Income Tax Appellate Tribunal - Delhi
Dcit, New Delhi vs M/S Samtex Fashions Ltd., New Delhi on 19 October, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'G', NEW DELHI
Before Ms. Sushma Chowla, Vice President
Dr. B. R. R. Kumar, Accountant Member
ITA No. 2810/Del/2010 : Asstt. Year : 2007-08
Addl. CIT, Vs Samtex Fashions Ltd.,
Range -7, G- 321, Chirag Delhi
New Delhi New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AABCS3233M
ITA No. 2556/Del/2010 : Asstt. Year : 2007-08
Samtex Fashions Ltd. Vs Addl. CIT
G- 321, Chirag Delhi Range -7,
New Delhi New Delhi
(APPELLANT) (RESPONDENT)
PAN No. AABCS3233M
Assessee by : Sh. Salil Kapoor, Adv.
Revenue by : Dr. Anjula Jain, Sr. DR
Date of Hearing: 21.08.2020 Date of Pronouncement: 19.10.2020
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeals have been filed by the revenue and assessee against the orde rs of the ld. CIT(A)-X, Ne w Delhi dated 23.03.2010.
2. Following grounds have been raised by the revenue:
"1. "Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs. 29,22,016/- made by the AO on account of disallowance of depreciation claimed on capitalization of preoperative expenses."2 ITA Nos. 2556 & 2810/Del/2010
Samtex Fashions Ltd.
2. "Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs. 39,60,000/- made by the AO on account of interest income deemed as income from other sources."
3. "Ld. Commissione r of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs. 14,28,530/- made by the AO on account of preferential allotment of shares treated as deemed dividend in the hands of the assessee company."
4. "Ld. Commissioner of Income Tax (Appeals) erred, in law and on the facts and circumstances of the case, in deleting the addition of Rs.1,13,39,786/- made by the AO on acco unt of unexplained income u/s 68 of the IT Act."
3. Following grounds have been raised by the assessee:
"1. That the learned Commissioner of Income Tax (Appeals)-X, New Delhi has erred, both on facts and in law in confirming addition o f Rs.84,88,000/- as unexplained income u/s 68 of the Income Tax Act."
4. The assessee company is engaged in the business of manufacturing, processing and fabrication of readymade garments. The assessee company exports its products mainly to countries like United States of Ame rica. It also has a branch office at Ne w York. Apart from the above business activity, the assessee has also shown other income unde r other heads of income.
Disallowanc e of Depreciation:
5. The AO found that the pre-operative e xpenses have been factored in, the cost of imported plant & machinery by capitalizing the pre-operative expenses and disallowed this 3 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
amo unt on the grounds that as per the schedule to depreciation in accordance with Section 32 of the Income Tax Act, 1961, the pre-operative expenses are not allowed to enhance the value of the plant & machinery and depreciation o n such enhance d cost.
6. The ld. CIT (A) deleted the addition on the grounds that the capitalization of expenses on the plant & machine ry has been made in accordance with the accounting standard.
7. Before us, the ld. DR argued that no expenses other than the actual cost incurred in purchasing the plant & machinery be added or facto red in to enhance the co st of plant & machinery.
8. The ld. AR argued that the machinery was purchased for the jacke t manufacturing and all the expenses incurred namely, interest on IDBI, term lo an processing fees, bank legal fees, diesel, electricity and wages of workers have been capitalized and depreciatio n @ 7.5 % is claime d on the pre-operative expenses as the capitalization was made in the month of March 2007. He relied on the judgment of the Hon'ble Apex Court in the case of Challapalli Sugars Ltd. Vs CIT 98 ITR 167.
9. Heard the arguments of bo th the parties and perused the material available on reco rd.
10. Coming to the legal issue , it was submitted that depreciation u/s 32 of the Act is allowed on actual cost of the asset, which means the actual cost to the assessee. This cost should be co nstrued in ordinarily commercial manne r. T hus, it will include the cost incurre d to bring the asset to the running condition. It is a fact that the expenses such as interest, wage s 4 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
of workers and diesel & electricity expenses were incurred for installation o f machinery and interest on borro wed capital used for purchase of machinery upto the date of installation thereof are capital expenses. Fro m the above, it can be held that any expenditure o n putting up fixed asset will amount to the cost of fixed asset. It is also an accepted standard that AS-1O regarding "accounting for fixe d assets" issued by the ICAI specifies the components of cost of a fixe d asset. T hus, the purchase price of an asse t includes import duties, levies and any other cost directly attributable to the asset for bringing it to the working condition. The conte ntion o f the learned DR referring to the findings of the Assessing Officer that these expenses are revenue in nature cannot be accepted as in the pre-operative stage, all the expenses are capitalized irrespective their nature in the general parlance . The reve nue has not been able to bring any evidence on reco rd that any of the expenditure was not related to the plant & machinery. It is an undisputed fact that the assessee has incurred expenditure of Rs. 29,22,016/- in the pre commencement pe riod. Even if all the expenses are revenue in nature, since the expenses were incurred for setting up fixed asset, they have to be capitalised.
