Delhi High Court
Commissioner Of Income Tax vs Orient Ceramics & Inds. Ltd. on 20 January, 2011
Author: A.K.Sikri
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ ITA No.65 of 2011
with
ITA No.66/2011
% Decision Delivered On: JANUARY 20, 2011.
1) ITA No.65 of 2011
COMMISSIONER OF INCOME TAX . . . Appellant
through : Mr. Anupam Tripathi, Sr.
Standing Cousnel.
VERSUS
ORIENT CERAMICS & INDS. LTD. . . .Respondent
through: Mr. Salil Aggarwal, Advocate with
Mr. Anil Makhija, Advocate.
2) ITA No.66 of 2011
COMMISSIONER OF INCOME TAX . . . Appellant
through : Mr. Anupam Tripathi, Sr.
Standing Cousnel.
VERSUS
ORIENT CERAMICS & INDS. LTD. . . .Respondent
through: Mr. Salil Aggarwal, Advocate with
Mr. Anil Makhija, Advocate.
CORAM :-
HON'BLE MR. JUSTICE A.K. SIKRI
HON'BLE MR. JUSTICE M.L. MEHTA
1. Whether Reporters of Local newspapers may be allowed
to see the Judgment?
2. To be referred to the Reporter or not?
3. Whether the Judgment should be reported in the Digest?
A.K. SIKRI, J. (ORAL)
1. CM No.643 of 2011 in ITA No.66 of 2011
Exemption is allowed, subject to just exceptions.
CM stands disposed of.
2. In both these appeals, which pertain to the same assessee and
relate to two different Assessment Years, three additions of
identical nature were made by the Assessing Officer, which were
deleted by the CIT (A) and the order of the CIT (A) has been
confirmed by the Income Tax Appellate Tribunal (hereinafter
referred to as „the Tribunal‟) vide common judgment dated
11.02.2010. Additions were of the following nature:
(a) Depreciation on custom duty payment;
(b) Expenditure on the glow sign board; and
(c) Depreciation on UPS.
3. Insofar as the first item of addition is concerned, the background
of the facts is that the assessee company had imported machinery
under duty exemption certificate issued by the Ministry of
Finance. Because of this certificate issued in favour of the
assessee, the assessee did not pay any custom duty on the import
of the said machinery. However, in the Assessment Year 2004-05,
the Custom Department disputed the said certificate and issued
Show Cause Notice to the assessee and called upon the assessee
to pay the differential amount of custom duty and demand of
`4,25,34,028 was made in this behalf. The assessee paid this
amount without prejudice to its contention that the certificate
issued by the Ministry of Finance was valid, legal and proper and
no such custom duty was paid. While paying the custom duty, the
assessee has contested the show cause notice issued by the
Custom Department and these proceedings are still pending.
Since the amount of `4,25,34,028 was paid by the assessee in the
aforesaid manner, the assessee capitalized the cost of machinery
by adding the said payment to the cost of machinery and on that
basis, depreciation @ 25% on the said addition was claimed to the
cost of machinery as well. The Assessing Officer (AO) disallowed
the depreciation on the aforesaid addition.
4. The question, in these circumstances, arose as to whether the
assessee who had made the payment in the meantime would be
entitled to add the same to the cost of plant and machinery and
claim depreciation thereon.
5. The CIT (A) as well as the Tribunal while accepting the course of
action taken by the assessee in claiming depreciation on the said
amount as well relied upon the judgments, i.e., Commissioner Of
Income-tax, Bombay City I Vs. Messrs. Shoorji Vallabhdas
And Co. 46, ITR 144 (SC); Tuticorin Alkali Chemicals &
Fertilizers Ltd. Vs. Commissioner of Income Tax 227 ITR 172
(SC); Kedarnath Jute Manufacturing Co. Ltd. Vs.
Commissioner of Income Tax 82 ITR 363 and Sutlej Cotton
Mills Ltd. Vs. Commissioner of Income Tax 116 ITR 1 (SC)
wherein it is held that even if the liability is challenged and the
legal proceedings are pending, once the amount has gone out of
the coffers of the assessee, the assessee would be entitled to
capitalize the same. The Tribunal while dealing with these
judgments held as under:
"At the outset we are convinced with the arguments made
by Shri Salil Aggarwal, advocate, that mere book entries are
not decisive of any income. The question is whether a
receipt of money is taxable or not, whether certain
deductions from that receipt are permissible in law or not,
the question has to be decided according to the principles
of law and not in accordance with the book entries for the
accounting practice since the accounting practice cannot
override the provisions of the Act. These views are fortified
by the judgment of various courts of law in the cases of
Tuticorin Alkali Chemicals and Fertilizers Ltd. v. CIT (1997)
227 ITR 172 (SC), Kedarnath Jute Manufacturing Co. Ltd. v.
CIT (1971) 82 ITR 363 (SC), Sutlej Cotton Mills Ltd. v. CIT
(1979) 116 ITR 1 (SC) and CIT v. Shoorji Vallabhdas and Co.
