Novopan Industries Ltd.,, Medak v. DCIT, Cir-16(1), Hyderabad

ITA 543/HYD/2011 | 2007-2008
Pronouncement Date: 28-11-2014 | Result: Partly Allowed

Appeal Details

RSA Number 54322514 RSA 2011
Assessee PAN AAACN7008A
Bench Hyderabad
Appeal Number ITA 543/HYD/2011
Duration Of Justice 3 year(s) 7 month(s) 28 day(s)
Appellant Novopan Industries Ltd.,, Medak
Respondent DCIT, Cir-16(1), Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 28-11-2014
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 28-11-2014
Assessment Year 2007-2008
Appeal Filed On 31-03-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN JUDICIAL MEMBER ITA.NO.543/HYD/2011 ASSESSMENT YEAR 2007-2008 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. PAN AAACN7008A VS. DCIT CIRCLE 16(1) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE : MR. V. SIVAKUMAR FOR REVENUE : MR. RAJAT MITRA DATE OF HEARING : 30.10.2014 DATE OF PRONOUNCEMENT : 28.11.2014 ORDER PER B. RAMAKOTAIAH A.M. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-V HYDERABAD DATED 14.02.20 11. 2. ASSESSEE IN THIS CASE HAS FILED RETURN OF INCOM E ADMITTING TOTAL INCOME OF RS.2 94 49 710 AND ASSESS MENT WAS COMPLETED ON TOTAL INCOME OF RS.7 09 93 156. IN THE COURSE OF SCRUTINY ASSESSMENT A.O. MADE DISALLOWANCE OF CLAI M OF UNABSORBED DEPRECIATION OF RS.3 90 54 350 LOSS OF SURRENDER OF LEASE OF RS.24 89 096. IN THE COURSE OF ASSESSME NT ASSESSEE ALSO MADE REQUEST TO EXCLUDE AN AMOUNT OF RS.91 25 379 WHICH HAD ACCOUNTED AS INCOME BUT LATER REALIZED TH AT THE AMOUNT HAS NEITHER ACCRUED NOR RECEIVABLE. A.O. HOW EVER DID NOT CONSIDER THIS CLAIM. BEFORE THE LD. CIT(A) ASS ESSEE WAS UNSUCCESSFUL AND HENCE THE PRESENT APPEAL. ASSESSE E HAS 2 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. RAISED SIX GROUNDS OUT OF WHICH GROUND NOS. 1 AND 6 ARE GENERAL IN NATURE. 3. WE HAVE HEARD THE LD. COUNSEL AND LD. D.R. IN DETAIL AND CONSIDERED PAPER BOOK PLACED ON RECORD A ND ISSUES ARE DEALT WITH GROUND WISE. 4. GROUND NO.2 PERTAINS TO THE ISSUE OF CLAIM OF S ET OFF OF UNABSORBED DEPRECIATION FROM ANOTHER COMPANY . ASSESSEE CLAIMED SET OFF OF BROUGHT FORWARD UNABSOR BED DEPRECIATION BELONGING TO M/S. GVK NOVOPAN INDUSTRI ES P. LTD. AGAINST THE INCOME OFFERED IN THIS YEAR. THAT CLAIM WAS MADE UNDER SECTION 72A OF THE I.T. ACT. AS PER THE SCHEME OF MERGER AND DEMERGER AGREEMENT AS APPROVED BY HONBL E A.P. HIGH COURT VIDE ORDERS DATED 07.12.2006 ASSESSEE A CQUIRED MANUFACTURING UNITS OF M/S. GVK NOVOPAN INDUSTRIES P. LTD. AND GVK PETRO CHEMICALS P. LTD. AND AMALGAMATED CO MPANY M/S. NOVOPAN FURNITURE P. LTD. THERE IS NO DISPUTE WITH REFERENCE TO THE SCHEME OF MERGER OF MANUFACTURING UNITS AND AMALGAMATION OF A COMPANY. IT WAS ASSESSEES CONTEN TION THAT M/S. GVK NOVOPAN INDUSTRIES P. LTD. HAS ONLY ONE MANUFACTURING UNIT AND ENTIRE MANUFACTURING UNIT HA S BEEN TRANSFERRED TO ASSESSEE COMPANY BY WAY OF MERGER. T HEREFORE THE UNABSORBED DEPRECIATION IN THE HANDS OF SAID CO MPANY SHOULD BE GIVEN SET OFF TO ASSESSEE-COMPANY AND IT WAS FURTHER INFORMED THAT M/S. GVK NOVOPAN INDUSTRIES P. LTD. DOES NOT HAVE ANY OTHER MANUFACTURING UNIT AND HAS CONVERTED ITSELF INTO INVESTMENT COMPANY. THEREFORE DEPRECIATION WH ICH WAS NOT SET OFF THERE SHOULD BE CARRIED FORWARD AND SE T OFF IN THE HANDS OF ASSESSEE COMPANY AS THE SAID MANUFACTURING UNIT HAS BEEN ACQUIRED BY ASSESSEE. A.O. HOWEVER DID NO T ACCEPT ASSESSEES CONTENTIONS FOR THE REASONS THAT THE DEF INITION OF 3 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. MERGER/ AMALGAMATION ITSELF HAS CERTAIN LIMITATIONS IN THE MANNER OF ARRANGEMENT OF SCHEME OF THINGS AND SINCE ASSESSEE HAS NOT FOLLOWED THE AMALGAMATION PROCEDURE PROVIS IONS OF SECTION 72A DOES NOT APPLY. THE LD. CIT(A) AFTER AN ALYZING THE FACTS OF THE CASE UPHELD A.OS ACTION. 5. LD. CIT(A) OBSERVED IN HIS ORDER THAT THE CLAIM OF ASSESSEE IS TO BE EXAMINED WITH REFERENCE TO DEFINI TION OF AMALGAMATION CONTAINED IN SECTION 2(1)(B) OF THE AC T. THEN HE REFERRED TO THE CONTENTS OF NOTICE GIVEN TO THE SHA REHOLDERS OF M/S. GVK NOVOPAN INDUSTRIES LTD. AND OBSERVED THAT M/S. GVK PETRO CHEMICALS LTD. AND M/S. GVK NOVOPAN INDU STRIES P. LTD. WERE SPLIT INTO TWO PARTS I.E. MANUFACTUR ING DIVISION AND RESIDUAL COMPANIES. HE OBSERVED THAT IT WAS ONL Y THE MANUFACTURING DIVISIONS THAT WERE TRANSFERRED TO AS SESSEE COMPANY AND THE TWO COMPANIES CONTINUES TO EXIST WI THOUT THE MANUFACTURING DIVISIONS. IN THE SCHEME OF ARRANGEME NT ONLY COMPANY THAT WAS COMPLETELY AMALGAMATED WAS M/S. NO VOPAN FURNITURES P. LTD. NOTICING THAT M/S. GVK NOVOPAN INDUSTRIES LTD. CONTINUES TO BE A RESULTANT COMPANY AND CHANG ED ITS NAME TO M/S. ZINGER INVESTMENTS P. LTD. THE LD. CI T(A) APPROVED THE ACTION OF THE ASSESSING OFFICER. HE AL SO TOOK SUPPORT FROM THE NOTICE ISSUED TO THE SHAREHOLDERS ORDERS OF HONBLE A.P. HIGH COURT WITH REFERENCE TO DEFINITIO N OF SCHEME TO CONCLUDE THAT THERE WAS NO AMALGAMATION WITH AS SESSEE COMPANY OF M/S. GVK NOVOPAN INDUSTRIES P. LTD. AND IT IS ONLY ACQUISITION OF ASSETS AND LIABILITIES OF THE M ANUFACTURING DIVISION. SINCE THE SCHEME OF ARRANGEMENT FALLS SHO RT OF THE DEFINITION OF AMALGAMATION AS PER THE ACT THE PROV ISIONS OF SECTION 72A ARE NOT APPLICABLE. AGGRIEVED ASSESSEE HAS RAISED GROUND-2 ON THE ABOVE ISSUE. 4 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. 6. ASSESSEE REITERATES THE SUBMISSIONS MADE BEFOR E THE LOWER AUTHORITIES VIZ. THAT THE ASSETS OF M/S. GVK NOVOPAN INDUSTRIES P. LTD. COMPRISED OF ONLY THE MANUFACTU RING DIVISION AND THE ENTIRE MANUFACTURING DIVISION WAS ACQUIRED BY ASSESSEE COMPANY. REFERENCE WAS INVITED TO THE COPI ES OF THE BALANCE SHEET OF M/S. GVK NOVOPAN INDUSTRIES P. LTD . AS AT 31.03.2006 AND ALSO DETAILS OF ASSETS AND LIABILITI ES OF M/S.GVK NOVOPAN INDUSTRIES P. LTD. APPROVED BY THE HONBLE HIGH COURT FOR ACQUISITION BY ASSESSEE COMPANY AS C ONTAINED IN THE ORDER OF THE HONBLE HIGH COURT. REFERENCE W AS ALSO INVITED TO THE BALANCE SHEET M/S. ZINGER INVESTMENT S (P) LTD. AS AT 31.3.2007 WHICH SHOWS THAT THERE WERE NO FIXE D ASSETS/LIABILITIES CONSEQUENT TO THE ACQUISITION OF THE SAME BY ASSESSEE COMPANY. THESE DOCUMENTS SHOW THAT M/S. GV K NOVOPAN INDUSTRIES P. LTD. HAD ONLY ONE DIVISION VIZ. THE MANUFACTURING DIVISION AND ALL THE ASSETS AND LIABI LITIES WERE ACQUIRED BY ASSESSEE COMPANY AS PER THE ORDER OF TH E HONBLE HIGH COURT. 6.1. ASSESSEE ALSO SUBMITS THAT IT DEMONSTRATED BEFORE THE CIT(A) THAT THE CONDITIONS TO BE FULFILLED BY AS SESSEE COMPANY AS WELL AS M/S.GVK NOVOPAN INDUSTRIES PVT. LTD. AS LAID DOWN IN SEC.72A AND RULE 9C OF THE I. T . RUL ES WERE SATISFIED. ATTENTION WAS INVITED TO PAGES 3 AND 4 WRI TTEN SUBMISSIONS FILED BEFOR E T HE C.I.T(A) ENCLOSED IN THE PAPER BOOK. IT ALSO PLEADED BEFORE THE CIT(A) THAT ITS CA SE FALLS WITHIN THE PROVISIONS OF SEC.2(1B) WHICH DEFINES AMALGAMATION. ASSESSEE SUBMITS THAT THE CIT (A) IS NOT JUSTIFIED IN REJECTING ASSESSEE'S PLEA FOR SET OFF O F UNABSORBED DEPRECIATION BEL ON GING TO M/S.GVK NOVOPAN INDUSTRIES PVT. LTD. AGAINST ITS INCOME FOR ASST.YEAR 2007- 08. IT WAS SUBMITTED THAT IT WAS ELIGIBLE FOR SET OFF THE 5 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. B ROUGHT FORWARD UNABSORBED DEPRECIATION OF RS.3 90 54 350/-. 7. AFTER CONSIDERING THE RIVAL CONTENTIONS WE AGR EE WITH THE ORDERS OF THE AUTHORITIES. FIRST OF ALL A S POINTED OUT BY THE AUTHORITIES ASSESSEE HAS NOT AMALGAMATED M/S. GVK NOVOPAN INDUSTRIES P. LTD. PROVISIONS OF SECTION 72 A RELATING TO CARRY FORWARD AND SET OFF OF ACCUMULATED LOSSES AND UNABSORBED DEPRECIATION ALLOWANCE IN AMALGAMATION O R DEMERGER WILL APPLY ONLY IN THE CASE OF AMALGAMATIO N OF COMPANIES OR DEMERGER OF COMPANIES. RELEVANT DEFINI TION OF AMALGAMATION AS PER SECTION 2 (1B) IS AS UNDER : (1B) AMALGAMATION IN RELATION TO COMPANIES MEANS THE MERGER OF ONE OR MORE COMPANIES WITH ANOTHER COMPAN Y OR THE MERGER OF TWO OR MORE COMPANIES TO FORM COMP ANY (THEIR COMPANY OR COMPANIES WHICH SO MERGED BEING REFERRED TO AS THE AMALGAMATING COMPANY OR COMPANIE S AND THE COMPANY WITH WHICH THEY MERGE OR WHICH IS FORMED AS A RESULT OF THE MERGER AS THE AMALGAMATE D COMPANY) IN SUCH A MANNER THAT (I) ALL THE PROPERTY OF THE AMALGAMATING COMPANY OR COMPANIES IMMEDIATELY BEFORE THE AMALGAMATION BECOMES THE PROPERTY OF THE AMALGAMATED COMPANY BY VIRTUE OF THE AMALGAMATION; (II) ALL THE LIABILITIES OF THE AMALGAMATING COMPANY OR COMPANIES IMMEDIATELY BEFORE THE AMALGAMATION BECOME THE LIABILITIES OF THE AMALGAMATED COMPANY BY VIRTUE OF THE AMALGAMATION. (III) SHAREHOLDERS HOLDING NOT LESS THAN THREE FOURTHS IN VALUE OF THE SHARES IN THE AMALGAMATING COMPANY OR COMPANIES (OTHER THAN SHARES ALRREADY HELD THEREIN IMMEDIATELY BEFORE THE AMALGAMATION BY OR BY A NOMINEE FOR THE AMALGAMATED COMPANY OR ITS SUBSIDIARY) BECOME SHAREHOLDERS OF THE AMALGAMATED COMPANY BY VIRTUE OF THE AMALGAMATION OTHERWISE THAN AS A RESULT OF THE ACQUISITION OF TH E PROPERTY OF ONE COMPANY BY ANOTHER COMPANY PURSUANT TO 6 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. THE PURCHASE OF SUCH PROPERTY BY THE OTHER COMPANY OR AS A RESULT OF THE DISTRIBUTION OF SUCH PROPERTY TO TH E OTHER COMPANY AFTER THE WINDING UP OF THE FIRST MENTIONE D COMPANY; 8. AS CAN BE SEEN FROM THE ABOVE PROVISION AMALGAMATION IS IN RELATION TO COMPANIES MEANS MER GER OF ONE OR MORE COMPANIES WITH ANY OTHER COMPANY. IN AS SESSEES CASE IN THE SCHEME OF ARRANGEMENT THERE IS ONLY O NE COMPANY WHICH GOT MERGED WITH ASSESSEE COMPANY BY WAY OF AMALGAMATION I.E. NOVOPAN FURNITURE LTD. ON WHICH THERE IS NO DISPUTE. HOWEVER AS FAR AS GVK NOVOPAN INDUSTRI ES P. LTD. OR GVK PETRO CHEMICALS P. LTD. ARE CONCERNED THOS E COMPANIES STILL EXIST WITH ITS OWN IDENTITY AND HAS NOT AMALGAMATED INTO ASSESSEE COMPANY. EVEN THOUGH PART OF THE PROPERTIES WERE ACQUIRED BY ASSESSEE COMPANY THIS CAN ONLY BE CONSIDERED AS ACQUISITION BY WAY OF SALE OR AS A SCHEME BUT NOT BY WAY OF AMALGAMATION. IN VIEW OF THIS WE ARE OF THE OPINION THAT PROVISIONS OF SECTION 72A PERTAINING T O CARRY FORWARD DEPRECIATION OF M/S. GVK NOVOPAN INDUSTRIES P. LTD. CANNOT BE SET OFF IN ASSESSEES CASE AS THAT COMPA NY IS IN EXISTENCE AND HAS NOT AMALGAMATED AND IT ONLY CAN C LAIM CARRY FORWARD AND SET OFF DEPRECIATION AVAILABLE TO IT. I N VIEW OF THIS GROUND NO.2 IS REJECTED. 9. GROUND NO.3 IS WITH REFERENCE TO ALTERNATE CLAI M TO INCREASE WDV OF ASSETS ACQUIRED BY UNABSORBED DEPRE CIATION OF RS.3 90 54 350. IT WAS ASSESSEES CONTENTION THA T IN CASE THE CARRY FORWARD DEPRECIATION WAS NOT ALLOWED TO BE SE T OFF IN ASSESSEES HAND ASSESSEE IS ENTITLED TO INCREASE T HE WDV OF ASSETS BY THE SAME AMOUNT. 7 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. 9.1. BEFORE THE LD. CIT(A) ASSESSEE RAISED THE UND ER MENTIONED GROUND OF APPEAL AS GROUND NO.2(D). 2(D) WITHOUT PREJUDICE TO THE ABOVE THE APPELLANT S UBMITS THAT THE A.O. HAVING NOT ALLOWED THE APPELLANTS CL AIM FOR SET OFF OF UNABSORBED DEPRECIATION OF RS.3 90 54 35 0 AGAINST THE INCOME FOR THE A.Y. 2007-08 HE SHOULD HAVE INCREASED THE WDV OF ASSETS OF THE APPELLANT WITH T HE UNABSORBED DEPRECIATION OF RS.3 90 54 350 BELONGING TO GVK NOVOPAN INDUSTRIES PRIVATE LIMITED AND SHOULD H AVE ALLOWED DEPRECIATION ON THUS ENHANCED WDV OF ASSETS OF GVK NOVOPAN INDUSTRIES PRIVATE LIMITED ACCORDINGLY. 9.2. THE LD. CIT(A) DID NOT GIVE ANY SPECIFIC FIND ING ON THIS GROUND OF APPEAL. 9.3. ASSESSEE SUBMITS THAT AS PER SECTION 43(6)(B) WRITTEN DOWN VALUE IS TO BE RECKONED AFTER EXCLUDIN G DEPRECIATION ACTUALLY ALLOWED FROM THE ACTUAL COST. ASSESSEE SUBMITS THAT THE UNABSORBED DEPRECIATION OF RS.3 90 54 350 IS LIABLE TO BE TREATED AS NOT ACTUALLY ALLOWED. ASSES SEE RELIED ON THE DECISIONS OF THE HONBLE MADRAS HIGH COURT IN T HE CASE OF CIT VS. SILICAL METALLURGIC LTD. 324 ITR 29 (MAD.) AND THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. HINDUSTAN PETROLEUM CORPORATION LTD. 187 ITR 1 (BOM.) AND PLEADED BEFORE THE CIT(A) THAT THE UNABSORBED DEPRECIATION WAS LIABLE TO BE TREATED AS NOT ACTUAL LY ALLOWED AND CONSEQUENTLY THE WDV OF THE ASSETS HAS TO BE IN CREASED BY THE AMOUNT OF RS.3 90 54 350. AS ALREADY SUBMITTED THE CIT(A) DID NOT GIVE A FINDING ON THIS GROUND OF APP EAL. ASSESSEE RELIES ON THE AFORESAID DECISIONS OF THE HONBLE MA DRAS AND BOMBAY HIGH COURTS AND PRAYS THAT WITHOUT PREJUDICE TO ITS MAIN GROUND OF APPEAL VIZ. THAT BROUGHT FORWARD U NABSORBED DEPRECIATION IS TO BE SET OFF AGAINST ITS INCOME T HE A.O. MAY BE 8 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. DIRECTED TO ENHANCE THE WDV BY THE AMOUNT OF UNABSO RBED DEPRECIATION. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE PROVISIONS OF THE ACT AS WELL AS THE FA CTS AVAILABLE ON RECORD. THE ENTIRE CASE LAW RELIED UPON BY ASSES SEE PERTAINS TO CASES WHERE THERE WAS AMALGAMATION. IN THE CASE OF CIT VS. SILICAL METALLURGIC LTD. 324 ITR 29 (MAD.) HONBLE MADRAS HIGH COURT WAS CONSIDERING THE CASE OF UNABSORBED DEPRECIATION OF AMALGAMATING COMPANY. LIKE WISE TH E CASE OF CIT VS. HINDUSTAN PETROLEUM CORPORATION LTD. 187 I TR 1 (BOM.) IS ALSO WITH REFERENCE TO WRITTEN DOWN VALUE OF ASSETS OF AMALGAMATION OF COMPANIES AND SCOPE OF EXPLANATION 2A AND SECTION 43(6). HOWEVER THOSE TWO CASES ARE NOT APP LICABLE TO THE FACTS OF ASSESSEE AS THERE IS NO AMALGAMATION O F IMPUGNED COMPANY. AS ASSESSEE HAS ONLY ACQUIRED THE MANUFACT URING UNITS AND HAS NOT AMALGAMATED THE SAID TWO COMPANIE S THE QUESTION OF ENHANCING THE WDV DOES NOT ARISE. MOREO VER AS SEEN FROM THE ORDERS OF A.O. ASSESSEE HAS ACQUIRED ASSETS AND LIABILITIES AND HAS ISSUED SHARES IN LIEU THEREOF. THEREFORE THE COST AT WHICH THE ASSETS WERE ACQUIRED WAS THE COS T OF ASSETS FOR THE PURPOSE OF DEPRECIATION. THE CONTENTION THA T WDV OF ASSETS SHOULD BE INCREASED BY UNABSORBED DEPRECIATI ON OF M/S. GVK NOVOPAN INDUSTRIES P. LTD. WHICH HAS NOT AMALG AMATED WITH THE COMPANY CAN NOT BE ACCEPTED. THE FACTS OF THE CASES RELIED UPON BY ASSESSEE ARE BEING ENTIRELY DIFFEREN T THE PRINCIPLES CANNOT BE APPLIED TO ASSESSEES CASE. AC CORDINGLY GROUND NO. 3 IS REJECTED. 11. GROUND NO.4 PERTAIN TO CLAIM OF LOSS OF SURREN DER OF LEASE OF RS.24 89 096. 9 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. 11.1. ASSESSEE DECIDED TO SET UP A PARTICLE BOARD UNIT IN THE STATE OF UTTARANCHAL IN INTEGRATED INDUSTRI AL ESTATE PANTNAGAR-UDHAM SINGH NAGAR. IT APPROACHED THE STATE INDUSTRIAL DEVELOPMENT CORPORATION OF UTTARANCHAL LT D FOR ALLOTMENT OF LAND ON LEASE BASIS. THE SAID CORPORAT ION ALLOTTED 40 470 SQ.MTRS OF LAND AT SECTOR 12. ASSESSEE COMPANY PAID RS.1 72 06 750 AS ADVANCE AND OTHER EXPENSES TOWARDS THE LAND. SUBSEQUENTLY THE SAID CORPORATION WANTED TO SHIFT THE SITE TO SECTOR 9. THE PROPOSED SITE WAS FOUND UNSUITABLE FOR CONSTRUCTION OF FACTORY. ASSESSEE DECIDED TO CANCEL THE AGREEMENT WHEREUPON THE STATE INDUSTRIAL CORPORATION REFUNDED TH E ADVANCE AFTER FORFEITING RS.24 89 096. 11.2. ASSESSEE COMPANY DEBITED A SUM OF RS.24 89 096 IN ITS P&L ACCOUNT (SCH.14 TO P&L A/C.) TOWARDS 'LOSS ON SURRENDER OF LEASE' AND CLAIMED THE S AME AS REVENUE EXPENDITURE. THE A.O HELD THAT THE EXPEN DITURE OF RS.24 89 096 WAS INCURRED TOWARDS SETTING UP A UNI T IN UTTARANCHAL STATE I.E. FOR MAKING CAPITAL INVESTMEN T. THE NET LOSS ARISING THERE FROM IS TO BE TREATED TO BE TREA TED AS 'CAPITAL LOSS'. ACCORDINGLY HE DISALLOWED THE CLAIM. 11.3. IN APPEAL THE CIT(A) HELD THAT THERE IS NO AMBIGUITY IN THE FACT THAT SETTING UP OF A NEW PLANT IS A CAPITAL TRANSACTION AND ANY LOSS SUFFERED IN THAT PR OCESS IS A CAPITAL LOSS AND THAT ASSESSEE HAS NOT BEEN ABLE TO SHOW ANY EVIDENCE TO JUSTIFY OTHERWISE. HE UPHELD THE ACTIO N OF THE A.O. 11.4. ASSESSEE SUBMITS THAT THE TRANSACTION IN QUESTION WAS UNDERTAKEN WITH A VIEW TO EXPAND THE 10 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. BUSINESS OF ASSESSEE COMPANY BY MANUFACTURING PRE- LAMINATED PARTICLE-BOARDS AND RESINS. THE LOSS IN Q UESTION WAS INCURRED BY ASSESSEE ON ACCOUNT OF THE FACT THAT THE STATE INDUSTRIAL CORPORATION OF UTTARANCHAL PROPOSED TO CHANGE THE SITE ALLOTTED TO ASSESSEE TO AN UNSUITABLE LOCATION. ASSESSEE INFORMED THE SAID CORPORATION THAT THE PROPOSED ALTERNATE LOCATION DOES NOT MEET ITS REQUIREMEN T. IN SPITE OF ASSESSEE'S REQUEST THE CORPORATION DID N OT ACCEDE TO ALLOW ASSESSEE TO RETAIN THE LAND ORIGINALLY ALLOTTED. ASSESSEE GOT OUT OF AN ONEROUS BUSINESS TRANSACTION AND IN THE PROCESS INCURRED LOSS OF RS.24 89 096. 11.5. ASSESSEE RELIED ON VARIOUS DECIDED CASES IN SUPPORT OF ITS CONTENTION THAT THE LOSS IS ALLOWABLE AS REVENUE LOSS VIZ. INDO RAMA SYNTHETICS (I) LTD. VS CIT 333 ITR 18 DEL (185 TAXMANN 277 DEL) CIT VS VARDHAMAN SPINNING GENERAL MILLS LTD. 176 TAXMANAN 157 P & H AND ONGC VIDESH LTD. VS DCIT 37 SOT 97 DEL (127 TTJ 49 7 DEL). IN THE CASE OF INDO RAMA SYNTHETICS LTD. 333 ITR 18 DEL (SUPRA) THE PROJECT PROPOSED BY ASSESSEE COULD NOT TAKE OFF BASICALLY BECAUSE ASSESSEE COULD NOT PROCURE THE ALLOTMENT OF REQUISITE LAND FROM THE GOVERNMENT OF KARNATAKA AND EXPENDITURE INCURRED ON MISCELLANEOUS ITEMS WAS DIRECTED BY THE HIGH COURT TO BE ALLOWED AS REVENUE EXPENDITURE. IN THE CASE OF VARDHAMAN SPINNIN G & GENERAL MILLS LTD. 176 TAXMANN 157 P & H (SUPRA) THE SAID COMPANY HAD INCURRED CERTAIN EXPENSES FOR EXPLORING POSSIBILITY OF SETTING-UP A PAPER PROJECT WHICH DID NOT MATERIALIZE. IT WAS FOUND THAT NO ASSET OF A PERMANENT NATURE WITH AN ENDURING BENEFIT HAD BEEN ACQUIRED. IT WAS THEREFORE HELD THAT ASSESSEE'S CLAIM IN RESPECT OF SA ID 11 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. EXPENDITURE WAS TO BE ALLOWED TREATING IT AS REVENUE EXPENDITURE. IN THE CASE OF ONGC VIDESH LTD 37 SOT 97 DEL (SUPRA) EXPENSES OF RS. 43.85 LAKHS WERE INCURRED FOR PURCHASE AND EVALUATION OF THE SEISMIC DATA OF FOREIG N BLOCKS. THE HON'BLE ITAT FOUND THAT ASSESSEE BEING E NGAGED IN THE BUSINESS OF EXPLORATION AND PRODUCTION OF HYDROCARBONS IN OTHER COUNTRIES TO AUGMENT THE OIL RESOURCES OF INDIA IT WAS CONTINUOUSLY EVALUATING VA RIOUS BUSINESS OPPORTUNITIES BEFORE ACQUIRING A PARTICULAR FIELD/BLOCK. THERE IS NO DISPUTE TO THE FACT THAT IN ALL INDUSTRIES AN ACTIVITY FOR FURTHERANCE OF ITS BUSINES S OR EVALUATION OF BETTER PROFIT-EARNING PROCESS IN ONE MAN NER OR OTHER IS UNDERTAKEN. EFFORT TO EVALUATE THE PROSPECTS O F EARNING BETTER PROFIT IS NOT A SEPARATE ACTIVITY BUT IS I N THE COURSE OF CONDUCT OF NORMAL DAY-TO-DAY BUSINESS. THE EXPENDITURE SO INCURRED BY ASSESSEE WAS HELD FOR FURTHERANCE OF ACTIVITIES UNDERTAKEN BY IT IN THE NORMA L COURSE OF ITS BUSINESS. 12. AFTER CONSIDERING THE RIVAL CONTENTIONS WE AR E NOT IN AGREEMENT WITH ASSESSEES CONTENTIONS. EVEN THOU GH LD. COUNSEL RELIED ON THE DECISIONS OF INDO SYNTHESIS I NDIA LTD. VS. CIT 333 ITR 18 (DEL.) AS SEEN FROM THE FACTS O F THE CASE THE EXPENDITURE INCURRED WAS IN THE NATURE OF SALAR Y WAGES REPAIRS MAINTENANCE DESIGN AND ENGINEERING FEE T RAVELLING AND OTHER EXPENSES OF ADMINISTRATIVE NATURE. HONBL E HIGH COURT FELT INDUBITABLY IN THE NORMAL COURSE THESE EXPENSES COULD BE TREATED AS REVENUE EXPENDITURE. THE UNIT W HICH ASSESSEE HAS PROPOSED TO SET UP HAS INEXTRICABLE LI NKAGE WITH THE EXISTING BUSINESS OF ASSESSEE. IN VIEW OF THAT THE HONBLE HIGH COURT CONSIDERED IN THE CONTEXT OF EXISTING BU SINESS WITH COMMON ADMINISTRATION AND COMMON FUND AND SINCE NO NEW 12 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. ASSET ALSO CAME TO BE CREATED THE EXPENDITURE WAS HELD TO BE DEDUCTIBLE. 12.1. IN THE CASE OF ONGC VIDESH LTD. VS. DCIT (S UPRA) THE ISSUE WAS NOT OF NEW PROJECT BUT CATEGORISED AS CAPITAL EXPENDITURE IN THE COURSE OF ASSESSEES BUSINESS. T HE ITAT DELHI BENCH CONSIDERED THE NATURE OF EXPENDITURE I NCURRED FOR PURCHASE AND EVALUATION OF SEISMIC DATA OF FOREIGN BLOCKS AND FOUND THAT ASSESSEE BEING ENGAGED IN BUSINESS OF EX PLORATION AND PRODUCTION OF HYDROCARBONS IN OTHER COUNTRIES T O AUGMENT THE OIL RESOURCES OF INDIA IT HAS TO CONTINUOUSLY EVALUATE BUSINESS OPPORTUNITIES BEFORE ACQUIRING A PARTICULA R FIELD/BLOCK. THE EXPENSES CANNOT BE SAID TO BRING A N ENDURING BENEFIT NOR THE SAME CAN BE SAID TO BE AN INITIAL O UTLAY FOR EXPLORATION OF BUSINESS. IN VIEW OF THAT FOLLOWING THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. ESSAR OIL LTD. SUCH EXPENDITURE WAS ALLOWED AS REVENUE EXPEN DITURE. HOWEVER AS SEEN FROM THE FACTS OF THIS CASE THERE IS NO DISPUTE WITH REFERENCE TO OTHER EXPENDITURE INCURRE D BY ASSESSEE FOR ESTABLISHING THE UNIT IN UTTARAKHAND. THE EXPENDITURE ON PROJECT REPORT INITIAL EXPENDITURE FOR TRAVELLING SALARY ETC. INCURRED ON THE SAID PROJECT COULD HAV E BEEN CLAIMED AS REVENUE EXPENDITURE BY ASSESSEE AS THERE IS NO DISPUTE ON SUCH EXPENDITURE. THE DISPUTE IS ONLY WI TH REFERENCE TO SURRENDER OF THE LAND ACQUIRED ON LEAS E BASIS. AS CAN BE CLEARLY SEEN ASSESSEE COMPANY PAID AN AMOUN T OF RS.1.72 CRORES AS AN ADVANCE TOWARDS LAND. WHEN THE SITE WAS BEING SHIFTED TO ANOTHER PLACE ASSESSEE FOUND THAT LAND WAS UNSUITABLE FOR CONSTRUCTION OF FACTORY AND CANCELLE D THE AGREEMENT. THEREUPON INDUSTRIAL DEVELOPMENT CORPOR ATION REFUNDED THE ADVANCE RETAINING PART AMOUNT. SINCE T HE 13 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. ADVANCE WAS PAID FOR ACQUIRING LAND FOR ESTABLISHIN G FACTORY THE SAID EXPENDITURE WOULD HAVE RESULTED IN GETTING AN ASSET. THEREFORE THE NATURE OF EXPENDITURE ALLOWED IN THE ABOVE SAID CASES RELIED ON BY ASSESSEE WAS ENTIRELY DIFFERENT FROM THE NATURE OF EXPENDITURE INCURRED BY ASSESSEE. IN THIS CASE THE PRINCIPLES LAID DOWN BY THE ABOVE DECISIONS RELIED UPON BY ASSESSEE DO NOT APPLY TO THE FACTS OF THE CASE. SIN CE THE EXPENDITURE IS FOR ACQUIRING LAND WHICH WAS NOT ACQ UIRED SUBSEQUENTLY THE EXPENDITURE IS CORRECTLY CATEGORI SED AS CAPITAL EXPENDITURE AND THE LOSS THEREOF IS TO BE TREATED AS CAPITAL LOSS. IN THE NORMAL COURSE IF THE PROJECT T OOK OFF THE AMOUNT WOULD HAVE BEEN SHOWN IN ASSET SCHEDULE ONLY AND COULD NOT BE CLAIMED AS REVENUE EXPENDITURE. WE A CCORDINGLY REJECT THE GROUND AND AFFIRM THE ORDER OF A.O. AND LD. CIT(A) ON THE ISSUE. 13. GROUND NO.5 PERTAINS TO ISSUE OF NON-EXCLUSION OF INCENTIVES NOT ACCRUED FROM THE INCOME OFFERED TO A N EXTENT OF RS.91 25 379 (RS.34 21 854 + RS.57 03 525). ASSESSE E HAS ACCOUNTED AN AMOUNT OF RS.34 21 854 AS SALES TAX PA ID WHICH WAS REFUNDABLE IN TERMS OF INDUSTRIAL INVESTMENT PO LICY G.O.MS. NO. 178 OF GOVERNMENT OF A.P. LIKEWISE ASS ESSEE ALSO ACCOUNTED FOR INCENTIVE OF RS.57 03 525 AS ELECTRIC ITY CONSUMPTION BUT REFUNDABLE AS AN INCENTIVE BY THE A BOVE G.O. AT RS.0.75 PER UNIT OF ELECTRICITY CONSUMPTION. WHI LE COMPUTING THE INCOME FOR THE PURPOSE OF INCOME TAX ASSESSEE HAS TAKEN THESE INCENTIVES IN LEDGER ACCOUNT AND CL AIMED THE NET AMOUNT. LATER ON ASSESSEE CAME TO KNOW THAT THE SE AMOUNTS WERE REFUSED BY GOVERNMENT OF A.P. AND ACCO RDINGLY VIDE LETTER DATED 04.12.2009 A.O. WAS REQUESTED TO EXCLUDE 14 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. THE AMOUNTS. A.O. HOWEVER DID NOT CONSIDER THE CLA IM NOR THERE IS ANY MENTION IN THE ASSESSMENT ORDER. 13.1. IN APPEAL THE CIT(A) OBSERVED THAT THIS IS SUE HAS NOT BEEN DISCUSSED IN THE ASSESSMENT ORDER. HE CONS IDERED ASSESSEE'S EXPLANATION AND OBSERVED THAT ASSESSEE I TSELF HAD SHOWN THE INCENTIVES AS INCOME OF THE CURRENT YEAR. HE FURTHER OBSERVED THAT THERE WAS CLEAR CUT SCHEME UNDER WHIC H SUCH INCENTIVES WERE TO BE PROVIDED AND ASSESSEE HAD RIG HTLY SHOWN THE INCOME ON ACCRUAL BASIS. HE OBSERVED THAT THE C ORRECT METHOD OF ACCOUNTING IS NOT TO REOPEN THE CLOSED BO OKS FOR THE YEAR ENDING ON 31-3-2007. IT IS ONLY AFTER THE EXPI RY OF THE FINANCIAL YEAR THAT THE APPELLANT SEEMED TO FEEL TH AT THE 'INCENTIVE' INCOME MAY BE UNREALIZABLE. HE HELD THA T THE CORRECT METHOD OF ACCOUNTING IS TO PASS SUITABLE EN TRIES IN THE BOOKS AT THAT POINT TO SHOW THAT THE AMOUNTS WERE UNREALIZABLE. ON THE BASIS OF THIS REASONING THE C .I.T(A) DISMISSED THE GROUND OF APPEAL TAKEN BY ASSESSEE. 13.2. ASSESSEE SUBMITS THAT THE CI.T(A) IS NOT JU STIFIED IN DISMISSING THIS GROUND OF APPEAL. ASSESSEE HAS B EEN DENIED THE BENEFIT OF SUBSIDY BY GOVERNMENT OF ANDHRA PRAD ESH. ACCORDINGLY THE RELEVANT AMOUNTS HAVE NOT ACCRUED AS INCOME TO ASSESSEE. THE LEARNED CIT(A) OUGHT TO HAVE CONSI DERED THE UNCONTROVERTED FACTS OF THE CASE AND THE RATIO OF T HE CASES CITED BEFORE THE A.O AND ALLOWED ASSESSEE'S CLAIM. BEFORE THE CIT(A) ASSESSEE PLEADED THAT THE INCENTIVE ARE ONLY A BOOK ENTRIES BUT HAVE NOT RESULTED IN ANY INCOME AT ALL AND THAT IT WAS HYPOTHETICAL INCOME WHICH DID NOT MATERIALISE. SINC E NO INCOME HAS RESULTED AT ALL EVEN THOUGH AN ENTRY IS MADE TO THAT EFFECT IN BOOKS IT CANNOT BE CONSIDERED AS IN COME FOR TAX PURPOSES. IN THIS CONNECTION ASSESSEE RELIED ON THE DECISION IN 15 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. THE CASE OF CIT VS. SHOORJI VALLABHDAS & CO. 46 IT R 144 SC AND CALCUTTA HIGH COURT DECISION IN THE CASE OF CIT VS./ METHOD TRADING INVESTMENT LTD. 246 ITR 588 (CAL.). 13.3. ON A QUERY BY THE BENCH TO EXPLAIN THE NECES SARY ENTRIES LD. COUNSEL PLACED THE FOLLOWING A NOTE EX PLAINING THE DETAILS. 1.1 AS DIRECTED BY THE HON'BLE IT AT DURING THE COURSE OF HEARING OF THE ABOVE NUMBERED APPEAL ASSESSEE SUBMITS THE FOL LOWING PAPERS FOR KIND PERUSAL. 1.2. WHILE FURNISHING RETURN OF INCOME FOR A.Y 200 4-05 ASSESSEE INCLUDED IN ITS TOTAL INCOME AN AMOUNT OF RS.57 03 525 TOWARDS POWER INCENTIVE AND RS.34 21 854 TOWARDS SALES TAX INCENT IVE. THE TOTAL OF THESE TWO INCENTIVES WORKS OUT TO RS.91 25 3798. 1.3. A COPY OF P & L ACCOUNT IS SUBMITTED HEREWITH (SHEET-1). EXPENDITURE OF RS.7 66 36 700 DEBITED TO P&L ACCOUN T IS NET OF POWER INCENTIVE CREDITED TO THIS ACCOUNT. A COPY OF THE ' POWER-FACTORY' ACCOUNT IS SUBMITTED HEREWITH. (SHEET-2). A COPY OF THE DETAILS OF EXPENDITURE DEBITED TO THE POWER ACCOUNT IN SHADNAG AR UNIT AND THE POWER INCENTIVE CREDITED TO THE SAID ACCOUNT IS ALS O SUBMITTED HEREWITH (SHEETS-3&4).THIS ACCOUNT SHOWS THAT ASSESSEE INCUR RED RS.2 73 31 192 UNDER VARIOUS SUB-HEADS IN THE SHADNAGAR UNIT AND C REDITED THE POWER INCENTIVE OF RS.57 03 525 AGAINST THE SAID EXPENDIT URE. THE TOTAL EXPENDITURE OF. RS.7 66 36 701 IS THE AGGREGATE OF THE EXPENDITURE PERTAINING TO THREE SEPARATE UNITS OF ASSESSEE VIZ. PATANCHERU SHADNAGAR AND RESIN-DIVISION. IT MAY THEREFORE KIND LY BE SEEN THAT THE POWER INCENTIVE CREDITED TO THE 'POWER AND FUEL' AC COUNT WENT TO REDUCE THE EXPENDITURE UNDER THIS ACCOUNT THUS EFFE CTIVELY SHOWING THAT THE POWER INCENTIVE HAS BEEN TAKEN INTO ACCOUNT WHI LE ARRIVING AT THE NET PROFIT OF RS.7 04 28 927. ASSESSEE SUBMITS HERE WITH A COPY OF THE 1 ST PAGE OF ITS I.T RETURN FOR ASST. YEAR 2007-08 AND A DJUSTED STATEMENT OF INCOME FOR THE Y-E:31-3-2007 (SHEETS 5 TO 7 )WHEREI N COMPUTATION HAS STARTED WITH NET PROFIT OF RS.7 04 28 927 AS PER P & L ACCOUNT AND ENDED WITH GROSS TOTAL INCOME OF RS 3 00 49 714 DECLARED IN THE RETURN OF INCOME. 1.4 ASSESSEE ALSO SUBMITS HEREWITH A COPY OF SALES TAX INCENTIVE ACCOUNT SHOWING THAT INCENTIVE OF RS.34 21 854 HAS BEEN IN CLUDED IN THE ACCOUNTS. (SHEET-8). A COPY OF SCHEDULE 10 TO P & L ACCOUNT IS ALSO SUBMITTED HEREWITH (SHEET-G) WHICH SHOWS THAT 'INDU STRIAL INCENTIVE' OF RS 34 21 854 HAS BEEN INCLUDED IN 'OTHER INCOME' IN THE P&L ACCOUNT. IT 16 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. MAY KINDLY BE SEEN THAT THE SALES TAX INCENTIVE OF RS.34 21 854 HAS BEEN TAKEN INTO ACCOUNT WHILE ARRIVING AT THE NET PROFIT OF RS 7 04 28 927. 14. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE DETAILS PLACED ON RECORD WE ARE OF THE OPINION THAT THIS ISSUE REQUIRES EXAMINATION BY A.O. AFRESH. SINCE S O MUCH OF THE AMOUNT WHICH WAS ACCOUNTED AS INCOME HAS NOT BE EN RECEIVED BY ASSESSEE NATURALLY THAT AMOUNT CANNOT BE BROUGHT TO TAX. HOWEVER THE ENTRIES MADE IN THE BOOKS OF A CCOUNTS NOT ONLY IN THIS YEAR BUT ALSO REVERSAL OF ENTRIES IN L ATER YEAR REQUIRE EXAMINATION. IN VIEW OF THIS WE ARE OF THE OPINION THAT THE CLAIM CAN BE EXAMINED BY A.O. AFRESH KEEPING I N MIND THE ENTRIES DURING THE YEAR AS WELL AS ENTRIES MADE IN BOOKS OF ACCOUNTS IN LATER YEAR AND ALLOW THE DEDUCTION IN T HIS YEAR AND IN CASE SUCH DEDUCTION WAS ALREADY ALLOWED IN A LA TER YEAR THE SAME IS REQUIRED TO BE WITHDRAWN. FOR THIS PURP OSE THE ISSUE IS RESTORED TO THE FILE OF A.O. FOR FRESH ADJ UDICATION. HOWEVER THE OBSERVATIONS ABOVE SHOULD NOT BE CONSI DERED AS DECISION ON MERITS WHICH REQUIRE CONSIDERATION BY A .O. WITH THESE OBSERVATIONS GROUND NO.5 IS ALLOWED FOR STAT ISTICAL PURPOSES. 15. IN THE RESULT APPEAL OF ASSESSEE IS PARTLY AL LOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 28.11.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD DATED 28 TH NOVEMBER 2014. VBP/- 17 ITA.NO.543/HYD/2011 NOVOPAN INDUSTRIES LTD. PATANCHERU MEDAK DIST. COPY TO 1. NOVOPAN INDUSTRIES LIMITED IDA PHASE-II PATAN CHERU MEDAK DISTRICT. 502 319. 2. DCIT CIRCLE 16(1) HYDERABAD 3. COMMISSIONER OF INCOME TAX (APPEALS)-V HYDERABA D. 4. COMMISSIONER OF INCOME TAX-IV HYDERABAD. 5. D.R. ITAT B BENCH HYDERABAD