As per depreciation schedule, the depreciation is allowed on buildings @5% for which the buildings are mainly used for residential purposes except hotels and boarding houses. The depreciation is allowed @10% on buildings used mainly for residential purposes and not covered by the category of 5% depreciation. The remaining two items are 100% depreciation category. The cement silos are structures specifically designed for preserving the cement from dampening and to keep the finished product intact. Any leakage of wall, the products will be got damaged and cannot be put to use and the entire production gets spoiled. Therefore, the cement silos are required specific design and construction and can be used only for the purpose of preserving the finished product of cement. Such structures cannot be used for residential purposes by human beings. Therefore, cement silos cannot fall under the category of buildings for the purpose of depreciation. As held by Hon’ble Supreme Court in 247 ITR 268, the buildings specifically designed and integral part of generating station should be considered as plants entitled for higher depreciation. Similarly, the cement silos are to be treated as integral part of the cement plant for storage and distribution of final product. Therefore we are of the considered the opinion that the cement silos are to be treated as plant and eligible for higher rate of depreciation.
FULL TEXT OF THE ORDER OF ITAT CHENNAI
This is an appeal filed by the Revenue against the common order dated 30.03.2016 in ITA Nos.53, 50(a) & 73/14-15/CIT(A)-17 of Commissioner of Income Tax (Appeals)-17, Chennai, for Assessment Years 2007-08, 2009-10 & 2012-13. Since the issues involved in these three appeals are common, for the sake of convenience and brevity all the three appeals are disposed in common order.
2. First issue in this appeal of the Revenue for the AY 2007-08 is relating to the disallowance of proportionate interest expenditure amounting to Rs.106.52 lakhs towards 80IA unit. The assessee debited to an amount of Rs.1725 lakhs towards interest and claimed the entire expenditure from non-80IA Unit. The AO held that the expenditure was common and apportioned between 80IA/non-80IA units. The assessee went on appeal before the Ld.CIT(A) and Ld.CIT(A) allowed the relief and Revenue is in appeal before us.
3. Appearing for the Revenue Shri Pathlavath Peerya, Ld.D.R submitted that the assessee has incurred a sum of Rs.1725 lakhs as interest expenditure and claimed the entire expenditure from the income of the units not entitled for deduction u/s.80IA instead of allocating the expenditure to all the units, since the expenditure was common in nature. The Ld.DR argued that the expenditure required to be allocated among the 80IA units also proportionately. According to the Ld.DR the assessee overstated the profits of 80IA units without allocating the interest expenditure and claimed excess deduction u/s.80IA without payment of taxes. According to the Ld.DR in the absence of any evidence to prove that utilization of borrowed funds were used by non-80IA units, the Ld.CIT(A) is not correct in holding that the loan borrowed by the assessee was not used by units eligible for deduction u/s.80IA.
4. On the contrary, Shri S. Sridhar, the Ld. Counsel of the assessee submitted that the assessee has furnished the details before AO evidencing that usage of loans and the interest bearing funds were used by the company for cement plant which is non-80IA unit and therefore the assessee has rightly claimed the deduction form the income of cement plant. The assessee exclusively borrowed the loan for the cement plant and no part of the loan was used for the power plant project. According to the Ld.Counsel there is no question of any disallowance on proportionate basis since the borrowed funds were exclusively used for the cement plant. Ld. Counsel also submitted that separate books of accounts are maintained for eligible and non-eligible units.
5. We have considered the rival submissions on either side and perused the material available on record. The assessee has borrowed the loan for setting up of cement project and no loan was borrowed for the purpose of power plant project. The assessee exclusively borrowed interest free loan from SIPKART for installation of power plant. When the assessee borrowed loans for different purposes and the balance sheet of the assessee clearly shows the classification of the secured loans, this Tribunal is of the considered opinion that the disallowance of proportionate interest between the eligible and non-eligible units is not justified. The facts of the case are identical to the assessee’s own case for the assessment year 2011-12 in ITA No.1492/Mds/2015 dated 24.03.2016 and the Hon’ble ITAT allowed the claim of the assessee on the same facts. Therefore, we do not find any reason to deviate from the earlier orders of this Tribunal cited supra. Accordingly, we confirm the order of the Ld. CIT(A) and the Revenue’s appeal on this ground is dismissed.
6. The second issue of appeal for the assessment years 2007-08, 2009-10, 2012-13 is excess depreciation on cement silos. The AO disallowed the excess depreciation on cement silos for the assessment years 2007-08, 2009-10 & 2012-13 to the tune of Rs.32,848/-, Rs.1,91,80,723/- and Rs.3,77,79,919/-respectively. The assessee claimed the depreciation on cement silos treating it as plant and machinery @15%. The AO held that cement silos are buildings and the depreciation was restricted to 10% as applicable to buildings and no additional depreciation was also allowed.
7. Aggrieved by the Order of the AO, the assessee went on appeal before the Ld.CIT(A) and submitted that the cement silos are specifically designed for preserving the cement, which should not come in into contact with water or moisture till it is put to use. Cement silos are not mere superstructures which can be used for business as well as residence and they are specifically designed structures to keep the finished products intact till it’s disposal from the cement plant. The Ld. CIT(A) considered the submissions made by the assessee and held that the cement silos are not the buildings, they are to be treated as plant and machinery and allowed the depreciation @15% as claimed by the assessee.
8. Aggrieved by the order of the Ld. CIT, the department is in appeal before us.
Appearing for the Revenue, the Ld. DR, Shri Pathlavath Peerya, CIT, submitted that the cement silos are the buildings which should be categorized as buildings other than those used for residential purposes and not covered by items @5% of depreciation and the AO is rightly allowed the depreciation @10% as applicable to buildings. According to the Ld. DR, depreciation on cement silos are to be allowed @10%. On the other hand, the Ld. Counsel submitted a detailed note on construction of cement silos as under:
“The storage of cement is important for packing the verity of cement in our modern cement works. The various products holding up to 1500 to 6000 tons of cement per silo, must be so designed that can be efficiently operated with procedures for preserving the quality of cement and dispatching the same for the plant.
The number and size of the cement silos will depend on the operating and despatch conditions of the plant. The silos were preferably installed at ground level. The cement is extracted from the silo and transported through the airsides to loading machine to pack the cement with bags by sack filling machines or by the bulk loading to the trucks to the customer.
The cement silo consist of various devices for filling the cement to silo and extraction bins provided inside the silo with closed conveying system and the bottom discharge arrangements used in our modern cement silos.
Our cement silos are invariably equipped with pneumatic handling systems and pneumatic discharge and flow regulating devices. Blowers and compressed air form an integral feature for extracting the cement from the silo.
The air is supplied by rotary piston blowers at pressures ranging from about 5000 mm w.g. Depending on the silo emptying system, the air supply rate for attaining a certain cement discharge rate varies. The blower air is admitted at the silo bottom with discharge airsides to extract the cement continuously from the silo.
A principle that all pneumatic emptying systems have in common is that the air blown into the silo is automatically switched cyclically from sector to sector of the bottom by a special distributing device in conjunction with pneumatically operated valves which are opened and closed as per the requirement. All the aerating sectors of the silo should be activated uniformly in order to ensure that the material level goes down at a regular rate over the entire silo cross-section. Flow regulating valves control rate of cement discharge from the silo.
Further, the binding property and strength of cement depends upon its capacity for chemical reaction, which can take place in the presence of water. Cement if not stored properly can absorb moisture from the atmospheric air or any other source and react with it chemically. The strength of such type of cement when used would be adversely affected to the extent such reaction would have taken place.
Basic requirement is that cement should not come in contact with water or moisture or moisture till it is put to use. If it comes in contact, it will react and form lumps. Then it loses its reactivity and this in turn will result in less strength. Preserving the quality of the product is one of the mandatory requirements prescribed by the Bureau of Indian Standard. Hence, cement should be stored in such a manner that no moisture or dampness is allowed to reach cement either from the ground or from the environment.
Our silos are installed in order to meet all the above requirements and quality standards of the product”.
Considering the special status of the structures under consideration and further considering the crucial role played by the said structures in the manufacturing and maintenance of the quality as prescribed by Bureau of Indian Standards of the raw materials and finished products, the said structures which formed part of the manufacturing process of the cement would be eligible for the depreciation at the rates prescribed to the plant & machinery at 15%”.
9. The Ld.AR also relied on Supreme Court judgement in the case of Karnataka Power Corporation reported in 247 ITR 268.According to the Ld.Counsel, the cement silos are plants and the depreciation is to be allowed @15%.
10. We have considered the submissions made by both the parties and perused the lower authorities’ orders and material on record. As per depreciation schedule, the depreciation is allowed on buildings @5% for which the buildings are mainly used for residential purposes except hotels and boarding houses. The depreciation is allowed @10% on buildings used mainly for residential purposes and not covered by the category of 5% depreciation. The remaining two items are 100% depreciation category. The cement silos are structures specifically designed for preserving the cement from dampening and to keep the finished product intact. Any leakage of wall, the products will be got damaged and cannot be put to use and the entire production gets spoiled. Therefore, the cement silos are required specific design and construction and can be used only for the purpose of preserving the finished product of cement. Such structures cannot be used for residential purposes by human beings. Therefore, cement silos cannot fall under the category of buildings for the purpose of depreciation. As held by Hon’ble Supreme Court in 247 ITR 268, the buildings specifically designed and integral part of generating station should be considered as plants entitled for higher depreciation. Similarly, the cement silos are to be treated as integral part of the cement plant for storage and distribution of final product. Therefore we are of the considered the opinion that the cement silos are to be treated as plant and eligible for higher rate of depreciation.
Accordingly, we confirm the order of the Ld. CIT(A) and dismiss the Revenue’s appeal.
11. The next issue of Revenue’s appeal is MAT credit. The Ld. CIT(A) has allowed the MAT Credit placing reliance on the order of this ITAT in the assessee’s own case in ITA No.1085 & 448/Mds/2012 and 468/Mds/2014.The issue decided by the ITAT in the cited order was bad and doubtful debts but not the MAT credit. The MAT credit arose in assessee’s case for exclusion of surcharge and Education Cess and not because of bad and doubtful debts. It is an independent and different issue which should be addressed by the Ld. CIT(A) separately and the Ld. CIT(A) has not adjudicated upon. Therefore, we remit the issue back to the file of Ld. CIT(A) on this issue and direct the CIT(A) to re-adjudicate the issue on merits. This ground of appeal of Revenue is allowed for statistical purposes.
12. The next issue of appeal in this case was additional depreciation. As per Sec.32(1) (iia) of IT Act, the AO disallowed the additional depreciation claimed by the assess on cement silos holding that the cement silos as buildings but not the plant and machinery. For the reasons discussed in the earlier paragraphs of this order, this Tribunal held that the cement silos as plant and machinery but not the buildings and allowed the depreciation as applicable in the case of plant and machinery. Therefore, we hold that the cement silos are the plant and machinery and eligible for additional depreciation as per section 32(1)(iia) of Income Tax Act. Accordingly, we confirm the order of the Ld. CIT(A).
13. In original grounds filed along with Form-36 for the AY 2009-10 & and 2012-13 the Revenue has raised the objection relating to additional depreciation for power generation plant which was effective from 01.04.2013. In the assessee’s case, the additional depreciation was claimed in the case of cement plant on cement silos but not on power generation plant. Therefore, the Revenue’s ground on additional depreciation for power plant is infructuous and hence dismissed.
14. In the result, the appeals of the Revenue are partly allowed.
Order pronounced in the open court on 30th November, 2016, at Chennai.