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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार/ PER Rajendra A.M.- लेखा लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order dated 19/01/2015 of the CIT (A)-8, Mumbai, the Assessing Officer (AO) has filed the present appeal.Assessee-company,engaged in business of manufacturing and trading chemicals,filed its return of income on 14/10/2010, declaring Loss of Rs.11.30 crores.The AO completed the assessment under section 143 (3) of the Act, on 28/03/2013, determining its income at Rs.(-) 74.46 lakhs.
Effective ground of appeal is about deleting the addition made by the AO,amounting to Rs. 8.45 crores. During the course of assessment proceedings, the assessee filed a detailed working with regard to its pre-operative expenditure allocation. From the said working, the AO found that the assessee had included a sum of Rs.2.65 crores on account of raw material for trial run. He directed the assessee to furnish further details and issued a show cause notice on 21/03/2013. After considering the same,the AO held that the assessee had earned a total income of Rs.6.89 crores, that it had reduced an expenditure of Rs.9.55 crores from total income to arrive at net expenditure, that it had transferred the net expenditure under the head ‘Trial run expenditure’ i.e. Rs.2.65 crores to its capital work in progress, that it had claimed the net expenditure of Rs.2.91 crores, that it had earned an income of Rs. 25.96 lakhs, that it had netted off the figure and had finally included a sum of Rs.2,65,71,782/- in its capital work in progress, that it had shown its PP plant was yet to be commissioned on 28/02/2010, that the other plant was under commissioning
2491/M/15(10-11) M/s. Universal Chemical & Industries Ltd. stage, that the Expert Advisory Committee (EAC) had mentioned that income arising out of the trial run expenditure had to be considered for purpose of taxation. The specific query was raised as to why sum of Rs.6.89 crores accounted by it on account of sale of goods and a sum of Rs. 1.55 crores on account of captive power consumption should not be considered as income of the assessee. After considering a summation of the assessee, the AO observed that the assessee had submitted the copy of Ledger account pertaining to sale of goods as effected by the assessee which it had perpetrated to be on account of trial run sales, that from the accounts it was clear that the same did not pertain to trial run production, that it had not furnished any register/document to show that such expenditure was pertaining to any trial run carried about by it, that the assessee had submitted a copy of plant commissioning certificate, dated 28/02/2010, pertaining to its PP plant, that for the purpose of the income tax proceedings it was irrelevant, that cost of the assets was to be determined as per the section 43 (6) of the Act, that assessee might have purchased raw material for production, that sales resulting from the said raw material could not be said to be have any relation to the cost to the assessee, that majority of the expenditure pertaining to trial run was purely related to earn non-commissioned plant and not to generate any sales. Finally the amount of income earned by the assessee of Rs.8.45 crores (Rs. 6.89crores + Rs. 1.55 crores) had to be taxed in the hands of the assessee and the expenditure incurred by it had to be attributed to the operation of the plant. He made an addition of Rs. 8.45 crores on account of income generated on sale of goods generated on trial run. Similarly he found that assessee had reduced a sum of Rs. 10.17 lakhs, being scrap sale, from the cost of its assets. The AO held that same had to be treated as income earned by the assessee.
Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority (FAA).Before him, the assessee argued that domestic sales from pre-operative trial runs stood at Rs.6.89 crores,that the expenses incurred during the pre-operative period capitali - sed and not claimed in the return of income amounted to Rs.9.55 crores,that the net amount capitalized by it was Rs.2.65 crores,that it had capitalized the value of self generated electricity for captive consumption(Rs. 1.55 crores),that EAC opinion did not deal with taxability of income arising during the construction period, that the opinion was about capitalisation of expenditure during the construction period, that it had furnished the details of sales for the trial run period, that the certification of commissioning of plant was submitted during the assessment proceed - 2
2491/M/15(10-11) M/s. Universal Chemical & Industries Ltd. ings,that the sales were made prior to the commissioning of the Plant, that the AO had ignored the evidences produced in that regard, that the AO had brought to tax the receipts arising in pre- operative period, that the receipts were rightly reduced in the books of account from the cost of assets in accordance with the recognized method of accounting. Referring to the AS-10 the assessee relied upon the cases of Bokaro Steel Ltd. (236ITR315) and Bongaon Refinery and Petrochemicals Ltd.(251ITR329).Alternatively,it was argued that AO should be directed to allow the underlying expenditure from the receipts which had been taxed.After considering the submission of the assessee and the assessment order, the FAA held that income tax was leviable upon income/profits and gains,that it was not a tax on gross reciept.He directed the AO to allow the underlying expenditure from the receipts that has been taxed.
4.During the course of hearing before us, the Departmental Representative (DR) supported the order of the AO and stated that addition was based on the opinion of EAC. The Authorised Representative(AR) supported the order of the FAA.
5.We have heard the rival submission and perused the material before us.We find that the AO had made an addition of Rs.8.55 crores to the income of the assessee comprising of pre-operative domestic sale derived from trial-runs(Rs.6.89 crores),notional income from inter-division transfer of power(Rs.1.55 crores) and sale of scrap (Rs.10.17lakhs), that the assessee had reduced the receipt from the cost of asset.We find that the treatment given to the disputed amount was in accordance with the AS-10.Here,we would like to refer to the case of Bokaro Steel Ltd.(supra) of Hon’ble Apex court.In that matter the assessee was incorporated in January, 1964. Its object was to construct and own an integral iron and steel works. During the AY.s 1965-66 to 1971-72, the work of construction of the company's factory and installation of the plant was in the process of completion. The company had not started any business during the assessment years in question. (i) During this period, the company had given to the contractors, quarters for the residence of the staff and workers employed by the contractors who had been engaged by the assessee for carrying out the work of construction. The assessee charged the contractors for the use of the quarters so given. (ii) Secondly, during the assessment years in question, the assessee had entered into supplementary agreements with its contractors under which the assessee had made certain advances to the contractors to enable them to execute the large scale construction work
2491/M/15(10-11) M/s. Universal Chemical & Industries Ltd. smoothly.The assessee-company had charged interest. This interest was later adjusted against the dues of the contractors. (iii) For the purpose of the construction work the assessee had given on hire certain plant and machinery to the contractors. Against the letting of plant and machinery, the assessee received from the contractors, income in the form of hire charges. (iv) The assessee- company allowed the contractors to use the stones lying on the assessee's land for construction work. The stones lying on the assessee-company's land were the capital assets of the assessee- company.The assessee charged the contractor a certain amount by way of royalty for excavation and use of these stones for construction work. In the appellate proceedings,the Tribunal held that the amounts under items Nos. 1 to 4 received by the assessee had gone to reduce the cost of construction.These were in the nature of capital receipts which could be set off against the capital expenditure incurred by the assessee during the relevant assessment years. This view was upheld by the High Court.On appeal the Supreme Court held as under:
“.......the first three heads of income were (i) the rent charged by the assessee to its contractors for housing workers and staff employed by the contractor for the construction work of the assessee including certain amenities granted to the staff by the assessee, (ii) hire charges for plant and machinery which was given to the contractors by the assessee for use in the construction work of the assessee, and (iii) interest from advances made to the contractors by the assessee for the purpose of facilitating the work of construction. The activities of the assessee in connection with all these three receipts were directly connected with or incidental to the work of construction of its plant undertaken by the assessee. The advances which the assessee made to the contractors to facilitate the construction activity of putting together a very large project was as much to ensure that the work of the contractors proceeded without any financial hitch as to help the contractors. The arrangements which were made between the assessee-company and the contractors pertaining to these three receipts were arrangements which were intrinsically connected with the construction of its steel plant. The receipts had been adjusted against the charges payable to the contractors and had gone to reduce the cost of construction. They had, therefore, been rightly held as capital receipts and not income of the assessee from any independent source.... In case money is borrowed by a newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalised and added to the cost of the fixed assets created as a result of such expenditure. By the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting up its plant and machinery, such receipts will go to reduce the cost of its assets. These are receipts of a capital nature and cannot be taxed as income.” We find that while deciding the appeal,the FAA has directed the assessee to allow the expenditure from the taxable receipts.Thus,he has followed the very basic principle of taxation jurisprudence and that principle stipulates that all the expenditure incurred by the assessee have to be compulsorily allowed from the income taxed by the AO. If the AO wants to tax a particular
2491/M/15(10-11) M/s. Universal Chemical & Industries Ltd. income,he cannot disallow the expenditure incurred by the assessee to earn the said income. Considering the above,we are of the opinion that the order of FAA does not suffer from any legal or factual infirmity.Therefore,confirming the same we decide the effective Ground of appeal against the AO.