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Income Tax Appellate Tribunal, MUMBAI BENCH “B” MUMBAI
Before: SHRI M. BALAGANESH & SHRI RAVISH SOOD
ORDER PER RAVISH SOOD, J.M: The present appeal filed by the revenue is directed against the order passed by the CIT(A)-21, Mumbai, dated 05.07.2011, which in turn arises from the order passed by the A.O under Sec. 143(3) of the Income Tax Act, 1961 (for short „Act‟) dated 05.07.2011 for A.Y. 2008-09. The revenue has assailed the impugned order on the following grounds before us:
1. On the facts and in the circumstances of the case as well as in law, the Ld.CIT(A) erred in deleting the addition of Rs.15.30 crores made by the Assessing Officer as unexplained credit u/s.68 of the Act, without appreciating the fact that the assessee had provided no 2 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. evidence to prove that the said amount represents a known liability which is payable.
2. On the facts and in the circumstances of the case as well as in law, the Ld.CIT(A) erred in deleting the addition of disallowance of Rs.36,63,345/- being insurance charges for HVDC project & Rs.27,34,250/- being lease rentals for HVDC project made by the Assessing Officer without appreciating the fact that the expenses were prepaid expenses.
On the facts and in the circumstances of the case as well as in law, the Ld.CIT(A) erred in deleting the addition of disallowance of Rs.92,83,326/- made by the Assessing Officer, being payment towards stamp duty and service fee without appreciating the fact that the expenditure relates to the loan taken for acquisition of fixed assets which must be capitalized.
4. On the facts and in the circumstances of the case as well as in law, the Ld.CIT(A) erred in deleting the addition of disallowance of Rs.10,62,493/- made by the Assessing Officer, being freight on capital equipments, without appreciating the fact that freight on capital item is capital expenses and also assessee's reliance on ESAAR 1985 to support its claim was fully irrelevant.
On the facts and in the circumstances of the case as well as in law, the Ld.CIT(A) erred in deleting the addition of disallowance of write back of an amount of Rs.5.87 crores, the amount being disallowed as capital expenditure in AY 2007-08 while arriving at total income without appreciating the fact that the addition were made by the Assessing Office on the basis of comments of CAG in the statement of accounts of the assessee for AY 2007-08.
6. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the assessing officer be restored.
7. The appellant craves leave to amend or alter any grounds or add a new ground which may be necessary.”
Briefly stated, the assessee company which is engaged in the business of electricity transmission in the State of Maharashtra had e-filed its return of income for A.Y 2008-09 on 29.09.2008, declaring an income of Rs.415,88,96,270/- after claiming set-off of unabsorbed depreciation of Rs.205,50,92,578/-. The return of income was processed as such u/s 143(1) of the Act. Subsequently, the case of the assessee was selected for scrutiny assessment u/s 143(2) of the Act.
3 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. 3. The A.O vide his order passed u/s 143(3), dated 31.12.2010 assessed the income of the assessee company at Rs.678,95,17,660/- under the normal provisions of the Act. Further, the „book profit‟ of the assessee company u/s 115JB was determined at an amount of Rs.259,21,17,643/-. The A.O while framing the assessment inter alia made the following additions/disallowances to the returned income of the assessee.
Sr. No. Particulars Amount 1. Addition towards an unexplained credit u/s 68 Rs.15,30,00,000/- of the Act. 2. Disallowance of prepaid expenses w.r.t HVDC project : (i). Insurance charges : Rs.27,34,250/- (ii).Lease rentals : Rs.27,34,250/- Rs.63,97,594/- 3. Disallowance of stamp duty and service fees Rs.92,83,326/- expenditure. 4. Disallowance of freight on capital equipments. Rs.10,62,493/-
Aggrieved, the assessee carried the matter in appeal before the CIT(A). After deliberating at length on the issues in question in the backdrop of the contentions advanced by the assessee, the CIT(A) found favour with the claim of the assessee and vacated the aforementioned additions/disallowances that were made by the A.O. It was further observed by the CIT(A), that the assessee by raising an „additional ground of appeal
‟ had sought reduction of an amount of Rs.5,87,29,000/- that was disallowed by the A.O by treating the same as a capital expenditure in the immediately preceding year i.e A.Y 2007-
08. It was observed by the CIT(A) that the A.O while framing the assessment for A.Y. 2007-08, vide his order u/s 143(3), dated 29.12.2009 had inter alia disallowed the aforesaid expenditure by treating the same as a capital expenditure. It was noticed by the CIT(A) that the aforementioned addition was made despite the fact that the necessary rectification entries were passed by the assessee in the subsequent year i.e in the period relevant to A.Y. 2008-
09. It was noticed by the CIT(A), that the aforesaid disallowance made by the A.O in A.Y. 2007-08 was on appeal vacated by his predecessor, subject to a direction, that the said expenses would be allowed in the subsequent year in which appropriate correction entries were passed by the assessee i.e the year 4 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. under consideration, viz. A.Y 2008-09. Observing, that the A.O while framing the assessment for the year under consideration i.e A.Y. 2008-09 had failed to give effect to the directions of the CIT(A) and not allowed the deduction of the aforesaid amount of Rs.5,87,29,000/- while computing the assessee‟s income for the said year, therefore, he directed the AO to allow the necessary relief to the assessee.
5. The revenue being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. The ld. Authorised Representative (for short „A.R‟) for the assessee at the very outset of the hearing submitted that majority of the issues involved in the present appeal were covered by the order of the Tribunal in the assessee‟s own case for the preceding years. In order to drive home his aforesaid claim the ld. A.R had placed on record a brief synopsis along with the copies of the orders passed by the Tribunal in the assessee‟s own case for A.Y. 2006-07.
Per contra, the ld. Departmental Representative (for short „D.R‟) relied on the assessment order.
We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them. We shall deal with the multiple issues which had been assailed before us by the revenue in a chronological manner.
The revenue has assailed the deletion of an addition of Rs.15.30 crore that was made by the A.O u/s 68 of the Act. For a fair appreciation of the controversy leading to the impugned addition, we shall briefly cull out the facts germane to the same. During the course of the assessment proceedings, it was observed by the A.O that the Comptroller & Auditor General (for short „CAG‟) had observed that de hors any corresponding bond or loan existing in the „books of account‟ of the assessee company, an amount of Rs.15.30 crs was reflected as an outstanding liability. On being confronted, it was submitted 5 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. by the assessee that the aforesaid amount was an „Opening balance‟ of transfer Schemes that were received from the erstwhile MSEB. It was submitted by the assessee that the aforesaid amount appeared in the „account code 46.737‟ (interest accrued but not due on Indian currency loan ILFS) – Rs.0.42 crs. AND „account code – 46.746‟ (private bonds interest accrued but not due) – Rs.14.88 crs i.e totalling Rs.15.30 crs, which were to be cleared at the time of finalization of the transfer scheme. For the sake of clarity, the reply filed by the assessee in context of the issue in question as was submitted before the A.O is reproduced as under: “This is as per the opening balances of Transfer Schemes received from the erstwhile MSEB. The said amount appears in the a/c code 46.737 (interest accrued but not due on Indian currency loan ILFS) – Rs.0.42 crs. & a/c code – 46.746 (private bonds int accrued but not due) – Rs.14.88 crs i.e total Rs.15.30 crs. This will be cleared at the time of finalization of the Transfer Scheme.” However, the A.O did not find favour with the aforesaid explanation of the assessee. Observing, that the liability of Rs.15.30 crore represented an unexplained credit that was neither in existence nor payable, the same was added by him under Sec. 68 of the Act. On appeal, it was observed by the CIT(A) that the assessee was one of the successor companies to the erstwhile MSEB and was formed in the previous year relevant to the A.Y 2006-07 on the demerger/unbundling of the said MSEB. It was observed by the CIT(A), that as claimed by the assessee, and rightly so, on the demerger/unbundling of MSEB, both its assets and liabilities, to the extent the same pertained and were specifically allocable to the transmission undertaking were transferred to the assessee. It was observed by the CIT(A) that some of the liabilities of the erstwhile MSEB that were transferred /allocated to the assessee were not discharged and were accordingly being reflected in its accounts as outstanding, and the liability of Rs. 15.30 crore was one of such outstanding liability. It was further observed by the CIT(A), that the interest accrued liability of Rs. 15.30 crore was on account of transfer of certain liabilities on unbundling/demerger of erstwhile MSEB and was 6 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. appearing in the „balance sheet‟ of the assessee as an „opening balance‟ on 01.04.2017 and no fresh credit entries were passed during the year. In the backdrop of the aforesaid facts, the CIT(A) was of the view that since liabilities in question did not pertain to the year under consideration, the same, thus, could not have been added as an unexplained cash credit u/s 68 of the Act. It was, thus, observed by the CIT(A) that as submitted by the assessee, and rightly so, there were no unexplained credits and unexplained liabilities. Observing, that as per the audit objection raised by CAG the liabilities in question pertained to the earlier years, it was, thus, concluded by the CIT(A) that by no means an addition u/s 68 could have been made in the hands of the assessee. The CIT(A) while concluding as hereinabove had observed as under:
3.3. I have carefully considered the facts of the case. The A.O. made addition of Rs.15.30 crores u/s.68 of the Act holding the sum as unexplained credit. The A.O. made addition on the basis of audit objection raised by CAG. However, the CAG only pointed out that the corresponding loan of bonds were not existing in the relevant record against the liability of interest accrued at Rs.15.30 crores. The CAG stated that the correctness of the claim were not verifiable. The A.O. made addition u/s.68 on account of unexplained credit in the books of accounts. However, the question for consideration is whether there could be any unexplained credit in the books of account of the appellant, the appellant Government. The appellant has explained that the interest Rs.15.30 crores was on account of transfer of certain unbundling of erstwhile MSEB. The said liabilities were appearing balance sheet as opening balances as on 01.04,2007 and no fresh entries were passed during the year. Since such liabilities were not pertaining to the year under consideration, the same could not have been considered in the year under consideration for the purpose of addition u/s.68 of the Act, Since the liabilities were pertaining to the earlier years, duly shown in the balance sheets of earlier year and also as opening balance in the year under consideration, the appellant correctly made entries of interest accrued on such old liabilities. Such liabilities were received by the appellant on account of unbundling of erstwhile MSEB, which fact was not disputed. In support of its claim of liabilities (on which interest accrued during the year) pertaining to the earlier years* the appellant has filed copies of balance sheets of the concerned year and has also explained that similar objection was raised by CAG in the F.Y.2Q06-07 pertaining to A.Y.2007-08 which is reproduced as under: Appellant's reply to the CAG objection A/c code 46.7 - Accrued/unclaimed amount relating to borrowings - Rs.53.96 crores Interest accrued is shown as Rs. This is as per the opening balance, as 15.35 crores for which neither per the transfer scheme received from corresponding loan, bonds exists erstwhile MSEB. The relevant details in the account nor relevant record pertaining to this case being sought 7 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. are available for verification (HO & from MSEDCL soon and based on the WM), hence the correctness of the response further action will be taken. amount is not verifiable Thus, there is force in appellant's argument that there were no unexplained credit and unexplained liabilities. The interest of Rs.15.30 crores accrued during the year on the old liabilities received from erstwhile MSEB on unbundling of the MSEB. There is force in appellant's argument that in the facts and circumstances the provisions of sec.68 were not applicable. Even the audit objection raised by CAG in the immediately preceding year shows that the liabilities (considered in the year under consideration) were pertaining to the earlier years. It is worth to mention here that in assessment order of A.Y.2007-08, though this objection was raised by CAG but no addition was made by A.O. on this account.”
We have given a thoughtful consideration to the aforesaid issue and concur with the view taken by the CIT(A), viz. that the interest accrued liability of Rs.15.30 crore was transferred to the assessee on demerger/unbundling of the erstwhile MSEB; and as the said liabilities in question pertained to the earlier year, the same, thus, could not have been added during the year under consideration as an unexplained cash credit u/s 68 of the Act. We, therefore, finding no infirmity in the view taken by the CIT(A) uphold the deletion of Rs.15.30 crore. The Ground of appeal No. 1 is dismissed.
9. We shall now take up the grievance of the revenue that the CIT(A) had erred in deleting the disallowance of insurance charges of HVDC projects of Rs.36,63,345/-; and lease rentals for HVDC projects of Rs.27,34,250/-, loosing sight of the fact that both the said expenses were in the nature of prepaid expenses. During the course of the assessment proceedings, it was observed by the A.O that the assessee had inter alia debited the following expenses in its profit and loss account in respect of its HVDC projects:
Sr. No. Particulars Amount 1. Insurance charges Rs.73,26,689/- 2. Lease rentals Rs.27,34,250/- Observing, that the aforementioned expenses were in the capital field, the A.O called upon the assessee to explain as to why the same may not be disallowed. In reply, it was submitted by the assessee that the High Voltage Direct Current (HVDC) project was commenced by the erstwhile Maharashtra 8 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. State Electricity Board (MSEB) on 13th November, 1998 (i.e in the financial year 1998-99) and was transferred to the assessee in terms of the unbundling scheme pursuant to which the transmission undertaking of MSEB was transferred to the assessee. In support of the aforesaid factual position that HVDC project was not a new one and was an existing project since last many years, the assessee placed on record supporting documentary evidence, viz. copy of the lease agreement dated 21.05.1997; and copy of the office notes dated 28.04.1999 and 25.05.1999. It was further submitted by the assessee that the insurance charges in question pertained to HVDC Terminal Station situated at Chandrapur and HVDC RS O&M Circle situated at Padghe, and the said charges were by no means in the nature of a capital expenditure. Also, copy of the journal voucher evidencing the payment of lease rentals of Rs.27,34,250/- was filed in the course of the assessment proceedings. It was further submitted before the A.O that a similar issue had came up in the assessee‟s case for A.Y. 2006-07, and the same had been decided in the assessee‟s favour by the CIT(A). However, the A.O was not persuaded to subscribe to the aforesaid submission of the assessee. Holding a conviction that the aforesaid expenditure in question pertained to the succeeding year, and thus, was in the nature of prepaid expenditure, the A.O was of the view that the same could not be claimed as an expenditure during the year under consideration. Backed by his aforesaid conviction, the A.O disallowed 50% of the insurance charges of Rs.73,26,689/- and also the lease rental charges of Rs.27,34,250/-, and thus, made an addition of Rs.63,97,594/- (50% of Rs.73,26,680/- plus Rs.27,34,250/-) to the returned income of the assessee.
Before the CIT(A), the assessee rebutting the aforesaid observations of the A.O submitted that it had not claimed deduction of any prepaid expenses. It was submitted by the assessee that in the immediately preceding year i.e A.Y. 2007-08, the same expenses were incurred for the period spread over A.Y. 2007-08 and A.Y. 2008-09. It was, thus, submitted by the assessee that in A.Y. 2007-08 only the expenses pertaining to the said preceding year were claimed, while for the balance expenses pertaining to the year in question i.e.
9 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. A.Y. 2008-09 were claimed only in the said year. On a similar footing, it was submitted by the assessee that though the insurance expenses and lease rental were paid during the year under consideration for the period 01.10.2007 to 30.09.2008, however, in the accounts, the expenditure pertaining to the year under consideration only were claimed (including the expenses pertaining to the year under consideration that were paid in the immediately preceding year). After deliberating at length on the contentions advanced by the assessee the CIT(A) found favour with the same. Observing, that as claimed by the assessee that it had not claimed any prepaid expenses, and rightly so, the CIT(A) vacated the disallowance of Rs.63,97,594/- that was made by the A.O. For the sake of clarity, we herein reproduce the observations of the CIT(A) on the basis of which he had concluded as hereinabove; “4.3 I have carefully considered the facts of the case. The appellant in its written submissions has explained that it had not claimed expenditure pertaining to the next financial year. The appellant has explained that in the A.Y.2007-08, same expenses were incurred for the period spread over to A.Y.2007-08 and 2008-09. In A.Y.2007- 08 the expenses pertaining to only that year were claimed and the balance expenses pertaining to this year (which were paid in A.Y.2007-08) had been claimed now in the year under consideration. Similarly the insurance expenses and lease rentals were paid during the year for the period 01.10.2007 to 30.09.2008. However, in the accounts, the expenditure pertaining to the period pertaining to the year under consideration were only claimed including the expenses which were paid in immediately preceding year. The appellant has explained the same as under: “Padghe Circle Particulars Ref. JV No. DR. CR. Paid in Advance in 2006-07 2285707 1 now reversed in apr.07 Payment of premium 16744 2 Paid in AY 2008-09 (50% booked in 2288150 3 the FY2008-09) Refund of excess premium paid 605418 4 Total 4590601 605418 Net Paid in AY 2008-09 3895183 10 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. Chandrapur Circle Paid for the year 2007-08 2269426 All the four JVs are Premium paid 4543705 arranged serially in Rectification entry for excess 1202199 annex.2 – Insurance – provisions (Ref. recd.) Chandrapur Circle Paid in AY. 2008-09 (50% 2269426 booked in the FY 2008-09) Total 6813131 3471625 Net Paid in AY.2008 -09 3341506 Total Insurance premium paid in year 2007-08 (AY 2008-09) Padghe Circle 3985183 Chandrapur Circle 3341506 Total 7326689 Extract of segregation of Accounts Head: 76. 107-9 Location Code Schedule No:010 i) Insurance charges for HVDC 330 39851783 340 3341506 TOTAL 7326689 Thus the appellant has satisfactorily explained that it had not claimed any prepaid expenses as incorrectly held by A.O. The disallowance made by A.O. is therefore, deleted. These grounds of appeal are therefore, allowed.” We have given a thoughtful consideration to the issue in question and concur with the view taken by the CIT(A), that as rightly claimed by the assessee that the expenses in question pertaining to the HVDC project were not in the nature of prepaid expenses, but pertained to the year under consideration i.e A.Y. 2008-09, therefore, the same were rightly claimed as deduction. Accordingly, in the backdrop of our aforesaid deliberations, we are of the considered view that no infirmity arises from the order of the CIT(A) to the extent he had vacated the disallowance of the HVDC expenses, viz. Insurance charges:Rs.36,63,345/-;and lease rentals: Rs.27,34,250/-, therein aggregating 11 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. to an amount of Rs.63,97,594/-. We, thus, uphold the order of the CIT(A) in context of the issue in question. The Ground of appeal
No. 2 is dismissed.
11. We shall now take up the grievance of the revenue that the CIT(A) had erred in deleting the disallowance of stamp duty and service fee aggregating to Rs.92,83,326/- that was made by the A.O, on the ground, that the same being an expenditure pertaining to a loan taken for acquisition of fixed asset was thus required to be capitalised. As is discernible from the assessment order, it was observed by the A.O that the assessee had inter alia claimed deduction of stamp duty expenditure of Rs.85,18,230/-; and service fee of Rs.7,62,056/-. On being queried as to why the aforesaid expenditure may not be disallowed as the same was incurred in the capital field, it was submitted by the assessee that as the payment of stamp duty was w.r.t hypothecation of assets that were offered as security for availing of various loans by the assessee company from REC/PFC, the same, thus, was allowable as a revenue expenditure. Insofar the expenditure that was incurred towards service fees of Rs.7,62,056/- was concerned, it was submitted by the assessee that the same comprised of the payments that were made towards service fee to Bank of India in respect of loans take from “Credit Suisee Switzerland” and “SEB Sweden”. It was, thus, submitted by the assessee that as the aforesaid expenditure was incurred in the normal course of its business, the same, was therefore allowable as deduction u/s 37(1) of the Act. In support of his aforesaid contention the ld. A.R relied on the judgment of the Hon‟ble Supreme Court in the case of India Cement Ltd. Vs. CIT, (1966) 60 ITR 52 (SC), wherein the Hon‟ble Apex Court had held that the stamp duty, registration fees etc. paid for obtaining a loan was allowable as a business expenditure. However, the A.O did not find favour with the aforesaid contention of the assessee. Holding a conviction that the stamp duty, registration fees that was paid by the assessee for hypothecation of assets that were offered as security for availing various loans from REC/PFC was in the nature of an expenditure incurred for acquisition of fixed assets, the A.O was of the view that the same were required to be capitalized. Backed by his 12 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. aforesaid view the A.O disallowed the aforesaid claim of expenditure of Rs.92,83,326/-.
12. On appeal, it was observed by the CIT(A) that the A.O had incorrectly disallowed the aforesaid expenditure by wrongly relating the same to acquisition of capital assets by the assessee. It was observed by the CIT(A), that a similar issue had came up in the assessee‟s own case for A.Y. 2006-07, wherein the said expenses were allowed by his predecessor, by observing, that as the expenses were incurred for availing various loans and service fee for trusteeship for MSEB bonds, the same, thus were in the nature of business expenses which did not create any capital asset of an enduring nature. Accordingly, the CIT(A) following the view that was taken by his predecessor while disposing off the assessee‟s appeal for A.Y. 2006-07, and keeping in view the fact that the expenditure in question was not incurred for acquisition of any fixed asset therein observed, that as the aforesaid expenses were incurred by the assessee in the normal course of its business, thus, the disallowance made by the A.O was liable to be vacated. The CIT(A) while concluding as hereinabove, had observed as under:
“5.3 I have considered the facts of the case. The A.O. has disallowed appellant's claim of stamp duty paid at Rs.85,18,270/- and service fees paid at Rs.7,62,056/- holding that the expenditure relates to loans taken for acquisition of fixed assets from REC/PFC, which were to be capitalized. However, in its submission before A.O, the appellant never claimed that the loans were taken for acquisition of fixed assets. The appellant explained to the A.O. that the said expenses were routine expenses incurred during the course of business and were allowable u/s.37(1) of the Act since no capital asset had been created by incurring such expenditure. In the facts and circumstances the A.O. incorrectly disallowed the expenditure incorrectly [relating the said expenditure with the acquisition of capital asset. Incidentally this issue was also there in A.Y.2006-07 wherein the said expenses were allowed by the undersigned by holding that the expenses e incurred for availing various loans and service fee for trusteeship for [MSEB bonds. It was also held in appeal order of A.Y.2006-07 that the said expenses were business expenses which did not create capital asset of enduring nature. We have deliberated at length on the issue in question and are persuaded to subscribe to the view taken by the CIT(A) that the aforesaid expenses, viz. Stamp Duty expenses: Rs.85,18,270/-; and Service fees expenses: Rs.7,62,056/-, having been incurred by the assessee in the normal course of 13 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. its business, which had not resulted to creation of any capital asset of an enduring nature, thus were allowable as a deduction u/s 37(1) of the Act. Our aforesaid view is fortified by the judgment of the Hon‟ble Supreme Court in the case of India Cements Ltd. Vs. CIT(A) (1966) 60 ITR 52 (SC), wherein it has been held by the Hon‟ble Apex Court that the stamp duty, registration fees, lawyers fees etc. paid for obtaining a loan is allowable as a business expenditure. Accordingly, finding no infirmity in the view taken by the CIT(A), who in our considered view had rightly vacated the disallowance of Rs.92,83,326/-, we uphold his order to the said extent. The Ground of appeal
No. 3 is dismissed.
13. We shall now take up the grievance of the revenue that the CIT(A) had erred in deleting the disallowance of freight expenditure of Rs.10,62,493/- that was made by the A.O, on the ground, that the same was incurred by the assessee on account of a capital equipment. As is discernible from the records, the assessee had claimed deduction of Rs.10,62,493/- on account of freight on capital equipment. On being queried as to why the aforesaid expenditure may not be disallowed, it was submitted by the assessee that its aforesaid claim of expense was as per the policy prescribed under clause no. 2.20(6)(7) of Annexure V of the Electricity (supply) (Annual Account) Rules, 1985 (ESAAR 1985). However, the aforesaid claim of the assessee did not find favour with the A.O, who was of the view that as the freight expenditure was admittedly incurred on capital items, the same, thus, being an expenditure incurred in the capital field was not allowable as a deduction. Insofar the support drawn by the assessee from the ESAAR, 1985 Rules to support its claim for deduction of the aforesaid expense was concerned, the same was held by the A.O to be wholly irrelevant. Accordingly, on the basis of his aforesaid observations the A.O disallowed the assessee‟s claim for deduction of freight expenses of Rs.10,62,493/-.
14. On appeal, the CIT(A) observed that the freight expenses were disallowed by the A.O, on the ground, that the same were incurred for 14 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. transportation of a new capital equipment, and thus, the same was to form part of the cost of the said capital equipment. It was observed by the CIT(A), that the assessee had in the course of the appellate proceedings placed on record documentary evidence which revealed that the freight expenses in question were incurred for transportation/shifting of an existing capital assest i.e transformer (Nasik Circle), and not for transportation of any new capital asset purchased by the assessee. It was, thus, observed by the CIT(A) that as the freight expenses were incurred by the assessee on transportation of an existing capital asset i.e for the purpose of shifting it for repairs, the same, was thus allowable as a business/revenue expenditure. Accordingly, on the basis of his aforesaid deliberations the CIT(A) vacated the disallowance of freight expenses of Rs.10,62,493/- that was made by the A.O, observing as under:
‟6.3 I have considered the facts of the case. The A.O. disallowed the appellant's claim of freight expenses of Rs,10,62,493/- holding that the same were incurred on transportation of capital equipments. Probably the A.O. thought that the freight expenses were pertaining to the transportation of new capital equipments and therefore, should form part of cost of those new capital equipment. During the course of assessment proceedings, the appellant filed its submissions to the A.O. vide letter dtd.20.12.2010, During appellate proceedings, the appellant had filed a copy of the said letter. In that letter the appellant clearly explained that the freight expenses were transportation charges for repairs of transformer (Nasik Circle). The appellant also filed documentary evidences in respect of payment made towards freight charges on such repairs to the A.O. It was true that the freight expenditure was incurred for transportation/shifting of capital asset, however, such capital assets were existing capital assets and not the new capital assets purchased by the appellant. The appellant incurred such freight expenses on transportation of existing capital assets for the purpose of shifting them for repairs. Since the expenditure was incurred on existing capital equipments, therefore, such expenditure was allowable as business/revenue expenditure. The disallowance made by A.O, is therefore, deleted. This ground of appeal is allowed.
We have given a thoughtful consideration and concur with the view taken by the CIT(A) that the disallowance of freight expenses of Rs.10,62,493/- by the A.O was based on misconceived facts. As the aforesaid freight expenditure was incurred by the assessee for transportation/shifting of an existing capital asset i.e transformer (Nasik Circle), for the purpose of getting the same repaired, the same in our considered view, as observed by the CIT(A), and rightly so, was allowable as a revenue expenditure u/s 37(1) of the Act. Accordingly, finding no infirmity in the view taken by the CIT(A) as regards the 15 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. deletion of the disallowance of freight expenses of Rs.10,62,493/-, we uphold his order to the said extent. The Ground of appeal No. 4 is dismissed.
15. We shall now take up the claim of the revenue that the CIT(A) had erred in deleting the disallowance of an amount of Rs.5.87 crs. that was treated as a capital expenditure in A.Y 2007-08. The controversy qua the issue in question lies in a narrow compass. Before the CIT(A), the assessee had raised an „additional ground‟ that the A.O while computing the total income of the assessee for the year under consideration had erred in not reducing the „write back‟ of an amount of Rs.5,87,29,000/- that was disallowed by him in A.Y. 2007-08 by treating the same as a capital expenditure, despite the fact that specific directions to the said effect were given by the CIT(A) while disposing off the assessee‟s appeal for A.Y 2007-08. It was submitted by the assessee that during the A.Y. 2007-08 the assessee had inter alia incurred expenses aggregating to Rs.5,87,29,000/- which were claimed as a revenue expenditure, as under : i. Expenditure on renovation & modernization of RS.3,88,00,000/-. ii. Expenditure on transformer rewinding of Rs.1,43,00,000/- iii. Expenditure on replacement of earth wire on Chandrapur Padghe Line of Rs.56,29,000/-.
However, the A.O on the basis of the comments of the CAG to the Statement of Accounts of the assessee for the said year, had while framing the assessment u/s 143(3), vide his order dated 29.12.2009 for the said preceding year i.e A.Y 2007-08 disallowed the aforesaid expense by treating them as having been incurred in the capital field. The aforesaid additions were made in spite of the fact that the necessary rectification entries were passed in the subsequent year i.e in the year ended 31st March, 2008 relevant to A.Y. 2008- 09. On appeal, the CIT(A) confirmed the said action of the A.O, subject to a direction that the aforesaid expenses be allowed during the year in which the appropriate correction entries were passed by the assessee i.e in the year under consideration i.e A.Y 2008-09, without netting off of capital expenditure 16 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. pertaining to assessment year 2007-08. It was submitted by the assessee that in the backdrop of the aforesaid specific direction of the CIT(A), the assessee had requested the A.O to allow a deduction of Rs.5,87,29,000/- while computing its income for the year under consideration i.e A.Y. 2008-09, which, however, was rejected by him. After admitting the „additional ground of appeal‟ that was raised by the assessee, the CIT(A) taking cognizance of the fact that his predecessor while disposing off the assessee‟s appeal for the immediately preceding year i.e A.Y. 2007-08, vide his order dated 19.11.2010 had specifically directed the A.O to allow necessary relief to the assessee during the year under consideration i.e A.Y 2008-09. In the backdrop of the aforesaid facts, the CIT(A) directed the A.O to give effect to the direction of the CIT(A) that was contained in Para 3.3 of his appellate order dated 19.11.2010 for A.Y. 2007-08. The relevant observations of the CIT(A) in context of the issue are reproduced as under:
11.2 I have considered the facts of the case. The additional ground raised j is consequential to the directions given in appeal order of A.Y.2007-08. The [appeal for the year under consideration was filed by appellant on 01.02.2011 whereas the appeal order for A.Y.2007-08 was passed subsequently i.e. on 19.11.2010. In the facts and circumstances there was no question for raising this ground by the appellant in the grounds of appeal filed on 01.02.2011. The additional ground raised by appellant is therefore, admitted. The appellant's above submissions are correct. In para 3.3 of the appeal order dtd. 19.11.2010 for A.Y.2007-08, the A.O. was directed to allow appellant's these expenses in subsequent year without I netting off of capital expenditure of that year. The A.O. is directed to allow necessary relief to the appellant in the year under consideration as per directions given in para 3.3 of appeal order for A.Y.2007-08. For statistical purposes, this additional ground is allowed.
We have given a thoughtful consideration to the aforesaid issue, and find, that as the CIT(A) had merely directed the A.O to allow necessary relief to the assessee qua the aforesaid issue in question, i.e in conformity with the directions that were given by the CIT(A) while disposing off the assessee‟s appeal for A.Y. 2007-08, dated 10.11.2010, we find no infirmity in the same as had been alleged by the revenue. Accordingly, finding no merit in the contentions raised by the revenue qua the aforesaid issue in question, the Ground of appeal no. 5 is dismissed.
17 ACIT-10(1) Vs. M/s Maharashtra State Transmission Com. Ltd. 16. Resultantly, the appeal filed by the revenue dismissed in terms of our aforesaid observations.