Income Tax Appellate Tribunal - Ahmedabad
Gujarat State Fertilisers & Chemicals ... vs Assessee on 6 June, 2003
IN THE INCOME TAX APPELLATE TRIBUNAL: AHMEDABAD BENCHES
"D" BENCH: AHMEDABAD
(BEFORE S/SHRI H. L. KARWA, JM AND A N PAHUJA, AM)
ITA No. 3228/Ahd/2203
A Y: 1999-2000
Gujarat State Fertilizers & Chemicals Vs ACIT (OSD)Circle -1, Baroda
Ltd., P.O. Fertilizer Nagar 391 750,
Dist. Vadodara
[PAN: AAACG 7996 C]
Appellant Respondent
In ITA No.3358/Ahd/2003
AY: 1999-2000
DCIT Circle -1, Baroda Vs Gujarat State Fertilizers &
Chemicals Ltd.,
P.O. Fertilizer Nagar 391 750,
Dist. Vadodara
Appellant Respondent
Assessee by Shri JP Shah, AR
Revenue by Shri Aditya Vikram, DR
ORDER
A N PAHUJA: These cross appeals by the Revenue and the assessee against an order dated 6-6-2003 of the learned CIT(A)-I, Baroda, raise the following grounds:
ITA No. 3228/Ahd/2003[Assessee]"1. The order passed by the learned Commissioner of Income-tax (Appeals) is erroneous on facts and contrary to the provisions of law and therefore requires to be suitable modified. It is submitted that it be so done now.
2. The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance made by the Assessing Officer upto 1% of the total expenditure on repairs and maintenance considering the same as capital expenditure. Your appellant submits that merely because the expenditure on replacement of certain items was substantial, the same cannot be considered as capital ITA No.3228 & 3358/Ahd/2003 2 Gujarat State Fertilizers & Chemicals Ltd.
expenditure. Your appellant submits that in the facts and circumstances of the case, the entire expenditure on repairs and maintenance is of revenue nature and therefore it is fully allowable. It is submitted that it be so held now.
3. The learned Commissioner of Income-tax (Appeals) erred in not entertaining the additional ground of appeal filed by your appellant in respect of the claim of depreciation on the plant and machinery and other assets used for the Trial run production in Ammonia Plant-IV. Your appellant submits that in the facts and circumstances of its case, the learned CIT(A) ought to have entertained the additional ground of appeal filed by your appellant and allowed the claim of depreciation as it has fulfilled the conditions laid down u/s. 32 of the Income-Tax Act, 1961. Your appellant submits that additional ground of appeal be admitted and depreciation as claimed be allowed now.
4. The learned Commissioner of Income-tax (Appeals) erred in not entertaining the additional grounds of appeal filed by your appellant in respect of claim of deduction for the subsidy received Rs.23.37 crores and Rs.5.29 crores credited to profit and loss A/c. but eventually was repayable and repaid to Government in respective years - Asst. year 2001-02 and Asstt. Year 2004-05 due to reduction in subsidy on account of revision in retention price. Your appellant submits that in the facts and circumstances, the learned CIT(A) ought to have entertained the additional ground of appeal and allowed the claim for deduction of the amount of subsidy recovered by the Government. Your appellant submits that additional ground of appeal be admitted and deduction for the subsidy recovered by the Government be granted now because such subsidy receipt was not the real income of the assessee.
5. The learned Commissioner of Income-tax (Appeals) erred in confirming the disallowance of provision for doubtful debts. Your appellant submits that the provisions have been made as the amounts due from various parties not recoverable. It is submitted that in the facts and circumstances, the provision made for doubtful debts ought to have been allowed. Your appellant submits that it be so allowed now.
6. The Commissioner of Income-tax (Appeals) erred in confirming the disallowance of an amount of Rs.3,05,67,622/- being expenses incurred on abandoned project - LPG project written off. Your appellant submits that the expenditure has been incurred in connection with the expansion of business/same business. Your appellant submits that in the facts and circumstances, as the ITA No.3228 & 3358/Ahd/2003 3 Gujarat State Fertilizers & Chemicals Ltd.
expenditure has been incurred for the purpose of expansion of business/same business, the same is fully allowable as deduction. It is submitted that it be so held now.
7. The Commissioner of Income-tax (Appeals) erred in confirming the disallowance of depreciation in respect of Nylon- 6 Plant on the amount received and treated towards the repairs. Your appellant submits that it has received, inter alia, Rs.724.98 Lacs in connection with assets damaged on account of fire in Nylon-6 Plant. Your appellant considered Rs.362.49 Lacs towards reinstatement of assets damaged and balance of Rs. 362.49 Lacs towards repairing the assets. Your appellant submits that in the facts and circumstances, the entire amount of Rs.724.98 Lacs received from Insurance Company towards the assets damaged cannot be deducted from the W. D. V. of the Plant & Machinery as part of the amount has been reimbursed by the Insurance Company for repairing the Plant & Machinery damaged. In the facts and circumstances of the case, the disallowance of depreciation of Rs.90,62,500/- made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) is required to be deleted. It is submitted that it be so done now.
Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal."ITA No. 3358/Ahd/2003[ Revenue ]
"1. On the facts and in the circumstances of the case and in law, the learned CIT(A)-I, Baroda, has erred in deleting Rs.10.99,25,676/- being "pre-commencement-stage" income as not an assessable income under the head income from "other sources.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of Rs.13.96 Crores being excise duty component attributable to finished goods while computing valuation of closing stock.
3. On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have upheld the order passed by the Assessing Officer.
4. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored."ITA No.3228 & 3358/Ahd/2003 4
Gujarat State Fertilizers & Chemicals Ltd.
2 Adverting first to ground no.1 in the appeal of the Revenue and ground no. 3 in the appeal of the assessee, facts, in brief, as per relevant orders are that return declaring income of Rs.40,48,05,624/- in terms of provisions of section 115J of the Income-tax Act,1961 (hereinafter referred to as the Act) filed on 31st December, 1999 by the assessee, engaged in the business of manufacturing of fertilizers and chemicals, after being processed on 4-12-2000 u/s 143(1) of the Act, was selected for scrutiny with the issue of notice u/s 143(2) of the Act on 18- 12-2000. During the course of assessment proceedings, the Assessing Officer[AO in short] noticed on perusal of schedule- 20 of the annual report of the company that the assessee decapitalized income of Rs.4000.36 lacs out of trial run production, by reducing the same from the pre-operative expenses capitalized by it. The Ammonia gas generated from the trial production was utilized in production of fertilizers while inputs utilized like power, nitrogen, D. M. Water, steam and power etc. worth Rs.2901.11 lacs generated by other units, were consumed in production of ammonia. Accordingly to the assessee, the said Ammonia-IV Plant was not commissioned during the period relevant to the year under consideration. In the books of accounts of the assessee company, value of inputs of Rs. 2901.11 lacs was shown as other income under the head 'Captive Consumption of Project under Execution' while cost of inputs produced by other units and ammonia supplied by Ammonia-IV plant to other units was debited as expenditure in the respective units. It was claimed by the assessee that according to the accepted accounting practice, the income generated during the pre-production period will have to be capitalized and therefore, income generated out of trial run production would go to reduce the pre-production expenses, which would ultimately be capitalized. However, the AO did not accept the method followed by the assessee and treated the amount of Rs.4000.36 lacs as revenue receipt and after reducing the cost of inputs to the extent of Rs.2901.11 lacs, assessed the remaining amount of Rs.10,99,25,676/- under the head 'Income from other sources'. Since the Ammonia Plant did not commence production and was in trial run for more than 2 years, the AO also disallowed the depreciation claimed by the assessee.
ITA No.3228 & 3358/Ahd/2003 5Gujarat State Fertilizers & Chemicals Ltd.
3. On appeal, the assessee contended that the company had already reduced the cost of production of Ammonia from project cost and therefore, Ammonia produced had already been accounted for in the books of accounts. While explaining that the cost of inputs of Rs.2911.01 lacs was already treated as other income of the company and credited to the profit & loss account and the Ammonia of Rs. 4000.36 lacs produced in the Ammonia-IV Plant was reduced from the project cost in accordance with guidelines issued by the Institute of Chartered Accountants of India, the assessee contended that the fertilizers produced were shown as sales and credited to profit & loss account. Therefore, there was no justification in including the difference of about Rs. 11 crores again as income. Alternatively, it was contended that if the amount is taxed as income, the expenses directly related to producing such income should be allowed and not only the captive consumed items. Simultaneously, an additional ground of appeal was also filed, urging that depreciation on the entire amount should be allowed in view of the decision of the Hon'ble Gujarat High Court in the case of ACIT vs. Ashima Syntex Ltd. [2001] 251 ITR 133 (Guj). The assessee pleaded that the allowance be also made of the cost of production of Rs.86.67 crores being the first four items of Schedule 20 of page 42 of the annual accounts and thus, a computed loss of Rs.46.67 crores would rise.
4. In the light of these submissions, the learned CIT(A) concluded as under:
"2.5 To first verify what would be the nature of trial run production and whether it is indeed "income from other sources", the Director's report was seen in which the following para has been given in respect of Ammonia IV Plant.
"The 1350 MTPD Ammonia - IV plant is a modular construction having various sections like Reformer, Air Separation, Hydrogen, CO2, Remocal and Off-sites. After ensuring that all these sections are independently performing satisfactorily and that there are no process limitations, trial production commenced form the beginning of January, 1999 and the plant has been running at various incremental loads. During 100% plant load some problems were observed which are being analysed in consultation with process ITA No.3228 & 3358/Ahd/2003 6 Gujarat State Fertilizers & Chemicals Ltd.
licensors and equipment manufacturers. After completing these consultations and obtaining their recommendations, it is expected that the Guarantee Test Run of the plant would be undertaken and then the commercial production would commence."
2.6 From the above it would become clear that all the various sections of the plant are running satisfactorily and it was only that at the final stage the guaranteed output was wanting. Hence pending the final clearance of limitations, the plant is actually functioning fully and commercial production would be stated to commence only when the final Guarantee Test Run is completed. Therefore, the plant is fully functional, though not at an optimal level. Therefore, it can well be said that income is being generated and merely because captive consumption is seen on both sides of the account of this plant, it is being treated as pre- commencement. I am in agreement with the Assessing Officer on the ground that income can definitely arise if the plant is producing income but has not gone into commercial production. However this clearly invites the corollary of calling for deduction of all expenses directly related to producing such income. The schedule 20 is reproduced here for simplicity:
A Income Generated: 4,000.36
During the Trial Run Production and
Consumed Captively 4000.36
(A) Total Income
(b) Expenses:
(a) Direct Expenses incurred:
1 Raw Material Consumer 5261.75
2 Electricity & Fuel 491.49
3 Captive Product Consumed 2901.11
4 Water 11.94
8666.29
(b) Indirect expenses:
1 Technical Fees & Supervision charges 806.67
2 Insurance 484.30
3 Personnel Expenses 274.09
4 Research & Developments Cess 49.71
5 Printing, Statinoery,post, Tele etc. 18.04
6 Realignment of Foreign Currencies 4417.71
7 Travelling and Conveyance 15.55
8 Legal, prof. & consultancy charges 73.80
9 Income tax on foreign payments 99.42
ITA No.3228 & 3358/Ahd/2003 7
Gujarat State Fertilizers & Chemicals Ltd.
10 Share/Debenture issue expenses 2.79
11 Miscellaneous Expenses 60.50
12 Depreciation 0.37
6302.95
(c) Depreciation on Plant and Machinery
used during the Trial Run production (As
per working) 21084.39
(B) Total Expenses (a+b+c) 36053.63
( C) Net Difference (A-B) -
32053.27
The above chart clearly shows that other raw material
consumed electricity, fuel and water would also have to be considered as expenses against the income generated and not only the captive products consumed. Such direct expenditure would total 8666.29 lacs. Over and above this depreciation on plant and machinery, if considered would be 21084.39 lacs.
2.7 During discussions with the appellant's representative and the departmental officers present the appellant stated that it is willing to accept taxability of Rs.4000.36 crores provided its other claims as also claim of depreciation is allowed. Even otherwise the claim of depreciation has to be separately entertained and has been raised as a separate ground of appeal. The departmental officers could not controvert the claim of the appellant for other direct expenses and relied on the basic assessment order.
2.8 On going through the submissions on both sides and looking into the facts of the case, I find that there is no controversy regarding the fact that the plant is still under trial production. It is neither the case of the department, nor the case of the assessee that commercial production has been undertaken. Therefore, the claims have to be considered holding the Ammonia Plant to be at the precommencement stage. The Assessing Officer has apparently gone by the Supreme Court's decision in the case of Tuticorin Alkalies to tax any income arising during pre-commencement period and the appellant has stated that if it is taxed then all direct expenses relating to such income would also be allowable which would result in a loss of over Rs.40 crores.
2.9 In my view it is not the decision of Tuticorin Alkalies which is applicable to the facts of this case. The nature of income considered is not in the nature of "income from other sources" as envisaged by the Supreme Court. On the contrary in my view the decision of the Supreme Court in the case of Bokaro Steel 236 ITR 315, better fits the facts of the case. The ITA No.3228 & 3358/Ahd/2003 8 Gujarat State Fertilizers & Chemicals Ltd.
Court had clearly held that if the assessee receives any amount which are inextricably linked with the process of setting up its plant and machinery such receipts would go to reduce the costs of assets and would be receipt of a capital nature which cannot be taxed. In the present instance, the plant is under testing for its efficiency prior to commencement and the inputs and outputs have already been netted by GSFC and the net result has been capitalized. In my view the method followed by the appellant as reflected in its books of account is the most correct and valid method of treating pre commencement production. Any attempt to tax the production which is already accounted for as input of the fertilizer plant would lead to a distorted picture of the accounts of M/s. GSFC. Similarly inputs which are already shown as "other income" by various plants whose products are captively used in the Ammonia IV Plant, if not allowed to be set off against the production of the plant would also lead to a distorted picture of the accounts of M/s. GSFC. Above all the method followed is as prescribed by the Institute of Chartered Accountants of India and I see no reason to disturb the basic precommencement production picture by attempting to tax the production as notional income and set it off against various expenses. This exercise has already been done in the accounts of M/s. GSFC as the inputs have already been shown as income and the output is shown as purchases/ expenditure by other units of M/s. GSFC. Hence the accounting method is absolutely correct and no benefit is gained from distributing this picture. Hence, I hold that the addition is not valid, relying on the Supreme Court decision in the case of Bokaro Steel Ltd. where the netting principle has been followed. In view of the above discussion while the addition made in the assessment order is deleted, the assessee's claim for computation of loss arising out of the addition is negatived. Hence, the additional ground of appeal on this point is rejected.
2.10 The second point taken by the appellant is the applicability of the Gujarat High Court's decision in the case of Ashima Syntex Ltd. In this case the Court held that even trial run of machinery entitles the assessee to depreciation. Therefore, the appellant claims far the plant has clearly been under production for trial run throughout the year and the plant and machinery has been used for the purpose of business and therefore, depreciation totaling Rs.21084.39 lacs should be allowed. The departmental officers have vehemently protested against this claim stating that deprecation is allowable only when the business has commenced and as the business has not yet commenced no claim of depreciation is allowable. They have pointed out from the decision of the Gujarat High Court itself that there would be a difference between cases where a long time is taken to install the machines and obtain good results. In such cases commercial production cannot start and this is the picture available in the case of M/s. GSFC."
ITA No.3228 & 3358/Ahd/2003 9Gujarat State Fertilizers & Chemicals Ltd.
2.11 I am in agreement with the departmental view on the subject. In the above mentioned case of Ashima Syntex Ltd. the assessee was manufacturing fabrics and imported jet looms from Japan during the accounting year and trial production commenced on 23 March 1993. The Assessing Officer had held that the business could not be said to have been set up. But the Court held that the question was not one of setting up a new unit but of expansion of the unit. 2.68 lakh mtrs of Grey cloth was manufactured. Law does not require that there must be optimum production for getting the benefit, only there must be use of plant and machinery of the purpose of business. The assessee was, therefore, entitled for depreciation.
2.12 The present case is however very different. The Ammonia Plant is an entirely new unit and it is not a question of expansion of an old unit. It is not only some plant and machinery added to an old unit which is under consideration, but an entire plant which is still subject to various correctness before it can go into commercial production. As already seen from the discussion in the previous paras and from the Directors report on the subject, that the desired results are not yet available and were also apparently not available in the succeeding assessment year. Therefore, this is clearly a case pertaining to precommencement period for which depreciation would not be available. In fact this point has been clarified by the High Court itself on page 147 of the above mentioned decision. The observation of the Court has follows:
"It is required to be noted that when an entrepreneur undertakes to invest a huge amount for the manufacture of the product, he has to plan it properly. Installation of machinery or plant and machinery in the building itself is not sufficient to attract the provisions contained in section 32 of the Act. There must be use of plant and machinery for the purpose of business as contemplated in section 32 of the Act. There is thus a thin line between the trial run and actual production, or many a time, the word used is "commercial production". If the machines are installed properly and it gives good result, then one need not wait for any rectification in the system. There may be some cases wherein after commencement of the production, the machine may not give proper results-may be on account of failure of certain parts, may be on account of requirement of certain additional machinery, etc. In such a case, the production obtained at the initial stage would be considered as trial production."
As can be seen from the above, the present case is different to that of Ashima Syntex where the machines installed worked immediately and strictly there was no trial run as such. In the case of M/s. GSFC the trial run has continued for over two years and therefore, the ITA No.3228 & 3358/Ahd/2003 10 Gujarat State Fertilizers & Chemicals Ltd.
appellant cannot claim the benefit of depreciation during this period. The reliance on the decision of the Ashima Syntex is misplaced and the claim of the assessee is therefore, dismissed. In the sum total as regards this first ground of appeal, the addition made by the ITO is deleted. However, the two claims of expenditure and depreciation made by the appellant in the additional grounds of appeal stand dismissed."
5. The assessee is now in appeal against the rejection of their claim for depreciation in terms of ground no. 3 of the appeal while the Revenue is in appeal against the aforesaid findings of the learned CIT(A), deleting the amount of Rs.10,99,25,676/- as income assessed under the head 'other sources'. The learned AR on behalf of the assessee while relying upon the decision of the Hon'ble Gujarat High Court in the Case of Ashima Syntex Ltd. (supra) submitted that even during trial run of the unit, depreciation cannot be disallowed. On the other hand, the learned DR supported the findings of the learned CIT(A) on the issue of depreciation while relying upon on the order of the AO in respect of assessment of the amount Rs.10,99,25,676/- under the head 'Income from other sources'.
6. We have heard both the parties and gone through the facts of the case. Undisputedly , Ammonia-IV plant was under trial production during the year under consideration and the commercial production is yet to commence. Therefore, as concluded by the ld. CIT(A), the claims have to be considered, holding the Ammonia-IV Plant to be at the pre- commencement stage. It is well settled that under the accounting practices, all expenditure including interest cost incurred during the project construction period are accumulated and disclosed as capital work-in-progress until the assets are ready for commercial use. Income earned from investment of surplus borrowed funds during construction/trial run period is reduced from capital work-in-progress for accounting purposes while expenditure/income arising during trial run is added to/reduced from capital work-in-progress. Hon'ble Apex Court in the case of Bokaro Steel Vs. CIT, 236 ITR 315 held that if the assessee receives any amount which are inextricably linked with the process of setting up its plant and machinery, such receipts would ITA No.3228 & 3358/Ahd/2003 11 Gujarat State Fertilizers & Chemicals Ltd.
go to reduce the costs of assets and would be receipt of a capital nature, which cannot be taxed. In the case under consideration, undisputedly and as found by the ld. CIT(A), the plant is under testing for its efficiency prior to commencement of commercial production and the inputs and outputs have already been netted by GSFC and the net result has been capitalized. Considering the facts and circumstances of the case and the guidelines of the ICAI, we are in agreement with the ld. CIT(A) that any attempt to tax the production, which is already accounted for as input for the fertilizer plant and the captive inputs of other units utilized in Ammonia IV Plant, if not allowed to be set off against the production of the plant, would lead to a distorted picture of the accounts of M/s. GSFC. In these circumstances, especially when Revenue have not placed before us any material contrary to the aforesaid findings of the ld. CIT(A) in so far as addition of Rs. 10,99,25 ,676 is concerned nor pointed out any contrary decision, we have no hesitation in upholding the findings of the ld. CIT(A) while relying upon the decision of the Hon'ble Apex Court in Bokaro Steel Ltd.. Therefore, ground no.1 in the appeal of the Revenue is dismissed.
