PHOENIX CHEMICAL WORKS P.LTD,MUMBAI vs. ADDL CIT RG 7(1), MUMBAI

The present appeal has been filed by the assessee against the order dated 12.02.2013 in respect of Assessment Year (AY) 2009-10 on the following grounds of appeal:

We have considered the argument advanced by the AR of the assessee and also perused the order of AO and First Appellate Authority (FAA).

We are not convinced with the arguments of Ld AR, when the factory land and building has been sold, how the purchaser/buyer allowed the assessee to use the Plant & Machinery installed at the purchased land and building in absence of any cogent and documentary evidence which may prove either relationship of tenant-landlord or license-licensee in respect of the land on which Plant & Machinery was installed and were readily kept ready for passive use, the assessee has failed to prove his contention and the submission made before the AO as well as CIT(A) and thus the disallowance made on account of depreciation does not require any interference at our end, hence this ground is dismissed.

Next ground for our consideration is adding of Rs. 4,86,657/- on account of expenditure considering as there was no business activity.

The AR of the assessee has argued that the assessee has incurred Rs. 2,08,905/- on account of Power & Fuel, Rs. 1,49,662/- on repairs and maintenance of Plant & Machinery, Rs. 1,14,959/- on water charges and Rs. 13,331/- on laboratory expenses and all the expenses incurred by the assessee should have been allowed by the AO. We have seen that AO, while making this disallowance by considering that there was no business activity and out of business expenditure, the AO has allowed the amount incurred in rates & taxes, travel & conveyance, postage, telephone and internet, stationary, professional fees, legal and professional fees, vehicle expenses, Director’s fees, Director’s remuneration, freight & forward charges and office rent by considering that these expenses are essential for running the assessee’s business and disallowance was made as not carried out any business activity.

The CIT(A) while dealing with this ground has observed that during the year under consideration, the assessee has sold its factory land and building, however, the plant and machinery had not been sold and AO in the assessment order has discussed all the facts and could not prove that plant and machinery was not removed and was kept for actual or passive use and altogether the circumstances for incurring on power and fuel were in doubt and confirmed the addition. The AR of the assessee has argued that the assessee was entitled for deduction on the basis of case titled as CIT vs. Oswal Agro Mills reported vide (2012) 341 ITR 467 (Del).

We have gone through the order of AO as well as CIT(A), both the authorities below have considered the fact and law referred by Ld AR. We found that there was not business activity and the plant and machinery was not used for production purpose, hence the expenditure on account of power and fuel, repair and maintenance, water charges was disallowed. The assessee has not brought on record any evidence which may substantiate the claim of assessee to justify the expenditure during the period, when there was no business activity and plant and machinery was not used for the purpose of production. The legitimate expenses were already allowed by the AO.

The AR of the assessee has relied upon the judgment of Delhi High Court reported vide 341 ITR 467 wherein the Hon’ble Court has held that any forced idleness of the machinery cannot disentitled the assessee from getting the benefit of allowance, the assessee-company competed the construction of building and installation of machinery but could not start regular manufacturing with the aid of that machinery because of frequent labour unrest and claimed development in respect of this machinery. However, in the case of assessee, the assessee has sold the factory land and plant and machinery was lying idle and was allegedly shown ready for passive use, hence, the fact of the assessee’s case are at variance from the fact of case of Oswal Agro Mills and the same is helpful to the assessee, hence this ground is rejected.

Next ground for our consideration is the addition of Rs. 1.01 Crore on account of payment to vacate the land of the assessee’s factory, the AO while dealing with this addition in para-5 of its addition has observed that the assessee while computing the Long Term Capital Gain (LTCG) for sale of factory land claimed that he had to pay compensation of Rs. 1.01 Crore to M/s Simran Enterprises. The assessee was asked to give the details about the genuineness of the transaction and the assessee vide letter dated 01.11.2011 contended that it paid compensation to M/s Simran Enterprises. The AO sent a notice u/s 133(6) dated 07.01.2011 to M/s Simran Enterprises and called the books of account, bank transaction, nature of business and the detail of the advance received from the assessee and PAN Number. It was observed that no response to the notice u/s 133(6) was received and that Inspector of Income-tax was deputed to conduct field enquiry, The Inspector submitted his report on 05.12.2011 stating that he was not able to trace out M/s Simran Enterprises and the address given by the assessee was found to be the residential premises of Mr. Vikas Vora, who was not aware about M/s. Simran Enterprises. The AO observed that the assessee could not produce the person nor could confirmed the PAN number of recipient of big amount though the assessee has furnished the details of cheques issued which alone does not prove the genuineness of the payment and thus doubted the genuineness of payment of Rs. 1.01 Crore and made the disallowance.

The CIT(A) while dealing with issue has observed that the assessee, during the assessment proceeding as well as at appellate proceeding failed to prove the existence of tenant/M/s Simran Enterprises and failed to prove genuineness of the amount of such payment and in absence of genuineness and bonafide the expenditure claimed was not proved and thus upheld the addition.

The AR of the assessee has argued that the assessee has made expenditure for making his title clear and free from encumbrances for transfer of the property and as per section 41(i), the assessee is entitled for the entire expenditure incurred wholly and exclusively in connection with transfer.

We have perused the order of AO as well as FAA, it was brought on record that the payment alleged by the assessee was made through cheques, copies of which are placed as page no. 41, 42 & 43 of the Paper Book, and the details of cheque number(s) and dates are mentioned at page no. 45 of PB. Neither the AO nor the FAA has considered in its order that, if the cheque which were A/c payee cheque issued to Shri Mervin Sushank Andrade, Proprietor of M/s Simran Enterprises was cleared from the bank account of the assessee or not. Having considered these fact, we deem it proper to restore this issue to the file of AO to verify whether the cheque mentioned at PB No. 41,42 & 43 whose details are given on page no. 44 of PB were encased in the account of Proprietor of M/s Simran Enterprises or not to and to get verify from the bankers of the assessee and pass the appropriate order in accordance with law in terms of clause 1 of section 48 of I.T. Act. The assessee is also directed to fully cooperate and file the statement of account or any other documents if require by AO during the remand proceedings.

The AR of the assessee has relied upon the judgment of Delhi High Court reported vide 341 ITR 467 wherein the Hon’ble Court has held that any forced idleness of the machinery cannot disentitled the assessee from getting the benefit of allowance, the assessee-company competed the construction of building and installation of machinery but could not start regular manufacturing with the aid of that machinery because of frequent labour unrest and claimed development in respect of this machinery. However, in the case of assessee, the assessee has sold the factory land and plant and machinery was lying idle and was allegedly shown ready for passive use, hence, the fact of the assessee’s case are at variance from the fact of case of Oswal Agro Mills and the same is helpful to the assessee, hence this ground is rejected.

In the result, the appeal filed by the assessee is allowed for statistical purpose Order pronounced in the open court on this 31st December 2015.