M/s. Karnataka State Small Industries Development Corp.Ltd, Bangalore V. ACIT, Bangalore

ITA 1087/BANG/2010

• Counselvise Citation: 108721114 RSA 2010
• Duration Of Justice: 1 year(s) 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 20-06-2012
• Assessment Year: 1996-1997
• Appeal Filed On: 17-09-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE
• Keywords: Depreciation; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 260A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N. BARATHVAJA SANKAR, VICE RESIDENT AND SMT. P MADHAVI DEVI, JUDICIAL MEMBER ITA NO.1087/BAN G/2010 (ASST. YEAR :1996-97) M/S KARNATAKA STATE SMALL INDUSTRIES DEV. COPN. LTD.,(KSSDC LTD) A.O.BUILDING INDUSTRIAL ESTATE, RAJAJINAGAR, BANGALORE560 010. APPELLANT PAN AAACK 5856H VS THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-11(5), BANGALORE. RESPONDENT ASSESSEE BY : SHRI S. PARTHASARATHI, ADVOCATE RESPONDENT BY : SMT SUSAN THOMAS JOSE, JCIT DATE OF HEARING : 2 1-06-2012 DATE OF PRONOUNCEMENT : 04-07-2 012 O R D E R PER P MADHAVI DEVI, JUDICIAL MEMBER THIS APPEAL IS FILED BY THE ASSESSEE. THE R ELEVANT ASSESSMENT YEAR IS 1996-97. THE APPEAL IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)- I AT BANGALOR E DATED ITA NO.1087(B)/2010 2 30.06.2010. THE APPEAL ARISE OUT OF THE ASSESSMENT COMPLETED U/S 143(3) R.W.S 260A OF THE INCOME-TAX ACT, 1961 2. THE ASSESSEE HAS RAISED VARIOUS GROUNDS OF APPE AL NO.1 TO 7, HOWEVER, THE ASSESSEE HAS ALSO FILED REVISED GRO UNDS OF APPEAL WHICH ARE AS UNDER : 1. THE LD. CIT(A) ERRED IN UPHOLDING THE DISALLOW ANCE OF RS.13,63,450/- BEING THE POWER LINES SERVICE CHARGE S EXCLUDED IN THE VALUATION OF THE CURRENT ASSETS. 2. THE LD. ASSESSING AUTHORITY AND THE APPELLATE AUTHORITY ERRED IN NOT APPRECIATING THE NOTES ON AC COUNT AND SIGNIFICANT ACCOUNTING POLICY AS EXPLAINED BY T HE ASSESSEE. 3. THE LD. CIT(A) OUGHT TO HAVE ACCEPTED THE EXPL ANATION AND ALLOWED THE DEDUCTION OF RS.13,63,450/- AS CLAI MED BY THE APPELLANT. 4. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THAT T HE HONBLE TRIBUNAL IN THE FIRST ROUND HAS ALLOWED HE CLAIM AND THE HIGH COURT HAS SET ASIDE THE ISSUE BACK TO THE FILE OF THE ASSESSING AUTHORITY ONLY TO CONSIDER THE CLA IM IN THE RIGHT PERCEPTIVE AFTER CONSIDERING THE ACCOUNTING P OLICY TO BE CONSISTENTLY FOLLOWED BY THE APPELLANT. 5. THE LD.CIT(A) OUGHT TO HAVE APPRECIATED THAT TH E APPELLANT HAD RIGHTLY CLAIMED THE EXPENDITURE BEING THE PART OF THE EXPENDITURE ON INFRASTRUCTURAL FACILITI ES IN PROVIDING POWER LINES FOR WHICH THE LICENCE IS GIVE N BY THE ELECTRICAL AUTHORITIES WHEN FACILITY WAS HANDED OVE R. ITA NO.1087(B)/2010 3 6. ON THE FACTS THE LD.CIT(A) OUGHT TO HAVE ACCEPT ED THE EXPLANATION OF THE APPELLANT AND ALLOWED THE CLAIM IN FULL. 7. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED A T THE TIME OF HEARING OF THE APPEAL THE APPELLANT PRAYS T HAT THE APPEAL MAY BE ALLOWED. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY IS IN THE BUSINESS OF DEVELOPING AND PROMOTING OF SMAL L SCALE INDUSTRIES IN KARNATAKA. FOR THE ASSESSMENT YEAR 1 996-97, THE ASSESSEE HAS FILED ITS RETURN OF INCOME ON 21.11.96 DECLARING A TOTAL INCOME OF RS.67,18,380/-, WHICH AFTER SET OF OFF UNABSORBED DEPRECIATION BROUGHT FORWARD FROM EARLIER YEARS WAS SHOWN AT RS.1,23,050/ DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE INCOME-TAX ACT, VARIOUS DETAILS WERE CALLED FOR AND THE ASESEEE FILED THE SAME. AFTER PERUSAL OF THE SAME, THE AO OBSERVED THAT THE ASSESSEE HAD CHANGED ITS METHOD OF EVALUATION A S COMPARED TO EARLIER YEARS IN NOT INCLUDING POWER LINE SERVICES CHARGES OF RS.33,48,977/- IN THE VALUATION OF CURRENT ASSETS A S PER THE DECISIONS OF THE CORPORATION AND THE EXPENDITURE IN CURRED DURING THE YEAR FOR THIS PURPOSE WAS RS.19,85,527/- WHILE THE EXPENDITURE RELATING TO PRIOR YEARS WAS RS.13,53,460/-. THE ASS ESSEES EXPLANATION WITH REGARD TO THE SAME WAS CALLED FOR. THE ASSESSEE EXPLAINED THAT IT HAD INCURRED EXPENDITURE FROM THE FINANCIAL YEAR ITA NO.1087(B)/2010 4 1993-94 TOWARDS PROVISION OF POWER LINE INFRASTRUCT URE FACILITIES TO SHED ALLOTTEES IN INDUSTRIAL ESTATES WHICH HAS ACCU MULATED TO RS.13,63,460/- AND WAS SHOWN AS WORK IN PROGRESS IN THE ACCOUNTS AND CLASSIFIED AS CURRENT ASSETS. IT WAS SUBMITTED THAT THE CORPORATION HAS NEVER WRITTEN OFF THE EXPENDITU RE IN THE ACCOUNTS WITH THE INTENTION OF RECOVERING THE AMOUN T FROM KARNATAKA ELECTRICITY BOARD WHO IS THE SERVICE PROV IDER. HOWEVER, THE CORPORATION WAS CORRESPONDINGLY RECOVERING FROM THE ALLOTTEE THE COST OF THE SHED WHICH ALSO INCLUDED THE COST O F INFRASTRUCTURE FACILITIES CREDITED BY THE CORPORATION AND THE PROC EEDINGS OF SUCH COLLECTIONS WAS TREATED AS INCOME. IT WAS SUBMITTE D THAT IN THE FINANCIAL YEAR 1995-96, THE CORPORATION CHARGED THE EXPENDITURE INCURRED FOR THE ABOVE INFRASTRUCTURE FACILITIES DU RING THE YEAR TO ITS PROFITS AND LOSS ACCOUNT WITHOUT CORRESPONDINGLY CO NSIDERING IT AS CURRENT ASSET. IN VIEW OF THE FACT THAT THE FACILI TIES CREATED BY THE CORPORATION FOR DRAWING POWER LINES WAS TO BE HANDE D OVER TO KARNATAKA ELECTRICITY POWER FOR FREE OF COST AND TH E CORPORATION DID NOT HAVE ANY TITLE OR OWNERSHIP RIGHTS OVER THE FAC ILITIES SO CREDITED, IT HAD BECOME NECESSARY FOR THE CORPORATION TO EXCL UDE THE EXPENDITURE OF RS.13,63,450/- ACCUMULATED AND CONSI DERED AS CURRENT ASSETS FROM THE VALUATION OF WORKING PROGRE SS AS ON ITA NO.1087(B)/2010 5 31.3.1996. IT WAS ALSO SUBMITTED THAT THE EXPENDIT URE SO INCURRED DO NOT CONSTITUTE ANY CAPITAL EXPENDITURE AS THE EX PENDITURE DID NOT CONFIRM ANY BENEFIT OF ENDURING NATURE NOR DOES THE ASSET SO CREATED OUT OF THE EXPENDITURE BELONGS TO THE ASSES SEE. IT WAS SUBMITTED THAT THE ASSETS WERE HANDED OVER TO KARNA TAKA ELECTRICITY POWER BOARD DURING THE YEAR UNDER CONSI DERATION AND HENCE, THE DIFFERENCE IN THE VALUE WAS TO BE WRITTE N OFF IN THE ACCOUNTS AS DONE BY THE ASSESSEE. HOWEVER, THE AO WAS NOT CONVINCED WITH THE ASSESSEES CONTENTION AND HELD T HAT THE CLAIM OF PRIOR PERIOD EXPENDITURE OF RS.13,53,460/- CANNOT B E ALLOWED DURING THE RELEVANT ASSESSMENT YEAR BECAUSE THE ASS ESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. HE FURT HER HELD THAT IN THE EARLIER YEARS, THE EXPENDITURE WHICH WAS TREATE D AS CURRENT ASSETS IN THE RESPECTIVE FINANCIAL YEARS, CANNOT BE WRITTEN OFF IN A SUBSEQUENT YEAR ON ACCOUNT OF RETROSPECTIVE CHANGE IN THE METHOD OF ACCOUNTING AND THAT IF AT ALL ANY CHANGE IN THE METHOD OF ACCOUNTING HAS TO BE EFFECTED, IT IS TO BE EFFECTED FROM THE PREVIOUS YEAR UNDER CONSIDERATION AND NOT FROM EARLIER YEAR PERIOD AS IT CHOOSES. HE THUS DISALLOWED THE CLAIM OF PRIOR PER IOD OF EXPENDITURE 13,46,163/- AND BROUGHT IT TO TAX. ITA NO.1087(B)/2010 6 4. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE PREF ERRED AN APPEAL BEFORE THE ITAT WHICH WAS ALLOWED. 4.1 THE REVENUE CARRIED THE MATTER IN APPEAL BEFOR E THE HONBLE HIGH COURT AND THE HIGH COURT VIDE ORDER DA TED 30.11.2006 REMITTED THE MATTER BACK TO THE AO FOR R E-DECISION AND RECONSIDERATION OF THE MATTER AFRESH WITHOUT IN ANY WAY BEING INFLUENCED BY HIS EARLIER ORDER OR BY ORDER OF THE HONBLE HIGH COURT AND DIRECTED HIM TO PASS ORDERS IN ACCORDANCE WITH LAW. 4.2 CONSEQUENT TO THE SAME, THE ASSESSING OFFICER RECONSIDERED THE ISSUE AND HELD THAT THE EXPENDITUR E INCURRED BY THE ASSESSEE ON CREATING THE POWER LINE IS REVENUE IN NATURE AND, THEREFORE, SUCH EXPENDITURE IS TO BE ALLOWED IN THE YEAR IN WHICH IT IS INCURRED. AS THE EXPENDITURE CLAIMED BY THE AS SESSEE TO THE TUNE OF RS.13,063,460/- RELATES TO THE YEARS PRIOR TO THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR IN QUESTION, T HE AO DENIED THE CLAIM AND ADDED IT TO THE TOTAL INCOME OF THE A SSESSEE. 4.3 AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BE FORE THE CIT(A) WHO CONFIRMED THE ORDER OF THE AO AND THE AS SESSEE IS IN SECOND APPEAL BEFORE US IN THE SECOND ROUND OF LITI GATION. ITA NO.1087(B)/2010 7 5. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI S.PAR THSARATHI, WHILE REITERATING SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW SUBMITTED THAT THE ASSESSEE HAS T AKEN THE EXPENDITURE INCURRED BY IT ON LAYING OF THE POWER L INES TO THE WORK- IN PROGRESS AND TO THE CURRENT ASSET ACCOUNT WHIL E INCOME EARNED FROM THE SHED ALLOTTES WAS ALWAYS OFFERED AS INCOME , IN THE RELEVANT YEARS. HE SUBMITTED THAT IN THE RELEVANT PREVIOUS YEAR, THE ASSESSEE HAD TO HANDOVER THE POWER LINES TO KEB AND , THEREFORE, IT WAS NECESSARY TO CLAIM THE ENTIRE EXPENDITURE FOR T HE RELEVANT ASSESSMENT YEAR ONLY. HE SUBMITTED THAT WHEN THERE IS CHANGE IN ACCOUNTING, THERE IS BOUND TO BE SUCH DISPUTE RELAT ING TO THE ALLOWABILITY OF EARLIER YEARS EXPENSES BUT AS HELD BY THE HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS. BELAH ARI INVESTMENT (P). LTD., REPORTED IN 299 ITR 1, (SC) EVERY ASSESS EE IS ENTITLED TO CHANGE THE METHOD ACCOUNTING UNLESS ITRESULTS IN DI STORTION OF PROFITS OF THE PARTICULAR YEAR. HE ALSO PLACED REL IANCE UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. STANDARD RADIATORS PVT. LTD REPORTED IN 286 ITR 207 , WHEREIN IT WAS HELD THAT WHERE THE ASSESSEE CHANGES ITS SYSTEM OF ACCOUNTING FROM CASH BASIS TO MERCANTILE BASIS AND ACCORDINGLY , CLAIMS DEDUCTION OF PROVISION FOR BONUS AS WELL AS PAYMENT OF BONUS ITA NO.1087(B)/2010 8 RELATABLE TO THE EARLIER YEAR MADE IN THE YEAR UNDE R CONSIDERATION, THE TOTAL DEDUCTION WAS NECESSARY CONCOMITANT IN TH E YEAR OF CHANGE OF SYSTEM OF ACCOUNTING AND, THEREFORE, PAYM ENT COULD NOT BE SAID TO BE RELATABLE TO EARLIER YEAR AND DISALLO WED. HE ALSO PLACED RELIANCE UPON THE DECISION OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF CIT VS. WEST COAST PAPER MILLS LTD. REPORTED IN 193 ITR 349 (BOM.) WHEREIN IT WAS HELD THAT WHERE T HE METHOD OF ACCOUNTING HAS BEEN CHANGED FOR GENUINE REASONS AND THE CHANGE IS REGULARLY AND CONSISTENTLY FOLLOWED THEREAFTER, THE SAME IS PERMISSIBLE EVEN IF IT RESULTS IN DOUBLE DEDUCTION IN THE FIRST YEAR. 6. HE ALSO RELIED UPON THE DECISION OF THE HONBLE HIGH COURT OF CALCUTTA IN THE CASE OF EASTERN BENGAL JUTE TRAD ING CO. LTD., REPORTED IN 112 ITR 575(CAL.) WHEREIN SIMILAR DECI SION WAS GIVEN. 7. THE LEARNED DR SMT. SUSAN THOMAS JOSE, THE OTH ER HAND SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND S UBMITTED THAT THE ASSESSEE HAS BEEN FOLLOWING THE MERCANTILE SYST EM OF ACCOUNTING ALL ALONG AND THEREFORE, THE EXPENDITURE RELATABLE P.Y IS ALLOWABLE AND IS IN FACT ALLOWED TO THE ASSESSEE. SHE SUBMITTED THAT EXPENDITURE RELATING TO THE EARLIER YEARS CANN OT BE ALLOWED DURING THE YEAR AS IT HAS ALREADY BEEN TAKEN TO THE CURRENT ASSET ACCOUNT AND IF THE SAME IS ALLOWED DURING THE RELEV ANT ASSESSMENT ITA NO.1087(B)/2010 9 YEAR, IT WOULD AMOUNT TO DOUBLE DEDUCTION. AS REGA RDS THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR TH E ASSESSEE, THE LEARNED DR SUBMITTED THAT THEY ARE DISTINGUISHABLE ON FACTS. 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THE RIVAL CONTENTIONS, WE FIND THAT WHILE REMITTING THE ISSUE BACK TO THE AO, THE HONBLE KARNATAKA HIGH COURT HAS DIRECTED T HE AO TO CONSIDER THE QUESTION BEFORE THEM I.E WHETHER EXPEN DITURE OF RS.13,65,450/- INCURRED BY THE ASSESSEE OVER THE AS SET WHICH WAS DEBITED TO THE PROFIT AND LOSS ACCOUNT AND ALSO CRE DITED TO CLOSING STOCK AND AS WORKING IN PROGRESS AND TREATED AS AN ASSET DURING THE FINANCIAL YEAR 1994-95 SHOULD BE TREATED AS REV ENUE EXPENDITURE DURING THE CURRENT ASSESSMENT YEAR 1996 -97, WHEN THE ITEM WAS HANDED OVER FREE OF COST TO THE K.E.B , ESPECIALLY WHEN IT WAS REFLECTED IN OPENING STOCK AND OMITTED IN THE CLOSING STOCK. THE REVENUE AUTHORITIES HAVE HELD THAT EXPEN DITURE INCURRED BY THE ASSESSEE ON LAYING OF THE POWER LI NES IS REVENUE IN NATURE. HAVING HELD SO, MERELY BECAUSE THE SAID EX PENDITURE HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT AND CRE DITED TO THE CLOSING STOCK UNDER WORK IN PROGRESS AND TREATED AS A CURRENT ASSET DURING THE FINANCIAL YEAR 1994-95, IT WILL N OT CHANGE THE NATURE OF ITS BEING REVENUE EXPENDITURE. THE ONLY QUESTION TO BE ITA NO.1087(B)/2010 10 CONSIDERED IS WHEN THE ASSESSEE HAS TO HAND OVER PO WER LINES TO KEB FREE OF COST WHETHER IT CAN CLAIM THE EXPENDITU RE INCURRED BY IT FOR THE EARLIER ASSESSMENT YEARS AS A DEDUCTION OF EXPENDITURE OF THE RELEVANT ASSESSMENT YEAR. IT IS TO BE SEEN THA T THE ASSESSEE HAS ALSO EARNED INCOME FROM THE SAID POWER LINES AN D THE SAME HAS ALSO BEEN OFFERED IN THE YEARS OF RECEIPT. BY T REATING THE EXPENDITURE AS WORK-IN PROGRESS, THE ASSESSEE IN TH E YEAR IN WHICH THE POWER LINES ARE TO BE HANDED OVER IN K.E.B,FREE OF COST, HAS TO SET OFF THE WORK-IN PROGRESS, FROM THE PROFITS OF T HE RELEVANT YEAR AS THE ASSESSEE IS NO LONGER GOING TO EARN INCOME OUT OF THE SAID POWER LINES. BY DEBITING THE EXPENDITURE TO PROFIT AND LOSS ACCOUNT AND CREDIBILITY THE CLOSING STOCK, IT IS CLEAR THAT THE ASSESSEE HAS NOT CLAIMED THIS EXPENDITURE AS DEDUCTION IN THE EA RLIER YEARS. AS HELD BY THE HONBLE COURTS IN THE DECISIONS RELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE (THOUGH ON A DIFFE RENT SET OF FACTS) WHEREVER THERE IS A CHANGE OF METHOD OF ACCOUNTING, FOR GENUINE REASONS, THERE IS EVERY CHANCES OF CLAIM OF DOUBLE DEDUCTION ARISING DURING THE YEAR ON CHANGE OF ACCOUNTING. A S HELD BY THE HONBLE HIGH COURTS IN THE CASES CITED (SUPRA), THE NECESSITY AND THE CRYSTALLIZATION OF THE LIABILITY DURING THE REL EVANT PERIOD IS TO BE CONSIDER FOR ALLOWING THE EXPENDITURE. IN THE CASE BEFORE US, THE ITA NO.1087(B)/2010 11 ASSESSEE HAS NOT CLAIMED THE EXPENDITURE IN THE EAR LIER YEARS AND THERE IS NO CLAIM OF DOUBLE DEDUCTION IN THE RELEVA NT ASSESSMENT YEAR. FURTHER, THE ASSESSEE WHO HAS CHANGED THE MET HOD OF ACCOUNTING DUE TO GENUINE REASON OF HAVING TO HAND OVER THE POWER LINES TO KEB CAN CLAIM THE EXPENDITURE RELATING TO EARLIER YEARS IN THIS YEAR, EVEN IF IT RESULTS IN DOUBLE DEDUCTION. 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 4 TH JULY, 2012. SD/- SD/- (N.BARATHVAJA SANKAR) (P MADHAVI DEVI) VICE PRESIDENT JUDICIAL MEMBER AM* . BANGALORE DATED : 04-07-2012 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BANGALORE.