M/s. Tratec Engineers Private Limited, New Delhi V. DCIT, New Delhi

CO 244/DEL/2010

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7656 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-08-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 09-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 16-08-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR B R R KUMAR
• Assessee Lawyers: RAKESH KHIWANI
• Keywords: Gift; Depreciation; Tax effect; Capital receipt
• Section: 56

Judgement Text

ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH H NEW DELHI BEFORE SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER AND SHRI C.M. GARG, JUDICIAL MEMBER I.T.A. NO. 3086/DEL/2010 A.Y. : 2007-08 DY. COMMISSIONER OF INCOME TAX, CIRCLE 16(1), NEW DELHI VS. M/S TRATEC ENGINEERS PVT. LTD., 440, KAILASH TOWER-II, EAST OF KAILASH, NE WDELHI 110 065 (PAN/GIR NO. : AAACT 3573E) AND C.O. NO. 244/DEL/2010 (IN ITA NO. 3086/ DEL/2010) A.Y. 2007-08 M/S TRATEC ENGINEERS PVT. LTD., VS. ACIT, CIRCLE 16 (1) 440, KAILASH TOWERS, EAST OF KAILASH, NEW DELHI NEW DELHI 110 048 (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. RAKESH KHIWANI, CA DEPARTMENT BY : DR. B.R.R. KUMAR, SR. D.R. ORDER ORDER ORDER ORDER PER SHAMIM YAHYA : AM PER SHAMIM YAHYA : AM PER SHAMIM YAHYA : AM PER SHAMIM YAHYA : AM THIS APPEAL BY THE REVENUE AND CROSS OBJECTION BY T HE ASSESSEE EMANATE OUT OF ORDER OF THE LD. COMMISSIONER OF INCO ME TAX (APPEALS) DATED 15.4.2010 AND PERTAIN TO ASSESSMENT YEAR 200 7-08. 2. THE GROUND RAISED IN THE REVENUES APPEAL IS TH AT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. COMMISSIONE R OF INCOME TAX ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 2 (A) HAS ERRED IN ALLOWING THE CLAIM OF ` 8,14,368/- AS DEDUCTION UNDER SECTION 35(1)(IV) R.W.S. 35(2) OF THE INCOME TAX AC T ON SCIENTIFIC RESEARCH, IGNORING THE FINDINGS OF THE ASSESSING OF FICER THAT NO RESEARCH WORK WAS CARRIED OUT BY THE ASSESSEE. 3. AT THE THRESHOLD, WE NOTE THAT TAX EFFECT IN THIS CASE IS LESS THAN ` 3 LACS FIXED BY THE CBDT FOR FILING APPEAL BEFORE THE TRIBUNAL. AS PER INSTRUCTION NO. 3/2011 (F.NO. 279/MISC./142/2007-ITJ) DATED 09.02.2011 ISSUED BY THE CBDT, THE TAX EFFECT FOR FILING APPEAL BEFORE THE APPELLATE TRIBUNAL SHOULD BE MORE THAN ` 3 LAKHS. THE AFORESAID INSTRUCTIONS HAVE BEEN HELD TO BE APPLICABLE TO ALL PENDING APPEALS BY THE HONBLE DELHI HIGH COURT IN THE DECISIONS IN THE CASES:- (I) C.I.T. VS. M/S P.S. JAIN & CO. IN ITA NO. 179/199 1, ORDER DATED 2 ND AUGUST, 2010. (II) C.I.T. VS. DELHI RACE CLUB IN ITA NO. 128/2008, ORDER DATED 3 RD MARCH, 2011. 3.1 IN THE PRESENT CASE, ADMITTEDLY THE TAX IS BELOW ` 3 LAKHS. HENCE, THE APPEAL IS IN CONTRAVENTION OF THE AFORESAID CBDT CIRCULAR/INSTRUCTION. HENCE, THE SAME IS LIABLE TO BE DISMISSED. ACCORDINGLY, THIS APPEAL BY THE REVENUE STANDS DISMISSED FOR TAX EFFEC T. 4. ASSESSEES CROSS OBJECTION THE GROUNDS RAISED IN THE ASSESSEES CROSS OBJECTI ON READ AS UNDER:- ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 3 I) THAT THE LD. COMMISSIONER OF INCOME TAX (A) HAS GROSS LY ERRED IN SUSTAINING PART DISALLOWANCE UNDER THE FO LLOWING HEADS: S.NO. NATURE OF EXPENDITURE AMOUNT DISALLOWED RELIEF DISALLOWANCE CONFIRMED 1. TELEPHONE EXPENSES 80,000/- OUT OF 9,38,661/- 60,000/- 20,000/- 2. TRAVELLING EXPENSES 1,00,000/- OUT OF 13,73,900/- 80,000/- 20,000/- 3. VEHICLE MAINTENANCE 1,20,000/- OUT OF 11,89,886/- 1,00,000/- 20,000/- ON THE GROUNDS :- A.) IGNORING THE FACT THAT ALL THESE HAVE BEEN DECLARED AND TAXED U/S. XII H OF THE INCOME TAX ACT, 1961 (FRINGE BENEFIT TAX). B.) THERE CAN BE NO PERSONAL USE IN THE HANDS OF THE COMPANY. C.) THAT NO ADHOC DISALLOWANCES CAN BE MADE BY THE ASSESSING OFFICER AND D.) THE CLAIM OF THE ENTIRE EXPENDITURE TAXED AS FBT CANNOT BE TAXED AGAIN BY MAKING THE DISALLOWANCE. THE DISALLOWANCE THEREFORE NEEDS TO BE STRUCK DOWN. II) THE LD. COMMISSIONER OF INCOME TAX (A) HAS GROSSLY E RRED IN NOT CONSIDERING THE SUBSIDY RECEIVED DURING THE YEAR OF ` ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 4 75,000/- FROM THE SATE GOVERNMENT AGAINST THE PURCHA SE OF GENERATOR IN F.Y. 1996-97 AS CAPITAL RECEIPT AND HAS FURTHER ERRED IN DIRECTING THE SAME TO BE REDUCED FROM THE C OST OF SPECIFIED ASSET TO ALLOW THE DEPRECIATION, IGNORING THE JUDGMENET OF THE HONBLE SUPREME COURT IN C.I.T. VS. P.J. CHEMICALS LTD. (1994) 121 CTR (SC) 201. THE SUBSI DY RECEIVED IS A NON-TAXABLE RECEIPT IN THE HANDS OF T HE ASSESSEE AS CLAIMED IN THE RETURN AND THE CLAIM OF THE ASSESSEE, IT IS PRAYED, NEEDS TO BE ACCEPTED. III) THE ASSESSEE CRAVES INDULGENCE TO ADD, AMEND, ALTER, MODIFY OR TO REVISE ALL OR NAY OF THE GROUNDS OF CRO SS OBJECTION RAISED ABOVE. 5. APROPOS ISSUE OF DISALLOWANCE OF EXPENDITURE: IN THIS REGARD ASSESSING OFFICER MADE THE DISALL OWANCE UNDER SEVERAL HEADS AS UNDER:- S.NO. NATURE OF EXPENDITURE AMOUNT DISALLOWED REMARKS OF THE ASSESSING OFFICER 1 GIFTS AND REWARDS 34,556/- NOT INCURRED FOR BUSINESS PURPOSE 2 TELEPHONE EXPENSES 80,000/- OUT OF 9,38,661/- PERSONAL USE OF TELEPHONES 3 TRAVELLING EXPENSES 1,00,000/- OUT OF 13,73,900/- NON-BUSINESS PURPOSE; VOUCHERS DO NOT CONTAIN SPECIFIC DETAILS. ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 5 4 VEHICLE MAINTENANCE 1,20,000/- OUT OF 11,89,886/- NON BUSINESS PURPOSE; UNVERIFIABLE NATURE OF VOUCHERS. 