Cera Sanitaryware Ltd., Ahmedabad V. The Addl.CIT.,Range-1, Ahmedabad

ITA 744/AHD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80343 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 17-09-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 08-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Depreciation; Business expenditure; Initiation of penalty proceedings
• Section: 234B; 32; 37; 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD . . , , BEFORE SHRI N.S. SAINI, A CCOUNTANT MEMBER AND SHRI KU L BHARAT, JUDICIAL MEMBER . / I.T.A. NO . 744/AHD/2011 ( / ASSESSMENT YEAR : 2007 - 08 ) CERA SANITARYWARE LTD. MADHUSUDAN HOUSE OPP. NAVRANGPURA - TELE - EXCHANGE, NAVRANGPURA, AHMEDABAD / VS. ADDL. COMMISSIONER OF INCOME TAX CIRCL E - 1, JITENDRA CHAMBER ASHRAM ROAD AHMEDABAD ./ ./ PAN/GIR NO. : AABCM 9244 N ( / APPELLANT ) .. ( / RESPONDENT ) / APPELLANT B Y : SHRI S.N.SOPARKAR WITH MS.URVASHI SHODHAN, A.RS. / RESPONDENT B Y : SHRI DINESH SINGH, S R .DR / DATE OF HEARING 17/09/2014 / DATE OF PRONOUNCEMENT 26/09/2014 / O R D E R PER SHRI KUL BHARAT, JUDICIAL MEMBER : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - VI, AHMEDABAD ( CIT (A) IN SHORT) DATED 22/12/2010 PERTAINING TO ASSESSMENT YEAR (AY) 2007 - 08 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL (CONCISED AND MODIFIED) : - 1. THAT THE ORDER OF THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) CONFIRMING DISALLOWANCE MADE BY LD. ADDL. COMMISSIONER OF INCOME - ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 2 - TAX, RANGE - 1, AHMEDABAD ARE AGAINST LAW, FACTS AND EVIDENCE ON RECORD. 2. THE APPELLANT COMPANY SUBMITS THAT THE DISALLOWANCE OF RS.7 ,80,826/ - FROM THE CLAIM OF DEPRECIATION U/S.32 OF THE ACT MADE BY THE LD. ADDL. CIT AND CONFIRMED BY THE LD. CIT(A) IS AGAINST LAW, FACTS AND EVIDENCE ON RECORD AND THE DISALLOWANCE IS REQUIRED TO BE DELETED. 3. THE DEPRECIATION ON THE MUMBAI PREM ISES PURCHASED, POSSESSED AND OWNED BY THE COMPANY, WAS PUT TO USE DURING THE YEAR, HENCE THE APPELLANT COMPANY WAS ENTITLED TO DEPRECIATION OF RS.7,80,826/ - AS BUILDINGS AS PER THE PROVISIONS OF SECTION 32 OF THE I.T. ACT, 1961. THE APPELLANT CONTENDS THA T THE APPELLANT HAS RIGHTLY CLAIMED DEPRECIATION ON THE MUMBAI PREMISES PUT TO USE / READY DURING THE ACCOUNTING YEAR. 4. THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) ERRED IN CONFIRMING DISALLOWANCE OF DEPRECIATION OF MUMBAI PREMISES - BUILDING ON CONSIDERING THAT BUSINESS ASSETS OF MUMBAI DISPLAY UNIT WERE NOT READY TO PUT TO USE BY END OF THE YEAR. 5. THE APPELLANT CLAIMS THAT THE DEDUCTION OF RS.24,30,554/ - BEING LIABILITY PROVIDED / AMORTIZED OF EMPLOYEE STOCK OPTION SCHEME WAS AN ALLO WABLE DEDUCTION U/S.28 READ WITH SECTION 37 OF THE ACT. 6. THE APPELLANT CONTENDS THAT THE LIABILITY UNDER EMPLOYEES STOCK OPTION SCHEME WAS REMUNERATION / STAFF WELFARE SCHEME FOR THE EMPLOYEES BEING AN INCENTIVE TO EMPLOYEES ENTITLING DEDUCTION U /S.28 R/W 37 OF THE ACT. 7. THE LD. CIT (APPEALS) HAS ERRED IN NOT DELETING THE INTEREST CHARGED U/S. 234B OF RS. 11 ,43,780/ - AND U/ S .234C OF RS.5,25,159/ - OF THE ACT. 8. THAT THE LD. COMMISSIONER OF INCOME - TAX (APPEALS) HAS ERRED IN CONFIRM ING THE INITIATION OF PENALTY PROCEEDING U/S. 271(1 )(C) OF THE ACT. 9. IN VIEW OF THE ABOVE AND OTHERS THAT MAY URGED AT THE TIME OF HEARING, IT IS PRAYED THAT: (I) THE DISALLOWANCE/ADDITIONS MADE AND CONFIRMED BY THE CIT(A) TO THE INCOME OF THE APPELLANT COMPANY MAY PLEASE BE DELETED AND DEDUCTION AND RELIEF CLAIMED MAY PLEASE BE ALLOWED. ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 3 - (II) THAT THE INTEREST CHARGED U/S. 234B OF THE ACT OF RS. 11 ,43,780 / - AND U/S. 234C OF THE ACT IS OF RS.5,25,159/ - MAY BE CANCELLED. ( III) PENALTY PROCEEDINGS INITIATED U/S.271( 1 )(C) MAY PLEASE BE CANCELLED AND NOTICE BE VACATED. (IV) SUCH OTHER RELIEF OR REDUCTION AS THE FACTS AND CIRCUMSTANCES OF THE CASE SO REQUIRE BE GRANTED. 2. 1. BRIEFLY STATED FACTS ARE THAT THE RETURN FOR AY 2007 - 08 WAS FILED ON 29/10/2007 DECLARING A TOTAL INCOME AT RS.11,43,52,149/ - . THE ASSESSMENT U/S.143(3) OF THE I NCOME TAX ACT ,1961 (HEREINAFTER REFERRED TO AS THE ACT ) WAS FRAMED VIDE ORDER DATED 22/12/2009, THEREBY THE ASSESSING OFFICER (AO IN SHO RT ) DISALLOWED THE CLAIM OF DEPRECIATION MADE BY THE ASSESSEE ON ACCOUNT OF THE ASSET HAS NOT BEEN PUT TO USE DURING THE YEAR RATHER AFTER ACQUISITION, THE BATH STUDIO WAS BEING BUILT ON IT. ON APPEAL BY THE ASSESSEE, THE LD.CIT(A) CONFIRMED THE ADDITIO N MADE BY THE AO REJECTING THE SUBMISSIONS OF THE ASSESSEE ON THE BASIS THAT THE PROPERTY WAS READY ONLY ON 31 ST MA Y - 2007, THEREFORE IT CANNOT BE SAID THAT PROPERTY WAS READY FOR USE FOR BUSINESS PURPOSE IN PREVIOUS YEAR. 3 . GROUND NOS.1 TO 4 ARE INTER - CONNECTED AND, THEREFORE, THE SAME ARE DISPOSED OF TOGETHER. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AUTHORITIES BELOW HAVE FAILED TO APPRECIATE THE FACTS IN RIGHT PERSPECTIVE. HE SUBMITTED THAT THE DECISIONS RELIED UPON BY THE ASSESSEE BE FORE THE AUTHORITIES BELOW WERE NOT CONSIDERED. HE SUBMITTED THAT IT IS NOT DISPUTED THAT THE ASSET WAS PURCHASED ON 05/03/2007 AND WAS READY FOR BUSINESS USE. HE REITERATED THE SUBMISSION AS WERE MADE BEFORE THE ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 4 - LD.CIT(A) AND SUBMITTED THAT THE LD.CIT(A ) WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE. 3. 1. ON THE CONTRARY, LD.SR.DR VEHEMENTLY ARGUED THAT THE ACTION OF THE AUTHORITIES BELOW IS JUSTIFIED AS IT HAS BEEN GIVEN FINDING ON FACT THAT THE PROPERTY WAS PUT TO USE ONLY IN THE SUBSEQUENT YEAR, I .E. 10/05/2007, THEREFORE NO INTERFERENCE IS CALLED FOR IN THE ORDERS PASSED BY THE AUTHORITIES BELOW. 4. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE UNDISPUTED F ACTS ARE THAT THE ASSESSEE HAD PURCHASED THE PREMISES ON 05/03/2007 AND FOR THE PURPOSE OF BATH STUDIO THE FURNISHING AND OTHER WORK WERE CARRIED OUT FROM MARCH - 07 TO 31 ST MAY - 2007. THE CONTENTION OF THE ASSESSEE IS THAT THE PREMISES WERE PUT TO USE FOR BUSINESS PURPOSE AS THE FURNISHING OF THE PREMISES FOR THE PURPOSE OF ESTABLISHING BATH STUDIO COMMENCED IN THE MONTH OF MARCH - 2007, HENCE THE ASSESSEE IS ENTITLED FOR CLAIMED DEPRECIATION. THE AO IN HIS ORDER HAS OBSERVED THAT THE ASSET HAS NOT BEEN P UT TO USE DURING THE YEAR RATHER AFTER ACQUISITION, THE BATH STUDIO WAS BEING BUILT ON IT. UNDER THESE FACTS, WE HAVE TO EXAMINE WHETHER THE ASSESSEE WOULD BE ENTITLED FOR THE DEPRECIATION AS CLAIMED DESPITE THE UNDISPUTED FACT THAT THE ASSESSEE HAD O NLY PURCHASED THE BUILDING DURING THE YEAR UNDER CONSIDERATION AND CARRIED OUT CERTAIN FURNISHING WORK FOR THE PURPOSE OF ESTABLISHING THE BATH STUDIO . THE CONTENTION OF THE ASSESSEE IS THAT THE PREMISES WERE PUT TO USE FOR BUSINESS PURPOSE AS THE WORK OF FURNISHING WAS BEING CARRIED OUT FOR THE ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 5 - PURPOSE OF ESTABLISHING A BATH STUDIO . THEREFORE, THE DEPRECIATION ON THE PREMISES CANNOT BE DENIED AS PER PROVISIONS OF SECTION 32 OF THE I.T.ACT, 1961. IN SUPPORT OF THIS CONTENTION, THE ASSESSEE HAD RELIED UPON THE FOLLOWING CASE - LAWS: - 1. CIT VS. INDIA TEA & TIMBER TRADING CO. (1966) 221 ITR 857 (GAUH). 2. CAPITAL BUS SERVICES PVT.LTD. VS. CIT (1980) 123 I T R 404 (DEL) 3. CIT V S . G . N . AGRAWAL (1996) 217 ITR 250 (BOM). 4. CIT VS. VAYITHRI PLANTATIONS (19 81) 128 ITR 675 (MAD.) 5. LIQUIDATORS OF PURSA LTD. VS. CIT (1954) 25 ITR 265 (SC) 6. CIT VS. GEOTECH CONSTRUCTION CORPN. 162 CTR 528 (KER.) 7. CIT VS. PEPSU ROAD TRANSPORT CORPN. (2002) 253 IT 303 (P&H). 8. CIT VS. REFRIGERATION & ALLIED INDUSTRIES LTD. 113 TAXMAN 103(DEL.) 4.1. WE FIND THAT THE HON BLE G AUHATI HIGH COURT IN THE CASE OF CIT VS. INDIA TEA AND TIMBER TRADING CO. REPORTED AT (1996) 251 ITR 857(GAUH) CONCURRED THE VIEW OF OTHER HIGH COURTS THAT THE WORD USED FOR BUSINESS PURPOSE SHOULD HAVE A WIDER IMPORT INCLUDING ACTIVE AS WELL AS PASSIVE US AGE OF THE ASSET. FURTHER, WE FIND THAT THE HON BLE GAUHATI HIGH COURT IN THE SAID JUDGEMENT H AS OBSERVED THAT THE HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SUHRID GEIGY LTD. (REPORTED A T 133 ITR 884) HAS TAKEN A CONTRARY VIEW. WE FIND THAT THE HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. SUHRID GEIGY LTD. H AS OBSERVED AS UNDER: - WHEN THE CUP IS BEING FILLED WITH THE DRINK IT CANNOT BE SAID THAT ONE IS ENGAGED IN DRINKING. A SIMILAR QUESTION ARISES WHEN THE DEPRECIATION IS CLAIMED IN RESPECT OF A BUILDING CONSTRUCTED IN THE COURSE OF THE ERECTION OF A NEW PLANT. CAN DEPRECIATION ALLOWANCE BE CLAIMED FOR THE BUILDING FOR A PERIOD: (1) BEFORE THE COMPLETION OF THE INSTALLATION OF MACHI NERY IN THE SAID BUILDING; ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 6 - (2) BEFORE IT STARTS FUNCTIONING EFFECTIVELY; (3) BEFORE THE PRODUCTION (EVEN TRIAL RUN) IS COMMENCED AND THE BUSINESS OF THE COMPANY OF MANUFACTURING AN ARTICLE WITH THE AID OF THE SAID MACHINERY HAS COMMENCED? CAN DEPRECIATION BE ALLOWED IN THESE FACTS AND CIRCUMSTANCES WHEN IT IS ALLOWABLE UPON THE PROPERTY BEING USED FOR OR IN THE BUSINESS OF THE SAID UNIT OF THE COMPANY? IN OTHER WORDS, THE QUESTION IS WHETHER IT CAN BE SAID THAT THE BUILDING HAS BEEN USED IN THE BUSINESS EVE N BEFORE THE ARTICLES, FOR PRODUCTION OF WHICH THE PLANT IS SET UP, HAVE NOT BEEN PRODUCED AND THE MACHINERY ITSELF HAS BECOME FUNCTIONAL LATER ON. 4.2. THE HON BLE GUJARAT HIGH COURT IN THE CASE OF SUHRID GEIGY LTD.(SUPRA) HELD AS UNDER: - 3. THE VIEW T AKEN BY THE TRIBUNAL IS THAT THE DATE ON WHICH THE MACHINERY INSTALLED IN THE BUILDING BECAME FUNCTIONAL IS IRRELEVANT. WHAT IS RELEVANT IS THE DATE ON WHICH THE MACHINERY WAS INSTALLED IN THE BUILDING. NOW, PROVISIONS ON WHICH RELIANCE IS PLACED FOR CLAIM ING DEPRECIATION ALLOWANCE, NAMELY S. 32(1) R/W R. 5 AS THEY STOOD AT THE RELEVANT TIME (RELEVANT FOR THE ASSESSMENT IN QUESTION, I.E., 1965 - 66) MAY BE QUOTED. SEC. 32(1), SO FAR AS IT IS MATERIAL FOR OUR PURPOSES, READS AS UNDER: '32(1) IN RESPECT OF DEPR ECIATION OF BUILDING, MACHINERY, PLANT OR FURNITURE OWNED BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, THE FOLLOWING DEDUCTIONS SHALL, SUBJECT TO THE PROVISIONS OF S. 34, BE ALLOWED....... (II) IN THE CASE OF BUILDING, MACHINERY , PLANT OR FURNITURE, OTHER THAN SHIPS COVERED BY CL. (I), SUCH PERCENTAGE ON THE WRITTEN DOWN VALUE THEREOF, AS MAY IN ANY CASE OR CLASS OF CASES BE PRESCRIBED.......' (EMPHASIS SUPPLIED) RULE 5 OF THE RULES, SO FAR AS IT IS MATERIAL FOR OUR PURPOSES READ S AS UNDER: '5. DEPRECIATION (1) SUBJECT TO THE PROVISIONS OF SUB - RR. (2) AND (3), THE ALLOWANCE UNDER CL. (I) OR CL. (II) OR SUB - S. (1) OF S. 32 IN RESPECT OF DEPRECIATION OF BUILDING, MACHINERY, PLANT OR FURNITURE SHALL BE AT A PERCENTAGE OF THE ACTUAL C OST OR THE WRITTEN DOWN VALUE, AS THE CASE MAY BE, EQUAL TO (I) 100 PER CENT, (II) FIFTY PER CENT, OR (III) NIL PER CENT OF THE NUMBER SHOWN IN THE CORRESPONDING ENTRY IN THE SECOND COLUMN OF THE STATEMENT IN PART I APPENDIX I TO THESE RULES ACCORDING AS T HE BUILDING, MACHINERY, PLANT OR FURNITURE, HAVE BEEN USED BY THE ASSESSEE IN HIS BUSINESS OR PROFESSION DURING THE PREVIOUS YEAR, (I) FOR A PERIOD OF 180 DAYS OR MORE (II) FOR A PERIOD OF LESS THAN 180 DAYS BUT MORE THAN 30 ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 7 - DAYS, OR (III) FOR A PERIOD OF THIRTY DAYS OR LESS THAN THIRTY DAYS RESPECTIVELY...........' (EMPHASIS SUPPLIED) 4. IT MUST BE REALISED THAT WHAT WAS BEING ERECTED WAS A NEW PLANT THOUGH IT WAS BEING ERECTED BY AN EXISTING COMPANY. THE MACHINES WHICH WERE INSTALLED IN THE BUILDING IN Q UESTION IN RESPECT OF WHICH DEPRECIATION ALLOWANCE IS CLAIMED BECAME FUNCTIONAL ONLY ON 7TH MARCH, 1965. THE BUSINESS OF THE COMPANY WAS TO MANUFACTURE DYESTUFFS ETC., THE PRODUCTION OF DYESTUFFS COULD NOT HAVE COMMENCED BEFORE 7TH MARCH, 1965, THE DATE ON WHICH THE MACHINES BECAME OPERATIVE. UNDER THE CIRCUMSTANCES, CAN IT BE SAID THAT THE BUILDING WAS USED BY THE ASSESSEE FOR THE PURPOSES OF HIS BUSINESS AT A POINT OF TIME WHEN THE MACHINES, HAD NOT BECOME FUNCTIONAL, MERELY BECAUSE THE MACHINES HAD ALREA DY BEEN INSTALLED? IN ORDER TO SUCCEED, THE ASSESSEE MUST ESTABLISH (1) THAT THE BUILDING IN QUESTION WAS USED FOR THE PURPOSE OF HIS BUSINESS, AND (2) THAT IT WAS USED FOR THE PURPOSES OF HIS BUSINESS DURING THE RELEVANT PERIOD. NOW, ATTENTION MUST BE FO CUSSED ON THE EXPRESSION 'HAVE BEEN USED BY THE ASSESSEE IN HIS BUSINESS OR PROFESSION DURING THE PREVIOUS YEAR'. THE EMPHASIS IS ON 'USER' OF THE BUILDING 'IN THE BUSINESS OF THE ASSESSEE'. MERE PREPARATION FOR THE USER CANNOT AMOUNT TO USER. THERE MUST B E ACTUAL, EFFECTIVE AND REAL USER IN THE COMMERCIAL SENSE. AND THE USER MUST BE SO LINKED WITH THE BUSINESS THAT IT CAN BE SAID THAT THERE IS AN IMMEDIATE NEXUS BETWEEN THE USER AND THE BUSINESS, I.E., THE REAL BUSINESS OF THE ASSESSEE. THE BUSINESS OF THE ASSESSEE WAS TO PRODUCE THE DYESTUFFS ETC. THE BUILDING WAS USED FOR THE PURPOSE OF BUSINESS OF PRODUCTION OF DYESTUFFS ONLY AFTER THE MACHINES BECAME OPERATIVE W.E.F. 7TH MARCH, 1965. COUNSEL FOR THE ASSESSEE HAS ARGUED THAT THE MACHINES HAD FIRST TO BE INSTALLED BEFORE THESE MACHINES COULD BE OPERATED. THE USER HAD, THEREFORE, IT IS SO ARGUED, COMMENCED ON THE DATE ON WHICH THE INSTALLATION WAS COMPLETED. IN FACT, IF THIS ARGUMENTS WERE VALID, IT CAN BE SAID THAT THE USER HAD BEGUN AS SOON AS THE WORK OF INSTALLATION HAD COMMENCED REGARDLESS OF WHEN IT WAS COMPLETED. IN OUR OPINION, THERE IS A BUILT - IN FALLACY IN THIS ARGUMENT. THE FALLACY WILL BECOME EVIDENT IF THE ARGUMENT IS TESTED BY ENVISIONING AN HYPOTHETICAL SITUATION. TAKE THE CASE OF A BUILDING W HICH WAS COMPLETED, SAY IN 1970, AND THE INSTALLATION OF THE MACHINERY WAS COMMENCED IN 1971, BUT COULD NOT BE COMPLETED, FOR SAY FIVE YEARS THEREAFTER, TILL 1974. COULD IT THEN BE CONTENDED THAT THE BUILDING WAS 'USED' FOR THE PURPOSES OF THE 'BUSINESS' O F THE ASSESSEE AND COULD THE ASSESSEE HAVE CLAIMED DEPRECIATION FOR THESE FIVE YEARS? FIVE YEARS EVEN BEFORE THE MACHINERY BECAME FUNCTIONAL AND THE PLANT WAS COMMISSIONED? IN OTHER WORDS, EVEN BEFORE IT COULD HAVE COMMENCED TRIAL PRODUCTION LET ALONE ACTU AL PRODUCTION? THE ANSWER IS OBVIOUSLY 'NO'. DEPRECIATION, IT MUST NOT BE OVERLOOKED, IF INSEPARABLE FROM THE ACTUAL USER FOR BUSINESS. AND, DEPRECIATION ALLOWANCE IS PERMISSIBLE ONLY ON THAT ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 8 - ACCOUNT. IT IS NOT AN ALLOWANCE FOR NATURAL WEAR AND TEAR BY REA SON OF THE AGING PROCESS. IN A WAY, EVERY BUILDING MUST HAVE STARTED AGING FROM THE DAY IT WAS CONSTRUCTED. BUT DEPRECIATION CANNOT BE CLAIMED IN THAT BEHALF BY WAY OF COMPENSATION FOR SUCH DIMINUTION IN LIFE SPAN AND VALUE. IT IS CLAIMABLE ONLY ON ACCOUNT OF ITS USER FOR BUSINESS WHICH CAN RESULT IN PROFITS OR GAINS. THIS CAN HAPPEN ONLY WHEN PRODUCTION COMMENCES. ANOTHER ILLUSTRATION MAY ALSO MAKE THE POSITION ABUNDANTLY CLEAR. TAKE THE CASE OF A FACTORY WHICH HAS TOTALLY CLOSED DOWN ITS BUSINESS OPERATIO NS FOR FIVE YEARS DURING WHICH IT DOES NOT OPERATE THE FACTORY OR WORK FOR PROFITS OR GAIN. CAN DEPRECIATION BE CLAIMED FOR THIS PERIOD NOTWITHSTANDING THIS FACTOR? IN OUR OPINION, THEREFORE, THE COMMENCEMENT OF THE BUSINESS BY WAY OF THE PRODUCTION OF THE ARTICLE FOR THE MANUFACTURE OF WHICH THE PLANT WAS BEING SET UP IS AN ESSENTIAL PRECONDITION FOR HOLDING THAT THE BUSINESS OF THE COMPANY HAD STARTED. IF THE BUSINESS HAD NOT STARTED TILL THEN, THERE WAS NO QUESTION OF CLAIMING DEPRECIATION FOR USING A PA RTICULAR BUILDING OR MACHINERY 'IN THE BUSINESS'. A SOMEWHAT SIMILAR QUESTION HAD ARISEN BEFORE THIS COURT IN IT REF. NO. 205/74, DECIDED ON 19TH OCT., 1978. (ADDL. CIT VS. SPECIALITY PAPER LTD.) DEPRECIATION WAS CLAIMED BY THE ASSESSEE WITH EFFECT FORM TH E DATE ON WHICH TRAIL PRODUCTION WAS COMMENCED. IT APPEARS THAT THERE WAS A TIME LAG BETWEEN THE DATE WHEN THE TRIAL PRODUCTION COMMENCED AND THE DATE WHEN THE ACTUAL PRODUCTION COMMENCED. THE COURT TOOK THE VIEW THAT THE DATE ON WHICH THE TRIAL PRODUCTION COMMENCED WAS IRRELEVANT FOR THE PURPOSES OF CLAIMING DEPRECIATION AND THAT IT CANNOT BE SAID THAT THE COMPANY HAD SET UP ITS BUSINESS AT THE POINT OF TIME WHEN THE TRIAL PRODUCTION HAD COMMENCED. IN OTHER WORDS, THE COMPANY HAD NOT COMMENCED ITS BUSINESS FROM THE STANDPOINT OF THE RIGHT TO CLAIM DEPRECIATION FOR THE USER OF A BUILDING OR MACHINE IN THE BUSINESS OF THE ASSESSEE - COMPANY. UNDER THE CIRCUMSTANCES, THE CONCLUSION IS INESCAPABLE THAT THE TRIBUNAL HAD COMMITTED AN ERROR IN REVERSING THE VIEW TAK EN BY THE ITO AS CONFIRMED BY THE AAC AND IN DECIDING THE QUESTION IN FAVOUR OF THE ASSESSEE. WE, THEREFORE, ANSWER THE QUESTION REFERRED TO US, AS UNDER: QUESTION : 'WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE TRIBUNAL WAS JUSTIFIED IN LAW IN HOLDING THAT THE 'AZO' BUILDING WAS USED FOR THE PURPOSES OF BUSINESS FOR MORE THAN ONE MONTH IN THE RELEVANT ACCOUNTING YEAR FOR THE ASSESSMENT YEAR 1965 - 66 AND WAS ENTITLED TO DEPRECIATION IN THE SAID ASSESSMENT YEAR?' ANSWER : IN THE NEGATIVE, I .E., IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. THERE WILL BE NO ORDER REGARDING COSTS. ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 9 - 4.3. IN THE CASE IN HAND ALSO, ALTHOUGH THE APPELLANT HAD PURCHASED THE BUILDING FOR BUSINESS PURPOSE AND FURNISHING OF THE SAME WAS BEING CARRIED OUT FOR AC TUAL USE. THEREFORE, IN VIEW OF THE BINDING PRECEDENT OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SUHRID GEIGY LTD., WE ARE NOT INCLINED TO ACCEPT THE ARGUMENTS ADVANCED BY THE LD. SR. COUNSEL FOR THE ASSESSEE, SAME ARE HEREBY REJECTED O N THIS ISSUE. THUS, G ROUND NOS.1 TO 4 OF ASSESSEE S APPEAL ARE REJECTED. 5. NOW, WE TAKE UP GROUND NOS.5 & 6 OF ASSESSEE S APPEAL WHICH ARE INTER - CONNECTED AND, THEREFORE, THE SAME ARE DECIDED TOGETHER. 5.1. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITT ED THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF EMPLOYEE S STOCK OPTION SCHEME (ESOP) AMOUNTING TO RS.24,30,554/ - MADE U/S.28 R.W.S. 37 OF THE ACT. THE LD. SR. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THESE ISSUES ARE SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF HON BLE SPECIAL BENCH OF THE TRIBUNAL (ITAT BANGALORE BENCH SPECIAL BENCH) RENDERED IN THE CASE OF BIOCON LTD. VS. DY.CIT REPORTED AT (2013) 155 TTJ 649:: 35 TAXMANN.COM 335 (BANGALORE - TRIB.)(SB).. 5.2. ON THE CONTRARY, LD.SR.DR SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE AUTHORITIES BELOW WERE JUSTIFIED IN MAKING THE DISALLOWANCE. ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 10 - 6. WE HAVE HEARD RIVAL SUBMISSIONS, PERUSED THE MATERIAL AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE FIND THAT THE LD.CIT(A) IN PARA - 7.3. OF HIS ORDER HAS HELD AS UNDER: - 7.3. I HAVE CONSIDERED THE FACTS OF THE CASE, ASSESSMENT ORDER AND APPELLANT S SUBMISSION. APPELLANT HAS CLAIMED THE ESOP EXPENSE WITHOUT IN CURRING A SINGLE PENNY EXPENSE ON EMPLOYEES. NOT A SINGLE RUPEE HAS GONE OUT OF THE ASSESSEE S BOOKS FOR THE PURPOSE OF ESOP BUT STILL THE DIFFERENCE BETWEEN MARKET PRICE OF SHARE AND ESOP OFFER PRICE WAS CONSIDERED AS LOSS/EXPENSE AND THE SAME WAS CLAIME D. ALL THE ARGUMENTS RAISED BY THE APPELLANT HAVE BEEN ANSWERED CLEARLY BY THE ASSESSING OFFICER WHICH IS QUOTED IN PARA - 7.1 ABOVE. I COMPLETELY AGREE WITH THE ASSESSING OFFICER S ORDER REBUTTING APPELLANT S CONTENTIONS. SINCE ELABORATE DISCUSSION HAS B EEN GIVEN IN THAT PART, THE SAME IS NOT REPEATED HERE. THE APPELLANT S CLAIM IS FOUND TO BE FRIVOLOUS AND TOTALLY UNSUSTAINABLE IN VIEW OF THE FOLLOWING FACTS: - 1 - ESOP IS A SCHEME FOR EMPLOYEES BY WHICH THEY ARE ALLOTTED COMPANY S SHARES AT DISCOUNT TO M ARKET PRICE. ISSUE OF SHARES OF PREMIUM OR DISCOUNT IS CAPITAL IN NATURE AND HENCE BALANCE SHEET ITEM. THERE IS NO REVENUE LOSS OR GAIN IN ISSUE OF EQUITY SHARES. IF SHARES ARE ISSUED AT PREMIUM THEN SHARE PREMIUM ACCOUNT IN BALANCE SHEET INCREASES. I F THE SHARES ARE ISSUE AT DISCOUNT EITHER SHARE PREMIUM ACCOUNT IS REDUCED OR SHARES DISCOUNT ACCOUNT IS INCREASED. IN EITHER EVENT, PROFIT OR INCOME OF THE COMPANY IS NOT AT ALL AFFECTED. THEREFORE CLAIMING ANY LOSS ON ACCOUNT OF GIVING OPTION TO EMPLOY EE TO SUBSCRIBE SHARES AT LOWER VALUE IS WITHOUT ANY BASIS AND FRIVOLOUS. 2 - WHEN SHARES ARE ISSUED AT PREMIUM, SAID PREMIUM IS NOT OFFERED AS INCOME FOR TAX, THEREFORE ANY REDUCTION IN SHARES PREMIUM CANNOT RESULT IN LOSS WHICH CAN BE CLAIMED IN P&L ACCOU NT. ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 11 - 3 - DISCLOSURE NORMS FOR LIMITED COMPANIES CAN BE THERE AS PER SEBI OR ICAI GUIDELINES BUT THE ACCOUNTING WILL NOT MAKE THE CLAIM AS ALLOWABLE EXPENSE OR LOSS. FOR BEING AN ALLOWABLE EXPENSE OR LOSS, THE FIRST CONDITION IS THAT EXPENSE CANNOT BE CAPIT AL IN NATURE. SHARE PREMIUM OR LOSS ON PREMIUM IS UNDOUBTEDLY CAPITAL IN NATURE AND THEREFORE CLEARLY OUTSIDE THE PURVIEW OF SECTION 37 AND 28 WHICH DEALS WITH REVENUE EXPENSES OR LOSSES. THEREFORE MAKING SUCH CLAIM JUST ON THE BASIS OF ACCOUNTING ENTRIE S FOR CERTAIN DISCLOSURE PURPOSES AND COMPLETELY IGNORING THE PROVISIONS OF IT ACT IS NOTHING BUT FURNISHING INACCURATE PARTICULARS OF INCOME. CONSIDERING THE ABOVE AND THE DISCUSSION IN ASSESSMENT ORDER, I FIND THIS CLAIM FRIVOLOUS, UNSUSTAINABLE AND NOT AS PER THE PROVISIONS OF LAW. ACCORDINGLY THE ADDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED. 6.1. IT IS NOT DISPUTED THAT THE ASSESSEE HAS CLAIMED BUSINESS EXPENDITURE ON ESPO. THE SIMILAR ISSUE WAS BEFORE THE HON BLE SPECIAL BENCH OF ITAT BANGA LORE RENDERED IN THE CASE OF BIOCON LTD. VS. DY.CIT(SUPRA), WHEREIN THE HON BLE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: - IN THE PRESENT CASE, THE ASSESSEE - COMPANY WAS A CLOSELY HELD COMPANY IN THE PREVIOUS YEAR RELE VANT TO THE ASSESSMENT YEAR 2003 - 04 AND AS SUCH THERE WAS NO QUESTION OF LISTING OF ITS SHARES AND HAVING SOME MARKET PRICE AT THE TIME OF GRANT OF OPTIONS. ORDINARILY, THE AMOUNT OF DISCOUNT ON PREMIUM WHICH IS WRITTEN OFF OVER THE VESTING PERIOD REPRESE NTS THE MARKET PRICE OF THE SHARES LISTED ON THE STOCK EXCHANGE ON THE DATE OF GRANT OF OPTION AS REDUCED BY THE PRICE AT WHICH OPTION IS GIVEN TO THE EMPLOYEES. HOWEVER, SINCE THERE WAS NO AVAILABILITY OF ANY MARKET PRICE OF SUCH SHARES ON THE DATE OF GR ANT OF OPTION AS THE COMPANY CAME TO BE LISTED ON A STOCK EXCHANGE IN A SUBSEQUENT YEAR, THE ASSESSEE - COMPANY TOOK THE MARKET PRICE OF THE SHARE ON THE DATE OF GRANT OF OPTION AT RS.919. NO MATERIAL WORTH THE NAME WAS PLACED ON RECORD TO INDICATE AS TO HO W A SHARE WITH FACE VALUE OF RS.10 HAD ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 12 - BEEN VALUED AT RS.919 FOR CLAIMING DEDUCTION TOWARDS DISCOUNT AT RS.909 PER SHARE. THIS ASPECT OF VALUATION OF SHAR E S AT RS.919 PER SHARE NEEDS TO BE EXAMINED BY THE ASSESSING OFFICER [PARA 12.2]. 6.2. RESPECTFULLY FOLLOWING THE AFORESAID DECISION OF SPECIAL BENCH OF ITAT BANGALORE RENDERED IN THE CASE OF BIOCON LTD.(SUPRA), WE ALLOW THE GROUND NOS. 5 & OF ASSESSEE S APPEAL. 7. GROUND NO.7 IS AGAINST IN DELETING THE INTEREST CHARGED U/S.234B OF RS.11,43,780/ - AND U/S.234C OF RS.5,25,159/ - OF THE ACT. THE ISSUE BEING CONSEQUENTIAL IN NATURE. 8. GROUND NO.8 IS AGAINST THE INITIATION OF PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT. THIS ISSUE IS PRE - MATURE, HENCE NEEDS NO INDEPENDENT ADJUDICATION. 9. GROUND NO.9 I S AGAINST CHARGING OF INTEREST U/S.234B & U/S.234C AND PENALTY PROCEEDINGS U/S.271(1)(C) OF THE ACT. THESE ISSUES ARE CONSEQUENTIAL AND PREMATURE. 10. IN THE RESULT, ASSESSEE S APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN COURT ON THE DATE MENTIONED HER EINABOVE AT CAPTION PAGE SD/ - SD/ - ( . . ) ( ) ( N.S. SAINI ) ( KUL BHARAT ) ACCOU NTANT MEMBER JUDICIAL MEMBER AHMEDABAD; DATED 26 / 09 /20 1 4 . . , . . ./ T.C. NAIR, SR. PS ITA NO. 744/AHD/2011 CERA SANITARYWARE LTD. VS. ADDL.CIT ASST.YEAR 2007 - 08 - 13 - / COPY OF THE ORDER FORWARDED TO : 1 . / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) - VI, AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD 1. DATE OF DICTATION .. 22 /24 .9.14 (DICTATION - PAD 14 - PAGES ATTACHED AT THE END OF THIS FILE) 2. DA TE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER .. 2 2 /24 .9.14 3. OTHER MEMBER... 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P.S./P.S .. 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S . 26.9.1 4 6. DATE ON WHICH THE FILE GO ES TO THE BENCH CLERK 26.9.14 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK ... 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER .. 9 . DATE OF DESPATCH OF THE ORDER