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Before: SHRI A.T.VARKEY, JM & DR. A.L.SAINI, AM
Department by :Shri P.K.Srihari, CIT,DR Assessee by : Shri Nageswar Rao, Advocate & Shri Amit Sharma, FCA सुनवाई क� तार�ख / Date of Hearing : 18/07/2018 घोषणा क� तार�ख/Date of Pronouncement:10/10/2018 आदेश / O R D E R
Per Dr. Arjun Lal Saini, AM:
The captioned appeal filed by the Revenue, and the Cross Objection filed by the assessee, pertaining to assessment year 2001-02, are directed against the order passed by ld. Commissioner of Income Tax (Appeals)-4, Kolkata, which in turn arises out of an assessment order passed by the Assessing Officer under section 254 r.w.s.263 of the Income Tax Act, 1961 (in short, ‘the Act’), dated 24.12.2009.
Since the appeal filed by the Revenue and the cross objection filed by the assessee relate to the same assessment year and identical issue are involved
2 M/s. MCC PTA India Corp. Pvt. Ltd. C.O.No.49/Kol/2015 A.Y: 2001-02 therefore these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity.
The grievance raised by the Revenue are as follows : “1. That on the facts and in the circumstances of the case Ld. CIT(A) has erred in allowing assessee’s claim of depreciation of Rs.3,06,89,825/- on miscellaneous expenditure of Rs.12,33,83,564/- capitalized and included in Block of Asset without appreciating the fact that the assessee failed to provide necessary details to show that such expenditure were genuinely incurred for acquisition of assets or attribute to acquisition of assets. 2. That the appellant craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing.”
The grievance raised by the assessee in its cross objection are as follows :-
“1. On the facts and in the circumstances of the case and in law, the Ld. CIT (Appeals) should have adjudicated and dealt with the ground of the respondent by holding that the order of Learned Deputy Commissioner of Income Tax, Circle- 11 (2), Kolkata (Ld. DCIT') dated 24 December 2009 giving effect to Hon'ble Income Tax Appellate tribunal, Kolkata('ITAT') order dated 26 December 2008 is bad in law since Ld. DCIT has not followed the order of Hon'ble ITAT.
2. The Respondent craves leave to add, amend, and withdraw any ground of appeal in the interest of natural justice either before or during the course of appeal proceedings.”
The brief facts qua the issue are that on perusal of depreciation schedule of Tax Audit Report, the ld AO noticed that the assessee had capitalized Miscellaneous Expenditure to the extent not written off or adjusted amounting to Rs.12,33,83,564/- and claimed depreciation to the tune of Rs.3,06,89,825/- on the said amount. During the assessment proceedings, the assessee was asked to explain the nature of Miscellaneous Expenditure to the tune of Rs.12,33,83,564/- . In response, the assessee submitted that these Miscellaneous Expenditure to the tune of Rs.12,33,83,564/- were related to setting up of the plant and had therefore, been included in the gross block of assets on 01.04.2000 and capitalized them and assessee claimed depreciation thereon. It was also stated that 3 M/s. MCC PTA India Corp. Pvt. Ltd. C.O.No.49/Kol/2015 A.Y: 2001-02 details of these expenses had been submitted during the original assessment proceedings including further details such as, details of capitalization of Misc. Expenditure amounting to Rs. 12,33,83,564/-, License Agreement with MCC, Japan, Agreement with Ryoka Systems Inc. for SAP Implementation, SAP end user authorization agreement with MCC, Japan and details of payments made to West Bengal Pollution Control Board, Payments for water supply, site investigation and environmental clearance and to WBSEB for power supply. It was submitted by the assessee before the ld AO that these items were capitalized in line with views on application of cost taken after consulting eminent tax experts.
However, the assessing officer rejected the contention of the assessee and noted that assessee had claimed depreciation on the original costs of assets and over and above, had also capitalized depreciation and loss on sale of assets, calculated as per the Companies Act and added the same in the cost of fixed assets for claiming depreciation. The Ld AO noted that this had resulted in double deduction of depreciation, which is not allowable. The AO also noted that such enhancement of capital cost is not regular and Miscellaneous Expenditure to the tune of Rs.12,33,83,564/-, does not qualify for depreciation u/s 32 of the I.T. Act, therefore, ld AO disallowed depreciation to the tune of Rs.3,06,89,825/-.
Aggrieved by the stand so taken by the ld AO, the assessee carried the matter in appeal before the ld. CIT(A) with success. The ld. CIT(A) deleted the addition made by assessing officer. Aggrieved by the order of ld CIT(A), the Revenue is in appeal before us.
The ld. Counsel for the assessee begins by pointing out that the assessee had submitted all the documents and evidences such as bills and invoices in respect of the miscellaneous expenditure of Rs.12,33,83,564/- before the ld AO as well as before the ld. CIT(A) vide paper book pages 255 to 261. The ld. Counsel submitted that in the Tax Audit report of the company, it is abundantly clear that the company has treated Rs.12,33,83,564/- as miscellaneous
4 M/s. MCC PTA India Corp. Pvt. Ltd. C.O.No.49/Kol/2015 A.Y: 2001-02 expenditure to the extent not written off in its audited financial statement for the year ended 31.03.2001. The company has been legally advised that the said amount can be capitalized under the Income Tax Act, 1961 and the depreciation can also be claimed u/s 32 of the Act. Therefore, the ld. Counsel submitted that the assessee, submitted all the invoices and bills relating to purchase of fixed assets and the miscellaneous expenditure incurred by the assessee to bring the capital asset into operation and for commercial production and this way, the assessee has proved the bona fide of his claim. The ld. Counsel stated that after purchasing the fixed assets there are so many expenses to be incurred by the assessee, like erection of fixed assets, foundation of the fixed assets, trial run, technical assistance, necessary permission from the Government for Pollution clearance certificate and other legal formalities. Therefore, the cost of the fixed assets is not only the price of the fixed assets, but it includes other incidental expenses which are necessary to bring the asset into its present condition and location. Therefore, these other incidental expenses are miscellaneous expenses in the assessee`s case under consideration and should be capitalized and the assessee has every right to claim depreciation thereon. Therefore, the assessee has rightly claimed the depreciation on the miscellaneous expenses of Rs.12,33,83,564/-.
On the other hand, the ld. Departmental Representative for the Revenue has primarily reiterated the stand taken by the AO, which we have already noted in our earlier para, and is not being repeated for the sake of brevity.
We have given a careful consideration to the rival submissions and perused the materials available on record. We note that the issue of disallowance of Depreciation on miscellaneous expenditures capitalized, to the tune Rs.3,06,89,825/-, has arisen because of Note No.5 to Annexure III to the Tax Audit Report, which is given below for ready reference :
5 M/s. MCC PTA India Corp. Pvt. Ltd. C.O.No.49/Kol/2015 A.Y: 2001-02 From the above notes to accounts, it is clear that just like any other Note to accounts, it is just a clarificatory note. We note that the expenditures were incurred by the assessee in the various processes in setting up of the entire facilities and plant. These comprise of miscellaneous expenditures on Plant & Machinery such as Licence fees, SAP systems implementation, Technical Documents, Handling systems, Pollution Control Equipment, payments to Pollution Control Board, Payments for Water-Supply to Haldia development Authority, expenditures on environmental clearances, miscellaneous expenditures on Factory Building, Residential Building etc. We note that it is common-sense that miscellaneous expenditures incurred in acquiring an asset get embedded in the cost of the asset acquired. The expenditures may be on miscellaneous items, but they were incurred in connection with the acquiring of the plant and fixed assets. Thus ultimately, they must necessarily be included to the respective asset cost; and, thus consequentially Depreciation being on the entire asset, these added costs automatically get covered for depreciation.
We note that the assessing officer in the impugned assessment order, apart from not allowing the depreciation, has also mentioned another view that this has resulted in double-deduction. We note that this other view of the ld AO is misconceived. There is no double-deduction. As we have noted in our para 10 of this order that these expenditures have only been included in the respective asset cost, and depreciation claimed on the respective asset. The Note to the tax audit report is only a clarificatory note. The Note does not imply that the depreciation is over and above the depreciation claimed. Hence, we do not agree with the ld
6 M/s. MCC PTA India Corp. Pvt. Ltd. C.O.No.49/Kol/2015 A.Y: 2001-02 assessing officer that depreciation claimed on the miscellaneous expenses ‘is over and above the depreciation claimed’. Hence, we note that the claim of the assessee is lawful and correct.
We note that the assessee has submitted necessary bills and vouchers before the AO vide paper book page nos. 225 to 261. It is also clear from the Tax Audit report of the company that the intention of the company was to capitalize miscellaneous expenditure to the fixed assets. The company has been legally advised that the said amount of Rs.12,33,83,664/- should be capitalized under the Income Tax Act, 1961 and depreciation thereon should be claimed u/s 32 of the Act. Accordingly, the said amount had been included in the cost of the fixed assets and depreciation has been claimed by the assessee. We do not find any irregularity, so far as capitalization of the miscellaneous expenses are concerned. The ld. Departmental Representative for the revenue has failed to bring any cogent evidence and any material on record to show that these miscellaneous expenditures should not capitalized, and the company is not entitled to claim depreciation thereon. Therefore, these miscellaneous expenses are very much connected with the plant and machinery. The assessee has rightly capitalized these expenses and claimed the depreciation thereon. Therefore, ultimately these miscellaneous expenses must necessarily be included to the respective cost of the asset and this is consequential depreciation being on the entire asset, thus it automatically covered for depreciation. For this we rely on the judgment of the Hon’ble Supreme Court in the case of Challapali Sugars Ltd vs CIT 98 ITR 167 (SC), wherein it was held that all expenditure necessary to bring into existence the fixed assets and put them in working condition must be capitalized. In the light of the accepted principles of accountancy, this expenditure be allowed to be capitalized as cost of such assets and therefore depreciation must be allowable on such cost. Therefore, considering the factual position and position in law, as explained above, we do not find any infirmity in the order of the ld. CIT(A). That being so, we decline to interfere in the order passed by the ld CIT(A), his order on this issue is hereby upheld and grounds of appeal raised by the Revenue is dismissed.
7 M/s. MCC PTA India Corp. Pvt. Ltd. C.O.No.49/Kol/2015 A.Y: 2001-02
We note that the Cross Objection filed by the assessee is just supportive to the order of the ld. CIT(A) and since we have dismissed the appeal of the Revenue, therefore the Cross Objection filed by the assessee becomes infructuous and does not require any adjudication.
In the result, the appeal of the Revenue is dismissed and the Cross objection filed by the assessee is also dismissed.
Order pronounced in the open court on this 10.10.2018.
Sd/- Sd/- (A.T.VARKEY) (DR. A. L. Saini) �या�यक सद�य/ लेखा सद�य / JUDICIAL MEMBER ACCOUNTANT MEMBER कोलकाता /Kolkata; Dated: 10/10/2018 RG, SPS आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : अपीलाथ� / The Appellant- D.C.I.T., Circle-11(2),Kolkata 1. ��यथ� / The Respondent.- M/s MCC PTA India Corp. Pvt. Ltd. 2. आयकर आयु�त(अपील) / The CIT(A)-4, Kolkata. 3. आयकर आयु�त / CIT-4, Kolkata. 4. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, 5. ITAT, Kolkata गाड� फाईल / Guard file. 6.