M/S. EASTERN SUGAR & INDUSTRIES LTD.,KOLKATA vs. ACIT, CENTRAL CIRCLE - XI, KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “C”, BENCH KOLKATA BEFORE SHRI N.V.VASUDEVAN & DR. A.L.SAINI, AM आयकर अपील सं./ITA No.1950/Kol/2010 (�नधा�रण वष� / Assessment Year :2004-2005) M/s Eastern Sugar & Vs. ACIT, CC-XI, Kolkata, Industries Ltd., C/o M/s Poddar Court Building, Salarpuria Jajodia & Co., 7, 18, Rabindra Sarani, C.R.Avenue, Kolkata- Kolkata-700001 700072 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABCE 2944 F .. (अपीलाथ� /Appellant) (��यथ� / Respondent) AND आयकर अपील सं./ITA No.1951/Kol/2010 (�नधा�रण वष� / Assessment Year :2006-2007) M/s Eastern Sugar & Vs. ACIT, CC-XI, Kolkata, Industries Ltd., C/o M/s Poddar Court Building, Salarpuria Jajodia & Co., 7, 18, Rabindra Sarani, C.R.Avenue, Kolkata- Kolkata-700001 700072 �थायी लेखा सं./जीआइआर सं./PAN/GIR No. : AABCE 2944 F .. (अपीलाथ� /Appellant) (��यथ� / Respondent) �नधा�रती क� ओर से /Assessee by : Shri S.K.Tulsiyan, Advocate राज�व क� ओर से /Revenue by : Shri Pinaki Mukherji, JCIT, Sr.DR सुनवाई क� तार�ख / Date of Hearing : 02/02/2017 घोषणा क� तार�ख/Date of Pronouncement 15/02/2017 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM: The captioned two appeals filed by the assessee, pertaining to the assessment years 2004-2005 & 2006-07, are directed against the order passed by ld. Commissioner of Income Tax (Appeals), Central-I, Kolkata, in Appeal No.434/CC-IV/CIT(A),C-I/08-09, dated 05.08.2010 and Appeal No.433/CC-XI/CIT(A),C-I/08-09, dated 11.08.2010, respectively which in turn arises out of an assessment order passed by the Assessing Officer

2 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. (AO) Under Section 143 (3) of the Income Tax Act 1961, (hereinafter

referred to the ‘Act’), dated 08.12.2008 & 30.12.2008, respectively.

assessment years, different issues involved, therefore, these have been

clubbed together and a consolidated order is being passed for the sake of

convenience and brevity.

ITA No.1950/Kol/2010(AY : 2004-05)

loss Rs.10,25,83,680/-. The assessment of the assessee company was

completed by the AO u/s.143(3) on 18.10.2006. subsequently it was

noticed by the AO that income had escaped assessment, therefore, notice

u/s.148 was issued and served upon the assessee. In course of

reassessment proceedings, following observations were made :-

That the assessee has been claiming depreciation on P&M (Plant & Machinery). In A.Y 2002-03 and A.Y 2003-04. In A.Y 2003-03 the depreciation was disallowed as assessee did not produce necessary evidences of it's acquisition. The P&M on which depreciation has been allowed to the tune of Rs.25,70,750/- remain same in A.Y 2004-05. Thus, on P&M depreciation to the tune of Rs.25,70,750/- has been wrongly allowed; for which evidence of acquisition were not produced when required as per the record of A.Y. 2003-03 in this assessee's case. In response the assessee AR filed a written submission and claimed that the books of the assessee were not rejected and that the factory was witnessing labor unrest. The reply of the assessee does not satisfy the issue in band and therefore the same is not acceptable. (Addition Rs.25,70,750/-)

3 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd.

an appeal before the ld. CIT(A), who has confirmed the addition made by

the AO observing the followings :-

3.3. Moreover, the Bombay High Court in the case of Yuvraj v Union of India (2009) 315 ITR has specifically held that the points not decided while passing assessment order under section 143(3) not a case of change of opinion. Further the Allahabad High Court in the case of EMA India vs ACIT,30 DTR (AlI)82 (order dated 5.10.2009) , has discussed the issue in detail and after taking into consideration of the finding of Hon,ble Delhi High Court in the case of CIT v Kalvinator (I) Ltd 256 ITR 1, has held that the reassessment is permissible where the A.O has passed an assessment order without application of mind . The supreme Court in the case of CIT V Kelvinator (India) Ltd 320 ITR 651, has only settled the law, that change of opinion cannot be basis of reason to believe and review of order under section 147 is not permissible. However whether any opinion was formed at the time of original assessment is a question of fact and is case specific . In the case under consideration as per material available on record the issue was not at all considered by the A.O . Further the claim of the assessee that the notice issued under section 148 was not in the proper format as it does not mentioned all details were examined and found to have no merit. Hence, it is held that the reopening proceeding initiated by the A.O is as per provision of the Act. Accordingly the ground no 1 to 5 taken by the appellant is dismissed. 4. Ground no 6 taken by the appellant is against the disallowance of depreciation of Rs.25,70,7501 . During the course of appeal the L.d AR made following submission - "Ground No. 6 is against the action of the AO in disallowing Rs. 25,70,750/- out of claim for depreciation and which was allowed in the original assessment. In this connection this is to submit that the accounts of your petitioner being audited and the auditors having certified the acquisition of such assets, no disallowance could be made simply on the ground that evidences in respect of acquisition of such Plant & Machinery had not been produced. Hence the disallowance of Rs.25,70,750/- may kindly be deleted. 4.1 I have carefully considered the submissions of the Ld. AR. The assessee had claimed depreciation on the WDV of the plant and machinery purchased in earlier years, which was disallowed in the A.Y.2002-03 and 2003-04 as the assessee failed to produce the necessary evidences of its acquisition. The disallowance has been confirmed in appeal filed by the

4 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd.

appellant. Considering above, the disallowance on account of depreciation made by the AO of Rs.25,70,750/- is confirmed and accordingly ground no.6 taken by the appellant is dismissed.

further appeal before us and has taken the following grounds of appeal :-

5 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. the assessments of the preceding two asstt. years and the the Ld. CIT(A) was also wholly wrong and unjustified in confirming the A.O's wrongfull action in disallowing the depreciation in much excess. Actions of both the A.O and Ld. CIT(A) were unreasonable, uncalled for and bad in law. 6. For that your petitioner craves the right to put additional grounds and/or to alter/amend/modify the present grounds at the time of hearing.

appeal, but at the time of hearing the main grievance of the assessee has

been confined to only two issues namely, reassessment proceedings

initiated by the AO was without any tangible material and secondly

disallowance of assessee’s claim of depreciation of Rs.25,70,750/- on

brought forward old plant and machinery acquired in earlier year.

1.1. The assessment was originally completed uls.l43(3) on 1811012006 determining the loss at Rs.10,16,01,700/-.

1.2. Subsequently, by letter dated 0410612008, issued u/s.148 of the IT Act, bearing no number, the AO informed the assessee that assessment completed u/s.143(3) of the Act for the relevant assessment year, had been reopened uls.l47 of the Act. Copy of the same is enclosed at page no. 53 of the P/b.

It is relevant to note here that the said notice issued uls.148 of the IT Act lacked the approval of the higher authority for initiation of proceedings uls.l47, which is required as per proviso to sec.l51 (1) of the IT Act.

1.3. In response to the aforesaid notice, the assessee filed return uls.l48, under protest, on 07/07/2008, copy of which is enclosed at page no.55 of the Plb. Further, vide letter dated 03/07/2008, the assessee requested the AO to communicate the reasons for initiation of proceedings uls.l47.

6 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. 1.4. The reasons were thereafter communicated by the AO vide letter dated 1311 012008. Copy of the same enclosed at page nos. 57-58 of the Plb.

1.5. The reasons recorded for reopening the assessment related to the claim of depreciation on Plant & Machinery which was already dealt with in the original assessment order for the said assessment year.

1.6. In this context, after the receipt of the reasons, the assessee vide letter dated 04/11/2008, filed its objection to initiation of proceedings u/s.147 of the Act. Copy of the same enclosed at page no. 59-60 of the P/b.

1.7. However, without giving reply or passing order in respect of such objection filed, the AO completed the assessment for the relevant assessment year u/s.1471143(3) of the Act vide order dated 08112/2008.

1.8. Being aggrieved, the assessee filed an appeal against the said assessment order which was dismissed by the Ld.CIT(A), Central-I, Kol, by his order dated 05.08.2010.

1.9. Being aggrieved by the order of the Ld. CIT, the assessee seeks the kind justice of the Hon'ble Income Tax Appellate Tribunal and has filed an appeal in this regard.

The following submissions are, therefore, given by the appellant for your kind consideration:

2.1. Therefore, allegation of the Ld.CIT(A) in his appellate order (dated 05/08/2010), that in course of the original assessment the AO accepted the claim of depreciation made in the return without any inquiry and

7 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. hence, there was no formation of opinion, is totally baseless. Moreover, the claim of the Ld.CIT that it is found from records the AO has not considered the issue of allowability of depreciation at the time of original assessment is also not substantiated by him by bringing any material on record.

2.2. Simply, based on the above, the Ld.CIT concluded that since there was no formation of opinion at the time of original assessment with regard to the claim of depreciation there was no question of changing it, which is not correct at all.

2.3. It will be clear from perusal of the copy of reasons recorded by the AO for issuance of notice u/s.148, as enclosed at page no.57 of the P/b, that the AO has formed his opinion for reopening of proceedings u/s.147 for the relevant assessment year merely based on the fact that in A.Y. 2002-03 proportionate depreciation was disallowed based on the non- production of supporting evidences in connection to fresh acquisition during that year due to prolonged labour trouble in the sugar factory.

Relevant portions of the reasons recorded are reproduced hereunder:

"Seen from the record that the assessee has been claiming depreciation on P&M in A. Y 2002-03 and A. Y 2003-04. In A. Y 2002-03 the depreciation was disallowed as assessee did not produce necessary evidences of it's acquisitions. The P&M on which depreciation has been allowed to the tune of Rs.25, -0, -50 - remain same in A. Y2004-05. Thus, on P&M depreciation to the tune of Rs.25, 70, 750/- has been wrongly allowed; for which evidence of acquisition were not produced when required as per the record of A. Y 2002-03 in this assessee's case.

Therefore, I have reason to believe that income to the tune of Rs.25, 70, 750/- has been wrongly not considered "

2.4. It is pertinent to note here that this fact was already available with the AO at the time of completion of original assessment on 18/10/2006 as the assessment for the A.Y. 2002-03 was already complete on 29/03/2005. Therefore, it is clear that the original assessment having been completed u/s.143(3) based on the material on record and that no new material or information being received by the AO subsequently after the completion of the assessment u/s.143(3), the proceedings initiated u/s.147 merely tantamount to change of opinion which cannot form the basis for reopening a completed assessment.

2.5. To buttress the foregoing arguments, reliance is placed on the judgment of the Hon'ble Supreme Court in the case of COMMISSIONER OF INCOME-TAX v. KELVINATOR OF INDIA LTD. reported in [2010] 320 ITR 561. In the said case it was held as under:

8 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd.

