Case Law Details

Case Name : ACIT Vs. Everest Industries Ltd. (ITAT Mumbai)
Appeal Number : ITA No. 815/Mum/2007, ITA Nos. 1365, 1366/Mum/2009, ITA Nos. 1885, 1886, 1971 & 1972/Mum/2013
Date of Judgement/Order : 15/09/2017
Related Assessment Year :
Courts : All ITAT (5168) ITAT Mumbai (1632)

ACIT Vs. Everest Industries Ltd. (ITAT Mumbai)

1. The only grievance of the revenue in this appeal is that the provisions of section 50C of the Act mandates that where a transfer of capital asset being land or building or both is for consideration less then its value as adopted/assessed by the State Government for the purpose of stamp duty then the stamp duty value would be adopted as being the full value of consideration for computing capital gains arising out of transfer of the asset. It is the case of the revenue that section 50C of the Act would apply also to transfer of leasehold interest in land and is not limited to only to transfer of land and building or both.

The impugned order of the Tribunal allowed the respondent – assessee’s appeal by following its own decision in Atul G. Puranik v. ITO 58 DTR 208on identical issue. The Tribunal in Atul G. Puranik (supra) held that section 50C of the Act would apply only to a capital asset being land or building or both and it cannot apply to transfer of lease rights in a land.

2. Without analyzing scheme under which sales tax subsidy was granted the same cannot be decided whether it was capital or revenue receipt.

3. AO cannot make a reference to DVO for purpose of valuation where the value of capital asset declared by assessee, was not less than fair market value (FMV).

4. Intention behind section 54G is clear that assessee should invest sale proceeds of sale of specified asset in industrialization or should deposit the same in bank account thus on piece-meal purchase of plant and machinery deduction can be claimed by assessee.

5. The expression new machinery is to be construed as referring to condition that at the time of acquisition or installation plant and machinery should be new therefore, additional depreciation under section 32(1)(iia) was to be allowed on installing machinery any time.

6. When foreign exchange fluctuation gain would be taxed, on same premise, foreign exchange loss must be allowed. 

Full Text of the ITAT Order is as follows:-

Challenging the orders of the Commissioner (Appeals)-I/II, Thane, the assessing officer (AO) and the assessee have filed appeals for the above-mentioned years. Assessee- company is engaged in the business of manufacture and sale of asbestos cement sheets and accessories. The details of dates of filing of returns, returned incomes, dates of assessments, dates of orders of the First Appellate Authority (FAA) can be summarized as under :–

A.Y. ROI filed on Returned Income Assessment datw Assessed Income Date of order of the CIT (A)
2004-05 1-11-2004 Rs. 20.59 crores 3-3-2006 Rs. 71.38 crores 30-11-2006
2005-06 28-10-2005 Rs. 23.76 crores 3-12-2007 Rs. 29.68crores 28-11-2008
2007-08 31-10-2007 Rs. 4.74 crores 11-12-2007 Rs. 18.48 crores 9-11-2012
2008-09 30-9-2008 (-) Rs. 36.28 crores 23-12-2010 Rs. 7.13 crores 9-11-2012

As most of the issues, raised by the AO/the assessee are common, so, we are adjudicating all the appeals together.

During the course of hearing before us, the Authorized Representative of the assessee did not want to press grounds of appeal no. 10 and 11 and both the additional grounds raised by it.

Hence, same stand dismissed, as not pressed. Last two grounds of appeal are general in nature, so, same are not being adjudicated.

ITA/815/Mum/2007, assessment year 2004-05.

2. First Ground of appeal is about sales tax subsidy amounting to Rs. 6.57 crores. During the assessment proceedings, the assessing officer observed that the assessee had filed a revised return of income claiming notional sales tax liability to the tune of Rs. 6,57,91,246, as incentive/subsidy in the form of sales tax exemption, that it had claimed that subsidy was capital receipt, that it had relied upon the cases of Balrampur Chini Mills Ltd. (238 ITR 445) and Reliance Industries Ltd. (88 ITD 273, Mumbai Special Bench), that it had claimed that the notional sales tax liability for setting up the unit at Lakampur in district Nashik was in the nature of capital receipt, that it was granted to encourage investment in the backward areas of the State of Maharashtra. The assessing officer observed that the sales tax exemption were applicable right from the assessment year 1995-96, that the assessee had got eligibility certificate is also certificate of entitlement way back in 1996, that it had not claimed any deduction on notional sales tax exemption as capital receipt for the assessment year s 1995-96 to 2003-04, that filing of a revised return on the last day for the year under consideration was only an indication of afterthought on part of the assessee to claim sales tax exemption as capital subsidy, that any capital subsidy granted by the government would be granted as one-time transaction, that it could not be the nature of recurring incentive, that the very nature of subsidy under Special Scheme of Maharashtra Government for year to year basis up to 10-15 years indicated the nature of exemption as revenue rather than capital as claimed by the assessee, that the assessee had filed a revised return on 31-3-2005, that there was no indication of any omission for any wrong statement in the original return of income, that the claim of sale tax incentive as per the revised return under section 139(5) was legally not tenable. He analyzed the sales tax incentive scheme and held that in the case of Reliance Industries Ltd. (RIL) the Tribunal had dealt with the sales tax incentive granted under 1979 scheme. He analyzed the various aspects of the incentive scheme of 1993 i.e., Maharashtra Special Package Scheme of 1993 and held that the legislature had never intended that sales tax incentive by way of exemption would be different from sales tax incentive by way of deferral and by way of interest-free unsecured loan, that merely because the sales tax incentive by way of exemption was not payable at all would not change its colour from a revenue receipt to capital receipt, that incentive was to be calculated at percentage of fixed capital investment depending on the category of area in which the eligible unit was being set up, that the sales tax incentives were never intended to be in the nature of capital incentive. Finally, he held that claim made by the assessee, under the head notional sales tax liability, to the extent of Ruby 6.57 crores, was not allowable.

2.1. Aggrieved by the order of the assessing officer, assessee preferred an appeal before the First Appellate Authority (FAA) and made elaborate submissions. It also relied upon certain case laws. After considering the available material, she held that sales tax incentive was granted to the assessee in respect of shifting of the factory from Mumbai to district Nashik in the year 1995, that it had put forth its claim for similar reduction in the assessment year 2001-02 by way of additional ground before the Tribunal, that in respect of assessment year 2002-03 application under section 264 for similar claim was spending with the Commissioner, that until the assessment 2000–01 no claim whatsoever was made by the assessee although it was granted exemption rights from the assessment year 1995-96, that assessee could make claims in any of the subsequent years even though it had not done so in the earlier years, that it did not claim the exemption for almost 8 years showed that nature of the exemption was not clear even to the assessee, that it was advised in represented by professionals, that the scheme and the certificate granted to the assessee proved that it had got sales tax incentive by way of interest-free unsecured loan, that it had to repay the sales tax liability after 10 years as per the repayment schedule, that there was no mention in the scheme to the effect that the amounts retained by it had to be utilized towards acquisition of any fixed capital, that the perusal of the 1993 scheme revealed that earlier scheme of 1988 was fully revised, that the reliance of the assessee on the decision of the Tribunal in the case of RIL was not correct, that the said decision deliberated upon the earlier scheme and not the one under which the assessee had been granted sales tax exemption, that the assessee received the sales tax incentive on a totally different scheme than the one deliberated upon by the Tribunal. Finally, the FAA held that the nature of subsidy in the case under consideration was not of capital nature, that there was nothing under the scheme to indicate that sales tax exemption was in the nature of capital subsidy for the purpose of bringing into existence any capital asset or for the purpose of subsidizing purchase of any capital asset, that the validity period of the scheme was 176 months, that the assessee had not linked the sales tax incentive receipt to the acquisition of any capital asset, that as per the scheme the assessee was entitled to receive incentive only if it would make the sales/or purchase and that if no sales were made it would not receive any incentive, that it had also accepted that sales tax exemption had been granted on the basis of sales.

2.2. Before us, the Authorized Representative contended that the issue of sales tax subsidy was decided by the Tribunal in the case of Reliance Industries, that the subsidy received was a capital receipt, that the Hon’ble Supreme Court had sent back the issue to the Hon’ble Bombay High Court, that the order of Tribunal in the case of Reliance Industries was still a good law. The Departmental Representative supported the order of the FAA and contended that both the Schemes were separate, that the matter of Reliance Industries dealt with the earlier Scheme, that the Scheme under consideration for the year was 1993 Scheme.

2.3. We have heard the rival submissions and perused the material before us. We find that the assessee had claimed that sales tax incentives received by it had to be treated as capital receipt in the revised return filled by it. The assessing officer and the FAA had rejected its claim. The matter of RIL, relied upon by the assessee, has been sent back to the Hon’ble Bombay High Court by the Hon’ble Apex Court with a direction to consider the provisions of the scheme. There is no doubt about the principles governing the subsidies-if the subsidy is in the field of setting up of a business or for capital goods it has to be considered a capital receipt or same has to be taxed as revenue receipt. The said broad categorization is applicable to all kind of subsidies. As the various schemes announced by the state government from time to time lay down different conditions for availing the incentive schemes, so, without analyzing the scheme, as a whole, no final conclusion can be drawn. Considering the peculiar facts and circumstances of the case, we are of the opinion, that in the interest of justice matter should be restored back to the file of the assessing officer for fresh adjudication. He is directed to compare the scheme deliberated upon by the Tribunal in the case of RIL and the scheme of 1993 applicable for the year under appeal. He would afford a reasonable opportunity of hearing to the assesseee. First Ground of appeal is decided in favour of the assessee, in part.

3. Next effective Ground of appeal (GOA.2-5) is about income under the head capital gains from sale of plot of land at Mulund. During the assessment proceedings, the assessing officer found that the assessee had sold industrial land pertaining to the Mulund factory, that in the return of income it had claimed Long-Term Capital Loss (LTCL) from sale of plot of land, that it had claimed deduction under section 54 of the Act, that in the return of income it had taken value of sale consideration at Rs. 64.92 crores as per the registered agreement of sale of the plot of land, that on the sale deed document the franked value of stamp duty was mentioned at Rs. 80.78 lakhs, that the details obtained from the office of the registrar indicated that market value of the plot of land was Rs. 80.78 crores, that the sale document also indicated payment of stamp duty at the rate of 10% (Rs. 80,78,150). Referring to the provisions of section 50 of the Act, he stated that it had dealt with the special provisions for full value of consideration in certain cases, that the provisions were clearly applicable to the case under consideration, that the value received by the assessee from sale of land was less than the value adopted by the Stamp Valuation Authority. Accordingly, he decided to take the full value of consideration as per the provisions of section 50 and directed the assessee to file explanation in that regard. The assessee stated that conditions of section 50 were not applicable. The assessing officer observed that the assessee had not directly disputed the value adopted by the Stamp valuation authority, that the case was not referred to District Valuation Officer (DVO) as required by the provisions of section 50 (2) of the Act. However, he decided to make a request to the DVO to furnish the case of sale instances for the plot of land during the same period in which the plot of land was sold. Vide his letter dated 2-1-2006, he communicated the rate of land and sale instances of the same period and same locality as in the case of land pertaining to the assessee. Taking note of the letter of the DVO, the assessing officer held that the approximate rate of land in Mulund area during the month of March, 2004 was Rs. 1,352 per sq. ft. to Rs. 2,223 per sq. ft., that the computation of rate made by the DVO was very reasonable, that rate per ft.2as per the stamp duty authorities would be Rs. 1,140(Rs. 80,78,14,570 (/)7,08,894 sq.ft.), that the rate of Rs. 1,140 per sq. ft. was very reasonable compared to the rate suggested by the DVO. Finally, he held that value of consideration for the plot of land had to be taken at Rs. 80.78 crores as against Rs. 64.92 crores.

With reference to the Fair Market Value (FMV) as on 1-4-1981, the assessing officer observed that the assessee had adopted value at Rs. 200 per sq. ft. based on the report of a registered valuer, that the assessee had a large chunk of land at Mulund, that the land was divided in two categories i.e., residential land and industrial land, that during the financial year 1994 -95 it shifted its industrial undertaking, that it entered into an agreement for development of both types of land with a builder namely Lok Housing Group, as per the agreement sale of residential land started in financial year 1994-95 and accordingly the assessee claimed Long-Term Capital Gain (LTCG) on sale of land, that the land in question was acquired much before 1-4-1981, that the assessee exercised the option of FMV as on that date for the cost of acquisition of land, that the land was valued at the rate of Rs. 60.40 per square feet (Rs. 650 per sq.mtr.) as on 1-4-1981, that the assessee had filed the valuation report along with the return of income, that the valuation was done by a registered valuer who had inspected the site on 4-2-1991, that in the assessment proceedings the then assessing officer had taken the rate at the Rs. 575 per sq. mtr. instead of Rs. 650 per sq. mtr. as claimed by the assessee, that in the appellate proceedings the then FAA had directed the assessing officer to get the property valued from the DVO for the purpose of FMV of the land as on 1-4-1998 and then finalised the assessment. Accordingly, the matter was referred to the DVO who determined the value of the land, as on 1-4-1981, at the rate of Rs. 590 per sq. mtr. (Rs. 54.83 per sq. ft.). As per the assessing officer the assessee, vide its letter dated 7-3-2003, during the proceedings of the computation had consented to adopt the value as reported by the DVO on the reference made by the Department, that for the purpose of computation of capital gain for the assessment year 2001-02 in respect of part of land sold during the relevant assessment year The assessee had consented to adopt the value as reported by the DVO on the reference made by the Department, that all along the assessment proceedings from assessment year 1995-96 till assessment year 2001-02 the assessee had taken FMV at the rate of Rs. 60.40 per sq. ft. as on 1-4-1981 and had accordingly computed the LTCG, that in the assessment year the respective assessing officers had taken the FMV of land as on 1-4-1981 at the rate of Rs. 54.83 per sq. ft., that the FMV of land had never been contested by the assessee before the appellate authority. Referring to the report of the registered valuer filed by the assessee along with the return of income for the year under consideration, the assessing officer observed that the registered valuer had considered sale instances in the report and arrived at the rate of Rs. 200 per square feet, that the DVO had considered the sale instances considered by the registered valuer, that the valuation officer had held that rate of Rs. 590 per sq. mtr. was determined after taking into consideration all the relevant factors, that the rate of Rs. 590 per sq. mtr. adopted by the DVO as against the rate of Rs. 650 adopted by the assessee was very reasonable and was based on the sale instances of the land in the same locality and same period, that the registered valuer had adopted the FMV at the rate of Rs. 200 per square feet as on 1-4-1981, that the valuation of plot of land had been done on different methods, that the registered valuer had valued the land a single unit, that the comments given by the valuer were not supported with any documentary evidences and were based on presumptions only, that the rate of FMV as on 1-4-1981 calculated by the valuer on the basis of different methods of valuation was only to suit the requirements of the assessee for higher value, that during the assessment proceedings it had submitted another valuation report dated 1-3-2006 and had taken the rate at Rs. 200 per sq.ft. as on 1-4-1981, that the registered valuer had given sales instances of flat, go downs and shops of different areas along with two instances of Mulund, that the sale instances were for constructed property and the rate varied from Rs. 250 to Rs. 300, that the rate suggested by the valuer was not reasonable, that it had sold the land in the financial year 2003-04 as a residential land after converting the industrial land, that in the process of conversion it had incurred expenses in nature of compensation to the workers and expenses for obtaining TDR, that the cost of improvement had been separately claimed by it while computing the capital gains, that the amount of such expenses were in the range of Rs. 15– Rs. 16 crores, that if the value of the said amount is on 1-4-1981 was calculated backwards the FMV as on 1-4-1981 would be much lower than what had been reported by the DVO, that the rate of Rs. 200 per sq.ft. has FMV of land could not be accepted, that the principle of estoppel is applicable as the assessee was all along taking the rate of land is on 1-4-1981. Rs. 60.40 per sq.ft. for the assessment year s 1995-96 till 2001-02, that suddenly for the year under consideration the FMV rate of the land as on 1-4-1981 was taken at Rs. 200 per sq. ft., that the rate adopted by the DVO i.e., Rs. 54.83 per sq. ft. as on 1-4-1981 adopted till the assessment year 2001-02 was not contested by the assessee, that it could not be allowed to take the FMV of the land at Rs. 200 per sq.ft. on the basis of the report of a registered valuer filed along with the return of income. He re-computed the income under the head LTCG from the sale of land at Rs. 54.41 crores. 3.1. During the appellate proceeding, before the FAA, the assessee made elaborate submissions and relied upon certain case laws. After considering the available material, she held that the assessing officer had computed the LTCG at Rs. 50.32(1) crores as against the LTCL of Rs. 15.34 crores as claimed by the assessee, that the assessing officer had correctly applied the provisions of section 50 of the Act to the facts of the case, that he had necessary and sufficient documentary evidences to show that the stamp duty had been paid on the total value of Rs. 80.78 crores as against the assessee’s claim that land was sold only for Rs. 64.92 crores, that the argument of the assessee about referring the matter to the valuation officer was not on sound footing, that as per the provisions of section 50 the assessing officer had option to refer the matter to the valuation officer, that the assessing officer had brought on record similar instances of sale and had also independently concluded that if the value of land sold was adopted at the rate of the stamp duty authorities the rate per sq. ft. would come to a similar value occurring in the area in respect of the land sold. With regard to FMV of the land as on 1-4-1981, the FAA held that the assessing officer had correctly adopted the rate of the land determined in the earlier assessment year s, that on earlier occasions the DVO had recommended the rate of Rs. 590 per sq. meters and that same was adopted at the time of giving effect to the appellate order, that the assessee did not file further appeal in respect of the rate adopted by the assessing officer, that the reliance of the assessee on the value of land, as per the report of the registered valuer was not binding in view of the fact that such value had already been determined without being contested in the earlier years’ income tax proceedings, that the assessee was granted deduction on account of improvements of property for the various expenses incurred by it on account of conversion of land from industrial to residential. Referring to the provisions of section 54, the FAA held that the section could not be interpreted in isolation, that the assessee had claimed and had been allowed the benefit of special deduction under section 54 in the earlier assessment year s, that it could not be allowed the benefit of same deduction again in the year under consideration, that to avail the benefit of the provisions of section 54 time period was of material importance. About the area of land sold, the FAA held that the assessee had contended that area of land should be taken at Rs. 7.08 lakhs sq. ft. instead of Rs. 6.38 lakhs sq. ft., that the assessing officer had deliberated upon the figures appearing in the sale agreement entered into by the assessee, that the argument raised by the assessee had to be dismissed. With regard to the brought forward capital losses, the FAA directed the assessing officer to verify the figures and pass necessary orders.

3.2. Before us, the Authorized Representative argued that during the year under consideration, the assessee had transferred the development rights in respect of its industrial land situated at Mulund to Nirmal Lifestyles (NL) in terms of the development agreement dated 24-2-2004, that in terms of the said agreement gross sale consideration agreed between both the parties amounted to Rs. 64.92 crores, that accordingly the said sum was considered as full value of the sale consideration for the purpose of computing capital gains on sale of development rights, that the assessee had not parted with the ownership, that in the agreement it was identified as owner and NL was termed as a developer, that it had authorized and permitted the developer for carrying out work of development and construction, that stamp duty had been paid at the rate of 1%, is applicable to the development agreement and not at the rate of 5% applicable to normal sale transactions, that the provisions of section 50 dealt with transfer of land in building, that the transfer of development rights in land was not part of the scheme and recessed by the legislature while enacting the provisions of section 50, that section 50 had created a fiction for substituting full value of consideration with stamp duty value, that there was distinction between land and buildings and rights in land and building, that the legislature had made parallel use of land and building as well as rights in land and building, that both were distinct from each other and had different connotation, that section 50 of the Act was not applicable to transfer of development rights. He referred to cases of Voltas Ltd. (161 ITD 199), Balkwade Sadanand Dhanji (ITA/686(PN/2013); Heatex Products (P) Ltd. (ITA/270 of 2014) and Aditya B. Mahadeviya (ITA/1351/Mum/2015). With regard to applicability of section 50(2) of the Act, the Authorized Representative stated that the assessee had, vide its letter dated 18-1-2006, disputed the value adopted by the stamp valuation authority, that disregarding the objection assessing officer proceeded to complete the assessment at the value determined by the state authorities without referring to DVO, that the action was totally against the express provision of the Act, that FAA had wrongly held that assessing officer had discretion in referring the case to the valuation cell-especially when the assessee had lodged its objection. He referred to the case of Aditya Narayan Verma- HUF (ITA/4166/Del/2013, date 7-6-2017).

3.2.1. Referring to the issue of FMV of the land as on 1-4-1981, he contended that he assessing officer had taken FMV on the basis of valuation report dated 22-3-2002 for the assessment year 1995-96, that the valuation in assessment year 1995-96 was done by the assessee as well as by the assessing officer for residential land, that the assessing officer had not disputed the fact, that for the year under consideration the asset involved was rights in industrial land, that the Rights were not comparable to the nature of assets that was valued in the earlier assessment years, that the assessee had obtained registered valuer’s report as on 1-4-1981 pertaining to industrial land, that the assessee had contested the valuation done by DVO for the earlier assessment year s, that valuation report had been set aside by the Tribunal for the assessment year 1995-96, that the valuation done by the DVO since 1995-96 would not survive any longer, that there was no question of Estoppel in any event, that for computing FMV of the property it had submitted a valuation report from two independent valuers, that the valuer had computed FMV of the assets as on 1-4-1981 based on four well accepted scientific methods which provided a range of values between 200-240 per sq.ft., that on a conservative basis FMV was finalized at Rs. 200 per sq.ft. as a fair approximation of the probable value of land. He referred to India Valuer’s Directory and Reference Book and stated that the industrial land was situated in ‘T’ ward of Municipal Corporation of Greater Mumbai, that land was situated between LBS Marg on West and Central Railways Line on the East, that in Indian Valuers Directory market value of the adjoining areas had been decided to Rs. 440-480 per sq.ft. as on 1-4-1981, that the land was located in Mulund.

3.2.2. The Authorized Representative further made submission about the reference made to the DVO under section 55A of the Act and contended that no reference to DVO could be made where value of the capital asset, estimated by the registered valuer was more than its FMV. He relied upon the cases of Daulal Mohata (360 ITR 680) of the Hon’ble Bombay High Court and argued that the assessing officer had not referred the matter to the DVO at the time of assessment, that reference was made at a later stage. He referred to Pg.s 122, 123, 268, 274, 275,340,362,379 and 423 of the PB..

The Departmental Representative argued that land had rights embedded in that, that without transferring land there could not be development of property, that possession of land was given to the developer , that transfer of land had taken place, that provisions of section 50C were applicable, that it was not a case of transfer of TDR, that with the shifting of industrial estates assets has shifted to Lakhampur, that assessee was not entitled to claim deduction under section 54G of the Act, that the investment was made after nine years. hereferred to the cases of Arif Akhtar Husain (45 SOT 257); Dattani Developers (2016) 182 TTJ 230 (Mumbai – Trib.); Edac Engineering Ltd. (2014) 159 TTJ 526 (Chennai – Trib.); Bharat R. Patel (2016) 159 ITD 473 (Mumbai – Trib.).

In his rejoinder, the Authorized Representative stated that in the case of Voltas Ltd. the Tribunal had dealt with the issue of development rights of the plot of land owned by the assessee, that the issue had been decided in favour of the assessee.

3.3. We have heard the rival submissions and perused the material before us. We find that three basic questions regarding sale of land by the assessee will have to be decided to adjudicate the ground, namely—(i) applicability of provisions of section 50 of the Act, (ii) FMV of the land as on 1-4-1982 and (iii) entitlement of deduction under section 54G of the Act (GOA, 6-8).

3.3.1. First of all we would take up the issue of applicability of section 50. We find that in the case of Aditya D Mahadevia (ITA/1351/Mum/2015- assessment year 2011-2012, dt. 4-11-2016), the Trib­unal has dealt with the identical issue. Following the judgment of the Hon’ble Bombay High Court in the case of Heatex Products (supra) the Tribunal decided the issue in favour of the assessee. We are reproducing the relevant portion of the order and it reads as under :–

2. The grievance of revenue relates to deleting the addition of Rs. 41,47,204 made by assessing officer on account of transfer of lease hold rights in the property under section 50C of the Income Tax Act.

3. Rival contentions have been heard and record perused.

4. Facts in brief are that the assessee acquired lease hold rights from Lavasa Corporation Ltd. It was contention of assessee that property rights were acquired on lease basis and the lease amount for the same was to be paid in installments. Since assessee on account of financial difficulties could not make the payment of lease as per the schedule, the lease hold rights were assigned to M/s. Deepak Textiles for consideration of Rs. 28,59,395. The assessing officer held that assessee has transferred rights in an immovable property, accordingly he invoked the provisions of section 50C and made an addition of Rs. 41,47,204.

5. By the impugned order, Commissioner (Appeals) deleted the addition after following the order of the ITAT- Mumbai Bench in case of Atul G Puranik v. ITO (132(1) ITD 499)and Kolkata Bench of ITAT in case of Tejinder Singh (2012) 147 TTJ 87 (Kolkata).

6. On the other hand, learned Authorised Representative placed on record order of the ITAT Mumbai Bench in case ofShavo Norgren (P) Ltd., (2013) 152 TTJ 482 (Mumbai –  Trib.)in support of the proposition that provisions of section 50C is applicable even in case of transfer of lease hold rights in plots as well as rights in building.

7. We have considered rival contentions and found that issue under consideration is covered by the number of decisions of ITAT-Mumbai Bench in case of Atul G. Puranik 58 DTR 208 Pradeep Steel Re-Rolling Mills (P) Ltd., (2013) 155 TTJ 294 (Mumbai – Trib.)wherein it was held that section 50C applies only to capital assets being land or building or both, it does Shri Aditya D. Mahadevia 3 not in terms include leasehold rights in land or building within its scope. Similar view has been taken in the case of Voltas Ltd., (2017) 183 TTJ 788 (Mumbai – Trib.), ITAT Bench in case of Kancast (P) Ltd., (2015) 68 SOT 110 (Pune – Trib.). Recently Hon’ble Bombay High Court in case of Heatex Products (P) Ltd., vide order dated 26-7-2016 dismissed the appeal filed by the Revenue wherein Tribunal following the decision in case of Atul G Puranik 58 DTR 208 held that provisions of section 50C would apply only to capital assets being land or building or both and it could not be applied to transfer of lease hold rights in land.

9. The precise observation of the Hon’ble Bombay High Court in case of Heatex Products (P) Ltd.,was as under :–

“3. The only grievance of the revenue in this appeal is that the provisions of section 50C of the Act mandates that where a transfer of capital asset being land or building or both is for consideration less then its value as adopted/assessed by the State Government for the purpose of stamp duty then the stamp duty value would be adopted as being the full value of consideration for computing capital gains arising out of transfer of the asset. It is the case of the revenue that section 50C of the Act would apply also to transfer of leasehold interest in land and is not limited to only to transfer of land and building or both.

4. The impugned order of the Tribunal allowed the respondent – assessee’s appeal by following its own decision in Atul G. Puranik v. ITO 58 DTR 208on identical issue. The Tribunal in Atul G. Puranik (supra) held that section 50C of the Act would apply only to a capital asset being land or building or both and it cannot apply to transfer of lease rights in a land.

5. It appears the Revenue has accepted the decision of the Tribunal in Atul G. Puranik (supra). This inference is drawn as no evidence of filing an appeal from the order of the Tribunal in Atul G. Puranik (supra) is produced. The fact situation in both Atul G. Puranik (supra) and this case is identical as no distinction in facts of the present case from those arising in Atul Puranik (supra) has been pointed out.

6. In above view the question as framed does not give any rise to any substantial question of law and thus not entertained.”

10. Respectfully following the proposition of law laid down by Hon’ble Bombay High Court, we do not find any infirmity in the order of Commissioner (Appeals) for deleting addition by holding that section 50C is not applicable in case of lease hold rights.”

3.3.2. Now, we would take up the issues of not referring the matter to the DVO for determining the market value of the assets. Perusal of pages 122-23 reveal that vide its letter dated 18-1- 2006, the assessee had disputed the value adopted by the stamp duty authorities. In our opinion, once objections are raised, by an assessee, about the valuation, the assessing officer has no option-he had to refer the matter to the valuation cell. But, in the case under appeal the AO completed the assessment without making a reference. We hold that the assessing officer had crossed the limits drawn by the provisions of the Act. In the case of Aditya Narayan Verma HUF the Tribunal has held as under :–

“On the very perusal of the provisions laid down under section 50C of the Act reproduced herein above, we fully concur with the finding of the id. Commissioner (Appeals) that when the assessee in the present case had claimed before assessing officer that the value adopted or assessed by the stamp valuation authority under sub section (1) exceeds the fair market value of the property as on the date of transfer, the assessing officer should have referred the valuation of the capital asset to a valuation officer instead of adopting the value taken by the state authority for the purpose of stamp duty. The very purpose of the Legislature behind the provisions laid down under sub section (2) to section 50C of the Act is that a valuation officer is an expert of the subject for such valuation and is certainly in a better position than the assessing officer to determine the valuation. Thus, non-compliance of the provisions laid down under sub section (2) by the assessing officer cannot be held valid and justified. The Honble jurisdictional High Court of Allahabad in the case of Shashi Kant Garg 285 ITR 158 (All) has been pleased to hold that it is well settled that if under the provisions of the Act an authority is required to exercise powers or to do an act in a particular manner, then that power has to be exercised and the act has to be performed in that manner alone and not in any other manner.”

Respectfully following the above, we hold that the FAA had not interpreted the provisions of section 50(2) of the Act correctly, that the assessing officer should have referred that matter to the DVO.

3.3.3. One more issue related with sale of plot of land is FMV of the asset as on 1-4- 1981. We find that the assessee had valued the FMV of the land at Rs. 200 per sq.feet, that the FMV was based on the report of a registered valuer, that later on he obtained one more report from other valuer, that the assessing officer and the FAA had rejected the FMV adopted by it, that they held that it had not challenged the FMV determined by the DVO for the period 1995 to 2001, that the FAA was of the opinion that rate computed by the valuer was not supported by documentary evidences. As far as FVM of assessment year 1995-96 is concerned it is sufficient to say that valuation report for that period has been set aside by the Tribunal and thus it does not survive. A perusal of the Indian Valuers Directory and Reference Book(Pg.340 of the PB) reveal that the market value of land located in the adjoining areas of Mulund on 1-4-1981 was Rs. 400-480 per Sq.feet. Tribunal, in the case of Kumar K Chabaria (ITA/5347/Mum/2008, has considered the said Reference Book as a reliable source for valuation of capital assets. So, in our opinion, FMV adopted by the assessee as on 1-4-1981 cannot be brushed aside-rather it is quite reasonable.

As far as reference to the DVO under section 55A of the Act is concerned, we would like to say that after the judgments of the Hon’ble Bombay High Court in the cases of Daulal Mohta (360 ITR 680) and Pooja Prints (360 ITR 697) there is no doubt that the assessing officer cannot make a reference to the DVO for purpose of valuation, where the value of the property, declared by the assessee, is not less than FMV. In other words reference under section 55A of the Act can only be made in cases where the value of capital asset shown by an assessee is less than the FMV of the land. In the case under consideration, the value shown the assessee is more than the FMV and therefore there was no justification for making a reference to the Valuation Cell. Besides, the assessing officer had made the reference after the assessment was over. In short, in our opinion the FAA was not justified in endorsing the views of the assessing officer. Considering the above, grounds no.2-5 are decided in favour of the assessee.

4. Next effective ground of appeal (GOA.6-8) is about dis allowance made under section 54 G of the Act. With regard to admissibility of claim, made by the assessee, under section 54G of the Act, the assessing officer observed that in the computation of income under the head income from capital gains the assessee had computed net loss from sale of land, that it had claimed that an amount of Rs. 6.79 crores had been invested in plant and machinery (P&M) head for the factory at Lakhampur Nasik, that Rs. 20 crores were claimed to have been invested in the capital gain account scheme as per section 54G(2), that the claim for the said amount had been taken at NIL because of loss computed under the head capital gains. Referring to the provisions of the section, he held that the capital asset in question was plot of land that was sold in the year 2004, that from the past records it was clear that the industrial undertaking had been shifted to Nasik and it had started commercial production in the assessment year 1995-96, that the assessee had claimed exemption under section 54 for the assessment year s 1995-96 and 1996-97, that the land was transferred in 2004 and that the period allowed by the Act should have been between 2003 and 2007 for claiming deduction under section 54G, that the industrial undertaking had been shifted in the financial year 1994-95, that the assessee could not by any stretch of imagination claim that was applicable for the sale of land in the financial year 2003-04, that the contention of the assessee that there was no bar on piece-meal sale of capital asset as per the provisions of section 54G was incorrect, that the capital gains arising from each sale transaction of capital asset had to necessarily fit in the time period of one year before and three years after the transfer of such capital asset for being eligible for deduction under section 54G of the Act, that shifting of original industrial undertaking was complete before 1-1-2002 itself, that the provisions of section 54G did not intend to give exemption for any further expansion in the capacity or investment in plant and machinery subsequent to original shifting of industrial undertaking, that the computation of income for the assessment years 2000-01 and 2001-02 indicated that the assessee had sold part of residential land during the previous year relevant to those assessment year s also, that there was no mention of any claim under section 54 for the said assessment year s in the notes submitted with the computation of income. Finally, he held that claim made by the assessee for deduction under section 54G was not admissible for the year under consideration.

4.1. After considering the submission of the assessee and the assessment order, the FAA held that the section 54G had to be read as a whole, that the phrase ‘in consequence of’ related to the period of 3 years after the date of transfer of the capital asset referred to in the provisions of section 54G(1) of the Act, that the assessee had already claimed and had also been allowed the benefit of special deduction under section 54G in the earlier years, that it could not be allowed the same deduction again. Finally, she upheld the order of the assessing officer.

4.2. Before us, the Authorized Representative argued that the assessee had fully satisfied all condition for claiming deduction under section 54G, that undertaking was shifted from urban area to non-urban area i.e., from Mulund to Lakhampur, that as a consequence of shifting of undertaking capital asset (rights in the land) had also been transferred, that the assessee had utilized the proceeds from the transfer for purchase/acquisition of specified assets within a period of one year, that an amount of 6.79 crores had been appropriated towards purchase of P&M at Lakhampur, that Rs. 20 crores had been deposited under the Capital Gains Accounts Scheme 1988, that the time limit of three year had to be taken from the date of transfer of capital asset and not from the date of shifting of industrial undertaking, that the word transfer was used in conjunction with capital asset, and utilization of the capital gains arising therefrom, that the word shifting was prefixed with phrase industrial undertaking, that it had shifted its undertaking to Lakhmpur in assessment year 1995-96, that to obtain economic benefits from vacant land it entered into development agreement, that due to the dispute with the developer the matter was contended before the courts, that after settlement of dispute it had transferred the capital asset in the very next year to another developer, that all the conditions of section 54G were duly complied with, that the assessing officer and the FAA had misread the law.

The Departmental Representative argued that industrial unit was shifted before nine years of purchasing of plant and machinery and depositing of money in the specified bank account, that investment was not made in the time limit prescribed by the Act.

4.3. We have heard the rival submissions and perused the material before us. We find that during the previous year relevant to the assessment year 1995-96 the assessee had shifted its industrial undertaking out of Mumbai, that it had entered into an agreement with Lok group for transfer of development rights for the industrial land at Mulund, that because of litigation the agreement with Lok group was terminated, that later on the assessee entered into a new agreement with NL for a consideration of Rs. 64.92 crores, that it made a claim that it was entitled for deduction under section 54G of the Act.

4.3.1. Before proceeding further, it would be useful to consider the background of the section 54G of the Act. Section 280 ZA of the Act, dealing with the shifting of an assessee from an urban area to another area, was omitted from 1-4-1987 and on the same day section 54G was introduced in the Act. In his budget Speech, Hon’ble Minister of Finance, while introducing the Finance Act, 1987 stated as under :–

“83. Concentration of industries in many of our urban areas poses serious problems of congestion, pollution and hazards. In order to encourage industries to shift out of such areas, I propose to exempt capital gains made on the sale of land and buildings in such areas provided these are reinvested in approved relocation schemes.”

Notes on clause for the Finance Bill, 1987 reads as under :–

“The new section 54G provides for exemption of capital gains on transfer of assets in cases of industrial undertaking shifting from urban area. Sub-section (1) provides that if an assessee transfers a long-term capital asset in the nature of machinery, plant, building or land used for the purposes of the business of the industrial under taking situated in an urban area in connection with the shifting of such undertaking to a non-urban area, and within a period of one year before or three years after the date of transfer, purchases new machinery or plant and acquires land or building or constructs building for the purposes of his business in the area to which the under taking is shifted or incurs expenses on shifting the original asset and transferring the establishment of the undertaking to such area and incurs expenses on such other purposes as may be specified in a scheme framed by the Central Government, the capital gain shall be exempt to the extent such gain has been utilized for the aforesaid purposes.

Explanation to sub-section (1) defines ‘urban area’ on the lines of the definition in section 280Y.”

The relevant part of the Memorandum Explaining the Provisions in the Finance Bill, 1987, reads as under :–

“34. Under the existing provisions of section 280ZA of the Income Tax Act, any company owning an industrial undertaking situated in an urban area, is entitled for a tax credit certificate with reference to the amount of the tax payable on capital gains arising from the transfer of its machinery, plant, etc., to any other area. These provisions have not proved to be very effective.

With a view to promoting decongestion of urban areas and balanced regional growth, the Bill seeks to exempt capital gains arising on transfer of long-term capital assets in the nature of machinery, plant, building or land used for the purposes of the business of the industrial undertaking situated in an urban area in connection with the shifting of such industrial undertaking from an urban area to a non-urban area. Accordingly, capital gains arising in such cases will be exempt to the extent they are utilized within a period of one year before or three years after the date of transfer, for the purchase of new machinery or plant or acquiring land and building, etc., for the purpose of the business in the area to which the undertaking is shifted or incurs expenses on shifting the original asset and transfer ring the establishment of the undertaking to such area and incurs expenses as may be specified. As a consequential measure, section 280ZA of the Income Tax Act is proposed to be omitted. These amendments will take effect from 1-4-1988, and will, accordingly, apply in relation to the assessment year 1988-89 and subsequent years.” On a conjoint reading of the aforesaid Budget Speech, Notes on clauses and Memorandum

Explaining the Finance Bill of 1987, it becomes clear that the idea of omitting section 280ZA and introducing on the same date section 54G was to do away with the tax credit certificate scheme together with the prior approval required by the Board and to substitute the repealed provision with the new scheme contained in section 54G of the Act.

4.3.2. The opening portion of section 54G reads as follow :–

Subject to the provisions of sub-section (2), where the capital gain arises from the transfer of a capital asset……..”

In our opinion, the most important and decisive factor for claiming the deduction, arising of capital gain, is transfer of capital asset. In other words, capital gains and transfer of specified assests should have a direct and live link. Shifting of undertaking is also important, but the tax incidence will come into picture only after assets are transferred. The purpose behind the section is to decongest the urban areas and to shift the industries from the cities. In that sense it is a welfare legislation. As per the settled principles of taxation benevolent provisions of Act should always be interpreted liberally. The intention behind the section is clear that assessee should invest the sale proceeds of sale of specified assets in industrialization or should deposit the same in a designated bank account.

The assessee, in the case under consideration, had entered in to an agreement with a developer for selling rights in the plots of land. But, the agreement was cancelled later on due to differences between the assessee and the developer. It found a new developer and sold the specified assets resulting in accruing of capital gains. There is no doubt that after receiving the sale proceeds from the developer, the assessee had invested the money in purchasing P&M and part of it was deposited in a designated bank account. P &M purchased by it at the time of shifting the premises had nothing to do with the new P & M acquired after sale of capital assets. There is no precondition in the section that new machinery should be purchased at the time of shifting of industrial undertaking. No undertaking can function without P&M. But, the assessee can purchase machinery even after shifting and commissioning of business from the new premises. Expansion of business can take place any time. Generally, shifting of industrial unit from urban to rural areas take place simultaneously. But, in a few cases, there can be time lag between shifting of unit and receipt of capital gains. In such cases what is be considered is sale of assets and receipt of capital gains.

Considering the peculiar facts and circumstances of the case, we are of the opinion that the assessing officer and the FAA had wrongly denied the benefit of the section 54 G of the Act to the assessee. Grounds No. 6-8 are decided in favour of the assesssee.

5. Grounds 9 and 12 are also about sale of right of the plot of land. As pre the assessee the assessing officer had erroneously reduced the area of assets sold by it. It was also argued that there was a mistake in determining the proportionate cost of improvement calculation.

5.1. The Authorized Representative argued that the assessing officer and FAA erroneously reduced the area of assets sold, that there was error in calculation of proportionate cost of improvement, that it had sold development rights in land and not the land itself, that the area to be considered had to be measured in terms of FSI and not area of land, that the assessing officer should have considered FSI potential of 7.08 lakhs sq.ft for computing the cost in the hands of the assessee, that in the development agreement it had mentioned that saleable land was 6.38 lakhs sq.ft., that the FAA had reduced the cost of acquisition and cost of improvement. He referred to the Pg.s 274,207-267 of the PB. The Departmental Representative supported the order of the FAA.

5.2. In our opinion, both these facts needs further verification on part of the assessing officer. So, in the interest of justice we direct the assessing officer to decide both the issue afresh. He is directed to consider all the facts and figures produced by it, before us, during the appellate proceedings. Both the grounds stand partly allowed.

Next effective Ground of appeal (GOA.13-16) is about ad hoc dis allowance of various expenses. During assessment proceedings, the assessing officer had made dis allowance under various heads namely electricity expenses (7.20 lakhs); sales promotion expense (Rs. 4 lakhs); repairs and maintenance (25 lakhs); and legal and professional charges (10 lakhs).

6.1. During the appellate proceedings, the FAA remanded back the issue of electricity expenses to the file of assessing officer. With regard to other dis allowances, he held that the same were only meager dis allowances in comparison to quantum of expenses. In short, all ad hoc dis allowance, made by the assessing officer, were confirmed by the FAA.

6.2. Before us, the Authorized Representative stated that the Tribunal while deciding the appeal for assessment year 2003-04 (ITA/814/Mum/2007) had decide identical issue and set aside the issue of dis allowance made for electricity expenses to the file of FAA for fresh adjudication, that FAA, vide his order dated 30-3-2015, deleted the said dis allowances, that the Tribunal had deleted the other dis allowance while adjudicating appeal for assessment year 2003-04 (supra). The Departmental Representative left the issue to the discretion of the Bench.

6.3. We find that the Tribunal had deliberated upon the issue of ad-hoc dis allowance as under

“22. The learned counsel for the assessee submitted that a dis allowance cannot be made merely on conjectures and surmises. He vehemently contended that in the absence of any material on record to show that any part of the sale promotion expenses having been incurred for business purposes, the entire expenditure has to be allowed under section 37(1) as held in National Industrial Corporation v. CIT 258 ITR 575 (Del). He also relied on the following case laws: Lalchand Bhagat Ambica Ram v. CIT (1959) 37 ITR 288 (SC) CIT v. Daulat ram Rawatmull (1973) 87 ITR 349/360 (SC) Sukhdayal Rambilas v. CIT (1982) 136 ITR 414/418 (Bom) He also pointed out that the details of the sale promotion expenditure are given at page 237 of the paper book as well as on pages 19 and 36 of the supplementary paper book.

23. The learned Departmental Representative, on the other hand, supported the order of the first appellate authority.

24. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and on a perusal of the orders of the authorities below as well as the case laws cited we find that the dis allowances in question is made on an adhoc basis merely on the ground that there would be a possibility that some of the expenses would have not been incurred. The assessee provided complete break up of all the details in the course of assessment proceedings and also an extract of the ledger account in respect of the details provided. The assessing officer has not asked for any specific detail or proof in the nature of any particular bill from the assessee during the assessment proceedings. No explanation regarding allow ability or reasonableness of the expenses was asked for during the course of assessment proceedings. On this factual matrix, we hold that the adhoc dis allowance is nothing but a sheer surmise and such dis allowance cannot be sustained. In the result, this addition is deleted.” Following the above, we allow grounds of appeal no. 13-16.

ITA/1365/Mum/2009, 2004-05 :–

7. The assessee has filed the above appeal against the order of the assessing officer passed under section 143(3) read with section 250 of the Act. During the course of hearing before us, the Authorized Representative did not press GOA 1-5.

Hence, same stand dismissed. GOA 6 is consequential in nature, so, we are not adjudicating it.

ITA/1366/Mum/2009,2005-06 :–

8. Grounds no. 2, 3, 5 and 6 were not pressed by the Authorized Representative of the assessee, so, we dismiss the same as not pressed.

9. Ground no. 1 is about sales tax incentive scheme. Following our order for earlier assessment year (paragraph 2.3 of the order), we restore back the issue to the file of the assessing officer and allow the ground partly.

10. Ad-hoc dis allowance of Rs. 61.26 lakhs is the subject matter of Ground four. During the assessment proceedings, the assessing officer found that the assessee had claimed sales promotion expenses incurred under a scheme namely Shubh Utsav under which stockiest were provided foreign trips as reward, that Kyoni Travels were paid the disputed sum. He disallowed Rs. 6 lakhs on ad-hoc basis holding that the expenses claimed under the scheme were not laid out wholly and exclusively for the purpose of business.

10.1. In the appellate proceedings, the FAA confirmed the dis allowance made by the assessing officer. However, he disallowed the entire amount i.e., Rs. 61.26 lakhs as against Rs. 6 lakhs disallowed by the assessing officer.

10.2. Before us, the Authorized Representative argued the there was no basis for making ad hoc dis allowance, that the Tribunal, while deciding the appeal for the assessment year 2003-04, had allowed the relief to the assessee holding that ad hoc dis allowance could not be sustained, that the FAA had inadvertently disallowed the entire expenditure, that he had not given any reason for the enhancement. Departmental Representative left the issue to the discretion of the Bench.

10.3. We have heard the rival submissions and perused the material before us. We find that the assessing officer had made ad hoc dis allowance of Rs. 6 lakhs, that the FAA disallowed Rs. 61.26 lakhs, that the assessee did not file any application under section 154 of the Act before the FAA to rectify the factual mistake. We find that the Tribunal had deleted the ad hoc dis allowance, as discussed at para No. 6.3 of our order. The assessing officer has not given any reason to prove that the expenditure incurred by the assessee was not wholly and exclusively for business purposes. Therefore, reversing the order of the FAA, we decide the issue in favour of the assessee.

11. Fifth ground of appeal is about dis allowance of provision for leave encashment of Rs. 62.92 lakhs. The assessee had raised an additional ground before the FAA in that regard. Facts of the issue are that in the return of income, the assessee had added back provision for leave encashment of Rs. 62,92,345 outstanding till the last date of filing of return in view of provisions of section 43B(f), that before the FAA it raised an additional ground referring to the judgment of Hon’ble Calcutta High Court Delivered in the case of Exide Industries Ltd. (292 ITR 470). The FAA did not deal with the issue holding that no dis allowance on account of leave encashment was made in the order passed by the assessing officer.

11.1. Before us, the Authorized Representative argued that provision for leave encashment was an ascertained and definite liability calculated according to actuarial valuation, that same was not a contingent liability. He referred to the cases of Exide Industries Ltd. (supra), Bharat Earth Movers (245 ITR 428) and Aditya Birla Nuvo Ltd. (68 SOT 403). The Departmental Representative left the issue to the discretion of the bench.

11.2. We find that the FAA has not adjudicated the issue, though a specific ground was raised before him with regard to provision for leave encashment. As per the Hon’ble Bombay High Court additional claim can be raised before the appellate authorities (349 ITR 336-Pruthvi Brokers and Shareholders Private Ltd.). Therefore, we are of the opinion matter should be restored back to the file of the FAA for fresh adjudication, who would decide the issue after affording a reasonable opportunity of hearing to the assessee and after considering the cases relied upon before us. Fifth ground of appeal is allowed in favour of the assessee, in part.

ITA/1971/Mum/2013, assessment year 2007-08 :–

12. First ground of appeal deals with deduction in respect of provision for leave encashment, amounting Rs. 1.69 crores. During the assessment proceedings the assessing officer found that the assessee had debited Rs. 1,69,22,101 towards provision for leave encashment in profit & loss account. However, the assessing officer disallowed the claim of the assessee on the Ground that the it had made the claim in view of the decision of the Excide Industries Ltd. (292 ITR 470), that the Hon’ble Supreme Court had provisionally stayed order of Calcutta High Court in the case of Excide Industries. In the appellate proceedings the FAA upheld the order of the assessing officer.

12.1. Before us, the Authorized Representative stated that the provisions for leave encashment was an ascertained and definite liability calculated according to actuarial valuation, that same could not be termed co contingent liability. He referred to the case of Bharat Earth Movers (245 ITR 428) and Aditya Birla Nuvo Ltd. (68 SOT 403).

12.2. We have heard the rival submissions and perused the material before us. We find that the assessee had made the claim as per the judgment of the Calcutta High Court that was late on stayed by the Hon’ble Apex Court. As far as the matters of Bharat Earth Movers (supra) and Aditya Birla Nuvo Ltd. (supra) are concerned, we will like to mention that both did not have benefit of the judgment of the Hon’ble Supreme Court in the case of Exide Industries Ltd. (supra). Therefore, in our opinion, the order of the FAA does not suffer from any legal or factual infirmity. Confirming the same, we decide first ground of appeal, against the assessee.

13. Next ground is about deduction of additional depreciation under section 32(1)(iia) of the Act, in respect of eligible plant and machinery required and store during the financial year 2005-06. During the assessment proceedings, the assessing officer found that the assessee had claimed additional depreciation of Rs. 5.53 crore in respect of plant and machinery acquired and installed after 31-3-2005 but before 1-4-2006. After considering the submission of the assessee, in that regard, the assessing officer held that additional depreciation was allowable on acquisition of new assets, that the assets would be new only in the year in which it had been acquired and put to use, that once an asset had been depreciated and used in the business of the assessee it could not be considered to be a new asset.

13.1. The FAA, after considering the submissions held, that the appellant has claimed additional depreciation under section 32(1) on the Plant & Machinery acquired and installed after 31-3-2005, but before 1-4-2007, that the section has undergone changes on various occasions and prior to the amendment effected by the Finance Act, 2005, the additional depreciation was allowable in the previous year in which the Industrial undertaking began to manufacture or produce any article or thing, that the additional depreciation was allowable only in the previous year in which the New P&M were purchased and installed subject to certain conditions, that by the Finance Act, 2005, section 32(1)(iia) has been amended, that the additional depreciation was allowable only in respect of any New P&M and the Machinery & Plant acquired in earlier year could be said to be a new Plant & machinery in the subsequent years,. He referred to the Explanatory note to Finance Act 2005, (Circular No. 3, dt. 27-2-2006) and held that additional depreciation would be admissible only at the time of investment in new P&M and not in any of the subsequent years. Finally he upheld the order of the assessing officer.

13.2. Before us the Authorised Representative referred to the case of Gloster Jute Mills Ltd. (ITA/95/Kol/2011, dated 1-3-2017) and argued that as per the amended provisions of section 32(1) the restriction previously imposed of allowing additional depreciation only in the year of installation of machinery had ceased to exist as an from 1-4-2006, that additional depreciation was available even in the subsequent assessment years, that the expression new machinery had to be construed as referring to the condition at the time of acquisition or installation and not in the subsequent years. The Departmental Representative argued that the assessee had claimed depreciation on the plant and machinery which were acquired and installed after 31-3-2005, that it had claimed additional depreciation in the assessment year 2006-07, that it had claimed additional depreciation on same assets for the year under appeal also. He relied upon the order of the Tribunal in the case of CRI Pump (P) Ltd. (2013) 58 SOT 154 (Chennai – Trib.), wherein it was held that no additional deprecia -tion could be allowed on the same assets on year to year basis. Relying upon the order of the Tribunal in the case of International Cars & Motors Ltd. v. ITO, (2013) 56 SOT 50 (Delhi – Trib.), he argued that incentive provisions of the Act could be read liberally, that liberal approach should not be applied at the cost of literal and obvious meaning of the statute, that intention of the legislature could be inferred by going to the Explanatory notes, budget speeches and previous amendments, that the provisions of section 32(1) were very clear, that there was no mention in the Act that additional depreciation should be allowed on the same assets from year to year basis. He referred to the cases of Plantation Corpn. of Kerala (247 ITR 155) and Prakashnath (266 ITR 1).

13.3. We have heard the rival submissions and perused the material before us. We find that in the case of Gloster Jute Mills Ltd. (supra) the Tribunal has deliberated upon the issue extensively and has decided it, while deciding the appeal filed by the assessing officer, as under :–

“24. Ground No. 3 raised by the revenue reads as follows :–

“3. That on the facts and in the circumstances of the case, learned Commissioner (Appeals) has erred in law by allowing assessee’s claim of additional depreciation of plant and machinery on original cost in the year subsequent to the year of acquisition and installation and thereby has erred in deleting the addition of Rs. 54,21,617 without appreciating the fact that such additional depreciation is allowable on plant and machinery only in the year of acquisition and installation.”

25. This ground of appeal relates to the claim of the assessee for additional depreciation under section 32(1)(iia) of the Act. The undisputed facts are that the original cost of the new machinery purchased and installed by the assessee after 31-3-2005, but before 1-4-2006 in the 100% EOU and DTA unit Rs. 29,77,470 and Rs. 2,41,30,615. The WDV of these machineries as on 1-4-2006 was Rs. 24,51,920 and Rs. 1,81,50,266 respectively. The assessee availed of additional depreciation @ 20% on the original cost of the machinery at Rs. 5,95,494 and Rs. 48,26,123 respectively in assessment year 2006-07. In assessment year 2007-08 also the assessee claimed additional depreciation at 20% of the original cost viz., Rs. 5,95,494 and Rs. 48,26,123 respectively in all depreciation totaling Rs. 54,21,617.

26. According to the assessing officer, the deduction under section 32(1)(iia) of the Act is granted only to “new” plant and machinery and once depreciation is granted in the 1st year in which the machinery is installed or put to use, the machinery ceases to be a new machinery and therefore additional depreciation cannot be allowed. The plea of the assessee however was that section 32(1)(iia) of the Act merely provides that further to the normal depreciation at the prescribed rates, an additional depreciation shall be allowed to the assessee at the rate of 20% on new plant and machinery acquired and installed after 31-3-2005. However, the period the period during which such additional depreciation shall be allowed is not specified in the Act. Thus, one may conclude that the allowance of additional depreciation shall not only be restricted to the initial year but continue to second and subsequent years.

27. The claim for additional depreciation was however rejected by the Commissioner (Appeals) for the reason that additional depreciation is available only in respect of new plant and machinery acquired and installed after 31-3-2005. The word ‘new’ is not defined in the Act. According to the Shorter Oxford Dictionary the word ‘new’ means “not existing before; now made, or brought into existence, for the first time”. The assessing officer held that the assets on which additional depreciation was claimed by the assessee is neither “new” nor brought into existence in the hands of the assessee in the relevant previous year. It is already used in earlier years and is already depreciated and, therefore, old in the hands of the assessee in the previous year. He held that the qualification that the asset should be new was basic qualification for entitlement of additional depreciation as laid down in the provisions of section 32(1)(iia) of the Act and that conditions was not satisfied in the case of the assessee. The assessing officer accordingly disallowed the claim of the assessee for additional depreciation.

28. Before we set out the conclusions of the Commissioner (Appeals) on this issue, it would be worthwhile to examine the history of scheme of allowance by way of additional depreciation in the Act.

“Section 32 Depreciation.–(1) In respect of depreciation of–

(i) buildings, machinery, plant or furniture, being tangible assets;

(ii) know-how, patents, copyrights, trade marks, licences, franchises or any other business or

commercial rights of similar nature, being intangible assets acquired on or after the 1-4-1998, owned, wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed–

(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed;

(ii) in the case of any block of assets, such percentage on the written down value thereof as may be prescribed :–

Section 32(1)(iia) of the Act was originally introduced by the finance (no.2) Act, 1980 with effect from 1-4-1981 reads thus (the sub-section existed upto 31-3-1988 and was deleted thereafter) :–

XXXXX

Section 32(1)(iia) as substituted by Finance Act, 2005, (with effect from 1-4-2006) reads as follows: “(iia) in the case of any new machinery or plant (other than ships and aircraft), which has been acquired and installed after the 31-3-2005, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to twenty per cent. of the actual cost of such machinery or plant shall be allowed as deduction under clause(ii) :–

29. It can be seen from the provisions of section 32(1)(iia) as it existed from 1-4-1981 to 31-3-1988 and reinserted sub-sequently from 1-4-2003 that the benefit for claiming additional depreciation was restricted only to the initial assessment year. However the provisions of section 32(1)(iia) as substituted by the finance Act, 2005 with effect from 1-4-2006, the benefit for claiming additional depreciation was not so restricted to only to the intital assessment year. From assessment year 1981-82 to 87-88, the claim for additional depreciation was restricted to previous year in which such machinery or plant is installed or, if the machinery or plant is first put to use in the immediately succeeding previous year.

From assessment year 2003-04 till 2005-06, the claim for additional depreciation was restricted to previous year in which such undertaking begins to manufacture or produce any article or thing on or after the 1-4-2002; or if any industrial undertaking existed before the 1-4-2002, during any previous year in which it achieves the substantial expansion by way of increase in installed capacity by not less than ten per cent. From assessment year 2006-07, there is no restriction with regard to the year in which such additional depreciation should be allowed and also there is no restriction with regard to the additional depreciation being allowed only on the written down value and therefore the additional depreciation even in the second and subsequent years have to be allowed on the original cost of the Asset. These are evident from a plain reading and literal construction of the relevant statutory provisions.

The Commissioner (Appeals) after considering the aforesaid scheme and history of the provisions of section 32(1)(iia) of the Act, deleted the addition made by assessing officer observing as follows :–

“I have considered the submissions of the learned A/R and find substance in the contention of the Appellant. On a conjoint reading of the provisions of section 32(1)(iia) inserted by Finance (No. 2) Act, 1980 and reinserted by Finance Act, 2002 it is evident that the said sections specifically restricted the allowability of additional depreciation in the year of installation of P&M. However, in the section 32(1)(iia) amended vide Finance Act, 2005 Legislature had omitted the proviso wherein it was provided that such depreciation could be claimed only in the initial assessment year. This being a specific omission it could be construed that the intent of the Legislature was not to restrict the allowance of additional depreciation to the year in which the assets are installed but also in the second and subsequent years provided that the aggregate depreciation does not exceed the cost of the asset. It is settled law that a fiscal statute has to be interpreted the basis of the language used therein and not interpreted out of context the same as held by Apex Court in the case of Orissa State Warehousing Corporation, Mohammad Ali Khan and Madurai Mills Co. Ltd. (Referred to by the Appellant.) Further, it is also imperative to state that section 32(1)(iia) is a beneficial provision enacted with the view to provide benefit to the assessee. The same is also evident from the Explanatory Notes to the Finance Act, 2005 wherein it has been clarified that in order to encourage investment the provisions of section 32(1)(iia) have been amended. In so far as the language used in the provision in concerned one has to construe the language beneficially and in favour of the assessee as held by the Jurisdictional High Court in the case of Indian Jute Mill Association in 134 ITR 68. There is little merit in the contention of the assessing officer that the asset is not new in the second year. In my view for claiming additional depreciation the assessee has to acquire and install the plant & machinery after 31-3-2005 and the same should be new in the year of installation. There is no requirement that the assets should be new in the year of claim of additional depreciation.

For the reasons aforesaid I am of the view that in terms of provisions of section 32(1)(iia), additional depreciation is available in assessment year 2006-07 and subsequent years in respect of all new plant & machinery acquired and installed after 31-3-2005 subject to overall criteria that total depreciation does not exceed the actual cost. Hence Ground No. 4 is decided in favour of the Appellant.”

31. Aggrieved by the order of Commissioner (Appeals) the revenue has raised ground no.3 before the Tribunal. The learned Departmental Representative placed reliance on the order of the assessing officer. The learned Counsel for the assessee submitted that fiscal statute shall be interpreted on the basis of the language used therein and not de hors the same. It was argued that Clause (iia) to section 32(1) was first introduced vide Finance (No. 2) Act, 1980 with effect from 1-4-1981 and was applicable till assessment year 1987-88. The clause was sub-sequently re-introduced vide Finance Act, 2002 with effect from 1-4-2003. On perusal of clause (iia) to section 32(1) as existed during the aforesaid period, it could be seen that the legislature conferred the benefit of additional depreciation only in the first assessment year when the asset was installed and first put to use. However vide Finance Act, 2005, clause (iia) to section 32(1) was amended with effect from 1-4-2006 wherein the condition of claiming additional depreciation only in the initial assessment year was deleted. It was submitted that since the specific condition for claim of additional depreciation in one year has been done away with, it should be construed as the intention of the legislature to allow additional depreciation in subsequent years as well. Reliance was placed on the following decisions wherein it has been held that a fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. Even if there is a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation :–

Orissa State Warehousing Corporation v. CIT (1999) 237 ITR 589 (SC)

Prakash Nath Khanna and Another v. CIT (2004) 266 ITR 1 (SC)

Smt. Tarulata Shyam & Othrs v. CIT (1977) 108 ITR 345 (SC)

Padmasundara Rao v. State of Tamil Nadu 255 ITR 147 (SC)

Apart from the above, it was also pointed out that DTC Bill 2013 has proposed expressly that additional depreciation would be allowed in the financial year in which the P&M is used for the first time and those provisions are not made with retrospective effect. It was argued that the legislature has consciously not restricted the allowance of additional depreciation on the original cost for assessment year 2006-07 till assessment year 2013-14 to one year only and therefore the additional depreciation should be allowed on the original cost of the asset for the second and subsequent years as well. It was submitted that the condition imposed by the relevant provisions was that Plant and Machinery must be new at the time of installation to be eligible for additional depreciation under section 32(1)(iia) and not new in subsequent years.

32. We have given very careful consideration to the rival submissions and are of the view that the provision of section 32(1)(iia) as amended with effect from 1-4-2006 by the Finance Act 2005, there is no restriction that the additional depreciation will be allowed only in one year or that it would be allowed only on the written down value. The law as it prevailed prior to the said amendment imposed such a condition that additional depreciation will be allowed only in the year of installation of machinery or plant or the year in which it is first put to use or the year in which the concerned undertaking begins to manufacture or produce any article or thing or achieves substantial expansion by way of increase in installed capacity by 25%. The only objection of the assessing officer is that the provisions refer to “new machinery or plant” and therefore the machinery will cease to be a new machinery after the end of the first year in which it is installed or put to use. In our view this stand taken by the revenue is not supported by the language of statutory provision. The condition imposed by the relevant provisions is that Plant and Machinery must be new at the time of installation to be eligible for additional depreciation under section 32(1)(iia) and not new in subsequent years. The expression “new machinery” is therefore to be construed as referring to the condition that at the time of acquisition or installation the machinery or plant should be new. Going by the legislative history of the relevant provision, we are of the view that the condition for allowing additional depreciation only in the initial assessment year ceased to exist as and from 1-4-2006. The plain language of the section warrants such an interpretation.

We therefore uphold the order of Commissioner (Appeals) and dismiss ground no.3 raised by the revenue.”

Respectfully, following the above, we decide Ground no.2 in favour of the assessee. We would like to mention that the cases relied upon by the Departmental Representative do not deal with the issue directly.

Whereas in the case relied upon by us, the Tribunal has dealt with the identical issue and has given a categorical finding for the year under consideration.

14. Third Ground of appeal is about non admission of the ground for exclusion of sales tax incentive in computing book profit under section 115 JB of the Act.

The Authorised Representative referred to cases of Shree Cement Ltd. (ITA/614, 615 and 635/JP/2010- assessment year 2004-05 to 2006-07), M/s. Brakes India Ltd. (ITA/209 & 1166/Mds./2010- assessment year -2005-06 and 2006-07, dt. 6-12-2012); Solaris Chemtech Ltd. (ITA/5202 & 5201/Del/2010, date 18-7-16); Shivalik Ventures (P) Ltd. (2015) 173 TTJ 238 (Mumbai – Trib.);

14.1. While deciding the issue of sales tax incentive in the earlier years, we have restored back the matter to FAA for fresh adjudication. Following the same, we remit back the Ground No. 3 (b) to the file of FAA.

As far Ground No. 3(a) we have already held that Appellate authority can admit new claims made before them for the first time. Therefore, we direct FAA to admit Ground raised by the assessee as GOA-3(a) before us. He would decide the issue raised in both the sub grounds after affording reasonable opportunity of hearing to the assessee. Grounds 3(a) and 3(b) are allowed partly.

ITA/1885/Mum/2013, assessment year 2007-08 :–

15. The effective Ground of appeal, filed by the assessing officer, for the year under consideration is deleting an amount of Rs. 4.23 crores, being disallowance of claim of sales tax incentive. While deciding the appeal field by assessee, for earlier years, we have restored back the issue of sales tax incentive to the file of FAA for fresh adjudication. Following the same we direct him to decide the issue afresh. Effective Ground of appeal is allowed in his favour, in part.

ITA/1972/Mum/2013, assessment year 2008-09

16. First Ground of appeal, filed by assessee, is about provision for leave encashment debited to profit & loss acount amounting to Rs. 67.98 lakhs. Following our order for the earlier year, we decide the first ground against the assessee.

17. Second Ground deals with additional depreciation under section 32(1)(iia) amounting to Rs. 7.14 crores in respect of eligible P&M acquired and installed during assessment year 2005-06 and 2006-07. Following our order for earlier year,(Paragraph 13 of the order), we allow the ground raised by the assessee.

18. Last Ground of appeal is about not allowing foreign exchange fluctuation loss of Rs. 4.93 crores, incurred by assessee in respect of currency swap and derivative transactions. The assessee had claimed notional loss, before the assessing officer as detailed below :–

Type of derivative transaction Payable to Amount (Rs.)
Libor Cap derivative ICICI Bank 81,26,744
Currency Swap ICICI Bank 3,27,23,633
Currency Swap Centurion Bank 85,00,000

He observed that as per final Term Sheet issued by ICICI Bank in respect of Libor Hedge it was noticed that the trade date was 26-7-2007 and settlement dates were every six months starting from January 2008 to 25-7-2014, that during the year under consideration, only one date of 25-1-2008 fell on which settlement could have been carried out by the appellant in that regard, that other settlement dates were falling in the subsequent assessment years, that any loss or gain arising on settlement date falling during the period under consideration could only be considered in this assessment year, that other dates of settlement fell in subsequent years, no loss/gain in respect thereto had accrued in the year under consideration. He directed the assessing officer to work out the profit or loss in this regard. For remaining two transactions, he held that loss or gain arising on settlement date falling during the year under appeal could only be considered.

18.1. In the appellate proceedings, the FAA held that all the transactions were arranged on notional basis and no physical delivery was intended to be taken, that same were of speculative nature, that the assessee had notionally worked out the loss as on the last date of the year in order to make the claim, that notional claim by no stretch of imagination could be considered as actual business expenditure, that the notional loss claimed by the it in respect of foreign exchange swap transaction was not an allowable business expenditure. Accordingly, the action of the assessing officer was confirmed.

18.2. Before us, the Authorised Representative argued that it was not notional loss, that loss comprised of swap loss and net foreign exchange gain in respect of export sales and imports made during the previous year, that the loss was arising as a result of mark to market valuation of outstanding derivative contracts on the balance sheet as per AS-11 issued by the ICAI, that the transaction had been entered in the normal course of business operations of the assessee to safeguard against foreign exchange risk, that the loss had arisen on account of booking of foreign exchange on the basis of exchange rate prevailing on 31-3-2008, that assessee was consistent -ly following the same practice, that in the subsequent year when there was profit on similar transactions the assessing officer had taxed it. The Departmental Representative supported the order of the FAA.

18.3. We have heard the rival submissions and perused the material before us. During the year under consideration the assessee had accounted for foreign exchange loss of Rs. 350.18 lakhs, that it was net of foreign exchange gain, that the loss mainly comprised of swap loss of Rs. 493.50 lakhs, that the assessee was consistently booking loss or gain on Foreign exchange on the basis of the foreign exchange rate as on the last date of particular year. In the subsequent year i.e., assessment year 2011-12 when the assessee had shown surplus the assessing officer had taxed the same. In our opinion the assessing officer should follow uniform policy for taxing or not taxing the foreign exchange loss/gains. If gains are to be taxed of a particular transaction the losses arising out of same cannot be denied to the assessee. The AO/ FAA has not commented upon the fact that assessee was following AS-11. Considering the above, we are of the opinion that FAA was not justified in confirming the order of the assessing officer. Ground No. 3 is decided in favour of the assessee.

ITA/1886/Mum/2013, assessment year 2008-09

19. Effective Ground of appeal (GOA 1-4), raised by the assessing officer is about deleting an amount of Rs. 5.37 crores, being disallowance of claim of sales tax incentive. Following our order for the earlier year (Para-15), we direct the assessing officer to decide the issue afresh. Effective Ground of appeal is allowed in his favour, in part.

As a result, appeals filed by the assessee and the assessing officer stand partly allowed. Order pronounced in the open court on 11-9-2017.

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