M/S. INDIAN SEAMLESS STEELS & ALLOYS LTD. vs THE JT CIT S.R.19,

Income Tax Appellate Tribunal, “I” BENCH, MUMBAI

Before: SHRI SAKTIJIT DEY & SHRI RAJESH KUMAR

For Appellant: Shri Rajan Vora

For Respondent: Shri B.C.S. Naik a/w, Shri R.M. Madhavi

PER BENCH

These cross appeals pertaining to assessment year 1998–99, 1999–2000 and 2001–02, are directed against separate orders of the learned Commissioner (Appeals)–X, Mumbai.

ITA no.2214/Mum./2005 – Assessee’s Appeal

The only ground raised by the assessee is in relation to depreciation of ` 29,84,50,639 computed by the Assessing Officer while completing the assessment.

Brief facts are, the assessee a public limited company is engaged in manufacturing of steel. For the assessment year under

4 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) consideration, assessee filed its return of income on 25th November 1998, declaring loss of ` 18,81,57,930. During the assessment proceedings, while verifying the return of income and audited statement of account, the Assessing Officer noticed that assessee had not claimed depreciation on assets. When called upon to explain the reason for doing so, it was submitted by the assessee that depreciation is to be claimed at the option of the assessee and cannot be thrust upon it. In support of such contention, assessee relied upon the decision of the Hon'ble Supreme Court in CIT v/s Mahendra Mills Ltd., [2000] 243 ITR 56 (SC). However, in response to the query raised by the Assessing Officer, assessee furnished the details of depreciation allowable under the Act. The Assessing Officer, after verifying the factual details observed, the assessee returned the loss of ` 18,81,57,930, before claiming depreciation under section 32 of the Act. He further noticed, the assessee was having huge unabsorbed depreciation and business loss to be carried forward. He, therefore, was of the view that the reason for not claiming depreciation was due to the fact that unabsorbed depreciation cannot be carried forward for set–off beyond eight years and keeping that in mind the assessee wanted to avail depreciation as and when it wanted on the gross block asset. The Assessing Officer, however, did not agree with the claim of the assessee. He was of the view that profit or gain of business or profession is to be worked out in terms of section 28 of the Act. He observed, section 29 of the Act provides that the profits or gain of business or profession as referred to in section 28 shall be computed in accordance with the provisions of section 30 to section 43D of the Act. He further noted that on verification of record, it was found that the assessee had claimed depreciation till assessment year 1996–97 and from 1997–98, he was not claiming. According to Assessing Officer, use of the word “shall” in section 32(1) of the Act makes it

5 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) mandatory to compute depreciation and no discretion is left either to the assessee or to the Assessing Officer. The Assessing Officer also observed that the ratio laid down by the Hon'ble Supreme Court in case of Mahendra Mills ltd. (supra) will not be applicable as it was prior to the amendment of section 34(1) of the Act which was deleted w.e.f. 1st April 1988. Thus, the Assessing Officer finally concluded that the assessee since is eligible for depreciation on fixed assets, the same is allowable. Accordingly, he allowed depreciation of ` 29,84,50,635. Being aggrieved with the aforesaid decision of the Assessing Officer, assessee challenged the same in appeal preferred before the learned Commissioner (Appeals).

The learned Commissioner (Appeals), however, upheld the decision of the Assessing Officer.

Learned Authorised Representative submitted before us, whether to claim depreciation or not on a particular asset, is the option of the assessee and the benefit of depreciation cannot be thrust upon the assessee by the Department. In support of such contention, he relied upon the decision of the Hon'ble Supreme Court Mahendra Mills Ltd. (supra). Learned Authorised Representative also submitted, as per the provisions of section 32, existing at the relevant point of time, the assessee had option to decide whether to claim depreciation or not. If the assessee did not desire to claim depreciation, it cannot be forced upon the assessee. In this context, referring to Explanation 5 to section 32 as introduced by the Finance Act, 2001, he submitted, under the said explanation allowance of depreciation was made mandatory irrespective of the fact whether assessee has claimed or not. However, he submitted, such amendment would be effective from

6 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 1st April 2002, and not applicable to the impugned assessment year. For such proposition, he relied upon the following decisions:–

i) CIT v/s Silvassa Industries Ltd., [2013] 36 Taxmann.com 280 (Bom.); ii) CIT v/s Kerala Electric Lamp Works Ltd., [2008] 261 ITR 721 (Ker.); iii) CIT v/s Friends Corporation, [1989] 180 ITR 334 (P&H) iv) CIT v/s Sree Snehavalli Textiles Pvt. Ltd., [2003] 259 ITR 77 (Mad.); and v) Parksons Press Ltd. v/s ITO, [2007] 12 sot 128 (Mum.).

Further learned Authorised Representative submitted, assessee has not claimed depreciation in assessment year 1997–98, which was evident from the return of income filed by the assessee. He submitted, the Assessing Officer being conscious of the fact that the assessee has not claimed any depreciation also completed assessment accepting that fact. He submitted, when the Department has adopted a particular view in the earlier assessment year, the same could not be changed in the subsequent years on identical facts. For such proposition, he relied upon the decision of the Hon'ble Supreme Court in Radhasoami Satsang v/s CIT, [1992] 193 ITR 321 (SC).

Learned Departmental Representative, however, contesting the claim of the assessee submitted, assessee claimed depreciation on the assets in the earlier assessment years, therefore, he cannot stop claiming in the impugned assessment year. Learned Departmental Representative submitted, in view of the provisions contained under section 32 of the Act, which uses the word “shall” grant of depreciation is mandatory. He submitted, the assessee cannot use the depreciation for tax saving purpose. For such proposition, he relied upon the

7 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) decision of the Hon'ble Punjab & Haryana High Court in Mittal Belting & Machinery Stores v/s CIT & Anr. [2002] 253 ITR 341 (P&H).

We have considered the submissions of the parties and perused the material available on record. Undisputedly, from the assessment year 1997–98, the assessee had not claimed depreciation on assets for whatever may be the reason. It is also accepted that in assessment year 1997–98, the Assessing Officer did not compute depreciation of assets while completing the assessment. The issue before us is whether grant of depreciation is mandatory under the provisions of section 32 as it stood at the relevant point of time or it was at the option of the assessee. On a careful reading of section 32(1), it appears that though the expression used there is “deduction shall be allowed”, but the expression “shall” used will not make allowance of depreciation mandatory. This is because of the fact that by Finance Act, 2001, Explanation 5 was inserted to section 32 which reads as under:– Explanation 5.—For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; 9. On a plain reading of the aforesaid Explanation–5, it is clear that grant of depreciation became mandatory irrespective of the fact whether the assessee has claimed the deduction or not while computing the total income. However, this provision is effective only from 1st April 2002 and not retrospectively, as held in the decisions relied upon by the learned Authorised Representative. Hence, in our view, it will not apply to the impugned assessment year. Thus, reading of the Explanation in the context of the provision of section 32(1), as it existed earlier, it becomes clear that had it been the intention of the legislature to make allowance of depreciation mandatory, they would

8 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) not have brought Explanation–5 to section 32(1) w.e.f. 1st April 2002 only. Therefore, in our view, the conclusion drawn by the Departmental Authorities that the expression “shall” used in section 32 is mandatory is not correct and cannot be a correct interpretation of the statutory provisions. Moreover, in case of Mahendra Mills Ltd. (supra), the Hon'ble Supreme Court has laid down the proposition that provisions for claiming of depreciation is for the benefit of the assessee, hence, if the assessee does not wish to avail the benefit for some reason, the benefit cannot be forced upon the assessee as it is for the assessee to see if the claim of depreciation is to his advantage. The Hon’ble Madras High Court in case of CIT v/s Sree Senhavalli Textiles Pvt. Ltd. [2003] 259 ITR 77 (Mad.) and CIT V/S Aircel Ltd. [2008] 296 ITR 85 (Mad.), following the decision of Mahendra Mills Ltd. (supra) expressed similar view. In our view, the aforesaid principle laid down by the Hon'ble Supreme Court and Madras High Court will apply to the facts of the present case. The decision relied upon by the learned Departmental Representative is not applicable to facts of the present appeal. In the aforesaid view of the matter, we hold that in the absence of any claim of depreciation by the assessee, it cannot be thrust upon it by the Assessing Officer. Accordingly, we direct the Assessing Officer to compute income of the assessee after withdrawing depreciation granted to the assessee. Ground raised by the assessee is allowed.

10.

In the result, assessee’s appeal is allowed.

ITA no.2050/Mum./2005 – Department’s Appeal Department has raised two effective grounds.

11.

In ground no.1, Department has challenged the decision of the learned Commissioner (Appeals) in allowing expenditure of `

9 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 6,32,80,792, claimed by the assessee on account of Up Stream Rolling Mills (USRM) trial run expenditure.

12.

Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited an amount of ` 4,68,78,462 as USRM trial run expenditure and interest on working capital till trial run of ` 1,64,02,336. When called upon to justify its claim, it was submitted by the assessee that during the year under consideration, company replaced the PSW rolling mill with a four stand upstream rolling mill. It was submitted, earlier the rolling was done with the help of PSW rolling mill and 8 stand down stream rolling mill (DSRM). The assessee submitted, the trial run expenditure represent excess of stock of products rolled through USRM during the period from 2nd August 1997 to 15th September 1997, over sales realisation of such product. The assessee submitted, the stocks normally includes costs like raw materials, consumables, power and fuel, labour, processing costs, selling expenditure, interest cost, etc. It was submitted, steel round manufacturing business was already set–up in earlier years, hence, trial run expenses is deductible as revenue expenditure. The Assessing Officer, however, did not find merit in the submissions of the assessee. He was of the view that trial run expenditures are capital in nature as such, expenditures are inevitable for commissioning the plant and machinery. According to him, untill the plant is ready for commercial production, the expenditure incurred up to that point of time should be capitalised as the cost of land. Accordingly, he disallowed the expenditure of ` 6,32,80,798. The assessee challenged the disallowance before the learned Commissioner (Appeals).

10 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 13. Learned Commissioner (Appeals), after considering the submissions of the assessee in the light of the facts and material on record noticed, the issue has already been decided by his predecessor–in–office in assessee’s own case for assessment year 1996–97. Relying upon the said order, learned Commissioner (Appeals) allowed assessee’s claim.

14.

We have considered the submissions of the parties and perused the material available on record. Both the learned Counsels agreed before us that the issue is covered by the decision of the Tribunal in assessee’s own case for the assessment year 1996–97, wherein the Tribunal confirmed the order of the learned Commissioner (Appeals) by allowing assessee’s claim of deduction. On a perusal of the aforesaid order of the co–ordinate bench in ITA no.6146/Mum./2002 and another, dated 4th March 2016, it is observed, the Tribunal while deciding the issue held as under:–

“12. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited judgment of various High Courts and also the relevant material placed on record. On perusal of the CIT (A)‟s order, we find the CIT (A) discussed the issue at length before deciding the issue in favour of the assessee. Para 4.3 of his order is relevant in this regard. Considering the significance and also for the sake of completeness of this order, the said para 4.3 is extracted as under:- “4.3 In my considered opinion, the finding recorded by the AO is without taking into consideration the actual facts obtaining in the appellant's case as also the nature of the appellant's business. It is seen that in the appellant's case no new business has been set up. The appellant undisputedly is engaged in the same line of forging business ever since the financial year 1993-94. The business has been that of rolling steel bars right from the year 1993-94. Sine, the appellant found that the existing process of rolling steel bars was falling short of reaching the desired level of specifications another machine namely downstream - rolling mill was installed. This machine was obviously a part and parcel of the appellant's existing plant and at the most it can be described as an

11 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) extension of the existing manufacturing activity. No new line of business has come into existence and only the already existing manufacturing process has been improved upon. The AO has over looked these aspects completely and has also not controverted the basic facts projected by the appellant that the machine in question is installed in the same premises of existing business and it is being managed by the same person in charge of production and the same managerial staff. The AO has also not considered that the stream rolling process is under the same existing administrative control and the production is also financed from the same existing pool of working capital funds. In other words, the AO has failed to appreciate that the improvised technique of production is a part and parcel of the existing business. In the appellant's case it is not a fact that a new business is in the process of being set up and there are no preliminary expenses involved. The nature of the expenses also shows that there is no capital expenditure involved. These expenses relate to production in as much as these have been incurred in the purchase of raw materials, consumable items required in the process of production, electricity consumption in the production activity, repairs and processing charges. Even if the expenses relate to trial run, the same in my considered opinion, constitute revenue expenditure in view of the fact that the trial run does not relate to any new line of the business and it is in respect of an existing manufacturing activity. The assessee's business constitutes the same business and there was an inter- connection, inter-lacing and inter dependence and unity between the existing business and the machine installed for bringing about improvement in the process of production. The AO has missed to take note of the foregoing facts and circumstances and even the appellant‟s submissions during the course of assessment proceedings have not been incorporated in the body of the impugned order or assessment. In view of what is discussed above, it is held that the expenses in question are allowable as revenue expenditure. AO is directed to allow the expenses of Rs.26,30,65,934/-.” 13. Further, we have also perused the cited judgments of various High Courts relied on by the Ld Counsel for the assessee. On perusal of the said judgments, we find the same are relevant for the proposition that “where the assessee is engaged in the business of steel rolling mill, which demands frequent replacement of rolls, the relatable expenditure constitutes revenue expenditure”. Considering the same, we are of the opinion, the decision taken by the CIT (A) is fair and reasonable and it does not call for any

12 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) interference. Accordingly, Ground no.2 raised by the Revenue is dismissed.”

15.

There being no material difference in facts brought to our notice, following the aforesaid decision of the co–ordinate bench of the Tribunal, we uphold the order of the learned Commissioner (Appeals) by dismissing the ground raised by the Department.

16.

In ground no.2, the Department has challenged the decision of the learned Commissioner (Appeals) in accepting assessee’s claim of deduction on account of lease rental payment of ` 2,29,11,128.

17.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited a sum of ` 5,06,34,206, towards payment of lease rentals. Noticing that similar lease rental claimed by the assessee in the assessment year 1996–97, was disallowed by the Assessing Officer. He followed the same and disallowed the amount of ` 2,29,11,128. Being aggrieved of such disallowance, the assessee preferred appeal before the learned Commissioner (Appeals).

18.

The learned Commissioner (Appeals) noticed that the main reason on which the Assessing Officer disallowed lease rental is that sales and lease back transactions were entered with group companies. However, it was submitted by the assessee that the Assessing Officer’s observations that lease transaction was not genuine is without any basis considering the fact that lessors have paid the considerations to the assessee company. It was also stated, assessee has also paid lease management fee and lease rentals. The learned Commissioner (Appeals) after considering the submissions of the assessee and noticing that the issue has been decided by his predecessor–in–office

13 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) in assessee’s favour in assessment year 1996–97 followed the same and deleted the addition made by the Assessing Officer.

19.

We have considered the submissions of the parties and perused the material available on record. Learned Counsel appearing for both the parties agreed that the issue is squarely covered by the decision of the Tribunal in assessee’s own case for assessment year 1996–97. On a perusal of the order dated 4th March 2016, in ITA no.6146/Mum./ 2002, it is observed, the Tribunal while dealing with identical issued has upheld the decision of the learned Commissioner (Appeals) observing as under:–

“18. We have heard both the parties and perused the orders of the Revenue Authorities as well as the cited judgments of the various High Courts and the relevant material placed before us. It is an undisputed fact that the assessee sold some assets to its group concerns and leased back the same. During the year, assessee paid a sum of Rs. Rs.5,16,31,914/- on account of lease rent. The said lease rent represents two segments ie (1) an amount of Rs. 2,79,18,351/- paid to group concerns and (2) an amount of Rs. 2,37,13,563/- was paid to third parties viz, (i) Infra Structure Leasing & Finance Co. Ltd (Rs. 1,48,50,000/-); (ii) Kotak Mahindra Finance Ltd (Rs. 3,51,929/-) and (iii) others Rs. 85,11,634/-). During the assessment, AO doubted the transaction between the assessee and its group concerns, not with the third parties. But, in the assessment, AO made addition of Rs. 5,16,31,914/- by bringing the said two segments of the lease rent paid by the assessee instead of the amount paid to its group concerns ie Rs. 2,79,18,351/-. On this issue, CIT (A) observed that the sale and lease back transactions are legally allowable and there is statutory prohibition / bar on two parties to enter into agreement with certain terms and conditions including the risk factor by mutual consent. He also observed that the assessee did not sell the assets to its sister concerns at higher value. Basing on the above observations, CIT (A) held that the sale and lease back transactions of the assessee cannot be held as non-genuine and deleted the total addition of Rs. 5,16,31,914/-. It is the case of the Revenue that where there is no genuine sale of equipment by the assessee (lessee) to its sister concerns (lessor), the lease agreement entered by them cannot be considered as a genuine transaction. Revenue is critical about „certain terms‟ and

14 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) conditions of the lease agreement and also about the risk factor of the assets. As per the Revenue the lease transaction is nothing but a finance transaction / loan transaction and the assets were held in the name of the lessors only for the purpose of security of the loan given. Hence, the lease rent paid by the assessee company is nothing but the repayment of loan finance taken from the lessors. Per contra, the case of the assessee is that when the sale and lease back transactions are accepted by the Department from the lessors‟ side, the same transactions cannot be questioned by the Revenue when it comes to the lessee (assessee). After hearing both the parties and on perusal of the relevant record placed before us on this issue as well as the above narrated facts of the case, we find merit in the argument of the Ld Counsel for the assessee. In so far as the sale and lease back transactions are concerned, there no legal bar / statutory prohibition in entering into two parties with mutual consent. It is also settled law that the losses are permissible to be set-off against the capital gains. Therefore, we cannot agree with the Revenue‟s view on this point. Further, in our opinion, when the assets existed, the sale and lease back transactions cannot be held as non-genuine. The decisions relied on by the assessee are relevant for the proposition that in the absence of any material or evidence to show that the intention of the parties were different from what has been incorporated in the sale and lease back agreement and the transaction was really a sham or dubious transaction and was a colourable device, finding that the sale and lease back transaction was a colourable device is not sustainable. It is relevant to mention here that when the AO not doubted the lease rent transaction between the assessee and the third parties, why he brought the lease rent amount paid to the third parties? We cannot appreciate such type of unsustainable additions. Considering the above, we are of the opinion that the decision taken by the CIT (A) while deleting addition of Rs. 5,16,31,914/- by treating the sale and lease back transaction as genuine one is fair and reasonable and it does not call for any interference. Accordingly, Ground no.3 raised by the Revenue is dismissed.”

20.

There being no material difference in facts brought to our notice, the decision of the co–ordinate bench of the Tribunal as referred to above will clearly apply to the facts of the present case. Moreover, the Hon'ble Supreme Court in M/s. I.C.D.S. v/s CIT, [2013] 350 ITR 007 (SC), has held that such lease back transactions are permissible in law. In the present case, as evident on record, the lessor has duly

15 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) accounted for the lease rentals in their account and claimed depreciation on such leased assets. Thus, it is clear that the lease back transaction has been accepted as genuine in case of lessor. That being the case, genuineness of such transaction cannot be questioned in case of the assessee. In the aforesaid view of the matter, we do not find any infirmity in the order of the learned Commissioner (Appeals) and accordingly the same is upheld by dismissing the ground no.2 raised by the Department.

21.

In the result, Department’s appeal is dismissed.

ITA no.2215/Mum./2005 – Assessee’s Appeal

In this appeal, assessee has raised two grounds.

22.

Insofar as ground no.2 is concerned, the learned Authorised Representative submitted, on the instructions of the assessee, he did not wish to press this ground. Consequently, ground no.2, is dismissed as “not pressed”.

23.

In ground no.1, assessee has challenged computation of depreciation amounting to ` 22,22,16,012.

24.

As could be seen, this issue is similar to the issue raised by the assessee in ITA no.2214/Mum./2005, wherein, vide Para–9, we have directed the Assessing Officer to withdraw depreciation granted to the assessee. Consistent with our findings given therein, ground no.1, raised by the assessee is allowed.

25.

In the result, assessee’s appeal is partly allowed.

16 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) ITA no.2051/Mum./2005 – Department’s Appeal

In this appeal, the Department has raised three grounds.

26.

Ground no.1, is on the issue of allowance of assessee’s claim of deduction on account of lease rental.

27.

This issue is similar to the issue raised by the Department in ground no.2 in its appeal being ITA no.2050/Mum./2005, wherein, vide Para–19 and 20, we have upheld the order of the learned Commissioner (Appeals) by dismissing the ground raised by the Department. Consistent with our findings given therein, we uphold the order of the learned Commissioner (Appeals) and dismiss ground no.1, raised by the Department.

28.

In ground no.2, the Department has challenged the decision of the learned Commissioner (Appeals) in allowing assessee’s claim of deduction of ` 58,51,135, on account of debit balance written–off.

29.

Brief facts are, during the assessment proceedings, the Assessing Officer while verifying the computation of income filed along with return of income noticed that assessee has claimed deduction under section 58,51,135, on account of debit balance written–off in the books against provision of doubtful advance made in the earlier years. When called upon to justify the claim, the assessee submitted, it had entered into agreement with M/s. Voest Alpine Industrial Services, GmbH, Vales, Austria, on 11th May 1993, for introducing manufacture of various grades of steel in its plant at Jejuri. As per the agreement, the services are to be provided in three phases, Phase–1 involved payment of lump sum fee of 21.60 lakh ATS payable in three equal installments of 7,20,000 ATS. The assessee paid two installments of

17 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 7.20 lakh ATS each during the year 1993 and 1994. However, as the assessee was not satisfied with the quality of services rendered by Vales, did not pay back the advance till 31st March 1999, assessee decided to right off advances in the books of account in the previous year 1998–99. The Assessing Officer, however, did not find merit in the submissions of the assessee. He was of the view that as per section 36(2), for an amount to be written–off as bad debt, two conditions have to be satisfied. Firstly, the debt has been taken into account in computing the income of the assessee of the previous year in which the amount written off or in relevant previous year and secondly it represent money lent in the ordinary course of business of money lending business which is carried on by the assessee. The Assessing Officer observed, the amount in question was never included in the income of the assessee. Hence, the assessee is not eligible for the deduction. The assessee challenged the disallowance before the learned Commissioner (Appeals).

30.

The first appellate authority, after considering the submissions of the assessee, in the light of various decisions relied upon found that as per the facts on record, the assessee has written–off the amount of ` 58,51,135, in the books of account during the impugned assessment year. He also found that the amount in question represent the advance paid to one Austrian company for which the agreement was entered between the parties on 11th May 1993. He also found that as the arrangement between the parties did not fructify, the assessee in fact made a provision for bad debt in the year 1994–95. However, the provision was disallowed in that assessment year.

31.

The learned Commissioner (Appeals) observed, the amount of ` 58,51,135 is nothing but a trading loss of the assessee which was

18 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) incurred in the normal course of business, hence, it is allowable under section 28 of the Act. Accordingly, he allowed assessee’s claim of deduction of ` 58,51,135.

32.

Learned Departmental Representative relying upon the reasoning of the Assessing Officer submitted, since the assessee has not fulfilled the conditions of section 36(2), deduction claimed is not allowable.

33.

Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the advance made by the assessee was in the ordinary course of business. Further, the advanced amount has become irrecoverable, hence, the assessee decided to write–off the same. Therefore, the irrecoverable advance made in the course of business being nothing but loss incurred by the assessee during the normal course of business is allowable as business loss either under section 28 or 37. For such proposition, he relied upon the decision of the Hon'ble Jurisdictional High Court in I.B.M. World Trade Corporation v/s CIT, [1990] 186 ITR 412 (Bom.), and a number of other decisions.

34.

We have considered the submissions of the parties in the light of the decisions relied upon and perused the material available on record. As is evident, the Assessing Officer does not dispute the fact that the assessee has paid the amount claimed as bad debt to the Austrian company in pursuance to an agreement entered into between them and subsequently since the agreement was not acted upon, the assessee had demanded return of money. However, since the amount was not paid back by the Austrian company, it became irrecoverable. From the aforesaid facts, it is clear that the advance of money by the assessee to the Austrian company was in the normal course of its business. It is also a fact that the provisions for bad debt made by the

19 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) assessee in the assessment year 1994–95, was disallowed and added back to the income. Therefore, when in the impugned assessment year, the assessee has actually written–off the amount in its books, the assessee is eligible to claim deduction of their recoverable advance as it is in the nature of business loss. This view is supported by the decision of the Hon'ble Jurisdictional High Court in IBM World Trade Corporation (supra) and other decisions relied upon by the learned Authorised Representative. Therefore, we do not see any reason to interfere with the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Department.

35.

The next issue raised by the Department in ground no.3, relates to allowance of assessee’s claim of deduction of ` 25 lakh being professional fee paid towards re–structuring of financial loan.

36.

Brief facts are, during the assessment proceedings, the Assessing Officer noticed that assessee has debited an amount of ` 25 lakh to the Profit & Loss account. On verification, he found that the said amount paid to Indian Seamless Services Ltd., as professional fees for re–structuring assignment given to them. In response to the query raised by the Assessing Officer, it was explained by the assessee that the benefit derived by the assessee on account of re–structuring had been offered for taxation, hence, the deduction claimed is allowable. The Assessing Officer, however, did not find merit in the submissions of the assessee. He was also of the view that the expenditure incurred being capital in nature is not allowable. Accordingly, he added back the amount of ` 25 lakh. Being aggrieved of such additions, the assessee challenged the same before the learned Commissioner (Appeals).

20 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 37. Before the first appellate authority, it was argued by the assessee that the financial re–structuring has been in respect of term loans granted by various financial institutions like IDBI, ICICI, IFCI, LIC, UTI, etc., and working capital granted by the banks. It was submitted, interest on these loans were claimed and allowed as revenue expenditure. It was further submitted, the benefit derived from the re–structuring was offered for taxation and the assessee was also assessed on such income. The assessee submitted, the expenditure incurred cannot be for deriving enduring benefit. In support of such contention, the assessee relied upon a number decision.

38.

The learned Commissioner (Appeals), after considering the submissions of the assessee in the light of judicial pronouncements held that the expenditure incurred cannot be treated as capital as by virtue of such payment no new tangible or intangible asset has been created. Accordingly, he allowed assessee’s claim of deduction.

39.

Learned Departmental Representative relying upon the observations of the Assessing Officer submitted, the expenditure incurred by the assessee being capital in nature should not have been allowed.

40.

Learned Authorised Representative on the other hand referring to the copy of invoice of professional fees paid to Indian Seamless Services Ltd., submitted, such expenditure was incurred towards consultation fees for securing financial re–structuring. As there was no enduring benefit derived by the assessee, the expenditure incurred cannot be treated as capital. Learned Authorised Representative submitted, the expenditure was incurred to re–structure its existing loan so as to get the benefit of reduction in the interest cost. Learned

21 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) Authorised Representative drawing the attention of the Bench to the Profit & Loss account for the assessment year 1999–2000 submitted, as a result of such financial re–structuring, assessee derived benefit of ` 14.86 crore which has been credited as income to the Profit & Loss account. Learned Authorised Representative submitted, as the assessee has declared income derived out of the benefit of re– structuring corresponding expenditure has to be allowed. In support of such contention, he relied upon a number of decisions of Hon’ble Supreme Court as well as different High Courts, as referred to in the written notes.

41.

We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon by the assessee. On a perusal of the assessment order, it is evident that the Assessing Officer without substantiating the basis on which the expenditure incurred can be treated as capital in nature has disallowed assessee’s claim. He has not established on record that by incurring such expenditure, assessee has acquired some assets providing benefit of enduring nature. On the other hand, as demonstrated by the Assessing Officer, the consultation fee was paid for financial re–structuring of loans which has resulted in rejection of interest cost and as a consequence, assessee has derived benefit of ` 14.86 crore, which was offered as income for the impugned assessment year. That being the case, corresponding expenditure incurred by the assessee for earning such income has to be allowed as deduction. The decisions relied upon by the learned Authorised Representative also supports this view. In the aforesaid view of the matter, we do not find any infirmity in the order of the learned Commissioner (Appeals) which is accordingly confirmed. Ground no.3 raised by the Department is dismissed.

22 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited)

42.

In the result, Department’s appeal is dismissed.

ITA no.2216/Mum./2005 – Assessee’s Appeal

In this appeal, the assessee has raised four grounds.

43.

Insofar as ground no.4 is concerned, the learned Authorised Representative submitted, on the instructions of the assessee, he does not want to press this ground. Consequently, ground no.4, is dismissed as “not pressed”.

44.

In ground no.1, assessee has challenged computation of depreciation amounting to ` 16,93,78,656.

45.

This issue is similar to the issue raised by the assessee in ITA no.2214/Mum./2005, wherein, vide Para–9, we have directed the Assessing Officer to withdraw depreciation granted to the assessee. Consistent with our findings given therein, ground no.1, raised by the assessee is allowed.

46.

Ground no.2, relates to disallowance of legal and professional charges of ` 11.25 lakh.

47.

Brief facts are, from the details submitted by the assessee in the course of assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of ` 11.25 lakh being fees paid to Indian Seamless Services Ltd., for obtaining sanction for loan deferment proposal. The Assessing Officer called upon the assessee to explain why the expenditure claimed should be allowed as business expenditure. In response to the query raised by the Assessing Officer, it was submitted by the assessee looking at its financial condition, the

23 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) assessee had proposed to IDBI the lead financial institution to defer the existing re–payment schedule of term loan by two years. It was submitted, assessee availed services of ISFS for representing assessee’s case to IDBI and obtain deferment. It was submitted, IDBI ultimately sanctioned companies proposal vide their letter dated 5th March 1998 and for the services rendered by ISFS assessee paid an amount of ` 11.25 lakh. Assessing Officer, though, agreed that interest payable to financial institutions and debited to Profit & Loss account is based on the sanction of IDBI and in the absence of the sanction the company would have paid penal and compound interest on the delay / default as per original schedule. However, he observed, assessee could not submit proof of any service rendered by ISFS. He further observed, negotiation with IDBI having taken place during the financial year 1997–98 how the assessee could debit the professional charges in the impugned assessment year. Accordingly, he disallowed assessee’s claim of expenditure. Though, assessee challenged such disallowance before the first appellate authority but the learned Commissioner (Appeals) rejected assessee’s claim by holding that the expenditure does not pertain to the impugned assessment year. Further, he also observed, in the absence of requisite details, deduction could not have been allowed.

48.

The learned Authorised Representative submitted, ISFS raised the invoice for professional services rendered on 17th October 2000 and the assessee received such invoice in the financial year 2000–01 relevant to assessment year under consideration. It was submitted, the assessee has accounted the expenditure in the books of account only when it received the invoices from ISFS. He submitted, the statutory auditor also did not classify the said expenditure as prior period expenses as the same was crystallized and quantified in the

24 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) year under consideration upon receipt of the invoices. Therefore, the expenditure has to be allowed in the year in which it crystallized.

49.

The learned Departmental Representative on the other hand relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals).

50.

We have considered the submissions of the parties and perused the material available on record. As is evident, the primary reason on the basis of which assessee’s claim of expenditure was disallowed is the expenditure does not pertain to the impugned assessment year. However, as demonstrated by the assessee and which has not been controverted by the Department, ISFS raised the invoice for professional services rendered on 17th October 2000, which is within the financial year 2000–01. Therefore, only when the invoice was raised by ISFS and assessee receives it the expenditure having been quantified crystallized and the assessee has accounted for it in its books of account. That being the case, the assessee’s claim cannot be disallowed on the ground that the expenditure pertains to prior period. Therefore, we direct the Assessing Officer to allow the expenditure of ` 11.25 lakh. Ground no.2 is allowed.

51.

Ground no.3, relates to disallowance of product development expenses of ` 12,08,98,619.

52.

Brief facts are, in the course of assessment proceedings, the Assessing Officer, while verifying the audited statement of account, noticed that assessee has claimed an amount of ` 12,08,98,619, as product development expenses. When called upon to justify the claim, assessee submitted that it has commenced its manufacturing activity during the assessment year 1994–95, however, in assessment year

25 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 2001–02, though, the manufacturing activity was going on the assessee continued to develop new grades and sizes of steel bars which is the principal product of the company. It was submitted, development of new grades of steel bar and development of market for the same is an integral part of running the normal business. It was submitted, the expenditure incurred represent excess of normal production expenses like raw materials, consumables, processing expenses, etc., in respect of new grades of steel bar over sales realization, hence, the same is a normal business expenditure, therefore, allowable under section 37(1) of the Act. The Assessing Officer, however, did not find merit in the submissions of the assessee. He observed, the assessee himself admitted that it has developed new grade of steel bar. Therefore, expenditure incurred is for enduring benefit. That being the case, the assessee has rightly deferred the expenditure in the books of account. The Assessing Officer ultimately held that the expenditure being capital in nature cannot be allowed. The assessee challenged the disallowance before the learned Commissioner (Appeals).

53.

The learned Commissioner (Appeals), after considering the submissions of the assessee observed, the expenditure was not debited to the Profit & Loss account which indicates that the assessee itself has not treated the amount as expenditure of the current year. Relying upon a decision of the Tribunal, Hyderabad Bench, in TCI Finance Ltd., 91 ITD 573 (Hyd.), wherein, it was held that accrual of expenditure of income under mercantile system cannot be different under Income Tax Act and Companies Act, he held as the amount of expenditure was incurred for the development of a new product, the same cannot be allowed as deduction under section 37(1).

26 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 54. Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the deduction claimed represent excess cost of raw material, processing expenditure over sales realization of such product, hence, is allowable expenditure under section 37(1) of the Act. He submitted, product development expenses are incurred only for the modification of the existing product and not for development of any new product. He submitted, the expenditure incurred was not for purchase of plant and machinery. Hence, such expenditure does not have any enduring benefit and, therefore, should be treated as revenue expenditure. For such proposition, he relied upon the following decisions:–

i) CIT v/s Escorts Auto Components Ltd., [2010] 323 ITR 11 (P&G); ii) DCIT v/s Max India Ltd., [2006] 105 TTJ 1002; iii) M/s. Cisco Systems (I) Pvt. Ltd. v/s ACIT, ITA no.431/Bang./2010, dated 28.4.2011; iv) CIT v/s ACL Wireless Ltd. [2013] 361 ITR 210 (Del.); v) Glaxo Smith Kline Consumer Healthercare Ltd., 112 TTJ 94 (Chd.); vi) Metalman Auto Pvt. Ltd., 74 ITD 327 (Chd.); vii) Rediff.com India Ltd., 141 TTJ 679 (Mum.).

55.

Further, the learned Authorised Representative submitted, unlike Companies Act, there is no concept of deferred revenue expenditure in the Income Tax Act. The expenditure can either be revenue or capital. In assessee’s case, since the expenditure does not provide any enduring benefit, it is revenue expenditure. Learned Authorised Representative submitted, entries in the books of account are not conclusive. Allowability of any expenditure cannot be based only on

27 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) accounting system followed by the assessee. Merely because the assessee in its books of account has treated it as a deferred expenditure, it does not lose its character of revenue expenditure. For such proposition, he relied upon the decision of the Hon'ble Supreme Court in Taparia Tools Ltd. v/s JCIT, [2003] 372 ITR 605 (SC) and a number of the other decisions. Finally, learned Authorised Representative submitted, assessee had incurred similar expenditure earlier and claimed the same as revenue expenditure, which was also accepted by the Department. In support of such contention, learned Authorised Representative referred to the computation of income for assessment year 1995–96 and 1997–98 and copies of assessment orders passed for these years. Learned Authorised Representative submitted, though, principle of res judicata does not apply to Income Tax proceedings, but if a particular view has been adopted by the Department in earlier years, the said view cannot be changed in the subsequent year unless there is change in fact and law. In other words, rule of consistency should be followed by the Department. For such proposition, he relied upon the decision of Hon'ble Supreme Court in Radhasoami Satsang v/s CIT [1992] 193 ITR321 (SC).

56.

Learned Authorised Representative on the other hand, relying upon the observations of the Assessing Officer and the learned Commissioner (Appeals) submitted, expenditure incurred being capital in nature cannot be allowed.

57.

We have considered the submissions of the parties and perused the material available on record. On going through the assessment order as well as the order of the learned Commissioner (Appeals), we noticed that assessee’s claim has been disallowed primarily for two reasons. Firstly, assessee in its books of account has claimed it as

28 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) deferred expenditure and further, the expenditure incurred for development of new product being for enduring benefit of the assessee is in the nature of capital expenditure. However, as could be seen before the Departmental Authorities assessee has consistently taken the stand that the expenditure incurred was not for installation of new plant and machinery, but towards raw materials and consumables required in continuous process of development of grade and size of steel bars. Thus, before coming to a conclusion regarding the nature of expenditure whether revenue or capital, the relevant facts relating to incurring of such expenditure has to be properly examined. It has to be ascertained whether the expenditure incurred has resulted in acquisition of any asset of enduring nature or the expenditure incurred is towards purchase of raw material, consumables and processing charges in regular course of its manufacturing activities. However, these facts have not at all been examined either by the learned Commissioner (Appeals) or by the Assessing Officer as they heavily relied upon the accounting treatment given by the assessee in the books of account. It is a settled principle of law that entries in the books of account are not conclusive. A deduction or allowance cannot be allowed or disallowed only on the basis of entries in the books of account. Further, it has been submitted by the assessee that similar expenditure incurred towards product development was allowed by the Department in the earlier assessment year. This fact also requires examination. Therefore, considering the fact that the Departmental Authorities before disallowing the expenditure claimed by the assessee by treating it as capital in nature have not properly examined the relevant facts relating to the expenditure claimed, we are inclined to restore the matter back to the file of the Assessing Officer for deciding afresh after due opportunity of being heard to the assessee. It goes without saying, the Assessing Officer must consider all relevant facts

29 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) and the ratio laid down in the decision which the assessee may rely upon, pas a reasoned order. Ground no.3, is allowed for statistical purposes.

58.

In the result, assessee’s appeal is partly allowed for statistical purposes.

ITA no.2052/Mum./2005 – Department’s Appeal

In this appeal, the Department has raised two effective grounds.

59.

Ground no.1 relates to allowance of assessee’s claim of deduction of ` 23,93,495, towards expenditure incurred on watch and ward.

60.

Brief facts are, during the assessment proceedings, the Assessing Officer after verifying the details of expenditure claimed by the assessee observed that an amount of ` 23,93,495 claimed towards watch and ward expenses pertained to earlier years. In response to the query raised by the Assessing Officer, it was submitted by the assessee that as the expenditure crystallized during the year under consideration, it is allowable as deduction. However, the Assessing Officer alleging that no evidence was produced by the assessee to support the same disallowed expenditure and added back to the income of the assessee. Being aggrieved of such disallowance, assessee challenged the same before the learned Commissioner (Appeals).

61.

In the course of hearing before the learned Commissioner (Appeals), the assessee contesting the decision of the Assessing Officer submitted, the statutory auditor has not considered the expenditure as prior period expenditure as the expenditure crystallized

30 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) during the year. It was submitted by the assessee that though the expenditure pertained to the prior period but it crystallized during the year under consideration after the amount was finally settled after negotiation. Therefore, the Assessing Officer was not justified in disallowing assessee’s claim without calling for relevant and necessary evidence. The learned Commissioner (Appeals), after considering the submissions of the assessee found that the expenditure incurred crystallized during the year. Accordingly, he allowed it under section 37(1) of the Act.

62.

Learned Departmental Representative challenging the finding of the learned Commissioner (Appeals) submitted, assessee did not produce any evidence either before the Assessing Officer or before the learned Commissioner (Appeals). However, learned Commissioner (Appeals), without assigning any reason has allowed assessee’s claim.

63.

Learned Authorised Representative submitted, during the year, assessee incurred expenditure of ` 61,97,582, towards security services availed from third parties. He submitted, out of the said amount, a sum of ` 23,93,495, was paid in relation to security service availed by the assessee in the assessment year 1999–2000 and 2000– 01. However, the expenditure was quantified and crystallized during the impugned assessment year after negotiation with the third party. Learned Authorised Representative submitted, merely because an expenditure relate to a transaction of an earlier year, it does not become liability of that year unless it is quantified and crystallized in that year. The learned Authorised Representative submitted, the Assessing Officer is only disputing the year of claim and has no dispute with regard to the fact that the assessee has incurred expenditure and otherwise it is allowable as deduction. Learned Authorised

31 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) Representative relying upon the decision of the Hon'ble Supreme Court in CIT v/s Excel Industries Limited, [2013] 358 ITR 295 (SC) submitted, when the deduction is allowable to the assessee the year of claim should not be made an issue for litigation as the impact of such disallowance in a particular assessment year would be either tax neutral or negligible.

64.

We have considered the submissions of the parties and perused the material available on record. As could be seen, the Assessing Officer disallowed the deduction claimed by treating it as prior period expenditure on the reasoning that the assessee failed to prove that expenditure has crystallized during the year. However, it is a consistent claim of the assessee before the Departmental Authorities that the expenditure crystallized and quantified during the year under consideration after negotiation with the third party who provided watch and ward service. However, the documentary evidence to demonstrate that the amount crystallized during the assessment year after negotiation with the third parties have not been placed before us. The learned Commissioner (Appeals)’s order is also silent on the issue whether he has himself examined any documentary evidence to demonstrate that the expenditure pertaining to earlier assessment year was quantified and crystallized during the year under consideration after negotiation. In view of the aforesaid, we restore the matter back to the file of the Assessing Officer to verify the fact whether expenditure claimed was quantified and crystallized after negotiation with third parties. If the assessee through proper documentary evidence proves such fact, then there is no difficulty in allowing assessee’s claim of expenditure in the impugned assessment year. This ground is allowed for statistical purposes.

32 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited) 65. In ground no.2, the Department has challenged the decision of the learned Commissioner (Appeals) in allowing assessee’s claim of deduction on account of lease rental payment amounting to ` 1,14,94,544.

66.

67.

In the result, Revenue’s appeal is dismissed.

68.

To sum up, assessee’s appeal in ITA no.2214/Mum./2005 is allowed, Department’s appeal in ITA no.2050/Mum./2005 is dismissed, Assessee’s appeal in ITA no.2215/Mum./2005 is partly allowed, Department’s appeal in ITA no.2051/Mum./2005 is dismissed, Assessee’s appeal in ITA no.2216/Mum./2005 is partly allowed for statistical purposes and Department’s appeal in ITA no.2052/Mum./ 2005 is dismissed. Order pronounced in the open Court on 29.06.2016

Sd/- Sd/- SAKTIJIT DEY RAJESH KUMAR ACCOUNTANT MEMBER JUDICIAL MEMBER

MUMBAI, DATED: 29.04.2016

33 M/s. Indian Seamless Steels & Alloys Ltd. (Now known as ISMT Limited)

Copy of the order forwarded to: (1) The Assessee; (2) The Revenue; (3) The CIT(A); (4) The CIT, Mumbai City concerned; (5) The DR, ITAT, Mumbai; (6) Guard file. True Copy By Order Pradeep J. Chowdhury Sr. Private Secretary (Dy./Asstt. Registrar) ITAT, Mumbai

M/S. INDIAN SEAMLESS STEELS & ALLOYS LTD. vs. THE JT CIT S.R.19,