"The concept of "change of opinion" on the part of the Assessing Officer to reopen an assessment does not stand obliterated after the substitution of section 147 of the Income-tax Act, 1961, by the Direct Tax Laws (Amendment) Acts, 1987 and 1989. After the amendment, the Assessing Officer has to have reason to believe that income has escaped assessment, but this does not imply that the Assessing Officer can reopen an assessment on mere change of opinion. The concept of "change of opinion" must be treated as an in- built test to check the abuse of power. Hence after April 1, 1989, the Assessing Officer has power to reopen an assessment, provided there is "tangible material" to come to the conclusion that there was escapement of income from assessment. Reason must have a link with the formation of the belief"

2.6. Further, reliance is also placed on the following judgments wherein it is repeatedly held that re- opening of assessment on mere change of opinion is not sustainable:

• D. T. & T. D. C. Ltd. vs. CIT (2010) 324ITR 234 (Del.).

In the said case, it was held as under:

"The assessing officer has been given power to reassess under section 147 upon certain conditions being satisfied, and the assessing officer does not have power to review. If such a change of opinion were to be permitted as a ground of reassessment then it would amount to granting a licence to the assessing officer to review his decision, which he does not have under the provision of section 147. "

• MJ. Pharmaceuticals Ltd vs. CIT (2008) 297ITR 119 (Bom) (Assessment Year 2003-2004)

In this case, the hon'ble High Court observed as under:

"Issue regarding addition of amount of deferred taxation for computing book profits u/s. 115JB having been raised by the AO at the time of original assessment u/s. 143(3} and no addition having been made by AO on the account on being satisfied with the explanation of the assessee reopening of assessment on the very same issue suffered from change of opinion in the absence of any fresh material hence invalid. "

• Asteroids Trading & Investment P. Ltd. vs DCIT (2009) 308 ITR 190 (Bom)

In the said case, it was held that since no new material brought on record, reassessment on change of opinion of officer not valid.

9 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. • Asian Paints Ltd. vs. DCIT (2008) 308 ITR 195 (Bom)

In this case, the hon'ble High Court observed that mere change of opinion of A.O. not ground for reassessment.

• ICICI Prudential Life Insurance Co. Ltd. (2010) 325 ITR 471 (Bom)

In the said case, the hon'ble Bombay High Court held that re-opening of assessment on the same ground in the absence of any tangible material was based on mere change of opinion and therefore is not sustainable.

• Aventis Pharma Ltd. vs. Astt. CIT (2010) 323 ITR 570 (Bom) (577).

• Bhavesh Developers vs. A.O. (2010) 224 CTR 160 (Bom).

2.7. Based on the ratio of judgment decided in the aforesaid cases, it follows that no valid proceeding u/s.147 could be initiated even within a period of four years on mere change of opinion, if all material facts had been disclosed by the assessee and the AO had complete knowledge of all such materials and further, the assessment had also been completed after taking into consideration all such material facts.

2.8. In the instant case, the AO has completed the original assessment on 18/10/2006 based on the material on record and has allowed the claim of depreciation on plant and machinery. Therefore, where the assessee has disclosed all material primary facts, proceedings U/S 147 cannot be taken if the AO fails to draw the correct legal inference from such facts or fails to pursue the matter appropriately. (CIT v Krishnakutty Menon 181 ITR 237).

2.9. Again, as will be apparent from the reassessment order dated 08/12/2008 for the A.Y 2004-05, the AO has merely substituted his own opinion by holding that proportionate depreciation to the tune of Rs.25, 70, 750/- was disallowable thereby completely ignoring the tax audit report which was available and was considered before passing the original assessment order for the said year.

2.10. Hence, in absence of new information or detail being available to the AO after completion of the original assessment u/s.143(3) of the Act, proceedings initiated u/s.147 of the Act for the relevant assessment year, is not valid in the instant case of the assessee. It is clear in the present case of the assessee the "reason to believe" is based on non existing material and therefore in absence of tangible material to reach a reasonable belief that the income liable to tax has escaped assessment, the entire proceeding initiated u/s.147 of the Act is liable to be quashed.

10 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. 2.11. Reference in this connection is invited to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Amitabh Bachchan, ITA No.4646 of 2010 (order copy enclosed), wherein it was held as under:

"The assessee had made a claim for 30% adhoc expenditure. This was withdrawn by the assessee when asked by the AO to substantiate. The reopening on the basis that the said adhoc expenditure constituted "unexplained expenditure" uls 69 was based on the same material. There was no fresh tangible material before the AO to reach a reasonable belief that the income liable to tax has escaped assessment. It is a settled position of law that review under the garb of reassessment is not permissible."

2.12. Again, at this juncture attention is invited to the recent decision of the Hon 'ble Delhi High Court in the case of PR. Commissioner of Income- tax v. Tupperware India (P.) Ltd. reported in [2016] 236 Taxman 494, wherein the Court while observing that the expression "reason to believe" cannot have two different standards or sets of meaning, one applicable where the assessment was earlier made under section 143(3) and another applicable where an intimation was earlier issued under section 143(1), held as under:

“ •••••••• The reopening order of the Assessing Officer only refers to the report of statutory auditor under section 44AB which report was already enclosed with the return filed by the assessee. Therefore, factually, there was no new material that the Assessing Officer came across so as to have 'reasons to believe that the income had escaped assessment .... "

It is pertinent to note here that the assessee's case is on a much better footing than the above-said case since in the case of the assessee the assessment was originally completed uls.143(3) of the Act and complete details of the claim of depreciation and audit report were already before the AO at the time of completion of assessment u/s.143(3) of the Act.

