2012 (7) TMI 123 - AT - Income Tax

Allowance of expenditure of HRC Plant as revenue expenses - Revenue contested that same was shown in the balance sheet as capital work-in-progress as commercial production had not started - Held that - for the purpose of excise duty, the whole factory was considered as a one unit in the excise return and therefore the view taken by the AO that HBI and HRC were two different units was not correct - as the new project was a part of existing business as there was complete integration and interlacing of both the units, therefore the expenditure incurred such as interest on borrowed funds and general administrative expense have to be allowed. As regards the debenture issue expenses the debentures are not compulsorily convertible into shares as these were optionally convertible and therefore the conversion would depend upon option if any exercised by the debenture holders. Therefore it could not be said that intention was clearly to issue shares. Obviously the intention was to raise loan which could be converted into shares in future if any option was exercised. Thus,the debenture issue expenses considering the judgments in Ashima Syntex Limited. Versus Assistant Commissioner Of Income-tax Central Circle - 2(3) 2006 (3) TMI 188 (Tri) have to be allowed - decided in favour of assessee. Deletion of disallowance of interest expenditure on the working capital of HRC Division - shown by the assessee company as Deferred Revenue expenditure - Held that - As it has already been held that HRC project is part of the existing business of the assessee all revenue expenditure have to be allowed - in favour of assessee. Deletion of disallowance of lease rent - assessee had debited in the P&L account expenses on account of rent paid on leasing transactions less by Rs.25.15,95,039, while filing the return of income the assessee claimed this difference as a deduction - Held that - The deduction claimed by the assessee was in respect of its actual liability of payment of lease rent to the lessor and the treatment in the books of account will not alter the character of the expenditure when it comes to claiming deduction while computing total income under the Act - no prejudice is caused to revenue - decided in favour of assessee. Deletion of addition of provision made for doubtful debts to the Book Profit u/s115JA - Held that - By virtue of Finance(No.2) Act, 2009, clause (g) inserted in the Explanation contained in Section 115JA(2)the amount or amounts set aside as provision for diminution in the value of any asset, is specifically mentioned - that provision for doubtful debts and doubtful advances did not fall within clause (c) of the said Explanation in as much as they amounted to provision in respect of diminution in the value of asset - as provision made for doubtful debts which is debited to the P&L Account has to be added for arriving at the book profit, the addition made by the AO has to be restored - decided in favour of revenue. Maintainability of appeals only on ground of low tax effects - Held that - As the appeals of the revenue have to be dismissed as not maintainable as the tax effect involved in these appeals were only notional as the income ultimately determined in assessment for these years was only a loss and as these appeals were filed prior to 15/5/2008 from which date notional tax effect was also considered as tax effect for filing appeals. Thus these appeals are dismissed - decided against revenue.

Issues Involved:
1. Treatment of expenditure of HRC Plant as revenue expenses.
2. Disallowance of interest expenditure on working capital of HRC Division.
3. Disallowance of lease rent.
4. Addition of provision for doubtful debts to Book Profit u/s 115JA.
5. Procedural fairness regarding opportunity afforded to the AO.

Detailed Analysis:

1. Treatment of Expenditure of HRC Plant as Revenue Expenses:
The primary issue was whether the expenditure of Rs. 2,18,11,65,893/- for the HRC Plant should be treated as revenue expenses. The assessee, engaged in manufacturing steel, claimed this expenditure as revenue, arguing that the HRC project was an extension of its existing business. The AO had disallowed this claim, treating it as capital expenditure since the commercial production had not started. The CIT(A) allowed the deduction, considering the HRC project as part of the existing business. The Tribunal upheld the CIT(A)'s decision, referencing a prior Tribunal decision that supported the view that the HRC project was an extension of the existing business, thus allowing the revenue expenditure incurred before commercial production as a deduction.

2. Disallowance of Interest Expenditure on Working Capital of HRC Division:
The AO disallowed the interest expenditure of Rs. 26,62,32,317/- on the working capital of the HRC Division, treating it as capital expenditure. This decision was consequential to the first issue. Since the Tribunal upheld that the HRC project was part of the existing business, it followed that all revenue expenditures, including interest on working capital, should be allowed. The Tribunal dismissed the revenue's ground, aligning with its earlier decision.

3. Disallowance of Lease Rent:
The AO disallowed the lease rent of Rs. 25,15,95,039/- claimed by the assessee. The CIT(A) allowed the deduction, stating that the change in the method of treatment in the books did not alter the character of the expenditure. The Tribunal upheld the CIT(A)'s decision, noting that the deduction was in respect of the actual liability of lease rent payment and that the treatment in the books of account does not alter the nature of the expenditure.

4. Addition of Provision for Doubtful Debts to Book Profit u/s 115JA:
The AO added a provision for doubtful debts of Rs. 3,53,35,020/- to the book profit under section 115JA. Due to a retrospective amendment in Section 115JA, provisions for doubtful debts and advances are to be added while computing book profits. Both parties agreed that the addition made by the AO should be restored. The Tribunal allowed the revenue's ground on this issue.

5. Procedural Fairness Regarding Opportunity Afforded to the AO:
The revenue raised a concern that the AO was not afforded proper opportunity before the CIT(A). However, the Tribunal found no substantiation for this claim and dismissed this ground.

Additional Appeals (ITA No.3228/M/05, ITA No.3229/M/08 & ITA4214/A/03):
The revenue's appeals for these assessment years were dismissed based on the principle of low tax effect and notional tax effect. The Tribunal referenced a prior decision where it was held that appeals filed before 15/5/2008 should not consider notional tax effect for determining the maintainability of appeals. Since the income determined was a loss, the appeals were dismissed as non-maintainable.

Conclusion:
The appeal by the revenue was partly allowed concerning the addition of provision for doubtful debts to book profit, while other grounds were dismissed. The additional appeals were dismissed due to low tax effect considerations.

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