Indication Instruments Ltd., Faridabad V. DCIT, New Delhi

ITA 5940/DEL/2010

• Counselvise Citation: 594020114 RSA 2010
• Duration Of Justice: 9 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2005-2006
• Appeal Filed On: 27-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SALIL MISHRA
• Assessee Lawyers: DR RAKESH GUPTA SHRI TARUN; SUMIT JAINC A
• Keywords: Depreciation; Earning of tax free income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C DELHI BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL ITA NO. 5940(DEL)/2010 ASSESSMENT YEAR: 2005-06 INDICATION INSTRUMENTS LTD., DEP UTY COMMISSIONER OF INCOME PLOT NO. 19, SECTOR-6, VS. T AX, CIRCLE 11(1), NEW DELHI. FARIDABAD. PAN: AAACI1204M (APPELLANT) (RESPON DENT) APPELLANT BY : DR. RAKESH GUPTA, ADVOCATE, SHRI TARUN, ADVOCATE & SHRI SUMIT JAIN,C.A. RESPONDENT BY: SHR I SALIL MISHRA, SR. DR DATE OF HEARING : 24.10.2011 DATE OF PRONOUNCEMENT : 25.10.2011. ORDER PER K.G. BANSAL : AM IN THIS APPEAL, THE ASSESSEE HAS TAKEN UP THR EE GROUNDS REGARDING DISALLOWANCE OF DEPRECIATION ON MOULDS, PAYMENT OF CLUB FEES AND EXPENDITURE INCURRED IN EARNING TAX-FREE INCOME. 1.1 THE BRIEF FACTS ARE THAT THE ASSESSEE IS E NGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF DASH BOARD INSTRUMENTS. THE RETURN WAS FILED ON 31.10.2005 DECLARING TOTAL INCOME OF RS.8,85,68,0 70/-. THE ASSESSMENT WAS COMPLETED ON 17.12.2007 AT TOTAL INCOME OF R S. 8,92,80,140/-. THE ITA NO. 5940(DEL)/2010 2 ORDER WAS SUBJECT MATTER OF APPEAL BEFORE THE CI T(APPEALS)-XI, NEW DELHI AND THE APPEAL WAS DISPOSED OFF ON 20.10.20 10. 2. GROUND NO. 1 IS THAT THE LD. CIT(APPEALS) ERRE D IN DISALLOWING THE DEDUCTION OF DEPRECIATION OF RS. 2,51,166/- ON MOUL DS. IN THE ASSESSMENT ORDER, IT IS MENTIONED THAT THERE IS NO EVIDENCE T HAT THE MOULDS REACHED THE FACTORY OF THE ASSESSEE ON OR BEFORE 31.03.2005. THEREFORE, ONE OF THE CONDITIONS OF USE OF THE ASSET FOR THE PURPOSE O F BUSINESS IS NOT SATISFIED. THE LD. CIT(APPEALS) RETURNED A FINDING THAT THE QUESTION IS PURELY OF FACT AND IT IS CLEARLY ADMITTED BY THE ASSESSEE THAT THE MOULDS WERE LYING WITH THE SUPPLIER. THE PRODUCTION STARTED AT THE PREMISES OF THE SUPPLIER, A SUBMISSION NEVER SUBSTANTIATED BY ANY MATERIAL ON RECORD. THEREFORE, THE FINDING OF THE AO HAS BEEN UPHELD. 2.1 BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO PAGE NOS. 111 TO 113 OF THE PAPER BOOK, WHICH CONSTITUTE THE ORD ER PLACED BY THE ASSESSEE COMPANY WITH M/S ASIS MOULDS INDIA P. LTD. (ASIS FOR SHORT) ON 08.09.2004 FOR A SUM OF RS. 16.25 LAKH. IT IS ME NTIONED THAT THE VENDOR COMPANY SHALL BEAR THE COST OF TAKING OUT 20 ACCEPTABLE SAMPLES OF EACH KIND OF MOULD AND A PILOT SUPPLY OF 1000 MOULDS OF EACH VARIETY. ITA NO. 5940(DEL)/2010 3 THE PAYMENT WAS TO BE MADE IN THREE INSTALLMENT S, THE LAST BEING OF RS. 2,40,000/- ON ACCEPTABLE SUPPLY OF 1000 MOULDS. THEREAFTER, HE REFERRED TO PAGE NOS. 107 TO 109. PAGE NO. 107 IS THE N OTE FURNISHED TO THE AO FOR CLAIMING 50% OF THE NORMAL DEPRECIATION ON THE MOUL DS. IT IS MENTIONED THAT AFTER PLACING THE ORDER ON 08.09.2004, A SUM OF RS. 4,80,000/- WAS PAID ON 09.09.2004. THE VENDOR COMPANY DEVELOPED THE SAMPLES AND THE SAMPLES WERE RECEIVED ON 24.11.2004 AND 06.12.2 004. THE MOULDS WERE FOUND TO BE IN ORDER EXCEPT FOR MINOR DEVIATION FR OM THE SPECIFICATION, HOWEVER, A FURTHER SUM OF RS. 4.00 LAKH WAS PAID ON 22.01.2005. THE MOULDS WERE DEVELOPED IN NOVEMBER, 2004 BUT WERE RECEIVED ON 30.03.2005. PAGE NO. 108 IS THE INVOICE FROM TH E ASIS SHOWING PAYMENTS OF RS. 4,80,000/-, RS. 4.00 LAKH AND RS. 4,51,673 /- ON 09.09.2004, 21.01.2005 AND 29.03.2005 RESPECTIVELY. THE INVO ICE IS IN RESPECT OF CLUSTER HOUSING MOULDS AND PANEL MOULDS. PAGE NO. 110 IS THE PROVISIONAL RECEIVING REPORT UNDER WHICH BOTH THE MOULDS WERE FOUND TO BE OF ACCEPTABLE QUALITY. PAGE NO. 114 IS THE LETT ER OF THE ASSESSEE ADDRESSED TO THE ASIS IN CONNECTION WITH PAYMENT OF SECOND I NSTALLMENT. IT IS INTER- ALIA MENTIONED THAT SINCE SAMPLES HAVE NOT BEEN APPROVED BY OEM CUSTOMER AS SOME DEVIATION HAS BEEN FOUND, HOWEV ER, THE SECOND INSTALLMENT IS RELEASED AND THE BALANCE OF RS. 3.20 LAKH WILL BE PAID ON ITA NO. 5940(DEL)/2010 4 RECTIFICATION OF THE MOULDS AS PER INSPECTION REP ORT. THE CASE OF THE LD. COUNSEL IS THAT THE ARRANGEMENT INVOLVED DEVELOP MENT OF SAMPLE MOULDS, ITS TESTING, MANUFACTURE OF FINAL MOUNDS AND THEI R TESTING AT THE PREMISES OF THE VENDOR AND DELIVERY OF MOULDS OF SATISFACTOR Y QUALITY TO THE ASSESSEE. ALL THESE PROCESSES WERE COMPLETED ON 30.03.2005. THEREFORE, THE ASSESSEE IS ENTITLED TO DEDUCT DEPRECIATION AT 50% OF THE AMOUNT OF DEPRECIATION ADMISSIBLE FOR THE WHOLE YEAR. ON TH E OTHER HAND, THE SUBMISSION OF THE LD. DR IS THAT THE MOULDS WERE RECEIVED ON 30.03.2005. THERE IS NO EVIDENCE THAT THESE MOULDS WERE USED IN THE PURPOSE OF BUSINESS. 2.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. THE FACT THAT THE MOULDS OF SATISFAC TORY QUALITY WERE RECEIVED ON 30.03.2005 IS NOT IN DISPUTE. THESE MOULDS HA VE BEEN INCLUDED IN THE BLOCK OF ASSETS. IN THE CASE OF CIT VS. OSWAL AGRO MILLS LTD., (2011) 50 DTR 305, IT HAS BEEN HELD THAT THE INTENTION BE HIND INTRODUCING THE CONCEPT OF BLOCK OF ASSETS IS TO SIMPLIFY THE PROCEDURE OF CALCULATION OF DEPRECIATION, WHICH HAS TO BE ALLOWED ON THE ENTI RE BLOCK OF DEPRECIABLE ASSETS. THE DETAILS IN RESPECT OF EACH ITEM OF D EPRECIABLE ASSET UNDER A PARTICULAR BLOCK IS NOT REQUIRED TO BE MAINTAINED . THE VALUE OF THE BLOCK ITA NO. 5940(DEL)/2010 5 OF ASSETS HAS TO BE FOUND OUT FROM THE OPENING WDV BY ADJUSTING IT WITH THE VALUE OF SALE OF ASSETS AND PURCHASE OF ASS ETS DURING THE YEAR. IN THIS CASE, THE ASSETS HAD BEEN PURCHASED AND BROUGHT TO THE FACTORY ON 30.03.2005. THEREFORE, THE ASSETS WERE READY FO R USE IN THE PROCESS OF MANUFACTURE. THE ASSETS WERE ALSO INCLUDED IN TH E BLOCK OF ASSETS. THEREFORE, WE ARE OF THE VIEW THAT THE ASSESSEE IS ENTITLED TO DEDUCT DEPRECIATION ON THESE ASSETS @ 50% OF THE NORMAL DEPRECIATION ADMISSIBLE UNDER APPENDIX-I. ACCORDINGLY, GROUND NO. 1 IS ALLOWED. 3. GROUND NO. 2 IS THAT THE LD. CIT(APPEALS) ERRE D IN DISALLOWING THE EXPENDITURE OF RS. 16,180/- REPRESENTING CLUB FEE S. THE FINDING OF THE AO IS THAT THE EXPENDITURE IS THE PERSONAL EXPENDITU RE OF THE DIRECTOR. THE LD. CIT(APPEALS) HAS CONFIRMED THIS FINDING BY MENT IONING THAT ALL PERSONAL EXPENSES OF DIRECTOR CANNOT BE PASSED IN THE ACCO UNTS OF THE COMPANY. AS AGAINST THE AFORESAID, THE SUBMISSION OF THE LD. C OUNSEL IS THAT THE EXPENDITURE IS INCURRED FOR THE PURPOSE OF BUSINE SS AS THE MEMBERSHIP OF DIRECTORS HELPS HIM TO MEET VARIOUS CONSTITUENT S. WE FIND THAT THE ISSUE STANDS COVERED BY THE DECISION OF HONBLE BOMBA Y HIGH COURT IN THE CASE OF OTIS ELEVATOR CO.(INDIA) LTD., (1992) 1 95 ITR 682. RESPECTFULLY FOLLOWING THIS DECISION, GROUND NO. 2 IS ALLOWE D. ITA NO. 5940(DEL)/2010 6 4. GROUND NO. 3 IS AGAINST DISALLOWANCE OF A SUM O F RS. 1,25,272/- BY ATTRIBUTING IT TO EARNING OF EXEMPT INCOME. THE FINDING OF THE AO IS THAT THE ASSESSEE EARNED DIVIDEND INCOME OF RS. 12,52, 722/-, WHICH IS NOT INCLUDIBLE IN ITS TOTAL INCOME U/S 10. IT W AS CLAIMED THAT NO EXPENDITURE IS INCURRED FOR EARNING THIS INCOME. HOWEVER, T HIS EXPLANATION WAS NOT ACCEPTED AND 10% OF THE EXPENDITURE WAS DISALLO WED. THE FINDING OF THE AO HAS BEEN CONFIRMED BY THE LD. CIT(APPEALS) BY MENTIONING THAT THE ISSUE STANDS COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT, (2010) 194 TAXMAN 203, IN WHICH IT HAS BEEN HELD THAT REASONABLE DISALLOWANCE CAN BE MADE BY LOOKING TO THE FACTS OF THE CAS E. 4.1 THE SUBMISSION OF THE LD. COUNSEL IS THAT AN AD-HOC DISALLOWANCE HAS BEEN MADE WITHOUT PIN-POINTING ANY EXPENDITU RE WHICH CAN BE RELATED TO THE EARNING OF THE DIVIDEND INCOME. ON THE OT HER HAND, THE LD. DR RELIED ON THE FINDING OF THE LD. CIT(APPEALS). 4.2 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. WE FIND THAT THE ASSESSEE HAS MADE I NVESTMENT OF RS. ITA NO. 5940(DEL)/2010 7 2,92,85,433/- IN SHARES OF 29 COMPANIES. ON GO ING THROUGH THE POSITION OF INVESTMENT AS ON 31.03.2005 AND 31.03.200 4, IT IS SEEN THAT THE ASSESSEE HAS SOLD AND PURCHASED SHARES IN THIS YE AR. THE ASSESSEE HAS ALSO EARNED DIVIDEND INCOME OF RS. 12,52,722/-. THE I NVESTMENT DECISION DOES OCCUPY THE ATTENTION OF THE MANAGEMENT. SO DOES THE DECISION TO BUY OR SELL A PARTICULAR SCRIP. THEREFORE, IT CANNOT BE SAID THAT NO EXPENDITURE CAN BE ATTRIBUTED TO EARNING OF THE INCOME BY WAY OF DIVIDEND. ON SUBSTANTIAL INVESTMENT & DIVIDEND O F MORE THAN RS. 12.00 LAKH, THE LOWER AUTHORITIES HAVE MADE A DISALLO WANCE OF RS. 1,25,272/- ONLY. ACCORDING TO US, THIS DISALLOWANCE IS RE ASONABLE HAVING REGARD TO THE DECISION IN THE CASE OF GODREJ & BOYCE MANUF ACTURING CO. LTD. (SUPRA). ACCORDINGLY, THIS GROUND IS DISMISSED. 5. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. SD/- SD/- (C.L. SETHI) (K.G.BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER SP SATIA COPY OF THE ORDER FORWARDED TO:- INDICATION INSTRUMENTS LTD., NEW DELHI. DCIT, CIRCLE 11(1), NEW DELHI. CIT(A) CIT THE DR, ITAT, NEW DELHI. ASSISTANT REGISTRAR.