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TMI Blog2012 (9) TMI 1027X X X X Extracts X X X X X X X X Extracts X X X X ..... TO, W 11(1), New Delhi v. M/s. Ekta Promoters Pvt. Ltd reported in (2008)-305 ITR (AT) 1 (DEL) (SB). 1.1 The remaining grounds raised are in an illustrative and narrative manner. They are, therefore, reformulated in a concise manner as under: I. Ground Nos. 1 to 8: - that the CIT (A) has erred in disallowing the claim of Rs. 1,09,62,508/- representing loss on damage of shipment; - that the CIT (A) has erred in holding that the loss on damaged shipment was capital in nature; - that the CIT (A) also erred in not allowing the alternate claim of allowing depreciation u/s 32 of the Act in respect of loss on damage of shipment. II. Ground No. 9: - that the CIT (A) has erred in not appreciating that the assessee operated on a cost plus model and consequently, in case the loss on damaged shipment was held to be capital in nature, the corresponding revenue derived by the assessee in respect of such loss should also be held to be capital in nature; & III. Ground Nos. 10 to 12: - that the CIT (A) has erred in not allowing the entire amount of deduction u/s 80JJAA of the Act. 2. Briefly stated, the facts of the issues are as under: The assessee company is in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes. However, that does not make all expenditure deductible from the point of view of computation of income under the Income Tax Act. Decision in this regard has to be taken in accordance with what the law of the land lays down. Merely reiterating ad nauseam that the loss was incurred in the ordinary course of business and was, therefore, incidental to it does not make it so nor does it automatically qualify the loss as allowable as revenue expenditure. Moreover, the jurisdictional High Court in the case of DP Chirania & Co., (supra) has categorically held that capital expenditure which is wholly and exclusively laid out or expended for the purposes of business was not available for the reason that sec. 37 very clearly excluded capital expenditure from its purview which has been affirmed by the Apex Court in the case of Hasimara Industries ltd (supra). (c) The appellant's reliance on the principle upheld by the Rajasthan High Court in the case of Anjani Kumar Co. Ltd (supra) that expenditure, although incurred with the aim and objective of acquiring a capital asset, would carry the attributes of revenue expenditure in the event that the capital asset was not ultimately acq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust because they had worked for more than 300 days in the second year of their employment, the second year of their employment cannot be considered as the first year for the purpose of allowing deduction under this section. The AO further opined that in no case, however, deduction was admissible in r/o new workmen who have not worked for at least 300 days during the year. 6.3. In view of the facts of the case and the position of law as discussed in the preceding paragraphs, the AO gave a categorical finding that the wages paid to employees who had worked for less than 300 days in this year cannot be considered for the purposes of deduction u/s 80JJAA. Accordingly, the AO concluded that in AY 2005-06, deduction would be available only in r/o the wages paid to the following employees: (i) the new workmen employed during the FY relevant for the current AY and who have worked for at least 300 days during the year; (ii) the new workmen employed during the FY relevant for AY 2004-05 and who have worked for more than 300 days during this year; and (iii) the new workmen employed during the FY relevant for AY 2003-04 who have worked for more than 300 days during this year. 6.4 It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c) whereby those who were employed for a period of less than 300 days during the previous year were excluded from this definition. While respectfully following the decision of the jurisdictional ITAT on the issue relating to the appellant's eligibility for deduction u/s 80JJAA, the matter is set aside with a specific direction to the AO to restrict the deduction to the extent it has been claimed for employees who have worked for less than 300 days in the previous year in contravention of Explanation (ii)(c) to Sec. 80JJAA after giving due opportunity to the appellant of being heard. 5. Aggrieved, the assessee has come up with the present appeal. During the course of hearing before us, the learned AR came up with an elaborate and comprehensive submission coupled with various case laws. The submissions made by the learned AR are summarized as under: (1) Loss on damage of goods in the course of shipment is allowable in computing the business income: - that the assessee had imported shipment of certain computers which were, however, damaged due to rain at the airport in India; and that the loss on account of damage of computer after netting off the receipt of insurance claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee; and that the fact that such loss was on account of import of computers were irrelevant. Thus, loss on damage of shipment of goods is allowable in computing the business income and that it cannot be disallowed u/s 37, as no expenditure is occasioned by the loss. Alternative claims: - that income chargeable under the head 'profits and gains of business or profession' shall be computed in accordance with the system of accounting regularly employed by an assessee. This is the mandate of s. 145(1). S. 145(1) shall, however, be subjected to the provisions of sub-sec. (2) of s. 145; and that as per sub-sec.(2), the Central Government may notify in the Official Gazette the accounting standards to be followed by any class of assessees or in respect of any class of income; - that two accounting standards have been notified till date by the Central Government u/s 145(2). Accounting Standard 1 relates to disclosure of accounting policies and Accounting Standard 2 relates to disclosure of prior period and extraordinary items and changes in accounting policies; 5.1 Elaborately quoting the Accounting Standard 1 and also relying on the case laws, namely: (i) CIT v. Gannon Du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the loss due to damage of computers would be computed under the head 'capital gains' and the loss so ascertained would be eligible for set off and carry forward in accordance with the mandate of Ch. VI. S. 45(1A) of the Act prescribes how loss is to be computed when the asset is destroyed as a result of natural causes; & 5.1.2 The learned AR in his subsequent submission had, more or less, reiterated what was contended in the earlier hearing. In conclusion, the learned AR had placed reliance on the following case laws for the proposition that the loss incurred is to be allowed as business loss : * CIT v. Industry and Commerce Enterprises (P) Ltd (1979) 118 ITR 606 (Ori); * Addl. CIT v. BMS P Ltd (1979) 119 ITR 321 (Mad); * CIT v. Dandayuthapani Foundry (P) Ltd (1980) 123 ITR 709 (Mad); * CIT v. Dhampur sugar Mills Ltd (1988) 177 ITR 675 (All) * Jwala Prasad Radha Kishan v. CIT (1971) 79 ITR 530 (All); * CIT v. Inden Biselers (1973) 91 ITR 427 (Mad); * Thackers H P & Co v. CIT (1982) 134 ITR 21 (MP); * CIT v. K M Mody (1983) 141 ITR 903 (Bom); * CIT v. F M Chinoy & Co P Ltd (1969) 74 ITR 780 (Bom); * ACIT v. W S Industries India Ltd (2011) 9 ITR (Trib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ays of employment in section 80JJAA is to exclude seasonal industries from claiming a deduction; to exclude industries, where the nature of activity is such that they are forced to frequently recruit and lay-off people. In the erstwhile law on depreciation for example, seasonal industries work referred to as those in operation for 240 days. 300 days probably is a 'built-up' of 25% over and above such a figure, in an attempt to prevent the seasonal industry from claiming a deduction under section 80JJAA. 12) Section 80JJAA was introduced to facilitate generation of new employment opportunities. An incentive was therefore offered to assessees giving employment to a specified minimum number of employees. The interpretation of the section should be in a manner which promotes the objective sought to be achieved and not frustrate it. Being a beneficial provision, it must be liberally construed. These were the guidelines given by the Supreme Court while dealing with deduction under section 80J in the case of Bajaj Tempo v CIT 196 ITR 188. The section is to be interpreted in a purposive manner". --------------------------------------- 18) Alternatively, for a person to be a " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the asset must exist and not sold, destroyed or demolished or otherwise disposed off. In the present case, the assets were destroyed in transit before reaching the premises of the assessee for use in business. By no stretch, the asset could be said to be form part of any block, entitled to depreciation. Merely because the assessee had a block of asset consisting of similar plant and machinery and had incurred capital outgo, they very fact that such capital outlay did not result in bringing the assets in existence and business user, would mean that such expenditure would not lead to any addition in the opening WDV of the block and, hence, no depreciation. * As Sec. 2(11) clearly mentions that the 'block of assets' represents a group of assets, in respect of which, same percentage of depreciation is prescribed comprising of tangible (building, furniture, plant and machinery etc.,) and intangible assets. Rule 5(2) of the I.T. Rules requires that a new plant and machinery must be installed for the purposes of business of manufacture of any article or thing.....; * That ownership of an asset is not to be determined by the paper or ownership document, but, by possession and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... who left the employment included 42 workmen newly employed and another 4 newly employed who worked for more than 300 days, leaving 1048 workmen as on the last date (Col. 7). As mentioned in Col 11(c) of Form 10DA, number of regular workmen employed as on the last date of the previous year including newly employed workmen were employed for less than 300 days. However, no details have been furnished. Even in the Notes to report in Form 10DA, the auditor had not mentioned such number of employees, but, merely, mentioned that though such newly employed workmen worked for less than 300 days, they have been considered for deduction; * that the legal position - Form 10DA, CBDT's Circular No. 772 dated 23.12.1998 - clearly state that the new regular workmen must be in employment for at least 300 days to be eligible for deduction; * that the object of s. 80JJA (sic) 80JJAA is indisputably to encourage employment in the organized sector. The incentive is aimed at not only providing employment or mere recruitment but also retaining such new workmen on regular employment for long periods. If an assessee merely employs the workmen in the last quarter or last month of the previous year a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccount and claimed as a deduction. 7.1.2 Rejecting the assessee's contentions and citing various case laws, the AO had observed in the assessment order that the nature of expenditure is always decided by the aim or objective with which it was incurred irrespective of its nomenclature or the accounting treatment given to it. In the instant case, the appellant's objective was acquisition of a capital asset which is nothing but capital expenditure. Hence, any loss or expenditure incurred in this connection would be capital in nature. 7.1.3 The alternative claim of the assessee that in the event the loss was held to be capital in nature, it should be added to the block of assets and depreciation be allowed on the same, for which, the AO opined that depreciation was allowable u/s 32 in respect of assets 'owned and used for the purpose of the business'. In other words, in order to be eligible for depreciation, it was essential to fulfill both the conditions viz., (i) being owned and (ii) used for the purpose of the business. However, in the instant case, the AO pointed out that when the equipment was damaged and returned without being taken into the assessee's premi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain objective of the assessee was to acquire the machinery and naturally the entire expenditure for its acquisition will have to be capitalized. In the instant case, the equipment got damaged while in transit, the Insurance Company after duly assessing the damage compensated a portion of the cost of the equipment. Moreover, the assessee had treated the receipt of the insurance claim as a capital receipt in its accounts. Thus, the remaining portion of the cost of the equipment, as rightly observed by the AO and subsequently sustained by the CIT (A), cannot be allowed as a revenue loss. 7.1.7 At this juncture, it is more appropriate to recall the ruling of the Hon'ble jurisdictional High Court in the case of D.P. Cirania & Co v. CIT reported in (1978) 112 ITR 0012 (Kar). After duly analyzing the issue and also extensively referring various rulings, the Hon'ble Court had held that: 39. The consideration in the present case which, in our opinion, point so clearly as to dominate the other and vaguer indication to the contrary are those that bear upon the question whether the outlay brings into existence an 'advantage for the enduring benefit' of the business and perta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be deducted as business loss". 7.1.9 Taking into account all the facts as deliberated upon in the fore-going paragraphs and also in conformity with the rulings of the Hon'ble jurisdictional High Court and the Hon'ble Apex Court cited supra, we are of the considered view that the AO was fully justified in rejecting the assessee's claim of deduction of Rs. 1.09 crores being the loss on account of damage to an asset. 7.2 Before parting with, we would like to reiterate that we have duly perused the case laws relied on by the assessee and of the firm view that they have no relevance to the facts of the issue under consideration. 7.2.1 In respect of alternative claim of the assessee in allowing depreciation u/s 32 of the Act, we find that the AO had, after considering the assessee's contentions, rejected the claim on the ground that "4.12.................. Thus, in order to be eligible for depreciation, it is necessary that both the above conditions viz., (i) being owned AND (ii) used for the purpose of the business, should be satisfied. Apparently in this case, the second requirement of being 'used' is not satisfied. When the machine got damaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he CIT(A) reads as follows:- The learned Assessing Officer has erred in law and in facts in not appreciating that the appellant operated on a cost plus model and consequently, in case the loss on damaged shipment is held to be capital in nature, the corresponding revenue derived by the appellant in respect of such loss should also be held to be capital in nature. 8.2 The finding rendered by the CIT(A) in respect of the above ground reads as follows :- Finally, in ground 28, the appellant raised the issue that since it was operating on a cost plus model, in case the loss on damaged shipment was held to be capital in nature, the corresponding revenue derived in r/o such loss should also be held to be capital in nature. It is unclear from the appellant's ground as to what relevance the following of a cost plus model has in this context and what revenue adjustment is being sought as a consequence. Under the circumstances, I am unable to accept this argument. 8.3 Aggrieved by the dismissal of the above ground, the assessee raised the following contention before us:- If it is concluded that loss on damage on account of shipment of computers is not allowable as deduction nor f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -03 in the assessee' own case. Since the finding of the said Bench for the said AYs has been challenged before the Hon'ble High Court by the Revenue, the AO rejected the assessee's claim u/s 80JJAA of the Act for the AY under consideration. 9.3 After taking into account the findings of the earlier Bench of the Tribunal, the CIT (A)-LTU took a stand that though the Tribunal had upheld the assessee's eligibility for the said deduction from the stand point of whether the assessee's employees qualified as 'workmen' within the meaning of s 80JJAA or not the allow-ability of deduction u/s 80JJAA was never examined from the point of view of tenure of work by the said employees within the meaning of the definition of the term 'regular workmen' contained in Explanation (ii)(c) whereby those who were employed for a period of less than 300 days during the previous year were excluded from this definition. While following the findings of the jurisdictional Tribunal on the issue relating to the appellant's eligibility for deduction u/s 80JJAA, the matter was set aside with a direction to the AO to restrict the deduction to the extent it has been claimed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Merely because an appeal has been filed in the High Court the order of the Tribunal does not lost its precedential value. The CIT (A) has rightly followed the same. In view of the same, we do not find any reason to interfere with the orders of the CIT (A). 3. In the result, the revenue's appeal is dismissed. 9.6 On query from the Bench as to why this appeal (assessee's appeal) was not clubbed with the Revenue's appeal, both the learned AR and the learned DR submitted that they were not aware of the pendency of assessee's appeal when the department's appeal was disposed off on 29.9.2011. 9.7 After considering the rival contention and taking into account all these facts and circumstances of the matter into consideration; we are of the considered view that the issue requires re-examination. The CIT(A) had set aside the assessment giving specific direction to Assessing Officer to disallow the 80JJAA claim in respect of permanent employees salary who have worked for less than 300 days in the concerned previous year. The CIT(A) has not considered the assessee's elaborate submission in respect of the issue (Para 6.2) (supra). Therefore, in the interest of jus ..... X X X X Extracts X X X X X X X X Extracts X X X X
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