ECO AXIS SYSTEMS P.LTD, MUMBAI V. DCIT RG 2(1), MUMBAI

ITA 730/MUM/2013

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 4449 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-08-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 07-05-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 28-01-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Assessee Lawyers: MIHIR SHAH
• Keywords: Business income; Cost of acquisition; Capital receipt; Revenue expenditure
• Section: 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI BEFORE SHRI C N PRASAD, JUDICIAL MEMBER & SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.730/MUM/2013 ASSESSMENT YEAR : 2008 - 09 M/S. ECO AXIS SYSTEMS PRIVATE LIMITED, 43, DR. V B GANDHI MARG, FORT, MUMBAI 400 023. PAN AAACF8154H VS. DY CIT RANGE 2(1), MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI NITESH JOSHI & SHRI MIHIR SHAH RESPONDENT BY : SHRI V JUSTIN DATE OF HEARING : 2 0 .0 6 .201 8 DATE OF PRONOUNCEMENT : 10 .0 8 . 201 8 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER THIS APPEAL BY ASSESSEE ARISES OUT OF THE ORDER OF THE CIT(A) 4 , MUMBAI, DATED 08.11.2011, WHICH IN TURN HAS ARISEN OUT OF T HE ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3) OF THE INCOME TAX ACT, 1961 (HE REINAFTER REFERRED TO AS THE ACT) RELATING TO A.Y. 2008-09. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)] HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER ( AO) IN HOLDING THAT RECEIPT ON SALE OF 3 ALYGN MACHINES OF RS. 59,20,84 9/- AND RENT OF RS. 64,200/- IS A REVENUE RECEIPT LIABLE TO TAX. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE DIRECTED THE AO TO REDUCE THE AFORESAID AMOUNTS FROM THE CAPITAL WO RK IN PROGRESS (PRODUCT DEVELOPMENT EXPENDITURE (RCS)). ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 2 2. WITHOUT PREJUDICE TO GROUND 1, THE LD CIT(A) H AS ERRED IN CONFIRMING THE ACTION OF THE AO IN NOT ALLOWING DEDUCTION OF I NDIRECT EXPENSES OF RS.44,21,635/- WHILE TREATING THE RECEIPT ON SALE O F 3 ALYGN MACHINES AS REVENUE RECEIPT. THE LD. CIT(A) HAS FURTHER ERRED I N HOLDING THAT INDIRECT EXPENSES ARE OVERHEAD EXPENSES AND THEY ARE NOT DIR ECTLY CONNECTED OR IDENTIFIABLE WITH THE MACHINES SOLD. ON THE FACTS A ND CIRCUMSTANCES OF THE CASE, INDIRECT EXPENSES OF RS. 44,21,635/-, WHICH A RE DEBITED TO CAPITAL WORK IN PROGRESS, OUGHT TO BE ALLOWED AS DEDUCTION IN TAXING THE RECEIPT ON SALE OF 3 ALYGN MACHINES AS REVENUE RECEIPT. 3. WITHOUT FURTHER PREJUDICE TO GROUND 1 ABOVE, T HE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE AO IN ADOPTIN G THE COST OF PURCHASE 3 ALYGN MACHINES SOLD AT RS. 7,22,853/- AS AGAINST RS. 16,12,630/- BEING ACTUAL COST OF PURCHASE INCURRED BY THE APPELLANT. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE PURCHASE COST OUGHT TO BE TAKEN AT RS. 16,12,630/- AND NOT RS.7,22,853/- ADOPTED BY THE AO . 4. LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLO WANCE OF EXPENSES OF RS. 51,15,880/- MADE BY THE AO BY TREATING THESE EX PENSES AS RELATABLE TO CAPITAL WORK IN PROGRESS (CWIP) AND THUS, CAPITA LISING THE SAME TO CWIP. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AN D IN LAW, THE SAID EXPENSES OUGHT TO BE ALLOWED AS REVENUE EXPENDITURE . 3. THE ISSUE RAISED IN GROUND NO.1 IS AGAINST THE C ONFIRMATION OF THE ACTION OF THE ASSESSING OFFICER IN HOLDING THE RECEIPT ON SAL E OF 3 ALYGN MACHINES FOR ` 59,20,849/- AND RENT OF ` 64,200/- AS REVENUE IN NATURE AND LIABLE TO TAXED . ACCORDING TO THE ASSESSEE THE SAME WERE CAPITAL IN NATURE AS THE SAID SALE WAS MADE OF TRIAL/DEMO MACHINES AND THE RENT WAS RECE IVED WHEN THE PROJECT WAS IN THE DEVELOPMENT STAGE AND THE EXPENDITURE INCURRED IN CONNECTION THERE WITH WERE DEBITED TO THE CAPITAL WORK-IN-PROGRESS ACCOUNT (PR ODUCT DEVELOPMENT EXPENDITURE (RCS)). THE FACTS IN BRIEF ARE THAT THE ASSESSEE I S ENGAGED IN THE BUSINESS OF PROVIDING INTEGRATED SOLUTIONS, MACHINE-TO-MACHINE TECHNOLOGY (M2M), A CONCEPT WHEREIN THE PERFORMANCE OF INDUSTRIAL EQUIPMENT IS REMOTELY MONITORED, ANALYZED AND CORRECTED TO IMPROVE MACHINE AND PROCESS RELIAB ILITY. DURING THE ASSESSMENT ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 3 PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLOSING WORK-IN- PROGRESS AT ` 5,67,66,927/-, WHICH IS COMPRISED OF FOLLOWING: CAPITAL WIP (SOFTWARE) ` 91,33,547/- PRODUCT DEVELOPMENT EXPENSES (RCS) ` 1,87,33,460/- PRODUCT DEVELOPMENT EXPENSES (RMD) ` 2,88,99,921/- TOTAL ` 5,67,66,927/- THE ASSESSING OFFICER FURTHER OBSERVED THAT THE ASS ESSEE HAS CREDITED INCOME TOTALING TO ` 59,20,849/- FROM THE SALE PROCEEDS OF 3 ALYGN MACH INE TO M/S. RAJA BISCUITS, M/S. COLE AND M/S. ESDEE AND RENT INCOME OF ` 64,200/- TO CAPITAL WORK-IN- PROGRESS ACCOUNT. ACCORDINGLY, THE ASSESSEE WAS AS KED TO EXPLAIN AS TO WHY THE SAME SHOULD NOT BE TREATED AS SALE FOR THE YEAR UND ER CONSIDERATION, TO WHICH, THE ASSESSEE VIDE LETTER DATED 06.08.2010 SUBMITTED THA T THE ASSESSEE COMPANY IS DEVELOPING M2M AND RCS PRODUCT WHICH