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TMI Blog2022 (12) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... d in quantum proceedings while he had confirmed the levy of penalty on certain other issues. Since the fate of the penalty appeal is dependent on the order passed in the quantum appeal of the assessee, all the appeals were taken up together for hearing. 3. We shall first deal with assessee's appeal in quantum proceedings in ITA No.1747/Ahd/2009 - A.Y 2005-06 4. The original grounds raised by the assessee being argumentative, the assessee subsequently filed concise grounds of appeal before us on 24-12-13 to which no objection was raised by the Revenue. We shall therefore be dealing with the grounds raised therein. 5. Ground No 1-3, it was contended related to the disallowance of project expenses, depreciation and on account of addition made of interest and misc income earned from the certain projects undertaken by the assessee which the AO found had not commenced operations. Ld.Counsel for the assessee contended that his arguments with respect to all the grounds were identical. Therefore, all the above grounds are being dealt with together. 6. Ld.counsel for the assessee stated that the assessee being in the business of exploration of minerals was undertaking the said activity a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ignite Project, Bhavnagar at Rs.12,305/- iii) Lignite Project, Tadkeshwar Rs.33,01,301/- 7. The ld.counsel for the assessee stated that all these issues have been raised in Ground No.1, 2 and 3 as under: "a) In facts and circumstances of the case, Your Appellant most respectfully submits that the learned Assessing Officer has erred in rejecting claim of project expenses of Rs. 32,60,51,123/- in respect of lignite based AKRI MOTA POWER PROJECT which was a step further for forward integration of existing business, and Ld. CIT (A) has further erred in Confirming this disallowance. b) In facts and circumstances of the case, Your Appellant further submits that Ld. A.O, erred in making an addition of Rs. 555,24,208/~ being Interest and Misc income of the said Power Project, Particularly when the payment of interest in respect of said Power Project was Capitalized, and Ld. CIT(A) has further erred in confirming this addition. 2. In facts and circumstances of the case, Your Appellant most respectfully submits that learned A.O. erred in making addition of project expenses in respect of two Lignite Projects at Bhavnagar and Tadkeshwar Which were basically an expansion of its Exist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nothing but vertical integration of existing business of the assessee only, and could not be treated as new business carried out by the assessee. The ld.counsel for the assessee reiterated his contention that considering the fact that management, control and funds and entire work was being carried out under a common business system only, merely because the projects were situated in different geographical locations it could not be said to be new business. 10. The ld.DR relied on the orders of the Revenue authorities. 11. We have gone through order of authorities below, and we have noted that with respect to Akri Mota power project, which was dealt at para-5 of the CIT(A)'s order, the entire project expenses of Rs.33,60,51,123/- were disallowed for the reason that it was entirely new project set up by the assessee; process of construction was going on, and had not commenced production or generation of electricity. Further it was held not to be an expansion of the existing business of the assessee, but an entirely new project totally different and distinct from the existing industrial undertaking. The ld.CIT(A), we have noted, has confirmed, disallowance of project expense, as made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld.A.R. carefully. The LdAR. has not contradicted the findings of the A.O. that the project under reference was entirely a new project the construction thereof was not completed during the relevant period. Further the Ld.A.R. has not brought on record supporting facts to show that the project was an expansion of appellant's existing business. It is a well settled position of law that the expenditure incurred on interest for the money borrowed for setting up a new industrial undertaking is not deductible before its completion. In these circumstances, the A.O. has rightly rejected the appellant's claim for deduction under the provisions of sec.36(1)(iii) of the Act" 13. With respect to Tadkeshwar project, for the same reason, as in the case of Bhavnagar project, the claim of project expenses was disallowed. The findings of the Ld.CIT(A) upholding the order of the AO at para 7.2 of his order is as under: "7.2 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. The Ld.A.R. has not contradicted the findings of the A.O. that the project under reference was entirely a new project and the construction thereof was not completed during the re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is entitled to claim interest paid thereon as deduction under Section 36(1)(iii) of the Act; (iii) interest may have to be capitalized after the borrowed capital or loan taken is utilized in bringing into existence an asset at the stage of commencement of business. In other words, after the assesseeDs business had already commenced then the interest paid on capital borrowed or loan taken can be claimed as deduction under Section 36 (1)(iii) of the Act. (iv) in coming to the conclusion whether the interest paid on capital borrowed or loan taken in setting up a new line of business ought to be capitalized or treated as revenue expenditure, the test as laid down by the Supreme Court in the case of Produce Exchange Corporation (supra) and Prithvi Insurance Company (supra) would be relevant and; (v) lastly, as long as interest is paid on capital borrowed or loan taken in respect of new line of business which is in the same business fold for the purposes of ascertaining income under Section 28 of the Act, it can be claimed as a deduction under Section 36(1)(iii) of the Act. 8. In the instant case, the Tribunal has returned the finding that there is a unity of control and manageme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h has not been manufactured by the assessee and therefore the power project could not be said to be vertical integration of the business of the assessee . This we find is of no consequence. As long as it is not disputed that lignite is the major raw material from which power is been generated and lignite being extracted by the assessee itself in its mining business, setting up power project is nothing but a vertical integration of the business of the assessee only. For this reason alone, setting up of the power project cannot be said to be a new business of the assessee. Even otherwise, based on the parameter laid down by the Hon'ble Apex Court in Monnet Industries (supra) also it cannot be said to be new business undertaking merely because it is a completely different project which has been set up by the assessee. In the case of Monnet Industries Ltd. (supra) the facts of the case was that the assessee was in the business of ferro-alloys and had set up sugar manufacturing plants at different place s which were treated as new business of the assessee and all expenditure incurred prior to the commencement of the business were treated as not allowable. In these facts and circumstance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance of depreciation with respect to these projects since we have held these projects to be in continuation of the business of the assessee and not new undertakings set up ,above in our order. 22. As for denial of depreciation of machinery used in AKRI MOTA Project,it transpires from order of the authorities below that claim was denied for the reasons that the assets were not shown to have been used as at the end of the year. The assessee's claim of having conducted trial production or trial run was rejected by the Revenue. The reasons for rejecting the claim, as emanates from orders of the ld.CIT(A), is that apparently after conducting the trial run the assessee had actually put to use its machinery after seven months and gave no explanation for this long gap between conducting trial run and commencing actual user of the assets, from which the Revenue concluded that trial run conducted by the assessee was a mere sham and only for the purpose of claiming huge depreciation. 23. Before us, the ld.counsel for the assessee contended that the fact that it had conducted trial run had been evidenced by the fact that the power generated by virtue of trial run was to GEB; copy of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cies ,that there is a huge gap between trial run and production of power, being seven months, for which no reasonable explanation was apparently given by the assessee. Considering the fact that the assessee had demonstrated carrying on trial runs with valid evidences, which have not been controverted by the Revenue despite being placed before both the authorities below, we cannot agree with the finding of the Revenue authorities that no trial run was conducted by the assessee. In view of the same, we hold that the assessee had rightly claimed deprecation at Rs122,67,81,665 & Rs 38,26,54,024/-. Assessee's claim of depreciation is accordingly allowed. Ground of appeal No. 1-3 are allowed. 26. Ground No.4 raised by the assessee is against order of the ld.CIT(A) upholding rejection of claim of prior period expenses amounting to Rs.67,37,949/-. The ground reads as under: 4. In facts and circumstances of the case, Your Appellant most respectfully submits that the Ld. A.O. erred in rejecting claim of Rs. 67,37,9497- being the amount of prior period expenses even through the said expenditure had, materialized and Crestaiised during this Financial Year and Ld, C!T (A) further erred in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention was drawn to para-4 to 4.3 of the order containing the said directions of the ITAT. In view of this, the ld.counsel for the assessee fairly admitted that he had no grievance against the direction of the ld.CIT(A) on the impugned issue. 29. In view of the above, We see no reason to interfere in the order of the ld.CIT(A) in this regard. This ground of appeal raised by the assessee is therefore dismissed. 30. Ground No.5, 6 and 10 relate to different additions/ disallowances made on account of lease and buy-back arrangement entered into by the assessee with Gujarat State Road Transport Corporation (GSRTC). 31. The ld.counsel for the assessee pointed out that the assessee had bought buses from GSRTC which were leased back to be sold to it ultimately in a lease and buy-back arrangement. Accordingly, the assessee had claimed depreciation on these buses, being owner of these buses and had also shown lease rental income and interest income on delayed rent received. Further, since the assessee was unable to recover the lease rental income from GSRTC it had accounted for the lease rental and interest income on receipt basis. Also considering inability of GSRTC to pay the lease re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nbsp; 32. Taking up first denial of depreciation on buses which were leased out by the assessee to GSRTC, the Ld. Counsel for the assessee's contention was that the Revenue had relied on the decision of Special Bench of the ITAT in the case of Indus Ind Bank Vs. ACIT in (2012) 135 ITD 165 while holding so. The ld.counsel for the assessee contended that since then much water had flown and these lease and buyback issues had been accepted to be genuine by Supreme Court in the case of ICDS Ltd.Vs. CIT, 29 taxmann.com 129 (SC). Copy of the order was placed before us. 33. With respect to claim of bad debt, contention of the ld.counsel for the assessee was that this claim had been made in the P&L account by the assessee and it had been explained to the authorities below that it pertained to the lease rental and interest income from GSRTC which had remained unrecovered. He contended that even Directors' resolution in this regard, in writing, approving write off of bad debts had been filed. The ld.counsel for the assessee further contended that the Revenue's contention that the assessee had renewed lease and buy-back arrangement in the year showed that there was no problem in recovery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing since A. Y. 1994-95 relevant to accounting year 1993-94. 8.2 Your Appellant entered into first leasing transaction with Gujarat State Road Transport Corporation under lease Agreement in F. Y 1993-94 relevant to A. Y. 1994-95 for giving Buses on lease to Gujarat State Road Transport Corporation which were purchased under valid sale invoices of Gujarat State Road Transport Corporation Dt. 24/03/94. The full consideration was paid by A/c. payee cheques. Due Sales Tax payable to State Government by the Vendors viz. Gujarat State Road Transport Corporation was also paid. The lease rentals also received periodically by A/c. payee cheques. 8.3 In respect of first leasing transactions entered into A.Y. 1994-95 with Gujarat State Road Transport Corporation, the same has been accepted as genuine lease transaction by the Learned Assessing Officer being Dy. Comm. Of Income, SR-9, Ahmedabad in order passed u/s. 143(3) of the Act Dt. 21/03/1997 and taxed the lease rentals and accepted the claim of depreciation since your Appellant fulfilled both the conditions laid down for grant of depreciation u/s. 32 of the Act in original scrutiny assessment made u/s.143(3) for A.Y. 1995-96, A.Y. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation as the Hon'ble I.T.A.T. has not decided the issue on merits. Therefore, under these circumstances, the ground taken by the appellant against the disallowance is hereby dismissed." 35. He also drawn to para 15-15.5 of the order taxing lease rental and interest on delayed rentals on accrual basis rejecting assesses claim of accounting for on receipt basis as under: "15. The ground No.8 of appeal is regarding taxing of interest and lease rent receivable amounting to Rs.8,93,10,033/-. The A.O. from the perusal of Directors report found that the statutory auditors of the appellant had observed that "certain items of income are accounted on cash basis as stated in accounting policy No.1(A) in Schedule XVI which is not in accordance with Accounting Standard AS 9 "Revenue Recognition" ". In continuation of such note the A.O. found that the appellant had not accounted for lease rental amounting to Rs.5,37,26,160/- and delayed interest thereon amounting to Rs.3,27,89,873/- receivable from G.S.R.T.C. during the relevant period. He further found the appellant did not account for the interest accrued on loan to GIIC amounting to Rs.27,94,000/-. In response to queries raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oubtful, interest in respect of the same was also not provided relying on the on the decision of Hon'ble Supreme Court in the case of Uco Bank v CIT 237 ITR 889 . The Learned assessing officer has not accepted the contention of your appellant and has made the addition of Rs. 27,94,000/-." 15.3 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. It is an admitted fact that the appellant is following mercantile system of accounting. The provisions of sec. 145 of the Act are very clear in this regard after its amendment w.e.f. 1.4.1997, that an assessee has to follow either cash system of accounting or the mercantile system of accounting. The hybrid system of accounting is not permissible now. Under the mercantile system of accounting the income has to be recognized on accrual basis only. It may be pointed out that the appellant's main plea regarding non inclusion of impugned income is that M/s.G.S.R.T.C. was not in a position to pay its due. However, such plea is against the facts which emerged after close analysis of the affairs of the appellant company made by the A.O. The appellant in the F.Y.2005-06 itself debited the accounts of G.S.R. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the close of the accounting year in respect of the assessment year 1978-79. The Tribunal held that what was waived by the assessee was income which had already accrued to it according to the method of accounting regularly employed by it. On a reference: Held, that the taxability is attracted not only when income was actually received but also when it accrued. Income accrues when it falls due, that is to say when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive. Therefore, the income by way of interest, waived by the assessee, was includible in its total income for the assessment years 1977-78 and 1978-79." 15.5 The reliance placed by the Ld.A.R. on the decision of Hon'ble Supreme Court in the case of UCO Bank Ltd 237 ITR 887 is of no help to the appellant as same has been rendered in respect of the sticky advances in the banking business. Therefore, in view of the above, the ground taken by the appellant is hereby dismissed." He further drew our attention to para 18-18.3 of the order denying claim of bad debts on account of unrecoverable lease rentals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the relevant period. In this regard reliance is also placed on the decision of the Hon'ble Gujarat High Court in the case of Dhall Enterprise and Engineers Pvt. Ltd Vs. CIT 295 ITR 481 has held that "under clause (vii) of section 36(1) of the Income-tax Act, 1961, the requirement for allowing deduction on account of bad debt is that the bad debt should be written off as irrecoverable. Merely debiting the amount is not sufficient. The requirement is that the assesses should also prove that the debt has become bad in that particular year."(emphasis supplied). 18.3 Therefore, the appellant has to prove two vital points for claiming a deduction u/s.36(1)(vii) with regard to bad debt namely the debt has become bad, and it became bad during the relevant period. The debt claimed by the appellant in respect of G.S.R.T.C does not fulfill the conditions as laid down by the Hon'ble Gujarat High Court in the case of Dhall Enterprise and Engineers Pvt. Ltd. In view of this the appellant's claim of bad debt amounting to Rs.11,75,96,456/- is hereby Rejected. The disallowance made by the A.O. is therefore, hereby confirmed." 36. We have heard the rival contentions and gone thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on'ble apex court and the Ld.DR has not distinguished the said case before us, applying the decision of the Hon'ble apex court ,we hold that the assesses is entitled to claim depreciation on leased assets .The order of the Ld.CIT(A) upholding the disallowance of depreciation amounting to Rs.72,30,369/- is set aside and the AO is directed to allow the same. 39. Having held so, we now proceed to deal with the issue of taxing the lease rentals; on accrual basis as held by the Revenue or on cash basis as claimed by the assessee. 40. We find that the solitary basis with the Revenue for taxing lease rentals on accrual basis is that the assessee was following mercantile system of accounting and even section 145 of the Act directs following of either cash or mercantile system and not hybrid system. But as rightly pointed out by the Ld.Counsel for the assessee, even as per the accrual basis only those amounts certain for recovery are to be accounted for. In the present case the contention of the assessee was that GSRTC being in stringent financial position was not paying lease rentals .This is evident from the fact that the assessee had written off lease rentals of earlier years unrecover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Ld, A.O. has erred in making addition of Rs.53,84,000/- in respect of contribution made to the Office of Commissioner of Geology & Mining, Gandhinagar on the plea that there was no legal or statutory obligation or liability of the Appellant to make such payment. Your Appellant further submits that for the purpose of allowance of any expenditure incurred by the Appellant as per the provisions of sect 37 of the IT Act, the expenditure should be for the purpose of business, and Ld. CIT (A) has further erred in confirming such addition." 44. As transpires from orders of the authorities below, the AO has disallowed the contribution made by the assessee to the Office of Commissioner of Geology & Mining, Gandhinagar amounting to Rs.53,84,000/-holding that there was no legal and statutory liability for the assessee to make such expenditure, and he further observed that the assessee did not bring on record the benefit derived from it during the relevant period out of such expenses. 45. Before the ld.CIT(A), the assessee contended that this contribution of Rs.53,84,000/- to the Office of Geology & Mining, Gandhinagar was made for the purpose of upgradation of their laboratory at Gandhin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Gandhinagar was in furtherance of the business of the assessee only. The fact that the contribution made to the Office of Commissioner of Geology & Mining, Gandhinagar was given for setting up of laboratory for research and testing in the field of mining, has not been controverted by the Revenue. It is also fact on record that the assessee is in the business of mining of minerals. Therefore the research carried out in the laboratory would benefit the assessee is a foregone conclusion. There is no doubt that the contribution made by the assessee to the Office of Commissioner of Geology & Mining, Gandhinagar was to assist and for the benefit of the business of mining only. The assessee need not demonstrate derivation of any direct/actual benefit on account of any expenditure claimed as long as intention for deriving benefit from the said expenditure is there. Intention to derive benefit is sufficient to treat the claim as allowable revenue expenditure on commercial principle itself. As rightly pointed out by the Ld.Counsel for the assessee, the Hon'ble apex court ,in the case of Sri Venkata Satyanarayana Rice Mill Contractors Co.(supra) settled the proposition with regard to claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt had held that there was a continuous benefit to the business of the company over the entire period. He further relied on the decision of Hon'ble Bombay High Court in the case of Taparia Tools Ltd., 260 ITR 102 taking the same view. The relevant findings of the Ld.CIT(A) at page 40 para 21.2 - 21.5 of the order is as under; "21.2 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. I find considerable force in the argument of the Ld.A.R. that the expenditure incurred for diverting the river does not result in acquisition of a new capital asset by the appellant. Nonetheless, the nature of expenditure is such that the appellant will be having benefit therefrom for a longer period. Therefore, under these circumstances, having regard to the matching principle, entire expenses incurred for getting the benefit under reference cannot be allowed in the year under reference. In this regard, reliance is placed on the decisions of Hon'ble Supreme Court in the case of Madras Industrial Investment Corpn. Vs. CIT 225 ITR 802, wherein the apex court held that where there is a continuing benefit to the business of the company over the entire period. The lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the River. The purpose was to remove an obstacle and therefore there was no question of the assessee deriving any enduring benefit from the same also. He drew our attention to submissions filed to the Ld.CIT(A) in this regard reproduced at para 21.1 of the order as under: " 21.1 During the appellate proceedings, the Ld.A.R. of the appellant objected to the said addition and submitted as under: 11.24 Your Appellant is engaged in mining activities. Whenever mining is required to be done at a place where river is flowing, the same is required to be diverted to facilitate mining at such place. Your appellant incurred expenditure of Rs.3,41,80,929/- in this regard during the year under review. 11.25 The Learned assessing officer has wrongly considered this expenditure as Capital expenditure giving a benefit of enduring nature to your appellant. The Learned assessing officer has failed to appreciate the difference between the benefit and removal of disadvantage or obstacle. The said expenditure did not give any benefit to your appellant but it simply removed the disadvantage which was there. 11.26 Your appellant relied on the decisions of Hon'ble Supreme Court in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Madras Industrial Investment Corp.(supra) also relied upon by the Ld.CIT(A) is we find distinguishable on facts where the issue before the Hon'ble Apex Court was allowability of discount on issue of debentures, which it was held was to be allowed proportionately over the period of holding of the debentures. The issue therefore did not relate to capital/revenue expenditure. This issue was also there in Taparia Tools(supra) where the Hon'ble Bombay High Court held likewise but the said decision was reversed by the Hon'ble apex court subsequently . In view of the above we hold, the assessee's claim of expenses incurred for excavation of river diversion amounting to Rs.3,4,80,929/- as allowable revenue expense. Ground of appeal No.8 is allowed. 56. Ground No.9 raised by the assessee relates to disallowance of interest incurred for the purpose of earning exempt income, amounting to Rs.23,50,047/-,as per the provisions of section 14A of the Act, which was confirmed by the ld.CIT(A). The said ground reads as under: "9. In facts and circumstances of the case, Your Appellant most respectfully submits that Ld, A.O, has erred in making an addition of Rs. 23,50,047/- u/s 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for the purpose of making investment. He drew our attention to the audited financial accounts of the assessee before us placed at page no.1 to 105. He pointed out that the assessee had owned interest free funds of Rs.767.00 Crs while investment for earning exempt income amounted to only Rs.71 crores. He stated therefore that no disallowance under section 14A was warranted and relied upon the decision of Hon'ble Apex Court in the case of CIT(LTU) vs Reliance Industries Ltd. CA No. 37 of 2019 & others dated 23-03-2019. He further contended that direction of the ld.CIT(A) to follow Rule 8D for the purpose of computing disallowable expenses in the impugned year i.e. Asst.Year 2005-06 when such rules were not even notified was not in accordance with judgment of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. CO. Vs. CIT, 328 ITR 81wherein it had been categorically held that these rules were to be applied prospectively only w.e.f. Asst.Year 2007-08 onwards. He further pointed out that in the preceding year i.e. Asst.Year 2003-04, this issue had been decided by the ITAT in favour of the assessee. Our attention as drawn to page no.15 of the compilation of the orders wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X
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