7. As regards issue of depreciation raised in ground no.3 in the appeal of the assessee, the ld. CIT(A) while distinguishing the decision of Hon'ble jurisdictional High Court in the case of Ashima Syntex Ltd. (supra) held that the present case is different from that of Ashima Syntex Ltd.where the machines installed worked immediately and strictly there was no trial run as such. In the case of M/s. GSFC the trial run has continued for over two years and therefore, the assessee cannot claim the benefit of depreciation during this period, the ld. CIT(A) concluded. Apparently, the ld. CIT(A) upheld the disallowance of claim of depreciation, holding that machinery used for trial runs is not used within the meaning of provisions of sec. 32 of the Act. We are of the opinion that user of the machinery in test production or experimental manufacture was still user for the purposes of the assessee's business. We are supported in our view by the decision of Hon'ble Madras High Court in the case of V. Ramakrishna and Sons Ltd. v. CIT [1984] 149 ITR 554 (Mad) .
ITA No.3228 & 3358/Ahd/2003 12Gujarat State Fertilizers & Chemicals Ltd.
7.1 In CIT v. Union Carbide (I) Ltd. [2002] 254 ITR 488 (Cal), Hon'ble High Court held that it is one thing for machinery to wait passively during the year in question, ready to come into use commercially at any time although it might actually not have been used, because the running units ran perfectly, but this is not the same thing as plant or machinery which is being brought up to the state of actually active commercial use, during the year, which is wholly spent in trial production, i.e., in making the machinery fully ready for generating projected commercial profit . It might be that the assessee's use is to keep it as a stand by. But it might be again that the assessee had used it for a trial production or in some other purpose for the assessee's business, which is not immediately productive of commercial profit. But this would not go against the assessee. Once the assessee can establish bona fide use of the machinery for the purpose of the assessee's business, then and in that event, the assessee establishes the assessee's right to claim depreciation. Hon'ble High Court further held that it sometimes happens that the claiming of depreciation or investment allowance is inextricably connected with the assessee commencing its business in the first place. If a new company has not commenced its business. at all, it might be that no use made by it of plant or machinery can be said to be use by it for the purposes of its business, because it has no business as yet. But so far as the present assessee is concerned, it has had its business long running , and thus, trial production is quite sufficient, in our opinion, for the assessee to claim justly and properly depreciation .
7.2 Hon'ble High Court also observed in the aforecited decision that unless there are words in the section indicating that not every kind of use for the purpose of the business will satisfy for attracting allowance, it is not open for the Revenue to read into the section any words of limitation so as to affect the interest of the assessee. It is with a view to the business of the assessee that the assessee used the machinery for the purposes of its business in causing those to go into trial production. If that is not using the machinery for the purposes of the ITA No.3228 & 3358/Ahd/2003 13 Gujarat State Fertilizers & Chemicals Ltd.
business, then how else the above activity of the assessee can be described in that regard.
7.3 In view of the foregoing, we have no hesitation in setting aside the findings of the ld. CIT(A) in the matter of depreciation on plant and machinery under trial runs and accordingly, direct the AO to allow the claim of the assessee in accordance with the provisions of section 32 of the Act. Thus, ground no. 3 in the appeal of the assessee is allowed.
8. Adverting now to ground No.2 in the appeal of the Revenue relating to addition of Rs.1396 lacs, being excise duty for the purpose of valuing the finished goods, the AO noticed on perusal of schedule-7 of the annual report that the assessee did not consider excise duty while valuing finished goods lying in the factory premises. The auditors in note -3 below schedule-7 mentioned that valuation of finished products lying at the factory premises has not been paid or provided for, is taken exclusive of excise duty estimated at Rs. 1396 lacs and this has no impact on profits of the company for the year. AO further noticed that para 4b of schedule-21 ,inter alia, mentioned that closing stock of finished products lying at depots, warehouses, consignment stockists, other parties and stocks remaining out of inter-unit transfers, is valued inclusive of excise duty. According to the AO, the method adopted by the company for valuation of finished goods is not consistent. To a query by the AO, the assessee while relying upon the decisions in the case of ITO vs. Food Specialities Ltd. 48 TTJ 621, CIT vs. English Electric Co. of India Ltd.,. 109 Taxman 401 and Saraswati Industrial Syndicate Ltd. vs. Union of India AIR 1975 SC 460, contended that excise duty on finished goods lying in the factory or bonded warehouse, was excluded while valuing the finished goods. However, the AO did not accept these contentions of the assessee and relying on the CBDT circular no.1389 of March 1981, included the excise duty for valuation of closing stock of finished goods lying in the factory. Since excise duty was not provided for in the books, the AO denied deduction u/s 43B of the Act also. Here it may be pointed out that the AO did not examine the ITA No.3228 & 3358/Ahd/2003 14 Gujarat State Fertilizers & Chemicals Ltd.
applicability of provisions of sec. 145A of the Act, inserted by the Finance (No.2) Act,1998,w.e.f 1.4.1999.
9. On appeal, the learned CIT(A) concluded as under:
"3.4 In my view this issue is covered by the Madras High Court decision in the case of English Electric Co. Ltd. vs. CIT 243 ITR 729. As mentioned by the Madras High Court, the excise duty liability is incurred on completion of manufacturing of excisable goods. It cannot be converted into an asset by including the same as part of closing sock unless a similar liability was an item deductible for the purpose of arriving at the profit for the year. As no liability is being allowed in the present case, no addition on this ground should be made. As regards stocks cleared and kept at depots and warehouses have also been correctly valued including the element of excise duty as it has been paid. There is, therefore, no inconsistency in the method of accounting. The addition made is therefore deleted."
10. The Revenue is now in appeal against the aforesaid findings of the learned CIT(A). The ld. DR pointed out that the ld. CIT(A), ignoring the provisions of sec. 145A of the Act, relied upon a decision of the Hon'ble Madras High Court in the case of English Electric Company(supra), which was relevant for the AY 1984-85 i.e for the period prior to insertion of sec. 145A of the Act . After the insertion of provisions of sec. 145A of the Act, the assessee has to adjust the valuation of purchase, sale and inventory in accordance with the statutory provisions. On the other hand, the learned AR on behalf of the assessee submitted that the issue is squarely covered by the decision of the Hon'ble Supreme Court in CIT Vs. Indo Nippon Chemicals Company Ltd.,261 ITR 275.
11. We have heard both the parties and gone through the facts of the case. We find that neither the AO nor the ld. CIT(A) examined the applicability of provisions of sec. 145A of the Act in the facts and circumstances of the case for the purpose of considering excise duty in valuing the finished goods lying in the factory. The AO relied upon an old circular no. 1389 of March ,1981 while the ld. CIT(A) relied upon the decision of the Hon'ble Madras High Court in the case of ITA No.3228 & 3358/Ahd/2003 15 Gujarat State Fertilizers & Chemicals Ltd.
English Electric Company(supra) rendered in the context of law relevant for the AY 1984-85. Even the decision of Hon'ble Apex Court in the case of Indo Nippon Chemicals Company Ltd.(supra) was in the context of law relevant for the AY 1989-90 only and the Hon'ble Bombay High Court in their decision in the said case of Indo Nippon Chemicals Company Ltd., 245 ITR 384 clearly observed that the Hon'ble High Court was not inclined to go into the provisions of section 145A of the Act, applicable w.e.f. 1.4.1999. Before proceeding further, we may have a look at the extant provisions of sec. 145A of the Act , which read as under:
"145A Method of accounting in certain cases-Notwithstanding anything to the contrary contained in s. 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head "Profits and gains of business or profession" shall be-
(a) in accordance with the method of accounting regularly employed by the assessee; and
(b) further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and conditions as on the date of valuation.
Explanation: For the purposes of this section, any tax, duty, cess or fee (by whatever name called) actually under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment."
The aforesaid provisions of the Act stipulate that the valuation of purchase and sale of goods and inventory for the purpose of computation of income from business of profession or profession shall be made on the basis of the method of accounting regularly employed by the assessee, subject to certain adjustments provided therein. The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income. These adjustments are as under:
(i) Any tax, duty, cess or fee actually paid or incurred or inputs should be added to the cost of inputs (raw materials, stores, etc.) if not already added in the books of account.ITA No.3228 & 3358/Ahd/2003 16
Gujarat State Fertilizers & Chemicals Ltd.
(ii) Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account.
(iii) Any tax, duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw materials, etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts."
11.1 The language in s. 145A of the Act is absolutely clear, when it stipulates that purchase, sales and inventory are to be adjusted and not only the closing stock. The assessee is, therefore, required to adjust the value of purchase, sales, opening stock and closing stock in accordance with the provisions of s. 145A of the Act . A mere glance at the impugned orders reveal that the ld. CIT(A) without examining the applicability of statutory provisions of sec. 145A of the Act, merely relied upon a decision of the Hon'ble Madras High Court in English Electric Company(supra) and adjudicated the issue . The AO also added the amount without ascertaining the impact of provisions of sec. 145A of the Act. As for the adjustments u/s.145A of the Act, Hon'ble Delhi High Court in the case of CIT Vs. Mahavir Aluminium Ltd. 297 ITR 77, held that while valuing closing stock, adjustment on account of excise duty and modvat credit has necessarily to be made as stipulated in section 145A of the Act. In view of the said provisions, irrespective of the method followed by an assessee for accounting, adjustment on account of excise duty has to be made. As already pointed out, the AO simply relied on the comments in the auditors' report for the adjustments in closing stock on account of excise duty, without having recourse to provisions of sec. 145A of the Act. We are of the opinion that the adjustments have to be made after considering the impact of excise duty on purchases, sale of goods and closing as well as opening inventory. The ld. CIT(A) without even appreciating the law as contained in section l45A of the Act, has simply accepted assessee's contention that whatever be the method followed by the assessee it would not affect its profits. It is not the question of what effect would be there on the profits but when the statute stipulates a particular methodology of adjustments for tax, duty, cess or fee then it has to be followed. Neither the ITA No.3228 & 3358/Ahd/2003 17 Gujarat State Fertilizers & Chemicals Ltd.
assessee nor the Assessing Officer and the ld. CIT(A) have any powers to ignore the provisions of sec. 145A of the Act or to make any variation therein. In these circumstances, especially when there is no material before us to ascertain as to whether or not the assessee has followed the method prescribed in sec. 145A of the Act nor the ld. CIT(A) or the AO recorded any findings on the applicability of these provisions while the decision relied upon by the ld. CIT(A) and the ld. AR relate to assessment years prior to insertion of the aforesaid provisions of sec. 145A of the Act , in the interest of justice and fair play , we vacate the findings of the ld. CIT(A) and restore the matter to the file of the AO with the directions to re-adjudicate the issue in accordance with law in the light of provisions of sec. 145A of the Act, after allowing sufficient opportunity of hearing to the assessee. With these directions, ground no. 2 in the appeal of the Revenue is disposed of.
12. Adverting now to ground no.2 in the appeal of the assessee, on perusal of schedule-15 of the annual report enclosed with the return, the AO noticed that the assessee debited an amount of Rs.3963.91 lacs for the repair and maintenance of the building, plant and machinery and others. To a query by the AO, seeking details of repairs and maintaining expenses exceeding Rs. 5 lacs each, the assessee submitted a copy of ledger account wherein expenses of Rs.5 lacs and above were debited. The learned AR expressed his inability to explain the exact details of the expenditure incurred on the ground that there were huge number of vouchers and receipts, which were very difficult to trace out. On examination of ledger account of repair and maintenance, the AO noticed that a number of items of expenses claimed as repair and maintenance expenses, were actually incurred either for construction of assets such as building, compound wall, toilet etc. or were incurred for expansion or renovation of the existing assets or the same had been incurred for extension, renewal or restoration of existing assets. Since the assessee did not furnish any bill or voucher while the copy of ledger account did not mention sufficient details about the nature of expenditure, on further examination of the details submitted by the ITA No.3228 & 3358/Ahd/2003 18 Gujarat State Fertilizers & Chemicals Ltd.
assessee, as detailed on page 13 to 16 of the assessment order, the AO concluded that expenditure was mainly incurred for construction of new asset like compound wall, bath rooms, toilets and for replacement of major parts of machinery. The AO was of the opinion that the most of the expenditure did not fall within the meaning of current repairs u/s 31 of the Act and instead such expenditure provided enduring advantage to the assessee. Accordingly, the AO disallowed 5% of the total expenditure on repair and maintenance ,considering the same as capital expenditure, resulting in disallowance of Rs.198.20 lacs while allowing depreciation thereon.
13. On appeal, the assessee contended that their fixed assets are of over Rs. 1875 crores and expenditure on repairs and maintenance comes to about 2% while the accounts of the assessee are audited. Accordingly, it was pleaded that the expenditure should not be treated as capital expenditure. Alternatively, it was pleaded that if this expenditure is treated as capital expenditure, depreciation should also be allowed. In the light of these submissions, the learned CIT(A) concluded as under:
"4.3 The appellant was asked to submit a note on how the capital and revenue expenditure is bifurcated in the entire corporation. They were also asked to submit any internal audit notings etc. to show whether any of the expenses have been considered for slotting as capital/ revenue expenditure. The appellant has submitted some details and a large number of invoices etc. and also relating to some of the items mentioned by the Assessing Officer in its order. All the items are considered below. The assessee explained that it is the practice of the company to prepare the Annual Budget in advance for each financial year, where the total capital expenditure as well as revenue expenditure are envisaged and provided for separately. The details of expenditure are submitted by each department of the company and the finance department allocates funds on the basis of priorities and essentialities of the expenditure. The budget drawn fully reflects capital as well as revenue expenditure to be incurred during the year. The respective departments initiate the proposal for capital/revenue expenditure, giving full details and justification for obtaining the financial approval. While scrutinizing the proposals, if the expenditure results in substantial operational saving or enduring benefit then the same is booked under capital expenditure. If they are of a routine nature for maintaining the normal operations of the company, then it is ITA No.3228 & 3358/Ahd/2003 19 Gujarat State Fertilizers & Chemicals Ltd.
charged to revenue account. This is done in case of every proposal and every expenditure. The company draws a separate capital budget for new schemes, additional facilities, modernization programmes etc. which are booked to capital accounts. Each of the components of the budget are given code numbers and financial concurrence numbers to facilitate the subsequent monitoring and recording of actual expenditure under the head 'revenue or capital'.
4.4 The company also has a full fledged internal audit department, over and above managerial audit. The repairs and maintenance are booked through purchase journals and the concerned section obtains concurrence of debit to either capital or revenue head. Any errors in booking are caught and corrected. It is therefore, stated that there is no justification for treating any of the repairs and maintenance expenditure as capital in nature.
4.5 A perusal of the audit note submitted as samples shows that the objections relate to non maintenance of bills or differences in rates for contracts given, or non-specification of rates on contracts. In short they appear more to deal with financial propriety rather than issues of capital or revenue. On going through the details of vouchers of repairs and maintenance produced, it is seen that one of the major invoices is for replacement of 4 inch diameter cross-country ammonia pipeline between main plant to Sikka unit, damaged due to cyclone. The entire amount of Rs.28,96,487/- is for replacement of the pipeline and pertains to labour charges, vehicles, site expenditure etc. Tenders have been considered and amounts granted. On the other hand there are certain items which are clearly for maintenance like inspection of 10,000 mtr. ton atmospheric storage tanks. For this inspection scaffolding is provided by GSFC and the actual inspection and maintenance work was done by M/s. Project and Development (I) Lt., Gaziabad. There are some amounts like Rs.2,98,390/- for purchase of LT Distribution Board and Rs. 6.04 lacs for purchase of batteries for replacement in power back-up system of Polymerisation unit. In addition there are numerous small entries for labour charges of various jobs, but whether such items are linked to installation of capital asset or replacement items or more maintenance work is difficult to state. However, from all the details, it is clear that there is a certain substantial element of replacement of certain items which were originally present and were part of block of assets of the company.
4.6 It is a moot point that when an item is a part of a block assets and is availing of depreciation within that block, then if it is replaced, the depreciation on the original items still continues to be drawn. The old item is neither sold nor reduced from the block of assets. However, the new replacement is treated as a revenue expenditure merely because it is treated as not part of the block of assets. This itself is ITA No.3228 & 3358/Ahd/2003 20 Gujarat State Fertilizers & Chemicals Ltd.
an illogical situation in as much as for e.g. the pipeline of GSFC being part of block of assets, if totally replaced becomes a revenue expenditure, even though the original item was a capital asset. The same item in the second round is treated as revenue when the original was clearly classified as a capital item. Even section 31 as pointed out by the Assessing Officer envisages repairs of a routine and maintenance nature, no matter what the cost but it cannot be extended to replacements of huge items, merely on the ground that nothing new has been added. A major replacement like an entire pipeline mentioned above would certainly be an item of capital expenditure and which has to be added to the block of assets because firstly, the earlier pipeline was treated as capital expenditure also and secondly the original item still continues to be present at its reduced WDV value in the block of assets. In fact the block of assets in such instances does not project the correct value of the block because a new item of much greater value has replaced the old one but the WDV would continue to be very small in comparison. On the other hand the entire claim of revenue expenditure would be allowed leading to lower profits on the one hand and a lower than correct value of the block of assets. Therefore, in my view the Assessing Officer was correct in holding that at least some of the items included in the repairs and maintenance expenditure were in the nature of capital and which should be treated as part of block of assets.
4.7 I am further inclined to uphold this view because from the system followed for demarcation of revenue and capital expenditure as submitted by the appellant and discussed in para 4.3. Each division submits its budget proposals for revenue and capital items but these revenue and capital demarcations are more linked to large and new purchases Vs routine and small expenses required to be incurred for running the units. They are not linked to the concepts of capital and revenue expenditure as understood in the Income-tax Act. Although conceivably a large part of revenue claim under repairs and maintenance has been correctly debited as revenue expenditure, I would uphold the Assessing Officer view that there certainly appear to be certain items which are replacements or new purchases which fall into the category of capital expenditure. It is also my view that the Assessing Officer has not erred by making an adhoc disallowance because looking to the voluminous details and the non linkage of various labour charges and expenses with the items on which they are spent, it is difficult to pinpoint how much of the expenditure or the specific items are capital in nature. However, the Assessing Officer has made an adhoc addition of 5% which in my view appear to be on the high side considering that the total repair and maintenance expenditure of M/s. GSFC is only 2% of the block of assets. In my view disallowance of 1% would meet the ends of justice and would cover such expenditure where large items are totally replaced or new items with enduring benefits have ITA No.3228 & 3358/Ahd/2003 21 Gujarat State Fertilizers & Chemicals Ltd.
been added. The Assessing Officer is directed to reduce the disallowance to 1% of the expenditure and grant depreciation in respect of the same at the rates applicable."
14. The assessee is now in appeal against the aforesaid findings of the ld. CIT(A),upholding the addition to the extent of 1%. The learned AR on behalf of the assessee relied upon their submissions before the learned CIT(A) while the learned DR supported the findings of the ld. CIT(A).
15. We have heard both the parties and gone through the facts of the case. We find that in the absence of complete details and bills/vouchers for the aforesaid expenditure on repair and maintenance, the AO made an estimated disallowance of 5% of the total expenditure debited to repair and maintenance account, treating the same as capital in nature while the learned CIT(A) reduced the same to 1% in the light of submissions on behalf of the assessee. The question which arises for determination in this case is whether the assessee was entitled to claim the aforestated amounts as "current repairs" under sections 30 and 31(i) of the Act or u/s 37 (1) of the Act as revenue expenditure. Though the AO referred to provisions of section 31 of the Act, stating that the expenditure was not on current repairs , before the ld. CIT(A) the assessee contended that expenditure relates to revenue items and not capital items. Whether or not expenditure is on current repairs, Hon'ble Supreme Court in the case of Ballimal Naval Kishore v. CIT [1997] 2 SCC 449, while approving the test formulated by Shri Chagla C J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom),observed as follows:
"The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure.ITA No.3228 & 3358/Ahd/2003 22
Gujarat State Fertilizers & Chemicals Ltd.
If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure."
15.1 Hon'ble Supreme Court in another case of CIT Vs. Sarvanna Spinning Mills P Ltd., 293 ITR 201(SC) while referring to the aforesaid decision in the case of Ballimal Naval Kishore(supra) observed that "An allowance is granted by clause (i) of section 31 in respect of amount expended on current repairs to machinery, plant or furniture used for the purposes of business, irrespective of whether the assessee is the owner of the assets or has only used them. The expression "current repairs" denotes repairs which are attended to when the need for them arises from the viewpoint of a businessman. The word "repair" involves renewal. However, the words used in section 31(i) are "current repairs". The object behind section 31(i) is to preserve and maintain the asset and not to bring in a new asset. In our view, section 31(i) limits the scope of allowability of expenditure as deduction in respect of repairs made to machinery, plant or furniture by restricting it to the concept of "current repairs". All repairs are not current repairs. Section 37(1) allows claims for expenditure which are not of capital nature. However, even section 37(1) excludes those items of expenditure which expressly fall in sections 30 to 36. The effect is to delimit the scope of allowability of deductions for repairs to the extent provided for in sections 30 to 36. To decide the applicability of section 31(i) the test is not whether the expenditure is revenue or capital in nature, which test has been wrongly applied by the High Court, but whether the expenditure is "current repairs". The basic test to find out as to what would constitute current repairs is that the expenditure must have been incurred to "preserve and maintain" an already existing asset, and the object of the expenditure must not be to bring a new asset into existence or to obtain a new advantage.
15.2 Hon'ble Apex Court in the aforecited case further observed that the Legislature intended to stress that under section 31(i) of the Act, the permissible deduction admissible is only for current repairs and therefore, the question as to whether the expenditure incurred by the assessee conceptually is revenue or capital in nature is not relevant for deciding the question as to whether such an expenditure comes within the etymological meaning of the expression "current repairs". In other words, even if the expenditure is revenue, it may not fall in the connotation of "current repairs" in section 31(i). It was further observed that ITA No.3228 & 3358/Ahd/2003 23 Gujarat State Fertilizers & Chemicals Ltd.
replacement generally may not fall under the expression "current repairs" but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression "current repairs".
15.3 Under section 37, a particular item of expenditure may be deductible if the expenditure does not fall within sections 30 to 36 ; that it should have been incurred in the accounting year; that it should be in respect of a business carried an by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is "revenue" or "capital in nature" would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. .
15.4 In view of the foregoing, if we now analyse the facts of the case, the assessee did not furnish the bills/vouchers of repairs and maintenance expenses exceeding Rs. 5 lacs each sought by the AO and instead, the assessee submitted only a copy of ledger account, wherein expenses of Rs.5 lacs and above were debited. The learned AR on behalf of the assessee expressed his inability to explain the exact details of the expenditure incurred on the ground that there were huge number of vouchers and receipts, which were very difficult to trace out. Since the assessee did not furnish any bill or voucher in order to ascertain the nature of the expenditure while the copy of ledger account did not mention sufficient details about the nature of transactions, on further examination of the details submitted by the assessee, the AO culled out few items of expenditure on page 13 to 16 of the assessment order and accordingly, estimated 5 % of the total expenditure, being not on current repairs, treating the same as capital in nature. On appeal, the ld. CIT(A) after analyzing the issue further reduced the estimate to 1%. Not the Revenue but the assessee is in now appeal before us. The ld. AR on behalf of the assessee merely carried us through the findings of the lower authorities and did not refer us to any material controverting the aforesaid findings of the ld. CIT(A). In the light of aforesaid ITA No.3228 & 3358/Ahd/2003 24 Gujarat State Fertilizers & Chemicals Ltd.
decisions of the Hon'ble Apex Court and considering the totality of the facts and circumstances of the case, especially when the ld. AR has not referred us to any material so as to take a different view in the matter, we have no alternative but to uphold the findings of the ld. CIT(A).Therefore, ground no. 2 in the appeal of the assessee is dismissed.
16. Ground No.5 in the appeal of the assessee relates to disallowance of provisions for doubtful debts. The AO noticed on perusal of schedule-17 to the accounts that the assessee had debited an amount of Rs.465.13 lacs on account of provisions for doubtful debts/advances. To a query by the AO, the assessee did not submit any material evidence that the debts had actually become bad or written off in the books of accounts. Accordingly, relying upon the decision of the Hon'ble Supreme Court in the case of Travancore Tea Estate Co. Ltd. vs. CIT 233 ITR 203 and the decision of the Hon'ble Madras High Court in the case of Chetinand Company Pvt. Ltd. reported in 147 ITR 724, the AO rejected the claim for deduction of provision of doubtful debts of Rs.465.13 lacs.
18. On appeal, the learned CIT(A) while relying upon the orders of the CIT(A) in assessment years 1996-97 and 1997-98, upheld the disallowance while directing the AO to allow the amount as and when actually written off.
19. The assessee is in appeal against the aforesaid findings of the learned CIT(A).At the outset, the learned AR on behalf of the assessee contended that the issue has been decided against the assessee by the ITAT vide order dated 08-08-2008 in ITA nos. 525 and 659/Ahd/2002 for the AY 1996-97 and 1997-98. On the other hand, the learned DR , while supporting the findings of the learned CIT(A),did not dispute the submissions of the ld. AR.
20. We have heard both the parties and gone through the facts of the case as also the decision referred to. We find that ITAT vide their order dated 8-8-2008 in assessee's own case in the assessment year 1996-97 and 1997-98 concluded that in view of the admitted fact that the assessee had not written off the amount ITA No.3228 & 3358/Ahd/2003 25 Gujarat State Fertilizers & Chemicals Ltd.
in question and had claimed simply on the basis of provision, the learned CIT(A) was quite justified in upholding the denial of assessee's claim for bad debts. Undisputedly, the amount has not been written off in the accounts in the year under consideration. Accordingly, in the light of the findings of the Tribunal in the preceding assessment years 1996-97 and 1997-98, we have no alternative but to uphold the findings of the learned CIT(A), in rejecting the claim of the assessee. Therefore, ground No.5 in the appeal of the assessee is dismissed.
21. Ground no.6 in the appeal of the assesseerelates to disallowance of an amount of Rs.3,05,67,622/-, being expenses incurred on abandoned LPG project written off. On perusal of schedule -17 to the accounts, AO found that the assessee claimed deduction of Rs.365.08 lacs on account of write off of an abandoned project. To a query by the AO, the assessee explained that the Project Committee in their meeting held dated 29-10-2003 accorded approval for setting up a LPG project at Sikka with 4,00,000 MTPA capacity as per viability report prepared by Projects and Development India Ltd. by installing 2 X 10,000 MT refrigerated storage tanks, unloading dociline, truck loading bays etc. at an estimated cost of Rs.124 Crores. Subsequently, due to unviability of the project, expenditure of Rs.3,05,67,622/- was written off as revenue expenditure. Since the assessee did not have any income from the said project, the AO disallowed the claim of expenditure.
23. On appeal, the assessee argued that the expenditure had been incurred in connection with expansion of business. However, the learned CIT(A) rejected these contentions of the assessee, holding as under:
"6.4 I am unable to agree with the appellant on this point because this was not even an expansion of an existing business. This was an entirely new project for distribution of LPG and for which separate facilities and space were to be created. This project was in no way linked to the existing Ammonia, Caprolactum, Fertiliser etc. units already existing. Therefore, it was not a question of extension of the business. The Assessing Officer has rightly pointed out that the project never got commissioned and no income arose from the same, therefore, all expenditure whether revenue or capital prior to commencement has to be ITA No.3228 & 3358/Ahd/2003 26 Gujarat State Fertilizers & Chemicals Ltd.
capitalized, and if written off then no claim is allowable under the head of "business income". The Assessing Officer is correct both on the facts and on the legal position of the case and hence the addition made is upheld."
22. The assessee is now in appeal against the aforesaid findings of the learned CIT(A). At the outset, the learned AR on behalf of the assessee contended that a similar issue in terms of ground no.3 in the appeal for assessment year 1996-97 in ITA No. 525/Ahd/2002 was restored to the file of the AO for re-examination. On the other hand, the learned DR did not dispute these submissions of the learned AR .
23. We have heard both the parties and gone through the facts of the case. it is well settled commercial principle of accounting that the nature of expenditure is determined at the first instance when it is incurred and its nature cannot be altered on account of subsequent events.We find that in the assessment year 1996-97 the assessee had started a new joint venture with the equity participation by the assessee and the Government of Uganda. Subsequently, the project was found not feasible and accordingly, an amount of Rs.91.20 lacs was written off. In that year also, the assessee claimed that the expenditure was for the expansion of existing business . The facts and circumstances in the year under consideration being similar to those in the assessment year 1996-97,we find merit in the contention of the learned AR on behalf of the assessee and accordingly, following the aforesaid decision of the ITAT for the AY 1996-97, vacate the findings of the learned CIT(A) and restore this issue back to the file of the AO for fresh consideration, in accordance with law, after allowing sufficient opportunity of hearing to the assessee. With these directions, ground no.6 in the appeal of the assessee is disposed of.
24. Ground no.7 in the appeal of the assessee relates to disallowance of depreciation in respect of Nylon-6 plant on the amount received and treated towards repairs. During the financial year 1996-97 relevant to assessment year 1997-98, there was a major fire in Nylon-6 Plant in the factory premises at Fertilizernagar. Against the damage, the assessee received an amount of ITA No.3228 & 3358/Ahd/2003 27 Gujarat State Fertilizers & Chemicals Ltd.
Rs.499.85 lacs from the New India Assurance Co. Ltd. towards loss of profit and Rs 724.98 lacs towards loss of assets/equipments during the assessment year 1999-2000. The amount of Rs.499.85 lacs on account of loss of profits was offered to tax under the head other income while out of the amount of Rs.724.98 lacs received from New India Assurance Co. Ltd. towards damage of assets, an amount of Rs.360.49 lacs was reduced from WDV of the assets and Rs.362.49 lacs was kept for maintenance. To a query by the AO, the assessee explained that the company had presumed that 50% of the amount receivable from the insurance company would be used for repairing the damaged equipments and 50% against equipment destroyed. It was explained in the notes attached to the return of income that the money received for the loss or damage of the property in terms of the conditions of contract, cannot be liable for capital gain or under any other provision of the Act even though the amount was credited in the profit & loss account. Inter alia, the assessee relied upon the decisions of the Hon'ble Supreme Court in the case of Vaniya Silk Mills Pvt. Ltd. vs. CIT,191 ITR 647 and Myrebond & Kyel Tea Indistries Ltd. Vs. CIT,224 ITR 589(SC) . However, the AO did not accept these contentions of the assessee and relying upon the provisions of section 43(6)(c)(B) of the Act, reduced the entire amount from WDV of the plant and machinery and accordingly disallowed 25% of the depreciation claimed by the assessee amounting to Rs.90,62,500/-.
25. On appeal, the learned CIT(A) while relying upon appellate orders for the assessment year 1996-97 and 1997-98 upheld the disallowance.
26. The assessee is now in appeal against the aforesaid findings of the ld. CIT(A).At the outset, the learned AR on behalf of the assesse contended that the issue is squarely covered by the decision dated 8.8.2008 of the Tribunal in the assessee's own case in ITA No.659 and 994/Ahd/2002 for the AYs 1997-98 & 1998-99 against the assessee On the other hand, the learned DR supported the findings of the learned CIT(A) and the aforesaid decision of the Tribunal.
27. We have heard both the parties and gone through the facts of the case as also the decision referred to by the ld. AR. We find that the ITAT in their ITA No.3228 & 3358/Ahd/2003 28 Gujarat State Fertilizers & Chemicals Ltd.
aforesaid order dated 8-8-2008 in para nos.33 to 37 and 56 and 57 decided the issue against the assessee. Respectfully following the aforesaid decision of the ITAT, we have no alternative but to reject the ground raised by the assessee. Therefore, ground no.7 in the appeal of the assessee is dismissed.
28. Ground nos. 3 & 4 in the appeal of the Revenue and ground no.1 in the appeal of the assessee, being general in nature nor any submissions having been made on these grounds, do not require any separate adjudication and ground No. 4 in the appeal of the assessee having not been pressed before us while no additional ground having been raised in terms of the residuary ground in the appeal of the assessee, all these grounds are dismissed.
29. In the result, both these appeals are partly allowed, but for statistical purposes.
Order pronounced in the open Court on 28th August, 2009 Sd/- Sd/-
(H. L. KARWA) (A.N. PAHUJA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date: 28th August,2009
LAKSHMIKANT/
Copy of the order forwarded to:
1. The assessee
2. DCIT Circle -1, Baroda
3. CIT(A)-I, Baroda
4. The CIT concerned
5. The D.R. ITAT, Ahmedabad,
6. Guard File
BY ORDER
DR / AR, ITAT, Ahmedabad