J.H. Kharawala Pvt. Ltd.,, Ahmedabad vs Department Of Income Tax

IN THE INCOME TAX APPELLATE TRIBUNAL " B " BENCH, AHMEDABAD (BEFORE SHRI SHAILENDRA Kr. YADAV, J.M. & SHRI ANIL CHATURVEDI, A.M.)

I.T. A. No. 1233/AHD/2011 (Assessment Year: 2007-08)

The ACIT( OSD)-1, Range- V/S J.H. Kharawala Pvt. Ltd. Jay 4, Ahmedabad House, Panchvati, ambawadi, Ahmedabad (Appellant) (Respondent)

PAN: AAACJ 5528P

Appellant by : Shri Roop Chand, Sr. D.R. Respondent by : Shri Nimish Vayawala, A.R.

(आदे श)/ORDER

Date of hearing : 25-03-2015 Date of Pronouncement : 10 -04-2015

PER SHRI ANIL CHATURVEDI,A.M.

1. This appeal filed by the Revenue is against the order of CIT(A)-VII, Ahmedabad dated 18.01.2011 for A.Y. 2007-08.

2. The relevant facts as culled out from the material on record are as under.

3. Assessee is a company stated to be engaged in the business of manufacturing of Dyes, Chemicals & Intermediaries. Assessee filed its return of income for A.Y. 2007-08 on 29.10.2007 declaring total income of Rs. 1,36,94,970/-. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) vide order dated 24.12.2009 and the total income was determined at Rs.7,19,35,230/-. Aggrieved by the order of A.O., Assessee 2 ITA No 1233/AHD/2011 . A.Y. 2007-08 carried the matter before ld. CIT(A) who vide order dated 18.01.2011 granted substantial relief to the Assessee. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us and has raised the following grounds;-

1. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 4,11,50,043/- on depreciation in respect of unproved additions to various assets, without properly appreciating the facts of the case and the material brought on record by the Assessing Officer.

2. The ld. CIT(A) has erred in law and on facts in admitting evidence in contravention of Rule 46A.

3. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 14,03,005/- u/s. 40A(2)(b), made by the A.O, without properly appreciating the facts of the case and the material brought on record by the Assessing Officer.

4. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of claim of deduction u/s.80IA amounting to Rs. 1,56,87,215/-, made by the A.O, without properly appreciating the facts of the case and the material brought on record by the Assessing Officer.

4. Ground No. 1 & 2 are considered together.

5. During the course of assessment proceedings, A.O noticed that Assessee has claimed depreciation on the fixed assets. A.O noted that Assessee could not produce the bills for all the additions made by the Assessee. He accordingly considered the addition to fixed assets only to the extent of bills that were produced and on the remaining additions, the depreciation aggregating to Rs. 4,11,50,043/- on various assets were disallowed by him. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who after considering the submissions of the Assessee, the remand report from the A.O and on the assessee's reply to remand report deleted the addition made by the A.O by holding as under:-

2.6 I have carefully considered the entire facts on record, the findings and remand report of A.O., the submissions of the appellant, applicability of Rule 46A and comments on remand report of the appellant.

3 ITA No 1233/AHD/2011 . A.Y. 2007-08

The Assessee has claimed the depreciation on the additions of Plant & machinery and other assets. The addition to the Plant & machinery is Rs.14.17 crores and to the building is Rs. 3.69 crores. The amount of depreciation disallowed on additions to fixed assets works out to Rs.411.50 lacs which details are as under:-

The A.O. took the view that he would grant the depreciation on the value in respect of which invoices are produced. Thus he disallowed the depreciation as shown below:

Item Value on Bills Amount not Dep. Total Dep. which Dep. produced considered Disallowed Claimed Claimed i.e. for Dep. (including addition opening WDV) Building(A) Rs. Rs. 4386570 Rs. Rs. 3255438 Rs. 7108024 36940945 32554375 Plant & Rs. Rs. Rs. Rs. Machinery(B) 118197576 668221901 550024305 23554289 On boiler© 201829 Total(B+C) Rs. 23756088 ETP(D) Rs. Rs. 1846718 Rs. Rs. Rs. 23564537 21717819 14138517 14235805

(i) The A.O. considered the value of boiler at Rs. 46,44,000 as against Rs. 1,11,91,512 on the ground that invoices of only Rs. 46,44,000 were produced. He allowed 80% depreciation on Rs. 4644000 as against Rs. 3917029 claimed @ 35% of Rs. 1,11,91,512.

(ii) The A.O. has disallowed the depreciation on entire addition of ETP on the ground that no details have been brought on record.

As such the A.O. has disallowed substantial part of depreciation on the ground that all the Bills in respect of additions for fixed assets were not produced. The A.O. has also disallowed the depreciation in respect of machinery categorized as Effluent Treatment Plant which is eligible to depreciation @ 100% since category wise details (as per rules) were not provided, during assessment proceedings. The A.O. disallowed the depreciation amounting of Rs.-41150043/-. The appellant has filed an application for admission of additional evidence under rule 46A of I.T. Rules 1962 stating that it may be allowed to produce the Bills now because Bills are substantial pieces of evidence and in the interest of the justice, the appellant should be allowed to produce the same. The appellant has contended that show cause notice calling for various details including bills of additions to fixed assets exceeding Rs. 1.00 lac was issued by the A.O only on 16/11/2009 which was received after 2-3 days by the assessee in normal course. It is reiterated that the assessee was required to file many other details also and the time available was only 30 days. It was not possible for the assessee to file each and every bill as called upon by the A.O., in such short span of time allowed. The Affidavit of the Accountant Mr. Shailesh Kaiaria has been filed and put on the record.

2.6.1 The appellant further contended that the A.O. called for the Bills of items above Rs. 1.00 lakh only. However, at the time of finalizing the assessment, the A.O. has disallowed the depreciation in respect of all the bills irrespective of the bill amount below Rs. 1.00 lac. The appellant has also contended that as the bills above Rs. 1.00 lac were 4 ITA No 1233/AHD/2011 . A.Y. 2007-08 voluminous, it was requested to the A.O. to allow assessee to file the copy of invoices of above Rs. 2.00 lacs.

2.6.2 It was also argued before me, that the A.O. has made the piecemeal disallowances. The Plant & machinery of the assessee is self fabricated. The A.O. has not given any findings as to which machinery which is shown as put to use, was not ready because of the fact that some essential components / parts were not purchased. The stand taken by the A.O. has resulted in allowance of depreciation in respect of some component of machinery and disallowance in respect of some other component of the same machinery. Thus, there is inconsistency in the stand taken by the A.O. The A.O. has not given any finding that amount shown as invested in Plant & machinery has in fact been invested elsewhere. The Invoices are outside evidences. The Payment of most of the invoices are made by account payee cheques and therefore there is no manipulation possible. 2.6.3 In respect of ETP plant, the A.O. has disallowed the higher depreciation only on the ground that specific category-wise details of machinery as mentioned in the rules was not furnished. The Ld. A.R. strongly contended that the A.O. has not called for such specific details, during assessment proceedings.

The assessee is working in pollutant industry and has to set up pollution control plant. During the remand report the head wise details of various items as prescribed in the income tax rules along with the certificate of Mr. Verma who is working as environmental engineer with company is furnished.

2.6.4 In view of all the facts mentioned above, the A.O. was directed to verify the invoices produced by the appellant and her remand report was called for In the remand report, the A.O. has stated that except minor discrepancy of Rs. 500/- in one of the invoice, there is no other discrepancy in respect of other invoices produced before her. She has also stated that it is not possible for her to check each and every invoice and therefore remand report is submitted on the basis of random verification of voluminous invoices filed by the asessee.

The A.O. has further stated that simply by examining the invoices, it cannot be proved that machinery was in fact installed and was put to use.

2.6.5 The appellant has submitted the explanation to the Remand report. The Ld. A.R. submitted that the appellant has already filed the relevant certificate of its ETP Engineer before the A.O. mentioning the category wise Effluent treatment equipments installed by it during the year. In connection with the satisfaction of the user condition, the appellant has stated that in the original assessment order there is no finding of the A.O that the machinery was not put to use during the year. The disallowance of depreciation is only in respect of machinery components, the invoices of which, were not produced before A.O. Even during the remand Report proceedings no specific show cause notice was issued to the assessee asking whether the machinery & Building was put to use or not. The appellant has submitted before me that whatever details were called for were produced before the A.O. to enable her to submit the report.

2.6.6. The appellant also drawn my attention towards the fact that large portion of addition to plant and machinery is in respect of VS Plant. This fact was brought to the notice of the A.O. that VS plant started functioning at Khambhat during the year. The relevant Excise Registers were filed before the A.O. Similarly, another major portion of addition to plant & machinery is in respect of Textile 'Auxiliary at Sanand. The production in that plant also started during the current year and the assessee has filed 5 ITA No 1233/AHD/2011 . A.Y. 2007-08 the copy of the first invoice during the assessment proceeding. At the time of submission of the remand Report, the A.O. has not considered the vital pieces of evidence which were there on the record. I therefore, reject the argument of the A.O. that the machinery was not put to use during the year.

2.6.7 As regards, admission of the invoices as additional evidence, I find that these invoices are nothing but additional documents in support of books of account and the detail breakup of plant and machinery which was already filed before the A.O. The reliance placed by the appellant on C.I.T. V/s. Poddar Swadeshi Udyog 168 Taxman 182 (Gau.) is very apt in this connection.

In this case the Hon'ble Gauhati High Court held that section 250 of the Income-tax Act, 1961, read with rule 46A of the Income-tax Rules, 1962 - Commissioner (Appeals) - Procedure of - Assessment year 1992-93 - While- making assessment, Assessing Officer disallowed purchase of raw materials in respect of certain parties on account of failure of assessee to furnish purchase details - On appeal, Commissioner (Appeals) admitted additional evidence produced by assessee before him and deleted entire disallowance Tribunal upheld order of Commissioner (Appeals) observing that new details furnished by assessee were in continuation of original evidence produced before Assessing Officer - Whether since Assessing Officer was not given any opportunity to examine new details as provided in sub-rule (3) of rule 46A, there appeared to be an irregularity in- matter; however for that irregularity, it would not be in aid of justice to refer matter back to Assessing Officer again, as both Commissioner (Appeals) as well as Tribunal rendered concurrent findings of fact - Held, yes - Whether moreover, powers ot appellate authority are co-terminus with those of Assessing Officer and, therefore, Commissioner (Appeals) as well as Tribunal committed no error in law in considering additional evidence at appellate stage - Held, yes.

I also find that in v:ew of invoices being voluminous, time of 30 days to produce the copies of such invoices cannot be considered as sufficient as the assessee was required to file many other details also along with the Bills called for. Thus the sufficient opportunity was not given. In any case, here the issue involved is regarding allowance of depreciation which is statutory allowance and is to be allowed at a correct figure of investment in fixed assets. In view of this, it is necessary to admit the evidence to dispose- off the case, properly. In such cases, in view of Section 250 (5) I have got ample power to collect the necessary material and evidences which are necessary to dispose-off the case. I find that evidences now being produced are very much essential to dispose-off the case and to reach at the conclusion in effective manner. I therefore, admit the additional evidence produced during appellant proceedings. The reliance placed by the appellant on the case of Pari Mangaldas Ratilal rendered by Hon'ble Gujarat High Court 1977 CTR 647 Guj. and the recent unreported decision of Ahmedabad I.T.A.T. in the case of M/s. Trisun Commodities Ltd. is very apt in this regard.

I also find that the evidence now sought to be produced was not withheld willfully. 1 observe that the basic details and many invoices were already filed before A.O during assessment proceedings. Thus the decision of A.C.I.T. V/s. Hiromi Hirose 298 ITR (AT) 269 is also applicable. I have already given the opportunity to the A.O. regarding additional evidence and called for her comments.

2.6.8 The main reason for disallowance of depreciation was that the assessee has not produced all invoices of additions to fixed assets during assessment proceedings. 1 have 6 ITA No 1233/AHD/2011 . A.Y. 2007-08 already held that the invoices produced before me are admissible as additional evidence. In the remand report proceedings also the A.O has not noticed any major discrepancy in the additional evidences submitted by the appellant. I, therefore, held that depreciation disallowed by the A.O. cannot be sustained. The A.O. also disallowed the depreciation in respect of Pollution control equipments on the ground that, particular category-wise details as required under the rules were not filed. I have gone through the certificate of ETP Engineer of the company therein he has specified the rule wise heading of the plant and machinery. I'find that the company is in the chemical industry and therefore, it has to install the Pollution control equipments. I have perused the earlier assessment orders and the chart of the depreciation. It is seen that the appellant has"to make heavy capital expenditure in respect of Pollution control equipments. In the past also such expenditure has been considered as capital expenditure and higher rate of depreciation has been allowed. In view of all these facts, I find that there is no merit in disallowing the depreciation claim of the appellant.

I find that reliance placed by the Ld. A.R. on the various judicial decisions also supports the contention of the appellant. If the assets are even kept ready for use the depreciation is allowable.

I therefore, direct the A.O. to verify the details of additions to Plant & Machinery and Building which are already filed before her and to allow the depreciation to the appellant at the applicable statutory rates accordingly. The A.O should also consider and verify the details of pollution control equipments already filed before her and to allow the depreciation at the rate of 100% on the same accordingly. As such this ground of appeal is allowed.

6. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us.

7. Before us, ld. D.R. pointed to the findings of A.O and he further submitted that ld. CIT(A) was not justified in admitting additional evidence in violation of provisions of Rule 46A. He thus supported the order of A.O. On the other hand ld. A.R. reiterated the submissions made before ld. CIT(A) and supported his order.

8. We have heard the rival submissions and perused the material on record. We find that ld. CIT(A) for the reasons spelt out on the order and after relying on the decisions cited, admitted additional evidence under Rule 46A. Before 7 ITA No 1233/AHD/2011 . A.Y. 2007-08 us, ld. D.R. could not point out the illegality in admission of additional evidence by him. We further find that ld. CIT(A) after considering the submissions of the Assessee and other material on record has deleted his additions by a well reasoned and detailed order. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus the grounds of Revenue are dismissed.

Ground No. 3 is with respect to deletion of disallowance made u/s. 40A(2)(b).

9. During the course of assessment proceedings, A.O noticed that Assessee had paid Rs. 15,01,470/- to Jay Infra Trade Pvt. Ltd., a sister concern. A.O noted that Assessee has not given any justification and reasonableness of the payment made by it. He was further of the view that the onus was on the Assessee to prove the reasonableness and legitimate needs of the business for incurring of expenditure. He was of the view that in the absence of any justification, the service charges of Rs. 15,01,470/- paid by the Assessee to Jay Infra Trade was excessive to the extent of Rs. 14,03,005/-. He accordingly made an addition of the same u/s. 40A(2)(b) of the Act. . Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A). Ld. CIT(A) noted that identical issue arose in the case of Assessee for A.Y. 03-04 & 04-05 and the disallowances made by the A.O were deleted by CIT(A) and the order of CIT(A) was confirmed by Hon'ble ITAT. He further noted that in the absence of any new facts for sustaining the disallowance, the action of A.O cannot be upheld. He thus deleted the addition by holding as under:-

8 ITA No 1233/AHD/2011 . A.Y. 2007-08 3.2 I have carefully considered the findings of the A.O and the submission of theappellant. The A.O has disallowed major portion of amount paid to M/s. Jai Infra Trade Pvt.Ltd. as house keeping charges. The appellant explained that the payee company is providing composite services including the seating facilities to the staff of the appellant company. To provide the services the payee company has invested substantial amount in building, furniture, computer and is also incurring recurring expenses.

I find that in the past also the identical disallowance was made and was deleted by my predecessor. For A.Y. 2003-04 and 2004-05 the disallowance was deleted by CIT(A) and the said order has been confirmed by Hon'ble ITAT vide ITA No.l607/Ahd/2007- A.Y. 2003-04 and ITA No.4063/Ahd/2007 - A.Y. 2004-05. In view of the above facts I delete the disallowance as no new facts for sustaining the disallowance has been brought on record by the A.O. As such this ground of appeal is allowed.

10. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us.

11. Before us, ld. D.R. supported the order of A.O. On the other hand ld. A.R. reiterated the submissions made before ld. CIT(A) and supported his order.

12. We have heard the rival submissions and perused the material on record. We find that while deleting the disallowance made by A.O, ld. CIT(A) has noted that identical disallowance made by the A.O in earlier years was deleted by CIT(A) and order of ld. CIT(A) was also confirmed by Hon'ble Tribunal. Before us, Revenue has not brought any material on record to controvert the findings of ld. CIT(A) nor has brought any distinguishing feature of the case for the year under consideration with that of earlier years. We therefore find no reason to interfere with the order of ld. CIT(A) and thus this ground of Revenue is dismissed.

Ground No. 4 is with respect to deletion of disallowance of claim u/s. 80IA of the Act.

9 ITA No 1233/AHD/2011 . A.Y. 2007-08

13. During the course of assessment proceedings, A.O noticed that Assessee has claimed deduction of Rs. 1,56,87,215/- u/s. 80IA of the Act with respect to the generation of power and income from steam. A.O noticed that energy generated from steam has been considered as generation of power. He also noticed that the steam energy was used for captive consumption only and it is not an energy or source of power which was transmittable or can be fed in to the grid. He was therefore of the view that steam cannot be considered as power for the purpose of claiming deduction u/s. 80IA(4) of the Act. He accordingly disallowed the claim of deduction. Aggrieved by the order of A.O., Assessee carried the matter before ld. CIT(A) who after relying on the various decisions cited in the order held that Assessee is eligible for deduction by holding as under:-

4.3 I have carefully considered the facts of the case, submission of the appellant and findings of the A.O. The appellant has set up a Steam based power Plant in Cambay in respect of which the deduction U/s. 80IA is claimed. The required statutory audit reports for claiming the deduction are already filed before the A.O. The appellant explained during assessment proceedings as well as appellate proceedings that while calculating the profit, it has considered the value of the steam which is used after rotation of turbine, in its manufacturing process. The appellant has explained that steam is nothing but a form of power. The appellant has relied upon various judicial decision of I.T.A.T. Benches in this connection and also the decision of Gujarat High court under the Central Excise Law. The A.O. has on the other hand referred to the speech of the Finance Minister that U/s. 80IA, the intention of the legislature is to give the deduction to the unit which is generating power and the power in such case means Electric power and not any other power.

I find that various judicial pronouncement referred to by the appellant clearly holds that steam is a form of power and therefore, while considering the profit of the captive power plant, the value of the steam is to be considered. I also find that the recent decision of Mumbai bench in D.C.W. Ltd V/s. A.C.I.T. MUM 132 TTJ 442 /37 SOT 322 (Mum) 2010 10 ITA No 1233/AHD/2011 . A.Y. 2007-08 case has held that steam generated in the power plant is nothing but the bye-product and has got the direct connection with the Industrial undertaking and is therefore, to be considered for the purpose of working out the profit of Industrial undertaking. In the said decision, the Hon'ble ITAT has referred to the unreported decision of Madras High Court in the case of C1T V/s, TANFAC Industries Ltd. Therein the Madras High Court has also held that while working out the profit of Captive power plant, the value of the steam generated and used in the manufacturing process in other unit is to be taken into account. The SLP from the said decision has been dismissed by the Hon'ble Apex Court. In view of this decision, the disallowance cannot be made on the alleged and the imaginary intention of the legislature. If there is any ambiguity in law then only other tools of interpretation such as Finance Minister's speech etc. are to be referred to. Respectfully following the decisions of ITAT Benches end also the unreported decisions of Hon'ble Madras High Court referred to in the decision of D.C.W. LTD. (SUPRA) Mumbai Tribunal, I allow the deduction u/s. 80IA as claimed by the appellant. As such this ground of appeal is allowed.

14. Aggrieved by the aforesaid order of ld. CIT(A), Revenue is now in appeal before us.

15. Before us, ld. D.R. supported the order of A.O. On the other hand ld. A.R. reiterated the submissions made before A.O. & CIT(A) and further placed reliance on the decision at Mumbai Tribunal in the case of West Coast Paper Mills Ltd. vs. ACIT (2014) 52 Taxman.com 268 (Mum Tribunal) and also placed on record the copy of the aforesaid decision. He thus supported the order of ld. CIT(A).

16. We have heard the rival submissions and perused the material on record. We find that while deciding the issue in favour of the Assessee, ld. CIT(A) had relied on the various decisions including the decision of Madras High Court 11 ITA No 1233/AHD/2011 . A.Y. 2007-08 in the case of CIT vs. Tanfac Industries Ltd. He has also noted that SLP filed by the Revenue against the aforesaid decision of Madras High Court has been dismissed by Hon'ble Apex Court. Before us Revenue has not brought any contrary binding decision in its support not could controvert the findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus this ground of Revenue is dismissed.

17. In the result, the appeal of Revenue is dismissed.

Order pronounced in Open Court on 10 - 04 - 2015.

Sd/- Sd/- (SHAILENDRA Kr. YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad. TRUE COPY Rajesh

Copy of the Order forwarded to:- 1. The Appellant. 2. The Respondent. 3. The CIT (Appeals) - 4. The CIT concerned. 5. The DR., ITAT, Ahmedabad. 6. Guard File. By ORDER

Deputy/Asstt.Registrar ITAT,Ahmedabad