Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI I.C.SUDHIR & SHRI PRASHANT MAHARISHI
O R D E R PER PRASHANT MAHARISHI, A. M. 1. These are the appeals filed by the assessee and the revenue against the order dated 08/02/2011 of ld CIT(A), IV, New Delhi for the Assessment Year 2005-06. 2. The assessee has raised the following grounds of appeal:- “1. That the Ld. CIT (Appeal) has erred in law and on facts in holding that the A.O. was justified in disallowing the claim of depreciation of Rs. 1,18,02,678/- related to Building, Plant & Machinery, Data Processing Equipment Office Equipment and Furniture & Fixture installed at new plant at Bawal.
2. That the Ld. CIT (Appeal) has erred in law and on facts in holding that the A.O. was justified in disallowing the claim of additional depreciation of Rs.57,94,5497- related to Plant & Machinery installed at new plant at Bawal.
Page 2 of 11 3. That the Ld. CIT (Appeal) has erred in law and on facts in holding that the A.O. was justified in disallowing the manufacturing expenses including raw material of Rs. 10,26,3117- related to new plant at Bawal.
That the Ld. CIT (Appeal) has erred in law and on facts in holding that the A.O. was justified in disallowing the whole claim of interest charges, bank charges and commission of Rs. 49,16,4507- related to at new plant at Bawal and treating the post production component as capital expenditure.
That the Ld. CIT (Appeal) has erred in law and on facts in sustaining disallowance to the extent of 5% amounting to Rs. 225187- u7s 14A of the Income Tax Act, 1961.
That the Ld. CIT (Appeal) has erred in law and on facts in holding that the A.O. was justified in disallowing the amount of Rs. 11,04,004, paid to HSIDC treating the same as capital expenditure.
That the impugned appellate order is arbitrary, illegal, bad in law and in violation of rudimentary principles of contemporary jurisprudence.”
The revenue has raised the following grounds of appeal:- “1. In the facts and circumstances of the case, the Ld.CU(A) has erred in law and on facts in deleting addition of Rs.2602024/- on account of disallowance of additional depreciation claimed by the assessee on Gurgaon Plant ignoring that the Bawal Plant, where capacity addition was made and for which depreciation was claimed, was not used in the relevant F.Y. and therefore depreciation cannot be allowed.
2. In the facts and circumstances of the case, the Ld.CIT(A) has erred in law and on facts in deleting addition of Rs.40651/- on account of disallowance of extra depreciation on computer peripherals/accessories ignoring that as per the IT Rules 60% depreciation is allowable only on computer and computer software and not on computer peripherals and accessories.
3. The Ld.CIT(A) has erred on facts and in law in restricting the disallowance u/s 14A read with Rule 8D to Rs.22518/- as against disallowance of Rs.114814/-. Ld. CIT(A) has failed lo take cognizance of sub-section (3) of section 14A which specifies that even if the assessee makes a claim that no expenditure has been incurred in earning the exempted income, sub-section (2) of section 14A shall apply, meaning thereby, disallowance u/s 14A(1) is called for.”
4. The brief facts of the case are that the assessee company is engaged in the business of manufacturing and sale of sheet metal components. For the year it filed its return of income on 29.10.2005 showing income of Rs. 75231525/- which was subsequently revised on 29.01.2007 on the same income. During the assessment proceedings the ld Assessing Officer made certain disallowance with respect to depreciation, manufacturing expenses, interest expenditure, and u/s 14A and thereafter determined the total income of Rs. 102633010/- vide assessment order u/s 143(3) of the Act on 06.12.2007. The assessee contested the disallowances before the ld CIT(A) whose order is under challenge before us by both the parties.
5. We first take up the appeal of the assessee. The first ground of the appeal is against disallowance of the claim of depreciation of Rs. 11802678/- related to various assets at new plant at Bawal. During the year assessee has claimed depreciation on new plant at Bawal and Page 3 of 11 claimed depreciation thereon of Rs. 11802678/- and additional depreciation of Rs. 5794549/-. According to the Assessing Officer some of the plant such as heavy machines continues to arrive in the next financial year therefore the issue was examined whether the said machinery has been used during the year. For this he examined the AGM production by issue of summons u/s 131 and recorded his statement. On the basis of the statement to obtain further evidence the ld Assessing Officer carried out survey u/s 133A of the Income Tax Act and impounded certain materials. Based on the information the ld Assessing Officer issued show cause notice regarding claim of depreciation u/s 32 as whether the asset is put to use or not. According to the assessee the initial commissioning of the plant at Balwal was on 15.03.2005 and dispatch of goods before 31.03.2005. Therefore, it has set up and use the plant for the purpose of its business. However, the ld Assessing Officer rejected the claim of the assessee holding that: i. The isolated sale instance of production on 29.03.2005 and its sale on 30.03.2005 and its dispatch on 31.03..2005 have been proved to be merely self serving book entries. ii. Moving boslter assemblies and other items tabulated in para 3.5 being important parts of set No.i & III on 315T presss machines were not delivered before 31.03.2005, therefore, these sets could not have been used before 31.03.2005. iii. The isolated production instances claimed to have been produced on set No. II also could not happen because the dies used for the said production were received only after 02.04.2005. iv. The evidence relating to usage of dies and production and sale on 29.03.2005 as produced by the assessee company are self-serving in as much as they are bearing the entries of movement amongst the assessee’s own Bawal and Gurgaon units without the involvement of any independent party corroborating such movement. The isolated sales have not been made to any independent party. v. The transport bills in respect of movement of isolated sale or that of dies for production, which could have corroborated the version of the assessee by involvement of some independent party, have not been produced for examination. vi. The assessee has not even be able to prove through any evidence much less any cogent evidence that initial trial runs have been conducted on the machineries claimed to have been used on 29.03.2005, or even by 31.03.2005 as per discussion in para 3.6. vii. In view of these facts and circumstances of the case and after due consideration to assessee’s reply to show cause notice, it cannot be said that the Bawal plant commenced production, even by way of trial runs before 31.03.2005. considering the fact that book entry of production on 29.03.2005 is a fictitious entry and there is no production till 07.04.2005 as per the assessee’s production record, it can be held that Page 4 of 11 the trial runs in respect of the press line commenced only on 07.04.2005 and the final commissioning took place only on 27.04.2005 as per the commissioning certificate duly signed by Sh. Sanjeev Sharma, AGM (Production) and the ISGEC Engineer on 27.04.2005 as per page No. 53,61 and 70- of impounded Annexure A-1 (and this incidentally being the only piece of evidence which is signed by the ISGEC Engineers as per the impounded material along with the detailed beck list cum inspection report of around 8 pages enclosed with each of these three certificates for three 315T presses) viii. On the last date of hearing on 03.12.2007, the assessee has furnished certain self serving and irrelevant and on verifiable evidence in its last ditch effort to defend its case in the nature of photographs of dispatch and challans and freight bills on certain inter unit job works. These evidences in any way do not indicate the usage of machinery comprised in the new plant, which is the issue under consideration. Moreover, they are prior to 29.03.2005, which is date of use of plant claimed by the assessee. ix. The reply furnished by the assessee company is therefore, rejected. The assessee has not only claimed depreciation on these presses but also on the ancillary plant and machinery, data processing equipment, office equipment and furniture and fixtures in respect of Bawal plant as not be said to have been used unless the main plant comprising of press line is used. This interpretation does not need any over emphasis as the assessee has itself taken the date of use as same (i.e. 29.03.2005) in respect of all the block of assets of Bawal plant as tabulated in para 3. Therefore, claim of depreciation of Rs. 11802678/- in respect of Bawal plant is disallowed.
