The DCIT, Central Circle, Vijayawada v. M/s KCP Ltd., Chennai

ITA 629/VIZ/2002 | 1997-1998
Pronouncement Date: 19-03-2010 | Result: Partly Allowed

Appeal Details

RSA Number 62925314 RSA 2002
Bench Visakhapatnam
Appeal Number ITA 629/VIZ/2002
Duration Of Justice 7 year(s) 5 month(s) 26 day(s)
Appellant The DCIT, Central Circle, Vijayawada
Respondent M/s KCP Ltd., Chennai
Appeal Type Income Tax Appeal
Pronouncement Date 19-03-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted DB
Tribunal Order Date 19-03-2010
Assessment Year 1997-1998
Appeal Filed On 23-09-2002
Judgment Text
PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV JUDICIAL MEMBER AND SHRI BR BASKARAN ACCOUNTANT MEMBER ITA NO.629/VIZAG/2002 ASSESSMENT YEAR: 1997-98 DCIT CENTRAL CIRCLE VS. THE KCP LTD. VIJAYAWADA CHENNAI ITA NO.763/VIZAG/2004 ASSESSMENT YEAR: 2000-01 ACIT CENTRAL CIRCLE VS. THE KCP LTD. VIJAYAWADA CHENNAI APPELLANT BY: SHRI SUBRATA SARKAR CIT (DR) RESPONDENT BY: SHRI C. SUBRAHMANYAM CA ORDER PER BENCH : THESE TWO APPEALS OF THE REVENUE ARE DIRECTED AGAI NST THE ORDER PASSED BY THE LD CIT (A) AND THEY RELATE TO THE ASS ESSMENT YEARS 1997-98 AND 2000-01. SINCE SOME OF THE ISSUES ARE COMMON IN NATURE WE FIND IT CONVENIENT TO DISPOSE THESE TWO APPEALS BY THIS COMMON ORDER. 2. THE REVENUE IS IN APPEAL WITH REGARD TO THE FOLL OWING ISSUES IN THE APPEAL FILED FOR THE ASSESSMENT YEAR 1997-98: A) MODERNIZATION OF PLANT & MACHINERY RS. 55 00 0/- B) INTEREST PAYABLE TO STATE TRADING CORPORATION-RS .5 76 000/- C) INTEREST RELATING TO HYDEL PROJECT -- RS.2 83 54 097/- 2.1 THE REVENUE IS IN APPEAL IN RESPECT OF THE FOLL OWING ISSUES IN THE APPEAL FILED FOR THE ASSESSMENT YEAR 2000-01: A) AFFORESTATION FEE PAID TO THE FOREST DEPARTMENT PAGE 2 OF 8 B) LIQUIDATED DAMAGES CLAIMED BY THE ASSESSEE. C) INTEREST ON MONEYS BORROWED FOR ESTABLISHING HYDE L POWER PROJECT 3. THE FIRST ISSUE RELATES TO THE RELIEF OF RS.55 0 00/- GIVEN BY THE LD CIT(A) OUT OF THE MODERNIZATION EXPENDITURE INCU RRED BY THE ASSESSEE. THE ASSESSEE INCURRED EXPENDITURE OF RS. 96 05 749/- TOWARDS MODERNIZATION OF ITS MACHINERIES IN THE CEM ENT DIVISION I.E. IN THE RAMAKRISHNA CEMENT UNIT AND CLAIMED THE SAME AS CURRENT REPAIRS U/S 31(1) OF THE ACT. THE ASSESSING OFFICER DID NO T ACCEPT THE CLAIM OF THE ASSESSEE AND ADDED THE SAME TO THE TOTAL INCOME . BEFORE THE LD CIT (A) THE ASSESSEE AGREED TO THE DISALLOWANCE OF THE EXPENDITURE EXCEPT FOR A SUM OF RS.55 000/- RELATING TO THE COS T OF IMPACT CRUSHER. THE ASSESSEE CLAIMED THE SAME AS REVENUE EXPENDITUR E ON THE GROUND THAT (A) IT HAD TO REPLACE THE OLD CRUSHER AS THE SAME WAS NOT GIVING UNIFORM SIZE OF LIMESTONE. (B) NO ADDITIONAL PRODUC TION CAPACITY WAS ACHIEVED (C) THE SAID EXPENDITURE WAS INCURRED TO I MPROVE THE EFFICIENCY ON PROFIT EARNING CAPACITY. IN THAT REG ARD THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE ITAT CHENNAI BENCH IN THE CASE OF MADRAS CEMENTS LTD. VS. DCIT (42 TTJ 175). ACCE PTING THE CONTENTIONS OF THE ASSESSEE THE LD CIT (A) ALLOWED THE CLAIM OF THE ASSESSEE. 