ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 2(1)(1), VADODARA, VADODARA vs. GUJARAT INSECTICIDES LIMITED, ANKLESHWAR

The assessee is a limited company engaged in the business of manufacturing and selling of various insecticides. The return of income was filed on 30/11/2015, showing income of Rs.14,54,16,340/-. During the course of assessment proceedings, the AO called for various details and information for the purpose of finalization of assessment. The AO passed the order u/s.143(3) of the Act making additions as detailed below:

The assessee filed an appeal against the order of the AO. The Ld. CIT(A), who partly allowed the appeal by deleting additions made by AO on account of interest, repairs & maintenance and additional depreciation.

Aggrieved by the order of the Ld.CIT(A), the Revenue is in appeal before us with following grounds of appeal:

This ground relates with a disallowance of Rs. 80,46,000/- on account of interest and finance charges. The brief facts are such that the assessee has a working capital finance facility and paid interest and finance charges to the tune of Rs.80.46 Lacs out of total finance cost of Rs.96.18 Lacs. The AO during the course of assessment proceedings observed that the company is having trade receivables from its holding company Charda Chemicals Ltd. (GCL) as detailed below: (Figures in Lacs) Asst. Year : 2015-16

The assessee also placed reliance on some judicial pronouncements.

Not satisfied with the reply of the assessee and as the bank loan was higher than the balance due from GCL, the AO disallowed the interest and finance charges for Rs.80.46 Lacs.

The Ld.CIT(A) while accepting that the facts in the present case are identical with that of earlier years where the ITAT in ITA Nos. 556 & 675/Ahd/2013 for A.Y. 2009-10 decided in favour of assessee, deleted the addition.

During the course of hearing, the Ld.Departmental Representative relied on the order of the AO.

The Ld.Counsel for the assessee relied on the order of the Ld.CIT(A) and pointed out that the assessee has not charged interest to any other party from whom amounts are receivable beyond 180 days.

At this juncture, for the sake of clarity, we reproduce the relevant part of the decision of Co-ordinate Bench in assessee’s own case (ITA Nos.556 & 675/Ahd/2013) dated 19/07/2013:

We have heard both the sides at some length. We have also carefully perused several evidences placed on record. It is not in dispute that the sales made to GCL remained outstanding and on the other hand, the assessee had a bank liability. The fundamental objection of the Assessing Officer was that had the assessee recovered the outstanding dues from GCL, then there would not be the liability of that extent of interest of the bank as it was debited to Profit & Los account under the head interest and financial charges. That objection was dealt with in the following manner. That as far as the liability towards bank was concerned, the ld. A.R. has placed on record certain figures to demonstrate that the said bank liability 10 ITA No 556 & 675/Ahd/2013 . A.Y. 2009-10 had gone down in comparison to the last year. That it has also been argued before us that even the notional interest @ 15% was incorrect because the prevailing rate charged by the Bank was only 11.25% during the year. That the assessee was otherwise having a regular business transactions of purchase and sales with GCL. That the said GCL was the major customer during that year. That it has also been placed on record that the assessee was purchasing certain raw material from GCL which was its monopoly product. That the vehement contention was that in the like manner the assessee was also enjoying credit facility against purchases made from GCL. That it was not a case of mere purchase and sale as it has happened with other debtors or customers but the business relationship with GCL was on different terms being a holding company and in that capacity GCL has provided specialized services to assessee in the field of manufacturing and marketing. All these facts were narrated to ld. CIT(A) through written submissions which were placed before us on page Nos. 138 to 190 of paper-book. From this discussion, it is evident that the assessee-company had a regular business transaction and it was not for any extraneous consideration. In the regular course of business purchases and sales have been made with the said concern and not with the intention to siphon out the borrowed funds. The factum of the case thus demonstrated that the assessee has taken a commercial decision keeping in mind the interest of its business and the other surrounding circumstances under which the assessee was getting facilities. Once it was a proper for the revenue authorities to step in to the shoes of a business man to decide whether such a commercial decision was advantageous or not. Rather, we are of the view that the Assessing Officer has proceeded merely on this presumption that the borrowed funds of Bank of Baroda have been siphoned to GCL, but no specific instance or transaction was demonstrated. As far as The ACIT vs. Gujarat Insecticides Ltd. Asst. Year : 2015-16

It is an undisputed fact that the facts in the present appeal are identical to that of A.Y. 2001-02 and earlier years. We for reasons given by the Co- ordinate Bench and following order of Co-ordinate Bench of Tribunal for A.Y. 2001-02, find no reason to interfere with the order of CIT(A). Thus this ground of Revenue is dismissed.”

Upon review of the facts and circumstances of the case, along with the relevant judicial pronouncements and consistent treatment in prior years, we conclude that the disallowance of Rs. 80,46,000/- by the AO on account of interest and finance charges is not justified. The assessee has demonstrated that the borrowed funds were used for business purposes, and the conditions laid out in Section 36(1)(iii) were met. The outstanding amounts with GCL and other customers were part of normal business transactions, with no interest charged in alignment with industry practices. Asst. Year : 2015-16

This ground relates to the disallowance of Rs.74,55,570/- made by AO on account of disallowance of repairs & maintenance to plant and machinery. The AO treated total amount of Rs.98,70,863/- as a capital expenditure and disallowed Rs.74,55,570/-, after allowing depreciation of Rs.24,15,,293/- on the same.

During the course of assessment proceedings, the assessee contented that that these were repairs and maintenance necessary due to continuous usage of equipment for many years on account of highly corrosive plant. The assessee-company also placed reliance on the various judgements in support of its contentions. However, the AO concluded that the so-called replacement of parts/items has resulted into enduring nature of benefit and are not in the nature of current repairs within the meaning of Section 31 and, therefore, cannot be said that these items were only replacements. The AO treated these repairs as additions to the Plant & Machinery and allowed depreciation on the same as per applicable rates.

The Ld.CIT(A) deleted this addition relying on the decisions of Co- ordinate Bench and the Ld.CIT(A) in assessee’s own cases of earlier years. Asst. Year : 2015-16

We have noted the submission of assessee at the time of assessment and appellate proceedings. The assessee stated that these additions are not independent items of machine but spare parts of certain machines, which are replaced, and therefore, the same has been claimed as revenue expenditure. The assessee further submitted that replacement of machineries/equipments is integral part of the plant and not an independent plant. These equipments in unison can never complete manufacturing process. Machineries/Equipments which are replaced cannot produce any of assessee's products independently without the help of other sets of machineries and equipment.

It is also noted that the assessee is an ISO 14001 Company i.e. the Certificate for Environmental Protection. Under this Certification, it is the duty of the assessee to keep the environment clean and pollution free. For that the assessee has to maintain its plants in good condition so that it will not create the pollution and spoil the environment. Due to replacement of these equipments/machineries, there is no increase in production capacity of the plant.

Along with other decisions of Co-ordinate Bench and the Ld.CIT(A), the assessee placed reliance on its own case for A.Y. 2012-13, where the addition was deleted following the principle of consistency. We reproduce the relevant para of the said decision: Asst. Year : 2015-16

The Ld.Counsel for the assessee relied on the order of the Ld.CIT(A) and, on the other hand, the Ld.DR relied on the order of AO.

We observe that the assessee maintained that the expenditures were for spare parts integral to the machines and not independent items. The assessee explained that the replaced machineries/equipments were part of the plant and not separate entities capable of independent functioning. It was noted that the assessee, an ISO 14001 certified company, had to maintain its plant in good condition to comply with environmental standards, which necessitated these repairs. The replacements did not result in an increase in production capacity. We also refer to the principle of consistency, highlighting a similar decision in the assessee’s favour for the Assessment Year 2012-13. The ACIT vs. Gujarat Insecticides Ltd. Asst. Year : 2015-16

In light of the submissions and evidence provided, and consistent with the findings in the assessee's previous cases, we concur with the decision of the Ld.CIT(A). The AO did not furnish adequate evidence or technical details to justify treating the expenditures as capital rather than revenue. The AO's conclusions were found to be general and not based on substantive material. The expenditure of Rs.74,55,570/- is to be treated as revenue expenditure, and the addition made by the AO is deleted. Therefore, we uphold the order of the Ld.CIT(A) and dismiss this ground of Revenue’s appeal.

This ground relates with deleting the disallowance of Rs.37,38,754/- being assessee's claim of balance depreciation by way of additional depreciation in respect of machinery acquired and installed in the last year. The facts are such that during the year under consideration, assessee claimed additional depreciation amounting to Rs 1,21,89,792/- on new plant and machinery installed and commissioned in last year as detailed below:

The assessee claimed this additional depreciation being balance depreciation as per the provisions of section 32 of the Act. During the course of assessment proceedings, the assessee submitted that the Finance Act, 2015 made clarification amendment by providing 2nd proviso to section 32(1)(iia) of the Act.

The AO, not being satisfied with the claim of assessee, disallowed the claim of additional depreciation stating that the relevant proviso comes into effect from 01/04/2016 and thus the relevant assessment year will be A.Y.2017-18. 12. 3. The Ld.CIT(A) deleted the addition relying on some judicial pronouncements specifically referring the decision of Hon’ble Madras High Court in case of Hinduja Foundries Ltd. reported in [2021] 129 taxmann.com 139 (Mad.). The relevant paras are reproduced as under:

CIT(A) further concluded that: “In view of the above judicial precedents, itis clear that ii the present A.Y.(AY 2015- 1,6) the appellant was eligible to claim the balance additional depreciation of Rs. 37,38,754/- no assets acquired and put to use for less than 180 days in A.Y. 2014- 15. The disallowance of Rs. 37,38,754/- is hereby deleted. Grounds no. 4 and 4.1 are hereby allowed.”

The Ld.Counsel for the assessee relied on the order of the Ld.CIT(A) and, on the other hand, the Ld.DR relied on the order of AO.

In the case of Hinduja Foundries Ltd. case, the Hon’ble Madras High Court held that the assessee is entitled to claim the balance additional depreciation in the subsequent year if the new plant and machinery were put to use for less than 180 days in the previous year. This precedent supports the position that additional depreciation can be claimed in the subsequent year for assets that were partially depreciated in the year of acquisition.

Based on the above facts and the judicial precedent set by the Hon’ble Madras High Court in Hinduja Foundries Ltd.(supra), we arrive at the conclusion that the assessee is eligible to claim the balance additional depreciation of Rs.37,38,754/- for the new plant and machinery commissioned for less than 180 days in the financial year 2013-14 and claimed in AY 2015-16. Although the AO contended that the amendment by The ACIT vs. Gujarat Insecticides Ltd. Asst. Year : 2015-16

In the combine result, the appeal of Revenue is dismissed. Order pronounced in the Open Court on 4th July, 2024 at Ahmedabad. (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER

""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त ( अपील ) / The CIT(A) - (NFAC), Delhi

"वभागीय ""त"न"ध , आयकर अपील"य अ"धकरण , राजोकट/DR,ITAT, Ahmedabad, 6. गाड" फाईल /Guard file.