ITO WARD 1, PUDUCHERRY vs. LES ATELIERS PONDICHERRY (P) LTD., PONDICHERRY

PER G. MANJUNATHA, AM: This bunch of four appeals filed by the assessee as well

as Revenue are directed against common order passed by the

learned Commissioner of Income Tax (Appeals), Puducherry

dated 19.03.2018 and pertain to assessment years 2013-14 &

2014-15. Since, facts are identical and issues are common, for

2 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 the sake of convenience, these appeals were heard together

and are being disposed off, by this consolidated order.

ITA Nos. 1869 & 1870/Chny/2018:

of appeal for both assessment years, therefore, for the sake of

brevity, grounds of appeal filed for the assessment year 2013-

14 are reproduced as under:-

“1. Whether the CIT(A) is right in deciding that the assessee is entitled for depreciation u/s.32 even when the machinery is not actually used but on the assumption that the machinery was ready to use; relying on the decision of Madhya Pradesh High Court in the case of Premier Industries Limited Vs CIT 323 ITR 672; particularly in view of the judgement of the Honourable Supreme Court in the case of Liquidators of Pursa Ltd., Vs CIT [1954] 25 ITR 265 quoted by the High Court of Kerala in the case of CIT, Kottayam Vs Malayala Manorama Co. Ltd., [2018] 91 taxmann.com 14? 2. Whether The CIT(A) is right in relying on the decision of Madhya Pradesh High Court in the case of Premier Industries Limited Vs CIT 323 ITR 672 in the light of the Honourable Supreme Court’s decision in the case of Liquidators of Pursa Ltd., Vs CIT [1954125 ITR 265 where it was held that the machinery had to be used during the accounting year for claiming depreciation? This decision of the Supreme Court is now reiterated by the High Court of Kerala in the recent judgment in the case of CIT, Kottayam Vs Malayala Manorama Co. Ltd., [2018] 91 taxmann.com 14? 3. Whether the CIT(A) is correct in allowing the expenditure of depreciation u/s32 when the machinery was not used during the year and it remains idle even now after six years? 4. Whether the CIT(A) is right in deciding the fact that the machinery was ready for use, when the Auditors commented that they could not physically inspect the machinery?

3 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 5. Whether the CIT(A) is correct in allowing the expenditure disallowed under under Section 14 A when bulk of assessee’s income/receipts was dividend income which did not form part of total income I taxable income?

ground No.1 to 4 of Revenue appeal for both assessment years

is disallowance of depreciation on plant & machinery. The

assessee is engaged in the business of manufacturing of

leather goods. During the impugned assessment year, the

company has suspended its manufacturing activity due to

labour unrest. However, the assessee has claimed depreciation

on plant & machinery on the ground that plant & machinery was

put to use in business of the assessee and thus, whether any

manufacturing activity was carried out or not, depreciation on

said machinery is allowable as per the Act. The Assessing

Officer, however, was not convinced with explanation furnished

by the assessee and according to him, when the assessee has

not used plant & machinery for the purpose of business during

relevant assessment year, then question of allowing

depreciation on plant & machinery does not arise. The

Assessing Officer further noted that in order to claim

depreciation as per provisions of section 32(1) of the Act, the

4 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 assessee should satisfy certain conditions as per which plant &

machinery must be owned by the assessee and secondly, said

plant & machinery must be used for purpose of business of the

assessee. Since the assessee has not used plant & machinery

for purpose of business of the assessee, the claim of

depreciation on plant & machinery cannot be allowed as

deduction and accordingly added back depreciation claimed on

plant & machinery.

preferred an appeal before the learned CIT(A). Before the

learned CIT(A), the assessee reiterated its arguments taken

before the Assessing Officer in light of certain judicial

precedents, including decision of the Hon’ble Jurisdictional High

Court of Madras in the case of CIT Vs Vayithiri Plantations Ltd.

(128 ITR 675). The sum & substance of arguments of the

assessee before learned CIT(A) are that plant & machinery was

put to use in business of the assessee and once particular

plant & machinery is ready for use, then depreciation on such

plant & machinery needs to be allowed whether or not, said

5 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 plant & machinery was used during relevant period. The

learned CIT(A), after considering relevant facts and also by

following decision of Hon'ble Madras High Court in the case of

CIT Vs Vayithiri Plantations Ltd. (supra) observed that plant &

machinery on which depreciation claimed was owned by the

assessee and further, they have been using in business of the

assessee. Although, said plant & machinery was not used for

impugned assessment year, but same is because of labour

unrest which resulted in temporary suspension of

manufacturing activity otherwise, plant & machinery was

already put in business of the assessee and thus, the

Assessing Officer was incorrect in disallowing depreciation on

plant & machinery merely for reason that same was not used

for purpose of the business during relevant period.

erred in deleting additions made by the Assessing Officer

towards disallowance of depreciation on plant & machinery

without appreciating fact that the assessee has not used plant &

machinery for purpose of business of the assessee which is

6 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 evident from fact that business of the assessee was temporarily

closed down due to labour unrest. The learned DR further

submitted that in order to claim depreciation asset must be

owned by the assessee and further, same needs to be put to

use in business. In this case, although asset was owned by the

assessee, but same were not put to use in the business for

relevant period and thus, question of claiming depreciation on

such asset does not arise.

supporting order of the learned CIT(A) submitted that there is

no dispute with regard to fact that assets were put to use in

business of the assessee in earlier financial years. It is also not

in dispute that manufacturing activity was temporarily shut down

due to labour unrest, otherwise the assessee is owning plant &

machinery as a going concern and thus, even if there is no

activity in the impugned assessment year, depreciation

allowable under the Act on said plant & machinery needs to be

allowed. The learned CIT(A), after considering relevant facts

has rightly deleted disallowance of depreciation on plant &

machinery and his order should be upheld.

7 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 7. We have heard both the parties, perused material

available on record and gone through orders of the authorities

below. The assessee is engaged in the business of

manufacturing of leather goods, has commenced its

manufacturing activity from assessment year 2012-13 itself,

which is evident from fact that the assessee has declared

revenue from operations for earlier financial years. It is also an

admitted fact that the assessee has claimed depreciation on

said plant & machinery for earlier financial year and same has

been allowed by the Department. The dispute is with regard to

depreciation claimed for impugned assessment year. The

assessee has claimed depreciation on plant & machinery on the

ground that even though there is temporary suspension of

manufacturing activity, but said suspension is temporary lull.

Further, the assessee is considered to be a going concern and

assets on which depreciation was claimed was continued to

be used in the business of the assessee, once labour unrest is

resolved. Therefore, it is right in claiming depreciation. It was

contention of the Assessing Officer that when assets were not

used in the business of the assessee for the relevant

8 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 assessment year, question of allowance of depreciation does

not arise.

Assessing Officer to disallow depreciation on plant &

machinery in light of arguments of the assessee and we

ourselves do not subscribe to the reasons given by the

Assessing Officer for simple reason that, when plant &

machinery is kept ready for use and further same is put to use

in business of the assessee, any forced idleness of the

machinery cannot disentitle the assessee from getting benefit of

allowance of depreciation. Further, machinery which is kept

idle may well deprecate, particularly during idle period.

Therefore, once machinery is ready for use and further, put to

use in business of the assessee, depreciation needs to be

allowed for normal wear and tear whether or not said machinery

was actually utilized for purpose of business during relevant

period. This principle is supported by the decision of the

Hon’ble Madras High Court in the case of CIT Vs. Vayithiri

Plantations Ltd. (supra) and decision of the Hon’ble Bombay

High Court in the case of CIT vs. Viswanath Bhaskar Sathe

9 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 (1937) 5 ITR 621. In this case, assets were not used in

business of the assessee. However, due to labour unrest, same were not put to use for manufacturing purpose for impugned assessment year. Therefore, for this reason depreciation on

plant & machinery cannot be denied. The learned CIT(A), after considering relevant facts has rightly deleted additions made by the Assessing Officer towards disallowance of depreciation.

Hence, we are inclined to uphold findings of the learned CIT(A) and reject ground taken by the Revenue for both assessment years.

1961. The assessee has not declared any income from operations for the year under consideration, however, has claimed certain expenditure like travelling and conveyance, legal and professional expenses, communication expenses etc.

The Assessing Officer had disallowed expenditure debited into profit & loss account by the assessee on the ground that when there is no income from operations, question of deduction of

10 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 various expenditure does not arise and hence, invoked

provisions of section 14A of the Act, and disallowed entire

expenses claimed by the assessee.

erred in deleting additions made by the Assessing Officer

towards disallowance of expenditure u/s.14A of the Income

Tax Act, 1961, without appreciating fact that except interest

income, the assessee has not shown any income from

operations and thus, the Assessing Officer has rightly

disallowed various expenditure debited into profit & loss

account.

assessee has debited various expenditure including

communication expenses, travelling and conveyance expenses

which are in the nature of day to day expenses, which needs to

be incurred by any corporate body whether or not any income

generated from business activity. Therefore, the learned CIT(A)

after considering relevant facts has rightly deleted additions

11 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 made by the Assessing Officer and his order should be

upheld.

available on record and gone through orders of the authorities

below. The Assessing Officer has disallowed various

expenditure debited into profit & loss account which are in

nature of general administration and other overhead expenses

incurred by any corporate body to maintain corporate status of

the assessee, without verifying fact that said expenditure is

relatable to exempt income, which is not taxable under the Act

or not. Further, once there is no exempt income for relevant

period, then question of disallowance of expenses relatable to

said exempt income does not arise. In this case, on perusal of

facts, we find that the Assessing Officer has not recorded any

finding on exempt income of the assessee. In absence of any

finding with regard to exempt income, the Assessing Officer

cannot simply disallow general, administrative and other

overhead expenses which are incurred in normal course of

business of the assessee for maintaining corporate status of

any company u/s.14A of the Income Tax Act, 1961. The

12 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 learned CIT(A), after considering relevant facts has rightly held

that the Assessing Officer has erred in invoking provisions of

section 14A of the Act to disallow various expenditure claimed

by the assessee. The said findings of the learned CIT(A) goes

uncontroverted from the Revenue. Hence, we are inclined to

uphold findings of the learned CIT(A) and reject ground taken

by the Revenue for both assessment years.

assessment years 2013-14 & 2014-15 are dismissed.

ITA No. 1483/Chny/2018 (AY: 2013-14):

“1. The order of the Respondent is contrary to law and facts of the case and is therefore liable to be set aside. 2. The Respondent has erred in disallowance of foreign exchange loss of Rs.58,02,684/- under Section 43A and 37 of the Income tax Act, 1961, without appreciating the fact that the Appellant has incurred foreign exchange loss relating to loan availed from State Bank of India for providing security deposit to its holding company and not for acquisition of any asset either in India or outside India. Moreover, from the said security deposit, the Appellant had earned interest income, which is offered for taxation. 3. The Appellant states that the above grounds are independent and without prejudice to one another. The Appellant craves leave to file additional grounds at the time of hearing.”

13 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 15. The only issue that came up for our consideration from

assessee appeal for assessment year 2013-14 is disallowance

of foreign currency fluctuation loss amounting to

Rs.58,02,684/- u/s.43A r.w.s. 37 of the Income Tax Act, 1961.

The facts with regard to impugned dispute are that the

assessee has availed term loan from bank and same has been

converted into FCNR (B) loan. The assessee has incurred

foreign currency fluctuation loss on account of conversion of

term loan into FCNR(B) loan and same has been claimed as

deduction u/s.37 of the Act, on the ground that loan has been

availed to give security deposit to M/s. Leather Craft India, an

associate company of the assessee. The Assessing Officer

has disallowed foreign currency fluctuation loss claimed by the

assessee u/s.43A r.w.s. 37 of the Act, on the ground that any

loss incurred on fluctuation of foreign currency can be allowed

only in case where the assessee has borrowed loan for

acquisition of any asset outside India. Since, the assessee has

taken loan and same has been used for giving security deposit

to associate concern, same is not utilized for purpose of

14 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 business of the assessee and hence, disallowed foreign

currency fluctuation loss claimed by the assessee.

learned CIT(A) has erred in sustaining additions made by the

Assessing Officer towards disallowance of foreign exchange

loss u/s.43A r.w.s. 37 of the Act, without appreciating fact

that the assessee has incurred foreign currency fluctuation loss

relating to loan availed from State Bank of India for providing

security deposit to its holding company and not for acquisition

of asset either in India or outside India. He further submitted

that any foreign exchange loss can be disallowed u/s.43A of the

Act, if such loss is arisen out of conversion of foreign currency

loan, and further such loss is arisen in the course of availing

loan for acquiring any asset in India. Since, the assessee has

taken normal loan for purpose of business of the assessee, any

expenditure incurred including loss on fluctuation of foreign

currency needs to be allowed u/s.37 of the Income Tax Act,

1961.

15 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 17. The learned DR, on the other hand, supporting order of

the learned CIT(A) submitted that the Assessing Officer as

well as learned CIT(A) has brought out clear facts to the effect

that loan was not utilized for purpose of business of the

assessee and thus, any loss incurred on foreign exchange

fluctuation is capital in nature, which cannot be allowed u/s.43A

of the Income Tax Act, 1961.

available on record and gone through orders of the authorities

below. The assessee has availed term loan from bank and the

same has been subsequently converted into FCNR (B) loan.

The assessee has incurred exchange loss on account of

conversion of term loan into FCNR (B) loan. The Assessing

Officer has disallowed exchange loss incurred on account of

fluctuation of foreign currency on the ground that said loan was

not utilized for purpose of business of the assessee. It was

explanation of the assessee before the Assessing Officer that

term loan availed from bank was used to give security deposit

to holding company of the assessee in normal course of

16 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 business and thus, any loss incurred on fluctuation of foreign

currency is allowable u/s.37 of the Income Tax Act, 1961. We

have gone through reasons given by the Assessing Officer to

disallow foreign currency fluctuation loss incurred on FCNR (B)

loan in light of arguments of the learned AR for the assessee

and we ourselves do not agree with arguments of the learned

AR for the assessee for simple reason that unless assessee

demonstrates with evidence to prove fact that FCNR (B) loan

has been utilized for purpose of business of the assessee, any

loss incurred on fluctuation of foreign currency cannot be

allowed as revenue expenditure u/s.37 of the Income Tax Act,

1961. No doubt, the Assessing Officer has clearly erred in

invoking provisions of section 43A of the Act, to disallow foreign

exchange loss, because said provision is applicable only in

cases, where the assessee has acquired foreign currency loan

for acquiring any asset in India. In this case, the assessee has

not acquired any asset either in India or from outside India.

Therefore, the Assessing Officer cannot disallow foreign

exchange loss u/s.43A of the Act. But, fact remains that the

Assessing Officer had also disallowed said loss u/s.37 of the

17 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 Act on the ground that loan was not utilized for the purpose of

business of the assessee . It is well settled principle of law that

in order to claim deduction for any expenditure incurred by the

assessee including interest on loans, then loan should be

borrowed for purpose of business of the assessee. In this case,

the assessee has failed to bring on record any evidence to

prove that loan was in fact, borrowed for purpose of business

of the assessee. Therefore, we are of the considered view that

there is no error in the reasons given by the Assessing Officer

to make additions towards disallowance of foreign exchange

fluctuation loss u/s.37 of the Income Tax Act, 1961. Hence, we

are inclined to uphold order of the learned CIT(A) and dismiss

appeal filed by the assessee.

year 2013-14 is dismissed.

ITA No. 1508/Chny/2018 (A.Y.2014-15):

18 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 2. The Respondent has erred in disallowing land development charges of Rs.54,01,176/- under Section 69 of the Income Tax Act, 1961. 3. The Respondent failed to appreciate that Section 69 can be invoked only when the twin conditions stipulated in the section are satisfied. One. Investment are not recorded in the books of accounts and other, the assessee does not offer explanation about the nature and the source of the investments or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory. In the present case, the Appellant has recorded the land development charges in the books of accounts which have been subject to audit. 4. The Respondent erred in holding that land is not shown in the fixed asset schedule under the Income Tax Act. The Respondent failed to appreciate that there is no separate field meant for Land in the fixed asset schedule in the Income tax returns prescribed under Income Tax Act as no depreciation allowance is provided for land. 5. The Respondent failed to consider the submission and documents provided by the Appellant where in the explanation sought by the Respondent regarding the land development charges is provided.”

the assessee appeal for assessment year 2014-15 is

disallowance of land development charges of Rs.54,01,176/-

u/s.69 of the Income Tax Act, 1961. The Assessing Officer has

disallowed a sum of Rs.54,01,176/- incurred by the assessee

for land development charges on the ground that the assessee

has failed to file any evidence to prove that expenditure was

incurred for land development. The Assessing Officer further

19 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 noted that although, the assessee has debited land

development charges into fixed asset account, but on perusal

of fixed asset schedule as per Income Tax Act, 1961, no such

amount was reflected in fixed asset schedule. Therefore, he

opined that the assessee has not able to explain investments

in land development charges and thus, held that amount

incurred for land development charges is unexplained

investments, which is taxable u/s.69 of the Income Tax Act,

1961.

learned CIT(A) has erred in sustaining additions made towards

land development charges u/s.69 of the Income Tax Act, 1961,

without appreciating fact that Section 69 can be invoked only

when twin conditions stipulated therein are satisfied, as per

which, investment is not recorded in books of account of the

assessee and further, the assessee does not offer explanation

about nature and source of investments. In this case, the

assessee has recorded expenditure incurred for land

development charges and has also explained source for such

investments and hence, the Assessing Officer as well as

20 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 learned CIT(A) were completely erred in disallowing land

development charges u/s.69 of the Income Tax Act, 1961.

the learned CIT(A) submitted that the assessee has failed to

produce any details for land development charges and also

failed to explain how same is not shown in fixed asset

schedule as per Income Tax Act, 1961, and thus, there is no

error in the reasons given by the Assessing Officer to make

additions towards land development charges u/s.69 of the Act.

available on record and gone through orders of the authorities

below. The provisions of section 69 of the Income Tax Act,

1961, deals with unexplained investment which can be brought

to tax. As per said provision, if an assessee made any

investments which were not recorded in books of account, if

any, maintained by him for any source of income and the

assessee offers no explanation about nature and source of

investments or explanation offered by him is not in the opinion

21 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 of Assessing Officer is satisfactory, then value of investments

may be deemed to be income of the assessee for such financial

year. From a plain reading of above provisions of section 69, it

is very clear that in order to bring any amount within ambit of

section 69 of the Act, twin conditions must be satisfied, as per

which first condition is that the assessee should made

investments which is not recorded in books of account and

further, the assessee offers no explanation about nature and

source of investments. In this case, the assessee has incurred

land development charges and same has been recorded in

books of account of the assessee. The assessee has also

explained nature and source of investments. Once the

assessee has recorded investments in books of account and

further explained nature and source of investments, then same

cannot be brought to tax u/s.69 of the Act. The Assessing

Officer without appreciating facts has made addition for land

development charges u/s.69 of the Income Tax Act, 1961. The

learned CIT(A) has simply confirmed additions made by the

Assessing Officer without giving any valid reasons. Hence, we

set aside order of the learned CIT(A) and direct the Assessing

22 ITA Nos. 1869 & 1870/Chny/2018 and 1483 &1508/Chny/2018 Officer to delete additions made towards land development

charges u/s.69 of the Income Tax Act, 1961.

year 2014-15 is allowed.

assessment years are dismissed, appeals filed by assessee

for assessment year 2013-14 is also dismissed and that

assessment year 2014-15 is allowed.

Order pronounced in the open court on 22nd December, 2021

Sd/- Sd/- (महावीर �संह) (जी. मंजुनाथ) (Mahavir Singh) (G. Manjunatha ) उपा�य�/ Vice-President लेखा सद$य / Accountant Member चे&नई/Chennai, 'दनांक/Dated 22nd December, 2021 DS

आदेश क� ��त)ल*प अ+े*षत/Copy to: 1. Appellant 2. Respondent 3. आयकर आयु,त (अपील)/CIT(A) 4. आयकर आयु,त/CIT 5. *वभागीय ��त�न0ध/DR 6. गाड� फाईल/GF.