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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI SANDEEP GOSAIN
सुनवाई की तायीख / Date of Hearing : 23.09.2015 घोषणा की तायीख /Date of Pronouncement :16.10.2015 आदेश / O R D E R
PER D. KARUNAKARA RAO, AM:
This appeal filed by the assessee on 31.3.2011 is against the order of the CIT (A)-8, Mumbai dated 12.1.2011 for the assessment year 2006-2007. In this appeal, assessee raised the following grounds which read as under: “1. DISALLOWANCE OF DEPRECIATION OF Rs. 2,34,437/- 1.1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in confirming the disallowance of depreciation on Electric Installation used in factory premises to operate various Machinery & Equipments in manufacturing of POY and polyester chips, by saying that with effect from assessment year 2002-2004 the appendix specifically defines furniture and fixture as including electric fittings. 1.2. The Ld CIT (A) failed to appreciate the facts that electric installation are part and parcel of plant and machinery, which includes High Tension power cabling panel boards 66KVA power line are connected with manufacturing process cannot be treated as part of furniture and fixtures and hence allowances of depreciation @ 10% is not justified.
2. DISALLOWANCE OF INTEREST OF Rs. 69,76,659/- 2.1. On the facts and in the circumstances of the case and in law, the Ld CIT (A) erred in confirming disallowance of interest by stating that similar addition had been confirmed by CIT (A) in assessment year 2005-2006. 2.2. The Ld CIT (A) failed to prove any direct nexus between the amount invested and interest expenditure attributed towards purchases of land at Athal, Silvassa, without appreciating the facts the appellant company had not borrowed any funds for acquiring land and other assets till 31st March, 2005, whatever expenditure was incurred towards projects were from internal accrual. 2.3. The Ld CIT (A) erred in not considering the details reply given vide letter dated 12.1.2011 confirming that the payment of land purchase at Athal was given from current account maintained by the company with Indian Overseas Bank Ltd against the temporary OD facilities given by bank against the Fixed Deposit.
3. EXCESS PAYMENT TO PARTY COVERED U/S 40A(2)(b) Rs. 4,77,918/- 3.1. The Ld CIT (A) erred in confirming disallowance of Rs. 4,77,918/- u/s 40A(2)(b) in respect of plastic adaptors from Arya Industries, without appreciating the facts that payment made to specified persons are well within the prevailing market rates in competitive atmosphere and are comparable iwth other manufacturers. 3.2. The Ld CIT (A) failed to appreciate the facts that while comparing the rates with third parties, though the lower quotations were also available, the then AO has purposefully taken the higher quotation available. 3.3. The Ld CIT (A) failed to appreciate the facts that appellant company cannot compromise on the quality of plastic adaptors for its use in packing of finished products to avoid damaged to finished goods.
4. DISALLOWANCE OF EXPENDITURE COVERED U/S 35d OF Rs. 21,94,414/- FOR RAISING FCCB 4.1. the Ld CIT (A) erred in confirming the disallowance made by AO for not allowing expenditure u/s 35D incurred for raising FCCB on account of expenditure in the nature of travelling, bank charges, other pro. fee not specified in section 35D actuarial valuation charges, advisory service charges, out of pocket charges, listing fee and offering circular for issue of the FCCB and also charges for opinion, certification charges filing fee, for increase in authorized capital and professional fee and private placement which are not specifically allowed by section 35D. 4.2. The Ld CIT (A) failed to appreciate the facts that there was direct nexus between these expenditure incurred and FCCB and issue of fresh share capital raised during the year. The word in connection with .....” is vide expression to encompass even other expenditure which is not mentioned in section 35D.
NOT ALLOWING ALTERNATE CLAIM OF DEPRECIATION ON ASSETS TAKEN ON LEASE ALLOWED IN ASSESSMENT YEAR 2004-2005 AND 2005-06 Rs. 45,87,122/- 5.1. The Ld CIT (A) erred in not allowing alternate claim of depreciation of Rs. 45,87,122/- on assets taken on lease from Bombay Dyeing against the Lease Rental disallowed in assessment year 2004-2005 by saying that AO has not made any discussion in this regards. 5.2. The Ld CIT (A) failed to appreciate the facts that copy of the submission given before the AO was also submitted to the CIT (A) during the course of appeal proceedings which states that in assessment year 2004-05 and 2005- 06 alternate claim was allowed by the then AO in respective year. 5.3. On similar issue in AY 2007-2008, CIT (A) has allowed the relief of alternate claim of depreciation on assets taken on lease. Additional Ground 6. The Ld CIT (A) failed appreciate the fact that if the expenses are not allowable u/s 35D, then alternative the revenue expenditures may be allowed u/s 37.”
At the outset, Ld Counsel for the assessee brought our attention to the above grounds and mentioned that they are covered by the order of the Tribunal in the assessee‟s own case in the earlier AYs 2002-03; 2004-05 and 2005-06 in ITA No.4035/M/2006 (AY 2002-2003) and & 1624/M/2009 vide the order dated 17.12.2014 copy of which is placed on record. Considering the same, ground wise adjudication is given in the following paragraphs of this order.
Ground No.1 relates to the disallowance of depreciation of certain assets and the rate of depreciation is the subject matter of dispute. While the assessee claimed rate of depreciation @15% on the assets mentioned in the above grounds, the AO restricted the same to 10%. On similar facts, the Tribunal held in favour of the assessee and granted 25% as claimed by the assessee in the earlier AYs mentioned above. Bringing our attention to para 29 at page 12 of the said order of the Tribunal (supra) dated 17.12.2014, Ld Counsel for the assessee read out the relevant lines from the said para and demonstrated to the satisfaction of the Bench. For the sake of completeness of this order, relevant lines of the said para are extracted as under: “29...............Hence, by following the decision of the Ahmedabad Bench of the Tribunal referred above, we hold that the electrical fittings in the instant case should be considered as plant and machinery and hence the depreciation should be allowed at the rate of 25% to plant and machinery.”
Considering the above Tribunal‟s decision on the identical issue as well as in the absence of any contrary decision before us from the side of the Revenue, we, respectfully following above decision of the Tribunal, hold that the „electric fittings‟ should considered as „plant & machinery‟ and hence the depreciation should be allowed @ 15% to the said plant & machinery as claimed by the assessee. Accordingly, Ground no.1 with its sub-grounds raised
by the assessee is allowed.
5. Ground No.2 relates to the disallowance of interest of Rs. 69,76,659/- u/s 36(1)(iii) of the Act. Briefly stated relevant facts in this regard are that the assessee purchased land at Athal, Silvassa along with the boundary wall constructed thereon. In this regard, concerned Government Authorities not permitted the assessee for manufacturing of Polyester Polymer at Athal, Silvassa and therefore, the assessee- company decided to shift the said project to Sarigam, Gujarat. The land at Athal, Silvassa was sold in AY 2007-2008. During the year under consideration, assessee company incurred Rs. 17,98,46,190/- as „interest‟ expenditure. Out of the said amount, Rs. 7,78,34,944/- was capitalized to fixed assets for new industrial undertaking at Sarigam. In the assessment, AO disallowed the interest of Rs.
69,76,659/- on the ground that the said interest relate to the capital expenditure. Aggrieved, assessee carried the matter in appeal before the first appellate authority. After considering the submissions of the assessee, CIT (A) confirmed the decision of the AO. Therefore, the assessee is in appeal before the Tribunal vide ground no.2 mentioned above.
During the proceedings before us, Ld Counsel for the assessee brought our attention to the said order of the Tribunal (supra) dated 17.12.2014 and mentioned that an identical issue was decided by the by the Tribunal vide para 31 of this order and therefore, the present ground should also be decided in the same lines.
On the other hand, Ld DR dutifully relied on the orders of the Revenue Authorities.
After hearing both the parties and on perusal of the orders of the Revenue Authorities as well as the cited decision of the Tribunal (supra), we find the said para 31 of the Tribunal‟s order dated 17.12.2014 is relevant in this regard. Considering the significance of the said para 31 and also for the sake of completeness of this order, the same is extracted as under: “31. We have heard the parties and perused the record. At the time of hearing the Ld AR submitted that the assessee had used the internal cash accruals for funding the above said projects and the availability of its own funds could be proved to the AO by showing the balance sheet of the assessee. Accordingly, he requested that this matter may be set aside to the file of the AO so that the assessee would be able to demonstrate about the availablility of its own funds, to which the Ld DR also did not object. Accordingly, we set aside the order of the Ld CIT (A) and restore this issue to the file of AO with a direction to examine this issue afresh by considering the information and explanation that may be furnished by the assessee and take appropriate decision in accordance with law.”
Considering the commonality of the issue involved in the instant ground with that of the one decided by the Tribunal (supra) vide above extracted para 31 of its order and respectfully following the same, we remand this issue to the file of the AO with identical directions. Accordingly, ground no.2 with its sub-grounds raised
by the assessee is allowed for statistical purposes.
10. Ground No.3 relates to the disallowance of Rs. 4,77,918/- u/s 40A(2)(b). Brief facts in this regard are that the assessee made purchases POY to the tune of Rs. 3,54,44,578/- and plastic adapter to the tune of Rs. 67,53,401/- from Arya Industries in which the chairman of the company is the partner. In the assessment , AO observed that similar purchases were made from other parties and compared the rates. AO accepted the rates for purchase of paper tubes. However, he was of the view that purchase of plastic adapter, there were some variations with other parties. Accordingly, AO made addition of Rs 4,77,918/- u/s 40A(2)(b) of the Act. On appeal, CIT (A) confirmed the said addition made by the AO. Aggrieved, assessee is in appeal before the Tribunal.
During the proceedings before us, at the outset, Ld Counsel for the assessee brought our attention to the said decision of the Tribunal (supra) dated 17.12.2014 and mentioned that vide para 35 the Tribunal directed the AO to compute the disallowance @ 6% of the aggregate purchase value of the purchases made from M/s. Arya Industries, and therefore, considering the commonality of the issue, the present ground should also be decided in the same lines.
On the other hand, Ld DR dutifully relied on the orders of the Revenue Authorities.
After hearing both the parties and on perusal of the orders of the Revenue Authorities as well as the cited decision of the Tribunal (supra), we find the said para 35 of the Tribunal‟s order dated 17.12.2014 is relevant in this regard. Considering the significance of the said para 35 and also for the sake of completeness of this order, the same is extracted as under: “35...........Accordingly, to put this matter at rest, we direct the AO to recomputed the disallowance at the rate of 6% of the aggregate purchase value of purchases made from M/s. Arya Industries. The order of the CIT (A) on this issue stands modified accordingly.”
Considering the commonality of the issue involved in the instant ground with that of the one decided by the Tribunal (supra) vide above extracted para 35 of its order and respectfully following the same, we direct the AO to compute the disallowance @ 6% of the aggregate purchase value of the purchases made from Arya Industries. Accordingly, this ground 3 with its sub-grounds is partly allowed.
Ground No.4 relates to the allowablility of the claim u/s 35D of the Act. In this regard, Ld Counsel for the assessee brought our attention to the additional ground filed before us for the first time making an alternate claim seeking relief u/s 37(1) of the Act. In this regard, Ld Representatives of both the parties mentioned that this issue raised in ground no.4 needs to be remanded to the file of the AO for fresh adjudication after admitting the said additional ground.
After hearing both the parties and on perusal of the additional ground raised
by the assessee, we find the request for admission of the additional ground and remanding the same for fresh adjudication is appropriate and it requires to be sustained. Accordingly, the additional ground along with the ground no.4 raised by the assessee is remanded to the file of the AO for fresh adjudication. It is needless to mentioned that the AO shall grant a reasonable opportunity of being heard to the assessee as per the set principles of natural justice. Accordingly, additional ground as well as ground no.4 with its sub-grounds are allowed for statistical purposes.
17. Ground No.5 relates to the disallowance of alternate claim of depreciation of Rs. 45,87,122/-, when the rentals were not allowed. In this regard, Ld Counsel for the assessee brought our attention to the said Tribunal‟s order (supra) dated 17.12.2014 and mentioned the on identical facts, Tribunal decided the similar issue vide para 10 of its order. After hearing both the parties and on perusal of the said para 10 of the Tribunal‟s order (supra), we find the same is relevant in this regard. Considering the significance of the said para 10 for the sake of completeness of this order, the same is extracted as under: “10. We notice that the AO has denied the benefit of depreciation also on the ground that the assessee is not the owner of the asset as per the lease agreement. There is a fallacy in the said decision. Once the AO has held that this was a case of finance transaction by ignoring the lease agreement, in our view, he should not refer to the very same lease agreement to decide about the ownership. Accordingly, we are of the view that the assessee should be allowed depreciation benefit.”
18. Considering the commonality of the issue involved in the instant ground with that of the one decided by the Tribunal (supra) vide above extracted para 35 of its order and respectfully following the same, we are of the considered opinion that the assessee should be allowed depreciation benefit. Accordingly, ground no.5 with its sub-grounds raised by the assessee is allowed.