IN THE ITAT DELHI BENCH ‘G’
Solaris Bio Chemicals Ltd.
Deputy Commissioner of Income-tax
IT APPEAL NOS. 987 (DELHI) OF 2011
AND 5044 TO 5046 (DELHI) OF 2010 & 2011
[ASSESSMENT YEARS 2004-05 TO 2007-08]
JULY 13, 2012
A.D. Jain, Judicial Member
ITA Nos.5044 to 5046/Del/2010 are assessee’s appeals for A.Y.s 2004-05 to 2006-07 and ITA No. 987/Del/2011 is assessee’s appeal for A.Y. 2007-08 against the orders passed by the CIT(A)-XII, New Delhi.
2. The first issue common to all these appeals is concerning disallowance of depreciation on trial run expenditure, amounting to Rs. 11,74,59,492/- for A.Y. 2004-05, Rs. 8,80,94,619/- for A.Y. 2005-06, Rs. 3,96,42,579/- for A.Y. 2006-07 and Rs. 3,36,96,190/- for A.Y. 2007-08. The Assessing Officer disallowed the claim of the assessee, holding that for Assessment Year 2003-04, it had been held in the assessment order that since there was commercial production and not trial production, the expenditure incurred was not to be allocated to the fixed assets during the next financial year and capitalized and so the assessee was not entitled to claim such depreciation. This was followed by the Assessing Officer in all the assessment years before us. The Ld. CIT(A) also did not allow the assessee’s claim.
3. Before us, the learned counsel for the assessee has placed a copy of the Tribunal order dated 16.12.2011 in ITA No. 3218/Del/2010, for Assessment Year 2003-04, wherein the matter has been remitted by the Tribunal to the Assessing Officer for decision afresh.
4. The Ld. DR, on the other hand, has placed reliance on the impugned orders in this regard.
5. Having heard the parties and having perused the material on record with regard to this issue, we find that the Tribunal vide its order dated 16.12.2001 (supra) for A.Y. 2003-04, has remitted the matter to the file of the Assessing Officer by making the following observations:-
“5. We have heard both the parties and gone through the facts of the case. The issues as to whether the assessee undertook trial production or commercial production and when trial production ended and commercial production started, are essentially question of facts to be decided on the basis of relevant books of accounts and production records including quality control reports etc. apart from discussion with the concerned chemists/production staff in the plant. As is apparent from the facts narrated before us, according to the assessee, trial runs for manufacturing citric acid, stated to have commenced on 7.11.2001, continued in the year under consideration even when the assessee manufactured 7626 MT of citric acid and sold the same in the domestic and international markets as also paid excise duty and sales tax as against production of 1708 MT in the preceding year. Indisputably, the assessee did not produce the relevant books of accounts and production records including quality control reports etc. either before the AO or the ld. CIT(A) while a claim was made before the ld. CIT(A) that entire production was sold by way of scrap. No material appears to have been placed before either the lower authorities and even before us that the goods manufactured by the assessee, were returned by any of the buyers due to quality problems or were sold as a scrap. Though at the time of hearing, the ld. AR submitted copies of correspondence relating to few complaints [pg.1 to 21], it is not known as to whether or not these complaints were placed before the lower authorities nor the ld. CIT(A) examined these aspects. We find that he lower authorities did not make any attempt to ascertain the international and domestic rates of citric acid vis-a-vis rates at which the assessee sold its products in order to ascertain as to whether or not the product manufactured by the assessee was really substandard, as claimed by the assessee. The manufacture of such a product without the help quality control experts is well nigh impossible. No such reports on quality of the product were either produced before the AO or the ld. CIT(A) and even before us. As already stated, in the year under consideration domestic sale of Rs. 34,56,81,771/- and export sale of Rs. 2,76,86,320/- have been made. There is no material before us in order to ascertain as to whether or not the entire production of 7626 MT was substandard so as to necessitate trial production. Hon’ble Bombay High Court in CIT v. Hindustan Antibiotics Ltd., 93 ITR 548, observed that until the company reaches a stage where it is in a position to decide that a final product, which could ultimately be sold in the market, could be manufactured or produced by it, it will be idle formality to say that it had started manufacture or production of articles simply because trial products are prepared with a view to verify whether they can be ultimately used in the preparation or manufacture of the final products. In the present case, however, we find that no material whatsoever has been produced by the assessee before any of the income-tax authorities and even before us to show that the production made by the assessee in the year under consideration was merely a trial production and that the goods produced were not for commercial sale even when the assessee made sales in domestic market and international market of more that Rs. 37 crores. Even otherwise, the ld. CIT(A) have not recorded her specific findings as to when the trial production ended and commercial production started nor adjudicated each of the grounds of appeal of the assessee separately and nor even recorded her findings on the disallowance of expenditure, capitalized in the preceding year. In view of the foregoing, especially when complete facts and documents have not been placed before us while the matter has not be examined by the lower authorities in its proper perspective, we consider it fair and appropriate to set aside the order of the ld. CIT(A) and restore the matter to the file of the AO for deciding the issues raised in the ground nos. 1 to 6 in the appeal afresh, in accordance with law in the light of our aforesaid observations, after examining all the relevant books or accounts and records of production, including quality control reports etc and of course after allowing sufficient opportunity to the assessee. Needless to say that while redecuiding the issues, the AO shall pass a speaking order, bringing out clearly as to when the trial production ended and commercial production started. The assessee is also directed to co-operate in the assessment and place all the relevant facts within their specific knowledge and produce all the relevant books of accounts including production records and quality control reports before the AO. With these observations, ground nos. 1 to 6 in the appeal are disposed of.”
6. The ld. CIT(A), it is seen, has decided the matter against the assessee for AYs 2004-05 and 2007-08 whereas for AYs 2005-06 and 2006-07, the matter has been remitted to the file of the Assessing Officer for decision afresh.
7. Accordingly, for AYs 2004-05 and 2007-08, the matter is remitted to the file of the Assessing Officer to be decided afresh in accordance with law, in keeping with the Tribunal order for Assessment Year 2003-04 (supra). For AYs 2005-06 and 2006-07, however, the order of the Ld. CIT(A) is upheld.
8. In ITA No. 5045/Del/2010 for A.Y. 2005-06, the second issue is regarding allowance of depreciation on Plant & Machinery being power plant, @ 10% and not @ 25%, as claimed.
9. The facts are that during the year, the assessee showed plant and machinery of Rs. 21,05,53,381, as an addition to “Plant & Machinery” under Schedule IV of the books of account. In Form 3CD, however, such addition was shown as addition to “building.” The Assessing Officer allowed depreciation at 10% i.e., the rate applicable to “building.” The Ld. CIT(A) upheld this action of the Assessing Officer, following ‘Goetze (India) Ltd. v. CIT  284 ITR 323, as done by the Assessing Officer, holding that the higher rate of depreciation @ 25%, as claimed by the assessee, ought to have been claimed by filing a revised return; that the Assessing Officer had also disallowed the claim on the basis of audit report in Form 3CD, which cannot be changed subsequently by filing a claim without altering the contents thereof; and that if the assessee had to alter its claim, he should have filed a revised Form 3CD, which was not done.
10. Before us, it has been maintained on behalf of the assessee, that the addition was, in fact, to “Plant & Machinery” and had inadvertently wrongly been shown as addition to “building” in Form 3 CD; that a statement showing the details of the addition was filed by the assessee before the Assessing Officer on 26.11.2007, demonstrating that the addition to the assets was eligible for depreciation @ 25%, as applicable to “Plant & Machinery” and not @ 10%, as applicable to “building”; that the assessee’s claim was, however, rejected by the Assessing Officer, citing ‘Goetze (India) Ltd.’ (supra); that the Ld. CIT(A) wrongly upheld the Assessing Officer’s action; that Explanation 5 to Section 32(1) is very clear in this regard, as it states that the provisions of Section 32(1) shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing its total income; that, moreover, in ‘K.K.S.K. Leather Processors (P) Ltd. v. ITO  126 ITD 215 (Chennai), it has been held that the provisions of Section 32(1) have to be applied whether or not the assessee has claimed the deduction in respect of depreciation in computing the total income; that ‘Goetze (India) Ltd.’ (supra) is not applicable, since claim of depreciation at a higher rate, as made before the Assessing Officer is not at all a new claim, as held in ‘Jt. CIT v. Hero Honda Finlease Ltd.’  115 TTJ 752 (Delhi), whereas ‘Goetze (India) Ltd.’ (supra) is with regard to only a new claim made in the assessment and not concerning modification of claim; that, further, still in ‘CIT v. Ramco International,  180 Taxman 584 (Punj. & Har.), it has been held that where during the assessment proceedings the assessee was not making any fresh claim and had duly furnished the documents and submitted Form 10CCB for claim u/s 80IB, revised return was not required to be filed; and that, as such, either the claim of depreciation on Plant & Machinery @ 25%, amounting to Rs. 21,05,42,889/- may be allowed, or the matter may be restored to the Assessing Officer to allow depreciation on the basis of the nature of assets capitalized during the year.
11. The Ld. DR, per contra, has placed strong reliance on the impugned order in this regard. It has been contended that undisputedly, in Schedule IV of the books of account of the assessee, the addition was shown as addition to “Plant & Machinery”; the addition was, however, shown as addition to “building” in Form 3CD; that the Assessing Officer disallowed the assessee’s claim on the basis of the audit report in Form 3CD besides on the basis of the decision in ‘Goetze (India) Ltd. (supra); that the Ld. CIT(A) has correctly observed that the tax audit report is signed by the auditor as well as approved by the directors of the company and, as such, it cannot be changed subsequently by filing a claim, without altering the contents of the report; that since the assessee did not file any revised Form 3CD, ‘Goetze (India) Ltd.’ (supra) is squarely applicable and, therefore, the action of the Assessing Officer in granting depreciation @ 10% as against the claim of 25%, as confirmed by the Ld. CIT(A), is wholly in accordance with law; and that, therefore, the grievance of the assessee in this regard does not hold water and the same be rejected.
12. We have heard the parties on this issue and have perused the material on record with regard thereto. At the outset, it would be proper to mention Explanation 5 to Section 32(1) of the IT Act. This Explanation reads as follows:-
“Section 32(1) Explanation 5: For the removal of doubts, it is, hereby, declared that the provisions of this sub-section shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income.”
13. As per Section 32(1)(i), in respect of depreciation of buildings, machinery, plant or furniture, being tangible assets, owned, wholly or partly by the assessee and used for the purposes of business or profession, the deductions enumerated under the said Section shall be allowed.
14. In ‘K.K.S.K. Leather Processors (P) Ltd. (supra), it has been held, inter alia, that the Explanation 5 to sub-section (1) of Section 32 makes it clear that the provisions of sub-section (1) of Section 32 shall apply whether or not the assessee has claimed the deduction in respect of depreciation in computing his total income. From the provisions of sub-section (1) of Section 32 along with the Explanation 5, it is clear that the Assessing Officer is duty bound and under obligation to allow the deduction of depreciation as per the provisions of sub-section (1) of Section 32.
15. Further, in ‘Goetze (India) Ltd. (supra), undeniably, the decision rendered was only in respect of a new claim made in the assessment and not in respect of modification of claim. In ‘Hero Honda Finlease Ltd.‘ (supra), the assessee had claimed higher depreciation @ 40% during the assessment proceedings, as against @ 20% in the tax audit report. The Tribunal held that the claim of higher depreciation in the assessment proceedings could not be termed as a new claim and that Goetze (India) Ltd. (supra) was only in respect of a new claim made in the assessment proceedings and not modification of claim. Then, in ‘Ramco International’ (supra), it has been held that where, during the assessment proceedings, the assessee had not made any fresh claim and had duly furnished the documents and submitted Form No. 10CCB for claim u/s 80IB of the Act, no revised return was required to be filed.
16. In keeping with the aforesaid decisions, here also, on facts, it is held that since the assessee had only sought to claim a higher rate of depreciation, no revised return of income was required to be filed and that being so, ‘Goetze (India) Ltd. (supra) is not applicable at all and it has been wrongly applied by the authorities below.
17. In view of the above discussion, the grievance of the assessee in this regard is justified and is accepted as such. Therefore, ground No. 4 in ITA No. 5045/Del/2010 for A.Y. 2005-06 is accepted. The only other issue is that of initiation of penalty proceedings u/s 271(1)(c), which is consequential.
18. In the result, all the assessee’s appeals for A.Y.s 2005-06 & 2006-07 are partly allowed, as indicated above, and those for A.Y.s 2004-05 and 2007-08 are allowed.