Gujarat State Fertilisers & Chemicals Ltd., V. THE ACIT (OSD),

ITA 3228/AHD/2003

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9228 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 13-07-2009
• Assessment Year: 1999-2000
• Appeal Filed On: 07-08-2003
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ADITYA VIKRAM
• Assessee Lawyers: J P SHAH
• Keywords: Capital asset; Business income; Depreciation; Bad and doubtful debts; Revenue expenditure; Capital expenditure; Set aside
• Section: 43B; 37(1); 143(1); 251; 143(2); 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL: AHMEDABAD BEN CHES D BENCH: AHMEDABAD (BEFORE S/SHRI H. L. KARWA, JM AND A N PAHUJA, AM) ITA NO. 3228/AHD/2203 A Y: 1999-2000 GUJARAT STATE FERTILIZERS & CHEMICALS LTD., P.O. FERTILIZER NAGAR 391 750, DIST. VADODARA [PAN: AAACG 7996 C] VS ACIT (OSD)CIRCLE -1, BARODA APPELLANT RESPONDENT IN ITA NO.3358/AHD/2003 AY: 1999-2000 DCIT CIRCLE -1, BARODA VS GUJARAT STATE FERTILIZERS & CHEMICALS LTD., P.O. FERTILIZER NAGAR 391 750, DIST. VADODARA APPELLANT RESPONDENT ASSESSEE BY SHRI JP SHAH, AR REVENUE BY SHRI ADITYA VIKRAM, DR ORDER A N PAHUJA: THESE CROSS APPEALS BY THE REVENUE AND THE ASSESSEE AGAINST AN ORDER DATED 6-6-2003 OF THE LEA RNED CIT(A)-I, BARODA, RAISE THE FOLLOWING GROUNDS: ITA NO. 3228/AHD/2003[ASSESSEE] 1. THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) IS ERRONEOUS ON FACTS AND CONTRARY TO THE PROVISIONS OF LAW AND THEREFORE REQUIRES TO BE SUITABLE MODIFIED. IT IS SUBMITTED THAT IT BE SO DONE NOW. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING O FFICER UPTO 1% OF THE TOTAL EXPENDITURE ON REPAIRS AND MAINTENA NCE CONSIDERING THE SAME AS CAPITAL EXPENDITURE. YOUR APPELLANT SUB MITS THAT MERELY BECAUSE THE EXPENDITURE ON REPLACEMENT OF CE RTAIN ITEMS WAS SUBSTANTIAL, THE SAME CANNOT BE CONSIDERED AS C APITAL ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 2 EXPENDITURE. YOUR APPELLANT SUBMITS THAT IN THE FAC TS AND CIRCUMSTANCES OF THE CASE, THE ENTIRE EXPENDITURE ON REPAIRS AND MAINTENANCE IS OF REVENUE NATURE AND THEREFORE IT I S FULLY ALLOWABLE. IT IS SUBMITTED THAT IT BE SO HELD NOW. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT ENTERTAINING THE ADDITIONAL GROUND OF APPEAL FILED BY YOUR APPELLANT IN RESPECT OF THE CLAIM OF DEPRECIATION ON THE PLAN T AND MACHINERY AND OTHER ASSETS USED FOR THE TRIAL RUN PRODUCTION IN AMMONIA PLANT-IV. YOUR APPELLANT SUBMITS THAT IN THE FACTS AND CIRCUMSTANCES OF ITS CASE, THE LEARNED CIT(A) OUGHT TO HAVE ENTER TAINED THE ADDITIONAL GROUND OF APPEAL FILED BY YOUR APPELLANT AND ALLOWED THE CLAIM OF DEPRECIATION AS IT HAS FULFILLED THE CONDI TIONS LAID DOWN U/S. 32 OF THE INCOME-TAX ACT, 1961. YOUR APPELLANT SUBM ITS THAT ADDITIONAL GROUND OF APPEAL BE ADMITTED AND DEPRECI ATION AS CLAIMED BE ALLOWED NOW. 4. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN NOT ENTERTAINING THE ADDITIONAL GROUNDS OF APPEAL FILED BY YOUR APPELLANT IN RESPECT OF CLAIM OF DEDUCTION FOR THE SUBSIDY RE CEIVED RS.23.37 CRORES AND RS.5.29 CRORES CREDITED TO PROFIT AND LO SS A/C. BUT EVENTUALLY WAS REPAYABLE AND REPAID TO GOVERNMENT I N RESPECTIVE YEARS ASST. YEAR 2001-02 AND ASSTT. YEAR 2004-05 DUE TO REDUCTION IN SUBSIDY ON ACCOUNT OF REVISION IN RETE NTION PRICE. YOUR APPELLANT SUBMITS THAT IN THE FACTS AND CIRCUMSTANC ES, THE LEARNED CIT(A) OUGHT TO HAVE ENTERTAINED THE ADDITIONAL GRO UND OF APPEAL AND ALLOWED THE CLAIM FOR DEDUCTION OF THE AMOUNT O F SUBSIDY RECOVERED BY THE GOVERNMENT. YOUR APPELLANT SUBMITS THAT ADDITIONAL GROUND OF APPEAL BE ADMITTED AND DEDUCTI ON FOR THE SUBSIDY RECOVERED BY THE GOVERNMENT BE GRANTED NOW BECAUSE SUCH SUBSIDY RECEIPT WAS NOT THE REAL INCOME OF THE ASSESSEE. 5. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN CONFIRMING THE DISALLOWANCE OF PROVISION FOR DOUBTF UL DEBTS. YOUR APPELLANT SUBMITS THAT THE PROVISIONS HAVE BEEN MAD E AS THE AMOUNTS DUE FROM VARIOUS PARTIES NOT RECOVERABLE. I T IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCES, THE PROVISION MADE FOR DOUBTFUL DEBTS OUGHT TO HAVE BEEN ALLOWED. YOUR APPELLANT SU BMITS THAT IT BE SO ALLOWED NOW. 6. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N CONFIRMING THE DISALLOWANCE OF AN AMOUNT OF RS.3,05,67,622/- BEING EXPENSES INCURRED ON ABANDONED PROJECT LPG PROJECT WRITTEN OFF. YOUR APPELLANT SUBMITS THAT THE EXPENDITURE HAS BEEN INC URRED IN CONNECTION WITH THE EXPANSION OF BUSINESS/SAME BUSI NESS. YOUR APPELLANT SUBMITS THAT IN THE FACTS AND CIRCUMSTANC ES, AS THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 3 EXPENDITURE HAS BEEN INCURRED FOR THE PURPOSE OF EX PANSION OF BUSINESS/SAME BUSINESS, THE SAME IS FULLY ALLOWABLE AS DEDUCTION. IT IS SUBMITTED THAT IT BE SO HELD NOW. 7. THE COMMISSIONER OF INCOME-TAX (APPEALS) ERRED I N CONFIRMING THE DISALLOWANCE OF DEPRECIATION IN RESPECT OF NYLON- 6 PLANT ON THE AMOUNT RECEIVED AND TREATED TOWARDS THE REPAIRS. YO UR APPELLANT SUBMITS THAT IT HAS RECEIVED, INTER ALIA, RS.724.98 LACS IN CONNECTION WITH ASSETS DAMAGED ON ACCOUNT OF FIRE I N NYLON-6 PLANT. YOUR APPELLANT CONSIDERED RS.362.49 LACS TOW ARDS REINSTATEMENT OF ASSETS DAMAGED AND BALANCE OF RS. 362.49 LACS TOWARDS REPAIRING THE ASSETS. YOUR APPELLANT SUBMIT S THAT IN THE FACTS AND CIRCUMSTANCES, THE ENTIRE AMOUNT OF RS.72 4.98 LACS RECEIVED FROM INSURANCE COMPANY TOWARDS THE ASSETS DAMAGED CANNOT BE DEDUCTED FROM THE W. D. V. OF THE PLANT & MACHINERY AS PART OF THE AMOUNT HAS BEEN REIMBURSED BY THE INSUR ANCE COMPANY FOR REPAIRING THE PLANT & MACHINERY DAMAGED . IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE OF DEPRECIATION OF RS.90,62,500/- MADE BY THE ASSESSING OFFICER AND CO NFIRMED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) IS REQUIRE D TO BE DELETED. IT IS SUBMITTED THAT IT BE SO DONE NOW. YOUR APPELLANT PRAYS FOR LEAVE TO ADD, ALTER AND/OR AMEND ALL OR ANY OF THE GROUNDS BEFORE THE FINAL HEARING OF APPEAL. ITA NO. 3358/AHD/2003[ REVENUE ] 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A)-I, BARODA, HAS ERRED IN DELETING RS.10.99,25,676/- BEING PRE-COMMENCEMENT-STAGE IN COME AS NOT AN ASSESSABLE INCOME UNDER THE HEAD INCOME F ROM OTHER SOURCES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN DELETING THE ADDITI ON OF RS.13.96 CRORES BEING EXCISE DUTY COMPONENT ATTRIBU TABLE TO FINISHED GOODS WHILE COMPUTING VALUATION OF CLOSING STOCK. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER P ASSED BY THE ASSESSING OFFICER. 4. IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE C IT(A) BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 4 2 ADVERTING FIRST TO GROUND NO.1 IN THE APP EAL OF THE REVENUE AND GROUND NO. 3 IN THE APPEAL OF THE ASSESSEE, FACTS, IN BRIE F, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS.40,48,05,624/- IN TER MS OF PROVISIONS OF SECTION 115J OF THE INCOME-TAX ACT,1961 (HEREINAFTER REFERR ED TO AS THE ACT) FILED ON 31 ST DECEMBER, 1999 BY THE ASSESSEE, ENGAGED IN THE BUSI NESS OF MANUFACTURING OF FERTILIZERS AND CHEMICALS, AFTER BEING PROCESSED ON 4-12-2000 U/S 143(1) OF THE ACT, WAS SELECTED FOR SCRUTINY WITH THE ISSUE OF NO TICE U/S 143(2) OF THE ACT ON 18- 12-2000. DURING THE COURSE OF ASSESSMENT PROCEEDING S, THE ASSESSING OFFICER[AO IN SHORT] NOTICED ON PERUSAL OF SCHEDULE - 20 OF THE ANNUAL REPORT OF THE COMPANY THAT THE ASSESSEE DECAPITALIZED INCOME OF R S.4000.36 LACS OUT OF TRIAL RUN PRODUCTION, BY REDUCING THE SAME FROM THE PRE-O PERATIVE EXPENSES CAPITALIZED BY IT. THE AMMONIA GAS GENERATED FROM T HE TRIAL PRODUCTION WAS UTILIZED IN PRODUCTION OF FERTILIZERS WHILE INPUTS UTILIZED LIKE POWER, NITROGEN, D. M. WATER, STEAM AND POWER ETC. WORTH RS.2901.11 LACS G ENERATED BY OTHER UNITS, WERE CONSUMED IN PRODUCTION OF AMMONIA. ACCORDINGLY TO THE ASSESSEE, THE SAID AMMONIA-IV PLANT WAS NOT COMMISSIONED DURING THE PE RIOD RELEVANT TO THE YEAR UNDER CONSIDERATION. IN THE BOOKS OF ACCOUNTS OF TH E ASSESSEE COMPANY, VALUE OF INPUTS OF RS. 2901.11 LACS WAS SHOWN AS OTHER INCOM E UNDER THE HEAD CAPTIVE CONSUMPTION OF PROJECT UNDER EXECUTION WHILE COST OF INPUTS PRODUCED BY OTHER UNITS AND AMMONIA SUPPLIED BY AMMONIA-IV PLANT TO O THER UNITS WAS DEBITED AS EXPENDITURE IN THE RESPECTIVE UNITS. IT WAS CLAIME D BY THE ASSESSEE THAT ACCORDING TO THE ACCEPTED ACCOUNTING PRACTICE, THE INCOME GENERATED DURING THE PRE-PRODUCTION PERIOD WILL HAVE TO BE CAPITALIZED A ND THEREFORE, INCOME GENERATED OUT OF TRIAL RUN PRODUCTION WOULD GO TO REDUCE THE PRE-PRODUCTION EXPENSES, WHICH WOULD ULTIMATELY BE CAPITALIZED. HOWEVER, THE AO DI D NOT ACCEPT THE METHOD FOLLOWED BY THE ASSESSEE AND TREATED THE AMOUNT OF RS.4000.36 LACS AS REVENUE RECEIPT AND AFTER REDUCING THE COST OF INPUTS TO TH E EXTENT OF RS.2901.11 LACS, ASSESSED THE REMAINING AMOUNT OF RS.10,99,25,676/- UNDER THE HEAD INCOME FROM OTHER SOURCES. SINCE THE AMMONIA PLANT DID NO T COMMENCE PRODUCTION AND WAS IN TRIAL RUN FOR MORE THAN 2 YEARS, THE AO ALSO DISALLOWED THE DEPRECIATION CLAIMED BY THE ASSESSEE. ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 5 3. ON APPEAL, THE ASSESSEE CONTENDED THAT THE COMPA NY HAD ALREADY REDUCED THE COST OF PRODUCTION OF AMMONIA FROM PROJ ECT COST AND THEREFORE, AMMONIA PRODUCED HAD ALREADY BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNTS. WHILE EXPLAINING THAT THE COST OF INPUTS OF RS.2911 .01 LACS WAS ALREADY TREATED AS OTHER INCOME OF THE COMPANY AND CREDITED TO THE PROFIT & LOSS ACCOUNT AND THE AMMONIA OF RS. 4000.36 LACS PRODUCED IN THE AMMONI A-IV PLANT WAS REDUCED FROM THE PROJECT COST IN ACCORDANCE WITH GUIDELINES ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE ASSESSEE CONTEN DED THAT THE FERTILIZERS PRODUCED WERE SHOWN AS SALES AND CREDITED TO PROFIT & LOSS ACCOUNT. THEREFORE, THERE WAS NO JUSTIFICATION IN INCLUDING THE DIFFERE NCE OF ABOUT RS. 11 CRORES AGAIN AS INCOME. ALTERNATIVELY, IT WAS CONTENDED THAT IF THE AMOUNT IS TAXED AS INCOME, THE EXPENSES DIRECTLY RELATED TO PRODUCING SUCH INC OME SHOULD BE ALLOWED AND NOT ONLY THE CAPTIVE CONSUMED ITEMS. SIMULTANEOUSL Y, AN ADDITIONAL GROUND OF APPEAL WAS ALSO FILED, URGING THAT DEPRECIATION ON THE ENTIRE AMOUNT SHOULD BE ALLOWED IN VIEW OF THE DECISION OF THE HONBLE GUJA RAT HIGH COURT IN THE CASE OF ACIT VS. ASHIMA SYNTEX LTD. [2001] 251 ITR 133 (GUJ ). THE ASSESSEE PLEADED THAT THE ALLOWANCE BE ALSO MADE OF THE COST OF PROD UCTION OF RS.86.67 CRORES BEING THE FIRST FOUR ITEMS OF SCHEDULE 20 OF PAGE 4 2 OF THE ANNUAL ACCOUNTS AND THUS, A COMPUTED LOSS OF RS.46.67 CRORES WOULD RISE . 4. IN THE LIGHT OF THESE SUBMISSIONS, THE LEAR NED CIT(A) CONCLUDED AS UNDER: 2.5 TO FIRST VERIFY WHAT WOULD BE THE NATURE OF T RIAL RUN PRODUCTION AND WHETHER IT IS INDEED INCOME FROM OTHER SOURCES , THE DIRECTORS REPORT WAS SEEN IN WHICH THE FOLLOWING PARA HAS BEEN GIVEN IN RESPECT OF AMMONIA IV PLANT. THE 1350 MTPD AMMONIA IV PLANT IS A MODULAR CONS TRUCTION HAVING VARIOUS SECTIONS LIKE REFORMER, AIR SEPARATI ON, HYDROGEN, CO2, REMOCAL AND OFF-SITES. AFTER ENSURING THAT ALL THESE SECTIONS ARE INDEPENDENTLY PERFORMING SATISFACTORILY AND THA T THERE ARE NO PROCESS LIMITATIONS, TRIAL PRODUCTION COMMENCED FOR M THE BEGINNING OF JANUARY, 1999 AND THE PLANT HAS BEEN RUNNING AT VARIOUS INCREMENTAL LOADS. DURING 100% PLANT LOAD SOME PROB LEMS WERE OBSERVED WHICH ARE BEING ANALYSED IN CONSULTATION W ITH PROCESS ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 6 LICENSORS AND EQUIPMENT MANUFACTURERS. AFTER COMPLE TING THESE CONSULTATIONS AND OBTAINING THEIR RECOMMENDATIONS, IT IS EXPECTED THAT THE GUARANTEE TEST RUN OF THE PLANT WOULD BE U NDERTAKEN AND THEN THE COMMERCIAL PRODUCTION WOULD COMMENCE. 2.6 FROM THE ABOVE IT WOULD BECOME CLEAR THAT ALL THE VARIOUS SECTIONS OF THE PLANT ARE RUNNING SATISFACTORILY AN D IT WAS ONLY THAT AT THE FINAL STAGE THE GUARANTEED OUTPUT WAS WANTING. HENC E PENDING THE FINAL CLEARANCE OF LIMITATIONS, THE PLANT IS ACTUALLY FUN CTIONING FULLY AND COMMERCIAL PRODUCTION WOULD BE STATED TO COMMENCE O NLY WHEN THE FINAL GUARANTEE TEST RUN IS COMPLETED. THEREFORE, THE PLA NT IS FULLY FUNCTIONAL, THOUGH NOT AT AN OPTIMAL LEVEL. THEREFORE, IT CAN W ELL BE SAID THAT INCOME IS BEING GENERATED AND MERELY BECAUSE CAPTIVE CONSUMPT ION IS SEEN ON BOTH SIDES OF THE ACCOUNT OF THIS PLANT, IT IS BEING TRE ATED AS PRE- COMMENCEMENT. I AM IN AGREEMENT WITH THE ASSESSING OFFICER ON THE GROUND THAT INCOME CAN DEFINITELY ARISE IF THE PLAN T IS PRODUCING INCOME BUT HAS NOT GONE INTO COMMERCIAL PRODUCTION. HOWEVER TH IS CLEARLY INVITES THE COROLLARY OF CALLING FOR DEDUCTION OF ALL EXPENSES DIRECTLY RELATED TO PRODUCING SUCH INCOME. THE SCHEDULE 20 IS REPRODUCE D HERE FOR SIMPLICITY: A (A) (B) (A) 1 2 3 4 (B) 1 2 3 4 5 6 7 8 9 INCOME GENERATED : DURING THE TRIAL RUN PRODUCTION AND CONSUMED CAPTIVELY TOTAL INCOME EXPENSES: DIRECT EXPENSES INCURRED: RAW MATERIAL CONSUMER ELECTRICITY & FUEL CAPTIVE PRODUCT CONSUMED WATER INDIRECT EXPENSES : TECHNICAL FEES & SUPERVISION CHARGES INSURANCE PERSONNEL EXPENSES RESEARCH & DEVELOPMENTS CESS PRINTING, STATINOERY,POST, TELE ETC. REALIGNMENT OF FOREIGN CURRENCIES TRAVELLING AND CONVEYANCE LEGAL, PROF. & CONSULTANCY CHARGES INCOME TAX ON FOREIGN PAYMENTS 4,000.36 5261.75 491.49 2901.11 11.94 806.67 484.30 274.09 49.71 18.04 4417.71 15.55 73.80 99.42 4000.36 8666.29 ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 7 10 11 12 (C) (B) ( C) SHARE/DEBENTURE ISSUE EXPENSES MISCELLANEOUS EXPENSES DEPRECIATION DEPRECIATION ON PLANT AND MACHINERY USED DURING THE TRIAL RUN PRODUCTION (AS PER WORKING) TOTAL EXPENSES (A+B+C) NET DIFFERENCE (A-B) 2.79 60.50 0.37 6302.95 21084.39 36053.63 - 32053.27 THE ABOVE CHART CLEARLY SHOWS THAT OTHER RAW MATERI AL CONSUMED ELECTRICITY, FUEL AND WATER WOULD ALSO HAV E TO BE CONSIDERED AS EXPENSES AGAINST THE INCOME GENERATED AND NOT ONLY THE CAPTIVE PRODUCTS CONSUMED. SUCH DIRECT EXPENDITURE WOULD TOTAL 8666. 29 LACS. OVER AND ABOVE THIS DEPRECIATION ON PLANT AND MACHINERY, IF CONSIDERED WOULD BE 21084.39 LACS. 2.7 DURING DISCUSSIONS WITH THE APPELLANTS REPRES ENTATIVE AND THE DEPARTMENTAL OFFICERS PRESENT THE APPELLANT STA TED THAT IT IS WILLING TO ACCEPT TAXABILITY OF RS.4000.36 CRORES PROVIDED ITS OTHER CLAIMS AS ALSO CLAIM OF DEPRECIATION IS ALLOWED. EVEN OTHERWISE TH E CLAIM OF DEPRECIATION HAS TO BE SEPARATELY ENTERTAINED AND HAS BEEN RAISE D AS A SEPARATE GROUND OF APPEAL. THE DEPARTMENTAL OFFICERS COULD N OT CONTROVERT THE CLAIM OF THE APPELLANT FOR OTHER DIRECT EXPENSES AND RELI ED ON THE BASIC ASSESSMENT ORDER. 2.8 ON GOING THROUGH THE SUBMISSIONS ON BOTH SIDES AND LOOKING INTO THE FACTS OF THE CASE, I FIND THAT THERE IS NO CONT ROVERSY REGARDING THE FACT THAT THE PLANT IS STILL UNDER TRIAL PRODUCTION. IT IS NEITHER THE CASE OF THE DEPARTMENT, NOR THE CASE OF THE ASSESSEE THAT COMME RCIAL PRODUCTION HAS BEEN UNDERTAKEN. THEREFORE, THE CLAIMS HAVE TO BE C ONSIDERED HOLDING THE AMMONIA PLANT TO BE AT THE PRECOMMENCEMENT STAGE. T HE ASSESSING OFFICER HAS APPARENTLY GONE BY THE SUPREME COURTS DECISION IN THE CASE OF TUTICORIN ALKALIES TO TAX ANY INCOME ARISING DUR ING PRE-COMMENCEMENT PERIOD AND THE APPELLANT HAS STATED THAT IF IT IS T AXED THEN ALL DIRECT EXPENSES RELATING TO SUCH INCOME WOULD ALSO BE ALLO WABLE WHICH WOULD RESULT IN A LOSS OF OVER RS.40 CRORES. 2.9 IN MY VIEW IT IS NOT THE DECISION OF TUTICORIN ALKALIES WHICH IS APPLICABLE TO THE FACTS OF THIS CASE. THE NATURE OF INCOME CONSIDERED IS NOT IN THE NATURE OF INCOME FROM OTHER SOURCES AS ENV ISAGED BY THE SUPREME COURT. ON THE CONTRARY IN MY VIEW THE DECISION OF T HE SUPREME COURT IN THE CASE OF BOKARO STEEL 236 ITR 315, BETTER FITS T HE FACTS OF THE CASE. THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 8 COURT HAD CLEARLY HELD THAT IF THE ASSESSEE RECEIVE S ANY AMOUNT WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY SUCH RECEIPTS WOULD GO TO REDUCE THE COSTS OF ASSET S AND WOULD BE RECEIPT OF A CAPITAL NATURE WHICH CANNOT BE TAXED. IN THE P RESENT INSTANCE, THE PLANT IS UNDER TESTING FOR ITS EFFICIENCY PRIOR TO COMMENCEMENT AND THE INPUTS AND OUTPUTS HAVE ALREADY BEEN NETTED BY GSFC AND THE NET RESULT HAS BEEN CAPITALIZED. IN MY VIEW THE METHOD FOLLOWE D BY THE APPELLANT AS REFLECTED IN ITS BOOKS OF ACCOUNT IS THE MOST CORRE CT AND VALID METHOD OF TREATING PRE COMMENCEMENT PRODUCTION. ANY ATTEMPT T O TAX THE PRODUCTION WHICH IS ALREADY ACCOUNTED FOR AS INPUT OF THE FERT ILIZER PLANT WOULD LEAD TO A DISTORTED PICTURE OF THE ACCOUNTS OF M/S. GSFC. S IMILARLY INPUTS WHICH ARE ALREADY SHOWN AS OTHER INCOME BY VARIOUS PLAN TS WHOSE PRODUCTS ARE CAPTIVELY USED IN THE AMMONIA IV PLANT, IF NOT ALLOWED TO BE SET OFF AGAINST THE PRODUCTION OF THE PLANT WOULD ALSO LEAD TO A DISTORTED PICTURE OF THE ACCOUNTS OF M/S. GSFC. ABOVE ALL THE METHOD FOL LOWED IS AS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANT S OF INDIA AND I SEE NO REASON TO DISTURB THE BASIC PRECOMMENCEMENT PRODUCT ION PICTURE BY ATTEMPTING TO TAX THE PRODUCTION AS NOTIONAL INCOME AND SET IT OFF AGAINST VARIOUS EXPENSES. THIS EXERCISE HAS ALREADY BEEN DO NE IN THE ACCOUNTS OF M/S. GSFC AS THE INPUTS HAVE ALREADY BEEN SHOWN AS INCOME AND THE OUTPUT IS SHOWN AS PURCHASES/ EXPENDITURE BY OTHER UNITS OF M/S. GSFC. HENCE THE ACCOUNTING METHOD IS ABSOLUTELY CORRECT A ND NO BENEFIT IS GAINED FROM DISTRIBUTING THIS PICTURE. HENCE, I HOL D THAT THE ADDITION IS NOT VALID, RELYING ON THE SUPREME COURT DECISION IN THE CASE OF BOKARO STEEL LTD. WHERE THE NETTING PRINCIPLE HAS BEEN FOLLOWED. IN VIEW OF THE ABOVE DISCUSSION WHILE THE ADDITION MADE IN THE ASSESSMEN T ORDER IS DELETED, THE ASSESSEES CLAIM FOR COMPUTATION OF LOSS ARISING OU T OF THE ADDITION IS NEGATIVED. HENCE, THE ADDITIONAL GROUND OF APPEAL O N THIS POINT IS REJECTED. 2.10 THE SECOND POINT TAKEN BY THE APPELLANT IS TH E APPLICABILITY OF THE GUJARAT HIGH COURTS DECISION IN THE CASE OF AS HIMA SYNTEX LTD. IN THIS CASE THE COURT HELD THAT EVEN TRIAL RUN OF MACHINER Y ENTITLES THE ASSESSEE TO DEPRECIATION. THEREFORE, THE APPELLANT CLAIMS FA R THE PLANT HAS CLEARLY BEEN UNDER PRODUCTION FOR TRIAL RUN THROUGHOUT THE YEAR AND THE PLANT AND MACHINERY HAS BEEN USED FOR THE PURPOSE OF BUSINESS AND THEREFORE, DEPRECIATION TOTALING RS.21084.39 LACS SHOULD BE AL LOWED. THE DEPARTMENTAL OFFICERS HAVE VEHEMENTLY PROTESTED AGA INST THIS CLAIM STATING THAT DEPRECATION IS ALLOWABLE ONLY WHEN THE BUSINES S HAS COMMENCED AND AS THE BUSINESS HAS NOT YET COMMENCED NO CLAIM OF D EPRECIATION IS ALLOWABLE. THEY HAVE POINTED OUT FROM THE DECISION OF THE GUJARAT HIGH COURT ITSELF THAT THERE WOULD BE A DIFFERENCE BETWE EN CASES WHERE A LONG TIME IS TAKEN TO INSTALL THE MACHINES AND OBTAIN GO OD RESULTS. IN SUCH CASES COMMERCIAL PRODUCTION CANNOT START AND THIS I S THE PICTURE AVAILABLE IN THE CASE OF M/S. GSFC. ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 9 2.11 I AM IN AGREEMENT WITH THE DEPARTMENTAL VIEW ON THE SUBJECT. IN THE ABOVE MENTIONED CASE OF ASHIMA SYNTEX LTD. T HE ASSESSEE WAS MANUFACTURING FABRICS AND IMPORTED JET LOOMS FROM J APAN DURING THE ACCOUNTING YEAR AND TRIAL PRODUCTION COMMENCED ON 2 3 MARCH 1993. THE ASSESSING OFFICER HAD HELD THAT THE BUSINESS COULD NOT BE SAID TO HAVE BEEN SET UP. BUT THE COURT HELD THAT THE QUESTION W AS NOT ONE OF SETTING UP A NEW UNIT BUT OF EXPANSION OF THE UNIT. 2.68 LAKH MTRS OF GREY CLOTH WAS MANUFACTURED. LAW DOES NOT REQUIRE THAT THERE MUST BE OPTIMUM PRODUCTION FOR GETTING THE BENEFIT, ONLY THERE MUST BE USE OF PLANT AND MACHINERY OF THE PURPOSE OF BUSINESS. THE ASSESSEE WAS, THEREFORE, ENTITLED FOR DEPRECIATION. 2.12 THE PRESENT CASE IS HOWEVER VERY DIFFERENT. T HE AMMONIA PLANT IS AN ENTIRELY NEW UNIT AND IT IS NOT A QUEST ION OF EXPANSION OF AN OLD UNIT. IT IS NOT ONLY SOME PLANT AND MACHINERY ADDED TO AN OLD UNIT WHICH IS UNDER CONSIDERATION, BUT AN ENTIRE PLANT WHICH IS S TILL SUBJECT TO VARIOUS CORRECTNESS BEFORE IT CAN GO INTO COMMERCIAL PRODUC TION. AS ALREADY SEEN FROM THE DISCUSSION IN THE PREVIOUS PARAS AND FROM THE DIRECTORS REPORT ON THE SUBJECT, THAT THE DESIRED RESULTS ARE NOT YET A VAILABLE AND WERE ALSO APPARENTLY NOT AVAILABLE IN THE SUCCEEDING ASSESSME NT YEAR. THEREFORE, THIS IS CLEARLY A CASE PERTAINING TO PRECOMMENCEMEN T PERIOD FOR WHICH DEPRECIATION WOULD NOT BE AVAILABLE. IN FACT THIS P OINT HAS BEEN CLARIFIED BY THE HIGH COURT ITSELF ON PAGE 147 OF THE ABOVE MENT IONED DECISION. THE OBSERVATION OF THE COURT HAS FOLLOWS: IT IS REQUIRED TO BE NOTED THAT WHEN AN ENTREPRENE UR UNDERTAKES TO INVEST A HUGE AMOUNT FOR THE MANUFACTURE OF THE PRO DUCT, HE HAS TO PLAN IT PROPERLY. INSTALLATION OF MACHINERY OR PLAN T AND MACHINERY IN THE BUILDING ITSELF IS NOT SUFFICIENT TO ATTRACT TH E PROVISIONS CONTAINED IN SECTION 32 OF THE ACT. THERE MUST BE USE OF PLAN T AND MACHINERY FOR THE PURPOSE OF BUSINESS AS CONTEMPLATED IN SECT ION 32 OF THE ACT. THERE IS THUS A THIN LINE BETWEEN THE TRIAL RU N AND ACTUAL PRODUCTION, OR MANY A TIME, THE WORD USED IS COMME RCIAL PRODUCTION. IF THE MACHINES ARE INSTALLED PROPERLY AND IT GIVES GOOD RESULT, THEN ONE NEED NOT WAIT FOR ANY RECTIFICATIO N IN THE SYSTEM. THERE MAY BE SOME CASES WHEREIN AFTER COMMENCEMENT OF THE PRODUCTION, THE MACHINE MAY NOT GIVE PROPER RESULTS -MAY BE ON ACCOUNT OF FAILURE OF CERTAIN PARTS, MAY BE ON ACCO UNT OF REQUIREMENT OF CERTAIN ADDITIONAL MACHINERY, ETC. I N SUCH A CASE, THE PRODUCTION OBTAINED AT THE INITIAL STAGE WOULD BE CONSIDERED AS TRIAL PRODUCTION. AS CAN BE SEEN FROM THE ABOVE, THE PRESENT CASE IS DIFFERENT TO THAT OF ASHIMA SYNTEX WHERE THE MACHINES INSTALL ED WORKED IMMEDIATELY AND STRICTLY THERE WAS NO TRIAL RUN AS SUCH. IN THE CASE OF M/S. GSFC THE TRIAL RUN HAS CONTINUED FOR OVER TWO YEARS AND THEREFORE, THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 10 APPELLANT CANNOT CLAIM THE BENEFIT OF DEPRECIATION DURING THIS PERIOD. THE RELIANCE ON THE DECISION OF THE ASHIMA SYNTEX IS MI SPLACED AND THE CLAIM OF THE ASSESSEE IS THEREFORE, DISMISSED. IN THE SUM TOTAL AS REGARDS THIS FIRST GROUND OF APPEAL, THE ADDITION MADE BY THE IT O IS DELETED. HOWEVER, THE TWO CLAIMS OF EXPENDITURE AND DEPRECIATION MADE BY THE APPELLANT IN THE ADDITIONAL GROUNDS OF APPEAL STAND DISMISSED. 5. THE ASSESSEE IS NOW IN APPEAL AGAINST THE REJEC TION OF THEIR CLAIM FOR DEPRECIATION IN TERMS OF GROUND NO. 3 OF THE APPEAL WHILE THE REVENUE IS IN APPEAL AGAINST THE AFORESAID FINDINGS OF THE LEARNE D CIT(A), DELETING THE AMOUNT OF RS.10,99,25,676/- AS INCOME ASSESSED UNDER THE H EAD OTHER SOURCES. THE LEARNED AR ON BEHALF OF THE ASSESSEE WHILE RELYING UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ASHIMA SY NTEX LTD. (SUPRA) SUBMITTED THAT EVEN DURING TRIAL RUN OF THE UNIT, DEPRECIATIO N CANNOT BE DISALLOWED. ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE FINDINGS O F THE LEARNED CIT(A) ON THE ISSUE OF DEPRECIATION WHILE RELYING UPON ON THE ORD ER OF THE AO IN RESPECT OF ASSESSMENT OF THE AMOUNT RS.10,99,25,676/- UNDER TH E HEAD INCOME FROM OTHER SOURCES. 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THR OUGH THE FACTS OF THE CASE. UNDISPUTEDLY , AMMONIA-IV PLANT WAS UNDER TRIAL PR ODUCTION DURING THE YEAR UNDER CONSIDERATION AND THE COMMERCIAL PRODUCTION I S YET TO COMMENCE. THEREFORE, AS CONCLUDED BY THE LD. CIT(A), THE CLAI MS HAVE TO BE CONSIDERED, HOLDING THE AMMONIA-IV PLANT TO BE AT THE PRE- COMM ENCEMENT STAGE. IT IS WELL SETTLED THAT UNDER THE ACCOUNTING PRACTICES, ALL EX PENDITURE INCLUDING INTEREST COST INCURRED DURING THE PROJECT CONSTRUCTION PERIOD ARE ACCUMULATED AND DISCLOSED AS CAPITAL WORK-IN-PROGRESS UNTIL THE ASSETS ARE READY FOR COMMERCIAL USE. INCOME EARNED FROM INVESTMENT OF SURPLUS BORROWED FUNDS D URING CONSTRUCTION/TRIAL RUN PERIOD IS REDUCED FROM CAPITAL WORK-IN-PROGRESS FOR ACCOUNTING PURPOSES WHILE EXPENDITURE/INCOME ARISING DURING TRIAL RUN IS ADD ED TO/REDUCED FROM CAPITAL WORK-IN-PROGRESS. HONBLE APEX COURT IN THE CASE O F BOKARO STEEL VS. CIT, 236 ITR 315 HELD THAT IF THE ASSESSEE RECEIVES ANY AMOU NT WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY, SUCH RECEIPTS WOULD ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 11 GO TO REDUCE THE COSTS OF ASSETS AND WOULD BE RECEI PT OF A CAPITAL NATURE, WHICH CANNOT BE TAXED. IN THE CASE UNDER CONSIDERATION, U NDISPUTEDLY AND AS FOUND BY THE LD. CIT(A), THE PLANT IS UNDER TESTING FOR ITS EFFICIENCY PRIOR TO COMMENCEMENT OF COMMERCIAL PRODUCTION AND THE INPUTS AND OUTPUTS HAVE ALREADY BEEN NETTED BY GSFC AND THE NET RESULT HAS BEEN CAPITALIZED. CO NSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE AND THE GUIDELINES OF THE ICAI, WE ARE IN AGREEMENT WITH THE LD. CIT(A) THAT ANY ATTEMPT TO TAX THE PRO DUCTION, WHICH IS ALREADY ACCOUNTED FOR AS INPUT FOR THE FERTILIZER PLANT AND THE CAPTIVE INPUTS OF OTHER UNITS UTILIZED IN AMMONIA IV PLANT, IF NOT ALLOWED TO BE SET OFF AGAINST THE PRODUCTION OF THE PLANT, WOULD LEAD TO A DISTORTED PICTURE OF TH E ACCOUNTS OF M/S. GSFC. IN THESE CIRCUMSTANCES, ESPECIALLY WHEN REVENUE HAVE N OT PLACED BEFORE US ANY MATERIAL CONTRARY TO THE AFORESAID FINDINGS OF THE LD. CIT(A) IN SO FAR AS ADDITION OF RS. 10,99,25 ,676 IS CONCERNED NOR POINTED OUT A NY CONTRARY DECISION, WE HAVE NO HESITATION IN UPHOLDING THE FINDINGS OF THE LD. CIT(A) WHILE RELYING UPON THE DECISION OF THE HONBLE APEX COURT IN BOKARO STEEL LTD. . THEREFORE, GROUND NO.1 IN THE APPEAL OF THE REVENUE IS DISMISSED. 7. AS REGARDS ISSUE OF DEPRECIATION RAISED IN GROUND NO.3 IN THE APPEAL OF THE ASSESSEE, THE LD. CIT(A) WHILE DISTINGUISHING THE D ECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ASHIMA SYNTEX LTD. (SUPRA ) HELD THAT THE PRESENT CASE IS DIFFERENT FROM THAT OF ASHIMA SYNTEX LTD.WHERE T HE MACHINES INSTALLED WORKED IMMEDIATELY AND STRICTLY THERE WAS NO TRIAL RUN AS SUCH. IN THE CASE OF M/S. GSFC THE TRIAL RUN HAS CONTINUED FOR OVER TWO YEARS AND THEREFORE, THE ASSESSEE CANNOT CLAIM THE BENEFIT OF DEPRECIATION DURING THIS PERIO D, THE LD. CIT(A) CONCLUDED. APPARENTLY, THE LD. CIT(A) UPHELD THE DISALLOWANCE OF CLAIM OF DEPRECIATION, HOLDING THAT MACHINERY USED FOR TRIAL RUNS IS NOT USED WITHIN THE MEANING OF PROVISIONS OF SEC. 32 OF THE ACT. WE ARE OF THE OPINION THAT USER OF THE MACHINERY IN TEST PRODUCTION OR EXPERIMENTAL MANUFA CTURE WAS STILL USER FOR THE PURPOSES OF THE ASSESSEE'S BUSINESS. WE ARE SUPPORT ED IN OUR VIEW BY THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE O F V. RAMAKRISHNA AND SONS LTD. V. CIT [1984] 149 ITR 554 (MAD) . ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 12 7.1 IN CIT V. UNION CARBIDE (I) LTD. [2002] 254 ITR 488 (CAL), HONBLE HIGH COURT HELD THAT I T IS ONE THING FOR MACHINERY TO WAIT PASSIVELY DURI NG THE YEAR IN QUESTION, READY TO COME INTO USE COMMERCIALLY AT AN Y TIME ALTHOUGH IT MIGHT ACTUALLY NOT HAVE BEEN USED, BECAUSE THE RUNNING UN ITS RAN PERFECTLY, BUT THIS IS NOT THE SAME THING AS PLANT OR MACHINERY WHICH IS B EING BROUGHT UP TO THE STATE OF ACTUALLY ACTIVE COMMERCIAL USE, DURING THE YEAR, WHICH IS WHOLLY SPENT IN TRIAL PRODUCTION, I.E., IN MAKING THE MACHINERY FULLY REA DY FOR GENERATING PROJECTED COMMERCIAL PROFIT . IT MIGHT BE THAT THE ASSESSEE'S USE IS TO KEEP IT AS A STAND BY. BUT IT MIGHT BE AGAIN THAT THE ASSESSEE HAD USED IT FOR A TRIAL PRODUCTION OR IN SOME OTHER PURPOSE FOR THE ASSESSEE'S BUSINESS, WHI CH IS NOT IMMEDIATELY PRODUCTIVE OF COMMERCIAL PROFIT. BUT THIS WOULD NOT GO AGAINST THE ASSESSEE. ONCE THE ASSESSEE CAN ESTABLISH BONA FIDE USE OF TH E MACHINERY FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS, THEN AND IN THAT EVENT, THE ASSESSEE ESTABLISHES THE ASSESSEE'S RIGHT TO CLAIM DEPRECIATION. HONBLE HIG H COURT FURTHER HELD THAT IT SOMETIMES HAPPENS THAT THE CLAIMING OF DEPRECIATION OR INVESTMENT ALLOWANCE IS INEXTRICABLY CONNECTED WITH THE ASSESSEE COMMENCING ITS BUSINESS IN THE FIRST PLACE. IF A NEW COMPANY HAS NOT COMMENCED ITS BUSIN ESS. AT ALL, IT MIGHT BE THAT NO USE MADE BY IT OF PLANT OR MACHINERY CAN BE SAID TO BE USE BY IT FOR THE PURPOSES OF ITS BUSINESS, BECAUSE IT HAS NO BUSINES S AS YET. BUT SO FAR AS THE PRESENT ASSESSEE IS CONCERNED, IT HAS HAD ITS BUSIN ESS LONG RUNNING , AND THUS, TRIAL PRODUCTION IS QUITE SUFFICIENT, IN OUR OPINIO N, FOR THE ASSESSEE TO CLAIM JUSTLY AND PROPERLY DEPRECIATION . 7.2 HONBLE HIGH COURT ALSO OBSERVED IN THE AF ORECITED DECISION THAT UNLESS THERE ARE WORDS IN THE SECTION INDICATING THAT NOT EVERY KIND OF USE FOR THE PURPOSE OF THE BUSINESS WILL SATISFY FOR ATTRACTING ALLOWANCE, IT IS NOT OPEN FOR THE REVENUE TO READ INTO THE SECTION ANY WORDS OF LIMIT ATION SO AS TO AFFECT THE INTEREST OF THE ASSESSEE. IT IS WITH A VIEW TO THE BUSINESS OF THE ASSESSEE THAT THE ASSESSEE USED THE MACHINERY FOR THE PURPOSES OF ITS BUSINESS IN CAUSING THOSE TO GO INTO TRIAL PRODUCTION. IF THAT IS NOT USING THE MACHINERY FOR THE PURPOSES OF THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 13 BUSINESS, THEN HOW ELSE THE ABOVE ACTIVITY OF THE ASSESSEE CAN BE DESCRIBED IN THAT REGARD. 7.3 IN VIEW OF THE FOREGOING, WE HAVE NO HESI TATION IN SETTING ASIDE THE FINDINGS OF THE LD. CIT(A) IN THE MATTER OF DEPRECI ATION ON PLANT AND MACHINERY UNDER TRIAL RUNS AND ACCORDINGLY, DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE IN ACCORDANCE WITH THE PROVISIONS OF SECTION 32 OF THE ACT. THUS, GROUND NO. 3 IN THE APPEAL OF THE ASSESSEE IS ALLOWED. 8. ADVERTING NOW TO GROUND NO.2 IN THE APPEAL OF TH E REVENUE RELATING TO ADDITION OF RS.1396 LACS, BEING EXCISE DUTY FOR THE PURPOSE OF VALUING THE FINISHED GOODS, THE AO NOTICED ON PERUSAL OF SCHEDULE-7 OF THE ANNUAL REPORT THAT THE ASSESSEE DID NOT CONSIDER EXCISE DUTY WHILE VALUING FINISHED GOODS LYING IN THE FACTORY PREMISES. THE AUDITORS IN NOTE -3 BELOW SCH EDULE-7 MENTIONED THAT VALUATION OF FINISHED PRODUCTS LYING AT THE FACTORY PREMISES HAS NOT BEEN PAID OR PROVIDED FOR, IS TAKEN EXCLUSIVE OF EXCISE DUTY EST IMATED AT RS. 1396 LACS AND THIS HAS NO IMPACT ON PROFITS OF THE COMPANY FOR THE YEA R. AO FURTHER NOTICED THAT PARA 4B OF SCHEDULE-21 ,INTER ALIA, MENTIONED THAT CLOSI NG STOCK OF FINISHED PRODUCTS LYING AT DEPOTS, WAREHOUSES, CONSIGNMENT STOCKISTS, OTHER PARTIES AND STOCKS REMAINING OUT OF INTER-UNIT TRANSFERS, IS VALUED I NCLUSIVE OF EXCISE DUTY. ACCORDING TO THE AO, THE METHOD ADOPTED BY THE COMPANY FOR VA LUATION OF FINISHED GOODS IS NOT CONSISTENT. TO A QUERY BY THE AO, THE ASSESSEE WHILE RELYING UPON THE DECISIONS IN THE CASE OF ITO VS. FOOD SPECIALITIES LTD. 48 TTJ 621, CIT VS. ENGLISH ELECTRIC CO. OF INDIA LTD.,. 109 TAXMAN 401 AND SARASWATI INDUSTRIAL SYNDICATE LTD. VS. UNION OF INDIA AIR 1975 SC 460, CONTENDED THAT EXCISE DUTY ON FINISHED GOODS LYING IN THE FACTORY OR BONDED WA REHOUSE, WAS EXCLUDED WHILE VALUING THE FINISHED GOODS. HOWEVER, THE AO DID NOT ACCEPT THESE CONTENTIONS OF THE ASSESSEE AND RELYING ON THE CBDT CIRCULAR NO.13 89 OF MARCH 1981, INCLUDED THE EXCISE DUTY FOR VALUATION OF CLOSING STOCK OF F INISHED GOODS LYING IN THE FACTORY. SINCE EXCISE DUTY WAS NOT PROVIDED FOR IN THE BOOKS , THE AO DENIED DEDUCTION U/S 43B OF THE ACT ALSO. HERE IT MAY BE POINTED OUT TH AT THE AO DID NOT EXAMINE THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 14 APPLICABILITY OF PROVISIONS OF SEC. 145A OF THE ACT , INSERTED BY THE FINANCE (NO.2) ACT,1998,W.E.F 1.4.1999. 9. ON APPEAL, THE LEARNED CIT(A) CONCLUDED AS UNDE R: 3.4 IN MY VIEW THIS ISSUE IS COVERED BY THE MADR AS HIGH COURT DECISION IN THE CASE OF ENGLISH ELECTRIC CO. LTD. V S. CIT 243 ITR 729. AS MENTIONED BY THE MADRAS HIGH COURT, THE EXCISE DUTY LIABILITY IS INCURRED ON COMPLETION OF MANUFACTURING OF EXCISABLE GOODS. IT CANNOT BE CONVERTED INTO AN ASSET BY INCLUDING THE SAME AS PART OF CLOS ING SOCK UNLESS A SIMILAR LIABILITY WAS AN ITEM DEDUCTIBLE FOR THE PURPOSE OF ARRIVING AT THE PROFIT FOR THE YEAR. AS NO LIABILITY IS BEING ALLOWED IN THE P RESENT CASE, NO ADDITION ON THIS GROUND SHOULD BE MADE. AS REGARDS STOCKS CLEA RED AND KEPT AT DEPOTS AND WAREHOUSES HAVE ALSO BEEN CORRECTLY VALU ED INCLUDING THE ELEMENT OF EXCISE DUTY AS IT HAS BEEN PAID. THERE I S, THEREFORE, NO INCONSISTENCY IN THE METHOD OF ACCOUNTING. THE ADDI TION MADE IS THEREFORE DELETED. 10. THE REVENUE IS NOW IN APPEAL AGAINST THE AFORES AID FINDINGS OF THE LEARNED CIT(A). THE LD. DR POINTED OUT THAT THE LD . CIT(A), IGNORING THE PROVISIONS OF SEC. 145A OF THE ACT, RELIED UPON A DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF ENGLISH ELECTRIC COMPANY( SUPRA), WHICH WAS RELEVANT FOR THE AY 1984-85 I.E FOR THE PERIOD PRIOR TO IN SERTION OF SEC. 145A OF THE ACT . AFTER THE INSERTION OF PROVISIONS OF SEC. 145A OF T HE ACT, THE ASSESSEE HAS TO ADJUST THE VALUATION OF PURCHASE, SALE AND INVENTO RY IN ACCORDANCE WITH THE STATUTORY PROVISIONS. ON THE OTHER HAND, THE LEARNE D AR ON BEHALF OF THE ASSESSEE SUBMITTED THAT THE ISSUE IS SQUARELY COVER ED BY THE DECISION OF THE HONBLE SUPREME COURT IN CIT VS. INDO NIPPON CHEMI CALS COMPANY LTD.,261 ITR 275. 11. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. WE FIND THAT NEITHER THE AO NOR THE LD. CIT(A) EXAM INED THE APPLICABILITY OF PROVISIONS OF SEC. 145A OF THE ACT IN THE FACTS AND CIRCUMSTANCES OF THE CASE FOR THE PURPOSE OF CONSIDERING EXCISE DUTY IN VALUING THE FINISHED GOODS LYING IN THE FACTORY. THE AO RELIED UPON AN OLD CIRCULAR NO. 138 9 OF MARCH ,1981 WHILE THE LD. CIT(A) RELIED UPON THE DECISION OF THE HONBLE MADR AS HIGH COURT IN THE CASE OF ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 15 ENGLISH ELECTRIC COMPANY(SUPRA) RENDERED IN THE CON TEXT OF LAW RELEVANT FOR THE AY 1984-85. EVEN THE DECISION OF HONBLE APEX COURT IN THE CASE OF INDO NIPPON CHEMICALS COMPANY LTD.