TMI Blog2005 (6) TMI 486X X X X Extracts X X X X X X X X Extracts X X X X ..... t received on share application money in a separate bank account until the share allotment was over. Thus, there was direct nexus between interest income earned and share issue expenses. Decision of Hon ble Supreme Court in CIT v. Bokaro Steels Ltd. [1999] 236 ITR 315 would be applicable and set off has to be allowed. Accordingly, this issue is decided in favour of the assessee. This ground is, therefore, allowed. 2/3. Second ground is regarding disallowance of expenditure of Rs. 1,43,341 on gifts and presentations, made by Assessing Officer under Rule 6B. This issue is decided by the Tribunal for subsequent assessment years in assessee s own case in assessee s favour in the following orders: ( i )ITA No. 2690/B/93 vide its order dated 20-12-2002 - 1989-90. ( ii )ITA No. 2419/B/94 vide its order dated 4-8-2003 - 1990-91. ( iii )ITA No. 4034/M/96 vide its order dated 7-3-2005 - 1991-92. Accordingly, the facts and circumstances remaining the same, we allow this ground of the assessee in its favour. 4. The third ground is regarding disallowance of 50% of expenditure on technical conference of stockists, as entertainment expenditure. While dealing with this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3 lakhs out of lavish travelling expenses of Rs. 3.8 lakhs on travelling and food. The present year expenditure seems to be normal day-to-day expenses on pooja for running the temple in the vicinity of the plant. Accordingly, after considering the rival submissions, facts of the issue as stated above, and Tribunal s decision referred above, this ground is allowed in favour of the assessee. The addition so sustained by CIT(A) is deleted. 7. The sixth ground is regarding disallowance of Rs. 93,220 being village welfare expenses. This expenditure relates to expenditure towards general village welfare in the vicinity of the plant. We find that this issue also covered by the decision of ITAT in ITA No. 2690/M/93 vide its order dated 20-12-2002 in assessee s own case for assessment year 1989-90. Accordingly following above order, this ground is decided in favour of the assessee. The appeal of the assessee succeeds on this issue. 8. The seventh ground is about disallowance of expenditure of Rs. 1,01,31,669 paid for power lines and transmission towers to Gujarat Electricity Board (GEB). According to the Assessing Officer, this expenditure relates to the assessment year 1987-88 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclusively for the purpose of commercial production which actually started during the accounting year 1986-87 relevant to assessment year 1988-89 and hence the same should be allowed as a deduction in the assessment year 1988-89. In the case of CIT v. Bharat Stores Ltd. 70 ITR 651 (Orissa) 1968 - the assessee made certain advances for early planting and supply of sugarcane but the suppliers were effected in the next following year and hence the payments allowed in the next year. 10. The Assessing Officer after considering the submissions of the assessee, disallowed the claim by observing as under : ( a )The assessee gave advance of Rs. 101.32 lakhs to GEB during the period 1985-86 relevant to assessment year 1987-88. Installation of transmission tower, cable and power lines was completed within 30th June, 1986. The fact is also admitted in the 5th Annual report 1986-87 under Schedule-D. ( b )The supply of electricity commenced after 30th June, 1986. The entire expenditure incurred on erection of power lines related to assessment year 1987-88. ( c )The assessee paid electricity charges for trial run production as well as commercial production after 30th June, 1986, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommenced commercial production during the period 1985-86 and accordingly the appellant company had correctly treated it as revenue expenditure allowable in assessment year 1988-89. ( iii )The expenditure of Rs. 101.32 lakhs cannot be treated as expenditure pertaining to previous year as power was utilised for commercial production in October, 1986 which pertains to the previous year relevant to the assessment year 1988-89. ( iv )With prejudice to our above contentions it is submitted that the learned CIT(A) should at least have allowed the said expenditure to be capitalised and granted depreciation on the same. Since he has confirmed the same as revenue expenditure pertaining to the previous year. 14. In support of above submissions, the learned counsel for assessee relied on the following judgments : (1) CIT v. Gujarat Mineral Development Corpn. [1981] 132 ITR 377 confirmed in CIT v. Gujarat Mineral Development Corpn. (GMDC) [2001] 249 ITR 787 (SC). (2) CIT v. Bharat Stores Ltd. [1968] 70 ITR 651 (All.). 15. We have heard the rival submissions and considered the facts and material on record. We find that the department does not dispute that it is a reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . s case ( supra ). In GMDC s case ( supra ), there were two questions before Hon ble Gujarat High Court Gujarat Mineral Development Corpn. s case ( supra ). One was about the year of allowability of expenditure incurred on installing pipelines and other was computation of capital under section 80-J, wherein it was held that the amount not immediately required for business and kept in short time fixed deposit was includible in computing capital under section 84 (new 80-J). Thus, it appears that Hon ble Supreme Court had decided and confirmed the decision of Hon ble Gujarat High Court on the 2nd issue. There is apparently no deliberation on the year of allowability. 16. In GMDC s case, there was a running business and payment was made to GEB to carry on the business more efficiently. Since payment was incurred during the course of running business, it was considered to be revenue in nature and was allowed. In the present case, a new plant and machinery by way of new cement plant was being installed which ultimately became operative only with effect from October, 1986 when commercial production started. As the expenditure was incurred in the financial year 1985-86 and ins ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal for the assessment year 1989-90 in ITA No. 9690/M/93 held as under : "17.3 We have considered the rival submissions in the light of material placed before us. It is a fact that assessee s business had started during the preceding year and it had already started extracting limestone from the mines. The impugned expenses are to be incurred on year to year basis and cannot be said to be incurred prior to commencement of business. Since the business had already commenced, the same will not be covered by the provisions of section 35(1). Further, the said expenditure was incurred for extracting raw material and not for acquiring any asset of enduring benefit or advantage. In this context, we rely on the decision of apex court in the case of Empire Jute Co. Ltd. ( supra ) wherein it was held that if the advantage consists merely in facilitating the assessee s trading operation, the expenditure would be on revenue account. Respectfully, following the said decision and other decisions relied upon by the ld. counsel, we hold that the said expenditure can in no way be treated as capital in nature. We, therefore confirm the order of CIT(A) who has held that the impugned expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preciation on such assets were capitalized. This is in accordance with accounting practices of ICAI. Hence, the assessee is entitled for depreciation on these capitalized pre-operative expenses including depreciation. On the other hand, the learned DR relied on the orders of Assessing Officer and CIT(A). 21. After hearing both the parties, we are of view that assessee deserves to succeed. The reasons are firstly: there is no dispute on the proposition that pre-operative expenses related directly or indirectly to the setting up of plant and machinery or building can be capitalized. Support is derived from the decision of Hon ble Rajasthan High Court in CIT v. Anil Steel Industries Ltd. [1992] 193 ITR 124 (Raj.), CIT v. Bharat Agri. Co. [1998] 233 ITR 643 (Patna). 22. Once pre-operative expenses having direct or indirect nexus with setting up of business or installation of machinery can be capitalized, then there is no reason why they are not entitled for depreciation as per rules. It cannot be a case that capitalisation is permissible, direct or indirect cost can be added to actual cost of plant and machinery or building but depreciation cannot be allowed in post op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period of construction. Such depreciation may be charged either by applying the normal depreciation rates to the original cost of such assets or, in the alternative, the depreciation may be charged indirectly by capitalizing the difference between the original cost of equipment or facilities and the sale or scrap value thereof at the end of the construction. The latter method is particularly appropriate in the case of special construction equipment and temporary construction facilities. In either case, the depreciation provided during the construction period should ordinarily be treated as part of the indirect construction cost and capitalized accordingly. If any item of fixed assets used during the construction period is retained by the project for use after production, the residual book value of such assets should be depreciated in the normal way after commencement of production." Finally, so long as the charging of depreciation in pre-operative period and bringing it back by capitalisation does not increase the actual cost, there cannot be any objection to this accounting. Even otherwise, actual cost of "assisting asset" installed in pre-operative period are eligible for c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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