DECIDED BY: ITAT, HYDERABAD BENCH `B’, HYDERAD, IN THE CASE OF: Sponge Iron India Ltd. Vs. DCIT, APPEAL NO: ITAT No. 410 & 411/Hyd/2007, DECIDED ON May 21, 2010.
Per Chandra Poojari, Accountant Member
These two appeals preferred by the assessee are directed against different orders passed by the CIT(A) –IV, Hyderabad dated 38.4.2006 and pertains to the assessment years 2001-02 & 2003-04. Since common issues are involved in these two appeals, they are clubbed together, heard together and disposed off vide this common order for the sake of convenience.
2. In both the appeals the first ground raised by the assessee are common and general in nature and does not require any adjudication.
3. The grounds 6 & 7 raised in these two appeals for which there is no permission from COD and accordingly these two grounds are dismissed.
4. The next ground Nos.3,4 and 5 are with reference to disallowance of depreciation on SAF Plant.
5. Brief facts of the case are that there was disallowance of depreciation on SAF Plant of Rs.4,45,39,956/- in the assessment year 2001-02. Similar disallowance was made in other year under consideration also. The assessing officer noticed that the assessee has constructed a sub merged Arc Furnace (SAF Plant) which was capitalized in the books w.e.f. 1.4.1999 for the assessment year 2000-01 and the following observations have been made in the annual report:
5.1. 4. SAF Plant has been capitalized w.e.f. 1.4.1999. The plant has not been in operation since capitalization. However an amount of Rs.145.22 lakhs (previous year Rs.145.22 lakhs) has been provided as normal depreciation on the assets of SAF”. Further, the Director’s report also contains a remark which is as under:
5.2. “During the year 2002-03 also the SAF Plant continued to remain idle in view of the continued depressed conditions in the market for Silico Manganese. Though the company made efforts were not successful. “
6. In view of the above, the assessing officer after giving an opportunity to the assessee, disallowed the depreciation claimed on the SAF plant relying on the ratio of the decision of the Hon’ble Mumbai High Court in the case of Dineshkumar Gulbchand Agrawal Vs. CIT & Another (reported in 267 ITR 768) (Bom. HC), wherein it was held that for availing the depreciation, the asset must be actually used for the purpose of business and not merely ready for use. The assessing officer also relied on the decision of the Hon’ble Gujarat High Court in the case of CIT Vs. Suhrid Geigy Ltd. (reported in 133 ITR 884) (Guj. HC), wherein it has been emphasized that the use must be actual, real and effective in the commercial sense.
7. The assessing officer did not accept the assessee’s contention that the test of `user’ has to be applied to the block of assets as a whole instead of each individual asset of the block. In this respect, the assessing officer held that since the assets of the SAF plant were only installed and never put to use for commercial production, the assets cannot become part of the respective block of assets.
8. On appeal to CIT(A), he confirmed the order of the assessing officer. Hence the assessee is in appeal before us.
9. The Learned AR submitted that the company is wholly owned by the Govt. of India and Govt. of Andhra Pradesh. It is engaged in manufacture and sale of pig iron and sponge iron. The assessee’s counsel drew our attention to the flow chart of pig iron production. Its main activity is production of sponge iron and sale of the same. He stated as follows:
9.1. The plant and machinery was established in the year 1980 at Palvancha and thereafter there was a substantial expansion during the year 1985 and the full production including the production in the expanded that commenced in July, 1985. As can be seen from the flow chart of the pig ore and coal. The lump iron ore and the coal are crushed, they are scrammed to the size and are fed to the manufacturing process. In so far as the coal is concerned, the entire coal is used in the kiln but in so far as iron ore is concerned, 0.6% to 1% of the iron ore fines remain and cannot be used in the process of manufacture. Therefore, they have to be dumped as wastage and assessee did not find any use for the said iron ore fines. In so far as coal is concerned, the plant leaves waste heat char. The assessee was of the view that by using the sponge iron fines and the heat char it can manufacture pig iron from the sponge iron and also produce silicon manganese. Therefore, in the year 1996 it established submerged arc furnace (SAF) so as to enable the company to manufacture pig/silicon manganese. The entire process of manufacture of pig iron and silicon manganese commenced in the year 1996 as enumerated in the following paras.
9.2. The plant was completed and commissioned in the year 1996. During the year 1996, the plant commenced its production of pig iron. However with the introduction of mini blast furnaces in India, the production of pig iron was more uneconomical in such mini blast furnaces and the assessee started incurring losses in the production of pig iron. The following factors lead the company to stop the manufacture of production of pig iron in the year 1997 itself:
a) when the proposal of setting up pig iron plant through SAF was taken up, there was tremendous shortage of pig iron in the country and it was being imported. During the implementation period concept of mini blast furnace came into India and many mini blast furnaces were set up and commissioned in India for production of pig iron economically and hence the operation were not continued.
b) Due to globalization, prices of steel and other products fell down drastically and this further aggravated the situation and operations of SAF became uneconomical. However, sponge iron plant and power plant from waste heat recovery system were continuously operated to meet SIIL’s power requirements.
10.1. Thereafter, in the year 1997, the facility of SAF has been modified for production of silicon manganese by adding certain other equipment. At present, the entire plant together can produce sponge iron, pig iron and silicon manganese. The plant SAF is an integral part of the total plant and machinery held by the company. Such plant cannot independently produce anything. But it can convert sponge iron to pig iron if associated with other plant and machinery. The expenditure incurred by the company in installing SAF was capitalized in the year 1999 and accordingly depreciation was claimed for the ay 2000-01 and onwards. The fact that is claiming depreciation on the SAF has been stated by mentioning in the final accounts from the assessment year 2000-01 and onwards. For the assessment year under consideration i.e. 2001-02 , the profit amounted to Rs.663.62 lakhs. According to the computation, the total income worked out to Rs.5,10,06,055 and after claiming set off of the earlier year losses the net income is reduced to Rs.Nil. Accordingly, the return of income was filed on 30.10.2001 admitting the total income at Rs.Nil.
11. He drew our attention to the provisions of sec.32(1) of the IT Act and stated that as per sub clause (ii) of sub section 1 of Sec.32, the prescribed percentage of depreciation to be computed on the written down value of block of assets. The `written down value’ is defined by sec.43(6)(c ) of the IT Act. He submitted that even when a part of the asset is not put to use the written down value becomes allowable for depreciation. Only when entire block of assets is not put to use, depreciation may not be allowable. The concept of `block assets’ introduced for the purpose of arriving at depreciation provides for depreciation even on those assets which are not used during the previous year. He submitted that in the case of block assets, the utilization of assets is not relevant as the assessee becomes entitled for depreciation if the block is put to use whether partly or totally. This concept was introduced w.e.f. 1.4.88 by the Taxation Laws and Amendments and Miscellaneous Provisions Act, 1988. He submitted that when the assets are formed into a block of assets cannot again be separated. The intention of the Legislature is to grant depreciation on the written down value of entire plant and machinery without considering the independently unit of machinery. In such circumstances, the assessing officer cannot divide individual parts of the machinery for granting the depreciation and has to consider the plant and machinery as an integral one unit. He submitted that the expression of word `used’ mentioned in Sec.32 is applicable to block of assets and not to an individual item of assets included in the block of assets. The entire plant and machinery is kept ready for use and was not used for business considerations, since the production of pig iron and silicon manganese is not economical, the assessee stopped the process of manufacturing the pig iron and it was selling the sponge iron directly to various industries in India. The assessee can produce at any point of time pig iron, if situation warrants. He submitted that the SAF plant is not an independent machinery and it is integral of the entire plant and machinery system for production of pig iron. In view of this he submitted when the entire factory is ready to use and a part of the plant and machinery of that factory is not used, the entire plant and machinery becomes entitled for depreciation.
12. He relied on the following judgements:
a) Pact well printers Vs. ACIT report in 59 ITD 340
b) Indoctotherm India Ltd. Vs. DCIT reported in 69 ITD
c) CIT Vs. Swaroop Vegetable Products reported in 198 CTR 595
13. Further he submitted that when the assessee bona fidely installed the machinery but it becomes defective or non functional, it cannot be said that assessee is not put to use the machinery for the purpose of business and it cannot possible to disallow the depreciation. For this proposition he relied on the judgement of Karnataka High Court in the case of CIT Vs. Chamundeswari Sugar Limited (309 ITR 326) (Karn. HC)
14. Finally, he submitted that for the years 1994-95, 1995-96 and 1996-97 , pig iron was produced by using the same plant. For this purpose, he drew our attention to the show cause notice issued by Commercial Tax Department for these assessment years. He also drew our attention to RGI Register for demonstrating the production of ferrous waste from manufacture of pig iron which is placed on record at Page No.5a.1 to 5a.5, 5b.1 to 5b.4 and 5c.1 to 5c.4 of Assessee Paper Book. He also drew our attention to the details of electricity bills from January, 1994 to March 1996 and submitted that consumption of electricity has gone up in the month of June 1994 and August 1994 to December 1994 for heating up/trial operation of SAF plant. In December, 1995 and January 1996 again consumption of power has gone up. He also contended that even closed unit entitled for depreciation or depreciation even allowable if assets not used at all for entire year. For this purpose he relied on various unreported ITAT orders.
15. On the other hand the departmental representative submitted that before the assessing officer assessee has taken only one plea that the SAF plant was kept ready for use. Now the plea of the assessee is that the SAF plant was used in earlier years and only in this assessment years under consideration it was not used due to business considerations. He drew our attention to the page No.2 of the assessment order of assessment year 2003-04. Further he drew our attention to the Audit Report of these assessment years. Further he submitted that as per 28th Annual Report of the assessee the SAF Plant has been capitalized w.e.f. 1.4.1999. The plant has not been in operation since capitalization. However, depreciation has been provided for. He submitted that the SAF plant was not at all put to use since capitalization. The argument of the assessee counsel is contrary to the records and whatever the evidence produced by the assessee in support of the usage of the SAF plant is new evidence which cannot be considered at this stage. He submitted that even if the trial run carried on by the assessee, it is an empty formality since there is no intention of usage of the plant and management has taken a decision not to go for commercial production . Further, he submitted that kept in the state of readiness to use of the plant is no meaning since various parts of the machinery were removed at various time. He drew our attention to the office note dated 09.12.2005 placed at Page No.7.7 of the Assessee’s Paper Book which reads as follows:
Note: The existing gear reducer of DRP I cooling tower fan No.2 is completely damaged and is beyond repairable. Procurement for a new gear box is under progress and as a `stop gap’ , arrangement, the same model 346-602 To do PCT make available at our SAF Plant. Your honour may kindly be spared to put back the fan into operation. Submitted for kind information and approval.
DGM(O): Since plant is not in operation, may be spared for the DAP-II cooling tower on returnable basis, as procurement action is under progress.
He further submitted that there was no intention to use the plant and it is a scrap material cannot enter into block of assets and depreciation was rightly denied .
We have heard both the parties and perused material on record. The SAF plant was acquired for the purpose of producing pig iron. As per assessee’s own Audit Report and Director’s Report thought the asset was capitalized w.e.f. 1.4.1999, the said plant was not in operation since capitalization. The Director’s Report of the year 2002-03 contains the remark that the SAF plant continued to remain idle in view of the depressed conditions in the market for silicon manganese. Though the company has made effort to find out the possibility of alternative use of SAF, these efforts was not successful. As per record, it was not put to use even after 7-8 years from the date of trial production i.e. from the date of trial production. There was a inspector report to this effect . Contrary to this, the assessee produced certain unsubstantiated documents which are not produced before the lower authorities. The evidence produced by the assessee at this stage without any petition for admission of this evidence or explaining the reason for not producing the same before the lower authorities, we are not in a position to consider the same. The assessee has not shown any reasonable cause for not producing the same before the lower authorities. There is no iota of evidence or discussion regarding this evidence in the order of the lower authorities. In our opinion, this evidence cannot be considered at this stage.
15.2. Further, the SAF plant is not an integral part of the main Plant and the main plant can function without involving SAF plant. The assessee was not able to show any evidence to the effect that the said SAF plant was kept ready with intention to use. On the other hand, various parts of the said plant was removed at various times. Then it means that there was no intention to use of this plant. This was fortified by the Schedule -18, Notes given at Para 7 of Annual Report for the year 1995-96 wherein it was stated that after ascertaining the possibility of producing the pig iron out of the sponge iron by trial operation, the plant has not started any commercial production because of two reasons:
1. Non availability of adequate and sustained power from the state Electricity Board
2. Non viability from economic angle on account of free availability of high grade pig iron both from domestic manufacturers as well as by way of imports. So, after trial production the very idea of producing pig iron out of sponge iron was abandoned completely without there being any future prospects in this respect. There is no intention of prospective production of pig iron in future. Being so, there is no merit in the argument of the assessee counsel that the SAF plant was kept ready for use. Regarding various case laws relied by the assessee counsel, we are of the opinion that these case laws not applicable to the facts of the present case. In the present case, the SAF plant not at all used at any time and there was no intention to use the Plant. Instead various parts of the plant were removed and used for some other purpose. In these circumstances, we cannot apply the ratio laid down by various case law cited by the assessee counsel. In our opinion, even after introduction of concept of block assets, the identity of the individual assets were not lost and the assessing officer can restrict the depreciation having regard to the usage of the SAF plant. In the present case, since capitalization this SAF Plant, it was not in operation as such it cannot enter into block asset and the condition laid down in Sec.32 (1) not fulfilled and the assessee is not entitled for depreciation on this plant. This ground of the assessee is dismissed.
16. The next common ground Nos. 8 & 9 are relating to disallowance of outstanding expenses and arrears of salary.
17. Brief facts of the case are that the assessee company has claimed expenditure towards provision for revision of wages of Rs.1,89,31,000/- The assessing officer held that since the provision is not an actual expenditure, and in the absence of proof whether it is actually paid in the subsequent year, the expenditure is not allowable and therefore the same is added back to the return of income of the assessee. Similarly, provisions of miscellaneous expenses at Rs.7,83,000/- was disallowed while computing the income as per the provisions of Sec.115JB of the IT Act.
18. We have heard both the parties and perused material on record. The learned counsel relied on the order of the Tribunal dated 11.7.2005 in ITA No.12/Hyd/2002 & Others for the assessment year 1998-99 and others in the case of NMDC Ltd. Vs. DCIT for the proposition that provisions made towards additional liability on account of enhanced wage and salary are allowable in the year of making such provision. After carefully examining the facts of the case, we are of the opinion that these expenses are disallowed on non production of evidence by the assessee for incurring these expenses. In the interest of justice, we set aside this issue to the file of assessing officer for fresh consideration with a direction to the assessee to produce necessary evidence in support of its claim. The assessing officer required to reexamine the issue in accordance with law.
19. The last common ground in both the appeals are relating to incorrect calculation of MAT.
20. Brief facts of the case are that while computing the income u/s 115JB, the assessing officer inter alia added the various provisions to the book profit. Before the CIT(A), the assessee not able to lead any evidence in support of its claim. After hearing both the parties, we set aside this issue to the file of assessing officer for fresh consideration to allow ascertained liability on production of requisite evidence by the assessee for crystallization of this expenditure in the assessment year under consideration.
21. In the result, appeals of the assessee’s are partly allowed.