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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SMT. ANNAPURNA GUPTA & SHRI SIDDHARTHA NAUTIYAL
(Assessment Year: 2018-19) Gujarat Gas Ltd., Vs. Principal Commissioner of 2, Shanti Sadan Society, Income Tax-3, Opp. Parimal Garden, Ellisbridge Ahmedabad S.O., Ahmedabad-380006 [PAN No.AAECG8093Q] (Appellant) .. (Respondent) Appellant by : Shri S. N. Soparkar, Sr. Advocate & Shri Parin Shah, A.R. Respondent by: Shri A. P. Singh, CIT DR Date of Hearing 07.10.2024 Date of Pronouncement 21.11.2024 O R D E R
PER SIDDHARTHA NAUTIYAL - JUDICIAL MEMBER:
This appeal has been filed by the Assessee against the order passed by the Ld. Principal Commissioner of Income Tax, (in short “Ld. PCIT”), Ahmedabad-3 vide order dated 06.03.2024 passed for A.Y. 2018-19.
The Assessee has taken the following grounds of appeal:-
“I. Revision by learned Pr. CIT is contrary to the provision of law. II. Non-granting of Additional depreciation u/s 32(1)(iia) of the Act on Plant & Machinery. III. Non-granting of deduction u/s. 35DD of the Act.”
The brief facts of the case are that the Ld. PCIT on review of the case records observed that the assessee company had claimed additional depreciation on certain block of assets. The PCIT observed that the assessee company is engaged in the business of city gas distribution including sale purchase, supply, prcoessing, distribution and transportation of natural gas.
Gujarat Gas Ltd. vs. PCIT Asst.Year –2018-19 - 2– The PCIT was of the view that mere process of compression of natural gas cannot be considered to be a manufacturing activity for the purpose of claim of additional depreciation. However, the A.O. had allowed the claim of the assessee of additional depreciation without considering this aspect. Further, the PCIT observing that the assessee had claimed deduction under Section 35DD of the Act amounting to Rs. 5.39 crores, but the PCIT observed that the assessee company had made provision for Stamp Duty which was categorized as “contingent liability” and hence, the A.O. erred in allowing the claim of the assessee to the extent of Rs. 5 crores since as per tax laws, a claim of contingent liability cannot be allowed.
During the course of 263 proceedings, the assessee relied on several judicial precedents in support of it’s contention that the assessee was engaged in “manufacturing activities” and thus entitled to addition depreciation. However, Ld. PCIT was of the view that in the process of compressing natural gas, both the input and output remain the same i.e. natural gas and no new distinct product was created. He noted that the definition of “manufacture” under Section 2(29A) of the Act requires a transformation into a new and distinct product, which was not the case here. The PCIT was of the view that the assessee had not provided sufficient details during original assessment proceedings to substantiate the claim for additional depreciation amounting to Rs. 18.89 crores and therefore, the A.O. had failed to properly examine or verify this claim, thereby making the assessment order erroneous and prejudicial to the interest of the Revenue. Regarding the assessee’s claim for deduction under Section 35DD of the Act, the PCIT was of the view that the A.O. has erred in allowing deduction of contingent liability of Rs. 25 crores for Satmp Duty, without carrying out any investigation whether the amount was paid or still payable. Accordingly, the assessment order was set-aside as being erroneous and prejudicial to the interest of the Revenue, for the above reasons.
Gujarat Gas Ltd. vs. PCIT Asst.Year –2018-19 - 3– 5. The assessee is in appeal before us against the aforesaid order passed by PCIT. Regarding the non-granting claim of additional depreciation amounting to Rs. 18.89 crores on Plant & Machinery, the Counsel for the assessee submitted that Ld. PCIT failed to consider that the assessee is indeed an industrial undertaking, involved in producing decontaminated, odorized and optimally pressurized natural gas, a process that qualifies as “manufacturing”. The Counsel for the assesee submitted that in previous decisions, the Ld. CIT(A), the Ahmedabad ITAT and the Hon’ble Gujarat High Court in the case of Gujarat Gas Company Ltd., which later amalgamated with the assessee company, have consistently accepted the position that the assessee company is engaged in “industrial activity” related to production of natural gas. The Ld. CIT(A) allowed deduction under Section 80-IA of the Act for several years beginning from A.Y. 1997-98 and the ITAT upheld similar claims for earlier years thereby affirming that the assessee was an “industrial undertaking”. Further, The Counsel for the assessee drew our attention to specific ruling by the Gujarat High Court which ruled in favour of Gujarat Gas Company Ltd., recognizing that processing activities qualities as “manufacturing”. The Counsel for the assessee also pointed that in previous year, the ITAT had granted depreciation on Plant & Machinery for Gujarat Gas Company Ltd., specifically in relation to the compression of natural gas, which was considered to be part of “manufacturing processes”. The Counsel for the assessee further placed reliance on similar ruling for other gas distribution companies, including Indian Gas Ltd. and Central UP Gas Ltd., where additional depreciation claimed were allowed for activity involving the processing, distribution and transportation of natural gas. Accordingly, the Counsel for the assessee submitted that the assessee is entitlted to additional depreciation under Section 132(1)(iia) of the Act.
In response, Ld. D.R. placed reliance on the observations made by Ld. CIT(A) on this issue.
We have heard the rival submissions and perused the materials on record.
We shall first discuss the issue of allowability of claim of deduction under Section 32(1)(iia) of the Act.
During the course of arguments, the Counsel for the assessee drew our attention to a table showing summary of orders in favour of the assessee for claim of deduction under Section 80-IA of the Act, which have accepted that the assessee company is an industrial undertaking and carrying out “manufacturing activities”, thereby granting deduction under Section 80-IA of the Act to the assessee company. The table giving the decision in favour of the assessee are reproduced below for ready reference:
Summary of order in favour of the assessee accepting that the assessee company is an industrial undertaking and carries out “Manufacturing Activity” thereby granting deduction under 80IA of the Act Sr. F.Y. A.Y. Authority passing Order Appeal No. No. 1 1991-92 1992-93 ITAT ITA No. 1266/Ahd/1999 High Court Appeal No. 85/2009 2 1992-93 1993-94 ITAT ITA No. 1895/Ahd/2002 3 1993-94 1994-95 ITAT ITA No. 2606/A/2002 High Court Appeal No. 60/2009 4 1994-95 1995-96 ITAT ITA No. 2607/A/2002 High Court Appeal No. 62/2009 5 1995-96 1996-97 ITAT ITA No. 2608/A/2002 High Court Appeal No. 64/2009 6 1996-97 1997-98 CIT(A) CIT(A)-VIII/87/DC. Cir 4/2014-15 Now CIT(A)- 2/DC. Cir 4/2014-15 ITAT ITA No. 3628/Ahd/2015 7 1997-98 1998-99 ITAT ITA No. 2211/Ahd/2004 8 1998-99 1999-00 ITAT ITA No. 2212/Ahd/2004 High Court Appeal 06/2014 9 1999-00 2000-01 ITAT ITA No. 3446/Ahd/2004
Further, we observe that the Gujarat High Court in Tax Appeal No. 60 of 2009 in the case of CIT vs. Gujarat Gas Company Ltd. has made the following observations:
“6.1 Taking into account the observations made by the Tribunal while allowing the claim of the assessee, that there is a process of altering gas for making it consumable for industrial or domestic purpose or making it more user friendly for the industrial undertaking. In that view of the matter, we are of the opinion that the Tribunal has rightly taken the view that the assessee carries out manufacturing activity. No interference is called for with the order of the Tribunal. Therefore, we answer the question in favour of the assessee and against the revenue.”
Accordingly, in light of the above facts and the decisions in which it has been held that the assessee company is engaged in manufacturing activity, we are of the considered view that the Ld. PCIT has erred in facts and in law in holding that the A.O. erred in allowing assessee’s claim for additional depreciation under Section 32(1)(iia) of the Act, thereby making the assessment order erroneous and prejudicial to the interest of the Revenue.
In the result, Ground (II) of the assessee’s appeal is allowed.
Ground No. (III) non-granting of deduction under Section 35DD of the Act of Rs. 5 crores.
Regarding the non-grant of deduction under Section 35Dd of the Act amounting to Rs. 5 crores by invoking Section 263 of the Act, the Counsel for the assessee submitted that the Ld. PCIT erred in overlooking certain key facts on this issue. The Counsel for the assessee submitted that PCIT failed to consider that the assessee had made provision of expense of Stamp Duty of Rs. 25 crores in pursuance of scheme of amalgamation and accordingly, this was booked in the books of account of F.Y. 2015-16 i.e. A.Y. 2016-17.
Gujarat Gas Ltd. vs. PCIT Asst.Year –2018-19 - 6– Further, while filing the return of income of A.Y. 2016-17, this amount of Rs. 25 crores was fully disallowed and claimed over a period of five years under Section 35DD of the Act, starting from A.Y. 2016-17 in the return of income. The PCIT did not take into account the fact that the assessee company had clearly disclosed in it’s Financial Report that out of total Stamp Duty of Rs. 43.53. crores, a sum of Rs. 25 crores have been provided for in the accounts for F.Y. 2015-16, relevant to A.Y. 2016-17. Hence, this amount was neither categorized as contingent liability nor reported as contingent liability by the assessee company. Further, the assessee company had paid full Stamp Duty of Rs. 42.86 crores which included the Rs. 25 crores provision, in two installments, Rs. 10.88 crores in December 2016 and Rs. 39.98 crores in March 2019 on receipt of final order from the competent authority. Therefore, assessee was rightly justified in claiming deduction under Section 35DD of the Act, considering that the liability was fully discharged and the expenditure had been incurred as per mercantile system of accounting. Further, the Counsel for the assessee submitted that the PCIT had failed to consider that Section 35DD of the Act allows for deduction of the expenses when they are incurred and not necessarily paid. It was submitted that the obligation to pay the Stamp Duty arose in F.Y. 2015-16, relevant to A.Y. 2016-17 on receipt of order of Hon’ble Gujarat High Court, approving the scheme of amalgamation vide order dated 30.03.2015, received by the assessee on 15.05.2015. Therefore, the present obligation existed in F.Y. 2015-16 and hence the assessee had incurred a sum of Rs. 25 crores eligible for deduction under Section 35DD of the Act. The Counsel for the assessee further submitted that the A.O. had also reopened the case of the assessee for A.Y. 2017-18 on the same ground for disallowance under Section 35DD of the Act and after being satisfied with the explanation and necessary evidences provided by the assessee, the A.O. dropped the reopening proceedings vide order dated 30.03.2022. Accordingly, it was
On going through the facts of the instant case, we observe that the assessee has given the necessary proof of payment of a sum of Rs. 42.86 crores towards these Stamp Duty expenses in two installments on December 2016 and March 2019. Therefore, the fact that the assessee has made actual payment of Rs. 42.86 crores (which included the Rs. 25 crores provision) is not under the dispute. Secondly, we observe that this identical issue came up for consideration in the case of the assessee for A.Y. 2017-18 as well, wherein with respect to similar issue, the assessment proceedings initiated under Section 147 of the Act to examine this issue were dropped in light of the submissions made by the assessee, with the following observations:
“Having gone through the reply and the contention of the assessee which were put forth by CA Shri Chintan Shah during the video conference, I am of the opinion that the assessee has not only provided for the expense, but also incurred the expenses to the tune of Rs10.88 crores up to the year-end of FY 2016-17, therefore, rightfully, the claim of the assessee cannot be denied in respect of sec 35D of the IT Act. Further, in mercantile system of accounting once the expenses are provided/charged and committed, they no longer remain contingent, but they are said to have incurred for the purpose for which they were provided. In this case the assessee has actually paid the stamp duty, which it is claiming as deduction under section 35D. Therefore considering the facts and circumstances of the case, the income of the assessee is determined at Rs. 14,191,04,230/-.”
Accordingly, looking into the above facts and also taking into consideration that the assessee has given actual proof of payment of Stamp Duty charges and also in light of the assessment order dated 30.03.2022 for A.Y. 2017-18, wherein re-assessment proceedings, which were initiated to examine this issue for dropped by the A.O. after taking into consideration the assessee’s written submissions on this, we are of the considered view that the A.O. has not erred in facts and in law in not making addition on this issue.
In the result, we are of the considered view that Ld. PCIT has erred in facts and in law in holding that the assessment order is erroneous and prejudicial in so far as to the interest of the Revenue with regards to the allowability of claim of deduction under Section 35DD of the Act.
In the result, Ground No. (III) of the assessee’s appeal is allowed.
In the result, the appeal of the assessee is allowed for A.Y. 2018-19. This Order pronounced in Open Court on 21/11/2024