Megha Multimetals Pvt. Ltd., Mandi Gobindgarh V. Addl. CIT, Mandi Gobindgarh

ITA 104/CHANDI/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51579 (ITAT-CHANDIGARH)
• Duration Of Justice: 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-11-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 20-10-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 27-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAI SHREE SHARMA
• Assessee Lawyers: HARI OM ARORA
• Keywords: Depreciation; Notional interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 2; 143(3); 133A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO. 104/CHD/2011 ASSESSMENT YEAR: 2007-08 M/S MEGHA MULTIMETALS PVT.LTD., VS THE ADDL CIT, MANDI GOBINDGARH MANDI GOBINDGARH RANGE, MANDI GOBINDGARH PAN NO. AABCM1593L (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI HARI OM ARORA RESPONDENT BY : SMT. JAI SHREE SHARMA DATE OF HEARING : 20.10.2011 DATE OF PRONOUNCEMENT : 17.11.2011 ORDER PER MEHAR SINGH, AM THE PRESENT APPEAL HAS BEEN FILED BY THE ASSESSEE A GAINST THE ORDER PASSED BY THE CIT(A), PATIALA DATED 29.12.2010 RELA TING TO ASSESSMENT YEAR 2007-08 UNDER SECTION 143(3) OF THE INCOME TA X ACT, 1961 (IN SHORT THE ACT). 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN UPHOLDIN G THE ADDITION OF RS. 38,304/- MADE BY THE ASSESSING OFFI CER U/S 36(1)(III) OF THE INCOME TAX ACT, 1961 (IN SHOR T 'THE ACT'). DISALLOWANCE OF INTEREST ON ACCOUNT OF OUTSTANDING DEBIT BALANCE IN ACCOUNT OF M/S VIVEK S TEEL INDUSTRIES IS MISPLACED AND UNTENABLE. 2. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN UPHOLDIN G THE ADDITION OF RS. 95,801/- MADE BY THE ASSESSING OFFI CER 2 U/S 36(1)(III) OF THE INCOME TAX ACT, 1961 (IN SHOR T 'THE ACT'). THE DISALLOWANCE MADE ON ACCOUNT OF OUTSTAND ING DEBIT BALANCES IN THE ACCOUNTS OF SMT. PUSHP SHANTA GUPTA AND SHRI ANIL KUMAR, DIRECTORS OF THE COMPANY IS MISPLACED AND UNTENABLE. 3. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN HOLDING THAT THE ASSESSING OFFICER IS JUSTIFIED IN COMING TO THE CON CLUSION THAT THE APPELLANT HAS DIVERTED FUNDS FOR NON BUSIN ESS PURPOSES AND SUSTAINING THE ADDITIONS OF RS. 38,30 4/- AND RS. 95801/-. 4. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMI NG THE ADDITION OF RS. 75,205/- MADE ON ACCOUNT OF CAPITA L EXPENDITURE ON ROLLS, REVENUE EXPENDITURE ON REPAIR ING OF MACHINERY ON ACCOUNT OF EXPENDITURE INCURRED ON ROLLS HAS WRONGLY BEEN TREATED AS CAPITAL EXPENDITU RE INSTEAD OF REVENUE EXPENDITURE. THE ADDITION SUSTA INED IS TENABLE AND CONTRARY TO LAW. 5. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN CONFIRMI NG THE ADDITION OF RS. 1,38,375/- MADE BY THE ASSESSING OF FICER ON ACCOUNT OF REPLACEMENT OF GEAR BOX BY TREATING T HE SAME AS CAPITAL EXPENDITURE. THE EXPENDITURE INCURR ED BY THE APPELLANT ON ACCOUNT OF CURRENT REPAIRS ON REPLACEMENT OF GEAR BOX AMOUNTING TO RS. 1,50,000/- HAS WRONGLY BEEN TREATED AS CAPITAL EXPENDITURE. TH E CLAIM OF ENTIRE AMOUNT INCURRED BY THE APPELLANT FO R REPLACEMENT OF DEFECTIVE GEAR BOX HAS WRONGLY BEEN CAPITALIZED AND ONLY DEPRECIATION HAS BEEN ALLOWED INSTEAD OF ALLOWING THE SAME IN ENTIRETY. 6. THAT THE LD. CIT(A) IS NOT JUSTIFIED IN SUSTAINI NG THE ADDITION OF RS. 20,000/- ON ACCOUNT OF SALE/CLOSING STOCK SCRAP OF CONSUMABLE. 7. THAT THE LD. CIT(A) HAS FAILED TO CONSIDER THAT THE APPELLANT HAS SURRENDERED RS. 20 LACS DURING THE CO URSE OF SURVEY ON ACCOUNT OF VARIATION IN CASH, DOCUMENT S AND STOCKS FOR AVOIDING LITIGATION AND TO BUY PEACE OF MIND AND THE AMOUNT SURRENDERED COVERED THE VARIATI ONS AND THE DISCREPANCIES FOR WHICH ADDITIONS HAVE BEEN SUSTAINED SEPARATELY. 3. IN THE FIRST GROUND, THE ASSESSEE CHALLENGED THE CONFIRMATION OF ADDITION OF RS. 38,304/- MADE BY THE ASSESSING OFFI CER U/S 36(1)(III) OF THE INCOME TAX ACT, 1961. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FILED ITS RETURN OF INCOME, ON 17.10.2007, DECLARING INCOME AT RS. 24,5 2,186/-. A SURVEY 3 OPERATION U/S 133A OF THE ACT WAS CONDUCTED IN THIS CASE, ON 7.9.2006. DURING THE COURSE OF SURVEY OPERATION, DISCREPANCY IN THE STOCK OF SCRAP AND CASH WAS FOUND. TO COVER UP THE DISCREPANCY, T HE ASSESSEE SURRENDERED RS. 20 LACS, AS ADDITIONAL INCOME OF TH E COMPANY AS UNDER:- I) RS. 5 LACS ON ACCOUNT OF SCRAP AND MACHINERY PAR TS. II) RS. 5 LACS ON ACCOUNT OF NON-EXCISABLE STOCK OTHER THAN MACHINERY SPARE PARTS. III) RS. 10 LACS ON ACCOUNT OF CASH. 5. THE ASSESSEE COMPANY IS RUNNING ITS STEEL ROLLIN G MILL AFTER TAKING THE SAME ON LEASE FORM M/S VIVEK STEEL INDUSTRIES, G.T. ROAD, MANDI GOBINDGARH, WHICH WAS PROPRIETORSHIP CONCERN OF ITS DIRECTOR SHRI ANIL KUMAR. THE COPY OF THE LEASE DEED HAS BEEN FILED B Y THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE SAID LEA SE DEED WAS EXECUTED ON 3.10.2005, FOR 3.5 YEARS, AT THE LEASE RENT OF R S. 2 LACS PER ANNUM. THE IMPUGNED DISALLOWANCE WAS MADE ON ACCOUNT OF OUTSTA NDING DEBIT BALANCE IN THE ACCOUNT OF M/S VIVEK STEEL INDUSTRIES, MANDI GOBINDGARH. THE ASSESSING OFFICER MADE THE IMPUGNED ADDITION BY PLA CING RELIANCE ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES, 286 ITR 1 (P&H). THE ASSESSING OFFICER ALSO CONSIDERED DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F S.A. BUILDERS V CIT (2004) 269 ITR 535 (P&H). THE ASSESSING OFFICER WA S OF THE OPINION THAT THE ASSESSEE FAILED TO DEMONSTRATE BUSINESS EX PEDIENCY IN ADVANCING INTEREST FREE LOANS TO M/S VIVEK STEEL INDUSTRIES. CONSEQUENTLY, THE IMPUGNED ADDITION WAS MADE BY THE ASSESSING OFFICER . THE LD. CIT(A) ALSO UPHELD THE ADDITION MADE BY THE ASSESSING OFFI CER. THE FINDINGS OF THE CIT(A) AS CONTAINED IN PARAS 4.2 TO 4.5 ARE REP RODUCED HEREIN UNDER:- 4 4.2 BEFORE ME, THE COUNSEL FOR THE APPELLANT IN RE GARD TO INTEREST FREE ADVANCES TO SISTER CONCERN AND DIRECT ORS, HAS STATED THAT THE ACCOUNTS OF THE SISTER CONCERN M/S VIVEK STEEL INDUSTRY, MANDI GOBINDGARH WAS A RUNNING ACCOUNT DE PICTING DEBIT AND CREDIT ENTRIES AND AS PER THE BUSINESS NE EDS. IN THE CASE OF DIRECTORS AN AMOUNT OF RS. 55 LACS HAD BEEN SQUARED UP IN THE ACCOUNTS BEFORE THE DATE OF SURVEY. THE ACCOUNT WAS IN THE NATURE OF TRADE ACCOMMODATION AND THE MONEY HAD BEEN ADVANCED FOR BUSINESS PURPOSES. THE EFFECT OF INTE REST ON ADVANCES MADE TO DIRECTORS STOOD SETTLED IN THE SUR RENDERED AMOUNT AND THE NOTIONAL INTEREST SHOULD BE TAKEN AS A PART OF THE COMPOSITE SURRENDER OF RS. 20 LAC. THE DISCLOSU RE WAS MADE IN THE SHAPE OF STOCK AND CASH AND ALL IRREGUL ARITIES UP TO THE DATE OF SEARCH STOOD TAKEN CARE OF IN VIEW O F THE MAGNITUDE OF THE SURRENDERED AMOUNT. 4.3 THE ASSESSING OFFICER IN THIS REMAND REPORT HAS STATED AS UNDER:- REGARDING DISALLOWANCE OF INTEREST IN RESPECT OF INTEREST FREE ADVANCE GIVEN TO SISTER CONCERN NAMEL Y M/S VIVEK STEEL INDUSTRIES, MANDI GOBINDGARH, ASSESSEE HAS USED THE TERM COMMERCIAL EXPEDIENCY WITHOUT ACTUALL Y EXPLAINING THE NATURE OF COMMERCIAL EXPEDIENCY WHIC H FORCED THE ASSESSEE TO GIVE INTEREST FREE ADVANCES. SO FAR AS CALCULATION OF INTEREST IN RESPECT OF THIS A DVANCES IS CONCERNED, THE SAME WAS SUBMITTED AS ASSESSEE IT SELF DURING ASSESSMENT PROCEEDINGS AND THIS FACT HAS BEE N MENTIONED IN THE ASSESSMENT ORDER. SURRENDER OF RS. 20 LACS WAS MADE BY THE ASSESSEE DURING SURVEY U/S 133A ON ACCOUNT OF TANGIBLE DISCREPANCIES NOTICED IN THE STOCK AND CASH. SO FA R AS INTEREST CHARGEABLE ON THE ADVANCES GIVEN TO DIRECT ORS IS CONCERNED, THE SAME, BY ANY STRETCH OF IMAGINATION CANNOT BE CONSIDERED TO BE INCLUDED IN THE STOCK OR CASH OF THE ASSESSEE. ASSESSEES SUBMISSIONS THAT THE CHARGEABLE INTEREST ON THIS ISSUE WAS COVERED IN TH E SURRENDERED AMOUNT IS WITHOUT ANY LOGIC OR BASIS. 4.4 IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE C ASE AND RIVAL SUBMISSIONS OF BOTH THE ASSESSING OFFICER IN HIS REMAND REPORT AND THE CONTENTIONS OF THE LD. COUNSEL, I AM OF THE OPINION THAT THE APPELLANT COULD NOT PROVE ANY COMM ERCIAL 5 EXPEDIENCY FOR GIVING INTEREST FREE ADVANCES TO THE SISTER CONCERN AND DIRECTORS OF THE COMPANY WHEN ON THE OT HER SIDE INTEREST HAD BEEN CHARGED ON UNSECURED AND SECURED LOANS. THE CASE LAWS CITED BY THE COUNSEL ARE OF NO HELP B ECAUSE THEY ARE ON DIFFERENT SET OF FACTS. THE CONTENTION OF T HE APPELLANT THAT THIS AMOUNT IS COVERED IN THE SURRENDERED AMOU NT AFTER SURVEY HAS BEEN CORRECTLY REBUTTED BY THE ASSESSING OFFICER IN HIS REMAND REPORT. I HOLD THAT ASSESSING OFFICER I S FULLY JUSTIFIED IN COMING TO THE CONCLUSION THAT APPELLAN T HAD DIVERTED FUNDS FOR NON-BUSINESS PURPOSES. 6. WE HAVE CAREFULLY PERUSED THE RIVAL SUBMISSION, FACTS AND RELEVANT RECORD AND FOUND THAT THE ASSESSEE HAS FAILED TO ES TABLISH EVEN PRIMA-FACIE EXISTENCE OF BUSINESS EXPEDIENCY IN THE PRESENT CAS E. THE SURRENDER OF RS. 20 LACS HAVE BEEN MADE BY THE ASSESSEE AGAINST SPECIFIC DISCREPANCIES NOTED IN THE STOCK AND CASH. THEREFORE, THE ADDITI ON MADE BY THE ASSESSING OFFICER AND UPHELD BY THE CIT(A) BY INVOK ING THE PROVISIONS OF SECTION 36(1)(III) OF THE ACT IS NOT COVERED UNDER THE SURRENDER MADE BY THE ASSESSEE AGAINST THE SPECIFIC DISCREPANCY. IT I S A CASE WHERE THE ASSESSEE HAS GIVEN INTEREST FREE ADVANCES TO THE SI STER CONCERN AND DIRECTORS OF THE COMPANY, WHEREAS THE ASSESSEE HAS PAID INTEREST ON SECURED AND UNSECURED LOANS. IN VIEW OF THE FACTS OF THE CASE, FINDINGS OF THE LD. CIT(A) ARE UPHELD. THUS, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 7. THE GROUND NO.2 RAISED BY THE ASSESSEE RELATES T O UPHOLDING OF THE ADDITION MADE BY THE ASSESSING OFFICER U/S 36(1)(II I) OF THE ACT, BY THE CIT(A), WITH REGARD TO THE DISALLOWANCE MADE OUTSTA NDING DEBIT BALANCES IN THE ACCOUNTS OF DIRECTORS OF THE COMPANY. THE CI T(A) AFTER DISCUSSING THE ISSUE ALONGWITH GROUND NO.1 HAVE UPHELD THE ACT ION OF THE ASSESSING 6 OFFICER. KEEPING IN VIEW THE SIMILAR FACTS OF THE CASE, WE UPHOLD THE FINDING OF THE CIT(A), IN THIS REGARD AND GROUND NO .2 IS DISMISSED ACCORDINGLY. 8. THE GROUND NO.3 RELATES TO THE SUSTAINING OF THE ADDITIONS FOR RS. 38,304/- AND RS. 95,801/- BY THE CIT(A) WITH REGARD TO THE DIVERSION OF FUNDS FOR NON BUSINESS PURPOSES. THIS GROUND IS I NTERRELATED WITH GROUND NOS 1 & 2 RAISED ABOVE AND THE SAME STANDS ADJUDICA TED AS PER DISCUSSION HELD ABOVE. HENCE, NO SEPARATE ADJUDICATION IS ESSE NTIAL IN RESPECT OF THIS GROUND. 9. AT THE TIME OF HEARING, LD. COUNSEL FOR THE ASSE SSEE DID NOT PRESS GROUND NO.4, HENCE THE SAME IS DISMISSED AS NOT PRE SSED. 10. GROUND NO.5 RELATES TO CONFIRMATION OF ADDITION OF RS. 1,38,375/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF REPLACE MENT OF GEAR BOX BY TREATING IT AS CAPITAL EXPENDITURE. WE FIND THA T THE ISSUE IN QUESTION IS COVERED BY THE DECISION OF THE HON'BLE MYSORE HIGH COURT IN THE CASE OF HANUMAN MOTOR SERVICE V CIT IN 66 ITR 88 (MYSORE) WHEREIN ON SIMILAR FACTS AND CIRCUMSTANCES, THE MATTER HAS BEEN DECIDE D IN FAVOUR OF THE ASSESSEE BY HOLDING AS UNDER:- HELD, THAT THE MACHINERIES CONCERNED WERE BUSES AN D NOT THE PETROL ENGINES THAT WERE REPLACED. THE REPL ACEMENT OF WORN OUT PARTS OF A MACHINERY DOES NOT BY ITSELF BRING A NEW ASSET INTO EXISTENCE. THE FACT THAT AN OLD PART OF A MACHINERY WAS REPLACED BY A NEW PART DID NOT MEAN T HAT A NEW ASSET HAS BEEN BROUGHT INTO EXISTENCE. IN RELAT ION TO THE BUS CONCERNED, THE REPLACEMENT OF ITS ENGINE WAS ON LY A CURRENT REPAIR OF THAT BUS; THERE WAS NO JUSTIFICAT ION FOR UNDERSTANDING THE EXPRESSION 'CURRENT REPAIRS' AS B EING EQUIVALENT TO PETTY REPAIRS, AND THE EXPENDITURE CL AIMED WAS ALLOWABLE AS CURRENT REPAIRS UNDER SECTION 10(2)(V) . 7 11. RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF T HE HON'BLE MYSORE HIGH COURT (SUPRA), THE GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE ASSESSEE. 12. IN GROUND NO.6, THE GRIEVANCE OF THE ASSESSEE IS AGAINST THE ACTION OF THE CIT(A), IN SUSTAINING OF ADDITION OF RS. 20, 000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT SALE / CLOSING STOCK S CARP OF CONSUMABLES. AFTER GOING THROUGH THE RECORDS, WE DO NOT FIND ANY MERIT IN UPHOLDING THE ADDITION OF RS. 20,000/- AS NO COGENT AND CREDIBLE MATERIAL HAS BEEN BROUGHT ON RECORD BY THE CIT(A). CONSEQUENTLY, THE IMPUGNED ADDITION IS DELETED. 13. THE ISSUE RAISED IN GROUND NO.7 HAS ALREADY BEE N DISCUSSED AND ADJUDICATED, WHILE DECIDING THE GROUND NOS 1 TO 3 O F THE APPEAL RAISED BEFORE US. THIS GROUND OF APPEAL IS NOT AS SUCH AS INDEPENDENT GROUND OF APPEAL, BEING IN SUPPORT OF CONTENTION RAISED TO SU PPORT THE GROUND NOS. 1 TO 3. HENCE, NO SEPARATE ADJUDICATING IS CONSIDERED ESSENTIAL AND CONSEQUENTLY DISMISSED. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF NOVEMBER, 2011. SD/- SD/- (SUSHMA CHOWLA) (MEHAR SING H) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 17 TH NOVEMBER, 2011 RKK 8 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR TRUE COPY BY ORDER ASSISTANT REGISTRAR 9 IN FINDING OUT WHETHER A GIVEN CASE FALLS WITHIN TH E SCOPE OF CLAUSE (V) OF SECTION 10(2), THE TRUE TEST IS WHETHER, AS A RESUL T OF THE EXPENDITURE WHICH IS CLAIMED AS EXPENDITURE FOR REPAIRS, WHAT IS REAL LY BEING DONE IS TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET OR WHETHER THE OBJECT OF SUCH EXPENDITURE WAS TO BRING A NEW ASSET INTO EXIS TENCE OR TO OBTAIN A NEW OR FRESH ADVANTAGE. IF IT IS THE FORMER, THEN I T IS A 'REPAIR'. IF IT IS THE LATTER, IT SHOULD BE CONSIDERED AS A REPLACEMENT OR RENEWAL. FURTHER, IN CONSIDERING A CLAIM FOR DEDUCTION UNDER SECTION 10( 2)(V), THE QUESTION WHETHER THE EXPENDITURE IS A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE IS NOT RELEVANT. A READING OF CLAUSE (XV) OF SECTION 1 0(2) MAKES IT ABUNDANTLY CLEAR THAT THE DEDUCTIONS CLAIMED UNDER CLAUSES (I) TO (XIV) OF SECTION 10(2) MAY BE EITHER A REVENUE EXPENDITURE O R CAPITAL EXPENDITURE. THE ASSESSEE WAS A FIRM OF BUS OPERATORS. PREVIOUSL Y THEIR BUSES WERE RUN WITH PETROL ENGINES. IN THE ACCOUNTING YEAR RELEVAN T TO THE ASSESSMENT YEAR 1957-58, THE ASSESSEE REPLACED THE PETROL ENGINES O F SOME OF THEIR BUSES WITH DIESEL ENGINES. THE COST OF INSTALLATION OF TH E DIESEL ENGINES AMOUNTED TO RS. 14,485 AND THIS AMOUNT WAS CLAIMED AS A DEDUCTION EITHER UNDER SECTION 10(2)(V) OR UNDER SECTION 10(2)(XV) O F THE ACT. THE TRIBUNALS BELOW REJECTED THE CLAIM MADE BY THE ASSE SSEE. THE HIGH COURT DIRECTED THE TRIBUNAL, UNDER SECTION 66(4) OF THE ACT, TO SUBMIT A FURTHER STATEMENT OF FACTS IN THE LIGHT OF THE LAW STATED ABOVE. FROM THE FACTS STATED IN THE FURTHER STATEMENT, IT WAS CLEAR THAT THE PETROL ENGINES WHICH WERE REPLACED WERE NOT IN SERVICEABLE CONDITION: HELD, THAT THE MACHINERIES CONCERNED WERE BUSES AND NOT THE PETROL ENGINES THAT WERE REPLACED. THE REPLACEMENT OF WORN OUT PARTS OF A MACHINERY DOES NOT BY ITSELF BRING A NEW ASSET INTO EXISTENCE. THE FACT THAT AN OLD PART OF A MACHINERY WAS REPLACED BY A N EW PART DID NOT MEAN THAT A NEW ASSET HAS BEEN BROUGHT INTO EXISTENCE. I N RELATION TO THE BUS CONCERNED, THE REPLACEMENT OF ITS ENGINE WAS ONLY A CURRENT REPAIR OF THAT BUS; THERE WAS NO JUSTIFICATION FOR UNDERSTANDING T HE EXPRESSION 'CURRENT REPAIRS' AS BEING EQUIVALENT TO PETTY REPAIRS, AND THE EXPENDITURE CLAIMED WAS ALLOWABLE AS CURRENT REPAIRS UNDER SECTION 10(2 )(V).