DCIT, Circle - 8, Kolkata, Kolkata V. M/s. Bhagawati Oxygen Ltd., Kolkata

ITA 1392/KOL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 54483 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 1 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 02-07-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D R SINDHAL
• Assessee Lawyers: D S DAMLE
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH: KOL KATA () BEFORE . . , ! '# '# '# '# /AND ' # , ! ) [BEFORE HONBLE SHRI S. V. MEHROTRA, AM & HONBLE S RI MAHAVIR SINGH, JM] #$ #$ #$ #$ / I.T.A NO. 1392/KOL/2010 %& ''( %& ''( %& ''( %& ''(/ // / ASSESSMENT YEAR: 2006-07 DEPUTY COMMISSIONER OF INCOME TAX, VS. M/S. BHAGAW ATI OXYGEN LTD. CIRCLE-8, KOLKATA. (PAN-AABCB 2164 N) (*+ /APPELLANT ) (,-*+/ RESPONDENT ) FOR THE APPELLANT: SHRI D. R. SINDHAL FOR THE RESPONDENT: SHRI D. S. DAMLE . / ORDER PER MAHAVIR SINGH, JM ( ' ' ' ' # # # #, , , , ! ! ! ! ) THIS APPEAL BY REVENUE IS ARISING OUT OF ORDER OF C IT(A)-VIII, KOLKATA IN APPEAL NO 290/CIT(A)-VIII/KOL/08-09 DATED 22.04.2010. ASSESSM ENT WAS FRAMED BY ACIT, CIR-9, KOLKATA U/S. 143(3) OF THE INCOME TAX ACT, 1961 (HE REINAFTER REFERRED TO AS THE ACT) FOR ASSESSMENT YEAR 2006-07 VIDE HIS ORDER DATED 22.12. 2008. 2. THE ONLY ISSUE IN THIS APPEAL OF THE REVENUE IS AGAINST THE ORDER OF CIT(A) IN ALLOWING THE EXPENDITURE OF CONSUMPTION OF ZEOLITE AS REVENU E IN NATURE AS AGAINST THE ORDER OF AO HOLDING THE SAME AS CAPITAL IN NATURE. FOR THIS, RE VENUE HAS RAISED THE FOLLOWING GROUND NO.1: 1)THAT LD. CIT(A) ERRED ON FACTS AND IN CIRCUMSTAN CES OF THE CASE AND IN LAW IN HOLDING THAT CONSUMPTION OF ZEOLITE IS REVENUE IN NATURE AN D ACCORDINGLY THE CLAIM OF EXPENDITURE OF RS.1,57,95,238/- MADE BY THE ASSESSEE IS AN ALLO WABLE EXPENDITURE. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT ASSESSE E HAS INCURRED EXPENSES ON ACCOUNT OF ZEOLITE AS REPAIR AND MAINTENANCE FOR A TOTAL COST OF RS.1,57,95,238/-. ACCORDING TO ASSESSING OFFICER, THIS EXPENDITURE IS NOT REVENUE IN NATURE RATHER IT IS CAPITAL IN NATURE DUE TO FOLLOWING REASONS: A) ASSESSEE WILL GET THE BENEFIT OF THESE EXPENDIT URES FOR MORE THAN ONE ACCOUNTING PERIOD. AND AS PER ACCOUNTING CONCEPTIONS ANY EXPE NDITURE WHICH GIVES BENEFIT FOR MORE THAN ONE ACCOUNTING PERIOD IS CAPITAL EXPENDITURE. B) AS PER TERM LOAN SANCTION LETTER ISSUED BY UNION BANK OF INDIA, IT IS UPGRADATION OF OXYGEN PLANT, UPGRADATION COST IS CAPITAL EXPENDITU RE. 2 ITA 1392/K/2010 BHAGWATI OXYGEN LTD. A.Y.06-07 THE ASSESSING OFFICER ACCORDINGLY DISALLOWED THE SA ME AS CAPITAL EXPENDITURE. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE CIT(A), WHO ALLOWE D THE CLAIM OF ASSESSEE BY TREATING THE SAME AS REVENUE EXPENDITURE BY HOLDING AS UNDER: IT IS, THEREFORE, SEEN THAT WHETHER ZEOLITE CAN BE CONSIDERED TO BE PART OF MACHINERY OR PLANT IS EXTREMELY DOUBTFUL GIVEN ITS NATURE AS A C ONSUMABLE. HOWEVER, EVEN IF THIS WAS SO APPLYING THE FUNCTIONAL TEST, AS CALLED FOR BY T HE HONBLE SUPREME COURTS OBSERVATIONS, REFERRED TO ABOVE, ZEOLITE IS, SEEN T O BE A FACILITATING AGENT IN A SINGLE, INTEGRATED PROCESS AND, IN MY OPINION, REPLACEMENT OF SUCH FACILITATING AGENT DOES NOT RESULT IN REPLACEMENT OF ENTIRE PLANT.FURTHERMORE, ZEOLITE WAS INITIALLY A NATURALLY OCCURRING MATERIAL. SUCH A MATERIAL, BY COMMONSENSE , WOULD BE IN THE NATURE OF A CONSUMABLE RATHER THAN A PLANT. THE APPELLANT HAS C LAIMED THAT EVEN AFTER REPLACEMENT OF ZEOLITE ITS INSTALLED CAPACITY HAS NOT BEEN AUGM ENTED. NO CONTROVERSY ON THIS ISSUE HAS BEEN RAISED IN THE A.OS ORDER AND, IN ANY CASE THE APPELLANTS AUDITED ACCOUNTS BEAR OUT ITS ASSERTION. THE EXPENDITURE INCURRED BY THE APPELLANT THEREFORE HAS LEFT ITS FIXED CAPITAL UNTOUCHED. REPLACEMENT OF ZEOLITE IN A CHAM BER DID NOT RESULT IN THE ACQUISITION OF A CAPITAL ASSET. AT BEST IT CAN BE SAID THAT THE APPELLANT REPLACED ONE OF THE PART OF AN INTEGRATED PLANT AND THEREFORE THE EXPENDITURE, AS PER THE HONBLE SUPREME COURTS OBSERVATIONS WOULD CONSTITUTE EXPENDITURE ON CURREN T REPAIRS AND BY EXTENSION REVENUE EXPENDITURE. THE A.O. IS DIRECTED TO TREAT THE EXPE NDITURE ACCORDINGLY. HOWEVER, WHILE GIVING EFFECT TO THIS ORDER THE A.O. SHALL WITHDRAW THE DEPRECIATION HE HAS ALLOWED IN RESPECT OF SUCH EXPENDITURE. AGGRIEVED, REVENUE CAME IN APPEAL BEFORE US. 4. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH FACTS AND CIRCUMSTANCES OF THE CASE. THE BRIEF FACTS ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF PRODUCTION OF INDUSTRIAL GASES IN ITS UNIT LOCATED AT GHATSILA, JHARKHAND. ASSESSEE S UNIT IS ADJACENT TO THE MANUFACTURING UNIT OF HINDUSTAN COPPERS LTD., WHO IS THE PRINCIPAL CUSTOM ER OF ASSESSEE AND ENTIRE PRODUCTION FOR THE RELEVANT FINANCIAL YEAR WAS SUPPLIED TO HINDUST AN COPPERS LTD. THE ASSESSEE NARRATED THE FACT THAT IT PRODUCES OXYGEN BY USING VACUUM PRESSU RE SWING ADSORPTION (VPSA) TECHNOLOGY. THE SAID VPSA MANUFACTURING PLANT AND CONNECTED TEC HNOLOGY WAS SUPPLIED BY TAIYO NIPPON SANSO CORPORATION, JAPAN. SINCE INCEPTION VPSA PLAN T HAS ANNUAL PRODUCTION CAPACITY OF 54,00,000NM3 OF OXYGEN. THE VPSA PLANT CONSISTS OF AIR FAN, ADSORBER VESSELS; ADSORBENT CHEMICAL, VACUUM PUMP, OXYGEN COMPRESSOR, CONTROL V ALVES, PROGRAMMABLE LOGIC CONTROL SYSTEM, INSTRUMENT AIR COMPRESSORS, WATER PUMPS, CO OLING TOWERS, WATER TREATMENT SYSTEMS, ELECTRONIC AND PNEUMATIC INSTRUMENTATION, TRANSFORM ERS, MOTORS, ELECTRICAL PANELS, PIPELINES AND SYSTEMS ETC. THE ADSORBER VESSEL CONTAINS CHEMICAL ADSORBENTS WHICH ARE ZEOLITES MOLECULAR SIEVES AND ALUMINA GEL (NEOBEAD)/ACTIVATED ALUMINA AND CERAMIC BALLS. IN THE COURSE OF MANUFACTURING, VPSA PLANT SEPARATES OXYGEN FROM AIR BY VACUUM PRESSURE SWING ADSORPTION USING ADSORBENT VIZ. ZEOLITES. IN THE PRODUCTION PR OCESS AIR IS SEPARATED BY SHORT TIME CYCLE ADSORPTION /DESORBTION ON ADSORBENT BED; USING GAS PRESSURE VARIATION AS THE PRINCIPLE. VPSA TECHNOLOGY USES SOPHISTICATED CYCLES EMPLOYING MULT IPLE ADSORBERS AND INTERNAL RECOVERY STEPS. AS A RESULT AIR SEPARATION PRODUCES HIGH PURITY OXY GEN AT MINIMUM COST. ASSESSEE EXPLAINED 3 ITA 1392/K/2010 BHAGWATI OXYGEN LTD. A.Y.06-07 PROCESS FLOW CHART FOR THE PRODUCTION OF OXYGEN BY USING VPSA TECHNOLOGY. THE VPSA PROCESS IS BASED ON PHYSICAL ABSORPTION PHENOMENA W HERE OXYGEN IS PRACTICALLY NON- ADSORBABLE; COMPARED TO MOLECULES SUCH AS N2 (NITRO GEN), C02 (CARBON DIOXIDE), H20 (HYDROGEN). THESE MOLECULES IN THE AIR CAN BE SELEC TIVELY ADSORBED AND HIGH PURITY OXYGEN IS OBTAINED. THE SAID PRODUCTION PROCESS WORKS AT AMBI ENT TEMPERATURE AND THERE IS NO NEED FOR HEAT OR HIGH TEMPERATURE FOR REGENERATION. THE CHAN GES IN TEMPERATURE ARE CAUSED ONLY BY HEAT OF ADSORPTION AND DESORBTION. THE MANUFACTURING OPE RATIONS IN VPSA SYSTEM ARE COMPLETELY AUTOMATIC WITH ALL CYCLE CONTROL VALVES ARE ACTUATE D BY ELECTRIC CONTROL SYSTEM. THE VPSA SYSTEM PRODUCES OXYGEN GAS BY USING THE FOLLOWING T HREE BASIC STEPS: STEP 1 (ADSORBTION ) AIR COMPRESSED BY THE AIR FAN IS SENT TO ONE OF THE ADSORBERS AND THEN FLOWS INTO THE ADSORBER. H10, C02 AND N2 IN THE AIR ARE SELECTIVEL Y ADSORBED FROM BOTTOM TO TOP. WHILE AT THE SAME TIME, HIGH PURITY OXYGEN GAS IS D ISCHARGED FROM THE OTHER END OF THE BED AND SENT TO PRODUCT LINE AS A PRODUCT. STEP 2 (DESORPTION) THE ADSORBER IS EVACUATED TO REGENERATION PRESSURE BY THE VACUUM PUMP AND H20, C02 AND N2 ADSORBED IN SYNTHETIC ZEOLITES ARE DESORBED. STEP 3 (REPRESSURE) THE ADSORBER IS REPRESSURISED TO ADSORPTION PRESSUR E WITH A SPLIT STREAM OF OXYGEN PRODUCT THE PRODUCED OXYGEN GAS IS COMPRESSED TO REQUIRED P RESSURE BY THE OXYGEN COMPRESSOR. THE PRODUCTION PROCESS CARRIED OUT IN VPSA PLANT IS A CONTINUOUS ONE. ALL PROCESSES INVOLVED IN PRODUCTION OF OXYGEN ARE INTERLINKED, I NTER DEPENDENT AND ALL PROCESSES ARE CONTINUOUSLY PERFORMED RESULTING PRODUCTION OF OXYG EN. ALL THE COMPONENTS AND EQUIPMENTS COMPRISED IN VPSA TOGETHER CONSTITUTE SI NGLE INTEGRATED PLANT. AS EXPLAINED BY ASSESSEE, FOR PRODUCTION OF OXYGEN, USE OF CHEMICAL ADSORBENT IS CRITICAL. THE QUALITY AND COST OF PRODUCTION SUBSTANTIALLY DEPEND S ON THE QUALITY OF ADSORBENT CHEMICALS I.E. ZEOLITES, IN THE CASE OF THE ASSESSEE. IN THE PROCE SS OF PRODUCING OXYGEN ADSORBENT CHEMICALS KEPT IN THE ADSORBENT VESSELS ARE CONSUMED OVER A P ERIOD OF TIME & THEREFORE THE WORN OUT ADSORBENT MATERIALS BEING ZEOLITES AND ALUMINA GEL ARE REPLACED AT PERIODIC INTERVALS. HOWEVER, IT MAY BE APPRECIATED THAT ADSORBENT CHEMICALS VIZ. ZEOLITES AND ALUMINA GEL BY ITSELF DO NOT CONSTITUTE PLANT OR MACHINERY NOR SUCH CHEMICALS CA N PRODUCE OXYGEN OR ANY GAS ON THEIR OWN. ON STAND ALONE BASIS THESE ADSORBENT CHEMICALS DO N OT PERFORM ANY FUNCTION & THEREFORE CANNOT BE REGARDED AS PLANT OR MACHINERY. THESE CHE MICALS, WHEN PUT INSIDE THE ADSORBENT VESSELS AND THEREAFTER WHEN THE AIR IS PASSED THROU GH THE VASSALS IN CONTROLLED CONDITIONS; FACILITATE SEPARATION OF AIR INTO DIFFERENT GASES S UCH AS NITROGEN, OXYGEN ETC. THESE ADSORBENT CHEMICALS ARE IN THE NATURE OF CONSUMABLE ITEMS WHI CH GET CONSUMED AND/OR EXHAUSTED IN THE COURSE OF PRODUCTION PROCESS AND THEREFORE REQUIRED TO BE REPLACED WITH FRESH ADSORBENT 4 ITA 1392/K/2010 BHAGWATI OXYGEN LTD. A.Y.06-07 CHEMICALS SO THAT THE OVERALL PRODUCTION CAPACITY O F THE VPSA PLANT IS MAINTAINED ON EVEN KEEL. EVEN INSTALLED CAPACITY OF VPSA PLANT CONTINU ED TO REMAIN 54,00,000 NM3 ANNUALLY AND THERE WAS NO INCREASE IN THE INSTALLED CAPACITY AS A RESULT OF ZEOLITES REPLACED DURING THE YEAR UNDER CONSIDERATION. 5. WE FIND THAT THE LD. CIT-DR ONLY MADE ARGUMENT THAT THE ASSESSEE WILL GET ENDURING BENEFIT FOR MORE THAN ONE ACCOUNTING PERIOD. HE AL SO STATED THAT AS PER TERMS OF LOAN SANCTIONED BY UNION BANK OF INDIA ITS UP-GRADATION OXYGEN PLANT AND ACCORDING TO HIM UP- GRADATION COST IS CAPITAL EXPENDITURE. ACCORDINGLY , HE STATED THAT ITS EXPENDITURE IS CAPITAL IN NATURE AND NOT REVENUE IN NATURE AS HELD BY CIT(A). WE FIND THAT DURING THE FINANCIAL YEAR 2005-06 THE ASSESSEE MERELY REPLACED ADSORBENT CHEM ICALS IN PLACE OF PARTIALLY WORN OUT OR EXHAUSTED CHEMICAL WHICH REQUIRED REPLACEMENT DUE T O CONTINUOUS USE OVER THE PAST FEW YEARS AND IN ORDER TO RESTORE THE PRODUCTIVITY AND QUALI TY OF THE OXYGEN PRODUCED IT WAS NECESSARY TO REPLACE THE ADSORBENT CHEMICALS IN THE ADSORBENT VE SSELS. HOWEVER BY SUBSTITUTING AND/OR REPLACING THE ZEOLITES IN PLACE OF EXISTING ADSORBE NT CHEMICALS, NO NEW PLANT OR EQUIPMENT WAS ACQUIRED NOR THERE WAS INCREASE IN THE PLANT CAPACI TY. THE REPLACEMENT OF ADSORBENT CHEMICALS ONLY RESTORED THE OPTIMUM PRODUCTION CAPACITY OF EX ISTING PLANT WHICH ENABLED ASSESSEE TO CONTINUE TO PRODUCE HIGH QUALITY OXYGEN. EVEN BEFOR E AND AFTER THE REPLACEMENT OF ZEOLITES THE OVERALL NATURE OF MANUFACTURING PLANT, MANUFACTURIN G PROCESS AND PRODUCTION CAPACITY REMAINED UNCHANGED. IN THE CIRCUMSTANCES THE AO WAS UNJUSTIFIED IN CONCLUDING THAT ASSESSEE HAD INCURRED CAPITAL EXPENDITURE AND THEREBY ACQUIR ED NEW PLANT AND MACHINERY IN ITS BUSINESS OF MANUFACTURING; INDUSTRIAL GASES. IT IS A FACT T HAT ASSESSEES MANUFACTURING PLANT IS A CONTINUE PROCESS PLANT AND ALL EQUIPMENTS & MACHINERIES ARE INTER-LINKED AND INTERDEPENDENT AND TOGETHER FORM ONE SINGLE INTEGRATED MANUFACTURING A PPARATUS. IN PARTICULAR, ADSORBENT CHEMICALS VIZ. ZEOLITES & ALUMINA GEL ARE PLACED IN THE ADSORBENT VESSELS AND WORK ONLY AS FACILITATING AGENT FOR BIFURCATION OF AIR INTO NITR OGEN, OXYGEN, ETC WHEN THE AIR IS PASSED THROUGH THE ADSORBER VESSELS IN CONTROLLED CONDITIONS. THES E CHEMICALS ACT MERELY FACILITATING AGENT FOR GENERATING GASES FROM THE AIR. BY ITSELF THESE CHEM ICAL AGENTS ARE NOT CAPABLE OF MANUFACTURING OR PRODUCING ANY ARTICLE OR THING. IT IS ONLY WHEN THE ENTIRE PLANT, EQUIPMENTS AND COMPONENTS FUNCTION IN UNISON AND CERTAIN CONTROLLED CONDITION S ARE CREATED IN THE ADSORBENT VESSELS, CERTAIN CHEMICAL PROCESSES TAKES PLACE WITHIN THE ADSORBENT VESSELS AND THE AIR PASSING THROUGH THESE VESSELS ARE SEGREGATED INTO DIFFERENT GASES. THE AD SORBENT CHEMICALS ONLY FACILITATE SEPARATION OF AIR INTO DIFFERENT GASES. IN THE COURSE OF PRODU CTION OF GASES, THE ADSORBENT CHEMICALS ARE CONSUMED AND THEREFORE UPON ITS WEAR AND TEAR THE Z EOLITES ARE REQUIRED TO BE REPLACED AT PERIODIC INTERVALS. THERE IS NO DEFINED USEFUL LIFE FOR ZEOLITES. DEPENDING ON NUMEROUS FACTORS, 5 ITA 1392/K/2010 BHAGWATI OXYGEN LTD. A.Y.06-07 ASSESSEE DECIDES THE TIME PERIOD WITHIN OR AFTER WH ICH THE ZEOLITES ARE TO BE REPLACED AND MOREOVER ZEOLITES DO NOT HAVE ANY STANDARD LIFE CYC LE AND DEPENDING ON THE USAGE AND EFFLUX OF TIME THE DECISION IS TAKEN AS TO WHEN AND HOW MUCH ZEOLITES NEED TO BE REPLACED. THE ASSESSEE INCURRED EXPENDITURE ON IMPORTED ZEOLITE FROM JAPAN FOR USD 108000 (FOB), CUSTOM DUTY RS.13,00,202/-, OCEAN FREIGHT RS.69,766/- IN A.Y.20 09-2010 AND THEREFORE IT CAN EASILY BE INFERRED THAT ZEOLITES HAD WORKING LIFE WHICH EXTEN DED BEYOND ONE ACCOUNTING YEAR; FOR THAT REASON ALONE AO COULD NOT CONCLUDE THAT THE ASSESSE E HAD INCURRED CAPITAL EXPENDITURE. IN ORDER TO MANUFACTURE AND PRODUCE INDUSTRIAL GASES EVEN ON ONE DAY, IT WAS NECESSARY FOR THE ASSESSEE TO PUT IN ADSORBENT VESSELS ADSORBENT CHEMICALS VIZ . ZEOLITES. WHETHER THE ASSESSEE PRODUCED OXYGEN ON ONE DAY OR CONTINUED TO PRODUCE OXYGEN OV ER PROLONGED PERIOD, IT WAS NECESSARY TO PUT IN ADEQUATE QUANTITY OF ADSORBENT CHEMICALS SO AS TO CARRY ON THE MANUFACTURING PROCESS. WE ARE OF THE VIEW, IN VIEW OF THE GIVEN FACTS THAT THERE WERE PRE-EXISTING ADSORBENT CHEMICALS VIZ. ZEOLITES AND DURING THE F.Y.2005-06 THE ASSESS EE HAD MERELY REPLACED AND SUBSTITUTED ZEOLITES IN PLACE OF WORN OUT OR EXHAUSTED ADSORBEN T CHEMICALS. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) HOLDING THE EXPENDITURE INCURRED ON PURCHASE OF ZEOLITES AS REVENUE EXPENDITURE. 6. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISSE D. 7. ORDER PRONOUNCED IN OPEN COURT ON 05.08.2011. SD/- SD/- . . , ! ' '' ' # # # # , ! (S. V. MEHROTRA (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER ( / / / /) )) ) DATED :5 TH AUGUST, 2011 '01 %23 4' JD.(SR.P.S.) . 5 ,6 76'8- COPY OF THE ORDER FORWARDED TO: 1 . *+ / APPELLANT DCIT, CIRCLE-8, KOLKATA. . 2 ,-*+ / RESPONDENT, M/S. BHAGAWATI OXYGEN LTD., 67, PARK STREET, KOLKATA- 700 016 3 . .% ( )/ THE CIT(A), KOLKATA 4. .% / CIT, KOLKATA 5 . '> ,% / DR, KOLKATA BENCHES, KOLKATA -6 ,/ TRUE COPY, .%?/ BY ORDER, #3 /ASSTT. REGISTRAR .