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TMI Blog2009 (3) TMI 645X X X X Extracts X X X X X X X X Extracts X X X X ..... or reconstruction of business already in existence. The CIT(A) confirmed the order of the Assessing Officer by observing as under : "Perusal of clauses ( i ) and ( ii ) of sub-section (2) of 80-IB makes it abundantly clear that the purpose is to set up a new industrial undertaking which necessarily means purchasing new plant and machinery. For this reason only, the Legislature has laid down that the industrial undertaking is not formed by splitting up or the reconstruction of a business already in existence, that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. The conditions are such which do not allow use of any previously used machinery or plant even by the same assessee for its newly set up industrial unit. The idea is that a new industrial unit is set up and it should work with the help of newly acquired plant and machinery. Use of previously used machinery is restricted to less than twenty per cent. The emphasis is on prohibiting the use of previously used machinery and that too for any purpose by any industrial unit or any business by the assessee or by anybody else. The deduction is also not available if an indust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the expression previously used has been construed as previously used by the same assessee. For this purpose she relied upon following decisions : Electronic Corpn. of India Ltd. ( supra ), CIT v. Sainthia Rice Oil Mills [1971] 82 ITR 778 (Cal.), CIT v. Fenner Cockill Ltd. [1969] 74 ITR 394 (Mad.), CIT v. Kopran Chemical Co. Ltd. [1978] 112 ITR 893 (Bom.). 3.4 The learned AR submitted that CIT(A) has wrongly relied upon the definition of small scale undertaking in section 80-IB(14)( g ) read with section 11B of the IRDA. A small scale undertaking is one whose investment in fixed assets, plant and machinery does not exceed Rs. 3 crores (reduced to one crore with effect from 24-12-1999) whether held on ownership terms or lease or on hire purchase. In order to determine whether an undertaking is a small scale undertaking or not the investment in machinery would include machinery taken on lease or hire. But the definition cannot be excluded to section 80-IB(2)( ii ). The definition is relevant only when the expression small scale undertaking is specifically used in the section e.g. proviso to section 80-IB(2)( iii ), 80-IB(3)( ii ). 4. The learned DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he background for the insertion of section 15C. It is also significant that the limit of the number of years for the purpose of claiming exemption has been progressively raised from the initial 3 years in 1949 to 6 years in 1953, 7 years in 1954, 13 years in 1956 and 18 years in 1960. The incentive introduced in 1949 has been thus stepped up ever since and the only object is that which we have already mentioned." 5.3 In the said judgment, Textile Machinery Corpn. Ltd. s case ( supra ) Goswami J., speaking for the court, observed (p. 203) : "Again, the new undertaking must not be substantially the same old existing business. The third excluded category mentioned above is significant. Even if a new business is carried on but by piercing the veil of the new business, it is found that there is employment of the assets of the old business, the benefit will not be available. From this it clearly follows that substantial investment of new capital is imperative. The words the capital employed in the principal clause of section 15C are significant, for fresh capital must be employed in the new undertaking claiming exemption. There must be a new undertaking where substantial in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, there cannot be any question of reconstruction . Webster s Dictionary , 2nd Edition, explains the word reconstruction as the act of constructing again . Therefore, while considering the question whether a particular business is or is not reconstruction , it is first necessary to enquire what was the nature of the business which was already in existence was the nature of the business, which was already in existence, the same as the nature of business which acquired a new shape ? If the answer is in the negative, there is no scope for holding that there is any reconstruction of the existing business because reconstruction implies the continuation of the same business in some altered form. This alteration may assume the form of changing the manner or method of carrying on the same business; it may involve change or rationalisation of the administrative set up or business organisation. But when its basic nature changes, it cannot be said that the business is reconstructed . It is not every alternation in the mode, method or scope of the activities of a business and it is not every transfer of assets from one unit to another that will involve reconstruction. The expression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company started new industrial undertaking and commenced commercial production of Auto components at Aurangabad in the previous year relevant to assessment year 1999-2000. For that purpose they constructed new factory building, acquired new plant and machinery and also installed new electrical installations. These are separately disclosed in the schedule of fixed assets. 5.8 At pages 14, 15, 16 and 17 of assessee s paper book the fixed assets schedule for the year ended 31-3-1999, 31-3-2000, 31-3-2001, and 31-3-2002 has been placed wherein old building, plant and machinery and electrical installation has been separately shown. The relevant abstract from those schedules are reproduced as below : 1999 Description Gross Block Cost Addition Total Building Old 203800 203800 New 6931264 6931264 Plant and Machinery Old 1116168 1116168 New 481938 481938 Instruments 11700 11700 Pattern and Dies 81321 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 378101 378101 Total 4959634 192983 1222979 6375596 5.9 A list of new plant and machinery for the year under ended on 31-3-2002 has been placed at page 18 of assessee s paper book. In assessment year 1999-2000 and 2000-01. Since there was no profit from new industrial undertaking, therefore, no deduction was claimed under section 80-IA/80-IB. From above factual position we find that the new industrial unit of the assessee has been formed by new machines, building etc. However, to run the business the assessee taken some machinery on hire. Whether machinery taken on hire amounts to transfer of machinery previously used. The Hon ble jurisdictional High Court in the case of Bayer Agrochem Ltd. ( supra ) while dealing with section 15C of 1922 Act, held that where the owner of a property retains the right to use the premises and in fact does not so there is no transfer in from the assessee as understood by section 15C of the Income-tax Act, 1922 and the assessee was entitled to relief under that section. The facts of the case are that the assessee also acquired its own plant and machinery and actually used the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l unit is formed by the transfer of machinery and plant previously used for any purpose. The previous used machinery may be there but there is no transfer of plant and machinery. Therefore, under these circumstances the assessee cannot be disqualified for deduction under section 80-IA/IB, we, therefore, allow the claim of the assessee. 6. The 2nd common ground in both the appeals is in respect of addition on account of MODVAT under section 145A. 7. The Assessing Officer noted in his assessment order that as per the tax audit report filed along with the return of income the assessee had unutilized MODVAT credit. It was reported in the tax audit report that the assessee is following exclusive method of accounting. The Assessing Officer was of the view that the unutilized MODVAT is not considered for the valuation of closing stock of raw material. After considering the submissions of the assessee, the Assessing Officer held that as per the provisions of section 145A the unutilized Modvat credit is to be considered for valuation of closing stock, therefore, the amounts were added to the value of closing stock and to the total income. The CIT(A) confirmed the action of the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a )in accordance with the method of accounting regularly employed by the assessee; and ( b )further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called) actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. Explanation. For the purposes of this section, any tax, duty, cess or fee (by whatever name called) under any law for the time being in force, shall include all such payment notwithstanding any right arising as a consequence to such payment. 5.2 The adjustments provided in this section can be made while computing the income for the purpose of preparing the return of income. These adjustments are as follows : ( a )Any tax, duty, cess or fee actually paid or incurred on inputs should be added to the cost of inputs (raw materials, stores etc.); if not already added in the books of account. ( b )Any tax, duty, cess or fee actually paid or incurred on sale of goods should be added to the sales, if not already added in the books of account. ( c )Any tax, duty, cess or fee actually paid or incurred on the inventory (finished goods, work-in-progress, raw mater ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions. The profit and loss account on exclusive method would be as under : Item Particulars Unit Rate Amt. Amt. Item Particulars Unit Rate Amt. ( a ) Opening Stock 10 10 100 ( h ) By sales 60 25 1500 ( b ) Purchase of raw material 90 10 900 ( i ) By closing stock of finished goods 20 20 400 Total 100 10 1000 ( c ) Less closing stock of raw material 20 10 200 ( d ) Raw material consumed 80 10 800 ( e ) To manufacturing cost 80 10 800 ( f ) To excise duty on finished goods sold 0 ( g ) To gross profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 145A will have to be made in all cases where exclusive method is followed. 23.15 When the exclusive method is followed in the accounts, the adjustments to be made under section 145A can be explained by the following illustrations which is required to be reported under clause 12( b ). Sl. No. Particulars (Rs.) Increase in profit (Rs.) Decrease in profit 1. Increase in cost of opening stock on inclusion of excise duty on which MODVAT credit is available/availed ( j-a ) 20 2. Increase in purchase cost of raw material on inclusion of excise duty on which MODVAT credit is available/availed ( k-b ) 180 3. Increase in sales of finished goods on inclusion of excise duty ( s-h ) 180 4. Excise duty paid on sale of finished goods as a result of its inclusion in sales ( p-f ) 180 5. Increase in closing stock of raw material on inclusion of excise duty ( l-c ) 40 6. Increase in closing stock of finished goods on inclusion of excise duty ( t-i ) 60 7. Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich has been adjusted in closing stock of finished goods. No doubt the excise duty adjusted to the closing stock is an allowable revenue expenses. The addition of entire balance in MODV AT account is not proper because the nature of this account is personal account, an item of assets side of the Balance Sheet which always having a debit balance. Question of allowable/disallowable arises only in respect of excise duty expenditure where the assessee follows exclusive method of accounting and effect of the section 145A is to be given. It may be noted that after making the addition to the closing stock under section 145A, it will be possible to claim a separate deduction for excise duty actually paid after the year end but before the due date for filing the return of income on production of evidence as provided under section 43B. Therefore, in the above illustration if the assessee has paid Rs. 60 added in the valuation of closings stock of finished goods before due date of filing the return deduction for the same can be separately claimed in the computation of income under section 43B, if other conditions of that sections are satisfied. 5.5 In case of where there is no actual payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of assessee in the light of above discussion. If the Assessing Officer founds that the assessee has given effect to section 145A and also deduction under section 43B is made as per above discussion, the addition of Rs. 29,39,872 made by him under section 145A may be deleted. Thus, the grounds of appeal raised by the assessee in this regard are treated as allowed for statistical purposes. 6. Now we take the second aspect of the matter. The learned AR submitted that effect of the section 145A to opening stock is also to be given, he relied upon the decision of Delhi High Court in the case of CIT v. Mahavir Alluminium Ltd. 168 Taxman 27 (Delhi). The DR on the other hands relied upon orders of revenue authorities. He has also relied upon following decisions : ( i ) West Coast Paper Mills Ltd. v. Asstt. CIT 286 ITR 252 (AT); ( ii ) CIT v. Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC); ( iii ) J.B. Chemicals and Pharmaceuticals Ltd. v. Addl. CIT 10 SOT 362 (Mum.); ( iv )ITA No. 7751/M/04 - order dated 28-1-2008; ( v ) Dy. CIT v. Glaxo Smithkline Consumer Healthcare Ltd. 107 ITD 343 (Chd.) (SB). 7. We have heard the learned representatives of the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e valuation shall be further adjusted to include the amount of any tax, duty, cess or fee (by whatever name called), actually paid or incurred by the assessee to bring the goods to the place of its location and condition as on the date of valuation. The Delhi High Court in the case of CIT v. Mahavir Alluminium Ltd., 168 Taxman 27 (Delhi) has held that corresponding adjustment must be made in opening stock subject; however, to a condition that such adjustment should not result in double deduction for same expenditure. The Delhi High Court judgment is the only High Court judgment available on the issue. In such circumstance the judicial proprietary demands that we are to follow the above judgment of the High Court. Since we follow the judgment of the Delhi High Court therefore the decisions of Tribunal relied upon by the Ld. DR does not help to revenue. The Judgment of the Apex Court in the case of CIT v. Indo Nippon Chemicals Co. Ltd. 261 ITR 275 (SC), cited by the Ld. DR is distinguishable on facts as the said case decided by the Apex Court considering the facts of that case. The Apex Court in that case held that adopting gross method for purchases and net methods for uncon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of interest NIL ( iii )One-half per cent of average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. Value of investments, income from which does not or shall not form part of the total income. Amount (Rs.) Amount (Rs.) As on 1-4-2000 1,695,259 As on 31-3-2001 1,695,259 Total 3,390,516 Average Investment = Rs. 33,90,518 1,695,259 Disallowance at the rate of 1/2 per cent of average investment of Rs. 16,95,250 8,476 13. After hearing the learned representatives of the parties and perusing the record as well as the citations quoted by the learned representatives of the parties. The issue under consideration relates to section 14A of the Income-tax Act which provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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