TMI Blog2009 (8) TMI 1238X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire expenditure on repairs and maintenance is of revenue nature and therefore it is fully allowable. It is submitted that it be so held now. 3. The learned Commissioner of Income-tax (Appeals) erred in not entertaining the additional ground of appeal filed by your appellant in respect of the claim of depreciation on the plant and machinery and other assets used for the Trial run production in Ammonia Plant-IV. Your appellant submits that in the facts and circumstances of its case, the learned CIT(A) ought to have entertained the additional ground of appeal filed by your appellant and allowed the claim of depreciation as it has fulfilled the conditions laid down u/s. 32 of the Income-Tax Act, 1961. Your appellant submits that additional ground of appeal be admitted and depreciation as claimed be allowed now. 4. The learned Commissioner of Income-tax (Appeals) erred in not entertaining the additional grounds of appeal filed by your appellant in respect of claim of deduction for the subsidy received ₹ 23.37 crores and ₹ 5.29 crores credited to profit and loss A/c. but eventually was repayable and repaid to Government in respective years Asst. year 2001-02 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,62,500/- made by the Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals) is required to be deleted. It is submitted that it be so done now. Your appellant prays for leave to add, alter and/or amend all or any of the grounds before the final hearing of appeal. ITA No. 3358/Ahd/2003[ Revenue ] 1. On the facts and in the circumstances of the case and in law, the learned CIT(A)-I, Baroda, has erred in deleting ₹ 10.99,25,676/- being pre-commencement-stage income as not an assessable income under the head income from other sources. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of ₹ 13.96 Crores being excise duty component attributable to finished goods while computing valuation of closing stock. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) ought to have upheld the order passed by the Assessing Officer. 4. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored. 2 Adverting first to ground no.1 in the appeal of the Revenue and ground no. 3 in the appeal of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduction of Ammonia from project cost and therefore, Ammonia produced had already been accounted for in the books of accounts. While explaining that the cost of inputs of ₹ 2911.01 lacs was already treated as other income of the company and credited to the profit loss account and the Ammonia of ₹ 4000.36 lacs produced in the Ammonia-IV Plant was reduced from the project cost in accordance with guidelines issued by the Institute of Chartered Accountants of India, the assessee contended that the fertilizers produced were shown as sales and credited to profit loss account. Therefore, there was no justification in including the difference of about ₹ 11 crores again as income. Alternatively, it was contended that if the amount is taxed as income, the expenses directly related to producing such income should be allowed and not only the captive consumed items. Simultaneously, an additional ground of appeal was also filed, urging that depreciation on the entire amount should be allowed in view of the decision of the Hon ble Gujarat High Court in the case of ACIT vs. Ashima Syntex Ltd. [2001] 251 ITR 133 (Guj). The assessee pleaded that the allowance be also made of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst the income generated and not only the captive products consumed. Such direct expenditure would total 8666.29 lacs. Over and above this depreciation on plant and machinery, if considered would be 21084.39 lacs. 2.7 During discussions with the appellant s representative and the departmental officers present the appellant stated that it is willing to accept taxability of ₹ 4000.36 crores provided its other claims as also claim of depreciation is allowed. Even otherwise the claim of depreciation has to be separately entertained and has been raised as a separate ground of appeal. The departmental officers could not controvert the claim of the appellant for other direct expenses and relied on the basic assessment order. 2.8 On going through the submissions on both sides and looking into the facts of the case, I find that there is no controversy regarding the fact that the plant is still under trial production. It is neither the case of the department, nor the case of the assessee that commercial production has been undertaken. Therefore, the claims have to be considered holding the Ammonia Plant to be at the precommencement stage. The Assessing Officer has apparently g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... karo Steel Ltd. where the netting principle has been followed. In view of the above discussion while the addition made in the assessment order is deleted, the assessee s claim for computation of loss arising out of the addition is negatived. Hence, the additional ground of appeal on this point is rejected. 2.10 The second point taken by the appellant is the applicability of the Gujarat High Court s decision in the case of Ashima Syntex Ltd. In this case the Court held that even trial run of machinery entitles the assessee to depreciation. Therefore, the appellant claims far the plant has clearly been under production for trial run throughout the year and the plant and machinery has been used for the purpose of business and therefore, depreciation totaling ₹ 21084.39 lacs should be allowed. The departmental officers have vehemently protested against this claim stating that deprecation is allowable only when the business has commenced and as the business has not yet commenced no claim of depreciation is allowable. They have pointed out from the decision of the Gujarat High Court itself that there would be a difference between cases where a long time is taken to install the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses wherein after commencement of the production, the machine may not give proper results-may be on account of failure of certain parts, may be on account of requirement of certain additional machinery, etc. In such a case, the production obtained at the initial stage would be considered as trial production. As can be seen from the above, the present case is different to that of Ashima Syntex where the machines installed worked immediately and strictly there was no trial run as such. In the case of M/s. GSFC the trial run has continued for over two years and therefore, the appellant cannot claim the benefit of depreciation during this period. The reliance on the decision of the Ashima Syntex is misplaced and the claim of the assessee is therefore, dismissed. In the sum total as regards this first ground of appeal, the addition made by the ITO is deleted. However, the two claims of expenditure and depreciation made by the appellant in the additional grounds of appeal stand dismissed. 5. The assessee is now in appeal against the rejection of their claim for depreciation in terms of ground no. 3 of the appeal while the Revenue is in appeal against the aforesaid findings of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the production of the plant, would lead to a distorted picture of the accounts of M/s. GSFC. In these circumstances, especially when Revenue have not placed before us any material contrary to the aforesaid findings of the ld. CIT(A) in so far as addition of ₹ 10,99,25 ,676 is concerned nor pointed out any contrary decision, we have no hesitation in upholding the findings of the ld. CIT(A) while relying upon the decision of the Hon ble Apex Court in Bokaro Steel Ltd.. Therefore, ground no.1 in the appeal of the Revenue is dismissed. 7. As regards issue of depreciation raised in ground no.3 in the appeal of the assessee, the ld. CIT(A) while distinguishing the decision of Hon ble jurisdictional High Court in the case of Ashima Syntex Ltd. (supra) held that the present case is different from that of Ashima Syntex Ltd.where the machines installed worked immediately and strictly there was no trial run as such. In the case of M/s. GSFC the trial run has continued for over two years and therefore, the assessee cannot claim the benefit of depreciation during this period, the ld. CIT(A) concluded. Apparently, the ld. CIT(A) upheld the disallowance of claim of depreciation, holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the section any words of limitation so as to affect the interest of the assessee. It is with a view to the business of the assessee that the assessee used the machinery for the purposes of its business in causing those to go into trial production. If that is not using the machinery for the purposes of the business, then how else the above activity of the assessee can be described in that regard. 7.3 In view of the foregoing, we have no hesitation in setting aside the findings of the ld. CIT(A) in the matter of depreciation on plant and machinery under trial runs and accordingly, direct the AO to allow the claim of the assessee in accordance with the provisions of section 32 of the Act. Thus, ground no. 3 in the appeal of the assessee is allowed. 8. Adverting now to ground No.2 in the appeal of the Revenue relating to addition of ₹ 1396 lacs, being excise duty for the purpose of valuing the finished goods, the AO noticed on perusal of schedule-7 of the annual report that the assessee did not consider excise duty while valuing finished goods lying in the factory premises. The auditors in note -3 below schedule-7 mentioned that valuation of finished products lying at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inted out that the ld. CIT(A), ignoring the provisions of sec. 145A of the Act, relied upon a decision of the Hon ble Madras High Court in the case of English Electric Company(supra), which was relevant for the AY 1984-85 i.e for the period prior to insertion of sec. 145A of the Act . After the insertion of provisions of sec. 145A of the Act, the assessee has to adjust the valuation of purchase, sale and inventory in accordance with the statutory provisions. On the other hand, the learned AR on behalf of the assessee submitted that the issue is squarely covered by the decision of the Hon ble Supreme Court in CIT Vs. Indo Nippon Chemicals Company Ltd.,261 ITR 275. 11. We have heard both the parties and gone through the facts of the case. We find that neither the AO nor the ld. CIT(A) examined the applicability of provisions of sec. 145A of the Act in the facts and circumstances of the case for the purpose of considering excise duty in valuing the finished goods lying in the factory. The AO relied upon an old circular no. 1389 of March ,1981 while the ld. CIT(A) relied upon the decision of the Hon ble Madras High Court in the case of English Electric Company(supra) rendered in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ogress, raw materials, etc.) should be added to the inventories, if not already added while valuing the inventory in the accounts. 11.1 The language in s. 145A of the Act is absolutely clear, when it stipulates that purchase, sales and inventory are to be adjusted and not only the closing stock. The assessee is, therefore, required to adjust the value of purchase, sales, opening stock and closing stock in accordance with the provisions of s. 145A of the Act . A mere glance at the impugned orders reveal that the ld. CIT(A) without examining the applicability of statutory provisions of sec. 145A of the Act, merely relied upon a decision of the Hon ble Madras High Court in English Electric Company(supra) and adjudicated the issue . The AO also added the amount without ascertaining the impact of provisions of sec. 145A of the Act. As for the adjustments u/s.145A of the Act, Hon ble Delhi High Court in the case of CIT Vs. Mahavir Aluminium Ltd. 297 ITR 77, held that while valuing closing stock, adjustment on account of excise duty and modvat credit has necessarily to be made as stipulated in section 145A of the Act. In view of the said provisions, irrespective of the method followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expressed his inability to explain the exact details of the expenditure incurred on the ground that there were huge number of vouchers and receipts, which were very difficult to trace out. On examination of ledger account of repair and maintenance, the AO noticed that a number of items of expenses claimed as repair and maintenance expenses, were actually incurred either for construction of assets such as building, compound wall, toilet etc. or were incurred for expansion or renovation of the existing assets or the same had been incurred for extension, renewal or restoration of existing assets. Since the assessee did not furnish any bill or voucher while the copy of ledger account did not mention sufficient details about the nature of expenditure, on further examination of the details submitted by the assessee, as detailed on page 13 to 16 of the assessment order, the AO concluded that expenditure was mainly incurred for construction of new asset like compound wall, bath rooms, toilets and for replacement of major parts of machinery. The AO was of the opinion that the most of the expenditure did not fall within the meaning of current repairs u/s 31 of the Act and instead such expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion programmes etc. which are booked to capital accounts. Each of the components of the budget are given code numbers and financial concurrence numbers to facilitate the subsequent monitoring and recording of actual expenditure under the head revenue or capital . 4.4 The company also has a full fledged internal audit department, over and above managerial audit. The repairs and maintenance are booked through purchase journals and the concerned section obtains concurrence of debit to either capital or revenue head. Any errors in booking are caught and corrected. It is therefore, stated that there is no justification for treating any of the repairs and maintenance expenditure as capital in nature. 4.5 A perusal of the audit note submitted as samples shows that the objections relate to non maintenance of bills or differences in rates for contracts given, or non-specification of rates on contracts. In short they appear more to deal with financial propriety rather than issues of capital or revenue. On going through the details of vouchers of repairs and maintenance produced, it is seen that one of the major invoices is for replacement of 4 inch diameter cross-country ammonia pipel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the original item still continues to be present at its reduced WDV value in the block of assets. In fact the block of assets in such instances does not project the correct value of the block because a new item of much greater value has replaced the old one but the WDV would continue to be very small in comparison. On the other hand the entire claim of revenue expenditure would be allowed leading to lower profits on the one hand and a lower than correct value of the block of assets. Therefore, in my view the Assessing Officer was correct in holding that at least some of the items included in the repairs and maintenance expenditure were in the nature of capital and which should be treated as part of block of assets. 4.7 I am further inclined to uphold this view because from the system followed for demarcation of revenue and capital expenditure as submitted by the appellant and discussed in para 4.3. Each division submits its budget proposals for revenue and capital items but these revenue and capital demarcations are more linked to large and new purchases Vs routine and small expenses required to be incurred for running the units. They are not linked to the concepts of capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee contended that expenditure relates to revenue items and not capital items. Whether or not expenditure is on current repairs, Hon ble Supreme Court in the case of Ballimal Naval Kishore v. CIT [1997] 2 SCC 449, while approving the test formulated by Shri Chagla C J. in the case of New Shorrock Spinning and Manufacturing Co. Ltd. v. CIT [1956] 30 ITR 338 (Bom),observed as follows: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of 'repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislatur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure comes within the etymological meaning of the expression current repairs . In other words, even if the expenditure is revenue, it may not fall in the connotation of current repairs in section 31(i). It was further observed that replacement generally may not fall under the expression current repairs but, in certain cases, where the old parts were not available in the market or where the old parts had worked for 50 to 60 years, replacement can, in such cases of exception, fall within the expression current repairs . 15.3 Under section 37, a particular item of expenditure may be deductible if the expenditure does not fall within sections 30 to 36 ; that it should have been incurred in the accounting year; that it should be in respect of a business carried an by the assessee; that it should not be on personal account of the assessee; that it should not be in the nature of capital expenditure and that it should be spent wholly and exclusively for business. Whether expenditure is revenue or capital in nature would depend upon several factors, namely, nature of the expenditure, nature of the business activity etc. . 15.4 In view of the foregoing, if we now analys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 724, the AO rejected the claim for deduction of provision of doubtful debts of ₹ 465.13 lacs. 18. On appeal, the learned CIT(A) while relying upon the orders of the CIT(A) in assessment years 1996-97 and 1997-98, upheld the disallowance while directing the AO to allow the amount as and when actually written off. 19. The assessee is in appeal against the aforesaid findings of the learned CIT(A).At the outset, the learned AR on behalf of the assessee contended that the issue has been decided against the assessee by the ITAT vide order dated 08-08-2008 in ITA nos. 525 and 659/Ahd/2002 for the AY 1996-97 and 1997-98. On the other hand, the learned DR , while supporting the findings of the learned CIT(A),did not dispute the submissions of the ld. AR. 20. We have heard both the parties and gone through the facts of the case as also the decision referred to. We find that ITAT vide their order dated 8-8-2008 in assessee s own case in the assessment year 1996-97 and 1997-98 concluded that in view of the admitted fact that the assessee had not written off the amount in question and had claimed simply on the basis of provision, the learned CIT(A) was quite justified in upholdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and on the legal position of the case and hence the addition made is upheld. 22. The assessee is now in appeal against the aforesaid findings of the learned CIT(A). At the outset, the learned AR on behalf of the assessee contended that a similar issue in terms of ground no.3 in the appeal for assessment year 1996-97 in ITA No. 525/Ahd/2002 was restored to the file of the AO for re-examination. On the other hand, the learned DR did not dispute these submissions of the learned AR . 23. We have heard both the parties and gone through the facts of the case. it is well settled commercial principle of accounting that the nature of expenditure is determined at the first instance when it is incurred and its nature cannot be altered on account of subsequent events.We find that in the assessment year 1996-97 the assessee had started a new joint venture with the equity participation by the assessee and the Government of Uganda. Subsequently, the project was found not feasible and accordingly, an amount of ₹ 91.20 lacs was written off. In that year also, the assessee claimed that the expenditure was for the expansion of existing business . The facts and circumstances in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reciation claimed by the assessee amounting to ₹ 90,62,500/-. 25. On appeal, the learned CIT(A) while relying upon appellate orders for the assessment year 1996-97 and 1997-98 upheld the disallowance. 26. The assessee is now in appeal against the aforesaid findings of the ld. CIT(A).At the outset, the learned AR on behalf of the assesse contended that the issue is squarely covered by the decision dated 8.8.2008 of the Tribunal in the assessee s own case in ITA No.659 and 994/Ahd/2002 for the AYs 1997-98 1998-99 against the assessee On the other hand, the learned DR supported the findings of the learned CIT(A) and the aforesaid decision of the Tribunal. 27. We have heard both the parties and gone through the facts of the case as also the decision referred to by the ld. AR. We find that the ITAT in their aforesaid order dated 8-8-2008 in para nos.33 to 37 and 56 and 57 decided the issue against the assessee. Respectfully following the aforesaid decision of the ITAT, we have no alternative but to reject the ground raised by the assessee. Therefore, ground no.7 in the appeal of the assessee is dismissed. 28. Ground nos. 3 4 in the appeal of the Revenue and ground ..... 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