2021 (5) TMI 1 - AT - Income Tax

Disallowance of depreciation claimed on capitalization of preoperative expenses - CIT (A) deleted the addition on the grounds that the capitalization of expenses on the plant machinery has been made in accordance with the accounting standard. - HELD THAT - Any expenditure on putting up fixed asset will amount to the cost of fixed asset. It is also an accepted standard that AS-1 O regarding accounting for fixed assets issued by the ICAI specifies the components of cost of a fixed asset. Thus, the purchase price of an asset includes import duties, levies and any other cost directly attributable to the asset for bringing it to the working condition. The contention of the learned DR referring to the findings of the Assessing Officer that these expenses are revenue in nature cannot be accepted as in the pre-operative stage, all the expenses are capitalized irrespective their nature in the general parlance. The revenue has not been able to bring any evidence on record that any of the expenditure was not related to the plant machinery. It is an undisputed fact that the assessee has incurred expenditure of ₹ 29 ,22,016 /- in the pre commencement period. Even if all the expenses are revenue in nature, since the expenses were incurred for setting up fixed asset, they have to be capitalised. Section 43(1) defines actual cost to mean actual cost of the asset to the assessee, reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. In the case of CIT Vs. Food Specialities Limited, (1982 )136 ITR 203 (Delhi), it was held that the Tribunal was right in holding that the expenditure of test runs was a capital expenditure. Therefore, expenses involved in purchase of milk and determining that the factory was in proper working condition and making adjustment does not seem to be anything more than steps in setting up and finalisation of the factory, which is the capital asset. After tests have been carried out, it can be said that the factory had been set up and it is ready for commercial production. Therefore, the expenses can be said to have been incurred as cost of the plant and machinery. In the case of Challapalli Sugars Limited 1974 (10) TMI 3 - SUPREME COURT it has been held that interest of Rs.- X - incurred on borrowed capital for purchase of plant and machinery, accruing to the date of installation of the machinery is a capital expenditure, on which depreciation and development rebate are admissible. From this decision it can be said that if an expenditure which is otherwise of revenue in nature, has been incurred towards acquisition of a capital asset, it will be the cost of the asset provided it has been incurred upto the date of installation of the asset. However, it is also clear that there should a direct nexus between expenditure and putting up of the asset. Hence, keeping in view the facts of the case, provisions of Section 43(1 ), provisions of Section 32 and the judgments of the Hon ble Supreme Court, we hereby decline to interfere with the order of the ld. CIT (A). Interest Income - AO has added an amount being 12 % notional interest on the amount of loan extended to the subsidiary company of the assessee - AO held that the assessee has claimed finance expenses of ₹ 1.89 crores on the loans taken and since the interest bearing funds have been utilized to accord interest free advances to the subsidiary company, the interest receivable by the assessee company needs to be charged - HELD THAT - As examined the balance sheet and found that the assessee has got paid up capital of ₹ 8 .7 crores for the year ending 31.03 .2006 and ₹ 9 .9 crores for the year ending 31.03.2007. The reserves surplus of the assessee varied between ₹ 26 .3 crores to ₹ 28 .2 crores for the two years. Since, the assessee has indisputably been proven to be having sufficient own funds, no disallowance u/ s 36(1 )(iii) of the Act is called for or no notional charging of the interest is legally acceptable. The assessed is at liberty to use their own funds as they deem fit, keeping in veiw the business contingencies as long as such action doesn t result infarction of any statue or laws in force. We hold that the action of revenue is not backed up by any legal sanction . Hence,the appeal of the revenue on this ground is hereby dismissed. Deemed Dividend and Allotment of Shares - As per the balance sheet, the assessee has received an amount during the financial year 2005-06 as share application money, pending allotment - HELD THAT - it is clear that the share application money was received in the earlier assessment year 2006 -07 . The AO has mentioned (page 8 of AO) that the amounts have been introduced in the earlier year but went ahead making variation u/s 68 during the instant year. Hence, the addition made by the Assessing Office u/s 68 in the assessment year 2007-08 of the monies received in the earlier assessment year 2006-07 is liable to be quashed. Appeal of the revenue on this ground is allowed. Addition of sundry creditors - sundry creditors have not complied to the notices issued u/ s 133(6 ) - HELD THAT - List of creditors is on account of the purchases made by the assessee during the year and amount outstanding against them. AO made addition on the grounds that the identity, genuineness and creditworthiness of the sundry creditors because the notices issued u/s 133 (6) have not been complied with. The notices have been duly received by the parties and their failure to reply cannot be attributed as a cause of default by the assessee. The fact that the notices have been duly served demonstrate the existence of the parties - the assessee has been continuously dealing with these parties in subsequent years which could have been verified by the AO as the records available with the revenue. The parities namely, M/s Sutluj Industries Ltd., M/ s Vardhman Trades Ltd., M/s Ruchi Impex by general parlance cannot be said to be non-existing entities. Notwithstanding that, no enquiries have been conducted by the AO to prove or to suspect the transactions to be of bogus in nature. After duly serving and receipt of the notices and failure of the recipient parties, to comply to the notices, cannot make the sundry creditors liable to be treated u/s 68 - Once, the assessee has discharge the onus by furnishing the details to prove the genuineness of the transaction, then the onus shifts on to the revenue to prove that these transactions have not genuine. Such enquiry has not even initiated by the Assessing Officer while bringing the amounts to tax. The addition was made by the AO just because the sundry creditors have not complied to the notices issued u/ s 133(6 ) of the Act. - Decided in favour of assessee. Addition on share premium account - HELD THAT - On perusal of record and while deciding the issue of deemed dividend and allotment of shares, we have noted that Share Application Money was received in AY 2006-07 and not in AY 2007-08. Hence, on this ground itself, no addition is warranted u/s 68 of the Act. Further, out of total amount received, ₹ 1.19 cr. is against share capital account and ₹ 84,88,000/- against share premium and ₹ 1,80,000/- against forfeiture. Hence, no addition on this account is warranted. The ground of appeal raised by assessee is allowed.

Summary

Issues Involved:

1. Disallowance of depreciation on capitalization of preoperative expenses.
2. Addition of interest income deemed as income from other sources.
3. Addition of preferential allotment of shares treated as deemed dividend.
4. Addition of unexplained income under Section 68 of the IT Act.
5. Addition of unexplained income under Section 68 of the IT Act in the assessee's appeal.

Detailed Analysis:

Disallowance of Depreciation:

The Assessing Officer (AO) disallowed ?29,22,016/- on account of depreciation claimed on capitalization of preoperative expenses, arguing that preoperative expenses should not enhance the value of plant and machinery for depreciation purposes under Section 32 of the Income Tax Act, 1961. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted this addition, stating that capitalization was done according to accounting standards. The Appellate Tribunal upheld the CIT(A)'s decision, emphasizing that expenses incurred to bring an asset to working condition, such as interest, wages, and installation costs, should be capitalized. This view was supported by precedents like Challapalli Sugars Ltd. vs. CIT and CIT vs. Lucas-TVS Limited, which recognized such expenses as part of the asset's actual cost.

Interest Income:

The AO added ?39,60,000/- as notional interest on loans extended to the assessee's subsidiary, arguing that interest-bearing funds were used for interest-free advances. The assessee contended it had sufficient own funds to extend these loans. The Tribunal, after examining the balance sheet, found that the assessee had adequate own funds and thus, the notional interest addition was not justified. The Tribunal dismissed the revenue's appeal on this ground, stating that the assessee is free to use its own funds as deemed fit without infringing any statutes.

Deemed Dividend and Allotment of Shares:

The AO treated ?14,28,530/- as deemed dividend, arguing that the preferential allotment of shares was actually a dividend. The CIT(A) deleted this addition, and the Tribunal upheld this decision, noting that the share application money was received in the previous assessment year (2006-07) and not in the current year (2007-08). Therefore, the addition under Section 68 for the current year was not warranted.

Unexplained Income under Section 68:

The AO added ?1,13,39,786/- as unexplained income under Section 68, citing non-compliance from sundry creditors in response to notices issued under Section 133(6). The CIT(A) deleted this addition, stating that the assessee had provided sufficient details to prove the genuineness of the transactions. The Tribunal upheld the CIT(A)'s decision, noting that the non-compliance of third parties to notices cannot be grounds for treating the transactions as bogus, especially when the assessee had discharged its onus by providing necessary confirmations and details.

Assessee's Appeal on Unexplained Income:

The assessee appealed against the addition of ?84,88,000/- as unexplained income under Section 68, arguing that no fresh credit was received during the year and that the share application money was received in the previous assessment year (2006-07). The Tribunal, agreeing with the assessee, noted that the share application money was indeed received in the earlier year and thus, no addition under Section 68 was warranted for the current year. The Tribunal allowed the assessee's appeal.

Conclusion:

The Tribunal's judgment resulted in the revenue's appeal being partly allowed and the assessee's appeal being fully allowed. The Tribunal upheld the CIT(A)'s decisions on disallowance of depreciation, interest income, deemed dividend, and unexplained income under Section 68, while also allowing the assessee's appeal regarding unexplained income.