills Ltd. reported in 243 ITR 56 which pertained to the period prior to the section’s omission.”

   23 As already seen BMIL merged with the assessee company as per the scheme of amalgamation w.e.f. 1/4/96. The assessee has claimed depreciation on the assets taken over as part of the merger. The AO noticed from the schedule of depreciation furnished by the assessee that depreciation was being claimed on the WDV without adjusting for depreciation allowable for A.Y.s 1995-96 & 1996-97 in the hands of erstwhile BMIL. The erstwhile BMIL did not opt to claim depreciation for the assessment years 1995-96 & 1996-97 although assets have been used in the business carried on by BMIL during those years. The AO was of the view that depreciation is not available to the assessee on the WDV without taking into consideration the allowable depreciation on the use of the assets during the assessment year 1995-96 & 1996-97 by BMIL. Depreciation charge being in the nature of a deduction for wear and tear of the assets, it was mandatory that depreciation is charged to arrive at the correct income for any given year. The AO referred to the decision of the Hon’ble Bombay High Court in the case of M/s. Premier Automobiles Ltd. 206 ITR 001(Bom), wherein it was held as follows:

       “Under section 32 of the Act, the assessee is entitled to allowance of depreciation. It is for him to claim the same. If he does not claim the same or wants to forgo the same, he is free to do so. This judgement does not say anything about carry forward of depreciation which has not been claimed by the assessee in the particular year. So far as the current year’s depreciation is concerned, it is for the assessee to claim the same or not to claim the same. If he does not claim it, he loses the depreciation. There is no question of any depreciation allowable for that year and in that event the question of any unabsorbed depreciation of that year will not arise. This decision, however, cannot be carried any further to contend that the assessee is free not to claim depreciation in the year to which it pertains but carry forward the same to the subsequent year or years as it likes.”

   It was further held that:
       “what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year u/s. 32(2) of the Act. In other words, an assessee who des not claim deduction for the depreciation allowable to him u/s. 32 of the Act in the particular year loses it once for all.”

   Accordingly, the WDV in respect of the assets belonging to erstwhile BMIL was adjusted (by reduction of the WDV) for the foregone depreciation for A.Y’s 1995-96 & 1996-97.

   24. On appeal by the Assessee, the CIT(A) held that depreciation on the WDV as claimed by the Assessee on the assets in question should be allowed. The CIT(A) held that the AO was not correct in reading the judgment of the Hon’ble Bombay High Court in the case of Premier Automobiles (supra) as laying down a limitation that notional allowance has to be reduced from the WDV to arrive at the WDV of the subsequent year. The CIT(A) also found that the decision of the Hon’ble Supreme Court in the case of Mahindra Mills Ltd. (supra) clearly lays down the proposition that WDV has to be arrived at only after reducing depreciation actually allowed and in a case where the Assessee has not claimed depreciation it cannot be said that it was notionally allowed. Aggrieved by the order of the CIT(A) the revenue has raised Gr.No.2 before the Tribunal.
   25. We have heard the rival submissions. We are of the view that the order of the CIT(A) has to be upheld. The Hon’ble Supreme Court in CIT Vs. Mahendra Mills (2000) 159 CTR (SC) 381 has laid down that the assessee is entitled to exercise his option even through the filing of revised return and that option cannot be denied to him nor can depreciation be thrust on the assessee against his willingness. It was held that until a claim is made for allowing deductions of the nature covered under s. 32 along with necessary particulars, there would hardly be any occasion for the ITO to ‘allow’ any ‘claim’. Two conditions – the making of a claim and the furnishing of particulars – have been read as cumulative conditions by the Hon’ble Supreme Court in Mahendra Mills (supra). If either of the two conditions are not fulfilled the AO cannot force the depreciation allowance on the assessee. It further follows logically that in the absence of a claim by the assessee the allowance cannot be thrust upon him even if the particulars are available to the AO. Therefore, the mere fact that the assessee before us did not make a claim for depreciation places a fetter upon the powers of the AO t allow depreciation.

   26. The contention of the Revenue was that after 1st April, 1988, the condition of furnishing the particulars required by subsec. (1) and (2) of s. 34 has been done away with and that has altered the effect of the judgment in Mahendra Mills (supra). It is difficult to uphold the contention because not only has the Supreme Court viewed the conditions as cumulative, but more importantly, they have viewed the claim for depreciation as something over which the AO has no control and is the choice of none else than the assessee. It would be proper to understand the judgment as also laying down, impliedly, that if there is no claim of depreciation by the assessee, that should be an end of the matter. Therefore, the judgment also lays down in principle that irrespective of whether the statute requires the furnishing of the particulars are not, if there is no claim for depreciation, it cannot be allowed by the AO. The debate, therefore, as to whether the omission of s. 34(1) and (2) and r. 5AA of the IT Rules would change the position prima facie appears to be academic but since it has been raised and that question has also been answered by Mahendra Mills (supra) we proceed to decide the same. The following observations of the Supreme Court in this regard clinch the issue in favour of the position that despite the omission of the above sub-sections of s. 34 and the rule, still depreciation allowance cannot be thrust upon the assessee in the absence of a claim:

       ‘The language of the provisions of ss.32 and 34 is specific and admits of no ambiguity. Sec.32 allows depreciation as deduction subject to the provisions of s. 34. Sec. 34 provides that deduction under section shall be allowed only if prescribe particulars have been furnished. We have seen r. 5AA of the Rules which though since deleted provided for the particulars required for the purpose of deduction under s. 32. Even in the absence of r. 5AA, the return of income in the form prescribed itself requires particulars to be furnished by the assessee and no claim for the depreciation has been made in the return. The ITO in such a case is required to compute the income without allowing depreciation allowance. The circular of the Board, dt. 11th April, 1955, is of no help to the Revenue. It imposes merely a duty on the officers of the Department to assist the taxpayers in every reasonable way, particularly, in the matter of claiming and securing relief. The officer is required to do no more than to advise the assessee. It does not place any mandatory duty on the officer to allow depreciation of the assessee does not want to claim that. The provision for claim of depreciation is certainly for the benefit of the assessee. It if does not wish to avail that benefit for some reason, benefit cannot be forced upon him. It is for the assessee to see if the claim of depreciation is to his advantage. Rather the ITO should advise him not to claim our view in the spirit of the circular, dt. 11th April, 1955. Income under the head ‘profits and gains of business or profession’ is chargeable to income-tax under s. 28 and that income under s. 29 is to be computed in accordance with the provisions contained in ss. 30 to 43A. The argument that since s. 32 provides for depreciation if has to be allowed in computing the income of the assessee cannot in all circumstances be accepted in view of the bar contained in s. 34. If s. 34 is not satisfied and the particulars are not furnished by the assessee, his claim for depreciation under s. 32 cannot be allowed. Sec. 29 is thus to be read with reference to other provisions of the Act. It is not in itself a complete code.’

   27. The Supreme Court has observed that even in the absence of the rule, since the return form itself prescribes particulars to be furnished in support of the claim of depreciation, the allowance can be granted on if the assessee makes a claim and the particulars required in the return form are furnished. The ratio of the observations is that in order to obtain an allowance or deduction, it is necessary for the assessee to make a claim and also support it by necessary particulars or evidence. Therefore, the contention on behalf of the revenue that after the omission of subsec. (1) and (2) of s. 34 and r. 5AA w.e.f. 1st April, 1988, depreciation has to be mandatorily claimed cannot be accepted. It is further seen that Expln. 5 to 32 was introduced by the Finance Act, 2002 w.e.f 1-4-02 and it provides as follows:

       Explanation 5. – For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income;

   Thus, it can be safely said that omission of section 34 has not affected the assessee’s choice to claim depreciation allowance. This choice is, however, expressly taken away by insertion of Explanation 5 in section 32 with effect from 1st April, 2002, from assessment year 2002-03 onwards. In CIT Vs. Sree Senhavalli Textiles (P) Ltd., 259 ITR 77 (Mad), the Hon’ble Madras High Court has held that though after judgment was rendered by the apex Court in CIT Vs. Mahendra Mills [2000] 159 CTR (SC) 381: [2000] 243 ITR 56 (SC), Expln. 5 was inserted in s. 32(1) by the Finance Act, 2001, w.e.f. 1st April, 2002, declaring that ‘for the removal of doubts’ the provisions of sub-s (1) will apply whether or not the assessee claims deduction in respect of depreciation in computing his total income, that Explanation cannot be regarded as taking away the effect of the judgment of the Supreme Court for the years prior to the date of introduction of the Explanation. The law declared by the Supreme Court cannot be regarded as having merely raised doubts. The interpretation of the relevant provisions of the Act by the apex court settles the law, and unless the subsequent amendment to the statute is expressly given retrospective effect, the law laid down by the apex court will remain the binding law for the period to the amendment. The newly added Explanation takes effect only on and from 1st April, 2002, and will not be applicable for prior years. If claim made in the original return had been given up in the revised return, there was no obligation to consider the claim for depreciation.

   27. The Hon’ble Supreme Court in the case of Mahendra Mills (Supra) had made the following observations:

       “….Allowance of depreciation is calculated on the written down value of the assets, which written down value would be the actual cost of acquisition less the aggregate of all deductions "actually allowed" to the assessee for the past years. "Actually allowed" does not mean "notionally allowed". If the assessee has not claimed deduction of depreciation in any past year it cannot be said that it was notionally allowed to him. A thing is "allowed" when it is claimed. A subtle distinction is there when we examine the language used in section 16 and sections 34 and 37 of the Act. It is rightly said that a privilege cannot be to a disadvantage and an option cannot become an obligation. The Assessing Officer cannot grant depreciation allowance when the same is not claimed by the assessee.”

   28. In the light of the above observations of the Hon’ble Supreme Court, let us see the decision of the Hon’ble Bombay High Court in the case of Premier Automobiles (Supra). The question before the Hon’ble Court and the circumstances under which it arose were as follows:

       "Whether, on the facts and in the circumstances of the case, the assessee-company could lawfully claim the development rebate in priority to depreciation allowance prescribed under section 32 of the Income-tax Act, 1961, while computing its total income for each of the assessment years 1970-71, 1971-72 and 1972-73?"

   As is evident from the question, the controversy related to priority in the matter of set off of unabsorbed depreciation allowance and unabsorbed development rebate. The assessee had substantial amount of unabsorbed depreciation and unabsorbed development rebate which had been carried forward from year to year. The claim of the assessee was that as there was a time limit fixed under the Act for carrying forward of unabsorbed development rebate, it should be set off first against the current year's profit in the respective years and thereafter if any profit is left, the unabsorbed depreciation should be adjusted. According to the Income-tax Officer, under the scheme of the Act, the unabsorbed depreciation had to be adjusted first and then only, if any profits are left, the unabsorbed development rebate can be adjusted. Thus, the question was of priority between carried forward unabsorbed development rebate and unabsorbed depreciation in the matter of set off against the current year's profits. In the light of the above controversy, the Hon’ble Bombay High Court held as follows:

       “Thus, it is clear that what section 32 allows an assessee is the deduction by way of depreciation of an asset of an amount calculated as a percentage of the written down value thereof as may be prescribed. It is for the assessee to claim the same and furnish the requisite particulars. If the assessee does not claim the same, it cannot be allowed. But in that case, there will be no depreciation for that year which can be said to be unabsorbed to be carried forward to a subsequent year under section 32(2) of the Act. In other words, an assessee who does not claim deduction for the depreciation allowable to him under section 32 of the Act in the particular year, loses it once for all. He is not entitled to claim the same in a subsequent year though he will again be entitled in that subsequent year to claim depreciation for that year.”

   (underlining by us for emphasis).
   The AO has relied on the underlined portion of the judgment to hold that an assessee who does not claim deduction for depreciation allowable to him under section 32 of the Act in a particular year loses it once for all. The AO has overlooked the fact that the above observation are in the context of priority of claims for development rebate of depreciation under section 32 of the Act. In our view the above observation does not support the case made out by the A.O. We, therefore, uphold the order of the CIT(A) and dismiss the Ground No.2 raised by the assessee”.

13. As the issues involved in the year under consideration as raised in ground No. 3 & 4 of the Revenue’s appeal as well as all the material facts relevant thereto are similar to that of A.Y. 1997-98, we respectfully follow the order of the co-ordinate Bench of this Tribunal for A.Y. 1997-98 and uphold the impugned order of the ld. CIT(A) giving relief to the assessee on these issues. Ground No. 3 & 4 of the Revenue’s appeal are accordingly dismissed.

14. As regards ground No. 5, it is observed that the issue involved therein relating to assessee’s claim for depreciation on assets of bulk drug division of Sumitra Pharmaceuticals & Chemicals Ltd. is also squarely covered in favour of the assessee by the order of the Tribunal dtd. 16-5-2012 for A.Y. 1997-98 wherein a similar issue has been considered and decided by the Tribunal in favour of the assessee following its order for A.Y. 1996-97 wherein an identical issue was decided in favour of the assessee after recording all the relevant facts, submissions of both the sides and the decision thereon as under:-

   “ 3. As regards ground No.1 brief facts of the case are that the assessee company which is engaged in the business of manufacturing of pharmaceuticals products filed its return of income on 30/11/97 declaring a loss of Rs. 70,67,21,243/-. Subsequently, assessee filed a revised return of income on 30/3/98 revising the loss figure to Rs. 70,66,81,323/-. During the assessment proceedings u/s. 143(3), the AO noticed that during the relevant previous year the assessee company had taken over the bulk drug unit of M/s Sumitra Pharmaceutical & Chemicals Ltd. [SPCL] located near Hyderabad and that it is as per the scheme of arrangement approved by the shareholders of both the companies and also by the jurisdictional High Courts of both the companies. He further observed that as per the scheme of arrangement, appointed date for the take over was the first day of April 1995 and accordingly the assessee company has filed the return of income along with the consolidated balance-sheet and profit & loss account incorporating the result of the operations of the bulk drugs unit also. From the details filed along with the revised return of income, the AO observed that the assessee company has taken over the assets and liabilities of the bulk drugs unit at their estimated market value as on the appointed date after making all the necessary provisions for the appreciation, increase or efficiency, diminution in the value of any asset or for the anticipated short-fall in realization of any assets or for any dividend or other liability or obligation transferred to the assessee company in pursuant to the scheme of arrangement but not provided for in the books of SPCL. He observed that the assessee company claimed depreciation on the revalued figures of depreciable assets instead of the corresponding figures of the written down value in the books of SPCL as on 31-3-95. The AO asked the assessee company to explain as to how the depreciation under the Income Tax Act is allowable on the revalued figures. The assessee company submitted that all the assets and liabilities of SPCL have been taken over as per the scheme of arrangement approved by the Hon’ble High Courts of Andhra Pradesh and Bombay and as per clause-10 of the scheme, the company was required to record the assets taken over at their estimated market value and accordingly the valuation report of M/s Sabnis & Co., dated 20-12-95 was obtained and the assets have been revalued and the depreciation is accordingly claimed on the revalued figures. It was also submitted that the written down value of the assets in the hands of SPCL has no relevance to the cost of the same in the assessee company’s hands for the purpose of depredation allowance u/s.32 of the Act. it was stated that “cost” for the purpose of depreciation allowance should relate to the person who owns it and not with respect to his predecessor. In this connection, assessee placed reliance upon the following decisions:

   (a) CIT v. Solomon 1 ITR 324 [Rangoon High Court]
   (b) CIT vs. Groz Packert Saboo Ltd. 116 ITR 135 [S.C]
   (c) Francis Vallbhyar vs. CIT 40 ITR 426 [Mad]

   The AO, however, was not satisfied with the assessee’s explanation and held that the written down value of the depreciable assets in the hands of the previous owner is to be adopted as the value of assets in the hands of the assessee for the purpose of claim of depreciation. He, accordingly, reworked the depreciation allowable on the basis of written down value at Rs. 2,98,85,394/- as against the claim of the assessee of Rs. 11,48,96,238/-. Aggrieved, assessee filed an appeal before the CIT[A) who allowed the same holding that the cost of appreciation of the assets of the bulk drugs unit in the hands of the assessee was the market value of the assets entered into the books of the assesee on the basis of the valuation report as approved by the High Courts of Andhra Pradesh and Bombay and also by the shareholders of both the companies and, therefore, for the purpose of allowing depreciation this valuation is to be taken. Aggrieved by the same, the revenue is in appeal before us.

   5. The ld. DR strongly supported the order of the AO and submitted that the scheme of arrangement as approved by the High Courts of Andhra Pradesh and Bombay is only with regard to the transfer of assets and liabilities -and not with regard to the valuation of assets and liabilities as adopted by the two companies. According to him, the correctness or otherwise of the valuation of assets has not been gone into by the respective High Courts and therefore the valuation cannot be said to be genuine. Further, he submitted that the legislative intention as can be perused from various Explanations on “actual cost” incorporated in the Act is to allow depreciation on the original written down value of the depreciable assets even when the ownership is transferred unless actual cost can be directly determinable with reference to any specific asset. He placed reliance upon the following decisions in support of his contentions
   i. CIT vs. Poulose & Mathean Pvt. Ltd., 236 ITR 416 [Ker.]
   ii. Dalmia Ceramic Industries Ltd. vs. CIT, 277 ITR 219 [Del]
   6. The ld. counsel for the assessee, on the other hand, supported the order of the CIT[A] and reiterated the submissions made before the authorities below. He submitted that the assessee company is in no way related to SPCL and therefore the market value of the assets as approved by the Hon’ble High Courts of Andhra Pradesh and Bombay, being at arm’s length has to be adopted for the purpose of claiming depreciation thereof.

   7. Having heard both the parties and having considered their rival contentions, we find that sec.32 of the Income Tax Act provides for depreciation on tangible and intangible assets. It is also provided that in the case of block of assets, depreciation shall be allowed on the written down value thereof as may be prescribed.

   Explanation 2 to sub-sec.[1] of sec.32 provides that for the purpose of this sub section, “written down value of the block of assets” shall have the same meaning as in clause [c] of subsection [6] of section 43.
       Sub-section [6] of section 43 defines written down value to mean.
       (a) In the case of assets acquired in the previous year, the actual cost to the assesse;
       (b) In the case of assets acquired before the previous year, the actual cost to the assessee less all depreciation actually allowed to him under this Act, or under the Indian Income Tax Act, 1922 or any Act repealed by that Act, or under any executive orders issued when the Indian Income Tax Act, 1886 was in force
       (c) In the case of any block of assets
       [i] in respect of any previous year relevant to the assessment year commencing on the 1 day of April, 1988, the aggregate of the written down values of all the assets falling within that block of assets at the beginning of the previous year and adjusted.
       A………………………
       B………………………
       C………………………
       Explanation 1- When in a case of ‘succession in business or profession, an assessment is made on the successor under subsection [2] of section 170 the written down value of “any asset or any block of assets” shall be the amount which would have been taken as its written down value if the assessment had been made directly on the person succeeded to.

   Explanation 2.- Where in any previous year, ‘any block of assets is transferred, -
       (a) by a holding company to its subsidiary company. or by a subsidiary company to its holding company and the conditions of clause [iv] or, as the case may be, of clause [v] of section 47 are satisfied; or
       (b) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company,
       then, notwithstanding anything contained in clause [1], the actual cost of the block of assets in the case of the transferee company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.
   From the above provisions, it is clear that in the following cases the written down value of the assets or block of assets in the hands of the Transferor company has to be adopted for the purpose of. grant of depreciation in the hands of transferee company.
       (1) where the transfer of block of assets is by a holding company to the subsidiary company or by a subsidiary company to holding company;
       (2) by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company

   In all other cases clause [a] of sub-sec.[61 of sec.43 applies, i.e. the actual cost to the assessee. In the case before us the bulk drugs unit of SPCL was taken over by the assessee company. It is not the case of the revenue that it is the transfer of assets by a holding company to a subsidiary or by a subsidiary to the holding company or that it is a case of amalgamation. The AO has observed that the facts of the assessee’s case are in a sense akin to a case of full fledged amalgamation and that the scheme of arrangement has been designed in such a manner so as to escape the definition of amalgamation but the substantial conditions have been fulfilled. He also observed that it is obvious from the scheme that the shareholders of SPCL holding not less than 9/10th in value of shares have to be shareholders of MPIL and that all fixed depreciable assets are secured loans and unsecured loans and most of the current assets and liabilities have been taken over and what is left behind is only a husk of the corporate entity. He has held that a miniscule portion of the assets and liabilities are retained by SPCL and therefore the scheme is nothing but the amalgamation though it does not cover the definition of amalgamation u/s.2[B] of the Act. This observation of the AO cannot be accepted. To consider a transaction as amalgamation, there has to be a complete merger of one or more company with another company or merger of two or more companies to form one company in such a manner that all the properties and liabilities of the amalgamating companies become the properties or liabilities of the amalgamated companies as defined In subsec.[1B) of sec.2 of the Income Tax Act. From the above it can be observed that in the case of an amalgamation the amalgamating company looses its identity and independent existence. All the assets and liabilities also have to be transferred. In the case before us, the assessee company has taken over the assets and liabilities of only one division of SPCL and SPCL has not lost its identity or independent existence. Therefore, it does not satisfy the conditions of amalgamation as laid down under sub-sec.[1B] of sec.2 of the Act. Before the takeover of the bulk drug unit there is no connection whatsoever between the two companies and the market value of the block of assets has been arrived at as per the valuation report of M/s Sabnis & Co. Therefore, it cannot be said that it is not genuine or is not at arm’s length. In such a case, the written down value of the assets has to be the actual cost to the assessee. The decisions relied upon by the Id. DR are not applicable to the facts of-the case before us, as they are cases relating to transfer of assets by a subsidiary company to its holding company and incorporation of a partnership firm into a limited company. In view of the same, we do not see any reason to interfere with the order of the CIT[A] and this ground of appeal is rejected”.

15. As the issue involved in the year under consideration as raised in ground No. 5 of the Revenue’s appeal as well as all the material facts relevant thereto are similar to assessment years 1996-97 and 1997-98, we respectfully follow the orders of the co-ordinate Bench of this Tribunal for A.Y. 1996-97 & 1997-98 and uphold the impugned order of the ld. CIT(A) giving relief to the assessee. Ground No. 5 is accordingly dismissed.

16. In ground No. 6, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of Rs. 2,84,10,992/- made by the A.O. on account of expenditure incurred by the assessee on closure of its Thane factory.

17. The activity of manufacturing Comsat Forte tablets was carried on by the assessee at BMIL’s Thane plant which was forced to close down from September, 1996 as the tablets manufactured therein did not conform to the prescribed specifications and standards and the licence was cancelled by the Joint commissioner (Food and Drug Administration). Even after closure, certain expenses had to be incurred by the assessee in respect of Thane plant and such expenses incurred by the assessee on staff costs to the extent of Rs. 1,29,35,051/- and under other heads to the extent of Rs. 1,54,75,141/- were disallowed by the A.O. for the following reasons:-

   (“a) These expenses were not incurred to keep the business running but to close down one part of the business operations. The employees who were left at the Thane factory were not engaged in production of any other business activity. The expenses were also not incurred in connection with the relocated items of plant and machinery.

   (b) The decision of the Gujarat High Court in the case of Nathalal Asharam Vs. CIT (194 ITR 110) supports disallowance of such closure expenses. In this case allowability of deduction of Rs. 74,500/-, being the amount set-apart for compensation intended to be paid to retrenched employees consequent to closure of the factory, came up for consideration. The court upheld disallowance of the expenditure relying on many cases, especially the decision of the Supreme Court in the case of Gemini Cashew Sales Corporation (65 ITR 643).”

The matter was carried before the ld. CIT(A) and it was submitted on behalf of the assessee before him that despite closure of the Thane plant, the business conducted there from had been shifted to other manufacturing units located elsewhere. It was contended that the business carried on at Thane plant thus was continued by the assessee at other places and the expenses in question, therefore, should be allowed. As regards the decision of Hon’ble Supreme Court in the case of Gemini Cashew Sales Corporation (supra) relied upon by the A.O., it was submitted on behalf of the assessee that the facts involved in the said case were altogether different inasmuch as the liability to pay retrenchment compensation had arisen for the first time after the closure of the business and it did not arise during the course of carrying on of the business. It was contended that the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair v. Commissioner of Incometax (2001) 247 ITR 178 (SC), on the other hand, was directly applicable to the facts of the assessee’s case as the assessee in the said case was running ten cashew processing units as a single business and the compensation paid to the employees of four of the said ten units closed because of labour problems was held to be business expenditure by the Hon’ble Supreme Court allowable u/s 37 of the Act. It was held by the Hon’ble Supreme Court that for the industrial health of the business, all four units had to be closed by the assessee and hence the expenditure incurred for that purpose was business expenditure. It was submitted on behalf of the assessee that its unit at Thane was closed as a business necessity arising out of statutory compulsion and since the business carried on in the said unit was not discontinued but shifted to other places, the expenditure incurred in question was allowable u/s 37(1) of the Act. The ld. CIT(A) found merit in the submissions made on behalf of the assessee on this issue and directed the A.O. to allow the expenses in question incurred by the assessee in relation to the closed Thane plant holding that the ratio of the decision in the case of K. Ravindranathan Nair (supra) was squarely applicable to the facts of the assessee’s case.

We have heard the arguments of both the sides and perused the material. It is observed that this issue has been examined by the ld. CIT(A) in the light of submissions made on behalf of the assessee as well as the material available on record. As found by him on such examination, Thane unit was closed by the assessee as a business necessity arising out of statutory compulsion. As further found by him, the business carried on in the said unit was not discontinued but shifted to other places. Having taken note of these facts, the ld. CIT(A) held that the ratio of the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (supra) was clearly applicable to the facts of the assessee’s case and accordingly he directed the A.O. to allow the deduction claimed by the assessee on account of expenses pertaining to the closed Thane factory u/s 37(1) of the Act. At the time of hearing, the ld. D.R. has not been able to bring anything on record to controvert or rebut the finding of fact recorded by the ld. CIT(A) on this issue and this being so as well as keeping in view the decision of Hon’ble Supreme Court in the case of K. Ravindranathan Nair (supra), we find no infirmity in the order of the ld. CIT(A) giving relief to the assessee on this issue. The same is therefore upheld and ground No. 6 of Revenue’s appeal is dismissed.

In ground No. 7, the Revenue has challenged the action of the ld. CIT(A) in deleting the disallowance of interest to the extent of Rs. 1,32,44,720/- made by the A.O. by holding that the same was attributable to the investment made by the assessee in tax free bonds.

During the year under consideration, total investment of Rs. 38.32 crores was made by the assessee in shares, mutual funds and tax free bonds. In this regard, it was noted by the A.O. that out of the total funds available with the assessee during the relevant period, 56.94% were the borrowed funds. Applying the said ratio, he worked out the utilization of borrowed funds for making the said investment at Rs. 21.82 crores. Since the assessee’s average cost of borrowed funds was 6.05%, he worked out the interest attributable to the borrowed funds utilized for making tax free investment at Rs. 1,32,44,740/- and made a disallowance to that extent. Before the ld. CIT(A), it was submitted on behalf of the assessee that the entire investment in shares, mutual funds and tax free bonds was actually made by the assessee out of the issue of fresh capital at a premium made during the financial year 1993-94. The resolutions of the Board of Directors dated 19-11-1993 and 23-2-1994 along with the balance sheet of the assessee as on 31-03-1994 were filed by the assessee before the ld. CIT(A) in order to support and substantiate its stand. On perusal of the said documentary evidence, the ld. CIT(A) found that the entire investment in tax free bonds etc. was made by the assessee out of its own funds in the form of fresh capital on which no interest was payable and accordingly the disallowance made by the A.O. out of interest was deleted by him.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that specific finding has been given by the ld. CIT(A) in the impugned order on perusal of the relevant documentary evidence in the form of Board Resolution and the relevant balance sheet of the assessee that the entire investment in shares, mutual funds and tax free bonds was made by the assessee out of its own funds in the form of fresh share capital issued at premium on which no interest was payable. In our opinion, the said finding given by the ld. CIT(A), which has remained uncontroverted by the ld. D.R., is sufficient to show that the entire investment in tax free bonds was made by the assessee company out of own funds and there was no utilization of borrowed funds for making the said investment so as to warrant any disallowance on account of interest. We therefore find no infirmity in the order of the ld. CIT(A) deleting the disallowance made by the A.O. on account of interest and upholding the same, we dismiss ground 7 of Revenue’s appeal.

In ground No. 8, the Revenue has challenged the action of the ld. CIT(A) in deleting the addition of Rs. 10.60 crores made by the A.O. on account of debenture redemption reserve while computing the book profit u/s 115 JA of the Act.

In the original return filed by the assessee, book profit u/s 115JA of the Act was computed at Rs. 15,11,76,495/- which was subsequently recomputed by the assessee at Rs. 11,92,36,595/- in the revised return. During the course of assessment proceeding, the assessee filed a further revised computation of book profit showing the same at Rs. 8,58,23,427/-. In this regard, it was noted by the A.O. that the amount of Rs. 10.60 crores transferred to debenture redemption reserve was debited by the assessee in the P&L account. According to him, the said amount set aside for redeeming the debentures, which constituted loan of the assessee, was nothing but a reserve and the same therefore was liable to be added while computing the book profit being “the amounts carried to any reserve by whatever name called”. He held that the debentures when raised by the assessee company did not form part of its income and therefore the redemption of the same could not be allowed as deduction while computing the book profit u/s 115 JA of the Act. On appeal, the ld. CIT(A) held that the debentures was a loan liability of the assessee and any amount retained for repayment of such loan liability was not in the nature of reserve as held by the Hon’ble Supreme Court in the case of National Rayon Corporation Ltd. v. Commissioner of Incometax (1997) 227 ITR 764 (SC). As regards the stand taken by the A.O. that the debenture redemption reserve could not be allowed as deduction from book profit as the said debentures when raised did not form part of its income, the ld. CIT(A) held that this stand taken by the A.O. was contrary to the scheme of taxing book profit u/s 115JA of the Act. He accordingly held that the debenture redemption reserve amount debited by the assessee company to the P&L account was in the nature of the amount retained for providing an ascertained liability and it was deductible while computing the book profit as per the provisions of section 115JA of the Act.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. It is observed that the issue involved in ground No. 8 of the Revenue’s appeal is squarely covered in favour of the assessee by the order of the Tribunal dtd.16-05-2012 in assessee’s own case for A.Y. 1997-98 (supra) wherein a similar issue has been decided by the Tribunal in favour of the assessee holding that the amount of debenture redemption reserve debited to the P&L account was a provision and since the said provision was made for an ascertained liability, it was deductible while computing the book profit as per the provisions of section 115JA of the Act. Respectfully following the said decision of the coordinate Bench of this Tribunal in assessee’s own case for A.Y. 1997-98, we uphold the impugned order of the ld. CIT(A) deleting the addition of Rs. 10.60 crores made by the A.O. on account of debenture redemption reserve while computing the book profit u/s 115JA of the Act and dismiss ground No. 8 of the Revenue’s appeal.

In ground Nos.9,10 & 11, the Revenue has challenged the action of the ld. CIT(A) in deleting the additions made by the A.O. on account of VRS expenses amounting to Rs. 15,25,73,927/-, Thane factory closure expenses amounting to Rs. 3,50,36,634/- and loss on termination of lease amounting to Rs. 3,02,33,000/- while computing the book profit u/s 115JA of the Act.

The VRS expenses and Thane factory closure expenses debited by the assessee to the P&L account were added by the A.O. while computing the book profit u/s 115JA of the Act on the ground that the same were of capital nature which could not be allowed. As regards the loss on termination of lease debited to the P&L account, the A.O. held that the assessee company itself had agreed that the relevant leases were not genuine and losses arising out of such leases therefore could not be allowed as deduction while computing the book profit. On appeal, the ld. CIT(A) held that the VRS expenses and Thane factory closure expenses were debited by the assessee to the P&L account and even if they were capital in nature, the same could not be added back or disallowed while computing the book profit as per section 115JA of the Act. As regards the loss on termination of lease, the ld. CIT(A) held that even if the assessee had accepted under VDIS that the relevant lease agreements were not genuine, the loss arising on termination of such losses was real and the assessee having debited the same to the P&L account, it could not be added back or disallowed while computing the profit u/s 115JA of the Act. He therefore deleted the additions made by the A.O. of the above three amounts for the purpose of computing the book profit u/s 115JA of the Act.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. As agreed by the ld. representatives of both the sides, all the three issues raised in grounds No. 9,10 & 11 are squarely covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of Apollo Tyres Ltd. v. Commissioner of Income-tax (2002) 255 ITR 273 (SC) wherein it has been held as under:-

   “The Assessing Officer, while computing the book profits of a company under section 115J of the Income-tax Act, 1961, has only the power of examining whether the books of account are certified by the authorities under the Companies Act as having been properly maintained in accordance with the Companies Act. The Assessing Officer, thereafter, has the limited power of making increases and reductions as provided for in the Explanation to section 115J. The Assessing Officer does not have the jurisdiction to go behind the net profits shown in the profit and loss account except to the extent provided in the Explanation. The use of the words “in accordance with the provisions of Parts II and III of Schedule VI to the Companies Act” in section 115J was made for the limited purpose of empowering the Assessing Officer to rely upon the authentic statement of accounts of the company. While so looking into the accounts of the company, the Assessing Officer has to accept the authenticity of the accounts with reference to the provisions of the Companies Act, which obligate the company to maintain its accounts in a manner provided by that Act and the same to be scrutinised and certified by statutory auditors and approved by the company in general meeting and thereafter to be filed before the Registrar of Companies who has a statutory obligation also to examine and be satisfied that the accounts of the company are maintained in accordance with the requirements of the Companies Act. Sub-section (1A) of section 115J does not empower the Assessing Officer to embark upon a fresh enquiry in regard to the entries made in the books of account of the company”.

Respectfully following the decision of the Hon’ble Apex Court in the case of Apollo Tyres Ltd. (supra), we uphold the impugned order of the ld. CIT(A) deleting the addition made by the A.O. on account of VRS expenses, Thane Factory expenses and loss on termination of lease expenses while computing the book profit u/s 115JA of the Act and allow ground No. 9,10 & 11.

Now, we shall take up the C.O. of the assessee, ground No. 1 of which relates to the disallowance of Rs. 14,42,654/- made by the A.O. and confirmed by the ld. CIT(A) on account of community development expenses.

The following expenses incurred by the assessee during the year under consideration were claimed under the head community development expenses:-

The above expenses claimed by the assessee were disallowed by the A.O. holding that the same could not be considered as incurred wholly and exclusively for the purpose of assessee’s business. The ld. CIT(A) confirmed the said disallowances holding that there was no direct nexus between the assessee’s business and the community development expenses incurred by the assessee.

After considering the rival submissions and perusing the relevant material on record, it is observed that the ratio of the decision of Hon’ble Madras High Court in the case of Commissioner of Income-tax v. Madras Refineries Ltd. (2004) 266 ITR 170 (Mad.) cited by the ld. Counsel for the assessee is squarely applicable to this issue involved in the C.O. of the assessee. In the said case, the amount spent for bringing drinking water as also for establishing or improving the school meant for the residents of the locality in which the business was situated was held to be deductible by the Hon’ble Madras High Court. It was held by the Hon’ble Madras High Court that the concept of business is not static. It has evolved over a period of time to include within its fold the concrete expression of care and concern for the society at large and the people of the locality in which the business is located, in particular. Being known as a good corporate citizen brings goodwill of the local community, as also with the regulatory agencies and the society at large, thereby creating an atmosphere in which the business can succeed in a greater measure with the aid of such goodwill. Respectfully following the decision of the Hon’ble Madras High Court in the case of Madras Refineries Ltd. (supra) and having regard to the relevant facts of the present case, we hold that the community development expenses incurred by the assessee are allowable as deductible business expenditure u/s 37(1) of the Act. We therefore delete the disallowance made by the A.O. and confirmed by the ld. CIT(A) on this issue and allow ground No. 1 of cross objection of the assessee.

The issue raised in ground No. 2 of the assessee’s C.O. relates to the disallowance of Rs. 71,54,354/- made by the A.O. and confirmed by the ld. CIT(A) on account of provision for bad and doubtful debts.

The deduction claimed by the assessee on account of bad and doubtful debts was disallowed by the A.O. on the ground that creation of mere provision was not enough and the amounts should have been actually written off by crediting the same to the individual accounts of the debtors in order to satisfy the requirements of section 36(1)(vii) r.w.s. 37(2) of the Act. On appeal, the ld. CIT(A) confirmed the disallowance for the same reasons as given by the A.O.

We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The ld. Counsel for the assessee has contended that specific amounts were identified by the assessee as bad and doubtful debts and the relevant entries made by it in the books of accounts are sufficient to show that the bad debts were written off as required by the provisions of section 36(1)(vii) of the Act. In support of this contention, he relied on the decision of Hon’ble Supreme Court in the case of Vijaya Bank vs. CIT & Ano., (2010) 190 Taxman 257 (SC). The ld. D.R., on the other hand, submitted that the stand of the assessee needs verification in the light of the decision of Hon’ble Supreme Court in the case of Vijaya Bank (supra) and the matter therefore may be sent back to the A.O. for such verification. We find merit in the contention of the ld. D.R. Accordingly, this issue is restored to the file of the A.O. with a direction to decide the same afresh in the light of the decision of Hon’ble Supreme Court in the case of Vijaya Bank (supra) after verifying the relevant facts from record. Ground No. 2 of assessee’s C.O. is accordingly treated as allowed for statistical purpose.

The issue raised in ground No. 3 relates to disallowance of Rs. 1,72,900/- made by the A.O. and confirmed by the ld. CIT(A) on account of payments made to foreign technicians.

The expenditure claimed by the assessee on account of payments made to foreign technicians was disallowed by the A.O. as well as by the ld. CIT(A) on the ground that the corresponding services were rendered by the said foreign technicians during the financial year 1995-96. As specifically mentioned in the impugned order of the ld. CIT(A), bill for the said services was raised by the foreign technicians only on 1-4-1997 and the same thus was received by the assessee only in the year under consideration. We therefore agree with the contention of the ld. Counsel for the assessee that the deduction on account of payments to foreign technicians should justifiably be allowed in the year under consideration. Accordingly the disallowance made by the A.O. and confirmed by the ld. CIT(A) on this issue is deleted and ground No. 3 of assessee’s C.O. is allowed.

During the course of proceeding before the Tribunal, the assessee has raised an additional ground relating to its alternative claim that the expenditure incurred on repairs to building in A.Y. 1989-90 having been held to be capital in nature by the Tribunal, depreciation thereon should be allowed in the year under consideration.

After considering the rival submissions and perusing the relevant material on record, it is observed that a similar additional ground raised by the assessee in A.Y. 1997-98 claiming the depreciation on Rs. 13,73,793/- being amount capitalised in A.Y. 1989-90 out of repairs to building was admitted by the Tribunal vide its order dtd. 16-5-2012 (supra) and the A.O. was directed to grant depreciation as claimed in the said ground after verifying the capitalised value of the repairs to the building. Respectfully following the said order of the Tribunal, we admit the additional ground raised by the assessee in its C.O. and direct the A.O. to allow the depreciation as claimed by the assessee after verifying the exact value on account of repairs capitalised to the building account in A.Y. 1989-90.

In the result, appeal filed by the Revenue is dismissed while the C.O. filed by the assessee is allowed.

The order pronounced in the open court on 15.3.2013.