TMI Blog2018 (2) TMI 1909X X X X Extracts X X X X X X X X Extracts X X X X ..... civil foundation the windmills will not generate power and that civil foundation cannot be separated from windmills and cannot be treated as a separate building. With respect to the cost of erection and commissioning expenditure, Ld.CIT(A) has given a finding that the same cannot be separated from windmills as the same are directly related to the functioning of windmills. The aforesaid findings of Ld.CIT(A) has not been controverted by Revenue. We further find that in the case of CIT Vs. Mehru Electricals and Mechanical Engineers Pvt. Ltd. [ 2016 (7) TMI 708 - RAJASTHAN HIGH COURT] has held that the rate of depreciation applicable to windmills also applies to civil foundation and electric turbine generator for windmill as they are the part of the windmill. We further find that the Hon ble Bombay High Court in the case of CIT Vs. CTR Manufacturing Industries Pvt. Ltd. [ 2016 (4) TMI 265 - BOMBAY HIGH COURT] has held that the depreciation of windmill is to be allowed even on the cost like erection and commissioning charges, electric items, application charges etc., which are capitalized to windmill. Before us, Revenue has not placed any contrary binding decision in its support. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re not applicable to the year under consideration being A.Y. 2007-08. It is also a fact that assessee has suo-motu disallowed ₹ 5 lac u/s 14A of the Act and that the assessee is not in appeal against the aforesaid addition. Further before us, Revenue has not placed any contrary binding decision in its support. In such a situation, we find no reason to interfere with the order of Ld.CIT(A) and thus, the ground of the Revenue is dismissed. Disallowance of commission u/s 40A(2) - AO can disallow the expenditure made to close associates having substantial interest in the company for goods, services and facilities - HELD THAT:- AO can disallow only that portion of expenditure, which in his opinion, is excessive or unreasonable. Reasonableness of the expenditure has to be seen from the view point of the businessman and not from the view point of Revenue authorities. Before disallowing the expenses, the AO must establish that the payment is excessive or unreasonable and he has to place on record evidences with respect to excessiveness and unreasonableness. He cannot proceed merely on the basis of surmises and conjectures. Before us, no material has been placed by the Revenue to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to the present facts. Considering the totality of aforesaid facts, we find no reason to interfere with the order of Ld.CIT(A) and thus, the ground of Revenue is dismissed. - ITA No.616, 963/PUN/2014 Assessment Year : 2007-08 - - - Dated:- 12-2-2018 - Shri Anil Chaturvedi, AM And Shri Vikas Awasthy, JM Assessee by : Shri C.H. Naniwadekar Shri A.S. Deshpande. Revenue by : Shri Rajeev Kumar, CIT. ORDER Anil Chaturvedi, 1. These cross-appeals filed by assessee and Revenue u/s 253 of the Act, emanate out of the order of Commissioner of IncomeTax (A) 2, Nashik dt.24.02.2014 for A.Y. 2007-08. 2. The relevant facts as culled out from the material on record are as under :- Assessee is a company stated to be engaged in the business of manufacturing of engines, generators, engine parts etc. Assessee electronically filed its return of income for A.Y. 2007-08 on 27.10.2007 declaring total income of ₹ 1,55,61,71,300/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dt.30.12.2009 and the total income was determined at ₹ 1,65,82,98,190/-. Aggrieved by the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or windmill without appreciating that these are not the integral part of the windmill without which the windmill cannot be worked. 2. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of ₹ 45,69,505/-on account of debit balances written off by admitting the new evidences filed by the assessee and without giving any opportunity to the AO to examine the same at his level. 3. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of ₹ 15,60,235 on account of liquidated damages by admitting the new evidences, without giving an opportunity to the AO to examine the same at his level. 4. Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in deleting the addition of ₹ 15,60,823/- on the issue of provision for Liquidated damages, without appreciating that the provision has not been made on a scientific basis? 5.Whether on the facts and circumstances of the case and in law, the CIT(A) is justified in restricting the addition made to ₹ 1,20,90,752/- as against the addition made of ₹ 8,01 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oc basis, it cannot be allowed as deduction. AO accordingly disallowed ₹ 37,18,638/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who granted partial relief to assessee by holding as under : 6.2 I have carefully considered the submission of the appellant, and I find it partly acceptable. Considering the fact that an amount of ₹ 7,99,257/- has been paid in subsequent year on account of liquidated damages, the same cannot be treated as ad-hoc provision. On identical issue in AY 2005-06, I had allowed the claim of appellant to the extent of liquidated damages paid in subsequent years. The appellant had filed details of how the provision had been worked out, giving details of the invoice no, customer name, invoice amount, copies of PO showing LD clauses, etc. The provision for liquidated damages had been worked out on terms of purchase orders, delay in executing the customer's order, etc. Out of disallowance of ₹ 37,18,638/-,the appellant had filed details of ₹ 31,68,638/-. No details of ₹ 6,00,000/-(Difference of ₹ 37,18,638/-less ₹ 31,68,638/-) had been provided. Therefore, disallowance of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he said head to the tune of ₹ 1,99,10,567/-. As per the assessee, the liquidated damages represent the payments for late delivery, deficiency in quality of goods / material supplied vis-a-vis specifications / requirements, etc. The assessee explained that the liquidated damages had nothing to do with any infraction of law. The major recovery was of ₹ 1,56,62,034/- effected by M/s. Oil India Ltd., who had made the said recovery as the assessee had failed to complete installation and commissioning within the agreed contract schedule. The Assessing Officer held the same to be in the nature of penalty and disallowed the same. In this regard, he placed reliance on the ratio laid down by the Hon'ble High Court of Delhi in Rohtak Textiles Mills Vs. CIT (1997) 226 ITR 485 (Del), wherein payment of liquidated damages were held as non-deductible. As regards the other liquidated damages, since the assessee had only given general submissions, the same was not accepted and the entire claim towards liquidated damages was disallowed. 40. Before the CIT(A), the assessee pointed out that in the purchase order placed by M/s. Oil India Ltd., there was clear stipulation of comple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee pointed out that out of liquidated damages paid to M/s. Oil India Ltd., sum of ₹ 1.49 crores was allowed by the CIT(A), against which the Revenue is in appeal. However, balance sum of ₹ 6,64,552/- payable to M/s. Oil India Ltd. was to be verified by the Assessing Officer. However, till date, no such appeal effect has been allowed. He referred to page 190 of Paper Book and pointed out that clause (iii) related to charging of interest as per purchase order and he further referred to page 199 of the Paper Book to establish that the amount has been recovered by M/s. Oil India Ltd. And hence, there is no discrepancy in the claim of assessee. He, then, referred to the provision made on account of other party i.e. ₹ 20,82,140/-. He stressed that the said provision was made in respect of sales effected during the year which was customer-wise and the said principle was followed in respect of all the parties and the amounts were paid in the succeeding year and in case those are not demanded, then the provision was reversed. He further stated that out of total sum of ₹ 20,82, 1401-, ₹ 6,09,543/- was already paid during the year by the assessee. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid the said amount as per document at page 199 of the Paper Book, we find that the said claim of ₹ 6,64,552/- is also to be allowed in the hands of assessee. In view of the facts and circumstances and the evidences which are available on record, we find no merit in the order of CIT(A) in remitting the issue to the file of Assessing Officer to call for relevant particulars. Accordingly, we reverse the findings of CIT(A) in this regard and delete the addition of ₹ 6,64,552/-. 47. Now, coming to balance liquidated damages of ₹ 20,82,140/- for which the assessee had made the provision in its books of account. The assessee points out that after effecting sales during the relevant years, provisions are made during the year customer-wise and the said principle has been followed by the assessee from year to year. In other words, the assessee is following the method of accounting, under which provision is made on account of any liquidated damages, which the assessee may have to pay. In case the same are paid in the next year, then the same are debited to provision and if not paid, then the provision is reversed. The assessee having followed the said system of acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Ld.A.R. has not been controverted by Ld.D.R. We therefore following the order of the Co-ordinate Bench of the Tribunal and for similar reasons restore the issue to the file of AO. Thus, the ground of the assessee is allowed for statistical purposes and ground of Revenue is dismissed. 10.1. In the result, the appeal of the assessee is partly allowed for statistical purposes. 11. Now we take up Revenue s Appeal in ITA No.963/PUN/2014. 12. First ground is with respect to depreciation on windmill. 12.1. During the course of assessment proceedings, AO on perusing the depreciation schedule noticed that assessee has claimed depreciation of ₹ 10,51,87,561/- on windmill. AO also noticed that the addition made to fixed assets on account of seven windmills was to the extent of ₹ 26,29,68,903/-. The assessee was asked to furnish the details with respect to addition to windmill and the calculation of depreciation on windmill. AO noticed that during the year assessee company had installed seven windmills on 30.12.2006 for generation of power and had claimed 40% depreciation on such windmills. On perusing the details, he noticed that assessee had claimed de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... windmill treated as building. In my opinion, cost on the foundation of windmill is eligible for depreciation rate which is applicable for windmill as it is integral part of windmill. The work order placed by the appellant on contractor for civil foundation also includes work related to construction of approach internal roads. The appellant informed during appellate proceedings, the cost of internal road is approx. ₹ 5 lacs. Relying on the decision on Pune ITAT in Poonawala Finvest Agro Pvt. Ltd. vs ACIT, I hold that depreciation on internal roads will not be allowable at rate of 80% but the same is allowable @ 10%. The cost of foundation will be ₹ 1,24,45,634/- (i.e. cost of foundation ₹ 1,24,95,634/- less cost of roads ₹ 5,00,000/-. The depreciation allowable on roads will be restricted to ₹ 25,000/-. The Assessing officer is directed to delete the addition ₹ 15,90,219/- ( ₹ 16,15,219 less ₹ 25,000). 4.5 The cost of errection commissioning includes errection of wind Energy converters (WEC), Interconnecting the WEC with grid, evacuation of power generated, etc. The cost of erection and commissioning cannot be separated fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25 of 2013 order dt.01.03.2016) has held that the depreciation of windmill is to be allowed even on the cost like erection and commissioning charges, electric items, application charges etc., which are capitalized to windmill. Before us, Revenue has not placed any contrary binding decision in its support. In view of the aforesaid facts, we find no reason to interfere with the order of Ld.CIT(A) and thus, this ground of the Revenue is dismissed. 15. 2nd ground is with respect to deleting the addition of ₹ 45,69,505/- on account of debit balances written off. 15.1. During the course of assessment proceedings, AO on perusing the details noticed that assessee had claimed ₹ 69,53,304/- on account of debit balances written off. AO was of the view that for claiming the deduction debit balances, the amount written off should have been taken into account while computing the income of the assessee. In the present case he was of the view that the written off balances was in the nature of advances, deposits etc., and therefore the same cannot be claimed as bad debts. He accordingly denied the claim of written off debit balances of ₹ 66,81,059/-. Aggrieved by the order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho had neither refunded the advances nor had supplied the materials. He also noticed that identical issue came up in assessee s own case before the Pune Bench of the Tribunal in ITA No.615/PUN/2014 for A.Y. 2006-07 wherein the claim of the assessee was allowed. He accordingly directed that the same may be allowed. With respect to the addition of ₹ 38,50,000/- he noted that it was with respect to the entry tax levied by the Karnataka Government. He has noted that assessee had filed appeal before Karnataka Bench of the Tribunal and the dispute was decided in favour of the assessee and the entire tax was refunded and the assessee has offered the same as income. In such a situation, Ld.CIT(A) was of the view that the addition of ₹ 38,50,000/- was not warranted. With respect to ₹ 21,11,554/- he noted that since assessee could not furnish the details, he confirmed the addition to that extent. Before us, Revenue has not pointed out any fallacy in the findings of Ld.CIT(A). In view of these facts, we do not find any reason to interfere with the order of Ld.CIT(A) and thus, the ground No.2 of the Revenue is dismissed. 18. 3rd and 4th grounds are inter-connected and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hold that rule 8D is applicable w. e. f. AY 2008-09 and is not applicable to AY 2007-08. The Rule 8D is applicable from AY 2008- 09. The AO cannot make recourse to Rule 8D for prior years to determine the amount of expenditure incurred by the company in relation to exempt income. The appellant has stated that ₹ 1,10,90,752/- interest paid during the year is related to investments. The appellant has availed short term loan for the purchase of equity shares of Kirloskar Ferrous Industries Limited during the year. The loan has been repaid during this assessment year. Considering these facts and provisions of section 14A, the interest expenses are directly related to earnings of exempt income and needs to be disallowed. Similarly, the appellant stated that other direct indirect expenses related to investments (Mutual Funds) are the salary of employees in the finance department looking after purchase and sale of Mutual Funds. The appellant has estimated these salary expenses at ₹ 5,00,000/-. The appellant has estimated only the salary expenses in the finance department looking after the purchase and sale of mutual funds for the purpose of disallowance. The appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der consideration being A.Y. 2007-08. It is also a fact that assessee has suo-motu disallowed ₹ 5 lac u/s 14A of the Act and that the assessee is not in appeal against the aforesaid addition. Further before us, Revenue has not placed any contrary binding decision in its support. In such a situation, we find no reason to interfere with the order of Ld.CIT(A) and thus, the ground of the Revenue is dismissed. 23. Ground No.6 is with respect to deletion of addition made of ₹ 12,46,100/- u/s 40A(2) of the Act. 23.1. During the course of assessment proceedings, AO noticed that assessee had paid commission of ₹ 8,03,65,000/- as commission to executive and non-executive Directors. The assessee was asked to explain the reasonableness of the expenditure of commission in terms of Sec.40A(2) of the Act. Assessee inter-alia submitted that the remuneration has been paid as per the provisions of the Companies Act, 1956 and the actual payments are less than the eligible amounts prescribed under Companies Act. It was further submitted that the remuneration has been offered for tax by the respective Directors and there is no evasion of tax. It was therefore submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nessman and not from the view point of Revenue authorities. Further before disallowing the expenses, the AO must establish that the payment is excessive or unreasonable and he has to place on record evidences with respect to excessiveness and unreasonableness. He cannot proceed merely on the basis of surmises and conjectures. Before us, no material has been placed by the Revenue to demonstrate that the payment of commission was not bonafide or how it was unreasonable. Merely by comparing the commission paid between two years, it cannot be concluded that the commission was excessive. We further find that Ld.CIT(A) while deciding the issue has noted that the facts for the year under consideration are identical to that of earlier years and in earlier years, the payment of commission was allowed. Before us, Revenue has not placed any material on record to controvert the findings of Ld.CIT(A). We therefore find no reason to interfere with the order of Ld.CIT(A). Thus, the ground of Revenue is dismissed. 26. Ground No.7 is with respect to addition on account of warranty expenses. 26.1 During the course of assessment proceedings AO noticed that assessee made a provision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us. 27. Before us, Ld.D.R. supported the order of AO. Ld.A.R. on the other hand, reiterated the submissions made before AO and Ld.CIT(A) and supported the order of Ld.CIT(A). 28. We have heard the rival submissions and perused the material on record. We find that while deciding the issue, Ld.CIT(A) has given a finding that in case of large engines the warranty obligation starts immediately after the sales made by the assessee. Ld.CIT(A), following the decision of order in assessee s own case in A.Ys. 2005-06 and 2006-07 also held that the provision of warranty for large engines at ₹ 1,07,02,212/- is an allowable deduction. Before us, Revenue has not placed any material on record to controvert the findings of Ld.CIT(A). We therefore find no reason to interfere with the order of Ld.CIT(A). Thus, the ground of Revenue is dismissed. 29. Ground Nos.8(a) and 8(b) are inter-connected and are with respect to disallowance of claim of long term capital loss of ₹ 31,24,06,458/-. 29.1. During the course of assessment proceedings, AO noticed that assessee has claimed loss of ₹ 31,24,06,458/- on redemption of cumulative redeemable non convertible prefer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty share capital of KFIL way back in 1993-94. KFIL came out with a rights issue in FY 2006-07 one of the objectives of issue of equity shares was redemption of preference shares. Further investment by the appellant was made in equity shares in FY 2006-07. The appellant subscribed to 2,43,00,000 equity shares of ₹ 5 each in KFIL in FY 2006-07 according to its entitlement of rights issue. The appellant also subscribed 1,46,92,002 equity shares as per undertaking to subscribe for the unsubscribed portion. The investment in preference share capital was made (Details of purchase of preference share capital mentioned on page no 23 of the assessment order) in various years Le. FY 1997-98 to FY 2003-04. The total investment of the appellant is summarised as follows: Sr.No. Particulars Face Value Rs. No. of Shares As on 31.03.2007 (in Rs.) No of Shares As on 31.03.2008 Rs. (in Rs.) 1 Equity Shares 5 27000000 270000 65992002 16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... received earlier. The AO had also failed to note that the form of investment loan or preference share capital will be decided by facts of the case and the same was decided by the appellant and lenders keeping its interest in mind. There is clear distinction between loan or debt and share capital. In the case of debt, there is undertaking to pay the amount and pay interest. The expression share is defined in Companies Act to mean share in share capital of the company. The Companies Act envisages two types of share capital, equity share capital preference share capital. Thus there is difference between a loan preference share capital. The investment in preference shares of a company suffering losses may be safer than loan as the same has right to receive dividends, right to receive back capital, etc. The AO had stated that the appellant escapes paying capital gains tax but not stated any facts how the appellant had escaped paying capital tax. The long term capital gains in this assessment year even after disallowing long term capital loss for this year gets adjusted against the carried forward long term loss from earlier years. The appellant confirmed during appeal p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entitled to long term capital loss incurred on redemption of preference share capital amounting to ₹ 31,24,06,458/-. Thus the appeal is allowed and the AO is directed to allow the long term capital loss. The AO will also state the Long Term Capital Losses to be carried forward considering the Long term capital loss of this year is ₹ 31,24,06,458/-.Thus this ground of appeal is allowed. Aggrieved by the order of Ld.CIT(A), Revenue is now in appeal before us. 30. Before us, Ld.D.R. took us through the findings of AO and submitted that strategy of assessee was a tax planning devise to evade taxes. He thus supported the order of AO. Ld.A.R. on the other hand, reiterated the submissions made before lower authorities and submitted that the assessee and KFIL are listed companies. KFIL is promoted by assessee and that assessee is dependent on KFIL for the procurement of raw materials required by the assessee. He submitted that in view of restructuring arrangement, assessee and other financial institutions were issued preference shares in lieu of its debts and one of the precondition for restructuring arrangement was that the prmotors should bring additional capit ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
