TMI Blog2012 (9) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... ture for its acquisition will have to be capitalized. In the instant case, the equipment got damaged while in transit, the Insurance Company after duly assessing the damage compensated a portion of the cost of the equipment. Moreover, the assessee had treated the receipt of the insurance claim as a capital receipt in its accounts. Thus, the remaining portion of the cost of the equipment, as rightly observed by the AO and subsequently sustained by the CIT (A), cannot be allowed as a revenue loss. Therefore, we are of the considered view that the AO was fully justified in rejecting the assessee s claim of deduction being the loss on account of damage to an asset. We find that there has been no finding recorded by the first appellate authority. With regard to the assessee s other alternative claim of loss on account of damage of computer equipments constitutes short term capital loss u/s 45(1A) of the Act, we would like to point out that the assessee had not raised this contention before the lower authorities. However, since the claim is purely a legal issue, in the interest of justice, we are of the view that the matter needs to be considered by the CIT(A). Thus, both the al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture. Therefore, this part of the ground is not maintainable and, hence, the same is dismissed. However, with regard to charging of interest u/s 234D of the Act, we are of the considered view that the AO was justified in charging of interest u/s 234D of the Act which is in conformity with the findings of the Hon'ble ITAT, Delhi Special Bench in the case of ITO, W 11(1), New Delhi v. M/s. Ekta Promoters Pvt. Ltd reported in (2008)-305 ITR (AT) 1 (DEL) (SB). 1.1 The remaining grounds raised are in an illustrative and narrative manner. They are, therefore, reformulated in a concise manner as under: I. Ground Nos. 1 to 8: - that the CIT (A) has erred in disallowing the claim of Rs. 1,09,62,508/- representing loss on damage of shipment; - that the CIT (A) has erred in holding that the loss on damaged shipment was capital in nature; - that the CIT (A) also erred in not allowing the alternate claim of allowing depreciation u/s 32 of the Act in respect of loss on damage of shipment. II. Ground No. 9: - that the CIT (A) has erred in not appreciating that the assessee operated on a cost plus model and consequently, in case the loss on damaged shipment was held to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... othing but capital expenditure. Hence, any loss or expenditure incurred in this connection would be capital in nature. (b) The appellant's claim that the expenditure was 'undoubtedly' incurred wholly and exclusively for business purposes is somewhat of a specious argument. At one level, all expenditure incurred in the course of business is incurred for business purposes. However, that does not make all expenditure deductible from the point of view of computation of income under the Income Tax Act. Decision in this regard has to be taken in accordance with what the law of the land lays down. Merely reiterating ad nauseam that the loss was incurred in the ordinary course of business and was, therefore, incidental to it does not make it so nor does it automatically qualify the loss as allowable as revenue expenditure. Moreover, the jurisdictional High Court in the case of DP Chirania Co., (supra) has categorically held that capital expenditure which is wholly and exclusively laid out or expended for the purposes of business was not available for the reason that sec. 37 very clearly excluded capital expenditure from its purview which has been affirmed by the Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s would be available only if the employees had worked for not less than 300 days in each of the years. If in the first year, deduction was not admissible for the reason that the workmen had not worked for a period of 300 days, the deduction would be admissible for the next two (not three) AYs if during those years the workmen had worked for at least 300 days each. The AO pointed out that just because they had worked for more than 300 days in the second year of their employment, the second year of their employment cannot be considered as the first year for the purpose of allowing deduction under this section. The AO further opined that in no case, however, deduction was admissible in r/o new workmen who have not worked for at least 300 days during the year. 6.3. In view of the facts of the case and the position of law as discussed in the preceding paragraphs, the AO gave a categorical finding that the wages paid to employees who had worked for less than 300 days in this year cannot be considered for the purposes of deduction u/s 80JJAA. Accordingly, the AO concluded that in AY 2005-06, deduction would be available only in r/o the wages paid to the following employees: (i) the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant's eligibility for the said deduction from the stand point of whether the appellant's employees qualified as 'workmen' within the meaning of sec. 80JJAA or not, the allow-ability of deduction u/s 80JJAA was never examined from the point of view of tenure of work by the said employees within the meaning of the definition of the term 'regular workmen' contained in Explanation (ii)(c) whereby those who were employed for a period of less than 300 days during the previous year were excluded from this definition. While respectfully following the decision of the jurisdictional ITAT on the issue relating to the appellant's eligibility for deduction u/s 80JJAA, the matter is set aside with a specific direction to the AO to restrict the deduction to the extent it has been claimed for employees who have worked for less than 300 days in the previous year in contravention of Explanation (ii)(c) to Sec. 80JJAA after giving due opportunity to the appellant of being heard. 5. Aggrieved, the assessee has come up with the present appeal. During the course of hearing before us, the learned AR came up with an elaborate and comprehensive submission coupled with var ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different from 'expenditure'. Loss is something which comes 'ab extra'. There would be no outflow of money. However, there would be a deprivation of an economic benefit or resource when loss is suffered. Relies on in the case of Dr. T.A. Quereshi v. CIT (2006) 287 ITR 547 (SC); - that in the present case, the loss on damage of shipment of goods were incidental and ancillary to business carried on by the assessee; and that the fact that such loss was on account of import of computers were irrelevant. Thus, loss on damage of shipment of goods is allowable in computing the business income and that it cannot be disallowed u/s 37, as no expenditure is occasioned by the loss. Alternative claims: - that income chargeable under the head 'profits and gains of business or profession' shall be computed in accordance with the system of accounting regularly employed by an assessee. This is the mandate of s. 145(1). S. 145(1) shall, however, be subjected to the provisions of sub-sec. (2) of s. 145; and that as per sub-sec.(2), the Central Government may notify in the Official Gazette the accounting standards to be followed by any class of assessees or in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted. The assets existed in the said block were being used by the assessee and, therefore, the requirement of 'use' of assets as per s. 32 was met/satisfied. Thus, the assessee, it was contended, eligible for depreciation u/s 32 in respect of the amount of loss on damage on account of shipment of goods; - that without prejudice, loss on shipment of goods is to be considered and allowed as 'short term capital loss', that the loss due to damage of computers would be computed under the head 'capital gains' and the loss so ascertained would be eligible for set off and carry forward in accordance with the mandate of Ch. VI. S. 45(1A) of the Act prescribes how loss is to be computed when the asset is destroyed as a result of natural causes; 5.1.2 The learned AR in his subsequent submission had, more or less, reiterated what was contended in the earlier hearing. In conclusion, the learned AR had placed reliance on the following case laws for the proposition that the loss incurred is to be allowed as business loss : CIT v. Industry and Commerce Enterprises (P) Ltd (1979) 118 ITR 606 (Ori); Addl. CIT v. BMS P Ltd (1979) 119 ITR 321 (Mad); CIT v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e phrase regular workman would have to be understood as not temporary, not seasonal, not irregular, and not casual. The first two limbs of the definition exclude impermanent employees. The same principle should attach even the third limb of the definition. This would be on the principle of 'ejusdem generis'. The reference to 300 days should therefore have to be understood as excluding persons who have been given temporary jobs. 11) The reference to 300 days of employment in section 80JJAA is to exclude seasonal industries from claiming a deduction; to exclude industries, where the nature of activity is such that they are forced to frequently recruit and lay-off people. In the erstwhile law on depreciation for example, seasonal industries work referred to as those in operation for 240 days. 300 days probably is a 'built-up' of 25% over and above such a figure, in an attempt to prevent the seasonal industry from claiming a deduction under section 80JJAA. 12) Section 80JJAA was introduced to facilitate generation of new employment opportunities. An incentive was therefore offered to assessees giving employment to a specified minimum number of employees. The int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business income, such as beneficial ownership, possession, ready to use or passive user and business user. Relies on the case laws: (i) 323 ITR 018 (Kar); (ii) 323 ITR 672 (MP); (iii) 328 ITR 297 (Del) that the common line is that the assets have become part of the block by virtue of their possession and availability for use, or actual user in the past and they existed with the assessee at the end of the previous year; in order to be part of block of assets, the asset must exist and not sold, destroyed or demolished or otherwise disposed off. In the present case, the assets were destroyed in transit before reaching the premises of the assessee for use in business. By no stretch, the asset could be said to be form part of any block, entitled to depreciation. Merely because the assessee had a block of asset consisting of similar plant and machinery and had incurred capital outgo, they very fact that such capital outlay did not result in bringing the assets in existence and business user, would mean that such expenditure would not lead to any addition in the opening WDV of the block and, hence, no depreciation. As Sec. 2(11) clearly mentions that the ' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er interpretation that would defeat the very purpose has to be rejected; and that the compliance to the conditions has to be strict and complete and not a formality; that it could be seen from the auditor's report in Form 10DA, the number of workmen as on the first day of the previous year was 846 and the assessee claims to have further employed 351 new regular workmen and out of the total of 1197 workmen, 149 workmen ceased to be employed with the assessee during the year. The workmen who left the employment included 42 workmen newly employed and another 4 newly employed who worked for more than 300 days, leaving 1048 workmen as on the last date (Col. 7). As mentioned in Col 11(c) of Form 10DA, number of regular workmen employed as on the last date of the previous year including newly employed workmen were employed for less than 300 days. However, no details have been furnished. Even in the Notes to report in Form 10DA, the auditor had not mentioned such number of employees, but, merely, mentioned that though such newly employed workmen worked for less than 300 days, they have been considered for deduction; that the legal position - Form 10DA, CBDT's Circular No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee. On being queried, it was ascertained that during the year under consideration, the assessee had placed an order with its supplier in USA for supply of certain computer equipments. According to the assessee, the computer equipments got damaged while in transit and the same was sent back for which insurance claim was made. It was the case of the assessee that loss incurred in respect of damaged equipment aggregating to Rs. 1.09 crores, (purchase cost minus insurance amount received) was debited to its P L account and claimed as a deduction. 7.1.2 Rejecting the assessee's contentions and citing various case laws, the AO had observed in the assessment order that the nature of expenditure is always decided by the aim or objective with which it was incurred irrespective of its nomenclature or the accounting treatment given to it. In the instant case, the appellant's objective was acquisition of a capital asset which is nothing but capital expenditure. Hence, any loss or expenditure incurred in this connection would be capital in nature. 7.1.3 The alternative claim of the assessee that in the event the loss was held to be capital in nature, it should be added to the bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and returned to the supplier. The Insurance Company had compensated the assessee a part of the cost of the asset so damaged. As rightly pointed out by the AO, the difference between the cost of the equipment and the amount so reimbursed by the Insurance Company was a capital loss having been incurred in relation to acquisition of a capital asset. The nature of expenditure has to be decided by the objective with which it is incurred and not by the nomenclature or the accounting treatment given to the expenditure. The main objective of the assessee was to acquire the machinery and naturally the entire expenditure for its acquisition will have to be capitalized. In the instant case, the equipment got damaged while in transit, the Insurance Company after duly assessing the damage compensated a portion of the cost of the equipment. Moreover, the assessee had treated the receipt of the insurance claim as a capital receipt in its accounts. Thus, the remaining portion of the cost of the equipment, as rightly observed by the AO and subsequently sustained by the CIT (A), cannot be allowed as a revenue loss. 7.1.7 At this juncture, it is more appropriate to recall the ruling of the Hon& ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has been reinforced by the verdict of the Hon'ble Supreme Court in the case of Hasimara Industries Ltd v. CIT Anr reported in (1998) 230 ITR 927 (SC). It was ruled by the Hon'ble Apex Court that The assessee being engaged in tea business, amount deposited by the assessee with the licensor company for the purpose of securing licence under which the assessee could work licensors' Cotton Mills was for the purpose of acquiring a profit making asset and loss of such deposit following liquidation of licensor-company could not be deducted as business loss . 7.1.9 Taking into account all the facts as deliberated upon in the fore-going paragraphs and also in conformity with the rulings of the Hon'ble jurisdictional High Court and the Hon'ble Apex Court cited supra, we are of the considered view that the AO was fully justified in rejecting the assessee's claim of deduction of Rs. 1.09 crores being the loss on account of damage to an asset. 7.2 Before parting with, we would like to reiterate that we have duly perused the case laws relied on by the assessee and of the firm view that they have no relevance to the facts of the issue under consideration. 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived MAP Resolution for assessment year 2005-06 between the Indian competent authority and the US competent authority under Article 27 of the Indo US Double Taxation Avoidance Convention and as a result of which, the Arms Length margin was determined at 17.5% on operating cost. Accordingly, the grounds raised before the CIT(A) with regard to the transfer pricing adjustment (ground nos. 2 to 19) was dismissed. 8.1 The ground no. 28 raised by the assessee before the first appellate authority was also rejected. Ground no. 28 raised before the CIT(A) reads as follows:- The learned Assessing Officer has erred in law and in facts in not appreciating that the appellant operated on a cost plus model and consequently, in case the loss on damaged shipment is held to be capital in nature, the corresponding revenue derived by the appellant in respect of such loss should also be held to be capital in nature. 8.2 The finding rendered by the CIT(A) in respect of the above ground reads as follows :- Finally, in ground 28, the appellant raised the issue that since it was operating on a cost plus model, in case the loss on damaged shipment was held to be capital in nature, the correspo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees of the assessee all of whom drew salaries of more than Rs. 1600/month cannot be classified as workmen. It was, further, clarified by the AO that the assessee's claim for such deduction from the AY 2001-02 onwards has been rejected by the Department on the ground that the employees in respect of whom deduction claimed were not 'workmen' within the meaning assigned to the word in the Industrial Disputes Act. 9.2 However, the Hon'ble earlier Bench of the Tribunal had decided the issue in favour of the assessee for the AYs 2001-02 2002-03 in the assessee' own case. Since the finding of the said Bench for the said AYs has been challenged before the Hon'ble High Court by the Revenue, the AO rejected the assessee's claim u/s 80JJAA of the Act for the AY under consideration. 9.3 After taking into account the findings of the earlier Bench of the Tribunal, the CIT (A)-LTU took a stand that though the Tribunal had upheld the assessee's eligibility for the said deduction from the stand point of whether the assessee's employees qualified as 'workmen' within the meaning of s 80JJAA or not the allow-ability of deduction u/s 80JJAA was n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f of the Revenue's appeal for the assessment year under consideration [AY 2005-06] (ITA No. 1385/Bang/2010 dt. 29.9.2011) on the same issue, the Hon'ble earlier Bench has observed thus: 2.2.................................................................................... At the time of hearing, Learned Counsel for the assessee filed before us the copies of the orders of the Tribunal in the assessee's own case for the earlier assessment years. We find that the issue has been considered by the CIT (A) and, accordingly, has issued suitable direction to the AO. Merely because an appeal has been filed in the High Court the order of the Tribunal does not lost its precedential value. The CIT (A) has rightly followed the same. In view of the same, we do not find any reason to interfere with the orders of the CIT (A). 3. In the result, the revenue's appeal is dismissed. 9.6 On query from the Bench as to why this appeal (assessee's appeal) was not clubbed with the Revenue's appeal, both the learned AR and the learned DR submitted that they were not aware of the pendency of assessee's appeal when the department's appeal was disposed off on 29.9.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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