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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
आयकर अपीलीय अधिकरण “B” न्यायपीठ म ुंबई में। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, MUMBAI श्री महावीर स ुंह, न्याययक दस्य एवुं श्री एन. के. प्रिान लेखा दस्य के मक्ष । BEFORE SRI MAHAVIR SINGH, JM AND SRI NK PRADHAN, AM
Aayakr ApIla saM./ ITA No. 1205/Mum/2014 (inaQa-arNa baYa- / Assessment Year 2009-10) Navin Fluorine International The Commissioner of Limited Income Tax-7, 2nd Floor, Sunteck Centre, Aayakar Bhavan, M.K. road, Vs. 37/40, Subhash road, Mumbai Vile Parle (East), Mumbai-400 057 (ApIlaaqaI- / Appellant) .. (p`%yaqaaI- / Respondent) स्थायी लेखा सं./PAN No. AABCP0464B
अपीलाथी की ओर से / Appellant by : Ms. Arati Vissanji, AR प्रत्यथी की ओर से / Respondent by : Shri G.L.V. Prasad, DR सुनवाई की तारीख / Date of hearing: 10-06-2019 घोषणा की तारीख / Date of pronouncement : 10-06-2019
AadoSa / O R D E R
महावीर स ुंह, न्याययक दस्य/ PER MAHAVIR SINGH, JM: This appeal filed by the assesse is arising out of the Revision order passed by Commissioner of Income Tax, Mumbai [in short CIT] in appeal No. Nil, dated 24.01.2014. The Assessment was framed by the Addl. Commissioner of Income Tax, Range-7(1), Mumbai (in short ITO/ AO) for 2 the A.Y. 2009-10 vide order dated 29.12.2011, under section 143(3) of the Income-tax Act, 1961 (hereinafter ‘the Act’).
The only issue in this appeal of assessee is against the revision order passed by CIT under section 263 of the Act as bad in law. For this assessee has raised the following ground No. 1: -
“On the facts and circumstances of the case and in law, the Commissioner of Income Tax ought to not held that the assessment order passed Cinder Section 143(3) of the Act dated 29-12-2011 by the Assessing Officer is erroneous as the same is prejudicial to the interest of the revenue and consequently. Commissioner of Income Tax ought to have not passed Order dated 24-01-2014 under Section 263 of the Act. In view of the same, the Order dated 24-01-2014 passed by the Commissioner of Income Tax under Section 263 of the Act should be held as bad-in-law and hence, should be quashed / cancelled.”
However, now during the hearing before us, the learned Counsel for the assessee drew our attention to additional ground raised, and according to the learned Counsel practically this ground is arising out of the main ground and is on merits of the case. For this, the learned Counsel for the assessee drew our attention to the additional ground which read as under: -
“The Order dated 24.01.2014 passed by the Commissioner of Income Tax u/s 263 of the Act should be held as bad-in-law on account of the following and accordingly be quashed/ cancelled:
3 For claim of depreciation U/s. 32 of the Act, it is not necessary that the assets should be used throughout the previous year and in relation to block of assets, the identity of the individual assets is not there and accordingly, so long as block of assets continues to be used for the purpose of business, depreciation allowance is admissible on that block of assets even though some of the assets may have impaired/ became obsolete: and/ or (b) The adjustment U/s. 145A of the Act of Rs. 1,32,86,625/- was made by the AO himself on the basis followed in AY. 2007-08 and the same basis has been followed in subsequent assessment years till A.Y. 2016-17: and/ or (c) For claim of capital expenditure incurred during the year U/s. 35(1)(iv) r.w, 35(2) of the Act amounting to Rs. 2,58,19,4341-, the test of put to use is not relevant.”
The learned Counsel for the assessee fairly agreed that the CIT in his revision order has adjudicated following four issues: -
“i. MAT credit of Rs.19,88,06,245/- has been allowed as there is no MAT credit remaining to be carried forward from the earlier assessment year. This has been done without making any enquiry.
ii. Fixed assets' amounting to Rs.4220.03 lacs has been transferred to /Impairment of Fixed Assets Account". The book depreciation of Rs.469.73 lacs was added back for the purpose of computing the taxable income, and neither any adjustment been 4 carried out in respect of "Impairment of fixed assets" under any block of assets nor has the depreciation attribution to the assets classified as “Impairment of Assets: been added back nor the receipt of ₹ 5550.47 lacs for phasing out the production of CFC in the earlier years which has been treated as out the production of CFC in the earlier years which has been treated as a capital receipt and credited to the capital account was offered for taxation. The depreciation on the impaired assets, if any, claimed and allowed should have been enquired into before being allowed. This has not been done.
iii. Deduction of Rs.1,32,86,625/- on account of adjustment u/s. 145A of the Act was made to the value of the closing stock in the earlier year whereas similar claim for immediate proceeding assessment year 2008-09 was disallowed by the Assrcez5 officer. In accordance with the stand taken. assessment year 2008-09, the claim of deduction of Rs. 1,32,86,625/- should have been examined by the Assessing Officer, whereas no enquiry in this regard was conducted.
iv. The assessee is consistently following mercantile system of accounting and charging the expenditure of capital nature on scientific research related to the assessee's business transferred to the work-in- progress account till the asset was ready to be put to use, and once the asset is ready to be put to use, the said asset is transferred to the fixed asset account. During the current assessment year, the assessee claimed and have been allowed
5 deduction of the capital expenditure amounting to ₹ 2,58,19,434/- which is pending for completion and was transferred to the fixed asset account. This has been done without making any enquiry prima facie warranted on facts and circumstances of the case.”
The learned Counsel for the assessee argued that the first issue i.e. MAT credit is against the assessee and to that extent she agreed that the revision is within the framework of law.
The learned Counsel for the assessee, as regards to the second issue argued that the AO during the original course of assessment proceedings allowed the admissible depreciation under section 32 of the Act on assets for which impairment loan was provided during the year ended 31.03.2009. The learned Counsel for the assessee stated that once the asset is part of the block of asset and depreciation is granted on that block it cannot be denied as deprecation in subsequent year on the ground that one of the assets is not used by the assessee in the year under consideration. She argued that that user of assets has to be upon block as a whole instead of individual asset. For this, the assessee relied on the decision of Hon’ble Delhi High Court in the case of CIT Vs. Yamaha Motor India Pvt. Ltd. (2010) 328 ITR 297 (Delhi), wherein it is held as under: -
“8. The matter can be looked at from another angle also. No doubt, the expression used in section 32 is "used for the purposes of the business". However, this expression has to be read harmoniously with the expression "discarded" as found in clause (iii) of sub-section (1). Obviously, when a thing is discarded it is not used. Thus ‘use’ and ‘discarding’ are not in the same field and cannot stand together.
6 However, if we adopt a harmonious reading of the expressions "used for the purposes of the business" and "discarded" then it would show that "used for the purposes of the business" only means that the assessee has used the machinery for the purposes of the business in earlier years. It is not disputed that in the facts of the present case, and as discussed above, that the machinery in question was in fact used in the previous year and depreciation was allowed on the block of assets in the previous years. Taking therefore a realistic approach and adopting a harmonious construction, we feel that the expression "used for the purpose of the business" as found in section 32 when used with respect to discarded machinery would mean that the user in the business is not in the relevant financial year/previous year but in the earlier financial years. Any other interpretation would lead to an incongruous situation because on the one hand the depreciation is allowed on discarded machinery after allowing inter alia an adjustment for scrap value, yet, on the other hand user would be required of the discarded machinery which use is not possible because of various reasons viz., the age of the machinery, or that it has become obsolete as new technology has come in and so on. We thus hold that the discarded machinery may not be actually used in the relevant previous year as long as it is used for the purposes of business in the earlier years.
We, therefore, answer the two questions of law by holding that the ITAT was correct in law in directing
7 the Assessing Officer to re-compute depreciation after reducing the scrap value of the assets which have been discarded and written off in the books of account for the year under consideration from the written down value of the block of assets. Actual user of the machinery is not required with respect to discarded machinery and the condition for eligibility for depreciation that the machinery being used for the purpose of the business would mean that the discarded machinery is used for the purpose of the business in the earlier years for which depreciation has been allowed.”
The learned Counsel for the assessee explained the fact that the "retired fixed assets" for which impairment loan has been provided for, related to the assessee company's one of the industrial undertaking situated at Dewas which were installed/constructed and put to use in the relevant year of installation and construction and continued to be used thereafter and the same were retired on account of restructuring of assessee company's organic chemicals activities including deploying some of the assets of it's Dewas unit in other projects currently under implementation. The assessee company had a business plan to utilize its Dewas Site for a value added “Contract Research and Manufacturing Business". The retired fixed assets were used during the year ended 31st March, 2009. The retired fixed assets have no connection vis-a-vis compensation received pursuant to the Montreal Protocol for phasing out the production of ozone depleting substances.
On the other hand, the learned CIT Departmental Representative, Shri GLV Prasad, relied on the order of Commissioner of Income Tax (Appeals).
8 9. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee company is engaged in the business of manufacture and trading of chemicals. The principal products manufactured are Refrigerant Gases, Hydrofluoric Acid and Fluoro Chemicals. The manufacturing facilities are located at Rhestan near Surat at Gujarat and Dewas at Madhya Pradesh. The assessee company in its accounts for the year ended 31.03.2009 had classified certain fixed assets as "retired from active use" and provided for impairment loss of Rs. 469.73 Lakhs. The said impairment loss was added while computing the total income of the assessee for the year ended 31.03.2009. For reference, Fixed Assets Schedule and Computation of Total Income for the year ended 31.03.2009, highlighting the relevant part was referred. For the year ended 31.03.2009 the assessee company had claimed depreciation allowance of Rs. 14,61,81,5691- u/s. 32 of the Act, in its Return of Income. The Unit-wise claim of depreciation allowance is as under: -
Sr. No. Unit Depreciation Allowance (₹) 1. Bhestan Undertaking 12,74,15,307/- 2. Dewas undertaking 1,87,66,262/- Total 14,61,81,569/- We noted that Annexure "D" of the Tax Audit Report for the year ended 31.03.2009 giving particulars for claim of depreciation allowance under section 32 of the Act was perused.
In view of the above facts of the case, we are of the view that this issue is covered by the decision of Hon’ble Delhi high court in the case of Yamaha Motor India Pvt. Ltd. (supra) and further the decision of Hon’ble Gujarat High Court in the case of CIT vs. Sonal Gum Industries (2010) 322 ITR 542 (Gujarat), wherein it is held that in case of block of assets, which is not possible to segregate items falling within the block of assets for the purpose of granting depreciation or restricting the claim thereof.
9 Once, it was found that the assets were used for business it was not necessary that all the items falling within the plant and machinery have to be used simultaneously for being entitled depreciation. In our view, the fixes assets forming part of the block of assets of the Dewas undertaking, the assessee is entitled for the claim. In the present case before us, the assets were acquired in prior years on which depreciation allowance under section 32 of the Act was allowed. The fixed assets forming part Dewas units were used during the year ended 31.03.2009 for the purpose of business and block of assets to which these assets utilized were used for the purpose of business. Therefore, we are of the view that the conditions depreciation allowance under section 32 of the Act were duly satisfied with respect to fixed assets forming part of Dewas Undertaking, though the same were retired as of the year end. Hence, we find that the AO has rightly allowed the claim of the assessee. In any case, there could be to two views possible and AO has taken one of the possible view on the issue. In view of the decision of Hon’ble Supreme Court in the case of 83 ITR 243 Malabar Industries, the revision order passed by CIT on this issue is bad in law and hence, the same is quashed.
The next issue is as regards to the adjustment made under section 145A of the Act as the assessee company has claimed deduction of ₹ 1,34,86,625/- on account of adjustment made to the value of the closing stock in the earlier years and has been allowed as deduction. However, similar claim of deduction made in the AY 2008-09 was disallowed by the AO and in accordance with the action taken in AY 2008-09, the claim of deduction of ₹ 1,32,86,625/- has not been properly examined by the AO therefore, according to CIT, the same should have been examined and hence, he revised the issue.
10 12. The learned Counsel for the assessee before us, referred that the amount of ₹ 1,32,86,625/- represents reduction in total income on account of adjustment carried out under section 145 of the Act by the AO himself in assessing the income under section 143(3) of the Act and under such circumstances, deduction was claimed by assessee in this return of income for the assessment year under reference. The learned Counsel for the assessee drew our attention to the computation of total income filed year ended 31.03.2009 and clause 12(a) of the tax audit report for the year ended 31.03.2009 was referred, wherein it is mentioned that as per the assessee company no adjustment was required to be made to the return income under section 145A of the Act. These details were filed before the AO during the course of assessment proceedings vide letter dated 10.11.2011 and 23.11.2011. The learned Counsel explained that in assessing the income of the assessee company for the assessment year 2007-2008 under section 143(3) of the Act, the assessing officer did not accept the contention of the assessee company that no adjustment is required to be made U/s. 145A of the Act in assessing the income u/s.143(3) of the Act. He directed the assessing company to work out the adjustment as per method prescribed by him, based on which an addition was made of Rs. 69,92,450/ u/s. 145A of the Act. The assessee filed copy of the order for the assessment year 2007- 2008 before us.
Similarly, in Assessment Year 2008-2009 the AO did not accept the contention of the assessee company that no adjustment is required to be made U/s. 145A of the Act in assessing the income u/s. 143(3) of the Act and directed to work out the adjustment on similar lines as done in Assessment Year 2007-2008. Based on the said working, the income was required to be reduced by Rs. 31,98,8791/-. However, the AO did not made any adjustment while assessing the income for said the 11 assessment year. The assessee filed copy of letter dated 24.11.2010 submitted in the course of assessment proceedings in this regard.
Similarly, for Assessment Year 2009-2010, the AO did not accept the contention of the assessee company that no adjustment is required to be made U/s. 145A of the Act in assessing the income U/s. 143(3) of the Act and directed to work out the adjustment on similar lines as done in Assessment Year 2007-2008. Based on the said working, the income was required to be reduced by Rs. 1,32,86,625/-. The assessee filed copy of letter dated 15.11.2011 submitted in the course of assessment proceedings in this regard, which brings out the fact that the AO had not carried out any adjustment in assessing the income for the assessment year 2008-09. The AO, after examining the facts of the case, including the manner of adjustment carried out in the assessment year 2007-08 and to the fact that no adjustment was done in assessment year 2008-09, carried out the adjustment of Rs.1,32,86,6251- under section 145A of the Act in assessing the income under section 143(3) of the Act. The said adjustment is proper in law as the value of Opening Stock has to be taken at a value assigned to it in assessment of income for immediate preceding year. Accordingly, it was argued that the adjustment which has been carried out under section 145A of the Act in assessing the income for the assessment year 2009-2010 is in accordance with the directions of the Income Tax Department and hence the same cannot be treated as erroneous and prejudicial to the interests of the revenue. Further, the AO was fully aware of the fact that no such adjustment was made U/s.145A of the Act in assessing the income U/S.143(3) of the Act for the preceding assessment year i.e. assessment year 2008-2009. 15. On the other hand, the learned CIT relied on the revision order passed by CIT.
12 16. We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee is following the method of accounting consistently and even in AY 2007-08 and 2008-09 assessing officer accept the contentions of the assessee and no adjustment was made under section 145 A of the Act, while assessing the income under section 143(3) of the Act. Similarly, in AY 2009-10, the AO do not accept the contention of the assessee and adjustment was made under section 144 of the Act while assessing the income under section 143(3) of the Act. Based on the working of assessment years 2007-09 and 2008-09, the income was reduced by a sum of ₹ 1,32,86,625/-. We noted that the adjustment carried out under section 145A of the Act in assessing the income for AY 2009-10 is in according with the consistency followed by income tax department and not by the assessee. Hence, we are of the view that the direction of revision by CIT is without any basis on merits. The assessee has full proof case. On this issue, we allow the claim of the assessee.
The next issue is as regards to the order of allowability of capital expenditure by the AO in respect of assets acquired but not put to use during the year ended 31.03.2009 claimed under section 35(1)(vi) of the Act read with section 35(2) of the Act amounting to ₹ 2,58,19,534/-.
We have heard rival contentions and gone through facts and circumstances of the case. We noted the facts that the assessee company has an in-house Research & Development Unit at Rhestan, Surat, which has been accorded approval by the Government of India, Ministry of Science & Technolgy, Department of Scientific & Industrial Research, Technology Bhavan, New Delhi - 110016. The assessee had filed copy of the said approval letter in its paper book as Annexure 40. We noted that during the year, the assessee company has incurred expenditure on scientific research as under: -
13 Sr. No. Particulars Amount in Amount in Deduction claimed 1. Revenue expenditure 1,88,97,581/- 35(1)(i) laid out or expended on scientific research related to the business of the assessee company 2 Capital expenditure incurred on scientific research related to the business of the assessee company a. Equipments installed 6,75,52,867/- 35(1)(iv) and Building r.w.s 35(2) Capitalised b. Equipment un-installed 2,58,19,534 9,33,72,401/- 35(1)(iv) r.w.s and Building in 35(2) progress Total 11,22,69,982/-
We noted that, the CIT in revision proceeding, required the assessee to justify as to why deduction under section 35(1)(iv) read with section 35(2) of the Act should be granted for equipments which are un- installed as in your opinion, the assets have to be actually used for the purpose of claiming deduction of capital expenditure under section 35(1)(iv) of the Act. The assessee replied that the assessee had claimed the deduction under section 35 of the Act and relevant portion of Section 35 of the Act is as under:
"Expenditure on scientific research -
(])In respect of expenditure on scientific research, the following deductions shall be allowed-
(iu) in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, such deduction as may be admissible under the provisions of subsection (2).
