ASTEC LIFESCIENCES LTD,MUMBAI vs. PR CIT 2, MUMBAI

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ITA 3406/MUM/2017Status: DisposedITAT Mumbai29 December 2017AY 2012-136 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the assessee's treatment of 'capital work-in-progress' was in line with accounting policies and that the AO had made necessary verifications. Following the principle of consistency and the Delhi High Court's decision in CIT v. Escorts Ltd., the Tribunal found no error in the AO's assessment.

What were the facts?

The PCIT invoked Section 263, alleging the AO erroneously allowed deduction under Section 35D(1)(ii) as the assessee's new unit activity had not commenced, evidenced by capital work-in-progress. The assessee argued consistency in claiming expenses over three years and that 'capital work-in-progress' represented advances for fixed assets.

What were the issues?

Whether the PCIT was justified in revising the AO's order under Section 263 based on the interpretation of 'capital work-in-progress' and the commencement of new unit activities. Whether the principle of consistency applies when the department challenges a claim accepted in previous years.

Which sections of the Income-tax Act were involved?

Section 35D,Section 263

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, MUMBAI BENCH “A” MUMBAI

Before: SHRI D.T. GARASIA & SHRI N.K. PRADHAN

For Appellant: Mr. Ashwin S. Chhag, AR
For Respondent: Mr. R.P. Meena, DR
Hearing: 05/10/2017Pronounced: 29/12/2017

ORDER PER N.K. PRADHAN, A.M. This is an appeal filed by the assessee. The relevant assessment year is 2012-13. The appeal is directed against the order passed by of the Principal Commissioner of Income Tax -2, Mumbai (hereafter referred as ‘PCIT’) u/s 263 of the Income Tax Act 1961, (the ‘Act’).

2.

In a nutshell, the PCIT on perusal of the assessment record found that the Assessing Officer (AO), while completing the assessment u/s 143(3) on 17.03.2015 had allowed deduction u/s 35D(1)(ii) amounting to Rs.2,43,02,765/- erroneously as the assessee’s activity of extension of undertaking of commencement of production of new unit had not begun.

M/s Astec Life Sciences As per him, this is clear from the balance sheet dated 31.03.2012 wherein the closing capital work-in-progress is continuing. The PCIT observed that there was closing capital work-in-progress of Rs.43,62,06,071/- in the balance sheet as on 31.03.2012. Therefore, he held that the assessee’s activity of extension of undertaking or commencement of production by the new unit had not yet begun and the claim of deduction u/s 35D(1)(ii) was erroneous and prejudicial to the interest of the revenue. He set aside the assessment order passed by the AO and directed him to pass an order afresh after giving opportunity of being heard to the assessee.

3.

Before us, the Ld. counsel of the assessee submits that the assessee-company had followed the principle of consistency as this being the 3rd year of claim of pro rata expenses allowable u/s 35D under the same set of facts. Reliance was placed by him on the judgment of the Hon’ble Delhi High Court in CIT v. Escorts Ltd. 9 taxmann.com (Delhi), wherein it has been held that when fundamental nature of transactions in question, which was examined year after year had remained same, the department could not change its views as regards the nature of transactions in issue in relevant assessment year by dubbing it as erroneous. The Ld. counsel further clarifies from the ‘Notes On Accounts’ to ‘Annual Report’ wherein it has been stated in respect of fixed assets and capital work-in-progress that the stated work-in-progress is nothing but outstanding advances paid to acquire the fixed assests and the cost of fixed assets that are not yet installed and to this it was submitted that M/s Astec Life Sciences Act and hence the same cannot be viewed otherwise to take an inference that the order of the AO was erroneous. The Ld. counsel files a Paper Book (P/B) containing the audited accounts for the AY 2010-11, AY 2011-12 and AY 2012-13.

4.

On the other hand, the Ld. DR relies on the order passed by the PCIT and submits that the AO while completing the assessment had allowed deduction u/s 35D(1)(ii) amounting to Rs.2,43,02,765/- erroneously as the assessee’s activity of extension of undertaking or commencement of production of new unit had not yet begun.

5.

We have heard the rival submissions and perused the relevant materials on record. We come across capital work-in-progress of Rs.436,206,071/- in the balance sheet as at 31.03.2012 of the assessee- company. In the ‘Accounting Policies and Notes On Accounts’, it has been stated that “Capital Work-in-Progress comprises outstanding advances paid to acquire Fixed Assets and cost of Fixed Assets that are not yet installed” (page 11 of P/B). In accounting terms, Capital Works-in-Progress comprises outstanding advances paid to acquire fixed assets and the cost of fixed assets that are not yet ready for their intended use at the balance sheet date. We find that the treatment given by the assessee-firm is as per the accounting policies.

M/s Astec Life Sciences 5.1 We also find from the records that the AO has passed the order by making verification which should have been made. 5.2 We find that the assessee-company has claimed deduction u/s 35D in the computation of income filed along with the return of income for the AY 2010-11 and AY 2011-12. This is the 3rd year of claim of pro rata expenses allowable u/s 35D under the same set of facts. In Escorts Ltd. (supra), the Commissioner, while scrutinizing the records pertaining to the assessee for the relevant assessment year 1992-93, noticed that it had claimed capital loss in connection with purchase and sale of units of the UTI and the AO had permitted it to carry forward the said loss without due verification and inquiry. Consequently, the Commissioner issued a show cause notice to the assessee u/s 263. The assessee filed a reply to the notice. The Commissioner, thereafter passed an order u/s 263 disallowing the claim of the assessee in respect of the said capital expenses. The Hon’ble High Court observed that the assessee had been engaged in the activity of buying and selling the units for several years prior to the relevant year and that was not disputed by the department. The issue in question was raised by the department for the first time in the assessment year succeeding the relevant assessment year i.e. in the assessment year 1993-94. In the said assessment year (i.e. 1993-94), the AO had dubbed the transactions as ‘speculative’. As a matter of fact, it was the material pertaining to the succeeding assessment year, i.e. 1993-94, which was available on record, which prompted the M/s Astec Life Sciences

263.

The Hon’ble High Court held that “the department could not reopen an assessment based on a fresh inference of transactions which had been carried on by the assessee and had been accepted, in turn, by the Revenue for several preceding years, on the pretext of dubbing them as erroneous.” The above judgment of the Hon’ble Delhi High Court supports the case of the assessee. This being the 3rd year of claim of pro rata expenses available u/s 35D under the same set of facts, the AO has rightly allowed it. 5.3 Respectfully following the decision in Escorts Ltd. (supra), we cancel the order u/s 263 passed by the PCIT. 6. In the result, the appeal filed by the assessee is allowed. Order pronounced in the open Court on 29/12/2017. Sd/- Sd/- (D.T. GARASIA) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated: 29/12/2017 Rahul Sharma, Sr. P.S.

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