The DCIT, Circle-4, Ahmedabad V. Hazira Gas Pvt.Ltd., Ahmedabad

ITA 1079/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5743 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-07-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 13-07-2010
• Assessment Year: 2004-2005
• Appeal Filed On: 25-03-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R K DHANSETA
• Assessee Lawyers: P M MEHTA
• Keywords: Capital asset; Depreciation; Business expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND N. S. SAINI, AM) ITA NO.1079/AHD/2008 A. Y.: 2004-05 THE A. C. I. T., CIRCLE-4, 1 ST FLOOR, NAVJIVAN TRUST BUILDING, OFF ASHRAM ROAD, NAVRANGPURA AHMEDABAD VS HAZIRA GAS PVT. LTD., 101, ABHIJEET-II, MITHAKALI SIXTH ROAD, AHMEDABAD PA NO. AAGCS 0824 D (APPELLANT) (RESPONDENT) APPELLANT BY SHRI R. K.DHANSETA, DR RESPONDENT BY SHRI PM MEHTA, AR O R D E R PER BHAVNESH SAINI: THIS APPEAL OF THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-VIII, AHMED ABAD DATED 10 TH JANUARY,2008 ASSESSMENT YEAR 2004-05 ON THE FOLLOW ING GROUND: 1. THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS O F THE CASE IN DIRECTING THE A. O. TO DELETE THE DISALLOWANCE O F RS.30,32,29,590/- BEING THE BUSINESS EXPENDITURE IN THE NATURE OF PRE-OPERATIVE EXPENSES IGNORING THE F ACT THAT THE ASSESSEE COMPANY DID NOT CARRY OUT ANY COMMERCIAL TRANSACTION LIKE BUYING OR SELLING OF L N G OR C N G GAS DURING THE YEAR AS PER THE MAIN OBJECTIVE OF THE COMPANY, DURING THE YEAR UNDER APPEAL. 2. THE AO OBSERVED THAT DURING THE YEAR UNDER CONSI DERATION, THE ASSESSEE HAS NOT COMMENCED ITS BUSINESS; HENCE, EXP ENSES INCURRED PRIOR TO THE COMMENCEMENT OF THE BUSINESS HAVE TO B E CAPITALIZED. THE ASSESSEE HAD DEBITED PERSONAL EXPENSES TO THE TUNE OF RS.44,72,93,648/-, ADMINISTRATIVE AND OTHER EXPENSE S OF RS.24,42,80,836/- AND DEPRECIATION OF RS.5,19,45,45 4/- TO THE PROFIT & LOSS ACCOUNT AND IT HAS SHOWN LOSS OF RS.30,32,29,5 90/- AFTER MAKING ITA NO.1070/AHD/2008 ACIT, CIR-4 VS HAZIRA GAS (P) LTD., AHMEDABAD 2 CERTAIN DISALLOWANCES/ADJUSTMENTS. SIMILAR ISSUE CA ME UP IN THE PRECEDING ASSESSMENT YEAR 2003-04 AND THE AO FOLLOW ING THE FINDINGS OF THE PRECEDING ASSESSMENT YEAR TREATED THE EXPENSES AND LOSS CLAIMED AS CAPITAL EXPENDITURE AND DISALLOWED THE SAME. IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT THE ISSUE IS COVERED BY HIS ORD ER FOR ASSESSMENT YEAR 2003-04 IN WHICH THE APPEAL OF THE ASSESSEE HAS BEE N ALLOWED AND THE AO WAS DIRECTED TO ALLOW THE EXPENSES AS BUSINESS L OSS AND ALSO ALLOW DEPRECIATION. THE LEARNED CIT(A) ACCORDINGLY ALLOWE D THE APPEAL OF THE ASSESSEE BY FOLLOWING HIS APPELLATE ORDER FOR ASSES SMENT YEAR 2003-04. 3. THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTS ET SUBMITTED THAT THE ISSUE IS NOW COVERED BY THE ORDER OF ITAT AHMED ABAD BENCH IN THE CASE OF THE SAME ASSESSEE FOR PRECEDING ASSESSMENT YEAR 2003-04 IN ITA NO. 1929/AHD/2007DATED 07-05-2010 WHEREBY DEPARTMEN TAL APPEAL HAS BEEN DISMISSED. COPY OF THE ORDER IS FILED ON RECOR D. THE ORDER OF THE TRIBUNAL HAS NOT BEEN DISPUTED BY THE LEARNED DR. 4. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE AR E OF THE VIEW THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY T HE ORDER OF THE TRIBUNAL DATED 07-05-010 IN WHICH DEPARTMENTAL APPEAL ON IDE NTICAL QUESTION HAS BEEN DISMISSED IN THE ASSESSMENT YEAR 2003-04. THE FINDINGS OF THE TRIBUNAL IN PARA 7 TO 11 ARE REPRODUCED AS UNDER: 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE MAIN OBJECT OF THE ASSESSEE COMPANY IS TO CARRY OUT BUSI NESS OF BUYING, SELLING, SUPPLYING, MARKETING, DISTRIBUTING , IMPORTING AND/OR TRADING IN NATURAL GAS INCLUDING RE-GASIFIED L N G, LIQUIFIED NATURAL GAS, C N G AND OTHER FORM OF NATU RAL GAS, ASSOCIATED GASEOUS SUBSTANCES. THE GOVERNMENT OF IN DIA HAD GRANTED APPROVAL OF THE OBJECT OF THE ASSESSEE FOR THE ABOVE PURPOSE TO MEET OUT THE REQUIREMENTS OF THE GASES. THE ASSESSEE FILED DETAILED REPLY BEFORE THE AO AND THE LEARNED CIT(A) TO EXPLAIN THAT IN ORDER TO ACHIEVE THE OBJE CTIVE OF THE ASSESSEE, IT HAD ENTERED INTO SEVERAL AGREEMENTS AN D MOUS FOR SALE AND PURCHASE OF THE GASES. THE DETAILS SUB MISSIONS OF ITA NO.1070/AHD/2008 ACIT, CIR-4 VS HAZIRA GAS (P) LTD., AHMEDABAD 3 THE ASSESSEE HAVE BEEN INCORPORATED BY THE AO IN TH E ASSESSMENT ORDER. THE LEARNED CIT(A) ALSO BRIEFLY N OTED VARIOUS STAGES OF THE ASSESSEE WHICH WERE CARRIED O UT TOWARDS BUSINESS ACTIVITIES INCLUDING MARKETING ACT IVITIES AND COMMERCIAL ACTIVITIES CARRIED OUT BY THE ASSESSEE. THE ASSESSEE IN THE PAPER BOOK FILED THE FOLLOWING MOU AND AGREEMENT: (1) PB -6 MOU DATED 26-03-2002 BETWEEN THE ASSESS EE (SELLER) AND SURAT ELECTRICITY CO. LTD. (BUYER) FOR PURCHASE AND SALE OF THE NATURAL GAS. (2) MOU DATED 11-12-2002 BETWEEN THE ASSESSEE (SELL ER) AND RASTRIYA CHEMICALS & FERTILIZERS LTD. FOR PURCH ASE OF GAS (3) HEADS OF AGREEMENTS DATED 02-02-2004 BETWEEN TH E ASSESSEE AND RASTRIYA CHEMICALS & FERTILIZERS LTD. FOR PURCHASE OF GAS 8. THE ABOVE WOULD SHOW THAT THE ASSESSEE HAD COMMENCED ITS BUSINESS BY SECURING ORDERS FOR PURCH ASE AND SALE OF GASES. THE CASE OF THE ASSESSEE IS THUS OF TRADING IN GASES WHICH WAS NOT PROPERLY APPRECIATED BY THE AO AND THE AO TOOK IT TO BE A BUSINESS NOT COMMENCED BECAUSE T HE ASSESSEE WAS IN THE PROCESS OF SETTING UP OF THE UN IT. ITAT AHMEDABAD BENCH IN THE CASE OF GENERAL MOTORS INDIA LTD. (SUPRA) CONSIDERING THE DECISION OF JURISDICTIONAL HIGH COURT IN THE CASE OF PREM CONDUCTORS PVT. LTD. HELD THAT THE BUSINESS OF THE ASSESSEE HAS COMMENCED AS SOON AS THE ASSESS EE STARTED SECURING ORDERS FOR THE GOODS TO BE PRODUCE D LATER ON. THE AO WAS ACCORDINGLY DIRECTED TO ALLOW DEDUCTION FOR THE EXPENDITURE FROM THE DATE WHEN BOOKING OF CARS HAS STARTED. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE BASIS O F THE FINDINGS GIVEN BY THE LEARNED CIT(A) AND THE DETAIL S FILED IN THE PAPER BOOK HAS BEEN ABLE TO SATISFY THAT THE AS SESSEE HAS COMMENCED ITS BUSINESS ACTIVITIES DURING THE YEAR U NDER CONSIDERATION. THE LEARNED CIT(A) WAS, THEREFORE, J USTIFIED IN HOLDING THAT EVEN THOUGH NO SALE TOOK PLACE DURING THE YEAR THE COMMENCEMENT OF INITIAL STEPS OF THE ASSESSEES ACTIVITIES IS NOT IN DOUBT. THE LEARNED CIT(A) WAS ALSO JUSTIF IED IN HOLDING THAT THE ISSUE OF GAS DISTRIBUTION BEING A REGULATED ACTIVITY, THE ASSESSEES CLAIM IS TO BE CONSIDERED TAKING THE OBJECTIVES IN VIEW OF THE SCOPE OF THE BUSINESS. TH E LEARNED CIT(A) WAS ALSO JUSTIFIED IN HOLDING THAT THE BUSIN ESS OF THE ASSESSEE WAS SET UP AND NECESSARY MARKETING EXPLORA TION AND CONNECTED MOU WERE TAKEN UP. HENCE, THE EXPENDI TURE ITA NO.1070/AHD/2008 ACIT, CIR-4 VS HAZIRA GAS (P) LTD., AHMEDABAD 4 INCURRED WAS AFTER SET UP OF THE BUSINESS AND CANNO T BE APPORTIONED TO ANY CAPITAL ASSET. 9. THE AO NOTED THE DECISION OF CHELLAPALLY SUGAR M ILLS LTD. VS CIT 98 ITR 167 (SC) WHEREIN IT IS HELD THAT EXPENSES INCURRED BEFORE COMMENCEMENT OF PRODUCTION IN A SEPARATE DISTINCT UNIT WHICH HAS NO CONNECTION WITH THE EXISTING BUSINESS WITH REFERENCE TO WHICH CAPITAL W AS BORROWED CAN BE CAPITALIZED AND ADDED TO THE COST O F THE FIXED ASSETS. THE AO ALSO REFERRED TO THE DECISION IN THE CASE OF MINING & EXPLOSIVE PVT. LTD. 202 ITR 710 IN WHICH IT HAS BEEN HELD THAT EXPENDITURE INCURRED IN CONNECTION WITH SET UP OF A BUSINESS IS NOT DEDUCTIBLE AS THE BUSINESS IS NOT SET UP. BOTH THE ABOVE DECISIONS RELIED UPON BY THE AO ARE DISTINGUISHABLE WITH THE FACTS O F THE PRESENT APPEAL AS NOTED ABOVE. THE ASSESSEE INCURRE D THE EXPENDITURE FOR THE PURPOSE FOR BUSINESS IN BUSINES S IN THE PRESENT APPEAL AND THAT IT BEING A TRADING CONCERN HAS NO RELEVANCY FOR SET UP OF THE BUSINESS AS IS ARGUED B Y THE LEARNED COUNSEL FOR THE ASSESSEE. THE DECISIONS REL IED UPON BY THE AO ARE, THEREFORE, NOT APPLICABLE TO THE FAC TS OF THE CASE. 10. THE LEARNED COUNSEL FOR THE ASSESSEE IN THE PAP ER BOOK ALSO REFERRED TO PB-39 WHICH IS DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF WESTERN INDIA VEGE TABLE PRODUCTS LTD. (26 ITR 151) IN WHICH IT WAS OBSERVED THAT WHEN A BUSINESS IS ESTABLISHED AND IS READY TO COMMENCE BUSINESS THEN IT CAN BE SAID OF THAT BUSINESS THAT IT IS SET UP. BUT BEFORE IT IS READY TO COMMENCE BUSINESS IT IS NOT SET UP. BUT THERE MAY BE INTERREGNUM, THERE MAY BE A INTERVAL BETWEEN A BUSINESS WHICH IS SET UP AND A BUSINESS WHICH IS CO MMENCED AND ALL EXPENSES INCURRED AFTER THE SET UP OF THE B USINESS AND BEFORE COMMENCEMENT OF THE BUSINESS ALL EXPENSES DU RING THE INTERREGNUM WOULD BE PERMISSIBLE DEDUCTION U/S 10(2 ) OF THE IT ACT. THE FACTS AND CIRCUMSTANCES NOTED ABOVE AN D THE FINDING OF FACTS RECORDED BY THE LEARNED CIT(A) ON THE BASIS OF MATERIAL BEFORE HIM, IT IS CLEAR THAT IN THE CASE O F THE ASSESSEE THE BUSINESS OF SALE AND PURCHASE OF GASES HAVE BEE N COMMENCED DURING THE ASSESSMENT YEAR IN QUESTION. T HE FINDING OF FACTS RECORDED BY THE LEARNED CIT(A) HAV E NOT BEEN REBUTTED THROUGH ANY MATERIAL ON RECORD. THE DETAIL S OF THE MOUS FILED IN THE PAPER BOOK SHOW THAT THE ASSESSEE ENTERED INTO AGREEMENTS OF SALE OF THE GASES WITH OTHER PAR TIES IN THE ASSESSMENT YEAR IN QUESTION OR BEFORE. SINCE THE AS SESSEE HAS BEEN ABLE TO SATISFY THAT IT STARTED SECURING ORDER S FOR SALE OF ITA NO.1070/AHD/2008 ACIT, CIR-4 VS HAZIRA GAS (P) LTD., AHMEDABAD 5 GASES, THEREFORE, THE ASSESSEE HAD COMMENCED ITS BU SINESS ACCORDINGLY. WE, THEREFORE, DO NOT FIND ANY INFIRMI TY IN THE ORDER OF THE LEARNED CIT(A) IN ALLOWING DEDUCTION O F THE EXPENDITURE IN THIS CASE. WE ACCORDINGLY CONFIRM HI S ORDER AND DISMISS THE APPEAL OF THE REVENUE. 11. AS A RESULT, THE DEPARTMENTAL APPEAL STANDS DISMISSED. 5. THE ISSUE IS COVERED BY THE ABOVE ORDER AND NO O THER FINDING IS GIVEN BY THE AO EXCEPT FOLLOWING HIS ORDER FOR EARL IER YEAR. BY FOLLOWING THE SAME ORDER OF THE TRIBUNAL, WE DISMISS THE DEPA RTMENTAL APPEAL. 6. IN THE RESULT, THE DEPARTMENTAL APPEAL IS DISMIS SED. ORDER PRONOUNCED ON 16-07-2010 SD/- SD/- (N. S. SAINI) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 16-07-2010 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD