TMI Blog2017 (12) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... roved all the three ingredients of section 68. The Ld.AO, except for finding fault with the evidence filed by the assessee and disbelieving the same has not been able to add any evidence or information to come to the conclusion that the assessee has not received share application money from the subscriber. The CIT(A), after considering all the evidences filed by the assessee, has rightly deleted addition made by the AO - Decided against revenue Disallowance of depreciation - assets put to use for less than 180 days as evident as per the note ‘credits for excise duty availed on capital goods purchased - Held that:- On perusal of details filed by the assessee, we find that the assessee has rightly classified assets purchased and put to use for more than 180 days and assets purchased and put to use for less than 180 days. This is further supported by bills. The AO, without appreciating facts, only on the basis of input credits for excise duty claimed in the month of March has come to the conclusion that all assets are purchased and put to use for less than 180 days.. The assessee has filed depreciation chart as per which it has capitalised plant & machinery and other asses of ͅ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eet. The AO without appreciating the facts made addition to PLA balance on suspicion and surmise without bringing any material on record to show that this represents unutilised Modvat credit which has not been considered for valuation of closing stock. The CIT(A), after considering submissions of the assessee has rightly deleted addition made by the AO. Addition towards excise duty credits in the P&L Account within the meaning of section 145(3) - AO, on the basis of notes to accounts came to the conclusion that excise duty collected is in the nature of receipt accrued to the assessee, but the assessee has failed to recognise it as income - Held that:- We do not find any merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to the excise department which is evident from the fact that the assessee has routed its excise duty collected on sales and payment of excise duty through balance-sheet. The assessee, for the purpose of disclosure of accounts in accordance with provisions of section 145(1) shown sales net of excise duty in the P&L Account. The AO misconstrued the facts to make addition towards excise duty collect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards repairs and maintenance to plant & machinery. - I.T.A No.8806/Mum/2011 And I.T.A No.549/Mum/2012 - - - Dated:- 8-12-2017 - Shri Joginder Singh(JUDICIAL MEMBER And Shri G Manjunatha (ACCOUNTANT MEMBER For The Assessee : Shri B.V. Jhaveri For The Revenue : Shri Praveen Kumar ORDER Per G Manjunatha, AM : These cross appeals filed by the assessee as well as revenue are directed against the order of the CIT(A)-20, Mumbai dated 30-11-2011 and it pertains to AY 2008-09. Since facts are identical and issues are common, these appeals were heard together and are disposed of by this common order, for the sake of convenience. 2. The brief facts of the case are that the assessee company filed its return of income for the assessment year 2008-09 on 26-09-2008 declaring total loss of ₹ 3,15,83,056. The case was selected for scrutiny and notices u/s 143(2) and 142(1) were served on the assessee alongwith a questionnaire. In response to the notices, the authorized representative of the assessee appeared from time to time and furnished details, as called for. The assessment was completed u/s 143(3) on 27-12-2010 determining total income at ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umstances of the case and law, the CIT(A) erred in deleting the addition made on account of disallowance of lnterest amounting of ₹ 8341,111 /- within 'the' meaning of Explanation 3D to the section 4313(e) of the Act: 5. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of disallowance of repairs Maintenance being Capital expenditure of ₹ 15,86,633/- without providing an opportunity in accordance to the Income tax rule 46A. 6. On the facts and in the circumstances of the case and law, the CIT(A) erred in deleting the addition made on account of excise duty towards cost of stock amounting of ₹ 42 30,010 /- within the meaning of section 145A of the Act. . 7. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of excise credits in the balance sheet amounting of ₹ 12,91,55,8191- within the meaning of section 145(3) of the Act. 8. On the facts and in the circumstances of the case and law, the Ld CIT(A) erred in deleting the addition made on account of disallowance of j expenses amounting of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditworthiness of the party and genuineness of transaction. Although the assessee has submitted address of shareholder, copy of share application form and other details, the same by itself is not enough to prove the genuineness of transaction of old creditworthiness of allottee. The AO further observed that the assessee has failed to justify charging a huge premium of ₹ 190 per share without establishing determination of the value of share. The AO further observed that though the assessee has filed various details to justify valuation of share, such valuation is stated to be obtained as per the request of the management and also the basis of valuation as stated to be on the basis of management projection of finance for the period from FY 2007-08 to 2011-12. These finances are only projections and estimates and without reference to any past records and audited financial statements of the assessee company. The value has not conducted any due diligence or no independent verification of the facts and the figures provided in the data given by the management. Though the assessee has followed discounted cash flow method for valuation of shares which is based on the project financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urther submitted that the assessee has received share application money of ₹ 8,51,26,250 on three occasions, i.e. on 18-04- 2006; 27-12-2006; and 31-03-2007 which is evident from the fact that the said money has been credited into HDFC Bank Ltd, Lower Parel Branch in US$. The assessee has filed various details including application filed before RBI for approval of allotment of equity shares to non-resident alongwith foreign inward remittance certificate. Therefore, there is no reason for the AO to doubt the genuineness of transactions. The Ld.AR further submitted that various details have been filed before the AO to justify charging premium. Assuming for a moment that the assessee has not justified charging premium, it is irrelevant for the purpose of making addition u/s 68, as the section speaks about identity, genuineness of transaction and creditworthiness of the parties. The assessee has discharged all three ingredients of section 68 and hence, the CIT(A) has rightly deleted addition made by the AO and his order should be upheld. The Ld.AR referring to the decision of Delhi High Court in the case of CIT vs Usha Stud Agricultural Farm 301 ITR 385 (Del) and the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee fails to prove identity, genuineness of transactions and creditworthiness of the parties. If credits are not pertaining to the relevant period or if the credits are carried forward from previous financial year, then no addition can be made u/s 68 of the Act, in respect of credits appearing in the books of account. This legal proposition is supported by the decision of Hon ble Delhi High Court in the case of CIT vs Usha Stud Agricultural Farm Ltd (supra), wherein it was held that the AO was incorrect in making addition towards credit balances in the accounts of the assessee brought forward from earlier years u/s 68 of the Act. In this case, the assessee has received share application money in the financial year relevant to AY 2007-08 and converted such share application money into share capital by allotting equity shares during the relevant financial year 2007-08. Therefore, we are of the view that the AO was incorrect in making addition towards share application money received in the earlier financial year for the year, under consideration, u/s 68 of the Act. 10. Having said so, let us examine whether, on the facts and in the circumstances, the AO was right in treat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in respect of share application money was accepted. During current assessment proceedings also, the assessee has filed various details to prove identity of the subscriber, genuineness of the transaction and the creditworthiness of the subscriber. The assessee also filed all necessary evidence right from Foreign Inward Remittance certificate to application filed with Forex department of RBI to justify allotment of equity shares and receipt of share application money from M/s Great Value Company Ltd of Mauritius. Once the initial burden cast upon the assessee to prove the identity, genuineness of transactions and creditworthiness of the parties is established, then it is for the AO to prove otherwise with necessary evidences. In this case, the AO, without bringing any cogent material on record, simply made addition by doubting the transaction only on the basis of higher share premium charged by the assessee to conclude that transaction is not genuine. Therefore, we are of the considered view that there is no reason of whatsoever to make addition towards share application money received from M/s Great Value Company Ltd of Mauritius in the financial year 2006-07 relevant to AY 2007 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perusal of details filed by the assessee, we find that the assessee has rightly classified assets purchased and put to use for more than 180 days and assets purchased and put to use for less than 180 days. This is further supported by bills. The AO, without appreciating facts, only on the basis of input credits for excise duty claimed in the month of March has come to the conclusion that all assets are purchased and put to use for less than 180 days.. The assessee has filed depreciation chart as per which it has capitalised plant machinery and other asses of ₹ 13,12,87,037 before 30th September, 2007. There is no evidence to the contrary in the AOs possession that plant machinery was put to use after 30th September, 2007 except input credit availed in March, 2008 which is not relevant as per section 32 is concerned. The CIT(A), after considering relevant details has rightly deleted addition made by the AO and hence, we are inclined to uphold the findings of CIT(A) and reject ground raised by the revenue. 13. The next issue that came up for our consideration is disallowance of interest amounting to ₹ 1,80,13,928 u/s 36(1)(iii) and 37(1) of the Act. The AO disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is borrowed for the purpose of working capital or for acquisition of capital assets. Whether the assessee has taken term loan for acquisition of capital asset or working capital is irrelevant as long as such interest is paid after commencement of production. In this case, admittedly, the production activity of the assessee has been commenced in the previous year relevant to AY 2007-08. This fact has not been disputed by the revenue. Therefore, we are of the view that there is no reason for the AO to disallow interest paid on term loan by holding that it is in the nature of capital expenditure. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error in the order of the CIT(A), hence, reject ground raised by the revenue. 16. The next issue that came up for our consideration is disallowance of interest paid on cash credit accounting to ₹ 83,41,171 u/s 43B(e) of the Act. The AO disallowed interest on the ground that from the copy of bank statement filed in support of proof of payment of interest it was seen that the bank has debited interest to the CC account on regular intervals and thereby increased the debit bala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count u/s 43B(e) of the Act. The CIT(A), after considering relevant submissions has rightly deleted addition made by the AO. We do not see any error in the order of the CIT(A); hence, we are inclined to uphold the order of the CIT(A) and reject ground raised by the revenue. 20. The next issue that came up for our consideration is addition made by the AO towards excise duty (PLA) of ₹ 42,30,010 shown as loans and advances. The AO made addition towards excise duty being personal ledger account balance shown in the loans and advances on the ground that the assessee has failed to include excise duty for valuation of closing stock. The AO further observed that the assessee has paid excise duty on the raw materials and that part of raw-material which has not utilised is appearing on the closing stock. Such closing stock of raw material has to be adjusted with the unutilised Modvat credit. However, the assessee has failed to make any adjustment towards unutilised Modvat credit while valuing closing stock, therefore, made addition of ₹ 42,30,010. The CIT(A) deleted addition made by the AO by holding that the AO s conclusions are without any basis that excise duty has not b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The AO disallowed excise duty collected on the ground that as per the amended provisions of section 145A, all taxes and duties collected are required to be included in sales and shall be routed through P L Account. The assessee has not shown excise duty collected of ₹ 12,91,55,890 though such treatment is necessarily to be given as per the provisions of section 145(1) of the Act. The AO, further observed that the assessee, by way of disclosure in the notes to accounts, have already recognised excise duty collected as its income and only for the purpose of tax payment it sought to differ. It is clearly not acceptable in mercantile system of accounting. Therefore, the AO made addition by invoking provisions of section 145(3) of the Act. 23. The Ld.CIT(A) deleted addition made by the AO by holding that this amount relates to goods sold, further strengthens the case that it does not relate to closing stock. An item sold can by no stretch of imagination be part of the closing stock inventory. The entire excise duty collected from the customers has been paid to excise department and there is no adverse comment in tax audit report regarding 43B. It is a fact that assessee has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... net of excise duty in its financial statements. The assessee has followed a method wherein the excise duty collected and paid has been routed through balance-sheet; however, shown excise duty collected as a separate item in P L Account. The AO misconstrued the facts to make addition only on the basis of notes to accounts given in the financial statements wherein the assessee has stated that the company being qualified as an exemption unit made an application under the Central Excise Notification No.39/2001 and on receipt of the exemption certificate, the company will be eligible for refund of excise duty paid and the same will be accounted for as and When received. The AO, on the basis of notes to accounts came to the conclusion that excise duty collected is in the nature of receipt accrued to the assessee, but the assessee has failed to recognise it as income. We do not find any merit in the findings of the AO for the reason that the assessee has collected excise duty on sales and paid the same to the excise department which is evident from the fact that the assessee has routed its excise duty collected on sales and payment of excise duty through balance-sheet. The assessee, f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record, we find that the CIT(A) has recorded a categorical finding to the effect that the impugned payment of ₹ 33,00,944 is covered by the certificate furnished by the assessee u/s 197 of the Act, for non deduction of tax at source u/s 194C. The AO, without appreciating the facts, simply disallowed transportation charges u/s 40(a)(ia) even though the assessee has furnished valid certificate issued u/s 197 of the Act. We do not find any error in the findings of the CIT(A); hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 29. The next issue that came up for our consideration is addition made by the AO on account of reduction in production of pig iron amounting to ₹ 21,65,77,838 by rejecting books of account u/s 145 of the Act. The AO has dealt with the issue of addition on account of reduction in production assessee at paras 10 to 10.3 on pages 12 to 15 of the assessment order. The AO compared the consumption of raw materials with the production of finished goods for AY 2007-08 and found that the production has been reduced by 7.75% which in quantity worked out to 11,788 metric tonnes which was valued at ₹ 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... books of account u/s 145(3) and estimated production loss at 11,738 M.T. and worked out total value at ₹ 21,65,77,838 and treated it as unaccounted sales for the year. 30. It is the contention of the assessee that the AO was erred in estimating production loss on the basis of production percentage of previous financial year without appreciating the fact that production cannot be at equal level at all times and it depends upon various parameters including quality of raw materials used for production of pig iron. The assessee further submitted that it has purchased coal which is having a FV content of 63% when compared to average FV content of 66% in 2006-07 which is the main reason for reduction in production of pig iron. The assessee further submitted that during the year under consideration it is generated 22,675 m.t. of fines and sold for a value of ₹ 8.73 crores which is included in sales in the P L Account. The assessee further submitted that due to moisture and ash content in LAM coke, there is a reduction of 5,742 m.t. which is included in consumption of raw materials. If you take into account sale of fines and moisture and ash content, then net consumption o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by product of raw material. The iron ore fines of 22675.970 MT so generated were sold through M/s.Canara Overseas Ltd a company an exporters of such fines. The transportation of fines was arranged by M/s.Canara Overseas Ltd on which the appellant had no control. About 84% exports were made to China and the consideration has been credited to the Profit Loss Account. The documentary evidence including sale bills, export docum.ants, auditor's certificate are placed on record and no discrepancy or adverse comments has been noticed. As such, the appellant's stand that said difference of 7.57% is on account of inclusion of iron fines is acceptable. The revised yield is worked out as below:- Particulars 2007-08 2006-07 Raw materials Quantity (MT) Quantity (MT) IRON ORE 92389.437 56678.440 COKE 44126.989 28027.588 DOLOMITE 4630.073 3529.000 QUARTZITE 1157.467 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3.70% by the appellant and mentioned by the Assessing Officer as a credit in calculation of yield by the appellant is very reasonable. 32. The AO has made addition towards estimated production loss on the basis of comparison of production of finished goods percentage of financial years 2006-07 to 2007-08 and found 7.75% reduction in production of pig iron. The AO has rejected explanations offered by the assessee to justify reduction in production loss which is attributable to quality of raw material being LAM coke used for production of pig iron which is having lesser content of FV when compared to previous year coke used for production of pig iron. The assessee also explained that it has generated 22675 m.t. of iron ore fines as a by-product while handling coke in stock yards and production process which has been sold for a value of ₹ 8.73 crores. The assessee also explained that due to less moisture and ash contents, there is a reduction in quantity of 5742 m.t. in consumption of raw materials, and if both sale of fines quantity of 22675 m.t. and moisture and ash content of 5742 m.t. are considered, then the production percentage of pig iron works out to 42.39% whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reconciliation explaining the shortfall. Therefore, we are of the view that the AO was incorrect in making addition towards estimated production loss. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not find any error or infirmity in the order of the CIT(A) and hence, we are inclined to uphold the order of the CIT(A) and dismiss the ground raised by the revenue. 35. The next issue that came up for our consideration from assessee s appeal as well as revenue s appeal is disallowance of repairs and maintenance to plant and machinery being capital in nature. The AO has disallowed repairs and maintenance to plant and machinery for ₹ 2,24,08,100 on the ground that expenditure is in the nature of capital expenditure which gives enduring benefit to the assessee. The AO further observed that the assessee has repaired blast furnace which was installed in the previous financial year with a capital cost of ₹ 5,38,32,142. The function of the same is directly related to yield of production and its failure which compelled the assessee to re-align the same with durable yield efficient and energy efficient with fire bricks. The repair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the assessee has carried out necessary repairs. The AO never disputed the fact that the assessee has not created any new asset. The AO made disallowance only on the ground that total cost incurred for repair and maintenance worked out to 40% of existing machine. The AR further submitted that cost incurred for repairs and maintenance is not a relevant factor for deciding whether it is capital or revenue in nature but what is relevant is whether the assessee has restored already existing plant and machinery or created new plant machinery which gives enduring benefit. The assessee has repaired the existing plant and machinery, therefore, the AO was incorrect in disallowing expenditure as capital in nature. In support of his arguments relied upon plethora of judgements including the decision of Hon ble Bombay High Court in the case of New Sharrock Spinning Mfg Co Ltd vs CIT 30 ITR 338 (Bom). The assessee also relied upon the decision of Hon ble Supreme Court in the case of Ballimal Naval Kishore Anr vs CIT 224 ITR 414. 37. On the other hand, the Ld.DR submitted that the Ld.CIT(A) was right in upholding addition made by the AO towards disallowance of repairs and maintenan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inferior quality of blast furnace which was installed for the first time in 2005 and hence, it has repaired inferior quality blast furnace to achieve better yield and energy efficient which cannot be construed as creation of new asset which gave enduring benefit to the assessee. The assessee further contended that the AO was completely went wrong with his reasoning to disallow expenditure by holding that total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset without appreciating the fact that cost incurred for repairs and maintenance is not relevant factor to decide whether a particular expenditure is capital or revenue in nature. What is required to be seen is whether the assessee has repaired existing plant and machinery or created new plant machinery which gives enduring benefit to the assessee. 39. The AO has disallowed repairs to plant machinery only on the ground that expenditure incurred for repairs and maintenance works out to more than 40% of total cost of the asset. Other than this, the AO has not given any reason to come to the conclusion that expenditure incurred is in the nature of capital expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case laws. The Hon ble Bombay High Court in the case of New Shorrock Spinning Manufacturing Co. Ltd. v. CIT (30 ITR 338) wherein their Lordships observed as under: In our opinion, therefore, the expression current repairs used in section 10(2)(v) means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration, which is only for the purpose of preserving or maintaining an already existing asset, which does not bring a new asset into existence or does not give to the assessee a new or different advantage, and they must be repairs which are attended to as and when the need for them arises. We should also like to make it clear that the question as to when a building, machinery, plant or furniture requires repairs and when the need arises must be decided by not any academic or theoretical test but must be decided by the test of commercial expediency. It is after all for a businessman primarily to decide when his building, machinery, plant or furniture requires repairs. It is by that test alone that the question must be decided as to whether the repairs are current repairs or repairs which have fallen into arrears or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)). Normally initial investment on machines and their parts will be in the nature of capital expenditure but replacement of parts of an existing machinery in the course of their working will he a revenue expenditure. 42. In the case of CIT v. Malerkotla Steels And Alloys P. Ltd. (336 ITR 49 the Punjab Haryana High Court held that the assessee had effected repairs to the damaged furnace in the course of the regular business and no new assets were acquired. The effect of the repairs carried out by the assessee has been only to restore the machinery to its original condition. Therefore, it was current repairs. 43. In the case of Metro Ispat Pvt Ltd vs CIT in ITA No.4069/Mum/2008 dated 17th December, 2009, the ITAT, Mumbai Bench held that the expenditure incurred on replacement of chilled rolls / fire bricks / forged rolls cannot be treated as capital expenditure though it may not fall within the description of Current repairs but it is allowable as deduction u/s 37 of the Act. 44. In this view o ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
