The Commissioner Of Income Tax v. The Shahbad Co-Op. Sugar Mills Ltd

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH. I.T.A. No.515 of 2008 Date of decision: 17.12.2010 The Commissioner of Income Tax Vs. The Shahbad Co-op. Sugar Mills Ltd. -----Appellant. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOELHON'BLE MR. JUSTICE AJAY KUMAR MITTALHON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:-Mr. Yogesh Putney, Sr.Standing Counselfor the appellant. for the appellant. Mr. S.K. Mukhi, Advocate andMs. Jyoti, Advocatefor the respondent. --- ADARSH KUMAR GOEL, J. 1. The revenue has preferred this appeal under Section260-A of the Income Tax Act, 1961 (for short, “the Act”) againstthe order of the Income Tax Appellate Tribunal, New Delhi inI.T.A. No.3530/DEL/1997 for the assessment year 1994-95claiming following substantial questions of law:- “1. Whether on the facts and in the circumstances of thecase, the Ld. ITAT was right in law in allowing theassessee’s claim of Rs.25,000/- on account ofeducation fund ignoring the fact that the assesseehad been following the mercantile system ofaccounting and that the liability of the annualcase, the Ld. ITAT was right in law in allowing theassessee’s claim of Rs.25,000/- on account ofeducation fund ignoring the fact that the assesseehad been following the mercantile system ofaccounting and that the liability of the annual subscription for the earlier asstt. Year of which theassessee was well aware was not allowable in theyear relevant to the Asstt. Year 1994-95? Whether on the facts and in the circumstances of thecase, the Ld. ITAT was right in law in allowing theclaim of Rs.6,19,637/- on account of subscription paid to Haryana State Cooperative DevelopmentFederation relating to the Asstt. Year 1992-93,ignoring the fact that the assessee had beenfollowing the mercantile system of accounting andthat the liability of the annual subscription for theearlier asstt. Year of which the assessee was wellaware was not allowable in the year relevant to theAsstt. Year 1994-95? Whether on the facts and in the circumstances of thecase, the Ld. ITAT was right in law in allowing thedepreciation of Rs.18,24,187/- in respect of themachinery costing Rs.97.20 lacs reported by theauditors to have neither been used nor in usablecondition, on the basis of the certificate from engineerof the assessee furnished during the course ofappellate proceedings before the Ld. ITAT, whereasthe reply of the assessee to the audit objection asreproduced in para 9 of the ITAT’s order was notsupported by any evidence and the Audit Officer in itsreport dated 30.09.2004 had, after considering theassessee’s reply, not dropped the audit objection,thereby making the observation as made in para 8.2of the audit report?” 2. The assessee is a co-operative society engaged inmanufacture and sale of sugar. The Assessing Officer disallowed claim for deduction on amount paid towards education fund andsubscription paid to the apex body of the assessee on the groundthat the said payments did not relate to the year in question but tothe assessment year 1992-93 and financial year 1992-93respectively. The Assessing Officer also disallowed claim fordeprecation on the machinery relying upon audit report of theauditors of the assessee that the machinery was neither used norwas in usable condition and was kept idle. The CIT(A) affirmedthe view of the Assessing Officer but the Tribunal upheld theclaim of the assessee as follows:- 2. The assessee is a co-operative society engaged inmanufacture and sale of sugar. The Assessing Officer disallowed claim for deduction on amount paid towards education fund andsubscription paid to the apex body of the assessee on the groundthat the said payments did not relate to the year in question but tothe assessment year 1992-93 and financial year 1992-93respectively. The Assessing Officer also disallowed claim fordeprecation on the machinery relying upon audit report of theauditors of the assessee that the machinery was neither used norwas in usable condition and was kept idle. The CIT(A) affirmedthe view of the Assessing Officer but the Tribunal upheld theclaim of the assessee as follows:- 4.Ground No.3 is that the CIT(Appeals) was notjustified in upholding the disallowance of Rs.25,000/-on account of education fund and Rs.6,19,671/- onaccount of subscription paid to Haryana StateCooperative Development Federation. It wassubmitted on behalf of the assessee that this issuestands decided in favour of the assessee by the orderof the Tribunal for the assessment year 1995-96 inITA No.2519/Del/2000 dated 23/11/2004. In thisorder, the Tribunal has dealt with the amount ofRs.25,000/- paid as subscription to the educationfund. It was noted that the amount was paid on thedirections of the Registrar of the CooperativeSocieties and such instructions, in the form of a letter,were received by the assessee during the relevantaccounting year. In the year before us also, theassessee received the letter of the Registrar, whichwas dated 23/03/1994, on 31/03/1994. A perusal ofthis letters shows that it was in respect of the entireamount of Rs.25,000/- as well as Rs.6,19,671/- which was also paid as subscription to the Haryana StateCooperative Development Federation. The amountwas also paid on 31/03/1994 as the journal voucherplaced at page 3 of the paper book shows. Thus boththe amounts are allowable as deduction as claimed bythe assessee. We direct accordingly and allow theground.” xxxxxxxxxx9.Ground No.7 is directed against thedisallowance of depreciation of Rs.18,24,187/-. Theassessee claimed depreciation of Rs.62,63,946/-.The Assessing Officer however observed thatmachinery costing Rs.97.29 lacs was reported by theauditors to have been neither used nor in usablecondition. Based on this report, the Assessing Officernegatived the claim for depreciation on thismachinery. The written down value of the machinerywas Rs.72,96,760/-. The depreciation on the sameamounted to Rs.18,24,187/- which was disallowed.The disallowance having been confirmed by the CIT(Appeals), the assessee is in further appeal before theTribunal. We have perused para 8.2 of the auditreport which contained the audit objection as well asthe assessee’s reply, these are reproduced below: “OBJECTIPN 8.2 Some machinery items such as vapour cellof Rs.65.94 lacs, Juice Clarifier of Rs.20.45lacs and Sugar Grader of Rs.4.17 lacswere lying idle from the last year 1992-93,and in other words above said Machineryitems were installed without necessity.Besides this Fly Ash Arrestor Pad Pweitierof Rs.6.73 lacs has also not in workingof Rs.65.94 lacs, Juice Clarifier of Rs.20.45lacs and Sugar Grader of Rs.4.17 lacswere lying idle from the last year 1992-93,and in other words above said Machineryitems were installed without necessity.Besides this Fly Ash Arrestor Pad Pweitierof Rs.6.73 lacs has also not in working order from the last year 1992-93. Ifinterest is calculated @ 18% PA on theamount invested for installation above saidmachinery items in that case less ofinterest of Rs.1751220/- annually. REPLY order from the last year 1992-93. Ifinterest is calculated @ 18% PA on theamount invested for installation above saidmachinery items in that case less ofinterest of Rs.1751220/- annually. REPLY It is submitted that the machinerymentioned in this para were installed toincreased the capacity of 1250 TCD Plant.All the machineries are working properly.There is no loss to the mill due toinstallation of referred machineries.Hence, para may be deopped.”mentioned in this para were installed toincreased the capacity of 1250 TCD Plant.All the machineries are working properly.There is no loss to the mill due toinstallation of referred machineries.Hence, para may be deopped.” It will be seen as in the case of machinery repairs, theIncome-tax authorities merely relied upon the auditobjection without taking note of the assessee’s replywhich seems to have been accepted by the auditors.The objection raised by the auditors was that thevapour cell, juice clarifier and sugar grader were idlefrom the earlier year which means they were installedwithout necessity. The fly ash arrestor was found tobe not in working order. The assessee has pointedout in its reply that these items of machinery wereinstalled to increase the capacity of the plant and thatthey are all working properly. The reply of theassessee has not been taken note of by the Income-tax authorities. The assessee has filed thedepreciation chart as per the Income Tax assessmentfor the year under appeal. On the plant andmachinery in question, depreciation has been allowedin the earlier year. In pages 11 and 12 of the paperbook, the assessee has also enclosed a certificatefrom the engineers justifying the installation of the various items of machinery mentioned by the auditorsand explaining the justification for their installation. Ithas also been certified that these equipments whichwere installed in the earlier year were workingsmoothly in the year under appeal. In the light of theevidence adduced by the assessee, we are unable touphold the strong argument raised by the learned CITDR before us that though the machinery might havebeen installed and used in the earlier year, it may nothave worked during the year under consideration. Asalready noted, the basic flaw in the approach of theIncome-tax authorities is that they merely relied on theaudit objection, without taking into consideration howthe assessee met the audit objection. The factsbrought out in the assessee’s reply to the objectionare supported by the certificate by the engineers keptat pages 11 and 12 of the paper book. In thesecircumstances, we direct the Assessing Officer toallow the depreciation. The ground is allowed.” 3. We have heard learned counsel for the parties. 4. Learned counsel for the revenue submitted that theTribunal reversed the finding of the Assessing Officer and the CIT(A) to the effect that payment towards education fund andsubscription did not relate to assessment years in question byreferring to a letter of the Registrar, which was neither brought onrecord nor contents thereof reproduced nor the revenue wasgiven an opportunity to rebut the same. With regard todepreciation, learned counsel for the revenue submitted that the machinery in question having been kept idle and never used,depreciation was not admissible. 5. Learned counsel for the assessee supported the impugned finding. 6. After hearing learned counsel for the parties andperusing the record, we are of the view that questions (1) and (2)have to be answered in favour of the revenue while question (3)has to be answered in favour of the assessee. machinery in question having been kept idle and never used,depreciation was not admissible. 5. Learned counsel for the assessee supported the impugned finding. 6. After hearing learned counsel for the parties andperusing the record, we are of the view that questions (1) and (2)have to be answered in favour of the revenue while question (3)has to be answered in favour of the assessee. 7. As regards education fund, the Tribunal has observedthat the same related to the year in question in view of letter ofthe Registrar. The said letter has neither been reproduced nor isshown to be on record. Moreover, the details furnished by theassessee before the Assessing Officer clearly are to the effectthat the education fund related to assessment year 1992-93 andthe subscription related to financial year 1992-93. The AssessingOfficer noticed the said facts as follows:- “The assessee has claimed expenditure onaccount of subscription to the extent of Rs.1412689/-.From the details it is noticed that a sum of Rs.25000/-paid to Haryana State Coop. Development Federationfor education fund relates to asstt. Year 1992-93 andan other some of Rs.619671/- paid to Haryana StateCoop. Development Federation as subscription alsorelates to financial year 1992-93. Both these amountsare disallowed being not the financial year 1993-94,however, is allowed as deduction. Total disallowanceunder this head works out to Rs.644672/-. 8. Admittedly, the assessee followed mercantile systemof accounting. In such situation, the deduction claimed could notbe allowed in the year of payment but in the year when theamount were due. 9. As regards question (3), no doubt the auditors of theassessee objected to machinery being kept idle, resulting in lossof interest on investment, the stand of the assessee that the saidmachinery was installed to increase capacity of the plant, was nottaken into account by the Assessing Officer and the CIT(A).Moreover, the Tribunal relied upon certificate of the engineersjustifying installation of items of machinery. 10. We also find that expression ‘used’ in Section 32 ofthe Act has been judicially interpreted to include machinery keptfor use, even if the same was not actively used. Passive user hasalso been held to be user where it may be necessary for businessof the assessee to keep the machinery ready for use. Referencemay be made to the judgment of Delhi High Court in CITv.Refrigeration & Allied Industries Ltd.[2001] 247 ITR 12.Therein reliance was placed on the following judgments:- “i)Machinery Manufacturers Corporation Ltd.v. CIT[1957] 31 ITR 203 (Bom);[1957] 31 ITR 203 (Bom); i)Machinery Manufacturers Corporation Ltd.v. CIT[1957] 31 ITR 203 (Bom);[1957] 31 ITR 203 (Bom); ii)CIT.v. Viswanath Bhaskar Sathe [1937] 5 ITR 62 (Bom); iii)CIT.v. Dalmia Cement Ltd.[1945] 13 ITR 415 (Patna); iv)Liquidators of Pursa Ltd.v. CIT[1954] 25 ITR 265 (SC); v)CIT.v. Bombay State Transport Corporation [1979] 118 ITR 399 (Bom); vi)G.R. Govindarajulu Naidu.v. CIT[1973] 90 ITR 13(Mad);(Mad); vii)CIT.v. Elecon Engineering Co. Ltd. [1974] 96 ITR672 (Guj) and672 (Guj) and viii)CIT.v. Geo Tech Construction Corporation [2000]244 ITR 452 (Ker);244 ITR 452 (Ker); “i)Machinery Manufacturers Corporation Ltd.v. CIT[1957] 31 ITR 203 (Bom);[1957] 31 ITR 203 (Bom); i)Machinery Manufacturers Corporation Ltd.v. CIT[1957] 31 ITR 203 (Bom);[1957] 31 ITR 203 (Bom); ii)CIT.v. Viswanath Bhaskar Sathe [1937] 5 ITR 62 (Bom); iii)CIT.v. Dalmia Cement Ltd.[1945] 13 ITR 415 (Patna); iv)Liquidators of Pursa Ltd.v. CIT[1954] 25 ITR 265 (SC); v)CIT.v. Bombay State Transport Corporation [1979] 118 ITR 399 (Bom); vi)G.R. Govindarajulu Naidu.v. CIT[1973] 90 ITR 13(Mad);(Mad); vii)CIT.v. Elecon Engineering Co. Ltd. [1974] 96 ITR672 (Guj) and672 (Guj) and viii)CIT.v. Geo Tech Construction Corporation [2000]244 ITR 452 (Ker);244 ITR 452 (Ker); Reference was also be made to dictionary meaning of the word‘depreciation’ as also the object of allowing depreciation. In thepresent case, the machinery in question is vapour cell, juiceclarifier and fly ash arrester paid pweitier which according to theassessee had to be kept ready for use for its businessexpediency. Stand of the assessee is that it resulted in increaseof capacity of the plant and that on account of technicaljustification for the said machinery, items of the machines wereinstalled. Even though the auditors may not have accepted thesaid stand, the assessee was entitled to free play in joints intaking a decision to install the machinery if in its view the samewas necessary for its business. If the assessee was to installsuch a machinery on its bonafide business consideration, mere absence of proof of actual use thereof was not enough to denythe claim for depreciation. Accordingly, we do not find anyground to interfere with the finding of the Tribunal, holding thatthe assessee was entitled to depreciation on the machinery, asclaimed. 11. Accordingly, the appeal is partly allowed, as indicatedabove. (ADARSH KUMAR GOEL) JUDGE December 17, 2010ashwani (AJAY KUMAR MITTAL) JUDGE