2.13. Apart from the above, the assessee would like to submit that the notice dated 04/06/2008 issued uls.148 (copy enclosed at page nO.53 of the Plb) do not connote to the prescribed format as it lacked the approval of the higher authority as required as per proviso to section 151 (2) of the IT Act for the initiation of proceedings uls.147 of the Act.

2.14. It is to be noted here that when a statute requires something to be done in a particular manner, it has to be done in that manner. The provisions of section 151(2) of the Income Tax Act, 1961, provides that where an assessment has been made under section 143(3), a notice under section 148 cannot be issued by an Assessing Officer, who is below the rank of the Assistant Commissioner or the Deputy Commissioner, unless the Joint Commissioner is satisfied on the reasons

11 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. recorded by the Assessing Officer that there is a fit case for the issuance of a notice.

2.15. However, as evident from perusal of the above said notice dated 04/06/2008 issued uls.148 of the Act, there is no mention of the approval of the Joint Commissioner as required uls.151 (2) of the Act. Thus, it follows from the above that sufficient compliance uls.151 is absent in the instant case thereby rendering the notice issued to be invalid.

2.16. In support of the aforesaid proposition, reliance is being placed on the decision of the BOMBAY HIGH COURT in the case of COMMISSIONER OF INCOME-TAX v. SMT. SUMAN WAMAN CHAUDHARY [2010J 321 ITR 495 (Bom) , in which case, the Tribunal held that the notice was issued without jurisdiction, as the Assessing Officer had to record the reasons which required the approval of the Deputy Commissioner or the Joint Commissioner and a certificate that the reasons recorded by the Assessing Officer were sufficient for issue of such a notice.

On appeal further by the Department, the Hon'ble High Court, dismissing the appeal, held as under:

"that the finding of the Tribunal that under section 151(2) of the Income- tax Act, 1961, prior approval of the concerned authority was required to be taken before issuing a notice was correct. "

It is pertinent to note here that the Supreme Court has dismissed the special leave petition filed by the Department against the judgement: [2009] 312 ITR (St.) 339.]

2.17. More so, it is relevant to note here that soon after the issue of the alleged notice uls.148, the assessee filed the return uls.148, under protest, on 07/07/2008 and requested the AO to communicate the reasons for initiation of proceedings uls.147. The reasons were communicated by the AO vide letter dated 1311 0/2008 and the assessee vide letter dated 0411112008, filed its objection. However, without giving reply or passing order in respect of such objection filed, the AO passed the assessment order on 08/12/2008 uls.1471143(3) of the Act for the relevant assessment year. The said action is not as per law. The AO has erred in not disposing of the assessee's objection against the "reason" recorded for reopening of the assessment.

2.18. The Hon'ble Supreme Court in the case of GKN Driveshaft (India) Ltd. reported in 259- ITR-19 has held that on receipt of the reasons recorded by the A.O. while reopening an assessment uls 147, the Assessee is entitled to submit an objection against the "Reasons". The A.O. is thereafter required to dispose o(such objectio,,:s by a speaking

12 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. order and only thereafter he could proceed to complete the reassessment proceeding.

2.19. There are several decisions in which the Hon'ble High Courts have set aside the reassessment proceeding for the failure of the A.O. to first dispose of the objections raised by the assessee against the reasons recorded. Few such decisions are cited as under:

• Allana cold storage vs. ITO (2006) 287ITR 1 (Bom.) (Asst Yr 2001-2002)

In the said case, following the order passed by the Supreme Court in the case of GKN Driveshaft [259-ITR-19J, the matter was set aside to pass fresh order.

• lOT Infrastructure and Eng. Services Ltd. vs. ACIT (2010) 329ITR 547 (Bom):

In the said case, the Hon'ble High Court held that reassessment framed by the assessing officer without disposing of the primary objection raised by the assessee to the issue of reassessment notice issued by him was liable to be quashed.

• Smt. Kamalesh Sharma [Delhi High Court] (287-ITR-337).

• Vishanath Engineer [Gujrat High Court] (352-ITR-549).

2.20. In light of the aforesaid judicial pronouncements, it appears that the reassessment order passed for the relevant assessment year requires to be set aside for doing it afresh.

2.21. To sum up, the following conclusions can be drawn in assessee's case:

• First of all the alleged notice issued u/s.148 lacked the approval of the higher authority as required u/s.151(2) of the IT Act.

• Further, when the "reason" was intimated to the assessee and it filed written objection to the "reason", then although as per the Hon'ble Supreme Court direction in the case of GKN Driveshaft (India) Ltd. (259- ITR-19) the A.O. was required to dispose of the objections by a speaking order, the A.O. in this case did not follow this procedure and eventually passed the reassessment order.

• Finally, even though details of the claim of depreciation was already submitted alongwith the return and the AO completed the original assessment based on the material on record, the AO initiated proceedings u/s.147 without any new fact or new material and disallowed

13 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. proportionate claim of depreciation, which is clearly a substitution of his own opinion and can never form the basis for reopening a completed assessment.

2.22. As such, taking into consideration the above, the assessee would like to submit that in absence of tangible material to reach a reasonable belief that the income liable to tax has escaped assessment, the entire proceeding initiated u/s.147 of the Act is liable to be quashed. Consequently, no addition on account of depreciation claim is possible.

