Income Tax Appellate Tribunal - Mumbai
Gujarat Ambuja Cements Ltd vs Asstt. Cit, Inv. Circle (3)1 on 3 June, 2005
Equivalent citations: [2005]4SOT59(MUM)
ORDER
D.C. Agrawal, A.M. This is an appeal filed by the assessee against the order of CIT(A) for assessment year 1988-89 raising several grounds therein. They are being disposed of sequentially as under :
(1) We have heard the learned counsel for the assessee and learned Departmental Representative and also considered the material on record.
(2) The first ground is regarding addition of Rs. 29,000 about disallowance of set off of interest received on share application money (over subscription) against share issue expenses. This issue is covered by the decision of Mumbai ITAT in Dy. CIT v. XLO GWB Cardon Shaft Ltd. (IT Appeal No. 6113 (Bom) of 1995 and IT Appeal No. 2931 (Mum) of 1998, in favour of the assessee. As per section 69(4) of Companies Act, 1956 the assessee was required to keep the amount received on share application money in a separate bank account until the share allotment was over. Thus, there was direct nexus between interest income earned and share issue expenses. Decision of Hon'ble Supreme Court in CIT v. Bokaro Steels Ltd. (1999) 236 ITR 315 would be applicable and set off has to be allowed. Accordingly, this issue is decided in favour of the assessee. This ground is, therefore, allowed.
2/3. Second ground is regarding disallowance of expenditure of Rs. 1,43,341 on gifts and presentations, made by assessing officer under Rule 6B. This issue is decided by the Tribunal for subsequent assessment years in assessee's own case in assessee's favour in the following orders :
(i) ITA No. 2690/B/93 vide its order dated 20-12-2002 - 1989-90.
(ii) ITA No. 2419/B/94 vide its order dated 4-8-2003 - 1990-91.
(iii) ITA No, 4034/M/96 vide its order dated 7-3-2005 - 1991-92.
Accordingly, the facts and circumstances remaining the same, we allow this ground of the assessee in its favour.
4. The third ground is regarding disallowance of 50% of expenditure on technical conference of stockists, as entertainment expenditure. While dealing with this issue in the assessment year 1989-90 in ITA No. 2690/M/93 in assessee's own case the ITAT observed as under :
"4.5 We have considered the rival submissions in the light of material presented before us. From the details of expenditure on technical conference held abroad, we find that most of the expenditure was incurred on travelling, accommodation and other miscellaneous expenses leaving a small portion (20,501) towards hotel expenses. The hotel expenditure incurred for stockists distributors is, in our opinion, clearly of entertainment nature. In holding this view we are fortified by the decision of Hon'ble Bombay High Court in the case of India Plastics Ltd. 240 ITR 528. Looking to the facts that details of miscellaneous expenses of Rs. 37,041 are not on record, we hold that it will meet the ends of justice if disallowance out of Rs. 8,70,336 on account of entertainment expenditure is restricted to Rs. 40,000. The assessee, therefore, gets relief of Rs. 4, 10,000. In the absence of details of expenses in respect of dealers/stockists conference conducted in India as well as of housekeeping expenses, we are of the opinion that no interference is called for in the order of CIT(A).
This ground is, therefore, partly allowed with a relief of Rs. 4,10,000."
Following above decision and facts being similar, it will meet ends of justice if the expenditure of Rs. 20,000 is disallowed. Accordingly, the assessee gets partial relief and the ground is accordingly, partly allowed.
5. The fourth ground is regarding disallowance of guesthouse expenses of Rs. 5,06,481. The learned Authorised Representative has contended that the issue is decided against the assessee in assessee's own case by ITAT in ITA No. 2690/M/93 vide its order dated 20-12-2002 for the assessment year 1989-90.
Following the above decision of the Tribunal, the disallowance is confirmed. The assessee fails on this ground.
6. The fifth ground is regarding disallowance of pooja expenses of Rs. 61,984. According to the assessee, the issue is covered in its favour by the decision of the Tribunal in assessee's own case, in ITA No. 2690/M/93 vide its order dated 20-12-2002 for assessment year 1989-90. We find that this issue is covered in favour of the assessee by the above decision of the Tribunal. In the assessment year 1989-90, the Tribunal allowed the temple inauguration expenses except disallowance of Rs. 3 lakhs out of lavish travelling expenses of Rs. 3.8 lakhs on travelling and food. The present year expenditure seems to be normal day-to-day expenses on pooja for running the temple in the vicinity of the plant. Accordingly, after considering the rival submissions, facts of the issue as stated above, and Tribunal's decision referred above, this ground is allowed in favour of the assessee. The addition so sustained by CIT(A) is deleted.
7. The sixth ground is regarding disallowance of Rs. 93,220 being village welfare expenses. This expenditure relates to expenditure towards general village welfare in the vicinity of the plant. We find that this issue also covered by the decision of ITAT in ITA No. 2690/M/93 vide its order dated 20-12-2002 in assessee's own case for assessment year 1989-90. Accordingly following above order, this ground is decided in favour of the assessee. The appeal of the assessee succeeds on this issue.
8. The seventh ground is about disallowance of expenditure of Rs. 1,01,31,669 paid for power lines and transmission towers to Gujarat Electricity Board (GEB). According to the assessing officer, this expenditure relates to the assessment year 1987-88 in which year the installation of power lines and transmission towers were completed. The facts of the case are that the assessee for installation of plant and machinery for its cement plant at Ambuja Nagar, Gujarat required 19,000 KV of power, which was not available at that place. The GEB had a substation at Talala, which was about 30 kms. away from Ambuja Nagar. To get the requisite power supply, the agreement was reached with GEB, whereby the assessee-company was required to make an advance totalling to Rs. 1,01,31,669 including Rs. 99,00,000 initially demanded. It was stipulated in the agreement executed on 16-8-1985 with GEB that assessee-company will not be owner of the transmission lines and supply cables and it will have to start production within three months of installation of power lines. Accordingly, payment was made to GEB which was shown in the balance sheet under head "asset - power lines" and depreciation thereon was claimed to the extent of Rs. 3.62 lakhs. Installation of power lines and transmission towers was completed by June, 1986, trial production was started during August, September, 1986 and commercial production was started from October, 1986 when the assessee got full power supply of 19,000 KV.
9. However, the assessee while filing return of income, claimed this sum as revenue expenditure for the assessment year 1988-89 (financial year July 1986 to June 1987) on the ground that it started commercial production in October 1986 and, therefore, entire expenditure is revenue and allowable in that assessment year. The gist of the detailed reply given by the assessee to the assessing officer was as under:
(i) The power line was required to be kept ready by June/July 1986 by GEB.
(ii) The GEB gave full power load of 19,000 KVA only in August, 1986.
(iii) The company could utilise the requisite power of 19000 KVA from the power lines from the month of October, 1986 in which commercial production started.
(iv) Further to ensure that the power supply made by GEB through power line was utilised within three months of the power line made available by GEB. Hence, in order to ensure all the above, the company had to approach GEB well in advance and made the payment also in advance as required by the GEB in the year 1985-86 itself. Though the payment for the power line was made in the earlier year, it has been expended wholly and exclusively for the purpose of commercial production which actually started during the accounting year 1986-87 relevant to assessment year 1988-89 and hence the same should be allowed as a deduction in the assessment year 1988-89. In the case of CIT v. Bharat Stores Ltd. 70 ITR 651 (Ori) 1968 - the assessee made certain advances for early planting and supply of sugarcane but the suppliers were effected in the next following year and hence the payments allowed in the next year.
10. The assessing officer after considering the submissions of the assessee, disallowed the claim by observing as under:
(a) The assessee gave advance of Rs. 101.32 lakhs to GEB during the period 1985-86 relevant to assessment year 1987-88. Installation of transmission tower, cable and power lines was completed within 30-6-1986. The fact is also admitted in the 5th Annual report 1986-87 under Schedule-D.
(b) The supply of electricity commenced after 30-6-1986. The entire expenditure incurred on erection of power lines related to assessment year 1987-88.
(c) The assessee paid electricity charges for trial run production as well as commercial production after 30-6-1986, which was separately debited by the assessee in the profit and loss account and a portion of which was capitalised also.
(d) The advance payment for erection of power lines was made in 1985-86 and installation of power line was also completed during that year.
11. The assessing officer, thereafter took the view that expenditure is to be allowed as revenue expenditure. As the expenses were incurred during the assessment year 1987-88, the sum is required to be considered in that assessment year onty. As there was no commercial production during the assessment year 1987-88, the expenditure cannot be considered as revenue in that assessment year. The erection of power lines was made in the assessment year 1987-88. The installation of Transmission lines and cables was completed in assessment year 1987-88. But the assessee received electricity in the assessment year 1988-89 for which expenses were charged separately. In view of this, the assessing officer disallowed the claim of Rs. 1,01,31,669 being not related to the assessment year 1988-89.
12. The CIT(A) considered the submissions of learned Authorised Representative and also the reasonings of the assessing officer and confirmed the finding of the assessing officer by observing as under:
"14.2 I have considered the facts of the case. I find that the assessing officer has correctly analysed the facts. There is no doubt that the expenditure is allowable as revenue expense since the ownership is vest with the GEB. There can also be no dispute about the fact that the expenses on the power lines were incurred during the assessment year 1987-88. They are accordingly required to be considered in that assessment year only. However, since there was no commercial production during that assessment year 1987-88 it cannot be allowed as a revenue expenses. The above finds support from the decision in the case of Ritz Continental Hotel -114 ITR 550. Accordingly, the claim of the assessee amounting to Rs. 101.32 lakhs being the expenditure on the installation of power lines cannot be allowed, being not related to the year under consideration. The disallowance made by the assessing officer is, therefore, confirmed."
13. Before us, the learned counsel for assessee submitted that :
14. In support of above submissions, the learned counsel for assessee relied on the following judgments :
(1) CIT v. Gujarat Mineral Development Corpn. (1981) 132 ITR 377 confirmed in CIT v. Gujarat Mineral Development Corpn. (GMDC) (2001) 249 ITR 787 (SC).
(2) CIT v. Bharat Stores Ltd. (1968) 70 ITR 651 (All).
15. We have heard the rival submissions and considered the facts and material on record. We find that the department does not dispute that it is a revenue expenditure. Only dispute is as to when it should be allowed.
The decision of Hon'ble Gujarat High Court in GMDC (supra) is on slightly different facts. In that case, GMDC incurred an expenditure of Rs. 20.46 lakhs paid to GEB (Gujarat Electricity Board), which represented fifty per cent of the total amount spent by the GEB for laying electric cables and electric supply transmission lines, etc. for a beneficiation plant to enable GMDC to separate waste material from useful minerals. Lines, cables and transmission lines were to be the property of the GEB. In the accounting year 1967-68, GMDC paid Rs. 19 lakhs by way of advance to GEB and in subsequent years one seventh of the total amount of Rs. 20.46 lakhs was shown as revenue expenditure, written off by way of expenditure. The installation was complete in December 1968. The GMDC claimed the amount of Rs. 20.46 lakhs as revenue expenditure for the assessment year 1969-70. The Tribunal held that the expenditure did not relate to the year under appeal and further that expenditure was of capital nature. Hon'ble Gujarat High Court on these facts held that business was being carried on previously by the assessee, the beneficiation plant only enabled the GMDC to carry it more efficiently. The advantage was not in the capital field and hence the expenditure, although its benefit would endure for number of years was of revenue nature. As the installation was completed in December 1969, that is during the previous year relevant to the assessment year 1969-70, the expenditure of Rs. 20.46 lakhs was allowable in the assessment year 1969-70 only. When the matter travelled to Hon'ble Supreme Court at the instance of department, the Hon'ble Supreme Court in GMDCs case (supra) observed as under :
"In view of the decision of this court in the case of CIT v. Elecon Engineering Co. Ltd. (1987) 167 ITR 639, these appeals are dismissed."
Hon'ble Supreme Court's decision in CIT v. Elecon Engg. Co. Ltd. (supra) related to computation of relief under section 84 of the Income Tax Act, 1961 in relation to a new industrial undertaking, holding that profits of the computation period has necessarily to be added due to deeming provision under rule 19(5). Thus, the question about determination of the year for allowability of the expenditure was not before Hon'ble Supreme Court in Elecon Engg. Co. Ltd.'s case (supra). In GMDC's case (supra), there were two questions before Hon'ble Gujarat High Court Gujarat Mineral Development Corpn.'s case (supra). One was about the year of allowability of expenditure incurred on installing pipelines and other was computation of capital under section 80-J, wherein it was held that the amount not immediately required for business and kept in short time fixed deposit was includible in computing capital under section 84 (new 80-J). Thus, it appears that Hon'ble Supreme Court had decided and confirmed the decision of Hon'ble Gujarat High Court on the 2nd issue.
There is apparently no deliberation on the year of allowability.
16. In GMDC's case, there was a running business and payment was made to GEB to carry on the business more efficiently. Since payment was incurred during the course of running business, it was considered to be revenue in nature and was allowed. In the present case, a new plant and machinery by way of new cement plant was being installed which ultimately became operative only with effect from October, 1986 when commercial production started. As the expenditure was incurred in the financial year 1985-86 and installation was also complete in same financial year, it can only be treated as pre-operative expenditure, even though, it was of revenue nature. All the pre-operative or pre-production expenditure, which have direct or indirect nexus with the set up of plant & machinery has to be capitalised. Since the assessee is not the owner of plant and machinery, i.e., power lines and transmission towers for supply of electricity, the expenditure was rightly not treated as capital by the assessing officer. However, all the revenue expenditure incurred in pre-operative/pre-production period need to be capitalised as held in Madras Fertilisers Ltd. v. CIT (1994) 209 ITR 174 (Mad), CIT v. Madras Fertilisers Ltd. (1999) 238 ITR 672 (Mad), CIT v. Ashoka Cements Ltd. (1990) 186 ITR 443 (Cal) and also in Challapalli Sugars Ltd. v. CIT (1975) 98 ITR 167(SC) that pre-operative expenses can be capitalised. The question now arises is as to whether the assessee is entitled for any depreciation on such capitalised expenditure as claimed by him. In above referred cases, it has also been held that the assessee is entitled for depreciation on such pre-operative expenses capitalised. Respectfully, following the above decisions, we direct the assessing officer to allowed preciation to the assessee on this capitalised pre-operative expenses. We find that the assessee received some refund of Rs. 1,52,726.75 from GEB vide ref. No. OM/Com/F.P.... 17W/637/5833, dated 26-9-1990. The amount paid to GEB is Rs. 99,00,000, which should be capitalised and depreciation be allowed thereon this year.
17. Ground No. 8 relates to disallowance of miscellaneous expenditure as under :
(i) Ouarry development expenses of Rs. 25,69,139,
(ii) Market research and development expenses of Rs. 8,18,712 and
(iii) Advertisement for corporate image of Rs. 8,53,980.
According to learned counsel, these items are covered by following decisions :
"(a) ITA No. 2690/M/93 vide its order dated 20-12-2002 for assessment year 1989-90
(b) ITA No. 2419/M/94 vide its order dated 4-8-2003 for assessment year 1990-91
(c) Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC)
(d) CIT v. Ananda Bazar Patrika (P) Ltd. (1990) 184 ITR 542 (Cal)
(e) CIT v. Berger Paints (India) Ltd. (No. 2) (2002) 254 ITR 503 (Cal)"
Vide para 17.3 of its order dated 20-12-2002, the Tribunal for the assessment year 1989-90 in ITA No. 9690/M/93 held as under:
"17.3 We have considered the rival submissions in the light of material placed before us. It is a fact that assessee's business had started during the preceding year and it had already started extracting limestone from the mines. The impugned expenses are to be incurred on year to year basis and cannot be said to be incurred prior to commencement of business. Since the business had already commenced, the same will not be covered by the provisions of section 35(1). Further, the said expenditure was incurred for extracting raw material and not for acquiring any asset of enduring benefit or advantage. In this context, we rely on the decision of Apex Court in the case of Empire Jute Co. Ltd. (supra) wherein it was held that if the advantage consists merely in facilitating the assessee's trading operation, the expenditure would be on revenue account. Respectfully, following the said decision and other decisions relied upon by the learned counsel, we hold that the said expenditure can in no way be treated as capital in nature. We, therefore, confirm the order of CIT(A) who has held that the impugned expenditure is revenue expenditure allowable under section 37(1). The assessing officer has not discussed the issue at all. The appeal of the revenue fails on this issue as well."
In view of the above, quarry development expenses are treated as revenue expenditure and are allowed. The assessee succeeds on this ground.
Other two expenses, viz., market research and development expenses of Rs. 8,18,712 and advertisement of corporate image of Rs. 85,39,801, the assessee has placed reliance on three decisions (supra). The assessing officer have treated them as capital expenditure and so confirmed by the CIT(A) vide paras 15 and 15.1 of his order. Since the business of the assessee has commenced during this year, the expenditure on quarry development expenses, will be treated as revenue expenditure, following the decision of Tribunal referred above. Regarding market research and development expenses the issue is squarely covered by CIT v. Ananda Bazaar Patrika (P) Ltd. (1990) 184 ITR 5421 (Cal) that the expenditure is revenue in nature and allowable. Expenditure on advertising is also held as revenue expenditure in CIT v. Berger Paints India Ltd. (No. 2) (2002) 254 ITR 503 (Cal). In view of these decisions, we allow this ground of the assessee.
18. Ground No. 9 relating to disallowance of depreciation of office premises in possession and being used for business of the company on the plea that it is not registered in the name of the company, the issue is decided in favour of the assessee by ITAT in the following decisions :
"(a) ITA No. 2690/M/93 vide its order dated 20-12-2002 for assessment year 1989-90
(b) ITA No. 2419/M/94 vide its order dated 4-8-2003 for assessment year 1990-91"
Following above decisions, the issue is decided in favour of the assessee. This ground is, therefore, allowed.
19. Ground No. 10 is about disallowance of depreciation on pre-operative expenses capitalized before start of the commercial production in October 1986. The CIT(A) while confirming the addition gave his observations in paras 17 and 17.1 of his order as under.
20. The learned counsel for assessee argued that the appellant company had started commercial production since October 1986, prior to this it had charged depreciation on some fixed assets, which were put to use before start of commercial production. The pre-operative expenses including depreciation on such assets were capitalized. This is in accordance with accounting practices of ICAI. Hence, the assessee is entitled for depreciation on these capitalized pre-operative expenses including depreciation. On the other hand, the learned Departmental Representative relied on the orders of assessing officer and CIT(A).
21. After hearing both the parties, we are of view that assessee deserves to succeed. The reasons are firstly: there is no dispute on the proposition that pre-operative expenses related directly or indirectly to the setting up of plant and machinery or building can be capitalized. Support is derived from the decision of Hon'ble Rajasthan High Court in CIT v. Anil Steel Industries Ltd. (1992) 193 ITR 1241 (Raj), CIT v. Bharat Agri. Co. (1998) 233 ITR 643 (Pat).
22. Once pre-operative expenses having direct or indirect nexus with setting up of business or installation of machinery can be capitalized, then there is no reason why they are not entitled for depreciation as per rules. It cannot be a case that capitalisation is permissible, direct or indirect cost can be added to actual cost of plant and machinery or building but depreciation cannot be allowed in post operative period, if otherwise permissible under the rules to that particular block of assets to which such pre-operative expenses have been added. Secondly, depreciation claimed in pre-operative period is also a part of pre-operative expenses. If certain assets are used in pre-operative period to assist the setting up of plant and machinery, then depreciation on such "assisting assets" is rightly debitable to pre-operative expenses like any other direct or indirect cost. This will be fully in accordance with accounting principles. Wear and tear of such "assisting assets" is a normal phenomenon in pre-operative period and hence the depreciation thereon is rightly a part of "pre-operative expenses". Thirdly, it is incorrect to say that there is a double claim of depreciation, once in the pre-operative period and other after capitalization in the post-operative period. It is because, relevance of claim of depreciation is against revenue. That claim of depreciation is beneficial when there is a profit chargeable to tax. Pre-operative expenses and depreciation are never claimed against revenue in pre-operative period. It has neither been claimed as such nor allowed by the department in pre-operative period. The claim or charge is only for accounting purposes. Such "assisting assets" are credited by depreciation and pre-operative expenses are debited by the amount of depreciation. Thus, where an "assisting asset" has limited life span, it may get exhausted (in terms of value) before the plant starts operative. Therefore, they rightly become part of capitalized pre-operative expenses like any other direct or indirect cost. Admittedly, there is no case of the revenue that the pre-operative expenses and depreciation so added have no direct or indirect nexus with the setting up of plant, machinery or building. As depreciation on "assisting assets" have direct nexus with setting up of plant and machinery and building and are part of pre-operative expenses for capitalization. The accounting principles of ICAI permit the claim of depreciation in post operative period on such capitalized pre-operative expenses including depreciation. The relevant para from the guidance notes issued by ICAI is as under:
" 17.18 It is recommended that depreciation should be charged during the construction period on any items of fixed assets or temporary construction facilities used during the period of construction. Such depreciation may be charged either by applying the normal depreciation rates to the original cost of such assets or, in the alternative, the depreciation may be charged indirectly by capitalizing the difference between the original cost of equipment or facilities and the sale or scrap value thereof at the end of the construction, The latter method is particularly appropriate in the case of special construction equipment and temporary construction facilities. In either case, the depreciation provided during the construction period should ordinarily be treated as part of the indirect construction cost and capitalized accordingly. If any item of fixed assets used during the construction period is retained by the project for use after production, the residual book value of such assets should be depreciated in the normal way after commencement of production."
Finally, so long as the charging of depreciation in pre-operative period and bringing it back by capitalisation does not increase the actual cost, there cannot be any objection to this accounting. Even otherwise, actual cost of "assisting asset" installed in pre-operative period are eligible for claim of depreciation in post-operative period. In view of the above, we hold that the assessee is entitled to depreciation as per rules on the capitalized value of pre-operative expenses including depreciation charged on the assets used in pre-operative period.
23. Ground No. 11 requires no interference as the penalty proceedings are independently initiated and adjudicated. They are to be decided as per facts and law related to them. Hence this ground is rejected. Ground No. 12 is general and hence, it is also rejected.
24. In the result, the appeal of the assessee is partly allowed as indicated above.