(1962) 46 ITR 144 (SC). There is nothing on record placed
by the departmental representative to establish that the
appeal has been filed by the Assessee against any order of
the Customs Department. The explanation, therefore,
appears to be satisfactory that on the directions issued by
the Customs Department, the payment of customs duty has
been made though the same has been shown as advance
or a note has been appended in the accounts for contingent
liability. Therefore, in our view the Assessee has made the
payment of customs duty only when the liability has
accrued on it. Since the customs duty has been paid to
acquire the plant and machinery and therefore, it has to be
capitalised, moreover, there is no dispute to the fact that
such expenditure cannot be capitalised as observed by the
assessing officer in his order in paragraph 2.3. The
obligation to pay the excise duty arose during the
impugned year and therefore, the liability to pay the
amount had accrued to the Assessee during the year itself
and the said liability cannot be said to be contingent and
cannot be said to be an advance payment. The order of the
learned Commissioner (Appeals) is a reasoned order, who
has rightly accepted the contention and explanation of the
Assessee and has rightly allowed the claim of the Assessee
for capitalisation of the payment of excise duty amounting
to Rs. 4,25,34,027 and has rightly directed the assessing
officer to allow the depreciation on the said amount. We
find no infirmity in the order of the learned Commissioner
(Appeals). Thus ground No. 1 of the revenue is dismissed."
6. We are in agreement with the aforesaid approach of the Tribunal
which is in consonance with the law laid down by the Supreme
Court and therefore, are of the opinion that no substantial
question of law arises insofar as this issue is concerned.
7. Coming to the expenditure on glow sign boards incurred by the
assessee, the issue was as to whether the said expenditure is
revenue or capital in nature. The plea of the assessee was that
these glow sing boards are of perishable nature, which the
assessee had displayed at the various outlets of its dealers and
therefore, the entire amount should be treated as revenue
expenditure and was allowable under Section 37 of the Act as
business expenditure. The AO, however, did not accept the
submission of the assessee holding as under:
"4.3 Glow Sing Boards are made of materials like
steel/aluminum frames and plastic sheets and display the
information for long periods subject to minor repairs.
Considering the useful life of the boards, Assessee
Company was rightly treating the expenditure as capital
expenditure in the earlier years i.e. prior to A Yr 05-06.
There is no change in circumstances for changing the
treatment of expenditure from capital to revenue. During
the A Yr 2005-06 the Assessing Officer had concluded that
the assessee company cannot be allowed to change the
accounting treatment of particular item without any basis."
8. Thus, only on the ground that the frames of these glow sing
boards are made of steal/aluminum, the AO came to the
conclusion that the expenditure incurred thereupon was capital in
nature. He was also influenced by the fact that till the previous
year, the assessee had itself capitalized the expenditure and only
from the Assessment Year 2005-06, accounting policy in regard to
incurring on expenditure on glow sing boards was changed by the
assessee.
9. The CIT (A) deleted this addition holding it to be expenditure of
Revenue in nature.
10. The order of the CIT (A) has been upheld by the Tribunal and in
arriving at the conclusion that the expenditure was of revenue
nature, the Tribunal has followed the judgment of the Punjab &
Haryana High Court in the case of Commissioner of Income Tax
Vs. Liberty Group Marketing Division [(2009) 315 ITR 125].
11. We have gone through the said judgment rendered by the Punjab
& Haryana High Court. The Court dealt with the same issue, viz.,
expenditure on glow sing boards and held the expenditure to be
revenue in nature in the following manner:
"14. Considering the above principle of law, in the present
case, it is to be seen as to whether the expenditure
incurred by the assessee on glow sign boards was with a
view to bringing into existence an asset or an advantage for
the enduring benefit of the business. In our opinion, the
expenditure incurred by the assessee on glow sign boards
does not bring into existence an asset or advantage for the
enduring benefit of the business, which is attributable to
the capital. The glow sign board is not an asset of
permanent nature. It has a short life. The materials used in
the glow sign boards decay with the effect of weather.
Therefore, it requires frequent replacement. The Tribunal
has also recorded a finding that the assessee has to incur
expenditure on glow sign boards regularly in almost each
year. This fact itself shows that the advantage accrued from
the use of the glow sign boards is not of enduring nature.
Thus, the expenditure by the assessee on these glow sign
boards did not bring into existence any asset or advantage
for the enduring benefit of the business. The assessee has
spent the expenditure on the glow sign boards with an
object to facilitate the business operation and not with an
object to acquire asset of enduring nature. Therefore, the
said expenditure was of revenue nature and the Tribunal
has rightly treated the same as of revenue nature."
12. Agreeing with the aforesaid view taken by the Punjab & Haryana
High Court, we hold that no question of law arises on this aspect
as well.
13. The third issue pertaining to depreciation on UPS arises only in the
Assessment Year 2005-06. The assessee had claimed
depreciation on UPS @ 60% whereas the AO had allowed it @ 25%
and on this basis, disallowance of `1,470 was made. The issue
now stands covered by the judgment of this Court in the case of
Commissioner of Income Tax Vs. BSES Yamuna Powers Ltd.
(in ITA No.1267 decided on 31.08.2010) wherein it was held that
the depreciation @ 60% on such items shall be allowed.
14. Therefore, we are of the opinion that these appeals are without
any merit, which are accordingly dismissed.
(A.K. SIKRI)
JUDGE
(M.L. MEHTA)
JUDGE
JANUARY 20, 2011
pmc
