Paruthi Engineers (P) Ltd., Delhi V. ITO, New Delhi

ITA 391/DEL/2014

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 3774 (ITAT-DELHI)
• Duration Of Justice: 4 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 13-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 22-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Retrospective amendment; Revenue expenditure; Capital expenditure
• Section: 201(1); 37; 139

Judgement Text

INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F : NEW DELHI BEFORE SHRI AMIT SHUKLA , JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER ITA NO. 5902/DEL/2013 (ASSESSMENT YEAR: 2009 - 10 ) ITA NO. 391/DEL/2014 (ASSESSMENT YEAR: 2010 - 11) PARUTHI ENGINEERS (P) LTD, 2A/ 501. RANG RASAYAN APPTT, SECTPR - 13, ROHINI, DELHI PAN:AAACP5303J VS. DCIT, CIRCLE - 14(1), NEW DELHI (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SATYEN SETHI, ADV REVENUE BY: SHRI ATIQ AHMAD, SR. DR DATE OF HEARING 09/11 / 2017 DATE OF PRONOUNCEMENT 05 / 02 / 201 8 O R D E R PER PRASHANT MAHARISHI , A. M. 1. THE ABOVE TWO APPEALS FOR TWO DIFFERENT ASSESSMENT YEARS I.E. FOR A Y 2009 10 AND 2010 11 ARE FILED BY THE ASSESSEE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) XVII, NEW DELHI DATED 11/9/2013 AND 2/12/2013 RESPECTIVELY. AS THE APPEALS OF THE ASSESSEE INVOLVE SIMILAR GROUND OF APPEAL ON SIMILAR FACTS, THEREFORE THEY ARE DISPOSED OFF TOGETHER BY THIS COMMON ORDER. 2. THE ASSESSEE HAS RAISED THE FOLLOWING G ROUNDS OF APPEAL FOR THE AY 2009 - 10: - 1. WHETHER IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE ARBITRARY ACTION OF THE AO IN MAKING FOLLOWING DISALLOWANCE: - II. INTEREST REPAYMENT OF HIRE PURCHASE INSTALLMENT TO RELIANCE CAPITAL AND CHOLAMANDALAM FINANCE U/S 40(A)(IA) OF THE ACT 136768/ - III. PRE - OPERATIVE EXPENSE - 170005/ - THE JUSTIFIED, UNLAWFUL AND UNWARRANTED ACTION OF CONFIRMING THE DISALLOWANCE WITHOUT CAREFULLY CONSIDERING THE SUBMISSION IS LIABLE AND URGED TO BE DELETED. PAGE 2 OF 14 2. WHETHER UNDER THE CIRCUMSTANCES OF THE CASE AND IN VIEW OF THE FACTS THE LD CIT(A) WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE MADE BY THE LD AO ON ACCOUNT OF FOLLOWING EX PENDITURES, DESPITE BEING AGREED FOR NOT INITIATING ANY PENALTY PROCEEDINGS AGAINST THE SAME: - MACHINERY REPAIR AND MAINTENANCE - RS, 284554/ - TRADE TAX W/OFF - RS. 94962/ - THE ARBITRARY ACTION OF THE LD CIT(A) IN CONFIRMING THE DISALLOWANCE IS LIABL E AND URGED TO BE CANCELLED AND DISALLOWANCE BE DELETED. 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL FOR THE AY 2010 - 11: - 1. WHETHER IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD CIT(A) WAS JUSTIFIED IN CONFIRMING THE ARBITRARY ACTION OF THE AO IN MAKING FOLLOWING DISALLOWANCE: - I) DISALLOWANCE OF INTEREST ELEMENT INCLUDED IN HIRE PURCHASE INSTALLMENT (EMI) PAID TO RELIANCE CAPITAL LTD AND CHOLAMANDALAM INVESTMENT & FINANCE CO. LTD RS. 70377/ - II) DEFERRED REVENUE EXPENDITURE BEING WRITTEN OFF @1/5 TH ANNUALLY) RS. 244817/ - THE UNJUSTFIED, UNLAWFUL AND UNWARRANTED ACTION OF CONFIRMING THE DISALLOWANCE WITH CAREFULLY CONSIDERING THE SUBMISSION IS LIABLE AND URGED TO BE DELETED. 4. THE APPEAL FOR ASS ESSMENT YEAR 2009 10 HAS PRECISELY TWO ISSUES BEFORE US AS UNDER: - A. DISALLOWANCE OF INTEREST BEING REPAYMENT OF HIRE PURCHASE INSTALLMENT TO RELIANCE CAPITAL AND CHOLAMANDALAM FINANCE UNDER SECTION 40 (A) (I A) OF THE ACT FOR NON - DEDUCTION OF TAX AT SOUR CE B. DISALLOWANCE OF PREOPERATIVE EXPENDITURE C. DISALLOWANCE OF MACHINERY REPAIRS AND MAINTENANCE EXPENDITURE OF RS. 2 84554/ AND TRADE TAX WRITE - OFF OF RS. 9 4962/ - 5. SIMILAR ISSUES ARE ALSO FOR AY 2010 - 11. PAGE 3 OF 14 6. AT THE COMMENCEMENT OF THE HEARING THE LD. AR SUBMIT TED THAT HE DOES NOT WANT TO PRESS, THE DISALLOWANCE OF TRADE TAX WRITE - OFF OF RS. 9 4962/ COVERED IN GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE FOR AY 2009 - 10. . HENCE, THAT PART OF GROUND NO. 2 IS DISMISSED. 7. ASSESSEE IS A COMPANY ENGAGED IN THE BUSINES S OF MANUFACTURING/FABRICATION OF TELECOMMUNICATION TRANSMISSION TOWERS. THE COMPANY FURNISHED ITS RETURN OF INCOME ON 21/9/2009 SHOWING TOTAL INCOME OF RS. 46419150/ . THE CASE OF THE ASSESSEE WAS PICKED UP FOR SCRUTINY AND THE LD. ASSESSING OFFICER MADE DISALLOWANCE OF CERTAIN EXPENDITURE AGAINST WHICH THE APPEAL WAS PREFERRED BEFORE LD. CIT (A) WHO UPHELD DISALLOWANCES HENCE THE APPEAL IS PREFERRED BEFORE US. 8. THE FIRST GROUND OF APPEAL IS AGAINST DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 136768/ ON T HE ASSETS WHICH HAVE BEEN FINANCED BY RELIANCE CAPITAL LIMITED AND CHOLAMANADALAM FINANCE LTD. THE ASSESSEE HAS EXECUTED HIRE PURCHASE AGREEMENT FOR SECURING SUCH FINANCE. HOWEVER, THE AMOUNT OF INTEREST PAID TO THESE COMPANIES WAS NOT SUBJECTED TO T DS DESPITE COVERED UNDER SECTION 194A OF THE INCOME TAX ACT. ADMITTEDLY, ASSESSEE HAS NOT DEDUCTED ANY TAX ON SUCH SUM. THEREFORE THE LD. ASSESSING OFFICER DISALLOWED RS. 136768/ - APPLYING THE PROVISIONS OF SECTION 40A(IA) OF THE ACT. ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT (A) CONTESTING THE ABOVE DISALLOWANCE WHO HELD THAT THE ASSETS HAVE NOT BEEN TAKEN ON HIRE BUT HAVE BEEN FINANCED BY THE FINANCE COMPANIES AND ASSESSEE HAS TAKEN LOAN FOR PURCHASE OF THE VEHICLES. HE HELD THAT ASSESSEE HAS PAID INTEREST AND THEREFORE THE DISALLOWANCE MADE BY THE LD. ASSESSING OFFICER FOR NON - DEDUCTION OF TAX AT SOURCE ON SUCH PAYMENT TO SUCH NONBANKING FINANCIAL COMPANIES IS CONFIRMED. 9. BEFORE US THE LD. LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT ASSESSEE HAS TA KEN THE ASSETS ON HYPOTHECATION AS PER HIRE PURCHASE AGREEMENT AND HAS NOT PAID ANY INTEREST TO THESE COMPANIES BUT IT IS HIRE CHARGES WHICH CANNOT BE REGARDED AS LOAN AND THEREFORE THE PROVISIONS OF SECTION 194A OF THE INCOME TAX ACT DO NOT APPLY. HE FURT HER RELIED ON THE DECISION OF THE RANI LEASING AND FINANCE LTD VERSUS CIT (2015) 377 ITR 220. HE ALSO PLACED RELIANCE ON THE DECISION OF ASHOK LEYLAND FINANCES LTD VERSUS ACIT (2002) 80 ITD 560. ALTERNATIVELY HE ALSO ARGUED THAT THE APPELLANT PAGE 4 OF 14 HAS NOT BEEN TREATED AS ASSESSEE IN DEFAULT UNDER SECTION 201 AND THE CONDITION OF SECOND PROVISO TO SECTION 40A (IA) ARE MET. AND THEREFORE HE PRESSED RELIANCE ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN CIT VERSUS ANSAL LANDMARK TOWNSHIP PRIVATE LIMITED (2015 ) 377 ITR 635 WHEREIN IT HAS BEEN HELD THAT THE 2 ND PROVISO IS DECLARATORY AND CURATIVE IN NATURE AND HAS RETROSPECTIVE EFFECT FROM 1/4/2005 . 10. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY SUBMITTED THAT ASSESSEE IS REQUIRED TO DEDUCT TAX AT SOURCE ON THE PAYMENT MADE TO FINANCE COMPANIES AS INTEREST UNDER SECTION 194A OF THE INCOME TAX ACT. ASSESSEE HAS ADMITTEDLY FAILED TO DEDUCT ANY TAX AT SOURCE AND THEREFORE THE DISALLOWANCE IS CORRECTLY CONFIRMED. WITH RESPECT TO THE ALTERNATIVE ARGUMENT OF THE ASSES SEE HE SUBMITTED THAT THESE PROVISO DOES NOT APPLY FROM 1/4/2005. HE FURTHER SUBMITTED THAT THE SPECIAL LEAVE PETITION OF THE REVENUE BEFORE THE HONBLE SUPREME COURT HAS BEEN ADMITTED AND IS PENDING FOR DISPOSAL AS PER 73 TAXMANN.COM 63 (SC). HE THEREFOR E SUBMITTED THAT THE ABOVE PROVISO INSERTED DOES NOT APPLY RETROSPECTIVELY. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND NOTED THE ORDERS OF THE LOWER AUTHORITIES. IN THE PRESENT CASE, ADMITTEDLY THE ASSESSEE HAS TAKEN ASSETS ALLEGEDLY ON HIRE PUR CHASE AGREEMENT FROM THE ABOVE TWO FINANCE COMPANIES. THE ASSESSEE HAS STATED THAT IT HAS PAID THE HIRE PURCHASE CHARGES AND THEREFORE NO TAX IS REQUIRED TO BE DEDUCTED ON THAT. BEFORE THE LOWER AUTHORITIES, THE ASSESSEE HAS FAILED TO PROVE THAT THERE WAS A HIRE PURCHASE AGREEMENT BUT NOT A FINANCE AGREEMENT IN FORM AND IN SUBSTANCE BEFORE THE LOWER AUTHORITIES. EVEN OTHERWISE, THE NONBANKING FINANCIAL COMPANIES HAVE ALSO TREATED IT AS LOAN GIVEN TO THE ASSESSEE AS PER THE FINANCIAL STATEMENTS PLACED IN T HE PAPER BOOK. ASSESSEE HAS ALSO DEBITED THE ACCOUNT OF INTEREST EXPENDITURE IN ITS PROFIT AND LOSS ACCOUNT. THEREFORE, WE REJECT THE CONTENTION OF THE ASSESSEE THAT THESE ARE THE HIRE CHARGES AND NOT INTEREST PAYMENT TO THE NONBANKING FINANCIAL COMPANIES. WE HOLD THAT THESE ARE THE INTEREST PAYMENT MADE BY THE ASSESSEE AND THEREFORE THE TAX SHOULD HAVE BEEN DEDUCTED ON THIS PAYMENT UNDER SECTION 194A OF THE INCOME TAX ACT. AS ASSESSEE HAS FAILED TO DO SO THERE IS NO INFIRMITY IN THE ORDER OF THE LOWER AUT HORITIES IN DISALLOWING THE ABOVE PAYMENT FOR NON - DEDUCTION OF TAX. PAGE 5 OF 14 12. COMING TO THE 2 ND ASPECT OF AN ALTERNATIVE PLEA OF THE ASSESSEE THAT 2 ND PROVISO TO SECTION 40 (A) (IA) APPLIES RETROSPECTIVELY IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF TH E HONBLE DELHI HIGH COURT IN CASE OF CIT VERSUS ANSAL LANDMARK TOWNSHIP PRIVATE LIMITED 61 TAXMANN.COM 45 (DEL) WHEREIN IT HAS BEEN HELD THAT 9. IT IS SEEN THAT THE SECOND PROVISO TO SECTION 40(A)(IA) WAS INSERTED BY THE FINANCE ACT, 2012 WITH EFFECT FROM 1ST APRIL 2013. THE EFFECT OF THE SAID PROVISO IS TO INTRODUCE A LEGAL FICTION WHERE AN ASSESSEE FAILS TO DEDUCT TAX IN ACCORDANCE WITH THE PROVISIONS OF CHAPTER XVII B. WHERE SUCH ASSESSEE IS DEEMED NOT TO BE AN ASSESSEE IN DEFAULT IN TERMS OF THE FI RST PROVISO TO SUB - SECTION (1) OF SECTION 201 OF THE ACT, THEN, IN SUCH EVENT, 'IT SHALL BE DEEMED THAT THE ASSESSEE HAS DEDUCTED AND PAID THE TAX ON SUCH SUM ON THE DATE OF FURNISHING OF RETURN OF INCOME BY THE RESIDENT PAYEE REFERRED TO IN THE SAID PROVI SO'. 10. IT IS POINTED OUT BY LEARNED COUNSEL FOR THE REVENUE THAT THE FIRST PROVISO TO SECTION 201(1) OF THE ACT WAS INSERTED WITH EFFECT FROM 1ST JULY 2012. THE SAID PROVISO READS AS UNDER: 'PROVIDED THAT ANY PERSON, INCLUDING THE PRINCIPAL OFFICER OF A COMPANY, WHO FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDANCE WITH THE PROVISIONS OF THIS CHAPTER ON THE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX IF SUCH RESIDENT ( I ) HAS FURNISHED HIS RETURN OF INCOME UNDER SECTION 139; ( II ) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPUTING INCOME IN SUCH RETURN OF INCOME; AND ( III ) HAS PAID THE TAX DUE ON THE INCOME DECLARED BY HIM IN SUCH RETURN OF INCOME; AND THE PERSON FURNISHES A CERTIFICATE TO THIS EFFECT FROM AN ACCOUNTANT IN SUCH FORM AS MAY BE PRESCRIBED.' 11. THE FIRST PROVISO TO SECTION 201(1) OF THE ACT HAS BEEN INSERTED TO BENEFIT THE ASSESSEE. IT ALSO STATES THAT WHERE A PERSON FAILS TO DEDUCT TAX AT SOURCE ON THE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SUCH PERSON PAGE 6 OF 14 SHALL NOT BE DEEMED TO BE AN ASSESSEE IN DEFAULT IN RESPECT OF SUCH TAX IF SUCH RESIDENT HAS FURNISHED HIS RETURN OF INCOME UNDER SECTION 139 OF THE ACT. NO DOUBT, THERE IS A MANDATORY REQUIREMENT UNDER SECTION 201 TO DEDUCT TAX AT SOURCE UNDER CERTAIN CONTINGENCIES, BUT THE INTENTION OF THE LEGISLATURE IS NOT TO TREAT THE ASSESSEE AS A PERSON IN DEFAULT SUBJECT TO THE FULFILMENT OF THE CONDITI ONS AS STIPULATED IN THE FIRST PROVISO TO SECTION 201(1). THE INSERTION OF THE SECOND PROVISO TO SECTION 40(A)(IA) ALSO REQUIRES TO BE VIEWED IN THE SAME MANNER. THIS AGAIN IS A PROVISO INTENDED TO BENEFIT THE ASSESSEE. THE EFFECT OF THE LEGAL FICTION CREA TED THEREBY IS TO TREAT THE ASSESSEE AS A PERSON NOT IN DEFAULT OF DEDUCTING TAX AT SOURCE UNDER CERTAIN CONTINGENCIES. 12. RELEVANT TO THE CASE IN HAND, WHAT IS COMMON TO BOTH THE PROVISOS TO SECTION 40(A)(IA) AND SECTION 201(1) OF THE ACT IS THAT AS LONG AS THE PAYEE/RESIDENT (WHICH IN THIS CASE IS ALIP) HAS FILED ITS RETURN OF INCOME DISCLOSING THE PAYMENT RECEIVED BY AND IN WHICH THE INCOME EARNED BY IT IS EMBEDDED AND HAS ALSO PAID TAX ON SUCH INCOME, THE ASSESSEE WOULD NOT BE TREATED AS A PERSON IN DE FAULT. AS FAR AS THE PRESENT CASE IS CONCERNED, IT IS NOT DISPUTED BY THE REVENUE THAT THE PAYEE HAS FILED RETURNS AND OFFERED THE SUM RECEIVED TO TAX. 13. TURNING TO THE DECISION OF THE AGRA BENCH OF ITAT IN RAJIV KUMAR AGARWAL'S CASE ( SUPRA ), THE COURT FINDS THAT IT HAS UNDERTAKEN A THOROUGH ANALYSIS OF THE SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT AND ALSO SOUGHT TO EXPLAIN THE RATIONALE BEHIND ITS INSERTION. IN PARTICULAR, THE COURT WOULD LIKE TO REFER TO PARA 9 OF THE SAID ORDER WHICH READS AS UN DER: 'ON A CONCEPTUAL NOTE, PRIMARY JUSTIFICATION FOR SUCH A DISALLOWANCE IS THAT SUCH A DENIAL OF DEDUCTION IS TO COMPENSATE FOR THE LOSS OF REVENUE BY CORRESPONDING INCOME NOT BEING TAKEN INTO ACCOUNT IN COMPUTATION OF TAXABLE INCOME IN THE HANDS OF THE RECIPIENTS OF THE PAYMENTS. SUCH A POLICY MOTIVATED DEDUCTION RESTRICTIONS SHOULD, THEREFORE, NOT COME INTO PLAY WHEN AN ASSESSEE IS ABLE TO ESTABLISH THAT THERE IS NO ACTUAL LOSS OF REVENUE. THIS DISALLOWANCE DOES DEINCENTIVIZE NOT DEDUCTING TAX AT SOURCE WHEN SUCH TAX DEDUCTIONS ARE DUE, BUT, SO FAR AS THE LEGAL FRAMEWORK IS CONCERNED, THIS PROVISION IS NOT FOR THE PURPOSE OF PENALIZING FOR THE TAX DEDUCTION AT SOURCE LAPSES. THERE ARE SEPARATE PENAL PROVISIONS TO THAT EFFECT. DEINCENTIVIZING A LAPSE AND PUNISHING A LAPSE ARE PAGE 7 OF 14 TWO DIFFERENT THINGS AND HAVE DISTINCTLY DIFFERENT, AND SOMETIMES MUTUALLY EXCLUSIVE, CONNOTATIONS. WHEN WE APPRECIATE THE OBJECT OF SCHEME OF SECTION 40(A)(IA), AS ON THE STATUTE, AND TO EXAMINE WHETHER OR NOT, ON A 'FAIR, JUST AND E QUITABLE' INTERPRETATION OF LAW AS IS THE GUIDANCE FROM HON'BLE DELHI HIGH COURT ON INTERPRETATION OF THIS LEGAL PROVISION, IN OUR HUMBLE UNDERSTANDING, IT COULD NOT BE AN 'INTENDED CONSEQUENCE' TO DISALLOW THE EXPENDITURE, DUE TO NON - DEDUCTION OF TAX AT SOURCE, EVEN IN A SITUATION IN WHICH CORRESPONDING INCOME IS BROUGHT TO TAX IN THE HANDS OF THE RECIPIENT. THE SCHEME OF SECTION 40(A)(IA), AS WE SEE IT, IS AIMED AT ENSURING THAT AN EXPENDITURE SHOULD NOT BE ALLOWED AS DEDUCTION IN THE HANDS OF AN ASSESSE E IN A SITUATION IN WHICH INCOME EMBEDDED IN SUCH EXPENDITURE HAS REMAINED UNTAXED DUE TO TAX WITHHOLDING LAPSES BY THE ASSESSEE. IT IS NOT, IN OUR CONSIDERED VIEW, A PENALTY FOR TAX WITHHOLDING LAPSE BUT IT IS A SORT OF COMPENSATORY DEDUCTION RESTRICTION FOR AN INCOME GOING UNTAXED DUE TO TAX WITHHOLDING LAPSE. THE PENALTY FOR TAX WITHHOLDING LAPSE PER SE IS SEPARATELY PROVIDED FOR IN SECTION 271C, AND, SECTION 40(A)(IA) DOES NOT ADD TO THE SAME. THE PROVISIONS OF SECTION 40(A)(IA), AS THEY EXISTED PRIOR T O INSERTION OF SECOND PROVISO THERETO, WENT MUCH BEYOND THE OBVIOUS INTENTIONS OF THE LAWMAKERS AND CREATED UNDUE HARDSHIPS EVEN IN CASES IN WHICH THE ASSESSEE'S TAX WITHHOLDING LAPSES DID NOT RESULT IN ANY LOSS TO THE EXCHEQUER. NOW THAT THE LEGISLATURE H AS BEEN COMPASSIONATE ENOUGH TO CURE THESE SHORTCOMINGS OF PROVISION, AND THUS OBVIATE THE UNINTENDED HARDSHIPS, SUCH AN AMENDMENT IN LAW, IN VIEW OF THE WELL SETTLED LEGAL POSITION TO THE EFFECT THAT A CURATIVE AMENDMENT TO AVOID UNINTENDED CONSEQUENCES I S TO BE TREATED AS RETROSPECTIVE IN NATURE EVEN THOUGH IT MAY NOT STATE SO SPECIFICALLY, THE INSERTION OF SECOND PROVISO MUST BE GIVEN RETROSPECTIVE EFFECT FROM THE POINT OF TIME WHEN THE RELATED LEGAL PROVISION WAS INTRODUCED. IN VIEW OF THESE DISCUSSIONS , AS ALSO FOR THE DETAILED REASONS SET OUT EARLIER, WE CANNOT SUBSCRIBE TO THE VIEW THAT IT COULD HAVE BEEN AN 'INTENDED CONSEQUENCE' TO PUNISH THE ASSESSEES FOR NON - DEDUCTION OF TAX AT SOURCE BY DECLINING THE DEDUCTION IN RESPECT OF RELATED PAYMENTS, EVEN WHEN THE CORRESPONDING INCOME IS DULY BROUGHT TO TAX. THAT WILL BE GOING MUCH BEYOND THE OBVIOUS INTENTION OF THE SECTION. ACCORDINGLY, WE HOLD THAT THE INSERTION OF SECOND PROVISO TO SECTION 40(A)(IA) PAGE 8 OF 14 IS DECLARATORY AND CURATIVE IN NATURE AND IT HAS RETR OSPECTIVE EFFECT FROM 1ST APRIL, 2005, BEING THE DATE FROM WHICH SUB CLAUSE (IA) OF SECTION 40(A) WAS INSERTED BY THE FINANCE (NO. 2) ACT, 2004.' 14. THE COURT IS OF THE VIEW THAT THE ABOVE REASONING OF THE AGRA BENCH OF ITAT AS REGARDS THE RATIONALE BEHIN D THE INSERTION OF THE SECOND PROVISO TO SECTION 40(A)(IA) OF THE ACT AND ITS CONCLUSION THAT THE SAID PROVISO IS DECLARATORY AND CURATIVE AND HAS RETROSPECTIVE EFFECT FROM 1ST APRIL 2005, MERITS ACCEPTANCE. 15. IN THAT VIEW OF THE MATTER, THE COURT IS UNA BLE TO FIND ANY LEGAL INFIRMITY IN THE IMPUGNED ORDER OF THE ITAT IN ADOPTING THE RATIO OF THE DECISION OF THE AGRA BENCH, ITAT IN RAJIV KUMAR AGARWAL'S CASE ( SUPRA ). 13. THEREFORE RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE DELHI HIGH COURT WE SET ASIDE THE WHOLE ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER WITH A DIRECTION TO THE ASSESSEE TO SATISFY THE CONDITIONS OF THE 1 ST AND 2 ND PROVISO READ WITH SECTION 201 OF THE INCOME TAX ACT BEFORE THE LD. ASSESSING OFFICER AND LD. AO MAY EXAMINE TH E ABOVE DETAILS AND IF FOUND IN ACCORDANCE WITH THE LAW, MAY DELETE THE DISALLOWANCE. ACCORDINGLY, GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE WITH RESPECT TO DISALLOWANCE ON INTEREST EXPENDITURE TO NONBANKING FINANCIAL COMPANIES FOR NON - DEDUCTION OF TAX A T SOURCE IS ALLOWED WITH ABOVE DIRECTION. 14. THE SECOND LIMB OF GROUND NO. 2 WAS WITH RESPECT TO THE DISALLOWANCE OF PREOPERATIVE EXPENDITURE OF RS. 170005/ . THE ASSESSEE HAS INCURRED AN EXPENDITURE OF RS. 850023/ AND CLAIMED DEDUCTION UNDER SECTION 35D OF THE ACT BEING 1/5 OF THE TOTAL EXPENDITURE. THE ABOVE EXPENDITURE HAS BEEN INCURRED BY THE ASSESSEE ON ACCOUNT OF SALARY, WAGES, INCREASE IN AUTHORIZED SHARE CAPITAL ETC. THE LD. ASSESSING OFFICER AFTER EXAMINATION OF THE DETAILS HAS HELD THAT ASSESSEE HAS FAILED TO BRING ON RECORD ANY EVIDENCE THAT THE EXPENDITURE INCURRED BY THE ASSESSEE ARE COVERED UNDER THE PROVISIONS OF SECTION 35D OF THE INCOME TAX ACT AND HENCE HE DISALLOWED. BEFORE THE LD. CIT (A) THE ASSESSEE CONTESTED THAT THE ABOVE EXPENDITURE BY MISTAKE HAS BEEN SHOWN IN RETURN AS PREOPERATIVE EXPENDITURE BUT ARE IN FACT INCURRED FOR THE EXPANSION AN EXTENSION PERTAINING TO ONE OF THE UNIT AND THEREFORE SHOULD BE ALLOWED IN FULL AS A PAGE 9 OF 14 REVENUE EXPENDITURE. LD. CIT (A) DID NOT AGREE WITH THE CONT ENTION OF THE ASSESSEE BECAUSE THOSE PARTICULAR UNITS FOR WHICH THE EXPENDITURE HAS BEEN CLAIMED BY THE ASSESSEE HAS COMMENCED OPERATIONS FROM MARCH 2009 BECAUSE FOR THAT YEAR THERE WAS NO BUSINESS DURING THE RELEVANT YEAR CARRIED OUT BY THE ASSESSEE. FUR THER, ACCORDING TO HIM THE PROVISIONS OF SECTION 35D ARE ALSO NOT SATISFIED. 15. BEFORE US, THE ASSESSEE HAS MADE AN APPLICATION UNDER RULE 11 OF INCOME TAX APPELLATE TRIBUNAL RULES, 1963 FOR ADMISSION OF ADDITIONAL GROUND. THE ADDITIONAL GROUND RAISED IS WITH RESPECT TO THE FACT THAT THAT AUTHORITIES BELOW DID NOT APPRECIATE THAT STAFF SALARY AND WAGES FOR THE PERIOD NOVEMBER 2008 TO FEBRUARY 2009 AGGREGATING TO RS. 850023/ WAS REVENUE IN NATURE. THEREFORE SUCH EXPENDITURE SHOULD HAVE BEEN ALLOWED AS THE DEDU CTION FULLY. THE ASSESSEE SUBMITTED THAT THE ABOVE GROUND OF APPEAL RAISED IS PURELY LEGAL IN NATURE AND DOES NOT REQUIRE FRESH INVESTIGATION OF FACTS. THEREFORE, HE SUBMITTED THAT THE ABOVE ADDITIONAL GROUND MAY BE ADMITTED. 16. THE LD. DEPARTMENTAL REPRESEN TATIVE VEHEMENTLY CONTESTED THAT ASSESSEE HAS CHANGED ITS STAND NOW. EARLIER IT WAS STATED THAT IT IS A CAPITAL EXPENDITURE AND THEREFORE 1/5 OF SUCH EXPENDITURE SHOULD BE ALLOWED UNDER SECTION 35D OF THE INCOME TAX ACT AND NOW IT IS SAYING THAT IT SHOULD BE ALLOWED AS REVENUE EXPENDITURE IN THE YEAR IN WHICH IT IS INCURRED. THE ASSESSEE HIMSELF IS NOT SURE WHETHER THE EXPENDITURE IS REVENUE IN NATURE OR CAPITAL IN NATURE. THE STAND OF THE ASSESSEE IS ALSO CHANGING BEFORE THE LOWER AUTHORITIES BEFORE THE L D. ASSESSING OFFICER IT CLAIMED DEDUCTION UNDER SECTION 35D OF THE ACT WHEREAS BEFORE THE LD. CIT (A) IT ASKED FOR THE DEDUCTION UNDER THE PROVISIONS OF SECTION 37 (1) OF THE ACT. IN VIEW OF THIS, THE ABOVE ADDITIONAL GROUND CANNOT BE ADMITTED BECAUSE IT R EQUIRES A DEEPER INVESTIGATION INTO THE FACTS OF THE CASE WHETHER THE EXPENDITURE IS REVENUE OR CAPITAL IN NATURE. IT IS ALSO REQUIRED TO BE INVESTIGATED WHETHER THE SAME IS ALLOWABLE DURING THE YEAR OR NOT BECAUSE OF THE OBSERVATION OF THE LD. CIT (A) WHE REIN IT HAS BEEN HELD THAT THESE EXPENDITURE ARE INCURRED FOR A PARTICULAR UNIT WHICH HAS NOT COMMENCED ITS OPERATION. HE THEREFORE SUBMITTED THAT SUCH GROUND OF APPEAL CANNOT BE ADMITTED AT THE STAGE. PAGE 10 OF 14 17. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AS W ELL AS PERUSED THE ORDERS OF THE LOWER AUTHORITIES. ADMITTEDLY, THE ASSESSEE HAS INCURRED CERTAIN EXPENDITURE, WHICH IS CLAIMED BY THE ASSESSEE UNDER SECTION 35D OF THE INCOME TAX ACT AND 1/5 OF SUCH EXPENDITURE HAVE BEEN CLAIMED AS DEDUCTIBLE DURING THE Y EAR. HOWEVER, BEFORE THE LD. CIT APPEAL ASSESSEE STATED THAT THIS EXPENDITURE IS REVENUE IN NATURE AND THEREFORE SHOULD HAVE BEEN ALLOWED THE DEDUCTION. SO THE CLAIM BEFORE US IS THE REPETITION OF THE CLAIM MADE BY THE ASSESSEE BEFORE THE LOWER AUTHORITIE S AND THEREFORE IT IS NOT AN ADDITIONAL GROUND BUT AND ALTERNATIVE PLEA WHICH CAN BE RAISED AT ANY POINT OF TIME. IN VIEW OF THIS, WE ADMIT THE ALTERNATIVE PLEA OF THE ASSESSEE THAT THE REVENUE EXPENDITURE SHOULD BE ALLOWED IN THE YEAR IN WHICH IT IS INC URRED PROVIDED THEY ARE INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND INCURRED AFTER THE SETTING UP OF THE BUSINESS. IF THESE CONDITIONS ARE SATISFIED THEN THE ASSESSEE MUST BE ALLOWED THE CLAIM OF DEDUCTION OF THESE EXPENDITURE IF THEY ARE FOUND TO BE REVENUE IN NATURE. IN VIEW OF THIS CONTROVERSY THAT WHETHER THE EXPENDITURE ARE REVENUE OR CAPITAL IN NATURE WE SET ASIDE THE WHOLE ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER WITH A DIRECTION TO THE ASSESSEE TO SUBSTANTIATE ITS CLAIM BEFORE THE LD. ASSESSING OFFICER THAT THESE EXPENDITURE INCURRED BY THE ASSESSEE WHICH WERE EARLIER CLAIMED BY THE ASSESSEE UNDER SECTION 35D OF THE INCOME TAX ACT ARE IN FACT THE REVENUE IN NATURE AND SHOULD HAVE BEEN ALLOWED IN THE YEAR IN WHICH IT IS I NCURRED AND HAVE ALSO BEEN EXPENDED AFTER SETTING UP OF THE BUSINESS. IN VIEW OF THIS WE SET ASIDE GROUND NO. 1 WITH RESPECT TO THE PREOPERATIVE EXPENSES OF RS. 170005/ DISALLOWED BY THE LD. ASSESSING OFFICER BACK TO THE FILE OF AO WITH A DIRECTION TO VER IFY THE DETAIL AFTER IT IS SUBMITTED BY THE ASSESSEE IN VIEW OF THE DIRECTION GIVEN BY US AND THEN DECIDE THE ISSUE ON MERITS AFRESH. IN VIEW OF THIS GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE WITH RESPECT TO THE ABOVE DISALLOWANCE IS ALLOWED. IN THE RESUL T GROUND, NO. 1 OF THE APPEAL OF THE ASSESSEE IS ALLOWED WITH ABOVE DIRECTION. 18. THE GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2010 11 ALSO RELATE TO THE SIMILAR KIND OF DISALLOWANCE OF PAGE 11 OF 14 1. RS. 70377/ FOR NON - DEDUCTION OF TAX ON ACCOUNT OF INTEREST PAID BY THE ASSESSEE TO THE NONBANKING FINANCIAL COMPANIES. 2. RS. 244817/ - CONSIDERED AS DEFERRED REVENUE EXPENDITURE. 19. FOR THE REASON GIVEN BY US WHILE ALLOWING THE GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2009 10 WE ALSO ALLOW GROUND NO. 1 OF THE APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2010 11. 20. COMING TO THE GROUND NO. 2 OF THE APPEAL WHERE THE MACHINERY AND REPAIR EXPENDITURE OF RS. 2 84554/ DISALLOWED BY THE LD. ASSESSING OFFICER. DURING THE YEAR ASSESSEE HAS INCU RRED AN EXPENDITURE OF RS. 331452/ - IS MACHINERY REPAIR EXPENDITURE FOR PURCHASE OF DIES, BLOWER AND ELECTRICAL ITEMS. THE LD. ASSESSING OFFICER WAS OF THE VIEW THAT SUCH EXPENDITURE ARE CAPITAL IN NATURE AND THEREFORE THE ASSESSEE IS ENTITLED TO THE DEPRE CIATION THEREON ONLY. THEREFORE, OUT OF THE TOTAL EXPENDITURE OF RS. 3 31452/ OF MACHINERY REPAIRS AND MAINTENANCE, LD AO ALLOWED THE DEPRECIATION OF RS. 4 6898/ AND DISALLOWED THE BALANCE SUM OF RS. 284554/ . THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT (A) WHO HELD THAT THERE IS NO INFIRMITY IN THE ORDER OF THE LD. AO. HOWEVER, BEFORE THE LD. CIT (A) THE ASSESSEE CONTENDED THAT THIS EXPENDITURE IS REVENUE IN NATURE AND THEREFORE SHOULD HAVE BEEN ALLOWED AS DEDUCTION COMPLETELY. 21. THE LD. AUTHORIZED REPRESENTATIVE SUBMITTED THAT THESE EXPENDITURE ARE REVENUE EXPENDITURE . HE SUBMITTED THAT DURING THE YEAR IN NEW PLANT WAS COMMISSIONED IN MARCH 2009 WHERE THE TOTAL ADDITION OF RS. 92905757/ WAS MADE. HE FURTHER SUBMITTED THAT THE ABOVE EXPENDITURE OF SALARY, WHICH WAS CONSIDERED IN GROUND NO. 1, IS PREOPERATIVE EXPENDITURE AND THE ABOVE PLANT AND MACHINERY ARE RELATED TO THE SAME UNIT. HE FURTHER SUBMITTED THAT BEFORE THE LD. CIT (A) IT WAS SUBMITTED THAT DIES PURCHASED FOR RS. 244786 IS CONSIDER ED AS CONSUMABLE EXPENDITURE BECAUSE IT LAST FOR JUST 2 TO 3 WEEKS AND AS SUCH WAS REVENUE IN NATURE. HE SIMILARLY SUBMITTED WITH RESPECT TO ELECTRICAL SWITCHES AND BLOWERS. 22. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY CONTESTED THAT THE ASSESSEE IS IN P ROCESS OF SETTING UP OF A NEW PLANT AND MACHINERY AS PAGE 12 OF 14 STATED BY THE ASSESSEE HIMSELF AND THEREFORE THESE ASSETS, WHICH ARE PURCHASED FOR THE FIRST TIME, ARE CAPITAL IN NATURE AND THEREFORE THE LD. AO HAS CORRECTLY DISALLOWED THEM CLAIMED AS A REVENUE EXPEND ITURE AND ALLOWED DEPRECIATION THEREON. HE FURTHER STATED THAT ASSESSEE HAS FAILED TO SHOW THAT THESE ARE THE REPLACEMENT EXPENDITURE INCURRED BY THE ASSESSEE WHEN THE PLANT ITSELF HAS JUST STARTED. HE THEREFORE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIE S. 23. WE HAVE CAREFULLY CONSIDERED THE RIVAL CONTENTION AND NOTED THE REASONS FOR MAKING THE DISALLOWANCE AS WELL AS FOR CONFIRMATION OF THE SAME BY THE LOWER AUTHORITIES. IN THE PRESENT CASE, THE ASSESSEE HAS SET UP A PLANT, WHICH WAS COMMISSIONED IN MARCH 2 009. ADMITTEDLY, ASSESSEE HAS INCURRED CERTAIN EXPENDITURE OF PURCHASE OF DIES, BLOWER, AND OTHER ELECTRICAL PARTS. THE CLAIM OF THE ASSESSEE IS THAT THESE ARE THE REVENUE EXPENDITURE AND THEY DO NOT HAVE USEFUL LIFE OF LONGER PERIOD. LD. AO STATES THAT TH ESE ARE THE CAPITAL EXPENDITURE AND THEREFORE THEY CANNOT BE ALLOWED AS REVENUE EXPENDITURE UNDER THE HEAD MAINTENANCE AND REPAIRS OF MACHINERIES. ADMITTEDLY THESE EXPENDITURE ARE BEEN INCURRED IN THE YEAR ENDED ON MARCH 2009 AND THEREFORE IT IS NOT CERTA IN WHETHER THEY ARE PURCHASED FOR THE FIRST TIME OR THEY ARE REPLACEMENT OF THE ASSETS. IN VIEW OF THIS WE SET ASIDE THIS ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER WITH THE DIRECTION TO THE ASSESSEE TO SHOW THAT HOW THE ABOVE EXPENDITURE ARE TO B E TREATED AS REVENUE EXPENDITURE. THE LD. ASSESSING OFFICER IS DIRECTED TO EXAMINE THE CLAIM OF THE ASSESSEE AND DECIDE THE ISSUE AFRESH ON MERITS. IN VIEW OF THIS GROUND, NO. 2 OF THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED WITH ABOVE DIRECTION. 24. IN THE RESULT, APPEAL OF THE ASSESSEE FOR ASSESSMENT YEAR 2009 10 IS PARTLY ALLOWED AND FOR ASSESSMENT YEAR 2010 11 IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 0 5 / 0 2 /2018 . - S D / - - S D / - ( AMIT SHUKLA ) (PRASHANT MAHARISHI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 0 5 / 0 2 /2018 A K KEOT PAGE 13 OF 14 COPY FORWARDED TO 1. APPLICANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR:ITAT ASSISTANT REGISTRAR ITAT, NEW DELHI