M/S GUPTA METALLICS 7 POWER LTD.,,NAGPUR vs. A.C.I.T. CENTRAL CIR.,- 2(3), NAGPUR

Brief facts of the case are that the assessee filed its return of income on 30.03.2007 declaring total income of Rs.7,94,36,386/-. However, the assessee shown Rs.1,70,08,715/- as income in the Income Calculation Sheet and claimed exemption of Rs.1,00,000/- u/s.80G of the Act. The return of the assessee was proceeded u/s.143(1) of the Act and the AO completed the assessment making various additions to the tune of Rs. 74,16,154/-, less depreciation u/s 32 of the Income Tax Act allowed on capitalisation of revenue expenditure for Rs. 31,92,441/- finally making the taxable income as Rs. 2,11,32,428/- and resultantly the tax payable was arrived at Rs. 77,32,884/- as mentioned in the assessment order.

Aggrieved by the assessment order, the assessee appealed before the CIT(A) and the CIT(A) partly allowed the appeal of the assessee, against which the assessee is in further appeal before the Tribunal.

The case was argued by the rival parties, we heard the same, have perused the material available and submissions of the parties. Our considered view and decisions on different grounds raised by the assessee are as under:- Ground 1: General in nature needs not separate adjudication

Ld AR of the assessee at the outside has represented the case by submitting a gist if submissions. The said submission has details of the expenditure incurred on certain expenses which were treated as capital expenditure by the AO. Such details are as under:- (a) The factory has already commenced production in the immediate previous year when one kiln unit became functional. The second kiln commenced production on 26th July, 2004. The company had achieved turnover of Rs 4.87 Crores in immediate previous and RS.32.70 Crores in the year under consideration. The expenditure which has been disallowed by the A.O. relates to the regular working of the factory or information collected for further expansion of the unit and therefore revenue in nature. The same are not identifiable with any specific plant and machinery under installation and therefore allocation of the expenditure to plant and machinery by the A.O. is misplaced. (b) Rs.65,000/- was paid to M/s. Star Geotech for the Contoor Survey and Map Preparation. The Contoor Report and Map is required to be submitted at the Sub Divisional Office of the Collectorate which is a legal formality and has to be complied with after the construction and installation of factory. The factory is established as long as in the year 2003-04. PB Page 1-2 (c) Rs.25,000/- was paid to M/s. Star Geotech for preparation of Hydrological Survey Report for the Rajura Site that is Factory site of the company. The impugned report is required to be submitted to the environmental department of the Government of India and has no connection so far as the establishment of factory or establishment of plant and machinery. PB Page 3-5 (d) Rs.2,42,000/- was paid to M/s. PNB Guilt Ltd. for obtaining Techno Economic Report of the company for appraisal of the unit by the Punjab National Bank. Therefore, the aforesaid company evaluated the loan proposal for which a Techno Economic Report was prepared by them. The expenditure incurred benefited the company by getting proper evaluation from highly qualified professionals of PNB Guilt Ltd. The A.O. failed to appreciate that the unit was already inexistence and the company has achieved substantial turnover with the commencement of two kilns. The expenditure incurred for the existing business is an allowable expenditure. PB Page 6 (e) The expenditure of Rs.1,10,200/- was incurred for, environmental testing work of the Sponge Iron Plant of the company at Rajura The unit of the assessee is heavy pollution making industry and therefore required to check from time to time whether the pollution in the environment is within the permissible limit. This report can be obtained after the commencement of production when the factory is regularly running. PB Page 7-8 (f) The expenditure of RS.8,750/- was incurred for obtaining Title Verification and Search Report in respect of Gupta House. The bank was insisting for collateral security against the loan limit sanctioned to the company and therefore the company offered premises in Gupta House as Collateral security for which the Title verification and search report from the Advocate is necessarily required. PB Page 9-10

Ld Dr on the other hand had relied upon the orders of Ld AO and Ld CIT(A) and submitted that the revenue authorities has rightly decided the issue and therefore the same needs to be upheld.

We have considered the submissions of the rival parties and carefully perused material available on records. The submission of the Ld AR was that the factory has been established, two kiln units were started production in the FY 2003- 04, which was further substantiated by the AR by submitting that the factory has already commenced production and the company has achieved a turnover of Rs. 4.87 crore in the immediate previous year and Rs. 32.70 Crore in the year under consideration.

We have perused the order of Ld AO and Ld CIT(A). This issue was discussed at length by the Ld CIT(A) in its order and observed as under:-

The AO has observed that in the account of professional and consultancy fee, the company has registered following expenses on various dates which are actually related to its factory construction which should have been included in the cost of capital assets. Instead, the company has claimed these expenses in its profit and loss account as under. The expense of Rs 65,000/- was registered towards Star 05th April 2004 was actually related with of maps pertaining to contoor survey of the factory. The expenses of Rs.25,000/- registered for Star Geotech on 18th May 2004 was actually related with preparation of survey report of the factory at Rajura. The expense of Rs 2,42,000/- registered for PNB Guilt Ltd on 01st June 2004 was actually related with the techno- economic report on Sponge Iron. The expense of Rs 1,10,200/- towards M/s Environmental Engineers Inc. on 30th March 2005 was actually related with environmental testing work of Sponge Iron plant. The expense of Rs 8,750/- shown for Shri Arun B Chaudhary on 16th May 2004 was actually related with preparation of title verification and search report of Gupta House.

The Assessee has objected to the action of AO. The assessee has submitted that the factory has already commenced production in the immediate previous year when one kiln unit became functional. The second kiln commenced production on 26th July, 2004 and the company has achieved turnover of Rs. 4.87 Crores in immediate previous and Rs. 32.70 Crores in the year under consideration.

The assessee has further argued that the presumption of the AO that the factory is under installation is contrary to facts available on record. It is a matter of record that the company has undertaken further expansion program and the installation work of third kiln unit was in progress. The assessee has further stated that the expenditure which has been disallowed by the A.O. relates to the regular working of the factory or information collected for further expansion of the unit. The same are not identifiable with any specific plant and machinery under installation and therefore allocation of the expenditure to plant and machinery by the A.O. is misplaced. The assessee has further stated as under in his written submission: “The individual expenditure disallowed is dealt as under ;- (i) The assessee paid Rs. 65,000/ - to M/ s. Star Geotech for the Contoor Survey and Map Preparation. The assessee has already established the two kilns unit which has commenced production. Thereafter various other ancillary items in relation to production process were also provided to such unit. The Contoor Report and Map is required to be submitted at the Sub-divisional Office of the Collectorate which is a legal formality and has to be complied with after the construction and installation of factory. It is not a case wherein the survey report and Map is obtained for the purpose of establishment of factory as in the case of assessee the factory is established as long as in the year 2003-04. In such circumstances it is submitted that the expenditure is of revenue nature and allowable. (il) The assessee has paid Rs.25,000/- to M/s. Star Geotech for preparation of Hydrological Survey Report for the Rajura Site that is Factory site of the company. The impugned report is required to be submitted to the environmental department of the Government of India and has no connection so far as the establishment of factory or establishment of plant and machinery. Therefore, the same is claimed as revenue expenditure. (iii) Amount of Rs.2,42,000/- was paid to M/s. PNB Guilt Ltd. For obtaining Techno Economic Report of the company. We have to inform that the assessee had already approached State Bank of India for the purpose of obtaining finance however, there was delay in disbursement and in between the company approached Punjab National Bank for securing finance for the company. Meanwhile, the production had already commenced and the factory was very much in operation. The Punjab National Bank make appraisal of the unit through their merchant Banking Division in the name of PNB Guilt Ltd. and therefore the aforesaid company evaluated the loan proposal for which a Techno Economic Report was prepared by them. The assessee paid Rs.2,42,000/- for this report as per the directions of Punjab National Bank. Since the SBI started a disbursement of loan, the assessee dropped the idea of obtaining loan from PNB. The expenditure incurred benefited the company by getting proper evaluation from highly qualified professionals of PNB Guilt Ltd. And the report was useful for further expansion programme of the company. The A. O. failed to appreciate that the unit was already inexistence and the company has achieved substantial turnover with the commencement of two kilns. The expenditure incurred for the existing business is an allowable expenditure. The expenditure for obtaining such Techno Economic Feasibility Report is a revenue expenditure and therefore the disallowance made by the A.O. is highly unjustified. (iv) The assessee incurred expenditure of Rs.1,10,200/- environmental testing work of the sponge Iron Plant of the company at Rajura. The amount was paid to M/s. Environmental Engineers Inc. by account payee cheque and the bills and other documents were produced before the A.O. It is submitted that the industry of the assessee is heavy pollution making industry and therefore required to check from time to time whether the pollution in the environment is within the permissible limit. This report can be obtained only after the commencement of production when the factory is regularly running. The pollution control Board through its local office is always keeping check on the pollution level in an. around the factory premises. If the pollution is not found control there is always a fear of closing of factory hence, such type of testing etc. is periodically required to be done. Thus this expenditure has no relation for either establishment of factory or plant and machinery. In view of this fact the assessee has properly claimed the expenditure as revenue expenditure and the same is allowable. (v) The assessee has incurred expenditure of Rs. 8,750/- for obtaining Title Verification and Search Report in respect of Gupta House. The amount was paid to Shri Arun B. Choudhari and the bills were produced before the A.O. We have to inform that the bank was insisting for collateral security against the loan limit sanctioned to the company and therefore the company offered premises in Gupta House as Collateral security for which the Title verification and search report from the Advocate is necessarily required. This expenditure is revenue expenditure as neither any asset is created nor it can be related to acquisition of any plant and machinery. The expenditure for obtaining loan by the existing unit is an allowable revenue expenditure and the A.O. was not justified in disallowing the expenditure by considering the same as capital expenditure."

The Assessment order, remand report and assessee's submission are considered. On perusal of the details of expenses, it is seen that the expenses incurred are in the nature of pre- installation expenses. None of the expenses under discussion appear to be in the nature of revenue expenses. Some of the kilns have started production from July, 2004 as claimed by the assessee whereas some ,were under construction/ installation. The fact that production has started during the year on some of the kilns does not change the nature of expenses especially considering that construction work was still in progress as admitted by the assessee in its submission.

The expenses on preparation of survey report and map, preparation of hydrological survey report for the factory side, preparation of techno-economic for obtaining bank loan, preparation of environmental test report for the sponge Iron plant cannot be taken as revenue expenses by any stretch of imagination in the business of the assessee.

Therefore, .in the facts of the case, it is held that the disallowance of Rs.4,50,950/- made by the AO was justified. The order of the AO on the issue is upheld and addition made by the AO is confirmed.

We have heard the rival contentions and perused the material available. In this regard The decision of Honble Supreme Court in the case of Empire Jute Co. Ltd. Vs. CIT, 124 ITR 1 (Supreme Court) would be relevant to quote, wherein Honble Supreme Court has explained as to how test of enduring benefit was not conclusive in the following words used in the case of M/s. Lazard India Pvt. Ltd. :- “There may be cases where expenditure, even if incurred for obtaining advantage of enduring benefit, may none the less be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. It the advantage consists merely in facilitating the assessees trading operations or enabling the management and conduct of the assessees business to be carried on more efficiently or more profitably while leaving the fixed capital untouched the expenditure would be on revenue account, even through the advantage may endure for an indefinite future. The test of enduring benefit is therefore not certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given case.”

From the above legal position, it has emerged out that “What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test”. However, in the present case the expenditure incurred by the assessee may be enduring in nature but when we see the same in commercial sense, these expenditure were incurred for smooth and uninterrupted functioning of the business of the assessee like Contoor Report and Map to be submitted to at the sub divisional office of the Collectorate which is a legal formality and has to be complied after completion of construction and installation of factory these were not for establishment of the factory, Hydrological Survey report submitted to the environmental department has no connection with establishment of the factory, Techno Economic report for loan from bank for already existing unit of the company, environmental testing work which needs to be done on periodically to be submitted to Pollution Control Board for continuous functioning of the factory, title verification report and search report for providing collateral security to bank for obtaining loan for the existing unit. We have considered all this factors showing nature of expenses and there connection with the establishment or asset or with regular business of the assessee. Revenue’s contention that the expenses are in the nature of capital expenditure and there nature cannot be changed even if the production of some of the kilns is started especially considering the fact that construction work was still in progress for other kilns, cannot be considered worth merit as the expenses done was in nature of regular compliances necessary for uninterrupted functioning of the production and business of the assessee. Therefore, these expenses are revenue in directed to allow the same as revenue expenditure. Consequently, this ground of appeal is decided in favour of the assessee. Ground 3: Machinery hire charges Rs. 7,67,258/-

On this ground Ld AR submitted that these expenses were towards higher charges for crane which was utilised for the purpose of lifting of raw material to be poured through funnel of the kiln as well as for lifting of finished goods for loading and unloading purpose. AR also explained that crane which was utilised for the purpose of installation hired for Rs. 28,49,690/- from M/s Samarth Lifters has already been capitalised being used for installation purpose.

In this regard observation and conclusion of the Ld CIT(A) was as under:-

It is seen from the remand report that the amount of rent Rs.28,49,690/- paid between the period 041/04/2004 to 31/10/2004 has been capitalized by the assessee and included in the cost of kiln-2 and kiln-3. However the amount of rent of crane of Rs.4,95,000/- paid to M/s J.K.Transport and Rs.2,72,258/- paid to M/s Maheshwari transport have not been included in the cost of the plant. There is no dispute on the understanding that the cranes would have been used by the assessee for the running of the manufacturing operations. There is merit in the observation and argument of the AO that the rent paid for cranes amounting Rs.4,95,000/- and Rs.2,72,258/- respectively needs to be capitalized and cannot be allowed as revenue expenditure. Therefore, the disallowance to the extent of Rs.7,67,258/- out of the disallowance made by the AO of Rs.10,49,569/- is upheld and confirmed.

We have considered the contentions of the assessee and the revenue on this issue and observe that the AO in assessment order as well as in remand report has mentioned that the assessee has not brought on record any evidence that the cranes were not used for the installation and construction purpose. Ld CIT(A) has relied on the assessment of the AO and on remand report but have not considered the submissions of the assessee where the assessee has submitted that:- (d) That the A.O. disallowed sum of Rs.4,95,000/- and 2,72,258/- paid to M/s. J.K.Trandport and M/s. Maheshwari Transport respectively on the basis that the same was not capitalised in the cost of plant and machinery. We object to the action of the A.O. and have to submit that the assessee has produced the details of machinery hire charges account alongwith bills and vouchers. It was informed to the A.O. as well as found in the books of accounts that the crane utilised for the purpose of installation of plant and machinery which was hired from M/s. Samarth Lifters for Rs. 28,49,690/- was duly capitalised in the cost of plant and machinery. The aforesaid crane was exclusively used for the purpose of installation and therefore the expenditure was duly capitalised. However, in respect of the other two cranes which were hired from M/s. J.K. Transport and M/s. Maheshwari Transport it was explained to the A.O. that the cranes were utilised for the purpose of lifting of raw material as well as finished goods for loading and unloading purposes. The cranes were also used for lifting of other material lying in the factory site. There is no evidence brought on record by the A.O. to establish that the cranes were used for the purpose of installation of plant and machinery. We draw your kind attention to para 11.2 and 11.3 on Page 8 of the Assessment order and have to submit that the disallowance is made without providing any reason for his action. In such circumstances it is submitted that the hire charges paid for the purpose of lifting of material may kindly be allowed as revenue expenditure.

In our considered opinion assessee has furnished his submissions and tried to clarify the issue through submissions. Also the assessee has fairly disclosed the fact and capitalised a sum of Rs.28.49/- under the same head of expenditure being used for the installation purpose and charged Rs. 7.67 Lac to revenue as per actual use of the cranes. We therefore hold that, disallowance only on the basis of understanding, belief, doubt or self opinion by the revenue authorities without having any proof to prove that the cranes were not used for regular operations of the factory, is not sustainable. Accordingly this issue decided on favour of the assessee, thus allowed. Ground 4: Disallowance of Power & Fuel Expense Rs. 3,50,000/- :

On this ground assesee’s submission was as under:- Expenditure of Rs.26,500/- was incurred for ROC fees, late filing fees and fees to the company secretary for professional services. The filing fees of Rs.19,500/- was paid for filing of documents relating to the year payment of Rs.1,000/- was made at late filing fees The filing fees is due only when the documents are filed. Thus the liability of expenditure crystallises on the event of filing of the document which occurred during the year. Similarly, the professional fees for the FY 2003-04 regarding company law matters was paid to the Company Secretary at Rs.6,000/- as the work related the aforesaid dealer was completed during the year by filing the documents and also the bills were raised during the year under consideration.

Ld CIT(A) has decided this ground against the assessee observing that:

On perusal of the observations of the AO in the assessment order and the arguments of the assessee in the submission, it is seen that the expenses under discussion pertain to prior period. None of these expenses pertain to' the current year. There is no dispute on the fact that the assessee is maintaining its books of accounts on mercantile system.

In my considered view, the expenses are not allowable to the assessee for F.Y.05-06. Therefore, the order of the AO on the issue is upheld. The addition of Rs.26,500/- made by the AO is upheld and confirmed.

We have considered the submissions of both parties and have the opinion that merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year, unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the accounts are maintained on the mercantile basis and that it related to a transaction of the previous year.

We therefore of the view that, fee paid to ROC, late filing fee and professional charges to the company secretary for Rs. 26,500/- shall be allowed to the assessee, being determined and crystallized during the year under reference on execution of such services during the year. Therefore, this ground is decided in favour of the assessee. Ground 6 and Ground 7: Disallowance of Advertisement and Business Promotion expenses – Rs. 67,050/- and disallowance of credit card expenses for Rs. 50,567/-

Submissions of the assessee on these ground was as under:- Addition of Rs. 67,050/- from out of the Advertisement and Business Promotion Expenses was made on the basis that the expenditure has no direct relation with the business of the assessee. The assessee incurred expenditure of Rs.18,550/- for purchase of Gold Ginny from M/s. Das Jewellers, The aforesaid items were purchased for onward distribution at the time of Diwali to the value customer including the employees of such customer. Similarly, a 'silver show piece worth Rs.48,500/- was purchased from M/s, Batukbhai & Sons which was presented to the Director of M/s, Llyods Steel ltd Wardha who is one of the valued customer and major purchaser of the company. There is no evidence that the items have been used for personal purposes. The expenditure of smoothly with the customer. That the AO. disallowed Rs.50,567/- from out of business promotion expenses on the basis that the bills were not produced before him, Expenditure was incurred the ICICI Credit by the Director of the company on account of various facilities while on tour for business purposes. The documents were submitted by the Director to the company and the claim was found appropriate then only the reimbursement was allowed by the company,

Ld DR vehemently relied upon the orders of revenue authority wherein Ld AO has disallowed and CIT(A) has confirmed the disallowance on the ground that such expenditure could not be considered as business expense being the assessee was unable to produce the details and bills of the said expense.

After carefully considering the submissions of the rival parties, we are of the view that, when the incurrence of expenses in indisputably accepted by the Ld AO. Also no specific adverse finding could be drawn out by the revenue authorities. Looking to volume of the business and business exigencies such petty payments towards business promotion and expenses incurred by the directors during for the purpose of business may be allowed, therefore contentions of the assessee are accepted and ground number 6 & 7 are allowed in favour of the assessee. Ground 8: Disallowance of Rs. 3,75,000 processing fee application of on loan

Assessee’s written submission on this ground were: HDFC Bank sanctioned Term Loan of Rs.5,50 Crores on the basis of appraisal of the property in which one of the criteria was the discounting of future rentals, While finalising the proposal, processing fees of Rs,35,000/- was charged by the Bank. Since the processing fees was non-refundable, the company had to bear the loss and in view of this fact the same was claimed as revenue expenditure. The term-loan was not materialized and therefore, the loss incurred was claimed as expenditure.

Ld CIT(A) in his order has observed on this issue, as under:

The AO has observed that the company had claimed Rs.3,75,000/- related to the processing fee of term loan taken from HDFC Bank at Pune. The AO disallowed the assessee's claim of expenses of Rs. 3,75,000/- treating the expenditure of capital nature, since the term loan was -for the purpose of acquisition of premises at Pune.

The assessee has stated In its submission that the company approached HDFC Bank for the purpose of Term Loan for acquisition of property, Block No. A- 205, A-206 and B- 206 on second floor, ICC Realty India Pvt. Ltd., Senapati Bapat Road, Pune for business purposes. While finalizing the proposal of term loan, processing fees of Rs.3,75,000/- was charged by the Bank, sanction letter of HDFC Bank, Voucher of Rs.3,75,000/- and the entries in the books of account were produced before the A.O. As a natural corollary the HDFC Bank did not release the term loan as it was revealed to the company that the property to be purchased was having defective title. The assessee has further stated that since the processing fees was non- refundable, the company had to bear the loss and in view of this fact the same was claimed as revenue expenditure.

On perusal of the assessment order, remand report and the assessee’s submission on the issue, it is seen that the expenses relate to a term loan for the purchase of property at Pune. It is not clear from the submission of the assessee whether the property in question was being purchased in the hands of the assessee company or certain individuals. No documentary evidences in support of the assessee's arguments have been submitted during the appellate proceedings. From the assessment order also it is seen that no such evidences appear to have been submitted by the assessee during assessment. In any case, expenditure on processing fees of the term loan would be capital in nature.

We have carefully perused the submissions of the assessee, orders of AO, CIT(A). At the outset it is being admittedly accepted by both the parties that expenditure on processing fee for loan applied was paid to the bank. The loan was applied for the purchase of property by the company for business purpose. However, due to some defects in the title of the property document the loan was not granted to the assessee. Ld CIT(A) proceedings. This contention of the revenue authorities is not tenable as the loan was applied and processing fee was charged to the assessee company by the HDFC bank as per their letter dated October 21, 2004 (page 12-14 of the paper book of the assessee), if the loan would have been granted the funds disbursed would also be utilised by the assessee company only for its business purpose as per the terms of loan granted by the bank. Therefore, under no stretch of imagination it could be drawn out that the loan could be in the name of any individual person and not for the assessee company. Consequently, the expenditure incurred under normal prospect of the business to generate funds for the needs of business by way of loan, even if the proposal was not succeeded under certain peculiar circumstances, the same shall be treat as bonafide business expense and shall be permissible under the law. We therefore of the considered opinion that processing fee for availing of loan for the business purpose of the assessee company are allowable and thus this ground of the appeal of the assessee is allowed. Ground 9: Interest charged u/s 234A, 234B and 234C

This ground of appeal in consequential in nature, since all the above grounds are allowed in favour of the assessee, this ground of appeal needs no separate adjudication and accordingly dismissed.

In the result, appeal of the assessee is allowed. Order pronounced under Rule 34(4) of ITAT Rules, 1963 on 15/07/2022. (SANDEEP GOSAIN) (ARUN KHODPIA) न्याययक सदस्य / JUDICIAL MEMBER ऱेखा सदस्य / ACCOUNTANT MEMBER नागपुर Nagpur; ददनाांक Dated 15/07/2022 Prakash Kumar Mishra, Sr.P.S. आदेश की प्रयिलऱपप अग्रेपिि/Copy of the Order forwarded to : 1. अऩीलाथी / The Appellant- प्रत्यथी / The Respondent- 2. आयकि आयुक्त(अऩील) / The CIT(A), 3. आयकि आयुक्त / CIT 4. ववभागीय प्रनतननधध, आयकि अऩीलीय अधधकिण, नागपुर / DR,

ITAT, Nagpur गार्ा पाईल / Guard file. 6. सत्यावऩत प्रनत ////