2019 (1) TMI 1399 - AT - Income Tax

Deprecation on capital spares - Held that - deprecation u/s 32 of the Act on capital spares is allowable expenses even though they have not been put to use during the relevant period. In the instant case it is not in dispute that the capital spares were purchased and kept ready for use in case of emergency by the assessee and as such allowable expenses on account of depreciation claimed by the assessee on capital spares. Disallowance of expenses on the ground that the business has not been commenced during the previous year and as such not allowable - expenditure from the date of commencement of its business or from the date of setting up of the business? - Held that - In the instant case business of the assessee was set up from the date of entering into agreement for acquisition of the fertilizer plant and without expert legal and financial opinion the entire deal would not have been through. The moment the assessee has taken first step for setting up the business it is established that the business has been set up and the assessee became entitled for expenses of the previous year. Such expenses are to be treated as business expenses from the date of setting up of the business which is certainly 03.11.2005. Moreover finance of the assessee company are audited one and no mistake has been pointed out. So we are of the considered view that the AO as well as CIT (A) have erred in disallowing the expenses hence expenses of 29, 68, 000/- are ordered to be allowed as business expenses incurred for setting up the business of the assessee company during the previous year Addition on account of prior period income - invoking provisions contained u/s 154 to make the addition as noticed that in the computation of income assessee has reduced the prior period income from the total income during the year under assessment - Held that - This addition made by the AO is not sustainable for two reasons one that when the computation of income was there before the AO at the time of completion of assessment u/s 143 (3) of the Act the same cannot be treated as a mistake apparent on record as it needs detailed investigation by providing an opportunity of being heard to the assessee; and two that it is still a debatable issue if the prior period income can be added as income u/s 154 of the Act. Moreover it is revenue neutral because the assessee company is running into loss. So in these circumstances the addition made by the AO is not sustainable Addition u/s 14A read with Rule 8D (iii) - Sufficiency of own funds - Held that - As assessee was in possession of sufficient interest free funds at its disposal to make investment. In these circumstances we are of the considered view that disallowance u/s 14A in this case cannot be more than 5, 403 the exempt income earned during the year under assessment. So AO is directed to disallow the amount of 5, 403/- only instead of 1, 25, 000/-. Addition invoking the provisions u/s 43B - non-payment of statutory dues of outstanding sales-tax pertaining to the month of March 2010 before the due date of filing the return of income - Held that - In the instant case since assessee has got outstanding dues on account of salestax converted into loan by the Government of UP (through PICUP) the assessee is held to have complied with the provisions contained u/s 43B of the Act. So we are of the considered view that the assessee is entitled for deduction thereof Entitled for depreciation on intangibles as well as depreciation on assumed intangibles - slump sale - AO disallowed the depreciation on the sole ground that when depreciation on the tangible assets has already been availed of by the assessee no depreciation on intangible is allowable - Held that - When in the valuation report which is given by PDIL a Government of India Undertaking intangibles assets and their benefits have been specifically valued and the assessee had paid a sum of 125 crores in a slump sale agreement for approvals licences permits registration to run the business over and above the total price of fertilizer plant i.e. 1, 444 crores the same are intangibles and deprecation thereon is allowable u/s 32(1)(ii) of the Act apart from the depreciation claimed by the assessee on tangible assets Claim of preliminary expenses made u/s 35D - Held that - No ambiguity that the amount claimed by the assessee u/s 35D(2)(c)(iii) was incurred towards registration of the company as a new concern and not for increasing authorized share capital. So in these circumstances the decision rendered in CIT vs. Hindustan Insecticides Ltd. 2001 (2) TMI 75 - DELHI HIGH COURT relied upon by the AO is not applicable to the facts and circumstances of the case. So ld. CIT (A) has rightly deleted the addition made by the AO qua claim of preliminary expenses made u/s 35D and as such there is no scope to interfere into the findings returned by the ld. CIT (A). Addition going through the confirmation of the creditors namely Indian Oil Corporation (IOC) on the ground that the same has not been accounted for credit note dated 31.1.2007 till 31.03.2007. - CIT (A) deleted the addition on the ground that when the same amount has been accounted for in the subsequent years and in both the assessment years the net result is loss then there is no justification in disallowing the amount in question in assessment year in question - This is a factual issue decided by the ld. CIT (A) and there is no need to interfere into the findings returned by the ld. CIT (A) Allowability of prior period expenses - assessee itself has admitted before AO when confronted that the amount was erroneously netted and offered to be added for computation of taxpayer s income Held that - As when the assessee has erroneously netted the amount of prior period expenses the question of allowing the same as prior period expense does not arise. Addition @10% as expenses under the head vehicle repair and maintenance in order to exclude personnel expenses booked under it - Held that - Order passed by the ld. CIT (A) deleting the addition of 7, 96, 706/- shows that the ld. CIT (A) after appreciating the fact that the assessee company is situated at Shahjahanpur and its headquarter is at Noida and assessments are made at Bareilly and its appellate jurisdiction is at Delhi and Lucknow and it is having large work force the travelling is commercial necessity. Moreover the ld. CIT (A) has rightly observed that there is no evidence or material available with the AO to work out personnel use of vehicle rather he has proceeded to estimate the same which is not permissible when accounts of the assessee are audited one and has been duly accepted by the Revenue Penalty u/s 271(1)(c) - addition on account of sales-tax not paid & disallowed u/s 43B and disallowance of depreciation on spare parts - Held that - Perusal of penalty order goes to show that the penalty has been levied by the AO for concealment of particulars of its income and furnishing of inaccurate particulars of income. It is settled principle of law that in order to initiate the penalty proceedings a valid show-cause notice as required u/s 271(1)(c) read with section 274 is required to be issued to the assessee so as to make him aware as to under which limb of section 271(1)(c) the penalty is going to be levied. But in the instant case AO even at the time of passing the penalty order was not aware if the assessee has concealed the income or has furnished inaccurate particulars of its income rather preferred to levy the penalty on both the accounts . See CIT vs. Manjunatha Cotton and Ginning Factory & Ors. 2013 (7) TMI 620 - KARNATAKA HIGH COURT . CIT (A) has rightly deleted the penalty on this account. Furthermore when as per our findings returned in the preceding paras while deciding the grounds in the respective appeal filed by the assessee the addition on the basis of which penalty has been levied has been deleted penalty cannot survive and as such has to be deleted.

Summary

Issues Involved:
1. Validity of assessment orders.
2. Disallowance of depreciation on capital spares.
3. Disallowance of professional fees as business expenditure.
4. Disallowance of preliminary expenses under section 35D.
5. Disallowance of depreciation on intangible assets.
6. Disallowance of prior period income.
7. Disallowance under section 14A.
8. Addition under section 43B.
9. Deletion of penalty under section 271(1)(c).

Issue-wise Detailed Analysis:

1. Validity of Assessment Orders:
The assessee challenged the validity of assessment orders for AYs 2006-07, 2007-08, and 2009-10, claiming they were bad in law. The Tribunal found these grounds to be general in nature and did not require specific adjudication.

2. Disallowance of Depreciation on Capital Spares:
The assessee claimed depreciation on capital spares, which was disallowed by the AO/CIT(A) due to lack of evidence. However, the Tribunal allowed the claim by relying on the Delhi High Court’s decision in CIT vs. Insilco Limited, which held that depreciation on capital spares is allowable even if not used during the relevant period. The Tribunal directed the AO to allow the claim after due verification.

3. Disallowance of Professional Fees as Business Expenditure:
The AO and CIT(A) disallowed the professional fees claimed by the assessee, considering them part of the acquisition cost of the fertilizer plant. The Tribunal, however, found that these expenses were incurred for setting up the business and were allowable under section 37(1). The Tribunal relied on the Bombay High Court’s decision in Western India Vegetable Products Ltd. vs. CIT, which held that expenses incurred after setting up the business but before commencement are deductible.

4. Disallowance of Preliminary Expenses Under Section 35D:
The AO disallowed preliminary expenses claimed by the assessee under section 35D, arguing that payments to the ROC for increased authorized share capital were not admissible. The Tribunal found that the expenses were incurred for the registration of the company as a new concern and not for increasing share capital. The Tribunal upheld the CIT(A)’s decision to allow these expenses.

5. Disallowance of Depreciation on Intangible Assets:
The AO disallowed depreciation on intangible assets, arguing they were not covered by Part B of the Income-tax Rules. The CIT(A) allowed the claim, relying on the Supreme Court’s decision in CIT vs. Techno Shares & Stocks Ltd. The Tribunal upheld the CIT(A)’s decision, noting that the valuation of intangible assets was done by PDIL, a Government of India Undertaking, and included approvals, licenses, permits, and registrations necessary for running the business.

6. Disallowance of Prior Period Income:
The AO disallowed prior period income by invoking section 154, arguing it was a mistake apparent on record. The Tribunal found this addition unsustainable, as it required detailed investigation and was a debatable issue. The Tribunal ruled in favor of the assessee, noting that the company was running into a loss, making the issue revenue-neutral.

7. Disallowance Under Section 14A:
The AO made a disallowance under section 14A read with Rule 8D, which was confirmed by the CIT(A). The Tribunal found that the AO did not record dissatisfaction with the assessee’s claim that no expenses were incurred to earn dividend income. The Tribunal limited the disallowance to the amount of exempt income earned during the year, following the Delhi High Court’s decision in Maxopp Investment Ltd.

8. Addition Under Section 43B:
The AO added an amount under section 43B for non-payment of statutory dues of outstanding sales-tax before the due date of filing the return. The Tribunal found that the sales-tax liability was converted into a loan by the Government of Uttar Pradesh, making the addition unsustainable. The Tribunal relied on the Delhi High Court’s decision in CIT vs. Minda Wirelinks (P.) Ltd. and the CBDT circular, ruling in favor of the assessee.

9. Deletion of Penalty Under Section 271(1)(c):
The AO levied a penalty for furnishing inaccurate particulars of income, which was deleted by the CIT(A). The Tribunal upheld the deletion, noting that the AO was not clear whether the penalty was for concealment of income or furnishing inaccurate particulars. The Tribunal also observed that the additions on which the penalty was based were deleted, making the penalty unsustainable. The Tribunal relied on the Supreme Court’s decision in K.C. Builders v. Assistant Commissioner of Income-tax.

Conclusion:
The appeals filed by the assessee were largely allowed, and those filed by the Revenue were mostly dismissed. The Tribunal directed the AO to allow claims after due verification and upheld the CIT(A)’s decisions in favor of the assessee on various grounds. The penalty levied under section 271(1)(c) was also deleted.