Satluj Jal Vidyut Nigam Ltd., New Shimla V. DCIT, Shimla

ITA 1100/CHANDI/2010

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1597 (ITAT-CHANDIGARH)
• Duration Of Justice: 4 year(s) 11 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 28-07-2015
• Assessment Year: 2004-2005
• Appeal Filed On: 23-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DR AMA RVEER SINGH
• Keywords: Depreciation; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO.1100/CHD/2010 ASSESSMENT YEAR: 2004-05 SATLUJ JAL VIDYUT NIGAM LTD., VS. DCIT HIMFED BUILDING CIRCLE NEW SHIMLA SHIMLA PAN NO. AAICS1370F (APPELLANT) (RESPONDENT) APPELLANT BY : SH. RAJIV SOOD RESPONDENT BY : DR. AMARVEER SINGH DATE OF HEARING : 28/07/2015 DATE OF PRONOUNCEMENT : 05/08/2015 ORDER PER BHAVNESH SAINI, J.M. THE PRESENT APPEAL IS FILED BY THE ASSESSE AGAINST THE ORDER OF THE CIT(A), SHIMLA, DT. 03/06/2010, FOR THE AY 2004 -05. 2. THE ASSESSEE HAS RAISED 4 GROUNDS OF APPEAL WHIC H READS AS UNDER: 1. THAT THE APPELLANT HAS RIGHTLY CLAIMED AND CAPIT ALIZED INCIDENTAL EXPENDITURE DURING CONSTRUCTION AS THE T HE OPERATIONS HAD NOT STARTED IN THE RELEVANT YEAR. 2- THE LD. A.O. HAS ERRED IN FACT AND LAW BY STATIN G THAT THERE IS ANOTHER CATEGORY OF EXPENDITURE NOT RELATED TO CONSTRUCTION AND WHICH CANNOT BE CAPITALIZED. THERE IS COMPLETE NEXUS BETWEEN THE EXPENDITURE INCURRED AND COST OF CONSTRUCTION. 3. THE AD-HOC AND ARBITRARY DISALLOWANCE OF EXPENDI TURE IS LEAST WARRANTED. 2 4. THE LD. A.O.S REQUIREMENT OF IDENTIFICATION AND QUANTIFICATION OF EXPENSES BETWEEN THOSE EXPENDITUR E INCURRED TOWARD COST OF CONSTRUCTION AND FOR OTHER ACTIVITIES IS AN IMPOSSIBLE DEMAND AS SUCH DISTINCTION NEVER EXIS TED AND TO DRAW EVEN AN IMAGINARY LINE IS GOING TO BE AMBIG UOUS AND BASED UPON CONJECTURE AND SURMISES. 3. WE HAVE HEARD LD. REPRESENTATIVES OF BOTH PARTIE S AND PERUSED THE MATERIAL ON RECORD. 4. WE FIND THAT THE ASSESSE IS A COMPANY WHICH WAS IN THE PROCESS OF SETTING UP ITS HYDRO POWER PROJECT IN EARLIER YE ARS AND HAD DURING THE YEAR COMMENCED GENERATION OF POWER BY COMMISSIO NING FOUR OF ITS UNITS. DURING THE IMPUGNED A.Y., THE ASSESSE FI LED ITS RETURN OF INCOME ON 01-11-2004 DECLARING BUSINESS LOSS OF RS. 46,78,35,650/- AND INCOME FROM OTHER SOURCES OF RS. 87,07,480/-. T HUS NET LOSS OF RS. 45,91,28,170/- WAS RETURNED BY THE ASSESSE. 5. DURING THE PERIOD WHEN CONSTRUCTION ACTIVITY WAS GOING ON , THE ASSESSE WAS DEBITING VARIOUS INDIRECT EXPENSES INC URRED BY IT UNDER THE HEAD INCIDENTAL EXPENSES DURING CONSTRUCTION ( IEDC), FOR BEING CAPITALIZED ON COMMISSIONING OF THE ASSESSES POWER PROJECT .ALL DIRECT EXPENSES WERE SHOWN UNDER THE HEAD CAPI TAL WORK IN PROGRESS. DURING THE IMPUGNED AY THE ASSESSE COMMIS SIONED ITS PROJECT AND CAPITALIZED A SUM OF RS. 632,40,38,000/ - IN THE IEDC ACCOUNT, AND CLAIMED DEPRECIATION THEREON. DURING A SSESSMENT PROCEEDINGS THE AO OBSERVED THAT OUT OF IEDC OF RS. 6,32,40,38,000/- A SUM OF RS. 3,27,02,06,446/- WAS ON ACCOUNT OF SAL ARIES & WAGES OF VARIOUS YEARS SINCE ITS INCEPTION TO COMMISSIONING OF ITS PROJECT. THE A.O FELT THAT WHILE MOST OF THE OTHER EXPENSES ,OT HER THAN THE EXPENSES ON ACCOUNT OF SALARY & WAGES AND OTHERWISE SPECIFICALLY DISCUSSED FOR DISALLOWANCE IN THE ASSESSMENT ORDER, COULD BE CONSIDERED ELIGIBLE FOR CAPITALIZATION, BY VIRTUE O F THEIR BEING COVERED BY PARA.5 OF THE GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURING CONSTRUCTION PERIOD, ISSUED BY T HE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, IT WAS NOT POSSIBLE THAT THE ENTIRE SALARY & WAGES EXPENSES WERE INDIRECTLY RELATABLE T O CONSTRUCTION ACTIVITY. RELYING UPON PARA.6 OF THE GUIDANCE NOTE ,HE PROCEEDED 3 TO DISALLOW CAPITALIZATION OF THE SAME. FURTHER HE HELD THAT SINCE THE EXACT IDENTIFICATION AND QUANTIFICATION OF THESE EX PENSES WAS NOT POSSIBLE, AT LEAST 5% OF THESE EXPENSES SHOULD NOT BE CAPITALIZED. HE THEREFORE DISALLOWED CAPITALIZATION OF IEDC EXPENSE S OF RS. 16,35,10,322/- AND CONSEQUENTLY REDUCED THE ALLOWAB LE DEPRECIATION FROM 120,25,04,492/- TO RS. 119,71,07, 513/- MAKING THEREBY A DISALLOWANCE OF RS 53,96,979/- OUT OF DEP RECIATION. 6. LD CIT(A) UPHELD THE DISALLOWANCE BY THE A.O BU T RESTRICTED IT TO THE YEAR UNDER CONSIDERATION. AGGRIEVED BY THE S AME, THE ASSESSE PREFERRED THIS APPEAL BEFORE US. 7. BEFORE US THE AR PLEADED THAT THE COMPANY WAS SP ECIFICALLY INCORPORATED FOR THE EXECUTION OF THE POWER PROJECT ONLY AND ALL EFFORTS OF THE ASSESSE COMPANY WERE MEANT EXCLUSIVE LY FOR THE EXECUTION OF THE PROJECT. THEREFORE, HE PLEADED THA T ALL EXPENSES WERE DIRECTLY OR INDIRECTLY RELATABLE TO THE PROJEC T AND AS PER PARA 5 OF THE GUIDANCE NOTE OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA WERE RIGHTLY BOOKED AS IEDC AND CAPITALIZED T HEREAFTER. THE DR ON THE OTHER HAND RELIED UPON THE ORDER OF THE LD. CIT (A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. 9. THE ONLY ISSUE IN THE PRESENT APPEAL RELATES TO DISALLOWANCE OF CAPITAL EXPENDITURE AND AS A CONSEQUENCE DEPRECIATI ON THEREON .WE FIND THAT AFTER DELIBERATING ON THE ISSUE ON ME RIT, BOTH THE AO AND THE CIT(A) HAVE QUANTIFIED THE DISALLOWANCE ,AT 5% OF THE SALARY & WAGES. THE CIT (A) HAS AT PAGE 3 PARA7 OF HIS ORD ER HELD: THE APPELLANT HAS DEBITED A SUM OF RS.632,40,38,0 00/- UNDER THE HEAD IEDC OUT OF WHICH A SUM OF RS.327,02,06,44 6/- HAS BEEN DEBITED ON ACCOUNT OF SALARIES AND WAGES IN VA RIOUS YEARS SINCE THE INCEPTION TO THE COMMISSIONING OF T HE PROJECT EXPENSES RELATABLE TO CONSTRUCTION ACTIVITY. IN THE ABSENCE OF EXACT QUANTIFICATION OF THESE EXPENSES,TILL DATE,TH E DISALLOWANCE OF 5% OF THESE EXPENSES FOR CAPITALIZA TION IS HELD TO BE IN ORDER 4 IT IS CLEAR THAT THE DISALLOWANCE HAS BEEN MADE ARB ITRARILY IN AN AD HOC MANNER. NEITHER THE AO NOR THE CIT (A) HAVE GIV EN ANY BASIS FOR ARRIVING AT THE FIGURE OF 5% FOR MAKING THE DISALLO WANCE .NO SPECIFIC INSTANCES HAVE BEEN HIGHLIGHTED FOR THE SAME .IN FA CT THE BASIS, IF ANY ,GIVEN FOR ARRIVING AT THE FIGURE OF 5%, IS THE ABSENCE OF EXACT QUANTIFICATION OF THE EXPENSES. THE DISALLOWANCE T HEREFORE IS NOT SUSTAINABLE IN THE EYES OF LAW AS HAS BEEN HELD IN THE FOLLOWING DECISIONS: LAVRIDS KNUDSEN MASKINFABRIK (INDIA) LTD. VS ADDL. CIT (2006) 102 TTJ (PUNE)882 SAYAJI IRON & ENGG. CO. VS. CIT (2002) 253 ITR 749( GUJ) MODI EXPORTS. VS. ACIT(2008) 12 DTR 1 (DEL-TRIB) 10. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTH ORITIES BELOW AND DELETE THE DISALLOWANCE MADE OF EXPENSES CAPITA LIZED I.E RS.16,35,10,322/- .BEING 5% OF SALARY AND WAGES AND THE CONSEQUENT DISALLOWANCE OF DEPRECIATION OF RS. 53,96,979/- IS DELETED. 11. IN THE RESULT THE APPEAL OF THE ASSESSE IS ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 05/08/2015 SD/- SD/- (T.R. SOOD) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 05/08/2015 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR