Century Enka Limited, Pune V. ACIT, Circle - 1, Mumbai, Pune

ITA 215/KOL/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4942 (ITAT-KOLKATA)
• Duration Of Justice: 4 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-03-2016
• Appeal Filed By: Assessee
• Bench Allotted: A
• Assessment Year: 1995-1996
• Appeal Filed On: 10-02-2012
• Court: TRIBUNAL
• Department Lawyers: TANUJ NEOGI
• Assessee Lawyers: AKASH MANSINKA
• Keywords: Depreciation; Opportunity of being heard

Judgement Text

1 ITA NO.215/KOL/2012-CENTURY ENKA LIMITED- A.Y.1995- 96 IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH A KOL KATA [BEFORE HONBLE SHRI N.V.VASUDEVAN, JM & SHRI WAS EEM AHMED, AM ] I.T.A.215/KOL/2012 ASSESSMENT YEAR : 1995-96 CENTURY ENKA LIMITED (IN THE MATTER -VERSUS- A.C. I.T., CIRCLE-1, OF RAJASHREE POLYFIL LTD.)PUNE MUMBAI. (PAN:AABCC2491D) (APPELLANT) (RESPONDENT) FOR THE APPELLANT: MS.SHREYA LOYALKA, FCA & SHR I AKASH MANSINKA, FCA FOR THE RESPONDENT: SHRI TANUJ NEOGI, JCIT, SR.DR DATE OF HEARING : 11.02.2016. DATE OF PRONOUNCEMENT : 02.03.2016. ORDER PER N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 16.12.2011 OF CIT(A)-VI, KOLKATA, RELATING TO AY 1995-96. 2. THE ASSESSEE IS ENGAGED IN THE MANUFACTURE AND S ALE OF POLYESTER CHIPS, NYLON/POLYESTER YARN, NYLON TYRE CORD/FABRICS, POLY ESTER INDUSTRIAL YARN ETC. THE ASSESSEE WAS INCORPORATED ON 24.10.1988. DURING TH E PREVIOUS YEAR THE PFY PROJECT OF THE ASSESSEE WAS UNDER IMPLEMENTATION AND COMMER CIAL PRODUCTION HAD NOT COMMENCED. SINCE COMMERCIAL OPERATIONS OF THE ASSES SEE HAD NOT COMMENCED DURING THE PREVIOUS YEAR, THE ASSESSEE CAPITALIZED ALL THE EXPENSES INCURRED DURING THE PREVIOUS YEAR. WHILE DOING SO, THE ASSESSEE REDUCE D THE FOLLOWING INCOME FROM PREOPERATIVE EXPENSES DURING CONSTRUCTION PERIOD: - I) INTEREST ON DEPOSIT RS.14,01,95,927 II)INTEREST ON TAX FREE BONDS RS. 1,14,16,027 III)BILL DISCOUNTING COMMISSION RS. 1,30,37,043 IV) GAIN ON SALE OF INVESTMENT RS. 94,55,610 RS.17,41,04,607 3. THE AO WAS OF THE VIEW THAT INTEREST ON DEPOSIT , COMMISSION ON BILL DISCOUNTING AND GAIN ON SALE OF INVESTMENT BEFORE COMMENCEMENT OF BUSINESS WAS TAXABLE AS 2 ITA NO.215/KOL/2012-CENTURY ENKA LIMITED- A.Y.1995- 96 INCOME FROM OTHER SOURCES AND CAPITAL GAIN. TH E ASSESSEE CLAIMED BEFORE THE AO THAT THE FUNDS RAISED BY THE ASSESSEE FOR THE PU RPOSE OF SETTING UP THE PFY PROJECT, PENDING UTILISATION OF FUNDS FOR THE PROJE CT, WERE DEPLOYED BY THE ASSESSEE BY INVESTING IN UNITS OF UTI AND PLACING THEM IN DEPOS ITS ETC., RESULTING IN THE INCOME REFERRED TO ABOVE. THE ASSESSEE CLAIMED THAT AS PE R THE GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURING CONSTRUCTION PERIOD ISSUED B Y THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI) SUCH EARNINGS WHICH ARE DIRECTLY IDENTIFIED WITH THE ASSSESSEES PFY PROJECT HAVE BEEN DEDUCTED FROM THE PROJECT EXPENDITURE CARRIED FORWARD FOR THE EVENTUAL CAPITALISATION. THE ASSES SEE PLACED RELIANCE ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CHALLAP ALLI SUGARS LTD. VS. CIT 98 ITR 167 (SC) FOR THE PROPOSITION THAT ACCOUNTING TREATM ENT AS PER ACCOUNTING STANDARDS WOULD BE RELEVANT EVEN FOR TAX PURPOSES. THE ASSES SEE FURTHER CONTENDED THAT THE FUNDS, THE DEPLOYMENT OF WHICH HAS RESULTED IN INCO ME SET OUT ABOVE, WERE RAISED SOLELY WITH THE OBJECT OF DEFRAYING THE PROJECT COS T AND THE TEMPORARY UTILIZATION OF SUCH FUNDS, WITH A VIEW TO MINIMISE THE FINANCIAL B URDEN ON THE PROJECT, FORM AN INTEGRAL PART OF THE MANAGEMENT OF THE CAPITAL FUND S USED FOR SETTING UP THE PROJECT. THUS THE TEMPORARY DEPOSIT/INVESTMENTS CANNOT BE VI EWED AS AN INVESTMENT ACTIVITY, IN AN ORDINARY SENSE, FOR EARNING INCOME BUT IN THE LA RGER PERSPECTIVE, REPRESENTED AN EFFECTIVE MODE OF REDUCING THE PROJECT COSTS. THE RETURN WERE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP THE BUSINESS, THEY WERE D ISTINGUISHABLE FROM INCOME RECEIVED ON MERE INVESTMENT OR DEPOSIT OF SURPLUS MONEY. TH E RETURNS ARE DIRECTLY RELATED TO THE CAPITAL STRUCTURE OF THE BUSINESS WHICH WAS BEI NG SET-UP AND GO TO REDUCE THE COST OF CONSTRUCTION, THEY CANNOT BE TREATED AS REVENUE RECEIPTS. THE ASSESSEE ALSO CONTENDED THAT IN THE EVENT THE RECEIPTS ARE CONSID ERED AS TAXABLE UNDER THE HEAD INCOME FROM OTHER SOURCES AND CAPITAL GAINRESPE CTIVELY, EXPENDITURE INCURRED IN EARNING INCOME FROM OTHER SOURCES SHOULD BE ALLOWED U/S.57(III) OF THE INCOME TAX ACT, 1961 (ACT). 4. THE AO HOWEVER DID NOT ACCEPT THE CLAIM OF THE A SSESSEE. HE HELD THAT INTEREST AND OTHER INCOME HAS TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES AND CAPITAL GAIN RESPECTIVELY. WITH REG ARD TO THE CLAIM OF THE ASSESSEE THAT 3 ITA NO.215/KOL/2012-CENTURY ENKA LIMITED- A.Y.1995- 96 IN THE EVENT OF INTEREST AND OTHER INCOME IS BROUGH T TO TAX UNDER THE HEAD INCOME FROM OTHER SOURCES, THE COMPUTATION OF SUCH INCOME SHOULD BE DONE AFTER ALLOWING DEDUCTION U/S.57(III) OF THE ACT, THE AO HELD THAT THE ASSESSEE DID NOT GIVE ANY DETAILS OR CLAIMED ANY EXPENSES FROM INCOME BEING TAXED. H E ALSO HELD THAT ONLY EXPENDITURE INCURRED TO EARN INCOME CHARGED TO TAX UNDER THE HE AD INCOME FROM OTHER SOURCES COULD BE ALLOWED AS A DEDUCTION AND THE ASSESSEE CL AIM DOES NOT SATISFY THIS REQUIREMENT OF THE LAW. 5. ON APPEAL BY THE ASSESSEE, THE CIT(A) CONFIRMED THE ORDER OF THE AO. BEFORE CIT(A) THE ASSESSEE CONCEDED THAT INTEREST INCOME H AS TO BE ASSESSED UNDER THE HEAD INCOME FROM OTHER SOURCES BUT CONTENDED THAT EXPE NSES INCURRED IN EARNING THE INTEREST & OTHER INCOME SHOULD BE ALLOWED AS DEDUCT ION U/S.57(III) OF THE ACT AND ONLY THE RESULT INCOME SHOULD BE BROUGHT TO TAX UNDER TH E HEAD INCOME FROM OTHER SOURCES. THE ASSESSEE IN THE SUBMISSIONS FILED BE FORE THE CIT(A) DATED 21.12.2011 HAD GIVEN DETAILS OF EXPENDITURE CLAIMED AS DEDUCTI ON U/S.57(III) OF THE ACT AS ANNEXURE 3 TO THE SAID SUBMISSIONS. THE SAME ARE P LACED AT PAGES 72 TO 78 OF THE PAPER BOOK. THE CIT(A) ON THE ABOVE SUBMISSIONS HE LD IN PARA 8 OF HIS ORDER THAT THE ASSESSEE DID NOT SUBMIT ANY DETAILS OF EXPENSES. H E ALSO ADDED THAT EXPENSES HAVE NOT BEEN INCURRED DIRECTLY TO EARN THE INCOME AND T HAT THE ASSSESSEE HAS NOT GIVEN ANY BASIS OF ALLOCATION OF EXPENSES. THE CONCLUSIONS O F THE CIT(A) IN THIS REGARD ARE CONTRADICTORY IN THE SENSE THAT IF NO DETAILS ARE G IVEN BY THE ASSESSEE, THERE WOULD BE NO REMARK THAT THE EXPENSES HAVE NOT BEEN INCURRED DIRECTLY TO EARN INCOME AND THAT THE REMARK THAT THE ASSESSEE HAS NOT GIVEN ANY BASI S OF ALLOCATION OF EXPENSES. 6. THE FINAL CONCLUSIONS OF THE CIT(A) ON THE ISSU E WERE AS FOLLOWS: 11. THE ASSESSEE DID NOT BORROW ANY FUNDS/MONEY SP ECIFICALLY FOR THE PURPOSES OF GIVING IT ON INTEREST. THERE IS NO DIRECT RELATIONS HIP OF EARNING OF INTEREST OF RS.14,01,95,927/- AND THE FUNDS BORROWED OR CONTRIB UTED TO GIVE IT ON INTEREST. THE INCOME OF INTEREST HAS BEEN ASSESSED AS INCOME FROM OTHER SOURCES BY THE ASSESSING OFFICER. I AGREE WITH THE REASONING GIVEN BY ASSESS ING OFFICER TO DISALLOW ANY EXPENDITURE ON EARNING OF INTEREST AND SHORT TERM C APITAL GAIN. IT SHOWS THAT THE SURPLUS FUNDS HAVE BEEN UTILISED FOR THE SAID PURPOSE OF GI VING IT ON INTEREST. SIMILARLY THE CAPITAL GAIN OF RS.94,55.610/- MIGHT HAVE BEEN CALC ULATED AFTER DEDUCTING THE DIRECT EXPENSES INCURRED THEREON. 4 ITA NO.215/KOL/2012-CENTURY ENKA LIMITED- A.Y.1995- 96 12. SIMILARLY FOR BILL DISCOUNTING, THE ASSESSEE MA Y HAVE INCURRED SOME EXPENSES. THEREFORE ON THE BILL DISCOUNTING COMMISSION THEREF ORE, IN ABSENCE OF ANY INFORMATION GIVEN BY THE ASSESSEE BOTH DURING ASSESSMENT PROCEE DINGS OR APPELLATE PROCEEDINGS AND FOLLOWING THE PRINCIPLES OF EQUITY AND JUSTICE THE EXPENSES @10% OF INCOME IS ALLOWED TO BE DEDUCTED FROM THE EARNINGS. THE ASSESSING OFF ICER WILL ALLOW EXPENSES OF RS.13,03,709/- ON THIS BILL DISCOUNTING COMMISSION. SINCE THIS HAS BEEN ALLOWED AS EXPENSES FROM INCOME FROM OTHER SOURCES, THE SAME W ILL NOT BE ALLOWED TO BE ADDED BACK IN THE WORK IN PROGRESS OF THE YEAR. ACCORDING LY THE ASSESSEE GETS AN EXPENSES TO BE ALLOWED AND RS.13,03,709/-. THE ASSESSEE GET A D EDUCTION OF EXPENSES ONLY AMOUNTING TO RS.13,03J09/- ON ESTIMATE BASIS IN THE HEAD OF INCOME FROM 'OTHER SOURCES'. ACCORDINGLY, THE PLEA OF THE ASSESSEE IS PARTLY ACCEPTED AND THE ASSESSING OFFICER IS DIRECTED TO ALLOW THE WORK IN PROGRESS T O BE CAPITALISED AFTER DEDUCTING THE EXPENSES ALLOWED AS DISCUSSED SUPRA FOR AN AMOUNT O F RS. 13,03,709/- AND DEPRECIATION ON THE WORK IN PROGRESS TO-BE ALLOWED FROM THE YEAR OF OPERATION. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 7. AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSESS EE IS IN APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED COU NSEL FOR THE ASSESSEE WHO REITERATED THE STAND OF THE ASSESSEE AS PUT FORTH B EFORE CIT(A) AND FURTHER SUBMITTED THAT ALL THE DETAILS INCLUDING THE UTILIZATION OF F UNDS ON WHICH INTEREST WAS PAID AND WHICH WERE DEPLOYED TO EARN INTEREST INCOME WERE DU LY FURNISHED BEFORE THE AO/CIT(A) AND THE OBSERVATIONS AND CONCLUSIONS IN T HIS REGARD ARE INCORRECT. IT WAS ALSO BROUGHT TO OUR NOTICE THAT IN AY 96-97 ON AN I DENTICAL ISSUE THE HONBLE TRIBUNAL IN ITA NO.488/KOL/2008 WAS PLEASED TO ALLOW THE CLA IM OF THE ASSESSEE WITH A RIDER THAT NEXUS BETWEEN THE INCOME AND EXPENDITURE HAS T O BE EXAMINED AND INCOME COMPUTED. THE LEARNED DR RELIED ON THE ORDER OF TH E AO/CIT(A). 9. WE HAVE GIVEN A VERY CAREFUL CONSIDERATION TO TH E RIVAL CONTENTIONS. THERE CAN BE NO DISPUTE TO THE PROPOSITION THAT DEDUCTION U/S .57(III) OF THE ACT HAD TO BE GIVEN WHEN INCOME IS BROUGHT TO TAX UNDER THE HEAD INCOM E FROM OTHER SOURCES, PROVIDED THE CONDITIONS LAID DOWN IN SEC.57(III) OF THE ACT ARE SATISFIED. THE CIT(A) HAS ACCEPTED THIS POSITION BUT HAS SOUGHT TO REJECT THE CLAIM OF THE ASSESSEE ON EXTRANEOUS AND IRRELEVANT CONSIDERATIONS AND IGNORING THE CLAI M MADE BY THE ASSESSEE. THE AO/CIT(A) HAVE NOT GIVEN ANY FINDING WITH REGARD TO CLAIM OF THE ASSESSEE FOR ALLOCATION OF EXPENDITURE INCURRED ON SALARY OF EMP LOYEES AND OTHER EXPENDITURE WHICH ARE GIVEN AT PAGE-74 OF THE PAPER BOOK FILED BEFORE US. THE FINDING WITH REGARD 5 ITA NO.215/KOL/2012-CENTURY ENKA LIMITED- A.Y.1995- 96 TO BORROWED FUNDS NOT HAVING BEEN USED FOR THE PURP OSE OF MAKING INVESTMENTS WHICH YIELDED INTEREST INCOME IN QUESTION HAS BEEN GIVING WITHOUT CONSIDERING THE FUND FLOW STATEMENT AND APPORTIONMENT OF INTEREST EXPENSES RE LATABLE TO PRE COMMENCEMENT EXPENSES AND INTEREST INCOME CHARGEABLE TO TAX UNDE R THE HEAD INCOME FROM OTHER SOURCES. THESE DETAILS ARE GIVEN AT PAGE-76 TO 77 OF THE PAPER BOOK. WE ARE THEREFORE OF THE VIEW THAT THE ORDER OF CIT(A) ON T HIS ISSUE HAS TO BE SET ASIDE AND THE ISSUE REMANDED TO THE AO FOR FRESH CONSIDERATION AS WAS DONE BY THE TRIBUNAL IN AY 96-97. THE AO WILL CONSIDER THE CLAIM OF THE ASSES SEE IN THE LIGHT OF THE DOCUMENTS ALREADY AVAILABLE ON RECORD AFTER AFFORDING ASSESSE E OPPORTUNITY OF BEING HEARD. THE ASSESSEE WILL BE AT LIBERTY TO SUBSTANTIATE ITS CAS E BY FILING ANY OTHER RELEVANT AND CONTEMPORANEOUS EVIDENCE TO SUBSTANTIATE ITS CASE. 10. IN THE RESULT FOR STATISTICAL PURPOSE THE APPEA L IS TREATED AS ALLOWED. O RDER PRONOUNCED IN THE COURT ON 02.03.2016. SD/- SD/- [WASEEM AHMED ] [ N.V.VASUDEVAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 02.03.2016. [RG PS] COPY OF THE ORDER FORWARDED TO: 1.CENTURY ENKA LIMITED (IN THE MATTER OF RAJASHREE POLYFIL LIMITED), 2 ND FLOOR, CENTURY ARCADE, NARANGI BAUG ROAD, PUNE-411001. 2.A.C.I.T., CIRCLE-1, MUMBAI. 3. CIT-II, KOLKATA 4. THE CIT(A)-VI, KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER, ASST. REGISTRAR, ITAT, KOLKATA BENCHES 6 ITA NO.215/KOL/2012-CENTURY ENKA LIMITED- A.Y.1995- 96