Omml-Jsc (Jv) Kameng, Jaipur vs Department Of Income Tax

Jh vkj-ih-rksykuh] U;kf;d lnL; ,oa Jh Vh-vkj-ehuk] ys[kk lnL; ds le{k BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM

vk;dj vihy la-@ITA No. 427/JP/2012 fu/kZkj.k o"kZ@Assessment Year : 2007-08

I.T.O. cuke M/s OMML-JSC (JV) Kameng, Ward 2(2), Jaipur. Vs. Om Tower, Church Road, M.I. Road, Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AAAJO 0083 B vihykFkhZ@Appellant izR;FkhZ@Respondent

jktLo dh vksj ls@ Revenue by : Shri Rajesh Ojha (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri B.V. Maheshwari (C.A.)

lquokbZ dh rkjh[k@ Date of Hearing : 17/03/2015 ?kks"k.kk dh rkjh[k@ Date of Pronouncement : 10/04/2015

vkns'k@ ORDER

PER: T.R. MEENA, A.M.

This is an appeal filed by the revenue against the order dated

16/02/2012 passed by the learned CIT(A)-I, Jaipur for A.Y. 2007-08.

The effective grounds of appeal are as under:-

"Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) is justified in

(i) treating the expenses of Rs. 2,07,45,500/- as Revenue Expenditure ignoring the fact that these

2 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

expenses were capital in nature as the same were incurred by the assessee on site development,

(ii) Deleting the disallowance of Rs. 23,71,650/- on account of deferred revenue expenses written off even when these expenditure were capital in nature."

2. The first ground of appeal is against treating the expenses of Rs.

2,07,45,500/- as revenue expenditure. The ld. Assessing Officer

observed that the return for A.Y. 2007-08 declaring total income of Rs.

30,92,420/- was filed on 26/10/2007, which was scrutinized U/s 143(3)

of the Income Tax Act, 1961 (hereinafter referred as the Act). M/s Om

Metals Ltd. + JSC(JV) Kameng is a joint venture concern of company

named Om Metals & Minerals Ltd. (Now Metals Infraprojects Ltd. and

JSC, Ukrein). There was a contract of designing, fabrication, erection

and commissioning of Pen Stock Steel Liner of Hydro Mechanical goods

and equipments under Kameng Arunachal Pradesh Project, issued by

North Eastern Electric Power Corpn. Ltd, New Colony, Shilong. For

entering into the said contract, Om metals and JSC entered into a

Memorandum of Understanding called Consortium Agreement which can

also been termed as Joint Venture (JV) Agreement. On verification of

P&L account of the assessee, the ld Assessing Officer found that the

assessee had claimed deferred revenue expenditure written off 3 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

amounting to Rs. 23,71,650/-. He called for details of deferred revenue

expenditure, which were explained by the assessee that it engaged in

the execution of long term project, the expenditure relates to previous

years revenue expenditure, which has been written off w.e.f. F.Y. 2006-

07, being the first year when the sales of the project had been booked.

The Assessing Officer further asked to give the details, which was

replied by the assessee vide letter dated 18/11/2009. After considering

the assessee's reply, the Assessing Officer observed that it incurred Rs.

2,07,45,500/- on site expenses which were found in capital in nature

rather than revenue. The total duration of the project is 51 months and

as such the claim of the assessee for writing off the revenue

expenditure over a period of 10 years was not justified. The assessee

again filed the reply vide letter dated 29/12/2009 before the Assessing

Officer. The Assessing Officer held that these expenses were

preoperative project expenses and assessee's claim for the entire

expenses was deferred revenue expenses were not in order. Out of

total expenditure incurred up to 31/3/2006 amounting to Rs.

2,37,16,498/-, the amount of Rs. 2,07,45,500/- was not revenue but

capital in nature. Thus, the expenses had been incurred by the assessee

on development of site. Even though, the land on which these expenses 4 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

had been incurred did not belong to the assessee but the expenditure

had been made to create assets, which were clearly enduring in nature.

As such it held that the expenses of Rs. 2,07,45,500/- was capital

expenditure and only the balance of Rs. 29,70,998/- were revenue in

nature when he held the expenses as capital in nature. He allowed

depreciation @ 10% i.e. Rs. 20,74,550/-. It is further held that the

assessee's claim in respect of write off of these expenses over a period

of 10 years is not proper as the total project period as per contract

awarded was 51 months. It is further held that the correct way for

claiming these pre-operative revenue expenses is to bifurcate the same

on the basis of billing made to the extent of Rs. 86,85,663/-, which was

negligible as compared to the total project cost of Rs. 2,36,13,65,551/-.

Pre-operative project revenue expenses can be charged to the P&L

account only on the basis of its billing during the year in proportion to

the total project cost. This worked out to Rs. 10,927/-.

3. Being aggrieved by the order of the Assessing Officer, the

assessee carried the matter before the learned CIT(A), who had allowed

the appeal by observing as under:-

5 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

"4.3 I have carefully perused the order of the A.O. and submissions of the AR and concur with the submissions of the AR on the following grounds:

1. Facts of the case are that the appellant entered into a joint venture for design, fabrication and errection of Kameng Hydro Electric Project at Arunachal Pradesh for North Eastern Electric Power Corporation Limited. The joint Venture consortium agreement was signed with JSC "Ukrhydromech", Ukraine. The approximately value of the contract work was Rs. 2,36,13,65,551/- and approximate time of completion of work was 51 months.

The agreement with NEEPCO was signed on 22 December, 2004.

2. As per submission the terrain was hostile and to even initiate the work of installing the Hydro Electric Project, the appellant had to clear forests, construct roads, cut the hills to reach the site. The expenses incurred on this was treated as deferred revenue expenditure by the appellant.

3. As per the contract signed with NEEPCO, it is seen that the contractor, that is the appellant was required to perform the work of construction of Hydro Mechanical equipments under Kameng Hydro Electric Project, 6 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

Arunachal Pradesh and after completion of the said work to hand over the same to NEEPCO and leave. It did not have any continuing right in the assets created for NEEPCO. Thus, the expenditure incurred by the appellant to reach the site where the work had been commissioned to it could not be treated as capital expenditure because no asset was created for the enduring benefit of the appellant. Though enduring benefit may have accrued to the government of Arunachal Pradesh for the operation of the Kameng Hydro Electric Project the nature of the expenditure in the hands of the appellant remained revenue. Thus the finding of the A.O. that the expenditure incurred by the appellant of Rs. 2,07,45,500/-was capital in nature is not upheld.

4. Regarding the treatment of this expenditure as deferred revenue expenditure over the period of the 10 years it is seen that the Income Tax Act does not recognize the concept of "deferred revenue expenditure" per se. However, section 37(1) of the Income Tax Act governs the question of allowability of any expenditure as follows:-

(a) Paid out wholly and exclusively for the purpose of the business or profession and further

(b) Must not be-

7 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

(i) Capital expenditure;

(ii) Personal expense; or (iii) An allowance of the character described in Section 32 to 36.

I have already held this expenditure to be revenue in nature as per the discussion above. It is clearly not a personal expense of the appellant. Once the expenditure is treated as revenue whether to treat it as deferred revenue represents a management decision in view of the magnitude of the expenditure involved. Reliance is placed on the following case laws wherein the above issue was addressed directly and the decision has consistently been in favour of the assessee. :- Amar Raja batteries Ltd. Vs. ACIT (2004) 91 ITD 280 (Hyd) :- JCIT Vs. Modi Olivetti Ltd. (2005) 4 SOT 859 (Delhi) :- Hero Honda Motors Ltd. Vs. JCIT (2005) 3 SOT 572 (Delhi).

:- Charak Pharmaceuticals Vs. JCIT (2005) 4 SOT 393 (Mumbai).

The arguments universally recognized and affirmed among all the above judgments is that "where any expenditure is treated as a "Deferred revenue Expenditure", it presupposes that the concerned expenditure, creating benefit is in the Revenue filed and is a revenue expenditure, but considering its enduring 8 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

benefits as well as the fact that it does not result in the creation of any new asset or advantage of enduring nature in the Capital filed, the same is required to be treated distinctly from Capital Expenditure. By following the above line of argument the various Benches of the Tribunal have unanimously upheld the allowability of such Deferred Revenue Expenditure as revenue Expenditure.

To conclude, it is held that the expenditure of Rs. 2,07,45,500/- incurred by the appellant did not result in creation of any identifiable capital asset for it. The expenditure was essentially revenue in nature and it was the management's decision to amortise it in the books for the duration of 10 years. This decision of the management does not require interference from the income tax department as per the case laws relied on above. Whether there were amortised for the period of 51 months (period of contract) or 10 years was essentially a management decision which did not vitiate the claim of expenditure since it was revenue in nature. In view of the above discussion the claim of the assessee of deferred revenue expenses of Rs. 23,71,650/- is allowed."

9 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

4. Now the Revenue is in appeal before us. The learned D.R.

vehemently supported the order of the Assessing Officer.

5. At the outset, the learned A.R. for the assessee submitted that no

assets have been created by incurring expenditure on site. These

expenses were incurred by the appellant to reach the site where the

work had been commissioned to it because no assets was created for

enduring benefit of the appellant. He further supported the order of the

ld CIT(A). The Ld. AR again relied upon the case laws referred to the

CIT(A) during the course of assessment proceedings and argued that

these expenses are wholly and exclusively incurred for the business

purposes and allowable U/s 37 of the Act.

6. We have heard the rival contentions of both the parties and

perused the material on record. The Ld. CIT(A) has examined this issue

in detail and these expenses were incurred to remove the forest and

development of the site. The facilities/expenditure incurred on land

does not belong to the assessee. The assessee did not have any

continuing right in the assets created for NEEPCO. The DR had not

controverted the finding given by the Ld. CIT(A). She has also relied on

the various case laws referred on page 5 of her order. It is a fact that 10 ITA 427/JP/2012_ ITO Vs. M/s OMML-JSC(JV) Kameng

under the Income Tax law does not recognize the concept of deferred

revenue expenditure. The expenses allowed U/s 37(1) of the Act should

be revenue and not the capital expenditure, personal expenses and

allowable U/s 32 and 36 of the Act. Therefore, we uphold the order of

the Ld. CIT(A).

7. In the result, the revenue's appeal is dismissed.

Order pronounced in the open court on 10/04/2015.

Sd/- Sd/- ¼vkj-ih-rksykuh½ ¼Vh-vkj-ehuk½ (R.P.Tolani) (T.R. Meena) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated 10th April, 2015 *Ranjan

vkns'k dh izfrfyfi vxzsf'kr@Copy of the Order forwarded to:

1. vihykFkhZ@The Appellant- I.T.O., Ward 2(2), Jaipur..

2. izR;FkhZ@ The Respondent- M/s OMML-JSC (JV) Kameng, Jaipur.

3. vk;dj vk;qDr@ CIT

4. vk;dj vk;qDr@ vk;dj vk;qDr¼vihy½@The CIT(A)

5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur

6. xkMZ QkbZy@ Guard File (ITA No. 427/JP/2012).

vkns'kkuqlkj@ By order,

lgk;d iathdkj@Asst. Registrar