TMI Blog2011 (4) TMI 784X X X X Extracts X X X X X X X X Extracts X X X X ..... may be applied for capitalizing the training expenses - According to him, in the instant case, the training expenditure relates to plant and machinery only, therefore, the same should be allocated to plant and machinery. The expenditure relatable to the installation of the machinery can at best be construed as a part of the cost of the plant and machinery which can be capitalized - Find from the order of the CIT(A) that he has given a finding that the assessee has not produced the full details regarding the training expenses paid to the foreign consultant. The submission of the ld counsel for the assessee that since the Assessing Officer has not asked for those details, therefore, the same were not given, in our opinion, does not find force in it. Although, the assessee in the paper book has given the invoice wise details of payment including TDS, it is also not clear as to whether the TDS so deducted has been properly deposited to the credit of the Central Government account in terms of provisions of sec. 40(a) of the I T Act - Accordingly, set aside the order of the CIT(A) and restore the matter to the file of the Assessing Officer to decide the issue afresh and in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /- was incurred after commencement of the production. Since expenses are in revenue nature, the company decided to treat it as deferred revenue expenditure to be written off over a period of 36 months." 2.1 However, the contention of the assessee was not accepted by the AO on the ground that the assessee itself has claimed that these were incurred prior to date of production; so it cannot be allowed as revenue expenditure during the year. While coming to this conclusion, the Assessing Officer relied on the decision of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs CIT reported in 227 ITR 172. He, accordingly disallowed an amount of Rs. 3,15,75,394/- and added to the total income of the assessee. The AO further noted that deduction u/s 32(1) of the Act can be allowed only on tangible and un-tangible assets. Since the assessee has not created any assets, the deprecation was not allowed on this amount. 2.2 Before the CIT(A), the assessee reiterated the same submissions as made before the Assessing Officer and submitted that the said expenditure was incurred wholly and exclusively for the purpose of the business and accordingly, is al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed as revenue expenditure then the same should be allowed to be capitalized and depreciation should be allowed. While doing so, he noted that the Assessing Officer had asked the assessee to file the complete details of the expenditure incurred under this head with evidences, which was not furnished and only a computer generated sheet was furnished. Since the Assessing Officer had no occasion to examine the genuineness of the payment; therefore, no direction can be issued to the Assessing Officer to allow capitalization of the claim of expenditure. Further, the payment has been made to M/s Werner International, USA and the payment was to be made @ USD 6500 per consultant man week over and above the other related expenditure. Since the payment was made to a foreign consultant and since the assessee has not informed whether the various provisions relating to payment made to the foreign consultant had been complied with as per provisions of sec. 40(a); therefore, the claim of the assessee is not allowable. He, accordingly, rejected both the claims of the assessee. 4. Aggrieved by such order of the CIT(A), the assessee is in appeal here before us with the following grounds; "1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.3 The ld counsel for the assessee, referring to pages 27 to 36 of the paper book, drew the attention of the Bench to the copy of the agreement with Werner International Management Consultant. Referring to page 34 of the paper book, he drew the attention of the Bench to the clause of the agreement towards the fee to be paid to Werner International @ USD 6500 per consultant man week for 24 weeks. He submitted that the Assessing Officer has never asked the assessee to furnish the details. Referring to para 4.2 at page 2 of the assessment order, he submitted that the Assessing Officer has asked the assessee to give details of bills for training and selection fees paid after commercial production. He submitted that when the Assessing Officer himself has allowed the payment made after the commencement of the business, the CIT(A) cannot say that the assessee has not filed the details. 6.4 So far as the objection of the CIT(A) that it is not known whether the tax has been deducted from the payment made to the foreign consultant in convertible foreign exchange, the ld counsel for the assessee referred to pages 37 and 38 of the paper book and submitted that full details regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed in case the expenditure is not allowed as revenue, she submitted that the decision of the Hon'ble Bombay High Court in the case of Badalapur Co Ltd., is distinguishable on facts. In that case the assets were identifiable whereas in the instant case, there is no identifiable asset; therefore, depreciation cannot be allowed. She submitted that the Assessing Officer has committed a mistake in allowing a part of the expenses. However, nothing can be done now. As regards the payment of fees after deduction of TDS, she submitted that it is not known whether such TDS has been deposited or not. She accordingly, submitted that the order of the CIT(A) should be upheld. 6.10 The ld counsel for the assessee, in his rejoinder submitted that the Hon'ble supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd (supra) was concerned with earning of interest income during construction period and therefore, the same cannot be applicable to the facts of the present case. He submitted that the decision of the Calcutta High Court in the case of New Central Jute Mills (supra) is directly on this issue. Therefore, alternate contention of the assessee should be allowed. 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer to allow capitalization of this claim of expenditure. We find, the ld CIT(A), while rejecting the claim of revenue expenditure further noted that since there is no evidence of deduction of tax at source u/s 40(a) for payment made to foreign consultant; therefore, the same also cannot be allowed as revenue expenditure. 7.1 Since the expenditure of Rs. 3,15,75,374/- was not incurred during the year/not crystallised during the year and does not relate to this year; therefore, the same, in our opinion, cannot be allowed as an expenditure during this year. Further, since the expenditure was incurred prior to commencement of business, the same is in the nature of pre-operative expenditure and therefore, cannot be termed as revenue expenditure for the impugned assessment year. Therefore, the first contention of the ld counsel for the assessee that the same should be allowed as revenue expenditure of this year is without any merit. The decision relied on by the ld counsel for the assessee is also distinguishable and not applicable to the facts of the present case. 7.2 In so far as the alternate contention of the assessee regarding the allowability of depreciation on the am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epreciation and development rebate, the capitalization of the following items from out of those mentioned by the ACC: i) Staff training expense - 5-% of Rs/54,246/- ii) Insurance - 50% of Rs. 54,252 as applicable to the machinery and plant used in the construction or erection of the plant. 8.2 The Tribunal also directed the grant of depreciation and development rebate of Rs 41,832/- in view of the error pointed out by the assessee's counsel. 8.3 The revenue took up the matter before the Hon'ble High Court and the question no.2 referred to the High Court by the Tribunal, reads as under: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in including the original cost of the plant and machinery any part of the expenses incurred for (i) staff training (ii) insurance and (iii) power and fuel in ascertaining the actual cost for the purpose of allowance of development rebate and deprecation allowance?" 8.4 The Hon'ble High Court answered the question in favour of the assessee and against the revenue by holding that the expenses incurred for staff training, insurance and power and fuel for installing plant and machinery form ..... 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