6. Against the above order the assessee-preferred appeal before ld CIT (A), who also rejected the contention of the assessee that machines have been put to use. His main findings were that the trial production has commenced but record of production was not produced. Further, as claimed by the assessee that it has produced 170 items it was not clear whether they were produced at the factory or as the part of job work. Further, he rejected the contention of assessee that plant and machinery were ready to use and therefore, even if no production is made the depreciation is allowable to the assessee. Consequently, it confirmed disallowances of the claim of the depreciation as well as additional deprecation on plant and machinery. Further regarding the submission of mandatory certificate in form No. 3A which was submitted by the assessee during the course of assessment proceeding as the powers of the Assessing Officer are limited. Therefore aggrieved with the order of the ld CIT(A) this ground is raised before us.
Page 5 of 11 7. Before us the ld Authorised Representative submitted that as the business has been set up of Bawal Unit depreciation should have been allowed. He submitted that the unit was connected with permanent power connection in the month of January 2005 the excise registration was obtained and installation report of machines dated 24.02.2005 was also obtained, therefore it is conclusively proved that plant is used for the purpose of business. He further submitted that exhaustive evidence furnished such as commissioning certificate, attendance record of outsourced employees, details of production up to March 2005 from excise records and freight payment details of the goods dispatched which were produced before March along with the photographs of the dispatched goods to the Assessing Officer. He submitted that the statement of the engineer recorded by the Assessing Officer proves that major press for cutting the sheets etc were installed before 31.03.2005 and it is stated that unit was set up before March 2005 and machineries were run on trial basis producing the units. With respect to the main machines, he submitted that all the three machines were received on 31.01.2005 and 15.03.2005. the first and second machine were already commissioned on 15.03.2005 and 20th March 2005, whereas the third machine was also commissioned before the month of March. He further submitted that from the use of the machine, 175 centre body for manufacture and were sold to Caparo Maruti Ltd, another unit of the assessee in the month of March vide invoice No. 1 dated 30.03.2005. On the above production assessee has paid excise duty and education cess also. He further referred that in the VAT return was also the above sum was shown. He further referred to the letter dated 22.10.2007 where show that there was production in the plant and there was sale of those product and consumption of electricity. He further submitted that raw material purchased is also demonstrated by the photocopy of the stock records. With respect to the order of the ld CIT(A) he submitted that the claim of the assessee was rejected for the only reason that whether the items were produced at the factory or as part of job work. For this, he submitted that it was produced at the factory as evidence from the excise register. He further stated that ld CIT (A) has not appreciated that when the goods are dispatched from the factory it has mentioned the vehicle No, and mode of transportation along with the place of the removal and date of removal in the invoice itself. He further stated excise duty is payable on removal of goods and this fact was rejected by the ld CIT(A). In view of this, he submitted that the assessee is eligible for depreciation on plant and machinery as the machineries were installed and put to use during the year.
The ld DR relied on the orders of the lower authorities and submitted that as there was no production during the year the depreciation on the plant and machinery cannot be allowed.
We have carefully considered the rival contentions and perused the orders of the lower authorities. As the assessee is engaged in the business of manufacturing of sheet metal Page 6 of 11 components, it mainly purchased three machinery of 315 ton each, which was delivered to the assessee on 31.01.2005 and 15.03.2005. For these machines assessee submitted commissioning certificate with respect to two machines, which were commissioned respectively on 15.03.2005 and 20.30.2005. With respect to the third machine it was submitted that the same was initially commissioned on 28.03.2005 but finally that machine was commissioned on 08.04.2005. Mainly for this reason the depreciation was disallowed by ld AO. We have carefully considered the commissioning and performance certificate issued which shows that vide purchase order dated 22.06.2004 the machineries were orders and it has been successfully installed and commissioned on 28.03.2005 and these are working satisfactorily. It was further certified that above said machine is taken for production. In view of this with respect to the identical certificate, which was not controverted by the AO, it is strange that for third machine the commissioning certificate is not to be believed. Therefore, apparently all the three machines were taken for production on those respective dates. Whether those machines were used or not is also required to be tested by appreciating the evidence for the purposes of satisfying the user test for claim of depreciation. Assessee has claimed that it has produced 175 units of center body and same were sent by invoice dated 31.030.2005 to the Gurgaon Unit of the assessee on payment of excise duty by road transport details for which are mentioned in that invoice. The purchase of raw material is also required for the production of goods and such purchase of goods are demonstrated in the VAT return filed by the assessee on 31.03.2005. Details of production recorded for the month of March as well as bills and vouchers along with inward and outward register were also produced before the ld. AO. Further, the letter dated 28.11.2007 submitted before the ld. AO clearly demonstrated receipt of raw material as well as production of 175 units and dispatch thereof. The LD AO has stated that these are the self-serving evidences of the assessee. The Finding arrived by the Ld AO that this are self serving evidence should have been proved by the AO by showing contrary evidences when he has exercised his powers u/s 131 and 133A of the act. No such evidences were brought to our notice by ld DR. Hence, therefore, it cannot be said that plant and machinery were not put to use before the end of the year. Before the Assessing Officer, assessee explained the dates of commissioning that initial commissioning is the process, which is conducted without tools and dies for only 8 hours and after that it is fully commissioned, Therefore, there is no difference in the initial commissioning date and the final commissioning date. This fact was also not controverted by revenue. Though it is admitted that the full-scale production was commenced w.e.f 7th April onwards due to some minor problems at the time of initial commissioning which was before the month of March. Regarding statement of the production in-charge, assessee submitted that the production manager has stated that production commenced in the first week April Page 7 of 11 2005 which assessee itself is also saying but the statement is with respect to full-fledged production. For the depreciation if the plant and machinery is used for the business even for the day the assessee is entitled to claim depreciation as it amounts to user of those assets for the purpose of the business. It is not necessary that all machines should run to the extent of its full capacity. Further, with respect to the receipt of the spare tools and dies stated by the ld Assessing Officer that they were received in next year, submission of the assessee remains uncontroverted that bolster assembly was part of standby tools and original part is already installed. For this the assessee submitted that it was received on 02.03.2005 by the entry no 375 in the invoice register and by invoice dated 20.02.2005 of the supplier. Assesse has also clearly stated that bolster assembly was already fitted in the original machine as per the order and the machinery stated by the AO received in the month of April are to be kept as reserve and stand by. Before ld. AO assessee submitted the production process flow chart and use of work force with respect to the stated production of 175 units on 29.03.2005. On verification of the inward register submitted by the assessee before ld AO, it was submitted that these presses were purchased from Indian sugar and general Engineering Corporation, which were recorded in the books of accounts in the month of March, however most of the material and machines were received by the end of the February, or first week of March 2005. Therefore the statement of the production incharge that it takes 20 days for assembling and putting it for the production, therefore even if after considering that date it cannot be denied that there is no possibility of These machines put to use before the close of the year. Therefore based on the evidences submitted by the assessee, it cannot be denied that plant and machinery was put to use before 31st March 2005 as materials were produced by consuming the raw material and same were also transferred to the another units of the assessee on payment of excise duty corroborated by the stock register as well as the sales tax return filed by the assessee. The finding of the ld AO that production and dispatch of goods is just a make believe evidence by assessee cannot be accepted in absence of proving them false by placing contrary evidence. After all the payment of excise duty cannot be rejected so lightly. Regarding the order of ld CIT (A) wherein he has accepted that trial production has commenced but records of the same was not furnished. When the assessee has produced excise records the finding of the ld first appellate authority is not correct. Further so far user of the assets are concerned whether production is made on its own or on job work basis, it does not adversely affect the claim of the assessee as both the activities prove use of the assets. Therefore, the claim of the assessee for depreciation cannot be rejected because evidence shown by the assessee reasonably proves the user of the asset. In view of this ground No. 1 of the appeal of the assessee with respect to the claim of depreciation of Rs. 11802678/- is allowed.
Page 8 of 11 10. Ground No. 2 of the appeal of the assessee was against confirmation of disallowance of claim of additional depreciation of Rs. 5794549/-. The ld Assessing Officer disallowed the above claim with respect to Bawal Plant holding that as no plant is put to use till 31st March 2005 and no capacity addition can be said to have taken place during the year so as to justify the claim of additional depreciation. It was further denied because of the reason that Form 3AA was filed during the course of hearing and not at the time of filing of the return.
Ld AR submitted the same argument which was submitted with respect to the claim of the depreciation and that form no 3AA can be submitted at any time before the completion of assessment proceedings. He referred to the order of ld CIT (A) on this issue. Ld DR relied on the order of the ld AO and CIT (A).
As we have already held in Ground NO. 1 that plant and machinery was put to use during the year the first ground of the ld Assessing Officer does not survive and further the Form 3AA filed by the assessee during the course of hearing is required to be considered, consequently, for granting the claim of additional depreciation considering the Form 3AA submitted by the assessee during the assessment proceedings, we restore this ground of appeal
to the file of the Assessing Officer with a direction to consider the above form and based on our decision for allowing the depreciation to the assessee, decide and compute on merits the additional depreciation allowable to the assessee. In the result ground No. 2 of the appeal of the assessee is allowed with above direction.
13. The ground No. 3 and 4 were with respect to disallowance of manufacturing expenses and raw material purchased and interest charges etc amounting to Rs. 4916450/- with respect to Bawal Unit on the ground that unit is not established.
14. We have already held in ground No. 1 that the assessee has set up its business and commenced production before 31.3.2005, therefore, the ld AO is directed to verify the allowability of expenditure covered in ground Nos. 3 and 4 of this appeal considering that aspect and then deciding the issue afresh about the allowability of the expenditure in accordance with law. In the result ground Nos. 3 and 4 of the appeal is allowed with above direction.
15. The ground No. 5 of the appeal is with respect disallowance of Rs. 22518/- u/s 14A of the Income Tax Act. The ld Assessing Officer noted that assessee has claimed exempt income of Rs. 4,50,354/- against which the assessee stated that no expenditure was incurred for earning the above dividend and hence no disallowance was made. The ld Assessing Officer rejected the argument of the assessee stating that to monitor the investment made by the assessee the management and establishment expenses and other expenses must have been incurred to take care of the above investment. Therefore, he noted that that total expenditure incurred by the assessee and compared it with the gross receipts and proportionately disallowed Rs.
Page 9 of 11 114814/- . Against this the assessee preferred an appeal before the ld first appellate authority who computed 5% of the total exempted expenditure as reasonable estimate and confirmed the disallowance of Rs. 22518/-. Aggrieved by this the assessee is in appeal before us.
The ld AR submitted that the burden to prove direct nexus on the revenue and further no satisfaction is found in the assessment order which is mandatory.
The ld DR relied upon the orders of the lower authorities.
We have carefully considered the rival contentions and noted that the ld Assessing Officer has carefully considered the claim of the assessee that no expenditure incurred for earning the above dividend income. He therefore further held that the assessee might have incurred expenditure on account of monitoring the investment made and in absence of the details he disallowed proportionate expenditure. Furthermore, ld CIT(A) has reduced this disallowance to the extent of 5% of the income earned u/s 14A relying upon the decision of Hon’ble Bombay High Court. In view of this we do not find any infirmity in the order of the ld First appellate authority in restricting the disallowance to the extent of Rs. 22518/- and therefore ground No. 5 of the appeal of the assessee is dismissed.
Ground No. 6 of the appeal of the assessee is against holding the sum of Rs. 1104004/- paid to HSIDC for allotment of land as capital expenditure. The assessee has claimed a sum of Rs. 1104004/- as fine and penalty paid to HSIDC. It was submitted that if the aforesaid amount was not paid the allotment of the 27000 sq mtrs of the land would have been cancelled. However, the assessee did not produce corresponding terms and conditions to support its contentions and later on claimed that the above sum was paid out of commercial expediency. Before the ld Assessing Officer it was also stated that the payment of this sum has to be capitalized along with the retained land. Therefore, the ld Assessing Officer held the above sum as capital expenditure. On appeal before the ld CIT(A) the assessee filed additional evidences which were not admitted by the ld CIT(A) and hence, the ground of the appeal of the assessee was dismissed.
The ld AR submitted that it is not penal in nature but was compensatory and also revenue expenditure and the ld CIT(A) have not admitted the additional evidence and therefore, there is an error in the order of the ld CIT(A).
The ld DR relied upon the orders of the lower authorities.
We have carefully considered the rival contentions and also perused the request for admission for additional evidences by the assessee before the first appellate authority. The ld CIT(A) did not admit the additional evidence for the reason that assessee could not justify admission of the above evidences under any of the clauses of Rule 46A (1) where the additional evidences should have been admitted. Before us also the ld AR could not point out how this case is falling under any of the clauses of Rule 46A(1) of the Income Tax Rules.
Page 10 of 11 Furthermore the Assessing Officer has noted that the assessee has not produced the necessary terms and conditions of the payment of sum of Rs. 1104004/-. Therefore, in the interest of justice we set aside this issue to the file of ld Assessing Officer with a direction to the assessee to submit necessary evidence about the claim of the above sum as revenue expenditure and then ld AO may decide it in accordance with law.. In the result ground No. 6 of the appeal of the assessee is allowed with above direction.
In the result appeal filed by the assessee is partly allowed.
Now we come to the appeal of the revenue. The first ground of the appeal is against the deletion of addition of Rs. 2602024/- on account of disallowance of additional depreciation on Gurgaon Plant.
The ld DR relied upon the order of ld Assessing Officer and ld AR relied upon the order of the first appellate authority.
We have carefully considered the rival contentions and find that ld CIT(A) has taken into consideration Form NO. 3AA filed by the assessee relying upon the decision of Hon’ble Delhi High Court in CIT Vs. Jai Parabolic Springs Ltd. 306 ITR 42 (Del) and allowed the claim of additional depreciation. No infirmity was pointed out by revenue in the order of the ld CIT(A) in allowing additional depreciation on Gurgaon plant. Therefore, we confirm the finding of the ld CIT(A) in admitting Form No. 3AA filed by the assessee before the ld. Assessing Officer and thereby allowing additional depreciation of Rs. 2602024/- on Gurgaon plant. Hence, ground No. 1 of the appeal of the revenue is dismissed.
Ground No. 2 of the appeal of the revenue is against the disallowance of depreciation at the higher rate made by the ld Assessing Officer on computer peripherals amounting to Rs. 40651/- deleted by ld CIT(A).
The rival parties agreed that the issue is now squarely covered in favour of the assessee by the decision of Hon'ble Delhi High Court in case of CIT Vs. BSES Rajdhani Power Ltd dated 31st August 2010 and therefore, the ld CIT(A) has correctly adjudicated in favour of the assessee. In the result the ground No. 2 of the appeal of the revenue is dismissed.
Ground No. 3 of the appeal of the revenue is against disallowance of Rs. 114814/- made by the ld Assessing Officer restricted by ld CIT(A) to Rs. 22518/- u/s 14A of the act.
The ld DR relied upon the order of the ld Assessing Officer and ld AR relied upon the order of the ld CIT(A).
We have carefully considered the rival contentions. While deciding ground No. 5 of the appeal of the assessee we have already upheld the order of the ld CIT(A) for confirming the disallowance of Rs. 22518/- against the disallowance made by the ld AO of Rs. 114814/-. The ld DR could not point out how the order of the ld CIT(A) is erroneous where he has relying upon the order of the Hon’ble Bombay High Court restricting the disallowance after