3.1 THE REVENUE NOW SUBMITS BEFORE US THAT THE DECISION OF THE CHENNAI ITAT BENCH IN THE CASE OF MADRAS CEMENTS LT D. CITED ABOVE HAS BEEN REVERSED BY THE HONBLE MADRAS HIGH COURT AND THE SAME IS REPORTED IN 255 ITR 243. ACCORDINGLY IT WAS CONTEN DED THAT THE DECISION OF LD CIT(A) NEEDS TO BE REVERSED AS THE F IRST APPELLATE AUTHORITY HAS RELIED UPON THE DECISION OF THE ITAT CHENNAI WHICH IS NO LONGER A GOOD LAW. IT WAS ALSO BROUGHT TO OUR NOT ICE THAT IN THE ASSESSEES OWN CASE RELATING TO THE ASSESSMENT YEAR 1996-97 IN ITA NO.178/VIZAG/2002 AND NO.233/VIZAG/2002 THIS BENC H OF TRIBUNAL VIDE ITS ORDER DATED 31-07-2008 HAD SET ASIDE A SI MILAR ISSUE TO THE FILE PAGE 3 OF 8 OF THE AO FOR FRESH CONSIDERATION IN VIEW OF THE DE CISION OF THE HONBLE SUPREME COURT IN THE CASE OF SARAVANA SPINNING MILL S (P) LTD. (2007 293 ITR 201). SINCE THE ISSUE BEFORE US IS ALSO I DENTICAL WITH THE ISSUE RELATING TO THE ASSESSMENT YEAR 1996-97 WE THINK I T PROPER TO SET ASIDE THIS ISSUE ALSO TO THE FILE OF THE AO IN ORD ER TO ENABLE HIM TO MAKE A HARMONIOUS DECISION. ACCORDINGLY THE ISSUE BEFORE US IS SET ASIDE TO THE FILE OF AO WITH A DIRECTION TO CONSIDE R THE ISSUE AFRESH IN ACCORDANCE WITH THE LAW AFTER AFFORDING NECESSARY O PPORTUNITY OF BEING HEARD TO THE ASSESSEE. 4. THE NEXT ISSUE RELATES TO THE ADDITION ON ACCOUN T OF INTEREST PAYABLE TO STATE TRADING CORPORATION (STC). THE ASS ESSEE COMPANY HAS BEEN MAKING PROVISIONS FOR THE INTEREST PAYABLE TO THE STATE TRADING CORPORATION AS PER THE ORDER PASSED BY THE HONBLE SUPREME COURT. A SUM OF RS.48.00 LAKHS WAS PAYABLE BY THE ASSESSEE TO STC ON WHICH THE ASSESSEE WAS MAKING PROVISION EVERY YE AR TOWARDS INTEREST PAYABLE WHICH IS CALCULATED @ 12% PER ANNU M. IT WAS BROUGHT TO OUR NOTICE THAT IN THE ASSESSEES OWN CA SE RELATING TO THE ASSESSMENT YEAR 1996-97 REFERRED SUPRA SIMILAR DIS ALLOWANCE MADE BY THE AO WAS DELETED BY THE ITAT BY FOLLOWING THE DE CISION OF ITAT HYDERABAD IN ASSESSEES OWN CASE IN ITA NO.834/H/89 . FROM THE ORDER OF THE LD CIT(A) WE NOTICE THAT THE LD CIT ( A) HAS FOLLOWED THE DECISION OF ITAT HYDERABAD BENCH IN THIS REGARD AND HENCE WE DO NOT FIND ANY REASON TO INTERFERE WITH HIS DECISION ON T HIS ISSUE. 5. THE LAST ISSUE IN BOTH THE APPEALS RELATE TO THE INTEREST PAID ON MONEY BORROWED FOR ESTABLISHING THE HYDEL PROJECT. THE AO DISALLOWED THE CLAIM OF THE ASSESSEE TREATING THE HYDEL PROJEC T AS A NEW LINE OF BUSINESS. IN THE ASSESSEES OWN CASE RELATING TO THE ASSESSMENT YEAR 1996-97 (ORDER DATED 31-07-2008 PASSED IN THE CASE OF THE ASSESSEE HEREIN IN ITA NO.178/V/2002 AND ITA NO.233/V/2002) SIMILAR PAGE 4 OF 8 DISALLOWANCE OF INTEREST HAS BEEN DELETED BY THIS B ENCH OF TRIBUNAL. THE RELEVANT OBSERVATIONS OF BENCH ARE EXTRACTED BE LOW: 10.1 WE HEARD THE PARTIES. INTEREST ON BORROWED CA PITAL IS ALLOWED U/S 36(1)(III) OF THE INCOME TAX ACT. TH E HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. RAJEEV LOCHAN KANORIA 208 ITR 616 HAS OBSERVED THA T THE ONLY ENQUIRY THAT IS TO BE MADE IS WHETHER THE PAYMENT OF INTEREST WAS IN RESPECT OF CAPITAL BORRO WED FOR THE PURPOSE OF ASSESSEES BUSINESS. IN THIS CONNECTION IT IS PERTINENT TO NOTE THE FOLLOWING OBSERVATIONS OF THE LD CIT (A): ADMITTEDLY IN THE CASE ON HAND THE CAPITAL WAS BORROWED FOR THE PURPOSE OF SETTING UP OF A HYDEL PROJECT FOR GENERATION OF POWER FOR CAPTIVE CONSUMPTION AS A BACKWARD INTEGRATION AND THEREFORE IT WAS FOR THE PURPOSE OF BUSINESS AND CONSEQUENTLY THE INTEREST COST INCURRED THEREON IS TO BE ALLOWED AS DEDUCTION FROM ITS BUSINESS PROFITS. HENCE THERE IS A CLEAR FINDING THAT THE HYDEL PROJE CT IS MEANT FOR GENERATION OF POWER FOR CAPTIVE CONSUMPTI ON AND HENCE IT CANNOT BE TAKEN AS A NEW PROJECT. SINC E THE DECISION OF LD CIT (A) IS IN ACCORDANCE WITH TH E SETTLED LAW WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD CIT (A). SINCE THE DECISION RENDERED BY LD CIT (A) IS IN ACC ORDANCE WITH THE DECISION OF THIS TRIBUNAL CITED ABOVE WE DO NOT FI ND ANY REASON TO INTERFERE WITH THE SAME. 6. THE FIRST ISSUE IN THE APPEAL RELATING TO THE AS SESSMENT YEAR 2000-01 RELATES TO THE CLAIM OF RS.25.00 LAKHS PAID TO THE FOREST DEPARTMENT AS AFFORESTATION FEE. THE ASSESSEE COMPA NY OBTAINED LICENSE FROM THE MINING DEPARTMENT TO EXCAVATE LIME STONE FROM THE FOREST LANDS BELONGING TO THE GOVERNMENT. THE LIME STONE IS THE MAIN RAW MATERIAL FOR THE PRODUCTION OF CEMENT. SINCE T HE EXISTING FOREST COVER WOULD BE DESTROYED IN CARRYING OUT THE MINING PROCESS THE MINING DEPARTMENT COLLECTED RS.25.00 LAKHS FROM THE ASSESSEE PAGE 5 OF 8 COMPANY TOWARDS COST OF AFFORESTATION. THE ASSESSE E CLAIMED THE ABOVE SAID PAYMENT AS REVENUE EXPENDITURE. HOWEVER THE AO BY PLACING THE RELIANCE ON THE DECISION OF THE HONBLE ANDHRA PRADESH HIGH COURT IN THE CASE OF CHINTALAPUDI RANGANAYAKUL U VS. CIT (51 ITR 276) TREATED THE SAME AS CAPITAL EXPENDITURE AND A CCORDINGLY DISALLOWED THE CLAIM OF THE ASSESSEE. BEFORE THE L D CIT(A) THE ASSESSEE CONTENDED THAT THE DECISION OF ANDHRA PRAD ESH HIGH COURT RELIED ON BY THE AO IS DISTINGUISHABLE. IT WAS SUBMI TTED THAT IN THE CASE CITED ABOVE THE ASSESSEE THEREIN PAID MONEY FOR SH ORT LEASE FOR MINING OF IRON ORE AND ALSO COMPENSATION FOR LOSS OF CROP. HENCE THE MONEY PAID FOR LEASE OF LAND AS WELL AS THE COMPENSATION PAID FOR LOSS OF CROP WAS HELD AS CAPITAL EXPENDITURE. HOWEVER IN THE I NSTANT CASE THE ASSESSEE HAS TAKEN FOREST LAND FROM THE GOVERNMENT FOR THE PURPOSE OF MINING THE LIME STONE. THE ASSESSEE IS LIABLE TO P AY ROYALTY TO THE GOVERNMENT FOR EXCAVATION OF LIME STONE. SINCE THE LAND IS A FOREST LAND AND IN THE PROCESS OF MINING THE FOREST GETS D EPLETED THE GOVERNMENT HAS ASKED FOR COMPENSATION FOR MEETING T HE COST OF AFFORESTATION AND HENCE THE SAID PAYMENT IS REVENUE EXPENDITURE. THE LD CIT (A) RELIED UPON THE FOLLOWING DECISIONS TO D ECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE: A) ARUNACHAL PRADESH FOREST CORPORATION LTD. VS. CIT 228 ITR 390 (GAU) B) DY.COMMISSIONER OF INCOME-TAX VS. HINDUSTAN ZINC LTD . 77 TTJ 334 C) BIKANER GYPSUMS LTD. VS. CIT (SC) 187 ITR 39. 6.1 WE HAVE HEARD THE RIVAL CONTENTIONS ON THIS ISS UE. IN THE CASE OF ARUNACHAL PRADESH FOREST CORPORATION LTD. SUPRA T HE ASSESSEE THEREIN TOOK LEASE OF FOREST LAND. IN ORDER TO COMPENSATE THE TREES WHICH ARE CUT DOWN THE ASSESSEE REPLANTED SAPLINGS OF TREES AT VACANT PLACES PURSUANT TO THE TERMS OF LEASE. THE FRUITS OF REPL ANTATION WOULD NOT BE ENJOYED BY THE ASSESSEE. HENCE THE HONBLE GUAHATI HIGH COURT HELD IT PAGE 6 OF 8 TO BE REVENUE EXPENDITURE. IN THE CASE OF BIKANER GYPSUM LTD. REFERRED SUPRA THE HONBLE SUPREME COURT HELD THAT THE AMOUNTS SPENT ON REMOVAL OF RESTRICTIONS WHICH OBSTRUCTED T HE CARRYING OF BUSINESS OF THE MINING WITHIN A PARTICULAR AREA IN RESPECT OF WHICH THE APPELLANT HAD ALREADY OCCURRED MINING RIGHTS IS AN EXPENDITURE OF REVENUE IN NATURE. IN THE INSTANT CASE ALSO THE ASS ESSEE HAD ACQUIRED MINING RIGHTS OVER THE FOREST LAND. IT IS WELL KNO WN FACT THAT IN THE PROCESS OF MINING THE EXISTING FOREST WOULD GET DE PLETED. HENCE IN ORDER TO MAKE GOOD THE LOSS OF FOREST TREES THE GO VERNMENT HAS TO GROW TREES IN NEW AREAS HENCE THE IMPUGNED COMPENS ATION OF RS.25.00 LAKHS WAS DEMANDED FROM THE ASSESSEE. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE COULD NOT CARRY ON THE MININ G OPERATIONS WITHOUT MAKING THE SAID PAYMENT. FURTHER THE ASSESSEE IS N OT GOING TO ENJOY THE FRUITS OF THE NEW FOREST TO BE CREATED BY THE G OVERNMENT. THE EXISTING FOREST COVER IS A RESTRICTION WHICH HAS OB STRUCTED THE CARRYING THE BUSINESS OF MINING AND HENCE THE AMOUNT SPENT F OR THE REMOVAL OF THE SAME WOULD CONSTITUTE THE REVENUE EXPENDITURE AS PER THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F BIKANER GYPSUM REFERRED SUPRA. IN THE CASE OF CHINTALAPUDU RANGAN AYAKULU WHICH IS RELIED UPON BY THE AO THE LAND WAS TAKEN ON LEASE WHERE AS THE ASSESSEE HAS ONLY GOT THE MINING RIGHT ON PAYMENT O F ROYALTY. HENCE AS CONTENDED BY THE ASSESSEE THE FACTS OF THAT CAS E WOULD NOT APPLY TO THE CASE UNDER CONSIDERATION. IN VIEW OF THE FOR EGOING DISCUSSIONS WE ARE OF THE VIEW THAT THE LD CIT (A) HAS RIGHTLY DELETED THE ADDITION OF RS.25.00 LAKHS. 7. THE NEXT ISSUE IN THE APPEAL RELATING TO THE ASS ESSMENT YEAR 2000-01 RELATES TO THE DISALLOWANCE OF LIQUIDATED D AMAGES. THE ASSESSEE MADE A PROVISION OF RS.2 96 006/- TOWARDS LIQUIDATED DAMAGES. THE AO WAS OF THE VIEW THAT THE LIABILITY TO PAY LIQUIDITY DAMAGES WOULD ARISE ONLY ON COMPLETION OF THE CONTR ACT. ACCORDINGLY THE AO VERIFIED THE DETAILS OF CONTRACT AND IDENTIF IED THAT THE LIABILITY PAGE 7 OF 8 TOWARDS THE LIQUIDITY DAMAGES TO THE EXTENT OF RS.2 85 000/- HAS NOT CRYSTALLIZED DURING THE YEAR UNDER CONSIDERATION SI NCE THE RELEVANT CONTRACT WAS NOT COMPLETED BY 31-3-2000. ACCORDINGL Y HE DISALLOWED THE ABOVE SAID SUM OF RS.2 85 000/-. HOWEVER THE LD CIT (A) NOTICED THAT THE PRESENT ISSUE IS SQUARELY COVERED BY THE D ECISION OF ITAT HYDERABAD SPECIAL BENCH IN THE ASSESSEES OWN CASE R EPORTED IN 34 ITD 50 (SB) AND ACCORDINGLY GRANTED RELIEF. 7.1 THE FACTS RELATING TO THE ISSUE ARE STATED IN B RIEF. THE ASSESSEE ENTERS INTO CONTRACT FOR SUPPLY OF MACHINERY. ACCOR DING TO THE TERMS OF CONTRACT IF THE MACHINERY IS NOT SUPPLIED WITHIN T HE SCHEDULED DATE THE ASSESSEE HAS TO PAY COMPENSATION TO THE BUYER I N THE FORM OF LIQUIDATED DAMAGES CALCULATED ON THE BASIS OF AN AG REED RATE. AT THE END OF EVERY FINANCIAL YEAR THE ASSESSEE COMPANY I DENTIFIES THE CONTRACTS IN WHICH THE SCHEDULED DATE HAS EXPIRED A ND ALSO QUANTIFIES THE LIQUIDATED DAMAGES PAYABLE. ACCORDINGLY THE ASS ESSEE COMPANY MAKES PROVISIONS IN THE ACCOUNTS. ACCORDING TO THE ASSESSEE THE POINT OF ACCRUAL OF LIQUIDITY DAMAGES IS THE POINT WHEN T HE BREACH OF SCHEDULED DATE OCCURRED. HOWEVER THE AO WAS OF THE VIEW THAT THE POINT OF ACCRUAL IS THE DATE OF COMPLETION OF RELEV ANT CONTRACT. 7.2 AS NOTICED BY THE LD CIT(A) THE ISSUE REGA RDING THE POINT OF ACCRUAL OF LIQUIDITY DAMAGES HAS BEEN SETTLED BY T HE DECISION OF THE HYDERABAD SPECIAL BENCH IN THE ASSESSEES OWN CASE R EFERRED SUPRA WHERE IN IT WAS HELD THAT THE CLAIM FOR DAMAGES ARO SE AT THE POINT OF BREACH AND AT THAT POINT OF TIME THE LIABILITY ACC RUED AND HENCE THE PROVISION FOR LIQUIDATED DAMAGES WAS TO BE ALLOWED AS DEDUCTION. SINCE THE LD CIT (A) HAS FOLLOWED THE DECISION OF THE SPE CIAL BENCH OF THE ITAT WE DO NOT FIND ANY REASON TO INTERFERE WITH H IS DECISION. PAGE 8 OF 8 8. IN THE RESULT THE APPEAL FILED BY THE REVENUE FOR ASSESSMENT YEAR 1997-98 IS TREATED AS PARTLY ALLOWED AND THE A PPEAL FOR ASSESSMENT YEAR 2000-01 IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 19-03-2010. SD/- SD/- (SUNIL KUMAR YADAV) (B R BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PVV/SPS VISAKHAPATNAM DATE:19 TH MARCH 2010. COPY TO 1 THE KCP LTD. RAMAKRISHNA BUILDINGS 2 DR. P.V. CHERIAN CRESCENT CHENNAI-8 2 THE ACIT CENTRAL CIRCLE VIJAYAWADA 3 THE CIT VIJAYAWADA 4 THE CIT(A) VIJAYAWADA 5. THE CIT CENTRAL HYDERABAD 6 THE DR ITAT VISAKHAPATNAM. 7 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM