M/s. Chennai Petroleum Corporation Ltd., CHENNAI V. ACIT, CHENNAI

ITA 1858/CHNY/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5721 (ITAT-CHENNAI)
• Duration Of Justice: 6 year(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 21-06-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 17-11-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAIRAM RAIPURA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Additional evidence; Question of law; Cost of acquisition; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 43B; 143(3); 80HHC; 37(1); 32

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B, CHENNAI , ! . '# %&, ( %) BEFORE SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER ./ITA NO.1858/MDS/2011 ( # !*# / ASSESSMENT YEAR : 2004-05 CHENNAI PETROLEUM CORPORATION LTD., REFINERY HOUSE, MANALI, CHENNAI 600 068 [PAN: AAACM 4392C] VS. ASST. COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I(3), CHENNAI 600 034 ( /APPELLANT ) ( / RESPONDENT ) ./ITA NO.1980/MDS/2011 ( # !*# / ASSESSMENT YEAR : 2004-05 DY. COMMISSIONER OF INCOME TAX, LARGE TAXPAYER UNIT, CHENNAI 600 101 VS. CHENNAI PETROLEUM CORPORATION LTD., REFINERY HOUSE, MANALI, CHENNAI 600 068 [PAN: AAACM 4392C] ( /APPELLANT ) ( / RESPONDENT ) ( #+,- . /ASSESSEE BY : SHRI R.VIJAYARAGHAVAN, ADVOCATE !- . /REVENUE BY : SHRI JAIRAM RAIPURA, CIT / ! - , / DATE OF HEARING : 07.09.2017 0* - , / DATE OF PRONOUNCEMENT : 05.12.2017 /O R D E R PER SANJAY ARORA, AM : THESE ARE CROSS APPEALS, I.E., BY THE ASSESSEE AND THE REVENUE, ARISING OUT OF THE ORDER BY THE COMMISSIONER OF INCOME TAX (APP EALS), LTU, CHENNAI 2 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. (CIT(A) FOR SHORT) DATED 14.09.2011, PARTLY ALLOW ING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT FOR U/S. 143(3) OF THE I NCOME TAX ACT (THE ACT HEREINAFTER) DATED 26.12.2006 FOR ASSESSMENT YEAR ( AY) 2004-05. ASSESSEES APPEAL (ITA NO. 1858/MDS./2011) 2. THE FIRST ISSUE, RAISED PER GD. 2; GD. 1 BEING G ENERAL IN NATURE, WARRANTING NO ADJUDICATION, IS THE DISALLOWANCE OF RESET FEE INCURRED IN THE SUM OF . 13.48 CR., CHARGED AND PAID BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE A SSUMED BORROWINGS FOR FINANCING THE EXPANSION OF ITS REFINING CAPACITY, CONTRACTING LOAN/S FROM OIL INDUSTRIES DEVELOPMENT BOARD (OIDB) FOR THE PURPOSE . IN VIEW OF THE DECLINE IN INTEREST RATES SUBSEQUENT TO THE YEAR 2000, THE ASS ESSEE SOUGHT, IN VIEW THEREOF, A CHANGE IN THE INTEREST RATE/S TO LOWER THAN THE CON TRACTED RATE/S OR, IN THE ALTERNATIVE, A PERMISSION TO LIQUIDATE THE HIGH COS T LOAN/S BY, OSTENSIBLY, AVAILING FRESH LOAN/S AT THE PREVAILING, LOWER RATE/S OF INT EREST. OIDB ALLOWED CONTINUING THE EXISTING BORROWING, I.E., AT THE LOWER RATE/S O F INTEREST, SUBJECT TO PAYMENT OF 2 PER CENT. OF THE OUTSTANDING LOAN/S, WHICH WAS TE RMED AS RESET FEE. THE REVENUE REGARDS IT AS INTEREST, WITHIN THE MEANING OF THE TERM AS DEFINED U/S. 2(28A) OF THE ACT. THE SAME, AFTER ALL, IS ONLY A O NE TIME FEE INCURRED IN LIEU OF THE RECURRING COST IN THE FORM OF HIGHER INTEREST. THE SAME WOULD THEREFORE STAND TO BE ALLOWED U/S. 36(1)(III). SO, HOWEVER, AS THE SAME IS IN RESPECT OF BORROWING/S APPLIED FOR SETTING UP THE NEW REFINERY , WHICH WAS IN PROGRESS, THE INTEREST COST WOULD STAND TO BE CAPITALIZED AS A PA RT OF THE PROJECT COST IN VIEW OF PROVISO TO S. 36(1)(III), INSERTED BY FINANCE ACT, 2003, W .E.F. 01.04.2004, READING AS UNDER: OTHER DEDUCTIONS 36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWIN G CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREI N, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28- (I) TO (II) 3 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. (III) THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION: PROVIDED THAT ANY AMOUNT OF THE INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET (WHETHER CAPIT ALISED IN THE BOOKS OF ACCOUNT OR NOT); FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET T ILL THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE, SHALL NOT BE ALLOW ED AS DEDUCTION. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. WHAT INFIRMITY, THEN, ONE MAY ASK, INFLICTS THE IM PUGNED ORDER? IN FACT, NONE STOOD POINTED OUT BY THE LD. AR. THERE IS ALSO NO DISPUTE QUA FACTS. THE ASSESSEE RELIES ON THE DECISION IN CIT V. GUJARAT GUARDIAN LTD. [2009] 177 TAXMAN 434 (DEL), HOLDING PREPAYMENT CHARGES AS ONL Y INTEREST AND, BEING PAYABLE TO A FINANCIAL INSTITUTION, TO WHICH THEREF ORE THE PROVISION OF S. 43B(D) SHALL APPLY, SO THAT IT WOULD BE DEDUCTIBLE FOR THE YEAR OF PAYMENT. THE SAID DECISION, THUS, RATHER THAN ASSISTING THE ASSESSEE S CASE, FAVOURS THAT OF THE REVENUE. THE HON'BLE COURT CONFIRMED THE EXPENDITUR E, BEING ON ACCOUNT OF RESTRUCTURING OF LOAN, AS INTEREST, AND, FURTHER, B EING TO A FINANCIAL INSTITUTION, AS SUBJECT TO THE BAR OF S. 43B PROVIDING FOR PAYMENT AS A CONDITION PRECEDENT FOR DEDUCTION. THE RESET FEE IS AGAIN ONLY IN THE NATUR E OF INTEREST, DEFINED U/S. 2(28A) TO INCLUDE ANY SERVICE FEE OR CHARGE IN RESP ECT OF MONEYS BORROWED OR DEBT INCURRED. THE SAME STANDS PAID DURING THE RELE VANT FINANCIAL YEAR, SO THAT THE CONDITION OF S. 43B STANDS SATISFIED. FURTHER, IN VIEW OF THE PROVISO TO S. 36(1)(III), EFFECTIVE AY 2004-05, THE SAME WOULD ST AND TO BE A PART OF THE COST OF THE CAPITAL ASSET/S TOWARD ACQUIRING WHICH THE B ORROWING STANDS APPLIED; THE INTEREST BEING INCURRED DURING THE CONSTRUCTION PER IOD. THE YEAR UNDER REFERENCE IN GUJARAT GUARDIAN LTD. (SUPRA) WAS AY 1996-97, WHEREAT THE SAID PROVISO WAS NOT ON THE STATUTE BOOK. IN FACT, EVEN PRIOR TO A.Y 2004-05, ONE COULD CONTEND OF CAPITALIZATION OF THE INTEREST COST IN V IEW OF EXPLANATION 8 TO S. 43(1), DEFINING ACTUAL COST, PROVIDING THAT THE INTEREST INCURRED IN RELATION TO ACQUISITION OF AN ASSET, SO MUCH OF IT AS IS RELATA BLE TO THE PERIOD AFTER THE ASSET IS 4 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. FIRST PUT TO USE, WOULD NOT FORM PART OF THE COST OF THE SAID CAPITAL ASSET. THE INTEREST DURING THE CONSTRUCTION PERIOD, I.E., PRIO R TO IT BEING FIRST PUT TO USE, WOULD THUS STAND TO BE CAPITALIZED. FURTHER, THAT T HEREFORE THE PROVISO TO S. 36(1)(III) IS CLARIFICATORY AND, THUS, RETROSPECTIV E IN NATURE, AS INDEED HELD IN JCT LTD. V. DY. CIT [2005] 276 ITR 115 (CAL). THE NON-CAPITALIZATION O F INTEREST IN BOOKS, FOLLOWING ACCOUNTING STANDARDS OR OTHERWISE, STANDS RENDERED AS OF NO CONSEQUENCE IN VIEW OF THE CLEAR LANGUAGE OF THE PR OVISION. THE POSITION OF LAW, HOWEVER, FOR A.YS 2004-05 AND THE SUBSEQUENT YEARS, IS WITHOUT ANY SHADOW OF DOUBT, AS CLARIFIED BY THE APEX COURT IN DY . CIT V. CORE HEALTH CARE LTD. [2008] 298 ITR 194 (SC). THE REVENUES STAND IS, ACCORDINGLY, UPHELD, DISMI SSING THE ASSESSEES GROUND. WE MAY THOUGH ADD THAT THE REVENUE HAS, CAP ITALIZING THE INTEREST COST, CONSIDERED THE SAME FOR GRANT OF DEPRECIATION (REFE R PARA II (PG.4) OF THE ASSESSMENT ORDER). 4. GD. 3 RAISES THE ISSUE OF COMPUTATION OF THE PR OFITS OF THE BUSINESS UNDER EXPLANATION ( BAA ) TO S. 80HHC, WHICH PROVIDES FOR EXCLUSION OF, AMO NG OTHERS, RECEIPTS BY WAY OF BROKERAGE, COMMISSION, INTEREST, RENT, CHARGES OR ANY OTHER RECEIPTS OF SIMILAR NATURE, INCLUDED IN THE PROFIT OR GAIN COMPUTED U/S. 28. IT IS THIS PROFIT WHICH IS THEN APPORTIONED ON THE BASIS OF EXPORT TURNOVER TO THE TOTAL TURNOVER TO YIELD THE PROFIT FROM THE EXPORT TURNOV ER. THE RECEIPTS ARE LISTED AT PARA 7.2, PG. 8 OF THE IMPUGNED ORDER. 5. BEFORE US, IT WAS THE ADMITTED STAND OF THE PART IES THAT THE ISSUE STANDS PRINCIPALLY COVERED AGAINST THE ASSESSEE BY THE TRI BUNALS ORDER IN THE ASSESSEES OWN CASE FOR A.Y 2003-04 (IN ITA NO.1823/MDS/2006, REPORTED AT 2 ITR (TRIB) 325 (CHENNAI TM)). QUA SALE OF SCRAP, THE LD. AR WOULD SUBMIT THAT THE SA ME WOULD STAND NOT TO BE INCLUDED IN THE TOTAL TURNOV ER, AS HELD IN CIT V. PUNJAB STAINLESS STEEL INDUSTRIES [2014] 364 ITR 144 (SC). 5 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. 6. WE HAVE HEARD THE PARTIES, AND CAREFULLY PERUSED THE ORDER BY THE TRIBUNAL IN THE ASSESSEES CASE FOR A.Y 2003-04 (SUPRA). WIT H REFERENCE TO THE DECISIONS BY THE HON'BLE APEX COURT REPORTED AT 295 ITR 228 A ND 290 ITR 667, THE RATIONALE FOR THE EXCLUSION OF THE INDEPENDENT INCO MES IN THE COMPUTATION OF THE EXPORT PROFITS STANDS EXPLAINED. WE FIND NO REASON FOR A DIFFERENT VIEW, SAVE QUA INCOME BY WAY OF SALE OF SCRAP IN VIEW OF THE DEC ISION IN PUNJAB STAINLESS STEEL INDUSTRIES (SUPRA). WE DO LIKEWISE, INCLUDING REMISSION, FOR T HE SAME REASON/S, AS WAS DONE BY THE TRIBUNAL IN THAT CASE QUA SOME RECEIPTS, VIZ. UNCLAIMED/UNSPENT LIABILITIES; RECOVERIES FROM EMPL OYEES - FURNITURE, ETC. FURTHER, THE REMISSION, INSTEAD OF BEING VARIOUSLY TO THE AO AND THE FIRST APPELLATE AUTHORITY, AS DONE BY THE TRIBUNAL IN THA T CASE, WOULD BE UNIFORMLY TO THE FILE OF THE LD. CIT(A), WHO SHALL DECIDE AFTER HEARING THE PARTIES BEFORE HIM. AS REGARDS RECEIPTS BY WAY OF TESTING FEES ( . 94.33 LACS) AND OTHERS ( . 47.24 LACS), FOR THE SAME REASON, I.E., BEING INDEPENDENT INCOMES, WOULD STAND TO BE EXCLUDED IN COMPUTING THE PROFITS OF THE BUSINESS. AS REGARDS THE SALE OF SCRAP, THERE SHALL BE NO EXCLUSION UNDER EXPLANATION (BAA) IN ITS RESPECT AS THE SAME IS TO BE REGARDED AS A REDUCTION IN THE COST OF RAW-MA TERIAL AND, FURTHER, THE SALE SHALL NOT STAND TO BE INCLUDED IN THE AMOUNT OF TO TAL TURNOVER OF THE BUSINESS. THIS, HOWEVER, SHALL NOT EXTEND TO THE SALE OF POWE R, WHICH SHALL STAND INCLUDED IN THE TOTAL TURNOVER. BEFORE PARTING WITH THIS ISSUE, WE MAKE IT CLEAR T HAT THE EXCLUSION, IN VIEW OF THE DECISION BY THE HON'BLE APEX COURT IN ACG ASSOCIATED CAPSULES PVT. LTD. V. CIT [2012] 343 ITR 89 (SC), RELIED UPON BY THE ASSESSE E BEFORE US, IS ONLY QUA THE INCOME IN RELATION TO THE RECEIPTS BY WAY OF SALE OF POWER, CRANE CHARGES, TESTING CHARGES, ETC., I.E., AFTER NETTING IDENTIFIABLE COSTS INCURRED IN RELATION THERETO. WE DECIDE ACCORDINGLY. 6 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. 7. THE FOURTH AND THE FINAL GROUND OF THE ASSESSEE S APPEAL IS THE CONSIDERATION BY THE REVENUE OF THE INTEREST ON DEL AYED PAYMENTS AGAINST SUPPLY OF CRUDE AND INTEREST ON LOANS/ADVANCES AS INCOME FROM OTHER S OURCES. THE ASSESSEE CLAIMS THE SAME AS FORMING PART OF THE BUSINESS INCOME AND, IN THE ALTERNATIVE, ONLY THE NET INCOME ON ACCOUNT OF INTE REST BEING LIABLE TO BE EXCLUDED IN VIEW OF THE DECISION IN ACG ASSOCIATED CAPSULES PVT. LTD. (SUPRA). 8. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. THE ASSESSEES ALTERNATE CLAIM, DISMISSED BY THE L D. CIT(A) WITH REFERENCE TO THE DECISION IN CIT V. V.CHINNAPANDI [2006] 282 ITR 389 (MAD), IS MISCONCEIVED. THIS IS AS, EVEN AS NOTED BY THE TRIB UNAL IN THE ASSESSEES CASE FOR A.Y 2003-04 (IN ITA NO.1823/MDS/2006), THE QUESTION OF REDUCTION OF INTEREST IN COMPUTATION OF THE PROFITS OF THE BUSINESS UNDER EXPLANATION ( BAA) TO S. 80HHC WOULD ARISE ONLY WHERE THE SAME IS ASSESSABLE AS BUSINESS INCOME, WHILE THE REVENUE INSISTS THAT THE SAME IS ASSESSAB LE U/S. 56, I.E., AS INCOME FROM OTHER SOURCES. TOWARD THE SAME IT RELIES ON TH E DECISIONS IN SOUTH INDIA SHIPPING CORPORATION LTD. V. CIT [1999] 240 ITR 24 (MAD) AND TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. V. CIT [1997] 227 ITR 172 (SC). THE ASSESSEE, ON THE OTHER HAND, HAS RELIED ON, INTER ALIA , THE DECISIONS IN CIT V. BOKARO STEEL LTD . [1999] 236 ITR 315 (SC) AND CIT V. KARNAL CO-OPERATIVE SUGAR MILLS LTD . [2000] 243 ITR 2 (SC). THE QUESTION THEREFORE IS WH ICH OF THE TWO SETS OF DECISIONS IS APPLICABLE IN THE FACTS AND CIRCUMSTAN CES OF THE PRESENT CASE? WE ARE NOT IMPRESSED BY THE LD. CIT(A)S RELIANCE ON T HE DECISIONS AS TO WHETHER THE INTEREST INCOME COULD BE SAID TO BE DERIVED FROM TH E ASSESSEES INDUSTRIAL UNDERTAKING IN-AS-MUCH AS THAT IS NOT THE ASSESSEE S CASE. THE TRIBUNAL FOR A.Y 2003-04 SET ASIDE THE MATTER BACK TO THE FILE OF TH E ASSESSING OFFICER (AO) IN VIEW OF THE ABSENCE OF THE RELEVANT DETAILS, I.E., FOR DETERMINING THE MATTER. IN SOUTH INDIA SHIPPING CORPORATION LTD. (SUPRA), THE HON'BLE COURT, FOLLOWING TUTICORIN ALKALI CHEMICALS & FERTILIZERS LTD. (SUPRA), HELD THAT THE HEADS OF 7 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. INCOME UNDER WHICH AN INCOME IS ASSESSABLE DEPENDS ON THE MANNER IN WHICH IT IS DERIVED. HOW COULD THE SAME, WE WONDER, BE FAULTED ? IN FACT, THE HON'BLE APEX COURT HAS IN BOKARO STEEL LTD . (SUPRA) AND KARNAL CO-OPERATIVE SUGAR MILLS LTD . (SUPRA) APPLIED THE SAME PRINCIPLES, TO FIND, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE INTEREST INCOME AS I NCIDENTAL TO THE ACQUISITION OF THE ASSET/S OR THE SETTING UP OF THE PLANT AND MACH INERY, SO AS TO BE A CAPITAL RECEIPT WHICH WOULD GO TO THE REDUCE THE COST OF TH E RELEVANT ASSET, IN THE SAME MANNER AS THE INTEREST COST ON BORROWINGS APPLIED F OR THE SAME STANDS TO BE INCLUDED AS A PART OF THE ACTUAL COST OF THE ASSET U/S. 36(1)(III) R/W S. 43(1), MORE PARTICULARLY A.Y 2004-05 ONWARDS. WE MAY AT THIS STAGE ALSO DWELL ON THE QUANTUM OF EXCLUSION (REDUCTION) UNDER EXPLANATION (BAA). THIS IS AS, EVEN IF REGARDED AS INCOME FROM OTHER SOURCES, IN-AS-MUCH AS THE INTEREST COST RELATABLE TO THE INTEREST RECEIPT, WHERE INCURRED, IS THUS DEDUCTIBLE U/S. 57(III) (THE ONUS TO ESTABLISH WHICH WOULD BE ON THE ASSESSEE), AND IT IS ONLY THE NET (INTEREST) IN COME THAT WOULD STAND TO BE EXCLUDED. THIS IS AS THE SAID INTEREST COST, DEBITE D TO THE PROFIT AND LOSS ACCOUNT OF THE COMPANY, CANNOT THEREFORE CONTINUE TO BE CLA IMED OR REGARDED AS DEDUCTIBLE U/S. 36(1)(III) AS BUSINESS EXPENDITURE. WHERE, HOWEVER, ASSESSABLE AS BUSINESS INCOME, AS IN THE CASE OF THAT RECEIVED FR OM TRADE DEBTORS, NO ADJUSTMENT QUA INTEREST RECEIPT MAY BE REQUIRED AS THE CORRESPOND ING INTEREST COST THE FINANCING COST BEING INCURRED IN RELATIO N TO THE ENTIRE DEBT PORTFOLIO, I.E., RATHER THAN THE DEBT REPRESENTING THE DELAYED PAYMENT ONLY, MAY BE CONSIDERED AS STANDING REDUCED TO THAT EXTENT, I.E. , BY AND TO THE EXTENT OF THE INTEREST RECEIVED/RECEIVABLE. THE SAME, IT MAY BE N OTED, IS AKIN TO THE REALIZATION BY WAY OF SALE OF SCRAP, WHICH IS TO BE REGARDED ON LY AS A REDUCTION IN THE COST OF RAW-MATERIAL AND NOT AS AN INDEPENDENT INCOME. WE, ACCORDINGLY, ONLY CONSIDER IT PROPER, IN THE A BSENCE OF THE REQUISITE DETAILS, WHILE CONFIRMING THE VALIDITY OF THE PRINC IPLES RELIED UPON BY THE 8 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. REVENUE, TO REMIT THE MATTER BACK TO THE FILE OF TH E LD. CIT(A) FOR A DECISION ON MERITS AFTER HEARING THE PARTIES BEFORE HIM. WE DEC IDE ACCORDINGLY. REVENUES APPEAL (ITA NO. 1980/MDS./2011) 9. WE NEXT CONSIDER THE REVENUES APPEAL. THE FIRST ISSUE IN THE REVENUES APPEAL IS THE MAINTAINABILITY OR OTHERWISE IN LAW O F THE DEDUCTION IN RESPECT OF THE REVAMPING COST OF ITS EXISTING VISBREAKER UNIT , WORK ON WHICH WAS ABANDONED MIDWAY BY THE ASSESSEE. WHILE THE ASSESSE E CLAIMS IT AS A REVENUE EXPENDITURE, THE REVENUE INSISTS IT TO BE ONLY IN T HE NATURE OF A CAPITAL LOSS. THE LD. CIT(A) HAS UPHELD THE ASSESSEES CLAIM, FOLLOWI NG THE DECISION IN CIT V. TAMIL NADU CHEMICAL PRODUCTS LTD. [2003] 259 ITR 582 (MAD); CIT V. GRAPHITE INDIA LTD [1996] 221 ITR 420 (CAL) AND CIT V. ANJANI KUMAR CO. LTD. [2003] 259 ITR 114 (RAJ). BEFORE WE PROCEED FURTHER IN THE MATTER, IT WOULD BE RELEVANT TO ASCERTAIN THE FACTS AND DETERMINE THE NATURE OF THE EXPENDITU RE AND, THUS, THE ISSUES ARISING IN RESPECT OF THE SAID CLAIM. THE VISBREAKER UNIT W AS ORIGINALLY COMMISSIONED IN 1979. IN FEBRUARY, 1995, IT WAS DECIDED TO REVAMP T HE SAME, UPON WHICH IT WOULD BE ABLE TO HANDLE 5.50 LAKH TPA OF HEAVY ENDS FROM THE EXISTING REFINERY, AND COST ABOUT . 47 CR. MEANWHILE, THE ASSESSEES EXPANSION PROJE CT FOR ENHANCING ITS REFINING CAPACITY (BY 3 MMTA) WAS APP ROVED BY THE GOVERNMENT OF INDIA (GOI). THE SAME REQUIRED ANOTHER 6 LAKH TP A OF VISBREAKER CAPACITY. ENGINEERS INDIA LTD. (EIL) INDICATED THE COST OF TH E PLANT AND MACHINERY FOR THE COMBINED VISBREAKER (11.50 LAC TPA) AT . 78 CR. THE TOTAL COST OF TWO SEPARATE PROJECTS WAS ESTIMATED AT . 130 CR., WHILE, ON THE OTHER HAND, THE TOTAL COST , AFTER ADDING OTHER COMPONENTS LIKE PROCESS PACKAGE, ENGINEERING FEE, CONTINGENCY, ETC. OF A NEW PLANT WITH EQUIVALENT CA PACITY, WOULD BE . 105 CR., RESULTING IN A SAVING OF . 25 CR. IN ADDITION, THE DISTILLATE YIELDS OF THE NEW VISBREAKER UNIT WOULD BE 30%, WHILE THAT OF THE REV AMPED VISBREAKER UNIT, DUE TO INADEQUACY OF SPACE FOR ADDITIONAL EQUIPMENT, WA S NOT EXPECTED TO EXCEED 9 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. 15%. THE COMPANY, ACCORDINGLY, VIDE THE MEETING OF ITS BOARD OF DIRECTORS (BOD) DATED 18/11/1997 , APPROVED THE DROPPING OF THE VISBREAKER REVAMPING PROJECT (MINUTES AT PB PAGES 151-152). THOUGH THERE WAS NO FRESH COMMITMENT TO EXPENDITURE FOR THE SAID (REVAMPING) PROJECT, TH E COMPANY HAD BY THEN ALREADY EXPENDED . 610.02 LACS THEREON, INCLUDING . 172.14 LACS ON S TEEL, STRUCTURALS, ETC. AND . 197.50 LACS ON CONSTRUCTION OF TANK PADS. OF THE SAME, THE COMPANY WAS ABLE TO RETRIEVE COSTS WORTH . 378.37 LACS BY USING THE STEEL PLATES, STRUCTURALS, TANKS, FOR ITS OTHER ONGOING P ROJECTS, LEAVING A BALANCE UN- UTILIZED EXPENDITURE OF . 231.65 LACS . THIS WAS DONE DURING THE YEARS 1998 AND 1999, INFORMING THE BOARD AND TAKING ITS ADVICE VID E BOD MEETINGS DATED 25/2/1998 AND 06/9/1999. THERE BEING NO SCOPE FOR R ECOUPMENT OF THIS BALANCE EXPENDITURE IN ANY OF THE ONGOING/FUTURE PROJECTS, THE SAME WAS FINALLY WRITTEN OFF ON SANCTION VIDE BOD MEETING DATED 14/4/2004 . PROVISION FOR THE SAME HAD IN FACT BEEN MADE IN ACCOUNTS EARLIER, I.E., IN F. Y. 1998-99 ( . 150.66 LACS), F.Y. 2000-01 ( . 12.47 LACS) AND F.Y. 2001-02 ( . 68.52 LACS) (PB PGS. 142 150). THE FIRST ISSUE, THEREFORE, THAT ARISES IS WHETHER THE WRITE OFF IS DEDUCTIBLE FOR THE CURRENT YEAR. THE REVAMP PROJECT HAD BEEN F INALLY DROPPED ON 18/11/1997, I.E., DURING THE PREVIOUS YEAR RELEVANT TO A.Y 1998-99, AND IN FACT DELETED PRIOR TO 06/9/1999, OF WHICH THE BOARD WAS INFORMED ON THAT DATE. FURTHER, EVEN THE BALANCE WAS CLEARLY PROVIDED IN B OOKS OVER A PERIOD OF TIME, GIVING DETAILED REASONS AS TO WHY IT WAS NOT POSSIB LE TO ABSORB THOSE COSTS, DETAILED AS UNDER, IN THE OTHER PROJECTS OF THE COM PANY: (PB PGS. 146-147) I. ACCOUNTING YEAR 1998-99 PROCESS PACKAGE ( .) 1. PAYMENT TO EIL PROCESS PACKAGE 61,20,000 2. PAYMENT TO EIL DETAILED ENGINEERING 79,65,000 3. MISCELLANEOUS EXPENDITURE INCURRED 9,81,479 150,66,479 10 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. TOTAL PROVISIONS MADE IN THE BOOKS: (I+II+III) 2,31,65,656 THAT BEING SO, HOW, WE WONDER, WOULD THE SAME BE DE DUCTIBLE FOR THE CURRENT YEAR? THE ALLOWABILITY, I.E., ASSUMING IT TO BE DED UCTIBLE U/S. 37(1), WOULD ONLY BE WHEN THE COSTS, IDENTIFIED AND CONFIRMED AS DEAD COSTS, WERE PROVIDED FOR IN THE BOOKS OF ACCOUNT. CARRYING THESE COSTS IN ACCOU NTS, CONFIRMED AS SUNK COSTS, BY NOT WRITING THEM OFF, BUT ONLY MAKING A PROVISIO N FOR IT, IS NOT UNDERSTOOD, THOUGH WOULD NEVERTHELESS STAND TO BE ALLOWED (ON PROVISION) IN VIEW OF THE SAME CONSTITUTING AN EFFECTIVE CHARGE ON THE PROFIT OF THE COMPANY (THROUGH DEBIT TO THE PROFIT AND LOSS ACCOUNT). FURTHER, EVE N IF THERE IS A DEBIT TO THE PROFIT AND LOSS ACCOUNT FOR THE CURRENT YEAR, I.E., THE YE AR OF WRITE OFF, THE SAME WOULD STAND OFFSET BY THE WRITE BACK OF THE PROVISION TO THAT EXTENT, BEING NO LONGER REQUIRED, NEUTRALIZING THE SAID DEBIT. THERE IS THU S NO CHARGE OR TAXABLE EVENT FOR THE CURRENT YEAR. FURTHER STILL, THE WRITE OFF BEIN G SANCTIONED BY THE BOARD ONLY ON 14.04.2004, THE SAME COULD BE EFFECTED IN THE AC COUNTS ONLY FOR THE FOLLOWING YEAR; THE CURRENT EXPIRING ON 31.03.2004. EACH YEAR IS A SEPARATE AND INDEPENDENT UNIT OF ASSESSMENT, AND INCOME OF EACH YEAR IS ASSESSABLE ONLY FOR THAT YEAR. THIS REPRESENTS TRITE LAW, APPARENT FROM A BARE READING OF SS. 3, 4 & 5 OF THE ACT. REFERENCE IN THIS CONTEXT MAY ALSO BE M ADE TO THE DECISION IN CIT V. BRITISH PAINTS INDIA LTD. [1991] 188 ITR 44 (SC). THERE IS, THUS, AT THE THRESHOLD, NO BASIS FOR THE IMPUGNED EXPENDITURE BE ING CONSIDERED FOR ALLOWABILITY FOR THE CURRENT YEAR. WE ARE, WE MAY A DD, CONSCIOUS THAT THIS IS NOT THE REASON ADVANCED BY THE REVENUE FOR NON-ACCEPTAB ILITY OF THE ASSESSEES II. ACCOUNTING YEAR 2000-01 RS. 12,46,968 4. ADVANCE PAID BHEL FOR SUPPLY OF SOAKER DRUM 12, 46,968 III. ACCOUNTING YEAR 2001-02 RS. 68,52,209 5. BALANCE AMOUNT OF ALLOCATED INTEREST AND OVERHEA DS AFTER TRANSFERRING TO CONSTRUCTION OF TANK PADS 45,70,832 6. BALANCE STOCK / MATERIALS AVAILABLE IN PROJECT S TORES 16,42,824 7. MISCELLANEOUS EXPENDITURE INCURRED 6,38,553 68,52,209 11 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. CLAIM. THE MOOT QUESTION, HOWEVER, IS WHETHER THIS WOULD CONSTRAIN THE TRIBUNAL FROM TAKING COGNIZANCE OF THE MATERIAL ON RECORD AND DECIDE IN ACCORDANCE WITH LAW, I.E., AFTER DETERMINING THE FA CTS. IT IS THE CORRECT LEGAL POSITION THAT IS RELEVANT, AND NOT THE VIEW THAT TH E PARTIES MAY TAKE OF THEIR RIGHTS IN THE MATTER ( CIT V. C. PARAKH & CO. (INDIA) LTD . [1956] 29 ITR 661 (SC); KEDARNATH JUTE MFG. CO. LTD. V. CIT [1971] 82 ITR 363 (SC)). THE TRIBUNAL AS AN APPELLATE AUTHORITY, IS UNDER BOUNDEN DUTY TO CO RRECT THE ERRORS, IF ANY, ATTENDING THE PROCEEDINGS FOR ASSESSMENT, ISSUING A PPROPRIATE DIRECTIONS. (REFER, INTER ALIA , KAPURCHAND SHRIMAL V. CIT [1991] 131 ITR 451 (SC)). AS EXPLAINED IN CIT V. WALCHAND AND CO. (P.) LTD. [1967] 65 ITR 381 (SC), THE TRIBUNAL IS TO DEAL WITH AND DETERMINE ALL THE QUESTIONS WHICH ARI SE OUT OF THE SUBJECT MATTER OF APPEAL, IN LIGHT OF THE EVIDENCE AND CONSISTENTLY W ITH THE JUSTICE OF THE CASE. WITHOUT PREJUDICE TO THE FOREGOING, I.E., THE REAS ON/S FOR WHICH WE CONSIDER THE ASSESSEES CLAIM AS NOT VALID FOR THE CURRENT Y EAR, THE COSTS INCURRED AND, THUS, BEING CLAIMED, ARE ONLY CAPITAL EXPENDITURE. THAT THE SAME DID NOT FINALLY RESULT IN A CAPITAL ASSET WOULD NOT IN ANY MANNER C HANGE THE CHARACTER OF THE EXPENDITURE AS CAPITAL EXPENDITURE; RATHER, ONLY IM PLY THE SAME TO BE A CAPITAL LOSS, I.E., A LOSS IN THE CAPITAL FIELD OR ON CAPIT AL ACCOUNT. THE SAME, WITHOUT DOUBT, STANDS INCURRED ONLY FOR THE PURPOSE OF BUSI NESS, BUT BEING CAPITAL IN NATURE, IS IMPERMISSIBLE FOR DEDUCTION U/S. 37(1) . A CAPITAL EXPENDITURE, MERELY BECAUSE IT IS INFRUCTUOUS, WOULD NOT ALTER ITS CHAR ACTER AS SUCH, AS INDEED IS THE CASE QUA A REVENUE EXPENDITURE. THAT AN EXPENDITURE IS ABOR TIVE OR DOES NOT SERVE ITS INTENDED PURPOSE IS BY ITSELF NO REASON F OR IT BEING NOT ALLOWED OR ALLOWED, WHERE OTHERWISE ALLOWABLE OR, AS THE CASE MAY BE, NOT DEDUCTIBLE, I.E., FOR THAT REASON. THE LAW IN THE MATTER IS WELL SETT LED AND THE CASE LAW LEGION, AND TOWARD WHICH WE MAY CITE SOME DECISIONS: A.V. THOMAS & CO. LTD. V. CIT [1963] 48 ITR 67 (SC) SWADESHI COTTON MILLS CO. LTD. V. CIT [1967] 63 ITR 65 (SC) HASIMARA INDUSTRIES LTD. V. CIT [1998] 230 ITR 927 (SC) 12 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. HASIMARA INDUSTRIES LTD. V. CIT [1998] 231 ITR 842 (SC) NONE OF THE DECISIONS BY THE HON'BLE APEX COURT, CL ARIFYING THE LAW IN THE MATTER, HAVE BEEN CONSIDERED IN THE CASE LAW RELIED UPON BY THE ASSESSEE/LD. CIT(A). HOW COULD, THEN, THE SAME BE FOLLOWED? WHY, THE HONBLE JURISDICTIONAL HIGH COURT, RELYING ON THE DECISIONS BY THE APEX COURT, INCLUDING BY ITS LARGER BENCH CONSTITUTION IN SWADESHI COTTON MILLS CO. LTD. (SUPRA), HELD LIKEWISE PER ITS RECENT DECISION IN KWALITY FUN FOODS AND RESTAURANTS (P.) LTD. [2013] 356 ITR 170 (MAD). THE DECISION IN TAMIL NADU CHEMICAL PRODUCTS LTD . (SUPRA) IS IN RESPECT OF DEDUCTION U/S. 35AB QUA TECHNICAL KNOW-HOW, A CAPITAL EXPENDITURE, WITH THE SAID DEDUCTION BEING IN THE N ATURE OF A CAPITAL ALLOWANCE, AS DEPRECIATION ALLOWANCE U/S. 32(1), AND HAS THERE FORE NO APPLICATION IN THE FACTS OF THE PRESENT CASE. THE ASSESSEES CASE IS A CCORDINGLY WITHOUT MERIT. WE, FOR THE FOREGOING REASONS, ALLOW GROUNDS 2.1 T HROUGH 2.3 OF THE REVENUES APPEAL; GD. 1 BEING GENERAL IN NATURE, NO T WARRANTING ANY ADJUDICATION, IN ITS FAVOUR. WE DECIDE ACCORDINGLY. 10. THE NEXT ISSUE IN THE REVENUES APPEAL IS THE A LLOWANCE OF DEPRECIATION ON GAS SWEETENING PLANT. THE SAME WAS NOT ALLOWED BY T HE AO ON THE GROUND THAT IT HAD NOT BEEN ADMITTEDLY USED FOR EVEN A SINGLE DAY DURING THE RELEVANT YEAR. THE LD. CIT(A) ALLOWED THE ASSESSEES CLAIM FOLLOWING T HE DECISION BY THE TRIBUNAL IN THE ASSESSEES CASE FOR AY 1998-99 (IN ITA NO.18 22/MDS/2006, DATED 23.10.2009, REPORTED AT 2 ITR (TRIB.) 325 (CHENNAI- TM)), RELIED UPON BY THE ASSESSEE BEFORE US AS WELL. 11. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD, INCLUDING THE DECISION BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR AY 1998-99, WHICH IS A MAJORITY DECISION. A READING OF THE SAME REVEALS THAT THE PLANT WAS NE VER USED AT ANY TIME AFTER ITS INSTALLATION DURING THE PREVI OUS YEAR RELEVANT TO A.Y. 1997- 98 . THE THIRD MEMBER HAS ENDORSED THE ASSESSEES CLAI M ON THE BASIS THAT THE 13 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. PLANT WAS KEPT READ-TO-USE THOUGH COULD NOT BE US ED FOR REASONS AND CIRCUMSTANCES BEYOND THE CONTROL OF THE ASSESSEE. T HE DECISION THUS TURNS ON THE READY TO USE BEING A SUFFICIENT COMPLIANCE OF THE CONDITION OF USER IN S. 32(1). THE ARGUMENT APPEARS TO BE THAT THE PLANT, THOUGH C OULD NOT BE WORKED DUE TO NON-AVAILABILITY OF THE RAW MATERIAL, IS YET KEPT R EADY FOR USE, WHICH MAY BE REGARDED AS A PASSIVE, AS AGAINST ACTIVE, USER. THE ARGUMENT HAS APPEAL ONLY WHERE THE SUPPLY OF RAW MATERIAL IS EXPECTED TO BE RESTORED SOON OR, EVEN OTHERWISE, IMMINENT. IN THE PRESENT CASE, HOWEVER, THE ABSENCE OF SUPPLY CONTINUES FOR YEARS. HOW IS THE ASSESSEE, THEN, ABL E TO PRODUCE? IS THE PROCESS OUTSOURCED? HOW ARE THE OTHERS IN THE INDUSTRY FARI NG IN THIS REGARD? THERE IS IN FACT NOTHING ON RECORD TO SHOW THAT THE GAS SWEETEN ING PLANT WAS KEPT IN A READY-TO-USE STATE DURING THE RELEVANT PREVIOUS Y EAR. HOW COULD THEN, ONE MAY ASK, THE SAID ORDER BE APPLICABLE FOR THE CURRENT Y EAR? RELIANCE THEREON BY THE LD. CIT(A) IS MECHANICAL AND MISPLACED. TO BE FAIR, WE NOTICE THAT THOUGH SUCH A CONTENTION WAS RAISED BEFORE HIM (PARA 6.1 OF THE I MPUGNED ORDER), I.E., OF THE ASSET BEING KEPT READY FOR USE, THE SAME IS WITHOUT REFERENCE TO ANY MATERIAL. HE OUGHT TO HAVE, RATHER THAN PROCEEDING ON THAT BASIS , I.E., ASSUMING IT TO BE CORRECT, OUGHT TO HAVE REQUIRED THE ASSESSEE TO SUB STANTIATE THE SAME, OBSERVING THE PROCEDURE U/R. 46A. AND EVEN WHERE CONSIDERED P ROPER TO ADMIT ADDITIONAL EVIDENCE, I.E., CONSIDERING THAT THOUGH IT IS PRINC IPALLY THE ASSESSEES DUTY TO PROVE ITS CLAIMS, THE AO ALSO OUGHT TO HAVE CALLED UPON THE ASSESSEE TO DO SO, THE FIRST APPELLATE AUTHORITY COULD HAVE PROCEEDED IN THE MATTER ONLY AFTER OBSERVING THE PROCEDURE U/R. 46A(2). THE MATTER, IT NEEDS TO BE APPRECIATED, IS FACTUAL, AND IT IS HIGHLY IMPROBABLE THAT A PLANT, IDLE FOR YEARS (DUE TO UNAVAILABILITY OF RAW MATERIAL), IS YET KEPT IN A READY FOR USE STATE. THERE IS ALSO NOTHING ON RECORD TOWARD ANY DEVELOPMENT SUGGE STING AN ANTICIPATED REGULAR SUPPLY OF RAW MATERIAL (SOUR GAS). WHY WOUL D THEN THE COMPANY KEEP THE PLANT IN A READY TO USE STATE, ENTAILING UPKE EP & MAINTENANCE COSTS? IN FACT, 14 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. THERE IS NOTHING TO SUGGEST THAT THE ASSESSEES OPE RATIONS OF REFINING CRUDE OIL AND MANUFACTURING PETROLEUM PRODUCTS HAVE SUFFERED ON ACCOUNT OF NON- OPERATION OF THIS PLANT, SO THAT PRESUMABLY ALTERNA TE PROCESSES STAND SINCE FORMALIZED AND STREAM-LINED, I.E., UNDERTAKEN ON A REGULAR BASIS. THAT IS, THE ASSESSEES CLAIM OF THE PLANT BEING KEPT READY TO USE IS, UNDER THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE, QUIZZICAL. THE MATTE R, THEREFORE, TO ENABLE THE ASSESSEE AN OPPORTUNITY TO PROVE ITS CLAIM OF THE PLANT BEING KEPT READY FOR USE, WOULD STAND TO BE REMITTED BACK TO THE FILE OF THE LD. CIT(A) FOR A DECISION THEREON ON MERITS AFTER EXAMINATION PER A SPEAKING ORDER, OBSERVING THE DUE PROCESS OF LAW. CONTINUING FURTHER, THE ISSUE THAT IN OUR VIEW ARI SES IS NOT WHETHER THE PLANT WAS DURING THE RELEVANT YEAR IN A READY-TO-USE STAT E, OF WHICH THERE IS NO EVIDENCE , BUT WHETHER A PLANT OR MACHINERY COULD FORM PART OF THE RELEVANT BLOCK OF ASSETS ON THE VALUE OF WHICH ALONE DEPRECIATIO N IS EXIGIBLE, WITHOUT BEING ACTUALLY PUT TO USE, I.E., FOR THE PURPOSES OF THE BUSINESS OR PROFESSION OF THE ASSESSEE. THE REASON FOR THE SAME IS SIMPLE, AND LI ES IN THE LANGUAGE OF THE PROVISION ITSELF. SECTION 32(1) IN ITS RELEVANT PAR T READS AS UNDER: DEPRECIATION. 32. (1) IN RESPECT OF DEPRECIATION OF (I) BUILDING, MACHINERY, PLANT OR FURNITURE, BEING TANG IBLE ASSETS; (II) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENSE S, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1 ST DAY OF APRIL, 1998, OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTIONS SH ALL BE ALLOWED (I) IN THE CASE OF ASSETS OF AN UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER, SUCH PERCENTA GE ON THE ACTUAL COST THEREOF TO THE ASSESSEE AS MAY BE PRESCRIBED; (II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCENTAGE ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED: PROVIDED . PROVIDED FURTHER THAT WHERE AN ASSET REFERRED TO IN CLAUSE ( I ) OR CLAUSE ( II ) OR CLAUSE ( IIA ), AS THE CASE MAY BE, IS ACQUIRED BY THE ASSESSEE DURING 15 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. THE PREVIOUS YEAR AND IS PUT TO USE FOR THE PURPOSES OF BUSINESS OR PROFESSION FOR A PERIOD OF LESS THAN ONE HUNDRED AND EIGHTY DAYS IN THAT PREVIOUS YEAR, THE DEDUCTION UNDER THIS SUB-SECTION IN RESPECT OF SUCH ASSET SHALL BE RESTRICTED TO FIFTY PER CENT OF THE AMOUNT CALCULATED AT THE PERCENTAGE PRESCRIBED FOR AN ASSET UNDER CLAUSE ( I ) OR CLAUSE ( II ) OR CLAUSE ( IIA ), AS THE CASE MAY BE. PROVIDED ALSO . [EMPHASIS, OURS] SECTION 2(11) DEFINES A BLOCK OF ASSETS, QUA BOTH TANGIBLE AND INTANGIBLE ASSETS, AS A GROUP OF ASSETS FALLING WITHIN A CLASS OF ASSETS IN RESPECT OF WHICH THE SAME PERCENTAGE OF DEPRECIATION IS PRESCRIBED. AFTE R ITS SUBSTITUTION BY FINANCE (NO.2) ACT, 1988, W.E.F. 01/4/1989, DEPRECIATION U/ S. 32(1) IS EXIGIBLE, EXCEPT IN RESPECT OF ASSETS OF AN UNDERTAKING ENGAGED IN GENE RATION AND DISTRIBUTION OF POWER, AT A SPECIFIED PERCENTAGE, ON THE WRITTEN DO WN VALUE (WDV) OF A BLOCK OF ASSETS. IN OTHER WORDS, THE CONDITION OF PUT TO USE, RATHER THAN BEING A QUALIFYING CONDITION FOR DEPRECIATION ON AN INDIVID UAL ASSET, AS IS BEING CLAIMED, BECOMES A CONDITION FOR IT FORMING A PART OF A BLOC K OF ASSETS. IT COULD NOT, AFTER ALL, BE THAT THOUGH AN ASSET IS ELIGIBLE FOR DEPREC IATION, IT YET CANNOT ENTER A BLOCK. NO DEPRECIATION, AS NOTED, IS EXIGIBLE ON TH E VALUE OF AN INDIVIDUAL ASSET, SAVE THE EXCLUDED CATEGORY, EXCEPT ON IT FORMING PA RT OF A BLOCK OF ASSETS. AND WHICH EXPLAINS THE QUESTION POSED BY US. THE WORD EMPLOYED IS USED. THE WORDS USED FOR T HE PURPOSES OF BUSINESS OR PROFESSION, OCCURRING IN SEC. 32(1), C AME UP FOR CONSIDERATION BY THE HON'BLE APEX COURT IN LIQUIDATORS OF PURSA LIMITED V. CIT [1954] 25 ITR 265 (SC), WHILE INTERPRETING SEC. 10(2)(IV) (OF THE 1922 ACT), CONTAINING THE SAME WORDS. THE HON'BLE COURT HELD THAT PLANT MUST BE USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION WHICH WAS ACTUALLY CARRIED ON AND THE PROFIT OF WH ICH IS ASSESSABLE U/S. 10(1). IN THE FACTS OF THAT CASE , THE ASSESSEE COMPANY, GROWING SUGARCANE AND MANUFACTURING AND SELLING SUGAR, ENTE RED INTO AN AGREEMENT FOR SALE OF ITS LANDS, BUILDING, MACHINERY AND PLANT A S ON AUGUST 9, 1943. THE CONSIDERATION THEREFOR WAS RECEIVED ON 07.12.1943 A ND THE POSSESSION OF THE 16 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. FACTORY GIVEN ON 10.12.1943. THE ASSESSEE CONTINUED TO SELL THE STOCKS OF SUGAR, WHICH WAS NOT SOLD ALONG WITH OTHER ASSETS, FROM AU GUST 9, 1943 TO DECEMBER 10, 1943, AND CLAIMED ON THAT BASIS TO BE CARRYING ON BUSINESS. THE PLANT AND MACHINERY WAS ADMITTEDLY NEVER USED DURING THE ACCO UNTING YEAR, THOUGH KEPT IN TRIM AND RUNNING ORDER, ON WHICH BASIS IT CLAIME D THE EXCESS ARISING ON THE SALE OF MACHINERY AS BUSINESS PROFIT U/S. 10(2)(VII ). THE HON'BLE COURT DENIED THE SAME, HOLDING AS UNDER: (PG. 275) TURNING TO THE FACTS TO BE GATHERED FROM THE RECORD S IT IS QUITE CLEAR THAT THE INTENTION OF THE ASSESSEE WAS TO DISCONTINUE IT S BUSINESS AND THE SALE OF THE MACHINERY AND PLANT WAS A STEP IN THE PROCES S OF THE WINDING UP OF ITS BUSINESS. THE SALE OF THE MACHINERY AND PLANT W AS NOT AN OPERATION IN FURTHERANCE OF THE BUSINESS CARRIED ON BY THE ASSES SEE BUT WAS A REALISATION OF ITS ASSETS IN THE PROCESS OF GRADUAL WINDING UP OF ITS BUSINESS WHICH EVENTUALLY CULMINATED IN THE VOLUNTA RY LIQUIDATION OF THE COMPANY. EVEN IF THE SALE OF THE STOCK OF SUGAR BE REGARDED AS CARRYING ON OF THE BUSINESS BY THE COMPANY AND NOT A REALISA TION OF ITS ASSETS WITH A VIEW TO WINDING UP, THE MACHINERY OR PLANT NOT BE ING USED DURING THE ACCOUNTING YEAR AT ALL AND IN ANY EVENT NOT HAVING HAD ANY CONNECTION WITH THE CARRYING ON OF THAT LIMITED BUSINESS DURIN G THE ACCOUNTING YEAR, S. 10(2)(VII) CAN HAVE NO APPLICATION TO THE SALE O F ANY SUCH MACHINERY OR PLANT. IN THIS VIEW OF THE MATTER, THE ANSWER TO TH E FIRST QUESTION SHOULD BE IN THE NEGATIVE AND WE ANSWER ACCORDINGLY . IT NOTED THAT THE WORD USED HAD BEEN USED IN SOME POOL CASES IN A WIDE SENSE SO AS TO INCLUDE PASSIVE USER AS WELL. DECLINING TO ENTER INTO THE ASPECT OF PASSIVE USER, THE APEX COURT HELD THAT IN WHATEVER SENSE TH E WORD WAS USED, IT WAS CLEAR THAT TO ATTRACT THE OPERATION OF SS. 10(2)(V),(VI) & (VII), THE ASSET MUST BE USED, AT LEAST FOR A PART OF THE YEAR. [CLAUSES (V), (VI) AN D (VII) OF S. 10(2) REFER TO THE SAME ASSETS AS REFERRED TO IN S. 10(2)(IV), I.E., U SED FOR THE PURPOSE OF BUSINESS OR PROFESSION, WITH S. 10(2)(VI) BEING IN RESPECT OF D EPRECIATION.] IN ITS WORDS: (PGS. 272-273) THE WORD 'USED' HAS BEEN READ IN SOME OF THE POOL CASES IN A WIDE SENSE SO AS TO INCLUDE A PASSIVE AS WELL AS ACTIVE USER. IT IS NOT NECESSARY, FOR THE PURPOSES OF THE PRESENT APPEAL, TO EXPRESS ANY OPINION ON THAT POINT ON WHICH THE HIGH COURTS HAVE EXPRESSED DIFFERENT V IEWS. IT IS HOWEVER, CLEAR THAT IN ORDER TO ATTRACT THE OPERATION OF CLA USES (V), (VI) AND (VII) THE 17 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. MACHINERY AND PLANT MUST BE SUCH AS WERE USED, IN W HATEVER SENSE THAT WORD IS TAKEN, AT LEAST FOR A PART OF THE ACCOUNTIN G YEAR. IF THE MACHINERY AND PLANT HAVE NOT AT ALL BEEN USED AT ANY TIME DUR ING THE ACCOUNTING YEAR NO ALLOWANCE CAN BE CLAIMED UNDER CLAUSE (VII) IN R ESPECT OF THEM AND THE SECOND PROVISO ALSO DOES NOT COME INTO OPERATION. SURELY THE USER REFERRED TO BY THE HON'BLE APEX COU RT IMPLIES ONLY AN ACTUAL USER. AS WE SHALL PRESENTLY SHOW, THE SAME I NCLUDES PASSIVE USER AS WELL. IN DINESHKUMAR GULABCHAND AGRAWAL V. CIT [2004] 267 ITR 768 (BOM), IT WAS HELD THAT THE WORD USED IN S. 32 DENOTES THAT THE ASSET HAS BEEN ACTUALLY USED AND NOT MERELY READY FOR USE. SLP AGAINST THE SAME HAS BEEN DISMISSED IN [2004] 266 ITR (ST.) 106. PASSIVE USER, GIVEN THE NATURE O F USER, IS ONLY AN ACTUAL USER. TAKE, FOR EXAMPLE, THE CASE OF AN ELECTRIC GENERATO R WHICH IS USED AS A STANDBY IN CASE OF POWER FAILURE. IT IS MAINTAINED IN GOOD RUN NING CONDITION, WITH FUEL, I.E., READY FOR BEING USED AS AND WHEN REQUIRED. COULD IT , IN CASE OF NO POWER FAILURE DURING THE YEAR, BE SAID TO HAVE NOT BEEN USED, DIS ENTITLING DEPRECIATION? IT IS CLEARLY A PASSIVE USER AS AGAINST ACTIVE ONE, ENTIT LING DEPRECIATION. THE TRIBUNAL IN G. SHOES EXPORTS V. ASST. CIT (IN ITA NOS.5736 AND 6209/MUM/2014, DATED 24.10.2016), EXAMINED A NUMBER OF DECISIONS TO FIND THAT IN EACH CASE OF PASSIVE USER, AS IN THE POOL CASES REFERRED TO BY THE HON'B LE APEX COURT IN LIQUIDATORS OF PURSA LIMITED (SUPRA), THERE IS AN IMPLIED, AS AGAINST A NOTIONAL , USER. WE EXTRACT A PART OF THE SAID DECISION AS UNDER TO EXHIBIT THE SAME, WHICH, INCIDENTALLY, ALSO BEARS REFERENCE TO A SITUATION OBTAINING IN THE PRE SENT CASE: 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD. DISCUSSION 3.1 THE QUESTION BEFORE US IS IF THE ASSESSEE IS EL IGIBLE FOR ITS CLAIM OF DEPRECIATION ALLOWANCE ON THE NEW WINDMILL ACQUI RED BY IT. SECTION 32(1), WHICH PROVIDES FOR DEPRECIATION ALLOWANCE UN DER THE ACT, READS AS UNDER: DEPRECIATION. 32. (1) IN RESPECT OF DEPRECIATION OF. 18 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. USER IS THUS ONE OF THE TWO PRECONDITIONS OR PREREQ UISITES THE OTHER BEING OWNERSHIP (OF THE CAPITAL ASSET), FOR THE CLA IM OF THE DEPRECIATION ALLOWANCE U/S. 32(1) OF THE ACT. THE WORD EMPLOYED IN THE PROVISION IS USED, AS EMPHASIZED BY THE HONBLE JURISDICTIONAL HIGH COURT IN DINESHKUMAR GULABCHAND AGRAWAL VS. CIT [2004] 267 ITR 768 (BOM) (SLP AGAINST WHICH STANDS DISMISSED BY THE APEX COU RT, REPORTED AT ([2004] 266 ITR (ST.) 106), SO THAT AN ASSET, TO BE ELIGIBLE FOR THE CLAIM OF DEPRECIATION IN ITS RESPECT, IS TO BE ACTUALLY USED , I.E., AS THE WORD USED OCCURRING THEREIN WAS CONSIDERED BY THE HONBLE COU RT AS DENOTING, AND THAT A READY TO USE STATE SHALL NOT ENTITLE A CLA IM OF DEPRECIATION QUA THE SAID ASSET. IN THE FACTS OF WHITTLE ANDERSON LTD. VS. CIT [1971] 79 ITR 613 (BOM), REFERRED TO BY THE HONBLE COURT, THE AG REEMENT CLEARLY PROVIDED TWO OF THE FOUR PRESSES WHICH WERE DIVERTE D IN THE POOLING ARRANGEMENT WERE TO REMAIN IDLE WHILE THE TWO PRESS ES WORKED; THE OWNERS OF THOSE PRESSES HAD TO KEEP THEM READY FOR USE AT ANY TIME AND THE CONTINGENCY FOR THEIR USE COULD ALSO, UPON THE TERMS OF THE AGREEMENT, ARISE AT ANY TIME. THE MACHINES WERE THUS UNDER FORCED IDLENESS AND, ACCORDINGLY, LIABLE TO BE CONSIDERED AS IN USE DURI NG THE RELEVANT PERIOD IN-AS-MUCH AS THEY WERE KEPT READY FOR USE AT ANY M OMENT . SIMILAR WAS THE SITUATION IN CIT VS. VISHWANATH BHASKAR SATHE [1937] 5 ITR 621 (BOM). HOW, WE WONDER, COULD A DIFFERENT VIEW BE TA KEN; THE MACHINE BEING KEPT READY FOR USE AT ANY MOMENT. THEY WERE S URELY DEPLOYED IN BUSINESS, AND THEIR BEING PUT TO ACTUAL USE BEING A CONTINGENCY OVER WHICH THEY HAD NO CONTROL AND, FURTHER, WHICH COULD ARISE AT ANY TIME. IN FACT, THE IDENTITY OF THE MACHINES WHICH WERE IDLE AND WHICH WORKED WOULD KEEP CHANGING FROM TIME TO TIME, AND, WAS NOT RELEVANT; THE PURPORT OF THE ARRANGEMENT BEING TO KEEP SOME MACHI NES (PRODUCTIVE CAPACITY) IN SURPLUS, AS A STANDBY, SO THAT THE PRO DUCTION DID NOT SUFFER ON ACCOUNT OF A BREAKDOWN IN ANY OF THE WORKING MACHIN ES (OPERATING CAPACITY). HOW COULD THEN, ONE MAY ASK, A DIFFERENC E BE MADE, FOR THE MACHINE USED VIS--VIS THAT NOT USED, ALL OF WH ICH FORMED PART OF A POOL, MADE AVAILABLE, SOME OF WHICH WERE TO NECESSA RILY REMAIN IDLE AT ANY GIVEN TIME, ALBEIT LIABLE TO BE USED AT ANY TIM E. IN CIT VS. G. N. AGRAWAL [1996] 217 ITR 250 (BOM), AGAIN, THE TRUCKS UNDER REPAIR DURING THE RELEVANT YEAR WERE ALREADY PART OF THE ASSESSEES BUSINESS (OPERATIONAL) ASSETS, HAVING BEEN PUT TO U SE EARLIER, AS ALSO IN THE SUBSEQUENT YEAR. THEIR BEING THUS UNDER REPAIR DURI NG THE RELEVANT YEAR WAS CONSIDERED BY THE HONBLE COURT AS OF NO MOMENT . SURELY, THE CAPITAL ASSETS ALREADY DEPLOYED IN, AND COMMITTED T O THE BUSINESS COULD NOT BE REGARDED AS NOT IN USE MERELY ON ACCOUNT OF THE SUSPENSION FROM ACTIVE USER ON ACCOUNT OF WITHDRAWAL FROM SERVICE F OR REPAIRS, WHICH IS ONLY TO ENSURE THE CONTINUITY OF THEIR SERVICE. IT WAS UNDER SUCH LIKE CIRCUMSTANCES, SIGNIFYING PASSIVE USER, AS AGAINST AN ACTIVE ONE, THAT THE HONBLE COURT FOUND THE SAME AS SATISFYING THE TEST OF USER AND, THUS, LIABLE TO BE REGARDED AS USED IN TERMS OF SECTION 32(1). CAN, FOR EXAMPLE, A PLANT OR MACHINERY, WHICH COULD NOT BE U SED FOR WANT OF (SAY) 19 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. FEEDSTOCK OR ENERGY, BE REGARDED AS USED, SO AS T O BE ELIGIBLE FOR DEPRECIATION. THE ANSWER, TO OUR MIND, WOULD DEPEND ON WHETHER THE SAME IS FUNCTIONAL AS ALSO IF IT STANDS PUT TO USE EARLIER. SURELY, WHERE SO, TEMPORARY NON-USER WILL NOT DISQUALIFY THE SAME AS THE SAME COULD ONLY BE REGARDED AS AVAILABLE FOR USE AND, ACCORDINGLY, A CASE OF A PASSIVE USER. WHERE, HOWEVER, THE MACHINERY HAS NOT BEEN PUT TO U SE AS ANY TIME EARLIER, AND IS TO BE PUT TO USE FOR THE ASSESSEES BUSINESS FOR THE FIRST TIME, IT CANNOT BE REGARDED AS AN ASSET IN PASSIVE USE . THEN, AGAIN, WHAT MAY ALSO BE RELEVANT IS IF THE SAME IS LIABLE TO BE USED IN FUTURE. IF (SAY), THE USER IS PROSCRIBED IN-AS-MUCH AS THE MANUFACTUR ING PROCESS REQUIRES A RAW MATERIAL WHICH IS BANNED, SO THAT THE MACHINERY CANNOT BE UNDER NORMAL CIRCUMSTANCES RESTORED TO PRODUCTION, THERE IS NO QUESTION OF IT BEING REGARDED AS A PASSIVE USER, IN CONTRADISTINCT ION TO AN ACTIVE ONE, ENTITLING DEPRECIATION. IDLENESS OR TEMPORARY SUSPENSION FROM ACTIVE USER WOULD NOT THEREFORE DISENTITLE A CLAIM FOR DEPRECIA TION. 3.2 CONTINUING FURTHER, A PLANT OR MACHINE (OR ANY CAPITAL ASSET FOR THAT MATTER), THEREFORE, CANNOT BE REGARDED AS SETU P OR ESTABLISHED OR, PUT DIFFERENTLY, READY TO BE COMMENCED, .. 3.3 TRIAL RUN IS IN FACT A STAGE ANTERIOR TO THE RE ADY TO USE STATE. THAT IS, THE SET-UP OR THE READY-TO-USE STATE IS A STAGE SUBSEQUENT TO THE TRIAL RUN OR TRIAL PRODUCTION, TO WHICH A PLANT OR MACHIN E IS SUBJECT, TO TEST ITS OPERATIONAL FITNESS, I.E., OF IT BEING ABLE TO PROD UCE OR MANUFACTURE AN ARTICLE OR THING IT IS ACQUIRED FOR AND, THEREFORE, DELIVER. IT IS A PROCESS OF SETTING UP THE PLANT FOR THE INTENDED PURPOSE, I.E. , OF IT BEING OPERATIONALLY FIT. SERIOUS GLITCHES MAY BE DISCOVER ED AT THIS STAGE, SO THAT THE PLANT IS NOT READY FOR PRODUCTION AND, THEREFOR E, NOT READY FOR USE, AND WHICH WOULD THEREFORE REQUIRE BEING SUITABLY ADDRES SED. IN FACT, AS EXPLAINED BY THE ASSESSEE ITSELF DURING ASSESSMENT PROCEEDINGS, THE PROCESS OF GENERATING ELECTRICITY THROUGH THE WIND TURBINE IS A COMPLEX PROCESS, REQUIRING MANY MACHINES LIKE SHAFTS, ROTOR BLADES, GENERATORS, TURBINES, TRANSFORMERS AND CONVERTERS. ALL THESE MA CHINES ARE INTERCONNECTED VIA LARGE NETWORKED SUPPLY LINES AND DELICATE ELECTRICAL CIRCUITS. THERE ARE MANY ELECTRICAL ENGINEERS ALONG WITH ENERGY SPECIALISTS WORKING TOGETHER IN UNISON TO SETUP AND COMMISSION THE WINDMILL PROJECT AT THE SITE. COMPUTER PROGRAMMING IS DONE AT THE SITE ON THE WINDMILL SYSTEM, SO THAT HEAVY ELECTRICAL CIRCU ITS RUN ON AUTOMATION AND FAIL-STOP IN CASE OF OVERLOADS TO PROTECT THE S YSTEM. AFTER ERECTION AND SET UP, SUCH SYSTEMS ARE TESTED TO AFFIRM WHETH ER THE MACHINES ARE WORKING IN UNISON WITHOUT OVER LOADING, ELECTRICAL SURGES OR OTHER GLITCHES. IT IS ONLY THEREAFTER THAT IT CAN BE SAID TO BE COMMISSIONED OR OPERATIONAL. A FIT TRIAL RUN IS THUS A TESTING PHAS E BEFORE WHICH A PLANT CAN BE DECLARED AS FIT AND READY FOR USE, I.E., COMMISS IONED. NO WONDER, ALL THE EXPENDITURE UP TO THIS STAGE STANDS TO BE CAPIT ALIZED AS COST OF THE PROJECT (ALSO REFER: CHALLAPALLI SUGARS LTD. VS. CIT [1975] 98 ITR 167 20 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. (SC)). HOW, THEN, CAN A PLANT OR MACHINERY BE REGARDED AS BEING CAPABLE OF BEING USED, MUCH LESS ACTUALLY USED, EVE N IF PASSIVELY, PRIOR THERETO ? [EMPHASIS, SUPPLIED] IN OTHER WORDS, THERE IS WITHOUT DOUBT A CASE FOR D EPRECIATION BEING ALLOWED IN CASE OF PASSIVE USER, WHICH MUST ONLY BE, IN THE FA CTS AND CIRCUMSTANCES OF THE CASE, REGARDED AS AN ACTUAL USER. THE PRESENT, ON THE CONTRARY, IS A CASE OF NON- USER . WHEN THERE IS NO AVAILABILITY OF RAW-MATERIAL, THE PLANT IS INCAPABLE OF BEING USED. WHAT VALUE THEN, ONE MAY ASK, ITS BEIN G KEPT IN A READY TO USE STATE? IT IS NOT, WE EMPHASISE, A CASE OF THE RAW MATERIAL BEING IN SHORT SUPPLY OR OF ITS SUPPLY BEING TEMPORARILY SUSPENDED, BUT ITS CONTINU ED UNAVAILABILITY FOR YEARS, SINCE THE INSTALLATION OF THE PLANT, OR PERHAPS EVE N EARLIER. COULD IT, UNDER THE CIRCUMSTANCES, BE SAID THAT THE PLANT STANDS USED, ALBEIT PASSIVELY? WE THINK NOT. THE TEST EXPLAINED IN LIQUIDATORS OF PURSA LTD . (SUPRA) QUA THE WORDS 'USED FOR THE PURPOSE OF THE BUSINESS' IS TO MEAN ' USED FOR THE PURPOSE OF ENABLING THE OWNER TO CARRY ON THE BUSINESS AND EARN PROFITS IN THE BUSINESS ', EVEN AS NOTED IN CIT V. MAPS TOURS & TRAVELS [2003] 260 ITR 655 MAD) (AT PG. 656). HOW COULD THE PLANT IN THE PRESENT CASE BE EVEN REMOTEL Y CONSIDERED AS ENABLING THE CARRYING ON OF ITS BUSINESS BY THE ASSESSEE. THERE IS NO PASSIVE USER IN THE INSTANT CASE, MUCH LESS FOR THE PURPOSE OF THE ASSE SSEES BUSINESS. IN MAPS TOURS & TRAVELS (SUPRA), THE FOLLOWING QUESTION OF LAW WAS ANSWERED BY THE HONBLE COURT IN THE AFFIRMATIVE: 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL IS RIGHT IN LAW IN DIRECTING THAT THE ASSESSEE IS ENTI TLED TO DEPRECIATION IN RESPECT OF THE TEN MOTOR CARS PURCHASED ON MARCH 30 , 1989, AND MARCH 31, 1989, EVEN THOUGH THE ASSESSEE HAD NOT PROVED THE F ACT THAT THE ASSETS WERE USED FOR THE PURPOSE OF BUSINESS DURING THE RELEVAN T ACCOUNTING YEAR?' THE MOTOR CARS, WHICH WERE THE ASSETS IN THE SAID C ASE, COULD NOT, IN THE ABSENCE OF REGISTRATION, BE PUT TO USE, AS CORRESPONDINGLY, IS THE COMPLETE ABSENCE OF THE RAW-MATERIAL IN THE PRESENT CASE. THE ARGUMENT OF R EADY TO USE IS, UNDER THE CIRCUMSTANCES, AS WAS IN THAT CASE, MISPLACED. THIS ASPECT BECOMES EVEN MORE 21 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. APPARENT WHEN THE MATTER IS EXAMINED IN LIGHT OF TH E EXTANT LAW, I.E., S. 32, AS IT HAS DEVELOPED OVER A PERIOD OF TIME. THE SECOND PROVISO TO S. 32(1) REQUIRES AN ASSET TO BE PUT TO USE FOR A PERIOD OF 180 DAYS DUR ING THE YEAR OF ITS ACQUISITION TO ENTITLE IT FOR DEPRECIATION AT THE NORMAL (PRESCRIB ED) RATE. A USER BELOW THE SAID TIME PERIOD WOULD OPERATE TO RESTRICT DEPRECIATION TO 50 PER CENT OF THE DEPRECIATION AT THE NORMAL RATE. NO DOUBT THE SAID EXAMINATION OF THE EXTENT OF USER IS LIMITED TO THE YEAR OF THE ACQUISITION OF THE A SSET, WHICH PERHAPS COULD BE IN VIEW OF THE IMPRACTICALITY OF SUCH EXAMINATION O NCE IT ENTERS THE BLOCK OF ASSETS. THE QUESTION, HOWEVER, THAT IS RELEVANT IS IF IT COULD ALSO INCLUDE THE PERIOD FOR WHICH THE ASSET IS KEPT READY FOR USE. W E THINK NOT AS, CLEARLY, USER IN ACTUAL TERMS ONLY COULD POSSIBLY BE OR CONTEMPLATED FOR BEING MEASURE D IN TERMS OF THE PERIOD OF USER. THIS WOULD, WE MAY ADD, AND AS EXPLAINED ABOVE, INC LUDE PASSIVE USER AS WELL . HOWEVER, TO MEASURE NOTIONAL USER, THAT THE EXP RESSION READY TO USE SIGNIFIES, IN TERMS OF ITS PERIOD, I S FACILE. THE QUESTION THEREFORE THAT ARISES FOR ANSWER, AND WHICH WE CONSIDER AS MERITING ONE IN THE NEGATIVE, IS: COULD A NOTIONAL USER ENTITLE AN ASSET FOR DEPRECIATION . THE QUESTION POSED EARLIER, I.E., AT THE START OF THE DISCUSSION, WOULD ALSO STAND SLIGHTLY MODIFIED TO: WHETHER THE ASSET CAN BE SAID TO BE ENTITLED TO DEPRECIATION WITHOUT ANY USER, ACTIVE O R PASSIVE ? AN ASSET CANNOT ENTER A BLOCK OF ASSET WITHOUT SUCH A USER, SO THAT THE WDV OF THE RELEVANT BLOCK OF ASSETS (ON WHICH ONLY DEPRECIATION IS TO BE ALLO WED), AS INCLUDING ITS ACQUISITION COST, DOES NOT ARISE. WE ARE CONSCIOUS THAT DEPRECIATION STANDS ALLOWED ON THE SAID PLANT FOR AY 1997-98. HOWEVER, IN VIEW OF THE CLEAR FINDING OF THE RELEVANT PLANT BEING NOT PUT TO USE AT ANY T IME AFTER ITS INSTALLATION, THE SAME COULD NOT, CLEARLY, BE CONSIDERED AS A PART OF THE BLOCK OF ASSETS, ON WHICH ALONE DEPRECIATION IS TO BE ALLOWED FOR THE CURRENT YEAR. THE DEPRECIATION FOR AY 1997-98, AS WE UNDERSTAND, STANDS ALLOWED IN VIEW O F TRIAL RUN. A TRIAL RUN IS A PART OF THE SETTING UP OF THE PLANT FOR ACTUAL USE, I.E., FOR THE PURPOSE FOR WHICH IT 22 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. STANDS ACQUIRED. THE SAME IS THUS ONLY A PART OF TH E COMMISSIONING OF THE PLANT. NO WONDER, THE COST OF TRIAL PRODUCTION, WHEREIN AL L THE TECHNICAL GLITCHES STAND TO BE REMOVED AND THE PRODUCTION CAPABILITY VERIFIE D, INCLUDING AS TO THE QUALITY OF THE OUTPUT, STANDS TO BE CAPITALIZED AS PART OF THE PROJECT (ASSET) COST, ON WHICH DEPRECIATION IS TO BE, UPON USER, ALLOWED. TH E MATTER STANDS EXAMINED IN SOME DETAIL IN G. SHOES EXPORTS (SUPRA) (REFER PARA 3.3 OF THE SAID ORDER). WE MAY, BEFORE PARTING WITH OUR ORDER, ADDRESS THE DECISION IN CIT V. VAYITHRI PLANTATIONS LTD . [1981] 128 ITR 675 (MAD), RELIED UPON BY THE TRIB UNAL IN THE ASSESSEES CASE FOR AY 1998-99 SUPRA. THE SA ME, AS ITS READING REVEALS, IS DISTINGUISHABLE ON FACTS AS WELL AS IN LAW. WE HAVE , FIRSTLY, EXPLAINED THAT THIS IS A CASE OF COMPLETE NON USER AND NOT A CASE OF PASSIVE USER, AS WAS FOUND BY THE HON'BLE COURT IN THAT CASE. THE PLANT IS IDLE SINCE ITS INSTALLATION IN F.Y. 1996-97, I.E., FOR YEARS, FOR WANT OF RAW-MATERIAL, WHICH AP PEARS TO BE BANNED. THERE IS IN FACT, STRANGELY, NO EXPLANATION, AT ANY STAGE, IN T HIS RESPECT. THE ASSESSEE COMPANY HAS OSTENSIBLY FOUND AN ALTERNATE METHOD FO R ACHIEVING THE RESULTS (PRODUCTION) SOUGHT TO BE ATTAINED BY USING THE GAS SWEETENING PLANT. COULD IT BE THEN SAID THAT THE SAID PLANT IS BEING USED AND, FU RTHER, FOR THE PURPOSES OF THE ASSESSEES BUSINESS? THERE IS, UNDER THE CIRCUMSTAN CES, NO PASSIVE USER FOR THE ASSESSEES BUSINESS, WITH EVEN THE CLAIM OF THE REA DY-TO-USE STATE BEING SUSPECT, SO AS TO REQUIRE VERIFICATION. IN FACT, THE READY TO USE ARGUMENT LOSES SIGNIFICANCE UNDER THE CIRCUMSTANCES, WHICH IS RELE VANT ONLY WHERE IT AMOUNTS TO A PASSIVE USER. THE NON USER IN VAYITHRI PLANTATIONS LTD . (SUPRA) WAS ON ACCOUNT OF LABOUR UNREST, AN ABERRATION. THE SAME WAS, UNDE R THE CIRCUMSTANCES, REGARDED BY THE HON'BLE COURT AS A CASE OF PASSIVE USER. AVAILABILITY OF RAW MATERIAL FOR WHICH THE PLANT IS DESIGNED (EVEN IF N OT ON A REGULAR BASIS), IS, ON THE OTHER HAND, INTEGRAL TO ITS FUNCTIONING AND NO T EXTRANEOUS THERETO, AS WAS FOUND BY THE HONBLE COURT IN THAT CASE. IT MAY BE THAT THE COMPANY HAS FOUND ALTERNATE SOURCES FOR ACHIEVING THE DESIRED RESULT, OR AN ALTERNATE TECHNOLOGY SO 23 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. AS TO DISCARD THE EARLIER ARRANGEMENT AS UNFEASIBLE OR UNECONOMICAL OR, PLAINLY, AS NOT LEGAL/KEEPING WITH PUBLIC POLICY AS, FOR E XAMPLE, WHERE THE RAW MATERIAL (SOUR GAS) HAS, OR RESULTS IN, (HIGHER) PO LLUTANT/S. THE POSITION IS COMPLETELY UNEXPLAINED, MUCH LESS, EXAMINED. THERE COULD BE NO PRESUMPTION AS TO PASSIVE USER UNDER THE CIRCUMSTANCES. THE SAM E, IT MAY BE APPRECIATED, IS ONLY WHEN THE ACTUAL SUPPLY OF RAW MATERIAL IS IMMI NENT, SO THAT IT COULD REASONABLY BE ARGUED THAT THE PLANT IS KEPT READY I MPENDING THE RECEIPT OF THE RAW MATERIAL, AS WHERE A PURCHASE ORDER FOR THE SAM E STANDS ISSUED. WE HAVE, ON PRINCIPLE, ABUNDANTLY CLARIFIED THAT A PASSIVE USER , EVEN CITING EXAMPLES THEREOF, WHERE SO, WOULD ENTITLE DEPRECIATION. TWO, THE HON' BLE COURT IN THAT CASE DISREGARDED THE REVENUES CONTENTION OF THE WORDS PUT TO USE IN THE FOLLOWING YEAR, AS APPEARING IN THE SECOND PART OF S. 33, ON THE GROUND THAT THE SAME MAY HOLD OR APPLY WHERE A NEW BUSINESS IS BEING SET UP, SO THAT THE ASSET IS FIRST PUT TO USE IN THAT YEAR. THE TWO LIMBS WERE SEPARATE. T HE WORDS USED AND PUT TO USE, OCCURRING IN SEC. 32(1) AND THE SECOND PROVISO THERETO RESPECTIVELY, HOWEVER, FORM PART OF ONE INTEGRATED CODE, TO BE AS SIGNED THE SAME MEANING AND UNDERSTOOD IN THE SAME SENSE. IT COULD NOT BE OTHER WISE. THE SAID DECISION WOULD THEREFORE NOT APPLY IN THE PRESENT CASE. FURT HER, WE ALSO CLARIFY THAT WE STATE SO ON THE BASIS OF AN APPRECIATION OF FACTS, WHICH IS, WITH RESPECT, MISSING IN THE TRIBUNALS ORDER SUPRA. IN FACT, THE CITED D ECISION BY THE HON'BLE HIGH COURT WAS RELIED UPON ONLY BY THE LD. THIRD MEMBER. IN VIEW OF THE FOREGOING, WE ARE NOT INCLINED TO CO NSIDER THE ASSESSEES CASE AS COVERED BY THE DECISION BY THE TRIBUNAL IN ITS OWN CASE FOR A.Y 1998-99 (IN ITA NO.1822/MDS/2006). AS, HOWEVER, NO SPECIFIC ARGUMENTS IN RELATION TO THIS GROUND WERE MADE AT THE TIME OF HEARING, AND T HE MATTER HEARD SUMMARILY ON THE BASIS OF IT BEING COVERED BY THE TRIBUNALS ORDER SUPRA, WE ONLY CONSIDER IT PROPER TO, IN THE INTEREST OF JUSTICE AND THE FAIRN ESS OF PROCEDURE, RESTORE THE MATTER BACK TO THE FILE OF THE LD. CIT(A) FOR A DEC ISION ON MERITS PER A SPEAKING 24 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. ORDER IN ACCORDANCE WITH LAW AND AFTER ALLOWING BOT H THE PARTIES BEFORE HIM A REASONABLE OPPORTUNITY OF HEARING. THE PRINCIPLE OF RES JUDICATA , WE MAY ADD, HAS NO APPLICATION IN THE PROCEEDINGS UNDER THE ACT . WHY, IN THAT CASE, THE AO WAS BOUND TO ALLOW DEPRECIATION, AND COULD NOT HAVE ADOPTED THE VIEW HE DOES (REFER, INTER ALIA, NEW JEHANGIR VAKIL MILLS LTD. V. CIT [1963] 49 ITR 137 (SC)). THE TRIBUNAL IS, IN OUR VIEW, IN VIEW OF ITS FINDIN GS, OBLIGED TO DIRECT SO (REFER WALCHAND AND CO. (P.) LTD. (SUPRA)). FURTHER, WE MAY CLARIFY, THAT THE LD. CIT(A) NEED NOT CONSTRAIN HIMSELF BY THE OPINION EX PRESSED BY US IN THIS ORDER AND, RATHER, IS TO TAKE AN INDEPENDENT DECISION, OF COURSE HAVING REGARD TO AND TAKING GUIDANCE FROM OUR OBSERVATIONS, WHICH THOUGH SHALL HAVE PERSUASIVE VALUE, ANSWERING THE QUESTIONS/ISSUES POSED/RAISED BY US, OR ANY OTHER HE DEEMS RELEVANT AND PROPER, FOR THE PURPOSE. THE READY-TO -USE CLAIM, WHERE FOUND AS RELEVANT BY HIM, SHALL REQUIRE BEING VERIFIED. THAT IS, HIS IS TO BE AN INDEPENDENT ORDER, DETERMINING AND TAKING INTO ACCOUNT THE RELE VANT FACTS, AND THE LAW IN THE MATTER; WITH WE CONSIDERING IT PROPER TO DO SO, SO AS TO REMOVE THE PROCEDURAL INFIRMITY AS WELL AS A LACK OF PROPER EXAMINATION O F THE RELEVANT FACTS. WE DECIDE ACCORDINGLY. 12. IN THE RESULT, BOTH THE ASSESSEES AND THE REVE NUES APPEALS ARE PARTLY ALLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON DECEMBER 05, 2017 AT CHENNAI . SD/- SD/- ( '# %& ) (GEORGE MATHAN) ( / JUDICIAL MEMBER ( ) (SANJAY ARORA) /ACCOUNTANT MEMBER /CHENNAI, 1 /DATED, DECEMBER 5, 2017 EDN 25 ITA NOS. 1858 & 1980/MDS/2011 (AY 2004-05) CHEN NAI PETROLEUM CORPORATION LTD. 2 - 3(,45 65*, /COPY TO: 1. ( #+,- /ASSESSEE 2. ASSESSING OFFICER 3. / 7, ( )/CIT(A) 4. / 7, /CIT 5. 5!89 3(,( /DR 6. 9:# ; /GF