Alpha Toyo Limited, Faridabad V. Addl. CIT, Faridabad

ITA 3330/DEL/2011

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5172 (ITAT-DELHI)
• Duration Of Justice: 6 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-08-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 13-06-2017
• Assessment Year: 2002-2003
• Appeal Filed On: 23-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R C DANDAY
• Assessee Lawyers: SAMRAT JONEJA
• Keywords: Reopening of assessment; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 142(1); 37(1); 148

Judgement Text

1 ITA NOS. 3330 & 3331/DEL/2011 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: A NEW DELHI BEFORE SHRI R. K. PANDA, ACCOUNTANT MEM BER AND MS SUCHITRA KAMBLE, JUDI CIAL MEMBER I.T.A .NO. 3330/DEL/2 011 (A.Y .2002-03) AND I.T.A .NO. 3331/DEL/2 011 (A.Y .2003-04) ALPHA TOYO LTD. 9-H, SECTOR-6 FARIDABAD AABCA4900D (APPELLANT) VS ADD. CIT RANGE-1 FARIDABAD (RESPONDENT) APPELLANT BY SH. SAMRAT JONEJA, CA RESPONDENT BY SH. R.C. DANDAY, SR. DR ORDER PER SUCHITRA KAMBLE, JM THESE APPEALS ARE FILED BY THE ASSESSEE AGAINST THE ORDERS DATED 24.03.2011 AND 31.03.2011 PASSED BY CIT(A)- FARIDAB AD FOR A.YS. 2002-03 & 2003-04. 2. THE GROUNDS OF APPEAL ARE AS UNDER:- (ITA NO. 3330/DEL/2011) 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A), ERRED IN PASSING THE ORDER U/S 250 BY MI SCONCEIVING THE FACTS, MAKING UNFOUNDED ASSUMPTIONS AND BASED ON TH AT ARRIVING AT THE CONCLUSION THAT THE EXPENDITURE OF RS.47,74,477 /- INCURRED BY DATE OF HEARING 13.06.2017 DATE OF PRONOUNCEMENT 02.08.2017 2 ITA NOS. 3330 & 3331/DEL/2011 THE APPELLANT IS NOT A BUSINESS LOSS TO BE ALLOWED IN COMPUTING THE INCOME OF THE APPELLANT. 1.2. WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS A ND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A), ERRED IN PASSING TH E ORDER U/S 250 BY MISCONCEIVING THE FACTS, MAKING UNFOUNDED ASSUMP TIONS ON THE BASIS OF NOMENCLATURE GIVEN TO THE ENTRIES IN THE B OOKS OF ACCOUNTS INSTEAD OF ASCERTAINING THE REAL NATURE OF THE TRAN SACTION WHICH IS CONTRARY TO LAW AND BASED ON THAT ARRIVING AT THE C ONCLUSION THAT THE CAPITAL EXPENDITURE OF RS.47,74,477/- INCURRED BY T HE APPELLANT IS NOT TO BE TREATED AS A PART OF BLOCK OF ASSETS AND DEPRECIATION ALLOWANCE SHOULD NOT BE AFFORDED TO THE APPELLANT. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. (ITA NO. 3331/DEL/2011) 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A), ERRED IN PASSING THE ORDER U/S 250 BY M ISCONCEIVING THE FACTS, MAKING UNFOUNDED ASSUMPTIONS AND BASED ON TH AT ARRIVING AT THE CONCLUSION THAT THE EXPENDITURE OF RS.99,25,150 /- INCURRED BY THE APPELLANT IS NOT A BUSINESS LOSS TO BE ALLOWED IN COMPUTING THE INCOME OF THE APPELLANT. 1.2 WITHOUT PREJUDICE TO THE ABOVE, ON THE FACTS AN D CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN PASSING THE ORDER U/S 250 BY MISCONCEIVING THE FACTS, MAKING UNFOUNDED ASSUMPTIO NS ON THE BASIS OF NOMENCLATURE GIVEN TO THE ENTRIES IN THE B OOKS OF ACCOUNTS INSTEAD OF ASCERTAINING THE REAL NATURE OF THE TRAN SACTION WHICH IS CONTRARY TO LAW AND BASED ON THAT ARRIVING AT THE C ONCLUSION THAT THE CAPITAL EXPENDITURE RS.99,25,150/- INCURRED BY THE APPELLANT IS NOT 3 ITA NOS. 3330 & 3331/DEL/2011 TO BE TREATED AS A PART OF BLOCK OF ASSETS AND DE PRECIATION ALLOWANCE SHOULD NOT BE AFFORDED TO THE APPELLANT. THE ABOVE GROUNDS OF APPEAL ARE MUTUALLY EXCLUSIVE AND WITHOUT PREJUDICE TO EACH OTHER. 3. THE ASSESSEE COMPANY IS A PUBLIC LIMITED COMPANY MANUFACTURING AUTO COMPONENTS LIKE HANDLE BAR SWITCHES FOR ESCORT/YAMA HA SINCE 1978. IN 1989, THE COMPANY ACQUIRED THE RIGHT TO USE DESIGN, DRAWI NGS AND OTHER TECHNICAL KNOW-HOW FOR MANUFACTURING OF LOCKS AND CAR COMBINA TION SWITCHES FROM ASAHI ALPHA LIMITED. ASAHI ALPHA LIMITED HAD IN TUR N OBTAINED THE RIGHT TO USE IN 1988 FROM ASAHI DENSO LIMITED. IN THE RESPECTIVE YEARS THE COST OF TECHNICAL KNOW-HOW, INTEREST ON IFCI LOAN AND SMALL MACHINE T OOLS WERE NOT CLAIMED AS REVENUE AS THE COMMERCIAL PRODUCTION HAD NOT STARTE D. THE ENTIRE DEVELOPMENT COST WAS SHOWN UNDER THE HEAD DEFERRED REVENUE EXP ENDITURE IN THE BALANCE SHEET ASSET SIDE. AS PER THE ASSESSEE, ALL THESE EXPENSES ARE ALLOWABLE IN THE NORMAL COURSE OF REVENUE EXPENDITURE. 4. FOR THE SAKE OF CONVENIENCE WE HEREBY TAKING UP THE FACTS OF A.Y. 2002- 03. DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 2002- 03, M/S YAMAHA MOTORS FOR WHOM THIS DEVELOPMENT WAS BEING DONE SWITCHED OVER FROM EARLIER TECHNOLOGY OF 2 STROKE ENGINE TO 4 STROKE ENGINE AND FROM 6 VO LT BATTERY TO 12 VOLT BATTERY. THUS THE USAGE AND DEMAND OF THE PRODUCT BEING DEVE LOPED BY THE ASSESSEE CAME TO AN END AND THE ENTIRE LOCK PROJECT WAS ABOR TED. THE RETURN OF INCOME DECLARING LOSS OF RS.40,28,879/-WAS FILED BY THE AS SESSEE ON 30/10/2002 FOR A.Y. 2002-03, WHICH WAS PROCESSED U/S 143(1) OF THE ACT ON 26/2/2004. THEREAFTER, THE A.O OBSERVED THAT IN THE P & L ACCO UNT, THE ASSESSEE HAD CLAIMED EXPENDITURE OF RS. 47,74,477/- UNDER THE HE AD LOCK PROJECT WRITTEN OFF. SINCE THE EXPENDITURE BEING CAPITAL IN NATUR E, THE A.O RECORDED THE REASONS THAT THE INCOME TO THAT EXTENT HAD ESCAPED ASSESSMENT AND ISSUED NOTICE U/S 148 OF THE ACT ON 19/3/2007. IN RESPONS E TO THE SAID NOTICE, THE ASSESSEE FILED RETURN DECLARING SAME LOSS OF RS.40, 28,879/-. IN RESPONSE TO 4 ITA NOS. 3330 & 3331/DEL/2011 NOTICE U/S 143(2), THE LD. COUNSEL OF THE ASSESSEE VIDE LETTER DATED 14/8/2007 REQUESTED FOR SUPPLY OF THE REASONS RECORDED FOR RE OPENING OF ASSESSMENT. THE COPY OF REASONS RECORDED WAS SUPPLIED ON THE SAME D AY. IN RESPONSE TO FURTHER NOTICES U/S 143(2) AND 142(1) DATED 11/9/2007, THE ASSESSEE OBJECTED TO REOPENING OF ASSESSMENT. THE A.O THEREFORE, DISPOS ED OFF THE OBJECTIONS BY PASSING A SPEAKING ORDER ON 11/10/2007. THE A.O PR OVIDED THE OPPORTUNITY TO THE ASSESSEE AS TO WHY THE CLAIM OF RS.47,74,477/- MAY NOT BE DISALLOWED. THE ASSESSEE CONTENDED THAT THE EXPENDITURE SHOULD BE ALLOWED AS INCURRED DURING THE YEAR. THE A.O, HOWEVER, HELD THAT THE ASSESSEE FAILED TO CLARIFY THE SPECIFIC SECTION UNDER WHICH SUCH LOSS WAS CLAIMED AND ALSO FAILED TO ESTABLISH THE NECESSARY CONDITIONS FOR ALLOWING SUCH CLAIM AS ELI GIBLE BUSINESS EXPENDITURE. ACCORDINGLY, THE CLAIM OF LOCK PROJECT WRITTEN OFF AMOUNTING TO RS.47,77,477/- WAS DISALLOWED BY THE ASSESSING OFFICER. 5. AGGRIEVED BY THE ORDER OF THE A.O, THE ASSESSEE FILED APPEAL BEFORE THE CIT(A) AND THE CIT(A) HELD AS UNDER:- 6.1. AS REGARDS GROUND NO. 2 OF APPEAL, IT IS EVI DENT FROM THE RECORDS THAT THE APPELLANT HAD INCURRED EXPENDITURE UNDER THE HEAD LOCK PROJECT WHICH INCLUDED CAPITAL WORK IN PROGRESS, TECHNICAL KNOWHOW AND DEFERRED REVENUE EXPENDITURE ETC. AGGREGATING TO RS.47,74,47 7/- TILL 31.03.2002. THE SAME HAS BEEN WRITTEN OFF IN THE P&L ACCOUNT AN D CLAIMED AS REVENUE EXPENDITURE. ADMITTEDLY, THE ENTIRE EXPENDITURE WAS ON ACCOUNT OF SETTING UP A NEW PROJECT FOR MANUFACTURING LOCKS ETC. FOR Y AMAHA MOTORS LTD. HENCE, THE EXPENDITURE INCURRED ON SETTING UP OF A NEW PROJECT WAS ON CAPITAL ACCOUNT. THE SAME HAS BEEN SHOWN AS WORK IN PROGRESS AND EVEN THE EXPENDITURE WHICH WAS INCIDENTAL TO SETTING UP OF PROJECT AND REVENUE IN NATURE HAD TO BE INCLUDED AS DEFERRED REVENUE EX PENDITURE AS THE ASSETS SO INVOLVED IN THE NEW PROJECT WERE NOT PUT TO USE FOR THE PURPOSE OF BUSINESS. ONLY THE EXPENDITURE OF RECURRING NATURE CAN BE ALLOWED AS ELIGIBLE BUSINESS EXPENDITURE. SINCE, THE EXPENDITU RE WAS INCURRED ON 5 ITA NOS. 3330 & 3331/DEL/2011 CREATION OF INCOME GENERATING APPARATUS FOR THE PUR POSE OF GETTING ENDURING BENEFITS, SUCH EXPENDITURE WAS CERTAINLY C APITAL IN NATURE. AS CONTENDED IN GROUND NO. 2, THE AFORESAID EXPENDITUR E CANNOT BE' LEGALLY PERMITTED TO FORM PART OF BLOCK OF ASSETS AS THE AS SETS REPRESENTED BY THE SAID EXPENDITURE HAVE NOT BEEN PUT TO USE FOR THE P URPOSE OF BUSINESS, SO AS TO ENTITLE THE APPELLANT TO CLAIM DEPRECIATION. IT IS ONLY AFTER FULFILLMENT OF THIS CONDITION THAT AN ASSET SHALL FORM PART OF REL EVANT BLOCK OF ASSET ONLY AFTER IT HAS BEEN PUT TO USE FOR BUSINESS PURPOSE. THEREFORE, ON FACTUAL AND LEGAL ASPECTS, I DO NOT FIND ANY FORCE IN THE AVERM ENTS OF THE LEARNED COUNSEL THAT SUCH EXPENDITURE REPRESENTING WORK IN PROGRESS IS ELIGIBLE TOBE INCORPORATED IN THE BLOCK OF ASSETS. ONCE, THE EXPE NDITURE HAS BEEN HELD TO BE CAPITAL IN NATURE, THE AO IS UNDER NO LE GAL OBLIGATION TO VERIFY REASONS AND NATURE OF SAME WITH YAMAHA MOTORS LTD. HENCE, THE GROUND NO. 2 OF APPEAL IS DISMISSED. 6.2. IN THE GROUND NO. 3 OF APPEAL, THE LEARNED COU NSEL HAS CONTENDED THAT ALTERNATIVELY, THE SAID EXPENDITURE MAY BE ALLOWED AS BUSINESS LOSS. SINCE, THE ENTIRE EXPENDITURE WAS ON CAPITAL WORK, THE SAME IS NOT PERMITTED TO BE ALLOWED AS BUSINESS LOSS UNDER ANY PROVISIONS OF THE ACT. IT IS CORRECT THAT THE PROJECT HAS NOT COMMENCED AN D THE ENTIRE AMOUNT SPENT ON THAT PROJECT HAS BEEN A LOSS TO THE APPELL ANT BUT THE SAID LOSS IS ON CAPITAL ACCOUNT. THE LOSS IS CAPITAL IN NATURE. IT WOULD BE ONLY AFTER THE ASSETS REPRESENTING SUCH EXPENDITURE ARE SOLD OR OT HERWISE DISCARDED OR DISPOSED OFF THAT THE CAPITAL LOSS WOULD BE DETERMI NED AND NOT TILL THE EXPENDITURE REMAINS AS CAPITAL WORK IN PROGRESS. TH EREFORE, I FIND NO MERITS IN THE CONTENTIONS RAISED WITH REFERENCE TO THIS GROUND OF APPEAL. HENCE, GROUND NO. 3 OF APPEAL ALSO STANDS DISMISSED . THE ACTION OF THE AO IN TREATING THE SAID LOSS AS CAPITAL LOSS AND IN CO NSEQUENTIAL DISALLOWANCE THEREOF IS UPHELD. 6. THE LD. AR SUBMITTED THAT INCURRING EXPENSES FOR ADDING A NEW PRODUCT 6 ITA NOS. 3330 & 3331/DEL/2011 LINE OR FOR A NEW MODEL OF EXISTING PRODUCT LINE IS A REGULAR FEATURE OF COMPANYS BUSINESS. SOMETIMES ORDERS ARE NOT OBTAI NED. BASED ON MATCHING CONCEPT THE EXPENSES ARE RECORDED IN PROFIT & LOSS ACCOUNT IN THE YEAR SALES IS REALIZED. THE OBVIOUS REASONS FOR WRITING OFF WAS THE CHANGE OF TECHNOLOGY BY THE CUSTOMERS FOR WHICH OUR DEVELOPMENT WAS NOT SUI TABLE. THIS WAS EXPLAINED IN DETAILS AND ALSO SUPPORTED BY AFFIDAVI T FROM THE ASSESSEE. THE A.O WAS REQUESTED FOR DIRECT CONFIRMATION FROM THE CUST OMER ABOUT THE ASSESSEES CLAIM. THE WRITING OFF WAS BEYOND CONTROL OF THE A SSESSEE IN LIEU OF THE CIRCUMSTANCES, THEREFORE THIS WAS CLAIMED AS REVENU E EXPENDITURE U/S 37(1) FOR THE REASONS THAT THIS EXPENDITURE INCURRED AS NEW L OCK PROJECT WAS A NEW PRODUCT LINE BELONGING TO THE SAME BUSINESS OF THE AUTO-COMPONENTS AND TAKEN UNDER THE SAME COMPANY WITH UNITY OF CONTROL AND COMMON FUNDS AND ALL THE EXPENDITURES, IF APPRECIATED INDIVIDUALLY A RE ALL REVENUE IN NATURE. BESIDES ABOVE THE ASSESSEE COMPANY HAD BROUGHT FORW ARD UNABSORBED LOSSES OF RS.5.4 CRORE. THE WRITTEN OFF WAS NOT DONE TO S AVE TAX. THE LD. AR RELIED UPON THE JUDGMENT OF HONBLE DELHI HIGH COURT IN CA SE OF INDO RAMA SYNTHETIC INDIA PVT. LTD VS. CIT 333 ITR 18. AS RELATES TO GR OUND NO. 2, THE LD. AR SUBMITTED THAT THE SAME IS NOT PRESSED. AS RELATES TO ADDITIONAL GROUND NO. 3, THE LD. AR SUBMITTED THAT AS THE ASSESSEE HIMSELF H AS DISALLOWED RS.7,66,940/- THEREFORE THE DISALLOWANCE BY THE A.O , SHOULD HAVE BEEN REDUCED IN RESPECT OF THIS AMOUNT. 7. THE LD. DR RELIED ON THE ORDER OF THE ASSESSING OFFICER & THE CIT(A). THE LD. DR ALSO SUBMITTED THAT THE ISSUE OF EXPENDITURE INCURRED IN RESPECT OF BUSINESS OR NOT HAS TO BE REMANDED BACK TO THE ASSE SSING OFFICER TO VERIFY THE SAME. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. FROM THE RECORDS IT CAN BE REVEALED THAT T ECHNICAL KNOW-HOW FEES EXPENSES PENDING FOR CAPITALIZATION AND DIFFERED RE VENUE EXPENDITURE WAS NOT PROPERLY LOOKED INTO BY THE ASSESSING OFFICER AS WE LL AS BY THE CIT(A). THUS, 7 ITA NOS. 3330 & 3331/DEL/2011 THE EXPENDITURE INCURRED FOR NEW LOCK PROJECT HAS T O BE VERIFIED BY THE ASSESSING OFFICER AS THE LD. AR SUBMITTED THAT NEW LOCK PROJECT WAS A NEW PRODUCT LINE BELONGING TO THE SAME BUSINESS OF THE AUTO-COMPONENTS AND TAKEN UNDER THE SAME COMPANY WITH UNITY OF CONTROL AND COMMON FUNDS AND ALL THE EXPENDITURES, AND IF THE SAID APPRECIATED I NDIVIDUALLY ARE ALL REVENUE IN NATURE. THE SAME HAS TO BE VERIFIED BY THE ASSESSIN G OFFICER. THE MATTER NEEDS TO BE REMANDED BACK BEFORE THE ASSESSING OFFICER FO R THIS ISSUE. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING. AS RELATES TO GROUND NO. 2, THE SAME IS NOT PRESSED BY THE ASSESSEE, HENCE DISM ISSED. THE ADDITIONAL GROUND NO. 3 THOUGH THE SAID GROUND WAS NOT TAKEN B EFORE THE CIT(A), THE SAME HAS TO BE VERIFIED BY THE ASSESSING OFFICER. T HE MATTER NEEDS TO BE REMANDED BACK BEFORE THE ASSESSING OFFICER FOR THIS ISSUE. NEEDLESS TO SAY, THE ASSESSEE BE GIVEN OPPORTUNITY OF HEARING. 9. IN RESULT, THE APPEALS OF THE ASSESSEE ARE PARTL Y ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 02 ND AUGUST, 2017 . SD/- SD/- (R. K. PANDA) (SUCHITRA KAMBLE) ACCOUNTANT MEMBER JUDICIAL MEM BER DATED: 02/08/2017 R. NAHEED * COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT 8 ITA NOS. 3330 & 3331/DEL/2011 ASSISTANT REGISTRAR ITAT NEW DELHI DATE 1. DRAFT DICTATED ON 13/06/2017 PS 2. DRAFT PLACED BEFORE AUTHOR 13/06/2017 PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER .2017 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 02.08.2017 PS/PS 6. KEPT FOR PRONOUNCEMENT ON PS 7. FILE SENT TO THE BENCH CLERK 0 2 .08.2017 PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER.