M/s. Madhav Steels, Bhavnagar v. The ACIT., Circle-2,, Bhavnagar

ITA 1356/AHD/2006 | 2002-2003
Pronouncement Date: 09-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 135620514 RSA 2006
Assessee PAN AADFM3387M
Bench Ahmedabad
Appeal Number ITA 1356/AHD/2006
Duration Of Justice 3 year(s) 10 month(s) 14 day(s)
Appellant M/s. Madhav Steels, Bhavnagar
Respondent The ACIT., Circle-2,, Bhavnagar
Appeal Type Income Tax Appeal
Pronouncement Date 09-04-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 09-04-2010
Date Of Final Hearing 06-04-2010
Next Hearing Date 06-04-2010
Assessment Year 2002-2003
Appeal Filed On 26-05-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL : A BENCH : AHMEDABAD (BEFORE HONBLE SHRI T.K. SHARMA J.M. & HONBLE SH RI A.N. PAHUJA A.M.) I.T.A. NO. 1356/AHD./2006 ASSESSMENT YEAR : 2003-2004 M/S. MADHAV STEELS BHAVNAGAR -VS.- ASSISTANT COMMISSIONER OF INCOME TAX (PAN : AADFM 3387 M) CIRCLE-2 BHAVNAGAR (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SANJAY R. SHA H C.A. RESPONDENT BY : SHRI ANAND MOHAN SR . D.R. O R D E R PER SHRI T.K. SHARMA JUDICIAL MEMBER : THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE O RDER DATED 31.03.2006 OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-XVIII AHMEDABA D FOR THE ASSESSMENT YEAR 2003-04 ON THE FOLLOWING GROUNDS :- (1) THE ASSESSMENT ORDER IS BAD IN LAW. (2) THE LEARNED A.O. HAS ERRED ON FACTS AND IN LAW IN T REATING RS.5 34 600/- BEING TRANSFER EXPENSES OF THE PLOT A S CAPITAL EXPENDITURE AS AGAINST REVENUE EXPENSES CLAIMED BY THE APPELLANT AND THE LD. CIT.(A) IN CONFIRMING THE SAME. (3) WITHOUT PREJUDICE TO ABOVE LD. CIT.(A) ERRED IN LA W AS WELL AS ON FACTS IN DISALLOWING DEPRECIATION ON TRANSFER FEE O F RS.5 34 600/- THEREBY ENHANCING THE ASSESSMENT. (4) THE LD. A.O. HAS ERRED ON FACTS AND IN LAW IN DISAL LOWING THE DEDUCTION U/S. 80IA OF RS.2 76 568/- BY NOT CONSIDE RING THE SHIP BREAKING ACTIVITY AS MANUFACTURING ACTIVITY AND THE LD. CIT.(A) IN CONFIRMING THE SAME. 2. GROUND NO. 1 OF THIS APPEAL IS GENERAL IN NATURE AND THEREFORE NEEDS NO ADJUDICATION. 3. THE FACTS RELATING TO CONTROVERSY INVOLVED IN GR OUNDS NO. 2 & 3 OF THIS APPEAL ARE THAT FOR THE PURPOSE OF ACQUIRING SHIP BREAKING RIGHTS IN PL OT NO. 33 AT ALANG SHIP BREAKING PLOT FROM GMB WHICH WAS EARLIER HELD BY M/S. TAWAWALA METAL INDUSTRIES (P) LTD. THE ASSESSEE HAD 2 ITA NO. 1356/AHD/200 6 MADE PAYMENT OF RS.5 34 600/- AS TRANSFER FEE TO GM B IN ADDITION TO PAYMENT OF PREMIUM OF RS.19 30 906/-. THE A.O. TREATED THE PAYMENT OF RS. 5 34 600/- AS CAPITAL EXPENDITURE INCURRED IN CONNECTION WITH ACQUISITION OF RIGHTS TO USE PLOTS FROM GMB AND ACCORDINGLY ALLOWED DEPRECIATION UNDER SECTION 32 ON THIS AMOUNT DISAL LOWING THE ASSESSEES CLAIM OF TRANSFER FEE AS REVENUE EXPENDITURE. 4. ON APPEAL IN THE IMPUGNED ORDER THE LEARNED CO MMISSIONER OF INCOME TAX(APPEALS) UPHELD THE ACTION OF A.O. ON THE GROUND THAT EXPEND ITURE IN QUESTION WAS INCURRED FOR THE PURPOSE OF ACQUISITION OF RIGHTS TO CARRY ON THE BU SINESS OF SHIP BREAKING AT PLOT NO. 33 WHICH OTHERWISE WAS NOT PERMISSIBLE AND HENCE NOT POSSIBL E TO UNDERTAKE. ACCORDING TO LD. CIT(A) BY SECURING THE PERMISSION FROM GMB ON GETTING THE PER MISSION TRANSFERRED FROM THE PREVIOUS PERMISSION HOLDER THE ASSESSEE HAS ACQUIRED THE AP PARATUS OF BUSINESS. THIS ONE TIME PAYMENT FOR SECURING THE PERMISSION IS OF CAPITAL NATURE AN D NOT DEDUCTIBLE AS REVENUE EXPENDITURE. AGGRIEVED BY THIS ORDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) THE ASSESSEE IS IN APPEAL BEFORE US. 5. AT THE TIME OF HEARING BEFORE US ON BEHALF OF A SSESSEE SHRI SAJAY R. SHAH C.A. APPEARED AND CONTENDED THAT IN THE IMPUGNED ORDER THE LEARN ED COMMISSIONER OF INCOME TAX(APPEALS) HAS RELIED ON THE DECISION OF THE HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF M/S. R.S. RADHAKISHAN KAPOOR VS.- CIT [47 ITR 938] AND ANOTH ER JUDGMENT OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF M/S. HOTEL RAJMAHAL [152 ITR 218]. THE LD. COUNSEL CONTENDED THAT THE FORMER JUDGMENTS RELATE TO PAYMENT MADE BY ONE PART NER TO OTHER PARTNER SO THAT THE OTHER PARTNER MAY BECOME THE SOLE OWNER OF THE SHOP. BUT THE ISSU E IS IN RESPECT OF ACQUISITION OF LEASEHOLD RIGHTS. THE LD. COUNSEL OF THE ASSESSEE SUBMITTED T HAT BOTH THESE DECISIONS ARE NOT APPLICABLE TO THE FACTS OF ASSESSEES CASE. IN SUPPORT OF THIS T HE LD. COUNSEL OF THE ASSESSEE RELIED ON THE DECISION OF THE ITAT RAJKOT BENCH IN THE CASE OF J CIT VS.- KAPOORCHAND BANSAL REPORTED IN (2004) 88 TTJ (RAJKOT) 379 AND CONTENDED THAT THE O RDER OF LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ON THIS ISSUE BE DELETED. 6. ON THE OTHER HAND SHRI ANAND MOHAN SR. D.R. AP PEARED ON BEHALF OF THE REVENUE CONTENDED THAT BY ACQUIRING THE PERMISSION TO UTILI ZE PLOT NO. 33 AT ALANG SHIP BREAKING YARD 3 ITA NO. 1356/AHD/200 6 FROM M/S. TAWAWALA METAL INDUSTRIES PVT. LTD. THE ASSESSEE HAS ACQUIRED CAPITAL ASSET THEREFORE TRANSFER FEE PAID IS NOT ALLOWABLE AS REVENUE EXPEN DITURE. 7. HAVING HEARD BOTH THE SIDES WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT ITAT RAJKOT BE NCH IN THE CASE OF JCIT VS.- KAPOORCHAND BANSAL (SUPRA) AFTER EXAMINING THE RELEVANT PROVISI ONS OF GMB ACT 1981 TOOK THE VIEW THAT TRANSFER FEE IS ALLOWABLE AS REVENUE EXPENDITURE. T HE RELEVANT DISCUSSION IS CONTAINED IN PARAS 6 7 & 8 OF THE SAID DECISION OF ITAT READS AS UNDER : - 6. WE HAVE GIVEN OUR CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND THE MATERIAL ON RECORD IS NO DEPUTE OVER THE FACT THAT THE ASSESSE E HAS OBTAINED PERMISSION TO USE THE PLOT UNDER A STATUE (GMB ACT 1981) PROMULGATED BY THE GOVERNME NT OF GUJARAT THE TERMS AND CONDITIONS ON WHICH THE ASSESSEE IS REQUIRED TO USE THE PLOT ARE CLEARLY SPELT OUT UNDER THE GMB ACT. THUS WHATEVER THE ASSESSEE IS SUPPOSED TO DO OR NOT TO D O IS AS PER THE STATUTORY REQUIREMENTS. IT IS NOT DISPUTED THAT PERMISSION TO USE THE PLOT IS FOR A P ERIOD OF 10 YEARS. AT THE END OF THE SAID PERIOD T HE ARRANGEMENT AUTOMATICALLY TERMINATES WITHOUT ANYTHI NG BEING DONE BY THE GMB IN THIS REGARD UNLESS THE ARRANGEMENT IS RENT WED WITHIN 3 MONTHS PRIOR TO THE DATE OR EXPIRY OF THE PERMISSION PERIOD. THE PREMIUM TO BE PAID BY THE ASSESSEE IN T HREE INSTALMENTS IS SPREAD OVER 18 MONTHS AND THE SAME IS AS PER THE PROVISIONS OF THE AFORESAID STATUTE. AS PER THE TERMS IN THE STATUTE THE ASSESSEE IS REQUIRED TO PAY 25 PER CENT OF THE PREM IUM IN THE VERY FIRST YEAR. IT IS THIS PAYMENT WHIC H HAS BEEN CLAIMED TRY THE ASSESSEE AS REVENUE EXPEND ITURE WHICH THE AO HAS DISALLOWED AND HAS GRANTED DEDUCTION ONLY OF 1/10 TH OF THE TOTAL PREMIUM AMOUNT. IT IS NOT CLEAR FROM THE ASSESSMENT ORDER AS TO WHETHER THE AO HAS TREATED THE IMPUGNED EXPENDITURE AS CAPITAL EXPENDITURE OR AS DEFERRED REVENUE EXPENDITURE WHATEVER MAY BE THE C ASE AS PER THE AO IT APPEARS THAT HE HAS SPREAD THE PREMIUM AMOUNT OVER A PERIOD OF 10 YEARS ON THE PRINCIPLE OF MATCHING COST CONCEPT HOWEVER THE CIT(A) HAS DECIDED THE ISSUE BY PRESUM ING THAT THE AO HAS TREATED IT AS CAPITAL EXPENDITURE. 7. FIRSTLY AS REGARDS THE MATCHING COST CONCEPT UNDOUBTEDLY MARCHING COST CONCEPT IS ONE OF THE FUNDAMENTAL PRINCIPLES OF ACCOUNTANCY. UNLESS T HE COSTS ARE DIRECTLY CO-RELATED WITH THE REVENUE IT HAS EARNED NO TRUE PROFIT CAN BE ARRIVED AT. TH IS IS ABSOLUTELY TRUE AS REGARDS TRADING BUSINESS AND MANUFACTURING ACTIVITIES. HOWEVER THERE ARE CE RTAIN ACTIVITIES WHERE THE COSTS CANNOT BE DIRECTLY CO-RELATED WITH THE REVENUE R AS AN ILLUSTRATION. IN CASE OF CONSULTANCY FIRMS AT TIMES IT BECOMES DIFFICULT TO MATCH THE COST DIRECTLY WITH T HE REVENUE. CONSULTANCY SERVICES MAY SPREAD OVER MARE THAN A YEAR AND OF A NUMBER OF PROJECTS. THERE MAY BE CERTAIN COSTS COMMON TO ALL THE PROJECTS. THE EFFORTS PUT IN FOR VARIOUS PROJECTS M AY BE VARYING- THE REVENUE EARNED FROM SUCH CONSULTANCY SERVICES MAY NOT BE DIRECTLY PROPORTION ATE TO THE EFFORTS PUT IN A PARTICULAR YEAR. UNDER SUCH CIRCUMSTANCES IT BECOMES DIFFICULT TO MATCH T HE COST WITH THE REVENUE. SIMILAR IS THE CASE OF A SHIP BREAKING ACTIVITY. SHIP BREAKING ACTIVITY CANN OT BE EQUALED WITH A STANDARDISED MANUFACTURING THE BREAKING OF A SHIP HAS MANY IFS AND BUTS AND IT MAY SPREAD OVER M AN INDEFINITE TUNE. THE REVENUE EARNING PROCESS IS ALSO NOT CERTAIN. THEREF ORE TO APPLY MATCHING COST CONCEPT TO A SHIP BREAKING ACTIVITY MAY NOT BE ABSOLUTELY CONDUCTIVE. THEREFORE TO DISALLOW PART OF THE PREMIUM MERELY BECAUSE MATCHING COST CONCEPT HAS TO BE FOLL OWED IS NOT JUSTIFIABLE 8. LET US NOW EXAMINE WHETHER THE EXPENDITURE IS O R' CAPITAL NATURE OR NOT. IN BOTH THE CASES THE ASSESSEES WERE UTILIZING THE PLOT PRIOR TO THE COMMENCEMENT OF THE GMB ACT. IN ORDER TO ORGANIZE THE SHIP BREAKING ACTIVITY THE GMB ACT A S PROMULGATED AND FOR THE EXISTING PLOT HOLDERS A SPECIAL DEVISED UNDER THE ACT- THEREFORE BY OBTA INING THE PERMISSION TO USE THE PLOT FOR A PERIOD OF 10 YEARS WHAT THE ASSESSEE DID WAS MERELY PRESE RVE AND PROTECT HIS EXISTING FACILITIES FOR THE PURPOSE OF HIS BUSINESS. BY OBTAINING THE PERMISSIO N TO USE THE PLOT THE ASSESSEE HAS NOT ACQUIRED ANY CAPITAL ASSET. THE PERMISSION IS FOR A SHORT PE RIOD OF 10 YEARS. THE ASSESSEE CANNOT TRANSFER HIS RIGHT TO USE THE PLOT TO ANY OTHER PERSON THE ASSE SSEE CANNOT CARRY ON ANY ACTIVITY OTHER THAN SHIP 4 ITA NO. 1356/AHD/200 6 BREAKING ON THE SAID PLOT. THE ASSESSEE DOES NOT AC QUIRE ANY RIGHT TITLE OR INTEREST OVER THE PLOT. T HE ASSESSEE EVEN IS DEEMED TO BE NOT IN THE POSSESSION OF THE PLOT. ALL THESE FACTORS GO TO SHOW THAT BY PAYING THE PREMIUM THE ASSESSEE HAS MERELY FACILITA TED THE OPERATIONS OF HIS BREAKING BUSINESS NO ADVANTAGE OF ENDURING NATURE IS OBTAINED. IN THIS C ONNECTION THE OBSERVATION OF THE SUPREME COURT M THE CASE OF BOMBAY STEAM NAVIGATION CO. P. LTD. V S. CIT (1965) 56 ITR 52 (SC) ARE QUITE PERTINENT. IT HAS BEEN OBSERVED THAT IF THE OUT GOI NG OR EXPENDITURE IS SO RELATED TO THE CARRYING ON OR CONDUCT OF THE BUSINESS THAT IT MAY BE REGARDED AS AN INTEGRAL PART OF THE PROFIT EARNING PROCESS AND NOT FOR ACQUISITION OF AN ASSET OR A RIGHT OF A PER MANENT CHARACTER; THE POSITRON OF WHICH JS A CONDITION TO THE CARRYING ON OF THE BUSINESS THE E XPENDITURE MAY BE REGARDED AS REVENUE EXPENDITURE. THEREFORE M VIEW OF THE FOREGOING DIS CUSSION AND PARTICULARLY M THE LIGHT OF THE PROVISIONS OF GMB ACT WE ARE OF THE CLEAR VIEW THA T THE EXPENDITURE INCURRED BY THE ASSESSEE IS OF REVENUE NATURE. IT MAY ALSO BE OBSERVED THAT THE LI ABILITY TO THE ASSESSEE ACCRUES AS PER THE TERMS IN THE STATUTE AND HENCE THE DEDUCTION HAS TO BE ALLOW ED IN THE YEAR IN WHICH THE ACCRUAL TAKES PLACE. WE UPHOLD THE ORDER OF THE CIT{A) DELETING THE THE DISALLOWANCE OF RS 9 11 250 IN BOTH THE CASES. 7.1. IN OUR OPINION THE CONTROVERSY INVOLVED IN TH IS GROUND OF APPEAL IS SQUARELY COVERED BY THE AFORESAID DECISION OF ITAT RAJKOT BENCH IN THE CASE OF JCIT VS.- KAPOORCHAND BANSAL (SUPRA). WE THEREFORE FOLLOWING THE SAME DIRECT T HE ASSESSING OFFICER TO ALLOW THE TRANSFER FEE PAID BY THE ASSESSEE AS REVENUE EXPENDITURE. RESULT ANTLY GROUND NO. 2 IS ALLOWED 8. WITH REGARD TO GROUND NO. 3 THE LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT IN CASE TRANSFER FEE IS ALLOWED AS REVENUE EXPENDITURE IN THAT EVENT THIS GROUND OF APPEAL WILL RENDER INFRUCTUOUS. IN PARA 7.1 ABOVE (SUPRA) WE HAVE DIR ECTED THE ASSESSING OFFICER TO ALLOW TRANSFER FEE PAID BY THE ASSESSEE AS REVENUE EXPENDITURE. TH EREFORE THIS GROUND OF APPEAL IS RENDERED INFRUCTUOUS AND DISMISSED. 9. WITH REGARD TO THE GROUND NO. 4 OF THIS APPEAL AT THE TIME OF HEARING BEFORE US BOTH SIDES CONCEDED THAT THE HON'BLE SUPREME COURT IN TH E CASE OF VIJAY SHIP BREAKING CORPN. VS.- CIT REPORTED IN 175 TAXMAN 77 HELD THAT SHIP BREAKI NG ACTIVITY GAVE RISE TO THE PRODUCTION OF A DISTINCT AND DIFFERENT ARTICLE THEREFORE ENTITLED TO DEDUCTION UNDER SECTION 80HH AND 80I OF THE INCOME TAX ACT. THE SAID DECISION OF THE HON'BLE SU PREME COURT IS SQUARELY APPLICABLE TO THE FACTS OF ASSESSEES CASE BECAUSE THE ASSESSEE IS AL SO ENGAGED IN THE BUSINESS OF SHIP-BREAKING ACTIVITY. THEREFORE THE ASSESSEE IS ENTITLED TO DE DUCTION UNDER SECTION 80IA OF THE INCOME TAX ACT. IN THE RETURN OF INCOME THE ASSESSEE CLAIMED DEDUCTION UNDER SECTION 80IA AMOUNTING TO RS.2 76 568/-. IN THE ASSESSMENT ORDER IN PARA 10 O N PAGE 4 THE A.O. TOOK THE VIEW THAT IT IS NOT ENTITLED TO DEDUCTION UNDER SECTION 80IA BECAUSE IT IS NOT ENGAGED IN PRODUCTION OF ANY ARTICLE OR THINGS. HOWEVER IN PARA 11 OF THE ASSESSMENT ORDER THE A.O. OBSERVED THAT INCOME DISCLOSED BY THE ASSESSEE FOR THE PURPOSE OF DEDUCTION UNDER SEC TION 80IA INCLUDES INCOME FROM INTEREST 5 ITA NO. 1356/AHD/200 6 RS.7 90 975/- INCOME FROM SALES TAX REFUND RS.2 22 807/- KASAR & DISCOUNT RS.2 84 274/- AND PLOT DEVELOPMENT INCOME OF RS.1 00 000/-. ACCORDING TO A.O. THESE ARE NOT DERIVED FROM INDUSTRIAL ACTIVITY AS PER THE JUDGMENT OF THE HON' BLE SUPREME COURT IN THE CASES OF HINDUSTAN LEVEL LTD. [239 ITR 297] STERLING FOOD LTD. [237 I TR 579] ORISSA STATE WAREHOUSING CORPORATION LTD. [237 ITR 589]. HOWEVER NOWHERE IN THE ASSESSMENT ORDER THE ASSESSING OFFICER WORKED OUT THE CORRECT AMOUNT OF DEDUCTION ADMISSIBLE TO THE ASSESSEE. IN VIEW OF THIS THE ISSUE REGARDING WORKING OF DEDUCTION UNDER SECT ION 80IA IS RESTORED TO THE FILE OF A.O. WITH THE DIRECTION THAT HE WILL WORK OUT THE CORRECT AMO UNT OF DEDUCTION UNDER SECTION 80IA AND ALLOW THE SAME KEEPING IN VIEW THE JUDGMENT OF THE HON'BL E SUPREME COURT IN THE CASE OF VIJAY SHIP BREAKING CORPN. VS.- CIT (SUPRA). 10. IN THE RESULT FOR STATISTICAL PURPOSES THE AP PEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE. THE ORDER WAS PRONOUNCED IN THE COURT ON 09.04.2010 . SD/- SD/- (A.N. PAHUJA) (T.K. SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 09 / 04 /2010 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE (2) THE DEPARTMENT. 3) CIT(A) CONCERNED (4) CIT CONCERNED (5) D.R. ITAT AHMEDABAD. TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT AHMEDABAD LAHA/SR.P.S.