Micron Instruments Pvt. Ltd., New Delhi vs Department Of Income Tax

PER CHANDRAMOHAN GARG, J.M.

This appeal has been filed by the revenue against the order of the

CIT(A)-IX, New Delhi dated 25.11.2011 in Appeal No.26/10-11 for AY

2008-09. Although the revenue has raised as many as five grounds in this

appeal but except main ground no. 2, other grounds are argumentative and

supportive to the main ground no. 2 which reads as under:-

"2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in allowing the deduction of interest of Rs.1,36,17,335/- as revenue expenditure even though the same was never claimed by the assessee in the return of income."

1 ITA No.1227/Del/2012 Asstt.Year: 2008-09 2. Brief facts giving rise to this appeal are that the assessee company

was engaged in the business of manufacturing of precision instruments

mainly for the Ministry of Defence, Govt. of India, British Aerospace, UK and

for GE med. The assessee filed a return of income of Rs.27.9.2008 declaring

an income of Rs.3,97,79,640 and the same was processed u/s 143(1) of the

Income Tax Act, 1961. Subsequently, the case was selected for scrutiny

through CASS and statutory notices u/s 143(2) of the Act and 142(1) of the

Act, along with detailed questionnaire, were served on the assessee. The

AO noticed that the assessee paid Rs.2,66,97,900 towards permission from

the Government under a new policy allowed the land to be used for any

other purpose besides running a factory including the commercial/service

activities on payment of certain amount. The said amount of instalment

was inclusive of interest of Rs.1,36,17,335/-. The AO also noticed that the

assessee did not make claim in the return of income but later put forth the

claim of interest as revenue expenditure though a letter filed during the

assessment proceedings as it was not claimed in the profit and loss

account. The AO after detailed deliberations held that the amount of

instalment inclusive of interest was capital in nature and cannot be allowed

as revenue expenditure to the assessee. The AO also observed that the

claim of revenue expenditure pertaining to interest paid in the instalment

had not been made in the return, therefore, the same is not allowable.

2 ITA No.1227/Del/2012 Asstt.Year: 2008-09

3. Being aggrieved by the above assessment order, the assessee

preferred an appeal before the CIT(A) which was allowed on this issue.

Now, the aggrieved revenue is before this Tribunal with the main ground as

reproduced hereinabove.

4. We have heard arguments of both the sides and carefully perused the

relevant material placed on record before us. Ld. DR submitted that in view

of decision of Hon'ble Supreme Court in the case of Goetze (India) Ltd.

vs CIT 284 ITR 323 SC, the AO is not empowered to entertain any claim of

the assessee which could not be placed in the return of income or by way of

a revised return. Ld. DR further submitted that the CIT(A) erred in

allowing the deduction of interest as revenue expenditure even though the

same was never claimed by the assessee, either in the return of income or

by way of revised return of income. Ld. DR further contended that the

assessee could have claimed it by way of a revised return during the course

of assessment proceedings only and CIT(A) was not empowered to allow

the same during the first appellate proceedings. Ld. DR vehemently

contended that the CIT(A) was not justified in allowing the interest as

revenue expenditure even though the same has been incurred in respect of

capital asset as per facts and circumstances of the case. Ld. DR finally

prayed that the impugned order may be set aside by restoring that of the

AO.

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5. Replying to the above, ld. Counsel of the assessee supporting the

impugned order submitted that in the case of Goetze (India) Ltd. vs CIT

(supra), the Hon'ble Apex Court did not impinge on the power of the

Tribunal and the first appellate authority. Ld. Counsel further contended

that the asset was already in existence and the business of the assessee was

running from the same factory, therefore, the interest paid along with

instalment towards conversion charges of land cannot be capitalized. Ld.

Counsel has further drawn our attention and submitted that the payment of

interest on the instalment of principal amount in this case is akin to the

payment of the same on loans taken for the acquisition of fixed assets like

vehicle, machinery etc. and, therefore, interest paid on loans taken for fixed

asset is allowable as revenue expenditure.

6. On careful consideration of above rival submissions, at the outset, we

note that the CIT(A) allowed the appeal of the assessee on this issue with

following observations, findings and conclusion:-

" 4.10 I have considered the findings recorded by the Id. AO as per the assessment order, the submissions made by the Id. AR and the facts of the case on record. The main issue is as to whether the interest of Rs.1,36,17,335/- is revenue or capital in nature? As explained above it is admitted that the interest was paid in respect of the conversion charges payable for the land, where the only factory of the Appellant from which the business is carried on and continues to be carried on till date, is situated. The amount of conversion charges have already been capitalized and the issue at hand is only as regards the allowability of the interest paid on the installments of the 4 ITA No.1227/Del/2012 Asstt.Year: 2008-09

principle amount. The Appellant submitted that the appellant's factory is situated on the Industrial site no 143 B in Industrial Area Phase I Chandigarh. The Chandigarh U.T. Administration under a new policy allowed the land to be used for any other purpose besides running a factory including the commercial/service activities on payment of a certain sum of money. As it was a scheme open for a fixed time, the Appellant thought it commercially prudent to avail of the scheme. The Appellant decided to opt for the scheme as it would give it greater flexibility to add additional area in the factory for its office and other use. There was no plan for demolishing or stopping the operation of the factory at the aforesaid land and the production is continuing from the same place till date. It is pertinent to note that the Appellant's business is in existence and the very land for which conversion fee was paid is the only manufacturing/ production facility of the Appellant from where the business is being run for the last over 30 years.

4.11 The capitalization of the conversion charges was made as the land is capable of being used for commercial and other purposes. But as the asset is already in existence and the business is running from the same very factory, the interest paid cannot be capitalized. Instead it IS a revenue expense and hence the sum of Rs.1,36,17,335/- is allowed to be deducted from the total income. The payment of interest on the installments of principle amount in this case is akin to the payment of the same on loans taken for acquisition of fixed assets like vehicles, machinery, etc. When the interest paid on loans taken for fixed assets, is allowed as revenue expenditure, I see no reason as to why the same should be treated of capital in nature on the case under consideration. It is trite that notwithstanding treatment of a particular item in the books of account, whether the expense is revenue or not has to be decided on the nature of the expense. Therefore, even though said interest amount was capitalized in the books of account erroneously, which was later rectified in the books of account during financial year 2009- 10, the nature of the expense is revenue and the same is a deductible expenditure. The AO is, therefore, directed to allowed the claim of Rs.1,36,17,335/- on account of interest

5 ITA No.1227/Del/2012 Asstt.Year: 2008-09

made by the appellant. The ground no. 2 is accordingly allowed to the appellant."

7. Under peculiar facts and circumstances of the present case and the

conclusion of the CIT(A), as mentioned hereinabove, it is not in dispute that

the assessee paid instalment towards conversion charges of land and the

asset was already in existence and the business of the assessee was running

from the very same factory premises. Ld. Counsel of the assessee fairly

accepted that the assessee neither made any claim in the original return nor

filed any revised return and the interest was also not found placed in the

P&L account but the assessee pressed his claim by way of letter filed before

the AO during the assessment proceedings. In view of decision of Hon'ble

Apex Court in the case of Goetze (India) Ltd. vs CIT (supra), the AO is not

empowered to entertain any claim out of return of income which could not

find place in the original return of income or otherwise than by revised

return but in the same decision, Hon'ble Apex Court made it clear that this

did not impinge on the power of the Tribunal. However, we are of the

considered opinion that since the asset i.e. factory premises was already in

use of assessee, therefore, the interest paid along with instalment towards

conversion of charges of land cannot be treated as capital expenditure and

the same cannot be held to be capital expenditure. Thus, we are of the

opinion that the CIT(A) was right in holding that the interest expenditure

6 ITA No.1227/Del/2012 Asstt.Year: 2008-09

cannot be capitalized and the same was allowable as revenue expenditure.

Accordingly, we are of the considered opinion that the CIT(A) was right in

allowing the appeal of the assessee on this issue and we are unable to see

any ambiguity, infirmity or any other valid reason to interfere with the

order of the CIT(A).

8. In the result, the appeal of the revenue is dismissed.

Order pronounced in the open court on 27.01.2015.

Sd/- Sd/-

(G.D. AGRAWAL) (CHANDRAMOHAN GARG) VICE PRESIDENT JUDICIAL MEMBER

DT. 27th JANUARY 2015 'GS'

Copy forwarded to:-

1. Appellant 2. Respondent 3. C.I.T.(A) 4. C.I.T. 5. DR By Order

Asstt. Registrar

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