ACIT, Virudhunagar V. M/s. Rajapalayam Mills Limited, Rajapalayam

ITA 1170/CHNY/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5011 (ITAT-CHENNAI)
• Duration Of Justice: 10 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 01-06-2011
• Assessment Year: 2001-2002
• Appeal Filed On: 16-07-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: P B SEKARAN
• Assessee Lawyers: V JAGADISAN
• Keywords: Capital asset; Depreciation; Revised return
• Section: 115JB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI (BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER) .. I.T.A. NO. 1170/MDS/2010 ASSESSMENT YEAR : 2001-02 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I, KATCHERI ROAD, VIRUDHUNAGAR 626 001. (APPELLANT) V. M/S RAJAPALAYAM MILLS LIMITED, POST BOX NO.1, P.A.C. RAMASAMY SALAI, RAJAPALAYAM. PAN : AAACR8897F (RESPONDENT) APPELLANT BY : SHRI P.B. SEKARAN RESPONDENT BY : SHRI V. JA GADISAN O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE REVENUE, ITS GRIEVANCE IS THAT LD. CIT(APPEALS) DIRECTED ALLOWANCE OF DEPRECIATION ON PRE-PRODUCTION EXPENSES OF ` 3,39,61,382/-, CLAIMED BY THE ASSESSEE. AS PER TH E REVENUE, THE CIT(APPEALS) DID NOT FOLLOW THE DECISI ON OF CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ORIENT COSMET ICS LTD. V. DCIT (74 ITD 135) AND THAT OF HON'BLE DELHI HIGH COURT I N THE CASE OF ALLIED ELECTRONICS AND MAGNETICS LTD. (304 ITR 160). I.T.A. NO. 1170/MDS/10 2 2. SHORT FACTS APROPOS ARE THAT ASSESSEE IN THE BUS INESS OF MANUFACTURE AND SALE OF YARN AND BIOTECHNOLOGY PROD UCTS, HAD FILED RETURN FOR THE IMPUGNED ASSESSMENT YEAR ON 30.10.20 01 WHICH WAS REVISED ON 29.4.2002. IN SUCH REVISED RETURN, LOSS OF ` 9,54,83,015/- EARLIER CLAIMED WAS SCALED DOWN TO ` 8,90,98,026/-, WHEREAS, THE INCOME OF ` 2,62,30,696/- DECLARED UNDER SECTION 115JB OF INCO ME- TAX ACT, 1961 (HEREINAFTER CALLED THE ACT) REMAIN ED THE SAME. ANOTHER RETURN WAS FILED BY THE ASSESSEE ON 31.3.20 03 WHEREIN THE LOSS RETURNED UNDER NORMAL COMPUTATION WAS AGAIN SC ALED DOWN TO ` 2,52,46,070/-, WHEREAS, THE INCOME ADMITTED UNDER S ECTION 115JB WAS INCREASED TO ` 3,43,27,236/-. WHILE COMPLETING THE ASSESSMENT, THE A.O. STARTED FROM THE LOSS RETURNED AS PER THE THIRD RETURN FILED VIZ. ` 2,52,46,070/- FOR COMPUTING THE INCOME UNDER NORMA L PROVISIONS. HE MADE CERTAIN DISALLOWANCES WHICH, INTER ALIA, IN CLUDED A DISALLOWANCE OF ` 3,39,61,382/- FOR A CLAIM OF DEDUCTION ON SCIENTIF IC RESEARCH. ASSESSEE HAD, DURING THE COURSE OF ASSES SMENT PROCEEDINGS, FILED A LETTER CLAIMING DEDUCTION OF ` 4,40,65,540/- UNDER SECTION 35(1)(I) AND 35(1)(IV) OF THE ACT AS SCIENT IFIC RESEARCH EXPENSES. THE A.O. HOWEVER, ACCEPTED THE CLAIM OF ` 1,01,04,158/- I.T.A. NO. 1170/MDS/10 3 OUT OF IT, AND MADE A DISALLOWANCE OF THE BALANCE ` 3,39,61,382/- WITH THE FOLLOWING NARRATION:- AS FAR AS CLAIM TO 35(1)(I), IT IS TO BE SAID THAT ANY CLAIM MUST RELATE TO THE BUSINESS. ALL EXPENDITURE OF REVENUE IN NATURE RELATING TO THIS SCIENTIFIC RESEARCH MUST BE CERTIF IED BY UNDER RULE 6(1) OF I.T. RULES. PRESCRIBED AUTHORITY IS DI RECTOR GENERAL (EXEMPTION) IN CONCURRENCE WITH SECRETARY, DEPT. OF SCIENTIFIC & INDUSTRIAL RESEARCH, GOVT. OF INDIA. THIS CERTIFIC ATE IS NOT OBTAINED SO FAR BY THE ASSESSEE. TOTAL EXPENSES INC URRED TOWARDS REVENUE FROM 98-99 TO 2001-02, COME TO ` 4,40,65,540. IN WHICH PRE-PRODUCTION EXPENSES COMES TO ` 3,39,61,382, FOR WHICH NECESSARY CERTIFICATE FROM PRESCRIBED AUTHORIT Y IS NECESSARY TO ALLOW THE SAME U/S. 35(1)(I). FOR BALA NCE ` 1,01,04,158, BEING THE CURRENT YEAR EXPENSES INCURRE D AFTER THE COMMENCEMENT OF PRODUCTION, IS ALLOWED AS REVENUE E XPENDITURE. AS SUCH, CLAIM TO REVENUE U/S. 35(1)(I) IS NOT ALLO WED. DISALLOWANCE OUT OF TOTAL CLAIM OF ` 4,40,65,540/-, A SUM OF ` 1,01,04,158/- IS ALLOWED AND DISALLOWING BALANCE CL AIM, ADDITION WORKS OUT TO (+) ` 3,39,61,382 3. ASSESSEE AGGRIEVED BY THIS AS ALSO CERTAIN OTHER ADDITIONS MADE, MOVED IN APPEAL BEFORE THE CIT(APPEALS). ITS AVERMENT WAS THAT THE CLAIM OF ` 4,40,65,540/- WAS NOT AT ALL MADE IN THE RETURN OF INCOME AND THEREFORE, THE ADDITION OF ` 3,39,61,382/- WAS NOT WARRANTED. THE A.O., IT WAS POINTED OUT, HAD MADE A DISALLOWANCE FOR A REASON THAT SUCH EXPENSES WERE INCURRED PRIOR TO THE START OF COMMERCIAL PRODUCTION. AS PER THE ASSESSEE, WHEN I T HAD NOT MADE CLAIM AT ALL IN THE RETURN OF INCOME, THE A.O. COMM ITTED A MISTAKE IN I.T.A. NO. 1170/MDS/10 4 MAKING SUCH DISALLOWANCE, WHEN HE STARTED THE COMPU TATION FROM THE LOSS RETURNED AS PER THE RETURN OF INCOME. A FURTH ER CLAIM WAS ALSO MADE BY THE ASSESSEE THAT IF SUCH AMOUNT WAS NOT AL LOWED FOR DEDUCTION UNDER SECTION 35(1)(IV) OF THE ACT, NECES SARY DEPRECIATION HAD TO BE ALLOWED TO IT SINCE IT FORMED PART OF THE CAPITALIZED ASSET. THE CIT(APPEALS), AFTER CONSIDERING THE SUBMISSION, WAS OF THE OPINION THAT THERE WAS A DOUBLE ADDITION OF ` 3,39,61,382/- SINCE ASSESSEE HAD NOT CLAIMED ANY DEDUCTION OF SUCH AMOU NT IN ITS RETURN OF INCOME, THE ASSESSING OFFICER HAVING STARTED THE COMPUTATION FROM THE FIGURE OF LOSS RETURNED BY THE ASSESSEE IN ITS RETURN OF INCOME. LD. CIT(APPEALS) ALSO DIRECTED THE A.O. TO VERIFY T HE FACTS REGARDING THE CLAIM OF DEPRECIATION ON PRE-PRODUCTION EXPENSE S OF ` 3,39,61,382/- AND TAKE APPROPRIATE DECISION IN ACCO RDANCE WITH LAW. HOWEVER, THE A.O. GIVING EFFECT TO THE ORDER OF LD. CIT(APPEALS), WHILE CORRECTING THE MISTAKE VIS--VIS PRE-PRODUCTION EXP ENSES OF ` 3,39,61,382/- AS DIRECTED BY LD. CIT(APPEALS), MENT IONED THAT AVAILABILITY OF DEPRECIATION ON SUCH AMOUNT WOULD B E CONSIDERED AFTER EXAMINATION OF FACTS AT A LATER POINT OF TIME. THE ASSESSEE, THEREAFTER FILED A RECTIFICATORY PETITION ON 6.3.2008 WHEREIN IT GAVE DETAILS OF EXPENDITURE OF ` 3,39,61,382/- CLAIMED, INTER ALIA, PLEADING FOR I.T.A. NO. 1170/MDS/10 5 ALLOWANCE OF DEPRECIATION THEREOF. HOWEVER, THE A. O. VIDE HIS ORDER DATED 1.6.2009 HELD AS UNDER ON THIS ISSUE:- THE ASSESSEE HAS FILED THE DETAILS OF EXPENDITURE F OR ` 3,39,61,382/- AND DEPRECIATION WORKINGS FOR THE SAM E. THE ASSESSEE HAS EXPLAINED THAT THE TREATMENT OF PRE-PR ODUCTION EXPENSES SHOULD BE APPORTIONED TO CAPITAL ASSETS AS PER THE GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURING C ONSTRUCTION PERIOD ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNT ANTS OF INDIA. BUT TO ALLOW DEPRECIATION U/S 32, THE ASSET SHOULD HAVE BEEN USED, FOR THE BUSINESS. SINCE DURING PRE-PROD UCTION PERIOD THE ASSETS COULD NOT HAVE BEEN USED FOR THE ASSESSE ES BUSINESS, THE ASSESSEES CLAIM OF DEPRECIATION IS REJECTED. 4. APPEAL WAS FILED AGAINST THIS ORDER OF THE A.O. BEFORE THE CIT(APPEALS). AS PER THE ASSESSEE, IT HAD FURNISHE D THE DETAILS OF EXPENDITURE BEFORE THE A.O. IT WAS ALSO SUBMITTED THAT SUCH PRE- PRODUCTION EXPENDITURE WAS APPORTIONED TO THE CAPIT AL ASSETS AS PER THE GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURI NG CONSTRUCTION PERIOD ISSUED BY THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA. ACCORDING TO ASSESSEE, THE EXPENDITURE WAS INCURRED AND IT RELATED TO ITS BIO-TECHNOLOGY UNIT AND THESE WERE NEVER DISPUT ED. LD. CIT(APPEALS) WAS APPRECIATIVE OF THESE CONTENTIONS. ACCORDING TO HIM, THE ASSESSING OFFICER HAD FAILED TO GIVE DEPRE CIATION DESPITE COMMERCIAL PRODUCTION HAVING STARTED IN MAY, 2000. ONCE, COMMERCIAL PRODUCTION HAD STARTED, ACCORDING TO LD. CIT(APPEALS), THE I.T.A. NO. 1170/MDS/10 6 CLAIM OF DEPRECIATION HAD TO BE ALLOWED. SINCE THE REVENUE FROM THE BIO-TECHNOLOGY UNIT ON WHICH SUCH EXPENSES WERE INC URRED, WAS RECOGNIZED IN THE RELEVANT PREVIOUS YEAR, LD. CIT(A PPEALS) HELD THAT THE ASSESSEE WAS ENTITLED FOR DEPRECIATION THEREOF. 5. NOW BEFORE US, THE LEARNED D.R., ASSAILING THE O RDER OF LD. CIT(APPEALS), SUBMITTED THAT WHEN COMMERCIAL PRODUC TION HAD NOT STARTED, IT WAS NOT APPROPRIATE TO ALLOW DEPRECIATI ON. RELIANCE WAS PLACED ON THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF ALLIED ELECTRONICS AND MAGNETICS LTD. (SUPRA) AS WE LL AS THAT OF CO- ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF ORIE NT COSMETICS LTD. (SUPRA). 6. PER CONTRA, LEARNED A.R. SUPPORTED THE ORDER OF LD. CIT(APPEALS). 7. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. WITHOUT DISPUTE ASSESSEE HAD FILED THREE RETURNS FO R THE IMPUGNED ASSESSMENT YEAR. IN THE LAST RETURN FILED ON 31.3. 2003, THE LOSS COMPUTED UNDER THE NORMAL PROVISION WAS ` 2,52,46,070/-. ASSESSING OFFICER HAD STARTED HIS COMPUTATION FOR T HE IMPUGNED ASSESSMENT YEAR FROM THIS LOSS OF ` 2,52,46,070/-. AS PER THE I.T.A. NO. 1170/MDS/10 7 ASSESSEE, A SUM OF ` 3,39,61,382/-, DEPRECIATION ON WHICH IS THE SUBSTANTIAL ISSUE BEFORE US, FORMED PART OF A TOTAL SUM OF ` 4,40,65,540/- BEING EXPENDITURE INCURRED ON SCIENTI FIC RESEARCH WHICH WAS NEVER CLAIMED BY THE ASSESSEE IN THE RETURN OF INCOME. ACCORDING TO ASSESSEE, THE SAID AMOUNT WAS CLAIMED UNDER SECTION 35(1)(I) AND 35(1)(IV) OF THE ACT THROUGH A SEPARAT E LETTER DURING THE COURSE OF ASSESSMENT PROCEEDINGS. WE FIND THAT THE CONTENTION OF THE ASSESSEE REGARDING DEPRECIATION TO BE ALLOWED O N PRE-PRODUCTION EXPENSES IF PROPERLY ALLOCATED TO CAPITAL ASSETS, I S TO BE ACCEPTED. FINDING OF LD. CIT(APPEALS) THAT BIO-TECHNOLOGY UNI T, NAMELY, SHRI RAMCO BIOTECH, HAD COMMENCED PRODUCTION IN MAY, 200 0 HAS NOT BEEN DISPUTED BY THE REVENUE. MAY, 2000 IS A MONTH FALLING IN THE RELEVANT PREVIOUS YEAR AND THEREFORE, PRE-PRODUCTIO N EXPENSES OF SUCH UNIT IF PROPERLY ALLOCATED BETWEEN VARIOUS ASS ETS OF THAT UNIT WOULD BE ELIGIBLE FOR DEPRECIATION. THE CASES RELI ED ON BY THE REVENUE VIZ. ALLIED ELECTRONICS AND MAGNETICS LTD. (SUPRA) OF HON'BLE DELHI HIGH COURT AND THAT OF CO-ORDINATE BENCH OF T HIS TRIBUNAL ORIENT COSMETICS LTD. (SUPRA), WERE BOTH ON THE ISSUE REGA RDING ALLOWANCE OF PRE-PRODUCTION EXPENSES WHERE COMMERCIAL PRODUCT ION HAD NOT STARTED. WHEN COMMERCIAL PRODUCTION HAD NOT STARTE D AND THE CLAIM I.T.A. NO. 1170/MDS/10 8 OF THE ASSESSEE THAT THE EXPENDITURE WAS REVENUE IN NATURE WAS NOT ALLOWED, THEN, OF COURSE, SUCH EXPENSES IF PROPERLY CAPITALIZED AND ALLOCATED TO VARIOUS ASSETS, DEPRECIATION WOULD BE ALLOWABLE, ONCE COMMERCIAL PRODUCTION STARTED. IN FACT, GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURING CONSTRUCTION PERIOD ISSUED B Y THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA CLEARLY MANDATES SO. NEITHER THE A.O. NOR THE CIT(APPEALS) HAS GONE THROUGH THE ALLO CATION DONE BY THE ASSESSEE, SUBMITTED TO THE A.O. ALONG WITH ITS RECTIFICATORY PETITION DATED 6.3.2008. WHILE THE A.O. SIMPLY DISALLOWED T HE CLAIM OF DEPRECIATION, THE CIT(APPEALS) WITHOUT GOING THROUG H THE CORRECTNESS OF THE ALLOCATION DONE BY THE ASSESSEE, DIRECTED TH E A.O. TO ALLOW THE CLAIM OF DEPRECIATION. FURTHER, FROM THE COMPUTATI ON OF INCOME FILED BY THE ASSESSEE FOR THE IMPUGNED ASSESSMENT YEAR, I N RELATION TO ITS RETURN FILED ON 31 ST MARCH, 2003, WE FIND THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF ` 1,98,44,429/- UNDER SECTION 35(1)(I) AND ` 29,62,579/- UNDER SECTION 35(1)(IV) OF THE ACT FOR SCIENTIFIC RESEARCH FOR SHRI RAMCO BIOTECH. IT IS TO BE NOTED THAT A.O . HAD STARTED HIS COMPUTATION FROM THE LOSS RETURNED BY THE ASSESSEE IN SUCH RETURN. SO, TWO QUESTIONS HAVE TO BE ANSWERED. WHETHER THE AMOUNT CLAIMED UNDER SECTION 35(1)(I) AND 35(1)(IV) OF THE ACT IN THE I.T.A. NO. 1170/MDS/10 9 COMPUTATION AS MENTIONED ABOVE, COMPRISES IN IT, AN Y PART OF THE AMOUNT OF ` 3,39,61,382/- ON WHICH DEPRECIATION IS CLAIMED. I F SOME OF THE ITEMS ARE OVERLAPPING, IT WOULD RESULT IN DO UBLE DEDUCTION WHICH CANNOT BE ALLOWED. SECOND QUESTION IS WHETHER THE PRE-PRODUCTION EXPENSES HAVE BEEN PROPERLY CAPITALIZED AGAINST DIF FERENT ASSETS. ALL THESE ISSUES ARE REQUIRED TO BE EXAMINED BEFORE THE DEPRECIATION IS CORRECTLY WORKED OUT AND CLAIMED. WE ARE, THEREFOR E, OF THE OPINION THAT THE MATTER REQUIRES A RE-VISIT BY THE A.O. WE , THEREFORE, SET ASIDE THE ORDERS OF THE A.O. AND CIT(APPEALS) IN THIS REG ARD AND REMIT THE MATTER TO THE FILE OF THE A.O. FOR FRESH CONSIDERAT ION. A.O. SHALL VERIFY WHETHER ANY PART OF PRE-PRODUCTION EXPENSES OF ` 3,39,61,382/- ON WHICH DEPRECIATION IS CLAIMED, IS CLAIMED NOW IS AL READY INCLUDED IN THE DEDUCTION CLAIMED BY THE ASSESSEE UNDER SECTION 35(1)(I) AND 35(1)(IV) OF THE ACT IN THE COMPUTATION FILED BY TH E ASSESSEE ALONG WITH THE RETURN FILED ON 31 ST MARCH, 2003, FROM WHICH THE A.O. HAD PROCEEDED. THE ASSESSING OFFICER HAS ALSO TO VERIF Y THE ALLOCATION OF ` 3,39,61,382/- TO VARIOUS ASSETS AND ALLOW DEPRECIA TION THEREON IF HE FINDS THE ALLOCATION DONE IS IN THE MANNER PRESCRIB ED UNDER GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURING CONSTRUCTIO N PERIOD ISSUED I.T.A. NO. 1170/MDS/10 10 BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. ORDERED ACCORDINGLY. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER WAS PRONOUNCED IN THE COURT ON 10 TH JUNE, 2011. SD/- SD/- (U.B.S. BEDI) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 10 TH JUNE, 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-II, MADURAI (4) CIT-II, MADURAI (5) D.R. (6) GUARD FILE