Raymon Patel Gelatine Pvt.Ltd., Baroda V. The ACIT.,Circle-4, Baroda

ITA 806/AHD/2012

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 5264 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 9 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 27-06-2017
• Assessment Year: 2004-2005
• Appeal Filed On: 12-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINOD TALWANI
• Assessee Lawyers: MEHUL PATEL
• Keywords: Capital asset; Business income; Depreciation; Revenue expenditure
• Section: 271(1)(c); 143(3); 80HHC

Judgement Text

ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 1 OF 7 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD BENCH D, AHMEDABAD [CORAM: JUSTICE P P BHATT, PRESIDENT, AND PRAMOD KU MAR, VICE PRESIDENT] ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 RAYMON PATEL GELATINE PVT LTD .....APPEL LANT 61, HARIBHAKTI EXTENSION OLD PADRA ROAD, VADODARA [PAN: AACCR4454L] VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 4 (1)AHMEDABAD ..........RESPONDEN T APPEARANCES BY MEHUL PATEL FOR THE ASSESSEE VINOD TALWANI FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : OCTOBER 30, 2018 DATE OF PRONOUNCEMENT : JANUARY 29, 2019 O R D E R PER PRAMOD KUMAR, VICE PRESIDENT: 1. THESE TWO APPEALS PERTAIN TO THE SAME ASSESSEE, ARE INTERCONNECTED AND WERE HEARD TOGETHER. AS A MATTER OF CONVENIENCE, THEREFO RE, BOTH OF THESES APPEALS ARE BEING DISPOSED OF BY WAY OF THIS CONSOLIDATED ORDER . ITA NO. 278/AHD/ 2009 2. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT HA S CHALLENGED CORRECTNESS OF THE ORDER DATED 18 TH NOVEMBER 2008 PASSED BY THE CIT(A) IN THE MATTER O F ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX A CT, 1961, FOR THE ASSESSMENT YEAR 2004-05. 3. IN THE FIRST GROUND OF APPEAL, THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 2 OF 7 THAT THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) III, BARODA HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN CONF IRMING THE DISALLOWANCE OF RS.40,65,595 OUT OF INTEREST EX PENSE. 4. THE ASSESSEE BEFORE US IS ENGAGED IN THE BUSINES S OF MANUFACTURING AND PRODUCTION OF OSSEIN GELATINE AND DICALCIUM PHOSPHA TE, APART FROM BEING ENGAGED IN PROCESSING AND EXPORT OF PROCESSED MARINE PRODUCTS. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE CAP ITALIZED THE WORK IN PROGRESS IN RESPECT OF NEW PLANT AND BUILDING AS VASAD, AGGREGA TING TO RS 11,51,83,344, ON THE GROUND THAT IT WAS NOT PUT TO USE. IT WAS IN THIS BACKDROP THAT THE ASSESSEE WAS REQUIRED TO DISCLOSE WHETHER ANY INTEREST WAS PAID IN RESPECT OF THE CAPITAL WORK IN PROGRESS. THE IDEA ESSENTIALLY WAS TO DISALLOW THE DEDUCTION OF SUCH INTEREST AS REVENUE EXPENDITURE AND TO ADD THE SAME TO CAPITALI ZATION. THE ASSESSEE, HOWEVER, POINTED OUT THAT THE ASSESSEE HAD SUFFICIENT INTERE ST FREE FUNDS, AND, AS SUCH, NO PART OF THE INTEREST PAYMENTS COULD BE ATTRIBUTED TO THE INVESTMENT IN THE WORK IN PROGRESS. THE DETAILED SUBMISSIONS WERE ALSO MADE TO DEMONSTRATE THAT THE BORROWED FUNDS WERE NOT USED IN THE WORK IN PROGRES S AND, AS SUCH, NO PART OF THE INTEREST PAYMENTS ARE REQUIRED TO BE CAPITALIZED. T HIS PLEA WAS REJECTED BY THE ASSESSING OFFICER. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT ANY SUCCESS. LEARNED CIT(A) ALSO REJECTED THE PLEA OF THE ASSESSEE, AND OBSERVED AS FOLLOWS: I HAVE CONSIDERED SUBMISSIONS OF THE COUNSEL AND TH E FACTS OF THE CASE. IT IS NOT IN DISPUTE THAT THE APPELLANT WAS HAVING SUBSTA NTIAL WORK IN PROGRESS AS ON 31-3-2004, I.E. RS 11.98 CRORES. AS PER AMEND ED PROVISIONS OF SECTION 36(1)(III), INTEREST ON CAPITAL BORROWED FOR THE PU RPOSE OF CAPITAL ASSETS IS TO BE CAPITALIZED TILL THE ASSET IS PUT TO USE. ADM ITTEDLY, CWIP BALANCE OF RS 11.98 CRORES HAVE NOT BEEN PUT TO USE DURING THE YEAR, AND, AS SUCH, CLAIM OF INTEREST ON BORROWED FUNDS RELATING TO SUCH CWIP IS NOT ALLOWABLE AND THE SAME HAS TO BE CAPITALIZED. THE APPELLANT S UBMITTED THAT NO AMOUNTS WERE BORROWED DURING THE YEAR, AND, ONLY RS 39.85 LAKHS WERE ADDED TO THE CWIP DURING THE YEAR AS SUCH, THERE WA S NO MAJOR ADDITION IN THE CURRENT YEAR TO THE VALUE OF CWIP. THESE ARG UMENTS ARE NOT CORRECT AND RELEVANT TO THE ISSUE. AS FAR AS THE CLAIM OF I NTEREST IS CONCERNED, THE SAME IS NOT FOR CAPITAL BORROWED DURING THE YEAR. SIMILARLY, THE INCREASE OR DECREASE IN CWIP DURING THE YEAR IS NOT RELEVANT AS FAR AS CAPITALIZATION OF INTEREST ON OUTSTANDING BORROWING ARE CONCERNED. IT IS NOT IN DISPUTE THAT THE APPELLANT HAS BORROWED HUGE FUNDS TO THE EXTENT OF MORE THAN RS 55 CRORES WHICH ARE INVESTED IN FIXED AND CURRENT ASSE TS. THE APPELLANTS FUNDS ARE MIXED AND FROM THE COMMON FUNDS INVESTMENTS ARE MADE IN CWIP AS WELL AS INVENTORY AND DEBTORS ETC. TOTAL INTEREST PAID WAS RS 2,20,24,107 ON ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 3 OF 7 SECURED LOAN AND RS 40,65,595 ON UNSECURED LOAN. TH E ASSESSING OFFICER CONSIDERED INTEREST ON SECURED LOANS AS BUSINESS EX PENSES AND ALLOWED THE SAME. HE CONSIDERED RS 40,65,595 INTEREST PAID ON U NSECURED LOAN AS DEPLOYMENT ON CAPITAL WORK IN PROGRESS. SINCE APPEL LANT HAS NOT MAINTAINED ANY RECORDS OR DETAILS FOR USE OF BORROW ED FUNDS, IT CANNOT BE SAID THAT BORROWED FUNDS WERE NOT USED FOR CWIP. OU T OF TOTAL INTEREST OF MORE THAN RS 2.06 CRORES, THE ASSESSING OFFICER HAS CONSIDERED RS 40.65 LAKHS AS INTEREST ON CAPITAL BORROWED FOR THE PURPO SE OF CWIP. FURTHER, THIS INTEREST IS TREATED AS PART OF CWIP ON WHICH A PPELLANT WILL BE ELIGIBLE FOR DEPRECIATION FROM THE YEAR IN WHICH THE CWIP WI LL BECOME BUSINESS ASSETS AND WILL BE USED FOR THE PURPOSE OF BUSINESS . THE DISALLOWANCE OF INTEREST CANNOT BE RESTRICTED TO THE CURRENT YEARS BORROWING OR CURRENT YEARS CWIP SINCE INTEREST IS PAID ON FUNDS BORROWE D EARLIER AND UTILIZED AS CWIP. I, THEREFORE, HOLD THAT THE INTEREST TO TH E EXTENT OF RS 40.65 LAKHS WERE RELATING TO CWIP AND, HENCE, AS PER NEWLY INTR ODUCED PROVISO TO SECTION 36(1)(III), THE SAME IS DISALLOWABLE. THE A DDITION MADE BY THE ASSESSING OFFICER IS CONFIRMED. 5. THE ASSESSEE IS AGGRIEVED AND IS IN FURTHER APPE AL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 7. WE FIND THAT THE IMPUGNED DISALLOWANCE IS BASED ON THE PRESUMPTION, AND WITHOUT ANY COGENT MATERIAL TO SUPPORT SUCH PRESUMPTION, THAT ALL THE UNSECURED LOANS ARE RAISED FOR THE PURPOSE OF MAKING INVESTMENTS IN THE CAPITAL WORK I N PROGRESS. THIS PRESUMPTION CLEARLY CONTRADICTS WITH CIT(A)S OWN F INDING, AS REPRODUCED ABOVE, TO THE EFFECT THAT THE APPELLANTS FUNDS ARE MIXED AN D FROM THE COMMON FUNDS INVESTMENTS ARE MADE IN CWIP AS WELL AS INVENTORY A ND DEBTORS ETC. IF THE FUNDS ARE MIXED FUNDS, AS IS THE FINDING OF THE CIT(A), THERE CANNOT BE ANY BASIS FOR THE CONCLUSION, AS HAS BEEN EVENTUALLY ADOPTED BY HIM, THAT ENTIRE UNSECURED LOANS ARE USED FOR THE PURPOSE OF INVESTMENT IN CWIP (I.E. CA PITAL WORK IN PROGRESS). IT IS ALSO NOT IN DISPUTE, AND THE FINANCIAL STATEMENTS FILED BY THE ASSESSEE CLEARLY RE-ESTABLISH THAT, THAT THE INVESTMENTS IN CWIP ARE FAR IN EXCESS OF THE INTEREST FREE FUNDS A VAILABLE TO THE ASSESSEE. IN SUCH CIRCUMSTANCES, IN THE LIGHT OF HONBLE JURISDICTIONAL HIGH COURTS JUDGMENT IN THE CASE OF CIT VS RAGHUVIR SYN THETICS LTD (354 ITR 222) AND HONBLE BOMBAY HIGH COURTS JUDGMENT IN THE CASE OF CIT VS RELIANCE UTILITIES & POWER LTD (313 ITR 340), THE PRESUMPTION HAS TO BE THAT THE INVESTMENTS ARE MADE OUT OF INTEREST FREE FUNDS. THAT IS THE APPROACH CONSIS TENTLY TAKEN BY VARIOUS COORDINATE ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 4 OF 7 BENCHES OF THIS TRIBUNAL. CLEARLY THEREFORE, WHICHEVER WAY ONE LOOKS AT IT, THERE IS NO LEGALLY SUSTAINABLE FOUNDATION FOR THE PRESUMPTION THAT BORROWED FUNDS WERE USED IN THE CAPITAL WORK IN PROGRESS. THE CIT(A) HIMSELF ADMITS THAT THE FUNDS ARE MIXED AND THAT THE ONLY BASIS IS THE NATURE OF LOAN I.E. SECU RED LOAN VS UNSECURED LOAN. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIR ETY OF THE CASE, WE UPHOLD THE PLEA OF THE ASSESSEE AND DELETE THE IMPUGNED DISALLOWANC E OF RS 40,65,595 ON THE ADMITTED PRESUMPTION THAT THE SECURED LOANS WERE USED IN THE CAPITAL WORK IN PROGRESS. THE ASSESSEE SUCCEEDS ON THIS POINT. 8. GROUND NO. 1 IS THUS ALLOWED. 9. IN GROUND NOS. 2, 3 AND 4, WHICH WE WILL TAKE UP TOGETHER AND WHICH DEAL WITH THE ADHOC DISALLOWANCES, THE ASSESSEE HAS RAISED TH E FOLLOWING GRIEVANCES: 2. THAT THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.7,11,926/- BEING REPAIRS AND MAINTENANCE EXPENSES OF PLANT AND MACHINERY. 3. THAT THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.1,16,396/- BEING REPAIRS AND MAINTENANCE EXPENSES TO FACTORY BUILDING. 4. THAT THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF RS.1,50,000/- OUT OF VEHICLE EXPENSES, RS.50,000/- OUT OF TELEPHONE EXPENSES AND RS.25,000 /- OUT OF OFFICE EXPENSES. 10. ALL THE ABOVE DISALLOWANCES ARE PURELY ON ADHOC BASIS AND ON THE GROUND THAT DESPITE SPECIFIC REQUISITIONS, ALL THE BILLS AND VO UCHERS WERE NOT PRODUCED, THAT COMPLETE EXAMINATION OF THESE EXPENSES BY THE AO WA S NOT POSSIBLE, AND THAT ELEMENT OF PERSONAL EXPENSES CANNOT BE RULED OUT. I N APPEAL, HAVING NOTED THE CONTENTIONS OF THE ASSESSEE THAT ALL THE DETAILS WE RE DULY PRODUCED, THE CIT(A) CONFIRMED, RATHER SUMMARILY, STAND OF THE ASSESSING OFFICER. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 11. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING P ERUSED THE MATERIAL ON RECORD, WE ARE OF THE CONSIDERED VIEW THAT THE IMPUGNED DISALLOWANCE, WHICH ARE PURELY ADHOC IN NATURE, ARE SIMPLY BASED ON SURMISES AND CONJECT URES AND CANNOT, THEREFORE, MEET ANY JUDICIAL APPROVAL. THE STAND OF THE ASSESSEE THAT ALL THE DETAILS WERE DULY PRODUCED ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 5 OF 7 BEFORE THE ASSESSING OFFICER, AND THAT THERE IS NO REQUISITION WHICH REMAINS TO BE COMPLIED WITH, HAS SIMPLY BEEN BRUSHED ASIDE. IN AN Y CASE, IN THE CASE OF A CORPORATE ASSESSEE, THERE IS NO QUESTION OF PERSONAL EXPENSES . WE HAVE ALSO NOTED THAT SIMILAR DISALLOWANCES HAVE BEEN DELETED IN THE EARLIER YEAR S AS WELL. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF TH E CASE, WE UPHOLD THESE GRIEVANCES OF THE ASSESSEE AND DELETE THE IMPUGNED DISALLOWANC ES. 12. GROUND NOS. 2, 3 AND 4 ARE THUS ALLOWED. 13. IN GROUND NO. 5, THE ASSESSEE HAS RAISED THE FO LLOWING GRIEVANCE: 5. THAT THE LEARNED CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN PARTIALLY CONFIRMING THE DISALLOWANCE OUT OF LABOUR CHARGES AND REDUCING THE SAME TO 10% INSTEAD OF 20% DISALLOWED BY THE AS SESSING OFFICER INSTEAD OF DELETING THE SAME IN TOTO. 14. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED, THE ASSESSING OFFICER DISALLOWED 20% OF THE LABOUR CHARGES ON THE GROUND THAT COMPLETE CHECK OVER EXPENSES WAS NOT POSSIBLE. WHEN THE DISALLOWANCE W AS CHALLENGED BEFORE THE CIT(A) AND IT WAS CONTENDED THAT THE ALLEGATION OF THE ASSESSING OFFICER WAS FACTUALLY INCORRECT AND CONTRARY TO THE EVIDENCE AV AILABLE ON RECORD, THE CIT(A) SIMPLY BRUSHED ASIDE THE ARGUMENT AND PROCEEDED TO SCALE DOWN THE DISALLOWANCE TO 10% BY OBSERVING THAT SINCE ENTIRE PAYMENT IS MADE BY CASH TO 6-7 PERSONS AND VOUCHERS WERE NOT PROPERLY MAINTAINED, THE DISALLOW ANCE WAS JUSTIFIED IN PRINCIPLE. THE ASSESSEE IS NOT SATISFIED WITH THE PARTIAL RELI EF SO GIVEN AND IS IN FURTHER APPEAL BEFORE US. 15. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED TH E MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE AP PLICABLE LEGAL POSITION. 16. IN OUR CONSIDERED VIEW, THE REASONS FOR UPHOLDI NG THE DISALLOWANCE ARE RATHER VAGUE AND PROCEED ON SWEEPING GENERALIZATIONS. THE ALLOWANCES ARE PURELY ADHOC IN NATURE AND NO SPECIFIC LEGALLY SUSTAINABLE DEFECTS HAVE BEEN POINTED OUT AND THE STAND OF THE ASSESSEE THAT ALL THE DETAILS WERE DUL Y PRODUCED BEFORE THE ASSESSING OFFICER, AND THAT THERE IS NO REQUISITION WHICH REM AINS TO BE COMPLIED WITH, HAS SIMPLY BEEN BRUSHED ASIDE. WE HAVE ALSO NOTED THA T SIMILAR DISALLOWANCES HAVE BEEN DELETED IN THE EARLIER YEARS AS WELL. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MIND ENTIRETY OF THE CASE, WE UPHOLD THE GRIEVAN CE OF THE ASSESSEE AND DELETE THE IMPUGNED DISALLOWANCE IN ENTIRETY. 17. GROUND NO. 5 IS ALSO THUS ALLOWED. 18. IN GROUND NO. 6, THE GRIEVANCE RAISED BY THE AS SESSEE IS AS FOLLOWS: ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 6 OF 7 6. THAT THE LEARNED CIT (A) HAS GRIEVOUSLY ERRED IN LAW AND ON FACTS IN RESTRICTING THE CLAIM OF DEDUCTION U/S. 80HHC OF THE ACT BY CONFIRMING THE REDUCTION OF 90% OF INTEREST INCOME AND MISC. INCOME FROM THE PROFIT OF ELIGIBLE BUSINESS INCOME AND BY REJECTING THE CLAIM OF DEDUCTION IN RESPECT OF EXPORT INCENTIVE S. 19. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED, LEARNED REPRESENTATIVES FAIRLY AGREE THAT THIS ISSUE IS REQUIRED TO BE REST ORED TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDICATION WITH THE BENEFIT OF DIRECT DECISIONS FROM HONBLE SUPREME COURT IN THE CASE OF ACG ASSOCIATED CAPSULE S LTD VS CIT (343 ITR 89) AND TOPMAN EXPORTS VS CIT (342 ITR 49). THAT IS PRE CISELY WHAT WAS DONE BY THE TRIBUNAL IN THE EARLIER ASSESSMENT YEARS. WE ACCEPT THE PLEA AND REMIT THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR FRESH ADJUDIC ATION AS SUCH. ORDERED, ACCORDINGLY. 20. GROUND NO. 6 IS THUS ALLOWED FOR STATISTICAL PU RPOSES IN THE TERMS INDICATED ABOVE. 21. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. ITA 806/AHD/12 22. BY WAY OF THIS APPEAL, THE ASSESSEE APPELLANT H AS CHALLENGED CORRECTNESS OF THE ORDER DATED 10 TH JANUARY 2012 PASSED BY THE CIT(A) IN THE MATTER OF PENALTY UNDER SECTION 271(1)(C) OF THE INCOME TAX ACT, 1961 , FOR THE ASSESSMENT YEAR 2004- 05. 23. THE IMPUGNED PENALTY IS LEVIED WITH RESPECT TO DISALLOWANCE OF INTEREST OF RS 40,65,595. THIS DISALLOWANCE, HOWEVER, STANDS DELET ED IN THE LIGHT OF OUR ORDER ON ITA NO. 278/AHD/2009 SET OUT EARLIER IN THIS CONSO LIDATED ORDER. AS THE QUANTUM ITSELF STANDS DELETED, THE VERY FOUNDATION OF THE I MPUGNED PENALTY CEASES TO HOLD GOOD IN LAW. WE, THEREFORE, DELETE THE IMPUGNED PEN ALTY OF RS 14,58,531. 24. IN THE RESULT, THIS APPEAL IS ALLOWED. ITA NOS 278/AHD/2009 AND 806/AHD/2012 ASSESSMENT YEAR: 2004-05 PAGE 7 OF 7 SUMMARY 25. TO SUM UP, THE ITA NO. 278/AHD/ 2009 IS PARTLY ALLOWED AND THE ITA NO. 806/AHD/12 IS ALLOWED. PRONOUNCED IN THE OPEN COURT TODAY ON THE 29 TH DAY OF JANUARY, 2019. SD/- SD/- JUSTICE P P BHATT PRAMOD KUMAR (PRESIDENT) (VICE PRESIDENT) AHMEDABAD, DATED THE 29 TH DAY OF JANUARY, 2019 COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ETC TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD