TaxTMI 
TaxTMI 
2020 (3) TMI 113
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....stances 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 justified in deleting addition of Rs. 1,49,85,698/- by allowing expenditure relate....
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....red 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 a share holder in connection with equity investments and such expenditure would be a charge on his income and not on the income of the company....
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...../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. 5. The next common ground in both the appeals, Ground No. 3 is with regard to deletion of addition made u/s. 32(1)(iia) of the I.T. Act of Rs. 13,66,95,....
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....res 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 the assessee ranged from fabricating and assembling the coffee vending machine to the point of installation in various places and serving customers with liquid coffee fit for consumption. It was reiterated that the activi....
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....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 eligible for additional depreciation as claimed and directed that the same be allowed. According to the CIT(A), under the circumstances, 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, ....
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....he 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 v. Bengal Beverages (P) Ltd (2017) 87 Taxmann.com 103(Kolkata-Trib) 2. D.J. Stone Crusher Vs. CIT (2010) 229 CTR 195 (HP) 3. CIT, Shimla Vs. Smt.Supriya Gill (2013) 31 Taxmann.com 69 (HP) 4. Lucky Mineral (P) Ltd V. CIT (2000) 162 CTR (SC) 404 : (2000) 245 ITR 830 (SC) 5. Poabs Rock Products (P) Ltd V. ACIT,Circle-1, ....
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....ng, 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 sorting, garbling and manual grading, out-turning of garbled coffee and bulking, thereby, the same being a irreversible process, there is a change in the chemical composition of the product. Alternatively, one cannot say that the same is a 'processing'. It amounts to production and manufacture of a distinct commercial product different from original product. In view of this, the machinery like coffee making machine, vending machine, express kiosks etc., whic....
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....facture, 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 change, but ultimately, it is only when the change, or a series of changes, bring about a result so as to produce a new and distinct article, that it can be said that the commodity used as raw material has been consumed in the manufacture of the end-product. To put it differently, the final product does not retain the identity of the raw material after it has undergone the process or processes of manufacture." 6.6 Thus, the whole process of conversion of the raw material when leads to production of new article and when....
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....ture 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 also in the light of the decision of the Bangalore Bench of the Tribunal in the case of M/s.Emdee Apparels vs. ACIT 54 SOT 600, particularly considering the availability of interest free own funds, the CIT(A) was of the view that there was no case for disallowing interest on estimated capital attributable to work in progress by treating the same as capital nature. 8.3 Against this, the Revenue is in appeal before us. The Ld. DR submitted that the Tribunal in its order in ITA No. 1501/Bang/2013 and 1586/Bang/2013 dated 21/06/2017 ....
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....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 Officer in para 9.2 of the order stated that as per the provisions of the Act, all costs which are incurred in bringing the capital asset into operational use need to be necessarily capitalized. The above finding is not as per the provisions of section 36(1)(iii) of the Act. The interest on borrowed capital is to be allowed as revenue once the business has commenced irrespective of the fact as to whether such borrowed funds are utilized for either revenue purposes or for capital purposes, unless the case falls under the proviso above which was introduced by Finance Act 2003 w.e.f A. Y.2004-05. (3) The proviso above wa....
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....ition 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. "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." (8) The Ld. AR submitted that consequent to introduction of the above proviso, the law has differentiated situations such as acquisition of asset out of borrowed funds for extension of existing business or otherwise. In the case of the assessee the setting up of new coffee ....
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....ncept 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 case of extension of existing business. The facts of the case are that M/s. Monnet Industries Limited was having a ferro alloys manufacturing unit. It set up a sugar plant at a different place out of its borrowed fund. There was unity of control and management in respect of both plants and there was also intermingling of funds and dove-tailing of business. Under the circumstances, it was held that setting up a sugar plant was considered as an act of extension of existing business of the assesses, i.e., running a ferro alloys manufacturing unit. (11) It was submitted that in the case of the assessee the work in progress does not represent any investment in the nature of setting up a new business. The work in progress as explained is in the nature of coffee shops which are....
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....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 and is in existence which is a continuous and existing business of the assessee, and these mobilization expenses are to be treated as revenue expenditure as these expenses are incurred after the business is being set-up and is not a capital expenditure as the rigs after acquisition are available for hire and ready to be put to use, i.e., giving them on charter hire. Thus, these rigs which are imported are ready and available to be put to use being available for charter hiring after acquisition by the assessee so far as assessee concerned as the same are available for being given on charter hiring from the time the rigs are acquired by the assessee and are merely to be moved to and installed at the site of the clients desirous of taking the same on hire for oil drilling, so that all the mobilization ....
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.... 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 utilized for the purpose of investment in work in progress. It was submitted that the borrowed funds had been utilized for the purpose for which they had been borrowed and there was no nexus between such funds and work in progress. (19) The Ld. AR also relied on the following decisions wherein it was held that if the assessee is in possession of non-interest bearing funds exceeding the investments, it cannot be presumed that, borrowed funds have been diverted for such purpose and interest disallowed. i) Commissioner of Income Tax V. Reliance Industries Ltd (2019) 102 Taxmann.com 52 (SC) ii) Pr. Commissioner of Income Tax V. Basti Sugar Mills Co. (2018) 98 Taxmann.com 401 (Delhi) iii) CIT V. Smt.Satish Bala Malhotra (2017) 79 Taxmann.com 50 (P&H) 8.7 Thus, the Ld. AR submitted that the work in progress under consideration was Rs. 35,85....
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....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 on record as well as the case laws relied upon by the ld.AR. But the proviso to section 36(1)(iii) inserted by the Finance Act, 2003 w.e.f. 01.04.2004 is very relevant for this issue. As per the same, till the asset for which the loan is borrowed is put to use, interest is not allowable. The judgments cited by the learned AR are for the period before insertion of this proviso and hence, not relevant. Hence, there is no merit in these grounds of the assessee and therefore, rejected. Ground No.4 of Revenue is allowed." 8.9.1 Further, it is to be noted that the Miscellaneous Application filed by the assessee in MA No.211 & 212/Bang/2017, the Tribunal dismissed the claim of the assessee vide order dated 06.12.2017. Hence, we have no option other than following the earlier order of the Tribunal in assessee's own case. Accordingly, this ground raised by the Revenue in both the appeals is allowed.....
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....ue 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 revenue/income. There are also small quantums like generator maintenance used for setting up coffee shops and security charges which are also revenue in nature. Under the circumstances, it was submitted that the above expenditure incurred in respect of the regular employees of the assessee company is allowable as revenue under the provisions of the Act. Accordingly, the expenditure was claimed as revenue in the statement of assessable income for the A.Y.2013-14. 9.4 On appeal, the CIT(A) deleted the addition by observing that the above expenditure consisting of salary, travelling/conveyance etc. is in the nature of revenue. The Assessing Officer had allowed the salary expenses but had disallowed the other expenses like travelling, conveyance, etc. which were linked to the above expenditure and are of the same nature. Further, the CIT(A) observed that even for the AYs. 2011-12 and 2012-13 similar disallowances were made. The said disallowance was a subject matter of appeal before the CIT(A....
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....ails 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 business. It is common knowledge that there is a cut through competition in the automobile market and the assessee was required to bring new models in the market in order to retain/capture market. Therefore, the expenditure incurred by the assessee in respect of on- going business was a revenue expenditure. The marketability of the new entirely depended on the sale promotion, holding of training and seminar so that new model was well received in the market. 9.7 The Ld. AR also relied on the decision of ITAT, Mumbai in the case of Reliance Wellness Ltd V. DCIT in ITA No.3444 & 4273/2013 wherein it was held as follows: "6.1 From the submissions made by the assessee before the AO it is also clear that opening of stores at various places was one composite business of the assessee and in that course the assessee had started operation in its stores at Bangalore and Hyderabad. It was the contention of the assessee that operations of these stores at various locations is one composite business and once business had been st....
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....x 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 the assessee are the same "business" or "different businesses" regard must be had to the common management of the main business and other lines of businesses, of trading organization, common employees, common administration, a common fund and a common place of business. For evaluating the "same business", the test of unity of control and the nature of business is to be applied. The Commissioner (appeals) after appreciating the evidence produced on record had observed that various businesses carried on by the assessee including health care constituted the same business of the assessee. The Appellate Tribunal was right in law in allowing the expenses in setting up new business of Rs. 6,70,78,483/- treating it as revenue in nature." 9.9 The Ld. AR also relied on the following decisions: i) Reliance Hypermart Ltd. vs. ACIT (ITAT, Mumbai) ii) Olive Bar & Kitchen (P) Ltd. vs. DCIT 102 taxmann.com 98 (Mum Trib.) iii)Daimler India Commercial Vehicles Pvt. Ltd., vs. DCIT 107 taxmann. com 243 (Mad.) Thus, the Ld. AR requested the Tribunal to con....
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....4 - 2012-2013 - 39,32,28,754 2013-2014 - 20,02,41,512 The Assessing Officer noticed that the judgment in the case of M/s. Woodward Governor India Pvt Ltd Vs. CIT (312 ITR 254) does not speak anything in the context of losses or gains on reinstatement of capital liabilities which does not attract or fall into the ambit of Sec. 43A of the IT Act, 1961 which means, the judgment in the case of M/s. Woodward Governor India Pvt Ltd Vs. CIT (312 ITR 254) does not apply to the facts of the instant case, as in the assessee's case, the issue involved is loss or gain on reinstatement of a capital loans that are not falling within the ambit of Sec 43A of the IT Act 1961 (i.e., here, the forex losses on ECB loans) were utilized for acquiring machinery in India and not abroad. The Assessing Officer also noticed that in the assessee's case the re-in-statement of capital loans does not fall within the ambit of section 43A of the Act. 10.2 Before the CIT(A), it was contended that the assessee had consistently followed this system of accounting and was accepted by the department upto A.Y.2011-12. As per the company law the treatment of exchange fluctuation gain/loss is governed by AS-11....
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....ch reads as under: - "43A. Notwithstanding anything contained in any other provisions of this Act, where an assesses has acquired any asset in any previous year from a country outside India for the purposes of his business or profession, and in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset,..............". The Ld. AR submitted that the provision can be invoked only when an assessee has acquired any asset from a country outside India. In the case of the assessee loans were in foreign currency but there were no assets acquired from a country outside India. Hence, the provisions of section 43A of the Act are not applicable. 10.6 The ld. AR relied on the judgments of the Supreme Court in justification of the claim that the exchange fluctuation loss is allowable as revenue: i) Commissioner of Income Tax_V. Woodward Governor India (P) Ltd (2009) 312 ITR 254 The Supreme Court has given a finding that the exchange fluctuation loss as on the last day of the accounting year has to be recognized on accrual notionally and considered for expenditure U/s. 37 of the Act. ii) CESC Ltd V. CIT (1998) 233 ITR 50 (SC). The Suprem....
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....ed capital, such profit or loss would be of capital nature". The ratio of the above decision is whether the gain or loss should be brought to tax or allowed as deduction depends upon whether the foreign currency transactions were carried on account of capital or revenue items. If the foreign currency transactions are undertaken on capital account, the gain made out of such transaction is outside ambit of taxation, of course subject to the application of provisions of section 43A of the Act. If the transactions undertaken are on account of revenue items, the gain is clearly taxable and so the loss also is clearly allowable. In the present case, in the assessment year 2013-2014, Rs. 18.12 crore represent the notional forex loss that is reinstatement of loan as on 31st March by marking to marketing rate and the balance amount is incurred on actual payment made during the year. In the assessment year 2014-2015, Rs. 25.55 crore represent notional forex loss as above and balance amount is incurred on actual payment during the year. The Assessing Officer except making bald assertion that the transactions were undertaken on account of capital items no evidence was brought on record to est....