TaxTMI 
TaxTMI 
2009 (1) TMI 296
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....st the addition/disallowance made by the AO and the CIT(A) vide order dt. 4th Aug., 2003 dismissed the appeal of the assessee. Before us, the assessee has raised five grounds of appeal which are disposed of in seriatim as under: 3. Grounds of appeal Nos. 1 and 2 are taken together and the same are as under: "(1) On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming that freight charges of Rs. 35,61,395 have to be included in the value of closing stock of this assessment. He ought not to have done so. (2) Without prejudice to ground No. 1 above, on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in holding that addition to the income of this assessment on account of including the freight of Rs. 35,61,395 in the value of closing stock could not be restricted to Rs. 11,87,652 even though in the value of closing stock of the earlier assessment, freight of Rs. 24,63,743 was included and the said higher value has to be considered as the value of the opening stock of this assessment. He ought not to have done so." 4. The relevant facts relating to this issue are that in the asst. yr. 199....
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....not been included in the valuation of closing stock. However, the AO, in our view, would not be justified in adding the cost of outward freight, which as per the method of accounting regularly employed by the assessee is not added to the valuation of the closing stock. The decision of the Hon'ble Supreme Court in the case of CIT vs. British Paints India Ltd. (1991) 91 CTR (SC) 108 : (1991) 188 ITR 44 (SC) is also inapplicable to the facts of this case. In that case, the Hon'ble Supreme Court held that the AO is empowered to reject the method of accounting even regularly employed by the assessee, if he is of the opinion that the true profits and gains cannot be determined as per the method of accounting adopted by the assessee. After the decision of the Hon'ble Supreme Court s. 145A has been incorporated which reads as under: "145A. Notwithstanding anything to the contrary contained in s. 145, the valuation of purchase and sale of goods and inventory for the purposes of determining the income chargeable under the head 'Profits and gains of business or profession' shall be- (a) in accordance with the method of accounting regularly employed by the assessee; and (b) further ad....
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....on of the CIT(A) in allowing the relief has held as under: "The ground No. 3 pertains to addition of Rs. 20,19,480 being Modvat credit added to the value of closing stock. Both the parties agreed that this ground is covered in assessee's favour by the Hon'ble Supreme Court decision in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC), affirming the Hon'ble Bombay High Court decision reported at CIT vs. Indo Nippon Chemical Co. Ltd. (2000) 164 CTR (Bom) 78 : (2000) 245 ITR 384 (Bom). Accordingly, the finding of the learned CIT{A) on this issue is confirmed." 13. The learned Departmental Representative, on the other hand, contended that in view of s. 145A, the decision of the Tribunal in the case of Cyanamid India Ltd. is not applicable. 14. We have given our careful consideration to the rival contentions. In our considered view, the decision of the Tribunal in the case of Cyanamid India Ltd. relates to the asst. yr. 1994-95, when s. 145A was not on the statute book. It is also pertinent to mention that the Hon'ble Bombay High Court in the case of CIT vs. Indo Nippon Chemical Co. Ltd. (2000) 164 CTR (Bom) 78 : (2000) 245 ITR....
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....e submitted that effect of the s. 145A to opening stock is also to be given. He relied upon the decision of Delhi High Court in the case of CIT vs. Mahavir Aluminium Ltd. (2008) 214 CTR (Del) 45 : (2008) 168 Taxman 27 (Del). The Departmental Representative on the other hand relied upon orders of Revenue authorities. He has also relied upon following decisions: (i) West Coast Paper Mills Ltd. vs. Asstt. CIT (2006) 105 TTJ (Mumbai) 344 : (2006) 286 ITR 252 (Mumbai)(AT); (ii) CIT vs. Indo Nippon Chemicals Co. Ltd. (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC); (iii) J.B. Chemicals & Pharmaceuticals Ltd. vs. Addl. CIT (2006) 10 SOT 362 (Mumbai); (iv) ITA No. 7751/Mum/2004-order dt. 28th Jan., 2008; (v) Dy. CIT vs. Glaxo Smithkline Consumer Healthcare Ltd. (2007) 110 TTJ (Chd)(SB) 183 : (2007) 107 ITD 343 (Chd)(SB). 7. We have heard the learned Representatives of the parties, record perused and gone through decisions cited. In this connection, it is worthwhile to note that the Memorandum and CBDT circular Explaining the Provisions of s. 145A inserted by the Finance (No. 2) Bill, 1998 states as follows: 'Computation of value of inventory The issue relating ....
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.... Ltd. (2008) 214 CTR (Del) 45 : (2008) 168 Taxman 27 (Del) has held that corresponding adjustment must be made in opening stock subject however, to a condition that such adjustment should not result in double deduction for same expenditure: The Delhi High Court judgment is the only High Court judgment available on the issue. In such circumstance the judicial proprietary demands that we are to follow the above judgment of the High Court. Since we follow the judgment of the Delhi High Court, therefore, the decisions of Tribunal relied upon by the learned Departmental Representative does not help the Revenue. The judgment of the apex Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd., cited by the learned Departmental Representative is distinguishable on facts as the said case decided by the apex Court considering the facts of that case. The apex Court in that case held that adopting gross method for purchases and net methods for unconsumed stock at the end of year is not permissible. 7.3 On consideration of s. 145A, above Memorandum and CBDT circular Explaining the Provisions of s. 145A and above judgment of the Delhi High Court, we noted that when the adjustments are ....
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....ell as the inventories inclusive of element of taxes. In this method, if the assessee does not credit the Modvat credit availed or accrued on the utilisation of the inputs, it is bound to give distorted picture of the income of the assessee. This is neither the intention of the legislature nor of the Hon'ble Delhi High Court in the case of CIT vs. Mahavir Aluminium Ltd. (2008) 214 CTR (Del) 45 : (2008) 168 Taxman 27 (Del). The Hon'ble High Court in the aforesaid case, while holding that the adjustment has got to be made in the opening stock also has held that "every corresponding adjustment must be made in the opening stock subject however to a condition that such adjustment should not result in double deduction for the same expenditure". 19. In our considered view, the gross method has got to be followed as per provisions of s. 145A in contrast with the net method as mandated under the said section, which in our view, will put an end to the unnecessary litigation. According to our limited understanding, there may not be any substantial benefit or loss to the assessee by following gross method in respect of the inputs and the inventories etc. as mandated under s. 145A. We accord....
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....ooks of account in the year of the claim. 23. The learned Departmental Representative, on the other hand, has relied upon the order of the AO and that of the CIT(A). 24. We have given bur careful consideration to the rival contentions. It is observed from the assessment order that the AO has disallowed the claim of the assessee for the reasons indicated therein in para 5.3 of the assessment order which is reproduced as under: "It has been judicially decided by the Kerala High Court in Travancore Tea Estates Co. Ltd. vs. CIT (1992) 102 CTR (Ker) 273 : (1992) 197 ITR 528 (Ker) that the burden of proof that there is a debt owing to the assessee that it has been taxed in the earlier years, that the debt arose in the course of business of the assessee and finally that it had become bad in the year of account, is all on the assessee. Further, the Calcutta High Court in the case of CIT vs. Coates of India Ltd. (1998) 150 CTR (Cal) 311 : (1998) 232 ITR 324 (Cal) has held that having regard to the facts and circumstances of the case, the assessee is required to show that a bona fide assessment had been made by him to the effect that the realization of the debts was not possible. Fu....
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.... for the purpose of verification of the said aspect and take a decision accordingly in the light of the decision of the jurisdictional High Court of Bombay in the case of Star Chemicals (Bombay) (P) Ltd. and s. 36(2) of the Act. The ground of appeal raised by the assessee is thus allowed for statistical purposes. 26. We now take up the appeal of the assessee for the asst. yr. 1998-99. 27. The first ground of appeal is as under: "On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in confirming the action of the learned AO in holding that the commuted value of fees/compensation of Rs. 5,70,42,000 payable by your appellants to M/s Atul Ltd. under the agreement dt. 14th Feb., 1997 and modified by a letter dt. 4th Feb., 1998 is in the nature of capital expenditure. He ought not to have done so." 28. The relevant facts relating to this issue are that the assessee had claimed deduction of Rs. 5,70,42,000 on account of commuted fee paid/payable towards infrastructure facilities in the computation of total income filed with the return of income notwithstanding the fact that the said amount was not debited to the P&L a/c. During the course ....
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..... It was further stated that Rs. 3,20,42,000 had been paid by the assessee during the accounting year ending 31st March, 1998 and the balance amount of Rs. 2,50,00,000 was paid in the financial year 1998-99. The assessee in the computation of income had claimed the total deduction of Rs. 5,70,42,000. The AO has disallowed the claim by treating the expenditure as capital expenditure not qualifying for deduction under s. 37. The AO has given detailed reasons for making the disallowance. The AO has also pointed out that the assessee in its accounts had not debited the above amount as expenditure for the year under appeal. That the assessee in its balance sheet had shown the sum of Rs. 3,20,42,000 as an advance without any debit in the P&L a/c. That in the subsequent assessment year, the assessee has after paying further amount of Rs. 2,50,00,000 amortised the total amount of Rs. 5,70,42,000 under the head 'Miscellaneous expenditure' over a period of six years from the asst. yr. 1999-2000. According to the AO, the assessee in its accounts stated the above amount as an advance and from the asst. yr. 1999-2000 onwards as capital expenditure amortised over six years. The claim of deductio....
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....C) 555 : (1997) 225 ITR 802 (SC) and the decision of the Calcutta High Court in the case of CIT vs. Berger Paints (India) Ltd. (2002) 174 CTR (Cal) 269 : (2002) 254 ITR 503 (Cal) to support the contention. 32. The learned Departmental Representative, on the other hand, relied upon the findings of the AO as well as those of the CIT(A). It has further been pointed out that the assessee company has been taken over by the another company after expiry of two years and therefore the allowance of deduction of the lump sum payment for acquisition of the right to use the infrastructure facilities cannot be allowed in the year under appeal. Our attention was invited to findings of CIT(A) particularly to para Nos. 8 to 10 of the order, wherein the issue has been dealt with in detail. Further reliance has been placed on the following decisions to support the decision of the Revenue authorities: (1) CIT vs. Khimline Pumps Ltd. (2002) 178 CTR (Bom) 284 : (2002) 258 ITR 459 (Bom); (2) Enterprising Enterprises vs. Dy. CIT (2007) 208 CTR (SC) 433 : (2007) 293 ITR 437 (SC); (3) Jt. CIT vs. Mukund Ltd. (2007) 109 TTJ (Mumbai)(SB) 172 : (2007) 291 ITR 249 (Mumbai)(SB)(AT); (4) Aztec Sof....
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....ient is not material in determining whether the payment is revenue or capital disbursement qua the payer. (ii) There may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit, may nonetheless be on revenue account and the test of enduring benefit may breakdown. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principle laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more efficiently or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future. The test of enduring benefit is therefore, not a certain or conclusive test and it cannot be applied blindly and mechanically without regard to the particular facts and circumstances of a given....
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....reas Atul has with a view to improving and enhancing on a continuous basis, the quality of life of the larger work force employed at the above chemical complex, at considerable cost, expenses and effort, developed over the years the aforesaid chemical complex by providing and creating excellent infrastructural facilities, such as, landscaping, schools (Kalyani and Atul Vidyalayal, sports complex, community center, dams, water treatment plants, water supply lines, roads and other facilities more particularly described in the First Schedule hereunder written (for all which development and infrastructural facilities are hereunder for the sake of brevity collectively called 'infrastructural facilities'): And whereas along with other lessees and other occupants of the premises in the aforesaid chemical complex. CIL and its employees with Atul's permission have been using and enjoying the infrastructural facilities for the past-forty years at no significant cost or consideration in spite of requests by Atul to CIL to pay proportionate compensation: And whereas pursuant to negotiations held between Atul and CIL, the parties have agreed that CIL will pay to Atul and Atul wi....
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.... described in the Second Schedule hereunder written. 4. Atul shall: (a) Subject to cl. 2 above, ensure unobstructed and uninterrupted use and enjoyment by CIL and its employees of the infrastructural facilities during the subsistence of this agreement and shall not do or omit to do or suffer to be done anything whereby such use and enjoyment by CIL and its employees of the infrastructural facilities during the subsistence of this agreement is avoided, impeded, hindered or obstructed in any manner, and, (b) by solely liable for payment of any taxes, cesses, charges or outgoings of whatsoever nature and all increases therein or any new levies or outgoings assessed, charged, imposed or payable for or in respect of or in relation to or in connection with Atul's ownership of the infrastructural facilities their establishment and/or use and enjoyment by the users thereof except any taxes or charges in respect of electricity which shall be borne by CIL on actual usage basis; 5. The monthly fee or compensation referred to in d. 3 above shall be in respect of the use and enjoyment by CIL and its employees of the infrastructural facilities described in the First Schedule. It is e....
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.... 5. Land revenue charges (presently the same is Rs. 6,863.37 per year). 6. Share of road repair and Kalyani school running charges on the same basis as at present. 7. Rental, electricity charges and house tax for residential quarters leased to Cyanamid India. 8. Steam supplied by Atul to CIL on actual consumption basis. 9. Recurring charges for effluent treatment facilities @ 5 per cent of total expenses. 10. Water cess (for 1995-96, CIL's share amounted to Rs. 16,971.80). 11. Internal telephone connection charges (the same amounted to Rs. 1,525 during 1995-96).'" 37. The above agreement has been modified by a letter dt. 4th Feb., 1998 of M/s Cyanamid India Ltd., whereby monthly payment has been agreed to be commuted at a sum of Rs. 15 crores less monthly fee already paid. In our considered view, it is important to note that from the date of lease agreement i.e., 26th Aug., 1953 till the year 1997 i.e., upto the execution of the agreement dt. 14th Feb., 1997, the assessee had been using all the infrastructure facilities referred to in the agreement without any cost. However, the assessee was required to pay the operational charges for some of the facilities ind....
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....------------------------------------------------------ 2. Supply of electric power 2. Share of standing charges for (11,000 volts) through Atul the power substation. At present owned sub-station and such share works out to Rs. transformer; 5,74,080 per year; ------------------------------------------------------------------ 3. Provision of suitable heavy 3. Water charges for water load all weather road network consumed by CIL. The method of with adequate storm water computation of the rate shall drains, avenue trees and be the same as at present. lighting within the Atul Chemical Complex. ------------------------------------------------------------------ 4. Provision of adequate 4. Land supervision charges effluent drainage system (presently the ....
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....nbsp; treatment facilities @ 5 per cent of total expenses. ------------------------------------------------------------------ 10. Water cess (for 1995-96, CIL's share amounted to Rs. 16,971.80). -----------------------------------------------------------------....
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....ase of CIT vs. Madras Auto Service (P) Ltd. In the Madras High Court decision, the issue was about the payment of rent in a lump sum. The Hon'ble Madras High Court held that lump sum payment of rent for the use of premises was allowable as a deduction as revenue expenditure. In the case of CIT vs. Madras Auto Service (P) Ltd., the Hon'ble Supreme Court has laid down the following principles of law: "The general principles applicable in determining whether the trade expenditure is revenue or capital are as under: 1. Outlay is deemed to be capital when it is made for the initiation of a business, for extension of a business, or for a substantial replacement of equipment. 2. Expenditure may be treated as properly attributable to capital when it is made not only once and for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade.... If what is got rid of by a lump sum payment is an annual business expense chargeable against revenue, the lump sum payment should equally be regarded as a business expenses, but if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether." 41. ....
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....re guarantee deposit would not carry any interest payable to the lessee by the lessor. The lease deed granted to the assessee the liberty to use the land for excavation purposes and subsidiary purposes. The assessee claimed rent amounts worked out at Rs. 10,752 per annum as revenue expenditure. The claim of the assessee in this behalf was turned down by the authorities, the Tribunal and finally by the High Court. On appeal, the Hon'ble Supreme Court has held as under: "Held, dismissing the appeal, that in the instant case as indicated by the lease deed, what was to be paid by the assessee was rent for the land that was leased. It was payable @ Rs. 35 per acre per month. The assessee was required to pay in advance the rent calculated at this rate for the entire period of the lease i.e., fifteen years in the form of a deposit. The deposit was by way of the guarantee for due performance of this lease deed for fifteen years, that is towards fifteen years' rent. It was adjustable against the rent of each month and it carried no interest. On the facts and circumstances of the case, the sum of Rs. 10,752 paid by the assessee in the accounting year was not expenditure allowable as a ded....
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....otan Lime Syndicate vs. CIT and Pingle Industries Ltd. vs. CIT. 46. Reference to the decision of the Hon'ble Bombay High Court in the case of CIT vs. Khimline Pumps Ltd. will also be useful. In this case, an open plot of land was leased out to M/s APVE Ltd., a company for a period of 95 years commencing from 1st Aug., 1965 on payment of a premium of Rs. 1,62,400 and yearly rent of Re. 1. Under the lease, the company had, at the end of the 95 years to deliver vacant possession of the land. It was entitled to remove any building or structure put up by it on the land. The company had erected building, plant and machinery thereon. M/s APVE Ltd. was ordered to be wound up and its assets were sold under the directions of the High Court. The assessee got the premises transferred by paying Rs. 75 lakhs for entire unit-Rs. 45 lakhs were paid for rent and building. The assessee claimed deduction as a revenue expenditure. The AO held that Rs. 45 lakhs related to acquisition of leasehold land and the said amount was not allowable as a deduction. On appeal, the Tribunal held that Rs. 45 lakhs was a capital expenditure, but without giving reasons held that since the benefit of expenditure wou....
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....e improvements had also resulted in providing better facilities for carrying on the business of the appellant, the betterment charge did not become revenue expenditure." 48. In the present case, the factors which are important to be considered is that there was a lease agreement between M/s Cyanamid India Ltd. and M/s Atul Ltd. right from the year 1953 and until the execution of the agreement dt. 14th Feb., 1997, the assessee was using infrastructure facilities in the complex without making any payments except payments towards operational cost. That by virtue of agreement dt. 14th Feb., 1997, M/s Cyanamid India Ltd. had agreed to pay a monthly payment of more than Rs. 14.6 lakhs w.e.f. 1st April, 1996. The agreement dt. 6th Feb., 1998 has fixed the commuted value for the acquisition of right to use the facilities in consideration of Rs. 15 crores which is roughly 8.5 times the annual payment agreed upon by virtue of agreement dt. 14th Feb., 1997 when unexpired lease of period was more than six decades. 49. Taking all the factors into consideration, we are of the view that the assessee in this case has made a lump sum payment for acquisition of right to use infrastructure faci....
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....st of extension of treated effluent discharge pipeline owned and belonging to M/s Atul Ltd. represented an expenditure of capital nature and or represented an investment made for creating a new asset. He ought not to have done so." "Without prejudice to the aforesaid contention, the learned CIT(A) has erred in rejecting your appellants claim for allowance of depreciation with reference to the expenditure of Rs. 96,25,000. He ought not to have done so." 53. The relevant facts relating to this issue are that M/s Cyanamid India Ltd. had agreed to share 25 per cent of the total cost of extension of treated effluent discharge pipeline (4 kms. pipeline). A common additional pipeline had to be constructed which was to be used by M/s Cyanamid India Ltd., M/s Atul Limited and M/s Cibatul. M/s Cyanamid India Ltd. had agreed to pay 25 per cent of the total cost of the project as per the terms and conditions indicated at p. 21 of the order of the CIT(A). The AO has pointed out that as per the Gujarat Pollution Control Board, the treated effluent discharge pipeline in Atul Complex was required to be extended by installation of 4 kms of marine outfall effluent discharge pipeline. The total....
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....al nature, then the assessee having a joint owner of the pipeline also required to incur expenditure of repairs and maintenance, depreciation be allowed to the assessee. The learned counsel for the assessee relied upon the decision of the Pune Bench of the Tribunal in the case of Tata Johnson Controls Automotive Ltd. vs. Addl. CIT in ITA No. 1418/Pn/2006 for the asst. yr. 2001-02 to support the contention that any expenditure incurred for sharing of facility for smooth running of the business of the assessee is permissible as a revenue expenditure. 57. The learned Departmental Representative, on the other hand, relied upon the orders of the Revenue authorities and contended that the assessee had acquired the benefit of enduring nature and that laying down of pipeline was agreed by three companies jointly and the cost has been borne by the assessee on the basis of the actual expenditure incurred. According to the learned Departmental Representative, the assessee has not agreed to make payment for the user of the facility, but for construction of additional pipeline, the cost of which was shared by three companies and accordingly the expenditure was on capital account. 58. We h....
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....eated effluent discharge pipeline by four kilometres. In order to meet the requirements of the Pollution Control Board, if the assessee had laid down the pipeline by meeting the entire cost of the pipeline, there would be no doubt about the nature of the expenditure being of capital nature. In this case, the pipeline is jointly to be used by three companies and the cost has been met proportionately. The mere fact that the cost of laying down of the pipeline is met by three companies, in our considered view, will not take out the expenditure of the capital nature to the field of expenditure of revenue nature. So, however, it appears that the assessee is not the owner of the pipeline. In our view, it will be relevant to ascertain the ownership of the pipeline. 60. There is a letter dt. 6th March, 1997 written by M/s Cyanamid India Ltd. to the General Manager, Infrastructure Unit, Atul Complex, Atul. The contents of the letter are reproduced hereunder: "Thank you for sending me a copy of the progress report No. 3, dt. 27th Feb., 1997. I note that the final quotations have been obtained and the contract is to be finalised by the first week of March, 1997. I have also ....
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.... approval by us of quotations, orders, costs and expenses and technical specifications by our technical/finance personnel. If at any time in future, Cyanamid should discontinue use of the aforesaid treated effluent discharge pipeline, Cyanamid shall also discontinue any further contribution as aforesaid." 62. From the contents of the above letters, it appears that the assessee is not an owner of the pipeline. The cost of laying down additional pipeline of 4 kms. in the Atul Complex has been met by three companies. All the three companies are taxpayers. It is not known as to who is the owner of the pipeline. If the assessee company is not the owner of the pipeline, as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Associated Cement Companies Ltd., the assessee would be entitled to deduction of the cost of the pipeline contributed by it. We have also not been informed about the treatment given by the other two contributors and the view taken by the Revenue in their cases. We are, therefore, constrained to remit this issue to the file of the AO to verify the ownership of the pipeline. If the pipeline is co-owned by the assessee along with two other contr....
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....re. The AO has treated the cost of film and other production expenses for producing advertisement films and commercials to be used as TV spots as capital expenditure. The AO has relied upon the decision of the Bombay High Court in the case of CIT vs. Patel International Film Ltd. (1976) 102 ITR 219 (Bom), wherein it has been laid down that there is a distinction between the expenditure on production of film and expenditure on exhibiting the same by paying to various TV channels. 66. We have given our careful consideration to the rival contentions. We find similar issue has been considered by the Mumbai Bench of the Tribunal in the case of Dy. CIT vs. Metro Shoes (P) Ltd. (2004) 89 TTJ (Mumbai) 48 : (2002) 258 ITR 106 (Mumbai)(AT) in which decision of the Bombay High Court in the case of CIT vs. Patel International Film Ltd. has also been considered. The relevant portion of the order is reproduced hereunder: "It has been submitted before us by the learned Departmental Representative that since the benefit derived from the production of the film is of enduring nature, the expenditure on the production of such advertising film is capital expense. On the other hand, the lea....