1. These are the cross-appeals which were heard together and are being disposed of by the common order for the sake of convenience. First we take up the Departmental appeal. The following grounds have been raised by the Revenue in this appeal : "1. Learned CIT(A)-XIV, New Delhi, has erred in law and on the facts in restricting the disallowance on account of travelling expenses to Rs. 1,06,864 as against Rs. 1,85,282 disallowed by the AO. 2. Learned CIT(A)-XIV, New Delhi, has erred in law and on facts in deleting the disallowance of depreciation amounting to Rs. 26,76,856 + Rs. 5,66,258 = Rs. 32,43,114 on addition to plant and machinery due to exchange rate fluctuation.
3. Learned CIT(A)-XIV, New Delhi, has erred in law and on facts in allowing deduction for expenditure pertaining to axle project to the extent of Rs. 1,16,16,792.
4. Learned CIT(A)-XIV, New Delhi, has erred in law and on the facts in allowing deduction of Rs. 45 lacs being the amount of alleged discount allowed.
5. The learned CIT(A) has erred in law and on the facts in allowing deduction of Rs. 33,89,393 on account of expenses incurred on issue of partly convertible debentures by way of right issue." 2. As far as grounds No. 1 to 3 are concerned, both the parties are agreed that the same are covered in favour of the assessee by the decision of the Tribunal dt. 23rd Feb., 2001, in assessee's own case for asst. yr. 1991-92, Therefore, following the same these are decided in favour of the assessee and against the Revenue.
3. Ground No. 4 deals with the disallowance of deduction of Rs. 45 lacs on account of discount. Briefly stated, the facts are that assessee is supplier of components to Maruti Udyog Ltd. It was maintaining the books of accounts on mercantile basis. According to the assessee, it had incurred a liability on account of discount of sales to Maruti Udyog Ltd. (MUL in short) in the year under consideration but the entry was made in subsequent year at the time of payment. In the original return no claim was made in this regard but such claim was made in the revised return. There is no discussion in the assessment order regarding this claim of the assessee. Accordingly, the same was agitated before the CIT(A). The CIT(A) asked the AO to offer his comments in respect of this ground. The AO vide letter dt. 5th Sept., 1995, stated that the assessee, in the computation statement filed along with the return had shown that the expenses pertained to next year. It was further stated by him that the claim of the assessee was not discussed in the assessment order as the expenses and also the liability to pay the discount was determined only in the previous year relevant to asst. yr. 1993-94. It was further opined by AO that the expenditure in the form of special discount provided to MUL was not in the regular course of their business and merely a devise to share the assessee's profit with MUL. Further, there was nothing on the record to show that the sales made to MUL were subject to any such conditions of providing special discounts, etc. Further, such special discount was neither paid in the past nor in future till date. Therefore, the alleged discount was nothing but application of its income. The report of the AO was confronted to the assessee. In reply, it was submitted that the discount pertained to the sales effected during the year ending 31st March, 1992, though paid in subsequent year. Since the mercantile system of accounting was followed, the deduction was allowable in the year under consideration. It was further stated by the assessee that the MUL was the most important customer and the negotiations for escalation in the price and discount on sale price were carried on and the final settlement was reached at the end. of the year. It was also submitted that the price escalation, of Rs. 6,06,88,567 pertaining to the current year's sale was included by the assessee in the total sales by crediting the P&L a/c. Further, the discount allowed on sales was adjusted by MUL from the amount of escalation claimed of the current year in the next year. It was further submitted that Government of India had 50 per cent shareholdings in MUL and, therefore, no doubt could be raised about the genuineness of the payments. Accordingly, it was prayed that the disallowance made by AO should be deleted since the liability had been incurred in the year under consideration.
4. The CIT(A) examined the details furnished by the assessee before him. It was noticed by him that the escalation charges to the extent of Rs. 6,06,88,567 were included in the total sales as per the P&L a/c. It was also noticed that on 29th March, 1992, the assessee had offered a one time lump sum discount of Rs. 42.5 lacs and the same was again increased to Rs. 4 (sic-45) lacs on 31st March, 1992. Further, M/s MUL had also certified that the special discount of Rs. 45 lacs was agreed to be given by the assessee vide letter dt. 31st March, 1992, for the financial year 1991-92 and the same was deducted by them while settling their price escalation claim. In view of such material, it was held by the CIT(A) that claim of assessee should be allowed since the liability had crystallized during the previous year relevant to assessment year under appeal. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
5. After hearing both the parties at length, we are of view that the issue has not been decided by the CIT(A) in the right perspective.
Undisputedly, the contractual trading liability has to be allowed in the year in which it is crystallized where accounts are maintained on mercantile system. There is also no dispute that the assessee was the supplier of goods to MUL. According to the assessee, there was demand for escalation of price which was settled in the last week of March, 1992, subject to the allowance of discount of Rs. 45 lacs in respect of the sales effected in the year under consideration. Further, according to the assessee the price escalation in respect of the sales for the year under consideration was credited in the books of account and offered the same for taxation. However, the entry regarding the discount was made in the books at the time of payment i.e., in the succeeding year when it was adjusted by MUL against payment of escalation charges. Despite the direction of the Bench, the assessee has not been able to place the relevant material to establish that price escalation was settled subject to sales discounts of Rs. 45 lacs in the last week of March, 1992. It is also beyond our understanding as to why entry of Rs. 45 lacs was not made in the books of accounts if allowance or discount was part of price escalation package between the parties particularly when the entry regarding price escalation was made in the books. It is also not clear as to .why the claim was not made in the original return if the liability had crystallized in March, 1992.
No doubt the claim of the assessee cannot be rejected on the ground that it was not claimed in the original return but if the claim has been made in the revised return, it must be substantiated by the proper material/evidence. There is nothing on the record to suggest that any evidence to substantiate the same was filed either along with the return or before the AO in the assessment proceedings. It appears from the appellate order that CIT(A) found that on 29th March, 1992, the assessee had offered one time lump sum discount of Rs. 42.5 lacs which was increased to Rs. 45 lacs on 31st March, 1992. But it is not clear as to why such offer was made by the assessee. It is also not clear as to whether any claim of discount was lodged by MUL. It is also not clear whether such offer of the assessee was accepted in the year under consideration. Mere offer of discount does not crystallize into liability unless the other party accepts the same. Further, it is not clear as to whether the CIT(A) ever confronted the evidence, if any, furnished by the assessee to the AO. Such inaction amounted to violation or Rule 46A of IT Rules, 1962. The CIT(A) has also not referred to any material on the basis of which it could be established that claim of Rs. 45 lacs related to sales effected by the assessee.
Whether the sum of Rs. 45 lacs allowed by the assessee, as discount to MUL was out of commercial expediency is not clear, from the orders of the lower authorities. In view of the above discussion, we are unable to sustain the order of the CIT(A). Accordingly, the order of CIT(A) is set aside on this issue and the matter is restored to the file of AO for fresh adjudication on the basis of material/evidence which may be furnished by the assessee or on the basis of any material gathered by him. The assessee shall be given a reasonable opportunity to establish its claim.
6. The last ground relates to deduction of Rs. 33,89,393 on account of expenses incurred on the issue of partly convertible debentures by way of right issue which has been deleted by the CIT(A). The claim of the assessee was rejected by the AO considering such expenditure as capital expenditure. The matter was carried before the CIT(A) before whom it was submitted that expenses were in respect of the issue of debentures by way of right to the shareholders. According to the assessee, such expenses included service charges paid for advertisement, bankers to the issue, registrar to the issue, consultants to the issue, listing fee to the stock exchange, etc. etc. which were in. the nature of revenue expenditure. It was opined by the CIT(A) that the expenditure was for the right issue of partly convertible debentures and not .towards shares. Considering the nature of expenses, the claim of the assessee was .allowed. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
7. Both the parties have been heard at length, As far as legal position is concerned, it is well settled by now that if the expenditure is incurred for obtaining loan, the same is allowable as revenue expenditure in view of the judgment of Hon'ble Supreme Court in the case of India Cements Ltd. v. CIT (1966) 60 ITR 52 (SC). On the same analogy, the expenditure on public issue of debentures would be allowable as a revenue expenditure since the issue of debentures is a mode for obtaining loan. On the other hand, if the expenditure is incurred on the public issue of shares it is capital expenditure not allowable under Section 37 in view of Supreme Court judgments in the case of Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798 (SC) and in the case of Punjab State Industrial Development Corporation (1997) 225 ITR 792 (SC).
8. In the present case, the public issue was in respect of partly convertible debentures. The scheme of the public issue has been perused by us. The object of the issue was to raise the finance for expansion and diversification of business. Twenty-three lacs debentures of the face value of Rs. 40 each were issued to the existing shareholders which carried interest rate of 14 per cent p.a. Every shareholder holding 2 eguity shares was entitled to 1 such debenture. The debentures was in two parts. Part A was convertible part of Rs. 25 lacs which was compulsorily and automatically to be converted into one equity share of Rs. 10 each at the end of 6 months from the date of allotment and consequently face value of the debenture was to be reduced to Rs. 15. It further provides that equity, share allotted as a result of conversion shall rank pan passu in all respects with the existing equity shares. The same result could have been achieved by the assessee by public issue of shares and debentures separately. It is only because of convenience and from economic point of view, a combined public issue was made. It is settled legal position that nomenclature of a document is not relevant. What is relevant is the true nature of the transaction. It is apparent from the scheme that assessee was incurring expenditure for raising capital of the company as well as loans. The Part A of debentures was to become permanent part of the capital structure of the company within a short period of 6 months from the date of allotment. It was only Part B which was to be returned on redemption. Merely because single issue was made for shares and debentures in the guise of debenture, the entire expenditure, in our opinion, does not partake the character of revenue expenditure. In these circumstances, we are of the view that the proportionate expenditure should be allowed as revenue expenditure. The view taken by us is also fortified by the Ahmedabad Bench of the Tribunal in the case of Banco Products India Ltd. (1997) 59 TTJ (Ahd) 387 : (1997) 63 ITD 370 (Ahd). Accordingly, the order of the CIT(A) is set aside and the AO is directed to allow 37.5 per cent of the total expenditure as revenue expenditure.
9. Now We come to the appeal of the assessee. The first issue arising out of this appeal relates to the disallowance of Rs. 95,66,232 under Section 43B. Briefly stated, the facts are that assessee is a company engaged ' in the business of manufacturing of automobile parts. During the year under consideration, it had imported certain raw materials on which customs duty was paid at the time of clearing the same, The customs duty so paid was added to the cost of import by debiting the purchase account. However, at the end of the year, the unused raw material was shown in the closing stock at cost including the customs duty. The customs duty included in the cost of raw material in the closing stock amounted to Rs. 95,66,232. It appears from the assessment order that no claim was made by the assessee under Section 43B in respect of this amount and for the first time the claim was raised before the CIT(A) in view of the decision of Hon'ble Gujarat High Court in the case of Lakhanpal National Ltd. v. ITO (1986) 162 ITR 240 (Guj) and the decision of Special Bench of the Tribunal in the case of Indian Communication Network (P) Ltd. v. IAC (1994) 48 TTJ (Del)(SB) 604 : (1994) 49 ITD 56 (Del)(SB). The ground being legal was admitted for consideration by the CIT(A). However, on merits, the claim of the assessee was not accepted since, according to the CIT(A), there was.no change in the method of accounting followed by the appellant and the customs duty claimed to be included in the closing stock was never claimed in the accounts nor in the course of assessment proceedings.
Since the value of closing stock being shown consistently in the similar manner and there was no material to indicate as to what material had been consumed and how much of the customs duty was included in the closing stock, the CIT(A) rejected the claim of the assessee. It may also be mentioned that according to CIT(A), the facts of the present case were different from the facts before the Special Bench. Aggrieved by the same, the assessee is in appeal before the Tribunal.
10. After hearing both the parties, we are inclined to accept the contention raised on behalf of the assessee. There is no dispute of the fact that the customs duty paid by the assessee was being charged to trading account raising the cost of purchase. It is also not disputed that closing stock of raw material included the value of the customs duty amounting to Rs. 95,66,232. Further, there is no dispute that the customs duty was actually paid in the year under consideration. There is no dispute also to the legal position that claim of customs duty can be allowed only in the year in which it is actually paid as per the provisions of Section 43B. Therefore, the question arises whether the claim of the assessee stands allowed if the cost of customs duty is included in the closing stock. According to the accounting principles, whenever the raw material purchased is shown in the closing stock and carried forward to the next year in the form of opening stock, it cannot be said that the cost of purchase has been allowed. For the similar reason, the customs duty paid by the assessee has been added to the cost of raw material and the same has been shown in the closing stock and carried forward to the next year in the form of opening stock. Therefore, it cannot be said that the expenditure on account of customs duty stands allowed to the assessee in the year under consideration. It is on this basis that the Hon'ble Gujarat High Court held that claim under Section 43B can be allowed on the basis of payment. Similar view has been taken by the Special Bench of the Tribunal in the case of Indian Communication Network (supra) wherein the facts were similar to the facts of the present case. The CIT(A) was not justified in observing that facts before the Special Bench were different from the present case. Section 43B allows the deduction on actual payment basis irrespective of the method adopted by the assessee. Therefore, following the decision of the Special Bench, the assessee is entitled to deduction of the aforesaid amount under Section 43B in the year under consideration. However, a query was raised in the course of hearing as to whether it would not amount to double deduction since the assessee would be able to get additional deduction of the same amount in the form of opening stock of the next year. In response, the learned counsel for the assessee has fairly conceded that assessee would not be able to get deduction in the subsequent year and, therefore, he would have no objection if this amount is assessed in the subsequent year. Therefore, the order of CIT(A) is set aside on this issue and the addition made by him is hereby deleted. However, in view of the undertaking given by the assessee's counsel, the AO would be at liberty to make addition in the subsequent year in accordance with law.
11. The next issue relates to the disallowance of Rs. 39,63,018 under Section 35(1)(iv). Briefly stated, the facts are that assessee had incurred capital expenditure of Rs. 39,63,018 on purchase of two machinery. No claim was made under Section35(1)(iv) in the original return nor there was any note by the auditors in Form No. 3CD. However, the claim was made in the course of assessment proceedings under Section 35(1)(iv). Considering the fact that the claim was not made originally and nothing was stated in the audit report and also the fact that assessee could not produce any evidence to show that some sort of research had actually been done during the year, the claim was disallowed by the AO.12. The matter was carried before the CIT(A) before whom it was submitted that full details of the expenditure incurred by the assessee was filed before the AO. According to the assessee's counsel before the CIT(A), the claim of the assessee was rejected merely on the ground that this amount was not mentioned in the audit report. It was also submitted that the similar claim had been allowed by the CIT(A) for asst. yr. 1991-92. After considering the details as well as the submissions, the CIT(A) was of the view that assessee could file the claim in the course of assessment proceedings even if it was not raised in the original return. Therefore, the claim could not be disallowed merely on the ground that audit report omitted to mention such expenditure. Once the claim was made, the AO was bound to adjudicate upon such issue. However, on merits, the CIT(A) was of the view that the machineries purchased by the assessee were meant for only testing and no research work could be said to have been done by these machineries. According to him, the assessee had utilised the machineries and equipments only for quality control rather than for any scientific research. Accordingly, no interference was made by the CIT(A) in the order of AO. Aggrieved by the same, the assessee is in appeal before the Tribunal.
13. The learned counsel for the assessee has strongly submitted before us that the machineries/equipments were purchased for carrying out R&D activity and if there was any doubt, the same should have been referred to the prescribed authority. On the other hand, the learned Departmental Representative has supported the order of the CIT(A).
14. After hearing both the parties, we are unable to sustain the order of the CIT(A). In our considered opinion, the CIT(A) could not reject the claim of the assessee by holding that machinery/equipment were not utilized for R&D activity without obtaining the report in this regard from the prescribed authority as provided in Sub-section (3) of Section 35. Sub-section (3) provides that if any question arises under this section as to whether any asset was being used for scientific research or not then the Board shall refer the question to the prescribed authority whose decision shall be final. In view of this clear provision which has not been complied with we set aside the order of the CIT(A) and restore the matter to the file of AO, who shall readjudicate the matter on the basis of material which may be furnished before him and in case of any doubt he may decide the issue after referring the matter in accordance with Sub-section (3) of Section 35.
15. The last issue relates to the computation of deduction under Section 80-I. The assessee had claimed deduction under Section 80-I in respect of the profits derived from the steering unit. However, the AO noticed that there was loss in another unit, namely, axle unit and, therefore, he allowed the deduction on the net income after adjusting the loss from axle unit.
16. The matter was carried before the CIT(A) before whom it was submitted that for the purpose of deduction under Section 80-I, the steering unit and axle 'units were different industrial units and, therefore, the assessee was entitled to deduction in respect of steering unit ignoring the losses from the axle unit. The CIT(A) noticed that for the purpose of claiming interest of Rs. 1,10,89,957, the assessee had taken the plea that axle unit was mere expansion of steering unit and, therefore, such interest could not be disallowed since there was common management, common finance, etc. It is on this plea of the assessee the claim of the interest was allowed by the CIT(A). On this finding, the CIT(A) was of the view that assessee could not now say that axle unit was entirely different from steering unit.
It was also noticed by the CIT(A) that both the manufacture of steering column and axle were undertaken by the assessee from the existing plant and there were common overhead expenses, engagement of staff, utilisation, of raw material, etc. Accordingly, it was held that there were no two industrial units and the deduction was rightly restricted to the profits after adjustment of entire expenditure in respect of the manufacture of axle. Aggrieved by the same, the assessee is in appeal before the Tribunal.
17. After hearing both the parties, we find that the issue stands covered against the assessee by the decision of the Tribunal, dt. 23rd Feb., 2001, in assessee's own case for asst. yr. 1991-92 (ITA No.989/Del/1995) wherein it has been held that losses of the one unit must be set off against the profits of other unit in view of Section 80AB.Such decision was taken after considering the judgment of Madras High Court in the case of CJT v. Sundaravel Match Industries (2000) 245 ITR 605 (Mad) relied upon by the learned Departmental Representative.
However, the learned counsel for the assessee has relied on the decision of Andhra Pradesh High Court in the case of CIT v. Vishakha Industries (2001) 251 ITR 471 (AP) which was delivered after considering the judgment of the Hon'ble Supreme Court in the case of CIT v. Canara Workshop (1986) 161 ITR 320 (SC). According to this judgment, the assessee is entitled to claim deduction in respect of the particular unit without setting off the losses of other unit provided both units are independently functioning. This Judgment was not available when the Tribunal decided the issue for asst. yr. 1991-92, Now before us two views are available which are conflicting views on the interpretation of Section 8QAB. Therefore, following the decision of the Supreme Court in the case of CIT v. Vegetable Products (1973) 88 ITR. 192 (SC), we prefer the view expressed by the Hon'ble Andhra Pradesh High Court, which is in favour of the assessee. However, we notice that CIT(A) has observed that manufacturing of axle was undertaken from the existing plant and there were common overhead expenses and utilisation of raw material. Further, there is no discussion in the assessment order as to whether there existed two different units functioning independently. This factual aspect requires verification. Further, it is clarified that all the deductions under Chapter VI-A cannot exceed the gross .total income computed in.
accordance with Section 80B(5). This is apparent from the express provision of Section 80A(2). In view of the above discussion, the order of the CIT(A) is set aside on this issue and the matter is restored to the file of AO, who shall readjudicate the issue after verifying the fact as to whether the steering unit and the axle unit are units functioning independently. The claim of the assessee would not be rejected merely on the ground that axle unit was established by way of expansion of the existing business. If it is found that both units were functioning independently then the claim of the assessee would be allowed without setting off the losses of the other unit. However, while allowing such deduction, he will take into consideration the provisions of Section 80A(2).