Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri G Manjunatha & Shri Ravish Sood
O R D E R Per G Manjuntha, Accountant Member
This appeal filed by the Revenue is directed against order of the CIT(A)-12, Mumbai, dated 09.09.2016, and it pertains to assessment year 2012-13. The Revenue has raised following grounds of appeal:-
1) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the addition made by the assessing officer of Rs 45,85,395/- on account of Finance Cost (Rs 37,122), Depreciation & Amortisation Expenses (Rs 6,96,270), Other Expenses (Rs 7,17,160) and Depreciation claimed in the computation of income (Rs 31,34,843)
2. On the fact and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that the assessee company failed to prove that it had actually carried out any business activity during A.Y. 2012-13 and the assets on which depreciation had been claimed were actually used for the purpose of business.” 3. "The appellant prays that the order of the CIT(Appeals) on the above ground be set aside and that of the AO be restored."
4. "The appellant craves leave to amend or alter any ground or add a new ground, which may be necessary.”
The facts of the case are that the assessee, a private limited company engaged in the business of Design and develop Concentrated Photovoltaic system, filed its return of income for A.Y. 2012-13 on 28.09.2012, declaring loss at ` 46,37,639/-. The case was selected for scrutiny and notice u/s. 143(2) and 142(1) of the Act were issued. In response to notices authorized representative of the assessee appeared from time to time and filed various details as called for. During the course of assessment proceedings, the Assessing Officer noticed that the assessee has claimed various expenses including depreciation however, neither has shown sale from business activity nor any other income therefore, called upon the assessee to explain as to why expenses debited to Profit & loss account shall not be disallowed. In response to notice, assessee vide letter dated 16.03.2015, submitted that the business of the assessee is to create a methodology by virtue of which efficiency of solar power generating system could be empowered. The assessee had started its business activity by entering into a joint development agreement with Indian Institute of Science for research on various aspects of CPV technology, for which it has incurred various expenses. Direct expenses incurred in relation to Research and Development has been capitalized however, the expenditure incurred in the nature of overhead expenses has been debited to profit & loss account. The Assessing Officer after considering relevant submissions of the assessee disallowed expenses claimed including depreciation on assets by observing that the assessee failed to file any evidence to prove that it has commenced its activity and also put to use assets on which depreciation has been claimed. Relevant portion is extracted below:
“4.2 In similar circumstances the assessee company was asked to show cause how the above expenses claimed are allowable when there is no business activity during the year. It was also requested to substantiate its claim with explanation alongwith supporting evidences.
In response to said query, the assessee company has offered its explanation vide letter dated 16.03.2015 that the business of the assessee is to create a methodology by virtue of which the efficiency of solar power generating systems could be improved. This entailed setting up research facility and in that research facility carrying out the requisite research or spadework for creating that methodology. Once the activity of research of that methodology commenced the business would certainly have been said to have commenced. Once this happens the computation necessarily has to fall within the parameters of he provisions of sections 28 to 44. Each expenditure thereafter has to be tested on the touchstone of the relevant provisions of section 28 to 44. "For the sake of brevity the explanation of the assessee is produced hereinabove"
Perusal of the details of expenses debited to P&L A/c and reflected in schedule 2.15 of the schedules forming part of profit & loss account reveals that the assesse has debited Other expenses to the tune of Rs. 7,17,160/-. Out of Rs. 7,17,160/- an amount of Rs. 1,53,416/- was incurred on account of ROC fees & Shares Issue Expenses.
During the year under consideration, there was an increase in share capital, of the assessee. The assessee was asked to give the details of - the expenses incurred for the increase in share capital of the company and also explain as to why the expenses pertaining to share capital should not be capitalized. The expenditure incurred by the assessee in issuing shares with a view to increase its capital could not amount to revenue expenditure and would fall under capital expenditure. It is an established position of law that any expenditure incurred by a company in connection with issue of shares with a view to increase its capital, is a capital expenditure.
It is also seen that the assessee has claimed depreciation of Rs.38,31,113/- in computation of total income. Preliminary condition of section 32(1) of the Act is that " In respect of depreciation of assets owned wholly or partly, by the assessee and used for the purpose of the business or profession, deduction on account of 'Depreciation' shall be allowed." Indeed the assets on which depreciation was claimed was owned by the assessee but the same was not used for the purpose of the business as there is no business activity carried out of the assessee. Hence, depreciation claimed of Rs. 38,31,113/- is disallowed and added to the total income of the assessee.
Explanation of the assessee has been perused carefully and found not satisfactorily, as assessee fails to prove that the assessee company has actual carried out any business activity. Unless the assessee prove that actual business activity was carried out by the assessee then allowability of deduction/expenditure arise. Since, no business activity was carried out by the assessee during the year, expenditure claimed in pretexts of business activity deserves to be disallowed. In view of the above discussion and considering the assessee explanation the following expenditure amounting to Rs. 45,85,395/-is disallowed and added to the total income. (i) Finance cost : Rs. 37,122 (ii) Depreciation & Amortisation Expenses : Rs. 696,270 (iii) Other expenses : Rs. 7,17,160 (iv) Depreciation claimed in Computation Rs. 31,34.843/- ( 38,31,113 - 7,17,160/-) Rs. 45,85,395/- As the assessee has concealed particulars of income and furnished inaccurate particulars of income, penalty proceedings u/s 271(l)(c) of the Act are initiated separately.” Aggrieved by the assessment order, the assessee preferred appeal before the CIT(A).
Before the CIT(A) assessee has filed elaborate written submissions, which has been reproduced at page nos. 5 and 6 of the CIT(A)’s Order. The sum and substance of the arguments of the assessee before the CIT(A) are that it has commenced its business activity of Research and Development in the field of CPV technology in association with Indian Institute of Science. The assessee has incurred various expenses, which has been capitalized pending amortization. However, the expenditure in the nature of recurring and day to day expenses has been debited to the profit and loss account, including depreciation of fixed assets. Therefore, the Assessing Officer erred in disallowing expenses incurred wholly and exclusively for business only for the reason that no revenue has been generated for the year under consideration. The learned CIT(A) after considering relevant submissions of the assessee observed that assessee has filed various details to prove commencement of business in the field of research and development to manufacture solar power generating equipments and the assets acquired/purchased were put to use for such research activity during the year and, hence, claim of depreciation is tenable u/s. 32 of the Act. Since the assessee has commenced its business by engaging itself in research activity so expenses fall within the provisions of the Act and allowable as business expenditure. The relevant portion of the order of the CIT(A) is extracted below:
“I have carefully perused the assessment order and the appellant's contention. It is held that A.O. erred in disallowing "the claim of depreciation" without appreciating the fact that the appellant company is engaged into R&D to manufacture the solar power generating equipments and the assets acquired /purchased / created were put to use for such research activity during the year and hence the claim of deprecation is tenable u/s 32. It is significant to note that, while the assessing officer accepts the ownership of the assets, he denies depreciation on the ground that they have not been put to use. Appellant has amply demonstrated that the assets of the company have been put to use the business of the company. So, the user test has to be applied in the context of the s business and is to be allowed. Further the Assessing officer did not consider the fact that the accounts of the company were prepared in consonance with the accounting policies and standards and the same, were audited as per the provisions of Company Law by the Statutory Auditors. So it is held that the appellant has commenced its business by engaging itself in the research activity and so the expenses fall within the provisions of The Act and are eligible as allowable business expenses. The addition of the A.O. are deleted. Grounds of Appeal
No.l to 4 are allowed.”
4. The learned DR submitted that the learned CIT(A) erred in deleting the additions made by the Assessing Officer towards disallowance of various expenses including depreciation on assets without appreciating the fact that the assessee has not filed any evidence to prove commencement of business and also the fact that no revenue has been generated from its business activity for the year under consideration. The learned AR for the assessee, on the other hand, strongly supporting the order of the CIT(A) submitted that the finding of the Assessing Officer to disallow various expenses is illogical and irrelevant for the reason that earning of revenue from the business activity may not be the sole reason for claiming expenses which are wholly and exclusively incurred for business activity of the assessee. The assessee has filed various details to prove its business activity and acquisition of assets for such Research and Development activity. Therefore, there is no reason for the Assessing Officer to disallow legitimate expenses incurred for business purpose.
We have heard both the parties and perused the material available on record. The assessee has filed necessary evidence before the lower authorities to prove that it has commenced its business activity of Research and Development in the field of CPV technology in association with Indian Institute of Science for which it has incurred various expenses including salary and other expenses which has been capitalized to Research and Development expenditure. The assessee also claimed certain expenses, which are in the nature of general overhead expenses including depreciation on assets put to use for Research and Development activity. The Assessing Officer accepted the fact that the assets on which depreciation was claimed was owned by the assessee but further observed that the same was not used for the purpose of business as there is no business activity carried out during the year under consideration for the sole reason that no revenue has been generated from the business activity for the year under consideration. Except this, the Assessing Officer has not brought out any other evidence to justify his finding that the assessee has not carried out any business activity for the year under consideration. On the other hand, the assessee has filed various details to prove expenses of business and also commencement of business activity of Research and Development in the field of CPV technology in association with Indian Institute of Science. The assessee also filed various evidence to prove that the assets owned by it are infact put to use for its business activity. Therefore, we are of the considered view that the Assessing Officer having been accepted the fact that the assessee has owned the assets completely erred in disallowing expenses including depreciation of assets only for the reason that no revenue has been generated from business activity. The CIT(A) after considering relevant facts have rightly deleted the additions made by the Assessing Officer. We, therefore, do not find any error in the order of the CIT(A) and, hence, we are inclined to uphold the findings of the CIT(A) and dismiss the appeal of the Revenue.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on this day of 13th July 2018.