M/s KD Construction, Bhubaneswar V. ITO, Bhubaneswar

ITA 243/CTK/2011

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4368 (ITAT-CUTTACK)
• Duration Of Justice: 1 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 03-05-2011
• Court: TRIBUNAL
• Department Lawyers: S C MOHANTY
• Assessee Lawyers: J M PATTNAIKAR
• Keywords: Depreciation; Set aside

Judgement Text

IN THE INCME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE : HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER, AND HONBLE SHRI K.S.S.PRASAD RAO, JUDICIAL MEMBER. ITA NO. 243 AND 244/CTK/2011 (ASSESSMENT YEAR 2006 - 07 M/S.K.D.CONSTRUCTION, PLOT NO.70 1A,LINGIPUR, SISUPALGARH,BHUBANESWAR PAN: AAHFK 3853 A VERSUS INCOME - TAX OFFICER, WARD 1(2), BHUBANESWAR. (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHRI J.M.PATTNAIK,AR FOR THE RESPONDENT SHRI S.C.MOHANTY, DR ORDER SHRI K.K.GUPTA, ACCOUNTANT MEMBE R : IN ITA NO.243/CTK/2011 THE ASSESSEE AGITATES THE ACTION OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IN CONFIRMING THE DISALLOWANCE OF DEPRECIATION BY THE ASSESSING OFFICER ON THE FACTS AND CIRCUMSTANCES OF THE ASSESSEES CASE AND ALSO CONFIRMIN G THE DISALLOWANCE OF EXPENSES PARTLY GRANTING RELIEF WHICH EXPENSES WERE DISALLOWED BY THE ASSESSING OFFICER ON ADHOC LUMP SUM BASIS. 2. IN ITA NO.244/CTK/2011 THE ASSESSEE AGITATES THE ACTION OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) CONFIRMING THE PENALTY LEVIED U/S.271(1)(C) IN RESPECT OF ADDITION MADE ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION AMOUNTING TO 2,43,688. 3. SINCE BOTH THE APPEALS ARE INTER - LINKED ARE HEARD TOGETHER AND ARE DISPOSED OF F BY THIS COMMON ORDER FOR THE SAKE OF CONVE NIENCE. 4. THE BRIEF FACTS RELEVANT FOR THE PURPOSE OF DISPOSAL OF THESE APPEALS ARE THAT THE ASSESSEE IS A CIVIL CONTRACTOR AND HAD INTRODUCED COMMERCIAL ASSETS IN THE FIRM BY TAKING A PARTNER PROVIDING ASSETS OWNED BY IT IN THE FIRM AGAINST THE CAPITAL A ND THE LOAN OUTSTANDING FROM THE BANK. THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, HELD THAT THE WRITTEN DOWN VALUE (WDV) WAS TO BE CALCULATED IN SO FAR AS THE ASSESSEE HAD USED THESE ASSETS PRIOR TO INTRODUCTION THEREOF IN THE FIRM THEREFORE ITA NO.243 AND 244/CTK/2011 2 COMPUTED DEPRECIATION BY REDUCING THE EXCESS CLAIM AMOUNTING TO 2,43,688. THE ASSESSING OFFICER ALSO MADE DISALLOWANCE OF 3,12,300 OUT OF EXPENSES CLAIMED WITH RESPECT TO CIVIL WORK CARRIED OUT BY THE ASSESSEE FIRM WHICH INTERALIA INCLUDED T HE PAYMENT FOR LABOUR CHARGES, BRICKS, CHIP, STEEL RODS ETC. THE ASSESSING OFFICER ALSO LEVIED PENALTY OF 2,00,000 U/S.271(1)(C) ON THE BASIS OF THE ABOVE TWO ADDITIONS. 5. AGGRIEVED, THE ASSESSEE APPEALED BEFORE THE LEARNED CIT(A). AFTER CONSIDERING THE FACTS OF THE CASE AND SUBMISSIONS OF THE ASSESSEE , THE LEARNED CIT(A) CONFIRMED THE ADDITION MADE ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION AND PARTLY SUSTAINED THE ADDITION TO 2,00,000 AGAINST 3,12,300 MADE BY THE ASSESSING OFFICER ON ADHOC LUMP SUM DISALLOWANCE OF EXPENSES. IN RESPECT OF APPEAL AGAINST THE PENALTY U/S.271(1)(C), THE LEARNED CIT(A) RETAINED THE PENALTY LEVIED ONLY IN RESPECT OF DISALLOWANCE OF EXCESS CLAIM OF DEPRECIATION BUT DELETED THE PENALTY LEVIED WITH RESPECT TO ADHOC LUMP SUM DISALLOWANCE OUT OF EXPENSES CLAIMED BY THE ASSESSEE. 6. AGGRIEVED FURTHER, THE ASSESSEE HAS FILED APPEALS AGAINST THE ORDERS OF THE LEARNED CIT(A) IN RESPECT OF QUANTUM ASSESSMENT AS WELL AS PENALTY U/S.271(1)(C). 7. FIRST THE QUANTUM APPEAL. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT THE ASSETS THAT WERE INTRODUCED BY THE MANAGING PARTNER WERE TO BE AT THE WDV WITHOUT INDICATING AS TO HOW THE VALUE AS INCORPORATED BY THE ASSESSEE FIRM AGAINST THE LOAN AND CAPITAL INTRODUCED COULD NOT BE SUBJECTED TO DEPRECIATION IN ACCORDANCE WITH THE PROVISIONS OF THE I.T.ACT. THE ASSETS WERE INTRODUCED AS PER THE PARTNERSHIP DEED WHEN THE PARTNERS AGREED THAT THE CAPITAL BY THE SAID PARTNER WOULD BE IN THE FORM OF ASSETS WHICH WERE USED BY HIM IN ERSTWHILE PROPRIETORSHIP CONCERN. THE LEARNED ASSESSING OFFICER THEREFORE ITA NO.243 AND 244/CTK/2011 3 CLEARLY ERRED IN HOLDING WHAT THE WDV WOULD HAVE BEEN FOR VALUE TO THE ASSESSEE INSOFAR AS THE ASSESSEE HAD NOT CHARGED DEPRECIATION BY MAKING PROFIT ON T HE TAX PAID AMOUNT OF INCOME WHEN HE CHOSE TO INTRODUCE THE SAID ASSETS AS CONTRIBUTION OF HIS CAPITAL. THE FIRM HAS AGREED TO THE PROPOSITION THAT THE LOAN AND THE CAPITAL WILL BE AS PER THE PARTNERSHIP DEED THEREFORE WAS NOT TO BE COMPUTED AS IN THE SECO ND PROVISO TO SECTION 32(1) AS NOTED BY THE LEARNED CIT(A). IT WAS NOT THE CASE OF THE ASSESSING OFFICER THAT THE ASSESSEE HAD CLAIMED DEPRECIATION TO COMPUTE THE WDV WHICH HE HIMSELF HAS BROUGHT ON RECORD WITHOUT INDICATING AS TO HOW THE VALUE HAS BE EN DE TERMINED. THE ASSESSEE CHO SE TO HOLD THE SAID ASSETS WITH THE FIRM ON THE VALUE WHICH WAS IN ACCORDANCE WITH THE PARTNERSHIP DEED AGREEABLE TO THE FIRM INSOFAR AS THE REMAINING LOAN AGAINST HYPOTHECATION OF THOSE ASSETS WAS TO BE PAID TO THE BANK. IT IS NO T THE CASE OF THE INDIVIDUAL MANAGING PARTNER MAKING PROFIT AGAINST DEPRECIABLE ASSET S. THE ASSETS SO TRANSFERRED HAVE BEEN IDENTIFIED TO BE BELONG ING TO THE PARTNER THEREFORE CANNOT BE SAID TO BE ON WDV INSOFAR AS THE LEARNED CIT(A) ERRED IN HOLDING THAT THIS WOULD RESULT IN CLAIMING MORE THAN 100% DEPRECIATION ON THEM AND IT WAS A CASE OF SUCCESSION, MERGER AND AMALGAMATION. HE POINTED OUT THAT WDV CANNOT CLAIM D EPRECIATION MORE THAN 100% AND I S INFINITE. THE DEPRECIATION HAS TO BE CHARGED TILL THE LIFE O F THE ASSETS WAS NOT CONSIDERED BY THE LEARNED CIT(A). SIMILARLY, IT WAS NOT THE CASE OF THE ASSESSEE HAVING THE ASSETS ON THE BASIS OF SUCCESSION, MERGER AND AMALGAMATION BUT ON THE BASIS OF INTRODUCTION OF CAPITAL IN THE FORM OF ASSETS WHICH VALUE WAS AG REEABLE AMONGST THE PARTNERS AS PER THE PARTNERSHIP DEED. HE THEREFORE, PRAYED THAT THE USE OF ASSETS IS UNDISPUTED AND THE CAPITAL INTRODUCED WAS AGAINST THE ASSETS TOGETHER WITH THE LOAN REQUIRED NO CONSIDERATION FOR THE WDV TO ITA NO.243 AND 244/CTK/2011 4 BE IMPOSED WHICH VALUE HAS NOT BEEN ASCERTAINED BY THE AO IN ACCORDANCE WITH THE PROVISIONS OF THE I.T.ACT. 8. ON THE ISSUE OF PART SUSTENANCE OF DISALLOWANCE OF EXPENSES BY THE LEARNED CIT(A), THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS CAN BE PERUSED IN THE ORDERS OF T HE AUTHORITIES BELOW, THE EXPENSES DISALLOWED ARE ON ACCOUNT OF CIVIL CONTRACT WORK CARRIED OUT BY THE ASSESSEE WITH MATERIAL WHICH MATERIAL S ARE BILLED AND REIMBURSED BY THE CONTRACTEES. THE MAJOR EXPENSES THEREFORE HAVE BEEN CONSIDERED FOR A LUMP SUM DIS ALLOWANCE CANNOT BE DISALLOWED AS THE ASSESSING OFFICER HAS NOT BROUGHT ON RECORD THAT THE ASSESSEE HAD INFLATED THE EXPENSES TO CLAIM M ORE THAN THE CONTRACT RECEIPTS. DISALLOWANCE OF EXPENSES THEREFORE BECOMES CHALLENGING THE BILLS SUBMITTED BY THE ASSESS EE TO THE CONTRACTEES WHICH DISALLOWANCE ON ADHOC LUMP SUM BECOMES GROSSLY UNJUSTIFIED AND UNREASONABLE. HE PRAYED THAT THE PART SUSTENANCE OF THE DISALLOWANCE MAY KINDLY BE DIRECTED TO BE DELETED. 9. THE LEARNE D DR SU PPORTED THE ORDERS OF THE AUTHORITIES B ELOW. HE POINTED OUT THAT THE WDV AS COMPUTED BY THE ASSESSING OFFICER HAS TO BE ADOPTED IN VIEW OF THE ASSESSING OFFICER DETERMINING THE WDV ON WHICH THE DEPRECIATION COULD BE ALLOWED IN THE IMPUGNED ASSESSMENT YEAR TO THE ASSESSEE FIRM. THE LEARNED CIT(A ) THEREFORE RIGHTLY NOTED THAT THE FACT FINDING FOR DISALLOWANCE OF DEPRECIATION WAS TO BE CONFIRMED. IN RESPECT OF SUSTENANCE OF ADDITION ON ACCOUNT OF ADHOC DISALLOWANCE OF EXPENSES, THE LEARNED DR SUPPORTED THE ORDER OF THE LEARNED CIT(A) ON THE BASIS OF ASSESSEE NOT ABLE TO PRODUCE THE DETAILS OF EXPENSES CLAIMED IN THE P & L ACCOUNT. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. ON THE FACTS AND CIRCUMSTANCES WE ARE INCLINED TO HOLD THAT THE CLAIM OF DEPRECIATI ON ON THE VALUE ASSIGNED IN THE PARTNERSHIP DEED ITA NO.243 AND 244/CTK/2011 5 WAS ON THE BASIS OF CAPITAL INTRODUCED WAS NOT A CASE OF MERGER OR SUCCESSION BECAUSE AS PER THE PARTNERSHIP DEED THE MANAGING PARTNER HA D INTRODUCED THE ASSETS BELONGING TO HIM IN LIEU OF THE CAPITAL WHICH HAS BEEN VALUED ON HIS ACCOUNT. THE BANK LOAN ALSO STOOD TRANSFERRED ON THESE ASSETS WHICH THE ASSESSING OFFICER AND THE LEARNED CIT(A) OBSERVED THEREFORE CANNOT BE A CASE FOR COMPUTING THE WDV AS ON THE DATE OF INTRODUCTION OF CAPITAL BY THE PARTNERS WIT HOUT BRINGING ON RECORD THE DEPRECIATED VALUE BEING THE WDV ON ACCOUNT OF INDIVIDUAL ASSESSEE WHETHER HAVING CLAIMED THE SAME OR NOT. THE ASSESSEE HAD BEEN FILING HIS RETURN U/S.44AD AND THEREFORE, DEPRECIATION WAS DEEMED ALLOWED NOT AFFECTING THE WDV. IN ANY CASE, THE INCOME AGAINST THE PURPORTED DEPRECIATION WHICH WOULD BRING DOWN THE VALUE OF THE WDV , AS SUGGESTED BY THE LEARNED ASSESSING OFFICER , CANNOT BE TAXED IN THE HANDS OF THE FIRM INSOFAR AS THE PARTNERSHIP DEED OF THE FIRM CLEARLY INDICATE THAT T HE PROFIT WILL BE SHARED IN ACCORDANCE WITH THE CAPITAL INTRODUCED BY THE RESPECTIVE PARTNERS. THE REMUNERATION AND SALARY HAS BEEN PAID IN ACCORDANCE THERETO THEREFORE CLINCHES THE ISSUE IN FAVOUR OF THE ASSESSEE THAT THE VALUE WHICH HAS BEEN INSCRIBED IN THE PARTNERSHIP DEE D WAS THE VALUE AGAINST WHICH DEPRECIATION WAS TO BE CLAIMED. WE HAVE BEEN TOLD BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT DEPRECIATION HAS BEEN ALLOWED ON THE WDV THEREAFTER THEREFORE CANNOT CHANGE THE VALUE SIMPLY BECAUSE THE ASSESS ING OFFICER INSISTS ON COMPUTING HIS OWN VALUE VIS - - VIS AS INCORPORATED BY THE ASSESSEE ON THE FORMATION OF THE PARTNERSHIP FIRM. THE DEPRECIATION DISALLOWED BY THE AUTHORITIES BELOW THEREFORE CANNOT BE SUSTAINED AND THE SAME IS HEREBY DELETED. 11. ON THE ISSUE OF SUSTENANCE OF DISALLOWANCE OUT OF EXPENSES, WE ARE INCLINED TO HOLD THAT A LUMP SUM DISALLOWANCE CANNOT BE MADE ESPECIALLY FOR THOSE EXPENSES WHICH ARE PART OF THE COST TO BE REIMBURSED BY THE ITA NO.243 AND 244/CTK/2011 6 CONTRACTEES ON FURNISHING BILLS. IT IS NOT THE CASE O F THE ASSESSING OFFICER THAT THE CONTRACTEES WILL NOT BE PAYING THESE REIMBURSEMENTS ON THE BASIS OF THIS DISALLOWANCE. THEREFORE IT WILL BECOME DOUBLE JEOPARDY FOR THE ASSESSEE TO WHICH WE ARE UNABLE TO CONSIDER IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES AS HAVE BEEN PUT FORTH BY THE LEARNED COUNSEL FOR THE ASSESSEE. THE LUMP SUM DISALLOWANCE OF THE EXPENSES CLAIMED FOR REIMBURSEMENT BECOMES AN INTERNAL DEPARTMENT TRANSACTIONS AND NOT FOR DISALLOWING FOR I.T.PURPOSES. THE MAJOR EXPENSES THEREFORE HAVE BEE N CONSIDERED FOR LUMP SUM DISALLOWANCE WITHOUT BRINGING ANY MATERIAL ON RECORD IN THE NATURE OF BUSINESS CONDUCTED BY THE ASSESSEE, THEREFORE, REQUIRES FULL CLAIM. IN VIEW OF THE ABOVE, THE IMPUGNED ORDER OF THE LEARNED CIT(A) IS SET ASIDE AND THE ENTIRE D ISALLOWANCE MADE BY THE ASSESSING OFFICER IN THIS REGARD IS DELETED. 12. ITA NO.244/CTK/2011. T HERE IS NO DISPUTE TO THE FACT THAT THE LEARNED CIT(A) HAS SUSTAINED THE PENALTY U/S.271(1)(C) ONLY IN RELATION TO THE ADDITION MADE ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION. FOR THE REASONS DISCUSSED ABOVE, WE HAVE DELETED THE SAID ADDITION MADE ON ACCOUNT OF EXCESS CLAIM OF DEPRECIATION. THEREFORE, THE PENALTY SO SUSTAINED BY LEARNED CIT(A) REQUIRES TO BE DELETED SINCE THE ADDITION ON THE BASIS OF WHICH THE LEARNED CIT(A) SUSTAINED THE PENALTY HAS BEEN DEL ` ETED BY US. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND CANCEL THE IMPUGNED PENALTY LEVIED U/S.271(1)(C) OF THE ACT. 1 3. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. PRONOUNCED IN OPEN COURT ON DT. 30 TH JUNE, 2011 S D/ - S D/ - (K.S.S.PRASAD RAO) JUDICIAL MEMBER (K.K.GUPTA) ACCOUNTANT MEMBER DATE: H.K.PADHEE, SENIOR PRIVA TE SECRETARY. ITA NO.243 AND 244/CTK/2011 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT: M/S.K.D.CONSTRUCTION, PLOT NO.701A,LINGIPUR, SISUPALGARH,BHUBANESWAR PAN: AAHFK 3853 A 2. THE RESPONDENT: INCOME - TAX OFFICER, WARD 1(2), BHUBANESWAR. 3. THE CIT, 4. THE CIT(A), 5. THE DR, CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY, BY ORDER, SENIOR PRIVATE SECRETARY.