TaxTMI 
TaxTMI 
2022 (12) TMI 333
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....penalty levied on certain additions confirmed in quantum proceedings while he had confirmed the levy of penalty on certain other issues. Since the fate of the penalty appeal is dependent on the order passed in the quantum appeal of the assessee, all the appeals were taken up together for hearing. 3. We shall first deal with assessee's appeal in quantum proceedings in ITA No.1747/Ahd/2009 - A.Y 2005-06 4. The original grounds raised by the assessee being argumentative, the assessee subsequently filed concise grounds of appeal before us on 24-12-13 to which no objection was raised by the Revenue. We shall therefore be dealing with the grounds raised therein. 5. Ground No 1-3, it was contended related to the disallowance of project expenses, depreciation and on account of addition made of interest and misc income earned from the certain projects undertaken by the assessee which the AO found had not commenced operations. Ld.Counsel for the assessee contended that his arguments with respect to all the grounds were identical. Therefore, all the above grounds are being dealt with together. 6. Ld.counsel for the assessee stated that the assessee being in the business of explora....
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.... and interest treated as income from other sources with respect to - i) Akrimota Power Project at Rs.5,55,24,208/- ii) Lignite Project, Bhavnagar at Rs.12,305/- iii) Lignite Project, Tadkeshwar Rs.33,01,301/- 7. The ld.counsel for the assessee stated that all these issues have been raised in Ground No.1, 2 and 3 as under: "a) In facts and circumstances of the case, Your Appellant most respectfully submits that the learned Assessing Officer has erred in rejecting claim of project expenses of Rs. 32,60,51,123/- in respect of lignite based AKRI MOTA POWER PROJECT which was a step further for forward integration of existing business, and Ld. CIT (A) has further erred in Confirming this disallowance. b) In facts and circumstances of the case, Your Appellant further submits that Ld. A.O, erred in making an addition of Rs. 555,24,208/~ being Interest and Misc income of the said Power Project, Particularly when the payment of interest in respect of said Power Project was Capitalized, and Ld. CIT(A) has further erred in confirming this addition. 2. In facts and circumstances of the case, Your Appellant most respectfully submits that l....
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.... the existing business of the assessee, since it was into business of extraction of minerals, which was an important and major material required for production of power. Therefore, power project was nothing but vertical integration of existing business of the assessee only, and could not be treated as new business carried out by the assessee. The ld.counsel for the assessee reiterated his contention that considering the fact that management, control and funds and entire work was being carried out under a common business system only, merely because the projects were situated in different geographical locations it could not be said to be new business. 10. The ld.DR relied on the orders of the Revenue authorities. 11. We have gone through order of authorities below, and we have noted that with respect to Akri Mota power project, which was dealt at para-5 of the CIT(A)'s order, the entire project expenses of Rs.33,60,51,123/- were disallowed for the reason that it was entirely new project set up by the assessee; process of construction was going on, and had not commenced production or generation of electricity. Further it was held not to be an expansion of the existing business o....
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....nt and distinct from the existing industrial undertaking. The finding of the AO was upheld by the ld.CIT(A) at para 6.4 of his order as under: "6.4 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. The LdAR. has not contradicted the findings of the A.O. that the project under reference was entirely a new project the construction thereof was not completed during the relevant period. Further the Ld.A.R. has not brought on record supporting facts to show that the project was an expansion of appellant's existing business. It is a well settled position of law that the expenditure incurred on interest for the money borrowed for setting up a new industrial undertaking is not deductible before its completion. In these circumstances, the A.O. has rightly rejected the appellant's claim for deduction under the provisions of sec.36(1)(iii) of the Act" 13. With respect to Tadkeshwar project, for the same reason, as in the case of Bhavnagar project, the claim of project expenses was disallowed. The findings of the Ld.CIT(A) upholding the order of the AO at para 7.2 of his order is as under: "7.2 I have considered the facts of the c....
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.... is that:- (i) a loan taken or capital borrowed is, by itself, not a capital asset, nor does it give an advantage of an enduring nature; (ii) as long as a loan was taken or capital was borrowed for the purposes of business, the assessee is entitled to claim interest paid thereon as deduction under Section 36(1)(iii) of the Act; (iii) interest may have to be capitalized after the borrowed capital or loan taken is utilized in bringing into existence an asset at the stage of commencement of business. In other words, after the assesseeDs business had already commenced then the interest paid on capital borrowed or loan taken can be claimed as deduction under Section 36 (1)(iii) of the Act. (iv) in coming to the conclusion whether the interest paid on capital borrowed or loan taken in setting up a new line of business ought to be capitalized or treated as revenue expenditure, the test as laid down by the Supreme Court in the case of Produce Exchange Corporation (supra) and Prithvi Insurance Company (supra) would be relevant and; (v) lastly, as long as interest is paid on capital borrowed or loan taken in respect of new line of business which i....
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....f mining of the assessee , since it was lignite based project, where lignite is a major material for the projects for the purpose of generation of power. The Ld.CIT(A) does not dispute this fact. On the contrary he relies on the fact that machineries also were required for producing power which has not been manufactured by the assessee and therefore the power project could not be said to be vertical integration of the business of the assessee . This we find is of no consequence. As long as it is not disputed that lignite is the major raw material from which power is been generated and lignite being extracted by the assessee itself in its mining business, setting up power project is nothing but a vertical integration of the business of the assessee only. For this reason alone, setting up of the power project cannot be said to be a new business of the assessee. Even otherwise, based on the parameter laid down by the Hon'ble Apex Court in Monnet Industries (supra) also it cannot be said to be new business undertaking merely because it is a completely different project which has been set up by the assessee. In the case of Monnet Industries Ltd. (supra) the facts of the case was that th....
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....up the issue denial of claim of depreciation in all the projects. Depreciation on assets used in implementation of the project of Lignite extraction at Bhavnagar and Tadkeshwar, having also been denied finding the projects to be new and in which business activity was yet to commence, we delete the disallowance of depreciation with respect to these projects since we have held these projects to be in continuation of the business of the assessee and not new undertakings set up ,above in our order. 22. As for denial of depreciation of machinery used in AKRI MOTA Project,it transpires from order of the authorities below that claim was denied for the reasons that the assets were not shown to have been used as at the end of the year. The assessee's claim of having conducted trial production or trial run was rejected by the Revenue. The reasons for rejecting the claim, as emanates from orders of the ld.CIT(A), is that apparently after conducting the trial run the assessee had actually put to use its machinery after seven months and gave no explanation for this long gap between conducting trial run and commencing actual user of the assets, from which the Revenue concluded that trial r....
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....eing reported in the newspaper. All these evidences filed by the assessee having been dealt with by the authorities below, they have clearly chosen to ignore all these very valid evidences. On the contrary, they have arrived at a finding of no trial run for generation of power according to their own whims and fancies ,that there is a huge gap between trial run and production of power, being seven months, for which no reasonable explanation was apparently given by the assessee. Considering the fact that the assessee had demonstrated carrying on trial runs with valid evidences, which have not been controverted by the Revenue despite being placed before both the authorities below, we cannot agree with the finding of the Revenue authorities that no trial run was conducted by the assessee. In view of the same, we hold that the assessee had rightly claimed deprecation at Rs122,67,81,665 & Rs 38,26,54,024/-. Assessee's claim of depreciation is accordingly allowed. Ground of appeal No. 1-3 are allowed. 26. Ground No.4 raised by the assessee is against order of the ld.CIT(A) upholding rejection of claim of prior period expenses amounting to Rs.67,37,949/-. The ground reads as under: ....
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....he AO with identical direction to examine which expenses had crystalised during the year and allow claim of the expenses accordingly. He drew our attention to the order passed in the Asst.Year 2003-04 in the case of the assessee in ITA No.1185 and 1246/Ahd/2007 dated 29.1.2015, copy of which placed before us at page no.1 to 36. Our attention was drawn to para-4 to 4.3 of the order containing the said directions of the ITAT. In view of this, the ld.counsel for the assessee fairly admitted that he had no grievance against the direction of the ld.CIT(A) on the impugned issue. 29. In view of the above, We see no reason to interfere in the order of the ld.CIT(A) in this regard. This ground of appeal raised by the assessee is therefore dismissed. 30. Ground No.5, 6 and 10 relate to different additions/ disallowances made on account of lease and buy-back arrangement entered into by the assessee with Gujarat State Road Transport Corporation (GSRTC). 31. The ld.counsel for the assessee pointed out that the assessee had bought buses from GSRTC which were leased back to be sold to it ultimately in a lease and buy-back arrangement. Accordingly, the assessee had claimed depreciation on....
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....iod with Gujarat State Transport Corporation Ltd. V, 268,63,080/- Lease Rentals from October, 2004 to Mach 2005 for the period beyond Lease period which expired on 30.9.2004. c. 327,89,873/- Interest Calculated by ld.AO for delayed payments of Lease due from Gujarat State Road Transport Corporation Ltd. 3. 27,94,000/- Total Rs. 8,93,10,033/- 32. Taking up first denial of depreciation on buses which were leased out by the assessee to GSRTC, the Ld. Counsel for the assessee's contention was that the Revenue had relied on the decision of Special Bench of the ITAT in the case of Indus Ind Bank Vs. ACIT in (2012) 135 ITD 165 while holding so. The ld.counsel for the assessee contended that since then much water had flown and these lease and buyback issues had been accepted to be genuine by Supreme Court in the case of ICDS Ltd.Vs. CIT, 29 taxmann.com 129 (SC). Copy of the order was placed before us. 33. With respect to claim of bad debt, contention of the ld.counsel for the assessee was that this claim had been made in the P&L account by the assessee and it had been explained to the authorities below that it pertained to the lease r....
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....allowance and submitted as under: "8.1 Your Appellant is carrying on mining activities in the State of Gujarat Since 1964. It is engaged in taping major mineral resources and developing mineral based industrial products which includes energy mineral like lignite, basis commodity like base metals and industrial minerals like Bauxite and Flourspar. Your Appellant is further engaged in the business of leasing since A. Y. 1994-95 relevant to accounting year 1993-94. 8.2 Your Appellant entered into first leasing transaction with Gujarat State Road Transport Corporation under lease Agreement in F. Y 1993-94 relevant to A. Y. 1994-95 for giving Buses on lease to Gujarat State Road Transport Corporation which were purchased under valid sale invoices of Gujarat State Road Transport Corporation Dt. 24/03/94. The full consideration was paid by A/c. payee cheques. Due Sales Tax payable to State Government by the Vendors viz. Gujarat State Road Transport Corporation was also paid. The lease rentals also received periodically by A/c. payee cheques. 8.3 In respect of first leasing transactions entered into A.Y. 1994-95 with Gujarat State Road Transport Corporation, the ....
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....e are similar to A.Yrs. 1999-2000 to 2002-03. My Ld. Predecessors on the identical facts have decided the issue against the appellant. Since, there is no change in the facts and legal position, the disallowance made by the A.O. is hereby confirmed. The Ld.A.R. has referred to the quashing of proceedings by the Hon'ble I.T.A.T. for the A.Yrs. 1995-96 & 1996-97 in support of his claim. However, that quashing does not , supports the appellant's claim for depreciation as the Hon'ble I.T.A.T. has not decided the issue on merits. Therefore, under these circumstances, the ground taken by the appellant against the disallowance is hereby dismissed." 35. He also drawn to para 15-15.5 of the order taxing lease rental and interest on delayed rentals on accrual basis rejecting assesses claim of accounting for on receipt basis as under: "15. The ground No.8 of appeal is regarding taxing of interest and lease rent receivable amounting to Rs.8,93,10,033/-. The A.O. from the perusal of Directors report found that the statutory auditors of the appellant had observed that "certain items of income are accounted on cash basis as stated in accounting policy No.1(A) in Schedule XV....
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....8,63,0807- which pertains to the period beyond the period covered by the lease agreement. 11.7 The said lease agreement provided for interest on delayed lease rentals. Since, the lease rentals itself were not recoverable, interest on delayed lease rental was also not provided for. The Learned assessing officer has made addition of Rs. 3,27,89,8737- being interest on delayed payment of lease rentals by GSRTC. 11.8 Your appellant had advanced certain sum to GIIC. Since the said sum itself was doubtful, interest in respect of the same was also not provided relying on the on the decision of Hon'ble Supreme Court in the case of Uco Bank v CIT 237 ITR 889 . The Learned assessing officer has not accepted the contention of your appellant and has made the addition of Rs. 27,94,000/-." 15.3 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. It is an admitted fact that the appellant is following mercantile system of accounting. The provisions of sec. 145 of the Act are very clear in this regard after its amendment w.e.f. 1.4.1997, that an assessee has to follow either cash system of accounting or the mercantile system of accoun....
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....t from the subsidiary company due to its financial condition. The Income-tax Officer found on verification that interest had actually accrued for both the assessment years on the basis of the method of accounting followed by the assessee and the interest was waived only after the accrual. The Commissioner of Income-tax (Appeals) affirmed the views of the Assessing Officer. The resolution forgoing interest was passed a few days before the close of the accounting year in respect of the assessment year 1977-78 and another resolution was passed after the close of the accounting year in respect of the assessment year 1978-79. The Tribunal held that what was waived by the assessee was income which had already accrued to it according to the method of accounting regularly employed by it. On a reference: Held, that the taxability is attracted not only when income was actually received but also when it accrued. Income accrues when it falls due, that is to say when it becomes legally recoverable, irrespective of whether it is actually received or not and accrued income is that income which the assessee has a legal right to receive. Therefore, the income by way of interest, waived by ....
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....f the case and the submissions of the Ld.A.R. carefully. The close analysis of the submissions made by the appellant before the A.O. clearly reveal that he did not take legal action for recovery of impugned debt on his own volition. In other words, the effective steps were not taken by the appellant to recover the outstanding debt. There is no evidence of any correspondence which were made by the appellant with the defaulting party. The appellant reversed the entries in its books of accounts of subsequent year. Therefore, under these circumstances it can not be held that the debt under reference became bad during the relevant period. In this regard reliance is also placed on the decision of the Hon'ble Gujarat High Court in the case of Dhall Enterprise and Engineers Pvt. Ltd Vs. CIT 295 ITR 481 has held that "under clause (vii) of section 36(1) of the Income-tax Act, 1961, the requirement for allowing deduction on account of bad debt is that the bad debt should be written off as irrecoverable. Merely debiting the amount is not sufficient. The requirement is that the assesses should also prove that the debt has become bad in that particular year."(emphasis supplied). 18....
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....eon by the lessor was held not allowable. The Hon'ble Apex court recognized the genuineness of such arrangements and held that by virtue of various clauses in the agreement the ownership of the asses leased was that of the lessor. Claim of depreciation thereon by the lessors was accordingly held allowable by the Hon'ble apex court. 38. Since in the present case the assesees lease and buy back arrangement has been held to be a colorable device on the basis of the special bench decision of the ITAT in IndusInd Bank (supra) which blanket proposition vis a vis lease and buy back arrangements has since been reversed by the Hon'ble apex court and the Ld.DR has not distinguished the said case before us, applying the decision of the Hon'ble apex court ,we hold that the assesses is entitled to claim depreciation on leased assets .The order of the Ld.CIT(A) upholding the disallowance of depreciation amounting to Rs.72,30,369/- is set aside and the AO is directed to allow the same. 39. Having held so, we now proceed to deal with the issue of taxing the lease rentals; on accrual basis as held by the Revenue or on cash basis as claimed by the assessee. 40. We find that the solitary bas....
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....see had renewed lease agreement with GSRTC which proved that the debts were capable of recovery, has been duly explained by the assessee as being on account of expiry of earlier agreement which in no way effected the recovery of earlier lease rentals. In view of the above Ground No.5,6 and 10 are allowed. 43. In Ground No.7, the assessee has challenged the order of the ld.CIT(A) in confirming the disallowance by the AO of the claim of contribution made by the assessee to the Office of Commissioner of Geology & Mining, Gandhinagar amounting to Rs.53,84,000/-. Ground No.7 reads as under: "7. Your Appellant further submits that the Ld, A.O. has erred in making addition of Rs.53,84,000/- in respect of contribution made to the Office of Commissioner of Geology & Mining, Gandhinagar on the plea that there was no legal or statutory obligation or liability of the Appellant to make such payment. Your Appellant further submits that for the purpose of allowance of any expenditure incurred by the Appellant as per the provisions of sect 37 of the IT Act, the expenditure should be for the purpose of business, and Ld. CIT (A) has further erred in confirming such addition." 44. A....
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....erated submissions made before the ld.CIT(A), while ld.DR relied on the order of the ld.CIT(A). He further relied on the decision of Hon'ble Apex Court in the case of Venkata Satyanarayana Rice Mill Contractors Co., (1996) 89 taxman 92 (SC) for the proposition that any contribution made by an assessee with a view to secure benefit to the assessee's business, whether voluntary or at the instance of the authorities concerned, were to be allowed. 47. We have heard contentions of both the parties. We find merit in the contentions of the ld.counsel for the assessee that the contribution made by the assessee to the Office of Commissioner of Geology & Mining, Gandhinagar was in furtherance of the business of the assessee only. The fact that the contribution made to the Office of Commissioner of Geology & Mining, Gandhinagar was given for setting up of laboratory for research and testing in the field of mining, has not been controverted by the Revenue. It is also fact on record that the assessee is in the business of mining of minerals. Therefore the research carried out in the laboratory would benefit the assessee is a foregone conclusion. There is no doubt that the contribution made b....
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....MDC Vs. CIT 132 ITR 377 (Guj. High Court) (d) CIT Vs, GMDC 249 ITR 787 (S.C)." 49. As transpires from the orders of authorities below the AO found that the assessee had claimed this expenditure as having been incurred to divert course of river so that mining could be done at the place. The AO accordingly held the expenditure to be enduring in nature since the assessee was not required to incur the same year to year and accordingly treated the same as capital expenditure. 50. The ld.CIT(A) upheld order of the AO relying on the decision of Hon'ble Apex Court in the case of Madras Industrial Investment Corpn. Vs. CIT, 225 ITR 802 from which he noted that the Hon'ble Apex Court had held that there was a continuous benefit to the business of the company over the entire period. He further relied on the decision of Hon'ble Bombay High Court in the case of Taparia Tools Ltd., 260 ITR 102 taking the same view. The relevant findings of the Ld.CIT(A) at page 40 para 21.2 - 21.5 of the order is as under; "21.2 I have considered the facts of the case and the submissions of the Ld.A.R. carefully. I find considerable force in the argument of the Ld.A.R. that the expenditure incurre....
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....nsel for the assessee contended before us that decision of Hon'ble Bombay High Court in the case of Taparia Tools Ltd. (supra) had been reversed by the Hon'ble Apex Court which was reported in (2015] 372 ITR 605 SC). Copy of the order was placed before us. He further contended that even as per the Ld.CIT(A) no asset had come into existence by virtue of incurring this expenditure therefore it is settled law that in the absence of any asset coming into existence the expenditure cannot be treated as capital in nature. That even otherwise the sole purpose of incurring the expenditure was to facilitate carrying on business of mining by diverting the river from its course so as to enable mining in the area occupied by the River. The purpose was to remove an obstacle and therefore there was no question of the assessee deriving any enduring benefit from the same also. He drew our attention to submissions filed to the Ld.CIT(A) in this regard reproduced at para 21.1 of the order as under: " 21.1 During the appellate proceedings, the Ld.A.R. of the appellant objected to the said addition and submitted as under: 11.24 Your Appellant is engaged in mining activities. Whenever ....
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....e expense was incurred only for enabling conduct of the business of the assessee, admittedly without any expenditure being incurred on capital account. The ratio settled by the Hon'ble apex court in the case of Empire Jute(supra) will therefore squarely apply in the facts of the present case. Accordingly therefore, we hold, that the impugned expenditure is to be treated as revenue in nature. 55. The decision of the Hon'ble Bombay High court in the case of Taparia Tools (supra) relied upon by the Ld.CIT(A) while holding the claim of expenditure to be on capital account ,has been pointed out by the Ld.Counsel to have been reversed by the Hon'ble Supreme Court. The Ld.DR did not controvert the same. The Decision of the Hon'ble apex court in the case of Madras Industrial Investment Corp.(supra) also relied upon by the Ld.CIT(A) is we find distinguishable on facts where the issue before the Hon'ble Apex Court was allowability of discount on issue of debentures, which it was held was to be allowed proportionately over the period of holding of the debentures. The issue therefore did not relate to capital/revenue expenditure. This issue was also there in Taparia Tools(supra) where the H....
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....held that since the assessee had not come forward with complete details to establish that it did not incur any expenditure to earn exempt income, it could not be held that nothing is attributable out of interest to the income from dividend income. Further reliance on the decision of Special Bench of the ITAT, Mumbai Bench in the case of ITO Vs. Daga Capital Management P.Ltd. which laid down that provision of Rule 8D inserted Income Tax Rules, 1962 is clarificatory for the purpose of computing disallowance under section 14A of the Act. The ld.CIT(A), accordingly, directed that disallowance be computed following the procedure laid down in Rule 8D of the Rules. 59. Before us, the ld.counsel for the assessee contended that the assessee had sufficient interest free funds for the purpose of making investment. He drew our attention to the audited financial accounts of the assessee before us placed at page no.1 to 105. He pointed out that the assessee had owned interest free funds of Rs.767.00 Crs while investment for earning exempt income amounted to only Rs.71 crores. He stated therefore that no disallowance under section 14A was warranted and relied upon the decision of Hon'ble Apex ....