Addl. CIT, Noida V. M/s Hongo India (P) Ltd., Gautam Budh Nagar

ITA 832/DEL/2011

• Counselvise Citation: 83220114 RSA 2011
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 27-06-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 11-02-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MRS BANITA DEVI NAOREM
• Assessee Lawyers: D D BANSAL
• Keywords: Opportunity of being heard; Capital receipt; Revenue expenditure; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES: I NEW DELHI BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER AND SHRI B.K. HALDAR, ACCOUNTANT MEMBER ITA NO: 832/DEL/2011 A.Y. : 2000-2001 ADDL.CIT, NOIDA RANGE VS. HONGO INDIA P.LTD. NOIDA, 2 ND FLOOR G-BLOCK 12, UDYOG VIHAR SHOPPING COMPLEX, SECTOR 20 KASNA ROAD NOIDA 201 301 GAUTAM BUDH NAGAR (APPELLANT) (RESPONDEN T) APPELLANT BY : MRS. BANITA DEVI NAOREM, SR.D.R. RESPONDENT BY : SRI D.D.BANSAL, C.A. O R D E R PER DIVA SINGH, JUDICIAL MEMBER THIS IS THE APPEAL FILED BY THE DEPARTMENT AGAINS T THE ORDER DATED 1.11.2010 OF LD.CIT(A), GHAZIABAD PERTAINING TO A.Y . 2000-01 WHEREIN THE DEPARTMENT HAS RAISED FOLLOWING GROUNDS. 1. THAT THE LD.CIT(A) HAS ERRED IN LAW AND ON FACT S IN HOLDING THE REVENUE RECEIPT OF RS. 26,63,283/- AS T RIAL RUN RECEIPT BEING CAPITAL IN NATURE WITHOUT APPRECIATI NG THAT PROPER SALE WAS MADE BY THE ASSESSEE COMPANY AND HENCE THE BUSINESS OF THE ASSESSEE HAD COMMENCED AN D 2 RECEIPTS ON SUCH ACCOUNT WERE REVENUE IN NATURE RIG HTLY TREATED AS INCOME OF THE ASSESSEE. 2. THAT THE ORDER OF THE LD.CIT(A) DESERVES TO BE S ET ASIDE AND THE ORDER OF THE A.O. BE RESTORED. 2. AT THE OUTSET IT WOULD BE RELEVANT TO BRING OUT THE FACT THAT THIS IS THE SECOND ROUND ON THE ISSUE BEFORE THE TRIBUNAL. IN THE FIRST ROUND THE A.O. VIDE HIS ORDER DT. 30 TH JANUARY, 2003 HELD THAT THE AMOUNT OF RS. 26,63,283/- BEING THE INCOME EARNED DURING THE PERIOD 1.4.99 TO 31.3.99 BROUGHT IT TO TAX AS INCOME FROM OTHER SOUR CES. AS SUCH ITS DEDUCTION FROM PREOPERATIVE EXPENSES WHICH WAS CLA IMED BY ASSESSEE WAS HELD TO BE NOT ALLOWABLE. THE BREAK UP OF THI S SPECIFIC AMOUNT OF RS. 26,63,283/- IS AS UNDER. NATURE O F INCOME AMOUNT (RS.) FOREIGN EXCHANGE FLUCTUATION (ON RAW MATERIALS USED DURING TRIAL RUN OF PLAT) 2,99,454/ - JOB WORK (FOR TRIAL RUN OF PLANT) 12,99,147 SALE OF COMPONENTS (OBTAINED DURING TEST RUN OF PLANT) 1,73,329 SALE OF SCRAP (OBTAINED DURING T EST RUN) 4,18,453 SALE OF MISC. SCRAP (PACKING MATERIALS OF PLANT) 4,72,900 26,63,283 2.1. THE ISSUE TRAVELLED BEFORE THE CIT(A) WHO CONF IRMED THE ACTION OF THE AO VIDE HIS ORDER DT. 15.10.2003 AND THERE AFTE R IT CAME UP BEFORE THE TRIBUNAL WHO RESTORED THE ISSUE BACK TO THE FIL E OF AO VIDE ORDER DT. 2 ND JUNE, 2006 WHICH IS PLACED AT PAGES 29 TO 35 OF TH E PAPER BOOK. 3. IN THE SECOND ROUND THE A.O. HELD THAT THE RECE IPTS WERE REVENUE IN NATURE VIDE ORDER DT. 29.11.2007 AND THE ISSUE A GAIN CAME UP BEFORE 3 THE CIT(A) WHICH IS THE IMPUGNED ORDER UNDER CHALLE NGE. CONSIDERING THE ARGUMENTS ADVANCED BY THE ASSESSEE AND THE DIR ECTIONS GIVEN BY THE ITAT THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE VIDE PARA 5.1 TO 5.7. THE SAME ARE REPRODUCED HEREUNDER FOR READ Y REFERENCE. 5.1 I HAVE NO DOUBT WHATEVER THAT THE ASSESSEE COM PANY, IN FACT WENT THROUGH THE TRIAL PRODUCTION RUNS DURING THE P ERIOD 1.4.99 TO 6.6.99. THIS IS CLEAR FROM THE COMPARATIVE CHART OF PRODUCTION AND SALE DURING THE TRIAL RUNS VS. NORMAL PRODUCTION PE RIOD (POST TRIAL PRODUCTION PERIOD SUBMITTED BY THE ASSESSEES COUNS EL). IT IS CLEAR THAT PERCENTAGE OF SCRAP DURING FINAL TRIAL PRODUCT ION IS MUCH MORE AND CAN BE ATTRIBUTED TO ON-GOING TRIAL PRODUCTION. IN THE ABSENCE OF ANY COGENT REASONING OR EVIDENCE IN THE AOS ORDER, THERE IS NO REASON TO CAST DOUBT ON THE AUTHENTICITY OF THE SAME. THE APPELLANTS COUNSEL HAS ALSO EFFECTIVELY REPLIED TO THE ITAT BENCH OBSE RVATIONS IN HIS REPLY. THAT ITAT OBSERVED REGARDING VARIOUS FACTOR S LIKE WHETHER DETAILS OF JOB WORK ARE THERE, WHETHER COMMERCIAL T AXES WERE PAID, WHETHER ACTIVITIES WERE INEXTRICABLE PART OF SETTIN G UP OF MANUFACTURING ACTIVITY. NOW FROM THE DETAILS OF ACCOUNTS OF JOB WORK AND T RIAL PERIOD AND SUBMISSION, IT IS CLEAR THAT TRIAL RUN WAS INEXTRIC ABLY LINKED WITH THE SETTING UP OF MANUFACTURING ACTIVITY. COMMERCIAL T AXES WERE PAYABLE EVEN ON SALE MADE OUT OF TRIAL RUN. I HAVE ALSO CAREFULLY GONE THROUGH THE INDIVIDUAL ITEMS OF IMPUGNED RECEIPTS AND THEIR NATURE AND AM IN COMPLETE AGREEM ENT WITH THE APPELLANTS COUNSEL THAT THE SAME ARE OF CAPITAL NA TURE BEING THOSE ARISING DURING THE TRIAL PRODUCTION PERIOD. 5.3. DURING THE COURSE OF DISCUSSION OF THE CASE, T HE LD. COUNSEL FOR THE APPELLANT ALSO SOUGHT TO DRAW MY ATTENTION TO T HE FOLLOWING OBSERVATIONS OF HONBLE DELHI HIGH COURT IN ADDL.CI T, NEW DETHI VS IDPL(L41 ITR 134) CASE:- WE DO NOT FIND ANY GROUND FOR INTERFERING WITH TH E ORDER OF THE APPELLATE ASSISTANT COMMISSIONER. ANY RECEIPT OR PA YMENT BY AN ASSESSEE HAD NECESSARILY TO BE RELATED TO A SOURCE OF INCOME AND IF IT CAN BE RELATED TO A SPECIFIC SOURCE, IT CANNOT BE RELATED TO THE RESIDUARY SOURCE. 1N THE PRESENT CASE, THE IMPUGNED AMOUNTS WERE CLEARLY REFERABLE TO THE SOURCE OF INCOME UNDER T HE HEAD 'BUSINESS, PROFESSION AND VOCATION. THE FACT THAT THE BUSINES S WAS NOT YET COMPLETELY SET UP DID NOT DETRACT FROM THE EXISTENC E OF THE SOURCE. THE BUSINESS WAS IN THE PROCESS OF BEING SET UP AND REC EIPTS AND PAYMENTS IN RESPECT OF T[HAT SOURCE, WHILE THE BUSI NESS WAS BEING SET UP, MUST NECESSARILY BE RELATED TO THAT SOURCE. SIN CE THE BUSINESS 4 WAS NOT STILL FULLY SET UP, THE RECEIPTS AND PAYME NTS WOULD BE CLEARLY ON CAPITAL ACCOUNT. . IT WOULD BE INCONSISTENT TO HOLD THAT THE EXPE NDITURE INCURRED BY THE ASSESSEE PRIOR TO THE SETTING UP WOULD BE O F A CAPITAL NATURE BUT THAT THE RECEIPTS WOULD BE OF A REVENUE NATURE , IN A CASE WHERE THESE RECEIPTS AND PAYMENTS PERTAIN TO THE FIXED S TRUCTURE OF THE COMPANY'S BUSINESS THAT IS BEING SET UP. ' THE RATIO OF THIS CASE LAW FAVOURS THE CASE OF THE APPELLANT. 5.4. THE A.O'S OBSERVATIONS IN SUPPORT OF HIS VIE W APPEAR TO BE BASED PURELY ON HIS DOUBTS AND SURMISES. HIS CONTE NTION THAT THE FACTS OF THE ASSESSEES CASE ARE DIFFERENT FROM THO SE OF BOKARO CASE ALSO CANNOT BE UPHELD BECAUSE THE RATIO OF THE HON 'BLE SUPREME COURT JUDGMENT IS VERY CLEAR AND FULLY APPLICABLE IN ASSESSEE'S CASE, IN SO FAR AS ONE CANNOT POSSIBLY HAVE INCOME FROM B USINESS ACTIVITIES, WHEN THE BUSINESS HAS NOT YET STARTED. 5.5. IT IS ALSO ON RECORD THAT SUCH TRAIL RUN WA S SPECIFICALLY MENTIONED IN THE DIRECTORS REPORTS AND AUDITED BALA NCE SHEET. 5.6. REGARDING ALTERNATIVE PLEA OF THE APPELLANT, I NOTE THAT FROM THE BEGINNING THE COMPANY HAS ASSERTED THAT IN CAS E ITS RECEIPTS DURING THE TRAIL PERIOD ARE TO BE TREATED AS REVEN UE RECEIPTS, IN THAT CASE, ITS EXPENDITURE DURING THAT PERIOD SHOULD ALS O BE TREATED AS REVENUE EXPENDITURE AND ONLY NET AMOUNT (IF IT BE POSITIVE) SHOULD BE TREATED AS TAXABLE. THE MERIT OF THE COMPANY'S PLEA CANNOT BE DENIED. T HE HON'BLE ITAT E BENCH ALSO SPECIFICALLY DIRECTED THE A.O. TO ADJUDI CATE ON THE COMPANYS PLEA IN THE MATTER. HOWEVER, AO'S ORDER IS SILENT ON THE ISSUE. THE COM PANY'S COUNSEL HAS STRESSED HIS PLEA. HE HAS ALSO SUBMITTED DETAIL ED COMPUTATION AND COMPANYS STATUTORY AUDITOR'S CERTIFICATE IN O RDER TO QUANTIFY THE REVENUE EXPENSES IN CASE ITS MAIN PLEA IS NOT F OUND ACCEPTABLE; AND THE ALTERNATIVE PLEA TO BE CONSIDERED. THE A.OS SILENCE ON THE APPELLANT'S ALTERNATIVE P LEA - DESPITE CLEAR DIRECTIONS OF THE ITAT BENCH IS VERY CONFOUNDING, BECAUSE AS SUBMITTED BY APPELANT'S COUNSEL, IF THE SAME WAS TO BE ACCEPTED, THE ASSESSEE'S LOSS WILL HAVE TO BE ASSESSED AT A MUCH HIGHER FIGURE. HOWEVER, SINCE I AM INCLINED TO ACCEPT THE MAIN PL EA OF THE APPELLANT, THIS DISCUSSION IS ONLY FOR THE RECORD. THUS FOLLOWING THE REASONING DISCUSSED IN DETAIL IN THE AFOREMENTIONED PARAS, I DECIDE THIS ISSUE IN FAVOUR OF APPELLANT AND DELETE ADDITION OF RS. 26,63,283/-. IN THE RESULT, THE APPEAL IS ALLOWED. 4. AGGRIEVED BY THIS THE REVENUE IS IN APPEAL BEFOR E THE TRIBUNAL. 5 5. LD.D.R. PLACES RELIANCE UPON THE ASSESSMENT ORDE R AND THE ORDER OF THE TRIBUNAL ON THE BASIS OF WHICH IT WAS HIS SU BMISSION THAT THE CIT(A) HAS IGNORED THE SPECIFIC FINDING OF THE TRIB UNAL ON THE BASIS OF WHICH DIRECTIONS WERE GIVEN AS SUCH IT WAS ARGUED THE IMPUGNED ORDER DESERVES TO BE SET ASIDE AND THE ASSESSMENT ORDER B E UPHELD. 6. THE LD.A.R. ON THE OTHER HAND RELIES UPON THE IM PUGNED ORDER. INVITING ATTENTION TO THE ORDER OF THE TRIBUNAL PL ACED IN PAPER BOOK BY ASSESSEE AT PAGES 29 TO 35 IT WAS HIS SUBMISSIONS T HAT DESPITE SPECIFIC DIRECTIONS OF THE ITAT THE A.O. STILL PROCEEDED TO CONSIDER THE AMOUNT OF RS. 26 LAKHS ODD AS REVENUE IN NATURE AND THE CIT( A) CONSIDERING THE DETAILED SUBMISSIONS ADVANCED BEFORE HIM WHICH ARE REPRODUCED AT PAGES 4 TO 13 AND THE JUDGEMENT OF THE APEX COURT I N THE CASE OF BOKARO STEEL DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. IT WAS HIS SUBMISSION THAT THE WRITTEN SUBMISSIONS ADVANCED BY THE ASSESS EE ARE AVAILABLE IN THE PAPER BOOK AND ARE REPRODUCED IN THE IMPUGNED O RDER. THE SAME WERE REITERATED AT LENGTH AND HEAVILY RELIED UPON B Y LD.A.R. IT WAS VEHEMENTLY CONTENDED THAT THE ASSESSEE IS A MODERN HITECH PLANT WITH AN INVESTMENT OVER 66 CRORES AND IS A DEDICATED PL ANT FOR STEEL PARTS AND CONTAINERS FOR HONDA SIEL INDIA LTD. AND SINCE ASS ESSEES PLANT IS DEDICATED TO THE REQUIREMENTS OF HONDA SIEL NO JOB WORK OR SALES WERE MADE AS SUCH TO ANY OTHER PARTY. IT WAS HIS SUBMIS SION THAT BEING A DEDICATED PLANT THE GOODS PRODUCED DURING TRIAL R UNS WERE NECESSARILY SOLD TO HONDA SIEL AS THEY WERE TO BE MADE SPECIFI CALLY TO MEET THE 6 REQUIREMENTS OF THE CAR MANUFACTURERS. THE RECEIP TS ON THIS ACCOUNT WERE TREATED AS CAPITAL RECEIPTS AS THE COST OF MAT ERIALS USED DURING THIS PERIOD WERE TREATED AS CAPITAL EXPENSES AS THESE WERE EXPENSIVE HIGH QUALITY STEEL ETC. AND TRIAL RUN EXECUTED WAS NECE SSARY ON THE ACTUAL MATERIAL AND PRODUCT AND ONLY THE NET MATERIAL COST IS ULTIMATELY UTILIZED. IT WAS SUBMITTED THAT THE TRIAL PRODUCTION WAS A NE CESSARY ACTIVITY WHEREIN HUGE INVESTMENTS IN PLANT AND MACHINERY EQU IPPED WITH ROBOTIZED MACHINERY WHICH HAD TO WORK IN TANDEM WIT H HUMAN BEINGS IN ORDER TO PRODUCE STEEL CAR PARTS OF INTERNATIONAL Q UALITY WAS AT STAKE. THE REASONABLENESS AND BUSINESS PRUDENCE OF HAVING A TRIAL RUN CANNOT BE DENIED. IT WAS FURTHER SUBMITTED THAT THE COM PANYS MAIN RAW MATERIAL IS HIGH QUALITY IMPORTED STEEL AND ANY MI S CONFIGURATION OR MIS INSTALLATION OR FOR THAT MATTER ANY MIS HANDLING WO ULD RESULT IN HUGE LOSSES IN THE FORM OF REJECTION OF PRODUCED ITEMS. ACCORDINGLY IT WAS NECESSARY TO HAVE A TRIAL AND THE ASSESSEES TRIAL HAS BEEN FOR A PERIOD OF ABOUT 8 TO 9 WEEKS. THE SAID NECESSITY AROSE SO AS TO ALLOW THE TECHNICAL PARA METERS OF HIGHLY SOPHISTICATED PLANT AND MACHI NERY AND EQUIPMENT TO BE SET ABSOLUTELY ACCURATELY SO AS TO YIELD OPTI MUM GOOD QUALITY PRODUCTION WITH MINIMUM WASTAGE AND MINIMUM REJECTI ONS. SAFETY HAZARDS TO MAN, MATERIAL AND MACHINES ALSO COULD BE CROSS CHECKED. REFERRING TO THE SUBMISSIONS ADVANCED BEFORE THE CI T(A) REPRODUCED IN THE SAID ORDER IT WAS SUBMITTED THAT IT HAS TO BE U NDERSTOOD THAT IN THE TYPE OF PRODUCTION ENVIRONMENT THE ASSESSEE OPERATE D THE UTILIZATION 7 WHETHER DURING THE TRIAL PRODUCTION OR DURING THE N ORMAL PRODUCTION WAS OF THE SAME MEN, MATERIAL AND MACHINES. THE ONLY DIFFERENCE IS THAT AFTER THE TRIAL PERIOD EQUIPMENT ETC. ARE TO BE SET UP AND FINE TUNING AS PER TECHNICAL PARA METERS BY TRIAL AND ERROR APPROA CH OF THE EQUIPMENT VIS--VIS THE MATERIAL AND THE MAN-POWER THE PROD UCTION SCALE IS INCREASED AS THEN IT BECOMES FIT TO PASS THE TEST O F QUALITY. ACCORDINGLY THE PERCENTAGE OF DEFECTIVES IS NECESSARY HIGHER THAN NORMAL ON ACCOUNT OF WHICH FACT PRODUCTION ACTIVITY IS KEPT ON A LOW KEY BASIS AND NOT ON THE OPTIMUM LEVEL. 6.1. IT IS FURTHER SUBMITTED THAT IN THE FACTS OF THE ASSESEES CASE AS IT HAS BEEN ADDRESSED IN THE WRITTEN SUBMISSIONS THAT THE POSITION WAS AS UNDER. (I) ACTUAL JOB WORK AND SALES INCOME DURING THE TRIAL P ERIOD WERE AS UNDER. JOB WORK 12,98,147/- SALES 1,73,329/- --------------- 14,72,476/- =========== (II) AS AGAINST THE ABOVE SALES DURING TRIAL PERIOD, TOT AL SALES AFTER TRIAL PERIOD FROM JUNE, 1999 TO MARCH, 2000) WERE R S. 240,937,030/-, GIVING AVERAGE MONTHLY SALES OF RS. 24,093,703/-. THUS, COMPARATIVE FIGURES WOULD WORK OUT AS UNDER. 2 MONTHS SALE DURING THE TRIAL PERIOD 1.4.99 TO 9.6.99 2 MONTHS AVERAGE SALES DURING POST TRIAL PRODUCTION PERIOD %SGE INCREASE IN SALES DURING POST TRIAL PERIOD OF F.Y. 199-2000 RS. 14,72,476/- RS. 481,87,406/- 3275.54% 8 (III) ON THE OTHER HAND, WASTAGES/SCRAP GENERATED DURING THE TRIAL PRODUCTION PERIOD WAS RS. 4,18,453/- AS AGAINST GOO DS PRODUCTION WORTH RS. 14,72,476/- I.E. 28.4%. 6.2. ON THE BASIS OF THE ABOVE CALCULATIONS IT WAS CONTENDED THAT IT WOULD BE EVIDENT THAT THE QUANTITY/PERCENTAGE OF SC RAP WAS ABNORMALLY HIGH AND IT WAS SOLELY ATTRIBUTABLE TO THE ON GOIN G TRIAL PRODUCTION, AND FINE TUNING DURING THE RELEVANT PERIOD AND THE ASS ESSEE COULD NOT AFFORD TO INCUR THE SAME LEVEL OF WASTAGE ON A FULL SCALE PRODUCTION ACTIVITY. THE DATA IT WAS CONTENDED CLEARLY ADDRESSES THE NEC ESSITY OF HAVING A TRIAL RUN WHICH WAS A GENUINE AND AN ESSENTIAL EXE RCISE IN THE CASE OF ASSESSEE. 6.3. THE DOUBTS CAST BY THE A.O. ON THE REAL-NESS OF TRIAL RUNS OF THE ASSESSEE ARE PURELY BASED ON HIS SURMISES AND CONJE CTURES AND IS WITHOUT ANY LOGIC OR REASONABLE BASIS. ATTENTION W AS INVITED TO PAPER BOOK PAGE 50 WHICH CONTAINS THE DIRECTORS CERTIFIC ATE. RELIANCE WAS PLACED UPON THE APPROPRIATE NOTING IN THE AUDITED B ALANCE SHEET AND THE DIRECTORS REPORT. FOR READY REFERENCE THEY ARE RE PRODUCED FROM PAGE 65 AND 71 RESPECTIVELY. AUDITED BALANCE SHEET AS ON 31.3.20000 (UNDER SCH.N.PARA D) : EXPENDITURE INCURRED ON THE PROJECT UNDER IMPLEMENTATION/TRAIL RUN ARE TREATED AS PRE-OPERATI VE EXPENDITURE PENDING ALLOCATION TO THE ASSETS, AND T HE SAME HAVE BEEN APPORTIONED ON 7 TH JUNE, 99 THE DATE OF COMMENCEMENT OF COMMERCIAL PRODUCTION ON BUILDING A ND PLANT AND MACHINERY IN PROPORTION TO THEIR VALUE AS ON THE SAID DATE. 9 DIRECTORS REPORT FOR F.Y. ENDED 31.3.2000 (UNDER PA RA : PROJECT) : THIS YEAR ASSUMES SIGNIFICANCE FOR THE COMPANY ALL THE MACHINERY FOR THE PROJECT TO MANUFACTURE AUTOMOBILE COMPONENTS TO CATER MAINLY THE REQUIREMENTS OF CAR FRAME COMPONENTS FOR HONDA SIEL CARS INDIA LTD. FOR THEIR PROJECT IN INDIA WERE INSTALLED WITH A CAPACITY OF 30600 NO S. CAR SETS. THE COMPANY HAS MADE AN INVESTMENT OF RS. 61 0,162 MILLIONS IN THE PROJECT TILL MARCH, 20000, COMMERCI AL PRODUCTION HAS ALSO STARTED FROM 7 TH JUNE, 1999. 6.4. RELIANCE WAS ALSO PLACED UPON THE JUDGEMENT OF APEX COURT IN THE CASE OF BOKARO STEEL AND IT WAS VEHEMENTLY CONTEND ED THAT THE TRIAL RUNS ARE INEXTRICABLY PART OF SETTING UP OF A LARGE PLAN T AND BY BYPASSING THE SAID EXERCISE WITHOUT ESTABLISHING THE ESSENTIAL ST ANDARDS REQUIRED WOULD NOT HAVE BEEN FEASIBLE. 6.5. IT WAS SUBMITTED THAT IN REGARD TO EACH OF THE SE I.E. FOREIGN EXCHANGE FLUCTUATION, JOB WORK FOR TRAIN RUN, SA LE OF COMPONENTS AND SALE OF SCRAP OBTAINED DURING THE TRIAL RUN AND THE SCRAP WHICH CONTAINED THE NECESSARY MATERIAL OF THE PLANT AND STEEL ETC. THE ASSESSEE HAD SPECIFICALLY ADDRESSED AND SOME OF THE SUBMISSIONS ARE FOUND AT PAGES 8 AND 9 OF THE IMPUGNED ORDER FOR READY REFERENCE THE SAME ARE REPRODUCED HEREUNDER. FOREIGN EXCHANGE FLUCTUATION ON RAW MATERIAL USED D URING TRIAL RUN OF PLANT (RS. 2,99,454/-) THIS REPRESENTS INCOME OF THE ASSESSEE ON ACCOUNT O F FAVORABLE FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF MATERIAL S USED IN TRIAL RUNS. IN OTHER WORDS, IN ORDER TO CAPITALIZE THE C ORRECT ACTUAL COST OF MATERIALS USED IN TRIAL RUNS, THIS AMOUNT N EEDS TO BE DEDUCTED FROM THE COST OF MATERIALS. THUS, IT IS O NLY APPROPRIATE TO TREAT IT AS CAPITAL RECEIPT TO BE ADJUSTED FROM THE COST OF MATERIAL USED DURING TRAIN RUNS. (COPY OF ACCOUNT A TTACHED). JOB WORK FOR TRIAL RUN OF PLANT (RS. 12,99,147/-) 10 THESE RECEIPTS ARE ON ACCOUNT OF JOB WORKS DONE ON ASSESSEES PLANT DURING TRIAL RUNS FOR HONDA SIEL INDIA LTD. SINCE THE ASSESEES IS A DEDICATED PLANT FOR THE REQUIREMENT OF HONDA, NATURALLY, HONDA HAS REQUIRED CONFIDENCE IN THE ASS ESSEE, AND HAS COOPERATED WITH THE COMPANY DURING TRIAL RUNS O F ITS PLANT. IT IS WORTHWHILE TO MENTION THAT ENTIRE ABNORMAL WA STAGE OF MATERIAL DURING TRIAL RUNS HAS BEEN BORNE BY THE AS SESSEE COMPANY ONLY. THUS, IT IS ONLY APPROPRIATE TO TREAT JOB WORK RECE IPTS IN QUESTION AS CAPITAL RECEIPTS. (COPY OF ACCOUNT ATTACHED). SALE OF COMPONENTS OBTAINED DURING TEST RUN OF PLAN T (RS. 1,73,329/-) THE GOOD PRODUCTION OBTAINED DURING TRIAL RUNS WAS SOLD TO HONDA. THE RECEIPTS ON THIS ACCOUNT ARE APPROPRIAT ELY TREATED AS CAPITAL RECEIPTS, AS THE COST OF MATERIALS USED DURING THIS PERIOD IS TREATED AS CAPITAL EXPENSE. THUS, ONLY T HE NET MATERIAL COST IS ULTIMATELY CAPITALIZED. IT IS ALSO SUBMITT ED THAT SINCE THE COMMERCIAL TAXES DO NOT RECOGNIZE TRIAL PERIOD, TAX AS APPLICABLE ON THE SALE IN QUESTION, WAS DULY PAID BY THE ASSES SEE. (COPY OF ACCOUNT ATTACHED). SALE OF MISC. SCRAP PACKING MATERIALS OF PLANT (RS. 4,72,900/-) THESE RECEIPTS ARE ON ACCOUNT OF SALE OF EMPTY PACK ING BOXES OF MACHINERY ETC. SINCE THE COST OF PLANT IS TREATED AS CAPITAL EXPENDITURE, IT IS QUITE APPROPRIATE TO TREAT THE R EALIZATION FROM SALE OF EMPTY PACKING BOXES OF SUCH MACHINES ETC. A S CAPITAL RECEIPTS. (COPY OF ACCOUNT ATTACHED). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. CONSIDERING THE FACTS AVAILAB LE ON RECORD AS CANVASSED IN THE FIRST ROUND BEFORE THE TRIBUNAL ON THE BASIS OF WHICH VIDE PARA 5 IN ITA 569/DEL/2004 VIDE ITS ORDER DATE D 2 ND JUNE, 2006 CERTAIN DIRECTIONS WERE GIVEN. ON A PERUSAL OF THE PHOTOCOPIES OF THE SAID ORDER WHICH WERE FOUND PLACED ON RECORD IT WAS SEEN THAT THE PHOTOCOPIES ON RECORD WERE ILLEGIBLE. THE CASE WA S FIXED FOR CLARIFICATION AS IT WAS RELEVANT TO CONSIDER THE FACT WHETHER SP ECIFIC DIRECTIONS OF THE TRIBUNAL WERE CARRIED OUT OR NOT. 7.1. AS SUCH THE PARTIES WERE HEARD ON FACTS IN R EGARD TO THE SPECIFIC DIRECTIONS OF THE TRIBUNAL. FOR READY REFERENCE TH E SPECIFIC DIRECTIONS 11 CONTAINED IN PARA 5 OF ITAT ORDER DT. 2 ND JUNE, 2006 WHOSE TYPED COPY IS MADE AVAILABLE ON RECORD BY THE LD.A.R. IS REPRODUC ED HEREUNDER. 5. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS OF THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON R ECORD. WE FIND THAT IT HAS BEEN OBSERVED BY THE A.O. AND THIS IS THE FIRST YEAR OF THE COMMENCEMENT OF THE BUSINESS OF THE ASS ESSEE COMPANY AS IN THE EARLIER YEAR THE COMPANY WAS BEIN G INSTALLED AND WAS UNDER CONSTRUCTION. SUBSEQUENTLY, THE COMM ERCIAL BUSINESS OF THE COMPANY STARTED FROM 1 ST JUNE, 1999. IT WAS FURTHER OBSERVED BY THE A.O. THAT THE ASSESSEE DURI NG THE PERIOD 1.4.99 TO 31.5.99 I.E. PRIOR TO THE START OF COMMER CIAL PRODUCTION EARNED CERTAIN INCOME AGGREGATING TO RS. 26,63,283/ - AND HAS DEBITED THIS INCOME OUT OF TOTAL PRE-OPERATIVE EXPE NSES AND AFTER SETTING OFF THE SAME, THE NET PRE OPERATIVE EXPENSE S OF RS. 7,30,84,272/- WERE CLAIMED AS REVENUE EXPENDITURE. THE A.O. HOWEVER, DID NOT ACCEPT THE ASSESSEES CLAIM AND FO LLOWING THE DECISION OF HONBLE SUPREME COURT IN TUTICORIN ALKA LI CHEMICALS AND FERTILISERS LTD. VS CIT (1997) 227 ITR 172 (SC) TREATED THE IMPUGNED RECEIPTS AS TAXABLE INCOME FOR THE YEAR UN DER CONSIDERATION. ON APPEAL, THE LD.CIT(A) HAS ALSO HELD THAT THE RECEIPTS EARNED BY THE ASSESSEE BEFORE THE COMMENCE MENT OF THE BUSINESS WERE CLEARLY TAXABLE AS REVENUE RECEIPTS A ND ACCORDINGLY CONFIRMED THE ADDITION MADE BY THE A.O. IN THE GROUNDS OF APPEAL BEFORE US, THE ASSESSEE CLAIMED THAT SUCH RECEIPTS ARE CAPITAL IN NATURE, THEREFORE, THE SAME HAS RIGHTLY BEEN SET OFF OUT OF PRE OPERATIVE EXPENSES, AND IN SUPPORT OF IT, THE RELIANCE WAS PLACED IN CIT VS. BOKARO STEEL LTD . (1999) 236 ITR 315 (S.C.), BONGAGAON REFINERY AND PETROCHEMICA LS LTD. VS CIT (2001) 251 ITR 329 (SC), ACIT VS. INDIAN DRUG A ND PHARMACEUTICAL LTD. (1983) 141 ITR 134 (DELHI) AND CIT VS. STC 12 OF INDIA LTD. (1973) 92 ITR 294 (DELHI). HOWEVER, BEFORE APPLYING THE DECISIONS RELIED ON BY THE PARTIES WE OBSERVED THAT THE COMPLETE FACTS ARE NOT ON RECORD IN AS MUCH AS THER E IS NO DETAIL OF JOB WORK, SALE OF COMPONENTS AND SCRAPS. THERE IS NO MATERIAL ON RECORD TO SHOW AS TO WHETHER THE SALE OF COMPONE NTS AND JOB WORKS WERE MADE TO HONDA SIEL CARS (INDIA) LTD. OR OTHER PARTIES OTHER THAN THE SAID COMPANY. IT IS ALSO NOT ON REC ORD AS TO WHETHER THE ASSESSEE IS LIABLE TO COMMERCIAL TAX AN D/OR CENTRAL EXCISE ON SUCH SALES. THERE IS ALSO NO MATERIAL ON RECORD TO SHOW THAT THE ACTIVITIES OF THE ASSESSEE IN CONNECTION W ITH THE IMPUGNED RECEIPTS ARE DIRECTLY CONNECTED WITH OR IN CIDENTAL TO ITS BUSINESS OR SUCH RECEIPTS ARE INEXTRICABLY LINKED W ITH THE SETTING UP OF THE ASSESEES BUSINESS. WE FURTHER FIND THAT THE LD.CIT(A) HAS NOT PASSED ANY SPEAKING ORDER ON THE ALTERNATE PLEA TAKEN BY THE ASSESSE THAT IF AT ALL THE A.O. WANTED TO T REAT THESE RECEIPTS AS REVENUE RECEIPTS, HE WAS DUTY BOUND T O SIMULTANEOUSLY TO ALLOW THE EXPENDITURE INCURRED BY THE APPELLANT IN ORDER TO EARN THE RECEIPTS IN QUESTION . BESIDES THIS, THE ASSESSEE HAS NOT FILED ANY PAPER BOOK INCLUDING THE STATEMENT OF ACCOUNTS TO SUBSTANTIATE HIS CLAIM. I N THIS VIEW OF THE MATTER AND IN THE INTEREST OF JUSTICE, WE CONSI DER IT FAIR AND REASONABLE TO SEND BACK THE MATTER TO THE FILE OF T HE AO AND ACCORDINGLY WE SET ASIDE THE ORDER PASSED BY THE LD CIT(A) AND RESTORE THE ISSUE TO THE FILE OF AO WHO SHALL DECID E THE SAME AFRESH IN THE LIGHT OF OUR OBSERVATIONS HEREINABOVE AND ACCORDING TO LAW AFTER PROVIDING SUFFICIENT OPPORTUNITY OF B EING HEARD TO THE ASSESSEE AND ACCORDINGLY THE GROUNDS TAKEN BY THE A SSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. 7.2. CONSIDERING THE ARGUMENTS VIS--VIS THE FACTS AS AVAILABLE ON RECORD AND THE SETTLED LEGAL PRINCIPLES WE ARE OF T HE VIEW THAT RELEVANT 13 FACTS STILL NEED TO BE BROUGHT ON RECORD. THE CO-O RDINATE BENCH SPECIFICALLY DIRECTED THAT FACTS HAVE NOT BEEN CORR ECTLY BROUGHT ON RECORD BY THE AUTHORITIES BEFORE THE BENCH. BEFORE WE SPE CIFICALLY ADDRESS THESE WE ARE OF THE VIEW THAT THE ARGUMENTS ON CASE LAW A ND THE FACTS THAT THE REJECTION RATE OF PRODUCTION DURING THE TRIAL RUN A ND POST TRIAL RUN HAS GONE UP HAS NOT BEEN DISPUTED. THE RELEVANCE OF HA VING A TRIAL RUN IN THE CASE OF AN ASSESSEE WHO IS ENGAGED IN THE MANUF ACTURE OF HI-TECH SPECIALIZED CAR PARTS NEEDS NO CASE LAW. HOWEVER W HAT IS RELEVANT IS THE FACTS OF THE SPECIFIC CASE AT HAND WHICH WE ARE PAI NED TO SEE ARE STILL NOT AVAILABLE ON RECORD. THE ASSESSEE HAS CLAIMED THAT DURING THE TRIAL RUN THERE ARE RECEIPTS FROM FOREIGN EXCHANGE FLUCTUATIO N, JOB WORK ETC. 7.3. IN THE LIGHT OF THE ARGUMENTS ADVANCED AND THE MATERIAL AVAILABLE ON RECORD IT IS SEEN THAT AS PER THE ASSESSEES ST AND THE BUSINESS COMMENCED ON 1 ST JUNE, 1999 NO DOCUMENT HAS BEEN RELIED UPON IN SUPPORT OF THIS CLAIM. HOWEVER THE BASIS OF THE SA ME HAS ALSO NOT BEEN QUESTIONED BY THE A.O. NOR BY THE DEPARTMENT. BE T HAT AS IT MAY AS OBSERVED THE RELEVANCE OF DOING A TRIAL RUN CANNOT BE DECIDED BY ANYONE EXCEPT BY THE ASSESSEE AND HAVING HAD A TRIAL RUN T HE ASSESSEE HAS ARGUED ON THE BASIS OF FACTS THAT THE PERCENTAGE OF REJECTION HAS COME DOWN DRASTICALLY. FROM THESE FACTS THE ASSESSEE W OULD LIKE US TO INFER THAT THE TRIAL RUN WAS SUCCESSFUL AND NECESSARY AND A PRUDENT DECISION ON ITS PART. RELEVANCE, PRUDENCE AND SUCCESS OF T HE SAME IS NOT UNDER CONSIDERATION WHAT IS TO BE CONSIDERED IS THE TREAT MENT WHICH IS TO BE 14 MET TO THE RECEIPTS SO GENERATED. IN THE KIND OF H IGHLY SPECIALIZED, MECHANISED MANUFACTURING IN WHICH THE ASSESSEE IS ENGAGED IT CANNOT BE DISPUTED THAT SOME EXPERTS WOULD HAVE BEEN NOMIN ATED ON BEHALF OF THE ASSESSEE OR HONDA SIEL WHOSE CAPTIVE UNIT THE A SSESSEE WAS TO ENSURE THAT THE MANUFACTURING QUALITY IS AS PER THE SPECIALIZED REQUIREMENT OF HONDA SIEL. IT IS SEEN THAT NO EVID ENCE IN REGARD THERETO HAS BEEN CONSIDERED BY ANY AUTHORITY. TRIAL RUN PR ESUPPOSES THAT CERTAIN FINE TUNING OF THE MACHINERY MOULDS ETC. WO ULD HAVE BEEN NECESSARY. IN REGARD TO THIS FACT NO EVIDENCE HAS BEEN LED IN REGARD TO THE CHANGES IF ANY NECESSITATED FOR WHICH COSTS MA Y HAVE BEEN INCURRED FOR FINE TUNING AND/OR CHANGING THE MOULDS/MACHINER Y ETC. 7.4. IN REGARD TO THE JOB WORK IT HAS BEEN CANVASS ED BY THE ASSESSEE THAT THE RAW MATERIAL WHICH IS A HIGH QUALITY STE EL WAS PROVIDED BY HONDA SIEL WAS UTILIZED TO MANUFACTURE CERTAIN PART S IN THE TRIAL RUN PERIOD. THERE NECESSARILY MUST HAVE BEEN DOCUMENTS ON THE BASIS OF WHICH AT SPECIFIC COSTS THE STEEL RAW MATERIAL WOUL D HAVE BEEN MADE AVAILABLE TO THE ASSESSEE AND THERE MUST HAVE BEEN SPECIFIC JOB WORK REQUIREMENTS SET OUT IN THE CONTRACT ALONG WITH THE PRICE TREATMENT, SETTLEMENT FOR THE SUCCESSFUL PRODUCTION OF THE CO MPONENTS FOR WHOSE MANUFACTURE THE ASSESSEE WAS BROUGHT INTO EXISTENCE . NO DOCUMENTATION IN REGARD TO THE JOB WORK CONTRACTS H AD BEEN PLACED ON RECORD. THE TREATMENT TO BE GIVEN TO THE SALE OF COMPONENTS WHICH WAS SUCCESSFULLY PRODUCED DURING THE TRIAL RUN PERIOD C OULD BE CONSIDERED 15 ONLY ONCE THE BASIC DOCUMENTS ARE AVAILABLE. THE T ERMS AND CONDITIONS SET OUT THEREIN WOULD DIRECTLY IMPACT THE CONCLUSIO N HERE. 7.5. IN REGARD TO THE FOREIGN EXCHANGE FLUCTUATION S THE PRICES AT WHICH THE RAW MATERIAL WAS MADE AVAILABLE TO THE ASSESSEE AND THE FOREIGN EXCHANGE FLUCTUATIONS TO WHICH THE COSTS WERE SUBJE CTED AND THE NECESSARY ENTRIES IN REGARD TO BOOKS OF THE ASSESSE E IN REGARD THERETO ALSO HAVE TO BE TAKEN INTO CONSIDERATION. 7.6. IN REGARD TO THE SALE COMPONENT SHOWN IT HAS B EEN STATED THAT THE ASSESSEE HAD ITS OWN RAW MATERIAL ALSO AND SUCCESSF UL PRODUCTION UTILIZING THIS HAS BEEN REFLECTED AS SALE COMPONENT S AND REJECTIONS AS SCRAP. FOR THIS PURPOSE DOCUMENTS ENTRUSTING THE A SSESSEE TO MANUFACTURE SPECIFIC ARTICLES AT SPECIFIC COSTS OF A SPECIFIC QUALITY MUST BE AVAILABLE. THIS DOCUMENT HAS NOT BEEN BROUGHT O N RECORD. THE TERMS AND CONDITIONS THEREIN ARE RELEVANT FOR DECIDING TH E ISSUE. 7.7. THE TREATMENT TO BE GIVEN TO THE SALE OF SCRA P AND MISC. SCRAP ETC. NECESSARILY DEPEND UPON THE FINDINGS ON THE EARLIER ISSUES. AS SUCH IT IS NOT ONLY RELEVANT TO CONSIDER THE REPORT OF THE EXP ERT WHO OVERSAW THE TRIAL RUN AND THE CERTIFICATION IF ANY GIVEN BY THE SAID EXPERT THAT THE TRIAL RUN WAS SUCCESSFUL OR NOT BUT ALSO THE CHANGES SO N ECESSITATED AS REJECTION RATE HAS BEEN STRONGLY AFFECTED BY WAY OF SUBSTANTIAL REDUCTION. IT IS ONLY ONCE THE FACTS ARE MARSHALLED THAT THE C ASE LAW CAN BE APPLIED. 8. ACCORDINGLY FOR THE REASONS GIVEN HEREINABOVE TH E IMPUGNED ORDER IS SET ASIDE AND THE ISSUE IS RESTORED BACK TO THE FILE OF THE A.O. TO DECIDE 16 THE ISSUE IN ACCORDANCE WITH LAW BY WAY OF A SPEAKI NG ORDER. NEEDLESS TO SAY THAT THE ASSESSEE SHALL BE AFFORDED A REASONABL E OPPORTUNITY OF BEING HEARD. THE ASSESSEE WOULD BE AT LIBERTY TO PLACE A LL RELEVANT DOCUMENTS IN SUPPORT OF ITS CLAIM. 9. IN THE RESULT THE APPEAL OF THE DEPARTMENT IS AL LOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 23 RD DECEMBER, 2011. SD/- SD/- (B.K. HALDAR ) (DIVA SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 23 RD DEC., 2011 *MANGA COPY OF THE ORDER FORWARDED TO: 1. APPELLANT; 2.RESPONDENT; 3.CIT; 4.CI T(A); 5.DR; 6.GUARD FILE BY ORDER DY. REGISTRAR