14 (2) For the purpose of clause (iv) of sub-section (1),-
(ia) in case where such capital expenditure is incurred after the 31$t day of March, 1967, the whole of such capital expenditure incurred in any previous year shall be deducted for that previous year. (emphasis supplied)
Explanation. Where any capital expenditure has been incurred before the commencement of the business, the aggregate of the expenditure so incurred within the three years immediately preceding the commencement of the business shall be deemed to have been incurred in the previous year in which the business is commenced."
From the above bare provision of Section 35(l)(iv) of the Act, it is clear that it provides for deduction in respect of any expenditure of a capital nature on scientific research related to the business carried on by the assessee, as may be admissible under the provisions of Subsection
(2) of Section 35 of the Act. Clause (iv) of sub-section (2) of Section 35 of the Act provides for deduction of whole of such capital expenditure (other than on land) in the previous year in which it is incurred. Accordingly, for the purpose of availing deduction of capital expenditure U/s. 35(1)(iv) of the Act, an assessee has to incur expenditure of capital in nature on scientific research relating to its business. The language employed in Section 35 of the Act, nowhere provides for the purpose of allowability of capital expenditure U/s. 35(1)(iv) of the Act that the assessee has to use the asset for research and development purposes during the relevant previous year in which such expenditure is incurred. The assessee becomes entitled to deduction even if the asset in question is not actually
15 used, provided it has incurred capital expenditure during the previous year on scientific research.
In view of the above, we noted that for the purpose of claiming deduction of capital expenditure U/s. 35(1)(iv) read with Section 35(2) of the Act, what is necessary is incurrence of expenditure, which the assessee company has incurred and not the user of the asset during the previous year in which such expenditure is incurred. Further, the eligible year of claiming deduction is the year of incurrence of such expenditure. In view of above, it will be observed that as per Section 35(I)(iv) read with Section 35(2) of the Act, deduction for capital expenditure incurred is allowable under the said section, as under:
“(i) Deduction under the provisions of Section 35 of the Act is given only during the previous year in which the expenditure is incurred;
(ii) Accordingly, an assessee cannot be deprived off the benefit of deduction in respect of capital expenditure under the provisions of Section 35 of the Act if the asset is not used in the previous year in which the capital expenditure is incurred;
(iii) Consequently, once it is established that the capital expenditure has been incurred for the purpose of scientific research, the same is allowable in the year of incurrence.”
We also noted that the Central Board of Direct Taxes vide their Circular No. 5-P (LXXVI63) of 1967 also endorses the above proposition. The relevant extract of the said Circular as quoted by the Hon High Court of Gujarat in the matter of CIT v. Gujarat Aluminium Extrusions Private Limited, reported in 263 ITR 453, is as under: -
16 "('ii) The amount of capital expenditure incurred by an assessee after March 31, 1967, on scientific research related to his business will be allowed to be deducted in full in computing his business profits of the year in which such expenditure is incurred" 23. Even, the ccircular issued by the Central Board of Direct Taxes are legally binding on the Revenue authorities as held by the Hon. Supreme Court in the case of UCO Bank Vs. CIT 237 ITR 889. Hence, we are of the view that this issue is allowable on merits and we accordingly, reverse the revision order of CIT on this issue.
Hence, on the above three issues, we reverse the revision order passed by CIT under section 263 of the Act but sustain the order on the issue of MAT Credit.
In the result, the appeal of the assessee is partly allowed.
Order pronounced in the open court on 10.06.2019. (एन. के. प्रधान/ NK PRADHAN) (महावीर ससंह /MAHAVIR SINGH) (लेखा सदस्य / ACCOUNTANT MEMBER) (न्याययक सदस्य/ JUDICIAL MEMBER) मुंबई, ददनांक/ Mumbai, Dated: 10.06.2019. दीप रकार, व.यनजी धिव / Sudip Sarkar, Sr.PS
17 आदेश की प्रयिसलपप अग्रेपिि/Copy of the Order forwarded to : अपीलाथी / The Appellant 1. प्रत्यथी / The Respondent. 2. आयकर आयुक्त(अपील) / The CIT(A) 3. आयकर आयुक्त / CIT 4. ववभागीय प्रयतयनधध, आयकर अपीलीय अधधकरण, मुंबई / DR, ITAT, 5. Mumbai गार्ड फाईल / Guard file. 6. आदेशान ार/ BY ORDER, सत्यावपत प्रयत //// उप/ हायक पुंजीकार (Asstt.