TaxTMI 
TaxTMI 
2019 (8) TMI 551
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....as Rs. 75.75.525/-) reduced from the capital-work-in-progress considered as taxable: 1 : I The Commissioner of Income-lax (Appeals) has erred in confirming the action of the Assessing Officer in holding that the amount of Rs. 15.68,804/- (mentioned in the assessment Order as Rs. 15,75.S25/-) being the interest earned on fixed deposits reduced from the capita I-work-in-progress as taxable. 1 : 2 The Appellant submits that considering the facts and circumstances of its case and the law prevailing on the subject the interest earned on fixed deposits is a capital receipt not exigible to tax and the Commissioner of Income-tax (Appeals) ought to have held as such. 1 : 3 The Appellant submits that the Assessing Officer be directed to delete the addition so made by him and to re-compute its total income and tax thereon accordingly. 2 : 0 Re.: Testing period revenue of Rs. 3,69,06,8557- reduced from the capitalwork- in-progress considered as taxable: 2 : 1 The Commissioner of Income-tax (Appeals) has erred in confirming the action of the Assessing Officer in holding that the testing period revenue of Rs. 3,69,06,8557- reduced from the capital-work-in-progress was part of its total....
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....ities. 5. We have considered the submissions of the parties and perused the material on record. We have seen that issue pertaining to addition of interest on fixed deposit with HDFC Bank, is squarely covered the decision of the Tribunal, Solarfield Energy Two Pvt Ltd (supra). We also find that the facts for the year under consideration are pari materia with the facts considered by Tribunal in Solarfield Energy Two Ltd (supra). The coordinate bench of Tribunal in Solarfield Energy Two Pvt Ltd (supra), after considering the judgement of the Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd vs CIT (1997) 227 ITR 172 (SC), has passed the following order:- 8. We have heard rival contentions and perused the material available on record in the light of decisions relied upon. We have also applied our mind to the decisions relied upon. Undisputed facts are, the assessee was awarded the work of setting-up of Solar Power Plant project in Rajasthan by NWIML. It is also evident, NWNL has entered into a power projects agreement with the assessee on 25th January 2012. As per the terms and conditions stipulated in the bid one of the financial criteria in Reques....
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.... of the decision In Tuticorin A/kali Chemicals and Fertilisers Ltd. (supra) referred to by the Departmental Authorities. Further, the Hon'ble Supreme Court took note of the decision of the Hon'ble Supreme Court in Challapalli Sugars Ltd. v/s CIT, [1995] 98 ITR 167 (SC) wherein it was held that accepted accountancy rule for determining cost of fixed deposit is to include all expenditure necessary to bring such assets into existence and to pay them in working condition. In case money Is borrowed by newly started company which is in the process of constructing and erecting its plant, the interest incurred before the commencement of production on such borrowed money can be capitalized and added to the cost of fixed asset created as a result of such expenditure. Following the aforesaid reasoning, the Hon'ble Supreme Court in Bokaro Steels Ltd. (supra) * held that by applying the same reasoning if the assessee receives any amounts which are inextricably linked with the process of setting-up of plant and machinery such receipts will come to reduce the cost of its assets, hence, are of capital nature. The ratio laid down by the Hon'ble Supreme Court in Bokaro Steels Ltd. ....
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....atives expenditure thereby will go to reduce the cost of CWIP. Ground raised is allowed." 6. The issue and the governing facts for the year under consideration are find to be identical to the issue decided by the Tribunal in Solarfield Energy Two Pvt Ltd, a sister concern of the assessee. Therefore, consistent with the view taken by the Tribunal in the case of Solarfield Energy Two Pvt Ltd (supra), we allow the ground raised by the assessee. 7. Ground No.2 relates to testing period revenue of Rs. 3,69,06,855/-. The ld. AT for the assessee submits that this ground of appeal is also covered in favour of the assessee by the decisions of the co-ordinate in the following cases:- 1. M/s Eco Axis Systems Pvt Ltd - ITA No.730/Mum/2013 dated 10- 08-2018 for AY 2008-09, 2. M/s A.D. Hydro Power Ltd - ITA No.5007/Del/2015 dated 10-10- 2018 for AY 2011-12, 3. Gujarat State Fertilizers & Chemicals Ltd - ITA No.3228/Ahd/2003 dated 28th August, 2009 for AY 1999-2000, 8. On the other hand the ld. DR for the revenue has relied on the orders of the lower authorities. The ld DR for the revenue further submits that the income received by the assessee before commencement of the business has to ....
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.... the development of products by the assessee and allowed capitalization of expenses but at the same time the Revenue has chosen to treat the sale of demo machines to the tune of Rs. 59,20,849/- and recovery of rent amounting to Rs. 64,200 as revenue receipt and added the same to the income of the assessee after allowing the expenses of Rs. 14,75,5537-. The case of the assessee also finds support from the Guidance Notes issued by the Institute of Chartered Accountants of India on treatment of expenditure during construction period, which provides that if any revenue is realized during the trial run or product development stage, the same should be set off against the expenditure incurred in connection with the said project/products. The case of the assessee is also squarely covered by the decisions relied upon by the learned AR. In the case of International Seaports (Haldia) P Ltd.vs. ITO (supra), the co-ordinate Bench has held as under: 8. We have heard rival contentions of both the parties and perused the materials available on record. The Id. AR submitted the paper book which is running from pages 1 to 113 and highlighted that to make the berth ready for commercial operations th....
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....un activity is regarded as an activity which is necessary to prepare the asset for its intended use. This is because flaws in the facilities at Berth noticed during trial run operation are rectified to bring the Berth to its intended use. Therefore, the expenditure incurred during trial run towards building/constructing the Berth should also be capitalized as per the requirements of Accounting Standard 166. It is also an undisputed fact that operation of cargo / vessel during trial run was directly linked with the building up of facilities in the Berth No. 4A of Haldia Dock Complex. Hence, any income earned on such operation during trial run was incidental to the building of assets for setting up the Berth. Therefore, income earned during preoperative stage was a capital receipt, which would go to reduce the cost of asset and it is settled that the deposit of money was directly linked with the purchase of plant and machinery. Hence, any income earned on such deposits was incidental to the acquisition ofassessee for setting up the plant and machinery. Thus, the interest was a capital receipt which would go to reduce the cost of the asset and Ld AR relied on the decision of Hon&#....
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....Officer treated the assessment year 1998-99 as the initial year for the benefit claimed and since this benefit was allowable for five years, according to the Assessing Officer, this benefit was admissible from the assessment year 1998-99 to the assessment year 2002-03. The assessee on the other hand claimed the benefit from the assessment years 1999- 2000 to 2003 -04, The plea of the assessee was that trial production did not amount to manufacture of its products. It was only when commercial production commenced, which, according to the assessee, commenced only in the assessment year 1999-2000 that production commenced. The Commissioner (Appeals) confirmed the order of the Assessing Officer but the Tribunal reversed that order holding that section 80-IA/80-IB of the Act being beneficial legislation, the benefit should be extended to the assessee. It further held that as on March 20,1998t only trial production started which was different from commercial production and the benefit of that section should be allowed in the year in which commercial production started, i.e. in the assessment year 1999- 2000 andf therefore, would be extendable up to the assessment year 2003-04. On appeal:....
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....d that there was any defect in the water cooler or air-conditioner produced and sold by the assessee to the dealer, The Tribunal, in the circumstances, was right that the two types of conditions stipulated in section 80-IA were fulfilled with the commercial sale of the two items in that assessment year. Whether the purpose of that sale was to obtain registration of excise or sales tax would be immaterial." The Bombay High Court has also decided the similar issue in favour of assessee in the case of CIT Vs. Hindustan Antibiotics Ltd.(1974) 93ITR 548 (Bom) and relevant extract of the order is reproduced below : "The word "articles"used in the express/on "has begun or begins to manufacture or produce articles "in section 15C(2)(ii) must be interpreted regard being had to the object for which the section was enacted. The provision was enacted with a view to encouraging the establishment of new industrial undertakings and the object was sought to be achieved by granting exemption from tax on profits derived from such undertakings during the first five years. The object of the section presupposes that profits are capable of being earned. Hence, until an assessee reaches a stage whe....
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....ercial operation has not began. In view of above we reverse the order of the Id. CFT(A) and allow the appeal of the assessee." Similarly, in the case of Gujarat State Fertilizers & Chemicals Ltd. (supra)/ the co ordinate Bench has held as under: "6. We have heard both the parties and gone through the facts of the case. Undisputedly f Ammonia-IV plant was under trial production during the year under consideration and the commercial production is yet to commence. Therefore, as concluded by the Id. CIT(A), the claims have to be considered, holding the Ammonia-IV Plant to be at the pre-commencement stage. It is well settled that under the accounting practices, all expenditure including interest cost incurred during the project construction period are accumulated and disclosed as capital work-in-progress until the assets are ready for commercial use. Income earned from investment of surplus borrowed funds during construction/trial run period is reduced from capital workin- progress for accounting purposes while expenditure/income arising during trial run is added to/reduced from capital work-inprogress. Hon'ble Apex Court in the case of Bokaro Steel Vs. CIT, 236ITR 315 held th....
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....and on perusal of the relevant finding given in the impugned order, we find that, it is an undisputed fact that assessee has shown income of Rs. 3,16,68,000/- pertaining to income from sale of power during trial run period has been adjusted from the expenditure incurred during construction/trial period from 17.7.2010 to 28.7.2010 amounting to Rs. 4,90,42,000/-pending capitalisation. AO on one hand has added the income and on the other hand treated the corresponding expenditure as capital. We are unable to appreciate the action of the AO in adding the receipts of Rs. 3,16,68,0007- as income, because if the expenses before the commencement of the business are added to the cost of assets and allowed to be capitalised then how the corresponding income from the commercial production is treated as revenue. It is also capital in nature which has to be reduced accordingly. This principle has been reiterated by the Supreme Court in the case of CIT vs. Bokaro Steel Limited 236 ITR 315, wherein it has been held that if the assessee receives any amount which are inextricably linked with the process of setting up its plant and machinery, then such receipts will go to reduce the cost of its asse....
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.... test runs and experimentation, a plant may be engaged in actual production, but until the test runs are completed and the plant is properly adjusted on the basis thereof, it cannot be said to be ready for "commercial production". The expression "Commercial Production" refers to production in commercially feasible quantities and in a commercially practicable manner. Further, it is a correct and_accepted procedure to capitalize all expenses incurred during construction period and in connection with the process of start-up and commissioning of the plant. In fact, such expenses would be incurred in order to bring the plant up to the stage at which it can commence commercial production. Thus, it is correct to capitalize the expenditure incurred on start-up and commissioning of the plant. The expenditure so incurred, therefore, should be capitalized in the same way as other indirect construction expenditure. In the present context, therefore the expenditure incurred during trial run contributes to construction of the facilities at Berth No, 4A of Haldia Dock Complex as trial run activity is regarded as an activity which is necessary to prepare the asset for its intended use. This is bec....
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....peration began immediately thereafter on dated 15/1/2004, Now the question here arises that in case of any flaw caught during the trial run then in that event certainly the commercial operation shall only begin after the removal of the flaw. In view of thi,s the income generated during trial run shall certainly be adjusted against the pre-operative expenses. Having said this we are inclined to reverse the order of the Id. CIT(A) and direct the lower authorities to adjust the trial run income from preoperative expenses of the assessee. We are relying on the judgment of the^ Delhi High Court in the case of Commissioner of Income Tax Vs. Nestor Pharmaceuticals Limited 322 ITR 631 where itwas held that : "The assessee was in the business of manufacture of pharmaceutical formulation in bulk drugs and supplying drugs to the Government hospitals, institutions besides selling the product in domestic and foreign markets. It claimed the benefit under section 80-IA/80-IB of the Income-tax Act, 1961. It carried out trial production from March 20, 1998. On that basis the Assessing Officer treated the assessment year 1998-99 as the initial year for the benefit claimed and since this benefit wa....
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....ect in law. The Tribunal held that the assessee had not only produced the goods for trial purposes but there was, in fact, sale of one water cooler and air-conditioner in the assessment year 1998-99 relevant to the previous year/financial year 1997-98. The explanation of the assessee was that this was done to file the registration under the Excise Act as well as the Sales tax Act. The Tribunal held that the sale of one water cooler and one airconditioner as on March 31, 1998, for the purpose of obtaining registration of excise and sales tax was manufacture within the meaning of section 80-lA. On appeal: Held, that the assessee had sold one water cooler and one airconditioner before April, 1998. Thus, the stage of trial production had been crossed and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of those articles marketable quality was established, more particularly when the assessee failed to show that the dealer returned those goods on the ground that there was any defect in the water cooler or air-conditioner produced and sold by the assessee to the dealer. The Tribunal,....
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.... the assessee for the first time in the assessment year 1956-57 and, therefore, it was entitled to the exemption under section 15C for the assessment year 1960-61 also." 10. We also further observe that the facts of the case law cited by the AO i.e. Tutikorin Alkali Chemicals & Fertilizers Ltd. (supra) for treating the receipts of trial run as business receipt are different from the facts of the instant case. The Apex Court in the said case has treated the interest income on the surplus fund as income from other sources because there was no nexus between the activity of the assessee and interest income. The assessee has invested idle fund for short period of time before the commencement of the business. There was no connection between interest income and the business of the assessee. The interest income was independent and separate from the business of the assessee. However in the instant case the income generated during trial run is very much connected with the business of the assessee hence the question of recognizing the income does not arise as the commercial operation has not began. In view of above we reverse the order of the Id. CIT(A) and allow the appeal of the assessee.....