DCIT CIR. 2(2), MUMBAI V. M/s. LARSEN & TOUBRO LTD., MUMBAI

ITA 4771/MUM/2005

• Counselvise Citation: 477119914 RSA 2005
• Duration Of Justice: 9 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-08-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 27-08-2014
• Assessment Year: 1997-1998
• Appeal Filed On: 01-07-2005
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S D SHRIVASTAVA
• Assessee Lawyers: J D MISTRI
• Keywords: Reopening of assessment; Depreciation
• Section: 143(3); 32; 147; 10

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL J , BENCH MUMBAI , BEFORE : SHRI R.C.SHARMA , A M & SHRI SANJAY GARG, J M ITA NO. 4459 / MUM/20 05 ( ASSESSMENT YEAR : 1997 - 98 ) LARSEN & TOUBRO LIMITED, TAXATION DEPARTMENT, L&T HOUSE, N.M.MARG, BALLARD ESTATE, MUMBAI - 4000 001 VS. ACIT, RG.2(2), MUMBAI PAN/GIR NO. : A A ACL 0140 P ( APPELLANT ) .. ( RESPONDENT ) AND ITA NO. 4771/ MUM/20 05 ( ASSESSMENT YEAR :1997 - 98 ) ACIT, RG.2(2), MUMBAI VS. LARSEN & TOUBRO LIMITED, TAXATION DEPARTMENT, L&T HOUSE, N.M.MARG, BALLARD ESTATE, MUMBAI - 4000 001 PAN/GIR NO. : AA ACL 0140 P ( APPELLANT ) .. ( RESPONDENT ) /ASSESSEE BY : SHRI J.D MISTRI /REVENUE BY : SHRI S.D.SHRIVASTAVA DATE OF HEARIN G : 2 7 TH AUGUST , 201 4 DATE OF PRONOUNCEMENT : 27 TH AUGUST , 201 4 O R D E R PER R.C.SHARMA ( A .M.) : TH ESE ARE THE CROSS APPEALS FILED BY THE ASSESSEE AND REVENUE AGAINST THE ORDER CIT(A ) , DATED 28 - 3 - 2005 FOR THE ASSES SMENT YEAR 1997 - 98 , IN THE MATTER OF ORDER PASSED U/S. 143(3) R.W.S.147 OF TH E ACT . ITA NO. 4459&4771 / 05 2 2 . IN ITS GROUNDS OF APPEAL THE ASSESSEE IS AGGRIEVED FOR REOPENING OF ASSESSMENT U/S. 147 AND ALSO FOR DISALLOWANCE OF CLAIM OF DEPRECIATION IN RESPECT OF ITS CEMENT FACTOR Y AT GUJARAT. 3 . RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT ASSESSEE HAD CLAIMED DEPRECIATION IN RESPECT OF THE MACHINERIES WHICH WERE STATED TO HAVE BEEN INSTALLED AND PUT TO USE IN THE PRODUCTION OF CLINKER WHICH IS IN TERMEDIATES STAGE FOR PRODUCTION OF CEMENT. THE AO OBSERVED THAT EVEN IF THE ASSESSEE HAD PRODUCED 100 MT OF CLINKER IT WAS ONLY A TRIAL RUN FOR ONE DAY AND THIS QUANTITY WAS MINUSCULE COMPARED TO THE INTENDED PRODUCTION CAPACITY AND THAT THE ASSESSEE WAS NOT ABLE TO PROVE THAT AFTER THE TRIAL RUN, COMMERCIAL PRODUCTION OF CLINKER WAS INITIATED WITHIN REASONABLE TIME. THE AO POINTED OUT THAT THE TRIAL RUNS CONTINUED TILL OCTOBER 1997 BEFORE THE REASONABLE QUANTITY OF CLINKER WAS PRODUCED. THE AO HELD THAT U SE OF MACHINERY FOR TRIAL PRODUCTION CANNOT BE DEEMED TO BE USER FOR THE PURPOSE OF BUSINESS AND THEREFORE DEPRECIATION ON PLANT AND MACHINERY USED IN PRODUCTION OF CLINKER CANNOT BE ALLOWED. THE AO DISALLOWED THE CLAIM OF DEPRECIATION OF RS. 34,79,40,576/ - . 4 . BY THE IMPUGNED ORDER, CIT(A) CONFIRMED THE DISALLOWANCE BY OBSERVING AS UNDER : - 5.5 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT. AS PER SECTION 32 THE DEPRECIATION CAN BE ALLOWED ONLY IF THE ASSETS HAVE BEEN USED FOR THE PURPOSE OF BUSINESS CARRIED ON DURING THE YEAR. THE EXPRESSION 'USED FOR THE PURPOSE OF BUSINESS OR PROFESSION MEANS THAT THE ASSETS WERE CAPABLE OF BEING PUT TO USE AND WERE USED FOR THE PURPOSE OF ENABLING THE OWNER TO CARRY ON THE BUSINESS OR PROFESSION. THE USER OF ASSET S DURING THE YEAR SHOULD BE ACTUAL, EFFECTIVE AND REAL USER IN THE COMMERCIAL SENSE. IN THE CASE OF THE APPELLANT AS HAS BEEN POINTED OUT BY THE AO, EVEN IF IT IS ACCEPTED THAT PLANT AND MACHINERY USED FOR PRODUCTION OF INTERMEDIATE STAGES ARE ELIGIBLE FOR DEPRECIATION, IS ACCEPTED, THE TRIAL PRODUCTION TOOK ITA NO. 4459&4771 / 05 3 PLACE ONLY FOR ONE DAY. IT APPEARS THAT SOME TECHNICAL SNAG DEVELOPED IN THE PLANT AND, THEREFORE, IMMEDIATELY THE TRIAL RUN WAS STOPPED. THE AO HAS STATED THAT THE TRIAL RUN CONTINUED AT LEAST TILL OCT OBER, 1997. THIS FINDING OF THE AO HAS NOT BEEN CONTROVERTED BY @ THE APPELLANT. THE APPELLANT HAS NOT PRODUCED ANY EVIDENCE TO SHOW AS TO WHEN EXACTLY THE COMMERCIAL PRODUCTION STARTED. IN THE PRESENT CASE, THE TRIAL PRODUCTION BY THE ASSESSEE CANNOT BE C ONSIDERED AS THE DATE OF USER BY THE ASSESSEE. ONE CANNOT IGNORE THE FACTS THAT THERE WAS SUBSTANTIAL GAP BETWEEN THE FIRST TRIAL RUN AND SUBSEQUENT TRIAL RUNS AND COMMERCIAL PRODUCTION. IT IS NOT THE CASE OF THE APPELLANT THAT TRIAL RUNS CONTINUED AND THE APPELLANT CONTINUED TO DO TRIAL PRODUCTION WITHOUT BREAK TILL IT STARTED COMMERCIAL PRODUCTION. FROM THE LONG GAP BETWEEN THE FIRST TRIAL RUN AND SUBSEQUENT TRIAL RUNS IT CAN BE SAID THAT THE INSTALLATION OF PLANT AND MACHINERY EVEN FOR PRODUCTION OF CLIN KERS WAS NOT SATISFACTORILY COMPLETED AND WAS STILL IN INSTALLATION STAGE.' 5 . WE HAVE CONSIDERED RIVAL CONTENTIONS, CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW AND FOUND FROM THE RECORD THAT NEITHER THE AO NOR THE CIT(A) HAS DISPUTED THE TRIAL RUN OF THE CEMENT PLANT FOR MANUFACTURING OF CLINKER. THE CIT(A) CONFIRMED THE ACTION OF THE AO MERELY ON THE PLEA THAT TRIAL RUN PRODUCTION BY THE ASSESSEE CANNOT BE CONSIDERED AS USE OF MACHINERY BY THE ASSESSEE. THE CIT(A) ALSO OBSERVED THAT THERE WAS SUBSTANTIAL GAP BETWEEN THE FIRST TRIAL RUN AND SUBSEQUENT TRIAL RUNS AND COMMERCIAL PRODUCTION. BY OBSERVING THAT ASSESSEE CONTINUED TO DO TRIAL PRODUCTION WITHOUT BREAK TILL IT STARTED COMMERCIAL PRODUCTION, THE CIT(A) DISALLOWED ASSESSEES CLAIM OF DEPRECIATION. THERE IS NO MERIT IN THE ACTION OF THE LOWER AUTHORITIES FOR DENIAL OF CLAIM OF DEPRECIATION IN RESPECT OF PLANT AND MACHINERY WHICH HAS BEEN PUT TO USE EVEN FOR TRIAL PRODUCTION, WHICH IS ALSO FOR THE PURPOSE OF ASSESSEES BUSINESS OF MANUF ACTURE OF CLINKER. 6 . THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ACIT VS. ASHIMA SYNTEX, 251 ITR 133 (GUJ) HELD THAT EVEN TRIAL PRODUCTION OF A MACHINERY WOULD FALL WITHIN THE AMBIT OF 'USED FOR THE PURPOSE OF BUSINESS' . F URTHER, IT ITA NO. 4459&4771 / 05 4 WAS HELD THAT AS THE STATUTE DOES NOT PRESCRIBE A MINIMUM TIME LIMIT FOR 'USE' OF THE MACHINERY, THE ASSESSEE CANNOT BE DENIED THE BENEFIT OF DEPRECIATION ON THE GROUND THAT THE MACHINERY WAS USED FOR A VERY SHORT DURATION FOR TRIAL RU N. FURTHERMORE, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF C IT VS. INDUSTRIAL SOLVENTS & CHEMICALS PVT. LTD., (MUMBAI) (119 ITR 615) HELD THAT ONCE THE PLANT COMMENCES OPERATION AND REASONABLE QUANTITY OF PRODUCT IS PRODUCED, THE BUSINESS IS SET UP. THIS IS SO EVEN IF THE PRODUCT IS SUB - STANDA RD AND NOT MARKETABLE. INDUSTRI AL SOLVENTS & CHEMICALS PVT. LTD WAS ENTIRELY A NEW COMPANY. THE COURT HELD THAT ONCE THE BUSINESS IS SET UP, THE EXPENSES INCURRED THEREAFTER WILL HAVE TO BE TREATED AS INCURRED IN THE COURSE OF BUSINESS AND ON THE SAME BAS IS THE DEPRECIATION AND DEVELOPMENT REBATE ADMISSIBLE TO THE ASSESSEE COMPANY WOULD HAVE TO BE DETERMINED . 7 . IN VIEW OF THE ABOVE JUDICIAL PRONOUNCEMENTS, WE DO NOT FIND ANY JUSTIFICATION ON THE PART OF THE LOWER AUTHORITIES FOR DECLINE OF THE CLAIM OF DE PRECIATION WHEN THE FACT OF ASSESSEE HAVING USED THE MACHINERY FOR TRIAL RUN WAS NOT DECLINED BY ANY OF THE LOWER AUTHORITIES. EVEN USE OF MACHINE FOR ONE DAY WILL ENTITLED THE ASSESSEE FOR CLAIM OF DEPRECIATION. SINCE IT IS NOT CLEAR FROM THE RECORD AS TO THE PERIOD FOR WHICH MACHINERY WAS ACTUALLY USED BY ASSESSEE , WE DIRECT THE AO TO VERIFY THE PERIOD OF USED AND RESTRICT THE CLAIM OF DEPRECIATION TO 50% , IF HE FINDS THAT MACHINERY WAS USED FOR LESS THAN 180 DAYS DURING THE YEAR UNDER CONSIDERATION. 8 . IN THE APPEAL FILED BY THE REVENUE, ACTION OF THE CIT(A) WAS OBJECTED WITH REGARD TO COMPUTATION OF BOOK PROFIT U/S. 115 JA , WHEREIN ITA NO. 4459&4771 / 05 5 PROVISION MADE FOR ECC JOBS WAS DIRECTED TO BE REDUCED FROM BOOK PROFIT ON THE PLEA THAT IT WAS ASCERTAINED LIABILITY. 9 . WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE RECORD. WHILE COMPUTING THE BOOK PROFIT U/S. 115 JA , THE AO ENHANCED THE SAME BY THE AMOUNT OF PROVISIONS FOR ECC JOBS . THE ASSESSEE HAS PROVIDED THIS LIABILITY FOR ECC JOBS AND ADDED THE SAME IN THE VALUATION OF WORK - IN - PROGRESS. THE AO HELD THAT PROVISION IS TOWARDS UNASCERTAINED LIABILITY AND, THEREFORE, REQUIRED TO BE ADDED TO THE BOOK PROFIT U/S. 115JA. 10 . BY THE IMPUGNED ORDER, THE CIT(A) DELETED THE ADDITION AFTER HAVING THE FOLLOWING OBSERVATIONS : - 8.10 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT. IN THE PRESENT CASE IN THE REGULAR ASSESSMENT U/S. 143(3) OF THE ACT FOR THE A.Y. 199798 ITSELF MY LD. PREDECESSOR HAS DELETED THE DISALLOWANCE OF RS. 10,75,11,0001 - ON ACCOUNT OF VALUATION OF CONSTRUCT ION CONTRACT AND IT HAS BEEN HELD THAT THERE IS NO JUSTIFICATION FOR DISTURBING THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT ON CONSISTENT BASIS. IT IS ALSO INFORMED BY THE APPELLANT THAT THE HON'BLE IT A T FOR THE A. Y. 1988 - 89 HAS ALSO DELETED SIMI LAR ADDITION. AS IN THE REGULAR ASSESSMENT FOR THE SAME ASSESSMENT YEAR, THE ADDITION MADE BY THE AO HAS BEEN DIRECTED TO BE DELETED BY THE LD. C!T(A), IT CAN NOT BE SAID THAT FOR THE PURPOSE OF COMPUTATION OF BOOK PROFIT THE LIABILITY IS UNASCERTAINED WHI LE FOR THE PURPOSE OF COMPUTATION OF TOTAL INCOME THE LIABILITY WAS ASCERTAINED AND HENCE RIGHTLY REDUCED FROM VALUE OF CLOSING STOCK. THE ADDITION MADE BY THE AO TO THE BOOK PROFIT ON ACCOUNT OF PROVISION FOR ECC JOB IS, THEREFORE, DIRECTED TO BE DELETED. THE GROUND OF APPEAL NO. 5 IS ALLOWED. 1 1 . WE HAVE CONSIDERED RIVAL CONTENTIONS AND FOUND THAT WHILE WORKING THE BOOK PROFIT U/S. 115JA, THE AO HAS ADDED THE PROVISION FOR ECC JOBS. WE ALSO FOUND THAT THE PROVISION MADE FOR ECC JOBS WAS FOR ASCERTAINED L IABILITY WHICH WAS ALSO ADDED BY THE ASSESSEE IN THE VALUATION OF WORK - IN - PROGRESS. THUS, EFFECTIVELY, IT WAS NOT AN ITEM OF PROFIT AND LOSS ACCOUNT BUT WAS AN ITEM OF TRADING ACCOUNT INSOFAR AS IT WAS ALSO ADDED IN WORK - IN - PROGRESS FORMING THE PART OF TRA DING ACCOUNT. WE FOUND THAT SIMILAR ITA NO. 4459&4771 / 05 6 ADDITIONS MADE IN THE A.Y.1988 - 89 WAS ALSO DELETED BY THE TRIBUNAL IN ASSESSEES OWN CASE. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR DELETING THE ADDITION MADE ON ACCOUNT OF PROVISION FOR ECC J OBS. 1 2 . THE GROUND RAISED BY THE ASSESSEE WITH REGARD TO REOPENING OF THE ASSESSMENT ORDER WAS NOT PRESSED, THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. 1 3 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED IN PART WHEREAS THE APPEAL OF THE REVENUE IS D ISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 27/08/ 201 4 . 27/08/ 2014 SD/ - SD/ - ( ) ( SANJAY GARG ) ( ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 27/08 /2014 /PKM , PS COPY OF THE ORDER FORWARDED TO : / BY ORDER, ( ASSTT. REGISTRAR) / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDEN T. 3. / THE CIT(A) - X, MUMBAI. 4. / CIT 5. / DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//