M/S. TATA MOTORS LTD.,MUMBAI vs. JT. CIT SPL. RG. - 2, MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य, राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार/ PER Rajendra A.M.- अनुसार Challenging the orders of the CIT(A)-XXXII,Mumbai,dated 08.07.2003 the assessee and the AOs(AO.s)have filed cross appeals for the above mentioned two assessment years(AY.s.)raising various grounds of appeal. As the issues are almost common for both the AY.s.,so,for the sake of convenience we are adjudicating both the appeals by a single common order.Assessee-company,is engaged in the business of manufacture of trucks, buses, moving machines,diesel and marine engines etc.Details of filing of returns,returned incomes, assessed incomes etc.can be summarised as under: AY. ROI filed on Returned income Dt. Of order Assessed Income CIT(A)order dt. 1997-98 28.11.1997 Rs.53.3crores 30.03.2000 682,78,45,030/- 08.07.2003 1998-99 30.11.1998 Rs.71.09 crores 30.03.2001 Rs.43,13,17,850/- 30.07.2004 ITA/6214/M/2003:

3.First ground of appeal deals with excess disallowance u/s.37(2A) with regard to expenditure on business meetings and conferences(Rs.27,47,686/-), Entertainment Expenses of employees accompanying guests(Rs.5.77lakhs) and expenditure of beverages provided at the annual general meeting(Rs.1.67 lakhs).It was brought to our notice that while deciding the appeal for the AY.1996-97 (ITA/1015/Mum/2001, dt.31.7.2007),the Tribunal had dealt with all the three issues.We would like to reproduce the relevant portion of the said order and it reads as under:- “3.The first dispute in assessee’s appeal and the first part in Gr.No.2 of revenue’s appeal relates to entertainment expenses.The disallowance is in respect of entertainment expenses u/s. 37(2A) on employees accompanying guests.The assessee claimed 25% relatably to such nature.We find the Tribunal consistently accepted 25% as claimed by the assessee . In the light of the same the assessee’s claim is allowed and the revenue’s ground is rejected.” 4.The next dispute in assessee’s appeal and the second part in ground No.2 of the revenue’s appeal relates to partial disallowance of expenditure on business meetings and conferences. The learned counsel for the assessee by relying on the following orders of the Tribunal submitted that the issue has to be decided in favour of the assessee. decided on 19.4.2006 in the assessee’s own case for the Assessment year 1994-95 ITA No.5449/M/98 decided on 28.3.2006 in the assessee’s own case for the Assessment year 1993-94. ITA No.2744/Mum/97 decided on 06.02.2007 in the assessee’s own case for the AY 1992-93 ITA No5372/Bom/85 dtd on 03.09.87 for the Asst. year 82-83 in the case of Skeiko India bearing Co.Ltd.V.IAC M.C.Davar Aromatics (P) Ltd.) v. DCIT 125Taxman134(Ahd.)(Mag.) Lakhanpal National ltd.v.ITO 69ITD9(Ahd.)(SB) On the other hand the learned Departmental Representative relied upon the order of the lower authorities 5.We have heard both the sides and have also perused the aforesaid orders of the Tribunal.In light of the same,we direct the AO to frame the disallowance. 6.The next dispute in the asseesee’s appeal relates to expenses on food and beverages provided to business associates of the company in the offices and factories.The issue is also decided in favour of the asseessee by the following order of the Tribunal. i)ITA.No.7061/M/98 dt.19.4.2006 for (A.Y. 1994-95) ii) ITA.No.5449/M/98 dt.28.3.2006 for (A.Y. 1993-94) iii)ITA.No.1278/B/95 dt.26.6..2006 for (A.Y. 1992-93 iv)ITA No.2744/Mum/97 dt.6.2.2007 (A.Y. 1992-93) v)ITA.No.1962/M/2000 dt.06.2.2007 for (A.Y. 1995-96) We have heard both the sides and have also perused the material placed on record. In the light of aforesaid orders of the Tribunal the issue is decide in favour of the assessee.

7. The next dispute in the assessee’s appeal and the third part in Gr.No.2 of the revenue’s appeal relates to expenditure related to beverages provided at the Annual General Meeting. We have heard both parties The issue is decided in favour of the assessee by following order of the Tribunal: i)ITA.No.7061/M/98 dt.19.4.2006 for (A.Y. 1994-95)

ITA/6214 & 6504/M/Tata Motors ii) ITA.No.5449/M/98 dt.28.3.2006 for (A.Y. 1993-94) iii)ITA.No.1278/B/95 dt.26.6..2006 for (A.Y. 1992-93 iv)ITA.No.1962/M/2000 dt.06.2.2007 for (A.Y. 1995-96) v)ITA.No.7121/M/96 dt.2.6.2005 for (A.Y. 1992-93) Following the aforesaid order of the Tribunal, the assessee’s claim is allowed and the ground raised by the revenue is dismissed. Respectfully following the order for the earlier year,First Ground of appeal is decided in favour of the assessee, in part.The AO is directed to follow the order for the earlier year.

4.Effective Ground No.2(GOA 3)is about expenses incurred at staff inspection house, amounting to Rs.59.80 lakhs) 4.1.The AR fairly conceded that issue in respect of disallowance of telephone expenditure of (Rs.13.13 lakhs) is covered against the assessee by the Tribunal order for the AY.1994 (ITA/ 5449/M/1998, dt.28.3.06) and that issue regarding food expenses was covered partly in favour of the assessee about food expenses, after considering the decision of the Hon’ble Apex Court in the case of Britannia Industries. We find that while deciding the appeal for the earlier AY.,the Tribunal had disallowed the telephone expenditure and had allowed expendi- ture incurred on food. Respectfully following the orders of the two earlier years telephone expenses claimed by the assessee stand disallowed and expenditure incurred under the head food expenses is allowed as per the order of the last AY. Ground No.3 is partly allowed.

