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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: S/SHRI SANJAY ARORA & AMARJIT SINGH
आदेश / O R D E R Per Bench: This is a set of two Appeals by the Assessee and the Revenue in respect of two consecutive years, being assessment years (AYs) 2007-08 and 2008-09, against separate orders by the first appellate authority, being the Commissioner of Income Tax (Appeals)-7 & 4, Mumbai (‘CIT(A)’ for short) for those years. The first appellate authority having decided differently for the two years for Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) each of the disallowances under appeal, forms the reason for the assessee being the appellant for one (AY 2008-09) and a respondent for another (AY 2007-08) year.
The facts in brief are that the assessee company was in the business of manufacture of electronic goods and appliances till the year 1998, since when the manufacturing activity stopped, due to, as stated, adverse market conditions and inefficient administration of the company. However, during the relevant previous years, being the financial years 2006-07 and 2007-08, the assessee claims to have undertaken job-work in respect of hermetically sealed refrigerator compressors for its’ sister concern, M/s. Applicomp India Ltd., claiming that it (its’ Management) had set things right from f.y. 2003-04 onwards, also undertaking trading activity in the goods being manufactured earlier (refer orders by the Revenue authorities and ‘Statement of Facts’ by the assessee). The Revenue, however, disallowed depreciation on plant and machinery and electric installation, and which constitutes the principal issue in these appeals. Proper details with regard to the plant and machinery used for job work, which it suspects to be a make-believe, i.e., with a view to bolster the claim for depreciation allowance, had not been furnished at any stage. The assessee meets this by stating that it had incurred expenses on power, fuel and water for the purpose, which in fact stand allowed in assessment for AY 2008- 09, for which year the disallowance of depreciation stands confirmed by the first appellate authority. ‘Business’ is a word of wide import, and there is nothing to restrict its scope to a single activity, i.e., manufacturing. A long period of inactivity does not itself imply the assessee being not in business. Passive user, where the asset/s is in a ready-to-use state, has been regarded as a sufficient compliance of the user test for depreciation allowance. In fact, after the introduction of the concept of ‘block of assets’, individual assets lose their identity, so that depreciation is allowable with reference to the written down Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) value (WDV) of the block of assets, irrespective of which assets comprising it are actually put to use. Support is drawn for the various arguments/propositions from various decisions. On an enquiry by the Bench as to the actual work undertaken with reference to the plant and machinery deployed for the same, in- as-much as there is no enumeration thereof at any stage of the proceedings, the ld. Authorized Representative (AR), the assessee’s counsel, would submit that he could produce materials to substantiate the same, providing a flowchart (of the activities), and that the suspicion raised by the Revenue authorities in the matter is wholly misplaced, being guided merely by the fact that the job work is undertaken for a sister concern, and which by itself could hardly be a ground to disallow a claim. On another query by the Bench with regard to the absence of any ‘labour expenses’ in respect of job-work – there being no reference thereto in the orders by the authorities below, he would draw our attention to the statement of casual labour charges (at Rs. 4.85 lacs) at paper-book (PB) page 47, admitting though that the same was not furnished before the Revenue authorities, and which fact stands clearly mentioned in the preface to the compilation.
We have heard the parties, and perused the material on record. 3.1 We would, to begin with, attempt to clarify the law in the matter; the same having been subject to elucidation by the higher courts, including the Honorable jurisdictional High Court, in different fact settings. Section 32 (1) of the Act reads as under: ‘Depreciation 32. (1) In respect of depreciation of – (i) buildings, machinery, plant or furniture being tangible assets ; (ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) owned, wholly or partly, by the assessee and used for the purposes of the business or profession the following deductions shall be allowed - (i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed. (ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed: Provided that no deduction ...........’ User is thus one of the two preconditions or prerequisites – the other being ownership (of the capital asset), for the claim of the depreciation allowance u/s. 32(1) of the Act. The word employed in the provision is ‘used’, as emphasized by the Hon’ble jurisdictional High Court in Dineshkumar Gulabchand Agrawal vs. CIT [2004] 267 ITR 768 (Bom) (SLP against which stands dismissed by the Apex Court, reported at ([2004] 266 ITR (St.) 106), so that an asset, to be eligible for the claim of depreciation in its respect, is to be actually used, i.e., as the word ‘used’ occurring therein was considered by the Hon’ble Court as denoting, and that a ‘ready to use’ state shall not entitle a claim for depreciation qua the said asset. In the facts of Whittle Anderson Ltd. vs. CIT [1971] 79 ITR 613 (Bom), referred to by the Hon’ble Court, the agreement clearly provided two of the four presses which were diverted to the pooling arrangement were to remain idle while the two presses worked; the owners of those presses had to keep them ready for use at any time and the contingency for their use could also, upon the terms of the agreement, arise at any time. The machines were thus under forced idleness and, accordingly, liable to be considered as in use during the relevant period in-as-much as they were kept ready for use at any moment. Similar was the situation in CIT vs. Vishwanath Bhaskar Sathe [1937] 5 ITR 621 (Bom). How, we wonder, could a different view be taken; the machine being kept ready for use at any moment. They were surely deployed in business, and their being put to actual use being a contingency over which they had no control and, further, which could arise at any time. In fact, the identity of the machines which were idle and which worked would keep changing from time to time, and, was not relevant; the purport of the arrangement being to Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) keep some machines (productive capacity) in surplus, as a standby, so that the production did not suffer on account of a breakdown in any of the working machines (operating capacity). How could then, one may ask, a difference be made for the machine ‘used’ vis-à-vis that ‘not used’, all of which formed part of a pool, made available, some of which were to necessarily remain idle at any given time, albeit liable to be used at any time. In CIT vs. G. N. Agrawal [1996] 217 ITR 250 (Bom), again, the trucks under repair during the relevant year were already part of the assessee’s business (operational) assets, having been put to use earlier, as also in the subsequent year. Their being thus under repair during the relevant year was considered by the Hon’ble Court as of no moment. Surely, the capital assets already deployed in, and committed to the business could not be regarded as not in use merely on account of the suspension from active user on account of withdrawal from service for repairs, which is only to ensure the continuity of their service. It was under such like circumstances, signifying passive user, as against an active one, that the Hon’ble Court found the same as satisfying the test of ‘user’ and, thus, liable to be regarded as ‘used’ in terms of section 32(1). Can, for example, a plant or machinery, which could not be used for want of (say) feedstock or energy, be regarded as ‘used’, so as to be eligible for depreciation. The answer, to our mind, would depend on whether the same is functional as also if it stands put to use earlier. Surely, where so, temporary non-user will not disqualify the same as the same could only be regarded as available for use and, accordingly, a case of a passive user. Where, however, the machinery has not been put to use at any time earlier, and is to be put to use for the assessee’s business for the first time, it cannot be regarded as an asset in passive use. Then, again, what may also be relevant is if the same is liable to be used in future. If (say), the user is proscribed in-as-much as the manufacturing process requires a raw material which is banned, so that the machinery cannot be under normal circumstances restored to production, there is no question of it being regarded as a passive user, in contradistinction to an active one, entitling
ITA No.3949/Mum/2013 Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) depreciation. Idleness or temporary suspension from active user would not therefore disentitle a claim for depreciation. A review of the binding judicial precedents, toward which we have also perused the decision in the case of CIT v. L&T Mcneil Ltd. [1993] 202 ITR 662 (Bom), thus yields that user is a condition precedent for the claim of depreciation allowance. The same implies an actual user, and there is no legal fiction or deemed user, being principally a matter of fact. Ready-to-use state or passive user has been regarded as user in the peculiar facts of the case, where no distinction in fact could be drawn between an ‘active’ or ‘passive’ user. This also forms the substance of the findings by the tribunal in the case of G. Shoes Exports (in and 6209/Mum/2014 dated 24/10/2016).
3.2 We may next examine the facts of the case. The manufacturing admittedly stopped in the year 1998. The assessee claims to have restored operations since f.y. 2003-04, commencing trading operations. The same is surely as much business as is manufacturing. We are however concerned with the claim for depreciation on plant and machinery and electric installation, erstwhile used for the manufacture of electronic goods and appliances. There is in fact no claim of the same being used for trading – which by definition is selling of bought out goods, but for carrying out job-work only. We are unable to agree with the Revenue that the claim becomes unacceptable merely because the job-work is for a sister concern. Nothing stops the Revenue, if it suspects a false or an untrue claim, to probe further in the matter, but the assessee’s claim cannot be ousted at the threshold for that reason. The same is in fact complemented by the claim for expenditure on power, fuel and water. Though the expenditure has no doubt come down drastically – from Rs. 52.18 lacs (in AY 2007-08) to Rs. 20.93 lacs in AY 2008-09, but so has the volume of the job- work – from Rs. 219.18 lacs to Rs. 59.81 lacs for the respective years. The Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) labour expenses, at Rs. 4.85 lacs (for AY 2007-08) appears to be included in the manufacturing expenses as there is no separate claim for the same. Again, what is the expenditure on labour, which should be an integral part of the job-work, for AY 2008-09? At the same time, the assessee’s claim is sans any details, and so are therefore the orders by the authorities below. Why, it is doubtful if the plant and machinery, rusted for years, could be made operational by expending meager sums on repairs. That apart, there may be significant technological changes over time, which may render the operations unfeasible, both qualitatively and quantitatively. The claim would require being examined, with the onus to establish its claim, proving it, being on the assessee. The job-work would need to be profiled in terms of its processes, specifying the machinery required and used for carrying out the same, i.e., the different processes. A flowchart, as submitted by the ld. AR, giving description of the process, wherever required, may be facilitative, coupling it preferably with the different factors of production, viz. labour, power, fuel and water, which the different processes involve or entail, so as to enable proper comprehension. It needs to be appreciated that the user is a matter of fact, and that the assessee’s claim for depreciation allowance hinges critically on the same being established.
3.3 Continuing further, we are conscious that the scope of manufacturing activity is more extensive by far than the job-work, so that the entire block of assets, or even a substantial part of it, may not be put to use for job-work. The nature of the job-work vis-à-vis manufacturing, carried out earlier, would therefore be required to be ascertained. The claim of depreciation, as for other expenses or allowances, is qua a business, for each of which income u/c IV-D is to be computed separately. The block of assets, w.r.t. the WDV of which depreciation is to be worked out, is accordingly to be reckoned business-wise. Depreciation on ‘plant and machinery’ and ‘electric installation’ is not in Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) respect of the trading business. What would therefore be equally relevant and material, i.e., apart from user, is if the said assets, assuming their user, as claimed, for job-work, can be said to be used for the same business as for which they were used earlier and formed a part of block of assets of. That is, is the job- work same or a different business from the erstwhile manufacturing business? Where same, the individual assets used for job-work, even if different from that used for manufacturing, would enter the same block of assets, and depreciation exigible w.r.t. it’s WDV. Though the condition of user is a primary condition, which could only be qua an asset, depreciation is allowable with reference to the WDV of the relevant block of assets. Though therefore it may not be correct to say that the assets lose their identity in-as-much as they continue to be maintained, operated and used as individual assets, their values merge upon entering a block of assets, with reference to the WDV of which only depreciation is allowable. There is nothing in law to suggest that the user test is to be carried out for all the assets comprising a block of assets, carving out a ‘fresh’ block by excluding the assets not used during the relevant year, carrying out this exercise each year. On the other hand, if the job-work represents a separate, new business, the claim of depreciation would be with reference to the assets used for this business only. That is, on the basis of the assets of the said business, whether acquired anew, i.e., post 1998, or even if ‘transferred’ from the erstwhile manufacturing business. There has been no examination of the assessee’s claim from this stand-point, which we direct. Lest we may be, in so directing, be considered as having travelled outside the scope of these appeals, reference may be drawn, inter alia, to the decisions in Kapurchand Shrimal v. CIT [1981] 131 ITR 451 (SC) and Ahmedabad Electricity Co. Ltd. v. CIT [1993] 199 ITR 351 (Bom) (FB). Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) 3.4 The assessment for both the years is accordingly set aside qua the issue of claim for the impugned depreciation, and the matter restored to the file of the Assessing Officer (AO) for adjudication by issuing definite findings of fact upon due verification, based of-course on the material on/taken on record, giving proper opportunity to establish its’ claims to the assessee.
The second issue is in relation to the disallowance of repairs incurred, claimed at Rs. 6.16 lacs and Rs. 2.51 lacs for the two consecutive years respectively. The same stand disallowed and, further, deleted and confirmed in first appeal, for the same reasons as have guided the disallowance of depreciation allowance for the relevant years. Clearly, the same cannot be disallowed merely because the assessee is also undertaking trading operations, i.e., apart from job-work. In fact, in a given case, the repair work could be independent of the job-work also. The assessee, on its part, has also not furnished the relevant details. The AO, to whose file the matter is therefore restored, shall examine the same in light of the materials and explanations furnished, and decide the same in accordance with law, issuing definite findings of fact/s. We decide accordingly.
The next disallowance is in respect of claim for interest expenditure under section 36(1)(iii) of the Act. The assessee had borrowed funds from American Express Bank at Rs. 1291.96 lacs during the previous relevant to AY 2006-07, which was found as diverted for investment in shares, i.e., at Rs. 6.63 cr. and Rs. 11.20 cr. as at 31/3/2006 and 31/3/2007 respectively. The investment commencing in September, 2006, proportionate disallowance was made for AY 2007-08 (at Rs. 59.65 lacs). The ld. CIT(A) allowed the same on the basis that the expression ‘for the purpose of business’ includes both revenue and capital expenditure. For AY 2008-09, the disallowance, made at Rs. 86.02 lacs, was Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) confirmed for the reason that the same warrants disallowance not only u/s. 36(1)(iii) but u/s. 14A as well, which stands rightly invoked by the AO.
We have heard the parties, and perused the matter on record. The matter is principally factual, i.e., whether or not, and if so to what extent, the investment in shares is met by the assessee with its own funds or, in the alternative, represents, in whole or in part, a diversion of borrowed funds. The claim has been disallowed principally for want of substantiation. The deletion for AY 2007-08 in first appeal is without basis in-as-much as the avenue of borrowed monies is claimed to be the investment in shares, which do not represent either revenue or capital expenditure, but only an investment, and which is certainly not the assessee’s business, besides yielding income not forming part of the total income, attracting section 14A. The assessee could furnish a fund flow statement, i.e., since the time the borrowing commenced, stated to be during the year relevant to AY 2006-07. At the same time, the assessee’s claim of having sufficient ‘own’ funds would also need to be examined with reference to it’s audited accounts, which form a part of the record. We extract the relevant financials as under from the assessee’s balance sheets forming part of the record (PB pgs. 11, 24) (Amount in Rs. lacs) Year TF BF FA NCA P&L Inv. in ending Shares 31.03.2006 2308.63 1291.97 4693.86 (3518.66) (355.89) 663.06 31.03.2007 2277.24 1260.58 3882.72 (4138.26) (559.17) 1783.06 31.03.2008 2099.63 1082.97 3576.53 (4273.91) (652.77) 1908.88 [TF: Total Funds; BF: Borrowed Funds; FA: Fixed Assets; NCA: Net Current Assets; P&L: Profit and Loss A/c] The borrowing is by way of unsecured loan, so that the same is without any stipulation with regard to the application of funds, and neither has any been stated Indian Refrigerator Co. Ltd. (AYs. 2007-08 & 2008-09) by either the assessee or the Revenue. The assessee has a net excess of current liabilities over current assets at Rs. 3518.66 lacs as on 31/03/2006. It is this excess, no longer tied in current assets (working capital), so that it provides liquidity, that can be said to fund the investment in shares, besides the depletion in capital by way of debit balance in the profit and loss account. It is only the balance excess which, along with the share capital and the borrowed funds, finance the investment in fixed assets. For the following two years, which are the years under reference, there has been a decline in the borrowed funds, so that there has been in fact a net repayment of borrowings. It is the release of funds from fixed assets (principally through depreciation, a non-cash charge) and further accretion to current liabilities – upon realization of the spontaneous current assets, that provide the funds for investment in shares for the immediately following year, i.e., f.y. 2006-07. No part of the borrowed capital can thus be said as applied for or considered as financing the investment in shares so as to attract any disallowance, either u/s. 36(1)(iii) or u/s. 14A. We direct accordingly.
In the result, the assessee’s appeal is partly allowed and partly allowed for statistical purposes, while the Revenues’ appeal is partly allowed for statistical purposes.