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TMI Blog2016 (4) TMI 525X X X X Extracts X X X X X X X X Extracts X X X X ..... - incurred on mobilization of Rigs and interest paid on debenture of Rs. 1,04,71,234/-, totaling to Rs. 2,91,78,953/- as capital expenditure. - 2. The learned C.I.T. (Appeals) erred in confirming the Assessing officer's order of not adjusting the amount declared as a additional income of Rs. 1,25,00,000/- as per survey declaration dated 11th February,2010 which was made to cover previous discrepancy if any in books of accounts and /or returned income of the company, relevant to Assessment Year 2009-10, against the addition made of Rs. 2,91,78,953/-." 3. The brief facts of the case are that the assessee company is mainly engaged in the business of giving Rigs on hire to Government and Private parties. 4. During course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, it was observed by the AO that the assessee company has reduced its profit by Rs. 3,43,28,180/- and the asessee company was asked to explain the same. The assessee company replied that these are expenses which the assessee company incurred on mobilization of rig's on which the assessee company has received the mobilization charges from their clients and the mobilization charges received ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first appeal before the CIT(A). 6. Before the CIT(A) the assessee company submitted that while making the above mentioned additions, the A.O. has not considered that the assessee company has wrongly capitalized the following expenses on the rigs during the year:- Particulars of expenses Rig 8 Rig 9 Rig 10 Rig 11 Total Insurance charges 575250 575250 Demurrage 40710 40710 Bank charges 17950 5795 4811 28556 Travelling expenses 18810 18810 165136 202756 Freight charges 1111643 8924719 116926 1201977 11355265 Transport charges 10544.5 1125061 970800 3150276 Interest on debenture 5235617 5235617 10471234 Interest on loan 3996041 3996042 7992083 Professional fees 171000 116050 287050 Crane hiring charges 225000 225000 Total 2818778 18552377 1266592 11690433 34328180 The assessee company stated the expenses incurred on Rig number 8 and 10 are clearly revenue in nature as these rigs started working in the assessment year 2008-09. It was further submitted that the expenses incurred on the other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company had requested for the benefit of the said income be granted to the assessee company by the A.O. The CIT(A) observed that the assessee company has incurred mobilization charges of rigs which expenditure were rightly capitalized in its books of accounts as no revenue can be earned until mobilization is complete and rigs start operations. The CIT(A) held that entries in the books of accounts are not decisive and does not prevent the assessee company from claiming the expenses as revenue expenses even though the same was capitalized in the books of accounts of the assessee company as the accounting treatment is not conclusive . Further the purposes of Companies Act,1956 and Income Tax Act, 1961 are altogether different. Section 37 of the Act prohibits grant of deduction of expenditure which is of capital nature. But ,the assessee company had not commissioned rigs in the previous year relevant for the assessment years involved . The assessee company contended that the two of its rigs have been commissioned in the assessment year and therefore it cannot be held that the expenses incurred on them are capital in nature in spite of the fact that they were capitalized in the books o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany had itself treated the expenses as capitalized expenses incurred towards the project undertaken as capital work-in-progress and the expenses are incurred for getting the rig ready for use and incurred prior to commencement and was rightly capitalized by the assessee company. The CIT(A) observed that no documentary proof of the mobilization and use of the rigs in the instant year was submitted or produced by the assessee company. Further, the CIT(A) held that the expenditure was incurred to bring asset or advantage of enduring nature and therefore is to be treated as capital. Pre-commencement expenditure is not tax deductible as they are not tax deductible as they are incurred for setting up operations and not wholly and exclusively incurred in production of income. The CIT(A) held that the assessee company has considered these expenses as pre-operative itself and capitalized and subsequently claimed by the assessee company as revenue expenditure which is not allowable. Accordingly, the CIT(A) confirmed the order of the AO and held that there is no infirmity in the order of the AO treating the entire expenditure incurred for mobilization of rigs amounting to Rs. 3,43,28,180/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es incurred by the assessee company is to be allowed as revenue expenditure even if it is capitalized in the books of account. The assessee company is importing rigs which are transferred to the client's site and thereafter are installed at clients site for which expenses have been incurred. The assessee company also incurred expenses for insurance etc. The Revenue has not allowed the same because the same was capitalized in the books of account and has not been debited to the P&L account. The ld counsel submitted that the assessee company's business of importing rigs and giving the same on hire is a continuous business and transportation and other charges incurred for bringing the rigs to site is not a capital expenditure. The ld counsel submitted that the assessee company is in business of hiring of rigs which has commenced and transportation of rigs to client site is not capital expenditure. The ld. Counsel for the assessee company relied on the judicial decisions (i) CIT v. Triveni Engineering and Industries Limited (2009) 19 DTR 274(Del HC), (ii) India Cements Limited v. CIT 60 ITR 52(SC), (iii) CIT v. Lotte India Corporation Limited (2007) 290 ITR 248(Mad. HC.) (iv) Grasim In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year's which is an admitted position by the revenue also. Thus, it is un-disputed and admitted fact that the said business of the assessee company of giving rigs on charter hiring basis to Government and Private parties such as ONGC etc. for oil drilling purposes was a continuing and existing business of the assessee company which was set-up since preceding assessment year's. The assessee company undertook expansion of the very same existing and continuing business of giving rigs on charter hiring basis , from 7 rigs company to 11 rigs company by importing four additional rigs . The assessee company imported these additional 4 rigs and received mobilization charges from its clients during the assessment year with respect to these additional new rigs and the said mobilization charges received by the assessee company were offered for taxation by the assessee company in the return of income filed with the Revenue. It has been stated by the assessee company that rig no. 8 and 10 were working since preceding assessment year 2008-09 . Thus, it is stated that mobilization expenses incurred with respect to rig no 8 and 10 are clearly revenue in nature and are allowable as revenue expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the prospective client on charter hiring basis for drilling of oil by the clients. These rigs which are imported are taken to the site of the client and installed and commissioned there-at and made operational for oil drilling by the client and the assessee company is paid charter hiring charges by the client who have charter hired these rigs for drilling of oil . The assessee company incurs mobilization charges in the interregnum period till the mobilization is completed and the rigs are commissioned and made operational. The rig number 8 and 10 were already operational since preceding assessment year , while first mobilization advance was received during the impugned assessment year with respect to rig number 9 and 11. The reference is drawn to provisions of Section 3 and 4 of the Act which stipulates as under: " ["Previous year" defined. 3. For the purposes of this Act, "previous year" means the financial year immediately preceding the assessment year : Provided that, in the case of a business or profession newly set up, or a source of income newly coming into existence, in the said financial year, the previous year shall be the period beginning with the date of setting u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be considered is from which date are the expenses of this business to be considered permissible deductions and for that purpose the section that we have got to look to is Section 2(11) and that section defines the "previous year" and for the purpose of a business the previous year begins from the date of the setting up of the business. Therefore it is only after the business is set up that the previous year of that business commences and in that previous year the expenses incurred in the business can be claimed as permissible deductions. Any expenses incurred prior to the setting up of a business would obviously not be permissible deductions because those expenses would be incurred at a point of time when the previous year of the business would not have commenced. We must therefore look at the decision of the Tribunal as really referring to the setting up of the business in the language of Section 2(11) and not expenses connected with the commencement of the business. Mr. Palkhiwalla says that if that be the correct approach, then the Tribunal has misdirected itself in considering the commencement of the business and not the setting up of the business. Let us try and understand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having got their machinery and plant, and having also employed their foremen, and having got their works erected and generally got everything ready, then they began to take the raw materials and to turn out their products." Therefore if this case were to be applied to the present assessee, then we would be driven to the conclusion that, if anything, the Tribunal has taken a view of the case very favourable to the assessee because on the facts of this case it would seem that the Income-tax Officer was right in holding that the net expenses prior to the 1st of November, 1946, should not be allowed as permissible deductions. That is why it is important to consider whether the expression used in the Indian statute for setting up a business is different from the expression Mr. Justice Rowlatt was considering, viz., "commencing of the business." It seems to us, that the expression "setting up" means, as is defined in the Oxford English Dictionary, "to place on foot" or "to establish," and in contradistinction to "commence". The distinction is this that when a business is established and is ready to commence business then it can be said of that business that it is set up. But before it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se rigs became available for hire from the time these rigs were acquired by the assessee company as the assessee company is in a position to charter hire these newly acquired rigs and these rigs are available and ready to be put to use from the time these rigs are acquired by the assessee company in its continuing and existing business of chartered hiring of rigs , the said existing business of chartered hiring is admittedly already set-up in the earlier years. With the import of these new rigs it cannot be said that the new business is set up or new source of income has come into existence rather it is the same old business of chartered hiring of rigs which is existing and continuing, rather there is an expansion or capacity addition through these newly acquired four rigs in the same business of charter hiring of rigs which was carried on the assessee company admittedly since earlier year's. The business and source of income of the assessee company is same and continuing i.e. charter hiring of these rigs and in expansion thereof of the same existing and continuing business of chartered hiring of rigs, these additional rigs are acquired by the assessee company and installed at clie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is a revenue expenditure and not a capital expenditure. The judgment of Hon'ble Delhi High Court in the case of CIT v. Triveni Engineering and Industries Limited(supra) and CIT v. Relaxo Footwear Limited(supra) relied upon by the assessee company supports the contentions of the assessee company as these new four rigs were acquired as an expansion of the existing business of the assessee company to charter hire the rigs which was admittedly set-up in the earlier years and no new business had been set up with acquisition of these four new rigs nor any new source of income has come to existence as there is a unity of management, control and interlacing in the business of the assessee company , we , therefore, in view of our detailed discussions and reasoning as above hold that the mobilization expenses incurred by the assessee company of Rs. 3,43,28,180/- is to be allowed as revenue expenditure. The interest paid by the assessee company on the borrowings for acquisition of the rigs is toward the business of the assessee company as these new rigs are available for being given on hire and ready to be put to use immediately on their acquisition by the assessee company as per the charte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t allowable as revenue expenditure. Article 265 of the Constitution of India reads that "No tax shall be levied or collected except by the authority of law." In terms of the Article 265 of the Constitution, tax can be levied only if it is authorized by law. The Hon'ble Bombay High Court in Balmukund Acharya vs DCIT, CIT and UOI 310 ITR 310 held that Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.The Hon'ble Bombay High Court in Nirmala L. Mehta v. A. Balasubramaniam, C.I.T. (2004) 269 ITR 1 held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law. Circular No. 14(XL-35) of 1955, dated 11.4.1955, issued by the Central Board of Direct Taxes reads as under: "Officers of the department must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w. The taxing authority cannot collect or retain tax that is not authorized. Any retention of tax collected, which is not otherwise payable, would be illegal and unconstitutional. The Hon'ble Bombay High Court in Balmukund Acharya vs DCIT, CIT and UOI 310 ITR 310 held that Tax can be collected only as provided under the Act. If any assessee, under a mistake, misconception or on not being properly instructed is over assessed, the authorities under the Act are required to assist him and ensure that only legitimate taxes due are collected.The Hon'ble Bombay High Court in Nirmala L. Mehta v. A. Balasubramaniam, C.I.T. (2004) 269 ITR 1 held that there cannot be any estoppel against the statute. Article 265 of the Constitution of India in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief that he is entitled to where the tax is levied or collected without authority of law.Circular No. 14(XL-35) of 1955, dated 11.4.1955, issued by the Central Board of Direct Taxes reads as under: "Officers of the department must not take advantage of ignorance of an assessee as to his rights. It is one of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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