Dy.Commissioner of Income Tax, Bareilly V. M/s Dhampur Sugar Distillery Pvt. Ltd.,

ITA 73/LKW/2014

• Counselvise Citation: 7323714 RSA 2014
• Duration Of Justice: 1 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-03-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 10-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 11-02-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: AKSHAY KUMAR GUPTAC A
• Keywords: Business income; Depreciation; Business expenditure; Revenue expenditure; Capital expenditure
• Section: 32; 37

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NO.73/LKW/2014 ASSESSMENT YEAR:2009 - 10 M/S DHAMPUR SUGAR DISTILLERY PVT. LTD., VILL. & POST - ASMOLI, DISTT - MORADABAD. VS DY.C.I.T., CENTRAL CIRCLE, BAREILLY. (RESPONDENT) (APPELLANT) SHRI P. K. DEY, D. R. APPELLANT BY SHRI AKSHAY KUMAR GUPTA,C.A. RESPONDENT BY 10/02/2015 DATE OF HEARING 12 /03/2015 DATE OF PRONOUNCEMENT O R D E R PER A. K. GARODIA, A.M. THIS IS REVENUES APPEAL DIRECTED AGAINST THE ORDER PASSED BY LEARNED CIT(A), BAREILLY DATED 04/11/2013 FOR THE ASSESSMENT YEAR 2009 - 2010. 2. GROUND NO. 1 IS AS UNDER: 1. THE LEARNED CIT(A), BAREILLY HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION OF RS.46,43,692/ - ON ACCOUNT OF DISALLOWING DEPRECIATION WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 3. LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LE ARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). HE ALSO SUBMITTED THAT AS PER PAGE NO. 9 OF THE PAPER BOOK WHERE DETAILS OF PREOPERATIVE EXPENSES ARE AVAILABLE, IT CAN BE SEEN THAT SUCH EXPENSES WERE COMPUTED AFTER DEDUCTING SALES DURIN G TRIAL RUN PERIOD OF 465.67 LAC AND THEREFORE, DEPRECIATION SHOULD BE ALLOWED FOR FULL YEAR BECAUSE SALE WAS THERE EVEN BEFORE COMMENCEMENT OF COMMERCIAL PRODUCTION. 2 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER BY MAKING THIS OBSERVATION IN PARA 3 OF THE ASSESSMENT ORDER THAT THE EXPENDITURE INCURRED BEFORE THE COMMENCEMENT OF COMMERCIAL PRODUCTION IS NOT ALLOWABLE AND THE SAME IS TO BE CAPITALIZED. ON PAGE NO. 9 OF THE PAPER BOOK ALSO, WE FIND THAT THE ASSESSEE HAS CLAIMED INCURRING OF TOTAL PREOPERATIVE EXPENSES OF RS.711.65 LAC AND FROM THE SAME , THE ASSESSEE HAS REDUCED VARIOUS INCOME SUCH AS INTEREST ON FDR, S ALES AND INCREASE IN STOCK ETC. AND EXPENSES WAS WORKED OUT IN THIS MANNER OF RS.17.40 LAC . T HE ASSESSEE HAS ADDED THE EXPENSES OF PRECEDING YEAR OF RS.63.83 LAC AND TOTAL SUCH EXPENSES OF RS.81.24 LAC WERE CAPITALIZED. THE EXPENSES CLAIMED IN THE PRESENT YEAR AS PREOPERATIVE EXPENSES INCLUDES SALARY AND WAGES TO EMPLOYEES ALONG W ITH OTHER VARIOUS ALLOWANCES TO THEM, VEHICLE RUNNING AND MAINTENANCE APART FROM OTHER EXPENSES AND HENCE, THIS IS ADMITTED POSITION AS PER THE ASSESSEE ALSO THAT ALL THE EXPENSES INCURRED UP TO 13 TH OCTOBER, 2008 ARE TO BE CAPITALIZED. BY THE SAME LOGIC, EVEN IF IT IS ACCEPTED THAT VARIOUS THINGS SUCH AS GOODWILL, COMPUTER, FURNITURE ETC. WERE BEING USED IN COURSE OF TRIAL RUN OF THE ASSESSEE COMPANY, THE EXPENSES INCURRED FOR THAT PURPOSE HAVE TO B E CAPITALIZED BECAUSE IT WILL INCREASE THE PREOPERATIVE EXPENSES OF THE CURRENT YEAR BY THIS AMOUNT . THE DISALLOWANCE OF DEPRECIATION RESULTS INTO THE SAME THING BECAUSE THE EXPENSES REMAINED CAPITALIZED AS WDV OF THE CONCERNED ASSET BECAUSE THE WDV DOES NOT DE CREASE WHEN DEPRECIATION IS DISALLOWED. 5. MOREOVER, AS PER THE RELEVANT PROVISO TO SECTION 32(1) OF THE ACT, IT HAS BEEN SPECIFIED THAT IF AN ASSET REFERRED TO IN CLAUSE (I) OR CLAUSE (II) OR CLAUSE (IIA) ARE USED FOR A PERIOD BELOW 180 DAYS FOR TH E PURPOSE OF BUSINESS THEN DEPRECIATION NORMALLY ALLOWED SHOULD BE REDUCED TO 50%. CLAUSE (II) OF SUB SECTION (1) OF SECTION 32 OF THE ACT INCLUDES KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENCES, FRANCHISES OR ANY OTHER BUSINESS 3 OR COMMERCIAL RIGHTS OF SIMILAR NATURE, BEING INTANGIBLE ASSETS AND THEREFORE, GOODWILL IS ALSO COVERED BY THIS CLAUSE (II) OF SUB SECTION (1) OF SECTION 32. OTHER ASSETS BEING COMPUTER ETC. ARE COVERED BY CLAUSE (I) OF SUB SECTION (1) OF SECTION 32 AND THEREFORE, THIS PROVIS O IS APPLICABLE TO ALL THE ASSETS. NOW THE QUESTION IS WHETHER THE USE OF THE ASSETS FOR TRIAL RUN CAN BE CONSIDERED AS USE OF THE ASSET FOR THE PURPOSE OF BUSINESS. IN OUR CONSIDERED OPINION, WHEN THE SALE PROCEEDS IS NOT CONSIDERED AS BUSINESS RECEIPT AND THE EXPENSES INCURRED FOR PRODUCING THE GOODS IN COURSE OF TRIAL RUN ARE NOT CONSIDERED BUSINESS EXPENDITURE, IT CANNOT BE SAID THAT THE ASSETS USED IN COURSE OF TRIAL RUN WERE USED FOR BUSINESS PURPOSES PARTICULARLY IN VIEW OF THIS PROVISO OF SECTION 32(1) OF THE ACT. HENCE, IN OUR CONSIDERED OPINION, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER TO THE EXTENT OF 50% OF THE DEPRECIATION ON GOODWILL, COMPUTER, FURNITURE ETC. IS JUSTIFIED. REGARDING THE DECISION OF CIT(A), WE FIND THAT HIS DECISION I S ON THE BASIS THAT FURNITURE, COMPUTER AND OFFICE EQUIPMENTS ARE INSTALLED IN THE ADMINISTRATIVE OFFICE WHICH REMAINED IN USE DURING THE INSTALLATION AND TRIAL RUN PERIOD. THE QUESTION IS NOT AS TO WHETHER THE ASSE TS IN QUESTION WERE USED OR NOT BUT THE QUESTION IS AS TO WHETHER SUCH USE WAS FOR BUSINESS PURPO SE OR NOT. WHEN THE BUSINESS HAS NOT COMMENCED, HOW IT CAN BE SAID THAT THE ASSETS WERE USE D FOR BUSINESS PURPOSES. IT IS ADMITTED POSITION OF LAW THAT ANY EXPENDITURE INCURRED DURING THE TRIAL RUN PERIOD OR INSTALLATION PERIOD HAS TO BE CAPITALIZED AND BY THIS LOGIC, EXPENSES INCURRED ON ACCOUNT OF DEPRECIATION DURING INSTALLATION PERIOD OR TRIAL RUN PERIOD IS NOT ALLOWABLE AS BUSINESS EXPENSES BUT SAME IS TO BE CAPITALIZED. DISALLOWANCE OF DEPREC IATION GIVES THE SAME RESULT BECAUSE BY WAY OF DISALLOWANCE OF DEPRECIATION, THE VALUE OF ASSETS IN QUESTION DOES NOT GO DOWN AND THEREFORE, THE EXPENDITURE REMAINS CAPITALIZED. HENCE, IN VIEW OF THE ABOVE DISCUSSION, WE REVERSE THE ORDER OF CIT(A) AND RE STORE THAT OF THE ASSESSING OFFICER. ACCORDINGLY, GROUND NO. 1 IS ALLOWED. 4 6. GROUND NO. 2 IS AS UNDER: 2. THAT THE CIT(A), BAREILLY HAS ERRED IN LAW AND ON FACTS OF THE CASE IN DELETING THE ADDITION OF RS.7,01,300/= - ON ACCOUNT OF DISALLOWING LEGAL EX PENSES WITHOUT VERIFYING THE FACTS ON RECORDS AND ASSIGNING ANY LOGICAL REASON. 7. LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). A QUERY WAS RAISED BY THE BENCH AS TO WHAT WAS THE PURPOSE FOR OPENING ESCROW ACCOUNT FOR WHICH THIS LEGAL FEES OF RS.7,01,300/ - WAS PAID ON ACCOUNT OF DRAFTING OF ESCROW ACCOUNT AGREEMENT. IN REPLY, IT WAS SUBMITTED BY THE ASSESSEE THAT ESCROW ACCOUNT WAS OPENED IN COURSE OF RAISING O F SHARE CAPITAL. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THIS ISSUE WAS DECIDED BY LEARNED CIT(A) AS PER FOLLOWING PARA ON PAGE NO. 3 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: - I HAVE CAREFULLY CONSIDER ED THE GROUND OF APPEAL, PERUSED THE ASSESSMENT ORDER AND GONE THROUGH THE DETAILED WRITTEN SUBMISSIONS OF THE AR FOR THE APPELLANT. FOR ALLOWABLE EXPENDITURE UNDER SECTION 37(1), THE MONEY PAID OUT OR AWAY MUST BE (A) PAID OUT WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF THE BUSINESS OR PROFESSION; AND FURTHER (B) MUST NOT BE; (I) CAPITAL EXPENDITURE; (II) PERSONAL EXPENSE; OR (III) AN ALLOWANCE OF THE CHARACTER DESCRIBED IN SECTIONS 30 TO 36. IN THE CASE BEFORE ME, THE APPELLANT HAS INCURRED LEGAL AND PROFE SSIONAL CHARGES OF RS.11,73,029/ - (RS. ELEVEN LAC SEVENTY THREE THOUSAND TWENTY NINE ONLY) OUT OF WHICH RS.4,71,729/ - RELATES TO NORMAL BUSINESS EXPENDITURE ALLOWABLE U/S 37 OF I.T. ACT. FURTHER THE AMOUNT OF RS.7,01,300/ - BEING LEGAL FEES PAID TO DRAFTIN G OF ESCROW ACCOUNT AGREEMENT INCLUDING RS.6,36,300/ - CHARGED BY HSBC BANK FOR MAINTENANCE OF ESCROW ACCOUNT WHICH IS ALSO NORMAL BUSINESS EXPENDITURE ALLOWABLE U/S 37 OF I.T. ACT. THERE IS NOTHING ON RECORD TO REBUT THE EXPLANATION OF THE APPELLANT. IN TH E FACTS AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE AS MADE BY THE AO IS NOT FOUND SUSTAINABLE AND THE SAME IS DELETED. IN THE RESULT THE APPEAL IS ALLOWED. 5 9. WE FIND THAT AS PER THE ASSESSMENT ORDER, THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER ON THE BASIS THAT THE EXPENSES INCURRED IS CAPITAL IN NATURE. THIS IS ADMITTED BY LEARNED A.R. OF THE ASSESSEE BEFORE US THAT THE ESCROW ACCOUNT WAS OPENED IN COURSE OF RAISING OF FRESH SHARE CAPITAL AND HENCE , AS HELD IN THE JUDGMENT OF HON'BLE A PEX COURT RENDERED IN THE CASE OF BROOKE BOND INDIA LTD. VS. CIT, 225 ITR 798 AND VARIOUS OTHER JUDGMENTS, IT IS SETTLED LEGAL POSITION THAT EXPENSES INCURRED FOR RAISING SHARE CAPITAL IS CAPITAL EXPENDITURE AND SAME IS NOT ALLOWABLE AS REVENUE EXPENDITURE . HENCE, RESPECTFULLY FOLLOWING THIS JUDGMENT OF HON'BLE APEX COURT, WE HOLD THAT THE ORDER OF CIT(A) ON THIS ISSUE IS NOT SUSTAINABLE AND THEREFORE, WE REVERSE THE SAME AND RESTORE THAT OF THE ASSESSING OFFICER BECAUSE THE EXPENDITURE IN QUESTION WAS INC URRED BY THE ASSESSEE ON ACCOUNT OF LEGAL FEES PAID FOR DRAFTING OF ESCROW ACCOUNT AGREEMENT AND THIS ESCROW ACCOUNT WAS ADMITTEDLY REQUIRED TO BE OPENED FOR FACILITATING RAISING OF FRESH SHARE CAPITAL. ACCORDINGLY, GROUND 2 OF THE REVENUE IS ALLOWED. 10. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS ALLOWED. (ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT M EMBER DATED: 12 /03/2015. *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1.THE APPELLANT 2.THE RESPONDENT. 3.CONCERNED CIT 4.THE CIT(A) 6 5.D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR