DCIT CIR 3(3)(2), MUMBAI V. UNIVERSAL CHEMICAL & INDUSTRIES P.LTD, MUMBAI

ITA 2491/MUM/2015

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8072 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 10 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-03-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 15-02-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 30-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M C OMI NINGSHEN
• Assessee Lawyers: KIRIT S SANGHVI; MANISH R RESHAMWALA
• Keywords: Capital asset; Capital receipt; Capital expenditure

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -H BENC H MUMBAI BEFORE S/SH.RAJENDRA,ACCOUNTANT MEMBER AND RAMLAL NEGI,JUDICIAL MEMBER ./I.T.A./2491/MUM/2015, / ASSESSMENT YEAR: 2010-11. DCIT-CIRCLE-3(3)(2) ROOM NO.609, 6TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. VS. M/S. UNIVERSAL CHEMICAL & INDUSTRIES PVT.LTD.,507, RAHEJA CENTRE, 214, NARIMAN POINT,MUMBAI-400 021. PAN: AAACU 0974 C ( /APPELLANT ) ( / RESPONDENT) / R EVENUE BY: SHRI M.C. OMI NINGSHEN -DR /ASSESSEE BY: S/SHRI KIRIT S. SANGHVI & MANISH R. RESHAMWALA / DATE OF HEARING: 15/02/2017 / DATE OF PRONOUNCEMENT: 07.03.2017 ,1961 254(1) ORDER U/ S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , / PER RAJENDRA A.M. - CHALLENGING THE ORDER DATED 19/01/2015 OF THE CIT ( A)-8, MUMBAI, THE ASSESSING OFFICER (AO) HAS FILED THE PRESENT APPEAL.ASSESSEE-COMPANY,ENGAG ED IN BUSINESS OF MANUFACTURING AND TRADING CHEMICALS,FILED ITS RETURN OF INCOME ON 14/10/2010, DECLARING LOSS OF RS.11.30 CRORES.THE AO COMPLETED THE ASSESSMENT UNDER SECTION 143 (3) OF T HE ACT, ON 28/03/2013, DETERMINING ITS INCOME AT RS.(-) 74.46 LAKHS. 2. EFFECTIVE GROUND OF APPEAL IS ABOUT DELETING THE A DDITION MADE BY THE AO,AMOUNTING TO RS. 8.45 CRORES. DURING THE COURSE OF ASSESSMENT PROCEE DINGS, THE ASSESSEE FILED A DETAILED WORKING WITH REGARD TO ITS PRE-OPERATIVE EXPENDITURE ALLOCA TION. FROM THE SAID WORKING, THE AO FOUND THAT THE ASSESSEE HAD INCLUDED A SUM OF RS.2.65 CRORES O N ACCOUNT OF RAW MATERIAL FOR TRIAL RUN. HE DIRECTED THE ASSESSEE TO FURNISH FURTHER DETAILS AN D ISSUED A SHOW CAUSE NOTICE ON 21/03/2013. AFTER CONSIDERING THE SAME,THE AO HELD THAT THE ASS ESSEE HAD EARNED A TOTAL INCOME OF RS.6.89 CRORES, THAT IT HAD REDUCED AN EXPENDITURE OF RS.9. 55 CRORES FROM TOTAL INCOME TO ARRIVE AT NET EXPENDITURE, THAT IT HAD TRANSFERRED THE NET EXPEND ITURE UNDER THE HEAD TRIAL RUN EXPENDITURE I.E. RS.2.65 CRORES TO ITS CAPITAL WORK IN PROGRESS, THA T IT HAD CLAIMED THE NET EXPENDITURE OF RS.2.91 CRORES, THAT IT HAD EARNED AN INCOME OF RS. 25.96 LAKHS, THAT IT HAD NETTED OFF THE FIGURE AND HAD FINALLY INCLUDED A SUM OF RS.2,65,71,782/- IN ITS C APITAL WORK IN PROGRESS, THAT IT HAD SHOWN ITS PP PLANT WAS YET TO BE COMMISSIONED ON 28/02/2010, THA T THE OTHER PLANT WAS UNDER COMMISSIONING 2491/M/15(10-11) M/S. UNIVERSAL CHEMICAL & INDUSTRIES LTD. 2 STAGE, THAT THE EXPERT ADVISORY COMMITTEE (EAC) HAD MENTIONED THAT INCOME ARISING OUT OF THE TRIAL RUN EXPENDITURE HAD TO BE CONSIDERED FOR PURP OSE OF TAXATION. THE SPECIFIC QUERY WAS RAISED AS TO WHY SUM OF RS.6.89 CRORES ACCOUNTED BY IT ON ACCOUNT OF SALE OF GOODS AND A SUM OF RS. 1.55 CRORES ON ACCOUNT OF CAPTIVE POWER CONSUMPTION SHOULD NOT BE CONSIDERED AS INCOME OF THE ASSESSEE. AFTER CONSIDERING A SUMMATION OF THE ASSE SSEE, THE AO OBSERVED THAT THE ASSESSEE HAD SUBMITTED THE COPY OF LEDGER ACCOUNT PERTAINING TO SALE OF GOODS AS EFFECTED BY THE ASSESSEE WHICH IT HAD PERPETRATED TO BE ON ACCOUNT OF TRIAL RUN SALES, THAT FROM THE ACCOUNTS IT WAS CLEAR THAT THE SAME DID NOT PERTAIN TO TRIAL RUN PRODUCTI ON, THAT IT HAD NOT FURNISHED ANY REGISTER/DOCUMENT TO SHOW THAT SUCH EXPENDITURE WAS PERTAINING TO ANY TRIAL RUN CARRIED ABOUT BY IT, THAT THE ASSESSEE HAD SUBMITTED A COPY OF PLANT COMMISSIONING CERTIFICATE, DATED 28/02/2010, PERTAINING TO ITS PP PLANT, THAT FOR THE PURPOSE OF THE INCOME TAX PROCEEDINGS IT WAS IRRELEVANT, THAT COST OF THE ASSETS WAS TO BE DETERMINED AS PER THE SECTION 43 (6) OF THE ACT, THAT ASSESSEE MIGHT HAVE PURCHASED RAW MATERIAL FOR PRODUCTION, T HAT SALES RESULTING FROM THE SAID RAW MATERIAL COULD NOT BE SAID TO BE HAVE ANY RELATION TO THE CO ST TO THE ASSESSEE, THAT MAJORITY OF THE EXPENDITURE PERTAINING TO TRIAL RUN WAS PURELY RELA TED TO EARN NON-COMMISSIONED PLANT AND NOT TO GENERATE ANY SALES. FINALLY THE AMOUNT OF INCOME EA RNED BY THE ASSESSEE OF RS.8.45 CRORES (RS. 6.89CRORES + RS. 1.55 CRORES) HAD TO BE TAXED IN TH E HANDS OF THE ASSESSEE AND THE EXPENDITURE INCURRED BY IT HAD TO BE ATTRIBUTED TO THE OPERATIO N OF THE PLANT. HE MADE AN ADDITION OF RS. 8.45 CRORES ON ACCOUNT OF INCOME GENERATED ON SALE OF GO ODS GENERATED ON TRIAL RUN. SIMILARLY HE FOUND THAT ASSESSEE HAD REDUCED A SUM OF RS. 10.17 LAKHS, BEING SCRAP SALE, FROM THE COST OF ITS ASSETS. THE AO HELD THAT SAME HAD TO BE TREATED AS INCOME EARNED BY THE ASSESSEE. 3. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE PRE FERRED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY (FAA).BEFORE HIM, THE ASSESSEE ARGUED THA T DOMESTIC SALES FROM PRE-OPERATIVE TRIAL RUNS STOOD AT RS.6.89 CRORES,THAT THE EXPENSES INCU RRED DURING THE PRE-OPERATIVE PERIOD CAPITALI - SED AND NOT CLAIMED IN THE RETURN OF INCOME AMOUNTE D TO RS.9.55 CRORES,THAT THE NET AMOUNT CAPITALIZED BY IT WAS RS.2.65 CRORES,THAT IT HAD C APITALIZED THE VALUE OF SELF GENERATED ELECTRICITY FOR CAPTIVE CONSUMPTION(RS. 1.55 CRORES),THAT EAC O PINION DID NOT DEAL WITH TAXABILITY OF INCOME ARISING DURING THE CONSTRUCTION PERIOD, THAT THE OP INION WAS ABOUT CAPITALISATION OF EXPENDITURE DURING THE CONSTRUCTION PERIOD, THAT IT HAD FURNISH ED THE DETAILS OF SALES FOR THE TRIAL RUN PERIOD, THAT THE CERTIFICATION OF COMMISSIONING OF PLANT WA S SUBMITTED DURING THE ASSESSMENT PROCEED - 2491/M/15(10-11) M/S. UNIVERSAL CHEMICAL & INDUSTRIES LTD. 3 INGS,THAT THE SALES WERE MADE PRIOR TO THE COMMISSI ONING OF THE PLANT, THAT THE AO HAD IGNORED THE EVIDENCES PRODUCED IN THAT REGARD, THAT THE AO HAD BROUGHT TO TAX THE RECEIPTS ARISING IN PRE- OPERATIVE PERIOD, THAT THE RECEIPTS WERE RIGHTLY RE DUCED IN THE BOOKS OF ACCOUNT FROM THE COST OF ASSETS IN ACCORDANCE WITH THE RECOGNIZED METHOD OF ACCOUNTING. REFERRING TO THE AS-10 THE ASSESSEE RELIED UPON THE CASES OF BOKARO STEEL LTD. (236ITR315) AND BONGAON REFINERY AND PETROCHEMICALS LTD.(251ITR329).ALTERNATIVELY,IT WAS ARGUED THAT AO SHOULD BE DIRECTED TO ALLOW THE UNDERLYING EXPENDITURE FROM THE RECEIPTS WHICH HAD BEEN TAXED.AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE AND THE ASSESSMENT ORDE R, THE FAA HELD THAT INCOME TAX WAS LEVIABLE UPON INCOME/PROFITS AND GAINS,THAT IT WAS NOT A TAX ON GROSS RECIEPT.HE DIRECTED THE AO TO ALLOW THE UNDERLYING EXPENDITURE FROM THE RECEIPTS THAT H AS BEEN TAXED. 4. DURING THE COURSE OF HEARING BEFORE US, THE DEPARTM ENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE AO AND STATED THAT ADDITION WAS BASED ON THE OPINION OF EAC. THE AUTHORISED REPRESENTATIVE(AR) SUPPORTED THE ORDER OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AO HAD MADE AN ADDITION OF RS.8.55 CRORES TO THE INCOM E OF THE ASSESSEE COMPRISING OF PRE-OPERATIVE DOMESTIC SALE DERIVED FROM TRIAL-RUNS(RS.6.89 CRORE S),NOTIONAL INCOME FROM INTER-DIVISION TRANSFER OF POWER(RS.1.55 CRORES) AND SALE OF SCRAP (RS.10.17LAKHS), THAT THE ASSESSEE HAD REDUCED THE RECEIPT FROM THE COST OF ASSET.WE FIND THAT THE TREATMENT GIVEN TO THE DISPUTED AMOUNT WAS IN ACCORDANCE WITH THE AS-10.HERE,WE WOULD LIKE TO REF ER TO THE CASE OF BOKARO STEEL LTD.(SUPRA) OF HONBLE APEX COURT.IN THAT MATTER THE ASSESSEE WAS INCORPORATED IN JANUARY, 1964. ITS OBJECT WAS TO CONSTRUCT AND OWN AN INTEGRAL IRON AND STEEL WOR KS. DURING THE AY.S 1965-66 TO 1971-72, THE WORK OF CONSTRUCTION OF THE COMPANY'S FACTORY AND I NSTALLATION OF THE PLANT WAS IN THE PROCESS OF COMPLETION. THE COMPANY HAD NOT STARTED ANY BUSINES S DURING THE ASSESSMENT YEARS IN QUESTION. (I) DURING THIS PERIOD, THE COMPANY HAD GIVEN TO TH E CONTRACTORS, QUARTERS FOR THE RESIDENCE OF THE STAFF AND WORKERS EMPLOYED BY THE CONTRACTORS WHO H AD BEEN ENGAGED BY THE ASSESSEE FOR CARRYING OUT THE WORK OF CONSTRUCTION. THE ASSESSEE CHARGED THE CONTRACTORS FOR THE USE OF THE QUARTERS SO GIVEN. (II) SECONDLY, DURING THE ASSESS MENT YEARS IN QUESTION, THE ASSESSEE HAD ENTERED INTO SUPPLEMENTARY AGREEMENTS WITH ITS CONT RACTORS UNDER WHICH THE ASSESSEE HAD MADE CERTAIN ADVANCES TO THE CONTRACTORS TO ENABLE THEM TO EXECUTE THE LARGE SCALE CONSTRUCTION WORK 2491/M/15(10-11) M/S. UNIVERSAL CHEMICAL & INDUSTRIES LTD. 4 SMOOTHLY.THE ASSESSEE-COMPANY HAD CHARGED INTEREST. THIS INTEREST WAS LATER ADJUSTED AGAINST THE DUES OF THE CONTRACTORS. (III) FOR THE PURPOSE OF T HE CONSTRUCTION WORK THE ASSESSEE HAD GIVEN ON HIRE CERTAIN PLANT AND MACHINERY TO THE CONTRACTORS . AGAINST THE LETTING OF PLANT AND MACHINERY, THE ASSESSEE RECEIVED FROM THE CONTRACTORS, INCOME IN THE FORM OF HIRE CHARGES. (IV) THE ASSESSEE- COMPANY ALLOWED THE CONTRACTORS TO USE THE STONES L YING ON THE ASSESSEE'S LAND FOR CONSTRUCTION WORK. THE STONES LYING ON THE ASSESSEE-COMPANY'S LA ND WERE THE CAPITAL ASSETS OF THE ASSESSEE- COMPANY.THE ASSESSEE CHARGED THE CONTRACTOR A CERTA IN AMOUNT BY WAY OF ROYALTY FOR EXCAVATION AND USE OF THESE STONES FOR CONSTRUCTION WORK. IN T HE APPELLATE PROCEEDINGS,THE TRIBUNAL HELD THAT THE AMOUNTS UNDER ITEMS NOS. 1 TO 4 RECEIVED BY THE ASSESSEE HAD GONE TO REDUCE THE COST OF CONSTRUCTION.THESE WERE IN THE NATURE OF CAPITAL RE CEIPTS WHICH COULD BE SET OFF AGAINST THE CAPITAL EXPENDITURE INCURRED BY THE ASSESSEE DURING THE REL EVANT ASSESSMENT YEARS. THIS VIEW WAS UPHELD BY THE HIGH COURT.ON APPEAL THE SUPREME COURT HELD AS UNDER: .......THE FIRST THREE HEADS OF INCOME WERE (I) TH E RENT CHARGED BY THE ASSESSEE TO ITS CONTRACTORS F OR HOUSING WORKERS AND STAFF EMPLOYED BY THE CONTRACTO R FOR THE CONSTRUCTION WORK OF THE ASSESSEE INCLUDING CERTAIN AMENITIES GRANTED TO THE STAFF BY THE ASSESSEE, (II) HIRE CHARGES FOR PLANT AND MACHINERY WHICH WAS GIVEN TO THE CONTRACTORS BY THE ASSESSEE FOR USE IN THE CONSTRUCTION WORK OF THE ASSESSEE, AND (III) INTEREST FROM ADVANCES MADE TO THE CONTRACTORS BY THE ASSESSEE FOR THE PURPOSE OF FACILITATING THE WORK OF CONSTRUCTION. T HE ACTIVITIES OF THE ASSESSEE IN CONNECTION WITH AL L THESE THREE RECEIPTS WERE DIRECTLY CONNECTED WITH O R INCIDENTAL TO THE WORK OF CONSTRUCTION OF ITS PLANT UNDERTAKEN BY THE ASSESSEE. THE ADVANCES WHIC H THE ASSESSEE MADE TO THE CONTRACTORS TO FACILITATE THE CONSTRUCTION ACTIVITY OF PUTTING TOG ETHER A VERY LARGE PROJECT WAS AS MUCH TO ENSURE THAT THE WORK OF THE CONTRACTORS PROCEEDED WITHOUT ANY FINANCIAL HITCH AS TO HELP THE CONTRACTORS. THE ARRANGEMENTS WHICH WERE MADE BETWEEN THE ASSESS EE-COMPANY AND THE CONTRACTORS PERTAINING TO THESE THREE RECEIPTS WERE ARRANGEMENTS WHICH WER E INTRINSICALLY CONNECTED WITH THE CONSTRUCTION OF ITS STEEL PLANT. THE RECEIPTS HAD BEEN ADJUSTED AGAINST THE CHARGES PAYABLE TO THE CONTRACTORS AND HAD GONE TO REDUCE THE COST OF CONSTRUCTION. THEY H AD, THEREFORE, BEEN RIGHTLY HELD AS CAPITAL RECEIPTS AND NOT INCOME OF THE ASSESSEE FROM ANY IN DEPENDENT SOURCE.... IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF PRODUC TION ON SUCH BORROWED MONEY CAN BE CAPITALISED AND ADDED TO THE COST OF THE FIXED ASSE TS CREATED AS A RESULT OF SUCH EXPENDITURE. BY THE SAME REASONING IF THE ASSESSEE RECEIVES ANY AMOUNTS WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY, SUCH RECEIPT S WILL GO TO REDUCE THE COST OF ITS ASSETS. THESE ARE RECEIPTS OF A CAPITAL NATURE AND CANNOT BE TAXE D AS INCOME. WE FIND THAT WHILE DECIDING THE APPEAL,THE FAA HAS DIRECTED THE ASSESSEE TO ALLOW THE EXPENDITURE FROM THE TAXABLE RECEIPTS.THUS,HE HAS F OLLOWED THE VERY BASIC PRINCIPLE OF TAXATION JURISPRUDENCE AND THAT PRINCIPLE STIPULATES THAT AL L THE EXPENDITURE INCURRED BY THE ASSESSEE HAVE TO BE COMPULSORILY ALLOWED FROM THE INCOME TAXED BY THE AO. IF THE AO WANTS TO TAX A PARTICULAR 2491/M/15(10-11) M/S. UNIVERSAL CHEMICAL & INDUSTRIES LTD. 5 INCOME,HE CANNOT DISALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE TO EARN THE SAID INCOME. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E ORDER OF FAA DOES NOT SUFFER FROM ANY LEGAL OR FACTUAL INFIRMITY.THEREFORE,CONFIRMING THE SAME WE DECIDE THE EFFECTIVE GROUND OF APPEAL AGAINST THE AO. AS A RESULT, APPEAL FILED BY THE AO STANDS DISMISSE D. . ORDER PRONOUNCED IN THE OPEN COURT ON 07 TH MARCH, 2017. 07 , 2017 SD/- SD/- ( / RAM LAL NEGI ) ( / RAJENDRA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 07 .03 .2017. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.