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International Seaports (Haldia) Pvt. Ltd. Versus Income Tax Officer, Ward-12 (3) , Kolkata

2016 (2) TMI 745 - ITAT KOLKATA

Receipt from trial run of berth hire charges - whether treated as business income - Held that:- In the instant case the income generated during trial run is very much connected with the business of the assessee hence the question of recognizing the income does not arise as the commercial operation has not began. In view of above we reverse the order of the ld. CIT(A) - Decided in favour of assessee

Addition on the basis of TDS certificate - Work in progress - Held that:- AO has found .....

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in support of his claim. Now the question before us is to check whether the income of the assessee has been offered to tax or not. So for this purpose we are restoring the file to the AO with the direction to check whether the income of the assessee has been disclosed in the subsequent year or not. If yes then delete the addition made by the assessee. - Decided in favour of assessee for statistical purposes. - ITA No.1194/Kol /2010 - Dated:- 20-1-2016 - Shri Mahavir Singh, Judicial Member and Sh .....

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dated 29.12.2006 for assessment year 2004-05 and the assessee raised the following grounds:- 1. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata acted unlawfully and with material irregularity in upholding the additions in the sums of ₹ 3,00,18,070/- made on account of the alleged income from cargo handling charges, ₹ 16,84,582/- made on account of the alleged income from berth hire charges and ₹ 2,22,23,527/- made on account of the allege discrepancy in TDS .....

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Tax Officer, Ward 12(3), Kolkata of construing the receipts from trial run in the sum of ₹ 3,17,02,632/- as income of the appellant and the alleged findings in this regard without considering the issues in a proper perspective are altogether arbitrary, unwarranted and perverse. 3. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata in upholding the impugned finding of the Ld. Income Tax Officer, Ward 12(3), Kolkata of interpreting the receipts from trial runs to the tune o .....

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on of the Ld. Income Tax Officer, Ward 12(3), Kolkata of incorporating the work-in-progress of ₹ 2,22,23,527/- as income earned in the assessment year under dispute without arriving at any adverse inference on the method of accounting followed by the appellant and his alleged action on that behalf is altogether unlawful, illegal, unjust, biased and capricious. 5. FOR THAT the Ld. Commissioner of Income Tax (Appeals) XXXVI, Kolkata gravely erred in upholding the impugned finding of the d. I .....

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e charges as business income. 3. The facts of the case are that the assessee is a Private Ltd. Company which is engaged in the business of port development and inter alia has income from the activity of cargo handling and berth hire charge. The assessee was awarded a contract to build a berth no. 4A at Haldia Dock Complex. As per the contract the assessee was to conduct the trial run of the port before the start of commercial operation. The assessee began the trial run on the date 7-12-2003 and .....

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nly after the completion of the project. Hence the income earned during the trial cannot be reduced from the preoperative expenses. Accordingly, the AO sought clarification from the assessee on adjusting the trial run income against the preoperative expenses and raised question that why trial run income should not be treated as business income. 5. The assessee submitted that prior to the start of commercial operation, only few vessels were handled to have the trial run of the system and treated .....

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it clearly held by Lordship that Interest earned on short-term investment of funds borrowed for setting up of factory during construction of factory before commencement of business has to be assessed as income from other sources and it cannot be held to be non-taxable or ground that it would go to reduce interest on borrowed amount which would be capitalized. . Hence the pre-operative i.e. trial run income for ₹ 3,17,02,632.00 was added to the total income of the assessee. 7. Aggrieved, as .....

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nce it was a commercial activity resulting in earning of income, I am of the view it cannot be termed as pre-operative income. I am therefore of the view that the AO has righty treated it as taxable income. Accordingly the ground No.2 is dismissed. Being aggrieved by this order of Ld. CIT(A) assessee preferred second appeal before us. Shri Samnath Ghosh, Ld. Authorized Representative appearing on behalf of assessee and Shri Debasish Banerjee, Ld. Departmental Representative appearing on behalf o .....

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eated the trial run of vessels as preoperative handling of the plant and income generated from such preoperative handling has been treated as preoperative income . In the books of account of the assessee for the previous year relevant to the assessment year under dispute, such preoperative income has been set off against the preoperative expenses of ₹ 3,17,02,632/-, which consisted of berth hire charges in the sum of ₹ 16,84,562/- and ₹ 3,00,18,070/- being cargo handling charge .....

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e berth. It is an admitted fact that even during a period of test runs and experimentation, a plant may be engaged in actual production, but until the test runs are completed and the plant is properly adjusted on the basis thereof, it cannot be said to be ready for commercial production . The expression Commercial Production refers to production in commercially feasible quantities and in a commercially practicable manner. Further, it is a correct and accepted procedure to capitalize all expenses .....

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erefore the expenditure incurred during trial run contributes to construction of the facilities at Berth No. 4A of Haldia Dock Complex as trial run activity is regarded as an activity which is necessary to prepare the asset for its intended use. This is because flaws in the facilities at Berth noticed during trial run operation are rectified to bring the Berth to its intended use. Therefore, the expenditure incurred during trial run towards building / constructing the Berth should also be capita .....

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hat the deposit of money was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposits was incidental to the acquisition of assessee for setting up the plant and machinery. Thus, the interest was a capital receipt which would go to reduce the cost of the asset and Ld AR relied on the decision of Hon ble Supreme Court in the case of CIT v. Karnal Co-operative Sugar Mills Ltd. (2000) 243 ITR 2 (SC) and C.I.T. Vs. Bokaro Steel Limited. (1999) 236 ITR 315 (S .....

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beginning of commercial operation. The ld. AR drew our attention on pages 17,18,19,20,21 of the Paper Book where the requirement for the trial run was requested before the beginning of actual operation. The purpose of the trial run was to check whether there is any flaw in the system or not so that remedial action can be taken well in time in the event of any flaw in the system. So it is clear that the purpose of the trial run was to check the flaw in the system and not to begin the commercial .....

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expenses. Having said this we are inclined to reverse the order of the ld. CIT(A) and direct the lower authorities to adjust the trial run income from preoperative expenses of the assessee. We are relying on the judgment of the Delhi High Court in the case of Commissioner of Income Tax Vs. Nestor Pharmaceuticals Limited 322 ITR 631 where it was held that : The assessee was in the business of manufacture of pharmaceutical formulation in bulk drugs and supplying drugs to the Government hospitals, .....

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03. The assessee on the other hand claimed the benefit from the assessment years 1999-2000 to 2003-04. The plea of the assessee was that trial production did not amount to manufacture of its products. It was only when commercial production commenced, which, according to the assessee, commenced only in the assessment year 1999-2000 that production commenced. The Commissioner (Appeals) confirmed the order of the Assessing Officer but the Tribunal reversed that order holding that section 80-IA/80-I .....

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80-IA, was the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things . The trial production began on March 20, 1998, as per the details given in the audit report furnished by the assessee along with its returns of income for the assessment years 2003-04 and 2004-05. There was no dispute that the first sale was made on April 23,1998, which would be the period relevant to the assessment year 1999-2000. Merely because s .....

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only in the year 1999-2000. The order of the Tribunal allowing the benefit of deduction under section 80- IA/80IB of the Act from the assessment year 1999-2000 treating it as the initial year of production to the assessment year 2003-04 was correct in law. The Tribunal held that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and airconditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The .....

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ed and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when the assessee failed to show that the dealer returned those goods on the ground that there was any defect in the water cooler or air-conditioner produced and sold by the assessee to the dealer. The Tribunal, in the circumstances, was right that the two types of con .....

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cture or produce articles in section 15C(2)(ii) must be interpreted regard being had to the object for which the section was enacted. The provision was enacted with a view to encouraging the establishment of new industrial undertakings and the object was sought to be achieved by granting exemption from tax on profits derived from such undertakings during the first five years. The object of the section presupposes that profits are capable of being earned. Hence, until an assessee reaches a stage .....

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ses of section 15C. The assessee-company undertook a project for the manufacture of penicillin. It started actual operations for the manufacture of crude penicillin in December 1954. The first samples of crude penicillin were required to be sent to U.S.A. and U.K. for obtaining certificates as to their qualities. The certificates were obtained in June, 1955, and the assessee started regular production of sterile penicillin, the only product that could be sold in the market, in August, 1955. On t .....

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also further observe that the facts of the case law cited by the AO i.e. Tutikorin Alkali Chemicals & Fertilizers Ltd. (supra) for treating the receipts of trial run as business receipt are different from the facts of the instant case. The Apex Court in the said case has treated the interest income on the surplus fund as income from other sources because there was no nexus between the activity of the assessee and interest income. The assessee has invested idle fund for short period of time .....

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he appeal of the assessee. 11. The second issue raised by the assessee is as regards that ld. CIT(A) erred in confirming the order of the AO by treating the work in progress of ₹ 2,22,23,527/- on account of TDS certificate. 12. During the year the assessee has disclosed income from operations and work-in-progress for an amount of ₹ 7,34,25,493/-. However, as per the TDS certificate the assessee s earned income ₹ 12,13,61,939/- as detailed under: Sl No. Name of 1 Interest other .....

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operations as per P & L A/c ₹ 6,73,04,559.00 2) Add : Income during trial run ₹ 3,17,02,632.00 3) Add : Bank interest (pre-operative income) ₹ 1,31,221.00 Total ₹ 9,91,38,412.00 4) Income as per TDS certificate ₹ 12,13,61,939.00 Difference ( short income) ₹ 2,22,23,527.00 The reason for the difference was explained that the M/s SAIL has deducted TDS on the work in progress account also and the assessee has not shown such work-in-progress as Revenue accoun .....

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nfirmed the action of AO by observing as under:- I have carefully considered the above. Apparently, the entire amount of ₹ 12,13,61,939/- were received by the appellant towards cargo handling operations and other receipts. Further, M/s Steel Authority of India Ltd. has treated the above payment to the appellant towards charges for operations. Further, no evidence was filed before me to indicate that the above sum of ₹ 22,22,23,527/- represents work-inprogress but not receipts towards .....

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se from a future imagination. It was apprised that Steel Authority of India, the contractor had deducted tax on the total payment made to the appellant which was shown by the appellant as Work-in-progress. It was also apprised to the Ld. Assessing Officer that the same was duly disclosed in the subsequent assessment year 2005-2006. However, the Ld. Assessing officer did not enquire about the veracity of the explanation furnished by the appellant. It was his view that, such sum was not offered as .....

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