TESSITURA MONTI INDIA P.LTD, MUMBAI V. DCIT 8(3),

CO 99/MUM/2010

• Counselvise Citation: [2011] 122 COUNSELVISE.COM (IT) 5995 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 28 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 27-04-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Next Hearing Date: 15-03-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 29-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUSUM INGLE PER R K
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 37(1); 32

Judgement Text

1 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI MUMBAI MUMBAI MUMBAI J JJ J BENCH BENCH BENCH BENCH MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI MUMBAI BENCHES, MUMBAI BEFORE SHRI BEFORE SHRI BEFORE SHRI BEFORE SHRI D MANMOHAN, VP & SHRI D MANMOHAN, VP & SHRI D MANMOHAN, VP & SHRI D MANMOHAN, VP & SHRI R K PANDA, AM R K PANDA, AM R K PANDA, AM R K PANDA, AM ITA NO. ITA NO. ITA NO. ITA NO. 7404/MUM/2007 7404/MUM/2007 7404/MUM/2007 7404/MUM/2007 (ASST YEAR (ASST YEAR (ASST YEAR (ASST YEAR 2 22 200 0000 004 44 4- -- -05 0505 05) )) ) TESSITURA MONTI INDIA P LTD 401 TRADE AVENUE SUREN ROAD ANDHERI (EAST) MUMBAI 20 VS THE ASST COMMR OF INCOME TAX RANGE 8(3), MUMBAI ( (( ( APPELLANT APPELLANT APPELLANT APPELLANT ) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) PAN NO. PAN NO. PAN NO. PAN NO.AABCT3524E AABCT3524E AABCT3524E AABCT3524E & && & CROSS OBJECTION NO.99/MUM/20 CROSS OBJECTION NO.99/MUM/20 CROSS OBJECTION NO.99/MUM/20 CROSS OBJECTION NO.99/MUM/2010 1010 10 THE DY COMMR OF INCOME TAX RANGE 8(3), MUMBAI VS TESSITURA MONTI INDIA P LTD 401 TRADE AVENUE SUREN ROAD ANDHERI (EAST) MUMBAI 20 ( (( ( CROSS OBJECTOR CROSS OBJECTOR CROSS OBJECTOR CROSS OBJECTOR ) )) ) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) A SSESSEE BY SHRI NITESH JOSHI REVENUE BY SMT KUSUM INGLE-CIT-DR PER R K PANDA, AM PER R K PANDA, AM PER R K PANDA, AM PER R K PANDA, AM THIS APPEAL FILED BY THE ASSESSEE AND THE CROSS OBJ ECTION FILED BY THE REVENUE ARE DIRECTED AGAINST THE ORDER DATED 4.10.2 007 OF THE CIT(A) XXIX, MUMBAI RELATING TO ASSESSMENT YEAR 2004-05. FOR T HE SAKE OF CONVENIENCE, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 2 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 ITA NO.7404/MUM/2007 (BY THE ASSE ITA NO.7404/MUM/2007 (BY THE ASSE ITA NO.7404/MUM/2007 (BY THE ASSE ITA NO.7404/MUM/2007 (BY THE ASSESSEE) SSEE) SSEE) SSEE) 2 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF DYED YARN SHIRTING FABRIC. IT HAD FILED ITS RETURN OF INCOME DECLARING LOSS OF RS. 5,04,31,520/-. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT TH E ASSESSEE HAS DEBITED AN AMOUNT OF RS. 3,93,79,324/- UNDER THE HEAD TRAININ G AND SELECTION FEES. THE ASSESSING OFFICER ASKED THE ASSESSEE TO JUSTIFY ITS CLAIM BY GIVING DETAILS OF BILLS FOR TRAINING AND SELECTION FEE PAID. THE ASSESSEE FILED A COMPUTER GENERATED SHEET WHEREIN AN AMOUNT OF RS. 78,03,930/- WAS SHOW N AS INCURRED DURING THE YEAR AND THE BALANCE OF RS. 3,15,75,394/- WAS FOUN D TO BE INCURRED PRIOR TO THE DATE OF PRODUCTION. FURTHER, THE ASSESSEE VIDE LET TER DATED 7.11.2006 HAS SUBMITTED BEFORE THE ASSESSING OFFICER AS UNDER; THE COMPANY WAS SET UP FOR MANUFACTURING OF 60,00, 000 METERS OF YARD DYED SHIRTING FABRIC AND STARTED ITS COMMERCIAL PRO DUCTION ON 8 TH APRIL 2003. DURING IMPLEMENTATION OF THE PROJECT, THE COMPANY ENTERED INTO AN AGREEMENT WITH WERNER INTERNATIONAL USA, A REPORTED TEXTILE CONSULTANT FIRM SPECIALIZED IN RECRUITMENT AND TRADING OF WORK ERS. ACCORDINGLY, WERNER INTERNATIONAL DEPUTED THEIR CONSULTANTS FROM THE USA AND OTHER COUNTRIES ALONG WITH INDIAN CONSULTANTS WHO DID STU DY ON REQUIREMENT OF STAFF, MADE WORKERS AVAILABLE, SELECTED ABOUT 250 W ORKERS BY APPLYING SPECIAL TEST AND TRAINING THEM FOR ACHIEVING REQUIR ED QUALITY PARAMETERS AND QUANTITY. THE COMPANY HAD INCURRED EXPENSES OF RS. 3,93,79,32 4/- ON SUCH TRAINING OF THIS AN AMOUNT OF RS. 3,15,75,394/- WAS INCURRED PRIOR TO THE DATE OF PRODUCTION AND RS. 78,03,930/- WAS INCURRED AFTER COMMENCEMENT OF THE PRODUCTION. SINCE EXPENSES ARE IN REVENUE NATURE, T HE COMPANY DECIDED 3 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 TO TREAT IT AS DEFERRED REVENUE EXPENDITURE TO BE W RITTEN OFF OVER A PERIOD OF 36 MONTHS. 2.1 HOWEVER, THE CONTENTION OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO ON THE GROUND THAT THE ASSESSEE ITSELF HAS CLAIMED THA T THESE WERE INCURRED PRIOR TO DATE OF PRODUCTION; SO IT CANNOT BE ALLOWED AS REVE NUE EXPENDITURE DURING THE YEAR. WHILE COMING TO THIS CONCLUSION, THE ASSESSIN G OFFICER RELIED ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZERS LTD VS CIT REPORTED IN 227 ITR 172. HE, ACCORDINGLY DISALLOWED AN AMOUNT OF RS. 3,15,75,394/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE AO FURTHER NOTED THAT DEDUCTION U/S 32(1) OF THE AC T CAN BE ALLOWED ONLY ON TANGIBLE AND UN-TANGIBLE ASSETS. SINCE THE ASSESSEE HAS NOT CREATED ANY ASSETS, THE DEPRECATION WAS NOT ALLOWED ON THIS AMOUNT. 2.2 BEFORE THE CIT(A), THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE THE ASSESSING OFFICER AND SUBMITTED THAT THE SAID EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND ACCORDINGLY, IS ALLOWABLE AS DEDUCTION U/S 37(1) OF THE I T ACT. FURTHER, THE AFORESAID EXPENDITURE ON TRAINING EXPENSES COULD NOT HAVE BEE N CLAIMED AS A DEDUCTION IN THE YEAR IN WHICH IT WAS INCURRED SINCE THE ASSESSE E DID NOT HAVE ANY BUSINESS ACTIVITY IN THE SAID YEAR. 2.3 ALTERNATIVELY, IT WAS SUBMITTED THAT IN CASE THE ENTIRE EXPENDITURE OF RS. 3,15,75,394/- IS NOT ALLOWED IN THE ABOVE ASSES SMENT YEAR THEN DEPRECIATION 4 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 ON THE SAID AMOUNT SHOULD BE GRANTED. IT WAS SUBMIT TED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD SUBMITTED WITHOUT PREJUDICE A STATEMENT SHOWING COMPUTATION OF DEPRECIATION AFTE R CAPITALISATION OF TRAINING EXPENSES. IT WAS BROUGHT TO THE NOTICE OF THE CIT( A) THAT THE EXPENDITURE INCURRED UNDER VARIOUS HEADS AGGREGATED TO RS. 5,2 7,57,445/, WHICH HAVE BEEN ALLOCATED TO PLANT & MACHINERY AND BUILDINGS. A S TATEMENT SHOWING ALLOCATION OF THE SAID EXPENSES AND DEPRECIATION CLAIMED THEREON AS PER THE RETURN OF INCOME WAS SUBMITTED AND IT WAS SUBMITTED THAT DEPRECIAT ION HAS BEEN GRANTED ON THE AFORESAID EXPENSES CAPITALIZED. IT WAS ACCORDINGLY SUBMITTED THAT INCIDENTAL EXPENDITURE INCURRED DURING THE CONSTRUCTION PERIOD SHOULD BE ALLOCATED TO THE FIXED ASSETS AND DEPRECIATION BE ALLOWED U/S 32 OF THE I T ACT. 3 THE CIT(A) WAS ALSO NOT CONVINCED WITH THE EXPL ANATION GIVEN BY THE ASSESSEE. HE NOTED THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS ON 8 TH APRIL 2003 AND FILED ITS RETURN OF INCOME FOR THE FIRST T IME FOR ASSESSMENT YEAR 2004-05 DECLARING LOSS OF RS. 5,04,31,520/-. FROM THE VAR IOUS DETAILS FILED BY THE ASSESSEE, HE NOTED THAT AN AMOUNT OF RS. 3,15,32,50 5/- WAS INCURRED BETWEEN THE PERIOD 1.4.2002 TO 31.3.2003 AND ANOTHER AMOUN T OF RS. 6,51,089/- WAS INCURRED BETWEEN THE PERIOD 1.4.2003 TO 76.4.2003. THE BALANCE AMOUNT WAS INCURRED FROM 8.4.2003 TO 31.3.2004. THE AMOUNT HA S BEEN PAID TO M/S WERNER INTERNATIONAL, USA FOR TRAINING. HE NOTED THAT THE EXPENDITURE WAS NOT INCURRED DURING THE YEAR AND THE EXPENDITURE WAS CRYSTALLIZE D IN THE EARLIER YEAR. SINCE THE AMOUNT OF RS.3,15,75,394/- WAS INCURRED IN EARL IER YEAR; THEREFORE, THE SAME CANNOT BE ALLOWED AS REVENUE EXPENDITURE FOR THE CU RRENT YEAR. ACCORDING TO HIM, IT IS TRITE LAW THAT ONLY THE EXPENDITURE OF T HE YEAR IS ALLOWABLE DURING THE 5 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 YEAR AGAINST THE INCOME OF THE YEAR. HE ALSO REJEC TED THE ALTERNATE CONTENTION TAKEN BY THE ASSESSEE THAT IF THE EXPENDITURE IS NO T ALLOWED AS REVENUE EXPENDITURE THEN THE SAME SHOULD BE ALLOWED TO BE C APITALIZED AND DEPRECIATION SHOULD BE ALLOWED. WHILE DOING SO, HE NOTED THAT T HE ASSESSING OFFICER HAD ASKED THE ASSESSEE TO FILE THE COMPLETE DETAILS OF THE EXPENDITURE INCURRED UNDER THIS HEAD WITH EVIDENCES, WHICH WAS NOT FURNISHED A ND ONLY A COMPUTER GENERATED SHEET WAS FURNISHED. SINCE THE ASSESSING OFFICER HAD NO OCCASION TO EXAMINE THE GENUINENESS OF THE PAYMENT; THEREFORE, NO DIRECTION CAN BE ISSUED TO THE ASSESSING OFFICER TO ALLOW CAPITALIZATION OF THE CLAIM OF EXPENDITURE. FURTHER, THE PAYMENT HAS BEEN MADE TO M/S WERNER IN TERNATIONAL, USA AND THE PAYMENT WAS TO BE MADE @ US $ 6500 PER CONSULTANT MAN WEEK OVER AND ABOVE THE OTHER RELATED EXPENDITURE. SINCE THE PAYMENT W AS MADE TO A FOREIGN CONSULTANT AND SINCE THE ASSESSEE HAS NOT INFORMED WHETHER THE VARIOUS PROVISIONS RELATING TO PAYMENT MADE TO THE FOREIGN CONSULTANT HAD BEEN COMPLIED WITH AS PER PROVISIONS OF SEC. 40(A); THER EFORE, THE CLAIM OF THE ASSESSEE IS NOT ALLOWABLE. HE, ACCORDINGLY, REJECTE D BOTH THE CLAIMS OF THE ASSESSEE. 4 AGGRIEVED BY SUCH ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL HERE BEFORE US WITH THE FOLLOWING GROUNDS; 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF TRAIN ING EXPENSES AMOUNTING TO RS. 3,15,75,394/-. 2) WITHOUT PREJUDICE TO THE ABOVE GROUND OF APPAL, AND IN THE ALTERNATIVE; I) THE CIT(A) ERRED IN REJECTING THE ALTERNATIVE CONTE NTION OF THE APPELLANT THAT THE SAID EXPENDITURE SHOULD BE CAPIT ALIZED AS 6 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 PART OF PREOPERATIVE EXPENDITURE AND DEPRECIATION O UGHT TO BE GRANTED THEREON.; II) THE CIT(A) ERRED IN REJECTING THE CAPITALIZATION OF THE AFORESAID EXPENDITURE ON THE GROUND THAT THE ASSESS ING OFFICER HAD NO OCCASION TO EXAMINE THE GENUINENESS OF THE PAYMENT; III) THE CIT(A) ERRED IN HOLDING THAT THE CLAIM FOR THE AFORESAID EXPENDITURE IS NOT ALLOWABLE EITHER AS REVENUE OR C APITAL EXPENDITURE SINCE THE APPELLANT HAD NOT INFORMED WH ETHER THE PROVISIONS OF SEC. 40(A) HAD BEEN COMPILED WITH . 5 THE REVENUE HAS TAKEN THE FOLLOWING GROUNDS IN IT S CROSS OBJECTION: I ) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE ASSESSEE HAD NOT SUBMITTED THE DETAILS AND EVIDENCE S OF EXPENSES IN SUPPORT OF GENUINENESS OF THE CLAIM II) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE PROVISIONS OF SEC 40(A) HAVE NOT BEEN COMPLIED WITH BY THE ASSESSEE. 6 THE LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT AL THOUGH PART OF THE EXPENDITURE WAS INCURRED PRIOR TO COMMENCEMENT; HO WEVER, SINCE THE BUSINESS COMMENCED ONLY DURING THE YEAR; THEREFORE, THE ENTI RE EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE DURING THE YEAR. 6.1 IN HIS ALTERNATE CONTENTION, HE SUBMITTED THAT DEPRECIATION ON THIS EXPENDITURE SHOULD BE ALLOWED, IF THE SAME IS TREAT ED AS CAPITAL IN NATURE. HE SUBMITTED THAT THE ASSESSEE HAS CAPITALIZED THE OTH ER EXPENDITURE IN THE RATIO OF THE COST OF THE ASSETS; THEREFORE, THE SAME FORMULA MAY BE APPLIED FOR CAPITALIZATION OF TRAINING EXPENDITURE. HE SUBMITT ED THAT IT IS RELATABLE TO THE PLANT & MACHINERY; THEREFORE, THE SAME SHOULD BE AL LOCATED TO PLANT AND MACHINERY. 7 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 6.2 REFERRING TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF SHRIRAM REFRIGERATION INDUSTRIES LTD VS CIT REPORTE D IN 127 ITR 746, HE SUBMITTED THAT IN THE LIGHT OF THE DECISION OF THE HONBLE DE LHI HIGH COURT, THE ENTIRE EXPENDITURE SHOULD BE ALLOWED IN THE ASSESSMENT YEA R 2004-5 EVEN THOUGH THE SAME HAS BEEN INCURRED DURING THE ASSESSMENT YEAR 2 003-04. 6.3 THE LD COUNSEL FOR THE ASSESSEE, REFERRING TO P AGES 27 TO 36 OF THE PAPER BOOK, DREW THE ATTENTION OF THE BENCH TO THE COPY O F THE AGREEMENT WITH WERNER INTERNATIONAL MANAGEMENT CONSULTANT. REFERRING TO PAGE 34 OF THE PAPER BOOK, HE DREW THE ATTENTION OF THE BENCH TO THE CLAUSE OF THE AGREEMENT TOWARDS THE FEE TO BE PAID TO WERNER INTERNATIONAL @ US $ 6500 PER CONSULTANT MAN WEEK FOR 24 WEEKS. HE SUBMITTED THAT THE ASSESSING OFFICER H AS NEVER ASKED THE ASSESSEE TO FURNISH THE DETAILS. REFERRING TO PARA 4.2 AT P AGE 2 OF THE ASSESSMENT ORDER, HE SUBMITTED THAT THE ASSESSING OFFICER HAS ASKED T HE ASSESSEE TO GIVE DETAILS OF BILLS FOR TRAINING AND SELECTION FEES PAID AFTER CO MMERCIAL PRODUCTION. HE SUBMITTED THAT WHEN THE ASSESSING OFFICER HIMSELF H AS ALLOWED THE PAYMENT MADE AFTER THE COMMENCEMENT OF THE BUSINESS, THE CI T(A) CANNOT SAY THAT THE ASSESSEE HAS NOT FILED THE DETAILS. 6.4 SO FAR AS THE OBJECTION OF THE CIT(A) THAT IT IS NOT KNOWN WHETHER THE TAX HAS BEEN DEDUCTED FROM THE PAYMENT MADE TO THE FORE IGN CONSULTANT IN CONVERTIBLE FOREIGN EXCHANGE, THE LD COUNSEL FOR TH E ASSESSEE REFERRED TO PAGES 8 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 37 & 38 OF THE PAPER BOOK AND SUBMITTED THAT FULL D ETAILS REGARDING THE INVOICE NO. DATE OF REMITTANCE AND THE AMOUNT OF TDS DEDUCT ED WERE FURNISHED BEFORE THE ASSESSING OFFICER. 6.5 REFERRING TO THE DECISION OF THE HONBLE CALC UTTA HIGH COURT IN THE CASE OF CIT VS NEW CENTRAL JUTE MILLS REPORTED IN 135 ITR 736, HE SUBMITTED THAT THE HONBLE HIGH COURT IN THE SAID DECISION HAS HELD TH AT INTEREST PAID, FOR THE PERIOD PRIOR TO THE COMMENCEMENT OF PRODUCTION ON AMOUNTS BORROWED BY THE ASSESSEE FOR THE ACQUISITION AND INSTALLATION OF P LANT AND MACHINERY FORMS PART OF THE ACTUAL COST OF THE ASSETS WITHIN THE MEANIN G OF SEC. 43 OF THE I T ACT AND THEREFORE, ENTITLED TO DEPRECIATION AND DEVELOPMEN T REBATE U/S 33 & 34 OF THE I T ACT, 1961. 