TMI Blog2019 (1) TMI 1399X X X X Extracts X X X X X X X X Extracts X X X X ..... siness, it is established that the business has been set up and the assessee became entitled for expenses of the previous year. Such expenses are to be treated as business expenses from the date of setting up of the business which is certainly 03.11.2005. Moreover, finance of the assessee company are audited one and no mistake has been pointed out. So, we are of the considered view that the AO as well as CIT (A) have erred in disallowing the expenses, hence expenses of ₹ 29,68,000/- are ordered to be allowed as business expenses incurred for setting up the business of the assessee company during the previous year Addition on account of prior period income - invoking provisions contained u/s 154 to make the addition as noticed that in the computation of income, assessee has reduced the prior period income from the total income during the year under assessment - Held that:- This addition made by the AO is not sustainable for two reasons : one, that when the computation of income was there before the AO at the time of completion of assessment u/s 143 (3) of the Act, the same cannot be treated as a mistake apparent on record as it needs detailed investigation by providing an o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o, in these circumstances, the decision rendered in CIT vs. Hindustan Insecticides Ltd. [2001 (2) TMI 75 - DELHI HIGH COURT], relied upon by the AO, is not applicable to the facts and circumstances of the case. So, ld. CIT (A) has rightly deleted the addition made by the AO qua claim of preliminary expenses made u/s 35D and as such, there is no scope to interfere into the findings returned by the ld. CIT (A). Addition going through the confirmation of the creditors, namely, Indian Oil Corporation (IOC) on the ground that the same has not been accounted for credit note dated 31.1.2007 till 31.03.2007. - CIT (A) deleted the addition on the ground that when the same amount has been accounted for in the subsequent years and in both the assessment years, the net result is loss then there is no justification in disallowing the amount in question in assessment year in question - This is a factual issue decided by the ld. CIT (A) and there is no need to interfere into the findings returned by the ld. CIT (A), Allowability of prior period expenses - assessee itself has admitted before AO when confronted that the amount was erroneously netted and offered to be added for computation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No.5696/Del./2015, ITA No.4622/Del./2014, ITA No.851/Del./2011, ITA No.852/Del./2011, ITA No.3569/Del./2011, ITA No.248/Del./2014, ITA No.5616/Del./2014, ITA No.4963/Del./2015 - - - Dated:- 17-12-2018 - ITA No.247/Del./2014 Shri N.K. Billaiya, Accountant Member And Shri Kuldip Singh, Judicial Member For the ASSESSEE : Shri Vijay Ranjan, Advocate, Ms. Ira Kapoor, CA For the REVENUE : Shri J.K. Mishra, CIT DR, Smt. Naina Soin Kapil, Senior DR ORDER PER KULDIP SINGH, JUDICIAL MEMBER : The aforesaid cross appeals filed by the assessee and the Revenue are being disposed off by way of consolidated order to avoid repetition of discussion. 2. The appellant, M/s. Kribhco Shyam Fertilizers Ltd. (hereinafter referred to as the assessee ) by filing the present appeals, sought to set aside the impugned orders dated 02.12.2010, 02.12.2010, 10.05.2011, 28.07.2015 14.07.2014 passed by Ld. CIT (Appeals)-VIII, New Delhi/ CIT (Appeals)-5, Delhi qua the Assessment Years 2006-07, 2007-08, 2008-09, 2009-10 2010-11 respectively on the following grounds inter alia that:- ASSESSEE S APPEALS ITA NO.764/DEL/2011 (AY 2006-07) 1. On the fact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w the Ld. CIT (A) erred in confirming the rectification ignoring the fact that higher income had already been assessed in earlier years by way of reduction of depreciation on the basis of letter filled by the assessee and once an income is already assessed in earlier year the same cannot be again assessed in a current year as it will amount to double taxation. 4. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in confirming the rectification on an issue which is highly debatable. ITA NO.4622/DEL/2014 (AY 2010-11) 1. On the facts and circumstances of the case and in law the Ld. CIT (A) erred in confirming the addition of ₹ 1,25,000/- under section 14A of the Act without appreciating the fact that Ld. A.O. had not recorded any satisfaction about the correctness of the claim of the Assessee that no expenditure has been incurred on earning dividend income by the Assessee. 