INDIAN REGRIGERATOR COMPANY LTD, MUMBAI V. DCIT RG 3(2), MUMBAI

ITA 3949/MUM/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8741 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 13-07-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 17-05-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T A KHAN
• Keywords: Capital asset; Depreciation; Capital expenditure
• Section: 14A; 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH, MUMBAI B EFORE S/SHRI SANJAY ARORA, ACCOUNTANT MEMBER AND AMARJIT SINGH, JUDICIAL MEMBER / I.T.A. NO.941/MUM/2014 ( / ASSESSMENT YEAR: 2007-08) DY. COMMISSIONER OF INCOME TAX RANGE 3(2), R. NO.674, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI - 400020 / VS. M/S. INDIAN REFRIGERATOR COMPANY LTD. AUTO CARS COMPOUND, ADALAT ROAD, AURANGABAD - 431005 / I.T.A. NO.3949/MUM/2013 ( / ASSESSMENT YEAR: 2008-09) M/S. INDIAN REFRIGERATOR COMPANY LTD. AUTO CARS COMPOUND, ADALAT ROAD, AURANGABAD - 431005 / VS. DY. COMMISSIONER OF INCOME TAX RANGE 3(2), R. NO.674, 6 TH FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI - 400020 ./ ./PAN/GIR NO. : AAACI 4122Q ( /APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY: SHRI BHUPENDRA KARKHANIS DEPARTMENT BY: SHRI T.A.KHAN / DATE OF HEARING : 24.08.2016 /DATE OF PRONOUNCEMENT:18.01.2017 ! / O R D E R PER BENCH: THIS IS A SET OF TWO APPEALS BY THE ASSESSEE AND TH E REVENUE IN RESPECT OF TWO CONSECUTIVE YEARS, BEING ASSESSMENT YEARS (A YS) 2007-08 AND 2008-09, AGAINST SEPARATE ORDERS BY THE FIRST APPELLATE AUTH ORITY, BEING THE COMMISSIONER OF INCOME TAX (APPEALS)-7 & 4, MUMBAI (CIT(A) FOR SHORT) FOR THOSE YEARS. THE FIRST APPELLATE AUTHORITY HAVING DECIDED DIFFER ENTLY FOR THE TWO YEARS FOR 2 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) EACH OF THE DISALLOWANCES UNDER APPEAL, FORMS THE R EASON FOR THE ASSESSEE BEING THE APPELLANT FOR ONE (AY 2008-09) AND A RESPONDENT FOR ANOTHER (AY 2007-08) YEAR. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY WAS IN THE BUSINESS OF MANUFACTURE OF ELECTRONIC GOODS AND APPLIANCES TILL THE YEAR 1998, SINCE WHEN THE MANUFACTURING ACTIVITY STOPPED, DUE TO, AS STAT ED, ADVERSE MARKET CONDITIONS AND INEFFICIENT ADMINISTRATION OF THE COMPANY. HOWE VER, DURING THE RELEVANT PREVIOUS YEARS, BEING THE FINANCIAL YEARS 2006-07 A ND 2007-08, THE ASSESSEE CLAIMS TO HAVE UNDERTAKEN JOB-WORK IN RESPECT OF HE RMETICALLY SEALED REFRIGERATOR COMPRESSORS FOR ITS SISTER CONCERN, M /S. APPLICOMP INDIA LTD., CLAIMING THAT IT (ITS MANAGEMENT) HAD SET THINGS R IGHT FROM F.Y. 2003-04 ONWARDS, ALSO UNDERTAKING TRADING ACTIVITY IN THE G OODS BEING MANUFACTURED EARLIER (REFER ORDERS BY THE REVENUE AUTHORITIES AN D STATEMENT OF FACTS BY THE ASSESSEE). THE REVENUE, HOWEVER, DISALLOWED DEPRECI ATION ON PLANT AND MACHINERY AND ELECTRIC INSTALLATION, AND WHICH CONS TITUTES THE PRINCIPAL ISSUE IN THESE APPEALS. PROPER DETAILS WITH REGARD TO THE PL ANT AND MACHINERY USED FOR JOB WORK, WHICH IT SUSPECTS TO BE A MAKE-BELIEVE, I.E., WITH A VIEW TO BOLSTER THE CLAIM FOR DEPRECIATION ALLOWANCE, HAD NOT BEEN FURN ISHED AT ANY STAGE. THE ASSESSEE MEETS THIS BY STATING THAT IT HAD INCURRED EXPENSES ON POWER, FUEL AND WATER FOR THE PURPOSE, WHICH IN FACT STAND ALLOWED IN ASSESSMENT FOR AY 2008- 09, FOR WHICH YEAR THE DISALLOWANCE OF DEPRECIATION STANDS CONFIRMED BY THE FIRST APPELLATE AUTHORITY. BUSINESS IS A WORD OF WIDE IMPORT, AND THERE IS NOTHING TO RESTRICT ITS SCOPE TO A SINGLE ACTIVITY, I.E., MANUFACTURING. A LONG PERIOD OF INACTIVITY DOES NOT ITSELF IMPLY THE ASSE SSEE BEING NOT IN BUSINESS. PASSIVE USER, WHERE THE ASSET/S IS IN A READY-TO-US E STATE, HAS BEEN REGARDED AS A SUFFICIENT COMPLIANCE OF THE USER TEST FOR DEPRECIA TION ALLOWANCE. IN FACT, AFTER THE INTRODUCTION OF THE CONCEPT OF BLOCK OF ASSETS , INDIVIDUAL ASSETS LOSE THEIR IDENTITY, SO THAT DEPRECIATION IS ALLOWABLE WITH RE FERENCE TO THE WRITTEN DOWN 3 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) VALUE (WDV) OF THE BLOCK OF ASSETS, IRRESPECTIVE OF WHICH ASSETS COMPRISING IT ARE ACTUALLY PUT TO USE. SUPPORT IS DRAWN FOR THE V ARIOUS ARGUMENTS/PROPOSITIONS FROM VARIOUS DECISIONS. ON AN ENQUIRY BY THE BENCH AS TO THE ACTUAL WORK UNDERTAKEN WITH REFERENCE TO THE PLANT AND MACHINER Y DEPLOYED FOR THE SAME, IN- AS-MUCH AS THERE IS NO ENUMERATION THEREOF AT ANY S TAGE OF THE PROCEEDINGS, THE LD. AUTHORIZED REPRESENTATIVE (AR), THE ASSESSEES COUNSEL, WOULD SUBMIT THAT HE COULD PRODUCE MATERIALS TO SUBSTANTIATE THE SAME , PROVIDING A FLOWCHART (OF THE ACTIVITIES), AND THAT THE SUSPICION RAISED BY T HE REVENUE AUTHORITIES IN THE MATTER IS WHOLLY MISPLACED, BEING GUIDED MERELY BY THE FACT THAT THE JOB WORK IS UNDERTAKEN FOR A SISTER CONCERN, AND WHICH BY ITSEL F COULD HARDLY BE A GROUND TO DISALLOW A CLAIM. ON ANOTHER QUERY BY THE BENCH WIT H REGARD TO THE ABSENCE OF ANY LABOUR EXPENSES IN RESPECT OF JOB-WORK THER E BEING NO REFERENCE THERETO IN THE ORDERS BY THE AUTHORITIES BELOW, HE WOULD DR AW OUR ATTENTION TO THE STATEMENT OF CASUAL LABOUR CHARGES (AT RS. 4.85 LAC S) AT PAPER-BOOK (PB) PAGE 47, ADMITTING THOUGH THAT THE SAME WAS NOT FURNISHED BE FORE THE REVENUE AUTHORITIES , AND WHICH FACT STANDS CLEARLY MENTIONED IN THE PR EFACE TO THE COMPILATION. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 WE WOULD, TO BEGIN WITH, ATTEMPT TO CLARIFY THE LAW IN THE MATTER; THE SAME HAVING BEEN SUBJECT TO ELUCIDATION BY THE HIGH ER COURTS, INCLUDING THE HONORABLE JURISDICTIONAL HIGH COURT, IN DIFFERENT F ACT SETTINGS. SECTION 32 (1) OF THE ACT READS AS UNDER: DEPRECIATION 32. (1) IN RESPECT OF DEPRECIATION OF (I) BUILDINGS, MACHINERY, PLANT OR FURNITURE BEING TANG IBLE ASSETS ; (II) KNOW-HOW, PATENTS, COPYRIGHTS, TRADE MARKS, LICENCE S, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATU RE, BEING INTANGIBLE ASSETS ACQUIRED ON OR AFTER THE 1ST DAY OF APRIL, 1 998, 4 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) OWNED, WHOLLY OR PARTLY, BY THE ASSESSEE AND USED F OR THE PURPOSES OF THE BUSINESS OR PROFESSION THE FOLLOWING DEDUCTIONS SHALL BE ALLOWE D - (I) IN THE CASE OF ASSETS OF AN UNDERTAKING ENGAGED IN GENERATION OR GENERATION AND DISTRIBUTION OF POWER, SUCH PERCENTAGE ON THE A CTUAL COST THEREOF TO THE ASSESSEE AS MAY BE PRESCRIBED. (II) IN THE CASE OF ANY BLOCK OF ASSETS, SUCH PERCENTAGE ON THE WRITTEN DOWN VALUE THEREOF AS MAY BE PRESCRIBED: PROVIDED THAT NO DEDUCTION ........... USER IS THUS ONE OF THE TWO PRECONDITIONS OR PREREQ UISITES THE OTHER BEING OWNERSHIP (OF THE CAPITAL ASSET), FOR THE CLAIM OF THE DEPRECIATION ALLOWANCE U/S. 32(1) OF THE ACT. THE WORD EMPLOYED IN THE PROVISIO N IS USED, AS EMPHASIZED BY THE HONBLE JURISDICTIONAL HIGH COURT IN DINESHKUMAR GULABCHAND AGRAWAL VS. CIT [2004] 267 ITR 768 (BOM) (SLP AGAINST WHICH STANDS DI SMISSED BY THE APEX COURT, REPORTED AT ([2004] 266 ITR (ST.) 106), SO THAT AN ASSET, TO BE ELIGIBLE FOR THE CLAIM OF DEPRECIATION IN ITS RESPECT, IS TO BE ACTU ALLY USED, I.E., AS THE WORD USED OCCURRING THEREIN WAS CONSIDERED BY THE HONBLE COU RT AS DENOTING, AND THAT A READY TO USE STATE SHALL NOT ENTITLE A CLAIM FOR DEPRECIATION QUA THE SAID ASSET. IN THE FACTS OF WHITTLE ANDERSON LTD. VS. CIT [1971] 79 ITR 613 (BOM), REFERRED TO BY THE HONBLE COURT, THE AGREEMENT CLEARLY PROVIDED T WO OF THE FOUR PRESSES WHICH WERE DIVERTED TO THE POOLING ARRANGEMENT WERE TO RE MAIN IDLE WHILE THE TWO PRESSES WORKED; THE OWNERS OF THOSE PRESSES HAD TO KEEP THE M READY FOR USE AT ANY TIME AND THE CONTINGENCY FOR THEIR USE COULD ALSO, UPON THE TERMS OF THE AGREEMENT, ARISE AT ANY TIME. THE MACHINES WERE THUS UNDER FORCED IDL ENESS AND, ACCORDINGLY, LIABLE TO BE CONSIDERED AS IN USE DURING THE RELEVANT PERI OD IN-AS-MUCH AS THEY WERE KEPT READY FOR USE AT ANY MOMENT. SIMILAR WAS THE SITUAT ION IN CIT VS. VISHWANATH BHASKAR SATHE [1937] 5 ITR 621 (BOM). HOW, WE WONDER, COULD A DIFF ERENT VIEW BE TAKEN; THE MACHINE BEING KEPT READY FOR USE AT A NY MOMENT. THEY WERE SURELY DEPLOYED IN BUSINESS, AND THEIR BEING PUT TO ACTUAL USE BEING A CONTINGENCY OVER WHICH THEY HAD NO CONTROL AND, FURTHER, WHICH COULD ARISE AT ANY TIME. IN FACT, THE IDENTITY OF THE MACHINES WHICH WERE IDLE AND WHICH WORKED WOULD KEEP CHANGING FROM TIME TO TIME, AND, WAS NOT RELEVANT; THE PURPO RT OF THE ARRANGEMENT BEING TO 5 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) KEEP SOME MACHINES (PRODUCTIVE CAPACITY) IN SURPLUS , AS A STANDBY, SO THAT THE PRODUCTION DID NOT SUFFER ON ACCOUNT OF A BREAKDOWN IN ANY OF THE WORKING MACHINES (OPERATING CAPACITY). HOW COULD THEN, ONE MAY ASK, A DIFFERENCE BE MADE FOR THE MACHINE USED VIS--VIS THAT NOT USED, A LL OF WHICH FORMED PART OF A POOL, MADE AVAILABLE, SOME OF WHICH WERE TO NECESSARILY R EMAIN IDLE AT ANY GIVEN TIME, ALBEIT LIABLE TO BE USED AT ANY TIME. IN CIT VS. G. N. AGRAWAL [1996] 217 ITR 250 (BOM), AGAIN, THE TRUCKS UNDER REPAIR DURING THE RELEVANT YEAR WERE ALREADY PART OF THE ASSESSEES BUSINESS (OPERATIONAL) ASSETS, HAVING BEEN PUT TO USE EARLIE R, AS ALSO IN THE SUBSEQUENT YEAR. THEIR BEING THUS UNDER REPAIR DURING THE RELEVANT YE AR WAS CONSIDERED BY THE HONBLE COURT AS OF NO MOMENT. SURELY, THE CAPITAL ASSETS ALREADY DEPLOYED IN, AND COMMITTED TO THE BUSINESS COULD NOT BE REGARDED AS NOT IN USE MERELY ON ACCOUNT OF THE SUSPENSION FROM ACTIVE USER ON ACCOUNT OF WITHD RAWAL FROM SERVICE FOR REPAIRS, WHICH IS ONLY TO ENSURE THE CONTINUITY OF THEIR SER VICE. IT WAS UNDER SUCH LIKE CIRCUMSTANCES, SIGNIFYING PASSIVE USER, AS AGAINST AN ACTIVE ONE, THAT THE HONBLE COURT FOUND THE SAME AS SATISFYING THE TEST OF USE R AND, THUS, LIABLE TO BE REGARDED AS USED IN TERMS OF SECTION 32(1). CAN, FOR EXAMP LE, A PLANT OR MACHINERY, WHICH COULD NOT BE USED FOR WANT OF (SAY) FEEDSTOCK OR EN ERGY, BE REGARDED AS USED, SO AS TO BE ELIGIBLE FOR DEPRECIATION. THE ANSWER, TO O UR MIND, WOULD DEPEND ON WHETHER THE SAME IS FUNCTIONAL AS ALSO IF IT STANDS PUT TO USE EARLIER. SURELY, WHERE SO, TEMPORARY NON-USER WILL NOT DISQUALIFY THE SAME AS THE SAME COULD ONLY BE REGARDED AS AVAILABLE FOR USE AND, ACCORDINGLY, A C ASE OF A PASSIVE USER. WHERE, HOWEVER, THE MACHINERY HAS NOT BEEN PUT TO USE AT A NY TIME EARLIER, AND IS TO BE PUT TO USE FOR THE ASSESSEES BUSINESS FOR THE FIRST TI ME, IT CANNOT BE REGARDED AS AN ASSET IN PASSIVE USE. THEN, AGAIN, WHAT MAY ALSO BE RELEV ANT IS IF THE SAME IS LIABLE TO BE USED IN FUTURE. IF (SAY), THE USER IS PROSCRIBED IN -AS-MUCH AS THE MANUFACTURING PROCESS REQUIRES A RAW MATERIAL WHICH IS BANNED, SO THAT THE MACHINERY CANNOT BE UNDER NORMAL CIRCUMSTANCES RESTORED TO PRODUCTION, THERE IS NO QUESTION OF IT BEING REGARDED AS A PASSIVE USER, IN CONTRADISTINCTION TO AN ACTIVE ONE, ENTITLING 6 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) DEPRECIATION. IDLENESS OR TEMPORARY SUSPENSION FROM ACTIVE USER WOULD NOT THEREFORE DISENTITLE A CLAIM FOR DEPRECIATION. A REVIEW OF THE BINDING JUDICIAL PRECEDENTS, TOWAR D WHICH WE HAVE ALSO PERUSED THE DECISION IN THE CASE OF CIT V. L&T MCNEIL LTD . [1993] 202 ITR 662 (BOM), THUS YIELDS THAT USER IS A CONDITION PRECEDE NT FOR THE CLAIM OF DEPRECIATION ALLOWANCE. THE SAME IMPLIES AN ACTUAL USER, AND THERE IS NO LEGAL FICTION OR DEEMED USER, BEING PRINCIPALLY A MATTER OF FACT. READY-TO-USE STATE OR PASSIVE USER HAS BEEN REGARDED AS USER IN THE PECUL IAR FACTS OF THE CASE, WHERE NO DISTINCTION IN FACT COULD BE DRAWN BETWEEN AN ACTI VE OR PASSIVE USER. THIS ALSO FORMS THE SUBSTANCE OF THE FINDINGS BY THE TRI BUNAL IN THE CASE OF G. SHOES EXPORTS (IN ITA NOS.5736 AND 6209/MUM/2014 DATED 24/10/201 6). 3.2 WE MAY NEXT EXAMINE THE FACTS OF THE CASE. THE MANUFACTURING ADMITTEDLY STOPPED IN THE YEAR 1998. THE ASSESSEE C LAIMS TO HAVE RESTORED OPERATIONS SINCE F.Y. 2003-04, COMMENCING TRADING O PERATIONS. THE SAME IS SURELY AS MUCH BUSINESS AS IS MANUFACTURING. WE ARE HOWEVER CONCERNED WITH THE CLAIM FOR DEPRECIATION ON PLANT AND MACHINERY A ND ELECTRIC INSTALLATION, ERSTWHILE USED FOR THE MANUFACTURE OF ELECTRONIC GO ODS AND APPLIANCES. THERE IS IN FACT NO CLAIM OF THE SAME BEING USED FOR TRADING WHICH BY DEFINITION IS SELLING OF BOUGHT OUT GOODS, BUT FOR CARRYING OUT J OB-WORK ONLY. WE ARE UNABLE TO AGREE WITH THE REVENUE THAT THE CLAIM BECOMES UN ACCEPTABLE MERELY BECAUSE THE JOB-WORK IS FOR A SISTER CONCERN. NOTHING STOPS THE REVENUE, IF IT SUSPECTS A FALSE OR AN UNTRUE CLAIM, TO PROBE FURTHER IN THE M ATTER, BUT THE ASSESSEES CLAIM CANNOT BE OUSTED AT THE THRESHOLD FOR THAT REASON. THE SAME IS IN FACT COMPLEMENTED BY THE CLAIM FOR EXPENDITURE ON POWER, FUEL AND WATER. THOUGH THE EXPENDITURE HAS NO DOUBT COME DOWN DRASTICALLY FROM RS. 52.18 LACS (IN AY 2007-08) TO RS. 20.93 LACS IN AY 2008-09, BUT SO HAS THE VOLUME OF THE JOB- WORK FROM RS. 219.18 LACS TO RS. 59.81 LACS FOR T HE RESPECTIVE YEARS. THE 7 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) LABOUR EXPENSES, AT RS. 4.85 LACS (FOR AY 2007-08) APPEARS TO BE INCLUDED IN THE MANUFACTURING EXPENSES AS THERE IS NO SEPARATE CLAI M FOR THE SAME. AGAIN, WHAT IS THE EXPENDITURE ON LABOUR, WHICH SHOULD BE AN IN TEGRAL PART OF THE JOB-WORK, FOR AY 2008-09 ? AT THE SAME TIME, THE ASSESSEES CLAIM IS SANS ANY DETAILS, AND SO ARE THEREFORE THE ORDERS BY THE AUTHORITIES BELO W. WHY, IT IS DOUBTFUL IF THE PLANT AND MACHINERY, RUSTED FOR YEARS, COULD BE MAD E OPERATIONAL BY EXPENDING MEAGER SUMS ON REPAIRS. THAT APART, THERE MAY BE SI GNIFICANT TECHNOLOGICAL CHANGES OVER TIME, WHICH MAY RENDER THE OPERATIONS UNFEASIBLE, BOTH QUALITATIVELY AND QUANTITATIVELY. THE CLAIM WOULD R EQUIRE BEING EXAMINED, WITH THE ONUS TO ESTABLISH ITS CLAIM, PROVING IT, BEING ON THE ASSESSEE. THE JOB-WORK WOULD NEED TO BE PROFILED IN TERMS OF ITS PROCESSES , SPECIFYING THE MACHINERY REQUIRED AND USED FOR CARRYING OUT THE SAME, I.E., THE DIFFERENT PROCESSES. A FLOWCHART, AS SUBMITTED BY THE LD. AR, GIVING DESCR IPTION OF THE PROCESS, WHEREVER REQUIRED, MAY BE FACILITATIVE, COUPLING IT PREFERABLY WITH THE DIFFERENT FACTORS OF PRODUCTION, VIZ. LABOUR, POWER, FUEL AND WATER, WHICH THE DIFFERENT PROCESSES INVOLVE OR ENTAIL, SO AS TO ENABLE PROPER COMPREHENSION. IT NEEDS TO BE APPRECIATED THAT THE USER IS A MATTER OF FACT, AND THAT THE ASSESSEES CLAIM FOR DEPRECIATION ALLOWANCE HINGES CRITICALLY ON THE SAM E BEING ESTABLISHED. 3.3 CONTINUING FURTHER, WE ARE CONSCIOUS THAT THE S COPE OF MANUFACTURING ACTIVITY IS MORE EXTENSIVE BY FAR THAN THE JOB-WORK , SO THAT THE ENTIRE BLOCK OF ASSETS, OR EVEN A SUBSTANTIAL PART OF IT, MAY NOT B E PUT TO USE FOR JOB-WORK. THE NATURE OF THE JOB-WORK VIS--VIS MANUFACTURING, CAR RIED OUT EARLIER, WOULD THEREFORE BE REQUIRED TO BE ASCERTAINED. THE CLAIM OF DEPRECIATION, AS FOR OTHER EXPENSES OR ALLOWANCES, IS QUA A BUSINESS, FOR EACH OF WHICH INCOME U/C IV-D IS TO BE COMPUTED SEPARATELY. THE BLOCK OF ASSETS, W.R .T. THE WDV OF WHICH DEPRECIATION IS TO BE WORKED OUT, IS ACCORDINGLY TO BE RECKONED BUSINESS-WISE. DEPRECIATION ON PLANT AND MACHINERY AND ELECTRIC INSTALLATION IS NOT IN 8 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) RESPECT OF THE TRADING BUSINESS. WHAT WOULD THEREFO RE BE EQUALLY RELEVANT AND MATERIAL, I.E., APART FROM USER, IS IF THE SAID ASS ETS, ASSUMING THEIR USER, AS CLAIMED, FOR JOB-WORK, CAN BE SAID TO BE USED FOR THE SAME BUSINESS AS FOR WHICH THEY WERE USED EARLIER AND FORMED A PART OF BLOCK O F ASSETS OF. THAT IS, IS THE JOB- WORK SAME OR A DIFFERENT BUSINESS FROM THE ERSTWHIL E MANUFACTURING BUSINESS ? WHERE SAME, THE INDIVIDUAL ASSETS USED FOR JOB-WORK , EVEN IF DIFFERENT FROM THAT USED FOR MANUFACTURING, WOULD ENTER THE SAME BLOCK OF ASSETS, AND DEPRECIATION EXIGIBLE W.R.T. ITS WDV. THOUGH THE CONDITION OF U SER IS A PRIMARY CONDITION, WHICH COULD ONLY BE QUA AN ASSET, DEPRECIATION IS ALLOWABLE WITH REFERENCE TO THE WDV OF THE RELEVANT BLOCK OF ASSETS. THOUGH THE REFORE IT MAY NOT BE CORRECT TO SAY THAT THE ASSETS LOSE THEIR IDENTITY IN-AS-MU CH AS THEY CONTINUE TO BE MAINTAINED, OPERATED AND USED AS INDIVIDUAL ASSETS, THEIR VALUES MERGE UPON ENTERING A BLOCK OF ASSETS, WITH REFERENCE TO THE W DV OF WHICH ONLY DEPRECIATION IS ALLOWABLE. THERE IS NOTHING IN LAW TO SUGGEST THAT THE USER TEST IS TO BE CARRIED OUT FOR ALL THE ASSETS COMPRISING A B LOCK OF ASSETS, CARVING OUT A FRESH BLOCK BY EXCLUDING THE ASSETS NOT USED DURI NG THE RELEVANT YEAR, CARRYING OUT THIS EXERCISE EACH YEAR. ON THE OTHER HAND, IF THE JOB-WORK REPRESENTS A SEP ARATE, NEW BUSINESS, THE CLAIM OF DEPRECIATION WOULD BE WITH REFERENCE T O THE ASSETS USED FOR THIS BUSINESS ONLY. THAT IS, ON THE BASIS OF THE ASSETS OF THE SAID BUSINESS, WHETHER ACQUIRED ANEW, I.E., POST 1998, OR EVEN IF TRANSFE RRED FROM THE ERSTWHILE MANUFACTURING BUSINESS. THERE HAS BEEN NO EXAMINATI ON OF THE ASSESSEES CLAIM FROM THIS STAND-POINT, WHICH WE DIRECT. LEST WE MAY BE, IN SO DIRECTING, BE CONSIDERED AS HAVING TRAVELLED OUTSIDE THE SCOPE OF THESE APPEALS, REFERENCE MAY BE DRAWN, INTER ALIA, TO THE DECISIONS IN KAPURCHAND SHRIMAL V. CIT [1981] 131 ITR 451 (SC) AND AHMEDABAD ELECTRICITY CO. LTD. V. CIT [1993] 199 ITR 351 (BOM) (FB). 9 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) 3.4 THE ASSESSMENT FOR BOTH THE YEARS IS ACCORDINGL Y SET ASIDE QUA THE ISSUE OF CLAIM FOR THE IMPUGNED DEPRECIATION, AND THE MATTER RESTORED TO THE FILE OF THE ASSESSING OFFICER (AO) FOR ADJUDICATION BY ISSUING DEFINITE FINDINGS OF FACT UPON DUE VERIFICATION, BASED OF-COURSE ON THE MATER IAL ON/TAKEN ON RECORD, GIVING PROPER OPPORTUNITY TO ESTABLISH ITS CLAIMS TO THE ASSESSEE. 4. THE SECOND ISSUE IS IN RELATION TO THE DISALLOWA NCE OF REPAIRS INCURRED, CLAIMED AT RS. 6.16 LACS AND RS. 2.51 LACS FOR THE TWO CONSECUTIVE YEARS RESPECTIVELY. THE SAME STAND DISALLOWED AND, FURTHE R, DELETED AND CONFIRMED IN FIRST APPEAL, FOR THE SAME REASONS AS HAVE GUIDED T HE DISALLOWANCE OF DEPRECIATION ALLOWANCE FOR THE RELEVANT YEARS. CLEA RLY, THE SAME CANNOT BE DISALLOWED MERELY BECAUSE THE ASSESSEE IS ALSO UNDE RTAKING TRADING OPERATIONS, I.E., APART FROM JOB-WORK. IN FACT, IN A GIVEN CASE , THE REPAIR WORK COULD BE INDEPENDENT OF THE JOB-WORK ALSO. THE ASSESSEE, ON ITS PART, HAS ALSO NOT FURNISHED THE RELEVANT DETAILS. THE AO, TO WHOSE FI LE THE MATTER IS THEREFORE RESTORED, SHALL EXAMINE THE SAME IN LIGHT OF THE MA TERIALS AND EXPLANATIONS FURNISHED, AND DECIDE THE SAME IN ACCORDANCE WITH L AW, ISSUING DEFINITE FINDINGS OF FACT/S. WE DECIDE ACCORDINGLY. 5. THE NEXT DISALLOWANCE IS IN RESPECT OF CLAIM FOR INTEREST EXPENDITURE UNDER SECTION 36(1)(III) OF THE ACT. THE ASSESSEE H AD BORROWED FUNDS FROM AMERICAN EXPRESS BANK AT RS. 1291.96 LACS DURING TH E PREVIOUS RELEVANT TO AY 2006-07, WHICH WAS FOUND AS DIVERTED FOR INVESTMENT IN SHARES, I.E., AT RS. 6.63 CR. AND RS. 11.20 CR. AS AT 31/3/2006 AND 31/3/2007 RESPECTIVELY. THE INVESTMENT COMMENCING IN SEPTEMBER, 2006, PROPORTIONATE DISALL OWANCE WAS MADE FOR AY 2007-08 (AT RS. 59.65 LACS). THE LD. CIT(A) ALLOWED THE SAME ON THE BASIS THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS INCLUD ES BOTH REVENUE AND CAPITAL EXPENDITURE. FOR AY 2008-09, THE DISALLOWANCE, MADE AT RS. 86.02 LACS, WAS 10 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) CONFIRMED FOR THE REASON THAT THE SAME WARRANTS DIS ALLOWANCE NOT ONLY U/S. 36(1)(III) BUT U/S. 14A AS WELL, WHICH STANDS RIGHT LY INVOKED BY THE AO. 6. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATTE R ON RECORD. THE MATTER IS PRINCIPALLY FACTUAL, I.E., WHETHER OR NOT, AND IF SO TO WHAT EXTENT, THE INVESTMENT IN SHARES IS MET BY THE ASSE SSEE WITH ITS OWN FUNDS OR, IN THE ALTERNATIVE, REPRESENTS, IN WHOLE OR IN PART, A DIVERSION OF BORROWED FUNDS. THE CLAIM HAS BEEN DISALLOWED PRINCIPALLY FOR WANT OF SUBSTANTIATION. THE DELETION FOR AY 2007-08 IN FIRST APPEAL IS WITHOUT BASIS IN-AS-MUCH AS THE AVENUE OF BORROWED MONIES IS CLAIMED TO BE THE INVE STMENT IN SHARES, WHICH DO NOT REPRESENT EITHER REVENUE OR CAPITAL EXPENDITURE , BUT ONLY AN INVESTMENT, AND WHICH IS CERTAINLY NOT THE ASSESSEES BUSINESS, BES IDES YIELDING INCOME NOT FORMING PART OF THE TOTAL INCOME, ATTRACTING SECTIO N 14A. THE ASSESSEE COULD FURNISH A FUND FLOW STATEMENT, I.E., SINCE THE TIME THE BORROWING COMMENCED, STATED TO BE DURING THE YEAR RELEVANT TO AY 2006-07 . AT THE SAME TIME, THE ASSESSEES CLAIM OF HAVING SUFFICIENT OWN FUNDS W OULD ALSO NEED TO BE EXAMINED WITH REFERENCE TO ITS AUDITED ACCOUNTS, W HICH FORM A PART OF THE RECORD. WE EXTRACT THE RELEVANT FINANCIALS AS UNDER FROM TH E ASSESSEES BALANCE SHEETS FORMING PART OF THE RECORD (PB PGS. 11, 24) (AMOUNT IN RS. LACS) YEAR ENDING TF BF FA NCA P&L INV. IN SHARES 31.03.2006 2308.63 1291.97 4693.86 (3518.66) (355.89) 663.06 31.03.2007 2277.24 1260.58 3882.72 (4138.26) (559.17) 1783.06 31.03.2008 2099.63 1082.97 3576.53 (4273.91) (652.77) 1908.88 [TF: TOTAL FUNDS; BF: BORROWED FUNDS; FA: FIXED ASSET S; NCA: NET CURRENT ASSETS; P&L: PROFIT AND LOSS A/C] THE BORROWING IS BY WAY OF UNSECURED LOAN, SO THAT T HE SAME IS WITHOUT ANY STIPULATION WITH REGARD TO THE APPLICATION OF FUNDS , AND NEITHER HAS ANY BEEN STATED 11 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) BY EITHER THE ASSESSEE OR THE REVENUE. THE ASSESSEE HAS A NET EXCESS OF CURRENT LIABILITIES OVER CURRENT ASSETS AT RS. 3518.66 LACS AS ON 31/03/2006. IT IS THIS EXCESS, NO LONGER TIED IN CURRENT ASSETS (WORKING C APITAL), SO THAT IT PROVIDES LIQUIDITY, THAT CAN BE SAID TO FUND THE INVESTMENT IN SHARES, BESIDES THE DEPLETION IN CAPITAL BY WAY OF DEBIT BALANCE IN THE PROFIT AND L OSS ACCOUNT. IT IS ONLY THE BALANCE EXCESS WHICH, ALONG WITH THE SHARE CAPITAL AND THE BORROWED FUNDS, FINANCE THE INVESTMENT IN FIXED ASSETS. FOR THE FOLLOWING TWO Y EARS, WHICH ARE THE YEARS UNDER REFERENCE, THERE HAS BEEN A DECLINE IN THE BORROWED FUNDS, SO THAT THERE HAS BEEN IN FACT A NET REPAYMENT OF BORROWINGS. IT IS THE RELEA SE OF FUNDS FROM FIXED ASSETS (PRINCIPALLY THROUGH DEPRECIATION, A NON-CASH CHARG E) AND FURTHER ACCRETION TO CURRENT LIABILITIES UPON REALIZATION OF THE SPONT ANEOUS CURRENT ASSETS, THAT PROVIDE THE FUNDS FOR INVESTMENT IN SHARES FOR THE IMMEDIAT ELY FOLLOWING YEAR, I.E., F.Y. 2006-07. NO PART OF THE BORROWED CAPITAL CAN THUS B E SAID AS APPLIED FOR OR CONSIDERED AS FINANCING THE INVESTMENT IN SHARES SO AS TO ATTRACT ANY DISALLOWANCE, EITHER U/S. 36(1)(III) OR U/S. 14A. WE DIRECT ACCOR DINGLY. 7. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED AND PARTLY ALLOWED FOR STATISTICAL PURPOSES, WHILE THE REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON JANUARY 18, 2 017 SD/- SD/- (AMARJIT SINGH) (SANJAY ARORA) JUDICIAL MEMBER ACCOUNTANT MEMBER ' # MUMBAI; $ DATED : JANUARY 18, 2017 EDN 12 ITA NO .941/MUM/2014 & ITA NO.3949/MUM/2013 INDIAN REFR IGERATOR CO. LTD. (AYS. 2007-08 & 2008-09) / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. % ( ) / THE CIT(A)- 4. % / CIT 5. &'( ))*+ , *+ , ' # / DR, ITAT, MUMBAI 6. (,- . / GUARD FILE. / BY ORDER, / ! (DY./ASSTT. REGISTRAR) ' # , ' # / ITAT, MUMBAI