International Seaports (Haldia) Pvt. Ltd., Hooghly V. ITO, Ward - 12(3), Kolkata, Kolkata

ITA 1194/KOL/2010

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3358 (ITAT-KOLKATA)
• Duration Of Justice: 5 year(s) 7 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 22-08-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 11-06-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DEBASISH BANERJEE JCITSRDR
• Keywords: Business income
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 1194 / KOL / 2010 ASSESSMENT YEAR :2004-05 INTERNATIONAL SEAPORTS (HALDIA) PVT. LTD. C/O. SHRI SOMNATH GHOSH, ADVOCATE, SEVENTH BROTHERS LODGE, P.O. BUROSHIBTALA, P.S. CHINSURAH, DIST. HOOGHLY, PIN 712 105 [ PAN NO.AAAACI 9468 D ] V/S . INCOME TAX OFFICER, WARD-12(3), AAYKAR BHAVAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI SOMNATH GHOSH, ADVOCATE /BY RESPONDENT SHRI DEBASISH BANERJEE, JCIT-SR-DR /DATE OF HEARING 10-12-2015 /DATE OF PRONOUNCEMENT 20-01-2016 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF ORDE R OF COMMISSIONER OF INCOME TAX (APPEALS)-XXXV, KOLKATA IN APPEAL NO.34/ CIT(A)- XXXVI/KOL/WARD-12(3)/06-07 DATED 19.03.2010. ASSESS MENT WAS FRAMED BY ITO WARD-12(3), KOLKATA U/S 143(3) OF THE INCOME TA X ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) VIDE HIS ORDER DATED 29.1 2.2006 FOR ASSESSMENT YEAR 2004-05 AND THE ASSESSEE RAISED THE FOLLOWING GROUN DS:- ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 2 1. FOR THAT THE LD. COMMISSIONER OF INCOME TAX (AP PEALS) XXXVI, KOLKATA ACTED UNLAWFULLY AND WITH MATERIAL IRREGULA RITY IN UPHOLDING THE ADDITIONS IN THE SUMS OF RS.3,00,18,070/- MADE ON A CCOUNT OF THE ALLEGED INCOME FROM CARGO HANDLING CHARGES, RS.16,8 4,582/- MADE ON ACCOUNT OF THE ALLEGED INCOME FROM BERTH HIRE CHARG ES AND RS.2,22,23,527/- MADE ON ACCOUNT OF THE ALLEGE DISC REPANCY IN TDS CERTIFICATES IN THE ASSESSMENT ORDER PASSED U/S. 14 3(3) OF THE INCOME TAX ACT, 1961 BY THE LD. INCOME TAX OFFICE, WARD 12 (3), KOLKATA IN GROSS VIOLATION OF THE PROVISIONS OF S. 142(3) OF T HE INCOME TAX ACT, 1961 AND THE PURPORTED ACTIONS IN RESPECT OF THOSE ISSUES ARE ALTOGETHER ILLEGAL, INVALID AND UNTENABLE IN LAW. 2. FOR THAT THE LD. COMMISSIONER OF INCOME TAX (APP EALS) XXXVI, KOLKATA MISREAD THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE IN UPHOLDING THE PURPORTED ACTION OF THE LD. INCOME TA X OFFICER, WARD 12(3), KOLKATA OF CONSTRUING THE RECEIPTS FROM TRIA L RUN IN THE SUM OF RS.3,17,02,632/- AS INCOME OF THE APPELLANT AND THE ALLEGED FINDINGS IN THIS REGARD WITHOUT CONSIDERING THE ISSUES IN A PRO PER PERSPECTIVE ARE ALTOGETHER ARBITRARY, UNWARRANTED AND PERVERSE. 3. FOR THAT THE LD. COMMISSIONER OF INCOME TAX (APP EALS) XXXVI, KOLKATA IN UPHOLDING THE IMPUGNED FINDING OF THE LD . INCOME TAX OFFICER, WARD 12(3), KOLKATA OF INTERPRETING THE RE CEIPTS FROM TRIAL RUNS TO THE TUNE OF RS.3,17,02,632/- AS REVENUE IN NATURE R ELYING ON THE RATIO LAID DOWN IN THE CASE OF TUTIKORIN ALKALI CHEMICALS & FERTILIZERS LTD. VS CIT [1997] 227 ITR 172 (S.C) I S NOT IN CONSONANCE WITH LAW AS WELL AS ON FACTS AS THE ISSU ES ARE THOROUGHLY DISTINGUISHABLE AND THE IMPUGNED FINDING ON THAT BE HALF IS WHOLLY CAPRICIOUS, FLAWED, ERRONEOUS AND PERVERSE. 4. FOR THAT THE LD. COMMISSIONER OF INCOME TAX (APP EALS) XXXVI, KOLKATA WAS WRONG ON THE FACTS AND IN LAW IN UPHOLD ING THE PURPORTED ACTION OF THE LD. INCOME TAX OFFICER, WARD 12(3), K OLKATA OF INCORPORATING THE WORK-IN-PROGRESS OF RS.2,22,23,52 7/- AS INCOME EARNED IN THE ASSESSMENT YEAR UNDER DISPUTE WITHOUT ARRIVING AT ANY ADVERSE INFERENCE ON THE METHOD OF ACCOUNTING FOLLO WED BY THE APPELLANT AND HIS ALLEGED ACTION ON THAT BEHALF IS ALTOGETHER UNLAWFUL, ILLEGAL, UNJUST, BIASED AND CAPRICIOUS. 5. FOR THAT THE LD. COMMISSIONER OF INCOME TAX (APP EALS) XXXVI, KOLKATA GRAVELY ERRED IN UPHOLDING THE IMPUGNED FIN DING OF THE D. INCOME TAX OFFICER, WARD 12(3), KOLKATA OF CONSTRUI NG THE INCOME DISCLOSED IN THE ASSESSMENT YEAR 2005-2006 AS INCOM E IN THE CONCERNED ASSESSMENT YEAR WITHOUT JUDICIOUSLY CONSI DERING THE RECONCILIATION SUBMITTED IN THIS REGARD BY THE APPE LLANT AND THE ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 3 PURPORTED ACTION ON THAT COUNT IS THOROUGHLY UNJUST , IMPROPER AND UNSUSTAINABLE IN LAW. 2. THE FIRST ISSUE RAISED BY THE ASSESSEE IN THIS A PPEAL IS THAT THE LD. CIT(A) ERRED IN TREATING THE RECEIPT OF 3,17,02,632/- FROM TRIAL RUN OF BERTH HIRE CHARGES AS BUSINESS INCOME. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LTD. COMPANY WHICH IS ENGAGED IN THE BUSINESS OF PORT DEVELOPMEN T AND INTER ALIA HAS INCOME FROM THE ACTIVITY OF CARGO HANDLING AND BERT H HIRE CHARGE. THE ASSESSEE WAS AWARDED A CONTRACT TO BUILD A BERTH NO . 4A AT HALDIA DOCK COMPLEX. AS PER THE CONTRACT THE ASSESSEE WAS TO CO NDUCT THE TRIAL RUN OF THE PORT BEFORE THE START OF COMMERCIAL OPERATION. THE ASSESSEE BEGAN THE TRIAL RUN ON THE DATE 7-12-2003 AND ENDED ON DATED 13-01- 2004. THE ACTUAL COMMERCIAL OPERATION STARTED IMMEDIATELY AFTER THE SUCCESSFUL COMPLETION OF TRIAL RUN ON DATED 15.01.2004. DURING THE TRIAL RUN , ASSESSEE HAS EARNED INCOME FOR CARGO HANDLING CHARGES OF RS.3,00,18,070 /- AND RS.16,84,562/- FOR BERTH HIRE CHARGES (TOTAL RS. 3,17,02,632.00). THE ASSESSEE HAS NOT OFFERED THE INCOME FOR TAX, EARNED DURING THE TRIAL RUN BUT ADJUSTED TO THE PRE-OPERATIVE EXPENSES. 4. HOWEVER THE AO OBSERVED THAT THE TRIAL RUN BEGIN S ONLY AFTER THE COMPLETION OF THE PROJECT. HENCE THE INCOME EARNED DURING THE TRIAL CANNOT BE REDUCED FROM THE PREOPERATIVE EXPENSES. ACCORDINGLY , THE AO SOUGHT CLARIFICATION FROM THE ASSESSEE ON ADJUSTING THE TR IAL RUN INCOME AGAINST THE PREOPERATIVE EXPENSES AND RAISED QUESTION THAT WHY TRIAL RUN INCOME SHOULD NOT BE TREATED AS BUSINESS INCOME. 5. THE ASSESSEE SUBMITTED THAT PRIOR TO THE START O F COMMERCIAL OPERATION, ONLY FEW VESSELS WERE HANDLED TO HAVE THE TRIAL RUN OF THE SYSTEM AND TREATED AS PREOPERATIVE HANDLING OF THE PLANT. THEREFORE THE INCOME GENERATED DURING TRAIL RUN HAS BEEN TREATED AS PREOPERATIVE INCOME . AS A RESULT OF THIS THE PRE- ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 4 OPERATIVE EXPENSES HAS COME DOWN BY THE SAID AMOUNT AND THE BALANCE HAS BEEN CAPITALIZED AFTER APPORTIONING TO THE ASSETS. 6. HOWEVER, THE AO DISREGARDED THE CLAIM OF THE ASS ESSEE AND DISALLOWED THE SAME RELYING ON THE JUDGMENT OF HONBLE APEX CO URT IN THE CASE OF TUTIKORIN ALKALI CHEMICALS & FERTILIZERS LTD. V. CI T 227 ITR 172 (SC), IT CLEARLY HELD BY LORDSHIP THAT INTEREST EARNED ON SHORT-TERM INVESTMENT OF FUNDS BORROWED FOR SETTING UP OF FACTORY DURING CONSTRUCT ION OF FACTORY BEFORE COMMENCEMENT OF BUSINESS HAS TO BE ASSESSED AS INCO ME FROM OTHER SOURCES AND IT CANNOT BE HELD TO BE NON-TAXABLE OR GROUND THAT IT WOULD GO TO REDUCE INTEREST ON BORROWED AMOUNT WHICH WOULD BE C APITALIZED. . HENCE THE PRE-OPERATIVE I.E. TRIAL RUN INCOME FOR RS. 3,17,02 ,632.00 WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 7. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE LD.C IT(A) WHO UPHELD THE ACTION OF AO BY OBSERVING AS UNDER:- I HAVE CAREFULLY CONSIDERED THE ABOVE. THE APPELLA NT CARRIED OUT CARGO HANDLING (OF STEEL AUTHORITY OF INDIA) DURING THE P ERIOD 7.12.2003 TO 13.01.2004. THOUGH IT WAS CALLED TRIAL RUN, IT HAD RECEIVED CONSIDERATION FOR THE SERVICES RENDERED. THE CUSTOMER, SAIL ALSO TREATED THE SAME AS CARGO HANDLING SERVICES AND MADE PAYMENTS ACCORDING LY. FURTHER, TDS WAS ALSO DEDUCTED, BY THE SAIL, FROM THIS PAYMENT. SINCE IT WAS A COMMERCIAL ACTIVITY RESULTING IN EARNING OF INCOME, I AM OF THE VIEW IT CANNOT BE TERMED AS PRE-OPERATIVE INCOME. I AM THER EFORE OF THE VIEW THAT THE AO HAS RIGHTY TREATED IT AS TAXABLE INCOME . ACCORDINGLY THE GROUND NO.2 IS DISMISSED . BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) ASSESSE E PREFERRED SECOND APPEAL BEFORE US. SHRI SAMNATH GHOSH, LD. AUTHORIZED REPRESENTATIVE A PPEARING ON BEHALF OF ASSESSEE AND SHRI DEBASISH BANERJEE, LD. DEPARTMENT AL REPRESENTATIVE APPEARING ON BEHALF OF REVENUE. ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 5 8. WE HAVE HEARD RIVAL CONTENTIONS OF BOTH THE PART IES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LD. AR SUBMITTED THE PAPER BOOK WHICH IS RUNNING FROM PAGES 1 TO 113 AND HIGHLIGHTED THAT TO MAKE THE BERTH READY FOR COMMERCIAL OPERATIONS THE ASSESSEE WAS TO UNDERTAKE THE RESPONSIBILITY OF COMPLETING THE WORK IN ACCORDANCE TO THE AGREEMENT OF BUILDING THE BERTH 4A. AS PER THE AGREEMENT TRIAL RUN WAS THE PRE-CONDITIO N BEFORE THE START OF THE COMMERCIAL OPERATION. THE ASSESSEE TREATED THE TRIA L RUN OF VESSELS AS PREOPERATIVE HANDLING OF THE PLANT AND INCOME GENERATED FROM SUCH PREOPERATIVE HANDLING HAS BEEN TREATED AS PREOPERATIVE INCOME . IN THE BOOKS OF ACCOUNT OF THE ASSESSEE FOR THE PREVIOUS YEAR RE LEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, SUCH PREOPERATIVE INCOME HAS BE EN SET OFF AGAINST THE PREOPERATIVE EXPENSES OF RS.3,17,02,632/-, WHICH CO NSISTED OF BERTH HIRE CHARGES IN THE SUM OF RS.16,84,562/- AND RS.3,00,18 ,070/- BEING CARGO HANDLING CHARGES AND THE BALANCE AMOUNT WAS CAPITAL IZED TO BE APPORTIONED TO FIXED ASSET. THE SPECIOUS FINDING OF THE AO THAT LOADING AND UNLOADING OF CARGO DURING THE PERIOD FROM 07.12.2003 TO 13.01.20 04 ON TRIAL BASIS WAS COMMERCIAL ACTIVITY OF THE ASSESSEE AND THE RECEIPT S EARNED THERE FROM WAS ASSESSED AS INCOME FROM BUSINESS WHICH IS TOTALLY U NTENABLE AND INCONSISTENT WITH THE FACTS OF THE CASE SINCE IT WAS DONE AT THE BEHEST OF THE HOLDIA DOCK COMPLEX AUTHORITIES IN ORDER TO ESTABLISH THE STABI LITY OF THE BERTH. IT IS AN ADMITTED FACT THAT EVEN DURING A PERIOD OF TEST RUN S AND EXPERIMENTATION, A PLANT MAY BE ENGAGED IN ACTUAL PRODUCTION, BUT UNTI L THE TEST RUNS ARE COMPLETED AND THE PLANT IS PROPERLY ADJUSTED ON THE BASIS THEREOF, IT CANNOT BE SAID TO BE READY FOR COMMERCIAL PRODUCTION . THE EXPRESSION COMMERCIAL PRODUCTION REFERS TO PRODUCTION IN COMMERCIALLY FEASIBLE QUA NTITIES AND IN A COMMERCIALLY PRACTICABLE MANNER. FURTHER, IT IS A C ORRECT AND ACCEPTED PROCEDURE TO CAPITALIZE ALL EXPENSES INCURRED DURIN G CONSTRUCTION PERIOD AND IN CONNECTION WITH THE PROCESS OF START-UP AND COMMISS IONING OF THE PLANT. IN FACT, SUCH EXPENSES WOULD BE INCURRED IN ORDER TO B RING THE PLANT UP TO THE STAGE AT WHICH IT CAN COMMENCE COMMERCIAL PRODUCTIO N. THUS, IT IS CORRECT TO CAPITALIZE THE EXPENDITURE INCURRED ON START-UP AND COMMISSIONING OF THE PLANT. ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 6 THE EXPENDITURE SO INCURRED, THEREFORE, SHOULD BE C APITALIZED IN THE SAME WAY AS OTHER INDIRECT CONSTRUCTION EXPENDITURE. IN THE PRESENT CONTEXT, THEREFORE THE EXPENDITURE INCURRED DURING TRIAL RUN CONTRIBUTES T O CONSTRUCTION OF THE FACILITIES AT BERTH NO. 4A OF HALDIA DOCK COMPLEX AS TRIAL RUN ACTIVITY IS REGARDED AS AN ACTIVITY WHICH IS NECESSARY TO PREPARE THE ASSET FO R ITS INTENDED USE. THIS IS BECAUSE FLAWS IN THE FACILITIES AT BERTH NOTICED DU RING TRIAL RUN OPERATION ARE RECTIFIED TO BRING THE BERTH TO ITS INTENDED USE. T HEREFORE, THE EXPENDITURE INCURRED DURING TRIAL RUN TOWARDS BUILDING / CONSTR UCTING THE BERTH SHOULD ALSO BE CAPITALIZED AS PER THE REQUIREMENTS OF ACCOUNTIN G STANDARD 166. IT IS ALSO AN UNDISPUTED FACT THAT OPERATION OF CARGO / VESSEL DURING TRIAL RUN WAS DIRECTLY LINKED WITH THE BUILDING UP OF FACILITIES IN THE BE RTH NO. 4A OF HALDIA DOCK COMPLEX. HENCE, ANY INCOME EARNED ON SUCH OPERATION DURING TRIAL RUN WAS INCIDENTAL TO THE BUILDING OF ASSETS FOR SETTING UP THE BERTH. THEREFORE, INCOME EARNED DURING PREOPERATIVE STAGE WAS A CAPITAL RECE IPT, WHICH WOULD GO TO REDUCE THE COST OF ASSET AND IT IS SETTLED THAT THE DEPOSIT OF MONEY WAS DIRECTLY LINKED WITH THE PURCHASE OF PLANT AND MACHINERY. HE NCE, ANY INCOME EARNED ON SUCH DEPOSITS WAS INCIDENTAL TO THE ACQUISITION OF ASSESSEE FOR SETTING UP THE PLANT AND MACHINERY. THUS, THE INTEREST WAS A C APITAL RECEIPT WHICH WOULD GO TO REDUCE THE COST OF THE ASSET AND LD AR RELIED ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. KARNAL CO-OPERATIVE SUGAR MILLS LTD . (2000) 243 ITR 2 (SC) AND C.I.T. VS. BOKARO STEEL LIMITED. (1999) 236 ITR 315 (SC) 9. FROM THE AFORESAID DISCUSSION, WE FIND THAT THE ASSESSEE HAS MADE SOME INCOME DURING THE PERIOD OF TRIAL RUN AND THE SAME WAS ADJUSTED AGAINST THE PRE-OPERATIVE EXPENSES. THE AO REJECTED THE WOR KING OF ASSESSEE AND HELD THAT THE INCOME GENERATED DURING THE TRIAL RUN INCOME PERIOD CANNOT BE ADJUSTED AGAINST THE PREOPERATIVE EXPENSES AND THE SAME WAS CONFIRMED BY THE LD. CIT(A). HOWEVER, WE OBSERVE THAT IT WAS THE CONDITION IN THE AGREEMENT THAT THE TRIAL RUN HAS TO BE CARRIED OUT BEFORE THE BEGINNING OF COMMERCIAL OPERATION. THE LD. AR DREW OUR ATTENTION ON PAGES 17,18,19,20,21 ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 7 OF THE PAPER BOOK WHERE THE REQUIREMENT FOR THE TRI AL RUN WAS REQUESTED BEFORE THE BEGINNING OF ACTUAL OPERATION. THE PURPO SE OF THE TRIAL RUN WAS TO CHECK WHETHER THERE IS ANY FLAW IN THE SYSTEM OR NO T SO THAT REMEDIAL ACTION CAN BE TAKEN WELL IN TIME IN THE EVENT OF ANY FLAW IN THE SYSTEM. SO IT IS CLEAR THAT THE PURPOSE OF THE TRIAL RUN WAS TO CHECK THE FLAW IN THE SYSTEM AND NOT TO BEGIN THE COMMERCIAL OPERATIONS. IN THE INSTANT CAS E THE TRIAL RUN WAS SUCCESSFULLY COMPLETED ON DATED 13/1/2004 WITHOUT A NY FLAW IN THE SYSTEM. THEREFORE THE COMMERCIAL OPERATION BEGAN IMMEDIATEL Y THEREAFTER ON DATED 15/1/2004. NOW THE QUESTION HERE ARISES THAT IN CAS E OF ANY FLAW CAUGHT DURING THE TRIAL RUN THEN IN THAT EVENT CERTAINLY T HE COMMERCIAL OPERATION SHALL ONLY BEGIN AFTER THE REMOVAL OF THE FLAW. IN VIEW O F THI,S THE INCOME GENERATED DURING TRIAL RUN SHALL CERTAINLY BE ADJUSTED AGAINS T THE PRE-OPERATIVE EXPENSES. HAVING SAID THIS WE ARE INCLINED TO REVERSE THE ORD ER OF THE LD. CIT(A) AND DIRECT THE LOWER AUTHORITIES TO ADJUST THE TRIAL RU N INCOME FROM PREOPERATIVE EXPENSES OF THE ASSESSEE. WE ARE RELYING ON THE JUD GMENT OF THE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. NESTOR PHARMACEUTICALS LIMITED 322 ITR 631 WHERE IT WAS HELD THAT : THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURE OF PHARMACEUTICAL FORMULATION IN BULK DRUGS AND SUPPLYING DRUGS TO TH E