TMI Blog2005 (9) TMI 516X X X X Extracts X X X X X X X X Extracts X X X X ..... s unit on the ground that the said unit became functional during this year and trial production was started. It was also claimed that the assessee was already engaged in the business of manufacturing of dyes and chemicals. The new unit for manufacturing another chemical known as MAP was only an extension or expansion of the assessee s existing business. The Assessing Officer disallowed the claim on the ground that MAP unit was an independent unit and since commercial production was not started during the year, depreciation was not admissible. It was further observed by the Assessing Officer that after some experimental trial production, manufacturing of MAP was not found to be commercially feasible by the assessee-company and, therefore, this manufacturing unit was abandoned and the assessee resorted to massive modifications in the plant for manufacturing of another chemical, this factor was also considered by the Assessing Officer while disallowing the assessee s claim for depreciation. 4. When the matter came up before the CIT(A), the assessee contended that the MAP project was integral part of the existence line of assessee s business. It was pointed out that trial productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose raw material was purchased by the assessee. The ld. counsel invited our attention to pages 97 to 114 and pages 120 and 121 of the paper book to emphasise his point that the plant and machinery was subjected to trial runs over a long period of time during the previous year from 11th October, 1991 to 8th February, 1992. The relevant pages of the paper book contain the details and the charts regarding the trial runs of plant and machinery during the aforesaid period. For the proposition that if plant and machinery has been subjected to trial production, depreciation is allowable, the ld. counsel drew support from the following cases ( i ) CWT v. Ramaraju Surgical Cotton Mills Ltd. [1967] 63 ITR 478 (SC) ( ii ) V. Ramakrishna Sons Ltd. v. CIT [1984] 149 ITR 554 (Mad.) ( iii ) CIT v. Industrial Solvents Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.) ( iv ) Asstt. CIT v. Ashima Syntex Ltd. [2001] 251 ITR 133 (Guj.) 8. The ld. CIT-DR, Shri B.R. Meena, strongly supported the orders of the revenue authorities and contended that the assessee s claim for depreciation has been rightly disallowed by the revenue authorities as commercial production was not c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio of the Bombay High Court judgment in the case of Industrial Solvents Chemicals (P.) Ltd. ( supra ) may be reproduced below : "Held, that the Tribunal had found that the assessee-company did obtain some reasonable quantity of the finished product on the running of its factory on some days between 19th August, 1961, and 11th September, 1961, but the finished product obtained by the assessee could be termed as sub-standard. It cannot be contended that because the end product then obtained was not of proper standard, the business of the assessee cannot be said to have been set up though the plant was being worked. Therefore, on the finding of the Tribunal, the assessee-company could be regarded as having set up its business by 19th August, 1961, and not in February, 1961, and it would be entitled to the expenses incurred thereafter as expenses incurred in the course of its business. The admissible business loss would have to be calculated by the ITO as from August 19, 1961, and on the same basis the depreciation and development rebate admissible to the assessee-company would have to be determined." The Madras High Court in the case of V. Ramakrishna Sons Ltd. ( s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow the depreciation on such machinery which has not been used even for a day in the whole year. The Tribunal has committed an error in allowing the depreciation on machinery which has not been used even for a day in the previous relevant year in question." It may be seen that in the above case the machinery was not used even for a day in the previous relevant year. The ld. CIT-DR has also relied on the ITAT Madras Bench decision in the case of Orient Cosmetics Ltd. ( supra ). In that case it was held that if no commercial production or trading activity had been started and only trial run had been carried out, investment allowance and depreciation will not be allowable. We feel that this issue is required to be decided in consonance with the binding decision of the Bombay High Court in the case of Dineshkumar Gulabchand Agrawal ( supra ). Here it may be mentioned that a number of High Courts have held that even if plant and machinery is kept ready for use, depreciation is allowable. In other words the High Courts have endorsed the view that if an asset is subjected to passive use, the assessee cannot be denied the benefit of deduction. However, in view of the Bombay High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness purposes. In our view, trial production or trial running of plant and machinery entails actual use of the plant and machinery for business purposes. The Assessing Officer is, therefore, directed to allow depreciation as per provisions of law. Since the actual trial production commenced in the month of October 1991 and continued till February 1992, the plant and machinery has been used for a period of less than 180 days in the previous year, and, therefore, the depreciation may be restricted to 50 per cent of the admissible amount. It may be mentioned that this finding will have impact upon subsequent assessment years as WDV carried forward from year to year will have to be modified accordingly. The Assessing Officer shall accordingly recompute depreciation allowable during all the subsequent assessment years. 11. Ground No. 2 pertains to disallowance of interest of Rs. 23,01,836 relating to borrowings used for MAP project. We have heard both the sides on this issue and have gone through the facts. The revenue authorities have disallowed interest on the ground that the borrowed funds were utilized for investment in the new project and, therefore, till the project commences ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommencement of the business but before an asset is first put to use cannot be allowed as a revenue deduction section 36(1)( iii ) of the Act is against the plain language of the provisions of the Act. Whether the Legislature wanted to restrict allowance/deduction to a particular type of expenditure a specific provision has been incorporated in the Act, as for example, the provisions of sections 37 and 35D. The scope of section 36(1)( iii ) and Explanation 8 to section 43(1) are different. They operate in separate fields and though both are relatable to computing income under section 28 yet the nature of deductions are entirely distinct from each other. The concept and the meaning of "actual cost" which is the definition laid down in section 43(1) of the Act is for a limited purpose, viz. , at a point of time when deduction is to be granted for the purpose of wear and tear [section32] or an incentive for the purpose of setting up a specified industry [sections 32A and 33]. The term "actual cost" is applicable only in relation to an asset as against the phrase "capital borrowed" used in clause ( iii ) of section 36(1) of the Act. The term "capital borrowed" in the said provisio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owards borrowings made for the purpose of acquiring the new machinery. The Assessing Officer and the Commissioner of Income-tax (Appeals) rejected the claim. The Tribunal, however, allowed the deduction." From the above it would appear that the Gujarat High Court has taken into account Explanation 8 to section 43(1). This view also finds support from the Bombay High Court decision in the case of Tata Chemicals Ltd. ( supra ). Respectfully following the precedents, the Assessing Officer is directed to allow deduction in respect of the interest. Here also the WDV of the relevant assets may have to be modified in the subsequent assessment years if the interest has been added by the Assessing Officer to the cost of assets. The Assessing Officer is directed accordingly to verify and take necessary action for the subsequent assessment years. 13. Ground No. 3 pertains to confirmation by the ld. CIT(A) of the following disallowances made by the Assessing Officer in respect of IPU manufacturing unit ( i ) Depreciation Rs. 19,60,131 ( ii ) Expenditure on power and fuel Rs. 26,53,965 ( iii ) Research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... items. Obviously, this task has been taken by the assessee in the interest of business and further the plant and machinery has been subjected to trial runs. For the same purpose the assessee has incurred research development expenditure and expenditure on consumption of power and fuel as also interest expenditure on funds borrowed for the purpose of modification of this unit. For the reasons already elaborately stated by us above, we hold that the assessee is entitled to the relevant deductions including depreciation. The orders of the revenue authorities on this issue are, therefore, reversed and the Assessing Officer is directed to allow the expenses claimed by the assessee under the head research development expenditure , power and fuel expenditure and interest expenditure . The Assessing Officer is also directed to allow depreciation as per provisions of law after verifying the period during which the plant and machinery was actually used for trial runs. The WDV of the assets shall be modified for the succeeding assessment years. 16. The last ground of appeal pertains to reduction in the quantum of deduction claimed by the assessee under section 80-I of the I.T. Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account have been maintained and, therefore, the correct profits which can be said to be derived from the relevant industrial undertaking can be only a matter of estimate. As per the auditors certificate it is seen that raw material has been adopted on actual cost and wages have also been stated to be on actual basis. The over-heads including salaries have been apportioned on the basis of consumption of raw material. Other non-allocable over-heads have been bifurcated on the basis of sales. Interest expenditure has been allocated to the industrial unit on the basis of consumption of raw material. In our view the working of the assessee cannot be said to be free from fault. The over-head expenses have been allocated partly on the basis of consumption of raw material and partly on the basis of sales. Interest expenditure has been allocated on the basis of consumption of raw material whereas the same should be on the basis of relevant borrowed funds which have been utilized in respect of the relevant industrial undertakings. For these reasons the profits estimated by the assessee and certified by the auditors cannot be said to be reliable. Under section 80-I deduction is allowable st ..... X X X X Extracts X X X X X X X X Extracts X X X X
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