Income Tax Appellate Tribunal - Delhi
Ahmedabad Vadodara Express Co. Ltd, vs Assessee on 16 January, 2007
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "A" NEW DELHI
BEFORE SHRI G.E. VEERABHADRAPPA : VICE PRESIDENT; AND
SRHI D.R. SINGH : JUDICIAL MEMBER
ITA No. 2110/Del/07
Asstt. Yr: 2003-04
M/s Ahmedabad Vadodara Express Vs. Income-tax Officer,
Co. Ltd. ( A subsidiary of NHAI) Ward 1(4), New Delhi.
Plot No. G-5&6, Sector-10,
Dwarka, New Delhi-110075.
PAN/GIR no. AADCA3349L
( Appellant ) ( Respondent )
Appellant by : Shri Sumant Chadha CA
Respondent by : Shri G.K. Maheshwari CIT DR
ORDER
PER G.E. VEERABHADRAPPA, V.P:
This appeal, by the assessee, arises out of the order dated 16-1-2007 of the CIT(Appeals)-IV, New Delhi for A.Y. 2003-04.
2. The assessee is a company, incorporated under the Companies Act. It is a 100% subsidiary of National Highway Authority of India ('NHAI'), which is a public sector undertaking. The activity of the company is to construct and maintain Ahmedabad Vadodara Expressway in the state of Gujarat and to collect toll from the road users. The total length of the project was 93.3 kms., which was divided to be completed in two phases. The first phase commenced on 24-8-2000 involving a length of 0 to 43.3 kms. And 2 cost of the project was Rs. 205.29 crores. The second phase commenced on 19-6-2001 involving a length from 43.3 kms to 93.3 kms and the cost of the project was Rs. 344.93 crores. The schedule dates of the phase-wise completion were 15-1-2003 and 7-6-2004 respectively. For A.Y. 2003-04 the assessee originally filed a return of income on 24-11-2003 declaring a loss of Rs. 23,11,540/-. No depreciation was claimed on the gross block of Expressway Phase-I amounting to Rs./ 209,48,99,464/-., which appeared in the schedule of fixed assets as on 31-3-2003. The amount of interest earned on term deposits amounting to Rs. 61,38,023/- was reduced from indirect expenditure incidental to construction and the same was not declared as income. This return was revised on 28-3-2005. In the revised computation, allowable depreciation was shown at Rs. 10,47,85,756/- but the same was restricted to the tune of Rs. 43,16,488/- to the extent of other income available/ declared. The business loss of Rs. 66,28,023/- was adjusted against the income declared under the head "Income from other sources", which included the interest income from term deposit to the extent of Rs. 61,38,023/- and income from sale of Tender documents which was to the extent of Rs. 4,90,000/-, which aggregated to Rs. 66,28,023/-. Following reasons were given for revised return:
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"a) The company had not started commercial operations during the year under review and therefore the interest on term deposit and sale on tender documents were reduced from the cost of capital work in progress. However, the same is disclosed now under the head "income from other sources" for income tax purpose only.
b) The company initially did not charge depreciation on Expressway as the notification for Toll Fee collection was not received from Government of India despite the fact that it was capitalized and was put to use on 28th January 2003. the company has now, however, charged depreciation on the same."
3. As regards the claim of depreciation, the assessee, in the revised return, justified the same on the ground that the express Highway Phase-I was completed on 15-1-2003 and was opened for traffic on 28-1-2003 and it was also based on the report of the Comptroller & Auditor General ('CAG'), wherein it raised objections for not claiming depreciation despite the asset being put to use. The assessee filed copy of the invitation for inauguration ceremony. The AO, however, did not accept the assessee's version. The documents filed by the assessee company as completion certificate, was a letter dated 7-5-2003 of the Consulting Engineering Services (India) Pvt. Ltd., which was signed by the Managing Director of that company in the capacity of Engineer, Ahmedabad Vadodara Expressway. The contents of letter, which was addressed to M/s Sumber Mitra Jaya, the contractors, read as under:
"1. ... The balance works of Ahmedabad - Vadodara Expressway, Phase-I, from Km 0.00 to 43.4 ( unto Nadiad - Dakor) State Highway has been substantially completed on 15.1.2003.4
2. In accordance with the contract clause 48.1 you shall complete with due expedition, the outstanding works and rectification of defects during the Defects Liability Period unto 14th January 2004, as per enclosed list.