GOVERNMENT HOSPITALS, INSTITUTIONS BESIDES SELLING THE PRODUCT IN DOMESTIC AND FOREIGN MARKETS. IT CLAIMED THE BENEFIT UNDER SECTI ON 80-IA/80-IB OF THE INCOME-TAX ACT, 1961. IT CARRIED OUT TRIAL PRODUCTI ON FROM MARCH 20, 1998. ON THAT BASIS THE ASSESSING OFFICER TREATED T HE ASSESSMENT YEAR 1998-99 AS THE INITIAL YEAR FOR THE BENEFIT CLAIMED AND SINCE THIS BENEFIT WAS ALLOWABLE FOR FIVE YEARS, ACCORDING TO THE ASSE SSING OFFICER, THIS BENEFIT WAS ADMISSIBLE FROM THE ASSESSMENT YEAR 199 8-99 TO THE ASSESSMENT YEAR 2002-03. THE ASSESSEE ON THE OTHER HAND CLAIMED THE BENEFIT FROM THE ASSESSMENT YEARS 1999-2000 TO 2003 -04. THE PLEA OF THE ASSESSEE WAS THAT TRIAL PRODUCTION DID NOT AMOU NT TO MANUFACTURE OF ITS PRODUCTS. IT WAS ONLY WHEN COMMERCIAL PRODUCTIO N COMMENCED, WHICH, ACCORDING TO THE ASSESSEE, COMMENCED ONLY IN THE ASSESSMENT YEAR 1999-2000 THAT PRODUCTION COMMENCED. THE COMMI SSIONER (APPEALS) CONFIRMED THE ORDER OF THE ASSESSING OFFI CER BUT THE TRIBUNAL REVERSED THAT ORDER HOLDING THAT SECTION 80-IA/80-I B OF THE ACT BEING BENEFICIAL LEGISLATION, THE BENEFIT SHOULD BE EXTEN DED TO THE ASSESSEE. IT FURTHER HELD THAT AS ON MARCH 20,1998, ONLY TRIAL P RODUCTION STARTED WHICH WAS DIFFERENT FROM COMMERCIAL PRODUCTION AND THE BENEFIT OF THAT SECTION SHOULD BE ALLOWED IN THE YEAR IN WHICH COMM ERCIAL PRODUCTION ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 8 STARTED, I.E. IN THE ASSESSMENT YEAR 1999-2000 AND, THEREFORE, WOULD BE EXTENDABLE UP TO THE ASSESSMENT YEAR 2003-04. ON AP PEAL : HELD, THAT THE INITIAL ASSESSMENT YEAR, FOR THE PUR POSE OF SECTION 80-IA, WAS THE ASSESSMENT YEAR RELEVANT TO THE PREVIOUS YE AR IN WHICH THE INDUSTRIAL UNDERTAKING BEGINS TO MANUFACTURE OR PR ODUCE ARTICLES OR THINGS. THE TRIAL PRODUCTION BEGAN ON MARCH 20, 19 98, AS PER THE DETAILS GIVEN IN THE AUDIT REPORT FURNISHED BY THE ASSESSEE ALONG WITH ITS RETURNS OF INCOME FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05. THERE WAS NO DISPUTE THAT THE FIRST SALE WAS MADE O N APRIL 23,1998, WHICH WOULD BE THE PERIOD RELEVANT TO THE ASSESSMEN T YEAR 1999-2000. MERELY BECAUSE SOME CLOSING STOCK WAS SHOWN AS ON M ARCH 31, 1998, THAT WOULD NOT LEAD TO THE CONCLUSION THAT THERE WA S COMMERCIAL PRODUCTION AS WELL. EVEN FOR THE PURPOSE OF TRIAL P RODUCTION MATERIAL WOULD BE NEEDED AND THERE WOULD BE PRODUCTION WHICH WOULD RESULT IN STOCK OF FINISHED GOODS. THE EVIDENCE PRODUCED BY T HE ASSESSEE WAS ACCEPTED BY THE TRIBUNAL AS WELL, FROM WHICH IT WAS CLEAR THAT THERE WAS ONLY A TRIAL PRODUCTION IN THE ASSESSMENT YEAR 1998 -99 AND COMMERCIAL AND FULL-FLEDGED PRODUCTION COMMENCED ONLY IN THE Y EAR 1999-2000. THE ORDER OF THE TRIBUNAL ALLOWING THE BENEFIT OF DEDUC TION UNDER SECTION 80- IA/80IB OF THE ACT FROM THE ASSESSMENT YEAR 1999-20 00 TREATING IT AS THE INITIAL YEAR OF PRODUCTION TO THE ASSESSMENT YE AR 2003-04 WAS CORRECT IN LAW. THE TRIBUNAL HELD THAT THE ASSESSEE HAD NOT ONLY PR ODUCED THE GOODS FOR TRIAL PURPOSES BUT THERE WAS, IN FACT, SALE OF ONE WATER COOLER AND AIR- CONDITIONER IN THE ASSESSMENT YEAR 1998-99 RELEVANT TO THE PREVIOUS YEAR/FINANCIAL YEAR 1997-98. THE EXPLANATION OF THE ASSESSEE WAS THAT THIS WAS DONE TO FILE THE REGISTRATION UNDER THE EX CISE ACT AS WELL AS THE SALES TAX ACT. THE TRIBUNAL HELD THAT THE SALE OF O NE WATER COOLER AND ONE AIR-CONDITIONER AS ON MARCH 31, 1998, FOR THE P URPOSE OF OBTAINING REGISTRATION OF EXCISE AND SALES TAX WAS MANUFACTU RE WITHIN THE MEANING OF SECTION 80-IA. ON APPEAL : HELD, THAT THE ASSESSEE HAD SOLD ONE WATER COOLER A ND ONE AIR- CONDITIONER BEFORE APRIL, 1998. THUS, THE STAGE OF TRIAL PRODUCTION HAD BEEN CROSSED AND THE ASSESSEE HAD COME OUT WITH THE FINAL SALEABLE PRODUCT WHICH WAS IN FACT SOLD AS WELL. THE QUANTUM OF COMMERCIAL SALE WOULD BE IMMATERIAL. WITH SALE OF THOSE ARTICLES MA RKETABLE QUALITY WAS ESTABLISHED, MORE PARTICULARLY WHEN THE ASSESSEE FA ILED TO SHOW THAT THE DEALER RETURNED THOSE GOODS ON THE GROUND THAT THER E WAS ANY DEFECT IN THE WATER COOLER OR AIR-CONDITIONER PRODUCED AND SO LD BY THE ASSESSEE TO THE DEALER. THE TRIBUNAL, IN THE CIRCUMSTANCES, WAS RIGHT THAT THE TWO TYPES OF CONDITIONS STIPULATED IN SECTION 80-IA WER E FULFILLED WITH THE COMMERCIAL SALE OF THE TWO ITEMS IN THAT ASSESSMENT YEAR. WHETHER THE ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 9 PURPOSE OF THAT SALE WAS TO OBTAIN REGISTRATION OF EXCISE OR SALES TAX WOULD BE IMMATERIAL. THE BOMBAY HIGH COURT HAS ALSO DECIDED THE SIMILAR ISSUE IN FAVOUR OF ASSESSEE IN THE CASE OF CIT VS. HINDUSTAN ANTIBIOTI CS LTD.(1974) 93 ITR 548 (BOM) AND RELEVANT EXTRACT OF THE ORDER IS REPRODUC ED BELOW : THE WORD ARTICLES USED IN THE EXPRESSION HAS BE GUN OR BEGINS TO MANUFACTURE OR PRODUCE ARTICLES IN SECTION 15C(2)( II) MUST BE INTERPRETED REGARD BEING HAD TO THE OBJECT FOR WHIC H THE SECTION WAS ENACTED. THE PROVISION WAS ENACTED WITH A VIEW TO E NCOURAGING THE ESTABLISHMENT OF NEW INDUSTRIAL UNDERTAKINGS AND TH E OBJECT WAS SOUGHT TO BE ACHIEVED BY GRANTING EXEMPTION FROM TAX ON PR OFITS DERIVED FROM SUCH UNDERTAKINGS DURING THE FIRST FIVE YEARS. THE OBJECT OF THE SECTION PRESUPPOSES THAT PROFITS ARE CAPABLE OF BEING EARNE D. HENCE, UNTIL AN ASSESSEE REACHES A STAGE WHERE IT IS IN A POSITION TO DECIDE THAT A FINAL PRODUCT WHICH CAN BE ULTIMATELY SOLD IN THE MARKET CAN BE MANUFACTURED IT CANNOT BE SAID TO HAVE STARTED MANUFACTURE OF TH E ARTICLES. IF IT BECOMES NECESSARY FOR AN ASSESSEE TO PRODUCE A TRIA L PRODUCT AT AN EARLIER STAGE TO VERIFY WHETHER IT CAN BE USED ULTI MATELY IN THE MANUFACTURE OF THE FINAL ARTICLE, THE COMMENCEMENT OF OPERATION FOR THE MANUFACTURE OF THE TRIAL PRODUCT WOULD NOT CONSTITU TE COMMENCEMENT OF MANUFACTURE OF ARTICLES FOR THE PURPOSES OF SECTION 15C. THE ASSESSEE-COMPANY UNDERTOOK A PROJECT FOR THE MA NUFACTURE OF PENICILLIN. IT STARTED ACTUAL OPERATIONS FOR THE MA NUFACTURE OF CRUDE PENICILLIN IN DECEMBER 1954. THE FIRST SAMPLES OF C RUDE PENICILLIN WERE REQUIRED TO BE SENT TO U.S.A. AND U.K. FOR OBTAININ G CERTIFICATES AS TO THEIR QUALITIES. THE CERTIFICATES WERE OBTAINED IN JUNE, 1955, AND THE ASSESSEE STARTED REGULAR PRODUCTION OF STERILE PENI CILLIN, THE ONLY PRODUCT THAT COULD BE SOLD IN THE MARKET, IN AUGUST, 1955. ON THE QUESTION WHEN THE MANUFACTURE OF STERILE PENICILLIN HAD STARTED A ND WHETHER THE ASSESSEE WAS ENTITLED TO THE EXEMPTION UNDER SECTIO N 15C FOR THE ASSESSMENT YEAR 1960-61 : HELD, ON THE FACTS, THAT PRODUCTION OF ARTICLES BY THE ASSESSEE HAD BEGUN ONLY IN AUGUST, 1955. THE BENEFIT OF THE EXE MPTION UNDER SECTION 15C AROSE TO THE ASSESSEE FOR THE FIRST TIME IN THE ASSESSMENT YEAR 1956-57 AND, THEREFORE, IT WAS ENTITLED TO THE EXEM PTION UNDER SECTION 15C FOR THE ASSESSMENT YEAR 1960-61 ALSO. 10. WE ALSO FURTHER OBSERVE THAT THE FACTS OF THE C ASE LAW CITED BY THE AO I.E. TUTIKORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA) FOR TREATING THE RECEIPTS ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 1 0 OF TRIAL RUN AS BUSINESS RECEIPT ARE DIFFERENT FROM THE FACTS OF THE INSTANT CASE. THE APEX COURT IN THE SAID CASE HAS TREATED THE INT EREST INCOME ON THE SURPLUS FUND AS INCOME FROM OTHER SOURCES BECAUSE T HERE WAS NO NEXUS BETWEEN THE ACTIVITY OF THE ASSESSEE AND INTEREST I NCOME. THE ASSESSEE HAS INVESTED IDLE FUND FOR SHORT PERIOD OF TIME BEFORE THE COMMENCEMENT OF THE BUSINESS. THERE WAS NO CONNECTION BETWEEN INTEREST INCOME AND THE BUSINESS OF THE ASSESSEE. THE INTEREST INCOME WAS INDEPENDEN T AND SEPARATE FROM THE BUSINESS OF THE ASSESSEE. HOWEVER IN THE INSTANT CA SE THE INCOME GENERATED DURING TRIAL RUN IS VERY MUCH CONNECTED WITH THE BU SINESS OF THE ASSESSEE HENCE THE QUESTION OF RECOGNIZING THE INCOME DOES N OT ARISE AS THE COMMERCIAL OPERATION HAS NOT BEGAN. IN VIEW OF ABO VE WE REVERSE THE ORDER OF THE LD. CIT(A) AND ALLOW THE APPEAL OF THE ASSES SEE. 11. THE SECOND ISSUE RAISED BY THE ASSESSEE IS AS R EGARDS THAT LD. CIT(A) ERRED IN CONFIRMING THE ORDER OF THE AO BY TREATING THE WORK IN PROGRESS OF RS. 2,22,23,527/- ON ACCOUNT OF TDS CERTIFICATE. 12. DURING THE YEAR THE ASSESSEE HAS DISCLOSED INCO ME FROM OPERATIONS AND WORK-IN-PROGRESS FOR AN AMOUNT OF RS.7,34,25,49 3/-. HOWEVER, AS PER THE TDS CERTIFICATE THE ASSESSEES EARNED INCOME RS.12, 13,61,939/- AS DETAILED UNDER: SL NO. NAME OF 1 INTEREST OTHER THAT INTEREST ON 72,685 14,901 UNION BANK OF INDIA 2 -DO- 58,536 12,000 -DO- 3 PORT PAYMENT 4,98,489 10,218 INTRO SHIPPING 4 PAYMENT TO CONTRACTOR 11,99,98,606 24,59,977 SAIL 5 -DO- 2,46,500 5,160 CHOWRI NGHEE 6 -DO- 2,01,322 4,214 7 -DO- 1,46,750 3,071 -DO- 8 -DO- 1,39,050 2,910 -DO- TOTAL 12,13,61,939 25,12,451 25,12,451 ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 1 1 THE AO SOUGHT THE CLARIFICATION FOR THE DIFFERENCE ARISING BETWEEN THE INCOME DECLARED AND THE INCOME FROM THE TDS CERTIFICATE. T HE ASSESSEE SUBMITTED AS UNDER:- 1) INCOME FROM OPERATIONS AS PER P & L A/C RS. 6,73 ,04,559.00 2) ADD : INCOME DURING TRIAL RUN RS. 3,17,02,632 .00 3) ADD : BANK INTEREST (PRE-OPERATIVE INCOME) RS. 1,31,221.00 TOTAL RS. 9,91,38,412.00 4) INCOME AS PER TDS CERTIFICATE RS. 12,13,61,939.00 DIFFERENCE ( SHORT INCOME) RS. 2,22,23,527.00 THE REASON FOR THE DIFFERENCE WAS EXPLAINED THAT TH E M/S SAIL HAS DEDUCTED TDS ON THE WORK IN PROGRESS ACCOUNT ALSO AND THE AS SESSEE HAS NOT SHOWN SUCH WORK-IN-PROGRESS AS REVENUE ACCOUNT DURING THE YEAR. THE ASSESSEE HAS BOOKED SUCH INCOME IN THE SUBSEQUENT YEAR I.E. 2004-05 THE FINANCIAL YEAR. HOWEVER THE ASSESSEE DISREGARDED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE WAS IN RECEIPT OF SUCH INC OME WHICH SHOULD HAVE BEEN DISCLOSED IN THE RETURN OF INCOME. THEREFORE T HE DISCREPANCY ARISING FROM THE TDS CERTIFICATE FOR AN AMOUNT OF RS.2,22,23,527 /- WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 13. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT(A) WHO CONFIRMED THE ACTION OF AO BY OBSERVING AS UNDER:- I HAVE CAREFULLY CONSIDERED THE ABOVE. APPARENTLY, THE ENTIRE AMOUNT OF RS.12,13,61,939/- WERE RECEIVED BY THE APPELLANT TO WARDS CARGO HANDLING OPERATIONS AND OTHER RECEIPTS. FURTHER, M/ S STEEL AUTHORITY OF INDIA LTD. HAS TREATED THE ABOVE PAYMENT TO THE APP ELLANT TOWARDS CHARGES FOR OPERATIONS. FURTHER, NO EVIDENCE WAS FI LED BEFORE ME TO INDICATE THAT THE ABOVE SUM OF RS.22,22,23,527/- RE PRESENTS WORK-IN- PROGRESS BUT NOT RECEIPTS TOWARDS OPERATIONS. CONSI DERING THE ABOVE, I DO NOT FIND ANY REASONS TO INTERFERE WITH THE ASSES SMENT ORDER. ACCORDINGLY, THIS GROUND NO.3 IS DISMISSED . BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) ASSESSE E PREFERRED SECOND APPEAL BEFORE US. ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 1 2 14. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. LD. AR SUBMITTED THAT IT IS ALSO NOT IN DIS PUTE THAT THE ALLEGED FINDING OF THE LD. ASSESSING OFFICER ON THE ISSUE OF DISCREPAN CY OF RS.2,22,23,527/- IS SIMPLY AN ISSUE WHICH AROSE FROM A FUTURE IMAGINATI ON. IT WAS APPRISED THAT STEEL AUTHORITY OF INDIA, THE CONTRACTOR HAD DEDUCT ED TAX ON THE TOTAL PAYMENT MADE TO THE APPELLANT WHICH WAS SHOWN BY THE APPELL ANT AS WORK-IN-PROGRESS. IT WAS ALSO APPRISED TO THE LD. ASSESSING OFFICER T HAT THE SAME WAS DULY DISCLOSED IN THE SUBSEQUENT ASSESSMENT YEAR 2005-20 06. HOWEVER, THE LD. ASSESSING OFFICER DID NOT ENQUIRE ABOUT THE VERACIT Y OF THE EXPLANATION FURNISHED BY THE APPELLANT. IT WAS HIS VIEW THAT, S UCH SUM WAS NOT OFFERED AS INCOME BY THE APPELLANT IN ITS PROFIT & LOSS ACCOUN T AND ACCORDINGLY THE IMPUGNED AMOUNT IS LIABLE TO BE CONSIDERED AS INCOM E FOR THE ASSESSMENT YEAR UNDER DISPUTE. THE APPROACH OF THE LD. ASSESSI NG OFFICER IN THIS RESPECT IS ONE SIDED. IT IS AXIOMATIC THAT WHEN THERE WAS D IFFERENCE WITH THE FIGURES OF A PARTY WITH THAT OF THE ASSESSEE, IT WAS THE DUTY OF THE LD. ASSESSING OFFICER TO PROVIDE OPPORTUNITY TO THE APPELLANT TO RESOLVE ANY ALLEGED DISCREPANCY. AS A RESULT, THE APPROACH OF THE LD. ASSESSING OFFICER W AS CONTRARY TO LAW AND AS SUCH, THE ADDITION MADE ON THE SPECIOUS PREMISE OF DISCREPANCY OF TDS IN THE SUM OF RS.2,22,23,527/- ON A TENUOUS JUSTIFICAT ION SOLELY DEPENDING ON EXTRANEOUS FACTS NOT GERMANE TO THE ISSUE IS THOROU GHLY UNTENABLE AND THE LD. COMMISSIONER (APPEALS) IN UPHOLDING SUCH IMPUGNED S PECIOUS ADDITION HAS WRONGLY CONSTRUED THE FACTS OF THE CASE WHICH IS TH EREFORE UNSUSTAINABLE BEING DIAMETRICALLY OPPOSED TO LAW. ON THE OTHER HAND THE LD. DR RELIED ON THE ORDERS OF AUTHORITIES BELOW. 15. FROM THE AFORESAID DISCUSSIONS WE FIND THAT THE AO HAS FOUND OUT THAT THE ASSESSEE HAS UNDERSTATED HIS INCOME ON BASIS OF THE DISCREPANCY NOTICED IN THE TDS CERTIFICATE. ON THE OTHER HAND THE LD. A R SUBMITTED THAT THE ASSESSEE HAS TAKEN ADVANCE FROM THE PARTY DURING TH E YEAR AGAINST WHICH THE AMOUNT OF WORK IN PROGRESS WAS SHOWN IN THE BALANCE SHEET OF THE ASSESSEE. THE LD. AR FURTHER SUBMITTED THAT SUCH WORK IN PROG RESS HAS BEEN OFFERED TO ITA NO.1194/KOL/2010 A.Y. 2004-05 INTERNATIONAL SEAPORTS (HALDIA) P.LTD. V. ITO WD -12(3) KOL. PAGE 1 3 TAX IN THE SUBSEQUENT YEAR. THE LD. AR HAS SUBMITTE D THE FINANCIAL STATEMENT OF THE SUBSEQUENT YEAR OF THE ASSESSEE IN SUPPORT O F HIS CLAIM. NOW THE QUESTION BEFORE US IS TO CHECK WHETHER THE INCOME O F THE ASSESSEE HAS BEEN OFFERED TO TAX OR NOT. SO FOR THIS PURPOSE WE ARE R ESTORING THE FILE TO THE AO WITH THE DIRECTION TO CHECK WHETHER THE INCOME OF T HE ASSESSEE HAS BEEN DISCLOSED IN THE SUBSEQUENT YEAR OR NOT. IF YES THE N DELETE THE ADDITION MADE BY THE ASSESSEE. IN VIEW OF THE ABOVE, THIS GROUND OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 16. IN THE RESULT, ASSESSEE APPEAL IS PARTLY ALLOWED FO R STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT 20/ 01/2016 SD/- SD/- (MAHAVIR SINGH) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP !- 20 / 0 1/201 6 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-INTERNATIONAL SEAPORTS(HALDIA) PVT. LTD. , C/O SHRI SOMNATH GHOSH, ADVOCATE, SEVEN BROTHERS LODGE, P.O.BUROSHIBTALA, P.S. CHINSURA DIST. HOOGHLY, PIN 712 105 2. /RESPONDENT-ITO, WARD-12(3), AAYKAR BHAVAN, P7, CHO WRINGHEE SQ., KOL-69 3. ) *+ , , - / CONCERNED CIT KOLKATA 4. , , -- / CIT (A) KOLKATA 5. 012 33*+, , *+ , / DR, ITAT, KOLKATA 6. 267 89 / GUARD FILE. BY ORDER/ , , /TRUE COPY/ / , *+ ,