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2016 (4) TMI 379 - ITAT AHMEDABAD

2016 (4) TMI 379 - ITAT AHMEDABAD - TMI - Addition made on account of initial connection charges Held that:- CIT(A) after having considered the submissions of the assessee, has given a finding that ₹ 4.76 crores was initial connection charges collected on behalf of the BPCL for the equipments and was rightly shown as current liability by the assessee and could not be treated as income of the assessee and with respect to the balance amount of ₹ 52,50,830/- he has given a finding that .....

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gas - Held that:- We find that ld. CIT(A) while deleting the addition has given a finding that assessee purchased gas from GSPC which is transmitted through pipelines and that gas is purchased by it at the “delivery point” or “tap off” point and it is same as the point at which it is sold to the customers and it is a back to back arrangement for purchase by the assessee and sale to its customers and the quantity purchased by assessee is same that is sold by assessee. Before us, Revenue has not p .....

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s. He, therefore, held that assessee was eligible for depreciation. Before us, Revenue has not placed any material on record to controvert the above findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) - Decided against revenue

Non treating the process of compression of natural gas as manufacture - whether the activity of compression of Gas to CNG amounts to manufacture for claiming additional depreciation u/s.32(iia)? - H .....

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rdinate Bench in the case of GSPC (supra) direct that the addition made therein on account of liquidated damages received by the assessee from the suppliers of the equipments be deleted. Since, the addition itself is deleted, the question of granting depreciation on the amount as directed by ld. CIT(A) does not arise. We, therefore, direct the A.O. to delete the addition of liquidated damages and reverse the depreciation (as directed by ld. CIT(A)) if allowed to the assessee.- Decided against re .....

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ar 2007-08 and 17.03.2012 for A.Y. 2008-09. We first proceed with A.Y. 2007-08. 2. The relevant facts as culled out from the materials on record are as under: 3. The Assessee is a joint venture company of Gujarat State Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. and is engaged in the business of supply of gas to industrial, domestic and commercial establishments and to automobile and other industrial sectors through the City Gas Distribution Network Systems. Assessee electro .....

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the order of ld. CIT(A), Revenue is now in appeal before us. The grounds raised by Revenue in ITA No.2956/Ahd/2010 reads as under: (1) The learned CIT(Appeals) has erred in law and on facts in deleting the addition made on account of initial connection charges of ₹ 5,28,72,901/-. (2) The learned CIT(Appeals) has erred in law and on facts in deleting the addition of ₹ 15,97,186/-, made on account of estimating the value of Closing Stock of natural gas.. (3) The learned CIT(Appeals) h .....

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connectivity and had collected initial connection charges of ₹ 5,28,72,901/- from customers towards the cost of such meters and instruments. He also noticed that it was netted off against ₹ 4,76,62,071/- being the cost of meters and instruments which were in the process of being transferred to BPCL and which was shown under the head current liabilities and the balance amount of ₹ 52,58,830/- was netted off from the cost of assets. The assessee was asked to show cause as to why .....

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o the remaining amount of ₹ 52,58,830/-, it was submitted that it was a capital receipt and was netted off against the value of plant and machinery. The submission of the assessee was not found acceptable to the A.O. in view of the fact that the buyers had paid non refundable initial connection charges and according to the A.O., meters and other equipments remained assessee s property, even after its installation. He was therefore of the view that the receipts in the form of initial connec .....

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initial connection charges from customers towards cost of the meters and instruments. Out of this amount ₹ 4,76,62,071/- have been collected on behalf of BPCL for the meters and instruments to be supplied by them and shown as current liabilities by the appellant. Balance amount of ₹ 52,50,830/- has been netted out of off from the value of cost of plant and machineries. A.O. has held this amount of ₹ 5,28,72,901/- as the taxable income holding that these are non-refundable initi .....

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0,830/- assessee has treated it as the capital receipt and has reduced the value of Plant & Machinery by this amount. This is appropriate as the said amount has been received towards the installation of pipeline, meters and equipments i.e. capital assets for supplying gas to the clients. This amount is on account of bringing into place the Plant & Machinery and appellant has already claimed the reduced depreciation to this extent. Such conclusion is duly supported by decision of Hon' .....

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order of ld. CIT(A), Revenue is now in appeal before us. 6.1 Before us, ld. D.R. took us through the observations and finding of A.O. and supported his order. He further submitted that the case laws relied upon by the assessee before ld. CIT(A) are distinguishable on facts. Ld. A.R. on the other hand reiterated the submissions made before the A.O. and ld. CIT(A) and further submitted that of the total amount of ₹ 5,28,72,901/- that was collected from the customers, ₹ 4,76,22,071/- wa .....

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k of assets. He further placed reliance on the decisions cited by assessee before the ld. CIT(A) and, thus, supported the order of ld. CIT(A). 7. We have heard the rival submissions and perused the material on record. The issue in the present case is about the taxability of initial connection charges collected by the assessee. We find that ld. CIT(A) after having considered the submissions of the assessee, has given a finding that ₹ 4.76 crores was initial connection charges collected on b .....

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he aforesaid amount from the aggregate cost of assets. Before us, Revenue has not placed any material on record to controvert the finding of ld. CIT(A), nor has pointed out as to how the decisions relied upon by assessee would not be applicable to the present facts. In view of the aforesaid facts, we find no infirmity with the order of ld. CIT(A). Thus, this ground of Revenue is dismissed. 8. Second ground is with respect to estimating the value of closing stock of natural gas. 8.1 The A.O., on .....

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ssee was not found acceptable to the A.O. A.O. held that the assessee did not furnish the details of closing stock. A.O., thereafter, proceeded to estimate the value of closing stock, being the gas in pipeline at 1% of the total purchases and accordingly made an addition of ₹ 15,97,186/-. 9. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who deleted the addition by holding as under: 5.3 I have considered the assessment order as well as assessee's cont .....

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o various places in Gandhi nagar, Sabarkantha & Mehsana to which appellant caters to. The gas is purchased by it at "Delivery point" or Tap Off" The delivery point and purchase point are the same and it is a back to back arrangement for purchase by the appellant and sale to the customers. From the said delivery point gas is sold to the customers as per pre-determined agreement with the customers as per their requirements in industries/establishments. It has been stated that on .....

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k in the appellant's books. The appellant had followed a particular method in A.Y. 2005-06, which have not been objected to by the Assessing Officer. The present method followed is consistent with that and unless the method adopted for A.Y. 2005- 06 is changed, the value of opening and closing stock for the year cannot be arrived at and the result of the income cannot be found out. Further, what comes out clearly is that the gas in the pipelines does not belong to the assessee and the title .....

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timate buyer, appears to be very low. In the face of this situation, the onus was on the Assessing Officer to disprove the stand taken by the assessee, both with respect to the method followed as also the quantum of the closing stock, which has not been done by him. The estimate made, I am afraid, is purely hypothetical and is not related either to technical or historical facts of the assessee." From the facts of the case and decision on similar issue mentioned above, addition of ₹ 15 .....

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e submission made before the A.O. and ld. CIT(A) and further submitted that assessee is getting the gas purchases at a delivery point or tap off and from the said delivery point or tap off point, the gas is sold to customers and that the delivery points and purchase points are same and therefore there is no question of closing stock. He further submitted that quantity of sale of gas is more than quantity of purchase of gas on account of measurement tolerance and hence, question of closing stock .....

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customers and the quantity purchased by assessee is same that is sold by assessee. Before us, Revenue has not placed any material on record to controvert the above findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus, this ground of Revenue is dismissed. 12. Ground no.3 is with respect to deleting the addition on account of depreciation on meters and instruments. 12.1 The A.O. on perusing the depreciation chart noticed that .....

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essee carried the matter before the ld. CIT(A) who deleted the addition by holding as under: 6.3 I have considered the assessment order as well as assessee's contentions. The AO has disallowed depreciation of Rs,44,95,071/- holding that assessee is not the owner of the meters and instruments etc representing the Plant & Machinery. It is seen from records that appellant is the owner of the meters, instruments, Plant and Machinery and has shown the same in the books of accounts in Sch. 3 o .....

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been disputed by A,O. In view of such detailed explanation and evidences submitted, there is no reason to disallow depreciation. Accordingly, the depreciation of ₹ 44,95,071/- is allowed. 14. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us. 14.1 Before us, ld. D.R. supported the order of A.O. Ld. A.R. on the other hand reiterated the submissions made before the A.O. and ld. CIT(A) and supported the order of ld. CIT(A). 15. We have heard the rival submissions and pe .....

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e above findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus, this ground of Revenue is dismissed. 16. In the result, the appeal of the Revenue is dismissed. We now proceed with the appeals for A.Y. 2008-09. 17. Assessee filed its return of income for A.Y. 2008-09 on 26.09.2008 declaring total income at ₹ 5,03,57,400/-. The case was selected for scrutiny and thereafter assessment was framed u/s.143(3) of the Act vide o .....

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n facts in deleting the addition made on account of initial connection charges of ₹ 9,32,12,585/-. (2) The learned CIT(Appeals) has erred in law and on facts in deleting the addition made by the AO in respect of Closing Stock of ₹ 15,67,717/-. 17.1 As far as appeal of assessee in ITA No.1259/Ahd/2012 is concerned, before us, at the outset on pointing out that the grounds raised by the assessee are argumentative in nature and not inconsonance with Rule 8 of Income Tax (Appellate Tribu .....

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ned CIT(A) to uphold the decision of the learned A.O regarding addition of the liquidated damages ₹ 48,689/- may kindly be deleted. We first proceed with Revenue s appeal in ITA No.1301/Ahd/2012 18. Before us, at the outset, both the parties submitted that grounds raised in the present appeal of Revenue are identical to that of ground no.1 & 2 raised in Revenue s appeal in A.Y. 2007-08 and the submission made by them while arguing the appeal of Revenue for A.Y. 2007-08 are also applica .....

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cess of compression of natural gas as manufacture. 20.1 On perusing the statement of depreciation, A.O. noticed that assessee has claimed additional depreciation at 20% amounting to ₹ 80,87,323/-. A.O. was of the view that the necessary condition for claiming additional depreciation is that assessee should be engaged in manufacturing or production of any article or thing. According to the A.O., the assessee has claimed benefit of additional depreciation on the premises that the process of .....

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nied the claim of additional depreciation of ₹ 80,87,323/-. 21. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who upheld the order of A.O. by observing as under: 5.2 I have carefully gone through the facts of the case, the assessment order, the appellant contentions, the provisions of the act and the decided law on the issue. After thorough consideration the following pertinent observations are made: a) Admittedly there is no change in the composition or .....

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various shades of meaning and ordinarily involves application of some labour, resulting in a final product, which is commercially different from the article to which the labour was applied. An article is said to be commercially different if it has 'distinct character, name and use after the process to which it is subjected'. This is not the case here. There is no commercially different use. Use is the same. Only density has changed for easy transportation and storage. All the process doe .....

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tion of making goods or any material produced by hand by machinery or by other agency. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine." According to the Webster's Dictionary, 'manufacture' means; '(a ) to make or fashion by hand or machinery, (b) to work into useful form, (c) to produce in a mechanical way, (d) to produce goods by hand or by industr .....

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a different product. In the case of CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325 (Bom.), the High Court held that the word 'manufacture' has wider and narrower connotation. The Hon'ble High Court held as under:- "The word 'manufacture' has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word 'manufacturer .....

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ply to the bringing into existence of something which is different from its components. ..." (p. 325) The Hon'ble ITAT, Spl. Bench, Pune in the case of B. G. Chitale [116 TTJ (SB)658] has held that in the process of pasteurization, the milk passes through various stages of "processing'. Defective raw milk is eliminated, odour and smell test is carried out. The raw milk is passed through fine duplex filters again to remove the impurities. At the next stage, predetermined quantit .....

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d then it is cooled using glycol chiller to 1 degree C/2 degree C. In spite of all the process, the name 'milk' continues and it is treated as such in the market, though the natural ratio of components changes; it is used for the same purpose as it would have been used in its original stage itself. Mere value addition is not sufficient to treat it as a separate commodity. Such process has to be treated as an independent process eligible for the claim the assessee had made. [Para 17]. The .....

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sence ; then there is no difference between potable spirit and brandy or whisky. It also held that therefore, no distinct article or thing could be said have been produced by assessee as alcohol remained alcohol throughout processing stage till it was marketed. In the instant case even blending is not there. The Hon'ble jurisdictional ITAT, Ahmedabad A, Bench in the case of Aqua Minerals Pvt Ltd 96 ITD 417 has also adjudicated on similar principles. The gist of the decision is as follows: &q .....

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ms of the name, use and character of the end product, which together lead it to be recognized as such in the commercial circles. [Para 4] The law in the matter, thus, having been brought forth with sufficient clarity, what needs to be seen to decide the issue, was as to whether the end product, i.e. the treated water, which is a purified and demineralised (to the extent required) version of the normal tap water as supplied by the Municipal Corporation, can be said to have acquired the 'newne .....

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not 'processed', which term, as would be evident, has a narrower connotation, and in which category the assessee's case, without doubt, falls. [Para 9.2] Though by the process to which water is subject, it is rendered free of impurities, minerals (present either free or in the form of their salts), and micro organisms and, thus, made more hygienic and suitable for human consumption yet despite this transformation, it remains only drinking water, i.e., what it was at the raw material .....

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ecades. As such, it is difficult to see low a new product has come into existence. It may be that the treated water as produced is a better or superior form of drinking water. But that would not alter the ratio afore stated, for that matter, a range of qualities for each product being sold in the market. But this would not make them, for that reason, to be recognized as separate (generic) products so that the market strives to attract customers by building a brand name/image around it on the str .....

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manufacture to include 'Process' as done by the Central Excise Act, wherein it has been widened to even include processes incidental or ancillary to the completion of manufactured product. In fact the definition of manufacture as per the Central Excise has been further widened by specific goods as per the Schedule. Even certain packaging or repacking have been included. Therefore, the meaning of manufacture which has been specifically made broader for the specific purpose cannot be impor .....

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ocess of compression employed by the appellant does not lead to manufacture. The decision of the AO in denying the claim of additional depreciation is therefore, upheld and the related ground of appeal and it sub-parts are dismissed. 22. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us. 22.1 Before us, ld. A.R. reiterated the submissions made before the A.O. and ld. CIT(A) and further submitted that the issue is now covered in favour of the assessee, in view of the decis .....

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R. on the other hand supported the order of A.O. and ld. CIT(A). 23. We have heard the rival submissions and perused the material on record. The issue in the present case is as to whether the activity of compression of Gas to CNG amounts to manufacture for claiming additional depreciation u/s.32(iia) of the Act. We find that Co-ordinate Bench of Tribunal in case of GSPC Gas Company Ltd.(supra) on identical facts has decided the issue in favour of assessee by holding as under: 16. We have heard t .....

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change of form but basic ingredients remain same. 16.1. The Hon'ble Apex Court in the case of rendered in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd. reported at (2010) 320 ITR 79 has held as under:- "21. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated .....

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e manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of s. 80-IA of the IT Act, 1961. 22. For the afore-stated reasons, civil appeals filed by the Department stand dismissed with no order as to costs." 16.2. Respectfully following the ratio laid down in the case of Income Tax Officer vs. Arihant Tiles & .....

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) 26 Taxmann.com 220 reads as under: HELD-I Activity of filling up cylinder with LPG There is no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. LPG bottling or filling the gas in the cylinder is not a simple activity and cannot be performed under normal conditions. This is a highly technical and complex activity which requires precise functions of technically expert persons or .....

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e cylinder surface. The cylinders are then filled with LPG by automatic filling carousel. After filling the gas, the cylinder is checked for the correctness and to ensure that no cylinder is remained under filled or over filled. The cylinders are then sent for in-line test both for checking the valve bung leak and the body leaks. The defective cylinders are separated and sent for the valuation. All the good cylinders are then sent to hot air sealing unit where the cylinders are sealed with the P .....

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nt Commissioner Central Excise vide his decision order dated 23-10-1998 has held the bottling of LPG cylinder as manufacture; however, in the absence of the status of the finality of the said order one cannot lay much reliance on the same. Bottling Plant of LPG is an essential process for rendering the product marketable and useable for the end consumer. [Para 7.4] Word Production as used in sections 80HH, 80-IA It is to be noted that that the term used in the sections 80HH, 80-I/80-IA is manufa .....

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as a domestic kitchen fuel. As discussed earlier, the process by which the LPG is filled up in the cylinder makes it possible and viable commercial product. [Para 7.6] In view of the above it has to be held that the bottling plant wherein the LPG is filled in the cylinders for domestic and non-domestic kitchen use involves various specialized process and therefore, it is an activity of manufacture/production. Accordingly, the assessee s claim for deduction has to be allowed. [Para 7.7] Before us .....

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ges. 24.1 The A.O., on perusing the computation of income, noticed that amount of ₹ 48,689/- which was received as liquidated damages from suppliers and vendors of machinery, as compensation for delay in delivering machinery, was considered as capital receipt by the assessee. A.O. was of the view that the receipts were of revenue in nature. He accordingly added the same to the income of assessee. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who upheld t .....

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he delay in supplying accessories of machines already installed and running is also included. It is to be seen that the business was already running and it is not the case that new machinery would have resulted in commencement of production thereafter. With due respect it is submitted that the decision of the Hon'ble Gujarat High Court in the case of Saurashtra Cement (Supra) is distinguishable on facts. The compensation received is held to be revenue in nature and the decision of the AO is .....

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has been deleted. He pointed to the relevant paras of the order. He, thus, submitted that the addition be deleted. Ld. D.R., on the other hand, supported the orders of A.O. and ld. CIT(A). 27. We have heard the rival submissions and perused the material on record. The issue in the present case is the treatment to be given to the liquidated damages i.e. whether it is revenue receipt or capital receipt. It is an undisputed fact that liquidated damages were received by the assessee from the supplie .....

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credited the liquidated damage of ₹ 2,25,88,566/- However, in the computation of income, it has reduced this amount. The AO relied on the judgement of the Hon'ble Gujarat High Court rendered in the case of Shree Digvijay Cement Co.Ltd. vs. CIT(1982) 138 ITR 45 (Guj.) and the judgement of Hon'ble Calcutta High Court rendered in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.). The AO has observed that on examination of the ledger account of liquidated damage inc .....

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suffered as a result of delay in supply of machinery. It has nothing to do with the cost of machinery. Though adjusted against the cost of machinery, it was none the less compensation. The actual cost of machinery could not be reduced by ₹ 5,72,216 and depreciation and development rebate had to be allowed on the entire cost of machinery as per the agreement." 23.1. The Hon'ble High Court of Calcutta in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.) has held a .....

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cost of the machinery under s.43(1)." 23.2. However, the Hon'ble Supreme Court in the case of CIT vs. Sauarashtra Cement Ltd. (2010) 233 CTR 209:: (2010) 325 ITR 422(SC) has held as under:- "13. We have considered the matter in the light of the aforenoted broad principle. It is clear from clause No. 6 of the agreement dt. 1st Sept., 1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to whic .....

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t of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof came into play. The afore-stated amount received by the assess .....

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ore the Hon'ble Apex Court were that the assessee engaged in the manufacture of cement, etc. entered into an agreement with M/s.Walchandnagar Industries Limited, Bombay for purchase of additional cement plant from them for a total consideration of ₹ 1,70,00,000/-. As per the terms of contract, the amount of consideration was to be paid by the assessee in four installments. As per the clause in the agreement, in the event of delay caused in delivery of the machinery, the assessee was to .....

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- from the supplier by way of liquidated damages. During the course of assessment proceedings for the relevant assessment year, a question arose whether the said amount received by the assessee as damages was a capital or a revenue receipt. The AO negatived the claim of the assessee that the said amount should be treated as a capital receipt. Accordingly, he included the said amount in the total income of the assessee. Aggrieved, the assessee filed an appeal before the CIT(A), but without any su .....

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i.e. a fixed asset on capital account, which could be said to be connected with the source of income or profit making apparatus rather than a receipt in course of profit earning process and, therefore, it could not be treated as part of receipt relating to a normal business activity of the assessee. The Tribunal also observed that the said receipt had no connection with loss or profit because the very source of income viz., the machinery was yet to be installed. Accordingly, the Tribunal allowe .....

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