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Income Tax Appellate Tribunal, “A” BENCH : KOLKATA
Before: Hon’ble Shri P.M.Jagtap, AM & Sri N.V.Vasudevan, JM ]
IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH : KOLKATA [Before Hon’ble Shri P.M.Jagtap, AM & Sri N.V.Vasudevan, JM ] ITA No.1240/Kol/2013 Assessment Year : 2007-08 D.C.I.T., Circle-4, -vs.- M/s. RBA Exports Pvt.Ltd. Kolkata Kolkata [PAN : AABCR7429N) (Respondent) (Appellant)
For the Appellant : Shri Uday Kumar Sardar, CIT, Sr.DR For the Respondent : Shri Arvind Agarwal, Advocate
Date of Hearing : 05.04..2016. Date of Pronouncement : 11.05.2016. ORDER Per N.V.Vasudevan, JM
This is an appeal by the Revenue against the order dated 26.2.2013 of CIT(A)- IV, Kolkata, relating to AY 2007-08.
The only issue raised by the revenue in this appeal is as to whether the CIT(A) was justified in deleting the addition of Rs.70,99,318/- made by the AO by disallowing depreciation claimed by the Assessee. The grounds of appeal raised by the revenue read thus:
“1. That on the facts and circumstances of the case the Ld. CIT(A) has erred in law in directing the A.O. to delete the addition of Rs.7099318/- on account of depreciation by accepting assessee’s submission based on electricity bills, although no such bill were furnished before the AO, without allowing any opportunity to the AO for verification of the same in violation of Rule – 46A. 2. That on the facts and circumstances of the case the Ld. CIT(A) has erred in law in directing the A.O. to delete the addition of Rs.7099318/- on account of depreciation though the assessee could not explain properly the issues raised by the AO.”
2 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 3. The Assessee is a company. It is engaged in the business of manufacturing of ductile iron. During the previous year relevant to AY 2007-08, the Assessee was in the process of setting up an industrial unit for manufacturing of ductile iron in Tamil Nadu. The Assessee had shown receipt of job work charges of Rs.18 lakhs and claimed depreciation of Rs.74.60 lakhs. The depreciation claimed as deduction u/s.32 of the Income Tax Act, 1961 (Act) was as follows:
Block of Assets Plant & Machinery @ 15% Rs.67,78,828 Block of Assets Furniture & Fixtures @ 10% Rs. 73,106 Block of Assets computer, computer software @ 60% Rs. 5,43,458 Rs.74,60,392
The components of Block of Assets Plant and Machinery was motor car, cycle, two wheelers, generator (pre-operative expense), weighing machines, tools and gauges, inspection machinery, welding machines, machinery (machine shops), pumps and pre- operative expense. The components of Block of Assets Furniture & fixture included furniture and fixtures, office equipments, office equipment (Chennai), electrical accessories-office and mobile. The depreciation schedule as per the Act and as given in the schedule of fixed assets and depreciation annexed to the balance sheet of the Assessee as on 31.3.2007 are given as an annexure to this order for better appreciation of facts.
It can be seen from the Schedule of fixed assets and depreciation annexed to the balance sheet that the factory building was yet to be completed and was shown as capital work in progress. The AO was of the view that one of the requirements for claiming depreciation u/s.32 of the Act was that the assets on which depreciation is being claimed ought to have been put to use for the purpose of business of the Assessee. The AO called upon the Assessee to explain as to why the claim of depreciation, to the
3 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 extent that the assets on which depreciation is claimed could not have been put to use since the factory building was not completed be not disallowed.
The Assessee submitted before the AO that the construction work of factory building started during the AY 2006-07 and was being completed in a phased manner. 90% of the work of factory building was completed by AY 2007-08. The Assessee pointed out that out of a total cost of factory building of Rs.393.97 lakhs incurred and capitalized upto 31.3.2008 Rs.367.79 lakhs was incurred upto 31.3.2007. The Assessee claimed that during AY 2007-08 the completed area of factory building was utilized and production was carried out therein. The Assessee further explained that since factory building was not completed as a whole, the same was not capitalized in the books of accounts of AY 2007-08.
The AO however was of the view that the opening value of the factory building as on 1.4.2006 was Rs.59.61 lakhs and the addition during the previous year was Rs.308.17 lakhs. The claim of the Assessee was that after construction, Plant and machinery was installed and job work was done from June, 2006. This in the opinion of the AO was impossible. The AO also observed that there was no electricity expenses of the factory claimed in the profit and loss account. Power and fuel expenses alone were claimed by the Assessee which was a very low sum of Rs.1,75,340/-. According to the AO the fuel and power charges would have been paid only for running generator to supply electricity to carry out work of construction of factory building and erection of plant and machinery. The AO was of the view that without putting the machinery and plant the Assessee ought not to have capitalized their value in the books of accounts and claimed depreciation therein. The AO therefore disallowed claim of the Assessee for depreciation except depreciation on motor car, cycle and two wheelers of Rs.3,61,074/-. This resulted in an addition of Rs.70,99,318/- (Rs.74,60,392 – 3,61,074) to the total income of the Assessee. 3
4 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 7. Before CIT(A) the Assessee pointed out that in ductile iron foundry, the major area of the shed is occupied by furnace, molding line, sand plant, stores and stock yard and other ancillary plant and machinery and only small area is required for machining activities such as CNC lathes, planning machines, grinding machines etc. It was further submitted that the process of setting up the unit was started in the financial year 2005- 06 and around June, 2006, the machining section of the unit was made operational. The Assessee further claimed that the machineries on which depreciation was claimed had been installed in the machine shop and were used for the purpose of doing job work for outside parties. The Assessee pointed out from the depreciation chart filed under the Act for claiming depreciation that depreciation on plant and machinery worth Rs.5,87,43,955/- had not been claimed by the Assessee to the extent they were not used for production of ductile iron castings as they were not put to use.
The Assessee further submitted that the observations of the AO in the order of assessment that the opening value of factory building as on 01.04.06 was Rs. 59.61 lakh and addition of Rs. 308.17 lakh was made only in this year and that after the construction, plant & machinery was installed and job work was done from June 2006 which seems to be near impossible is not correct. In this regard it was submitted that opening w.d.v of factory building as on 1.4.06 was Rs.59.61 lakh and further expenditure of Rs. 73.10 lakh in April 2006 and Rs. 20.47 lakh in May 2006. In effect, the assessee had already incurred an expenditure of Rs. 153.181akh by May 2006. It was submitted that the assessee has started the activities in its industrial unit in a phased manner and during the asst year 2007-08, the assessee had started commercial activities in its machine shop. This is evidenced by the fact that the assessee has done machining work using its own machine shop for various reputed parties i.e. Sundaram Fasteners Ltd., Electrosteel Castings Ltd. etc on a job work basis. It was further pointed out that though under the head Plant & Machinery, during the asst year 2007-08, the assessee has capitalized Rs. 7,79,63,887/-, the assessee has claimed depreciation amounting to 4
5 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 Rs. 64.,07,754/- on plant and machinery of Rs. 1,92,19,931/- only which were installed and used by the assessee in its machine shop and other plant and machinery such as weighing machine, generator, pumps etc. used by the assessee for carrying out the activities in its machine shop. The AO also has failed to appreciate the fact that a part of the factory building was operational by June 2006 and the fact that the area required by the machine shop is much less as compared to the total area required for manufacturing of castings.
It was further submitted that the observations of the AO that there was no electric expense for the factory and that means no power connection has been given yet are not correct. On this observations the Assessee submitted that it had paid Rs. 5,01,470/- to Tamilnadu Electricity Board as electricity charges. The ledger copy of electricity charges together with copies of electricity bills issued by Tamilnadu Electricity Board were produced before the AO for his verification. It was also submitted that the observations of the AO that power and fuel expense of Rs. 1,75,340/- appears to be very low and was for the generator is again not correct. In this regard it was submitted that Out of the power expenditure of Rs. 1,75,340/-, Rs.2,896/- represents electric charges for office electricity, Rs. 97,977/- electric charges for running of machine shop and Rs. 74,.467/- incurred for purchase of diesel used for running the generator for generation of power for production purpose. The observation by the AO that power & fuel expenses appears to be very low is totally erroneous. The AO has chose to ignore the fact That the assessee has charged to its profit & loss account the power & fuel expenses incurred in relation to its use of machine shop activities only whereby the assessee has earned Rs. 18.15 lakh as job work charges. In face the assessee has incurred power & fuel expenses of Rs. 1.75lakh for earning job work charges of Rs. 18. 151akh.
It was further submitted that the observations of the AO that it remains unexplained how the capitalization of other plant/machinery work was done without the help of 5
6 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 power. In this regard, the Assessee drew attention of CIT(A) to Schedule 4(B) to the Balance sheet clearly and that it discloses that Rs. 5,360/- electricity charges and Rs. 38,976/- power & fuel as part of the pre-operative expenses allocated to the capitalization of Plant & Machinery (Machine Shop) and electrical installations. Schedule 4(A) to the Balance Sheet clearly discloses that the assessee has Rs. 2,23,403/- as Power & Fuel and Rs. 4, 03, 493/- as Electricity Charges as unallocated pre-operative expenses as at 31.03.2007 which has subsequently been allocated to various fixed assets and capitalized in 31.03.2008.
It was also submitted that besides disallowing depreciation on plant & machinery of Rs. 64,07,754/- as stated above, the AO has also disallowed the claim of depreciation on the following assets without assigning any reason even though all the under mentioned assets were used by the assessee for the purpose of its business: Asset Description Depreciable Depreciation Value (Rs.) (Rs.) Computer 749502 321828
Computer Software 738767 221630
Furniture & Fixtures 436337 38357
Office Equipments 223437 17509
Office Equipments 137600 6880
Electrical accessories 143886 7560
. Mobiles 43990 2801 ~ Office Premises 1068492 75000 TOTAL 691565 DEPRECIATION
7 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 12. It was submitted that the Assessee does not derives any tax advantage by claiming depreciation in the asst. year 2007-08. The returned loss position of the assessee for the asst. year 2007-08, 2008-09 and 2009-10 was as under: Asst. Year Returned loss for the year 2007-08 Rs. 7415443/- 2008-09 Rs. 39895993/- 2009-10 Rs. 19855883/-
It was thus argued that it was very likely that the assessee would be in a disadvantageous position as far as tax outflow is concerned in the future years when the assessee makes profit since the assessee would have to pay tax u/s 115J8 as because out of the above loss of Rs. 671.67 lakh depreciation loss constitutes Rs. 564.49 lakh. It was therefore contended that the disallowance of depreciation of Rs. 70,99,318/- was arbitrary and based on surmises which are contrary to the facts of the case.
The CIT(A) agreed with the submissions of the Assessee and deleted the disallowance of depreciation as made by the AO. The following were his observations: “3.2. I have examined the rival submissions. It is a fact that the appellant has installed plant & machinery only to the extent of Rs. 1,92,19,931/- during the year and on the said assets it has claim depreciation for Rs. 64,07,754/-. Most of the amount spent on purchase of assets was towards purchase of machinery pertaining to the machine room. Machining section consists of turrets, lathes, plano-millers, borers, shapers and other simple machinery to give the iron castings of final tough before packing and shipping. The machine room does not consist of any heavy machinery or furnace which requires extensive activity of installation and electricity consumption. As will appear from the nature of machinery in the machine room, only final touches are required to be given to the Iron Castings. The machinery pertain to machine room was purchased during April and May, 2007 has not been doubted by the A.O. What has also been doubted is the installation of the said machinery. In fact, if one analyses the type of machinery purchased during April, May and upto the 1st week of June, 2007, we find that these are mostly CNC lathe machinery. This machinery are high precision and computer controlled machinery which can very easily be put to 7
8 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 use. The earliest bill of job work is dated 14.06.2006. Therefore, the appellant had almost 2and 1/2 months of time before production/job work started. This was of ample time to put to use CNC machine. What has been overlooked by the A.O. is that electric power charges to the extent of Rs. 5,01,470/- has been paid to the electricity Board for the entire factory. However, for running machine shop, electric charges of Rs. 97,977/- has been shown and for running the generator, diesel charges of Rs. 74,467/- has been shown. As machining tools are not heavy duty machinery, the electrical and generator charges for power was sufficient to take care of job work of the appellant. The A.O. has not doubted the job work income received by the appellant which hat there is nothing !o hold that job work was not done by the appellant. In fact, the job work was done for reputed clients and the A.O. had all the resources to verify the genuineness of the same. If, job work was done and electricity and fuel expenses incurred, then there is no reason to doubt that machinery in the machine room could not have been put to use. As already discussed, the Iron castings come to the machine room at the end of the manufacturing process for finishing of the product. This machinery can be installed and put to use almost immediately upon their receipt. Two months time before job work began in June,2006 i.e. April and May, 2006 are held to be sufficient time for installation of simple machinery if' the machine room. To sum up, when the purchase of machinery is not doubted and neither is the resultant job work doubted, there is no ground to doubt the installation of machinery in the machine room as these are simple machinery. The electric power expenses incurred by the appellant to run the simple machinery justify the usage of machinery for doing job work. As the machinery was put to use, the depreciation claimed of the appellant disallowed to the extent of Rs. 70,99,318/- should now be allowed by the A.O.”
Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal. The learned DR reiterated the stand of the Revenue that the conclusions of the CIT(A) that the assets on which depreciation was claimed were in fact put to use by the Assessee for the purpose of its business during the previous year, was based on additional evidence which were taken cognizance by the CIT(A) in violation of Rule 46-A of the Income Tax Rules, 1962 (Rules). He reiterated the stand of the AO as reflected in the order of assessment.
The learned counsel for the Assessee submitted that the CIT(A) came to the conclusion that the machineries were put to use not on the basis of electricity bills filed 8
9 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 before CIT(A) but for the reason that fuel and power charges were booked by the Assessee and the machining tools were not heavy duty machinery and could run on generators. The CIT(A) has also held that the receipt from job work was not doubted by the AO and therefore deleted the addition made by the AO. Without prejudice to the aforesaid submission, the learned counsel also submitted that the electricity bills at page 14 to 46 of the paper book filed by the Assessee were shown to the AO in the course of assessment proceedings. In this regard our attention was drawn to page 8 and 9 of the paper book of the Assessee wherein the record of proceedings before the AO have been filed. Perusal of the same shows that on 3.11.2009, the A/R of the Assessee appeared before the AO and filed certain details and produced books of accounts. The AO raised a specific query and asked for submissions as to how the plant and machinery were put to use when the factory shed remained as WIP and nature of job charges. On 9.12.2009 the AO has recorded the fact that submissions regard query raised earlier were filed and has further called upon the Assessee to file addition to fixed assets and details with depreciation computation as per Act. Again on 4.12.2009 the A/R of the Assessee gave the required details. It was the submission of the AR that on the above dates of hearing, the electricity bills at pages 14 to 46 were also shown to the AO for verification. His further submission was that the case of the revenue is only based on violation of Rule 46A of the Rules and in view of the circumstances pointed out as above, the appeal of the revenue should be dismissed. In all other respects he relied on the order of the CIT(A).
We have given a very careful consideration to the rival submissions. Admittedly before the AO there was no whisper by the Assessee regarding the electricity charges of Rs.5,01,470/- paid to Tamilnadu Electricity Board as electricity charges. It is also clear from the submissions made by the Assessee before CIT(A) that the aforesaid electricity charges was not claimed as deduction in the profit and loss account. There is no evidence on record to show that the electricity bills placed at pages 14-46 of the 9
10 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 Assessee’s paper book were in fact produced before the AO for verification in the course of assessment proceedings. The factual position with regard to electricity charges, power and fuel charges as it emanates from the record is that a sum of Rs.2,23,403 incurred as expenditure on power and fuel and another sum of Rs.5,01,470 was incurred as electricity charges for the factory in Tamil Nadu were treated as part of the pre operative expenses incurred during the previous year ended 31.3.2006 pending allocation as at 31.3.2006 allocated to machine shop fixed assets during the year ended 31.3.2007. The Assessee had claimed as deduction in the profit & loss account a sum of Rs.1,75,340 in the profit and loss account which comprised of Rs.2,896/- electricity charges for office, Rs.97,977/- comprised of electricity charges for running of machine shop and Rs.74,446 incurred for purchase of diesel used for running generator. The CIT(A) in coming to the conclusion that the Assessee had established use of the machineries has placed reliance on the fact that electricity charges of Rs.5,01,470/- were incurred by the Assessee, the fact that receipts from job work were not doubted by the AO and that the machineries in the machine shop were not heavy duty machinery and that the electricity and power generator charges shown in the profit and loss account was sufficient to carry out the job work. The CIT(A) has also observed that the machineries in the machine room were purchased in April and May, 2006 and would not require much time for their assembly and use and therefore the claim of the Assessee that the machineries were put to use from June, 2006. These factual details coupled with the fact that electricity bills were not available before the AO, shows that the CIT(A) has relied on additional evidence in violation of Rule 46A of the Rules. Rule 46-A of the Rules read thus:
46-A: Production of additional evidence before the Deputy Commissioner (Appeals)and Commissioner (Appeals). (1) The appellant shall not be entitled to produce before the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals), any evidence, whether oral or documentary, other than the evidence produced by him during the course of
11 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 proceedings before the Assessing Officer, except in the following circumstances, namely:—
(a) where the Assessing Officer has refused to admit evidence which ought to have been admitted; or (b) where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the Assessing Officer; or
(c) where the appellant was prevented by sufficient cause from producing before the Assessing Officer any evidence which is relevant to any ground of appeal; or
(d) where the Assessing Officer has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.
(2) No evidence shall be admitted under sub-rule (1) unless the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals)] records in writing the reasons for its admission.
(3) The Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals)] shall not take into account any evidence produced under sub-rule (1) unless the Assessing Officer has been allowed a reasonable opportunity—
(a) to examine the evidence or document or to cross-examine the witness produced by the appellant; or
(b) to produce any evidence or document or any witness in rebuttal of the additional evidence produced by the appellant.
(4) Nothing contained in this rule shall affect the power of the Deputy Commissioner (Appeals) or, as the case may be, the Commissioner (Appeals) to direct the production of any document, or the examination of any witness, to enable him to dispose of the appeal, or for any other substantial cause including the enhancement of the assessment or penalty (whether on his own motion or on the request of the Assessing Officer) under clause (a) of sub-section (1) of section 251 or the imposition of penalty under section 271.
A reading of Rule 46-A(2) & (3) of the Rules shows that it was mandatory on the part of the CIT(A) before admitting additional evidence as well as before taking into account any additional evidence produced before CIT(A) to afford opportunity to examine the evidence so produced and to allow opportunity to produce any evidence in rebuttal of such evidence. We are of the view that there was violation of the aforesaid 11
12 ITA No.1240/Kol/2013 M/s. RBA Exports Pvt. Ltd. A.Yr.2007-08 rules as contended by the revenue in their grounds of appeal. It has to be examined as to why the electricity expenses of Rs.5,01,470/- were capitalized in the books of accounts and not claimed in the profit and loss account and how those charges can be linked to the use of machineries on which depreciation is claimed by the Assessee. It also needs to be examined as to whether the power & fuel charges of Rs.1,75,340/- was sufficient to carry out the job work charges claimed by the Assessee. 18. For the reasons given above, we are of the view that the order of the CIT(A) on this issue requires to be set aside and the issue needs to be looked into afresh by the AO in the light of the observations as set out above. We hold and direct accordingly. The AO will afford opportunity of being heard to the Assessee before deciding the issue. The Assessee will also be at liberty to let in further evidence to substantiate it’s case. 19. For statistical purpose, the appeal of the revenue is treated as allowed. Order pronounced in the Court on 11.05.2016.
Sd/- Sd/- [P.M.Jagtap] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 11.05.2016. [RG PS]
Copy of the order forwarded to: 1.M/s. RBA Exports Pvt.Ltd., 2/6, sarat Bose Road, Central Plaza, 6th Floor, Kolkata- 700020. 2. D.C.I.T., Circle-4, Kolkata. 3. CIT(A)-IV, Kolkata 4. CIT-II, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.