AOC India Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 848/PUN/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7468 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 8 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 14-12-2016
• Assessment Year: 2010-2011
• Appeal Filed On: 28-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Keywords: Depreciation; Question of law; Capital expenditure
• Section: 32; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE !' #'' $% & BEFORE SHRI R.K. PANDA, AM & SHRI VIKAS AWASTHY, JM / ITA NO. 848/PUN/2014 %' ( ')( / ASSESSMENT YEAR : 2010-11 AOC INDIA PVT. LTD., M/S. MZSK & ASSOCIATES, CHARTERED ACCOUNTANTS, LEVEL 3, RIVERSIDE BUSINESS BAY, PLOT NO.84, WELLESLEY ROAD, NEAR RTO, PUNE 411 001 PAN : AAHCA4484A .. APPELLANT VS. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE 1(1), PUNE. .. RESPONDENT ASSESSEE BY : SHRI NEELESH KHANDELWAL DEPARTMENT BY : SHRI P.L. KUREEL DATE OF HEARING : 14-12-2016 DATE OF PRONOUNCEMENT : 06-01-2017 * / ORDER PER VIKAS AWASTHY, JM : THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDE R OF COMMISSIONER OF INCOME TAX (APPEALS) III, PUNE DATED 31.1 0.2013 FOR THE ASSESSMENT YEAR 2010 11. 2 ITA NO848/PUN/2014, A.Y: 2010 - 11 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE: THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTU RING UNSATURATED POLYESTER RESINS. THE ASSESSEE OBTAINED C OMMERCIAL RIGHTS FOR MANUFACTURING UNSATURATED POLYESTER RESINS AN D VINYL ESTER RESINS FROM M/S. ALPHA CORPORATION OF TENNESSEE, USA. THE ASSESSEE WAS NOT HAVING ANY INFRASTRUCTURE OR PLANT OF ITS OWN FOR THE MANUFACTURING OF RESINS, THEREFORE, THE ASSESSEE ENTERED INTO MANUFACTURING AGREEMENT WITH M/S. KANORIA CHEMBOND PV T. LTD. (KCPL). AS PER THE AGREEMENT, KCPL WOULD MANUFACTURE RES INS EXCLUSIVELY FOR THE ASSESSEE AT ITS WADA FACTORY WITH THE TECHNOLOGY PROVIDED BY THE ASSESSEE. FOR UTILIZING MANUFACTURING FACILITY OF KCPL, THE ASSESSEE AGREED TO PAY CONVERSION FEE AT THE RAT E OF RS.10,000/- PER METRIC TON OF QUANTITIES MANUFACTURED. THE RAW MATER IAL REQUIRED FOR PRODUCTION WAS TO BE SUPPLIED BY THE ASSESSEE. THE INITIAL AGREEMENT WAS FOR THE PERIOD OF 18 MONTHS TO BE RENEW ED AUTOMATICALLY. THE ASSESSEE IN ORDER TO MAKE THE MANUFA CTURING UNIT OF KCPL TO SUIT ITS REQUIREMENTS FOR MANUFACTURING UNSATUR ATED POLYESTER AND VINYL ESTER RESINS INSTALLED SOME MORE EQUIP MENTS AND MACHINES. THE VARIOUS EQUIPMENTS INSTALLED BY ASSESSEE INT ER-ALIA INCLUDES TALC TANK OF APPROXIMATELY 40 TONNES CAPACITY, D ISPENSER AGITATORS, ASSOCIATED PUMPS, VALVES ETC. THE ASSESSEE C ONSTRUCTED ONE TALC PRODUCTION BUILDING TO HOUSE TALC TANK AND FURTHER IN STALLED OVERHEAD CRAINS. THE ASSESSEE ALSO IN ORDER TO AUGMENT ELECTRICAL SERVICE INSTALLED ADDITIONAL MOTOR CONTROL CENTRE AND VARIO US OTHER SUPPORTING EQUIPMENTS. 3. THE ASSESSEE IN ITS RETURN OF INCOME FOR THE ASSESSME NT YEAR 201011 FILED ON 13.10.2010 DECLARED TOTAL INCOME OF RS.84,92,3 10/-. 