TaxTMI 
TaxTMI 
2017 (12) TMI 1896
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....13.48 cr., charged and paid by the assessee during the relevant previous year. The brief facts of the case are that the assessee assumed borrowings for financing the expansion of it's refining capacity, contracting loan/s from Oil Industries Development Board (OIDB) for the purpose. In view of the decline in interest rates subsequent to the year 2000, the assessee sought, in view thereof, a change in the interest rate/s to lower than the contracted rate/s or, in the alternative, a permission to liquidate the high cost loan/s by, ostensibly, availing fresh loan/s at the prevailing, lower rate/s of interest. OIDB allowed continuing the existing borrowing, i.e., at the lower rate/s of interest, subject to payment of 2 per cent. of the outstanding loan/s, which was termed as 'reset fee'. The Revenue regards it as interest, within the meaning of the term as defined u/s. 2(28A) of the Act. The same, after all, is only a one time fee incurred in lieu of the recurring cost in the form of higher interest. The same would therefore stand to be allowed u/s. 36(1)(iii). So, however, as the same is in respect of borrowing/s applied for setting up the new refinery, which was in progress, the inte....
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....statute book. In fact, even prior to A.Y. 2004-05, one could contend of capitalization of the interest cost in view of Explanation 8 to s. 43(1), defining 'actual cost', providing that the interest incurred in relation to acquisition of an asset, so much of it as is relatable to the period after the asset is 'first put to use', would not form part of the cost of the said capital asset. The interest during the construction period, i.e., prior to it being 'first put to use', would thus stand to be capitalized. Further, that therefore the proviso to s. 36(1)(iii) is clarificatory and, thus, retrospective in nature, as indeed held in JCT Ltd. v. Dy. CIT [2005] 276 ITR 115 (Cal). The non-capitalization of interest in books, following Accounting Standards or otherwise, stands rendered as of no consequence in view of the clear language of the provision. The position of law, however, for A.Ys 2004-05 and the subsequent years, is without any shadow of doubt, as clarified by the Apex Court in Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194 (SC). The Revenue's stand is, accordingly, upheld, dismissing the assessee's ground. We may though add that the Revenue has, capitalizing the inter....
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....rial and, further, the sale shall not stand to be included in the amount of 'total turnover' of the business. This, however, shall not extend to the sale of power, which shall stand included in the total turnover. Before parting with this issue, we make it clear that the exclusion, in view of the decision by the Hon'ble Apex Court in ACG Associated Capsules Pvt. Ltd. v. CIT [2012] 343 ITR 89 (SC), relied upon by the assessee before us, is only qua the 'income' in relation to the receipts by way of sale of power, crane charges, testing charges, etc., i.e., after netting identifiable costs incurred in relation thereto. We decide accordingly. 7. The fourth and the final ground of the assessee's appeal is the consideration by the Revenue of the interest on delayed payments against supply of crude and interest on loans/advances as 'income from other sources'. The assessee claims the same as forming part of the business income and, in the alternative, only the net income on account of interest being liable to be excluded in view of the decision in ACG Associated Capsules Pvt. Ltd. (supra). 8. We have heard the parties, and perused the material on record. The assessee's....
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....n the quantum of exclusion (reduction) under Explanation (baa). This is as, even if regarded as income from other sources, in-as-much as the interest cost relatable to the interest receipt, where incurred, is thus deductible u/s. 57(iii) (the onus to establish which would be on the assessee), and it is only the net (interest) income that would stand to be excluded. This is as the said interest cost, debited to the profit and loss account of the company, cannot therefore continue to be claimed or regarded as deductible u/s. 36(1)(iii) as business expenditure. Where, however, assessable as business income, as in the case of that received from trade debtors, no adjustment qua interest receipt may be required as the corresponding interest cost - the financing cost being incurred in relation to the entire debt portfolio, i.e., rather than the debt representing the delayed payment only, may be considered as standing reduced to that extent, i.e., by and to the extent of the interest received/receivable. The same, it may be noted, is akin to the realization by way of sale of scrap, which is to be regarded only as a reduction in the cost of raw-material and not as an independent income. ....
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....at PB pages 151-152). Though there was no fresh commitment to expenditure for the said (revamping) project, the company had by then already expended Rs. 610.02 lacs thereon, including Rs. 172.14 lacs on steel, structurals, etc. and Rs. 197.50 lacs on construction of tank pads. Of the same, the company was able to retrieve costs worth Rs. 378.37 lacs by using the steel plates, structurals, tanks, for its other ongoing projects, leaving a balance unutilized expenditure of Rs. 231.65 lacs. This was done during the years 1998 and 1999, informing the Board and taking its advice vide BOD meetings dated 25/2/1998 and 06/9/1999. There being no scope for recoupment of this balance expenditure in any of the ongoing/future projects, the same was finally written off on sanction vide BOD meeting dated 14/4/2004. Provision for the same had in fact been made in accounts earlier, i.e., in f.y. 1998-99 (Rs. 150.66 lacs), f.y. 2000-01 (Rs. 12.47 lacs) and f.y. 2001-02 (Rs. 68.52 lacs) (PB pgs. 142 - 150). The first issue, therefore, that arises is whether the write off is deductible for the current year. The revamp project had been finally dropped on 18/11/1997, i.e., during the previous year rel....
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....arent from a bare reading of ss. 3, 4 & 5 of the Act. Reference in this context may also be made to the decision in CIT v. British Paints India Ltd. [1991] 188 ITR 44 (SC). There is, thus, at the threshold, no basis for the impugned expenditure being considered for allowability for the current year. We are, we may add, conscious that this is not the reason advanced by the Revenue for non-acceptability of the assessee's claim. The moot question, however, is whether this would constrain the Tribunal from taking cognizance of the material on record and decide in accordance with law, i.e., after determining the facts. It is the correct legal position that is relevant, and not the view that the parties may take of their rights in the matter (CIT v. C. Parakh & Co. (India) Ltd. [1956] 29 ITR 661 (SC); Kedarnath Jute Mfg. Co. Ltd. v. CIT [1971] 82 ITR 363 (SC)). The tribunal as an appellate authority, is under bounden duty to correct the errors, if any, attending the proceedings for assessment, issuing appropriate directions. (refer, inter alia, Kapurchand Shrimal v. CIT [1991] 131 ITR 451 (SC)). As explained in CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC), the tribunal is to ....
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.... Grounds 2.1 through 2.3 of the Revenues' appeal; Gd. 1 being general in nature, not warranting any adjudication, in its favour. We decide accordingly. 10. The next issue in the Revenue's appeal is the allowance of depreciation on gas sweetening plant. The same was not allowed by the AO on the ground that it had not been admittedly used for even a single day during the relevant year. The ld. CIT(A) allowed the assessee's claim following the decision by the Tribunal in the assessee's case for AY 1998-99 (in ITA No. 1822/Mds/2006, dated 23.10.2009, reported at 2 ITR (Trib.) 325 (Chennai-TM)), relied upon by the assessee before us as well. 11. We have heard the parties, and perused the material on record, including the decision by the tribunal in the assessee's own case for AY 1998-99, which is a majority decision. A reading of the same reveals that the plant was never used at any time after its installation during the previous year relevant to A.Y. 199798. The third member has endorsed the assessee's claim on the basis that the plant was kept 'read-to-use' though could not be used for reasons and circumstances beyond the control of the assessee. The decision thus turns on the '....
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....is, under the given facts and circumstances of the case, quizzical. The matter, therefore, to enable the assessee an opportunity to prove it's claim of the plant being kept ready for use, would stand to be remitted back to the file of the ld. CIT(A) for a decision thereon on merits after examination per a speaking order, observing the due process of law. Continuing further, the issue that in our view arises is not whether the plant was during the relevant year in a ready-to-use state, of which there is no evidence, but whether a plant or machinery could form part of the relevant block of assets - on the value of which alone depreciation is exigible, without being actually put to use, i.e., for the purposes of the business or profession of the assessee. The reason for the same is simple, and lies in the language of the provision itself. Section 32(1) in its relevant part reads as under: 'Depreciation. 32. (1) In respect of depreciation of- (i) building, machinery, plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trade marks, licenses, franchises or any other business or commercial rights of similar nature, being in....
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....65 (SC), while interpreting sec. 10(2)(iv) (of the 1922 Act), containing the same words. The Hon'ble Court held that plant must be used for the purposes of the business or profession which was actually carried on and the profit of which is assessable u/s. 10(1). In the facts of that case, the assessee company, growing sugarcane and manufacturing and selling sugar, entered into an agreement for sale of its' lands, building, machinery and plant as on August 9, 1943. The consideration therefor was received on 07.12.1943 and the possession of the factory given on 10.12.1943. The assessee continued to sell the stocks of sugar, which was not sold along with other assets, from August 9, 1943 to December 10, 1943, and claimed on that basis to be carrying on business. The plant and machinery was admittedly never used during the accounting year, though kept in trim and running order, on which basis it claimed the excess arising on the sale of machinery as business profit u/s. 10(2)(vii). The Hon'ble Court denied the same, holding as under: (pg. 275) 'Turning to the facts to be gathered from the records it is quite clear that the intention of the assessee was to discontinue i....
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....des passive user as well. In Dineshkumar Gulabchand Agrawal v. CIT [2004] 267 ITR 768 (Bom), it was held that the word 'used' in s. 32 denotes that the asset has been actually used and not merely ready for use. SLP against the same has been dismissed in [2004] 266 ITR (St.) 106. Passive user, given the nature of user, is only an actual user. Take, for example, the case of an electric generator which is used as a standby in case of power failure. It is maintained in good running condition, with fuel, i.e., ready for being used as and when required. Could it, in case of no power failure during the year, be said to have not been used, disentitling depreciation? It is clearly a passive user as against active one, entitling depreciation. The tribunal in G. Shoes Exports v. Asst. CIT (in ITA Nos. 5736 and 6209/Mum/2014, dated 24.10.2016), examined a number of decisions to find that in each case of passive user, as in the pool cases referred to by the Hon'ble Apex Court in Liquidators of Pursa Limited (supra), there is an implied, as against a notional, user. We extract a part of the said decision as under to exhibit the same, which, incidentally, also bears reference to a situation o....
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....did not suffer on account of a breakdown in any of the working machines (operating capacity). How could then, one may ask, a difference be made, for the machine 'used' vis-à-vis that 'not used', all of which formed part of a pool, made available, some of which were to necessarily remain idle at any given time, albeit liable to be used at any time. In CIT vs. G. N. Agrawal [1996] 217 ITR 250 (Bom), again, the trucks under repair during the relevant year were already part of the assessee's business (operational) assets, having been put to use earlier, as also in the subsequent year. Their being thus under repair during the relevant year was considered by the Hon'ble Court as of no moment. Surely, the capital assets already deployed in, and committed to the business could not be regarded as not in use merely on account of the suspension from active user on account of withdrawal from service for repairs, which is only to ensure the continuity of their service. It was under such like circumstances, signifying passive user, as against an active one, that the Hon'ble Court found the same as satisfying the test of 'user' and, thus, liable to be regarded as 'used' in terms o....
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....ts. There are many electrical engineers along with energy specialists working together in unison to setup and commission the windmill project at the site. Computer programming is done at the site on the windmill system, so that heavy electrical circuits run on automation and fail-stop in case of overloads to protect the system. After erection and set up, such systems are tested to affirm whether the machines are working in unison without over loading, electrical surges or other glitches. It is only thereafter that it can be said to be commissioned or operational. A fit trial run is thus a testing phase before which a plant can be declared as fit and ready for use, i.e., commissioned. No wonder, all the expenditure up to this stage stands to be capitalized as cost of the project (also refer: Challapalli Sugars Ltd. vs. CIT [1975] 98 ITR 167 (SC)). How, then, can a plant or machinery be regarded as being capable of being used, much less actually used, even if passively, prior thereto?' [emphasis, supplied] In other words, there is without doubt a case for depreciation being allowed in case of passive user, which must only be, in the facts and circumstances of the case, re....
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....extent of user is limited to the year of the acquisition of the asset, which perhaps could be in view of the impracticality of such examination once it enters the block of assets. The question, however, that is relevant is if it could also include the period for which the asset is kept ready for use. We think not as, clearly, user in actual terms only could possibly be or contemplated for being measured in terms of the period of user. This would, we may add, and as explained above, include passive user as well. However, to measure 'notional user', that the expression 'ready to use' signifies, in terms of its period, is facile. The question therefore that arises for answer, and which we consider as meriting one in the negative, is: Could a notional user entitle an asset for depreciation. The question posed earlier, i.e., at the start of the discussion, would also stand slightly modified to: Whether the asset can be said to be entitled to depreciation without any user, active or passive? An asset cannot enter a block of asset without such a user, so that the WDV of the relevant block of assets (on which only depreciation is to be allowed), as including its acquisition cost, does n....
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....e Hon'ble Court as a case of passive user. Availability of raw material for which the plant is designed (even if not on a regular basis), is, on the other hand, integral to its' functioning and not extraneous thereto, as was found by the Hon'ble Court in that case. It may be that the company has found alternate sources for achieving the desired result, or an alternate technology so as to discard the earlier arrangement as unfeasible or uneconomical or, plainly, as not legal/keeping with public policy - as, for example, where the raw material (sour gas) has, or results in, (higher) pollutant/s. The position is completely unexplained, much less, examined. There could be no presumption as to passive user under the circumstances. The same, it may be appreciated, is only when the actual supply of raw material is imminent, so that it could reasonably be argued that the plant is kept ready impending the receipt of the raw material, as where a purchase order for the same stands issued. We have, on principle, abundantly clarified that a passive user, even citing examples thereof, where so, would entitle depreciation. Two, the Hon'ble Court in that case disregarded the Revenue's cont....