Reversal of cenvat credit on WIP/ finished goods written off in the books of accounts -reg

Circular No. 907/27/2009-CX



F.No.267/141/2009-CX8

Government of India
Ministry of Finance
Department of Revenue
(Central Board of Excise & Customs)



New Delhi, dated the 7th December, 2009.



To,

All Chief Commissioners of Central Excise (including LTU),

All Commissioners of Central Excise (including LTU),

All Director Generals.



Sir/ Madam,



Subject: Clarification on issues related to reversal of cenvat credit on WIP/ finished goods written off in the books of accounts -reg.



References have been received from field formations stating that as per Rule 3(5B) of CENVAT Credit Rules, 2004, if the value of inputs is fully written off, then the manufacture is required to pay an amount equal to cenvat credit taken. However, there is no provision to demand reversal of credit taken on inputs which have gone into manufacture of work in progress (WIP), semi finished goods and finished goods which have also been written off fully in the books of accounts.

2. The matter has been examined. Rule 3(5B) of the CENVAT Credit Rules, 2004, provides that if the value of any input on which cenvat credit has been taken is written off fully in the books of accounts, then the manufacturer is required to reverse the credit taken on the said input. As far as finished goods in concerned, it is stated that excise duty is chargeable on the activity of manufacture or production. Even though liability for payment of tax has been postponed to the time of removal of goods for the factory, but still the legal liability to pay the excise duty has been fastened on the goods, when it has been manufactured or produced. Therefore, normally all goods manufactured suffer excise duty at the time of removal, but if the manufactured goods are destroyed due to natural causes etc., Rule 21 of Central Excise Rules, 2002, provides for remission of duty. Further, Rule 3(5C) of CENVAT Credit Rules, 2004, also requires reversal of credit on the inputs when the duty is ordered to be remitted under the said Rule 21. Therefore, if the goods have been manufactured, in that case, a manufacturer is liable to pay excise duty unless duty is remitted under Rule 21. Therefore, if the value of finished goods is written off, the manufacturer would be liable to pay excise duty or he would be required to reverse the credit on the inputs used, if duty has been remitted on finished goods.



3. As regard writing off work in progress (WIP), it is stated that if the WIP has reached the stage, when it can be considered as manufactured goods, in that case, the same treatment as applicable to finished goods, discussed in para2 above would apply. However, if the activity carried out on the WIP goods cannot be considered as amounting to manufacture, in that case, the said goods should be considered as input and the treatment for reversal of credit applicable to input would be applicable.

1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia
2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry

Scope for making addition on a/c of disallowance of expenditure u/s 40(a) in a case where assessee follows ‘completed contract method’: ITAT MUMBAI, BENCH ‘J’

Scope for making addition on a/c of disallowance of expenditure u/s 40(a) in a case where assessee follows ‘completed contract method’
The correct procedure in “completed contract method” is that instead of making addition, if some expenditure are found to be not allowable, the AO should correct the amount of work-in-progress by reducing or enhancing work-in-progress as the case may be


ITAT MUMBAI, BENCH ‘J’

Savala Associates

v.

ITO

ITA No. 4441/M/2008

October 27, 2009

RELEVANT EXTRACTS:

** ** ** ** ** ** ** ** ** ** ** **

6.1 On plain reading of above section, we find that certain expenditures are not allowable if the assessee failed to deduct tax or after deduction same was not paid in time. However, such expenditures are allowable Provided that where in respect of any such sum. Tax has been deducted in any subsequent year, or has been deducted—

(A) during the last month of the previous year but paid after the said due date; or

(B) during any other month of the previous year but paid after the end of the said previous year.

Such sum shall be allowed as a deduction in computing the income of the previous year in which such tax has been paid.

6.2 The above provision is related to amount not deductible while computation of income chargeable under the head 'profits and gains of business or profession. Basically, income chargeable under the head 'profit and gains of business or profession' or 'income from other sources', be computed in accordance with cash or mercantile system of accounting regularly employed by the assessee. Recognition/ identification of income under the I.T. Act is attainable by several methods of accounting considering the nature of business activities. It may be noted that the same result could be attained by any one of the accounting methods. "Completed contract method'' is one such method. Similarly, "percentage of completion method" is another such method. Under the "completed contract method", the revenue is not recognized until the contract is complete. Under the said method, costs are accumulated during the course of the contract period. As per the accepted accounting principle, it is accumulated under one head of account, work-in-progress'. The project constituted the stock-in-trade of the assessee. The project did not constitute a fixed asset of the assessee. In the last accounting period when work is completed, the profit and loss account is prepared, that 'work-in-progress' account is to be transferred in profit & loss account. Thus, the "completed contract method" determines profits/loss only when contract is completed. Now question arises how the profit is to be calculated in case of 'completed contract method'. One of the important aspects to be seen is Cost incurred by a contractor which can be divided into Cost that relate directly to a specific contract; Cost that can be attributed to the contract activity in general and can be allocated to specific contracts and Costs that relate to the activities of the contractor generally, or that relate to contract activity but cannot be related to specific contracts. Examples of costs that relate directly to a specific contract include :site labour costs, including supervision: materials used for project construction; depreciation of plant and equipment required for a contract; costs of moving plant and equipment to and from a site. Examples of costs that can be attributed to the contract activity in general and can be allocated to specific contracts include: insurance; design and technical assistance; construction overheads. Examples of costs that relate to the activitiesof the contractor generally, or that relate to contract activity but cannot be related to specific contracts, include: general administration and selling costs; finance costs; research and development costs; depreciation of plant and equipment that cannot be allocated to a particular contract. In case of ""completed contract method", the above expenses related to individual project have to be capitalized in work-in-progress which is similar to stock in trade, of respective individual project. Opening balance of work-in-progress of individual project will go up in the relevant year. When these projects were completed, in that year, income has to be computed after considering increased opening work-in-progress and receipts of the relevant project. Accordingly, in the year when these projects were completed, income on account of those projects is be computed after considering increased opening balance of work-in-progress due to addition of expenses for the period of project in work in progress. Contrary, if certain expenditures are not allowable under the Act the work in progress will not increased by that amount. Such expenses are to exclude from the Work in progress if same were included by the assessee. For the above purposes the AO has to examine the work in progress account in each assessment year. If on examination the AO did not find any mistake in work-in-progress account then said work-in-progress is to be carried forward in the next year and so on till completion of project. If on examination, the AO found that the work-in-progress shown in books of account is not correct, the AO is empowered to correct the same. In other words, it can be said that work-in-progress is just like one side of profit & loss account i.e. debit side, the AO can have all powers to examine this debit side of profit & loss account including the power of examination of allowability / disallowability of expenditure u/s 40(a) of the Act. In the case under consideration we find that the AO has rightly noted that the expenditure claimed by the assessee which are subject to TDS liability but TDS was no paid in time; therefore these were disallowable u/s 40(a). In principle we agree with above view of revenue that in case oi "completed contract method" the AO is empowered to examine the expenditures incurred during the year which increases the opening work in progress or addition in work in progress. But we do not agree with the view of revenue that addition is to be made in total income, if some expenditure were found not allowable/The correct procedure in "completed contract method” is.. that instead of making addition the AO should correct the amount of work-in-progress by reducing or enhancing work-in-progress as the case may be a such corrected WIP will be finally considered in profit and loss account/contract account for the year in which work is completed. The result of calculation of correct profit in case of "completed contract method" could be attained by this procedure. In the case under consideration, the AO made addition in all the projects including incomplete projects, which is not warranted. Such addition in total income is warranted only in respect of project which is completed during the year. The learned AR has conceded the additions in respect of completed works. Necessary calculation is required after verification from original record. The original record is not readily available at this stage under the circumstances we send back this matter to the file of the AO with direction to delete the additions made in total income in respect of incomplete projects. However the addition in respect of completed project is to confirm subject to verification of calculation of the amount. The AO is further directed to correct the amount of work-in-progress of incomplete works/projects in accordance with the above discussion and after providing opportunity of hearing to the assessee.

** ** ** ** ** ** ** ** ** ** ** **

1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia
2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry

Change of method of accounting of overdue charges from mercantile basis to cash system does not create any income : HIGH COURT OF MADRAS

Change of method of accounting of overdue charges from mercantile basis to cash system does not create any income

HIGH COURT OF MADRAS

CIT

v.

Annamalai Finance Ltd.

TAX CASE (APPEAL) NO. 1087 OF 2009

NOVEMBER 2, 2009

RELEVANT EXTRACTS :

** ** ** ** ** **
In the instant case, learned counsel for the Revenue is not in a position to demonstrate or satisfy us that due to the change of accounting method adopted by the respondent/assessee, which is permissible in law as per the ratio laid down in (i) CIT v. Matchwell Electricals (I.) Ltd. (2003)263 ITR 227 (Bom) and (ii) Hela Holdings Pvt. Ltd. v. CIT (2003) 263 ITR 129 (Cal), the Revenue suffered any loss or such a change of methodology attracts tax evasion. Concededly, there is no finding to that effect in the assessment order or in the order of the Commissioner of Income-tax (Appeals).

The change of method of accounting of overdue charges from the mercantile basis to cash system, method of accounting, as followed by an assessee, does not create any income; but the method of accounting only recognizes income. Therefore, either to apply the accrual system or cash system, recognition of income is a paramount factor. In the present case, the disputed amount is the overdue charges receivable `by the assessee from various parties on the basis of hire-purchase and lease agreements. As per the terms of the agreements, overdue charges are payable by the parties concerned to the assessee when they make defaults in paying the instalments as per the schedule of payments. When the instalment itself is overdue, is not collected, there is no basis for making out a case that the additional overdue charges payable by the parties would be collectible with certainty. The terms of the agreements which enable the assessee-company to demand overdue charges is only an enabling provision and that enabling provision does not guarantee the collection of overdue charges. It only gives a cause of action to the assessee. In such cases it is very difficult to recognize income against overdue charges.

We are, therefore, of the considered opinion that the Tribunal has rightly deleted the additions made towards overdue charges, acknowledging the change of method of accounting of overdue interest alone on cash basis.

** ** ** ** ** **
1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia
2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry

Set off of long term capital loss with indexation against long term capital gains without indexation is allowable ITAT, MUMBAI BENCH ‘B’

Set off of long term capital loss with indexation against long term capital gains without indexation is allowable
ITAT, MUMBAI BENCH ‘B’, MUMBAI
 
Keshav S. Phansalkar

v.

ITO

ITA NO. 3261/MUM/2007

JUNE 3, 2009

RELEVANT EXTRACTS :

** ** ** ** ** **

8. Section 70(3) of the Act postulates that for any assessment year where there is a loss in respect of long term capital asset, the asscssee shall be entitled to have the amount of such loss set off against the income, if any fas arrived at under a similar computation) made for the assessment year in respect of any other long term capital asset. Section 112 of the Act provides for tax on long term capital gains. Section 112 of the Act provides that where the total income of the assessee includes any income arising from the transfer of a long term capital asset, assessable under the head 'income from capital gains', the tax payable by the assessee on the total income shall be aggregate of the amount of income tax payable on the total income as reduced by the amount of such long term capital gains and the amount of income tax calculated on such long term capital gains @ 20% in the case of an individual / Hindu undivided family, being resident and domestic company and also in the case of nonresident, not being a company or foreign company and in any other cases. The proviso under section 112 of the Act reads as under:-

"Provided that where the total income as reduced by such long-term capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of twenty per cent;

(b) in the case of a fdomestic] company,—'

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income: and

(ii) the amount of income-tax'calculated on such long-term capital gains at the rate of [twenty] per cent:

[(c) in the case of a non-resident (not being a company) or a foreign company,—

(i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income; and

(ii) the amount of income-tax calculated on such long- . term capital gains at the rate of twenty per cent;]

[(d)]in any other case [of a resident],—

(i) the amount of income-tax pay able on the total income as reduced by the amount of long-term capital gains, had the total income as so reduced been its total income ; and

(ii) the amount of income-tax calculated on such long-term capital gains at the rate of [twenty] per cent."



9. While computing the tax on long term capital gains, the provisions of the Act by way of section 112 recognizes two methods of computing gain arising on the transfer of long term capital asset. The provision for computation of tax on sale of assets being listed securities/units or zero coupon bond is provided in the proviso under section 112(1) of the Act. In respect of listed securities/units or zero coupon bonds, the option is available to the assessee, to compute the tax payable on the income arising on the transfer of such assets either by indexation of cost of acquisition or without indexation. The proviso to section 112(1) of the Act provides that where the assessee exercises the option of indexation of cost of acquisition and working out the tax on income from long term capital gains with indexation, rate of tax applicable is 20% as provided under the Act. How ever, in case the assessee opts not to resort to provisions of second proviso to section 48 i.e. opts long term capital gain without indexation, then the tax is to be worked out @ 10% of such amount of capital gain. In case, where the assessee computes the income from long term capital gains with indexation on which tax payable @ 20% of such gains and such tax exceeds 10% of the amount of capital gains worked out by the assessee without indexation, then the proviso to section 112 of the Act provides that the excess shall be ignored for computing the tax payable by the assessee. In other words, the assessee has to work out the long term capital gains with indexation and without indexation and in case, the working with indexation is exercised, which in turn is assessable @ 20% gains and such amount exceeds 10% of the amount of capital gains worked out without indexation, then such excess is to be ignored. The word . used in the proviso to section 112 of the Act is "shall" implying thereby that the computation of long term capital gain with indexation and LTCG without indexation has to be carried out by the assessee before exercising the option of paying tax either on gain arising after indexation or without indexation. Once the computation of long term capital gain with or without indexation has been worked put by the assessee,. men the quantum of tax payable on long term capital assets with indexation @ 20% and the 10% lax payable on gains arising without indexation is the indicator for adopting one of the methods of computation of income from capital gains. In all such cases, where the lax on I/I'CG without indexation being 10% of the gains is less than 20% of tax payable in respect of the income arising from long term capital asset with indexation, then the assessee has an option of paying lower of the tax.

10. Section 14 of the Act classifies the heads of income for the purpose of charge of income tax and computation of total income and the following heads of income are provided :

"A.—Salaries

B - Omitted

C—Income from house property.

D—Profits and gains of business or profession.

E—Capital gains.

F—Income from other sources"

Thereafter provision of computing the income under the respective heads of income is provided under various sections and Chapter E relating to capital gains is enshrined in sections 48 to 55 of the Act. The Act recognizes two types of capital gains arising in the hands of the assessee i.e. income from sale of long term capital asset and income from sale of short term capital asset. The difference between the two arising on-sate of long term capital asset and short term capital asset is the period of holding of the respective asset as provided under the respective sections. Once the income from capital gains is determined under section 45 to SS of the Act and in case there is a loss from one source as against the gain from another source under the same head of income, then the provisions of section 70 come into play. Section 70(1) clearly provides that where the net result for any assessment year in respect of any sources falling under any head of income other than capital gains is loss, then the assessee shall be entitled to set off of such loss against income from any other source under same head. Section 70(2) provides that where as a result of computation of income under section 48 to 55 in respect of airy short term capital asset, if there is a loss then the assessee shall be entitled to set off of the said loss against the income, if any, arrived at under a similar computation made for the assessment year in respect of any other short Term capital asset. Section 70(3) of the Act provides for similar computation in respect of capital asset other than the short term capita) asset. Section 71 of the Act provides for set off of loss from one head against income from another head and section 72 provides for carry forward and set off of business losses.

11. Reading the provisions of set off of carry forward losses against the income arising to the assessee, it transpires that the Act recognizes two instances for set off. The first instance of set off of losses from one source of income is against the income arising from another source under the same head of income and the second set off provided under section 71 of the Act talks of the set off of loss from one head against the income from another head. In case, the assessee has different sources of income under one head of income, then section 70(1) provides for set off of losses arising from one source against the another source under the same head of income except in case of capital gains. In respect of capital gains, the Act recognizes two types of capital gains in respect of transfer of short term capital asset and in respect of any capital gain arising on transfer of asset other than the short term capital asset The head of income in both the cases is 'capital gains' i.e. Chapter E dealing with capita] gain, but the Act recognizes two kinds of capital gains i.e. one arising in respect of short term capital asset and the second arising in respect of long term capital asset. Section 70(3) of the Act dealing with set off losses arising on transfer of long term capital asset against the gain arising on account of sale of long term capital asset talks of two sources of income under the same head 'income from capital gains'. Similarly, under section 70(2) of the Act similar provisions are provided in respect of short term capital asset. The first step to be determined is whether the assessee has transferred short term capital asset or long term capital asset. Any losses arising on the transfer of a capital asset is necessarily to be adjusted against the capital gain arising thereunder, whether short term or long term Any losses arising from transfer of long term capital assets is to be adjusted against the gain arising from transfer of long term capital gains. The aforesaid provisions of section 70 were substituted by Finance Act, 2002 with effect from 1.4.2003 and prior to its substitution, the section provided that where, die net result for any assessment year, in respect of any source falling under any head of income was loss, the assessee was entitled to have such amount of loss set off against the income from other sources falling under the same head of income. Prior to the amendment of Finance Act, 2002 losses arising on the transfer of short term capital asset could be set off against the gain arising from the transfer of long term capital asset. But after the amendment with effect from 1.4.2003, the amended provisions of section 70 do not allow such set off between the gain/loss arising on transfer of short term capital asset/long term capital asset.

12. The provisions of Section 112 of the Act are only to be applied for working out the tax on long term capital gain as clarified by us in paras hereinabove. There are two methods of computing the tax on income arising from transfer of long term capital asset i.e. with indexation or without indexation and in case where the tax payable being 10% of the amount of capital gains without indexation is less than the tax worked out on transfer of long term capital asset after indexation, then the assessee has an option of paying the lower amount of tax. The two methods of computing the gain/loss on transfer of long term capital asset fall under the same head of income i.e. capital gain on transfer of long term capital asset The spirit of section 70(3) covers all such transactions where the gains are arising on the transfer of long term capital asset and in case of any set off of loss arising from one source i.e. transfer of long term capital asset against gain arising on the transfer of another sources of transfer of long term capital asset is to be allowed under the provisions of section 70(3) of the Act. Accordingly, we are of the view that the option of the assessee to work out the gain arising on transfer of long term capital asset with or without indexation is distinct from allowing the set off of loss arising under one particular method of computation against gain arising on account of following another method of computation of gains on transfer of long term capital asset Both workings are for the purpose of determining the income from transfer of long term capital assets and the same falls under the same-head of income and such set off of loss arising from one source against the gain arising from another source under same head is allowable to the assessee in accordance with the provisions of section 70(3) of the Act. Accordingly, we direct the Assessing Officer to set off the capital loss -worked out by the assessee with indexation against the long term capital gains 'without indexation worked by the assessee in the original computation of income, '. but after detennimng the tax on gains on the transfer of long term capital asset is worked out after following the formula provided in the proviso to section 112 of the Act. The grounds of appeal are thus allowed.

** ** ** ** ** **
1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia
2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry

ITAT, DELHI BENCH ‘G’ Allowability of expenditure on modification and renovation of a building before commencement of business

Allowability of expenditure on modification and renovation of a building before commencement of business

Expenditure incurred on modification and renovation of a building before commencement of business is neither allowable under section 30(a)(ii) nor section 37.

ITAT, DELHI BENCH ‘G’, DELHI

Punj Hospitality Pvt. Ltd.
v.
ITO

ITA NO. 3425(Del) of 2009

OCTOBER 23, 2009

RELEVANT EXTRACTS :

** ** ** ** ** **

6. We have heard both the parties and gone through the material available on record. The assessee company was incorporated on 5th October. 2005 with the object to carry on business of restaurant and hotels etc. The company entered into agreement on 10th October. 2005 with M/s. Aggarwal Motels P. Ltd. [AHPLJ for a period of 18 months to manage and operate their AHPL business of hotel and bar which they were carrying on for the several years under the name and style as "Tavern on the Greens". The assessee also entered into supplementary agreement for the purpose of management and operation of the existing restaurant and bar with certain modifications and renovations for a period of 18 months by investing a sum of Rs.50.00,000/- to be subscribed by the assessee company from its own resources to provide a new look to the existing set up of the restaurant and bar of AHPL and to run the said business in conducive manner, but under the new name and style as "Climax Tavern on the Greens". In terms of these two agreements the revenue from the said business is to be shared between the parties. Therefore, according to assessee the expenditure had been incurred as business expenditure. There no dispute that expenditure has been incurred on repairs and renovation of the hotel building by the assessee under the terms of the "supplementary agreement". Under section 30(a)(ii) of IT Act. 1961 in respect repairs of a premises, used for the purposes of the business or profession, the amount paid by him on account of current repairs to the premises shall be allowed as deduction. The Explanation to section 30 clarifies that the amount paid on account of current repairs referred to in subclause (ii) of clause (a) of section 30 shall not include any expenditure in the nature of capital expenditure. The provisions of section 30 will be pressed into operations only when the premises are used for the purposes of business or profession. In the instant case the assessee company was incorporated on 5lh Oct. 2005 entered into agreements on 10.10.2005 for the purpose of management and operation of the existing restaurant and bar of AHPL. Certain modifications and renovations to the restaurant and bar building were to be carried out by investing a sum of Rs.50.00.000/- to be subscribed by the assessee from its own funds. Hence the assessee as a matter of fact contributed capital of Rs 50,00,000/- in order to participate in the profit of joint venture. Thus the assessee had incurred the expenditure on modifications and renovations before start of the business of management of hotel and restaurant. It is a different matter that the said contribution was utilised tor the purposes of modifications and renovation of the building so as to make it conducive to the business requirements of running restaurant and bar from clause 5 of the agreement dated IOth October, 2000. We find that the assessee was to complete the renovation and decoration within 30 days from the date of receipt of the possession of the building. Further grace period of 15 days was allowed in case due to any reason the renovation could not be completed within the stipulated period of 30 days. From these facts it is clear that the business of management and operation ot the restaurant and bar commenced after the renovation of the building was over. Hence the contribution made by the assessee is a capital investment brought into the business of joint venture, which was spent by the assessee on modifications and renovations of the building, as per the agreements entered into between the parties before actual commencement of business activities of management and operation of the restaurant.

7. Now we will examine whether expenditure incurred will be allowable as current repairs u/s 30(a)(ii) of the Act. The expression used in section 30(a)(ii) and in section 31(i) of the Income-tax Act, 1961 is 'current repairs' and not mere 'repairs'. It has been held by Hon'ble Bombay High Court in New Shorrock Spg. & Mfg. Co. Ltd. v. CIT [1956] 30 ITR 338 that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration but which is not lor the purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage They are such repairs as are attended to as and when need arises and that the question when a building, machinery, etc. requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The test evolved in New Shorrock Spg. & Mfg. Co. Ltd/s case (supra) is the most appropriate one having regard to the context in which the said expression occurs. Hon'ble Supreme Court in Ballinml Naval Kishore v. CIT [1997] 224 ITR 414 (SC) applied the test evolved in New Shorrock Spg & Mfg. Co, Ltd.*s case (supra) by holding as under:

"In our opinion the test involved by Chagh C.J., in New Shorrock Spinning *" Manufacturing Co. Ltd 's case [1956}30 ITR 338 (Bom) is the most appropriate Q*e having regard to the context in whidtijkhe said expression occurs. It has also been followed by a majority of the High Courts in India. We respect fully accept and adopt the test.

Applying the aforesaid test, if we look at die facts of this case, it will he evident thai what the assessee did was not mere repairs hut a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure oj the budding. By no stretch of imagination, can it be said that the said repairs qualify as "current repairs" within the meaning of section l()(2)(v). It was a case of total renovation and has rightly been held by the High Court to he capital in nature. Indeed, the finding of the High Court is that as against the sum of Rs. I ~MOO for which the assessee had purchased the factory in 193?. the expenditure incurred in the relevant accounting year was in the region of Rs. I,20.000.”

From the judicial pronouncements referred to above it is clear that expenditure which is not for the purpose of renewal or restoration and which does not bring a new asset into existence or does not give to the assessee a new or different advantage will be allowable as deduction. . Therefore the expenditure on modifications and renovations of the building cannot be allowed as current repairs u/s 30(a)(ii) of IT Act, 1961.



8. In the case before us the facts of the case are some what different. In this case as discussed above the assessee renovated and modified the building, the bar room, VIP area etc. to suit the business requirement of joint venture for which the assessee was to incur expenditure from its sources and not from the funds of the joint venture. Therefore the expenditure incurred by the assessee was capital expenditure in its own hands. The expenditure was incurred before actual commencement of business activities. The things would have been different had the expenditure been incurred by AHPL during the course normal business activities and assessee had shared the profits from operation of business of restaurant and bar. At the best in view of provisions of Explanation to section 32(1) of the Act any capital expenditure incurred on construction or on renovation or extension of. or improvement to the building in respect of which the assessee holds a lease or other right of occupancy for the purposes of the business or profession the assessee will be entitled to deduction u/s 32 of the Act, as if the said structure or work is a building owned by the assessee. Therefore the entire expenditure will constitute capital expenditure in the hands of assessee.

