M/s Cosmic Kitchen Pvt. Ltd., New Delhi V. ACIT, New Delhi

ITA 5549/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3935 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 10-05-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 08-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: Y KAKKAR
• Keywords: Capital asset; Depreciation; Capital expenditure
• Section: 32

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH B NEW DELHI) BEFORE SHRI C.L. SETHI, JUDICIAL MEMBER AND SHRI K.G. BANSAL, ACCOUNTANT MEMBER I.T.A. NO.5549/D/2010 ASSESSMENT YEAR :2006-07 M/S COSMIC KITCHEN PVT. LTD., VS. A.C.I.T., B-109, GREATER KAILASH, PART-I, CIRCLE 3(1), NEW DELHI NEW DELHI PAN NO.AACCC 5193K (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI AJAY VOHRAS/GAURAU JAIN/SH IKHA SHARMA, ADVOCATES RESPONDENT BY : SHRI Y. KAKKAR, SR. DR ORDER PER K.G. BANSAL: AM: THE ONLY GROUND TAKEN IN THIS APPEAL, FILED BY THE ASSES SEE, IS THAT THE LEARNED CIT(A) ERRED IN DISALLOWING DEPRECIATION OF `2,70 ,744/- IN RESPECT OF PRE- OPERATIVE EXPENSES ALLOCATED TO FIXED ASSETS. IT IS ALSO M ENTIONED THAT HE ERRED IN HOLDING THAT THE EXPENSES WERE REVENUE IN NATURE AND NOT LINK ED WITH INSTALLATION OF VARIOUS ASSETS. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY FI LED ITS RETURN ON 29.11.2006 DECLARING LOSS OF `30,94,980/-. THE RETUR N WAS PROCESSED U/S 143(1) OF THE INCOME-TAX ACT, 1961, ON 13.10.2007. A NOTIC E U/S 143(2) DATED 10.10.2007 WAS SERVED ON THE ASSESSEE FOR MAKING SCRUTINY ASSESSMENT. IT WAS FOUND THAT .THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND T RADING IN CAKES, PASTRIES, BISCUITS, BREAD, OTHER BAKERY PRODUCTS, CHOCOLATE PRODU CTS, CONFECTIONERIES AND 5549-2010-CK 2 ALLIED FOODS PRODUCTS. THESE PRODUCTS ARE DIRECTLY SUPP LIED TO INSTITUTIONAL CUSTOMERS. IT IS ALSO OPERATING A RESTRO NAMED CHOKO LA. 2.1 ON PERUSAL OF THE ACCOUNTS AND NOTES THERETO, IT WAS FOUND THAT .THE ASSESSEE COMPANY COMMENCED COMMERCIAL OPERATIONS FROM 13.10.200 5. IN VIEW THEREOF, THE ASSESSEE WAS REQUESTED TO FILE THE DETAILS OF PRE-OPERATIV E EXPENSES. ACCORDING TO THE DETAILS SUBMITTED, EXPENDITURE OF `16,93 ,153/- WAS INCURRED BEFORE 13.10.2005, THE DETAILS OF WHICH ARE AS UNDER:- S.NO. PARTICULARS OF EXPENSES UP TO 13.10.2005 1. ADMN. & GENERAL EXPENSES 66,829 2. CONVEYANCE 5,604 3. ELECTRICITY, GAS & WATER 73,069 4. KITCHEN WARE 12,131 5. NET CONSUMPTION OF MATERIAL 1,98,082 6. OCCUPATION COST/RENT 9,09,194 7. PAYROLL COSTS 4,25,169 8. TRANSPORTATION CHARGES 3,075 TOTAL 16,93,153 2.2 AS THE EXPENSES HAD BEEN INCURRED PRIOR TO COMMENCEMENT O F BUSINESS, THE ASSESSEE WAS REQUESTED TO STATE AS TO WHY THE CLAIM OF DEPR ECIATION OF `2,70,744/-, IN RESPECT OF PRE-OPERATIVE EXPENSES SHOULD NOT BE DISALLOWED. IT WAS SUBMITTED THAT THE EXPENSES HAVE BEEN INCURRED FOR THE P URPOSE OF SETTING UP THE ASSETS OF THE COMPANY AND, THEREFORE, THESE HAVE BEEN ALLO CATED TO VARIOUS ASSETS IN THE RATIO OF THE COST OF THE ASSET TO THE TOTAL COST. HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THIS CONTENTION. IT HAS BEEN HELD THAT THE EXPENSES ARE REVENUE IN NATURE AND NOT LINKED TO ANY ASSET USED FOR THE PURPOSE OF BUSINESS AFTER 13.10.2005. THEREFORE, THE DEDUCTION OF DEPRECIATION ON T HESE EXPENSES WAS DISALLOWED. THE LEARNED CIT(A) CONFIRMED THIS FINDING B Y MENTIONING THAT THE ASSESSEE HAS NOT BEEN ABLE TO SUBSTANTIATE THAT THE EXPENSES WERE INCURRED FOR ACQUISITION OF ANY FIXED ASSET. U/S 32 OF THE ACT, T HE DEDUCTION FOR DEPRECIATION CAN 5549-2010-CK 3 BE GRANTED ONLY IN RESPECT OF SPECIFIED ASSETS SUBJECT TO THE CONDITION THAT THE EXPENDITURE IS INCURRED FOR ITS COST. 3. BEFORE US, THE LEARNED COUNSEL DREW OUR ATTENTION TOWARD S THE FINDINGS OF THE ASSESSING OFFICER AND THE LEARNED CIT(A). OUR ATTENTION HAS ALSO BEEN DRAWN TOWARDS MAJOR EXPENSES, BEING ADMINISTRATIVE AND GENERAL EXPENSES OF `73,069/-. NET CONSUMPTION OF MATERIAL OF `1,98,082/-, RENT OF ` 9,09,194/- AND PERSONNELS SALARY OF `4,25,169/-. IT IS SUBMITTED THAT ELECTRICI TY, GAS AND WATER CHARGES, CONSUMPTION OF MATERIAL CHARGES, AND KITCHENWARE EXPENSES OF `12,131/- WERE INCURRED IN THE COURSE OF TRIAL PRODUCTION. THE RENT IS IN RESPECT OF PREMISES IN WHICH THE EQUIPMENTS HAVE BEEN SET UP. IT WAS SUBMITTED BEFORE THE LOWER AUTHORITIES THAT PRIOR TO COMMENCEMENT OF BUSINESS ON 13.10.2005, ALL TH E ACTIVITIES WERE CENTERED AROUND PUTTING UP VARIOUS FIXED ASSETS TO BRING THEM T O WORKING CONDITION. THUS, THE ONLY ACTIVITY CARRIED OUT UPTO THIS DATE, WAS TO PUT UP THE PLANT AND OTHER FIXED ASSETS SO THAT THE BUSINESS OF MANUFACTURE OF VARIOUS F OOD PRODUCTS MAY BE CARRIED OUT. SINCE THESE EXPENSES WERE INCURRED FOR PUTTING UP THE AS SETS, THEY WERE REQUIRED TO BE CAPITALIZED TOWARDS THE COST. THE RENT WAS IN RESPECT OF THE LAND ON WHICH ASSETS WERE INSTALLED FOR CARRYING OUT THE BUSINESS . THE EXPENSES ON ELECTRICITY, GAS AND WATER WERE INCURRED FOR RUNNING VARI OUS ASSETS IN THE CONSTRUCTION PERIOD. COMING TO THE LEGAL ISSUE, IT IS SUBMITTED THAT DEPRECIATION U/S 32 OF THE ACT IS ALLOWED ON ACTUAL COST OF THE ASSET, W HICH MEANS THE ACTUAL COST TO THE ASSESSEE. THIS COST SHOULD BE CONSTRUED IN ORDINARIL Y COMMERCIAL MANNER. THUS, IT WILL INCLUDE THE COST INCURRED TO BRING THE ASSET TO THE RUNNING CONDITION. IT WAS FURTHER SUBMITTED THAT EXPENSES SUCH AS LEGAL CHARGES AND STAMP DUTY IN THE CASE OF LAND, ARCHITECT FEES IN CASE OF BUILDING, WAGES AND SALA RY PAID FOR INSTALLATION OF MACHINERY AND INTEREST ON BORROWED CAPITAL USED FOR PURC HASE OF MACHINERY UPTO THE DATE OF INSTALLATION THEREOF ARE CAPITAL EXPENSES. FRO M THE ABOVE, IT WOULD 5549-2010-CK 4 TRANSPIRE THAT ANY EXPENDITURE ON PUTTING UP FIXED ASS ET WILL AMOUNT TO THE COST OF FIXED ASSET. IT WAS ALSO SUBMITTED THAT AS-10 REGARDI NG ACCOUNTING FOR FIXED ASSETS ISSUED BY THE ICAI SPECIFIES THE COMPONENTS OF COS T OF A FIXED ASSET. THUS, THE PURCHASE PRICE OF AN ASSET INCLUDES IMPORT DUTIES, LEV IES, NON-REFUNDABLE TAXES AND ANY OTHER COST DIRECTLY ATTRIBUTABLE TO THE ASSET FO R BRINGING IT TO THE WORKING CONDITION. THE EXAMPLES GIVEN IN AS-10 ARE SITE PREPARATI ON, INITIALLY DELIVERY AND HANDLING COST, INSTALLATION COST, SUCH AS LAYING FO UNDATIONS, AND PROFESSIONAL FEES FOR ARCHITECTS AND ENGINEERS. THE PRELIMINARY PROJECT EXPENDI TURE, INDIRECT EXPENDITURE RELATING TO CONSTRUCTION AND OTHER INDIRECT EXPENDITURE N OT RELATED TO CONSTRUCTION HAVE BEEN INCLUDED IN THE COST OF THE ASSET. ACCORDINGLY , IT IS ARGUED THAT THE EXPENSES ARE REQUIRED TO BE CAPITALIZED AND THAT THE ALLOCAT ION HAS BEEN MADE BY THE ASSESSEE ON A REASONABLE BASIS IN THE RATIO OF COST OF THE ASSET TO THE TOTAL COST. 3.1 IN REPLY, THE LEARNED DR REFERRED TO THE FINDINGS OF TH E ASSESSING OFFICER AND THE LEARNED CIT(A) THAT ALL THE EXPENSES ARE REVENUE IN NATURE. THE ASSESSEE HAS NOT BEEN ABLE TO BRING ANY EVIDENCE ON RECORD THAT ANY OF THE EX PENDITURE WAS RELATED TO A PARTICULAR ASSET. IN FACT, THE EXPENDITURE HAS BEEN ALLOCATED TO THE ASSETS ON A PROPORTIONATE BASIS. THE ASSESSEE HAS ALSO BEEN DEALING IN SOFT DRINKS IN THE PRE- COMMENCEMENT PERIOD. THEREFORE, IT IS ARGUED THAT THE EXPENS ES CANNOT BE ALLOWED TO BE CAPITALIZED. 3.2 IN THE REJOINDER, THE LEARNED COUNSEL SUBMITTED THAT T HE ASSESSEE IS NOT DEALING IN SOFTWARE. IT IS MANUFACTURING VARIOUS FOO D ITEMS AND SELLING THEM INSTITUTIONAL CUSTOMERS. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSION S MADE BEFORE US. THE FACTS ARE THAT THE ASSESSEE HAS INCURRED EXPENDITURE OF `16,93,153/- IN THE PRE- 5549-2010-CK 5 COMMENCEMENT PERIOD, WHICH HAS BEEN DEBITED UNDER 8 HEADS, TH E DETAILS OF WHICH HAVE ALREADY BEEN FURNISHED. PRIMA FACIE ALL THE EXP ENSES ARE REVENUE IN NATURE. THE ASSESSEE HAS NOT BEEN ABLE TO LINK ANY OF THE EXPENDITURE WITH A PARTICULAR FIXED ASSET. HOWEVER, ITS CASE IS THAT IN TH IS PERIOD, IT WAS ONLY ENGAGED IN PUTTING UP FIXED ASSETS ON RENTED LAND. SINCE THE EXPENS ES WERE INCURRED FOR SETTING UP FIXED ASSET, THEY HAD TO BE CAPITALIZED. THE ASSESSEE HAS CAPITALIZED THE EXPENSES IN THE RATIO OF THE COST OF THE ASSET TO THE TOTA L COST, WHICH IS A REASONABLE BASIS. ON THE OTHER HAND, THE OF THE LEARNED DR IS THAT IN ABSENCE OF ANY CO- RELATION OF ANY EXPENDITURE WITH ANY FIXED ASSETS, THE EXP ENSES WHICH ARE OF REVENUE IN NATURE, CANNOT BE CAPITALIZED. 4.1 SECTION 43(1) DEFINES ACTUAL COST TO MEAN ACTUAL COST OF THE ASSET TO THE ASSESSEE, REDUCED BY THAT PORTION OF THE COST THEREOF, IF A NY, AS HAS BEEN MET DIRECTLY OR INDIRECTLY BY ANY OTHER PERSON OR AUTHORITY . 4.2 IN THE CASE OF CIT VS. FOOD SPECIALTIES LIMITED, (198 2) 136 ITR 203 (DELHI), IT HAS BEEN MENTIONED THAT IT SEEMS THAT THE TRIBUNAL WAS NO T WRONG IN HOLDING THAT THE EXPENDITURE OF TEST RUNS WAS A CAPITAL EXPENDITURE. TH EREFORE, EXPENSES INVOLVED IN PURCHASE OF MILK AND DETERMINING THAT THE FA CTORY WAS IN PROPER WORKING CONDITION AND MAKING ADJUSTMENT DOES NOT SEEM TO BE ANY THING MORE THAN STEPS IN SETTING UP AND FINALIZATION OF THE FACTORY, WHICH IS THE CAPITAL ASSET. AFTER TESTS HAVE BEEN CARRIED OUT, IT CAN BE SAID THAT THE FACTORY HAD BEEN SET UP AND IT IS READY FOR COMMERCIAL PRODUCTION. THEREFORE, THE EXPENSES CAN BE SAID TO HAVE BEEN INCURRED AS COST OF THE PLANT AND MACHINERY. WHEN COMPARING TH E FACTS OF THE CASE, IT CAN BE SAID THAT THE EXPENSES INCURRED ON KITCHENWARE AND CONSU MPTION OF MATERIAL DURING TRIAL RUN ARE TO BE CAPITALIZED TOWARDS THE COST OF PLANT AND MACHINERY. 5549-2010-CK 6 4.3 IN THE CASE OF CHALLAPALLI SUGARS LIMITED VS. CIT (1975) 98 ITR 167 (SUPREME COURT), IT HAS BEEN HELD THAT INTEREST OF `2,38,614/- IN CURRED ON BORROWED CAPITAL FOR PURCHASE OF PLANT AND MACHINERY, ACCRUING TO THE D ATE OF INSTALLATION OF THE MACHINERY IS A CAPITAL EXPENDITURE, ON WHICH DEPRECIATION AND DEVELOPMENT REBATE ARE ADMISSIBLE. FROM THIS DECISION IT CAN BE SAID THAT IF AN EXPENDITURE WHICH IS OTHERWISE OF REVENUE IN NATURE, HAS BEEN INCURRED TOWARDS AC QUISITION OF A CAPITAL ASSET, IT WILL BE THE COST OF THE ASSET PROVIDED IT HAS B EEN INCURRED UPTO THE DATE OF INSTALLATION OF THE ASSET. HOWEVER, IT IS ALSO CLEAR T HAT THERE SHOULD A DIRECT NEXUS BETWEEN EXPENDITURE AND PUTTING UP OF THE ASSET, WHICH IS MISSING IN THIS CASE. THEREFORE, THE RATIO OF THIS DECISION DOES NOT ADVANCE TH E CASE OF THE ASSESSEE. 4.4 IN THE CASE OF CIT VS. LUCAS-TVS LIMITED ( NO.2), ( 1977) 110 ITR 346, ONE OF THE QUESTIONS BEFORE THE COURT WAS WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, IT HAS BEEN RIGHTLY HELD THAT THE SUM OF `1, 30,768/- REPRESENTING INDIRECT EXPENDITURE ON SALARIES, RENT, LIGHTING, ETC. AND ALLOCATED TO VARIOUS ASSETS FORMED PART OF THE CAPITAL ASSET FOR THE ELIGIBILITY OF DEPRECIATION ALLOWANCE AND IN RELATION TO THE COST OF THE MACHINERY WAS ELIGIBLE FOR DEV ELOPMENT REBATE ALSO? THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPANY ACQUIR ED LAND NEAR MADRAS AND ERECTED BUILDINGS, PLANT AND MACHINERY ETC. IT ALSO TOO K ON LEASE ADJOINING LAND FOR ITS USE FROM INTEGRAL COACH FACTORY. AFTER COMPLETING THE WORK OF ERECTING THE FACTORY TO CERTAIN STAGE, THE PRODUCTION COMMENCED ON 01.12.1962 . THE ACCOUNTS OF THE ASSESSEE WERE CLOSED FOR THE FIRST TIME ON 30.11.1962, DURI NG WHICH IT INCURRED TOTAL EXPENDITURE OF `5,86,509/- RELATING TO SALARIES, RENT, L IGHTING ETC. THIS EXPENDITURE WAS CAPITALIZED AND ALLOCATED TO THE CAPITAL ASSETS IN THE RATIO OF DIRECT COST OF THE ASSETS. DEPRECIATION ALLOWANCE AND DEVELOPMENT REBATE WERE CLAIMED. THE ASSESSING OFFICER HELD THAT THE EXPENSES AMOUNTING TO `1,3 0,768/- WERE IN NO WAY CONNECTED WITH INSTALLATION OF ASSETS. THEREFORE, HE EXCL UDED THIS AMOUNT AND 5549-2010-CK 7 RECOMPUTED THE COST OF ASSETS. THE HONBLE COURT MENTIONED THAT THE QUESTION IS COVERED BY THE DECISION OF SUPREME COURT IN THE CASE OF CHAL LAPALLI SUGARS LIMITED VS. CIT (SUPRA) AND CIT VS. HINDUSTAN PETROLEUM CORPO RATION, (1975) 98 ITR 167, IN WHICH IT HAS BEEN HELD THAT ACCEPTED ACCOUNTANCY RULE FOR DETERMINING COST OF FIXED ASSETS IS TO INCLUDE OF EXPENDITURE NECESSARY TO BRING SUC H ASSETS INTO EXISTENCE AND TO PUT THEM IN WORKING CONDITION. THEREFORE, THE QUESTI ON WAS DECIDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. HAVING CONSIDERED THE F ACTS OF THE CASE, WE ARE OF THE VIEW THAT THEY ARE SIMILAR AND, THEREFORE, THE R ATIO OF THIS CASE IS APPLICABLE. AS THE AFORESAID DECISION DIRECTLY COVERS TH E ISSUE AT HAND, WE DO NOT THINK IT NECESSARY TO GO INTO THE CASE OF SANGROOR VANAS PATI LIMITED VS. CIT (2007) 288 ITR 222 (PUNJAB & HARYANA). 4.6 IN A NUTSHELL, IT IS HELD THAT THE EXPENSES INCURRED B Y THE ASSESSEE ARE REQUIRED TO BE CAPITALIZED IN THE LIGHT OF THE DECISION IN THE CASE OF FOOD SPECIALTIES LIMITED AND LUCAS-TVS LIMITED ( NO.2) (SUPRA). WE AR E ALSO OF THE VIEW THAT THE PROPORTIONATE METHOD EMPLOYED BY THE ASSESSEE IS FAIR AND REASONABLE. 5. IN RESULT, THE APPEAL IS ALLOWED. THIS ORDER WAS PRONOUNCED IN OPEN COURT ON 13.05.2011. SD/- SD/- ( C.L. SETHI ) ( K.G. BANSAL ) JUDICIAL MEMBER ACCOUNTANT ME MBER DT.13.05.2011. NS COPY FORWARDED TO:- 5549-2010-CK 8 1. M/S COSMIC KITCHEN PVT. LTD., B-109, GREATER KAILASH, PART-I, NEW DELHI. 2. ACIT, CIRCLE 3(1), NEW DELHI. 3. THE CIT 4. THE CIT (A), NEW DELHI. 5. THE DR, ITAT, LOKNAYAK BHAWAN, KHAN MARKET, NEW DELHI. TRUE COPY BY ORDER (ITAT, NEW DELHI).