TaxTMI 
TaxTMI 
2020 (3) TMI 113
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....the Supreme Court? (3) Whether on facts and in circumstances of the case, the Ld.CIT(A is justified in deleting addition of Rs. 13,66,95,452/- by not 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) and the disallowance made on additional depreciation u/s. 32(1)(iia) claimed by the assessee ought to have been upheld. (4) Whether on facts and in circumstances of the case, the Ld.CIT(A) is justified in deleting aforesaid addition by observing that the AO has accepted the Assessee's claim for the earlier years on this issue whereas the said assessments were re-opened on the very same issue and pending for assessment as on date? (5) Whether on facts and in circumstances of the case, the Ld. CIT(A) erred in allowing relief to the assessee on the interest capitalization towards work in progress of Rs. 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....
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....the investments were in the interest of business and not for earning any exempt income. It was submitted that the Assessing Officer had considered the investments in partnership firm namely, M/s. Classic Coffee Curing Works as having been made for the purpose of earning exempt income and had quantified disallowance u/s. 14A of the Act. It was submitted that the profits of the firm were taxed in the hands of the firm and what would be allocated was income which had already suffered tax and the share of profit from a registered firm of which the 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....
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....xempted income. In similar circumstances, the Bengaluru Bench of the Tribunal in the case of M/s. J.P. distilleries (P) Ltd. vs. ITO in ITA No.470/Bang./2017 dated 20/06/2018 held that where there is no exempt income no disallowance can be made under the provisions of section 14A of the Act. The same view was taken by the Delhi High court in the case of Cheminvest Ltd. vs. CIT (378 ITR 33) wherein it was held that the expression "does not form part of the total income" u/s. 14A of the I.T. Act envisages that there should be actual receipt of income 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. ....
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....f manufacturing varieties of liquid coffee as per the requirement of the customer. These machines are installed in Cafes and also various working places at the request of the corporate entities and organizations. Brochures having the details of the machinery and also explaining the functioning of the machinery 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 ....
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....afé vending and express kiosks are to be considered as manufacturing activity for the purpose of the provisions of section 32(1)(iia) of the Act. 5.6 The assessee referred to the word manufacture which is defined in the provisions of section 2(29BA) of the Act as follows: "29BA 'manufacture' with its grammatical variations, means a change in a non-living 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 eligib....
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....n the order of the Assessing Officer. 6.2 The Ld. AR submitted that the Assessing Officer had disallowed additional depreciation solely relying on the decision of Supreme Court in the case of M/s.Indian Hotels Co., Ltd V. ITO (2000) 112 Taxmann 46 (SC). The Ld. AR submitted that the decision of Supreme Court was in the context of deductions under the provisions of section 80J/32A 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....
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.... 103 (Kolkata - Trib.) 2) ACIT vs. Gamma PizzaKraft (P) Ltd. (61 taxman.com 199 (Delhi-Trib.) Thus, the Ld. AR submitted that the assessee was eligible for additional depreciation under the provisions of section 32(1)(iia) of the Act as claimed. 6.3 We have heard the rival submissions and perused the record. Now the question before us is 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 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 s....
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....co Products P.Ltd reported in [2006] 282 ITR 568 (Guj), wherein it was held:- "9. The tests to ascertain whether an activity amounts to manufacture or production of an article or thing have been laid down and reiterated by various decisions of the apex court and this High Court. Broadly, the requirement is that the raw material must be, in the first instance, subjected to a process of such a nature that it cannot be termed to be the same as the end-product after the raw material undergoes the process of manufacture, In other words, the 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 cha....
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....cess of setting up generally took a period of two to three months and was put to use immediately thereafter. The capital work in progress is a running account. While concluding the assessment the Assessing Officer disallowed an expenditure of Rs. 1,37,31,128/- calculated at 4.05% of the average work in progress on the ground that, till the shops are not put to use and not transferred from work in progress to fixed assets, the corresponding interest expenditure needs to be capitalized. The Assessing Officer disallowed the expenditure 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 ....
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....d capital is allowable under the provisions of section 36(1)(iii) of the Act. The said provision reads as under - 36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the referred to in section 28. (i) ..................................... (ia) ..................................... (ib) ..................................... (ii) ..................................... (iia) ...................................... (iii) The amount 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 Office....
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....ount. Unlike section 37 which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasizes the user of the capital and not the user of the asset which comes into existence as a result of the borrowed capital. The legislature has, therefore, made no distinction in section 36(1)(iii) between "capital borrowed for a revenue purpose" and "capital borrowed for a capital purpose". An assessee is entitled to claim interest paid on borrowed capital provided that the capital is used for business purpose irrespective of what may be the result of using the capital which the assessee has borrowed." (6) The Ld. AR submitted 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. ....
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....Taxman 597 (Bom) viii) CIT V. Bharat Commercial Corpn., (1997) 226 ITR 242 (Pat) ix) Banashankari Medial & Oncology Research Centre Ltd V. Asstt. CIT (IT Appeal No.1217/Bang/07) (Bang- ITAT). (x) CIT vs. Reliance Industries Ltd. 102 taxmann.com 218 (SC). (xi) CIT vs. Mangalam Cement Ltd. 99 taxmann.com (Raj. HC) (9) The Ld. AR submitted that even after introduction of proviso to section 36(1)(iii) of the Act, the investment in capital work in progress cannot be considered as in the process of extension of an existing business and no interest on borrowed capital can be disallowed. It was reiterated that the process is only that of expansion of an existing business and not extension. (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 c....
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....igs which was carried on the assessee company admittedly since earlier years. The business and source of income of the assessee company is same and continuing. Thus, the mobilization expenditure are incurred in connection with newly acquired rigs prior to the completion of mobilization of rigs, commissioning of rigs and rigs becoming operational at client's site. The said mobilization expenditure so disallowed by the authorities below even in the interregnum period before mobilization being completed and the rigs getting commissioned and operational at client site cannot be held to be capital expenditure rather these mobilization expenses with respect to new rigs imported by the assessee by way of expansion of existing and continuing business of charter 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 ....
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.... The issue before the tribunal was the allowability of expenditure relatable to new shops being established. The Tribunal in this context held that the process of setting up new shops is expansion of an existing business and hence the expenditure incurred is allowable as revenue. (16) On the same analogy, it was submitted that setting up of new shops is a part of the process of expansion of an existing business and hence interest on any borrowed capital attributable to such investments is to be allowed as revenue. (17) Without prejudice to the submissions above that no portion of interest on borrowed capital is disallowable under the provisions of the Act, it was submitted that the assessee was in possession of the following funds which are interest free. 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 Rs. 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 ....
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....and not for extension of existing business and therefore the proviso to section 36(1)(iii) is not applicable in the present case because the amendment in this proviso was made by the Finance Act, 2015 w.e.f. 01.04.2016 as per which the words "for extension of" were omitted and therefore in our considered opinion upto Assessment Year 2015-16, the proviso is applicable in only those cases where borrowed funds was used for acquisition of asset for extension of existing business. In the present case, the Assessment Year involved is Assessment year 2009-10 and therefore, in the facts of present case, in the present year, this proviso is not applicable and hence, we delete this disallowance by respectfully 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 o....
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....tc. The Assessing Officer noticed that though employees could have been utilized for the other 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 Rs. 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 rev....
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....ction with the launch of new model of car manufactured by the assessee. The Assessing Officer 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 busi....
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....ble in the year itself as per ratio of aforementioned decision of the Honble Bombay High Court in the case of CIT 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....
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....t common ground in the Revenue's appeal, Ground No.7 is with regard to deletion of addition of Rs. 20,02,41,512/- for A.Y. 2013-14 and Rs. 32,85,70,301/- for A.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 Rs. 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 - 14,49,92,136 2010-2011 10,91,42,862 - 2011-2012 6,20,65,764 - 2012-2013 - 39,32,28,754 2013-2014 ....
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.... 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 allowable revenue expense and deleted the addition made consequent to disallowance of expenditure of Forex Loss. 10.4 Against this, the Revenue is in appeal before us. The Ld. DR relied on the order of the Assessing Officer. 10.5 The Ld. AR drew our attention to the provisions of section 43A of the Act which reads as under: - "43....
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....r 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 into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other ha....