Income Tax Appellate Tribunal - Ahmedabad
Gspc Gas Company Ltd.,, Ahmedabad vs Assessee on 11 March, 2014
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद Ûयायपीठ 'डȣ
डȣ',
डȣ , अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH " D " BENCH, AHMEDABAD
सम¢ ौी एन.एस.सैनी, लेखा सदःय एवं ौी कुल भारत, Ûयाियक सदःय ।
BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER And
SHRI KUL BHARAT, JUDICIAL MEMBER
Sl. ITA No(s) Assessment Appeal(s) by
No(s) Year(s) Appellant vs. Respondent
Appellant Respondent
1. 3117/Ahd/2010 2007-08 GSPC Gas Jt.CIT/
Company Ltd. Addl.CIT
101/106, IT Gandhi-
Tower No.1 nagar
Indroda Circle Range
Gandhi-
Infocity
nagar
Gandhinagar-382
011
PAN:AABCG
1813F
2. 2958/Ahd/2010 2007-08 Revenue Assessee
3. 1390/Ahd/2012 2008-09 Assessee Revenue
4. 1300/Ahd/2012 2008-09 Revenue Assessee
5. 239/Ahd/2013 2009-10 Assessee Revenue
6. 678/Ahd/2013 2009-10 Revenue Assessee
Assessee by : Shri S.N.Soparkar, A.R.
Revenue by : Shri Vimalendu Verma, CIT-DR with
Shri K.C.Mathews, Sr.DR
सुनवाई कȧ तारȣख / Date of Hearing : 11/03/2014
घोषणा कȧ तारȣख /Date of Pronouncement : 11/04/2014
आदे श / O R D E R
PER SHRI KUL BHARAT, JUDICIAL MEMBER :
These six cross-appeals by the Assessee and the Revenue are directed against the separate orders of the Ld.Commissioner of Income Tax(Appeals)-Gandhinagar ('CIT(A)' for short) pertaining to ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -2- Assessment Years(AYs) 2007-08, 2008-09 & 2009-10 dated 31/08/2010, 28/03/2012 ad 28/12/2012 respectively. These appeals were heard together and are being disposed of by way of this consolidated order for the sake of convenience.
2. First, we take up the Assessee's appeal in ITA No.3117/Ahd/2010 and Revenue's appeal in ITA No.2958/Ahd/2010 for AY 2007-08. The following grounds have been raised by the respective parties:-
(A) Assessee's appeal (AY 2007-08) :
GROUNDS ITEM NO.1: ADDITION OF RS.6,39,93,408/- ON ACCOUNT OF CLOSING STOCK ARISING OUT OF CHANGE IN ACCOUNTING POLICY IN THE NEXT FINANCIAL YEAR 2007-08 (A.Y. 2008-09) I The learned CIT(A) Gandhinagar has grossly erred on the facts and circumstances of the case & in law in upholding the decision of the learned A.O. by confirming the addition of Rs.6,39,93,08/- on account of closing stock arising out of change in accounting policy in the next financial year 2007-08 (A.Y. 2008-09). The learned CIT(A) has confirmed the addition by stating that "The stock take over due to taking up over the demerged business of GSPC as given in notes to accounts has to be accounted by appellant during this year. So, non inclusion of the above closing stock of gas is not acceptable in view of the provisions of section 145(3) and accordingly book results are rejected. This is supported by the notes to accounts as mentioned above given in the annual report of the assessee. Accordingly, the above closing stock needs to be taken into account even if there arises to taxable income."
The learned CIT(A) has grossly erred by not accepting the facts that stock of petrol and diesel taken over due to taking up over the demerged business of GSPC is already considered and accounted by the appellant in the books of accounts for the F.Y. 2006-07. The learned CIT(A) failed to appreciate that only w.e.f. F.Y. 07-08 (A.Y. 08-09) the ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -3- appellant changed its accounting policy for 'Line Pack Gas" and consequently the stock of Natural Gas as Line Pack as at 31st March, 2008 would continue to remain a an inventory with the company and also since the company as an opinion either to purchase the same at the end of the agreement with the supplier or return it back to the supplier, the company has decided to account for the same as an inventory as at 31st March, 2008, which up to the financial year 2006-07 was charged to the profit & loss account. The learned CIT(A) has further failed to understand that by making addition of the Closing stock for A.Y. 2006- 07 (A.Y. 2007-08) it will automatically become opening stock for F.Y. 2007-08 (A.Y. 2008-09) and thus revenue effect will be Nil. The learned CIT(A) has grossly erred in rejecting the book results. He has failed to understand that accounts of the appellant are audited by internal auditors, statutory auditors, Tax Auditors and even C & AG of India.
He has also failed to appreciate that the learned A.O. has accepted the book results.
ITEM NO.II : LEVY OF INTEREST UNDER SECTION 234B & 234D OF THE ACT AND RECOVERY OF INTEREST U/S.244A OF THE ACT:
1. The learned CIT(A) Gandhinagar has grossly erred in law and on facts in partly upholding the decision of the learned A.O. to levy interest under Section 234B & 234D of the Act and recovering interest U/s.244A of the Act.
2. The appellant states that levy of interest is wholly unjustified and the same may kindly be stated.
3. That the interest U/s.234B & 234D on the facts and circumstances is not automatic or consequential.
III. The appellant reserves its right to add, amend, alter, substitute or modify all or any of the grounds stated hereinabove as the facts and circumstances of the case may justify.
Apart from the above grounds, the Assessee has raised the following additional ground:
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -4- Appellant craves leave to raise this additional ground of appeal before the Hon'ble ITAT. This is a legal ground and therefore as per the decision of Hon'ble Supreme Court in the case of National Thermal Power (229 ITR 383) it can be raised before the Hon'ble ITAT.
1. The appellant prays that on the facts and circumstances of the case of the ground of appeal addition pertaining to prior period expenses of Rs.15,45,925/- claimed in appeal bearing ITA # 1390/Ahd/2012 for A.Y. 2008-09 is not accepted o the ground that the expenses pertain to this Assessment year then direction be given to allow the same in A.Y. 2007-08.
Appellant craves leave to add, amend, alter, change, delete and edit the above ground of appeal before or at the time of the hearing of the appeal.
(B) Revenue's appeal (AY 2007-08) :
(1) The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.1,12,14,863/-, made on account of disallowance of depreciation claimed on the fixed assets under the head "Intangibles-
Right of Way (ROW) and Permissions".
(2) On the facts and circumstances of the case the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.
(3) It is therefore prayed that the order of the learned CIT(Appeals) may be set aside and that of the A.O. be restored to the above extent.
Revenue has raised the following additional ground:
1. The learned CIT(Appeals) has erred in law and on facts in accepting the change of terminology from ROU to ROW by the assessee without obtaining any supporting evidences or that due process has been followed before making such a change, as the terms have significantly different meaning.
2. On the facts and circumstances of the case the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -5- It is therefore prayed that the order of the learned CIT(Appeals) may be set aside and that of the A.O. be restored to the above extent.
2.1. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 20/11/2009, thereby the Assessing Officer(AO) made addition in respect of disallowance of depreciation on intangibles assets amounting to Rs.1,12,14,863/- and addition on account of closing stock amounting to Rs.6,39,93,408/- Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions of the assessee, partly allowed the appeal, wherein ld.CIT(A) deleted the addition made on account of disallowance of depreciation amounting to Rs.1,12,14,863/- and confirmed the addition of Rs.6,39,93,408/- made on account of closing stock. Now, both the assessee and revenue have filed appeals challenging the order of the ld.CIT(A).
3. In Assessee's appeal, i.e. in ITA No.3117/Ahd/2010 for AY 2007- 08 the first ground is against the addition of Rs.6,39,93,408/- on account of closing stock. The ld.Sr.counsel for the assessee submitted that the addition made by the AO and confirmed by the ld.CIT(A) is not justified. He submitted that the ld.CIT(A) erred by not accepting the facts that stock of petrol and diesel due to taking up over the demerged business of GSPC was already considered and accounted by the assessee in the books of accounts for the F.Y. 2006-07. The ld.CIT(A) failed to appreciate that only w.e.f. F.Y. 2007-08 (A.Y. 2008-09) the assessee ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -6- changed its accounting policy for "Line Pack Gas" and consequently the stock of Natural Gas as Line Pack as at 31st March-2008 would continue to remain as an inventory with the company and also since the company had an option either to purchase the same at the end of the agreement with the supplier or return it back to the supplier. For this, the company decided to account for the same as an inventory as at 31st March-2008, which upto the F.Y. 2006-07 was charged to the Profit & Loss account. He submitted that the ld.CIT(A) further failed to understand that by making addition of the closing stock for F.Y. 2006-07 (AY 2007-08) it would automatically become opening stock for F.Y. 2007-08 (AY 2008-
09) and thus revenue effect would be NIL. He submitted that the ld.CIT(A) has grossly erred in rejecting the book result. He submitted that the ld.CIT(A) has failed to appreciate that accounts of the assessee are audited by internal auditors, statutory auditors, tax auditors and even C&AG of India. He submitted that the ld.CIT(A) has also failed to appreciate that the ld.A.O. has accepted the book results. He submitted that it was submitted before the ld.CIT(A) that F.Y.2006-07 (AY 2007-
08) was the first major year of operation of the company. It was brought to the notice of the ld.CIT(A) that for the F.Y. 2006-07 (AY 2007-08) the assessee in its books of accounts had charged to revenue and, therefore, for that year there was no closing stock of Natural Gas as per books. However, w.e.f. F.Y. 2007-08 (AY 2008-09) the assessee changed its accounting policy and, consequently, the natural gas in line pack was shown as "Stock" and thus there was closing stock of PNG which would continue to remain as inventory. He submitted that this fact was duly ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -7- disclosed in the notes on account for the F.Y. 2007-08 (AY 2008-09). The ld.Sr.counsel for the assessee further submitted that even if the gas is measured at some value and treated as closing stock for the current year, then the same may be automatically qualify as opening stock of the next year. From the income tax point of view, the revenue effect would be NIL. He submitted that the AO is bound to accept the methodology in accounting adopted by the company on regular basis especially in the case when there was no revenue loss to the exchequer. He submitted that various decisions were relied upon by the assessee before the ld.CIT(A) in support of this contention. He submitted that law is well- settled that closing stock of the earlier year has to form the opening stock of the next accounting year. He submitted that if the disallowance is confirmed, then the closing stock of F.Y. 2006-07 (AY 2007-08) be treated as opening stock of F.Y. 2007-08 (AY 2008-09). Thus, revenue effect will be NIL.
4. On the contrary, ld.CIT-DR supported the order of the ld.CIT(A) and submitted that there is no error in the order of the ld.CIT(A).
5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The ld.CIT(A) has decided this issue in his order, by observing as under:-
"As per notes of accounts from 1st April, 2006 to 22nd May, 2007 (appointed date and effective date respectively), all the profits of retail gas business are to be accounted for by appellant and not demerging company i.e. GSPC in A.Y. 2007-08. Accordingly, to ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -8- determine correct profits, above closing stock needs to be taken into account.
The stock taken over due to taking up over the demerged business of GSPC as given in notes to accounts has to be accounted by appellant during this year. So, non inclusion of the above closing stock of gas is not acceptable in view of the provisions of section 145(3) and accordingly book results are rejected. This is supported by the notes to accounts as mentioned above given in the annual report of the assessee. Accordingly, the above closing stock needs to be taken into account even if there arises no taxable income. Accordingly, the addition of Rs.6,39,93,408/- made by the AO is upheld.
As regards the alternate ground regarding allowing the closing stock as opening stock next year, it may be mentioned that issue under consideration is determination of income of A.Y. 2007-08 as per correct closing stock for A.Y. 2007-08 which has been decided. As far as issue regarding the determination of effect on opening stock and income of A.Y. 2008-09, appellant may make appropriate application before the A.O. who will decide the issue as per law. Therefore, the alternate ground is rejected."
5.1. We find that the ld.CIT(A) ought not to have rejected the book results as the books of the assessee are subjected to audit by various departments. Therefore, the action of the ld.CIT(A) rejecting the book of accounts is set aside, however we do not find any infirmity in the order of the ld.CIT(A) in rejecting the alternate claim of the assessee that the closing stock for the AY 2007-08 be treated as opening stock of the AY 2008-09 since the ld.CIT(A) has given liberty to the assessee to approach to the AO. Thus, this ground of assessee's appeal is partly allowed.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10 -9-
6. Ground Nos.2 & 3 are against the levy of interest u/s.234B & 234D of the Act and recovering interest u/s.2344A of the Act. The same are being consequential in nature. Thus, these grounds of assessee's appeal are dismissed.
7. Now, we take up the additional ground taken by the assessee. The ld.counsel for the assessee submitted that this ground was not taken up before the ld.CIT(A). He submitted that in case the contention is not accepted in the AY 2008-09 on the ground that the expenses for assessment year under appeal, then a direction be given to the AO to allow such expenditure in the AY 2007-08.
7.1. The ld.CIT-DR has opposed the admission of the ground.
7.2. We have heard the parties. In view of the judgement of the Hon'ble Apex Court rendered in the case of National Thermal Power reported at 229 ITR 383 this ground is admitted for adjudication and would depend upon the ground taken in ITA No.1390/Ahd/2012 (assessee's own case) for AY 2008-09. It is held accordingly.
8. In the result, assessee's appeal for AY 2007-08 is partly allowed.
9. Next, we take up the Revenue's appeal, i.e. ITA No.2958/Ahd/2010 for AY 2007-08.
9.1. The only effective ground of Revenue's appeal is against the deletion of addition of Rs.1,12,14,863/- made on account of disallowance ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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of depreciation claimed on the fixed assets under the head "Intangibles- Right of Way (ROW) and Permissions".
9.2. The ld.CIT-DR submitted that the ld.CIT(A) was not justified in deleting the addition. He submitted that the ld.CIT(A) has taken as expenditure incurred on 'right of use' and the ld.CIT(A) has changed the terminology 'right of way'. He placed reliance on the decision of Hon'ble ITAT Mumbai Bench 'D' rendered in the case of Chembur Patalganga Pipelines Ltd. vs. Jt.CIT reported at 105 TTJ 788 (Mum.) in support of contention that depreciation is not allowable.
9.3. On the contrary, ld.Sr.counsel for the assessee submitted that the order of the ld.CIT(A) is justified. He further submitted that the ld.CIT(A) has examined the issue in right perspective. He also submitted that the assessee has not acquired any right into the land and the payments were made to the various municipalities for giving permission to have right of way. Therefore, the decision of the Hon'ble Mumbai Tribunal rendered in the case of Chembur Patalganga Pipelines Ltd.(supra) is not applicable.
10. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. Since the Revenue has raised additional ground challenging the action of the ld.CIT(A) in accepting the change of terminology from ROU to ROW by the assessee without obtaining any supporting evidences or that due process has been followed before making such a change, as the terms ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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have significantly different meaning, the ld.CIT-DR has contended that no Remand Report was sought from the AO before making such change. The ld.CIT(A) has decided this issue vide para-3.3 of his order, by observing as under:-
"3.3. I have considered the assessment order as well as the submission made by the assessee. It is seen that basically the AO has held that right of Way (ROW) expenses paid to various authorities for laying, crossing permissions, internal road, boring permission, dams and bridge crossing permission, railway and river crossing permission etc. for PNG network for pipe laying charges are not allowable because basic underlying asset is land which is taken for perpetual ownership which does not depreciate as held by various decisions relied upon by the assessee. He also relied on the decision of CIT(A) in the case of Gujarat State Petronet Ltd. for AY 2006-07 in which the disallowance of depreciation was upheld on land compensation. The appellant has made it very clear that for ROW, security deposit is given to various municipal authorities, local authorities, railways, etc., wherever applicable for laying pipeline. This amount is accounted as current asset and not fixed asset and no depreciation thereon has been claimed. The other expenses have been incurred for obtaining permission from various municipalities, railways, etc., for laying pipeline and they have been amortized for a period of 10 years as permissions are for limited time period. The permission only allows the assessee to lay pipeline for PNG network. The appellant has not purchased/taken on lease or taken on rent any land for purpose of ROW. The decisions relied upon by the AO are distinguishable on this account.
It is pertinent to note that in the case of Gujarat State Petronet Ltd. for AY 2006-07. CIT(A) had given the finding regarding 3 heads i.e. for crop compensation and Right of Way where he has allowed depreciation while cost of land compensation for the purpose of depreciation towards ROW has been allowed by the CIT(A) in GSPL. The AO has cited only part of the order of CIT(A) relating to land compensation (Right of Use). In the present case no payment has been made for crop compensation and land compensation has ot been claimed by the assessee. The charges have been paid for obtaining permission from various local authorities giving the assessee ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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permission for laying the pipelines ad these permissions are stated to be renewed periodically and that is why it has been amortized over a period of 10 years.
In view of the above discussion, addition made on account of depreciation on Right of Way amounting to Rs.1,12,14,863/- is deleted and this ground is allowed."
10.1. During the course of hearing, the assessee has placed documents, such as proof of payment made to various authorities, namely, Fixed Assets-ROU for the FYs 2007-08 & 2008-09 at Nadiad, Navsari (deduction for F.Y. 2008-09 Rs.31,625/-), Valsad, Morbi, Rajkot, Chotila, Surendranagar, Thangadh totalling to Rs.1,11,98,273/- (for F.Y.2007-08), Rs.1,61,85,963 (for F.Y. 2008-09) and Gross Block as on 31/03/2009 of Rs.2,73,52,611/- and letter of Secon Private Ltd. dated 10/04/2007 alongwith land compensation award No.01/Nadiad - CNG PL/2007of Rs.18,18,090/- (Appendix A) in support of its contention on this issue. The objection of the Revenue is that the ld.CIT(A) has not given any opportunity to the AO.
10.2. After considering the totality of the facts and in view of the fact that the assessee has placed on record certain documents (to various authorities cited above) which were not before the AO, the order of the ld.CIT(A) is set aside and the issue is remitted back to the file of AO for decision afresh. Therefore, this ground of Revenue's appeal is allowed for statistical purposes only.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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11. In the result, the appeal of the Revenue for AY 2007-08 is allowed but for statistical purposes.
12. Now, we take up the Assessee's appeal in ITA No.1390/Ahd/2012 and Revenue's appeal in ITA No.1300/Ahd/2012 for AY 2008-09. The following grounds have been raised by the respective parties:-
(A) Assessee' appeal (AY 2008-09) :
GROUNDS ITEM NO. I: ADDITION OF CLOSING STOCK OF RS. 56,82,092/- ON ARBITRARY BASIS IN RESPECT OF TRADING OF NATURAL GAS THROUGH PIPELINES - PNG 1.1 The learned CIT(A) Gandhinagar has grossly erred on the facts and circumstances of the case & in law in upholding the decision of the learned A.O. by confirming the addition of Rs. 56,82,092/- on account closing stock of PNG.
1.2 The learned CIT(A) has confirmed the addition by stating that "a) The A Y 2007-08 was effectively the first year of this business of the appellant and the AO has adopted the correct method of incorporating the increase in stock in that year.
b) The appellant itself has incorporated the opening stock as taken by the AO (closing stock of last year) as the dosing stock of this year. But, it is totally illogical on the part of the appellant again not to account for the increase in stock due to trading and manufacturing in the current year. The method employed by the A is a very reasonable method wherein the equivalent quantity of CNG in terms of PNG has been taken as per assessee's own disclosed results in the preceding year. The appellant has not been able to give any alternative method of working out the increase in stock in its submissions either before the AO or before the undersigned. The working of dosing stock as made by the AO is upheld. The AO has already allowed the benefit of deduction of addition of closing stock of last year as opening stock of this year. Therefore, the addition of Rs.56,82,0927- as made by the AO is confirmed."
1.3 The learned CIT(A) has failed to appreciate the fact that the learned A.O has never asked the appellant to furnish the quantitative details of purchase and sales. The learned CIT(A) has also failed to understand that the learned A.O. has made ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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addition on arbitrary basis by considering the quantity of sale and purchase as well as value of sales as per Note No. 16 of Notes forming part of accounts of Annual Report for F.Y 2007-08 (A.Y 2008-09) i.e. the year under reference. Whereas learned A.O has considered the quantity of F.Y 2006-07 (A.Y. 2007-08) for the conversion of CNG Manufactured from PNG. Further the learned A.O has conveniently not considered the "Note" mentioned below the quantitative details. The appellant reproduces the same for your honour's ready reference.
"Notes:
Difference in reconciliation of purchases and sales of gas quantities is on account of measurement tolerance and normal loss. Also, the purchase is effected mostly in Energy terms (MMBTU / Kcals etc) While the sale is done in terms of Volume (SCM), hence both the figures may not be comparable. Sale in value of CNG is net of discounts and excise duty."
1.4 The learned CIT(A) has failed to understand the fact that by confirming the addition of the Closing stock for F.Y. 07-08 {A.Y 08-09) the closing stock will automatically become the opening stock of the next year for F.Y. 08-09 (A.Y. 09-10) and the revenue loss will be Nil which is in line with the following judgments a. Chattar Extractions Pvt. Ltd. Vs. ITO (2004) 85 TTJ (Asr)(TM) 405 : (2004) 91 ITD 385 (Asr)(TM) b. West Coast Paper Mills Ltd. Vs. ACIT (2006) 105 TTJ (Mumbai) 344 : (2006) 106 ITD 19 (Mumbai), c. Cyanamid Agro Ltd. Vs. Addl. CIT (2009) 121 TTJ (Mumbai) 606 : (2009) The learned CIT(A) has grossly erred in rejecting the book results. He has failed to understand that accounts of the appellant are audited by internal auditors, statutory auditors, Tax Auditors and even CA & AG of India.
ITEM No. II : DISALLOWANCE OF RS. 2.23,43.676/- TOWARDS ADDITIONAL DEPRECIATION CLAIMED @ 20% ON PLANT & MACHINERY - CNG STATIONS:
2.1 The learned CIT(A) has failed to appreciate that the learned A.O has never specifically asked the appellant any details regarding additional depreciation claimed by the appellant.
2.2 The learned CIT(A) Gandhinagar has grossly erred on the facts and circumstances of the case and in the law in upholding the decision of the learned A.O. by confirming the disallowance of additional depreciation of Rs.2,23,43,676/- claimed @ 20% on Plant & Machinery - CNG Stations by stating that "Admittedly there is no change in the composition or properties of the gas when it is compressed. In fact, the gas is compressed only to facilitate its easy storage in larger quantities in smaller space and therefore easy transportation. In fact, the process is ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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similar to air being compressed to fill in tubes/tyres of vehicles and it would be beyond imagination to say that it is undergoing manufacture.
Another important factor is that the gas is again decompressed before use by just passing through a nozzle."
The learned CIT (A) has erred in stating that there is no change in the composition or properties of the gas when it is compressed. He has failed to appreciate that compression of the gas is necessary for its easy use and transportation.
2.3 The learned CIT (A) has grossly erred on the fact of the case and in the law by concluding that the process of compression of natural gas does not amount to manufacture by relying on the following decision a. Idandas V. Anant Ramchandra Phadke AIR 1982 SC 127 where in Hon'ble Supreme court has laid down three tests as to what constitutes manufacture. They are - (i) a certain commodity should have been produced; (ii) the process of production must involve either labour or machinery; and (iii) the end product should have a distinct character, name and used.
The appellant humbly submits that the above case is not applicable to the appellant as Hon'ble Supreme Court has laid down the test of deciding manufacturing purpose in terms of Secton 106 of the Transfer of Property Act.
b. Vs. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325 (Bom.) wherein Hon'ble Bombay High Court has held that "The word 'manufacture' has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word 'manufacturer' in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words 'manufacture and produce' apply to the bringing into existence of something which is different from its components...." (p. 325) From the above considering the narrower meaning, it means that the words manufacture ^ and produce apply to bringing in to existence of something which is different from its components. Hence process of compression of the natural gas is manufacture as it is required for its use and therefore the appellant is eligible for additional depreciation u/s. 32 (iia) of the Income tax Act, 1961.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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2.4 The learned CIT (A) has also grossly erred on the fact of the case and in the law by stating that the following decisions are squarely applicable to the appellant, i.e. the use of compressed gas (which again is decompressed) is essentially the same as before the so called process of compression.
a. Honourable ITAT Pune Spl. Bench B.G Chitale [116 TTJ (SB) 658] b. Honourable ITAT Culcatta Spl. Bench Shaw Scott Distilleries 70 TTJ (SB) 321] c. Honourable ITAT Ahmedabad Aqua Minerals Pvt Ltd 96 ITD 417 The appellant humbly submits that above case laws are not applicable to the appellant as in the case of appellant, at CNG stations, natural gas is compressed to very high pressure before injecting it into the fuel tanks of automobiles. Natural gas is pressurized with the help of a compressor and then it is stored in a stationary cascade. The compressor gets switched on whenever the pressure of this cascade goes down below a specified level. A CNG station typically consists of one or more compressor packages to compress natural gas to high pressure. Thus, compression of natural gas is required for its commercial use and its character gets changed for its use. Hence process of compression of the natural gas is manufacture and the appellant is eligible for additional depreciation u/s. 32 (iia) of the Income tax Act, 1961.
2.5 The learned CIT(A) has also relied on the decision of the Sacs Eagles Chicory 255 ITR 178 and stated that the term "manufacture" in much specific connote than a mere process. The appellant humbly submits that the case is not applicable to the appellant as Compression of Gas is required for its commercial use.
2.6 The appellant humbly submits that additional depreciation be granted in view of the findings of the following decisions.
a. DCIT V. N. V. Exports (P) Ltd. (2012) 49 SOT 534 (Kol.)(Trib.) b. Steelfab Building Systems vs. Income tax officer (2010) 127 ITD 419 (Mumbai) c. Fourways International vs. Income tax officer (2007) 11 SOT 437 (Mumbai) d. ACIT vs. Hynoup food & Oil Industries (P) Ltd.* (1999) 63 TTJ (Ahd) 111 e. ACIT vs. National Lamination Industries* (2007) 111 TTJ (Ahd)(TM) 754 f. V.M. Jog Engg. Ltd. Vs. JCIT (2006) 104 TTJ (Pune) 487 g. CIT vs. Yavatmal co-operative ginning & pressing (1993) 203 ITR 874 (Bom) h. Aspinwall & co. Ltd. Vs. CIT (2001) 170 CTR (SC) 68 i. CIT vs. Oswal woollen mills ltd. (2002) 175CTR(P&H) 184 2.7 The learned CIT{A) has failed to understand the fact that as per the Central Excise Act, 1944 the process of compression of natural gas (even if it does not ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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involve liquefaction), for the purpose of marketing it as Compressed Natural Gas (CNG), for use as a fuel or for any other purpose, shall amount to "manufacture".
The Central Excise Act, 1944 - Section 2 (f) defines manufacture which includes any process Section 2(f)(ii) - which is specified in relation to any goods in the section or chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture.
Central Excise Tariff Act, 1985 Chapter 27 Note No. 5 - Reproduced hereunder.
5. In relation to natural gas falling under heading 2711, the process of compression of natural gas (even if it does not involve liquefaction), for the purpose of marketing it as Compressed Natural Gas (CNG), for use as a fuel or for any other purpose, shall amount to "manufacture".
The appellant humbly draws the attention to the decision of CIT Vs. VTM Ltd. Wherein it was held as under.
Depreciation--Additional depreciation under s. 32(1)(iia)--New plant or machinery-- Assesses engaged in manufacture of textile goods having installed new wind mill was entitled to additional depreciation--It was not necessary for claiming additional depreciation that new machinery or plant should have any operational connectivity to the article or thing that was already being manufactured by the assesses--Further, when the Tribunal had rightly applied provisions of s. 32(1)(iia) it cannot be held that simply because Co-ordinate Bench of the Tribunal had earlier taken a different view, the Tribunal on this occasion also ought to have followed the same"
From the above it is concluded that it not necessary that to claim additional depreciation should have an operational connectivity to the article or thing that was already being manufactured. Further, appellant is paying excise duty as per the provisions of excise act as compression of natural gas falls within the definition of manufacture.
2.8 The appellant humbly submits that the process of compression of natural gas for use as a fuel be considered as "Manufacture" and in turn the impugned disallowance of claim of additional depreciation u/s. 32 Rs.2,23,43,676/- on additions made during the year in respect of CNG Stations may kindly be deleted.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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ITEM NO. Ill: DISALLOWANCE OF PRIOR PERIOD EXPENDITURE RS. 15,45,925/-
3.1 The learned CIT(A) has grossly erred on the facts and circumstances of the case and in the law in upholding the decision of the learned A.O by confirming the disallowance of the prior period expenses of Rs.15,45,925/-. The learned CIT(A) has failed to understand the fact that though the expenses are in the nature of security Expenses, Computer Expenses, Consultancy & Technical fees, Internal Audit Fees, Vat Credit etc. and are related to earlier years but they are incurred during the year and crystallized during the year. The learned CIT (A) has grossly erred on facts and in law by not deducting the prior period income from the total income and the expenses.
3.2 The learned CIT (A) has fail to understand the fact that the expenses claimed by the appellant is in line with the following judgments a. CIT Vs. Jagatjit Industries Ltd. 194Taxman 158 (Del.) b. Sterlite Industries (India) ltd. Vs. Addl.CIT (2006) 102 TTJ (Mumbai) 53.
ITEM No. IV: DISALLOWANCE OF INTEREST ON SHARE APPLICATION MONEY Rs. 3,30,46,723/-
4.1. The appellant humbly draws the attention of your honour that it has paid interest of Rs. 7,78,07,996/- on share application money as per the following details F.Y. A.Y. Interest on Treatment in the Treatment in the Income Tax Share Books Application Money 06-07 07-08 35,86,000 Capitalized Only Depreciation of Rs.
14,38,200/- has been Claimed 07-08 08-09 2,34,58,723 CWIP-lnterest A/c. No Depreciation has been claimed 3,30,46,723 07-08 08-09 4,47,61,273 Treated as Disallowed in the Return of Revenue Expense income Total 7,78,07,996 ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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4.2 The learned CIT (A) has grossly erred on the fact and circumstances of the case and in the law by upholding the decision of the learned A.O by confirming the disallowance of capitalized interest on share application money Rs.3,30,46,723/-.
4.3 The learned CIT(A) has grossly erred in law and on facts in stating that "the shares for which the appellant has borrowed money are its investments and not business. The interest paid for investments is not an allowable expenses u/s. 36(iii) of the IT Act. Neither are the shares depreciable assets. Therefore, the appellant cannot be allowed to capitalize the interest and then claim depreciation on the capitalized interest". The learned CIT (A) has failed to appreciate that appellant has not borrowed any money for investment in shares. In fact, the appellant has received share application money for which allotment is pending and appellant has paid interest on the same. The learned CIT(A) has failed to appreciate that investment will be in the hands of the person from whom amount of share application money is received.
4.4 The learned CIT (A) has grossly erred on the fact of the case by disallowing the interest on share application money of Rs. 95,88,000/- which was capitalized and only depreciation of Rs. 14,38,200/- was claimed. The learned CIT(A) has failed to appreciate that appellant has not claimed Rs. 95,88,000/- as expenses but appellant has claimed only Rs. 14,38,200/- by way of depreciation on capitalization of interest.
4.5 The learned CIT (A) has grossly erred on the fact of the case by disallowing the interest on share application money of Rs. 2,34,58,723/- which was not capitalized and no depreciation was claimed. The learned C,IT(A) has failed to appreciate that appellant has not claimed Rs. 2,34,58,723/- as expenses but the same was treated as CWIP-lnterest.
4.6 The learned CIT (A) has grossly erred on the fact of the case by stating that "(a) No Interest on borrowed capital for investment in shares or share application money is allowable as revenue expenditure, (b) Any claim of depreciation on capitalzed interest for amounts borrowed for share application has to be disallowed".
The appellant humbly submits that it has not borrowed any amount for investment in shares or share application. In fact appellant has received share application money and paid interest on the same.
4.7 Without prejudice to the claim and contention of the appellant, the learned CIT (A) has failed to appreciate the fact that the appellant has used the share application money for the acquisition of the assets and in turn interest paid on such share application money has been capitalized. The appellant humbly submits that if the appellant has not received the share application money then it would have borrowed the money from the Banks, Financial Institutions, etc. and interest on the same would have been capitalized.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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4.8 The appellant reproduce the section 36 (1) (iii) of the income tax Act, 1961:
"the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:
[Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction.] From the above it is clear that under section 36 (1) (iii) interest during the period from date of borrowing of the funds for the acquisition of the asset till the date on which such asset was first put to use shall not allowed as deduction hence the appellant has rightly capitalized the interest on share application money and rightly claim the depreciation on such capitalized interest.* 4.9 The appellant humbly draws the attention of your honour to the decision of Hon'ble ITAT Bangalore in the case of ACIT Vs. GMR Industries Ltd. Where in it was held that Share application money is debt for the assessee company till the time allotment is done and hence interest on share application money is allowable expenditure under section 36 (1) (iii) of the act.
4.10 Without prejudice to the above appellant humbly submits that disallowance of interest on share application money Rs. 3,30,46,723/- as made by the learned CIT (A) may kindly be deleted and if the disallowance is confirmed then the disallowance be restricted to Rs. 14,38,200/- i.e amount "of depreciation claimed on the capitalization of interest of Rs. 95,88,000/- on share application money.
ITEM NO&V: ADDITION ON ACCOUNT OF LIQUIDATED DAMAGES OF Rs. 2,25,88,566/-:
5.1 The (earned CIT(A) has grossly erred on facts and circumstances of the case and in law in upholding the decision of the learned A.O by treating liquidated damages as revenue receipt and confirmed the addition of Rs. 2,25,88,566/-.
5.2 The appellant humbly submits that the learned CIT(A) has fails to understand the fact that the delivery is essence of the contract in oil & gas industry, project delay some time effect the existence of the company, the liquidated damages is not a compensation and nor a rebate, it is towards delay in supply of machinery which in turn will be delay in the starting of plant hence the appellant has correctly treated the liquidated damages as capital receipt.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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5.3 The learned CIT (A) has treated liquidated damages as revenue receipt by stating that "It is to be seen that the business was already running and it is not the case that new machinery would have resulted in commencement of production thereafter. With due respect it is submitted that the decision of the Hon'ble Gujarat High Court in the case of Saurashtra Cement (Supra) is distinguishable on facts. The compensation received is held to be revenue in nature and the decision of the AO is accordingly upheld. The appellant has reduced the compensation from the cost for working the depreciation. The AO is directed to allow the enhanced depreciation by reversing this entry. The ground is decided as above."
The learned CIT (A) has also grossly erred on fact of the case by relying on the decision of Shree Digvijay Cement Co. Ltd. (1982) 138 ITR 45 (Guj). He further fails to appreciate the fact that the appellant has rightly considered the liquidated damages as capital receipt in the view decision of Honorable Gujarat High Court in the case of CIT Vs. Saurashtra Cement and Chemical Industries Ltd. 253 ITR 373 (Guj.) and Honorable Supreme Court in the case of Saurashtra Cement Ltd. (2010) 233 CTR 209.
5.4. The appellant humbly submits that the Liquidated damages be considered as capital receipt for the purpose of claim of depreciation u/s. 32 of the income tax act.
ITEM No. VI: LEVY OF INTEREST UNDER SECTION 234B & 234D OF THE ACT AND RECOVERY OF INTEREST U/S. 244A OF THE ACT:
6.1 The learned CIT (A) Gandhinagar has grossly erred in law and on facts in partly upholding the decision of the learned A.O, to levy interest under Section 234B & 234D of the Act and recovering interest U/s. 244A of the Act.
6.2 The appellant states that levy of interest is wholly unjustified and the same may kindly be deleted.
6.3 That the interest U/s 234B & 234D on the facts and circumstances is not automatic or consequential.
ITEM NO. VII: INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(c) OF THE ACT:
7. The Learned CIT(A) Gandhinagar has grossly erred in law and on facts in not deciding the issue by stating that the "initiation of penalty proceedings u/s. 271(1)(c) being premature Is not entertained."
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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The learned CIT(A) ought to have appreciated that the appellant has not furnished any inaccurate particulars either with the return of income or during assessment proceedings and also appellant has not concealed any particulars of income. The Learned CIT(A) ought to have appreciated that the additions are made on account of difference of opinion in interpretation of the provisions of law and therefore question of initiation of penalty proceeding does not arise.
Vlll. The appellant reserves its right to add, amend, alter, substitute or modify all or any of the grounds stated hereinabove as the facts and circumstances of the case may justify.
(B) Revenue's appeal (AY 2008-09) :
1. The learned CIT(Appeals) has erred in law and on facts in deleting the addition made by the AO on account of depreciation on Right of Way amounting to Rs.2,55,19,499/-.
2. The learned CIT(Appeals) has erred in law and on facts in deleting the addition made by the A.O. in respect of depreciation (reduced cost) amounting to Rs.26,48,101/-.
3. On the facts and circumstances of the case the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.
4. It is therefore prayed that the order of the learned CIT(Appeals) may be set aside and that of the A.O. be restored to the above extent.
12.1. Facts :- Brief facts pertaining to the AY 2008-09 upto the stage of ld.CIT(A) are recorded in para-3 of his order which is reproduced hereinbelow:-
"3. The appellant company is promoted by Gujarat State Petroleum Corporation Limited-GSPC (A Government of Gujarat Undertaking) Company was originally incorporated as Gujarat State Fuel Management Co.Ltd. on 11-03-99. The company got the Certificate for Commencement of Business on 07-04-99. The company was providing fuel advisory services. Subsequently on 14-12-05, the company's name was changed to GSPC Gas Company Limited. Pursuant to a scheme of arrangement as sanctioned by the High Court of Gujarat on 11-04-07, ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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the retail gas business of Gujarat State Petroleum Corporation Ltd. - GSPC was demerged and transferred to the appellant company w.e.f. 01-04-06 i.e. A.Y. 2007-08 which is the first year in which the appellant purchased and started distributing Natural Gas through City Gas Distribution Network. The appellant is mainly engaged in the business of Providing Fuel Advisory Services, Retail sale of Piped Natural Gas (PNG) and Compressed Natural Gas (CNG), City Gas Distribution Project and Setting up of Compressed Natural Gas (CNG) stations for Automobiles.
The appellant had filed its return of income for the above assessment year on 25-09-2008 declaring total income of RS.28,63,39,340/- under normal provisions and Book Profit U/s.115JB at Rs.5,55,62,053. The assessment has been completed u/s.143(3) and income was assessed at Rs.47,11,62,073/- after making the following additions/disallowances:
PARTICULARS RS. Disallowance of claim of Depreciation on intangibles - 2,55,19,499 RIGHT OF WAY (ROW)Expenses Addition on Arbitrary basis of closing stock in respect 56,82,092
of trading of Natural Gas through pipelines - PNG Disallowance of addition depreciation claimed 2,23,43,676 depreciation claimed @ 20% on Plant & Machinery - CNG Stations Disallowance of prior period expenditure 15,45,925 Disallowance of interest on share application money 3,30,46,723 Addition on account of liquidated damages 2,25,88,566"
The assessee further carried the matter in appeal before the ld.CIT(A), who after considering the submissions partly allowed the appeal, thereby ld.CIT(A) deleted the disallowance of claim of depreciation on intangible right of way, confirmed the addition amounting to Rs.56,82,092/- made on account of closing stock, disallowance of additional depreciation, disallowance of prior period expenses, disallowance of interest on share application money and ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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disallowance of liquidated damages. Against this, both the Assessee and the Revenue has filed appeal before this Tribunal.
12.2. Assessee's appeal (ITA No.1390/Ahd/2012) : The first grounds is against the addition of closing stock of Rs.56,82,092/-. The ld.Sr.counsel for the assessee submitted that the ld.CIT(A) failed to appreciate the fact that the AO had never asked the assessee to furnish the quantitative details of purchase and sales. He submitted that the ld.CIT(A) failed to understand that the ld.AO made addition on arbitrary basis by considering the quantity of sale and purchase as well as value of sales as per Note No.16 of Notes forming part of accounts of Annual Report for F.Y. 2007-08 (AY 2008-09), i.e. the year under reference. He submitted that whereas ld.AO has considered the quantity of F.Y. 2006-07 (AY 2007-08) for the conversion of CNG Manufactured from PNG. Further the ld.AO has conveniently not considered the "Note" mentioned below the quantitative details. He submitted that the difference in reconciliation of purchases and sales of gas quantities is on account of measurement tolerance and normal loss. He submitted that the purchase is effected mostly in Energy terms (MMBTU / Kcals, etc.) while the sale is done in terms of volume (SCM), hence both the figures may not be comparable. He submitted that the ld.CIT(A) has not considered the case-laws relied upon by the assessee. He further submitted that the ld.CIT(A) failed to understand the fact that by confirming the addition of the Closing Stock for F.Y.2007-08 (AY 08-09) the closing stock will automatically become ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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the opening stock of the next year for F.Y. 2008-09 (AY 09-10). Reliance is placed on the following judgements:-
(a) Chattar Extractions Pvt.Ltd. vs. ITO (2004) 85 TTJ (Asr)(TM) 405::
(2004) 91 ITD 385 (Asr) (TM).
(b) West Coast Paper Mills Ltd. vs. ACIT (2006) 105 TTJ (Mumbai) 344: (2006) 106 ITD 19 (Mumbai).
(c) Cyanamid Agro Ltd. vs. Addl.CIT (2009) 121 TTJ (Mumbai) 606.
12.3. The ld.Sr.counsel for the assessee submitted that the ld.CIT(A) erred in rejecting the books of the assessee-company. He submitted that assessee is a government company and is subjected to audit by various departments.
12.4. On the contrary, ld.CIT-DR supported the order of the ld.CIT(A). He submitted that the order of the ld.CIT(A) is completely justified.
13. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue at para-6.3 of his order, which is reproduced hereinbelow for the sake of clarity.
"6.3. I have considered the assessment order as well as the submission made by the assessee. The following pertinent observations are made on the issue, after careful consideration on the facts:
a) As far as the stock of natural gas as line pack is concerned, both the appellant and the AO have considered it as part of assessee's stock.
The value of the stock of CNG of 6481513 SCM valued at Rs.6,39,93,408/- belongs to the appellant and as per appellant, it was not taken in stock for AY 2007-08 but has now being included as per the company's decision.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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b) The stock as per a) above was there as per the AO and now admitted by the appellant on 31/3/2007. There is no dispute now on this issue.
c) The AO as discussed earlier has calculated the increase in stock during the year i.e. after 31/03/2007 by converting the purchases and sales into same unit i.e. quantity of equivalent PNG. The sale of CNG has been converted into PNG by taking the base of last year's production of CNG from PNG by the assessee itself. The appellant is maintaining the books as if there is no difference (neither increase not decrease) in stock quantity during the year; irrespective of the quantities purchased and sold.
The method of accounting tried to be adopted by the appellant without accounting for changes in stock would always give wrong picture of profit; and this has been demonstrated by the computation done by the AO wherein the increase in stock pertaining to this year itself is amounting to Rs.6,96,75,500/- has been ignored and the profits have been declared lower by this amount.
The contention of consistency in method of accounting is also not sustainable in this case because:
a) The AY 2007-08 was effectively the first year of this business of the appellant and the AO has adopted the correct method of incorporating the increase in stock in that year.
b) The appellant itself has incorporated the opening stock as taken by the AO (closing stock of last year) as the closing stock of this year. But, it is totally illogical on the part of the appellant again not to account for the increase in stock due to trading and manufacturing in the current year.
The method employed by the AO is a very reasonable method wherein the equipment quantity of CNG in terms of PNG has been taken as per assessee's own disclosed results in the preceding year. The appellant has not been able to give any alternative method of working out the increase in stock in its submissions either before the AO or before the undersigned. The working of closing stock as made by the AO is upheld. The AO has already allowed the benefit of deduction of addition of closing stock of last year as opening stock of this year.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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Therefore, the addition of Rs.56,82,092/- as made by the AO is confirmed."
13.1. So far as the proposition that closing stock of the previous year become the opening stock of the next year is concerned, there is no dispute in this regard and law is well-settled. We find that the AO in para-5.1 of his order has considered the quantitative details of the purchase and sales of natural gas. However, the grievance of the assessee is that the Assessing Officer has never asked the appellant- assessee to furnish the quantitative details of purchase and sales. It is submitted by the ld.Sr.counsel for the assessee that the AO has taken average sale price of 16.814 SCM. It should have been taken on the basis of Energy terms (MMBTU / Kcals, etc.) since the purchase have been taken on those terms. However, the ld.CIT(A) has given a finding that the AO has calculated the increase in stock by converting the purchases and sales into same unit, i.e. quantity of equivalent PNG. The sale of CNG has been converted into PNG by taking the base of last year's production of CNG from PNG by the assessee itself. The submission of the assessee is on the factual aspects needs to be verified by the Assessing Officer.
14. In view of the submission, we are of the considered view that this issue requires to be examined and verified by the AO and to be decided afresh. Accordingly, we hereby set aside the order of the ld.CIT(A) on this issue and restore this issue back to the file of AO for fresh decision taking into account all the submissions of the assessee. Needless to say ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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that the AO shall afford reasonable opportunity of hearing to the assessee. The assessee is directed to furnish all quantitative details related to its claim to the AO. Thus, this ground of assessee's appeal is allowed but for statistical purposes.
15. Ground No.2 is against disallowance of Rs.2,23,43,676/- towards additional depreciation claimed @ 20% on plant & machinery. The ld.Sr.counsel for the assessee submitted that the ld.CIT(A) was not justified in confirming the disallowance made by the AO. He submitted that as per Central Excise Tariff Act, 1985 - Chapter 27, Note No.5 in relation to natural gas falling under heading 2711, the process of compression of natural gas (even if it does not involve liquefaction), for the purpose of marketing it as Compressed Natural Gas (CNG), for use as a fuel or for any other purpose, shall amount to "manufacture". He submitted that it is not necessary that for claiming additional depreciation the new machinery and plant should have an operational connectivity to the article or thing that was already being manufactured. It is submitted that the appellant is paying excise duty as per provisions of excise act as compression of natural gas falls within the definition of manufacture. He submitted that the case-laws relied upon by the ld.CIT(A) is not applicable on the facts of the present case. The ld.Sr.counsel for the assessee relied upon the judgement of Hon'ble Apex Court rendered in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd. reported at (2010) 320 ITR 79.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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15.1. On the contrary, ld.CIT-DR vehemently argued that the argument advanced by the ld.Sr.counsel for the assessee is misplaced. The ld.CIT- DR submitted that the process is merely occurred for compression of natural gas and does not amount to manufacture. He supported the order of the ld.CIT(A) and submitted that as per settled proposition of law by the Hon'ble Supreme Court since there is no change in character of gas, the gas remains the same gas and having the same constituent. To buttress this contention, the ld.CIT-DR drew our attention on the definition of manufacture as given in section 2(29)BA of the Act.
15.2. In rejoinder, the ld.Sr.counsel for the assessee submitted that in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd.(supra), the Hon'ble Supreme Court has observed that if the contention of the Department is to be accepted, namely, that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job-workers and the activity undertaken by them has been recognized by various Government authorities as manufacture. The ld.Sr.counsel for the assessee drew our attention towards heading 2711, of Chapter 27, Note No.5 of Central Excise Tariff Act, 1985, wherein it has been categorically mentioned that the process of compression of natural gas for the purpose of marketing it as Compressed Natural Gas (CNG)) for use as a fuel or for any other purpose, shall amount to "manufacture". He submitted that in view of the binding precedent the claim of assessee deserves to be allowed.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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16. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that this issue is to be examined whether the assessee is entitled for additional depreciation claimed @ 20% on plant & machinery. Both the AO and ld.CIT(A) have rejected the claim on the basis that compression of conversion of PNG to CNG does not tantamount to manufacture, therefore, the assessee is not entitled for the additional depreciation claimed as there is only change of form but basic ingredients remain same.
16.1. The Hon'ble Apex Court in the case of rendered in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd. reported at (2010) 320 ITR 79 has held as under:-
"21. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognised by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under s. 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales-tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of s. 80-IA of the IT Act, 1961.
22. For the afore-stated reasons, civil appeals filed by the Department stand dismissed with no order as to costs."
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 31 -
16.2. Respectfully following the ratio laid down in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd. (supra), in our opinion, the authorities below were not justified in rejecting the claim of the assessee for additional depreciation. Thus, the addition made in this regard is hereby deleted. Thus, ground No.2 of assessee's appeal is allowed.
17. Ground No.3 is against disallowance of prior period expenses of Rs.15,45,925/-. The ld.Sr.counsel for the assessee submitted that the ld.CIT(A) erred in upholding the order of the AO and by confirming the amount of Rs.15,45,925/-. He submitted that the AO failed to understand the fact that though the expenses are in the nature of security expenses, computer expenses, consultancy and technical fees, internal audit fees, vat credit, etc. and are related to earlier years but they are incurred during the year and crystallized during the year under appeal.
17.1. On the contrary, d.CIT-DR supported the order of the authorities below.
18. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The AO has given a finding that on verification, it is found that with respect to all seven items, liability were ascertainable or crystallized in the relevant year which could not be postponed. The ld.CIT(A) confirmed the action of the AO by observing that the expenses are not of ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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gratuitous nature like bonus, but are related to services already rendered and the rates were known to the appellant as per the terms of agreement with the service providers, etc. The expenses accrued in those years and according to mercantile system of accounting these cannot be allowed in the year just because these have been accounted for by the appellant in this year. The only explanation given by the assessee is that these expenses are crystallized during the year under consideration. The assessee has relied on the following decisions:-
Sl.No(s) In the case of.... Reported at....
1. CIT vs. Jagatjit Industries Ltd. 194 taxman 158 (Del.)
2. Sterlite Industries (India) Ltd. (2006) 102 TTJ vs. Addl.CIT (Mumbai) 53.
18.1. The Hon'ble Delhi High Court in the case of CIT vs. Jagatjit Industries Ltd.(supra) has held that the assessee has been debiting the expenditure spilled over to the subsequent years and the AO had been allowing the same. The said accounting practice has been consistently followed by the assessee and accepted by the Department. If a particular accounting system has been followed and accepted and there is no acceptable reason to differ with the same, the doctrine of consistency would come into play.
18.2. The Hon'ble ITAT 'D' Bench Mumbai in the case of Sterlite Industries (India) Ltd. vs. Addl.CIT(supra) relying on the judgement of Hon'ble Jurisdictional High Court rendered in the case of Saurashtra ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 33 -
Cement & Chemicals Industries ltd. vs. CIT reported at (1995) 213 ITR 523 (Guj.) has held that Assessee having received bills/vouchers for some prior period expenses only in the relevant previous year, it is entitled to deduction of such expenditure irrespective of the fact that the assessee has been following mercantile system of accounting. The assessee has not placed anything on record suggesting that the bills and vouchers were received during the year under consideration except a statement is made that these expenses were crystallized and incurred during the year under consideration. It is not demonstrated that as to how these expenditure were crystallized during the year under consideration. The authorities below have given findings that the expenses so claimed on related to prior period and cannot be allowed in this year. After considering the totality of the facts and the ratio laid down by the Hon'ble Delhi High Court in the case of CIT vs. Jagatjit Industries Ltd.(supra) and the Hon'ble Coordinate Bench of Mumbai in the case of Sterlite Industries (India) Ltd. vs. Addl.CIT(supra), we restore this issue back to the file of AO to decide it afresh. The assessee is directed to produce the evidences in support its contention that these expenditure were crystallized during the year under consideration. Thus, this ground of assessee's appeal is allowed for statistical purposes only.
19. The fourth ground of assessee's appeal is against disallowance of interest on share application money Rs.3,390,46,723/-. The ld.Sr.counsel for the assessee submitted that the assessee has paid interest of Rs.7,78,07,996/- on share application money out of which amount of ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 34 -
Rs.95,88,000/- was capitalized during the AY 2007-08, an amount of Rs.14,38,200/- has been claimed in the AY 2008-09, an amount of Rs.2,34,58,723/- is treated as capitalized work-in-progress interest account - no depreciation has been claimed and Rs.4,47,61,273/- treated as Revenue expenses and disallowed in the return of income. He submitted that the ld.CIT(A) erred in confirming the capitalized interest on share application money Rs.3,30,46,723/-. He submitted that the ld.CIT(A) failed to appreciate that the appellant has not borrowed any money for investment in shares. In fact, the appellant has received share application money for which allotment is pending and appellant has paid interest on the same. He submitted that the ld.CIT(A) has failed to appreciate that investment will be in the hands of the person from whom amount of share application money is received. He further submitted that the ld.CIT(A) has grossly erred by disallowing the interest on share application money of Rs.95,88,000/- which was capitalized and only depreciation of rs.14,38,200/- was claimed. The ld.CIT(A) has failed to appreciate that the appellant has not claimed Rs.95,88,000/- as expenses but appellant has claimed only Rs.14,38,200/- by way of depreciation on capitalization of interest. The ld.Sr.counsel for the assessee submitted that the ld.CIT(A) has erred in disallowing the interest on share application money of Rs.2,34,58,723/- which was not capitalized and no depreciation was claimed. The ld.CIT(A) has failed to appreciate that appellant has not claimed Rs.2,34,58,723/- as expenses but the same was treated as capitalized work-in-progress interest. The ld.Sr.counsel for the assessee submitted that it has not borrowed any amount for ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 35 -
investment in shares or share application. In fact, appellant has received share application money and paid interest on the same. He submitted that without prejudice to the claim and contention of the appellant, the learned CIT(A) has failed to appreciate the fact that the appellant had used the share application money for the acquisition of the assets and in turn interest paid on such share application money was capitalized. The ld.Sr.counsel for the assessee submitted that if the appellant has not received the share application money, then it would have borrowed the money from the Banks, Financial Institutions, etc. and interest on the same would have been capitalized. He submitted that the Hon'ble ITAT Bangalore in the case of ACIT vs. GMR Industries Ltd. has held that share application money is debt for the assessee-company till the time allotment is done and hence interest on share application money is allowable expenditure under section 36(1)(iii) of the Act.
19.1. On the contrary, ld.CIT-DR supported the orders of the authorities below.
20. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) has decided this issue at para-10.3 of his order by observing as under:-
"10.3.I have considered the assessment order and the submission. The shares for which the appellant has borrowed money are its investments and not business. The interest paid for investments is ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 36 -
not an allowable expense u/s.36(1)(iii) of the IT Act. Neither are the shares depreciable assets. Therefore, the appellant cannot be allowed to capitalize the interest and then claim depreciation on the capitalized interest. The following directions are given on the issue after due consideration:
a) No interest on borrowed capital for investment in shares or share application money is allowable as revenue expenditure.
b) Any claim of depreciation on capitalized interest for amounts borrowed for share application has to be disallowed.
c) The appellant is claiming that it has itself added back some part of interest in the return of income; which it has treated as revenue expense in the accounts. No double addition is required if such is the case.
The AO is directed to verify the claim of expenses/depreciation as per the above directions, while giving the effect to this order. The ground are decided accordingly."
21. The undisputed facts of this case as emerged from the record before this Tribunal is that the share application money of Rs.3,30,46,723/- which was used in purchases of asset. The interest of Rs.2,95,88,000/- was capitalized by adding the sum to the cost of the asset on which depreciation of Rs.14,38,200/- was claimed. The lower authorities were not justified in disallowing the claim of depreciation of Rs.14,38,200/- as the interest expenses incurred became the cost of the asset acquired and, hence, eligible for depreciation thereon. Our this view finds support from the decision of the Hon'ble Coordinate Bench Bangalore rendered in the case of GMR Industries Ltd.(supra).
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 37 -
21.1. Further, the balance interest of Rs.2,34,58,723/- was not claimed as deduction by the assessee as submitted by the ld.AR during the course of hearing and question of disallowing the same does not arise in as much as the same was not controverted by the ld.DR. We, therefore, set aside the order of the lower authorities and delete the addition of Rs.2,34,58,723/-. In view of the above discussion, this ground of assessee's appeal is allowed.
22. Ground No.5 is against addition on account of liquidated damages of Rs.2,25,88,566/-. The ld.Sr.counsel for the assessee submitted that the ld.CIT(A) is not justified in confirming the action of the AO by treating liquidate damages as revenue receipt and confirmed the addition of Rs.2,25,88,566/-. He submitted that the authorities below failed to understand the fact that the delivery is essence of the contract in oil & gas industry, project delay sometime effect the existence of the company, the liquidated damages is not a compensation and nor a rebate, it is towards delay in supply of machinery which in turn will be delay in the starting of plant hence the appellant has correctly treated the liquidated damages as capital receipt. He submitted that the issue is squarely covered by the judgement of Hon'ble Supreme Court rendered in the case of CIT vs. Sauarashtra Cement Ltd. (2010) 233 CTR 209:: (2010) 325 ITR 422(SC). He submitted that the authorities below have wrongly applied the judgement of Hon'ble Gujarat High Court rendered in the case of Shree Digvijay Cement Co.Ltd. vs. CIT(1982) 138 ITR 45 (Guj.).
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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22.1. On the contrary, ld.CIT-DR supported the orders of the authorities below and submitted that there is no error in the order of the ld.CIT(A).
23. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the AO has observed that the assessee has credited the liquidated damage of Rs.2,25,88,566/- However, in the computation of income, it has reduced this amount. The AO relied on the judgement of the Hon'ble Gujarat High Court rendered in the case of Shree Digvijay Cement Co.Ltd. vs. CIT(1982) 138 ITR 45 (Guj.) and the judgement of Hon'ble Calcutta High Court rendered in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.). The AO has observed that on examination of the ledger account of liquidated damage income, these are receipts on various dates by the suppliers or vendors for delay in delivery of various types of machineries and accessories to the assessee. The Hon'ble High Court in the case of Shree Digvijay Cement Co.Ltd. vs. CIT (1982) 138 ITR 45 (Guj.) has held as under:-
"Held, that the actual cost or price of the machinery and compensation payable to the assessee-company were two different and distinct things. Compensation was paid to set off or reduce the loss which the assessee suffered as a result of delay in supply of machinery. It has nothing to do with the cost of machinery. Though adjusted against the cost of machinery, it was none the less compensation. The actual cost of machinery could not be reduced by Rs.5,72,216 and depreciation and development rebate had to be allowed on the entire cost of machinery as per the agreement."
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 39 -
23.1. The Hon'ble High Court of Calcutta in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.) has held as under:-
"Held, that no part of the actual cost of the machinery had been met by the German firm. The payment was compensation for low output because the machinery was defective. Furthermore, there was no reduction of the cost of the machinery already supplied and the amount which the assessee had received on account of low output had been treated as a revenue receipt and taxed as such. The amount of rebate recoverable from the foreign suppliers was not deductive in determining the actual cost of the machinery under s.43(1)."
23.2. However, the Hon'ble Supreme Court in the case of CIT vs. Sauarashtra Cement Ltd. (2010) 233 CTR 209:: (2010) 325 ITR 422(SC) has held as under:-
"13. We have considered the matter in the light of the aforenoted broad principle. It is clear from clause No. 6 of the agreement dt. 1st Sept., 1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, in our opinion, was a capital receipt ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (i) and (ii) extracted in para 1 (supra) and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt."
23.3. We find that the facts before the Hon'ble Apex Court were that the assessee engaged in the manufacture of cement, etc. entered into an agreement with M/s.Walchandnagar Industries Limited, Bombay for purchase of additional cement plant from them for a total consideration of Rs.1,70,00,000/-. As per the terms of contract, the amount of consideration was to be paid by the assessee in four installments. As per the clause in the agreement, in the event of delay caused in delivery of the machinery, the assessee was to be compensated at the rate of 0.5 per cent of the price of the respective portion of the machinery for delay of each month by way of liquidated damages by the supplier, without proof of actual loss. However, the total amount of damages was not to exceed 5 percent of the total price of the plant and machinery. The supplier defaulted and failed to supply the plant and machinery on the scheduled time and, therefore, as per the terms of contract, the assessee received an amount of Rs.8,50,000/- from the supplier by way of liquidated damages. During the course of assessment proceedings for the relevant assessment year, a question arose whether the said amount received by the assessee as damages was a capital or a revenue receipt. The AO negatived the claim of the assessee that the said amount should be treated as a capital receipt. Accordingly, he included the said amount in the total income of ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
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the assessee. Aggrieved, the assessee filed an appeal before the CIT(A), but without any success. The assessee carried the matter further in appeal to the Tribunal. Relying on the ratio of the decisions of this Court in CIT vs. Rai Bahadur Jairam Valji & Ors. (1959) 35 ITR 148 (SC) and Kettlewell Bullen & Co. Ltd. vs. CIT AIR 1965 SC 65, the Tribunal came to the conclusion that the said amount could not be treated as a revenue receipt. According to the Tribunal, the payment of liquidated damages to the assessee by the supplier was intimately linked with the supply of machinery i.e. a fixed asset on capital account, which could be said to be connected with the source of income or profit making apparatus rather than a receipt in course of profit earning process and, therefore, it could not be treated as part of receipt relating to a normal business activity of the assessee. The Tribunal also observed that the said receipt had no connection with loss or profit because the very source of income viz., the machinery was yet to be installed. Accordingly, the Tribunal allowed the appeal and deleted the addition made on this account. Being dissatisfied with the decision of the Tribunal, as stated above, at the instance of the Revenue, the Tribunal referred the aforenoted questions of law for the opinion of the High Court. The reference having been answered against the Revenue and in favour of the assessee.
23.4. In the present case also, the assessee has received liquidated damages on account of delay in supply of machinery. Therefore, respectfully following the ratio laid down by the Hon'ble Apex Court in ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 42 -
the case of CIT vs. Sauarashtra Cement Ltd. (2010) 233 CTR 209::
(2010) 325 ITR 422(SC), we hereby direct the AO to delete the addition made in this regard. Thus, this ground of assessee's appeal is allowed.
24. The sixth ground of assessee's appeal is against levy of interest u/s.234B & 234D of the Act and recovery of interest u/s.244A of the Act. This issue being consequential in nature and, therefore, same are rejected.
25. The seventh ground of assessee's appeal is against initiation of penalty proceedings u/s.271(1)(c) of the Act. This ground is pre-mature and dismissed as such.
26. In the result, assessee's appeal for AY 2008-09 is partly allowed for statistical purposes only as indicated hereinabove.
27. Now we take up the Revenue's appeal, i.e. ITA No.1300/Ahd/2012 for AY 2008-09.
27.1. Ground No.1 of Revenue's appeal is identical to the ground raised in ITA No.2958/Ahd/2010 (Revenue's appeal) for AY 2007-08. Since no change in the facts and circumstances has been pointed out by the ld.CIT-DR, following our decision passed in ITA No.2958/Ahd/2010 (supra), therefore this issue is also restored back to the file of AO. Thus, this ground of Revenue's appeal is allowed for statistical purposes only.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 43 -
28. Ground No.2 is against deletion of addition made by the AO in respect of depreciation (reduced cost) amounting to Rs.26,48,101/-.
28.1. The ld.CIT-DR supported the order of the AO, whereas, ld.Sr.counsel for the assessee supported the order of the ld.CIT(A).
28.2. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. Looking to the facts and circumstances of the case, we do not find any infirmity in the order of the ld.CIT(A), the same is hereby upheld. Therefore, this ground of Revenue's appeal is dismissed.
29. Grounds No.3 & 4 are general in nature require no independent adjudication.
30. In the result, Revenue's appeal for AY 2008-09 is partly allowed but for statistical purposes.
31. Now we take up the assessee's appeal for AY 2009-10, i.e. ITA No.239/Ahd/2013 for AY 2009-10. As per chart submitted by the ld.Sr.counsel for the assessee, the grounds are as under:-
Ground No.1:- Erred in confirming disallowance of closing stock of Rs.14,09,34,851/- on arbitrary basis in respect of trading of natural gas through pipelines - PNG.
Ground No.2:- Erred in enhancing closing stock of Rs.8,63,10,051/- on arbitrary basis in respect of trading of natural gas through pipelines - PNG.
ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 44 -
Ground No.3:- Erred in not considering net addition of Rs.56,82,092/- for F.Y. 07-08 (A.Y. 08-09) as opening stock for F.Y. 08-09 (A.Y. 09-10). u:- Erred in not allowing addition on account of closing stock for F.Y. 08-09 (A.Y. 09-10) as opening stock for F.Y. 09-10 (A.Y. 10-11). Ground No.5:- Erred in confirming disallowance of Rs.5,03,52,298/- towards additional depreciation @ 20% on plant & machinery - CNG stations.
Ground No.6:- Erred in not considering disallowance towards additional depreciation of Rs.5,03,52,298/- and failed to appreciate that appellant has claimed additional depreciation only of Rs.2,75,39,442/-. Ground No.7:- Erred in confirming Rs.98,22,456/- of liquidated damages as revenue receipt.
31.1. Ground Nos.1, 2, 3 & 4 are inter-connected in respect of addition on account of closing stock. The facts are identical as were in assessee's appeal in the AY 2008-09 in ITA No.1390/Ahd/2012, wherein we have restored the issue back to the file of the AO for fresh decision. Since no change in the facts are pointed out by the Revenue, taking a consistent view, the issue is restored back to the file of AO for fresh adjudication. Therefore, all these grounds are allowed but for statistical purposes. Ground Nos.5 & 6 are also inter-connected. These grounds are against the rejection of claim for additional depreciation. The identical issue was raised in assessee's appeal in ITA No.1390/Ahd/2012 for AY 2008-09, wherein we have decided the issue in favour of the assessee. Since no change in the facts have been pointed out by the Revenue, following our decision in AY 2008-09, these grounds of the assessee's appeal are allowed. Ground No.7 is against liquidated damages as revenue receipt. The identical issue has been dealt with by us in Assessee's appeal for AY 2008-09(supra) in ITA No.1390/Ahd/2012. For the same ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 45 -
reasoning, this ground is allowed for this year as well, since no change in the facts are pointed by the Revenue.
31.2. Ground No.8 is against levy of interest u/s.234B & 234C of the Act which is consequential in nature, same is held accordingly. 31.3. Ground No.9 is against initiation of penalty proceedings u/s.271(1)(c) of the Act which is pre-mature and, hence, the same is dismissed as such.
32. In the result, the Assessee's appeal for AY 2009-10 is partly allowed for statistical purposes only.
33. Lastly, we take up the Revenue's appeal, i.e. ITA No.678/Ahd/2013 for AY 20-09-10. The Revenue has raised the following grounds of appeal:-
1. The learned CIT(Appeals) has erred in law and on facts in deleting the addition made by the AO on account of disallowance of depreciation on Right of Way amounting to Rs.3,43,18,214/-.
2. On the facts and circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.
It is therefore prayed that the order of the learned CIT(Appeals) may be set aside and that of the A.O. be restored to the above extent.
33.1. The issue is identical as raised in Revenue's appeal for AY 2007- 08 in ITA No.2958/Ahd/2010(supra). Since the facts are identical to the facts of Revenue's appeal for AY 2007-08(supra), for the same ITA Nos.3117 &2958/Ahd/2010, 1390 &1300/Ahd/2012, 239 & 678/Ahd/2013 GSPC Gas Co.Ltd. vs. JCIT/ACIT Asst.Years - 2007-08, 2008-09 & 2009-10
- 46 -
reasoning, the Revenue's appeal for AY 2009-10 is allowed but for statistical purposes.
34. We summarize the result as under:-
(1) Assessee's appeal, i.e. ITA No.3117/Ahd/2010 for AY 2007-08 is partly allowed.
(2) Revenue's appeal, i.e. ITA No.2958/Ahd/2010 for AY 2007-08 is allowed for statistical purposes only. (3) Assessee's appeal, i.e. ITA No.1390/Ahd/2012 for AY 2008-09 is partly allowed for statistical purposes only as indicated hereinabove.
(4) Revenue's appeal, i.e. ITA No.1300/Ahd/2012 for AY 2008-09 is partly allowed for statistical purposes only. (5) Assessee's appeal, i.e. ITA No.239/Ahd/2013 for AY 2009- 10 is partly allowed for statistical purposes only. (6) Revenue's appeal, i.e. ITA No.678/Ahd/2013 for AY 2009-
10 is allowed for statistical purposes only.
Order pronounced in Court on the date mentioned hereinabove at caption page Sd/- sd/-
(एन.एस.सैनी) (कुल भारत)
लेखा सदःय Ûयाियक सदःय
( N.S. SAINI ) ( KUL BHARAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 11 / 04 /2014
टȣ.सी.नायर, व.िन.स./T.C. NAIR, Sr. PS
ITA Nos.3117 &2958/Ahd/2010,
1390 &1300/Ahd/2012,
239 & 678/Ahd/2013
GSPC Gas Co.Ltd. vs. JCIT/ACIT
Asst.Years - 2007-08, 2008-09 & 2009-10
- 47 -
आदे श कȧ ूितिलǒप
ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ(अपील) / The CIT(A)-Gandhinagar
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाईल / Guard file.
आदे शानुसार/ BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) उप/ आयकर अपीलीय अिधकरण, अिधकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation .. 26/27.3.14(dictation-pad 69-pages attached at the end of this File)
2. Date on which the typed draft is placed before the Dictating Member ......27.3.14
3. Date on which the approved draft comes to the Sr.P.S./P.S.................
4. Date on which the fair order is placed before the Dictating Member for pronouncement......
5. Date on which fair order placed before Other Member............
6. Date on which the fair order comes back to the Sr.P.S./P.S.......114.14
7. Date on which the file goes to the Bench Clerk.....................11.4.14
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................