6.6 REFERRING TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HABIB HUSSAIN VS CIT REPORTED IN 48 ITR 859, HE S UBMITTED THAT THE AMOUNT PAID TO ANOTHER FOR HELPING ASSESSEE IN PREPARING PLANS, SECURING PERMITS FOR CEMENT, STEEL, PETROL, IMPORT LICENCES, ETC., FORMS PART OF ACTUAL COST. 6.7 REFERRING TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS BELAPUR CO LTD REPORTED IN 161 ITR 516 HE SUBMITTED THAT THE HONBLE HIGH COURT, IN THE SAID DECISION HAS HELD THAT FOR EIGN TOUR EXPENDITURE INCURRED BY OFFICERS OF THE ASSESSEE COMPANY FOR PURCHASE OF CAPITAL ASSET AND STUDY OF DIFFUSER MAKING HAS TO BE CAPITALIZED FOR THE PURPO SE OF DEPRECIATION AND 9 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 DEVELOPMENT REBATE. HE ACCORDINGLY SUBMITTED THAT THE ENTIRE EXPENDITURE SHOULD BE ALLOWED AS REVENUE EXPENDITURE OR ALTERNA TIVELY, THE ASSESSEE SHOULD BE ENTITLED TO DEPRECIATION. 6.8 THE LD DR, ON THE OTHER HAND STRONGLY RELIED ON THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A. RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILIZ ERS LTD VS CIT REPORTED IN 227 ITR 172 AND THE DECISIONS REPORTED IN 158 ITR 25 AN D IN THE CASE OF ORIENT COSMETICS LTD V DCIT REPORTED IN 74 ITD 135 SHE SU BMITTED THAT THE SAME CANNOT BE ALLOWED AS REVENUE EXPENDITURE. REFERRING TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF SHRIRAM REF RIGERATION INDUSTRIES LTD (SUPRA), SHE SUBMITTED THAT THE SAME WAS RENDERED P RIOR TO THE DECISION OF THE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMI CALS AND FERTILIZERS LTD (SUPRA); THEREFORE, THE SAME CANNOT BE RELIED UPON. 6.9 AS REGARD THE ALTERNATE CONTENTION OF THE ASSES SEE THAT DEPRECIATION SHOULD BE ALLOWED IN CASE THE EXPENDITURE IS NOT AL LOWED AS REVENUE, SHE SUBMITTED THAT THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF BADALAPUR CO LTD., IS DISTINGUISHABLE ON FACTS. IN THAT CASE THE ASSETS WERE IDENTIFIABLE WHEREAS IN THE INSTANT CASE, THERE IS NO IDENTIFIABLE ASSET; THEREFORE, DEPRECIATION CANNOT BE ALLOWED. SHE SUBMITTED THAT THE ASSESSING OFFICER HAS COMMITTED A MISTAKE IN ALLOWING A PART OF THE EXPEN SES. HOWEVER, NOTHING CAN BE DONE NOW. AS REGARDS THE PAYMENT OF FEES AFTER D EDUCTION OF TDS, SHE 10 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 SUBMITTED THAT IT IS NOT KNOWN WHETHER SUCH TDS H AS BEEN DEPOSITED OR NOT. SHE ACCORDINGLY, SUBMITTED THAT THE ORDER OF THE CI T(A) SHOULD BE UPHELD. 6.10 THE LD COUNSEL FOR THE ASSESSEE, IN HIS REJOIN DER SUBMITTED THAT THE HONBLE SUPREME COURT IN THE CASE OF TUTICORIN ALKALI CHEMI CALS AND FERTILIZERS LTD (SUPRA) WAS CONCERNED WITH EARNING OF INTEREST INCOME DURIN G CONSTRUCTION PERIOD AND THEREFORE, THE SAME CANNOT BE APPLICABLE TO THE FAC TS OF THE PRESENT CASE. HE SUBMITTED THAT THE DECISION OF THE CALCUTTA HIGH CO URT IN THE CASE OF NEW CENTRAL JUTE MILLS (SUPRA) IS DIRECTLY ON THIS ISSUE. THERE FORE, ALTERNATE CONTENTION OF THE ASSESSEE SHOULD BE ALLOWED. 6.11 AS REGARDS THE ISSUE OF GENUINENESS OF THE TR ANSACTION, IT WAS SUBMITTED THAT THE CIT(A) FOR THE FIRST TIME HAS RAISED THIS ISSUE, WHICH WAS NEVER RAISED BY THE ASSESSING OFFICER. 7 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE BY BOTH THE PARTIES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND TH E CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSI DERED THE VARIOUS DECISIONS CITED BEFORE US. THERE IS NO DISPUTE TO THE FACT T HAT THE ASSESSEE IN THE P&L ACCOUNT HAS DEBITED AN AMOUNT OF RS. 3,93,79,324/- UNDER THE HEAD TRAINING AND SELECTION FEE. THERE IS ALSO NO DISPUTE TO THE FAC T THAT OUT OF THIS AMOUNT AN AMOUNT OF RS. 3,15,75,394/- WAS INCURRED DURING TH E PERIOD 1.4.2003 TO 31.3.2003 AND AN AMOUNT OF RS. 6,51,089/- WAS INCUR RED BETWEEN 1.4.2002 TO 11 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 7.4.2003. THE BALANCE AMOUNT OF RS. 71,95,730/- HAS BEEN INCURRED DURING THE PERIOD FROM 8.4.2003 TO 31.3.2004. WE FIND THE ASSESSING OFFICER WHILE COMPLETING THE ASSESSMENT HAS ALLOWED AN AMOUNT OF RS. 6,51,089 INCURRED BY THE ASSESSEE PRIOR TO THE COMMENCEMENT OF THE BUSIN ESS; BUT DURING THE RELEVANT ASSESSMENT YEAR AS ALLOWABLE EXPENDITURE APART FROM ALLOWING THE AMOUNT OF RS. 71,95,730/- INCURRED BY THE ASSESSEE AFTER COMMENCEMENT OF THE BUSINESS I.E. DURING THE ASSESSMENT YEAR . IT IS TH E SUBMISSION OF THE LD COUNSEL FOR THE ASSESSEE THAT THE AMOUNT OF RS. 3,15,32,50 5 SHOULD HAVE BEEN ALLOWED AS REVENUE EXPENDITURE. ALTERNATIVELY, THE SAME S HOULD HAVE BEEN CAPITALIZED AND DEPRECIATION SHOULD HAVE BEEN ALLOWED. IT IS T HE CASE OF THE REVENUE THAT SINCE THE AMOUNT WAS INCURRED PRIOR TO THE COMMENCE MENT OF THE BUSINESS AND SINCE IT IS NOT RELEVANT TO THIS YEAR; THEREFORE, T HE SAME CANNOT BE ALLOWED DURING THE YEAR. FURTHER, ACCORDING TO THE ASSESSING OFFI CER, DEPRECIATION U/S 32(1) OF THE ACT CAN BE ALLOWED ON TANGIBLE AND IN-TANGIBLE ASSETS. HOWEVER, SINCE THE EXPENDITURE INCURRED BY THE ASSESSEE HAS NOT CREATE D ANY ASSETS; THEREFORE, NO DEPRECIATION CAN BE ALLOWED. WE FIND THE CIT(A) REJECTED THE CLAIM OF THE REVENUE EXPENDITURE. HE EVEN REJECTED THE ALTERNAT E CONTENTION OF THE ASSESSEE REGARDING ALLOWANCE OF DEPRECIATION ON THE GROUND T HAT THE ASSESSEE HAD NOT FURNISHED THE COMPLETE DETAILS OF EXPENDITURE INCUR RED WITH EVIDENCE FOR WHICH THE ASSESSING OFFICER HAD NO OCCASION TO EXAMINE THE GENUINENESS OF THE PAYMENT; THEREFORE, NO DIRECTION CAN BE ISSUED TO T HE ASSESSING OFFICER TO ALLOW CAPITALIZATION OF THIS CLAIM OF EXPENDITURE. WE FIN D, THE LD CIT(A), WHILE REJECTING THE CLAIM OF REVENUE EXPENDITURE FURTHER NOTED THA T SINCE THERE IS NO EVIDENCE OF DEDUCTION OF TAX AT SOURCE U/S 40(A) FOR PAYMENT MADE TO FOREIGN CONSULTANT; THEREFORE, THE SAME ALSO CANNOT BE ALLOWED AS REVEN UE EXPENDITURE. 12 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 7.1 SINCE THE EXPENDITURE OF RS. 3,15,75,374/- WAS NOT INCURRED DURING THE YEAR/ NOT CRYSTALLISED DURING THE YEAR AND DOES NOT RELATE TO THIS YEAR; THEREFORE, THE SAME , IN OUR OPINION, CANNOT BE ALLOWED AS AN EXPENDITURE DURING THIS YEAR. FURTHER, SINCE THE EXPENDITURE WAS INCURRED PRIOR T O COMMENCEMENT OF BUSINESS, THE SAME IS IN THE NATURE OF PRE-OPERATIVE EXPENDIT URE AND THEREFORE, CANNOT BE TERMED AS REVENUE EXPENDITURE FOR THE IMPUGNED ASSE SSMENT YEAR. THEREFORE, THE FIRST CONTENTION OF THE LD COUNSEL FOR THE ASSE SSEE THAT THE SAME SHOULD BE ALLOWED AS REVENUE EXPENDITURE OF THIS YEAR IS WITH OUT ANY MERIT. THE DECISION RELIED ON BY THE LD COUNSEL FOR THE ASSESSEE IS ALS O DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 7.2 IN SO FAR AS THE ALTERNATE CONTENTION OF THE ASSESSEE REGARDING THE ALLOWABILITY OF DEPRECIATION ON THE AMOUNT OF RS. 3 ,15,32,505/- IS CONCERNED, WE FIND FROM THE COPY OF THE AGREEMENT WITH WERNER INT ERNATIONAL, USA, THAT THE ASSESSEE HAD TO PAY CONSULTING FEE ON THE TECHNICAL AUDIT OF THE PROJECT, INSTALLATION OF MACHINERY, RECRUITMENT AND TRAINING , MACHINE WORKERS, KITCHEN WORKERS, LABORATORY, SHIFT SUPERVISOR, APPLICATION OF THE WERNER SYSTEM AND METHODOLOGY ETC., AT US $ 6500 PER CONSULTANT MAN W EEK FOR 24 WEEKS. 8 WE FIND THE FACTS OF THE CASE ARE SOMEWHAT SIMILA R TO THE FACTS IN THE CASE OF NEW CENTRAL JUTE MILLS (SUPRA). IN THAT CASE, TH E COMPANY M/S NEW CENTRAL JUTE MILLS INCURRED A TOTAL EXPENDITURE OF RS. 49,52,2 67/- FROM THE INCORPORATION IN 13 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 1954 TILL THE COMMENCEMENT OF THE PRODUCTION BY SAH U CHEMICALS FACTORY ON 31STOCT 1959. IT WAS ARGUED BEFORE THE LOWER AUTHOR ITIES THAT THE ORIGINAL COST OF ASSETS INCLUDED NOT ONLY THE DIRECT EXPENSES RELA TING TO THE COST OF ERECTION OF PLANT AND MACHINERY BUT ALSO THOSE INCURRED IN FRA MING AND SETTING UP THE BUSINESS LIKE PRINTING, STATIONARY, POSTAGE, ADVERT ISING, PUBLICITY, TRIAL RUNNING ETC. THE ITO ALLOWED THE ASSESSEE TO CAPITALIZE RS. 59 LACS AND REFUSED TO GRANT DEPRECIATION AND DEVELOPMENT REBATE OF RS. 34 LACS. THE AAC , FOLLOWING THE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS STANDARD VACUM REFINING CO OF INDIA LTD REPORTED IN 61 ITR 799 CAM E TO THE CONCLUSION THAT THE EXPENSES AMOUNTING TO RS. 22 LACS ARE LIABLE TO BE EXCLUDED FROM THE COST OF THE ASSETS FOR THE PURPOSES OF DEPRECATION AND DEVELOPM ENT REBATE. 8.1 BEFORE THE TRIBUNAL, IT WAS ARGUED THAT ALL TH ESE EXPENSES RELATED TO PRE- PRODUCTION STAGES OF SAHU CHEMICALS L:TD FACTORY AN D THAT IN VIEW OF THE SEVERAL AUTHORITATIVE OPINIONS IN STANDARD BOOKS ON ACCOUNT ANCY, THESE AMOUNTS SHOULD BE TREATED AS FORMING PART OF THE COST OF THE ASSET S. IT WAS CONTENDED THAT ALL THOSE EXPENSES REALLY FORMED A PART OF THE COST OF ASSETS AS THEY WERE ALL INCURRED FOR THE ONLY PURPOSE OF CREATING AND PUTTI NG UP THE PLANT. THERE COULD NOT BE AND THERE WAS NO OTHER PURPOSE IN INCURRING THE EXPENDITURE IN QUESTION. THE TRIBUNAL, ON THE BASIS OF THE ARGUMENTS ADVANCE D BY BOTH THE PARTIES HELD THAT EVERY ITEM OF CAPITAL EXPENDITURE IS NOT BY IT SELF, ELIGIBLE FOR DEPRECATION AND DEVELOPMENT REBATE THOUGH IT IS TO BE OTHERWISE CAP ITALIZED. HOWEVER, UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE TRIBUN AL ALLOWED ON ESTIMATE FOR THE PURPOSES OF DEPRECIATION AND DEVELOPMENT REBATE , THE CAPITALIZATION OF THE FOLLOWING ITEMS FROM OUT OF THOSE MENTIONED BY THE ACC: 14 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 I) STAFF TRAINING EXPENSE 5-% OF RS/ 54,246/- II) INSURANCE - 50% OF RS. 54,252 AS APPLICABLE T O THE MACHINERY AND PLANT USED IN THE CONSTR UCTION OR ERECTION OF THE PLANT. 8.2 THE TRIBUNAL ALSO DIRECTED THE GRANT OF DEPRECI ATION AND DEVELOPMENT REBATE OF RS 41,832/- IN VIEW OF THE ERROR POINTED OUT BY THE ASSESSEES COUNSEL. 8.3 THE REVENUE TOOK UP THE MATTER BEFORE THE HONB LE HIGH COURT AND THE QUESTION NO.2 REFERRED TO THE HIGH COURT BY THE TRI BUNAL, READS AS UNDER: WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN LAW IN INCLUDING THE ORIGINAL COST OF THE PLANT AND MACHINERY ANY PART OF THE EXPENSES INCURRED FOR (I) STAFF TRAINING (II) INSURANCE AND (III) POWER AND FUEL IN ASCERTAINING THE ACTUAL COST FOR THE PURPOSE OF ALLOWANCE OF DEVELOPMENT REBATE AND DEPR ECATION ALLOWANCE? 8.4 THE HONBLE HIGH COURT ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY HOLDING THAT THE EXPENSE S INCURRED FOR STAFF TRAINING, INSURANCE AND POWER AND FUEL FOR INSTALLING PLANT A ND MACHINERY FORM PART OF THE ACTUAL COST OF THE MACHINERY AND DEPRECATION AND DE VELOPMENT REBATE IS ADMISSIBLE ON SUCH ACTUAL COST U/S 22 AND 34 OF THE I T ACT, 1961. 9 SIMILARLY, WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF BELAPUR CO LTD (SUPRA) HAS HELD THAT EXPENDITURE INCURRED O N FOREIGN TOUR UNDERTAKEN FOR THE PURCHASE OF A CAPITAL ASSETS AS ALSO FOR STUDY OF DIFFUSER WORKING HAS TO BE CAPITALIZED FOR THE PURPOSE OF ALLOWING DEPRECATION AND DEVELOPMENT REBATE THEREON. THE HONBLE HIGH COURT HAS HELD THAT THE T RIBUNAL WAS RIGHT IN UPHOLDING THE DIRECTION OF THE AAC TO CAPITALISE THE EXPENDIT URE ON THE FOREIGN TOURS FOR THE 15 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 PURPOSE OF DEPRECIATION AND DEVELOPMENT REBATE AND TO ALLOW THE SAME ON SUCH FIGURE AS THE ITO ARRIVED AT. 9.1 IT IS THE SUBMISSION OF THE LD COUNSEL FOR THE ASSESSEE THAT SINCE THE OTHER EXPENDITURE INCURRED BY THE ASSESSEE HAS BEEN CAPIT ALISED IN THE RATIO OF THE COST OF THE ASSETS; THEREFORE, THE SAME RATIO MAY BE APP LIED FOR CAPITALIZING THE TRAINING EXPENSES. ACCORDING TO HIM, IN THE INSTANT CASE, THE TRAINING EXPENDITURE RELATES TO PLANT & MACHINERY ONLY, THEREFORE, THE S AME SHOULD BE ALLOCATED TO PLANT & MACHINERY. 9.2 HOWEVER, WE FIND FROM THE COPY OF THE AGREEMENT PROPOSAL WITH M/S WERNER INTERNATIONAL MANAGEMENT CONSULTANT THAT THE SAME IS IN RESPECT OF TECHNICAL AUDIT OF THE PROJECT, INSTALLATION OF MAC HINERY, RECRUITMENT AND TRAINING TILL THE APPLICATION OF THE WERNER SYSTEMS AND METH ODOLOGY ETC.. IN OUR OPINION, ONLY THE EXPENDITURE RELATABLE TO THE INSTALLATION OF THE MACHINERY CAN AT BEST BE CONSTRUED AS A PART OF THE COST OF THE PLANT & MACH INERY WHICH CAN BE CAPITALIZED. FURTHER, WE FIND FROM THE ORDER OF THE CIT(A) THAT HE HAS GIVEN A FINDING THAT THE ASSESSEE HAS NOT PRODUCED THE FULL DETAILS REGARDING THE TRAINING EXPENSES PAID TO THE FOREIGN CONSULTANT. THE SUBM ISSION OF THE LD COUNSEL FOR THE ASSESSEE THAT SINCE THE ASSESSING OFFICER HAS N OT ASKED FOR THOSE DETAILS, THEREFORE, THE SAME WERE NOT GIVEN, IN OUR OPINION, DOES NOT FIND FORCE IN IT. ALTHOUGH, THE ASSESSEE IN THE PAPER BOOK HAS GIVEN THE INVOICE WISE DETAILS OF PAYMENT INCLUDING TDS, IT IS ALSO NOT CLEAR AS TO WHETHER THE TDS SO DEDUCTED 16 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 HAS BEEN PROPERLY DEPOSITED TO THE CREDIT OF THE CE NTRAL GOVERNMENT ACCOUNT IN TERMS OF PROVISIONS OF SEC. 40(A) OF THE I T ACT. 9.3 CONSIDERING THE TOTALITY OF THE FACTS OF THE CA SE, WE DEEM IT PROPER TO RESTORE THE MATTER BACK TO THE FILE OF THE ASSESSIN G OFFICER WITH A DIRECTION TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO SUBSTA NTIATE WITH EVIDENCE TO HIS SATISFACTION REGARDING THE EXPENDITURE THAT CAN BE ATTRIBUTABLE TO THE COST OF THE PLANT & MACHINERY. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. THE GROU ND RAISED BY THE ASSESSEE IS ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSE. 10 IN VIEW OF OUR DISCUSSIONS IN THE PRECEDING PARA S, THE GROUNDS RAISED BY THE REVENUE IN THE CROSS OBJECTION ARE ALLOWED AND THE GROUNDS RAISED BY THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PROSE. 11 IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE AND THE CO FILED BY THE REVENU E IS ALLOWED. ORDER PRONOUNCED ON THE 27 TH , DAY OF APRIL 2011. SD/- SD/- ( (( ( D MAMNOHAN D MAMNOHAN D MAMNOHAN D MAMNOHAN ) )) ) VICE PRESIDENT ( (( ( R K PANDA R K PANDA R K PANDA R K PANDA ) )) ) ACCOUNTANT MEMBER PLACE: MUMBAI : DATED: 27 TH , APRIL 2011 RAJ* COPY FORWARDED TO: 17 ITA NO. 7404/MUM/2007 CO NO.99/MUM/2007 1 APPELLANT 2 RESPONDENT 3 CIT 4 CIT(A) 5 DR /TRUE COPY/ BY ORDER DY /AR, ITAT, MUMBAI