6. BEFORE THE LD. COMMISSIONER OF INCOME TAX (A) ASS ESSEE INTER- ALIA SUBMITTED THAT FOR THE PRECEDING YEARS THE DISA LLOWANCE WAS CONFIRMED AFTER GIVING SUBSTANTIAL RELIEF TO THE ASS ESSEE. THE COMPARATIVE TABLE OF THE ALLOWANCES AND DISALLOWANCE WAS AS UNDER FOR THE ASSTT. YEAR 2006-07. S.NO. NATURE OF EXPENDITURE AMOUNT DISALLOWED RELIEF DISALLOWANCE CONFIRMED 1. GIFTS AND REWARDS 13,603/- 13,603/- NIL 2. TELEPHONE EXPENSES 80,000/- OUT OF 8,63,691/- 60,000/- 20,000/- 3. TRAVELLING EXPENSES 70,000/- OUT OF 7,17,282/- 60,000/- 10,000/- 4. VEHICLE MAINTENANCE 1,20,000/- OUT OF 12,17,738/- 1,00,000/- 20,000/- 6.1 CONSIDERING THE ABOVE FINDING OF THE LD. COMMI SSIONER OF INCOME TAX (A), LD. COMMISSIONER OF INCOME TAX (A) IN THE PRESENT ASSESSMENT YEAR RESTRICTED THE DISALLOWANCES AS UND ER:- S.NO. NATURE OF EXPENDITURE AMOUNT DISALLOWED DISALLOWANCE CONFIRMED RELIEF 1. GIFTS AND REWARDS 34,556/- NIL 34,556/- 2. TELEPHONE 80,000/- 20,000/- 60,000/- ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 6 EXPENSES OUT OF 8,63,691/- 3. TRAVELLING EXPENSES 1,00,000/- 20,000/- 80,000/- 4. VEHICLE MAINTENANCE 1,20,000/- 20,000/- 1,00,000/- 7. AGAINST THE ABOVE ADDITIONS, ASSESSEE HAS FILED CROSS OBJECTION BEFORE US. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORDS. WE FIND THAT IMPUGNED DISALLOWANCES WERE MADE BY THE ASSESSING OFFICER ON THE GROUND THAT PERSONAL USE OF THE FA CILITY CANNOT BE RULED OUT. NO SPECIFIC DEFECT SHOWING THAT CONCERNED EXPENDITURE WAS INCURRED FOR PERSONAL USE OF THE ASSESSEE HAS BEEN POINTED OUT BY THE ASSESSING OFFICER. UNDER THE CIRCUMSTANCES, IN OU R CONSIDERED OPINION, THE ADDITIONS IN THIS REGARD ARE ONLY ON ESTIMATE BASIS WITHOUT ANY DOLLOP OF COGENCY. UNDER THE CIRCUMSTANCES, WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDI TIONS IN THIS REGARD. 9. APROPOS ISSUE OF SUBSIDY OF ` 75,000/- ON THIS ISSUE ASSESSING OFFICER HELD THAT FROM TH E DETAILS FURNISHED BY THE ASSESSEE, IT HAS BEEN FOUND THAT T HE ASSESSEE HAS RECEIVED A SUBSIDY FROM THE HARYANA STATE GOVERNMENT ON THE PURCHASE OF GENERATOR SET. ASSESSING OFFICER OPIN ED THAT ASSESSEE ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 7 WAS REQUIRED TO REDUCE THE COST OF GENERATOR SET BY THIS AMOUNT AND THEN CLAIM THE DEPRECIATION ON THE BALANCE AMOUNT. HOWEVER, THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE AP EX COURT IN THE CASE OF C.I.T. VS. P.J. CHEMICALS LTD. (1994) 121 CT R SC 201 AND HAS NOT REDUCED THE COST OF GENERATOR SET. THE ASSESS EE HAS ALSO NOT OFFERED THIS AMOUNT AS INCOME FROM OTHER SOURCES. ASSESSEE IN THIS REGARD MADE THE FOLLOWING SUBMISSIONS BEFORE THE ASSE SSING OFFICER. A. THE CAPITAL SUBSIDY HAS BEEN RECEIVED FROM THE HARYANA STATE GOVT. ON THE BASIS OF THE APPLICATION MADE ON 30.7.1996 BUT THE SAME HAS BEEN RECEIVED DURING THE YEAR. THE SUBSIDY HAS BEEN GRANTED BY THE STATE GOVERNMENT ON THE PURCHASE OF THE GENERATOR SET. THE DOCUMENTS OF THE CLAIM MADE AND THE RELEVANT CORRESPONDENCE ARE ENCLOSED. B. THE RECEIPT OF SUBSIDY FROM THE STATE GOVT. HAS BEEN CLAIMED TO BE NON-TAXABLE AND THE SAME IS NOT TO BE DEDUCTED FROM THE COST OF THE ASSETS TO DETERMINE THE ACTUAL COST FOR THE PURPOSES OF CALCULATING THE DEPRECIATION. IN THIS REGARD WE PLACE RELIANCE ON THE SC ORDER IN THE CASE OF ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 8 C.I.T. VS. P.J. CHEMICALS LTD. (1994) 121 CTR (SC) 201. COPY OF THE SUPREME COURT ORDER IS ENCLOSED. THE SUPREME COURT HAS HELD. THE EXPRESSION ACTUAL COST NEEDS TO BE INTERPRETED LIBERALLY. THE SUBSIDY OF THE NATURE IN QUESTION DOES NOT PARTAKE OF THE INCIDENTS WHICH ATTRACT THE CONDITIONS FOR THEIR DEDUCTIBILITY FROM ACTUAL COST. GOVERNMENT SUBSIDY, IT IS NOT UNREASONABLE TO SAY, IS AN INCENTIVE NOT FOR THE SPECIFIC PURPOSE OF MEETING A PORTION OF THE COST OF THE ASSETS, THOUGH QUANTIFIED AS OR GEARED TO A PERCENTAGE OF SUCH COST. IF THAT BE SO, IT DOES NOT PARTAKE OF THE CHARACTER OF A PAYMENT INTENDED EITHER DIRECTLY OR INDIRECTLY TO MEET THE ACTUAL COST. THEREFORE, SUBSIDIES GRANTED TO INDUSTRIES ON A PERCENTAGE OF THE CAPITAL COST ARE NOT DEDUCTIBLE FROM THE ACTUAL COST UNDER SECTION 43(1) FOR PURPOSE OF CALCULATION OF DEPRECIATION. ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 9 C. IN VIEW OF THE ORDER OF THE SUPREME COURT IN P.J. CHEMICALS THE SUBSIDY RECEIVED HAS NOT BEEN REDUCED FROM THE COST OF THE ASSETS AND AS THERE IS NO OTHER PROVISION TO TAX THE SUBSIDY THEREFORE IT HAS BEEN REDUCED FROM THE TOTAL TAXABLE INCOME COMPUTED. 9.1 THE ASSESSING OFFICER DID NOT FIND THE ABOVE S UBMISSIONS OF THE ASSESSEE COGENT. ASSESSING OFFICER HELD THAT IF THE ASSESSEE APPLIED THE RATIO OF THE HONBLE APEX COURT IN THE CASE OF PJ CHEMICALS, IT WAS REQUIRED TO OFFER THE RECEIPT IN THE FORM OF THE SUB SIDY AS INCOME FROM OTHER SOURCES, BUT THE SAME WAS NOT DONE. ASSESSI NG OFFICER FURTHER HELD THAT AS PER THE PROVISIONS OF SECTION 41 OF TH E I.T. ACT THE SAID BENEFITS ARE LIABLE FOR TAXATION AND THE ASSESSEE I S BOUND TO ACCOUNT FOR THE SAID SUBSIDY AS TAXABLE INCOME. ASSESSING O FFICER FURTHER NOTED THAT ASSESSEE HAS RECEIVED A SUM OF ` 75,000/- ON ACCOUNT OF SUBSIDY RECEIVED TOWARDS 62.5 KVA GENERATOR SET. A SSESSING OFFICER FURTHER HELD THAT IF THE ASSESSEE BY RELYING ON TH E DECISION OF THE HONBLE SUPREME COURT IS NOT REDUCING THE COST OF T HE GENERATOR SET, IT IS DUTY BOUND TO ACCOUNT FOR THIS RECEIPT EITHER IN COME U/S. 41 OR UNDER THE RESIDUARY HEAD INCOME FROM OTHER SOURCES IN ACCO RDANCE THE PROVISION OF SECTION 56 OF THE I.T. ACT. THE A SSESSING OFFICER ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 10 CONCLUDED THAT SINCE THE ASSESSEE HAS FAILED TO OFF ER THIS INCOME THEREFORE, THE SUBSIDY OF ` 75000/-, WAS HEREBY ADD ED TO THE INCOME OF THE ASSESSEE. 10. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCOME TAX (A) NOTED THAT THE SUBSIDY WAS A CAPITAL RECEIPT AN D FOR PURCHASE OF THE GENERATOR SET, THE SAME SHOULD GO TO REDUCE THE COS T OF ACQUISITION. HE HELD THAT ASSESSING OFFICER IS HEREBY DIRECTED TO REDUCE ` 75000/- FROM THE BLOCK ASSETS (WHICH INCLUDED GENERATOR SET) AND ALLOW DEPRECIATION AS PER THE RATIO LAID DOWN IN THE CAS E OF P.J. CHEMICALS LTD. (SUPRA). 11. AGAINST THE ABOVE ORDER THE ASSESSEE HAS FILED THE CROSS OBJECTION BEFORE US. 12. WE HAVE HEARD THE RIVAL CONTENTIONS IN LIGHT OF THE MATERIAL PRODUCED AND PRECEDENT RELIED UPON. LD. COUNSEL O F THE ASSESSEE RELIED UPON THE HONBLE APEX COURT JUDGEMENT IN THE CASE OF C.I.T. VS. PONNI SUGARS & CHEMICALS 219 CTR 205. 12.1 LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND RELIED UPON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SAHNEY STEEL AND PRESS WORKS LTD VS. C.I.T. 228 ITR 0253. IN THIS C ASE, WE FIND THAT FOLLOWING WAS HELD :- ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 11 INCOME OR CAPITAL - SUBSIDY RECEIVED FROM GOVERNMEN T GENERAL PRINCIPLES PAYMENTS FROM PUBLIC FUNDS TO A SSIST ASSESSEE IN CARRYING ON TRADE OR BUSINESS ARE REVE NUE RECEIPTS SUBSIDY GRANTED TO ASSESSEES AFTER THEY STARTED PRODUCTION - REFUND OF SALES TAX, SUBSIDIES ON POW ER CONSUMED AND EXEMPTION FROM PAYMENT OF WATER CHARGES, ETC. AMOUNTS RECEIVED WERE PRODUCTION INCENTIVES AND OPERATIONAL SUBSIDIES AND NOT CAPITAL SUBSIDIES S UBSIDY PAYMENT WERE REVENUE IN NATURE INCOME TAX ACT, 196 1. 13. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. I N OUR CONSIDERED OPINION, CASE LAW RELIED UPON BY LD. DEPARTMENTAL RE PRESENTATIVE, IS NOT APPLICABLE ON THE FACTS OF THE PRESENT CASE. I N THE SAID CASE THE MATTER RELATED TO RECEIPTS WHOSE CHARACTER WAS PRODU CTION INCENTIVE OR OPERATIONAL SUBSIDY WHICH IS NOT THE CASE IN THE PR ESENT ONE. 13.1 THE CASE LAW FROM THE APEX COURT IN THE CASE OF P.J. CHEMICALS (SUPRA) IS ALSO NOT APPLICABLE ON THE FA CTS OF THE CASE. IN THE SAID CASE THE SUBSIDY WAS WITH REFERENCE TO A P ERCENTAGE OF CAPITAL COST, WHICH IS NOT THE CASE HERE. ITA NO. 3086/DEL/2010 & CO NO. 244/DEL/2010 12 13.2 IN THE CASE OF PONNI SUGAR MILLS AND CHEMICALS (SUPRA) THE HONBLE APEX COURT HAD HELD THAT IT IS THE OBJECT F OR WHICH SUBSIDY IS GIVEN, WHICH DETERMINES THE NATURE OF INCENTIVE SUBS IDY. 14. EXAMINING THE PRESENT CASE ON THE TOUCHSTONE OF ABOVE MENTIONED APEX COURT DECISION, WE FIND THAT THE SU BSIDY IN THE CASE WAS GRANTED BY THE STATE GOVERNMENT ON THE PURCHAS E OF GENERATOR SET. HENCE, THE SAME IS CAPITAL SUBSIDY AND SHOULD GO ON TO REDUCE THE COST OF ASSET. HENCE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A). HENCE, WE UPHOLD THE SAME. 15. IN THE RESULT, THE REVENUES APPEAL STANDS DISMI SSED AND ASSESSEES CROSS OBJECTION IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27/8/2012. SD/ SD/ SD/ SD/- -- - SD/ SD/ SD/ SD/- -- - [C.M. GARG] [C.M. GARG] [C.M. GARG] [C.M. GARG] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL JUDICIAL JUDICIAL JUDICIAL MEMBER MEMBER MEMBER MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE:- 27/8/2012 SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES