IUP Jindal Metals & Alloys Ltd., New Delhi V. DCIT, New Delhi

ITA 3755/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 52520 (ITAT-DELHI)
• Duration Of Justice: 1 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 02-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 05-08-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: SALIL MISHRA
• Assessee Lawyers: ANIL JAINC A
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C DELHI BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL ITA NO. 3755(DEL)/2010 ASSESSMENT YEAR: 2006-07 IUP JINDAL METALS & ALLOYS DEPUTY COMMISSIONER OF LTD., (FORMERLY KNOWN AS VS. INCOME-TAX, CIRCLE 11(1), IUP JINDAL HEXA METALS LIMITED), NEW DELHI. 28, NAJAFGARH ROAD, NEW DELHI-110015. PAN: AABCI2731E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ANIL JAIN,C.A. RESPONDENT BY : SHRI SALIL MISHRA, SR. DR ORDER PER K.G. BANSAL : AM THE ASSESSEE HAS TAKEN UP FIVE GROUNDS IN THE APPEAL, THE GIST OF WHICH IS THAT THE LD. CIT(APPEALS) ERRED IN NO T ENTERTAINING THE CLAIM OF THE ASSESSEE THAT PRE-OPERATIVE EXPENSES OF RS. 13,91,339/- CONSTITUTE REVENUE EXPENDITURE. IN THE ALTERNATIVE, IT IS CLAIMED THAT EXPENSES TO THE EXTENT OF RS. 8,41,339/- SHOULD BE CAPITALIZE D TOWARDS THE COST OF BUILDING, AND PLANT AND MACHINERY; AND LEGAL CHARG ES OF RS. 5,50,000/- FOR DRAFTING THE PROJECT SETTING UP AGREEMENT SHOULD B E CONSIDERED U/S 35D AS PRELIMINARY EXPENSES. ITA NO.5659(DEL)/2010 2 2. THE FACTS ARE THAT THE ASSESSEE-COMPANY FIL ED ITS RETURN DECLARING LOSS OF RS. 37,90,078/-. THE CASE WAS TAKEN UP FOR SCRUTINY BY ISSUING NOTICE U/S 143(2). IT WAS FOUND THAT THE ASSESS EE IS ENGAGED IN THE BUSINESS OF MANUFACTURING COLD ROLLED STAINLESS S TEEL AND NICKEL ALLOYS. THE ASSESSEE DEBITED A SUM OF RS. 13,91,339/- IN TH E PROFIT AND LOSS ACCOUNT, WHICH ARE IN THE NATURE OF PRE-OPERATIVE EXPENSE S. THEREFORE, THE EXPLANATION OF THE ASSESSEE WAS OBTAINED. IT WAS SUBMITTED THAT THE AMOUNT HAS BEEN WRONGLY DEBITED TO PROFIT AND LOSS ACC OUNT AND, THEREFORE, THE ASSESSEE HAD NO OBJECTION TO DISALLOWING THE SAM E. ACCORDINGLY, THE LOSS WAS COMPUTED AT RS. 23,98,739/-. 2.1 THE MATTER WAS AGITATED IN APPEAL. IT WAS SU BMITTED THAT THE ASSESSEE-COMPANY WAS PROMOTED BY JINDAL GROUP IN COLLABORATION WITH ARCELLOR STAINLESS INTERNATIONAL, FRANCE, THROUGH ITS SUBSIDIARY COMPANY, IMPHY UGINE PRECISION, TO SET UP COLD ROLLING P LANT AT BAHADURGARH, HARYANA. THE WORK OF INSTALLATION WAS COMPLETED D URING THE YEAR AND TRIAL RUNS WERE ALSO CONDUCTED. THE UNIT STARTED PRO DUCTION IN THE MONTH OF FEBRUARY, 2006. THE COST INCURRED FOR INSTALLATI ON, WHETHER DIRECT OR INDIRECT, WERE CAPITALIZED. A SUM OF RS. 13,91,33 9/- WAS GROUPED UNDER THE HEAD PRE-OPERATIVE EXPENSES. HOWEVER, TH E AUDITORS WERE OF THE ITA NO.5659(DEL)/2010 3 VIEW THAT SINCE COMMERCIAL PRODUCTION HAD STARTE D THE EXPENSES ARE OF REVENUE NATURE. A CLARIFICATION WAS SOUGHT DURING THE COURSE OF ASSESSMENT PROCEEDINGS. ON REALIZING THAT AN ERRO R HAS BEEN COMMITTED, IT WAS AGREED THAT THE EXPENSES SHOULD BE CAPITALIZE D BY ENHANCING THE COST OF FIXED ASSETS. THE AO MERELY DISALLOWED T HE EXPENDITURE WITHOUT CAPITALIZING THE SAME. THE LD. CIT(APPEALS) CON SIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE HIM. HE INTER- ALIA CONSIDERED THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F CHALLAPALLI SUGARS LTD. VS. CIT, (1975) 98 ITR167. AT PAGE NO. 174, THE COURT CONSIDERED THE STATEMENT ON AUDITING PRACTICES ISSUED BY THE IN STITUTE OF CHARTERED ACCOUNTANTS OF INDIA (1974), IN WHICH FOLLOWING S TATEMENT HAS BEEN MADE:- 2.5 FIXED ASSETS SHOULD BE VALUED AT COST AN D DEPRECIATION SHOULD BE WRITTEN OFF ON A PROPER AND CONSISTENT BASIS. COST INCLUDES ALL EXPENDITURE NECESSARY TO BRING THE ASSETS INTO EXISTENCE AND TO PUT THEM IN WORKING CONDITION . BY WAY OF ILLUSTRATION THE FOLLOWING MAY BE MENTIONED:- (I) LEGAL CHARGES AND STAMP DUTIES IN THE CASE OF LAND (II) ARCHITECTS FEES IN THE CASE OF BUILDINGS, (III) WAGES, SALARIES AND INSTALLATION EXPENSES IN THE CASE OF MACHINERY, AND (IV) INTEREST ON BORROWINGS TO THE EXTENT SPECIFI ED IN PARAGRAPH 2.22 RELEVANT PART OF PARAGRAPH 2.22 READS AS UNDER: - ITA NO.5659(DEL)/2010 4 2.22 THE QUESTION OFTEN ARISES AS TO WHETHER IN TEREST ON BORROWINGS CAN BE CAPITALIZED AND ADDED TO THE FIXED ASSETS WHICH HAVE BEEN CREATED AS A RESULT OF SUCH EXP ENDITURE. THE ACCEPTED VIEW SEEMS TO BE THAT IN THE CASE O F A NEWLY STARTED COMPANY WHICH IS IN THE PROCESS OF CONST RUCTING AND ERECTING ITS PLANT, THE INTEREST INCURRED BEFORE PRODUCTION COMMENCES MAY BE CAPITALIZED. INTEREST INCURRED MEANS ACTUAL INTEREST PAID OR PAYABLE IN RESPECT OF B ORROWINGS WHICH ARE USED TO FINANCE CAPITAL EXPENDITURE. IN NO CIRCUMSTANCES SHOULD IMPUTED INTEREST BE CAPITALI ZED, SUCH AS INTEREST ON EQUITY OR PREFERENCE CAPITAL AT A NOTIONAL RATE. INTEREST ON CAPITAL DURING CONSTRUCTION PAID IN ACCORDANCE WITH THE PROVISIONS OF SECTION208 OF THE COMPAN IES ACT, 1956, MAY HOWEVER, BE CAPITALIZED AS PERMITTED B Y THAT SECTION. INTEREST ON MONIES WHICH ARE SPECIFICALL Y BORROWED FOR THE PURCHASE OF A FIXED ASSET MAY BE CAPITAL IZED PRIOR TO THE ASSET COMING INTO PRODUCTION, I.E., DURIN G THE ERECTION STAGE. HOWEVER, ONCE PRODUCTION STARTS, NO INTE REST ON BORROWINGS FOR THE PURCHASE OF MACHINERY (WHETHE R FOR REPLACEMENT OR RENOVATION OF EXISTING PLANT) SHOU LD BE CAPITALIZED 2.2 THE COURT OBSERVED THAT THE ACCEPTED ACCOUNT ANCY RULE FOR DETERMINING THE COST OF FIXED ASSETS IS TO INC LUDE ALL EXPENDITURE NECESSARY TO BRING SUCH ASSETS INTO EXISTENCE A ND TO PUT THEM IN WORKING CONDITION. IN CASE MONEY IS BORROWED BY A NEWL Y STARTED COMPANY WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING I TS PLANT, THE INTEREST INCURRED BEFORE THE COMMENCEMENT OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALIZED AND ADDED TO THE COST O F FIXED ASSETS, WHICH HAVE BEEN CREATED AS A RESULT OF SUCH EXPENDIT URE. THE ABOVE RULE OF ITA NO.5659(DEL)/2010 5 ACCOUNTANCY SHOULD BE ADOPTED FOR DETERMINING THE ACTUAL COST OF THE ASSET IN THE ABSENCE OF ANY STATUTORY DEFINITION OR OTHER COMMUNICATION TO THE CONTRARY. THE FINDING OF THE LD. CIT(APPEALS) BASED ON THIS AND OTHER DECISIONS IS THAT ONLY THOSE COSTS WHICH COULD BE RELATED TO A FIXED ASSET COULD BE ADDED TOWARDS THE COST OF THE ASSET. SINCE NO SUCH ALLOCATION HAS BEEN MADE NOR IT HAS BEEN SHOWN THAT THE EXPE NDITURE INDIRECTLY RELATES TO THE INSTALLATION OF MACHINERY OR PLANT OR BUILD ING, THE CLAIM OF THE ASSESSEE HAS BEEN DENIED. 2.3 THERE WAS ALSO A CLAIM THAT LEGAL FEES OF R S. 5.50 LAKH SHOULD BE TREATED AS DEFERRED REVENUE EXPENDITURE UNDER SECTION 35D. THE AMOUNT WAS PAID TO M/S HAMMURABI & SOLOMON, ADVOCATES AN D CORPORATE LAW ADVISORS, FOR DRAFTING JOINT VENTURE AGREEMENT. THE CLAIM WAS THAT THE EXPENDITURE IS COVERED UNDER SECTION 35D(2)(B). IT HAS BEEN HELD THAT SINCE NO SUCH CLAIM WAS MADE BEFORE THE AO, I T CANNOT BE AGITATED NOW IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF GOETZE INDIA LTD. VS. CIT, (2006) TIOL 198 (SC). 2.4 AGGRIEVED BY THIS ORDER, THE ASSESSEE IS IN AP PEAL BEFORE US. ITA NO.5659(DEL)/2010 6 3. THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO T HE FACTS REGARDING THE JOINT VENTURE, ITEMS MANUFACTURED BY THE ASSESSE E AND THE DATE OF COMMENCEMENT OF PRODUCTION. IN REGARD TO THE SUM OF RS. 13,91,339/-, REFERENCES ARE MADE TO VARIOUS PAGES OF THE PAPE R BOOK. THE PROFIT AND LOSS ACCOUNT SHOWS AN EXPENDITURE OF RS. 63,45,778/ - DEBITED AS ADMINISTRATIVE AND OTHER EXPENSES. THE DETAIL S ARE GIVEN IN SCHEDULE- M, WHICH INCLUDES AN ITEM PRE-OPERATIVE EXPENS ES WRITTEN OFF AMOUNTING TO RS. 13,91,339/-. IN THE COMPANY BACK GROUND, IT IS INTER- ALIA STATED THAT THE COMPANY HAS SET UP A MODERN PLANT AT BAHADURGARH FOR DEVELOPING RELEVANT SKILLS AND COST EFFECT IVE FACILITIES FOR COLD ROLLING AND FINISHING ACTIVITIES. THE COMPANY STARTED ITS COMMERCIAL PRODUCTION FROM 01.02.2006. IT HAS BEEN CLARIFIED BY THE LD. COUNSEL THAT PRE-OPERATIVE EXPENSES HAD BEEN INCURRED PRIOR T O 01.02.2006. THE CASE OF THE LD. COUNSEL IS THAT THESE EXPENSES SHOULD HAVE BEEN CAPITALIZED TOWARDS THE COST OF FIXED ASSETS, I.E., MACHINER Y AND PLANT; AND BUILDING. WHEN ASKED WHETHER ANY ALLOCATION OF EXPENSES TOWARDS THE AFORESAID ASSETS WAS FURNISHED BEFORE THE AO OR THE LD. CI T(APPEALS), IT HAS BEEN SUBMITTED THAT NO SUCH ALLOCATION HAS BEEN FURNIS HED BEFORE LOWER AUTHORITIES. ITA NO.5659(DEL)/2010 7 3.1 ON THE OTHER HAND, THE CASE OF THE LD. DR IS BASED UPON THE FINDING OF THE LD. CIT(APPEALS) THAT PRE-PRODUCTION EXPENSES INCURRED IN CONNECTION WITH BRINGING THE ACTUAL ASSETS INTO EXISTENCE AND TO PUT THEM IN WORKING CONDITIONS HAVE TO BE INCLUDED IN THE ACTUAL CO ST OF THE ASSETS. HOWEVER, THE EXPENDITURE IN QUESTION IS MISCELLANEOUS EXP ENDITURE IN RESPECT OF PRESS CONFERENCE EXPENSES, NEWSPAPER AND MAGAZIN E REIMBURSEMENT, BOOKS AND PERIODICALS ETC. THESE EXPENSES CAN IN NO WAY BE RELATED TO INSTALLATION OF ANY CAPITAL ASSET. 3.2 BEFORE PROCEEDING FURTHER, WE MAY ALSO DEAL WITH THE CASES RELIED UPON BY THE LD. COUNSEL. IN THE CASE OF CIT VS. GREAT EASTERN SHIPPING CO. LTD., (1979) 118 ITR 772 (BOM.), THE ASSESSE E CLAIMED CERTAIN EXPENSES AS REVENUE EXPENSES. THE AO CAME TO T HE CONCLUSION THAT THESE COULD NOT BE ALLOWED AND THESE COULD ALSO NOT B E ADDED TO THE COST OF THE ASSETS. THE AAC HELD THAT THREE OF THE EXPENSES WERE RIGHTLY DISALLOWED BY THE AO. HOWEVER, THE REST OF THE EXPENSES WERE HELD TO BE CAPITAL IN NATURE, ON WHICH THE AO WAS DIRECTED TO ALLOW DEPRECIATION. THE DEPARTMENT CARRIED THE MATTER TO THE TRIBUNAL. IT WAS SUBMITTED THAT THE EXPENSES WERE INCURRED AFTER THE SHIP WAS READY AND IN A FIT CONDITION FOR USE, THEREFORE, THE EXPENSES COULD NOT HAVE PRODUCED ANY ASSET. THE ITA NO.5659(DEL)/2010 8 TRIBUNAL DID NOT FIND FORCE IN THE DEPARTMENTS CO NTENTION. THE HONBLE COURT INTER-ALIA CONSIDERED THE DECISION IN THE CASE OF CHALLAPALLI SUGARS LTD. AND HELD THAT THE NATURE AND CHARACTER OF TH E EXPENSES HAVE TO BE TAKEN INTO ACCOUNT. EACH ITEM OF EXPENDITURE HAS BEEN CONSIDERED BY THE AAC AND THE TRIBUNAL AND CORRECT DECISION WITH REGAR D TO THEM HAS BEEN TAKEN. IT MAY BE MENTIONED HERE BY US THAT THE EXPENSES HAD BEEN INCURRED AFTER THE SHIP WAS READY FOR USE, THEREFORE, THE BUSINES S HAD BEEN SET UP, WHICH IS NOT THE CASE HERE. FURTHER, IN THE CASE OF CIT VS. FOOD SPECIALITIES LTD., (1982) 136 ITR 203, THE FINDING OF THE TRIBUN AL THAT TRIAL RUN EXPENSES ARE CAPITAL IN NATURE WAS CORRECT ON FACTS AND IN LAW. HOWEVER, THE EXPENSES HERE DO NOT RELATE TO TRIAL RUNS. IN T HE CASE OF CIT VS. NIRLON SYNTHETIC FIBRE & CHEMICALS LTD., (1982) 137 I TR 1, IT HAS BEEN HELD THAT THE EXPENSES INCURRED AT THE TIME OF FOUNDATI ON LAYING CEREMONY AND INAUGURATION CEREMONY CONSTITUTE CAPITAL EXPENDIT URE. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THE DETAILS OF THE EXPENSES INCURRED BY THE ASSESSEE AS PRE- OPERATIVE EXPENSES ARE AS UNDER:- S.NO. PARTICULARS AMOUNT (RS.) 1. LEGAL & PROFESSIONAL CHARGES 7,71,151 2. MISCELLANEOUS EXPENDITURE 1,26,771 3. RECRUITMENT EXPENSES 1,000 ITA NO.5659(DEL)/2010 9 4. PRESS CONFERENCE EXPENSES 1,44,846 5. POSTAGE & TELEGRAM 6,199 6. SEMINAR EXPENSES 32,000 7. NEWSPAPER & MAGAZINE REIM. 4,313 8. BOOKS & PERIODICALS 17,449 9. FEE & SUBSCRIPTION 62,733 10 FILING FEES 14,515 11. PRINTING & STATIONERY 1,10,362 12 AUDIT FEE A/C 1,00,000 TOTAL : 13,91,339 4.1 OUT OF THESE EXPENSES, A SUM OF RS. 5,50,00 0/- REPRESENTS EXPENDITURE INCURRED FOR PREPARING JOINT VENTURE DOCUMENT, WHICH HAS TO BE CONSIDERED SEPARATELY. THE ASSESSEE HAS NOT BEE N ABLE TO RELATE ANY OF THE EXPENSES TOWARDS ANY OF THE ASSETS. IT HAS NOT BEEN SHOWN THAT THE EXPENSES WERE INTEGRALLY CONNECTED WITH ANY AS SET SUCH AS LAND, BUILDING OR MACHINERY AND PLANT. THEREFORE, THE CLAIM IS RIDDLED WITH TWO PROBLEMS-(A) IT IS NOT SHOWN THAT SUCH EXPENS ES ARE INCURRED IN THE COURSE OF ACQUISITION OR INSTALLATION OF THE ASSETS; (B) THE METHOD ON THE BASIS OF WHICH THE EXPENDITURE COULD BE ALLOCATED TO ONE OR THE OTHER ASSET ON A FAIR BASIS IS NOT SHOWN . THE SECOND QUEST ION REQUIRES FURTHER FINDING OF FACTS AS NO ALLOCATION AND THE DEPRE CIATION ADMISSIBLE ON ASSETS HAVE BEEN FURNISHED BEFORE ANY OF THE LOWER AU THORITIES. IN SUCH CIRCUMSTANCES, WE ARE OF THE VIEW THAT THE CLAIM OF THE ASSESSEE CANNOT BE ALLOWED. ITA NO.5659(DEL)/2010 10 5. IN SO FAR AS LEGAL FEES IS CONCERNED, THE C LAIM OF THE ASSESSEE IS MADE U/S 35D(2)(B). UNDER THIS PROVISION EXPE NDITURE IS ALLOWABLE FOR DRAFTING ANY AGREEMENT BETWEEN THE ASSESSEE AND ANY OTHER PERSON FOR ANY PURPOSE RELATING TO SETTING UP OR CONDUCT OF THE BUSINESS OF THE ASSESSEE. SUCH EXPENDITURE INCURRED PRIOR TO CO MMENCEMENT OF BUSINESS, HAS TO BE AMORTIZED AS PRELIMINARY EXPENSES. CL AUSE (B) DEALS WITH SETTING UP OF THE BUSINESS AND NOT FOR PREPARING THE JOINT VENTURE AGREEMENT, WHICH IS ENTERED INTO PRIOR TO THE COMMENCEMENT O F ACTIVITIES FOR SETTING UP THE BUSINESS. THEREFORE, WE ARE OF THE VIEW THAT THIS EXPENDITURE CAN ALSO NOT BE AMORTIZED FOR DEDUCTION IN A PHASED MANNER U/S 35D. 5. IN THE RESULT, THE APPEAL IS DISMISSED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 5 AUGUST, 2011. SD/- SD/- (I.P. BANSAL) (K.G. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 05.08.2011. SP SATIA COPY OF THE ORDER FORWARDED TO:- IUP JINDAL & ALLOYS LTD., NEW DELHI. DCIT, CIRCLE 11(1), NEW DELHI. CIT CIT(APPEALS) THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.