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Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
Before: SHRI I.C.SUDHIR & SHRI PRASHANT MAHARISHI
Assessee by : Sh. Ravinder Mani, Sr. DR Revenue by: Sh. V. K. Subharwal, Adv Sh. Rajan Gupta, CA Date of Hearing 11/05/2016 Date of pronouncement 27/06/2016 O R D E R PER PRASHANT MAHARISHI, A. M.
These are the appeals filed by the revenue against the order of the ld CIT (A)- 1. XV, New Delhi dated 28.02.2013 for the Assessment Year 2008-09 and ld CIT (A)-XIII, New Delhi for the Assessment Year 2009-10 dated 19.10.2012. The revenue has raised the following grounds of appeal for Assessment Year 2. 2008-09:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing additional depreciation u/s 32(1) (iia) of Rs. 8,41,235/- on the items of electric installations, Tools, Dyes and Moulds.
ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 2 of 10 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of wages payment of Rs. 1,24,26,484/- paid to M/s. Ganpati Enterprises Holding the same as revenue expenditure.
On the facts and in the circumstances of the case and in law, the Ld. CIT (A) has erred in allowing deduction u/s 10B on the amount of other processing charges of Rs. 2,81,827/- claimed to be received from customers.
On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in allowing deduction u/s 10B insurance claim of Rs. 7927/- and discount received from suppliers of Rs. 22,459/- The revenue has raised the following grounds of appeal for Assessment Year 3. 2009-10: “1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in allowing additional depreciation u/s 32(1)(iia) of Rs.28,02,000/- on the items of electric Installations, Tools, Dyes and Moulds.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of wages payment of Rs.78,27,098/- paid to M/s Ganpati Enterprises holding the same as revenue expenditure.
3. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleted the disallowance of Rs 36,37,151/- made in respect of Swap Charges and Loan Processing Charges by holding the same as revenue expenditure by admitting additional evidence without providing opportunity to the A.O. to verify the factual position.”
4. First we take up the appeal for the AY 2008-09 of the revenue.
5. The first ground of appeal is against allowance of additional depreciation of Rs. 841235/- on items of electric installation, tools, dyes and moulds. The ld Assessing Officer has disallowed the additional depreciation on the ground that machineries have not been installed and therefore the basic condition for granting additional depreciation is not fulfilled. He further stated that these equipments are not directly engaged in the manufacturing of articles. On appeal before the ld CIT (A), he allowed the additional depreciation holding that moulds, dies and electrical items are part and parcel of plant and machinery.
ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 3 of 10 6. On appeal before us ld DR submitted that as plant and machinery is not installed the additional depreciation cannot be allowed. He further stated that the items are also not related to manufacturing of goods.
Against this ld AR submitted that the claim of the assessee is in accordance with the provision of the law and the additional depreciation is allowable on plant and machinery. He further stated that the assessee is engaged in the business of manufacturing and satisfies all the conditions of section 32(1) (iia) of the Income Tax Act.
We have carefully considered the rival contentions. Assessee is engaged in the business of manufacturing of medical disposable items and for this purpose purchased moulds, dyes and electrical installation which are plant and machinery and are not disqualified for additional depreciation according to the second proviso to section 32(1)(iia) of the Act. The finding of the ld Assessing Officer that they are not installed is a contradictory statement as normal depreciation of such assets is already allowed. The normal depreciation is allowable when the assets are put to use, we failed to understand that while allowing the normal depreciation the assets have been accepted as being used and in allowing additional depreciation it is stated that they are not installed. Further, the plant itself exists for the manufacturing of the products and the items purchased by the assessee are also not falling in the negative list such as office equipments etc. we are of the view that the claim of the assessee of additional depreciation is in accordance with the law. Hence, we confirm the order of the ld CIT (A) in allowing the additional depreciation of Rs. 841245/- on electrical installation, tools, dies and moulds. In the result, the ground No. 1 of the appeal is dismissed.
The ground No. 2 of the appeal is against the deletion of disallowance of wages payment of Rs. 12426484/- as revenue expenditure. The ld Assessing Officer has noted that wages of Rs. 21907287/- has been paid during the year and there is no substantial increase in the turnover of the assessee. The wages payments have been made to one M/s. Ganpati Enterprise, the assessee did not provide any agreement of wages payments of those parties. ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 4 of 10 As assessee has failed to provide the reasonable reasons of the payment of wages and hence, it was presumed by LD. AO that such labour wages may have been used for construction of building. Hence, an amount of Rs. 12426484/- was disallowed as capital expenditure. Ld CIT (A) deleted the disallowance for the reason that there was no evidence in support of the doubt raised by the ld AO.
On appeal before us ld DR relied on the order of the ld Assessing Officer. Against this ld AR relied on the order of the ld CIT (A).
We have carefully considered the rival contentions. In the appellate order for AY 2008-09, ld CIT (A) has deleted the disallowance relying on the order of the ld CIT (A) for AY 2009-10. In assessment year 2009-10 the ld CIT(A) has deleted the disallowance holding as under:- “(iv) Disallowance out of Wages payments of Rs. 78,27,098/-:-During the year under consideration, the appellant has debited under the head wages Rs. 2,34,81,2937-which was paid to Ganpati Enterprises and Other employees working in the factory. The Assessing Officer observed that appellant's production process is highly sophisticated, therefore, the production cannot be taken by hiring such unskilled labours taken from Ganpati Enterprises. The Assessing Officer has also observed that there is huge increase in the wages however, there is no substantial increase in the turnover of the appellant. Therefore, the huge increase in the wages was not found justified by the Assessing Officer. Hence, the payment made to Ganpati Enterprises for supply of labour of Rs. 78,27,098/-was disallowed and added to the total income. During the course of appellate proceedings, the AR of the appellant submitted that the Assessing Officer has not properly reconciled the increase in production viz-a-viz wage. The appellant has submitted a chart as page 139 of the paper book which shows that the production of the appellant has gone up from Rs. 366.73 lacs in F.Y. 2007-08 to Rs. 447.65 lacs in F.Y. 2008-09. Similarly, the wages has gone up from Rs. 219/-lacs in F.Y. 2007-08 to Rs. 234.81 lacs in F.Y. 2008-09. The appellant has submitted that there is a increase in the production in A.Y. 2009-10 to the extent of 22% whereas increase in wages in A.Y. 2009-10 is less than 10%. Therefore, the appellant submitted that the observation of the Assessing Officer are factually incorrect and same cannot be relied upon for making disallowance of wages. As regards the labour supplied from Ganpati Enterprises, the appellant has filed copy of the agreement entered into on 03.01.2005 with Ganpati Enterprises. As per this agreement, the Ganpati Enterprises was to supply labours for lodging, un-lodging, unpacking, shifting, stacking of material ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 5 of 10 and semi-skilled manpower for production and cleaning work. As per this agreement the appellant was to pay Rs. 2,300/-per month to the laborer alongwith 4.75% ESI Charges, 13.61% PF and EPS and 6% service charges and Rs. 2/-per employee welfare fund. The agreement with Ganpati Enterprises was renewed on 02.11.2006, 28.11.2007, 23.12.2008 with revision in minimum wages every year. The appellant has filed copies of registration of Ganpati Enterprises with Assistant Commissioner of Service Tax, Regional Provident Fund Commissioner, ESIC Faridabad and license of labour contract issued by Haryana Govt. in support of its contention. The appellant claims that labours hired with Ganpati Enterprises was utilized for different purposes as mentioned above, which includes the semi skilled manpower used in the production and clinic work of the plant. It claims that payment to Ganpati Enterprises was made for hiring labour which was utilized in the business of appellant. The appellant has also filed confirmation from Ganpati Enterprises wherein it has mentioned that it has supplied labour to the appellant for its manufacturing activity in the factory. The labour supplied to the appellant are subject to deduction of PF, ESI, EPS, therefore, it cannot be said that labours were not supplied to the appellant. The payment to Ganpati Enterprises were made for supply of labour and same cannot be disallowed. As regards Assessing Officer's observation that labours supplied by M/s Ganpati Enterprises was unskilled labour and such labour cannot be utilized in highly sophisticated production process. Therefore, such labour was utilized in the construction of building, and such expenses are required to be capitalized under the head capital work in progress. In this regard the appellant has submitted that for construction of building the appellant has got separate contractor name Raja Singh and payment made to Sh. Raja Singh are subject to deduction of TDS. In support of its contention the appellant has filed copy of the TDS certificates issued in Form No. 16A to Sh. Raja Singh which is filed at page 162 and 163. As per these TDS certificates the payment was made to Sh. Raja Singh and TDS was deducted. The appellant has also filed copies of ledger account of Sh. Raja Singh. As per this Raja Singh had supplied labour of Rs. 20,01,445/-. The appellant has also filed copies of ledger account of building capital work in progress in the paper book which is filed at page 166 to 173 wherein the capital work in progress has been shown on account of building at Rs. 2,20,23,073/-. All these facts prove that no amount of payment made to Ganpati Enterprises was utilized for construction of building and the payment for construction of building was made separately to Sh. Raja Singh. In view of factual and legal position discussed above it is held that the payment to M/s Ganpati Enterprises was made for supplying the unskilled and semiskilled labour, which was used for lodging, un-lodging, cleaning of factory and in production process of the appellant. Hence, the amount of Rs. 78,27,098/-has to be allowed as revenue expenditure to the appellant and ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 6 of 10 same cannot be capitalized. Therefore, disallowance of Rs. 78,27,098/-is deleted.”
On the perusal of the order of the ld CIT(A) we do not find any infirmity in deleting the disallowance. None has been pointed out by the ld DR, in view of this we confirm the order of the ld CIT(A) in deleting the disallowance of wages payment of Rs. 12426484/- paid to M/s. Ganpati Enterprises holding that it is revenue expenditure. In the result ground No. 2 of the appeal is dismissed.
Ground No. 3 of the appeal is against the allowance of deduction on account of order processing charges of Rs. 281827/-. The assessee is 100% export oriented unit claiming deduction u/s 10B of the Act. During the year it has received order processing charges from its customers amounting to Rs. 281827/- on which deduction was not allowed as it was found that the profit is not derived from export of articles or things. The assessee carried the matter before the ld CIT(A) who in turn held that these charges were received from the customers due to variation in their non standardization items and therefore, it was part of total export turnover and hence, claim of deduction was allowed.
On appeal before ld DR relied upon the order of ld Assessing Officer and submitted that deduction u/s 10B on this sum is not allowable. Ld AR relied upon the order of the ld CIT (A) and submitted that these incomes are deductible u/s 10B of the Act.
We have carefully considered the rival contentions. According to schedule- XV if the audited account of the assessee a sum of Rs. 281827/- was received on account of processing charges. There is no dispute on the amount of total turnover as well as the export turnover. However the only dispute is with respect to profit eligible for deduction shall include the processing charges of Rs. 281827/- or not. According to the provisions of section 10B (4) the profit derived from export of goods is amount which bears to the profit of the business of the undertaking in the same proportion as the export turnover bears to the total turnover. Therefore if the amount of processing charges is the business income of the assessee same is eligible for deduction in ratio of export turnover to total turnover. As ld Assessing ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited ITA No 225/DEL/2012 A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 7 of 10 Officer himself has taxed the processing charges under the head business income of the assessee the amount of deduction is allowable to the assessee. Therefore, ground NO. 3 of the appeal of the revenue are dismissed confirming the finding of ld CIT (A).
The ground No. 4 of the appeal is on allowability of insurance claim of Rs. 7927/- and discount from suppliers of Rs. 22459/- . According to the ld Assessing Officer deduction on these two receipts are not allowable whereas the ld CIT (A) has held in favour of the assessee. As we have already held in ground No. 3 of the appeal that there is no dispute on the export turnover and total turnover amounts and when both these receipts are taxed with business income the ld CIT (A) has correctly allowed deduction on these two sums u/s 10B of the Act. We confirm the finding of the ld CIT(A) on this count and dismiss ground No. 4 of the appeal.
Ground No. 5 of the appeal is general in nature and therefore the same is dismissed.
In the result the appeal of the revenue is dismissed.
Now we come to the appeal of the revenue for AY 2009-10.
The first ground of appeal
is against allowance of additional depreciation of Rs. 2802000/- u/s 32(1) (iia) of the Act.
21. Ld DR and ld AR both submitted that the issue is similar to the ground No. 1 of the appeal of the revenue for AY 2008-09. We have also perused the ground No. 1 of the appeal and also are of the view that it is on similar facts. We have already dismissed ground No. 1 of revenue appeal for AY 2008-09 holding that when normal depreciation has been allowed there is no reason that additional depreciation should be disallowed for the reason that assets are not installed and used for manufacturing. In view of this we dismiss ground No. 1 of the appeal of the revenue.
22. Ground No. 2 of the appeal of the revenue is against deleting the disallowance of wages payment of Rs. 7827098/-.
23. Both the parties confirmed before us that ground No. 2 of the appeal of the revenue for AY 2008-09 and facts of this ground are similar. We have also perused the facts of the appeal and are also convinced that the grounds are similar. While deciding the appeal of the revenue for AY 2008-09 we have ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 8 of 10 deleted the disallowance in absence of any evidence about the use of labour for constructing any capital asset. Therefore, as we have already deleted the disallowance as AY 2008-09 on identical issue, for similar reasons the disallowance of Rs. 7827098/- made during the year is also not sustainable. Hence, we confirm the finding of the ld CIT(A) and dismiss ground No. 2 of the appeal.
Ground No. 3 of the appeal is against the deletion of disallowance of Rs. 3637151/- of swap charges, by holding the same as revenue expenditure. Ld AO has noted that during the year assessee has claimed swap charges of Rs. 2967111/- and loan processing charges of Rs. 670040/- totaling to Rs. 3637151/-. The swap charges are on transfer of loan from one lender to another when the assessee took the loan when it was in process of expansion of its business. Therefore, ld AO stated that it is capital expenditure in nature. The loan processing charges were also on account of swapping of the loan. The ld CIT(A) has dealt with the above disallowance at Page 19 and 20 of his order as under:- “ (v) Disallowance of Swap Charges and Loan processing charges of Rs. 36,37,151/-:-During the year the appellant has claimed Swap Charges FCNRB and Loan Processing Charges of Rs.29,67,11 l/-and Rs. 6,70,040/- respectively for Swapping the loan from one bank to the another bank and processing charges for sanction of loan. These expenses have been disallowed by the Assessing Officer on the ground that same are capital in nature. The appellant claims that the loans for which expenditure is claimed were not utilized for construction of building or purchase of new machinery during the year. The appellant had raised loans from Oriental Bank of Commerce in 2006 in Euro currency being 100% exporter. These loans were converted into Indian Rupees because of heavy fluctuations in the rates of Euro in the International Market and also heavy fluctuations in the interest rates accrued thereon. For converting the loan from Euro to Indian Rupees, the appellant has paid conversion charges of Rs. 29,67,111/-. In support of this the appellant has filed all supporting documents before Assessing Officer as well as before me. The papers relating to conversion of loan are filed from page 174 to 181 of the paper book. Therefore, these expenses are revenue expenditure incurred wholly and exclusively for business purposes of the appellant and same are fully allowable. As regards the loan processing charges of Rs. 6,70,040/-the same pertains to payment to Oriental Bank of Commerce for shifting of the loan from OBC to Axis Bank. The loan was shifted because of the pressure from ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09 Page 9 of 10 the bank for immediate payment of loan by Oriental Bank of Commerce. Since appellant was not in a position to pay the entire loan to OBC, it approached to Axis Bank Ltd. who had agreed to extend the credit facility of Rs. 13.04 crore. The appellant has filed copy of account of loan processing charges and copy of the bank account wherein loan processing charges have been debited to the appellant's account. These pages are filed at 182 to 185 of the paper book. The appellant has also filed sanctioned copy of credit facility of Axis Bank to the appellant. In view of the above it is established that Swap Charges paid to OBC for converting loan from Euro to Indian Rupees and processing charges paid to OBC for shifting of loan from OBC to Axis Bank Ltd. are revenue expenditure incurred wholly and exclusively for business purposes of the appellant. Hence, same are fully allowable. The Assessing Officer was not justified in treating the Swap Charges and Processing Charges as capital expenditure, therefore, the disallowance made by the Assessing Officer of Rs. 36,37,151/-is deleted. As a result, the appellant gets a relief of Rs. 1,43,33,675/- and grounds of appeal
No. 1 to 3 are partly allowed.” 25. ld DR reiterated the same arguments which were the arguments of the Assessing Officer while disallowing the same. Ld AR relied on the order of the ld CIT (A). He further stressed up on the nature of such expenditure with relevant pages of the paper book.
26. We have carefully considered the rival contentions. The brief facts are that earlier the assessee took loan from Oriental Bank of Commerce against foreign currency (FCNRB), which was later on converted into Rupee loan and for this transaction the assessee has incurred financial charges which are in the nature of interest expenditure which are in the nature of interest in view of the provision of section 2(28A) of the Income Tax Act. Such expenditure is allowable in terms of section 36(1) (iii) of the Income Tax Act. It is not the case of the revenue that the assets for which the loan was taken is not put to use. In view of this we find no infirmity in the order of the ld CIT (A) in allowing swapping charges holding them as revenue expenditure and allowing the claim of the assessee. Regarding the loan processing charges it is from shifting of loan from Oriental Bank of Commerce to Axis Bank. This is also allowable to assessee as revenue expenditure as it is an interest and allowability of the same is to be considered u/s 36(1) (iii) of the Act. For the similar reasons as we have explain for swapping charges we ACIT Circle -12() Neww Delhi V Harsoria Healthcare Private Limited A Y 2009-10 ITA No 3158/DEL/2013 A Y 2008-09