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TMI Blog2020 (3) TMI 113X X X X Extracts X X X X X X X X Extracts X X X X ..... issed. Additional depreciation - Addition made u/s. 32(1)(iia) - whether coffee, beverage and food stuffs are not distinct and new articles or things within the meaning of section 32(1)(iia) 2(29BA) - whether storing, drying of coffee, hulling, pealing, polishing, grading, colour sorting, garbling and manual grading, out-turning of garbled coffee and bulking thereby turning to liquid coffee is a manufacturing activity or not ? - HELD THAT:- In the present case, converting raw coffee beans which are not fit for human consumption as such to 'liquid coffee' which is fit for human consumption has to be considered as manufacturing activity, as it is an irreversible process producing different marketable product fit for human consumption. It came to that position by storing, drying of coffee, hulling, pealing, polishing, grading, colour sorting, garbling and manual grading, out-turning of garbled coffee and bulking, thereby, the same being a irreversible process, there is a change in the chemical composition of the product. Alternatively, one cannot say that the same is a 'processing'. It amounts to production and manufacture of a distinct commercial product differ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wance made in the assessment order was not warranted, as the expenditure on setting up of new outlets being an expansion of the existing business, is an allowable expense. Accordingly, the CIT(A) deleted the disallowance under project expenses made by the Assessing Officer. We do not find any infirmity in the order of the CIT(A) and confirm the order of the CIT(A). This ground of appeals of the Revenue is dismissed. Forex Loss - Allowable revenue expenditure - whether as per proviso to section 43A of the Act any adjustment can be done only on final settlement of the liability - HELD THAT:- The Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. [ 2009 (4) TMI 4 - SUPREME COURT] had already held that the actual payment was not a condition precedent for making adjustment in respect of foreign currency transactions at the end of the closing year. We are, therefore, unable to concur or agree with the view of the Assessing Officer that liability could arise only when the contract would have matured as such a stand is totally divorced from the accounting principles and is in variance with the principle upheld by the Apex Court in the case of Woodward Governor Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld. CIT(A) erred in allowing relief to the assessee on the interest capitalization towards work in progress of ₹ 1,45,80,683/- ignoring the fact that in the order in ITA No.1501/Bang/2013 (assessee s appeal) dated 21.06.2017, the Hon ble ITAT has decided the issue in favour of the Revenue? (6) Whether on facts and circumstances of the case, the Ld. CIT(A) is justified in deleting addition of ₹ 1,49,85,698/- by allowing expenditure related to establishment of outlets as revenue expenses instead of capitalizing the same. (7) Whether on facts and circumstances of the case, the Ld. CIT(A) is justified in deleting addition of ₹ 20,02,41,512/- by allowing the Forex Loss as a revenue expenditure ignoring the proviso to section 43A of the Act any adjustment can be done only on final settlement of the liability? (8) The appellant craves leave to add, alter, amend or to delete any of the grounds of appeal. 3. The first common ground in both the Revenue s appeals, is general in nature and does not require adjudication. 4. The next common ground, Ground No. 2 is with regard to deletion of addition made u/s. 14A r.w. Rule 8D(2)(iii) of the I.T. Rules. at S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee was a partner cannot be considered as income exempt for invoking the provisions of section 14A of the Act. It was submitted that investment in a partnership firm cannot be treated on par with investment in equity, since a partner participates in the activity of the firm and the income earned is taxable in the hands of the firm. Further, it was submitted that if any expenditure is incurred, the same would be charged against the income of the firm and the question of a partner incurring any expenditure on behalf of the firm does not arise. According to the assessee, the situation would be different if certain expenditure is incurred by a share holder in connection with equity investments and such expenditure would be a charge on his income and not on the income of the company. It was submitted that in the case of a capital investment in a firm by a partner, the question of incurring any expenditure independent of expenditure allowable in the hands of the firm would be incurred by the partner and hence, the question of invoking provisions of section 14A of the Act would not arise. Thus, it was submitted that a capital investment in a partnership firm cannot be considered on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome which was not includible in the total income, during the relevant previous year, for the purpose of disallowance of any expenditure incurred in relation to the said income. In other words, section 14A of the Act would not apply if no exempt income was received or receivable during the relevant previous year. Since in the present case, the Assessing Officer has not brought on record any earning of exempt income so as to invoke the provisions of section 14A r.w. Rule 8D(2)(iii) of the Act, we are in agreement with the finding of the CIT(A) on this issue. Accordingly, this ground of appeal of the Revenue in both the appeals is dismissed. 5. The next common ground in both the appeals, Ground No. 3 is with regard to deletion of addition made u/s. 32(1)(iia) of the I.T. Act of ₹ 13,66,95,452/- and ₹ 12,88,15,686/- for the assessment years 2013-14 and 2014-15 respectively without appreciating the fact that coffee, beverage and food stuffs are not distinct and new articles or things within the meaning of section 32(1)(iia) 2(29BA) of the I.T. Act. 5.1 The facts of the issue as narrated in ITA No. 3040/Bang/2018 are that the assessee is in the activity of manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nery were placed on record which formed major portion of the assets on which additional depreciation was claimed. 5.3 The assessee submitted that the other major item of machinery is basically used under the vending division or the vending machines and the entire machine is designed by the Coffee Tech Hub (CTH) using latest CAD software and is fully assembled/manufactured using all the components. The automatic coffee vending machine is used in the day to day manufacturing and trading activity of the assessee company. It was submitted that in automatic coffee fine machine fresh coffee beans in required quantity is ground inside the machine black coffee in desired strength comes out of the outlet using sophisticated brewing mechanism and subsequently milk is also sucked inside the device and variety of drinks delivered. The assessee reiterated that the manufacturing activity of the assessee ranged from fabricating and assembling the coffee vending machine to the point of installation in various places and serving customers with liquid coffee fit for consumption. It was reiterated that the activity of the assessee was in the nature of manufacture or production of an article or thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g mechanical object or article or thing (a) Resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use or (b) Bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 5.7 Thus, it was submitted that all the activities in respect of machineries in each of the divisions above are covered by the definition of manufacture under the provisions of section 2(29BA) of the Act. It was submitted that the above machineries are eligible for additional depreciation and the Assessing Officer had erred in disallowing the same. 6. On appeal, the CIT(A) after considering the submissions of the assessee held that the company was eligible for additional depreciation as claimed and directed that the same be allowed. According to the CIT(A), under the circumstances, converting raw coffee beans which are not fit for human consumption as such to 'liquid coffee' which is fit for human consumption has to be considered as manufacturing activity, as it is an irreversible process producing different marketable produ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act and has no relevance to the provisions of section 32(1)(iia) of the Act. It was also the claim of the Ld. AR that the time of the decision of the Supreme Court in the case of M/s. India Hotels Co., Ltd. cited supra, the word manufacture was not defined under the provisions of the act. As of now, the word has been defined under the provisions of section 2(29BA) of the Act and the judgment of the Supreme Court is no longer relevant. It was submitted that the allowability of additional depreciation has to be considered in the context of definition of the word manufacture as provided for under the provisions of section 2(29BA) of the Act. The Ld. AR relied on the ratios laid down in the following judgments, justifying the claim of additional depreciation: 1. DCIT, Circle-11(1), Kolkata v. Bengal Beverages (P) Ltd (2017) 87 Taxmann.com 103(Kolkata-Trib) 2. D.J. Stone Crusher Vs. CIT (2010) 229 CTR 195 (HP) 3. CIT, Shimla Vs. Smt.Supriya Gill (2013) 31 Taxmann.com 69 (HP) 4. Lucky Mineral (P) Ltd V. CIT (2000) 162 CTR (SC) 404 : (2000) 245 ITR 830 (SC) 5. Poabs Rock Products (P) Ltd V. ACIT,Circle-1, Thiruvalla (2013) 40 Taxmann.com 302 (Cochin -Trib) 6. Ko ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bulking thereby turning to liquid coffee is a manufacturing activity or not and whether it falls under section 2(29A) of the I.T. Act which resulted in manufacturing of object or article and bringing a distinct new product with different commercial composition or individual structure. In the present case, converting raw coffee beans which are not fit for human consumption as such to 'liquid coffee' which is fit for human consumption has to be considered as manufacturing activity, as it is an irreversible process producing different marketable product fit for human consumption. It came to that position by storing, drying of coffee, hulling, pealing, polishing, grading, colour sorting, garbling and manual grading, out-turning of garbled coffee and bulking, thereby, the same being a irreversible process, there is a change in the chemical composition of the product. Alternatively, one cannot say that the same is a 'processing'. It amounts to production and manufacture of a distinct commercial product different from original product. In view of this, the machinery like coffee making machine, vending machine, express kiosks etc., which are used for such activities, on wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he goods purchased as raw material should go in as inputs in the process of manufacture and the result must be manufacture of other goods, The article produced must be regarded by the trade as a new and distinct article having an identity of its own, an independent market after the commodity is subjected to the process of manufacture. The nature and extent of the process would vary from case to case, and in a given case, there may be only one stage of processing, while in another case, there may be several stages of processing, and perhaps, a different kind of process at every stage. That with every process, the commodity would experience a change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, that it can be said that the commodity used as raw material has been consumed in the manufacture of the end-product. To put it differently, the final product does not retain the identity of the raw material after it has undergone the process or processes of manufacture. 6.6 Thus, the whole process of conversion of the raw material when leads to production of new article and when its character, use and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure quantifying the same notionally with a finding that the said expenditure to the extent quantified above needs to be capitalised. 8.2 On appeal, the CIT(A) deleted the addition for the reason that this issue was the subject matter of appeal in the assessee s own case for the A.Ys.2011-12 and 2012-13. The CIT(A) passed an order in ITA Nos.19 20/CIT(A)-1/Co/15-16 dated 20.12.2016 holding that the interest attributable to capital work in progress cannot be considered as capital in nature and has to be allowed as revenue. In the light of the judgment of the Supreme Court in the case of Vardhaman Polytex vs.CIT 349 ITR 690 on definition of expansion and also in the light of the decision of the Bangalore Bench of the Tribunal in the case of M/s.Emdee Apparels vs. ACIT 54 SOT 600, particularly considering the availability of interest free own funds, the CIT(A) was of the view that there was no case for disallowing interest on estimated capital attributable to work in progress by treating the same as capital nature. 8.3 Against this, the Revenue is in appeal before us. The Ld. DR submitted that the Tribunal in its order in ITA No. 1501/Bang/2013 and 1586/Bang/2013 dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the interest paid in respect of capital borrowed for the purposes of the business or profession. Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. (iiia)................................... . (2) The Ld. AR submitted that the Assessing Officer in para 9.2 of the order stated that as per the provisions of the Act, all costs which are incurred in bringing the capital asset into operational use need to be necessarily capitalized. The above finding is not as per the provisions of section 36(1)(iii) of the Act. The interest on borrowed capital is to be allowed as revenue once the business has commenced irrespective of the fact as to whether such borrowed funds are utilized for either revenue purposes or for capital purposes, unless the case falls under the proviso above which was introduced by Finance Act 2003 w.e.f A. Y.2004-05. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that as far as the position of law in regard to the provisions of section 36(1)(iii) of the Act is concerned the interest on borrowed capital is to be allowed as a deduction irrespective of the fact as to whether such borrowed capital is utilized for a revenue expenditure or for acquiring a capital asset whether put to use or not, once the business activity has commenced and is in progress. (7) The Ld. AR submitted that from A.Y.2004-05 the following proviso has been introduced below the provisions of section 36(1)(iii) of the Act. Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. (8) The Ld. AR submitted that consequent to introduction of the above proviso, the law has differentiated situations such as acquisition of asset out of borrowed funds for extension of existing business or otherwise. In the case of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion. (10) The Ld. AR submitted that the concept of extension of an existing business has been discussed and parameters have been laid down in the various decisions of High Courts and also Supreme Court. The Ld. AR relied on the recent judgment of Supreme Court in the case of Commissioner of Income Tax Vs. Monnet Industries Limited (2012) 25 Taxmann.com 236 which deals with the issue of interest on borrowed capital utilised for acquisition of asset in the case of extension of existing business. The facts of the case are that M/s. Monnet Industries Limited was having a ferro alloys manufacturing unit. It set up a sugar plant at a different place out of its borrowed fund. There was unity of control and management in respect of both plants and there was also intermingling of funds and dove-tailing of business. Under the circumstances, it was held that setting up a sugar plant was considered as an act of extension of existing business of the assesses, i.e., running a ferro alloys manufacturing unit. (11) It was submitted that in the case of the assessee the work in progress does not represent any investment in the nature of setting up a new business. The work in progress as explai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harter hiring of rigs are revenue expenditure in nature keeping in view that the said new rigs are available for charter hire and ready to be put to use once the said rigs are acquired by the assessee and that the same business of charter hiring of rigs is continuing and no new source of business having been come into existence, as the business or the source of income is already set-up by the assessee admittedly in the preceding years and is in existence which is a continuous and existing business of the assessee, and these mobilization expenses are to be treated as revenue expenditure as these expenses are incurred after the business is being set-up and is not a capital expenditure as the rigs after acquisition are available for hire and ready to be put to use, i.e., giving them on charter hire. Thus, these rigs which are imported are ready and available to be put to use being available for charter hiring after acquisition by the assessee so far as assessee concerned as the same are available for being given on charter hiring from the time the rigs are acquired by the assessee and are merely to be moved to and installed at the site of the clients desirous of taking the same on hir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Share capital 61,40,50,597 Reserves Surplus 690,67,43,157 752,07,93,754 (18) It was submitted that the investment in the closing work in progress was hardly ₹ 35,85,50,924/-. Since the assessee had huge interest free funds at its disposal which were enough to cover up the work in progress, there was no case for the Assessing Officer to presume that borrowed capital was utilized for the purpose of investment in work in progress. It was submitted that the borrowed funds had been utilized for the purpose for which they had been borrowed and there was no nexus between such funds and work in progress. (19) The Ld. AR also relied on the following decisions wherein it was held that if the assessee is in possession of non-interest bearing funds exceeding the investments, it cannot be presumed that, borrowed funds have been diverted for such purpose and interest disallowed. i) Commissioner of Income Tax V. Reliance Industries Ltd (2019) 102 Taxmann.com 52 (SC) ii) Pr. Commissioner of Income Tax V. Basti Sugar Mills Co. (2018) 98 Taxmann.com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following this Tribunal order rendered in the case of AT T Global Network Services (India) Pvt. Ltd. vs. DCIT (supra). Accordingly, ground no. 4(b) is allowed. 8.9 However, we find that this issue came up for consideration before this Tribunal in assessee s own case for assessment year 2010-2011 in ITA No.1501 1586/Bang/2013, wherein the Tribunal vide order dated 21.06.2017 held on this issue as under:- 20. We have heard the rival submissions and perused the material on record as well as the case laws relied upon by the ld.AR. But the proviso to section 36(1)(iii) inserted by the Finance Act, 2003 w.e.f. 01.04.2004 is very relevant for this issue. As per the same, till the asset for which the loan is borrowed is put to use, interest is not allowable. The judgments cited by the learned AR are for the period before insertion of this proviso and hence, not relevant. Hence, there is no merit in these grounds of the assessee and therefore, rejected. Ground No.4 of Revenue is allowed. 8.9.1 Further, it is to be noted that the Miscellaneous Application filed by the assessee in MA No.211 212/Bang/2017, the Tribunal dismissed the claim of the assessee vide order dated 06.12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her purposes relating to existing/operational cafes, the balance part is only relating mainly to the un-commenced care's actually not put to use and they are out and out capital items and calls for capitalization as it is contributing towards expansion of the existing business. Hence, the Assessing Officer added back the amount of ₹ 1,49,85,698/- to the income returned and accordingly, brought it to tax. 9.3 Before the CIT(A), it was contended that the expenditure above was a small portion of the total expenditure incurred during the previous year and only to the extent above were capitalized in the books as attributable to setting up new cafes and this treatment was only for the purpose of the books accounts as per AS 10 which is mandatory as per the company law. The assessee submitted that the expenditure above are in the nature of salary, travelling/conveyance etc., and which are revenue in nature. These are expenditure incurred in respect of the regular employees of the assessee company and the assessee is already carrying on the business activity and has declared substantial revenue/income. There are also small quantums like generator maintenance used for setting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... found that the expenditure incurred was for travelling, training and seminar and the sale promotion of the new model of the car and disallowed the same on the ground that by incurring said expenditure, the assessee had obtained a benefit of enduring nature by way of establishing a car model in the automobile market. On appeal, the Commissioner (Appeals) upheld the disallowance on the ground that the new model car was going to be an asset and, therefore, the expenditure, related to the capital asset formation. On second appeal: There was no doubt about the fact that the assessee was already engaged in the business of manufacture of cars and the production had commenced about three years before. The new model of the car related to the same line of business which the assessee had been carrying on. The assessee had not set up a separate and independent unit to manufacture new model of the car. From the details of the expenses given, it was clear that the expenses related to travelling, training and seminar and advertisement, technical guidance fee, etc., of the on-going business. It is common knowledge that there is a cut through competition in the automobile market and the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT V/s Kothari Auto Parts Manufactures Pvt Ltd (supra) and Honble High Court of Gujarat in the case of CIT V/s Alembic Glass Industries Ltd (supra). These expenditures did not create any asset and also did not provide enduring benefit to the business of the assessee so as to say that the expenditure was capital in nature Therefore, we hold that expenditure are allowable in the year under consideration irrespective of the fact that assessee has given dual status to such expenditure in its books of account vis-a-vis computation of income filed along with return. .. 16. In view of the foregoing discussions, we set aside the orders passed by Ld CIT(A) in both the years under consideration and direct the assessing officer to allow the impugned expenditure in both the years. 9.8 The Ld. AR relied on the judgment of the High court of Punjab Haryana in the case of CIT Vs. Max India Ltd (No. 1) (2016) 388 ITR 74 (P H), wherein it was held as under: while determining whether two or more lines of businesses of the assessee are the same business or different businesses regard must be had to the common management of the main business and other lines of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Y. 2014-15 by allowing the Forex Loss as a revenue expenditure ignoring the proviso to section 43A of the Act any adjustment can be done only on final settlement of the liability. 10.1 The facts of the case as narrated in ITA No.3040/Bang/2018 are that during the previous year there was exchange fluctuation loss of ₹ 20,02,41,512/- relatable to foreign currency loans. The loss represented both on actual repayment and also on reinstatement. The assessee all along recognized the gain/loss consequent to exchange fluctuation as revenue. The details of the gain offered as income and loss claimed as expenditure right from A.Y.2004-05 is as under: - Assmt. Year Gain offered as income Loss claimed as expenditure 2004-2005 - 85,71,644 2005-2006 1,44,98,726 - 2006-2007 - 62,65,130 2007-2008 4,41,20,801 - 2008-2009 6,90,51,525 - 2009-2010 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee submitted that the exchange fluctuation loss was in the nature of revenue expenditure. 10.3 The CIT(A) deleted the addition by observing that the assessee had been consistently treating the gain/loss as revenue. The CIT(A) observed that there are various occasions in the past wherein the similar gain had been offered as income and the same was accepted by the department from A. Y.2004-05 till A. Y.2011-12. According to the CIT(A), the AO, for the first time, disturbed the similar loss on Forex claimed by the assessee for the A.Y.2012-13 by making the disallowance of forex loss. The CIT(A) had deleted the addition in his order in ITA No.19 20/CIT(A)-1/CO/15-16, dated 20.12.2016, relying on the various judicial pronouncements and also based on the principles of consistency as the assessee s treatment of similar Forex Gain was accepted as income by the AO in earlier years. In the light of the ratios laid down by the Hon'ble Supreme Court in the cases above and also considering the principles of consistency and the order of CIT(A) for the A.Y. 2012-13, the CIT(A) held that the foreign exchange fluctuation loss here in the peculiar facts and circumstances, is an all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of M/s.Kedarnath Jute Manufacturing Co., Ltd V. CIT (1971) 82 ITR 363 (SC). It is therefore a decided position of law that, merely because a different treatment was given to an expenditure in the books, the assessee cannot be denied of such expenditure while computing the total income as per the provisions of the Act, if such expenditure is otherwise allowable as per the said provisions. 10.7 The Ld. AR also relied on the following case laws: i) Likproof India Pvt. Ltd. vs. Addl. CIT ii) Pr. CIT vs. Seagram Manufacturing Pvt. Ltd. 78 Taxmann.com 293 (Delhi) iii) MFAR Hotels Resorts Ltd. vs. ACIT (105 taxmann.com 335 (cochin Trib.) iv) Baby Memorial Hospital Ltd. vs. ACIT 111 taxmann.com 189 (Cochin Trib.). Thus, the Ld. AR requested the Tribunal to consider the submissions above. 10.8 We have heard the rival submissions and perused the record. The Supreme Court in the case of Sutlej Cotton Mills Ltd. vs. CIT reported in (1979) 116 ITR 1 held as under: The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee of account of appreciation or depreciation in the value of foreign currency held by it, on conversion ..... X X X X Extracts X X X X X X X X Extracts X X X X
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