Appeal Details
Counselvise Citation
36324114 RSA 2013
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
10 month(s) 10 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
01-10-2014
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
DB
Next Hearing Date
15-07-2014
Assessment Year
2008-2009
Appeal Filed On
21-11-2013
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO S . 361 & 362 /PNJ/2013 (ASSESSMENT YEAR - 2008 - 09 &2009 - 10 ) THE ASST . COMMISSIONER OF INCOME , CIRCLE - 1, MARGAO , GOA. (APPELLANT) VS. M/S. SALGAOCAR MINING INDUSTRIES PVT. LTD., SALGAOCAR CHAMBERS, P.B.NO.35, MARGAO - GOA . PAN: AABCS8862 N (RESPONDENT) ITA NO.363 /PNJ/2013 (ASSESSMENT YEAR - 2008 - 09 ) M/S. SALGAOCAR MINING INDUSTRIES PVT. LTD., SALGAOCAR BHAWAN, ALTINHO, PANAJI - GOA PAN:AABCS8862 N (APPELLANT) VS. THE ADDL. COMMISSIONER OF INCOME TAX, MARGAO RANGE, MARGAOA . (RESPONDENT) REVENUE BY : SHRI NISHANT K. LD. DR. ASSESSEE BY : VICTOR NELATURI, ADV. DATE OF HEARING : 15/07 /2014 DATE OF PRONOUNCEMENT : 01/10 /2014 O R D E R PER: D.T. GARASIA (JM) THE ABOVE CROSS APPEALS FILED AGAINST THE ORDER OF CIT(A) ORDER DATED 24.09.2013 FOR A.Y.2008 - 09. 2. THE FOLLOWING GROUNDS ARE RAISED BY THE DEPARTMENT IN A . Y.2008 - 09 . 2 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 1. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) ORDER IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)PANAJI, HAS ERRED IN DELETING ADDITION AMOUNTING TO RS.37,56,939/ - TOWARDS PORT DEVELOPMENT EXPENSES MADE BY THE AO. THE LD. CIT(A), PANAJI ERRED IN TREATING THIS EXPENSES AS A REVENUE EXPENSES AS AGAINST CAPITAL EXPENSES. 3. WHET HER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)PANAJI, HAS ERRED IN DELETING ADDITION OF RS. 9,73,844/ - MADE BY THE AOON ACCOUNT OF SALVAGE WRECK REMOVAL EXPENSES. 4. THE LD. CIT(A), PANAJI HAS ERRED IN DELETING ADDITION OF RS. 35,89,64,088 / - RELATING TO CAPITAL EXPENDITURE INCURRED ON SHIP RENOVATION VIZ M V SUNRISE, MADE BY THE AO IGNORING THE DECISIONS OF THE SUPREME COURT IN THE CASE OF CIT V/S SARAVANA SPINNING MILLS PVT. LTD 293 ITR 201 AND BALLIMAL NAVAL KISHORE V/S. CIT (1997) 244 IT R 414, MODI SPINNING & WEAVING MILLS CO. L TD V/S. CIT (DEL) 200 ITR 544). CURRENT REPAIRS DOES NOT INCLUDE CAPITAL EXPENDITURE U/S. 31. 5. THE LD. CIT(A), PANAJI HAS ERRED IN DELETING ADDITION OF RS. 15,25,16,576/ - MADE BY THE AO TOWARDS UNACCOUNTED / EXC ESS STOCK BY IGNORING THE STRONG EVIDENCE COLLECTED BY THE AO IN THE SHAPE OF LETTER DATED 06/12/2010 GIVEN BY THE DIRECTORATE OF MINES AND GEOLOGY, GOVERNMENT OF GOA WHICH CONFIRMS THE PRODUCTION OR THE EXTRACTION OF ORE IN THE MINES OF THE ASSESSEE AT 7, 833MT ONLY DURING THE PERIOD RELEVANT TO A.Y. 2008 - 09. 2.1. W HEREIN THE FOLLOWING GROUNDS ARE RAISED BY THE ASSESSEE IN A.Y2008 - 0 9 . 1. CIT - APPEALS HAS ERRED IN UPHOLDING DISALLOWANCE U/S. 14A OF RS.3,240,027/ - . THE DISALLOWANCE U/S. 14A R.W.S. RULE 8D WORKS OUT TO RS.22,201/ - . 2. THE CIT(A) HAS ERRED IN TREATING CONTRIBUTION OF RS. 13,854,167/ - , TO GOA INFRASTRUCTURE DEVELOPMENT COMPA NY LIMITED, A GOVERNMENT UNDERTAKING, TOWARDS CONSTRUCTION OF USGAO BRIDGE WHICH IS ESSENTIAL FOR SMOOTH AND EFFICIENT RUNNING OF THE BUSINESS OF THE ASSESSEE, AS A CAPITAL EXPENDITURE. 2.2 THE FOLLOWING GROUND GROUNDS ARE RAISED BY THE DEPARTMENT IN AY2 009 - 10. 1. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) ORDER IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)PANAJI, HAS ERRED IN DELETING ADDITION OF RS. 10,94,884/ - U/S. 14A R.W. RULE 8D. 3 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 3 . THE LD. CIT(A), PANAJI HAS ERRED IN DELETING ADDITION OF RS. 48,60,08,180/ - RELATING TO CAPITAL EXPENDITURE INCURRED ON SHIP RENOVATION VIZ M V SUNRISE, MADE BY THE AO IGNORING THE DECISIONS OF THE SUPREME COURT IN THE CASE OF CIT V/S SARAVANA SPINNING M ILLS PVT. LTD 293 ITR 201 AND BALLIMAL NAVAL KISHORE V/S. CIT (1997) 244 ITR 414, MODI SPINNING & WEAVING MILLS CO. LTD V/S. CIT (DEL) 200 ITR 544]. CURRENT REPAIRS DOES NOT INCLUDE CAPITAL EXPENDITURE U/S. 31. ITA NO.363/PNJ/2013 FOR A.Y.2008 - 09 3. GROUND NO.1 OF ASSESSEES APPEAL WHICH READ AS UNDER: 1. CIT - APPEALS HAS ERRED IN UPHOLDING DISALLOWANCE U/S. 14A OF RS.3,240,027/ - . THE DISALLOWANCE U/S. 14A R.W.S. RULE 8D WORKS OUT TO RS.22,201/ - . 3.1. THE SHORT FACTS OF THE ASSESSEE ARE THAT THE ASSES SEE HAS RECEIVED DIVIDEND INCOME OF RS. 53,75,09,470/ - WHICH IS CLAIMED AS EXEMPT. THE ASSESSEE HAS NOT DISALLOWED ANY EXPE NDITURE U/S 14A. ON THIS INCOME . DURING THE COURSE OF HEARING, THE ASSESSEE WAS ASKED AS TO WHY EXPENDITURE ON THIS ACCOUNT SHOULD NO T BE COMPUTED AS PROVIDED UNDER RULE 8D OF INCOME TAX RULES. IN REPLY, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE - COMPANY SUBMITTED THAT THE ASSESSEE - COMPANY HAS RECEIVED DIVIDEND ON SHARES OF M/S TUNGABHADRA MINERALS PVT. LTD., AND THESE SHARES WERE INHERITED AFTER PARTITION OF V. M. SALGAOCAR FAMILY IN THE YEAR 1982. IT WAS ALSO SUBMITTED THAT SINCE THESE SHARES WERE NOT PURCHASED BY THE ASSESSEE - COMPANY, THERE IS NO UTILIZATION OF ANY FUNDS OUT OF THE INCOME OF THE ASSESSEECOMPANY AND HENCE NO EXPEN SES WERE INCURRED ON EARNING THIS DIVIDEND INCOME. AFTER CONSIDERING THE REPLY THE ASSESSING OFFICER HAS CALCULATED THE DISALLOWANCE. THE ASSESSING OFFICER HAS ALSO VERIFIED AND INFORMED THAT THE ASSESSEE HAS MAINTAINED AS DIVERSE EQUITY PORTFOLIO AND HAS INVESTED IN 3 DIFFERENT COMPANIES AND MUTUAL FUNDS THE INVESTMENTS IN THESE COMPANIES AND FUNDS AT THE BEGINNING AND CLOSE OF THE PERIOD RELEVANT TO THIS ASSESSMENT YEAR IS AS UNDER: NAME OF THE FUND AS ON 31/03/2007 AS ON 01/04/2006 INVESTMENTS (LONG TERM) (NON TRADE) 1) UNQUOTED RUPEES RUPEES 4 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 2)IN SUBSIDIARY COMPANIES 24, 120 EQUITY SHARES OF SALITHO ORES LTD., OF THE FACE VALUE OF RS.100/ - EACH FULL PAID. 4,307,205 4,307,205 50,000 EQUITY SHARES OF SALGAOCAR SHIPPING CO. PVT. LTD. OF THE FACE VALUE OF RS. 100/ - EACH FULL PAID (10 SHARES HELD IN THE NAME OF NOMINEE) 50,00,000 RUPEES 88,802 EQUITY SHARES OF TUNGABHADRA MUNERALS PVT. LTD. OF THE FACE VALUE OF RS.100/ - EACH FULL PAID. 44,40,100 44,40,100 1000 EQUITY SHARES OF BEST DEVELOPMENT & SERVICES PVT. LTD. OF THE FACE VALUE OF RS. 100/ - EACH FULL PAID. 1,00,000 1,00,000 1000 EQUITY SHARES OF EVERGAINT DEVELOPMENT & ADVISORS PVT. LTD. OF THE FACE VALUE OF RS. 100/ - EACH FULL PAID. 1,00,000 1,00,000 1000 EQUITY SHARES OF GOLDWIN BUILDERS PVT. LTD. OF THE FACE VALUE OF RS.100/ - EACH FULL PAID. 1,00,000 1,00,000 1000 EQUITY SHARES OF HARVEST BUILDERS CONSULTANTS PVT. LTD. OF THE FACE VALUE OF RS. 100/ - EACH FULL PAID. 1,00,000 1,00,000 999 EQUITY SHARES OF LEELA ESTATE DEV & INV CO PVT. LTD. OF THE FACE VALUE OF RS. 100/ - EACH FULL PAID. 99,900 99,900 501 EQUITY SHARES OF AUDI CONSTRUCTIONS PVT. LTD. OF THE FACE VALUE OF RS. 100/ EACH FULL PAID. 50,100 - B) IN OTHER COMPANIES 1,80,000 EQUITY SHARES OF DAMODAR BULK CARRIERS PVT. LTD. OF THE FACE VALUE OF RS. 10/ - EACH FULL PAID. 10,85,724 LESS: PROVISION FOR DIMINUTION IN INVESTMENTS 10,85,724 LESS: PROVISION FOR DIMINUTION IN INVESTMENTS 10,85,724 10 ,85,724 (10,85,724) 500 EQUITY SHARES OF NILHAT SHIPPING CO. PVT. LTD. OF THE FACE VALUE OF RS. 10/ - EACH FULL PAID 5 ,000 5,000 500 EQUITY SHARES OF JAYARAJ ESTATE DEVELOPMENT AND INVESTMENT CO. PVT. LTD. OF THE FACE VALUE OF RS.100/ - EACH FULL PAID. 50 ,000 5 0,000 29,000 EQUITY SHARES OF BEVIT PHARMACEUTICALS PVT. LTD. OF THE FACE VALUE OF RS.10/ - EACH FULL PAID UP. 2,89,500 289,500 6,50,000 EQUITY SHARES OF FMAM 65,00,000 65,00,000 5 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) AIRTIME PVT. LTD. OF THE FACE VALUE OF RS.10/ - EACH FULL PAID UP. 7,50,000 EQUITY SHARES OF MILLENIUM DECCAN BROADCAST PVT. LTD. OF THE FACE VALUE OF RS. 10/ - EACH FULL PAID 7,50,000 - 10,00,000 EQUITY SHARES OF KAKINADA SEA PORTS LIMITED, OF THE FACE VALUE OF RS. 10/. - EACH FULL PAID UP. 1,00,00,000 II QUOTED 571 EQUITY SHARES OF AUTOMOBILE CORPORATION OF GOA LTD. OF THE FACE, VALUE OF RS.107/ - EACH FULLY PAID.(MARKET VALUE RS.2,57,093/ - @ RS.450.23/ - PER SHARE) 10,525 10,525 171 NON - CONVERTIBLE PORTION OF 17% SECURED REDEEMABLE PARTLY CONVERTIBLE DEBENTURES OF AUTOMOBILE CORPORATION OF GOA LTD., OF THE FACE VALUE OF RS,75/ - EACH FULLY PAID. (PARTLY REDEEMED) 4,275 4,275 5005 EQUITY SHARES OF CAIRN INDIA LTD. OF THE FACE VALUE OF RS.160/ - EACH FULLY PAID (MARKET VALUE RS.11,21,621/ - @ RS.224.10/ - PER SHARE) 8,00,800 8,00,800 460 EQUITY SHAR ES OF IDEA CELLULAR IPO OF THE FACE VALUE OF RS.75/ - EACH FULLY PAID (MARKET VALUE RS.47219/ - @ RS. 102.65/ - PER SHARE) 34,500 34,500 BIRLA SUNLIFE - MUTUAL FUND 10,00,00,000 DSP MERRILL LYNCH INDIA T.I.G.E.R . MUTUAL FUND (MARKET VALUE RS. 1 8,80,474/ - NAV @ RS.41.3080 FOR 45,523.244UNITS) ( 25,00,000 - DSP MERRILL LYNCH INDIA T.I.G.E.R - MUTUAL FUND (MARKET VALUE RS.11,444,244/ - NAV @ RS.413080 FOR 277,046.6824 UNITS) 10,000,000 10,000,000 DSP MERRILL LYNCH OPPORTUNITIES - FUND - 10,000,000 HDFC EQUITY FUND (MARKET VALUE RS. 1,04,89,990/ - NAV@ RS.165.788 FOR 63,273.5188 UNITS) 10,000,000 10,000,000 ING VYSYA DOMESTIC OPPORTUNITIES FUND 10,000,000 PRUDENTIAL ICICI INFRASTRUCTURE FUND(MARKET VALUE RS.1,34,93,734/ - NAV @ RS.26.92 FOR 501,253. 1328 UNITS) 10,00 0,000 10,000,000 SUNDARAM BNP PARIBAS SELECT - 1,50,00,000 6 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) MIDCAP RELIANCE DIVERSIFIED POWER SECTOR FUND (MARKET VALUE RS. 1,34,33,199/ - NAY @ RS.42. 1742 FOR 3 18516.985 UNITS) 10,000,000 10,000,000 RELIANCE DIVERSIFIED POWER SECTOR GROWTH FUND (MARKET VALUE RS.2.031,242/ - NAY @ 62.8944 32,296.07 UNITS) 2,50,000 RELIANCE EQUITY OPPORTUNITIES FUND - 10,000,000 REANCE GROWTH FUND MARKET VALUE RS.1,73,24,543/ - NAY @ RS.333.74 FOR 51,910.299 UNITS) 1,50,00,000 1,50,00,000 DSP ML WORLD GOLD FUND (MARKET VALUE RS.32,27,618/ - NAY @ RS.14.1601 FOR 227,937.545 UNITS) 30,00,000 - ICICI PRUDENTIAL INFRASTRUCTURE FUND (MARKET VALUE RS. 20,75,239/ - NAY 26.92 FOR 77,089.115 UNITS) FUND ICICI PRUDENTIAL INFRASTRUCTURE 25,00,000 - JM BASIC FUND (MARKET VALUE RS.19,07,363/ - NAV @ RS. 26.,4211 FOR 72,190.907 UNITS) 25,00,000 ASK PORTFOLIO (MARKET VALUE RS.4,30,28,964/ - ) 5,00,00,000 TOTAL 15,74,91,905 22,19,41,805 THE ASSESSING OFFICER FOUND THAT ASSESSEE WAS MOVED FUNDS FROM ONE SCH EME TO ANOTHER POSSIBLY WITH A VIEW TO GET BETTER RETURNS. THEREFORE, THE ASSESSING OFFICER HAS RELIED UPON THE VARIOUS DECISIONS AND HE HAS CALCULATED THE DISALLOWANCE U/S. 14A R.W.S. 8D, A SUM OF RS. 32,40 ,027/ - , . THE ASSESSEE HAS GIVEN THE CALCULATION OF DISALLOWANCE U/S. 8D BUT ASSESSING OFFICER WAS OF THE VIEW THAT THIS CALCULATION OF THE ASSESSEE IS NOT AS PER LAW, THEREFORE, HE DISALLOWED A SUM OF RS. 32,40,027/ - 3.2. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DISMISSED THE APPEAL OF THE ASSESSEE . 3.3. DURING THE COURSE OF HEARING, WE FIND THAT THE ASSESSEE HAS GIVEN THE CALCULATION OF HIS DISALLOWANCE U/S. 14A R.W. RULE 8D WHICH READ AS UNDER: 1 AMOUNT OF EXPENDITURE DIRECTLY RELATING TO DIVIDEND INCOME 7 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 2 THE AMOUNT OF INTEREST WHICH IS NOT D IRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT FORMULA AXB/C A=AMOUNT OF INTEREST OTHER THAN INTEREST INCLUDED IN (1) B=THE AVERAGE VALUE OF INVESTMENT ON WHICH DIVIDEND EARNED C=AVERAGE TOTAL ASSETS AS APPEARING IN B/SHEET AT THE FIRST DAY AND LAST DAY HERE IN THE CASE OF APPELLANT A IS NIL BECAUSE THE INTEREST PAID WERE AS UNDER: ON FIXED LOANS FOR PURCHASE OF ASSETS .. RS. 4,18,51,712 ON PACKING CREDIT. RS. 1,22,30,003 ON CHARTER HIRE/HIRE PURCHASE RS. 54,25,317 TOTAL RS.5,95,07,032 ALL THESE INTERESTS PAID WERE DIRECTLY ATTRIBUTABLE TO THE INCOME FROM SALE OF ORE, TRANSHIPPER RECEIPTS, HIRE RECEIPTS ONLY. THE RULE 8D TALKS ABOUT THE INTERES T WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPTS, HEREIN OUR CASE INTERESTS PAID WERE DIRECTLY ATTRIBUTABLE TO ABOVE INCOME/RECEIPTS. B AVERAGE OF INVESTMENT AT THE BEGINNING OF THE YEAR RS. 44,40,100 INVESTMENT AT THE END OF THE YEAR RS. 44,40,100 AVERAGE OF THEM RS. 44,40,100 C AVERAGE OF TOTAL ASSETS AT THE 1ST DAY OF THE YEAR RS. 583, 36, 55,929 TOTAL ASSETS AT THE LAST DAY OF THE YEAR RS.777,36,49,695 AVERAGE WORKS OUT TO RS.680,36,52,8 12 THUS IN CASE OF APPELLANT AXB/C 0XRS.44,40,100 RS.680,36,52,812 THE AMOUNT EQUAL TO ONE AND HALF PERCENT OF AVERAGE INVESTMENT ON FIRST DAY AND LAST DAY OF THE YEAR 0.50% OF RS.44,40,100 RS.22,201 TOTAL RS.22,201 8 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) WE FIND THAT THIS CALCULATION OF THE ASSESSEE WAS GIVEN BUT CIT(A) HAS NOT GIVEN ANY FINDING WHETHER THIS CALCULATION IS AS PER LAW OR NOT. THE CIT(A) HAS NOT CALLED FOR REMAND FROM THE ASSESSING OFFICER, THEREFORE, IN THE INTEREST OF JUSTICE AND FAIR PL AY, WE RESTORE THIS CALCULATION TO THE FILE OF CIT (A) AND CIT(A) IS DIRECTED TO RECALCULATE THE DISALLOWANCE U/S. 14A R. W. RULE 8D OF THE IT ACT, AND CIT (A) IS DIRECTED TO PASS THE SPEAKING ORDER AFTER CONSIDERING THIS CALCULATION AND PASS THE ORDER AS PER LAW GIVING OPPORTUNITY OF HEARING TO THE ASSESSEE. APPEAL OF THE ASSESSEE IS ALLOWED STATISTICAL PURPOSE. 4. GROUND NO. 2 WHICH READ AS UNDER: - 2. THE C IT(A) HAS ERRED IN TREATING CONTRIBUTION OF RS. 13,854,167/ - , TO GOA INFRASTRUCTURE DEVELOPMENT COMPANY LIMITED, A GOVERNMENT UNDERTAKING, TOWARDS CONSTRUCTION OF USGAO BRIDGE WHICH IS ESSENTIAL FOR SMOOTH AND EFFICIENT RUNNING OF THE BUSINESS OF THE ASSES SEE, AS A CAPITAL EXPENDITURE. 4.1. THE SHORT FACTS OF THIS GROUND IS THAT THE ASSESSEE C OMPANY HAS DEBITED A SUM OF RS. 1,38,54,167/ - AS CONTRIBUTION TO GOA INFRASTRUCTURE DEVELOPMENT CO. LTD., FOR CONSTRUCTION OF USGAO BRIDGE. IT HAS BEEN SUBMITTED THAT GOVT OF GOA HAS ASKED TO MINES AT USGAO AREA CONSTRUCTION THE BRIDGE AS THE BRIDGE WAS USED BY THEM FOR TRANSPORTATION OF MINERALS ORES. THE OLD BRIDGE WAS CLAIMED TO HAVE BEEN DAMAGED BECAUSE OF THE TRANSPORTATION UNDERTAKEN BY THE MINE OWNERS. SINCE IT W AS NOT POSSIBLE FOR THE MINE OWNERS TO OPERATE THEIR MINES AND TO TRANSPORT ORES, ALL THE MINE OWNERS OF THE AREA WHO USED THIS BRIDGE AGREED FOR CONSTRUCTION OF THE BRIDGE. THE ASSESS EE HAS CONTRIBUTED A SUM OF RS. 1,38,54,167 / - AND CLAIMED AS A BUSINESS E XPENDITURE AS A REVENUE EXPENDITURE. 4. 2 . THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS CONFIRMED THE ORDER OF AO. 4. 3 . WE HAVE HEAD THE RIVAL CONDITION OF THE PARTIES. THE ASSESSEE HAS PAID RS. 13 , 854 , 167/ - BEING SHARE PAID TO GOA INFRASTRUCTURE DEVELOPMENT CORPORATION OF NEW USGAO BRIDGE. THE EXISTING BRIDGE WAS DESTROYED DURING 9 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) THE LIBERATION OF GOA AND THEREAFTER IT WAS REPAIRED FROM THE LEFT OVER STRUCTURES, COLUMNS ETC AS AN INTERIM MEASURE. T HIS BRIDGE ALLOWED ONLY ONE WAY TRAFFIC AT A TIME AND WAS MEANT FOR LIGHT GENERAL TRAFFIC NAMELY BUSES , CARS ETC. WITH INCREASE IN EXPORTS OF IRON ORE FROM 16 MILLION IN 2005 TO 50 MILLION TILL MARCH 2012, THERE WAS A NEED TO BUILD A NEW BRIDGE WITHOUT WH ICH IT WOULD NOT BE POSSIBLE TO CONTINUE TO EXPORT ON SUSTAINABLE BASIS. UNTIL THE NEW USGAO BRIDGE CAME INTO OPERATION THERE WAS LONG LINE OF TRUCKS WAITING ON EITHER SIDE OF EXISTING BRIDGE TO TRANSPORT THE IRON ORE. BY THIS, PRECIOUS TIME WAS LOST WHI CH IN TURN TRUCKS MADE LESS N UMBERS OF TRIPS PER DAY. THIS IN TURN INCREASED COST OF TRANSPORT. AFTER THE NEW BRIDGE WAS COMMISSIONED LOADED TRUCKS AND EMPTY TRUCKS MOVED IN OPPOSITE DIRECTION WITHOUT HAVING TO STOP OR WAIT FOR THE BRIDGE PASSAGE. THIS ESTABLISHES CLEARLY THAT THE SHARE OF EXPENSES FOR CONSTRUCTION OF THE NEW USGAO BRIDGE HAS RESULTED IN REVENUE IN TERMS OF COST PER TON TRANSPORTED AS WELL AS INCREASE IN THE QUANTITY OF ORE EXPORTED/SOLD. EXPENDITURE INCURRED BY COMPANY AS SHARE FOR CON STRUCTION OF NEW USGAO BRIDGE CANNOT BE CAPITAL EXPENDITURE BUT IS ENTIRELY REVENUE EXPENDITURE. AMOUNTS PAID AS CONTRIBUTION FOR CONSTRUCTION OF A BRIDGE FOR PROVIDING EASIER ACCESS FOR ITS WORKMEN AND MOVEMENT OF GOODS WOULD BE PERMISSIBLE REVENUE EXPEN DITURE AS HAD BEEN HELD IN CIT V. COATS VIYELLA INDIA LTD. [2002] 253 ITR 667 (MAD) FOLLOWING THE DECISION IN L.H. SUGAR FACTORY AND OIL MILLS (P) LTD. V. CIT [1980] 125 ITR 293 (SC), WHERE A SIMILAR CONTRIBUTION FOR CONSTRUCTION OF A ROAD TO FACILITATE T HE BUSINESS OF THE ASSESSEE WAS HELD TO BE REVENUE EXPENDITURE. THE FACT THAT SUCH CONTRIBUTION RESULTED IN CAPITAL ASSET WOULD NOT MAKE ANY DIFFERENCE, BECAUSE THE ASSESSEE IS NOT THE OWNER OF SUCH ASSET CREATED BY THE CONTRIBUTION. THE DISPUTE RELATE D TO EXPENDITURE INCURRED ON CONSTRUCTION OF ACCESS ROAD TO THE NEW BIRLA PERICLASE PLANT AT VISHAKAPATNAM IN ANDHRA PRADERSH. THIS APPROACH ROAD HAD BEEN CONSTRUCTED DURING THE YEAR ON THE LAND BELONGING TO THE 10 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) GOVERNMENT AND THE OWNERSHIP OF THE SAME WA S NOT WITH THE ASSESSEE. DEDUCTION FOR THE SAME WAS CLAIMED AS REVENUE EXPENDITURE. THE TRIBUNAL RELIED ON THE SUPREME COURT JUDGMENT OF EMPIRE J UTE CO. LTD. V. CIT[1980] 124 ITR 1 (SC), WHEREIN IT WAS HELD THAT THE INFERENCE, WHETHER A PARTICULAR EXPEND ITURE WAS IN THE NATURE OF CAPITAL EXPENDITURE OR REVENUE EXPENDITURE WAS DEPENDENT ON THE FACTS OF THECASE. A LUMP SUM PAYMENTS OR ENDURING BENEFIT IS NOT CONCLUSIVE TEST. THE SUPREME COURT HAD FURTHER HELD THAT WHERE THE PAYMENT FOR SECURING AN ENDURING ADVANTAGE IS IN THE REVENUE FILED IT WOULD BE REVENUE IN NATURE. WHERE THE EXPENDITURE WAS FOR OPERATION AND THE WORKING OF AN EXISTING PROFIT - MAKING APPARATUS, IT COULD ONLY BE REVENUE IN NATURE. IT IS ONLY WHERE THE EXPENDITURE WAS RELATED TO ANY ADDIT ION OR AUGMENTATION OF THE PROFIT - MAKING APPARATUS, THE SAME WOULD BE CAPITAL IN NATURE. RESPECTFULLY FOLLOWING THE SAME, WE ALLOW THE CLAIM. THIS GROUND OF APPEAL IS ALLOWED. ITA NO. 361 /PNJ/2013 FOR A.Y.2008 - 09 GROUND NO.1 . GENERAL IN NATURE 5. GROUND NO.2 OF THE DEPARTMENTS APPEAL WHICH READ AS UNDER: - 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)PANAJI, HAS ERRED IN DELETING ADDITION AMOUNTING TO RS.37,56,939/ - TOWARDS PORT DEVELOPMENT EXPENSES MADE BY THE AO. THE LD . CIT(A), PANAJI ERRED IN TREATING THIS EXPENSES AS A REVENUE EXPENSES AS AGAINST CAPITAL EXPENSES. 5.1 DURING THE COURSE OF SCRUTINY PROCEEDING IT WAS OBSERVED THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE OF RS.37,56,939/ - AS DREDGING AND CLEANING CHARGES AT VAGUS BANDAR(JETTY). THE ASSESSEE COMPANY HAS CLAIMED THE SAME AS REVENUE EXPENDITURE INCURRED WHO LLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND THEREFORE, ALLOWABLE U/S. 37(1) OF THE INCOME TAX ACT. THE ISSUE WAS CONSIDERED IN THE ASSESSMENT YEAR 2006 - 07 WHEREIN SUCH 11 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) EXPENDITURE WAS HELD AS CAPITAL IN NATURE. THE FACTS INVOLVED B EING IDENTICAL IN THIS ASSESSMENT YEAR, THE SAME VIEW WOULD NEED TO PREVAIL THIS ASSESSMENT YEAR ALSO. ACCORDINGLY, FOLLOWING THE ASSESSMENT ORDER FOR ASSESSMENT YEAR 2006 - 07, THE EXPENDITURE OF RS. 37,56,939/ - WAS DISALLOWED IN THIS YEAR. 5.2. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS ALLOWED THE CLAIM, FOLLOWING THE ASSESSMENT ORDER OF A.Y.2007 - 08 . I HAVE GONE THROUGH THE ASSESSMENT ORDER, FACTS OF THE ISSUE AND ARGUMENTS OF THE APPELLANT. DREDGING EXPENSES IS A PERIODICAL EXPENSE REQUIRED TO BE INC URRED FOR SMOOTH SAILING OF THE BARGES AND DOES NOT CREATE ANY CAPITAL ASSET OWNED BY THE APPELLANT. THEREFORE, IN MY OPINION, IT CANNOT BE CAPITALIZED AND HAS TO BE ALLOWED AS REVENUE EXPENDITURE. THE A.O. IS DIRECTED TO DELETE ADDITION OF RS. 37,56,939 / - ACCORDINGLY . 5.3. WE HAVE HEARD THE RIVAL CONDUCTION OF THE BOTH THE PARTIES THE ASSESSEE HAS INCURRED THESE EXPENSES AT VAGUS BANDUR. THESE EXPENSES WERE INCURRED DUE TO FLOW AND WATER CURRENT SAND GET ENUMERATED AT BOTTOMALONGSIDE JETTY VERY FREQUENTLY WHI CH BEING ENTRANCE FOR MOORING THE BAGGIES ALONG SIDE OF JETTY. THE CLEANING OF THE TANK IS ESSEN TIAL FOR SMOOTH BAR LOADING OPERATION. THE DREADING OPERATION IS REQUIRED TO BE DONE EVERY NOW AND THEN IT RECURRING NATURE AND NOT OF ANY ENDUR ING CAPITAL NATURE THEREFORE THESE EXPENSES ARE REVENUE EXPENSES. WE FIND THAT MAINTENANCE ORDINARILY INVOLVE REPLACEMENT. SUCH EXPENSES SHOULD BE TREATED AS REPAIRS AND BE DEDUCTIBLE FROM TAXABLE INCOME. THE CORRECTOR OF OUT LAY IS TO WHETHER IT IS CAP ITAL OR REVENUE DOES NOT DEPEND UPON MAGNITUDE OF OUT LAY BUT ON HIS NATURE. WE ARE OF THE VIEW THAT WHEN ANY EXPENDITURE INCURRED ON ACCOUNT OF FACILITYASSESSEE DREADING OPERATION OR ENABLING MAINTENANCES AND CONDUCT OF THE ASSESSEESBUSINESS MORE PREOPE RATIVELY WHILE LIVING THE FIX CAPITAL ON TAX. REPLACEMENT OF SAND IS REVENUE EXPENDITURE. IN THIS CASE THE ASSESSEE HAD INCURRED THE EXPENSES FOR PRESERVING AND MAINTAIN IN G ALREADY EXISTINGASSETS AND DES NOT BRING A NEW 12 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) ASSETS OR DOES NOT THE ASSESSEE G IVE ON DEFERENT ADVANTAGECANNOT BE TREATED AS CAPITAL EXPENSES. IN THE CASE OF CIT VS. HOTEL CONTROL PVT. LTD. [2004] 265 ITR 109 (UTTARANCHAL), IT WAS FOUND ADMISSIBLE ON THE GROUND THAT THE HOTEL SITUATED AT MUSSORIE HAD REQUIRED SUCH HEAVY EXPENDITURE AS NECESSITATED BY CLIMATIC CONDITIONS. THE ISSUE HAD ARISEN BECAUSE THE ASSESSEE HAS TREATED IT AS DEFERRED REVENUE EXPENDITURE PROMPTING THE ASSESSING OFFICER TO TREAT IT AS A CAPITAL EXPENDITURE. RENOVATION WAS CONCEDED IN PROVIDING FLUSH SYSTEM FOR LATRINES, REPLACING TILED ROOF BY CEMENT ROOF, CONSTRUCTION OF A WATER TANK , REPLACEMENT OF CONCRETE FLOOR BY KOTAA STONES AND REPAIRS TO THE FURNITURE. THOUGH THE DECISION WAS RENDERED IN THE CONTEXT OF RENOVATION NECESSITATED BY CLIMATIC CONDITIONS, THE POSITION SHOULD NOT BE DIFFERENT, EVEN WHERE IT IS PROMPTED BY OTHER CONSIDERATIONS LIKE BUSINESS EXIGENCIES TO MEET COMPETITIVENESS AND THE EXPECTED INCREASE IN STANDARD OF COMFORT FOR THE CUSTOMERS. SUCH AMOUNTS MAY NOT BE TREATED AS CAPITAL EXPENDITUR E MERELY BECAUSE THE BENEFIT OF SUCH EXPENDITURE WOULD OVERFLOW THE EXPENDITURE ITSELF. SUCH EXPENDITURE CANNOT BE TREATED AS CAPITAL EXPENDITURE. WE ARE OF THE VIEW THE CIT (A) APPEAL IS JUSTIFIED IN TREATING DREDGING EXPENSES AS REVENUE EXPENDITURE. I N THE RESULT THE DEPARTMENTAL APPEAL IS DISMISSED. 