M/s Gayatri Agro Oil & Food Products, V. ITO, Kalahandi

ITA 301/CTK/2011

• Counselvise Citation: 30122114 RSA 2011
• Duration Of Justice: 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2011
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 19-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 27-05-2011
• Court: TRIBUNAL
• Department Lawyers: A BHTTACHARJEE
• Keywords: Depreciation; Additional depreciation; Unabsorbed depreciation
• Section: 143(3)

Judgement Text

IN THE INC O ME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE : SHRI K.K.GUPTA, AM , AND SHRI K.S.S.PRASAD RAO, JM ITA NO. 301/CTK/2011 (ASSESSMENT YEAR 2006 - 07) M/S.GAYATRI AGRO OIL & FOOD PRODUCTS, AT/P.O.KESINGA, DIST.KALAHANDI (ORISSA) PIN: 7 66 012 PAN: AAFG 4509 B VERSUS INCOME - TAX OFFICER, BHAWANIPATANA (APPELLANT) (RESPONDENT) FOR THE APPELLANT: NONE (WRITTEN SUBMISSION) FOR THE RESPONDENT SHRI A.BHTTACHARJEE. DR DATE OF HEARING : 19.09.2011 DATE OF PRONOUNCEMENT : 2 3.09.2011 ORDER SHRI K.K.GUPTA, AM : THE ASSESSEE IS IN APPEAL AGITATING THE ACTION OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IN CONFIRMING THE DISALLOWANCE OF INTEREST PAID TO PARTNERS CAPITALIZED AND ALSO THE DISALLOWANCE OF DEPRECIATION ON T HE ASSETS CAPITALIZED INSPITE OF THE BRINGING ON RECORD THAT THE SAME WERE CLAIMED AS PER THE PROVISIONS OF LAW FOR AMORTISATION OF PRE - OPERATIVE EXPENSES AND CLAIM OF INTEREST TO THE PARTNERS UNDER THE PROVISIONS OF SECTION 40(B) OF THE INCOME - TAX ACT,196 1. 2. THIS APPEAL IS BEING DISPOSED OF ON THE BASIS OF ASSESSEE - APPELLANTS COUNSEL CHOOSING TO FILE WRITTEN SUBMISSION INSTEAD OF APPEARANCE WHICH HE ALSO CHOSE TO DO BEFORE THE LEARNED CIT(A) WHO CONSIDERED THE FACTUAL ASPECTS AS BROUGHT ON RECORD BY TH E ASSESSING OFFICER IN THE ORDER U/S.143(3) FOR CONFIRMING THE DISALLOWANCE OF CAPITALIZATION OF INTEREST PAID TO PARTNERS AND CONSEQUENT DISALLOWANCE OF DEPRECIATION THEREON. 3. THE BRIEF FACTS AS HAVE BEEN BROUGHT ON RECORD AND REITERATED BY THE LEARNED COUNSEL FOR THE ASSESSEE IN ITS WRITTEN SUBMISSIONS ALONG WITH THE DOCUMENTS ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM FORMED ON 12 . 01 .20 04 AND STARTED MANUFACTURING UNIT OF OIL & SOLVENT EXTRACTION. THE COMMERCIAL ITA NO.301/CTK/2011 2 PRODUCTION OF FIRM HAS STARTED FROM 07. 12. 20 05. THE BUSINESS OF THE APPELLANT DEEMED TO BE STARTED ON THE DATE OF FORMATION OF PARTNERSHIP. THE ASSESSEE FILED RETURN FOR THE ASSESSMENT YEAR 2006 - 07 SHOWING NIL INCOME WITH UNABSORBED DEPRECIATION OF 29,14,501. THE LEARNED ASSESSING OFFICER DURING ASSESSMENT U/S 143(3) OF THE IT ACT, 1961, DISALLOW (A) THE PREOPERATIVE PARTNERS CAPITAL INTEREST, (B) CAPITALIZATION IN FIXED ASSETS, (C) DEPRECIATION AND DETERMINED UNABSORBED DEPRECIATION AND LOSS TO 18,35, 797 AND ON APPEAL LEARNED CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER , WHICH IS ILLEGAL & HYPOTHETICAL . THE ASSESSING OFFICER DISALLOW ED PARTNERS CAPITAL INTEREST PRI O R TO COMMERCIAL PRODUCTION AMOUNTING TO 19 , 76 , 536 AND DISALLOW ED CAPIT ALIZATION IN PLANT AND MACHINERY O N THE GROUND OF PARTNERS INTEREST IS NOT THE PART OF ACTUAL COST AND NO BUSINESS PRIO R TO COMMERCIAL PRODUCTION AND AS SUCH RECONSTITUTE OF THE BALANCE SHEET SUOMOTO. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUN AL. 4. THE LEARNED AR OF THE ASSESSEE STATED IN THE WRITTEN SUBMISSIONS THAT THE ISSUES INVOLVED IN THE PRESENT APPEAL ARE (1) WHETHER INTEREST CAN B E AWARDED ON PARTNERS CAPITAL BEFORE START OF COMMERCIAL PRODUCTION FOR A MANUFACTURING UNIT? , (2) WHETHE R INTEREST OF PARTNERS CAPITAL BEFORE COMMERCIAL PRODUCTION CAN BE CAPITALIZED IN PLANT AND MACHINERY? , AND (3) WHETHER DEPRECIATION CAN BE CLAIM ON SUCH CAPITALIZED FIXED ASSETS? . THE ASSESSEE SUBMITTED IN THE WRITTEN SUBMISSIONS AS UNDER : 1. INTEREST PRIOR TO COMMERCIAL PRODUCTION ON PARTNERS CAPITAL ACCOUNT CAN BE CAPITALIZED & DEPRECIATION CAN BE CLAIMED IN SUCH CAPITALIZATION : THE ASSESSEE HAS LEGALLY CAPITALIZED THE PARTNERS CAPITAL INTEREST IN FIXED ASSETS AND DULY CREDITED AND TAXED IN PARTNER S HAND AND CLAIM LEGAL DEPRECIATION AS PER PROVISION OF LAW BUT THE LEARNED AO ON HYPOTHETICAL GROUND, ILLEGALLY DISALLOW THE CAPITALIZATION AND DEPRECIATION, RECONSTITUTING BALANCE SHEET AFRESH, THE FINDING OF THE AO IS HYPOTHETICAL AND ILLEGAL AND LIABLE TO BE DROPPED. ITA NO.301/CTK/2011 3 2. ACTUAL COST : SECTION 43(1) OF THE INCOME TAX ACT: INTEREST AND ALL EXPENSES TO BRING THE ASSET IN TO EXISTENCE AND PUT THEM IN THE WORKING CONDITION BEFORE PRODUCTION. THE AFORESAID EXPENSES HAS TO BE CAPITALIZED AND A PART OF ASSET. EX PLANATION 8 TO SECTION 43(1) : MAY BE REFERRED WHICH SPEAKS OF AS TO ANY AMOUNT IS PAID OR IS PAYABLE AS INTEREST IN CONNECTION WITH THE ACQUISITION OF AN ASSET, SO MUCH OF SUCH AMOUNT AS IS RELATABLE TO ANY PERIOD AFTER SUCH ASSET IS FIRST PUT TO USE SHAL L NOT BE INCLUDED, AND SHALL BE DEEMED NEVER TO HAVE BEEN INCLUDED, IN THE ACTUAL COST OF SUCH ASSET. (A) CIT VS. TATA HYDRO ELECTRIC POWER SUPPLY CO. LTD. (1979)118 ITR 716 (BOM ): INTEREST ON SHARE CAPITAL : INTEREST CAN BE CAPITALIZED NOT ONLY WHERE IT IS PAID ON MONEY TAKEN ON LOAN FOR CONSTRUCTION OF ANY WORK OR BUILDING BUT ALSO WHERE INTEREST IS PAID ON SHARE CAPITAL WHICH HAS BEEN RAISED AS CONTEMPLATED BY SECTION 107 OF THE INDIAN COMPANIES ACT, 1913 FOR ACQUIRING AN ASSET. SUCH INTEREST WILL BE PART OF ACTUAL COST AND BE ELIGIBLE FOR DEPRECIATION. (B) CIT VS. SABARI MILLS PRIVATE LTD. (1977)109 ITR 451 (MAD) PRE - PRODUCTION EXPENSES INCURRED IN CONNECTION WITH BRINGING THE ACTUAL ASSETS INTO EXISTENCE AND PUT TO THEM IN WORKING CONDITION HAVE TO BE IN CLUDED IN THE ACTUAL COST OF ASSETS. (C) 128 ITR 402 (DELHI) 3. TREATMENT OF INTEREST ON PARTNERS CAPITAL : AS PER THE AFORESAID PROVISION THE FOLLOWING TREATMENT CAN BE MADE, (A) ACCRUED INTEREST ON PARTNERS CAPITAL. 1. BEFORE COMMERCIAL PRODUCTION. : C APITALIZED IN THE FIXED ASSET AND OTHER ENTRY CRE DITED IN PARTNERS CAPITAL A/C. F ULFILS THE MERCANTILE ACCOUNTING NORMS. 2. AFTER COMMERCIAL PRODUCTION. : CHARGE TO P/L A/C AND CREDITED IN PART A/C - DOUBLE ENTRY COMPLETED. SO IN THE PRESENT CASE TREATMENT AS ABOVE HAVE LEGAL FORCE. 4. INTEREST TO WORKIN G PARTNER: SECTION 40B(III) & (IV) SPEAKS OF ALLOWABLE OF INTEREST TO PARTNER ON CAPITAL IF AUTHORIZED IN THE PARTNERSHIP DEED AND NOT AGAINST SECTION 184 OF THE IT ACT. IN THE PRESENT CASE MANDATE OF INTERES T ON PARTNERS CAPITAL IS AUTHORIZED BY PARTNERSHIP DEED AND INCASE OF LOSS OR NIL PROFIT. INTEREST MAY BE OR ITA NO.301/CTK/2011 4 MAY NOT BE REGULATED BY THE PARTNERS THEMSELVES. IN THE PRESENT CASE PARTNERS WERE DECIDED TO PROVIDED INTEREST AT THE SPECIFIED RATE NOT ABOVE 12% , WHICH IS AS PER LAW. 5. REGAR DING VIEW AS TO NO BUSINESS PRIO R TO COMMENCEMENT IS HYPOTHETICAL AND ILLEGAL AS WHEN THE PARTNERSHIP HAS BEEN FORMED AND AS SUCH OPERATIVE FROM THE DATE OF CREATION AND DEEMED TO BE A START OF BUSINESS FROM THE DATE OF PARTN ERSHIP AS OPERATION OF BUSIN ESS COMMENCE FROM THAT DATE AND ACTIVITIES WERE FOR THE PURPOSE OF BUSINESS. - WORDS FOR THE PURPOSE OF BUSINESS ARE WIDER IN SCOPE THAN FOR THE PURPOSE OF EARNING INCOME - THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDE R IN SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING INCOME, PROFITS AND GAINS - MADHAV PRASAD JATIA VS. CIT[1979] 118 ITR 200 (SC) L.M. THAPAR V. CIT [1988] 173 ITR 577 (CAL). HENCE THE ASSESSEE HAS LEGAL MANDATE TO AWARD INTEREST ON PARTNERS CAPITAL BEFORE COMMERCIAL PRODUCTION, CAPITALIZATION IN FIXED ASSETS AND CLAIM OF DEPRECIATION ON SUCH FIXED ASSETS AND AS SUCH ORDER S MADE BY LEARNED AO AND CIT(A) ARE ILLEGAL, HYPOTHETICAL AND LIABLE TO BE DROPPED AND RETURN FIGURE OF THE ASSESSEE MAY BE ACCEPT ED. 5. THE LEARNED DR, HOWEVER, RELIED ON THE ORDER OF THE LEARNED CIT(A) BY PERUSING THE ORDER AND SUBMITTING THAT THE AO, ON DETAIL DISCUSSION CAME TO A FINDING THAT THE DEBIT OF INTEREST INCOME ON PARTNERS CAPITAL AFTER THE COMMENCEMENT OF BUSINESS I. E. 6,81,237 IS PERMISSIBLE , WHEREAS THE INCLUSION OF INTEREST INCOME CREDITED TO THE PARTNER S CAPITAL ACCOUNT PRIOR TO THE COMMENCEMENT OF BUSINESS TO THE EXTENT OF 19,76,037 IS NOT SUSTAINABLE / TENABLE IN ABSENCE OF ANY BUSINESS FOR THAT PERIOD AS PER THE PROVISIONS OF THE INCOME - TAX ACT,1961 VIS - A - VIS THE INDIAN PARTNERSHIP ACT,1932. THE AO RELIED UPON RAMNIKAL SUNDE RL AL V. CIT (1959) 36 ITR 464 (BOMBAY); CHALLA PALLI SUGARS LTD. V. CIT (1975) 98 ITR 167(SC) AND MALABAR FISHERIES CO. V. CIT (1979) 120 ITR 4 9 (SC). THE AO FURTHER FOUND THAT ADDITIONAL DEPRECIATION HAS BEEN CLAIMED IN EXCESS OF ALLOWABI LITY ON THE ITA NO.301/CTK/2011 5 PLANT & MACHINERY ACQUIRED AND INSTALLED BEFORE 31.3.2005. ADDITIONAL DEPRECIATION IS ALLOWABLE ONLY IN RESPECT OF NEW PLANT & MACHINERY ACQUIRED AN D INSTALLED AFTER 31 3 2005 . AFTER CALCULATION, THE AO DISALLOWED THE EXCESS DEPRECIATION AND ADDITIONAL DEPRECIATION AMOUNTING TO 10,60,549. THE ASSESSEE SUBMITTED THAT IT HAS LEGALLY CAPITALIZED THE PARTNERS CAPITAL, INTEREST IN FIXED ASSETS AND DULY CREDITED AND TAXED IN PARTNERS HAND AND CLAIMED DEPRECIATION AS PER THE PROVISION OF LAW. THE ASSESSEE RELIED ON SECTION 43(1) OF THE ACT AND THE DECISIONS IN THE CASE OF CIT V. TATA HYDRO ELECTRIC POWER SUPPLY CO. LTD. (1979) 118 ITR 716(BOM.) & CIT. SA BARI MILLS PRIVATE LTD. (1977) 109 ITR 451 (MAD.). IT WAS FURTHER SUBMITTED THAT IN THE PRESENT CASE MANDATE OF INTEREST ON PARTNERS CAPITAL IS A UTHORIZED BY PARTNERSHIP DEED AN D IN CASE OF LOSS OR NIL PROFIT. IN THE PRESENT CASE THE PARTNERS DECIDED TO P ROVIDE INTEREST AT THE SPECIFIED RATE NOT ABOVE 12% WHICH IS AS PER LAW. THE APPELLANT FINALLY SUBMITTED THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER IN SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING INCOME, PROFITS AND GAINS. RELIANCE WAS PLACED BY HIM ON MADHCIV PRASAD JATIA V. CIT (1979) 118 ITR 200 (SC) AND L.M.THAPARV. CIT (1988) 173 ITR 577 (CAL.). THE LEARNED DR SUBMITTED THAT THE LEARNED CIT(A) CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND ALSO THE CASE LAWS CITED BEFORE HIM AN D CONSIDERING THE EXPRESSION ACTUAL COST IN THE LIGHT OF THE DECISION IN THE CASE OF CHLLAPALLI SUGAR LTD. V. CIT (1975) 98 ITR 167 (SC), THE LEARNED CIT(A) IS PERFECTLY JUSTIFIED IN DISALLOWING (I) INTEREST PAID ON CAPITAL ACCOUNT PRIOR TO THE COMMENCEM ENT OF PRODUCTION AMOUNTING TO 129,76,536 AND (II) EXCESS DEPRECIATION AND ADDITIONAL DEPRECIATION AMOUNTING TO 10,06,549. HE, THEREFORE, PRAYED TO UPHOLD THE IMPUGNED ORDERS OF THE AUTHORITIES BELOW. ITA NO.301/CTK/2011 6 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PARTIES AND CONSIDERING THE FACT S AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO FIND FAVOUR IN THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSEE AS HAVE BEEN REPRODUCED ABOVE. IT WAS NOT THE CASE OF THE ASSESSING OFFICER TO SEPARATELY DETERMINE THE ACTUAL COST OF THE ASSETS TO BE GRANTED DEPRECIATION AFTER THE COMMENCEMENT OF BUSINESS. THE APPLICABILITY OF THE DECISION OF HONBLE APEX COURT IN THE CASE OF CHLLAPALLI SUGAR LTD. V. CIT (1975) 98 ITR 167 (SC), AND MALABAR FISHERIES CO. V. CIT (1979) 120 ITR 49 (SC) THEREFORE BECOME CASE LAWS NOT TO BE CONSIDERED IN A COMBINATION INSOFAR AS THE PROVISIONS OF LAW CONSIDERS THE APPLICABILITY OF CITED CASE LAWS ON THE FACTS WHICH HAVE TO BE CONSIDERED IN ITS ENTIRETY. THE ASSESSEE HAD RETURNED INCOME AND THEREFORE WAS ELIGIBLE FOR THE P URPOSE OF GRANTING INTEREST ON CAPITAL TO THE PARTNERS IN ACCORDANCE WITH THE PROVISIONS OF SECTION 40(B). THE ASSESSEE CHOSE TO BIFURCATE THE INTEREST PAID TO THE PARTNER AS PRIOR TO COMMENCEMENT AND AFTER COMMENCE OF BUSINESS WHICH THE LEARNED ASSESSING OFFICER READILY AGREED. THIS IN TURN MADE THE ASSESSING OFFICER TO COMPUTE THE EXCESS DEPRECIATION AS PER PAGE 4 PARAGRAPH 2 OF HIS ORDER WHEN HE NOTED THAT THE AMORTISATION OF THE PREOPERATIVE EXPENSES UNDER THE PROVISIONS OF SECTION 35D WERE CLAIMED AS A DDITIONAL DEPRECIATION WHICH EXCESS WAS DISALLOWED. THIS CLEARLY INDICATES THAT THE ASSESSING OFFICER MISINTERPRETED THE FACTS BY HOLDING THE APPLICABILITY OF THE CASE LAWS CITED BY HIM IN HIS ORDER. THE LEARNED CIT(A) THEREFORE SUPPLEMENTED BY ONLY ACCEPT ING THE VERSION THAT ACTUAL COST OF THE ASSETS BEING THE INTEREST PAID ON BORROWINGS CAN BE ALLOWED FOR DEPRECIATION THEREFORE MISDIRECTED HIMSELF TO HOLD THAT THE CAPITAL CONTRIBUTED BY THE PARTNERS WAS THE AMOUNT THAT HAD GONE TO ACQUIRE THE ASSETS. THE ASSESSEE BEING A PARTNERSHIP FIRM, THE INTEREST PAID TO THE PARTNERS WAS ON THE CAPITAL INVESTED IN THE BUSINESS ITA NO.301/CTK/2011 7 THEREFORE WAS MISINTERPRETED BY THE LEARNED CIT(A) AS AN ACCOUNTING MISNOMER. THE CAPITAL IS OTHERWISE A LOAN TO THE BUSINESS WHICH HE READILY AGREED UNDER THE PROVISION THAT THE PARTNERSHIP FIRM DOES NOT HAVE A LEGAL ENTITY AND IS TO BE HELD AS BELONGING TO THE PARTNERS THEREFORE CANNOT BE SEPARATELY CONSIDERED FOR THE PURPOSE OF GRANTING INTEREST. THE CHARGE OF INTEREST ON ASSETS THEREFORE WAS RIGHTLY MADE IN ACCORDANCE TO THE PRINCIPLES OF ACCOUNTING WHICH THE LEARNED CIT(A) OUGHT TO CONSIDER IN THE LIGHT OF THE FACTUAL POSITION FOR DISALLOWANCE OF DEPRECIATION AS COMPUTED BY THE ASSESSING OFFICER IN HIS ORDER PAGE 4. WE RESTORE THE ISSU E TO THE FILE OF THE LEARNED ASSESSING OFFICER FOR CONSIDERATION AFRESH IN THE LIGHT OF THE FINDING THAT THE BOOKS OF ACCOUNT CLEARLY INDICATE THAT THE ASSETS THAT HAD NOT BEEN PUT TO USE ONLY CAN BE CONSIDERED FOR DEPRECIATION TILL SUCH TIME THE CAPITALIZ ATION THEREOF WAS PROPER WHICH INTEREST CLAIMED WAS RIGHTLY CAPITALIZED TO THE FIRM WHEN THE CAPITAL OF THE PARTNERS ENHANCED TO THAT EXTENT. NEEDLESS TO SAY, THE ASSESSEE IS ALSO DIRECTED TO PRESENT IN PERSON TO ASSIST THE ASSESSING OFFICER TO ESTABLISH A S TO HOW WHEN THE L AW PROVIDES FOR CAPITALIZATION OF INTEREST PRIOR TO COMMENCEMENT OF BUSINESS CAN BE DISALLOWED IN THE HANDS OF THE FIRM WHEN THE CAPITAL EMPLOYED WAS BY THE PARTNERS. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICA L PURPOSES. SD/ - SD/ - (K.S.S.PRASAD RAO) JUDICIAL MEMBER (K.K.GUPTA) ACCOUNTANT MEMBER DATE: 23 RD SEPTEMBER, 2011 H.K.PADHEE, SENIOR PRIVATE SECRETARY. ITA NO.301/CTK/2011 8 COPY OF THE ORDER FORWARDED TO : 1. TH E APPELLANT: M/S.GAYATRI AGRO OIL & FOOD PRODUCTS, AT/P.O.KESINGA, DIST.KALAHANDI (ORISSA) PIN: 766 012 2. THE RESPONDENT: INCOME - TAX OFFICER, BHAWANIPATANA 3. THE CIT, 4. THE CIT(A), 5. THE DR, CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY, BY ORDER, SENIOR PRIVATE SECRETARY.