ACIT 6(3), MUMBAI V. LONA INDUSTRIES LTD, MUMBAI

ITA 946/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 6631 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-04-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 25-02-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 02-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M L PERUMAL
• Assessee Lawyers: H P MAHAJANI; PRASAD BAPAT
• Keywords: Capital asset; Depreciation; Earning of tax free income; Revenue expenditure; Capital expenditure
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUM BAI . . , , BEFORE SHRI I. P. BANSAL, JM AND SHRI SANJAY ARORA , AM ./ I.T.A. NOS. 3888/MUM/2010 & 590/MUM/2011 ( / ASSESSMENT YEAR: 2006-07 & 2007-08) LONA INDUSTRIES LTD. ALTA BHAVAN, 532, SENAPATI BAPAT MARG, MUMBAI-400 028 / VS. ASST. CIT-CIRCLE 6(3), AAYKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 ./ ./PAN/GIR NO. AAACL 1166 F ( !'#$ / ASSESSEE ) : ( % / REVENUE ) & ./ I.T.A. NOS. 3398/MUM/2010 & 946/MUM/2011 ( / ASSESSMENT YEAR: 2006-07 & 2007-08) ASST. CIT-CIRCLE 6(3), AAYKAR BHAVAN, M. K. ROAD, MUMBAI-400 020 / VS. LONA INDUSTRIES LTD. ALTA BHAVAN, 532, SENAPATI BAPAT MARG, DADAR (W), MUMBAI-400 028 ./ ./PAN/GIR NO. AAACL 1166 F ( % / REVENUE ) : ( !'#$ / ASSESSEE ) !'#$ & ' / ASSESSEE BY : SHRI H. P. MAHAJANI & SHRI PRASAD BAPAT % & ' / REVENUE BY : SHRI M. L. PERUMAL ( %) & $* / DATE OF HEARING : 25.02.2014 +,- & $* / DATE OF PRONOUNCEMENT : 23.04.2014 2 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. . / O R D E R PER SANJAY ARORA, A. M.: THESE ARE A SET OF FOUR APPEALS, I.E., CROSS APPEAL S FOR ASSESSMENT YEARS (A.YS.) 2006-07 & 2007-08, ARISING OUT OF THE PART CONFIRMA TION BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 12, MUMBAI (CIT(A) FOR SHORT) OF THE ASSESSEES APPEALS CONTESTING ITS ASSESSMENTS FOR THE SAID YEARS. WE SHALL PROCEED YE AR-WISE. A.Y. 2006-07 2. WE SHALL START WITH THE ASSESSEES APPEAL (I.E., ITA NO.3888/MUM/2010), I.E., IN THE ORDER IN WHICH THE APPEALS WERE ARGUED BEFORE U S. THE FIRST ISSUE, RAISED PER GROUND NO. 1, IS QUA THE DISALLOWANCE OF PRIOR PERIOD EXPENSES AT RS.12 .09 LACS. THE FACTS OF THE CASE ARE SIMPLE AND LARGELY UNDISPUTED. THE ASSESSE E, A COMPANY IN, AMONG OTHERS, THE BUSINESS OF MANUFACTURING OF DYES AND PIGMENTS, HAS BEEN DRAWING WATER FROM RIVER PATALGANGA FOR ITS FACTORY AT VILLAGE LADIVALI ON T HE BANKS OF THE SAID RIVER, SINCE INCEPTION, PURSUANT TO AGREEMENTS ENTERED INTO WITH THE STATE OF MAHARASHTRA FROM TIME TO TIME, THE FIRST OF WHICH WAS IN THE YEAR 1969 AND T HE LAST ON 20.05.1994. THE STATE GOVERNMENT, REVISED AND INCREASED THE WATER CHARGES FROM TIME TO TIME, ALSO LEVYING, ADDITIONALLY, LOCAL FUND CESS AT 20% OF THE WATER C HARGE. A DEMAND OF RS.11,27,404/- WAS RAISED BY THE STATE GOVERNMENT VIDE LETTER DATED 14 .10.1996. THE COMPANY TOOK THE MATTER TO THE COURT AND WAS SUCCESSFUL IN SECURING TEMPORARY INJECTION FROM THE TRIAL COURT, RESTRAINING THE STATE FROM DISCONTINUING THE WATER SUPPLY DUE TO NON-PAYMENT, I.E., IN ACTING IN ACCORDANCE WITH AND IN TERMS OF ITS L ETTERS AND NOTICES. THE APPELLATE COURT, IN FURTHER APPEAL, WITH REFERENCE TO CLAUSE 13 OF T HE AGREEMENT DATED 20.05.1994, FOUND THAT THE PARTIES HAD AGREED TO THE GOVERNMENT RESER VING TO ITSELF A RIGHT TO REVISE THE WATER RATE AND LOCAL CESS FROM TIME TO TIME; RATHER, EVEN RETROSPECTIVELY. THE ASSESSEES CLAIM THAT THE REVISION BY THE STATE GOVERNMENT WAS UNREA SONABLE, UNILATERAL AND ARBITRARY WAS, ACCORDINGLY, NOT ACCEPTED (IN CIVIL APPEAL NO.09 OF 2001 DATED 30.08.2005/PB PGS.71- 78). THE COMPANY- APPELLANT APPEALED AGAINST THE SA ID ORDER. PENDING THE DISPOSAL OF THE 3 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. SAID APPEAL, OF THE DEMAND OF OVER RS.2 CRORES, AND INTERIM PAYMENT OF RS.20 LACS WAS MADE BY THE ASSESSEE-COMPANY DURING THE CURRENT YEA R. THE DEMAND UNDER DISPUTE AND, CONSEQUENTLY, THE INTERIM PAYMENT THEREOF, BEING AD MITTEDLY FOR THE PERIOD OF DISPUTE, I.E., SINCE PRIOR TO THE CURRENT YEAR, THE SAME WAS BOOKED PROPORTIONATELY, I.E., AT THE IMPUGNED SUM OF RS.12,09,051/-, AS A PRIOR PERIOD E XPENSE IN TERMS OF THE ACCOUNTING STANDARD (AS)-5 ISSUED BY ICAI, WITH THE BALANCE (R S.7,90,949/-) BEING ACCOUNTED FOR AS THE EXPENDITURE FOR THE CURRENT YEAR. IN ADDITION, THE COMPANY AGREED TO PAY, AND HAS BEEN ACCORDINGLY PAYING, RS.60,000/- PER MONTH FROM JANU ARY, 2006 ONWARDS. THE SUM OF RS.12.09 LACS WAS DISALLOWED FOR BEING ADMITTEDLY A PRIOR PERIOD EXPENSE, PRECLUDED FOR BEING ALLOWED UNDER THE MERCANTILE METHOD OF ACCOUN TING BEING FOLLOWED BY THE ASSESSEE. THE ASSESSEES CLAIM THAT THE PROVISION, IF MADE, F OR THE RELEVANT YEARS, I.E., TO WHICH THE DEMAND PERTAINS, WOULD HAVE BEEN DISALLOWED AS CONT INGENT, WAS DISMISSED AS PRESUMPTUOUS, CITING THE DECISION IN THE CASE OF BHARAT EARTH MOVERS VS. CIT [2000] 245 ITR 428 (SC), WHEREIN ITS STANDS EXPLAINED THAT EXP ENDITURE IS ALLOWABLE ON THE STRENGTH OF A PROVISION EVEN THOUGH THE SAME MAY STAND QUANT IFIED AND/OR DISCHARGED SUBSEQUENTLY. THE SAME BY ITSELF WOULD NOT MAKE THE CLAIM AS OF A CONTINGENT LIABILITY. RELIANCE STANDS ALSO PLACED BY THE REVENUE ON THE D ECISION IN DELHI TOURISM & T.D.C. LTD. VS. CIT [2006] 285 ITR 114 (DEL.); THE CLAIM IN THAT CASE B EING QUA ELECTRICITY CHARGES, SO THAT THE HONBLE COURT DISALLOWED THE C LAIM IN THE ABSENCE OF A PROVISION TOWARD A KNOWN LIABILITY FOR THE RELEVANT YEAR/S, I .E., TO WHICH THE CHARGE RELATED TO. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 3.1 THE ISSUE IS OF THE ALLOWABILITY OF THE SUM ADM ITTEDLY PERTAINING TO EARLIER YEARS, AND WHICH STANDS WORKED AT RS.12.09 LACS. IT MUST, HOWEVER, BE BORNE IN MIND THAT THE SAME IS ONLY BY WAY OF AN INTERIM PAYMENT SUBJECT T O DETERMINATION IN APPEAL. THAT IS, WHETHER THE LIABILITY, BEING IN DISPUTE, HAS ACCRUE D OR NOT CANNOT BE STATED SURELY ON THE BASIS OF THE MATERIAL ON RECORD. THE PROPOSITION TH AT THE PROVISION SHOULD BE MADE FOR ALL KNOWN LIABILITIES, WHICH IS THE MANDATE OF ACCOUNTA NCY, REPRESENTING IN FACT A CENTRAL ACCOUNTING PRINCIPLE OF CONSERVATISM AS WELL AS OF LAW IN-AS-MUCH AS THE AS ISSUED BY 4 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. THE CENTRAL GOVERNMENT U/S.145 OF THE ACT PROVIDES SO, IS SUBJECT TO THE LIABILITY BEING NOT IN DISPUTE BUT THE INFORMATION IN ITS RESPECT B EING NOT FULL AND/OR COMPLETE. AFTER ALL, PRUDENCE DOES NOT ALLOW CREATION OF HIDDEN RESERVES OR EXCESSIVE PROVISIONS. A PROVISION COULD, AND ONLY UNDERSTANDABLY SO, BE OR IS TO BE B ASED ONLY ON THE BEST AVAILABLE INFORMATION, SO THAT IF AS PER THE ASSESSEE IT IS N OT LIABLE FOR A PARTICULAR SUM, MERE RAISE OF A CLAIM BY THE OPPOSING PARTY WOULD NOT BY ITSELF R ENDER IT AS CONTRACTUALLY LIABLE FOR THE SAME. IN THE INSTANT CASE, THE ASSESSEE CLAIMS REVI SION IN THE CHARGES FROM TIME TO TIME BY THE STATE GOVERNMENT TO BE UNREASONABLE, UNILATERAL AND ARBITRARY. WHERE AND TO THE EXTENT IT IS SO, THE LIABILITY IN ITS RESPECT WOULD CRYSTALLIZE ONLY ON THE RESOLUTION OF THE DISPUTE, AND TOWARD WHICH WE MAY REFER TO THE DECIS ION IN THE CASE OF CIT VS. HINDUSTAN HOUSING & LAND DEVELOPMENT TRUST LTD. [1986] 161 ITR 524 (SC), WHICH ABUNDANTLY CLARIFIES THIS ASPECT OF THE MATTER: BY THE COURT: THERE IS A CLEAR DISTINCTION BETWEEN CASES SUCH AS THE PRESENT ONE, WHERE THE RIGHT TO RECEIVE PAYMENT IS IN DISPUTE AND IT IS NOT A QUESTION OF MERELY QUANTIFYING THE AMOUNT TO BE REC EIVED, AND CASES WHERE THE RIGHT TO RECEIVE PAYMENT IS ADMITTED AND THE QU ANTIFICATION ONLY OF THE AMOUNT PAYABLE IS LEFT TO BE DETERMINED IN ACCORDAN CE WITH SETTLED OR ACCEPTED PRINCIPLES. THE LAW CLEARLY DOES NOT REQUIRE THE ASSESSEE TO BO OK AND CLAIM AN EXPENDITURE IT CONSIDERS AS NOT CONTRACTUALLY LIABLE TO FOR BEING UNREASONABLE AND ARBITRARY. FURTHER, WHEN THE CONSIDERATION, AN ESSENTIAL ELEMENT OF CON TRACT, IS ITSELF NOT DEFINITE, COULD THE CLAIM BASED THEREON BE SAID TO BE LEGALLY FIRM ? 3.2 ON THE OTHER HAND, THE BASIC INFIRMITY ATTENDIN G THE ASSESSEES CASE IS THAT ITS CLAIM IS BASED ON PAYMENT, RATHER THAN ON ACCRUAL EVEN AS IT ADMITTEDLY AND AVOWEDLY FOLLOWS THE MERCANTILE METHOD OF ACCOUNTING. IT MAY WELL BE THAT THE ASSESSEE, THOUGH HAD STOPPED MAKING PAYMENTS ON ACCOUNT OF THE CLAIM/S B EING IN ITS VIEW ARBITRARY AND UNREASONABLE, YET HAS NO REASONABLE GROUND OR BASIS TO OBJECT TO THE CHARGES BEING LEVIED PRIOR TO THE LAST RAISE. WHY, THE PAYMENT MADE IS O NLY AT 10% OF THE CLAIM AND, FURTHER THE ASSESSEE HAS AGREED TO AND, IN FACT, IS PAYING AT R S.60,000/- P.M. W.E.F. JANUARY, 2006, SO 5 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. THAT IT IS APPARENTLY EVEN AGREEABLE TO A REASONABL E RAISE. NON-PAYMENT OF THE CHARGE TO THAT EXTENT WOULD NOT RENDER IT AS NOT CONTRACTUALL Y OBLIGED THEREFOR IN-AS-MUCH AS A PROVISION, DESPITE NON-PAYMENT, COULD HAVE BEEN MAD E TO THAT EXTENT. 3.3 THE MATTER WOULD REQUIRE BEING ADJUDICATED AFRE SH BY THE ASSESSING OFFICER (A.O.) IN LIGHT OF THE FORE-GOING DELINEATION OF THE LEGAL POSITION, CONSISTENT AND IN TERMS OF THE FACTS OF THE CASE. FURTHER ON, SUBSEQUENT DEVELOPME NTS IN THE MATTER; IT BEING SUB-JUDICE, COULD BE TAKEN INTO ACCOUNT BY HIM ONLY INSOFAR AS IT RELATES TO CONDITION/S EXISTING AS ON THE BALANCE-SHEET DATE (31.03.2006), TAKING A REASO NABLE VIEW IN-AS-MUCH AS A PROVISION COULD ONLY BE MADE ON THE BASIS OF THE BEST AVAILAB LE INFORMATION. FURTHER, WE ARE AWARE, AND IT MAY WELL BE ARGUED, THAT NO PART OF THE PAYM ENT OF RS.20 LACS IS IN DISPUTE IN-AS- MUCH AS THE A.O. HAS HIMSELF ALLOWED THAT PART THER EOF AS PERTAINING TO THE CURRENT YEAR. WE CONSIDER THIS AS PRESUMPTUOUS IN-AS-MUCH AS THER E HAS BEEN NO CONSIDERATION OF THE FACT THAT THE LIABILITY IS DISPUTED, AS ALSO THE BA SIS OF THE ASSESSEES CLAIM OF THE CHARGE BEING UNREASONABLE AND ARBITRARY, WHICH WE DISCERN AS THE BASIS OR THE GENESIS OF THE DISPUTE. CLEARLY, THE MATTER WARRANTS A CLEAR UNDER STANDING OF THE DISPUTE AND ITS PARAMETERS THE OBJECT OF THE EXAMINATION IN THE S ET ASIDE PROCEEDINGS BEING TO SEGREGATE THE DEMAND AS RAISED, IRRESPECTIVE OF ITS PAYMENT, INTO ITS VALIDLY DISPUTED AND PRACTICALLY UNDISPUTED COMPONENTS. THE ALLOWANCE OF A PART OF C LAIM BY THE A.O. UNDER THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AND THE CONTEXT OF THE ISSUE ARISING, IS THUS OF NO MOMENT. WE DECIDE ACCORDINGLY. 4. THE SECOND ISSUE, AGITATED PER ITS GROUND NO. 2, ALSO A SUBJECT MATTER OF THE REVENUES APPEAL, CONCERNS THE DISALLOWANCE OF A PA RT OF THE EXPENDITURE INCURRED ON RECONDITIONING OF THE DAMAGED FIXED ASSETS BY HOLDI NG IT AS A CAPITAL EXPENDITURE. BRIEF FACTS ARE THAT EXCESSIVE DAMAGE TO THE CAPITAL ASSE TS OF THE COMPANY, BEING BUILDING, PLANT AND MACHINERY, FURNITURE AND FIXTURE, ETC. WAS CAUS ED DUE TO FLOODS ON 26.07.2005, NECESSITATING UNDERTAKING OF EXTENSIVE REPAIRS, INC URRED AT RS.286.48 LACS FOR THE CURRENT YEAR. THE ASSESSEE CLAIMED THE ENTIRE SUM AS REPAIR S, BEING ONLY IN THE NATURE OF 6 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. RECONDITIONING OF THE ASSETS, LEADING TO NO ENDURIN G BENEFIT OR ADVANTAGE. WHILE THE A.O. DISALLOWED THE ENTIRE CLAIM AS CAPITAL EXPENDITURE, THE LD. CIT(A), THOUGH AGREEING WITH HIM IN PRINCIPLE, RELYING ON RECENT DECISIONS BY TH E APEX COURT IN CIT VS. SRI MANGAYARKARASI MILLS (P.) LTD. [2009] 315 ITR 114 (SC)[224 CTR 513] AND CIT VS. SARAVANA SPINNING MILLS (P.) LTD . [2007] 293 ITR 201 (SC) TO THE EFFECT THAT REPLAC EMENT EXPENDITURE CAN NEITHER BE CONSIDERED AS CURRENT RE PAIRS U/SS. 30 & 31 NOR AS REVENUE EXPENDITURE U/S.37(1), ON A PERUSAL OF THE DETAILS OF THE EXPENDITURE CLAIMED, RESTRICTED THE DISALLOWANCE TO RS.50,03,085/-. AGGRIEVED, BOTH THE PARTIES ARE IN APPEAL. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 BEFORE US, IT WAS THE ADMITTED POSITION BY BOTH THE PARTIES THAT THE MATTER HAS NOT BEEN EXAMINED IN ALL ITS ASPECTS BY THE AUTHORITIES BELOW. THE ASSETS WERE ADMITTEDLY DAMAGED DUE TO FLOODS, RENDERING THEM DYSFUNCTIONAL . THE BASIC ISSUE THAT, THUS, ARISES IS THE CATEGORIZATION OF THE LOSS TO ITS FIXED ASSETS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLOODS. AS -10 DEFINES A FIXED ASSET AS AN ASSET HELD BY AN ENTERPRISE WITH THE INTENTION OF BEING USED FOR THE PURPOSE OF PRODUCING OR PROVI DING GOODS AND SERVICES AND NOT FOR SALE IN THE NORMAL COURSE OF BUSINESS. THE SAME COR RESPONDS WITH THE DEFINITION OF A CAPITAL ASSET U/S.2(14) OF THE ACT. AS SUCH, IN-AS- MUCH AS AND TO THE EXTENT THE FLOODS CAUSED A DEPLETION IN THE OPERATING CAPACITY AND CA PABILITY OF THE FIRM, IT IS A CAPITAL LOSS BY DEFINITION. THE EXPENDITURE INCURRED IN BRINGING THE FIRMS CAPITAL ASSETS TO THEIR OPERATING STATE AND WORKING CONDITION IS UNDER THE FACTS AND CIRCUMSTANCES ONLY A SURROGATE MEASURE OF THE SAID DAMAGE CAUSED TO ITS CAPITAL BASE AND, THUS, ITS CAPITAL STRUCTURE, WHICH IS THUS ON CAPITAL ACCOUNT. FROM THE ACCOUNTANTS POINT OF VIEW, THE SAME WOULD THOUGH WARRANT BEING CHARGED TO THE OPERATING STATEMENT FOR THE RELEVANT PERIOD, I.E., AS REVENUE EXPENDITURE, ALBEIT EXTRAORDINARY , IN-AS-MUCH AND TO THE EXTENT IT DOES NOT LEAD TO A NY ENHANCEMENT IN THE PREVIOUSLY ASSESSED STANDARD OF PERFORMANCE OF THE RELEVANT CAPITAL ASSET/S, I.E., DOES NOT LEAD TO IMPROVEMENT. HOWEVER, IF SOME ADVANTA GE OR BENEFIT OF ENDURING NATURE ARISES, WHICH IS ONLY UNDERSTANDABLE IN-AS-MUCH AS THE PARTS USED FOR REPLACEMENT WOULD 7 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. BE NEW; HAVING A HIGHER WORK LIFE, IF NOT A HIGHER PRODUCTIVE CAPACITY, THAN THOSE REPLACED, SO THAT IT ENHANCES THE RATED CAPACITY AN D/OR CAPABILITY OF THE RELEVANT ASSET/S, THE SAME WOULD ON CAPITAL ACCOUNT. THE ACCOUNTING F RAME WORK IS GOVERNED BY THE RELEVANT ACCOUNTING STANDARDS ISSUED BY ICAI, WHICH WOULD BE BINDING ON THE COMPANY TO THE EXTENT THE SAME ARE MANDATORY AND APPLICABLE IN VIEW OF SECTION 209 OF THE COMPANIES ACT. 5.2 WHAT WOULD, HOWEVER, OBTAIN; THE ACCOUNTING MAN DATE OR PRESCRIPTION NOT-WITH- STANDING, IS THE LEGAL POSITION IN THE MATTER. SECT IONS 32(1)(II), 43(6), AND 50 ARE RELEVANT, BEING RATHER REQUIRED TO BE READ IN CONJUNCTION. AS EXPLAINED BY THE APEX COURT, THE TEST IS NOT WHETHER THE EXPENDITURE WAS REVENUE OR CAPITAL IN NATURE, BUT WHETHER THE EXPENDITURE WAS CURRENT REPAIRS. THE BASIC TEST IN ITS VIEW I S TO FIND OUT WHETHER EXPENDITURE WAS INCURRED TO PRESERVE AND MAINTAIN AN ALREADY EXIS TING ASSET, AND THE EXPENDITURE MUST NOT BRING INTO EXISTENCE A NEW ASSET OR BE TO OBTAI N NEW ADVANTAGE. WHAT WAS ADMISSIBLE U/S.31(1) IS ONLY CURRENT REPAIRS, AND THE ISSUE CA NNOT BE EXAMINED FROM THE PERSPECTIVE OF REVENUE OR CAPITAL EXPENDITURE . WHEN THE ASSESSEE, AS IN THE INSTANT CASE, STATES THAT NO ADDITIONAL ADVANTAGE HAS BEEN BROUGHT ABOUT OR SECU RED THROUGH REPAIRS; THE ASSET BEING ONLY RESTORED TO ITS NORMATIVE STATE, IT IS CLEARLY SPEAKING WITH REFERENCE TO THE POINT OF TIME PRIOR TO THE DAMAGE AND NOT AFTER THE DAMAGE. WHAT IS RELEVANT IS THE EFFECT OR IMPACT OF THE EXPENDITURE INCURRED ON THE STATE OF AFFAIRS AS EXISTING IMMEDIATELY PRIOR TO INCURRING THE SAME. TALKING WITH REFERENCE TO AN AN TERIOR POINT OF TIME IS TO DENY THE DAMAGE OR DEPLETION CAUSED DURING THE INTERVENING P ERIOD, AS FOR EXAMPLE ON ACCOUNT OF FLOODS IN THE INSTANT CASE. WHETHER THE REPAIRS A RE OCCASIONED BY THE EXTENSIVE DAMAGE ARISING DUE TO THE FLOODS OR CAUSED THROUGH A GRADUAL DEPLETION FROM USER (FOR THE BUSINESS PURPOSES) OVER A PERIOD OR MERELY ON ACCOUNT OF OBS OLESCENCE BY EFFLUX OF TIME IS A RELEVANT/MATERIAL CONSIDERATION, IS A PERTINENT QUE STION TO BE ASKED. THIS IS AS ONE COULD ARGUE THAT WHILE FLOODS MAY NOT BE AN INCIDENT OF T HE BUSINESS, USER FOR BUSINESS PURPOSES SHOULD WITHOUT DOUBT QUALIFY THE EXPENDITURE TO BE ON REVENUE ACCOUNT. WE HAVE ALREADY NOTED THAT THE CONSIDERATION AS TO WHETHER THE SAME CONSTITUTES A REVENUE EXPENDITURE 8 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. MAY NOT BE A RELEVANT CONSIDERATION, AS EXPLAINED B Y THE APEX COURT IN SARAVANA SPINNING MILLS (P.) LTD . (SUPRA). A MACHINERY, SINCE WORN OUT OR SUBSTANTI ALLY SO MAY INSTEAD OF BEING REPLACED AS SUCH IN WHICH CASE IT WOULD BE A CAPITAL EXPENDITURE, BE REPLACED IN ITS PARTS EITHER AT ONE GO OR IN PHASES, TO YIELD A N ENTIRELY NEW ASSET OR ALMOST SO. PERSEVERANCE OR MAINTENANCE OF AN EXISTING ASSET MU ST, THEREFORE, BE REGARDED AS LIMITED TO NON-REPLACEMENT OF PARTS OR AT LEAST THE PRINCIP AL PARTS. IN FACT, THE DEPRECATION COULD ITSELF BE REGARDED AS A CAPITAL ALLOWANCE TOWARD RE PLACEMENT OF AN ASSET. IN FACT, THE APEX COURT HAS ALSO CLARIFIED THAT THE REPLACEMENT OF PA RTS EVEN IN THE NORMAL COURSE MAY NOT NECESSARILY BE A REVENUE EXPENDITURE, AS INDEED WAS FOUND BY IT IN THE CASE OF SRI MANGAYARKARASI MILLS (P.) LTD. (SUPRA). 5.3 THE PRINCIPAL OR THE MOOT QUESTION THEREFORE THAT N EEDS TO BE ADDRESSED IS WHETHER THE LEGAL POSITION AND THE ACCOUNTING REQUIREMENTS ARE IN HARMONY AND, IF SO, TO WHAT EXTENT . THE DECISIONS BY THE APEX COURT IN THE MATTER, TW O OF WHICH STAND REFERRED TO, WOULD BE REQUIRED TO BE FOLLOWED IN LETTER AND SPIR IT AFTER DETERMINING THE FULL FACTS. FURTHER, ANY IMPROVEMENT TO THE ASSET, AS AFORE-NOT ED, WOULD THOUGH ONLY BE A CAPITAL ACCOUNT, LIABLE TO BE CAPITALIZED U/S. 43(1). AGAIN, THE ASSESSEE FOLLOWING ACCRUAL METHOD, SURELY, IT WOULD BE THE ACTUAL COST CONTEMPLATED TO BE INCURRED, AS AGAINST INCURRED PIECE MEAL IN A PARTICULAR YEAR, THAT WOULD BE REQUIRED T O BE CONSIDERED, AS ALSO THE MONIES REALIZABLE THROUGH SALE OF SCRAP, INSURANCE CLAIM, ETC. ANOTHER ASPECT THAT WE REGARD AS RELEVANT AND, THEREFORE, EMPHASIZE UPON IS THE ALLO WANCE OF DEPRECIATION U/S. 32(1) OF THE ACT ON THE AMOUNT HELD TO BE CAPITAL EXPENDITURE, W HICH SHOULD FOLLOW WHERE AND TO THE EXTENT THE SAME QUALIFIES TO BE A COST U/S.43(1). W E CONSIDER IT RELEVANT TO STATE SO AS THERE HAS BEEN NO CONSIDERATION OF THIS ASPECT OF THE MAT TER AS WELL, EVEN AS WE OBSERVE A SPECIFIC DIRECTION BY THE LD. CIT(A) TO THAT EFFECT FOR A.Y. 2007-08. THE ASPECT OF INSURANCE, ETC. IN-AS-MUCH AS IT FORMS PARTS OF THE MONEYS PAYABLE, WOULD ALSO REQUIRE BEING LOOKED INTO. THE PARTIES HAVING NOT LED ANY ARGUMENTS OR ANY ASS ISTANCE TO US IN THE MATTER; RATHER, ADMITTING TO THE MATTER BEING INDETERMINATE , SO THAT THE SAME MAY BE RESTITUTED, WE 9 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. ONLY CONSIDER IT FIT AND PROPER UNDER THE GIVEN FAC TS AND CIRCUMSTANCES OF THE CASE TO RESTORE THE MATTER BACK TO THE FILE OF THE A.O. TO DECIDE THE SAME IN ACCORDANCE WITH THE LAW AND IN CONSISTENCE WITH THE FACTS OF THE CASE P ER A SPEAKING ORDER. FURTHER, THE BASIS ON WHICH SEGREGATION OF THE EXPENDITURE ON THE REST ORATION OF THE ASSET/S TO ITS WORKING CONDITION AND/OR THE IMPROVEMENT, IF ANY, THERETO, WHERE SO, IS MADE, IN OUR VIEW, WOULD REQUIRE BEING BASED ON TECHNICAL AND/OR FINANCIAL E VALUATION LED BY THE ASSESSEE AND NOT ON A BROWSE OF THE RELEVANT EXPENDITURE DETAILS, AS DONE BY THE LD. CIT(A), IN-AS-MUCH AS THE SAME IS A HIGHLY TECHNICAL AND SPECIALIZED MATT ER AND NO PROPER OR OBJECTIVE ASSESSMENT COULD BE MADE MERELY BY PERUSING THE REL EVANT BILLS OR THE NOMENCLATURE OF THE PARTS BEING REPLACED. THE A.O. SHALL HAVE REGAR D TO OUR OBSERVATIONS, WHICH THOUGH MAY NOT BE REGARDED AS CONCLUSIVE BUT ONLY TOWARD P ROVIDING GUIDANCE AND EXPOSITION OF THE RELEVANT ASPECTS OF THE MATTER, WHICH WOULD THE REFORE BE REQUIRED TO BE EXAMINED. WE DECIDE ACCORDINGLY. THIS WOULD ALSO ANSWER THE FIRS T AND THE SOLE GROUND OF THE REVENUES APPEAL FOR A.Y. 2006-07. 6. GROUND NO. 3 OF THE ASSESSEES APPEAL WAS NOT PR ESSED DURING THE COURSE OF HEARING, AND IS ACCORDINGLY DISMISSED AS NOT PRESSE D, OBTAINING AN ENDORSEMENT TO THAT EFFECT FROM THE LD. AUTHORIZED REPRESENTATIVE (AR) ON THE RELEVANT GROUND OF APPEAL. 7. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED FOR STATISTICAL PURPOSES, AND THE REVENUES APPEAL IS ALLOWED FOR STATISTICAL PUR POSES. A.Y. 2007-08 ASSESSEES APPEAL 8. GROUND NO. 1 OF THE ASSESSEES APPEAL, WHICH RAI SES AN ISSUE QUA THE DISALLOWANCE U/S.14A OF THE ACT, WAS NOT PRESSED DURING THE COUR SE OF HEARING, AND IS ACCORDINGLY DISMISSED AS NOT PRESSED, OBTAINING AN ENDORSEMENT TO THAT EFFECT FROM THE LD. AR ON THE RELEVANT GROUND OF APPEAL. 10 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. 9. THE SECOND AND THE ONLY OTHER GROUND OF THE ASSE SSEES APPEAL IS IN RESPECT OF A DISALLOWANCE IN THE SUM OF RS.262.16 LACS QUA THE EXPENDITURE CLAIMED BY WAY OF REPAIRS AND MAINTENANCE OF PLANT AND MACHINERY. THE EXPENDI TURE WAS FOUND BY THE A.O. TO HAVE BEEN CLAIMED AT RS.324.61 LACS. HOWEVER, A PERUSAL OF THE SAME REVEALED EXPENDITURE TO THE EXTENT OF RS.62,45,020/- TO BE ON ACCOUNT OF TR ANSPORT OF WASTE MATERIALS. THE BALANCE EXPENDITURE OF RS.2,62,16,405/- WAS, ACCORDINGLY, R EGARDED AS CAPITAL EXPENDITURE. IN FACT, ITS NATURE, BY ADDUCING THE RELEVANT MATERIAL S, HAD ALSO NOT BEEN ESTABLISHED. THE SAME FOUND CONFIRMATION BY THE LD. CIT(A) IN APPEAL ON THE SAME BASIS. 10. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATE RIAL ON RECORD. AS APPARENT, THE NATURE OF THE EXPENDITURE AND ITS DISALLOWANCE AND, ACCORDINGLY, OUR DECISION QUA THE SAME, IN VIEW OF THE FOREGOING (REFER PARA 5), WOUL D BE THE SAME. IN FACT, NO SEPARATE ARGUMENTS WERE MADE FOR THE CURRENT YEAR. FURTHER, WE ALSO OBSERVE THAT BOTH THE AUTHORITIES BELOW HAVE SPECIFICALLY STATED OF THE A SSESSEE HAVING NOT LED ANY EVIDENCE TO ESTABLISH THE NATURE OF THE EXPENDITURE, THE ONUS F OR WHICH, WE MAY CLARIFY, WOULD ONLY BE ON THE ASSESSEE. WE DECIDE ACCORDINGLY. THE ASSESSE ES APPEAL IS, ACCORDINGLY, PARTLY ALLOWED FOR STATISTICAL PURPOSES. REVENUES APPEAL 11. THE SOLE ISSUE ARISING IN THE REVENUES APPEAL IS QUA THE DISALLOWANCE U/S.14A OF THE ACT. THE ASSESSEES ACCOUNTS FOR THE YEAR DISCL OSED EXPENDITURE ON INTEREST AND FINANCE CHARGES AT RS.19.35 LACS AS WELL AS INVESTM ENT (AS AT THE YEAR-END) AT RS.103.18 LACS IN ASSETS YIELDING INCOME NOT FORMING PART OF THE TOTAL INCOME. ADOPTING THE FORMULA AS PRESCRIBED UNDER RULE 8D, A DISALLOWANCE AT RS.7 ,20,534/- INCLUDING QUA INDIRECT, ADMINISTRATIVE EXPENDITURE AT RS.51,590/-, WAS ACCO RDINGLY EFFECTED. IN APPEAL, THE LD. CIT(A), IN VIEW OF THE DECISION BY THE HONBLE JURI SDICTIONAL HIGH COURT IN GODREJ & BOYCE MFG. CO. LTD. VS. DY. CIT [2010] 328 ITR 81 (BOM), ADVOCATING ANY REASONABLE METHOD IN ARRIVING AT THE QUANTUM OF DISALLOWANCE U /S. 14A FOR YEARS PRIOR TO A.Y. 2008- 09, CONFIRMED THE DISALLOWANCE AT 10% OF THE RELEVA NT INVESTMENT, I.E., WHICH WOULD 11 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. GENERATE INCOME NOT FORMING PART OF THE TOTAL INCOM E. AGGRIEVED, THE REVENUE IS IN APPEAL. 12. THE REVENUES GRIEVANCE, AS DISCLOSED PER ITS G ROUND OF APPEAL, IS BASED ON THE DECISION BY THE HONBLE COURT IN GODREJ & BOYCE MFG. CO. LTD. (SUPRA) HAVING NOT BEEN ACCEPTED BY THE REVENUE AND THE SLP BEING PROPOSED. WE FIND NO MERIT IN THE REVENUES APPEAL IN-AS-MUCH AS THE DECISION BY THE HONBLE JU RISDICTIONAL HIGH COURT IS BINDING EVEN IF THE SLP AGAINST THE SAME WHICH IS NOT CLEAR FR OM THE FACTS OF THE CASE AND THE MATERIAL ON RECORD (STANDS PREFERRED) OR EVEN ADMIT TED (UNLESS OF-COURSE THE OPERATION OF THE DECISION IS STAYED) BY THE APEX COURT. RULE 8D BEING NOT DIRECTLY APPLICABLE, THE LD. CIT(A) HAS IN HIS ESTIMATION CONSIDERED 10% OF THE INVESTMENT LIABLE TO GENERATE TAX- EXEMPT INCOME AS TOWARD EXPENDITURE DISALLOWABLE U/ S.14A OF THE ACT. THE ASSESSEE NOT PRESSING ITS APPEAL IN THE MATTER, WE FIND NO INFIR MITY THEREIN AND, ACCORDINGLY, DECLINE INTERFERENCE. WE DECIDE ACCORDINGLY. 13. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN COURT ON APRIL 23, 201 4 SD/- SD/- (I. P. BANSAL) (SANJAY ARORA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ( ) MUMBAI; / DATED : 23.04.2014 %. ../ ROSHANI , SR. PS ! ' #$%& ' &$ / COPY OF THE ORDER FORWARDED TO : 1. 0 / THE APPELLANT 2. 120 / THE RESPONDENT 3. ( 3$ ( ) / THE CIT(A) 4. ( 3$ / CIT - CONCERNED 5. 6%78 1$ 9! , * 9!- , ( ) / DR, ITAT, MUMBAI 6. 8:' ;) / GUARD FILE 12 ITA NOS. 3888/M/10, 590/M/11, 3398/M/10 & 946/M/11 (A.YS. 2006-07 & 07-08) LONA INDUSTRIES LTD. ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , ( ) / ITAT, MUMBAI