M/s. K.H.Leather Industries Ltd., CHENNAI V. ITO, CHENNAI

ITA 532/CHNY/2009

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1312 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 8 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-01-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 17-04-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S SRIDHAR SHRI P B SEKARAN
• Keywords: Depreciation
• Section: 142(1); 10B; 263; 10; 2

Judgement Text

IN THE INCOMETAX APPELLATE TRIBUNAL: B- BENCH:CHENN AI (BEFORE SHRI ABRAHAM P. GEORGE. ACCOUNT ANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER) ITA NO. 532/MDS/09 ASSESSMENT YEAR 2004-05 M/S K.H. LEATHER INDUSTRIES LTD, 829/1 PERIYAR EVR HIGH RD., CHENNAI 600010 (PAN AAACK2329K) VS THE ITO, CO.CIR.II(4) CHENNAI (APPELLANT) (RESPONDENT) APPELLANT BY: RESPONDENT BY: SHRI S.SRIDHAR SHRI P.B.SEKARAN, CIT-DR. ORDER PER ABRAHAM P.GEORGE, ACCOUNTANT MEMBER IN THIS APPEAL FILED BY THE ASSESSEE IT ASSAILS TH E ORDER PASSED BY CIT UNDER SEC. 263 OF THE INCOME-TAX ACT, 1961 (TH E ACT FOR SHORT). 2. SHORT FACTS RELATING TO THE CASE ARE THAT ASSESS EE WAS GIVEN A DEDUCTION OF ` 99,11,106/- UNDER SEC.10B OF THE ACT FOR THE IMPUGN ED ASSESSMENT YEAR. NOTICE WAS ISSUED BY THE CIT UNDER SEC. 263, FOR, ACCORDING TO HIM, THE DEDUCTION GIVEN WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. REASONS CITED FOR THE ISS UE OF NOTICE WERE: (I) AO HAD NOT CONSIDERED WHETHER CONDITION MENTIONED I N SUB-SEC.(2) OF ITA NO. 532/MDS/09 2 SEC.10B WAS SATISFIED BY THE ASSESSEE, (II) AUDIT R EPORT IN FORM 56G SPECIFICALLY MENTIONS THAT ASSESSEE HAD ESTABLISHED THE NEW UNIT (EOU) ON WHICH DEDUCTION WAS CLAIMED BY TRANSFER AND MERGER OF AN EXISTING UNIT, (III) ASSESSEE HAD ACQUIRED MACHINERY WORTH ` 5,44,74,087/- DURING THE PERIOD 1-4-2000 TO 31-3-2004 AND OUT OF THIS EXCEPT FOR MACHINERY WORTH ` 3,12,61,648/- ACQUIRED DURING THE RELEVANT PREVIOUS YEAR ALL OTHERS WERE ALREADY USED AND SUCH OLD MACHINERY WAS MORE THAN 20% OF THE TOTAL VALUE OF THE MACHINERY, (IV) AO HAD ADDED THE ENTIR E PROVISION FOR TAXATION OF ` 20 LAKHS TO THE INCOME FOR THE PERIOD 01-9-2003 TO 31-3-2004 RESULTING IN HIGHER PROFIT AND HIGHER DEDUCTION UNDER SEC. 10 B OF THE ACT, (IV) ENTIRE PACKING MATERIAL EXPENSES OF ` 1,60,90,111/- WAS CLAIMED FOR THE PERIOD 1-4-2003 TO 31-8-2003 AND NO PART OF THE EXPENSES W ERE APPORTIONED FOR THE PERIOD 1-9-2003 TO 31-3-2004. 3. REPLY OF THE ASSESSEE WAS THAT THOUGH IT HAD ACQ UIRED MACHINERY DURING THE PERIOD 1.4.2000 TO 31-3-2004 AND CLAIMED DEPRECIATION THEREON, SUCH MACHINERY WAS NOT ACTUALLY PUT TO USE AND CLAI M OF DEPRECIATION WAS FOR PASSIVE USER OF THE MACHINERY. ACCORDING TO THE ASSESSEE, MACHINERY WAS ACQUIRED DURING THE PERIOD FOR USE IN THE NEWLY ESTABLISHED EOU AND THERE WAS NO TRANSFER OF MACHINERY FROM OLD UNIT TO NEW UNIT. VIS--VIS THE ISSUE OF PROVISION FOR TAXATION BEING CHARGED TO TH E UNIT NOT CLAIMING 10B DEDUCTION, EXPLANATION OF THE ASSESSEE WAS THAT ENT IRE PROVISION WOULD ITA NO. 532/MDS/09 3 RELATE ONLY TO SUCH UNIT, SINCE FOR THE UNIT ON WHI CH IT WAS CLAIMING DEDUCTION UNDER SEC. 10B THERE WAS NO QUESTION OF A NY PROVISION FOR TAXATION BEING MADE. VIS--VIS THE ALLOCATION OF EX PENSES ON PACKING MATERIAL ASSESSEES CONTENTION WAS THAT IT WAS PROP ERLY DONE ON THE BASIS OF THE ACCOUNTS. CIT, AFTER CONSIDERING THE REPLY O F THE ASSESSEE, WAS OF THE OPINION THAT THERE WAS NOTHING ON RECORD TO COR ROBORATE ASSESSEES CLAIM THAT MACHINERY ACQUIRED DURING THE PERIOD 1-4 -2000 TO 31-3-2004 REMAINED IDLE. ACCORDING TO HIM, IF SUCH MACHINERY WAS CONSIDERED AS OLD MACHINERY, THEN THE OLD MACHINERY IN THE UNIT NEWLY ESTABLISHED EXCEEDED 20% LIMIT PRESCRIBED UNDER SUB-SEC.(2) OF SEC.10B O F THE ACT. CIT WAS ALSO OF THE OPINION THAT THE AUDIT REPORT WAS NOT CONSID ERED BY THE AO IN THE PROPER PERSPECTIVE AND THE AO FAILED TO CONSIDER TH E PROVISIONS OF SEC.10B(2) OF THE ACT. HENCE ACCORDING TO HIM, THE ORDER OF THE AO WAS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE R EVENUE. VIS-A-VIS THE OTHER ISSUES, LD. CIT WAS OF THE OPINION THAT THESE WOULD BE RELEVANT ONLY IF IT WAS FOUND THAT THE ASSESSEE WAS ELIGIBLE FOR DEDUCTION UNDER SEC.10B OF THE ACT. HE, THEREFORE, SET ASIDE THE ASSESSMENT ORDER WITH A DIRECTION TO THE AO TO CONSIDER THE CLAIM OF THE ASSESSEE AFRESH . 3. NOW BEFORE US, CONTENTION OF THE LD. AR IS THAT AO HAD ALLOWED THE THE DEDUCTION UNDER SEC.10B OF THE ACT TO THE ASSES SEE, AFTER CALLING FOR RELEVANT RECORDS. LD. COUNSEL POINTED OUT THAT THE AO HAD ON 7 TH SEPT. ITA NO. 532/MDS/09 4 2006 ALONGWITH HIS NOTICE UNDER SEC. 142(1) OF THE ACT, REQUIRED THE ASSESSEE, INTER ALIA, TO GIVE DETAILS OF DEDUCTIONS CLAIMED UNDER SEC.10B OF THE ACT. TAKING US THROUGH PAPER BOOK PAGES 3 TO4 W HICH IS A REPLY DATED 3-10-2006 FILED BY THE ASSESSEE, LD. AR POINTED OUT THAT ASSESSE HAD MENTIONED THEREIN THAT A DETAILED NOTE AND A RECOMP UTATION OF DEDUCTION UNDER SEC. 10B WOULD BE SUBMITTED LATER. ACCORDING TO HIM SUCH RECOMPUTATION WAS FILED AND REFERRED TO COPY THEREO F PLACED AT PAGE NOS.18 AND 19. LD. COUNSEL POINTED OUT THAT ASSESSE E HAD THUS GIVEN A DETAILED NOTE ON THE CLAIM FOR DEDUCTION UNDER SEC. 10B AND IT HAD, AT THE BEHEST OF THE AO PREPARED TWO PROFIT AND LOSS ACCOU NTS ONE FOR THE PERIOD 1-4-2003 TO 30-10-2003AND THE OTHER FOR THE PERIOD 1-10-2003 TO 31-3- 2004, TAKING THE DATE 1-10-2003 AS THE DATE OF ESTA BLISHMENT OF EOU. FURTHER ACCORDING TO HIM, ASSESSEE HAD OBTAINED CER TIFICATE AS AN EOU FROM CONCERNED MINISTRY ON17-10-2003, WHICH FACTUM WAS ALSO BROUGHT TO THE NOTICE OF THE LD. AO. THEREFORE, IT WAS ARGUED THAT THE AO HAD PERFECTLY APPLIED HIS MIND BEFORE GRANTING THE ASSESSEE DEDUC TION UNDER SEC. 10B OF THE ACT. VIS--VIS THE ISSUE OF OLD MACHINERY EXCEE DING 20%, LD. COUNSEL POINTED OUT THE RELEVANT PART OF THE REPORT OF THE STATUTORY AUDITORS IN FORM 56G. ACCORDING TO HIM, IT WAS CLEARLY MENTIONED THA T SEPARATE BUILDING FOR NEW FACTORY WAS BEING CONSTRUCTED AND MACHINERY IMP ORTED AND ACQUIRED SINCE 1-4-2000 WAS UTILIZED FOR THE NEW UNIT WAS CL EARLY SPECIFIED THEREIN. AGAIN AS PER THE LD. AR ONLY MACHINERY WORTH ` 1,08,76,532/- WAS OLD AND ITA NO. 532/MDS/09 5 THE PERCENTAGE THEREOF WORKED OUT ONLY TO 16.64%, WHICH WAS WELL BELOW THE LIMIT OF 20% SPECIFIED IN SUB-SEC.(2) OF SEC.10 B OF THE ACT. THEREFORE, AS PER THE LD. AR THERE WAS NO ERROR IN THE ORDER O F THE AO AND THE TWIN CONDITIONS OF EXISTENCE OF AN ERROR AND SUCH ERROR BEING PREJUDICIAL TO THE INTERESTS OF THE REVENUE WERE NOT SATISFIED. LD. CO UNSEL THEREFORE URGED THAT THE ORDER OF THE CIT UNDER SEC. 263 WAS TO BE QUASHED. 4. PER CONTRA, LD. DR SUBMITTED THAT IT MAY BE TRUE THAT AUDIT REPORT WAS AVAILABLE BEFORE THE AO WHILE MAKING ORIGINAL ASSES SMENT. ACCORDING TO HIM, IT MIGHT ALSO BE TRUE THAT THE ASSESSEE HAD GI VEN A REVISED WORK OUT OF ITS CLAIM FOR DEDUCTION UNDER SEC.10B IN PURSUANCE TO NOTICE ISSUED U/S 142(1) BY THE AO. NEVERTHELESS, TAKING US THROUGH T HE ASSESSMENT ORDER FOR THE IMPUGNED ASST. YEAR, LD. DR SUBMITTED THAT THERE WAS NOT EVEN A WHISPER THEREIN REGARDING THE CLAIM OF THE ASSESSEE U/S 10B OF THE ACT IN SUCH ASSESSMENT ORDER. IN OTHER WORDS, ACCORDING TO HIM, THERE WAS NO APPLICATION OF MIND BY THE AO. RELYING ON THE DECIS ION OF COORDINATE BENCH IN THE CASE OF SOUTH INDIA TRAVELS P. LTD. VS. ACIT (ITA NO.624/MDSD/08 DAED13-01-2009, LD. DR SUBMITTED THAT AO WAS NOT ON LY AN ADJUDICATOR BUT ALSO AN INVESTIGATOR. ACCORDING TO HIM, THE RETURN OF THE ASSESSEE MIGHT HAVE BEEN APPARENTLY IN ORDER BUT IT CALLED FOR FUR THER SCRUTINY AND THE CIRCUMSTANCES WERE SUCH THAT IT SHOULD HAVE PROVOKE D ENQUIRY. IN HIS OPINION, THEREFORE, THE ORDER OF THE AO WAS ERRONEO US INSOFAR AS IT WAS ITA NO. 532/MDS/09 6 PREJUDICIAL TO THE INTERESTS OF THE REVENUE AND THE CIT HAD RIGHTLY INVOKED SEC.263 OF THE ACT FOR SETTING RIGHT THE SAID ORDER . 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND PERUSED THE ORDERS OF THE AO AS WELL AS THE CIT. THE ISSUE IS W HETHER DEDUCTION UNDER SEC.10B OF THE ACT WAS PROPERLY ALLOWED BY THE AO A FTER DUE CONSIDERATION OF THE CLAIM OF THE ASSESSEE. THE FIRST CONDITION T HAT IS TO BE SATISFIED FOR INVOKING SEC.263 OF THE ACT IS THAT THERE SHOULD B E AN ERROR IN THE ORDER OF THE AO. THEREAFTER THE CIT HAS TO SEE WHETHER SUCH ORDER CAUSED ANY PREJUDICE TO THE INTERESTS OF THE REVENUE. NO DOUBT , AS POINTED OUT BY THE LD. DR, ASSESSMENT ORDER DID NOT MENTION ANYTHING R EGARDING THE CLAIM OF THE ASSESSEE UNDER SEC.10B. IN OUR OPINION, THIS BY ITSELF WOULD NOT DILUTE THE CLAIM OF THE ASSESSEE THAT DEDUCTION CLAIMED BY IT UNDER SEC. 10B OF THE ACT WAS PROPERLY INVESTIGATED BY THE AO. THERE ARE TWO REASONS WHY WE HAVE TO CONSIDER SO. THE FIRST ONE IS THAT AUDIT REPORT IN FORM NO.56G FILED BY THE ASSESSEE ALONGWITH THE RETURN OF INCOM E CLEARLY MENTIONED AS UNDER: THE COMPANY HAS MADE AN APPLICATION FOR ESTABLISHM ENT OF NEW UNIT BY TRANSFER AND MERGER OF EXISTING UNIT AS 100 % E.O.U. AS [PER INFORMATION FURNISHED TO US, THE COMPANY IS IN EXIS TENCE FOR THE PAST 25 YEARS, MANUFACTURING FULL SHOES AND SHOE UPPERS, MAJORITY OF PRODUCTS HAVING EXPORTED. THE COMPANY HAS ESTABLISH ED A FULL SHOE FACTORY IN THE SAME AREA NO.18 KRISHNAGIRI BYE PASS ROAD, RANIPET, WHEREIN THE OLD FACTORY IS SITUATED. THEY HAVE CONS TRUCTED SEPARATE BUILDING FOR NEW FACTORY AND MACHINERIES IMPORTED A ND ACQUIRED SINCE 1-4-2000 WERE USED FOR THE UNIT. ITA NO. 532/MDS/09 7 THE OLD MACHINERIES FROM EXISTING UNIT AS ON 1-4-20 00 USED IN E.O.U. IS LESS THAN 20% AS PER DETAILS GIVEN BELOW: AMOUNT PERCENTAGE ` AS ON 1-4-2000 1,08,76,532 16.64% MACHINERIES ACQUIRED 1.4.2000 TO 31.3.2001 ` 5830527 1.4.2001 TO 31.3.2002 ` 6741007 1.4.2002 TO 31.3.2003 ` 10641085 1.4.2003 TO 31.3.2004 ` 31261468 5,44,74,087 83.36% 6,53,,50,619 100% THE COMPANY HAS BEEN APPROVED AS EOU ON 17-102003. THIS IS THE FIRST YEAR OF EOU AND EXEMPTION U/S 10B IS CLAIMED FOR THIS ASSESSMENT. WE FURNISH HEREWITH OUR COMMENTS ON ESSENTIAL CONDI TIONS TO CLAIM 10B DEDUCTION. TO THE BEST OF OUR KNOWLEDGE, WE ARE OF THE OPINION THAT THE COMPANY IS ELIGIBLE FOR SECTION 10B. HOWEV ER, THE ALLOWANCE MAY BE ALLOWED AS PER THE PROVISIONS OF SEC.10B. OU R CERTIFICATE U/S 10B IS SUBJECT TO OUR REMARKS AND PARTICULARS FURNI SHED HEREWITH AND IT MAY BE DEALT AS PER LAW. 6. SO WHEN THE ASSESSMENT PROCEEDINGS WERE ON, AO H AD THE INFORMATION IN HIS POSSESSION. FURTHER TO THIS, A N OTICE U/S 142(1) OF THE ACT WAS ISSUED TO THE ASSESSEE ON 7-9-2006 AND ONE OF T HE ITEMS ON WHICH DETAILS WERE CALLED FOR WAS DEDUCTION CLAIMED UNDER CHAPTER VIA AND ITA NO. 532/MDS/09 8 10A/10B OF THE ACT. ASSESSEE HAD DURING THE COURSE OF ASSESSMENT GIVEN SUCH INFORMATION AND ALSO A REVISED COMPILATION OF ITS CLAIM UNDER SEC.10B OF THE ACT, BASED ON THE EOU CERTIFICATE OBTAINED F ROM MINISTRY OF COMMERCE ON 17-01-2003. TAKING THE DATE OF ESTABLIS HMENT OF THE EOU WAS 1.10.2003, ASSESSEE HAD REWORKED ITS CLAIM UNDE R SEC.10B OF THE ACT BY PREPARING TWO PROFIT AND LOSS ACCOUNTS AND SUCH REWORKED CALCULATION WAS AVAILABLE WITH THE AO WHEN HE WAS COMPLETING TH E ASSESSMENT. THUS AO HAD CALLED FOR NECESSARY INFORMATION AND ASSESSE E HAD FURNISHED THE SAME. AO WAS ALSO HAVING IN HIS POSSESSION THE AUD IT REPORT WHICH CLEARLY MENTIONED THAT THE CLAIM OF THE ASSESSEE WAS TO THE BEST OF THEIR KNOWLEDGE AN ELIGIBLE CLAIM. FURTHER IF WE LOOK AT SCHEDULES TO THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET APPENDED ALONGWI TH THE RETURN, IT CLEARLY SHOWS THAT ASSESSEE WAS CONSTRUCTING NEW BU ILDING DURING THE RELEVANT PERIOD AND THE ADDITION FOR THE NEW FACTOR Y BUILDING FOR THE RELEVANT PREVIOUS YEAR CAME TO ` 1,52,18,317/- IT MIGHT BE TRUE THAT ASSESSEE HAD CLAIMED DEPRECIATION FOR NEW MACHINERY ACQUIRED BY IT DURING THE PERIOD 1- 4-2000 TO 31-3-04 DEEMING IT AS PASSIVELY USED, BUT THE STAND OF THE ASSESSEE THAT SUCH NEW MACHINERY WAS HOUSED IN THE SEPARATE BUILDING BEING CONSTRUCTED FOR NEW FACTORY, AND ALSO MEANT F OR USE ONLY IN THE NEW EOU, WAS NEVER FOUND TO BE NOT TRUE. PASSIVE USE AN D CLAIM OF DEPRECIATION BASED ON SUCH PASSIVE USE WILL NOT MAK E A MACHINERY OLD. NO DOUBT, THE ORDER OF THE AO IF IT HAD BEEN WITHOU T APPLICATION OF MIND ITA NO. 532/MDS/09 9 WOULD HAVE BEEN ERRONEOUS AND PREJUDICIAL AND MERE ACCEPTANCE OF AN ENTRY IN A STATEMENT OF ACCOUNT IN THE ABSENCE OF S UPPORTING MATERIAL, WOULD HAVE IMPLIED NON APPLICATION OF MIND, AS HELD BY THE HONBLE APEX COURT IN MALABAR INDUSTRIAL CO. V. CIT (243 ITR 83) . NEVERTHELESS, JUST BECAUSE THE ORDER OF THE AO WAS CRYPTIC, WE CANNOT COME TO A CONCLUSION THAT SUCH ORDER WAS PASSED WITHOUT APPLICATION OF M IND. IT IS NOT NECESSARY FOR AN AO TO MENTION AND ELABORATE EACH AND EVERY I TEM OF THE CLAIM OF AN ASSESSEE, EVEN WHERE HE FIND THAT SUCH CLAIM IS IN ACCORDANCE WITH LAW AND PROPERLY EVIDENCED. WHAT HAS TO BE SEEN IS WHET HER THE RECORDS SHOW A PROPER APPLICATION OF MIND. IN OUR VIEW HERE ASSE SSEE WAS CALLED UPON TO FILE NECESSARY DETAILS, ASSESSEE HAD FILED SUCH DET AILS AND THE AO WAS IN POSSESSION OF ALL THE RELEVANT PARTICULARS RELATING TO THE CLAIM OF THE ASSESSEE U/S 10B OF THE ACT. IN SUCH A SITUATION IT CANNOT BE SAID THAT ORDER OF THE AO WAS ONE WITHOUT APPLICATION OF MIND. VIDE EXPLANATION 2 TO SUB- SEC. (2) OF SEC.80B, WHICH IS APPLICABLE FOR THE PU RPOSE OF INTERPRETING CL. (III) OF SUB-SEC.(2) OF SEC.10B, IT IS CLEAR THAT W HERE THE TOTAL VALUE OF THE MACHINERY OR PLANT TRANSFERRED TO A NEW BUSINESS DI D NOT EXCEED 20%, THEN SUCH TRANSFER WOULD NOT DISENTITLE AN ASSESSEE FROM CLAIMING DEDUCTION U/S 10B OF THE ACT BY CONSIDERING ASSESSEES BUSINESS T O HAVE BEEN FORMED BY TRANSFER OF MACHINERY OR PLANT PREVIOUSLY USED F OR ANY PURPOSE. AO THUS, HAVING COME TO LAWFUL VIEW, AFTER CONSIDERING THE DETAILS SUBMITTED BY THE ASSESSEE, WE ARE OF THE OPINION THAT THE CIT WA S TRYING TO SUBSTITUTE ITA NO. 532/MDS/09 10 HIS VIEW TO THE LAWFUL VIEW TAKEN BY THE AO. WHEN TWO VIEWS ARE POSSIBLE AND AO HAS TAKEN ONE VIEW, WE CANNOT SAY THAT SUCH AN ORDER OF THE AO WAS ERRONEOUS, AS HELD BY THE HONBLE APEX COURT IN THE CASE OF CIT VS. MAX INDIA LTD. (295 ITR 282). AS FOR THE RELIANCE P LACED BY THE LD. DR ON THE DECISION OF THE COORDINATE BENCH IN THE CASE OF SOUTH INDIA TRAVELS P. LTD. (SUPRA), WE ARE OF THE OPINION THAT THE SAID C ASE WOULD NOT APPLY TO THE FACTS HERE FOR THE SIMPLE REASON THAT THE AO HAD NO T REMAINED PASSIVE IN THE FACE OF THE RETURN FILED BY THE ASSESSEE, BUT H AD MADE FURTHER ENQUIRY AND PASSED ASSESSMENT ORDER AFTER OBTAINING THE REP LY OF THE ASSESSEE. WE ARE OF THE OPINION THAT IN THE CIRCUMSTANCES, CI T FELL IN ERROR IN INVOKING SEC.263 OF THE ACT FOR SETTING ASIDE THE ORDER OF T HE AO, THE TWIN CONDITIONS FOR INVOKING SUCH POWERS HAVING NOT BEEN SATISFIED. ORDER OF THE CIT IS QUASHED. APPEAL OF THE ASSESSEE STANDS ALLOWED. ORDER PRONOUNCED IN OPEN COURT SOON AFTER HEARING ON 05-1-2011. SD/- SD/- ( GEORGE MATHAN) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI: 5TH JANUARY, 2011 NBR CC: ASSESSEE/ ASSESSING OFFICER/ CIT(A)/ CIT/ D .R/ GUARD FILE. ITA NO. 532/MDS/09 11