Chemcon Engineers Pvt.Ltd., Baroda V. The ACIT., Circle-1(1), Baroda

ITA 2873/AHD/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5562 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 7 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 10-06-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 20-12-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C K MISHRA SRDR
• Keywords: Depreciation; Competent authority; Commercial expediency
• Section: 80IB; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD D BENCH BEFORE SHRI G.D. AGARWAL, VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER ITA NO.2873/AHD/2006 [ASSTT.YEAR: 2003-04] CHEMCON ENGINEERS PVT. LTD. -VS- ACIT, CIRCLE-1(1) , C-3, SARDAR ESATE, AJWA ROAD, BARODA BARODA PAN NO.AAACC7889E (APPELLANT) (RESPONDENT) REVENUE BY : SHRI C.K. MISHRA, SR-DR ASSESSEE BY: SHRI MILIN MEH TA, AR O R D E R PER MAHAVIR SINGH, JUDICIAL MEMBER:- THIS APPEAL BY ASSESSEE IS ARISING OUT OF THE ORDE R OF COMMISSIONER OF INCOME-TAX (APPEALS)-I, BARODA IN APPEAL NO.CAB/I-3 91/05-06 DATED 30-10-2006. THE ASSESSMENT WAS FRAMED BY ACIT, CIRCLE-1(1), BAR ODA U/S.143(3) OF THE INCOME- TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) VIDE HIS ORDER DATED 21-02-2006 FOR ASSESSMENT YEAR 2003-04. 2. THE FIRST ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) CONFIRMING THE ACTION OF ASSESSING OFFICER IN MAKIN G DISALLOWANCE OF RS.47,90,740/- ON ACCOUNT OF LOSS DUE TO FIRE. FOR THIS, ASSESSEE HAS RAISED THE GROUND NO.1 :- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN MAKING DI SALLOWANCE OF RS.47,90,740 ON ACCOUNT OF LOSS DUE TO FIRE. ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 2 IT MAY BE MENTIONED THAT THE AO HAD MADE THE SAID D ISALLOWANCE WITHOUT CONSIDERING THE SUBMISSIONS OF THE APPELLANT AND PU RELY ON THE BASIS OF ASSUMPTIONS, SURMISES AND CONJECTURE. 3. THE BRIEF FACTS RELATING TO THE ABOVE ISSUE ARE THAT THE ASSESSEE-COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CHEMICA LS NAMELY, H.M.D.S. AS WELL AS PROCESSING OF H.M.D.S. BY CONVERTING H.M.D.O. ON JO B-WORK BASIS. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS NOTICED FROM THE PROFIT & LOSS ACCOUNT THAT THE ASSESSEE HAS CLAIMED A SUM OF RS.4 8,46,001/- AS LOSS ON FIRE. THE ASSESSEE WAS REQUESTED TO EXPLAIN THE ALLOWABILITY OF LOSS OF MATERIAL AT RS.47,90,740/- AND LOSS OF ASSETS AT RS.55,261/-. THE ASSESSEE VIDE LETTER DATED 23- 09-2005 STATED THAT THERE WAS A MAJOR FIRE AT THE F ACTORY PREMISES BECAUSE OF CHEMICAL REACTIONS AS THE ASSESSEE-COMPANY IS DEALI NG IN HIGHLY INFLAMMABLE MATERIALS H.M.D.S. THE ASSESSEE STATED THAT FIRE OC CURRED NEAR ONE OF THE REACTORS WHERE THE BURNT MATERIALS WERE LYING AND DUE TO THA T THE RAW MATERIALS LYING IN AND AROUND THE FIRE AREA WAS TOTALLY DESTROYED AS THE S AME WAS OF HIGHLY EXPLOSIVE IN CHARACTER. IN SUPPORT OF THE SAME, THE ASSESSEE ST ATED THAT THE FIRE TENDER FROM BMC FOR EXTINGUISHING FIRE WAS CALLED. THE PERSONS WORK ING NEAR THE FACTORY AREA WERE BADLY AFFECTED AND TWO OF THE WORKERS DIED ON THE S POT AND ANOTHER TWO WERE DIED IN HOSPITAL WITHIN 2/3 DAYS. ACCORDINGLY, THE STOCK OF RAW MATERIALS DESTROYED AS CLAIMED AS LOSS ALONG WITH LOSS OF MACHINERY DESTRO YED IN FIRE. THE ASSESSING OFFICER ALSO NOTICED FROM NOTES TO THE ACCOUNT ENCLOSED WIT H THE RETURN OF INCOME AND THE AUDITORS HAD MADE THE FOLLOWING DISCLOSURES IN RESP ECT OF LOSS OF FIRE ON DIFFERENT ASSETS:- LOSS ON ACCOUNT OF ASSETS RS. 61,922/- EXPENSES INCURRED ON ACCOUNT OF REPAIRS TO FACTORY SHED AND OTHERS RS. 5,43,339/- MATERIALS LOSS OF THIRD PARTY RECEIVED FOR JOB WORK RS.47,90,740/- THE ASSESSING OFFICER DISALLOWED THE LOSS INCURRED BY THE ASSESSEE OF STOCK OF THIRD PARTIES RECEIVED FOR JOB-WORK AMOUNTING TO RS.47,90 ,740/- BY STATING THAT THE MATERIALS LOSS BELONGING TO 3 RD PARTY IS MERELY A PAPER LIABILITY, THEREFORE THE S AME IS DISALLOWED. AGGRIEVED, THE ASSESSEE PREFERRED APPEA L BEFORE CIT(A). THE CIT(A) ALSO CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY STATING THE REASONS THAT ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 3 WHETHER THE ASSESSEE IS COMPETENT TO MAKE CLAIM ON INSURANCE COMPANY FOR COMPENSATION OF THIS AMOUNT, PARTICULARLY IN THE CI RCUMSTANCES THAT THE SAID MATERIALS BELONGS TO THIRD PARTY, NAMELY LUPIN LTD. AND HARI ORGOCHEM PVT. LTD. THE CIT(A) STATED THAT THE ASSESSEE HAS NO CONNECTION W ITH STOCK-IN-TRADE OR WITH THE BUSINESS OF THE ASSESSEE. ACCORDING TO HIM, THE ASS ESSEE BEING IN THE BUSINESS OF PROCESSING OF CHEMICALS ON JOB-WORK BASIS GETS RAW MATERIALS SUPPLIED BY THIRD PARTIES, THEREFORE IF AT ALL ANY CLAIM IS TO BE MAD E FROM INSURANCE COMPANY ON ACCOUNT OF SUCH LOSS, IS TO BE CLAIMED BY THESE SUP PLIERS COMPANY. THE CIT(A) ALSO NOTED THAT THESE SUPPLIERS COMPANIES HAVE NOT MADE ANY CLAIM WITH ANY OF THE INSURANCE COMPANY ON ACCOUNT OF DAMAGES. ACCORDINGL Y, HE CONFIRMED THE FINDINGS OF ASSESSING OFFICER AND CONFIRMED DISALLOWANCE. AG GRIEVED, ASSESSEE CAME IN SECOND APPEAL BEFORE US. 4. BEFORE US LD. COUNSEL FOR THE ASSESSEE, SHRI MIL IN MEHTA STATED THE FACTS THAT THERE WAS A MAJOR FIRE AT THE FACTORY PREMISES OF T HE ASSESSEE DUE TO WHICH IT INCURRED LOSS OF RS.53,96,001/- AND THE DETAILS OF THE SAME ARE GIVEN IN THE ABOVE PARA-3. THE LD. COUNSEL STATED THAT THERE IS NO DIS PUTE BY EITHER THE ASSESSEE OR ASSESSING OFFICER THAT THERE WAS A FIRE IN THE PREM ISES OF THE ASSESSEE OR THAT THERE WAS A LOSS DUE TO THE SAID FIRE. ACCORDING TO HIM, IT IS AN ADMITTED POSITION THAT THE SAID LOSS ALSO INCLUDED MATERIAL LOST IN FIRE BELON GING TO THE THIRD PARTY AND THE QUANTUM OF SUCH LOSS WAS RS.47,90,740 AND THE LOSS OF THIRD PARTY MATERIAL WAS A LOSS IN THE NATURE OF REVENUE LOSS AND EVEN THE SAI D LOSS OF THE THIRD PARTY MATERIAL WAS ACTUALLY BORNE BY THE ASSESSEE AND FOR THE SAID LOSS THE RESPECTIVE THIRD PARTIES I.E. LUPIN LTD. AND HARI ORGOCHEM PVT. LTD. HAS NOT MADE ANY CLAIM WITH EITHER INSURANCE COMPANIES OR WITH ANY OTHER PARTIES. HE S TATED THAT THE ASSESSEE HAS MADE THE CLAIM FOR THE SAID LOSS IN ITS TAX PROCEED INGS AND HAS ALSO MADE A CLAIM FOR THESE LOSSES WITH THE INSURANCE COMPANIES AND THE P ART OF THE CLAIM WAS ADMITTED BY THE INSURANCE COMPANIES AND ACCORDINGLY, THE ASSESS EE RECEIVED A SUM OF RS.14.90 LAKH IN FINANCIAL YEAR 2004-05 AND RS.11,25,256/- I N FINANCIAL YEAR 2005-06 WHICH WAS PROMPTLY OFFERED TO TAX AND WAS ACCORDINGLY TAX ED BY THE ASSESSING OFFICER AS REVENUE INCOME IN THESE YEARS BUT THE ASSESSING OFF ICER DISALLOWED THIS LOSS BY THE REASONS THAT THE LOSS ON FIRE WAS NOT IN RESPECT OF THE RAW MATERIAL BELONGING TO THE ASSESSEE AND THEREFORE LOSS IS NOT SUFFERED IN THE COURSE OF CARRYING ON BUSINESS OF THE ASSESSEE. THE AO ALSO CITED ANOTHER REASON THAT THERE WAS NO CLAUSE IN JOB ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 4 ORDER BINDING THE ASSESSEE FOR COMPENSATING ANY LOS S SUFFERED ON ACCOUNT OF MATERIAL DAMAGED FOR ANY REASON AND THE AO ALSO OBS ERVED THAT THE ASSESSEE HAD NOT MADE THE PROVISION FOR THE LOSSES IN THE BOOKS OF ACCOUNT FOR THIS LOSS. HE FURTHER STATED THAT CIT(A) HAS CONFIRMED THE DISALLOWANCE B Y STATING THAT THERE IS NO CLAUSE IN THE AGREEMENT THAT THE ASSESSEE WAS REQUIRED TO RETURN THE PROCESSED MATERIAL EVEN IF IT WAS REQUIRED TO PURCHASE FINAL PRODUCT F ROM THE MARKET. AGREEMENT WITH LUPIN LTD SHOWS THAT THE RESPONSIBILITY FOR INSURAN CE OF MATERIALS LYING WITH THE ASSESSEE IN FORM OF WORK-IN-PROGRESS AND FINISHED G OODS AGAINST FIRE WAS WITH LUPIN LTD AND IN THE CASE OF HARI ORGOCHEM PVT. LTD THE A GREEMENT IS SILENT ABOUT THE INSURANCE COVER. HE ARGUED THAT THE LOWER AUTHORITI ES HAVE DISALLOWED LOSS OF MATERIAL DUE TO FIRE ON THE BASIS THAT THE SAME LOS S IS NOT SUFFERED IN THE COURSE OF CARRYING ON BUSINESS OF THE ASSESSEE BUT THE ASSESS EE IS CARRYING OUT THE JOB WORK WAS THE NORMAL BUSINESS ACTIVITY OF THE ASSESSEE AN D ACCORDINGLY HOLDING GOODS OF THE CUSTOMERS FOR DOING THE JOB WORK AND PROCESSING WAS PART AND PARCEL OF NORMAL BUSINESS ACTIVITY OF THE ASSESSEE AND THEREFORE HOL DING THE GOODS AND CONSEQUENT LOSS OF THE GOODS HAS TO BE CONSIDERED AS PART OF T HE NORMAL BUSINESS ACTIVITY OF THE ASSESSEE. HE FURTHER STATED THAT THE LOSS IS ALLOWA BLE AS DEDUCTION U/S.37(I) OF THE ACT OR ALTERNATIVELY U/S.28 OF THE ACT. ACCORDING T O HIM, SECTION 37(1) USES THE TERM WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT NECESSARILY AND THEREFORE, WHEN AN EXPENSE/LOSS IS INCURRED IN THE NORMAL ACTIVITY OF THE BUSINESS, THOUGH MAY NOT BE LEGALLY REQUIRED TO BE INCURRED, THE SAME IS STILL ALLOWABLE ON THE GROUND OF COMMERCIAL EXPEDIENCY. HE ARGUED THAT IT IS NOT IN DOUBT THAT BOTH THE CUSTOMERS OF THE ASSESSEE ARE NOT RELATED PARTY AND THE TRANSACTION WITH THEM IS IN DAY-TO-DAY COURSE OF BUSINESS AND CONSTITUTED MAJOR PARTY OF THE BUSINESS OF THE ASSESSEE. FURTHER, ACCORDING TO HIM, IT IS ALSO NOT IN DISPUTE THAT THE LOSS WAS ACTUALLY INCURRED AND WAS BORNE BY THE ASSESSEE AND THE ASSESSEE FOR THE REASONS OF COMMERCIAL EXPEDIENCY DECIDED TO BEAR THE LOSS, WITHOUT TAKING THE TECHNICAL GROUND OF ITS ABILITY TO CLAIM THE LOSS FROM THE CU STOMER. IN SUCH A SITUATION, HE STATED THAT THERE WOULD HAVE BEEN A POSSIBILITY TO RECOVER THE SUM, BUT SURETY OF LOSING THE CUSTOMER. IN VIEW THEREOF, THE ASSESSEE DECIDED TO BEAR THE LOSS FOR LONG TERM BENEFIT OF THE BUSINESS AND PURELY ON THE GROUND OF COMMERCIAL EXPEDIENCY. IN VIEW THEREOF, THE ASSESSEE RELYING UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V. NAINITAL BANK LTD. (1966) 62 ITR 638 (SC) CONTENDS THAT THE LOSS SHOULD BE ALLOWED AS DEDUCTION. ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 5 5. THE LD. COUNSEL FURTHER STATED THAT THE ASSESSEE HAS FILED CLAIM WITH THE INSURANCE CO. AND THE SUPPLIERS HAVE NOT FILED ANY CLAIM IN RESPECT OF SUCH LOSS DUE TO FIRE AND MOREOVER THE ASSESSEE HAS OFFERED TO TA X AMOUNT RECEIVED FROM THE INSURANCE COMPANY FOR WHICH ASSESSEE RECEIVED RS.14 .90 LAKH IN FINANCIAL YEAR 2004-05 AND RS.11,25,256/- IN FINANCIAL YEAR 2005-0 6 FROM THE INSURANCE CO. WHICH HAVE BEEN OFFERED TO TAX IN ASSESSMENT YEARS 2005-0 6 AND 2006-07 RESPECTIVELY. HE STATED THAT WHEN THE ASSESSEE TAKES A CONSCIOUS DEC ISION THAT IT WOULD NOT WANT TO MAKE A CLAIM AGAINST THE CUSTOMER/SUPPLIER/CONTRACT OR, THOUGH LEGALLY ENTITLED TO IT AND THE SAID DECISION IS SUPPORTED BY THE COMMERCIA L EXPEDIENCY, THEN THE RESULTANT LOSS OR EXPENSES SHOULD BE ALLOWED AS DEDUCTION. FO R CLAIMING DEDUCTION OF AN EXPENSE/LOSS, WHAT IS NECESSARY THAT SUCH EXPENDITU RE SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT NECESSARILY 6. ON THE OTHER HAND, LD. SR-DR, SHRI C.K. MISHRA R ELIED ON THE ORDERS OF THE LOWER AUTHORITIES. HE STATED THAT THE CIT(A) AS WEL L AS ASSESSING OFFICER HAVE GIVEN DETAILED REASONING FOR MAKING DISALLOWANCE OF LOSS AND HE FULLY RELY ON THE SAME. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESSE E HAS INCURRED LOSS OF STOCK AMOUNTING TO RS.47,90,740/- ON ACCOUNT OF FIRE IN T HE FACTORY PREMISES OF THE ASSESSEE ON 29-10-2002. THE ASSESSEE HAS RECEIVED THE MATERIAL FROM LUPIN LTD. AND HARI OROGOCHEM PVT. LTD. AS PER AGREEMENTS FOR CONVERTING H.M.D.O. TO H.M.D.S. THE ASSESSEE WAS REQUIRED TO RETURN THE CO MPLETE PROCESSED MATERIAL TO THESE TWO PARTIES BUT IN SPITE OF THE FACT THAT FIR E HAD OCCURRED IN WHICH MATERIAL SENT BY THE ABOVE SAID COMPANIES WERE DESTROYED AND THE ASSESSEE WAS REQUIRED TO RETURN PROCESSED MATERIAL AS PER AGREEMENTS EVEN IF IT IS REQUIRED TO PURCHASE FROM MARKET AND IN FACT THE ASSESSEE HAD RETURNED SUCH P ROCESSED MATERIAL AS AGREED AND THIS FACT WAS CONFIRMED BY THE RESPECTIVE PARTI ES. WE FIND THAT THE ASSESSEE HAS FILED CLAIM WITH THE INSURANCE CO. AND THE SUPPLIER S HAVE NOT FILED ANY CLAIM IN RESPECT OF SUCH LOSS DUE TO FIRE AND MOREOVER THE A SSESSEE HAS OFFERED TO TAX AMOUNT RECEIVED FROM THE INSURANCE COMPANY FOR WHIC H ASSESSEE RECEIVED RS.14.90 LAKH IN FINANCIAL YEAR 2004-05 AND RS.11,25,256/- I N FINANCIAL YEAR 2005-06 FROM THE ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 6 INSURANCE CO. WHICH HAVE BEEN OFFERED TO TAX IN ASS ESSMENT YEARS 2005-06 AND 2006-07 RESPECTIVELY. FROM THE ABOVE FACTS WE REACH TO A CONCLUSION THAT WHEN THE ASSESSEE TAKES A CONSCIOUS DECISION THAT IT WOULD N OT WANT TO MAKE A CLAIM AGAINST THE CUSTOMER/SUPPLIER/CONTRACTOR, THOUGH LEGALLY EN TITLED TO IT AND THE SAID DECISION IS SUPPORTED BY THE COMMERCIAL EXPEDIENCY, THEN THE RE SULTANT LOSS OR EXPENSES SHOULD BE ALLOWED AS DEDUCTION. WE ARE OF THE VIEW THAT FO R CLAIMING DEDUCTION OF AN EXPENSE/LOSS, WHAT IS NECESSARY THAT SUCH EXPENDITU RE SHOULD BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND NOT NECESSARILY AND THE ASSESSEE HAS DONE SO. WE FURTHER FIND FROM THE CASE LAW REFE RRED BY LD. COUNSEL FOR THE ASSESSEE IN THE CASE OF NAINITAL BANK LTD. (SUPRA), WHEREIN THE HONBLE APEX COURT HAS DEALT WITH THE SIMILAR CLAIM AND AFTER DISCUSSI NG THE FACTS ALLOWED THE CLAIM AS UNDER:- IT WAS URGED BY THE COMMISSIONER THAT BANK WAS UND ER NO LEGAL LIABILITY TO PAY TO THE CONSTITUENTS THE VALUE OF THE JEWELLERY PLEDGED WITH IT. IT WAS SAID THAT THE BANK WAS, A PLEDGE, ABAILEE OF THE JEWELLE RY AND, WAS IN LAW REQUIRED TO TAKE AS MUCH CARE OF THE PLEDGED JEWELLERY AS A PERSON OF ORDINARY PRUDENCE WOULD TAKE UNDER SIMILAR CIRCUMSTANCES OF HIS OWN JEWELLERY OF THE SAME BULK, QUANTITY AND VALUE, AND THE BANK HAVING PROVIDED AN ADEQUATE NUMBER OF WATCHMEN, IT WAS NOT LIABLE FOR THE LOSS OF THE PROPERTY PLEDGED, GRANTING THAT, ON PROOF THAT IT HAD TAKEN AS MUCH C ARE OF THE JEWELLERY PLEDGED WITH IT AS IT WOULD HAVE TAKEN IF IT BELONGED TO IT , THE BANK COULD ENFORCE ITS RIGHTS AND RECOVER THE FULL AMOUNT DUE FROM THE CON STITUENTS, THE QUESTION STILL REMAINS WHETHER IN ADMITTING LIABILITY FOR THE VALU E OF THE JEWELLERY PLEDGE, THE BANK LAID OUT EXPENDITURE FOR THE PURPOSE OF THE BU SINESS. THE QUESTION IS NOT ABOUT THE STRICT ENFORCEMENT OF THE LEGAL RIGHTS AN D OBLIGATIONS BETWEEN THE BANK AND ITS CONSTITUENTS. THE SOLE QUESTION IS WHE THER THE BANK IN INCURRING THE EXPENDITURE ACTED IN THE INTEREST OF AND FOR TH E PURPOSE OF ITS BUSINESS. THE BANK IS CARRYING ON BANKING BUSINESS AND ADVANC ES LOANS ON THE SECURITY OF JEWELLERY. THE CREDIT OF A BANKING BUSINESS IS V ERY SENSITIVE: IT LARGELY THRIVES UPON THE CONFIDENCE WHICH ITS CONSTITUENTS HAVE IN ITS MANAGEMENTS. TO MAINTAIN THAT CONFIDENCE THE MANAGEMENT HAS OFTE N TO MAKE CONCESSIONS AND THEREBY TO PRESERVE THE GOODWILL OF THE BUSINES S AND ITS RELATIONS WITH THE CLIENTELE. THE BANK COULD HAVE, IF SO ADVISED, TAKE N ITS STAND STRICTLY ON ITS LEGAL OBLIGATIONS, AND COULD HAVE RECOVERED THE AMO UNTS DUE BY THE CONSTITUENTS AT THE SAME TIME DENYING LIABILITY TO MAKE ANY COMPENSATION FOR THE LOSS OF JEWELLERY PLEDGE WITH IT. BUT SUCH A ST AND MIGHT VERY WELL HAVE RUINED ITS BUSINESS, ESPECIALLY IN THE RURAL AREAS IN WHICH IT OPERATED. THE BANK HAD EVIDENTLY TWO COURSES OPEN : TO ENFORCE IT S RIGHTS STRICTLY ACCORDING TO LAW, AND THEREBY TO LOSE THE GOODWILL IT HAD BUILT UP AMONG THE CONSTITUENTS, OR TO COMPENSATE THE CONSTITUENTS FOR LOSS OF THEIR JE WELLERY, AND MAINTAIN ITS BUSINESS CONNECTIONS AND GOODWILL. IN CHOOSING THE SECOND ALTERNATIVE, IN OUR JUDGMENT, THE BANK LAID OUT EXPENDITURE FOR THE PUR POSE OF ITS BUSINESS. PAYING TO THE CONSTITUENTS THE PRICE OF THE JEWELLE RY STOLEN IN A ROBBERY OR A ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 7 BURGLARY WAS THEREFORE EXPENDITURE FOR THE PURPOSE OF THE BUSINESS. THERE CAN BE NO DOUBT THAT THE EXPENDITURE WAS WHOLLY AND EXC LUSIVELY IN THE INTEREST OF THE BUSINESS. THE EXPENDITURE WAS LAID OUT FOR NO O THER PURPOSE. WE HOLD ACCORDINGLY THAT THE SETTLEMENTS WITH THE C ONSTITUENTS AND THE CONSEQUENT POSTING OF ENTRIES IN THE BOLA CANNOT BE REGARDED AS FORBEARANCE TO ENFORCE THE CLAIM OF THE BANK TO RECOVER THE LOA NS ADVANCED. THE SETTLEMENT CONSISTED OF TWO CONSTITUENT ELEMENTS PAYING BY THE BANK OF THE VALUE OF THE JEWELLERY PLEDGED WITH IT AGAINST RECE IPT FROM THE CONSTITUENT THE AMOUNT WHICH WAS RECOVERABLE BY THE BANK. THE FIRST ELEMENT OF THE TRANSACTION WOULD APPROPRIATELY BE DEEMED EXPENDITU RE AND SUCH EXPENDITURE HAVING BEEN LAID OUT FOR PROTECTING AND FURTHERING THE BUSINESS OF THE BANK WAS PROPERLY ADMISSIBLE UNDER SECTION 10(2)(XV) OF THE INCOME-TAX ACT, 1922. IN VIEW OF THE ABOVE FACTS AND CASE LAW OF HONBLE APEX COURT, WE ALLOW THE CLAIM OF THE ASSESSEE AND THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. 8. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) CONFIRMING THE ACTION OF ASSESSING OFFICER IN DISAL LOWING DEDUCTION U/S.80IB OF THE ACT. FOR THIS, ASSESSEE HAS RAISED FOLLOWING GROUND NO.2 :- THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN FACT AND IN LAW IN CONFIRMING THE ACTION OF THE AO IN DISALLOWING D EDUCTION U/S.80IB OF THE ACT ON THE GROUND THAT THE APPELLANT DOES NOT FULFILL T HE CONDITION OF BEING A SMALL SCALE INDUSTRIAL (SSI) UNDERTAKING AND THEREFORE NO DEDUCTION IS ALLOWABLE UNDER THE ACT. 9. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT AS PER THE CLAIM MADE BY THE ASSESSEE, IT HAD MADE TOTAL INVESTMENT IN PLANT & MACHINERY AT RS.92,01,549/- AND IT DOES NOT EXCEED RS.1 CRORE, FOR WHICH THE AS SESSEE FILED COMPUTATION AS UNDER:- PARTICULARS AMOUNT (RS) COST OF PLANT AND MACHINERY AS ON 1.4.02 94,42,823 LESS: INSTALLATION EXPENSES, TOOLS, JIGS 15,17,078 ASSET WRITTEN OFF 19,10,650 60,15,095 ADD: ADDITION DURING THE YEAR 2002-03 31,86,454 TOTAL VALUE OF PLANT & MACHINERY AS ON 31.3.03 92.0 1.549 ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 8 THE ASSESSEES CONTENTION WAS THAT THE CLAIM OF DED UCTION U/S.80IB IS MADE IN RESPECT OF UNIT AND HAS BEEN CLAIMING AND IS ALLOWE D THE DEDUCTION DU/S.80IB SINCE ASSESSMENT YEAR 1998-99 AND DEDUCTION IS AVAILABLE ONLY IF THE ASSESSEE SATISFIES THE REQUIREMENT OF BEING AN SSI UNIT. ACCORDING TO ASSESSEE, IT IS REGARDED AS SSI UNIT TILL THE END OF THE ASSESSMENT YEAR 2003-04 AN D THE ASSESSEE CONTINUED TO CLAIM DEDUCTION U/S.80IB OF 30% OF ITS PROFITS DERIVED FR OM THE UNDERTAKING. HOWEVER, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE CANNOT BE REGARDED AS AN SSI UNIT, THOUGH BEING CERTIFIED AS SUCH BY THE AUTHORITY CON STITUTED UNDER THE RELEVANT ACT. THE ONLY GROUND ON WHICH THE ASSESSING OFFICER COME S TO HIS CONCLUSION IS THAT INVESTMENT IN PLANT & MACHINERY IS OVER RS.1 CRORE AND THEREFORE THE ASSESSEE CANNOT BE REGARDED AS SSI UNIT AND IS NOT ENTITLED TO CLAIM DEDUCTION U/S.80IB OF THE ACT. THE ASSESSING OFFICER HAS CONSIDERED INVESTME NT IN PLANT & MACHINERY AS PER FOLLOWING METHOD: PARTICULARS AMT. (RS) INVESTMENT IN PLANT & MACHINERY AS PER ASSESSEE 92,01,549 ADD: CAPITAL WORK-IN-PROGRESS (NOTE-I) 16,01,973 ASSET WRITTEN OFF BY THE ASSESSEE (NOTE-II) 19,1 0,650 INVESTMENT IN PLANT & MACHINERY AS PER AO 1,27,14, 172 ACCORDING TO AO ANY PURCHASE OF MACHINERY MADE BY T HE ASSESSEE WOULD QUALIFY AS INVESTMENT IN PLANT & MACHINERY WHETHER IT IS PUT T O USE OR NOT. THE WRITE OFF OF THESE MACHINERIES HAVE NOT CULMINATED INTO THE GENERATION OF ANY SCRAP NOR HAS ANY INCIDENCE OF SALE OF THESE WRITTEN OFF MACHINERIES BEEN SHOWN WHICH IS AGAINST BUSINESS PRUDENCE AND CUSTOMARY TRADE PRACTICE. ACC ORDINGLY, HE DISALLOWED THE CLAIM U/S.80IB OF THE ACT. AGGRIEVED, ASSESSEE PREF ERRED APPEAL BEFORE CIT(A). THE CIT(A) ALSO CONFIRMED THE ACTION OF ASSESSING OFFIC ER BY STATING FOLLOWING REASONS: THOUGH THE ASSESSEES UNIT WAS DULY REGARDED AS AN SSI UNIT BY THE OFFICE OF THE DISTRICT INDUSTRIES COMMISSIONER AND AO CAN STILL G O INTO THE ASPECT WHETHER THE ASSESSEE IS CAN SSI UNIT. ACCORDING TO CIT(A), THER E IS NO EXPRESS PROVISION EITHER UNDER THE INDUSTRIAL DEVELOPMENT & REGULATION ACT, 1951 OR UNDER THE INCOME-TAX ACT TO ADOPT THAT PLANT & MACHINERY WHICH IS NOT IN STALLED SHOULD BE EXCLUDED FROM ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 9 COMPUTING INVESTMENT LIMIT OF RS.1 CRORE. AGGRIEVED , ASSESSEE CAME IN SECOND APPEAL BEFORE US. 10. AFTER HEARING THE RIVAL CONTENTIONS AND GOING T HROUGH THE FACTS OF THE CASE, WE FIND THAT THE ASSESSEE-COMPANY IS REGISTERED AS AN SSI UNIT AND PERMANENT REGISTRATION HAS BEEN GRANTED TO THE ASSESSEE ON 28 -03-2003. THE ASSESSEE HAS BEEN GRANTED DEDUCTION U/S80IB OF THE ACT AND ALSO CLAIMED FOR THE RELEVANT ASSESSMENT YEAR 2003-04. THE MACHINERIES, WHICH WER E WRITTEN OFF/DISCARDED WERE ACCORDINGLY WRITTEN OFF AND DISCARDED FROM THE BLOC K OF FIXED ASSETS IN THE BOOKS OF ACCOUNT AND WAS DISPLAYED ACCORDINGLY IN THE AUDITE D ANNUAL ACCOUNTS OF THE COMPANY. WE FURTHER FIND THAT THE ASSETS WHICH WERE NOT PUT TO USE BEFORE THE END OF THE YEAR, WERE SHOWN AS CAPITAL WORK-IN-PROGRESS IN THE BOOKS OF ACCOUNT AND NO DEPRECIATION ON THE SAME WAS EITHER PROVIDED IN THE BOOKS OF ACCOUNT OR WAS CLAIMED IN THE TAX PROCEEDINGS. IN FACT, THE AO HAS ALSO ACCEPTED THAT THESE ASSETS ARE ACTUALLY NOT PUT TO USE AND HAS ALSO NOT GRANTE D DEPRECIATION ON THE ASSETS. WE FIND FROM THE FACTS THAT THE ASSESSEE IN THE SUBSEQ UENT YEAR I.E. ASSESSMENT YEAR 2004-05, WHEN THE ADDITIONAL FIXED ASSETS WERE PUT TO USE, HAD ON ITS OWN INFORMED THE OFFICE OF THE DIC, THAT IT IS NO LONGER AN SSI UNIT AND ACCORDINGLY, THE REGISTRATION WAS CHANGED TO MEDIUM SCALE UNIT. WE FURTHER FIND T HAT FOR GRANTING THE ASSESSEE AS SMALL SCALE INDUSTRIAL UNDERTAKING, THE COMPETENT A UTHORITY IS UNDER THE INDUSTRIES (REGULATION AND DEVELOPMENT) ACT, 1951, WHO HAS REG ARDED THE ASSESSEE AS SMALL SCALE INDUSTRIAL UNDERTAKING. WE ARE OF THE VIEW TH AT ONCE THE COMPETENT AUTHORITY HAS REGARDED THE ASSESSEES UNIT AS SMALL SCALE UNI T AND ASSESSEE SUBMITTED IN SECTION 80IB(14)(G) SMALL SCALE INDUSTRIAL UNDERTA KING MEANS AN INDUSTRIAL UNDERTAKING WHICH IS, AS ON THE LAST DAY OF THE PRE VIOUS YEAR, REGARDED AS A SMALL SCALE INDUSTRIAL UNDERTAKING U/S. 11B OF THE INDUST RIAL (DEVELOPMENT & REGULATION) ACT, 1951. THE ASSESSEE IS REGARDED AS SMALL SCALE UNDERTAKING BY THE COMPETENT AUTHORITY AND THEREFORE THE ASSESSEE IS ELIGIBLE TO GET DEDUCTION U/S.80IB. THE AO HAS CONSIDERED THE ASSETS WHICH WERE WRITTEN OFF FO R COMPUTING THE LIMIT U/S.S80IA THOUGH IT WAS CLEARLY SHOWN THAT THE ACCOUNTS DULY REFLECT THAT THE ASSETS ARE DULY WRITTEN OFF. THE REASON FOR ITS WRITE OFF WAS ALSO MENTIONED TO ASSESSING OFFICER AND WHAT IS RELEVANT FOR CONSIDERING AN INDUSTRIAL UNDE RTAKING IS THE ASSETS WHICH ARE PRODUCTIVELY EMPLOYED IN A MANUFACTURING ACTIVITIES AND NOT OTHER ASSETS. THE AO ITA NO.2873/AHD/2006 A.Y. 2003-04 CHEMCON ENGINEERS PVT. LTD. V. ACIT, CIR-1(1), BRD PAGE 10 HAS ALSO CONSIDERED THE ASSETS WHICH WERE UNDER INS TALLATION AND WHICH WERE NOT PUT TO USE FOR CARRYING OUT THE MANUFACTURING ACTIVITIE S ALSO FOR COMPUTING THE LIMIT OF RS.1 CRORE. ACCORDINGLY, WE ARE OF THE VIEW THAT TH E ASSESSEE HAS COMPLIED WITH THE REQUIREMENTS OF SECTION 80IB AND THEREFORE ELIGIBLE FOR DEDUCTION. WE ALLOW THE CLAIM OF THE ASSESSEE. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 23 RD THIS DAY OF JULY,2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD, DATED : 23/07/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-I, BARODA 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD