ITO, Jaipur V. M/S OMML-JSC (JV) KAMENG, Jaipur

ITA 427/JPR/2012

• Counselvise Citation: 42723114 RSA 2012
• Duration Of Justice: 2 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-04-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 03-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: B V MAHESHWARI
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3); 37(1); 32; 37

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH VKJ-IH-RKSYKUH] U;KF;D LNL; ,OA JH VH-VKJ-EHUK] YS[KK LNL; DS LE{K BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM VK;DJ VIHY LA- @ ITA NO. 427/JP/2012 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR : 2007-08 I.T.O. WARD 2(2), JAIPUR. CUKE VS. M/S OMML-JSC (JV) KAMENG, OM TOWER, CHURCH ROAD, M.I. ROAD, JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ L A-@ PAN/GIR NO.: AAAJO 0083 B VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT JKTLO DH VKSJ LS @ REVENUE BY : SHRI RAJESH OJHA (JCIT) FU/KZKFJRH DH VKSJ LS @ ASSESSEE BY : SHRI B.V. MAHESHWARI (C.A.) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 17/03/2015 ?KKS'K .KK DH RKJH[ K @ DATE OF PRONOUNCEMENT : 10/04/2015 VKNS'K @ ORDER PER: T.R. MEENA, A.M. THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER DATED 16/02/2012 PASSED BY THE LEARNED CIT(A)-I, JAIPUR F OR A.Y. 2007-08. THE EFFECTIVE GROUNDS OF APPEAL ARE AS UNDER:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW THE LD. CIT(A) IS JUSTIFIED IN (I) TREATING THE EXPENSES OF RS. 2,07,45,500/- AS REVENUE EXPENDITURE IGNORING THE FACT THAT THESE ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 2 EXPENSES WERE CAPITAL IN NATURE AS THE SAME WERE INCURRED BY THE ASSESSEE ON SITE DEVELOPMENT, (II) DELETING THE DISALLOWANCE OF RS. 23,71,650/- ON ACCOUNT OF DEFERRED REVENUE EXPENSES WRITTEN OFF EVEN WHEN THESE EXPENDITURE WERE CAPITAL IN NATURE. 2. THE FIRST GROUND OF APPEAL IS AGAINST TREATING TH E EXPENSES OF RS. 2,07,45,500/- AS REVENUE EXPENDITURE. THE LD. ASSESS ING OFFICER OBSERVED THAT THE RETURN FOR A.Y. 2007-08 DECLARING TOTAL INCOME OF RS. 30,92,420/- WAS FILED ON 26/10/2007, WHICH WAS SCRUTI NIZED U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED AS THE ACT). M/S OM METALS LTD. + JSC(JV) KAMENG IS A JOINT VENTURE CON CERN OF COMPANY NAMED OM METALS & MINERALS LTD. (NOW METALS INFRAPR OJECTS LTD. AND JSC, UKREIN). THERE WAS A CONTRACT OF DESIGNING, FABR ICATION, ERECTION AND COMMISSIONING OF PEN STOCK STEEL LINER OF HYDRO MECHANICAL GOODS AND EQUIPMENTS UNDER KAMENG ARUNACHAL PRADESH PROJE CT, ISSUED BY NORTH EASTERN ELECTRIC POWER CORPN. LTD, NEW COLONY, SHILONG. FOR ENTERING INTO THE SAID CONTRACT, OM METALS AND JSC ENTERED INTO A MEMORANDUM OF UNDERSTANDING CALLED CONSORTIUM AGREE MENT WHICH CAN ALSO BEEN TERMED AS JOINT VENTURE (JV) AGREEMENT. O N VERIFICATION OF P&L ACCOUNT OF THE ASSESSEE, THE LD ASSESSING OFFIC ER FOUND THAT THE ASSESSEE HAD CLAIMED DEFERRED REVENUE EXPENDITURE W RITTEN OFF ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 3 AMOUNTING TO RS. 23,71,650/-. HE CALLED FOR DETAILS OF DEFERRED REVENUE EXPENDITURE, WHICH WERE EXPLAINED BY THE ASSESSEE TH AT IT ENGAGED IN THE EXECUTION OF LONG TERM PROJECT, THE EXPENDITURE RELATES TO PREVIOUS YEARS REVENUE EXPENDITURE, WHICH HAS BEEN WRITTEN OFF W.E.F. F.Y. 2006- 07, BEING THE FIRST YEAR WHEN THE SALES OF THE PROJE CT HAD BEEN BOOKED. THE ASSESSING OFFICER FURTHER ASKED TO GIVE THE DETA ILS, WHICH WAS REPLIED BY THE ASSESSEE VIDE LETTER DATED 18/11/200 9. AFTER CONSIDERING THE ASSESSEES REPLY, THE ASSESSING OFFICER OBSERVE D THAT IT INCURRED RS. 2,07,45,500/- ON SITE EXPENSES WHICH WERE FOUND IN C APITAL IN NATURE RATHER THAN REVENUE. THE TOTAL DURATION OF THE PROJE CT IS 51 MONTHS AND AS SUCH THE CLAIM OF THE ASSESSEE FOR WRITING OFF TH E REVENUE EXPENDITURE OVER A PERIOD OF 10 YEARS WAS NOT JUSTIF IED. THE ASSESSEE AGAIN FILED THE REPLY VIDE LETTER DATED 29/12/2009 BEFORE THE ASSESSING OFFICER. THE ASSESSING OFFICER HELD THAT THESE EXPEN SES WERE PREOPERATIVE PROJECT EXPENSES AND ASSESSEES CLAIM FOR THE ENTIRE EXPENSES WAS DEFERRED REVENUE EXPENSES WERE NOT IN OR DER. OUT OF TOTAL EXPENDITURE INCURRED UP TO 31/3/2006 AMOUNTIN G TO RS. 2,37,16,498/-, THE AMOUNT OF RS. 2,07,45,500/- WAS N OT REVENUE BUT CAPITAL IN NATURE. THUS, THE EXPENSES HAD BEEN INCU RRED BY THE ASSESSEE ON DEVELOPMENT OF SITE. EVEN THOUGH, THE LAND ON WHI CH THESE EXPENSES ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 4 HAD BEEN INCURRED DID NOT BELONG TO THE ASSESSEE BU T THE EXPENDITURE HAD BEEN MADE TO CREATE ASSETS, WHICH WERE CLEARLY E NDURING IN NATURE. AS SUCH IT HELD THAT THE EXPENSES OF RS. 2,07,45,50 0/- WAS CAPITAL EXPENDITURE AND ONLY THE BALANCE OF RS. 29,70,998/- WERE REVENUE IN NATURE WHEN HE HELD THE EXPENSES AS CAPITAL IN NATU RE. HE ALLOWED DEPRECIATION @ 10% I.E. RS. 20,74,550/-. IT IS FURT HER HELD THAT THE ASSESSEES CLAIM IN RESPECT OF WRITE OFF OF THESE EX PENSES OVER A PERIOD OF 10 YEARS IS NOT PROPER AS THE TOTAL PROJECT PERI OD AS PER CONTRACT AWARDED WAS 51 MONTHS. IT IS FURTHER HELD THAT THE CO RRECT WAY FOR CLAIMING THESE PRE-OPERATIVE REVENUE EXPENSES IS TO BIFURCATE THE SAME ON THE BASIS OF BILLING MADE TO THE EXTENT OF RS. 8 6,85,663/-, WHICH WAS NEGLIGIBLE AS COMPARED TO THE TOTAL PROJECT COST OF RS. 2,36,13,65,551/-. PRE-OPERATIVE PROJECT REVENUE EXPENSES CAN BE CHARG ED TO THE P&L ACCOUNT ONLY ON THE BASIS OF ITS BILLING DURING THE YEAR IN PROPORTION TO THE TOTAL PROJECT COST. THIS WORKED OUT TO RS. 10,927 /-. 3. BEING AGGRIEVED BY THE ORDER OF THE ASSESSING OF FICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE LEARNED CIT( A), WHO HAD ALLOWED THE APPEAL BY OBSERVING AS UNDER:- ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 5 4.3 I HAVE CAREFULLY PERUSED THE ORDER OF THE A.O. AND SUBMISSIONS OF THE AR AND CONCUR WITH THE SUBMISSION S OF THE AR ON THE FOLLOWING GROUNDS: 1. FACTS OF THE CASE ARE THAT THE APPELLANT ENTERED INTO A JOINT VENTURE FOR DESIGN, FABRICATION AND ERRECTION OF KAMENG HYDRO ELECTRIC PROJECT AT ARUNACHAL PRADESH FOR NORTH EASTERN ELECTRIC POWER CORPORATION LIMITED. THE JOINT VENTURE CONSORTIUM AGREEMENT WAS SIGNED WITH JSC UKRHYDROMECH, UKRAINE. THE APPROXIMATELY VALUE OF THE CONTRACT WORK WAS RS. 2,36,13,65,551/- AND APPROXIMATE TIME OF COMPLETION OF WORK WAS 51 MONTHS. THE AGREEMENT WITH NEEPCO WAS SIGNED ON 22 DECEMBER, 2004. 2. AS PER SUBMISSION THE TERRAIN WAS HOSTILE AND TO EVEN INITIATE THE WORK OF INSTALLING THE HYDRO ELECTRIC P ROJECT, THE APPELLANT HAD TO CLEAR FORESTS, CONSTRUCT ROADS , CUT THE HILLS TO REACH THE SITE. THE EXPENSES INCURRED O N THIS WAS TREATED AS DEFERRED REVENUE EXPENDITURE BY THE APPELLANT. 3. AS PER THE CONTRACT SIGNED WITH NEEPCO, IT IS SEE N THAT THE CONTRACTOR, THAT IS THE APPELLANT WAS REQUIRED TO PERFORM THE WORK OF CONSTRUCTION OF HYDRO MECHANICAL EQUIPMENTS UNDER KAMENG HYDRO ELECTRIC PROJECT, ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 6 ARUNACHAL PRADESH AND AFTER COMPLETION OF THE SAID WORK TO HAND OVER THE SAME TO NEEPCO AND LEAVE. IT DID NOT HAVE ANY CONTINUING RIGHT IN THE ASSETS CRE ATED FOR NEEPCO. THUS, THE EXPENDITURE INCURRED BY THE APPELLANT TO REACH THE SITE WHERE THE WORK HAD BEEN COMMISSIONED TO IT COULD NOT BE TREATED AS CAPITAL EXPENDITURE BECAUSE NO ASSET WAS CREATED FOR THE ENDURING BENEFIT OF THE APPELLANT. THOUGH ENDURING BENEFIT MAY HAVE ACCRUED TO THE GOVERNMENT OF ARUNACHAL PRADESH FOR THE OPERATION OF THE KAMENG HYDRO ELECTRIC PROJECT THE NATURE OF THE EXPENDITUR E IN THE HANDS OF THE APPELLANT REMAINED REVENUE. THUS T HE FINDING OF THE A.O. THAT THE EXPENDITURE INCURRED B Y THE APPELLANT OF RS. 2,07,45,500/-WAS CAPITAL IN NATURE IS NOT UPHELD. 4. REGARDING THE TREATMENT OF THIS EXPENDITURE AS D EFERRED REVENUE EXPENDITURE OVER THE PERIOD OF THE 10 YEARS IT IS SEEN THAT THE INCOME TAX ACT DOES NOT RECOGNIZE THE CONCEPT OF DEFERRED REVENUE EXPENDITURE PER SE. HOWEVER, SECTION 37(1) OF THE INCOME TAX ACT GOVERNS THE QUESTION OF ALLOWABILITY OF ANY EXPENDITURE AS FOLLOWS:- (A) PAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOS E OF THE BUSINESS OR PROFESSION AND FURTHER (B) MUST NOT BE- ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 7 (I) CAPITAL EXPENDITURE; (II) PERSONAL EXPENSE; OR (III) AN ALLOWANCE OF THE CHARACTER DESCRIBED IN SECTION 32 TO 36. I HAVE ALREADY HELD THIS EXPENDITURE TO BE REVENUE IN NATURE AS PER THE DISCUSSION ABOVE. IT IS CLEARLY N OT A PERSONAL EXPENSE OF THE APPELLANT. ONCE THE EXPENDI TURE IS TREATED AS REVENUE WHETHER TO TREAT IT AS DEFERRE D REVENUE REPRESENTS A MANAGEMENT DECISION IN VIEW OF THE MAGNITUDE OF THE EXPENDITURE INVOLVED. RELIANCE IS PLACED ON THE FOLLOWING CASE LAWS WHEREIN THE ABOVE ISSUE WAS ADDRESSED DIRECTLY AND THE DECISION HAS CONSISTENTLY BEEN IN FAVOUR OF THE ASSESSEE. :- AMAR RAJA BATTERIES LTD. VS. ACIT (2004) 91 ITD 2 80 (HYD) :- JCIT VS. MODI OLIVETTI LTD. (2005) 4 SOT 859 (DEL HI) :- HERO HONDA MOTORS LTD. VS. JCIT (2005) 3 SOT 572 (DELHI). :- CHARAK PHARMACEUTICALS VS. JCIT (2005) 4 SOT 393 (MUMBAI). THE ARGUMENTS UNIVERSALLY RECOGNIZED AND AFFIRMED AMONG ALL THE ABOVE JUDGMENTS IS THAT WHERE ANY EXPENDITURE IS TREATED AS A DEFERRED REVENUE EXPENDITURE, IT PRESUPPOSES THAT THE CONCERNED EXPENDITURE, CREATING BENEFIT IS IN THE REVENUE FIL ED AND IS A REVENUE EXPENDITURE, BUT CONSIDERING ITS ENDUR ING ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 8 BENEFITS AS WELL AS THE FACT THAT IT DOES NOT RESULT IN THE CREATION OF ANY NEW ASSET OR ADVANTAGE OF ENDURING NATURE IN THE CAPITAL FILED, THE SAME IS REQUIRED T O BE TREATED DISTINCTLY FROM CAPITAL EXPENDITURE. BY FOL LOWING THE ABOVE LINE OF ARGUMENT THE VARIOUS BENCHES OF T HE TRIBUNAL HAVE UNANIMOUSLY UPHELD THE ALLOWABILITY OF SUCH DEFERRED REVENUE EXPENDITURE AS REVENUE EXPENDITURE. TO CONCLUDE, IT IS HELD THAT THE EXPENDITURE OF RS. 2,07,45,500/- INCURRED BY THE APPELLANT DID NOT RES ULT IN CREATION OF ANY IDENTIFIABLE CAPITAL ASSET FOR IT. THE EXPENDITURE WAS ESSENTIALLY REVENUE IN NATURE AND IT WAS THE MANAGEMENTS DECISION TO AMORTISE IT IN THE BOOKS FOR THE DURATION OF 10 YEARS. THIS DECISION OF THE MANAGEMENT DOES NOT REQUIRE INTERFERENCE FROM THE INCOME TAX DEPARTMENT AS PER THE CASE LAWS RELIED ON ABOVE. WHETHER THERE WERE AMORTISED FOR THE PERIOD O F 51 MONTHS (PERIOD OF CONTRACT) OR 10 YEARS WAS ESSENTIALLY A MANAGEMENT DECISION WHICH DID NOT VITI ATE THE CLAIM OF EXPENDITURE SINCE IT WAS REVENUE IN NAT URE. IN VIEW OF THE ABOVE DISCUSSION THE CLAIM OF THE ASSESSEE OF DEFERRED REVENUE EXPENSES OF RS. 23,71,650/- IS ALLOWED. ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 9 4. NOW THE REVENUE IS IN APPEAL BEFORE US. THE LEARNE D D.R. VEHEMENTLY SUPPORTED THE ORDER OF THE ASSESSING OFF ICER. 5. AT THE OUTSET, THE LEARNED A.R. FOR THE ASSESSEE SUBMITTED THAT NO ASSETS HAVE BEEN CREATED BY INCURRING EXPENDITURE O N SITE. THESE EXPENSES WERE INCURRED BY THE APPELLANT TO REACH THE SITE WHERE THE WORK HAD BEEN COMMISSIONED TO IT BECAUSE NO ASSETS WA S CREATED FOR ENDURING BENEFIT OF THE APPELLANT. HE FURTHER SUPPO RTED THE ORDER OF THE LD CIT(A). THE LD. AR AGAIN RELIED UPON THE CASE LAWS REFERRED TO THE CIT(A) DURING THE COURSE OF ASSESSMENT PROCEEDINGS A ND ARGUED THAT THESE EXPENSES ARE WHOLLY AND EXCLUSIVELY INCURRED F OR THE BUSINESS PURPOSES AND ALLOWABLE U/S 37 OF THE ACT. 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE LD. CIT(A) HAS EX AMINED THIS ISSUE IN DETAIL AND THESE EXPENSES WERE INCURRED TO REMOVE THE FOREST AND DEVELOPMENT OF THE SITE. THE FACILITIES/EXPENDITURE INCURRED ON LAND DOES NOT BELONG TO THE ASSESSEE. THE ASSESSEE DID N OT HAVE ANY CONTINUING RIGHT IN THE ASSETS CREATED FOR NEEPCO. THE DR HAD NOT CONTROVERTED THE FINDING GIVEN BY THE LD. CIT(A). SH E HAS ALSO RELIED ON THE VARIOUS CASE LAWS REFERRED ON PAGE 5 OF HER ORD ER. IT IS A FACT THAT ITA 427/JP/2012_ ITO VS. M/S OMML-JSC(JV) KAMENG 10 UNDER THE INCOME TAX LAW DOES NOT RECOGNIZE THE CONC EPT OF DEFERRED REVENUE EXPENDITURE. THE EXPENSES ALLOWED U/S 37(1) OF THE ACT SHOULD BE REVENUE AND NOT THE CAPITAL EXPENDITURE, PERSONA L EXPENSES AND ALLOWABLE U/S 32 AND 36 OF THE ACT. THEREFORE, WE UPHO LD THE ORDER OF THE LD. CIT(A). 7. IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 10/04/2015. SD/- SD/- VKJ-IH-RKSYKUH VH-VKJ-EHUK (R.P.TOLANI) (T.R. MEENA) U;KF;D LNL;@ JUDICIAL MEMBER YS[KK LNL;@ ACCOUNTANT MEMBER TK;IQJ @ JAIPUR FNUKAD @ DATED 10 TH APRIL, 2015 *RANJAN VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE APPELLANT- I.T.O., WARD 2(2), JAIPUR.. 2. IZR;FKHZ @ THE RESPONDENT- M/S OMML-JSC (JV) KAMENG, JAIPUR. 3. VK;DJ VK;QDR @ CIT 4. VK;DJ VK;QDR @ VK;DJ VK;QDRVIHY @ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (ITA NO. 427/JP/2012). VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR