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TMI Blog2016 (4) TMI 1378X X X X Extracts X X X X X X X X Extracts X X X X ..... re, in our view, the conclusion drawn by the Departmental Authorities that the expression shall used in section 32 is mandatory is not correct and cannot be a correct interpretation of the statutory provisions. In case of Mahendra Mills Ltd. [ 2000 (3) TMI 3 - SUPREME COURT] has laid down the proposition that provisions for claiming of depreciation is for the benefit of the assessee, hence, if the assessee does not wish to avail the benefit for some reason, the benefit cannot be forced upon the assessee as it is for the assessee to see if the claim of depreciation is to his advantage. In the absence of any claim of depreciation by the assessee, it cannot be thrust upon it by the Assessing Officer. We direct the AO to compute income of the assessee after withdrawing depreciation granted to the assessee. Ground raised by the assessee is allowed. Expenditure claimed by the assessee on account of Up Stream Rolling Mills (USRM) trial run expenditure - Revenue or capital expenditure - HELD THAT:- These expenses relate to production in as much as these have been incurred in the purchase of raw materials, consumable items required in the process of production, electricity consumption in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld Trade Corporation [ 1988 (12) TMI 23 - BOMBAY HIGH COURT] and other decisions relied upon by the learned Authorised Representative. Therefore, we do not see any reason to interfere with the order of the learned Commissioner (Appeals). Accordingly, we uphold the same by dismissing the ground raised by the Department. Claim of deduction being professional fee paid towards re structuring of financial loan - HELD THAT:- expenditure incurred can be treated as capital in nature has disallowed assessee s claim. He has not established on record that by incurring such expenditure, assessee has acquired some assets providing benefit of enduring nature. On the other hand, as demonstrated by the Assessing Officer, the consultation fee was paid for financial re structuring of loans which has resulted in rejection of interest cost and as a consequence, assessee has derived benefit of 14.86 crore, which was offered as income for the impugned assessment year. That being the case, corresponding expenditure incurred by the assessee for earning such income has to be allowed as deduction. The decisions relied upon by the learned Authorised Representative also supports this view. In the aforesaid vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e incurred on watch and ward - HELD THAT:- Documentary evidence to demonstrate that the amount crystallized during the assessment year after negotiation with the third parties have not been placed before us. The learned Commissioner (Appeals) s order is also silent on the issue whether he has himself examined any documentary evidence to demonstrate that the expenditure pertaining to earlier assessment year was quantified and crystallized during the year under consideration after negotiation. In view of the aforesaid, we restore the matter back to the file of the Assessing Officer to verify the fact whether expenditure claimed was quantified and crystallized after negotiation with third parties. If the assessee through proper documentary evidence proves such fact, then there is no difficulty in allowing assessee s claim of expenditure in the impugned assessment year. This ground is allowed for statistical purposes. X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer, use of the word "shall" in section 32(1) of the Act makes it mandatory to compute depreciation and no discretion is left either to the assessee or to the Assessing Officer. The Assessing Officer also observed that the ratio laid down by the Hon'ble Supreme Court in case of Mahendra Mills ltd. (supra) will not be applicable as it was prior to the amendment of section 34(1) of the Act which was deleted w.e.f. 1st April 1988. Thus, the Assessing Officer finally concluded that the assessee since is eligible for depreciation on fixed assets, the same is allowable. Accordingly, he allowed depreciation of ₹ 29,84,50,635. Being aggrieved with the aforesaid decision of the Assessing Officer, assessee challenged the same in appeal preferred before the learned Commissioner (Appeals). 4. The learned Commissioner (Appeals), however, upheld the decision of the Assessing Officer. 5. Learned Authorised Representative submitted before us, whether to claim depreciation or not on a particular asset, is the option of the assessee and the benefit of depreciation cannot be thrust upon the assessee by the Department. In support of such contention, he relied upon the decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Mittal Belting & Machinery Stores v/s CIT & Anr. [2002] 253 ITR 341 (P&H). 8. We have considered the submissions of the parties and perused the material available on record. Undisputedly, from the assessment year 1997-98, the assessee had not claimed depreciation on assets for whatever may be the reason. It is also accepted that in assessment year 1997-98, the Assessing Officer did not compute depreciation of assets while completing the assessment. The issue before us is whether grant of depreciation is mandatory under the provisions of section 32 as it stood at the relevant point of time or it was at the option of the assessee. On a careful reading of section 32(1), it appears that though the expression used there is "deduction shall be allowed", but the expression "shall" used will not make allowance of depreciation mandatory. This is because of the fact that by Finance Act, 2001, Explanation 5 was inserted to section 32 which reads as under:- Explanation 5.-For the removal of doubts, it is hereby declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income; 9. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llenged the decision of the learned Commissioner (Appeals) in allowing expenditure of ₹ 6,32,80,792, claimed by the assessee on account of Up Stream Rolling Mills (USRM) trial run expenditure. 12. Brief facts are, in the course of assessment proceedings, the Assessing Officer noticed that the assessee had debited an amount of ₹ 4,68,78,462 as USRM trial run expenditure and interest on working capital till trial run of ₹ 1,64,02,336. When called upon to justify its claim, it was submitted by the assessee that during the year under consideration, company replaced the PSW rolling mill with a four stand upstream rolling mill. It was submitted, earlier the rolling was done with the help of PSW rolling mill and 8 stand down stream rolling mill (DSRM). The assessee submitted, the trial run expenditure represent excess of stock of products rolled through USRM during the period from 2nd August 1997 to 15th September 1997, over sales realisation of such product. The assessee submitted, the stocks normally includes costs like raw materials, consumables, power and fuel, labour, processing costs, selling expenditure, interest cost, etc. It was submitted, steel round manufactu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dly is engaged in the same line of forging business ever since the financial year 1993-94. The business has been that of rolling steel bars right from the year 1993-94. Sine, the appellant found that the existing process of rolling steel bars was falling short of reaching the desired level of specifications another machine namely downstream - rolling mill was installed. This machine was obviously a part and parcel of the appellant's existing plant and at the most it can be described as an extension of the existing manufacturing activity. No new line of business has come into existence and only the already existing manufacturing process has been improved upon. The AO has over looked these aspects completely and has also not controverted the basic facts projected by the appellant that the machine in question is installed in the same premises of existing business and it is being managed by the same person in charge of production and the same managerial staff. The AO has also not considered that the stream rolling process is under the same existing administrative control and the production is also financed from the same existing pool of working capital funds. In other words, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epartment has challenged the decision of the learned Commissioner (Appeals) in accepting assessee's claim of deduction on account of lease rental payment of ₹ 2,29,11,128. 17. Brief facts are, during the assessment proceedings, the Assessing Officer noticed that the assessee has debited a sum of ₹ 5,06,34,206, towards payment of lease rentals. Noticing that similar lease rental claimed by the assessee in the assessment year 1996-97, was disallowed by the Assessing Officer. He followed the same and disallowed the amount of ₹ 2,29,11,128. Being aggrieved of such disallowance, the assessee preferred appeal before the learned Commissioner (Appeals). 18. The learned Commissioner (Appeals) noticed that the main reason on which the Assessing Officer disallowed lease rental is that sales and lease back transactions were entered with group companies. However, it was submitted by the assessee that the Assessing Officer's observations that lease transaction was not genuine is without any basis considering the fact that lessors have paid the considerations to the assessee company. It was also stated, assessee has also paid lease management fee and lease rentals. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Revenue that where there is no genuine sale of equipment by the assessee (lessee) to its sister concerns (lessor), the lease agreement entered by them cannot be considered as a genuine transaction. Revenue is critical about "certain terms‟ and conditions of the lease agreement and also about the risk factor of the assets. As per the Revenue the lease transaction is nothing but a finance transaction / loan transaction and the assets were held in the name of the lessors only for the purpose of security of the loan given. Hence, the lease rent paid by the assessee company is nothing but the repayment of loan finance taken from the lessors. Per contra, the case of the assessee is that when the sale and lease back transactions are accepted by the Department from the lessors‟ side, the same transactions cannot be questioned by the Revenue when it comes to the lessee (assessee). After hearing both the parties and on perusal of the relevant record placed before us on this issue as well as the above narrated facts of the case, we find merit in the argument of the Ld Counsel for the assessee. In so far as the sale and lease back transactions are concerned, there no legal b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is appeal, assessee has raised two grounds. 22. Insofar as ground no.2 is concerned, the learned Authorised Representative submitted, on the instructions of the assessee, he did not wish to press this ground. Consequently, ground no.2, is dismissed as "not pressed". 23. In ground no.1, assessee has challenged computation of depreciation amounting to ₹ 22,22,16,012. 24. As could be seen, this issue is similar to the issue raised by the assessee in ITA no.2214/Mum./2005, wherein, vide Para-9, we have directed the Assessing Officer to withdraw depreciation granted to the assessee. Consistent with our findings given therein, ground no.1, raised by the assessee is allowed. 25. In the result, assessee's appeal is partly allowed. ITA no.2051/Mum./2005 - Department's Appeal In this appeal, the Department has raised three grounds. 26. Ground no.1, is on the issue of allowance of assessee's claim of deduction on account of lease rental. 27. This issue is similar to the issue raised by the Department in ground no.2 in its appeal being ITA no.2050/Mum./2005, wherein, vide Para-19 and 20, we have upheld the order of the learned Commissioner (Appeals) by dismissing the ground ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts on record, the assessee has written-off the amount of ₹ 58,51,135, in the books of account during the impugned assessment year. He also found that the amount in question represent the advance paid to one Austrian company for which the agreement was entered between the parties on 11th May 1993. He also found that as the arrangement between the parties did not fructify, the assessee in fact made a provision for bad debt in the year 1994-95. However, the provision was disallowed in that assessment year. 31. The learned Commissioner (Appeals) observed, the amount of ₹ 58,51,135 is nothing but a trading loss of the assessee which was incurred in the normal course of business, hence, it is allowable under section 28 of the Act. Accordingly, he allowed assessee's claim of deduction of ₹ 58,51,135. 32. Learned Departmental Representative relying upon the reasoning of the Assessing Officer submitted, since the assessee has not fulfilled the conditions of section 36(2), deduction claimed is not allowable. 33. Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the advance made by the assessee was in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid amount paid to Indian Seamless Services Ltd., as professional fees for re-structuring assignment given to them. In response to the query raised by the Assessing Officer, it was explained by the assessee that the benefit derived by the assessee on account of re-structuring had been offered for taxation, hence, the deduction claimed is allowable. The Assessing Officer, however, did not find merit in the submissions of the assessee. He was also of the view that the expenditure incurred being capital in nature is not allowable. Accordingly, he added back the amount of ₹ 25 lakh. Being aggrieved of such additions, the assessee challenged the same before the learned Commissioner (Appeals). 37. Before the first appellate authority, it was argued by the assessee that the financial re-structuring has been in respect of term loans granted by various financial institutions like IDBI, ICICI, IFCI, LIC, UTI, etc., and working capital granted by the banks. It was submitted, interest on these loans were claimed and allowed as revenue expenditure. It was further submitted, the benefit derived from the re-structuring was offered for taxation and the assessee was also assessed on such inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, as demonstrated by the Assessing Officer, the consultation fee was paid for financial re-structuring of loans which has resulted in rejection of interest cost and as a consequence, assessee has derived benefit of ₹ 14.86 crore, which was offered as income for the impugned assessment year. That being the case, corresponding expenditure incurred by the assessee for earning such income has to be allowed as deduction. The decisions relied upon by the learned Authorised Representative also supports this view. In the aforesaid view of the matter, we do not find any infirmity in the order of the learned Commissioner (Appeals) which is accordingly confirmed. Ground no.3 raised by the Department is dismissed. 42. In the result, Department's appeal is dismissed. ITA no.2216/Mum./2005 - Assessee's Appeal In this appeal, the assessee has raised four grounds. 43. Insofar as ground no.4 is concerned, the learned Authorised Representative submitted, on the instructions of the assessee, he does not want to press this ground. Consequently, ground no.4, is dismissed as "not pressed". 44. In ground no.1, assessee has challenged computation of depreciation amounting to ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bmitted, ISFS raised the invoice for professional services rendered on 17th October 2000 and the assessee received such invoice in the financial year 2000-01 relevant to assessment year under consideration. It was submitted, the assessee has accounted the expenditure in the books of account only when it received the invoices from ISFS. He submitted, the statutory auditor also did not classify the said expenditure as prior period expenses as the same was crystallized and quantified in the year under consideration upon receipt of the invoices. Therefore, the expenditure has to be allowed in the year in which it crystallized. 49. The learned Departmental Representative on the other hand relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals). 50. We have considered the submissions of the parties and perused the material available on record. As is evident, the primary reason on the basis of which assessee's claim of expenditure was disallowed is the expenditure does not pertain to the impugned assessment year. However, as demonstrated by the assessee and which has not been controverted by the Department, ISFS raised the invoice for professional se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t as expenditure of the current year. Relying upon a decision of the Tribunal, Hyderabad Bench, in TCI Finance Ltd., 91 ITD 573 (Hyd.), wherein, it was held that accrual of expenditure of income under mercantile system cannot be different under Income Tax Act and Companies Act, he held as the amount of expenditure was incurred for the development of a new product, the same cannot be allowed as deduction under section 37(1). 54. Learned Authorised Representative reiterating the stand taken before the Departmental Authorities submitted, the deduction claimed represent excess cost of raw material, processing expenditure over sales realization of such product, hence, is allowable expenditure under section 37(1) of the Act. He submitted, product development expenses are incurred only for the modification of the existing product and not for development of any new product. He submitted, the expenditure incurred was not for purchase of plant and machinery. Hence, such expenditure does not have any enduring benefit and, therefore, should be treated as revenue expenditure. For such proposition, he relied upon the following decisions:- i) CIT v/s Escorts Auto Components Ltd., [2010] 323 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perused the material available on record. On going through the assessment order as well as the order of the learned Commissioner (Appeals), we noticed that assessee's claim has been disallowed primarily for two reasons. Firstly, assessee in its books of account has claimed it as deferred expenditure and further, the expenditure incurred for development of new product being for enduring benefit of the assessee is in the nature of capital expenditure. However, as could be seen before the Departmental Authorities assessee has consistently taken the stand that the expenditure incurred was not for installation of new plant and machinery, but towards raw materials and consumables required in continuous process of development of grade and size of steel bars. Thus, before coming to a conclusion regarding the nature of expenditure whether revenue or capital, the relevant facts relating to incurring of such expenditure has to be properly examined. It has to be ascertained whether the expenditure incurred has resulted in acquisition of any asset of enduring nature or the expenditure incurred is towards purchase of raw material, consumables and processing charges in regular course of its manu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Commissioner (Appeals), the assessee contesting the decision of the Assessing Officer submitted, the statutory auditor has not considered the expenditure as prior period expenditure as the expenditure crystallized during the year. It was submitted by the assessee that though the expenditure pertained to the prior period but it crystallized during the year under consideration after the amount was finally settled after negotiation. Therefore, the Assessing Officer was not justified in disallowing assessee's claim without calling for relevant and necessary evidence. The learned Commissioner (Appeals), after considering the submissions of the assessee found that the expenditure incurred crystallized during the year. Accordingly, he allowed it under section 37(1) of the Act. 62. Learned Departmental Representative challenging the finding of the learned Commissioner (Appeals) submitted, assessee did not produce any evidence either before the Assessing Officer or before the learned Commissioner (Appeals). However, learned Commissioner (Appeals), without assigning any reason has allowed assessee's claim. 63. Learned Authorised Representative submitted, during the year, assessee incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed was quantified and crystallized after negotiation with third parties. If the assessee through proper documentary evidence proves such fact, then there is no difficulty in allowing assessee's claim of expenditure in the impugned assessment year. This ground is allowed for statistical purposes. 65. In ground no.2, the Department has challenged the decision of the learned Commissioner (Appeals) in allowing assessee's claim of deduction on account of lease rental payment amounting to ₹ 1,14,94,544. 66. This issue is similar to the issue raised by the Department in ground no.2 in its appeal being ITA no.2050/Mum./2005, wherein, vide Para-19 and 20, we have upheld the order of the learned Commissioner (Appeals) by dismissing the ground raised by the Department. Consistent with our findings given therein, we uphold the order of the learned Commissioner (Appeals) and dismiss ground no.2, raised by the Department. 67. In the result, Revenue's appeal is dismissed. 68. To sum up, assessee's appeal in ITA no.2214/Mum./2005 is allowed, Department's appeal in ITA no.2050/Mum./2005 is dismissed, Assessee's appeal in ITA no.2215/Mum./2005 is partly allowed, Department's appeal in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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