DCIT CIR 6(2)(1), MUMBAI V. CHROMA ENERGY P.LTD, MUMBAI

ITA 7115/MUM/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 5506 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 7 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 05-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T A KHAN
• Assessee Lawyers: KAVITA MEHEND ALE
• Keywords: Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 142(1); 32; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES C, MUMBAI BEFORE SHRI G MANJUNATHA, ACCOUNTANT MEMBER & SHRI RAVISH SOOD, JUDICIAL MEMBER ITA NO.7115/MUM/2016 ASSESSMENT YEAR : 2012-13 DY CIT CIR 6(2)(1) MUMBAI VS. M/S. CHROMA ENERGY PVT. LTD., C-36, GOODWILL BUILDING, MANMALA TANK ROAD, MUMBAI 400 016 PAN AADCC8677M (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T A KHAN RESPONDENT BY : SHRI ANIL SATHE & MS. KAVITA MEHEND ALE DATE OF HEARING : 11 .0 7 .201 8 DATE OF PRONOUNCEMENT : 13 .0 7 . 201 8 O R D E R PER G MANJUNTHA, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST ORDER OF THE CIT(A)-12, MUMBAI, DATED 09.09.2016, AND IT PERTAINS TO ASSESS MENT YEAR 2012-13. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL:- 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE ADDITION MADE BY TH E ASSESSING OFFICER OF RS 45,85,395/- ON ACCOUNT OF FINANCE COST (RS 37,12 2), DEPRECIATION & AMORTISATION EXPENSES (RS 6,96,270), OTHER EXPENSES (RS 7,17,160) AND DEPRECIATION CLAIMED IN THE COMPUTATION OF INCOME ( RS 31,34,843) 2. ON THE FACT AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE COMPANY FAILED TO PROVE THAT IT HAD ACTUALLY CARRIED OUT AN Y BUSINESS ACTIVITY DURING A.Y. 2012-13 AND THE ASSETS ON WHICH DEPRECIATION H AD BEEN CLAIMED WERE ACTUALLY USED FOR THE PURPOSE OF BUSINESS. 3. 'THE APPELLANT PRAYS THAT THE ORDER OF THE CIT( APPEALS) ON THE ABOVE GROUND BE SET ASIDE AND THAT OF THE AO BE RESTORED. ' ITA NO.7115/MUM/2016 CHROMA ENERGY PVT. LTD. 2 4. 'THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER A NY GROUND OR ADD A NEW GROUND, WHICH MAY BE NECESSARY. 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE, A P RIVATE LIMITED COMPANY ENGAGED IN THE BUSINESS OF DESIGN AND DEVELOP CONCE NTRATED PHOTOVOLTAIC SYSTEM, FILED ITS RETURN OF INCOME FOR A.Y. 2012-13 ON 28.0 9.2012, DECLARING LOSS AT ` 46,37,639/-. THE CASE WAS SELECTED FOR SCRUTINY A ND NOTICE U/S. 143(2) AND 142(1) OF THE ACT WERE ISSUED. IN RESPONSE TO NOTI CES AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FILED V ARIOUS DETAILS AS CALLED FOR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AS SESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED VARIOUS EXPENSES INCLUDING DEP RECIATION HOWEVER, NEITHER HAS SHOWN SALE FROM BUSINESS ACTIVITY NOR ANY OTHER INC OME THEREFORE, CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY EXPENSES DEBITED TO P ROFIT & LOSS ACCOUNT SHALL NOT BE DISALLOWED. IN RESPONSE TO NOTICE, ASSESSEE VIDE L ETTER DATED 16.03.2015, SUBMITTED THAT THE BUSINESS OF THE ASSESSEE IS TO CREATE A ME THODOLOGY BY VIRTUE OF WHICH EFFICIENCY OF SOLAR POWER GENERATING SYSTEM COULD B E EMPOWERED. THE ASSESSEE HAD STARTED ITS BUSINESS ACTIVITY BY ENTERING INTO A JOINT DEVELOPMENT AGREEMENT WITH INDIAN INSTITUTE OF SCIENCE FOR RESEARCH ON VA RIOUS ASPECTS OF CPV TECHNOLOGY, FOR WHICH IT HAS INCURRED VARIOUS EXPENSES. DIRECT EXPENSES INCURRED IN RELATION TO RESEARCH AND DEVELOPMENT HAS BEEN CAPITALIZED HOWEV ER, THE EXPENDITURE INCURRED IN THE NATURE OF OVERHEAD EXPENSES HAS BEEN DEBITED TO PROFIT & LOSS ACCOUNT. THE ASSESSING OFFICER AFTER CONSIDERING RELEVANT SUBMIS SIONS OF THE ASSESSEE DISALLOWED EXPENSES CLAIMED INCLUDING DEPRECIATION ON ASSETS B Y OBSERVING THAT THE ASSESSEE FAILED TO FILE ANY EVIDENCE TO PROVE THAT IT HAS CO MMENCED ITS ACTIVITY AND ALSO PUT TO USE ASSETS ON WHICH DEPRECIATION HAS BEEN CLAIMED. RELEVANT PORTION IS EXTRACTED BELOW: 4.2 IN SIMILAR CIRCUMSTANCES THE ASSESSEE COMPANY WAS ASKED TO SHOW CAUSE HOW THE ABOVE EXPENSES CLAIMED ARE ALLOWABLE WHEN THERE IS NO BUSINESS ACTIVITY DURING THE YEAR. IT WAS ALSO REQU ESTED TO SUBSTANTIATE ITS CLAIM WITH EXPLANATION ALONGWITH SUPPORTING EVIDENC ES. IN RESPONSE TO SAID QUERY, THE ASSESSEE COMPANY HAS OFFERED ITS EXPLANATION VIDE LETTER DATED 16.03.2015 THAT THE B USINESS OF THE ASSESSEE IS TO CREATE A METHODOLOGY BY VIRTUE OF WH ICH THE EFFICIENCY OF ITA NO.7115/MUM/2016 CHROMA ENERGY PVT. LTD. 3 SOLAR POWER GENERATING SYSTEMS COULD BE IMPROVED. T HIS ENTAILED SETTING UP RESEARCH FACILITY AND IN THAT RESEARCH FACILITY CARRYING OUT THE REQUISITE RESEARCH OR SPADEWORK FOR CREATING THAT METHODOLOGY . ONCE THE ACTIVITY OF RESEARCH OF THAT METHODOLOGY COMMENCED THE BUSIN ESS WOULD CERTAINLY HAVE BEEN SAID TO HAVE COMMENCED. ONCE THIS HAPPENS THE COMPUTATION NECESSARILY HAS TO FALL WITHIN THE PARAMETERS OF HE PROVISIONS OF SECTIONS 28 TO 44. EACH EXPENDITURE THEREAFTER HAS TO BE TES TED ON THE TOUCHSTONE OF THE RELEVANT PROVISIONS OF SECTION 28 TO 44. 'FO R THE SAKE OF BREVITY THE EXPLANATION OF THE ASSESSEE IS PRODUCED HEREINABOVE ' PERUSAL OF THE DETAILS OF EXPENSES DEBITED TO P&L A /C AND REFLECTED IN SCHEDULE 2.15 OF THE SCHEDULES FORMING PART OF PROF IT & LOSS ACCOUNT REVEALS THAT THE ASSESSE HAS DEBITED OTHER EXPENSES TO THE TUNE OF RS. 7,17,160/-. OUT OF RS. 7,17,160/- AN AMOUNT OF RS. 1,53,416/- WAS INCURRED ON ACCOUNT OF ROC FEES & SHARES ISSUE EXPE NSES. DURING THE YEAR UNDER CONSIDERATION, THERE WAS AN I NCREASE IN SHARE CAPITAL, OF THE ASSESSEE. THE ASSESSEE WAS ASKED TO GIVE THE DETAILS OF - THE EXPENSES INCURRED FOR THE INCREASE IN SHARE CAP ITAL OF THE COMPANY AND ALSO EXPLAIN AS TO WHY THE EXPENSES PERTAINING TO SHARE CAPITAL SHOULD NOT BE CAPITALIZED. THE EXPENDITURE INCURRED BY THE ASSESSEE IN ISSUING SHARES WITH A VIEW TO INCREASE ITS CAPITAL COULD NOT AMOUNT TO REVENUE EXPENDITURE AND WOULD FALL UNDER CAPITAL EX PENDITURE. IT IS AN ESTABLISHED POSITION OF LAW THAT ANY EXPENDITURE IN CURRED BY A COMPANY IN CONNECTION WITH ISSUE OF SHARES WITH A VIEW TO INCR EASE ITS CAPITAL, IS A CAPITAL EXPENDITURE. IT IS ALSO SEEN THAT THE ASSESSEE HAS CLAIMED DEPRE CIATION OF RS.38,31,113/- IN COMPUTATION OF TOTAL INCOME. PREL IMINARY CONDITION OF SECTION 32(1) OF THE ACT IS THAT ' IN RESPECT OF DE PRECIATION OF ASSETS OWNED WHOLLY OR PARTLY, BY THE ASSESSEE AND USED FO R THE PURPOSE OF THE BUSINESS OR PROFESSION, DEDUCTION ON ACCOUNT OF 'DE PRECIATION' SHALL BE ALLOWED.' INDEED THE ASSETS ON WHICH DEPRECIATION W AS CLAIMED WAS OWNED BY THE ASSESSEE BUT THE SAME WAS NOT USED FOR THE PURPOSE OF THE BUSINESS AS THERE IS NO BUSINESS ACTIVITY CARRIED O UT OF THE ASSESSEE. HENCE, DEPRECIATION CLAIMED OF RS. 38,31,113/- IS D ISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. EXPLANATION OF THE ASSESSEE HAS BEEN PERUSED CAREFU LLY AND FOUND NOT SATISFACTORILY, AS ASSESSEE FAILS TO PROVE THAT THE ASSESSEE COMPANY HAS ACTUAL CARRIED OUT ANY BUSINESS ACTIVITY. UNLESS TH E ASSESSEE PROVE THAT ACTUAL BUSINESS ACTIVITY WAS CARRIED OUT BY THE ASS ESSEE THEN ALLOWABILITY OF DEDUCTION/EXPENDITURE ARISE. SINCE, NO BUSINESS ACTIVITY WAS CARRIED OUT BY THE ASSESSEE DURING THE YEAR, EXPENDITURE CL AIMED IN PRETEXTS OF BUSINESS ACTIVITY DESERVES TO BE DISALLOWED. IN VIE W OF THE ABOVE DISCUSSION AND CONSIDERING THE ASSESSEE EXPLANATION THE FOLLOWING ITA NO.7115/MUM/2016 CHROMA ENERGY PVT. LTD. 4 EXPENDITURE AMOUNTING TO RS. 45,85,395/-IS DISALLOW ED AND ADDED TO THE TOTAL INCOME. (I) FINANCE COST : RS. 37,122 (II) DEPRECIATION & AMORTISATION EXPENSES : RS. 696,270 (III) OTHER EXPENSES : RS. 7 ,17,160 (IV) DEPRECIATION CLAIMED IN COMPUTATION RS. 31,34.843/- ( 38,31,113 - 7,17,160/-) RS. 45,85, 395/- AS THE ASSESSEE HAS CONCEALED PARTICULARS OF INCOME AND FURNISHED INACCURATE PARTICULARS OF INCOME, PENALTY PROCEEDIN GS U/S 271(L)(C) OF THE ACT ARE INITIATED SEPARATELY. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PRE FERRED APPEAL BEFORE THE CIT(A). 3. BEFORE THE CIT(A) ASSESSEE HAS FILED ELABORATE W RITTEN SUBMISSIONS, WHICH HAS BEEN REPRODUCED AT PAGE NOS. 5 AND 6 OF THE CIT (A)S ORDER. THE SUM AND SUBSTANCE OF THE ARGUMENTS OF THE ASSESSEE BEFORE T HE CIT(A) ARE THAT IT HAS COMMENCED ITS BUSINESS ACTIVITY OF RESEARCH AND DEV ELOPMENT IN THE FIELD OF CPV TECHNOLOGY IN ASSOCIATION WITH INDIAN INSTITUTE OF SCIENCE. THE ASSESSEE HAS INCURRED VARIOUS EXPENSES, WHICH HAS BEEN CAPITALIZ ED PENDING AMORTIZATION. HOWEVER, THE EXPENDITURE IN THE NATURE OF RECURRING AND DAY TO DAY EXPENSES HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT, INCLUD ING DEPRECIATION OF FIXED ASSETS. THEREFORE, THE ASSESSING OFFICER ERRED IN DISALLOWI NG EXPENSES INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS ONLY FOR THE REASON THAT N O REVENUE HAS BEEN GENERATED FOR THE YEAR UNDER CONSIDERATION. THE LEARNED CIT(A) A FTER CONSIDERING RELEVANT SUBMISSIONS OF THE ASSESSEE OBSERVED THAT ASSESSEE HAS FILED VARIOUS DETAILS TO PROVE COMMENCEMENT OF BUSINESS IN THE FIELD OF RESE ARCH AND DEVELOPMENT TO MANUFACTURE SOLAR POWER GENERATING EQUIPMENTS AND T HE ASSETS ACQUIRED/PURCHASED WERE PUT TO USE FOR SUCH RESEARCH ACTIVITY DURING T HE YEAR AND, HENCE, CLAIM OF DEPRECIATION IS TENABLE U/S. 32 OF THE ACT. SINCE THE ASSESSEE HAS COMMENCED ITS BUSINESS BY ENGAGING ITSELF IN RESEARCH ACTIVITY SO EXPENSES FALL WITHIN THE PROVISIONS OF THE ACT AND ALLOWABLE AS BUSINESS EXPENDITURE. THE RELEVANT PORTION OF THE ORDER OF THE CIT(A) IS EXTRACTED BELOW: ITA NO.7115/MUM/2016 CHROMA ENERGY PVT. LTD. 5 I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND THE APPELLANT'S CONTENTION. IT IS HELD THAT A.O. ERRED IN DISALLOWI NG 'THE CLAIM OF DEPRECIATION' WITHOUT APPRECIATING THE FACT THAT TH E APPELLANT COMPANY IS ENGAGED INTO R&D TO MANUFACTURE THE SOLAR POWER GEN ERATING EQUIPMENTS AND THE ASSETS ACQUIRED /PURCHASED / CRE ATED WERE PUT TO USE FOR SUCH RESEARCH ACTIVITY DURING THE YEAR AND HENCE THE CLAIM OF DEPRECATION IS TENABLE U/S 32. IT IS SIGNIFICANT TO NOTE THAT, WHILE THE ASSESSING OFFICER ACCEPTS THE OWNERSHIP OF THE ASSE TS, HE DENIES DEPRECIATION ON THE GROUND THAT THEY HAVE NOT BEEN PUT TO USE. APPELLANT HAS AMPLY DEMONSTRATED THAT THE ASSETS OF THE COMPA NY HAVE BEEN PUT TO USE THE BUSINESS OF THE COMPANY. SO, THE USER TE ST HAS TO BE APPLIED IN THE CONTEXT OF THE S BUSINESS AND IS TO BE ALLOWED. FURTHER THE ASSESSING OFFICER DID NOT CONSIDER THE FACT THAT THE ACCOUNTS OF THE COMPANY WERE PREPARED IN CONSONANCE WITH THE ACCOUNTING POLICIES AND STANDARDS AND THE SAME, WERE AUDITED A S PER THE PROVISIONS OF COMPANY LAW BY THE STATUTORY AUDITORS. SO IT IS HELD THAT THE APPELLANT HAS COMMENCED ITS BUSINESS BY ENGAGING ITSELF IN THE RESEARCH ACTIVITY AND SO THE EXPENSES FALL WITHIN THE PROVISIONS OF THE ACT AND ARE ELIGIBLE AS ALLOWABLE BUSINESS EXPENSES. THE ADDITION OF THE A.O. ARE DELETED. GROUNDS OF AP PEAL NO.L TO 4 ARE ALLOWED. 4. THE LEARNED DR SUBMITTED THAT THE LEARNED CIT(A) ERRED IN DELETING THE ADDITIONS MADE BY THE ASSESSING OFFICER TOWARDS DIS ALLOWANCE OF VARIOUS EXPENSES INCLUDING DEPRECIATION ON ASSETS WITHOUT APPRECIATI NG THE FACT THAT THE ASSESSEE HAS NOT FILED ANY EVIDENCE TO PROVE COMMENCEMENT OF BUS INESS AND ALSO THE FACT THAT NO REVENUE HAS BEEN GENERATED FROM ITS BUSINESS ACT IVITY FOR THE YEAR UNDER CONSIDERATION. THE LEARNED AR FOR THE ASSESSEE, ON THE OTHER HAND, STRONGLY SUPPORTING THE ORDER OF THE CIT(A) SUBMITTED THAT T HE FINDING OF THE ASSESSING OFFICER TO DISALLOW VARIOUS EXPENSES IS ILLOGICAL A ND IRRELEVANT FOR THE REASON THAT EARNING OF REVENUE FROM THE BUSINESS ACTIVITY MAY N OT BE THE SOLE REASON FOR CLAIMING EXPENSES WHICH ARE WHOLLY AND EXCLUSIVELY INCURRED FOR BUSINESS ACTIVITY OF THE ASSESSEE. THE ASSESSEE HAS FILED VARIOUS DETAI LS TO PROVE ITS BUSINESS ACTIVITY AND ACQUISITION OF ASSETS FOR SUCH RESEARCH AND DEV ELOPMENT ACTIVITY. THEREFORE, THERE IS NO REASON FOR THE ASSESSING OFFICER TO DIS ALLOW LEGITIMATE EXPENSES INCURRED FOR BUSINESS PURPOSE. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. THE ASSESSEE HAS FILED NECESSARY EVIDENCE BEFORE TH E LOWER AUTHORITIES TO PROVE THAT ITA NO.7115/MUM/2016 CHROMA ENERGY PVT. LTD. 6 IT HAS COMMENCED ITS BUSINESS ACTIVITY OF RESEARCH AND DEVELOPMENT IN THE FIELD OF CPV TECHNOLOGY IN ASSOCIATION WITH INDIAN INSTITUTE OF SCIENCE FOR WHICH IT HAS INCURRED VARIOUS EXPENSES INCLUDING SALARY AND OTHE R EXPENSES WHICH HAS BEEN CAPITALIZED TO RESEARCH AND DEVELOPMENT EXPENDITURE . THE ASSESSEE ALSO CLAIMED CERTAIN EXPENSES, WHICH ARE IN THE NATURE OF GENERA L OVERHEAD EXPENSES INCLUDING DEPRECIATION ON ASSETS PUT TO USE FOR RESEARCH AND DEVELOPMENT ACTIVITY. THE ASSESSING OFFICER ACCEPTED THE FACT THAT THE ASSETS ON WHICH DEPRECIATION WAS CLAIMED WAS OWNED BY THE ASSESSEE BUT FURTHER OBSER VED THAT THE SAME WAS NOT USED FOR THE PURPOSE OF BUSINESS AS THERE IS NO BUS INESS ACTIVITY CARRIED OUT DURING THE YEAR UNDER CONSIDERATION FOR THE SOLE REASON TH AT NO REVENUE HAS BEEN GENERATED FROM THE BUSINESS ACTIVITY FOR THE YEAR U NDER CONSIDERATION. EXCEPT THIS, THE ASSESSING OFFICER HAS NOT BROUGHT OUT ANY OTHER EVIDENCE TO JUSTIFY HIS FINDING THAT THE ASSESSEE HAS NOT CARRIED OUT ANY BUSINESS ACTIVITY FOR THE YEAR UNDER CONSIDERATION. ON THE OTHER HAND, THE ASSESSEE HAS FILED VARIOUS DETAILS TO PROVE EXPENSES OF BUSINESS AND ALSO COMMENCEMENT OF BUSIN ESS ACTIVITY OF RESEARCH AND DEVELOPMENT IN THE FIELD OF CPV TECHNOLOGY IN ASSOC IATION WITH INDIAN INSTITUTE OF SCIENCE. THE ASSESSEE ALSO FILED VARIOUS EVIDENCE TO PROVE THAT THE ASSETS OWNED BY IT ARE INFACT PUT TO USE FOR ITS BUSINESS ACTIVI TY. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSING OFFICER HAVING B EEN ACCEPTED THE FACT THAT THE ASSESSEE HAS OWNED THE ASSETS COMPLETELY ERRED IN D ISALLOWING EXPENSES INCLUDING DEPRECIATION OF ASSETS ONLY FOR THE REASON THAT NO REVENUE HAS BEEN GENERATED FROM BUSINESS ACTIVITY. THE CIT(A) AFTER CONSIDERING RE LEVANT FACTS HAVE RIGHTLY DELETED THE ADDITIONS MADE BY THE ASSESSING OFFICER. WE, T HEREFORE, DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT(A) AND, HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE CIT(A) AND DISMISS THE APPEAL OF THE REVENUE. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 1 3 TH JULY 2018. SD/- SD/- (RAVISH SOOD) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED : 13 TH JULY, 2018. SA ITA NO.7115/MUM/2016 CHROMA ENERGY PVT. LTD. 7 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE C I T(A), MUMBAI. 4. THE C I T 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI