Sec 234D is applicable only on regular assessment year and difference in depreciation due to exchange rate need to transfer to PL account as per AS-11.

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “A” New Delhi

BEFORE SHRI R.P. TOLANI AND SHRI SHAMIM YAHYA

ITA No. 1217/Del/2011

Asstt. Yr: 2004-05

BSC & CJV

74, Hemkunt Colony,

Opposite Nehru Place, N. Delhi.

PAN/GIR No. AADFB8115G

(Appellant)

Vs.

 ACIT, Circle 38(1),

New Delhi.

(Respondent)

AND

ITA No. 1752/Del/2011

Asstt. Yr: 2004-05

ACIT, Circle 38(1),

New Delhi.

(Appellant)

Vs.

 BSC & CJV

74, Hemkunt Colony, New. Delhi.

 (Respondent)

Appellant by: Shri Ajay Vohra, Adv.

Shri Amit Sachdeva Adv. &

Shri Amarjit Singh CA

Respondent by: Mrs. Geetmala Mahamoney CIT (DR) &

Mrs. Anusha Khurana Sr. DR

O R D E R

PER R.P. TOLANI, J.M:

These are cross appeals one by assessee and other by revenue against the CIT(A)’s order dated 11-1-2011 relating to A.Y. 2004-05.

i) Concise grounds raised by assessee are as under:

“1. That the Commissioner of Income Tax (Appeals) (“the CIT(A”) erred on facts and in law in upholding the jurisdiction of the assessing officer to reassess the income of the appellant under sections 147/143(3)/145(3) of the Incometax Act, 1961 (“the Act”).

1.1. That on facts and in law, the CIT(A) erred in failing to appreciate that the reassessment proceedings were based on mere change of opinion and incorrect facts.

2. That on facts and in law, the CIT(A) erred in upholding disallowance of additional depreciation to the tune of Rs. 4,05,12,853 and Rs. 1,52,73,164 on plant and machinery and tippers respectively without appreciating that the appellant was engaged in manufacture or production, inter alia, of mixed concrete.

3. That on facts and circumstances of the case and in law, the CIT(A) erred in upholding the jurisdiction of the assessing officer to make additions/ disallowances on various issues on the basis of roving and fishing enquiries conducted during reassessment proceedings de hors the basis and the issues on which reassessment proceedings were initiated under section 147/148 of the Act.

4. That on facts and circumstances of the case and in law, the CIT(A) erred in not admitting additional evidence filed by the appellant under Rule 46A of the Income-tax Rules, 1962 merely on the ground that the same was in the nature of unsigned photocopies.

5. That on facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the assessing officer in rejecting the books of account and assessing the income of the appellant from Indian Projects at Rs. 81,28,034 (@ 4% of gross receipts) on ad hoc and arbitrary basis, asagainst loss of Rs. 5,51,20,396 declared by the appellant.

5.1. That the CIT(A) erred on facts and in law in upholding the action of the assessing officer:

- on the basis of ex parte enquiries admittedly conducted behind the back of the appellant without confronting or affording ade4quate opportunity for rebuttal/ crossexamination;

- on the ground that the appellant did not furnish confirmations from such parties; and

- on the ground that the appellant had failed to produce quantitative details of stock and consumption.

5.2. Without prejudice, on the facts and circumstances of the case and in law, the CIT(A) erred in upholding estimation of profits from the Indian Projects @ 4% of the gross receipts.

5.3. That without prejudice, on the facts and circumstances of the case and in law, the CIT(A) erred in upholding the action of the assessing officer in considering gross receipts for the purpose of estimation of income from the Indian Projects to be Rs. 20,32,00,856 as against receipts of Rs. 19,40,54,608 declared by the appellant.

6. Without prejudice, that the CIT(A) erred in upholding the action of the assessing officer in not allowing deduction for employees’ contribution towards provident fund of Rs. 1,23,096, deposited before the due date of filing of return, merely on the ground that no separate addition in respect thereof was made by the assessing officer.

7. That the CIT(A) erred on the facts and in law, in upholding denial of deduction in respect of prior period expenses of Rs. 2,40,586 without appreciate that liability in relation thereto crystallized during the relevant previous year.

8. Without prejudice, that the CIT(A) erred on the facts and in law in not directing the assessing officer to allow deduction in respect of prior period expenses of Rs. 2,40,586 in earlier year(s).

9. Without prejudice, that the CIT(A) erred on the facts and in law in not directing the assessing officer to recomputed deduction allowable under section 80HHB of the Act, with reference to the assessed profits of the eligible projects, consistent with the additions/ disallowances sustained in the impugned order.

10. That the CIT(A) erred on the facts and in law in not adjudicating upon the ground raised by the appellant challenging the levy of interest under section 234D of the Act.”

II: Revenue grounds are as under:

1. On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 87,15,926/- made on account of excess depreciation claimed on the ground that the same is debited in misc. expenses of P&L account.

2. On the facts and circumstances of the case, the ld. CIT(A) erred in deleting the addition of Rs. 54,594/- made on account of wrong depreciation claimed on office equipment on the ground that the same is debited in misc. expenses of P&L account.

3. The appellant craves to add, amend or modify the grounds of appeal at any time.

2. Assessee has filed an application for additional evidence, same shall be dealt along with the relevant issue.

2.1 Brief facts are: The assessee is an AOP, formed by way of a joint venture of two company’s viz. M/s B. Seenaiah & Co. Projects Ltd.; and M/s C&C Constructions Pvt. Ltd. The assessee is engaged in the business of road construction in India and Afghanistan. For A.Y. 2004-05 original return was filed on 1-11-2004 declaring income of Rs. 13,46,14,926/- which was assessed u/s 143(3) on 28-12-2006 at Rs. 13,51,99,283/-. 2.2. Subsequently, AO noticed that assessee had claimed excess depreciation in audit report at Rs. 17,89,98,964/- as against depreciation shown in P&L A/c at Rs. 18,77,14,890/-. Consequently assessee had claimed excess depreciation of Rs. 87,15,926/- which had escaped assessment. AO had further reasons to believe that assessee had claimed additional depreciation which was not eligible to it by provisions and excess additional depreciation also was wrongly allowed. Thus the income to the extent of additional depreciation had also escaped assessment. Consequently, AO recorded following reasons for reopening the assessment u/s 148 of the Act:

“The assessee M/s BSC C&C, Joint Venture, 74, Hemkunt Colony, New Delhi is engaged in the business of road construction. Return of income in this case was filed on 1-11- 2004 declaring income at Rs. 13,46,14,926/-. Assessment wascompleted under section 143(3) on 28-12-2006 at an income of Rs. 13,51,99,283/-. Subsequently, it was noticed that assessee has claimed depreciation and additional depreciation on plant & machinery @ 25% and 15% respectively at Rs. 10,80,85,264/- as per annexure II of Audit Report. However, depreciation @ 25% is allowable in this case comes to Rs. 6,75,72,411/-. Thus the assessee has claimed excess depreciation amounting to Rs. 4,05,12,853/- in its return of income. The additional depreciation claimed at Rs. 4,05,12,853/- is not allowable as the assessee do not fulfill the conditions as laid down in sub section (iia) of Section 32 of the Act which reads as under:-

“In the case of any new machinery or plant “(other than ships and aircraft) which has been acquired and installed after the 31st day of March 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen percent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).

(A) A new industrial undertaking during any previous year in which such undertaking begins to

manufacture or produce any article or thing on or after the Ist day of April, 2002; or

(B) Any industrial undertaking existing before the Ist day of April, 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.”

Since the assessee is not engaged in the business of manufacture or production of any article or thing, hence the additional depreciation is not allowable to it. The Hon’ble Supreme Court in the case of CIT Vs. N.C. Budhiraja & Co. (1993) 204 ITR 307 (SC) has held that construction activity do not fall in the category of manufacture or production of any article or thing. Since the assessee do not qualify the basic condition, the additional depreciation claimed at Rs. 4,05,12,853/- is not allowable.

2. On scrutiny of the record, it has been further observed that assessee has claimed depreciation and additional depreciation on “Tippers” @ 25% and 15% respectively at Rs. 4,07,28,435/- as per annexure II of the audit report. Since, the assessee is not engaged in the business of manufacture or production of any article or thing, as discussed in para 1 above, additional depreciation claimed is not allowable to it. The depreciation allowable on this asset is Rs. 2,54,55,271/-. Thus the assessee has claimed excess depreciation of Rs. 1,52,73,164/-.

3. It has also been observed that assessee has debited to the profit and loss account, an amount of Rs. 18,77,14,890/- on account depreciation instead correct figure of Rs. 17,89,98,764/-. The mistake resulted in excess claim of depreciation at Rs.87,15,926/-. In response to show cause notice the assessee has stated that difference is on account of Exchange Fluctuation Account. However, no details were filed by the assessee neither during assessment proceeding nor in response to show cause notice. Thus the assessee has claimed excess depreciation at Rs. 87,15,926/-.

4. The assessee has also claimed depreciation on office equipment at 25% amounting to Rs. 6,38,713/-. The allowable depreciation on office equipment was Rs. 5,85,119/-. The mistake resulted in excess depreciation of Rs. 53,594/-.

5. In view of above, the assessee has claimed excess depreciation at Rs. 6,45,55,537/-. The assessee’s case covered under clause (c)(iv) of Explanation 2 of Section 147 of the Act.

I have therefore reasons to believe that income to the extent of Rs. 6,45,55,537/- has escaped assessment under section 147 of the I.T. Act. Hence notice under section 148 for the A.Y. 2004-

05 is issued”.

2.4. On the basis of these reasons, notice u/s 148 was issued on 30-10- 2008 by AO reopening the assessment and asking the assessee to file a return of income. The assessee vide letter dated 21-11-2008 requested to treat the return already filed as the one filed in response to notice u/s 148. Thereafter, AO issued notice u/s 143(2) and conducted the assessment proceedings. The excess claims of depreciation and claim of additional depreciation were objected and proposed to be withdrawn by AO. Assessee objected to reopening of assessment and proposed additions by way of detailed reply mainly contending as under:

2.5 Reopening of assessment u/s 148

2.6. Additional Depreciation

“The expansion in capacity is based on the increased production capacity of the crusher, hot mix plant, WMM plant and batching plant. It is further stated that the crusher is used to crush big stones into aggregate. This aggregate is the mixed with bitumen and the new material which is neither aggregate nor Bitumen, but is rather a new product are subsequently used in the construction of roads. Strictly applying the decision of the Supreme Court in N. C. Budhiraja’s case. Such activity does not result in manufacture/ production an article/ object. However, it is submitted that the mixtures, so produced by the aforesaid plants in different entitles/ work sites of the assessee are entirely different and different and distinct, in terms of its chemical composition and use, from the raw material used to manufacture such mixtures and since the mixtures are movable objects, the decision of Apex Court in N.C. Budhiraja’s case is inapplicable.”

Reliance was placed on following case laws:

- Dy. CST Vs. PIO Food Packers (1980) 46 STC 63 (SC);

- CIT v. Tata Locomotive & Engineering Co. Ltd. (1968) 68 ITR 325 (Bom.);

- Union of India Vs. Delhi Cloth & General Mills CO. Ltd. AIR 1963 SC 791 (SC);

- Narne Tulaman Manufacturers Pvt. Ltd. V. Collector of Central Excise (1990) 183 ITR 577 (SC).

- Sterling Foods Vs. State of Karnataka AIR 1986 SC 1809 (SC).

2.7. Excess depreciation on a/c deference in Computation and P & L a/c

2.7.1. In respect of excess depreciation of Rs. 87,15,926/- it was contended that there was no mistake and the difference in cost of asset was occasioned by exchange rate fluctuation as the assets were purchased in US $ terms and the said difference was to exchange fluctuation account. Assessee furnished a chart in this behalf. The detailed submissions are on record.

3. Apart from issues of additional and excess depreciation, during the course of reassessment proceedings AO further observed that assessee though had shown profits from construction contract; however in respect of Indian projects net loss of 28.40% on gross receipts was shown. AO thus proposed to verify the reasons for losses in respect of Indian projects and asked to submit following information vide letter dated 26-11-2009:

“1. You have claimed loss in respect of projects executed in India. In this regard the following information please may be furnished:-

i) Reasons for why you have suffered the loss in the Indian projects.

ii) Please furnish the copy of the tenders. Also state the percentage of profit quoted in the tender in respect of Indian projects.

iii) Is there any escalation clause in the tender, if any the same may also be explained/ furnished.

iv)Whether you have filed any claim for escalation with any arbitrator, if so the details there of may also be furnished.

v) The name of the projects in which you have suffered loss.

You have furnished the list of creditors without furnishing the addresses. The complete address of the creditors may please be furnished.

You have claimed expenses in respect of spare parts. The details of purchases under this head above Rs. 5,00,000/- along with a one copy of purchase bill of each party may please be furnished.

The basis of valuation of WIP may be furnished. Please state whether the deduction u/s 80HHB has been claimed on other income also which you have earned in India. Relevant extracts of the bank statements from which the payments for self assessment and advance tax for the A.Y. 2004-05, 2005-06 and 2006-07 were withdrawn and deposited in the government account.

The details of additional depreciation claimed in the A.Y. 2005-06, 2006-07 and 2007-08. You have claimed prior period expenses Rs. 2,40,586/- the nature of these expenses and the period to which it pertain may be furnished.

