DCIT Rg - 8(3), Mumbai v. M/s S.M.Dyechem Ltd, Mumbai

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F BEFORE SHRI S.V. MEHROTRA (AM) & N.V. VASUDEVAN (J M) I.T.A.NO. 6104/MUM/03 (ASSESSMENT YEAR : 1999-2000 ) DCIT RANGE 8(3) AAYAKAR BHAVAN M.K. ROAD MUMBAI-400 020. VS. M/S. S.M. DYECHEM LIMITED S.M. BHAVAN PLOT NO B-7 & B-10 WAGLE INDUSTRIAL ESTATE THANE-400 604. APPELLANT RESPONDENT PAN/GIR NO. : AAACS7371K ASSESSEE BY : SHRI S.A. KANJI DEPARTMENT BY : SHRI A.P. SIGH ORDER PER N.V. VASUDEVAN JM :- THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 9.6.2003 OF LEARNED CIT(A)-XXV MUMBAI RELATING TO A.Y. 1999 -2000. 2. GROUND NO. 1 RAISED BY THE REVENUE READ AS FOLL OWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW LEARNED CIT(A) ERRED IN ALLOWING THE DEPRECIATION OF RS. 29 .38 CRORES ON MEG PLANT WITHOUT APPRECIATING THE FACTS OF THE ISS UE. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND DEALING IN SNACK FOODS EDIBLE OI L AND MEG/DEG/TEG. THE ASSESSEE CLAIMED DEPRECIATION AS P ER THE INCOME TAX ACT AT A SUM OF RS. 30 61 39 894/-. OUT OF THE ABOVE DEPRECATION TO THE EXTENT OF RS. 29 38 40 912/- RELATED TO THE PLA NT AND MACHINERY AND OTHER ASSETS USED IN THE MONO ETHYLENE GLYCOL (MEG) PLANT OR DIVISION. THIS MEG PLANT WAS LOCATED AT KURKUMBH PUNE. THE M EG PLANT WAS AN EXISTING PLANT AND THE ASSESSEE WANTED TO CARRY OUT MAJOR MODIFICATION TO THE MEG PLANT. THE MEG PLANT AFTER MODIFICATION WAS SET UP AND STARTED TRIAL PRODUCTION IN F.Y. 1993-94. THE ASSESSEE CARR IED TRIAL RUN FROM F.Y. M/S. S.M. DYECHEM LIMITED 2 1993-94. TILL F.Y. 1998-99 TRIAL PRODUCTION CONTIN UED. THE OUTPUT FROM THIS TRIAL PRODUCTION WAS ALSO SOLD AND THE SALE PR OCEEDS WERE DULY REFLECTED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE F OR VARIOUS F.YS. AS FOLLOWS :- SALES F.Y. 1993-94 F.Y. 1994-96 (18 MONTHS) F.Y. 1996-97 F.Y. 1997-98 F.Y. 1998-99 QUANTITY (MTS) 9 429 22 319 3 430 5 3 VAVLUE (RS. IN LACS) 2 280.2 7 642.22 1 388.57 0.71 0.1 THE VALUE OF THE PLANT AND MACHINERY AT MEG PLANT T OTALING RS. 1 20 39 14 247/- (COMPRISING CAPITAL WORK-IN-PROGRE SS AS ON 1.4.1998 OF 11501.53 PLUS ADDITIONAL EXPENSES INCURRED DURING T HE PREVIOUS YEAR OF RS. 5.37 CRORES INCURRED DURING THE PREVIOUS YEAR) WERE CAPITALIZED IN THE BOOKS OF THE ASSESSEE FOR PREVIOUS YEAR. THE ASSESS EE EXPLAINED THAT THE MEG PLANT THOUGH IT COMMENCED TRIAL RUN IN THE F.Y. 1993-94 THE VALUE OF ITS PLANT AND MACHINERY WAS NOT CAPITALIZED IN T HE BOOKS OF ACCOUNT. IN THE PREVIOUS YEAR RELEVANT TO A.Y. 1999-2000 MANAG EMENT REALIZED THAT IT IS NO LONGER POSSIBLE TO RUN THE PLANT; AND THER EFORE THEY DECIDED TO CAPITALIZE THE VALUE OF THE PLANT AND CLAIM DEPRECA TION. ACCORDING TO THE ASSESSEE IT SATISFIED ALL THE CONDITIONS NECESSARY FOR GRANT OF DEPRECATION U/S. 32 OF THE ACT NAMELY IT OWNED PLANT AND MACHIN ERY AND USED IT FOR THE PURPOSE OF ITS BUSINESS AND ALSO GENERATED INCO ME BY USE OF PLANT AND MACHINERY. THE ASSESSING OFFICER HOWEVER DID ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF DEPRECIATION F OR THE FOLLOWING REASONS :- (A) THE ANNUAL REPORT ATTACHED TO THE RETURN OF INCOME CONTAINED NOTES REGARDING MEG PLANT WHICH WAS TO TH E EFFECT THAT THE OPERATIONS AT KURKUMBH CONTINUE TO REMAIN SUSPENDED IN THE CURRENT YEAR ALSO. (B) THE REMARKS OF AUDITORS IN NOTE B OF NOTES TO ACC OUNTS OF SCHEDULE P OF THE BALANCE SHEET WHICH IS AS FOLLO WS ALSO SHOWED THAT MEG PLANT DID NOT FUNCTION DURING THE W HOLE OF THE PREVIOUS YEAR:- M/S. S.M. DYECHEM LIMITED 3 THE COMPANY HAS BEEN REGISTERED AS A SICK INDUSTRI AL COMPANY U/S. 15 OF THE SIC INDUSTRIAL COMPANIES (SP ECIAL PROVISIONS) ACT 1985. A REHABILITATION PROPOSAL IS BEING WORKED OUT IN CONSULTATION WITH THE OPERATING AGENC Y AND BIFR. PENDING THE SAME THE ACCOUNTS HAVE BEEN PREP ARED ON GOING CONCERN BASIS IN SPITE OF THE GLYCOL PLANT OF THE COMPANY AT KURKUMBH PUNE REMAINING CLOSED THROUGHO UT THE YEAR AND SUBSTANTIAL LOSSES INCURRED BY THE COM PANY LEADING TO EROSION IN ITS NET WORTH. (C) AUDITORS HAVE FURTHER DISCLOSED IN SR. NO. 8 OF B-ACCOUNTS OF SAID SCHEDULE P THAT THE OPERATIONS OF THE GLYC OL DIVISION ARE CLOSED SINCE 29.3.1996. IN 8(B) AND 8 (D) OF SAME SCHEDULE P-B AUDITORS HAVE STATED : 8(B) : THE OPERATIONS OF THE GLYCOL DIVISION ARE CL OSED SINCE 29 TH MARCH 1996. DEPRECIATION HAS NOT BEEN PROVIDED ON EO PLANT AS THE PLANT WAS NOT UNDER OPERATION DURI NG THE YEAR. SIMILARLY NO DEPRECATION HAS BEEN PROVIDED ON THE MEG PLANT CAPITALIZED DURING THE YEAR. 8(D) : TECHNICAL KNOW-HOW FEE ON GLYCOL DIVISION A MOUNTING TO RS. 589.49 LAKHS HAS NOT BEEN PROVIDED FOR AND HENCE NOT CAPITALIZED IN PLANT AND MACHINERY. THUS ACCORDING TO THE ASSESSING OFFICER MEG PLANT WAS REMAINED CLOSED THROUGHOUT THE YEAR AND THEREFORE THE ASSESS EE IS NOT ENTITLED FOR BENEFIT OF DEPRECATION ON THE MEG PLANT. 4. THE ASSESSING OFFICER ALSO NOTICED THAT THE SAL E OF 3 MTS. OF GLYCOL WAS OF THE OPENING STOCK OF MONO ETHYLENE GLYCOL AS ON 1.4.1998. THEREFORE THERE WAS NO PRODUCTION OF MEG DURING THE YEAR. TH E ASSESSING OFFICER ALSO FORTIFIED HIS CONCLUSION THAT THERE WAS NO PRO DUCTION OF MEG BY POINTING OUT THAT THE DIRECTORS REPORT ON CONSUMPTI ON OF POWER AND FUEL PER UNIT OF PRODUCTION SHOWED THAT THERE WAS NO CON SUMPTION OF POWER AND FUEL ON MEG. THUS ACCORDING TO THE ASSESSING O FFICER NOT ONLY DEPRECIATION ON PLANT AND MACHINERY OF MEG PLANT HA S BEEN IMPROPERLY CLAIMED BUT ALSO THE CLAIM ON BUILDING EQUIPMENTS ETC. ON MEG PLANT WAS NOT PROPER AND SHOULD NOT BE ALLOWED. M/S. S.M. DYECHEM LIMITED 4 5. ASSESSING OFFICER WAS ALSO OF THE VIEW THAT THE ASSESSEE FAILED TO PRODUCE EVIDENCE REGARDING OWNERSHIP OF THE ASSETS. WE MAY MAKE IT CLEAR THAT THIS ASPECT IS NO LONGER RELEVANT BECAUS E BEFORE LEARNED CIT(A) IT WAS CONCEDED BY THE ASSESSING OFFICER IN THE REM AND REPORT THAT ALL THE DETAILS HAVE BEEN FURNISHED BY THE ASSESSEE BEFORE THE ASSESSING OFFICER AND THAT FINDING OF LEARNED CIT(A) HAS NOT BEEN CHA LLENGED BEFORE THE TRIBUNAL. THE ASSESSING OFFICER ULTIMATELY DISALLOW ED THE FOLLOWING CLAIM OF THE ASSESSEE FOR DEPRECIATION AS UNDER :- MEG PLANT RS. 15 04 89 281/- 1. OFFICE BUILDING NIL (NOT CLAIMED) 2. RESIDENTIAL BUILDING 13 12 589/- 3. FACTORY BUILDING 50 97 208/- 4. PLANT AND MACHINERY 28 57 83 397/- 5. ELECTRICAL INSTALLATION 2 04 968/- 6. FURNITURE AND FIXTURE 8 26 418/- 7. OFFICE EQUIPMENT 5 56 772/- 8. EDP EQUIPMENT 59 560/- ---------------------- 29 38 40 912/- ---------------------- CLAIM OF DEPRECIATION ON VEHICLES WAS ALLOWED AS TH ESE ASSETS ARE MOVABLE AND CAN BE USED IN THE DIVERSION OF BUSINES S OF THE ASSESSEE ALSO. THUS CLAIM OF DEPRECIATION WAS REDUCED BY RS . 29 38 40 912/- AND THE DEPRECIATION THAT WAS ALLOWED AS PER I.T. ACT 1961 WAS AS UNDER :- DEPRECIATION CLAIMED AS PER I.T. ACT 1961 RS. 30 61 39 894/- LESS : DEPRECIATION DISALLOWED AS PER I.T. ACT RS. 29 38 40 912/- (AS DISCUSSED ABOVE) ------------------------ RS. 1 22 98 982/- ------------------------ THUS DEPRECATION AMOUNTING TO RS. 29 38 40 912/- O N PLANT AND MACHINERY AND RELATED EXPENSES PERTAINING TO MEG PL ANT WAS NOT ALLOWED. 6. THE ASSESSING OFFICER RELIED ON THE FOLLOWING DE CISIONS TO SUPPORT HIS CONCLUSION THAT IN THE ABSENCE OF USER OF MACHI NERY DURING THE PREVIOUS YEAR THE ASSESSEE WILL NOT BE ENTITLED TO DEPRECATION :- M/S. S.M. DYECHEM LIMITED 5 (A) LIQUIDATORS OF PURSA LTD. 25 ITR 265 (SC) (B) CIT VS. JIWAJI RAO SUGAR LTD. 71 ITR 319 (MP) (C) CIT VS. SUHRID GEIGY LTD. 133 ITR 884 (GUJ) (D) CIT VS. J.K. TRANSPORT LTD 231 ITR 798 (E) MADRAS FERTILIZERS LTD. VS. CIT 209 ITR 174 (M AD) (F) METROPOLITION SPRINGS (P) LTD. VS. CIT 132 ITR 893 (BOM) 7. ON APPEAL BY THE ASSESSEE LEARNED CIT(A) HELD T HAT THE ASSESSEE WAS ENTITLED TO CLAIM DEPRECIATION. THE ASSESSEE BE FORE THE LEARNED CIT(A) HAD SUBMITTED THAT UP TO 29.3.1996 MEG PLANT WAS O PERATIONAL AND THIS FACT IS NOT IN DISPUTE. THE ASSESSEE ALSO SUBMITTE D THAT NOTE OF THE AUDITORS REFERRED TO BY THE ASSESSING OFFICER WAS ONLY WITH REGARD TO THE ASSESSEE NOT HAVING CLAIMED DEPRECIATION UNDER COMP ANIES ACT AND THAT IT HAS NOTHING TO DO WITH THE CLAIM OF DEPRECIATION UNDER I.T. ACT. THE ASSESSEE FURTHER SUBMITTED THAT THE THERE WAS PRODU CTION FROM MEG PLANT AND SALE OF THE SAME AND THEREFORE THE ASSESS EE SATISFIED TEST OF USER OF PLANT AND MACHINERY; AND THEREFORE ENTITLE D TO CLAIM DEPRECIATION. LEARNED CIT(A) ACCEPTED SUBMISSION O F THE ASSESSEE OBSERVING AS FOLLOWS :- THE ABOVE SUBMISSIONS OF LEARNED AR HAVE BEEN CONS IDERED CAREFULLY. I HAVE ALSO GONE THROUGH THE ASSESSMENT ORDER AND REMAND REPORT SUBMITTED BY THE ASSESSING OFFICER. T HE ASSESSING OFFICER HAS CONFIRMED THAT RELEVANT DETAILS I.E. BI LLS AND VOUCHERS FOR ADDITION TO THE PLANT AND MACHINERY IN MEG PLAN T HAVE BEEN FILED BEFORE HIM. IT IS FURTHER SEEN THAT THERE WER E TRAIL RUNS DURING THE PRECEDING YEARS OF HIS PLANT. AS PER DATA FURNI SHED BY THE ASSESSEE PRODUCTION HAS ALSO TAKEN PLACE IN THE ME G PLANT. HOWEVER THE WHOLE PLANT HAS BEEN CAPITALIZED AND C OMMENCED DURING THE YEAR ONLY. CONSIDERATION THESE FACTS I AM OF THE OPINION THAT THE APPELLANT IS ENTITLED FOR THE DEPR ECIATION TO THE TUNE OF RS. 29 38 40 912/- ON THE MEG PLANT. ACCORD INGLY I DIRECT THE ASSESSING OFFICER TO ALLOW THE SAID DEPRECIATIO N OF RS. 29 38 40 912/- FOR A.Y.1999-2000 TO THE ASSESSEE. 8. AGGRIEVED BY THE ORDER OF LEARNED CIT(A) THE RE VENUE HAS RAISED GROUND NO. 1 BEFORE THE TRIBUNAL. 9. THE FOLLOWING FACTS ARE NOT IN DISPUTE BEFORE US . THE ASSESSEE WANTED TO CARRY OUT MAJOR MODIFICATION TO MEG PLANT . IT TREATED ALL COSTS M/S. S.M. DYECHEM LIMITED 6 INCURRED IN DOING SO TO WORK IN PROGRESS ACCOUNT. T HE UNIT STATED TRIAL PRODUCTION IN F.Y. 1993-94. TRIAL PRODUCTION WAS C ARRIED OUT UP TO F.Y. 1997-98 RELEVANT TO A.Y. 1998-99. ON 29.3.1996 THE MEG DIVISION WAS CLOSED. THUS ADMITTEDLY THERE WAS NO USE OF THE A SSETS OF MEG UNIT DURING THE PREVIOUS YEAR RELEVANT TO A.Y. 1999-2000 . IN A.Y. 1999-2000 THE ASSESSEE CAPITALIZED THE VALUE OF WORK-IN-PROGR ESS ACCOUNT OF MEG UNIT AND CLAIMED DEPRECATION. THUS THE ASSESSEE TI LL SUCH CAPITALIZATION HAD TREATED THE LINE OF BUSINESS AS NOT HAVING BEEN SET UP. WE DO NOT FIND ANY SPECIAL REASONS FOR THE ASSESSEE HAVING CA PITALIZED THE VALUE OF WORK-IN-PROGRESS OF MEG UNIT DURING THE PREVIOUS YE AR. THE ASSESSING OFFICER HAS NOT DISPUTED THIS ASPECT AND HAS ONLY P ROCEEDED ON THE BASIS THAT THE ASSETS OF MEG UNIT WERE NOT PUT TO USE AND THEREFORE DEPRECAINO CANNOT BE ALLOWED. 10. THE ISSUE THAT NOW REQUIRES DETERMINATION BY TH E TRIBUNAL IS AS TO WHETHER DEPRECIATION CAN BE ALLOWED OR NOT. WE MAY ALSO CLARIFY THAT DURING THE PREVIOUS YEAR THERE WAS NO PRODUCTION W HATSOEVER IN THE MEG PLANT. THERE WAS ONLY SALE OF 3 MTS OF PRODUCTI ON AND THIS WAS THE CLOSING STOCK OF A.Y. 1998-99. FACTUALLY THERE IS N O DISPUTE THAT UP TO A.Y. 1998-99 THERE WAS PRODUCTION THOUGH QUANTITY PRODUCED WAS VERY INSIGNIFICANT. ANOTHER ASPECT WHICH NEEDS TO BE TAK EN NOTE OF IS THE FACT THAT MEG DIVISION REMAINED CLOSED. IT IS NOT THE AS SESSEES CASE THAT THE MEG DIVISION WAS ONLY TEMPORARY CLOSED OR THAT IT W AS REVIVED LATER. IN FACT THE COMPANY BECAME SICK AND PROCEEDINGS WERE PENDING BEFORE THE BIFR UNDER THE SICK INDUSTRIAL COMPANIES (SPECIAL P ROVISIONS) ACT 1985. ON THE ISSUE OF ALLOWING DEPRECIATION DECISION OF HON'BLE SUPREME COURT IN THE CASE OF LIQUIDATORS OF PURSA LIMITED VS. CIT 25 ITR 265 HAD BEEN RELIED UPON BOTH BY LEARNED DR AND LEARNED COUNSEL FOR THE ASSESSEE. THE FACTS OF THE AFORESAID CASE WAS AS FOLLOWS. TH E ASSESSEE WAS A GROWER MANUFACTURER AND DEALER IN SUGAR. THE DISPU TE RELATED TO A.Y. 1945-46 RELEVANT TO ACCOUNTING YEAR OF THE ASSESSEE BETWEEN 1.10.1943 TO 30.9.1944. THE ASSESSEES SHAREHOLDERS AND DIREC TORS WERE RESIDENT OF UK. THERE WAS AN OFFER TO PURCHASE THE ENTIRE BUSIN ESS OF THE ASSESSEE M/S. S.M. DYECHEM LIMITED 7 MADE ON 16.8.43. ON 8.10.43 THE OFFER WAS ACCEPTE D BY THE SHAREHOLDER IN AN EXTRA ORDINARY GENERAL MEETING. ON 7.12.1943 AN AGREEMENT FOR SALE WAS ENTERED INTO WITH THE PURCHASER. ON 10.12. 1943 THE FACTORY TOGETHER WITH THE MACHINERY WAS SOLD AND SALE PROCE EDS RECEIVED. THERE WAS NO DISPUTE THAT THE PLANT AND MACHINERY WAS NOT PUT TO USE BY THE ASSESSEE DURING THE ACCOUNTING YEAR. ON 20.6.1945 THE ASSESSEE WENT INTO VOLUNTARY LIQUIDATION. THE ASSESSING OFFICER A DDED TO TAX THE RECEIPTS ON SALE AS BUSINESS INCOME. UNDER SECTION 10(1) OF THE ACT 1922 PROFITS AND GAINS OF BUSINESS CARRIED ON BY AN ASSESSEE WER E LIABLE TO BE TAXED INCOME FROM BUSINESS. U/S. 10(2)(VII) THE DIFFEREN CE BETWEEN THE WDV OF PLANT AND MACHINERY USED IN THE BUSINESS AND THE SA LE VALUE WAS ALLOWED AS A DEDUCTION WHILE COMPUTING TAXABLE PROF ITS OF THE BUSINESS. UNDER THE SECOND PROVISO TO SEC.10(2)(VII) IF THE S ALE VALUE EXCEED THE WDV OF THE PLANT OR MACHINERY SUCH EXCESS WAS TAXAB LE AS PROFITS OF BUSINESS. THE COURT HELD THAT THERE WAS NO BUSINES S CARRIED ON BY THE ASSESSEE DURING THE PREVIOUS YEAR. THERE WAS EXCESS OF SALE PROCEEDS OF MACHINERY OVER THE WDV. THE QUESTION WAS WHETHER TH E SAME CAN BE TAXED AS BUSINESS PROFITS UNDER SECOND PROVISO TO S ECTION 10(2)(VII) OF THE ACT OF 1922. THE ARGUEMENT OF THE ASSESSEE WAS THA T SINCE THERE WAS NO BUSINESS CARRIED ON BY THE ASSESSEE DURING THE PREV IOUS YEAR THERE WAS NO USE OF THE PLANT AND MACHINERY AND THEREFORE NO DEPRECATION COULD BE CLAIMED. THE ASSESSEE SUBMITTED THAT SECOND PROVISO TO SECTION 10(2)(VIII) WILL APPLY ONLY WHEN DEPRECIATION IS CLAIMED OR ALL OWABLE ON THE PLANT AND MACHINERY THAT IS SOLD AND WHICH GIVES RAISE TO PROFIT TAXABLE UNDER SECOND PROVISO TO SECTION 10(2)(VII). IT IS IN THAT CONTEXT THE HON'BLE SUPREME COURT HELD THAT USER IS NECESSARY TO CLAIM DEPRECIATION. THE HON'BLE COURT IN THE SAID DECISION ALSO RECOGNIZED THE CONTROVERSY EXISTING REGARDING THE MEANING OF THE WORD USED T O INCLUDE BOTH ACTIVE AND PASSIVE USE BUT DID NOT EXPRESS ANY OPINION ON THE SAME. AFORESAID DECISION OF HON'BLE SUPREME COURT HAD BEEN CONSIDER ED BY HON'BLE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT VS . PICCADILY AGRO INDUSTRIES LTD. 311 ITR 24 (P&H). HON'BLE P&H HIGH COURT HELD THAT M/S. S.M. DYECHEM LIMITED 8 EVEN TRIAL PRODUCTION WOULD AMOUNT TO USE OF MACHIN ERY FOR THE PURPOSE OF BUSINESS AND THE ASSESSEE WOULD BE ENTITLED TO C LAIM DEPRECIATION. HON'BLE GUJARAT HIGH COURT IN THE CASE OF ACIT VS. ASHIMA SYNTEX LTD. 251 ITR 133 (GUJ) HAS HELD THAT THE TERM USE HAS WIDE CONNOTATION EVEN TRIAL PRODUCTION OF MACHINERY WOULD FALL WITHI N THE AMBIT OF USE FOR THE PURPOSE OF BUSINESS. LEARNED COUNSEL FOR THE A SSESSEE ALSO RELIED ON THE DECISION OF HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. CHAMANDESWARI SUGAR LTD. (2009) 21 DTR 175 (KAR) W HEREIN IT WAS HELD THAT IN A CASE WHERE THERE WAS NON USER OF ASS ET OWING TO DEFECT AND THEREFORE NON-FUNCTIONAL IT CANNOT BE SAID THAT TH ERE WAS NO USER OF THE MACHINERY. LEARNED COUNSEL FOR DEPARTMENT HOWEVE R PLACED RELIANCE ON THE DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF DINESHKUMAR GULABCHAND AGARWAL VS. CIT 267 ITR 768 (BOM); WHEREIN HON'BLE BOMBAY HIGH COURT HELD THAT KEEPING AN ASSE T READY FOR USE WOULD NOT AMOUNT TO ACTUAL USER OF MACHINERY AND AS SESSEE WOULD NOT BE ENTITLED TO DEPRECIATION. ANOTHER DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF B. MALANI & CO. VS. CIT 214 I TR 192 (BOM) WAS ALSO RELIED UPON BY LEARNED DR. THIS WAS A CASE WHERE TH E ISSUE WAS WITH REGARD TO ALLOWING DEPRECATION ON MACHINERY WHICH WAS INSTALLED DURING THE PREVIOUS YEAR WHICH WAS NEITHER USED IN THE YE AR OF INSTALLATION NOR IN THE IMMEDIATELY SUCCEEDING YEAR. THE ISSUE WAS W ITH REGARD TO ALLOWING INITIAL DEPRECATION. IN THAT CONTEXT HON' BLE BOMBAY HIGH COURT HELD THAT IF THERE IS GAP OF MORE THAN ONE CLEAR P REVIOUS YEAR BETWEEN INSTALLATION OF MACHINERY AND ITS USER NO DEPRECAT ION CAN BE CLAIMED. LEARNED DR ALSO RELIED ON THE DECISION IN THE CASE OF CENTRAL PROVINCES MANGANESE ORE CO. LTD. VS. CIT 5 ITR 734 (NAG) AND CIT VS. JIWAJI RAO SUGAR CO. LTD. 71 ITR 319 (MP). IN BOTH THE DECISI ONS THE HON'BLE HIGH COURT EXPRESSED THE VIEW THAT THERE MUST BE ACTUAL USER OF ASSETS TO CLAIM ALLOWANCE OF DEPRECIATION. 11. IT CAN BE SEEN FROM THE ABOVE DECISIONS RELIED UPON BY LEARNED DR AND THE LEARNED COUNSEL FOR THE ASSESSEE THAT TO AL LOW A CLAIM FOR M/S. S.M. DYECHEM LIMITED 9 DEDUCTION ON ACCOUNT OF DEPRECIATION THE ASSET HAS TO BE USED FOR THE PURPOSE OF BUSINESS. SUCH USER CAN BE EITHER ACTIVE /REAL USE OR PASSIVE USE. PASSIVE USE CAN AGAIN BE EITHER VOLUNTARY OR I NVOLUNTARY. IT WILL BE VOLUNTARY WHERE DUE TO BUSINESS EXIGENCIES SAY LACK OF DEMAND AN ASSESSEE MAY DECIDE NOT TO USE THE MACHINERY FOR A CERTAIN TIME. IN SUCH A SITUATION COURTS HAVE GONE BY THE INTENTION WHETH ER THE NON-USER IS TEMPORARY OR PERMANENT. IN CASE THE NON-USER IS ON LY TEMPORARY IT WAS CONSIDERED AS PASSIVE USER. IN A CASE WHERE DUE TO NON-AVAILABILITY OF RAW MATERIAL AN ASSESSEE DOES NOT USE MACHINERY THAT WI LL BE A CASE WHERE NON-USER IS INVOLUNTARY. EVEN IN SUCH CASES COURTS HAVE TAKEN THE VIEW THAT THERE IS A PASSIVE USE AND THEREFORE DEPRECATI ON HAS TO BE ALLOWED. IN CASE WHERE TRAIL PRODUCTION COMMENCES IT HAS BE EN CONSIDERED AS ACTUAL USER AND CLAIM FOR DEPRECIATION HAS BEEN ALL OWED. 12. THE FACTS OF THE PRESENT CASE HOWEVER ARE VER Y PECULIAR. THE ASSESSEE STARTED TRIAL PRODUCTION IN A.Y. 1994-95. UPTO A.Y. 1997-98 THERE WAS TRIAL PRODUCTION. IN A.Y. 1994-95 THE TR IAL PRODUCTION WAS 9429 MT. IN (A.Y. 1995-96 1996-97) IT WAS 22319 MT . IN A.Y. 1997-98 IT DECREASED AND WAS ONLY 3430 MT. IN A.Y. 1998-99 THERE WAS PRODUCTION OF JUST 5 MT. IN A.Y. 1999-2000 THERE W AS NO PRODUCTION. THE ASSESSEE DECIDED TO ABANDON THE MEG PLANT AS EA RLY AS 29.3.1996. THE ASSESSEE DID NOT CAPITALIZE THE VALUE OF THE PL ANT IN ITS BOOKS OF ACCOUNT AND HAD SHOWN IT AS ONLY WORK-IN-PROGRESS. IT IS ONLY IN A.Y. RELEVANT TO A.Y. 1999-2000 THE ASSESSEE CAPITALIZE D THE VALUE OF WORK-IN- PROGRESS AND CLAIMED DEPRECATION. DURING THE PREVIO US YEAR THERE WAS NO ACTIVE/REAL USE. IT CANNOT BE SAID THAT THERE WA S PASSIVE USER EITHER VOLUNTARY OR INVOLUNTARY. THERE ARE NO FACTS OR PLE A BY THE ASSESSEE ON THE BASIS OF WHICH IT CAN BE SAID THAT THE VOLUNTA RY NON-USER CAN BE CONSIDERED AS A PASSIVE USER EVEN IF ONE WERE TO AP PLY THE LIBERAL INTERPRETATION OF THE EXPRESSION USED FOR THE PURP OSE OF BUSINESS OF THE ASSESSEE. THE LEARNED CIT(A) HAS GONE BY THE FACT THAT THERE WAS USER OF THE PLANT IN THE PAST AND ALLOWED THE CLAIM OF THE ASSESSEE. IN OUR VIEW M/S. S.M. DYECHEM LIMITED 10 LEARNED CIT(A) HAS ERRED IN DOING SO. IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE PRESENT CASE WE ARE OF THE V IEW THAT THERE WAS NEITHER AN ACTUAL USER NOR PASSIVE USER OF THE MACH INERY/PLANT AND THEREFORE THE CLAIM OF THE ASSESSEE OUGHT NOT TO HA VE BEEN ALLOWED. WE THEREFORE REVERSE THE ORDER OF LEARNED CIT(A) ON TH IS ISSUE AND RESTORE THE ORDER OF THE ASSESSING OFFICER. GROUND NO. 1 OF THE REVENUE IS ALLOWED. 13. GROUND NO. 2 RAISED BY THE REVENUE READS AS FOL LOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW LEARNED CIT(A) ERRED IN ALLOWING THE BAD DEBTS TO THE TUNE OF RS. 3.43 LAKHS WITHOUT APPRECIATING THE FACTS OF THE ISSUE. 14. ACCORDING TO THE REVENUE TO CLAIM DEDUCTION ON ACCOUNT OF BAD DEBTS IT WAS NECESSARY EVEN AFTER THE AMENDMENT T O THE PROVISIONS OF SECTION 36(1)(VII) OF THE ACT THAT THE ASSESSEE SHO ULD ESTABLISH THAT THE DEBTS WRITTEN OFF AS BAD HAS IN FACT BECOME BAD. TH IS ISSUE IS NO LONGER RES INTEGRA AND IT HAS BEEN HELD BY THE SPECIAL BEN CH OF THE ITAT IN THE CASE OF OMAN INTERNATIONAL BANK SAOG 100 ITD 285 ( SB) THAT AFTER THE AMENDMENT TO PROVISIONS OF SECTION 36(1)(VII) W.E.F . 1.4.1989 IT HAS NO LONGER THAT THE ASSESSEE TO PROVE THAT THE DEBTS WR ITTEN OFF BY HIM IS INDEED HAS BECOME BAD DEBTS AND MERE WRITE OFF WOUL D BE SUFFICIENT TO CLAIM DEDUCTION. THE ABOVE VIEW OF THE SPECIAL BENC H HAS ALSO BEEN APPROVED BY HON'BLE BOMBAY HIGH COURT. IN VIEW OF T HE ABOVE THERE IS NO MERIT IN GROUND NO. 2 RAISED BY THE REVENUE AND THE SAME IS DISMISSED. 15. GROUND NO. 3 RAISED BY THE REVENUE READS AS FOL LOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW LEARNED CIT(A) ERRED IN DELETING THE DISALLOWANCE OF UNUTIL IZED MODVAT CREDIT OF RS. 74 641/- BEING THE DIFFERENCE OF THE MODVAT IN OPENING BALANCE AND CLOSING BALANCE AND CLOSING BAL ANCE ON THE BASIS OF THE AMENDMENT INSERTED U/S. 145A W.E.F. 1. 4.1999. 16. WHILE VALUING CLOSING STOCK THE ASSESSING OFFI CER ADDED UNUTILIZED MODVAT CREDIT OF RS. 2 87 741/- INVOKING PROVISIONS OF SECTION 145A OF M/S. S.M. DYECHEM LIMITED 11 THE ACT. ON APPEAL BY THE ASSESSEE LEARNED CIT(A) DIRECTED THAT UNUTILIZED MODVAT CREDIT IN OPENING STOCK OF 212 10 0 IS ALSO REQUIRED TO BE ADJUSTED. AS A RESULT OF THE DIRECTION OF LEARNE D CIT(A) ADDITION MADE BY THE ASSESSING OFFICER STOOD REDUCED TO RS. 74 64 1/-. WE ARE OF THE VIEW THAT THIS DIRECTION OF LEARNED CIT(A) IS IN AC CORDANCE WITH THE LAW LAID DOWN BY HON'BLE DELHI HIGH COURT IN THE CASE O F MAHAVIR ALLUMINIUM LTD. 297 ITR 77 (DEL). HENCE GROUND NO. 3 RAISED BY THE REVENUE IS DISMISSED. 17. GROUND NO. 4 RAISED BY THE REVENUE READS AS FOL LOWS :- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN L AW LEARNED CIT(A) ERRED IN DELETING THE ADDITION OF RS. 2.68 L AKHS ON ACCOUNT OF PREMIUM ON REDEMPTION OF DEBENTURES. 18. IT IS NOT IN DISPUTE BEFORE US THAT THIS ISSUE HAD COME UP FOR CONSIDERATION IN ASSESSEES OWN CASE IN A.Y. 1995-9 6 1997-98 & 1998- 99 AND THIS TRIBUNAL IN ITA NO. 361/MUM/03 5535/MU M/01 AND 4024/MUM/02 HAS HELD THAT PREMIUM ON REDEMPTION OF DEBENTURE HAS TO BE ALLOWED AS A DEDUCTION. THE TRIBUNAL FOLLOWED THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF MADRAS INDUSTR IAL INVESTMENT DEVELOPMENT CORPORATION VS. CIT 225 ITR 802 (SC) I N COMING TO THE CONCLUSION THAT THE PREMIUM PAID ON REDEMPTION OF D EBENTURES HAS TO BE ALLOWED AS A DEDUCTION. IN VIEW OF THE ABOVE THERE IS NO MERIT IN GROUND NO. 4 OF THE REVENUE AND THE SAME IS DISMISSED. 19. IN THE RESULT APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER HAS BEEN PRONOUNCED ON 30 TH DAY OF APRIL 2010. SD/- (S.V. MEHROTRA) ACCOUNTANT MEMBER SD/- (N.V. VASUDEVAN) JUDICIAL MEMBER DATED : 30 TH APRIL 2010 COPY TO : 1. THE ASSESSEE 2. THE RESPONDENT 3. THE CIT(A)-CONCERNED. M/S. S.M. DYECHEM LIMITED 12 4. THE CIT CONCERNED. 5. THE DR CONCERNED MUMBAI 6. GUARD FILE BY ORDER TRUE COPY ASSTT. REGISTRAR ITAT MUMBAI PS