3 ITA NO848/PUN/2014, A.Y: 2010 - 11 THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY AND ACCORDINGLY NOTICE U/S 143(2) OF THE INCOME-TAX ACT 1961 (HERE IN AFTE R REFERRED TO AS THE ACT) WAS ISSUED TO THE ASSESSEE ON 25.08.2011 . DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS THE ASSESSIN G OFFICER DISALLOWED THE CLAIM OF DEPRECIATION RS.3,35,251/- ON PLANT AN D MACHINERY AND OTHER EQUIPMENTS INSTALLED BY THE ASSESSE E AT WADA FACTORY OF KCPL. THE ASSESSEE IN ITS RETURN OF INCOME HAD CLAIMED PROJECT STRUCTURAL WORK EXPENSES TO THE TUNE OF RS.47 ,17,267/- INCURRED FOR INSTALLATION OF EQUIPMENTS ETC. THE ASSESSEE HAD ALSO CLAIMED MAINTENANCE AND MATERIAL COSTS RS.22,41,220/-. THE ASSESSING OFFICER HELD THAT EXPENDITURE INCURRED ON PROJEC T STRUCTURAL WORK IS CAPITAL IN NATURE AND HENCE CANNOT BE ALLOWED U/S 37 OF THE ACT AND FURTHER DISALLOWED EXPENDITURE TOWARDS MAINTENAN CE AND MATERIAL COSTS. AGGRIEVED BY THE ASSESSMENT ORDER DATE D 21.12.2012 THE ASSESSEE FILED APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) VIDE IMP UGNED ORDER REJECTED THE CONTENTIONS OF ASSESSEE AND UPHELD THE FINDINGS OF ASSESSING OFFICER. NOW THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL ASSAILING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). 4. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CA SE AND AS PER PROVISIONS & SCHEME OF THE ACT, IT BE HELD THAT DIS ALLOWANCE OF DEPRECIATION OF RS.3,35,251/- IN TERMS OF PROVISION S OF SECTION 32 OF THE ACT MADE BY THE AO AND CONFIRMED BY THE 1 ST APPELLATE AUTHORITY IS UNWARRANTED, UNJUSTIFIED, IMAGINARY AND CONTRARY TO THE PROVISIONS AND SCHEME OF THE ACT. IT FURTHER BE HELD THAT NO DISAL LOWANCE IS WARRANTED IN THE CASE OF THE APPELLANT ON FACTS PREVAILING IN THE CASE AND AS PER PROVISIONS OF LAW. THE DISALLOWANCE MADE BE DELETED . JUST AND PROPER RELIEF BE GRANTED TO THE APPELLANT. 2. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS & SCHEME OF THE ACT, IT BE HELD THAT DIS ALLOWANCE OF EXPENSES 4 ITA NO848/PUN/2014, A.Y: 2010 - 11 AT RS.42,47,267/- IN TERMS OF PROVISIONS OF SECTION 37 OF THE ACT MADE BY THE AO AND CONFIRMED BY THE 1 ST APPELLATE AUTHORITY IS UNWARRANTED, UNJUSTIFIED, IMAGINARY AND CONTRARY TO THE PROVISIO NS AND SCHEME OF THE ACT. IT FURTHER BE HELD THAT NO DISALLOWANCE IS WAR RANTED IN THE CASE OF THE APPELLANT ON FACTS PREVAILING IN THE CASE AND A S PER PROVISIONS OF LAW. THE DISALLOWANCE MADE BE DELETED. JUST AND PRO PER RELIEF BE GRANTED TO THE APPELLANT. 3. WITHOUT PREJUDICE TO GROUND NO.2 ABOVE IN CASE F OR ANY REASON IT IS HELD THAT SOME DISALLOWANCE OUGHT TO BE MADE THE N FOR THE REASONS GIVEN IN THE ORDER THEN IT BE HELD THAT THE DISALLO WANCE MADE B THE AO & UPHELD BY THE CIT(A) IS ON A VERY HIGH SIDE. JUST AND PROPER RELIEF BE GRANTED TO THE APPELLANT. 4. WITHOUT PREJUDICE TO OUR ABOVE GROUNDS INCASE FO R ANY REASON, DISALLOWANCE OF EXPENSES AT RS,42,47,267/- OR ANY P ART THEREOF IS MADE IN TERMS OF PROVISIONS OF SECTION 37 OF THE ACT IS HELD TO BE CAPITAL IN NATURE THEN ON FACTS AND CIRCUMSTANCES PREVAILING I N THE CASE AND AS PER PROVISIONS & SCHEME OF THE ACT IT BE HELD THAT DEPRECIATION BE GRANTED AS PER PROVISIONS OF LAW. JUST AND PROPER R ELIEF BE GRANTED TO THE APPELLANT. 5. ON FACTS AND CIRCUMSTANCES PREVAILING IN THE CAS E AND AS PER PROVISIONS & SCHEME OF THE ACT, IT BE HELD THAT DIS ALLOWANCE OF EXPENSES AT RS.22,41,220/- IN TERMS OF PROVISIONS OF SECTION 37 OF THE ACT MADE BY THE AO AND CONFIRMED BY THE 1 ST APPELLATE AUTHORITY IS UNWARRANTED, UNJUSTIFIED, IMAGINARY AND CONTRARY TO THE PROVISIO NS AND SCHEME OF THE ACT. IT FURTHER BE HELD THAT NO DISALLOWANCE IS WAR RANTED IN THE CASE OF THE APPELLANT ON FACTS PREVAILING IN THE CASE AND A S PER PROVISIONS OF LAW. THE DISALLOWANCE MADE BE DELETED. IN CASE ANY DISALLOWANCE NEEDS TO BE SUSTAINED, THEN THE SAME MAY BE RESTRIC TED TO A TOKEN AMOUNT. JUST AND PROPER RELIEF BE GRANTED TO THE AP PELLANT. 6. THE APPELLANT PRAYS TO BE ALLOWED TO ADD, AMEND, MODIFY, RECTIFY, DELETE, RAISE ANY GROUNDS OF APPEAL AT THE TIME OF HEARING. 5. SHRI NEELESH KHANDELWAL APPEARING ON BEHALF OF THE ASS ESSEE SUBMITTED THAT THE AUTHORITIES BELOW HAVE ERRED IN REJEC TING THE CLAIM OF ASSESSEE WITH RESPECT TO DEPRECIATION U/S 32 OF THE A CT AND THE EXPENDITURE CLAIMED BY THE ASSESSEE ON INSTALLATION OF EQU IPMENTS AND PLANT AND THEREAFTER MAINTENANCE AND MATERIAL SUPPLIED FOR THE UPKEEP OF EQUIPMENT AND MACHINES. THE LD.AR SUBMITTED THA T THE CLAIM OF DEPRECIATION HAS BEEN DENIED TO THE ASSESSEE MER ELY FOR THE REASON THAT THE PLANT AND EQUIPMENT IS INSTALLED AT THE FACTORY PREMISES OF KCPL. SINCE, THE ASSESSEE WAS NOT HAVING ITS OWN MANUFACTURING FACILITY, THE ASSESSEE ENTERED INTO MANUFACTUR ING AGREEMENT WITH KCPL. THE EXISTING PLANT AND EQUIPMENT AV AILABLE FOR 5 ITA NO848/PUN/2014, A.Y: 2010 - 11 USE AT KCPLS WADA FACTORY WAS NOT ADEQUATE TO PRODU CE RESINS IN VOLUME AND MANNER AS REQUIRED BY THE ASSESSEE. NECESS ARY CHANGES/ADDITIONS WERE REQUIRED TO BE MADE TO THE EXIST ING MANUFACTURING PLANT TO SUIT THE TECHNOLOGY OBTAINED BY T HE ASSESSEE. EXPENDITURE WAS INCURRED FOR INSTALLATION OF TALC TANK, DISPEN SING OF TALC IN A VESSEL, MATERIAL HANDLING OF TALC AND VARIOUS OTHER SMALL EQUIPMENTS FOR PRODUCTION OF LARGE VOLUME OF RESINS. THE LD.AR EXPLAINED THAT ONCE VESSEL IS USED FOR TALC, IT CANNOT BE U SED FOR ANY OTHER PURPOSES UNLESS IT IS CLEANED THOROUGHLY WHICH IS A VERY COSTLY AND TIME CONSUMING PROCESS. TALC CONTAMINATES THE VESSE L, ONCE CONTAMINATED, THE VESSEL CANNOT BE USED FOR GENERAL PURP OSES OR FOR OTHER TYPES OF UNSATURATED POLYESTER RESINS. THEREFORE , FOR STORAGE OF TALC A DEDICATED VESSEL IS REQUIRED. THE LD.AR SUBMITTED T HAT IT IS AN UNDISPUTED FACT THAT THE PLANT AND EQUIPMENT INSTALLED BY THE ASSESSEE AT WADA FACTORY OF KCPL WAS EXCLUSIVELY USED FO R MANUFACTURING OF RESINS FOR THE ASSESSEE. ONCE THE PLANT AND MACHINERY INSTALLED BY THE ASSESSEE IS USED EXCLUSIVELY FOR THE BUSINESS PURPOSES OF THE ASSESSEE, THE ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION ON SAME IRRESPECTIVE OF THE FACT WHETHER THE MACHINERY IS INSTALLED AT ASSESSEES OWN PREMISES OR AT THE PREMISES OF A JOB WO RKER. THE LD.AR CONTENDED THAT FOR CLAIMING DEPRECIATION U/S 32, THE ASSESSEE HAS TO SATISFY TWIN CONDITIONS I.E. (I) OWNERSHIP OF A SSET BY THE ASSESSEE AND (II) ACTUAL USE OF ASSET FOR THE BUSINESS PURP OSE OF THE ASSESSEE. IN THE PRESENT CASE BOTH THE CONDITIONS ARE SATISFIED. THE LD.AR IN SUPPORT OF HIS CONTENTIONS PLACED RELIANCE ON THE D ECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. ALLERGAN INDIA (P) LTD. REPORTED AS 371 ITR 38. 6 ITA NO848/PUN/2014, A.Y: 2010 - 11 5.1 THE LD.AR FURTHER SUBMITTED THAT THE ASSESSEE HAD INC URRED EXPENDITURE ON STRUCTURAL FABRICATIONS AND INSTALLATION OF TA LC TANK AND OTHER EQUIPMENTS. THE ASSESSEE HAD CLAIMED THE SAID EX PENDITURE U/S 37 OF ACT. THE AUTHORITIES BELOW DENIED THE CLAIM OF THE AS SESSEE BY HOLDING IT TO BE CAPITAL EXPENDITURE NOT INCURRED FOR THE B USINESS OF ASSESSEE. THE LD.AR SUBMITTED THAT ALTHOUGH ACCORDING T O THE ASSESSEE THE EXPENDITURE IS REVENUE IN NATURE, BUT EVEN IF IT IS TO BE TREATED AS CAPITAL EXPENDITURE, THE ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION ON SAME. THE EXPENDITURE HAS BEEN INCURRED FOR THE BUSINESS OF ASSESSEE. 5.2 THE LD.AR CONTENDED THAT THE ASSESSEE HAD INCURRED EXPENDITURE OF RS.22,41,220/- ON MATERIALS AND MAINTENANCE. THE SAID EXPENDITURE IS PURELY REVENUE IN NATURE AND IS FULLY ALLOWA BLE U/S 37 OF THE ACT. THE SAID EXPENDITURE HAS BEEN INCURRED TOWA RDS THE MAINTENANCE OF EQUIPMENTS. 6. ON THE OTHER HAND, SHRI P.L. KUREEL REPRESENTING THE DEPARTMENT VEHEMENTLY DEFENDED THE ORDER OF COMMISSIONE R OF INCOME TAX (APPEALS) IN SUSTAINING THE ADDITION. THE LD. DR SUBMITTE D THAT A PERUSAL OF MANUFACTURING AGREEMENT PLACED ON RECORD BY T HE ASSESSEE AT PAGE 74 TO 103 OF THE PAPER BOOK WOULD SHOW THAT T HE ASSESSEE WOULD BE PAYING RS.10,000/- PER METRIC TON AS CONVERSION FEE FOR CONVERSION OF ISOPHTHALIC PRODUCT, READY FOR SHIPMENT. THER E IS NO SUCH CLAUSE IN THE MANUFACTURING AGREEMENT THAT SHOWS T HAT ASSESSEE WOULD INSTALL EQUIPMENT /MACHINERY TO SUPPLEMENT THE MACHIN ERY ALREADY INSTALLED BY KCPL. THUS, THE ASSESSEE WAS NOT LIAB LE FOR INCURRING FURTHER EXPENDITURE ON PLANT AND MACHINERY. THE LD. DR 7 ITA NO848/PUN/2014, A.Y: 2010 - 11 PRAYED FOR REJECTING THE CONTENTIONS OF THE ASSESSEE AN D UPHOLDING THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). 7. WE HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENT ATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIE S BELOW. THE ASSESSEE IN APPEAL HAS IMPUGNED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING THE DISALLOWANCE OF DEPRECIA TION ON THE EQUIPMENTS AND MACHINERY INSTALLED BY THE ASSESSEE A T THE FACTORY PREMISES OF KCPL, EXPENDITURE INCURRED BY THE ASSESSEE FO R INSTALLATION OF PLANT AND EQUIPMENT AND EXPENDITURE TOWARDS MAINTENANCE AND MATERIAL COSTS. 8. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAD PURC HASED CERTAIN EQUIPMENT AND MACHINERY AND INSTALLED AT FACTORY PREMISES OF KCPL. THE ASSESSEE HAD ENTERED INTO MANUFACTURING AGREEMENT WITH KC PL FOR PRODUCTION OF POLYESTER VINYL RESINS. THE ASSESSEE HAD A CQUIRED COMMERCIAL RIGHTS FOR MANUFACTURING UNSATURATED POLYESTER RESINS AND VINYL RESINS FROM M/S. ALPHA CORPORATION, USA. SINCE THE AS SESSEE WAS NOT HAVING ANY MANUFACTURING PLANT OR PRODUCTION FACILIT Y OF ITS OWN, THE ASSESSEE ENTERED INTO MANUFACTURING AGREEMENT WITH KCPL. MANUFACTURING FACILITY OF KCPL AT ITS FACTORY AT WADA WAS NO T COMMENSURATE TO THE REQUIREMENTS OF THE ASSESSEE FOR P RODUCTION OF UN-SATURATED POLYESTER RESINS, THEREFORE THE ASSESSEE INSTALLED CERTAIN ADDITIONAL EQUIPMENTS TO MAKE THE MANUFACTURING FACILITY SUIT ITS REQUIREMENTS. A PERUSAL OF CLAUSE 3 & 5 OF THE MANUFACTUR ING AGREEMENT SHOWS THAT KCPL WOULD NOT SHARE TECHNOLOGY AND KNOWHOW OF THE ASSESSEE WITH ANY OTHER PERSON AND THE KCPL WO ULD CARRY OUT MANUFACTURING ACTIVITIES FOR THE ASSESSEE ALONE. IT IS AMPL Y CLEAR FROM 8 ITA NO848/PUN/2014, A.Y: 2010 - 11 THE AGREEMENT THAT KCPL WOULD PERFORM JOB WORK FOR THE ASSESSEE ONLY, HENCE, THE EQUIPMENTS INSTALLED BY THE ASSESSEE AT THE FACTORY PREMISES OF KCPL WOULD BE USED FOR THE BUSINESS PURPOSE OF ASSESSEE ALONE. 9. A PERUSAL OF THE PROVISION OF SECTION 32 OF THE ACT WOULD SHOW THAT FOR CLAIMING DEPRECIATION THE REQUIREMENT IS THAT THE ASSET SHOULD BE OWNED BY THE ASSESSEE, IT SHOULD BE USED FOR THE BUS INESS PURPOSE OF THE ASSESSEE AND IT SHOULD BE PUT TO USE DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEAR IN QUESTION. IN THE PRESENT CA SE, ALL THE SAID CONDITIONS HAVE BEEN SATISFIED. THE MACHINERY AND EQUIPMEN T HAS BEEN INSTALLED BY THE ASSESSEE AT THE FACTORY PREMISES O F KCPL WITH WHOM THE ASSESSEE HAS ENTERED INTO AGREEMENT FOR MANU FACTURING /PROCESSING OF RESINS IN ACCORDANCE WITH THE TECHNOLOGY A ND MATERIAL PROVIDED BY THE ASSESSEE. AS PER THE AGREEMENT, KCPL WAS EXCLUSIVELY CARRYING OUT MANUFACTURING PROCESS FOR THE ASSESSEE. TH US, THE EQUIPMENT INSTALLED BY THE ASSESSEE WAS UTILIZED FOR THE BU SINESS PURPOSE OF ASSESSEE ALONE. IT IS IMMATERIAL WHETHER THE A SSETS PURCHASED BY ASSESSEE ARE INSTALLED AT THE PREMISES OF T HE ASSESSEE OR THIRD PARTY. AS LONG AS THE ASSETS ARE USED FOR THE BU SINESS PURPOSE OF THE ASSESSEE, THE ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION ON THE SAID ASSETS. 10. THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF COMM ISSIONER OF INCOME TAX VS. ALLERGAN INDIA (P) LTD. (SUPRA) ALLOWED THE CLAIM OF DEPRECIATION WHERE THE MACHINERY PURCHASED BY THE ASSE SSEE WAS USED BY OTHER COMPANY TO MANUFACTURE PLASTIC BOTTLES FOR PRODUCTS OF 9 ITA NO848/PUN/2014, A.Y: 2010 - 11 ASSESSEE. THE RELEVANT EXTRACT OF THE JUDGMENT OF THE HON'BLE HIGH COURT IS AS UNDER: 4. THE MATERIAL ON RECORD DISCLOSES, THE ASSESSEE IS E NGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING OF PHARMACE UTICAL PRODUCTS AND ITS MACHINES. THE ASSESSEE HAD ENTERED INTO A CONTRACT WITH M/S. NICHOLAS PIRAMAL AND THE PRODUCTS MANUFACTURED ARE OPHTHALMIC WHICH REQUIRE PARTICULA R TYPE OF MACHINERY TO MANUFACTURE THE MOULDS. M/S. NICHOLAS PIRAMAL HAD THE PARTICULAR TYPE OF MACHINERY TO MANUFACTURE THE MOULDS AND AS PER THE MANUFACTURING AGREEMENT, THE ASSESSEE ALSO COULD PURCHASE THE SECOND MACHINERY WHICH WOULD BE INSTALLED IN THE PREMISES OF M/S. NICHOLAS PIRAMAL AND USED FOR THE MANUFACTURE OF THE SAID MOULDS. ACCORDINGLY, M/S. NICHOLAS PIRAMAL HAD ONE MACHINE AND THE ASSESSEE PURCHASED ANOTHER MACHINE AND INSTALLED THE SAME IN THE PREMISES OF M/S. NICHOLAS PIRAMAL AND THE SAME WAS USED FOR MANUFACTURING THE MOULDS. DURIN G THE FINANCIAL YEARS 1997-98 AND 1998-99, THE ASSESSEE CLAIME D DEPRECIATION ON THE SECOND MACHINE PURCHASED BY IT. THE ASSESSING AUTHORITY DISALLOWED THE DEPRECIATION CLAIMED BY THE ASSESSEE ON THE GROUND THAT THE ASSESSEE COMPANY HA D PURCHASED THE SECOND HAND MACHINE AND THAT IT HAD NO T UNDERTAKEN ANY MANUFACTURING ACTIVITY. THE CIT (A) CON FIRMED THE DISALLOWANCE. IN THE SECOND APPEAL BEFORE THE TRIBUNAL, THE TRIBUNAL HELD, FOR ALLOWING THE CLAIM OF DEPRECIATION ON ANY MACHINERY, SEC.32 OF THE