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Income Tax Appellate Tribunal, DELHI BENCH ‘G’, NEW DELHI
Before: Ms. Sushma ChowlaDr. B. R. R. Kumar
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the revenue and assessee against the orders of the ld. CIT(A)-X, New Delhi dated 23.03.2010.
Following grounds have been raised by the revenue: “1. “Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs. 29,22,016/- made by the AO on account of disallowance of depreciation claimed on capitalization of preoperative expenses.”
2 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. 2. “Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs. 39,60,000/- made by the AO on account of interest income deemed as income from other sources.”
“Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs. 14,28,530/- made by the AO on account of preferential allotment of shares treated as deemed dividend in the hands of the assessee company.”
”Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs.1,13,39,786/- made by the AO on account of unexplained income u/s 68 of the IT Act.”
Following grounds have been raised by the assessee: “1. That the learned Commissioner of Income Tax (Appeals)-X, New Delhi has erred, both on facts and in law in confirming addition of Rs.84,88,000/- as unexplained income u/s 68 of the Income Tax Act.”
The assessee company is engaged in the business of manufacturing, processing and fabrication of readymade garments. The assessee company exports its products mainly to countries like United States of America. It also has a branch office at New York. Apart from the above business activity, the assessee has also shown other income under other heads of income.
Disallowance of Depreciation:
The AO found that the pre-operative expenses have been factored in, the cost of imported plant & machinery by capitalizing the pre-operative expenses and disallowed this
3 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. amount on the grounds that as per the schedule to depreciation in accordance with Section 32 of the Income Tax Act, 1961, the pre-operative expenses are not allowed to enhance the value of the plant & machinery and depreciation on such enhanced cost.
The ld. CIT (A) deleted the addition on the grounds that the capitalization of expenses on the plant & machinery has been made in accordance with the accounting standard.
Before us, the ld. DR argued that no expenses other than the actual cost incurred in purchasing the plant & machinery be added or factored in to enhance the cost of plant & machinery.
The ld. AR argued that the machinery was purchased for the jacket manufacturing and all the expenses incurred namely, interest on IDBI, term loan processing fees, bank legal fees, diesel, electricity and wages of workers have been capitalized and depreciation @ 7.5% is claimed on the pre-operative expenses as the capitalization was made in the month of March 2007. He relied on the judgment of the Hon’ble Apex Court in the case of Challapalli Sugars Ltd. Vs CIT 98 ITR 167.
Heard the arguments of both the parties and perused the material available on record.
Coming to the legal issue, it was submitted that depreciation u/s 32 of the Act is allowed on actual cost of the asset, which means the actual cost to the assessee. This cost should be construed in ordinarily commercial manner. Thus, it will include the cost incurred to bring the asset to the running condition. It is a fact that the expenses such as interest, wages
4 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. of workers and diesel & electricity expenses were incurred for installation of machinery and interest on borrowed capital used for purchase of machinery upto the date of installation thereof are capital expenses. From the above, it can be held that any expenditure on putting up fixed asset will amount to the cost of fixed asset. It is also an accepted standard that AS-1O regarding “accounting for fixed assets” issued by the ICAI specifies the components of cost of a fixed asset. Thus, the purchase price of an asset includes import duties, levies and any other cost directly attributable to the asset for bringing it to the working condition. The contention of the learned DR referring to the findings of the Assessing Officer that these expenses are revenue in nature cannot be accepted as in the pre-operative stage, all the expenses are capitalized irrespective their nature in the general parlance. The revenue has not been able to bring any evidence on record that any of the expenditure was not related to the plant & machinery. It is an undisputed fact that the assessee has incurred expenditure of Rs. 29,22,016/- in the pre commencement period. Even if all the expenses are revenue in nature, since the expenses were incurred for setting up fixed asset, they have to be capitalised.
Section 43(1) defines “actual cost” to mean actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In the case of CIT Vs. Food Specialities Limited, (1982)136 ITR 203 (Delhi), it was held that the Tribunal was right in holding that the expenditure of test runs was a capital expenditure. Therefore, expenses involved in purchase of milk and determining that the factory was in proper
5 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. working condition and making adjustment does not seem to be anything more than steps in setting up and finalisation of the factory, which is the capital asset. After tests have been carried out, it can be said that the factory had been set up and it is ready for commercial production. Therefore, the expenses can be said to have been incurred as cost of the plant and machinery.
In the case of Challapalli Sugars Limited Vs. CIT (1975) 98 ITR 167 (Supreme Court), it has been held that interest of Rs.- ‘X’- incurred on borrowed capital for purchase of plant and machinery, accruing to the date of installation of the machinery is a capital expenditure, on which depreciation and development rebate are admissible. From this decision it can be said that if an expenditure which is otherwise of revenue in nature, has been incurred towards acquisition of a capital asset, it will be the cost of the asset provided it has been incurred upto the date of installation of the asset. However, it is also clear that there should a direct nexus between expenditure and putting up of the asset.
In the case of CIT Vs. Lucas-TVS Limited 110 ITR 346, one of the questions before the court was – whether, on the facts and in the circumstances of the case, it has been rightly held that the sum of ‘AA' representing indirect expenditure on salaries, rent, lighting, etc. and allocated to various assets formed part of the capital asset for the eligibility of depreciation allowance and in relation to the cost of the machinery was eligible for development rebate also? The facts of the case are that the assessee-company acquired land near
6 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. Madras and erected buildings, plant and machinery etc. It also took on lease adjoining land for its use from integral coach factory. After completing the work of erecting the factory to certain stage, the production commenced on 01.12.1962. The accounts of the assessee were closed for the first time on 30.11.1962, during which it incurred total expenditure of ‘BB’ relating to salaries, rent, lighting etc. This expenditure was capitalized and allocated to the capital assets in the ratio of direct cost of the assets. Depreciation allowance and development rebate were claimed. The Assessing Officer held that the expenses amounting to ‘BB’ were in no way connected with installation of assets. Therefore, he excluded this amount and recomputed the cost of assets. The Honourable Court held that the question is covered by the decision of Supreme Court in the case of Challapalli Sugars Limited Vs. CIT (supra) and CIT Vs. Hindustan Petroleum Corporation, 98 ITR 167, in which it has been held that accepted accountancy standard for determining cost of fixed assets is to include of expenditure necessary to bring such assets into existence and to put them in working condition. Therefore, the question was decided in favour of the assessee and against the revenue. Having considered the facts of the case, we are of the view that the present issue is similar and, therefore, the ratio of the above case is applicable. In the instant case, the revenue has nowhere brought on record that the expenses incurred are not related to the assets so as to deviate from the established rationes’.
Hence, keeping in view the facts of the case, provisions of Section 43(1), provisions of Section 32 and the judgments of
7 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. the Hon’ble Supreme Court, we hereby decline to interfere with the order of the ld. CIT (A).
Interest Income:
The Assessing Officer has added an amount of Rs.39,60,000/- being 12% notional interest on the amount of loan extended of Rs.3.3 crores to the subsidiary company of the assessee. The AO held that the assessee has claimed finance expenses of Rs.1.89 crores on the loans taken and since the interest bearing funds have been utilized to accord interest free advances to the subsidiary company, the interest receivable by the assessee company needs to be charged.
Before us, it was explained that the assessee company has got sufficient own funds to the tune of Rs.9.9 crores to extend interest free loans to the subsidiary. The relavant details of the balance sheet as to the availability of own funds are as under: Particulars As at As at 31.03.2007 31.03.2006 (Rs.) (Rs.) Schedule-I Share Capital Authorized 10000000 Equity Shares of Rs.10 each 100,000,000 100,000,000 (Previous year 10000000 equity shares of Rs.10 each)
Issues, Subscribed and Paid up: 99,000,000 87,100,000 9900000 equity shares of Rs.10 each fully paid up in cash (Previous year 8710000 equity shares of Rs.10 each fully paid up)
Share application money - 20,568,000 (Pending allotment including share premium money)
8 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. Forfeiture Account 180,000.00 - (100000 Zero Coupon warrant @Rs.1.80 per warrant) (Previous Year NIL)
Total 99,180,000 107,668,000
Schedule-II
Reserves and Surplus
Reserves: Capital Reserve: State Capital Subsidy 1,000,000 1,000,000 (A) 1,000,000 1,000,000
Surplus:
Share Premium Account 24,000,000 15,512,000
Profit and Loss Account 257,666,720 246,625,993
(B) 281,666,720 262,137,993 Total (A+B) 282,666,720 263,137,993
We have examined the balance sheet and found that the assessee has got paid up capital of Rs.8.7 crores for the year ending 31.03.2006 and Rs.9.9 crores for the year ending 31.03.2007. Further, the reserves & surplus of the assessee varied between Rs.26.3 crores to Rs.28.2 crores for the two years. Since, the assessee has indisputably been proven to be having sufficient own funds, no disallowance u/s 36(1)(iii) of the Act is called for or no notional charging of the interest is legally acceptable. The assessed is at liberty to use their own funds as they deem fit, keeping in veiw the business contingencies as long as such action doesn’t result infarction of any statue or laws in force. We hold that the action of revenue is not backed up by any legal sanction .Hence,the appeal of the revenue on this ground is hereby dismissed.
9 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. Deemed Dividend and Allotment of Shares:
As per the balance sheet, the assessee has received an amount of Rs.2,05,68,000/- during the financial year 2005-06 as share application money, pending allotment. The balance sheet filed before the AO is as under:
Particulars As at As at 31.03.2007 31.03.2006 (Rs.) (Rs.) Schedule-I Share Capital Authorized 10000000 Equity Shares of Rs.10 each 100,000,000 100,000,000 (Previous year 10000000 equity shares of Rs.10 each)
Issues, Subscribed and Paid up: 99,000,000 87,100,000 9900000 equity shares of Rs.10 each fully paid up in cash (Previous year 8710000 equity shares of Rs.10 each fully paid up)
- 20,568,000 Share application money (Pending allotment including share premium money)
Forfeiture Account 180,000.00 - (100000 Zero Coupon warrant @Rs.1.80 per warrant) (Previous Year NIL) Total 99,180,000 107,668,000
Schedule-II
Reserves and Surplus
Reserves: Capital Reserve: State Capital Subsidy 1,000,000 1,000,000 (A) 1,000,000 1,000,000
Surplus:
10 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. Share Premium Account 24,000,000 15,512,000
Profit and Loss Account 257,666,720 246,625,993
(B) 281,666,720 262,137,993 Total (A+B) 282,666,720 263,137,993
From the above, it is clear that the share application money was received in the earlier assessment year 2006-07. The AO has mentioned (page 8 of AO) that the amounts have been introduced in the earlier year but went ahead making variation u/s 68 during the instant year. Hence, the addition made by the Assessing Office u/s 68 in the assessment year 2007-08 of the monies received in the earlier assessment year 2006-07 is liable to be quashed. Appeal of the revenue on this ground is allowed.
Sundry Creditors:
During the examination & verification of the sundry creditors, the AO has issued notices u/s 133(6) to 12 parties as per the list given below: Sl. Name of Party Amount Sundry Creditor No. 1. M/s H.K. Enterprises 10,84,035/- Sundry Creditor 2. M/s Kunal Industries 10,71,361/- Sundry Creditor 3. M/s Naveen Button Stores 5,74,585/- Sundry Creditor 4. M/s Ram Enterprises 5,29,069/- Sundry Creditor 5. M/s Ram Sons Udyog Ltd. 6,91,425/- Sundry Creditor 6. M/s Ruchee Impex 22,65,949/- Sundry Creditor 7. M/s S.S. Machine 7,43,455/- Sundry Creditor 8. M/s Sutlej Industries Ltd. 29,01,189/- Sundry Creditor 9. M/s Vardhman Threads Ltd. 10,33,922/- Sundry Creditor 10. M/s Skyways Air Services Pvt. 8,62,036/- Sundry Creditor Ltd. 11. M/s Vikas Traders 11,23,012/- Sundry Creditor 12. Shri Abhiram Bahera 1,11,829/- Sundry Creditor
11 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. 21. Out of the above 12 parties, M/s Ram Enterprises mentioned at Serial No. 4 and M/s Vikas Traders mentioned at Serial No. 11 have complied to the notice. When the Assessing Officer queried the assessee about the non-compliance, the assessee has submitted that they have provided the correct address of the parties and mere non-compliance from a third party cannot form the basis of addition in the assessee’s case. Then the AO proceeded to make addition of the amount being shown as the outstanding sundry creditors u/s 68. While making the addition, the AO held that the assessee has not discharged the onus to prove, 1. Identity of the creditor 2. Capacity of the creditor 3. Genuineness of the transaction
The ld. CIT (A) has deleted the addition on the grounds that the assessee has discharged the primary onus by furnishing copies of confirmations, address, amount of transaction, PAN etc. The ld. CIT (A) held that the AO has not done any job to prove that the transactions of the assessee are not genuine though the regular transactions have been conducted in the subsequent year too.
The ld. DR for the revenue pointed out that no reply was received from sundry creditors except two of them; hence addition in the hands of the assessee. He referred to the observation of the ld. CIT (A) in para 7.3 at page 38 and pointed out that the same were not correct.
12 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. 24. The ld. AR for the assessee pointed out that list of creditors was of regular trade creditors. The revenue has not prove that the parties are not existing are bogus.
After hearing both the parties, it transpires that the list of creditors is on account of the purchases made by the assessee during the year and amount outstanding against them. The AO made addition on the grounds that the identity, genuineness and creditworthiness of the sundry creditors because the notices issued u/s 133(6) have not been complied with. The notices have been duly received by the parties and their failure to reply cannot be attributed as a cause of default by the assessee. The fact that the notices have been duly served demonstrate the existence of the parties. Further, the assessee has been continuously dealing with these parties in subsequent years which could have been verified by the AO as the records available with the revenue. The parities namely, M/s Sutluj Industries Ltd., M/s Vardhman Trades Ltd., M/s Ruchi Impex by general parlance cannot be said to be non-existing entities. Notwithstanding that, no enquiries have been conducted by the AO to prove or to suspect the transactions to be of bogus in nature. After duly serving and receipt of the notices and failure of the recipient parties, to comply to the notices, cannot make the sundry creditors liable to be treated u/s 68 of the Act. Once, the assessee has discharge the onus by furnishing the details to prove the genuineness of the transaction, then the onus shifts on to the revenue to prove that these transactions have not genuine. Such enquiry has not even initiated by the Assessing Officer while brining the amounts to tax. The addition was made by the AO just because the sundry creditors have not
13 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd. complied to the notices issued u/s 133(6) of the Act. Hence, keeping in view, the entire facts and circumstances of the case narrated above, we hereby decline to interfere with the order of the ld. CIT (A) and dismiss the ground no. 4 of the revenue’s appeal.
Now coming to appeal of assessee against addition of Rs.84,88,000/-.
The case of assessee is that no fresh credit on account of Share Application Money has been received during the year. Out of total amount received, shares at face value of Rs.10/- were issued and share premium @ Rs.8/- was booked. Revenue on the other hand has made addition of Rs.84,88,000/-, which is the share premium account.
On perusal of record and while deciding the issue of deemed dividend and allotment of shares, we have noted that Share Application Money was received in AY 2006-07 and not in AY 2007-08. Hence, on this ground itself, no addition is warranted u/s 68 of the Act. Further, out of total amount received, Rs.1.19 cr. is against share capital account and Rs.84,88,000/- against share premium and Rs.1,80,000/- against forfeiture. Hence, no addition on this account is warranted. The ground of appeal raised by assessee is allowed.
In the result, the appeal of the revenue is partly allowed and the appeal of the assessee is allowed. Order Pronounced in the Open Court on 19/10/2020. Sd/- Sd/- (Sushma Chowla) (Dr. B. R. R. Kumar) Vice President Accountant Member Dated: 19/10/2020 *Subodh*