Income Tax Appellate Tribunal - Mumbai
Rajhans Metals Pvt. Ltd. vs Ito on 28 August, 2007
Equivalent citations: (2008)115TTJ(MUM)779
ORDER
K.C. Singhal, Judicial Member
1. These are the cross appeals filed by the Revenue as well as the assessee which have been heard together and are being disposed off by the common order for the sake convenience. First we take up the appeal of the assessee. We take up the assessee's first ground whether the lower authorities were justified in assessing the sum of Rs. 2,25,37,301/- under Section 41(2) of the income-tax Act, 1961 (the Act), which represented the insurance claim received by the assessee.
2. Briefly stated, the facts are these. The assessee started a windmill project in the assessment year 1996-97 by installing windmills for the purpose of generating electricity. The total cost of such windmills amounted to Rs. 2.8 crore. The assessee claimed 100% depreciation on this asset for the assessment year 1996-97 itself. Thus, the written down value (WDV) of the plant was reduced to nil. However, the said windmills were destroyed in the cyclone in assessment year 1999-2000 against which the assessee received a sum of Rs. 2,25,37,301/- from the insurance company in the year under consideration. This amount was not offered for taxation by the assessee. A note had been given in the return of income stating that the same is not taxable in view of the opinion given by an advocate. According to that opinion, the assessee had not claimed deduction in respect of depreciation under Section 32(1)(i) of the Act and consequently, the provisions of Section 41(2) of the Act were not applicable. The Assessing Officer rejected the opinion given by that advocate for the reasons given in the assessment order.
3. It was observed by the Assessing Officer that Section 41(2) was omitted with effect from 1.4.1988 with a view to streamlining with the provisions of Section 32(1) and Section 50 of the Act, where the block of assets was to be considered for allowance of depreciation and no effect was to be given for the partial reduction of assets in the respective blocks. However, Section 41(2) has again been brought on the statute book by Finance (No. 2) Act, 1998, w.e.f. 1.4.1998. The Assessing Officer then referred to circular No. 772 dated 23.12.1998 to point out that Section 41(2) was inserted to tax the moneys payable, where it exceeds the WDV to the extent it does not exceed the actual cost. He also observed that such provisions were applicable to the moneys payable from assessment year 1998-99. Again after referring to the provisions of Section 32 of the Act, it was held by him that provisions of Section 41(2) were clearly applicable where the depreciation has been allowed in respect of building, machinery, plant or furniture. Accordingly, he assessed the amount of insurance received by the assessee under Section 41(2), which has also been confirmed by the CIT(A). Aggrieved by the same, the assessee is in appeal before the Tribunal.
4. The learned Counsel for the assessee has submitted before us that provisions of Section 41(2) of the Act can be applied only when machinery and plant, in respect of which depreciation has been claimed under Clause (i) of Section (32(1), has been sold, discarded, demolished or destroyed and moneys payable in respect of such plant and machinery are received. He then referred to the provisions of Section 32(1) as were on the statute book in assessment year 1996-97 inasmuch as the assessee had claimed the depreciation in that year, it was pointed out by him that in the assessment year 1996-97 Clause (i) of Section 32(1) of the Act was not on the statute book as it had been omitted with effect from 1.4.1988. It was Clause (ii) of Section 32(1) of the Act under which the assessee had claimed the deduction byway of depreciation on the windmills. Therefore, it cannot be said that the assessee had claimed any deduction under Clause (i) of Section 32(1), and consequently the charging provisions of Section 41(2) of the Act could not be invoked. It was also pointed out by him that provisions of Section 41(2) as originally enacted were omitted with, effect from 1.4.1988 and again have been brought on the statute book with effect from 1.4.1998. The provisions of Section 32(1) were also amended with effect from 1.4.1998, wherein the depreciation in respect of building, plant and machinery or furniture is allowable under Clause (i) of Section 32(1) of the Act. Accordingly it has been pleaded that Section 41(2) of the Act only refers to the amended provisions of Section 32(1)(i) and, therefore, such provisions would apply only to those cases where depreciation in respect of building, plant or machinery is allowed for assessment years 1998-99 and onwards. On the other hand, the learned DR has relied on the orders of lower authorities.
5. Rival submissions of the parties have been considered carefully, in our opinion, the contention raised by the learned Counsel for the assessee is not without force. The provisions of Section 41(2) are charging sections and, therefore, the same must be construed strictly if the facts of any case do not fall within the ambit of charging sections, then the assessee cannot be charged to tax by construing the provisions liberally. Section 41(2) as brought on the statute book with effect from 1.4.1998 is being reproduced as under:
41(2) Where any building, machinery, plant or furniture,-
(a) which is owned by the assessee;
(b) in respect of which depreciation is claimed under Clause (i) of Sub-section (1) of Section 32; and
(c) which was or has been used for the purposes of business, is sold, discarded, demolished or destroyed and the moneys payable in respect of such building, machinery, plant or furniture, as the case may be, together with the amount of scrap value, if any, exceeds the written down value, so much of the excess as does not exceed the difference between the actual cost and the written down value shall be chargeable to income-tax as income of the business of the previous year in which the moneys payable for the building, machinery, plant or furniture became due.
Explanation--Where the moneys payable in respect of the building, machinery, plant or furniture referred to in this sub-section become due in a previous year in which the business for the purpose of which the building, machinery, plant or furniture was being used is no longer in existence, the provision of this sub-section shall apply as if the business is in existence in that previous year.
The provisions of Section 32(1) were also amended with effect from 1.4.1998, which are also being reproduced as under:
32. (1) [In respect of depreciation of-
(i) buildings, machinery, plant or furniture, being tangible assets;
(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-] [(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;]
(ii) fin the case of any block of assets, such percentage on the written down value thereof as may be prescribed] Provided....] [Provided further....] [Provided also....] Provided also....] [Providedalso....] [Provided....] Provided....] The provisions of Section 32(1) as were on the statute book pertaining to assessrrieht year 1996-97 read as under:
32. (1) In respect of depreciation of buildings, machinery, plant or furniture owned by the assessee and used for the purpose of the business or profession, the following deductions shall, subject to the provisions of section 34, be allowed.
(i) [...]
(ii) [in the case of any block of assets such percentage on the written down value thereof as may be prescribed] [Provided....] [Provided....] [Provided....] [Provided also....]
6. in assessment year 1996-97 no separate deduction in respect of any individual machinery or plant was allowable in view of the concept of block of assets brought on the statute book with effect from 1.4.1988. The depreciation was allowable under Clause (ii) of Section 32(1) of the Act, in respect of the assets forming block of assets. It was under such provisions that the assessee claimed deduction @ 100% as per the prescribed rate in respect of windmills installed by the assessee. Clause (i) of Section 32(1) of the Act, as enacted originally, had been omitted with effect from 1.4.1988 and, therefore, it was not on the statute book in assessment year 1996-97. Thus it is clear that the assessee had claimed the depreciation under Clause (ii) of Section 32(1) of the Act and not under Clause (i) of Section 32(1). The legislature was well aware that Clause (i) of Section 32(1) had been omitted with effect from 1.4.1988 and Clause (i) was being brought again on the statute book with effect from 1.4.1998. Therefore, while enacting Section 41(2) with effect from 1.4.1998, in our opinion, the Legislature referred to the amended provisions of Section 32(1)(i) effective from 1.4.1998, Therefore, in our humble opinion, the provisions of Section 41(2) being the charging provisions could not be applied to those cases where the depreciation has been claimed prior to the amendment effective from 1.4,1998. Had the Legislature intended to apply the provisions of Section 41(2) to all the cases, then it could have used the words and figures "under Sub-section (1) of Section 32" instead of the words and figures "under Clause (i) of Sub-section 32(1)" in Section 41(2)(b). It is the wisdom of the Legislature which must prevail. The Courts are not supposed to supply or remove the words to or from the language used by the Legislature. If any lacuna is there, then it is only the Legislature which can remove the same by making suitable amendment. Accordingly, we are of the view that the provisions of Section 41(2) are not applicable in the present case and consequently, the sum of Rs. 2,25,37,301/- could not be assessed to tax by invoking the provisions of Section 41(2) of the Act. The order of the CIT(A) is, therefore, set aside on this issue and consequently, the addition sustained by him is hereby deleted.
7. The last issue raised by the assessee relates to disallowance of Rs. 3,40,770/- under Section 43B r.w. Section 36(1)(va) of the Act. The disallowance relates to payments made by the assessee towards Provident Fund and Employees State insurance scheme. The detail of the payment appears at page 5 of the order of the CIT(A). The disallowance has been made by the Assessing Officer and confirmed by the CIT(A) is on the ground that payments were made beyond the due dates. The CIT(A) has relied on the decision of Kerala High court in the case of South India corporation 242 ITR 114. Aggrieved by the same, the assessee is in appeal before the Tribunal.
8. Both the parties have been heard. The Tribunal has been consistently holding that payments made within the grace period are allowable as deduction under section 43B as well as Section 36(1)(va) of the Act. This view is supported by the judgement of Madras High court in the case of Shree Ganapathy Mills Ltd. 243 ITR 879. Even otherwise, it is a settled law that where two views are possible, the view which is favourable to the assessee should be adopted. Therefore, following the Madras High Court judgement, it is held that payments made within the grace period are to be allowed as deduction under section 43B of the Act. A perusal of the details show that all the payments except one payment of Rs. 51,268/- were made within the grace period. Consequently, the, disallowance is restricted to Rs. 51,268/- only. The order of the CIT(A) is, therefore, modified. The Assessing Officer shall restrict the disallowance to Rs. 51,268/-.
9. Now we take up the Revenue's appeal. Though various grounds have been raised, the effective ground relates to the disallowance of Rs. 3,00,818/- under Section. 35D, which has been deleted by the ClT(A).
10. Briefly stated, the facts are that the assessee had adopted a sum of Rs. 3,75,818/- as pre-operative expenses in the P & L Account under Section 35D of the Act. The Assessing Officer noted that deduction under Section 35D was available in respect of certain preliminary expenses over a period of 10 years @ 10% per annum subject to maximum of 2.5% of the capital employed over the entire period. Since the cost of the windmill project was Rs. 3 crore, the maximum limit allowable under section 35D was worked out at Rs. 7,50,000/- being 2.5% of the entire cost. In view of the same, it was held by him that 1/10th of the same was allowable as deduction, consequently, he allowed the deduction under Section 35D of the Act at Rs. 75,000/- and the balance amount of Rs. 3,00,818/- was disallowed. On appeal, the CIT(A) following his earlier order held that such expenses did not relate to expenditure covered under Section 35D and consequently the entire expenditure was allowable as deduction. Aggrieved by the same, the Revenue is in appeal before the Tribunal.
11. Both the parties have been heard. It is not clear as to what happened with reference to the order of the CIT(A) for the earlier years. However, it is strange to know that the assessee itself has claimed the deduction under section 35D spreading the same over 5 years. The relevant details of the expenditure incurred by the assessee have been filed before us by the assessee's counsel. A perusal of the same shows that the total expenditure was incurred in the first year i.e., the assessment year 1996-97, amounting to Rs. 23,86,120/- which included the sum of Rs. 16 lakhs as power evacuation charges, Rs. 6,53,720/- as stamp duty and Rs. 1,32,400/- as scrutiny charges. The sum of Rs. 4,77,224/- was being written off in each year from the assessment year 1996-97 to assessment year 1998-99. However, in the year under consideration, the assessee had claimed a sum of Rs. 3,75,818/- and the balance amount of Rs. 5,78,630/- has been claimed in assessment year 2000-01. We have iven our due consideration to the issue before us and in our view the order of CIT(A) cannot be sustained for the reasons given hereafter, if the expenditure is not covered by the provisions of Section 35D of the Act, as held by the ClT(A), then the deduction could not be allowed in the year under consideration inasmuch as the entire expenditure had been incurred in the first year i.e., the assessment year 1996-97. Further, the expenditure was incurred prior to the commencement of business and, therefore, could not be allowed as revenue expenditure even under section 37 of the Act. The nature of the expenses is also not such as to allow the spreading it over the years. If we consider this expenditure falling under section 35D of the Act, then the maximum limit is 2.5% of the total cost of the project. Since the total cost of the project is Rs. 3 crore, the maximum amount allowable to the assessee was 7,50,000/- and as per the provisions of that section only 1/10th of the above amount could be allowed. Therefore, in our opinion, the CIT(A) could not delete the disallowance made by the Assessing Officer. In view of the above discussion, the order of the CIT(A) is set aside on this issue and consequently, the disallowance of Rs. 3,00,818/- made by the Assessing Officer is restored. In the result, appeal of the assessee is partly allowed. The appeal of the Revenue stands allowed.
Order pronounced on 28th August, 2007.