INCOME TAX ACT PROVIDES THAT THE MACHINERY SHOULD BE OWNED WHOLLY OR PARTLY BY THE ASS ESSEE AND USED FOR THE PURPOSE OF BUSINESS OR PROFESSION OF T HE ASSESSEE. THERE IS NO DISPUTE THAT THE ASSESSEE OWNS THE MACH INERY BUT THE ONLY DISPUTE IS WHETHER IT IS USED FOR THE PURPOSE O F ASSESSEE'S BUSINESS OR PROFESSION. THE ASSESSEE HAD ENTERED INT O CONTRACT FOR MANUFACTURING OF CERTAIN OPHTHALMIC SOLUTIONS AND F OR THE SAID PURPOSE MACHINERY WAS PURCHASED AND INSTALLED IN THE PREMISES OF M/S. NICHOLAS PIRAMAL DURING THE RELEVANT FINANCIAL YEARS. T HE SAID MACHINERY HAD BEEN USED BY M/S. NICHOLAS PIRAMAL FOR MANUFACTURING OF THE SAID SOLUTIONS AND MOULDS. HE HE LD, WHEN THE MANUFACTURING IS DONE AS PER THE SPECIFICATIONS OF THE ASSESSEE AND THE GOODS ARE ALSO RECOGNIZED AS MANUFAC TURED BY THE ASSESSEE, SINCE THEY ARE SOLD IN THE BRAND NAME O F THE ASSESSEE THOUGH M/S. NICHOLAS PIRAMAL MANUFACTURED TH E SAID GOODS, IN THE FACTS OF THE CASE, IT IS THE ASSESSEE WH O IS MANUFACTURING THE GOODS. THEREFORE IT CANNOT BE SAI D THAT THE MACHINERY IS NOT USED FOR THE BUSINESS OR PROFESSIO N OF THE ASSESSEE. THEREFORE THEY WERE OF THE VIEW THAT THE ASSESSEE SATISFIED THE CONDITION OF USING THE MACHINERY FOR THE PURPOSE OF HIS BUSINESS. ACCORDINGLY HE IS ENTITLED TO DEPRECIATI ON ON THIS MACHINERY. 5. THE LEARNED COUNSEL FOR THE REVENUE CONTENDED, RELYI NG ON THE TERMS OF THE CONTRACT ENTERED INTO BETWEEN THE PARTIES THAT, FIRSTLY THE QUESTION OF ASSESSEE PROVIDING MACHINERY WOULD A RISE ONLY IN THE EVENT OF M/S. NICHOLAS PIRAMAL NOT POSSESSIN G THE SAID MACHINERY FOR MANUFACTURING. IN THE INSTANT CASE M/S . NICHOLAS 10 ITA NO848/PUN/2014, A.Y: 2010 - 11 PIRAMAL DID POSSESS THE MACHINERY. IN FACT THEY HAVE SOLD THE MACHINERY TO THE ASSESSEE AND THEREFORE THE ASSESSE E IS NOT ENTITLED TO THE BENEFIT AS IT RUNS COUNTER TO THE TER MS OF THE CONTRACT. SECONDLY IT WAS CONTENDED, INSPITE OF SUFFIC IENT OPPORTUNITY GIVEN TO THE ASSESSEE,' THE ASSESSEE HAS NOT PRODUCED ANY MATERIAL TO SHOW THAT THE SAID MACHINERY WAS USED 'FOR THE MANUFACTURE OF THEIR PHARMACEUTICAL PR ODUCTS AND THEREFORE THE FINDING RECORDED BY THE TRIBUNAL THAT IT IS USED FOR MANUFACTURING ACTIVITY IS WITHOUT ANY SUPPORTING EVID ENCE AND THEREFORE HE SUBMITS, THE SAID FINDING REQUIRES TO BE SET ASIDE . 6. IN ORDER TO CLAIM DEPRECIATION UNDER SEC.32, THE CON DITION TO BE SATISFIED IS, THE ASSESSEE SHOULD OWN WHOLLY OR PARTLY THE MACHINERY USED FOR THE PURPOSE OF BUSINESS OR PROFE SSION. THEREFORE HOW THE MACHINERY IS ACQUIRED, WHETHER AC QUISITION OF MACHINERY IS CONTRARY TO THE TERMS OF THE CONTRACT BETWEEN THE PARTIES, IS TOTALLY IRRELEVANT. ONCE THE ASSESSEE OWNS WHOLLY OR PARTLY ANY MACHINERY WHICH IS USED FOR THE PURPOSE OF THE BUSINESS OR HIS PROFESSION, THEN SEC.32 IS ATTRACTED AND IS ENTITLED TO DEPRECIATION. THEREFORE WE DO NOT SEE ANY ME RIT IN THE FIRST CONTENTION. 7. INSOFAR AS USER OF THE MACHINERY IS CONCERNED, THE ASSESSEE HAS PRODUCED THE CONTRACT BETWEEN THE PARTIES. HE H AS PRODUCED DOCUMENTS SHOWING THAT HE OWNS THE MACHINE RY. THERE IS EVIDENCE ON RECORD TO SHOW THAT THE ASSESS EE IS IN THE BUSINESS OF PHARMACEUTICAL PRODUCTS. THE ASSESSEE HA S ALSO FURNISHED CERTAIN SALE BILLS AND EYE DROPS AND OTHER PHARMACEUTICAL PRODUCTS MADE DURING THE CALENDAR YEAR 1998- 99. THE MACHINE IN QUESTION IS USED FOR MANUFACTURE OF PLASTIC BOTTLES OF SIZES 360 ML., 120 ML., ETC. THESE BOTTLES HAVE BEEN USED BY THE ASSESSEE FOR SELLING THE EYE DROPS AND OT HER PHARMACEUTICAL EYE CARE PRODUCTS IN SUPPORT OF WHICH HE HAS ENCLOSED THE DETAILS. UNFORTUNATELY THE ASSESSING AU THORITY SEEMS TO THINK THE ASSESSEE HAS TO DEMONSTRATE BEFO RE HIM IN THE INCOME TAX OFFICE HOW THIS MACHINERY IS USED IN MANUFACTURING THE PRODUCTS AND THE SAME IS NOT PROD UCED. HE HAS RECORDED A FINDING THAT THE SAID MACHINERY IS NO T USED IN HIS BUSINESS. IN THOSE CIRCUMSTANCES, RIGHTLY, THE TRIBUNA L HAS SET ASIDE THE SAID ORDER ON APPRECIATION OF THE AFORESAI D MATERIAL WHICH WAS ON RECORD AND HAS CATEGORICALLY RECORDED A FINDING OF FACT THAT THE SAID MACHINE WAS USED IN THE BUSINESS OF THE ASSESSEE AND T HEREFORE HE IS ENTITLED TO DEPRECIATION AS PROVIDED UNDER SEC. 32 OF THE ACT. WE DO NOT SEE ANY ERROR COM MITTED BY THE TRIBUNAL IN RECORDING THE SAID FINDING AND THERE FORE THE SAID SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. IN THE PRESENT CASE DEPRECIATION CLAIM HAS BEEN DISALLOWE D ONLY ON THE PRESUMPTION THAT SINCE ASSETS HAVE BEEN INSTALLE D BY THE 11 ITA NO848/PUN/2014, A.Y: 2010 - 11 ASSESSEE AT THE PREMISES OF THIRD PARTY/CONTRACT WORKE R THE ASSETS ARE NOT USED BY THE ASSESSEE. THIS PRESUMPTION OF THE DEPA RTMENT IS ABSOLUTELY UNFOUNDED. IT IS EVIDENT FROM RECORDS THAT AS SETS HAVE BEEN PURCHASED BY THE ASSESSEE AND ARE UTILIZED BY THE ASSE SSEE FOR IT BUSINESS. THUS, THE CONDITIONS LAID DOWN U/S 32 OF THE ACT FOR CLAIMING DEPRECIATION ARE SATISFIED. 11. ANOTHER OBJECTION RAISED BY THE LD. DR IS THAT IN TH E MANUFACTURING AGREEMENT, THERE IS NO CLAUSE THAT THE ASS ESSEE WOULD INSTALL ADDITIONAL PLANT AND MACHINERY AT THE PREMISES OF KCP L. WE DO NOT FIND ANY MERIT IN THIS OBJECTION RAISED BY THE DEPART MENT. THE ASSESSEE HAD INSTALLED ADDITIONAL EQUIPMENTS AND MACHINERY TO UPGRADE THE EXISTING MANUFACTURING FACILITY AND TO MAKE IT IN LINE WITH THE TECHNOLOGY AND VOLUME OF PRODUCTION AS PER ITS REQUIR EMENTS. THE DEPARTMENT HAS NOT DISPUTED THE EXPENDITURE INCURRED BY THE AS SESSEE IN PROCURING THE ASSET AND THE USE OF SAME FOR THE MAN UFACTURING OF RESINS. THUS, WE ARE OF THE CONSIDERED VIEW THAT THE AS SESSEE IS ELIGIBLE TO CLAIM DEPRECIATION ON THE EQUIPMENTS/MACHINERY INS TALLED BY THE ASSESSEE. ACCORDINGLY, GROUND NO.1 RAISED BY THE ASSESSEE IS ALLOWED. 12. IN RESPECT OF DISALLOWANCE OF EXPENDITURE OF RS.42,47,267 /- U/S. 37 IT IS CONTENDED THAT THE EXPENDITURE IS INCURRED IN RELATION TO THE INSTALLATION OF PLANT AND MACHINERY. THE ASSESSING OFFICE R HAS DISALLOWED THE EXPENDITURE ON THE GROUND THAT THE SAME IS CAPITAL IN NATURE AND IS NOT INCURRED FOR THE PURPOSE OF BUSINESS OF ASSESSEE. THE ASSESSEE HAS ASSAILED THE FINDINGS OF COMMISSIONER OF IN COME TAX (APPEALS) IN DISALLOWING THE SAID EXPENDITURE U/S. 37. THE ASS ESSEE 12 ITA NO848/PUN/2014, A.Y: 2010 - 11 HAS MADE AN ALTERNATE SUBMISSION THAT IN CASE THE EXPE NDITURE IS HELD TO BE CAPITAL IN NATURE, DEPRECIATION MAY BE ALLOWED ON THE SAME. IT IS AN ADMITTED POSITION THAT THE EXPENDITURE HAS BEEN INCUR RED BY THE ASSESSEE FOR THE INSTALLATION OF PLANT AND EQUIPMENT PURCHA SED BY THE ASSESSEE. IN THE PRECEDING PART OF THE ORDER WE HAVE ALREADY HELD THAT THE PLANT AND EQUIPMENT PURCHASED BY THE ASSESSEE INST ALLED AT THE FACTORY OF KCPL WERE FOR THE USE OF THE ASSESSEE AND TH E ASSESSEE IS ELIGIBLE TO CLAIM DEPRECIATION ON SAME. THUS, THE EXPENDITUR E INCURRED TOWARDS INSTALLATION OF SAID PLANT AND EQUIPMENT HAS TO BE CAPITALIZED. ACCORDINGLY, THE EXPENDITURE INCURRED TOWARDS INSTALLATION OF PLANT AND MACHINERY IS ELIGIBLE FOR DEPRECIATION. 13. THUS, IN VIEW OF OUR ABOVE FINDINGS, THE GROUND NO. 2 RA ISED IN THE APPEAL BY THE ASSESSEE TO ALLOW EXPENDITURE U/S. 37 OF THE ACT IS DISMISSED. THE GROUND NO.4 WHEREIN THE ASSESSEE HAS MAD E AN ALTERNATE PLEA TO ALLOW DEPRECIATION ON THE SAID EXPENDITURE IS A LLOWED. 14. THE THIRD ISSUE IN APPEAL IS WITH RESPECT TO THE EXPEN DITURE OF RS.22,41,220/- IN RESPECT OF MAINTENANCE AND MATERIAL COST. THE SAID EXPENDITURE ACCORDING TO THE ASSESSEE IS FOR SUPPLY O F RAW MATERIAL FOR MANUFACTURING RESINS AND CERTAIN EQUIPMENTS FOR THE MAINTE NANCE OF PLANT AND MACHINERY. THE SAID EXPENDITURE ALSO INCLUDES TRANSPORTATION CHARGES AND LABOUR COST. THE COMMISSION ER OF INCOME TAX (APPEALS) IN THE IMPUGNED ORDER HAS GIVEN THE DETAILS O F EXPENDITURE CLAIMED BY THE ASSESSEE. A PERUSAL OF DESCR IPTION OF THE EXPENDITURE SHOWS THAT THE EXPENDITURE HAS BEEN INCUR RED ON TRANSPORTATION, SUPPLY OF SOME LABORATORY TESTING INSTRUM ENTS, REPLACEMENT OF VALVES, REGULATORS, GAUGES ETC. THE COMMIS SIONER OF 13 ITA NO848/PUN/2014, A.Y: 2010 - 11 INCOME TAX (APPEALS) HAS OBSERVED THAT THE EXPENDITURE ON GAUGES, METERS, VALVES, CONTROLS FOR NITROGEN GAS ETC IS CAPITAL EXP ENDITURE. FROM THE DETAILS OF EXPENDITURE APPARENTLY SAME ITEMS O F EXPENDITURE APPEARS TO BE REVENUE IN NATURE, HOWEVER, IT IS NOT FORTH COMING WHETHER THE EXPENDITURE ON EQUIPMENTS MENTIONED IN THE LIST OF EXPENDITURE IS CAPITAL OR REVENUE. UNDER SUCH CIRCUMSTA NCES, WE DEEM IT APPROPRIATE TO REMIT THIS ISSUE BACK TO THE FILE OF ASSESSING OFFICER FOR DETERMINING THE NATURE OF EXPENDITURE. THE ASSE SSING OFFICER WHILE DECIDING THE ISSUE DENOVO SHALL ALSO CONSIDER THE PRINCIPLES LAID DOWN BY THE HON'BLE SUPREME COURT OF INDIA IN THE CASE OF COMMISSIONER OF INCOME TAX VS. SHRI MANGAYARKARASI MILLS (P) LTD. 315 ITR114 AND COMMISSIONER OF INCOME TAX VS. SARVANA S PINNING MILLS (P) LTD. 293 ITR 201 TO ASCERTAIN THE NATURE OF EXPENDITURE. IF THE EXPENDITURE CLAIMED UNDER THE HEAD MAINTENANCE AND MAT ERIAL HAVE EXPENDITURE BOTH REVENUE AND CAPITAL, THE ASSESSING OFFICER SHALL GIVE APPROPRIATE TREATMENT TO THE SAME, IN ACCORDANCE WITH LAW. ACCORDINGLY THE GROUND NO.5 RAISED IN THE APPEAL BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED IN THE AFORESAID TERMS. ORDER PRONOUNCED ON FRIDAY, THE 6 TH DAY OF JANUARY, 2017. SD/- SD/- + / R.K. PANDA) ( #'' $ / VIKAS AWASTHY) , ACCOUNTANT MEMBER % , JUDICIAL MEMBER / PUNE; / DATED : 6 TH JANUARY, 2017 S S G G R R 14 ITA NO848/PUN/2014, A.Y: 2010 - 11 *-.%/0#1#)/ / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ( ) / THE CIT(A)-III, PUNE 4. / THE CIT-III, PUNE 5. , ! , ' '#$ , / DR, ITAT, B BENCH, PUNE. 6. %& '( / GUARD FILE. ) * / BY ORDER, ., *$ / SR. PRIVATE SECRETARY, ! , / ITAT, PUNE