ORDER These 10 appeals comprise of four appeals by the assessee/appellant for the years 1989-90, 1990-91, 1993-94 and 1994-95 and six by the Revenue for the years 1990-91, 1991- 92, 1992-93, 1993- 94, 1994-95 and 1995-96.
2. Mr. Tariq Pervaiz, A.C.A, for the assessee and Mrs. Fiza Muzaffar, D.R. And Rana Munir Hussain, Legal Advisor for the Revenue present. Parties heard. The appeals are disposed of as under:- ASSESSMENT YEAR 1989-90
3. Through this appeal the assessee/appellant contest the estimate of rental receipts. As in the past, the assessee derives income from renting out of machinery. During the year under appeal the machinery was let out to M/s. Ghulam Fabrics Ltd., and the rental income declared was Rs.
360,000/-. During the year under consideration, the assessee purchased certain machinery and also sold some items of machinery. The Assessing Officer noted that even after sale of some items of machinery there was, still more machinery than in the preceding year. On this basis he felt that the rental income declared is low, because the last year also the rental income was declared at Rs.
360,000/-. The Assessing Officer therefore, discarded the declared version and estimated the rental receipts at Rs. 480,000/-. The learned CIT(A) confirmed the estimate. The assessment order is silent as to whether the Assessing Officer made any attempt to verify the rental receipts from M/s. Ghulam Fabrics Ltd. The A.R. of the assessee had taken the plea that under the agreement with the lessee, the rent could not be increased for the year under consideration, ln the absence of any sold evidence the Assessing Officer was not justified to estimate ordered to be accepted.
ASSESSMENT YEAR 1990-91
4. The assessee/appellant agitates the setting aside of the assessment for the year under consideration, lt is noted that after the setting aside of the assessment, the re-assessment has already been made and the second assessment order is also appealed against by the Revenue, ln the original assessm ent order dated 21.5.1991 to the rental income was declared at Rs. 420,000/- and the Assessing Officer estimated it at Rs. 500,000/-. The only basis given for enhancement of rental income is that in the earlier year also there was estimate of rental receipts, ln this appeal the only point agitated by the A.R. of the assessee in that the learned CIT(A) was not justified to set aside the assessm ent merely on the ground that second appeal in respect of preceding year was pending with the I.T.A.T. lt is contended that the assessment for each year is independent and therefore, the learned CIT(A) should have decided the case on facts and merits. The facts in this case are that the assessee had rented out machinery to a known party and the Assessing Officer brought no material on record to show that the rental receipts had been suppressed. We are therefore, of the view that the learned CIT(A) was not justified to set aside the assessment on this point. However, since reassessm ent has already been made, there is no point in remanding the case back to learned CIT(A). On this point therefore, the orders of the authorities below are vacated and the Assessing Officer directed to accept the declared receipts.
5. As stated above re-assessm ent for the Assessment Year 1991-92 had already been made against which the Revenue has referred second appeal which is now taken up. lt is noted that in the original assessm ent the Assessing Officer simply enhanced the rental receipts but no other addition was made. However, while making re-assessment the Assessing Officer, apart from enhancing the rental receipts, also disallowed the claim of depreciation. The disallowance was made on the ground that as the machinery was not used by the assessee, depreciation could not allowed in terms of Rule-1 of the Third Schedule, lt is noted that in the original assessment no such disallowance was made and the setting aside of the assessment by the learned CIT(A) was only on the point of estimate of rental receipts. Therefore, while making reassessment the Assessing Officer was not original assessm ent order remained intact except to the extent that the point regarding rental receipts, was to be reconsidered and decided by the ^Assessing Officer. Nevertheless, the learned CIT(A) has deleted the addition made in rental receipts and also ordered depreciation allowance to be given. As regards the rental receipts, we have already decided that the declared receipts be accepted. As regards the depreciation allowance, the provisions of section 13(1 )(c) provide for allowance of depreciation, in case the income is assessed u/S. 30. The plea of the Assessing Officer that in such a case depreciation is admissible only if the assessee is scheduled bank, a financial institution or such moder aba or leasing company as is approved by the C.B.R., is not correct, ln fact the condition of approval by the C.B.R, is applicable where the assessee's income from rental receipts is taxable u/S. 22. lt is obvious that the condition of use of the assets by the assessee cannot apply where rental receipts are taxed u/S. 30. Since section 13(1 )(c) authorities depreciation allowance, it means that the condition of use of assets by the assessee is dispensed with. The learned CIT(A) therefore, rightly allowed depreciation allowance.
ASSESSMENT YEARS 1991-92 ana 1992-93
6. Through these appeals the Revenue contests the deletion of addition made in lease into these years. The assessee declared lease rent receipts at Rs. 420,000/- and the Assessing Officer estimated these at Rs. 500,000/- in each of these two years. The main reason given by the Assessing Officer is that in 1985, lease money from old machinery was declared at Rs. 720,000/- but after replacement and addition of machinery the lease rental receipts have been declared at Rs.
420,000/-. The Assessing Officer is of the view that since the lessee is an associated undertaking, there is some collusive arrangement. Consequently, the Assessing Officer, dis-believing the declared version, estimated the rental receipts at Rs. 500,000/-. The learned CIT(A) deleted the addition on the ground that the Assessing Officer has failed to show the manner in which the lease income could be considered as suppressed or even low, as no basis was laid down to evaluate the reasonable quantum of lease rent. We agree with the finding of the learned CIT(A) there being no substantiative evidence of suppression of receipts. The learned CIT(A) was justified to delete the addition made on this score.
7. As regards the depreciation allowance, for the reasons already recorded in respect of Assessm ent Year 1990-91, the assessee was entitled to depreciation allowance and the order of the learned CIT(A) on this point is confirmed.
8. The assessee claimed an expense of Rs. 80,690/- for the Assessment Year 1991-92 and Rs.
80,593/- for the Assessm ent Year 1992-93, as make-up on loan taken for investment in plant and machinery. The Assessing Officer disallowed the claim on the ground that these amounts are to be capitalized because the loan taken was for purchase of plant the machinery, lt was further noted that in the year 1989 similar expense was capitalized by the assessee. According to the standard accounting principles, the interest on borrowed capital used for purchase of fixed assets is part of the cost of such assets. Before the 'earned CIT(A), the A.R. of the assessee contended that the expense is allowable u/S. 13(1 )(b). lt was further argued that in "circular No. 10 of 1967, dated 1.8.1967, the CBR clarified that if the capital borrowed could be co-related to the specific investment, the interest paid becomes admissible, expense, and that by payment of this interest the cost of the' investment is in no way increased. We have gone through the said Circular and it is noted that it appeals to a situation where borrowed capital is used to acquire shares of a company. The situation is different in the case of acquisition of fixed assets. The share certificates of a company are in the nature of an acknowledgement receipt of the capital investment made by the share- holder in the company. Therefore, in the case if the capital investment in a company is made by a share-holder with borrowed money, the interest paid in such a situation is obviously admissible as revenue expense. On the other hand, where a fixed asset is purchased with borrowed capital, the interest paid on it becomes part of the cost of the asset. The cost of a fixed asset includes all expenditure necessary to bring the asset into existence and put it in working condition. This principle was confirmed in Challengable Sugars Ltd. v. C/T, (1975) 98-ITR-167. The reliance on the provisions of section 13(1 )(b) is misplaced because it excludes capital expenditure or personal expenditure. The interest paid in the present case is in the nature of capital expenditure and as such it cannot be allowed as revenue expense. The order of the learned CIT(A) on this pointed is vacated and that of the Assessing Officer is restored for both the years under consideration.
ASSESSMENT YEAR 1993-94:
9. ln the cross appeals for this year, the assessee/appellant objects to set aside of the assessment on the point of depreciation allowance and the financial expenses, whereas the Revenue objects to acceptance of claim of depreciation allowance and the mark-up on borrowed capital. The learned CIT(A), following the decision in earlier year by his predecessor, held that depreciation allowance is admissible and also mark-up on borrowed capital is allowance. However, he set aside the assessm ent by directing the Assessing Officer to allow these expenses after verification. The objection by the assessee is that having admitted that depreciation allowance and mark-up expenses are allowable, the learned CIT(A) should not have set aside the assessment for verification of expenses. On the other hand, the Revenue's case is that the depreciation allowance and the mark-up on the borrowed capital is legally not admissible. So far as the depreciation allowance is concerned, we have already held in respect of earlier years that it is to be allowed. As regards the mark-up on borrowed capital used for purchase of plant and machinery, we have already held, for the reasons regarding in respect of Assessment Years 1991-92 and 1992- 93, that it is not admissible as revenue expense and can only be capitalized. Therefore, as regards depreciation allowance the order of the learned C-IT(A) is upheld, as the Assessing Officer is to check and work out the depreciation allowance before allowing it. On the point of mark-up on borrowed capital, the order of the learned CIT(A) is reacted and that of the Assessing Officer is restored. However, the Assessing Officer will allow depreciation after capitalization of the mark-up expense.
10. The next objection ^ pertains to the claim of repair expenses. The assessing claimed expenditure on repair of machinery at Rs. 39,200/-. The Assessing Officer did not allow this expense on the ground that expenditure is entirely irrelevant as the assessee sold out the items after their purchase. The learned CIT(A) reduced the addition to Rs. 20,000/- without giving any reason. The case of the assessee is that this expense should have been allowed in full, while the Department's case is that this expense is not allowable because the assessee had sold out the items of machinery. From the appellate order it appears that the details of repair expenses had been produced before the Assessing Officer, but has not bothered even to discuss the evidence produced nor indicated the items which are alleged to have been sold out. As the facts are not clear, we consider it appropriate to vacate the orders of the authorities below and direct the Assessing Officer to reexamine of claim of the assessee and adjudicate on this point with detailed reasoning.
11. The Revenue also objects to deletion of addition in the lease income. The assessee declared lease rental receipts at Rs. 4,20,000/-, and the Assessing Officer estimated it at Rs. 5,0, 000/- as in the preceding year. The learned CIT(A) directed that the declared receipts be accepted. For the reasons already recorded in respect of earlier years, we confirm the order of the learned CIT(A) on this point.
ASSESSMENT YEAR 1994-95.
12. The assessee/appellant objects to set aside of the assessment order on the point of depreciation allowance and the mark-up expenses, while the Revenue objects to the- allowance of mark-up expenses and depreciation allowance. For the reasons recorded in respect of Assessment Year 1993- 94, the order of the learned CIT(A) on the point of depreciation allowance is confirmed, while on the point of mark-up expenses, the order of the learned CIT(A) is vacated and that of Assessing Officer is restored. However, the Assessing Officer will allow depreciation after capitalization of the mark-up expense.
13. The next objection pertains to repair expense. The assessee claimed expense of Rs. 76,050/- which was disallowed by the Assessing Officer on the ground that the assessee had sold out the items after their purchase. The learned CIT(A) reduced the addition to Rs. 35,000/-. The case of the assessee is that the expense should have been allowed in full, while the Revenue states that the expense was not allowable. The actual facts are not clear from the assessment order and the appellate order. Therefore, we consider it appropriate to set aside the order of the authorities below and direct the Assessing Officer to re-examine the claim and give his findings with detailed reasoning.
14. The Revenue also objects to deletion of addition in lease rental income. The assessee declared lease rental income at Rs. 4,62,000/- and the Assessing Officer estimated it at Rs. 5,60,000/-. The learned CIT(A) deleted the addition on the ground that no evidence or solid reason for estimation has been given. We agree with the finding of the learned CIT(A) and his order is upheld on this point.
ASSESSMENT YEAR 1995-96
15. ln this departmental appeal, the Revenue objects to deletion of addition in lease income, the allowing of depreciation allowance, and the deletion of additions made under the heads "Financial Expenses" and "Repair Expenses". The assessee declared lease rental income at Rs. 4,62,000/- for a period of 12 months. The Assessing Officer estimated the lease rental income at Rs..8,40,000/-. For doing so, he relied on the history of the case. As no evidence for suppression of rental receipts had been given, the learned CIT(A) was justified to ance of declared rental receipt i. His order on this point is confirmed.
16. The next objection pertains to depreciation allowance. For the reasons recorded in respect of earlier years, he hold that the assessee was entitled to depreciation allowance and the order of the learned CIT(A) on this point is also confirmed.
17. The next objection pertains to mark-up expenses which were claimed at Rs. 1,58,505/-. This expense was disallowed by the Assessing Officer but allowed by the learned CIT(A). For the reason recorded for earlier years, the order of the learned CIT(A) is vacated and that of the Assessing Officer is restored. Flowerer, the Assessing Officer shall allow depreciation after capitalization of this amount.
18. The next objection pertains to repair expense claimed at Rs. 95,600/-. The expense was disallowed by the Assessing Officer on the ground that this expense is not related to income from business or profession under which it has been claimed. The learned CIT(A) observed that this expense related to repair of machinery leased out and the lease income has been assessed u/S.
30. The Assessing Officer has neither allowed this expense under the head "income from business" nor allowed it against lease income, ln the preceding year the expenses were disallowed on the ground that the item on which repair was claimed had been sold out. This year a different stand has been taken out by the Assessing Officer. Flowerer, since no objection was raised with regard to the genuineness of the claim, the learned CIT(A) ordered the expense to be allowed, lt is not clear whether this expense relates to income from business or to income from leading out of machinery, we consider it appropriate to vacate the orders of the authorities below and direct the Assessing Officer to re-examine the claim of expense and if found genuine and proper should be allowed under the respected head of income.
19. The assessee's appeals and Revenue's appeals are disposed of to the extent and in the manner indicated above.