Income Tax Appellate Tribunal - Hyderabad
Value Labs Llp , Hyderabad vs Asst. Commissioner Of Income Tax, ... on 9 April, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCHES "A" : HYDERABAD
(THROUGH VIDEO CONFERENCE)
BEFORE SHRI S.S.GODARA, JUDICIAL MEMBER
AND
SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER
I.T.A. No. 1922/HYD/2018
Assessment Year: 2014-15
M/s.ValueLabs LLP, Asst. Commissioner of
HYDERABAD Vs Income Tax,
[PAN: AAKFV2276K] Circle-8(1),
HYDERABAD
(Appellant) (Respondent)
For Assessee : Shri P.Murali Mohana Rao, AR
For Revenue : Shri Sibendu Moharana, DR
Date of Hearing : 01-02-2021
Date of Pronouncement : 09-04-2021
ORDER
PER S.S.GODARA, J.M. :
This assessee's appeal for AY.2014-15 arise against the ACIT, Circle-8(1), Hyderabad, assessment order dated 31-08- 2018 passed in furtherance to the Dispute Resolution Panel (DRP)-I, Bangalore's directions dt.27-06-2018 in F.No.59/DRP- 1/BNG/2018-19, involving proceedings u/s.143(3) r.w.s.144C (13) of the Income Tax Act, 1961 [in short, 'the Act'].
Heard both parties. Case file perused.
2. The assessee's first and foremost substantive ground raised during the course of hearing before us challenges correctness of both the lower authorities' action Arm's Length Price (ALP) adjustment of Rs.42,30,911/- towards interest on :- 2 -:
ITA No. 1922/Hyd/2018receivables qua its international transactions with overseas Associated Enterprise(s) (AEs). Suffice to say, it transpires at the outset that this tribunal's co-ordinate bench's decision involving AY.2013-14 ITA No.475/Hyd/2017, dt.15-12-2017 holds that since no interest was charged in AEs and non-AEs, the impugned interest on receivables leading to ALP adjusted under Chapter-X of the Act is not sustainable. Coupled with this, learned CIT-DR fails to dispute that the authorities herein have adopted SBI's short term deposit rates for computing the impugned adjustment which are not based on any comparable in the very segment. We thus find no reason to sustain the impugned adjustment both on principles of judicial consistency as well as on merits. The same is directed to be deleted. The assessee succeeds in the first and foremost substantive ground.
3. Next comes the second issue of depreciation disallowance of Rs.18,63,27,778/- relating to assessee's Chilveru Solar Plant in Mahabubnagar District. The DRP's detailed discussion to this effect reads as under:
"2.3 Ground of objection NO.3: Relating to the Disallowance of Depreciation of Plant and Machinery of Solar Power Plant at Chilveru Unit for Rs.18,63,27,778/- :-
Objection No:3.1: The AO erred in making disallowance of Depreciation on Plant and Machinery of Rs.18,63,27,778/- .
Objection No. 3.1.1: The AO erred in not appreciating the fact that the solar power plant was "Ready to use" from 26.03.2014 and the same was "Put to use" as on 29.03.2014 i.e. during the AY 2014-15.
Objection No. 3.1.2: The AO erred in not appreciating the fact that solar power plant has generated 65Kwh as on 31.03.2014 and the same was consumed by the local office set up in the premises of the plant which implies that the plant was put to use from 31.03.2014.
:- 3 -:ITA No. 1922/Hyd/2018
Objection No. 3.1.3: The AO ought to have appreciated the fact that CPDCL of AP limited has tested and issued the work completion certificate on 26.04.2014.
Objection No. 3.1.4: The AO ought to have appreciated the fact that admittedly the Electrical Inspectorate carried out the inspection (under Regulation 32 of the Central Electricity Authority (Measures relating to Safety and Electric Supply) Regulations, 2010) of the solar plant on 29.03.2014 for which putting the equipment to use' was sine qua non i.e. the inspection and subsequent approval of the solar power plant could not have been clone without the actual generation of electricity by the solar power plant.
Objection No. 3.1.5: The AO ought to have appreciated the fact that the final approval of the Electrical Inspectorate under Central Electricity Authority (Measures relating to Safety and Electric Supply) Regulations, 2010 was required to supply the electricity generated commercially and not for 'putting to Lise' for the inspection and trial run itself.
Objection No. 3.1.6: The AO erred in not appreciating the fact that the assessee has complied with all the conditions laid down u/s. 32 of the Act and is entitled to claim the said depreciation since the asset is used wholly and exclusively for the purpose of business as on 31.03.2014.
Objection No. 3.1.7: Without prejudice to above ground, the AO ought to have allowed the claim of depreciation to the assessee since the asset is ready for use as on 26.03.2014 and was actually put to use on 29.03.2014 during the course of inspection carried out by the Electrical Inspectorate.
Objection No. 3.1.8: The AO erred in drawing erroneous conclusions against the assessee which is not correct and not in accordance with the provisions of Act.
2.3.1 During the assessment proceedings the AO had called upon the assessee to substantiate its claim of depreciation over solar plant of Rs.34,53,67,922/- and to prove that the Power Plant was put to use as on 31.03.2014. In response, the assessee submitted that during the year- it installed Solar Power Plant in Chilveru Village and ill support of the claim that it was put to use, furnished copy of a certificate of M/s.Schneider Electric India Private Limited dated 31.03.2014. As per the said letter dated 31.03.2014, the plant was ready in all aspects for Power generation and all the machinery at site are run a trial production and put to use on 31.03.2014; and that 'the plant has generated 65Kwh on 31.03.2014 which has been consumed by the local office set up in the Plant premises at Chilveru village'. The AO noted that the said letter also referred to inspection :- 4 -:
ITA No. 1922/Hyd/2018by the Chief Electrical Inspector of Government of Andhra Pradesh on 29.03.2014, who had accorded his approval for energizing vide his letter CEIG/TS/HV/MBNR-149/DNo.J.350, and the AO called upon the assessee to produce the said letter of approval of Chief Electrical Inspector in letter No. CEIG/TS/HV/MBNR-149/DNo.1350 and also to produce evidence for production and consumption" of electricity generated of 65Kwh on 31.03.2014. The "AO, after perusal, of the said approval letter in CEIG/TS/HV/MBNR-149/D-No.1350 produced before him, noted that the said letter was dated 11.04.2014; and therefore raised a query as to how the letter dared 31.03.2014 of M/s. Schneider Electric Power Company could refer to the approval letter dated 11.04.2014 and for which the assessee could not give any clarification. Therefore, the AO inferred that the contents of the letter dated 31.03.2014 of M/s. Schneider Electric Power Company is false and not reliable, and concluded that the asset was put to use only after the statutory approval accorded vide letter elated 11.04.2014, and was not put to use during the F.Y 2013-14 and hence disallowed the depreciation claimed for the subject year, and proposed an addition of Rs.18,63,27,778/- .
2.3.2 During the DRP proceedings, it was contended that the asset was 'Ready to use' from 26.03.2014 and the same was 'put to use' as on 29.03.2014; and that the Power generated 65Kwh as on 31.03.2014 was consumed by the local office and that would imply that me-plant was put to use from 31.03.2014. It was contended that tile Electrical Inspectorate carried out the inspection on 29.03.2014 for which putting the equipment to use was sine qua non and that the subsequent approval could not have been granted without the actual generation of electricity. It was further contended that the final approval of the Electrical Inspectorate was required to supply electricity generated commercially and not for putting to use [01-
inspection and trial run. Thus it was argued that as the asset was 'Ready to use' on 26.03.2014 and actually 'put to use' on 29.03.2014 during the course of inspection by Electrical Inspectorate, the assessee was entitled to its claim of depreciation and the same should be-allowed. The assessee relied on the decision of Gujarat High Court in the case of ACIT vs. Ashima Syntex (251 ITR 133), and contended that even trial production of a machinery would fall within the ambit of use; and the decision of ITAT Hyderabad in the case of SPR Publication Private Limited and contended that 'ready to use' would be sufficient to claim depreciation.
2.3.3 From the submissions made. it could be seen that the assessee's contentions are:-
a) that the assets were ready to use on 26.03.2014 :- 5 -:ITA No. 1922/Hyd/2018
b) that the assets were put to use on 29.03.2014 when the inspection was carried out by Electrical Inspectorate
c) that there was actual generation of power of 65Klwv and consumed as on 31.03.2014 2.3.4 In support of these contentions the assessee primarily relied on the following documents before the AO:-
1. Letter dated 31.03.2014 issued by M/s. Schneider Electric Company Limited
2. Approval letter dated 11.04.2014 issued by the Electrical Inspectorate 2.3.5 During the DRP proceedings, the assessee was asked to submit the complete correspondence relating to the obtaining of statutory approval from the Electrical Inspectorate; and in response to the assessee vide letter dated 13.C13.201B.enclosed copies of assessee's letter dated 29.03.2014 to Chief Electrical Inspector notice from Chief Electoral Inspector dated 29.03.2014 and 11.04.2014, letter dated 18.03.2014 to Chief Electoral Inspector and notice from Chief Electoral Inspector-dated 18.03.2014. On perusal of these letters, it is seen that the assessee vide letter dated 18.03.2014 submitted drawings for approval which was provisionally approved for erection by the Chief Electrical Inspector vide letter in CEIG/TS/HT/MBNR-149/J.No/1095/14 dated 18.03.2014; which is valid upto 18.03.2015; arid the defects / omissions pointed in the drawings will be specifically inspected at the time of inspection of Chief Electrical Inspector; and that the installation shall conform to the relevant provisions of Central Electricity Authority (Measures relating to Safety and Electric Supply) Regulation 2010.
Subsequently, the assessee had submitted letter dated 29.03.2014 stating that the installation as per approved drawings were completed and requested to conduct inspection at the plant at the earliest. From the perusal of letter No. CEIG/TS/HV/MBNR-149/D- No-/Camp 14 dated 29.03.2014, (page 427 of paper book) it appears that inspection was conducted on 29.03.2014 and a tentative approval. which is valid upto 15.04.2014 was granted requiring the assessee to submit compliance report item wise and get it regularized. Subsequently, the assessee vide letter dated 11.04.2014 (page 432 of paper book) has submitted compliance report and requested to issue necessary approval at the earliest. The item wise compliance referred in the said letter was as under:-
Designated person (electrical Engineer) who is having 33KV permit holder will be appointed shortly in Mean time.
:- 6 -:ITA No. 1922/Hyd/2018
A Grade electrical contractors (Schneider Infrastructure) persons for operation and maintained of our H T installation to free from Danger.
2. Mr. M.Siva Ram Kumar, who appointed as a safety officer
3. AJB box has been earthed with 50 Sq. mm Copper cable and connected to separate earth electrode
4. Inverter Panel body earthed multi stand insulated cable replaced with 50 x 10mm G 1 flat
5. Provided the: sufficient cooling facility for Transformer with cross ventilation and exhaust systems Heating and cooling calculation sheet is enclosed with this Letter for your kind information and 'NC will take care about unitized substation oil Transformer in future projects.
6. 12mm x 1.2 mtrs rod earth electrodes replaced with 100m Dia with
3 mtrs Length C I pipe at centralized sub-station and 33KV VC Panel
7. 33KV VCB Panel double earthed with 100x10mm G 1 flat
8. Transformers body double earthed with 100x10mm G I flat
9. Provided earth spike on the 33KV structure at metering yard and synchronizing sub sub-station
10. 60mm HG Metal has been spreaded uniformly in the yard
11. Provided earth switch for Isolators at generation and synchronizing
12. 33KVOH Line Metal clamps has been earthed with 25x3mm G I flat and connected to 1" inch dia electrode
13. Provided metal clamp support for- V cross arms of Transmission Line
14. Provided first Aid box
15. Provided fire extinguishers at all the conspicuous places.
Thereafter, statutory approval was granted vide Letter No. CEIG/TS/HT/MBNR-149/D.No/1350/14 dated 11.04.2014.
2.3.6 In the light of above correspondence, we are unable to accept the assessee's contentions that the assets were ready to use on 26.03.2014 and were put to use on 7.9.03.2014. The letter dated :- 7 -:
ITA No. 1922/Hyd/201829.03.2014 of the Electrical Inspectorate requiring the assessee to comply with certain statutory requirements clearly show that the plant was not ready to use. The items of compliance referred in the assessee's letter elated 11.04.2014 clearly show that some of the machineries / equipments were not installed / erected as per the requirements specified in the Central Electricity Authority (Measures relating to Safety and Electric Supply) Regulation 2010, and that the plant was not safe for operation and that the assessee could rectify those deficiencies and complied with tile statutory requirements only as on 11.04.2014. Thus the Plant was not safe to use and not 'Ready to use' prior to 11.04.2014. A perusal of the Central electricity Authority (Measures relating to Safety and Electric Supply) Regulation 2010 would show that these Regulations have laid down elaborate measures to be complied with in the installation, erection. connection and supply of electrical equipments to ensure safety io human life and to prevent danger. The objective of these Regulations are to ensure that the. prescribed safety measures are followed so as to prevent danger to life. The assessee could comply with these measures only as on 11.04.2014. Therefore, it can be inferred that the assets were 'Ready to use' only as on 11.04.2014. Further, without complying with the safety requirements prescribed in a statutory regulation, these electrical equipments cannot be said to have attained the 'Ready to use' condition. Taking such a view would not only be illogical but also against public policy; as these safety measures are prescribed for public safety unci to prevent danger to life. Without complying with the safety measures prescribed in a statutory regulation, the assessee could not be allowed to claim benefits under another statute; which would amount to defeating the purpose of the Electricity Regulation 2010.
2.3.7 The assessee also placed reliance on the certificate of M/s Schneider' Electric Company vide letter dated 31.03.2014 stating that all the required machinery & infrastructure were installed and tested at site by 26th march 2014, in support of its plea that the plant was 'Ready to use' on 26.03.2014. We note that the assessee has not clarified even before us, as to how the said letter dated 31.03.2014 could make reference to Electricity Authorities' approval letter dated 11.04.2014. Therefore, we are of the view that the AO had rightly doubted the veracity of its contents and its credibility and cannot be relied as evidence. Even otherwise, as already discussed, the deficiencies in the safety measures pointed in the Inspection Report go to show that the Plant was not 'Ready to use' as on 29.03.2014, and was ready to use only on 11.04.2014. It is also relevant to note that this 'Ready to use' theory was rejected by the Hon'ble Karnataka High Court in JCIT vs. Yellama Dasappa Hospital (290 ITR 353), and the Bombay High Court in Dinesh Kurmar Gulabchancd Aggarwal vs. ACIT (267 ITR 768).
:- 8 -:
ITA No. 1922/Hyd/20182.3.8 The AR vehemently argued that at the time of inspection on 29.03.2014 the assets have been put to use, and that without putting the assets to use, the inspection could not have been carried on. In support, the AR relied on the decision of the Gujarat High Court in the case of Ashima Syntex Limited and the decision of ITAT Hyderabad in the case of SPR publications Private Limited. It was submitted that the Hon'ble Gujarat High Court in the case of ACIT vs. Ashima Syntex held that even trial production of a machinery would fall within the ambit of 'used for the purpose of business'; and placing reliance on the same, it was argued that it has to be implied that the plant was put to use on 29.03.2014 as without putting to use inspection could not have been done. Without prejudice, it was argued that even if the asset was ready to use, depreciation could be allowed and in this regard reliance was placed on the decision of Hon'ble ITAT Hyderabad in the case of SPR Publications Pvt Ltd vs. ACIT.
2.3.9 Having considered the submissions, we are unable to accept the argument that as inspection was carried out on 29.03.2014, it would imply that the asset was put into use on 29.03.2014. We are unable to appreciate how the ratio of Hon'ble Gujarat in the case of Ashima Syntex Limited would be applicable to support such argument. The brief facts before the Gujarat High Court was that the assessee purchased some power looms and commenced trial production, before the end of accounting year, though commercial production commenced much later. Some fabrics produced during the trial production was shown as closing stock. As there was clear evidence of production, the Court held that depreciation cannot be denied merely for the reason that the machinery was used for a short duration for trial run: and that even trial production would fail within the ambit of 'used for the purpose of business'. The facts in the instant case are totally different. There was only an inspection on 29.03.2014, by the Electrical Inspectorate, whose purpose was to verify whether the machinery & electrical equipments have been installed/erected as per the approved drawings of the Electricity Department and to verify whether the safety measures stipulated in the Central Electricity Authority (Measures relating to Safety & Electric Supply) Regulations 2010 have been complied with to prevent danger. The purpose of inspection was not to see whether the plant is fit for commercial production or could generate the electricity as per its capacity. The Inspection carried out on 29.03.2014 revealed deficiencies in the Safety Measures unci therefore the assessee was required to comply with the Electricity Regulations 2010 within a stipulated time. The implication of the Inspection report is that the safety measures prescribed in the statute have not been adhered to, and therefore the plant is not fit for operation unless the deficiencies are rectified and the requirements in the Regulation are complied with. For that reason approval was not given all 29.03.2014. Only :- 9 -:ITA No. 1922/Hyd/2018
after rectification of defects and compliance to the prescribed measures. the approval was given all 11.04.2014. Thus, there is no basis to infer that the plant was 'Ready to use' or 'put to use' on 29.03.2014. On the other hand, there is every reason to infer that the Plant was not ready to use and hence not put to use also, until 11.04.2014 when the statutory approval was given after rectification of defects. Besides, there was not even a claim that there was trial production on 29.03.2014; and there was no documentation to take such a view. We are of the considered view that the Inspection carried out by a Regulatory Authority cannot for any reason be equated to test run or trial production; and therefore it cannot be implied that the plant was already put to use because it was inspected. Hence, the pleas raised in this regard are rejected.
2.3.10 The assessee had also raised a plea that there was generation of electricity on 31.03.2014. No supporting evidence was produced before the AO or before us to substantiate such plea, expect the letter of M/s Schneider Electric Company Ltd. As already discussed the said letter cannot be relied on as evidence as its veracity is in doubt, besides it is also self-serving document, as the said company was the assessee's contractor. There is no other material on record to suggest generation of electricity as on 31.03.2014. Hence we regard this plea also.
2.3.11 Thus we find that the claim of tile assessee that the assets were 'Ready to use' on 26.03.2014 and 'put to use' on 29.03.2014 were not justified, in view of the above discussions. We also' note that the assessee failed to adduce any evidence to support its claim that there was generation of electricity to the tune of 65 Khw.
Therefore, we reject the pleas raised and accordingly, the AO is directed to make the proposed addition".
4. We are informed during the course of hearing that the departmental authorities have already allowed assessee's depreciation claim regarding the very fixed asset in next financial year. The assessee's case on the other hand, is that it is very much entitled for the impugned depreciation in this financial year since it had duly set up and put to use the solar power plant in issue. We therefore proceed to the assessee's case on the basis of the evidence/supportive material available in the case file.
:- 10 -:
ITA No. 1922/Hyd/20184.1. It emerges from a perusal of the above records that the assessee's power plant had witnessed the state government's authorities' on site inspection visit on 29-03-2014 as it is clear from a perusal of pg.427 in the paper book wherein it was directed to energise the corresponding equipment on purely temporary basis. This followed the taxpayer's compliance report of the very date. The last correspondence between the assessee and the electricity inspectorate is letter No.1350/2014 dt.11-04-2014. The assessee's stand all along has claimed to have commenced its solar power plant on 'test check' production well before the last day of the relevant accounting period i.e., 31-03-2014 and therefore entitled for the impugned depreciation. It has further stated that the 'energisations of the circuit was a condition precedent which never took place after 31st of March, 2014.
5. Learned CIT-DR at this stage invited our attention to the DRP's findings raising serious doubts on assessee's trial production claim. And that M/s.Schneider Electric India Private Limited (supra)'s letter could also not be accepted as correct being a prima facie case of anti-dating the state government's correspondence. The facts speak otherwise in our considered opinion. This is for the reason that M/s.Schneider Electric India Private Limited had merely clarified the letter number as 1350 which was ultimately issued on 11-04-2014. It therefore appears an instance wherein the said number was allotted to the latter followed by Schneider's Certificate and the ultimate sanction coming on 11-04-2015. We make it clear that the Revenue's stand otherwise also would not result in any deviation of facts as to :- 11 -:ITA No. 1922/Hyd/2018
when the assessee had installed the power plant and commenced its trial production. We notice the same in light of the Regulation 43(3) of the Central Electricity Authority (measures relating to safety and electrical supply) Regulations, 2010 makes it mandatory that the owner of any power installation shall itself test check every circuit of voltage followed by recording of the corresponding results to be forwarded to the inspecting authority. It is this regulation's prior test results condition that the assessee had ensured compliance in March, 2014 itself which ultimately culminated in its approval. We thus quote the case law discussed at assessee's behest before the DRP (supra) and accept the assessee's depreciation claim on the ground that it had very well installed and put to use the solar plant in issue which further underwent all the mandatory inspections in the month of March, 2014 only. The impugned depreciation disallowance of Rs.18,63,27,778/- is deleted. This second substantive ground also succeeds.
6. Next comes the third issue of forward contracts loss disallowance of Rs.27,70,201/-. We notice that this issue has arisen between the parties for the first time in the impugned assessment year since the Assessing Officer has himself been allowing the same u/s.37(1) of the Act. The DRP's directions affirming the impugned disallowance reads as under:
"2.5.1 Having considered the submissions, we note that at page 417 to 421 of the Paper book, the assessee has given some basic information in the form of MTM and PFE report relating to loss claimed on forward contract provision The assessee has not furnished the contract notes relating to the alleged forward contract transactions. From the perusal of the forward MTM and PFE report for :- 12 -:ITA No. 1922/Hyd/2018
the year ended 31.032013 and 31.03.2.014, it is reported as follows:-
Positive MTM Negative MTM
exposure exposure
31.03.2013 2,05,13,857 21,54,223
31.03.2014 5,54,72,903 49,24,424
2.5.2 The assessee was asked to clarify whether the positive MTM exposure in the form of gain has been admitted and offered to tax in the subject year and earlier year. The assessee was also asked to clarify that as the negative exposure amounted to Rs.70,78,647/-
(Rs.21,54,223 + Rs.49,24,424/-), where is the question of double disallowance as contended during the year. In response the assessee filed submission vide letter dated 20th June 2018, and wherein it was contended that the assessee had negative exposure during the year of Rs.49,24,424/- and which was adjusted against reversal of provision of Rs.21,54,223/- relating to the earlier F.Y. 2012-13, and thus the net loss claimed was only Rs.27,70,201/-. The assessee has not furnished any clarification as to whether the positive gain / exposure have been admitted and offered to tax. Further on perusal of paqe 418 of paper book, it is seen that the positive gain of Rs.5,54,72,903/- has been reversed in the same year. The AR has no explanation to offer as to why the negative exposure was not reversed in similar manner as to positive exposure in the same year. Thus it is evident that the assessee has not been offering to tax the gains on MTM, while claiming deduction for the notional loss arising on account of MTM.
2.5.3. The assessee in its written submission has claimed that the accounting exchange difference arising on settlement of transactions and translation of monetary items arc recognized as income or expense in the year in which they arise. But it is evident that the income / gain has not been offered to tax. Thus it is also not following tile ratio laid clown in CIT vs. Woodward Governor India Private Limited. (312 ITR 223 SC) which the assessee relied upon. It is also noted from the written submission that the losses arose on account of conversion of rupee term loan into foreign currency loan at the contracted forward exchange rate. Thus it is clear that these transactions are on capital account and any loss arising on the capital account is not allowable as revenue expenditure, thus the disallowance is justified on this count alone. 2.5.4 It is evident to note that the CBDT Instruction No. 3/2010 dated 23.03.2010, deals with allowability of loss under forward contract, which is extracted as under:-
:- 13 -:ITA No. 1922/Hyd/2018
2. "Marked to Market" is in substance a methodology of assigning value to a position held in a financial instrument based on its market price on the closing day of the accounting or reporting record.
Essentially, 'Marked to Market' is a concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. This is required from the point of view of transparent accounting practices for the benefit of tile shareholders of the company and its other stakeholders. Where companies make such an adjustment through their Trading or Profit/Loss Account, they book a corresponding loss (i.e the difference between the purchase price and the value as on the valuation date) in their accounts. This loss is a notional loss as no sale/conclusion/settlement of contract has taken place and the asset continues to be owned by the company.
A 'Marked to Market' loss may be given different accounting treatment by different assessee. Some may reflect such loss as a balance sheet item without making any corresponding adjustment in the Profit and Loss Account. Other may book the loss in the Profit and Loss Account which may result in the reduction of book profit. In cases where no sale or settlement has actually taken place and the loss on Marked to Market basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income. The same should therefore be added back for the purpose of computing the taxable income of an assessee.
2.5.5. Thus, from the perusal of details it is evident that the 1) loss claimed is admittedly notional in nature and was before the settlement of the forward contract 2) that the loss on the capital account-as the forward contracts were said to be entered for capital transaction 3) that the assessee did not adopt consistent method of accounting both the notional profits and losses which is impermissible in view of the ratio laid down in CIT vs. Woodward Governor (312 ITR 254 SC), DCIT vs. Cyient Limited (ITA Hyd. in ITA No. 474 & 475/2015 and 597/2016). The Mad HC in Indian Overseas Bank vs. CIT 183 ITR 200 held that till contracts are settled, there is no taxable gain nor allowable loss. In view of the above discussion we do not find any infirmity in the AO's action in disallowing the claim of loss of Rs.27,70,201/- debited in the P & L account. Accordingly the AO is directed to restrict the addition / disallowance to Rs.27,70,201/-.
2.5.6 It was also pleaded that the assessee has to be allowed benefit u/s 10A in respect of addition to total income and placed reliance on the CBDT circular No.37/2016 dated 02.11.2016. 2.5.7 Having considered the submissions, we note that the CBDT circular No. 37/2016 deals with allowability of deduction under :- 14 -:
ITA No. 1922/Hyd/2018chapter VI A on enhanced profits, and the circular would not be applicable where exemption was claimed u/s 10A. Accordingly this plea is dismissed".
7. The assessee is admittedly engaged in software development services carrying out international transactions in foreign currency (predominantly in US dollars). Pages 453 to 460 reveal that it had entered into foreign exchange contracts followed by the regular system of accounting wherein it transfers the losses from these contracts by debiting in the P&L A/c under the account head 'foreign currency transactions' on account of difference in currency rate on the last date of the year and contracted date. The said loss recognised is then transferred to provision for loss on forward contracts.
8. Continuing with the assessee's regular system of accounting, its corresponding figures of the amount is reversed and offered to income or adjusted against forward contract loss as it has done in AY.2013-14. Case file suggests that the impugned loss of Rs.27,70,201/- pertains to four vouchers for the years 2012-13 and 2013-14 which had been duly accepted by the Assessing Officer in revenue.
9. Coming to gain on such forwards contracts; if any, the learned lower authorities have failed to indicate any deficiency on assessee's part in recognising the same. So far as its stand is that these transactions relating to capital account, the assessee's treatment of these forward contracts in revenue account in the said earlier assessment years has admittedly gone un-rebutted. The fact also remains that the assessee's treatment given to these forward contracts in earlier and latter :- 15 -:ITA No. 1922/Hyd/2018
assessment years have been duly accepted by the Assessing Officer which has also not been rebutted in the lower proceedings. We therefore allow the assessee's claim in principle and leave it open for the Assessing Officer to finalize factual verification as per law. The third substantive grievance is taken as allowed for statistical purposes.
10. The assessee's fourth substantive grievance seeks to reverse the learned lower authorities' action disallowing cultivation, lease and depreciation towards biomass plant of Rs.3,58,99,242/-; comprising of Rs.1,44,45,495/-, Rs.1,05,84,500/- and Rs.1,14,77,247/-; respectively. The DRP's detailed discussion to this effect reads as under:
"2.6.3 From the perusal of the written submissions it is seen that the assessee claims that it held incurred cultivation expenses to the tune of Rs.1,44,45,495/- and lease expenses to the tune of Rs.1,05,84,500/- for the manufacture of briquettes in its biomass plant. It was stated that the cultivation expenditure was incurred for production of certain kind of grass called Napier grass used for manufacturing briquettes and that the lease expenses represent the expenses incurred towards leasing of land for cultivation of the said grass, It was contended that the business of the assessee commenced with the commencement of cultivation of grass, and as soon as the machinery and equipment was installed in the Biomass Plant. Without prejudice it was contended that the business of the assessee commenced as soon as manufacture of briquettes began in the financial year in question: and that due to the reason that the briquettes produced were not of sufficient calorific value the assessee could not affect sale of the same; and therefore it was contended that the subsequent lease and cultivation expenses are allowable as revenue expenditure. It was also contended that the activity of cultivation of grass, setting of plant & machinery and manufacture of briquettes have taken place in same financial year and therefore the cultivation and lease expenditure are revenue in nature and allowable u/s 37 of the IT Act. Break up details of expenses given at paqe 403-408 of paper book was relied in support.
2.6.4 In regard to claim of depreciation on Biomass equipment, it was stated that the assessee installed the equipment during the financial :- 16 -:ITA No. 1922/Hyd/2018
year; and that the biomass plant. was put to use during the year and was used for generation of electricity, which was used by the assessee and as well for the production of sample briquettes and therefore the claim of depreciation should be allowed. Without prejudice. it was contended that the machinery and equipment for Biomass Plant was completely set up and ready for use and that depreciation is allowable even when the asset is ready to use. Accordingly it was pleaded to allow the depreciation claim of Rs.1,14,77,247/-.
2.6.5 From the perusal of the information filed at page 402 to 407, it is noticed that there was no information as to when the plant & machinery was set up and at which location, as to when the plant & machinery were purchased, and as to when approval for the biomass plant was obtained. Therefore, the assessee was afforded an opportunity to furnish complete details as to when the biomass plant was installed when it was ready to use, what was its capacity and details of approval obtained from regulating authorities, etc. In response, the assessee filed certain information vide letter dated 20.06.2018 in pages 28 to 47. All these information are considered in answering the objections raised.
2.6.6. As per the Note furnished at p.28 (letter dated 20.6.2018) the assessee commenced Biomass unit from 28 Jan 2013, after taking necessary approvals the activity commenced at Sl.No's 564/A1, 563/AAz, 564/AAz, 548/1, 562/2, 563/1, 564/1A Gondhari (V & M) Nizamabad district. It was stated that approval was taken from local authorities, water, fire and pollution department to commence production. It was further stated that the assessee taken land on lease to set up plant & install necessary equipment for production of briquettes which are used for generating electricity. It is seen that page 31 of the information filed was letter dated 30.07.2014 of the Gram Panchayat office Gondhari giving NOC to construct factory for Biomass plant. Page 29 is letter dated 02.07.2014 from the Commissioner of Industries, Telangana communicating factory approved plans. This was issued alter the conditional approval granted in letter No. D Dis. C2/NZB/6744/2014 dated 20.05.2014.
Page 32 is the letter dated 29.05.2014 issued by the A.P.Pollution Board after inspection of the site on 24.05.2014 and after clarification submitted by the assessee on 28.05.2014, granting consent for establishment of industry for manufacture of Biomass briquette in the site under section 25 of water (Prevention and control of pollution) Act 1974 and under Section 21 of Air (Prevention and control of pollution) Act 1981; Clause 10, schedule A of the said order requires that the consent for operation (CFO) shall be obtained before starting trial production. The assessee has not filed the order granting consent for operation CFO. Page 37 is letter dated 10.09.2014 of AP State :- 17 -:
ITA No. 1922/Hyd/2018Disaster Response and Fire Services Department granting No Objection Certificate to the proposed industry. It is also stated in the said letter that the building should not be occupied without obtaining any No Objection Certificate for occupancy from the Fire Department. Perusal of all these information clearly show that the approval for the plant from the Pollution Department, Fire Department, Gram Panchayat were given only after May 2014. It is also seen that consent for operation order is required even for trial production, and that the assessee failed to produce the consent for operation order suggesting that CFO order was not granted at all. Further, it is seen that the inspection of the site took place only on 24.05.2014, and thus, no approval could have been given prior to 24.05.2014. Therefore the claim of the assessee that the biomass plant was set up and ready to use as on 31.03.2014 is not factually correct. We also note that the assessee had not furnished any information or documentation before the AO or before us to substantiate its contention that the biomass plant was installed and put into use as on 31.03.2014. Though it was contended that the assessee put to use the biomass plant and manufactured sample briquettes during the subject year, no evidence was filed to support such contention. We also find such a claim to be illogical, as the approvals from regulatory authorities were granted only after May 2014.
2.6.7 The onus is on the assessee to substantiate that the business of generation of power through biomass plant or manufacture of briquette was set up and that the expenditure incurred by way of lease and cultivation expenses were incurred for the purpose of such business and were incurred after the setting of such business for allowance u/s 37 of the IT Act. The expression 'setting up' means, 'to place on foot or to 'establish'. A business is said to be established when it is ready to commence. In the instant case, no evidence was furnished to prove that the business was set up or commenced or ready to commence as on 31.03.2014. No nexus was shown for the lease expenses with the biomass plant. As the biomass plant was set up as on 31.03.2014, and the business not commenced by that time, the expenditure claimed towards lease and cultivation are not allowable as business expenditure for the subject year. We do not find any infirmity in the AO's action in disallowing the claim of deduction towards lease and cultivation expenses and the depreciation allowance. Accordingly, the proposed disallowances on these three counts are upheld.
2.6.8 A perusal of the lease expenses show that lease expenses were claimed for lease of land at Gouraram, Gandivet village, Saravapur, Matsang villages, and it is noted that w.r.t. entry dated 13.05.2013, there was purchase of land at Pothangal for Rs.4,68,750/- against entry dated 16.05.2013, there was purchase of land for Rs.52,500/-
and against entry dated 23.01.2014 there was purchase of land for :- 18 -:
ITA No. 1922/Hyd/2018Rs.3,94,500/-. Apparently these purchase expenses cannot be allowed as revenue expenditure and are liable to be disallowed on this count also.
2.6.9 A perusal of the cultivation expenses given at page 403 of paper book show that the following advances were made for supply of Napier strips.
Date Name Amount in Rs.
08.07.2013 B.Venkateshwar Reddy 2 Lakhs
08.07.2013 M.Vijayander Reddy 4 Lakhs
23.07.2013 M.Vijayander Reddy 5 Lakhs
23.07.2013 N.Vidyasaga Reddy 5 Lakhs
01.08.2013 M.Vijayander Reddy 5 Lakhs
20.08.2013 N.Vdyasaga Reddy 1 Lakh
Total 22 Lakhs
Being advances, these amounts are not prima facie allowable as revenue expense. Further it is noticed that amounts to the tune of Rs.26,88,550/- were debited towards lease expenses in the month of March 2014 (of which Rs.4,05,000/- on 31.03.2014), and the lease was stated to be for a period of one year. Therefore they would not take the characteristic of revenue expenses for this year. For these reasons also, these expenditure are not allowable. As a result these objections are rejected.
11. We have heard rival submissions. It is noticed that all the three instant claims are interconnected. The assessee's case is that since it had set up a biomass plant, it got the land(s) on lease and grew Nepiar gross thereupon to be consumed in the briquettes produced therefore in biomass power production. Paper book pages 402 to 480 inter alia contain the necessary documents i.e., breakup of the impugned cultivation expenses (cow dung, gross testing, labour charges, Napier gross bricks and ploughing charges ledger accounts, ledger of lease expenses of Rs.1,05,84,500/-
note(s) on biomass that it had commenced activity from 28-01- 2013 after setting up the plant and machinery, unit's approval(s) from Commissionerate of Industries, Telangana :- 19 -:
ITA No. 1922/Hyd/2018Government dt.02-07-2014, Panchayat Raj Department NOC, State Pollution Control Board consent, State Disaster Response and Fire Services NOCs, State Government's Ground Water Department's permission to draw the specified under ground water capacity by pumping, depreciation ledger of biomass plant and machinery and vehicles and all particulars of lease money(ies), paid to landowners; respectively. All this overwhelming evidence duly proves the assessee's case that it had very much established its biomass plant by investing its capital. All these approvals and permissions also prove the stand adopted through out in support of the impugned expenses. Case law SPR Publications Pvt. Ltd. [63 taxmann.com 161] and Chemplast Sanmar Ltd. [97 taxmann.com 347] (Madras) holds that such a plant and machinery which is ready to use is very much entitled for depreciation. We thus allow assessee's depreciation claim on plant and machinery of Rs.1,08,49,065/- and Rs.6,28,182/- on vehicles; respectively totalling to Rs.1,14,77,247/- in issue.
12. Coming to the remaining twin components of lease amount and cultivation charges and the reasoning that no income had been generated from all this activity thereby raising serious doubts on assessee's claim, we are unable to lose sight of the fact that learned lower authorities even took pains to summon the revenue records of the concerned estate to ascertain the actual fact it is very much evident not only from the list of payees but also forming part of the entire project details. Coupled with this, we find that assessee's travelling/conveyance, repairs/maintenance claims qua the same stand accepted by the Assessing Officer himself. Their :- 20 -:ITA No. 1922/Hyd/2018
lordships hon'ble apex court in S.A. Builders Ltd. Vs. CIT [288 ITR 1] (SC) held long back that the element of commercial expediency has to be adjudged not from the department's view but from that of the taxpayer. Case law 118 ITR 261 (SC) Sassoon J. David & Co. P. Ltd. Vs. CIT also held that the clinching expressing 'wholly and exclusively' employed in Section 37 of the Act does not mean necessarily and even a voluntary payment could be allowed so long as it is incurred for the purpose of business. We wish to observe here that the learner lower authorities have further not questioned as assessee's similar expenses in succeeding AY.2015-16. We thus conclude that all the three heads of disallowance(s) we herein totalling to Rs.3.58 crores (supra) deserve to be reversed. Order accordingly.
13. Lastly comes assessee's sixth substantive ground seeking to reverse 10% estimated disallowance of Rs.6,61,380/- out of the total claim which is not pressed before us keeping in mind the smallness thereof. Ordered accordingly.
Necessary computation shall follow as per law.
14. This assessee's appeal is partly allowed in above terms.
Order pronounced in the open court on 9 th April, 2021 Sd/- Sd/-
(LAXMI PRASAD SAHU) (S.S.GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad,
Dated: 09-04-2021
TNMM
:- 21 -:
ITA No. 1922/Hyd/2018
Copy to :
1.M/s.ValueLabs LLP, C/o. P.Murali & Co., Chartered Accountants, 6-3-655/2/3, 1st Floor, Somajiguda, Hyderabad.
2.The Asst. Commissioner of Income Tax, Circle-8(1), Hyderabad.
3. Dispute Resolution Panel (DRP), Bengaluru.
4. Director of Income Tax (IT & TP), Hyderabad.
5. Addl.Commissioner of Income Tax (Transfer Pricing), Hyderabad.
6.D.R. ITAT, Hyderabad.
7.Guard File.