AI Drafter 
TaxTMI 
TaxTMI 
2011 (10) TMI 629
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....cessary. The learned counsel also placed a fact sheet on record to sum up the issues. ITA No. 408/Mum/2010 4. In this appeal assessee has raised six grounds on various issues. Ground No. 1 and 2 are as under: - "1) The learned Commissioner of Income Tax (Appeals) - 15, Mumbai erred in confirming the disallowance of Rs. 229 lacs being contractual liability/expenses incurred in respect of setting up a paint plant at Pondicherry being expansion of paint business which was no longer pursued. 2. The Learned Commissioner of Income Tax (Appeals) -15, Mumbai erred in confirming disallowance of Rs. 90 lacs being contractual liability/expansion incurred in respect of setting up a paint plant at Taloja (Maharashtra) being expansion of paint business which was no longer pursued." 5. The facts leading to the issue are that the assessee intended to set up a plant in South India in order to cope up with the increase in demand for paints . The project in Pondicherry was considered and started the process and spent an amount of Rs. 2.29 crores, the details of which are as under: - S. No. Name of the Party Particulars Amount 1 Dalal Mott MacDonal....
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....vt. Ltd. Fly Ash Supply 2.48 Total 75.49 7. The A.O. disallowed the claim of both the above expenses on the ground that these expenses are capital in nature. With reference to the claim of Rs. 2.29 crores he was of the opinion that this expenditure was for an abandoned project, therefore, the expenditure is capital in nature and cannot be allowed as revenue expenditure. With reference to the provision made for Taloja plant he was of the opinion that this expenditure even though falls under pre-operative expenditure the deduction under section 35D(2) cannot be allowed as these were paid to a party which is not approved by the CBDT and further the project was completed in a later year and assessee had treated the amount as part of work-in-progress, therefore, capital in nature. 8. Before the CIT(A) it was contended that both the amounts are to be allowed as revenue expenditure as they pertain to abandoned projects and relied on various case law as under: - i. CIT vs. Graphic India Ltd 137 CTR 123 (Cal) ii. CIT vs. Woodcraft Products Ltd. 69 Taxman 415 iii. Excel Industries vs. DCIT 86 TTJ 840 The CIT(A) did....
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....ed the assessee is in the business of manufacturing paints. It had various projects in and outside India. The reasons for abandonment of the Pondicherry project was stated to be that the permissions were not granted by the Pondicherry govt. and the expenditure include evaluation, design and part construction. The case law relied upon by the assessee mostly pertain to the expenditure incurred on feasibility study. Feasibility studies/projects reports in the existing line of business of the assessee would have certainly been in the nature of revenue expenditure but in the case of the assessee it is not the expenditure alone on feasibility study or project reports. It is the expenditure of establishing a unit itself. The existing case law on this issue were reviewed by the Hon'ble Delhi High Court in the case of CIT vs. Priya Village Roadshows Ltd. 228 CTR 271 wherein the Hon'ble Delhi High Court not only considered its own order in the case of Triveni engineering Works Ltd. vs. CIT 232 ITR 639 and CIT vs. Modi Industries 200 ITR 341 but also considered the principles established by the Hon'ble Supreme Court in the case of empire Jute Co. Ltd. vs. CIT 124 ITR 1 and the lea....
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....f Karnataka and, therefore, the said project unit was abandoned during the assessment year. It was held by the Hon'ble Delhi High Court that the project related expenses are revenue in nature. Relying on the above principles, since the facts are similar to the present case the expenditure is to be allowed as revenue expenditure. Moreover it is seen that most of the expenditure pertains to the project consultancy and compensation charges except an amount of Rs. 18 lakhs for construction of compound wall. As far as feasibility study and architectural services are concerned they are, certainly, in the nature of revenue expenditure. As far as other two expenses are concerned an amount of Rs. 18,00,830/- pertains to construction of compound wall in which an asset was created, therefore, that part of the expenditure becomes capital expenditure, whereas the balance expenditure, including compensation charges are concerned, no asset was created by paying this amount. Accordingly, except the amount of Rs. 18,00,830/- claimed in the above, the balance of the amount is to be allowed as revenue expenditure and, therefore ground is partly allowed to the extent stated above. As far as Rs. 18....
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....considered. The CIT(A) considered the decision of the ITAT in the case of Shapporji S. Pallanji Power Ltd. vs. ITO 318 ITR (AT) 377 wherein the issue is of setting up of business/commencement of business for the first time. Since assessee is already in the business for a number of years the above case law relied on by the CIT(A) does not apply to the facts of the case. 15. Ground No. 3 pertains to the issue of adhoc addition of Rs. 76.72 lakhs on account of non-inclusion of damaged stock in valuation of closing stock. The issue arose as assessee is not valuing the damaged stock while computing the value of closing stock which was segregated and stored at a separate place and was taken into account as and when goods were disposed off. The A.O. has taken 0.4% of the closing stock as value of damaged stock and added to the closing stock. 16. At the outset it was submitted that this issue was covered by the order of the ITAT against assessee in earlier years and the amounts were being allowed in the year of actual sale. The relevant portion of the order is as under: - "10. Ground No. 2 is in respect of ad hoc addition of Rs. 50 lacs on account of non-inclusion of damaged....
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.... bank account where the surplus funds generated in that year was deposited. The argument that assessee could have utilized its surplus funds in repaying the borrowings instead of investing in shares and by not doing so, there was diversion of borrowed funds towards investment in shares to earn dividend income was not acceptable in view of CIT vs. Hero Cycles Ltd. 323 ITR 518 where it was held, distinguishing Abhishek Industries 286 ITR 1 (P&H), that if investment in shares is made by an assessee out of own funds and not out of borrowed funds, disallowance under section 14A is not sustainable. Accordingly, the disallowance of interest on borrowed funds as deleted. The learned counsel relied on above decision. 19. We notice that the A.O. as well as the CIT(A) invoked the provisions of Rule 8D. However, in the case of Godrej & Boyce Ltd. Mfg. Co. VS. DCIT 328 ITR 81 the Hon'ble Bombay High Court has held that application of Rule 8D is only prospective and, therefore, the said rule cannot be applied to A.Y. 2005-06. In the interest of justice, respectfully following the above decision we restore the issue to the file of the A.O. to examine the disallowance under section 14A cons....
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....Y. 1993-94 was already offered for tax in the return of income for A.Y. 2004-05. 22. Consequent to rectification orders the amount of interest granted was withdrawn. Therefore the assessee claimed the withdrawn amount as deduction as the same was offered as income in earlier years. Even though assessee has reconciled the amounts and claimed that the amount withdrawn by the Revenue which was offered as income in earlier year be allowed as deduction, the same was not considered by the A.O. and the CIT(A). Assessee relied on the decision in the case of CIT vs. Syndicate Bank 159 ITR 464. On examination of the facts as placed on record and consequential orders given in this regard, we are of the opinion that this issue requires factual examination by the A.O., as consequent to the orders of the ITAT in A.Y.1993-94, some more interest was granted to assessee. Therefore, the A.O. is directed to examine the interest granted to assessee and interest offered by assessee in respective assessment years and rework out the allowable amount if the amount offered to tax stood withdrawn by the Revenue, to that extent. A factual examination is required and the A.O. is directed to decide the issu....
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.... the short term capital gains he allowed only the cost of Rs. 1.12 crores paid on 22nd May 2004 and arrived at the short term capital gain at Rs. 8.02 crores. It was AO's contention that the purchase of lease rights as well surrender of tenancy was not related to the purchase of land, therefore, the cost paid for that cannot be considered as cost of acquisition. Before the CIT(A) it was contended that assessee had acquired the capital asset by originally paying for complete lease hold rights and subsequently vacating the tenancy by paying an amount of Rs. 4.77 crores, which amount should be considered as cost of improvement consequent to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Piroja C. Patel 242 ITR 582. Further the payment for reversionary rights of Rs. 1.12 crores was for betterment of existing lease hold rights and all put together assessee has acquired complete rights of the land which it has sold. Therefore, assessee was correct in taking indexed cost of acquisition at Rs. 11.66 crores. 26. The learned CIT(A), after considering the submissions and considering the Hon'ble Bombay High Court judgement in the case of CIT vs. Dr. D.A. Irani ....
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.... 1998 itself. The payment for vacation of tenants has to be considered as cost of improvement of the existing tenancy rights as per the decision of the Hon'ble Bombay High Court in the case of CIT vs. Piroja C. Patel 242 ITR 582. Subsequent to the vacation of tenancy in 2000, assessee has complete tenancy rights which are perpetually handed over by the original owner Shri Gandhi. For betterment of the existing title which the assessee has already had, a further agreement was entered into with Shri Gandhi for acquiring reversionary rights so that the title is complete. So when the lessee purchased the leased property from the owner by acquiring the reversionary rights the lease got extinguished. Therefore, the decision of CIT(A) in treating that the complete rights were acquired only in 2004 consequent to the acquisition of reversionary rights can not be faulted. The doctrine of merger was applied resulting in 'drowning' and 'sinking' of inferior right into superior right. Assessee has transferred his complete rights acquired by way of tenancy rights as well as reversionary rights in the property for development. Therefore, we are of the opinion that the CIT(A) has rightly consi....
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....en in the earlier year will have a consequential effect in the present assessment year. In A.Y. 2004-05, i.e. immediately preceding assessment year the matter was considered by the ITAT and the issue was restored to the file of the A.O. to examine the matter in the light of the orders in the earlier years. Respectfully following the same the issue is restored to the file of the A.O. to do it in the light of the facts as available on record in earlier years. Ground 2 is considered allowed for statistical purposes. 33. Ground No. 3 pertains to the direction of the CIT(A) in deleting the addition made on account of distribution of gift articles. The A.O., consequent to the orders in earlier years has disallowed 50% of the articles distributed as gift articles. The CIT(A), following the earlier years orders, deleted the said disallowance. 34. It is fairly submitted that the ITAT in A.Y. 2003-04 and in 2004-05 restricted the disallowance to 10% of the total amount distributed as gift articles. Respectfully following the same, we restrict the disallowance made by the A.O. to 10% of the total expenses. Accordingly the order of the CIT(A) to that extent is partly set aside and Assess....
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....and 0.25% of the guarantee amount as commission in financial year 2003-04. However, the A.O. made a reference to the TPO under section 92CA(1) for computing the arms length price in relation to international transactions. Assessee objected to the issue of treating the guarantee provided as not an international transaction and further submitted the details that assessee also charged a mark up of 0.20% on the entire guarantee commission and recovered an amount of Rs. 31,82,729/- in addition to the commission charged by the Indian branches of the bank from the assessee. The TPO, however, on the basis of the details available in the website of the ICICI Bank determined the bank guarantee charges at 3% of the amount and proposed an addition of Rs. 2,22,60,000/- as an adjustment. The facts were placed before the CIT(A) and also the fact that the TPO in earlier years has not made any adjustment on similar facts. The CIT(A), after considering the submissions, deleted the addition so made by observing as under: - "26) 1 have considered the submission and perused the assessment order as well as the TPO's order. Guarantee fees or a financial loan guarantee is a commitment entered int....