Capital accounts of the JV partners may be furnished. You have credited an amount of Rs. 1,45,65,520/- in the miscellaneous expenditure, the details for the same may be furnished. Copy of return of income, along with audit report, balance sheet and P&L account of the JV members please may be furnished for the A.Y. 2004-05, 2005-06 and 2006-07.

Copy of assessment order passed by the I.T. authorities in the cases of JV members, if any, for the A.Y. 2004-05, 2005-06 and 2006-07 may also be furnished.”

The assessee was also asked to furnish some more information vide this office letter no. 1306 dt. 08-12-2009:-

Copies of tender forms submitted to the contractee departments/ parties in respect of projects executed in India. Project wise agreed tender values viz-viz projected cost file with the evidence.

Reasons for loss in each and every project. Separate working of expenses and receipts with regard to each project. Furnish the detail consumption with regard to quantitative consumption of various items in comparison to tender file as well as tender granted.

Stock register of all the items maintained separately of together with regard to verification of issue as well as consumption of material.

Copy of ledger account of major items purchased above Rs. 10 lacs along with complete address of the party with two sample copy of the bills. Books of account including stock register.”

3.1. In response to these letters, assessee in respect of losses from Indian projects replied as under:

“For the losses incurred on India projects, we have to submit as follows:

a. With regard to loss on Indian projects, we have to state that the loss has been incurred due to delay in completion of projects, which has resulted in extra cost on account, idle manpower, increase in hire cost of machinery, increase in the cost of raw material. In some cases contract value at the time of completion was reduced.

b. We are submitting herewith details of start and completion of the Indian projects alongwith copy of award letters and completion certificate that in all the projects there was delay in completion of the same. In some cases contract value at the time of completion of project was also reduced because of delay in execution of the projects, which has also been detailed in the completion certificate.

c. Further, we have to state that due to delay in completion of projects, cost of the project was also increased. An example has been given as below:

Major component of raw material in construction of roads in Bitumen. From the above said statement, increase in cost of Direct Expenses may be considered at 30% approx.

d. We are submitting herewith project wise profit & loss Account of Indian Project. Your Honour would observe from the said chart that against total work done of Rs. 16.20 crores, raw material cost is Rs. 9.82 crores and other direct operating expenses is Rs. 8.54 crores. If 30% increase in the cost of Direct Expenses is considered, it has contributed to Rs. 4.25 crores in the total of Rs. 5.50 crore.

e. Further, your honour would observe from the projectwise Profit & Loss Account that in the Indirect Expenses major components are Depreciation and Finance Cost, which are Rs. 1.39 crores and Rs. 0.74 crores respectively. These have also contributed to loss along with other indirect expenses.

f. Further, since the projects were delayed, we had to incurred fixed overhead expenses such as salaries etc. continuously, which resulted in loss.

g. In some of the sites final contract value at the time of completion of the projects were reduced. In the Behram Site final contract value was reduced by a sum of Rs. 1.00 crore and in the Nakodar site the same was reduced by a sum of Rs. 0.98 crore. This has also impacted the profitability of the Indian project.

h. Further the accounts of the assessee have been duly audited for which proper bills and vouchers are available with the assessee.

In view of the above, it is submitted that the assessee has actually suffered a loss of Rs. 5.50 crores on Indian Projects, due to delay in execution of projects, which has resulted in increase in both, Indirect and Direct cost to the assessee.”

3.2. The assessee has also filed the written submission on 21-12- 2009 which are reproduced as under:-

“1. Copies of completion certificates of Indian Projects are attached herewith for your kind perusal. Your honour would observe from the completion certificate that all the projects were delayed. Further in some cases, contract value at the time of completion of project was also reduced, which has also resulted into losses on Indian projects.

2. Projects-wise agreed tender value and final amount received from the projects is also mentioned in the completion certificate submitted as above.

3. Copies of tenders of all the Indian projects are attached herewith for your kind perusal. These are very voluminous tenders and are being submitted in separate box files.

4. No profit percentage is quoted in the tenders. We only give consolidated price chargeable from the contractee.

5. Escalation clause varies from tender to tender. In some tenders escalation clause is agreed and income tender it is not. It is tender-specific.

6. No claim has been filed with any arbitrator for escalation for Indian projects

7. Projects-wise profit & loss of Indian sites has already been submitted to your good self vide letter dt. 16-12-2009. The assessee has suffered losses on following Indian projects:

a. Amritsar, Punjab

b. Hyderabad (only interest for the amounts financed to project from Hyderabad and depreciation on the machineries purchased from Hyderabad has been charged in Hyderabad books).

c. Kamha, Punjab

d. Rahon, Punjab

e. Jagraon, Punjab

f. Jangal, Punjab (This is a crusher site only)

The assessee has earned profit on following Indian sites.

a. Behram, Punjab

b. Nakodar, Punjab

c. Delhi

8. …..

9. For receipts and expenses on each project, we have already submitted project-wise profit & loss account for the year under consideration vide letter dated 16-12- 2009.

10. Quantitative consumption of various items of raw material in comparison to tender filed as well as tender granted cannot be made as the maintenance of stock records of raw material is not feasible and possible. The same fact has already been mentioned in the Tax Audit Report. Hence no stock registers are maintained for the Raw Material.

11. Reasons of losses have already been explained vide letter dated 16-12-2009.”

4. AO however held that the claim of additional depreciation was not allowable to assessee and the same was disallowed by following observations:

“6. The above reply of the assessee was examined in detail. In the light of following fact and legal pronouncements.

6.1. The case law relied upon by the assessee do not relate to the facts of the case of the assessee. The additional depreciation claimed is not allowable as the assessee do not fulfill the requisite conditions as laid down in sub section (iia) of section 32 of the act which reads as under:-

“In the case of any new machinery or plant (other than ships and aircraft) which has been acquired and installed after the 31st day of March, 2002, by an assessee engaged in the business of manufacture or production of any article or thing, a further sum equal to fifteen per cent of the actual cost of such machinery or plant shall be allowed as deduction under clause (ii).;

Provided that such further deduction of fifteen per cent shall be allowed to:

(A) a new industrial undertaking during any previous year in which such undertaking begins to manufacture or produce any article or thing on or after the Ist day of April, 2012; or

(B) Any industrial undertaking existing before the Ist day of April, 2002, during any previous year in which in achieves the substantial expansion by way of increase in installed capacity by not less than per cent;”

Since the assessee is not engaged in the business of manufacture or production of any article or thing, hence the additional depreciation is not allowable to it. The Hon’ble Supreme Court in the case of CIT Vs. N.C. Budhiraja & Co. (1993) 204 ITR 307 (SC) has held that construction activity do not fall in the category of manufacture or production of any article or thing.

The relevant part of the judgment is reproduced as under:

"Commonly manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place."

8. The word "production" or "produce" when used in juxtaposition with the word "manufacture" takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products which emerge in the course of manufacture of goods. The next word to be considered is "articles", occurring in the said clause. What does it mean? The word is not defined in the Act or the Rules. It must, therefore, be understood in its normal connotation the sense in which it is understood in commercial world. It is equally well to keep in mind the context since a word takes its colour from the context. The word "articles" is preceded by words "it has begun or begins to manufacture or produce". Can we say that the word "articles" in the said clause comprehends and takes within its ambit a dam, a bridge, a building, a road, a canal and soon? We find it difficult to say so. Would any person who has constructed a dam say that he has manufactured an article or that he has produced an article? Obviously not. If a dam is an article, so would be a bridge, a road, an underground canal and a multi-storied building. To say that all of them fall within the meaning of word 'articles' is to over-strain the language beyond its normal and ordinary meaning. It is equally difficult to say that the process of constructing a dam is a process of manufacture or a process of production. It is true that a dam is composed of several articles; it is composed of stones, concrete, cement, steel and other manufactured articles like gates, sluices etc. But to say that the end product, the dam, is an article is to be unfaithful to the normal connotation of the word. A dam is constructed; it is not manufactured or produced. The expressions "manufacture" and "produce" are normally associated with moveables articles and goods, big and small but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road or a building. The decisions of the Bombay High Court in CIT v. N. U. C. Pvt. Ltd. I and in CIT v. Shah Construction Co. Ltd.2 relied upon by Shri Murti are no doubt not decisions rendered under Section 80-HH or under Section 84 they arose under the relevant Finance Acts, the question being whether the assessees were industrial companies they do contain observations which tend to support the stand of the Revenue.

9. It may be that the petitioner is himself manufacturing some of the articles like gates, windows and doors which go into the construction of a dam but that makes little difference to the principle. The petitioner is not claiming the deduction provided by Section 80-HH on the value of the said manufactured articles but on the total value of the dam as such. In such a situation, it is immaterial whether the manufactured articles which go into the construction of a dam are manufactured by him or purchased by him from another person. We need not express any opinion on the question what would be the position, if the petitioner had claimed the benefit of Section 80-HH on the value of the articles manufactured or produced by him which articles have gone into/consumed in the construction of the dam.

 Please check the detail judgment in the attached file.....