M/s Karnataka Cement Works, Gulbarga V. ITO, Gowribidanur

ITA 701/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5600 (ITAT-BANGALORE)
• Duration Of Justice: 11 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 20-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K RAMANA BABU
• Assessee Lawyers: RAMESH KAMALAPURKAR
• Keywords: Capital asset; Depreciation; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

PAGE 1 OF 7 ITA NO.70 1/BANG/2010 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NO.701/BANG/2010 (ASSESSMENT YEAR 2006-07) M/S KARNATAKA CEMENT WORKS, (KOPPAL), H.O. S S PATILS COMPLEX, KHUBA PLOTS, S B TEMPLE ROAD, GULBARGA. - APPELLANT VS THE INCOME TAX OFFICER, WARD-1, GULBARGHA. - RESPONDENT APPELLANT BY : SHRI RAMESH KAMALAPURKAR, C .A. RESPONDENT BY : SHRI K RAMANA BABU, JCIT ORD ER PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE CIT (A), HUBLI DATED 30.3.2010. THE R ELEVANT ASSESSMENT YEAR IS 2006-07. 2. THE ASSESSEE HAS RAISED SIX GROUNDS IN THE GROU NDS OF APPEAL. HOWEVER, ALL THE GROUNDS RELATE TO THE SOLITARY ISSU E AS TO WHETHER THE CIT(A) IS JUSTIFIED IN CONFIRMING THE ADDITION OF R S.90,907/- ON ACCOUNT OF VAT TAX PAID ON CAPITAL GOODS. PAGE 2 OF 7 ITA NO.70 1/BANG/2010 2 3. THE ASSESSEE IS A PARTNERSHIP FIRM DOING THE BU SINESS OF MANUFACTURE AND SALE OF PCC/RCC POLES AND PIPES. FOR THE CONCERNED ASST. YEAR, RETURN OF INCOME WAS FILED ON 12.10.2006 DECLA RING AN INCOME OF RS.2,56,690/-. THE CASE WAS SELECTED FOR SCRUTINY A ND ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT VIDE ORDER DATED 28 .11.2008 FIXING A TOTAL INCOME OF RS.3,64,773/-. THE A.O. WHILE COMPLETING THE ASSESSMENT HAD MADE AN ADDITION OF RS.90,907/- ON ACCOUNT OF VAT T AX PAID ON CAPITAL GOODS. THE FACTS IN RELATION TO THE SAID ADDITION ARE AS FOLLOWS:- THE ASSESSEE FIRM PURCHASED A LORRY IN FEBRUARY, 20 06 AT A COST OF RS.8,84,499/- FROM SUNDARAM MOTORS BANGALOR E WITH INCLUDED VAT @ 12.5% OF RS.98,278/-. THE NET COST OF THE LORRY BEARING REGISTRATION NO. KA 37/4884, WORKED OUT TO RS.7,86,221 WHICH WAS TAK EN TO THE LORRY ASSET ACCOUNT WHEREAS THE SUM OF RS.98,278/- WAS TAKEN TO VAT INPUT ACCOUNT AND SET OFF AGAINST THE OUTPUT VAT TAX AND THE BALA NCE OUTSTANDING ON 31 ST MARCH, 2006 WAS PAID BY THE DUE DATE FALLEN AFTER 31 ST MARCH, 2006. THE FIRM CLAIMED DEPRECIATION ON BASIC VALUE OF LORRY OF RS.7,86,221/- PLUS OTHER ADDITIONS WHICH TOTALED TO RS.9,65,821/- EXCLUDING THE VAT COMPONENT, AT CORRECT RATE OF DEPRECIATION IN THE BOOKS OF THE FI RM. THE ASSESSING OFFICER IN COURSE OF THE ASSESSMENT PROCEEDINGS ENQ UIRED WITH THE DETAILS OF ADDITIONS TO FIXED ASSETS WHICH WAS FURNISHED BE FORE HIM IN COURSE OF ASSESSMENT PROCEEDINGS. THE AO CONCLUDED AFTER REFERRING TO THE PROVISION S OF KARNATAKA VAT ACT, 2003 THAT THE ASSESSEE FIRM IS N OT ELIGIBLE FOR SET UP OFF VAT TAX PAID AND HENCE, IT IS NOT ELIGIBLE FOR DEDUCTION OF RS.98,278/- PAGE 3 OF 7 ITA NO.70 1/BANG/2010 3 AND HENCE, HAS ADDED THE SAID SUM AS INCOME OF THE FIRM AND ALLOWED A DEPRECIATION OF RS.7,371/- AND A NET ADDITION OF RS .90,907/- WAS MADE TO THE RETURNED INCOME. 4. ON FURTHER APPEAL, THE FIRST APPELLATE AUTHORIT Y CONFIRMED THE ADDITION MADE BY THE AO. THE CONCLUSION DRAWN BY THE CIT(A) AT PAGE 3 OF THE IMPUGNED APPELLATE ORDER IS REPRODUCED BELOW:- ON CAREFUL EXAMINATION OF THE FACTS THAT IT IS SEE N THAT THE COST PRICE OF LORRY OF RS.8,84,499/- IS INCLUSIV E OF VAT OF RS.98,278/- AS PER THE VEHICLE SALE INVOICE ISSUED BY M/S SUNDARAM MOTORS, BANGALORE. IT IS UNDISPUTED THAT THE VAT IS PAID TOWARDS ACQUISITION OF A CAPIT AL GOODS I.E. LORRY, WHICH THE APPELLANT HAS INCLUDED IN THE MONTHLY VAT PAYMENTS AND CLAIMED THE SAME AS REVENUE EXPENDITURE. IT IS A FACT THAT ANY EXPENDITURE INCU RRED TOWARDS ACQUISITION OF A CAPITAL ASSET IS IN THE NA TURE OF CAPITAL EXPENDITURE WHICH IS CAPITALIZED BY INCLUDIN G THE SAME IN THE COST OF THE CAPITAL ASSET. THE EXPENDI TURE BEING IN THE NATURE OF CAPITAL CANNOT BE CLAIMED AS REVENUE EXPENDITURE. THIS ALSO FINDS SUPPORT FROM THE K- VAT ACT, 2003 WHICH CLEARLY STIPULATES THAT INPUT TA X SHALL NOT BE DEDUCTED IN CALCULATING THE NET TAX PA YABLE ON PURCHASE OF CAPITAL GOODS. IN VIEW OF THESE FACT S, I DECLINE TO INTERFERE WITH THE ORDER OF THE AO AND T HE ADDITION MADE BY THE AO OF RS,.90,907/- IS UPHELD. 5. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFOR E US. 6. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT A REVIEW OF THE VAT PROVISIONS EFFECTIVE AFTER 01.04.2005 SH ALL CLEARLY BRING OUT THAT, VALUE ADDED TAX CANNOT BE A MATTER OF DEDUCTI ON IN THE PROFIT AND LOSS ACCOUNT AND THEREFORE THERE IS NO EFFECT OF RE DUCING THE FIRMS INCOME PAGE 4 OF 7 ITA NO.70 1/BANG/2010 4 WHICH IS ASSESSABLE UNDER INDIAN INCOME TAX ACT, 19 61. IT WAS SUBMITTED THAT THE ASSESSEE HAS THE OBLIGATION OF PAYING TAX O N PURCHASES WITHIN THE STATE, WHICH IS DEBITED TO VAT INPUT ACCOUNT, COLLE CT TAX UNDER VAT ON GOODS SOLD AND CREDIT THE TAX COMPONENT TO VAT OUTP UT ACCOUNT AND REMIT THE NET BALANCE WHICH IS THE NET OF VAT INPUT TAX A ND VAT OUTPUT TAX, TO THE GOVERNMENT ACCOUNT BY THE DUE DATE. THE NET AMO UNT OF VAT PAID TO GOVERNMENT ACCOUNT IS NEVER CLAIMED AS AN EXPENDITU RE IN THE P&L ACCOUNT. IT WAS CONTENDED THAT THE AO NEVER APPRECIATED T HE FACT THAT THERE WAS NO IMPACT ON THE PROFIT AND LOSS ACCOUNT/ TAXABLE INCOME OF THE FIRM ON ACCOUNT OF THE METHOD OF ACCOUNTING FOLLOWE D BY THE ASSESSEE WHICH IS RATHER A CORRECT ACCOUNTING DONE BY THE ASSESSEE. 6.1 IT WAS FURTHER SUBMITTED THAT THE ACCOUNTING F OLLOWED BY THE ASSESSEE IN THE ENTIRE MATTER IS IN TOTAL AGREEMENT WITH THE ACCOUNTING STANDARD AS-10 FOR ACCOUNTING FOR FIXED ASSETS AS P RONOUNCED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA AND ALS O THE GUIDANCE NOTE ISSUED BY THE ICAI ON ACCOUNTING FOR STATE LEVEL VAL UE ADDED TAX. 6.2 THE ASSESSEE SUBMITTED THAT AS-10 (ACCOUNTING STANDARDS FOR ACCOUNTING FOR FIXED ASSETS) DEFINES THE COMPONENTS OF COST OF FIXED ASSETS AS UNDER:- THE COST OF AN ITEM OF FIXED ASSET COMPRISES ITS PURCHASE PRICE, INCLUDING IMPORT DUTIES AND OTHER N ON- REFUNDABLE TAXES OR LEVIES AND ANY DIRECTLY ATTRIBUTA BLE COST OF BRINGING THE ASSET TO ITS WORKING CONDITION FOR ITS INTENDED USE; ANY TRADE DISCOUNTS AND REBATES ARE PAGE 5 OF 7 ITA NO.70 1/BANG/2010 5 DEDUCTED IN ARRIVING AT THE PURCHASE PRICE, EXAMPLE OF DIRECTLY ATTRIBUTABLE COSTS ARE: (I) SITE PREPARATION; (II) INITIAL DELIVERY AND HANDLING COSTS; (III) INSTALLATION COST, SUCH AS SPECIAL FOUNDATIONS FOR PLANT; AND (IV) PROFESSIONAL FEES, FOR EXAMPLE, FEES OF ARCHITECTS AND ENGINEERS. THE COST OF A FIXED ASSET MAY UNDERGO CHANGES SUBSEQUENT TO ITS ACQUISITION OR CONSTRUCTION ON AC COUNT OF EXCHANGE FLUCTUATIONS, PRICE ADJUSTMENTS, CHANGE S IN DUTIES OR SIMILAR FACTORS. ACCOUNTING TREATMENT FOR VAT CREDIT IN CASE OF CAPI TAL GOODS: PARAGRAPH 9.1 OF ACCOUNTING STANDARD (AS) 10, ACCOUNTING FOR FIXED ASSETS, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTS OF INDIA, INTER-ALIA, PROVIDES A S BELOW: 9.1 THE COST OF AN ITEM OF FIXED ASSET COMPRISES I TS PURCHASE PRICE, INCLUDING IMPORT DUTIES AND OTHER N ON- REFUNDABLE TAXES OR LEVIES AND ANY DIRECTLY ATTRIBUTA BLE COST OF BRINGING THE ASSET TO ITS WORKING CONDITION FOR ITS INTENDED USE; ANY TRADE DISCOUNTS AND REBATES ARE DEDUCTED IN ARRIVING AT THE PURCHASE PRICE. VAT CREDIT IS CONSIDERED TO BE OF THE NATURE OF A REFUNDABLE TAX. THEREFORE, THE TAX PAID ON PURCHAS E OF CAPITAL GOODS SHOULD NOT BE INCLUDED IN THE COST OF SUCH CAPITAL GOODS. DEPRECIATION SHOULD BE CHARGED ON THE ORIGINAL COST OF FIXED ASSET EXCLUDING VAT CREDIT. PAGE 6 OF 7 ITA NO.70 1/BANG/2010 6 6.3 IT WAS CONTENDED THAT A REVIEW OF THE ABOVE GU IDANCE NOTE AND ACCOUNTING STANDARD AS-10 ON ACCOUNTING FOR FIXED A SSETS SHALL BRING OUT THE ONLY CONCLUSION THAT THE ACCOUNTING ENTRIES PASS ED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS ARE IN PERFECT AGREEMENT WITH THE PROPOSITION PRONOUNCED IN THE GUIDANCE NOTE AS ISSUED BY THE ICAI. 7. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED TH E ORDERS OF THE INCOME TAX AUTHORITIES. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS PLACED ON THE RECORD. IT IS THE CLAIM OF THE ASSE SSEE THAT THE NET VAT PAID TO GOVERNMETN ACCOUNT IS NEVER BROUGHT TO THE P&L A CCOUNT AND THE SAME IS CARRIED TO THE BALANCE SHEET. IF THE CONTENTION OF THE ASSESSEE IS TRUE, THE VAT COMPONENT OF THE CAPITAL GOODS PURCHASED WAS NE VER CLAIMED AS REVENUE EXPENDITURE TO REDUCE THE TAXABLE INCOME. THEREFOR E, THERE CANNOT BE AN ADDITION ON THIS COUNT. 8.1 HOWEVER, ON PERUSAL OF THE P&L ACCOUNT, WE FI ND THAT THERE IS DEBIT OF SALES TAX. IN THE COURSE OF HEARING, THE LEARNED AR SUBMITTED THAT THIS AMOUNT OF SALES TAX CLAIMED AS DEDUCTION IN P& L ACCOUNT IS PERTAINING TO SALES TAX FOR THE PAST YEARS. TO EXAMINE THE VERACI TY OF CLAIM OF THE ASSESSEE THAT VAT COMPONENT IS NEVER CLAIMED AS AN EXPENDITURE AND DOES NOT HAVE AN IMPACT ON THE P&L ACCOUNT, THE MATTER I S REMITTED TO THE FILE OF THE AO. THE AO SHALL DELETE THE ADDITION MADE, IF VAT COMPONENT IS NOT CLAIMED AS DEDUCTION IN THE P&L ACCOUNT. PAGE 7 OF 7 ITA NO.70 1/BANG/2010 7 9. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. THE ORDER PRONOUNCED ON FRIDAY, THE 6 TH DAY OF MAY, 2011 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/6/5. BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.