Finally, it is urged most respectfully that the Hon'ble Tribunal may be pleased to take into consideration the aforesaid submissions of the appellant and pass appropriate order allowing due relief as prayed for.

assessee did not produce relevant documents and information before the

AO and to that extent, the income has escaped assessment. In addition to

this, ld. DR for the revenue has also relied on the following judgments :-

i) Som Datt Builders (P) Ltd., 98 ITD 78 (Kol) :-

From the perusal of section 147, it is apparent that the Assessing Officer is well empowered to reopen the case within four years even the assessment has been framed under section 143(3) and since initiation of reassessment proceedings were initiated well within time to recompute the allowance wrongly allowed, the action of the Assessing Officer in reopening the case was justified and same could not be held to be a change of opinion, which was basically invoked for rectifying the glaring mistake committed by the Assessing Officer at the time of original assessment proceedings. The intention of the Legislature in amending the provision under section 147 with effect from 1-4-1989 was also meant for enabling the Assessing Officer to recompute the excess deduction/disallowance wrongly allowed to the assessee which came to his notice subsequently. [Para 24]

on record, we are of the view that there is merit in the submissions of the

assessee, as the propositions canvassed by the ld. AR for the assessee

are supported by the facts narrated by him. Ld. AR has pointed out that

14 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. the reasons recorded for reopening the assessment related to the claim of

depreciation on Plant & Machinery which was already dealt with in the

original assessment order for the said assessment year by the AO and

the AO did not any tangible material on record to reopen the assessment

proceedings. It is also relevant to note here that during the relevant

financial year there was no fresh acquisition of plant and machinery. Only

brought forward balance of previous year was appearing as opening WDV

on which computation of depreciation was made as per the provisions of

Section 32 of the IT Act. Therefore, based on the factual position and the

precedents cited by ld. AR for the assessee, we are of the view that

reopening of assessment u/s.147 is without any tangible material.

Accordingly, we allow the appeal of the assessee.

technical ground, therefore, we do not adjudicate the ground No.4 & 5

raised by the assessee as the same have become infructuous.

ITA No.1951/Kol/2010(AY : 2006-07)

15 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. 2. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the arbitrary, ad- hoc and estimated disallowance of Rs. 24,600/- @ 5% of Rs. 4.92 lakhs on account of Misc. expenses made in assessment purely on assumptions and presumptions on the alleged ground that the assessee was unable to produce all the bills and vouchers. The Actions of both the AO and the Ld. CIT(A) were unreasonable, uncalled for and bad in law.

1.1. Subsequently, notices u/s.142(1) & 143(2) of the Act were issued and served on the assessee. In response to the above, the AR of the assessee appeared from time to time and explained the return.

1.2. Finally, the assessment was completed u/s.l43(3) on 30112/2008 determining the loss at Rs.1 ,22,27,760/- thereby disallowing the claim of depreciation on plant and machinery to the tune of Rs.2,45,77,8501- and further, making an adhoc addition @ 5% of miscellaneous expenses for lack of supporting documents. The disallowance of depreciation was made on the ground there was no production in the company during the relevant financial year.

1.3. Being aggrieved by the order, the assessee filed an appeal before the Ld.CIT, who, vide his appellate order dated 1110812010, confirmed the additions made as above.

1.4. Being aggrieved by the order of the Ld. CIT, the assessee seeks the kind justice of the Hon'ble Income Tax Appellate Tribunal and has filed an appeal in this regard.

16 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. Ground No.1

2.1. The assessee company running a sugar mill started its production from the Assessment year 1996-97 and continued production till Assessment year 2004-05.

Thereafter, labour problem started and due to prolonged labour dispute production was temporarily stopped from Assessment year 2005-06 onwards.

Subsequently, during the financial year 2008-09, the company, M/s.Shree Hanuman Sugar & Industries Ltd. proposed to use the Plant & Machinery of the assessee company installed at Motihari, East Champaran, Bihar. Reference here is invited to the offer letter dated 0710812008 of M/s.Shree Hanuman Sugar & Industries Ltd. as enclosed at page no.1 of the Additional Plb.

2.2. On receipt of the above proposal, the assessee company with the intention of temporary making use of the plant agreed to the terms and conditions for usage of its Plant & Machinery by M/s.Shree Hanuman Sugar & Industries Ltd. for a mutually settled consideration. Accordingly, the assessee company agreed to keep the Plant & Machinery in "ready to use" condition at the beginning of every season. Reference here is invited to the letter of acceptance of the proposal by the assessee company dated 1610812008, as enclosed at page no. 2 of the Additional Plb.

2.3. As per the above agreement between the assessee company and M/s.Shree Hanuman Sugar & Industries Ltd., necessary repairs were made and M/s.Shree Hanuman Sugar & Industries Ltd. used the machineries of the assessee company in its production and started paying machinery usage charges from the financial year 2009-10 onwards. Attention here is invited to the audited accounts of the assessee company for the Assessment year's 2010-11 & 2011-12 in this connection, as enclosed at page nos. 3-21 of the Additional Plb, which evidences the receipt of the machinery usages charges by the assessee for the use of its plant & machinery in the production of M/s.Shree Hanuman Sugar & Industries Ltd.

Reference is also invited to the ledger account of Fixed Assets Usage Charges as appearing in the books of the assessee company for the financial year's 2009-10 & 2010-11, as enclosed at page nos. 22-25 of the Additional Plb, which further evidences the above-said fact.

17 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. 2.4. Again, the fact that the company, M/s.Shree Hanuman Sugar & Industries Ltd. after entering into agreement with the assessee company for the usage of its machinery resumed its production from the Financial year 2010-11 shall be evident from perusal of the audited account of the said company for the financial year ending 31/0312011, copy of which is enclosed at page nos. 26-40 of the Additional Plb. The production continued thereafter.

2.5. Thus, in view of the facts as discussed above it is clear that there was passive use of the plant & machinery by keeping the same in ready to use condition so that it can be used anytime in production by M/s.Shree Hanuman Sugar & Industries Ltd, as agreed upon.

Now, the two ingredients for depreciation allowance are:

(1) the depreciable asset should be owned by the assessee;

(2) it should be usedfor the purpose of the assessee's business or profession.

The words "used for the purpose of business" are capable of a larger and narrower interpretation. If the expression "used" is construed strictly it could be taken as connoting or requiring the active employment or the actual working of the machinery, plant or building in the business. On the other hand the wider meaning would include not only cases where the machinery or plant are actively employed but also cases where there is passive user of the same in business.

Therefore, an asset could be said to be in use when it is kept ready for use.

Hence, it follows from the above that depreciation has to be allowed not only for active use of an asset but also for its passive use. That is to say, even passive use of an asset i.e. while it is kept ready for use, it would tantamount to use of the asset for the purposes of the business and assessee would be entitled to depreciation thereon

2,6. In support of the aforesaid proposition, reliance is being placed on the following judgments wherein it is held that even passive use of an asset entitles it to depreciation:

• Capital Bus Service (P.) Ltd. «1980) 123 ITR 404) [Delhi High Court]:

A portion of the head note is reproduced as under:

"The allowance for normal depreciation does not depend upon the actual working of the machinery,' it is sufficient if the machinery in question is

18 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. employed by the assessee for the purposes of the business and for no other business and it is kept by him ready for actual use.”

• CIT v. Viswanath Bhaskar Sathe [(1937) 5 ITR 621] [Bombay High Court]:

In this case, the Hon'ble High Court held that the assessee was entitled to depreciation notwithstanding that the plant and machinery did not actually work during the previous year in question. The court, while holding so, interpreted the word "used" found in section 10(2)(vi) of the 1922 Act, as under:

"But, I think that the word 'used' in this section may be given a wider meaning and embraces passive as well as active user. Machinery which is kept idle may well depreciate, ' particularly during the monsoon season. It seems to me that the ultimate test is, whether, without the particular user of the machinery relied upon the profits sought to be taxed could have been made; and as I read the agreement in the case, the profits of the assessee during the year under assessment could not have been earned except by his maintaining his factory in good, working order, and that involves the user of the factory and the machinery",

• COMMISSIONER OF INCOME-TAX v. INDIA TEA AND TIMBER TRADING CO. [IN THE GAUHATI HIGH COURT] [1996J 221 ITR 857 (Gau):

In the said case, the assessee owned a sugar mill. The Assessing Officer denied depreciation in respect of the factory, plant and machinery as there was no production and no user of machinery during the year .

• The Appellate Assistant Commissioner and the Tribunal upheld the claim of the assessee on the basis of passive user by keeping the machinery in readiness.

On a reference, the hon'ble High Court held, "that the expression "used" should have a wider meaning so as to include not only actual but also passive user and depreciation was allowable. "

• COMMISSIONER OF INCOME-TAX v. REFRIGERATION AND ALLIED INDUSTRIES LTD. [2001] 247 ITR 12 (Del) [DELHI HIGH COURT]:

In this case, the hon'ble High Court observed as under:

"The principal factors responsible for reduction in value of a capital asset and for depreciation are: (a) ordinary wear and tear; (b) unusual damage; (c) inadequacy; (d) obsolescence. These factors include not only those

19 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. relating to physical deterioration but also those relating to the suitability of the asset as an economically productive unit after a period of time.

The two ingredients for depreciation allowance are (1) the depreciable asset should be owned by the assessee; (2) it should be used for the purpose of the assessee's business or profession. The words "used for the purpose of business" are capable of a larger and narrower interpretation. If the expression "used" is construed strictly it could be taken as connoting or requiring the active employment or the actual working of the machinery, plant or building in the business. On the other hand the wider meaning would include not only cases where the machinery or plant are actively employed but also cases where there is passive user of the same in business. An asset could be said to be in use when it is kept ready for use. "

• CIT V. Geo Tech Construction Corporation (2000) 244 ITR 452 (Ker):

In the said case, the assessee purchased two tippers on March 29, 1986, and claimed depreciation allowance for the assessment year 1986-87 on the same. The Assessing Officer did not allow depreciation on the ground that the assessee had not produced any evidence to show that they were put to use before March 31, 1986.

On appeal, the Tribunal held that even if there was no actual user the fact that they were kept ready for use would be enough for grant of depreciation on the principle of passive user of the asset. Accordingly, the claim of depreciation was allowed.

On further appeal, the hon'ble High Court held as under:

"that the words "used for the purpose of the business" were capable of a larger and narrower interpretation. If the expression "used" was construed strictly it could be taken as connoting or requiring the active employment or the actual working of the machinery, plant or building in the busi-ness. On the other hand, the wider meaning would include not only cases where the machinery, plant were actively employed but also cases where there was what may be described as passive user of the same in the business. An asset could be said to be used, when it was kept ready for use.

Since the Tribunal had recorded the finding that there was positive material to show the existence of the asset at the work site, and about the passive user it could not be termed to be one without any basis or illegal. Accordingly, the claim for depreciation was allowable".

• Income-Tax Officer vs Gujarat Mini Steel Ltd. [(1987) 23 ITD 74 Ahd] [Income Tax Appellate Tribunal- Ahmedabad]

20 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. In the said case, the hon'ble Tribunal held as under:

"The short point for decision is whether on the facts and circumstances of the case the assessee was entitled for depreciation on the building, plant, machinery and electric installations. The assessee was running the mini steel plant. The mini steel plant started its commercial production in December, 1974, and it was in operation up to 6-8-1975. The steel market was not favourable to the assessee and further there was a labour problem.

Consequently the plant was closed from 7-8-1975 to April, 1978. It was restarted in May, 1978. The D. R. has challenged two things; firstly the plant did not close due to the labour problem and secondly it is not correct that the plant was restarted in May 1978. Both facts were examined and it was found that Cl'T (AJ has given a finding that the plant was closed also due to labour problem and a finding has been given by the Accountant Member that the plant reopened in May 1978. No contradictory materials were available so that the said findings can be reversed. Therefore, on these facts the question whether the assessee was entitled for depreciation is to be answered .

The case of the assessee is that there was a temporary lull when the business activities of the assessee were suspended and the same were restarted when the position was favourable to it. Under the circumstances, the position even after the previous year will have to be taken into consideration in order to judge whether there was a temporary suspension of the business or the assessee had its intention to close the business for ever. It is clear from the activities of the assessee that the business was temporarily suspended due to unfavourable steel market and labour problem. After two years when the labour problem was over and the steel market was little favourable to the assessee the factory was reopened. Therefore, it is clear that the active use of the plant and machinery, though was not during the years, the passive use was and it cannot to be said that the plant was closed and, therefore, the plant and machinery etc. were not entitled for depreciation. Several decisions had been cited from both the sides. After considering the arguments and those decisions it is clear from the facts that there was only a temporary suspension of the business and, therefore, the assessee was entitled for depreciation for the passive use of its building, plant, machinery and electric installations. "

2.7. Hence, it is an accepted principle of law, as has been enunciated by the decisions, as relied on as above, that even if there was no actual user of the plant & machineries, the fact that they were kept ready for use would be enough for grant of depreciation on the principle of passive user of the asset.

21 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. 2.8. In the appellant company's case, admittedly there was a temporary lull owing to prolonged labour dispute due to which the business activities were suspended from Assessment year 2005-06 onwards. Lateron, during the financial year 2008-09, the assessee received a proposal from M/s.Shree Hanuman Sugar & Industries Ltd. for usage of the Plant & Machinery of the assessee company installed at Motihari. The assessee, immediately, getting an opportunity for temporary use of the plant, agreed to the terms and conditions for usage of its Plant & Machinery by M/s.Shree Hanuman Sugar & Industries Ltd. for a mutually settled consideration and agreed to keep the Plant & Machinery in "ready to use" condition. As per the above agreement, M/s.Shree Hanuman Sugar & Industries Ltd. started paying machinery usage charges from the financial year 2009-10 onwards as against usage of the plant & machineries of the assessee company in its production.

Therefore, it is clear that even though there was no active use of the plant and machinery, there was passive use by keeping the same in "ready to use" condition and thus, the assessee is rightfully entitled to claim depreciation on the same.

2.9. Again, it is relevant to note at this juncture that the provisions of sec.32 of the Act does not mandate usage of the asset by the assessee itself. As long as the asset is utilised {or the purpose of business of the assessee, the requirement of section 32 of the Act will stand satisfied, notwithstanding non-usage ofthe asset itselfby the assessee.

2.1 O. To buttress the argument, reliance is placed on the judgment of the Apex Court in the case of I.C.D.S. Ltd. v. CIT [TS-8-SC-2013] wherein it was explicitly held that as per sec.32 of the IT Act, a "Financer" satisfies the "ownership" & "user" test for depreciation.

It is to be noted here that in arriving at this conclusion, the SC relied upon the decision in the case of Shaan Finance Pvt. Ltd. [231 ITR 308 (SC)] in which case it was clarified that the phrase 'used for the purpose of business' does not necessarily require use of the asset by the assessee itself.

2.11. In light of the aforesaid judicial pronouncement it is clear that in a leasing transaction, the lessor, who is the owner of the asset, is entitled to depreciation under section 32 of the Act.

2.12. Now, applying the same analogy to the facts of the present case, it is submitted that the plant & machinery at Motihari of the assessee company were agreed to be used by M/s.Shree Hanuman Sugar & Industries Ltd. for a mutually settled consideration. Further, as per the above agreement,

22 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. fixed asset usage charges were paid by M/s.Shree Hanuman Sugar & Industries Ltd. from the financial year 2009-10 onwards as against usage of the same in its production. Such income derived from the leasing business of the assessee has been disclosed as business income in the Assessment years 2010-11 & 2011-12 and has been accepted as such by the Department in those years. Relevant copies of computation of total income for Assessment years 2010-11 & 2011-12 are enclosed at page nos. 41-48 of the Additional Plb, in this connection.

Reference here is further invited to relevant extracts of Memorandum of Association of the assessee company as enclosed at page nos. 49-54 of the Additional Plb. Perusal of Clause 11 of the main objects of the Memorandum reveals that leasing out of plant & machineries is one of the business activities of the assessee company.

2.13. As such, considering the above, the assessee would like to submit that the claim of depreciation on plant & machinery at Motihari which was kept "ready for use" due to temporary lull in the business owing to prolonged labour dispute and was actually used subsequently by giving the same on hire against receipt of hire charges, is totally admissible within the four corners of law.

Ground No.2 &3

3.1. In course of the assessment proceeding, the assessee was asked to produce detailed bills and vouchers substantiating the above claim.

3.2. In regard to the above, the assessee owing to the prolonged labour dispute going on in the factory as a result of which every record could not maintained properly, expressed his inability to produce all the bills & vouchers relating to the relevant assessment year, under consideration. However, the assessee produced some bills & vouchers which were readily available.

3.3. In view of the above, the Aa in spite of acknowledging such expenses to be genuine and correct in the Assessment order passed by him, disallowed 5% of the expenses claimed on an ad- hoc/estimated basis, on the alleged ground of lack of supporting evidences.

3.4. On further appeal, the Ld. CIT(A) further upheld the contention of the AO and confirmed the aforesaid disallowance.

23 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. 3.5. In view of the above, it is clear that the Ld. CIT(A) did not provide any distinct reason for the disallowance. Neither his decision was based on any material evidence to justify the disallowance. Even the Ld.CIT(A) has not doubted the genuineness of the expense but has merely sustained disallowance @ 5% of the expense on an ad hoc basis, which please note.

3.6. The assessee has already expressed the inability to produce all the bills & vouchers due to lack of maintenance of old records owing to the prolonged labour dispute going on, which fact is not disputed. Again, it is to be noted in this regard that accounts of the assessee are duly audited by a Chartered Accountant and as such, all expenditures are already vouched and verified. Therefore, no disallowance can be made on estimate basis merely based on surmises and conjectures.

3.7. In support of the above, reliance is placed on the following judicial decisions:

• The judgment of the Hon'ble ITAT, Delhi Bench 'C' in the case of Assistant Commissioner of Income Tax vrs. Ganpati Enterprises Ltd., IT Appeal No. 6112 (Delhi) of 2012 (copy enclosed at page nos. 55-58 of the Add!. Plb), whereby the Tribunal upheld the deletion of disallowance by the Ld. CIT(A). It was held:

"On the perusal of the Profit and Loss Account, it is observed that the assessee has debited expenses under various heads. Assessee also produced bills & vouchers for verification of the same. On verification, some of the expenses were found to be unverifiable for want of complete bills and vouchers. Hence a lump sum disallowance of Rs. 5,00,000/- on estimate basis is made to cover up all possible leakages.

On appeal Id. CIT(A) has deleted this disallowance on the ground that Id. Assessing Officer has not properly examined the books of account and not demonstrated as to how the expenses are not admissible to the assessee.

Therefore, if we weigh the finding of the Assessing Officer extracted (Supra) vis-a-vis the view taken by the Id. CIT(A) which is a higher authority in the pedestal of the hierarchy, the scale would tilt in favour of the ld.. first appellate authority, no interefere is called for in the order of the Id. CIT(A) on this issue, the first ground of appeal is rejected. "

• Further, the Hon'ble ITAT Kolkata in the case of Joint Commissioner of Income Tax v. I.T.C Ltd., reported in 299 ITR (A.T.) 341, held:

"that while disallowing 10 per cent. of expenditure, the Assessing Officer had not brought any material evidence on record to justify the

24 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. disallowance that such expenditure had resulted in benefit to a third party or had not been made by the assessee for its genuine business needs. The assessee had submitted the details of expenditure relating to sponsorship for organizing various events for the promotion of different brands of cigarettes manufactured by it. The assessee had shown the expenditure of Rs. 172.60 crores on account of advertisement expenses which included Rs. 133 lakhs as sales promotion expenses. The assessee-company had made an expenditure on the sponsorship of various events like golf, polo, football, cricket, racing, badminton, etc. for the purpose of advertisement of its product. The Department had not disputed the identical expenditure in any of the previous year and the auditors had also pointed out that such expenses were not related or incidental to the business needs of the assessee. The action of the Assessing Officer in disallowing 10 per cent. of such expenditure without material evidence on record was not justified."

3.8. Furthermore, reliance for the same can be placed on the following judgments of the Hon'ble Supreme Court of India:

3.9. In the backdrop of the above judgments, the assessee would like to submit that its case here stands clearly covered by the above mentioned decisions.

3.10. As such, it is being humbly prayed before Your Honours, that the disallowance of 5% of miscellaneous expenditure on an adhoc basis, may kindly be deleted.

judgments :-

i) Norplex Oak India, 198 TAXMAN 0470; “Conclusion : Assessee is entitled to get the benefit of depreciation under s.32 notwithstanding the fact that there was no operation

25 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. carried out at the factory during the relevant previous year and the plant and machinery could not be used during the assessment year due to unfavourable law and order situation in the State of Jammu & Kashmir.” 13. On the other hand for the revenue has primarily reiterated the stand

taken by the AO, which we have already noted in our earlier para and is

not being repeated for the sake of brevity.

on record, we are of the view that there is merit in the submissions of the

assessee, as the propositions canvassed by the ld. AR for the assessee

are supported by the facts narrated by him. Ld. AR has pointed out that

the assessee is entitled to get the benefit for depreciation u/s.32 even if

there was no operation and no manufacturing activity in the assessee’s

factory. The claim of depreciation on plant and machinery should not be

denied based on facts that the plant and machinery could not be used by

the assessee during the previous year.

estimated disallowance made by the AO. Ld. AR for the assessee has

submitted that the AO has made adhoc and estimated disallowance of

Rs.24,600/- @5% of Rs.4.92 lakh on account of miscellaneous expenses.

The addition made by the AO is purely on assumption, surmises and

guess and without bringing any cogent evidence on record. Ld. AR for the

assessee also purely on assumptions and presumptions on the alleged

ground that the assessee was unable to produce all the bills and

26 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd. vouchers. The adhoc disallowance made by the AO on guess and surmise without rejecting books of account of the assessee is not tenable.

27 ITA No.1950&19510/Kol/2010 M/s. Eastern Sugar & Industries Ltd.

उप/सहायक पंजीकार (Asstt. Registrar) आयकर अपील�य अ�धकरण, कोलकाता / ITAT, Kolkata