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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri N.V.Vasudevan & Shri Waseem Ahmed
O R D E R
PER Waseem Ahmed, Accountant Member:
- This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-VI, Kolkata dated 25.03.2014. Assessment was framed by DCIT, Circle-5, Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 09.01.2013 for assessment year 2010-11. The grounds raised by Revenue reads as under:- “1. That on the facts and in circumstances of the case, the CIT(A) erred on facts as well as in law in holding that depreciation of Rs.6,92,40,656/- on plants and machinery purchased of Rs.40,90,09,565/- was allowable, ignoring the fact that the plant and machinery acquired was commissioned at the end of the relevant previous year and in this regard the auditor in his report did not mention the actual date of installation / commissioning date in 3 CD report field along with the return however, CIT(A) accepted the additional evidences in this regard in contravention to rule 46A.” A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 2
2. That on the facts and in circumstances of the case, the CIT(A) erred on facts as well as in law in holding that interest attributable to acquisition of plant and machinery of Rs.53,71,826/- was allowable as revenue expenditure, ignoring the facts that plant and machinery was not put to use during the period which is evident from the auditor’s report in which auditor did not mention the date of installation / commission of plant & machinery, and as such, interest attributable to those plant and machinery was not allowable a revenue expenditure, rather it was required to be capitalized.”
3. That on the facts and in circumstances of the case, the CIT(A) erred in deleting the addition made on account of loss in transit of Rs.19,57,500/- by accepting additional evidences in support of assessee’s claim, ignoring the facts that by accepting additional evidence without getting report from the AO violating the provisions of rule 46A.
4. That the appellant craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing”. Shri S. Dasgupta, Ld. Departmental Representative appeared on behalf of Revenue and Shri Dev Kumar Kothari, Ld. Authorized Representative appeared on behalf of assessee.
2. First issue raised by Revenue in ground No.1 is that Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹6,92,40,656/- on account of depreciation on plant and machinery purchased during the year for ₹40,90,09,565/- though the same was not put to use. Similarly, Ld. CIT(A) granted relief to assessee on the basis of additional evidence which was accepted in contravention to Rule 46A of Income Tax Rules, 1962.
3. Briefly stated fact are that assessee in the present case is a private limited company and engaged in business of trading and manufacturing of compact disc. The assessee during the year has purchased huge plant and machinery for ₹ 35,71,65,000/- and it has also incurred cost in relation to such plant and machinery. Therefore, the same was capitalized by assessee by adding the same to the cost of plant and machinery. The cost of plant & machineries and incidentally cost incurred in relation to such plant and machineries are detailed as under:- (i) Plant and machinery 35,71,65,000/- (ii) L.C. Opening charges 12,25,920/- A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 3 (iii) Clearing charges 14,22,772/- (iv) Difference due to foreign exchange fluctuation 4,91,89,267/- (v) Addition for pre-operative charges 6,204/- Rs.409009163.5 The Assessing Officer during the course of assessment proceedings observed certain facts as detailed under:- a) The assessee has not incurred any cost on account of installation, commissioning and trial production on such plant and machinery; b) There was no report of engineers and consultancy available on installation on such plant and machineries. Accordingly, no cost on such engineers / consultancy was incurred by assessee during the year. c) There was no date mentioned in the tax audit report about such plant and machinery purchased during the year with regard to its “put to use”. In view of the above, AO was of the view that the plant and machinery purchased by assessee has not been “put to use” during the year. Therefore assessee is not eligible for depreciation of ₹ 6,92,40,656/-. Hence, the amount of depreciation claimed by assessee was disallowed and added to the total income of assessee.
4. Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that the installation certificate obtained from G. Steelmet Pte Ltd. Singapore was duly produced before the AO during the course of assessment proceedings. As per the certificate the trial production of three machines were commenced on 06.04.2009, 06.04.2009 and 22.05.2009 respectively. The machines purchased by assessee were sophisticated machines therefore there was no expenses on account of installation and trial run on such plant and machineries.
There was sufficient space inside factory building constructed by the assessee including civil and electrical works and the same was appearing in the A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 4 schedule of fixed assets. The date in the tax audit report for “put to use” of plant and machinery was not specified due to topographically error.
The entire amount of depreciation claimed by assessee for ₹ 6,92,40,656/- does not pertain to the year under consideration but part of it for ₹78,89,281/- represents the depreciation claimed on the opening written down value (WDV) of plant and machinery. Ld. CIT(A) called for remand report on the submission / details filed by the assessee in terms of Rule 46A(3) of IT Rules, 1962 vide letter dated 18.02.2014. AO in his remand report has submitted as under:- “The assessee has filed these supporting issued by G-Steelmet PTE Limited, Singapore and was received on 11.01.2013, however, the assessment ordered was received on 09.01.2013. As per the said letter for CDR plans the date of completion of installation is 02.04.2009 and that of CR Replication line is 19.05.2009. However, it must be stated here that why the Tax audit report is silent on the date of put to use of these plans and machineries is difficult to understand. Moreover, it is seen from the letters that CD Replication line was purchased by Space Matrix Agencies Pvt Ltd and the Ld CIT(A) may clarify this. The ld. CIT(A) ma9y draw necessary inferences in respect of these supporting documents and came to a logical conclusion as the undersigned is not in a position to comment on the genuineness and authenticity of these letters as it could not be verified within this short time. Without prejudice to the above, the undersigned does not find any infirmity in the content of the said letters regarding installation and trial production. However, the Ld. CIT(A) my examine other supporting documents to correlate the same.” Ld. CIT(A) after considering the submission made by assessee has deleted the addition made by AO by observing as under:- “3.6 I have considered the facts of the case. The Assessing Officer disallowed the claim of depreciation because according to him the appellant had not established the date on which the machinery was put to use. The machinery under consideration is CD replication line and injection moulding machine. The machinery was supplied by G Steel met PTE Ltd., Singapore. According to the appellant, it was sophisticated machinery which did not require any elaborate installation involving heavy expenditure etc. The commissioning of plant had been done by the supplier G. Steelmet PTE Ltd. which had conducted the trial run of the machine also. After carrying out the A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 5 commissioning and trial run, it issued the certificate called acceptance protocol. Though the appellant tried to submit these certificates at the time of assessment itself they could reach the assessing officer only after completion of assessment. The appellant has also stated that in the remand proceedings, the assessing officer has not been able to point out any specific defect in the evidence. He has also not conducted any inquiry. He has clearly stated in the report that he does not find any infirmity in the contents of the said letter regarding installation and trial production. He has however, requested the matter may be examined in the light of other supporting documents. 3.7. After going through the material on record, following observations are made:- i) The date of purchase of the items of machinery is prior to 31.03.2009 i.e. in the preceding financial year. Some import bills are as old as June, 2007. ii) As per the certificate issued by the supplier, the commissioning and installation of the machinery took place in April, 2009 which is towards the beginning of the previous year. iii) Though the auditor has not specifically mentioned the date of putting machine to use, they have computed the allowable depreciation for the full year implying that the machinery was put to use in the first half of the previous year iv) In a subsequent certificate, the tax auditor confirmed that the machinery was capitalized and put to use in April and May, 2009. 3.8. Furthermore, it is observed, that the turnover for the year under appeal was of Rs. 34,63,63,345/- with manufacturing expenses of Rs.24,44,794/-. As against that, in the immediately preceding year, there were manufacturing expenses of Rs. 7,08,182/- only and the turnover was of Rs. 5,82,12,285/- only. Prior to that, there was no manufacturing. The above facts clearly indicate that this was the first year in which the appellant company carried out significant and substantial manufacturing operation and thus achieved a quantum jump in turnover. According to the appellant, this could not have been possible without installation of the machinery imported by it from Singapore. The assessing officer has stated in his order that the business of the appellant was manufacturing of compact discs. The appellant was, prior to purchase of machinery under consideration, having substantially less machinery. As per schedule 4 to the balance sheet, plant & machinery as on 1.4.2009 were of RS.6.18 crores as against addition of Rs.40.9 crores. Thus, it does appear that the appellant could carry out substantial production achieved during the year on account of installation and use of the imported machinery. It may be recalled, that in the present case the addition is not based on any definite finding that the machinery was not put to use. Rather, the assessing officer took the lead from the fact that in the audit report no date was mentioned in respect of put to use. However, such omission, by itself, does not establish that machinery was not put to use. It is not even the case here, that the machinery was acquired towards the end of the previous year raising a reasonable doubt that machinery might have been put to use after close of the financial year. Instead, the machinery was purchased even prior to beginning of the previous year. The certificates issued by the supplier show A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 6 that the machinery was commissioned in the initial months of the financial year only. As the machinery was sophisticated, the appellant was not required to make any substantial expenditure for its commissioning. It was already having factory and infrastructure for using the machinery. The appellant was earlier having machinery of much lower value and had relatively small manufacturing turnover before the year under consideration. It achieved substantial production and turnover during the year, apparently due to installation and utilisation of the machinery. As stated earlier, no specific deficiency has been found by the assessing officer in respect of evidence produced by the appellant. All the surrounding facts and circumstances discussed above clearly indicate that the machinery was used during the year. Considering this, the disallowance of depreciation cannot be sustained and the same is deleted.” Aggrieved, by the above finding of Ld. CIT(A), the Revenue is in appeal before us.
Ld. DR before us vehemently relied on the order of AO whereas Ld. AR for the assessee before us filed paper book which is comprising pages 1 to 53 and drew our attention on the certificate for the installation issued by G.Steelmet PTE Ltd. Signapore which are placed on pages 9 to 11 of the paper book and Ld. AR for the assessee relied on the order of Ld. CIT(A).
We have heard the rival contentions of both the parties and perused the material available on record. In the instant case, the depreciation claimed by assessee was disallowed by AO on the premise that plant and machinery in respect of which depreciation was claimed were not “put to use”. However, we note that there was a opening WDV of plant and machinery for ₹5,25,95,209/- as evident from the Schedule of Fixed Assets placed on page 22 of the paper book. The assessee claimed total depreciation during the year in respect of plant and machinery for ₹6,92,40,656/-which was consisting of depreciation on WDV as well as plant and machinery purchased during the year. Thus, in our considered view, the AO has grossly erred in making the disallowance of the depreciation on the opening WDV on plant and machinery.
We also note that Ld. CIT(A) duly complied the provisions of 46A(3) of the IT Rules, 1962 by calling the remand report from AO on the submissions / details filed by the assessee at the time of appellate proceedings. Thus the allegation A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 7 of the Revenue that the additional documents have been accepted by the ld. CIT-A in contravention to the provisions of Rule 46A has no basis. At this juncture we also find important to reproduce the remand report furnished by the AO which is as under:- “The assessee has filed these supporting issue by G—Steelmet PTE Limited, Singapore and was received on 11.01.2013, however, the assessment order was passed on 09.01.2013, As per the said letter, for CDR plants the date of completion of installation is 02.04.2009 and that of CD Replication line is 19.05.2009. However, it must be stated here that why the Tax audit report is silent on the date of put to use of these plant and machineries is difficult to understand. Moreover, it is seen from the letters that CD Replication line was purchase by Space Martix Agencies Pvt. Ltd. and the ld CIT(A), may clarify this. The ld. CIT(A), may draw necessary inferences in respect of these supporting documents and came to a logical conclusion as the undersigned is not in a position to comment on the genuineness and authenticity of these letters as it could not be verified within this short time. Without prejudice to the above, the undersigned does not find any infirmity in the content of said letters regarding installation and trial production. However, the ld. CIT(A),ma9y examine other supporting documents to correlate the same.”
On perusal of the above report we note that the AO has not pointed out any defect in the submission of the assessee in his remand report.
6.1 We also hold that the merely non filling up the relevant column of tax audit report i.e. put to use, cannot be the basis for making the disallowance of depreciation amount. Similarly all other evinces produced during the proceedings before the lower authorities cannot be disregarded without pointing out any defect. Thus, we cannot ignore the details as furnished by the assessee before Authorities Below during the appellate proceedings. Ld. DR at the time of hearing has also not pointed out any defect in the finding of Ld. CIT(A). Thus, we have no alternative except to confirm the order of Ld. CIT(A). We order accordingly. A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 8 7. Next issue raised by Revenue in ground No.2 is that Ld. CIT(A) erred in deleting the addition made by the AO on account of interest expense of ₹53,71,826/- attributable to the acquisition of plant and machinery.
During the course of assessment proceedings, AO observed that cost incurred by assessee on account of LC charges of ₹9,64,504/- and interest charges of ₹44,07,322/- needs to be capitalized in view of the fact that the plant and machineries were not “put to use” during the year. Thus, AO held that the expense of ₹53,71,826/- cannot be allowed as revenue expenditure. Thus, he disallowed the same and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A) who deleted the addition in part made by AO by observing as under:- “4.2 This issue is also linked with ground no.1 & 2. Since the Assessing Officer had disbelieved the appellant’s claim that the plant and machinery had been installed, he was of the view that interest and bank charges pertaining to the same should have been capitalized and not claimed as revenue expenditure. While deciding ground no.1 and 2, I have already held that the machinery had been put to use by the appellant. Therefore, the appellant is entitled to claim interest and bank charges after commissioning of the machinery as revenue expenditure. It is seen that as per the certificate issued by the supplier, the entire machinery was run for trial production dated 22.05.2009. In the submissions made before the Assessing Officer (reproduced in the assessment order) also the appellant has stated that the plant and machinery being capitalized on 22.05.2009. Thus, it follows that the appellant shall be entitled to claim interest and bank charges as revenue expenditure if incurred after 22.05.2009. On going through the details of interest, it is seen that an amount of Rs.4,00,954/- was incurred on 18.05.2009. Similarly in bank charges an amount of Rs.95,793/- pertains to the period before 22.05.2009. Thus interest and bank charges of Rs.4,96,747/- are related to pre-commissioning period. The disallowance is therefore, confirmed to the extent of Rs.4,96,747/-. However, the Assessing Officer is directed to capitalize the aforesaid amount and allow depreciation on the same. The balance addition is deleted. The addition is reduced accordingly.” The Revenue, being aggrieved, is in appeal before us.
Before us both parties relied on the order of Authorities Below as favorable to them. A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 9 11. We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, it was observed that we have already held that plant and machineries have been “put to use” during the year under consideration. Therefore, the expense incurred by assessee on account of LC charges and interest charges should be treated as revenue in nature. In the light of above reasoning, we hold that the order of the Ld. CIT(A) is correct and in accordance with law and no interference is called for. We hold accordingly. This ground of Revenue’s appeal is dismissed.
Next issue raised by Revenue in ground No.3 is that Ld. CIT(A) erred in deleting the addition made by the AO for 19,57,500/- on account of loss in transit on the basis of additional evidences which were accepted in contravention to the provisions of Rule 46A of the IT Rules, 1962.
The assessee in the year has claimed a loss of ₹ 19,57,500/- on account of loss of goods in transit but failed to justify the same on the basis of documentary evidences before AO during assessment proceedings. Thus, the claim made by assessee was disallowed by the AO and added to the total income of assessee.
Aggrieved, assessee preferred an appeal before the Ld. CIT(A). The assessee before Ld. CIT(A) submitted that goods were exported in the financial year 2007-08 to M/s Dicker International Ltd. and accordingly the amount of sale was offered to tax. However, the party could not get the goods cleared from the Customs Authority. Therefore, the assessee has written off the goods under head “loss in transit” for ₹19,57,500/-. The Ld. CIT(A) after considering the submission of assessee deleted the addition in part by observing as under:- “5.2 Thus, it has been explained by the appellant that though the amount was debited as ‘loss in transit’, the claim was in nature of bad debt written off. As explained, the appellant had made export sale to M/s Dicker International Ltd. in the financial year 2007-08. However, the customer did not receive the items exported by the appellant due to loss in transit and therefore, did not make payment to the appellant. The appellant has produced the ledger account of the party which supports A.Y. 2010-11 DCIT Cir-5, Kol. Vs. M/s Space Matrix Media (P) Ltd. Page 10 the contention that the amount has been shown as sale in the financial year 2007-08 and thereafter no payment has been received. Thus, the amount was satisfying all the conditions prescribed u/s. 36(1)(vii) read with section 36(2) of the IT Act, 1961 and a per these provisions, the appellant was not required to produce any evidence such as insurance certificate etc. considering the above position, the appellant is entitled to claim the deduction u/s.36(1)(vii) of IT Act. The disallowance of Rs.19,57,500/- is therefore, deleted.” The Revenue, being aggrieved, is in appeal before us.
Before us Ld. DR vehemently relied on the order of AO and he left the issue to the discretion of the Bench where Ld. AR drew our attention on page 13 and 14 of the paper book where the copy of ledger of M/s Dicker International Ltd. was placed. Ld. AR further submitted that the copy of ledger was provided before AO during the assessment proceedings. The ld. AR also conceded the fact that it actually represents the bad debt but it was claimed as deduction under the wrong head “loss in transit” inadvertently. However, the ld. AR accordingly submitted that the deduction of bad debt cannot be denied merely on the basis that it was claimed under wrong head i.e. “loss in transit”. Ld. AR relied on the order of Ld. CIT(A).