SAURASHTRA FERROUS P. LTD, MUMBAI V. ITO WD 9(2)(2), MUMBAI

ITA 8806/MUM/2011

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 7964 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 11 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 05-04-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 29-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: B V JHAVERI
• Keywords: Unexplained cash credit; Capital asset; Depreciation; Source of fund; Additional evidence; Non-deduction of tax; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 142(1); 37(1); 194C; 32; 68; 145; 27

Judgement Text

1 SOURASHTRA FERROUS P LTD IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI JOGINDER SINGH(JUDICIAL MEMBER) AND SHRI G MANJUNATHA (ACCOUNTANT MEMBER) I.T.A NO.8806/MUM/2011) (ASSESSMENT YEAR:2008-09) SOURASHTRA FERROUS P LTD 93-C, MITTAL TOWER NARIMAN POINT MUMBAI-400 021 PAN : AAJCS0160P VS ITO, WD 9(2)(2), MUMBAI APPELLANT RESPONDEDNT I.T.A NO.549/MUM/2012) (ASSESSMENT YEAR:2008-09) ITO, WD 9(2)(2), MUMBAI VS SOURASHTRA FERROUS P LTD 93-C, MITTAL TOWER NARIMAN POINT MUMBAI-400 021 PAN : AAJCS0160P APPELLANT RESPONDEDNT ASSESSEE BY SHRI B.V. JHAVERI REVENUE BY SHRI PRAVEEN KUMAR DATE OF HEARING 24-10 -2017 DATE OF PRONOUNCEMENT 08-12-2017 O R D E R PER G MANJUNATHA, AM : THESE CROSS APPEALS FILED BY THE ASSESSEE AS WELL AS REVENUE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A)-20, MUMBAI DATED 30 -11-2011 AND IT PERTAINS TO AY 2008-09. SINCE FACTS ARE IDENTICAL AND ISSUES A RE COMMON, THESE APPEALS 2 SOURASHTRA FERROUS P LTD WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COM MON ORDER, FOR THE SAKE OF CONVENIENCE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE C OMPANY FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-09 ON 26-09-200 8 DECLARING TOTAL LOSS OF RS.3,15,83,056. THE CASE WAS SELECTED FOR SCRUTINY AND NOTICES U/S 143(2) AND 142(1) WERE SERVED ON THE ASSESSEE ALONGWITH A QUES TIONNAIRE. IN RESPONSE TO THE NOTICES, THE AUTHORIZED REPRESENTATIVE OF THE A SSESSEE APPEARED FROM TIME TO TIME AND FURNISHED DETAILS, AS CALLED FOR. THE ASS ESSMENT WAS COMPLETED U/S 143(3) ON 27-12-2010 DETERMINING TOTAL INCOME AT RS .49,36,78,420, INTERALIA MAKING ADDITIONS / DISALLOWANCES TOWARDS SHARE APPL ICATION MONEY U/S 68 OF THE INCOME-TAX ACT, 1961, DISALLOWANCE OF DEPRECIATION ON ASSETS, DISALLOWANCE OF INTEREST U/ S36(1)(III) AND U/S 43B, DISALLOWANCE O F REPAIRS AND MAINTENANCE BEING CAPITAL EXPENDITURE, ADDITION TOWARDS EXCISE DUTY U/S 145A, DISALLOWANCE OF EXPENSES U/S 40(A)(IA) AND ADDITION TOWARDS SHOR TFALL IN PRODUCTION OF GOODS. 3. AGGRIEVED BY THE ASSESSMENT ORDER, ASSESSEE PREFERR ED APPEAL BEFORE CIT(A). BEFORE THE CIT(A), ASSESSEE FILED WRITTEN SUBMISSIONS ON VARIOUS ADDITIONS / DISALLOWANCES MADE BY THE AO. THE CIT( A), FOR THE DETAILED REASONS RECORDED IN HIS ORDER DATED 30-11-2011 DELE TED ADDITIONS MADE BY THE AO TOWARDS SHARE APPLICATION MONEY U/S 68, DISALLOW ANCE OF DEPRECIATION ON FIXED ASSETS, DISALLOWANCE OF INTEREST U/S 36(1)(II I) AND U/S 43B, ADDITION MADE BY THE AO TOWARDS EXCISE DUTY U/S 145A, ADDITION ON ACCOUNT OF EXCISE DUTY CREDITS IN BALANCE-SHEET U/S 145(3), ADDITION TOWAR DS EXPENSES U/S 40(A)(IA) FOR 3 SOURASHTRA FERROUS P LTD FAILURE TO DEDUCT TAX AT SOURCE U/S 194C AND ADDITI ON MADE ON ACCOUNT OF SHORTFALL IN PRODUCTION BY REJECTING BOOKS OF ACCOU NT U/S 145A OF THE ACT. HOWEVER, THE CIT(A) HAS ALLOWED PARTIAL RELIEF IN R ESPECT OF ADDITION MADE BY THE AO TOWARDS DISALLOWANCE OF REPAIRS AND MAINTENA NCE EXPENDITURE BEING CAPITAL IN NATURE AND ALLOWED RELIEF OF RS.15,86,63 3 AND CONFIRMED BALANCE AMOUNT OF RS.2,08,21,467. THUS, THE CIT(A) HAS PAR TLY ALLOWED APPEAL FILED BY THE ASSESSEE. AGGRIEVED BY THE ORDER OF CIT(A), T HE ASSESSEE AS WELL AS THE REVENUE ARE IN APPEAL BEFORE US. 4. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APP EAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOU NT OF SHARE APPLICATION MONEY AMOUNTING OF RS. 8,51,26,250/- WI THIN THE MEANING OF SECTION 68 OF THE ACT.. 2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND LAW, THE CIT(A)ERRED IN DELETING THE ADDITION MADE ON ACCOUNT DEPRECIATION AMOUNTING OF RS.3,81 07,407/-, WITHIN THE MEANING O F SECTION 32 OF THE ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST AMOUNTING OF RS.1,80,13,92 8/- WITHIN T HE MEANING OF SECTION 37(1) OF THE ACT. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF LNTEREST AMOUNTING OF RS.8341,111 /- WITHIN 'THE' MEANING OF EXPLANATION 3D TO THE SECTION 4313(E) OF THE ACT: 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF R EPAIRS & MAINTENANCE BEING CAPITAL EXPENDITURE OF RS.15,86,633/- WITHOUT PROVIDING AN OPPORTUNITY IN ACCORDANCE TO THE INCOME TAX RULE 46A. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOU NT OF EXCISE DUTY TOWARDS COST OF STOCK AMOUNTING OF RS 42 30,010 /- WITHIN THE MEANING OF SECTION 145A OF THE ACT. . 7. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF 4 SOURASHTRA FERROUS P LTD EXCISE CREDITS IN THE BALANCE SHEET AMOUNTING OF RS .12,91,55,8191- WITHIN THE MEANING OF SECTION 145(3) OF THE ACT. 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE LD CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOU NT OF DISALLOWANCE OF J EXPENSES AMOUNTING OF WITHIN THE MEANING OF SECTION 40(A)(IA) OF THE ACT. 9. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE ON ACCOUNT OF REDUCTION OF PRODUCTION AMOUNTING OF RS.21,65,77 ,838/- BY REJECTING THE BOOKS OF ACCOUNT ' U/S.145 OF THE ACT. 10. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND LAW, THE LD CIT(A) ERRED IN ADMITTING ADDITIONAL EVIDENCES DESPITE SUBMITTING REMAND REPORT AND AGAINST RULE 46A IT RU LES 1962 11. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFI CER BE RESTORED. 5. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATION FROM REVENUES APPEAL IS ADDITION MADE ON ACCOUNT OF SHARE APPLICATION MONEY AMOUNTING TO RS.8,51,26,250 WITHIN THE MEANING OF SECTION 68 OF THE ACT. THE FACTS WITH REGARD TO THE IMPUGNED ADDITION ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE COMPANY HAS ALLOTTED SHARE CAPITAL WIT H SHARE PREMIUM TO M/S GREAT VALUE COMPANY LTD OF MAURITIUS. THE ASSESSEE HAS RECEIVED A SUM OF RS.8,51,26,250 FROM M/S GREAT VALUE COMPANY LTD OF MAURITIUS IN THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2007-08. THE ASSESSEE HAS ALLOTTED EQUITY SHARE OF RS.10 EACH AT A PREMIUM OF RS.190 P ER SHARE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO CALLED UPON THE A SSESSEE TO FURNISH COMPLETE DETAILS OF SOURCE OF FUNDS, NATURE OF RECEIPTS, STA TUTORY APPROVAL AND JUSTIFICATION FOR BASIS OF CHARGING SHARE PREMIUM. THE ASSESSEE WAS ALSO ASKED TO EXPLAIN AS TO WHY THE AMOUNTS SHOULD NOT BE TREATED AS UNEXPLA INED CREDITS U/S 68 OF THE ACT. IN RESPONSE TO SPECIFIC QUESTION, THE ASSESSE E, VIDE LETTER DATED 15-12-2010 5 SOURASHTRA FERROUS P LTD FURNISHED CONFIRMATION FROM SUBSCRIBER, NATURE OF R ECEIPT OF CAPITAL RESERVE, CAS CERTIFICATE AND BASIS OF PREMIUM ALONGWITH INT IMATION FILED WITH RBI, COPIES OF BOARD RESOLUTIONS, FOR ISSUE OF SHARE CAP ITAL AND FOR CHARGING PREMIUM, COPIES OF APPLICATION RECEIVED FROM THE SU BSCRIBER AND COPIES OF STATUTORY FORMS FILED WITH REGISTRAR OF COMPANIES. THE AO, AFTER CONSIDERING RELEVANT SUBMISSIONS AND ALSO CONSIDERING VARIOUS F ACTS OBSERVED THAT THE ASSESSEE COMPANY HAS TOTALLY FAILED TO JUSTIFY ISSU E OF SHARES AND ALSO CHARGING SHARE PREMIUM FROM TIME TO TIME. THE AO FURTHER OB SERVED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE BEYOND REASONABLE DOUBT THE CREDITWORTHINESS OF THE PARTY AND GENUINENESS OF TRANSACTION. ALTHOUGH THE ASSESSEE HAS SUBMITTED ADDRESS OF SHAREHOLDER, COPY OF SHARE APPLICATION F ORM AND OTHER DETAILS, THE SAME BY ITSELF IS NOT ENOUGH TO PROVE THE GENUINENE SS OF TRANSACTION OF OLD CREDITWORTHINESS OF ALLOTTEE. THE AO FURTHER OBSER VED THAT THE ASSESSEE HAS FAILED TO JUSTIFY CHARGING A HUGE PREMIUM OF RS.190 PER SHARE WITHOUT ESTABLISHING DETERMINATION OF THE VALUE OF SHARE. THE AO FURTHER OBSERVED THAT THOUGH THE ASSESSEE HAS FILED VARIOUS DETAILS TO JU STIFY VALUATION OF SHARE, SUCH VALUATION IS STATED TO BE OBTAINED AS PER THE REQUE ST OF THE MANAGEMENT AND ALSO THE BASIS OF VALUATION AS STATED TO BE ON THE BASIS OF MANAGEMENT PROJECTION OF FINANCE FOR THE PERIOD FROM FY 2007-08 TO 2011-12. THESE FINANCES ARE ONLY PROJECTIONS AND ESTIMATES AND WITHOUT REFERENCE TO ANY PAST RECORDS AND AUDITED FINANCIAL STATEMENTS OF THE ASSESSEE COMPANY. THE VALUE HAS NOT CONDUCTED ANY DUE DILIGENCE OR NO INDEPENDENT VERIFICATION OF THE FACTS AND THE FIGURES 6 SOURASHTRA FERROUS P LTD PROVIDED IN THE DATA GIVEN BY THE MANAGEMENT. THOU GH THE ASSESSEE HAS FOLLOWED DISCOUNTED CASH FLOW METHOD FOR VALUATION OF SHARES WHICH IS BASED ON THE PROJECT FINANCIALS OF THE COMPANY FOR THE NEXT FIVE FINANCIAL YEAR YEARS, THEREFORE, THERE IS NO REASON GIVEN BY THE ASSESSEE TO JUSTIFY CHARGING PREMIUM OF RS.190 PER SHARE. ALL THESE SEQUENCE OF EVENTS SHOW THAT THE PURPORTED SHARE APPLICATION MONEY RECEIVED FROM M/S GREAT VALUE COM PANY LTD OF MAURITIUS AND ALLOTMENT OF EQUITY SHARES WITH HUGE PREMIUM OF RS.190 IS NOT A GENUINE TRANSACTION AND ACCORDINGLY OPINED THAT THE ASSESSE E HAS FAILED TO ESTABLISH GENUINENESS OF TRANSACTIONS AND CREDITWORTHINESS OF THE PARTIES AND HENCE, MADE ADDITION TOWARDS SHARE APPLICATION MONEY RECEIVED F ROM M/S GREAT VALUE COMPANY LTD OF MAURITIUS U/S 68 OF THE INCOME-TAX A CT, 1961. 6. THE LD. DR SUBMITTED THAT THE LD.CIT(A) ERRED IN DE LETING ADDITION MADE BY THE AO TOWARDS SHARE APPLICATION MONEY WITHOUT A PPRECIATING THE FACTS THAT THE ASSESSEE HAS FAILED TO DISCHARGE ONUS CAST UPON IT U/S 68 OF THE ACT, BY DISCHARGING GENUINENESS OF TRANSACTIONS AND CREDITW ORTHINESS OF THE PARTIES. THE LD.DR FURTHER SUBMITTED THAT THOUGH THE ASSESSE E HAS FURNISHED RELEVANT DETAILS TO PROVE IDENTITY OF THE SHARE APPLICATION MONEY, THE SEQUENCE OF EVENTS CLEARLY ESTABLISHES THE FACT THAT THE ASSESSEE IS N OT ABLE TO JUSTIFY CHARGING HUGE PREMIUM OF RS.190 PER SHARE, THEREFORE, THE AO WAS RIGHT IN TAXING SHARE APPLICATION MONEY RECEIVED FROM M/S GREAT VALUE COM PANY LTD OF MAURITIUS U/S 68 OF THE ACT. THE LD.DR FURTHER SUBMITTED THA T MERELY DISCHARGING IDENTITY BY FILING CONFIRMATION FROM SUBSCRIBER AND FURNISHI NG BANK DETAILS FOR HAVING 7 SOURASHTRA FERROUS P LTD TRANSFERRED FUND THROUGH BANKING CHANNEL WILL NOT B E A SUFFICIENT COMPLIANCE OF SECTION 68 OF THE ACT. TO ESCAPE FROM THE CLUTCHES OF PROVISIONS OF SECTION 68 OF THE ACT, THE ASSESSEE HAS TO PROVE IDENTITY, GEN UINENESS OF TRANSACTION AND CREDITWORTHINESS OF THE PARTIES. IN THIS CASE, NO DOUBT, THE ASSESSEE HAS DISCHARGED IDENTITY OF THE PARTY, BUT FAILED TO PRO VE THE GENUINENESS OF TRANSACTIONS AND CREDITWORTHINESS OF THE PARTIES. THEREFORE, THE AO WAS RIGHT IN MAKING ADDITION U/S 68 OF THE ACT, AND HIS ORDER S HOULD BE UPHELD. 7. THE LD.AR FOR THE ASSESSEE, ON THE OTHER HAND, SUP PORTED THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE AO WAS COMPLETELY MIS CONSTRUED THE FACTS OF THE CASE TO MAKE ADDITION U/S 68 IN RESPECT OF SHARE AP PLICATION MONEY RECEIVED FROM M/S GREAT VALUE COMPANY LTD OF MAURITIUS IN T HE FINANCIAL YEAR RELEVANT TO AY 2007-08. THE LD.AR FURTHER SUBMITTED THAT TH E ASSESSEE HAS RECEIVED SHARE APPLICATION MONEY OF RS.8,51,26,250 ON THREE OCCASIONS, I.E. ON 18-04- 2006; 27-12-2006; AND 31-03-2007 WHICH IS EVIDENT F ROM THE FACT THAT THE SAID MONEY HAS BEEN CREDITED INTO HDFC BANK LTD, LOWER P AREL BRANCH IN US$. THE ASSESSEE HAS FILED VARIOUS DETAILS INCLUDING AP PLICATION FILED BEFORE RBI FOR APPROVAL OF ALLOTMENT OF EQUITY SHARES TO NON-RESID ENT ALONGWITH FOREIGN INWARD REMITTANCE CERTIFICATE. THEREFORE, THERE IS NO REA SON FOR THE AO TO DOUBT THE GENUINENESS OF TRANSACTIONS. THE LD.AR FURTHER SUB MITTED THAT VARIOUS DETAILS HAVE BEEN FILED BEFORE THE AO TO JUSTIFY CHARGING P REMIUM. ASSUMING FOR A MOMENT THAT THE ASSESSEE HAS NOT JUSTIFIED CHARGING PREMIUM, IT IS IRRELEVANT FOR THE PURPOSE OF MAKING ADDITION U/S 68, AS THE SECTI ON SPEAKS ABOUT IDENTITY, 8 SOURASHTRA FERROUS P LTD GENUINENESS OF TRANSACTION AND CREDITWORTHINESS OF THE PARTIES. THE ASSESSEE HAS DISCHARGED ALL THREE INGREDIENTS OF SECTION 68 AND HENCE, THE CIT(A) HAS RIGHTLY DELETED ADDITION MADE BY THE AO AND HIS ORDER SHOUL D BE UPHELD. THE LD.AR REFERRING TO THE DECISION OF DELHI HIGH COURT IN TH E CASE OF CIT VS USHA STUD AGRICULTURAL FARM 301 ITR 385 (DEL) AND THE DECISIO N OF THE APEX COURT IN THE CASE OF CIT VS P MOHANAKALA 291 ITR 228 SUBMITTED T HAT ADDITION CANNOT BE MADE TOWARDS CREDITS RECEIVED IN THE EARLIER YEAR U /S 68 OF THE INCOME-TAX ACT, 1961. 8. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA L AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE FACTS WITH REGARD TO THE RECEIPT OF SHARE APPLICATION MONEY IN THE FINANCIAL YEAR RELEVANT TO AY 2007-08 HAS NOT BEEN DISPUTED BY THE LOWER AUTHORITIES. IN FACT, THIS ISSUE HAS BEEN EXAMINED IN THE ASSESSMENT PROCEEDINGS OF A.Y. 2007 -08. THE ASSESSEE HAS FILED RELEVANT EVIDENCES TO PROVE RECEIPT OF MONEY IN THE FINANCIAL YEAR RELEVANT TO AY 2007-08. AS PER THE FOREIGN INWARD REMITTANC E CERTIFICATE FILED BY THE ASSESSEE AND ISSUED BY HDFC BANK LTD, LOWER PAREL B RANCH, THE ASSESSEE HAS RECEIVED SHARE APPLICATION MONEY FROM M/S GREAT VAL UE COMPANY LTD OF MAURITIUS ON 08-04-2006, 27-12-2006 AND 31-03-2007. THE ASSESSEE ALSO FILED VARIOUS DETAILS INCLUDING SHARE APPLICATION FORM, C ONFIRMATION FROM SUBSCRIBER, CAS CERTIFICATE FOR VALUATION OF SHARES, APPLICATI ON FILED WITH RBI FOR APPROVAL OF ALLOTMENT OF EQUITY SHARES TO NRI, BOARD RESOLUT ION FOR CHARGING PREMIUM AND STATUTORY FORM FILED WITH REGISTRAR OF COMPANIE S FOR INCREASE IN SHARE CAPITAL 9 SOURASHTRA FERROUS P LTD AND ALLOTMENT OF EQUITY SHARES. THE AO HAS NOT DIS PUTED ALL THESE EVIDENCES FILED BY THE ASSESEE. THE AO IS ONLY ON THE POINT THAT THE ASSESSEE IS NOT ABLE TO JUSTIFY HUGE PREMIUM OF RS.190 PER SHARE WITH ANY E VIDENCE. ACCORDING TO THE AO, THE SEQUENCE OF EVENTS ESTABLISHES AN UNDOUBTED CONCLUSION THAT THE PURPORTED TRANSACTIONS WITH M/S GREAT VALUE COMPANY LTD OF MAURITIUS IS NOT A GENUINE TRANSACTION AND ACCORDINGLY, THE ASSESSEE H AS FAILED TO PROVE GENUINENESS OF TRANSACTIONS AND CREDITWORTHINESS OF THE PARTIES. 9. THE PROVISIONS OF SECTION 68 PROVIDE FOR ADDITIONS WHERE ANY SUM IS FOUND CREDITED IN THE BOOKS OF ACCOUNT OF AN ASSESSEE MAI NTAINED FOR ANY PREVIOUS YEAR AND THE ASSESSEE, OFFERS NO EXPLANATION ABOUT THE N ATURE AND SOURCE THEREOF, OR THE EXPLANATION OFFERED BY HIM IS NOT IN THE OPINIO N OF THE AO SATISFACTORY, THE SUM SO CREDITED MAY BE CHARGED TO INCOME-TAX AS INC OME OF THE ASSESSEE OF THAT PREVIOUS YEAR. A PLAIN READING OF SECTION 68 MAKES IT CLEAR THAT ANY SUM FOUND CREDITED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE SH ALL BE TREATED AS INCOME OF THE ASSESSEE OF THAT PREVIOUS YEAR, IF THE ASSESSEE FAI LS TO PROVE IDENTITY, GENUINENESS OF TRANSACTIONS AND CREDITWORTHINESS OF THE PARTIES . IF CREDITS ARE NOT PERTAINING TO THE RELEVANT PERIOD OR IF THE CREDITS ARE CARRIE D FORWARD FROM PREVIOUS FINANCIAL YEAR, THEN NO ADDITION CAN BE MADE U/S 68 OF THE ACT, IN RESPECT OF CREDITS APPEARING IN THE BOOKS OF ACCOUNT. THIS LE GAL PROPOSITION IS SUPPORTED BY THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS USHA STUD AGRICULTURAL FARM LTD (SUPRA), WHEREIN IT WAS HELD THAT THE AO WAS INCORRECT IN MAKING ADDITION TOWARDS CREDIT BALANCES IN THE ACCO UNTS OF THE ASSESSEE BROUGHT 10 SOURASHTRA FERROUS P LTD FORWARD FROM EARLIER YEARS U/S 68 OF THE ACT. IN T HIS CASE, THE ASSESSEE HAS RECEIVED SHARE APPLICATION MONEY IN THE FINANCIAL Y EAR RELEVANT TO AY 2007-08 AND CONVERTED SUCH SHARE APPLICATION MONEY INTO SHA RE CAPITAL BY ALLOTTING EQUITY SHARES DURING THE RELEVANT FINANCIAL YEAR 20 07-08. THEREFORE, WE ARE OF THE VIEW THAT THE AO WAS INCORRECT IN MAKING ADDITI ON TOWARDS SHARE APPLICATION MONEY RECEIVED IN THE EARLIER FINANCIAL YEAR FOR TH E YEAR, UNDER CONSIDERATION, U/S 68 OF THE ACT. 10. HAVING SAID SO, LET US EXAMINE WHETHER, ON THE FACT S AND IN THE CIRCUMSTANCES, THE AO WAS RIGHT IN TREATING SHARE A PPLICATION MONEY AS UNEXPLAINED CREDIT U/S 68 OF THE INCOME-TAX ACT, 19 61. THE ASSESSEE HAS FILED VARIOUS DETAILS TO DISCHARGE ITS ONUS CAST U/S 68 O F THE ACT, TO PROVE IDENTITY, GENUINENESS OF TRANSACTION AND CREDITWORTHINESS OF THE PARTIES. THE ASSESSEE HAS RECEIVED SHARE APPLICATION MONEY FROM M/S GREAT VAL UE COMPANY LTD OF MAURITIUS THROUGH PROPER BANKING CHANNEL AND THE EV IDENCE OF WHICH HAS BEEN FURNISHED BEFORE THE AO. THE ASSESSEE ALSO FILED D ETAILS OF APPLICATION FILED BEFORE THE RBI FOR APPROVAL OF ALLOTMENT OF EQUITY SHARES TO NON RESIDENT. THE ASSESSEE ALSO FILED FOREIGN INWARD REMITTANCE CERTI FICATE ISSUED BY HDFC BANK LTD, LOWER PAREL BRANCH, WHICH CONTAINS THE NAME AN D ADDRESS OF THE SUBSCRIBER. THE ASSESSEE ALSO FILED CONFIRMATION L ETTER FROM THE SUBSCRIBER WHEREIN THE SUBSCRIBER HAS CONFIRMED SUBSCRIPTION O F SHARE CAPITAL IN THE ASSESSEE COMPANY. THE ASSESSEE ALSO FILED COPIES O F BOARD RESOLUTION AUTHORISING ISSUE OF SHARE CAPITAL ALONGWITH SHARE PREMIUM. THE ASSESSEE ALSO 11 SOURASHTRA FERROUS P LTD FILED CERTIFICATE FROM CA FOR VALUATION OF SHARES A ND STATUTORY FORM FILED WITH REGISTRAR OF COMPANIES FOR ALLOTMENT OF EQUITY SHAR ES. ALL THESE EVIDENCES WERE FILED BEFORE THE AO. THE AO HAS NOT MADE AN ATTEMP T TO INVESTIGATE ON THE IDENTITY, CAPACITY AND GENUINENESS OF THE TRANSACTI ON AND CREDITWORTHINESS OF THE PARTIES WHICH IS MATERIAL, WHEN ONE HAS TO INVOKE S ECTION 68 OF THE ACT. BY MERELY HOLDING THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THE SAME BEYOND REASONABLE DOUBT WILL NOT SUFFICE, WHEN THERE IS NO ADVERSE MATERIAL WITH THE AOS POSSESSION TO JUSTIFY IT. THE ASSESSEE HAS DIS CHARGED ITS INITIAL ONUS AND IT WAS FOR THE AO TO COME UP WITH SOMETHING INCRIMINA TING / ADVERSE MATERIAL TO SHIFT THE ONUS BACK TO THE ASSESSEE. THE ASSESSEE HAS POINTED OUT THAT SUBSCRIPTION TO SHARE CAPITAL WAS RECEIVED IN THE F INANCIAL YEAR 2006-07 RELEVANT TO AY 2007-08 IN RESPONSE TO A QUERY FROM THE AO. THE ASSESSMENT FOR AY 2007-08 WAS COMPLETED U/S 143(3) WHERE THE ASSESSEE WAS SPECICALLY ADDRESSED ALL QUERIES RAISED CALLING FOR VARIOUS DETAILS BY T HE THEN AO. THE ASSESSEE HAS FILED VARIOUS DETAILS TO EXPLAIN RECEIPT OF SHARE A PPLICATION MONEY AND ALLOTMENT OF EQUITY SHARES AND ALSO FILED BREAK UP OF MONEY R ECEIVED FROM M/S GREAT VALUE COMPANY LTD OF MAURITIUS AND ALLOTMENT OF EQU ITY SHARES. THEREAFTER THE ASSESSMENT WAS COMPLETED U/S 143(3) BY THE AO WHERE IN THE ADDITION IN RESPECT OF SHARE APPLICATION MONEY WAS ACCEPTED. DURING CU RRENT ASSESSMENT PROCEEDINGS ALSO, THE ASSESSEE HAS FILED VARIOUS DE TAILS TO PROVE IDENTITY OF THE SUBSCRIBER, GENUINENESS OF THE TRANSACTION AND THE CREDITWORTHINESS OF THE SUBSCRIBER. THE ASSESSEE ALSO FILED ALL NECESSARY EVIDENCE RIGHT FROM FOREIGN 12 SOURASHTRA FERROUS P LTD INWARD REMITTANCE CERTIFICATE TO APPLICATION FILED WITH FOREX DEPARTMENT OF RBI TO JUSTIFY ALLOTMENT OF EQUITY SHARES AND RECEIPT O F SHARE APPLICATION MONEY FROM M/S GREAT VALUE COMPANY LTD OF MAURITIUS. ONCE THE INITIAL BURDEN CAST UPON THE ASSESSEE TO PROVE THE IDENTITY, GENUINENESS OF TRANSACTIONS AND CREDITWORTHINESS OF THE PARTIES IS ESTABLISHED, THE N IT IS FOR THE AO TO PROVE OTHERWISE WITH NECESSARY EVIDENCES. IN THIS CASE, THE AO, WITHOUT BRINGING ANY COGENT MATERIAL ON RECORD, SIMPLY MADE ADDITION BY DOUBTING THE TRANSACTION ONLY ON THE BASIS OF HIGHER SHARE PREMIUM CHARGED B Y THE ASSESSEE TO CONCLUDE THAT TRANSACTION IS NOT GENUINE. THEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO REASON OF WHATSOEVER TO MAKE ADDITION T OWARDS SHARE APPLICATION MONEY RECEIVED FROM M/S GREAT VALUE COMPANY LTD OF MAURITIUS IN THE FINANCIAL YEAR 2006-07 RELEVANT TO AY 2007-08, IN T HE IMPUGNED ASSESSMENT YEAR, THAT TOO, WHEN THE ASSESSEE HAS PROVED ALL TH E THREE INGREDIENTS OF SECTION 68 OF THE ACT. THE LD.AO, EXCEPT FOR FINDING FAULT WITH THE EVIDENCE FILED BY THE ASSESSEE AND DISBELIEVING THE SAME HAS NOT BEEN ABLE TO ADD ANY EVIDENCE OR INFORMATION TO COME TO THE CONCLUSION THAT THE ASSE SSEE HAS NOT RECEIVED SHARE APPLICATION MONEY FROM THE SUBSCRIBER. THE CIT(A), AFTER CONSIDERING ALL THE EVIDENCES FILED BY THE ASSESSEE, HAS RIGHTLY DELETE D ADDITION MADE BY THE AO. WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDE R OF THE LD.CIT(A), WHO HAS DEALT WITH ALL THE FACTS ELABORATELY AND HAS RIGHTL Y COME TO THE CONCLUSION THAT THE ADDITION U/S 68 CANNOT BE INVOKED IN THE YEAR U NDER CONSIDERATION. HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE CIT(A ) AND REJECT GROUND RAISED BY 13 SOURASHTRA FERROUS P LTD THE REVENUE. 11. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S ADDITION MADE BY THE AO TOWARDS DISALLOWANCE OF DEPRECIATION AMOUNTING T O RS.381,07,407 WITHIN THE MEANING OF SECTION 32 OF THE ACT. THE AO DISAL LOWED DEPRECIATION CLAIMED BY THE ASSESSEE @50% OF ACTUAL DEPRECIATION ON THE GROUND THAT ASSETS WERE PUT TO USE FOR LESS THAN 180 DAYS WHICH IS EVIDENT AS P ER THE NOTE CREDITS FOR EXCISE DUTY AVAILED ON CAPITAL GOODS PURCHASED FROM M/S AN JANEYA ISPAT, MILLENNIUM METAL,SASHWAT INTERNATIONAL LTD, ETC. THE TREATMEN T OF EXCISE DUTY IN THE BOOKS OF ACCOUNT IN RESPECT OF ASSETS CAPITALISED CLEARLY SHOWS THAT INSTALLATION WAS DONE IN THE MONTH OF MARCH, 2008 AND THE ASSETS IN QUESTION HAVE BEEN USED FOR LESS THAN 180 DAYS. IT IS THE CONTENTION OF THE AS SESSEE THAT THE ASSETS PURCHASED AND PUT TO USE FOR MORE THAN 180 DAYS AND LESS THAN 180 DAYS WERE FURNISHED TO THE AO WITH COPIES OF BILLS. THE ASSESSEE FURTHER CONTENDED THAT THE AO, ONLY ON THE BASIS OF ENTRIES IN THE BOOKS OF ACCOUNT IN RESPECT OF TREATMENT OF INPUT CREDIT FOR EXCISE DUTY IN THE MONTH OF MARCH HAS CO ME TO THE CONCLUSION THAT ALL ASSETS ARE PUT TO USE FOR LESS THAN 180 DAYS AND HE NCE, ASSESSEE IS ELIGIBLE FOR 50% OF ACTUAL DEPRECIATION WITHOUT APPRECIATING THE BILLS AND OTHER EVIDENCES FILED. 12. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE ASSESSEE HAS FILED VARIOUS DETAILS WHICH IS ENCLOSED IN PAPER BOOK PAGES 124 TO 143 WHICH INCLUDES DETAILS OF AS SETS PURCHASED BILL-WISE AND TREATMENT IN ITS BOOKS OF ACCOUNT. ON PERUSAL OF D ETAILS FILED BY THE ASSESSEE, WE 14 SOURASHTRA FERROUS P LTD FIND THAT THE ASSESSEE HAS RIGHTLY CLASSIFIED ASSET S PURCHASED AND PUT TO USE FOR MORE THAN 180 DAYS AND ASSETS PURCHASED AND PUT TO USE FOR LESS THAN 180 DAYS. THIS IS FURTHER SUPPORTED BY BILLS. THE AO, WITHOU T APPRECIATING FACTS, ONLY ON THE BASIS OF INPUT CREDITS FOR EXCISE DUTY CLAIMED IN THE MONTH OF MARCH HAS COME TO THE CONCLUSION THAT ALL ASSETS ARE PURCHASE D AND PUT TO USE FOR LESS THAN 180 DAYS.. THE ASSESSEE HAS FILED DEPRECIATION CHA RT AS PER WHICH IT HAS CAPITALISED PLANT & MACHINERY AND OTHER ASSES OF RS .13,12,87,037 BEFORE 30 TH SEPTEMBER, 2007. THERE IS NO EVIDENCE TO THE CONTR ARY IN THE AOS POSSESSION THAT PLANT & MACHINERY WAS PUT TO USE AFTER 30 TH SEPTEMBER, 2007 EXCEPT INPUT CREDIT AVAILED IN MARCH, 2008 WHICH IS NOT RELEVANT AS PER SECTION 32 IS CONCERNED. THE CIT(A), AFTER CONSIDERING RELEVANT DETAILS HAS RIGHTLY DELETED ADDITION MADE BY THE AO AND HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF CIT(A) AND REJECT GROUND RAISED BY THE REVENUE. 13. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF INTEREST AMOUNTING TO RS.1,80,13,928 U/S 36(1)(III) AND 37(1) OF THE ACT. THE AO DISALLOWED INTEREST PAID ON TERM LOAN ON THE GRO UND THAT THE ASSESSEE HAS BORROWED TERM LOAN FOR ACQUISITION OF CAPITAL ASSET WHICH IS IN THE NATURE OF CAPITAL EXPENDITURE. THE AO FURTHER OBSERVED THAT EXCEPT INTEREST ON TERM LOAN ALL INTEREST EXPENDITURE ARE INCURRED FOR BUSINESS AS WORKING CAPITAL REQUIREMENTS. THE SELF ADMISSION OF THE ASSESSEE P ROVES THAT TERM LOAN ON WHICH INTEREST IS PAID HAS NOT BEEN UTILISED TOWARD S WORKING CAPITAL REQUIREMENTS. AS SUCH INTEREST PAID ON TERM LOAN I S NOT A REVENUE EXPENSE, BUT 15 SOURASHTRA FERROUS P LTD IN THE NATURE OF CAPITAL EXPENDITURE. ACCORDINGLY, INTEREST OF RS.1,80,13,928 HAS BEEN DISALLOWED. THE CIT(A), AFTER CONSIDERING THE EXPLANATION OF THE ASSESSEE AND ALSO RELYING UPON THE PROVISIONS OF SECTION 36( 1)(III) DELETED ADDITION MADE BY THE AO TOWARDS DISALLOWANCE OF INTEREST BY HOLDI NG THAT THE ISSUE IS WHETHER INTEREST PAYMENT IS IN RESPECT OF CAPITAL ASSET OR NOT IS IRRELEVANT INSOFAR AS SECTION 36(1)(III) IS CONCERNED. THE ASSESSEE IS N OT CLAIMING DEDUCTION ON ITS BORROWED FUNDS, BUT ON THE CORRESPONDING INTEREST P AID ON WHICH HAS COMMENCED PRODUCTION IN THE FINANCIAL YEAR 2006-07. IT IS OBVIOUS THAT THE AO HAS CONFUSED HIMSELF ON THIS ISSUE AND NOT UNDERSTO OD THE LAW IN PROPER PERSPECTIVE. 14. THE LD.DR SUBMITTED THAT THE LD.CIT(A) ERRED IN DEL ETING ADDITION MADE BY THE AO TOWARDS INTEREST PAID ON TERM LOAN WITHOU T APPRECIATING THE FACT THAT THE ASSESSEE HAS BORROWED TERM LOAN FOR THE PURPOSE OF ACQUISITION OF CAPITAL ASSETS, THEREFORE, THE AO WAS RIGHT IN DISALLOWING INTEREST U/S 36(1)(III) AND 37(1) OF THE ACT. THE LD. AR, ON THE OTHER HAND, STRONGLY SUPPORTED THE ORDER OF THE LD.CIT(A). 15. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA LS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS BORROWED TERM LOAN FROM BANKS FOR THE PURPOSE OF ACQUIRING CAPITAL ASSET AND SUCH TERM LOAN HAS BEEN BORROWED IN THE P REVIOUS YEAR RELEVANT TO AY 2007-08. THE AO HAS DISALLOWED INTEREST PAID ON TE RM LOAN ON THE GROUND THAT IT IS IN THE NATURE OF CAPITAL EXPENDITURE BUT NOT A REVENUE EXPENDITURE USED FOR 16 SOURASHTRA FERROUS P LTD THE PURPOSE OF BUSINESS. WE DO NOT FIND ANY MERIT IN THE FINDINGS OF THE AO FOR THE REASON THAT AS PER THE PROVISIONS OF SECTION 36 (1)(III) INTEREST PAID ON LOANS BORROWED FOR THE PURPOSE OF BUSINESS OF THE ASSESSE E IS DEDUCTIBLE IRRESPECTIVE OF THE FACT THAT WHETHER IT IS BORROWED FOR THE PUR POSE OF WORKING CAPITAL OR FOR ACQUISITION OF CAPITAL ASSETS. WHETHER THE ASSESSE E HAS TAKEN TERM LOAN FOR ACQUISITION OF CAPITAL ASSET OR WORKING CAPITAL IS IRRELEVANT AS LONG AS SUCH INTEREST IS PAID AFTER COMMENCEMENT OF PRODUCTION. IN THIS CASE, ADMITTEDLY, THE PRODUCTION ACTIVITY OF THE ASSESSEE HAS BEEN COMMEN CED IN THE PREVIOUS YEAR RELEVANT TO AY 2007-08. THIS FACT HAS NOT BEEN DIS PUTED BY THE REVENUE. THEREFORE, WE ARE OF THE VIEW THAT THERE IS NO REAS ON FOR THE AO TO DISALLOW INTEREST PAID ON TERM LOAN BY HOLDING THAT IT IS IN THE NATURE OF CAPITAL EXPENDITURE. THE CIT(A), AFTER CONSIDERING RELEVAN T FACTS HAS RIGHTLY DELETED ADDITION MADE BY THE AO. WE DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT(A), HENCE, REJECT GROUND RAISED BY THE REVENUE. 16. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S DISALLOWANCE OF INTEREST PAID ON CASH CREDIT ACCOUNTING TO RS.83,41 ,171 U/S 43B(E) OF THE ACT. THE AO DISALLOWED INTEREST ON THE GROUND THAT FROM THE COPY OF BANK STATEMENT FILED IN SUPPORT OF PROOF OF PAYMENT OF INTEREST IT WAS SEEN THAT THE BANK HAS DEBITED INTEREST TO THE CC ACCOUNT ON REGULAR INTER VALS AND THEREBY INCREASED THE DEBIT BALANCE IN THE ACCOUNT, AS A RESULT, THE INTE REST COMPONENT ON THE LOAN HAS BEEN CONVERTED INTO FURTHER LOAN OR ENHANCED UTILIS ATION OF CASH CREDIT LIMIT. BY DEBITING INTEREST AMOUNT, THE LOAN LIABILITY TOWARD S BANK ONLY INCREASES BY WAY 17 SOURASHTRA FERROUS P LTD OF DEBIT BALANCE IN THE BANK ACCOUNT WHICH IS CLEAR AND EVIDENT FROM THE BANK STATEMENT. THIS AMOUNTS TO CONVERSION OF INTEREST LIABILITY INTO A FURTHER LOAN. THE ASSESSEE HAS NOT COMPLIED WITH THE PROVISIONS O F SECTION 43B(E) AND EXPLANATION 3D THERETO. SUCH INTEREST IS ALSO NOT ACTUALLY PAID BEFORE FILING RETURN OF INCOME U/S 139(1). AS SUCH INTEREST CLAI MED IN THE P&L ACCOUNT REPRESENTING INTEREST EXPENSES TOWARDS CASH CREDIT ACCOUNT IS INADMISSIBLE. 17. THE LD.DR SUBMITTED THAT THE CIT(A) DELETED ADDITIO N MADE BY THE AO TOWARDS INTEREST PAID ON CC ACCOUNT WITHOUT APPRECI ATING THE FACT THAT THE ASSESSEE HAS CONVERTED INTEREST EXPENSES INTO FURTH ER LOAN WITHOUT THERE BEING ANY ACTUAL PAYMENT OF INTEREST TO BANK WHICH SQUARE LY COVERED WITHIN THE PROVISIONS OF EXPLANATION 3D TO SECTION 43B(E) OF T HE ACT. 18. THE LD.AR FOR THE ASSESSEE, ON THE OTHER HAND, SUBM ITTED THAT THE CIT(A) WAS RIGHTLY DELETED ADDITION AS THE PROVISIONS OF S ECTION 43B(E) EXPLANATION 3D HAS NO APPLICATION TO INTEREST PAID TO BANK ON ACCO UNT OF INTEREST ACCRUED ON CC ACCOUNT AS IT DOES NOT AMOUNT TO CONVERSION OF INTE REST INTO LOAN ACCOUNT. 19. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL AVAILABLE ON RECORD, WE FIND THAT THE AO HAS MADE ADDITIONS TOWARDS INTE REST ON CC ACCOUNT WITHOUT APPRECIATING THE FACTS IN RIGHT PERSPECTIVE WHETHER SUCH INTEREST FALLS WITHIN THE AMBIT OF SETION 43B(E) EXPLANATION 3D OF THE ACT. THE PROVISIONS OF SECTION 43B(E) PROVIDES FOR DISALLOWANCE OF INTEREST ON LOA NS OR ADVANCES IF SUCH INTEREST IS NOT PAID ON OR BEFORE THE DUE DATE OF F URNISHING RETURN OF INCOME. FURTHER EXPLANTION 3D EXPLAINS THE POSITION OF LAW PROVIDED IN SECTION 43B(E) 18 SOURASHTRA FERROUS P LTD SO AS TO CLARIFY THE POSITION OF INTEREST ACTUALLY PAID OR INTEREST CONVERTED INTO LOAN OR ADVANCES. IN THIS CASE, ADMITTEDLY, THE AS SESSEE HAS PAID INTEREST ON CASH CREDIT ACCOUNT WHICH HAS BEEN DEBITED BY THE BANK O N REGULAR INTERVALS. WE FURTHER NOTICE THAT SUCH INTEREST HAS BEEN PAID BY THE ASSESSEE ON OR BEFORE DUE DATE OF FURNISHING RETURN U/S 139(1) OF THE ACT. T HEREFORE, WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS COMPLETELY ERRED IN DISALLOWING INTEREST ON CC ACCOUNT U/S 43B(E) OF THE ACT. THE CIT(A), AFTER C ONSIDERING RELEVANT SUBMISSIONS HAS RIGHTLY DELETED ADDITION MADE BY TH E AO. WE DO NOT SEE ANY ERROR IN THE ORDER OF THE CIT(A); HENCE, WE ARE INC LINED TO UPHOLD THE ORDER OF THE CIT(A) AND REJECT GROUND RAISED BY THE REVENUE. 20. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S ADDITION MADE BY THE AO TOWARDS EXCISE DUTY (PLA) OF RS.42,30,010 SHOWN AS LOANS AND ADVANCES. THE AO MADE ADDITION TOWARDS EXCISE DUTY BEING PERS ONAL LEDGER ACCOUNT BALANCE SHOWN IN THE LOANS AND ADVANCES ON THE GROU ND THAT THE ASSESSEE HAS FAILED TO INCLUDE EXCISE DUTY FOR VALUATION OF CLOS ING STOCK. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS PAID EXCISE DUTY ON THE RAW MATERIALS AND THAT PART OF RAW-MATERIAL WHICH HAS NOT UTILISED IS APPE ARING ON THE CLOSING STOCK. SUCH CLOSING STOCK OF RAW MATERIAL HAS TO BE ADJUST ED WITH THE UNUTILISED MODVAT CREDIT. HOWEVER, THE ASSESSEE HAS FAILED TO MAKE ANY ADJUSTMENT TOWARDS UNUTILISED MODVAT CREDIT WHILE VALUING CLOS ING STOCK, THEREFORE, MADE ADDITION OF RS.42,30,010. THE CIT(A) DELETED ADDIT ION MADE BY THE AO BY HOLDING THAT THE AOS CONCLUSIONS ARE WITHOUT ANY B ASIS THAT EXCISE DUTY HAS NOT 19 SOURASHTRA FERROUS P LTD BEEN INCLUDED IN THE VALUE OF CLOSING STOCK. THE A SSESSEE HAS MADE ADVANCE PAYMENT OF EXCISE DUTY WHICH HAS BEEN KEPT IN PLA A CCOUNT AFTER ALL ADJUSTMENTS TOWARDS INPUT CREDIT AND EXCISE DUTY PA YABLE. THE AO, WITHOUT APPRECIATING THE FACT ONLY ON SUSPICION AND SURMISE S MADE ADDITION BY INVOKING PROVISIONS OF SECTION 145. THE ASSESSEE HAS FURNIS HED A CERTIFICATE FROM AUDITORS WHEREIN THEY HAVE CLARIFIED THAT THE IMPUGNED SUM H AS BEEN INCLUDED IN THE VALUATION OF CLOSING STOCK. THE AO HAS IGNORED ALL EVIDENCES FILED BY THE ASSESSEE TO MAKE ADDITION TOWARDS PLA BALANCE. THE RE IS NOTHING ON RECORD TO SHOW THAT EXCISE DUTY HAS NOT BEEN INCLUDED IN THE VALUE OF CLOSING STOCK, THEREFORE, HE DELETED THE ADDITION MADE BY THE AO. 21. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA L AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. ADMITTEDLY, THE ASSESSEE HAS SHOWN RS.42,30,010 IN THE ASSET SIDE OF THE BALANCE -SHEET UNDER THE HEAD PERSONAL LEDGER ACCOUNT. THE AO MADE ADDITION TO WARDS PLA BALANCE ON THE GROUND THAT THE ASSESSEE HAS NOT MADE SUITABLE ADJUSTMENTS TOWARDS UNUTILISED MODVAT CREDIT FOR VALUATION OF CLOSING S TOCK. WE DO NOT FIND ANY MERIT IN THE FINDINGS OF THE AO FOR THE REASON THAT THERE IS NOTHING ON RECORD TO INDICATE THAT THE ASSESSEE HAS NOT CONSIDERED UNUTI LISED INPUT TAX CREDIT FOR VALUATION OF CLOSING STOCK. THE ASSESSEE HAS FURNI SHED A CERTIFICATE FROM THE AUDITORS TO THE EFFECT THAT CLOSING STOCK HAS BEEN VALUED INCLUDING EXCISE DUTY. WE FURTHER NOTICE THAT AMOUNT SHOWN IN PLA ACCOUNT IS NOTHING BUT ADVANCE PAYMENT OF EXCISE DUTY WHICH HAS BEEN KEPT IN THE L OANS AND ADVANCES IN THE 20 SOURASHTRA FERROUS P LTD ASSET SIDE OF THE BALANCE-SHEET. THE AO WITHOUT AP PRECIATING THE FACTS MADE ADDITION TO PLA BALANCE ON SUSPICION AND SURMISE WI THOUT BRINGING ANY MATERIAL ON RECORD TO SHOW THAT THIS REPRESENTS UNU TILISED MODVAT CREDIT WHICH HAS NOT BEEN CONSIDERED FOR VALUATION OF CLOSING ST OCK. THE CIT(A), AFTER CONSIDERING SUBMISSIONS OF THE ASSESSEE HAS RIGHTLY DELETED ADDITION MADE BY THE AO. WE DO NOT FIND ANY ERROR IN THE ORDER OF T HE CIT(A); HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE CIT(A) AND R EJECT GROUND RAISED BY THE REVENUE. 22. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S ADDITION MADE BY THE AO TOWARDS EXCISE DUTY CREDITS IN THE P&L ACCOUNT F OR RS.12,91,55,890 WITHIN THE MEANING OF SECTION 145(3) OF THE ACT. THE AO D ISALLOWED EXCISE DUTY COLLECTED ON THE GROUND THAT AS PER THE AMENDED PRO VISIONS OF SECTION 145A, ALL TAXES AND DUTIES COLLECTED ARE REQUIRED TO BE INCLU DED IN SALES AND SHALL BE ROUTED THROUGH P&L ACCOUNT. THE ASSESSEE HAS NOT S HOWN EXCISE DUTY COLLECTED OF RS.12,91,55,890 THOUGH SUCH TREATMENT IS NECESSARILY TO BE GIVEN AS PER THE PROVISIONS OF SECTION 145(1) OF THE ACT. T HE AO, FURTHER OBSERVED THAT THE ASSESSEE, BY WAY OF DISCLOSURE IN THE NOTES TO ACCOUNTS, HAVE ALREADY RECOGNISED EXCISE DUTY COLLECTED AS ITS INCOME AND ONLY FOR THE PURPOSE OF TAX PAYMENT IT SOUGHT TO DIFFER. IT IS CLEARLY NOT ACC EPTABLE IN MERCANTILE SYSTEM OF ACCOUNTING. THEREFORE, THE AO MADE ADDITION BY INV OKING PROVISIONS OF SECTION 145(3) OF THE ACT. 23. THE LD.CIT(A) DELETED ADDITION MADE BY THE AO BY HO LDING THAT THIS 21 SOURASHTRA FERROUS P LTD AMOUNT RELATES TO GOODS SOLD, FURTHER STRENGTHENS T HE CASE THAT IT DOES NOT RELATE TO CLOSING STOCK. AN ITEM SOLD CAN BY NO STRETCH O F IMAGINATION BE PART OF THE CLOSING STOCK INVENTORY. THE ENTIRE EXCISE DUTY CO LLECTED FROM THE CUSTOMERS HAS BEEN PAID TO EXCISE DEPARTMENT AND THERE IS NO ADVERSE COMMENT IN TAX AUDIT REPORT REGARDING 43B. IT IS A FACT THAT ASSESSEE H AS CLAIMED ITS UNIT TO BE EXEMPT ENTITY AND IF THAT ISSUE IS DECIDED IN ITS FAVOUR A ND REFUND RECEIVED, THEN IT WILL BECOME INCOME U/S 41(1) OF THE IT ACT. IT APPEARS THAT THE AO GOT CARRIED AWAY BY THE NOTES TO ACCOUNTS TO HOLD THAT INCOME HAS BE COME RECEIVABLE. IN THIS CASE, THE ASSESSEE, INSTEAD OF DEBITING THE EXCISE DUTY PAID TO P&L ACCOUNT AND CREDITING EXCISE DUTY COLLECTED TO P&L ACCOUNT HAS ROUTED THROUGH BALANCE- SHEET ACCOUNT; HOWEVER, FOR THE PURPOSE OF DISCLOSU RE IN THE FINANCIAL STATEMENTS SHOWN EXCISE DUTY COLLECTED AS A SEPARAT E ITEM BY REDUCING FROM THE GROSS SALES. THIS PRESENTATION IS IN ACCORDANCE WI TH THE PROVISIONS OF SECTION 145(1) OF THE I.T. ACT, 1961 AND THE AO WAS INCORRE CT IN ADDING EXCISE DUTY COLLECTED AS INCOME OF THE ASSESSEE. 24. THE LD.DR SUBMITTED THAT THE LD.CIT(A) ERRED IN DEL ETING ADDITION MADE ON ACCOUNT OF EXCISE CREDITS IN THE BALANCE-SHEET W ITHIN THE MEANING OF SECTION 145(3) OF THE ACT WITHOUT APPRECIATING THE FACT THA T THE ASSESSEE HAS NOT ROUTED EXCISE DUTY THROUGH ITS P&L ACCOUNT THOUGH SUCH TRE ATMENT IS MANDATORY IN NATURE AS PER THE PROVISIONS OF SECTION 145(1) OF T HE ACT. THE AO HAS BROUGHT OUT CLEAR FACTS THAT IT IS IN THE NATURE OF INCOME ACCRUED TO THE ASSESSEE. HOWEVER, THE ASSESSEE HAS FAILED TO RECOGNISED EXCI SE DUTY COLLECTED AS INCOME 22 SOURASHTRA FERROUS P LTD AND HENCE, THE AO WAS RIGHT IN MAKING ADDITION AND HIS ORDER SHOULD BE UPHELD. 25. THE LD.AR FOR THE ASSESSEE, ON THE OTHER HAND, STR ONGLY SUPPORTED THE ORDER OF THE CIT(A) AND SUBMITTED THAT THE LD.AO FA ILED TO APPRECIATE THE PRESENTATION OF ACCOUNTS TO MAKE ADDITION TO EXCISE DUTY COLLECTED ON THE GROUND THAT EXCISE DUTY IS NOT ROUTED THROUGH P&L ACCOUNT AND SUCH TREATMENT IS IN VIOLATION OF THE PROVISION OF SECTION 145(1) OF THE ACT. EVEN GOING BY THE METHOD OF THE AO, IF THE SALES FIGURES WERE TO BE I NCREASED BY THE AMOUNT OF EXCISE DUTY, ON THE SAME PARITY OF REASONING, THE A MOUNT OF EXCISE DUTY PAID BY THE ASSESSEE IS REQUIRED TO BE DEBITED TO THE P&L A CCOUNT. SECONDLY, THE SAID EXCISE DUTY IS PAID BEFORE THE YEAR AND, THEREFORE, THE SAME CANNOT BE DISALLOWED. THE CIT(A), AFTER CONSIDERING RELEVANT FACTS HAS RIGHTY DELETED THE ADDITION AND HIS ORDER SHOULD BE UPHELD. 26. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA LS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. ADMITTEDLY, THE ASSESSEE HAS SHOWN EXCISE DUTY COLLECTED ON SALES NET OF EXCISE DUTY IN ITS FINANCIAL STATEMENTS. THE ASSESSEE HAS FOLLOWED A METHOD WHE REIN THE EXCISE DUTY COLLECTED AND PAID HAS BEEN ROUTED THROUGH BALANCE- SHEET; HOWEVER, SHOWN EXCISE DUTY COLLECTED AS A SEPARATE ITEM IN P&L ACC OUNT. THE AO MISCONSTRUED THE FACTS TO MAKE ADDITION ONLY ON THE BASIS OF NOT ES TO ACCOUNTS GIVEN IN THE FINANCIAL STATEMENTS WHEREIN THE ASSESSEE HAS STATE D THAT THE COMPANY BEING QUALIFIED AS AN EXEMPTION UNIT MADE AN APPLICATION UNDER THE CENTRAL EXCISE NOTIFICATION NO.39/2001 AND ON RECEIPT OF THE EXEMP TION CERTIFICATE, THE 23 SOURASHTRA FERROUS P LTD COMPANY WILL BE ELIGIBLE FOR REFUND OF EXCISE DUTY PAID AND THE SAME WILL BE ACCOUNTED FOR AS AND WHEN RECEIVED. THE AO, ON THE BASIS OF NOTES TO AC COUNTS CAME TO THE CONCLUSION THAT EXCISE DUTY COLLECTED IS IN THE NAT URE OF RECEIPT ACCRUED TO THE ASSESSEE, BUT THE ASSESSEE HAS FAILED TO RECOGNISE IT AS INCOME. WE DO NOT FIND ANY MERIT IN THE FINDINGS OF THE AO FOR THE REASON THAT THE ASSESSEE HAS COLLECTED EXCISE DUTY ON SALES AND PAID THE SAME TO THE EXCIS E DEPARTMENT WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEE HAS ROUTED ITS EXCI SE DUTY COLLECTED ON SALES AND PAYMENT OF EXCISE DUTY THROUGH BALANCE-SHEET. THE ASSESSEE, FOR THE PURPOSE OF DISCLOSURE OF ACCOUNTS IN ACCORDANCE WITH PROVISION S OF SECTION 145(1) SHOWN SALES NET OF EXCISE DUTY IN THE P&L ACCOUNT. THE A O MISCONSTRUED THE FACTS TO MAKE ADDITION TOWARDS EXCISE DUTY COLLECTED. THERE FORE, WE ARE OF THE CONSIDERED VIEW THAT THE CIT(A) WAS RIGHT IN DELETI NG ADDITION MADE TOWARDS EXCISE DUTY. WE DO NOT FIND ANY ERROR IN THE ORDER OF THE CIT(A). HENCE, WE ARE INCLINED TO UPHOLD THE FINDINGS OF THE CIT(A) A ND REJECT GROUND RAISED BY THE REVENUE. 27. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF EXPENSES AMOUNTING TO RS .33,00,944 WITHIN THE MEANING OF SECTION 40(A)(IA) OF THE ACT. THE AO MA DE ADDITION TOWARDS TRANSPORTATION CHARGES PAID TO M/S DELHI ASSAM ROAD WAYS CORPORATION LTD ON THE GROUND THAT THE ASSESSEE HAS FAILED TO DEDUC T TAX AT SOURCE U/S 194C OF THE ACT. THE AO FURTHER OBSERVED THAT IN RESPONSE TO S PECIFIC QUERY, THE ASSESSEE 24 SOURASHTRA FERROUS P LTD HAS SUBMITTED A CERTIFICATE U/S 197 OF THE ACT, SUB MITTED BY THE PARTY FOR NON DEDUCTION OF TAX AT SOURCE. ON GOING THROUGH THE C OPY OF THE SAID CERTIFICATE ISSUED ON 24-03-2008, IT WAS OBSERVED THAT THE SAID CERTIFICATE WAS VALID FOR THE PERIOD 29-02-2008 TO 31-03-2008. THE COPY OF THE S AID CERTIFICATE WAS RECEIVED BY THE ASSESSEE THROUGH AN EMAIL ON 17-12-2010. TH E ABOVE DATE CLEARLY SHOWS THAT THE ASSESSEE HAD OBTAINED THE CERTIFICATE FROM THE PARTY ONLY WHEN THE QUESTION WAS RAISED REGARDING TDS AND ALLOWABILITY OF EXPENSES U/S 40(A)(IA) OF THE ACT. AS PER SECTION 194C, THE ASSESSEE IS REQU IRED TO MAKE TDS ON TRANSPORTATION CHARGES, BUT FAILED TO DEDUCT TDS, T HEREFORE, THE AO OPINED THAT EXPENSES ARE INADMISSIBLE U/S 40(A)(IA) OF THE ACT. IT IS THE CONTENTION OF THE ASSESSEE THAT IT HAS PAID GROSS AMOUNT OF RS.6,23,9 9,417 TO M/S DELHI ASSAM ROADWAYS CORPORATION LTD AND DEDUCTED TDS OF RS.12, 24,764 FOR THE PERIOD FROM 01-04-2007 TO 20-02-2008. THE PAYEE HAS FURNI SHED CERTIFICATE ISSUED U/S 197 OF THE ACT, FOR NON DEDUCTION OF TAX AT SOURCE FOR THE PERIOD FROM 29-02- 2008 TO 31-03-2008, THEREFORE, IT HAS NOT DEDUCTED TDS ON PAYMENT MADE FOR THE ABOVE PERIOD OF RS. 33,00,944. THEREFORE, THE AO WAS INCORRECT IN DISALLOWING EXPENSES U/S 40(A)(IA), EVEN THOUGH SUC H PAYMENT IS NOT LIABLE FOR TDS U/S 194C IN VIEW OF THE CERTIFICATE FURNISHED B Y THE DEDUCTEE. 28. HAVING HEARD BOTH THE SIDES AND CONSIDERED MATERIAL ON RECORD, WE FIND THAT THE CIT(A) HAS RECORDED A CATEGORICAL FINDING TO THE EFFECT THAT THE IMPUGNED PAYMENT OF RS.33,00,944 IS COVERED BY THE CERTIFICATE FURNISHED BY THE ASSESSEE U/S 197 OF THE ACT, FOR NON DEDUCTION OF TAX AT SOURCE U/S 194C. 25 SOURASHTRA FERROUS P LTD THE AO, WITHOUT APPRECIATING THE FACTS, SIMPLY DISA LLOWED TRANSPORTATION CHARGES U/S 40(A)(IA) EVEN THOUGH THE ASSESSEE HAS FURNISHED VALID CERTIFICATE ISSUED U/S 197 OF THE ACT. WE DO NOT FIND ANY ERRO R IN THE FINDINGS OF THE CIT(A); HENCE, WE ARE INCLINED TO UPHOLD THE FINDIN GS OF THE CIT(A) AND REJECT GROUND RAISED BY THE REVENUE. 29. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION I S ADDITION MADE BY THE AO ON ACCOUNT OF REDUCTION IN PRODUCTION OF PIG IRO N AMOUNTING TO RS.21,65,77,838 BY REJECTING BOOKS OF ACCOUNT U/S 1 45 OF THE ACT. THE AO HAS DEALT WITH THE ISSUE OF ADDITION ON ACCOUNT OF REDU CTION IN PRODUCTION ASSESSEE AT PARAS 10 TO 10.3 ON PAGES 12 TO 15 OF THE ASSESSMEN T ORDER. THE AO COMPARED THE CONSUMPTION OF RAW MATERIALS WITH THE PRODUCTIO N OF FINISHED GOODS FOR AY 2007-08 AND FOUND THAT THE PRODUCTION HAS BEEN REDU CED BY 7.75% WHICH IN QUANTITY WORKED OUT TO 11,788 METRIC TONNES WHICH W AS VALUED AT RS.21,65,77,838. THE AO OBSERVED THAT THERE IS A R EDUCTION IN PRODUCTION OF FINISHED GOODS AND THE ASSESSEE HAS NOT BEEN ABLE T O EXPLAIN REDUCTION IN PRODUCTION WITH NECESSARY EVIDENCES. THE AO FURTHE R OBSERVED THAT THOUGH THE ASSESSEE SOUGHT TO EXPLAIN THE DIFFERENCE IN PRODUC TION OF FINISHED PRODUCTS ATTRIBUTABLE TO QUALITY OF RAW MATERIALS UTILISED F OR PRODUCTION OF PIG IRON AND GENERATION OF BY-PRODUCT, THERE IS NO BASIS IN THE GENERATION OF BY-PRODUCTS AND PRODUCTION OF PIG IRON. AS SUCH GENERATION OF BY-P RODUCT HAS APPEARED FOR THE FIRST TIME IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. THE AO FURTHER OBSERVED THAT THE ALLEGED MOISTURE AND GENERATION OF FINES HAS BE EN ACCOUNTED FOR ONLY IN THE 26 SOURASHTRA FERROUS P LTD CURRENT YEAR AND NEITHER IN THE PAST OR FUTURE RECO RDS OF THE ASSESSEE SHOWS SUCH ITEMS, HENCE THE SAME IS WITHOUT ANY BASIS AND DOCU MENTARY EVIDENCE. MOREOVER, THE ASSESSEE BEING A MANUFACTURING INDUST RY IS REQUIRED TO DISCLOSE THE CONSUMPTION RATIOS WITH REGARD TO THE YIELD, WA STAGE, BY-PRODUCTS, ETC IN THE TAX AUDIT REPORT AS WELL AS IN THE RETURN. THE TAX AUDIT REPORT, HOWEVER, DOES NOT SHOW THE YIELD OF FINISHED PRODUCT PERCENTAGE OF IT , SHORTAGE / EXCESS, IF ANY, AND THE RELEVANT COLUMNS ARE KEPT BLANK. THIS ITSELF S HOWS THAT THERE IS NO SUCH DATA OR RECORD MAINTAINED AS ON THE DATE OF TAX AUDIT. IT IS ONLY WHEN SPECIFIC QUERIES WERE RAISED, THE ASSESSEE, WITH A VIEW TO AVOID THE CRUCIAL QUESTION HAS FILED THE COOKED UP DETAILS WHICH ARE NOT BACKED BY ANY GENUI NE EVIDENCES. THOUGH THE ASSESSEE CLAIMS FINES SOLD CONSTITUTE 14.60% OF TOT AL RAW-MATERIAL PURCHASED AND MOISTURE AND ASH REDUCTION OF 3%, IT IS WITHOUT ANY EVIDENCE AND DOCUMENTARY SUPPORT. THE ASSESSEE STATED TO HAVE S OLD 22,675 M.T. OF FINES AT A SALE VALUE OF 8.73 CRORES IN 2007-08 WHICH IS INCLU DED IN THE SALES IN P&L ACCOUNT. THIS WORKS OUT TO AN AVERAGE SALE PRICE O F RS.3853 PER M.T. WHEREAS THE PURCHASE OF COAL FROM THE SISTER CONCERN WORKS OUT TO RS.10,192 TO RS.14,038 PER M.T.. THOUGH ASSESSEE CLAIMS TO HAVE RAISED A DEBIT NOTE TO THE SUPPLIER OF RAW MATERIALS TOWARDS MOISTURE AND ASH CONTENT OF QUANTITY OF 5742.27 M.T. FOR AN AMOUNT OF RS.6.48 CRORES, THE S AID DEBIT NOTE IS NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE. THEREFORE, THE AO OPINED THAT THE ASSESSEE WAS NOT ABLE TO EXPLAIN DIFFERENCE IN PROD UCTION OF PIG IRON WHEN COMPARED TO PREVIOUS FINANCIAL YEAR AND HENCE REJEC TED BOOKS OF ACCOUNT U/S 27 SOURASHTRA FERROUS P LTD 145(3) AND ESTIMATED PRODUCTION LOSS AT 11,738 M.T. AND WORKED OUT TOTAL VALUE AT RS.21,65,77,838 AND TREATED IT AS UNACCOUNTED SA LES FOR THE YEAR. 30. IT IS THE CONTENTION OF THE ASSESSEE THAT THE AO WA S ERRED IN ESTIMATING PRODUCTION LOSS ON THE BASIS OF PRODUCTION PERCENTA GE OF PREVIOUS FINANCIAL YEAR WITHOUT APPRECIATING THE FACT THAT PRODUCTION CANNO T BE AT EQUAL LEVEL AT ALL TIMES AND IT DEPENDS UPON VARIOUS PARAMETERS INCLUDING QU ALITY OF RAW MATERIALS USED FOR PRODUCTION OF PIG IRON. THE ASSESSEE FURTHER S UBMITTED THAT IT HAS PURCHASED COAL WHICH IS HAVING A FV CONTENT OF 63% WHEN COMPA RED TO AVERAGE FV CONTENT OF 66% IN 2006-07 WHICH IS THE MAIN REASON FOR REDUCTION IN PRODUCTION OF PIG IRON. THE ASSESSEE FURTHER SUBMITTED THAT D URING THE YEAR UNDER CONSIDERATION IT IS GENERATED 22,675 M.T. OF FINES AND SOLD FOR A VALUE OF RS.8.73 CRORES WHICH IS INCLUDED IN SALES IN THE P&L ACCOUN T. THE ASSESSEE FURTHER SUBMITTED THAT DUE TO MOISTURE AND ASH CONTENT IN L AM COKE, THERE IS A REDUCTION OF 5,742 M.T. WHICH IS INCLUDED IN CONSUM PTION OF RAW MATERIALS. IF YOU TAKE INTO ACCOUNT SALE OF FINES AND MOISTURE AN D ASH CONTENT, THEN NET CONSUMPTION OF RAW MATERIAL WORK OUT TO 42.39% WHIC H IS ON PAR WITH PREVIOUS YEARS PERCENTAGE OF 42.23% AND HENCE, THERE IS NO CHANGE IN PRODUCTION PERCENTAGE OF FINISHED GOODS IN TERMS OF QUANTITY. THE AO, WITHOUT APPRECIATING THE FACTS IN RIGHT PERSPECTIVE AND ALS O WITHOUT BRINGING ANY COGENT MATERIAL ON RECORD IN HIS POSSESSION THAT THE ASSES SEE HAS SOLD GOODS OUTSIDE THE BOOKS OF ACCOUNT OR THERE IS EXCESS STOCK FOUND IN THE POSSESSION OF THE ASSESSEE, MADE ADDITION ONLY ON THE BASIS OF SUSPIC ION AND SURMISES ON THE BASIS 28 SOURASHTRA FERROUS P LTD OF COMPARISON OF PRODUCTION FIGURES OF PREVIOUS FIN ANCIAL YEARS. 31. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA L AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE LD.CIT(A) HAS DEALT WITH THIS ISSUE AT PARAS 10 TO 10.3.1.11 ON PAGES 16 TO 27 OF HIS ORDER, WHEREIN HE HAS EXTRACTED WRITTEN SUBMISSIONS OF THE ASSESSEE AS WE LL AS THE POINT-WISE EXPLANATION OF THE ASSESSEE TO THE OBSERVATION OF T HE AO IN THE ASSESSMENT ORDER. THE LD.CIT(A) ALSO EXTRACTED IN THE FORM O F A TABLE REMAND REPORT OF THE AO AS WELL AS COUNTER COMMENTS OF THE ASSESSEE IN R ESPECT OF THE REMAND REPORTS DATED 04-07-2010 AND 08-08-2010. THE LD.CI T(A) AT PARA 10.3.1. AND 10.3.2 HELD THAT THE AO HAD NOT GIVEN ADEQUATE OPPO RTUNITY AND, THEREFORE, ADDITIONAL EVIDENCE FILED IN THE COURSE OF APPELLAT E PROCEEDINGS AND FURNISHED TO THE AO IS TO BE ADMITTED AS EVIDENCES. THE CIT(A) HAS ELABORATELY DISCUSSED THE ISSUE ON MERITS AND HELD THAT THE ASSESSEE HAS MADE OUT A CASE OF EXPLAINING IRON ORE FINES GENERATED AT THE TIME OF HANDLING IR ON ORES IN SEGMENTS. IT IS A KIND OF BY-PRODUCT OF IRON ORE AND NOT A SEPARATE R AW MATERIAL WHICH HAS BEEN SOLD. THE CIT(A) FURTHER OBSERVED THAT IF BY-PRODU CT OF IRON ORE FINES SOLD BY ASSESSEE AND THE REDUCTION IN QUANTITY OF COKE DUE TO MOISTURE AND ASH CONTENT IS CONSIDERED FOR THE PURPOSE OF CALCULATION OF CONSUM PTION OF RAW MATERIALS, THE PERCENTAGE OF PRODUCTION OF FINISHED GOODS ACHIEVE D BY THE ASSESSEE IS IN COMPARISON WITH PREVIOUS YEARS PERCENTAGE OF PRODU CTION OF FINISHED GOODS AND, THEREFORE, THE AO WAS INCORRECT IN ESTIMATING THE PRODUCTION LOSS ON THE BASIS OF PREVIOUS YEARS FIGURES. THE RELEVANT POR TION OF THE CIT(A)S ORDER IS 29 SOURASHTRA FERROUS P LTD EXTRACTED BELOW:- 10.3.8 TO SUM UP, FINES ARE GENERATED AT THE TIM E OF HANDLING THE IRON ORE IN STOCKYARDS AND AT THE TIME OF OPERATING IN HANDLING PLANT AND IS A WASTE OR BY PR ODUCT OF RAW MATERIAL. THE IRON ORE FINES OF 22675.970 MT SO GENERATED WERE SOLD THROUGH M/S.CANARA OVERSEAS LTD A COMPANY AN EXPORTERS OF SUCH FINES. THE TRANSPORTAT ION OF FINES WAS ARRANGED BY M/S.CANARA OVERSEAS LTD ON WH ICH THE APPELLANT HAD NO CONTROL. ABOUT 84% EXPORTS WER E MADE TO CHINA AND THE CONSIDERATION HAS BEEN CREDITED TO THE PROFIT & LOSS ACCOUNT. THE DOCUMENTARY EVIDENCE INC LUDING SALE BILLS, EXPORT DOCUM.ANTS, AUDITOR'S CERTIFICAT E ARE PLACED ON RECORD AND NO DISCREPANCY OR ADVERSE COMMENTS HA S BEEN NOTICED. AS SUCH, THE APPELLANT'S STAND THAT S AID DIFFERENCE OF 7.57% IS ON ACCOUNT OF INCLUSION OF I RON FINES IS ACCEPTABLE. THE REVISED YIELD IS WORKED OUT AS BELO W:- PARTICULARS 2007-08 2006-07 RAW MATERIALS QUANTITY (MT) QUANTITY (MT) IRON ORE 92389.437 56678.440 COKE 44126.989 28027.588 DOLOMITE 4630.073 3529.000 QUARTZITE 1157.467 1093.464 LIMESTONE 6113.781 3637.159 MANGANESE ORE 452.791 361.509 HYDRATED LIME POWDER 325.791 - PET COKE 5859.210 - 155055.393 93327.160 LESS : SALE OF FINES 22675.970 - LESS : MOISTURE & ASH DEDUCTION - NET CONSUMPTION 126637.176 93327.160 AS PER ASSESSEE FINISHED GOODS 2007-08 2006-07 QUANTITY (MT) QUANTITY (MT) CAST IRON 34,037 30 SOURASHTRA FERROUS P LTD PIG IRON ARTICLES 39715.975 27410.323 SKULL 3293.885 3636.952 SLAG 10678.278 8330.413 53688.138 39411.725 YIELD (%) 42.39 42.23 10.3.9 THUS, EVEN IF THE SECOND ISSUE OF MOISTURE IN COAL IS NOT TAKEN INTO ACCOUNT THEN ALSO THE YIELD IS COMPARABL E. 10.3.10 HOWEVER, THE ISSUE OF MOISTURE HAS ALSO ADDRESSED. IT IS FACT THAT MOISTURE CONTENT IS A FA CTOR WHILE PURCHASING THE COAL FROM SISTER CONCERN OR AN Y OTHER CONCERN. IT IS AN INTEGRAL PART OF COAL. THE MOISTURE AND ASH CONTENT IN LAM COKE DEPENDS UPON THE QUALIT Y OF IT AND WILL NEVER HE UNIFORM. THE APPELLANT HAD FILED A COPY OF EXTRACT TAKEN FROM WEBSITE IN RESPECT OF THE DETAIL S OF A PUBLIC COMPANY M/S.VEDANTA (SESA GOA GROUP) WHICH INDICATES THAT MOISTURE AND ASH AND VOLATILE CONTEN T EXCEEDS OVER 20%. HOWEVER, THE SAME WILL NEVER BE UNIFORM A ND WILL VARY ON THE QUALITY, THE PROCESS OF WHICH IT HAS TO BE TREATED INCLUDING MANUAL PINCHING OF COKE EMPLOYED BY THE A PPELLANT TO COOL IT DOWN AND TREATED IT IN THE RANGE OF AROU ND 5000 DEGREE CELSIUS. IN THE ABOVE BACKGROUND, THE MOISTU RE CONTENT TAKEN AT 3.70% BY THE APPELLANT AND MENTIONED BY TH E ASSESSING OFFICER AS A CREDIT IN CALCULATION OF YIE LD BY THE APPELLANT IS VERY REASONABLE. 32. THE AO HAS MADE ADDITION TOWARDS ESTIMATED PRODUCT ION LOSS ON THE BASIS OF COMPARISON OF PRODUCTION OF FINISHED GOODS PERCE NTAGE OF FINANCIAL YEARS 2006-07 TO 2007-08 AND FOUND 7.75% REDUCTION IN PRO DUCTION OF PIG IRON. THE AO HAS REJECTED EXPLANATIONS OFFERED BY THE ASSESSE E TO JUSTIFY REDUCTION IN PRODUCTION LOSS WHICH IS ATTRIBUTABLE TO QUALITY OF RAW MATERIAL BEING LAM COKE USED FOR PRODUCTION OF PIG IRON WHICH IS HAVING LES SER CONTENT OF FV WHEN COMPARED TO PREVIOUS YEAR COKE USED FOR PRODUCTION OF PIG IRON. THE ASSESSEE 31 SOURASHTRA FERROUS P LTD ALSO EXPLAINED THAT IT HAS GENERATED 22675 M.T. OF IRON ORE FINES AS A BY-PRODUCT WHILE HANDLING COKE IN STOCK YARDS AND PRODUCTION P ROCESS WHICH HAS BEEN SOLD FOR A VALUE OF RS.8.73 CRORES. THE ASSESSEE ALSO E XPLAINED THAT DUE TO LESS MOISTURE AND ASH CONTENTS, THERE IS A REDUCTION IN QUANTITY OF 5742 M.T. IN CONSUMPTION OF RAW MATERIALS, AND IF BOTH SALE OF F INES QUANTITY OF 22675 M.T. AND MOISTURE AND ASH CONTENT OF 5742 M.T. ARE CONSI DERED, THEN THE PRODUCTION PERCENTAGE OF PIG IRON WORKS OUT TO 42.39% WHICH AT PAR WITH 42.23% ACHIEVED IN THE PREVIOUS FINANCIAL YEAR. THE ASSESSEE HAS F URNISHED RELEVANT SUPPORTING DOCUMENTS FOR GENERATION OF BY-PRODUCT CALLED IRON ORE FINES AND SALE BY FURNISHING VARIOUS EVIDENCES. THE ASSESSEE HAS EXP ORTED 84% OF BY-PRODUCT TO CHINA WHICH HAS BEEN HANDLED BY M/S CANARA OVERSEAS LTD, A PUBLIC LIMITED COMPANY WHICH IS EVIDENT FROM THE FACT THAT THE SAI D COMPANY HAS FILED LETTER DEATED 07-01-2008 WHICH APPOINTED ITS OWN TRANSPORT ERS BY THE NAME, M/S ASHAPURA CARGO CARRIERS. THE FACT THAT AN AMOUNT O F RS.8.73 CRORES HAS BEEN CREDITED IN THE P&L ACCOUNT ON ACCOUNT OF EXPORT OF BY-PRODUCT IS NOT DISPUTED BY THE LOWER AUTHORITIES. THE ASSESSEE HAS ALSO FI LED AUDITORS CERTIFICATE TO SUPPORT ITS CASE. 33. COMING TO THE ISSUE OF MOISTURE CONTENT IN COAL USE D FOR PRODUCTION OF PIG IRON MOISTURE AND ASH CONTENT IS AN INTEGRAL PART O F COAL WHICH DEPENDS UPON QUALITY OF LAM COKE. THE MOISTURE AND ASH CONTENT WILL NEVER BE UNIFORM. THE ASSESSEE HAD FILED A COPY OF EXTRACT TAKEN FROM WEBSITE IN RESPECT OF DETAILS OF PUBLIC COMPANY, M/S VEDANTA WHICH INDICATES THAT MOISTURE AND ASH AND 32 SOURASHTRA FERROUS P LTD VOLATILE CONTENT EXCEEDS OVER 20%. IN THE ABOVE BA CKGROUND, THE MOISTURE CONTENT TAKEN BY THE ASSESSEE AT 3.7% AND MENTIONED BY THE ASSESSEE AS A CREDIT IN CALCULATION OF YIELD IS VERY REASONABLE. 34. THE AO HAS MADE ADDITION ON ESTIMATED PRODUCTION L OSS WITHOUT THERE BEING ANY COGENT MATERIALS IN HIS POSSESSION THAT T HE ASSESSEE HAS SOLD FINISHED GOODS OUTSIDE THE BOOKS OF ACCOUNT OR THE ASSESSEE IS CARRYING STOCK IN EXCESS OF STOCK SHOWN IN ITS BOOKS OF ACCOUNT. THE AO HAS NO T DISPUTED BOOKS OF ACCOUNT PRODUCED BY THE ASSESSEE WHICH WERE SUBJECTED TO AU DIT. THE AO HAS ALSO OVERLOOKED THE BASIC FACT THAT THE FINISHED PRODUCT S OF THE ASSESSEE ARE EXCISABLE AND NO FINISHED GOODS ARE REMOVED WITHOUT PAYMENT O F EXCISE DUTY. THERE IS NOTHING ON RECORD TO SUGGEST THAT EXCISE AUTHORITIE S HAVE CONTEMPLATED ANY ACTION ON SO-CALLED SUPPRESSED PRODUCTION AND THERE IS NOT AN IOTA OF EVIDENCE TO SUGGEST THAT THE ASSESSEE HAS SOLD PRODUCE OF FINIS HED GOODS, OUTSIDE BOOKS OF ACCOUNT. IN THE ABSENCE OF ANY INCORRECTNESS AS TO BOOKS OF ACCOUNT AND STOCK REGISTERS, MERELY ON THE BASIS OF COMPARISON OF PRO DUCTION PERCENTAGE OF FINISHED GOODS ADDITION CANNOT BE MADE FOR PRODUCTI ON LOSS, DESPITE, THE ASSESSEE EXPLAINS THE REASONS FOR SUCH PRODUCTION A ND ALSO FILED RECONCILIATION EXPLAINING THE SHORTFALL. THEREFORE, WE ARE OF THE VIEW THAT THE AO WAS INCORRECT IN MAKING ADDITION TOWARDS ESTIMATED PROD UCTION LOSS. THE CIT(A), AFTER CONSIDERING RELEVANT FACTS HAS RIGHTLY DELETE D ADDITION MADE BY THE AO. WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER OF THE CIT(A) AND HENCE, WE ARE INCLINED TO UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE GROUND RAISED BY 33 SOURASHTRA FERROUS P LTD THE REVENUE. 35. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATION F ROM ASSESSEES APPEAL AS WELL AS REVENUES APPEAL IS DISALLOWANCE OF REPA IRS AND MAINTENANCE TO PLANT AND MACHINERY BEING CAPITAL IN NATURE. THE AO HAS DISALLOWED REPAIRS AND MAINTENANCE TO PLANT AND MACHINERY FOR RS.2,24,08,1 00 ON THE GROUND THAT EXPENDITURE IS IN THE NATURE OF CAPITAL EXPENDITURE WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE. THE AO FURTHER OBSERVED THAT THE ASSESSEE HAS REPAIRED BLAST FURNACE WHICH WAS INSTALLED IN THE PREVIOUS FINANCI AL YEAR WITH A CAPITAL COST OF RS.5,38,32,142. THE FUNCTION OF THE SAME IS DIRECT LY RELATED TO YIELD OF PRODUCTION AND ITS FAILURE WHICH COMPELLED THE ASSE SSEE TO RE-ALIGN THE SAME WITH DURABLE YIELD EFFICIENT AND ENERGY EFFICIENT W ITH FIRE BRICKS. THE REPAIR COST WITH REFERENCE TO THE ORIGINAL COST OF THE MACHINES IS ABOUT 40% AND THAT ITSELF SHOWS THAT THE ASSET HAS BEEN TOTALLY REVAMPED FOR BETTER PRODUCTION, INCREASE YIELD, ETC. THE BLAST FURNACE IS THE CORE COMPONEN T OF THE MACHINERY USED IN THE UNIT AND THE VOLUME OF REPAIR WHICH ENHANCED THE LI FE OF THE MACHINERY AND ITS UTILITY IS CLEARLY A CAPITAL EXPENDITURE. THE ASSE SSEE DERIVED ENDURING BENEFIT FOR THE REST OF THE LIFE OF THE MACHINERY BY UNDERT AKING THIS REPAIR WHICH IS EVIDENT FROM THE FACT THAT THE ASSET INSTALLED WAS NEW ONE AND THE REPAIRS CARRIED OUT BY THE ASSESSEE IS ONLY AN IMPROVEMENT OF THE A SSET, THEREFORE, TOTAL EXPENDITURE INCURRED UNDER THE HEAD REPAIRS AND MA INTENANCE TO PLANT & MACHINERY IS IN THE NATURE OF CAPITAL EXPENDITURE C ANNOT BE ALLOWED AS DEDUCTION U/S 30(1) OR 37(1) OF THE INCOME-TAX ACT, 1961. IT IS THE CONTENTION OF THE 34 SOURASHTRA FERROUS P LTD ASSESSEE THAT THE COMPANY HAS INCURRED REPAIRS AND MAINTENANCE FOR REPAIRING BLAST FURNACE WHICH WAS DAMAGED DUE TO PRESSURE REA CTOR WHICH OPERATES AT A TEMPERATURE OF ABOVE 2300 DEGREE CENTIGRADE. THE B LAST FURNACE CONSISTS OF STEEL SHELL WHICH IS LINED WITH REFRACTORY BRICKS I NTERNALLY. THE SHELL IS CONTINUOUSLY COOLED BY WATER SPRAY EVAPORATION COOL ING SYSTEM FROM OUTSIDE. A REFRACTORY WAS INSTALLED IN THE YEAR 2005. SINCE THE SIZE OF THE FURNACE OF CHINESE DESIGN IS PUT UP FOR THE FIRST TIME IN THE COUNTRY AND THE SAME WAS NOT FUNCTIONING PROPERLY RESULTING IN YIELD GOING DOWN, THE ASSESSEE HAS CARRIED OUT NECESSARY REPAIRS TO KEEP THE BLAST FURNACE INTACT TO ACHIEVE BETTER PRODUCTION. THEREFORE, IT CANNOT BE CONSIDERED AS RECONSTRUCTIO N OF NEW ASSET OR BROUGHT ANY NEW ASSET TO HOLD THE EXPENDITURE INCURRED AS CAPIT AL EXPENDITURE. 36. THE LD.AR REFERRING TO PAPER BOOK SUBMITTED THAT EX PENSES OF REPAIR CONSISTS OF FIRE BRICKS WHICH IS MAJOR COMPONENT OF REPAIR EXPENDITURE WHICH HAS BEEN PURCHASED FROM SASWAT INTERNATIONAL LTD AN D COST OF EACH BRICKS IS IN THE RANGE OF RS.113 TO 209 WHICH CLEARLY SHOWS THAT IT IS A PART OF REPAIR OF EXISTING BLAST FURNACE, BUT NOT BRINGING INTO EXIST ENCE OF A NEW ASSET WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE. THE LD.AR ALSO F URNISHED COPIES OF PICTURES OF THE MACHINE TO ARGUE THAT IT IS AN INTEGRATED PR ODUCTION PROCESS IN WHICH BLAST FURNACE IS ONE OF THE PARTS OF THE PRODUCTION SYSTE M WHICH REQUIRED REPAIRS AS IT WAS NOT GIVING INTENDED RESULTS, THEREFORE, THE ASS ESSEE HAS CARRIED OUT NECESSARY REPAIRS. THE AO NEVER DISPUTED THE FACT THAT THE A SSESSEE HAS NOT CREATED ANY NEW ASSET. THE AO MADE DISALLOWANCE ONLY ON THE GR OUND THAT TOTAL COST 35 SOURASHTRA FERROUS P LTD INCURRED FOR REPAIR AND MAINTENANCE WORKED OUT TO 4 0% OF EXISTING MACHINE. THE AR FURTHER SUBMITTED THAT COST INCURRED FOR REP AIRS AND MAINTENANCE IS NOT A RELEVANT FACTOR FOR DECIDING WHETHER IT IS CAPITAL OR REVENUE IN NATURE BUT WHAT IS RELEVANT IS WHETHER THE ASSESSEE HAS RESTORED ALREA DY EXISTING PLANT AND MACHINERY OR CREATED NEW PLANT & MACHINERY WHICH GI VES ENDURING BENEFIT. THE ASSESSEE HAS REPAIRED THE EXISTING PLANT AND MA CHINERY, THEREFORE, THE AO WAS INCORRECT IN DISALLOWING EXPENDITURE AS CAPITAL IN NATURE. IN SUPPORT OF HIS ARGUMENTS RELIED UPON PLETHORA OF JUDGEMENTS INCLUD ING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF NEW SHARRO CK SPINNING & MFG CO LTD VS CIT 30 ITR 338 (BOM). THE ASSESSEE ALSO REL IED UPON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BALLIMAL NAVAL KISHORE & ANR VS CIT 224 ITR 414. 37. ON THE OTHER HAND, THE LD.DR SUBMITTED THAT THE LD. CIT(A) WAS RIGHT IN UPHOLDING ADDITION MADE BY THE AO TOWARDS DISALLOWA NCE OF REPAIRS AND MAINTENANCE TO PLANT & MACHINERY AS THE ASSESSEE HA S CARRIED OUT RENOVATION OF BLAST FURNACE WHICH GIVES ENDURING BENEFIT WHICH IS EVIDENT FROM THE FACT THAT COST INCURRED FOR REPAIRS AND MAINTENANCE WORKS OUT TO 40% OF THE COST OF THE EXISTING MACHINERY. THE LD.DR FURTHER SUBMITTED TH AT AS ADMITTED BY THE ASSESSEE, THE PRODUCTION CAPACITY OF THE MACHINE HA D DECREASED DUE TO BAD / INFERIOR QUALITY OF THE FURNACE WHICH THE ASSESSEE HAS REPLACED WITH BETTER QUALITY WHICH RESULTED INTO ENHANCED PRODUCTION CAP ACITY WHICH GAVE ENDURING BENEFIT TILL LIFE OF THE ASSET. THEREFORE, THE AO WAS RIGHT IN DISALLOWING REPAIRS 36 SOURASHTRA FERROUS P LTD TO PLANT & MACHINERY BEING CAPITAL IN NATURE AND HI S ORDER SHOULD BE UPHELD. THE LD.DR FURTHER SUBMITTED THAT IN RESPECT OF PART IAL RELIEF ALLOWED BY THE CIT(A) FOR RS.15,86,633, THE CIT(A) WITHOUT APPRECI ATING THE FACT THAT EXPENDITURE IS IN THE NATURE OF CAPITAL EXPENDITURE , DELETED ADDITION MADE BY THE AO WITHOUT ASSIGNING ANY REASONS. THE AO HAS BROUG HT OUT CLEAR FACTS TO THE EFFECT THAT TOTAL EXPENDITURE INCURRED BY THE ASSES SEE UNDER THE HEAD REPAIRS AND MAINTENANCE IS ONLY CAPITAL EXPENDITURE AND HENCE, IT CANNOT BE ALLOWED AS DEDUCTION U/S 30(1) OR U/S 37(1) OF THE ACT. 38. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATERIA L AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE AO DISALLOWED REPAIRS AND MAINTENANCE TO PLANT & MACHINERY ON THE GROUND THAT EXPENDITURE INCURRED IS IN THE NATURE OF CAPITAL EXPENDITURE WHICH GIVES ENDURING BENEFIT TILL THE LIFE OF THE ASSET. THE AO HAS GIVEN VARIOUS REASONS FOR DISALLOWING REPAIRS AND MAINTENANCE EXPENDITURE. ACCORDING TO HIM TOTAL EX PENDITURE INCURRED FOR REPAIRS AND MAINTENANCE WORKS OUT TO MORE THAN 40% OF THE EXISTING COST OF THE ASSET AND THE ASSESSEE DERIVED ENDURING BENEFIT FOR THE REST OF THE LIFE OF THE MACHINERY BY UNDERTAKING THE REPAIR. THE AO FURTHE R OBSERVED THAT FUNCTIONING OF THE BLAST FURNACE IS DIRECTLY RELATED TO YIELD O F PRODUCTION AND FAILURE OF ITS LINING WHICH COMPELLED THE ASSESSEE TO REALIGN THE SAME WITH DURABLE EFFICACY AND ENERGY SAVING LINING OF FIRE BRICKS WHICH IS NO THING BUT CAPITAL EXPENDITURE. IT IS THE CONTENTION OF THE ASSESSEE THAT EXPENDITU RE IS IN THE NATURE OF CURRENT REPAIRS WHICH DOES NOT GIVE RISE TO CREATION OF ANY NEW ASSET. THE ASSESSEE 37 SOURASHTRA FERROUS P LTD FURTHER CONTENDED THAT IT HAS REPAIRED BLAST FURNAC E WHICH WAS NOT GIVEN EXPECTED RESULT DUE TO INFERIOR QUALITY OF BLAST FU RNACE WHICH WAS INSTALLED FOR THE FIRST TIME IN 2005 AND HENCE, IT HAS REPAIRED I NFERIOR QUALITY BLAST FURNACE TO ACHIEVE BETTER YIELD AND ENERGY EFFICIENT WHICH CAN NOT BE CONSTRUED AS CREATION OF NEW ASSET WHICH GAVE ENDURING BENEFIT TO THE ASS ESSEE. THE ASSESSEE FURTHER CONTENDED THAT THE AO WAS COMPLETELY WENT WRONG WIT H HIS REASONING TO DISALLOW EXPENDITURE BY HOLDING THAT TOTAL EXPENDIT URE INCURRED FOR REPAIRS AND MAINTENANCE WORKS OUT TO MORE THAN 40% OF THE EXIST ING COST OF THE ASSET WITHOUT APPRECIATING THE FACT THAT COST INCURRED FO R REPAIRS AND MAINTENANCE IS NOT RELEVANT FACTOR TO DECIDE WHETHER A PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. WHAT IS REQUIRED TO BE SEEN IS WHETHER THE ASSESSEE HAS REPAIRED EXISTING PLANT AND MACHINERY OR CREATED NE W PLANT & MACHINERY WHICH GIVES ENDURING BENEFIT TO THE ASSESSEE. 39. THE AO HAS DISALLOWED REPAIRS TO PLANT & MACHINERY ONLY ON THE GROUND THAT EXPENDITURE INCURRED FOR REPAIRS AND MAINTENAN CE WORKS OUT TO MORE THAN 40% OF TOTAL COST OF THE ASSET. OTHER THAN THIS, T HE AO HAS NOT GIVEN ANY REASON TO COME TO THE CONCLUSION THAT EXPENDITURE INCURRED IS IN THE NATURE OF CAPITAL EXPENDITURE. ON THE OTHER HAND, THE ASSESSEE HAS F ILED VARIOUS DETAILS TO PROVE THAT IT IS MERELY A REPAIR OF BLAST FURNACE TO RETA IN ITS EXISTING PRODUCTION CAPACITY AND ENERGY EFFICIENCY. THE ASSESSEE HAS F ILED PICTURES OF THE PLANT AND MACHINERY. ACCORDING TO THE ASSESSEE, THE BLAST FU RNACE IS AN INTEGRATED PRODUCTION PROCESS, IN WHICH LINING IS ONE OF THE C OMPONENTS. DUE TO HIGH 38 SOURASHTRA FERROUS P LTD PRESSURE, THE LINING HAS BEEN DAMAGED BECAUSE OF WH ICH IT WAS NOT YIELDING EXPECTED PRODUCTION. THEREFORE, THE ASSESSE HAS LE VERAGED EXISTING BLAST FURNACE WITH NEW FIRE BRICKS. WE FIND THAT THE ASSESSEE HA S FURNISHED A PAPER BOOK EXPLAINING THE MATERIALS USED FOR REPAIRS AND MAINT ENANCE OF BLAST FURNACE. THE ASSESSEE HAS PURCHASED FIRE BRICKS FROM SASHWAT INT ERNATIONAL LTD AND THE COST OF EACH FIRE BRICKS WORKED OUT LESS THAN RS.200. T HE ASSESSEE ALSO FURNISHED VARIOUS MATERIALS USED FOR REPAIRING. ON PERUSAL O F THE DETAILS FILED BY THE ASSESSEE, THE MATERIALS USED FOR REPAIRS AND MAINTE NANCE OF BLAST FURNACE ARE IN THE NATURE OF MINUTE COMPONENTS WHICH CANNOT BE CON SIDERED AS CREATION OF NEW BLAST FURNACE WHICH GIVES ENDURING BENEFIT TO THE A SSESSEE. WE FURTHER NOTICE THAT THE AO COMPLETELY WENT WRONG TO CONCLUDE THAT EXPENDITURE IS IN THE NATURE OF CAPITAL EXPENDITURE ONLY ON THE BASIS OF COST IN CURRED FOR REPAIRS AND MAINTENANCE WHICH IS NOT AT ALL RELEVANT TO DECIDE WHETHER THE PARTICULAR EXPENDITURE IS CAPITAL OR REVENUE IN NATURE. THE Q UANTUM OF REPAIR EXPENDITURE INCURRED FOR THE BLAST FURNACE CANNOT BE A GUIDING OR DECISIVE FACTOR TO DETERMINE WHETHER THE EXPENDITURE IS CAPITAL OR REVENUE IN NA TURE. WE FURTHER NOTICE THAT BY REPAIRING A PART OF REFRACTORY LINING OF THE BLA ST FURNACE, NO ADDITIONAL ADVANTAGE IS PROCURED BY THE ASSESSEE COMPANY BECAU SE THE REPAIRING OF THE REFRACTORY LINING HAS NOT ENHANCED CAPACITY OF THE BLAST FURNACE. BY REPAIRING THE BLAST FURNACE, THE ASSESSEE COMPANY HAS REGAINE D ITS PRODUCTION CAPACITY WHICH HAS REDUCED SUBSTANTIALLY DUE TO DEFECTS IN T HE REFRACTORY LINING. THUS, THE ASSESSEE COMPANY HAS NOT DERIVED ANY ENDURING B ENEFIT FROM THE REPAIR OF 39 SOURASHTRA FERROUS P LTD THE REFRACTORY LINING, MORE SO, WHEN THE LIFE OF TH E REFRACTORY LINING CANNOT BE DETERMINED AS IT HAS TO WITHSTAND THE HEAT ABOVE 23 00 DEGREE CENTIGRADE. THEREFORE, WE ARE OF THE VIEW THAT REPAIR AND MAINT ENANCE TO PLANT & MACHINERY IS REVENUE IN NATURE. 40 . THE ASSESSEE HAS RELIED UPON VARIOUS CASE LAWS. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF NEW SHORROCK SPINN ING & MANUFACTURING CO. LTD. V. CIT (30 ITR 338) WHEREIN THEIR LORDSHIP S OBSERVED AS UNDER: IN OUR OPINION, THEREFORE, THE EXPRESSION 'CURRENT REPAIRS' USED IN SECTION 10(2)(V) MEANS EXPENDITURE ON BUILD INGS, MACHINERY, PLANT OR FURNITURE WHICH IS NOT FOR THE PURPOSE OF RENEWAL OR RESTORATION, WHICH IS ONLY FOR THE PURPO SE OF PRESERVING OR MAINTAINING AN ALREADY EXISTING ASSET , WHICH DOES NOT BRING A NEW ASSET INTO EXISTENCE OR DOES N OT GIVE TO THE ASSESSEE A NEW OR DIFFERENT ADVANTAGE, AND THEY MUST BE REPAIRS WHICH ARE ATTENDED TO AS AND WHEN THE NEED FOR THEM ARISES. ' WE SHOULD ALSO LIKE TO MAKE IT CLEAR THAT THE QUEST ION AS TO WHEN A BUILDING, MACHINERY, PLANT OR FURNITURE REQU IRES REPAIRS AND WHEN THE NEED ARISES MUST BE DECIDED BY NOT ANY ACADEMIC OR THEORETICAL TEST BUT MUST BE DECIDED BY THE TEST OF COMMERCIAL EXPEDIENCY. IT IS AFTER ALL FOR A BUSINE SSMAN PRIMARILY TO DECIDE WHEN HIS BUILDING, MACHINERY, P LANT OR FURNITURE REQUIRES REPAIRS. IT IS BY THAT TEST ALONE THAT THE QUESTION MUST BE DECIDED AS TO WHETHER THE REPAIRS ARE CURRENT REPAIRS OR REPAIRS WHICH HAVE FALLEN INTO ARREARS O R HAVE BEEN ACCUMULATED OVER A PERIOD OF TIME AND THEN EXPENDIT URE HAS BEEN INCURRED IN CARRYING OUT THOSE REPAIRS.' THE AFORESAID DECISION OF THE BOMBAY HIGH COURT HAS BEEN APPROVED AND APPLIED BY THE HON'BLE SUPREME COURT I N THE CASE OF BALLIMAL NAVAL KISHORE & ANR. V. CIT (224 ITR 414) WHEREIN THEIR LORDSHIPS OBSERVED AS UNDER: IN OUR OPINION THE TEST INVOLVED BY CHAGLA C. J., I N NEW 40 SOURASHTRA FERROUS P LTD SHORROCK SPINNING AND MANUFACTURING CO. LTD.'S CASE [1956] 30 ITR 338 (BORN) IS THE MOST APPROPRIATE ONE HAVIN G REGARD TO THE CONTEXT IN WHICH THE SAID EXPRESSION OCCURS. IT HAS ALSO BEEN FOLLOWED BY A MAJORITY OF THE HIGH COURTS IN INDIA. WE RESPECTFULLY ACCEPT AND ADOPT THE TEST.' DISMISSING THE APPEAL OF THE REVENUE, THE BOMBAY HI GH COURT HELD AS UNDER: 'ON A PLAIN READING OF THE ABOVE SECTION IT IS CLEA R THAT IN ORDER TO ENTITLE AN ASSESSEE TO CLAIM DEDUCTION UND ER SECTION 3 I OF THE ACT, THE AMOUNT MUST BE PAID ON ACCOUNT OF 'CURRENT REPAIRS'. THE EXPRESSION 'CURRENT REPAIRS' HAS NOT BEEN DEFINED IN THE ACT. IT HAS, THEREFORE, TO BE TAKEN IN ITS POPULAR OR COMMERCIAL SENSE. IN COMMERCIAL PARLANCE, IT MEANS REPAIRS WHICH ARE UNDERTAKEN IN THE NORMAL COURSE OF USER FOR THE PURPOSE OF PRESERVATION, MAI NTENANCE OR PROPER UTILISATION. IT DOES NOT MEAN 'PETTY REPAIRS' OR REPAIRS NECESSITATED BY WEAR AND TEAR DURING THE PA RTICULAR YEAR. PAYMENTS ON ACCOUNT OF 'CURRENT REPAIRS' MUST BE UNDERSTOOD IN CONTRADISTINCTION TO PAYMENTS FOR 'ADDITIONS' OR 'IMPROVEMENT'. AS OBSERVED BY CHAGLA C. J. IN NEW SHORROCK SPG. AND MFG. CO. LTD. V. CIT [1956] 3 0 HR 338 (BORN), THE SIMPLE TEST THAT MUST BE CONSTANTLY BORNE IN MIND IS THAT AS A RESULT OF THE EXPENDITURE WHIC H IS CLAIMED AS AN EXPENDITURE FOR REPAIRS WHAT IS REALLY BEING DONE IS TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET. TH E OBJECT OF THE EXPENDITURE SHOULD NOT BE TO BRING A NEW ASSET INTO EXISTENCE NOR TO OBTAIN A NEW OR DIFFERENT ADV ANTAGE. THE QUANTUM OF EXPENDITURE. 41. IN THE CASE OF CIT V. JAGATJIT INDUSTRIES LTD. (24 1 ITR 556). THE DELHI HIGH COURT HELD AS UNDER: 'WHETHER ON GIVEN SET OF FACTS, REPLACEMENT OF CERT AIN ITEMS, FORMING AN INTEGRAL OR IMPORTANT PART OF THE MACHINERY WOULD BE REVENUE EXPENDITURE OR CAPITAL EXPENDITURE IS PRIMARILY A QUESTION OF FACT, TO BE DECIDED IN THE CONTEXT OF THE BUSINESS CARRIED ON BY AN ASSESS EE. MERELY, BECAUSE THE BENEFIT ACCRUING BY THE EXPENDITURE IS OF ENDURING NATURE, IS BY ITSELF NOT A CONCLUSIVE TEST TO HOLD IT AS A CAPITAL EXPENDITURE (SEE EMPIRE JUTE CO. LTD. V. CIT [1980] 124 ITR 1 (SC)). NORMALLY INITIAL INVESTMENT ON MACHINES AND THEIR PARTS WILL BE IN THE NATURE OF C APITAL 41 SOURASHTRA FERROUS P LTD EXPENDITURE BUT REPLACEMENT OF PARTS OF AN EXISTING MACHINERY IN THE COURSE OF THEIR WORKING WILL HE A REVENUE EXPENDITURE. 42. IN THE CASE OF CIT V. MALERKOTLA STEELS AND ALLOYS P. LTD. (336 ITR 49 THE PUNJAB & HARYANA HIGH COURT HELD THAT THE ASSES SEE HAD EFFECTED REPAIRS TO THE DAMAGED FURNACE IN THE COUR SE OF THE REGULAR BUSINESS AND NO NEW ASSETS WERE ACQUIRED. THE EFFEC T OF THE REPAIRS CARRIED OUT BY THE ASSESSEE' HAS BEEN ONLY TO RESTO RE THE MACHINER Y TO ITS ORIGINAL CONDITION. THEREFORE, IT WAS CURRENT R EPAIRS. 43. IN THE CASE OF METRO ISPAT PVT LTD VS CIT IN ITA NO .4069/MUM/2008 DATED 17 TH DECEMBER, 2009, THE ITAT, MUMBAI BENCH HELD THAT T HE EXPENDITURE INCURRED ON REPLACEMENT OF CHILLED ROLLS / FIRE BRI CKS / FORGED ROLLS CANNOT BE TREATED AS CAPITAL EXPENDITURE THOUGH IT MAY NOT FA LL WITHIN THE DESCRIPTION OF CURRENT REPAIRS BUT IT IS ALLOWABLE AS DEDUCTION U/S 37 OF THE ACT. 44. IN THIS VIEW OF THE MATTER AND CONSIDERING THE RATI OS OF THE CASE LAWS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE ASSESSEE HAS NOT DERIVED ANY ENDURING BENEFIT BY REPAIRING DAMAGED REFRACTOR Y LINES OF BLAST FURNACE. THE ASSESSEE ONLY REGAINED ITS LOST PRODUCTION CAPA CITY BY REPAIRING REFRACTORY LINES. THEREFORE, THE LOWER AUTHORITIES WERE COMPL ETELY ERRED IN TREATING THE REPAIRS AND MAINTENANCE TO PLANT AND MACHINERY BEIN G CAPITAL IN NATURE. HENCE, WE DIRECT THE AO TO DELETE ADDITION MADE TOWARDS RE PAIRS AND MAINTENANCE TO PLANT & MACHINERY. 45. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IN ITA NO.8806/MUM/2011 IS 42 SOURASHTRA FERROUS P LTD ALLOWED AND THE APPEAL FILED BY THE REVENUE IN ITA NO.549/MUM/2012 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 08 TH DECEMBER, 2017. SD/- SD/- (JOGINDER SINGH) (G MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DT : 08 TH DECEMBER, 2017 PK/- COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR /TRUE COPY/ BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI