M/s Foods, Fats & Fertilisers Ltd,, Tadepallegudem v. The ACIT, Circle-1., Eluru

ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 1 OF 28 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO.556/VIZAG/2004 ASSESSMENT YEAR: 2001-02 ACIT CIRCLE-1 ELURU VS. M/S FOODS FATS & FERTILIZERS LTD. TADEPALLEGUDEM (APPELLANT) (RESPONDENT) PAN NO:AAACF 2643 K ITA NO.374/VIZAG/2005 ASSESSMENT YEAR: 2002-03 ACIT CIRCLE-1 ELURU VS. M/S FOODS FATS & FERTILIZERS LTD. TADEPALLEGUDEM (APPELLANT) (RESPONDENT) PAN NO:AAACF 2643 K ITA NO.404/VIZAG/2009 ASSESSMENT YEAR: 2006-07 ACIT CIRCLE-1 ELURU VS. M/S FOODS FATS & FERTILIZERS LTD. TADEPALLEGUDEM (APPELLANT) (RESPONDENT) PAN NO:AAACF 2643 K ITA NO.219/VIZAG/2006 ASSESSMENT YEAR: 2003-04 M/S FOODS FATS & FERTILIZERS LTD. TADEPALLEGUDEM VS. ACIT CIRCLE-1 ELURU (APPELLANT) PAN NO:AAACF 2643 K (RESPONDENT) ITA NO.175/VIZAG/2007 ASSESSMENT YEAR: 2004-05 M/S FOODS FATS & FERTILIZERS LTD. TADEPALLEGUDEM VS. ACIT CIRCLE-1 ELURU (APPELLANT) PAN NO:AAACF 2643 K (RESPONDENT) ITA NO.489/VIZAG/2008 ASSESSMENT YEAR: 2005-06 M/S FOODS FATS & FERTILIZERS LTD. TADEPALLEGUDEM VS. ADD. CIT RAJAHMUNDRY (APPELLANT) PAN NO:AAACF 2643 K (RESPONDENT) ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 2 OF 28 DEPARTMENT BY: SHRI T.H. LUCA S PETER CIT (DR) ASSESSEE BY: SHRI C. SUBRAMANYAM CA ORDER PER BENCH: ALL THESE APPEALS ARE DIRECTED AGAINST THE ORDERS OF LEARNED CIT(A) RAJAHMUNDRY. SINCE COMMON ISSUES ARE INVOLVED IN TH ESE APPEALS THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY TH IS COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF EDIBLE OIL EXPORT OF RICE ETC. IN ALL T HE YEARS UNDER CONSIDERATION THE ASSESSEE FILED RETURNS OF INCOME INTER ALIA CLAIMING DEDUCTION UNDER SECTION 80HHC AND 80IA OF THE ACT. THE ASSESSING OFFICER COMPLETED THE ASSESSMENTS OF THESE YEARS BY MAKING CERTAIN ADDITIONS AND ALSO BY REWORKING THE ELIGIBLE AMOUNT OF DEDUCTION UNDER SECTION 80HHC AND 80IA. IN THE APPEALS PREFERRED BY THE ASSESSEE LEARNED CIT (A) ACCEPTED THE CLAIMS OF THE ASSESSEE IN SOME YEARS A ND DID NOT ACCEPT THEM IN OTHER YEARS. HENCE BOTH THE PARTIES ARE IN APPE AL BEFORE US ASSAILING THE DECISION OF THE LEARNED CIT (A) IN RESPECT OF ISSUE S DECIDED AGAINST THEM. EVEN THOUGH COMMON ISSUES ARE THERE IN MORE THAN ON E YEAR WE PREFER TO DISPOSE OF THE APPEALS ONE BY ONE. A. ITA 556/VIZAG/04 ASST. YEAR 2001-02 REVENUE: 3. IN THE APPEAL OF THE REVENUE NUMBERED AS ITA 556/ VIZ/04 RELATING TO THE ASSESSMENT YEAR 2001-02 FOLLOWING ISSUES ARE A GITATED: A) PROVISION FOR LEAVE ENCASHMENT B) DEPRECIATION AND BARGE C) DEPRECIATION ON COMMUNITY HALL D) COMPUTATION OF DEDUCTION UNDER SECTION 80HHC E) COMPUTATION OF DEDUCTION UNDER SECTION 80IA ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 3 OF 28 4. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF P ROVISION FOR LEAVE ENCASHMENT. THE ASSESSEE HAD PROVIDED FOR INCREMENT AL LIABILITY ON LEAVE ENCASHMENT AT RS.15 593/-. THE ASSESSING OFFICER DI SALLOWED THE SAME BY HOLDING THAT THE SAID PROVISION IS NOT AN ASCERTAIN ED LIABILITY. HOWEVER THE LEARNED CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE B Y FOLLOWING THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT (245 ITR 428) (S.C). BEFORE US THE REVENUE DID NO T PLACE ANY MATERIAL TO SHOW THAT THE ABOVE SAID DECISION OF THE HON'BLE AP EX COURT DOES NOT APPLY TO THE FACTS IN THE HANDS OF THE ASSESSEE. IN THE C ASE OF M/S BHARAT EARTH MOVERS LTD. SUPRA THE HON'BLE APEX COURT HAS HELD THAT THE PROVISION MADE FOR LEAVE ENCASHMENT CANNOT BE TAKEN AS A CONTINGEN T LIABILITY AND HENCE IT IS AN ASCERTAINED LIABILITY. SINCE THE LEARNED CIT (A) HAS FOLLOWED THE DECISION OF THE HON'BLE APEX COURT WE DO NOT FIND IT NECESSARY TO INTERFERE IN HIS DECISION ON THIS ISSUE. 5. THE NEXT ISSUE RELATES TO THE RATE OF DEPRECIATI ON ADMISSIBLE ON BARGES. THE ASSESSEE CLAIMED DEPRECIATION ON BARGES @ 20%. HOWEVER THE ASSESSING OFFICER RESTRICTED THE CLAIM TO 10%. THE LEARNED CIT (A) ALLOWED DEPRECIATION AT THE RATE CLAIMED BY THE ASSESSEE. IT WAS BROUGHT TO OUR NOTICE THAT THIS ISSUE IS SQUARELY COVERED BY THE D ECISION OF THIS TRIBUNAL DATED 16-5-2008 IN THE ASSESSEES OWN CASE RELATING TO ASSESSMENT YEAR 1997-98 IN ITA NO.158/VIZAG/2002; WHEREIN IT HAS BE EN HELD THAT THE DEPRECIATION SHALL BE ALLOWED ON BARGES @ 20%. SINC E THE VIEW TAKEN BY THE LEARNED CIT (A) IS IN ACCORDANCE WITH THE DECIS ION OF THE TRIBUNAL CITED ABOVE WE AFFIRM HIS ORDER ON THIS ISSUE. 6. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF DE PRECIATION OF RS.2 16 998/- CLAIMED ON THE COMMUNITY HALL CONSTRU CTED BY THE ASSESSEE. THE ASSESSING OFFICER DISALLOWED THE SAID CLAIM BY STATING THAT THE COMMUNITY HALL CONSTRUCTED BY THE ASSESSEE IS NOT A BUSINESS ASSET. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 4 OF 28 HOWEVER THE LEARNED CIT (A) ALLOWED THE CLAIM OF T HE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: 6.5(III). AS REGARD THE APPELLANTS CLAIM OF DEPRE CIATION ON COMMUNITY HALL IT IS THE CONTENTION OF THE APPELLA NT THAT THE SAME IS USED FOR EXPLAINING THE SAFETY MEASURE TO B E FOLLOWED BY THE WORKERS AND IT IS ALSO USED FOR TRAINING CLA SSES FOR THE STAFF AND WORKERS. IT IS CONSTRUCTED IN THE FACTORY PREMISES ITSELF AND SPORTS AND GAMES ARE CONDUCTED IN THE CO MMUNITY HALL GROUND AND INDOOR GAMES ARE ALSO CONDUCTED IN THE COMMUNITY HALL. FURTHER FUNCTIONS SUCH AS INDEPENDE NCE DAY REPUBLIC DAY AND MAY DAY ARE ALSO CONDUCTED IN THE COMMUNITY HALL. SINCE THE COMMUNITY HALL IS CONSTRU CTED AND USED FOR THE BENEFIT AND WELFARE OF THE EMPLOYEES IT IS TO BE TREATED AS BUSINESS ASSET OF THE COMPANY AND APPELL ANT IS ENTITLED FOR DEPRECIATION. THE APPELLANT GETS RELIE F OF RS.2 16 998/-. WE NOTICE THAT THE LEARNED CIT (A) ALLOWED THE CLAI M ON NOTICING THAT THE SAID COMMUNITY HALL IS USED FOR THE WELFARE OF EMPL OYEES AND ALSO FOR CONDUCTING SOCIAL FUNCTIONS. SINCE THE COMMUNITY H ALL IS MEANT FOR THE USE OF EMPLOYEES IN OUR VIEW IT FORMS PART OF BUSINES S ASSET AND ACCORDINGLY THE ASSESSEE IS ENTITLED TO CLAIM DEPRECIATION THER EON. IN VIEW OF THE ABOVE WE DO NOT FIND ANY INFIRMITY IN THE DECISION OF THE LEARNED CIT (A) ON THIS ISSUE. 7. THE NEXT ISSUE RELATES TO THE COMPUTATION OF DED UCTION UNDER SECTION 80HHC. THE ASSESSEE CLAIMED THE DEDUCTION OF RS.3 5 8 953/- UNDER THE SAID SECTION. THE ASSESSING OFFICER BY FOLLOWING THE ME THODOLOGY ADOPTED FOR THE ASSESSMENT YEAR 2000-01 DETERMINED DEDUCTION A T NIL AMOUNT. IN THE APPEAL THE LEARNED CIT (A) SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER WITH CERTAIN DIRECTIONS WHICH INCLUDES A D IRECTION TO FOLLOW THE DECISION OF HIS PREDECESSOR FOR THE ASSESSMENT YEAR 2000-01. HOWEVER WE NOTICE THAT IN THE ASST. YEAR 2000-01 THE SAID IS SUE WAS CARRIED TO ITAT IN ITA NO.381/VIZAG/2004 AND THE TRIBUNAL VIDE ITS OR DER DATED 24 TH JANUARY 2011 HAS SET ASIDE THE ISSUE TO THE FILE OF THE AS SESSING OFFICER WITH THE FOLLOWING OBSERVATIONS: ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 5 OF 28 7. THE LAST ISSUE RELATES TO THE COMPUTATION OF DEDUCTION UNDER SECTION 80HHC OF THE ACT. IT WAS BROUGHT TO O UR NOTICE THAT ON IDENTICAL FACTS THE TRIBUNAL HAS ASIDE SI MILAR ISSUE TO THE FILE OF THE ASSESSING OFFICER IN THE ASSESSEES OWN CASE FOR ASSESSMENT YEARS 1997-98 AND 1998-99 IN ITA NO.158/ V/2002 AND ITA NO.159/V/2002 VIDE ITS ORDER DATED 16.05.2 008 AND 15.5.2009 RESPECTIVELY. IN THOSE APPEALS THE ASSES SING OFFICER WAS DIRECTED TO COMPUTE THE DEDUCTION UNDER SECTION 80HHC IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN B Y HON'BLE SUPREME COURT IN THE CASE OF CIT VS. K. RAVINDRAN N AIR (2007) 295 ITR 228. CONSISTENT WITH THE VIEW TAKEN IN THE ABOVE CITED CASES WE SET ASIDE THIS ISSUE ALSO TO THE FI LE OF THE ASSESSING OFFICER WITH A DIRECTION TO COMPUTE THE D EDUCTION UNDER SECTION 80HHC OF THE ACT IN ACCORDANCE WITH T HE PRINCIPLES LAID DOWN IN THE CASE OF K. RAVINDRAN NA IR (SUPRA). CONSISTENT WITH THE DECISION TAKEN IN THE ASSESSMEN T YEAR 2000-01 WE SET ASIDE THE ISSUE OF COMPUTATION OF DEDUCTION UNDER S ECTION 80HHC FOR THE INSTANT YEAR ALSO TO THE FILE OF THE ASSESSING OFFI CER WITH A DIRECTION TO COMPUTE THE DEDUCTION IN ACCORDANCE WITH THE DIRECT IONS GIVEN IN ITA NO.158/V/2002 AND ITA NO.159/V/2002 REFERRED (SUPR A) AND IN ACCORDANCE WITH THE PRINCIPLES LAID DOWN BY THE HON'BLE APEX C OURT IN THE CASE OF K. RAVINDRAN NAIR (SUPRA). 8. THE NEXT ISSUE RELATES TO THE COMPUTATION OF DED UCTION UNDER SECTION 80IA OF THE ACT. ACCORDING TO THE ASSESSEE IT IS E LIGIBLE FOR DEDUCTION UNDER SECTION 80IA OF THE ACT IN RESPECT OF THE FOLLOWING PLANTS: NAME OF THE PLANT A/C. YEAR IN WHICH PRODUCTION STARTED ASST.YEAR RATE OF DEDUCTION ELIGIBLE UPTO ASST.YEAR 1.REFINERY - III & VANASPATI 1992 - 93 1993 - 94 30% 2002 - 03 2. FRACCINATION 1992-93 1993-94 30% 2002-03 3. FEED PELLETISATION 1992-93 1993-94 30% 2002-03 4. EXPELLERS 1994-95 1995-96 30% 2004-05 HOWEVER THE ASSESSEE CLAIMED DEDUCTION ONLY IN RES PECT OF REFINERY-III AND VANASPATI PLANT AS THERE WAS LOSS IN OTHER PL ANTS. THE ASSESSEE HAD WORKED OUT A NET PROFIT OF RS.4 75 35 511/- IN RESP ECT OF REFINERY-III AND ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 6 OF 28 VANASPATI PLANT. ACCORDING TO THE COMPUTATION OF THE ASSESSEE NET PROFIT AFTER ADJUSTMENT OF PROFIT AND LOSSES FROM ALL PLAN TS AND EXPORT BUSINESS BUT BEFORE ALLOWING DEDUCTION UNDER SECTION 80IA WO RKED OUT TO RS.25 59 210/- AND ACCORDINGLY THE ASSESSEE RESTRIC TED ITS CLAIM FOR DEDUCTION UNDER SECTION 80IA ALSO TO RS.25 59 210/ -. 8.1 ACCORDING TO THE ASSESSING OFFICER THE COMPUTA TION OF RAW MATERIAL COSTS RELATABLE TO THE REFINERY-III AND VANASPATI P LANT IS ON THE LOWER SIDE. IN ADDITION TO THE ABOVE THE ASSESSING OFFIC ER ALSO OPINED THAT THE DETERMINATION OF VALUE OF INTERNAL TRANSFER TO THE IMPUGNED PLANT IS ALSO ON THE LOWER SIDE AND ACCORDINGLY OBSERVED THAT THE VA LUE OF INTERNAL TRANSFER SHOULD BE INCREASED BY 3%. ACCORDINGLY THE ASSES SING OFFICER COMPUTED THE COST OF RAW MATERIAL AT RS.48.67 LAKHS AS AGAIN ST RS.30.85 LAKHS ALLOCATED BY THE ASSESSEE. FOR DETERMINING THE RAW MATERIAL COST THE ASSESSING OFFICER ADOPTED SALES RATIO I.E. PROPORT ION OF TURN OVER OF REFINERY-III AND VANASPATI PLANT TO THE TOTAL TURNO VER OF THE ASSESSEE. SIMILARLY THE ASSESSING OFFICER INCREASED THE VALUE OF INTERNAL TRANSFER BY 3%. BY ADOPTING THE COSTS AND VALUES AS DISCUSSED ABOVE THE ASSESSING OFFICER COMPUTED DEDUCTION UNDER SECTION 80IA OF TH E ACT AT NIL VALUE. IN THE APPEAL THE LEARNED CIT (A) ALLOWED THE CLAIM O F THE ASSESSEE. 8.2 BEFORE THE LEARNED CIT (A) THE ASSESSEE OBJECTE D TO THE WORKINGS MADE BY THE ASSESSING OFFICER ON THE FOLLOWING LINE S: 1. THAT (SIC THE ASSESSEE) HAVE ALLOCATED THE TOT AL EXPENSES ON COST CENTER BASIS; 2. THAT THE ASSESSING OFFICER HAS CONSIDERED RE-AL LOCATION OF OVERHEADS ONLY TO THE EXTENT OF PAYMENTS & BENEF ITS TO EMPLOYEES @ 11.4466% (REFINERY-III & VANASPATI PLANT TURNOVER/TOTAL TURNOVER); 3. ALL OTHER HEADS OF EXPENDITURE WHERE THEY ARE MORE THAN THE SAID PERCENTAGE THE ASSESSING OFFICER HAS NOT PROPOSED ANY REVISION BUT TAKEN AS IT IS; ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 7 OF 28 4. IF THE SAID TURNOVER PERCENTAGE IS APPLIED TO MANUFACTURING & ADMINISTRATIVE EXPENSES IT COMES T O RS.2 72 45 611/- WHICH IS MUCH LOWER THAN WHAT THE APPELLANT HAD TAKEN ON COST CENTER BASIS TO REFINERY III & VANA SPATI (RS.9 76 13 672/-); 5. THOUGH THE MANUFACTURING & ADMINISTRATIVE EXPENS ES AND FINANCE COSTS ARE MORE IN REFINERY III & VANASPAT I THE PROFIT ELEMENT IS HIGH AS THE COST OF RAW MATERIAL IS LOW. AT THE TIME OF HEARING IT WAS BROUGHT TO OUR NOTIC E THAT THE ASSESSEE IS REQUIRED TO MAINTAIN COST ACCOUNTING RECORDS AS PER COST ACCOUNTING RECORDS (VANASPATI) RULES 1972. ACCORDINGLY THE AS SESSEE HAS MAINTAINED THE COST ACCOUNTING RECORDS AND FOLLOWED SYSTEMATIC METHOD FOR ALLOCATION OF VARIOUS EXPENSES TO REFINERY III & VANASPATI PLA NT. THE ASSESSEE HAS GIVEN THE BASIS OF APPORTIONMENT OF EXPENSES AS UND ER: 1.1 THE ASSESSEES COMPANY IS MAINTAINING RECORD A S PRESCRIBED PER COST ACCOUNTING RECORDS (VANASPATI RULES 1972). SUCH AS A) COST LEDGER B) STOCK RECORDS FOR RAW MATERIALS FINISHED GOODS WIS E C) COST STATEMENTS SHOWING CONSUMPTION AND PRODUCTION OF EACH PRODUCT FOR EACH PLANT. D) COST CENTRE WISE CONSUMPTION STATEMENTS E) COST CENTRE WISE DEPRECIATION STATEMENTS. 1.2 IT IS SUBMITTED THAT THE ASSESSEE COMPANY COMES WITHIN THE PURVIEW OF PROVISIONS OF SEC.209(I)(D) OF THE COMPAN IES ACT 1956 IN SO FAR AS MAINTENANCE OF COST RECORDS ARE CONCERNED WHICH IS MANDATORY. 1.3 APPORTIONMENT OF EXPENSES AS WORKED OUT BY ASSESSEE : THE COMPANY PREPARED DIVISIONAL PROFIT & LOS S ACCOUNT CLAIMING RELIEF UNDER SECTION 80I/80IA BASED ON THE ABOVE COST RECORDS ON THE FOLLOWING BASIS: 1. VARIOUS ACTIVITY CENTRES ARE IDENTIFIED AS DIVISION S TO ANALYZE THE EXPENSES AND INCOME. 2. ALL THE EXPENDITURE IS ANALYSED AND IDENTIFIED TO VARIOUS DIVISIONS DIRECTLY FROM THE PAYMENT VOUCHER/LEDGER. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 8 OF 28 3. SALES REALIZATION OF PRODUCTS MANUFACTURED AT VARIOUS DIVISIONS ARE IDENTIFIED DIRECTLY TO THE CONCERNED DIVISIONS. 4. INTER-DIVISIONAL TRANSFERS OF PROCESSED MATERIALS ARE AFFECTED AT THE MARKET PRICES WHEREVER POSSIBLE. IN CASES WHERE THE MARKET PRICES ARE NOT AVAILABLE COST/TECHNICAL ESTIMATES ARE ADOPTED. 5. DEPRECIATION IS IDENTIFIED TO VARIOUS DIVISIONS BASED ON THE ASSETS EMPLOYED IN EACH DIVISION. 6. SELLING & DISTRIBUTION OVERHEADS ARE APPORTIONED TO THE RESPECTIVE DIVISIONS BASED ON THE DIVISIONAL SALES REALIZATION. 7. OPENING AND CLOSING STOCKS ARE ADOPTED AS PER THE AUDITED FINANCIAL ACCOUNTS. 8. VARIOUS NON-COST ITEMS ARE IDENTIFIED AND APPORTIONED TO THE RESPECTIVE DIVISIONS BASED ON THE DIVISIONAL SALES REALIZATION. 9. INTEREST ON PROJECT TERM LOANS ARE IDENTIFIED TO THE RESPECTIVE DIVISIONS BASED ON THE TERM LOANS USED. USAGE INTEREST APPORTIONED BASED ON IMPORT PURCHASES CONSUMED AND TRADED. INTEREST ON WORKING CAPITAL BORROWINGS/TERM LOANS ARE APPORTIONED TO VARIOUS DIVISIONS BASED ON THE TOTAL EXPENDITURE INCURRED (BEFORE INTEREST AND DEPRECIATION) OF THE DIVISION. 1.4 IN SO FAR AS DIRECT EXPENSES ARE CONCERNED THE EXPENDITURE IS BOOKED DIRECTLY TO THE PARTICULAR PL ANT. 1.5 THE INDIRECT EXPENSES/OVERHEADS IDENTIFIED RELATED TO VARIOUS SERVICE/UTILITY DIVISIONS ARE APPORTIONED T O PROCESS DIVISIONS ON THE FOLLOWING BASIS. S.NO DESCRIPTION BASIS OF APPORTIONMENT 1 STORES REPAIRS & MAINTENANCE 2 TRANSPORT LIGHT VEHICLES 100% ADMINISTRATION OVERHEADS 3 CIVIL MAINTENANCE REPAIRS & MAINTENANCE BUILDIN GS 4 WORKSHOP REPAIRS & MAINTENANCE-PLANT & MACHINERY 5 BOILER HOUSE STEAM CONSUMPTION BASIS ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 9 OF 28 6 POWER HOUSE POWER UNITS CONSUMED 7 CELL HOUSE VOP STEARIC ACID PLANTS PRODUCTION RA TIO 8 EFFLUENT TREATMENT PLANT QUANTITY CONSUMED-TECHNI CAL ESTIMATE 9 STAFF QUARTERS 100% FACTORY OVERHEADS 10 FACTORY ADMINISTRATION WORKS COST RATIO 11 OFFICE ADMINISTRATION COST PRODUCTION RATIO 12 SALE ADMINISTRATION 100% SELLING OVERHEADS 1.6 THE BASIS OF APPORTIONMENT OF EXPENSES/OVERHEADS OF VARIOUS SERVICE/UTILITY DIVISIONS TO PROCESS DIVISI ONS ARE MADE AS PER GUIDELINES GIVEN IN COST ACCOUNTING STANDARD-3 (CAS-3) ISSUED BY THE COUNCIL OF THE INSTITUTE OF COST AND WORKS ACCOUNTANTS OF INDIA ON OVERHEADS. THUS WE NOTICE THAT THE ASSESSEE HAS BEEN FOLLOWIN G A SYSTEMATIC METHOD OF APPORTIONING THE COSTS TO VARIOUS PLANTS IN ACCO RDANCE WITH THE GUIDELINES ISSUED BY THE INSTITUTE OF COST AND WORKS ACCOUNTAN TS OF INDIA. IT WAS ALSO BROUGHT TO OUR NOTICE THAT THE ASSESSEE IS REQUIRED TO MAINTAIN THE COST RECORDS AS PER THE GOVERNMENT RULES. WE NOTICE THA T THE ASSESSING OFFICER DID NOT EXAMINE THESE COST RECORDS; INSTEAD HE HAS PROCEEDED TO DETERMINE THE RAW MATERIAL COSTS BY FOLLOWING THE AVERAGE MET HOD. WHEN THE ASSESSEE IS MAINTAINING DETAILED COST RECORDS AND IS ALSO FO LLOWING A SYSTEMATIC METHOD OF ALLOCATION OVER THE YEARS IN OUR VIEW T HE ASSESSING OFFICER SHOULD HAVE EXAMINED THE SAID COST RECORDS IN ORDER TO ASCERTAIN THE CORRECTNESS OF THE BASIS OF APPORTIONMENT. ONLY IF HE FINDS FAULT WITH THE SAID RECORDS IN OUR VIEW HE SHOULD HAVE REJECTED THEM AND SHOULD HAVE PROCEEDED TO COMPUTE THE APPORTIONMENT IN A MOST EQ UITABLE MANNER. IN OUR VIEW THE LEARNED CIT(A) HAS EXAMINED THE SAID SUBMISSIONS OF THE ASSESSEE IN A PROPER PERSPECTIVE AND ACCORDINGLY AL LOWED THE CLAIM OF THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: 8.4(II). IT IS CLEAR FROM THE ABOVE THAT THE APPEL LANT HAD ADOPTED THE EXPENDITURE ON ACTUAL BASIS WHEREAS THE ASSESSING OFFICER HAD ESTIMATED THE SAME. THE EXPEN DITURE IS ALLOCATED BY THE APPELLANT COST CENTER BASIS I.E. P LANT-WISE THE REMARKS OF THE ASSESSING OFFICER THAT SEPARATE SET OF BOOKS OF ACCOUNT SEPARATE PROFIT & LOSS ACCOUNT PL ANT WISE ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 10 OF 28 ARE NOT NECESSARY TO BE MAINTAINED. IT IS ENOUGH I F THE APPELLANT IS ABLE TO SHOW CLEARLY THE EXPENDITURE I NCURRED AND THE INCOME EARNED PLANT WISE. THE APPELLANT HAD PRE PARED DIVISIONAL PROFIT & LOSS ACCOUNT AS COULD BE SEEN F ROM THE PAPER BOOK FILED FOR WORKING THE DEDUCTION UNDER SE CTION 80IA. THEREFORE AS THE APPELLANT HAD DEBITED EXPEN DITURE PLANT WISE ON ACTUAL BASIS AND THE APPELLANT HAD EM PLOYED THE COST ACCOUNTANT AND MAINTAINED THE RELEVANT COS T ACCOUNTANCY RECORD THERE IS NO REASON WHY THE ASSE SSING OFFICER SHOULD RESORT TO ESTIMATION. THEREFORE THE ASSESSING OFFICER IS DIRECTED TO ADOPT THE WORKING OF 80IA AS ARRIVED AT BY THE APPELLANT BY RESTRICTING THE CLAIM TO THE EX TENT OF THE PROFITS AVAILABLE. THE APPEAL ON THIS GROUND IS ALL OWED. IN VIEW OF THE FOREGOING DISCUSSIONS WE ARE OF THE VIEW THAT THE ASSESSEE HAS FOLLOWED A SYSTEMATIC METHOD OF APPORTIONMENT WHICH NEED NOT BE DISTURBED IN THE ABSENCE OF FINDING OF ANY FLAW IN IT. HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH THE DECISION OF LEARNE D CIT(A) ON THIS ISSUE. B. ITA NO.374/VIZAG/2005 ASST. YEAR 2002-03 - REV ENUE 9. IN THE APPEAL NUMBERED AS ITA NO.374/VIZAG/2 005 FILED BY THE REVENUE FOR THE ASSESSMENT YEAR 2002-03 FOLLOWING I SSUES ARE URGED: A) DISALLOWANCE OF BAD DEBTS B) DEPRECIATION ON BARGE C) COMPUTATION OF DEDUCTION UNDER SECTION 80HHC D) COMPUTATION OF DEDUCTION UNDER SECTION 80IA 10. THE FIRST ISSUE RELATES TO THE DISALLOWANCE OF BAD DEBT AMOUNT OF RS.1 49 30 936/- BEING THE AMOUNT DUE FROM M/S PEN NAR PATTERSON SECURITIES LTD. THE ASSESSEE HAD ADVANCED THE ABOV E SAID AMOUNT TO M/S PENNAR PATTERSON SECURITIES LTD IN THE FORM OF INTE R CORPORATE DEPOSIT AND IT COULD NOT RECOVER THE SAME. HENCE IT WAS WRITTEN O FF AS BAD DEBT. THE ASSESSING OFFICER TREATED THE SAME AS A CAPITAL LOS S AND ACCORDINGLY DISALLOWED THE SAID CLAIM OF THE ASSESSEE. THE ASS ESSING OFFICER DID NOT ACCEPT THE CLAIM OF THE ASSESSEE THAT IT IS ALSO CA RRYING ON MONEY LENDING BUSINESS. HOWEVER THE LEARNED CIT(A) ACCEPTED THE CLAIM OF THE ASSESSEE ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 11 OF 28 THAT IT IS CARRYING ON MONEY LENDING BUSINESS ALSO AND THE AMOUNT ADVANCED TO M/S PENNAR PATTERSON SECURITIES LTD IS AN AMOUNT GIVEN IN THE ORDINARY COURSE OF MONEY LENDING BUSINESS AND ACCORDINGLY AL LOWED THE CLAIM OF BAD DEBT. 10.1 IN THE APPEALS NUMBERED AS 449 & 450/VIZAG/20 03 RELATING TO THE ASSESSMENT YEAR 1999-2000 IN THE ASSESSEES OWN CAS E THE QUESTION OF THE NATURE OF INTEREST INCOME RECEIVED FROM M/S PENNAR PATTERSON SECURITIES LTD WAS CONSIDERED. THE RELEVANT OBSERVATIONS ARE EXTR ACTED BELOW. 6. IN THE FIRST GROUND THE ASSESSEE IS ASSAILIN G THE DECISION OF LEARNED CIT(A) IN HOLDING THAT INTEREST INCOME AGGREGATING TO RS.66 85 523/- IS TO BE TREATED AS I NCOME CHARGEABLE UNDER THE HEAD INCOME FROM OTHER SOURCE S. AS STATED EARLIER THE ASSESSING OFFICER EXCLUDED FOLL OWING AMOUNTS AGGREGATING TO RS.1 60 36 600/- FROM THE BUSINESS I NCOME AND TREATED THEM AS INCOME UNDER THE HEAD INCOME FROM OTHER SOURCES. (I) INTEREST RECEIVED - 1 18 16 324/- (II) RENT RECEIVED - 1 07 871/- (III) DAMAGES RECEIVED FOR NON-FULFILLMENT OF CONTRACTS - 41 12 4 05/- ------------------ 1 60 36 600/- ========= WITH REGARD TO THE INTEREST RECEIPTS THE LEARNED C IT(A) ACCEPTED THAT VARIOUS AMOUNTS AGGREGATING TO RS.51 30 801/- ARE IN THE NATURE OF BUSINESS RECEIPTS. ACCORDINGL Y HE TREATED THE BALANCE AMOUNT OF RS.66 85 523/- AS INCOME CHAR GEABLE UNDER THE HEAD INCOME FROM OTHER SOURCES. HOWEVE R DURING THE COURSE OF HEARING THE LEARNED A.R RESTRICTED H IS ARGUMENTS ONLY WITH REGARD TO THE INTEREST RECEIPT OF RS.55 1 0 769/- FROM A COMPANY NAMED M/S PENNAR PATTERSON LTD. ACCORDINGL Y THE ORDER OF LEARNED CIT(A) IS CONFIRMED WITH REGARD TO THE REMAINING AMOUNTS AGGREGATING TO RS.11 74 754/-. 6.1 ACCORDING TO THE LEARNED A.R THE INTEREST I NCOME OF RS.55 10 769/- HAS TO BE TREATED AS INCOME FROM BUS INESS AND THE ARGUMENTS ADVANCED BY HIM IN THIS REGARD AR E SUMMARIZED BELOW:- (A) THE ASSESSEE HAS ADVANCED MONEY TO A COMPANY NAMED M/S PENNAR PATTERSON LTD IN THE NORMAL COURSE OF ITS BUSINESS. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 12 OF 28 (B) LENDING OF MONEY IS ONE OF THE OBJECTS OF THE COMPANY AS PER ITS MEMORANDUM OF ASSOCIATION. (C) IN EARLIER YEARS THE ASSESSEE DECLARED SIMIL AR RECEIPTS UNDER THE HEAD INCOME FROM BUSINESS ONLY AND THE SAME HAS BEEN ACCEPTED BY THE DEPARTMENT. (D) RELIANCE WAS PLACED ON THE DECISIONS REPORTED IN 101 TTJ (CHA) 29; CIT VS. J.J. EXPORTERS (324 ITR 3 29 (CAL)) AND THE DECISION OF THIS BENCH IN THE CASE OF VBC IN DUSTRIES LTD IN ITA NO.502/VIZAG/2005. 6.2 ON THE CONTRARY THE LEARNED DEPARTMENTAL REPRESENTATIVE ADVANCED HIS ARGUMENTS ON THE FOLLOW ING LINES. (A) THE ASSESSEE DID NOT PROVE THAT IT HAS CARRIE D ON MONEY LENDING BUSINESS AND THE IMPUGNED DEPOSIT MAD E WITH M/S PENNAR PATTERSON LTD. IS MONEY ADVANCED IN THE COURSE OF MONEY LENDING BUSINESS. (B) THE OBJECTS CLAUSE IN THE MEMORANDUM OF ASSOCIATION GENERALLY CONTAINS ALLY TYPES OF BUSINE SSES AND HENCE THE SAME CANNOT BE TAKEN AS A DECIDING FACTOR . (C) THE RULE OF RES JUDICATA SHALL NOT APPLY TO T HE INCOME TAX PROCEEDINGS AND HENCE THE TREATMENT ACCO RDED IN THE EARLIER YEARS TO SUCH KIND OF RECEIPTS NEED NOT BE CONSIDERED. (D) THE ASSESSEE ITSELF HAS DECLARED THE IMPUGNED AMOUNT AS INTER CORPORATE DEPOSIT AND NOT AS MONEY LENDING ADVANCE. (E) THE ASSESSEE HAS NOT TAKEN SO CONTESTED ON TH IS ISSUE BEFORE THE ASSESSING OFFICER. (F) THE QUESTION WHETHER SUCH KIND OF RECEIPTS IS INCOME FROM BUSINESS OR INCOME FROM OTHER SOURCES I S A QUESTION OF FACT WHICH HAS TO BE DECIDED ON THE BA SIS OF SURROUNDING CIRCUMSTANCES OF EACH CASE. (G) EVEN IF THE IMPUGNED INTEREST INCOME IS TO BE TREATED AS BUSINESS INCOME THE SAME HAS TO BE EXC LUDED FROM PROFITS OF BUSINESS AS PER CLAUSE (BAA) OF E XPLANATION TO SEC. 80HHC. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 13 OF 28 (H) RELIANCE WAS PLACED ON THE DECISIONS REPORTED IN PANDIAN CHEMICALS LTD. (262 ITR 278 (S.C)) AND CIT VS. K.RAVINDRANATHAN NAIR (295 ITR 228 (S.C)). 6.3 WE HAVE HEARD THE RIVAL CONTENTIONS AND PER USED THE RECORD. IN THE CASE OF J.J. EXPORTERS (SUPRA) WHI CH WAS RELIED UPON BY THE ASSESSEE THE HON'BLE CALCUTTA HIGH COU RT DISMISSED THE APPEAL OF THE REVENUE BY HOLDING THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE ORDER O F THE TRIBUNAL IN HOLDING THAT THE INTEREST INCOME EARNED FROM FIX ED DEPOSITS MADE OUT OF SURPLUS FUNDS FOR TEMPORARY PERIOD. TH US IT CAN BE SEEN THE QUESTION WHETHER THE IMPUGNED INTEREST INCOME IS TO BE TREATED AS BUSINESS INCOME OR OTHER SOURCES I NCOME IS A QUESTION OF FACT THAT HAS TO BE DECIDED ON THE BASI S OF CIRCUMSTANCES PREVAILING IN EACH CASE. WE NOTICE T HAT THE LEARNED CIT(A) HAS TAKEN SUPPORT FROM THE FOLLOWING CASE LAW TO ANALYSE THE ISSUE AS TO WHEN THE INTEREST INCOME CAN BE THE TAKEN AS BUSINESS RECEIPTS. (A) ASST. CIT VS. SOUTH INDIA PRODUCE COMPANY (262 ITR 20 (KER)) (B) K.S.SUBBIAH PILLAI AND CO. VS. CIT (260 ITR 30 4 (MAD)) (C) CIT VS. A.S.NIZAR AHMED AND CO. (259 ITR 244 (MAD)) (D) DR. V.P.GOPINATHAN (248 ITR 449 (S.C)) IN THE INSTANT CASE THE ASSESSEE HAS GIVEN MONEY TO M/S PENNAR PATTERSON LTD AND THE SAME HAS BEEN CLASSIFI ED AS INTER CORPORATE DEPOSITS BY THE ASSESSEE. IN COMMERCIAL PARLANCE THERE IS A LOT OF DIFFERENCE BETWEEN A DEPOSIT AN D A LOAN IN TERMS OF NATURE MODALITIES DOCUMENTS ETC. THE AS SESSEE HAS ONLY PLACED RELIANCE IN ONE OF THE CLAUSES FOUND IN THE OBJECT CLAUSE OF THE MEMORANDUM OF ASSOCIATION TO SUPPORT ITS PLEA THAT IT IS CARRYING ON MONEY LENDING BUSINESS. AS POINTED OUT BY LEARNED D.R THE OBJECT CLAUSE OF THE MEMORANDUM GE NERALLY CONTAINS ALL TYPES OF BUSINESSES AND HENCE IN OUR VIEW THE ASSESSEE HAS TO ADDUCE SOME OTHER CONTEMPORARY EVID ENCES IN SUPPORT OF ITS CLAIM THAT IT HAS CARRIED ON MONEY L ENDING BUSINESS. HOWEVER NO SUCH MATERIAL WAS PLACED ON RECORD BY THE ASSESSEE. THE FACTS PREVAILING IN THE CASE OF M /S VBC INDUSTRIES LTD. (SUPRA) IS DIFFERENT AND HENCE IN OUR VIEW THE ASSESSEE COULD NOT DERIVE SUPPORT FROM IT. IN VIEW OF THE FOREGOING WE DO NOT FIND ANY REASON TO INTERFERE W ITH THE DECISION OF LEARNED CIT(A) ON THIS ISSUE AND ACCORD INGLY UPHOLD THE SAME. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 14 OF 28 IN THE ABOVE CITED CASES THE ITAT HAS HELD THAT THE INTEREST RECEIVED FROM M/S PENNAR PATTERSON SECURITIES IS TAXABLE UNDER TH E HEAD INCOME FROM OTHER SOURCES MEANING THEREBY THE AMOUNT GIVEN TO THE SAID COMPANY IS NOT TREATED AS A BUSINESS ASSET. ACCORDINGLY THE LOSS ARISING OUT OF WRITING OFF OF THE AMOUNT ADVANCED TO M/S PENNAR PATTERSON SECURITIES LTD WOULD BE A CAPITAL LOSS AND THE SAME IN OUR VIEW CANNOT BE CLAIMED AS A BAD DEBT AGAINST THE INCOME FROM BUSINESS. ACCORDINGLY WE REVERSE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE AND RESTORE THE ADDITI ON MADE BY THE ASSESSING OFFICER. 11. THE NEXT ISSUE RELATES TO THE DEPRECIATION ON BARGE. FOR THE REASONS STATED IN PARAGRAPH NO.5 (SUPRA) WE UPHOLD THE ORD ER OF LEARNED CIT(A) ON THIS ISSUE. 12. THE NEXT ISSUE RELATES TO THE COMPUTATION OF D EDUCTION UNDER SECTION 80HHC OF THE ACT. FOR THE REASONS STATED IN PARAGR APH NO.7 (SUPRA) WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING O FFICER. 13. THE NEXT ISSUE RELATES TO THE COMPUTATION OF DEDUCTION UNDER SECTION 80IA OF THE ACT. DURING THE YEAR UNDER CONSIDERATI ON THE ASSESSEE CLAIMED DEDUCTION UNDER SECTION 80IA IN RESPECT OF THE FOLL OWING TWO UNITS. A) REFINERY III & VANASPATI PLAT B) EXPELLERS PLANT. THE ASSESSING OFFICER REJECTED THE CLAIM FOR EXPELL ER UNIT BY HOLDING THAT THE EXPELLERS ARE NOT PRODUCING ANY FINAL SALEABLE PR ODUCT AND THE PRODUCT OBTAINED FROM THE SAID EXPELLER IS ONLY A PRODUCT O F INTERMEDIARY STAGE. WITH REGARD TO THE REFINERY III AND VANASPATI PLAN T THE ASSESSING OFFICER ADOPTED THE AVERAGE BASIS AS FOLLOWED IN THE EARLIE R YEAR TO ARRIVE AT THE ELIGIBLE DEDUCTION. IN THE APPEAL THE LEARNED CIT( A) ALLOWED DEDUCTION ON BOTH THE UNITS. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 15 OF 28 13.1 WITH REGARD TO THE CLAIM OF DEDUCTION UNDER SECTION 80IA ON REFINERY III & VANASPATI PLANT WE HAVE ALLOWED THE DEDUCTION BY UPHOLDING THE ORDER OF LEARNED CIT(A) IN THE IMMEDI ATELY PRECEDING YEAR I.E. ASSESSMENT YEAR 2001-02 FOR THE REASONS STATED IN PARAGRAPH NO.8 (SUPRA). HENCE CONSISTENT WITH THE SAID VIEW WE DIRECT THE ASSESSING OFFICER TO ACCEPT THE COMPUTATION MADE BY THE ASSES SEE IN RESPECT OF THIS PLANT. 13.2 WITH REGARD TO THE EXPELLER PLAT IT WAS STATED THAT THE ASSESSEE IS TRANSFERRING THE PRODUCTS OBTAINED FROM IT TO ANOTH ER UNIT BELONGING TO IT. THE SAID TRANSFER IS NOTED AS INTERNAL TRANSFER IN THE BOOKS. THE ASSESSEE VALUED THE SAID INTERNAL TRANSFER ON SOME BASIS AND CALCULATED PROFIT FROM EXPELLER PLANT AND CLAIMED DEDUCTION UNDER SECTION 80IA THERE ON. ACCORDING TO THE ASSESSING OFFICER THE PRODUCT OBT AINED FROM EXPELLER UNIT IS ONLY A PRODUCT OF INTERMEDIARY STAGE AND IT IS N OT SALEABLE IN THE MARKET. HENCE THE ASSESSING OFFICER DENIED DEDUCTION UNDER SECTION 80IA OF THE ACT ON THE PROFIT RELATING TO THE EXPELLER UNIT. HOWEV ER THE LEARNED CIT(A) ACCEPTED THE CLAIM OF THE ASSESSEE THAT THE PRODUCT DERIVED FROM THE EXPELLER UNIT IS SALEABLE AND ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO ALLOW THE DEDUCTION UNDER SECTION 80IA ON IT. BEFO RE US THE LEARNED DEPARTMENTAL REPRESENTATIVE PLACED RELIANCE ON THE ORDER OF LEARNED CIT(A) PASSED IN THE SUCCEEDING YEAR I.E ASSESSMEN T YEAR 2003-04. IN THAT YEAR THE LEARNED CIT(A) DISMISSED THE CLAIM OF THE ASSESSEE. THE RELEVANT OBSERVATIONS MADE IN THAT YEAR BY LEARNED CIT(A) AR E EXTRACTED BELOW: V) BASED ON THE PRINCIPLES ENUNCIATED BY THE COURT S IN THE AFORE DISCUSSED CASE-LAWS IT CAN BE SAID THAT WHER E MANUFACTURED OR PRODUCED ARTICLES ARE TRANSFERRED I NTERNALLY FROM ONE UNIT TO ANOTHER FOR FURTHER PRODUCTION OR MANUFACTURE OF AN ENTIRELY DIFFERENT MARKETABLE PRODUCT THE FO LLOWING CRITERIA ARE REQUIRED TO BE SATISFIED:- A) THE UNIT FROM WHICH AN END PRODUCT IS SOUGHT TO BE TRANSFERRED TO ANOTHER UNIT TO BE UTILIZED AS RAW-M ATERIAL FOR THE PRODUCTION OR MANUFACTURING OF AN ENTIRELY DIFF ERENT MARKETABLE PRODUCT SHOULD COVER ALL ESSENTIAL STAGE S FROM ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 16 OF 28 A TO Z: SO AS TO GIVE THE MANUFACTURED OR PRODU CED ARTICLES A MARKETABLE ENTITY IN ORDER TO BE UTILIZ ED EITHER AS A RAW-MATERIAL FOR MANUFACTURE OR PRODUCTION OF A D IFFERENT ARTICLE OR THING OR TO BE CONSUMED AS A FINAL PROD UCT. THE MOST IMPORTANT REQUIREMENT FOR THE TRANSFERRING UNI T IS TO COVER ALL THE NECESSARY STAGES OF PRODUCTION OR MANUFACTURE AND NOT JUST PARTIAL STAGES SO AS TO QUALIFY AS AN INDUSTRIAL UNDERTAKING OTHERWISE NOT. COVERI NG OF LIMITED OR PARTIAL STAGES WOULD NOT BESTOW THE STAT US OF INDUSTRIAL UNDERTAKING UNLESS THE NECESSARY INFRAST RUCTURE OR WHEREWITHAL FOR A SUBSEQUENT AND FINAL STAGES DO NOT EXIST IN THE CASE OF AN ASSESSEE. B) THE NECESSARY INFRASTRUCTURE AND WHEREWITHAL TO COV ER ALL THE STAGES FROM A TO Z OF PRODUCTION AND MA NUFACTURE SHOULD BE AVAILABLE COUPLED WITH THE INTENTION TO MANUFACTURE OR PRODUCE THE FINAL STAGE PRODUCT. ON LY WHEN THE ABOVE CRITERIA ARE SATISFIED WOULD A UNIT BE CONSIDERED AS AN INDUSTRIAL UNDERTAKING EVEN THOUG H THE ARTICLE OR PRODUCT MANUFACTURED IS INTERNALLY TRANS FERRED TO ANOTHER UNIT FOR CAPTIVE CONSUMPTION OTHERWISE NOT . VI) APPLYING THE CRITERIA AS DISCUSSED ABOVE AS IN FERRED FROM THE RATIOS OF THE DECISIONS OF THE AFORE QUOTED CAS E-LAWS TO THE FACTS AND CIRCUMSTANCES OF THE APPELLANTS CASE IT COULD BE OBSERVED THAT THE APPELLANT WHO HAS CLAIMED TO HAVE BEEN ENGAGED IN THE PRODUCTION AND MANUFACTURE OF OILS F ROM SHEA- CAKES KOKUM-CAKES ETC. PURCHASED FROM OPEN MARKET CANNOT BE SAID TO HAVE COMPLETED ALL THE STAGES OF PRODUCT ION OR MANUFACTURE BY THE ISOLATES ACT OF EXTRACTION OF OI L FROM THE SEED-CAKES. IN THE APPELLANTS LINE OF ACTIVITIES THE PRODUCTION PROCESS STARTS FROM THE PROCUREMENT OF BASIC OIL SE EDS WHICH ARE THEN CONVERTED INTO CAKES IN THE NEXT STAGE OI L EXTRACTED THEREFROM AND AT THE FINAL STAGE THE OIL REFINED T O BE SOLD AS A MARKETABLE PRODUCT IN THE OPEN MARKET. ADMITTEDLY THE APPELLANT-COMPANY HAS THE NECESSARY INFRASTRUCTURE TO NOT ONLY EXTRACT THE OIL BUT ALSO PROCESS IT FURTHER FOR REF INING SUCH OIL. THE INTENTION OF THE APPELLANT TO MANUFACTURE OR PRODUCE THE REFINED OIL AS AN END PRODUCT IS EVIDENT FROM CARRY ING OUT THE MANUFACTURING PROCESS TO THE FINAL STAGE OF REFINEM ENT. IN THIS VIEW OF THE MATTER WHEN ALL THE STAGES OF MANUFACT URING IS COVERED FROM PROCUREMENT OF OIL SEEDS OR CAKES TO R EFINING OF OIL WOULD THEN SUCH INTEGRATED PROCESS BE TREATED AS AN INDUSTRIAL UNDERTAKING. THERE WOULD BE NOTHING WR ONG IF THE APPELLANT CLAIMS DEDUCTION UNDER SECTION 80IB IN RES PECT OF PROFITS IF ANY ON SALE OF THE FINAL PRODUCT BEIN G THE REFINED OIL. BUT FOR THE REASONS BEST KNOWN TO THE APPELLAN T IT HAS ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 17 OF 28 SOUGHT TO COMPUTE PROFIT AT THE STAGE OF EXTRACTION OF OIL WHICH IS ONLY AN INTERMEDIARY STAGE AND THEREFORE CANNOT BE SAID TO CONSTITUTE A FULL FLEDGED INDUSTRIAL UNDERT AKING BY ITSELF. SUCH REASONS WOULD BE WELL GUESSED WHEN THE FINAL A CCOUNTING RESULTS OF THE SALE OF END PRODUCT OF REFINED OIL I S VIEWED; THE APPELLANT HAS SHOWN NEGATIVE PROFIT OR RATHER CHOS EN TO PROJECT NEGATIVE PROFIT WHICH BY ITSELF WOULD NOT CONFER ANY BENEFIT OF DEDUCTION FOR THE PURPOSE OF DETERMINING THE TAXABLE INCOME. HENCE THE COMPULSION TO CREATE A FAADE OF EXPELLER REFINERY PLANTS AS SEPARATE UNITS AND INDUSTRIAL UNDERTAKINGS. THE BENEFICIAL PROVISIONS OF CHAPTER VIA OF THE ACT DOES NOT CONTEMPLATE CONFERRING UNDUE BENEFIT B Y COMPUTING PROFITS ON INTERNAL TRANSFER (AND NOT EXT ERNAL SALE) AT AN INTERMEDIARY STAGE NOT COVERING THE FINAL STA GE OF INDUSTRIAL ACTIVITY. IN THE APPELLANTS CASE EXTRA CTION OF OIL IS ONLY A COMPONENT OF AN INTEGRATED OIL MANUFACTURING PROCESS LEADING TO THE FINAL STAGE OF REFINING OF OIL AND THEREFORE CANNOT BE TREATED AS AN INDEPENDENT ACTIVITY TORN A WAY FROM THE REFINING PROCESS. THE REFINING PROCESS OF OIL I S A LOGICAL CULMINATION OF FURTHER PROCESSING OF VIRGIN OIL EXT RACTED FROM OIL SEEDS OR CAKES. AS THE REFINED OIL IS ONLY AN IMPRO VED AND ACCEPTABLE VERSION OF THE EXTRACTED OIL FROM CAKES AND THERE BEING NO QUALITATIVE CHANGE IN THE CHEMICAL COMPOSI TION OR PHYSICAL PROPERTY EXCEPT ELIMINATION OF CERTAIN IMP URITIES THE CLAIM THAT THE EXPELLER WHOSE BASIS FUNCTION IS T O EXTRACT OIL FROM SEEDS OR CAKES AS A SEPARATE UNIT AND HENCE AN INDUSTRIAL UNDERTAKING IS PATENTLY UNFOUNDED AND UNQUALIFIED ONE WITH AN INTENTION TO DERIVE UNDUE BENEFITS NOT CONTEMPLATED BY THE RELEVANT PROVISIONS OF THE I.T. ACT. 13.3 THE LEARNED AUTHORISED REPRESENTATIVE BY PLACI NG RELIANCE ON THE DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF DCW LTD.(2010) 37 SOT 322) AND ALSO PROVISIONS OF SECTION 80IA(8) SUBMIT TED THAT THE ASSESSEE IS REQUIRED TO ADOPT THE MARKET RATE TO ARRIVE AT THE VALUE OF PRODUCT TRANSFERRED TO OTHER UNITS FROM THE EXPELLER UNIT. HE FURTHER SUBMITTED THAT THE PRODUCT DERIVED FROM EXPELLER UNIT IS A DISTINC T SALEABLE PRODUCT AND IN SUPPORT OF IT HE INVITED OUR ATTENTION TO THE COPI ES OF INVOICES RAISED BY THE ASSESSEE IN NOVEMBER 2007 AND DECEMBER 2007 IN CON NECTION WITH THE SALE OF A PRODUCT NAMED KOKUM OIL. THE ASSESSEE FURTHER SUBMITTED THAT THE EXPELLER UNIT IS PRODUCING KOKUM OIL & SHEA OIL . HE ALSO PRODUCED ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 18 OF 28 CERTAIN ARTICLES DOWN LOADED FROM THE INTERNET TO D ESCRIBE THE USES OF SHEA OIL. 13.4 NOW THE CRUX OF THE ISSUE IS WHETHER THE PRODUCT DERIVED FROM THE EXPELLER UNIT IS A PRODUCT OF INTERMEDIARY STAGE OR A SALEABLE PRODUCT HAVING A MARKET VALUE. ACCORDING TO THE ASSESSEE IT IS P RODUCING KOKUM OIL SHEA OIL ETC. FROM THE EXPELLER UNIT. IT WAS SUBMITTED THAT THE PRODUCT SHALL BE RAW/CRUDE AND IT IS TRANSFERRED TO REFINERY UNIT FO R REFINING THE OIL OR TO SOLVENT EXTRACTION PLANT FOR PRODUCING SPECIALTY FA TS. THE VARIOUS DOCUMENTS DOWN LOADED FROM THE INTERNET IS RELATED TO SHEA BUTTER AND SHEA OIL AND IT IS STATED THEREIN THAT SHEA OIL IS A BY PRODUCT OF SHEA BUTTER PRODUCTION. IT IS ALSO NOT CLEAR WHETHER THE SHEA O IL MENTIONED IN THE SAID ARTICLE IS A RAW/CRUDE OIL OR REFINED OIL. THE COP Y OF INVOICES PRODUCED BY THE ASSESSEE PERTAINS TO NOV./DEC. 2007 AND IT IS S HOWN ONLY AS KOKUM OIL AND IT IS NOT CLEAR FROM THOSE INVOICES ALSO W HETHER THE SAID OIL IS RAW/CRUDE OR REFINED OIL. IN ANY CASE THE ASSESSEE HAS NOT BROUGHT ANY MATERIAL TO SHOW THAT THE PRODUCTS DERIVED FROM EXP ELLER UNIT WERE SALEABLE DURING THE YEARS UNDER CONSIDERATION. IN VIEW OF THE ABOVE WE ARE INCLINED TO ACCEPT THE OBSERVATIONS MADE BY THE LEA RNED CIT(A) IN THE ASSESSMENT YEAR 2003-04 WHICH HAVE BEEN EXTRACTED ABOVE. ACCORDINGLY WE REVERSE THE ORDER OF LEARNED CIT(A) FOR ASSESSME NT YEAR 2002-03 ON THIS ISSUE AND RESTORE THE ORDER OF THE ASSESSING O FFICER ON THIS ISSUE. C. ITA/219/VIZAG/2006 ASSESSMENT YEAR 2003-04 A SSESSEE: 14. THE APPEAL NUMBERED AS ITA/219/VIZAG/2006 HAS B EEN FILED BY THE ASSESSEE AND IT RELATES TO THE ASSESSMENT YEAR 2003 -04. THE ASSESSEE HAS FILED CONCISE GROUNDS OF APPEAL AND DURING THE COUR SE OF HEARING THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT HE IS NOT PRESSING GROUND NUMBERED AS 1.0. ACCORDINGLY THE SAID GROUND IS DIS MISSED AS WITHDRAWN. THE REMAINING GROUNDS GIVE RISE TO FOLLOWING TWO IS SUES: ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 19 OF 28 A) DEDUCTION UNDER SECTION 80HHC B) DEDUCTION UNDER SECTION 80IA 15. THE FIRST ISSUE RELATES TO THE COMPUTATION OF D EDUCTION UNDER SECTION 80HHC OF THE ACT. FOR THE REASONS STATED IN PARAGR APH NO.7 (SUPRA) WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING O FFICER. 16. THE NEXT ISSUE RELATES TO DEDUCTION UNDER SECTI ON 80IA ON THE INCOME RELATING TO EXPELLER PLANT. WE HAVE CONSIDER ED THIS ISSUE IN PARA NO.13 (SUPRA) IN THE APPEAL OF THE REVENUE RELATING TO THE ASSESSMENT YEAR 2002-03. CONSISTENT WITH THE VIEW TAKEN THEREIN WE HOLD THAT THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION UNDER SECTION 80IA ON EXPELLER PLANT. ACCORDINGLY WE UPHOLD THE ORDER OF THE LEARNED CIT (A) ON THIS ISSUE. D. ITA/175/VIZAG/2007 ASSESSMENT YEAR: 2004-05 ASSESSEE: 17. THE APPEAL NUMBERED AS ITA/175/VIZAG/2007 HAS B EEN FILED BY THE ASSESSEE AND IT RELATES TO THE ASSESSMENT YEAR 2004 -05. FOLLOWING TWO ISSUES ARE URGED IN THIS APPEAL: A) DISALLOWANCE OF EXPENSES RELATABLE TO DIVIDEND INCOME B) DEDUCTION UNDER SECTION 80HHC. 18. THE FIRST ISSUE RELATES TO THE ESTIMATION OF EX PENDITURE RELATABLE TO THE DIVIDEND INCOME FOR THE PURPOSE OF MAKING DISAL LOWANCE AS PER THE PROVISIONS OF SEC.14A OF THE ACT. DURING THE YEAR U NDER CONSIDERATION THE ASSESSEE DISCLOSED DIVIDEND INCOME OF RS.2 24 79 64 3/- AND CLAIMED THE SAME AS EXEMPT UNDER SECTION 10(34) OF THE ACT. TH E ASSESSEE DID NOT ALLOCATE ANY EXPENDITURE AGAINST IT. THE DIVIDEND INCOME WAS RECEIVED FROM ITS SUBSIDIARY COMPANIES NAMED M/S ASIA PACIFIC COM MODITIES LTD. AND M/S PARKER INTERNATIONAL PTE SINGAPORE. ACCORDING TO S EC. 14A OF THE ACT NO DEDUCTION SHALL BE ALLOWED IN RESPECT OF EXPENDITUR E INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 20 OF 28 UNDER THE ACT. HENCE THE ASSESSING OFFICER DID NO T ACCEPT THE CONTENTION OF THE ASSESSEE THAT IT DID NOT INCUR ANY EXPENDITU RE FOR EARNING THE IMPUGNED DIVIDEND INCOME. THE ASSESSEE ALSO DID NOT MAINTAIN SEPARATE BOOKS OF ACCOUNT FOR THIS SOURCE OF INCOME. HENCE THE ASSESSING OFFICER WAS OF THE VIEW THAT A PORTION OF THE TOTAL EXPENDI TURE INCURRED BY THE ASSESSEE DURING THE RELEVANT YEAR SHOULD BE ATTRIBU TABLE TO THE DIVIDEND INCOME. ACCORDINGLY BY TAKING CUE FROM THE PROVIS IONS OF SEC.80HHC OF THE ACT THE ASSESSING OFFICER ESTIMATED 10% OF THE DIV IDEND INCOME I.E. RS. 22 47 964/- AS THE PORTION OF COMMON EXPENDITURE AT TRIBUTABLE TO THE DIVIDEND INCOME AND ADDED THE SAME TO THE TOTAL INC OME OF THE ASSESSEE. THE LEARNED CIT (A) ALSO UPHELD THE ORDER OF THE AS SESSING OFFICER ON THIS ISSUE. 18.1 ACCORDING TO THE ASSESSEE THE INVESTMENT IN THE SUBSIDIARY COMPANIES WERE MADE IN THE FINANCIAL YEARS 1999-2000 2000-01 AND 2002-03 AND THE SAID INVESTMENTS CONSTITUTED ONLY A SMALL PERCENTAG E OF TOTAL PROFITS OF THOSE YEARS. IT WAS FURTHER SUBMITTED THAT NO EXPEN DITURE WAS INCURRED ON EARNING THE IMPUGNED DIVIDEND INCOME. ON THE OTHER HAND THE LEARNED DEPARTMENTAL REPRESENTATIVE DEFENDED THE ORDER OF L EARNED CIT(A). 18.2 IT IS AN ADMITTED FACT THAT THE ASSESSEE D ID NOT MAINTAIN SEPARATE BOOKS OF ACCOUNTS FOR THE INVESTMENTS MADE IN SHARE S. HENCE IT WOULD BE DIFFICULT TO FIND OUT WHETHER THE SAID INVESTMENTS WERE MADE OUT OF SURPLUS FUNDS OR FROM THE BORROWED FUNDS AND AS PER THE SET TLED PRINCIPLES; THE BENEFIT OF DOUBT SHOULD BE GIVEN TO THE ASSESSEE. HOWEVER IT CAN NOT BE DENIED THAT A PART OF ADMINISTRATIVE EXPENSES SHOUL D BE ATTRIBUTABLE TO THE DIVIDEND INCOME ALSO. IN THE INSTANT YEAR THE ASSE SSEE HAS RECEIVED THE DIVIDENDS FROM TWO COMPANIES. HENCE IN THIS KIND OF SITUATION WE ARE UNABLE TO AGREE WITH THE ASSESSING OFFICERS AD HOC ESTIMATE OF 10% OF THE DIVIDEND INCOME AS RELATABLE EXPENDITURE. WE ARE O F THE VIEW THAT ONE IS CONSTRAINED TO ESTIMATE THE PROBABLE EXPENSES THAT WOULD BE ATTRIBUTABLE TO ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 21 OF 28 THE IMPUGNED DIVIDEND INCOME IN THE ABSENCE OF SEP ARATE SET OF BOOKS OF ACCOUNT. ACCORDINGLY ON A CONSPECTUS OF THE MATTE R WE ESTIMATE THE EXPENSES ATTRIBUTABLE TO THE DIVIDEND INCOME AT RS. 2.00 LAKHS AND IN OUR VIEW IT WOULD MEET THE ENDS OF JUSTICE. WE ORDER A CCORDINGLY. THE ORDER OF LEARNED CIT(A) STANDS MODIFIED ACCORDINGLY. 19. THE NEXT ISSUE RELATES TO THE COMPUTATION OF DE DUCTION UNDER SECTION 80HHC OF THE ACT. FOR THE REASONS STATED IN PARAGR APH NO.7 (SUPRA) WE SET ASIDE THIS ISSUE TO THE FILE OF THE ASSESSING O FFICER. E. ITA/489/VIZAG/2008 ASSESSMENT YEAR: 2005-06 ASSESSEE: 20. THE APPEAL NUMBERED AS ITA/489/VIZAG/2008 HAS B EEN FILED BY THE ASSESSEE AND IT RELATES TO THE ASSESSMENT YEAR 2005 -06. FOLLOWING FOUR ISSUES ARE URGED IN THIS APPEAL: A) DISALLOWANCE OF EXPENSES RELATABLE TO DIVIDEND INCOME B) DISALLOWANCE OF MACHINERY REPAIR EXPENSES. C) DISALLOWANCE OF BUILDING REPAIR EXPENSES D) DENIAL OF DEDUCTION UNDER SECTION 90(2) OF THE ACT. 21. THE FIRST AND FOURTH ISSUE RELATES TO THE DI VIDEND INCOME OF THE ASSESSEE. IN THIS YEAR THE ASSESSEE DISCLOSED A DI VIDEND INCOME OF RS.1 12 67 939/- FROM THE INVESTMENT MADE IN ITS SU BSIDIARY COMPANIES VIZ. PARKER INTERNATIONAL PTE SINGAPORE AND M/S ASIA PA CIFIC COMMODITIES LTD. THE ASSESSEE RECEIVED A DIVIDEND INCOME OF RS.60 00 000/- FROM M/S ASIA PACIFIC COMMODITIES LTD AND CLAIMED THE SAME AS EXE MPT UNDER SECTION 10(34) OF THE ACT. THE ASSESSEE DID NOT ALLOCATE A NY EXPENDITURE AS ATTRIBUTABLE TO THE DIVIDEND INCOME. HENCE THE ASS ESSING OFFICER ESTIMATED EXPENSES AT 10% OF RS.60.00 LAKHS AND DISALLOWED TH E SAME. ON THE BALANCE AMOUNT OF DIVIDEND OF RS.52 67 939/- THE A SSESSEE CLAIMED TAX REBATE UNDER SECTION 90(2) OF THE ACT. THE ASSESSI NG OFFICER DENIED THE SAID REBATE AS THE ASSESSEE COULD NOT FILE NECESSARY EVI DENCES IN THAT REGARD. IN ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 22 OF 28 THE APPEAL THE LEARNED CIT(A) CONFIRMED THE DISALL OWANCE OF RS.6.00 LAKHS. WITH REGARD TO THE CLAIM OF TAX REBATE UNDER SECTIO N 90(2) OF THE ACT THE LEARNED CIT(A) REFUSED TO REMIT THE MATTER BACK TO THE ASSESSING OFFICER AS THE ASSESSEE STATED THAT THE EVIDENCES ARE STILL AW AITED. 21.1 IN THE EARLIER WE HAVE ESTIMATED THE EXPE NSES AT RS.2.00 LAKHS AGAINST THE DIVIDEND INCOME OF RS.2.24 CRORES. FOR THE REASONS STATED IN PARA 18.2 (SUPRA) WE ESTIMATE THE EXPENSES ATTRIB UTABLE TO THE IMPUGNED DIVIDEND INCOME OF RS.60.00 LAKHS AT RS.1.00 LAKH A ND IN OUR VIEW IT WOULD MEET THE ENDS OF JUSTICE. WE ORDER ACCORDINGLY. T HE ORDER OF LEARNED CIT(A) STANDS MODIFIED ACCORDINGLY. 21.2 WITH REGARD TO THE CLAIM OF TAX REBATE UNDER SECTION 90(2) OF THE ACT WE ARE OF THE VIEW THAT IN THE INTEREST OF NATURAL JUSTICE THE ASSESSEE SHOULD BE GIVEN ONE MORE OPPORTUNITY TO PRODUCE NECESSARY EVIDENCES AS IT HAD TO OBTAIN FROM ITS OVERSEAS COMPANY. ACCORDINGLY WE SET ASIDE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE AND REMIT THE MATTER B ACK TO THE FILE OF ASSESSING OFFICER AND ALLOW THE TAX REBATE IF THE A SSESSEE IS ABLE TO FILE NECESSARY EVIDENCES. THE ASSESSEE IS ALSO DIRECTED TO FILE THE NECESSARY EVIDENCES IN THIS REGARD WITH THE ASSESSING OFFICER . 22. THE NEXT ISSUE RELATES TO THE DISALLOWANCE OF MACHINERY REPAIRS OF RS.19 76 758/-. THE FOLLOWING EXPENSES CLAIMED BY THE ASSESSEE AS REPAIRS WERE DISALLOWED BY THE ASSESSING OFFICER BY TREATIN G THEM AS CAPITAL EXPENDITURE. A) BAKERY SHORTENING MARGARINEMANN PLANT INSTALLATION CHARGES - 94 965 B) UPGRADATION OF SE PLANT - 16 49 30 5 C) WORM ASSEMBLY CONSUMPTION - 2 32 758 ---------------- 19 76 758 ======== ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 23 OF 28 THE LEARNED CIT(A) ALSO CONFIRMED THE ORDER OF THE ASSESSING OFFICER. HENCE THE ASSESSEE IS IN APPEAL BEFORE US. 22.1 THE FIRST ITEM RELATES TO THE BAKERY SHORTE NING MARGARINEMANN PLANT INSTALLATION CHARGES. THE ASSESSING OFFICER TREATE D THE SAID EXPENDITURE AS CAPITAL IN NATURE WITH THE FOLLOWING OBSERVATIONS: IT IS CLEARLY MENTIONED IN THE ACCOUNTS THAT THE E XPENDITURE INCURRED IS IN RELATION TO THE INSTALLATION OF A PL ANT CALLED BAKERY SHORTENING MARGARINE PLANT. THE ASSESSEE COMPANY IN ITS REPLY STATED THAT THE EXPENDITURE IS INCURRED IN RELATION TO THE REPLACEMENT OF SOME COMPONENTS. THE ASSESSEE COMPAN Y HAS NOT PRODUCED ANY PROOF IN SUPPORT OF THE SAID CONTENTIO N ALONG WITH ITS REPLY. IT WAS NOT EVEN MENTIONED AS TO WHY IT W AS WRITTEN IN THE ACCOUNTS THAT THE EXPENDITURE IS INCURRED IN RE LATION TO THE INSTALLATION TO THE PLANT. AS THE INSTALLATION CHAR GES OF A PLANT CANNOT BE TREATED AS REVENUE EXPENDITURE THE ASSES SEE COMPANYS CONTENTION IS NOT ACCEPTED AND THE SAME I S TREATED AS CAPITAL EXPENDITURE. WE NOTICE THAT THE ASSESSEE DID NOT PRODUCE ANY MAT ERIAL EITHER BEFORE LEARNED CIT(A) OR BEFORE US TO SUPPORT ITS CONTENTI ON THAT THE SAID EXPENDITURE RELATES TO THE REPLACEMENT OF SOME COMP ONENTS. THE ASSESSEE ITSELF HAS DESCRIBED THE IMPUGNED AMOUNT AS INSTAL LATION CHARGES AND HENCE THE ASSESSING OFFICER HAS OBSERVED THAT THE INSTALL ATION CHARGES CAN ONLY BE TREATED AS PART OF CAPITAL EXPENDITURE. THE SAID V IEW WAS UPHELD BY LEARNED CIT(A). IN THE ABSENCE OF ANY CONTRARY MATERIAL W E ARE IN AGREEMENT WITH THE VIEWS OF TAX AUTHORITIES AND HENCE WE DO NOT FI ND ANY REASON TO INTERFERE WITH THE DECISION OF LEARNED CIT(A) ON THIS AMOUNT OF RS.94 965/-. 22.2 WITH REGARD TO THE OTHER TWO ITEMS WE ARE OF THE VIEW THAT THE QUESTIONS WHETHER THE CLAIM OF THE ASSESSEE IS TO B E ALLOWED OR NOT AND WHETHER IT IS TO BE ALLOWED AS REPAIRS UNDER SECTIO N 31 OR AS REVENUE EXPENDITURE UNDER SECTION 37(1) NEED TO BE EXAMINED AFRESH IN THE LIGHT OF THE FOLLOWING DECISIONS OF HON'BLE SUPREME COURT IN THE FOLLOWING CASES: A. CIT V SARAVANA SPINNING MILLS LTD. (293 ITR 201 ) ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 24 OF 28 B. CIT VS. RAMARAJU SURGICAL COTTON MILLS LTD (294 ITR 201) C. CIT VS. MANGAYARKARASI MILLS PVT. LTD (315 ITR 114) D. CIT VS. HINDUSTAN TEXTILES LTD. 2009-TIOL-138-S. C-IT-LB DATED 03- 11-2009 E. CIT VS. SUGAVANEESWARA SPINNING MILLS LTD (2009- TIOL-124-S.C -IT- LB DATED 16.11.2009 F. CIT VS. BHOJRAJ TEXTILE MILLS LTD (2009-TIOL-22- S.CT-IT-LB DATED 08- 02-2010. ACCORDINGLY WE SET ASIDE THE ORDER OF LEARNED CIT(A ) IN RESPECT OF THE ABOVE SAID TWO ADDITIONS AND REMIT THE SAME TO THE FILE O F ASSESSING OFFICER WITH A DIRECTION TO EXAMINE THE MATTER AFRESH IN THE LIGHT OF THE DECISIONS CITED ABOVE. 23. THE NEXT ITEM RELATES TO THE DISALLOWANCE OF BUILDING REPAIR EXPENSES OF RS.3 16 124/-. THE DETAILS OF SAID EXPENSES ARE FU RNISHED BELOW: 1 22-5-04 CHARGES FOR PROVIDING GYPSUM BOARD CEILING FOR VOP CONDITIONING HALL 13049 2 22-5-04 COST OF MATERIAL FOR GYPSUM BOARD CEILING FOR VOP N EW CONDITIONING HALL 87025 3 30-9-04 EXP.INCURRED IN CONNECTION WITH RENOVATION OF KOLKATA OFFICE BUILDING 49384 4 31-10-04 PURCHASE OF MARBLE FOR GUEST HOUSE 26539 5 18-12-04 G NAGESWARA RAO LC FOR CONST.OF GUEST HOUSE KITCHEN PLATFORM ETC 4600 6 20-12-04 FURNITURE POLISHING WORK AT GUEST HOUSE 30795 7 31.1.05 GRANITE MARBLES & GRANITE INDIA 40713 8 31-1-05 TOWEL RING DIVERTOR 10620 9 10-03-05 SANJAY CHOWDARY DUCO PAINTING ORDINARY ENAMEL PAINT ETC. FOR CHILDRENS BEDROOM AND GUEST HOUSE BED ROOM 38165 10 18-3-05 PAINTING OF GH FIRST FLOOR VERANDAH HALL 15234 316 124 23.1 THE NATURE OF THESE EXPENSES HAS BEEN EXPLAIN ED AS UNDER BY THE ASSESSEE. I) CEILING OF VANASPATI CONDITION HALL AMOUNTING T O RS.13049 AND RS.87028; II) COST INCURRED TOWARDS REGULAR WOOD PARTITIONING COST OF MATTRESSES AND INTERIORS INCLUDING CHARGES PAID TO SECURITY STAFF FOR KOLKATA OFFICE AMOUNTING TO RS.49 348/- ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 25 OF 28 III) GUEST HOUSE MAINTENANCE INCLUDING REPLACEMENT OF WORN-OUT TILES AMOUNTING TO RS.26539/- RS.40 713/- AND RS.9 600/-. IV) POLISHING OF FURNITURE AMOUNTING TO RS.30 795/ -; V) COST INCURRED TOWARDS 15 ITEMS USED FOR REPLACEMENT IN SANITARY AMOUNT FROM RS.36 TO RS.1867/- AGGREGATING TO RS.10 620/-; VI) COST OF PAINTS AND PAINTING CHARGES AMOUNTING TO RS .38 165/- AND RS.15 234/- OF ADMINISTRATIVE BLOCK HALL GUES T HOUSE ROOMS ETC. OF EXISTING BUILDINGS; 23.2 ON A CAREFUL PERUSAL OF THE ABOVE SAID EXPENS ES WE NOTICE THAT THESE EXPENSES HAVE BEEN INCURRED ON NORMAL REPAIR WORKS AND IN OUR VIEW; NO ASSET OF ENDURING NATURE HAS BEEN BROUGHT INTO EXISTENCE. ACCORDINGLY WE REVERSE THE ORDER OF LEARNED CIT(A) ON THIS ISSUE AND DIRECT THE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. F. ITA/404/VIZAG/2009 ASSESSMENT YEAR: 2006-07 REVENUE: 24. THE APPEAL NUMBERED AS ITA/404/VIZAG/2009 H AS BEEN FILED BY THE REVENUE AND IT RELATES TO THE ASSESSMENT YEAR 2006- 07. FOLLOWING ISSUES ARE URGED IN THIS APPEAL: A) REPAIRS TO BARGE AND STORAGE TANKS. B) REPAIRS TO MACHINERY. C) DEPRECIATION ON CORPORATE BUILDING. 25. THE FIRST ISSUE RELATES TO REPAIRS TO BARGE A ND STORAGE TANKS. THE ASSESSEE CARRIED OUT EXTENSIVE REPAIRS TO BARGE AND STORAGE TANKS SINCE BOTH THE ASSETS GOT DAMAGED TO A CONSIDERABLE EXTENT BY THE DEVASTATING EFFECT OF TSUNAMI IN THE YEAR 2003. THE ASSESSEE HAD INCUR RED A SUM OF RS.19 77 477/- AGAINST WHICH IT RECEIVED INSURANCE CLAIM TO THE TUNE OF RS.17 58 350/-. THE ASSESSEE HAD OFFERED THE INSURA NCE CLAIM AS INCOME AND CLAIMED THE EXPENDITURE INCURRED ON REPAIRS. THE AS SESSING OFFICER WAS OF THE VIEW THAT THE SAID EXPENDITURE IS CAPITAL IN NA TURE AND ACCORDINGLY PROPOSED TO DISALLOW THE SAME. HOWEVER HE DEDUCTED THE PROPORTIONATE INSURANCE CLAIM AMOUNT AND APPLICABLE DEPRECIATION FROM THE TOTAL EXPENDITURE AND ACCORDINGLY DISALLOWED A SUM OF RS. 2 91 636/-. THE LEARNED CIT (A) DELETED THE SAID ADDITION. ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 26 OF 28 25.1 ON A CAREFUL PERUSAL OF THE ORDER OF THE LEARN ED CIT (A) WE NOTICE THAT THE LEARNED CIT (A) HAS ALLOWED THE CLAIM OF T HE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: THE EXPENDITURE TOWARDS BARGE AND STORAGE TANK CO NSEQUENT TO THEIR EXTENSIVE DAMAGE CAUSED BY THE DEVASTATING TS UNAMI 2003 CLEARLY PARTAKES THE CHARACTER OF A REVENUE EXPENDI TURE IN AS MUCH AS BY UNDERTAKING REPAIRS TO SUCH ASSETS THE Y WERE BROUGHT BACK TO THEIR ORIGINAL OPERATIONAL LEVEL FA ILING WHICH SUCH ASSETS WOULD HAVE REMAINED IN-OPERATIONAL. IN THIS S ENSE THE PARAMETER OF PRESERVATION AND MAINTENANCE OF THE AS SETS APPLIES IN RESPECT OF THESE TWO ASSETS AND HENCE THE EXPE NDITURE THEREOF TAKES THE NATURE OF REVENUE EXPENDITURE. HENCE THE DISALLOWANCE MADE IS NOT SUSTAINABLE AND THE ASSESSING OFFICER WOULD DO WELL TO ALLOW THE ACTUAL EXPENDITURE INCURRED AFTER CONS IDERING THE BENEFIT OF INSURANCE CLAIM THEREOF. THUS THE IMPUGNED EXPENDITURE HAS BEEN INCURRED O NLY TO RESTORE THE BARGE AND STORAGE TANK INTO ITS EARLIER WORKING CON DITION. HENCE WE ARE OF THE VIEW THAT THE LEARNED CIT (A) HAS DECIDED THE I SSUE IN PROPER PERSPECTIVE AND ACCORDINGLY APPROVE HIS DECISION ON THIS ISSUE. 26. THE NEXT ISSUE RELATES TO CLAIM OF RS.3 99 375/ - AS MACHINERY REPAIRS. THE NATURE OF THIS EXPENDITURE IS CLAIMED TO BE THE LABOUR CHARGES INCURRED TOWARDS REVITALIZATION OF PLANT. THE ASSES SING OFFICER DISALLOWED THE SAID CLAIM TREATING THE SAME AS CAPITAL EXPENDITURE . HOWEVER THE LEARNED CIT (A) SET ASIDE THE ISSUE TO THE FILE OF THE ASSE SSING OFFICER WITH THE FOLLOWING OBSERVATIONS: SIMILARLY THE COST OF MISCELLANEOUS SPARE PARTS A ND LABOUR CHARGES FOR MAKING MACHINES OPERATIONAL TO THEIR OP TIMUM CAPACITY WITHOUT INCREASING THEIR CAPACITY BEYOND T HEIR ORIGINAL CAPACITY PARTAKES OF THE CHARACTER OF REVENUE EXPEN DITURE. SINCE SUCH EXPENDITURE FALLS WITHIN THE PARAMETER O F PRESERVATION AND MAINTENANCE THE ASSESSING OFFICER SHALL THEREFORE ALLOW EXACT EXTENT OF SUCH EXPENDITURE A FTER VERIFICATION. ON A CAREFUL PERUSAL ORDER OF THE LEARNED CIT (A) W E NOTICE THAT THE FIRST APPELLATE AUTHORITY HAS ONLY SET ASIDE THE ISSUE TO THE FILE OF THE ASSESSING ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 27 OF 28 OFFICER FOR TAKING APPROPRIATE DECISION AFTER MAKIN G FURTHER INQUIRIES ON THE IMPUGNED ISSUE AS THE DETAILS WERE NOT CLEARLY BRO UGHT OUT IN THE ASSESSMENT ORDER. HENCE WE DO NOT FIND ANY INFIRMI TY IN THE DECISION OF THE LEARNED CIT (A) ON THIS ISSUE. 27. THE NEXT ISSUE RELATES TO THE ALLOWABILITY OF D EPRECIATION ON THE CORPORATE OFFICE BUILDING. DURING THE YEAR UNDER CO NSIDERATION THE ASSESSEE HAS PURCHASED A BUILDING IN CHENNAI ON 31-3-2006 I .E. ON THE LAST DAY OF THE ACCOUNTING YEAR. THE REGISTRATION OF THE SAID PURCH ASE ALSO TOOK PLACE ON 31.3.2006. THE ASSESSING OFFICER CALLED FOR PROOF I N SUPPORT OF THE CLAIM THAT THE SAID BUILDING WAS USED FOR BUSINESS PURPOSES DU RING THE INSTANT YEAR ITSELF BUT THE ASSESSEE FAILED TO FURNISH ANY PROO F EXCEPT STATING THAT THE SAID BUILDING WAS OCCUPIED BY THE COMPANYS EXECUTI VES ON THE DAY OF REGISTRATION OF THE CONVEYANCE DEED ITSELF. HENCE THE ASSESSING OFFICER DISALLOWED THE CLAIM OF DEPRECIATION MADE ON THE SA ID BUILDING. HOWEVER THE LEARNED CIT (A) ALLOWED THE CLAIM BY OBSERVING THAT MERE PRESENCE OF EXECUTIVES IN THE BUILDING ON THE LAST DAY OF THE A CCOUNTING YEAR IS SUFFICIENT TO DESIGNATE IT AS OCCUPIED AND USED FOR THE PURPOS E OF BUSINESS. 27.1 AS PER PROVISIONS OF SEC. 32 DEPRECIATION IS A LLOWED ON ANY ASSET IF IT IS OWNED BY THE ASSESSEE AND USED FOR THE PURPOSES OF THE BUSINESS. THE ASSESSEE HAS OBTAINED THE OWNERSHIP OF THE IMPUGNED BUILDING ON 31.3.2006. HOWEVER DESPITE THE REQUEST MADE BY THE ASSESSING OFFICER THE ASSESSEE COULD NOT PRODUCE ANY EVIDENCE TO SHOW THA T THE SAME WAS PUT USE FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. WE ARE UNABLE TO AGREE WITH THE OBSERVATIONS MADE BY THE LEARNED CIT (A) T HAT MERE PRESENCE OF COMPANYS EXECUTIVES WOULD AMOUNT TO OCCUPATION AND USE OF BUILDING FOR THE PURPOSE OF BUSINESS. SINCE THE BUILDING ITSELF WAS PURCHASED ON THE LAST DAY OF THE ACCOUNTING YEAR IN ALL PRACTICAL SITUAT IONS IT WOULD BE DIFFICULT TO PUT THE SAME FOR USE FOR BUSINESS PURPOSES. IN O UR VIEW THE ASSESSEE SHOULD HAVE ADDUCED SOME EVIDENCE IN THIS REGARD. IN VIEW OF THE ABOVE ITA NOS.556 (6 CASES) FOODS FATS AND FERTILIZERS LT D TADEPALLEGUDEM PAGE 28 OF 28 WE REVERSE THE ORDER OF THE LEARNED CIT (A) ON THIS ISSUE AND RESTORE THE DISALLOWANCE OF DEPRECIATION MADE BY THE ASSESSING OFFICER. 28. IN THE RESULT THE APPEAL NUMBERED AS ITA 40 4/VIZAG/2009 IS DISMISSED AND ALL OTHER APPEALS ARE TREATED AS PART LY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED ACCORDINGLY ON 10 TH FEBRUARY 2011. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE: 10-02-2011 COPY TO 1 THE ASSTT. COMMISSIONER OF INCOME TAX KKS TOWERS RR PET ELURU 534002 2 THE ADDITIONAL COMMISSIONER OF INCOME TAX RAJAHM UNDRY 3 M/S. FOODS FATS & FERTILIZERS LTD. TANUKU ROAD TADEPALLEGUDEM 534101 4 5 THE CIT RAJAHMUNDRY THE CIT(A) RAJAHMUNDRY 6 THE DR ITAT VISAKHAPATNAM. 7 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM