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TMI Blog2014 (10) TMI 900X X X X Extracts X X X X X X X X Extracts X X X X ..... s and circumstances of the case, the Ld. CIT(A)Panaji, has erred in deleting addition of Rs. 9,73,844/- made by the AOon account of Salvage Wreck Removal Expenses. 4. The Ld. CIT(A), Panaji has erred in deleting addition of Rs. 35,89,64,088/- relating to capital expenditure incurred on ship renovation viz M V Sunrise, made by the AO ignoring the decisions of the supreme court in the case of CIT v/s Saravana Spinning Mills Pvt. Ltd 293 ITR 201 and Ballimal Naval Kishore V/s. CIT (1997) 244 ITR 414, Modi Spinning & Weaving Mills Co. Ltd V/s. CIT (Del) 200 ITR 544). Current repairs does not include capital expenditure u/s. 31. 5. The Ld. CIT(A), Panaji has erred in deleting addition of Rs. 15,25,16,576/- made by the AO towards unaccounted / excess stock by ignoring the strong evidence collected by the AO in the shape of letter dated 06/12/2010 given by the Directorate of Mines and Geology, Government of Goa which confirms the production or the extraction of ore in the mines of the assessee at 7,833MT only during the period relevant to A.Y. 2008-09." 2.1. Wherein the following grounds are raised by the assessee in A.Y2008-09. "1. CIT-Appeals has erred in upholding disallowance u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer has also verified and informed that the assessee has maintained as diverse equity portfolio and has invested in 3 different companies and mutual funds the investments in these companies and funds at the beginning and close of the period relevant to this assessment year is as under: The Assessing Officer found that assessee was moved funds from one scheme to another possibly with a view to get better returns. Therefore, the Assessing Officer has relied upon the various decisions and he has calculated the disallowance u/s. 14A r.w.s. 8D, a sum of Rs. 32,40,027/- ,. The assessee has given the calculation of disallowance u/s. 8D but Assessing Officer was of the view that this calculation of the assessee is not as per law, therefore, he disallowed a sum of Rs. 32,40,027/- 3.2. The matter carried to CIT(A) and CIT(A) has dismissed the appeal of the assessee. 3.3. During the course of hearing, we find that the assessee has given the calculation of his disallowance u/s. 14A r.w.Rule 8D which read as under: 1 Amount of expenditure directly relating to Dividend Income 2 The amount of interest which is not directly attributable to any particular incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of Usgao Bridge which is essential for smooth and efficient running of the business of the assessee, as a capital expenditure." 4.1. The short facts of this ground is that the assessee company has debited a sum of Rs. 1,38,54,167/- as contribution to Goa Infrastructure Development Co. Ltd., for construction of Usgao Bridge. It has been submitted that Govt of Goa has asked to mines at Usgao area construction the bridge as the bridge was used by them for transportation of minerals ores. The old bridge was claimed to have been damaged because of the transportation undertaken by the mine owners. Since it was not possible for the mine owners to operate their mines and to transport ores, all the mine owners of the area who used this bridge agreed for construction of the bridge. The assessee has contributed a sum of Rs. 1,38,54,167/- and claimed as a business expenditure as a revenue expenditure. 4.2. The matter carried to CIT(A) and CIT(A) has confirmed the order of AO. 4.3. We have head the rival condition of the parties. The Assessee has paid Rs. 13,854,167/- being share paid to Goa infrastructure Development Corporation of New Usgao bridge. The existing bridge was destroyed du ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticular expenditure was in the nature of capital expenditure or revenue expenditure was dependent on the facts of thecase.A lump sum payments or enduring benefit is not conclusive test. The Supreme Court had further held that where the payment for securing an enduring advantage is in the revenue filed it would be revenue in nature. Where the expenditure was for operation and the working of an existing profit-making apparatus, it could only be revenue in nature. It is only where the expenditure was related to any addition or augmentation of the profit-making apparatus, the same would be capital in nature. Respectfully following the same, we allow the claim. This ground of Appeal is allowed. ITA No. 361/PNJ/2013 for A.Y.2008-09 Ground No.1. General in nature 5. Ground No.2 of the department's appeal which read as under:- "2. Whether on the facts and circumstances of the case, the Ld. CIT(A)Panaji, has erred in deleting addition amounting to Rs. 37,56,939/- towards Port Development Expenses made by the AO. The Ld. CIT(A), Panaji erred in treating this expenses as a revenue expenses as against capital expenses." 5.1 During the course of scrutiny proceeding it was observed that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... already existing assets and does not bring a new assets or does not the assessee give on deferent advantage cannot be treated as capital expenses. In the case of CIT Vs. Hotel Control Pvt. Ltd. [2004] 265 ITR 109 (Uttaranchal), it was found admissible on the ground that the hotel situated at Mussorie had required such heavy expenditure as necessitated by climatic conditions. The issue had arisen because the assessee has treated it as deferred revenue expenditure prompting the Assessing Officer to treat it as a capital expenditure. Renovation was conceded in providing flush system for latrines, replacing tiled roof by cement roof, construction of a water tank, replacement of concrete floor by Kotaa stones and repairs to the furniture. Though the decision was rendered in the context of renovation necessitated by climatic conditions, the position should not be different, even where it is prompted by other considerations like business exigencies to meet competitiveness and the expected increase in standard of comfort for the customers. Such amounts may not be treated as capital expenditure merely because the benefit of such expenditure would overflow the expenditure itself. Such expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his treating this expenditure as revenue expenditure and our interference is not required. In the result, revenue appeal is dismissed on this ground. A.Y.2007-08 treated as a revenue expenditure. 7. Ground No.4This ground relates to deleting the addition of Rs. 35,89,64,088/- as capital expenditure incurred on ship renovation viz M V Sunrise.The assessee company has incurred the following expenditure which read as under:- Sr. No. Particulars Amount (US$) Remarks 1 Towards the payment to cosco (Nantong) Shipyard Co. Ltd for dry-dock charges and related charges 43,98,000.00 These are all the charges of shipyard which include the repairs and servicing of the ship. These repairs are mainly the replacement of steel plates and other parts. The hull of the ship is of steel plates. Since the ship is always in water, the hull gets corroded and hence the majority of steel plates required to replaced. The file containing brief information of this dry-docking expenses is enclosed. 2 Towards the supply of bunker at Singapore and China ocean as per bills enclosed 16,88,577.49 This is the supply of fuel 3 Port disbursement charges remitted to china ocean shipping Agency, Nantong ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .03.2010. Certificate No. COL10P034 dated: 13.09.2010 issued by Indian Register of Shipping carrying following particulars: Particulars of Ship Name of Ship SUNRISE Distinctive number or letters 2769/VVRO Port of Registry Mumbai Length (L) as defined in article 2(8)(metres) 215.42 Gross Tonnage 34920 IMO Number 7352335 Freeboard assigned as *A new ship Type of ship *Type B vii. The aforesaid three certificates issued by Certificate of Indian Registry/Indian Register of Shipping on various dates reveal the Following: The ship M.V. Sunrise was manufactured in 1974 and had an engine of 1973 vintage. The ship was therefore very old and its designated life was due to expire shortly. The ship M.V. Sunrise had a valid certificate for transshipment services till 29.03.2010. Thus, there was no need to carry out dry-docking restoration in June 2007 merely to obtain a seaworthiness certificate. The assessee's contention that dry-docking was necessary for obtaining the aforesaid seaworthiness certificate is therefore not supported by facts on record. After the dry-docking restoration, the ship M.V Sunrise was assigned as a new ship albeit carrying the ol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view that this is not a routine expenditure towards running/operation of the aforesaid vessel but was in the nature of structural remodelling which tantamount to creation of the new capital asset that would give benefit of an enduring nature to the assessee company. Therefore, he treated this as a capital expenditure and the Assessing Officer has allowed depreciation from A.Y. 2010-11. 7.1. Matter carried to CIT (A). 7.2. CIT(A) verified the detail expenditure and he categorized following expenditure can never be treated as capital expenditure which read as under: Sr. No. Particulars Amount (US$) Remarks 1 Towards the payment to Cosco (Nantong) Shipyard Co. Ltd for dry-dock charges and related charges 4,398,000 These are all the charges of shipyard which include the repairs and servicing of the ship. These repairs are mainly the replacement of steel plates and other parts. The hull of the ship is of steel plates. Since the ship is always in water, the hull get corroded and hence the majority of steel plates required to replaced. 2 Towards the supply of bunker at Singapore and China ocean 1,688,577.49 This is the supply of fuel 3 Port disbursement charges remitte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... city of the vessel. Taking a birds eye view of the complete facts of the case, in my opinion, the repairs expenses was required to keep the vessel sea-worthy and should be treated as current repairs and be allowed as revenue expenditure. The A.O. is directed to delete the addition amounting to Rs. 35,89,64,088/- made on this account and this Ground of appeal of the appellant is allowed accordingly." 7.3. The learned DR submitted that the Assessee, vide his paper book submitted in last hearing on 14.07.2014, has said that the expenses incurred for dry docking are revenue in nature. Assessee says it is to be done annually. However, thisis factually incorrect, Dry docking is not an annual feature. It is done every 30 months (2.5 years) on the basis of the surveyor report from Ministry of Shipping. In dry docking, mainly the steel plates of the ship touching sea are replaced because it has corroded and thinned down due to sea water. So, new plates will be installed replacing the old plates. Since the cost of steel is lowest in China, and since it is a major expenditure, ship owners prefer Chinese shipyards for dry docking.In the assessee's case, the surveyor reports or the quotation f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ltancy service 9,282,647 2 For supply of Bunker/Fuel at Singapore and china 67,885,695 5.25% consultancy service 3,563,999 3 Port disbursement charges China Ocean Shipping Agency, Nantong 1,660.728 5.25% consultancy service 87,188 4 Towards supply (purchase) of spares and consumables stores 71,400,912 5.25% consultancy service 3,748,548 5 Towards supply of provisions for ships crew during their stay in china and Singapore 1,769,221 5.25% consultancy service 92,884 6 Operation expenses like travelling, stationery, telephone etc incurred at china and Singapore 21,529,649 5.25% consultancy service 1,130,307 Total 358,964,088 The AO has verified this expenditure and he was of the view that major part of ship was replaced. This undoubtedly extended the life of the ship. The dry docking was undertaken Casco (Nantong) Shipyard-China. The Assessing Officer was of the view that every part of the ship like propeller, valves, hatch cove, hydraulic jacks, engine, turbo charger, deck piping, conveyor belt, cranes, slew bearings, pedestal, lifeboats, tunnel, accommodation decks, main deck, hatch cover chains, ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ture the Assessing Officer has treated this expenditure as capital expenditure but CIT(A) has also verified the detail expenditure and he categorized following expenditure can never be treated as capital expenditure which read as under: Sr. No. Particulars Amount (US$) Remarks 1 Towards the payment to Cosco (Nantong) Shipyard Co. Ltd for dry-dock charges and related charges 4,398,000 These are all the charges of shipyard which include the repairs and servicing of the ship. These repairs are mainly the replacement of steel plates and other parts. The hull of the ship is of steel plates. Since the ship is always in water, the hull get corroded and hence the majority of steel plates required to replaced. 2 Towards the supply of bunker at Singapore and China ocean 1,688,577.49 This is the supply of fuel 3 Port disbursement charges remitted to china ocean shipping Agency, Nantong 41,308,66 These are port statutory dues 4 Towards the supply of Consumables & Spares 1,776,014.42 These are the cost of consumables and spares used for repairs. 5 Towards the supply of provision for ship crew during their stay in china and Singapore 44,007.32 These are the cost of provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenue expenditure. In CIT vs Asher Textiles Ltd., 240 ITR 483. The old ceiling was replaced. It was held that expenditure on replacement of old ceiling made of hardboard set on wooden frames with thermostat wood insulation board set in aluminiumframesconstitute revenue expenditure. After the amendment of section 31, one must also take note of the Explanation inserted by the Finance Act, 2003 with effect from April 1, 2004, which rules out capital expenditure under section 31. But then, so does section 37. The most non-controversial argument is that there is no capital expenditure involved in the facts of the case, so that deduction cannot be denied, whether it be under section 31 or 37 and more so under section 37. In this context, the test as to whether it is revenue expenditure or capital expenditure is best understood with reference to precedents. It would be revenue expenditure, if the following facts are satisfied. 1. What is replaced is only a part 2. What is replaced had gone decrepit and old, so as to require replacement, 3. The replaced asset had to be sold either as junk or at nominal value or it remains unsold and unusable. 4. There has been no significant in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore taken out from mines is subjected to processing to make it marketable through beneficiation. Consequently, provisions of these Rules are squarely applicable. As per this, the assessee should have paid royalty on at least 2,24,030 MT of the iron ore mined that he had removed from the vicinity of the mines. However, during the year, the assessee had paid royalty only on 75,833 MT. the assessee claims to have paid royalty on the remaining 1,99,152 MT of Fines only on08.10.2010. This, however, the assessee could not have done on the total iron ore mined and moved from the mining area by the assessee in view of the clear provision of Rule 64-B of the Mineral Concession Rules. It was prima facie clear that the assessee could, at the most, have mined only 75,833 MT of iron ore on which he paid royalty. All the mine holders mining iron ore have to pay royalty to the state Government on the iron ore extracted by them. For this purpose they have to disclose the exact amount of iron ore mined to the concerned department of the state government.In the state government of Goa, Directorate Mines and Gology is the nodal department for this. To know the exact amount ofiron ore mined by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was 2,74,985 MT, however royalty was paid only on 75,833 MT of iron ore as the remaining ore was of a view low grade on which no royalty was considered as payable. The explanation of the assessee is not supported by the facts involved. The assessee had moved 2,24,030 MT of iron ore extracted from the mines and as per rule 64-B of the Mineral Concession Rules, 1960 royalty had to be paid on it. Further the assessee is accounting for the ore in its books of accounts and as such, if it had extracted whole of this ore, then it was bound to pay the royalty thereon. The very fact that the assessee neither paid royalty nor did it make a provision in the books of account for payment of such royalty shows that the assessee had mined only 75,833 MT of iron ore but claimed to have mined 2,74,985 MT of iron ore to match the figures for sale and the available closing stock in its books of account. The assessee was also asked to produce details of correspondence with Directorate of Mines contesting payment of royalty on 1,99,152 MT of iron ore because of its low grade. Such correspondence would have existed in case there was a dispute as to whether royalty was payable on 1,99,152 MT of iron o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not discharge the burden cast on him to prove that the apparent was not real. In the instant case, the detailed figure of iron ore mined made available to the, Directorate of Mines, Government of Goa by the assessee is 75,833 MT and this figure has to be preferred as the correct figure of the ore mined by the assessee especially when no other evidence to challenge this finding has been made available. Accordingly, the difference of 1,99,152 MT of iron ore is to be taxed in the hands of the assessee as unexplained stock. The assessee has claimed that the aforesaid stock of 1,99,152 MT was low grade iron ore. However, details of sales effected by the assessee reveal that the assessee had sold 28,20,715 MT of iron ore with Fe content of 57% or above out of which 3,8 1,404 MT was iron ore with Fe content of 60% or above. In facts, apart from 1,35,475 MT, all the remaining ore sold by the assessee was of grade 52% or above. As such,it would be safe to assume that the unexplained stock possessed by the assessee was of low grade ore having iron content of approximately 50%. The average purchase cost of such ore during the year shown by different entries in Goa who deal in iron ore, inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 340 total 51,06,325 Excess - 2,74,985 On confrontation, the assessee claimed that the excess stock is represented by assessee's extraction from its own mines. The A.O. verified further and found that the assessee had paid Royalty for a total quantity of Rs. 75,833 MT only, which still left a balance of 1,99,152 MT. on further confrontation, the assessee replied that the actual amount of iron ore extracted from kelim mines during the year was 2,74,985 MT, however Royalty was paid only on 75,833 MT of iron ore as the remaining ore was that of a very low grade on which no Royalty was considered to be payable. The A.O., however, did not explain the explanation of the assessee and made the aforesaid addition. 7.5. In view of the above facts, it is important to understand the system followed in mining Industry in Goa. To quote from appellant's submission. "It has been a regular practice followed in Goa that as and when the ore extracted is sold the Royalty is paid." The appellant also submitted the statement of account of Extraction contractor, who had extracted the ore, before the A.O., which was ignored while finalising the statement. The appellant also contended that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.3 The learned AR relied upon the order of CIT(A). 8.4. We have heard the rival contention of the both the parties. Looking to the facts and circumstances of the case, we find that the assessee has submitted before the CIT(A) that assessee has paid the royalty with penal interest on 1,99,152 MT to Mining Department, Goa. It is a regular practice followed in Goa when that as and when the ore is extracted and moved from the mine for the sale, royalty is paid. The ore of 1,99,152 MT was lying on the mine during the financial year 2007-08 and it was moved out of mine in the financial year 2010-11. The royalty has been paid to Director of Mines on 18.10.2010 shows clearly the quantity and year of extraction of ore on which the royalty is paid and assessee has paid royalty of Rs. 25,17,281/-. We find that after considering this evidence the Commissioner of Income Tax was of the view that assessee has paid the royalty on this iron ore, therefore, he has deleted the addition and our interference is not required. In the result, this ground of department's appeal is dismissed. ITA No.362/PNJ/2013 for A.Y.2009-10 9. Ground No.1 :- General in nature. 10. Ground No.2:- During the course o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 10,20,56,570 C average of Total assets at the 1st day Of the year Rs. 777,36,49,695 Total assets at the last Day of the year Rs. 881,82,53,949 Average works out to Rs. 829,59,5 1,822 Thus in case of appellant Ax B/C 0xRs.10,20,56,570 Rs. 829,59,51,822 0 The amount equal to one and half percent of average investment on first day and last day of the year 0.50% of Rs. 10,20,56,570 Rs. 510,283 Total Rs.5,10,283 The CIT(A) has verified and he disallowed Rs. 5,10,283/- as the expenditure incurred towards the earning the interest income u/s. 14A. Therefore, he has allowed the amount of Rs. 10,94,884/- u/s. 14A r.w. Rule 8D. 10.2. During the course of hearing the learned DR could not bring any evidence before us to show that calculation of Commissioner of Income Tax is not as per the rule, therefore, we have no alternative except the endorse the action of CIT(A). We find that the CIT Appeal has held that the Assessee has not paid any interest or acquiring investments therefore, he has restricted these disallowance to Rs. 5,10,283/-. We are the view that CIT (A) is justified in his action in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... undoubtedly extended the life of the ship. These details shows that during dry-docking not only the hull but every part of the ship like propeller, valves, hatch cover, hydraulic jacks, engine, turbo charge, deck piping, conveyor belt, cranes, slew bearings, pedestal, lifeboats, tunnel, accommodation decks, main deck, hatch cover chains, cargo hold, bulkheads, side stiffeners, button plates, tank hop plates were overhauled or renewed or replaced. Thus, the ship, despite retaining its old name and old registration, actually became a new asset with a long life capable of benefitting assessee's business for an extended period of time. (c).iii. It is to be noted that section 31 of the I.T. Act, 1961 that deals with repairs of machinery etc. states as under: "In respect of repairs and insurance of machinery, plant or furniture used for the purposes of the business or profession, the following deductions shall be allowed- (1) The amount paid on account of repairs thereto; (2) The amount of any premium paid in respect of insurance against risk of damage or destruction thereof. [Explanation- for the removal of doubts, it is hereby declared that the amount paid on account of curren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring spillage in M.V. Sunrise. 1,50,970/- TOTAL 38,10,277/- (c).v, Significantly, these amounts are not included in the amount of Rs. 48,60,08, 180/- that the assessee had incurred separately as a one-time expenditure in carrying out extensive dry-dock structural modifications of this vessel. This coupled with the facts that, (i)dry dock repairs of this magnitude had never been carried out in the earlier year; and (ii) dry dock repairs, in any case, are not carried out annually, negates the contention of the assessee that the expenditure of Rs .48,60,08,180 / -was routine expenditure towards running/operating cost of the vessel. (c)vi. The facts discussed above would reveal that the expenditure of Rs. 48,60,08,180/- incurred by the assessee on M.V. Sunrise was not a routine expenditure towards running/operating of the aforesaid vessel but was in the nature of structural remolding which tantamount to creation of a new capital asset that would give benefit of an enduring nature to the assessee company. It needs to be stressed that the asset in the form of a restructured ship with an extended life span is akin to bringing to existence a new capital asset through restorati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax (1955) 27 ITR 34,45 observed: "If the expenditure is made for acquiring or bringing into existence an asset or advantage for the enduring benefit of the business it is properly attributable to capital and is of the nature of capital expenditure. If on the other hand it is made not for the purpose of bringing into existence any such asset or advantage but for running the business or working it with a view to produce the profits, it is revenue expenditure. If any such asset or advantage for the enduring benefit of the business is thus acquired or brought into existence it would be immaterial whether the source of the payment was the capital or the income of the concern or whether the payment was made once and for all or was made periodically. The aim and object of the expenditure would determine the character of the expenditure whether it is a capital expenditure or revenue expenditure. The source or the manner of the payment would then be of no consequent. It is only in those cases where this test is of no avail that one may go to the test of fixed or circulating capital and consider whether the expenditure incurred was part of the fixed capital of the business or p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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