Ucal Machine Tools (P) Ltd., CHENNAI V. ITO, CHENNAI

ITA 797/CHNY/2016

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 8870 (ITAT-CHENNAI)
• Duration Of Justice: 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2016
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 09-06-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 31-03-2016
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH J
• Assessee Lawyers: T N SEETHARAMAN
• Keywords: Reopening of assessment; Difference of opinion; Change of opinion; Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI , ! ' . #$ % &' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NOS.797 & 798/MDS./2016 / ASSESSMENT YEARS : 2008-09 & 2009-10 M/S.UCAL MACHINE TOOLS (P) LTD. , (NOW MERGED WITH M/S.UCAL FUEL SYSTEMS LTD.) RAHEJA TOWERS,7 TH FLOOR, SIGMA WING, NO.177,ANNA SALAI, CHENNAI 600 002. VS. INCOME TAX OFFICER, COMPANY WARD-III(1), CHENNAI-34. [PAN AAACU 0826 D ] ( () / APPELLANT) ( *+() /RESPONDENT) / APPELLANT BY : MR.T.N.SEETHARAMAN,ADVOCATE /RESPONDENT BY : MR.A.V.SREEKANTH,JCIT,DR / DATE OF HEARING : 09 - 06 - 201 6 / DATE OF PRONOUNCEMENT : 15 - 07 - 2016 , / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE TWO APPEALS FILED BY THE ASSESSEE ARE DIRE CTED AGAINST THE COMMON ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-11 DATED 22.01.2016 PERTAINING TO THE ASSESSMENT YEARS 2008-09 & 2009-10. ITA NO.797 & 798/MDS./15 :- 2 -: 2. THE FIRST GROUND IN ITA NO.797/MDS./16 IS WIT H REGARD TO REOPENING OF ASSESSMENT U/S.147 OF THE ACT. 3. THE FACTS OF THE ISSUE ARE THAT THE ASSESSEE C OMPANY IS ENGAGED IN MANUFACTURE OF AUTOMOBILE COMPONENT AND ALSO MAKING DYES & MOULDS, JIGS AND FIXTURES AND SPECIAL PURPOS E TOOLS AS PER CUSTOMERS REQUIREMENTS. THE ASSESSEE FILED E-RETUR N FOR ASSESSMENT YEAR 2008-09 ON 29.09.2008 ADMITTING AN INCOME OF ` 1,12,41,631/- AND THE ASSESSMENT U/S.143(3) WAS COMPLETED ON 27. 12.2010 ACCEPTING THE INCOME RETURNED. SUBSEQUENTLY, THE AO FOUND THAT UNDER THE HEAD MANUFACTURING AND OTHER EXPENSES AN AMOU NT OF ` 67,39,084/- WAS INCLUDED AS EXPENDITURE ON REPLACEM ENT OF TOOLS WHICH REQUIRES TO BE DISALLOWED AND CAPITALIZED. T HEREFORE,, THE ASSESSMENT WAS RE-OPENED BY ISSUE OF NOTICE U/S.14 8 ON 10.04.2012. FINALLY, THE AO COMPLETED THE ASSESSMENT U/S.143(3 ) R.W.S.147 OF THE ACT ON 07.03.2014. AGGRIEVED, THE ASSESSEE CARRIED THE APPEAL BEFORE THE CIT(A). ON APPEAL, THE CIT(A) OBSERVED THAT TH E SCRUTINY ASSESSMENT WAS RE-OPENED WITHIN 4 YEARS FROM THE E ND OF THE ASSESSMENT YEAR. JUST BECAUSE AN ASSESSMENT WAS COM PLETED U/S.143(3), IT DOES NOT MEAN THE AO HAS CONSIDERED ALL THE ISSUES AND THE RELEVANT PROVISIONS OF THE ACT. LD.CIT(A) CITI NG VARIOUS JUDICIAL DECISIONS IN SUPPORT OF HIS DECISION, UPHELD THE RE -OPENING OF ITA NO.797 & 798/MDS./15 :- 3 -: ASSESSMENT U/S.147 OF THE ACT. AGAINST THIS, THE ASSESSEE IS IN APPEAL BEFORE US. 4. BEFORE US, THE LD.A.R SUBMITTED THAT AT THE TIM E OF ORIGINAL ASSESSMENT, THE AO CALLED FOR VARIOUS DETAILS BY IS SUING NOTICE U/S.143(2) OF THE ACT AND AFTER DULY COLLECTED REQU ISITE INFORMATION, AO PASSED ASSESSMENT ORDER. AFTER PASSING THE ASSESSM ENT ORDER, TILL ISSUE OF NOTICE U/S.148 OF THE ACT NOTHING NEW OR T ANGIBLE MATERIAL WAS FOUND BY THE AO. ACCORDING TO HIM, IT IS ONLY FRES H APPLICATION OF MIND ON SAME SET OF FACTS AND JUST IT IS THE CHANGE OF O PINION ONLY. FOR THIS PURPOSE, LD.A.R RELIED ON THE JUDGMENT OF SUPREME C OURT IN THE CASE OF CIT VS. KELVINATOR OF INDIA LTD. REPORTED IN [2 010] 320 ITR 561 (SC). ACCORDING TO HIM, THE REOPENING OF ASSESSMEN T IS BAD IN LAW. ON THE OTHER HAND, LD.D.R RELIED ON THE ORDER OF LD.CI T(A). 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. THE REOPENING OF ASSESSMENT NOTICE WAS GIVE N TO THE ASSESSEE WITHIN FOUR YEARS FROM THE END OF THE RELEVANT ASSE SSMENT YEAR AND IN VIEW OF THE EXPLANATION-1 TO SEC.147 OF THE ACT, TH E AO IS JUSTIFIED IN ISSUING THE NOTICE U/S.148 OF THE ACT FOR THE PURPO SE OF RE-ASSESSMENT. AFTER FIRST APRIL, 1989, THE AO HAS POWER TO REOPEN THE ASSESSMENT U/S.147 OF THE ACT PROVIDED AO HAS A REASON TO BELI EVE THAT INCOME HAS ESCAPED ASSESSMENT AND THERE IS TANGIBLE MATER IAL TO COME TO THE CONCLUSION THAT THERE IS AN ESCAPEMENT OF INCOME; MERE CHANGE OF ITA NO.797 & 798/MDS./15 :- 4 -: OPINION CANNOT BE A REASON FOR REOPENING THE CONC LUDED ASSESSMENT. THE ISSUE WAS TAKEN BY THE SUPREME COURT IN THE CAS E OF CIT VS. KELVINATOR OF INDIA LTD.(SUPRA), WHICH IS RELATING TO THE ASSESSMENT YEAR 1987-88. HOWEVER, AFTER AMENDMENT TO SEC.147 WITH EFFECT FROM 01.04.1989 WHERE AN INCOME LIABLE TO BE TAXED AS ES CAPED ASSESSMENT IN THE ORIGINAL ASSESSMENT DUE TO OVERSIGHT AND INA DVERTENCE OR A MISTAKE COMMITTED BY THE ITO, THE AO HAS JURISDICTI ON TO RE-OPEN THE ASSESSMENT. THE EXPLANATION-1 BELOW THE PROVISO TO 147 WHICH READS AS FOLLOWS:- EXPLANATION 1. PRODUCTION BEFORE THE ASSESSING OFF ICER OF ACCOUNT BOOKS OR OTHER EVIDENCE FROM WHICH MATERIAL EVIDENCE COULD WITH DUE DILIGENCE HAVE BEEN DISCOVERED BY TH E ASSESSING OFFICER WILL NOT NECESSARILY AMOUNT TO DISCLOSURE W ITHIN THE MEANING OF THE FOREGOING PROVISO. EXPLANATION-1 TO SEC.147 OF THE ACT GIVES POWER TO THE AO TO RE-OPEN THE ASSESSMENT IN OUR OPINION, FOR REOPENING OF AS SESSMENT , IT IS NOT NECESSARY THAT INFORMATION MUST BE DERIVED FROM EXT ERNAL SOURCE OF ANY KIND OR THAT THERE MUST BE A DISCLOSURE OF NEW AND IMPORTANT MATTERS SUBSEQUENT TO RE-OPENING OF ASSESSMENT. TH E RE-ASSESSMENT IS PERMISSIBLE EVEN IF THE INFORMATION IS OBTAINED FROM PROPER INVESTIGATION FROM THE MATERIALS AND RECORDS OR FRO M ANY ENQUIRY OR RESEARCH INTO THE FACTS OR LAW. THE TAX PAYER CANN OT BE ALLOWED TO TAKE ADVANTAGE OF ANY LAPSE ON THE PART OF THE AO. IN THE INSTANT CASE, ADMITTEDLY ASSESSMENT IS REOPENED WITHIN FOUR YEARS AND THE ITA NO.797 & 798/MDS./15 :- 5 -: ASSESSMENT WAS REOPENED FOR CONSIDERING THE DISALLO WANCE EXPENDITURE OF TOOLS. AS SUCH, WE CANNOT SAY THAT THERE IS A CHANGE OF OPINION, SINCE THERE IS NO OPINION FORMED BY THE AO IN THE RE-OPENING OF ASSESSMENT ON THIS ISSUE. ACCORDINGLY, WE UPHELD THE REOPENING OF ASSESSMENT MADE BY THE AO. THIS GROUND RAISED BY T HE ASSESSEE FOR ASSESSMENT YEAR 2008-09 STANDS REJECTED. 6. COMING TO THE SECOND COMMON GROUND IN BOTH THE APPEALS IS WITH REGARD TO TREATMENT OF EXPENDITURE ON TOOLS AS CAPITAL EXPENDITURE. ACCORDING TO LD.A.R, THE LIFE OF THE TOOLS IS VERY SHORT LIKE SCREW DRIVERS, SPANNERS WHICH ARE PURCHASED ALONG W ITH MACHINERIES. THESE ITEMS BY WEAR AND TEAR, GETS WORN OUT AND HAV E TO BE REPLACED AND SUCH REPLACEMENT ARE REVENUE EXPENDITURE ONLY A ND CANNOT BE CONSIDERED AS CAPITAL EXPENDITURE. LD.A.R PLACED RE LIANCE ON THE FOLLOWING JUDGMENTS. 1. IN THE CASE OF CIT VS. MANOHAR LAL HIRA LAL LTD. REPORTED IN [2013] 39 TAXMANN.COM 110 (ALLAHABAD) 2. IN THE CASE OF CIT VS. TVS MOTORS LTD. REPORTED IN [2014] 45 TAXMANN.COM 94(MADRAS) 7. ON THE OTHER HAND, LD.D.R SUBMITTED THAT THERE WERE PURCHASE OF DRILLS, MILLING TOOLS, MILLING CUTTER, HYDRAULIC TURNING FIXTURE FOR FITTING, CASTING, MICOR-BORE CARTRIDGE, LATHE FIXTURE, HYDRA ULIC TURNING FIXTURE, STEPPED DRILL, MILLING INSERTS, VERTICAL SWING, CLA MP CYLINDER, SC HOLE MIL, ITA NO.797 & 798/MDS./15 :- 6 -: MILLING, THREADING AND TURNING INSERTS, MILLING TOO LS & INSERTS ETC. FROM THE DESCRIPTION, THESE ARE CLEARLY TOOLS UTILIZED F OR PLANT & MACHINERY AND HAVING ENDURING BENEFIT. THEREFORE, LD.D.R REIT ERATED THAT THESE ITEMS CANNOT BE REGARDED AS CONSUMABLES TO BE QUALI FIED AS REVENUE EXPENDITURE ALLOWABLE U/S.37 OF THE ACT. LD.D.R REL IED ON THE CASE LAW OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. SAR AVANA SPINNING MILLS PV. LTD., REPORTED IN 293 ITR 201. FURTHER, L D.D.R SUBMITTED THAT THE CASE LAWS SUBMITTED BY THE ASSESSEES COUNSEL C ANNOT BE APPLICABLE TO THE FACTS OF THE CASE. 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IT IS CLEAR UPON READING THE PROVISIONS OF ACCOUNTI NG STANDARDS (AS) 2 AND (AS) 10 THAT, THE OPINION OF THE COUNCIL OF T HE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA IN RESPECT OF TREATMENT OF MAC HINERY SPARES IS BRIEFLY THAT MACHINERY SPARES WHICH ARE NOT SPECIFIC TO ANY FIXED ASSET AND CAN BE USED GENERALLY SHOULD BE TREATED AS PART OF INVENTO RY AND CHARGED TO PROFIT AND LOSS ACCOUNT AS AND WHEN THEY ARE CONSUMED DURI NG THE ORDINARY COURSE OF BUSINESS. ON THE OTHER HAND, IF THE MACHINERY SP ARES ARE OF THE NATURE OF CAPITAL SPARES/INSURANCE SPARES WHICH ARE SPECIFIC TO A PARTICULAR ITEM OF FIXED ASSET AND THEIR USE IS IRREGULAR, THEN, THEY SHOULD BE CAPITALIZED SEPARATELY AND DEPRECIATED ON A SYSTEMATIC BASIS OV ER A TIME FRAME NOT EXCEEDING THE USEFUL LIFE OF THE FIXED ASSET TO WHI CH THEY RELATE. AS A MATTER OF FACT, IN CASE THE FIXED ASSET TO WHICH THEY RELA TE, IS DISCARDED, THE MACHINERY SPARES WILL ALSO HAVE TO BE DISPOSED OF A S THESE SPARES ARE ITA NO.797 & 798/MDS./15 :- 7 -: INTEGRAL PARTS OF THE FIXED ASSET. IT IS TO BE NOTE D THAT THESE ACCOUNTING STANDARDS ARE MANDATORY IN NATURE AND APPLIED TO AC COUNTS PREPARED AFTER APRIL 1, 1999. IN THAT SENSE THE SUBMISSION OF THE ASSESSEE HAS TO BE ACCEPTED THAT THE CHANGE IN THE ACCOUNTING POLICY H AD BEEN BROUGHT ABOUT BY VIRTUE OF THE ISSUANCE OF THE REVISED ACCOUNTING STANDARDS ISSUED BY THE COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS O F INDIA, WHICH WERE, APPLICABLE FOR THE ASSESSMENT YEAR UNDER CONSIDERAT ION. FURTHERMORE, THE PROVISIONS OF SUB-SECTIONS (3A), (3B) AND (3C) OF S ECTION 211 OF THE COMPANIES ACT, 1956, CLEARLY PROVIDE THAT EVERY PRO FIT AND LOSS ACCOUNT AND BALANCE-SHEET OF A COMPANY SHALL COMPLY WITH THE AC COUNTING STANDARDS PRESCRIBED. WHERE THE ACCOUNTS OF THE COMPANY DO NO T COMPLY WITH THE ACCOUNTING STANDARDS IT IS REQUIRED TO DISCLOSE IN THE PROFIT AND LOSS ACCOUNT AND THE BALANCE-SHEET : (A) THE DEVIATION FROM THE ACCOUNTING STANDARDS ; (B) THE REASONS FOR SUCH DEVIATION ; AND (C) THE FI NANCIAL EFFECT, IF ANY, ARISING, DUE TO SUCH DEVIATION. WHAT IS IMPORTANT I S THAT SUB-SECTION (3) OF SECTION 211 PROVIDES THAT UNTIL THE CENTRAL GOVERNM ENT PRESCRIBES AN ACCOUNTING STANDARD IN CONSULTATION WITH THE NATION AL ADVISORY COMMITTEE AS SET UP UNDER SECTION 210A OF THE COMPANIES ACT, 195 6, PURSUANT TO A RECOMMENDATION OF THE INSTITUTE OF CHARTERED ACCOUN TANTS OF INDIA THE ACCOUNTING STANDARD ISSUED BY THE INSTITUTE OF CHAR TERED ACCOUNTANTS OF INDIA SHALL PREVAIL. THEREFORE, WE HAVE NO DIFFICUL TY IN ACCEPTING THE SUBMISSIONS OF LEARNED COUNSEL FOR THE ASSESSEE THA T IT WAS OBLIGED TO CAPITALISE THE ENTIRE COST OF SPARES IN CONSONANCE WITH THE MANDATORY PROVISIONS OF ACCOUNTING STANDARDS (AS) 2 AND (AS) 10. THE ASSESSEE HAS ITA NO.797 & 798/MDS./15 :- 8 -: BEEN MAINTAINING A MERCANTILE SYSTEM OF ACCOUNTING, THEREFORE, THE TREATMENT OF EMERGENCY SPARES IN ACCORDANCE WITH TH E REVISED ACCOUNTING STANDARD (AS) 2 AND (AS) 10 WOULD BE IN CONSONANCE WITH THE MERCANTILE SYSTEM OF ACCOUNTING WHICH UNDER THE ACT THE REVENU E IS REQUIRED TO LOOK AT FOR COMPUTING INCOME OF THE ASSESSEE CHARGEABLE UND ER THE HEAD ' PROFITS AND GAINS' FROM BUSINESS. THE SUBMISSION OF LD.D.R THAT THE ACCOUNTING TREATMENT TO BE METED OUT TO A TRANSACTION IN ACCOR DANCE WITH THE ACCOUNTING STANDARD HAS NO RELEVANCE FOR THE PURPOS ES OF THE INCOME-TAX ACT, 1961, IS A SUBMISSION WHICH DOES NOT COMMEND T O US. THUS, EXPENDITURE ON TOOLS IS TO BE ALLOWED AS REVENUE EX PENDITURE AND THIS GROUND OF THE APPEAL IS ALLOWED. 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IN I TA NO. 797/MDS./2016 IS PARTLY ALLOWED AND THE APPEAL OF A SSESSEE IN ITA NO. 798/MDS./2016 IS ALLOWED. ORDER PRONOUNCED ON 15 TH JULY, 2016, AT CHENNAI. SD/ - SD/ - ! ' # . $ %& ' ( DUVVURU RL REDDY )) % / JUDICIAL MEMBER ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER () / CHENNAI *+ / DATED: 15 TH JULY, 2016 K S SUNDARAM +,-- ./-0/ / COPY TO: - 1 . / APPELLANT 3. - 1-!' / CIT(A) 5. /23- 4 / DR 2. / RESPONDENT 4. - 1 / CIT 6. 3&-5 / GF