TCG REFINERIES LTD.,KOLKATA vs. I.T.O WD - 8(3),KOL., KOLKATA

This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-XXXII, Kolkata dated 10.10.2012. Assessment was framed by ITO Ward-8(3), Kolkata u/s 147/144 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 03.07.2007 for assessment year 2002-03. Shri A.K. Tibrewal, Ld. Authorized Representative appeared on behalf of assessee and Shri Sallong Yadan, Ld. Departmental Representative represented on behalf of Revenue.

The issue raised by assessee in this appeal is that Ld. CIT(A) erred in upholding the order of Assessing Officer by sustaining the disallowance of ₹30,46,320/- on account of consultancy income.

Briefly stated facts are that assessee is a limited company and engaged in the business of refineries. The assessee in the year under consideration has claimed Tax Deducted at Source (TDS) of ₹1,55,363/- only in its return of income, however it was A.Y. 2002-03 TCG Refineries Ltd. Vs. ITO Wd-9(3) Kol. Page 2 observed no correspondence income was shown in the profit and loss a/c of the assessee, in fact, no profit and loss a/c was prepared by assessee and filed with its return of income. It was observed that the consultancy income received by assessee was capitalized in the books of account on the ground that the company has not commenced commercial production. However, the AO was of the view that the consultancy income is not related to the refineries business of assessee and therefore same was liable to tax under the head “income from other sources”. Accordingly, AO treated the same as income from other source.

Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld CIT(A) submitted that commercial activity has not been started and therefore all the expenses including the consultancy income was capitalized under capital work-in-progress in the year under consideration. Some engineers were deputed to Boulevard Service Pvt. Ltd. (BSPL for short) for the project at Halida Petro-chemicals and the BSPL had reimbursed ₹30,46,316/- which was credited in the capital work-in-progress. However, the BSPL on the amount of reimbursement of salary has deducted TDS u/s. 194J of the Act which was made by virtue of provision of law. However, the ld. CIT(A) disregarded the contention of the assessee by observing that there is no relationship between the consultancy income received by the assessee and the cost incurred in relation to capital work-in-progress in connection to the refineries business. Therefore, Ld. CIT(A) upheld the order of AO. Being aggrieved by this order of Ld. CIT(A) assessee came in second appeal before us on the following grounds:- “

We have heard rival contentions of both the parties and perused and carefully considered the materials on record; including the judicial pronouncements cited and placed reliance upon. The issue in the instant case relates to the treatment of consultancy charge received by the assessee whether it has connection with the business of assessee or it should be treated as income from the other sources. It is undisputed fact that assessee has not started its commercial production and all the cost which has been incurred for the purpose of the business was duly capitalized. However, the assessee in the instant case, has received consultancy income before the commencement of commercial activities for ₹30,46,320/- and the view taken by Authorities Below that income has nothing to do with the project of the assessee and therefore same should be taxable under the head “income from other source”, whereas the argument of Ld. AR is that it has a direct connection and co-relation with the business of the assessee and therefore, same should be capitalized in the books of account of the assessee. Now the issue before us arises so as to whether the impugned consultancy income received by the assessee has direct co-relation with its activities. At the outset, we find that similar issue was raised by assessee before Ld. CIT(A) for A.Y 2004-05 vide ITA 217CIT(A)-VIII/Kol/06-07 wherein Ld. CIT(A) vide its order dated 16.03.2012 has allowed the appeal of assessee by holding that the consultancy income has direct nexus with the project activities of the assessee. The copy of Ld. CIT(A) is placed on pages 15 to 22 of the paper book. The relevant finding of the ld. CIT-A for the AY 2004-05 is reproduced below :- “I have carefully considered the submission made by the appellant along with the case laws referred to, perused the impugned assessment order and the facts of the case and the other materials on records. I find that there is substantial forced in the argument of the AR of the appellant. It is observed that the AO has taken into account the fact that since the appellant has claimed credit of TDS, the provisions of the Sec. 199(1) should be applicable and with that view in mind he treated the receipt as taxable income of the appellant. It is explained that Shri Rabin Mukhopadhyay, has been seconded/deputed for a short period to Boulevard Services Pvt. Ltd. 9BSPL) for A.Y. 2002-03 TCG Refineries Ltd. Vs. ITO Wd-9(3) Kol. Page 4 their works at Haldia Petrochemicals to have a link with Haldia Petrochemicals and part of the salary of Rs.1,93,333/- plus service tax of this Engineer has been reimbursed by BSPL to the appellant. This amount received from BSPL has been credited in the books of account as secondment charges received BSPL has deducted tax at source on the aforesaid amount paid by them to the appellant company u/s 194J. The total salary payment made by the appellant company to this engineer for the entire year was of Rs.17,16,118/- and that has also been debited to secondment charges. Thereafter, the net amount of Rs.15,22,785/- (Debit) in the secondment charges has been capitalized by the appellant by debiting CWIP along with all other expenses. It is further submitted that the company was in the process of setting up a Refinery project in the Haldia. The project was therefore under construction and no activities whether in the nature of business or otherwise has been carried out during the year under construction by it. The business has not commenced. No profit & loss has been prepared. All the expenses including salary and secondment charges incurred by it has been capitalized in the capital work in progress (CWIP) for the project. The amount of CWIP has been carried forward year after year. It is argued that the company has in its roll number of employees including engineers for the purposes of its project and the salary amounting to rs.114,63,496/- (debited under the head salary) and Rs.17,16,118/- (Debited under secondment charges) have been rightly capitalized by the company. It is further argued that the part of salary received by the engineer as secondment charges cannot be the income of the company in isolation. In support of its contention, my attention is drawn to the decision of the Hon'ble Supreme Court in the case of Bongaigaon Refinery vs. CIT (supra) delivered on the similar facts and circumstances wherein it has been held that such receipts were not taxable income but to be adjusted against project cost of the business. The following question has been referred to the Hon'ble Supreme Court. The AR of the appellant further submitted that in any event, assuming but not admitting the same, even if the receipt is an income than in such event the outgoing expenses incurred by the appellant during the year under consideration is deductable from such income. It is argued that during the year the appellant has incurred a sum of Rs.97,80,001/- towards various expenses and losses including salary, secondment charges and other expenses to run and maintain the company. After carefully considering the submissions of the appellant, perusing the impugned assessment order, the facts of the case and the other materials brought on records and respectfully following the decision of the Hon'ble Supreme Court in the case of Bongaigaon Refinery vs CIT (supra) referred to by the appellant, I am of the considered view that the AO is not justified in treating the part of salary received by the appellant company in lieu of the services rendered by one of its engineer as the taxable income of the company in contrary to the entirety of the facts and circumstances of the appellant’s case. Therefore, the AO is directed to delete the addition so made on wrong facts of the case. Thus, this ground of appeal of the appellant is allowed.”