Commissioner Of Income Tax, Faridabad v. M/S Mark Auto Industries Limited

-1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 537 of 2006 Date of Decision: 5.4.2011 Commissioner of Income Tax, Faridabad Versus M/s Mark Auto Industries Limited ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel,for the appellant.for the appellant. Mr. Rupesh Jain, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This order shall dispose of ITA Nos. 537 of 2006, 127 of2007 and 255 of 2008 as according to the learned counsel for theparties identical questions are involved therein. For brevity, the factsare being extracted from ITA No. 537 of 2006. 2.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 30.12.2005 passed by the Income Tax AppellateTribunal, Delhi Bench “F”, New Delhi (hereinafter referred to as “theTribunal”) in ITA No. 3550/(Del)/2000 for the assessment year 1996-97.The appeal was admitted by this Court on 22.7.2008 for determinationof the following substantial questions of law:- ITA No. 537 of 2006 “(i)Whether, on the facts and in the circumstances of thecase, the ITAT is right in law in confirming the orderof the CIT(A) regarding deletion of Rs.13,76,990/-,made by the Assessing Officer on account of rentundercharged by the assessee from its sisterconcern?case, the ITAT is right in law in confirming the orderof the CIT(A) regarding deletion of Rs.13,76,990/-,made by the Assessing Officer on account of rentundercharged by the assessee from its sisterconcern? (ii)Whether on the facts and circumstances of the case,the ITAT is right in law in allowing Rs.24,93,443/- asdepreciation on building for the full year, whereas theAssessing Officer has established that the said fixedasset was not completed and put to use on or before30.9.1995?the ITAT is right in law in allowing Rs.24,93,443/- asdepreciation on building for the full year, whereas theAssessing Officer has established that the said fixedasset was not completed and put to use on or before30.9.1995? (iii)Whether on the facts and circumstances of the case,the ITAT is right in allowing Rs.66,04,880/- asdepreciation on plant and machinery for the full year,when the Assessing Officer has established that thePlant & Machinery was not put to use on or before30.9.1995? (iv)Whether on the facts and circumstances of the casethe ITAT is right in law in allowing deduction ofRs.43,52,604/- as interest paid on money advancedto its sister concern free of interest in the light ofjudgment of this Court in CIT-I, Ludhiana Vs.Abhishek Industries Ltd., dated 4.8.2006?” 3.The facts, in brief, necessary for adjudication as pleaded inthe appeal are that the assessee filed its return of income on ITA No. 537 of 2006 28.11.1996 declaring a loss of Rs.20,83,260/-. The assessment in thiscase was completed on 16.3.1999 at an income of Rs.1,46,35,810/-.The disallowances made by the Assessing Officer which are relevant forthe purposes of present appeal are as under:- (a)Rs.13,76,990/- on account of rent under chargedfrom M/s Mark Exhaust Ltd., a sister concern of theassessee;from M/s Mark Exhaust Ltd., a sister concern of theassessee; (b)Rs.24,93,443/- as depreciation, which was allowed@ 5% on the additions made to the factory buildingsto the tune of Rs.4,98,68,854/- instead of 10%claimed by the assessee on the ground that thebuilding was not complete and fit for use before30.9.1995;@ 5% on the additions made to the factory buildingsto the tune of Rs.4,98,68,854/- instead of 10%claimed by the assessee on the ground that thebuilding was not complete and fit for use before30.9.1995; (a)Rs.13,76,990/- on account of rent under chargedfrom M/s Mark Exhaust Ltd., a sister concern of theassessee;from M/s Mark Exhaust Ltd., a sister concern of theassessee; (b)Rs.24,93,443/- as depreciation, which was allowed@ 5% on the additions made to the factory buildingsto the tune of Rs.4,98,68,854/- instead of 10%claimed by the assessee on the ground that thebuilding was not complete and fit for use before30.9.1995;@ 5% on the additions made to the factory buildingsto the tune of Rs.4,98,68,854/- instead of 10%claimed by the assessee on the ground that thebuilding was not complete and fit for use before30.9.1995; (c)depreciation on Rs.5,28,39,089/- on the plant andmachinery was restricted to 12.5% only as againstclaim of the assessee at 25% as the assessee hadfailed to produce any cogent evidence of start ofproduction prior to 30.9.1995 and, thus, enhancingthe income by Rs.66,04,880/-; (d)Rs.43,52,604/- out of interest claimed as expenseson account of interest paid on money advanced to itssister concern free of interest. 4.Feeling aggrieved, the assessee filed an appeal before theCommissioner of Income Tax (Appeals) [in short “the CIT(A)”] who videorder dated 23.5.2000 deleted the aforesaid additions. Against theorder of the CIT (A), the revenue approached the Tribunal who vide order dated 30.12.2005 dismissed the appeal. Hence, the present appeal by the revenue. 5.We have heard learned counsel for the parties. 6.The issues to be adjudicated in these appeals relate to the following:- (A)Whether an addition on account of rentundercharged by the assessee from its sisterconcern was rightly deleted by the CIT(A) and theTribunal?undercharged by the assessee from its sisterconcern was rightly deleted by the CIT(A) and theTribunal? (B)Whether the assessee was entitled to depreciationfor the full year on the building?for the full year on the building? (C)Whether depreciation on plant and machinery couldbe restricted to 50% on the ground that theproduction had started after 30.9.1995?be restricted to 50% on the ground that theproduction had started after 30.9.1995? (D)Whether the interest paid on money advanced to itssister concern free of interest was exigible to tax inthe hands of the assessee?sister concern free of interest was exigible to tax inthe hands of the assessee? 7.As regards first issue, the CIT(A) had accepted the plea ofthe assessee that the assessee-company was situated in villageBegumpur Khatola which was far away from any industrial estate withno facility of electricity available there. The comparable cases had notbeen referred by the Assessing Officer while determining notional rent.The Tribunal while affirming the aforesaid findings had recorded asunder:- “31.The AO has opined that the total investment inthe newly constructed building and land being that of Rs.7,73,09,772/- interest thereon at the minimumrate of 10% would work out at Rs.77,30,972/-, 50% ofwhich would amount to Rs.38,65,465/- that againstthis, the assessee was charging rent at the annualrate of Rs.18 lakhs only, which amounted to undercharging of rent. Before the learned Commissioner(A), the assessee had placed on record writtensubmissions along with the lease agreement, on thebasis of which the learned Commissioner (A) deletedthe addition in question. “31.The AO has opined that the total investment inthe newly constructed building and land being that of Rs.7,73,09,772/- interest thereon at the minimumrate of 10% would work out at Rs.77,30,972/-, 50% ofwhich would amount to Rs.38,65,465/- that againstthis, the assessee was charging rent at the annualrate of Rs.18 lakhs only, which amounted to undercharging of rent. Before the learned Commissioner(A), the assessee had placed on record writtensubmissions along with the lease agreement, on thebasis of which the learned Commissioner (A) deletedthe addition in question. 32.The Department has not been able tocontrovert the findings of fact recorded by the learnedCommissioner (A). The lease agreement producedby the assessee showed that the location of thecompany was far away from any industrial estate.The AO failed to consider the market rent and did notmake a comparison with other instances, for arrivingat a notional rent, taking an ad-hoc 10% of the valueof rent etc. The learned Commissioner (A) took intoaccount the written submission filed by the assesseealso, along with the lease agreement. The findingsrecorded by the learned Commissioner (A) have notbeen successfully challenged before us by theDepartment. Therefore, the order of the learnedCommissioner (A), in this regard, is found to be inorder. It is, as such, upheld.” 8.Nothing could be shown that the findings recorded by theCIT(A) and as affirmed by the Tribunal were perverse or erroneous inany manner. 9.Adverting to the second issue, the CIT(A) on appreciationof evidence had come to the conclusion that the assessee was entitledto depreciation on the building for the full year as it was ready and put touse prior to 30.9.1995. The findings recorded by the Tribunal whileaffirming the order of the CIT(A) in this regard are as under:- “39.Apropos Plant II, the assessee submittedbefore the learned Commissioner (A) that it hadconstructed two different building, a new building at39 Milestone, Village Begumpur Khatola Delhi JaipurHighway, Gurgaon and an extension to the existingbuilding at Plant II (Maruti Joint Venture Gurgaon).The assessee, in support of its claim, filed twocertificates from Architects, M/s Abhijit Ray &Associates. The first certificate dated 20.9.1995gave proof that a substantial part of the factory andoffice building was completed on the total cost ofRs.4,90,22,897/-. The second certificate dated25.3.96 stated that the remaining part of the factoryand office building have been completed and that thetotal cost incurred thereon was Rs.83,72,158/-. Theassessee submitted that these certificates werefurnished to the AO during the assessmentproceedings, but the AO ignored the first certificate and relying only on the second certificate dated25.3.1996 proceeded to disallow the depreciation ofbuilding completed in the first half of the property;that the AO treated it as having been completed inthe second half of the year; that the assesseecompany had already ignored sum ofRs.2,52,94,478/- till 31.3.1995 out of the total cost ofbuilding amounting to Rs.4,90,22,897/-, whichamount appeared as work-in-progress; that the AOaccepted the fact that the building was in existencebut held that it was put in use only in the latter half ofthe year; that commercial production had begun atthe new site on 29.6.1995; that raw materialmachines etc., had been received and installed at thenew building much before 30.9.1995; and that couldonly have been happened if the building was readyand put to use. The learned Commissioner (A), afterconsidering the evidence placed, agreed with thesubmission on behalf of the assessee to the effectthat the building was constructed and put to use on30.9.1995, it was held that the assessee was entitledto depreciation for whole year. As such, a furtherrelief of Rs.24,51,145/- was given. The total relief tothe assessee on depreciation of building thusamounted to Rs.24,94,443/- (Rs.42,298/- +Rs.24,51,145/-). 40.The plea raised by the department has beenthat since as per the certificate from M/s Abhijit Ray& Associates, the Architects of the assessee, theprocess of completion of the building was only in themonth of March, 1996. So, it could not have beenpossibly put to use before 30.9.1995. As a result,according to the department, the assessee is notentitled to the relief on account of depreciation of thebuilding, as granted by the learned Commissioner(A). 41.The learned Commissioner (A) has found as afact that the AO failed to take into consideration boththe certificates furnished by the Architects of theassessee. The first certificate dated 20.9.1995, gaveproof that a substantial part of the factory and officebuilding was completed and that the total costincurred thereon was Rs.4,09,22,897/-. It was onlythe second certificate dated 25.3.1996 which wastaken into consideration by the AO. This certificatestated that the remaining part of the fact and officebuilding had been completed and that the total costincurred thereon was Rs.83,72,158/-. Even thoughboth the certificates were furnished before the AO,the AO did not taken into consideration both of them.The AO took into consideration only the second one.This clearly amounted to non-appreciation and non- consideration of material evidence brought on record,resulting in the AO having treated the building ashaving been completed only in the second half of theyear. The first certificate of the Architects has notbeen found to be false. It was just ignored by theAO. Here also, it is not controverted that till31.3.1995, out of a total cost of building ofRs.4,90,22,897/-, the assessee company hadincurred a sum of Rs.2,52,94,478/- which amountwas reflected as Work-in-Progress in the balancesheet of the assessee as on 31.3.1995. The AOhimself observed that the building was in existence,but it was put to use only in the latter half of the year.It was also not controverted, as stated by theassessee, that commercial production began at thenew site at Gurgaon on 26.6.1995 and that rawmaterial, machines, etc. were received and installedat the new building, much earlier than 30.9.1995.This was not possible if the building was not readyand put to use. 42.The above facts and circumstances led thelearned Commissioner (A) to hold the assesseeentitled for depreciation for whole year. We do notfind any error in the finding of facts recorded by thelearned Commissioner (A). The ground raised by theDepartment in this regard in view of the aforesaid first 42.The above facts and circumstances led thelearned Commissioner (A) to hold the assesseeentitled for depreciation for whole year. We do notfind any error in the finding of facts recorded by thelearned Commissioner (A). The ground raised by theDepartment in this regard in view of the aforesaid first certificate dated 20.9.1995 issued by the Architectsof the assessee and the unrebutted material broughton record by the assessee before the authorities,does not have any force. It is, therefore, rejected.” 10.Learned counsel for the revenue could not demonstratethat there was any misreading or misappreciation of material on recordwhich may require interference by this Court in the aforesaid findings. 11.Taking up third issue, the Tribunal while affirming thefindings of the CIT(A) had concluded that plant and machinery were putto use before 30.9.1995 entitling the assessee depreciation for theentire year. The relevant observations noted by the Tribunal read thus:- “47.The AO observed that this letter clearlyshowed that no production had actually taken placetill 26.9.1995 and that production was yet tocommence. The assessee also claimed that the firstsale from the new plant was made to M/s MarkExhaust Systems Ltd. On 27.9.95. In this regard, theAO observed that M/s Mark Exhaust Systems Ltd.was none other than the assessee's own sisterconcern; that the copy of invoice issued by theassessee in respect of the said first sale showed thatsome 25 “End Covers” were sold in returnable casesagainst a purchase order received just a day before,i.e. on 26.9.1995; that the assessee could notproduce any corroborative evidence to establish thatthe goods ordered on 26.9.1995 could be manufactured within a short span of one day and thatthey were also despatched on the same day; that itwas noticed from the details of additions to plant andmachinery, filed by the assessee, that while details ofpurchases of various items of plants and machineryin Plant I and Plant II were furnished, no evidence ofinstallation and use of new power connection ofinaugural ceremony, etc. was filed; that there wasabsence of evidence of installation and use ofmachinery before 30.9.1995. The AO thus restrictedthe claim of the assessee for depreciation @ 25% onthe additions of Rs.5,28,39,089/- to 12.5%. Thus, asum of Rs.66,04,886/- was disallowed out ofdepreciation claimed on additions to plant andmachinery before 30.9.1995. 48.The learned CIT(A) observed in this regard,that new power connection would not be required forthe existing Plant I, which fact had not beenconsidered by the AO; and that the plant andmachinery installed at Plant I were mainly a fewpresses spot welder machines, acquired in June/July1995 and other small machines. Apropos Plant II,the assessee had submitted before the Ld.Commissioner (A) that it had imported plant andmachinery from commas, Italy, vide their letter dated25.9.1995 the said plant and machinery was cleared 48.The learned CIT(A) observed in this regard,that new power connection would not be required forthe existing Plant I, which fact had not beenconsidered by the AO; and that the plant andmachinery installed at Plant I were mainly a fewpresses spot welder machines, acquired in June/July1995 and other small machines. Apropos Plant II,the assessee had submitted before the Ld.Commissioner (A) that it had imported plant andmachinery from commas, Italy, vide their letter dated25.9.1995 the said plant and machinery was cleared from Customs, Kandla, Port , Gandhidham, Kutch, on17.8.1995 vide Bill of Entry No. 6401 dated anddespatched from Kandla Port on 19.8.1995, vide BillNo. 28/95-96 dated 19.8.1995, of Veera Transport.The said plant and machinery was received on23.8.1995 and unloaded by M/s Aneja CraneService. It was contended that these documentsclearly indicated that the plant and machinery wasreceived before 30.9.1995; that the plant andmachinery was installed, commissioned andcommercial production begun on 26.9.1995, underthe supervision of Engineers from M/s COMAS, Italy;that in support of the said fact of installation of plantand machinery, the assessee had field twocertificates, one dated 25.9.1995, and a confirmationdated 19.3.1999, issued by M/s Comas, Italy. Theformal intimation, as required under the ExciseRegulations, was given to the Superintendent ofCentral Excise, stating that production of theassessee's factory was going to start on 26.9.1995,and that 25 pieces of End Covers were procuredwhich were sold on 27.9.1995. Invoices of proof ofExcise Duty paid have been placed on record. It wasaverred that the new plant and machinery atBegumpur Khatola, Gurgaon was set up as anancillary of the assessee company's subsidiary, namely M/s Mark Exhaust Systems Ltd. and that inthe absence of adequate power from Haryana StateElectricity Board for running the plant and machinery,the assessee company had to rely on the DG set.Bills for hire of the DG set and diesel consumed werealso produced.” 12.The said finding being based on appreciation of material onrecord could not be held to be vitiated in any manner. 13.Referring to the last issue, the Tribunal has specificallyrecorded that the amount was invested by the assessee as shareapplication money with the sister concern, i.e., M/s Mark ExhaustSystems Ltd. and the department had failed to produce any evidencethat there was diversion of borrowed funds on which interest had beenpaid by the assessee. The relevant findings recorded by the Tribunalread as follows:- “70.Under Ground No.18, the Department pleadsthat the learned Commissioner (A) has erred indeleting the disallowance of Rs.43,53,604/- made bythe AO on account of interest on moneys advancedto M/s Mark Exhaust Systems Ltd. simply relying onthe submission of the assessee. The learnedCommissioner (A) has followed his own order forassessment year 1995-96 in the assessee's owncase, wherein the ld. CIT(A) had found that the AOhad not established that any of the borrowed fundshad been diverted for investing in M/s Mark Exhaust Systems Ltd. For the year under consideration, thelearned CIT(A) observed that the specific borrowingsfrom IFCI and ICICI were shown spent only onacquisition of specific machinery. It was on thisbasis, that the addition was deleted. 71.Before us, the learned counsel for theassessee has placed reliance on the Tribunaldecision in the assessee's own case for assessmentyear 1995-96 in ITA Nos. 338(Del)/2000 and 262(Del)98, wherein, this issue has been decided infavour of the assessee. Respectfully following thesaid order, ground No.18 is rejected.” 14.Learned counsel for the revenue was unable to makereference to any evidence which either had been ignored or improperlyappreciated warranting intervention of this Court in the above notedconclusion. Systems Ltd. For the year under consideration, thelearned CIT(A) observed that the specific borrowingsfrom IFCI and ICICI were shown spent only onacquisition of specific machinery. It was on thisbasis, that the addition was deleted. 71.Before us, the learned counsel for theassessee has placed reliance on the Tribunaldecision in the assessee's own case for assessmentyear 1995-96 in ITA Nos. 338(Del)/2000 and 262(Del)98, wherein, this issue has been decided infavour of the assessee. Respectfully following thesaid order, ground No.18 is rejected.” 14.Learned counsel for the revenue was unable to makereference to any evidence which either had been ignored or improperlyappreciated warranting intervention of this Court in the above notedconclusion. 15.Accordingly, there is no merit in these appeals and thesame are hereby dismissed. (AJA Y KUMAR MITTAL) JUDGE April 5, 2011gbs (ADARSH KUMAR GOEL) JUDGE IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 127 of 2007 Date of Decision: 5.4.2011 Commissioner of Income Tax, Faridabad Versus M/s Mark Auto Industries Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel,for the appellant.for the appellant. Mr. Rupesh Jain, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the order of even date recorded in ITA No. 537 of 2006 (Commissioner of Income Tax, Faridabad v. M/sMark Auto Industries Ltd). (AJA Y KUMAR MITTAL) JUDGE April 5, 2011gbs (ADARSH KUMAR GOEL) JUDGE -16- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 255 of 2008 Date of Decision: 5.4.2011 Commissioner of Income Tax, Faridabad Versus M/s Mark Auto Industries Ltd. ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL.HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel,for the appellant.for the appellant. Mr. Rupesh Jain, Advocate for the respondent. AJAY KUMAR MITTAL, J. The appeal is dismissed. For reasons, see the order of even date recorded in ITA No. 537 of 2006 (Commissioner of Income Tax, Faridabad v. M/sMark Auto Industries Ltd). (AJA Y KUMAR MITTAL) JUDGE April 5, 2011gbs (ADARSH KUMAR GOEL) JUDGE