Dy.Commissioner of Income Tax, Lucknow V. M/s Commercial Motors Ltd., Lucknow

ITA 746/LKW/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2042 (ITAT-LUCKNOW)
• Duration Of Justice: 11 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 22-07-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 25-09-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T P SINGH
• Keywords: Depreciation

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH A, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. A. K. GARODIA, ACCOUNTANT MEMBER ITA NO.746/LKW/2014 ASSESSMENT YEAR:2010-11 DCIT RANGE VI LUCKNOW V. M/S THE COMMERCIAL MOTORS LTD. 11, M.G. MARG, LUCKNOW TAN/PAN:AACCT7382 (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI. T.P. SINGH, D.R. RESPONDENT BY: WRITTEN SUBMISSION DATE OF HEARING: 22 07 2015 DATE OF PRONOUNCEMENT: 31 08 2015 O R D E R PER SUNIL KUMAR YADAV: THIS APPEAL IS PREFERRED BY THE REVENUE AGAINST THE ORDER OF THE LD. CIT(A), INTER ALIA, ON THE FOLLOWING GROUNDS:- 1. THE COMMISSIONER OF INCOME TAX (APPEALS), LUCKNOW HAS ERRED IN LAW AND ON FACTS OF THE CASE BY ALLOWING SHORT TERM CAPITAL LOSS OF RS.82,97,750/- TO THE ASSESSEE, WHICH ARISES AFTER SALE OF PLANT & MACHINERY AS SCRAP WHEN THE ASSESSEE COULD NOT PROVE ITS MOTIVE I.E. FOR WHAT PURPOSE THE PLANT AND MACHINERY WAS PURCHASED AND IN WHICH CIRCUMSTANCES THE SAME WAS SOLD IMMEDIATELY, AFTER BEARING SUCH HUGE LOSS. 2. THE COMMISSIONER OF INCOME TAX (APPEALS), LUCKNOW HAS ERRED IN LAW AND ON THE FACTS OF THE CASE BY TREATING THE LOSS OF RS.82,97,750/- AS LOSS INCIDENTAL TO TRADE, IGNORING THE DECISION GIVEN BY THE HON'BLE APEX COURT IN CASE OF CALCUTTA CO. LTD., VS. CIT(1959) 37/TR1 (SC) WHEREIN IT HAS BEEN HELD THAT THE GENERAL COMMERCIAL PRINCIPLE HAS TO BE KEPT IN VIEW WHILE DETERMING REAL :- 2 -: AND TRUE PROFIT OF A BUSINESS OR PROFESSION. 3. THE COMMISSIONER OF INCOME TAX (APPEALS), LUCKNOW HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE ADDITION OF RS.13,13,918/- MADE OUT OF INTEREST AND FINANCE CHARGES PAID TO BANK BECAUSE OF THE FACT THAT THERE WERE NO GENUINE REASONS IN PAYING THE INTEREST AND FINANCE CHARGES ON BANK LOANS WHEN THE ASSESSEE WAS HAVING SUFFICIENT FUNDS AS RESERVE AND SURPLUS AND ALSO GIVING INTEREST FREE LOAN/ADVANCE TO OTHERS. 4. THE COMMISSIONER OF INCOME TAX (APPEALS), LUCKNOW HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN RESTRICTING THE DISALLOWANCE MADE OUT OF REPAIRS OF BUILDING AND OTHERS TO THE EXTENT OF 10% AGAINST 20% AS MADE BY ASSESSING OFFICER EVEN WHEN HE JUSTIFIED THE MAKING OF DISALLOWANCE OF EXPENSES BY THE ASSESSING OFFICER. 2. THIS APPEAL WAS LISTED FOR HEARING ON 22.7.2015, BUT NONE APPEARED ON BEHALF OF THE ASSESSEE. HOWEVER, WRITTEN SUBMISSION IS FILED ON BEHALF OF THE ASSESSEE. ACCORDINGLY THE REVENUE WAS HEARD. 3. APROPOS GROUNDS NO.1 & 2, IT IS NOTICED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF DEVELOPMENT AND CONSTRUCTION OF BUILDING, FLATS, ETC. IT CLAIMED SHORT TERM CAPITAL LOSS OF RS.76,78,821/- AND THE DETAILS OF WHICH ARE AS UNDER:- PROFIT ON SALE OF INVESTMENT (SHARE) 7,47,61 LESS: S.T.T 1,28,732 6,18,929 PLANT AND MACHINERY AT KURSI ROAD VALUATION 1,05,00,000 AS PER BANK LESS: SALE PROCEED 22,02,250 (-) 82,97,750 SHORT TERM CAPITAL LOSS (82,97,750-6,18,929) (-) 76,78,821 :- 3 -: 4. THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM AND IN RESPONSE THERETO IT WAS SUBMITTED THAT THE LAND ALONG WITH PLANT & MACHINERY WAS PURCHASED FOR RS.2.70 CRORES ONLY. OUT OF ABOVE, THE PLANT & MACHINERY WAS VALUED AT RS.1.05 CRORES BY THE BANK AND WAS SOLD FOR A PRICE OF RS.22,02,250/- AND THE LOSS ON SALE OF ABOVE ASSET WAS CLAIMED AT RS.82,97,750/-. THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE EXPLANATION OF THE ASSESSEE AND HE OBSERVED THAT THE TOTAL AREA OF THE FACTORY LAND WAS 14730 SQ. MTRS. WAS PURCHASED AS BUSINESS PROJECT BEING THE ASSESSEE ENGAGED IN THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF BUILDING, FLATS, ETC. THEREFORE, THE INTENTION OF THE ASSESSEE IS TO USE ONLY LAND AND BUILDING AND NOT THE PLANT & MACHINERY. THE ASSESSEE HAS NEITHER PURCHASED PLANT & MACHINERY WITH A VIEW TO SELL IT ON PROFIT NOR TO RUN THE FACTORY BUT THE MOTIVE OF THE ASSESSEE WAS TO PURCHASE THE LAND FOR ITS REDEVELOPMENT. THEREFORE, THE ASSESSEE HAS PAID ONLY FOR THE VALUE OF LAND AND BUILDING AND NOT FOR THE PLANT & MACHINERY. THE VALUE OF PLANT & MACHINERY WAS IMMATERIAL FOR THE ASSESSEE, THEREFORE, NO LOSS HAS BEEN SUFFERED BY THE ASSESSEE ON SALE OF PLANT & MACHINERY. AT THE MOST, THE ALLEGED LOSS CLAIMED BY THE ASSESSEE WOULD BE ADDED TO THE COST OF LAND. HE ACCORDINGLY DENIED CLAIM ON LOSS OF SALE AT RS.82,97,750/-. 5. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WITH THE SUBMISSION THAT THE VALUATION OF PLANT & MACHINERY WAS ASCERTAINED BY THE APPROVED VALUER, WHICH WAS GOT DONE BY THE PUNJAB & SIND BANK. SINCE THE ASSESSEE HAS SUFFERED A LOSS ON SALE OF PLANT & MACHINERY, THE SAME SHOULD BE ALLOWED AS SHORT TERM CAPITAL LOSS. FINDING FORCE IN THE CONTENTIONS OF THE ASSESSEE, THE LD. CIT(A) HAS ALLOWED SHORT TERM CAPITAL LOSS HAVING OBSERVED THAT THE APPROVED VALUER WORKED OUT THE PRESENT MARKET VALUE OF THE PLANT & MACHINERY AND ALLOWED THE DEPRECIATION ON IT. :- 4 -: 6. AGGRIEVED, THE REVENUE IS BEFORE US WITH THE SUBMISSION THAT THE ASSESSEE WAS MAINLY ENGAGED IN THE BUSINESS OF CONSTRUCTION AND DEVELOPMENT OF BUILDING, FLATS, ETC. THE INTENTION OF THE ASSESSEE TO BUY THE FACTORY LAND ALONG WITH PLANT & MACHINERY WAS IN ORDER TO USE THE LAND FOR RAISING CONSTRUCTION THEREON AND NOT TO RUN THE INDUSTRY. THEREFORE, THE LOSS AS CLAIMED ON SALE OF MACHINERY CANNOT BE CALLED TO BE BUSINESS LOSS OR SHORT TERM CAPITAL LOSS TO THE ASSESSEE. THE ASSESSEE HAS IN FACT PURCHASED FACTORY BUILDING ALONG WITH MACHINERY KNOWING FULLY WELL THAT THE MACHINERIES WERE NOT OF ITS USE, AS THE ASSESSEE WAS NOT ENGAGED IN ANY SUCH TYPE OF BUSINESS ACTIVITIES IN WHICH SUCH MACHINERIES CAN BE USED. THE MACHINERIES ARE JUST LIKE A SCRAP FOR HIM, THEREFORE, THE LOSS CLAIMED IN SALE OF MACHINERIES CANNOT BE ALLOWED. THE SHORT TERM CAPITAL LOSS COULD HAVE BEEN ALLOWED, IF THE ASSESSEE HAS SOLD THE ENTIRE FACTORY BUILDING AT A LESSER PRICE. THE LD. D.R. FURTHER CONTENDED THAT AT THE MOST THE ALLEGED SHORT TERM CAPITAL LOSS COULD BE ADDED TO THE COST OF LAND OF THE FACTORY BUILDING. 7. HAVING CAREFULLY EXAMINED THE ORDERS OF THE LOWER AUTHORITIES IN THE LIGHT OF THE RIVAL SUBMISSIONS, WE FIND THAT UNDISPUTEDLY THE ASSESSEE IS NOT ENGAGED IN ANY SUCH BUSINESS ACTIVITIES IN WHICH THESE MACHINERIES CAN BE USED. THE ASSESSEE IN FACT WAS ENGAGED IN CONSTRUCTION OF BUILDING, FLATS, ETC. THEREFORE, THE FACTORY BUILDING WAS PURCHASED BY THE ASSESSEE ONLY FOR CONSTRUCTION OF THE BUILDING AND FLATS. AT THE MOST, THE COST OF MACHINERIES CAN BE ADDED IN THE COST OF LAND PURCHASED FOR RAISING FLATS AND BUILDING. THE MACHINERIES NEVER BECAME THE PART OF BUSINESS ASSET OF THE ASSESSEE, AS THE ASSESSEE WAS NEVER ENGAGED IN ANY MANUFACTURING ACTIVITY. THEREFORE, THE ALLEGED SHORT TERM CAPITAL LOSS AS CLAIMED BY THE ASSESSEE ON SALE OF MACHINERIES CANNOT BE ALLOWED, AS THE MACHINERIES WERE NEVER PURCHASED FOR ITS USE IN THE BUSINESS OF THE ASSESSEE . THE TOTAL COST OF LAND MAY BE INCREASED BY THE ALLEGED LOSS SUFFERED IN SALE OF MACHINERIES. IN THE LIGHT OF THESE :- 5 -: FACTS , WE DO NOT SUBSCRIBE THE VIEW OF THE LD. CIT(A) ON THIS ISSUE AND ACCORDINGLY WE SET ASIDE HIS ORDER IN THIS REGARD AND RESTORE THAT OF THE ASSESSING OFFICER. 8. SO FAR AS GROUND NO.3 IS CONCERNED, IT IS NOTICED THAT THE ASSESSEE HAS CLAIMED INTEREST AND FINANCE CHARGES AT RS.13,13,918/- WHICH INCLUDES INTEREST AMOUNTING TO RS.4,77,483/- ON TERM LOAN FOR GOKHLE MARG PROJECT AND INTEREST AMOUNTING TO RS.4,29,864/- ON TERM LOAN FOR CHINA GATE PROJECT. THOUGH THE ASSESSEE HAS RESERVE AND SURPLUS OF RS.12,98,89,122/-, THE ASSESSEE HAS GIVEN INTEREST FREE LOAN OF RS.50 LAKHS TO NAVEEN GUPTA AND RS.10 LAKHS TO PRITI GUPTA DURING THE YEAR. BESIDES LOAN OF RS.20 LAKHS WAS ALSO GIVEN TO SHRI. Y.K. JAIN AND RS.6 LAKHS TO RAHUL JAIN. SINCE THE ASSESSEE HAD DIVERTED THE BORROWED FUNDS IN INTEREST FREE LOANS, THE ASSESSING OFFICER HAS DISALLOWED THE INTEREST AND FINANCE CHARGES AMOUNTING TO RS.13,13,918/-, AGAINST WHICH AN APPEAL WAS FILED BEFORE THE LD. CIT(A) WITH THE SUBMISSION THAT THE BORROWED FUNDS FROM THE BANK WAS UTILIZED IN THE BUSINESS ACTIVITIES OF THE ASSESSEE. THEREFORE, THE PAYMENT OF INTEREST AND FINANCE CHARGES TO BANK BE ALLOWED, AS IT WAS INCIDENTAL TO THE BUSINESS OF THE ASSESSEE. THE ASSESSEE HAD SUFFICIENT RESERVE AND SURPLUS, OUT OF WHICH INTEREST FREE ADVANCES WERE GIVEN. THEREFORE, IN THE LIGHT OF THE JUDGMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. KADICO KHETAN LTD., 274 ITR 354 AND THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD., 313 ITR 340, INTEREST PAYMENT BE ALLOWED. 9. THE LD. CIT(A) HAVING EXAMINED THE ISSUE IN THE LIGHT OF THE AFORESAID JUDGMENTS HAS DELETED THE ADDITION HAVING OBSERVED THAT INTEREST WAS PAID ON THE BORROWED FUNDS WHICH WERE USED FOR THE BUSINESS PURPOSES. THE LD. CIT(A) HAS ALSO OBSERVED THAT THE ASSESSING OFFICER HAS NOT BROUGHT OUT ANY MATERIAL ON RECORD WHICH COULD PROVE THAT THE BORROWED FUNDS FROM THE BANK ON WHICH INTEREST AND FINANCES :- 6 -: CHARGES WERE PAID, WAS DIVERTED BY THE ASSESSEE IN PROVIDING INTEREST FREE LOANS. 10. AGGRIEVED, THE REVENUE IS BEFORE US, BUT COULD NOT ESTABLISH THAT THE BORROWED FUNDS WERE DIVERTED FOR NON-BUSINESS PURPOSES AND IN ADVANCEMENT OF INTEREST FREE LOANS. SINCE THE ASSESSEE WAS HAVING SUFFICIENT RESERVE AND SURPLUS, THE INTEREST FREE LOANS COULD HAVE BEEN GIVEN OUT OF THAT AVAILABLE FUNDS. 11. IN THE ABSENCE OF ANY FINDING OF THE ASSESSING OFFICER THAT THE BORROWED FUNDS WERE DIVERTED FOR ADVANCING INTEREST FREE LOANS, NO DISALLOWANCE OF INTEREST PAYMENT CAN BE MADE. WE ACCORDINGLY FIND NO MERIT IN THE REVENUES CONTENTIONS. WE, THEREFORE, CONFIRM THE ORDER OF THE LD. CIT(A) IN THIS REGARD. 12. APROPOS GROUND NO.3, IT IS NOTICED THAT THE ASSESSING OFFICER HAS MADE AD HOC DISALLOWANCE OF 20% OF THE REPAIR EXPENSES ON THE GROUND THAT REPAIR EXPENDITURES ARE NOT OPEN FOR VERIFICATION, AS VOUCHERS WERE NOT PRODUCED. THE DISALLOWANCE WAS RESTRICTED TO 10% BY THE LD. CIT(A). WE FIND NO JUSTIFICATION TO DISTURB THE FINDINGS OF THE LD. CIT(A) IN THIS REGARD. ACCORDINGLY, WE CONFIRM THE ORDER OF THE LD. CIT(A) ON THIS ISSUE. 13. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTIONED PAGE. SD/- SD/- [A. K. GARODIA] [SUNIL KUMAR YADAV] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 31 ST AUGUST, 2015 JJ:2508 :- 7 -: COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR ASSISTANT REGISTRAR