M/s Visaka Industries Limited, Secunderabad V. Addl.CIT, Range-3, Hyderabad

ITA 1048/HYD/2013

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2680 (ITAT-HYDERABAD)
• Duration Of Justice: 4 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 02-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N SWAPNA
• Assessee Lawyers: M V ANIL KUMAR
• Keywords: Capital asset; Business expenditure; Bad and doubtful debts; Revised return; Revenue expenditure; Capital expenditure
• Section: 143(3); 80IB; 37(1); 37; 6; 12; 10; 2; 11

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 1048/HYD/2013 ASSESSMENT YEAR: 2009-10 M/S VISAKA INDUSTRIES LTD., SECUNDERABAD. PAN AAACV 7263K VS. ADDL. COMMISSIONER OF INCOME-TAX, RANGE 3, HYDERABAD. APPELLANT RESPONDENT ITA NO. 1058/HYD/2013 ASSESSMENT YEAR: 2009-10 DY. COMMISSIONER OF INCOME-TAX, CIRCLE 3(3), HYDERABAD. VS. M/S VISAKA INDUSTRIES LTD., SECUNDERABAD. PAN AAACV 7263K APPELLANT RESPONDENT ASSESSEE BY: SRI M.V. ANILKUMAR REVENUE BY: SMT. N. SWAPNA DATE OF HEARING: 17/11/2017 DATE OF PRONOUNCEMENT: 25/01/2018 O R D E R PER S. RIFAUR RAHMAN, AM: THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE DIRECTED AGAINST THE ORDER OF CIT(A) - IV, HYDERABAD, DATED 08/04/2013 RELATES TO THE AY 2009-10. 2. BRIEFLY THE FACTS OF THE CASE ARE, ASSESSEE COMP ANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF ASBESTOS SHEETS, SYNTHETIC BLENDED YARN AND GARMENTS. FOR THE AY 200 9-10, THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 26/0 9/2009 DECLARING TOTAL INCOME OF RS. 47,18,10,950/-. THE R ETURN OF I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 2 INCOME WAS PROCESSED U/S 143(1) OF THE INCOME-TAX A CT, 1961 ( IN SHORT THE ACT) ON 26/03/2011. FURTHER, THE A SSESSEE FILED REVISED RETURN ON 24/11/2011 DECLARING TAXABLE INCO ME OF RS. 46,17,38,276/-. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND ACCORDINGLY, NOTICES U/S 143(2) WERE ISSUE D. AO COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT BY M AKING THE FOLLOWING DISALLOWANCES AS UNDER: 1. DISALLOWANCE OF PROVISION/WRITE OFF OF ADVANCES RS. 4,49,45,842/-: 2. DISALLOWANCE OF BAD DEBTS OF RS. 66,84,484/- 3. DISALLOWANCE OF CLAIM OF RS. 5,48,659/- U/S 80IB . 3. AGGRIEVED BY THE ORDER OF AO, THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE CIT(A). 4. AS REGARDS THE DISALLOWANCE OF PROVISION/WRITE O FF OF ADVANCES OF RS. 4,49,45,842/-, THE CIT(A) SUSTAINED THE DISALLOWANCE OF RS. 2,26,16,000/- AND RS. 1,64,00,0 00 ON ACCOUNT OF TEXTILE DIVISION (IMPAIRMENT LOSS) AND D ELETED THE DISALLOWANCE OF RS. 19,46,573/-, RS. 23,19,006/- AN D RS. 16,64,262/- , WHICH WERE PAID TO APGENCO FOR FLY AS H SUPPLY. 5. AS REGARDS THE DISALLOWANCE OF BAD DEBTS OF RS. 66,84,484/-, SINCE THE ASSESSEE WAS NOT PRESSED THI S GROUND, THE CIT(A) DISMISSED THE SAME AS NOT PRESSED. 6. AS REGARDS DISALLOWANCE OF CLAIM OF RS.5,48,659/ - U/S 80IB, THE CIT(A) ALLOWED THE CLAIM OF THE ASSESSE. 7. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE I S IN APPEAL BEFORE US AGAINST THE ORDER OF THE CIT(A) IN SUSTAINING THE ADDITION OF RS. 2,24,00,000/- AND RS. 1,60,00,0 00/- BEING THE AMOUNTS PAID AS ADVANCE TO MAHINDRA INDUSTRIAL PARK LTD FOR LEASE OF LAND TO SET UP A TEXTILE UNIT AND FOR THE PURCHASE OF I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 3 MACHINERY TO LAXMI MACHINERY WORK. THE REVENUE IS I N APPEAL BEFORE US AGAINST THE ORDER OF THE CIT(A) IN DELETI NG THE ADDITION OF RS. 59,29,841/- ON ACCOUNT OF EXPENDITU RE INCURRED TOWARDS PAYMENT TO APGENCO. 8. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. YOUR APPELLANT SUBMITS THAT THE CIT(A) OUGHT T O HAVE ALLOWED RS. 2,26,16,000 AND RS. 1,64,00,000/-, BEING AMOUNTS WRITTEN OFF, INCURRED IN THE COURSE O F BUSINESS AND EXCLUSIVELY FOR THE PURPOSE OF BUSINES S IN THE YEAR THEY HAVE BECOME NOT FRUITFUL. 2. YOUR APPELLANT SUBMITS THE CIT(A) ERRED IN LAW A ND FACTS OF THE CASE IN DISALLOWING THE AMOUNT OF RS. 2,26,16,000/- BEING THE AMOUNT PAID AS ADVANCE TO MAHINDRA INDUSTRIAL PARK LTD FOR PURCHASE OF LAND T O SET UP A TEXTILE UNIT, WHICH WAS NOT VIABLE AND FRUITFU L, AS CAPITAL EXPENDITURE. 3. YOUR APPELLANT SUBMITS THE CIT(A) ERRED IN LAW A ND FACTS OF THE CASE IN DISALLOWING THE AMOUNT OF RS. 1,64,00,000/- BEING THE AMOUNT PAID AS ADVANCE TO LAXMI MACHINERY WORKS FOR PURCHASE OF MACHINERY TO SET UP A TEXTILE UNIT, WHICH WAS NOT VIABLE AND FRUITFU L, AS CAPITAL EXPENDITURE. 4. YOUR APPELLANT SUBMITS THAT THE ADVANCE WAS PAID IN THE COURSE OF BUSINESS AND FOR THE PURPOSE OF BUSIN ESS AND HAS BEEN FORFEITED WAS ALLOWABLE AS BUSINESS EXPENSES UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961. 9. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT AN AMOUNT OF RS. 4,49,45,842/- DEBITED TO P& L ACCOUNT TOWARDS PROVISION/WRITE OFF OF ADVANCES UND ER THE HEAD MANUFACTURING AND OTHER EXPENSES. WHEN ASKED, THE ASSESSEE COMPANY FILED THE BREAK UP OF THE ABOVE EX PENDITURE AS UNDER: TEXTILE DIVISION IMPAIRMENT LOSS 22616000 TEXTILE DIVISION IMPAIRMENT LOSS 16400000 PAT DIVISION FLY ASH 1946573 I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 4 VIJ DIVISION FLY ASH 2319006 MIR DIVISION FLY ASH 1664262 TOTAL 4,49,45,842 WHEN THE ASSESSEE ASKED TO JUSTIFY ITS CLAIM WITH S UPPORTING EVIDENCE, THE ASSESSEE COMPANY FILED ITS REPLY ON 1 4/12/2011, WHICH WAS EXTRACTED BY THE AO AT PAGES 2 TO 3. 9.1 THE AO OBSERVED THAT THE ASSESSEE COMPANY HAS PAID RS.2,24,00,000/- FOR ACQUISITION OF 7 ACRES OF LAND AT SEZ, CHENNAI TO M/S. MAHINDRA INDUSTRIAL PARK LIMITED FO R THE PURPOSE OF STARTING APPAREL BUSINESS. SIMILARLY, TH E AMOUNT OF RS.1,64,00,000/- PAID TO M/S. LAKSHMI MACHINE WORKS WAS ALSO IN CONNECTION WITH PURCHASE OF TEXTILE MACHINE RY FOR EXPANSION OF ITS TEXTILE SEGMENT. AS PER THE SUBMIS SIONS OF THE ASSESSEE, THE PROJECT COULD NOT TAKE OFF AND IT HAD TO DROP ITS IDEA OF EXPANSION IN THE TEXTILE SEGMENT OWING TO S LUGGISH MARKET CONDITIONS AND THAT IT COULD NOT RECOVER THE MONIES PAID TO M/S.MAHINDRA INDUSTRIAL PARK LIMITED AND M/ S. LAKSHMI MACHINE WORKS. THE ASSESSEE SUBMITTED THAT IT HAD TO FORFEIT THE AMOUNTS ON THE GROUND OF BREACH OF CONTRACT ON ITS PART AND THE EXPENDITURE INCURRED BEING INCIDENTAL TO BU SINESS OF ASSESSEE, THE SAME CAN BE REGARDED AS A TRADING LOS S AND SHALL BE ALLOWED AS DEDUCTION U/S.37(1) OF THE 1. T . ACT. 9.2 THE AO OBSERVED THAT IN ORDER TO CLAIM A DEDUC TION U/S.37(1), THE ASSESSEE SHOULD HAVE INCURRED THE EX PENDITURE DURING THE YEAR OR RELATING TO THE YEAR. IF NO EXPE NDITURE IS INCURRED, DEDUCTION CANNOT BE ALLOWED. FURTHER, HE OBSERVED THAT AS PER THE ASSESSEE'S OWN SUBMISSIONS, THE EXP ENDITURE INCURRED IS IN CONNECTION WITH ACQUISITION OF LAND FOR ITS APPAREL BUSINESS AND PURCHASE OF MACHINERY FOR EXPANSION IN ITS TEXTILE SEGMENT. THEREFORE, THE EXPENDITURE IS UNDO UBTEDLY CAPITAL IN NATURE. FURTHER, HE OBSERVED THAT THE EX PENDITURE I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 5 HAS NEITHER INCURRED DURING THE YEAR NOR THE SAME I S RELATABLE TO THE YEAR UNDER CONSIDERATION. BY NO STRETCH OF I MAGINATION, THE EXPENDITURE IN QUESTION CAN BE REGARDED AS TRAD ING LOSS OF THE ASSESSEE FOR ALLOWANCE U/S. 37(1) OF THE I.T. A CT. THEREFORE, THE ASSESSEE'S CLAIM OF EXPENDITURE TOWA RDS WRITE OFF OF ADVANCES OF RS.2,26,16,000/- AND THE CLAIM O F FORFEITURE OF SECURITY DEPOSIT OF RS.1,64,00,000/-, WERE NOT A LLOWABLE EXPENDITURE UNDER THE PROVISIONS OF SEC.37(1) OF TH E INCOME TAX ACT, 1961 AND THE SAME WERE CONSIDERED FOR DISA LLOWANCE AND ADDITION TO THE TOTAL INCOME. 9.3 ALTERNATIVELY, THE AO OBSERVED THAT THE CLAIM O F THE ASSESSEE CANNOT ALSO BE ALLOWED UNDER THE PROVISION S OF SEC.36(1)(VII) AS A BAD DEBT WRITTEN OFF AS IRREVOC ABLE IN THE ACCOUNTS OF THE ASSESSEE IN THE PREVIOUS YEAR AS TH E CONDITIONS STIPULATED THEREIN FOR WRITE OFF AS BAD DEBT ARE - A) THE DEBT SHOULD BE INCIDENTAL TO THE BUSINESS. B) IT SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUT ING THE INCOME OF THE ASSESSEE OR IT SHOULD REPRESENT M ONEY LENT IN THE ORDINARY COURSE OF BUSINESS OR MONEY LE NDING BUSINESS. C) IT SHOULD BE WRITTEN OFF IN THE BOOKS OF ACCOUNT . D) THE BUSINESS IN RESPECT OF WHICH THE DEBT IS INC URRED SHOULD BE CONTINUED DURING THE PREVIOUS YEAR. 9.4 AO OBSERVED THAT IN THE ASSESSEE'S CASE, THE CL AIMS OF EXPENDITURE BEING NOT IN CONFORMITY WITH ANY OF THE CONDITIONS STIPULATED ABOVE, THE AMOUNTS CANNOT ALSO BE WRITTE N OFF AS BAD DEBTS FOR ALLOWANCE AND U/S.36(1)(VII) OF THE A CT. 10. BEFORE THE CIT(A), THE LD. AR SUBMITTED THAT WI TH A VIEW TO EXPAND THE APPAREL BUSINESS, IT HAD ENTERED INTO AN AGREEMENT WITH MAHINDRA INDUSTRIAL PARK LTD (MIPL) HAVING ITS REGISTERED OFFICE AT CHENNAI FOR ACQUIRING 7 ACRES OF LAND AT SEZ AREA, CHENNAI ON LEASE BASIS FOR 99 YEARS FOR A CONSIDERATION OF RS. 224 LAKHS AND THAT AS THE ASSE SSEE COULD I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 6 NOT FULFIL ITS PART OF THE CONTRACT, THE LESSOR HAD TERMINATED THE CONTRACT AND CONFISCATED THE ADVANCE LEASE AMOUNT. WITH REGARD TO THE PAYMENT OF RS.164 LAKHS TO M/S LAXMI MACHINE WORKS, THE AR SUBMITTED THAT THE PAYMENT WAS MADE A S A SECURITY DEPOSIT FOR THE PURCHASE ORDER FOR SUPPLY OF TEXTILE MACHINERY WORK FOR EXPANSION OF ITS TEXTILE BUSINES S AND THAT THE ASSESSEE COULD NOT EVENTUALLY GO FOR EXPANSION DUE TO SLUGGISH MARKET AND HAD TO FORFEIT THE DEPOSIT AMOU NT. THE AR SUBMITTED THAT AS THE LOSS WAS INCURRED FOR THE PUR POSE OF AND DURING THE COURSE OF BUSINESS, IT SHOULD BE ALLOWED AS A TRADING LOSS U/S. 37(1) OF THE INCOME TAX ACT. 11. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AS WELL AS ANALYSING THE ISSUE WITH VARIOU S CASE LAW, HELD THAT IN ASSESSEES CASE BOTH THE ASSETS LAND A ND THE MACHINERY WERE ASSETS OF ENDURING BENEFIT TO THE AS SESSEE AND THE EXPENDITURE INCURRED FOR THE PURPOSE OF ACQ UIRING THESE ASSETS NECESSARILY NEEDS TO BE CHARACTERISED AS CAPITAL AND THEIR LOSS AS CAPITAL LOSS. HE, THEREFORE, CONF IRMED THE ACTION OF THE AO. 12. LD. AR REITERATED THE SUBMISSIONS AS MADE BEFOR E THE CIT(A). 13. LD. DR RELIED ON THE ORDERS OF LOWER AUTHORITIE S AND RELIED ON THE FOLLOWING CASE LAWS: 1. DCIT VS. TATA HONEYWELL LTD., [2005] 93 ITD 507 (PUNE) 2. SWADESHI COTTON MILLS CO. LTD. VS. CIT, [1967] 6 3 ITR 65 3. KANORIA CHEMICALS & INDUSTRIES LTD. VS. CIT, [19 95] 78 TAXMAN 455 (CAL.) 4. ENTERPRISING ENTERPRISES, [2004] 268 ITR 95 (MAD .) 5. CIT VS. R.G. SCIENTIFIC ENTERPRISES (P.) LTD., [ 2008] 166 TAXMAN 161 (DEL.) 6. EID PARRY (INDIA) LTD. VS. CIT, [2002] 257 ITR 2 53 I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 7 7. HASIMARA INDUSTRIES LTD., VS. CIT, [1998] 98 TAX MAN 303 (SC) 14. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. WE HAVE NOTICED THAT ASSESSEE H AS ENTERED INTO AN AGREEMENT OF LEASE WITH M/S MAHINDR A INDUSTRIAL PARK LTD., CHENNAI FOR ACQUIRING 7 ACRES OF LAND AT 562 ON LEASE FOR 99 YEARS FOR A CONSIDERATION OF RS . 224 LAKHS AND DUE TO NON-PERFORMANCE OF CONDITIONS STIPULATE D IN THE AGREEMENT BY THE ASSESSEE, THE LESSOR HAS CONFISCAT ED THE ADVANCE. SIMILARLY, ASSESSEE PAID A SECURITY ADVANC E TO PURCHASE TEXTILE MACHINERY FOR EXPANSION OF TEXTILE BUSINESS TO M/S LAXMI MACHINE WORKS OF RS. 164 LAKHS. DUE TO SL UGGISH MARKET CONDITION, IT HAD TO DROP THE EXPANSION PLAN AND ACCORDINGLY THE SECURITY DEPOSITS WERE FORFEITED. L D. CIT(A) HAS TREATED THE ABOVE LOSSES AS THE CAPITAL IN NATU RE AND SUSTAINED THE DISALLOWANCE MADE BY AO. LD. DR ALSO SUPPORTED THE VIEWS OF THE TAX AUTHORITIES AND RELI ED ON FOLLOWING CASE LAW AND WE HAVE ANALYSED EACH CASE A S BELOW: 1. HASIMARA INDUSTRIES LTD. (SUPRA): IN THIS CASE, ASSESSEE HAS DIVERSIFIED ITS ACTIVITY INTO COTTON B USINESS. IN THIS PROCESS, IT HAD DEPOSITED RS. 20 LAKHS TO S ECURE LICENCE IN PURSUANT TO A LEAVE AND LICENCE AGREEMEN T. AFTER EXPIRY OF SCHEDULED PERIOD, THE LICENSOR COMP ANY WENT INTO LIQUIDATION. THE ASSESSEE COULD NOT RECOV ER THE DEPOSIT AND IT WAS WRITTEN OFF. THE SAME WAS HE LD TO BE CAPITAL LOSS. IN THE SAID CASE, THE ASSESSEE WAS INTO DIVERSIFICATION WHEREAS IN THE CASE ON HAND, IT WAS EXPANSION OF TEXTILE BUSINESS. HENCE, THE SAID CASE IS NOT APPLICABLE TO THE CASE UNDER CONSIDERATION. 2. TATA HONEYWELL LTD. (SUPRA): IN THIS CASE, A MACHINERY WAS LEASED OUT BY CFSL TO BSL FOR A PERIO D OF 9 YEARS. AFTER EXPIRY OF 5 YEARS, THE ASSESSEE APPROACHED BOTH THE ABOVE COMPANIES FOR TRANSPOSIN G IT AS LESSEE IN THE PLACE OF BSL FOR THE REMAINING PERIOD OF 4 YEARS. THE SAME WAS ACCEPTED AND TRIPARTITE AGREEMENT WAS ENTERED. THERE WAS A RENEWAL CLAUSE, WHICH GAVE RIGHT TO THE ASSESSEE TO RENEW AS MUCH T IME AS IT WANTED AS LONG AS IT COMPLIED WITH THE TERMS OF AGREEMENT/DEED. SINCE, ASSESSEE GOT ENDURING BENEFI T I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 8 DUE TO RENEWAL CLAUSE, IT WAS TREATED AS LEASEHOLD RIGHTS IN THE MACHINERY, THEREFORE, IT IS TREATED AS CAPIT AL ASSET AND THE EXPENDITURE AS CAPITAL EXPENDITURE. IN THE CASE BEFORE US, THERE IS NO RENEWAL CLAUSE AND IT IS FOR FIXED PERIOD OF 99 YEARS. SINCE THE ASSESSEE FAILED TO PE RFORM ITS PART OF DUTY, IT HAS LAST THE ADVANCE PAYMENT. THE ASSESSEE HAS NOT ENJOYED THE BENEFIT. THEREFORE, IT CANNOT BE TREATED AS ANY ASSET. 3. R.G. SCIENTIFIC ENTERPRISES (P) LTD. (SUPRA): IN THIS CASE, ASSESSEE PAID ADVANCE FOR PURCHASE OF PREMISE S. DUE TO SOME REASONS, PURCHASE COULD NOT BE COMPLETE D AND SELLER REFUSED TO RETURN THE MONEY. ASSESSEE CLAIMED THIS AS REVENUE EXPENDITURE. IT WAS HELD TH AT IT WAS ADVANCED FOR PURCHASE OF A CAPITAL ASSET THEREF ORE IT IS CAPITAL LOSS. THIS TRANSACTION IS NOT THE REG ULAR BUSINESS TRANSACTION OF THE ASSESSEE, IT IS INDEPEN DENT TRANSACTION FOR PURCHASE OF CAPITAL ASSET UNCONNECT ED TO THE BUSINESS CARRIED ON BY THE ASSESSEE. THEREFORE, THIS ISSUE CANNOT BE CONSIDERED IN THE PRESENT CASE ON H AND AS THE ASSESSE WANTED TO EXPAND THE EXISTING BUSINE SS IN THE TEXTILE. 4. EID PARRY (INDIA) LTD. (SUPRA): IN THIS CASE ALS O, ASSESSEE INCURRED EXPENDITURE FOR THE PURPOSE OF SE TTING UP A NEW PROJECT. THIS PROJECT WAS ABANDONED SUBSEQUENTLY. IT WAS HELD THAT THE EXPENDITURE SHOU LD BE TREATED AS CAPITAL EXPENDITURE. AGAIN THIS CASE ALS O NOT APPLICABLE TO THE CASE ON HAND AS IT IS FOR NEW PRO JECT NOT FOR EXPANSION. 5. ENTERPRISING ENTERPRISES (SUPRA): THIS CASE ALSO SIMILAR TO HASIMARA INDUSTRIES LTD. THE QUESTION WA S WHETHER LEASE RENT PAID IS CAPITAL OR NOT. AGAIN TH IS CASE IS NOT APPLICABLE TO THE FACTS OF THE CASE ON HAND. 6. KANORIA CHEMICALS (SUPRA): IN THIS CASE, THE LET TER OF INTENT WAS OBTAINED TO START A NEW PROJECT, WHIC H WAS ABANDONED. THE CASE IN HAND IS NOT ABOUT NEW PROJEC T BUT EXPANSION. HENCE, NOT APPLICABLE. 7. SWADESHI COTTON MILLS CO. LTD., (SUPRA): IN THIS CASE, ASSESSEE ENTERED INTO TWO CONTRACTS WITH TWO OTHER PARTIES FOR PURCHASE OF TEXTILE MACHINERY IN ORDER TO EXPAND ITS FACTORY, SUBSEQUENTLY, HAVING REGARD TO ALTERED CIRCUMSTANCES, DECIDED TO CANCEL BOTH CONTR ACT. THE CANCELLATION OF THESE CONTRACTS, ASSESSEE HAS T O INCUR COST. THESE COSTS WERE CLAIMED AS REVENUE EXPENDITURE. IT WAS HELD, THE PAYMENT MADE TO AVOID A LARGER CAPITAL EXPENDITURE THAT WOULD NOT HAVE SERV ED I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 9 THE INTEREST OF THE COMPANY. SUCH PAYMENT MADE IS CLEARLY IN THE NATURE OF A CAPITAL EXPENDITURE AND NOT AN EXPENDITURE INCURRED WHOLLY OR EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. 14.1 THE LAST CASE IS ON THE SUBJECT OF EXPANSION. THE HONBLE SUPREME COURT HAS DISALLOWED THE CLAIM OF T HE ASSESSEE BUT WE NOTICED IN THE SUBSEQUENT DECISION IN THE CASE OF SASSON J. DAVID & CO. P. LTD., 118 ITR 261, THE HONBLE SUPREME COURT EXPRESSED THEIR OPINION AND D ISCUSSED THE SIMILARITIES WITH SECTION 10(2)(XV) OF THE I.T. ACT, 1921 AND PURSUANT TO SECTION 37 OF I.T. ACT, 1961, IN THE FO LLOWING PARA: 20. THE NEXT CONTENTION URGED ON BEHALF OF THE DEPARTM ENT WAS THAT SINCE DAVIDS AND TATAS WERE INDIRECTLY BENEFIT ED BY THE RETRENCHMENT OF THE SERVICES OF THE EMPLOYEES OF TH E COMPANY AND PAYMENT OF COMPENSATION TO THEM AND SINCE THERE WAS NO NECESSITY TO RETRENCH THE SERVICES OF ALL THE EMPLOYEES, THE EXPENDITURE IN QUESTION COULD NOT BE TREATED AS AN EXPENDITURE LAI D OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE COMPANY. IT HAS TO BE OBSERVED HERE THAT THE EXPRESSION 'WHOLLY AND EXCLUSIVELY' U SED IN S. 10(2)(XV) OF THE ACT DOES NOT MEAN 'NECESSARILY'. O RDINARILY, IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY A ND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PRO FITS, THE ASSESSEE CAN CLAIM DEDUCTION UNDER S. 10(2)(XV) OF THE ACT EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO INCUR S UCH EXPENDITURE. IT IS RELEVANT TO REFER AT THIS STAGE TO THE LEGISLATIVE HISTORY OF S. 37 OF THE IT ACT, 1961, WHICH CORRESP ONDS TO S. 10(2)(XV) OF THE ACT. AN ATTEMPT WAS MADE IN THE IT BILL OF 1961 TO LAY DOWN THE 'NECESSITY' OF THE EXPENDITURE AS A CO NDITION FOR CLAIMING DEDUCTION UNDER S. 37. SEC. 37(1) IN THE B ILL READ 'ANY EXPENDITURE.....LAID OUT OR EXPENDED WHOLLY, NECESS ARILY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PRO FESSION SHALL BE ALLOWED....' THE INTRODUCTION OF THE WORD 'NECESSAR ILY' IN THE ABOVE SECTION RESULTED IN PUBLIC PROTEST. CONSEQUENTLY, W HEN S. 37 WAS FINALLY ENACTED INTO LAW, THE WORD 'NECESSARILY' CA ME TO BE DROPPED. THE FACT THAT SOMEBODY OTHER THAN THE ASSE SSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOULD NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION UNDER S. 10(2)(XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN BY LAW. THIS VIEW IS IN ACCORD WITH THE FOLLOWING OBSERVATIONS M ADE BY THIS COURT IN CIT VS. CHANDULAL KESHAVLAL & CO. : (1960) 38 IT R 601 (SC) : TC16R.507: IN THE ABOVE DISCUSSION, THE HONBLE SUPREME COURT HAS ALLOWED THE APPEAL OF THE ASSESSEE U/S 10(2)(XV) OF THE I.T. ACT, 1921 BY OBSERVING THAT AN EXPENDITURE WHICH IS INCURRED I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 10 WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT NECESSARILY FOR THE PURPOSE OF THE BUSINESS IS ALLO WABLE. THEREFORE, IN OUR VIEW, THERE IS CLEAR POSSIBILITY THAT IN THE CASE OF EXPANSION, THE EXPENDITURE IS FOR THE PURPO SE OF BUSINESS ONLY. 14.2 COMING TO THE ISSUE IN HAND, THE ASSESSEE MADE THE ADVANCE FOR PURCHASE OF MACHINERY AND LEASE ADVANCE , WHICH BECAME IRRECOVERABLE. THESE PAYMENTS WERE MADE FOR EXPANSION OF TEXTILE BUSINESS. IN OUR CONSIDERED V IEW, ANY INVESTMENT/ADVANCE PAID FOR PROCURING FIXED ASSETS OR LEASEHOLD RIGHTS, IT BECOMES AN ASSET ONLY AFTER SU CH ASSETS ARE INSTALLED OR FOR THAT MATTER ACCEPTED OR USED F OR THE BUSINESS. TILL THEN, IT REMAINS AS BUSINESS CONTRAC TS, WHICH COMES WITHIN THE BUSINESS OPERATION, IT DOES NOT MA TTER, WHETHER IT IS FOR CAPITAL OR REVENUE, IT IS FOR TH E PURPOSE OF BUSINESS ONLY. THEREFORE, IT FALLS WITHIN THE AMBIT OF SECTION 37. AS DISCUSSED IN THE CASE OF SASSON J. DAVID & C O. CASE (SUPRA) THAT AS LONG AS IT IS EXPENDED WHOLLY AND E XCLUSIVELY FOR THE PURPOSE OF BUSINESS, AND NOT NECESSARILY FO R THE BUSINESS, IT FALLS WITHIN THE AMBIT OF SECTION 37 O F THE ACT. THEREFORE, THE ADVANCE PAID FOR THE PURPOSE OF EXPA NSION, WILL FALL WITHIN THE AMBIT OF SECTION 37 OF THE ACT. WIT H REGARD TO THE ARGUMENT OF THE LD. DR THAT EXPENDITURE MUST BE EXP ENDED IN THE SAME YEAR TO GET THE DEDUCTION AS OBSERVED BY T HE AO, IN OUR CONSIDERED VIEW, IT IS FOR THE EXPANSION OF THE BUSINESS AND INCURRED DURING THE EARLIER YEARS, AS AND WHEN THE ASSESSEE REALISES THAT THIS CANNOT BE RECOVERED, TH IS CAN BE WRITTEN OFF IN THE YEAR IN WHICH IT IS DETERMINED T HAT IT CANNOT BE RECOVERED. THIS RIGHT CAN BE EXERCISED BY THE AS SESSEE WITH THE PROPER DOCUMENTATION ON RECORD. THEREFORE, THE CONTENTION OF LD. DR/AO ON THIS ASPECT IS NOT ACCEP TABLE. I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 11 THEREFORE, WE ARE INCLINED TO ALLOW THE GROUND RAIS ED BY THE ASSESSEE. 15. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: (I) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED BOTH IN LAW AND ON FACTS OF THE CASE. (II) THE CIT(APPEALS) SHOULD HAVE SUSTAINED THE DISALLOWANCE MADE TOWARDS AMOUNT PAID TO APGENCO FOR UPGRADATION, OPERATION AND MAINTENANCE OF FLY A SH EXTRACTION. (III) ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIME OF HEARING. 16. THE AO OBSERVED THAT THE ASSESSEE CLAIMED TO HA VE BEEN INCURRED AN AMOUNT OF RS. 59.25 LAKHS TOWARDS PAYMENT MADE TO APGENCO FOR UPGRADATION, OPERATION AND MAINTENANCE OF FLY ASH EXTRACTION SYSTEM AT VIJAYAW ADA THERMAL POWER STATION UNIT - 3, THE EXPENDITURE, BY NO STRETCH OF IMAGINATION PARTAKES THE CHARACTER OF 'REVENUE' IN NATURE FOR ALLOWANCE U/S. 37(1) OF THE ACT. FURTHER, THE IMPUG NED EXPENDITURE HAS ALSO NOT BEEN INCURRED DURING THE P REVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDER ATION. THE ASSESSEE ALSO FURNISHED NO EVIDENCE TO SUBSTANTIATE ITS CLAIM OF ARRANGEMENT BETWEEN THE ASSESSEE COMPANY AND M/S . APGENCO TO MAKE HOME ITS POINT THAT IT HAD TO INCUR THE EXPENDITURE FOR DRAWING FLY ASH AT CONCESSIONAL PRI CE. IN THE ABSENCE OF ANY EVIDENCE SUBSTANTIATING SUCH AN ARRA NGEMENT BETWEEN THE ASSESSEE COMPANY AND M/S. APGENCO, THE CLAIM OF EXPENDITURE WAS DISALLOWED AND ADDED TO TH E TOTAL INCOME BY THE AO. 17. BEFORE THE CIT(A), THE AR SUBMITTED THAT THE A SSESSEE, ALONG WITH THREE OTHER COMPANIES, HAD ENTERED INTO AN AGREEMENT WITH APGENCO IN THE YEAR 2006 FOR UPGRADA TION, OPERATION AND MAINTENANCE OF FLY ASH EXTRACTION SYS TEM AT I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 12 VIJAYAWADA THERMAL POWER STATION UNI T-3 WHICH ENAB LED THEM TO PROCURE FLY ASH SUPPLY FROM THIS UNIT AT CONCESS IONAL RATE UP TO 50% INVESTMENT MADE BY EACH COMPANY AND THAT THE BALANCE 50% INVESTMENT WAS LEFT TO APGENCO FOR ALLO WING SUPPLY OF FLY ASH TO THESE COMPANIES AS CONSIDERATI ON. THE AR SUBMITTED THAT THE APPELLANT HAD MADE AN INVESTMENT OF RS. 61.44 LAKHS DURING THE PERIOD STARTING FROM 2006 TO 2008 OF WHICH IT HAD CLAIMED RS. 59.25 LAKHS BEING THE PRO RATA BENEFIT UTILIZED DURING THE YEAR BY WAY OF SUPPLY OF FLY AS H BY APGENCO AT CONCESSIONAL RATE. THE AR SUBMITTED THAT AS THIS CLAIM WAS IN THE NATURE OF AMOUNT SPENT TO GAIN BEN EFIT OF CONCESSIONAL SUPPLY OF RAW MATERIAL, IT WAS AN EXPE NDITURE INCURRED FOR THE PURPOSE OF AND DURING THE COURSE O F BUSINESS OF THE COMPANY AND ALLOWABLE AS A REVENUE EXPENDITU RE / LOSS U/S. 37 OF THE INCOME TAX ACT. 18. THE CIT(A) REFERRING TO THE AGREEMENT DATED 06/ 03/2006 ENTERED BY THE ASSESSEE ALONG WITH THREE OTHER PART IES WITH APGENCO, OBSERVED THAT THE TERMS OF THE AGREEMENT M AKE IT CLEAR THAT THE INVESTMENT MADE IN THE UPGRADATION O F THE PLANT WAS TO BE RECOVERED BY THE ASSESSEE THROUGH SUPPLY OF FLY- ASH, A RAW MATERIAL FOR ITS OWN BUSINESS. FURTHER, HE OBSERVED THAT THE INVESTMENT BEING A QUID PRO QUO FOR THE SU PPLY OF RAW MATERIAL, THEREFORE, HAS TO BE HELD TO BE AN EXPEND ITURE ON REVENUE ACCOUNT. HE, THEREFORE, DELETED THE DISALLO WANCE MADE ON THIS COUNT BY THE AO. 19. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US, 20. LD. DR RELIED ON THE ORDER OF AO. 21. LD. AR SUBMITTED THAT THE ASSESSEE RELIED ON TH E MOU DATED 06/03/2006 ENTERED WITH APGENCO ALONG WITH OT HER I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 13 THREE COMPANIES TO UPGRADE THE FLY ASH EXTRACTION S YSTEM. BY THIS INVESTMENT, ASSESSEE WILL GET CONCESSIONAL RAT E WHILE PROCURING THE FLY ASH FROM APGENCO (MOU IS PLACED O N REVENUE PAPER BOOK AT PAGE 35.) HE CLAIMED THAT ASS ESSEE HAS PROCURED FLY ASH AT CONCESSIONAL RATE DURING TH E AYS UNDER CONSIDERATION. 22. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL ON RECORD. LD. AR HAS SUBMITTED THAT ASSE SSEE HAS MADE THE INVESTMENT IN ORDER TO GET THE BENEFIT OF PROCURING THE FLY ASH AT A CONCESSIONAL RATE. WHEN THE BENCH ASKED TO SUBSTANTIATE THE SUBMISSION, LD. AR BROUGHT ON RECO RD THE VARIOUS PURCHASE STATEMENTS, WHICH ARE PART OF RECO RD. IN ORDER TO VERIFY THE CLAIM OF THE ASSESSEE AND FOR P ROPER JUSTICE, WE ARE INCLINED TO REFER THIS MATTER BACK TO FILE OF AO WITH LIMITED PURPOSE TO VERIFY THE SUBMISSION OF TH E ASSESSEE, WHETHER ASSESSEE HAS PROCURED THE FLY ASH ON CONCES SION, WHICH SUPPORTS THE INVESTMENT DECISION. IN CASE, IT IS FOUND THAT ASSESSEE HAS PURCHASED THE FLY ASH AT CONCESSI ONAL RATE ( LESS BY RS. 40/- PER TONNE) THEN THE AO MAY ALLOW T HE CLAIM OF THE ASSESSEE, OTHERWISE, ADDITION MAY BE SUSTAINED. THEREFORE, GROUND RAISED BY REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 23. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D AND THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PU RPOSES. PRONOUNCED IN THE OPEN COURT ON 25 TH JANUARY, 2018. SD/- (P. MADHAVI DEVI) JUDICIAL MEMBER SD/- (S. RIFAUR RAHMAN) ACCOUNTANT MEMBER HYDERABAD, DATED 25 TH JANUARY, 2018. I.T.A. NOS. 1048 & 1058/HYD/2013 M/S VISAKA INDUSTRIES LTD., SECBAD 14 KV COPY FORWARDED TO: 1. M/S VISAKA INDUSTRIES LTD., C/O M. ANANDAM & CO. , CAS., 7A, SURYA TOWERS, SP ROAD, SECUNDERABAD. 2. ADDL. CIT, RANGE 3, HYDERABAD. 3. CIT(A) - IV, HYDERABAD 4 CIT - III, HYDERABAD 5 THE DR, ITAT, HYDERABAD 6 GUARD FILE