3. You have submitted a bank guarantee on 3rd April 2003 for Rs. 50 lakhs against submission of 'As constructed Drawings' on or before 20th September 2003. In case you fail to submit 'As constructed drawings' by the scheduled date, your Bank Guarantee shall be got encashed.
4. In accordance with Clause 48.1 of General Conditions of contract (FIDIC) for substantial completion of permanent works, this Taking over Certificate is hereby issued for the whole work."
4. According to the Assessing Officer, the contents of the above letter clearly showed that the project has been taken over on 7-5-2003 with the direction to complete the outstanding works and rectification of defects expeditiously. Therefore, it was wrong on the part of the assessee company to have claimed depreciation on an asset even prior to the taking over of the work.
5. The AO in para 10 has reproduced the audit observation of the CAG as also the reply given by the assessee against the audit observation, which read as under:
"10. The observations of the audit in this respect are stated to be as under:
Loss for the year Rs. 23.12 lakh This is understated by Rs. 180.79 lakh due to non-provision of depreciation on Expressway. Although the Expressway has been capitalized and opened for traffic from 28th January 2003 depreciation was not charged due to non-receipt of Toll fee collection Notification from the government of India. Consequently, fixed assets have been overstated by the same amount.5
The stand of the assessee that the above was in the shape of an audit objection cannot be accepted. The audit has simply given an observation besides, thee is a reason in the observation itself, which clarifies why the depreciation was not charged. The assessee was required to file the reply filed by it to the observation of the audit. In response, vide letter dated 28/02/2006, the following reply was submitted:
Reply to Audit objection raised by CAG for non-charging of depreciation:
The following is the relevant extract of the reply given to the CAG:
"The construction of Expressway Phase-I was completed on 15-1- 2003 on issuance of Completion Certificate and ready for Commercial Operations on that date itself. The same was inaugurated and opened to traffic by Shri Atal Behari Vajpayee the Hon'ble Prime Minister of India on 28-01-2003. However, the Commercial Operations was prolonged due to delay in issuance of Toll Fee Collection Notification by the Government of India in the official Gazette.
Since the project has not commenced its commercial operations till the end of the financial year 2002-03, the company decided not to provide any depreciation on "Expressway Phase-I" for a period of 2.5 months."
6. Accordingly, the Assessing Officer was of the view that commercial operations had not been started by the end of the relevant previous year and therefore no depreciation was allowable to the company. For the same reason, even the loss of Rs. 23,15,588/- was held not allowable during the year under consideration. The expenses debited to the P&L A/c, in the opinion of the Assessing Officer, were prior to the commencement of the business and required to be capitalized and therefore not allowable as revenue expenditure. The loss in the P&L A/c was disallowed and the assessee's income was computed at Rs. 66,28,023/-.
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7. Before the CIT(Appeals) it was contended that the construction of Express Highway Phase-I was completed on 15-1-2003 on issuance of completion certificate and it was ready for commercial operations on that date itself. The same was inaugurated and opened to traffic by Shri Atal Behari Vajpayee the then Hon'ble Prime Minister of India on 28-1-2003. However, the commercial operation was prolonged due to delay in issuance of Toll fee collection Notification by the Govt. of India in the official gazette. Since the project had not commenced its commercial operations till the end of the financial year 2002-03, the company decided not to provide any depreciation on Expressway Phase-I for a period of 2.5 months. Before the learned CIT(A) it was claimed that Notification for charging the toll fee for usage of the Express Highway came to be issued sometime in the month of January 2004 and the toll fee in fact was collected from 1-2-2004.On the strength of this it was claimed that the business of the assessee had already been set up and only commercial operation commenced later.
8. The CIT(A) rejected the assessee's claim, inter alia, by observing as under:
"..... The claim of the appellant that Expressway was completed on 15.1.03 does not appear to be correct. As per its own admission the contractor was asked to rectify the defects and the period of defect and liability was unto January, 2004. The manifestation of the occasion of setting up of business in this case is different from many other business and professions. Sensitive infrastructure like airport, railway tracks and 7 Express Highways are different from other types of plants and machineries. No prudent person would allow anybody to use an incomplete Airport, railway track or Expressway unless these are fully complete in all respects because using these infrastructures involves the risk of human life. In the present case the taking over certificate was issued on 7.5.04. Hence the use of the Expressway cannot be accepted before this ate. The appellant has not given any evidence during the course of assessment proceedings or these appellate proceedings to show the last date of completion of rectification work. According to the admission of the appellant the last date unto which the work could have been completed is 14.1.04. In absence of any evidence only two dates can be considered for ascertaining the date of setting up of business namely 7.5.03 or 14.1.04. Since there is no positive or negative evidence to show that rectification work was completed only on the last date i.e. 14.1.04, the date of taking over of project is held to be the date for setting up of business. Hence the asset i.e. Expressway is held not to have been sued before this date.
It is appropriate to mention here that inauguration ceremony cannot be a proof either to the occasion of setting up of business or the use of asset. It is a matter of common knowledge that functions like foundation stone laying ceremony and inauguration function are organized generally for political reasons. It has happened many times that foundation stone laying ceremony was organized but the project was never completed. The inauguration function only symbolizes the ceremony in which a particular beneficial project is dedicated to the nation. This is also evident from the contents of the invitation letter produced by the appellant that the function was organized for dedication to the nation of the National Expressway-I. This invitation letter is not a proof that appellant had set up is business on 28.1.03. In fact the set up of business was not possible before the date of taking over certificate. Hence it is held that the function organized on 28.1.03 is not conclusive evidence that Expressway was fully complete and it was used for profitable purpose. The letter dated 7.5.03 itself clearly shows that the work of Expressway was not fully completed on 15.1.03. The word "substantially" is not synonymous to "fully". This aspect has already been discussed that unless the work of such sensitive infrastructure is fully completed the same cannot be put for use for the purpose of the business of the appellant as the use of express highway at an immature stage would involve the risk of human lives."
9. The learned CIT(A) was of the view that the business was not set up prior to 31-3-2003 nor the expressway was used as an asset up to that date and therefore the claim of depreciation could not be accepted. 8
10. Aggrieved, the assessee is in second appeal before us and has taken the following grounds:
"1. On the facts and under the circumstances of the case the CIT(A) erred in upholding the contention of Assessing Officer to disallow the depreciation of Rs. 10,47,85,756/- ignoring the fact that the asset was owned and put to use during the year.
2. On the facts and under the circumstances of the case the CIT(A) has erred in upholding the contention of Assessing Officer to disallow the loss of Rs. 23,15,588/- as per profit and Loss Account and observing that the same is required to be capitalized. He disallowed such loss arisen on account of claim of certain expenditure as revenue expenditure from the date of setting up of the business i.e. from 15-01-2003 to 31-03-2003 on the basis of his opinion that neither the business was set up unto 31-03-03 nor the expressway was used as an asset unto that date. In fact business was set up on 15-01-2003 and expressway was duly opened for the public and accordingly was used for the purpose of business."
11. The assessee has filed a paper book containing 59 pages, mainly containing, written submissions before the authorities; extracts of the report of the CAG; copy of invitation for inauguration ceremony; copy of letter dated 7.5.2003; and copy of notification dated 16-1-2004. The assessee also sought our permission to file additional evidence relating to the correspondence between the assessee and other government authorities, which further substantiates the contentions of the assessee.
12. After hearing the parties, we are of the opinion that the additional evidence produced by the assessee deserves to be admitted and we admit the 9 same and proceed to dispose of the appeal on the basis of the contentions that are taken.
13. We have heard the learned counsel for the assessee who reiterated the same contentions that were taken before the authorities. In particular the evidences that were placed before the Assessing Officer, was heavily relied upon. The learned counsel contended that the express highway Phase-I was completed on 15-1-2003 and was opened for traffic from 28-1-2003. Even the letter issued on 7-5-2003 by M/s Consulting Engineering Services (India) Pvt. Ltd. also certified that Phase-I was substantially completed on 15-1-2003 and defects were directed to be removed by 14-1-2004. In a project of this magnitude some minor defects are likely to arise here and there and those defects were directed to be attended. It does not mean that the project itself was not set up. According to the learned counsel, the project itself was opened to public use on 28-1-2003. It was altogether different that the toll fee collection started from 1-2-2004 after issuance of such Notification on 16-1-2004.
14. The learned DR, on the other hand, strongly relied upon the discussions in the impugned order. According to him, the assessee's business was not set up within the financial year relevant to the assessment year under consideration. The assessee's own documents, by way of letter 10 dated 7-5-2003, showed that there were material defects which required correction and therefore it cannot be said that the project was set up in the financial year relevant to the assessment year in question. The record shows that the project has been taken over some time after 7-5-2003 and therefore the Assessing Officer as well as the CIT(A) have correctly rejected the claim of depreciation.
15. We have considered rival contentions of the parties and have gone through the entire material available on record. What is relevant for claiming depreciation, is the date of set up of the assessee's business, when the assets are employed in a business. The expression 'setting up' and 'commencement' have to be understood in their ordinary meaning. When exactly business can be regarded as having been set up, is basically a question of fact.
15.1. In Oxford English Dictionary, the expression 'setting up' means 'to place on foot' or 'to establish'. The expression is understood in this statute in contradiction to the word 'to commence'. The distinction is that when a business is established and is ready to commence business, then it can be said of that business that it is set up. There may be an interregnum, or an interval, between the setting up of a business and its actual commencement, 11 as pointed by the Bombay High Court in the case of Western India Vegetable Products Ltd. Vs. CIT (1954) 26 ITR (Bom).
15.2. There have been cases where there was serious dispute as to the date of set up of the business. A business can be said to be set up when it is established and is ready to start business. Normally, in a commercial house, the business would be regarded as set up, when the same is open to customers. In a manufacturing concern, the business could be said to be set up when the process of manufacture is ready to begin, when a substantial amount of raw material is purchased for being converted into a finished product. It is possible that a business can be treated as set up even if there is a production of sub-standard and not easily saleable product. This was so held by the Allahabad High Court in the case of Sir Shadilal Sugar and General Mills Ltd. Vs. CIT (1967) 63 ITR 72.
15.3. In the case of CIT Vs. Electron India (2000) 241 ITR 166 (Mad.), the assessee was held entitled to loss in business, though there was no sale of final product as the same was not of required purity.
15.4. What is necessary is that the business must be put into such a shape that it can start functioning either as business or as a manufacturing organization, as the case may be. It must always be appreciated that a 'business' connotes a continuous course or series of activities and that in 12 order that the business may be said to have commenced, it is not necessary that all the activities, which go to make up the business, should be started. It is sufficient if that one among the activities, which constitute the business, is commenced which is first in point of time and which must necessarily precede all the others. This was so held by the Gujarat High Court in the case of CIT Vs. Saurashtra Cement and Chemical Industries Ltd. (1973) 91 ITR 170 (Guj.).
15.5. The words 'ready to commence' would not necessarily mean that all the integrated activities are fully carried out and/ or wholly completed. The requirement is also complied with in a given case where an assessee had undertaken the first of the kind of integrated activities, which the business is overall comprised of. It is not necessary that all the categories of its business activities must start either simultaneously or that the last stage must start before it can be said that the business was set up. The test to be applied is as to when a businessman would regard a business as having commenced and the approach must be from a common sense point of view. This was so held by the Gujarat High Court in the case of CIT Vs. Western India Seafood P. Ltd. (1993) 199 ITR 777 (Guj.).
15.6. Therefore, what is material is the date when the company went into or started one or the other of its component activities.
1315.7. In the case of Western India Vegetable Products Ltd. Vs. CIT (1954) 26 ITR 151 (Bom.), the assessee company was incorporated on 29th December 1945, with the object of running an oil mill. It obtained a certificate of commencement of business on 20th April, 1946, which meant that the requisite share capital had been subscribed. It began to purchase raw materials some time in the end of September 1946. It purchased an oil- crushing machine on 1-11-1946 ad was in a position to crush and produce oil only after 1-11-1946. The Tribunal, having regard to the fact that the raw materials were purchased towards the end of September 1946 and that some time should have been taken in making arrangements for the purchase, held that the business was set up on 1 September, 1946 an this finding was upheld by the High Court.
15.8. In the case before us the assessee was involved in construction of road of Expressway to the extent of 93.3 kms. As could be seen from the records, the cost of project was about Rs. 550 crores. Naturally a project of such large magnitude, cannot be done at one point of time. Therefore, the project itself was divided into two phases. The first phase involved a length of 0 to 43.3 kms. and the second phase involved the rest of 50 kms. The schedule dates for phase-wise completion were 15-1-2003 and 7-6-2004 respectively. The assessee, in the course of business commenced the first 14 phase quickly and almost completed the project on 15-1-2003. In fact it was opened for traffic on 28-1-2003, on which date also the same was inaugurated by the Hon'ble Prime Minister of the country and it was regularly opened for public usage from 29-1-2003. In a project of such magnitude and size, it is quite natural that there are initial bottlenecks, but that does not result in the business itself to be treated as not having been set up. The Mumbai High court in the case of Western India Vegetable Products Ltd. Vs. CIT (supra), has held that even when the material was purchased by the unit and although the crushing machine itself was not purchased, was sufficient to say that the business had been set up. In the light of this principle it is held that the project in question was set up on 15-1-2003 and in any case it was opened to public usage from 28-1-2003. 15.9. The assessee in this case, as against the project cost of 205 crores has spent 209 crores and substantial amount was on 15-1-2003 on which date the assessee claims that it completed the first phase. In fact all the letters that were written, showed the project itself was completed on 15-1-2003 and there were some defects that were noticed and it was contractor's obligation under clause 48 to rectify the said defects. In other words, the assessee has completed the project and vide letter dated 7-5-2003 it directed the expeditious attendance of certain defects that were noticed by invoking the 15 contractor's obligations under the said contract. Even that letter shows that the project was substantially completed on 15-1-2003. Applying the principle laid down by the Bombay High court in the case of Western India Vegetable Products Ltd. Vs. CIT (supra), it can be safely concluded that the project in the facts and circumstances of the case, has got completed on 15- 1-2003, on which date almost all the project cost has been incurred. In fact the decision of the Bombay High court in the case of Western India Vegetable Products Ltd. Vs. CIT (supra), was approved by the Supreme Court in the case of CWT Vs. Ramaraju Surgical Cotton Mills Ltd. (1967) 63 ITR 478 (SC).
15.10. In fact in this case vide letter dated 13-3-2003, written by the assessee to Life Line Foundation, showed that the assessee had hired ambulance with a trained driver from 2nd February 2003 at a cost of Rs. 18,225/-, wherein the services of ambulance with a trained driver was kept at toll plaza location. The Prime Minister of the country inaugurated the stretch of the project on 28-1-2003 and it was immediately opened for traffic. In all such projects, the first project is dedicated to the nation, when there is free usage by the public for some time. It takes some time for the government to notify the toll collection. In this case the assessee even on 20-3-2003 wrote to the Ministry 16 of Road Transport & Highways, requesting for issuance of notification by drawing their attention to their earlier letter dated 27th December 2002. 15.11. What the assessee thought in the beginning, was that unless there was issuance of toll collection fee, the commercial operations had not commenced. In fact the law for the purpose of claiming depreciation, as already discussed, does not mean that assessee should start selling the products. What is relevant, is that even if a substantial work is completed, the business can be said to have been set up. There is no doubt that the entire project cost required for the first phase had already been spent by the assessee by 15-1-2003 and in fact even in the letter given to the contractor, which is the subject matter of reliance by the revenue, clearly specifies that the project had been substantially completed on 15-1-2003 and the contractor was required to attend certain defects that were noticed after the completion of the project. Those defects are very minor in nature and do not in any way drag he date of setting up of business to the date of such rectification. In our view, such a construction is not warranted, having regard to the facts and circumstances of this case and in the light of the principle laid down by the cases to which the assessee has placed reliance before the CIT(A) and to which our attention was drawn at the time of hearing and which are specifically discussed in the earlier paragraphs. 17 15.12. In a project of this magnitude it is quite understandable that there could be small defects to which attention was drawn of the contractors. In fact the contractor's obligation as per the clause in the contract extended to a period even after the project is fully operational. We have gone through the evidence placed in respect of the claim and are satisfied that the contention of the assessee deserves to succeed. Therefore, in our view, the assessee has correctly claimed depreciation of the assessment year in question. The AO is directed to accept the assessee's claim and allow the depreciation in accordance with law.
16. As regards the disallowance of loss, as per the P&L A/c, the Assessing Officer is directed to follow the consequences of our main finding that the assessee's business had been set up on 15-1-2003 i.e. within the financial year 2002-03, relevant for A.Y. 2003-04. We order accordingly.
17. In the result, assessee's appeal stands allowed as indicated above. Order pronounced in open court on 31-8-2009.
Sd/- Sd/- (D.R. SINGH ) ( G.E. VEERABHADRAPPA ) JUDICIAL MEMBER VICE PRESIDENT Dated: 31-08-2009. MP Copy to : 1. Assessee 2. AO 3. CIT 4. CIT(A) 5. DR 18 19