DCIT 2(1), MUMBAI vs. DIGHI PORT LTD, MUMBAI

It has been brought to our notice that appeal filed for A.Y. 2007-08 IS LATE BY 18 DAYS. During the course of hearing, the ld.counsel of the assessee drew our attention on the petition filed seeking condonation of delay which was duly supported by an affidavit from the managing director of the assessee company deposing the facts on oath. We have gone through the petition for condonation of delay as well as he affidavit. No serious objection was made by 3 ITA 286/Mum/2012 ITA 287/Mum/2012 CO 270/Mum/2012 ITA 738/Mum/2012 th4e ld.DR in this regard and nothing wrong was pointed out in the averments made in the affidavit. We find that in the interest of justice the appeal should be admitted and, therefore, delay of 18 days is condoned and he appeal is taken up or adjudication. 287/Mum/2012 – A.Ys. 2006-07 & 2008-09 3. First we shall take up revenue’s appeal for A.Y. 2006-07 in ITA No. 286/Mum/2012 and For A.Y. 2008-09 in No.1 of assessee’s appeal in ITA No.738/Mum/2011 for A.Y. 2007-08. In these revenue’s appeals and ground 1 of assessee’s appeal for A.Y. 2007-08,an identical issue has been raised with regard to disallowance of depreciation. The brief background is that assessee had claimed depreciation, but the same was disallowed by the assessing officer on the ground that the assessee had shown capital work-in-progress. But no income on account of project was offered. Under these circumstances, the Assessing Officer disallowed the depreciation and capitalised the same.

It was brought to our notice that similar issue had come up before the Tribunal in the immediately preceding year i.e. A.Y. 2005-06 wherein the Tribunal has allowed the benefit of depreciation vide its order dt. 16-0-7-2014 in ITA No.609/Mum/2010.

Per contra, the ld.DR relied upon the orders of A.O. It was submitted that even if the depreciation has been allowed in A.Y. 2005-06, the relevant facts need to be examined in the years before us.

We have gone through the orders of lower authorities as well as orders of Tribunal for A.Y. 2005-06. It is noted that in A.Y. 2005-06 the Tribunal allowed the depreciation with the following observations:

During the assessment proceedings, the A.O. noticed that the assessee had purchased new plant and machinery for Rs.l 0, 12,5001- and claimed depreciation of Rs.29,341/-. On further verification, the A.O. noted that MMB had written a letter to BLICL for payment of Rs.10,12,500/- for purchase of radar based AIS equipment from electronic lab. The A.O. thus concluded that the plant and machinery belonged to BLICL and not to the assessee. The assessee had simply brought the asset in balance-sheet and claimed depreciation which was not allowable. Accordingly, he has treated the amount of Rs.10,12,500/- as unexplained investment u/s. 69 and added it to the income of the assessee. He also disallowed the claim of depreciation on the said machinery.

During the course of hearing before us, the ld.counsel of the assessee fairly accepted that facts in these years may be verified. Under these circumstances, we sent this issue back to the file of the Assessing Officer with th direction to Assessing Officer to verify the order of A.Y. 2005-06 after making requisite verification of facts. The Assessing Officer shall give adequate opportunity of hearing to the assessee. The assessee shall submit requisite details an documentary evidence to enable the Assessing Officer to apply the benefits granted by the Tribunal in A.Y. 2005-06. It was also contended by the ld.counsel that in A.Y. 2008-09 there was no claim of depreciation and, therefore, question of disallowance did not arise. The assessee is free to raise all legal and factual issues before the Assessing Officer. The Assessing Officer shall decide this issue afresh after taking into account the judgement of the Tribunal and other factual material as may be brought on record by the assessee.

Thus revenue’s appeals are allowed for statistical purpose and ground No.1 of assessee’s appeal may also be treated as allowed for statistical purpose.

Now we shall take up remaining grounds in assessee’s appeal for A.Y. 2007-08.

Ground No.2: In this ground, the assessee has challenged the action of lower authorities in making disallowance of preoperative expe3nses o Rs.5,77,901/- by treating it as capital expenditure. In this regard, it was submitted by the ld.counsel of the assessee that this claim was made for the first time in .Y. 2004-05 wherein it was allowed in order u/s 154 vide order dt 14-2-2007. It was allowed by the Assessing Officer in A.Y. 2005-06 also in the order passed u/s 143(3) dt 29-03-2007. It was disallowed by the Assessing Officer in A.Y. 2006-07,but subsequently, the CIT(A) allowed it as preoperative expenses u/s 35D vide order dt 3-10-2011. It has been further stated at bar that no appeal has been filed by the revenue against the order of CIT(A). The ld. Ld. Departmental Representative for the Revenue did not controvert the factual submissions made by the ld.counsel.

We have gone through the orders of lower authorities. It is noted by us that this claim has been consistently allowed by the revenue in all the preceding years. It is noted that the Ld. CIT(A) allowed this claim in A.Y. 2006- 07 vide his order dt 3-10-2011 with the following observations:-

It was submitted by the ld.counsel that Rule 8D was not applicable for A.Y. 2007-08 in view of judgement of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd 328 ITR 81 (Bom). It was further submitted that no expenses were incurred for earning exempt income. It was submitted that the perusal of the Profit & Loss Account shows that in fact no expenses have been claimed in the Profit & Loss Account. The expenses deducted in Profit & Loss Account are mainly preoperative

We have gone through the facts of this case. We find force in the arguments of the ld. Counsel. The perusal of Profit & Loss Account shows that the assessee has mainly debited preoperative and preliminary expenses. There is no scope for making disallowance u/s 14A. Therefore, disallowance made by the Assessing Officer is directed to be deleted. The additional ground raised by the assessee is allowed.

Now we shall take up the cross objection filed by the assessee for assessment year 2008-09 in ITA No. 2187/Mum/2012.

Grounds 1 & 2 with regard to depreciation have already been decided in earlier part of our order.

In grounds 4 to 6, the assessee has challenged the action of lower authorities in making disallowanc3e u/s 14A. It is noted from the assessment order that disallowance has been made u/s 14A for an aggregate amount of Rs.21,47,578 comprising of the following three components:

During the course of hearing before us, it was submitted by the ld.counsel that the disallowance was factually incorrect and contrary to law. On the basis of submissions made by the ld.counsel we find that direct expenses amounting to Rs.1,58,016 has been disallowed by the assessee himself suo motto in the computation sheet. Therefore, the disallowance made by the Assessing Officer has lead to double disallowance; hence disallowance with regard to direct expenses is deleted.

With regard to disallowance on account of interest, it has been seen that the own funds of the assessee are more than Rs.177 crores whereas investments made in tax free securities is around Rs.10.22 crores. In the last year the amount of investment was around Rs.12.71 crores. Thus, investment in this year has decreased and no fresh investment has been made in tax free securities. Under these circumstances, we find that disallowance of interest should not have ben made in view of judgement of Reliance Utilities & Power Ltd 313 ITR 340 (Bom) and HDFC Bank Ltd (ITA No.330 o 2012). These facts have not been disputed by the ld.DR. Therefore, keeping in view the facts of this case and law clarified by the 10 ITA 286/Mum/2012 ITA 287/Mum/2012 CO 270/Mum/2012 ITA 738/Mum/2012 Hon’ble Bombay High Court, we find that disallowance of interest is not sustainable and the same is directed to be deleted.

With regard to the disallowanc4e on account of indirect expenses computed @0.5% it is noted by us that the assessee had suo motto made disallowance of the expenses which, according to the assessee, pertained to the earning of exempt income. The Assessing Officer has, nowhere, in the assessment order recorded any finding that expenses allocated by the assessee are factually not correct. No satisfaction has been recorded by the Assessing Officer in the assessment order that books of account and other records submitted by the assessee were not correct. It has not been mentioned anywhere in the assessment order that actual expenses incurred for earning the exempt income were more than the amount suo motto disallowed by the assessee. Under these circumstances, we find that the order passed by the Assessing Officer was not in accordance with law and facts and, therefore, the disallowance on account of indirect expenses is also directed to be deleted.

Ground 7 has not been pressed before us, and therefore, the same is dimissed.

In the result, revenue’s appeals are partly allowed, for statistical purpose and assessee’s appeal is partly allowed for statistical purpose and the cross objection filed by the assessee is allowed.