(SUPRA) WAS IN THE CONTEXT OF LAW RELEVANT FOR THE AY 1989-90 ONLY AND THE HONBLE BOMBAY HIGH COURT IN THEIR DECISION IN THE SAID CASE OF INDO NIPPON CHEMICALS COMPANY LTD., 245 ITR 384 CLEARLY OBSERVED THAT THE HONBLE HIGH COURT WAS NOT INCLINED TO GO INTO THE PROVISIONS OF SECTION 1 45A OF THE ACT, APPLICABLE W.E.F. 1.4.1999. BEFORE PR OCEEDING FURTHER, WE MAY HAVE A LOOK AT THE EXTANT PROVISIONS OF SEC. 145A OF THE A CT , WHICH READ AS UNDER: '145A METHOD OF ACCOUNTING IN CERTAIN CASES-NOTWITH STANDING ANYTHING TO THE CONTRARY CONTAINED IN S. 145, THE VALUATION OF PURC HASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSES OF DETERMINING THE INCOM E CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION' SHALL BE- (A) IN ACCORDANCE WITH THE METHOD OF ACCOUNTING REG ULARLY EMPLOYED BY THE ASSESSEE; AND (B) FURTHER ADJUSTED TO INCLUDE THE AMOUNT OF ANY T AX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY PAID OR INCURRED BY THE ASSESSEE TO BRING THE GOODS TO THE PLACE OF ITS LOCATION AND CONDITIONS A S ON THE DATE OF VALUATION. EXPLANATION: FOR THE PURPOSES OF THIS SECTION, ANY TAX, DUTY, CESS OR FEE (BY WHATEVER NAME CALLED) ACTUALLY UNDER ANY LAW FOR TH E TIME BEING IN FORCE, SHALL INCLUDE ALL SUCH PAYMENT NOTWITHSTANDING ANY RIGHT ARISING AS A CONSEQUENCE TO SUCH PAYMENT.' THE AFORESAID PROVISIONS OF THE ACT STIPULATE TH AT THE VALUATION OF PURCHASE AND SALE OF GOODS AND INVENTORY FOR THE PURPOSE OF COMP UTATION OF INCOME FROM BUSINESS OF PROFESSION OR PROFESSION SHALL BE MADE ON THE BASIS OF THE METHOD OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE, SUBJ ECT TO CERTAIN ADJUSTMENTS PROVIDED THEREIN. THE ADJUSTMENTS PROVIDED IN THIS SECTION CAN BE MADE WHILE COMPUTING THE INCOME FOR THE PURPOSE OF PREPARING T HE RETURN OF INCOME. THESE ADJUSTMENTS ARE AS UNDER: (I) ANY TAX, DUTY, CESS OR FEE ACTUALLY PAID OR I NCURRED OR INPUTS SHOULD BE ADDED TO THE COST OF INPUTS (RAW MATERIALS, STORES, ETC.) IF NOT ALREADY ADDED IN THE BOOKS OF ACCOUNT. ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 16 (II) ANY TAX, DUTY, CESS OR FEE ACTUALLY PAID OR I NCURRED ON SALE OF GOODS SHOULD BE ADDED TO THE SALES, IF NOT ALREADY ADDED IN THE BOOKS OF ACCOUNT. (III) ANY TAX, DUTY, CESS OR FEE ACTUALLY PAID OR INCURRED ON THE INVENTORY (FINISHED GOODS, WORK-IN-PROGRESS, RAW MATERIALS, ETC.) SHOUL D BE ADDED TO THE INVENTORIES, IF NOT ALREADY ADDED WHILE VALUING THE INVENTORY IN THE ACCOUNTS.' 11.1 THE LANGUAGE IN S. 145A OF THE ACT IS ABSOL UTELY CLEAR, WHEN IT STIPULATES THAT PURCHASE, SALES AND INVENTORY ARE TO BE ADJUST ED AND NOT ONLY THE CLOSING STOCK. THE ASSESSEE IS, THEREFORE, REQUIRED TO ADJU ST THE VALUE OF PURCHASE, SALES, OPENING STOCK AND CLOSING STOCK IN ACCORDANCE WITH THE PROVISIONS OF S. 145A OF THE ACT . A MERE GLANCE AT THE IMPUGNED ORDERS REVE AL THAT THE LD. CIT(A) WITHOUT EXAMINING THE APPLICABILITY OF STATUTORY PROVISIONS OF SEC. 145A OF THE ACT, MERELY RELIED UPON A DECISION OF THE HONBLE MADRAS HIGH C OURT IN ENGLISH ELECTRIC COMPANY(SUPRA) AND ADJUDICATED THE ISSUE . THE AO ALSO ADDED THE AMOUNT WITHOUT ASCERTAINING THE IMPACT OF PROVISIONS OF SE C. 145A OF THE ACT. AS FOR THE ADJUSTMENTS U/S.145A OF THE ACT, HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. MAHAVIR ALUMINIUM LTD. 297 ITR 77, HELD THAT WHILE VALUING CLOSING STOCK, ADJUSTMENT ON ACCOUNT OF EXCISE DUTY AND MODVAT CRE DIT HAS NECESSARILY TO BE MADE AS STIPULATED IN SECTION 145A OF THE ACT. IN VIEW OF THE SAID PROVISIONS, IRRESPECTIVE OF THE METHOD FOLLOWED BY AN ASSESSEE FOR ACCOUNTING, ADJUSTMENT ON ACCOUNT OF EXCISE DUTY HAS TO BE MADE. AS ALRE ADY POINTED OUT, THE AO SIMPLY RELIED ON THE COMMENTS IN THE AUDITORS REPO RT FOR THE ADJUSTMENTS IN CLOSING STOCK ON ACCOUNT OF EXCISE DUTY, WITHOUT HA VING RECOURSE TO PROVISIONS OF SEC. 145A OF THE ACT. WE ARE OF THE OPINION THAT TH E ADJUSTMENTS HAVE TO BE MADE AFTER CONSIDERING THE IMPACT OF EXCISE DUTY ON PURCHASES, SALE OF GOODS AND CLOSING AS WELL AS OPENING INVENTORY. THE LD. C IT(A) WITHOUT EVEN APPRECIATING THE LAW AS CONTAINED IN SECTION L45A O F THE ACT, HAS SIMPLY ACCEPTED ASSESSEES CONTENTION THAT WHATEVER BE THE METHOD F OLLOWED BY THE ASSESSEE IT WOULD NOT AFFECT ITS PROFITS. IT IS NOT THE QUESTIO N OF WHAT EFFECT WOULD BE THERE ON THE PROFITS BUT WHEN THE STATUTE STIPULATES A PARTI CULAR METHODOLOGY OF ADJUSTMENTS FOR TAX, DUTY, CESS OR FEE THEN IT HAS TO BE FOLLOWED. NEITHER THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 17 ASSESSEE NOR THE ASSESSING OFFICER AND THE LD. CIT( A) HAVE ANY POWERS TO IGNORE THE PROVISIONS OF SEC. 145A OF THE ACT OR T O MAKE ANY VARIATION THEREIN. IN THESE CIRCUMSTANCES, ESPECIALLY WHEN THERE IS NO MA TERIAL BEFORE US TO ASCERTAIN AS TO WHETHER OR NOT THE ASSESSEE HAS FOLLOWED THE METHOD PRESCRIBED IN SEC. 145A OF THE ACT NOR THE LD. CIT(A) OR THE AO RECORD ED ANY FINDINGS ON THE APPLICABILITY OF THESE PROVISIONS WHILE THE DECISIO N RELIED UPON BY THE LD. CIT(A) AND THE LD. AR RELATE TO ASSESSMENT YEARS PRIOR TO INSERTION OF THE AFORESAID PROVISIONS OF SEC. 145A OF THE ACT , IN THE INTERES T OF JUSTICE AND FAIR PLAY , WE VACATE THE FINDINGS OF THE LD. CIT(A) AND RESTORE T HE MATTER TO THE FILE OF THE AO WITH THE DIRECTIONS TO RE-ADJUDICATE THE ISSUE IN A CCORDANCE WITH LAW IN THE LIGHT OF PROVISIONS OF SEC. 145A OF THE ACT, AFTER ALLOWING SUFFICIENT OPPORTUNITY OF HEARING TO THE ASSESSEE. WITH THESE DIRECTIONS, GRO UND NO. 2 IN THE APPEAL OF THE REVENUE IS DISPOSED OF. 12. ADVERTING NOW TO GROUND NO.2 IN THE APPEAL OF T HE ASSESSEE, ON PERUSAL OF SCHEDULE-15 OF THE ANNUAL REPORT ENCLOSED WITH THE RETURN, THE AO NOTICED THAT THE ASSESSEE DEBITED AN AMOUNT OF RS.3963.91 LACS F OR THE REPAIR AND MAINTENANCE OF THE BUILDING, PLANT AND MACHINERY A ND OTHERS. TO A QUERY BY THE AO, SEEKING DETAILS OF REPAIRS AND MAINTAINING EXPE NSES EXCEEDING RS. 5 LACS EACH, THE ASSESSEE SUBMITTED A COPY OF LEDGER ACCOU NT WHEREIN EXPENSES OF RS.5 LACS AND ABOVE WERE DEBITED. THE LEARNED AR EX PRESSED HIS INABILITY TO EXPLAIN THE EXACT DETAILS OF THE EXPENDITURE INCURR ED ON THE GROUND THAT THERE WERE HUGE NUMBER OF VOUCHERS AND RECEIPTS, WHICH WE RE VERY DIFFICULT TO TRACE OUT. ON EXAMINATION OF LEDGER ACCOUNT OF REPAIR AND MAINTENANCE, THE AO NOTICED THAT A NUMBER OF ITEMS OF EXPENSES CLAIMED AS REPAI R AND MAINTENANCE EXPENSES, WERE ACTUALLY INCURRED EITHER FOR CONSTRU CTION OF ASSETS SUCH AS BUILDING, COMPOUND WALL, TOILET ETC. OR WERE INCURR ED FOR EXPANSION OR RENOVATION OF THE EXISTING ASSETS OR THE SAME HAD BEEN INCURRE D FOR EXTENSION, RENEWAL OR RESTORATION OF EXISTING ASSETS. SINCE THE ASSESSEE DID NOT FURNISH ANY BILL OR VOUCHER WHILE THE COPY OF LEDGER ACCOUNT DID NOT ME NTION SUFFICIENT DETAILS ABOUT THE NATURE OF EXPENDITURE, ON FURTHER EXAMINATION O F THE DETAILS SUBMITTED BY THE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 18 ASSESSEE, AS DETAILED ON PAGE 13 TO 16 OF THE ASSES SMENT ORDER, THE AO CONCLUDED THAT EXPENDITURE WAS MAINLY INCURRED FO R CONSTRUCTION OF NEW ASSET LIKE COMPOUND WALL, BATH ROOMS, TOILETS AND FOR REP LACEMENT OF MAJOR PARTS OF MACHINERY. THE AO WAS OF THE OPINION THAT THE MOST OF THE EXPENDITURE DID NOT FALL WITHIN THE MEANING OF CURRENT REPAIRS U/S 31 OF THE ACT AND INSTEAD SUCH EXPENDITURE PROVIDED ENDURING ADVANTAGE TO THE ASSE SSEE. ACCORDINGLY, THE AO DISALLOWED 5% OF THE TOTAL EXPENDITURE ON REPAIR AN D MAINTENANCE ,CONSIDERING THE SAME AS CAPITAL EXPENDITURE, RESULTING IN DISAL LOWANCE OF RS.198.20 LACS WHILE ALLOWING DEPRECIATION THEREON. 13. ON APPEAL, THE ASSESSEE CONTENDED THAT THEIR FI XED ASSETS ARE OF OVER RS. 1875 CRORES AND EXPENDITURE ON REPAIRS AND MAINTENA NCE COMES TO ABOUT 2% WHILE THE ACCOUNTS OF THE ASSESSEE ARE AUDITED. ACC ORDINGLY, IT WAS PLEADED THAT THE EXPENDITURE SHOULD NOT BE TREATED AS CAPITAL E XPENDITURE. ALTERNATIVELY, IT WAS PLEADED THAT IF THIS EXPENDITURE IS TREATED AS CAPI TAL EXPENDITURE, DEPRECIATION SHOULD ALSO BE ALLOWED. IN THE LIGHT OF THESE SUBMI SSIONS, THE LEARNED CIT(A) CONCLUDED AS UNDER: 4.3 THE APPELLANT WAS ASKED TO SUBMIT A NOTE ON H OW THE CAPITAL AND REVENUE EXPENDITURE IS BIFURCATED IN THE ENTIRE CORPORATION. THEY WERE ALSO ASKED TO SUBMIT ANY INTERNAL AUDIT NOTINGS ETC . TO SHOW WHETHER ANY OF THE EXPENSES HAVE BEEN CONSIDERED FOR SLOTTING AS C APITAL/ REVENUE EXPENDITURE. THE APPELLANT HAS SUBMITTED SOME DETAI LS AND A LARGE NUMBER OF INVOICES ETC. AND ALSO RELATING TO SOME O F THE ITEMS MENTIONED BY THE ASSESSING OFFICER IN ITS ORDER. ALL THE ITEM S ARE CONSIDERED BELOW. THE ASSESSEE EXPLAINED THAT IT IS THE PRACTICE OF T HE COMPANY TO PREPARE THE ANNUAL BUDGET IN ADVANCE FOR EACH FINANCIAL YEA R, WHERE THE TOTAL CAPITAL EXPENDITURE AS WELL AS REVENUE EXPENDITURE ARE ENVISAGED AND PROVIDED FOR SEPARATELY. THE DETAILS OF EXPENDITURE ARE SUBMITTED BY EACH DEPARTMENT OF THE COMPANY AND THE FINANCE DEPARTMEN T ALLOCATES FUNDS ON THE BASIS OF PRIORITIES AND ESSENTIALITIES OF THE E XPENDITURE. THE BUDGET DRAWN FULLY REFLECTS CAPITAL AS WELL AS REVENUE EXP ENDITURE TO BE INCURRED DURING THE YEAR. THE RESPECTIVE DEPARTMENTS INITIAT E THE PROPOSAL FOR CAPITAL/REVENUE EXPENDITURE, GIVING FULL DETAILS AN D JUSTIFICATION FOR OBTAINING THE FINANCIAL APPROVAL. WHILE SCRUTINIZIN G THE PROPOSALS, IF THE EXPENDITURE RESULTS IN SUBSTANTIAL OPERATIONAL SAVI NG OR ENDURING BENEFIT THEN THE SAME IS BOOKED UNDER CAPITAL EXPENDITURE. IF THEY ARE OF A ROUTINE NATURE FOR MAINTAINING THE NORMAL OPERATIONS OF THE COMPANY, THEN IT IS ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 19 CHARGED TO REVENUE ACCOUNT. THIS IS DONE IN CASE OF EVERY PROPOSAL AND EVERY EXPENDITURE. THE COMPANY DRAWS A SEPARATE CAP ITAL BUDGET FOR NEW SCHEMES, ADDITIONAL FACILITIES, MODERNIZATION PROGR AMMES ETC. WHICH ARE BOOKED TO CAPITAL ACCOUNTS. EACH OF THE COMPONENTS OF THE BUDGET ARE GIVEN CODE NUMBERS AND FINANCIAL CONCURRENCE NUMBER S TO FACILITATE THE SUBSEQUENT MONITORING AND RECORDING OF ACTUAL EXPEN DITURE UNDER THE HEAD REVENUE OR CAPITAL. 4.4 THE COMPANY ALSO HAS A FULL FLEDGED INTERNAL A UDIT DEPARTMENT, OVER AND ABOVE MANAGERIAL AUDIT. THE RE PAIRS AND MAINTENANCE ARE BOOKED THROUGH PURCHASE JOURNALS AN D THE CONCERNED SECTION OBTAINS CONCURRENCE OF DEBIT TO EITHER CAPI TAL OR REVENUE HEAD. ANY ERRORS IN BOOKING ARE CAUGHT AND CORRECTED. IT IS T HEREFORE, STATED THAT THERE IS NO JUSTIFICATION FOR TREATING ANY OF THE R EPAIRS AND MAINTENANCE EXPENDITURE AS CAPITAL IN NATURE. 4.5 A PERUSAL OF THE AUDIT NOTE SUBMITTED AS SAMPL ES SHOWS THAT THE OBJECTIONS RELATE TO NON MAINTENANCE OF BILLS O R DIFFERENCES IN RATES FOR CONTRACTS GIVEN, OR NON-SPECIFICATION OF RATES ON C ONTRACTS. IN SHORT THEY APPEAR MORE TO DEAL WITH FINANCIAL PROPRIETY RATHER THAN ISSUES OF CAPITAL OR REVENUE. ON GOING THROUGH THE DETAILS OF VOUCHERS O F REPAIRS AND MAINTENANCE PRODUCED, IT IS SEEN THAT ONE OF THE MA JOR INVOICES IS FOR REPLACEMENT OF 4 INCH DIAMETER CROSS-COUNTRY AMMONI A PIPELINE BETWEEN MAIN PLANT TO SIKKA UNIT, DAMAGED DUE TO CYCLONE. T HE ENTIRE AMOUNT OF RS.28,96,487/- IS FOR REPLACEMENT OF THE PIPELINE A ND PERTAINS TO LABOUR CHARGES, VEHICLES, SITE EXPENDITURE ETC. TENDERS HA VE BEEN CONSIDERED AND AMOUNTS GRANTED. ON THE OTHER HAND THERE ARE CE RTAIN ITEMS WHICH ARE CLEARLY FOR MAINTENANCE LIKE INSPECTION OF 10,000 M TR. TON ATMOSPHERIC STORAGE TANKS. FOR THIS INSPECTION SCAFFOLDING IS P ROVIDED BY GSFC AND THE ACTUAL INSPECTION AND MAINTENANCE WORK WAS DONE BY M/S. PROJECT AND DEVELOPMENT (I) LT., GAZIABAD. THERE ARE SOME AMOUN TS LIKE RS.2,98,390/- FOR PURCHASE OF LT DISTRIBUTION BOARD AND RS. 6.04 LACS FOR PURCHASE OF BATTERIES FOR REPLACEMENT IN POWER BACK -UP SYSTEM OF POLYMERISATION UNIT. IN ADDITION THERE ARE NUMEROUS SMALL ENTRIES FOR LABOUR CHARGES OF VARIOUS JOBS, BUT WHETHER SUCH IT EMS ARE LINKED TO INSTALLATION OF CAPITAL ASSET OR REPLACEMENT ITEMS OR MORE MAINTENANCE WORK IS DIFFICULT TO STATE. HOWEVER, FROM ALL THE D ETAILS, IT IS CLEAR THAT THERE IS A CERTAIN SUBSTANTIAL ELEMENT OF REPLACEMENT OF CERTAIN ITEMS WHICH WERE ORIGINALLY PRESENT AND WERE PART OF BLOCK OF ASSETS OF THE COMPANY. 4.6 IT IS A MOOT POINT THAT WHEN AN ITEM IS A PART OF A BLOCK ASSETS AND IS AVAILING OF DEPRECIATION WITHIN THAT BLOCK, THEN IF IT IS REPLACED, THE DEPRECIATION ON THE ORIGINAL ITEMS ST ILL CONTINUES TO BE DRAWN. THE OLD ITEM IS NEITHER SOLD NOR REDUCED FROM THE B LOCK OF ASSETS. HOWEVER, THE NEW REPLACEMENT IS TREATED AS A REVENU E EXPENDITURE MERELY BECAUSE IT IS TREATED AS NOT PART OF THE BLO CK OF ASSETS. THIS ITSELF IS ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 20 AN ILLOGICAL SITUATION IN AS MUCH AS FOR E.G. THE P IPELINE OF GSFC BEING PART OF BLOCK OF ASSETS, IF TOTALLY REPLACED BECOMES A R EVENUE EXPENDITURE, EVEN THOUGH THE ORIGINAL ITEM WAS A CAPITAL ASSET. THE SAME ITEM IN THE SECOND ROUND IS TREATED AS REVENUE WHEN THE ORIGINA L WAS CLEARLY CLASSIFIED AS A CAPITAL ITEM. EVEN SECTION 31 AS PO INTED OUT BY THE ASSESSING OFFICER ENVISAGES REPAIRS OF A ROUTINE AN D MAINTENANCE NATURE, NO MATTER WHAT THE COST BUT IT CANNOT BE EXTENDED T O REPLACEMENTS OF HUGE ITEMS, MERELY ON THE GROUND THAT NOTHING NEW HAS BE EN ADDED. A MAJOR REPLACEMENT LIKE AN ENTIRE PIPELINE MENTIONED ABOVE WOULD CERTAINLY BE AN ITEM OF CAPITAL EXPENDITURE AND WHICH HAS TO BE ADD ED TO THE BLOCK OF ASSETS BECAUSE FIRSTLY, THE EARLIER PIPELINE WAS TR EATED AS CAPITAL EXPENDITURE ALSO AND SECONDLY THE ORIGINAL ITEM STI LL CONTINUES TO BE PRESENT AT ITS REDUCED WDV VALUE IN THE BLOCK OF AS SETS. IN FACT THE BLOCK OF ASSETS IN SUCH INSTANCES DOES NOT PROJECT THE CO RRECT VALUE OF THE BLOCK BECAUSE A NEW ITEM OF MUCH GREATER VALUE HAS REPLAC ED THE OLD ONE BUT THE WDV WOULD CONTINUE TO BE VERY SMALL IN COMPARIS ON. ON THE OTHER HAND THE ENTIRE CLAIM OF REVENUE EXPENDITURE WOULD BE ALLOWED LEADING TO LOWER PROFITS ON THE ONE HAND AND A LOWER THAN CORR ECT VALUE OF THE BLOCK OF ASSETS. THEREFORE, IN MY VIEW THE ASSESSING OFFI CER WAS CORRECT IN HOLDING THAT AT LEAST SOME OF THE ITEMS INCLUDED IN THE REPAIRS AND MAINTENANCE EXPENDITURE WERE IN THE NATURE OF CAPIT AL AND WHICH SHOULD BE TREATED AS PART OF BLOCK OF ASSETS. 4.7 I AM FURTHER INCLINED TO UPHOLD THIS VIEW BECAU SE FROM THE SYSTEM FOLLOWED FOR DEMARCATION OF REVENUE AND CAPITAL EX PENDITURE AS SUBMITTED BY THE APPELLANT AND DISCUSSED IN PARA 4.3. EACH DI VISION SUBMITS ITS BUDGET PROPOSALS FOR REVENUE AND CAPITAL ITEMS BUT THESE REVENUE AND CAPITAL DEMARCATIONS ARE MORE LINKED TO LARGE AND NEW PURCHASES VS ROUTINE AND SMALL EXPENSES REQUIRED TO BE INCURRED FOR RUNNING THE UNITS. THEY ARE NOT LINKED TO THE CONCEPTS OF CAPITAL AND REVENUE EXPENDITURE AS UNDERSTOOD IN THE INCOME-TAX ACT. ALTHOUGH CONCEIVA BLY A LARGE PART OF REVENUE CLAIM UNDER REPAIRS AND MAINTENANCE HAS BEE N CORRECTLY DEBITED AS REVENUE EXPENDITURE, I WOULD UPHOLD THE ASSESSIN G OFFICER VIEW THAT THERE CERTAINLY APPEAR TO BE CERTAIN ITEMS WHICH AR E REPLACEMENTS OR NEW PURCHASES WHICH FALL INTO THE CATEGORY OF CAPITAL E XPENDITURE. IT IS ALSO MY VIEW THAT THE ASSESSING OFFICER HAS NOT ERRED BY MA KING AN ADHOC DISALLOWANCE BECAUSE LOOKING TO THE VOLUMINOUS DETA ILS AND THE NON LINKAGE OF VARIOUS LABOUR CHARGES AND EXPENSES WITH THE ITEMS ON WHICH THEY ARE SPENT, IT IS DIFFICULT TO PINPOINT HOW MUC H OF THE EXPENDITURE OR THE SPECIFIC ITEMS ARE CAPITAL IN NATURE. HOWEVER, THE ASSESSING OFFICER HAS MADE AN ADHOC ADDITION OF 5% WHICH IN MY VIEW APPEA R TO BE ON THE HIGH SIDE CONSIDERING THAT THE TOTAL REPAIR AND MAINTENA NCE EXPENDITURE OF M/S. GSFC IS ONLY 2% OF THE BLOCK OF ASSETS. IN MY VIEW DISALLOWANCE OF 1% WOULD MEET THE ENDS OF JUSTICE AND WOULD COVER SUCH EXPENDITURE WHERE LARGE ITEMS ARE TOTALLY REPLACED OR NEW ITEMS WITH ENDURING BENEFITS HAVE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 21 BEEN ADDED. THE ASSESSING OFFICER IS DIRECTED TO RE DUCE THE DISALLOWANCE TO 1% OF THE EXPENDITURE AND GRANT DEPRECIATION IN RESPECT OF THE SAME AT THE RATES APPLICABLE. 14. THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFORE SAID FINDINGS OF THE LD. CIT(A),UPHOLDING THE ADDITION TO THE EXTENT OF 1%. THE LEARNED AR ON BEHALF OF THE ASSESSEE RELIED UPON THEIR SUBMISSIONS BEFORE T HE LEARNED CIT(A) WHILE THE LEARNED DR SUPPORTED THE FINDINGS OF THE LD. CIT(A) . 15. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. WE FIND THAT IN THE ABSENCE OF COMPLETE DETAILS AND BILLS/VOUCHERS FOR THE AFORESAID EXPENDITURE ON REPAIR AND MAINTENANCE, TH E AO MADE AN ESTIMATED DISALLOWANCE OF 5% OF THE TOTAL EXPENDITURE DEBITED TO REPAIR AND MAINTENANCE ACCOUNT, TREATING THE SAME AS CAPITAL IN NATURE WH ILE THE LEARNED CIT(A) REDUCED THE SAME TO 1% IN THE LIGHT OF SUBMISSIONS ON BEHAL F OF THE ASSESSEE. THE QUESTION WHICH ARISES FOR DETERMINATION IN THIS CAS E IS WHETHER THE ASSESSEE WAS ENTITLED TO CLAIM THE AFORESTATED AMOUNTS AS 'CURRE NT REPAIRS' UNDER SECTIONS 30 AND 31(I) OF THE ACT OR U/S 37 (1) OF THE ACT AS R EVENUE EXPENDITURE. THOUGH THE AO REFERRED TO PROVISIONS OF SECTION 31 OF THE ACT, STATING THAT THE EXPENDITURE WAS NOT ON CURRENT REPAIRS , BEFORE THE LD. CIT(A) THE ASSESSEE CONTENDED THAT EXPENDITURE RELATES TO REVENUE ITEMS AND NOT CAPITA L ITEMS. WHETHER OR NOT EXPENDITURE IS ON CURRENT REPAIRS, HONBLE SUPREME COURT IN THE CASE OF BALLIMAL NAVAL KISHORE V. CIT [1997] 2 SCC 449, WHILE APPROV ING THE TEST FORMULATED BY SHRI CHAGLA C J. IN THE CASE OF NEW SHORROCK SPINNI NG AND MANUFACTURING CO. LTD. V. CIT [1956] 30 ITR 338 (BOM),OBSERVED AS FOLLOWS: 'THE SIMPLE TEST THAT MUST BE CONSTANTLY BORNE IN M IND IS THAT AS A RESULT OF THE EXPENDITURE WHICH IS CLAIMED AS AN EXPENDITURE FOR REPAIRS WHAT IS REALLY BEING DONE IS TO PRESERVE AND MAINTAIN AN ALREADY EXISTIN G ASSET. THE OBJECT OF THE EXPENDITURE IS NOT TO BRING A NEW ASSET INTO EXISTE NCE, NOR IS ITS OBJECT THE OBTAINING OF A NEW OR FRESH ADVANTAGE. THIS CAN BE THE ONLY DEFINITION OF 'REPAIRS' BECAUSE IT IS ONLY BY REASON OF THIS DEFINITION OF REPAIRS THAT THE EXPENDITURE IS A REVENUE EXPENDITURE. ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 22 IF THE AMOUNT SPENT WAS FOR THE PURPOSE OF BRINGING INTO EXISTENCE A NEW ASSET OR OBTAINING A NEW ADVANTAGE, THEN OBVIOUSLY SUCH AN E XPENDITURE WOULD NOT BE AN EXPENDITURE OF A REVENUE NATURE BUT IT WOULD BE A C APITAL EXPENDITURE, AND IT IS CLEAR THAT THE DEDUCTION WHICH THE LEGISLATURE HAS PERMITTED UNDER SECTION 10(2)(V) IS A DEDUCTION WHERE THE EXPENDITURE IS A REVENUE EXPENDITURE AND NOT A CAPITAL EXPENDITURE.' 15.1 HONBLE SUPREME COURT IN ANOTHER CASE OF CIT VS. SARVANNA SPINNING MILLS P LTD., 293 ITR 201(SC) WHILE REFERRING TO TH E AFORESAID DECISION IN THE CASE OF BALLIMAL NAVAL KISHORE(SUPRA) OBSERVED THAT AN ALLOWANCE IS GRANTED BY CLAUSE (I) OF SECTION 3 1 IN RESPECT OF AMOUNT EXPENDED ON CURRENT REPAIRS TO MACHINERY, PLANT OR FURNITURE USED FOR THE PURPOSES OF BUSINESS, IRRESPECTIVE OF WHETHER THE A SSESSEE IS THE OWNER OF THE ASSETS OR HAS ONLY USED THEM. THE EXPRESSION 'CURRE NT REPAIRS' DENOTES REPAIRS WHICH ARE ATTENDED TO WHEN THE NEED FOR THEM ARISES FROM THE VIEWPOINT OF A BUSINESSMAN. THE WORD 'REPAIR' INVOLVES RENEWAL. HO WEVER, THE WORDS USED IN SECTION 31(I) ARE 'CURRENT REPAIRS'. THE OBJECT BEH IND SECTION 31(I) IS TO PRESERVE AND MAINTAIN THE ASSET AND NOT TO BRING IN A NEW AS SET. IN OUR VIEW, SECTION 31(I) LIMITS THE SCOPE OF ALLOWABILITY OF EXPENDITURE AS DEDUCTION IN RESPECT OF REPAIRS MADE TO MACHINERY, PLANT OR FURNITURE BY RESTRICTIN G IT TO THE CONCEPT OF 'CURRENT REPAIRS'. ALL REPAIRS ARE NOT CURRENT REPAIRS. SECT ION 37(1) ALLOWS CLAIMS FOR EXPENDITURE WHICH ARE NOT OF CAPITAL NATURE. HOWEVE R, EVEN SECTION 37(1) EXCLUDES THOSE ITEMS OF EXPENDITURE WHICH EXPRESSLY FALL IN SECTIONS 30 TO 36. THE EFFECT IS TO DELIMIT THE SCOPE OF ALLOWABILITY OF DEDUCTIONS FOR REPAIRS TO THE EXTENT PROVIDED FOR IN SECTIONS 30 TO 36. TO DECIDE THE APPLICABILITY OF SECTION 31(I) THE TEST IS NOT WHETHER THE EXPENDITURE IS RE VENUE OR CAPITAL IN NATURE, WHICH TEST HAS BEEN WRONGLY APPLIED BY THE HIGH COURT, BU T WHETHER THE EXPENDITURE IS 'CURRENT REPAIRS'. THE BASIC TEST TO FIND OUT AS TO WHAT WOULD CONSTITUTE CURRENT REPAIRS IS THAT THE EXPENDITURE MUST HAVE BEEN INCU RRED TO 'PRESERVE AND MAINTAIN' AN ALREADY EXISTING ASSET, AND THE OBJECT OF THE EXPENDITURE MUST NOT BE TO BRING A NEW ASSET INTO EXISTENCE OR TO OBTAIN A NEW ADVANTAGE. 15.2 HONBLE APEX COURT IN THE AFORECITED CASE F URTHER OBSERVED THAT THE LEGISLATURE INTENDED TO STRESS THAT UNDER SECTION 3 1(I) OF THE ACT, THE PERMISSIBLE DEDUCTION ADMISSIBLE IS ONLY FOR CURRENT REPAIRS AN D THEREFORE, THE QUESTION AS TO WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE CO NCEPTUALLY IS REVENUE OR CAPITAL IN NATURE IS NOT RELEVANT FOR DECIDING THE QUESTION AS TO WHETHER SUCH AN EXPENDITURE COMES WITHIN THE ETYMOLOGICAL MEANING O F THE EXPRESSION 'CURRENT REPAIRS'. IN OTHER WORDS, EVEN IF THE EXPENDITURE I S REVENUE, IT MAY NOT FALL IN THE CONNOTATION OF 'CURRENT REPAIRS' IN SECTION 31(I). IT WAS FURTHER OBSERVED THAT ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 23 REPLACEMENT GENERALLY MAY NOT FALL UNDER THE EXPRES SION 'CURRENT REPAIRS' BUT, IN CERTAIN CASES, WHERE THE OLD PARTS WERE NOT AVAILAB LE IN THE MARKET OR WHERE THE OLD PARTS HAD WORKED FOR 50 TO 60 YEARS, REPLACEMEN T CAN, IN SUCH CASES OF EXCEPTION, FALL WITHIN THE EXPRESSION 'CURRENT REPA IRS'. 15.3 UNDER SECTION 37, A PARTICULAR ITEM OF EX PENDITURE MAY BE DEDUCTIBLE IF THE EXPENDITURE DOES NOT FALL WITHIN SECTIONS 30 TO 36 ; THAT IT SHOULD HAVE BEEN INCURRED IN THE ACCOUNTING YEAR; THAT IT SHOULD BE IN RESPECT OF A BUSINESS CARRIED AN BY THE ASSESSEE; THAT IT SHOULD NOT BE ON PERSON AL ACCOUNT OF THE ASSESSEE; THAT IT SHOULD NOT BE IN THE NATURE OF CAPITAL EXPE NDITURE AND THAT IT SHOULD BE SPENT WHOLLY AND EXCLUSIVELY FOR BUSINESS. WHETHER EXPENDITURE IS 'REVENUE' OR 'CAPITAL IN NATURE' WOULD DEPEND UPON SEVERAL FACTO RS, NAMELY, NATURE OF THE EXPENDITURE, NATURE OF THE BUSINESS ACTIVITY ETC. . 15.4 IN VIEW OF THE FOREGOING, IF WE NOW ANALYSE THE FACTS OF THE CASE, THE ASSESSEE DID NOT FURNISH THE BILLS/VOUCHERS OF REPA IRS AND MAINTENANCE EXPENSES EXCEEDING RS. 5 LACS EACH SOUGHT BY THE AO AND INST EAD, THE ASSESSEE SUBMITTED ONLY A COPY OF LEDGER ACCOUNT, WHEREIN EX PENSES OF RS.5 LACS AND ABOVE WERE DEBITED. THE LEARNED AR ON BEHALF OF TH E ASSESSEE EXPRESSED HIS INABILITY TO EXPLAIN THE EXACT DETAILS OF THE EXPEN DITURE INCURRED ON THE GROUND THAT THERE WERE HUGE NUMBER OF VOUCHERS AND RECEIPTS, WH ICH WERE VERY DIFFICULT TO TRACE OUT. SINCE THE ASSESSEE DID NOT FURNISH ANY B ILL OR VOUCHER IN ORDER TO ASCERTAIN THE NATURE OF THE EXPENDITURE WHILE THE C OPY OF LEDGER ACCOUNT DID NOT MENTION SUFFICIENT DETAILS ABOUT THE NATURE OF TRAN SACTIONS, ON FURTHER EXAMINATION OF THE DETAILS SUBMITTED BY THE ASSESSEE, THE AO CU LLED OUT FEW ITEMS OF EXPENDITURE ON PAGE 13 TO 16 OF THE ASSESSMENT ORDE R AND ACCORDINGLY, ESTIMATED 5 % OF THE TOTAL EXPENDITURE, BEING NOT ON CURRENT REPAIRS, TREATING THE SAME AS CAPITAL IN NATURE. ON APPEAL, THE LD. CIT(A ) AFTER ANALYZING THE ISSUE FURTHER REDUCED THE ESTIMATE TO 1%. NOT THE REVENUE BUT THE ASSESSEE IS IN NOW APPEAL BEFORE US. THE LD. AR ON BEHALF OF THE ASSES SEE MERELY CARRIED US THROUGH THE FINDINGS OF THE LOWER AUTHORITIES AND D ID NOT REFER US TO ANY MATERIAL CONTROVERTING THE AFORESAID FINDINGS OF THE LD. CIT (A). IN THE LIGHT OF AFORESAID ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 24 DECISIONS OF THE HONBLE APEX COURT AND CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE, ESPECIALLY WHEN THE LD. AR HAS NOT REFERRED US TO ANY MATERIAL SO AS TO TAKE A DIFFERENT VIEW IN THE MAT TER, WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE FINDINGS OF THE LD. CIT(A).THEREFORE, GR OUND NO. 2 IN THE APPEAL OF THE ASSESSEE IS DISMISSED. 16. GROUND NO.5 IN THE APPEAL OF THE ASSESSEE RELAT ES TO DISALLOWANCE OF PROVISIONS FOR DOUBTFUL DEBTS. THE AO NOTICED ON PE RUSAL OF SCHEDULE-17 TO THE ACCOUNTS THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.465.13 LACS ON ACCOUNT OF PROVISIONS FOR DOUBTFUL DEBTS/ADVANCES. TO A QUE RY BY THE AO, THE ASSESSEE DID NOT SUBMIT ANY MATERIAL EVIDENCE THAT THE DEBTS HAD ACTUALLY BECOME BAD OR WRITTEN OFF IN THE BOOKS OF ACCOUNTS. ACCORDINGLY, RELYING UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRAVANCORE TEA ESTATE CO. LTD. VS. CIT 233 ITR 203 AND THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CHETINAND COMPANY PVT. LTD. REPORTED IN 147 ITR 724 , THE AO REJECTED THE CLAIM FOR DEDUCTION OF PROVISION OF DOUBTFUL DEBTS OF RS .465.13 LACS. 18. ON APPEAL, THE LEARNED CIT(A) WHILE RELYING UPO N THE ORDERS OF THE CIT(A) IN ASSESSMENT YEARS 1996-97 AND 1997-98, UPHELD THE DISALLOWANCE WHILE DIRECTING THE AO TO ALLOW THE AMOUNT AS AND WHEN AC TUALLY WRITTEN OFF. 19. THE ASSESSEE IS IN APPEAL AGAINST THE AFORES AID FINDINGS OF THE LEARNED CIT(A).AT THE OUTSET, THE LEARNED AR ON BEHALF OF T HE ASSESSEE CONTENDED THAT THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE ITAT VIDE ORDER DATED 08-08-2008 IN ITA NOS. 525 AND 659/AHD/2002 FOR TH E AY 1996-97 AND 1997-98. ON THE OTHER HAND, THE LEARNED DR , WHILE SUPPORTIN G THE FINDINGS OF THE LEARNED CIT(A),DID NOT DISPUTE THE SUBMISSIONS OF THE LD. A R. 20. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE AS ALSO THE DECISION REFERRED TO. WE FIND THAT ITAT VI DE THEIR ORDER DATED 8-8-2008 IN ASSESSEES OWN CASE IN THE ASSESSMENT YEAR 1996-97 AND 1997-98 CONCLUDED THAT IN VIEW OF THE ADMITTED FACT THAT THE ASSESSEE HAD NOT WRITTEN OFF THE AMOUNT ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 25 IN QUESTION AND HAD CLAIMED SIMPLY ON THE BASIS OF PROVISION, THE LEARNED CIT(A) WAS QUITE JUSTIFIED IN UPHOLDING THE DENIAL OF ASSE SSEES CLAIM FOR BAD DEBTS. UNDISPUTEDLY, THE AMOUNT HAS NOT BEEN WRITTEN OFF I N THE ACCOUNTS IN THE YEAR UNDER CONSIDERATION. ACCORDINGLY, IN THE LIGHT OF T HE FINDINGS OF THE TRIBUNAL IN THE PRECEDING ASSESSMENT YEARS 1996-97 AND 1997-98, WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE FINDINGS OF THE LEARNED CIT(A), IN REJEC TING THE CLAIM OF THE ASSESSEE. THEREFORE, GROUND NO.5 IN THE APPEAL OF THE ASSESSE E IS DISMISSED. 21. GROUND NO.6 IN THE APPEAL OF THE ASSESSEERELATE S TO DISALLOWANCE OF AN AMOUNT OF RS.3,05,67,622/-, BEING EXPENSES INCURRED ON ABANDONED LPG PROJECT WRITTEN OFF. ON PERUSAL OF SCHEDULE -17 TO THE ACCO UNTS, AO FOUND THAT THE ASSESSEE CLAIMED DEDUCTION OF RS.365.08 LACS ON ACC OUNT OF WRITE OFF OF AN ABANDONED PROJECT. TO A QUERY BY THE AO, THE ASSESS EE EXPLAINED THAT THE PROJECT COMMITTEE IN THEIR MEETING HELD DATED 29-10 -2003 ACCORDED APPROVAL FOR SETTING UP A LPG PROJECT AT SIKKA WITH 4,00,000 MTP A CAPACITY AS PER VIABILITY REPORT PREPARED BY PROJECTS AND DEVELOPMENT INDIA L TD. BY INSTALLING 2 X 10,000 MT REFRIGERATED STORAGE TANKS, UNLOADING DOCILINE, TRUCK LOADING BAYS ETC. AT AN ESTIMATED COST OF RS.124 CRORES. SUBSEQUENTLY, DUE TO UNVIABILITY OF THE PROJECT, EXPENDITURE OF RS.3,05,67,622/- WAS WRITTEN OFF AS REVENUE EXPENDITURE. SINCE THE ASSESSEE DID NOT HAVE ANY INCOME FROM THE SAID PROJECT, THE AO DISALLOWED THE CLAIM OF EXPENDITURE. 23. ON APPEAL, THE ASSESSEE ARGUED THAT THE EXPENDI TURE HAD BEEN INCURRED IN CONNECTION WITH EXPANSION OF BUSINESS. HOWEVER, THE LEARNED CIT(A) REJECTED THESE CONTENTIONS OF THE ASSESSEE, HOLDING AS UNDER : 6.4 I AM UNABLE TO AGREE WITH THE APPELLANT ON TH IS POINT BECAUSE THIS WAS NOT EVEN AN EXPANSION OF AN EXISTING BUSIN ESS. THIS WAS AN ENTIRELY NEW PROJECT FOR DISTRIBUTION OF LPG AND FO R WHICH SEPARATE FACILITIES AND SPACE WERE TO BE CREATED. THIS PROJECT WAS IN N O WAY LINKED TO THE EXISTING AMMONIA, CAPROLACTUM, FERTILISER ETC. UNIT S ALREADY EXISTING. THEREFORE, IT WAS NOT A QUESTION OF EXTENSION OF TH E BUSINESS. THE ASSESSING OFFICER HAS RIGHTLY POINTED OUT THAT THE PROJECT NEVER GOT COMMISSIONED AND NO INCOME AROSE FROM THE SAME, THE REFORE, ALL EXPENDITURE WHETHER REVENUE OR CAPITAL PRIOR TO COM MENCEMENT HAS TO BE ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 26 CAPITALIZED, AND IF WRITTEN OFF THEN NO CLAIM IS AL LOWABLE UNDER THE HEAD OF BUSINESS INCOME. THE ASSESSING OFFICER IS CORRECT BOTH ON THE FACTS AND ON THE LEGAL POSITION OF THE CASE AND HENCE THE ADD ITION MADE IS UPHELD. 22. THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFORE SAID FINDINGS OF THE LEARNED CIT(A). AT THE OUTSET, THE LEARNED AR ON BE HALF OF THE ASSESSEE CONTENDED THAT A SIMILAR ISSUE IN TERMS OF GROUND N O.3 IN THE APPEAL FOR ASSESSMENT YEAR 1996-97 IN ITA NO. 525/AHD/2002 WAS RESTORED TO THE FILE OF THE AO FOR RE-EXAMINATION. ON THE OTHER HAND, THE LEARN ED DR DID NOT DISPUTE THESE SUBMISSIONS OF THE LEARNED AR . 23. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. IT IS WELL SETTLED COMMERCIAL PRINCIPLE OF ACCOUNTING THAT THE NATURE OF EXPENDITURE IS DETERMINED AT THE FIRST INSTANCE WHEN IT IS INCURRE D AND ITS NATURE CANNOT BE ALTERED ON ACCOUNT OF SUBSEQUENT EVENTS.WE FIND THA T IN THE ASSESSMENT YEAR 1996-97 THE ASSESSEE HAD STARTED A NEW JOINT VENTUR E WITH THE EQUITY PARTICIPATION BY THE ASSESSEE AND THE GOVERNMENT OF UGANDA. SUBSEQUENTLY, THE PROJECT WAS FOUND NOT FEASIBLE AND ACCORDINGLY, AN AMOUNT OF RS.91.20 LACS WAS WRITTEN OFF. IN THAT YEAR ALSO, THE ASSESSEE CLAIME D THAT THE EXPENDITURE WAS FOR THE EXPANSION OF EXISTING BUSINESS . THE FACTS AND CIRCUMSTANCES IN THE YEAR UNDER CONSIDERATION BEING SIMILAR TO THOSE IN THE A SSESSMENT YEAR 1996-97,WE FIND MERIT IN THE CONTENTION OF THE LEARNED AR ON B EHALF OF THE ASSESSEE AND ACCORDINGLY, FOLLOWING THE AFORESAID DECISION OF TH E ITAT FOR THE AY 1996-97, VACATE THE FINDINGS OF THE LEARNED CIT(A) AND RESTO RE THIS ISSUE BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION, IN ACCORDANCE WITH LAW, AFTER ALLOWING SUFFICIENT OPPORTUNITY OF HEARING TO THE ASSESSEE. WITH THESE DIRECTIONS, GROUND NO.6 IN THE APPEAL OF THE ASSESSEE IS DISPOSED OF. 24. GROUND NO.7 IN THE APPEAL OF THE ASSESSEE RELAT ES TO DISALLOWANCE OF DEPRECIATION IN RESPECT OF NYLON-6 PLANT ON THE AMO UNT RECEIVED AND TREATED TOWARDS REPAIRS. DURING THE FINANCIAL YEAR 1996-97 RELEVANT TO ASSESSMENT YEAR 1997-98, THERE WAS A MAJOR FIRE IN NYLON-6 PLANT IN THE FACTORY PREMISES AT FERTILIZERNAGAR. AGAINST THE DAMAGE, THE ASSESSEE R ECEIVED AN AMOUNT OF ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 27 RS.499.85 LACS FROM THE NEW INDIA ASSURANCE CO. LTD . TOWARDS LOSS OF PROFIT AND RS 724.98 LACS TOWARDS LOSS OF ASSETS/EQUIPMENTS DU RING THE ASSESSMENT YEAR 1999-2000. THE AMOUNT OF RS.499.85 LACS ON ACCOUNT OF LOSS OF PROFITS WAS OFFERED TO TAX UNDER THE HEAD OTHER INCOME WHILE OU T OF THE AMOUNT OF RS.724.98 LACS RECEIVED FROM NEW INDIA ASSURANCE CO. LTD. TOW ARDS DAMAGE OF ASSETS, AN AMOUNT OF RS.360.49 LACS WAS REDUCED FROM WDV OF TH E ASSETS AND RS.362.49 LACS WAS KEPT FOR MAINTENANCE. TO A QUERY BY THE AO , THE ASSESSEE EXPLAINED THAT THE COMPANY HAD PRESUMED THAT 50% OF THE AMOUN T RECEIVABLE FROM THE INSURANCE COMPANY WOULD BE USED FOR REPAIRING THE D AMAGED EQUIPMENTS AND 50% AGAINST EQUIPMENT DESTROYED. IT WAS EXPLAINED I N THE NOTES ATTACHED TO THE RETURN OF INCOME THAT THE MONEY RECEIVED FOR THE LO SS OR DAMAGE OF THE PROPERTY IN TERMS OF THE CONDITIONS OF CONTRACT, CANNOT BE L IABLE FOR CAPITAL GAIN OR UNDER ANY OTHER PROVISION OF THE ACT EVEN THOUGH THE AMO UNT WAS CREDITED IN THE PROFIT & LOSS ACCOUNT. INTER ALIA, THE ASSESSEE RELIED UPO N THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF VANIYA SILK MILLS PVT. LTD. VS. CIT,191 ITR 647 AND MYREBOND & KYEL TEA INDISTRIES LTD. VS. CIT,224 ITR 589(SC) . HOWEVER, THE AO DID NOT ACCEPT THESE CONTENTIONS OF THE ASSESSEE AN D RELYING UPON THE PROVISIONS OF SECTION 43(6)(C)(B) OF THE ACT, REDUCED THE ENTI RE AMOUNT FROM WDV OF THE PLANT AND MACHINERY AND ACCORDINGLY DISALLOWED 25% OF THE DEPRECIATION CLAIMED BY THE ASSESSEE AMOUNTING TO RS.90,62,500/-. 25. ON APPEAL, THE LEARNED CIT(A) WHILE RELYING UPO N APPELLATE ORDERS FOR THE ASSESSMENT YEAR 1996-97 AND 1997-98 UPHELD THE DISA LLOWANCE. 26. THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFORE SAID FINDINGS OF THE LD. CIT(A).AT THE OUTSET, THE LEARNED AR ON BEHALF OF T HE ASSESSE CONTENDED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION DATED 8.8 .2008 OF THE TRIBUNAL IN THE ASSESSEES OWN CASE IN ITA NO.659 AND 994/AHD/2002 FOR THE AYS 1997-98 & 1998-99 AGAINST THE ASSESSEE ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE FINDINGS OF THE LEARNED CIT(A) AND THE AFORESAID DE CISION OF THE TRIBUNAL. 27. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISION REFERRED TO BY THE LD. AR. WE FIN D THAT THE ITAT IN THEIR ITA NO.3228 & 3358/AHD/2003 GUJARAT STATE FERTILIZERS & CHEMICALS LTD. 28 AFORESAID ORDER DATED 8-8-2008 IN PARA NOS.33 TO 37 AND 56 AND 57 DECIDED THE ISSUE AGAINST THE ASSESSEE. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF THE ITAT, WE HAVE NO ALTERNATIVE BUT TO REJECT THE GROU ND RAISED BY THE ASSESSEE. THEREFORE, GROUND NO.7 IN THE APPEAL OF THE ASSESSE E IS DISMISSED. 28. GROUND NOS. 3 & 4 IN THE APPEAL OF THE REVENUE AND GROUND NO.1 IN THE APPEAL OF THE ASSESSEE, BEING GENERAL IN NATURE NOR ANY SUBMISSIONS HAVING BEEN MADE ON THESE GROUNDS, DO NOT REQUIRE ANY SEPA RATE ADJUDICATION AND GROUND NO. 4 IN THE APPEAL OF THE ASSESSEE HAVING N OT BEEN PRESSED BEFORE US WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED IN TE RMS OF THE RESIDUARY GROUND IN THE APPEAL OF THE ASSESSEE, ALL THESE GROUNDS ARE DISMISSED. 29. IN THE RESULT, BOTH THESE APPEALS ARE PARTLY AL LOWED, BUT FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28TH AUGUST, 2009 SD/- SD/- (H. L. KARWA) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE: 28TH AUGUST,2009 LAKSHMIKANT/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE 2. DCIT CIRCLE -1, BARODA 3. CIT(A)-I, BARODA 4. THE CIT CONCERNED 5. THE D.R. ITAT, AHMEDABAD, 6. GUARD FILE BY ORDER DR / AR, ITAT, AHMEDABAD