The ACIT, Circle-1., Eluru v. M/s Andhra Sugars Ltd., Tanuku

ITA 209/VIZ/2007 | 2004-2005
Pronouncement Date: 20-01-2011 | Result: Dismissed

Appeal Details

RSA Number 20925314 RSA 2007
Assessee PAN RULES2005E
Bench Visakhapatnam
Appeal Number ITA 209/VIZ/2007
Duration Of Justice 3 year(s) 8 month(s) 2 day(s)
Appellant The ACIT, Circle-1., Eluru
Respondent M/s Andhra Sugars Ltd., Tanuku
Appeal Type Income Tax Appeal
Pronouncement Date 20-01-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 20-01-2011
Date Of Final Hearing 07-10-2010
Next Hearing Date 07-10-2010
Assessment Year 2004-2005
Appeal Filed On 18-05-2007
Judgment Text
ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO. 56 /VIZAG/ 20 06 ASSESSMENT YEAR : 2003 - 04 THE ANDHRA SUGARS L TD TANUKU ACIT CIRCLE - 1 ELURU (APPELLANT) VS. (RESPONDENT) PAN NO.AAACT 6357Q ITA NO.124/VIZAG/2006 ASSESSMENT YEAR : 2003 - 04 ACIT CIRCLE - 1 ELURU THE ANDHRA SUGARS LTD TANUKU (APPELLANT) VS. (RESPONDENT) ITA NO.162/VIZAG/200 7 ASSESSMENT YEA R : 200 4 - 05 THE ANDHRA SUGARS LTD TANUKU ACIT CIRCLE - 1 ELURU (APPELLANT) VS. (RESPONDENT) ITA NO.209/VIZAG/2007 ASSESSMENT YEAR : 2004 - 05 ACIT CIRCLE - 1 ELURU THE ANDHRA SUGARS LTD TANUKU (APPELLANT) VS. (RESPONDENT) ITA NO.279/VIZAG/2009 ASS ESSMENT YEAR : 2006 - 07 AD. CIT RANGE RAJAHMUNDRY THE ANDHRA SUGARS LTD TANUKU (APPELLANT) VS. (RESPONDENT) ITA NO.280/VIZAG/2009 ASSESSMENT YEAR : 2006 - 07 THE ANDHRA SUGARS LTD TANUKU AD. CIT RANGE RAJAHMUNDRY (APPELLANT) VS. (RESPONDENT) ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 2 ITA NO.365/VIZAG/2008 ASSESSMENT YEAR : 2005 - 06 THE ANDHRA SUGARS LTD TANUKU AD. CIT RANGE RAJAHMUNDRY (APPELLANT) VS. (RESPONDENT) ITA NO.388/VIZAG/2008 ASSESSMENT YEAR : 2005 - 06 DCIT CIRCLE - 1 RAJAHMUNDRY THE ANDHRA SUGARS LTD TANUKU ( APPELLANT) VS. (RESPONDENT) APPELLANT BY: SHRI C.V.K. PRASAD ADVOCATE RESPONDENT BY: SHRI TH.L. PETER CIT(DR) ORDER PER SHRI S.K. YADAV JUDICIAL MEMBER : - THESE APPEALS ARE PREFERRED BY THE REVENUE AS WELL AS THE ASSESSEE AGAINST THE RESPECTIVE ORD ERS OF THE CIT(A). SINCE COMMON ISSUES ARE INVOLVED IN THESE APPEALS THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF THROUGH THIS CONSOLIDATED ORDER. WE HOWEVER PREFER TO ADJUDICATE THEM ONE AFTER THE OTHER. ITA NO.56 OF 2006: 2. THROUGH THIS APPEAL ASSESSEE HAS ASSAILED THE ORDER OF THE CIT(A) ON VARIOUS GROUND S WHICH ARE AS UNDER: I . INCENTIVE FREE SUGAR PRICE RS.16 49 062/ - 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN HIS CONCLUSION THAT SINCE THE APPELLANT DID NOT UTILIZE THE ADDITIONAL PRICE REALIZED ON SALE OF INCENTIVE SUGAR FOR REPAYMENT OF LOANS TO CENTRAL FINANCIAL INSTITUTIONS SUCH ADDITIONAL PRICE REALIZED CONSTITUTED REVENUE RECEIPT IN TERMS OF CLAUSE 12 OF INCENTIVE SCHEME OF DIRECTOR OF SUGAR DATED 10.3.1993. 2. T HE APPELLANT SUBMITS THAT THE ABOVE SAID LETTER AND ITS CONTENTS IS ONLY A MATTER BETWEEN THE GOVERNMENT AND THE SUGAR FACTORIES WHICH STIPULATES THAT IN THE EVENT OF THE SUGAR FACTORIES NOT CONFIRMING TO THE CONDITION THE INCENTIVES ALREADY GIVEN WOULD BE WITHDRAWN. THIS CONDITION IS NOT IN ANY WAY DECISIVE OF THE LEGAL CHARACTER OF THE AMOUNT REALIZED. 3. THE APPELLANT SUBMITS THAT WHAT IS REQUIRED UNDER THE SCHEME IS THAT THE EXTRA PRICE OR THE INCENTIVE PRICE REALIZED SHOULD BE UTILIZED IN REPAYM ENT OF LOANS OBTAINED FOR EXPANSION OR SETTING UP OF EITHER EXISTING OR NEW FACTORIES. THE APPELLANT SUBMITS THAT IRRESPECTIVE OF WHETHER THE LOANS ARE BORROWED FROM FINANCIAL INSTITUTIONS OR OTHERS WITHOUT ANY DIFFERENCE IF ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 3 REPAID WITH THE RECEIPTS REA LIZED ON SALE OF INCENTIVE SUGAR SUCH RECEIPTS WOULD CONSTITUTE `CAPITAL RECEIPTS AND THE COMMISSIONER OF INCOME TAX (APPEALS) SHOULD NOT HAVE TREATED IF AS REVENUE RECEIPT. 4. ABOVE ALL THE APPELLANT SUBMITS THAT EVEN IN ITS CASE IT HAS REPAID TO IC ICI IDBI LIC ETC. WHICH ARE ALL CENTRAL FINANCIAL INSTITUTIONS AND THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS. II. TOOLS WRITTEN OFF RS.19 74 952/ - 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS TO CONFIR M THE DISALLOWANCE OF RS.19 74 952/ - BEING THE COST OF UNSERVICEABLE OBSOLETE SMALL AND INSIGNIFICANT TOOLS. 2. THE APPELLANT SUBMITS THE MANAGEMENT OF THE APPELLANT HAS BEEN FOLLOWING A CONSISTENT METHOD OF WRITING OFF SUCH TOOLS FOR THE LAST 25 YEAR S AND MORE AND THAT NEVER SUCH ACTION WAS QUESTIONED BY THE ASSESSING OFFICER IN THE PAST. 3. THE APPELLANT SUBMITS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) SHOULD HAVE DELETED THIS ADDITION. III. DEBIT BALANCE WRITTEN OFF RS.25 000/ - 1. THE COM MISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS TO TREAT THE ABOVE AMOUNT WRITTEN OFF AS `CAPITAL LOSS AND CONFIRM THE DISALLOWANCE OF THE SAME. 2. THE APPELLANT SUBMITS THAT IT HAD ADVANCED MONEY IN THE COURSE OF ITS BUSINESS FOR PURCHASE OF MACHINERY WHICH WAS NEVER SUPPLIED THAT WHAT IT HAS LOST IS ITS MONEY BUT NOT ANY CAPITAL ASSET THAT MONEY ADVANCED FOR PURCHASE OF A CAPITAL ASSETS REMAINS ONLY AS MONEY ADVANCED TILL IT IS CONVERTED INTO A CAPITAL ASSET LIKE MACHINERY AND HENCE THE SAM E SHOULD BE TREATED AS REVENUE LOSS. IV. CONSULTATION FEE FOR MODIFICATION OF PLANT & MACHINERY IN ASPIRIN DIVISION OF RS.20 94 555/ - . 1. THE APPELLANT SUBMITS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMI NG THE DISALLOWANCE OF THE ABOVE AMOUNT WHICH WAS PAID TO A CONSULTANT DR. V.K. BHALLA TOWARDS HIS CHARGES FOR GIVING SUGGESTIONS IN THE MATTER OF MODIFICATIONS TO BE CARRIED OUT TO THE EXISTING PLANT AND MACHINERY IN ASPIRIN DIVISION TO SUIT THE STANDARD S OF FOOD AND DRUG ADMINISTRATION OF USA. 2. THE APPELLANT SUBMITS THAT THIS CONSULTATION WAS OBTAINED SO AS TO IMPROVE THE QUALITY OF THE PRODUCT TO EXPLORE THE MARKET IN USA AND OTHER COUNTRIES THAT THIS EXPENDITURE WAS INCURRED FOR THE PURPOSE OF IMP ROVING ITS PROFIT EARNING CAPACITY WITHOUT INCREASE IN PRODUCTION CAPACITY AND THAT THEREFORE IT IS A REVENUE EXPENDITURE. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 4 3. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN HIS CONCLUSION THAT FIXED ASSETS HAVE BEEN BROUGHT INTO EXISTENCE. T HE APPELLANT SUBMITS THAT THE IMPUGNED AMOUNT IS ONLY A CONSULTATION FEE BUT NOT ANY TOWARDS COST OF PLANT AND MACHINERY. V. FIXED COST REIMBURSED TO ISRO RS.7 15 112/ - . 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS OF THE CASE TO CONFIRM THE DISALLOWANCE OF RS.7 15 112/ - BEING THE PART OF THE FIXED COST REIMBURSED TO ISRO IN THE FACE OF THE FACT THAT EVEN THE SAID PART AMOUNT OF RS.7 15 112/ - WAS ACTUALLY REIMBURSED TO THE ISRO. 2. THE APPELLANT SUBMITS THAT THE CONDUCT OF THE APPELLANT IN REIMBURSING THE FIXED COST TO ISRO BASED ON FIVE YEARS AVERAGE ENDED WITH 31.3.2003 CLEARLY SHOWS THAT WHAT IS MENTIONED IN THE MINUTES OF THE MEETING DATED 30.7.2001 IS A MISTAKE AND BY OVERSIGHT INSTEAD OF RECORDING AS 31.3.2003 IT WAS RECORDED AS 31.3.2002 AND THE ACTUAL CONDUCT OF THE PARTIES ESTABLISHED THAT THIS IS A MISTAKE. 3. THE APPELLANT THEREFORE SUBMITS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) SHOULD HAVE ALLOWED THE SAME. 3. WITH REGARD TO THE GROUND NO.1 I.E. TAXA BILITY OF INCENTIVE FROM SUGAR PRICE OF RS.16 49 062/ - IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT THE IMPUGNED ISSUE IS SQUARELY COVERED BY THE JUDGEMENT OF THE APEX COURT IN THE CASE OF CIT VS. PO NNI SUGAR AND CHEMICALS LIMITED 306 ITR 392 IN WHICH IT WAS HELD THAT WHERE THE MAIN ELIGIBILITY CONDITION IN THE SCHEME WAS THAT THE INCENTIVE HAD TO BE UTILIZED FOR REPAYMENT OF LOANS TAKEN BY THE ASSESSEE TO SET UP NEW UNITS OR FOR SUBSTANTIAL EX PANSION OF AN EXISTING UNIT AND THE INCENTIVES WERE UTILIZED FOR THE SAID PURPOSE THE SUBSIDY RECEIVED BY THE ASSESSEE WAS NOT IN THE COURSE OF A TRADE BUT WAS CAPITAL NATURE. HE HAS ALSO INVITED OUR ATTENTION TO THE ORDER OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE PERTAINING TO THE ASSESSMENT YEARS 1999 - 2000 TO 2002 - 03 OF WHICH COPIES ARE AVAILABLE ON RECORD AT PG.NOS.35 TO 57 OF THE COMPILATION IN SUPPORT OF HIS CONTENTION THAT IN EARLIER YEARS TOO THIS INCENTIVE FREE SUGAR PRICE WAS CONSIDERED TO BE THE CAPITAL RECEIPT. THESE FACTUAL ASPECTS WERE NOT DISPUTED BY THE REVENUE. WE THEREFORE FOLLOWING THE ORDER OF THE TRIBUNAL IN THE ASSESSEES OWN CASE AND ALSO THE JUDGEMENT OF THE APEX COURT OF THE VIEW THAT THE SAID INCENTIVES ARE UTILIZED FOR THE REPAYMENT OF LOAN AND AS SUCH THE NATURE OF THE RECEIPTS IS OF CAPITAL NATURE. THE ASSESSEE HAS FILED THE BREAK ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 5 UP OF INCENTIVES AND ITS UTILIZATION AT PG.NO.129 OF THE COMPILATION AND FROM ITS CAREFUL PERUSAL WE FIND THAT WHATEVER INCENTIVE WAS RECEIVED BY THE ASSESSEES ON ACCOUNT OF FREE SUGAR SALE THE SAME WAS UTI LIZED FOR REPAYMENT OF LOAN OBTAINED FOR SETTING UP THE UNITS. THEREFORE IT IS OF CAPITAL NATURE AND IS NOT CHARGEABLE TO TAX. 4. WITH REGARD TO THE GROUND NO.2 THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT DURING THE COURSE OF ASSESSMENT PROCE EDINGS IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT NON - MOVING ITEMS OF TOOLS/STORES THAT HAD BECOME OBSOLETE AND UNSERVICEABLE OVER A PERIOD OF TIME WERE WRITTEN O FF IN THE BOOKS AND SUCH PRACTICE HAS BEEN IN VOGUE FOR THE PAST SEVERAL YEARS. THE A.O . AFTER CONSIDERING THE EXPLANATIONS HELD THAT THERE WAS NO JUSTIFICATION FOR WRITING OFF SUCH TOOLS/STORES SOUGHT TO BE WRITTEN OFF DURING THE ACCOUNTING YEAR UNDER CONSIDERATION. ACCORDINGLY THE A.O. DISALLOWED THE CLAIM . A SSESSEE PREFERRED AN APPEAL B EFORE THE CIT(A) AND REITERATED ITS CONTENTIONS . T HE CIT(A) RE - EXAMINED THE CLAIM OF THE ASSESSEE BUT WAS NOT CONVINCED WITH IT HE ACCORDINGLY CONFIRMED THE DISALLOWANCE AFTER HAVING OBSERVED THAT THE ASSESSEE FAILED TO ESTABLISH WITH FULL INFORMATION AN D SUPPORTING EVIDENCE OF THE YEAR OF ACQUISITION OF THE TOOLS AND ALSO THE NATURE OF SUCH TOOLS SOUGHT TO BE WRITTEN OFF ON THE GROUND OF UN - SERVICEABILITY. THE CIT(A) HAS FURTHER OBSERVED THAT MERE PRACTICE OF WRITING OFF TOOLS/STORES ON A REGULAR BASIS WOULD NOT JUSTIFY THE LIABILITY OF LOAN EXPENDITURE FROM THE INCOME TAX POINT OF VIEW. 5. AGGRIEVED THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND RAISED AN ALTOGETHER NEW PLEA THAT THE ASSESSEE COMPANY AS AND WHEN PURCHASED THE TOOLS IT H AS DEBITED THE COST OF SUCH TOOLS PURCHASED TO THE STOCK ACCOUNT STYLED AS TOOLS AND IMPLEMENTS IN THE LEDGER. ALL PURCHASES MADE ARE DEBITED TO THIS ACCOUNT HELD AS STOCK AND REFLECTED IN THE BALANCE SHEET UNDER CURRENT ASSETS . IT MEANS THAT WHENEV ER TOOLS ARE PURCHASED THEY ARE NOT IMMEDIATELY CHARGED TO PROFIT AND LOSS ACCOUNT BUT KEPT AND HELD AS CURRENT ASSET S . IN THE COURSE OF MANUFACTURING ACTIVITY OCCASIONS ARISES FOR REPAIR OF BUILDINGS PLANT AND MACHINERY AND FURNITURE AND ON SUCH OCCASI ON THE REQUIRED TOOLS FOR UNDERTAKING THE REPAIRS WILL BE ISSUED FROM THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 6 STORES. SUCH ISSUE OF TOOLS FROM GENERAL STORES FOR REPAIRS ARE DEBITED TO THE P&L ACCOUNT STYLED AS ` TOOL S WRITTEN OFF . THUS THE TOOLS WRITTEN OFF AS APPEARING IN THE PROFIT & LO SS ACCOUNT CONSIST OF ONLY THE COST OF TOOLS WHICH ARE ISSUED FOR REPAIRS AND MAINTENANCE AND WHICH CANNOT BE RETRIEVED. THIS NEW ARGUMENT WAS RAISED BY THE LD. COUNSEL FOR THE ASSESSEES THROUGH PETITION FILED UNDER RULE 11 OF THE INCOME TAX APPELLATE TRI BUNAL RULES WITH THE SUBMISSION TO GRANT A LEAVE TO RAISE THIS GROUND NOT SET FORTH IN THE MEMORANDUM OF APPEAL. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT THOUGH IT IS A NEW ARGUMENT RAISED BEFORE THE TRIBUNAL BUT IT IS A FACTUAL ASPECT WHIC H REQUIRES A PROPER VERIFICATION BY THE ASSESSING OFFICER THEREFORE THE FINDING OF THE CIT(A) ON THIS ISSUE BE SET ASIDE AND MATTER BE RESTORED TO THE FILE OF THE A.O. FOR RE - ADJUDICATION OF THE ISSUE IN THE LIGHT OF THESE FACTS. 6. THE LD. D.R. ON THE OTHER HAND HAS STRONGLY OPPOSED THE ADMISSION OF THE NEW PLEA RAISED BY THE ASSESSEE BEFORE THE SECOND APPEL LATE STAGE. THE LD. D.R. FURTHER CONTENDED THAT NEITHER BEFORE THE ASSESSING OFFICER NOR BEFORE THE CIT(A) THE ASSESSEE HAS RAISED THIS PLEA. BEF ORE THE LOWER AUTHORITIES HE WAS TAKING ALTOGETHER A DIFFERENT ARGUMENT . O NCE HE FIND S THAT ARGUMENT WOULD NOT HELP HIM HE RAISED A TOTALLY NEW ARGUMENT WHICH CANNOT BE ACCEPTED AS IT REQUIRES A FACTUAL VERIFICATION. 7. WE HAVE HEARD THE RIVAL SUBMIS SIONS AND CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE ARGUMENTS RAISED BY THE LD. COUNSEL FOR THE ASSESSEES BEFORE THE LOWER AUTHORITIES AND ALSO BEFORE US. NO DOUBT THE ASSESSEE HAS RAISED AN ALTOGETHER NEW ARGUMENT IN SUPPORT OF HIS CL AIM BEFORE THE TRIBUNAL. THIS ARGUMENT WAS NEVER RAISED BEFORE THE LOWER AUTHORITIES THEREFORE THE REVENUE AUTHORITIES HA D NO OCCASION TO ADJUDICATE THAT ARGUMENT. NO DOUBT THE ASSESSEE HAS RAISED A NEW ARGUMENT BEFORE THE TRIBUNAL BUT WE ARE QUITE CON SCIOUS ABOUT OUR JURISDICTION . BEING A LAST FACT FINDING BODY THE TRIBUNAL HAS TO ADJUDICATE ALL FACTUAL ASPECTS BEFORE ARRIVING AT A CONCLUSION. WE THEREFORE OF THE VIEW THAT THOUGH THE ASSESSEE HAS RAISED A NEW ARGUMENT BEFORE THE TRIBUNAL BUT IT IS A FACTUAL MATTER AND REQUIRES A VERIFICATION BY THE ASSESSING OFFICER BY MAKING NECESSARY ENQUIRIES. T HE ASSESSEE HOWEVER COULD NOT EXPLAIN AS TO WHY HE HAS NOT RAISED THIS ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 7 ARGUMENT BEFORE THE LOWER AUTHORITIES. THEREFORE IT CANNOT BE HELD THAT ON ACCOUN T OF UNAVOIDABLE CIRCUMSTANCES ASSESSEE COULD NOT RAISE THIS ARGUMENT. BUT WE ARE OF THE VIEW THAT IN THE INTEREST OF JUSTICE THIS ARGUMENT SHOULD BE ADJUDICATED BY THE LOWER AUTHORITIES. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND RES TORE THE MATTER TO THE FILE OF THE A.O. FOR ADJUDICATION OF THE ISSUE IN THE LIGHT OF THE NEW ARGUMENTS RAISED BY THE ASSESSEES AFTER AFFORDING AN OPPORTUNITY OF BEING HEARD TO HIM . WE ALSO DIRECT THE ASSESSEE TO PRODUCE ALL RELEVANT MATERIALS AND TO EXTE ND FULL COOPERATION TO THE ASSESSING OFFICER IN ADJUDICATING THE IMPUGNED ISSUE. 8. GROUND NO.3 RELATE TO THE DE BIT BALANCE WRITTEN OFF OF RS.25 000/ - AND IN THIS REGARD THE FACTS BORNE OUT FROM THE RECORD ARE THAT DURING THE COURSE OF ASSESSMENT PROCEE DINGS IT WAS EXPLAINED ON BEHALF OF THE ASSESSEE THAT ASSESSEE HAD PLACED AN ORDER WITH INDIANA SU C RO TECH PUNE DURING THE YEAR 1989 - 90 FOR PURCHASE OF A UTO F EE D P AN B OILING S YSTEM THAT THE SYSTEM HAD BEEN SUPPLIED BUT SOME MODIFICATIONS WERE REQUIRED IN RESPECT OF WHICH SAID PARTY WAS NOT RESPONDING AND HENCE THE DEBIT BALANCE IN THE BOOKS OF ACCOUNT WERE WRITTEN OFF. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE THE A.O. HELD THAT THE WRITE OFF DEBIT BALANCE IN RESPECT OF SAID PARTY REPRESENTED THE CAPITAL LOSS THEREFORE NOT AN ADMISSIBLE ITEM OF REVENUE EXPENDITURE AND ACCORDINGLY DISALLOWED THE SAME. 9. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT DEBIT BALANCE ARISE IN THE COURSE OF TRADE IN CONNECTION WITH THE MONEY ADVANCED FOR PURCHASE S OF MACHINERY AND HENCE THE SAME REPRESENT ED THE TRADING LOSS INSTEAD OF CAPITAL LOSS BUT THE ASSESSEE DID NOT FIND FAVOUR WITH HIM . NOW ASSESSEE IS BEFORE US AND REITERATED ITS CONTENTIONS. IT WAS ALSO CONTENDED THAT I T ASSUMES A CHARACTER OF A CAPITAL ONCE CAPITAL ASSET IS ACQUIRED OTHERWISE IT IS TRADING LOSS . THE LD. D.R. PLACED A RELIANCE UPON THE ORDER OF THE LOWER AUTHORITIES. 10. HAVING GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS WE FIND THAT SU M OF RS.25 000/ - WAS GIVEN AS ADVANCE TO PURCHASE A UTO F EE D P AN B OILING SYSTEM TO M/S. INDIANA SUCRO TECH PUNE. BUT THE ORDER WAS ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 8 NEITHER MATERIALIZED NOR THE ASSESSEE COULD RECEIVE THE ADVANCE BACK. NO DOUBT THE ADVANCE WAS GIVEN TO ACQUIRE A CAPITAL A SSET BUT IN FACT NO CAPITAL ASSET WAS ACQUIRED BY THE ASSESSEE. THEREFORE THIS AMOUNT COULD NOT ASSUME A CHARACTER OF COST TOWARDS THE CAPITAL ASSET. BUT IN ANY CASE IT CANNOT BE A BAD DEBT WHICH CAN BE WRITTEN OFF. AT THE MOST IT CAN BE CALLED TO BE A BUSINESS LOSS WHICH CAN ONLY BE ALLOWED SUBJECT TO PROOF THAT ASSESSEE COULD NOT RECOVER THE SAID AMOUNT DESPITE OF HIS BEST EFFORTS. SINCE IT HAS NOT BEEN BROUGHT ON RECORD AS TO WHAT EFFORTS ARE MADE BY THE ASSESSEE TO RECOVER THE SAID AMOUNT IT CANNO T BE ALLOWED IN THE YEAR OF CLAIM AS A BUSINESS LOSS. IT WOULD BE ALLOWED ONLY IN THOSE YEARS IN WHICH ASSESSEE SUCCESSFULLY PROVES THAT DESPITE ALL HIS BEST EFFORTS HE COULD NOT RECOVER THE SAID AMOUNT. 11. GROUND NO.4 RELATE TO THE CONSULTATION FEES PA ID FOR MODIFICATION OF PLANT AND MACHINERY IN ASPIRIN D I VISIONS OF RS.20 94 555/ - . 12. THE FACTS BORNE OUT FROM THE RECORD ARE THAT ASSESSEE HAS CLAIMED AN AGGREGATE EXPENDITURE OF RS.20 94 555/ - WHICH INCLUDED CONSULTATION FEES PAID TO ONE DR. V.K. BH ALL A TOWARDS MODIFICATION AND UPGRADATION OF THE MACHINERIES RELATING TO THE BULK DRUGS DIVISION AND CLAIMED SUCH EXPENDITURE AS REVENUE EXPENDITURE. HAVING EXAMINED THE CLAIM OF THE ASSESSEE THE ASSESSING OFFICER HAS HELD THAT SINCE THE MODIFICATION WORK IN RESPECT OF ASPIRIN PLANT HA D BEEN UNDERTAKEN TO CONFIRM TO THE REQUIREMENT S OF U.S. FEDERAL DRUGS AUTHORITY FOR THE PURPOSE S OF EXPORTING THE PRODUCT MANUFACTURED BY THE ASSESSEE TO OTHER COUNTRIES THE ASSESSEE STOOD TO DERIVE ADVANTAGE S OF ENDURING NA TURE AND THEREFORE THE AGGREGATE OF EXPENDITURE S CANNOT BE ALLOWED AS REVENUE EXPENDITURE UNDER THE CURRENT REPAIRS BUT SHOULD BE TREATED AS CAPITAL EXPENDITURE. THE A.O. ACCORDINGLY ALLOWED THE DEPRECIATION THERE OF. THE ASSESSEE PREFERRED AN APPE AL BEFORE THE CIT(A) WITH THE SUBMISSION THAT THE AGGREGATE OF EXPENDITURE INCURRED IN EFFECTING MODIFICATION TO THE BULK DRUG PLANT WAS INTENDED FOR THE PURPOSE OF INCREASING THE PROFIT EARNING CAPACITY AND THEREFORE NO CAPITAL ASSET OF THE ENDURING NA TURE HAS BEEN BROUGHT INTO EXISTENCE AS A CONSEQUENCE OF SUCH ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 9 EXPENDITURE. THUS SUCH EXPENDITURE SHOULD BE ALLOWED AS IT IS A REVENUE EXPENDITURE. HE HAS ALSO PLACED A RELIANCE UPON FOLLOWING JUDGEMENTS. EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1 (SC) AL EMBIC CHEMICAL WORKS CO. LTD. VS. CIT 177 ITR 377 (SC) INSTAL L MENT SUPPLY P. LTD. VS. CIT 149 ITR 52 (HIGH COURT DELHI) 12.1 THE CIT(A) RE - EXAMINED THE ISSUE IN THE LIGHT OF JUDGEMENTS RELIED ON BY THE ASSESSEE AND THE FACTUAL ASPECT AND WAS OF THE VIEW THAT WITH A VIEW TO MAKE ITS BULK DRUG PRODUCT ACCEPTABLE ABROAD PARTICULARLY IN WESTERN COUNTRIES WHICH INSIST UPON HIGHER QUALITY STANDARDS THE ASSESSEE LAUNCHED A PROJECT TO MODIFY THE BULK DRUG PLANT BY INSTALLING ADDITIONAL MACHINERIES AND TECHNIC AL ADVICE ON THE METHODOLOGY OF IMPROVING THE QUALITY OF THE PRODUCT. HE FURTHER OBSERVED THAT APPARENTLY THE PURPOSE APPEARS TO BE TO INCREASE THE PROFIT EARNING CAPACITY OF THE BULK TRADING UNIT BUT THEN THE PROFIT EARNING CAPACITY HAS BEEN ENSURED B Y NOT ONLY MODIFICATION TO THE PLANT AND MACHINERY BUT ALSO INTRODUCTION OF NEW MACHINERIES RESULTING IN IMPROV EMENT FOR THE FIRST TIME IN THE STANDARD AND QUALITY OF THE PRODUCT MANUFACTURED. HE ACCORDINGLY APPROVED THE ACTION OF THE A.O. RELEVANT OB SERVATION OF THE CIT(A) ARE EXTRACTED HEREUNDER: WITH A VIEW TO MAKE ITS BULK DRUG PRODUCT ACCEPTABLE ABROAD PARTICULARLY IN THE WESTERN COUNTRIES WHICH INSIST UPON HIGHER QUALITY STANDARDS THE APPELLANT LAUNCHED A PROJECT TO MODIFY THE BULK DRUG PLAN T BY INSTALLING ADDITIONAL MACHINERIES AND TECHNICAL ADVICE ON THE METHODOLOGY OF IMPROVING THE QUALITY OF THE PRODUCT. NO DOUBT THE RESULT WAS INTENDED TO PROMOTE THE BUSINESS ACTIVITY OF THE APPELLANT IN THE SAID DIVISION BY ENSURING THE SALE OF PRODUCT S ABROAD FOR THE FIRST TIME AND THEREBY BOOSTING OVERALL SALES FIGURE. APPARENTLY THE PURPOSE APPEARS TO BE TO INCREASE THE PROFIT EARNING CAPACITY OF THE BULK TRADING UNIT BUT THEN THE PROFIT EARNING CAPACITY HAS BEEN ENSURED BY NOT ONLY MODIFICATIO N TO THE PLANT AND MACHINERY BUT ALSO INTRODUCTION OF NEW MACHINERIES RESULTING IN IMPROVEMENT FOR THE FIRST TIME IN THE STANDARD AND THE QUALITY OF THE PRODUCT MANUFACTURED. THE RATIOS OF THE CASE - LAWS CITED HAVE HELD THAT IF THE ADVANTAGE FOR INCURRI NG EXPENDITURE CONSISTS MERELY IN FACILITATING THE ASSESSEES TRADING OPERATIONS OR ENABLING THE MANAGEMENT OR CONDUCT OF ASSESSEES BUSINESS TO BE CARRIED ON MORE EFFICIENTLY OR MORE PROFITABLY WHILE LEAVING FIXED CAPITAL UNTOUCHED SUCH EXPENDITURE WOULD BE ON REVENUE ACCOUNT. APPLYING SUCH RATIO IN THE APPELLANTS CASE IT CAN BE STATED THAT THE APPELLANT STOOD TO GAIN ON ACCOUNT OF SALE OF ITS PRODUCT ABROAD AND THEREBY INCREASE THE VOLUME OF ITS SALE ON A CONTINUES BASIS CONSEQUENT TO BRINGING INTO EXISTENCE OF NEW ASSETS BY WAY OF NEW SET OF MACHINERIES SO AS TO IMPROVE THE QUALITY OF ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 10 THE PRODUCT. IN THIS SENSE NOT JUST THE APPELLANTS TRADING OPERATIONS WERE FACILITATED BUT FIXED ASSETS WERE BROUGHT INTO EXISTENCE THAT RESULTED IN MANUFACTURING OF BETTER QUALITY PRODUCTS AND INCREASE IN THE VOLUME OF SUCH PRODUCTS. IN THIS VIEW OF THE MATTER THE AGGREGATE OF EXPENDITURES INCURRED FOR MODIFICATION AND UPGRADING OF THE BULK DRUG PLANT CAN BE SAID TO BE ON CAPITAL ACCOUNT AND NOT OF REVENUE IN N ATURE. IF AT A LATER PERIOD ANY REPAIR OR REPLACEMENT WERE TO BE CARRIED OUT N RESPECT OF THE BULK DRUG PLANT THEN OF COURSE THAT WOULD QUALIFY AS REVENUE EXPENDITURE. HENCE THE ACTION OF THE ASSESSING OFFICER IN TREATING THE EXPENDITURE TOWARDS MODI FICATION OF THE ASPIRIN PLANT AS CAPITAL EXPENDITURE IS NOT INTERFERED WITH. AS A RESULT THE NET DISALLOWANCE OF RS.18 32 735 IS HEREBY UPHELD. 13. AGGRIEVED THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND REITERATED ITS CONTENTIONS. HE HAS ALSO INVITED OUR ATTENTION TO THE CERTIFICATES AND THE CORRESPONDENCE EXCHANGED BETWEEN THE ASSESSEE AND OTHER DEPARTMENTS I N SUPPORT OF HIS CONTENTION THAT MODIFICATION IN THE MACHINERIES WERE DONE WITH AN OBJECT TO IMPROVE THE QUALITY OF THE PRODUCT S AS PER THE REQUIREMENTS OF THE U.S. FEDERAL DRUGS AUTHORITIES FOR THE PURPOSE OF EXPORTING IT TO OTHER COUNTRIES. THEREFORE THE EXPENDITURE INCURRED IN CONSULTATION AND MODIFICATION ARE OF REVENUE NATURE. 14. THE LD. D.R. ON THE OTHER HAND HAS CONTEND ED THAT UNDISPUTEDLY THE ASSESSEE LAUNCHED A PROJECT TO MODIFY THE BULK DRUG PLANT BY INSTALLING ADDITIONAL MACHINERIES AND TECHNICAL ADVICE ON THE METHODOLOGY OF IMPROVING THE QUALITY OF THE PRODUCT. ON ACCOUNT OF MODIFICATION THE QUALITY OF PRODUCT AND ITS QUANTITY WAS DRASTICALLY IMPROVED. THEREBY INCREASE IN THE VOLUME OF SALE ON CONTINUOUS BASIS CONSEQUENT TO BRINGING INTO EXISTENCE OF NEW ASSETS BY WAY OF NEW SET OF MACHINERIES SO AS TO IMPROVE THE QUALITY OF PRODUCTS. IN THIS SENSE NOT JUST THE A SSESSEES TRADING OPERATORS WERE FACILITATED BUT FIXED ASSETS WERE BROUGHT INTO EXISTENCE THAT RESULTED IN MANUFACTURING OF BETTER QUALITY PRODUCTS AND INCREASE IN THE VOLUME OF SUCH PRODUCTS. THEREFORE THE EXPENDITURE INCURRED IS CERTAINLY OF CAPITAL NAT URE. 15. HAVING GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS WE FIND THAT UNDISPUTEDLY THE MODIFICATION WORK IN RESPECT OF ASPIRIN PLANT HAD BEEN UNDERTAKEN TO CONFIRM THE REQUIREMENT OF U.S. FEDERAL DRUGS AUTHORITIES ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 11 FOR THE PURPOSE OF EXPO RTING THE PRODUCT MANUFACTURED BY THE ASSESSEE TO OTHER COUNTRIES. IT IS ALSO AN ADMITTED FACT THAT ON ACCOUNT OF MODIFICATION THE QUALITY AND QUANTITY OF THE PRODUCTS WERE DRA STICALLY IMPROVED. THER EFORE THE ISSUE ARISE S BEFORE US WHETHER AN EXPENDITUR E INCURRED FOR MODIFICATION AND UP - GRADATION OF THE MACHINERIES WHICH RESULT INTO IMPROVEMENT OF QUALITY OF THE PRODUCT AND SUBSTANTIAL INCREASE IN THE QUANTITY OF THE PRODUCT AMOUNTS TO A REVENUE EXPENDITURE ? 16. WE HAVE ALSO NOTED FROM THE ASSESSMENT OR DER THAT THE ASSESSEE HAS CATEGORICALLY STATED BEFORE THE A.O. THROUGH ITS NOTE DATED 29.10.2005 THAT THEY HAVE BEEN INCURRING LOSSES IN THE UNIT OF ASPIRIN FOR THE LAST 2/3 YEARS AS THERE WAS NO ADEQUATE INDIGENOUS DEMAND FOR THIS PRODUCT. THEY EXPLORE T HE POSSIBILITY AND FOUND THE MARKET IN EUROPEAN COUNTRIES AND USA . W ITH A VIEW TO MEET THE GUIDELINES OF FOOD AND DRUG ADMINISTRATION (FDA) OF USA THEY SOUGHT ADVICE FROM MR. B H ALLA WHO IS ACQUAINTED WITH THE FDS GUIDELINES AND HE SUGGESTED THE PROCEDURE TO BE FOLLOWED TO MEET THE GUIDELINES OF FDA. FOR THIS PROFESSIONAL FEES ASSESSEE HAS PAID A SUM OF RS.4 LAKHS AND ALSO TO MEET THE ABOVE GUIDELINES CHANGES IN THE PROCEDURE WERE IMPLEMENTED AND FOR THAT THE ASSESSEE HAS PURCHASED THE NECESSARY MINOR EQU IPMENTS AND GOT THE MODIFICATION DONE TO THE EXISTING EQUIPMENTS TO MEET THE QUALITY STANDARDS OF THE FDA. THESE FACTS WERE NOT DISPUTED BY THE REVENUE BUT THEY TREATED THE EXPENDITURE INCURRED ON MODIFICATION WORKS AS A CAPITAL EXPENDITURE WITHOUT REALIZ ING THE CURRENT DEVELOPMENT IN THE COMMERCIAL FIELD. A SIMILAR ISSUE WAS RAISED BEFORE THE APEX COURT IN THE CASE OF ALEMBIC CHEMICAL WORKS VS. CIT(SUPRA) IN WHICH THEIR LORDSHIP HAVE HELD THAT THE EXPENDITURE INCURRED IN RESPECT OF IMPROVEMENT IN THE EXI STING PROCESS AND TECHNOLOGY IS A REVENUE EXPENDITURE AND IS ALLOWABLE AS DEDUCTIONS. IN THAT CASE THE ASSESSEE COMPANY WAS ENGAGED IN THE MANUFACTURE OF ANTI - BIOTICS AND PHARMACEUTICALS. IN THE INITIAL YEAR OF ITS VENTURE THE ASSESSEE WAS ABLE TO ACHIE VE ONLY MODERATE YIELDS FROM THE PEN I CIL L IN E - PRODUC ING STRAINS USED BY IT WHICH YIELDED ONLY 5000 UNITS OF PEN I CILLIN E PER MILLI LITRE OF THE CULTURE MEDIUM. IN THE YEAR 1963 WITH A VIEW TO INCREASING THE YIELD OF PEN I CI L LIN E THE ASSESSEE ENGAGED WITH M/ S. MEIJI SEIKA KAISHA LIMITED A REPUTED ENTERPRISE ENGAGED IN THE MANUFACTURE OF ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 12 ANTIBIOTICS IN JAPAN WHICH AGREE D TO SUPPLY TO THE ASSESSEE REQUISITE TECHNICAL KNOWHOW SO AS TO ACHIEVE SUBSTANTIAL HIGHER LEVE L S OF PERFORMANCE OR PRODUCTION OF MORE THAN 10 000 UNITS OF PENICILLINE PER MILLI LITRE OF CULTURED B O RTH WITH THE AID OF BOTTLE TECHNOLOGY AND PROCESS OF FERMENTATION . THE NEGOTIATION CULMINATED IN AN AGREEMENT AND ASSESSEE HAD TO PAY A SUM OF RS.2 39 525/ - UNDER THE AGREEMENT AND CLAIMED IT AS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND CLAIMED DEDUCTION THERE OF AS A REVENUE EXPENDITURE. 17. THE APEX COURT YET WHILE ALLOWING THE CLAIM OF THE ASSESSEE AS REVENUE EXPENDITURE HAS OBSERVED THAT IT WOULD BE UNREALISTIC TO IGNORE THE RAPID ADVANCES IN THE RESEARCH IN ANTI - BIOTIC MEDICAL MICRO - BIOLOGY AND TO ATTRIBUTE A DECREE TO E NDURABILITY AND PERMANENCE TO THE TECHNICAL KNOW - HOW AT ANY PARTICULAR CHANGE IN THIS FA S T CHAN G ING AREA OF MEDICAL SCIENCE. THE STATE OF THE ART IN SOME O F THESE AREAS OF HIGH PRIORITY RESEARCH I S CONSTANTLY UPGRADED SO THAT KNOW - HOW CANNOT BE SAID TO BE THE ELEMENT OF REQUISITE DECREE OF DURABILITY AND NONEPHEMERALITY TO SHARE THE REQUIREMENTS AND QUALIFICATION OF AN ENDURING CAPITAL ASSET. THE RAPID STR I DES IN SCIENCE AND TECHNOLOGY IN THE FIELD SHO ULD MAKE US A LITTLE SLOW AND CIRCUMSPECT IN TOO READILY PIGEON - HOL ING AN OUTLAY SUCH AS THIS AS CAPITAL. THE IMPROVISATION IN THE PROCESS AND TECHNOLOGY IN SOME AREAS OF ENTERPRISES WAS SUPPLEMENT AL TO THE EX ISTING BUSINESS AND THERE WAS NO MATERIAL TO HOLD THAT IT AMOUNTED TO A NEW AREA OR FRESH VENTURE. 18. THE NATURE OF EXPENDITURE WHETHER IT IS REVENUE OR CAPITAL IN NATURE WAS EXAMINED BY THE APEX COURT IN VARIOUS JUDGEMENTS. BEFORE DWELLING UPON THE ISS UE INVOLVED WE WOULD LIKE TO EXAMINE THE LEGAL PROPOSITIONS LAID DOWN BY THE APEX COURT IN THIS REGARD. 19. IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS LTD. (SUPRA) THE APEX COURT HAS EXAMINED THE NATURE OF EXPENDITURES AND IN THAT CASE THE ISSUE BE FORE THEIR LORDSHIP WAS WHETHER THE EXPENDITURES INCURRED BY THE ASSESSEE FOR MODERNIZATION AND REPLACEMENT COME WITHIN THE CONNOTATION OF THE WORDS CURRENT REPAIRS ENVISAGED IN SECTION 31(I) OF THE ACT? IN THE ENTIRE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 13 JUDGEMENT THEIR LORDSHIP HAVE DEALT WITH THE ISSUE OF CURRENT REPAIRS AND THEY REFRAINED THEMSELVES FROM EXPRESSING THEIR VIEWS WITH REGARD TO THE ALLOWABILITY OF A CLAIM OF EXPENDITURE U/S 37(1) OF THE ACT. WITH RESPECT TO THE CURRENT REPAIRS THEIR LORDSHIP HAVE HELD THAT THE MANUFACTU RING PROCESS IN THE TEXTILE MILL WAS NOT ONE CONTINUOUS INTEGRATED PROCESS; (I) THAT TO DECIDE THE APPLICABILITY OF SECTION 31(I) THE TEST WAS NOT WHETHER THE EXPENDITURE WAS REVENUE OR CAPITAL IN NATURE BUT WHETHER THE EXPENDITURE WAS CURRENT REPAIRS. THE BASIC TEST WAS TO FIND OUT WHETHER EXPENDITURE WAS INCURRED TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET AND THE EXPENDITURE MUST NOT BE TO BRING A NEW ASSET INTO EXISTENCE OR TO NEW ADVANTAGE. THEIR LORDSHIP FURTHER HELD THAT EACH MACHINE IN CLUDING THE RING FRAME WAS AN INDEPENDENT AND SEPARATE MACHINE CAPABLE OF INDEPENDENT AND SPECIFIC FUNCTION AND THEREFORE THE EXPENDITURE INCURRED FOR REPLACEMENT THEIR - OF WOULD NOT COME WITHIN THE MEANING OF CURRENT REPAIRS. THE REPLACEMENT OF RING F RAME CONSTITUTED SUBSTITUTION OF AN OLD ASSET BY A NEW ASSET AND THEREFORE THE EXPENDITURE INCURRED BY THE ASSESSEE DID NOT FALL WITHIN THE MEANING OF CURRENT REPAIRS IN SECTION 31(I). UNDER SECTION 31(I) THE DEDUCTION ADMISSIBLE IS ONLY FOR CURRENT REPAIRS. THEREFORE THE QUESTION AS TO WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE CONCEPTUALLY IS REVENUE OR CAPITAL IN NATURE IS NOT RELEVANT TO DECIDE THE QUESTION WHETHER SUCH EXPENDITURE COMES WITHIN THE ETYMOLOGICAL MEANING OF THE EXPRESSION C URRENT REPAIRS. IN OTHER WORDS EVEN IF THE EXPENDITURE IS REVENUE IN NATURE IT MAY NOT FALL IN THE CONNOTATION OF CURRENT REPAIRS. THEIR LORDSHIP ACCORDINGLY CONFIRMED THE VIEW TAKEN BY THE ASSESSING OFFICER THAT EACH MACHINE INCLUDING THE RING FRAM E WAS AN INDEPENDENT AND SEPARATE MACHINE CAPABLE OF INDEPENDENT AND SPECIFIC FUNCTIONS. THEREFORE THE EXPENDITURE INCURRED FOR REPLACEMENT OF THE NEW MACHINES WOULD NOT COME WITHIN THE MEANING OF THE WORD CURRENT REPAIRS. THE JUDGEMENT WAS RENDERED BY THE APEX COURT ON AUGUST 10 2007. 20 . THERE AFTER IN ANOTHER CASE OF CIT VS. RAMARAJU SURGICAL COTTON MILLS LTD. (SUPRA) THEIR LORDSHIP OF THE APEX COURT HAD OCCASION TO EXAMINE THE CLAIM OF DEDUCTION OF THE EXPENDITURE INCURRED ON PLANT AND MACHIN ERY U/S 37 OF THE I.T. ACT. THAT CASE WAS RESTORED BACK TO THE CIT(A) BECAUSE THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 14 COMPLETE DETAILS REGARDING THE PRODUCTION CAPACITY REMAINING CONSTANT EVEN AFTER REPLACEMENT WAS NOT AVAILABLE. THEIR LORDSHIP HAVE NOT EXPRESSED THEIR OPINION ON THE ARGUM ENTS OF THE LD. COUNSEL FOR THE DEPARTMENT THAT THE ASSESSEE WAS NOT ENTITLED TO CLAIM REPLACEMENT EXPENDITURE AS REVENUE EXPENDITURE AS IT WAS NOT INCURRED TO REPLACE AN OLD WORN OUT ITEM OF MACHINERY THAT ON THE CONTRARY THE OLD MACHINE HAS BEEN REPLAC ED BY A NEW MACHINE WHICH CONSTITUTES OF AN ADVANTAGE OF AN ENDURING NATURE AND THE EXPENDITURE WAS CAPITAL IN NATURE. 21 . AGAIN IN THE CASE OF CIT VS. SH. MANGAYARKARSI MILLS PVT. LTD. (SUPRA) THE APEX COURT HAS DEALT WITH THE CLAIM OF THE ASSESSEE U/S 37 OF THE ACT AND THEY HAVE REFORMULATED THE QUESTION POSED BEFORE THEM. THE FORMULATED QUESTION IS AS UNDER: WHETHER EXPENDITURE INCURRED ON REPLACEMENT OF MACHINERY IN THE FACT AND CIRCUMSTANCES OF THIS CASE AMOUNTS TO A REVENUE EXPENDITURE DEDUCTIB LE U/S 37 OF THE ACT OR CURRENT REPAIRS DEDUCTIBLE U/S 31 OF THE ACT? THE RESPONDENT IN THIS CASE HAS RAISED A LIMITED CLAIM THAT THE EXPENDITURE INCURRED IS OF REVENUE IN NATURE. THEIR LORDSHIP HAS ALSO OBSERVED THAT THE RESPONDENT ONLY STATED THAT ITS CLAIM WAS LIMITED TO THE EXPENDITURE BEING OF REVENUE NATURE AND THUS ALLOWABLE U/S 37 OF THE ACT. NOWHERE HAD THE RESPONDENT CLAIMED THAT THE SAID EXPENDITURE AMOUNTED TO CURRENT REPAIRS U/S 31 OF THE ACT. THEREFORE ACCORDING TO THE RESPONDENT T HERE IS NO ISSUE REGARDING THE EXPENDITURE AMOUNTING TO CURRENT REPAIRS U/S 31 OF THE ACT. BUT THIS SUBMISSION OF THE RESPONDENT WAS NOT ACCEPTED BY THE APEX COURT AND THEIR LORDSHIP HAVE OBSERVED THAT APPELLANT HAS CONTENDED BEFORE THE COURTS BELOW THAT EACH OF THE ITEM OF MACHINERY IN A SPINNING MILL IS INDEPENDENT. THE APEX COURT HAS GIVEN A SPECIFIC FINDING WITH REGARD TO THE ISSUE WHETHER EACH MACHINE IN A TEXTILE MILL IS AN INDEPENDENT ITEM OR MERELY A PART OF A COMPLETE SPINNING MILL BY HOLDING TH AT THE RING FRAME IN TEXTILE MILL IS AN INDEPENDENT AND SEPARATE MACHINE AND IS ALSO A PART OF INTEGRATED PROCESS OF MANUFACTURE OF YARN INTEGRALLY CONNECTED TO OTHER MACHINES IN THE MILL FOR PRODUCTION OF THE FINAL PRODUCT. HOWEVER THIS INTERCONNECTION DOES NOT TAKE AWAY THE INDEPENDENT IDENTITY AND DISTINGUISHED FUNCTION OF EACH MACHINE. THUS EACH MACHINE IN TEXTILE MILL ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 15 SHOULD BE TREATED INDEPENDENTLY. THEIR LORDSHIP FURTHER OBSERVED THAT REPLACEMENT OF SUCH AN OLD MACHINE WITH A NEW ONE WOULD CONST ITUTE THE BRINGING INTO EXISTENCE OF A NEW ASSET IN PLACE OF THE OLD ONE AND NOT REPAIR OF THE OLD ONE AND EXISTING MACHINE AND ALSO A NEW ASSET IN A TEXTILE MILL IS NOT ONLY FOR A TEMPORARY USE RATHER IT GIVES THE PREDECESSOR AN ENDURING BENEFIT OF BETT ER AND MORE EFFICIENT PRODUCTION OVER A PERIOD OF TIME. RELYING UPON THE JUDGEMENT IN THE CASE OF SARAVANA MILLS REPORTED AT 293 ITR 201 (2) 224 ITR 414 (SC) (1967) (3) 66 ITR 710 (SC) THEIR LORDSHIP OBSERVED THAT SARAVANA MILLS CASE (1) HOLDS THAT EXPEN DITURE IS DEDUCTIBLE U/S 37 ONLY IF IT: (A) IS NOT DEDUCTIBLE U/S 30 TO 36 (B) IS OF A REVENUE NATURE (C) IS INCURRED DURING THE CURRENT ACCOUNTING YEAR AND (D) IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THEY FURTHER PLACED A RELIANCE UPON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF TRAVANCORE COCHIN CHEMICALS LIMITED VS. CIT 2 SCC 20 AND OBSERVED THAT THE EXPENDITURE IS OF CAPITAL NATURE WHEN IT AMOUNTS TO AN ENDURING ADVANTAGE FOR THE BUSINESS AND REPAIR IS DIFFERENT FROM BRINGING IN NEW ASSET FOR THE BUSINESS. FURTHER PLACING A RELIANCE UPON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF LAKSHMIJI SUGAR MILLS PVT. LTD. VS. CIT AIR 1972 SC 159 THEIR LORDSHIP FURTHER HELD THAT THE EXPENDITURE INCURRED FOR BRINGING INTO EXISTENCE NE W ASSET OR AN ENDURING BENEFIT FOR THE ASSESSEE AMOUNTS TO BE A CAPITAL EXPENDITURE. THEIR LORDSHIP THEREFORE HELD THAT A REPLACEMENT OF THE MACHINERY AMOUNTS TO BRINGING INTO EXISTENCE A NEW ASSET AND ALSO AN ENDURING BENEFIT FOR THE ASSESSEE. THEY ACCO RDINGLY HELD THE EXPENDITURE TO BE OF CAPITAL NATURE AND NOT ALLOWABLE U/S 37 OF THE ACT. THEIR LORDSHIP FURTHER OBSERVED IN THIS CASE THAT ACCOUNTING PRACTICES MAY NOT BE THE BEST GUIDE IN DETERMINING THE NATURE OF EXPENDITURE IN THIS CASE THEY ARE INDIC ATIVE OF WHAT THE ASSESSEE ITSELF THOUGHT OF THE EXPENDITURE IT MADE ON REPLACEMENT OF MACHINERY AND THAT THE CLAIM FOR DEDUCTION UNDER THE ACT WAS MADE MERELY TO DIMINISH THE TAX BURDEN AND NOT UNDER THE BELIEF THAT IT WAS ACTUALLY REVENUE EXPENDITURE. QUOTING VARIOUS EXAMPLES AND PLACING RELIANCE UPON VARIOUS JUDGEMENTS OF THE APEX COURT THEIR LORDSHIP OF THE APEX COURT HAVE MADE IT CLEAR THAT WHERE EXPENDITURE ARE INCURRED TO REPLACE AN INDEPENDENT UNIT OR A PART OF THE MACHINERY WHICH CONSTITUTES TO BE AN INDEPENDENT MACHINE RESULTING INTO AN ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 16 ENDURING BENEFIT IS A CAPITAL EXPENDITURE AND WOULD NOT BE ALLOWABLE AS A REVENUE EXPENDITURE. 22 . IN THE CASE OF CIT VS. HINDUSTAN TEXTILES LTD IN WHICH JUDGEMENT WAS RENDERED BY THE APEX COURT ON NOVEMBER 3 2009 A SIMILAR ISSUE WAS RAISED WHETHER THE ASSESSEES CLAIM OF DEDUCTION FOR EXPENDITURE ON REPLACEMENT OF AN ASSET IS ALLOWABLE U/S 37 OF THE ACT. THEIR LORDSHIP APEX COURT HAVE REMITTED THE MATTER BACK TO THE HIGH COURT FOR DE NOVO CONSIDERATION IN TH E LIGHT OF JUDGEMENT IN THE CASE OF MANGAYARKARSI MILLS PVT. LTD. (SUPRA) AND ALSO TO EXAMINE THE CASE IN VIEW OF TEST LAID DOWN BY THIS COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS PVT. LTD. (SUPRA) AND ALSO CIT VS. THE RAMARAJU SURGICAL COTTON MI LLS (SUPRA). A SIMILAR FINDING WAS AGAIN GIVEN BY THE APEX COURT IN THE CASE OF CIT VS. M/S. SUGAVANEESWARA SPINNING MILLS LTD. (SUPRA) WHILE RENDERING JUDGEMENT ON NOVEMBER 16 2009. AGAIN IN THE CASE OF CIT VS. BHOJRAJ TEXTILE MILLS LTD. (SUPRA) THE LARGER BENCH OF THE APEX COURT WHILE RENDERING JUDGEMENT ON 8 TH FEBRUARY 2010 AGAIN REMITTED THE MATTER BACK TO THE LOWER AUTHORITIES WITH THE SAME OBSERVATIONS TO RE - EXAMINE THE ISSUE IN THE LIGHT OF SARAVANA SPINNING MILLS LTD. (SUPRA) AND RAMARAJU SURG ICAL COTTON MILLS LTD. (SUPRA) NOT ONLY THAT THE HIGH COURT OF MADRAS IN THE CASE OF SUPER SPINNING MILLS VS. ACIT 323 ITR 449 HAS ALSO REMITTED THE MATTER BACK TO THE CIT(A) TO RECONSIDER THE ISSUE IN THE LIGHT OF DIRECTIONS GIVEN BY THE SUPREME COURT I N THE CASE OF SARAVANA SPINNING MILLS LTD (SUPRA) AND RAMARAJU SURGICAL COTTON MILLS LTD. (SUPRA) AND MANGAYARKARSI MILLS PVT. LTD. (SUPRA). FOLLOWING THESE JUDGEMENTS OF THE APEX COURT AND THE MADRAS HIGH COURT THE TRIBUNAL HAS ALSO RESTORED THE MATTER BACK TO THE ASSESSING OFFICER FOR RE - ADJUDICATION OF THE ISSUE IN THE LIGHT OF AFORESAID JUDGEMENTS OF THE APEX COURT IN THE CASE OF LAMBODHARA TEXTILES LTD. VS. ACIT IN ITA NO.288/MADRAS/2010. A RELIANCE WAS ALSO PLACED UPON THE JUDGEMENTS OF THE OTHER HIGH COURTS IN THE CASE OF NATHMAL BANKATLAL PARIKH & CO. VS. CIT 122 ITR 168 (AP); NEW SHORROCK SPINNING & MFG. CO. LTD. VS. CIT 30 ITR 338; CIT VS. CHOWGULE & CO. (P) LTD. 214 ITR 523; CIT VS. UDAIPUR DISTELLERY CO. LTD. 268 ITR 451 AND CIT VS. BHARAT ALUMINIUM LTD 292 ITR 600 (DEL). RELIANCE WAS ALSO PLACED ON THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 17 JUDGEMENT OF THE APEX COURT IN THE CASE OF CIT VS. KALYANJI MAVJI & CO. 122 ITR 49 (SC). 23 . WE HAVE CAREFULLY EXAMINED THE ABOVE REFERRED JUDGEMENTS AND WE FIND THAT THEY HAVE BEEN RENDE RED UNDER DIFFERENT SET OF FACTS. 24 . IN THOSE JUDGEMENTS A STRAIGHT JACKET FORMULA HAS NOT BEEN LAID DOWN BY APEX COURT OR HIGH COURT. CERTAIN GUIDELINES OR TEST HAVE BEEN LAID DOWN IN ORDER TO DETERMINE THE NATURE OF EXPENDITURE INCURRED BY THE ASSESSE E. ACCORDING TO US THE EXPENDITURE INCURRED IN REPAIR OR MAINTENANCE OF MACHINERY BY REPLACING ITS PART WHICH DOES NOT CONSTITUTE TO BE AN INDEPENDENT MACHINE SHALL BE THE REVENUE EXPENDITURE AND IS ALLOWABLE FOR DEDUCTION EITHER AS CURRENT REPAIRS OR U/S 37(I) OF THE ACT. IF THE EXPENDITURE ARE INCURRED IN REPLACEMENT OF THE MACHINE UNIT OR ANY OF ITS PART WHICH CONSTITUTES A MACHINE IN ITSELF CAUSING ENDURING BENEFIT TO THE ASSESSEE IS A CAPITAL EXPENDITURE. THE ABOVE OBSERVATIONS ARE ONLY SUGGE STIVE AND NOT THE CONCLUSIVE. 25 . TURNING TO THE FACTS OF THE CASE THOUGH THE REVENUE HAS EXAMINED THE NATURE OF EXPENDITURE BUT THE EXPENDITURES WERE NOT MINUTELY EXAMINED BY THE ASSESSING OFFICER IN THE LIGHT OF GUIDELINES OR TEST LAID DOWN BY THE A PEX COURT IN THE AFORESAID CASES. THEREFORE THE ISSUE REQUIRES A FRESH ADJUDICATION IN THE LIGHT OF AFORESAID JUDGEMENTS OF THE APEX COURT. WE ACCORDINGLY SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE A.O. WITH A DIRECTION TO RE - ADJUDICATE THE ISSUE AFRESH IN THE LIGHT OF RATIO LAID DOWN BY THE APEX COURT IN THE CASE OF SARAVANA SPINNING MILLS LTD (SUPRA) MANGAYARKARSI MILLS (P) LTD. (SUPRA) AND THE RAMARAJU SURGICAL COTTON MILLS LTD. (SUPRA). 26 . GROUND NO.5 RELATE TO THE FIXED COST REIMBURSED TO ISRO AT RS.7 51 112/ - AND BRIEF FACTS FROM THE RECORD IN THIS REGARD ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS CONTENDED ON BEHALF OF THE ASSESSEE THAT AS PER THE CONTRACT ENTERED INTO BETWEEN THE ASSESSEE AND THE ISRO FOR THE PRODUCTION AND SUPPLY OF UDMH/MMH (ROCKET FUEL) THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 18 MINIMUM GUARANTEED OFF - TAKE IS 50M T PER ANNUM BUT IF THE OFF - TAKE EXCEEDS 5% OF THE GUARANTEED QUANTITY IN ANY YEAR THE CORRESPONDING REDUCTION IN FIXED COST WOULD BE PASSED ON TO THE ISRO BY THE ASSESSEE AND THE AVERAGE PRICE BASED ON THE ACTUAL QUANTITY SHALL BE REWORKED MUTUALLY AND THE SAVINGS THUS ACCRUED SHALL BE ADJUSTED AGAINST THE FUTURE PAYMENT S DUE TO THE ASSESSEE. ACCORDINGLY THE ASSESSEE WORKED OUT THE AGGREGATE EXCESS OFF - TAKE FOR THE PERIOD OF 1.4.1998 TO 31.3.2003 COVERIN G PERIOD OF 5 YEARS AT 33.124 MT S AND EVALUATED THE FIXED COST THERE OF AT RS.46 48 000/ - @ RS.1 40 330/ - PER MT AND THE SAME WAS CLAIMED AS EXPENDITURE IN THE ACCOUNT S OF RELEVANT ASSESSMENT YEAR. O N EXAMINATION THE A.O. FOUND THAT THERE WAS NO PROVISION IN THE COLLABORATION AGREEMENT TO QUANTIFY THE AVERAGE OFF - TAKE OF ROCKET FUEL OVER A NUMBER OF YEARS ; IT WAS REQUIRED TO BE CALCULATED ON YEARLY BASIS. HE ACCORDINGLY ALLOWED THE EXCESS OFF - TAKE DU RING THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 2003 - 04 WHICH WORKED OUT AT 28.026 MT AT RS.39 32 888/ - . THE BALANCE CLAIM OF RS.7 15 112/ - WAS DISALLOWED. 27 . ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT IN TERMS OF C LAUSE 19.1 OF THE COLLABORATION AGREEMENT THE PARTIES HAVE MUTUALLY AGREED TO CONSIDER THE TOTAL OFF - TAKE FROM 1.4.1998 TO 31.3.2003 FOR THE PURPOSE OF REIMBURSEMENT OF THE BENEFIT TO THE ISRO. COPY OF THE MINUTES OF MEETING WAS ALSO FILED BEFORE THE CIT (A) WHERE FROM THE CIT HAS NOTICED THAT THE AGREEMENT FOR OFF - TAKE WAS DONE FOR THE PERIOD WEF 1.4.1998 TO 31.3.2002 COVERING A PERIOD OF 4 YEARS ONLY EXCLUDING THE ACCOUNTING YEAR 1.4.2002 TO 31.3.2003. THE CIT(A) ACCORDINGLY HELD THAT THE CONTENTION S OF THE ASSESSEE ARE PATENTLY FALSE AS THE ACCOUNTING PERIOD ENDED 31.3.2003 WAS NOT COVERED BY THE AGREEMENT BETWEEN THE PARTIES AS PER THE MINUTES OF MEETING. THEREFORE HE DID NOT ALLOW THE CLAIM OF THE ASSESSEE. 28 . NOW THE ASSESSEE IS BEFORE US WITH THE SUBMISSION THAT AS PER THE MINUTES OF MEETING THE PERIOD FOR CONSIDERATION OF OFF - TAKE WAS FROM 1.4.1998 TO 31.3.2002. MEANING THEREBY THIS AMOUNT IS TO BE SETTLED AND PAID WITHIN THE FINANCIAL YEAR 2002 - 03 RELEVANT TO THE ASSESSMENT YEAR 2003 - 04 W HICH IS THE IMPUGNED ASSESSMENT YEAR. THEREFORE THERE IS NO MIS - ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 19 REPRESENTATION OF FACTS BEFORE THE CIT(A). THE A.O. HAS ALREADY ALLOWED THE OFF - TAKE BENEFIT ACCRUING DURING THE YEAR. BASICALLY THE CIT(A) HAS NOT PROPERLY EXAMINED THE DOCUMENTS AND HA S GONE ON A WRONG PREMISE WHILE DISALLOWING THE CLAIM. 2 9 . THE LD. D.R. PLACED A HEAVY RELIANCE UPON THE ORDER OF THE CIT(A). 30 . HAVING GONE THROUGH THE ORDERS OF LOWER AUTHORITIES AND THE MINUTES OF THE MEETING AND THE OTHER CORRESPONDENCE AVAILABLE IN THE PAPER BOOK OF THE ASSESSEE WE FIND THAT UNDISPUTEDLY AS PER CLAUSE 19 .1 OF THE COLLABORATION AGREEMENT AN AMENDMENT TO THE AGREEMENT IS POSSIBLE IF BOTH THE PARTIES ARE MUTUALLY AGREED. FOLLOWING SUCH CLAUSE A MEETING DATED 30.7.2001 WAS HELD BETW EEN THE PARTIES TO CONSIDER THE TOTAL OFF - TAKE FROM 1.4.1998 TO 31.3.2002. MEANING THEREBY THIS TOTAL OFF - TAKE BENEFIT IS TO BE COMPUTED AFTER THE END OF 31.3.2002 WHICH FALLS WITHIN THE FINANCIAL YEAR 2002 - 03 RELEVANT TO THE ASSESSMENT YEAR 2003 - 04. TH E CURRENT YEARS OFF - TAKE BENEFIT WAS ALREADY ALLOWED BY THE A.O. T HE DISPUTE IS ONLY WITH REGARD TO THE OFF - TAKE BENEFIT FOR THE PERIOD OF 1.4.1998 TO 31.3.2002. AS PER THE AGREEMENT IT IS TO BE COMPUTED WITHIN THE FINANCIAL YEAR 2003 - 04 WHICH THE ASS ESSEE HAS ACTUALLY DONE. THEREFORE WE DO NOT FIND ANY IRREGULARITY IN COMPUTING THE OFF - TAKE BENEFIT BY THE ASSESSEE. THEREFORE WE ARE UNABLE TO UNDERSTAND ON WHAT BASIS THE A.O. HAS DISALLOWED THE CLAIM OF THE ASSESSEES. WE ACCORDINGLY OF THE VIEW T HAT THE OFF - TAKE BENEFIT FOR THE PERIOD FROM 1.4.1998 TO 31.3.2002 COMPUTED DURING THE IMPUGNED YEAR ARE TO BE ALLOWED AS REVENUE EXPENDITURE. WE ACCORDINGLY SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND DIRECT THE A.O. TO ALLOW THE CLAIM OF THE ASSESSE E. ITA NO.124 OF 2006: 31 . THROUGH THIS APPEAL REVENUE HAS PREFERRED AN APPEAL AGAINST THE ORDER OF THE CIT(A) ON VARIOUS GROUND WHICH ARE AS UNDER: 1. THE APPELLATE ORDER OF THE CIT(A) IS NOT ACCEPTABLE ON THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE CIT(A) OUGHT TO HAVE NOTED THAT AS PER THE PROVISIONS OF SECTION 32(1)(IIA) OF THE INCOME - TAX ACT 1961 R/W RULE 5A THE ASSESSEE IS REQUIRED TO FILE FORM NO.3AA & ANNEXURES A&B THERETO ALONG WITH RETURN OF INCOME FOR THE CLAIM OF ADDITIONAL DEPRECIATION. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 20 3. THE C IT(A) OUGHT TO HAVE NOTED THAT IN RESPECT OF DISTILLERY DIVISION TANUKU THE ASSESSEE HAS NOT FILED FORM NO.3AA & ANNEXURES A&B THERETO ALONG WITH RETURN OF INCOME AND CONSEQUENTLY THE ASSESSEE IS NOT ELIGIBLE FOR ADDITIONAL DEPRECIATION CLAIMED ATRS.9 91 647/ - . 4. THE CIT(A) OUGHT TO HAVE NOTED THAT IN VIEW OF THE DETAILS REQUIRED TO BE FURNISHED IN ANNEXURE A&B TO FORM NO.3AA SIGNATURE OF THE ASSESSEE IS NECESSARY WHICH WAS NOT FULFILLED IN RESPECT OF CSP DIVISION SAGGONDA AND CONSEQUENTLY THE ASSESSEE IS NOT ELIGIBLE FOR ADDITIONAL DEPRECIATION CLAIMED AT RS.2 92 89 171/ - . 5. THE CIT(A) OUGHT TO HAVE NOTED THAT AS PER FOOTNOTE (ACTION POINTS) NO.6 IT RULES 2005 EDITION PUBLISHED BY DIRECTORATE OF INCOME - TAX (RSP&PB) NEW DELHI) SIGNATURE OF THE ASSESSEE ON ANNEXURES A&B TO FORM NO.3AA AS PER THE REQUIREMENTS UNDER THE THIRD PROVISO TO SECTION 329(1)(IIA) IS A MUST. 6. THE CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION TO THE EX TENT OF RS.23 907 INCURRED TOWARDS POOJA EXPENSES/BAKSHIES/DASARA EXPENSES AS THE SAID EXPENDITURE CANNOT BE CONSIDERED TO HAVE BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF BUSINESS. 7. THE APPELLANT/ASSESSING OFFICER CRAVES LEAVE TO ADD AMEND OR ALTER ANY OF THE GROUNDS AS THE CASE MAY ARISE. 8. FOR THIS AND OTHER GROUND OF A PPEAL THAT SHALL BE URGED AT THE TIME OF HEARING OF THE APPEAL THE APPELLANT/ASSESSING OFFICER PRAYS BEFORE THE HONOURABLE ITAT THAT THE ADDITIONS MADE BY THE ASSESSING OFFICER MAY KINDLY BE RESTORED AS PRAYED IN GROUNDS OF APPEAL. 32 . GROUND NOS.1 7 & 8 ARE OF GENERAL IN NATURE AS SUCH NO INDEPENDENT ADJUDICATION IS CALLED FOR. THROUGH GROUND NOS.2 TO 5 THE REVENUE HAS RAISED SOME TECHNICAL OBJECTIONS WITH REGARD TO RAISING A CLAIM FOR ADDITIONAL DEPRECIATION BUT DURING THE COURSE OF HEARING OF THE AP PEAL THESE OBJECTIONS WERE NOT SUBSTANTIATED BY THE LD. D.R. BY PLACING A RELEVANT EVIDENCE AND THE RELEVANT PROVISIONS OF THE ACT. THEREFORE WE FIND NO FORCE IN TH ESE TECHNICAL OBJECTIONS AND WE REJECT THE SAME. GROUND NO.6 RELATE TO A DELETION OF ADDI TION OF RS.23 907/ - INCURRED ON PUJA EXPENSES /B AKSHIES/DASARA EXPENSES. IN THIS REGARD THE LD. D.R. HAS PLACED A RELIANCE UPON THE ORDER OF THE A.O. B UT WE FIND NO FORCE IN THESE SUBMISSIONS AND WE ARE OF THE VIEW THAT FOR THE WELFARE OF THE EMPLOYEES T HE ASSESSEE IS REQUIRE D TO INCUR ALL THESE EXPENSES. THEREFORE WE FIND NO MERIT IN TH IS APPEAL AND WE ACCORDINGLY CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. 33 . IN THE RESULT THE APPEAL OF THE REVENUE IS DISMISSED. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 21 ITA NO.162 OF 2007: 34 . THROUG H THIS APPEAL THE ASSESSEE HAS ASSAILED THE ORDER OF THE CIT(A) ON VARIOUS GROUNDS WHICH ARE AS UNDER: 1) DISALLOWANCE OF PROPORTIONATE EXPENDITURE OF RS.5 91 000/ - U/S 14A OF THE INCOME TAX ACT: 1) THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN AT TRIBUTING PART OF THE ADMINISTRATIVE EXPENSES SALARIES OF EMPLOYEES REPAIRS TO ASSETS AND OTHER EXPENDITURE TO THE DIVIDEND INCOME. 2) THE INVESTMENTS WERE MADE MORE THAN 15 TO 25 YEARS AGO AND NO EXPENDITURE CAN BE ATTRIBUTED DURING THE ASSESSMENT YEAR AS NO NEW INVESTMENTS WERE MADE DURING THIS YEAR. 3) NO EXPENDITURE CAN BE ATTRIBUTED FOR EARNING THE DIVIDEND INCOME SINCE THERE IS NO COMMERCIAL ACTIVITY IN EARNING THAT INCOME. 4) THE APPELLANT SUBMITS THAT SECTION 14A(2) WHICH WAS INTRODUCED VIDE FINANCE BILL 2 006 IS APPLICABLE FROM THE ASSESSMENT YEAR 2007 - 08 AND NOT EARLIER AND AS SUCH THE DIVIDEND INCOME RECEIVED DURING THE ASSESSMENT YEAR 2004 - 05 CANNOT BE BROUGHT INTO AMBIT OF SECTION 14A(2). 2) INCENTIVE FREE SUGAR PRICE RS.6 32 000/ - 1) THE CIT(A) IS NOT CORRECT IN HIS CONCLUSION THAT SINCE THE APPELLANT DID NOT UTILIZE THE ADDITIONAL PRICE REALIZED ON SALE OF INCENTIVE SUGAR FOR REPAYMENT OF LOANS TO CENTRAL FINANCIAL INSTITUTIONS SUCH ADDITIONAL PRICE REALIZED CONSTITUTED REVENUE RECEIPT IN TERMS OF CL AUSE 12 OF INCENTIVE SCHEME OF DIRECTOR OF SUGAR DATED 10.3.1993. 2) THE APPELLANT SUBMITS THAT THE ABOVE SAID LETTER AND ITS CONTENTS IS ONLY A MATTER BETWEEN THE GOVERNMENT AND THE SUGAR FACTORIES WHICH STIPULATES THAT IN THE EVENT OF THE SUGAR FACTORIES N OT CONFIRMING TO THE CONDITION THE INCENTIVES ALREADY GIVEN WOULD BE WITHDRAWN. THIS CONDITION IS NOT IN ANY WAY DECISIVE OF THE LEGAL CHARACTER OF THE AMOUNT REALIZED. 3) THE APPELLANT SUBMITS THAT WHAT IS REQUIRED UNDER THE SCHEME IS THAT THE EXTRA PRIC E OR THE INCENTIVE PRICE REALIZED SHOULD BE UTILIZED IN REPAYMENT OF LOANS OBTAINED FOR EXPANSION OR SETTING UP OF EITHER EXISTING OR NEW FACTORIES. THE APPELLANT SUBMITS THAT IRRESPECTIVE OF WHETHER THE LOANS ARE BORROWED FROM FINANCIAL INSTITUTIONS OR O THERS WITHOUT ANY DIFFERENCE IF REPAID WITH THE RECEIPTS REALIZED ON SALE OF INCENTIVE SUGAR SUCH RECEIPTS WOULD CONSTITUTE CAPITAL RECEIPTS AND THE CIT(A) SHOULD NOT HAVE TREATED IT AS REVENUE RECEIPT. 4) ABOVE ALL THE APPELLANT SUBMITS THAT EVEN IN IT S CASE IT HAS REPAID TO CENTRAL FINANCIAL INSTITUTIONS AND THE CIT(A) IS NOT CORRECT ON FACTS. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 22 3) TOOLS WRITTEN OFF RS.19 41 000/ - 1) THE CIT(A) IS NOT CORRECT ON FACTS TO CONFIRM THE DISALLOWANCE OF RS.19 41 000/ - BEING THE COST OF UNSERVICEABLE OBSOLETE SMALL AND INSIGNIFICANT TOOLS. THE TOOLS WRITTEN OFF ARE WORN OUT AND CANNOT BE USED AND CHARGEABLE TO REPAIRS & MAINTENANCE. 2) THE APPELLANT SUBMITS THE MANAGEMENT OF THE APPELLANT HAS BEEN FOLLOWING A CONSISTENT METHOD OF WRITING OFF SUCH TOOLS FOR THE LAST 25 YEARS AND MORE AND THAT NEVER SUCH ACTION WAS QUESTIONED BY THE ASSESSING OFFICER IN THE PAST. 3) THE APPELLANT SUBMITS THAT THE CIT(A) SHOULD HAVE DELETED THIS ADDITION. 4) CONSULTATION FEE FOR MODIFICATION OF PLANT & MACHINERY IN ASPIRIN DIVISION OF R S.1 36 02 802/ - 1) THE APPELLANT SUBMITS THAT THE CIT(A) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF THE ABOVE AMOUNT WHICH WAS PAID TO A CONSULTANT DR. V.K. BHALLA TOWARDS HIS CHARGES FOR GIVING SUGGESTIONS IN THE MATTER OF MODIFIC ATIONS TO BE CARRIED OUT TO THE EXISTING PLANT AND MACHINERY IN ASPIRIN DIVISION TO SUIT THE STANDARDS OF FOOD AND DRUG ADMINISTRATION OF USA. 2) THE APPELLANT SUBMITS THAT THIS CONSULTATION WAS OBTAINED SO AS TO IMPROVE THE QUALITY OF THE PRODUCT TO EXPLORE THE MARKET IN USA AND OTHER COUNTRIES THAT THIS EXPENDITURE WAS INCURRED FOR THE PURPOSE OF IMPROVING ITS PROFIT EARNING CAPACITY WITHOUT INCREASE IN PRODUCTION CAPACITY AND THAT THEREFORE IT IS A REVENUE EXPENDITURE. 3) THE CIT(A) IS NOT CORRECT IN TREATIN G THE RENOVATION OF FACTORY BUILDING & MACHINERY AS CAPITAL EXPENDITURE. 4) THE CIT(A) IS NOT CORRECT IN HIS CONCLUSION THAT FIXED ASSETS HAS BEEN BROUGHT INTO EXISTENCE. THE APPELLANT SUBMITS THAT THE IMPUGNED AMOUNT IS ONLY A CONSULTATION FEE AND REPAIRS B UT NOT ANY TOWARDS COST OF PLANT & MACHINERY. 5) THE CIT(A) FAILED TO APPRECIATE THE RATIO OF THE DECISION OF THE SUPREME COURT RENDERED IN EMPIRE JUTE MILLS LTD. VS. CIT WHERE IN THE APEX HAS CLEARLY LAID DOWN THAT THE EXPENDITURE INCURRED FOR IMPROVING O R INCREASING THE PROFIT EARNING CAPACITY WITHOUT AFFECTING THE CAPITAL STRUCTURE WOULD AMOUNTS TO ONLY REVENUE EXPENDITURE. 5) DISALLOWANCE OF LOSS IN RESPECT OF SUGARS DIVISION BHIMADOLE RS.1 94 288/ - AND CREDITING INTEREST RECEIVED RS.6 48 686/ - AS INCOME : 1) THE CIT(A) IS NOT CORRECT TO DISALLOW THE LOSS OF RS.1 94 288/ - AND TREATING INTEREST RECEIVED RS.6 48 686/ - AS INCOME. 2) THE WEST GODAVAR CO - OPERATIVE SUGARS LTD. BHIMADOLE WAS PURCHASED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR AND EVEN THOUGH THERE WAS NO PRODUCTION DURING THE YEAR THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 23 EXPENDITURE INCURRED SHOULD BE ALLOWED SINCE IT WAS INCURRED FOR EXPANSION OF THE EXISTING BUSINESS. 3) THE ASSESSEE COMPANY IS ALREADY HAVING TWO EXISTING SUGAR FACTORIES ONE AT TANUKU ESTABLISHED IN 1950 AND AN OTHER AT TADUVAI ESTABLISHED IN 1995 - 96 AND BHIMADOLE UNIT IS ONLY AN EXPANSION. 4) THE APPELLANT FURTHER SUBMITS THAT IT IS NOT CORRECT TO STATE THAT THE UNIT WAS ACQUIRED NOT AS AN ONGOING CONCERN WHERE THE MANUFACTURING OPERATION EXISTS EARLIER. THERE IS ONLY LULL IN PRODUCTION IN ONE YEAR TO UNDER TAKE NECESSARY REPAIRS TO THE EXISTING PLANT & MACHINERY WHICH IS NOTHING BUT CURRENT REPAIR. 6) REDUCING THE DEDUCTION U/S 80IA OF RS.48 40 110/ - 1) THE APPELLANT COMPANY IS HAVING A CO - GENERATION UNIT AT TADUVAI A ND DEDUCTION U/S 80IA IS BEING CLAIMED FROM THE ASSESSMENT YEAR 1998 - 99 ONWARDS. 2) THE APPELLANT HAD BEEN CONSISTENTLY FOLLOWING THE PRACTICE OF ALLOCATING THE EXPENDITURE OF THE HEAD OFFICE DIVISION TO THE UNITS WHICH ARE HAVING OUTSIDE SALES AND INTERNAL T RANSFERS BUT THE CO - GENERATION UNIT MACHINERY MANUFACTURING DIVISION (M.M. DIVISION) AND WIND POWER UNITS ARE SERVICE UNITS TO THE OTHER UNITS OF THE COMPANY AND HENCE THE REGISTERED OFFICE EXPENDITURE IS NOT ALLOCATED. 3) THE APPELLANT FURTHER SUBMITS TH AT ALLOCATION OF R.O. EXPENDITURE IS BEING ALLOCATED BY FOLLOWING A CONSISTENT PRACTICE AND NOT WITH THE INTENTION OF CLAIMING OF HIGHER DEDUCTION U/S 80IA OF THE INCOME TAX ACT. 35 . GROUND NO.1 RELATE TO THE DISALLOWANCE OF PROPORTIONATE EXPENDITURE OF R S.5 91 000/ - U/S 14A OF THE ACT AND IN THIS REGARD FACTS BORNE OUT FROM THE ORDER OF THE LOWER AUTHORITIES ARE THAT THE ASSESSEE HAS RECEIVED DIVIDEND INCOME OF RS.1 85 79 015/ - AND CLAIMED EXEMPTION U/S 10(34) OF THE ACT. THE ASSESSING OFFICER SHOW CAUSE D THE ASSESSEE AS TO WHY THE EXPENDITURE RELATING TO THE EARNING OF DIVIDEND INCOME SHOULD NOT BE DETERMINED AND DISALLOWED FOR THE PURPOSE OF COMPUTATION OF INCOME FROM PROFITS AND GAINS OF BUSINESS OR PROFESSION. IN RESPONSE THERETO IT WAS CLARIFIED BY THE ASSESSEE THAT INVESTMENT IN THE SHARES OF M/S. SR EE AK K AMAMBA TEXTILE S LIMITED M/S. J OCIL LIMITED AND ANDHRA BANK WERE MADE DURING THE ASSESSMENT YEAR 1958 - 59 1990 - 91 TO 1995 - 96 AND 2001 - 02 RESPECTIVELY FROM OUT OF SHARE CAPITAL AND RESERVE FUNDS A ND NOT FROM ANY BORROWED FUNDS AND THAT NO EXPENDITURE WAS INCURRED DURING THE RELEVANT ASSESSMENT YEAR 2004 - 05. THE A.O. WAS NOT CONVINCED WITH THE CONTENTION OF THE ASSESSEE AND HE HELD THAT IN THE CLAIM OF THE ASSESSEE THE INTEREST FREE FUNDS HAVING ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 24 I NVESTED IN PURCHASE OF SHARES FROM OUT OF WHICH THE DIVIDEND INCOME WAS EARNED WAS NOT AMENABLE TO VERIFICATION ON ACCOUNT OF THE FACT THAT ASSESSEE HA D NOT MAINTAINED ANY SEPARATE BOOKS OF ACCOUNTS FOR TAX FREE INCOME EARNED. IN A N ON GOING BUSINESS CON CERN LIKE THAT OF THE ASSESSEE COMPANY WHETHER DAY TO DAY TRANSACTIONS ARE VOLUMINOUS AND BUSINESS ACTIVITIES ARE INDIVISIBLE IT IS NOT POSSIBLE TO CORR ELATE ANY ASSET OR INVESTMENT TO A PARTICULAR LIABILITY WITHOUT HAVING MAINTAINED SEPARATE SET S OF BOO KS OF ACCOUNTS FOR TAXABLE AND EXEMPTED INCOME. HE ACCORDINGLY ALLOCATED THE EXPENDITURE RELATING TO TAXABLE AND NON - TAXABLE INCOME ON PRO RATA BASIS. 36 . ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AND REITERATED ITS CONTENTIONS. THE CIT(A) RE - EXA MINED THE ISSUE IN THE LIGHT OF ASSESSEES CONTENTIONS AND WAS OF THE VIEW THAT THE ASSESSEE DESERVES TO BE GIVEN THE BENEFIT OF DOUBT IN SUPPORT OF HIS CLAIM THAT IT HAD UTILIZED ITS OWN SURPLUS FUNDS NOT THE INTEREST BEARING BORROWED FUNDS FOR THE PURPOS E OF INVESTMENT IN THE SAID SHARES IN THE LIGHT OF BALANCE SHEET IN WHICH RESERVES AND SURPLUS FUNDS F A R EXCEEDING THE QUANTUM OF INVESTMENT IN SHARES ARE REFLECTED. HE ACCORDINGLY REJECTED THE PRINCIPLE OF ALLOCATION OF INTEREST EXPENDITURE O N PRO RATA B ASIS. HE WAS HOWEVER OF THE VIEW THAT ALTHOUGH THE INVESTMENTS IN SHARES WERE MADE IN EARLIER YEARS YET THE ASSESSEE CANNOT GET AWAY WITH THE PLEA THAT IT DID NOT INCUR ANY ADMINISTRATIVE AND OTHER GENERAL EXPENDITURE FOR DAY TO DAY MANAGEMENT AND MONITOR ING OF SUCH INVESTMENT PORTFOLIOS FOR WHICH EXPENDITURE RELATABLE TO SALARIES OF EMPLOYEES REPAIRS TO ASSETS AND OTHER RELATED EXPENSES COULD BE INEVITABLY ATTRIBUTABLE. HE ACCORDINGLY MADE A DISALLOWANCE OF RS.5 91 000/ - . THE RELEVANT OBSERVATION OF TH E CIT(A) ARE EXTRACTED HEREUNDER: WHILE EXAMINING THE CLAIM OF LOSS IN RESPECT OF SUGARS DIVISION BHIMADOLE THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAD RECEIVED INTEREST OF RS.6 48 686 FROM BANKS WHICH IT SET - OFF AGAINST THE EXPENDITURE OF THE S AID UNIT DURING THE YEAR AND ARRIVED AT NET LOSS OF RS.1 94 288 EXCLUDING DEPRECIATION. ON SHOW - CAUSING THE ASSESSEE AS TO HOW THE INTEREST INCOME DURING THE PRE - COMMENCEMENT PERIOD OF BHIMADOLE SUGARS DIVISION CAN BE SET - OFF AGAINST OTHER EXPENDITURES A ND ALSO WHY THE LOSS CLAIMED BY THE ASSESSEE SHOULD NOT BE DISALLOWED AS SUCH BHIMADOLE UNIT HAD NOT COMMENCED PRODUCTION DURING THE YEAR IT WAS EXPLAINED ON BEHALF ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 25 OF THE ASSESSEE THAT A COOPERATIVE SUGAR FACTORY NAMELY THE WEST GODAVARI CO - OPERATIVE S UGARS LTD. BHIMADOLE HAD BEEN PURCHASED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR AND EVEN THOUGH THERE WAS NO PRODUCTION DURING THE YEAR THE EXPENDITURES INCURRED SHOULD BE ALLOWED ON THE REASONING THAT THE SAID SUGAR FACTORY IS A ON - GOING CONC ERN. AFTER EXAMINING THE CONTENTION ON BEHALF OF THE ASSESSEE AND ON FURTHER EXAMINING THE ISSUE THE ASSESSING OFFICER OBSERVED THAT CONSEQUENT TO THE SAID THE WEST GODAVARI CO - OPERATIVE SUGARS LTD. BECOMING SICK UNIT WITHIN THE MEANING OF THE TERM U/S 12A OF THE A.P. COOPERATIVE SOCIETIES ACT THE REGISTRAR OF CO - OPERATIVE SOCIETIES VIDE ORDER DATED 29.2.2003 HELD THAT SINCE THE SOCIETY CANNOT UNDERTAKE ITS OPERATIONS IN A VIABLE MANNER AND THERE BEING NO POSSIBILITY OF ITS REHABILITATION IT WAS NECE SSARY IN THE PUBLIC INTEREST TO SELL AND TRANSFER THE ASSETS AND LIABILITIES OF THE SOCIETY IN WHOLE OR IN PART TO ANY OTHER PERSON AND APPLY THE SALE PROCEEDS TOWARDS DISCHARGE OF THE SOCIETYS LIABILITIES IN ACCORDANCE WITH THE PROVISIONS OF SECTION 12A (9) OF THE A.P. COOPERATIVE SOCIETY ACT. VIDE A SALE - DEED DATED 8.3.2004 THE ASSESSEE AS THE HIGHEST BIDDER PURCHASED OUT RIGHTLY THE ASSETS OF THE WEST GODAVARI CO - OPERATIVE SUGARS LTD. THE WEST GODAVARI CO - OPERATIVE SUGARS LTD. BHIMADOLE AS A ON - GO ING CONCERN AND THAT AS PER THE DIRECTORS REPORT MODERNIZATION OF UNIT WAS IN PROGRESS AND COMMERCIAL PRODUCTION WAS YET TO COMMENCE. IT BEING THE PRE - COMMENCEMENT STAGE WHATEVER EXPENDITURE INCURRED BY THE NEWLY ACQUIRED UNIT DURING THE EXECUTION PERI OD WAS REQUIRED TO BE CAPITALIZED BUT NOT TO BE ALLOWED AS REVENUE EXPENDITURE. SIMILARLY THE INTEREST INCOME EARNED BY THE SAID UNIT FROM BANK OF RS.6 48 686 DURING THE PRE - COMMENCEMENT PERIOD WAS REQUIRED TO BE TREATED AS INCOME FROM OTHER SOURCES IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M/S. TUTICORIN ALKALI CHEMICALS AND FERTILISERS LTD. VS. CIT (227 ITR 172) (SUPREME COURT). WITH SUCH OBSERVATION THE ASSESSING OFFICER DISALLOWED THE LOSS CLAIMED OF RS.1 94 288 AND ADDIT IONALLY TREATED AND BROUGHT TO TAX INTEREST INCOME OF RS.6 48 686 AS INCOME FROM OTHER SOURCES. 37 . THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT ASSESSEE HAS SIMPLY RECEIVED THE DIVIDEND INCOME AND WAS NOT REQUIRED TO MAINTAIN ANY ST AFF FOR THAT . T HEREFORE NO ADMINISTRATIVE EXPENSES WERE INCURRED. THE LD. D.R. ON THE OTHER HAND HAS PLACED A HEAVY RELIANCE UPON THE ORDER OF THE A.O. AND THE CIT(A). THE LD. D.R. HAS CONTENDED THAT THE ONUS IS UPON THE ASSESSEE TO PROVE THAT ITS SURPLUS FUND WAS IN VESTED IN THE SHARES. THE CIT(A) HOWEVER GIVEN A BENEFIT OF DOUBT TO THE ASSESSEES BUT ATLEAST THE EXPENDITURE INCURRED ON ADMINISTRATIVE EXPENSES SHOULD BE DISALLOWED. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 26 3 8 . HAVING GIVEN A THOUGHTFUL CONSIDERATION TO THE RIVAL SUBMISSIONS AND FROM PERUSAL OF THE ORDERS OF THE AUTHORITIES BELOW WE ARE OF THE VIEW THAT CIT(A) HAS RIGHTLY ADJUDICATED THE ISSUE AFTER HAVING HELD THAT IN THIS TYPE OF SITUATION IT IS VERY DIFFICULT TO FIND OUT WHETHER THE INVESTMENT IN SHARES WERE MADE OUT OF THE SURPLUS FUNDS O R THE BORROWED FUNDS FOR WHICH HE HAS GIVEN THE BENEFIT OF DOUBT TO THE ASSESSEES. BUT THE ASSESSEE HAS RECEIVED A SUBSTANTIAL AMOUNT OF RS.1 85 79 015/ - AS A DIVIDEND INCOME AND TO MAINTAIN THE INVESTMENT PORTFOLIOS AND OTHER THINGS ASSESSEE REQUIRE S TO INCUR SOME ADMINISTRATIVE EXPENSES. THE CIT(A) HAS RESTRICTED THE DISALLOWANCE TO RS.5.91 LAKHS TO WHICH WE DO NOT FIND ANY UNREASONABLENESS. WE ACCORDINGLY OF THE VIEW THAT CIT(A) HAS RIGHTLY MADE THE DISALLOWANCE OF RS.5.91 LAKHS AND NO INFERENCE IS C ALLED THERE IN. ACCORDINGLY WE CONFIRM THE ORDER OF CIT(A). 3 9 . GROUND NO.2 3 & 4 RELATE TO THE INCENTIVE FREE SUGAR PRICE TOOLS WRITTEN OFF AND EXPENDITURE INCURRED FOR MODIFICATION OF PLANT AND MACHINERY IN ASPIRIN DIVISIONS. THESE GROUNDS WERE ADJU DICATED BY US IN THE FOREGOING APPEAL NO.56 OF 2006 IN WHICH WE HAVE EXAMINED THE NATURE OF EXPENSES IN DETAIL AND FOLLOWING THE SAME VIEW WE DECIDE TH IS GROUND NO.2 IN FAVOUR OF THE ASSESSEES AND FOR GROUND NO S .3 & 4 THE MATTER IS RESTORED BACK TO THE FILE OF THE A.O. FOR ADJUDICATION IN TERMS INDICATED HEREIN ABOVE. 40 . GROUND NO.5 RELATE TO THE DISALLOWANCE OF LOSS IN RESPECT OF S UGA RS D IVISION BHIMADOLE OF RS.1 94 288/ - AND CREDITING THE INTEREST OF RS.6 48 686/ - AS INCOME. THE FACTS BORNE OUT FR OM THE RECORD IN THIS REGARD ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. HAS NOTICED THAT ASSESSEE HA D RECEIVED INTEREST OF RS.6 48 686/ - FROM BANKS WHICH IT SET OFF AGAINST THE EXPENDITURE OF THE SAID UNIT DURING THE YEAR AND ARRIVED AT NET LOSS OF RS.1 94 288/ - EXCLUD ING DEPRECIATION IN RESPECT OF SUGAR D IVISION BHIMADOLE. ON SHOW - CAUSE THE ASSESSEE AS TO HOW THE INTEREST INCOME DURING THE PRE - COMMENCEMENT PERIOD OF BHIMADOLE SUGAR DIVISION CAN BE SET OFF AGAINST THE OTHER EXPENDITUR ES AND ALSO WHY THE LOSS CLAIMED BY THE ASSESSEE SHOULD NOT BE DISALLOWED AS SUCH BHIMADOLE UNIT HAD NOT COMMENCED PRODUCTION DURING THE YEAR IT WAS EXPLAINED ON BEHALF OF THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 27 ASSESSEE THAT A CO - OPERATIVE SUGAR FACTORY NAMELY WEST GODAVARI CO - OPERATIVE SUGARS LIMITED BHIMADOLE HAD BEEN PURCHASED BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR AND EVEN THOUGH THERE WAS NO PRODUCTION DURING THE YEAR THE EXPENDITURE INCURRED SHOULD BE ALLOWED ON THE REASONING OF SUGAR FACTORY IS AN ON - GOING CONCERN. A FTER EXAMINING THE CONTENTIONS ON BEHALF OF THE ASSESSEE THE A.O. OBSERVED THAT CONSEQUENT TO THE SAID THE WEST GODAVARI CO - OPERATIVE SUGAR LIMITED BECOMING SICK UNIT WITHIN THE MEANING OF TERM U/S 12A OF THE A.P. CO - OPERATIVE SOCIETIES ACT THE REGISTRA R OF CO - OPERATIVE SOCIETIES VIDE ORDER DATED 29.2.2003 HELD THAT SINCE SOCIETY CANNOT UNDERTAKE ITS OPERATION S IN A VIABLE MANNER AND THERE BE ING NO POSSIBILITY OF ITS REHABILITATION IT WAS NECESSARY IN THE PUBLIC INTEREST TO S ELL AND TRANSFER THE ASSET S AND LIABILITIES OF THE SOCIETY IN WHOLE OR IN PART TO ANY OTHER PERSON AND APPLY THE SALE PROCEEDS TOWARDS DISCHARGE OF SOCIETYS LIABILIT IES IN ACCORDANCE WITH THE PROVISIONS OF SECTION 12A(9) OF A.P. CO - OPERATIVE SOCIETIES ACT . V IDE A SALE - DE ED DATED 8.3.2004 THE ASSESSEE A S THE HIGHEST BIDDER PURCHASE D OUT RIGHTLY THE ASSETS OF THE WEST GODAVARI CO - OPERATIVE SUGARS LIMITED. THE A.O. ALSO CAME ACROSS THE RELEVANT PORTION OF THE DIRECTORS REPORT AT PG.NO.12 OF THE ANNUAL ACCOUNTS FOR THE RELEVANT YEAR WHICH STATED INTERALIA THAT OPERATIONS WERE EXPECTED TO COMMENCE DURING THE SEA SON 2004 - 05. THE ASSESSING OFFICER ACCORDINGLY CONCLUDED THAT THE ASSESSEE HAD NOT TAKEN BOTH THE ASSETS AND LIABILITIES OF THE WEST GODAVARI CO - OPERATIVE SUGARS LIMITED AS A GOING CONCERN AND THAT AS PER DIRECTORS REPORT MODERNIZATION OF UNIT WAS IN PROGRESS AND COMMERCIAL PRODUCTION WAS YET TO COMMENCE. IT BEING THE PRE - COMMENCEMENT STAGE WHATEVER EXPENDITURE INCURRED BY THE NEWLY ACQUIRED UNIT DURING THE EXECUTION P ERIOD WAS REQUIRED TO BE CAPITALIZED BUT NOT TO BE ALLOWED AS REVENUE EXPENDITURE. SIMILARLY THE INTEREST INCOME EARNED BY THE SAID UNIT FROM BANK OF RS.6 48 686/ - DURING THE PRE - COMMENCEMENT PERIOD WAS REQUIRED TO BE TREATED AS INCOME FROM OTHER SOURCE S IN VIEW OF THE DECISION OF THE APEX COURT IN THE CASE OF TUTICORIN ALKALI CHEMICALS AND FERTILISERS LIMITED VS. CIT 22 7 ITR 172 (SC). THE A.O. ACCORDINGLY DISALLOWED THE LOSS CLAIM ED OF RS.1 94 288/ - AND BROUGHT TO TAX THE INTEREST INCOME OF RS.6 48 686 / - AS INCOME FROM OTHER SOURCES. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 28 41 . THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT IT WAS NOT CORRECT ON THE PART OF THE A.O. THAT THE BHIMADOLE SUGAR DIVISION WAS NOT ACQUIRED AS A N ON - GOING CONCERN BECAUSE THE MANUFACT URING OPERATION S DID EXIST EARLIER BEFORE IT WAS PURCHASED FROM THE WEST GODAVARI CO - OPERATIVE SUGARS LIMITED. THERE WAS ONLY A LULL IN PRODUCTION FOR ONE YEAR FOR THE PURPOSE OF UNDERTAKING NECESSARY REPAIRS TO PLANT AND MACHINERY AFTER WHICH COMMERCIAL PRODUCTION WAS RESTORED. 42 . THE CIT(A) RE - EXAMINED THE ISSUE IN THE LIGHT OF ASSESSEES CONTENTION BUT WAS NOT CONVINCED WITH IT. HE ACCORDINGLY CONFIRMED THE DISALLOWANCE AND THE ADDITION OF INTEREST INCOME AS AN INCOME FROM OTHER SOURCES. THE RELEVAN T OBSERVATION OF THE CIT(A) ARE EXTRACTED HEREUNDER: AFTER HEARING THE LEARNED AUTHORIZED REPRESENTATIVE AND ON A CAREFUL CONSIDERATION OF THE FACTS RELATING TO THE ISSUE THE FOLLOWING OBSERVATIONS MADE AND DECISIONS TAKEN: - (I) ADMITTEDLY THE BHIMA DOLE SUGARS UNIT HAD BEEN PURCHASED DURING THE RELEVANT ACCOUNTING YEAR CONSEQUENT TO THE SAID SUGARS UNIT OWNED EARLIER BY THE WEST GODAVARI CO - OPERATIVE SUGARS LTD. BECOMING SICK UNIT PRECLUDING IT FROM RUNNING THE UNIT IN A VIABLE MANNER. ALTHOUGH S UCH UNIT WAS PRESUMABLY OPERATIONAL PRIOR TO ITS PURCHASE ON AUCTION BY THE APPELLANT YET THE ACQUISITION OF THE SAID UNIT CANNOT BE CONSIDERED TO BE AN ACQUISITION OF AN ON - GOING CONCERN IN THE HANDS OF THE APPELLANT FOR THE SIMPLE REASON THAT THE APPELL ANT - COMPANY ACQUIRED ONLY THE ASSETS AND NOT THE BURDEN OF LIABILITIES. HAD THE LIABILITIES ALSO BEEN TAKEN OVER IT WOULD HAVE ASSUMED THE CHARACTER OF THE ACQUISITION OF A ON - GOING CONCERN. IT IS AN ADMITTED FACT THAT THERE WAS NO OPERATION OR COMMERCI AL PRODUCTION DURING THE ACCOUNTING YEAR RELEVANT TO THE ASSESSMENT YEAR 2004 - 05 AND AFTER ACQUISITION OF SUCH UNIT THE APPELLANT SET ABOUT PUMPING IN ITS OWN FUNDS FOR MODERNIZATION OF SUCH FACTORY BEFORE IT BECAME READY FOR OPERATIONS. THEREFORE SI NCE SUCH SUGARS UNIT AT BHIMADOLE BECAME THE PROPERTY OF THE APPELLANT FOR THE FIRST TIME ANY EXPENDITURE INCURRED FOR ITS MODERNIZATION BEFORE THE COMMENCEMENT OF PRODUCTION AND COMMERCIAL OPERATIONS PARTAKES OF THE CHARACTER OF PRE - COMMENCEMENT EXPENDIT URE QUALIFYING TO BE ONLY CAPITALISED. ONLY AFTER COMMENCEMENT OF ANY PRODUCTION IN SUCH NEWLY ACQUIRED UNIT WOULD ANY EXPENDITURE BE TREATED AS REVENUE AND NOT OTHERWISE. THE STAGE IN RESPECT OF THE NEWLY ACQUIRED UNIT BEING A PRE - COMMENCEMENT STAGE THE RATIO OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF M/S. TUTICORIN ALKALI CHEMICALS AND FERTILISERS LTD. VS. CIT(SUPRA) IS SQUARELY APPLICABLE IN RESPECT OF INTEREST INCOME EARNED ON BANK DEPOSITS. ACCORDINGLY SUCH INTEREST INCOME CANNO T BE SET - OFF AGAINST THE PRE - ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 29 COMMENCEMENT EXPENDITURE BUT HAVE TO BE ASSESSED AS INCOME UNDER THE HEAD OTHER SOURCES IN RESPECT OF THE SAID BHIMADOLE SUGARS DIVISION. LIKE IN THE CASE OF THE CITED CASE - LAW THE APPELLANT - COMPANY IS AT LIBERTY TO USE IT S INTEREST INCOME AS IT LIKES IS UNDER NO OBLIGATION TO UTILIZE ITS INCOME TO REDUCE ITS LIABILITY TO PAY INTEREST TO ITS CREDITORS (THERE BEING NO LIABILITIES OR CREDITORS IN RESPECT OF BHIMADOLE SUGARS UNIT) AND IT CAN UTILIZE ITS INTEREST IN WHATEVER MANNER IT LIKES AND THERE IS NO OVERRIDING TITLE OF ANYBODY IN RESPECT OF SUCH INCOME. IN THIS VIEW OF THE ANALYSIS OF THE FACTS AND CIRCUMSTANCES RELATING TO THE ISSUE IN THE CASE OF THE APPELLANT IN THE LIGHT OF THE CITED DECISION OF THE HONBLE SUPREM E COURT THE ASSESSING OFFICER CAN BE SAID TO HAVE CORRECTLY DISALLOWED THE LOSS CLAIMED OF RS.1 94 288 AND OVER AND ABOVE BROUGHT TO TAX INTEREST INCOME FROM BANK OF RS.6 48 686 AS INCOME FROM OTHER SOURCES. THIS ISSUE IS THEREFORE DECIDED AGAINST THE APPELLANT - COMPANY. 43 . AGGRIEVED THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL WITH THE SUBMISSIONS THAT ASSESSEE HAS ACQUIRED THE SUGAR DIVISION AT BHIMADOLE AS AN ONGOING CONCERN WITH ASSETS AND LIABILITIES. THEREFORE THE INCOME GENE RATED FROM THE BANK WITH RESPECT TO THAT SUGAR DIVISION IS A BUSINESS INCOME AND THE EXPENDITURE INCURRED O N THE MAINTENANCE OF THIS UNIT SHOULD BE TREATED AS A REVENUE EXPENDITURE AND ITS SET OFF AGAINST THE INTEREST INCOME SHOULD BE ALLOWED. 44 . THE L D. D.R. ON THE OTHER HAND HAS PLACED A HEAVY RELIANCE UPON THE ORDER OF THE CIT(A) WITH THE SUBMISSION THAT ASSESSEE HAS NOT PURCHASED THE BHIMADOLE SUGAR DIVISION AS A GOING CONCERN. THIS UNIT BECAME SICK AND IT WAS CLOSED DOWN WITHIN THE PROVISIONS OF S ECTION 12A OF THE CO - OPERATIVE SOCIETIES ACT AND THERE AFTER THE R EGISTRAR OF CO - OPERATIVE SOCIETIES VIDE ORDER DATED 29.2.2003 HAD ALSO HELD THAT SINCE THE SOCIETY CANNOT UNDERTAKE ITS OPERATION IN A VIABLE MANNER AND THERE IS NO POSSIBILITY OF ITS REHABI LITATION IT WAS NECESSARY IN THE PUBLIC INTEREST TO SALE AND TRANSFER THE ASSETS AND LIABILITIES OF THE SOCIETY IN WHOLE OR IN PART TO ANY OF THE PERSON AND TO APPLY THE SALE PROCEEDS TOWARDS DISCHARGE OF SOCIETIES LIABILITIES IN ACCORDANCE WITH THE PROVI SIONS OF SECTION 12A(9) OF THE A.P. COOPERATIVE SOCIETY ACT. MEANING THEREBY AT THE TIME WHEN THE SUGAR UNIT WAS PURCHASED IT WAS SICK AND CLOSED UNIT. ONLY THE ASSETS WERE PURCHASED AND THE SUBSTANTIAL AMOUNT WAS SPENT ON IT TO START THE COMMENCEMENT O F PRODUCTIONS IN THIS UNIT. THEREFORE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 30 THIS UNIT WAS NOT PURCHASED AS A GOING CONCERN AND THE EXPENDITURE INCURRED ON IT BEFORE ITS COMMENCEMENT ARE TO BE CAPITALIZED AND CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. SIMILARLY THE INTEREST INCOME EARNED W ITH REGARD TO THIS UNIT BEFORE THE PRE - COMMENCEMENT OF ITS PRODUCTION ARE ALSO TO BE TREATED AS AN INCOME FROM OTHER SOURCES. 45 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF RECORD WE FIND THAT THE ASSESSEE HAS ACQUIRED THE ASSETS OF SUGAR DIVISION AT BHIMADOLE IN AUCTION . BEFORE TH E UNIT WAS PUT ON SALE IT WAS DECLARED AS SICK UNIT WITHIN THE PROVISIONS OF SECTION 12A OF A.P. COOPERATIVE SOCIETIES ACT AND THE REG ISTRAR OF THE COOPERATIVE SOCIETIES HAS ALSO GIVEN A CATEGORICAL FINDIN G THAT SOCIETY CANNOT UNDERTAKE ITS OPERATION IN A VIABLE MANNER AND THERE BE NO POSSIBILITY OF ITS REHABILITATION. MEANING THEREBY WHEN THE SAID SUGAR DIVISION WAS PURCHASED IT WAS ONLY A CLOSED UNIT AND NOT A RUNNING CONCERN. MOREOVER THE ASSESSEE HAS PURCHASED ITS ASSETS AND NOT THE LIABILITIES. FOR THE COMMENCEMENT OF ITS PRODUCTION THE ASSESSEE HAS INCURRED LOT OF EXPENDITURE THERE ON. THEREFORE THE REVENUE HAS RIGHTLY HELD THAT WHATEVER EXPENDITURE ARE INCURRED UPON THIS UNIT FOR THE COMMENCEMEN T OF PRODUCTIONS ARE TO BE CAPITALIZED AND NOT TO BE ALLOWED AS REVENUE EXPENDITURE. SIMILAR IS THE POSITION WITH RESPECT TO THE INTEREST INCOME WHICH WAS EARNED BY THE ASSESSEE WITH RELATI ON TO THE SAME UNIT BEFORE THE COMMENCEMENT OF ITS PRODUCTION. TH EREFORE THE INTEREST INCOME GENERATED WITH RESPECT TO THIS UNIT WAS RIGHTLY CONSIDERED TO BE THE INCOME FROM OTHER SOURCES BY THE REVENUE AUTHORITIES. WE THEREFORE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY ADJUDICATED THE ISSUE IN THE LIGHT OF GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AND WE FIND NO INFIRMITY THEREIN. THEREFORE WE CONFIRM HIS ORDER. 46 . GROUND NO.6 RELATE TO THE REDUCTION OF DEDUCTION U/S 80IA OF RS.48 40 110/ - . FACTS BORNE OUT FROM THE RECORD ON THIS ISSUE ARE THAT ASSESSEE HAS CLAIMED DEDUCTION U/S 80IA OF AN AMOUNT OF RS.3 85 98 587/ - BEING THE 100% OF THE PROFIT S IN RESPECT OF ITS CO - GENERATION UNIT AT TADUVAI. ON VERIFICATION OF ITS CLAIM THE A.O. HAS OBSERVED THAT PROFIT SHOWN BY THE ASSESSEE IN RESPECT OF POWER GENERATION UNIT A ND THE WIND POWER UNIT WERE ABNORMALLY HIGH AS COMPARED TO THE PROFIT S DECLARED IN THE CASE S OF OTHER ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 31 UNITS LIKE SUGAR DIVISION DISTILLERY DIVISION CAUSTIC SODA DIVISION SULPHURIC ACID DIVISION ETC. W HEN REQUIRED TO FURNISH EXPLANATION IT WAS STATED O N BEHALF OF THE ASSESSEE THAT THE COST S OF POWER GENERATION FINANCE ESTABLISHMENT ETC. IN THE CASE OF POWER GENERATION UNIT WERE SUBSTANTIALLY LESS AS COMPARED TO OTHER UNITS WHICH RESULTED IN HIGHER PROFITS IN THE POWER GENERATION UNIT. IN THE BACK G ROUND OF THE CAP TIVE CONSUMPTION OF POWER BY SALE O R TRANSFER OF POWER FROM CO - GENERATION UNIT TO THE OTHER UNITS OF THE ASSESSEE COMPANY FOR THEIR MANUFACTURING ACTIVITIES AND KEEPING IN VIEW THE UNUSUALLY BLOTTED PROFIT OF THE POWER GENERATION UNIT THE A.O. SOUGHT TO INVOKE THE PROVISIONS OF SECTION 80IA(8) . T HE A.O. ACCORDINGLY RECALCULATED THE EXPENDITURE RELATABLE TO THE POWER DIVISION AND ALLOCATED A SUM OF RS.48 40 110/ - IN RESPECT OF POWER GENERATION UNIT . C ONSEQUENTLY THE DEDUCTIONS CLAIMED U/S 80IA WAS REDUCED BY RS.48 40 110/ - WHICH RESULTED IN INCREASE OF TAXABLE INCOME BY SUCH AMOUNT. 47 . THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSIONS THAT ASSESSING OFFICER HA D CONSISTENTLY FOLLOWED PRACTICE OF ALLOCATING THE EXPENDI TURE OF THE HEAD OFFICE DIVISION TO THE UNIT S WHICH ARE HAVING OUTSIDE SALES AND INTERNAL TRANSFERS BUT THE CO - GENERATION UNIT MACHINERY MANUFACTURING DIVISION (M.M. DIVISION) AND WIND POWER UNITS ARE SERVICE UNITS TO THE OTHER UNITS OF THE COMPANY AND HENCE THE REGISTERED OFFICE EXPENDITURE IS NOT ALLOCATED. A BULK OF INTERNAL FUNDS HAVE BEEN UTILIZED IN THE POWER GENERATION UNIT AND THEREFORE THE ASSESSING OFFICER OUGHT NOT TO HAVE ALLOCATED THE INTEREST EXPENDITURE OF THE HE AD OFFICE UNIT TO POWER GENERATION UNIT ON PRO RATA BASIS. CIT(A) RE - EXAMINED THE ISSUE BUT WAS NOT CONVINCED WITH THE EXPLANATIONS OF THE ASSESSEES AND HE CONFIRMED THE ORDER OF THE A.O. A FTER HAVING OBSERVED THAT PROVISIONS OF SECTION 80IA(8) CLEARLY BEING ATTRACTED IN THE AS SESSEES CASE BECAUSE OF INTER N AL TRANSFER AND SALE OF POWER THE A.O. IS COMPETENT TO REDETERMINE THE PROFITS OF THE ELIGIBLE BUSINESS I.E. T HE POWER GENERATION UNIT ON REASONABLE BASIS AS H E FIND IT EXCEPTIONALLY DIFFICULT TO DETERMINE THE MARKET VALUE OF THE POWER SOLD BY POWER GENERATION UNIT TO THE OTHER UNITS. THE RELEVANT OBSERVATION OF THE CIT(A) ARE EXTRACTED HEREUNDER: ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 32 AFTER HEARING THE LEARNED AUTHORIZED REPRESENTATIVE AND ON A CAREFUL CONSIDERATION OF THE FACTS RELATING TO THE ISSUE THE FOLL OWING OBSERVATIONS MADE AND DECISIONS TAKEN: - (I) IT IS AN ADMITTED FACT ON BEHALF OF THE APPELLANT THAT POWER GENERATED BY THE CO - GENERATION PLANT IS USED FOR CAPTIVE CONSUMPTION FOR OTHER UNITS MEANING THEREBY THAT THERE IS INTERNAL SALE AND TRANSFER OF POWER TO OTHER UNITS. IT HAS BEEN CLAIMED ON BEHALF OF THE APPELLANT THAT GENERAL EXPENDITURES HAVE BEEN ALLOCATED TO THE UNITS WHICH ARE HAVING BOTH OUTSIDE SALES AND INTERNAL TRANSFERS AS A MATTER OF CONSISTENT POLICY OVER THE YEARS. BUT THEN IT C AN BE SAID THAT ANY POLICY HOWSOEVER CONSISTENTLY FOLLOWED OVER THE YEARS CANNOT ACQUIRE LEGITIMACY UNLESS SUCH POLICY GIVES THE IMPRESSION OF A REASONABLE POLICY HAVING LOGIC AND BASED ON PROPER ACCOUNTING METHODS. IT CANNOT BE DENIED ON BEHALF OF THE APPELLANT THAT THE CO - GENERATION POWER PLANT COULD BE RUN AND OPERATED WITH CERTAIN AMOUNT OF GENERAL EXPENDITURE ATTRIBUTABLE TO SUCH RUNNING OF THE POWER PLANT. THERE IS NO LOGIC WHATSOEVER IN CLAIMING THAT MERELY BECAUSE THE CO - GENERATION PLANT SALE S/TRANSFERS ITS POWER INTERNALLY TO OTHER UNITS NO GENERAL EXPENDITURE SHOULD BE ATTRIBUTABLE. SUCH POLICY PRIMA FACIE APPEARS TO BE DELIBERATELY AND CALCULATEDLY IMBALANCED AND LOPSIDED WITH THE INTENTION TO ARTIFICIALLY INFLATE THE PROFIT IN RESPECT OF THE CO - GENERATION UNIT. THE MARKET VALUE OF THE DAY TO DAY COST OF EXPENDITURES ALLOCABLE BEING DIFFICULT TO BE DETERMINED THE ASSESSING OFFICER CAN BE SAID TO HAVE RESORTED TO MOST REASONABLE METHOD OF ALLOCATION OF EXPENDITURES AMONGST VARIOUS UNITS ON PRO - RATA BASIS. (II) IT M AY NOT BE OUT OF PLACE TO MENTION HERE THAT HONBLE SUPREME COURT IN THE CASE OF M/S. TUTICORIN ALKALI CHEMICALS AND FERTILISERS LTD. VS. CIT(SUPRA) HAS OBSERVED THAT WHETHER A PARTICULAR RECEIPT (OR PAYMENT) CONSTITUTE TAXAB LE INCOME (OR EXPENDITURE) HAS TO BE DECIDED ACCORDING TO THE PRINCIPLES OF LAW AND NOT IN ACCORDANCE WITH THE ACCOUNTING PRACTICE. APPLYING SUCH RATIO TO THE INSTANT CASE IT MAY BE STATED THAT THE SO CALLED CONSISTENT PRACTICE BY THE APPELLANT DOES NOT EVEN CONFIRM TO ANY REASONABLE ACCOUNTING PRACTICE AND HAS BEEN DESIGNED PURELY WITH AN INTENTION TO INFLATE THE INCOME OF THE CO - GENERATION UNIT AND CLAIM CENT PERCENT DEDUCTION AND THEREBY REDUCE THE INCIDENCE OF TAXATION TO A CONSIDERABLE EXTENT. THE PROVISIONS OF SECTION 80IA(8) CLEARLY BEING ATTRACTED IN THE APPELLANTS CASE BECAUSE OF INTERNAL TRANSFER AND SALE OF POWER THE ASSESSING OFFICER IS COMPETENT TO RE - DETERMINE THE PROFITS OF THE ELIGIBLE BUSINESS (POWER GENERATION UNIT) ON A REASONABLE B ASIS AS HE FOUND IT EXCEPTIONALLY DIFFICULT TO DETERMINE THE MARKET VALUE OF POWER SOLD BY THE POWER GENERATION UNIT TO THE OTHER UNITS. PRO - RATA BASIS BEING THE MOST ACCEPTABLE METHOD FOR ALLOCATION OF EXPENDITURE ON A REALISTIC BASIS THE ACTION OF THE ASSESSING OFFICER CAN BE SAID TO BE REASONABLE AND IN ORDER. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 33 (III) AS REGARDS THE CLAIM THAT MUCH OF INTERNAL FUNDS AND NOT BORROWED FUNDS HAVE BEEN PUMPED INTO THE POWER GENERATION UNIT NOT REQUIRING FURTHER ALLOCATION OF INTEREST EXPENDITURE IT MAY BE STATED THAT THE ONUS LIES WITH THE APPELLANT TO PROVE WITH SUPPORTING EVIDENCE THAT ONLY BULK OF INTERNAL FUNDS HAVE BEEN INVESTED IN THE POWER GENERATION UNIT AND THE BORROWED FUNDS HAVE BEEN INVESTED IN OTHER UNITS. THIS HAVING NOT BEEN DONE EITHER D URING THE ASSESSMENT PROCEEDINGS OR DURING THE APPELLATE PROCEEDINGS SUCH CLAIM OF THE APPELLANT CAN BE SAID TO BE BASELESS AND DEVOID OF MERIT. UNDER THE CIRCUMSTANCES THE ACTION OF THE ASSESSING OFFICER IN INVOKING THE PROVISIONS OF SECTION 80IA(8) A ND THEREAFTER COMPUTING THE PROFITS AND GAINS OF THE POWER GENERATION UNIT ON A REASONABLE BASIS CAN BE SAID TO BE REASONABLE AND JUSTIFIABLE NOT REQUIRING ANY INTERFERENCE. 4 8 . AGGRIEVED THE ASSESSEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL WITH T HE SUBMISSION THAT CIT(A) HAS NOT PROPERLY EXAMINED THE COMPLETE FACTS OF THE CASE. WHATEVER POWER WAS GENERATED IT WAS CONSUMED BY THE OTHER UNITS OF THE ASSESSEES ON A TRANSFER AND ASSESSEE HAS ADOPTED THE COST PRICE OF THE POWER IN ITS BOOKS WHILE TRAN SFERRING IT TO OTHER UNITS. THEREFORE THE OVER HEAD EXPENDITURE WHICH CANNOT BE IDENTIFIED WITH PARTICULAR UNITS WAS INCURRED ONLY FOR THOSE UNITS OF WHICH PRODUCTIONS WERE SOLD IN THE OPEN MARKET. 4 9 . THE LD. D.R. ON THE OTHER HAND HAS PLACED HEAVY REL IANCE UPON THE ORDER OF THE LOWER AUTHORITIES. 50 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF RECORD WE FIND THAT THE A.O. HAS OBJECTED THE ALLOCATION OF INDIRECT EXPENDITURE AMONGST THE ELIGIBLE AND NON - ELIGIBLE UNITS H AVING CON CLUDED THAT MAJOR PORTION OF THE INDIRECT EXPENSES ARE DEBITED TO THE NON - ELIGIBLE UNITS RESULTED INTO A MORE PROFIT IN THE ELIGIBLE UNIT. THE ASSESSEES MAIN CONTENTION IS THAT PRODUCTION OF THE ELIGIBLE UNIT I.E. POWER GENERATION PLANT WAS NOT SOLD IN THE OPEN MARKET AND THE POWER WAS CONSUMED BY ITS OTHER UNITS AND HE HAS NOT TRANSFERRED/SOLD THE POWER TO OTHER UNITS ON MARKET PRICE. HE HAS SIMPLY CREDITED IT TO SALE ACCOUNT AT THE COST PRICE. THEREFORE THE OVER HEAD EXPENSES RELATING TO THE SALE OF THE OTHER PRODUCTS OF OTHER UNITS CANNOT BE ALLOCATED TO THIS POWER GENERATION UNIT. THIS ASPECT WAS NOT EXAMINED BY THE LOWER AUTHORITIES. NOR WAS IT DISPUTED BEFORE US BY THE LD. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 34 D.R. DURING THE COURSE OF HEARING. IN THE LIGHT OF THESE FACTS WE ARE O F THE VIEW THAT ALLOCATION OF INDIRECT EXPENSES AMONGST THE ELIGIBLE UNITS AND NON - ELIGIBLE UNITS ARE NOT PROPER. WE THEREFORE SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE A.O. WITH THE DIRECTION TO VERIFY THE FACTS ABOUT THE CO ST OF POWERS ON ITS SALE OR TRANSFER TO OTHER UNITS OF THE ASSESSEE. IF IT IS TAKEN ON A COST PRICE THE OVER HEAD INDIRECT EXPENSES RELATING TO MARKETING OF THE PRODUCT OF THE OTHER UNITS OF THE ASSESSEE COMPANY SHOULD NOT BE ALLOCATED TO ITS POWER GENER ATION PLANT. A REASONABLE PART OF THE ADMINISTRATIVE EXPENSES CAN ONLY BE DEBITED TO THIS ELIGIBLE UNIT. WITH THESE DIRECTIONS WE RESTORE THE MATTER TO THE FILE OF THE A.O. TO RE - ADJUDICATE THE ISSUE AFRESH AFTER AFFORDING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEES. ITA NO.209 OF 2007: 51 . THIS IS AN APPEAL PREFERRED BY THE REVENUE ASSAILING THE ORDER OF CIT(A) ON VARIOUS GROUNDS BUT THEY ALL RELATE TO THE DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A ALLOCATED ON PRO RATA BASIS TO THE EXEMPTED DIVID END INCOME. THE IDENTICAL ISSUE WAS EXAMINED BY US IN THE FOREGOING APPEAL BEARING ITA NO.162 OF 2007. FOLLOWING THE SAME REASON WE CONFIRM THE ORDER OF THE CIT(A) IN WHICH THE ADDITION WAS RESTRICTED TO THE TUNE OF RS.5.91 LAKHS. ACCORDINGLY THIS APPE AL IS DISPOSED OFF. ITA NO.365 OF 2008: 52 . THIS APPEAL IS PREFERRED BY THE ASSESSEE ON VARIOUS GROUNDS WHICH ARE EXTRACTED AS UNDER: I. DISALLOWANCE OF PROPORTIONATE EXPENDITURE OF RS.4 00 000/ - U/S 14A OF THE INCOME TAX ACT: 1. THE COMMISSIONER OF IN COME TAX (APPEALS) IS NOT CORRECT IN ATTRIBUTING PART OF THE ADMINISTRATIVE EXPENSES SALARIES OF EMPLOYEES REPAIRS TO ASSETS AND OTHER EXPENDITURE TO THE DIVIDEND INCOME SINCE THE CORRESPONDING INVESTMENT IN SHARES WAS MADE 15 TO 20 YEARS AGO AND NOT IN THE YEAR OF ACCOUNT AND SINCE NO EXPENDITURE WAS INCURRED IN THE YEAR FOR EARNING THE INCOME. 2. THE APPELLANT SUBMITS THAT SECTION 14A(2) WHICH WAS INTRODUCED VIDE FINANCE BILL 2006 IS APPLICABLE FROM THE ASSESSMENT YEAR 2007 - 08 AND NOT EARLIER AND AS SUCH THE DIVIDEND INCOME RECEIVED DURING THE ASSESSMENT YEAR 2005 - 06 CANNOT BE BROUGHT INTO AMBIT OF SECTION 14A(2). ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 35 II. REDUCING THE DEDUCTION U/S 80IA OF RS.52 12 479/ - . 1. THE APPELLANT COMPANY SUBMITS THAT IT IS HAVING A CO - GENERATION UNIT AT TAD UVAI AND DEDUCTION U/S 80IA IS BEING CLAIMED FROM THE BEGINNING ONWARDS WITHOUT ALLOCATING THE HEAD OFFICE EXPENDITURE A CONSISTENT PRACTICE FOLLOWED SINCE THIS IS ONLY A SERVICE UNIT WITHOUT ANY OUTSIDE SALES. III. INCENTIVE FREE SUGAR PRICE RS.88 99 516/ - . 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN HIS CONCLUSION THAT SINCE THE APPELLANT DID NOT UTILIZE THE ADDITIONAL PRICE REALIZED ON SALE OF INCENTIVE SUGAR FOR REPAYMENT OF LOANS TO CENTRAL FINANCIAL INSTITUTIONS SUCH ADDITIONA L PRICE REALIZED CONSTITUTED REVENUE RECEIPT IN TERMS OF CLAUSE 12 OF INCENTIVE SCHEME OF DIRECTOR OF SUGAR DATED 10.3.1993. 2. THE APPELLANT SUBMITS THAT WHAT IS REQUIRED UNDER THE SCHEME IS THAT THE EXTRA PRICE OR THE INCENTIVE PRICE REALIZED SHOULD BE UTILIZED IN REPAYMENT OF LOANS OBTAINED FOR EXPANSION OR SETTING UP OF EITHER EXISTING OR NEW FACTORIES. THE APPELLANT SUBMITS THAT IRRESPECTIVE OF WHETHER THE LOANS ARE BORROWED FROM FINANCIAL INSTITUTIONS OR OTHERS WITHOUT ANY DIFFERENCE IF REPAID WI TH THE RECEIPTS REALIZED ON SALE OF INCENTIVE SUGAR SUCH RECEIPTS WOULD CONSTITUTE CAPITAL RECEIPTS AND THE COMMISSIONER OF INCOME TAX (APPEALS) SHOULD NOT HAVE TREATED IT AS REVENUE RECEIPT. 3. THE APPELLANT SUBMITS THAT IT HAS REPAID TO CENTRAL FIN ANCIAL INSTITUTIONS AND THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS. IV. CONSULTATION FEE RS.4 20 000/ - . REPAIRS TO PLANT & MACHINERY BUILDINGS RS.1 61 50 468/ - . 1 THE APPELLANT SUBMITS THAT THE COMMISSIONER OF INCOME TAX (APPEAL S) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE DISALLOWANCE OF THE ABOVE AMOUNT WHICH WAS PAID TO A CONSULTANT DR. V.K. BHALLA RS.2 20 000/ - TOWARDS HIS CHARGES FOR GIVING SUGGESTIONS IN THE MATTER OF MODIFICATIONS TO BE CARRIED OUT TO THE EXISTI NG PLANT AND MACHINERY IN ASPIRIN DIVISION TO MEET THE STANDARDS OF FOOD AND DRUG ADMINISTRATION OF USA SO AS TO IMPROVE THE QUALITY OF THE PRODUCT (TO EXPLORE THE MARKET IN USA ETC. ) AND ALSO RS.2 00 000/ - PAID TO INDIAN INSTITUTE OF CHEMICAL TECHNOLOGI ES (IICT) TO STUDY THE MATERIAL CONSUMPTION AND MANUFACTURING PROCESS NORMS WHICH IS IN THE NATURE OF PROFIT IMPROVEMENT. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN TREATING THE RENOVATION OF FACTORY BUILDING & MACHINERY AS CAPITAL EX PENDITURE. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN HIS CONCLUSION THAT FIXED ASSETS HAS BEEN BROUGHT INTO EXISTENCE. THE APPELLANT SUBMITS THAT THE IMPUGNED AMOUNT IS ONLY A CONSULTATION FEE AND REPAIRS BUT NOT ANY AMOUNT TOWARDS C OST OF PLANT & MACHINERY. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 36 4. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THE RATIO OF THE DECISION OF THE SUPREME COURT RENDERED IN EMPIRE JUTE MILLS LTD. VS. CIT WHERE IN THE APEX COURT HAS CLEARLY LAID DOWN THAT THE EXPENDITURE INCU RRED FOR IMPROVING OR INCREASING THE PROFIT EARNING CAPACITY WITHOUT AFFECTING THE CAPITAL STRUCTURE WOULD AMOUNT TO ONLY REVENUE EXPENDITURE. V. TOOLS WRITTEN OFF RS.19 89 000/ - 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS TO CONFIRM THE DISALLOWANCE OF RS.19 89 000/ - BEING THE COST OF UNSERVICEABLE OBSOLETE SMALL AND INSIGNIFICANT TOOLS. THE TOOLS WRITTEN OFF ARE WORN OUT AND CANNOT BE USED AND CHARGEABLE TO REPAIRS & MAINTENANCE AND HENCE THE DISALLOWANCE IS NOT WARRANTED . 2. THE APPELLANT SUBMITS THAT THE COMPANY HAS BEEN FOLLOWING A CONSISTENT METHOD OF WRITING OFF SUCH TOOLS AND THAT NEVER SUCH ACTION WAS QUESTIONED BY THE ASSESSING OFFICER IN THE PAST. VI. REPAIRS IN SUGARS DIVISION BHIMADOLE RS.52 49 207/ - . 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS MADE BY THE ASSESSING OFFICER WHO HIMSELF HAS STATED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS ADMITTED THAT AC SHEETS ROOF LIGHTING SHEETS AND P VC PIPES ETC. WHICH WERE IN BROKEN CONDITION WERE REPLACED AND WITH REGARD TO NON FACTORY BUILDINGS THE REPAIRS WERE UNDER TAKEN TO THE DAMAGED PORTION AND IT IS NOT CORRECT TO CONCLUDE THAT IT IS NOTHING BUT COMPLETE RENOVATION AND REMODELING TO TREAT IT AS CAPITAL EXPENDITURE. MAGNITUDE IS NOT THE CRITERIA TO CONCLUDE WHETHER EXPENDITURE IS CURRENT REPAIR OR IN THE NATURE OF CAPITAL EXPENDITURE. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN TREATING THE RENOVATION OF FACTORY BUILDING & MACHINERY AS CAPITAL EXPENDITURE. 3. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN HIS CONCLUSION THAT FIXED ASSETS HAS BEEN BROUGHT INTO EXISTENCE. THE APPELLANT SUBMITS THAT THE IMPUGNED AMOUNT IS ONLY A CONSULTATION FEE AND REPAIRS BUT NOT ANY AMOUNT TOWARDS COST OF PLANT & MACHINERY. 4. THE COMMISSIONER OF INCOME TAX (APPEALS) FAILED TO APPRECIATE THE RATIO OF THE DECISION OF THE SUPREME COURT RENDERED IN EMPIRE JUTE MILLS LTD. VS. CIT WHERE IN THE APEX COURT HAS CLEARLY LAID DOWN THAT THE EXPENDITURE INCURRED FOR IMPROVING OR INCREASING THE PROFIT EARNING CAPACITY WITHOUT AFFECTING THE CAPITAL STRUCTURE WOULD AMOUNT TO ONLY REVENUE EXPENDITURE. V. TOOLS WRITTEN OFF RS.19 89 000/ - . ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 3 7 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS TO CONFIRM THE DISALLOWANCE OF RS.19 89 000/ - BEING THE COST OF UNSERVICEABLE OBSOLETE SMALL AND INSIGNIFICANT TOOLS. THE TOOLS WRITTEN OFF ARE WORN OUT AND CANNOT BE USED AND CHARGEABLE TO REPAIRS & MAINTENANCE AND HENCE THE DIS ALLOWANCE IS NOT WARRANTED. 2. THE APPELLANT SUBMITS THAT THE COMPANY HAS BEEN FOLLOWING A CONSISTENT METHOD OF WRITING OFF SUCH TOOLS AND THAT NEVER SUCH ACTION WAS QUESTIONED BY THE ASSESSING OFFICER IN THE PAST. VI. REPAIRS IN SUGARS DIVISION BHIM ADOLE RS.52 49 207/ - . 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS MADE BY THE ASSESSING OFFICER WHO HIMSELF HAS STATED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS ADMITTED THAT AC SHEETS ROOF LIGHTING SHEETS AND PVC PIPES ETC. WHICH WERE IN BROKEN CONDITION WERE REPLACED AND WITH REGARD TO NON FACTORY BUILDINGS THE REPAIRS WERE UNDER TAKEN TO THE DAMAGED PORTION AND IT IS NOT CORRECT TO CONCLUDE THAT IT IS NOTHING BUT COMPLETE RENOVATION AND REMODELING TO TREAT IT AS CAPITAL EXPENDITURE. MAGNITUDE IS NOT THE CRITERIA TO CONCLUDE WHETHER EXPENDITURE IS CURRENT REPAIR OR IN THE NATURE OF CAPITAL EXPENDITURE. 2. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN CONCLUDING THAT THE ASSESSEE HAS UNDERTAKEN REMODELING MODIFICATION AND RENOVATION OF THE BUILDINGS AFTER OBTAINING THE EXPERT ADVICE OF CONSULTANT FROM GERMANY. THERE IS NO DEPARTURE FROM THE DESIGN PATTERN OF THE EARLIER FACTORY BUILDINGS OWNED BY THE CO.OP. SOCIETY. THE RE IS NO EXTENSIVE STRUCTURAL ALTERATION AND RENOVATION TO THE BUILDINGS TO CONCLUDE IT AS CAPITAL EXPENDITURE. VII. EXPENDITURE OF RS.10 00 000/ - PAID TO M/S. THE ANDHRA PRADESH POLLUTION CONTROL BOARD: 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS N OT CORRECT TO CONCLUDE THAT THE PAYMENT WAS MADE FOR NON COMPLIANCE OF STATUTORY DIRECTIONS AS PER THE PROVISIONS OF SEC. 33A OF WATER (PREVENTION AND CONTROL OF POLLUTION) AMENDMENT ACT 1988 WHEN THE ASSESSEE HAS COMPLIED WITH THE DIRECTIONS SUBSEQUENTLY . 2. THE BANK GUARANTEE WAS ENCASHED SINCE THE WORK WAS NOT DONE IN TIME AND THERE IS NO INFRINGEMENT OF LAW SO AS TO TREAT THE SAME AS PENAL IN NATURE TO ENCASH THE BANK GUARANTEE. HENCE THE AMOUNT IS ALLOWABLE AS BUSINESS EXPENDITURE AND IS ALLOWABLE U/S 37(1) OF THE INCOME TAX ACT. VIII. DISALLOWANCE OF EXPENDITURE OF RS.39 45 028/ - TREATING THE SAME AS CAPITAL EXPENDITURE IN SUGARS DIVISION TANUKU: 1 . THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE A DDITIONS MADE BY THE ASSESSING OFFICER WHEN REPAIRS WERE UNDERTAKEN TO EFFLUENT TREATMENT PLANT RELATING TO THE ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 38 DIGESTER AERATOR CLARIFLOCULATOR AND GAS LIQUID SOLID SEPARATOR WHICH ARE THE PARTS OF EFFLUENT TREATMENT PLANT WHICH GOT CORRODED AND REPLAC EMENT OF PARTS OF MACHINERY BECAME NECESSARY. 2. THIS IS NOTHING BUT REPLACEMENT OF PARTS OF MACHINERY OF EFFLUENT TREATMENT PLANT. THE FIRST APPELLATE AUTHORITY HAS HIMSELF HELD THAT THE ITEMS OF MACHINERY WERE ESSENTIAL WATER POLLUTION CONTROL EQUIPME NTS BUT NOT PLANT AS SUCH TO COME UNDER THE HEAD CAPITAL EXPENDITURE. IX. EXPENDITURE OF RS.35 87 572/ - IN SUGARS DIVISION TADUVAI: 1. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT TO SUSTAIN THE ADDITIONS MADE BY THE ASSESSING OFFICER. THE `B PAN WAS CONVERTED INTO `A PAN TO SUIT THE REQUIREMENT OF THE PROCESS BY REPLACING THE PIPE LINES CONDENSER AND PUMPS AND VALVES WHICH ARE NOTHING BUT PARTS OF PAN MACHINERY AND NOT PAN AS SUCH. 2. THIS IS ONLY MODIFIED TO SUIT THE REQUIREMENT OF PR OCESS WHICH IS NOTHING BUT CURRENT REPAIRS. X. FOR THESE GROUNDS AND SUCH OTHER GROUNDS TO BE RAISED AT THE TIME OF HEARING THE APPELLANT PRAYS THAT RELIEF MAY BE GRANTED ACCORDINGLY. 53 . GROUND NOS.1 2 3&5 WERE EXAMINED BY US IN THE FOREGOING PARAS O F THIS ORDER AND FOLLOWING THE REASONS GIVEN THEREIN WE DISPOSE OFF THESE GROUNDS. ACCORDINGLY WITH RESPECT TO GROUND NO.1 THE ORDER OF CIT(A) IS CONFIRMED AND THE GROUND NO.2 THE MATTER IS RESTORED BACK TO THE FILE OF THE A.O. FOR RE - COMPUTATION OF DED UCTIONS U/S 80IA AFTER MAKING PROPER ALLOCATION OF INDIRECT EXPENDITURE AMONG THE ELIGIBLE AND NON - ELIGIBLE UNITS. WITH RESPECT TO GROUND NO.3 THE ORDER OF THE CIT(A) IS SET ASIDE AND CLAIM OF THE ASSESSEE IS ALLOWED FOLLOWING THE REASONS GIVEN IN FOREGOI NG PARAS. ACCORDINGLY THE ADDITION IS DELETED. WITH REGARD TO GROUND NO.5 MATTER IS RESTORED BACK TO THE A.O. FOR RE - ADJUDICATION IN THE LIGHT OF EVIDENCE FILED BY THE ASSESSEE. 54 . WITH REGARD TO GROUND NO.6 IT IS NOTICED FROM THE ORDERS OF THE LOWE R AUTHORITIES THAT DURING THE SCRUTINY ASSESSMENT PROCEEDINGS THE A.O. NOTICED THAT SUBSTANTIAL AMOUNT S HA VE BEEN CLAIMED AS EXPENDITURE S IN RESPECT OF REPAIRS TO BUILDING S REPAIRS TO MACHINER Y REPAIRS TO OTHER ASSETS MISCELLANEOUS EXPENDITURE AND PROF ESSIONAL CHARGES AS COMPARED TO THE EXPENDITURE INCURRED FOR THE PRECEDING YEAR. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE EXPENDITURE IN RESPECT OF MACHINERY AND FACTORY BUILDING ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 39 WERE INCURRED FOR RENOVATION REMODELING AND MODIFICATION OF THE ASS ETS THEREBY GIVING ENDURING BENEFIT THERE OF TO THE ASSESSEES AND ACCORDINGLY SUCH EXPENDITURES WERE NOT ALLOWABLE AS REVENUE EXPENDITURE BUT LIABLE TO BE DISALLOWED AND CAPITALIZED. THE IDENTICAL ISSUE WAS EXAMINED IN EARLIER APPEAL OF THE ASSESSEE FO R THE ASSESSMENT YEAR 2004 - 05 IN WHICH THE ASSESSEE HAS ACQUIRED THE SAID SUGAR FACTORY AND WE HELD THAT THE ENTIRE EXPENDITURES INCURRED ON THIS NEW UNIT IS TO BE CAPITALIZED. IN THIS YEAR ALSO THE PRODUCTION WAS NOT COMMENCED AND BEFORE THE PRODUCTION WHATEVER EXPENDITURES ARE INCURRED EITHER ON REPAIR OF THE ASSETS BUILDINGS AND MACHINERIES ALONG WITH MISCELLANEOUS EXPENDITURES AND THE PROFESSIONAL CHARGES THE ENTIRE EXPENDITURE IS REQUIRED TO BE CAPITALIZED BECAUSE IT WAS INCURRED BEFORE THE COMMENC EMENT OF THE PRODUCTIONS. THEREFORE FOLLOWING THE VIEW TAKEN IN THE EARLIER APPEALS WE DECIDE THIS ISSUE AGAINST THE ASSESSEE AND HOLD THAT THE EXPENDITURES INCURRED WITH RESPECT TO THIS UNIT IS TO BE CAPITALIZED AND NOT ALLOWABLE AS A REVENUE EXPENDITUR ES. ACCORDINGLY THE ORDER OF THE CIT(A) IS CONFIRMED. 55 . WITH REGARD TO THE GROUND NO.7 WHICH RELATE TO AN EXPENDITURE OF RS.10 LAKHS PAID TO THE ANDHRA PRADESH POLLUTION CONTROL BOARD IT IS NOTICED FROM THE ORDER OF THE LOWER AUTHORITIES THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. NOTICED FROM THE TAX AUDIT REPORT A NOTE BY THE T AX A UDITOR TO THE EF F E CT THAT A PENALTY OF RS.10 LAKHS WAS PAID BY WAY ENCASHMENT OF BANK GUARANTEE TO ANDHRA PRADESH POLLUTION CONTROL BOARD FOR NON - COMPLIANCE OF THE DIRECTIONS ISSUED IN CONNECTION WITH DISCHARGE OF INDUSTRIAL EFFLUENTS INTO SATYAWADA DRAIN. WHEN REQUIRED BY THE A.O. TO EXPLAIN AS TO WHY THE SAID EXPENDITURE SHOULD NOT BE DISALLOWED IT WAS EXPLAINED ON BEHALF OF THE ASSESSEE THAT AS REQUIRED B Y THE ANDHRA PRADESH POLLUTION CONTROL BOARD A BANK GUARANTEE OF RS.10 LAKHS WAS ISSUED IN THEIR FAVOUR FOR UNDERTAKING MODIFICATION S /DIRECTIONS BY THE ASSESSEE COMPANY TO THE REQUIREMENT OF ANDHRA PRADESH POLLUTION CONTROL BOARD FOR DISCHARGE OF WASTE WA TER IN TO SATYAWADA DRAIN WHICH WAS INVOKED BY SUCH AUTHORITY FOR NON - COMPLYING TO ITS DIRECTIONS WITHIN THE SPECIFIED TIME. IT WAS FURTHER CONTENDED THAT SINCE THE ASSESSEE HAS NOT IN FRINGED ANY LAW BUT ONLY TOOK LONGER TIME FOR COMPLIANCE SUCH EXPENDIT URE OF RS.10 LAKHS IS VERY MUCH ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 40 ALLOWABLE DEDUCTION U/S 37 OF THE ACT. BEING NOT CONVINCED WITH THE EXPLANATIONS OF THE ASSESSEE THE A.O. REJECTED THE CONTENTIONS AND HELD THAT THE PENALTY OF RS.10 LAKHS PAID TO THE ANDHRA PRADESH POLLUTION CONTROL BOARD FOR CONTRAVENING OF RELEVANT PROVISIONS OF THE STATUTE RELATING TO POLLUTION CONTROL . ACCORDINGLY HE DISALLOWED THE SAID EXPENDITURE OF RS.10 LAKHS. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) BUT DID NOT FIND FAVOUR WITH HIM. 56 . NOW THE ASSES SEE IS BEFORE US WITH THE SUBMISSION THAT THE ANDHRA PRADESH POLLUTION CONTROL BOARD UPON RECEIPT OF SEVERAL COMPLAINTS AGAINST THE ASSESSEE INDUSTRY WITH REGARD TO THE DISCHARGE OF PARTIALLY TREATED WASTE WATER FROM ITS INDUSTRY INTO SATYAWADA DRAIN ISS UED CERTAIN DIRECTIONS FOR COMPLIANCE AS EARLY AS JULY 2003. HOWEVER DURING THE INSPECTION OF THE INDUSTRY BY THE AUTHORITIES OF ANDHRA PRADESH POLLUTION CONTROL BOARD ON 7.4.2004 IT WAS FOUND THAT THE ASSESSEE HAD NOT COMPLIED WITH MOST OF THE DIRECT IONS ISSUED THEREBY CAUSING POLLUTION OF THE SATYAWADA DRAIN. SUBSEQUENTLY THE ANDHRA PRADESH POLLUTION CONTROL BOARD ISSUED MODIFIED DIRECTIONS VIDE ITS LETTER DATED 1.5.2004 FOR UPGRADING ITS EFFLUENT TREATMENT PLANT BEFORE 30 TH SEPTEMBER 2004 AND FO R REDUCING THE EFFLUENT GENERATED TO THE TUNE OF 50 LIT/T O F SUGAR - CANE CRUS HED SO THAT THE TOTAL EFFLUENT GENERATED SHALL NOT EXCEED 250 KL/DAY AND FOR ENSURING SUCH COMPLIANCE IT OBTAINED A BANK GUARANTEE FOR RS.10 LAKHS FOR ENCASHMENT OF THE SAME IN T HE EVEN T OF NON - COMPLIANCE. THE ANDHRA PRADESH POLLUTION CONTROL BOARD INVOKED THE PROVISIONS OF SECTION 33 ( A ) OF THE WATER (PREVENTION AND CONTROL OF POLLUTION ) AMENDMENT ACT 1988 FOR ISSUING SUCH DIRECTIONS AS ALSO FOR APPROPRIATING THE BANK GUARANTEE AMOUNT OF RS.10 LAKHS BY WAY OF PENALTY IN THE EVENT OF NON - COMPLIANCE TO SUCH DIRECTIONS. ON FURTHER OBSERVING THAT BY FIRST WEEK OF DECEMBER 2004 THE ASSESSEE HAD FAILED TO COMPLY WITH THE CONDITIONS/DIRECTIONS CONTAINED IN THEIR LETTER DATED 1.5.2004 AND CONTINUED TO POLLUTE SATYAWADA DRAIN BY GENERATING EFFLUENT IN EXCESS OF PRESCRIBED LIMIT AND ACCOR DINGLY INDULGED IN EXCESSIVE EFFLUENT DISCHARGE THAT WAS PROHIBITED BY THE RELEVANT PROVISIONS OF WATER (PREVENTION AND CONTROL OF POLLUTION) A MENDM ENT ACT 1988. THEREFORE ENCASHMENT OF RS.10 LAKHS BY WAY OF PENALTIES IS ON ACCOUNT OF INFRINGEMENT/ CONTRAVENTION OF THE RELEVANT ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 41 PROVISIONS OF THE ABOVE MENTIONED STATUTE RELATING TO PREVENTION AND CONTROL OF POLLUTION. 57 . IT WAS FURTHER CLAIMED ON B EHALF OF THE ASSESSEE THAT NECESSARY COMPLIANCE HAS BEEN MADE AT A LATER PERIOD AND THEREFORE THE ASSESSEE CANNOT BE SAID TO HAVE INFRINGED THE PROVISIONS OF SECTION 33A OF WATER ( PREVENTION AND CONTROL OF POLLUTION ) AMENDMENT ACT 1988. THEREFORE THE PE NALTY IMPOSED UPON THE ASSESSEE I S OF COMPENSATORY NATURE AND NOT INFRINGEMENT OF LAW. THEREFORE IT IS ALLOWABLE AS A REVENUE EXPENDITURE. 5 8 . THE LD. D.R. ON THE OTHER HAND HAS PLACED A HEAVY RELIANCE UPON THE ORDER OF THE CIT(A). HE HAS ALSO CONTENDE D THAT THE PENALTY WAS IMPOSED UPON THE ASSESSEE FOR INFRINGEMENT OF LAW THEREFORE IT CANNOT BE ALLOWED AS A REVENUE EXPENDITURE. 5 9 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF THE ORDER OF THE AUTHORITIES BELOW WE FIND THAT AND HRA PRADESH POLLUTION CONTROL BOARD HAVE ISSUED CERTAIN DIRECTIONS TO THE ASSESSEE FOR NECESSARY COMPLIANCE TO REDUCE THE POLLUTION AND IN ORDER TO ENSURE THE COMPLIANCE OF THE DIRECTIONS A BANK GUARANTEE OF RS.10 LAKHS WAS ALSO OBTAINED. ONCE THE ASSESS EE FAILS TO MAKE THE COMPLIANCE WITHIN THE PRESCRIBED PERIOD THE BANK GUARANTEE WAS ENCASHED BY THE ANDHRA PRADESH POLLUTION CONTROL BOARD. NOW THE QUESTION ARISES WHETHER THE AMOUNT PAID BY THE ASSESSEES BY WAY OF PENALTY ON NON COMPLIANCE/DIRECTIONS OF THE ANDHRA PRADESH CONTROL BOARD IS OF A COMPENSATORY NATURE OR IT IS A PENALTY FOR INFRINGEMENT OF LAW ? IT IS ALSO BROUGHT ON RECORD THAT ON SUBSEQUENT DATE THE DIRECTIONS OF THE POLLUTION CONTROL BOARD WAS COMPLIED WITH BY THE ASSESSEE. THEREFORE TH E DELAY WAS CAUSED BY THE ASSESSEES IN COMPLIANCE OF THE DIRECTIONS ISSUED BY THE POLLUTION CONTROL BOARD AND FOR THE DELAY IT WAS LIABLE TO PAY A SUBSTANTIAL AMOUNT BY WAY OF PENALTY. THOUGH THE AMOUNT WAS CALLED TO BE A PENALTY BUT ACCORDING TO US IT WAS ONLY OF COMPENSATORY NATURE THEREFORE IT IS ALLOWABLE AS A REVENUE EXPENDITURE. ACCORDINGLY WE SET ASIDE THE ORDER OF THE CIT(A) AND DIRECT THE A.O. TO ALLOW THE PAYMENT OF RS.10 LAKHS BY WAY OF ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 42 PENALTY FOR NON - COMPLIANCE OF DIRECTION OF POLLUTION CONTROL BOARD AS A REVENUE EXPENDITURE. 60 . GROUND NO.8 AND GROUND NO.9 RELATE TO T HE DISALLOWANCE OF EXPENDITURES INCURRED IN REPAIR TO PLANT AND MACHINERY OF SUGAR DIVISION SITUATED AT TANUKU AND TADUVAI. THE ASSESSEE HAD CLAIMED AN EXPENDITURE TO THE TUNE OF RS.39 45 028/ - AS A REVENUE EXPENDITURE INCURRED IN RESPECT OF ACQUISITION OF 45 ITEMS OF PLANT AND MACHINERY RELATING TO EFFLUENT TREATMENT PLANT FOR REDUCING POLLUTION IN ITS SUGAR DIVISION SITUATED AT TANUKU AND CLAIMED IT TO BE A REVENUE EXPEND ITURE ON THE GROUND THAT EACH ITEM OF MACHINERY CONSTITUTED PART OF LARGER EFFLUENTS TREATMENT PLANT AND THEREFORE CANNOT BE SAID TO BE INDEPENDENT MACHINERY SO AS TO BE CONSIDERED AS A CAPITAL EXPENDITURE. THE A.O. EXAMINED THE CLAIM IN THE LIGHT OF EXPL ANATIONS OF THE ASSESSEES AND HELD THAT MACHINERIES AT SL.NO.1 TO 9 WERE EITHER REPLACEMENT OF WORN OUT MACHINERIES WITH NEW ONES OR THE REPLACEMENT OF OLD MACHINES WITH THE LATEST AND MODERN ONES AND SOME EXPENDITURES REPRESENTED REFURBISHMENT OF EFFLUEN T TREATMENT PLANT AND CONSULTANCY CHARGES PAID FOR REVAMPING OF THE PLANT THEREBY BESTOWING ENDURING BENEFIT TO THE ASSESSEE AND ACCORDINGLY WAS LIABLE TO BE TREATED AS A CAPITAL EXPENDITURE. HE ACCORDINGLY TREATED THE ENTIRE EXPENDITURE AS A CAPITAL EX PENDITURE AND DISALLOWED THE CLAIM OF THE ASSESSEES. HE HOWEVER ALLOWED A DEPRECIATION THERE ON AT THE APPROPRIATE RATES. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) BUT DID NOT FIND FAVOUR WITH HIM. 61 . SIMILAR IS THE POSITION WITH REGARD TO T HE OTHER UNIT OF SUGAR DIVISION SITUATED IN TADUVAI WHERE THE ASSESSEE HAS INCURRED AN EXPENDITURE TO THE EXTENT OF RS.35 87 572/ - ON PLANT AND MACHINERY RELATING TO SUGAR DIVISION TOWARDS JOB WORK CODE NO.7231. IT WAS EXPLAINED ON BEHALF OF THE ASSESSEE BEFORE THE A.O. THAT INITIALLY THE ASSESSEE COMPANY HAD PURCHASED `B CONTINUOUS PAN IN THE YEAR 2002 WHICH HA D BEEN CAPITALIZED . B UT DUE TO SOME PROCESS REQUIREMENTS THE PAN WAS CONVERTED INTO `A PAN. HENCE THE EXPENDITURE INCURRED FOR SUCH CONVERSIO N CONSTITUTED REVENUE EXPENDITURE. THE A.O. WAS NOT CONVINCED WITH THE EXPLANATIONS AND HE HELD THAT THE VERY FACT OF CONVERSION FROM ` B TO ` A INDICATED IMPROVEMENT IN THE EFFICIENCY OF ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 43 THE CONTINUOUS P AN THAT HAD AN EFFECT OF ENDURING BENEFIT ON THE AS SESSEE AND ACCORDINGLY WAS LIABLE TO BE TREATED AS A CAPITAL EXPENDITURE. THE A.O. ACCORDINGLY TREATED THE ENTIRE EXPENDITURE AS CAPITAL EXPENDITURE AND CAPITALIZED THE SAME. HE HOWEVER ALLOWED THE DEPRECIATION THERE ON. ASSESSEE PREFERRED AN APPEAL B EFORE THE CIT(A) BUT DID NOT FIND FAVOUR WITH HIM. NOW THE ASSESSEE IS BEFORE US. 62 . THE LD. COUNSEL FOR THE ASSESSEE MR. C.V.K. PRASAD ADVOCATE HAS EMPHATICALLY ARGUED THAT WHATEVER EXPENDITURE ARE INCURRED ON THE PLANT AND MACHINERIES IT WAS TO KEEP THE PLANT AND MACHINERY IN RUNNING CONDITIONS AND ALSO THE SAME ARE NECESSARY TO KEEP THE MACHINERY FIT FOR PRODUCTION. OUT OF THESE EXPENDITURE ASSESSEE HAS NOT ACQUIRED ANY INDEPENDENT MACHINERY OR THE UNIT AND MORE SO BY INCURRING THESE EXPENDITURES ASSESSEE HAS NOT ACQUIRED ANY ENDURING BENEFIT. THEREFORE THE ENTIRE EXPENDITURE IS TO BE ALLOWED AS A REVENUE EXPENDITURE. HE PLACED A RELIANCE UPON THE JUDGEMENT OF THE DELHI HIGH COU RT IN THE CASE OF INSTAL L MENT SUPPLY PVT. LTD. VS. CIT 14 9 ITR 52 (H IGH COURT DELHI) AND ALSO THE JUDGEMENTS OF THE APEX COURT IN THE CASE OF CIT VS. S ARAVANA SPINNING MILLS LTD. 293 ITR 201 ; CIT VS. RAMARAJU SURGICAL COTTON MILLS LTD. 294 ITR 201 ; CIT VS. MANGAYAR KARASI MILLS PVT. LTD. 315 ITR 114 ; CIT VS. HINDUSTAN TE XTILE S LTD. 2009 - TIOL - 138 - SC - IT - LB DATED 3.11.2009 ; CIT VS. SU GAVANEESWARA SPINNING MILLS LTD. 209 - TIOL - 124 - SC - IT - LB DATED 16.11.2009; CIT VS. BHOJRAJ TEXTILE MILLS LTD. 2009 - TIOL - 22 - SC - IT - LB DATED 8.2.2010 . 63 . THE LD. D.R. ON THE OTHER HAND HAS SUBMIT TED THAT WHILE EXAMINING THE NATURE OF EXPENDITURE INCURRED ON REPAIR/ MAINTENANCE OF THE PLANT AND MACHINERY ONE HAS TO EXAMINE WHETHER BY INCURRING THOSE EXPENDITURE THE ASSESSEE ACQUIRES ANY ENDURING BENEFIT OUT OF IT. THE LD. D.R. PLACED A RELIANCE UP ON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF S ARAVANA SPINNING MILLS LTD. (SUPRA) W ITH THE SUBMISSIONS THAT THE REPLACEMENT OF A PART OF A MACHINERY CANNOT BE CONSIDERED TO BE A REVENUE EXPENDITURE. BESIDES HE HAS ALSO PLACED A HEAVY RELIANCE UPON T HE ORDER OF THE CIT(A). ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 44 64. THE ISSUE OF NATURE OF EXPENDITURES HAS ALREADY BEEN EXAMINED BY US IN THE FOREGOING APPEAL NO.56 OF 2006 WHEREIN WE HAVE REMITTED THE MATTER TO THE ASSESSING OFFICER FOR RE - ADJUDICATION OF THE NATURE OF EXPENDITURE IN THE LIGH T OF THE JUDGEMENTS OF THE APEX COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS LTD. 293 ITR 201; CIT VS. RAMARAJU SURGICAL COTTON MILLS LTD. 294 ITR 201; CIT VS. MANGAYARKARASI MILLS PVT. LTD. 315 ITR 114; CIT VS. HINDUSTAN TEXTILES LTD. 2009 - TIOL - 138 - SC - IT - LB DATED 3.11.2009; CIT VS. SUGAVANEESWARA SPINNING MILLS LTD. 209 - TIOL - 124 - SC - IT - LB DATED 16.11.2009; CIT VS. BHOJRAJ TEXTILE MILLS LTD. 2009 - TIOL - 22 - SC - IT - LB DATED 8.2.2010. THEREFORE THE IMPUGNED ISSUE REQUIRES A FRESH ADJUDICATION BY THE ASSESSING OFFICER IN THE LIGHT OF AFORESAID JUDGEMENTS. ACCORDINGLY WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTION TO RE - EXAMINE THE ISSUE IN THE LIGHT OF AFOREMENTIONED JUDGEMENT S OF T HE APEX COURT . ITA NO.388 OF 2008 : 65 . IN THIS APPEAL THE REVENUE HAS ASSAILED THE ORDER OF THE CIT(A) ON A SOLITARY GROUND THAT THE CIT(A) HAS RESTRICTED THE DISALLOWANCE U/S 14A OF THE I.T. ACT TO THE EXTENT OF RS.5.91 LAKHS INSTEAD OF TOTAL DISALLOWANC E OF RS.9. 0 3 LAKHS MADE BY THE A.O. THE IDENTICAL ISSUE WAS EXAMINED BY US IN THE FOREGOING REVENUES APPEAL AND FOLLOWING THE DECISION TAKEN THEREIN WE CONFIRM THE ORDER OF THE CIT(A). ACCORDINGLY THE ORDER OF THE CIT(A) IS CONFIRMED. ITA NO.279 OF 2 00 9 : 66 . IN THIS APPEAL ALSO THE REVENUE HAS ASSAILED THE ORDER OF THE CIT(A) ON A SOLITARY GROUND THAT THE CIT(A) HAS RESTRICTED THE DISALLOWANCE U/S 14A OF THE I.T. ACT TO THE EXTENT OF RS.5 62 646/ - INSTEAD OF TOTAL DISALLOWANCE OF RS. 12 93 190/ - MADE B Y THE A.O. THE IDENTICAL ISSUE WAS EXAMINED BY US IN THE FOREGOING REVENUES APPEAL AND FOLLOWING THE DECISION TAKEN THEREIN WE CONFIRM THE ORDER OF THE CIT(A). ACCORDINGLY THE ORDER OF THE CIT(A) IS CONFIRMED. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 45 ITA NO.280 OF 2009: 67 . THROUGH THIS AP PEAL THE ASSESSEE HAS ASSAILED THE ORDER OF THE CIT(A) ON FOLLOWING GROUNDS: 1) DISALLOWANCE OF PROPORTIONATE EXPENDITURE OF RS.5 62 645/ - U/S 14A OF THE INCOME TAX ACT I) THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT IN ATTRIBUTING PART OF TH E ADMINISTRATIVE EXPENSES SALARIES OF EMPLOYEES REPAIRS TO ASSETS AND OTHER EXPENDITURE TOWARDS EARNING THE DIVIDEND INCOME SINCE THE CORRESPONDING INVESTMENT IN SHARES WAS MADE 15 TO 20 YEARS AGO AND NOT IN THE YEAR OF ACCOUNT AND SINCE NO EXPENDITURE WAS INCURRED IN THE YEAR FOR EARNING THE INCOME. II) THE APPELLANT SUBMITS THAT SECTION 14A(2) WHICH WAS INTRODUCED VIDE FINANCE BILL 2006 IS APPLICABLE FROM THE ASSESSMENT YEAR 2007 - 08 AND NOT EARLIER AND AS SUCH THE DIVIDEND INCOME RECEIVED DURING THE A SSESSMENT YEAR 2006 - 07 CAN NOT BE BROUGHT INTO AMBIT OF SECTION 14A(2). 2) REDUCING THE DEDUCTION U/S 80IA OF RS.44 25 699/ - . THE APPELLANT COMPANY SUBMIT THAT IT IS HAVING A CO - GENERATION UNIT AT TADUVAI AND DEDUCTION U/S 80IA IS BEING CLAIMED FROM THE BEGINNING WITHOUT ALLOCATING THE HEAD OFFICE EXPENDITURE A CONSISTENT PRACTICE FOLLOWED SINCE THIS IS ONLY A SERVICE UNIT WITHOUT ANY OUT SIDE SALES. AS REGARDS INTEREST IS CONCERNED IT IS BEING ALLOCATED ON FUNDS FLOW BASIS ON BORROWED FUNDS CONSISTENT LY. THE ASSESSING AUTHORITY HAS ALLOCATED THE EXPENDITURE PRORATE TO THE TURNOVER DERIVED FROM THIS UNIT AND THIS WAS CONFIRMED BY CIT(A) WHICH IS NOT CORRECT. 3) TOOLS WRITTEN OFF RS.31 46 000/ - : THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS TO CONFIRM THE ADDITION OF RS.31 46 000/ - BEING THE VALUE OF TOOLS ISSUED FROM STORES FOR REPAIRS AND MAINTENANCE AND CHARGED TO PROFIT & LOSS ACCOUNT. 4) CAUSTIC SODA DIVISION SAGGONDA: SERIAL NO.1 TO 8 - PAGE 12 OF THE ASSESSMENT ORDER RS.15 69 608/ - PAGE 14 & 19 OF APPELLATE ORDER. THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS MADE BY THE ASSESSING OFFICER THAT THE ITEMS 1 TO 8 MENTIONED IN THE ASSESSMENT ORDER ARE OF CAPITAL IN NATU RE. WITHOUT APPRECIATING THE FACT THAT SUCH EXPENDITURE WAS INCURRED ONLY TOWARDS REPAIRS/REPLACEMENTS AND MAINTENANCE OF THE BRINE PLANT WHICH CONSTITUTE A PART OF THE ENTIRE MACHINERY FOR MANUFACTURE OF CAUSTIC SODA THE OBJECT OF THIS EXPENDITURE IS NOT TO BRING IN ANY NEW ASSET INTO EXISTENCE OR TO OBTAIN NEW ADVANTAGE. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 46 B) SERIAL NO.9 TO 22 24 & 25 PAGE 13 OF THE ASSESSMENT ORDER RS.18 55 473/ - : PAGE 14 & 20 OF APPELLATE ORDER: THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS MADE BY THE ASSESSING OFFICER THAT THE MOTORS TO THE EXISTING MACHINERY WHICH WERE REPLACED ARE OF CAPITAL IN NATURE. THE APPELLANT SUBMITS THAT MOTORS ARE NOT INDEPENDENT MACHINERY THEY DO NOT HAVE ANY INDEPENDENT FUNCTI ON AND ARE ONLY FITTED TO THE VARIOUS MACHINERY AND CONNECTED AS PART OF THE MACHINERY TO WHICH IT IS ATTACHED AND HENCE THE EXPENDITURE IN REPAIR OR REPLACEMENT OF SUCH MOTORS IS ONLY REVENUE EXPENDITURE. C) ITEM 23 AMABACK WB CATRID FLT RS.14 40 705/ - THE APPELLANT SUBMITS THAT THE CIT(A) IS NOT CORRECT IN TREATING THE COST OF AMABACK WB CATRID FLT AS CAPITAL NATURE SINCE IT IS A PART OF BRINE PLANT. 5) SUGARS DIVISION BHIMADOLE: ITEM 2 TO 5 PAGE 16 OF THE ASSESSMENT ORDER RS.17 70 215/ - ITEM 6 TO 11 PAGE 17 OF THE ASSESSMENT ORDER RS.13 96 010/ - PAGE 21 OF THE APPELLATE ORDER: THE COMMISSIONER OF INCOME TAX (APPEALS) IS NOT CORRECT ON FACTS AND IN LAW IN CONFIRMING THE ADDITIONS MADE BY THE ASSESSING OFFICER STATING THAT REPLACEMENT OF MOTOR S GEARS BOXES FRONT DRIVE FUSE SWITCH BEARINGS PUMPS ETC. AS ITEMS MACHINERY CAPABLE OF INDEPENDENT OPERATION AND FUNCTIONS AND HENCE PART TAKE THE NATURE OF `CAPITAL EXPENDITURE. THE FIRST APPELLATE AUTHORITY HAS FAILED TO NOTE THAT THE DAMAGED MOT ORS GEAR BOXES ETC. ARE PARTS OF VARIOUS MACHINERY FORMING PARTS OF THE MANUFACTURING PROCESS OF SUGAR. 6) SUGARS DIVISION - 1 TANUKU: A) ITEM 1 TO 18 PAGE 19 OF THE ASSESSMENT ORDER RS.11 28 236/ - PAGE 22 OF THE APPELLANT ORDER PARA (C) B) ITEM 19 TO 23 PAGE 20 OF THE ASSESSMENT ORDER RS.11 43 807/ - PAGE 22 OF THE APPELLANT ORDER C) ITEM 24 PAGE 20 OF THE ASSESSMENT ORDER RS.4 08 604/ - PAGE 22 OF THE APPELLANT ORDER THE CIT(A) IS NOT CORRECT IN CONFIRMING THE ADDITIONS COMPRISED IN THE ABOVE ITEMS AS CAPITAL IN NATURE IN VIEW OF THE FACT THAT SIMILAR EXPENDITURE LIKE PUMPS GEAR BOXES AND MOTORS ETC. WAS TREATED AS REVENUE IN THE EARLIER YEARS THAT THEY DO NOT HAVE ANY INDEPENDENT FUNCTION AND EXISTENCE APART FROM SUGAR MACHINERY AN D THAT THEREFORE THE EXPENDITURE IS ONLY OF REVENUE IN NATURE. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 47 7) SUGARS DIVISION - II TADUVAI RS.53 24 488/ - PAGE 23 OF THE ASSESSMENT ORDER PAGE 22 OF APPELLANT ORDER PARA - D THE CIT(A) IS NOT CORRECT IN CONFIRMING THE ADDITIONS/DISALLOWANCE OF THE ABOVE EXPENDITURE AS CAPITAL IN NATURE WITHOUT REALIZING THE FACT THAT IT WAS ONLY INCURRED FOR SHIFTING THE EXISTING MACHINERY FROM OUTSIDE TO INSIDE THE FACTORY WHICH DID NOT RESULT IN ANY ADDITIONAL ADVANTAGE OF ENDURING NATURE AND THAT IT WAS ONLY A R EVENUE EXPENDITURE. ITEM 2 TO 14 PAGE 23 & 24 OF THE ASSESSMENT ORDER RS.23 99 318/ - PAGE 23 OF THE APPELLANT ORDER THE ABOVE EXPENDITURE CONSISTS OF DIFFERENT TYPES OF MOTORS PUMPS STARTER PANEL GEAR BOXES CHAIN BEGASSEE CARRIER WHICH ARE PARTS OF THE MACHINERY WHICH ARE INTEGRAL IN SUGAR PLANT. IT IS NOT CORRECT TO SAY THAT THEY ARE INDEPENDENT MACHINERY CAPABLE OF FUNCTIONING INDEPENDENTLY. IN THE CONTEXT OF SUGAR PLANT THEY ARE ONLY PARTS WITH NO INDEPENDENT EXISTENCE AND STATUS APART FROM AS SISTING THE SUGAR MACHINERY TO FUNCTION. WE RELY ON THE DECISION M/S. CHODAVARAM CO - OP. SUGAR MILLS VS. DCIT. THE CIT(A) IS NOT CORRECT IN CONFIRMING THE ABOVE EXPENDITURE AS CAPITAL IN NATURE SINCE THEY ARE REPLACEMENT OF PART OF THE SUGAR MACHINERY. T HE APPELLANT SUBMITS THAT THE EXPENDITURE IS REVENUE IN NATURE. THE DECISION OF SUPREME COURT IN M/S. SARAVANA SPINNING MILLS LTD. IS NOT APPLICABLE TO THE APPELLANT COMPANY SINCE THE FACTS ARE DIFFERENT FROM EACH OTHER. SARAVANA SPINNING MILLS IS A TEX TILE MILL WHERE AS THE APPELLANT MILLS ARE SUGAR AND CAUSTIC SODA. 8) FOR THESE GROUNDS AND SUCH OTHER GROUNDS TO BE RAISED AT THE TIME OF HEARING THE APPELLANT PRAYS THAT RELIEF MAY BE GRANTED ACCORDINGLY. 68 . GROUND NO S . 1 2 & 3 RELATE TO THE DISA LLOWANCE OF PROPORTIONATE EXPENDITURE U/S 14A OF THE I.T. ACT COMPUTATION OF DEDUCTION U/S 80IA AND THE LOSS ON ACCOUNT OF T OOLS WRITTEN OFF RESPECTIVELY AND THESE ISSUES WERE ALREADY ADJUDICATED BY US IN THE FOREGOING APPEALS AND FOLLOWING THE DECISION T AKEN THEREIN WE DISPOSE OFF THESE GROUNDS. ACCORDINGLY WITH REGARD TO THE DISALLOWANCE U/S 14A OF THE I.T. ACT THE ORDER OF THE CIT(A) IS CONFIRMED AND WITH REGARD TO THE COMPUTATION OF DEDUCTION U/S 80IA THE MATTER IS RESTORED BACK TO THE FILE OF THE A.O. FOR COMPUTATION OF DEDUCTION U/S 80IA AFTER RE - ALLOCATING THE ENTIRE EXPENSES AND THE GROUND NO.3 TOOLS WRITTEN OFF IS RESTORED TO THE FILE OF THE A.O. TO RE - ADJUDICATE THE ISSUE IN THE LIGHT OF EVIDENCE SUBMITTED BY THE ASSESSEE. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 48 69. GROUND NO.5 RELATE TO THE EXPENDITURE INCURRED ON BHIMADOLE SUGAR DIVISION. THE IDENTICAL ISSUE WAS EXAMINED IN FOREGOING APPEALS WHE RE WE HAVE TREATED THIS EXPENDITURE TO BE CAPITAL EXPENDITURE BECAUSE IT WAS INCURRED BEFORE THE COMMENCEMENT OF PRODUCTIONS. FOLLOWI NG THE VIEW TAKEN THEREIN WE HOLD THAT THE EXPENDITURE INCURRED IN SUGAR DIVISION BHIMADOLE IS OF CAPITAL NATURE AND IS TO BE CAPITALIZED AS IT WAS INCURRED BEFORE COMMENCEMENT OF PRODUCTIONS. 70. GROUND NOS.6 & 7 RELATE TO THE EXPENDITURE INCURRED IN SUGAR DIVISION AT TANUKU AND TADUVAI. TH ESE ISSUE S W ERE ALSO EXAMINED BY US IN FOREGOING APPEALS WHEREIN WE HAVE RESTORED THE ISSUE TO THE FILE OF THE A.O. WITH THE DIRECTION TO RE - ADJUDICATE THE NATURE OF EXPENDITURE IN THE LIGHT OF JUDGEMENT OF THE AP EX COURT IN THE CASE OF RAMARAJU SURGICAL COTTON MILLS LTD . (SUPRA). 71. GROUND NO.4 RELATE TO THE NATURE OF EXPENDITURE INCURRED ON CAUSTIC SODA DIVISION SAGGONDA. THE FACTS BORNE OUT FROM THE RECORD ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDIN GS THE ASSESSING OFFICER HAS NOTED FROM VARIOUS BILLS THAT ASSESSEE HAS INCURRED CERTAIN EXPENDITURES ON FABRICATION AND IRRIGATION WORKS INSTALLATION OF NEW MOTORS AND REPLACEMENT OF OLD PLANT & MACHINERY AND FORMED A VIEW RELYING UPON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS (P) LTD. (SUPRA) THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IN THIS DIVISION ARE NOT OF REVENUE NATURE AND HE ACCORDINGLY CAPITALIZED THE SAME AND ALLOWED THE DEPRECIATION. 72 . THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSIONS THAT THE EXPENDITURES ARE INCURRED IN REPAIR OR REPLACEMENT OF OUTDATED MACHINERIES OF THE UNIT. THE CIT(A) RE - EXAMINED THE ISSUE IN THE LIGHT OF JUDGEMENT OF THE APEX COURT IN THE CASE OF SARAVAN A SPINNING MILLS AND IN THE CASE OF BALLIMAL NAVAL KISHORE VS. CIT 224 ITR 414 AND CONFIRMED THE VIEW TAKEN BY THE A.O. THAT THE EXPENDITURE INCURRED COULD ONLY BE CAPITALIZED AS A CAPITAL EXPENDITURE. HE ACCORDINGLY CONFIRMED THE ADDITION. NOW THE ASSES SEE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL AND REITERATED ITS CONTENTIONS. ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 49 73 . THE LD. D.R. HAS PLACED A RELIANCE UPON THE ORDER OF THE CIT(A). 74 . HAVING CAREFULLY EXAMINED THE ORDER OF THE CIT(A) WE FIND THAT CIT(A) HAD ADJUDICATED THE ISSUE RE LYING UPON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF SARAVANA SPINNING MILLS LTD. (SUPRA) WHEREAS THE SAID JUDGEMENT WAS RENDERED WITH RESPECT TO THE CURRENT REPAIRS U/S 31 OF THE ACT. IN THIS JUDGEMENT THEIR LORDSHIP OF THE APEX COURT HAVE NOT EX PRESSED THEIR VIEWS WITH REGARD TO THE CLAIM OF ALLOWABILITY OF EXPENDITURE U/S 37 OF THE ACT. AFTER THE SARAVANA SPINNING MILLS (SUPRA) THE ISSUE WAS FURTHER EXAMINED BY THE APEX COURT IN THE CASE OF CIT VS. MANGAYARKARSI MILLS (P) LTD. VS. CIT (SUPRA). THEREAFTER THE APEX COURT HAS IN OTHER CASES RESTORED THE MATTER BACK TO THE CIT(A) FOR READJUDICATION OF THE ISSUE IN THE LIGHT OF JUDGEMENT OF THE APEX COURT IN THE CASE OF SARAVANA SPINNING MILLS LTD. (SUPRA) RAMARAJU SURGICAL COTTON MILLS LTD. (SUPR A) AND MANGAYARKARSI MILLS (P) LTD. (SUPRA). FOLLOWING THIS VIEW OF THE APEX COURT THE TRIBUNAL AND THE HIGH COURT HAVE ALSO RESTORED THE MATTER TO THE A.O. FOR RE - ADJUDICATION OF THE ISSUE. THE IDENTICAL ISSUE HAD ALREADY BEEN EXAMINED BY US IN FOREGOI NG APPEALS AND SINCE THE ISSUE WAS NOT ADJUDICATED IN THE LIGHT OF AFORESAID JUDGEMENTS OF THE APEX COURT THE MATER WAS REMITTED BACK TO THE FILE OF THE A.O. FOR RE - ADJUDICATION. FOLLOWING THE VIEW TAKEN THEREIN WE SET ASIDE THE ORDER OF THE CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE A.O. FOR RE - ADJUDICATION OF THE ISSUE IN TERMS INDICATED ABOVE. 75 . IN THE RESULT THE APPEALS OF THE ASSESSEE ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE APPEALS OF THE REVENUE ARE DISMISSED. PRONOUNCED I N THE OPEN COURT ON 20.01. 20 1 1 SD/ - SD/ - (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM DATED 20 TH JANUARY 20 1 1 ITA NO.56 124 162 209 279 280 365 388.ANDHRA SUGARS LTD. TANUKU 50 COPY TO 1 THE ANDHRA SUGARS LIMITED VENKATARAYAPURAM TANUKU - 534 215. 2 ACIT CIRCLE - 1 ELURU 3 AD. CIT RANGE RAHAMUNDRY 4 DCIT CIRCLE - 1 RAJAHMUNDRY 3 THE CI T RAJAHMUNDRY 4 THE CIT (A) RAJAHMUNDRY 5 THE DR ITAT VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM