Annapurna Gupta, A.M:— These two appeals have been preferred by the same assessee against separate orders of Ld. CIT(Appeals)-2, Ludhiana dated 31.3.2016 and 25.7.2016 relating to assessment years 2008-09 and 2009-10 respectively.

2. We shall first be taking up the appeal of the assessee in ITA No. 785.Chd/2016.

ITA No. 785.Chd/2016:

3. The ground Nos. 1 and 6 raised by the assessee read as under:

“1. That the impugned order has been passed by the Ld. Commissioner of Income Tax (Appeals) without proper application of mind, as such it is not sustainable in law and facts of the case.

6. The Appellant craves leave to add, amend, modify and/or add new grounds of Appeal before the Appeal is heard and disposed off.”

4. The above grounds are general and need no adjudication.

5. Ground No. 2 raised by the assessee reads as under:

“2. That under the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming disallowance of Rs. 64,43,680/- made on account of Interest claimed U/S 36(1)(iii) of the IT. Act, 1961. The disallowance confirmed is not based on proper appraisal of facts and law in the matter.”

6. This ground relates to disallowance made on account of interest claimed, u/s 36(1)(iii) of the Income Tax Act, 1961 (in short ‘the Act’), amounting to Rs. 64,43,680/-.

7. Brief facts relating to the issue are that during assessment proceedings the Assessing Officer noticed that the assessee had given loans and advances to the following parties:

Name Amount Purpose 1. Oswal Agroils Ltd. 1,42,524/- Promotion of the company 2. Adinath Traders Pvt. Ltd. 1.83.55.583/- Advance for purchases 3. Neminath Textile Pvt. Ltd. 1.42.39.795/- Advance for purchases 4. Oswal Oil Mills 46.15.820/- Advance for purchases 5. Oswal Overseas 1,63,43,620/- Advance for purchases 6. Ospin Traders P. 1.95.00.379/- Advance for purchases 7,31,97,721/-

8. On being asked to explain the business expediency for the same, the assessee stated that the loans and advances from Serial Nos. 2 to 5 were outstanding for business transaction of sale/purchase. Further the assessee stated that the loans and advances pertaining to M/s Oswal Agroils Ltd. was old balance and disallowance of interest on account of the same made u/s 36(1)(iii) of the Act for earlier years had been deleted by the CIT(Appeals), Ludhiana as per order dated 20.8.2010 The Assessing Officer rejected the contention of the assessee stating that the assessee had failed to explain how the business purpose was served by advancing these loans. He further pointed out that the assessee company was a sick unit incurring losses of more than Rs. 46 crores and it had availed secured and unsecured loans amounting to Rs. 43.87 crores for which interest of Rs. 5.16 crores had been paid. The Assessing Officer also pointed out that the loans had been given to company in which the relatives of the directors of the assessee company were directors. He further stated that had the assessee not advanced these moneys, he would have incurred minimum interest expenditure. The Assessing Officer, therefore, disallowed interest pertaining to aforesaid advances u/s 36(1)(iii) of the Income Tax Act,1961,computing the same at Rs. 64,43,680/-

9. Before the Ld.CIT(Appeals), the assessee reiterated the contentions made before the Assessing Officer. The Ld.CIT(Appeals) upheld the order of the Assessing Officer stating that the assessee had contended that the advances were given against purchase of property which had not been acquired during the year and since admittedly, the purchase and sale of property was not the business of the assessee, the disallowance of interest made was warranted. The relevant findings of the Ld.CIT(Appeals) at para 4.4 & 3.8 of the order are as under:

“4.4 I have carefully considered the appellants submission. I have also gone through assessment order. It is an admitted fact that purchase and sale of properties is not the business of the appellants company. The appellant has contended that the advances were given against purchase of property which has not been acquired during the year, hence cannot be termed that the same has been put to use.

“3.8 After careful consideration of all the facts, I am also inclined to agree with the contention of Id. AO. In the case of these advances the appellant has clearly failed to adduce evidence w.r.t any commercial expediency as this is not the business object of appellant concern. So advancing this huge amount without bringing any facts of business expediency is not allowable. The business purpose of these advances are not clear as the appellant has failed to controvert any logic behind these advances. The appellant company is a sick unit. The appellant has advanced huge amount to those co., wherein related set of directors or concerns are involved. The advance given by the appellant could not be satisfactorily explained as there is no element of commercial expediency.”

10. Before us, the Ld.Counsel for the assessee stated that the Ld.CIT(Appeals) had totally mis-appreciated the facts of the case as repeatedly pointed out by the assessee before the AO and the CIT(A). The Ld. counsel for assessee pointed out that the assessee had repeatedly contended that it was in the business of manufacturing and trading of edible oils and solvent oils and the said advances pertained to sale made to the said parties. The Ld. counsel for assessee pointed out to the submissions made before the Assessing Officer and CIT(Appeals) in this regard. The Ld. counsel for assessee thereafter pointed out that the Ld.CIT(Appeals) had mis-appreciated the facts by stating that the said advances were given against purchase of property as contended by the assessee. The Ld. counsel for assessee stated, therefore, that the issue had not been considered in the correct backdrop of the facts of the case.

11. The Ld. DR, fairly agreed with this contention of the assessee.

12. Having heard both the parties and having gone through the order of the Ld.CIT(Appeals), we agree with the contention of the Ld. counsel for assessee that the Ld.CIT(Appeals) has mis-appreciated the facts of the case. Undoubtedly, all along it was the case of the assessee that the said advances has been given on account of business transaction of sale/purchase made. Evidence in this regard by way of ledger account of the parties have also been filed and the said fact finds mention in the letters submitted to the Ld.CIT(A) placed at Paper Book page No. 43. But the Ld.CIT(Appeals) adjudicated the issue by totally mis-stating the fact that the advances were made for purchase of the property. In view of the same, we consider it fit to restore the matter back to the file of the Ld.CIT(Appeals) to adjudicate the issue afresh in the light of submissions and evidences filed by the assessee and correctly appreciating the facts of the case. We may add that the assessee be given due opportunity of hearing in this regard.

The ground of appeal No. 2, therefore, stands allowed for statistical purposes.

13. Ground Nos. 3 and 4 raised by the assessee reads as under:

“3. That the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming Ld. Assessing Officer's action in holding that unabsorbed depreciation pertaining to Assessment Years 1999-2000, 2000-2001 and 2001-02 is not eligible for carried forward for and set off in subsequent years. provisions of section 32(2) of the I.T Act, 1961 have been misconstrued and misapplied in the appellant's case.

4. That the Ld. Commissioner of Income Tax (Appeals) has failed to consider appellant's contention that they are Sick Industrial unit, as such the amended provisions of section 32(2) of the I.T Act, 1961 are not applicable. Proviso of Section 32(2) of the I.T Act, 1961 has not been construed and appraised properly in the appellant's case, which has resulted in erroneous order and untenable conclusion.”

14. The issue in the present ground pertains to carry forward of depreciation pertaining to assessment years 199798 to 2001-02 for setting off against profits, as per section 32(2) of the Act.

15. Briefly stated, the assessee had during the impugned year brought forward business losses and unabsorbed depreciation from preceding years, perusal of the details of which showed that the assessee had brought forward unabsorbed depreciation pertaining to the period 1997-98 to 2001-02. The Assessing Officer held that the unabsorbed depreciation for this period could not be allowed to be carried forward for more than 8 years immediately succeeding the assessment year to which they pertained as per the provisions of section 32(2) of the Act. He, therefore, denied carried forward of unabsorbed depreciation pertaining to the aforesaid period placing reliance on the judgment of the Special Bench of the I.T.A.T in the case of DCIT v. Times Guaranty Ltd. In ITA Nos. 4917 & 4918.Mumbai/2008. The Ld.CIT(Appeals) upheld the order of the Assessing Officer stating that even the ITAT Chandigarh Bench in the case of Liberty Plywood P. Ltd. v. ACIT in ITA No. 727.Chd/2012 dated 17.12.2012 had decided the issue in favour of the Revenue.

16. Before us, the Ld. counsel for assessee pointed out that the issue has been adjudicated now by various High Courts in favour of the assessee and also by the I.T.A.T, Delhi & Kolkatta Bench. The Ld. counsel for assessee drew our attention to the following decisions in this regard:

1) General Motors India (P) Ltd. v. DCIT, 354 ITR 244 (Guj).

2) Minda Sai Ltd. v. ITO, 167 TTJ 689 (Del)

3) JCT Limited v. CIT-IV, Kolkata, (2016) 159 ITD 983

4) Karnataka Co-operative Milk Producers Federation Ltd. v. DCIT, (2011) 53 DTR (Kar) 81

17. The Ld.DR on the other hand, relied upon the order of the Ld.CIT(Appeals).

18. We have heard contentions of both the parties. The issue in the present ground pertains to carry forward of un ab so rbedde preciation pertaining to assessment year 1997-98 to 2001-02 as per the provisions of section 32(2) of the Act.

19. To understand the issue correctly the provisions of section 32(2) of the Income Tax Act, 1961 as it existed at various points of time needs to be set out. Beginning with the period prior to the amendment made by Finance (No. 2) Act, 1996 w.e.f 1 April,1997 as per section 32(2), in the eventuality of insufficient profits and gains to adjust the depreciation allowance for a year, then subject to the provisions of section 72(2) and 73(3), the amount of such unadjusted allowance would be added to the amount of depreciation allowance for the following year deeming it to be part of the same and so on for eternity.

20. The Finance (No. 2) Act, 1996,substituted the provision of section 32(2) restricting the carry forward and set off of unabsorbed depreciation against income arising under the head Business and Profession, to eight assessment years immediately succeeding assessment year for which the aforesaid depreciation allowance was computed.

21. Finance Act, 2001, further substituted the provision of section 32(2) w.e.f 1 April 2002 reinforcing the provision as it existed initially i.e prior to its substitution by Finance (No. 2)Act 1996, allowing carry forward and set off of unabsorbed depreciation in eternity with no restriction on the period.

22. The Revenue in the present case has interpreted the section, as amended at various points of time, so as to hold that the restriction applicable to the time period of carrying forward and setting off unabsorbed depreciation pertaining to the period 1996-97-2000-01,would not be diluted by the later amendment to the section. In effect meaning that unabsorbed depreciation relating to this period would be allowed to be carried forward and set off only for succeeding eight years. This view was expressed by the Special Bench decision of ITAT Mumbai in the case of Times Guaranty (supra). But as rightly pointed out by Ld.Counsel for the assessee the Hon'ble Gujarat High Court in the case of General Motors India (P) Ltd. (supra) has categorically held that the depreciation pertaining to assessment year 1997-98 could be allowed to be carried forward and set off after a period of 8 years. The Hon'ble High court held that the unabsorbed depreciation available to an assessee on 01-042002 would be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provision of section 32(2) as it stood before the amendment. Reference was also made to the CBDT Circular No. 14 of 2001 vide which it was clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with. The relevant findings of the Hon'ble High Court are as under:

“37. The CBDT Circular clarifies the intent of the amendment that it is for enabling the industry to conserve sufficient funds to replace plant and machinery and accordingly the amendment dispenses with the restriction of 8 years for carry forward and set off of unabsorbed depreciation. The amendment is applicable from assessment year 2002-03 and subsequent years. This means that any unabsorbed depreciation available to an assessee on 1st day of April, 2002 (A.Y 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001 and not by the provisions of section 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow the unabsorbed depreciation allowance worked out in A.Y 1997-98 only for eight subsequent assessment years even after the amendment of section 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision. Hence keeping in view the purpose of amendment of section 32(2) of the Act, a purposive and harmonious interpretation has to be taken. While construing taxing statutes, rule of strict interpretation has to be applied, giving fair and reasonable construction to the language of the section without leaning to the side of assessee or the revenue. But if the legislature fails to express clearly and the assessee becomes entitled for a benefit within the ambit of the section by the clear words used in the section, the benefit accruing to the assessee cannot be denied. However, Circular No. 14 of 2001 had clarified that under Section 32(2), in computing the profits and gains of business or profession for any previous year, deduction of depreciation under Section 32 shall be mandatory. Therefore, the provisions of section 32(2) as amended by Finance Act, 2001 would allow the unabsorbed depreciation allowance available in the A.Y 1997-98, 1999-2000, 2000-01 and 2001-2 to be carried forward to the succeeding years, and if any unabsorbed depreciation or part thereof could not be set off till the A.Y 2002-03 then it would be carried forward till the time it is set off against the profits and gains of subsequent years.

38. Therefore, it can be said that, current depreciation is deductible in the first place from the income of the business to which it relates. If such depreciation amount is larger than the amount of the profits of that business, then such excess comes for absorption from the profits and gains from any other business or business, if any, carried on by the assessee. If a balance is left even thereafter, that becomes deductible from out of income from any source under any of the other heads of income during that year. In case there is a still balance left over, it is to be treated as unabsorbed depreciation and it is taken to the next succeeding year. Where there is current depreciation for such succeeding year the unabsorbed depreciation is added to the current depreciation for such succeeding year and is deemed as part thereof. If, however, there is no current depreciation for such succeeding year, the unabsorbed depreciation becomes the depreciation allowance for such succeeding year. We are of the considered opinion that any unabsorbed depreciation available to an assessee on 1st day of April 2002 (A.Y 2002-03) will be dealt with in accordance with the provisions of section 32(2) as amended by Finance Act, 2001. And once the Circular No. 14 of 2001 clarified that the restriction of 8 years for carry forward and set off of unabsorbed depreciation had been dispensed with, the unabsorbed depreciation from A.Y 1997-98 upto the A.Y 2001-02 got carried forward to the assessment year 2002-03 and became part thereof, it came to be governed by the provisions of section 32(2) as amended by Finance Act, 2001 and were available for carry forward and set off against the profits and gains of subsequent years, without any limit whatsoever.”

23. Even the Delhi Bench of the I.T.A.T in the case of Minda Sai Ltd. (supra) and the Kolkatta Bench of the ITAT in the case of JCT Ltd. (supra) after taking into consideration the decision of the Hon'ble Gujarat High Court in the case of General Motors India (P) Ltd. (supra) has reiterated the above proposition.

24. In the light of the above judicial precedence, especially the Gujarat High Court in the case of General Motors India Pvt. Ltd. (supra), we hold that the assessee is entitled to carry forward unabsorbed depreciation pertaining to assessment years 1997-98 to 2001-02.

Ground Nos. 3 and 4 raised by the assessee therefore stand allowed.

25. Ground No. 5 raised by the assessee reads as under:

“5. That the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming following expenses incurred by the Appellant for business purposes:—

(a) Rs. 82,661/- out of Puja and Shagun Expenses.

(b) Rs. 50,000 out of Travelling Expenses.”

26. The above ground was not pressed before us by the Ld.Counsel for the assessee considering the smallness of the amount. In view of the same, ground No. 5 is dismissed and at the same time, we may add that it should not be considered as a precedent for identical issue raised in any other year for the assessee.

27. In effect, the appeal of the assessee stands partly allowed.

ITA No. 1093.Chd/2016:

28. The assessee in this appeal has raised following grounds:

“1. That the impugned order has been passed by the Ld. Commissioner of Income Tax (Appeals) without proper application of mind, as such it is not sustainable in law and facts of the case.

“2. That under the facts and circumstances of the case, the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming disallowance of Rs. 16,46,045/- (wrongly mentioned as Rs. 64,43,680/-) made on account of Interest claimed U/S 36(1)(iii) of the IT. Act, 1961. The disallowance confirmed @ 10% against 12% made by the Ld. Assessing Officer ought to have been deleted entirely.

3. That the Ld. Commissioner of Income Tax (Appeals) is not justified in holding that the Appellant has advanced huge amounts to those companies wherein related set of Directors or concerns are involved, the facts of the case have not been appraised properly, which has resulted in untenable conclusion and misplaced finding. Provisions of Section 36(1)(iii) of the IT. Act, 1961 have been misconstrued and misapplied in the matter. The disallowance confirmed is based on surmises and on records.

4. That the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming Ld. Assessing Officer's action in holding that unabsorbed depreciation pertaining to Assessment Years 1999-2000,2000-2001 and 2001-02 is not eligible for carried forward for set off in subsequent years. provisions of section 32(2) of the IT. Act,1961 have been misconstrued and misapplied in the appellant's case.

5. That the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming Ld. Assessing Officer's action in holding that unabsorbed depreciation pertaining to Assessment Years 1999-2000,2000-2001 and 2001-02 is not eligible for carried forward for set off in subsequent years. provisions of section 32(2) of the IT. Act,1961 have been misconstrued and misapplied in the appellant's case.

6. That the Ld. Commissioner of Income Tax (Appeals) is not justified in confirming the disallowance of Rs. 41,299/- on account of Puja expenses. Expenses incurred for business purpose have wrongly been disallowed, although the appellant has never agreed for the addition.

7. That the additions and disallowances confirmed by the Ld. Commissioner(Appeals) are misplaced, untenable, contrary to law and in any case these are highly excessive. The order is devoid of judicious and rational approach.

8. The Appellant craves leave to add, amend, modify and/or add new grounds of Appeal before the Appeal is heard and disposed off.”

29. Ground No. 1 raised by the assessee is general and hence needs no adjudication.

30. Ground Nos. 2 and 3 raised by the assessee in this appeal relate to disallowance made on account of interest claimed u/s 36(1)(iii) of the Act and is identical to ground No. 2 raised by the assessee in ITA No. 785.Chd/2016. It was common ground between both the parties that the facts in the impugned year were identical to that in the preceding year, decided by us above in ITA no. 785.Chd/2016. Since in that case the issue has been restored back to the CIT(A) to decide it afresh, the decision rendered therein will apply mutatis mutandis in these grounds also and accordingly the issue in the said grounds are restored back to be decided afresh by the CIT(A). We may add that proper opportunity be given to the assessee in this regard.

Ground No. 2 & 3 of the appeal are, therefore, allowed for statistical purposes.

31. Ground Nos. 4 and 5 raised by the assessee in this appeal relate to carry forward for depreciation pertaining to assessment years 1997-98 to 2001-02 as per section 32(2) of the Act, and it was common ground between both the parties that they were identical to ground Nos. 3 and 4 raised by the assessee in ITA No. 785.Chd/2016. The decision rendered therein will therefore apply with equal force in these grounds also.

Ground Nos. 4 & 5 are, therefore, allowed.

32. Ground No. 6 raised by the assessee is not pressed and is identical to ground No. 5 raised by the assessee in ITA No. 785.Chd/2016 and the decision rendered therein will apply mutatis mutandis in this ground also.

Ground No. 6 therefore stands dismissed.

33. In the result, both the appeals of the assessee are partly allowed.