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2016 (4) TMI 525 - ITAT MUMBAI

2016 (4) TMI 525 - ITAT MUMBAI - [2016] 47 ITR (Trib) 687 - Disallowance of e mobilization expenses - revenue v/s capital expenditure - Held that:- Four rigs were acquired as an expansion of the existing business of the assessee company to charter hire the rigs which was admittedly set-up in the earlier years and no new business had been set up with acquisition of these four new rigs nor any new source of income has come to existence as there is a unity of management, control and interlacing in .....

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atment in its books of accounts by capitalizing the same in its books of accounts instead of debiting it to the Profit and Loss Account. This is the mandate of the Income Tax Act,1961 which has to be followed as the taxes can only be collected by the authority of law. In our considered view based on our above discussions and reasoning, the addition made by the A.O. and confirmed by the CIT(A) is ordered to be deleted. - Decided in favour of assessee - I.T.A. No. 4587/Mum/2013 - Dated:- 11-4-20 .....

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) arising from the assessment order dated 29-12- 2011 passed by the learned assessing officer(hereinafter called the AO ) u/s 143(3) of the Income Tax Act,1961(Hereinafter called the Act ). 2. The grounds raised by the assessee company in the memo of appeal filed with the Tribunal read as under:- 1. The learned C.I.T.(Appeals) erred in confirming the Assessing officer's order of treating the expenditure of ₹ 1,87,07,719/- incurred on mobilization of Rigs and interest paid on debenture .....

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78,953/-. 3. The brief facts of the case are that the assessee company is mainly engaged in the business of giving Rigs on hire to Government and Private parties. 4. During course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, it was observed by the AO that the assessee company has reduced its profit by ₹ 3,43,28,180/- and the asessee company was asked to explain the same. The assessee company replied that these are expenses which the assessee company incurred on .....

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#8377; 3,43,28,180/- for mobilization of Rigs. As these expenditures being in the nature of revenue expenditure, same were treated as revenue expenses while calculating the taxable income of the assessee company. The assessee company relied on the decision of Hon ble Supreme Court in the case of India Cement Ltd. v. CIT (1966) 60 ITR 52(SC) and CIT v. Lotte India Corporation Ltd. (2007) 290 ITR 248(Mad.) The assessee company submitted that assessee company has wrongly claimed interest amounting .....

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oks of accounts as per the Companies Act and hence the amount which has not been debited to Profit and Loss Account cannot be allowed as deduction while computing income chargeable to tax under the Act . The assessee company has , however, stated that the said expenditure was revenue expenditure under the Act but the assessee company has not been able to explain under which provisions of the Companies Act and the Act this expenditure gets a different treatment and in absence of such explanation, .....

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by the A.O. u/s 143(3) of the Act, the assessee company filed first appeal before the CIT(A). 6. Before the CIT(A) the assessee company submitted that while making the above mentioned additions, the A.O. has not considered that the assessee company has wrongly capitalized the following expenses on the rigs during the year:- Particulars of expenses Rig 8 Rig 9 Rig 10 Rig 11 Total Insurance charges 575250 575250 Demurrage 40710 40710 Bank charges 17950 5795 4811 28556 Travelling expenses 18810 18 .....

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t was further submitted that the expenses incurred on the others are mainly revenue expenses and allowable as revenue expenditure. It was further submitted that interest paid on convertible debenture which were raised by the company for the purpose of business in financial year 2007-08 is fully allowable expenditure for the assessment year 2009-10 as business expenditure. It was further submitted by the assessee company that the A.O. has not considered the fact that during the year under conside .....

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the AO has not taken into account that the assessee company had declared an additional sum of ₹ 1,25,00,000/- as income for the assessment year 2009-10 and accordingly had filed a revised return declaring the said amount as income, against which the Revenue should have allowed benefit of above mentioned amount of ₹ 1,25,00,000/-. The assessee company also submitted copies of invoices with respect to rig number 9 and 11 raised to the concerns with whom the transaction had been made t .....

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n the other hand has stated that even though the said amounts stood capitalized in its books of accounts, the expenses being revenue in nature would needed to be taken into consideration as such while computing the total taxable income. The CIT(A) noted that the assessee company had offered a sum of ₹ 1,25,00,000/- as additional income in the assessment year 2009-10 during the course of survey proceedings held on the assessee company on 11/2/2010 and accordingly the assessee company had re .....

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ugh the same was capitalized in the books of accounts of the assessee company as the accounting treatment is not conclusive . Further the purposes of Companies Act,1956 and Income Tax Act, 1961 are altogether different. Section 37 of the Act prohibits grant of deduction of expenditure which is of capital nature. But ,the assessee company had not commissioned rigs in the previous year relevant for the assessment years involved . The assessee company contended that the two of its rigs have been co .....

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mitted by the assessee company before the AO to establish the allotment of total expenditure capitalized to various rigs. The statement of the assessee company before the A.O. was that the interest amount of ₹ 52,25,592/- is to be capitalized as it relates to the period before the rigs were put in use. However, in the classification done by the assessee company to claim revenue expenses , the CIT(A) observed that the interest expenditure has been allocated to rig number 9 and 11 wherein th .....

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in the current year. To establish this the assessee company has submitted copies of invoices dt.17.5.2008 & 23.6.2008. However a study of the said invoices shows that the invoices do not mention the Rig used. As per the assessee company's own statement dated 11.2.2010 filed before the A.O. , it had other rigs operational in the year. Therefore, the CIT(A) held that unless the invoices are linked to the rig it cannot be held that the amount received was from the usage of rig which was pe .....

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bilisation as it is clear that it relates to the business benefits for the future. The assessee company had itself treated the expenses as capitalized expenses incurred towards the project undertaken as capital work-in-progress and the expenses are incurred for getting the rig ready for use and incurred prior to commencement and was rightly capitalized by the assessee company. The CIT(A) observed that no documentary proof of the mobilization and use of the rigs in the instant year was submitted .....

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equently claimed by the assessee company as revenue expenditure which is not allowable. Accordingly, the CIT(A) confirmed the order of the AO and held that there is no infirmity in the order of the AO treating the entire expenditure incurred for mobilization of rigs amounting to ₹ 3,43,28,180/- as capital in nature and adding the same to the income of the assessee company and allowing depreciation thereof , vide orders dated 04-03-2013. The CIT(A) rejected the alternate plea of the assesse .....

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n of expenses and not disallowance of expenses. The AO has allowed the capitalization of expenses against which benefit will be available to the assessee company spread over different years by grant of depreciation. The CIT(A) held that the additional income offered for taxation by the assessee company during survey is in the nature of income and it cannot be adjusted against the expenditure capitalized. Thus, the CIT(A) held that there is no infirmity in the order of the AO in computing the tot .....

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usiness of giving Rigs on chartered hiring to Government and Private parties like ONGC etc who places order on the assessee company. The assessee company has claimed the expenses with respect to the mobilization of rigs to the extent of ₹ 3,43,28,180/- which was not debited to the profit and loss account but was treated as capital expenditure in the books of accounts prepared under the Companies Act , while the same were revenue expenditure as per the Act. The ld counsel submitted that the .....

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been incurred. The assessee company also incurred expenses for insurance etc. The Revenue has not allowed the same because the same was capitalized in the books of account and has not been debited to the P&L account. The ld counsel submitted that the assessee company s business of importing rigs and giving the same on hire is a continuous business and transportation and other charges incurred for bringing the rigs to site is not a capital expenditure. The ld counsel submitted that the assess .....

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ndia Limited (2012) 352 ITR 376 (Delhi HC), and (vi) CIT v. Relaxo Footwears Limited 293 ITR 0231 (Del. HC). The assessee company also took an alternative plea that an amount of ₹ 1,25,00,000/- which was offered as an additional income as per declaration during survey proceedings on 11-02- 2010 u/s 133A of the Act, the benefit / credit should be allowed for the same. The assessee company submitted that the assessee company is in the business of hiring machines for drilling purposes which i .....

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owance of ₹ 52,25,592/- towards the interest with respect to the Rig no 9 and 11 which were not put to use , which was rightly disallowed by the AO and confirmed by the CIT(A). The ld Dr further submitted that no credit should be allowed to the assessee company with respect to ₹ 1,25,00,000/- which was declared and offered as additional income during the survey proceedings u/ss 133A on 11-02-2010. 10. Ld AR submitted in the rejoinder that the although assessee company has submitted b .....

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nterest is an allowable expenditure. 11. We have considered the rival contentions and also perused the material available on record including case laws. We have observed that the assessee company is in the business of giving rigs for drilling oil on charter hiring basis to Government and Private parties such as ONGC etc., since preceding year s which is an admitted position by the revenue also. Thus, it is un-disputed and admitted fact that the said business of the assessee company of giving rig .....

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ation charges from its clients during the assessment year with respect to these additional new rigs and the said mobilization charges received by the assessee company were offered for taxation by the assessee company in the return of income filed with the Revenue. It has been stated by the assessee company that rig no. 8 and 10 were working since preceding assessment year 2008-09 . Thus, it is stated that mobilization expenses incurred with respect to rig no 8 and 10 are clearly revenue in natur .....

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re. The assessee company has contended that rig number 8 and 10 were working since assessment year 2008-09 , while with respect to rig no 9 and 11 the first mobilization advance was received of ₹ 6,13,20,000/- with respect to rig number 9 on 23-06-2008 and ₹ 3,07,00,820/- was received for 1st mobilization of rig number 11 on 17-05-2008 i.e. both these first mobilization advances were received from GSPC during the impugned assessment, and these mobilization advances received were offe .....

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3,43,81,804/- with respect to rig no 8 , 9 , 10 and 11 , which were capitalized in the books of accounts of the assessee company although the assessee company claimed the same to be revenue expenditure while filing return of income with the Revenue. The assessee company in its business imports rigs and further transfer these rigs for use at client s site for which mobilization charges are incurred till mobilization is complete and rigs getting commissioned and operational at client s site . The .....

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g basis for drilling of oil by the clients. These rigs which are imported are taken to the site of the client and installed and commissioned there-at and made operational for oil drilling by the client and the assessee company is paid charter hiring charges by the client who have charter hired these rigs for drilling of oil . The assessee company incurs mobilization charges in the interregnum period till the mobilization is completed and the rigs are commissioned and made operational. The rig nu .....

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sion newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting up of the business or profession or, as the case may be, the date on which the source of income newly comes into existence and ending with the said financial year.] Charge of income-tax. 4. (1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or .....

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income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provision of this Act. Section 4 of the Act is a charging section which stipulates that the income shall be charged to tax in respect of the assessment year on prescribed rates in accordance with and subject to provisions of the Act in respect of the total income of the previous year of every person. While previous year is defined to be financial year immediately preceding assessment ye .....

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. CIT (1954) 26 ITR 151(Bom.) whereby the Hon ble Bombay High Court has drawn a distinction between the setting up of business and the commencement of business as under: Now, turning to our statute, the deductions claimed are under Section 10(2) and they are in relation to a business and in order that those deductions can be allowed, the business must be carried on by the assessee. In this case it is not disputed that the business was carried on in the relevant previous year which is the financi .....

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mmences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to the setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced. We must therefore look at the decision of the Tribunal as really referring to the setting up of the business in the language of Section 2(11) and not expen .....

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pression must mean something different, however slight the difference, from any other expression. English language is full of nuances and if possible we must give a different meaning to the expression "setting up" from the expression "commenced". Mr. Joshi very strongly relied on a judgment of Mr. Justice Rowlatt reported in Birmingham and District Cattle By-products Co. Ltd. v. Commissioners of Inland Revenue [1919] 12 Tax Cas 92. In that case the assessee company was incorp .....

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e purposes of excess profits tax a question arose as to the computation of average amount of capital employed by the company during the accounting period and the company contended that it commenced business on the date of its incorporation, viz., on the 20th of June, 1913, and that the pre-war standard should be based on the profits shown by revised accounts for the period 20th June, 1913, to 30th June, 1914, and Mr. Justice Rowlatt held, upholding the view of the Commissioners, that the busines .....

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achinery being ready, that it could be said that the assessee company had commenced business, and this is what the learned Judge says at page 97 : "Referring to their minutes having looked round, and having got their machinery and plant, and having also employed their foremen, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products." Therefore if this case were to be applied to the present assessee, .....

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Rowlatt was considering, viz., "commencing of the business." It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish," and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ready to commence business it is not se .....

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in a position to crush ground-nuts and produce oil. But prior to this there was a period when the business could be said to have been set up and the company was ready to commence business, and in the view of the Tribunal one of the main factors was the purchase of raw materials from which an inference could be drawn that the company had set up its business; but that is not the only factor that the Tribunal taken into consideration. The Tribunal has as pointed out in the statement of the case, s .....

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total absence of any evidence. As we have often said we are not concerned with the sufficiency of evidence on a reference. It is only if there is no evidence which would justify the decision of the Tribunal that a question of law would arise which would invoke our advisory jurisdiction which after all is a very limited jurisdiction. We will, therefore redraft the question submitted by the Tribunal as follows: "whether there was evidence before the Tribunal to hold that the assessee company .....

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a position to charter hire these newly acquired rigs and these rigs are available and ready to be put to use from the time these rigs are acquired by the assessee company in its continuing and existing business of chartered hiring of rigs , the said existing business of chartered hiring is admittedly already set-up in the earlier years. With the import of these new rigs it cannot be said that the new business is set up or new source of income has come into existence rather it is the same old bu .....

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additional rigs are acquired by the assessee company and installed at clients site for oil drilling where it is commissioned with completion of mobilization and made operational by commencing the work of drilling oil for the client. Thus, the mobilization expenditure are incurred in connection with newly acquired rigs prior to the completion of mobilization of rigs , commissioning of rigs and rigs becoming operational at client s site. The said mobilization expenditure so disallowed by the autho .....

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said rigs are acquired by the assessee company and that the same business of charter hiring of rigs is continuing and no new source of business having been come into existence, as the business or the source of income being charter hiring of the rigs is already set-up by the assessee company admittedly in the preceding year s and is in existence which is a continuous and existing business of the assessee company to import these rigs and to give them on hire to companies for oil drilling purposes .....

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vailable for being given on charter hiring from the time the rigs are acquired by the assessee company and are merely to be moved to and installed at the site of the clients such as ONGC, GSPC etc desirous of taking the same on hire for oil drilling, so that all the mobilization expenses which is in connection with these new rigs till these new rigs mobilization is completed and these rigs are installed at clients site and start commencing drilling of oil for the client is a revenue expenditure .....

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of these four new rigs nor any new source of income has come to existence as there is a unity of management, control and interlacing in the business of the assessee company , we , therefore, in view of our detailed discussions and reasoning as above hold that the mobilization expenses incurred by the assessee company of ₹ 3,43,28,180/- is to be allowed as revenue expenditure. The interest paid by the assessee company on the borrowings for acquisition of the rigs is toward the business of t .....

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e of India Cements Ltd. (supra) and Hon ble Madras High Court in the case of Lotte India Corporation Limited(supra) supports the case of the assessee company. The benefit of interest as revenue expenditure which was paid on the borrowings raised by the assessee company in connection with the acquisition of these new rigs cannot be denied to the assessee company as the same was incurred for acquiring the new rigs for giving on hire and these rigs are ready to be put to use from the time these rig .....

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the said new rigs were being put to use by way of commissioning at client site and becoming operational will also have to be allowed as revenue expenditure, as we have already held that the borrowings made by the assessee company for acquiring rigs is for the purposes of business and is an allowable expenditure, as the rigs after acquisition was available for hire and ready to be put to use so far as business of the assessee company of charter hiring of these rigs is concerned, provisions of Se .....

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ous belief the tax-payer has submitted before the authorities that the same is not allowable as revenue expenditure. Article 265 of the Constitution of India reads that No tax shall be levied or collected except by the authority of law. In terms of the Article 265 of the Constitution, tax can be levied only if it is authorized by law. The Hon ble Bombay High Court in Balmukund Acharya vs DCIT, CIT and UOI 310 ITR 310 held that Tax can be collected only as provided under the Act. If any assessee, .....

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uiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. Circular No. 14(XL-35) of 1955, dated 11.4.1955, issued by the Central Board of Direct Taxes reads as under: Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of their duties to assist a tax payer in every reasonable way, particularly in the matter of claiming and securing reliefs and in this regard the o .....

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any refunds or reliefs to which they appear to be clearly entitled but which they have omitted to claim for some reason or other; (b) freely advise them when approached by them as to their rights and liabilities and as to the procedure to be adopted for claiming refunds and reliefs . A reading of the circular shows that a duty is cast upon the assessing officer to assist and aid the assessee in the matter of taxation. They are obliged to advise the assessee and guide them and not to take advanta .....

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ses as per provisions of the Act . The judgment of Hon ble Supreme Court in the case of Kedarnath Jute Mfg. Co. Limited v. CIT (1971) 82 ITR 363(SC) and Hon ble Delhi High Court in the case of CIT v. Triveni Engineering & Industries Limited in (2009) 19 DTR 274(Del. HC) support the contentions of the assessee company in this regards .The taxes are to be collected by the authority of law which is mandate of Article 265 of the Constitution of India.Article 265 of the Constitution of India read .....

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f any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.The Hon ble Bombay High Court in Nirmala L. Mehta v. A. Balasubramaniam, C.I.T. (2004) 269 ITR 1 held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by author .....

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s regard the officers should take the initiative in guiding a tax payer where proceedings or other particulars before them indicate that some refund or relief is due to him. This attitude would, in the long run, benefit the department, for it would inspire confidence in him that he may be sure of getting a square deal from the department. Although, therefore, the responsibility for claiming refunds and reliefs rests with the assesses on whom it is imposed by law, officers should - (a) draw their .....

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