1. These are the appeals filed by the assessee and they relate to the assessment years 1977-78 and 1978-79 for which the previous years ended by 30-6-1976 and 30-6-1977, respectively.
2. The assessee is a company in which public are substantially interested. Some of the grounds are common in both these appeals and, hence they can be taken up together and disposed of by a common order.
3. Ground No. 1: The interest charged to the profit and loss account is Rs. 33,53,454 for the assessment year 1977-78. It includes interest paid on deposits of Rs. 20,32,696. The ITO applied the provisions of Section 40A(8) of the Income-tax Act, 1961 ('the Act') and disallowed interest thereon at 15 per cent. Such disallowed interest worked out to Rs. 3,04,904. For the assessment year 1978-79, the interest charged to profit and loss account was Rs. 35,22,595 which includes interest paid on deposits of Rs. 20,11,095. The disallowed interest at 15 per cent thereon under Section 40A(8) was Rs. 3,01,665. The assessee put forward the plea that because the assets of the assessee-company were hypothecated on 9-12-1980 as a security to the deposits received and under the terms of the hypothecation deed the hypothecation comes into effect from 1-7-1974, disallowance under Section 40A(8) cannot be made.
This contention was not accepted by the ITO for both the assessment years under consideration. According to him, the position as on the last date of the previous year relevant to both the assessment years under consideration is to be seen. He held that since the deed of hypothecation was executed only on 9-12-1980 and as it did not come into force on either of the last dates of the accounting years, the provisions of Sub-clause (ix) of Clause (b) of Section 40A(8) will not be available to the assessee. Thus, he had disallowed 15 per cent of interest over the deposits and added Rs. 3,04,904 to the income of the assessee-company for the assessment year 1977-78 and Rs. 3,01,665 for the assessment year 1978-79.
4. Aggrieved by the disallowances, the assessee went in appeal before the Commissioner (Appeals). The same plea which was put forward before the ITO was pressed into service before the Commissioner (Appeals). The learned Commissioner (Appeals) held that the ITO was correct. In his impugned orders, he observed: "The charge was created only long after the close of the accounting year. I am not able to appreciate the significance of the retrospective charge created in this case with effect from 1-7-1974, when all along the deposits stood unsecured between 1974 and December 1980." Therefore, he dismissed the appeals on this ground. Now the assessee-company is in second appeals before this Tribunal.
5. It is contended that the deed of hypothecation was executed on 9-12-1980. Under the terms of the said deed, it shall be deemed to come into effect from 1-7-1974. We are concerned with the previous years ended by 30-6-1976 and 30-6-1977. The contention on behalf of the assessee is that the deposits held by the assessee-company by those two dates should be deemed to have been backed by the mortgage security dated 9-12-1980, which had got the retrospective effect from 1-7-1974, and hence the deposits should be deemed to be secured deposits in which case the disallowance of 15 per cent interest due on them cannot be made under Section 40A(8). Explanation (b)(ix) which is as follows: (ix) as a loan from any person where the loan is secured by the creation of a mortgage, charge or pledge of any assets of the company (such loan being hereafter in this sub-clause referred to as the relevant loan) and the amount of the relevant loan, together with the amount of any other prior debt or loan secured by the creation of a mortgage, charge or pledge of such assets, is not more than seventy-five per cent of the price that such assets would ordinarily fetch on sale in the open market on the date of creation of the mortgage, charge or pledge for the relevant loan; The Ministry of Finance addressed a letter to the assessee-company on 1-11-1980 as a reply to the assessee's letter dated 25-9-1980. Copy of the letter is given at page 1 of the paper compilation. The letter discloses that the Government granted permission to the assessee-company under the provisions of the Capital Issues (Control) Act, 1947, for the creation of a charge ranking next to all other charges whether existing or to be created on fixed assets (other than immovable property), present and future, by the assessee-company and in favour of persons from whom the assessee-company had accepted/may accept deposits for one to three years, within the meaning of the Companies (Acceptance of Deposits) Rules, 1975. The outer limit of the deposits which can be accepted by the assessee-company, was put at Rs. 3,75,86,416 as it was found out to be the permissible amount as per the balance sheet of the assessee-company dated 30-6-1979. The letter further discloses that the authority given to the assessee-company should be used in 18 months period from the date of the letter, 1-11-1980. Condition No. (5) in the said letter shows that the authority conveyed is subject to the Companies (Acceptance of Deposits) Rules.
6. In pursuance of the authority granted, the assessee-company executed what is styled as 'Unattested memorandum of hypothecation' on 9-12-1980 in favour of the Central Bank Executor and Trustee Company Ltd. Copy of the hypothecation deed was furnished at pages 2-10 of the paper compilation. It was executed on Rs. 5 stamp paper. It was not registered. Clauses (4), (5)(i), (5)(ix) and) (5)(x) appear to be important for our purposes and, hence, they are extracted hereunder: (4) In pursuance of the said presents and for securing the due and proper repayment and discharge of the deposits including costs, charges, expenses, the remuneration payable to the trustee of these deposits and all other moneys due as aforesaid under these presents, the company doth hereby hypothecate and charge in favour of the trustee as and by way of second charge: All tangible movable property and fixed assets including all movable machinery and plant ...(hereinafter collectively referred to as 'the hypothecated assets') up to a sum of Rs. 3,75,86,416.** ** ** Further provided that the hypothecation/charge so created under these presents shall be deemed to be effective from 1-7-1974.
(5) In further pursuance of these presents and for the consideration aforesaid, the company doth hereby further agree, declare and covenant as follows: (i) The company shall enter into a suitable agreement with the Central Bank Executor & Trustee Co. Ltd. (Trustee) for the security in favour of the deposit holders on terms and conditions to be negotiated with the said trustee (hereinafter referred to as 'Articles of Agreement').
(ix) The security created under these presents will be valid until such time as the company repays all deposits accepted by it or to be accepted by it in future under the Companies (Acceptance of Deposits) Rules, 1975.
(x) The company shall be at liberty to cancel the security created under these presents after giving at least 30 days notice in writing to all the holders of the deposits and the trustee. Any deposit holder who objects to the cancellation of the security shall inform the company and the trustee in writing within 15 days of service of this intimation and shall be eligible to be repaid his deposit forthwith together with interest up to the date of repayment as applicable. On cancellation of the security, the company shall forthwith repay all deposits where the deposit holders have sought repayment as provided above. The cancellation will not be effective until such time as the company has repaid all deposits so required to be repaid to the satisfaction of the trustee.
As can be seen from page 1, the permission was granted subject to the provisions of the Companies (Acceptance of Deposits) Rules. The term 'deposit' is defined under the Companies (Acceptance of Deposits) Rules, under rule 2B. The said rule has got an Explanation given. The said Explanation is important for our purposes and it is as follows: Explanation: For the removal of doubts it is hereby declared that any deposit received or renewed by a company before the commencement of the Companies (Acceptance of Deposits) Amendment Rules, 1978, shall continue to be governed by the rules applicable at the time of such deposit or renewal as the case may be.
It is already known that the accounting years relevant for the two years under consideration closed by 30-6-1976 and 30-6-1977, respectively, which are much before the Companies (Acceptance of Deposits) Amendment Rules, 1978 came into force. The above rules came into force on 21-12-1978. Therefore, according to the clear terms of the Explanation, the terms of the deposits made and renewed by 30-6-1976 and 30-6-1977 should be governed by the terms and conditions agreed upon at the time of deposit or at the time of renewal, as the case may be. Therefore, it is obvious that for such deposits the benefits of the terms of mortgage deed dated 9-12-1980 cannot, under any circumstances, be applied or available. Further, the record in this case does not furnish to us any information as to whether the Central Bank Executor and Trustee Company Ltd. described as trustee in the mortgage deed dated 9-12-1980 was appointed trustee to all the deposit holders; if so, on which date and under what circumstances and purposes and what are the terms and conditions agreed upon between the assessee-company and the Central Bank Executor and Trustee Company Ltd. The so-called mortgage deed dated 9-12-1980 appears to be an unilateral document. Neither the Central Bank nor any of the depositors were parties to it. We do not know for a while whether the assessee at the time of inviting deposits agreed to offer security for the deposits or not. We also do not know what are the terms and conditions under which the deposits are made or accepted. Further, Article (5)(x) of the deed dated 9-12-1980 gives powers to the assessee-company to unilaterally cancel the so-called security created. Creating charge with retrospective effect and that too unilaterally is unknown to law and, in our opinion, such a document has no legal effect. So for the above reasons, we are of the view that the deposit holders with the assessee-company were not charge holders within the meaning of Section 40A(8), Explanation (b)(ix). Therefore, to our understanding the impugned deposits should be taken to be ordinary money deposits and not loans secured by the creation of mortgage, charge, pledge on any assets of the company. Hence, the disallowance of interest at 15 per cent on the aggregate amount of the deposits appears to us to be correct under law as well as on facts. Hence, the first of the grounds for both the assessment years fails.
7 to 17. [These paras are not reproduced here as they involve minor issues.) 18. Ground No. 10 in the appeal for the assessment year 1977-78 and Ground No. 9 in appeal for the assessment year 1978-79 raise a common question: whether Rs. 5,17,468 was disallowed as short-term capital loss without any basis. The question of short-term loss of Rs. 5,17,468 arises in the following circumstances. The assessee-company acquired 705 acres of land in S. No. 23 in Bhiwandi Tehsil of Thane District in Maharashtra State for purposes of setting up one of its units there.
The land was purchased on 10-11-1972 at a cost of Rs. 4,31,142. Roads were laid at a cost of Rs. 1,35,861 on this land. Subsequent to the purchase, the Maharashtra Private Forests (Acquisition) Act, 1975 'the Forest Act' was passed under the provisions of which all the private forests in Maharashtra automatically vested in the State Government with effect from the notified date. The concerned notification in this case was given on 29-8-1975. Pages 14-24 of the paper book filed on behalf of the assessee-company deal with this aspect of the matter. It can be seen from the record that representations both in writing and oral were made on behalf of the assessee-company to the Maharashtra Government claiming for exemption of the land in their occupation.
However, the Maharashtra Government issued orders in its Memorandum No.FLD/1076/124643-F-2, dated 20-4-1977, to the effect that the assessee-company should retain 81 acres of land in S. No. 23 of Lonad village and the remaining 624.14 acres shall vest in the State Government as reserved forest. Accordingly, the forest department had taken possession of the lands measuring 624.14 acres in S. No. 23 in village Lonad on 9-11-1977. Compensation as well as interest both amounting to Rs. 4,952.60 was determined by the State Government for having acquired 624.14 acres. The assessee-company, therefore, worked out the short-term capital loss of Rs. 5,17,468 in respect of these lands and claimed as deduction in the assessment year 1978-79. The ITO while finalising the assessment for 1978-79, disallowed the claim on the ground that the date of notification, viz., 29-8-1975, fell beyond the accounting period relevant to the assessment year 1978-79 and, therefore, held that the assessee-company was not entitled to deduction of short-term capital loss. The appeals for the assessment years 1977-78 and 1978-79 were taken up together for consideration by the learned Commissioner (Appeals). In these appeals the assessee-company contested the disallowance in both the assessment years inasmuch as the assessee-company had come up with the additional grounds for the assessment year 1977-78 on the basis of a petition dated 1-4-1982 filed before the learned Commissioner (Appeals). It is the contention of the assessee that if the capital loss could not be allowed in the assessment year 1978-79, it can as well be allowed in the assessment year since the date of notification (29-8-1975), fell in the accounting year relevant to the assessment year 1977-78. It is also argued that inasmuch as the final order of the Maharashtra Government quantifying the extent of the land acquired was passed only on 20-4-1977 the capital loss should be allowed only in the assessment year 1978-79. The learned Commissioner (Appeals) agreed with the contention of the ITO put forward before him that as far as the claim for capital loss in the assessment year 1977-78 is concerned, the said claim is belated and it cannot now be admitted in view of the decision of the Hon'ble Supreme Court in Addl. CIT v. Gurjargravures (P.) Ltd.  111 ITR 1. He disregarded the contention put forward on behalf of the assessee to the effect that the profit and loss account for the year ending 30-6-1976 will show the transaction despite the failure of the company to make the claim. On the grounds of equity, the ITO ought to consider the same in the assessment year 1977-78 if it was to be disallowed in the assessment year 1978-79. Reference was made to note 1 in page 15 of the printed balance sheet where the details of the acquisition by the Maharashtra Government are given. After going through the provisions of the Maharashtra Private Forests (Acquisition) Act, 1975, the learned Commissioner (Appeals) found that apparently it looks as though the assessee-company's land under consideration stood vested with the Government with effect from 29-8-1975 as per the effect of the provisions of Section 3(1) of the Forests Act. The learned Commissioner (Appeals), however, felt that the matter is not free from doubt in view of the provisions of Section 21 of the said Act under which the Government has power to declare in public interest any tract of land to be a private forest. The Commissioner (Appeals) felt that consequent upon the issue of notification by the State Government, it shall further issue notice to the owner of such tract of land to show cause why such declaration should not be made treating the tract of the land in his possession as private forest. The learned Commissioner (Appeals) found that in this case it is not clear from the record that under what provision the Maharashtra Government released 81(sic) acres of land to the assessee-company. If Section 3(1) of the Forests Act is entitled to have its full sway then the whole of the extent, viz., 705 acres, should be deemed to have been vested with the State Government on or from 29-8-1975 and in such case it is not clear, the learned Commissioner (Appeals) found, as to how the assessee-company can resume its control over 81 acres of land. If the title to the land vested with the State Government on or from 29-8-1975, the lands in question should be short-term capital asset as the date of their acquisition was 10-11-1972.
However, if the lands in question were considered to have been vested with the Government only as per the orders dated 20-4-1977 then the lands in question ceased to be short-term capital assets. The Commissioner (Appeals) ultimately felt that the assessee-company was not able to produce several data vital for decision on this subject. In the absence of such material facts, he was inclined to agree with the ITO that the claim for the assessment year 1978-79 is untenable. As far as the claim relating to the assessment year 1977-78 is concerned, the learned Commissioner (Appeals) held that it should fail as the claim cannot be allowed to be put forward at a late stage. Hence, on the above reasoning, the learned Commissioner (Appeals) rejected the claim of short-term capital loss both in the assessment years 1977-78 and 1978-79.
19. Now the assessee came up in second appeal against the said decision and raised a separate ground both in the assessment years 1977-78 and 1978-79. We heard both sides on this point. Under Section 3(1) all private forests vest in the State Government with effect from the appointed day. In this case the appointed day was 29-8-1975. Simply because there is a provision like Section 21, under which the State Government was given powers to declare in public interest any tract of land to be a private forest and before issuing a notification declaring that tract of land as private forest it should issue a show-cause notice to the owner of the land, does not, in our opinion, whittle down the effect of Section 3(1). Section 3(1) abolishes all private forests whereas Section 21 deals with any tract of land whose classification need not be a private forest. To our understanding, under Section 21 the Government can declare any waste land or a dry land or wet land or a pokharaba land as private forest land if it is in the public interest. Now as far as the land in question is concerned, at the time of its purchase it was a private forest land and so it has to be governed under the sweep of the provisions of Section 3(1). Every private forest land after the Forests Act came into force vested in the Government and the right, title and interest of the owner shall be deemed to have been extinguished. Therefore, the date on which the interest in the land in question vested with the State Government is 29-8-1975. So also, the date on which the ownership right of the assessee-company was extinguished over the whole of land of 705 acres is on 29-8-1975. The learned Commissioner (Appeals) seems to have been in a quandary to know under what provision of the Forests Act, the State Government granted or released 81 acres of land. In our opinion, this question would not have worried him inasmuch as after the Maharashtra State Government became the absolute owner of the land, it can grant any extent whatsoever to any person which it considers to be fit for the grant. The order of the Maharashtra Government dated 20-4-1977 should have been considered as an outright grant of land of 81 acres made by the State Government to the assessee-company. That has nothing to do with the abolition of the private forests or the vesting of erstwhile private forests in the State Government. Therefore, we have no reservations in our minds to come to the conclusion that the date on which the assessee-company lost title over the land was on 29-8-1975. Now the question remains whether such a claim is rightfully put forward for consideration of the learned Commissioner (Appeals) relating to the assessment year 1977-78. Admittedly, no specific ground was taken in this regard before the ITO and the assessee filed a petition dated 1-4-1982 before the learned Commissioner (Appeals) to admit an additional ground. The learned Commissioner (Appeals) held following the decision of the Supreme Court in Gurjargravures (P.) Ltd.'s case (supra) and agreeing with the ITO on this point that the said ground cannot be allowed to be raised at this late stage.
20. Now we shall consider whether this finding of the learned Commissioner (Appeals) is tenable. The decision of the Supreme Court in Gurjargravures (P.) Ltd.'s case (supra) is an authority for the proposition that no claim can be considered when either a ground is raised or any material is there to substantiate that ground already on record. By dint of the fact that the learned Commissioner (Appeals) applied the decision in Gurjargravures (P.) Ltd.'s case (supra) to the facts on hand would reveal that the claim was negatived because there was neither a ground nor material on record to substantiate that ground. If either of them was present, the decision in Gurjargravures (P.) Ltd.'s case (supra) does not apply. The learned Commissioner (Appeals) himself extracted the argument advanced on behalf of the assessee-company that there is sufficient material on record to entertain this ground. In para 41 the learned Commissioner (Appeals) extracted the argument as follows: The appellant's representative, however, pleaded that the profit and loss account for the year ending 30-6-1976 will show the transaction despite the failure of the company to make the claim on grounds of equity. The ITO ought to consider the same in the assessment year 1977-78 if it was to be disallowed in the assessment year 1978-79.
Reference was made to Note 1 in page 15 of the printed balance sheet where the details of the acquisition by the Maharashtra Government are given.
Thus, the truth of these assertions on behalf of the assessee-company was never denied by the learned Commissioner (Appeals). We are unable to agree with the learned Commissioner (Appeals) when he meant by his orders that there was no sufficient material on record to substantiate the claim. When the balance sheet as well as the profit and loss account of the assessee-company reveals all the necessary particulars of the acquisition, no other material is necessary to consider the claim. Therefore, in our opinion, as there is enough material already on record to entertain the claim even in the assessment year 1977-78, we hold that the learned Commissioner (Appeals) went wrong in dismissing the additional ground showing that it is filed at a late stage. According to us, the additional ground ought to have been admitted and ought to have been determined on merits. It is a pure question of law. We are of the view that we can ourselves dispose of the said question especially when there is no dispute with regard to basic facts concerning this question. We hold that the assessee-company lost title to the land (624.14 acres) on 29-8-1975 on the Maharashtra Government passing the Forests Act, and therefore, the assessee is entitled to claim short-term capital loss. As regards the amount of Rs. 1,35,861 spent towards laying of roads, we have to decide whether the roads form part of the plant or whether they are to be considered as buildings only. According to the latest Andhra Pradesh High Court decision in Coromandel Fertilizers Ltd., roads are considered to be an integral part of the plant if they are found laid in the factory premises and they are considered to be an essential part of the manufacturing unit of the assessee-company. This requires verification.
Therefore, for purposes of determining the amount of capital loss, the matter needs to be sent back to the ITO. The determination of the capital loss is restricted to the land which is lost by the assessee and it should be determined in the assessment year 1977-78. As regards the value of the roads, the ITO is directed to determine how far and to what extent terminal allowance can be allowed and to what extent the roads can be considered as plant or as a building and he is directed to give specific findings with regard to the above three aspects of the matter.