6. GROUND NO.3 WHICH READ AS UNDER: - 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A)PANAJI, HAS ERRED IN DELETING ADDITION OF RS. 9,73,844/ - MADE BY THE AO ON ACCOUNT OF SALVAGE WRECK REMOVAL EXPENSES. 6.1. THE ASSESSEE HAS CLAIMED AS BUSINESS EXPENDITURE AN AMOUNT OF RS. 9,73,844/ - TOWARDS SALVAGE WRECK REMOVAL EXPENSES. THE ASSESSEE WAS ASKED TO EXPLAIN THE NATURE OF THIS EXPENDITURE. THE ASSESSEES AUTHORIZED REPRESENTATIVE CLARIFIED THAT THE SHIP M.V. SANGEEVANI WAS SUNK IN 1996. AFTER VARIOUS LEGAL DISPUTES AND IN ACC ORDANCE WITH COURT ORDER, THE SALVAGE OPERATIONS WERE STARTED IN THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 2006 - 07. 13 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) THE ASSESSEE S CONTENDED THAT THE SALVAGING OF THE SHIP WHICH BELONGED TO THE ASSESSEE IS ALSO THE BUSINESS OF THE ASSESSEE COMPANY AND THA T THESE WERE INITIAL EXPENSES IN THE NATURE OF PAYMENTS MADE TO UNDERWATER DIVERS FOR INSPECTION. THE ASSESSEE SUBMITTED THAT WHEN THE WRECK IS REMOVAL AND SOLD AS SCRAP T HE INCOME WOULD BE OFFERED FOR TO TAX. THEREFORE, ASSESSEE CLAIMED THIS EXPENDITURE AS REVENUE EXPENDITURE. 6.2. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS FOLLOWING THE ORDER OF A.Y 2006 - 07 AND 2007 - 08. TREATED AS REVENUE EXPENDITURE. 6.3. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND THAT THE M.V. SANJEEVANI, A SHIP WAS SUNK PRIOR TO 1996 AND AS PER THE COURT ORDER THE ASSESSEE CONDUCTED THE SALVAGE OPERATION OF THE SHIP IN THIS YEAR. THE ASSESSING OFFICER DENIED THE CLAIM OF THE ASSESSEE. THE COMPANY SHIP BELONG TO THE ASSESSEE AND AS PER THE COURT ORDER THE ASSESSEE HAS INCURRED THIS EXPENDITURE FOR BUSINESS PURPOSE. THE ASSESSEE OFFER FOR TAXATION OF SALE VALUE OF SCRAP GENERATED IN THE YEAR IN WHICH IT IS SOLD. THE ASSESSEE HAS RELIED UPON THE DECISION OF CIT VS. CRESCENT FILMS (P.) LTD. 214/248 ITR 670 (MAD.) WHEREIN IT IS HELD THAT IN THE CASE OF SALVAGING ASSET IF THE EXPENDITURE OR NATURE OF TRANSACTION IS SUCH AS TO BE REGARDED AS ONE IN THE REVENUE FIELD, IT CANNOT BE TREATED AS CAPITAL, MERELY BECAUSE SUCH EXPENDITURE IS INCURRED FOR THE PURPOSE OF SALVAGING THE CAPITAL. WE FIND THAT THE CIT(A) IS JUSTIFIED IN HIS TREATING THIS EXPENDITURE AS REVENUE EXPENDITURE AND OUR INTERFERENCE IS NOT REQUIRED. IN THE RESULT, REVENUE APPEAL IS DISMISSED ON THI S GROUND. A.Y.2007 - 08 TREATED AS A REVENUE EXPENDITURE. 7. GROUND NO.4 THIS GROUND RELATES TO DELETING THE ADDITION OF RS.35,89,64,088/ - AS CAPITAL EXPENDITURE INCURRED ON SHIP RENOVATION VIZ M V 14 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) SUNRISE. THE ASSESSEE COMPANY HAS INCURRED THE FOLLOWING EXPENDITURE WHICH READ AS UNDER: - SR. NO. PARTICULARS AMOUNT (US$) REMARKS 1 TOWARDS THE PAYMENT TO COSCO (NANTONG) SHIPYARD CO. LTD FOR DRY - DOCK CHARGES AND RELATED CHARGES 4 3 , 98,000 .00 THESE ARE ALL THE CHARGES OF SHIPYARD WHICH INCLUDE THE REPAIRS AND SERVICING OF THE SHIP. THESE REPAIRS ARE MAINLY THE REPLACEMENT OF STEEL PLATES AND OTHER PARTS. THE HULL OF THE SHIP IS OF STEEL PLATES. SINCE THE SHIP IS ALWAYS IN WATER, THE HULL GET S CORRODED AND HENCE THE MAJORITY OF STEEL PLATES REQUIRED TO REPLACED. THE FILE CONTAINING BRIEF INFORMATION OF THIS DRY - DOCKING EXPENSES IS ENCLOSED. 2 TOWARDS THE SUPPLY OF BUNKER AT SINGAPORE AND CHINA OCEAN AS PER BILLS ENCLOSED 1 6 , 88,577.49 THIS IS THE SUPPLY OF FUEL 3 PORT DISBURSEMENT CHARGES REMITTED TO CHINA OCEAN SHIPPING AGENCY, NANTONG 41,308,66 THESE ARE PORT STATUTORY DUES 4 TOWARDS THE SUPPLY OF CONSUMABLES & SPARES 1 7 , 76,014.42 THESE ARE THE COST OF CONSUMABLES AND SPARES USED FOR REPAIRS. 5 TOWARDS THE SUPPLY OF PROVISION FOR SHIP CREW DURING THEIR STAY IN CHINA AND SINGAPORE 44,007.32 THESE ARE THE COST OF PROVISIONS I.E. FOOD ETC SUPPLIED FOR CREW MEMBERS 6 OPERATING EXPENSES LIKE TRAVELLING, STATIONERY, TELEPHONE ETC INCURRED AT CHINA AND SINGAPORE 5 , 35,524.91 THESE ARE RELATED EXPENSES 15 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 7 TOWARDS OUR TECHNICAL CONSULTANCY, SUPERVISION DURING REPAIRS AND PROVIDING FUNDS BEING 5.25% OF THE FULL AMOUNT 4 , 45,380 .00 THESE ARE THE F EES . TOTAL 89,25,812.80 (UNITED STATES DOLLAR EIGHT MILLION NINE HUNDRED TWENTY EIGHT THOUSAND EIGHT HUNDRED TWELVE AND CENTS EIGHTY ONLY) THE AO HAS VERIFIED THIS EXPENDITURE AND HE WAS OF THE VIEW THAT MAJOR PART OF SHIP WAS THE MAJOR PART OF THE SHIP WAS REPLACED. THIS UNDOUBTEDLY EXTENDED THE LIFE OF THE SHIP. THE DRY DOCKING WAS UNDERTAKEN CASCO (NANTONG) SHIPYARD - CHINA. THE ASSESSING OF FICER WAS OF THE VIEW THAT EVERY PART OF THE SHIP LIKE PROPELLER, VALVES, HATCH COVE, HYDRAULIC JACKS, ENGINE, TURBO CHARGER, DECK PIPING, CONVEYOR BELT, CRANES, SLEW BEARINGS, PEDESTAL, LIFEBOATS, TUNNEL, ACCOMMODATION DECKS, MAIN DECK, HATCH COVER CHAINS , CARGO HOLD, BULKHEADS, SIDE STIFFENERS, HOPPER PLATES, HULL HEADS, TANK HOP, STOOL SPACE STIFFENERS, DOUBLE BOTTOM PLATES, TANK HOP PLATES WERE OVERHAULED OR RENEWED. BEFORE AO THAT DRY DOCKING IS NECESSARY FOR RUNNING THE SHIP OR NOT AND WHETHER THE AS SESSEE HAS OBTAINED THE CERTIFICATE FROM CHARTERED ENGINEERS CERTIFICATES BEFORE AND AFTER THE DRY DOCKING, ANY DOCUMENTS(S) FROM THE AUTHORITIES SPECIFYING THAT THE AFORESAID DRY - DOCKING WAS ESSENTIAL, NAVIGATION CERTIFICATES BEFORE AND AFTER THE DRY - DO CKING. THE ASSESSEE HAS PRODUCED THE FOLLOWING DOCUMENTS WHICH READ AS UNDER: CERTIFICATE OF INDIAN REGISTRY DATED: 21.07.1998 THAT SHOW THAT THE SHIP M.V.SUNRISE WAS BUILT IN 1974 AND HAD A DOUBLE REVERSIBLE DIESEL ENGINE OF 1973 MAKE. CERTIFICATE OF CLASS ISSUED BY INDIAN REGISTER OF SHIPPING ON 17.02.2006 VIDE CERTIFICATE NO. 06047 AS PER WHICH SUBSEQUENT TO SURVEY CARRIED OUT IN MARCH/SEPTEMBER 2005, THE SHIP WAS CERTIFIED FOR TRANSSHIPMENT SERVICES IN FAIR WEATHER WITHIN 12 NAUTICAL MILES OFF PORTS ON WEST COAST OF INDIA AND FOR TRANSIT BETWEEN THEM IN BALLAST TILL 29.03.2010. CERTIFICATE NO. COL10P034 DATED: 13.09.2010 ISSUED BY INDIAN REGISTER OF SHIPPING CARRYING FOLLOWING PARTICULARS: 16 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) PARTICULARS OF SHIP NAME OF SHIP SUNRISE DISTINCTIVE NUMBER OR LETTERS 2769/VVRO PORT OF REGISTRY MUMBAI LENGTH (L) AS DEFINED IN ARTICLE 2(8)(METRES) 215.42 GROSS TONNAGE 34920 IMO NUMBER 7352335 FREEBOARD ASSIGNED AS *A NEW SHIP TYPE OF SHIP *TYPE B VII. THE AFORESAID THREE CERTIFICATES ISSUED BY CERTIFICATE OF INDIAN REGISTRY/INDIAN REGISTER OF SHIPPING ON VARIOUS DATES REVEAL THE FOLLOWING: THE SHIP M.V. SUNRISE WAS MANUFACTURED IN 1974 AND HAD AN ENGINE OF 1973 VINTAGE. THE SHIP WAS THEREFORE VERY OLD AND ITS DESIGNATED LIFE WAS DUE TO EXPIRE SHORTLY. THE SHIP M.V. SUNRISE HAD A VALID CERTIFICATE FOR TRANSSHIPMENT SERVICES TILL 29.03.2010. THUS, THERE WAS NO NEED TO CARRY OUT DRY - DOCKING RESTORATION IN JUNE 2007 MERELY TO OBTAIN A SEAWORTHINESS CERTIFICATE. THE ASSESSEES CONTENTION THAT DRY - D OCKING WAS NECESSARY FOR OBTAINING THE AFORESAID SEAWORTHINESS CERTIFICATE IS THEREFORE NOT SUPPORTED BY FACTS ON RECORD. AFTER THE DRY - DOCKING RESTORATION, THE SHIP M.V SUNRISE WAS ASSIGNED AS A NEW SHIP ALBEIT CARRYING THE OLD REGISTRATION. THIS SHOWS TH AT DRY - DOCKING REJUVENATED RESTORED THE OLD SHIP AS A NEW ASSET. AFTER VERIFYING THIS EXPENDITURE THE ASSESSING OFFICER HAS TREATED THIS EXPENDITURE AS CAPITAL EXPENDITURE. DURING THE COURSE OF ASSESSMENT PROCEEDING, IT WAS NOTICED THAT THE ASSESSEE HAS ONE TIME MADE EXPENDITURE OF RS.35,89,64,088/ - AS EXPENDITURE ON REPAIRS AND DRY DOCKING OF THE TRANSHIPPERS VESSEL M.V. SURISE. THE ASSESSEE WAS GIVEN SHOW CAUSE NOTICE AND ASSESSEE CONTENDED BEFORE AO THAT THE EXPENDITURE CONSISTS OF MAINTENANCE AND DRY DOCKING EXPENSES FOR M.V.SUNRISE. IT WAS FURTHER STATED THAT ALL THESE E XPENSES WERE NECESSARY FOR OPERATING AND MAINTAINING THE VESSEL IN GOOD WORKING CONDITION AS WELL AS TO FOLLOW THE NORMS LAID DOWN BY THE GOVERNMENT REGULATORY BODIES WHICH HAVE TO BE COMPLIED WITH. THIS EXPENSES HAVE TO BE INCURRED EVERY YEAR. THE ASSESSI NG OFFICER HAS VERIFIED THE EXPENDITURE AND WE 17 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) FIND THAT M.V SURISE WAS PURCHASED BY THE ASSESSEE COMPANY IN 1998. ITS WRITTEN DOWN VALUE IS RS.22,08,13,601/ - THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY DURING THE LAST FINANCIAL YEAR WAS 35,89,64,088 / - ON DRY - DOCKING AND RS.11,70,335/ - ON OTHER REPAIRS. THE ASSESSING OFFICER WAS OF THE VIEW THAT THIS REPAIR COMPRISE CHANGE OF THE ENTIRE HULL OF THE SHIP. THUS, THE MAJOR PART OF THE SHIP WAS REPLACED. THIS UNDOUBTEDLY EXTENDED THE LIFE OF THE SHIP. TH E DRY DROP EXPENSES D I D NOT CLEANS THE HULL BUT IT CLEANS EVERY PART OF THE SHIP LIKE PROPELLER, VALVES, HATCH COVE, HYDRAULIC JACKS, ENGINE, TURBO CHARGER, DECK PIPING, CONVEYOR BELT, CRANES, SLEW ETC. THEREFORE, ALL THE SHIPS WERE EITHER OVERHAULED OR R ENEWED. THE ASSESSING OFFICER WAS OF THE VIEW THE SHIP DESPITE RETAINING ITS OLD NAME AND OLD REGISTRATION, ACTUALLY BECAME A NEW ASSET WITH A LONG LIFE CAPABLE OF BENEFITING ASSESSEES BUSINESS FOR AN EXTENDED PERIOD OF TIME. THEREFORE, HE TREATED THIS EX PENDITURE IN CAPITAL NATURE. HE RELIED UPON THE EXPLANATION TO SECTION 31 THAT WAS INSERTED W.E.F. 1.04.2004 SPECIFICALLY EXCLUDES ANY EXPENDITURE IN THE NATURE OF CAPITAL FROM CURRENT REPAIRS. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE EXPENDITURE ON DRY DOCKING WAS NOT AN ANNUAL AFFAIRS AND MOST OF THE PARTS OF THE SHIP WERE OVERHAULED OR RENEWED DURING THE DRY DOCKING AND HENCE THE ASSET WAS RESTORED. IT WAS REPLACED MAJOR PARTS OF THE BODY OF THE ASSET. THEREFORE, THE ASSESSING OFFICER WAS OF THE VI EW THAT THIS IS NOT A ROUTINE EXPENDITURE TOWARDS RUNNING/OPERATION OF THE AFORESAID VESSEL BUT WAS IN THE NATURE OF STRUCTURAL REMODELLING WHICH TANTAMOUNT TO CREATION OF THE NEW CAPITAL ASSET THAT WOULD GIVE BENEFIT OF AN ENDURING NATURE TO THE ASSESSEE COMPANY. THEREFORE, HE TREATED THIS AS A CAPITAL EXPENDITURE AND THE ASSESSING OFFICER HAS ALLOWED DEPRECIATION FROM A.Y. 2010 - 11. 7. 1 . MATTER CARRIED TO CIT (A). 18 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 7. 2 . CIT(A) VERIFIED THE DETAIL EXPENDITURE AND HE CATEGORIZED FOLLOWING EXPENDITURE CAN NEVER BE TREATED AS CAPITAL EXPENDITURE WHICH READ AS UNDER: SR. NO. PARTICULARS AMOUNT (US$) REMARKS 1 TOWARDS THE PAYMENT TO COSCO (NANTONG) SHIPYARD CO. LTD FOR DRY - DOCK CHARGES AND RELATED CHARGES 4,398,000 THESE ARE ALL THE CHARGES OF SHIPYARD WHICH INCLUDE THE REPAIRS AND SERVICING OF THE SHIP. THESE REPAIRS ARE MAINLY THE REPLACEMENT OF STEEL PLATES AND OTHER PARTS. THE HULL OF THE SHIP IS OF STEEL PLATES. SINCE THE SHIP IS ALWAYS IN WATER, THE HULL GET CO RRODED AND HENCE THE MAJORITY OF STEEL PLATES REQUIRED TO REPLACED. 2 TOWARDS THE SUPPLY OF BUNKER AT SINGAPORE AND CHINA OCEAN 1,688,577.49 THIS IS THE SUPPLY OF FUEL 3 PORT DISBURSEMENT CHARGES REMITTED TO CHINA OCEAN SHIPPING AGENCY, NANTONG 41,308,66 THESE ARE PORT STATUTORY DUES 4 TOWARDS THE SUPPLY OF CONSUMABLES & SPARES 1,776,014.42 THESE ARE THE COST OF CONSUMABLES AND SPARES USED FOR REPAIRS. 5 TOWARDS THE SUPPLY OF PROVISION FOR SHIP CREW DURING THEIR STAY IN CHINA AND SINGAPORE 44,007.32 THESE ARE THE COST OF PROVISIONS I.E. FOOD ETC SUPPLIED FOR CREW MEMBERS 6 OPERATING EXPENSES LIKE TRAVELLING, STATIONERY, TELEPHONE ETC INCURRED AT CHINA AND SINGAPORE 535,524.91 THESE ARE RELATED EXPENSES 7 TOWARDS OUR TECHNICAL CONSULTANCY, SUPERVISION DURING REPAIRS AND PROVIDING FUNDS BEING 5.25% OF THE FULL AMOUNT 445,380 THESE ARE THE FEES TOTAL 8,929,812,80 19 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE SUBMISSION OF THE APPELLANT. THE FACTS THAT EMERGE FROM THE ASSESSMENT ORDER AND SUBMISSION OF THE APPELLANT, CAN BE SUMMARIZED AS UNDER: 1) THE APPELLANT PURCHASED AN OLD SEA VESSEL A CARGO SHIP AND CONVERTED THE SAME INTO A TRANSSHIPPER. 11) DURING THE YEAR UNDER CONSIDERATION AND IN THE SUBSEQUENT YEAR, THE APPELLANT CLAIMED TO HAVE SPENT SUBSTANTIAL AMOUNT IN REPAIRS AND MAINTENANCE. III) THE A.O CONCLUDED THAT SINCE SUBSTANTIAL AMOUNT HAS BEEN S PENT, THE ASSESSEE HAS ACHIEVED BENEFIT OF ENDURING NATURE AND THEREFORE THE EXPENDITURE SHOULD BE CAPITALIZED. HE ALSO DECIDED THAT SINCE THE VESSEL WAS NOT USED FOR THAT YEAR AND THE SUBSEQUENT YEAR, NO DEPRECIATION BE ALLOWED FOR THOSE TWO YEARS. IV) TH E APPELLANT CONTENTED THAT THE VESSEL WAS VERY OLD AND NEEDED SUBSTANTIAL REPAIRS TO BE SEA - WORTHY AND REMAIN AFLOAT. V) BOTH THE A.O. AND THE APPELLANT HAVE PLACED RELIANCE ON MANY JUDICIAL PRONOUNCEMENTS. 6.14. THESE JUDICIAL PRONOUNCEMENTS HAVE LAID DO WN CONTAIN TESTS SO AS TO ARRIVE AT A CORRECT CONCLUSION WHETHER ONE PARTICULAR EXPENDITURE IS REVENUE OR CAPITAL IN NATURE. 1ST QUESTION ARISES, WHETHER A NEW ASSET HAS COME INTO EXISTENCE. THE ANSWER IS IN THE NEGATIVE. NEXT QUESTION IS, WHETHER THE CHAR ACTER OF THE ASSET IS CHANGED OR THE CAPACITY OF THE VESSEL HAS INCREASED. AGAIN THE ANSWER IS IN NEGATIVE. IN FACT, IN THIS CASE, THE APPELLANT HAD TO INCUR EXPENDITURE IN ORDER TO KEEP THE VESSEL SEA - WORTHY AND JUST BECAUSE THE EXPENDITURE IS LARGE, IT C AN BE SAID THAT THE EXPENDITURE INCURRED IS CAPITAL IN NATURE. IN THIS CASE OLD ENGINE HAS NOT BEEN REPLACED BY A NEW ENGINE, INCREASING THE CAPACITY OF THE VESSEL. TAKING A BIRDS EYE VIEW OF THE COMPLETE FACTS OF THE CASE, IN MY OPINION, THE REPAIRS EXPEN SES WAS REQUIRED TO KEEP THE VESSEL SEA - WORTHY AND SHOULD BE TREATED AS CURRENT REPAIRS AND BE ALLOWED AS REVENUE EXPENDITURE. THE A.O. IS DIRECTED TO DELETE THE ADDITION AMOUNTING TO RS.35,89,64,088/ - MADE ON THIS ACCOUNT AND THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED ACCORDINGLY. 7.3 . THE LEARNED DR SUBMITTED THAT THE ASSESSEE, VIDE HIS PAPER BOOK SUBMITTED IN LAST HEARING ON 14.07.2014, HAS SAID THAT THE EXPENSES INCURRED FOR DRY DOCKING ARE REVENUE IN NATURE. ASSESSEE SAYS IT IS TO BE DONE ANN UALLY. HOWEVER, THISIS FACTUALLY INCORRECT, DRY DOCKING IS NOT AN ANNUAL FEATURE. IT IS DONE EVERY 30 MONTHS (2.5 YEARS) ON THE BASIS OF THE SURVEYOR REPORT FROM MINISTRY OF SHIPPING. IN DRY DOCKING, MAINLY THE STEEL PLATES OF THE SHIP 20 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) TOUCHING SEA ARE REP LACED BECAUSE IT HAS CORRODED AND THINNED DOWN DUE TO SEA WATER. SO, NEW PLATES WILL BE INSTALLED REPLACING THE OLD PLATES. SINCE THE COST OF STEEL IS LOWEST IN CHINA, AND SINCE IT IS A MAJOR EXPENDITURE, SHIP OWNERS PREFER CHINESE SHIPYARDS FOR DRY DOCKIN G.IN THE ASSESSEE S CASE, THE SURVEYOR REPORTS OR THE QUOTATION FROM SHIP YARD OR WORK DONE REPORT ARE NOT PRODUCED. ALSO, DRY DOCKING, WHICH IS A MAJOR EXPENSE, IS DONE TWO YEARS CONSECUTIVELY.IN THIS BACKGROUND, WHERE THE AGE OF SHIP EXTENDED SUBSTANTIAL LY AND BY OTHER FACTS MENTIONED IN THE ASSESSMENT ORDER, IT IS PLEADED THAT THE EXPENSES BE TAKEN AS CAPITAL EXPENDITURE. 7.4. THE LEARNED AR RELIED UPON THE ORDER OF CIT(A). 7.5. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FAC TS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE HAS PURCHASED M.V. SUNRISE SHIP IN 1988. THE ASSESSEE COMPANY HAS INCURRED THE FOLLOWING EXPENDITURE WHICH READ AS UNDER: - SR. NO. PARTICULARS AMOUNT (US$) REMARKS 1 TOWARDS THE PAYMENT TO COSCO (NANTONG) SHIPYARD CO. LTD FOR DRY - DOCK CHARGES AND RELATED CHARGES 4 3 , 98,000 .00 THESE ARE ALL THE CHARGES OF SHIPYARD WHICH INCLUDE THE REPAIRS AND SERVICING OF THE SHIP. THESE REPAIRS ARE MAINLY THE REPLACEMENT OF STEEL PLATES AND OTHER PARTS. THE HULL OF THE SHIP IS OF STEEL PLATES. SINCE THE SHIP IS ALWAYS IN WATER, THE HULL GET S CORRODED AND HENCE THE MAJORITY OF STEEL PLATES REQUIRED TO 21 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) REPLACED. THE FILE CONTAINING BRIEF INFORMATION OF THIS DRY - DOCKING EXPENSES IS ENCLOSED. 2 TOWARDS THE SU PPLY OF BUNKER AT SINGAPORE AND CHINA OCEAN AS PER BILLS ENCLOSED 1 6 , 88,577.49 THIS IS THE SUPPLY OF FUEL 3 PORT DISBURSEMENT CHARGES REMITTED TO CHINA OCEAN SHIPPING AGENCY, NANTONG 41,308,66 THESE ARE PORT STATUTORY DUES 4 TOWARDS THE SUPPLY OF CONSUMA BLES & SPARES 1 7 , 76,014.42 THESE ARE THE COST OF CONSUMABLES AND SPARES USED FOR REPAIRS. 5 TOWARDS THE SUPPLY OF PROVISION FOR SHIP CREW DURING THEIR STAY IN CHINA AND SINGAPORE 44,007.32 THESE ARE THE COST OF PROVISIONS I.E. FOOD ETC SUPPLIED FOR CREW MEMBERS 6 OPERATING EXPENSES LIKE TRAVELLING, STATIONERY, TELEPHONE ETC INCURRED AT CHINA AND SINGAPORE 5 , 35,524.91 THESE ARE RELATED EXPENSES 7 TOWARDS OUR TECHNICAL CONSULTANCY, SUPERVISION DURING REPAIRS AND PROVIDING FUNDS BEING 5.25% OF THE FULL AMOUNT 4 , 45,380 .00 THESE ARE THE F EES . TOTAL 89,25,812.80 (UNITED STATES DOLLAR EIGHT MILLION NINE HUNDRED TWENTY EIGHT THOUSAND EIGHT HUNDRED TWELVE AND CENTS EIGHTY ONLY) THESE EXPENDITURE CAN BE SUMMARIZED IN INDIAN CURRENCY AS UNDER: - SR. NO PARTICULARS AMOUNT IN RS. 1 COSCO NANTONG SHIPYARD CO. LTD FOR DRY DOCK AND RELATED EXPENSES 176,812,310 5.25% CONSULTANCY SERVICE 9,282,647 2 FOR SUPPLY OF BUNKER/FUEL AT 67,885,695 22 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) SINGAPORE AND CHINA 5.25% CONSULTANCY SERVICE 3,563,999 3 PORT DISBURSEMENT CHARGES CHINA OCEAN SHIPPING AGENCY, NANTONG 1,660.728 5.25% CONSULTANCY SERVICE 87,188 4 TOWARDS SUPPLY (PURCHASE) OF SPARES AND CONSUMABLES STORES 71,400,912 5.25% CONSULTANCY SERVICE 3,748,548 5 TOWARDS SUPPLY OF PROVISIONS FOR SHIPS CREW DURING THEIR STAY IN CHINA AND SINGAPORE 1,769,221 5.25% CONSULTANCY SERVICE 92,884 6 OPERATION EXPENSES LIKE TRAVELLING, STATIONERY, TELEPHONE ETC INCURRED AT CHINA AND SINGAPORE 21,529,649 5.25% CONSULTANCY SERVICE 1,130,307 TOTAL 358,964,088 THE AO HAS VERIFIED THIS EXPENDITURE AND HE WAS OF THE VIEW THAT MAJOR PART OF SHI P WAS REPLACED. THIS UNDOUBTEDLY EXTENDED THE LIFE OF THE SHIP. THE DRY DOCKING WAS UNDERTAKEN CASCO (NANTONG) SHIPYARD - CHINA. THE ASSESSING OFFICER WAS OF THE VIEW THAT EVERY PART OF THE SHIP LIKE PROPELLER, VALVES, HATCH COVE, HYDRAULIC JACKS, ENGINE, TURBO CHARGER, DECK PIPING, CONVEYOR BELT, CRANES, SLEW BEARINGS, PEDESTAL, LIFEBOATS, TUNNEL, ACCOMMODATION DECKS, MAIN DECK, HATCH COVER CHAINS, CARGO HOLD, BULKHEADS, SI DE STIFFENERS, HOPPER PLATES, HULL HEADS, TANK HOP, STOOL SPACE STIFFENERS, DOUBLE BOTTOM PLATES, TANK HOP PLATES WERE OVERHAULED OR RENEWED. BEFORE AO THAT DRY DOCKING IS NECESSARY FOR RUNNING THE SHIP OR NOT AND WHETHER THE ASSESSEE HAS OBTAINED THE CER TIFICATE 23 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) FROM CHARTERED ENGINEERS CERTIFICATES BEFO RE AND AFTER THE DRY DOCKING, A NY DOCUMENTS(S) FROM THE AUTHORITIES SPECIFYING THAT THE AFORESAID DRY - DOCKING WAS ESSENTIAL, NAVIGATION CERTIFICATES BEFORE AND AFTER THE DRY - DOCKING. THE ASSESSEE HAS PRODUCED THE FOLLOWING DOCUMENTS WHICH READ AS UNDER: CERTIFICATE OF INDIAN REGISTRY DATED: 21.07.1998 THAT SHOW THAT THE SHIP M.V.SUNRISE WAS BUILT IN 1974 AND HAD A DOUBLE REVERSIBLE DIESEL ENGINE OF 1973 MAKE. CERTIFICATE OF CLASS ISSUED BY INDIAN REGISTER OF SHIPPING ON 17.02.2006 VIDE CERTIFICATE NO. 06047 AS PER WHICH SUBSEQUENT TO SURVEY CARRIED OUT IN MARCH/SEPTEMBER 2005, THE SHIP WAS CERTIFIED FOR TRANSSHIPMENT SE RVICES IN FAIR WEATHER WITHIN 12 NAUTICAL MILES OFF PORTS ON WEST COAST OF INDIA AND FOR TRANSIT BETWEEN THEM IN BALLAST TILL 29.03.2010. CERTIFICATE NO. COL10P034 DATE D: 13.09.2010 ISSUED BY INDIAN REGISTER OF SHIPPING CARRYING FOLLOWING PARTICULARS: PARTICULARS OF SHIP NAME OF SHIP SUNRISE DISTINCTIVE NUMBER OR LETTERS 2769/VVRO PORT OF REGISTRY MUMBAI LENGTH (L) AS DEFINED IN ARTICLE 2(8)(METRES) 215.42 GROSS TONNAGE 34920 IMO NUMBER 7352335 FREEBOARD ASSIGNED AS *A NEW SHIP TYPE OF SHIP *TYPE B VII. THE AFORESAID THREE CERTIFICATES ISSUED BY CERTIFICATE OF INDIAN REGISTRY/INDIAN REGISTER OF SHIPPING ON VARIOUS DATES REVEAL THE FOLLOWING: THE SHIP M.V. SUNRISE WAS MANUFACTURED IN 1974 AND HAD AN ENGINE OF 1973 VINTAGE. THE SHIP WAS THEREFORE VERY OLD AND ITS DESIGNATED LIFE WAS DUE TO EXPIRE SHORTLY. THE SHIP M.V. SUNRISE HAD A VALID CERTIFICATE FOR TRANSSHIPMENT SERVICES TILL 29.03.2010. THUS, THERE WA S NO NEED TO CARRY OUT DRY - DOCKING RESTORATION IN JUNE 2007 MERELY TO OBTAIN A SEAWORTHINESS CERTIFICATE. THE ASSESSEES CONTENTION THAT DRY - DOCKING WAS NECESSARY FOR OBTAINING THE AFORESAID SEAWORTHINESS CERTIFICATE IS THEREFORE NOT SUPPORTED BY FACTS ON RECORD. 24 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) AFTER THE DRY - DOCKING RESTORATION, THE SHIP M.V SUNRISE WAS ASSIGNED AS A NEW SHIP ALBEIT CARRYING THE OLD REGISTRATION. THIS SHOWS THAT DRY - DOCKING REJUVENATEDRESTORED THE OLD SHIP AS A NEW ASSET. AFTER VERIFYING THIS EXPENDITURE THE ASSESSING OFFICER HAS TREATED THIS EXPENDITURE AS CAPITAL EXPENDITURE BUT CIT(A) HAS ALSO VERIFIED THE DETAIL EXPENDITURE AND HE CATEGORIZED FOLLOWING EXPENDITURE CAN NEVER BE TREATED AS CAPITAL EXPENDITURE WHICH READ AS UNDER: SR. NO. PARTICULARS AMOUNT (US$) REMARKS 1 TOWARDS THE PAYMENT TO C OSCO (NANTONG) SHIPYARD CO. LTD FOR DRY - DOCK CHARGES AND RELATED CHARGES 4, 398,000 THESE ARE ALL THE CHARGES OF SHIPYARD WHICH INCLUDE THE REPAIRS AND SERVICING OF THE SHIP. THESE REPAIRS ARE MAINLY THE REPLACEMENT OF STEEL PLATES AND OTHER PARTS. THE HULL OF THE SHIP IS OF STEEL PLATES. SI NCE THE SH IP IS ALWAYS IN WATER, THE HULL GET CORRODED AND HENCE THE MAJORITY OF STEEL PLATES REQUIRED TO REPLACED. 2 TOWARDS THE SUPPLY OF BUNKER AT SINGAPORE AND C HINA OCEAN 1,688,577. 49 THIS IS THE SUPPLY OF FUEL 3 PORT DISBURSEMENT CHARGES REMITTED TO CHINA OCEAN SHIPPING AGENCY, NANTONG 41,308,66 THESE ARE PORT STATUTORY DUES 4 TOWARDS THE SUPPLY OF CONSUMABLES & SPARES 1,776,014.42 THESE ARE THE COST OF CONSUMABLES AND SPARES USED FOR REPAIRS. 5 TOWARDS THE SUPPLY OF PROVISION FOR SHIP CREW DURING THEIR STAY IN CHINA AND SINGAPORE 44,007.32 THESE ARE THE COST OF PROVISIONS I.E. FOOD ETC SUPPLIED FOR CREW MEMBERS 6 OPERATING EXPENSES LIKE TRAVELLING, STATIONERY, TELEPHONE ETC INCURRED AT CHINA AND SINGAPORE 535,524.91 THESE ARE RELATED EXPENSES 7 TOWARDS OUR TECHNICAL CONSULTANCY, 445,380 THESE ARE THE FEES 25 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) SUPERVISION DURING REPAIRS AND PROVIDING FUNDS BEING 5.25% OF THE FULL AMOUNT TOTAL 8,929,812,80 THE CIT(A) HAS VERIFIED THIS EXPENDITURE AND HE WAS OF THE VIEW THAT THE ASSESSING OFFICER ASSUMED THAT ENTIRE HULL OF THE SHIP WAS CHANGED AND HE ASSUMED THAT THE NEW ASSET HAS COME BUT IN THE ROUTINE COURSE SHIP HAS TO GO FOR DRY DOCKING ALMOST FOR EVERY YEAR AND THESE ANNUAL REPAIRS ARE ESSENTIAL BECAUSE THERE IS ALWAYS LOTS OF WEAR AND TEAR OF PARTS RUSTING OF STEEL PLATES OF HULL ETC. WHICH REQUIRE THE REPLACEMENT AND REPAIRS WHICH CANNOT BE MADE WITHOUT TAKING THE S HIP IN DRY DOCK. THEREFORE, THE ASSESSEE HAS PRODUCED THE CERTIFICATE WHICH SHOWS THAT THE SHIP REQUIRES ANNUAL REPORTS AND MAINTENANCE FOR CARRIED OUT THE ANNUAL REPAIRS. THEREFORE, CIT(A) WAS OF THE VIEW THAT THIS IS REVENUE EXPENDITURE. IN C IT VS CHOWG ULE & CO. PVT LTD 214 ITR 523 (BOM). THE SHIP WAS REPAIRED, THE OLD PARTS WERE REPLACED BY NEW PARTS. HELD THAT IT IS A CURRENT REPAIR AND ALLOWABLE AS REVENUE EXPENDITURE. IN CASE VIJAYSHREE SPINNING MILLS (P) LTD. V. ACIT 314 ITR 212(MAD). EXPENDIT URE INCURRED IN REPLACING SPINDLES IN SPINNING MILL, IT WAS HELD THAT FINDING SHOULD BE ARRIVED AT AS WHETHER IN VIEW OF THIS ADDITION ANY EARNING CAPACITY HAS INCREASED. THE MATTER WAS REMANDED TO ARRIVE AT SUCH FINDING. IN CIT VS. SHRI HARI MILLS PVT . LTD 237 ITR 188 (MAD). REPLACEMENT OF WORN OUT MACHINERY PARTS OF MACHINERY, SUCH REPLACEMENT, RENEWALS AND REPAIRS WERE TO KEEP BUSINESS GOING WITHOU8T BREAKDOWN OF MACHINERY, MACHINERIES WERE NOT REPLACED WHOLLY NOR NEW MACHINERIES WERE ADDED, SUC H EXPENDITURE CANNOT BE TREATED AS CAPITAL EXPENDITURE. IN CIT VS. SHRI. RAANI LAAKSHMI GINNING SPINNING AND WEAVING MILLS LTD.. 256 ITR 592 (MAD). REPLACEMENT OF OLD AND WORN OUT PARTS IN MACHINERY, FINDING THAT WITHOUT REPLACING ALL THOSE PARTS, PRODUC TION COULD NOT BE CARRIED ON SMOOTHLY, HELD THAT NO ERROR IN ORDER OF ITAT ALLOWING DEDUCTION OF THE EXPENDITURE AS REVENUE EXPENDITURE. IN CIT VS COOPERATIVE SUGAR 26 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) LTD . 239 ITR 908 (KER). THE MACHINERY WAS REPLACED. IT WAS HELD THAT EXPENDITURE INCURRED ON REPLACEMENT OF MACHINERY WAS REVENUE EXPENDITURE. IN CIT VS ASHER TEXTILES LTD., 240 ITR 483. THE OLD CEILING WAS REPLACED. IT WAS HELD THAT EXPENDITURE ON REPLACEMENT OF OLD CEILING MADE OF HARDBOARD SET ON WOODEN FRAMES WITH THERMOSTAT WOOD INSULATION BOARD SET IN ALUMINIUMFRAMESCONSTITUTE REVENUE EXPENDITURE. AFTER THE AMENDMENT OF SECTION 31, ONE MUST ALSO TAKE NOTE OF THE EXPLANATION INSERTED BY THE FINANCE ACT, 2003 WITH EFFECT FROM APRIL 1, 2004, WHICH RULES OUT CAPITAL EXPENDITUR E UNDER SECTION 31. BUT THEN, SO DOES SECTION 37. THE MOST NON - CONTROVERSIAL ARGUMENT IS THAT THERE IS NO CAPITAL EXPENDITURE INVOL VED IN THE FACTS OF THE CASE, S O THAT DEDUCTION CANNOT BE DENIED, WHETHER IT BE UNDER SECTION 31 OR 37 AND MORE SO UNDER SE CTION 37. IN THIS CONTEXT, THE TEST AS TO WHETHER IT IS REVENUE EXPENDITURE OR CAPITAL EXPENDITURE IS BEST UNDERSTOOD WITH REFERENCE TO PRECEDENTS. IT WOULD BE REVENUE EXPENDITURE, IF THE FOLLOWING FACTS ARE SATISFIED. 1. WHAT IS REPLACED IS ONLY A PART 2. WHAT IS REPLACED HAD GONE DECREPIT AND OLD, SO AS TO REQUIRE REPLACEMENT, 3. THE REPLACED ASSET HAD TO BE SOLD EITHER AS JUNK OR AT NOMINAL VALUE OR IT REMAINS UNSOLD AND UNUSABLE. 4. THERE HAS BEEN NO SIGNIFICANT INCREASE IN PRODUCTIVE CAPACITY AFTER THE REPLACEMENT. IN THE INSTANT CASE ASSESSEE HAS INCURRED HEAVY EXPENDITURE ON REPLACEMENT OF PART OF SHIP BUT NO NEW ASSETS HAVE BEEN CREATED BY THE ASSESSEE . WE FIND THAT NEW ASSETS HAS COME THE CHARACTER OF THE SHIP IS NOT CHANGE. IN ORDER KEEP THE VESSELS SEA WORTHY ASSESSEE HAS INCURRED THE EXPENDITURE.THEASSESSEE HAS NOT REPLACED OLD MACHINE. IN THE INSTANT CASE WE FIND THAT ENTIRE HULL OF THE SHIP WAS NOT CHANGED. EVERY SHIP HAS TO GO FOR DRY 27 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) DOCKING ALMOST FOR EVERY YEAR AND THESE ANNUAL REPAI RS ARE ESSENTIAL BECAUSE THERE IS ALWAYS LOT OF WERE AND TEAR OF PARTS, RESTING OF STEEL PLATES OF HULLS WITH REQUIRES THE REPLACEMENT AND REPAIRS WE CANNOT BE MADE WITHOUT TAKING INTO DRY ROCK. WE FIND THAT BY INCURRING THESE EXPENSES THE SEA SIP IN TRAI NING CONDITION. THE ASSESSEE HAS MADE RENOVATION AND REPLACEMENT OF PARTS THEREFORE, THIS IS REVENUE EXPENDITURE. WE ARE OF THE VIEW THAT THE CIT(A) IS JUSTIFIED IN HIS ACTION AND OU R INTERFERENCE IS NOT REQUIRED. 8. GROUND NO.5. THE AO HAS MA DE THE ADDITION OF RS. 15,25, 16 , 576/ - WITH FOLLOWING REMARKS. ASSESSEE HAS KELIM MINE FROM WHICH IRON ORE IS EXTRACTED. DURING THE YEAR IN CONSIDERATION, THE ASSESSEE CLAIMS TO HAVE MINED 2,74,985 MT OF IRON ORE FROM THIS MINE. HOWEVER ROYALTY WAS PAID ONLY ON 75,833 MT OF IRON ORE. NO PROVISION TOWARDS PAYMENT OF ROYALTY WAS ALSO MADE IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. THE POSITION OF OPENING STOCK AND CLOSING STOCK OF IRON ORE IN THIS MINE FOR THIS YEAR WAS ASUNDER: OPENING STOCK AT KALI MINES - 64,135 MT CLOSING STOCK AT KALI MINES - 1,15,000 MT THUS, OUT OF 2,74,985 MT CLAIMED TO HAVE BEEN MINED BY THEASSESSEE DURING THE YEAR, THE ASSESSEE SOLD/OTHERWISE MOVED2,24,030 MT OF THE IRON ORE. RULE 64 - B OF THE MINERALCONCESSION RULES 1960 THAT DEALS WITH CHA RGING OF ROYALTY INCASE OF MINERALS SUBJECTED TO PROCESSING PROVIDE AS UNDER: 64 - B. CHARGING OF ROYALTY IN CASE OF MINERALS SUBJECTED TO PROCESSING: - 1) IN CASE PROCESSING OF RUN - OF - MINE MINERAL IS CARRIED OUT WITHIN THE LEASED AREA, THEN, ROYALTY SHALL B E CHARGEABLE ON THE PROCESSED MINERAL REMOVED FROM THE LEASED AREA. II) IN THE CASE RUN - OF - MINE MINERAL IS REMOVED FROM THE LEASED AREA TO A PROCESSING PLANT WHICH IS LOCATED OUTSIDE THE LEASE D AREA, THEN, ROYALTY SHALL BE CHARGEABLE ON THEUNPROCESSED RUN - OF MINE MINERAL AND NOT ON THE PROCESSED PRODUCT. IRON - ORE TAKEN OUT FROM MINES IS SUBJECTED TO PROCESSING TO MAKE IT MARKETABLE THROUGH BENEFICIATION. CONSEQUENTLY, PROVISIONS OF THESE RULES ARE SQUARELY APPLICABLE. AS PER THIS, THE ASSESSEE SHOULD HAVE PAID ROYALTY ON AT LEAST 2,24,030 MT OF THE IRON OR E MINED THAT HE HAD REMOVED FROM THE VICINITY OF THE MINES. HOWEVER, DURING THE YEAR, THE ASSESSEE HAD PAID ROYALTY ONLY ON 75,833 MT. THE ASSESSEE CLAIMS 28 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) TO HAVE PAID ROYALTY ON THE REMAINING 1,99,152 MT OF FINES ONLY ON08.10.2010. THIS, HOWEVER, THE ASSE SSEE COULD NOT HAVE DONE ON THE TOTAL IRON ORE MINED AND MOVED FROM THE MINING AREA BY THE ASSESSEE IN VIEW OF THE CLEAR PROVISION OF RULE 64 - B OF THE MINERAL CONCESSION RULES. IT WAS PRIMA FACIE CLEAR THAT THE ASSESSEE COULD, AT THE MOST, HAVE MINED ONLY 75,833 MT OF IRON ORE ON WHICH HE PAID ROYALTY. ALL THE MINE HOLDERS MINING IRON ORE HAVE TO PAY ROYALTY TO THE STATE GOVERNMENT ON THE IRON ORE EXTRACTED BY THEM. FOR THIS PURPOSE THEY HAVE TO DISCLOSE THE EXACT AMOUNT OF IRON ORE MINED TO THE CONCERNED D EPARTMENT OF THE STATE GOVERNMENT . IN THE STATE GOVERNMENT OF GOA, DIRECTORATE MINES AND GOLO GY IS THE NODAL DEPARTMENT FOR THIS. TO KNOW THE EXACT AMOUNT OFIRON ORE MINED BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION FROM KELIM MINES, A LETTER DATED: 09.12.2010WAS WRITTEN TO THE DIRECTORATE OF MINES AND GEOLOGY,GOVERNMENT OF GOA WHEREIN THEY WERE REQUESTED TO FURNISH DETAILS OF THE AMOUNT OF ORE EXTRACTED BY ASSESSEE M/S SALGAOCAR MINING INDUSTRIES PVT. LTD. DURING THE FMANCIAL YEAR 2007 - 08 AND THE AM OUNT OF ROYALTY PAID THEREON. DIRECTOR OF MINES, DIRECTORATE OF MINES AND GEOLOGY, GOVERNMENT OF GOA, VIDE THEIR LETTER NO. 01/629/10 - MINES/2993 DATED: 16.12. 2010 HAVE CLARIFIED THAT THE AMOUNT OF ORE EXTRACTED BYTHE ASSESSEE DURING THE PERIOD 01 .04.2007 T O 3 1.03.2008 AND THE AMOUNT OF ROYALTY PAID THEREON IS UNDER: T.C. NO. PRODUCTION IN MT ROYALTY PAID IN RS. DURING 2007 - 0 8 41/55 78,883 6,69,526/ - THE AFORESA ID SHOWS THE ASSESSEE, TILL 16.12.20 10, HAD DISCLOSED TO THE DIRECTORATE OF MINES THAT 75,833 MT OF IRON ORE WAS MINED BY IT DURING THE FINANCIAL YEAR 2007 - 08 AND HAD PAID THE ROYALTY ON THIS AMOUNT. HOWEVER, IN THE RETURN OF INCOME FILED WITH THE DEPARTMENT, THE ASSESSEE IS SHOWING QUANTITY OF IRON ORE MINED DURING THE YEAR AT2,74,985 MT. APART F ROM THE ORE CLAIMED TO HAVE BEEN MINED BY THE ASSESSEE, THE ASSESSEE HAD ALSO PURCHASED AND SOLD IRON ORE DURING THE YEAR. THE POSITION OF OPENING STOCK, CLOSING STOCK, PURCHASES AND SALES OF THE ASSESSEE DURING THIS YEAR IS AS UNDER: - OPENING STOCK: 7,18 ,806 SALES: 38,97,058MT PURCHASES: 4 1,12,534 CLOSING STOCK: 12,09,267 MT TOTAL: 48,31,340 MT TOTAL: 51,06,325 MT EXCESS: 2,74,985 MT THE AFORESAID SHOWS THAT THE ASSESSEE HAD SOLD/POSSESSED AS CLOSING STOCK AN EXCESS AMOUNT OF 2,74,985 T OF IRON ORE VIS - AVIS THE AMOUNT OF IRON ORE POSSESSED BY HIM AS OPENING STOCK AND THAT PURCHASED BY HIM DURING THE YEAR. THIS EXCESS AMOUNT 29 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) OF IRON ORE TOTAL L ING 2,74,985 MT, THE ASSESSEE IS CLAIMING TO HAVE EXCAVATED FROM ITS MINES. HOWEVER, AS PER RECORD S, THE ASSESSEE HAS MINED ONLY 75,833 MT OF IRON OREDURING THE YEAR. HENCE THE ASSESSEE IS IN POSSESSION OF EXCESS STOCK OF IRON ORE OF 1,99,152 MT DUR ING THIS YEAR. THE ASSESSEE WAS ACCORDINGLY ASKED TO CLARIFY AS TO WHY THIS QUANTITY OF 1,99,152 MT OF IRON ORE CLAIMED TO HAVE MINED FROM KELIM MINES BUT NOT ACTUALLY MINED AS SHOWN BY THE AVAILABLE RECORDS, BE TREATED AS UNEXPLAINED STOCK. IN ITS REPLY, THE ASSESSEE HAS TAKEN THE STAND THAT THE ACTUAL AMOUNT OF IRON ORE EXTRACTED FROM KELIM MINES DURING THE YEAR WAS 2,74,985 MT, HOWEVER ROYALTY WAS PAID ONLY ON 75,833 MT OF IRON ORE AS THE REMAINING ORE WAS OF A VIEW LOW GRADE ON WHICH NO ROYALTY WAS CONS IDERED AS PAYABLE. THE EXPLANATION OF THE ASSESSEE IS NOT SUPPORTED BY THE FACTS INVOLVED. THE ASSESSEE HAD MOVED 2,24,030 MT OF IRON ORE EXTRACTED FROM THE MINES AND AS PER RULE 64 - B OF THE MINERAL CONCESSION RULES, 1960 ROYALTY HAD TO BE PAID ON IT. FURTHER THE ASSESSEE IS ACCOUNTING FOR THE ORE IN ITS BOOKS OF ACCOUNTS AND AS SUCH, IF IT HAD EXTRACTED WHOLE OF THIS ORE, THEN IT WAS BOUND TO PAY THE ROYALTY THEREON. THE VERY FACT THAT THE ASSESSEE NEITHER PAID ROYALTY NOR DID IT MAKE A PROVISION IN THE BOOKS OF ACCOUNT FOR PAYMENT OF SUCH ROYALTY SHOWS THAT THE ASSESSEE HAD MINED ONLY 75,833 MT OF IRON ORE BUT CLAIMED TO HAVE MINED 2,74,985 MT OF IRON ORE TO MATCH THE FIGURES FOR SALE AND THE AVAILABLE CLOSING STOCK IN ITS BOOKS OF ACCOUNT. THE ASSESSEE WAS ALSO ASKED TO PRO DUCE DETAILS OF CORRESPONDENCE WITH DIRECTORATE OF MINES CONTESTING PAYMEN T OF ROYALTY ON 1,99,152 MT OF IRON ORE BECAUSE OF ITS LOW GRADE. SUCH CORRESPONDENCE WOULD HAVE EXISTED IN CASE THERE WAS A DISPUTE AS TO WHETHER ROYALTY WAS PAYABLE ON 1,99,152 MT OF IRON ORE EXTRACTED BY THE ASSESSEE. HOWEVER, THE ASSESSEE HAS CLARIFIED THAT NO SUCH CORRESPONDENCE EXISTS. THE ASSESSEE HAS ALSO NOT PRODUCED PRIMARY DOCUMENTS TO SHOW HOW MUCH ORE W AS MINED BY IT DURING THE FINANCIAL YEAR 2007 - 08. NO OTHER DOCUMENTS BUTTRESSING THE CLAIM OF THE ASSESSEE HAVE BEEN FIELD . IT IS THEREFORE CLEAR THAT THE ASSESSEE HAD NOT MINED 2,74,985 MT OF IRON ORE FROM ITS KELIM MINES AND THAT THE TOTAL IRON ORE ACTUALLY MINED BY THE ASSESSEE WAS ONLY 75,833 MT. THE CLAIM OF THE ASSESS EE THAT IT PAID ROYALTY ON 1,99,152 TON OF IRON ORE IN OCTOBER, 2010 CAN ALSO HAVE NO BEARING BECAUSE BY THAT TIME THE ASSESSMENT PROCEEDINGS HAD BEEN INITIATED AND THE ASSESSEE WAS BEING QUESTIONED ABOUT THE QUANTITY OF IRON ORE MINED BY HIM; AND IN ANY C ASE, THE DIRECTORATE OF MINES AND GEOLOGY HAVE CLARIFIED AS LATE AS 16.12.2010 THAT THE ASSESSEE HAD MINED AND PAID ROYALTY ONLY ON 75,833 MT OF IRON ORE FOR THE FINANCIAL YEAR 2007 - 08. AS STATED EARLIER, THE ASSESSEE HAS ALSO NOT BEEN ABLE TO GIVE ANY OTH ER EVIDENCE TO ESTABLISH THAT 2,74,985 MT OF IRON ORE WAS ACTUALLY MINED BY HIM. DESPITE BEING SPECIFICALLY ASKED TO DO SO, THE ASSESSEE DID NOT PRODUCE ANY PRIMARY DOCUMENTS RELATING TO EXCAVATION OF THE ORE AND DETAILS OF LOGISTIC MOVEMENT OF THE ORE THE REAFTER. THE ASSESSEE HAS THEREFORE COMPLETELY FAILED TO SHOW THAT HE HAD MINED 2,74,985 MT OF IRON ORE FROM ITS KELIM MINES. RECORDS SHOW THAT THE ACTUAL AMOUNT OF IRON ORE MINED BY THE ASSESSEE IS 75,833 MT. 30 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) IN THE CASE OF JAI SHARDA RICE MILLS V. ITO (1 991) 36 LTD 254, 258, IT WAS HELD THAT THE FIGURE OF STOCK CHECKED AND VERIFIED BY OTHER GOVERNMENT AUTHORITIES SHOULD BE PREFERRED. IN CENTURY FOAMS (P). LTD. V. CIT [1994] 210 ITR 625 (ALL.), IT WAS HELD THAT IF THERE WAS ACTUAL DISCREPANCY IN THE STOCKS HYPOTHECATED TO THE BANK AND THAT SHOWN IN THE ACCOUNTS, FOR WHICH THE ASSESSEE FAILED TO EXPLAIN BY. ANY ACCEPTABLE EXPLANATION OR MATERIAL, NO EXCEPTION COULD BE TAKEN TO THE ADDITION MADE BY THE AUTHORITIES. SIMILAR VIEW WAS ALSO ADOPTED IN THE CASE OF KAILA SWEET SUPPLIER V. CIT [1998] 100 TAXMAN 59 (ALL.), WHERE IT WAS HELD THAT ADDITION ON ACCOUNT OF DIFFERENCE BETWEEN VALUE OF STOCKS DECLARED TO THE BANK AND THE VALUE RECORDED IN THE ASSESSEES BOOKS CAN VALIDLY BEBROUGHT TO TAX, IF THE INFORMATION FURNISHED BY THE BANK CONTAINED NOT ONLY THE ITEMS OF STOCK BUT ALSO THEIR QUANTITY AND THE ASSESSEE DID NOT DISCHARGE THE BURDEN CAST ON HIM TO PROVE THAT THE APPARENT WAS NOT REAL. IN THE INSTANT CASE, THE DETAILED FIGURE OF IRON ORE MINED MADE AVAILABLE TO THE, DIRECTORATE OF MINES, GOVERNMENT OF GOA BY THE ASSESSEE IS 75,833 MT AND THIS FIGURE HAS TO BE PREFERRED AS THE CORRECT FIGURE OF THE ORE MINED BY THE ASSESSEE ESPECIALLY WHEN NO OTHER EVIDENCE TO CHALLENGE THIS FINDING HAS BEEN MADE AVAILABLE. AC CORDINGLY, THE DIFFERENCE OF 1,99,152 MT OF IRON ORE IS TO BE TAXED IN THE HANDS OF THE ASSESSEE AS UNEXPLAINED STOCK. THE ASSESSEE HAS CLAIMED THAT THE AFORESAID STOCK OF 1,99,152 MT WAS LOW GRADE IRON ORE. HOWEVER, DETAILS OF SALES EFFECTED BY THE ASSESS EE REVEAL THAT THE ASSESSEE HAD SOLD 28,20,715 MT OF IRON ORE WITH FE CONTENT OF 57% OR ABOVE OUT OF WHICH 3,8 1,404 MT WAS IRON ORE WITH FE CONTENT OF 60% OR ABOVE. IN FACTS, APART FROM 1,35,475 MT, ALL THE REMAINING ORE SOLD BY THE ASSESSEE WAS OF GRADE 52% OR ABOVE. AS SUCH,IT WOULD BE SAFE TO ASSUME THAT THE UNEXPLAINED STOCK POSSESSED BY THE ASSESSEE WAS OF LOW GRADE ORE HAVING IRON CONTENT OF APPROXIMATELY 50%. THE AVERAGE PURCHASE COST OF SUCH ORE DURING THE YEAR SHOWN BY DIFFERENT ENTRIES IN GOA WHO DEAL IN IRON ORE, INCLUDING THE ASSESSEE, IS AS UNDER: SL. NO. DATE % MODE OF DELIVERY RATE (PER MT) SELLER & BUYER 1 25.01.08 53 EX - PLOT 650 LIME LEITAO CO, VASCO BUYER - ACTION 2 31.03.08 52.5 1400 ACTION BUYER - BEML (TO CHINA) 3 31.03.08 52 EX - PLOT 575 LIMA LEITAO CO,VASCO, BUYER - ACTION 4 10.04.08 52 SUPPLIED AT PLOT 875 MINESCOPE (PERIOD) 10 TO 28.03.08). BUYER - ACTION 5 31.03.08 52 ALONGSIDE VESSEL 1565 KARISHMA EXPORTS. BUYER - ACTION 31 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 6 24.12.07 52.1 575 SHIVJAY MINE TRADE, BUYER - DBB. 7 06.05.08 54 SUPPLIED AT PLOT 1400 MINESCOPE(PERIOD . 15 - 31.03.2008). BUYER - ACTION 8 10.03.08 53.5 ALONGSIDE VESSEL 1700 ACTION. BUYER - ADANI (TO CHINA) 9 3 1.03.08 54 ALONGSIDE VESSEL 1730 ACTION. BUYER - CHENNAI. IRON ORE LUMPY 1 05.06.07 52.3 AVG. RATE FOR 53.55. SUPPLIED AT PLOT 575 UNITED TRADING. BUYER - DBB 2 22.12.07 52.07 AVG.RATEFOR5L.22. SUPPLIED AT PLOT 360 UNITED TRADING. BUYER - DBB 3 07.01.08. 52.43 AVG. RATE FOR 51.2. SUPPLIED AT PLOT 400 UNITED TRADING. BUYER - DBB 4 15.02.08 51.29 AVG. RATE FOR 52.95. SUPPLIED AT PLOT 400 UNITED TRADING. BUYER - DBB 5 15.02.08 52.95 AVG. RATE FOR PURCHASE FROM BALAJI MINES AND MINERALS PVT. LTD. 400 UNITED TRADING. BUYER - DBB 6 - 52 AVG. RATE FOR PURCHASE FROM BALANJI MINES AND MINERALS PVT. LTD. 520 SALGAOCAR MINING INDUSTRIES P. LTD. 7 - 52 AVG. RATE FOR PURCHASE FROM R. PRAVEEN CHANDRA. 250 SALGAOCAR MINING INDUSTRIES P. LTD. 8 - 52 AVG. RATE FOR PURCHASE FROM BALAJI PRODUCE CO. 192.5 SALGAOCAR MINING INDUSTRIES P. LTD. 9 - 52 AVG. RATE FOR CALIBRATED PURCHASE FROM SALITHO ORES P. LTD. 150 SALGAOCAR MINING INDUSTRIES P. LTD. 1048.06 16082.5 AVERAGE AVERAGE RATE 765.83 32 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) 8.1 . THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DELETED THE ADDITION BY OBSERVING AS UNDER: 7.4. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE ARGUMENTS OF THE APPELLANT. IN THIS CASE, THE ASSESSEE OWN MINE AND CARRIES OUT EXTRACTION OF IRON ORE. APART FROM OWN EXTRACTION, THE ASSESSEE ALSO PURCHASES IRON ORE FROM THE MARKET. ON COMPARING VARIOUS FIGURES PROVIDED BY THE ASSESSEE, THE A.O REACHED A CONCLUSION THAT THE ASSESSEE WAS IN POSSESSION OF 2,74,989 MT OF UNACCOUNTED STOCK AS UNDER: OPERATING STOCK 7,18,806 SALES 38,97,058 PURCHASES 41,12,534 CL. STOCK 12,09,267 TOTAL 48,31,340 TO TAL 51,06,325 EXCESS - 2,74,985 ON CONFRONTATION, THE ASSESSEE CLAIMED THAT THE EXCESS STOCK IS REPRESENTED BY ASSESSEES EXTRACTION FROM ITS OWN MINES. THE A.O. VERIFIED FURTHER AND FOUND THAT THE ASSESSEE HAD PAID ROYALTY FOR A TOTAL QUANTITY OF RS .75,833 MT ONLY, WHICH STILL LEFT A BALANCE OF 1,99,152 MT. ON FURTHER CONFRONTATION, THE ASSESSEE REPLIED THAT THE ACTUAL AMOUNT OF IRON ORE EXTRACTED FROM KELIM MINES DURING THE YEAR WAS 2,74,985 MT, HOWEVER ROYALTY WAS PAID ONLY ON 75,833 MT OF IRON ORE AS THE REMAINING ORE WAS THAT OF A VERY LOW GRADE ON WHICH NO ROYALTY WAS CONSIDERED TO BE PAYABLE. THE A.O., HOWEVER, DID NOT EXPLAIN THE EXPLANATION OF THE ASSESSEE AND MADE THE AFORESAID ADDITION. 7.5. IN VIEW OF THE ABOVE FACTS, IT IS IMPORTANT TO UN DERSTAND THE SYSTEM FOLLOWED IN MINING INDUSTRY IN GOA. TO QUOTE FROM APPELLANTS SUBMISSION. IT HAS BEEN A REGULAR PRACTICE FOLLOWED IN GOA THAT AS AND WHEN THE ORE EXTRACTED IS SOLD THE ROYALTY IS PAID. THE APPELLANT ALSO SUBMITTED THE STATEMENT OF ACC OUNT OF EXTRACTION CONTRACTOR, WHO HAD EXTRACTED THE ORE, BEFORE THE A.O., WHICH WAS IGNORED WHILE FINALISING THE STATEMENT. THE APPELLANT ALSO CONTENDED THAT THE SO CALLED EXCESS STOCK HAS BEEN SHOWN IN THE ACCOUNT STATEMENT. ITS NOT A CASE, WHERE THE ST OCK IS IN THE NEGATIVE MEANING THEREBY THAT THE SAME HAS BEEN SOLD, OUT OF BOOKS. THE AOS CONTENTION THAT THE STOCK SHOWN BY THE APPELLANT IS IN EXCESS, IS MISCONCEIVED, AS THE SAME WOULD ONLY RESULT IN DECLARATION OF HIGHER PROFIT, MEANING THEREBY HIGHER TAXES. ADDITION OF THE SAME HAS FURTHER INCREASED THE VALUE OF CLOSING STOCK WITHOUT ANY COGENT REASON. 7.6. THUS, IN VIEW OF THE TOTALITY OF FACTS AND THE EXPLANATION AND RECONCILIATION FURNISHED BY THE APPELLANT, I FIND THAT THERE IS PERCEIVABLE DISCREP ANCY IN THE STOCK OF THE APPELLANT AND THEREFORE, DIRECT THE A.O. TO DELETE THE ADDITION OF RS.15,25,16,576/ - MADE ON THIS ACCOUNT. THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED. 8.2 . THE LEARNED DR SUBMITTED THE WRITTEN SUBMISSION WHICH READ AS UNDER: 33 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) ACCORDING TO OPENING AND CLOSING STOCK OF ASSESSEE, 2,74,985 MT OF IRON ORE WAS EXCESS WITH ASSESSEE. HOWEVER, ASSESSEE PAID ROYALTY ONLY ON 75,883MT OF ORES. ON THE RUMINATING 1,99,152 MT ASSESSEE DID NOT PAY ROYALTY. ASSESSEE CLAIMS THAT THE ROYALTY WAS PAID ON THAT ON 08.10.2010. HOWEVER, IT IS NOT TRUE SINCE, - THERE IS NO EVIDENCE THAT ASSESSEE PAID ROYALTY FOR THE SAME IRON ORE ONLY - RULE 64 - B OF THE MINERAL CONCESSION RULES 1960 S AYS THAT ROYALTY IS CHARGEABLE ON THE PROCESSED MINERAL REMOVED FROM THE LEASED AREA - DIRECTOR OF MINES, GOVT OF GOA VIDE HIS LETTER DATED 16,12.2010 SAID THE PRODUCTION OF ASSESSEE FOR FY 2007 - 07 WAS ONLY 78,883MT AND PAID ROYALTY ON THE SAME - THERE WER E NO PRIMARY DOCUMENTS TO SHOW HOW MUCH ORE WAS MINED DURING FY 2007 - 08 - ASSESSEE PAID THE ROYALTY ON SUPPOSED EXCESS ORE ONLY AFTER ASSESSMENT PROCEEDINGS STARTED, IE. IN OCT 2010. - ALSO, ASSESSEE SAYS 1,991,152MT OF ORE WAS OF LOW QUALITY. BUT ASSESSEE HAS NEVER SOLD ANY ORE OF SUCH QUALITY. (ASSESSEE ALWAYS SOLD 57% OR MORE QUALITY ORE) SO ASSESSEE CONTRADICTS HIMSELF WHEN HE SAYS SOLD IRON ORE WAS OF HIGH QUALITY BUT THE MINED ONES WERE OF VERY LOW QUALITY. IT IS OBVIOUS THAT ASSESSEE SELLS IRON ORE O UTSIDE THE BOOKS AND WITHOUT PRIMARY DOCUMENTS, AND ONLY WHEN ASSESSMENT STARTED, HE PAID SOME ROYALTY AND CAME WITH THIS EXPLANATION FOR THE EXCESS ORE. THUS WITHOUT EVIDENCES, ASSESSEES CLAIM THAT HE PAID ROYALTY FOR SAME IRON ORE, IS JUST A STATEMENT A ND IT IS TO BE ADDED AS UNEXPLAINED STOCK. 8.3 THE LEARNED AR RELIED UPON THE ORDER OF CIT(A). 8.4 . WE HAVE HEARD THE RIVAL CONTENTION OF THE BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE HAS SUBMITTED BEFORE THE CIT(A) THAT ASSESSEE H AS PAID THE ROYALTY WITH PENAL INTEREST ON 1,99,152 MT TO MINING DEPARTMENT, GOA. IT IS A REGULAR PRACTICE FOLLOWED IN GOA WHEN THAT AS AND WHEN THE ORE IS EXTRACTED AND MOVED FROM THE MINE FOR THE SALE, ROYALTY IS PAID. T HE ORE OF 1,99,152 MT WAS LYING ON THE MINE DURING THE FINANCIAL YEAR 2007 - 08 AND IT WAS MOVED OUT OF MINE IN THE FINANCIAL YEAR 2010 - 11. THE ROYALTY HAS BEEN PAID TO DIRECTOR OF MINES ON 18.10.2010 SHOWS CLEARLY THE QUANTITY AND YEAR OF EXTRACTION OF ORE ON WHICH THE ROYALTY IS PAID AND ASSESSEE HAS PAID ROYALTY OF RS.25,17,281/ - . WE FIND THAT A FTER CONSIDERING THIS EVIDENCE THE COMMISSIONER OF INCOME TAX WAS OF THE VIEW THAT ASSESSEE HAS PAID THE ROYALTY ON THIS IRON ORE, THEREFORE, HE HAS DELETED THE ADD ITION AND 34 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) OUR INTERFERENCE IS NOT REQUIRED. IN THE RESULT, THIS GROUND OF DEPARTMENTS APPEAL IS DISMISSED. ITA NO.362/PNJ/2013 FOR A.Y.2009 - 10 9. GROUND NO.1 : - GENERAL IN NATURE . 10 . GROUND NO.2 : - DURING THE COURSE OF ASSESSMENT PROCEEDING, AO HAS OBSERVED THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS.4,96,94,016/ - DURING THE YEAR UNDER CONSIDERATION, BUT DID NOT APPORTION ANY EXPENSES TOWARDS THIS EARNING. IN RESPONSE TO SHOW CAUSE, THE ASSESSEE STATED THAT THIS DIVIDEND HAS BEEN EARNED ON SHARES OF M/S. TUNGBHADRA MINERALS PVT. LTD., WHICH CAME TO THE ASSESSEE AS A RESULT OF FAMILY PARTITION IN THE YEAR 1982 AND THEREFORE NO UTILIZATION OF FUNDS HAVE BEEN DONE TOWARDS EARNING IN THE INCOME. HOWEV ER, THE AO HAS INVOKED SECTION 14A. R.W. RULE 8D 5 .4.2 ACCORDINGLY, THE DISALLOWANCE U/S 14A IS WORKED OUT UNDER RULE 80 AS UNDER: - (I) AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME .. NIL (II) IN A CASE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF INTEREST DURING THE PREVIOUS YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY' PARTICULAR INCOME OR RECEIPT, AN AMOUNT COMPUTED IN ACCORDANCE WITH THE FOLLOWING FORMULA, NAMELY: - [AXB]/C = RS. [A]X RS. [B] = RS. [C] A A MOUNT OF EXPENDITURE BY WAY OF INTEREST OTHER THAN THE AMOUNT OF INTEREST INCLUDED IN CLAUSE (I) INCURRED DURING THE PREVIOUS YEAR [A]=RS.6,07,44,1467 - 35 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) B. THE AVERAGE OF VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR: OPENING INVESTMENT .. RS. 15,74,91,905/ - CLOSING INVESTMENT .. RS. 4,66.21.234/ TOTAL RS. 20,41,13,139/2 AVERAGE INVESTMENT = RS. [B] RS. 10,20,56,569/ - C. THE AVERAGE OF TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET OF THE ASSESSEE, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR; FOR THE PURPOSES OF THIS RULE, THE 'TOTAL ASSETS' SHALL MEAN TOTAL ASSETS AS APPEARING IN THE BALANCE SHEET EXCLUDING THE INCREASE ON ACCOUNT OF REVALUATION OF ASSETS BUT INCLUDING THE DECREASE ON ACCOUNT OF REVALUATION OF ASSETS. AVERAGE ASSETS TOTAL OPENING ASSETS RS. 5,54,17,03,865/ - TOTAL CLOSING ASSETS RS . 5.78,24,71,115/ - TOTAL RS. 11,32,41,74,980/2 AVERAGE ASSETS ..[C] RS. 5,66,20,87,490/ - RS. [A]X RS. - [ B] 6,07,44,146 X 10.20.56.569 = RS. 10,94,885/ - RS. [C] 5,66,20,87,490 {III} AN AMOUNT EQUAL TO ONE - HALF PER CENT OF THE AVERAGE OF THE VALUE OF INVESTMENT, INCOME FROM WHICH DOES NOT OR SHALL NOT FORM PART OF THE TOTAL INCOME, AS APPEARING IN THE BALANCE SHEET OF THE ASSESSES, ON THE FIRST DAY AND THE LAST DAY OF THE PREVIOUS YEAR. OPENING INVESTMENT RS. 15,74,91,905/ - CLOSING INVESTMENT RS.4,66,21,234/ - TOTAL RS.20,41,13,139/ - AVERAGE INVESTMENT = RS. 10,20,56,569/ - 0.5 PERCENT OF AVERAGE INVESTMENTS = RS. 5,10,282/ - 36 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) TOTAL EXPENSES DISALLOWABLE U/S 14A AS PER RULES 8D = (I)+(II)+(III) = NIL + RS. 10,94,885+ RS. 5,10,282 = RS. 16,05,167/ - ACCORDINGLY, A SUM OF RS. 16,05,167/ - IS ADDED TO THE INCOME OF THE ASSESSEE TOWARDS EXPENDITURE INCURRED FOR EARNING THE EXEMPTED INCOME WHICH IS DISALLOWED U/S 14A READ WITH RULE 8D. 10 .1. MATTER CARRIED TO CIT(A) , THE ASSESSEE HAS PRODUCED THE WORKING OF THE EXPENDITURE TOWARDS THE EARNING OF THE INCOME UNDER RULE 14A R.W. RULE 8D A ND ASSESSEE HAS SUBMITTED BEFORE CIT(A) WHICH READ AS UNDER: 1. AMOUNT OF EXPENDITURE DIRECTLY RELATING TO DIVIDEND INCOME 0 2. THE AMOUNT OF INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECENT FORMULA AXB/C A=AMOUNT OF INTEREST OTHER THAN INTEREST INCLUDED IN (1) B=THE AVERAGE VALUE OF INVESTMENT ON WHICH DIVIDEND EARNED C=AVERAGE TOTAL ASSETS AS APPEARING IN B/SHEET AT THE FIRST DAY AND LAST DAY HERE IN THE CASE OF APPELLANT A IS NIL BECAUSE THE INTEREST PAID WERE AS UNDER: ON FIXED LOANS FOR PURCHASE OF ASSETS.. RS.3,54,46,955 ON PACKING CREDIT... RS.1,91,95,204 ON CHARTER HIRE/HIRE PURCHASE RS.6,101987 RS. 6,07,44,146 ALL THESE INTERESTS PAID WERE DIRECTLY ATTRIBUTABLE TO THE INCOME FROM SALE OF ORE, TRANSHIPPER RECEIPTS, HIRE RECEIPTS ONLY. THE RULE 8D TALKS ABOUT THE INTEREST WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INC OME OR RECEIPTS, HEREIN OUR CASE INTERESTS PAID WERE DIRECT LY ATTRIBUTABLE TO ABOVE INCOME/ RECEIPTS. TOTAL B AVERAGE OF INVESTMENT AT THE BEGINNING OF THE YEAR RS.15,74,91,905 37 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) INVESTMENT AT THE END OF THE YEAR RS.4,66,2 1,234 AVERAGE OF THEM RS.10,20, 56,570 C AVERAGE OF TOTAL ASSETS AT THE 1ST DAY OF THE YEAR RS.777,36,49,695 TOTAL ASSETS AT THE LAST DAY OF THE YEAR RS.881,82,53,949 AVERAGE WORKS OUT TO RS.829,59,5 1,822 THUS IN CASE OF APPELLANT AX B/C 0XRS.10,20,56,570 RS.829,59,51,822 0 THE AMOUNT EQUAL TO ONE AND HALF PERCENT OF AVERAGE INVESTMENT ON FIRST DAY AND LAST DAY OF THE YEAR 0.50% OF RS. 10,20,56,570 RS. 510,283 TOTAL RS.5,10,283 THE CIT(A) HAS VERIFIED AND HE DISALLOWED RS.5,10,283/ - AS THE EXPENDITURE INCURRED TOWARDS THE EARNING THE INTEREST INCOME U/S. 14A. THEREFORE, HE HAS ALLOWED THE AMOUNT OF RS.10,94,884/ - U/S. 14A R.W. RULE 8D. 10 .2. DURING THE COURSE OF HEARING THE L EARNED DR COULD NOT BRING ANY EVIDENCE BEFORE US TO SHOW THAT CALCULATION OF COMMISSIONER OF INCOME TAX IS NOT AS PER THE RULE, THEREFORE, WE HAVE NO ALTERNATIVE EXCEPT THE ENDORSE THE ACTION OF CIT(A). WE FIND THAT THE CIT APPEAL HAS HELD THAT THE ASSESS EE HAS NOT PAID ANY INTEREST OR ACQUIRING INVESTMENTS THEREFORE, HE HAS RESTRICTED THESE DISALLOWANCE TO RS. 5,10,283/ - . WE ARE THE VIEW THAT CIT (A) IS JUSTIFIED IN HIS ACTION IN THE RESULT DEPARTMENT APPEAL IS DISMISSED. IN THE RESULT, THIS GROUND OF THE DEPARTMENTS APPEAL IS DISMISSED. 11 . GROUND NO.3: - DURING THE YEAR UNDER CONSIDERATION IT IS SEEN THAT ASSESSEE HAS CLAIMED EXPENDITURE ON REPAIRS AND MAINTENANCE OF SHIP RS.48,60,08,180/ - IN A.Y. UNDER CONSIDERATION. THE ASSESSING OFFICER HAS VERIFIED THIS EXPENDITURE AND TREATED AS CAPITAL EXPENDITURE BY OBSERVING AS UNDER: - 38 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS SEEN THAT THE ASSESSEE HAS CLAIMED EXPENDITURE ON REPAIRS AND MAINTENANCE OF SHIP RS.48,60,08,180/ - IN THE A.Y UNDER CONSIDERATION. PERUSAL OF THE DETAILS SHOWED THAT THIS INCLUDED A ONETIME EXPENDITURE OF RS.48,60,08, 180/ - AS EXPENDITURE ON REPAIRS AND DRY DOCKING OF THE TRANSSHIPPER VESSEL M.V. SUNRISE. THE ASSESSEE WAS ASKED TO GIVE DETAILS OF THE EXPENDITURE AS TO WHY THE SAME SHOULD NOT BE TREATED AS CAPITAL IN NATURE. 1. (B). THE ASSESSEES AUTHORIZED REPRESENTATIVE VIDE REPLY DATED NIL, IT IS SUBMITTED THAT T HE EXPENDITURE OF RS.48,60,08, 180/ - CONSISTS OF MAINTENANCE AND DRY DOCKING EXPENSES FOR M.V. SUNRISE. IT WAS FURTHER STATES THAT ALL THESE EXPENSE WERE NECESSARY FOR OPERATING AND MAINTAINING THE VESSEL IN GOOD WORKING CONDITION AS WELL AS TO FOLLOW THE N ORMS LAID DOWN BY THE GOVERNMENT REGULATORY BODIES WHICH HAVE TO BE COMPLIED WITH, IT WAS ALSO STATED THAT THESE EXPENSES HAVE TO BEINCURRED EVERY YEAR. (C).I. DETAILS FURNISHED BY THE ASSESSEE COMPANY HAVE BEEN CONSIDERED. MN. SUNRISE WAS PURCHASED BY THE ASSESSEE COMPANY IN 1998. THE EXPENDITURE INCURRED BY THE ASSESSEE COMPANY DURING THE LAST FINANCIAL YEAR ON REPAIRS AND DRY - DOCKING OF M.V. SUNRISE IS AS UNDER: ASSESSMENT YEAR AMOUNT OF EXPENDITURE (RS.) 2007 - 08 NIL - ON DRY - DOCKING 47,87,518/ - ON OTHE R REPAIRS 2008 - 09 35,89,64,088/ - ON DRY - DOCKING 11,70,335/ - ON OTHER REPAIRS 2009 - 10 48,60,08,180/ - ON DRY - DOCKING (ANNUAL REPAIR OF SHIP) 38,10,277/ - ON OTHER REPAIRS THE ABOVE TABLE BELIES THE CONTENTION OF THE ASSESSEE THAT DRY - DOCKING EXPENDITURE ON M.V. SUNRISE EXPENDITURE HAS TO BE INCURRED EVERY YEAR. TO ANALYZE THE NATURE OF THE REPAIRS FURTHER, THE ASSESSEE COMPANY WAS ASKED TO PROVIDE FULL DETAILS OF THE EXPENDITURE INCURRED ON THESE REPAIRS. THE SAME WERE PROVIDED. (C).II. IT IS SEEN THAT TH ESE REPAIRS COMPRISE CHANGE OF THE ENTIRE PORTION OF THE HULL OF THE SHIP WHICH IS CONSIDERED AS UNSAFE OR UNFIT. THIS UNDOUBTEDLY EXTENDED THE LIFE OF THE SHIP. THESE DETAILS SHOWS THAT DURING DRY - DOCKING NOT ONLY THE HULL BUT EVERY PART OF THE SHIP LIKE PROPELLER, VALVES, HATCH COVER, HYDRAULIC JACKS, ENGINE, TURBO CHARGE, DECK PIPING, CONVEYOR BELT, CRANES, SLEW BEARINGS, PEDESTAL, LIFEBOATS, TUNNEL, ACCOMMODATION DECKS, MAIN DECK, HATCH COVER CHAINS, CARGO HOLD, BULKHEADS, SIDE STIFFENERS, BUTTON PLATES , TANK HOP PLATES WERE OVERHAULED OR RENEWED OR REPLACED. THUS, THE SHIP, DESPITE RETAINING ITS OLD NAME AND OLD REGISTRATION, ACTUALLY BECAME A NEW ASSET WITH A LONG LIFE CAPABLE OF 39 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) BENEFITTING ASSESSEES BUSINESS FOR AN EXTENDED PERIOD OF TIME. (C).III. IT IS TO BE NOTED THAT SECTION 31 OF THE I.T. ACT, 1961 THAT DEALS WITH REPAIRS OF MACHINERY ETC. STATES AS UNDER: IN RESPECT OF REPAIRS AND INSURANCE OF MACHINERY, PLANT OR FURNITURE USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDU CTIONS SHALL BE ALLOWED - (1) THE AMOUNT PAID ON ACCOUNT OF REPAIRS THERETO; (2) THE AMOUNT OF ANY PREMIUM PAID IN RESPECT OF INSURANCE AGAINST RISK OF DAMAGE OR DESTRUCTION THEREOF. [EXPLANATION - FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT THE AM OUNT PAID ON ACCOUNT OF CURRENT REPAIRS SHALL NOT INCLUDE ANY EXPENDITURE IN THE NATURE OF CAPITAL EXPENDITURE.] THUS EXPLANATION TO SECTION 31 THAT WAS INSERTED W.E.F. 1.4.2004 SPECIFICALLY EXCLUDES ANY EXPENDITURE IN THE NATURE OF CAPITAL EXPENDITURE FROM CURRENT REPAIRS. THE MEANING OF CURRENT REPAIRS HAS BEEN DEFINED IN THE CASE OF BALLIMAL NAVAL KISHORE AND ANOTHER V. COMMISSIONER OF INCOMETAX, BOMBAY (1997)2 SCC 449 TO COMPRISE EXPENDITURE ON BUILDINGS, MACHINERY, PLANT OR FURNITURE, WHICH IS NOT FOR THE PURPOSE OF RENEWAL OR RESTORATION BUT WHICH IS ONLY FOR THE PURPOSE OF PRESERVING OR MAINTAINING AN ALREADY EXISTING ASSET AND WHICH DOES NOT BRING A NEW ASSE T INTO EXISTENCE OR DOES NOT GIVE TO THE ASSESSEE A NEW OR DIFFERENT ADVANTAGE, IN THE INSTANT CASE: THE EXPENDITURE ON DRY - DOCKING WAS NOT AN ANNUAL AFFAIR. MOST OF THE PART OF THE SHIP WERE OVERHAULD OR RENEWED DURING THE DRY - DOCKING AND HENCE THE ASSET RESTORED. IT REPLACED MAJOR PART OF THE BODY OF THE ASSET. IT WAS NOT ESSENTIAL FOR CONTINUED RUNNING OF THE ASSET DURING THE YEAR. IT GAVE RISE TO AN ENDURING BENEFIT IN TERMS OF EXTENDED LIFE OF THE ASSET TO THE ASSESSEE. THE EXPENDITURE IS T HEREFORE CLEARLY IN THE NATURE OF A CAPITAL EXPENDITURE. IN CIT V. NENOTH OIL MILLS LTD. (KER) 140 ITR 173, IT WAS HELD THAT WHERE IN A FISHING BOAT EXPENDITURE WAS INCURRED IN FITTING NEW ENGINE BUT THERE WAS NO FINDING THAT ENGINE NEEDED REPAIRS OR REPLA CEMENTS AND THE RENEWAL RESULTED IN AN ENDURING ADVANTAGES, HENCE THE EXPENDITURE COULD NOT BE HELD REVENUE IN NATURE. (C) IV, THE AFORESAID DISCUSSION SHOWS THAT THE EXPENDITURE OF RS.48,60,08,180/ - INCURRED ON TRANSFORMATION OF VESSEL M.V. SUNRISE WAS NO T OF THE NATURE OF ROUTINE 40 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) AND CURRENT REPAIRS BUT WAS OF THE NATURE OF STRUCTURAL MODIFICATION OF THE SHIP WITH A VIEW TO ENHANCING ITS LIFE. THE STRUCTURAL MODIFICATION WAS CONDUCTED BY THE ASSESSEE ON THE SHIP DURING THE ASSESSMENT YEAR IN ORDER TO ENHA NCE ITS LIFE THAT WOULD GIVE A BENEFIT OF ENDURING NATURE OF THE ASSESSEE COMPANY. THE ASSESSEES CLAIM THAT THIS EXPENDITURE WAS OF A ROUTINE NATURE NECESSARY FOR OPERATING AND MAINTAINING THE VESSEL IN GOOD WORKING CONDITION IS NOT REALLY BORNE OUT BY TH E FACTS ON RECORD. IN FACT, THE ASSESSEE HAS DEBITED EXPENDITURE INCURRED ON ROUTINE REPAIRS OF M.V. SUNRISE SEPARATELY AS FOLLOWS: PURPOSE AMOUNT (RS.) GENERAL MAINTENANCE OF SHIP 36,59,307/ - FOR CLEARING SPILLAGE IN M.V. SUNRISE. 1,50,970/ - TOTAL 38,10,277/ - (C).V, SIGNIFICANTLY, THESE AMOUNTS ARE NOT INCLUDED IN THE AMOUNT OF RS.48,60,08, 180/ - THAT THE ASSESSEE HAD INCURRED SEPARATELY AS A ONE - TIME EXPENDITURE IN CARRYING OUT EXTENSIVE DRY - DOCK STRUCTURAL MODIFICATIONS OF THIS VESSEL. THIS COUPLED WITH THE FACTS THAT, (I)DRY DOCK REPAIRS OF THIS MAGNITUDE HAD NEVER BEEN CARRIED OUT IN THE EARLIER YEAR; AND (II) DRY DOCK REPAIRS, IN ANY CASE, ARE NOT CARRIED OUT ANNUALLY, NEGATES THE CONTENTION OF THE ASSESS EE THAT THE EXPENDITURE OF RS .48,60,08,180 / - WAS ROUTINE EXPENDITURE TOWARDS RUNNING/OPERATING COST OF THE VESSEL. (C)VI. THE FACTS DISCUSSED ABOVE WOULD REVEAL THAT THE EXPENDITURE OF RS. 48,60,08,180/ - INCURRED BY THE ASSESSEE ON M.V. SUNRISE WAS NOT A ROUTINE EXPENDITURE TOWARDS RUNNING/OPERATING OF THE AFORESAID VESSEL BUT WAS IN THE NATURE OF STRUCTURAL REMOLDING WHICH TANTAMOUNT TO CREATION OF A NEW CAPITAL ASSET THAT WOULD GIVE BENEFIT OF AN ENDURING NATURE TO THE ASSESSEE COMPANY. IT NEEDS TO BE S TRESSED THAT THE ASSET IN THE FORM OF A RESTRUCTURED SHIP WITH AN EXTENDED LIFE SPAN IS AKIN TO BRINGING TO EXISTENCE A NEW CAPITAL ASSET THROUGH RESTORATION WHICH WOULD GIVE LASTING BENEFIT TO THEASSESSEE COMPANY. THE EXPENDITURE INCURRED ON REPAIRS WILL BE REVENUE EXPENDITURE WHEREAS, WHERE AN ELEMENT OF ADDITION, IMPROVEMENT OR BETTERMENT RESULTS FROM THE CONSTRUCTION, THE EXPENDITURE WILL BE CAPITAL IN NATURE. IN THIS CASE THE EXTENDED RENOVATION HAS RESULTED NOT ONLY IN ADDING LIFE TO THE ASSET WHICH O THERWISE WOULD HAVE BECOME OBSOLETE BUT HAS ALSO RESULTED IN REGENERATION OF ITS FUNCTION. IT HAS REJUVENATED THE LIFE OF THE SHIP. ITS PERFORMANCE CAPACITY HAS ALSO INCREASED. IT IS THEREFORE NOT A NORMAL CASE OF REPAIRS AND MAINTENANCE. THE ASSESSEE WAS ALSO ASKED TO FURNISH DETAIL AS TO HOW THE AFOR SAID RENOVATION WAS NOT IN THE NATURE OF A CAPITAL EXPENDITURE. VIDE ITS SUBMISSION, THE ASSESSEE, APART FROM THE EARLIER CONTENTION THAT THESE WERE REPAIRS OF A ROUTINE NATURE, ALSO MENTIONED THAT THE LOADI NG CAPACITY OF THE SHIP DID NOT CHANGE AS A RESULT OF THESE REPAIRS. THE COMPARATIVE FIGURES OF THE INCOME FROM TRANSSHIPPER ARE UNDER: 41 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) ASST YEAR AMOUNTS IN RS. 2007 - 08 7,83,49,700 2008 - 09 1,46,93,500 2009 - 10 0(SELF USE) 2010 - 11 9,27,53,430 THUS, DUE TO DRY - DOCKING, THE INCOME OF THE ASSESSEE FROM OF MN. SUNRISE HAD INCREASED DUE TO THE RESTORATION DONE DURING THE DRY - DOCKING. AS REGARDS TO OTHER SUBMISSIONS MADE BY THE ASSESSEE THAT DRY - DOCKING WAS ESSENTIAL TO MAINTAIN ITS SEA WORTHINESS. (C).VII . TO DETERMINE WHETHER AN EXPENDITURE IS REVENUE OR CAPITAL IN NATURE, CERTAIN BROAD TESTS HAVE BEEN LAID DOWN AND THE TEST SUGGESTED BY VISCOUNT CAVE K.C. IN ATHERTON V BRITISH INSULATED AND HEISBY CABLES LTD. (1925) 10 TC 155 (HL) HAVE BEEN LARGELY ACCEP TED. THE HONBLE SUPREME COURT IN ASSAM BENGAL CEMENT CO LTD. V COMMISSIONER OF INCOME TAX (1955) 27 ITR 34 (SC); SITALPUR SUGAR WORKS LTD V CIT (1963) 49 ITR 160 AND A NUMBER OF OTHER DECISIONS HAS ADOPTED THE TEST AS LAID DOWN IN ATHERTONS CASE, WHEN E XPENDITURE IS MADE.... WITH VIEW TO BRINGING INTO EXISTENCE AN ASSETOR AN ADVANTAGE FOR THE ENDURING BENEFIT OF A TRADE, I THINK THAT THERE IS VERY GOOD REASON FOR TREATING SUCH AN EXPENDITURE AS PROPERTY PROPERLY ATTRIBUTABLE NOT TO REVENUE BUT TO CAPITAL. REFERRING TO ATHERTONS CASE, AND CERTAIN OTHER AUTHORITIES ON THE DISTINCTION BETWEEN CAPITAL EXPENDITURE AND REVENUE EXPENDITURE AND THE TESTS TO BE APPLIED, THE HONBLE SUPREME COURT IN ASSAM BENGAL CEMENT CO LTD. V COMMISSIONER OF INCOME TAX (1955) 2 7 ITR 34,45 OBSERVED: IF THE EXPENDITURE IS MADE FOR ACQUIRING OR BRINGING INTO EXISTENCE AN ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS IT IS PROPERLY ATTRIBUTABLE TO CAPITAL AND IS OF THE NATURE OF CAPITAL EXPENDITURE. IF ON THE OTHER HAND IT IS MADE NOT FOR THE PURPOSE OF BRINGING INTO EXISTENCE ANY SUCH ASSET OR ADVANTAGE BUT FOR RUNNING THE BUSINESS OR WORKING IT WITH A VIEW TO PRODUCE THE PROFITS, IT IS REVENUE EXPENDITURE. IF ANY SUCH ASSET OR ADVANTAGE FOR THE ENDURING BENEFIT OF THE BUSINESS IS THUS ACQ UIRED OR BROUGHT INTO EXISTENCE IT WOULD BE IMMATERIAL WHETHER THE SOURCE OF THE PAYMENT WAS THE CAPITAL OR THE INCOME OF THE CONCERN OR WHETHER THE PAYMENT WAS MADE ONCE AND FOR ALL OR WAS MADE PERIODICALLY. THE AIM AND OBJECT OF THE EXPENDITURE WOULD DET ERMINE THE CHARACTER OF THE EXPENDITURE WHETHER IT IS A CAPITAL EXPENDITURE OR REVENUE EXPENDITURE. THE SOURCE OR THE MANNER OF THE PAYMENT WOULD THEN BE OF NO CONSEQUENT. IT IS ONLY IN THOSE CASES WHERE THIS TEST IS OF NO AVAIL THAT ONE MAY GO TO THE TEST OF FIXED OR CIRCULATING CAPITAL AND CONSIDER WHETHER THE EXPENDITURE INCURRED WAS PART OF THE FIXED CAPITAL OF THE BUSINESS OR PART OF ITS CIRCULATING CAPITAL. IF IT WAS PART OF THE FIXED CAPITAL OF THE BUSINESS IT WOULD BE OF THE NATURE OF CAPITAL EXPEND ITURE AND IT IF WAS PART OF ITS CIRCULATING CAPITAL IT WOULD BE OF THE NATURE OF REVENUE EXPENDITURE. 42 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) IN THE INSTANT CASE , THE ASSESSEE COMPANY, BY EXTENSIVE RESTRUCTURING/RESTORATION OF AN OLD VESSEL, HAS CREATED A NEW ASSET WHICH WILL BRING ENDURING BEN EFIT TO THE ASSESSEE COMPANY. THE EXPENDITURE OF RS. 48,60,08,180/ - INCURRED BY THE ASSESSEE ON THE VESSEL M. V. SUNRISE CANNOT BE TREATED AS REVENUE EXPENDITURE AS: - * DRY - DOCKING IS NOT AN ANNUAL FEATURE. * ROUTINE REPAIRS ON THE TRANSSHIPER WERE DONE B Y THE ASSESSEE EVEN DURING THIS YEAR APART FROM THE DRY - DOCKING. * THE EXTENDED RENOVATION THAT IS IN THE NATURE OF RESTORATION HAS RESULTED IN ADDING LIFE TO M. V. SUNRISE, REGENERATED ITS FUNCTIONING AND INCREASED ITS PERFORMANCE CAPACITY. * PERFORMANCE OF THE VESSEL ALSO INCREASED AS A RESULT OF DRY - DOLCKING AS REVEALED BY THE INCREASED REVENUE EARNED AFTER THE DRY - DOCKING. THE EXPENDITURE IS IN THE NATURE OF A CAPITAL EXPENDITURE AND WILL NEED TO BE TREATED AS SUCH, ACCORDINGLY, THE EXPENDITURE OF RS. 48,60,08,180/ - INCURRED BY THE ASSESSEE ON THE VESSEL M. V. SUNRISE IS DISALLOWED AS BEING CAPITAL IN NATURE. SINCE THE SHIP HAS BEEN RELEASED FROM DRY - DOCKING ON 30.09.2008 THE DEPRECIATION FOR THIS YEAR IN THIS RESPECT WOULD ALLOWED ONLY TO THE EXTENT O F 50% OF ALLOWABLE DEPRECIATION I.E. 10%. HENCE, THE TOTAL ADDITION ON THIS COUNT IS RS. 48,60,08,180/ - . HOWEVER THE DEPRECIATION ALLOWABLE WOULD BE RS. 4,86,00,818/ - ON THIS COUNT. 11 . 1 . THE MATTER CARRIED TOCIT(A) AND CIT(A) HAS ALLOWED THE CLAIM BY OBSERVING AS UNDER: - 6.3. I HAVE GONE THROUGH THE ASSESSMENT ORDER AND THE CONTENTIONS OF THE APPELLANT. THE A.O. HAS NOT DOUBTED THE GENUINENESS OF THESE EXPENSES, BUT HIS MAIN CONTENTION IS THAT BY SPENDING SUCH A HUGE AMOUNT, THE APPELLANT HAS ACHIEVED AN ENDURING ADVANTAGE. IN MY OPINION, AS ALSO DECIDED BY ME IN EARLIER YEAR, IN THE CASE OF THE APPELLANT, THE EXPENDITURE INCURRED SHALL STILL BE CATEGORIZED AS CURRENT REPAIRS BECAUSE: I) WE HAVE TO BELIEVE IN THE BUSINESS ACUMEN OF THE ASSESSEE THAT IT WILL NOT SPEND ANYTHING UNTIL IT IS NECESSARY FOR HIM IN HIS BUSINESS INTEREST. II) THE EXPENDITURE ON REPAIRS WAS NECESSARY TO KEEP THE VESSEL IN GOOD CONDITION AND SEA - WORTHY. III) THE DRY - DOCKING AND OTHER REPAIRS HAVE NOT CAUSED A CHANGE IN CA PACITY/TONNAGE OR AFFECTED THE EFFICIENCY IN WORKING OF THE VESSEL. IV) NOW NEW ASSET HAS COME INTO EXISTENCE. 43 ITA NOS. 361, 362 & 363/PNJ/2013 (A.Y. 2008 - 09 & 2009 - 10) IN VIEW OF THE ABOVE, THE A.O. IS DIRECTED TO ALLOW THESE EXPENSES AS REVENUE EXPENSES AND DELETED THE ADDITION MADE ON THIS ACCOUNT. 11 . 2 . WE HAVE HEAD THE RIVAL CONDITION OF THE BOTH THE PARTIES. WE HAVE DISMISSED THE DEPARTMENTS APPEAL IN ITA NO. 361/PNJ/2013 IN A.Y 2008 - 09 . FOLLOWING THE SAME WE DISMISSED THESE GROUNDS OF APPEAL. 12 . IN THE RESULT, DEPARTMENT APPEAL IS DISMISSED. ASSESSEES APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 01.10.2014 . SD/ - SD/ - ( P.K. BANSAL) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : PANAJI / GOA DATED : 01 .10 .2014 P.S. - *PK* COPY TO : ( 1 ) APPELLANT ( 2 ) RESPONDENT ( 3 ) CIT CONCERNED ( 4 ) CIT(A) CONCERNED ( 5 ) D.R ( 6 ) GUARD FILE TRUE COPY, BY ORDER
Other Referred Cases
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Laws Referred To
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1:1 Consultation on Tax Litigation
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1:1 Consultation on Legal Requirements
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1:1 Consultation on Salary Structuring
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No Objection Letter for Use of Property – Partnership Firm
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Assignment of Registered Trademark
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