2016 (4) TMI 1378 - AT - Income Tax

Depreciation computed by AO while completing the assessment - HELD THAT - On a plain reading of the aforesaid Explanation 5, it is clear that grant of depreciation became mandatory irrespective of the fact whether the assessee has claimed the deduction or not while computing the total income. However, this provision is effective only from 1st April 2002 and not retrospectively, as held in the decisions relied upon by the AR. Hence, in our view, it will not apply to the impugned assessment year. Reading of the Explanation in the context of the provision of section 32(1), as it existed earlier, it becomes clear that had it been the intention of the legislature to make allowance of depreciation mandatory, they would not have brought Explanation 5 to section 32(1) w.e.f. 1st April 2002 only. Therefore, in our view, the conclusion drawn by the Departmental Authorities that the expression shall used in section 32 is mandatory is not correct and cannot be a correct interpretation of the statutory provisions. In case of Mahendra Mills Ltd. 2000 (3) TMI 3 - SUPREME COURT has laid down the proposition that provisions for claiming of depreciation is for the benefit of the assessee, hence, if the assessee does not wish to avail the benefit for some reason, the benefit cannot be forced upon the assessee as it is for the assessee to see if the claim of depreciation is to his advantage. In the absence of any claim of depreciation by the assessee, it cannot be thrust upon it by the Assessing Officer. We direct the AO to compute income of the assessee after withdrawing depreciation granted to the assessee. Ground raised by the assessee is allowed. Expenditure claimed by the assessee on account of Up Stream Rolling Mills (USRM) trial run expenditure - Revenue or capital expenditure - HELD THAT - These expenses relate to production in as much as these have been incurred in the purchase of raw materials, consumable items required in the process of production, electricity consumption in the production activity, repairs and processing charges. Even if the expenses relate to trial run, the same in my considered opinion, constitute revenue expenditure in view of the fact that the trial run does not relate to any new line of the business and it is in respect of an existing manufacturing activity. The assessee's business constitutes the same business and there was an inter-connection, inter-lacing and inter dependence and unity between the existing business and the machine installed for bringing about improvement in the process of production. AO has missed to take note of the foregoing facts and circumstances and even the appellant‟s submissions during the course of assessment proceedings have not been incorporated in the body of the impugned order or assessment. It is held that the expenses in question are allowable as revenue expenditure. Deduction on account of lease rental payment - HELD THAT - Hon'ble Supreme Court in M/s. I.C.D.S. v/s CIT, 2013 (1) TMI 344 - SUPREME COURT , has held that such lease back transactions are permissible in law. In the present case, as evident on record, the lessor has duly accounted for the lease rentals in their account and claimed depreciation on such leased assets. Thus, it is clear that the lease back transaction has been accepted as genuine in case of lessor. That being the case, genuineness of such transaction cannot be questioned in case of the assessee. In the aforesaid view of the matter, we do not find any infirmity in the order of the learned Commissioner (Appeals) and accordingly the same is upheld by dismissing the ground no.2 raised by the Department. Deduction on account of debit balance written off - HELD THAT - Since the amount was not paid back by the Austrian company, it became irrecoverable. From the aforesaid facts, it is clear that the advance of money by the assessee to the Austrian company was in the normal course of its business. It is also a fact that the provisions for bad debt made by the assessee in the assessment year 1994 95, was disallowed and added back to the income. Therefore, when in the impugned assessment year, the assessee has actually written off the amount in its books, the assessee is eligible to claim deduction of their recoverable advance as it is in the nature of business loss. This view is supported by the decision of the Hon'ble Jurisdictional High Court in IBM World Trade Corporation 1988 (12) TMI 23 - BOMBAY HIGH COURT and other decisions relied upon by the learned Authorised Representative. Therefore, we do not see any reason to interfere with the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Department. Claim of deduction being professional fee paid towards re structuring of financial loan - HELD THAT - expenditure incurred can be treated as capital in nature has disallowed assessee s claim. He has not established on record that by incurring such expenditure, assessee has acquired some assets providing benefit of enduring nature. On the other hand, as demonstrated by the Assessing Officer, the consultation fee was paid for financial re structuring of loans which has resulted in rejection of interest cost and as a consequence, assessee has derived benefit of ₹ 14.86 crore, which was offered as income for the impugned assessment year. That being the case, corresponding expenditure incurred by the assessee for earning such income has to be allowed as deduction. The decisions relied upon by the learned Authorised Representative also supports this view. In the aforesaid view of the matter, we do not find any infirmity in the order of the learned Commissioner (Appeals) which is accordingly confirmed. Ground no.3 raised by the Department is dismissed. Disallowance of legal and professional charges - HELD THAT - Primary reason on the basis of which assessee s claim of expenditure was disallowed is the expenditure does not pertain to the impugned assessment year. However, as demonstrated by the assessee and which has not been controverted by the Department, ISFS raised the invoice for professional services rendered on 17th October 2000, which is within the financial year 2000 01. Therefore, only when the invoice was raised by ISFS and assessee receives it the expenditure having been quantified crystallized and the assessee has accounted for it in its books of account. That being the case, the assessee s claim cannot be disallowed on the ground that the expenditure pertains to prior period. Therefore, we direct the Assessing Officer to allow the expenditure of ₹ 11.25 lakh. Disallowance of product development expenses - Revenue or capital expenditure - HELD THAT - It has to be ascertained whether the expenditure incurred has resulted in acquisition of any asset of enduring nature or the expenditure incurred is towards purchase of raw material, consumables and processing charges in regular course of its manufacturing activities. These facts have not at all been examined either by the Commissioner (Appeals) or by the AO as they heavily relied upon the accounting treatment given by the assessee in the books of account. It is a settled principle of law that entries in the books of account are not conclusive. A deduction or allowance cannot be allowed or disallowed only on the basis of entries in the books of account. Further, it has been submitted by the assessee that similar expenditure incurred towards product development was allowed by the Department in the earlier assessment year. This fact also requires examination. Considering the fact that the Departmental Authorities before disallowing the expenditure claimed by the assessee by treating it as capital in nature have not properly examined the relevant facts relating to the expenditure claimed, we are inclined to restore the matter back to the file of the Assessing Officer for deciding afresh after due opportunity of being heard to the assessee Claim of deduction towards expenditure incurred on watch and ward - HELD THAT - Documentary evidence to demonstrate that the amount crystallized during the assessment year after negotiation with the third parties have not been placed before us. The learned Commissioner (Appeals) s order is also silent on the issue whether he has himself examined any documentary evidence to demonstrate that the expenditure pertaining to earlier assessment year was quantified and crystallized during the year under consideration after negotiation. In view of the aforesaid, we restore the matter back to the file of the Assessing Officer to verify the fact whether expenditure claimed was quantified and crystallized after negotiation with third parties. If the assessee through proper documentary evidence proves such fact, then there is no difficulty in allowing assessee s claim of expenditure in the impugned assessment year. This ground is allowed for statistical purposes.

Summary

Issues Involved:
1. Depreciation Computation
2. Up Stream Rolling Mills (USRM) Trial Run Expenditure
3. Lease Rental Payment
4. Debit Balance Written-off
5. Professional Fee for Financial Loan Restructuring
6. Product Development Expenses
7. Watch and Ward Expenditure

Detailed Analysis:

1. Depreciation Computation:
The primary issue is whether the depreciation amounting to ?29,84,50,639 should be mandatorily computed and allowed by the Assessing Officer (AO) even if the assessee has not claimed it. The assessee argued that claiming depreciation is optional and relied on the Supreme Court decision in CIT v/s Mahendra Mills Ltd. The AO, however, contended that the use of "shall" in Section 32(1) of the Act makes depreciation computation mandatory. The Tribunal concluded that the amendment to Section 32(1) by Explanation 5, which made depreciation mandatory, is effective from 1st April 2002 and does not apply to the assessment year in question. Hence, the AO's decision to force depreciation was incorrect, and the assessee's appeal was allowed.

2. Up Stream Rolling Mills (USRM) Trial Run Expenditure:
The Department challenged the allowance of ?6,32,80,792 as revenue expenditure. The AO considered it capital expenditure necessary for commissioning the plant. The Commissioner (Appeals) and the Tribunal, however, upheld that the expenditure was revenue in nature, as the trial run was part of the existing business and did not involve setting up a new business. The Tribunal referenced its previous decision for the assessment year 1996-97, confirming that such trial run expenses are deductible as revenue expenditure.

3. Lease Rental Payment:
The Department contested the allowance of ?2,29,11,128 as lease rental payments, arguing the transactions were not genuine. The Tribunal upheld the Commissioner (Appeals)’s decision, noting that similar transactions were accepted in the earlier assessment year and that the transactions were genuine and legally permissible. The Tribunal also referenced the Supreme Court decision in M/s. I.C.D.S. v/s CIT, which validated such lease-back transactions.

4. Debit Balance Written-off:
The AO disallowed the deduction of ?58,51,135 for debit balance written-off, arguing it did not meet the conditions under Section 36(2). The Commissioner (Appeals) allowed it as a trading loss incurred in the ordinary course of business. The Tribunal upheld this view, referencing the decision of the Bombay High Court in I.B.M. World Trade Corporation v/s CIT, which supports the deduction of irrecoverable advances as business losses.

5. Professional Fee for Financial Loan Restructuring:
The AO disallowed ?25 lakh paid for financial restructuring, considering it capital expenditure. The Commissioner (Appeals) allowed it as revenue expenditure, noting no new asset was created. The Tribunal upheld this, emphasizing the expenditure was for restructuring existing loans, resulting in reduced interest costs and immediate financial benefits, thus qualifying as revenue expenditure.

6. Product Development Expenses:
The AO disallowed ?12,08,98,619 as capital expenditure for developing new grades of steel bars. The Commissioner (Appeals) upheld this, citing the accounting treatment of the expenditure as deferred. The Tribunal, however, noted that the nature of the expenditure (whether it resulted in an asset of enduring benefit or was part of regular manufacturing activities) was not properly examined. The matter was remanded to the AO for fresh examination and determination.

7. Watch and Ward Expenditure:
The AO disallowed ?23,93,495 as prior period expenditure. The Commissioner (Appeals) allowed it, noting it crystallized during the year. The Tribunal remanded the matter back to the AO to verify if the expenditure indeed crystallized during the year after negotiation with third parties.

Conclusion:
- Assessee’s appeal regarding depreciation computation was allowed.
- Department’s appeal on USRM trial run expenditure was dismissed.
- Department’s appeal on lease rental payment was dismissed.
- Department’s appeal on debit balance written-off was dismissed.
- Department’s appeal on professional fee for loan restructuring was dismissed.
- Assessee’s appeal on product development expenses was remanded for fresh examination.
- Department’s appeal on watch and ward expenditure was remanded for verification.

Order pronounced in the open Court on 29.06.2016.