THE SEKSARIA BISWAN SUGAR FACTORY LTD, MUMBAI V. DY ADDL CIT 2(3), MUMBAI

ITA 6700/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8802 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 06-08-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 20-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: JAYA KUMAR
• Assessee Lawyers: Y P TRIVEDI
• Keywords: Capital asset; Business income; Depreciation; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E BENCH BEFORE SHRI B.R.MITTAL(JUDICIAL MEMBER) AND SHRI B. RAMAKOTAIAH (ACCOUNTANT MEMBER) ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 THE SEKSARIA BISWAN SUGAR FACTORY LTD., 5 TH FLOOR, 139, NAGINDAS MASTER ROAD, FORT, MUMBAI-01. PA NO.AAACT 1343 C DCIT 2(3), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI Y.P.TRIVEDI RESPONDENT BY: SHRI JAYA KUMAR DATE OF HEARING: 6.8.2012 DATE OF PRONOUNCEMENT: 26 .9.2012 ORDER PER B.R.MITTAL, JM: THE ASSESSEE HAS FILED THIS APPEAL FOR ASSESSMENT YEAR 2007-08 AGAINST ORDER DATED 16.7.2010 OF LD CIT(A)-6 MUMBAI. 2. IN GROUND NO.1 OF APPEAL, THE ASSESSEE HAS DISPU TED THE ORDER OF LD CIT(A) IN CONFIRMING THE ADDITION OF RS.10,06,21,530 TO THE V ALUE OF CLOSING STOCK OF FREE SUGAR. 3. THE RELEVANT FACTS ARE THAT ASSESSEE IS ENGAGED IN MANUFACTURE OF WHITE CRYSTAL SUGAR FROM SUGAR CANE AT ITS FACTORY SITUATED AT BI SWAN, DIST-SITAPUR IN UTTAR PRADESH. DURING THE YEAR UNDER CONSIDERATION, ASSESSEE HAS S HOWN TOTAL SALES OF RS.178,43,20,448 AND AN AMOUNT OF RS.17,47,10,164 H AS BEEN REFLECTED AS GROSS PROFIT WHICH WORKS OUT TO 9.35% AS AGAINST 21.59% AND 25.3 8% IN THE ASSESSMENT YEARS 2005-06 AND 2004-05, RESPECTIVELY. THE AO ASKED TH E ASSESSEE TO FILE DETAILED REASONS ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 2 FOR FALL IN GROSS PROFIT RATE AND WAS ALSO REQUESTE D TO SUPPORT THE SAME WITH COGENT REASONS AND DOCUMENTARY EVIDENCES. ASSESSEE FILED ITS REPLY DATED 26.10.2009. IT WAS STATED THAT THE FINANCIAL YEAR 2006-07 RELATING TO ASSESSMENT YEAR 2007-08 WAS EXTREMELY DIFFICULT YEAR FOR SUGAR INDUSTRY AND PAR TICULARLY IN UTTAR PRADESH, WHERE ASSESSEES SUGAR FACTORY IS LOCATED. IT WAS STATED THAT NOT ONLY HAVE THE MARGIN SHRUNK BUT ALSO IT BECAME NEGATIVE BY THE END OF THE YEAR. IT WAS CONTENDED THAT THERE WAS ABNORMAL INCREASE IN CANE PRICE BY THE STATE GOVERN MENT AND ON THE OTHER HAND, THERE WAS DECREASE IN SUGAR SALES REALIZATION DUE TO HIG HER CARRY OVER OF INVENTORY FROM THE PREVIOUS YEAR AS THE PREVIOUS YEAR HAD THE RECORD P RODUCTION ALL OVER. IT WAS SUBMITTED THAT THE VALUATION OF CLOSING STOCK WAS DONE AT MAR KET VALUE AS THE ASSESSEE WAS CONSISTENTLY FOLLOWING THE METHOD OF STOCK VALUATIO N AT COST OR MARKET VALUE WHICHEVER IS LOWER. THE VALUATION OF STOCK AT THE MARKET VALUE RESULTED IN LOWER VALUATION OF THE CLOSING STOCK OF SUGAR AND, ACCORDINGLY, REDUCED G ROSS PROFIT AS WELL AS NET PROFIT. 4. ASSESSING OFFICER STATED THAT THE REASONS GIVEN BY THE ASSESSEE ARE IN A GENERALIZED MANNER WITHOUT FILING DOCUMENTARY EVIDE NCES IN SUPPORT OF THE SAME. HE STATED THAT IT MAY BE PARTLY CORRECT THAT PRICES O F CANE DURING THE YEAR UNDER CONSIDERATION HAVE GONE UP DUE TO THE POLICY OF STA TE GOVERNMENT, YET ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE INCREASED BURDEN OF RIS E IN PRICE OF CANE WAS NOT SHIFTED TO THE CUSTOMERS PARTLY OR COMPLETELY. HE STATED THAT PERCENTAGE INCREASE IN THE PRICES OF CANE CANNOT BE CONSIDERED AS SUFFICIENT REASONS FOR BRINGING DOWN THE GROSS PROFIT RATE FROM 20.59% TO 9.35%. AO STATED THAT THE INSPECTOR WAS DEPUTED TO SEE THE RECORD OF M/S. BAJAJ HINDUSTAN PVT LTD.,(BHL) A SUGAR MANUFAC TURER AND PRODUCER. HE STATED THAT ON EXAMINATION OF THE RECORDS OF BHL, IT IS FOUND T HAT THE GROSS PROFIT RATIO IS AT 12.77%. FURTHER, THE CLOSING STOCK OF SUGAR HAS BEEN VALUED WHICH WORKS OUT TO RS.14,574/- PER METRIC TON I.E. RS.1457.40 PER QUINTAL. HOWEVER , ASSESSEE HAS VALUED THE STOCK OF SUGAR FREE @ RS.1325/- PER QUINTAL AND THE TOTAL VA LUE OF STOCK OF SUGAR FREE WORKS OUT TO RS.70,17,02,775. AO STATED THAT ASSESSEE HAS FI LED COPIES OF STOCK STATEMENT WITH THE BANK FOR HYPOTHECATION OF CREDIT LIMIT AND VALU ED THE STOCK @ RS.1500 PER QUINTAL AS ON 31.3.2007. THUS, THE TOTAL VALUE OF THE STOCK O F 529587 QUINTALS OF SUGAR HAS BEEN DETERMINED AT RS.79,43,80,500. ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 3 5. AO ALSO CONSIDERED THE RATE OF MUMBAI COMMODITY EXCHANGE AND STATED THAT THE MARKET RATE OF SUGAR AS ON 31.3.2007 WAS RS.1515 MI NIMUM AND THE MAXIMUM WAS RS.1526 PER QUINTAL. THEREFORE, AS ON 31.3.2007, T HE MARKET RATE OF SUGAR RANGED BETWEEN RS.1515 TO RS.1526 PER QUINTAL. AO CONCLUD ED THAT THE BOOKS OF ACCOUNT ARE NOT ACCEPTABLE AS ASSESSEE HAS NOT CORRECTLY VALUED THE CLOSING STOCK OF SUGAR AND, ACCORDINGLY, REJECTED U/S.145(3) OF THE ACT . HE C ONSIDERED THE VALUATION OF SUGAR AT RS.1515 I.E. MARKET VALUE WHICH WAS FOUND AS PER IN FORMATION DOWNLOADED FROM THE MUMBAI COMMODITY EXCHANGE SITE AND CONSIDERING THE CLOSING STOCK OF 529587 QUINTAL WORKED OUT ITS VALUE AT RS.80,23,24,305 AS AGAINST AN AMOUNT OF RS.70,17,02,775 SHOWN BY THE ASSESSEE. HENCE, AO ADDED THE DIFFERE NCE OF RS.10,06,21,530 TO THE INCOME OF THE ASSESSEE. HE STATED THAT IF THIS AMO UNT IS ADDED TO THE INCOME OF THE ASSESSEE, THE GROSS PROFIT RATE WORKS OUT TO 15.40% , WHICH IS SLIGHTLY MORE THAN THE GROSS PROFIT RATE SHOWN BY THE COMPARABLE CASE OF B HL. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE LD CIT(A). 6. LD CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF A SSESSEE VIDE PARA 4.3 OF THE IMPUGNED ORDER HAS CONFIRMED THE ACTION OF AO, WHIC H READS AS UNDER: 4.3 I HAVE CONSIDERED THE FACTS OF THE ISSUE AS WE LL AS WRITTEN SUBMISSIONS MADE BY THE AR OF THE APPELLANT BUT DO NOT FIND MERIT IN THEM. A PERUSAL OF THE ASSESSMENT ORDER CLEARLY BRI NGS OUT THAT THE AO HAS NOT RELIED ON ONE FACTOR ONLY NAMELY THE HIGHER GP RATIO OF M/S.BAJAJ HINDUSTAN LTD. FOR REJECTING THE BOOKS OF THE APPEL LANT AND FOR REVISING THE VALUATION OF THE CLOSING STOCK, THE AO HAS BROU GHT OUT AN IMPORTANT FACTOR NAMELY THE STEEP DECLINE IN THE GP RATIO OF THE APPELLANT FROM 21.59% AND 25.38% IN THE IMMEDIATELY PRECEDING TWO YEARS TO 9.35% DURING THE CURRENT YEAR. THIS FACT COUPLED WITH THE FURNISHING OF HIGHER RATE OF RS. 1500/- PER QUINTAL TO THE BANK FROM WHO M CREDIT FACILITY WAS BEING UTILIZED WEIGHED ON THE MIND OF THE AO TO REJ ECT THE BOOKS OF ACCOUNT ESPECIALLY WHEN IT WAS NOTED THAT ANOTHER S UGAR MANUFACTURER WAS REFLECTING A HIGHER GP RATE OF 12.77% AND HAD A DOPTED THE RATE OF RS.1457.40/- PER QUINTAL REPRESENTING THE COST PRIC E. IT IS IMPORTANT TO NOTE HERE THAT EVEN IN THE CASE OF M/S. BAJAJ HIND USTAN LTD., THE RATE OF CLOSING STOCK OF SUGAR WAS ADOPTED AT RS.1457.40/- PER QUINTAL WHICH WAS TAKEN AT COST. THUS, EVEN THAT COMPANY CONSIDERED THE MARKET PRICE TO BE HIGHER THAN THE SAID RATE OF RS. 1457.40/-. THUS , THE MARKET RATE OF RS.1325/- ADOPTED BY THE APPELLANT WAS CLEARLY RIGH TLY REJECTED BY THE AO ESPECIALLY WHEN THE APPELLANT COULD NOT FURNISH ENO UGH EVIDENCE TO SUBSTANTIATE THE MARKET PRICE AS ON 31.03.2007; DES PITE SPECIFIC OPPORTUNITIES HAVING BEEN ALLOWED BY THE AO. THE AO HAS NOT DISTURBED THE METHOD OF VALUATION NAMELY COST OR MARKET PRIC E - WHICHEVER IS LOWER ADOPTED BY THE APPELLANT. HE HAS MERELY QUES TIONED AND ADJUSTED ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 4 THE MARKET RATE ADOPTED BY THEM. THE CONTENTION OF THE APPELLANT REGARDING DIFFERENCE IN QUALITY COULD NOT EXPLAIN T HE RATE OF RS.1500/- PER QUINTAL MENTIONED IN THE BANK STATEMENT BY THE APPE LLANT ITSELF. HENCE, THE ADDITION MADE BY THE AO ON ACCOUNT OF DIFFERENC E IN THE VALUATION OF CLOSING STOCK IS CONFIRMED. HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE THE TR IBUNAL. 7. DURING THE COURSE OF HEARING, LD A.R. SUBMITTED THAT AO HAS COMPARED THE PRICE OF BHL WHICH WAS NOT COMPARABLE TO THE CASE OF THE ASSESSEE. HE SUBMITTED THAT ASSESSEE WAS PRODUCING SMALLER GRAIN SIZE SUGAR WHI CH FETCHED LOWER PRICE AND THE COLOUR OF THE SUGAR GRAIN BEING INFERIOR AS COMPARE D TO BHL. HE SUBMITTED THAT BHL HAS CO-GENERATION POWER PLANTS IN MOST OF ITS FACTORIES WHICH RESULTS IN ADDITIONAL REVENUE FROM SALE OF POWER. THAT IN MOST OF THE FACTORIES OF BHL RESULTING INTO ADDITION TO ITS BOTTOM LINE SUBSTANTIALLY. BHL IS A VERY BIG ORGANI ZATION HAVING 14 SUGAR FACTORIES RESULTING INTO ECONOMIES OF SCALE WITH LOWER COST O F PRODUCTION. FURTHER, BHL HAS A LOCATIONAL ADVANTAGE SINCE IT IS NEAR TO DELHI RESU LTING INTO LOWER TRANSPORTATION COST. ON THE OTHER HAND, ASSESSEE HAS ONLY ONE MEDIUM SIZE F ACTORY HAVING HIGHER COST OF PRODUCTION IN COMPARISON TO BHL AS A RESULT OF WHIC H GROSS PROFIT OF BOTH THE COMPANIES CANNOT BE COMPARED. HE FURTHER SUBMITTED THAT AO H AS NOT FOUND ANY DEFECT IN THE BOOKS OF ACCOUNT AND HAS REJECTED THE BOOK RESULTS MERELY BECAUSE GROSS PROFIT RATE IS LOW. LD A.R. FURTHER SUBMITTED THAT AO HAS VALUED THE CLOSING STOCK BY TAKING PRICE OF SUGAR AT RS.1515 PER QUINTAL BEING THE PRICE REFLEC TED BY MUMBAI COMMODITY EXCHANGE AS AGAINST RS.1325 SHOWN BY THE ASSESSEE. HE SUBMI TTED THAT THE PRICE REFLECTED ON MUMBAI COMMODITY EXCHANGE IS NOT AN APPROVED METHOD EITHER UNDER THE COMPANIES ACT OR UNDER THE INCOME TAX ACT, 1961 AND HENCE, VA LUING CLOSING STOCK ON THE SAID PRICE IS TOTALLY UNJUSTIFIED. 8. LD A.R. REFERRED PAGE 17 OF PB AND SUBMITTED THA T THE COST OF PRODUCTION PER QUINTAL TO THE ASSESSEE IS RS.1508.10 AND THE VALUA TION OF CLOSING STOCK OF FREE SUGAR HAS BEEN WORKED OUT @ RS.1325 EXCLUDING EXCISE DUTY. L D A.R. REFERRED PAGE 38 OF PB WHICH CONTAINS DETAILS OF ACTUAL PRICE REALIZATION AND PRICE SUBMITTED TO THE BANKER FOR DETERMINING DRAWING CREDIT LIMIT. HE SUBMITTED THA T IN MARCH, 2007, THE AVERAGE PRICE REALIZATION WAS RS.1391.79 PER QUINTAL WHEREAS ASSE SSEE RIGHT FROM APRIL, 2006 TO MARCH, 2007 SUBMITTED THE PRICE TO ITS BANK @ RS.15 00 PER QUINTAL THOUGH AVERAGE ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 5 PRICE REALIZATION VARIED FROM RS.1845.16 IN APRIL, 2006 TO RS.1391.79 IN MARCH, 2007 PER QUINTAL. HE SUBMITTED THAT ASSESSEE SUBMITTED ON A DHOC BASIS THE RATE OF RS.1500 PER QUINTAL TO THE BANK AND SINCE THE OVER ALL LIMIT DI D NOT EXCEED, THE PRICE WAS NOT REVISED. LD A.R. RELYING ON THE DECISION OF HONBLE BOMBAY H IGH COURT IN THE CASE OF CIT VS. ACROW INDIA LTD., 298 ITR 447(BOM) SUBMITTED THAT T HE DEPARTMENT CANNOT RELY ON THE STATEMENT MADE BY THE ASSESSEE TO ITS BANK. LD A.R . SUBMITTED THAT THE PRICE OF SUGAR WAS CONTINUOUSLY FALLING IN THE RELEVANT PREVIOUS Y EAR AND THE FIGURE ADOPTED BY THE ASSESSEE FOR CLOSING STOCK IS THE CORRECT VALUATION . 9. ON THE OTHER HAND, LD D.R. SUPPORTED THE ORDERS OF AUTHORITIES BELOW. HE FURTHER SUBMITTED THAT THE CHART PLACED AT PAGE 38 OF PB SH OWS THE AVERAGE PRICE REALIZATION AT RS.1391.79 PER QUINTAL BUT ASSESSEE HAS VALUED THE CLOSING STOCK OF FREE SUGAR @ RS.1325 PER QUINTAL. HE SUBMITTED THAT IT IS NOT IN DICATED AS TO WHETHER THE SAID AVERAGE PRICE REALIZATION INCLUDES THE EXCISE DUTY ELEMENT OR NOT. HE SUBMITTED THAT AO HAS RIGHTLY CONSIDERED THE RATE OF CLOSING STOCK AS THE RATE ADOPTED BY THE ASSESSEE IS NOT BASED ON DOCUMENTARY EVIDENCES. 10. WE HAVE CONSIDERED SUBMISSIONS OF LD REPRESENTA TIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH RELEV ANT PAGES OF PAPER BOOK TO WHICH OUR ATTENTION WAS DRAWN AT THE TIME OF HEARING (SUP RA). IT IS A FACT THAT ASSESSEE WHILE SUBMITTING THE STATEMENT TO BANK HAS GIVEN THE RATE @ RS.1500 PER QUINTAL AS IS OBSERVED FROM PAGE 38 OF PB. THE SAID RATE IS INDI CATED UNIFORMLY THROUGH OUT THE YEAR THOUGH AS PER THE CHART, THE AVERAGE PRICE REALIZAT ION IN APRIL, 2006 WAS RS.1845.16 PER QUINTAL WHICH CAME DOWN IN MARCH, 2007 TO RS.1391.7 9 PER QUINTAL. AO HAS NOT DISPUTED THE FACT THAT THE PRICE OF SUGAR HAS FALLE N IN THE RELEVANT FINANCIAL YEAR AND IT WAS GOING DOWN THOUGH THE ASSESSEE SHOWED UNIFORM R ATE IN THE STATEMENT SUBMITTED TO THE BANK AT RS.1500 PER QUINTAL. THEREFORE, WE AGREE WITH LD A.R. THAT THE VALUATION OF CLOSING STOCK DECLARED BY THE ASSESSEE TO THE BA NK WAS NOT REALISTIC AND THE SAID STATEMENT SUBMITTED TO BANK CANNOT BE TAKEN AS THE CORRECT VALUATION OF SUGAR PRICE. 11. NOW COMING TO THE REJECTION OF BOOKS OF ACCOUNT , WE AGREE WITH LD A.R. THAT AUTHORITIES BELOW HAVE REJECTED THE BOOK RESULTS ME RELY BECAUSE GP SHOWN BY THE ASSESSEE IN THE ASSESSMENT YEAR UNDER CONSIDERATION IS LOW. NO OTHER FAULT HAS BEEN ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 6 FOUND IN THE BOOKS OF ACCOUNT MAINTAINED BY THE ASS ESSEE. THE HONBLE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX V. PARADISE HOLIDAYS, 325 ITR 13(DEL) HELD THAT IF NET PROFIT IS LOW THAT CANNOT BE A GROUND FOR REJECTING BOOKS OF ACCOUNT AND TO APPLY BEST JUDGMENT ASSESSMENT. HEN CE, WE HOLD THAT AUTHORITIES BELOW WERE NOT JUSTIFIED TO REJECT BOOKS OF ACCOUNT OF TH E ASSESSEE ON THE FACTS AND IN THE CIRCUMSTANCES. 12. NOW COMING TO THE ISSUE AS TO WHETHER ASSESSEE HAS CORRECTLY VALUED THE CLOSINGS TOCK OF SUGAR AS ON 31.3.2007. AS FAR AS THE CONTENTION OF LD A.R. THAT THE PRICE FIXED BY MUMBAI COMMODITY EXCHANGE IS NOT AN APPROVED METHOD AND THE SAME CANNOT BE CONSIDERED THE PRICE FOR VALUING THE CLOS ING STOCK, WE FIND SUBSTANCE IN THE SAID SUBMISSION AS THE RATE REFLECTED IN THE MUMBAI COMMODITY EXCHANGE IS NOT THE MARKET RATE OF THAT DATE, WHICH CAN BE ADOPTED FOR VALUING THE CLOSING STOCK ON A PARTICULAR DATE. 13. HOWEVER, AS PER STATEMENT CONTAINED AT PAGE 17 OF PB, THE COST OF PRODUCTION OF THE ASSESSEE IS RS.1508.10 PER QUINTAL. ASSESSEE H AS VALUED THE CLOSING STOCK OF FREE SUGAR OF 529587 @ RS.1325 PER QUINTAL. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE IS VALUING ITS CLOSING STOCK AT COST PRICE OR MARKET P RICE WHICHEVER IS LOWER FOR THE YEAR UNDER CONSIDERATION AND SINCE MARKET PRICE IS LOWER THAN THE COST OF PRODUCTION, THE ASSESSEE IS JUSTIFIED TO VALUE ITS CLOSING STOCK AT MARKET PRICE. THE QUESTION ARISES AS TO WHETHER THE MARKET PRICE AS ADOPTED BY THE ASSESSEE IS CORRECT OR NOT. ON PERUSAL OF STATEMENT AT PAGE 38 OF PB, ASSESSEE HAS GIVEN DETA ILS OF ACTUAL PRICE REALIZATION RELATED TO FINANCIAL YEAR 2006-07. WE OBSERVE THAT IN THE MONTH OF MARCH, 2007, THE AVERAGE PRICE REALIZATION IS THE LOWEST IN THE RELEVANT FIN ANCIAL YEAR I.E. RS.1391.79 PER QUINTAL. THEREFORE, THERE IS NO BASIS TO ADOPT THE MARKET VA LUE @ RS.1325 PER QUINTAL WHEN THE AVERAGE PRICE REALIZATION IS RS.1391.79 PER QUINTAL . HOWEVER, DURING THE COURSE OF HEARING, IT WAS INDICATED THAT THE SAID PRICE ALSO INCLUDED EXCISE DUTY AND ASSESSEE HAS SHOWN SEPARATELY IN ITS VALUATION OF CLOSING STOCK THE ELEMENT OF EXCISE DUTY @ RS.86.70 PER QUINTAL AND IF THE SAME IS INCLUDED IN THE CLOS ING STOCK VALUED BY ASSESSEE, IT WILL COME TO RS.1411.70 (RS.1325 + RS.86.70). HOWEVER, THE SAID FACT AS PER THE DETAILS PLACED ON RECORD IS NOT VERIFIABLE. CONSIDERING TH E FACTS OF THE CASE, WE HOLD THAT IF THE AVERAGE PRICE REALIZATION IN THE MONTH OF MARCH, 20 07 AS PER THE STATEMENT PLACED AT ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 7 PAGE 38 OF PB AT RS.1391.79 PER QUINTAL INCLUDES TH E EXCISE DUTY ELEMENT, THE CLOSING STOCK AS SHOWN BY THE ASSESSEE @RS.1325 PER QUINTAL (EXCLUDING EXCISE DUTY @ RS.86.70 PER QUINTAL) BE ACCEPTED AND NO ADDITION I S TO BE MADE ON ACCOUNT OF VALUATION OF CLOSING STOCK. IN CASE THE AVERAGE PRICE REALI ZATION AT RS.1391.79 PER QUINTAL IS EXCLUSIVE OF EXCISE DUTY ELEMENT, IN THAT CASE, THE CLOSING STOCK AS ON 31.3.2007 BE VALUED @ RS.1391.75 PER QUINTAL AS AGAINST RS.1325 PER QUINTAL CONSIDERED BY THE ASSESSEE AND THE DIFFERENCE BE ADDED TO THE CLOSING STOCK. THE AO WILL VERIFY ABOVE ASPECT WHILE GIVING EFFECT TO OUR ORDER AND DECIDE THE VALUATION OF CLOSING STOCK ACCORDINGLY. 14. SUBJECT TO ABOVE DIRECTION, WE DECIDE GROUND NO .1 OF APPEAL TAKEN BY THE ASSESSEE FOR STATISTICAL PURPOSES. 15. GROUND NO.2 READS AS UNDER: THE LD CIT(A) ERRED IN LAW AND ON FACTS IN UPHOLDI NG THE DISALLOWANCE OF RS.3,57,393 U/S.94(7) OF THE I.T.ACT, DISREGARDING THE SUBMISSIONS MADE BY THE APPELLANT. 16. AT THE TIME OF HEARING, LD A.R. SUBMITTED THAT GROUND NO.2 IS NOT PRESSED FOR. HENCE, SAME IS DISMISSED AS NOT PRESSED. 17. GROUND NO.3 READS AS UNDER: THE LD CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO IN TREATING THE REVENUE EXPENDITURE OF RS.2,67,02,115 AS THE APPELL ANTS CAPITAL EXPENDITURE. 18. THE ASSESSEE HAS FILED THE DETAILS OF REPAIR AN D MAINTENANCE WHICH IS STATED BY THE AO AT PAGES 9 & 10 OF ASSESSMENT ORDER AS UNDER : SL.NO. DATE OF PURCHASE PARTICULARS OF MACHINERY AMOUNT 1. 31.5.2006 HYDRAULIC GRAB COMPLETE WITH 15 HP MOT OR 468234.00 2. 30.6.2006 BLADED ROTOR ASSEMBLY FOR FRAME 550 MM MODEL TURBINE 1551215.80 3. 31.7.2006 OXYGEN GAS CYLINDERS 22050.00 4. 31.7.2006 OXYGEN GAS CYLINDERS, D.A. GAS CYLINDE R 21600.00 5. 31.7.2006 DIESEL CENTRIFUGE SYSTEM 244975.00 6. 31.7.2006 BUS COUPLER 1862120.00 ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 8 7. 31.8.2006 MULTIJET CONDENSOR 328780.00 8. 30.9.2006 M.S.FAB VAPOUR BODY SHELL OF SEMI KEST NER 627917.00 9. 31.10.2006 2300 M HAS SEMI KESTNER 261632.00 10. 31.10.2006 GUN METAL CASTING C.I. BRACKET CASTI NG 5159.00 11. 31.10.2006 PIPE LINE OF TURBINE 508058.00 12. 31.10.2006 PIPE LINE OF TURBINE 386114.00 13. 31.10.2006 PIPE LINE OF TURBINE 350013.00 14. 31.10.2006 PIPE LINE OF TURBINE 646942.00 15. 31.10.2006 PIPE LINE OF TURBINE 302291.00 16. 31.10.2006 PIPE LINE OF TURBINE 102880.00 17. 30.11.2006 ACB PANELS (3MW), BUS BAR, INTERCONN ECTING BUS DUCT 501663.64 18. 30.11.2006 MULTI BAFFLE ENRAINMENT ARRESTOR FOR SEMI KESTNER 470938.00 19. 30.11.2006 M.S.BAB. CALANDRIA FOR 2300 M2 HAS S EMI KESTNER 1569792.00 20. 30.11.2006 REPLACEMENT OF LINER, PISTON RINGS, CRANKSHAFT GRIND 307000.00 21. 30.11.2006 HYDRAULIC GRAB 624860.00 22. 30.11.2006 HYDRAULIC GRAB 470938.00 23. 30.11.2006 RECONDITIONING OF EXISTING TWO NO. T OP COVERS 560416.00 24. 30.11.2006 BRAKE DRUM COUPLING, HYDRAULIC THYRU STER BRAKE 152975.00 25. 30.11.2006 REPLACEMENT OF BORNOUT CALANDRIA OF SEMI KESTNER 313958.00 26. 14.12.2006 SEMI KESTENER FITTING CHARGES & SEMI KESTENER RELATED PIPELINE WORK 245000.00 27. 19.12.2006 DISM OF BELT CONVEYOR, MILL DRIVE PL ATE FORM 400000.00 28. 31.12.2006 PIPE 6 N.B. 1092000.00 29. 31.12.2006 SPARE PARTS MODI OF 1.5 MW TURBINE 670432.00 30. 28.2.2007 DESIGN ENGG. & SUPPLY OF STEAM PIPE L INE 1144000.00 31. 31.3.2007 DISM OF EXISTING ELECT. EQUIPMENT & R EFLIXING SAME 1957042.00 32. 31.3.2007 PREPARATION OF LANE TO MAKE IT CLEANI NG USABLE BY CLEARING, LEVELING 8531120.00 19. ASSESSING OFFICER STATED THAT THE EXPENSES WHIC H HAVE BEEN CLAIMED AS REVENUE EXPENDITURE, SAME SHOULD HAVE BEEN CAPITALIZED AS T HESE EXPENDITURES YIELD ENDURING BENEFIT TO THE ASSESSEE. AO DID NOT ACCEPT THE CON TENTION OF ASSESSEE THAT SUGAR INDUSTRY IS A SEASONAL INDUSTRY AND SUGAR FACTORY N ORMALLY WORK DURING THE SEASON ONLY TILL SUGARCANE LASTS AND THE EXPENSES INCURRED BY T HE ASSESSEE ARE IN THE NATURE OF CURRENT REPAIRS AND NOT CAPITAL IN NATURE. AO STAT ED THAT THE EXPENSES MADE ARE IN THE NATURE OF MACHINERY AND THE BENEFITS DERIVED THEREF ROM ARE ENDURING IN NATURE. HE ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 9 CONSIDERED THE SAID EXPENDITURE AS CAPITAL EXPENDIT URE. AO CAPITALIZED THE SAID EXPENDITURE AGGREGATING TO RS.2,67,02,115.44 AND AL LOWED THE DEPRECIATION OF RS.23,87,176 AS UNDER: EXPENDITURE INCURRED UPTO 30.9.2006 5126891 @15% 769034 EXPENDITURE INCURRED AFTER 30.9.2006 21575223 @ 7 .5% 1618142 TOTAL: 26702115 2387176 20. HENCE, AO MADE THE NET DISALLOWANCE OF RS.2,43, 14,939. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE LD CIT(A). LD CIT(A) CONFIRMED THE ACTION OF AO VIDE PARA 9.3 OF THE IMPUGNED ORDER AS UNDER: 9.3 I HAVE CONSIDERED THE FACTS OF THE ISSUE AS W ELL AS WRITTEN SUBMISSIONS MADE BY THE AR OF THE APPELLANT. A PERU SAL OF THE DETAILS OF THE EXPENDITURE FILED BY THE AR INDICATE THAT THE S AID EXPENDITURE IS CLEARLY CAPITAL IN NATURE AND CERTAIN ITEMS OF MACH INERY HAVE BEEN PURCHASED AFRESH FOR UP- GRADATION OR BETTER SERVIC E/IMPROVED PRODUCTION/IMPROVED SERVICE. NEW ASSETS HAVE CLEARL Y BEEN PURCHASED APART FROM INSTALLATION OF NEW PIPELINE OF TURBINE. EVEN THE EXPENDITURE ON OXYGEN GAS CYLINDER ETC. HAS BEEN RIGHTLY CAPITA LIZED BY THE AO IN THE CONTEXT OF UP-GRADATION OF CERTAIN MACHINERY. BESID ES, PREPARATION OF PARKING AREA AT A COST OF RS.85.31 LACS INCLUDING T HE LEVELING AND THE BRICK-LINING OF THE PARKING SPACE IS CLEARLY IN THE NATURE OF A CAPITAL EXPENDITURE. HENCE, THE ACTION OF THE AO IN CAPITAL IZING THE SAID IS CONFIRMED AND THIS GROUND IS DISMISSED. 21. HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 22. DURING THE COURSE OF HEARING, LD A.R. REFERRED ASSESSMENT ORDER AND SUBMITTED THAT AS PER DETAILS OF EXPENDITURES INCURRED BY THE ASSESSEE, SAME ARE REVENUE IN NATURE. LD A.R. REFERRED TO DECISION OF HONBLE AP EX COURT IN THE CASE OF EMPIRE JUTE CO. VS. CIT, 124 ITR 1 (SC) AND SUBMITTED THAT EVEN IF THE EXPENDITURE INCURRED FOR OBTAINING AN ADVANTAGE OF ENDURING BENEFIT MAY, NON E THE LESS, BE ON REVENUE ACCOUNT AND THE TEST OF ENDURING BENEFIT MAY BREAK DOWN. H E SUBMITTED THAT HONBLE APEX COURT HAS HELD THAT EVERY ADVANTAGE OF ENDURING NAT URE ACQUIRED BY AN ASSESSEE CANNOT BE SAID THAT THE EXPENDITURE IS CAPITAL IN NATURE. HE ALSO REFERRED TO DECISION OF HONBLE APEX COURT IN THE CASE OF CIT VS. RAMARAJU SURGICAL COTTON MILLS, 294 ITR 328(SC) AND SUBMITTED THAT IF THE REPLACEMENT OF EXISTING MACHI NERIES TAKES PLACE WITHOUT INCREASING THE PRODUCTION CAPACITY, SUCH EXPENDITURE ALWAYS CA NNOT BE CALLED TO BE CAPITAL IN NATURE. LD A.R. HAS SUBMITTED THAT MOST OF THE EXP ENDITURES INCURRED BY THE ASSESSEE ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 10 ARE ON ACCOUNT OF REPLACEMENT OF OLD PART OR TO CAR RY OUT CURRENT REPAIRS PARTICULARLY, WHEN THERE WAS NO PRODUCTION IN THE FACTORY. HENCE, SAME SHOULD BE CONSIDERED AS REVENUE EXPENDITURE AND REFERRED TO DECISION OF HON BLE MADRAS HIGH COURT IN THE CASE OF CIT VS. JAYBHARATH TEXTILES P. LTD, 310 ITR 301( MAD). 23. DURING THE COURSE OF HEARING, WHEN ADDITION OF LD A.R. WAS DRAWN TO THE TABLE CONTAINING DETAILS OF EXPENDITURES INCURRED BY THE ASSESSEE THAT A SUM OF RS.85,31,120 WAS INCURRED FOR PREPARATION OF LANE TO MAKE IT CLE ANING USABLE BY CLEARING LEVELING, HE SUBMITTED THAT SAID ITEM COULD BE RESTORED TO THE F ILE OF AO TO RE-EXAMINE AS TO WHETHER THE SAID EXPENDITURE IS IN THE NATURE OF CAPITAL EX PENDITURE TO CREATE A NEW ASSET OR NOT. 24. ON THE OTHER HAND, LD D.R. REFERRED PAGES 39-42 OF PB, WHICH CONTAINS DETAILS OF EXPENDITURES INCURRED BY THE ASSESSEE AND SUBMITTED THAT ASSESSEE HAS ALSO UPGRADED CERTAIN MACHINERIES BESIDES CREATING SEPARATE PARKI NG SPACE BY INCURRING EXPENDITURE OF RS.85.31 LAKHS. HE FURTHER SUBMITTED THAT ENTIRE E XPENDITURE IS NOT INCURRED FOR CARRYING OUT REPAIRING OR REPLACEMENT OF OLD MACHINERIES. H E SUBMITTED THAT ORDERS OF AUTHORITIES BELOW BE UPHELD. 25. WE HAVE CONSIDERED SUBMISSIONS OF LD REPRESENTA TIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE GONE THROUGH THE DETAIL S PERTAINING TO REPAIRS AND RENEWAL AS CONTAINED IN PAGES 39 TO 42 OF PB, DETAILS OF WH ICH HAS ALSO BEEN GIVEN AT PAGES 9-10 OF ASSESSMENT ORDER AND ALSO REPRODUCED HEREINABOVE IN PARA 18. 26. ON PERUSAL OF SAID DETAILS, WE DO AGREE THAT SO ME OF THE ITEMS I.E. MENTIONED AT SL.NOS.1,2,3,4,5,6,7,8,10,11,12,13,14,15,16,17,18,1 9,20,21,22,23,24,25,26,27,28,29, 30 & 31 ARE ITEMS FOR WHICH EXPENSES HAVE BEEN INCURRE D BY THE ASSESSEE EITHER FOR REPAIRING OF EXISTING PARTS OF THE MACHINERIES OR THE ITEMS HAVE BEEN CORRODED AND THEY HAVE BEEN REPAIRED OR REPLACED AND AS SUCH NO NEW ASSETS HAVE BEEN CREATED. HENCE, THESE ARE EXPENSES OF REVENUE IN NATURE AND ARE TO BE ALLOWED AS DEDUCTION. HOWEVER, IN RESPECT OF ITEM AT SL. NO.9 AMOUNTING TO RS.2,61 ,632, IT IS OBSERVED THAT A NEW MACHINERY WAS INSTALLED. SIMILARLY FOR THE ITEM AT SL. NO.32, IT APPEARS THAT A NEW PARKING SPACE WAS CONSTRUCTED BY THE ASSESSEE AT A COST OF RS.85,31,120.00. HENCE, WE ARE OF THE CONSIDERED VIEW THAT OUT OF TOTAL EXPENS ES OF RS.2,67,02,115, A SUM OF ITA NO.6700/MUM/2010 ASSESSMENT YEAR: 2007-08 11 RS.87,92,752 IS ON ACCOUNT OF INSTALLATION OF NEW M ACHINERIES AND CREATING ADDITIONAL CAPITAL ASSETS GIVING ENDURING BENEFIT TO THE ASSES SEE. HENCE, THE SAID EXPENDITURE OF RS.87,92,752 HAS RIGHTLY BEEN CAPITALIZED BY AUTHOR ITIES BELOW FOR WHICH ASSESSEE IS ENTITLED TO DEPRECIATION AS PER APPLICABLE RATE. H OWEVER, BALANCE EXPENDITURE OF AMOUNT OF RS.180,09,363 IS TO BE CONSIDERED AS REVENUE IN NATURE. AO WILL ALLOW THE SAID EXPENDITURE ACCORDINGLY AFTER MAKING REASONABLE ADJ USTMENT FOR DEPRECIATION ALLOWED BY HIM ON THE TOTAL AMOUNT OF RS.2,67,02,115 DISALLOWE D BY HIM CONSIDERING AS CAPITAL EXPENDITURE. HENCE, GROUND NO.3 OF APPEAL IS ALLO WED IN PART AS INDICATED ABOVE. 27. GROUND NO.4 READS AS UNDER: LD CIT(A) ERRED IN DISMISSING THE APPELLANTS CLA IM OF RS.28,900 ON ACCOUNT OF PENALTY WHICH WAS COMPENSATORY NATURE AND NOT PENAL NATURE. 28. LD A.R. SUBMITTED THAT ABOVE GROUND IS NOT PRES SED. HENCE, SAME IS DISMISSED AS NOT PRESSED. 29. IN THE RESULT, APPEAL FILED BY ASSESSEE IS ALLO WED IN PART. PRONOUNCED IN THE OPEN COURT ON 26 TH SEPTEMBER, 2012 SD/- ( B. RAMAKOTAIAH) ACCOUNTANT MEMBER SD/- (B.R. MITTAL) JUDICIAL MEMBER MUMBAI, DATED 26 TH SEPTEMBER, 2012 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),6, MUMBAI 4. COMMISSIONER OF INCOME TAX,2 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH E MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI