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TMI Blog2010 (9) TMI 1285X X X X Extracts X X X X X X X X Extracts X X X X ..... ting it as revenue expenditure and not capital expenditure as held by the Assessing Officer. Facts in brief as observed by the Assessing Officer for Assessment Year 2005-06 are that at the time of scrutiny, the assessee was asked to produce details purchase of stores and spares. Perusal of the details reveal that during the year the assessee had claimed purchase of Rolls as revenue expenses under the head stores spares . As per provision of Income-Tax Rules, Rolls in iron Steel Industries are eligible for depreciation @ 80%. When confronted with such finding the assessee relied on the decision of the court in the case of Malhotra Industries Corporation (Madras) 254 ITR 635. The Assessing Officer was of the view that the court in a terse order precluded the Revenue from referring the issue of depreciation as no such question was referred to in the memorandum of appeal. Thus, only on technical issues the appeal of the Department was turned down. Hence, the case is not applicable 80%/40% depreciation will only be allowed on purchase of Rolls in the case of the assessee. He thus, arrived at the conclusion that considering the high rate of wear and tear of Rolls high rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A) may kindly be set aside and that of Assessing Officer be restored. 5. On the other hand, the Ld. Counsel for the assessee while reiterating his same submissions as submitted before the Ld. CIT(A) further placed reliance on Explanatory Notes, Second Edition (1996) Volume 3 on Harmonized Commodity Description Coding System (Relevant part of the notes has been filed) and submitted that rolls for rolling mills are parts of the machinery which are replaced from time to time during the year itself and do not give rise to any asset or an advantage of any enduring nature which could be treated as capital expenditure liable for depreciation. For making this submission, he placed reliance on the decision of Hon ble Supreme Court in the case of CIT Vs. Saravana Spinning Mills P. Ltd. (2007) 293 ITR 201 (SC) and further placed reliance on the following decisions : i) CIT Vs. Malhotra Industrial Corporation (2002) 254 ITR 635 (P H), ii) CIT Vs. Mysore Spun Concrete Pipe Pvt. Ltd. (1992) 194 ITR 159 (Kar) and iii) CIT Vs- Renu Sagar Power Co. Ltd. (2008) 298 ITR 94 (All) To meet the argument of the Ld. DR that since as per provision of I. T. Rules rolls used in iron a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rolls as revenue expenditure Up to the assessment year 1991-92, the Department has allowed the same as deduction. In none of the earlier assessment years, the expenditure was treated as capital expenditure Now, the only issue before us is that the mere fact that the Appendix cited supra prescribed the rate of depreciation of rolls prior to September 30, 1991, as 100 per cent and thereafter at 50 per cent would show that the Legislature had intended to treat the same as capital in nature We are unable to accept the reasoning given by the Commissioner of Income-tax (Appeals) that if the intention of the Legislature was not to treat such expenditure as capital in nature, there was no necessity in providing the rate of depreciation on the rolls for the simple reason that expenditure incurred on rolls prior to the commencement of the business would be capital in nature. Therefore, it is necessary to provide the rate of depreciation on rolls so that depreciation at that rate could be allowed to the assessee. But it does not mean that expenditure incurred on replacement of rolls subsequent to the commencement of the business would also be a capital expenditure. The judgment of the Kar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim deduction as current repairs. In this view of the matter, we set aside the orders of the Commissioner of Income-tax (Appeals) and direct the Assessing Officer to allow deduction on the replacement cost of rolls as current repairs Accordingly, this ground of appeal is allowed for both the assessment years. The Hon ble Supreme Court in the case of CIT Vs- Saravana Spinning Mills P. Ltd. (Supra) at page 208 has observed as under : To give an example, a compressor is an important part of an air-condition machine. Repair of the compressor will come in the connotation of the word current repairs in section 31(i) of the said Act because the assessee does not replace the air-condition machine. At the highest, he replaces a part of the air-condition machine. So is the case of the picture tube in a television set, when the picture tube is replaced the television set is not replaced, therefore, such repairs alone can come within the connotation of the word current repairs in section 31(i) of the said Act as it stood at the material time. In the case of CIT Vs- Mysore Spun Concrete Pipe Pvt. Ltd. (supra), the Hon ble Karnataka High Court has held as under : Hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreed with the view taken by the Commissioner (Appeals) and held in favour of the assessee. In view of the above, we find no infirmity in the orders of the Ld. CIT(A) in deleting the additions for both the assessment years. Therefore, the grounds of appeal of the revenue for both the assessment years are dismissed. 7. Ground Nos. 2 and 3 for both the assessment years relate to deletion of additions on account deemed dividend u/s. 2(22)(e) of the Act. Briefly stated facts of the case as observed by the AO are as under : Examination of the accounts also revealed that the assessee during the year had taken a loan of Ps. 5,45,00,000/- from M/s Bazaloni Group Ltd. In order to investigate further in this matter the assessee was asked to submit shareholding pattern of both the companies. Comparison revealed that both were sister concerns sharing common director/promoters. Hence, in the requisition dated 06. 10.08 it was pointed out, In reply to my query raised in respect of applicability of section 2(22)(e) of the Act on acceptance of loan by the assessee from M/s. Bazaloni Group Ltd., please submit names of the Directors with their shareholding ratios and also mention oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form of loan, travelled from M/s. Bazaloni Group Ltd. to the assessee, who held 31.52% of shares of M/s Bazaloni Group Ltd. It was, thus, a clear case of deemed dividend in the hands of the assessee to the extent of the entire loan amount of Rs.5,45,00,000/-. However, the assessee argued that as per provisions of section 2(18)(b)(B)(c) of the Act M/s Bazaloni Group Ltd was a company in which the public are substantially interested as Rishi Trading Co. Ltd. and Soyuz Trading Co. Ltd were quoted companies and the assessee itself, though not quoted, was a company in which the public are substantially interested by virtue of section 2(18)(b)(B)(c) of the Act. Clearly, in the present case one thing has to be ascertained and that is the status of M/s Bazaloni Group Ltd. Directly it was not a quoted or widely held company. Its status was totally dependent on the status of the assessee. Again it was also true that the assessee, in itself, was not a company in which the public are substantially interested. The status of the assessee was dependent upon the status of other companies holding its shares. It was observed that only M/s Soyuz Trading Co. Ltd., M/s Rishi Trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from its side to contradict the obvious in order to be covered by the exception. This has not happened in this case. Manifestly, as per guideline provided by the Supreme Court on has to lift the corporate veil to understand the Intention and objectives of the assesee. Clearly, there is more than what meets the eye. The entire transaction was nothing but a colourable device by which accumulated and undistributed profit of M/s. Bazaloni Group Ltd. was passed on to the assessee without payment of dividend tax. Such avoidance of tax should not go un-noticed. Thus, in the present case MIs B zaloni Group Ltd. can never be designated as a company in which the public arc substantially interested. Consequently, the case appeared to be a fit case for application of provisions of section 2(22)(e) of the Act. However, considering the fact that available reserve in the account of M/s. Bazaloni Group Ltd. was only to the extent of Rs. 5,24,80,60/-, addition on account of deemed dividend in the hands of the assessee is restricted to the sum of Rs.5,24,80,600/ Likewise in respect of Assessment Year 2006-07 on the same analogy the Assessing Officer made the addition of Rs.18, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f such company if the whole of the share capital or by its nominees throughout the previous year. Explanation under the aforesaid clause prescribes the limit of holding 40% shares only in the case of manufacturing companies. As discussed above as in the case of the appellant all the three companies viz. Soyuz Trading Co. Ltd., Rishi Trading Co. Ltd. and Jindal (India) Ltd. are the companies in which Public are substantially interested and therefore satisfy the conditions of section 2(18)(b)(A) and (B), having collectively a holding of more than 58% shares of Bazaloni Group Ltd. Undoubtedly, the Bazaloni Group Ltd. is a Company in which the Public are substantially interested. The appellant has made reference to the following decisions : - 208 ITR 872 at pages 876, 877 204 ITR 74 (Bom) 310 ITR 266 (Guj) In 310 ITR 266 (Gui) in the case of CIT v. EMTICI ENGINEERING LTD. at pages 273 274 it was held that more than 50% of the shares were held by two companies who were subsidiaries of the holding company which interim was a listed Company. The two companies holding more than 50% shares of the company were to be treated as a Company in which the P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n either case possesses profits. It would therefore appear that the primary condition which has to be satisfied for the purpose of applicability of Section 2(22)(e) of the Act is that if the payment is to be made by a company which is not a Company in which the public are substantially interested, then and only then a loan or advance which is made by such a company is to be treated as deemed dividend. In the present case the loan has been obtained from Bazaloni Group Ltd. which is a Company in which the Public are substantially interested, Section 2(22)(e) would not apply and such a loan cannot be treated as deemed dividend for the purpose of Sections 2(22)(e) of the Act. It is to be borne in mind that Sections 2(22) treats certain transactions as deemed dividend i.e. by a fiction it for the purpose of Section 2(22)(e) of the Act. It is now well settled that if a statutory fiction is created it b be construed strictly and must be restricted for the very purpose for which such a fiction is created. In view of the above facts and in the argument placed before me and at the cost of repetition it is apparent that M/s. Bazaloni Group Ltd. is a company in which the Public are subst ..... X X X X Extracts X X X X X X X X Extracts X X X X
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