11. Section 43(1) defines "actual cost" to mean actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been me t directly or indi rectly by any other person or authority. In the case of CIT Vs. Food Specialities Limited, (1982)136 ITR 203 (Delhi), it was held that the T ribunal was right in holding that the expe nditure of test runs was a capital expenditure . The refore, expenses involved in purchase of milk and determining that the factory was in proper 5 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
working condition and making adjustment does not see m to be anything more than steps in setting up and finalisation of the factory, which is the capital asset. After tests have been carried out, it can be said that the factory had been set up and it is ready for commercial production. Therefore, the expenses can be said to have been incurred as cost of the plant and machinery.
12. In the case of Challapalli Sugars Limited Vs. CIT (1975) 98 ITR 167 (Supreme Court), it has been held that interest of Rs.- 'X'- incurred on borrowed capital fo r purchase of plant and machinery, accruing to the date of installation of the machinery is a capital expenditure, on which depreciation and development rebate are admissible. From this decision it can be said that if an expenditure which is otherwise of revenue in nature, has been incurred to wards acquisition of a capital asset, it will be the cost of the asset provided it has been incurre d upto the date of installation of the asset. However, it is also clear that there should a direct nexus betwe en expenditure and putting up of the asset.
13. In the case of CIT Vs. Lucas-TVS Limited 110 ITR 346, one of the questio ns before the court was - whether, on the facts and in the circumstances of the case, it has be en rightly held that the sum of 'AA' representing indirect expe nditure on salaries, rent, lighting, etc. and allocated to various assets formed part of the capital asse t for the eligibility of depreciation allowance and in relation to the cost of the machinery was eligible for de velopme nt re bate also? The facts of the case are that the assessee-company acquire d land near 6 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
Madras and e rected buildings, plant and machinery etc. It also took on lease adjoining land fo r its use fro m integral coach factory. After comple ting the work of e recting the factory to certain stage, the production commence d on 01.12.1962. The accounts of the assessee we re closed for the first time on 30.11.1962, during which it incurred total expenditure of 'BB' relating to salaries, rent, lighting etc. This e xpenditure was capitalized and allocated to the capital assets in the ratio of direct cost of the assets. Depreciation allowance and development rebate were claimed. The Assessing Officer held that the expe nses amounting to 'BB' were in no way connected with installation of assets. Therefore, he excluded this amount and recompute d the cost of assets. The Honourable Court held that the question is covered by the decision of Supreme Co urt in the case of Challapalli Sugars Limited Vs. CIT (supra) and CIT Vs. Hindustan Petroleum Corporation, 98 IT R 167, in which it has been held that accepted accountancy standard for determining cost of fixe d assets is to include o f expenditure necessary to bring such assets into existe nce and to put them in working condition. The refore, the question was decided in favour of the asse ssee and against the revenue. Having considered the facts of the case , we are of the view that the prese nt issue is similar and, therefore, the ratio of the above case is applicable. In the instant case, the revenue has nowhere brought on record that the expenses incurred are not related to the assets so as to deviate from the established rationes'.
14. Hence, keeping in view the facts of the case , provisions of Section 43(1), provisions of Section 32 and the judgme nts of 7 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
the Hon'ble Supreme Court, we hereby decline to interfere with the order of the ld. CIT (A).
Interest Income:
15. The Assessing Officer has added an amount of Rs.39,60,000/- being 12% notional inte rest on the amount of loan exte nded of Rs.3.3 crore s to the subsidiary company of the assessee. The AO held that the assessee has claimed finance expenses of Rs.1.89 crores on the loans taken and since the interest bearing funds have been utilized to accord interest free advances to the subsidiary company, the interest receivable by the assessee company needs to be charged.
16. Before us, it was explained that the assessee company has got sufficient own funds to the tune of Rs.9.9 crores to extend interest free loans to the subsidiary. The relavant details of the balance sheet as to the availability o f own funds are as under:
Particulars As at As at
31.03.2007 31 .03.2006
(Rs.) (Rs.)
Schedu le-I
Share Capital
Autho rized
10000000 Eq uity Shares of Rs.10 each 100,0 00,000 10 0,000,000
(Previo us year 100 0000 0 equity shares
of Rs.10 each)
Issues, Subscribed and Paid u p: 99,000,000 8 7,100,0 00
9900000 equity s hares of Rs.10 each
fully p aid up in cash (Previous year
8710000 equity s hares of Rs.10 each
fully paid up)
Share appli catio n mon ey - 2 0,568,0 00
(Pend ing allotment includi ng share
premium money)
8 ITA Nos. 2556 & 2810/Del/2010
Samtex Fashions Ltd.
Fo rfeitu re Accoun t 18 0,000.00 -
(10000 0 Zero Coupon warrant @Rs.1.80
per warrant)
(Previo us Y ear NIL)
Total 99 ,180,000 10 7,668,000
Schedu le-II
Reserves and Surplus
Reserves:
Cap ital Reserve:
State Capital Sub sid y 1,0 00,000 1,000,0 00
(A) 1,0 00,000 1,000,0 00
Surplu s:
Share Premiu m Accou nt 24 ,000,000 1 5,512,0 00
Profit and Loss Account 257,6 66,720 24 6,625,993
(B) 281,6 66,720 26 2,137,993
Total (A+B) 282,6 66,720 26 3,137,993
17. We have examined the balance sheet and found that the assessee has got paid up capital of Rs.8.7 crores for the year ending 31.03.2006 and Rs.9.9 crores fo r the year ending 31.03.2007. Further, the reserves & surplus of the assessee varied between Rs.26.3 crores to Rs.28.2 cro res for the two years. Since , the assessee has indisputably been proven to be having sufficient own funds, no disallowance u/s 36(1)(iii) of the Act is called for or no notional charging of the interest is legally acceptable. The assessed is at liberty to use their own funds as they deem fit, ke eping in veiw the business contingencies as long as such action doesn't result infarction of any statue or laws in force. We hold that the action of revenue is not backed up by any legal sanction .Hence,the appeal of the revenue on this gro und is hereby dismissed.
9 ITA Nos. 2556 & 2810/Del/2010Samtex Fashions Ltd.
Deemed Dividend and Allotment of Shares:
18. As per the balance sheet, the assessee has received an amo unt of Rs.2,05,68,000/- during the financial year 2005-06 as share application money, pending allotment. The balance sheet filed before the AO is as under:
Particulars As at As at
31.03.2007 31 .03.2006
(Rs.) (Rs.)
Schedule-I
Share Capital
Autho ri zed
10 00000 0 Equity Shares of Rs.1 0 each 100,0 00,000 10 0,000,000
(Previ ous year 10000000 equity shares
of Rs.10 each)
Issues, Subscribed and Paid u p: 99 ,000,000 8 7,100,0 00
99 00000 equity shares o f Rs.10 each
fully p aid up in cash (Previou s year
87 10000 equity shares o f Rs.10 each
fully paid up)
Share applicatio n money - 20,568,000
(Pen ding allotment in clu ding share
premium money)
Fo rfeiture Accoun t 180,000.00 -
(1000 00 Zero Coupo n warran t @Rs.1.80
per warrant)
(Previ ous Y ear NIL)
To tal 99 ,180,000 10 7,668,000
Schedule-II
Reserves an d Surplus
Reserves:
Cap ital Reserve:
State Capital Subsid y 1,0 00,000 1,000,0 00
(A) 1,0 00,000 1,000,0 00
Surplus:
10 ITA Nos. 2556 & 2810/Del/2010
Samtex Fashions Ltd.
Share Premi um Account 24 ,000,000 1 5,512,0 00
Profit and Lo ss Account 257,6 66,720 24 6,625,993
(B) 281,6 66,720 26 2,137,993
Total (A+B) 282,6 66,720 26 3,137,993
19. From the above , it is clear that the share application money was received in the earlier assessment year 2006-07.
The AO has mentione d (page 8 of AO) that the amounts have been introduced in the earlier year but went ahead making variation u/s 68 during the instant year. Hence, the addition made by the Assessing Office u/s 68 in the assessment year 2007-08 of the monies received in the earlier assessment year 2006-07 is liable to be quashed. Appeal of the revenue on this ground is allowe d.
Sundry Creditors:
20. During the examination & verification of the sundry creditors, the AO has issued no tices u/s 133(6) to 12 parties as per the list given below:
Sl. Name of Party Amo unt Sundry Creditor No.
1. M/s H.K. Enterprises 10,84,035/- Sundry Creditor
2. M/s Kunal In dustries 10,71,361/- Sundry Creditor
3. M/s Naveen Button Stores 5,74,585/- Sundry Creditor
4. M/s Ram Enterprises 5,29,069/- Sundry Creditor
5. M/s Ram Sons Udyog Ltd. 6,91,425/- Sundry Creditor
6. M/s Ruchee Impex 22,65,949/- Sundry Creditor
7. M/s S.S. Machine 7,43,455/- Sundry Creditor
8. M/s Sutlej Indu stries Ltd. 29,01,189/- Sundry Creditor
9. M/s Vardhman Threads Ltd. 10,33,922/- Sundry Creditor
10. M/s Skyways Ai r Services Pvt. 8,62,036/- Sundry Creditor Ltd.
11. M/s Vikas Trad ers 11,23,012/- Sundry Creditor
12. Shri Abhiram Bahera 1,11,829/- Sundry Creditor 11 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
21. Out of the above 12 parties, M/s Ram Ente rprises mentioned at Serial No. 4 and M/s Vikas Traders mentioned at Serial No . 11 have complied to the notice. When the Assessing Officer queried the assessee about the non-compliance, the assessee has submitted that they have provided the correct address of the parties and mere non-co mpliance from a third party cannot fo rm the basis of addition in the assessee's case.
Then the AO proceeded to make addition of the amount being shown as the o utstanding sundry creditors u/s 68. While making the addition, the AO held that the assessee has not discharged the onus to prove,
1. Identity of the creditor
2. Capacity of the creditor
3. Genuineness of the transaction
22. The ld. CIT (A) has deleted the addition on the grounds that the assesse e has discharged the primary onus by furnishing copies of confirmations, address, amount of transaction, PAN etc. The ld. CIT (A) held that the AO has not done any jo b to prove that the transactions of the assessee are not genuine though the regular transactions have been conducted in the subsequent year too.
23. The ld. DR for the revenue pointed out that no reply was received from sundry creditors except two of them; hence addition in the hands of the assessee. He referred to the observation of the ld. CIT (A) in para 7.3 at page 38 and pointed o ut that the same were not correct.
12 ITA Nos. 2556 & 2810/Del/2010Samtex Fashions Ltd.
24. The ld. AR for the assessee pointed out that list of creditors was of regular trade cre ditors. The revenue has not prove that the parties are not existing are bogus.
25. After hearing both the parties, it transpires that the list of creditors is on account of the purchases made by the assessee during the ye ar and amount outstanding against them. The AO made addition on the gro unds that the identity, genuineness and creditworthiness of the sundry creditors because the notices issued u/s 133(6) have not been complied with. The notices have bee n duly received by the parties and their failure to re ply cannot be attributed as a cause of default by the assessee. The fact that the notices have been duly served demonstrate the existence of the parties. Further, the assessee has been continuously dealing with these parties in subsequent years which co uld have been verified by the AO as the records available with the revenue. The parities namely, M/s Sutluj Industries Ltd., M/s Vardhman Trades Ltd., M/s Ruchi Impex by general parlance cannot be said to be non-existing entities. Notwithstanding that, no enquiries have bee n conducted by the AO to prove or to suspect the transactions to be of bogus in nature. After duly serving and receipt of the no tices and failure of the recipient parties, to comply to the notices, cannot make the sundry creditors liable to be treated u/s 68 of the Act. Once, the assessee has discharge the onus by furnishing the details to prove the genuine ness of the transaction, then the onus shifts on to the revenue to prove that these transactions have not ge nuine. Such enquiry has not eve n initiated by the Assessing Officer while brining the amounts to tax. The addition was made by the AO just because the sundry creditors have not 13 ITA Nos. 2556 & 2810/Del/2010 Samtex Fashions Ltd.
complied to the notices issued u/s 133(6) of the Act. He nce, keeping in view, the entire facts and circumstances of the case narrated above, we hereby decline to interfere with the orde r of the ld. CIT (A) and dismiss the ground no. 4 of the revenue's appeal.
26. Now coming to appeal of assessee against addition of Rs.84,88,000/-.
27. The case of assessee is that no fresh credit on account of Share Application Money has been received during the year. Out of total amount received, shares at face value of Rs.10/- were issued and share premium @ Rs.8/- was booked. Revenue on the other hand has made addition of Rs.84,88,000/-, which is the share premium account.
28. On perusal of record and while deciding the issue of deemed dividend and allotment of shares, we have noted that Share Application Money was received in AY 2006-07 and not in AY 2007-08. Hence, on this ground itself, no addition is warranted u/s 68 of the Act. Further, out of total amount received, Rs.1.19 cr. is against share capital account and Rs.84,88,000/- against share premium and Rs.1,80,000/- against forfeiture. Hence, no addition on this account is warranted. The ground of appeal raised by assessee is allowed.
29. In the result, the appeal of the revenue is partly allowed and the appeal of the assessee is allowed.
Order Pronounced in the Open Court on 19 /10/2020.
Sd/- Sd/- (Sushma Chowla) (Dr. B. R. R. Kumar) Vice President Accountant Member Dated: 19/10/2020 *Subodh*