TaxTMI 
TaxTMI 
TaxTMI 
2017 (12) TMI 535
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....t was completed u/s 143(3) on 27-12-2010 determining total income at Rs. 49,36,78,420, interalia making additions / disallowances towards share application money u/s 68 of the Income-tax Act, 1961, disallowance of depreciation on assets, disallowance of interest u/ s36(1)(iii) and u/s 43B, disallowance of repairs and maintenance being capital expenditure, addition towards excise duty u/s 145A, disallowance of expenses u/s 40(a)(ia) and addition towards shortfall in production of goods. 3. Aggrieved by the assessment order, assessee preferred appeal before CIT(A). Before the CIT(A), assessee filed written submissions on various additions / disallowances made by the AO. The CIT(A), for the detailed reasons recorded in his order dated 30-11-2011 deleted additions made by the AO towards share application money u/s 68, disallowance of depreciation on fixed assets, disallowance of interest u/s 36(1)(iii) and u/s 43B, addition made by the AO towards excise duty u/s 145A, addition on account of excise duty credits in balance-sheet u/s 145(3), addition towards expenses u/s 40(a)(ia) for failure to deduct tax at source u/s 194C and addition made on account of shortfall in production by reje....
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....thin the meaning of Section 40(a)(ia) of the Act. 9. On the facts and in the circumstances of the case and law, the Ld. CIT(A) erred in deleting the addition made on account of reduction of production amounting of Rs. 21,65,77,838/- by rejecting the books of account ' u/s.145 of the Act. 10. On the facts and in the circumstances of the case and law, the Ld CIT(A) erred in admitting additional evidences despite submitting remand report and against Rule 46A IT rules 1962 11. The appellant prays that the order of the CIT(A) on the grounds be set aside and that of the Assessing Officer be restored." 5. The first issue that came up for our consideration from revenue's appeal is addition made on account of share application money amounting to Rs. 8,51,26,250 within the meaning of section 68 of the Act. The facts with regard to the impugned addition are that during the year under consideration, the assessee company has allotted share capital with share premium to M/s Great Value Company Ltd of Mauritius. The assessee has received a sum of Rs. 8,51,26,250 from M/s Great Value Company Ltd of Mauritius in the financial year relevant to assessment year 2007-08. The assessee ....
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....l year years, therefore, there is no reason given by the assessee to justify charging premium of Rs. 190 per share. All these sequence of events show that the purported share application money received from M/s Great Value Company Ltd of Mauritius and allotment of equity shares with huge premium of Rs. 190 is not a genuine transaction and accordingly opined that the assessee has failed to establish genuineness of transactions and creditworthiness of the parties and hence, made addition towards share application money received from M/s Great Value Company Ltd of Mauritius u/s 68 of the Income-tax Act, 1961. 6. The Ld. DR submitted that the Ld.CIT(A) erred in deleting addition made by the AO towards share application money without appreciating the facts that the assessee has failed to discharge onus cast upon it u/s 68 of the Act, by discharging genuineness of transactions and creditworthiness of the parties. The Ld.DR further submitted that though the assessee has furnished relevant details to prove identity of the share application money, the sequence of events clearly establishes the fact that the assessee is not able to justify charging huge premium of Rs. 190 per share, therefo....
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....ted that addition cannot be made towards credits received in the earlier year u/s 68 of the Income-tax Act, 1961. 8. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The facts with regard to the receipt of share application money in the financial year relevant to AY 2007-08 has not been disputed by the lower authorities. In fact, this issue has been examined in the assessment proceedings of A.Y. 2007-08. The assessee has filed relevant evidences to prove receipt of money in the financial year relevant to AY 2007-08. As per the Foreign Inward Remittance certificate filed by the assessee and issued by HDFC Bank Ltd, Lower Parel Branch, the assessee has received share application money from M/s Great Value Company Ltd of Mauritius on 08-04-2006, 27-12-2006 and 31-03-2007. The assessee also filed various details including share application form, confirmation from subscriber, CA's certificate for valuation of shares, application filed with RBI for approval of allotment of equity shares to NRI, Board resolution for charging premium and statutory form filed with registrar of companies for increase in share capital ....
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..... The assessee has filed various details to discharge its onus cast u/s 68 of the Act, to prove identity, genuineness of transaction and creditworthiness of the parties. The assessee has received share application money from M/s Great Value Company Ltd of Mauritius through proper banking channel and the evidence of which has been furnished before the AO. The assessee also filed details of application filed before the RBI for approval of allotment of equity shares to non resident. The assessee also filed Foreign Inward Remittance certificate issued by HDFC Bank Ltd, Lower Parel Branch, which contains the name and address of the subscriber. The assessee also filed confirmation letter from the subscriber wherein the subscriber has confirmed subscription of share capital in the assessee company. The assessee also filed copies of Board Resolution authorising issue of share capital alongwith share premium. The assessee also filed certificate from CA for valuation of shares and statutory form filed with Registrar of companies for allotment of equity shares. All these evidences were filed before the AO. The AO has not made an attempt to investigate on the identity, capacity and genuineness....
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.... three ingredients of section 68 of the Act. The Ld.AO, except for finding fault with the evidence filed by the assessee and disbelieving the same has not been able to add any evidence or information to come to the conclusion that the assessee has not received share application money from the subscriber. The CIT(A), after considering all the evidences filed by the assessee, has rightly deleted addition made by the AO. We do not see any reason to interfere with the order of the Ld.CIT(A), who has dealt with all the facts elaborately and has rightly come to the conclusion that the addition u/s 68 cannot be invoked in the year under consideration. Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 11. The next issue that came up for our consideration is addition made by the AO towards disallowance of depreciation amounting to Rs. 381,07,407 within the meaning of section 32 of the Act. The AO disallowed depreciation claimed by the assessee @50% of actual depreciation on the ground that assets were put to use for less than 180 days which is evident as per the note 'credits for excise duty availed on capital goods purchased from M/s Anja....
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....pital asset which is in the nature of capital expenditure. The AO further observed that except interest on term loan all interest expenditure are incurred for business as working capital requirements. The self admission of the assessee proves that term loan on which interest is paid has not been utilised towards working capital requirements. As such interest paid on term loan is not a revenue expense, but in the nature of capital expenditure. Accordingly, interest of Rs. 1,80,13,928 has been disallowed. The CIT(A), after considering the explanation of the assessee and also relying upon the provisions of section 36(1)(iii) deleted addition made by the AO towards disallowance of interest by holding that the issue is whether interest payment is in respect of capital asset or not is irrelevant insofar as section 36(1)(iii) is concerned. The assessee is not claiming deduction on its borrowed funds, but on the corresponding interest paid on which has commenced production in the financial year 2006-07. It is obvious that the AO has confused himself on this issue and not understood the law in proper perspective. 14. The Ld.DR submitted that the Ld.CIT(A) erred in deleting addition made by....
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.... of cash credit limit. By debiting interest amount, the loan liability towards bank only increases by way of debit balance in the bank account which is clear and evident from the bank statement. This amounts to conversion of interest liability into a further loan. The assessee has not complied with the provisions of section 43B(e) and Explanation 3D thereto. Such interest is also not actually paid before filing return of income u/s 139(1). As such interest claimed in the P&L Account representing interest expenses towards cash credit account is inadmissible. 17. The Ld.DR submitted that the CIT(A) deleted addition made by the AO towards interest paid on CC account without appreciating the fact that the assessee has converted interest expenses into further loan without there being any actual payment of interest to bank which squarely covered within the provisions of Explanation 3D to section 43B(e) of the Act. 18. The Ld.AR for the assessee, on the other hand, submitted that the CIT(A) was rightly deleted addition as the provisions of section 43B(e) Explanation 3D has no application to interest paid to bank on account of interest accrued on CC account as it does not amount to conve....
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....s towards input credit and excise duty payable. The AO, without appreciating the fact only on suspicion and surmises made addition by invoking provisions of section 145. The assessee has furnished a certificate from auditors wherein they have clarified that the impugned sum has been included in the valuation of closing stock. The AO has ignored all evidences filed by the assessee to make addition towards PLA balance. There is nothing on record to show that excise duty has not been included in the value of closing stock, therefore, he deleted the addition made by the AO. 21. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. Admittedly, the assessee has shown Rs. 42,30,010 in the asset side of the balance-sheet under the head 'Personal Ledger Account'. The AO made addition towards PLA balance on the ground that the assessee has not made suitable adjustments towards unutilised Modvat credit for valuation of closing stock. We do not find any merit in the findings of the AO for the reason that there is nothing on record to indicate that the assessee has not considered unutilised input tax credit for valuation of c....
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....ot carried away by the notes to accounts to hold that income has become receivable. In this case, the assessee, instead of debiting the excise duty paid to P&L Account and crediting excise duty collected to P&L Account has routed through balancesheet Account; however, for the purpose of disclosure in the financial statements shown excise duty collected as a separate item by reducing from the gross sales. This presentation is in accordance with the provisions of section 145(1) of the I.T. Act, 1961 and the AO was incorrect in adding excise duty collected as income of the assessee. 24. The Ld.DR submitted that the Ld.CIT(A) erred in deleting addition made on account of excise credits in the balance-sheet within the meaning of section 145(3) of the Act without appreciating the fact that the assessee has not routed excise duty through its P&L Account though such treatment is mandatory in nature as per the provisions of section 145(1) of the Act. The AO has brought out clear facts that it is in the nature of income accrued to the assessee. However, the assessee has failed to recognised excise duty collected as income and hence, the AO was right in making addition and his order should b....
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....ards excise duty collected. Therefore, we are of the considered view that the CIT(A) was right in deleting addition made towards excise duty. We do not find any error in the order of the CIT(A). Hence, we are inclined to uphold the findings of the CIT(A) and reject ground raised by the revenue. 27. The next issue that came up for our consideration is addition made on account of disallowance of expenses amounting to Rs. 33,00,944 within the meaning of section 40(a)(ia) of the Act. The AO made addition towards transportation charges paid to M/s Delhi Assam Roadways Corporation Ltd on the ground that the assessee has failed to deduct tax at source u/s 194C of the Act. The AO further observed that in response to specific query, the assessee has submitted a certificate u/s 197 of the Act, submitted by the party for non deduction of tax at source. On going through the copy of the said certificate issued on 24-03-2008, it was observed that the said certificate was valid for the period 29-02-2008 to 31-03-2008. The copy of the said certificate was received by the assessee through an email on 17-12-2010. The above date clearly shows that the assessee had obtained the certificate from the p....
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....e sought to explain the difference in production of finished products attributable to quality of raw materials utilised for production of pig iron and generation of by-product, there is no basis in the generation of by-products and production of pig iron. As such generation of by-product has appeared for the first time in the books of account of the assessee. The AO further observed that the alleged moisture and generation of fines has been accounted for only in the current year and neither in the past or future records of the assessee shows such items, hence the same is without any basis and documentary evidence. Moreover, the assessee being a manufacturing industry is required to disclose the consumption ratios with regard to the yield, wastage, by-products, etc in the tax audit report as well as in the return. The tax audit report, however, does not show the yield of finished product percentage of it, shortage / excess, if any, and the relevant columns are kept blank. This itself shows that there is no such data or record maintained as on the date of tax audit. It is only when specific queries were raised, the assessee, with a view to avoid the crucial question has filed the coo....
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....thout bringing any cogent material on record in his possession that the assessee has sold goods outside the books of account or there is excess stock found in the possession of the assessee, made addition only on the basis of suspicion and surmises on the basis of comparison of production figures of previous financial years. 31. We have heard both the parties, perused the material available on record and gone through the orders of authorities below. The Ld.CIT(A) has dealt with this issue at paras 10 to 10.3.1.11 on pages 16 to 27 of his order, wherein he has extracted written submissions of the assessee as well as the point-wise explanation of the assessee to the observation of the AO in the assessment order. The Ld.CIT(A) also extracted in the form of a table remand report of the AO as well as counter comments of the assessee in respect of the remand reports dated 04-07-2010 and 08-08-2010. The Ld.CIT(A) at para 10.3.1. and 10.3.2 held that the AO had not given adequate opportunity and, therefore, additional evidence filed in the course of appellate proceedings and furnished to the AO is to be admitted as evidences. The CIT(A) has elaborately discussed the issue on merits and he....
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....eld (%) 42.39 42.23 10.3.9 Thus, even if the second issue of "moisture" in coal is not taken into account then also the yield is comparable. 10.3.10 However, the issue of moisture has also addressed. It is fact that moisture content is a factor whi le purchasing the coal f rom sister concern or any other concern. It is an integral part of coal. The moisture and ash content in LAM Coke depends upon the quality of it and will never he uniform. The appellant had filed a copy of extract taken from Website in respect of the details of a public company M/s.Vedanta (Sesa Goa Group) which indicates that moisture and ash and volatile content exceeds over 20%. However, the same will never be uniform and will vary on the quality, the process of which it has to be treated including manual pinching of coke employed by the appellant to cool it down and treated it in the range of around 5000 degree Celsius. In the above background, the moisture content taken at 3.70% by the appellant and mentioned by the Assessing Officer as a credit in calculation of yield by the appellant is very reasonable." 32. The AO has made addition towards estimated production loss on the basis of comparison of p....
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....the assessee has sold finished goods outside the books of account or the assessee is carrying stock in excess of stock shown in its books of account. The AO has not disputed books of account produced by the assessee which were subjected to audit. The AO has also overlooked the basic fact that the finished products of the assessee are excisable and no finished goods are removed without payment of excise duty. There is nothing on record to suggest that excise authorities have contemplated any action on so-called suppressed production and there is not an iota of evidence to suggest that the assessee has sold produce of finished goods, outside books of account. In the absence of any incorrectness as to books of account and stock registers, merely on the basis of comparison of production percentage of finished goods addition cannot be made for production loss, despite, the assessee explains the reasons for such production and also filed reconciliation explaining the shortfall. Therefore, we are of the view that the AO was incorrect in making addition towards estimated production loss. The CIT(A), after considering relevant facts has rightly deleted addition made by the AO. We do not fin....
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....sessee has carried out necessary repairs to keep the blast furnace intact to achieve better production. Therefore, it cannot be considered as reconstruction of new asset or brought any new asset to hold the expenditure incurred as capital expenditure. 36. The Ld.AR referring to paper book submitted that expenses of repair consists of fire bricks which is major component of repair expenditure which has been purchased from Saswat International Ltd and cost of each bricks is in the range of Rs. 113 to 209 which clearly shows that it is a part of repair of existing blast furnace, but not bringing into existence of a new asset which gives enduring benefit to the assessee. The Ld.AR also furnished copies of pictures of the machine to argue that it is an integrated production process in which blast furnace is one of the parts of the production system which required repairs as it was not giving intended results, therefore, the assessee has carried out necessary repairs. The AO never disputed the fact that the assessee has not created any new asset. The AO made disallowance only on the ground that total cost incurred for repair and maintenance worked out to 40% of existing machine. The AR ....
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....s enduring benefit till the life of the asset. The AO has given various reasons for disallowing repairs and maintenance expenditure. According to him total expenditure incurred for repairs and maintenance works out to more than 40% of the existing cost of the asset and the assessee derived enduring benefit for the rest of the life of the machinery by undertaking the repair. The AO further observed that functioning of the blast furnace is directly related to yield of production and failure of its lining which compelled the assessee to realign the same with durable efficacy and energy saving lining of fire bricks which is nothing but capital expenditure. It is the contention of the assessee that expenditure is in the nature of current repairs which does not give rise to creation of any new asset. The assessee further contended that it has repaired blast furnace which was not given expected result due to inferior quality of blast furnace which was installed for the first time in 2005 and hence, it has repaired inferior quality blast furnace to achieve better yield and energy efficient which cannot be construed as creation of new asset which gave enduring benefit to the assessee. The a....
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....urnace cannot be a guiding or decisive factor to determine whether the expenditure is capital or revenue in nature. We further notice that by repairing a part of refractory lining of the blast furnace, no additional advantage is procured by the assessee company because the repairing of the refractory lining has not enhanced capacity of the blast furnace. By repairing the blast furnace, the assessee company has regained its production capacity which has reduced substantially due to defects in the refractory lining. Thus, the assessee company has not derived any enduring benefit from the repair of the refractory lining, more so, when the life of the refractory lining cannot be determined as it has to withstand the heat above 2300 degree centigrade. Therefore, we are of the view that repair and maintenance to plant & machinery is revenue in nature. 40. The assessee has relied upon various case laws. The Hon'ble Bombay High Court in the case of New Shorrock Spinning & Manufacturing Co. Ltd. v. CIT (30 ITR 338) wherein their Lordships observed as under: "In our opinion, therefore, the expression "current repairs" used in section 10(2)(v) means expenditure on buildings, machinery, pla....
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..... J. in New Shorrock Spg. and Mfg. Co. Ltd. v. CIT [1956] 30 hR 338 (Born), the simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure should not be to bring a new asset into existence nor to obtain a new or different advantage. The quantum of expenditure." 41. In the case of CIT v. Jagat jit Industries Ltd. (241 ITR 556). the Delhi High Court held as under: "Whether on given set of facts, replacement of certain items, forming an integral or impor tant par t of the machinery would be revenue expenditure or capital expenditure is primarily a question of fact , to be decided in the context of the business carried on by an assessee. Merely, because the benefit accruing by the expenditure is of enduring nature, is by itself not a conclusive test to hold it as a capital expenditure (see Empire Jute Co. Ltd. v. CIT [1980] 124 ITR 1 (SC)). Normally initial investment on machines and their parts will be in the nature of capital expenditure but replacement of parts of an existing machinery in the co....