IS UNDER DEVEL OPMENT STAGE AND ALL THE EXPENSES INCURRED/INCOME RECEIVED IN CONNECTION THE RE TO WERE DEBITED/CREDITED UNDER THE HEAD PRODUCT DEVELOPMENT EXPENDITURE. TH E ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE SALE REALIZATION OF ` 59,20,846/- WERE FROM TRIAL/DEMO PRODUCTS/MACHINES AND, THEREFORE, CREDITED TO PRODU CT DEVELOPMENT EXPENDITURE AS IT WAS THE DURING THE DEVELOPMENT PERIOD OF THE PRO DUCT. THE ASSESSEE HAS RELIED ON COUPLE OF DECISIONS VIZ. CIT VS. BOKARO STEEL LT D. (SC) 236 ITR 315; INDIAN OIL PANIPAT POWER CONSORTIUM LTD. VS. ITO 315 ITR 255 ( DEL) TO DEFEND ITS CASE. THE SUBMISSIONS OF THE ASSESSEE DID NOT FIND FAVOUR WIT H THE ASSESSING OFFICER AND THE ASSESSING OFFICER TREATED THE SALE AS SALE OF FULLY DEVELOPED MACHINES AS PER THE ALTERATIONS REQUIRED TO SUIT THE BUYER. THE ASSESS ING OFFICER ALSO DISTINGUISHED THE ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 4 CASE LAWS RELIED UPON BY THE ASSESSEE AND THUS, AFT ER ALLOWING EXPENSES OF ` 14,75,553/- MADE NET ADDITION OF ` 45,09,496/-. 4. IN THE APPELLATE PROCEEDINGS, THE CIT(A) ALSO CO NFIRMED THE ADDITION MADE BY THE ASSESSING OFFICER BY OBSERVING AS UNDER: 5. I HAVE CONSIDERED THE FACTS OF THE CASE AND SUB MISSIONS OF THE ASSESSEE. PRODUCT DEVELOPMENT IS A CONTINUOUS PROCE SS OF THE ASSESSEE AND IT KEEPS ON GOING, WHEREAS, A.O. HAS RIGHTLY OB SERVED THAT THE MACHINE SOLD MUST HAVE BEEN EITHER COMPLETE AND REQ UIRED NO FURTHER DEVELOPMENT OR THEY MUST HAVE BEEN AT A STAGE WHICH COULD BE COMMERCIALLY OR INDUSTRIALLY USED BY THE BUYER AND, THEREFORE, SALE OF THE MACHINE SHOULD BE TREATED AS INCOME OF THE ASSESSEE AND NEED NOT BE REDUCED FROM COST OF THE PRODUCTS. THE CLAIM OF THE ASSESSEE THAT IT HAS GIVEN A DIFFERENT TREATMENT IN THE BOOKS OF ACCOUNT WILL HAVE NO IMPACT ON THE TAXABILITY OF ANY SUCH RECEIPT BECAUSE ASSES SEE CAN GIVE ANY TREATMENT AS IT LIKES OR AS MAY BE RECOMMENDED BY A CCOUNTING BODIES BUT FOR INCOME-TAX PURPOSES IT IS NOT NECESSARY THA T THE SAME VIEW IS FOLLOWED. THE SALE CONSIDERATION IS CLEARLY TAXABLE . THE CASE LAW CITED BY THE ASSESSEE HAVE ALREADY BEEN DEALT BY THE A.O. AN D I FULLY AGREE WITH THE A.O. ON THIS ISSUE THAT THE FACTS OF THE ASSESS EE'S CASE ARE DIFFERENT FROM THE FACTS OF THE CASE LAWS CITED BY THE ASSESS EE. THEREFORE, THE SALE CONSIDERATION ON SALE OF THE THREE MACHINES IS TAXA BLE IN THE YEAR UNDER CONSIDERATION AND SIMILARLY RENTAL INCOME IS ALSO T AXABLE IN THE YEAR UNDER CONSIDERATION BECAUSE PRODUCT DEVELOPMENT 6. THE ASSESSEE HAS ALSO CLAIMED THAT WHILE TREATI NG THE SALE OF THREE MACHINES AND RENTAL INCOME AS INCOME PERTAINI NG TO THIS YEAR AND TAXABLE, A.O. HAS ONLY ALLOWED THE DIRECT EXPENSES AND INDIRECT EXPENSES HAVE NOT BEEN ALLOWED. WHEREAS, INDIRECT EXPENSES A RE OVERHEAD EXPENSES AND THEY ARE NOT DIRECTLY CONNECTED OR IDE NTIFIABLE WITH THE THREE MACHINES SOLD BY THE ASSESSEE. THERE IS NO RE ASON OR BASIS FOR ALLOCATION OF ANY INDIRECT EXPENSES TO THE MACHINE SOLD. IN ANY CASE, IT IS NOT THAT THESE EXPENSES ARE NOT ALLOWED TO THE ASSE SSEE. THEY ARE ALLOWED TO BE CAPITALIZED AS COST OF THE OTHER MAJO R PRODUCTS AND, THEREFORE, THIS CLAIM OF THE ASSESSEE IS ALSO REJEC TED. 7. THE ASSESSEE HAS ALSO CLAIMED THAT THE PURCHASE COST HAS BEEN WRONGLY ALLOWED AND IT SHOULD HAVE BEEN HIGHER AMOU NT, WHEREAS, A.O. HAS PROPERLY CONSIDERED AND ALLOWED THE PURCHASE CO ST. IF THERE IS ANY ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 5 SUCH MISTAKE THEN THE ASSESSEE COULD HAVE APPLIED F OR RECTIFICATION U/S. 154 BUT ASSESSEE DOES NOT APPEAR TO HAVE APPLIED FO R RECTIFICATION BECAUSE NO SUCH EVIDENCE HAS BEEN FILED AND, THEREF ORE, THE CLAIM OF THE ASSESSEE IS REJECTED. IN RESULT, THE GROUNDS OF APP EAL OF THE ASSESSEE ARE DISMISSED. 5. THE LEARNED AR VEHEMENTLY SUBMITTED BEFORE US TH AT THE ORDER PASSED BY THE LEARNED CIT(A) IS GROSSLY WRONG AND AGAINST THE FAC TS ON RECORD. HE FURTHER SUBMITTED THAT THE ASSESSEE WAS DEVELOPING A PRODUC T, WHICH WAS IN THE GESTATION PERIOD. DURING THAT PERIOD WHATEVER EXPENSES WERE I NCURRED ON DEVELOPMENT, NET OF RECOVERIES WERE DEBITED TO THE PRODUCT DEVELOPMENT ACCOUNT AND WHATEVER AMOUNTS WERE REALISED BY SALE OF DEMO/TRIAL PRODUCT S OR BY RECOVERY BY WAY OF RENT ON THE PROJECT SIDE WERE CREDITED TO PRODUCT DEVELO PMENT ACCOUNT, WHICH IS IN LINE WITH THE GENERALLY ACCEPTED ACCOUNTING STANDARD AND ALSO THE RATIO LAID DOWN BY THE APEX COURT AND OTHER JUDICIAL FORUMS. THE LEARNED AR STATED THAT THE ASSESSEE IS ENGAGED IN DEVELOPMENT OF INTEGRATED SOLUTIONS AND MACHINE TO MACHINE TECHNOLOGY FOR IMPROVING THE PERFORMANCE OF INDUSTRIAL EQUIPME NTS ACCORDING TO THE BUSINESS REQUIREMENTS, IMPROVE THE QUALITY OF THE PRODUCT AN D ENHANCE THE PRODUCT RELIABILITY. THE LEARNED AR ARGUED THAT THE SALE O F 3 ALYGN MACHINES TO THREE PARTIES VIZ. M/S. RAJA BISCUITS, M/S. COLE AND M/S. ESDEE D URING THE YEAR, WERE IN FACT TRIAL/DEMO MACHINES, WHICH WERE PART OF PRODUCT DEV ELOPMENT PROCESS OF THE ASSESSEE AND, THUS, WERE SOLD SO THAT FURTHER IMPRO VEMENT COULD BE MADE ON THESE MACHINES AND THE PRODUCT WHICH IS FINALLY DEVELOPED AS FINISHED PRODUCT IS OF HIGH STANDARD SO THAT ASSESSEE COULD ESTABLISH ITS NAME IN THE MARKET. THE LEARNED AR SUBMITTED THAT EVEN A SLIGHT DEFECT OR MALFUNCTIONI NG OF THE MACHINE COULD LEAD TO PRODUCT FAILURE, WHICH MAY CAUSE HUGE DAMAGE TO THE REPUTATION OF THE ASSESSEE ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 6 AND ENTAIL HUGE FINANCIAL LOSS. THE LEARNED AR ALS O BROUGHT TO THE NOTICE OF THE BENCH THE CLASSIFICATION OF THE SAID EXPENSES AS CA PITAL WORK-IN-PROGRESS INCLUDING PRODUCT DEVELOPMENT EXPENSES SHOWN UNDER THE HEAD FIXED ASSETS AND THE AMOUNT DURING THE YEAR WAS ` 5,67,66,727/- VIZ-A-VIZ ` 2,09,38,494/- IN THE CORRESPONDING PREVIOUS YEAR. WHILE REFERRING TO PA GE 257 OF THE PAPER-BOOK, THE LEARNED COUNSEL SUBMITTED THAT THE SAID FACT WAS DU LY DISCLOSED BY THE ASSESSEE BY WAY OF NOTE UNDER THE SCHEDULE 18 NOTES TO ACCOUNT , STATING THAT CAPITAL WORK-IN- PROGRESS REPRESENTS PROJECT DEVELOPMENT EXPENSES IN CURRED IN DEVELOPING COMPANYS PRODUCTS AND AFTER COMPLETION OF THE PROJ ECT I.E. AVAILABLE FOR COMMERCIAL SALE, THE EXPENSES WILL BE AMORTIZED BASED ON ECONO MIC USEFUL LIFE AS ESTIMATED BY THE MANAGEMENT AND SIMILARLY GOODWILL (INCLUDED AS INTANGIBLE ASSET UNDER FIXED ASSET) WILL ALSO BE AMORTIZED FROM THE PERIOD THE P ROJECT DEVELOPMENT EXPENSES ARE CAPITALIZED. IT WAS ALSO STATED IN THE SAID NOTE T HAT COMPANY HAD SOLD TRIAL/DEMO MACHINES DURING THE YEAR, WHICH WERE REGARDED AS PR OJECTS UNDER DEVELOPMENT AND PENDING THE COMPLETION OF PROJECT, SALES AMOUNTING TO ` 59,20,849/- WERE REDUCED FROM THE PROJECT DEVELOPMENT EXPENSES. THE LEARNED AR FURTHER ARGUED THAT THE DEPARTMENT HAS NOT DOUBTED THE FACT THAT THE PROJEC TS WERE UNDER DEVELOPMENT DURING THE YEAR IN AS MUCH AS THE REVENUE HAS NOT D ISPUTED THE CAPITALIZATION OF THE EXPENSES. HE FURTHER POINTED OUT THAT IN THE NEXT YEAR THE ASSESSEE HAS CAPITALIZED THE EXPENSES BY REFERRING TO THE TAX AUDIT REPORT, WHICH WAS PLACED BEFORE THE BENCH, WHEREIN THE ASSESSEE HAS CAPITALIZED THE AMO UNT TO THE TUNE OF ` 2,78,61,279/- UNDER THE HEAD INTANGIBLE ASSETS SUB HEAD ALYGN REGISTER CONTROL SYSTEM. THUS, THE LEARNED COUNSEL ARGUED THAT THE APPROACH OF THE DEPARTMENT IS ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 7 WRONG AND INCONSISTENT IN VIEW OF THE FACT THAT TH E DEPARTMENT HAS ALLOWED THE EXPENSES TO BE CAPITALIZED DURING THE TRIAL WITHOUT DISPUTING THE SAME WHEREAS DISPUTED THE RECEIPTS FROM SALE OF DEMO/TRIAL PRODU CTS AND RENT RECOVERIES AS CAPITAL IN NATURE. THE LEARNED AR FURTHER BROUGHT TO THE N OTICE OF THE BENCH THE GUIDANCE NOTE ON TREATMENT OF EXPENDITURE DURING THE CONSTRU CTION PERIOD AND SUBMITTED THAT THE SAID GUIDANCE NOTE SPECIFICALLY PROVIDED I N PARA 11.4 THAT WHATEVER INCOME IS EARNED DURING THE TRIAL RUN THROUGH SALE OF THE MERCHANDISE PRODUCE OR MANUFACTURED PRODUCTS, THE SAME SHOULD BE SET OFF A GAINST THE INDIRECT EXPENDITURE INCURRED DURING THE PERIOD OF DEVELOPMENT /TEST RUN S. HE FURTHER REFERRED TO OTHER PARAS OF THE GUIDANCE NOTE VIZ. 15.2 AND 17.11 TO R EINFORCE HIS ARGUMENTS. FINALLY, THE LEARNED AR SUBMITTED THAT THE ORDER OF THE CIT( A) IS BAD IN LAW IN VIEW OF THE FACT THAT THE SALE OF DEMO/TRIAL PRODUCTS WERE TRE ATED AS NORMAL SALE AND, THUS, DENIED THE ASSESSEE SET OFF AGAINST THE REVENUE EXP ENDITURE INCURRED ON PRODUCT DEVELOPMENT, WHICH WAS IN PROGRESS DURING THE YEAR. WHILE RELYING ON THE DECISIONS OF THE TRIBUNAL IN THE CASE OF INTERNATIONAL SEAPOR TS (HALDIA) PVT. LTD. IN ITA NO. 1194/KOL/2010 FOR A.Y. 2004-05 AND GUJARAT STATE FE RTILIZERS & CHEMICALS LTD. IN ITA NO. 3228 & 3358/AHD/2003 FOR A.Y 1999-2000, THE LEA RNED AR PLEADED THAT THE ORDER OF THE CIT(A) MAY BE SET ASIDE AND THE ASSESS ING OFFICER BE DIRECTED TO REDUCE THE AMOUNT OF SALE OF ALYGN MACHINES FROM T HE THREE PARTIES AS ALSO THE RENTAL RECEIPTS FROM THE PROJECT DEVELOP EXPENSES A CCOUNT AS HAS BEEN CLAIMED BY THE ASSESSEE. 6. THE LEARNED DR, ON THE OTHER HAND, HEAVILY RELIE D ON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE SALE OF TH REE MACHINES TO THREE DIFFERENT ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 8 PARTIES REPRESENTED REGULAR SALES AND NOT SALE OF T RIAL/DEMO PRODUCTS DURING THE PRODUCT DEVELOPMENT AS THE ASSESSEE HAS FULLY DEVEL OPED THE MACHINES AND THE SAME WERE ALTERED AND TUNED TO THE REQUIREMENTS OF THE RESPECTIVE BUYERS. THE LEARNED DR ALSO DISTINGUISHED THE DECISIONS RELIED UPON BY THE LEARNED AR BY SUBMITTED THAT THE FACTS OF THESE CASES ARE DIFFERE NT AND, THEREFORE, THE SAME ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE. 7. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE ORDERS OF THE AUTHORITIES BELOW AND T HE DECISIONS RELIED ON BY THE LEARNED AR. THE UNDISPUTED FACTS OF THE CASE ARE T HAT THE ASSESSEE IS ENGAGED IN THE DEVELOPMENT OF MACHINE 2 MACHINE (M2M) AND REGI STER CONTROL SYSTEM (RCS) AND WHATEVER EXPENSES INCURRED WERE DEBITED TO CAPI TAL WORK-IN-PROGRESS INCLUDING THE PROJECT DEVELOPMENT EXPENSES. DURING THE YEAR THE TOTAL EXPENDITURE WAS ` 5,67,66,927/-, THE BREAK-UP OF WHICH HAS BEEN GIVEN IN THE FOREGOING PARAGRAPHS. DURING THE YEAR THE ASSESSEE SOLD THREE ALYGN MACHI NES TO THREE DIFFERENT PARTIES IN ORDER TO TEST THE RELIABILITY AND SUITABILITY WHEN THE PROJECT WAS NOT FINALIZED AND STILL IN THE DEVELOPMENT STAGE. ACCORDING TO THE ASSESSEE IT WAS SALE OF DEMO/TRIAL PRODUCTS AND, THEREFORE THE SAME WAS CREDITED TO T HE PRODUCT DEVELOPMENT EXPENSES ACCOUNT TO THE TUNE OF ` 59,20,849/-. SIMILARLY, RECOVERY OF RENT FROM CONTRACTORS WHO WERE DOING CONTRACT AT THE FACTORY PREMISES WERE CREDITED TO THE TUNE OF ` 64,200/-. NOW THE ISSUE BEFORE US IS WHETHER THE SAID REVENUE BY WAY OF SALE AND RENTAL INCOME CONSTITUTES REVENUE INCOME O R A CAPITAL RECEIPT DURING THE YEAR. ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 9 8. HAVING CONSIDERED THE FACTS OF THE CASE IN TOTAL ITY, WE FIND THAT THE REVENUE HAS NOT DOUBTED THE DEVELOPMENT OF PRODUCTS BY THE ASSESSEE AND ALLOWED CAPITALIZATION OF EXPENSES BUT AT THE SAME TIME THE REVENUE HAS CHOSEN TO TREAT THE SALE OF DEMO MACHINES TO THE TUNE OF ` 59,20,849/- AND RECOVERY OF RENT AMOUNTING TO ` 64,200 AS REVENUE RECEIPT AND ADDED THE SAME TO TH E INCOME OF THE ASSESSEE AFTER ALLOWING THE EXPENSES OF ` 14,75,553/-. THE CASE OF THE ASSESSEE ALSO FINDS SUPPORT FROM THE GUIDANCE NOTES ISSUED BY THE INSTI TUTE OF CHARTERED ACCOUNTANTS OF INDIA ON TREATMENT OF EXPENDITURE DURING CONSTRU CTION PERIOD, WHICH PROVIDES THAT IF ANY REVENUE IS REALIZED DURING THE TRIAL RUN OR PRODUCT DEVELOPMENT STAGE, THE SAME SHOULD BE SET OFF AGAINST THE EXPENDITURE INCU RRED IN CONNECTION WITH THE SAID PROJECT/PRODUCTS. THE CASE OF THE ASSESSEE IS ALSO SQUARELY COVERED BY THE DECISIONS RELIED UPON BY THE LEARNED AR. IN THE CASE OF INTE RNATIONAL SEAPORTS (HALDIA) P LTD.VS. ITO (SUPRA), THE CO-ORDINATE BENCH HAS HELD AS UNDER: 8. WE HAVE HEARD RIVAL CONTENTIONS OF BOTH THE PAR TIES AND PERUSED THE MATERIALS AVAILABLE ON RECORD. THE LD. AR SUBMI TTED THE PAPER BOOK WHICH IS RUNNING FROM PAGES 1 TO 113 AND HIGHLIGHTE D THAT TO MAKE THE BERTH READY FOR COMMERCIAL OPERATIONS THE ASSESSEE WAS TO UNDERTAKE THE RESPONSIBILITY OF COMPLETING THE WORK IN ACCORDANCE TO THE AGREEMENT OF BUILDING THE BERTH 4A. AS PER THE AGREEMENT TRIAL R UN WAS THE PRE- CONDITION BEFORE THE START OF THE COMMERCIAL OPERAT ION. THE ASSESSEE TREATED THE TRIAL RUN OF VESSELS AS PREOPERATIVE H ANDLING OF THE PLANT AND INCOME GENERATED FROM SUCH PREOPERATIVE HANDLING HA S BEEN TREATED AS PREOPERATIVE INCOME. IN THE BOOKS OF ACCOUNT OF T HE ASSESSEE FOR THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER DISPUTE, SUCH PREOPERATIVE INCOME HAS BEEN SET OFF AGAINST THE PR EOPERATIVE EXPENSES OF RS.3,17,02,632/-, WHICH CONSISTED OF BERTH HIRE CHARGES IN THE SUM OF RS.16,84,562/- AND RS.3,00,18,070/- BEING CARGO HAN DLING CHARGES AND THE BALANCE AMOUNT WAS CAPITALIZED TO BE APPORTIONE D TO FIXED ASSET. THE SPECIOUS FINDING OF THE AO THAT LOADING AND UNLOADI NG OF CARGO DURING THE PERIOD FROM 07.12.2003 TO 13.01.2004 ON TRIAL BASIS WAS COMMERCIAL ACTIVITY OF THE ASSESSEE AND THE RECEIPTS EARNED TH ERE FROM WAS ASSESSED AS INCOME FROM BUSINESS WHICH IS TOTALLY UNTENABLE AND INCONSISTENT WITH ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 10 THE FACTS OF THE CASE SINCE IT WAS DONE AT THE BEHE ST OF THE HOLDIA DOCK COMPLEX AUTHORITIES IN ORDER TO ESTABLISH THE STABI LITY OF THE BERTH. IT IS AN ADMITTED FACT THAT EVEN DURING A PERIOD OF TEST RUN S AND EXPERIMENTATION, A PLANT MAY BE ENGAGED IN ACTUAL PRODUCTION, BUT UN TIL THE TEST RUNS ARE COMPLETED AND THE PLANT IS PROPERLY ADJUSTED ON THE BASIS THEREOF, IT CANNOT BE SAID TO BE READY FOR COMMERCIAL PRODUCTI ON. THE EXPRESSION COMMERCIAL PRODUCTION REFERS TO PRODUCTION IN COM MERCIALLY FEASIBLE QUANTITIES AND IN A COMMERCIALLY PRACTICABLE MANNER . FURTHER, IT IS A CORRECT AND ACCEPTED PROCEDURE TO CAPITALIZE ALL EX PENSES INCURRED DURING CONSTRUCTION PERIOD AND IN CONNECTION WITH THE PROC ESS OF START-UP AND COMMISSIONING OF THE PLANT. IN FACT, SUCH EXPENSES WOULD BE INCURRED IN ORDER TO BRING THE PLANT UP TO THE STAGE AT WHICH I T CAN COMMENCE COMMERCIAL PRODUCTION. THUS, IT IS CORRECT TO CAPIT ALIZE THE EXPENDITURE INCURRED ON START-UP AND COMMISSIONING OF THE PLANT . THE EXPENDITURE SO INCURRED, THEREFORE, SHOULD BE CAPITALIZED IN THE S AME WAY AS OTHER INDIRECT CONSTRUCTION EXPENDITURE. IN THE PRESENT C ONTEXT, THEREFORE THE EXPENDITURE INCURRED DURING TRIAL RUN CONTRIBUTES T O CONSTRUCTION OF THE FACILITIES AT BERTH NO. 4A OF HALDIA DOCK COMPLEX A S TRIAL RUN ACTIVITY IS REGARDED AS AN ACTIVITY WHICH IS NECESSARY TO PREPA RE THE ASSET FOR ITS INTENDED USE. THIS IS BECAUSE FLAWS IN THE FACILITI ES AT BERTH NOTICED DURING TRIAL RUN OPERATION ARE RECTIFIED TO BRING T HE BERTH TO ITS INTENDED USE. THEREFORE, THE EXPENDITURE INCURRED DURING TRI AL RUN TOWARDS BUILDING/CONSTRUCTING THE BERTH SHOULD ALSO BE CAPI TALIZED AS PER THE REQUIREMENTS OF ACCOUNTING STANDARD 166. IT IS ALSO AN UNDISPUTED FACT THAT OPERATION OF CARGO / VESSEL DURING TRIAL RUN W AS DIRECTLY LINKED WITH THE BUILDING UP OF FACILITIES IN THE BERTH NO. 4A O F HALDIA DOCK COMPLEX. HENCE, ANY INCOME EARNED ON SUCH OPERATION DURING T RIAL RUN WAS INCIDENTAL TO THE BUILDING OF ASSETS FOR SETTING UP THE BERTH. THEREFORE, INCOME EARNED DURING PREOPERATIVE STAGE WAS A CAPIT AL RECEIPT, WHICH WOULD GO TO REDUCE THE COST OF ASSET AND IT IS SETT LED THAT THE DEPOSIT OF MONEY WAS DIRECTLY LINKED WITH THE PURCHASE OF PLAN T AND MACHINERY. HENCE, ANY INCOME EARNED ON SUCH DEPOSITS WAS INCID ENTAL TO THE ACQUISITION OF ASSESSEE FOR SETTING UP THE PLANT AN D MACHINERY. THUS, THE INTEREST WAS A CAPITAL RECEIPT WHICH WOULD GO TO RE DUCE THE COST OF THE ASSET AND LD AR RELIED ON THE DECISION OF HONBLE S UPREME COURT IN THE CASE OF CIT V. KARNAL CO-OPERATIVE SUGAR MILLS LTD. (2000) 243 ITR 2 (SC) AND C.I.T. VS. BOKARO STEEL LIMITED.(1999) 236 ITR 315 (SC) 9. FROM THE AFORESAID DISCUSSION, WE FIND THAT THE ASSESSEE HAS MADE SOME INCOME DURING THE PERIOD OF TRIAL RUN AND THE SAME WAS ADJUSTED AGAINST THE PRE-OPERATIVE EXPENSES. THE AO REJECTED THE WORKING OF ASSESSEE AND HELD THAT THE INCOME GENERA TED DURING THE TRIAL RUN INCOME PERIOD CANNOT BE ADJUSTED AGAINST THE PR EOPERATIVE EXPENSES AND THE SAME WAS CONFIRMED BY THE LD. CIT(A). HOWEV ER, WE OBSERVE THAT IT WAS THE CONDITION IN THE AGREEMENT THAT THE TRIAL RUN HAS TO BE ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 11 CARRIED OUT BEFORE THE BEGINNING OF COMMERCIAL OPER ATION. THE LD. AR DREW OUR ATTENTION ON PAGES 17,18,19,20,21 OF THE P APER BOOK WHERE THE REQUIREMENT FOR THE TRIAL RUN WAS REQUESTED BEFORE THE BEGINNING OF ACTUAL OPERATION. THE PURPOSE OF THE TRIAL RUN WAS TO CHECK WHETHER THERE IS ANY FLAW IN THE SYSTEM OR NOT SO THAT REMEDIAL A CTION CAN BE TAKEN WELL IN TIME IN THE EVENT OF ANY FLAW IN THE SYSTEM. SO IT IS CLEAR THAT THE PURPOSE OF THE TRIAL RUN WAS TO CHECK THE FLAW IN T HE SYSTEM AND NOT TO BEGIN THE COMMERCIAL OPERATIONS. IN THE INSTANT CAS E THE TRIAL RUN WAS SUCCESSFULLY COMPLETED ON DATED 13/1/2004 WITHOUT A NY FLAW IN THE SYSTEM. THEREFORE THE COMMERCIAL OPERATION BEGAN IM MEDIATELY THEREAFTER ON DATED 15/1/2004. NOW THE QUESTION HER E ARISES THAT IN CASE OF ANY FLAW CAUGHT DURING THE TRIAL RUN THEN IN THA T EVENT CERTAINLY THE COMMERCIAL OPERATION SHALL ONLY BEGIN AFTER THE REM OVAL OF THE FLAW. IN VIEW OF THIS THE INCOME GENERATED DURING TRIAL RUN SHALL CERTAINLY BE ADJUSTED AGAINST THE PRE-OPERATIVE EXPENSES. HAVING SAID THIS WE ARE INCLINED TO REVERSE THE ORDER OF THE LD. CIT(A) AND DIRECT THE LOWER AUTHORITIES TO ADJUST THE TRIAL RUN INCOME FROM PRE OPERATIVE EXPENSES OF THE ASSESSEE. WE ARE RELYING ON THE JUDGMENT OF THE DELHI HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS.NESTOR PH ARMACEUTICALS LIMITED 322 ITR 631 WHERE IT WAS HELD THAT : THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURE OF PHARMACEUTICAL FORMULATION IN BULK DRUGS AND SUPPLY ING DRUGS TO THE GOVERNMENT HOSPITALS, INSTITUTIONS BESIDES SELL ING THE PRODUCT IN DOMESTIC AND FOREIGN MARKETS. IT CLAIMED THE BEN EFIT UNDER SECTION 80-IA/80-IB OF THE INCOME-TAX ACT, 1961. IT CARRIED OUT TRIAL PRODUCTION FROM MARCH 20, 1998. ON THAT BASIS THE ASSESSING OFFICER TREATED THE ASSESSMENT YEAR 1998-99 AS THE INITIAL YEAR FOR THE BENEFIT CLAIMED AND SINCE THIS BENEFIT WAS ALLOWABLE FOR FIVE YEARS, ACCORDING TO THE ASSESSING OFFICER, THI S BENEFIT WAS ADMISSIBLE FROM THE ASSESSMENT YEAR 1998-99 TO THE ASSESSMENT YEAR 2002-03. THE ASSESSEE ON THE OTHER HAND CLAIME D THE BENEFIT FROM THE ASSESSMENT YEARS 1999-2000 TO 2003 -04. THE PLEA OF THE ASSESSEE WAS THAT TRIAL PRODUCTION DID NOT AMOUNT TO MANUFACTURE OF ITS PRODUCTS. IT WAS ONLY WHEN COMME RCIAL PRODUCTION COMMENCED, WHICH, ACCORDING TO THE ASSES SEE, COMMENCED ONLY IN THE ASSESSMENT YEAR 1999-2000 THA T PRODUCTION COMMENCED. THE COMMISSIONER (APPEALS) CO NFIRMED THE ORDER OF THE ASSESSING OFFICER BUT THE TRIBUNAL REVERSED THAT ORDER HOLDING THAT SECTION 80-IA/80-IB OF THE ACT B EING BENEFICIAL LEGISLATION, THE BENEFIT SHOULD BE EXTENDED TO THE ASSESSEE. IT FURTHER HELD THAT AS ON MARCH 20,1998, ONLY TRIAL P RODUCTION STARTED WHICH WAS DIFFERENT FROM COMMERCIAL PRODUCT ION AND THE BENEFIT OF THAT SECTION SHOULD BE ALLOWED IN THE YE AR IN WHICH COMMERCIAL PRODUCTION STARTED, I.E. IN THE ASSESSME NT YEAR 1999- ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 12 2000 AND, THEREFORE, WOULD BE EXTENDABLE UP TO THE ASSESSMENT YEAR 2003-04. ON APPEAL : HELD, THAT THE INITIAL ASSESSMENT YEAR, FOR THE PUR POSE OF SECTION 80-IA, WAS THE ASSESSMENT YEAR RELEVANT TO THE PREV IOUS YEAR IN WHICH THE INDUSTRIAL UNDERTAKING BEGINS TO MANUFAC TURE OR PRODUCE ARTICLES OR THINGS. THE TRIAL PRODUCTION B EGAN ON MARCH 20, 1998, AS PER THE DETAILS GIVEN IN THE AUDIT REP ORT FURNISHED BY THE ASSESSEE ALONG WITH ITS RETURNS OF INCOME FOR T HE ASSESSMENT YEARS 2003-04 AND 2004-05. THERE WAS NO DISPUTE THA T THE FIRST SALE WAS MADE ON APRIL 23,1998, WHICH WOULD BE THE PERIOD RELEVANT TO THE ASSESSMENT YEAR 1999-2000. MERELY B ECAUSE SOME CLOSING STOCK WAS SHOWN AS ON MARCH 31, 1998, THAT WOULD NOT LEAD TO THE CONCLUSION THAT THERE WAS COMMERCIA L PRODUCTION AS WELL. EVEN FOR THE PURPOSE OF TRIAL PRODUCTION M ATERIAL WOULD BE NEEDED AND THERE WOULD BE PRODUCTION WHICH WOULD RESULT IN STOCK OF FINISHED GOODS. THE EVIDENCE PRODUCED BY T HE ASSESSEE WAS ACCEPTED BY THE TRIBUNAL AS WELL, FROM WHICH IT WAS CLEAR THAT THERE WAS ONLY A TRIAL PRODUCTION IN THE ASSESSMENT YEAR 1998-99 AND COMMERCIAL AND FULL-FLEDGED PRODUCTION COMMENCE D ONLY IN THE YEAR 1999-2000. THE ORDER OF THE TRIBUNAL ALLOW ING THE BENEFIT OF DEDUCTION UNDER SECTION 80-IA/80IB OF TH E ACT FROM THE ASSESSMENT YEAR 1999-2000 TREATING IT AS THE INITIA L YEAR OF PRODUCTION TO THE ASSESSMENT YEAR 2003-04 WAS CORRE CT IN LAW. THE TRIBUNAL HELD THAT THE ASSESSEE HAD NOT ONLY PR ODUCED THE GOODS FOR TRIAL PURPOSES BUT THERE WAS, IN FACT, SA LE OF ONE WATER COOLER AND AIR-CONDITIONER IN THE ASSESSMENT YEAR 1 998-99 RELEVANT TO THE PREVIOUS YEAR/FINANCIAL YEAR 1997-9 8. THE EXPLANATION OF THE ASSESSEE WAS THAT THIS WAS DONE TO FILE THE REGISTRATION UNDER THE EXCISE ACT AS WELL AS THE SA LES TAX ACT. THE TRIBUNAL HELD THAT THE SALE OF ONE WATER COOLER AND ONE AIR- CONDITIONER AS ON MARCH 31, 1998, FOR THE PURPOSE O F OBTAINING REGISTRATION OF EXCISE AND SALES TAX WAS MANUFACTUR E WITHIN THE MEANING OF SECTION 80-IA. ON APPEAL : HELD, THAT THE ASSESSEE HAD SOLD ONE WATER COOLER A ND ONE AIR- CONDITIONER BEFORE APRIL, 1998. THUS, THE STAGE OF TRIAL PRODUCTION HAD BEEN CROSSED AND THE ASSESSEE HAD COME OUT WITH THE FINAL SALEABLE PRODUCT WHICH WAS IN FACT SOLD AS WELL. TH E QUANTUM OF COMMERCIAL SALE WOULD BE IMMATERIAL. WITH SALE OF T HOSE ARTICLES MARKETABLE QUALITY WAS ESTABLISHED, MORE PARTICULAR LY WHEN THE ASSESSEE FAILED TO SHOW THAT THE DEALER RETURNED TH OSE GOODS ON THE GROUND THAT THERE WAS ANY DEFECT IN THE WATER C OOLER OR AIR- CONDITIONER PRODUCED AND SOLD BY THE ASSESSEE TO TH E DEALER. THE ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 13 TRIBUNAL, IN THE CIRCUMSTANCES, WAS RIGHT THAT THE TWO TYPES OF CONDITIONS STIPULATED IN SECTION 80-IA WERE FULFILL ED WITH THE COMMERCIAL SALE OF THE TWO ITEMS IN THAT ASSESSMENT YEAR. WHETHER THE PURPOSE OF THAT SALE WAS TO OBTAIN REGI STRATION OF EXCISE OR SALES TAX WOULD BE IMMATERIAL. THE BOMBAY HIGH COURT HAS ALSO DECIDED THE SIMILAR ISSUE IN FAVOUR OF ASSESSEE IN THE CASE OF CIT VS. HINDUSTAN ANTIBIOTI CS LTD.(1974) 93 ITR 548 (BOM) AND RELEVANT EXTRACT OF THE ORDER IS REPR ODUCED BELOW : THE WORD ARTICLES USED IN THE EXPRESSION HAS BE GUN OR BEGINS TO MANUFACTURE OR PRODUCE ARTICLES IN SECTION 15C( 2)(II) MUST BE INTERPRETED REGARD BEING HAD TO THE OBJECT FOR WHIC H THE SECTION WAS ENACTED. THE PROVISION WAS ENACTED WITH A VIEW TO ENCOURAGING THE ESTABLISHMENT OF NEW INDUSTRIAL UND ERTAKINGS AND THE OBJECT WAS SOUGHT TO BE ACHIEVED BY GRANTIN G EXEMPTION FROM TAX ON PROFITS DERIVED FROM SUCH UNDERTAKINGS DURING THE FIRST FIVE YEARS. THE OBJECT OF THE SECTION PRESUPP OSES THAT PROFITS ARE CAPABLE OF BEING EARNED. HENCE, UNTIL AN ASSESS EE REACHES A STAGE WHERE IT IS IN A POSITION TO DECIDE THAT A FI NAL PRODUCT WHICH CAN BE ULTIMATELY SOLD IN THE MARKET CAN BE MANUFAC TURED IT CANNOT BE SAID TO HAVE STARTED MANUFACTURE OF THE A RTICLES. IF IT BECOMES NECESSARY FOR AN ASSESSEE TO PRODUCE A TRIA L PRODUCT AT AN EARLIER STAGE TO VERIFY WHETHER IT CAN BE USED U LTIMATELY IN THE MANUFACTURE OF THE FINAL ARTICLE, THE COMMENCEMENT OF OPERATION FOR THE MANUFACTURE OF THE TRIAL PRODUCT WOULD NOT CONSTITUTE COMMENCEMENT OF MANUFACTURE OF ARTICLES FOR THE PUR POSES OF SECTION 15C. THE ASSESSEE-COMPANY UNDERTOOK A PROJECT FOR THE MA NUFACTURE OF PENICILLIN. IT STARTED ACTUAL OPERATIONS FOR THE MANUFACTURE OF CRUDE PENICILLIN IN DECEMBER 1954. THE FIRST SAMPLE S OF CRUDE PENICILLIN WERE REQUIRED TO BE SENT TO U.S.A. AND U .K. FOR OBTAINING CERTIFICATES AS TO THEIR QUALITIES. THE C ERTIFICATES WERE OBTAINED IN JUNE, 1955, AND THE ASSESSEE STARTED RE GULAR PRODUCTION OF STERILE PENICILLIN, THE ONLY PRODUCT THAT COULD BE SOLD IN THE MARKET, IN AUGUST, 1955. ON THE QUESTION WHE N THE MANUFACTURE OF STERILE PENICILLIN HAD STARTED AND W HETHER THE ASSESSEE WAS ENTITLED TO THE EXEMPTION UNDER SECTIO N 15C FOR THE ASSESSMENT YEAR 1960-61 : HELD, ON THE FACTS, THAT PRODUCTION OF ARTICLES BY THE ASSESSEE HAD BEGUN ONLY IN AUGUST, 1955. THE BENEFIT OF THE EXEMPTION UNDER SECTION 15C AROSE TO THE ASSESSEE FOR THE FIR ST TIME IN THE ASSESSMENT YEAR 1956-57 AND, THEREFORE, IT WAS ENTI TLED TO THE ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 14 EXEMPTION UNDER SECTION 15C FOR THE ASSESSMENT YEAR 1960-61 ALSO. 10. WE ALSO FURTHER OBSERVE THAT THE FACTS OF THE CASE LAW CITED BY THE AO I.E. TUTIKORIN ALKALI CHEMICALS & FERTILIZER S LTD.(SUPRA) FOR TREATING THE RECEIPTS OF TRIAL RUN AS BUSINESS RECEIPT ARE D IFFERENT FROM THE FACTS OF THE INSTANT CASE. THE APEX COURT IN THE SAID CASE H AS TREATED THE INTEREST INCOME ON THE SURPLUS FUND AS INCOME FROM OTHER SOU RCES BECAUSE THERE WAS NO NEXUS BETWEEN THE ACTIVITY OF THE ASSESSEE A ND INTEREST INCOME. THE ASSESSEE HAS INVESTED IDLE FUND FOR SHORT PERIO D OF TIME BEFORE THE COMMENCEMENT OF THE BUSINESS. THERE WAS NO CONNECTI ON BETWEEN INTEREST INCOME AND THE BUSINESS OF THE ASSESSEE. T HE INTEREST INCOME WAS INDEPENDENT AND SEPARATE FROM THE BUSINESS OF T HE ASSESSEE. HOWEVER IN THE INSTANT CASE THE INCOME GENERATED DU RING TRIAL RUN IS VERY MUCH CONNECTED WITH THE BUSINESS OF THE ASSESSEE HE NCE THE QUESTION OF RECOGNIZING THE INCOME DOES NOT ARISE AS THE COMMER CIAL OPERATION HAS NOT BEGAN. IN VIEW OF ABOVE WE REVERSE THE ORDER OF THE LD. CIT(A) AND ALLOW THE APPEAL OF THE ASSESSEE. SIMILARLY, IN THE CASE OF GUJARAT STATE FERTILIZERS & CHEMICALS LTD. (SUPRA), THE CO - ORDINATE BENCH HAS HELD AS UNDER: 6. .WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. UNDISPUTEDLY , AMMONIA-IV PLANT WAS UNDER TRI AL PRODUCTION DURING THE YEAR UNDER CONSIDERATION AND THE COMMERCIAL PRO DUCTION IS YET TO COMMENCE. THEREFORE, AS CONCLUDED BY THE ID. CIT(A) , THE CLAIMS HAVE TO BE CONSIDERED, HOLDING THE AMMONIA-IV PLANT TO BE A T THE PRE- COMMENCEMENT STAGE. IT IS WELL SETTLED THAT UNDER T HE ACCOUNTING PRACTICES, ALL EXPENDITURE INCLUDING INTEREST COST INCURRED DURING THE PROJECT CONSTRUCTION PERIOD ARE ACCUMULATED AND DIS CLOSED AS CAPITAL WORK-IN-PROGRESS UNTIL THE ASSETS ARE READY FOR COM MERCIAL USE. INCOME EARNED FROM INVESTMENT OF SURPLUS BORROWED FUNDS DU RING CONSTRUCTION/TRIAL RUN PERIOD IS REDUCED FROM CAPIT AL WORK-IN-PROGRESS FOR ACCOUNTING PURPOSES WHILE EXPENDITURE/INCOME ARISIN G DURING TRIAL RUN IS ADDED TO/REDUCED FROM CAPITAL WORK-IN-PROGRESS. HON 'BLE APEX COURT IN THE CASE OF BOKARO STEEL VS. CIT, 236 ITR 315 HELD THAT IF THE ASSESSEE RECEIVES ANY AMOUNT WHICH ARE INEXTRICABLY LINKED W ITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY, SUCH RECEIPTS W OULD GO TO REDUCE THE COSTS OF ASSETS AND WOULD BE RECEIPT OF A CAPITAL N ATURE, WHICH CANNOT BE TAXED. IN THE CASE UNDER CONSIDERATION, UNDISPUTEDL Y AND AS FOUND BY THE ID. CIT(A), THE PLANT IS UNDER TESTING FOR ITS EFFI CIENCY PRIOR TO COMMENCEMENT OF COMMERCIAL PRODUCTION AND THE INPUT S AND OUTPUTS HAVE ALREADY BEEN NETTED BY GSFC AND THE NET RESULT HAS BEEN CAPITALIZED. CONSIDERING THE FACTS AND CIRCUMSTANCE S OF THE CASE AND THE ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 15 GUIDELINES OF THE ICAI, WE ARE IN AGREEMENT WITH TH E ID. CIT(A) THAT ANY ATTEMPT TO TAX THE PRODUCTION, WHICH IS ALREADY ACC OUNTED FOR AS INPUT FOR THE FERTILIZER PLANT AND THE CAPTIVE INPUTS OF OTHE R UNITS UTILIZED IN AMMONIA IV PLANT, IF NOT ALLOWED TO BE SET OFF AGAI NST THE PRODUCTION OF THE PLANT, WOULD LEAD TO A DISTORTED PICTURE OF THE ACCOUNTS OF M/S. GSFC. IN THESE CIRCUMSTANCES, ESPECIALLY WHEN REVENUE HAV E NOT PLACED BEFORE US ANY MATERIAL CONTRARY TO THE AFORESAID FINDINGS OF THE LD. CIT(A) IN SO FAR AS ADDITION OF RS. 10,99,25 ,676 IS CONCERNED N OR POINTED OUT ANY CONTRARY DECISION, WE HAVE NO HESITATION IN UPHOLDI NG THE FINDINGS OF THE ID. CIT(A) WHILE RELYING UPON THE DECISION OF THE H ON'BLE APEX COURT IN BOKARO STEEL LTD.. THEREFORE, GROUND NO.1 IN THE AP PEAL OF THE REVENUE IS DISMISSED. BESIDES, THE ASSESSEE HAS ALSO CAPITALIZED OUT OF T HE CAPITAL WORK-IN PROGRESS ACCOUNT IN THE NEXT YEAR AS IS APPARENT FROM THE TA X AUDIT REPORT FILED BY THE ASSESSEE BEFORE US. UNDER THESE CIRCUMSTANCES, WE ARE NOT IN AGREEMENT WITH THE CONCLUSION DRAWN BY THE CIT(A) THAT THE RECEIPTS FR OM SALE OF 3 ALYGN MACHINES AMOUNTING TO ` 59,20,849/- AND RENT OF ` 64,200/- RECEIVED DURING THE TRIAL/DEMO RUN IS REVENUE IN NATURE. ACCORDINGLY, WE SET ASID E THE ORDER OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW DEDUCTION OF THE SAID RECEIPTS BY WAY SALE OF MACHINES AND RENT FROM THE PRODUCT DEVELOPMENT EXPE NDITURE ACCOUNT. WE ORDER ACCORDINGLY. 9. SINCE WE HAVE ALREADY DECIDED GROUND NO.1 IN FAV OUR OF THE ASSESSEE, GROUND NOS. 2 & 3 BECOME INFRUCTUOUS AND NEED NOT B E ADJUDICATED. THEY ARE DISMISSED AS SUCH. 10. THE NEXT ISSUE IN GROUND NO.4 IS WITH REGARD TO CONFIRMATION OF DISALLOWANCE OF ` 51,15,880/- BY THE CIT(A) AS MADE BY THE ASSESSING OFFICER BY TREATING THE EXPENSES AS RELATABLE TO CAPITAL WORK-IN-PROGRESS. THE FACTS IN BRIEF ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS OBSERVE D THAT THE ASSESSEE ALLOCATED ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 16 EXPENSES INCURRED DURING THE YEAR TO THE PROJECT DE VELOPMENT EXPENSES BEING CAPITAL WORK IN PROGRESS FOR THE PRODUCTS BEING DE VELOPED BY THE ASSESSEE AND PART OF THE SAID EXPENDITURE WAS TREATED AS EXPENSES ATT RIBUTABLE TO EARNING OF REVENUE RECEIPTS DURING THE YEAR. THE ASSESSEE HAS APPORTI ONED 90% OF THE EXPENSES WHICH ARE COMMON IN NATURE TO PRODUCT DEVELOPMENT E XPENSES AND 10% HAVE BEEN APPORTIONED TO THE INCOME RECEIVED DURING THE YEAR WHEREAS IN SOME OTHER EXPENSES CHARGED TO PROFIT AND LOSS ACCOUNT THE SAM E RATIO HAS NOT BEEN FOLLOWED BY THE ASSESSEE, DETAILS WHEREOF IS APPENDED IN PAR A 6 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT T HE ASSESSEE HAS DEBITED TO THE PROFIT AND LOSS ACCOUNT THE EXPENSES WITHOUT JUSTIF ICATION AND ACCORDINGLY, THE ASSESSEE WAS SHOW CAUSED AS TO WHY THE SAME RATIO O F 10:90 SHOULD NOT BE APPLIED TO OTHER EXPENSES ALSO. THEREAFTER, THE ASSESSEE R EPLIED TO THE SHOW CAUSE NOTICE, WHICH DID NOT FIND FAVOUR WITH THE ASSESSING OFFICE R AND HE WORKED OUT THE DISALLOWANCE OF ` 51,15,880/- AND ADDED IT TO THE TOTAL INCOME OF TH E ASSESSEE, THE DETAILS THEREOF IS GIVEN IN PARA 6.3 OF THE ASSESSM ENT ORDER. 11. IN THE APPELLATE PROCEEDINGS, THE LEARNED CIT(A ) AFFIRMED THE ASSESSMENT ORDER BY OBSERVING AND HOLDING AS UNDER: I HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMIS SIONS OF THE ASSESSEE. IF COMMON EXPENSES HAVE BEEN APPORTIONED BY THE ASS ESSEE ITSELF IN THE RATIO OF 9:1 BETWEEN PRODUCT DEVELOPMENT EXPENSES A ND THE INCOME RECEIVED DURING THE YEAR THEN LOGICALLY THE OTHER E XPENSES SHOULD HAVE ALSO BEEN INCURRED IN THE SAME RATIO AND, THEREFORE , I AGREE WITH THE A.O. HENCE, THIS GROUND OF APPEAL IS REJECTED. ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 17 12. BEFORE US, THE LEARNED AR VEHEMENTLY SUBMITTED THAT THE FACTS OF THE CASE WERE TOTALLY MISCONSTRUED BY THE LD CIT(A) BY APPRO VING THE DISALLOWANCE. HE DREW OUR ATTENTION TO THE WRITTEN SUBMISSIONS FILED BEFO RE THE CIT(A), WHICH CONTAIN A VERY COMPREHENSIVE EXPLANATION AS REGARDS ALLOCATIO N OF EXPENSES TO THE PROFIT & LOSS ACCOUNT AND PROJECT DEVELOPMENT EXPENSES. THE LEARNED COUNSEL SUBMITTED THAT ON EACH ITEM EXPLANATION HAS BEEN SUBMITTED BY THE ASSESSEE TO JUSTIFY THE APPORTIONMENT OF EXPENSES IN THE RATIO OF 10:90 IN SOME CASES AND DIFFERENT RATIO FOR THE REMAINING EXPENSES. THE LEARNED AR TRIED T O EXPLAIN AS TO HOW EXPENSES WERE APPORTIONED TO THE TUNE OF 90% TOWARDS PRODUCT DEVELOPMENT EXPENSES BY SUBMITTING THAT THESE EXPENSES WERE SPECIFICALLY HI RED/INCURRED IN CONNECTION WITH THE DEVELOPMENT OF THE PROJECT AND THEREFORE, SUCH RATIO WAS ADOPTED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT THE REPLY OF T HE ASSESSEE WAS NOT CONSIDERED BY THE CIT(A) AND HE UPHELD THE ORDER OF THE ASSESS ING OFFICER WITHOUT GIVING ANY REASON OR JUSTIFICATION TO REACH SUCH A CONCLUSION. THE LEARNED AR TOOK US THROUGH 15 PAGE REPLY IN WHICH EACH AND EVERY ITEM OF EXPEN DITURE HAS BEEN EXPLAINED IN DETAIL WITH REASONS AND JUSTIFICATION FOR THE APPOR TIONMENT OF EXPENSES INTO REVENUE AND CAPITAL. FINALLY, THE LEARNED AR SUBMITTED THA T IN VIEW OF THESE FACTS THE ORDER OF THE CIT(A) SHOULD BE REVERSED AND THE ASSESSING OFFICER SHOULD BE DIRECTED TO DELETE THE DISALLOWANCE. 13. THE LEARNED DR, ON THE OTHER HAND, SUBMITTED TH AT THE ASSESSEE HAS ADOPTED DIFFERENT PROPORTIONS FOR APPORTIONMENT IN ORDER TO SUPPRESS THE REVENUE DURING THE YEAR WHICH WAS RIGHTLY REJECTED BY THE ASSESSING OF FICER AND CONFIRMED BY THE CIT(A). THE FURTHER SUBMITTED THAT THE REPLY FILED BY THE ASSESSEE BEFORE THE FIRST ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 18 APPELLATE AUTHORITY WAS HIGHLY SUBJECTIVE AND, THER EFORE, THE ORDER OF THE CIT(A) SHOULD BE UPHELD. 14. HEAVING HEARD THE RIVAL SUBMISSIONS AND PERUSIN G THE MATERIAL ON RECORD, INCLUDING THE POINT-WISE REPLY, DATED 20.10.2011, F ILED BY THE ASSESSEE BEFORE THE FIRST APPELLATE AUTHORITY, WE OBSERVE THAT THE ASSE SSEE HAS EXPLAINED WITH REASONS THE APPORTIONMENT OF EXPENSES INTO REVENUE AND CAPI TAL ACCOUNT IN WHICH NO DEFECTS OR DEFICIENCIES WERE POINTED OUT. AFTER PERUSING TH E SAID REPLY WE CERTAINLY FEEL THAT THE APPORTIONMENT OF EXPENSES WERE MADE CORRECTLY. MOREOVER THERE IS NO MATERIALS BROUGHT BEFORE US BY THE REVENUE TO TAKE A VIEW SUPPORTING THE ORDER OF CIT(A). THE ASSESSING OFFICER HAS ALSO TREATED THE EXPENDITURE AS CAPITAL IN NATURE WITHOUT GIVING ANY REASONS WHICH IS HIGHLY SUBJECTI VE AND WHIMSICAL. UNDER THESE CIRCUMSTANCES, WE ARE NOT IN AGREEMENT WITH THE CON CLUSION OF THE CIT(A) TO UPHOLD THE ORDER OF AO ON THIS ISSUE. THE ASSESSEE HAS RI GHTLY APPORTIONED THE EXPENSES DEPENDING UPON THE NATURE AND PURPOSE OF EXPENSES W ITH ADEQUATE REASONING. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) AND DI RECT THE ASSESSING OFFICER TO DELETE THE DISALLOWANCE. 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 1 0 TH AUGUST 2018. SD/- SD/- (C N PRASAD) (RAJESH KUMAR) JUDICIAL MEMBER A CCOUNTANT MEMBER MUMBAI, DATED : 10 TH AUGUST, 2018. SA ITA NO.730/MUM/2013 ECO AXIS SYSTEMS PRIVATE LIMITED 19 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, E BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// (ASSISTANT REGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI