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Income Tax Appellate Tribunal, “H”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI RAVISH SOOD, JM
आदेश/ O R D E R PER R.C.SHARMA (A.M):
This is an appeal filed by the Revenue against the order of CIT(A)- 22, Mumbai dated 18/07/2014 in the matter of order passed u/s.143(3) of the IT Act.
In this appeal, revenue is aggrieved for deleting the disallowance of interest and depreciation on plant and machinery.
Rival contentions have been heard and record perused.
AO has disallowed the assessee’s claim of interest in para 4.1 to 4.5 of the assessment order. From the details filed AO found that the assessee had taken an expansion program by enhancing the installed capacity from 5000 metric tones to 7000 metric tones per annum. Term loans M/s. Maso Automotives Pvt. Ltd., amounting to RS.10.49 crores were taken from the bank and fixed assets to the tune of 7.49 crores were purchased out of the above term loan for which interest of Rs.1,14,38,636/- was debited to the P&L a/c. On scrutiny of the annual accounts the AO could notice that there was no enhancement either in the installed capacity or in the actual production as, reported in the notes to account. He was under the impression that the expansion program was still under progress during the year and the machineries were not put into use. Hence he was of the view that the interest pertaining to term loans amounting to Rs.48,52,831/- needs to be capitalized, The assessee was required to prove that the machineries were actually put into use on the dates as claimed by the assessee in its letter dt. 8/11/2010. In response to this, a letter dt. 29/11/2010 was filed by the assessee, but the AO was not satisfied, hence the AO had capitalized the interest on term loans pertaining to purchase of new machineries.
By the impugned order, CIT(A) deleted the disallowance of interest after observing as under:- 3.6 I have carefully considered the above submission and the finding of the AO in the remand report. The details-of P&M furnished indicates that the appellant had an existing plant consist of all the machinery (as heat treatment furnace, induction heating furnace etc.) engaged in the manufacture of die steel forgings. Before adjudicating the issue as to whether the new machineries purchased as a part of expansion was actually put into use for production or not, it is better to understand the various process involved in manufacturing of the dies and the machineries used for such process. The conversion of raw material into finished product involves various processes and different machineries are used for each of the particular -process. The details of production process furnished by the appellant is available in Pgs.312, 314, 404 & 405 and it is reproduced here under for the sake of convenience.
M/s. Maso Automotives Pvt. Ltd., Sr. No. Machine / Process Description Facility Type (Operation/inspection/Transportation/Storage 010 As per Quality Receiving Inspection:- Receiving Inspection of Plan. Incoming parts (Rolled Bar) as per Quality Plan 020 Hydro 12 tons Transportation:- Shifting of bars for cutting to Cut Area . 030 Cutting Operation'- Cutting of bars as per operation sheet 41 050 Forklift Transportation:- Shifting of cut pieces near Heating Furnace. (Induction) 060 350 KW Operation'- Heating as per operation sheet 060- induction 4110/020 Furnace 70 1300 T Operation:- Forging as per operation sheet 060- PRESS 4110/030 080 Trimming Operation:- Trimming as per operation sheet 060- 4110/040 090 Forklift Transportation:- Shifting of material to Fettling ar for grinding 100 Fettling Operation:- Fettling as per Operation Sheet 060-4110/050.: 110 Fork lift Transportation:- Shifting of material to Heat treatment shoptor Hardening & tempering 120 Heat Qperation:- Heat treatment as per Operation Shee Treatme 060-4110/060 nt 130 Fork lift Transportation:- Shifting of material to Shot bla M/s. Maso Automotives Pvt. Ltd., F area blasting. 140 Shot Blasting Operation:- Shot Blasting as per Operation 060-4110/070': 150 Crack Crack detection as per operation Detection Inspection sheet 060-4110 160 As per Quality Final lnspection:-Final lnspection as per Quality plan 170 Manually in Transportation:-Shifting of material to Delivery pallet . area if required.
3.6.1 The bars which are cut into size is subjected to heat treatment by induction furnace and then with the use of press, the heated bars are forged and then it is trimmed. Later it is subjected to heat treatment and short blasting. The process clearly indicates that the crucial machineries involved are the induction furnace and the 1300 T/ 1600 T and 2500 T press. During the assessment year the appellant had made addition of the following assets to the P&M. S.No. Particulars Make Additions(cost) 1 Heat Treatment Plant . Indigenous 4,533,816 2 VMC machine Imported,California, USA 4,081,630 3 Crane Indigenous 947,525 4 Hydro 10 Faridabad, India 1,105,000 5 Reducer roller Machine Indigenous 382,822 6 Induction & Heating Machine Indigenous 2,606,589 7 Shearing/cutting machine Indigenous 2,443,797 8 500 TonTrimming press Indigenous 2,097,567 9 2500 Ton Press lmported .Czech 19,206,327 10 1600 Ton & 1300 Ton press Imported 'Switzerland 26,542,926 11 Induction heating equipment 2,304,559 3.6.2 Now l proceed to discuss, how certain crucial machineries engaged in production were purchased, transported, installed and commissioned. During the year the appellant had purchased 2000 ton press, 1600 ton M/s. Maso Automotives Pvt. Ltd., press and 1300 ton press which were found to have been imported. Copy of the invoice dt. 26.4.2007 for purchase of 2500 ton press is available in pg.18 of the paper book which shows that it was imported from Czech Republic. The customs clearance certificate dt.26.6.2007 available in pg- 19 of the paper book indicate that the appellant had paid customs duty of Rs.3,71,320/- on this machinery. 3.6.3 Similarly, the invoice for acquisition of 1600 and 1300 ton press dt.9.10.2007 is available in page-25 of the paper book. The customs clearance certificate dt. 200.11.2007 available in pg.26 shows the appellant had paid Rs 82,326/- for 1600 to press and Rs.65,860/- for 1300 ton press towards customs duty. After it was cleared from the Mumbai Port, these machineries were transported to the appellant's factory at Aurangabad. In support of this, copy of the bill issued by M/s. Roadways India Ltd. dt. 5.1.2007, Unde Crane Service dt. 29.1.2008, M/s. Grace Roadways Corpn. dt. 21.04.2007 was filed and the lorry receipts are available in pg.14, 15,22,23 & 29 of the paper book. The perusal of lorry receipts shows the above machineries have been delivered to the appellant's factory at Allahabad during April and October 2007 and January 2008 . 3.6:4 Another important machinery which is' engaged in the manufacturing process of dies is Billet Heating Machine. The appellant had purchased induction billet heating unit 800 Kw from M/s. Electrotherm India Ltd. Paloda, Gandhi Nagar Dist. on 1.9.6.2007. The copy of invoice is available in pg.3 of the paper book. However, scrutiny of the details filed indicate that after commissioning the machine had developed various technical problems and because of this it could not be put into use till February 2008: In support of this the appellant had furnished evidences in the form of minutes of the meeting (pgs. 35 to 37 of the paper book) and service reports given by Electrotherm India Ltd. The minutes of the meeting dt. 6.1.2008 shows that certain major defects were observed which were enumerated in pg. 1& 2 of the minutes. It was also mentioned .that the heating unit was not made worth for use due to poor service provided by the supplier. The minute was signed by 3 employees each of the appellant and the supplier. 3.6.5 The service reports available in pgs.· 3'8 to 44 of the paper book show the various complaints, diagnosis, the finding and the solution to the problem. Such reports are available for the period Jan & Feb. 2008. ,In the service report dt.12.02.2008 the service engineer had made a mention that "machine was running on trial basis for more than 15 days. No problem in the machine. Customer is satisfied with the performance." 3.6.6 I find there was another minutes of meeting between the appellant and the supplier M/s. Electrotherm lndia Ltd. recorded on 1.03.2008, in which the supplier had suggested solution to certain minor technical M/s. Maso Automotives Pvt. Ltd., issues and it confirms the commissioning of this machine . .,.,All these evidences clearly indicate that billet heating unit was installed and the trial [Un had already commenced in the month of F ebruary2008. 3.6.7 In addition to the above, certain internal correspondence between the GM (Works) to GM (Project) were filed showing the successful installation of machineries such as forging press 2500 ton, VMC 'machine, 1600 ton press and another 2500 ton press. The correspondences indicate that the respective. machineries were successfully' installed, trial taken and handed over for production. The letter dt.13.3.2008 shows that the 2500 ton press was installed on 1.2.2008. Another letter dt. 20/03/2008 shows that the 1600. Ton press and 1300 Ton press were put into use for production on 17.03.2008 ·AII these evidences clearly indicate that the machineries purchased were installed~ and commissioned and trial productions started in the month of March 2008. The AO had come to the conclusion that no credence can be given on such internal memos and therefore rejected the claim of the appellant. In my opinion unless' the AO brings evidence to show that these memos were prepared only to make a bogus claim, a mere surmise that these are make belief communications and hence credence cannot be given is not an acceptable proposition, As brought out by me there are external evidences in the form of service report to show that certain machineries have been installed and trial run started in the month of February/March 2008.
3.6,8 Further, the AR of the appellant brought to my notice the eligibility certificate of (IPS) for expansion unit under PSI 2007 scheme issued by Jt. Director of lndustries, Aurangabad region. The date of issue was 16.7.2009., Sr. No.4 of the certificate show the date of start of commercial production after expansion as 1.4.2008. Unless the P&M purchased are installed and commissioned the commercial production is not possible. The certificate issued by the Govt. authority in my view is an important piece of evidence and it cannot be simply brushed aside. The AO did not bring any material to controvert this fact. 3.6.9 In order to verify the veracity of the claim that the newly acquired P&M was put into use as part of major expansion during the year the AO had directed the appellant to furnish certain specific information, evidences and explanation. In para 3.6 of the remand report the AO mentioned that a letter dt. 28.2.2012 was furnished on 29.2.2012 merely with a request not to capitalize the entire interest, as part of the interest had already been capitalized. In spite of the specific direction to furnish the details of month wise quantitative details of raw material purchased, items manufactured and sold along with copies of the Excise returns filed month wise for production of the dies and scrap, the appellant was not in a position to file these details. Hence, AO came to the conclusion that appellant had failed to substantiate its claim that the P&M. involved in question were actually put into use. In para. 3.8 the AO mentions that 'the M/s. Maso Automotives Pvt. Ltd., internal correspondence 'with the GM Project and GM Works was a self serving document and did not consider these as evidences. 'I do not agree with the above contention of the AO. As discussed in the above paragraph there are external evidences available to show that certain machineries have been put into use in March 2008. The evidences filed during the appellate proceeding remanded to the AO shows that the machines were put into use for production. 3.6.10 The AO had compared the production of finished goods of the earlier months with the production in the month of January to March 2008 and came to the conclusion that there was less production in the last three months. As mentioned above in the month of March 2008 the appellant had attempted only trial production and there was no possibility of commercial production being started. Therefore, the conclusion drawn by the AO has no merits. Moreover when the commercial production has not commenced the appellant can not be expected to file the excise return showing production from the expanded unit. 3.6.11 Hence in my view the machineries were installed/commissioned and the , appellant had started the trial production, however because of various teething trouble, the commercial production could not be started. Once the machines were put in to use for trial production then it can be said that the machinery is put into use and hence-the AO is not correct in capitalizing the entire interest. 3.6.12 Appellant had filed statement showing disbursement of term loan against various items of machineries acquired during the F.Y. 2007-08 which is available in pg. 405 of the paper book and it is also available in pages 8 to 10 of this order as a part of the rejoinder filed. It shows that a sum of RS.627.47 lacs was disbursed during the year, for which Rs 48,52,831 was paid as interest. The appellant had suo moto capitalized interest amounting to RS.16.92 lacs till such time the machinery was actually put into use. 3.6.13 The statement of loan disbursal (page 8 of this order) shows the first 4 items were on account of heat treatment plant. According to the appellant it was claimed to have been put into use on 10.4.2007, but in. fact there was no evidence to show that it was actually put into use. The loan for induction billet heating machine was .disbursed on 28.06.2007 and 'it was claimed 'to have been put into use on 19.6.2007. I find no interest was capitalized on account of this machine. As discussed above in para ~.6.4, 3.6.5. & 3.6.6, this particular machine was supplied by M/s. Electrotherm India Ltd. vide invoice dt. 19/06/2007. Subsequent to installation it developed various problems and hence could not be put into use till Feb. 2008. Though this machine was purchased on 19.6.2007, .the appellant had claimed it as installed on the very s.ame day and in my view it was definitely not possible .
M/s. Maso Automotives Pvt. Ltd., 3.6.14 Appellant had made a claim that the interest needs to be capitalized on a standalone basis till each of the machinery was put into use. I am not in a position to agree with this contention as the processed end product from each machinery was not sold directly into the market. The final product sold was only the forged die and as discussed above, different machines are used in different process in manufacture of the die. Unless all the machinenes are put into use for the manufacture of the end product, capitalization of the interest cannot be considered on a standalone basis. I am of the firm view that the appellant needs to capitalize the interest till the date of trial production. Therefore I am not in position to agree with the working given by the appellant. Further the claim that Rs.31,68,831/- (48,52,531 - 16,92,000) needs to be allowed also cannot be considered in light of my clear finding' above.' For the reasons mentioned above, I direct the AO to capitalize machines' in the-manufacturing process till this date: 'Subject to this direction, this ground of-appeal is partly allowed·.-
AO has also disallowed assessee’s claim of depreciation. The AO had discussed the issue in para 5.1 to 5.4 of the assessment order. He was of the view that the expansion program undertaken by the assessee was not completed during the year and hence the Plant and machinery was not put into use. Further, he did not accept the letter file by GM Works to the Managing director that the trial run was satisfactory. The AO had drawn adverse inference that the appellant had failed to substantiate the claim and the letter filed by the official was only an afterthought, therefore, rejected the claim of depreciation.
By the impugned order CIT(A) deleted disallowance of depreciation after observing as under:- 4.3. I have considered the finding of the AO in the remand report and the rejoinder filed. For the detailed discussion given above with regard to Ground of appeal No. B wherein I have given a clear finding that the machineries have been installed and put into use for trial production by 17.03.2008. The evidences filed by the assessee shows that machines have been not only installed and commissioned but the trial production has also started. This being the factual position there is no question of disallowance of 'depreciation. Even otherwise also according to me the M/s. Maso Automotives Pvt. Ltd., machineries were ready for use. Hence, I do not agree with the finding of the AO that capital work was in progress. Therefore the addition made by the AO by disallowing the depreciation is hereby deleted. This ground of appeal is allowed.
8. Against the above order of CIT(A) revenue is in further appeal before us.
9. We have considered rival contentions and carefully gone through the orders of the authorities below. From the record we found that AO has disallowed assessee’s claim of depreciation and proportionate interest on the plea that machinery was not put to use and no production was taken during the year under consideration. 10. By the impugned order, CIT(A) deleted both the disallowance by recording detailed finding with respect to each and every machinery so imported, installed and commissioned. After asking for remand report, CIT(A) held that all these machines were duly purchased, installed and commissioned. The assessee has also taken a trial production during the year therefore, assessee was eligible for claim of depreciation. The CIT(A) also observed that even though assessee has started trial production but could not take commercial production due to various teething problem. As per our considered view, installing the machinery and taking trial production is sufficient to make assessee eligible for claim of depreciation on the plea that machines have been put to use. The detailed finding so recorded by CIT(A) are as per material on record, which has not been controverted by learned DR by bringing any positive material on record.
M/s. Maso Automotives Pvt. Ltd., Accordingly, we do not find any infirmity in the order of CIT(A) for deleting the disallowance of interest and depreciation. 11. In the result, appeal of the revenue is dismissed.