M/S. BILL FORGE PRIVATE LIMITED,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX (LTU), CIRCLE - 1, BANGALORE

A. The LAA erred in confirming the addition made by the LAO of treating a sum of Rs. 5,93,500/- being revenue expenditure as capital expenditure. B. Without prejudice to the above ground, the LAA erred in not allowing normal depreciation and additional depreciation on the capitalised value of the assets.

The LAA erred in confirming the action of the LAO in adding a sum of Rs. 16,24,491/- as income by treating the differential amount of the value of the asset as per Form 3CD and as per invoice as unexplained investments of the Appellant. 6. The LAA erred in not appreciating the fact that travelling expenditure of Rs. 6,54,487/- is incurred wholly and exclusively for business purpose and undertook additions merely on the basis of surmises by considering an element of personal nature.

The brief fact of the case shows that assessee is a company engaged in manufacture of forged auto components, filed its Return of Income (ROI) on 28.09.2012 at a total income of Rs. 14,09,65,540/-. This ROI was picked up for scrutiny by issuing notice under section 143(2) of the Act, on 07.08.2013. The Assessment Order was passed determining total income of the assessee at Rs. 20,15,65,845/- by making several disallowances. The assessee preferred appeal before the learned CIT(A) wherein assessee was granted some relief and appeal was partly allowed. However, still where the additions / disallowances were confirmed, the assessee is aggrieved and has preferred this appeal.

Assessee has furnished several compilation and charts during the course of hearing and prior to hearing. In deciding this appeal, we have considered those pages which were referred to before us during hearing.

Ground Nos. 1 and 2 of the appeal are general in nature, no specific arguments were advanced and therefore these grounds are dismissed.

As per ground number 3 of the appeal the assessee is challenging the disallowance of depreciation. Assessee has also raised an additional ground of appeal connected to this ground. As per ground number 3 assessee is challenging the disallowance of the appreciation on the assets as assessee failed to show that when those assets are put to use. As per additional ground it is challenged that once an asset has entered the block of asset it is neither possible nor it is necessary to consider whether each asset is used in the year and the test of user has to be applied upon the block of the asset as a whole instead of upon an individual asset. Therefore, it was claimed that the additional depreciation and appreciation disallowed by the learned assessing officer and confirmed by the learned CIT – A cannot be upheld. To support his proposition, the assessee has relied on the decision of the honourable Delhi High Court in case of Commissioner of income tax versus Oswal Agro Mills Ltd (2011) 197 taxman 25 (Delhi), decision of the honourable Gujarat High Court in case of Commissioner of income tax versus Sonal Gum Industries (2010) 322 ITR 542 (Gujarat) and decision of the coordinate bench in case of ACIT versus Indus League Clothing Ltd (ITA number 82/Bangalore/2018 dated 17 November 2021. We will proceed to decide the admission as well as adjudication on the ground after deciding ground number 3 of the appeal of the assessee, if warranted.

The learned AR submitted that assessee has produced the certificate of Chartered Engineer being installation certificate along with the copies of the invoices by filing additional evidence before the learned CIT(A) for allowability of claim of normal depreciation which was not at all considered by the learned CIT(A). He specifically referred to Page No.209 of the Paper Book wherein installation certificated dated 26.09.2011 was issued by B. K. Narayana Bhagavan, Chartered Engineer, certifying that asset code No.402414 has been installed and put to use for commercial production w.e.f. 26.09.2011. He therefore submitted that assessee should have been granted depreciation on the asset on the basis of above installation certificate.

The learned DR vehemently submitted that installation certificate submitted by the assessee of the Chartered Engineer does not help the case of the assessee for the reason that there is nothing mentioned in such installation certificate.

We have carefully considered the rival contentions and perused the Orders of the learned lower authorities. In this case, the simple fact shows that assessee has purchased a machinery for a total consideration of Rs.6,40,62,268/-, on which, according to the assessee, the depreciation is allowable for Assessment Year 2012-13 as same was put to use on 26.09.2011. For the purpose of user of the asset, only evidence submitted by the assessee was an installation certificate dated 26.09.2011 of Chartered Engineer. On careful perusal of the certificate of Chartered Engineer, we find that the certificate was issued without pointing out any evidence of user of that asset or showing what is the verification process that has been carried out by the Chartered engineer to certify the date of putting assets in to use. . In fact, the machinery is “Verson Press - Model – 52 – 2000 – 96 – 48T” having various parts and accessories which was combined as asset code No.402414. Therefore, on import of the machinery, all the parts would have been combined and then such machinery would have been installed and then put to use, if any. Further, merely producing the installation certificate without substantiating that on what material and evidence and inspection such certificate has been issued, credence to such certificate could not be given. Therefore, in the interest of justice, one more opportunity is granted to the assessee to substantiate the user of the asset contained in asset code No.402414 that same has been put to use during Financial Year 2011-12 by showing job card, machine card, production report, etc., before the learned AO. The onus is always on the assessee to show that asset is put to use for the claim of depreciation. Therefore, ground No.3(a) of the appeal is restored back to the file of the learned AO with above direction to the assessee.

Ground No. 3(b) is also with respect to depreciation on assets contained in item code Nos.402224 and 402249. The learned AO, in paragraph 3.6, noted that assessee has purchased two assets with code Nos.402224 and 402249 on 16.05.2011and 20.05.2011 with capitalization value of Rs.7,90,875/- and Rs.1,36,87,594/-. In the tax audit report, the assessee has not mentioned the date of capitalization of these assets. The learned AO, therefore, did not allow any depreciation as well as the additional depreciation on this sum. Thus, the additional depreciation of Rs.32,53,694/- and the normal depreciation of Rs. 24,62,770/- totaling to Rs. 57,47,464/- was disallowed. The assessee preferred an appeal before the learned CIT(A). The learned CIT(A) noted that assessee has produced installation certificate from Chartered Accountant which is duplicate certificate. Therefore, he held that assessee has not been able to prove with reliable evidence that these machines were actually put to use during the Financial Year. Accordingly, the Order of the learned AO was upheld.

The learned AR submitted that as the original installation certificate was lost, the assessee obtained duplicate installation certificate was produced and therefore, the assessee should have been granted additional depreciation as well as normal depreciation.

The learned DR referred to the remand report and submitted that in both the installation certificates, the signature of the Chartered Engineer is not matching and therefore, as assessee has failed to produce any evidence of the user of the asset, the depreciation and additional depreciation is correctly disallowed.

We have carefully considered the rival contentions and perused the Orders of the learned lower authorities. In this case, the asset No.402224 was purchased by the assessee from M/s. Endtec Machines by invoice dated 14.05.2011at a total cost of Rs.7,90,875/-. For the user test of the asset, assessee submitted an installation certificate of B. K. Narayana Bhagavan, Chartered Engineer, dated 24.05.2011 stating that such machinery is put to use on 24.05.2011. For the asset code No.402249, the assessee purchased a machine along with its parts and accessories for Rs.1,56,27,594/- and for the user an installation certificate of the same Chartered Engineer was submitted dated 11.07.2011 that this machine was put to use on 11.07.2011. Assessee claimed depreciation only on the basis of such installation certificate of Chartered Engineer. On perusal of that certificate, we note that t certificates does not speak about what are the evidence were verified by the CE and what is the process of verification carried out to show that installation date is correctly mentioned therein. As the user of the asset, it is demonstrated by submitting only the installation certificate without any evidence of machine card or job work on that machine, as directed in ground No.3(a),we also restore this issue back to the file of learned AO with direction to the assessee to substantiate the user of the asset

The learned AR submitted that assessee has submitted that there is an error in the computer module of the assessee and further furnished the invoices and also the production log from the ERP and installation certificate to substantiate its claim. Further, the affidavit of the Director of the company was also submitted. It was therefore submitted that as these machines are used during the year, the claim of additional depreciation as well as normal depreciation should have been allowed.

The learned DR vehemently supported the Orders of the learned lower authorities and submitted that assessee has failed to show any evidence as to how the assets were capitalized in the books of accounts of the assessee prior to the invoice date. It was also submitted that the claim of the computer error was also not substantiated.

We have carefully considered the rival contentions and perused the Orders of the learned lower authorities. Admittedly in this case, the assets were capitalized in the books of the assessee prior to the date of purchase invoice. However, that cannot be the only ground for disallowing claim of normal depreciation or additional depreciation to the assessee if the assessee has purchased those assets and used it for the purpose of the business during the year, and error has occurred due to implementation of ERP module. Before the ld Lower authorities, assessee has explained the error is also substantiated with affidavit of the Director. For the purpose of the user of the asset, the assessee has also submitted the invoice as well as the production log from the ERP and installation certificates. Therefore, as these evidences have not been verified by the lower authorities, we restore this ground of appeal

The learned authorized representative pressed ground number 4B of the appeal that if the above expenditure is considered as a capital expenditure than on the same also depreciation and additional depreciation should be allowed. He does not want to press ground number 4A of the appeal.

The learned CIT DR vehemently submitted that only if such expenditure qualifies the capitalization to the capital asset i.e., fixed assets then only depreciation should be granted.

We have carefully considered the rival contention and perused the orders of the learned that lower authorities. The dispute in this ground is whether a sum of ₹ 593,500/– is allowable to be capitalized to the fixed assets and then, if eligible, the depreciation thereon and additional depreciation also should be granted or not. Assessee is already agreed and not pressed that such expenditure is revenue in nature. Thus, ground number 4A of the appeal is dismissed. However, if such expenditure is part of the cost of the assets incurred to bring the fixed assets into existence, naturally it should be considered as the cost of acquisition of the asset and assessee is entitled to claim of depreciation and additional depreciation thereon. Therefore, we allow ground number 4B of the appeal and direct the learned assessing officer to grant depreciation on these amounts if assess demonstrate that this expenditure relates to the capital assets on which depreciation and additional depreciation is allowable.

Ground number 5 of the income with respect to addition of ₹ 1,624,491/– being the difference in the amount of the cost of the assets as stated in form number 3CD and the amount stated in invoices as unexplained investment of the assessee. During the course of assessment proceedings, the learned assessing officer noted that some of the assets have invoice value higher than the asset value capitalized in the books of account in case of three different type of assets. The learned that assessing officer made the addition of ₹ 16,24,491/– as unexplained investment. When the matter reached before the learned CIT – A the assessee explained that the invoice value and times the excise duty, additional duty levy able under the customs act for which credit is claimed separately. Assessee also submitted reconciliation thereof. However, the learned CIT – A does not find the explanation of the assessee convincing because the assessing officer has taken the figure of the invoice

The learned authorized representative submitted that the assessing officer has taken the incorrect figures which the assessee is not able to identify that wherefrom the invoice value is have been taken by the AO. He also submitted a chart before ours showing the reconciliation of the value shown in the invoices as well as the value at which asset is capitalized. It was further stated that when an asset is purchased, invoice value of such asset also contains the amount of excise duty and custom duty et cetera, for which, separate credit is taken by the assessee, therefore, the value of such asset is capitalized at net value of those duties. He therefore submitted that there is no error in the accounting.

The learned CIT DR submitted that the assessee could not reconcile the amounts before the learned that lower authorities and therefore the addition was made.

We have carefully considered the rival contention and values the orders of the learned lower authorities. We find that the learned assessing officer has noted in three cases of fixed assets where the value of the invoice is higher than the amount at which the asset is capitalized in the books of accounts of the assessee. Such differential amount was added by the learned assessing officer as unexplained expenditure. We find that before ours the assessee has submitted a chart of reconciliation of invoice value as well as the capitalized value in the books of accounts of the assessee. The claim of the assessee is that invoice value includes duties and taxes on such fixed assets forming separate credit claim is available to the assessee, therefore, the value of assets capitalized in the books of accounts as actual cost is net of those duties. We

Ground number 6 is with respect to the disallowance of travelling expenditure. Assessee has incurred a travelling expenditure of ₹ 10,654,487 out of that the learned assessing officer has disallowed a sum of ₹ 654,487 holding that the expenditure are in the nature of personal expenditure. The learned CIT – A also confirmed the action of the learned assessing officer holding that the element of personal expenditure of director and employees cannot be ruled out in the case of travelling expenses. Therefore, assessee is in before us.

The learned authorized official the assessee is a corporate entity and therefore there cannot be any expenditure which is personal in nature. It was further submitted that all those expenditures are incurred by the assessee wholly and exclusively for the purposes of the business of the assessee. It was further submitted that no instances were provided which can even be said to be even the personal expenditure of the employees and directors. It was stated that in absence of any such instance, the disallowance cannot be made.

The learned CIT DR supported the orders of the learned lower authorities.

We have carefully considered the rival contentions and use the orders of the learned lower authorities. Admittedly the case is that the assessee is a corporate entity, therefore there cannot be any personal expenditure incurred by the assessee which can be disallowed in the hence of corporate entity holding it to be personal in nature. It may be a case that in particular expenditure is not wholly and exclusively incurred by the assessee for the purposes of the business. There is no such instance pointed out by the learned lower authorities. In any case personal expenditure of the directors and employees, even if those are incurred, same could not have been disallowed in the hence of the assessee company as it is a staff expenditure or expenditure on employees. Even otherwise a limited company by its very nature cannot have personal expenditure. Thus, we reverse the orders of the learned Lower authorities and direct learned AO to delete the disallowance of Rs.6,54,487/- out of travelling expenditure and allow Ground no 6 of the appeal.

In the result appeal is allowed partly to extent indicated above.