2. On the facts and circumstances of the case and in law, Ld. CIT (A) erred in sustaining addition u/s 43B of the Act in respect of sales tax liability of ₹ 104,39,210/- 3. The appellant, ACIT, Circle 5 (1), New Delhi (hereinafter referred t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses. 4.1 The Ld. CIT (A) ignored the facts recorded by A.O and the fact that the assessee is maintaining the mercantile system of accounting. 4. On the facts and in the circumstances of the case and in law. the learned CIT(Appeals) has erred in deleting the addition of ₹ 18,40,403/- being the difference in the balance of creditors. 4.1 The Ld. CIT (A) ignored the facts recorded by A.O and the fact that the assessee did not account for the credit notes received from the clients. ITA NO.3569/DEL/2011 (AY 2008-09) 1. The order of the learned CIT (Appeals) is erroneous contrary to facts law. 2. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) has erred in deleting the addition of ₹ 22,46,82,475/- being the depreciation on intangible assets. 2.1 The Ld. CIT (A) ignored the finding recorded by the A.O and the fact that no depreciation is allowable on intangible assets as per I.T. Act. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the addition of ₹ 7,66,59,375/- being the disallowance of 15% of the WVD of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se in law, the Ld. CIT(A) erred in allowing prior period expenses of ₹ 15,13,126/-. ITA NO.4963/DEL/2015 (AY 2011-12) 1. That on the facts in the circumstances of the case in law, the Ld. CIT(A) has erred in deleting the addition on account of disallowance of depreciation on intangible assets of ₹ 9,48,46,982/-. 2. That on the facts in the circumstances of the case in law, the Ld. CIT(A) has erred in deleting the addition on account of disallowance of depreciation on estimated assets of ₹ 4,70,78,439/. 3. That on the facts in the circumstances of the case in law, the Ld. CIT(A) has erred in deleting the addition on account of disallowance of depreciation on spare machinery parts of ₹ 61,50,146/-. 4. That on the facts in the circumstances of the case in law, the Ld. CIT(A) has erred in deleting the addition on account of disallowance of expenses on vehicle Repair Maintenance of ₹ 7,96,706/-. 4. Appellant, ACIT, Circle 5 (1), New Delhi (hereinafter referred to as the Revenue ), by filing the present appeal sought to set aside the impugned order dated 30.10.2013 passed by the Commissioner of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,00,000/-, ₹ 15,000/-, ₹ 16,53,000/- and ₹ 5,00,000/- claimed by the assessee on account of payment for legal fees on exemption, consultation fee for transfer of employees, fee paid to PDIL and on account of purchase of stamp papers respectively. 9. In AYs 2007-08 2008-09, AO also disallowed an amount of ₹ 1,17,81,748/- and ₹ 1,00,14,486/- claimed by the assessee on account of capital spares respectively on the same ground. 10. In AYs 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11, AO disallowed an amount of ₹ 17,12,93,314/-, ₹ 29,97,63,300/-, ₹ 22,48,22,475/-, ₹ 16,86,16,856/- and ₹ 12,64,62,643/- respectively on account of depreciation on intangibles and AO also disallowed depreciation on assumed intangibles of ₹ 4,87,50,000/-, ₹ 9,01,87,500/-, ₹ 7,66,59,375/-, ₹ 6,51,60,469/- and ₹ 5,53,86,398/- in AYs 2006-07, 2007-08, 2008-09, 2009-10 and 2010-11 respectively. Similarly, AO also disallowed amount of ₹ 85,14,636/- each in AYs 2006-07, 2007- 08, 2008-09, 2009-10 and 2010-11 claimed by the assessee on account of preliminary expenses u/s 35D. In AY 2007-08, AO also disallowed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11 by following the decision rendered by Hon ble Delhi High Court in case cited as CIT vs. Insilco Limited (supra) as well as by following the decision rendered by the coordinate Bench of the Tribunal in Continental Carbon India Ltd. vs. ITO 2012 (7) TMI 34 . 17. Hon ble Delhi High Court in case cited as CIT vs. Insilco Limited (supra) dealt with the identical issue and has decided in favour of the assessee. The ratio of the judgment is under section 32 of the Act expression used for the purpose of business also includes emergency spares which even though ready for use are not as a matter of fact used during relevant period as the same are kept as spare parts to a fixed asset and in all probability be useless once the asset is discarded. So, the deprecation u/s 32 of the Act on capital spares is allowable expenses even though they have not been put to use during the relevant period. In the instant case, it is not in dispute that the capital spares were purchased and kept ready for use in case of emergency by the assessee and as such allowable expenses on account of depreciation claimed by the assessee on capital spares. 18. So, following the decision render ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . AO as well as CIT (A) have disallowed the aforesaid expenses claimed by the assessee on the sole ground that since the promoters of the assessee company are already in the line of fertilizer industry, the said promoters have managed the affairs of this company from their own resources and even otherwise till 1.01.2006, it cannot be said that the assessee company has set up their business. 22. We are of the considered view that to decide the controversy at hand, the date of setting up of the business is a relevant date to allow or disallow the expenses claimed by the assessee u/s 37(1) of the Act. To understand the controversy at hand, the assessee has brought on record the chronology of events as to purchase of the business of the assessee company which is extracted for ready perusal as under:- SR.NO. DATE OF EVENT EVENT REMARKS 1. 03.11.2005 Agreement to Sell between Shyam Basic Infrastructure Projects Pvt. Ltd.(SBIP) Oswal Chemicals Fertilizers Ltd.(OCFL) Consideration = 1900 crore + Book value on 13/01/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e spares capital spares besides other things. (REF: AY 06-07/Vol.l/P-126(Bk) 11. 31.10.2006 Sale Deed execution between OCFL KSFL (REF: AY 06-07/Vol.l/P-188) 23. Perusal of the chronology of events extracted above apparently shows that the business activities were started by the assessee company w.e.f. 03.11.2005 when Agreement to Sell between Shyam Basic Infrastructure Projects Pvt. Ltd. and Oswal Chemicals Fertilizers Ltd. (OCFL) was entered into and thereafter assessee company was incorporated on 08.12.2005. 24. Now, the question arises for determination is :- as to whether the assessee company is entitled for claiming business expenditure from the date of commencement of its business i.e. 18.01.2006 or from the date of setting up of the business? 25. We are of the considered view that when the assessee company has incurred expenses for making professional fee for taking legal opinion on sales-tax matter; paid legal fee for taking legal opinion on exemptions and concessions and then consultation for transfer of employees on take over and then paid fee to PD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rush groundnut 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 was not the only factor that the Tribunal had taken into consideration. The Tribunal had, on scrutinising the various details of the expenses, came to the conclusion that these expenses did not show that the business was set up prior to 1-9-1946. Thus, it could not be said that the decision of the Tribunal was based upon a total absence of any evidence. Therefore, there was evidence before the Tribunal to hold that the assessee-company set up its business as from 1.9.1946. 28. The decision rendered by Hon ble High Court of Bombay in Western India Vegetable Products Ltd. vs. CIT (supra) is squarely applicable to the facts and circumstances of the case because, in the instant case, business of the assessee was set up from the date of entering into agreement for acquisition of the fertilizer plant and without expert legal and financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .4622/DEL/2014 (AY 2010-11) 31. AO by invoking the provisions contained u/s 14A read with Rule 8D (iii) made disallowance of ₹ 1,25,000/-. CIT (A) confirmed the addition. 32. Undisputedly, assessee has earned dividend income of ₹ 5,403/- during the year under assessment. It is the case of the assessee that no expenses have been incurred by the assessee during the year under assessment and contended that at the most, disallowance cannot be more than the exempt income. 33. First of all, AO has not recorded dis-satisfaction as to the working out made by the assessee that no expenses have been incurred to earn the meager dividend income rather proceeded to invoke the provisions contained u/s 14A read with Rule 8D in a mechanical manner which is not permissible. 34. Hon ble Delhi High Court in judgment cited as Maxopp Investment Ltd. (supra) while deciding the identical issue held as under :- Section 14A even prior to the introduction of sub-sections (2) and (3) would require the Assessing Officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rejection must be for disclosed cogent reasons. It is then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. 36. Moreover, assessee was in possession of sufficient interest free funds at its disposal to make investment. In these circumstances, we are of the considered view that disallowance u/s 14A in this case cannot be more than ₹ 5,403, the exempt income earned during the year under assessment. So, AO is directed to disallow the amount of ₹ 5,403/- only instead of ₹ 1,25,000/-. Consequently, ground no.1in ITA No.4622/Del/2014 (AY 2010-11) in assessee s a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... GROUND NO.2 OF ITA NO.851/DEL/2011 (AY 2006-07) ITA NO.852/DEL/2011 (AY 2007-08) GROUNDS NO.2 3 OF ITA NO.3569/DEL/2011 (AY 2008-09) GROUNDS NO.1 3 OF ITA NO.248/DEL/2014 (AY 2009-10) ITA NO.5616/DEL/2014 (AY 2010-11) GROUNDS NO.1 2 OF ITA NO.4963/DEL/2015 (AY 2011-12) 41. Aforesaid grounds raised by the Revenue are qua deleting the addition made by the AO on account of depreciation on intangibles as well as depreciation on assumed intangibles. Except for difference in amounts, the facts are identical in all the appeals. So, aforementioned grounds in appeals filed by the Revenue for AYs 2006-07, 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12 are being disposed off in one-go to avoid repetition of discussion. 42. Undisputedly, purchase consideration of ₹ 1,908 crores qua fertilizer plant has been allocated towards different heads of fixed assets and other assets on the basis of report and valuation made by Project Development India Ltd. (PDIL), a Government of India Undertaking. Assessee claimed depreciation on intangibles @ 25%. AO, by declining the contentions raised by the assessee, disallowed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of intangible assets, which is extracted as under for ready perusal :- INTANGIBLE ASSETS (Rs. Lakhs) Sl. No. Particulars Current Value Value Adjustment for Operating Period Asset Value as on 18.01.2006 1.0 Due to Power Generation 7700 0 7700 2.0 Due to Argon Recovery Plant 4800 0 4800 Total 12500 0 12500 Note In addition to above, there are number of other intangible assets as detailed in the report. Though direct and indirect benefits of these assets are substantial, it is not possible to quantify the same. Hence, values against these items have not been shown. 47. When we further examine Chapter VII at pages 370 to 372 of the paper book, benefits of intangibles have been given in detail before evaluating the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intangible assets referred in section 32(1)(ii) preceding the term 'business or commercial rights of similar nature', it is seen that the aforesaid intangible assets are not of the same kind and are clearly distinct from one another. The fact that after the specified intangible assets the words 'business or commercial rights of similar nature' have been additionally used, clearly demonstrates that the legislature did not intend to provide for depreciation only in respect of specified intangible assets but also to other categories of intangible assets, which were neither feasible nor possible to exhaustively enumerate. In the circumstances, the nature of 'business or commercial rights' cannot be restricted to only six categories of assets, viz., know-how, patents, trademarks, copyrights, licenses or franchises. The nature of 'business or commercial rights' can be of the same genus in which all the aforesaid six assets fall. All the above fall in the genus of intangible assets that form part of the tool of trade of an assessee facilitating smooth carrying on of the business. In the circumstances, it is observed that in case of the assessee, intangible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO is concerned, ld. CIT (A) has rightly held that there is no basis for the AO to assume that further 10% of the total consideration of ₹ 1,908 crores is to be treated as intangibles not eligible for depreciation u/s 32(1)(ii) of the Act as the total sale consideration of ₹ 1,908 crores has been paid in terms of the Agreement to Sell between assessee and Oswal Chemical Fertilizers Limited. When the value of specific items has been put by PDIL under different heads, as discussed in the preceding paras, there is no scope for guesswork or assumption for such disallowance of depreciation of assumed intangibles. Moreover, this issue is consequential because when the assessee is otherwise found to be entitled for depreciation on intangibles, further depreciation on assumed intangibles is not sustainable. 56. Following the decision rendered by Hon ble High Court and coordinate Bench of the Tribunal discussed in the preceding paras, which are squarely applicable to the facts and circumstances of the case, we are of the considered view that when in the valuation report, which is given by PDIL, a Government of India Undertaking, intangibles assets and their benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s proposal put up by Chief Manager, F A for approving the object required for incorporation of the company for acquisition of assets of OCFL located at Shahjahanpur, UP. 59. When we examine the facts there is no ambiguity that the amount claimed by the assessee u/s 35D(2)(c)(iii) was incurred towards registration of the company as a new concern and not for increasing authorized share capital. So, in these circumstances, the decision rendered by the Hon ble Delhi High Court in CIT vs. Hindustan Insecticides Ltd. (supra), relied upon by the AO, is not applicable to the facts and circumstances of the case. So, ld. CIT (A) has rightly deleted the addition made by the AO qua claim of preliminary expenses made u/s 35D and as such, there is no scope to interfere into the findings returned by the ld. CIT (A). Consequently, Ground No.3 of ITA No.851/DEL/2011 (AY 2006- 07) ITA No.852/Del/2011 (AY 2007-08); Ground No.4 of ITA No.3569/Del/2011 (AY 2008-09) and Ground No.2 of ITA No.248/Del/2014 (AY 2009-10) ITA No.5616/Del/2014 (AY 2010-11) of Revenue s appeals are determined against the Revenue. REVENUE S APPEAL GROUND NO.4 OF ITA NO.852/DEL/2011 (AY 2007-08) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the ld. CIT (A) has erred in deleting the addition of ₹ 15,13,126/-. In these circumstances, when the assessee has erroneously netted the amount of ₹ 15,13,126/-, the question of allowing the same as prior period expense does not arise. So, Ground No.5 of ITA No.5616/Del/2014 (AY 2010-11) of Revenue s appeal is determined in favour of the Revenue. REVENUE S APPEAL GROUND NO.4 OF ITA NO.4963/DEL/2015 (AY 2011-12) 64. AO disallowed an amount of ₹ 7,96,706/- being 10% of ₹ 79,67,061/- claimed by the assessee as expenses under the head vehicle repair and maintenance in order to exclude personnel expenses booked under it. Perusal of the impugned order passed by the ld. CIT (A) deleting the addition of ₹ 7,96,706/- shows that the ld. CIT (A) after appreciating the fact that the assessee company is situated at Shahjahanpur and its headquarter is at Noida and assessments are made at Bareilly and its appellate jurisdiction is at Delhi and Lucknow and it is having large work force, the travelling is commercial necessity. Moreover, the ld. CIT (A) has rightly observed that there is no evidence or material available with the AO to wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalty has been levied by the AO for concealment of particulars of its income and furnishing of inaccurate particulars of income. It is settled principle of law that in order to initiate the penalty proceedings, a valid show-cause notice as required u/s 271(1)(c) read with section 274 is required to be issued to the assessee so as to make him aware as to under which limb of section 271(1)(c) of the Act, the penalty is going to be levied. 70. But, in the instant case, AO even at the time of passing the penalty order was not aware if the assessee has concealed the income or has furnished inaccurate particulars of its income rather preferred to levy the penalty on both the accounts . Reliance in this regard is placed on the decision of Hon ble Karnataka High Court in case of CIT vs. Manjunatha Cotton and Ginning Factory Ors. 359 ITR 565 (Karn.) , affirmed by Hon ble Supreme Court. 71. So, the ld. CIT (A) has rightly deleted the penalty on this account. Furthermore, when as per our findings returned in the preceding paras while deciding the grounds in the respective appeal filed by the assessee, the addition on the basis of which penalty has been levied, has been deleted, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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