2019 (7) TMI 795 - AT - Income Tax

Addition of pre-operative expenditure - nature of expenditure - revenue or capital expenditure - expenses are only to enhance the existing portfolio of the assessee and to increase its existing production capacity - HELD THAT - The decision of the Hon ble Delhi High Court in the case of Jay Engineering Works Ltd. 2007 (10) TMI 286 - DELHI HIGH COURT is found applicable wherein it has held that where a new unit set up is only an expansion of the business of the assessee the pre-operative revenue expenditure incurred by the assessee on the said project will be allowable expenditure. The facts of the case are squarely covered by the aforesaid decision of the Hon ble Delhi High Court. DR could not bring any contrary decision to the above proposition of law laid down by the Hon ble Delhi High Court. Even there is no denial of the fact that the expenditure claimed by the assessee is otherwise revenue in nature and not relating to the set up of the plant. In view of this this ground of appeal is hereby allowed and disallowance made by the A.O. on this issue is ordered to be deleted. Disallowance of interest on adhoc basis - HELD THAT - Assessee already capitalized the interest expenditure as per actual utilization there was no justification for adhoc disallowance made by the A.O. which even exceeds the actual interest expenditure incurred by the assessee. In view of this the disallowance on this issue is restricted to the extent of suo moto capitalized by the assessee and the addition made by the A.O. is ordered to be deleted. Addition of provision for warranty - HELD THAT - The CIT(A) has given a categorical finding that the method adopted by the assessee was a scientific method. Moreover the provision for warranty created by the assessee has been accepted by the Department till assessment year 2007-08. Hence based on the principle of consistency as well as considering that the provision was calculated by adopting a consistent method we do not find any infirmity in the order of the CIT(A) in deleting the disallowance made by the A.O. on this issue. Addition of bad debts written off - Government dues - HELD THAT - Some times due to certain difficulties/impediments it is not possible to complete the requisite formalities and even sometimes it is beyond the control of the assessee to get the necessary approval and further that sometimes the value of the required time and efforts applied for the recovery of dues is more than the actual amount recoverable and hence in the overall business interests it is deemed prudent to write off such debts. The assessee in this case has written off bad debts as there was no likelihood of recovery of the aforesaid outstanding amount. No justification on the part of the A.O. to make the impugned disallowance merely because the recovery was outstanding against the Government. This ground of appeal of the Revenue is therefore dismissed. Addition u/s 145 by including excise duty in closing stock of WIP - HELD THAT - In the case in hand the assessee has not paid any excise duty on the closing work in progress and hence there was no question of loading any excise duty on estimation basis. Even otherwise if the value of excise duty has to be included in the closing stock then the value of excise duty has also to be included in the opening stock and in that event there would be no difference in the result of the value of the opening stock and closing stock.

Issues Involved:
1. Limitation of assessment.
2. Treatment of pre-operative expenditure.
3. Disallowance of interest on an ad hoc basis.
4. Inclusion of excise duty in closing stock.
5. Provision for warranty claims.
6. Bad debts written off.

Issue-wise Detailed Analysis:

Ground No.1: Limitation of Assessment
The assessee did not press this ground. Hence, it was dismissed as not pressed.

Ground No.2: Treatment of Pre-operative Expenditure
The assessee contended the confirmation of addition made by the A.O. regarding pre-operative expenditure for expanding its business by setting up a new division. The assessee initially capitalized the expenditure but later claimed it as revenue expenditure in a revised return. The A.O. disallowed this claim, treating the expenditure as capital in nature. The CIT(A) upheld this view. The Tribunal, however, allowed the appeal, citing the decision of the Hon'ble Delhi High Court in 'Jay Engineering Works Ltd.', which held that pre-operative revenue expenditure for business expansion is allowable as a business deduction. The Tribunal found the expenditure to be revenue in nature and not related to setting up the plant, ordering the disallowance to be deleted.

Ground No.3: Disallowance of Interest on Ad Hoc Basis
The assessee contested the disallowance of ?180.52 lacs interest on an ad hoc basis. The A.O. calculated the interest expenditure on the average investment in capital work-in-progress and made an addition. The CIT(A) confirmed this. The Tribunal found that the assessee had capitalized the interest expenditure based on actual utilization and that the A.O.'s ad hoc disallowance exceeded the actual interest expenditure. The Tribunal restricted the disallowance to the extent of the interest already capitalized by the assessee and ordered the deletion of the addition.

Ground No.4: General Nature
This ground was general and did not require adjudication.

Revenue's Appeal:

Ground No.1: General Nature
This ground was general and did not require adjudication.

Ground No.2: Inclusion of Excise Duty in Closing Stock
The Revenue contested the deletion of the addition made by the A.O. under section 145A by including excise duty in the closing stock of work-in-progress. The Tribunal noted that this issue was covered by its earlier order in the assessee's case for previous assessment years, where it was held that if excise duty is included in the closing stock, it must also be included in the opening stock, resulting in no difference. The Tribunal dismissed this ground.

Ground No.3: Provision for Warranty Claims
The Revenue challenged the deletion of the addition of ?37 lacs made by the A.O. on account of excess provision for warranty. The A.O. had disallowed the provision, considering it excessive. The CIT(A) deleted the disallowance, noting that the provision was calculated using a consistent, scientific method. The Tribunal upheld the CIT(A)'s decision, emphasizing the principle of consistency and the scientific basis of the provision calculation.

Ground No.4: Bad Debts Written Off
The Revenue disputed the deletion of the addition of ?1.10 crores made by the A.O. on account of bad debts written off, arguing that debts from Government agencies could not be considered bad. The CIT(A) deleted the addition, observing that the write-off was justified as the debts were irrecoverable. The Tribunal supported this view, acknowledging the practical difficulties in recovering such debts and the prudence in writing them off.

Ground No.5: General Nature
This ground was general and did not require adjudication.

Conclusion:
The appeal of the assessee was partly allowed, and the appeal of the Revenue was dismissed. The Tribunal provided detailed reasoning for each ground, emphasizing legal precedents, principles of consistency, and practical business considerations.

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