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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI MANOJ KUMAR AGGARWAL
PER MAHAVIR SINGH, JUDICIAL MEMBER
These appeals are filed by the assessee against the order of CIT(A)-51, Mumbai dated 09.09.2016, 29.12.2017 and 29.12.2017 for assessment year 2012-13 to 2014-15 respectively which in turn has arisen from order of Assessing Officer passed under Section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 26.03.2015, 28.03.2016 and 30.12.2016 respectively.
The first common issue in these three appeals of assessee is as regards the disallowance of expenses relatable to exempt income by invoking the 2 Balasore Alloys Limited 1465 & 1466/Mum/2018 provisions of Section 14A read with Rule 8D(2)(iii) of the Income Tax Rules, 1962 (in short ‘the Rules’). The facts and circumstances in all these three years, i.e. assessment year 2012-13, 2013-14 and 2014-15 are identical and disallowance is only on one limb, i.e. under Rule 8D(2)(iii) of the Rules, being administrative expenses equal to 0.5% on average value of investments. For this, assessee has raised identically worded grounds in all the three years. Hence, we will take the facts and grounds raised in assessment year 2012-13 in ITA no. 7093/Mum/2016 and will apply the decision in all the three years. The relevant grounds raised in assessment year 2012-13 reads as under :-
“1. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in confirming the disallowance of Rs.1,99,721/- u/s. 14A r.w.r. 8D(iii). The disallowance made by the Learned Assessing Officer and confirmed by the Learned Commr. of Income Tax (Appeals) is not justified and be deleted.
2. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in concluding that sum of Rs.1,99,721/- is the administrative expenses incurred by the appellant for earning exempt income and has erred in disallowing the same u/s. 14A r.w.r. 8D(iii). The appellant prays that the appellant has not incurred any administrative expenses for making investments which will yield exempt income. The addition made by the Learned Assessing Officer of Rs.1,99,721/- may be deleted.
On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred not considering the fact that the appellant has not earned any exempt income during A.Y. 2012-13 and no disallowance be made u/s. 14A rws 8D(2)(iii). The appellant prays that the addition made by the Learned Assessing Officer and confirmed by Learned Commr. of Income Tax (Appeals) may be deleted.”
3. The brief facts are that the Assessing Officer while computing disallowance of expenses relatable to exempt income under Rule 8D(2)(iii) of the Rules read with Section 14A of the Act noted that the assessee has suo moto disallowed a sum of Rs.70,291/- on the dividend income earned by the 3 Balasore Alloys Limited 1465 & 1466/Mum/2018 assessee amounting to Rs.3,63,000/- from SBI Mutual Fund, which is claimed as exempt. The Assessing Officer straightaway applied Rule 8D(2)(iii) of the Rules and computed the disallowance at Rs.2,70,012/-, as against the suo moto disallowance computed by the assessee of Rs.70,291/-, thereby the Assessing Officer added an amount of Rs.1,99,721/- to the returned income of the assessee. Aggrieved, assessee preferred appeal before the CIT(A). The CIT(A) also confirmed the action of the Assessing Officer by noting that earning of dividend income during the year is not necessary for making disallowance under Section 14A of the Act. Therefore, he upheld the action of the Assessing Officer in computing the disallowance of expenses relatable to exempt income by invoking the provisions of Section 14A of the Act read with Rule 8D(2)(iii) of the Rules. Aggrieved, now assessee is in appeal before the Tribunal.
Before us, the assessee contended that direction be given to the Assessing Officer to compute the disallowance only on the investments which give rise to exempt income and not the entire income as held by the Special Bench of the Tribunal in the case of ACIT vs Vireet Investment (P.) Ltd., [2017] 58 ITR(T) 313 (Delhi - Trib.) (SB). When this was confronted to the learned Sr. DR, she could not controvert the above argument of the learned counsel for the assessee.
5. After hearing both the sides and going through the facts and circumstances of the case, we are convinced with the argument of learned counsel for the assessee and hence direct the Assessing Officer to compute the disallowance of expenses relatable to exempt income only to the extent of investments giving rise to exempt income and not the entire investments in view of the decision in the case of Vireet Investment (P.) Ltd. (supra). Thus, this issue of assessee’s appeal is allowed in terms of the above direction.
4 Balasore Alloys Limited 1465 & 1466/Mum/2018
The facts and circumstances in the appeals for assessment years 2013-14 and 2014-15 in & 1466/Mum/2018 being exactly identical as in appeal for assessment year 2012-13 above, hence, respectfully following the same, this issue is allowed for these years also on the same lines.
7. The next issue in this appeal of assessee is against the order of CIT(A) confirming the action of Assessing Officer in treating the ‘intangible assets’ being mines development as ‘plant and machinery’ and granting depreciation @ 15% on the opening WDV on the block of intangible assets. The assessee contends that the CIT(A) could not have amended the opening WDV on the block of ‘intangible assets’ and treated the same as ‘plant and machinery’. For this, assessee has raised identically worded grounds in all the three years. Hence, we will take the facts and grounds raised in assessment year 2012-13 in and will apply the decision in all the three years. The relevant grounds raised in assessment year 2012-13 reads as under :-
“4. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in treating the intangible assets being the Mine Development as “plant & machinery” and has granted the depreciation @ 15% on the opening WDV of the block of intangibles. The conclusion reached by the Learned Assessing Officer and confirmed by the Learned Commr. of Income Tax (Appeals) is erroneous and contrary to the provisions of law. The Learned Commr. of Income Tax (Appeals) does not have any power to amend the opening WDV of the block of intangible assets and treating the same as “plant & machinery”. The appellant prays that the appellant be granted depreciation on the opening wdv of the block of intangibles at 25% during A.Y 2012-13.
On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has ignored the fact that till A.Y 2011-12 the Income tax department has accepted the claim of the appellant and has treated “Mine
5 Balasore Alloys Limited 1465 & 1466/Mum/2018 Development” as the intangible asset eligible for claim @ 25%. The Learned Assessing Officer and the Learned Commr. of Income Tax (Appeals) has granted depreciation on the opening WDV of the intangibles @ 15%. The appellant prays that on the opening WDV of Rs.4,33,89,136/- the depreciation may be granted @ 25%.
6. On the facts & circumstances of the case the appellant prays that the Learned Assessing Officer and the Learned Commr. of Income Tax (Appeals) has erred in granting depreciation @ 15% on the addition of Rs.6,84,49,593/- as the same is an intangible asset being “Mine Development” instead of accepting the claim of appellant that the depreciation be allowed at 25%. The appellant prays that the depreciation be granted @ 25% on the addition of Rs.6,84,49,593/-.
On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has confirmed the grant of depreciation at Rs.1,17,87,220/- as against the depreciation claimed by the appellant at 25% on the intangibles amounting to Rs.1,96,45,367/-. The Learned Assessing Officer has erred in disallowing the claim of depreciation to the extent of Rs.75,58,146/-.
8. Without prejudice to ground no. 4 to 7 the appellant prays that if the claim of the appellant is not accepted that the expenditure incurred during the year amounting to Rs.6,84,49,593/- on Mine Development is to be treated as intangibles asset, then the said sum of Rs.6,84,49,593/- be allowed as revenue expenditure u/s. 37(1) of Income Tax Act, 1961.”
The brief facts of the case are that the assessee is engaged in the business of manufacturing raising of Chrome ore and Manganese ore from its captive mine located in Odisha and Madhya Pradesh. The assessee is manufacturing and selling Ferro Alloys of various grades. Assessee is also engaged in trading business of various allied products like Coke, Chrome ore lumpy, etc. The assessee’s plant is located in Odisha and the Government of Odisha has given licence in respect of mines situated at Kaliapani, Sukinda,
6 Balasore Alloys Limited 1465 & 1466/Mum/2018 Dist. Jajpur, Odisha. The license is given to the assessee to extract the Chrome ore, which is basically major raw material for the manufacturing process. In order to extract the Chrome ore, it is necessary first to decide at which location good quality of material is located and it is necessary to identify a particular spot for carrying out actual excavation. The area of mines is approx. 64 hectares and at different locations in the mines, different quality of material is located. Assessee has to undertake drilling process through various parties who actually carry out drilling at different locations to find out at which depth the said material can be found and what will be the quality of the material. The assessee is having licence to exploit the mines from earlier years and, in the past also, assessee had to incur expenditure on drilling, which has been capitalised under the head ‘intangible assets’ and depreciation has been being claimed on it during past years. The depreciation has also been allowed under the head ‘intangible assets’ in the past years till assessment year 2011-12. The assessee, in assessment year 2012-13, i.e. the year under consideration, claimed depreciation on the opening WDV including additional cost incurred, which is capitalised under the head ‘intangible assets’, but the Assessing Officer granted depreciation by treating the expenses under the head ‘plant and machinery’ and not under the head ‘intangible assets’. The Assessing Officer changed the classification of assets from ‘intangible assets’ to ‘plant and machinery’ even though till assessment year 2011-12 the classification of the asset has been accepted by the Department as ‘intangible assets’. The Assessing Officer accordingly disallowed depreciation and restricted the same to 15% instead of 25% claimed by the assessee. Even on the opening WDV of Rs.4,33,89,136/-, the Assessing Officer granted depreciation @ 15% instead of 25%. The assessee, aggrieved by the order of Assessing Officer, filed appeal before the CIT(A). The CIT(A) confirmed the action of the Assessing Officer and also amended the opening WDV on the block of ‘intangible assets’ treating the 7 Balasore Alloys Limited 1465 & 1466/Mum/2018 same as ‘plant and machinery’. For this, the CIT(A) observed in para 6 and 6.2 as under :-
“6. Depreciation - During the course of assessment proceedings, it is observed that the assessee claimed depreciation at the rate of 25% on intangible assets being mines development expenses. AO after considering the provisions of the Act held that the said assets would not come under the purview of intangible assets. Further, in view of the nature of expenses incurred, assessee itself capitalized these expenses as Plant in the books of account. Therefore, AO allowed depreciation @ 15% as is applicable to Plant and Machinery and accordingly restricted the depreciation claim to Rs.1,17,87,220/- as against the claim of Rs.1,96,45,367/-. The difference amount of Rs.75,58,146/- is added back. Against this addition, during appellate proceedings, it is argued that over the years, assessee has been claiming depreciation @ 25% on mines development and hence the depreciation should be allowed @ 25%. It is also contended that department allowed 25% depreciation on the same in earlier years. Therefore, it is contended that as per sec. 43(6), AO cannot change the block of assets from 25% to 15%. Alternatively, it is argued that the entire expenditure may be allowed as revenue expenses.
6.1 I have considered the arguments of the assessee and have gone through the provisions of the Act, in this regard. As stated by the AO, mines development expenses do not form part of intangibles assets as per the I.T. Rules. The expenditure made is in the nature of improvement of mines which becomes part of mining assets which are, no doubt, tangible assets. As mining is the main industry of the assessee, AO correctly categorized the said expenditure under Plant and has correctly worked out depreciation as per the Act.
6.2 Coming to the alternate argument of the assessee, the expenses which give long standing and enduring benefit are categorized as mining development expenses. They being expenses in the nature of capital, cannot be allowed as revenue expenditure. In view of the above, I uphold the action of the AO and dismiss the grounds relating to this issue.”
Aggrieved, now assessee is in appeal before the Tribunal.
8 Balasore Alloys Limited 1465 & 1466/Mum/2018
Before us, the learned counsel for the assessee narrated the facts which we have already incorporated above. He also argued that Revenue has consistently been accepting the classification of assessee’s assets as ‘intangibles’ and in this very year, for the first time, the Revenue, without any basis, changed the classification from ‘intangible assets’ to ‘plant and machinery’ and accordingly re-computed the depreciation @ 15% instead of 25% claimed by the assessee. The learned counsel for the assessee stated that the expenditure incurred is in the nature of intangibles and has been consistently allowed by the Department in the past and, in this year, there is no reason for change nor there is any reason given by either the Assessing Officer or the CIT(A) in their respective orders for the change.
On the other hand, the learned Senior DR heavily relied on the assessment order and the order of the CIT(A).
We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has claimed depreciation on the opening WDV of Rs.4,33,89,136/-. Assessee has also made additional expenditure during the year of Rs.6,84,49,593/-. The learned counsel for the assessee pointed out to the depreciation chart filed along with the return of income and annexure to Form 3CD for the year ended 31.03.2012 wherein depreciation on Mines Development is classified under the head ‘intangibles’ and depreciation claimed @ 25%. He drew our attention to page 77 of the Paper Book wherein details of additions and WDV as on 01.04.2011 is given, which is matching with the claim of the assessee. We noted that the depreciation claimed on the intangibles amounting to Rs.1,96,45,367/- is included in the Depreciation Schedule attached along with the Tax Audit
9 Balasore Alloys Limited 1465 & 1466/Mum/2018 Report. As per the said Schedule, the WDV of the ‘intangibles’ being Mines Development is Rs.4,33,89,136/- and the addition during the year under the head ‘intangibles’ is Rs.6,84,49,593/-, and on this, depreciation of Rs.1,96,45,367/- is claimed @ 25%. We noted that the assessee is engaged in the business of manufacturing of Ferro Chrome from the plant located at Odisha. The assessee exploited the licence of mining given to it in the earlier years and in the past also, the assessee has incurred expenditure on drilling, which is capitalised under the head ‘intangible assets’ and depreciation claimed in the earlier years. The assessee in assessment year 2012-13, i.e. the year under consideration, claimed depreciation on the opening WDV and also incurred an additional cost, which is capitalised under the head ‘intangible assets’. The cost incurred by the assessee is covered by the provisions of Section 32(1)(ii) of the Act and under this provision, claim of depreciation is allowable in respect of Know-how, Patent, Copyright, Trademark, License, Franchise or any other business or commercial right of similar nature. All these rights are classified as ‘intangible assets’. In our opinion, where the assessee in the course of business acquired asset and thereafter incurred additional cost/expenditure in respect of that asset for the purpose of its effective use in the business, then, the additional cost incurred in respect of that asset is to be capitalised and depreciation has to be allowed. In the entirety of the facts noted above, as the Revenue has consistently treated this asset as ‘intangible’ and not as ‘plant and machinery’, the Revenue has no reason to deviate from the same. Hence, we are of the view that the assessee is entitled to claim depreciation on the classification of asset as ‘intangibles’ under Section 32(1)(ii) of the Act and depreciation is to be allowed @ 25% instead of 15% as computed by the Assessing Officer by treating it as ‘plant and machinery’. Accordingly, we reverse the orders of the authorities below and allow this issue of assessee’s appeal.
10 Balasore Alloys Limited 1465 & 1466/Mum/2018
The facts and circumstances in the appeals for assessment years 2013-14 and 2014-15 in & 1466/Mum/2018 being exactly identical as in appeal for assessment year 2012-13 above, hence, respectfully following the same, this issue is allowed for these years also on the same lines.
The next common issue in assessee’s appeals is regarding charging of interest under Section 234B and 234C of the Act. The said ground is consequential in nature and does not require any specific adjudication.
In the result, all the appeals of the assessee are allowed.
Order pronounced in the open court on 19th November, 2019.