DCIT,CIR-11(1), Kolkata, Kolkata V. M/s Haldia Petrochemicals Ltd., Kolkata

ITA 1976/KOL/2016

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4139 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2003-2004
• Appeal Filed On: 06-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P K SRIHARI
• Assessee Lawyers: ACCOUNTS
• Keywords: Capital asset; Depreciation; Additional evidence; Revenue expenditure; Capital expenditure
• Section: 32; 145; 37; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA A BENCH, KOLKATA (BEFORE SRI J. SUDHAKAR REDDY, ACCOUNTANT MEMBER & SRI S.S. VISWANETHRA RAVI, JUDICIAL MEMBER) ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), KOLKATA...........................APPELLANT VS. M/S. HALDIA PETROCHEMICALS...............................RESPONDENT BENGAL ECO INTELLIGENT PARK (TECHNO) TOWER-1, BLOCK-EM PLOT NO. 3 SALT LAKE CITY SECTOR-V, 3 RD FLOOR KOLKATA -91 [PAN : AAACH 7360 R] APPEARANCES BY: SHRI HARKAMAL CHAKRAVORTY, SR. GENERAL MANAGER, FINANCE & ACCOUNTS, APPEARED ON BEHALF OF THE ASSESSEE. SHRI P.K. SRIHARI, CIT, D/R. APPEARING ON BEHALF OF THE REVENUE. DATE OF CONCLUDING THE HEARING : SEPTEMBER 11 TH , 2018 DATE OF PRONOUNCING THE ORDER : OCTOBER 30 TH , 2018 ORDER PER J. SUDHAKAR REDDY, AM :- THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-9, KOLKATA, (HEREINAFTER THE LD. CIT(A)), DT. 28/06/2016, PASSED U/S 250 OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT), RELATING TO ASSESSMENT YEAR 2003-04, ON THE FOLLOWING GROUNDS:- 1. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CIT (A) ERRED IN ALLOWING EXPENSES INCURRED ON ACCOUNT OF MAINTENANCE OF ROAD NOT OWNED BY THE ASSESSEE. 2. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CIT(A) ERRED IN ALLOWING EXPENSES INCURRED ON ACCOUNT OF MAINTENANCE OF ROAD, WHILE A SEPARATE COMPANY EXISTS FOR PERFORMING SUCH WORK. 3. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CIT(A) ERRED IN ALLOWING AMORTISATION OF EXPENSES, THOUGH THE SAME IS PATENTLY DISALLOWABLE. 4. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING LOSS ARISING OUT OF EXCHANGE RATE FLUCTUATION IN A PERFUNCTORY MANNER WITHOUT GOING INTO THE DETAILS REGARDING THE NATURE OF SUCH CLAIM. 5. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING LOSS ARISING OUT OF EXCHANGE RATE FLUCTUATION MERELY ON THE BASIS OF EARLIER 2 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS YEAR'S ORDER, WITHOUT CHECKING THE FACTS RELATED TO THE CLAIMS AND ALSO WITHOUT CONSIDERING THE FACT THAT IN TAX MATTERS RES JUDICATA IS NOT APPLICABLE. 6. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE CIT(A) ERRED IN ALLOWING EXPENSES OF RS. 36,60,000/- DESPITE THE FACT THAT ITS NATURE WAS EXPLAINED AS 'SHARE/DEBENTURE ISSUE EXPENSES BEFORE THE AO AND AS ANNUAL TRUSTEESHIP FEES BEFORE THE CIT(A). 7. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING EXPENSES OF RS. 36,60,000/- WITHOUT REFERRING THE ISSUE BACK TO THE AO FOR VERIFICATION OF THE TRUE NATURE OF THE EXPENSES, THEREBY VIOLATING PROVISIONS OF RULE 46A OF I T RULES. 8. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING EXPENSES OF RS. 14,60,000/-, DESPITE THE FACT THAT THE ASSESSEE IN ITS REFERENCE BEFORE THE CIT(A) AT PARA 3.8(A) CONTENDED THAT SUFFICIENT OPPORTUNITY WAS NOT PROVIDED FOR EXPLANATION OF THE NATURE OF EXPENDITURE. 9. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING EXPENSES OF RS. 14,60,000/- IN VIOLATION OF THE PROVISIONS OF RULE 46A OF I T RULES, AS THE ASSESSEE ITSELF ASSERTED THAT THE NATURE OF EXPENDITURE WAS NOT EXPLAINED BEFORE THE AO. 10. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING EXPENSES OF RS.13,05,20,000/-, DESPITE THE FACT THAT THE ASSESSEE IN ITS REFERENCE BEFORE THE CIT(A) AT PARA 3.9(B) ADMITTED THAT IT HAD FAILED TO PROVIDE APPROPRIATE EXPLANATION OF THE NATURE OF EXPENDITURE BEFORE THE AO. 11. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING EXPENSES OF RS.13,05,20,000/- IN VIOLATION OF THE PROVISIONS OF RULE 46A OF I T RULES, AS THE ASSESSEE ITSELF ASSERTED THAT THE NATURE OF CLAIM WAS NOT EXPLAINED BEFORE THE AO. 12. THAT ON THE FACT AND IN THE CIRCUMSTANCES OF THE CASE ORDER OF THE CIT(A) IS ERRONEOUS IN ALLOWING EXPENSES INCURRED ON ACCOUNT OF PURCHASE OF SOFTWARE SYSTEMS, WHICH ARE IN THE NATURE OF FIXED ASSETS. 13. THAT THE APPELLANT CRAVES LEAVE TO ADD, ALTER/OR AMEND ANY OF THE GROUNDS OF APPEAL DURING THE COURSE OF HEARING. 2. THE BRIEF FACTS APROPOS GROUND NO. 1 & 2 ARE AS FOLLOWS:- THE ASSESSEE INCURRED AN EXPENDITURE OF RS. 25,00,000/- IN RESPECT OF ROADWORK AT KHUDIRAMNAGAR UNDER THE HEAD REPAIR AND MAINTENANCE. THE ASSESSEE IS NOT THE OWNER OF THE ROAD BUT HALDIA DEVELOPMENT AUTHORITY (HEREIN AFTER REFERRED TO AS HDA) AND THE AMOUNT AS BEEN PAID HDA FOR CONSTRUCTION AND REPAIR OF APPROACH ROAD AT KHUDIRAMNAGAR FOR THE BENEFIT OF THE ASSESSEE'S EMPLOYEES RESIDING AT TOWNSHIP TO REACH THE FACTORY. THE LD. A.O. HAS NOT DISPUTED THIS FACTS MENTIONED HEREIN IN HIS ASSESSMENT 3 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS ORDER. THE A.O. HELD THAT THE EXPENDITURE IS A CAPITAL EXPENDITURE AND NOT ALLOWABLE AS A DEDUCTION. HE ALSO HELD THAT THE TOWNSHIP IS OWNED AND MAINTAINED BY HALDIA RIVERSIDE ESTATE LIMITED, A SUBSIDIARY OF THE ASSESSEE (HEREIN AFTER REFERRED TO AS HREL) AND NOT BY THE ASSESSEE AND AS HREL IS RESPONSIBLE FOR PROVIDING HOUSING FACILITY AND MAINTAINING THE TOWNSHIP, THE EXPENDITURE INCURRED TOWARDS CONSTRUCTION OF APPROACH ROAD IN KHUDIRAMNAGAR FROM THE TOWNSHIP TO THE ASSESSEE'S FACTORY SHOULD HAVE BEEN BORNE BY HREL. 2.1. AGGRIEVED THE ASSESSEE CARRIED IN APPEAL BEFORE THE LD. FIRST APPELLATE AUTHORITY. THE LD. CIT(A) ALLOWED THIS GROUND OF THE ASSESSEE BY RELYING ON THE JUDGMENT OF THE HONBLE APEX COURT IN THE CASE OF LH SUGAR FACTORY & OIL MILLS PVT. LTD. VS. CIT (1980) 125 ITR 0293, WHEREIN SUCH EXPENDITURE WAS HELD TO BE CATEGORIZED AS REVENUE EXPENDITURE. 2.2. WE FIND NO INFIRMITY IN THE FINDINGS OF THE LD. CIT(A) AND UPHOLD THE SAME. HENCE GROUND NO. 1 & 2 OF THE REVENUE ARE DISMISSED. 3. GROUND NO. 3 IS REGARDING DISALLOWANCE OF RS.15.46 CRORES BEING AMORTIZATION EXPENSES. WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE KOLKATA A BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06; IN ITA NOS. 581& 587/KOL/2009, WHEREIN IT WAS HELD AS FOLLOWS:- 13. THE NEXT ISSUE RAISED IN GROUND NO 5 & 6 BY THE ASSESSEE IN THIS APPEAL IS THAT LD. CIT(A) HAS ERRED IN CONFIRMING THE ORDER OF A.O BY DISALLOWING THE DEFERRED REVENUE EXPENSES FOR RS. 15.46 CRORES. 14. BEFORE COMING TO THE SPECIFIC ISSUE LET US UNDERSTAND THE BACKGROUND OF THE CASE. THE ASSESSEE HAS INCURRED SEVERAL EXPENSES PRIOR TO THE COMMENCEMENT OF COMMERCIAL PRODUCTION FROM THE ASSESSMENT YEAR 1985-86 TO 2001-02. THE COMMERCIAL PRODUCTION STARTED W.E.F. 01/08/2001. EXPENSES INCURRED PRIOR TO THE COMMENCEMENT OF BUSINESS ARE RS.805.65 MILLION. AS PER THE POLICY FOLLOWED BY THE ASSESSEE THESE EXPENSES WERE TO BE WRITTEN OFF OVER A PERIOD OF FIVE YEARS BEGINNING FROM THE ASSESSMENT YEAR 2002-03 AND ENDING IN THE ASSESSMENT YEAR 2007-08. ACCORDINGLY THE DEFERRED REVENUE EXPENSES WERE CLAIMED IN THE FOLLOWING MANNER: S.NO ASSESSMENT YEAR AMOUNT 1. 2002-03 10,30,83,570/- 2. 2003-04 15,46,25,355/- 3. 2004-05 15,46,25,355/- 4. 2005-06 15,46,25,355/- 5. 2006-07 15,46,25,355/- 6. 2007-08 5,15,41,785/- 4 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS FROM THE ABOVE FACTS, WE FIND THAT ASSESSEE HAS CLAIMED DEFERRED REVENUE EXPENSES IN EARLIER YEARS AS WELL BUT THE SAME WAS NOT DISPUTED BY THE REVENUE. HOWEVER, FOR THE YEAR UNDER CONSIDERATION THE A.O. HAS DISALLOWED THE DEFERRED REVENUE EXPENDITURE FOR AN AMOUNT OF RS. 15.46 CRORES. THE ASSESSEE DURING THE YEAR HAS CLAIMED DEFERRED REVENUE EXPENDITURE FOR AN AMOUNT OF RS. 15.46 CRORES UNDER SECTION 37 OF THE ACT. THE AO DURING THE ASSESSMENT PROCEEDINGS SOUGHT THE CLARIFICATION AS TO WHY THIS EXPENSE SHOULD BE ALLOWED. ON BEING QUESTIONED BY THE AO ABOUT THE ALLOWABILITY OF DEFERRED REVENUE EXPENDITURE, THE ASSESSEE SUBMITTED THAT THE DEFERRED REVENUE EXPENDITURES ARE ON ACCOUNT OF AMORTIZATION OF MISCELLANEOUS EXPENSES THAT WERE INCURRED PRIOR TO THE START OF THE COMMERCIAL PRODUCTION. THE ASSESSEE SUBMITTED THAT THE DEFERRED REVENUE EXPENDITURES WERE CLAIMED IN TERMS OF GUIDANCE NOTES ISSUED BY THE ICAI. AS PER THE GUIDANCE NOTE THE GOOD CORPORATE PRACTICE RECOGNIZES THE NEED TO WRITE OFF THESE EXPENSES TO PROFIT & LOSS ACCOUNT WITHIN A PERIOD OF 3-5 YEARS AFTER THE COMMENCEMENT OF COMMERCIAL PRODUCTION. IN CONSONANCE WITH THE ABOVE ACCOUNTING PRACTICE, THE ASSESSEE HAS BEEN AMORTIZING THE SAID PRELIMINARY COST OVER FIVE YEARS. THE ASSESSEE ALSO RELIED ON THE DECISION OF THE SUPREME COURT IN CIT VS UP STATE INDUSTRIAL INVESTMENT CORPORATION (1997) 225 ITR 703 AND CHALLAPALLI SUGAR LIMITED VS CIT (1975) 98 ITR 167.THE ASSESSEE ALSO SUBMITTED THAT THESE DEFERRED REVENUE EXPENDITURE PERTAINS TO THE ASSESSMENT YEARS STARTING FROM AY 1985-86 TO 2001-02. HOWEVER, THE AO HAS DISREGARDED THE CLAIM OF THE ASSESSEE BY CONSIDERING THAT THE AMOUNT OF AMORTIZED EXPENSES AND ITS ALLOWABILITY NEEDS TO BE DETERMINED AS PER THE PROVISIONS OF THE ACT. THERE IS NO PROVISION UNDER THE ACT FOR CLAIMING THE DEFERRED REVENUE EXPENDITURE. ALL THE DEFERRED REVENUE EXPENDITURES ARE REVENUE IN NATURE AND SHOULD HAVE BEEN CLAIMED IN THE YEAR OF ITS INCURRENCE. ACCORDINGLY, THE A.O. HAS DISALLOWED THE DEFERRED REVENUE EXPENDITURE AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 15. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). BEFORE LD. CIT(A) ASSESSEE HAS CLAIMED THE DEFERRED REVENUE EXPENDITURE AS PER THE GUIDANCE NOTE ISSUED BY ICAI ON EXPENDITURE INCURRED DURING CONSTRUCTION PERIOD. THE ASSESSEE HAS AMORTIZED THIS DEFERRED REVENUE EXPENDITURE AMOUNTING TO RS. 805.65 MILLION FOR A PERIOD OVER FIVE YEARS AFTER THE COMMENCEMENT OF COMMERCIAL PRODUCTION ON 01.08.2001. THE SAME HAS BEEN ALLOWED BY THE A.O. IN EARLIER YEARS. LD. AR CLAIMED THAT IF THIS DEFERRED REVENUE EXPENSES CANNOT BE CLAIMED AS AN EXPENSE U/S 37 THEN ASSESSEE SHOULD BE ALLOWED TO CAPITALIZE THIS EXPENSE AND SAME IS DEDUCTIBLE U/S 32. HOWEVER, LD. CIT(A) OBSERVED THAT THE ASSESSEE ITSELF ACCEPTS THAT THESE ARE THE EXPENSES NOT PERTAINING TO THE ASSESSMENT YEAR UNDER CONSIDERATION. THESE EXPENSES HAVE BEEN INCURRED IN EARLIER YEARS. AS PER THE INCOME TAX PROVISION, THERE IS NO CONCEPT AS DEFERRED REVENUE EXPENDITURE. ANY EXPENSE CAN EITHER BE REVENUE OR CAPITAL IN NATURE. CONTENTION OF ASSESSEE THAT EXPENSES SHOULD BE ALLOWED U/S 32 IS ALSO NOT TENABLE AS NO CAPITAL ASSET HAS COME INTO EXISTENCE. BEING AGGRIEVED BY THIS ORDER OF LD CIT(A) ASSESSEE IS IN SECOND APPEAL BEFORE US. 16. THE LD. AR BEFORE US SUBMITTED THAT THERE WERE INDIRECT EXPENSES INCURRED PRIOR TO THE COMMENCEMENT OF COMMERCIAL PRODUCTION OF THE ASSESSEE FACTORY ON 01.08.2001 AND AS PER THE GUIDANCE NOTE OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ON TREATMENT OF EXPENSES DURING THE CONSTRUCTION PERIOD, THE SAME WERE TREATED AS DEFERRED REVENUE EXPENSES AND CHARGED TO PROFIT AND LOSS ACCOUNT @ 1/5 P.A. OVER FIVE YEARS. THE LEARNED AR ALSO RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN CASE OF 5 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS CIT VS. UP STATE INDUSTRIAL INVESTMENT CORPORATION (1997) 225 ITR 703 AND CHALLAPALI SUGAR LIMITED V. CIT (1975) 98 ITR 167 THE ACCOUNTING PRINCIPLES ARE TO BE FOLLOWED FOR DETERMINATION OF INCOME UNDER THE INCOME TAX ACT AND HENCE THE AMOUNT OF DEFERRED REVENUE EXPENSES CHARGED IN THE PROFIT AND LOSS ACCOUNT IS ALLOWABLE U/S 37 OF THE ACT. BOTH AO AND THE CIT(A) HAVE REJECTED THE SAME IN ALL THE THREE ASSESSMENT YEARS ON THE GROUND THAT IT ACT RECOGNIZES ONLY CAPITAL AND REVENUE EXPENSES AND NOT DEFERRED REVENUE EXPENSES. BUT THEY HAVE NOT SUBSTANTIATED THE SAME WITH REFERENCE TO ANY PROVISIONS IN THE ITA NO.581 & 587/KOL/2009 A.Y. 2005- 06 HALDIA PETROCHEMICALS LTD. V. JCIT, RNG-12 KOL. PAGE 13 INCOME TAX ACT OR ANY JUDGMENT. LD. AR HAS RELIED ON THE CITATION OF THE TRIBUNAL DECISION IN CASE OF VIRTUAL SOFT SYSTEMS VS. ACIT [2010] 38 SOT 412(DELHI) WHERE IT WAS HELD THAT GUIDANCE NOTES ISSUED IS BINDING AND REVENUE CANNOT REJECT IT EASILY. HE FURTHER RELIED ON THE JURISDICTIONAL HIGH COURT IN CASE OF INDIA STEAMSHIP CO. LTD. VS. JOINT COMMISSIONER OF INCOME TAX & ORS. (2005)194 CTR (CAL) 386; EQ: (2005) 275 ITR 155 (CAL) HAS DENIED THE CLAIM OF THE REVENUE THAT THERE IS NO CONCEPT OF DEFERRED REVENUE EXPENDITURE IN THE ACT AND ASSESSEE CAN CLAIM THE DEDUCTION OF THE AMOUNT INCURRED BEFORE THE COMMENCEMENT OF COMMERCIAL PRODUCTION OVER A NUMBER OF YEARS. HON'BLE SUPREME COURT IN CASE OF MADRAS INDUSTRIAL INVESTMENT CORPORATION LIMITED VS. CIT [1997] 225 ITR 802 (SC) HAS ALSO UPHELD THE PRINCIPLE OF DEFERRED REVENUE EXPENSES. THE LD. AR ALSO PLEADED THAT THE DEFERRED REVENUE EXPENSES CAN ALSO BE ALLOWED TO BE CAPITALIZED UNDER SECTION 32 OF THE ACT. 17. FROM THE AFORESAID DISCUSSION, WE FIND THAT THE ASSESSEE HAS INCURRED EXPENSES PRIOR TO THE COMMENCEMENT OF BUSINESS AND CLASSIFIED AS DEFERRED REVENUE EXPENDITURE. THE ASSESSEE STARTED CLAIMING THOSE EXPENSES AFTER THE COMMENCEMENT OF BUSINESS 1/5TH OVER THE PERIOD OF 5 YEARS. HOWEVER, THE LOWER AUTHORITIES DISALLOWED THE SAME ON THE GROUND THAT THERE IS NO PROVISION UNDER THE ACT TO CLAIM THE DEFERRED REVENUE EXPENSES. FROM THE FACTS OF THE CASE WE OBSERVE THAT THE AO IS NOT SKEPTICAL ABOUT THE GENUINENESS OF THE EXPENSES INCURRED. THE WHOLE AMOUNT OF RS. 154.64 MILLION HAS BEEN INCURRED IN CONNECTION OF BUSINESS PRIOR TO THE COMMENCEMENT OF COMMERCIAL PRODUCTION. ANY EXPENSE INCURRED IN CONNECTION TO THE BUSINESS IS AN ALLOWABLE EXPENDITURE. FROM THE ABOVE EXPLAINED CITATIONS OF THE CASES DENYING THE NON EXISTENCE OF DEFERRED REVENUE EXPENDITURE TERM IN THE ACT IS NOT REASONABLE AND TENABLE. IN OUR CONSIDERED VIEW, ALL THE EXPENSES INCURRED PRIOR TO THE COMMENCEMENT OF PRODUCTION SHOULD BE CAPITALIZED WITH THE FIXED ASSETS OF THE ASSESSEE AND DEPRECIATION SHOULD BE ALLOWED THEREON ACCORDINGLY AS PER LAW. IN THIS CONNECTION, WE ARE RELYING IN THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF CHALLAPALLI SUGARS LTD V. CIT (1975) 98 ITR 167 (SC) WHERE THE HEAD NOTES IS AS REPRODUCED:- 'AS THE EXPRESSION 'ACTUAL COST' HAS NOT BEEN DEFINED, IT SHOULD BE CONSTRUED IN THE SENSE WHICH NO COMMERCIAL MAN WOULD MISUNDERSTAND. FOR THIS PURPOSE IT WOULD BE NECESSARY TO ASCERTAIN THE CONNOTATION OF THE EXPRESSION IN ACCORDANCE WITH THE NORMAL RULES OF ACCOUNTANCY PREVAILING IN COMMERCE AND INDUSTRY. THE ACCEPTED ACCOUNTANCY RULE FOR DETERMINING COST OF FIXED ASSETS IS TO INCLUDE ALL EXPENDITURE NECESSARY TO BRING SUCH ASSETS INTO EXISTENCE AND TO PUT THEM IN WORKING CONDITION. IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLAN, THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALIZED AND ADDED TO THE COST OF THE FIXED ASSETS CREATED AS A RESULT OF SUCH EXPENDITURE. WE ARE ALSO RELYING IN THE GUIDANCE NOTE ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA ON TREATMENT OF EXPENDITURE DURING CONSTRUCTION PERIOD WHERE IT 6 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS WAS RECOMMENDED THAT THE INDIRECT EXPENDITURE INCURRED DURING THE CONSTRUCTION PERIOD SHOULD BE CAPITALIZED AS PART OF INDIRECT CONSTRUCTION COST TO THE EXTENT TO WHICH THE EXPENDITURE IS INDIRECTLY RELATED TO CONSTRUCTION OR IF INCIDENTAL THERETO. AN ILLUSTRATIVE LIST OF SUCH POSSIBLE ITEMS OF EXPENDITURE WHICH WOULD QUALIFY FOR INCLUSION FOR THE PURPOSE OF CAPITALIZATION HAS BEEN PROVIDED INCLUDING THE FOLLOWING:- '(A) EXPENDITURE ON EMPLOYEES WHO ARE EITHER ASSIGNED TO CONSTRUCTION WORK OR TO SUPERVISION OVER CONSTRUCTION WORK INCLUDING SALARIES, PROVIDENT FUND AND OTHER BENEFITS, STAFF WELFARE EXPENSES, ETC. (B) EXPENDITURE ON TECHNICAL AND OTHER CONSULTANTS. (C) GENERAL ADMINISTRATIVE AND OFFICE EXPENDITURE WHICH IS INDIRECTLY RELATED OR INCIDENTAL TO CONSTRUCTION, INCLUDING, AS MAY BE APPROPRIATE, STATIONERY AND PRINTING, RENT, RATES AND TAXES, POSTAGE AND TELEGRAMS, TRAVEL AND CONVEYANCE ETC. (D) APPROPRIATE INSURANCE CHARGES. (E) APPROPRIATE EXPENDITURES ON MAINTENANCE AND OPERATION OF VEHICLES. (F) APPROPRIATE EXPENDITURES IN CONNECTION WITH TEMPORARY STRUCTURES AND SERVICE FACILITIES BUILT OR ACQUIRED SPECIALLY FOR THE PURPOSE OF CONSTRUCTION (SEE PARAGRAPHS 9.4 AND 9.5 OF THIS NOTE). (G) PRELIMINARY PROJECT EXPENDITURE TO THE EXTENT TO WHICH IT IS CAPITALIZED AS PART OF THE CONSTRUCTION COST (SEE PARAGRAPH 3 OF THIS NOTE). (H) FINANCIAL EXPENSES INCLUDING INTEREST AND OTHER SIMILAR CHARGES (SEE PARAGRAPH 4 OF THE NOTE). (I) DEPRECIATION ON FIXED ASSETS AS WELL AS ON TEMPORARY STRUCTURE AND OTHER FACILITIES USED DURING THE PERIOD OF CONSTRUCTION (SEE PARAGRAPH 9.4 AND 9.5 OF THIS NOTE). (J) EXPENSES ON TEST RUNS (SEE PARAGRAPH 11 OF THIS NOTE). (K) EXPENSES ON LAND GRADING AND LEVELING (SEE PARAGRAPH 96 OF THIS NOTE). TAKING A CONSISTENT VIEW BY THE DECISION OF HON'BLE SUPREME COURT AND RELIANCE IN THE AFORESAID GUIDANCE NOTE WE REVERSE THE ORDERS OF AUTHORITIES BELOW. HENCE, THIS GROUND OF THE ASSESSEE IS ALLOWED. 3.1. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE DISMISS THIS GROUND NO.3 OF THE REVENUE. 4. GROUND NO. 4 & 5 ARE REGARDING THE DISALLOWANCE OF LOSS ON ACCOUNT OF EXCHANGE RATE FLUCTUATIONS. WE FIND THAT BOTH THESE ISSUES ARE COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE KOLKATA A BENCH OF THE TRIBUNAL IN THE ASSESSEES 7 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS OWN CASE FOR THE ASSESSMENT YEAR 2005-06; IN ITA NOS. 581& 587/KOL/2009, WHEREIN IT WAS HELD AS FOLLOWS:- 28. THE ISSUE RAISED BY REVENUE IN GROUND NUMBER 1 IN THIS APPEAL IS THAT LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR RS.1,20,90,000/- ON ACCOUNT OF YEAR END ADJUSTMENT IN LOSS ON FOREIGN EXCHANGE ACCOUNT DUE TO REVALUATION OF SUNDRY CREDITORS AND SBI MMD ACCOUNT. THE ASSESSEE HAS DEBITED THE PROFIT AND LOSS ACCOUNT BY AN AMOUNT OF RS.1,20,90,000/- ON ACCOUNT OF DIFFERENCE ARISING FROM THE FOREIGN EXCHANGE IN THE VALUE OF SUNDRY CREDITORS ACCOUNT AND MMD SBI ACCOUNT. THE ABOVE SAID DIFFERENCE WAS RECORDED ON THE LAST DAY OF THE FINANCIAL YEAR WHILE PREPARING THE FINANCIAL STATEMENTS. THE AO OBSERVED THAT IT IS A NOTIONAL LOSS AND REPRESENTS CONTINGENT LIABILITIES WHICH HAVE NOT BEEN ACTUALLY INCURRED BY THE ASSESSEE. THEREFORE THE SAME WAS DISALLOWED BY THE AO AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 29. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL TO LEARNED CIT(A) WHERE IT WAS SUBMITTED THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE DIFFERENCE ON ACCOUNT OF FOREIGN EXCHANGE IN THE VALUE OF SUNDRY CREDITORS AND SBI MMD ACCOUNT AT THE END OF FINANCIAL YEAR WAS RECORDED IN THE PROFIT AND LOSS ACCOUNT IN TERMS OF ACCOUNTING STANDARD 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA. THE ASSESSEE HAS ALSO RELIED IN THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF SHRI SAJJAN KUMAR MILLS LIMITED VERSUS COMMISSIONER OF INCOME TAX WHERE IT WAS HELD THAT THE PROVISIONS IN THE ACCOUNTS ON ACCOUNT OF DIFFERENCE IN FOREIGN EXCHANGE SHOULD BE MADE BY THE COMPANY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING WHICH ARE HAVING EFFECT ON LIABILITIES AND AS A RESULT ON THE QUANTUM OF PROFITS. IT IS WELL SETTLED THAT PRE-EXISTING LIABILITIES SHOULD BE ADJUSTED IN THE LIGHT OF FOREIGN EXCHANGE UNDER MERCANTILE SYSTEM OF ACCOUNTING. THE CLAIM OF THE ASSESSEE CANNOT BE DENIED MERELY ON THE GROUND THAT IT IS JUST A PROVISION AND NO AMOUNT HAS BEEN PAID. ACCORDINGLY THE LEARNED CIT(A) HAS DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER:- 'THE APPELLANT'S CONTENTION IN THIS REGARD IS FOUND TO BE ACCEPTABLE, SINCE THE AR OF THE ASSESSEE VIDE HIS LETTER DT. 15.01.2009 HAS CONFIRMED THAT THE SUNDRY CREDITORS UNDER THIS ACCOUNT WERE ON REVENUE ACCOUNT AND NOT ON CAPITAL ACCOUNT. SINCE, IT IS SUBMITTED THAT SUCH EXCHANGE FLUCTUATION HAS ARISEN ON ACCOUNT OF NORMAL BUSINESS TRANSACTIONS OF MATERIAL PROCUREMENT ETC., IT IS AN ALLOWABLE DEDUCTION U/S. 37(1). I AGREE WITH THE CONTENTION OF THE APPELLANT AND HENCE THIS GROUND IS ALLOWED.' BEING AGGRIEVED BY THIS ORDER OF LD. CIT(A) REVENUE IS IN APPEAL BEFORE US. 30. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. BEFORE US LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AO AND ON THE OTHER HAND THE LEARNED AR RELIED ON THE ORDER OF LD CIT(A) AND FILED A PAPER BOOK WHICH RUNNING FROM PAGES 1 TO 97. FROM THE AFORESAID DISCUSSION, WE FIND THAT THE AO TREATED THE DIFFERENCE ARISING ON ACCOUNT OF FOREIGN EXCHANGE IN THE VALUE OF SUNDRY CREDITORS AS NOTIONAL LOSS AND CONTINGENT LIABILITY WHICH THE ASSESSEE HAS NOT INCURRED SO IT WAS DISALLOWED. HOWEVER WE STRONGLY DISAGREE WITH THE VIEW OF THE AO ON THE GROUND THAT THIS YEAR AND ADJUSTMENT WAS MADE BY THE ASSESSEE IN TERMS OF AS 11 ISSUED BY ICAI AND IN PURSUANCE OF MERCANTILE SYSTEM 8 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS OF ACCOUNTING AS NOTIFIED U/S 145 OF THE ACT. THE RELEVANT EXTRACT OF ACCOUNTING STANDARD 11 IS REPRODUCED BELOW:- '3.6 THE ACCOUNTING STANDARDS (A) 11, THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (REVISED 2003), ISSUED BY THE COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, COMES INTO EFFECT IN RESPECT OF ACCOUNTING PERIODS COMMENCING ON OR AFTER 1-4-2004. RELEVANT EXTRACT OF THE ACCOUNTING STANDARD IS REPRODUCED AS FOLLOWS:- '9. A FOREIGN CURRENCY TRANSACTIONS SHOULD BE RECORDED ON INITIAL RECOGNITION IN THE REPORTING CURRENCY, BY APPLYING TO THE FOREIGN CURRENCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTIONS. 10... 11 (A) AT EACH BALANCE SHEET DATE FOREIGN CURRENCY MONETARY ITEMS SHOULD BE REPORTED USING THE CLOSING RATE. HOWEVER, IN CERTAIN CIRCUMSTANCES, THE CLOSING RATE MAY NOT REFLECT WITH REASONABLE ACCURACY THE AMOUNT IN REPORTING CURRENCY THAT IS LIKELY TO BE REALIZED FROM, OR REQUIRED TO DISBURSE, A FOREIGN CURRENCY MONETARY ITEM AT THE BALANCE SHEET DATE, E.G. WHERE THERE ARE RESTRICTIONS ON REMITTANCES OR WHERE THE CLOSING RATE IS UNREALISTIC AND IT IS NOT POSSIBLE TO EFFECT AN EXCHANGE OF CURRENCIES AT THAT RATE AT THE BALANCE SHEET DATE. IN SUCH CIRCUMSTANCES, THE RELEVANT MONETARY ITEM SHOULD B REPORTED IN THE REPORTING CURRENCY AT THE AMOUNT WHICH IS LIKELY TO BE REALIZED FROM, OR REQUIRED TO DISBURSE, SUCH ITEM AT THE BALANCE SHEET DATE: 11(B).... 11(C)... 12. CASH RECEIVABLES AND PAYABLES ARE EXAMPLES OF MONETARY ITEMS.... 13. EXCHANGE DIFFERENCES ARISING ON THE SETTLEMENT OF MONETARY ITEMS OR ON REPORTING AN ENTERPRISE'S MONETARY ITEMS AT RATES DIFFERENT FROM THOSE AT WHICH THEY WERE INITIALLY RECORDED DURING THE PERIOD, OR REPORTED IN PREVIOUS FINANCIAL STATEMENTS, SHOULD BE RECOGNIZED AS INCOME OR AS EXPENSES IN THE PERIOD IN WHICH THEY ARISE...' AT THIS JUNCTURE WE ALSO WISH TO REPRODUCE THE PROVISIONS OF SECTION 145 OF THE ACT WHICH READS AS UNDER:- '3.4 AS PER SECTION 145 OF THE ACT, '(1) INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' OR 'INCOME FROM OTHER SOURCES' SHALL, SUBJECT TO THE PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. 9 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB-SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144 .' 31. WE ALSO FIND SUPPORT FROM THE DECISION OF HON'BLE DELHI HIGH COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA PRIVATE LIMITED [2007] 294 ITR 451 (DEL) WHERE IT WAS HELD THAT:- 'WE AFFIRM THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL IN OIL AND NATURAL GAS CORPORATION LTD. V. DEPUTY CIT (ASSTT .) [2003] 261 ITR (AT) 1 (DELHI) WHICH RIGHTLY FOLLOWS THE SETTLED POSITION AS EXPLAINED IN THE JUDGMENT OF THE HON'BLE SUPREME COURT WHICH WE HAVE REFERRED TO. WE, THEREFORE, REJECT THE SUBMISSION OF THE APPELLANT IN THESE APPEALS THAT THE INCREASE IN LIABILITY ON ACCOUNT OF THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE REMAINING ON THE LAST DAY OF THE FINANCIAL YEAR IS NOTIONAL OR CONTINGENT AND, THEREFORE, CANNOT BE ALLOWED AS A DEDUCTION.' FROM THE AFORESAID DISCUSSION WE FIND NO REASON TO INTERFERE IN THE ORDER OF LD CIT(A) AND ACCORDINGLY WE UPHOLD. HENCE THIS GROUND OF REVENUE'S APPEAL IS DISMISSED. 4.1. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE DISMISS GROUND NOS.4 & 5 OF THE REVENUE. 5. GROUND NO. 6 & 7 IS REGARDING THE DISALLOWANCE OF RS.36,60,000/- PAID TO UNITED BANK OF INDIA. THE LD. CIT(A) AT PARA 4.6. PAGE 15 OF HIS ORDER ALLOWED THIS EXPENDITURE ON THE GROUND THAT THIS ANNUAL PAYMENT IS TOWARDS TRUSTEESHIP FEES TO THE TRUSTEES OF DEBENTURE HOLDER I.E. UNITED BANK OF INDIA AND IS NOT AN EXPENSE ON ISSUE OF DEBENTURES AND ALSO FOR THE REASON THAT THIS PAYMENT HAS BEEN ALLOWED IN BOTH THE EARLIER AND LATER ASSESSMENT YEARS AS WELL. THE LD. D/R, COULD NOT CONTROVERT THIS FACTUAL FINDING OF THE LD. CIT(A). UNDER THESE CIRCUMSTANCES, WE UPHOLD THIS FINDING OF THE LD. CIT(A) AND DISMISS THIS GROUND OF THE REVENUE. 6. GROUND NO. 8 & 9 IS REGARDING DISALLOWANCE OF RS.14.6 LAKHS DEBITED AS LAND DEVELOPMENT CHARGE. THE LD. CIT(A) AT PARA 4.7. PAGE 15 OF HIS ORDER DELETED THIS DISALLOWANCE ON THE GROUND THAT THIS EXPENDITURE IS FOR THE GREEN BELT BEING MAINTAINED BY THE ASSESSEE AND HAS BEEN ALLOWED BY ASSESSING OFFICER IN EARLIER AN LATER ASSESSMENT YEARS. 10 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS 6.1. THE LD. D/R, COULD NOT CONTROVERT THIS FACTUAL FINDING OF THE LD. CIT(A). UNDER THESE CIRCUMSTANCES, WE UPHOLD THIS FINDING OF THE LD. CIT(A) AND DISMISS THIS GROUND OF THE REVENUE. 7. GROUND NO. 10 & 11 IS ON THE DISALLOWANCE OF RS.13.05 CRORES BEING FREIGHT CHARGES. WE FIND THAT BOTH THESE ISSUES ARE COVERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE BY THE DECISION OF THE KOLKATA A BENCH OF THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2005-06; IN ITA NOS. 581& 587/KOL/2009, WHEREIN IT WAS HELD AS FOLLOWS:- 32. THE 2ND ISSUE RAISED BY REVENUE IN GROUND NUMBER 2 IN THIS APPEAL IS THAT LEARNED CIT(A) ERRED IN DELETING THE ADDITION MADE BY THE AO FOR RS.13,55,80,000/- ON ACCOUNT OF FREIGHT EXPENSES. 33. DURING THE YEAR ASSESSEE HAS CLAIMED NET FREIGHT EXPENSES INCURRED IN CONNECTION WITH DOMESTIC, EXPORT OF THE GOODS AND FREIGHT ON STOCK TRANSFER. THE ASSESSEE HAS ALSO RECOVERED PART OF THE FREIGHT CHARGES FROM THE CUSTOMERS INCURRED IN CONNECTION WITH THE SALES. HOWEVER THE AO OBSERVED THAT EXPENSES INCURRED ON FREIGHT WAS MORE THAN THE RECOVERY MADE BY THE ASSESSEE FROM THE CUSTOMERS. THE AO ALSO FOUND THAT THE CLAIM OF THE ASSESSEE TOWARDS SUCH FREIGHT EXPENSES WAS ALSO DISALLOWED IN THE AYS 2003-04 AND 2004-05, SO THE AO ACCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSEE FOR FREIGHT EXPENSES AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 34. AGGRIEVED, ASSESSEE IS IN APPEAL PREFERRED AN APPEAL TO LD CIT(A) WHERE IT WAS DEMONSTRATED THAT WHEN THE GOODS ARE SOLD TO CUSTOMERS ON DELIVERY BASIS THEN THE ASSESSEE RECOVERS FREIGHT CHARGES FROM THE CUSTOMERS AS PER THE AGREEMENT BUT IN SOME OF THE CASES THE FREIGHT CHARGES ARE NOT RECOVERED IN FULL DUE TO THE COMPETITION IN THE MARKET. BESIDES, ASSESSEE RECOVERED THE FREIGHT CHARGES FROM THE CUSTOMERS AS PER THE AGREED AMOUNT BUT ON MANY OCCASIONS THE ASSESSEE HAD BORNE MORE AMOUNT OF FREIGHT CHARGES OVER AND ABOVE THE AMOUNT AGREED DUE TO DAMAGES/DETENTION CHARGES, PRICE INCREASED DUE TO INCREASE IN FUEL COST. MOREOVER, THE FREIGHT CHARGES ON THE STOCK TRANSFER FROM FACTORIES TO DEPOTS ARE TO BE INCURRED BY THE ASSESSEE ALONE. THE ASSESSEE SUBMITTED THAT FOR THE EARLIER AYS 2003-04 AND 2004-05 THE FREIGHT CHARGES WERE SHOWN AS RECEIVABLE IN THE BALANCE SHEET OF THE RESPECTIVE YEARS SO THE QUESTION OF DISALLOWANCE OF FREIGHT EXPENSES DOES NOT ARISE. HOWEVER, IN THE INSTANT CASE THE FREIGHT EXPENSES HAVE BEEN DEBITED IN THE PROFIT AND LOSS ACCOUNT AND NOTHING HAS BEEN SHOWN IN THE BALANCE SHEET AS RECEIVABLE. FINALLY, ASSESSEE PRAYED THAT THESE EXPENSES ARE INCURRED IN CONNECTION WITH THE BUSINESS ONLY AND ARE ELIGIBLE FOR DEDUCTION WHILE COMPUTING THE INCOME UNDER THE HEAD OF 'BUSINESS'. ACCORDINGLY THE LEARNED CIT(A) HAS DELETED THE ADDITION MADE BY THE AO BY OBSERVING AS UNDER:- 'THIS GROUND OF THE APPELLANT IS AGAINST DISALLOWANCE OF EXPENSES OF FREIGHT OF RS.13,55,80,000/-. THE APPELLANT DURING THE RELEVANT PREVIOUS YEAR HAS DEBITED TO THE P & L A/C RS.135.58 MILLION UNDER THE HEADING 'FREIGHT CHARGES'. OUT OF THE SAID AMOUNT 46.99 MILLION REPRESENTS THE ELEMENT OF FREIGHT COST IN EXCESS OF RECOVERY AND 86.59 MILLION REPRESENTING FREIGHT CHARGES ON STOCK TRANSFER WHICH IS NOT FOR ANY 11 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS RECOVERY OR OTHERWISE. THE AO HAS DISALLOWED THE FREIGHT EXPENSES ON THE GROUND THAT THE FREIGHT CHARGES IS RECEIVABLES OF THE APPELLANT AND IN THE NATURE OF BALANCE SHEET ITEM AND HENCE THE SAID DISALLOWANCE WAS MADE. THE AO HAS NOT DISPUTED THAT THESE EXPENSES WERE INCURRED BY THE APPELLANT. THE FREIGHT CHARGES SHORT RECEIVED FROM CUSTOMERS CAN BE FOR VARIOUS REASONS AND THE AO WAS NOT JUSTIFIED IN DISALLOWING THE SAME ONLY FOR THE REASON THAT THEY WERE RECOVERABLE FROM THE CUSTOMERS. SUCH EXPENDITURE SINCE HAS BEEN INCURRED FOR THE PURPOSES OF ASSESSEE'S BUSINESS IS CLEARLY AN ALLOWABLE ITEM AND AS FAR AS FREIGHT CHARGES ON STOCK TRANSFER IS CONCERNED THIS IS DEFINITELY EXPENDITURE INCURRED FOR BUSINESS IRRESPECTIVE OF THE ACT THAT THE SAME IS RECOVERABLE OR NOT FROM THE CUSTOMERS, I FIND FORCE IN ASSESSEE'S CONTENTIONS IN THIS REGARD, HENCE, THIS GROUND OF THE APPELLANT IS ALLOWED.' BEING AGGRIEVED BY THIS ORDER OF THE LEARNED CIT(A) REVENUE IS IN APPEAL BEFORE US. 35. WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. BEFORE US LD. DR VEHEMENTLY SUPPORTED THE ORDER OF AO AND LEFT THE ISSUE TO THE DISCRETION OF THE BENCH WHEREAS LD AR RELIED THE ORDER OF LD CIT(A). FROM THE AFORESAID RIVAL MATERIALS, WE FIND THAT THE AO HAS DISALLOWED THE FREIGHT EXPENSES ON THE GROUND THAT ASSESSEE HAS MADE SHORT RECOVERY FROM THE CUSTOMERS AND SIMILAR ADDITION WAS MADE IN THE EARLIER ASSESSMENT YEAR. HOWEVER, THE AO HAS NOT DISPUTED THE QUANTUM OF EXPENSES INCURRED BY THE ASSESSEE ON FREIGHT. FROM THE SUBMISSION OF LD. AR WE FIND THAT OUT OF THE TOTAL DISALLOWANCE MADE BY THE AO TOWARDS FREIGHT EXPENSES, A SUM OF RS. 86,59,000/- WAS INCURRED ON THE STOCK TRANSFER BY THE ASSESSEE FROM THE FACTORY TO THE DEPOTS. IN OUR VIEW, THE QUESTION OF DISALLOWANCE OF FREIGHT EXPENSES IN CONNECTION WITH THE STOCK TRANSFER DOES NOT ARISE. THIS FREIGHT EXPENSE HAS DIRECT CONNECTION WITH THE BUSINESS OF THE ASSESSEE. FOR OTHER FREIGHT EXPENSES, THE REASON GIVEN BY THE AO FOR THE DISALLOWANCE IS NOT TENABLE AS THE AO HAS NOT POINTED OUT ANY REASONABLE REASONS FOR THE SAME. THERE IS NO DOUBT THAT THE ASSESSEE HAD MADE SHORT RECOVERY FROM THE CUSTOMERS BUT THE REASONS FOR THE SAME WERE DULY EXPLAINED BY THE ASSESSEE. ACCORDINGLY THE LD. CIT(A) HAS GIVEN THE RELIEF TO THE ASSESSEE AND ON THIS POINT OF VIEW LD. DR HAS NOT BROUGHT ANYTHING ON RECORD CONTRARY TO THE FINDINGS OF THE LD CIT(A). IN VIEW OF ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF LD CIT(A) AND WE UPHOLD THE SAME. HENCE, THIS GROUND OF REVENUE'S APPEAL IS DISMISSED. 7.1. CONSISTENT WITH THE VIEW TAKEN THEREIN, WE DISMISS GROUND NOS. 11 & 12 OF THE REVENUE. 8. GROUND NO. 12, IS REGARDING DISALLOWANCE OF EXPENDITURE TOWARDS SOFTWARE SERVICES. THE LD. CIT(A) AT PARA 4.10. OF HIS ORDER DELETED THIS DISALLOWANCE MADE BY THE ASSESSING OFFICER BY OBSERVING THAT THIS AMOUNT IS A MANAGEMENT SUPPORT EXCESSIVE AND AMOUNT IS PAID EVERY YEAR FOR SAP SERVICES. THIS AMOUNT HAS BEEN ALLOWED IN ALL SUBSEQUENT ASSESSMENT YEARS BY THE ASSESSING OFFICER AS REVENUE EXPENDITURE. 12 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS 8.1. THE LD. D/R, COULD NOT CONTROVERT THIS FACTUAL FINDING OF THE LD. CIT(A). UNDER THESE CIRCUMSTANCES, WE UPHOLD THIS FINDING OF THE LD. CIT(A) AND DISMISS THIS GROUND OF THE REVENUE. 9. LD. COUNSEL FOR THE ASSESSEE CONTENDS THAT THERE WAS VIOLATION OF RULE 46A OF THE INCOME TAX RULES BY THE LD. CIT(A). ON A PERUSAL OF THE ORDER OF THE LD. CIT(A), WE DO NOT FIND ANY APPLICATION FOR ADMISSION OF ADDITIONAL EVIDENCE MADE BY THE ASSESSEE NOR ANY ADMISSION OF ADDITIONAL EVIDENCE BY THE LD. CIT(A). UNDER THESE FACTS AND CIRCUMSTANCES GROUND NO. 7 & 9 ARE DISMISSED AS SUCH. 10. IN THE RESULT, THIS APPEAL OF THE REVENUE IS DISMISSED. KOLKATA, THE 30 TH DAY OF OCTOBER, 2018. SD/- SD/- [S.S. VISWANETHRA RAVI] [ J. SUDHAKAR REDDY ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30.10.2018 {SC SPS} COPY OF THE ORDER FORWARDED TO: 1. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(1), KOLKATA 2. M/S. HALDIA PETROCHEMICALS BENGAL ECO INTELLIGENT PARK (TECHNO) TOWER-1, BLOCK-EM PLOT NO. 3 SALT LAKE CITY SECTOR-V, 3 RD FLOOR KOLKATA -91 3. CIT(A)- 4. CIT- , 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSISTANT REGISTRAR ITAT, KOLKATA BENCHES 13 ITA NO. 1976/KOL/2016 ASSESSMENT YEAR: 2003-04 M/S. HALDIA PETROCHEMICALS