TMI Blog2012 (5) TMI 643X X X X Extracts X X X X X X X X Extracts X X X X ..... f the appellant under sections 147/143(3)/145(3) of the Incometax Act, 1961 ( the Act ). 1.1. That on facts and in law, the CIT(A) erred in failing to appreciate that the reassessment proceedings were based on mere change of opinion and incorrect facts. 2. That on facts and in law, the CIT(A) erred in upholding disallowance of additional depreciation to the tune of ₹ 4,05,12,853 and ₹ 1,52,73,164 on plant and machinery and tippers respectively without appreciating that the appellant was engaged in manufacture or production, inter alia, of mixed concrete. 3. That on facts and circumstances of the case and in law, the CIT(A) erred in upholding the jurisdiction of the assessing officer to make additions/ disallowances on various issues on the basis of roving and fishing enquiries conducted during reassessment proceedings de hors the basis and the issues on which reassessment proceedings were initiated under section 147/148 of the Act. 4. That on facts and circumstances of the case and in law, the CIT(A) erred in not admitting additional evidence filed by the appellant under Rule 46A of the Income-tax Rules, 1962 merely on the ground that the same wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 80HHB of the Act, with reference to the assessed profits of the eligible projects, consistent with the additions/ disallowances sustained in the impugned order. 10. That the CIT(A) erred on the facts and in law in not adjudicating upon the ground raised by the appellant challenging the levy of interest under section 234D of the Act. II: Revenue grounds are as under: 1. On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of ₹ 87,15,926/- made on account of excess depreciation claimed on the ground that the same is debited in misc. expenses of P L account. 2. On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of ₹ 54,594/- made on account of wrong depreciation claimed on office equipment on the ground that the same is debited in misc. expenses of P L account. 3. The appellant craves to add, amend or modify the grounds of appeal at any time. 2. Assessee has filed an application for additional evidence, same shall be dealt along with the relevant issue. 2.1 Brief facts are: The assessee is an AOP, formed by way of a joint venture of two company s viz. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to manufacture or produce any article or thing on or after the Ist day of April, 2002; or (B) Any industrial undertaking existing before the Ist day of April, 2002, during any previous year in which it achieves the substantial expansion by way of increase in installed capacity by not less than ten per cent. Since the assessee is not engaged in the business of manufacture or production of any article or thing, hence the additional depreciation is not allowable to it. The Hon ble Supreme Court in the case of CIT Vs. N.C. Budhiraja Co. (1993) 204 ITR 307 (SC) has held that construction activity do not fall in the category of manufacture or production of any article or thing. Since the assessee do not qualify the basic condition, the additional depreciation claimed at ₹ 4,05,12,853/- is not allowable. 2. On scrutiny of the record, it has been further observed that assessee has claimed depreciation and additional depreciation on Tippers @ 25% and 15% respectively at ₹ 4,07,28,435/- as per annexure II of the audit report. Since, the assessee is not engaged in the business of manufacture or production of any article or thing, as discussed in para 1 abov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bitumen and the new material which is neither aggregate nor Bitumen, but is rather a new product are subsequently used in the construction of roads. Strictly applying the decision of the Supreme Court in N. C. Budhiraja s case. Such activity does not result in manufacture/ production an article/ object. However, it is submitted that the mixtures, so produced by the aforesaid plants in different entitles/ work sites of the assessee are entirely different and different and distinct, in terms of its chemical composition and use, from the raw material used to manufacture such mixtures and since the mixtures are movable objects, the decision of Apex Court in N.C. Budhiraja s case is inapplicable. Reliance was placed on following case laws: - Dy. CST Vs. PIO Food Packers (1980) 46 STC 63 (SC); - CIT v. Tata Locomotive Engineering Co. Ltd. (1968) 68 ITR 325 (Bom.); - Union of India Vs. Delhi Cloth General Mills CO. Ltd. AIR 1963 SC 791 (SC); - Narne Tulaman Manufacturers Pvt. Ltd. V. Collector of Central Excise (1990) 183 ITR 577 (SC). - Sterling Foods Vs. State of Karnataka AIR 1986 SC 1809 (SC). 2.7. Excess depreciation on a/c deference in Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period to which it pertain may be furnished. Capital accounts of the JV partners may be furnished. You have credited an amount of ₹ 1,45,65,520/- in the miscellaneous expenditure, the details for the same may be furnished. Copy of return of income, along with audit report, balance sheet and P L account of the JV members please may be furnished for the A.Y. 2004-05, 2005-06 and 2006-07. Copy of assessment order passed by the I.T. authorities in the cases of JV members, if any, for the A.Y. 2004-05, 2005-06 and 2006-07 may also be furnished. The assessee was also asked to furnish some more information vide this office letter no. 1306 dt. 08-12-2009:- Copies of tender forms submitted to the contractee departments/ parties in respect of projects executed in India. Project wise agreed tender values viz-viz projected cost file with the evidence. Reasons for loss in each and every project. Separate working of expenses and receipts with regard to each project. Furnish the detail consumption with regard to quantitative consumption of various items in comparison to tender file as well as tender granted. Stock register of all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total of ₹ 5.50 crore. e. Further, your honour would observe from the projectwise Profit Loss Account that in the Indirect Expenses major components are Depreciation and Finance Cost, which are ₹ 1.39 crores and ₹ 0.74 crores respectively. These have also contributed to loss along with other indirect expenses. f. Further, since the projects were delayed, we had to incurred fixed overhead expenses such as salaries etc. continuously, which resulted in loss. g. In some of the sites final contract value at the time of completion of the projects were reduced. In the Behram Site final contract value was reduced by a sum of ₹ 1.00 crore and in the Nakodar site the same was reduced by a sum of ₹ 0.98 crore. This has also impacted the profitability of the Indian project. h. Further the accounts of the assessee have been duly audited for which proper bills and vouchers are available with the assessee. In view of the above, it is submitted that the assessee has actually suffered a loss of ₹ 5.50 crores on Indian Projects, due to delay in execution of projects, which has resulted in increase in both, Indirect and Direct cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dy been explained vide letter dated 16-12-2009. 4. AO however held that the claim of additional depreciation was not allowable to assessee and the same was disallowed by following observations: 6. The above reply of the assessee was examined in detail. In the light of following fact and legal pronouncements. 6.1. The case law relied upon by the assessee do not relate to the facts of the case of the assessee. The additional depreciation claimed is not allowable as the assessee do not fulfill the requisite conditions as laid down in sub section (iia) of section 32 of the act which reads as under:- In the case of any new machinery or plant (other than ships and aircraft) which has been acquired and installed after the 31st day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).; Provided that such further deduction of fifteen per cent shall be allowed to: (A) a new industrial undertaking during any previous year in which such undertaking begins to manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat he has manufactured an article or that he has produced an article? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storied building. To say that all of them fall within the meaning of word 'articles' is to over-strain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices etc. But to say that the end product, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions manufacture and produce are normally associated with moveables articles and goods, big and small but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. The decisions of the Bombay High Court in CIT v. N. U. C. Pvt. Ltd. I and in CIT v. Shah Construction Co. Ltd.2 relied ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses account. The assessee has camouflage the accounts of concealing the amount under the miscellaneous expenses. The assessee should have shown this amount separately. The assessee has violated the accounting principle of disclosure also. Thus the contention of the assessee that he has debited the amount of ₹ 87,15,926/- in the miscellaneous expenses head is not accepted and the same is added back to the income of the assessee. Since the assessee has also taken the plea in respect of depreciation claimed on office equipment at ₹ 53,594/-, the same is also disallowed in view of above discussion and added to the income of the assessee. 5. In respect of losses in Indian projects, AO was of the view that books of accounts and records maintained by the assessee were not proper so as to reflect true profits and to compute the taxable income properly. A/c books were consequently rejected by AO with following observations: (i) Assessee has not maintained stock register and failed to furnish the detail regarding quantitative consumption of various items in comparison to tenders filed and tender granted. (ii) The assessee failed to file complete copy of accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction material which is not being consumed. The keeping of a stock register is of great importance because that is a means of verifying the assessee s accounts by having a quantitative tally . It is very relevant in order to correlate input and output. From the verification of books of accounts, it is noticed that the assessee has not maintained and not kept stock register for the various material such as rodi, petrol, diesel, bitumen, crushed stone which are purchased a well as claimed to have consumed by the assessee. If, after taking into account all the materials including the non-maintenance of a stock register, it is found that from the method of accounting the correct profits of the business are not detectible, the operation of the proviso to section 145(3) of the Income tax Act becomes inherent in the case of this assessee. (ix) From the perusal of the P L A/c it is seen that assessee has shown opening WIP of ₹ 7,50,07,877/- and closing WIP of ₹ 4,28,52,479/-. During the course of assessment proceeding, the assessee was requested vide letter no. 26-11-2009 to furnish the detailed basis along with reasons with evidences for the above valuations for e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dia Ltd. (1991) 188 ITR 44(SC), wherein it has been held that as from the books of the assessee, due to reasons detailed by the Assessing Officer in his order, correct income of the assessee was not detectible, the application of section 145 was upheld. 5.2. After rejecting the books of accounts, AO estimated the net profit of the assessee at 4% of gross receipts by following observations: Now after rejecting the books of accounts, in the estimation of net profit of the assessee following material facts are to be considered: a) Section 44AD of Income tax Act provides for determination of income @ 8% on gross receipts in case of contract business were not required who are maintain the accounts and not required to gets its account audited u/s 44AB of the I.T. Act. However, this section is not applicable in the case of assessee but it provides a basis and sets the direction for estimation of income. b) Similar assessee s who are in the similar line of business activity which is identically comparable with assessee s line of contract business do invariably offer income in the range of 3% to 5% of gross receipts when their books of accounts are audited u/s 44AB of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 81,28,034/- 4. Addition on account of loss on Indian Projects as allowed in regular assessment. 5,51,20,396/- Total taxable income 26,30,03,250/- 6. Aggrieved against AO s order, assessee preferred first appeal, raising various grounds thereby challenging the reopening of assessment; disallowance of additional depreciation; reduction in claim of depreciation and additions on account of rejection of books of accounts books of accounts. CIT(A) decided various issues as under: 7. Assessee challenged reopening of assessment by following ground : That in the facts in circumstances of the case, the impugned order was bad in law being based on mere change of opinion and there was no formation of reasonable belief regarding escapement of income, which is a sine qua non for valid assumption of jurisdiction under section 147/148 of the Act. 7.1. CIT(A) considered the submissions and rejected the ground of reopening of assessment by following observations: 3.3. The submissions of the appellant and the facts have been carefully considered. The arguments of the appellant are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to considering information from any source. There is nothing to suggest that the AO acted on the directions of any authority. A perusal of the reasons recorded u/s 148 clearly shows application of mind by the AO. He has discussed in detail the reasons for his belief that income has escaped assessment. In view of these facts, the appellant s arguments are not acceptable. 7.2. Reliance was placed by CIT(A) on following case laws: - Consolidated Photo Finvest Ltd. (2006) 281 ITR 394 (Del.); - Bawa Abhai Singh Vs. DCIT (2002) 253 ITR 83 (Del.) - Dr. Amin s Pathological Laboratory Vs. JCIT (2001) 252 ITR 673 (Bom.) - Lakshmi Machine Works Ltd. Vs. ACIT (2010) 126 ITD 263 (Chennai) - A.L.A. Firm Vs. CIT (1991) 189 ITR 285 (SC) 73.3. Thus CIT(A) rejected assessees grounds about reopening based on issued about proper disclosure, audit party information as not constituting proper information, change of opinion by AO, absence of reasonable belief for escapement of income. 8. Additional depreciation: After considering assesses submissions and case laws, CIT(A) disallowed the claim of additional depreciation by following observations: The ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h is different from the raw material. It was stated that bitumen concrete is individually marketable and has a distinct commercial identity. The appellant therefore, argued that this amounted to manufacture/ production and they were therefore, entitled to additional depreciation. 5.3. The submissions of the appellant and the fact have been carefully considered. The appellant is engaged in the construction of roads, highways and bridges. For construction of roads, concrete mixture is required to be prepared but this is only an input in the construction of roads. The business of the appellant is construction of roads and not sale of the concrete and similar material, used for construction of roads. Therefore, the claim that the appellant is engaged in manufacture or production is not justified. In N.C. Budharaja s case, the Hon ble Supreme Court has held that such activity does not amount to manufacture/ production. The ratio of this case is squarely applicable to the case of the appellant. 8.1. Reliance was placed by CIT(A) on following case laws: - Builders Associations of India Vs. Union of India (1994) 209 ITR 877. - CIT v. Vaish Bros. co. (2001) 247 ITR 385 (Al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material already on record. 9.4. The basis for reassessment is audit objection(s) raised by the audit party, a copy of objection was officially supplied to and responded to by the assessee. The audit party brought to the attention of the assessing officer, the decision of the Supreme Court in the case of NC Budhiraja: 204 ITR 412 and the consequent suggestion that additional depreciation, in law, had been incorrectly allowed in the original assessment to the assessee company engaged in road construction. 9.5. Ld counsel contends that as the issues about difference in figures of depreciation and claim of additional depreciation have been specifically examined by the assessing officer in the original assessment. Initiation of reassessment proceedings is thus caused by a mere change of opinion and therefore the reopening is bad in law and liable to be quashed. Reliance, is placed on the following decisions: - CIT v. Kelvinator of India Ltd.: 320 ITR 561 (SC) approving CIT v. Kelvinator India Ltd: 256 ITR 1 (Del.)(FB) - CIT v. Eicher Ltd.: 294 ITR 310 (Del) - CIT v. Goetze Ltd: 321 ITR 431 (Del) - Carlton Overseas (P) Ltd v. ITO 318 ITR 295 (Del.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt and distinct from the raw material in terms of its chemical composition and use. Furthermore, bitumen concrete is independently marketable and has a separate, distinct commercial identity. The expansion in capacity undertaken by the assessee for eligibility to claim of additional depreciation is based on the increased production capacity of the crusher, solid mix plant, WMM plant and batching plant, which are used in manufacture/ production of the said concrete mixture. 9.12. It is pleaded that assessee is to be construed as manufacturing/ producing an article or thing i.e. Bitumen Mix which is a separate, distinct and independently marketable commodity based on following propositions: a. Where a change or a series of changes results in emergence of a new and different article as understood in commercial circles, the same amounts to manufacture or production : - DCST v. PIO Food Packers [1980] 46 STC 63 (SC) - Kores India Ltd V. CCE: 174 ELT 7 (SC) - Ujagar Prints v. UOI: 179 ITR 317, 341 (SC) - CIT vs. Oracle Software India: 320 ITR 546 (SC) - Orient Longman Ltd V. ITO: 130 ITR 477 (Del.) b. Mixing of various raw materials in specifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies Ltd. v. ITO: 132 TTJ 233 (ITAT Ahd) Held: Increase in production capacity of intermediate product would entitle claim for additional depreciation - CIT v. Texmo Precision Castings: 321 ITR 481 (Mad) Held: Assessee engaged in business of manufacturing castings entitled to additional depreciation on wind mill installation notwithstanding that the same did not increase the production capacity of manufacturing castings - CIT v. Hi Tech Arai Ltd: 321 ITR 477 (Mad) - Held: No requirement of increase in production capacity of the article or thing being manufactured or produced - NRB Bearings Ltd v. DCIT: 133 ITD 306 (Mum ITAT) f. Where there is manufacture or production of intermediary article or thing, which is captively consumed in an activity which does not amount to manufacture or production of an article or thing, additional depreciation in respect of plant and machinery used for the manufacture or production of intermediary article or thing would be allowable - CIT v. Hydle Constructions: 259 ITR 344 (Del HC) In this case, the assessee claimed investment allowance under section 32A of the Act since it was engaged in manufacture/ pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment, based on roving and fishing enquiries, in respect of issues wholly unconnected with reasons recorded is impermissible notwithstanding Explanation 3 to Section 147 of the Act, - Ranbaxy Laboratories Ltd.: 336 ITR 136 (Del) As per Explanation (3) if during the course of these proceedings the Assessing Officer comes to conclusion that some items have escaped assessment, then notwithstanding that those items were not included in the reasons to believe as recorded for initiation of the proceedings and the notice, he would be competent to make assessment of those items. However, the legislature could not be presumed to have intended to give blanket powers to the Assessing Officer that on assuming jurisdiction under Section 147 regarding assessment or reassessment of escaped income, he would keep on making roving inquiry and thereby including different items of income not connected or related with the reasons to believe, on the basis of which he assumed jurisdiction. For every new issue coming before Assessing Officer during the course of proceedings of assessment or reassessment of escaped income, and which he intends to take into account, he would be required to iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.1. Ld. counsel pleads that assessee has business operations in India and Afghanistan, in respect of which the assessee has maintained separate books of account. During the relevant previous year, the assessee suffered huge losses to the tune of ₹ 5.51 crores from the Indian Projects on account of delay in completion of the projects resulting in cast overruns and reduction in consideration payable by the Government Departments / contractee. 11.2. The assessing officer rejected the books related to Indian projects, alleging that: - In the immediately preceding and succeeding years, the assessee had profit of 1.28% and 10.34% respectively. - Non-maintenance of stock registers at respective sites. - Some of the parties had not responded to summons issued by the assessing officer for confirmation of transactions with the assessee 11.3. AO proceeded to make an estimated addition of ₹ 81,28,034 in place of loss of ₹ 5.51 crores which was otherwise accepted during the original assessment proceedings under section 143(3) of the Act. 11.4. Ld counsel for the assessee contends that rejection of books and estimation are not justified as: i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished all details relating to stock - During the course of assessment proceedings, when the AO directed the assessee to produce quantitative tally of consumption of raw material, the assessee explained that such quantitative tally is not practically feasible in the nature of activities carried on by the assessee. However, the assessee produced/filed the following details/documents in support of the loss claimed by the assessee from operation at Indian sites: (a) Project-wise profit and loss account; (b) Copies of tender documents. (c) Details of start and completion of the Indian project; (d) Completion Certificate of the project; (e) Copy of Award Letters; (f) Details of raw material purchases along with Ledger accounts of purchase of raw materials; (g) Copies of bills for purchase of raw material on sample basis; (h) Details of spares and consumables; (i) Details of closing working progress of Indian sites; iv. Non-maintenance of stock register of consumption of raw material was not practicable: - As far as raw materials are concerned, the same, being bulky in nature, are normally packed in bags/ barrels. Raw mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es. The said evidence was however not admitted by the CIT(A) under Rule 46A of the Rules. The CIT(A) further held that the copies placed on record were unsigned copies of the relevant document, which, too, rendered the same inadmissible. vii. The AO and the CIT(A) failed to appreciate the distinction between (a) non-maintaining of stock register and (b) absence of records of stock and consumption of materials, which had been duly placed on record. viii. In any case, mere failure to produce details of quantitative consumption, without more, cannot be the sole basis for recourse to Section 144/145 of the Act. - CIT v. Jas Jack Elegance Exports: 324 ITR 95 (Del HC) - CIT v. Jacksons House (ITA No. 651/2010 rendered on 26.04.2010) - CIT v. Shere Punjab Silk Stores 1981 Tax 63(1) (Del HC) - Asoke Refractories (P) Limited: 279 ITR 457 (Cal.) - Pandit Bros v. CIT 26 ITR 159 (P H) - Veeriah Reddiar V. CIT: 38 ITR 152 (Ker.) - M. Durai Raj v. CIT, Ernakulam 83 ITR 484 (Ker.) - Jhandu Mal Tara Chand v. CIT : 73 ITR 192 (P H) - Bhagwati Emporium: (1995) 80 Taxman 227 (Ahd.) - ITO v. Oswal Emporium (1989) 30 ITD 241 (Del) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r consideration. 11.8. It is submitted that there was no warrant for taking recourse to the provisions of Section 145(3) of the Act and to complete reassessment on estimate basis by adopting ad hoc rate of gross profit. 12. Alternate grounds: If it is held that the books were rejected unjustifiably: i) Ground of appeal no. 6: Disallowance of payment of employees contribution: 12.1. During the relevant previous year, the assessee received employees contribution towards provident fund of ₹ 1,23,096, which was not deposited on or before the due date as stipulated in the relevant statute. However, the aforesaid employees contribution was duly deposited before the date of furnishing of return of income. No separate disallowance in respect thereof was however made in view of the fact that the AO had estimated the income of the assessee on ad hoc basis. The same is allowable deduction, in light of the decision of the jurisdictional High Court of Delhi in the case of CIT v. AIMIL Ltd: 321 ITR 508. ii) Ground of appeal no. 7 8: Disallowance of prior period expenses: 12.2. During the year, the assessee company incurred the following prior period expenses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le profits and gains stand inflated due to the disallowance of addl. Depreciation which were not foreseen. A direction may be issued 14. Ground of appeal no. 10: Interest U/s 234D of the Act: 14.1. In the reassessment order, the assessing officer has charged interest, inter alia, under Section 234D of the Act. In holding that interest under Section 234D, being interest on excess refund, is chargeable on refund granted to the assessee, the CIT(A) failed to appreciate that this section applies on regular assessment and the only case in which interest on excess refund may be charged pursuant to order under Section 147 of the Act is where such assessment is framed for the first time . Accordingly, no interest was leviable under Section 234D of the Act. Reliance is placed on Vishakhapatnam Bench of the Tribunal in Dredging Corporation of India v. ACIT: ITA 6/Vizag/2011, rendered on 25.07.2011. 14.2. The CIT(A), however, has not adjudicated this ground in the impugned order. REVENUE S APPEAL (ITA 1752/Del/2011): 15. Ground nos. 1 2: For the relevant assessment year, the assessee debited depreciation of ₹ 18,77,14,890 on plant and machinery and ₹ 6,38,713 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 18,77,14,890/- on account of depreciation instead of correct figure of ₹ 17,89,98,764/-. The mistake resulted in excess claim of ₹ 87,15,926/-. Since income had escaped assessment on account of excess depreciation granted to assessee AO had valid reasons to believe in terms of clause (c) (iv) of Explanation 2 to section 147 of the Act that income had escaped assessment. In this eventuality AO had no other choice to record reasons for reopening the assessment, thus complying with law reasons were recorded and notice u/s 147 was issued. 16.3. Assessee has raised various objections with regard to the action of reopening pleading that: a. all the details were before the Assessing officer during original assessment proceedings; b. that the assessee had filed statutory audit report in Form No. 3AA; c. that the Assessing Officer was aware of the claim of additional depreciation and action taken u/s 147 is a change of opinion; d. that the Assessing Officer has taken action u/s 147 due to audit objection. e. It has also been submitted that why the provisions of section 263 or 154 were not invoked instead of section 147. 16.4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant that Form 3AA was filed alongwith the return as a procedural requirement which is to be verified on the touchstone of allowability conditions which remain unanswered. 16.9. A claim cannot be allowed contrary to Hon ble supreme Court judgment in the case of N C Budharaja co, (supra). AO is under statutory obligation to redeem this aberration. In such cases allowance of unjust excess depreciation itself becomes a reason which obliges AO take up reassessment proceedings. 16.10. In the reasons for re-opening, the Assessing officer has also mentioned at the time of recording of the reasons that details in this regard were not filed. The assessee has wrongly mentioned that the relevant details were filed given during the assessment proceedings a perusal of paper book reveals that these details mentioned are enclosed with a letter dt. 24.8.2009 during the re-assessment proceedings. Thus assessee had not filed details along with documents during the original proceedings. This is indicative of the fact that during the course of original proceedings selective papers were filed for the reasons best known to assessee. This again justifies the reopening and belies the assesses claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible, the Assessing Officer may not have the power to issue a notice under section 148. However, in case, no opinion has been expressed, then whatever be the reason, as long as they prima facie satisfy the conscience of the Court, the Court would not interfere with the issuance of a notice. c) Dalmia Pvt. Ltd. 2011-TIOL-628-HC-DEL-IT (Delhi) Question of change of opinion arises when an Assessing Officer forms an opinion and decides not to make an addition and holds that the assessee is correct. In the present case the Assessing Officer had asked specific and pointed queries with regard to the sundry creditors of ₹ 1,66,37,402/- asked for confirmations, names, addresses and details of services rendered. An addition of ₹ 19,86,551/- was made for failure to furnish confirmation and explain what services were rendered by the creditors. There is no discussion, ground or reason why addition of ₹ 32,97,507/- was not made inspite of the failure of the assessee to furnish conformation and details. It will be appropriate in this regard to refer to Explanation 1 to Section 147 of the Act, which reads:- Explanation 1. - Production before the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amining whether the conditions which invested the Incometax Officer with the powers to reopen the assessment existed. It is not, observed the court, within the province of the High Court to record a final decision about the failure to disclose fully and truly all material facts bearing on the assessment and consequent escapement of income from assessment and tax. The court also held that from a mere production of the books of account, it could not be inferred that there had been full disclosure of the material facts necessary for the purposes of assessment. The terms of the Explanation, declared the court, were too plain to permit an argument that the duty of the assessee to disclose fully and truly all material facts would stand discharged when he produces the books of account or evidence which has a material bearing on the assessment. The court observed (page 644) : It is the duty of the assessee to bring to the notice of the Income-tax Officer particular items in the books of account or portions of documents which are relevant. Even if it be assumed that from the books produced, the Income-tax Officer, if he had been circumspect, could have found out the truth, the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws from the information received by the ITO. The information is not the realisation, the information gives birth to the realisation. In this case, the Supreme Court had primarily concerned with the expression information as stipulated in Section 147(b) of the Act as it existed and it was held that information of an internal audit party on a point of law cannot be regarded as information within the meaning of the said Section.It doesnot concern the deeming provision u/s 147 which was subsequently introduced by legislative amendment. h) It is well settled that audit objection on the point of fact can be a valid ground for reopening of assessment. In the case of New Light Trading Co. vs. Commissioner of Income Tax, (2002) 256 ITR 391 (Del), referring to the decision of Supreme Court in CIT vs. P.V.S. Beedies Pvt. Ltd. (1999) 237 ITR 13 (SC), has held as under (at page 393) : In the case of P. V. S. Beedies Pvt. Ltd. [1999] 237 ITR 13, the apex court held that the audit party can point out a fact, which has been overlooked by the Income-tax Officer in the assessment. Though there cannot be any interpretation of law by the audit party, it is entitled to point out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, which has been held in the case of N C Budharaja Co. supra, by the Hon ble supreme Court. The words 'manufacture' and 'production' have received extensive judicial attention both under the Income-tax Act as well as Central Excise Act and the various sales tax laws. The word production' has a wider connotation than the word 'manufacture' while every manufacture can be characterised as production, every production need not amount to manufacture. The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. Further, the word 'article' is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation - the sense in which it is understood in commercial world. The word 'articles' in section 80HH is preceded by words 'it has begun or begins to manufacture or produce'. The word 'articles' occurring in section 80 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting, executing etc., building, structures, factories etc. In the process and for the purpose of the said construction and repairs of buildings, it manufactured windows, doors, frames, concrete beams and slabs. Hon ble High Court held that : 1. The assessee manufactured windows, door frames, concrete slabs and beams for the purpose of particular building under construction or repair and not independently. These were not manufactured for sale in the market as such but for use in its own work of construction of buildings. Its business was a complete whole and there was no scope of artificially dividing its business into two parts- one of manufacture of window and door frames, etc., and the other of construction and repairs of buildings for which the said manufacture was done. The Tribunal was, therefore, wrong in treating the window and other door frames, concrete slabs and beams as goods like any other goods which were independently manufactured and sold in the market. 2. The Tribunal failed to consider whether the assessee fell within the special definition of industrial company as per section 2(7)(d) of the Finance Act, 1966 relevant in the instant case. According to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot, therefore, be said that the assessee was an industrial undertaking for the purpose of producing a article or thing for which the machinery or plant was wholly used. The main business of the assessee would have to be determined. Whether it was a construction business and any step involved in that construction business was only ancillary to the construction activity of the assessee or production of any goods was itself the main business activity of the assessee? An assessee may be engaged in the activity of building work as a contractor and in the process of completing that work some manufacture may be done at interim stages. The product of such manufacturing activity would not result in the production of goods but the product of such activity would be consumed by the assessee in its building work. In that case, the assessee would not be a producer but a consumer, for at the end of its business activity, it would be producing not any goods or articles but only constructing a building. The statement of law in the case of CIT v. Minocha Bros. (P.) Ltd. [1986] 160 ITR 134/ 26 Taxman 648 which was binding, is that inasmuch as the assessee is a manufacturer of buildings or const ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e- assessment proceedings. (b) Rejection of books of accounts, disallowance of loss and estimation of profits from the Indian Projects @ 4% of the gross receipts. (c) Non admission of the additional evidences by the CIT(A). 18.1. Secs 147/148 specifically provide that in re-assessment proceedings entire assessment stands reopened and AO can also examine any new issue. Assessing Officer found that assessee had claimed whopping 28.4% losses on Indian Projects at ₹ 5,51,20,396/- on gross receipts of ₹ 19,40,54,608/-. This loss was found to be abnormal compared to assessee s earlier and subsequent years results and other business entities of similar nature. In immediately preceding year the assessee has shown the profit of 1.21% and in succeeding year, profit is shown at 10.34%. This abnormality called was dutifully verified by Assessing officer who called for various details, which are elaborately discussed in the assessment order at pages 12 to 25. Assessing officer demonstrated that the stock registers, quantity tally and format information were not filed before him despite opportunities. 18.2. Assessee claimed material consumed at ₹ 13,79,68,93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctions who have shown net profit in the range of 3 to 4 %. 18.7. The assessee did not furnish any proof of payment of labour charges either. 18.8. To verify the claim of expenses under the head purchases of material, the Assessing Officer issued enquiry letters u/s 133 (6) in six cases,no reply was received in four cases, in two of the cases discrepancies were noticed. 18.9. Apropos ground about refusal of additional evidence, objections raised by the AO are relied. It is pleaded that assessee till second round i.e. reassessment also could not produce its own documents, which gives rise to an inference that the deficiencies were sought to be covered up by additional evidence. There was no hitch for assessee to explain his own accounts in two rounds for which burden lies squarely on it. No justification is given as to how it was prevented from filing in earlier proceedings. Management certificates for site stocks are prepared at the end of the accounting period which in case is 31-3-2004, filing these after 6 years in 2010 by way of additional evidence itself is a reason enough for refusal by CIT(A). 18.10. Apropos discrepancies in the receipts shown by the assessee vis- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sues which came to his notice subsequently during the re-assessment proceedings is justified. Alternate Grounds: Ground No. 6: 20. Deduction for employees contribution towards provident fund, amounting to ₹ 1,23,096/-. Order of AO is relied. Ground No. 7 8 :: 21. The Assessing Officer noticed that Prior period expenses of ₹ 2,40,586/- are not admissible because these expenses relate to earlier year. However, no separate addition is made by the Assessing Officer as it is covered under the estimation of income. The action of the Assessing officer is upheld by the CIT(A) and while doing so he has specifically pointed out that no evidence is filed by the appellant to substantiate the claim that these expenses have crystallized during the year. Neither any details of these expenses were given nor were any supporting evidences filed. Looking into the facts of the case, this ground of appeal deserves to be dismissed. Ground No. 9 22. Apropos deduction u/s 80HHB CIT(A) has held that the appellant has not filed any particulars regarding his fulfillment of the conditions for claiming deduction u/s 80HHB, in respect of the additions to income made in the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ): 24.3. The said decision has been rendered in the context of the failure of the assessee in making full and true disclosure, despite retrospective amendment in law. In that case, after the filing of the return of income for the assessment year 2001-02, the provisions of section 14A of the Act were retrospectively amended. During the course of original assessment, even though the said provisions were in force, the assessee did not declare any facts relating to disallowance under section 14A of the Act, thereby failing to comply with the retrospectively inserted obligation under that section. On account of such failure on the part of the assessee in complying with such statutory obligation of disclosing amount disallowable under section 14A, the reassessment proceedings were upheld by the High Court. The aforesaid decision was thus rendered in the context of failure to comply with a categorical statutory obligation, and thus has no application to the present controversy. 24.4. In the present case, the controversy is with regard to claim of additional depreciation in respect of which the assessee has made full and complete disclosure about the preliminary and material facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ACIT: ITA 3910/Del/2007 The basis for initiation of reassessment was information that came to light during the assessment proceedings for a succeeding year, which the Tribunal upheld as permissible. There was thus, fresh information (in the form of assessment order for subsequent year), which came to the possession of the assessing officer and hence the reassessment proceedings were held to be validly initiated. 24.6. Apropos issue of manufacture or production of intermediary articles or things, reliance on the following provisions/ decisions by the Revenue is misplaced: (i) Minocha Brothers Pvt Ltd v. CIT : 204 ITR 628 (SC) Affirming, CIT v. Minocha Brothers Pvt Ltd: 160 ITR 134 (Del HC). In that case, the issue for consideration was whether the assessee could be regarded as an industrial company as per the definition given in Finance Acts of 1971 and 1972 so as to be eligible for concessional rate of taxation. The said Finance Acts defined the expression industrial company to mean a company engaged, inter alia, in the business of manufacture. Explanation given below the definition of the expression industrial company explained that if 51% or more of the tot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew plant and machinery was installed for manufacture and production of bitumen concrete mixture and the installed capacity had been increased by more than 25%. 24.10. Reliance on the following provisions/ decisions by the Revenue is misplaced: 24.11. Ranbaxy Laboratories Ltd.: 336 ITR 136 (Del): As the appellant is not disputing the position that in terms of Explanation 3 to section 147 new issues may also be gone into by the assessing officer. The caveat, however, is that the assessing officer is not permitted to make roving and fishing enquiries and then make addition/ disallowance of any unconnected issue. Further, as held by the High Court, fresh notice would be required to be issued in such cases. 24.12. In case of Balbir Chand Mani v. CIT: 12 taxmann.com 276 (P H) cited by revenue, P H High Court held that in view of Explanation 3 to Section 147 of the Act, it was open for the assessing officer to reassess income in respect of issues other than those referred to in the reasons recorded. This decision is however not applicable to the facts of the appellant s case since in that case, there were no roving or fishing enquiries by the assessing officer, leading to reass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... production of article or thing. Since the road is not an article or thing it will not entitle the assessee for claim of additional depreciation u/s 32(i)(iia). 26.3. In our considered view: (i) at the time of passing original assessment order, AO was bound to follow the law of land as declared by Hon ble Suprme court in the case of N.C. Budhiraja (supra). This itself indicates not forming of a valid opinion by AO in original assessment proceedings. Whether judgment is distinguishable or not will fall in the realm of examining sufficiency of reasons which is not required at the level of recording of reasons. In these facts reopening in this case does not amount to change of opinion. (ii) From the reading of the reasons it clearly emerges from the record that the AO did not act merely on the audit information alone and he applied his independent mind also to come to a satisfaction for escapement of income and recording reasons. From this angle also, the AO s action in referring to audit objection, cannot be found fault with as held by Hon ble Delhi High Court in the case of New Light Trading Co. (supra), cited by ld. DR. (iii) We may also add that notwithstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ases is of no avail to the assessee s case in the given facts and circumstances. We have no hesitation to uphold the order of AO and ld. CIT(Appeals) upholding the validity of reassessment. The assessee s grounds in this behalf are dismissed. 27. Additional Depreciation U/s 32(1)(iia): Coming to merits of the disallowance of additional depreciation on plant machinery, detailed facts have been narrated above. The assessee is engaged only in road construction, as held by Hon ble Supreme Court in the case of N.C. Budhiraja (supra). the laying of road does not constitute manufacture or production of any article or thing, Learned counsel for the assessee has emphatically pleaded that N.C. Budhiraja s is not applicable as: (a) The judgment was rendered in peculiar facts and circumstances; (b) For road construction, the main ingredients of cost of laying road are Bitumen mix and labour charges. The alternate plea is to the effect that the Looking at the whole process Bitumen mix manufactured as an intermediary product constitutes a separate commercial commodity and is marketable independently. Therefore to the extent of Bitumen mix production, the assessee may be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Thus as the assessee cannot be held to be a producer of any article or thing, we are unable to accept the plea that to the extent of manufacturing of intermediate Bitumen mix, it may be treated as eligible for additional depreciation. In view of foregoings, on merits also the assessee s grounds are rejected. 29. A. Challenge to jurisdiction of AO in reassessing the Indian losses: 29.1. Learned counsel for the assessee has relied on Ranbaxy Laboratories case (supra) and claimed that the AO cannot make fishing and roving inquiries during the course of reassessment proceedings about Indian losses. Explanation 3 to Sec. 147 has been reproduced above, which provides that while making the reassessment, AO can proceed in respect of other issues though not mentioned in reasons and come to his knowledge subsequently in the course of reassessment proceedings. The explanation clearly lays down that reassessment of new issues is permissible even though the reasons for new issue are not recorded in the original reasons. With this statutory provision on record, we are unable to accept the assessee s plea that AO initiated roving and fishing inquiries in respect of Indian losses. 29.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also dismissed. 31. C. Merit of rejection of books and Estimate of profits from Indian projects @ 4%: 31.1. Assessee claimed whopping 28.4% losses on Indian Projects at ₹ 5,51,20,396/- on gross receipts of ₹ 19,40,54,608/-. This loss was found to be abnormal compared to assessee s earlier +1.21% and subsequent years +10.34% profits and other business entities of similar nature. Despite repeated requests stock registers, quantity tally and format information were not filed before AO. 31.2. AO called for details of material consumed at ₹ 13,79,68,931/-; stores, spares and consumables are claimed at ₹ 4,07,78,007/-, which is significant costs towards contracts; they were not filed. Consequently value of opening stock of material, purchases, quantitative details of various items rodi, bitumen, sand, stones, dust, diesel, petrol etc on diverse site could not be ascertained by AO 31.3. The details of quantitative consumption of various items in comparison to tenders filed and tenders granted also were not filed on the lame excuse that maintenance of stock records of raw material was not feasible and possible. Maintenance of relevant stock registers is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ances, AO had no choice but to reject the books of account and estimate the income. In these facts and circumstances, we see no infirmity in the order of AO rejecting the books of the assessee and making an estimate of profits. 32. D. Reasonableness of estimate at 4% of gross receipts: 32.1 The average of assesses preceding 1.21% and succeeding years 10.34% of profits comes to 5.77%. AO looking at the profits shown by similar type of road contractors has estimated it at 4%, which is lesser than assesses own average profits for two years. 32.2. If assessee was aggrieved on the estimate of 4% profits by AO, it could have dislodged it before CIT(A), by giving comparison with other road contractors who may have earned lesser profits. In the absence of any such exercise carried out by assessee we are unable to hold that AOs estimates should be interfered. If assessee chooses to be silent on material aspects of ascertainment of computation of correct profits and dislodge the estimate by specific details , the same is at its risk. Consequently AOs estimate cannot be held to be arbitrary, unreasonable or capricious. Thus assessee s grounds about rejection of books and estimation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... coordinate Vishakhapatnam bench. Hon ble Bombay high Court also has taken a similar view in the case of M/s Delta Airlines vide order dated 5-9-2011. Respectfully following these authorities, this ground of the assessee is allowed. Revenue s Appeal: 35. As the facts emerge, plant and machinery and office equipment installed at the Afghanistan site were acquired by the assessee on $ term loans. As a matter of accounting policy the fixed assets of the Afghanistan and Indian sites are consolidated in the balance sheet in rupee terms applying the exchange rate of ₹ 43.39 for conversion of US $ into Indian Rupees at the purchase value. 35.1. At the time of closing of accounts $ loans were revalued at 31-3-04 prevailing exchange rate of ₹ 45.68 per US dollar by method of average cost. This resulted in variation of the cost of Afghan fixed assets and consequent depreciation as on 31-3-04 value. The difference of increased depreciation was to be incorporated in accounts i.e. of ₹ 87,15,926 and ₹ 53,594 on plant and machinery and tippers respectively. This was credited to miscellaneous expenses account and to balance this entry, it was finally transferred to t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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