2011 (12) TMI 638 - AT - Income Tax

Summary

Issues Involved:
1. Acceptance of financial results and treatment of trial production expenses.
2. Confirmation of estimated revenue expenditure.
3. Allowance of depreciation on fixed assets used for trial production.
4. Estimation of income versus claimed loss and unabsorbed depreciation.
5. Disallowance of trial run expenditure from the preceding assessment year.
6. Allegation of non-application of mind by CIT(A).
7. General legality of the order.

Summary:

1. Acceptance of Financial Results and Treatment of Trial Production Expenses:
The learned CIT(A) erred in not accepting the financial results of the company, which were as per recognized accounting policies and standards prescribed by the ICAI, and in treating the entire expenses of income on trial production as capital work in progress. The AO observed that the plant and machinery had already been set up and the period of construction was over before production started. The AO disallowed preoperative expenses of `46,98,37,969/- and estimated net profit @ 0.5% on sales of `37,33,68,091/-.

2. Confirmation of Estimated Revenue Expenditure:
The CIT(A) confirmed the estimated revenue expenditure of `371,501,251 (99.5% of sales `373,368,091) instead of the actual amount incurred by the appellant company amounting to `648,727,055 for the year under consideration. The CIT(A) noted that the sales were claimed as allowable expenditure by the AR, which was not the intent of the AO.

3. Allowance of Depreciation on Fixed Assets Used for Trial Production:
The CIT(A) was wrong in not allowing any depreciation on fixed assets used for trial run production, whereas she estimated income of `1,866,840 on the reported sale of `373,368,091 included under trial run expenditure. The AO observed ambiguity in the assessee's stand of claiming depreciation while stating that the production was a trial production.

4. Estimation of Income Versus Claimed Loss and Unabsorbed Depreciation:
The CIT(A) was wrong in estimating income at `1,866,840/- instead of allowing a loss of `265,020,052 and unabsorbed depreciation of `162,662,308/-. The AO did not allow the expenses of `30,20,64,632/- as revenue expenditure nor allowed them to be carried forward.

5. Disallowance of Trial Run Expenditure from the Preceding Assessment Year:
The CIT(A) grossly erred in disallowing the trial run expenditure of `167,773,337 (out of total expenditure `46,98,37,969) relating to the preceding assessment year 2002-03. The AO disallowed even the capitalization of expenses incurred during the preceding assessment year.

6. Allegation of Non-application of Mind by CIT(A):
The orders passed by the learned CIT(A) were alleged to be without application of mind and without considering all the grounds of appeal. The CIT(A) did not record specific findings on when the trial production ended and commercial production started.

7. General Legality of the Order:
The order was otherwise claimed to be bad in law. The CIT(A) did not adjudicate each of the grounds of appeal separately and did not record findings on the disallowance of expenditure capitalized in the preceding year.

Conclusion:
The matter was set aside to the file of the AO for reconsideration in light of relevant books of accounts and records, including quality control reports, after allowing sufficient opportunity to the assessee. The AO was directed to pass a speaking order, clearly stating when the trial production ended and commercial production started. The appeal was allowed for statistical purposes.