5.Third effective ground of appeal (GOA-5)is about depreciation on leased assets.During the assessment proceedings the AO found that the assessee had claimed depreciation of Rs.240.80 crores.He directed it to file details about leased assets, location of the assets and to produce bill in respect of the machinery worth Rs.55.59 crores on which depreciation @ 100% was claimed.After considering the submission of the assessee and recording the statement of DGM (Finance) of the company ,the AO held that the assessee had purchased various assets and leased out to Andhra Pradesh State Electricity Board(APSEB).Rajasthan State electricity Board (RSEB) and National Radio and Electronics Co. Ltd. (NELCO). One of the companies from whom goods were purchased was Sea-horse Industries (SI).The AO observed that pursuant to the enquiry made by him,it was found that SI did not have any dealing with the assessee-company.He disallowed depreciation of Rs.5.99 lakhs with regard to the leased assets claimed to have been purchased from SI.

5.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was argued that it did not enter into transaction

ITA/6214 & 6504/M/Tata Motors amounting to Rs.11.98 lakhs (Invoice No.2516 dt.28.4. 1996) with SI, that the assets were first purchased by APSEB from the supplier i.e. SI, that the payment for the assets in question was made by the assessee and not by APSEB,that APSEB had confirmed the transaction. Before him,the assessee filed a confirmation from SI enclosing therewith a copy of invoice for Rs.11,19, 608/- for supply of meters to APSEB. Considering the available material,the FAA held that SI had been shifting stands,that initially it had denied relationship with the assessee, that later on it had confirmed the transactions, that he was unable to give due credence to the confirmation furnished as late as 29/04/2003, that it was difficult to hold that assessee had indulged in a wrongful claim of depreciation, that the assessee failed to prove its claim of depreciation before the AO satisfactorily, that for the said reason the AO was justified in rejecting the claim of depreciation.

5.2.Before us,the AR argued that assessee had entered into an agreement with APSEB for supplying meters,that APSEB had confirmed that cheques were handed over to the supplier by the Electricity Board, that APSEB had confirmed the existence of leased assets.He referred to page No.3.57 to 3.62 of the paper book and contended that SI had not only confirmed the transaction it had also admitted that cheque dated 26.3.1997 ,issued by the assessee was encashed by it, and it had supplied the goods to APSEB.The Departmental Representative (DR)supported the order of the FAA.

5.3.We have heard the rival submissions and perused the material before us.We find that initially the SI had denied to have any transaction with the assessee company. But later on it confirmed that it had supplied electricity meters to ASEPB,that it had received Rs.11.19 lakhs from the assessee,that the FAA had not alleged that the letter of SI was not genuine,that his only objection was the late submission of the letters of the SI and the failure of the assessee to produce the evidence during the assessment proceedings. In our opinion,the stand taken by the FAA was not justifiable.If he had any doubt about the genuineness of the transaction,he himself should have made further enquiries or should have directed the AO to conduct further investigation. The assessee is entitled to file additional evidences before the appellate authorities.Non filing of evidence before the AO or late filing of evidences cannot be the base for denying a legitimate claim made by an assessee.We have perused the documents relied upon by the assessee and a perusal of those documents clearly establish that assessee had made payment to SI and the APSEB was in possession of the assets leased by the ITA/6214 & 6504/M/Tata Motors assessee.Therefore, reversing the order of the FAA,we decide Ground.No.5 in favour of the assessee.

6.Ground No.6 deals with compensation of Rs.20 crores received upon termination of distributorship from Mercedez Benz (India) Pvt.Ltd. (MBIL). During the assessment proceed -ings, the AO found that the assessee was a general distributor of Mercedez Benz, that it would import completely built up vehicles and spare parts for sale in India and other countries, that vide joint venture agreement,dated 22.4.1994,between the Mercedez Benz and the assessee it was agreed that a separate JV company under the name and style of MBIL would be established, that JV was appointed as distributor in India and Bhutan,that on 28.01.1996 the assessee was appointed as distributor for passenger-cars,commercial-vehicles etc.,vide termination agreements dt.19.12. 97 the distributorship agreement was terminated, that the JV company paid a solatium of Rs.20 crores to the assessee.Before the AO the assessee contended that solatium was an item of revenue nature,that same was received in substitution of source of income and not in substitution of income,that it was a capital receipt. However,he rejected plea of the assessee.Relying upon the case of Blue Star (217ITR574) of the Hon'ble Bombay High Court,he held that compensation on termination of agency not resulting in cessation of business of assessee was an item of revenue receipt.

6.1.Aggrieved by the order of the AO the assessee preferred an appeal before the FAA.Before him,it was argued that in the case of Blue Star there was a termination of agency,that in the case under consideration there was a termination of distributorship,that distributorship was not synonymous to agency.After considering the submission of the assessee and the assessment order the FAA held that even if there was a difference between distributorship and agency it would not affect the nature of receipt, that the compensation received by the assessee was for loss of future income, that a lumpsum payment in lieu of a recurring payment of a revenue nature would be revenue expenditure,that a one-time receipt in lieu of a recurring revenue would assume the character of a revenue receipt, that the amount was received in one lump sum instead of a recurring manner over a period of years would make no difference to the character of the impugned amount. Finally, he upheld the order of the AO.

ITA/6214 & 6504/M/Tata Motors 6.2.Before us the AR argued that the source of the solatium was capital asset which had come to an end with the termination of the agreement, that the amount received by the assessee was a capital receipt.He relied upon the cases of Bombay Burmah Trading Corporation (161ITR 386) and Asiatic Textile Co. Ltd.(27ITR315).He also referred to the terms and conditions of distribution agreement,dated 01.01.1997. The DR contended that the business of the assessee was intact ,that only one source of income had come to an end,that financial structure of the assessee had not changed,that the business of the assessee continued,that it was a revenue receipt.He relied upon the cases of Blue Star(79 taxman 281) and Ion Exchange (India) Ltd. (130ITD318).In the rejoinder,the AR stated that distributorship was an independent activity and not one of the activities,that the case of Blue star was not applicable to the facts of the matter under consideration 6.3.We have heard the rival submissions and perused the material before us.After the judgment,delivered in the case of Shaw Wallace(6 I.T.C.178; A.I.R.1932 PC.138)a principle is being followed in the tax jurisprudence that there is a difference between compensation or damages paid or received for non-performance of a contract entered into in the course of business and compensation or damages paid for discontinuance of the business itself. The former may be treated as income but the amount paid for terminating a business cannot, ordinarily,be deemed to be income from that business taxable under the Act.In the one case, one gives up the source from which the income arises; in the other, one merely gives up anticipated profits,which would have accrued to him if the contract had not been discontinued or terminated, for cash payment.In the first case amount in question will not be taxable,but in the other it will be.In the case before us,it is found that a contract was entered into by the assessee with JV and on termination of the agreement it received solatium.The terms of and conditions of the termination-agreement clearly prove that the there was loss of source of income of the assessee.So,reversing the order of the FAA,we decide ground no.7 against the assessee.

7.Last effective Ground (GOA-8) is about reduction of claim u/s.80-IA on account of expenditure falling under section 35 of the Act.During the assessment proceedings the AO found that the assessee had set up a new unit in Lucknow in Oct. 1992, that it had claimed deduction u/s. 80IA with regard to the profit of the new unit. He made two adjustments in that regard. Miscellaneous income of Rs.10.70 lakhs of the Lucknow unit was reduced in arriving at the profits of the units.Besides, capital and scientific expenditure on scientific

ITA/6214 & 6504/M/Tata Motors research incurred by the R&D Department was allocated to Lucknow Unit on the basis of turnover.As a result, there was further deduction of profit eligible under section 80-IA of the Act.

7.1.Aggrieved by the order of the AO the assessee preferred an appeal before the FAA. After considering the available material he held that the benefit of research could not be said to be not utilized by the Lucknow unit at all, that in the absence of any possibility of direct allocation, the allocation made in ratio of turnover was just fair and reasonable.

7.2.Before us,Representatives of the sides agreed that the matter needs further verification and could be restored back to the file of the AO.Accordingly,we direct him to decide the issue afresh after affording a reasonable opportunity to the assessee.Ground no.8 is decided in favour of the assessee,in part.

ITA/6504/M/2003,AY-97-98(By Revenue ): 8.First ground of appeal raised by the AO is about disallowance u/s.37(2A)of the Act. Representatives of both the sides agreed that in the earlier year Tribunal had partly allowed the appeal filed by the AO/assessee.We have discussed the issue at paragraph 3,while adjudicating the appeal filed by the assessee.Respectfully following the order of the Tribunal, for the earlier AY.,first Ground is decided in favour of the AO,in part.

9.Ground No.2 deals with disallowance of Rs.1.14 crores (Rs.96.34 lakhs-expenditure on conveyance, Rs.18.43 lakhs-expenditure on telephone and telex) made under Rule 6D of the IT Rules, 1961(Rules).We find that the Tribunal had decided the issue against the AO at page-8 paragraph 19 of its order for the A.1996-97 (supra). “Ground No.4 in the revenue’s appeal relates to deletion of excess disallowanbce u/r.6D.In the light of the decision of the Hon'ble Bombay High Court in CIT vs.Chemet (240 ITR 624), and also the decisions of the Tribunal in the assessee’s own case for the AY.s 91-92 to 95-96 (ITA No.235/Mum/97 dt.26.6.2006, dt.6.2.2007, ITA No.5333/M/98 dt.28.3.06, ITA No.6705/M/93 dt.19.4.06 and ITA No.1690/M/00 dt.6.2.2007) the issue is decided in favour of the assessee and against the revenue .” Respectfully,following the above Ground No.2 is decided against the AO.

10.Third Ground pertains to disallowance of Rs.1.13 lakhs, made under Rule 6B of the Rules. The DR and the AR agreed that while deciding the appeal for AY. 1994-95(ITA/ 7061/

ITA/6214 & 6504/M/Tata Motors Mum/98-dt.19.4.2006),the Tribunal had dismissed the similar ground raised by the AO.The order of the Tribunal reads as under :- “ The Ground No.5 pertains to deletion by the ld. CIT(A) of disallowance of Rs.1,28,137/- u/r6B. Both the sides agreed that this issue is covered in assessee’s favour by ITAT’s order for the AY 93-94 referred to (supra). The facts are similar and the presentation articles did not bear any logo or the name of the company.The Tribunal has considered this issue at para 25 of the order and has held that no disallowance can be made u/r6B accordingly, on this issue also, we confirm the order of the Ld.CIT(A).” Respectfully,following the above Ground No.3 is decided against the AO.

11.Ground No.4 is about deduction claimed under the head Interest on borrowed capital (Rs. 5.31crores),as per the provisions of section 36(1)(iii) of the Act.We find that the identical ground was dismissed by the Tribunal while deciding the appeal for the AY 1996-97(supra) as under :- “ Ground No.5 in the revenue’s appeal relates to the allowance of claim u/s.36(1)(iii) being interest on borrowed capital.Both the parties are agreed that this issue is covered in favour of the assessee by the decision of the Tribunal in the assessee’s own case for the AY.s 1992- 93 to 1995-95 (ITA No.2744/M/97 dt.6.2.2007, dt.28.3.06, ITA No.6705/M/93 dt.19.4.06 and ITA No.1690/M/00 dt.6.2.2007). It is undisputed fact that borrowed capital has been utilized in the existing business of the assessee. Following the same the order of the CIT(A) is upheld.” Respectfully,following the above, Ground No.4 is decided against the AO.

12.Next Ground is with regard to expenditure incurred at Jamshedpur for discharging civic, social obligations of the Co. amounting to Rs.5.11 crores.We find that similar issue was decided against the AO by the Tribunal for the earlier AY.also.We would like reproduce paragraph 21 of page 9-10 of the order and it reads as follows:- “Ground No.6 in the revenue’s appeal relates to allowance of deduction of Rs.6,19,47,554/- being incurred in Jamshedpur Works.The assessee had incurred the following expenditure : i) Payment to Jamshedpur blood bank – Rs.6,69,210/- ii) Payment to Parivar Kalyan sansthan –Rs.2,31,52,633/- iii) Payment to Nav Jagret Manav Samaj-Rs.14,00,000/- iv) Payment to Ramvikas Kendra – Rs.44,67,152/- v) Expenditure on community development – Rs.22,92,790/- vi) Expenditure on educational assistance - Rs.2,99,65,769/- The ld. Departmental Representative relied on the order of the AO on the other hand the ld. Counsel for the assessee relied on the following Tribunal order in the assessee’s own case to support his own claim.” The Tribunal after referring to the earlier years orders(from 1983 -84 to 1995-96) upheld the order of the FAA.Considering the above,Ground No.5 is decided against the AO.

ITA/6214 & 6504/M/Tata Motors

14.Next ground is about provision for warranty of Rs.35.61 crores. It is found that identical ground raised by the AO,was dismissed by the Tribunal, while deciding the appeal for AY. 1996-97.We are reproducing paragraph no.22 of the pg.10 of the said order and it reads as under :- “Ground No.7 in revenue’s appeal relates to provision for warranty expenses of Rs. 12, 55, 68,000/-. Both the parties agreed that this issue is covered in favour of the assessee by the decision of the Tribunal in assessee’s own case for the AY.s 1992-93, 1994-95 and 1995

96. (ITA No.961/M/03 dt.23.8.03, dt.19.4.06 and ITA No.1690/M/00 dt.6.2.07), wherein the Tribunal has allowed the claim of the assessee. Following the same , the issue is decided in favour of the assessee and against the revenue.” Respectfully following the above order of the Tribunal,Ground no.7 is decided against the AO.

conducting this business has earned finance and service charges.The Bombay High Court decision in the case of Bombay Clothing Co. and other cases relied upon by the ld. Counsel for the assessee supports the case of the assessee .We, therefore, hold that clause (baa) is not applicable to the finance and service charges received by the assessee.Further, this income has already been included in the business turnover of the assessee company. Accordingly , we direct the AO not to reduce 90% of the finance and service charges from the profits of the business. Deduction allowable u/s. 80HHC shall be recomputed accordingly.” As far as recovery of various charges is concerned it is found that in the case of Burroughs Wellcome (India) Ltd. (ITA.s/5335 & 5363/Mum/2002,dtd.27.03.2008-AY.1998-99) it was held as under :- 20.We have considered the submissions made by both sides, material on record and orders of authorities below. At the very outset, we state that the nature of receipts involved in this ground of appeal is entirely different from the nature of receipts i.e. processing charges involved in the issue before the Hon'ble Supreme Court in the case of K. Ravindranathan Nair (supra), hence, the ratio of that decision is not applicable as such. Now, we shall consider the brief nature of each receipt. As far as Insurance recovery is concerned, it is noted that it has been received from the Insurance Company on account of breakeges, shortage etc., however, it is not clear whether this is connected with the local business or export activity of the assessee because if it is connected with the local activities of the same, then, absolutely it has no nexus with the export activities and, therefore, this should not form part of profits of business. However, at the same time the corresponding expenditure should also be excluded from profits of business so as to arrive at a proper figure of profits of business for the purpose of computation of deduction u/s. 80HHC of the Act. Thus we restore this issue to the file of A.O. to determine the nature of these receipts and treatment given by the assessee in the books of account and compute the profits of business accordingly, and keeping in mind the directions given by under section as above. The A.O., is further directed to similarly examine the unclaimed credit balances written back and if the expenses pertaining to these had been charged to the P&L account and claimed against the export profits in earlier year, then, such write back is eligible for deduction u/s. 80HHC of the Act, hence, the same should form profits of business. As regards amount received from employees for accommodation and recovery of depreciation from other concerns is concerned, if the expenditure in connection with accommodation and depreciation has been charged to the P&L account thereby reducing the export profit, then, these two items should not be excluded from the profit of business as it would result into double jeopardy to the assessee i.e. on the one hand export profits are reduced by the claim of these expenses and 90% of these receipts- being excluded from profits of business which is apparently not the scheme of the legislature. Hence, we direct the A.O. to examine these facts and decide the issue accordingly. As far as recovery of charges from FICOM, it stand on the same footing as of Insurance claims recoveries and un- claimed balances written back in the year under consideration and this should be decided by the A.O. on similar lines. Thus, this ground of the assessee stands restored to the file of A.O. to be disposed of in terms of the directions above. Before parting, we may add that the Id. D.R. has placed reliance on various decisions which are mainly relevant to the treatment of interest income as income from business or profession or income from other sources and principles of netting. Accordingly, hence, we do not give any specific finding thereon. We would also like to add that principle of netting is a Judicially settled principle, hence, if there is a nexus between the receipts and the expenses incurred in connection with thereof, the set off should be made and only 90% of the net balances should be excluded and in the event of expenditure is more than the receipt, nothing is liable to be excluded under Clause (baa) of explanation to Section 80HHC of the Act.” Respectfully following the orders of the Tribunal,we decide Ground No.9 against the AO.

ITA/6214 & 6504/M/Tata Motors 17.Next ground deals with deduction u/s. 80IA of the Act amounting to Rs.10.70 lakhs. While deciding Ground No.8 raised by the assessee for the year under consideration we have narrated the facts with regard to deduction claimed u/s. 80-IA of the Act. The AO reduced the amounts in question i.e.,miscellaneous income, while computing the profits. 17.1.After considering the submission of the assessee, the FAA referred to the decisions of Bangalore Clothing of Hon'ble Bombay High Court and Rajeev Enterprises of Special Bench of Jaipur, held that Miscellaneous income of Lucknow was in the nature of core operational income, that no non-operational activity of any kind was carried out in Lucknow, that the AO was not justified in reducing the disputed amount while computing the deduction u/s 80-IA of the Act. 17.2.Before us,the DR supported the order of the AO.The AR relied upon the cases of Maxcare Laboratories (273ITR-AT-1) and Investwealth Publishers (P.) Ltd.(96ITD106). We have heard the rival submissions and perused the material.We find that the issue of miscellaneous income,for computing the deduction u/s. 80-IA of the Act,has been dealt in the case of Maxcare Laboratories(supra)as under :- “In section 80-I of the Income-tax Act, 1961, the statute has used the expression “derived from” with a view to give a restricted meaning to the income of the industrial undertaking. However,in section 80-IA,the expression used is “profits and gains derived from any business of an “industrial undertaking” which shows that the intention of the Legislature while inserting the additional words in section 80-IA , i.e., “any business of” was to give the benefit of deduction not only to the profits and gains derived from the industrial undertaking but also to give the benefit of deduction in respect of income having a close and direct nexus with the profits and gains of the industrial undertaking. Whenever the Legislature had intended to give the benefit of deductions to the wider extent of income and not only to income derived from the industrial undertaking, it has used expressions like “profit attributed to”. To give an extended benefit, the statute has used the words “income derived from any business of an industrial undertaking”. Thus, any income generated out of an act which is required to be undertaken essentially for carrying on the business of industrial undertaking is to be considered for computing the deduction under section 80-IA .” Respectfully following the above,ground raised by the AO is decided against him.

18.Last GOA deals with depreciation on leased assets that were given on lease to APSEB, RSEB and NELCO,amountiung to Rs.27.19 crores.During the assessment proceedings the AO found that the assessee had purchased and leased out following assets:- SN. Name of manufacturer Type of assets Value of Depreciation( assets (Rs.) Rs.) 1. Seahorse Industries Simco made single phase 11,98,608/- NIL Meters 2. Bharat Heavy Electricals Electric Meters 7,39,09,310/- 3,69,54,717/- Ltd.(BHEL) 3. PI Industries Electronic Trivector Meter 29,97,310/- 14,98,655/- 4. Jaipur Metals and Electricals Electrical Meters 1,47,72,369/- 73,86,185/- Ltd.(JMEL) 11

ITA/6214 & 6504/M/Tata Motors

18.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA. Before him,it was argued that assets were purchased by the assessee and were leased to the users,that lessees had admitted the existence of the machinery,that the assets were leased to state electricity boards or to a Public Limited Company(NELCO),that the AO had not disputed the lease rentals received by the assessee,that it had taxed the leased income in assessee’s hands,that it had filed certificates from the users of the assets to the effect that they had not claimed any depreciation on the assets in question, that all the assets were new, that the value recorded in the books of the assessee was the original invoice cost of the respective manufacturers,that explanation 4A to section 43 (1) was not attracted, that it had fulfilled the dual condition of ownership and use of the assets. It relied upon the Instruction No.1973 of 31.12.1999 of the CBDT.

18.2.After considering the submission of the assessee and the assessment order,the FAA examined the claim of depreciation in case of each of the supplier and the user of the assets. With regard to BHEL,the FAA held that BHEL had confirmed the transaction and supply of goods to APSEB,that it had addressed a letter to dt.8.3.2000 to AO and confirmed that it had ITA/6214 & 6504/M/Tata Motors supplied the assets to the APSEB.Finally,he directed the AO to grant depreciation of 3.69 crores @ 50% of Rs.7.39 crores.

18.3.About PI Industries the AO had observed that it had sold goods to APSEB and not to TELCO,that the invoice No.449 was not dated 26/04/1996,but 26/03/ 1996, that invoices were changed to TELCO but delivery challans were in favour of APSEB.Before him the assessee argued that it had neither manipulated nor tampered with any invoice to claim depreciation,that it had not mislead the tax authority in any way, that the copies of invoices bearing appropriate stamp, signature of the suppliers were received by TELCO from APSEB through Kotak Mahindra Finance Ltd., that APSEB was a Govt. undertaking, that assessee had made payment to PI Industries directly as apparent from the confirmation of APSEB, that APSEB had confirmed that impugned assets were installed during the AY.1997-98, that he was not able to disregard such a categorical confirmation by a government undertaking, that the lease income was regularly assessed in the hands of the assessee, that it was entitled to depreciation of Rs.14.98 lakhs @ 50% of Rs.29.97 lakhs on the assets manufactured by PI Industries and leased to APSEB. 18.4.About the purchase from JMEL,the FAA observed that in that matter the supplier had confirmed that it had received payments from the assessee and had supplied the goods to APSEB, that the AO had not understood the nature of the transaction, that the assessee was the de-facto and dejure owner of the assets, that APSEB was the user, that JMEL was the manufacturer, that the assessee made the payment to the manufacturer was confirmed by the user of the assets, that the transaction of supply of asset by JMEL was a genuine transaction, that the assessee was entitled to a depreciation of Rs.73.86 lakhs (@50% of Rs.1.47 crores). 18.5.With regard to the transaction with BEML,the FAA observed that the facts were identical to the facts of JMEL.Following his order for JMEL,he directed the AO to allow depreciation of Rs.16.75 lakhs (@50% of 33.53 lakhs). 18.6.Towers and Transformers Ltd.(Value of purchases-Rs 2,41,19,134/-).The AO had alleged alterations of dates,etc. in the invoices and on that basis he disallowed the deprecia - tion.He further observed that held that the impugned assets are only meters and did not qualify for depreciation @ 100%. During the appellate proceedings,the FAA held that the impugned assets were first put to use by the user APSEB only in AY. 1997-98, that said fact had been unequivocally confirmed by APSEB,that the assessee had fulfilled the conditions for claiming depreciation,that the value and the user were undisputed,that as per item III(3)(iii)(B)(e) of Appendix I to Income-tax 13

ITA/6214 & 6504/M/Tata Motors Rules, 1962 the assessee was eligible for 100% depreciation for electric meteres,that it was not open to an AO to sit in judgment over an item expressly stated in the Rules,that no conse -rvation of energy could be achieved without its actual measurement and the distinction attempted by the AO was not at all justified. 18.7.APEEC.(Value of purchases Rs.1,07,38,330/-).The AO had held that goods supplied by APEEC were not for monitoring energy flow, but only for recording consumption of electricity. For reasons identical to that for supplies from TowersTransformers Ltd,he hold that the assessee was entitled to depreciation of Rs 53,69,165 (50% of Rs 1,07,38,330/- )on assets leased to APSEB. 18.8.VXL Landis and GYR Ltd.(Value of purchase-Rs 1,98,84,720/-) The AO has held that the meters purchased by VXL Landis and GYR Ltd.were not energy saving devices,but simply measured the consumption of energy ,that the assessee was not authorised by a resolution of the Board to enter into a lease transaction. In support of its plea, the assessee submitted that the members of the appellant company had already passed a resolution way back in September,1995 authorising the assessee to commence leasing activities,that in that light there was no need for the Board to once again approve the business of leasing.Considering the above fact,he decided the issue in favour of the assessee and held that it was entitled to depreciation of Rs. 99,42,360 (@ 50% of Rs. 1,98,84,720/-). 18.9.India Meters –(Value of purchases Rs 67,21,623/-).The only reason for the AO to deny due depreciation was absence of confirmation by the manufacturer.During the appellate proceedings,the assessee filed copy of paid cheque as also confirmations of APSEB.The FAA allowed depreciation of Rs.33,60,812/-@ 50% of Rs 67,21,623 based on confirmation filed by the user APSEB as also the evidence of paid cheque copy. 18.10.Crompton Greaves-(Value of purchases Rs 21,18,744/-).It is submitted before the FAA,during the appellate proceedings,that merely because the supplier had not responded to the inquiries, the AO could not reject the claim of the appellant. In support of the genuineness of the lease transaction, evidence in the form of lease agreement with APSEB, confirmation of receipt and installation of impugned assets by APSEB,copies of invoices, discharge of purchase consideration by way of cheques of TELCO and confirmation of such discharge by APSEB were placed on the record.Considering the said evidences,the FAA held that the AO was not justified in denying depreciation to the assessee.He,therefore, held that it was entitled to depreciation of Rs 10,59,372( @ 50% of Rs. 21,18,744/-). 18.11.RSEB(Value of purchases Rs.24,65,00,574/-)

ITA/6214 & 6504/M/Tata Motors The assets leased consisted of control and relay panel, instrumentation and monitoring meters and shunt-capacitors.These assets were entitled to 100% depreciation. However, since the transaction of purchase and lease back took place towards the end of the previous year, the assessee had claimed depreciation @ 50% thereof.In support of its claim,it placed the certain documents on the record of the AO.The documents included Copy of confirmation from RSEB stating that depreciation was not claimed by RSEB on leased assets,that the impugned assets were installed and put to use before 31.3.1997 and that the impugned assets were unencumbered. But,the AO disallowed the claim of depreciation made by the assessee. The FAA,after considering its submissions and assessment order held that the AO had issued summons to RSEB,that non appearance of RESB could not held a deciding factor against the assessee,that that in response to summons RSEB had replied vide letter dated February 15.02.2000 listing out the assets sold by RSEB to TELCO and the manner in which sale proceeds were received from TELCO and deposited in the bank account of RSEB with State Bank of India, Sanganeri Gate, Jaipur,that RSEB had further stated that since the equipments sold to TELCO were purchased by RSEB from different manufacturers and received at various stores scattered all over the State of Rajasthan arranging copies of purchase bill would take ,that pursuant to a reminder issued by the Department on 13th March RSEB had asked for further time,that at no point of time it had denied that the assets were sold to TELCO and taken back on lease. He observed that with a view to further satisfy the Department, the assessee had arranged with Tata Economic Consultancy Services (TECS)for verification of these assets and on 23/ 03/2000,that a report in that regard was placed on the record of the AO,that there was no discussions in the assessment order with regard to evidence brought on the record by the appellant company in support of its claim for depreciation on the purchase and lease back transaction.Finally,he directed the AO to allow depreciation on the assets leased to RSEB. 18.12.NELCO- (Value of purchases Rs.2.40 Crores) During the assessment proceedings,it was found that the assessee had purchased a micro based equipment processor for energy control for steel rolling mill at Jamshedpur,that it was also a purchase and lease back transaction between the assessee and NELCO. In support of the claim of depreciation the assessee placed on record copy of invoice of NELCO copy of lease agreement between NELCO and TELCO, copy of commissioning certificate issued by NELCO along with the installation certificate.However, the AO disallowed the claim of depreciation made by the assessee.

ITA/6214 & 6504/M/Tata Motors After considering the submission of the assessee and the assessment order the FAA held that the transfer of purchase and lease back of assets with NELCO stood fully supported and corroborated by various documents placed on record of the Assessing Officer, that TELCO was regularly receiving lease rental from NELCO and that same had been offered for taxation, that one such income was brought to tax,that corresponding deduction for earning income by way of depreciation had to be allowed.Finally, he held that the assessee was entitled to depreciation of Rs.1.20 crores. 18.13.APSEB(value of purchases -11.47crores) The AO had denied depreciation to the assessee as certain confirmation letter sent by him to APSEB were returned undelivered.He observed that APSEB had purchased the goods in FY.1996-97,that the assessee passed the resolution regarding purchase and lease back in the months of Jan. and Mar. 1997, that the assessee was not entitled to claim depreciation. Before the FAA,the assessee furnished documents with regard to sale of assets by APSEB to the assessee,lease agreement between it and APSEB, confirmation by APSEB stating that assets sold to the assessee were installed at various locations in AP and same were free from all encumbrances, that share holders of the assessee had passed a special resolution in the month of Sept. 1995 to pursue equipment leasing business .The FAA held that APSEB was in dire need of funds, that it restored to lease finance, that vide instruction No.1973 of 31/12/1999 the CBDT had acknowledged that depreciation could not be denied to both the lessor and the lessee even in a finance lease, that in the case under consideration the lessee had expressly confirmed that it had not claimed any depreciation that lessor had to be granted depreciation of Rs.5.73 crores. The FAA referred to the cases of Consortium Finance Ltd.(82ITD808); Birla Chemicals & Traders P.Ltd. (ITA/7510/B/93); Unimed Technologies Ltd.(73ITD150); Newdeal Finance Investment Ltd.(74ITD469); and Bombay Burmah Corpn.Ltd. (82ITD531) and finally decided the ground of appeal in favour of the assessee.

18.14.During the course of hearing the DR supported the order of AO and the AR relied upon the order of FAA.He referred to the cases of ICDS Ltd. (350ITR527);Apollo Finvest (I) Ltd. (ITA No.2298 of 2013);The West Coast Paper Mills Ltd.(ITA No.389 of 2008);Sheba Properties Ltd.(A.Y.98-99,2006-07 and 2008-09)ITAT Mumbai dt.25.6.2014.

18.15.We have heard the rival submissions and perused the material before us.We find that impugned assets underlying lease agreements were very much in existence, that purchase 16

ITA/6214 & 6504/M/Tata Motors consideration of assets was discharged by the assessee through banking channels,that copies of the cheques were also produced,that the lease transactions were completed as per all legally prescribed procedures, that it was a rightful owner of leased assets that the lessees had confirmed the ownership of assets,that they had not claimed depreciation in their books of account for purchase and lease of assets.,that lease rentals earned by the assessee was offered to tax and same was assets by the AO.s in the year under consideration as well as in the subsequent AY.s. Here,we would like to discuss the matter of I.C.D.S Ltd.(supra).In that case the Hon'ble’ble Apex Court has held as under: “The provision on depreciation in the Income-tax Act, 1961, reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim under section 32 of the Act. The section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilized for the purpose of business of the assessee, the requirement of section 32 will stand satisfied, notwithstanding non-usage of the asset itself by the assessee. The definitions of “ownership” essentially make ownership a function of legal right or title against the rest of the world. However, it is “nomen generalissimum”, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied. As long as the assessee has a right to retain the legal title against the rest of the world, it would be the owner of the asset in the eyes of law.” As the assessee was the owner of the assets leased out to different parties, so,it was entitled to claim depreciation.The FAA had gone through the lease agreements, confirmation letters and other relevant material.As the existence of assets and their use is in doubt,so,the AO,in our opinion was not justified in denying the claim of depreciation made by assessee. We also find that FAA had allowed depreciation @50%,as the assets were used for less that 180 days during the year under consideration.It is also a fact that two of the lessees are state electricity boards i.e. APSEB and RSEB. Both of them have confirmed the lease transaction and installation of machinery/ assets.The FAA had observed that it could not be alleged that govt. undertakings had colluded with the assessee to mislead and defraud the govt. of its reveune by giving wrong confirmations.So,we do not see any infirmity in the order of the FAA.Confirming his order,we decide the Ground No.11 against the AO.

ITA/7418/M/2004-AY:98-99 19.First Ground of appeal is about disallowance u/s. 40A(9) of the Act,amounting to Rs.2.77 lakhs.While deciding the appeal for the earlier year,(paragraph 13),we have decided the issue in favour of the assessee.Following the same,Ground No.1 is decided in favour of the assessee.

ITA/6214 & 6504/M/Tata Motors 20.Second Ground is about depreciation on leased assets leased to APSEB and manufactured by Seahorse Industries Ltd.,amounting to Rs.5.99 lakhs. Following our order for the earlier year,second ground is decided in favour of the assessee.

21.Third ground pertains to deduction u/s. 80HHC for computation of profits u/s.115JA.As per the FAA,the AO had not discussed the issue in his assessment order.However,the assessee argued before the FAA that it had furnished requisite documents to the AO,that it had filed a return of income showing loss, that it did not claim any deduction,that it was assessed under MAT provisions, that computation of deduction u/s.80HHC was relevant, that it was entitled to reduce the amount of deduction from book profit for the purpose of section 115JA,that the AO had neither discussed nor allowed the deduction.The FAA directed the AO to consider the claim made by the assessee and pass a speaking order. 21.1.Before us the AR relied upon the cases of Bhari Information Technology System Private Ltd.(340 ITR 593) and Gharda Chemicals Ltd.(55taxmann. com27).The DR left the issue to the discretion of the Bench.We find that the FAA had asked the AO to pass a speaking order after considering the submission of the assesse. If he has not passed the order till date,he is directed to follow the instruction of the FAA to consider the cases relied upon by the AR, before us,and to pass an order within period of three months of receipt of this order.Ground No.3 is allowed in favour of the assessee,in part.

ITANo.7441/M/04 (A.Y. 98-99): 22.First Ground of Appeal is about expenditure incurred at Jamshedpur Works (Rs. 43.96 lakhs).We have decided the identical issue against the AO at para No.12,in the order for the earlier AY. Following the same,Ground No.1 is dismissed.

23.Ground No.2 is about disallowance u/s. 40A(9) of the Act(Rs.57.75 lakhs).We find similar issue was decided against the AO by us,while deciding the appeal for the earlier assesstment year(paragraph 13 of our order).Following the same,second Ground is dismissed 24.We had decided the issue of provision of warranty (Rs.450.72lakhs) against the AO,while deciding the appeal for the AY.1997-98 at paragraph No. Following that order,we dismiss ground no.3.

ITA/6214 & 6504/M/Tata Motors 25.Next ground is about depreciation on leased assets that were leased to State Electricity Board or NELCO .We find that Ground No.11 of the earlier AY. dealt with the samilar issue and that appeal filed by the AO has been dismissed (para no.18). Therefore,Ground No.4 is decided against him.

26.Next Ground is about disallowance of expenditure incurred on Mango Bridge (Rs.3.18 crores).During the assessment proceedings the AO found that the assessee had incurred an expenditure of Rs.3,18,53,000/- towards its share of cost of construction of a new bridge at Mango,Jamshedpur, that it was capitalized in the books that filing the return, that same was claimed as revenue expenditure.He held that assessee had not proved that the expenditure was incurred wholly and exclusively for the purpose of business, that there was no proof that expenditure resulted in providing common facility to the town. Alternatively,he held that the expenditure would provide enduring benefit to the assessee, that same was capital in nature. He did not allow depreciation to the assessee as it was not the owner of the bridge.

26.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the FAA and made elaborate submissions before him. After considering the assessment order and the submissions of the assessee, the FAA held that expenditure had been incurred on construction of new bridge used for bringing vehicle from truck terminal to factory area, that it was constructed at a place where the factory of the assessee was situated, that it would improve the traffic situation and would help the assessee in better movements of vehicles. The FAA referred to the cases of L.H Sugar Factory and Oil Mills Pvt. Ltd. (125ITR293),Coats Viyella (India) Ltd. (253ITR 667) Madras Auto Services P. Ltd.(233ITR468) and Associated Cement Compamies Ltd.(127ITR257) and held that advantage obtained by the assessee by contribut- ing part of construction cost of bridge was an allowable expenditure, that has not acquired any capital asset nor was there any extension of the profit making apparatus of the assessee.

26.2.Before us,the AR supported the order of FAA and relied upon the case of Bongaigaon Refinery & Petrochemicals(222ITR208)and Rajasthan Spg.& Wvg. Mills Ltd. (272ITR487). The Departmental Representative supported the order of the AO.

26.3.We have heard the rival submissions and perused the materials before us. We find that the assessee had contributed a sum of Rs. 3.18 crores to construct a new bridge,that AO had not brought on record /any fact to prove that assessee gained enduring benefit by partial 19

ITA/6214 & 6504/M/Tata Motors contribution to the construction of the new bridge.In our opinion,the bridge facilitated the better transportation of the goods to and from the factory site.If the assessee is received any benefit it was at an advantage of revenue nature.Therefore,we are of the opinion that order of FAA does not suffer from any legal infirmity.Endorsing the same,we decide Fifth Ground against the AO.

27.Ground No.6 is in respect of disallowance of expenditure on additional water lines(Rs.1. 50 crores).During the assessment proceedings,the AO found that the assessee had incurred an expenditure for additional water lines at its Pune facilities,that it had capitalised the expenditure in the regular books of account but while filing the statement of income it was claimed as revenue expenditure. However,the AO held that the expenditure was of capital in nature.

27.1.Before FAA,the assessee made the same arguments that were made for Ground No.5 and relied upon some more case laws.The FAA,after considering the available material held that the facts of the case under consideration were similar to the facts of the case of Chougule Chemiclas Pvt. Ltd.(216ITR234) of the Hon'ble Bombay High Court, that the expenditure incurred on laying new pipeline for augmenting the existing water supply in the factory premises was allowable as revenue expenditure.

27.2.During the course of hearing before us,the DR supported the order of the AO and the AR relied upon the order of the FAA.We find that the issue is covered by the judgment of Hon'ble Jurisdictional High Court delivered in the case of Chougule Chemiclas Pvt. Ltd.(supra).Respectfully following the same,Ground No.6 is decided against the AO.

28.Ground No.7 is about disallowance of vendor development expenses of Rs. 37. 70 crores. During the assessment proceedings the AO found that the assessee had treated the said expenditure as deferred revenue expenditure,that it had debited Rs.1.98 crores to the P&L account,that in the computation of income it claimed deduction of the entire amount.

28.1.As per the FAA,the AO had not given any finding of allowability of the expenditure as deferred revenue expenditure or about allowability of depreciation.During the appellate proceedings,the assessee made detailed submissions about allowing the expenditure as revenue expenditure.Alternatively,it was argued that it should be allowed as deferred revenue 20

ITA/6214 & 6504/M/Tata Motors expenditure over the period of time and in accordance with the accounting policies followed by it. It was also argued that if the expenditure was to be treated as capital in nature the AO should be directed to allow depreciation on it.After considering the submission of the assessee and the assessment order,the FAA held that the assessee had incurred expenditure for developing the tools as per the specifications given by it, that expenditure was incurred for development of stock in trade.It produced before the FAA a copy of the letter from one of the Tool suppliers to show as to how the tool amortisation cost was considered while fixing the purchase price.Considering the same,the FAA held that the excise duty was paid at total assessable value,that it would pay only the price after cash discount, that the tool amortisation cost was taken care of while fixing the purchase price of the tools,that the expenditure on vendor development was revenue in nature,that instead of developing the tool in its in house engineering research centre the assessee had provided assistance to tool manufacturers for developing design,drawing of the tool component,that the payment was made in stages depending upon the development of tools/component samples, that it had not acquired any new asset,that there was no addition or extension to the profit making apparatus of the assessee,that incurring of expenditure did not add to the fixed capital of the assessee,it only helped in procuring the stock in trade, that the expenditure was not capital in nature.The FAA referred to the cases of Revathy C.P. Equipments Ltd(245ITR686);Jyothi Electric Motors Ltd.(255 ITR 345);Electro Medicals (163ITR807); Bongaigaon Refinery and Petrochemicals Ltd.(supra)and directed the AO to allow the expenditure fully in the year under consideration.

28.2.The DR supported the order of the AO.The AR relied upon the order of the FAA and relied upon the cases of Alembic Chemical Works Co. Ltd.(177 ITR 377).

28.3.We have heard the rival submissions and perused the materials before us.We find that the assessee had incurred an expenditure of Rs.37.70 crores,that in the books of account it had treated the expenditure as deferred revenue expenditure, that in the computation of income and during the assessment proceedings it claimed that expenditure was of revenue nature,that the AO had not given any finding about allowability of the expenditure,that the expenditure was incurred for developing the tools/components.In our opinion,the entries in the books of account do not decide allowability of expenditure as revenue expenditure.Nor are the books decisive to hold an expenditure as capital expenditure.What has to be seen is the nature of expenditure.The FAA has given categorical finding of fact that expenditure did not add to the fixed capital of the assessee or helped it in acquiring the source of profit. 21

ITA/6214 & 6504/M/Tata Motors Therefore,in our opinion the FAA was justified in allowing the expenditure as revenue expenditure.Ground No.7 is decided against the AO.

29.Next Ground deals with disallowance of consultancy fee paid on account of business process reengineering,amounting to Rs.16.42 lakhs.During the assessment proceedings,the AO found that the assessee had appointed M/s.Arthur Anderson a consultancy firm for review of business proceedings,that it had treated the consideration paid to consultancy firm as deferred revenue expenditure in the books of account,and had amortised it for a period of year years,that in the computation of income assessee claimed entire amount as revenue expe -nditure.The AO held that the benefit from expenditure would be available to the assessee over a period of time,that it would be of an enduring nature.However, he allowed half of the expenditure for the year under consideration.

29.1.Aggrieved by the order of the AO,the assessee preferred an appeal before FAA.After considering the available material,the FAA held that the expenditure incurred by the assessee on account of consultancy fee for business process reengineering was revenue expenditure , that it had not started any new line of business,that the consultancy fee was also not paid for setting up any new business,that same was paid for purposes of improving the profitability of existing business.The FAA referred to the case of Crompton Engineering Co. Ltd.(242ITR 317)and Abbot Laboratories P.Ltd.(202ITR818)and held that entire expenditure,even if shown as deferred revenue expenditure in the books of account,had to be allowed in the year in which it was incurred.Before us, the DR and the AR supported the orders of AO and the FAA respectively.

29.2.We find that the AO had allowed half of the expenditure for the year under consideration,that the assessee had availed the services of a consultancy firm to improve the working of the company.As that fee was paid for improving the existing system,therefore,in our opinion the order of the FAA does not suffer from any legal infirmity.Confirming the same Ground.No.8 is decided against the AO.

As a result,appeals,filed by the assessee and the AO,for the AY.1997-98 stand partly allowed. Appeal of the assessee for the AY.1998-99 is partly allowed and appeal of the AO is dismissed.

ITA/6214 & 6504/M/Tata Motors