9. It has also been contended that the assessee had not taken the premises on lease and the expenditure was incurred on joint venture formed by the assessee with the owner with an intention to run the business of restaurant and bar and share the profit of joint venture and hence the expenditure was incurred wholly and exclusively for the purposes of business. This contention of the assessee in our view is also not correct. There is no dispute that actual operation of restaurant and bar took place after modification and renovation of the building to suit the business requirements was over. Hence the expenditure was not incurred during the course of actual operations of business activities. Hon’ble Madras High court in the case of A.Y.S. Paisutha Nadar v. CIT [1962] 46 ITR 1041 (Mad.) had held that section 10(2)(xv) of the Indian income-tax Act, 1922 [section 30(a)(ii) of 1961 Act.] relating to expenditure laid out or expended wholly and exclusively for the purpose of the assessee's business, clearly indicated that the expenditure should relate to a business which is already in existence and not one that is to come into existence in the future. Hence the expenditure incurred on modifications and renovations of the building cannot be treated to have been incurred during the course of business wholly and exclusively for the purposes of business and cannot be allowed as deduction u/s 37 of the Act.

10. From above discussion it is clear that expenditure incurred on modification and renovation is neither allowable under section 30(a)(ii) or section 37 of the Act. The assessing officer had rightly treated the expenditure capital in nature and had allowed the deduction under section 32( 1) of the Act. We accordingly uphold the order of CIT(A).

** ** ** ** ** **
1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia
2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry

ITAT, MUMBAI BENCHES ‘E’,Establishment of identity of creditor, creditworthiness of creditor and genuineness of transaction

Establishment of identity of creditor, creditworthiness of creditor and genuineness of transaction


It would depend upon facts of each case whether all the three ingredients to discharge the onus to prove cash credit have been proved by the assessee or not; if an NRI, engaged in business of real estate development with substantial means, decided to invest in real estate in India, genuineness of same cannot be doubted unless there is any evidence to contrary.



ITAT, MUMBAI BENCHES ‘E’, MUMBAI (THIRD MEMBER)

Tulip Hotels Pvt. Ltd.

v.

DCIT

ITA Nos. 6490 & 6491/Mum/2008

November 27, 2009



RELEVANT EXTRACTS:

** ** ** ** ** ** ** ** ** ** ** **



5. I have carefully considered the argument of both the sides and perused the material placed before me. It is a settled law that the onus is upon the assessee to prove the cash credit in his books of account. To discharge such onus, the assessee has to prove – (i) the identity of the creditor, (ii) the creditworthiness of the creditor, and (iii) genuineness of transaction. It would depend upon facts of each case whether all the above three ingredients to discharge the onus have been proved by the assessee or not. Before evaluating the evidences produced by the assessee, it is to be mentioned that some evidences were produced by the assessee before the Assessing officer and some were filed before the Income Tax Appellate Tribunal as additional evidences. The learned DR has pointed out that the learned JM has considered the additional evidences, while deleting the addition for cash credit, without allowing any opportunity to the Assessing Officer to cross examine such evidence. In principle I agree with the learned DR that when the Income Tax Appellate Tribunal admits additional evidence, it should allow a reasonable opportunity to the Assessing Officer to examine such additional evidence and to produce any evidence or document in rebuttal of such additional evidence. For this purpose, either the ITAT can call for the Remand Report from the Assessing Officer or may set aside the matter to the Assessing Officer for examination of additional evidence and thereafter re-adjudication. Admittedly, it has not been done by the ITAT in this case. However, being a Third Member, I am required to resolve the difference amongst the Members. In this case, unfortunately, both the learned Members have considered the additional evidence without allowing any opportunity to the Assessing Officer to cross examine such evidence. The learned JM, after considering the additional evidence, is of the opinion that the assessee has been able to discharge the onus of providing the cash credit; while the learned AM, even after considering the additional evidence produced before the ITAT, is of the opinion that the assessee is unable to discharge the onus. The question referred to me is also whether the addition should be deleted or to be confirmed. In the above circumstances, I am left with no alternative but to consider all the evidences, including additional evidence considered by the learned Members of the ITAT and then arrive at the conclusion whether the assessee is able to discharge the onus lay upon him.



6. Regarding identity: At page 28 of the assessee’s paper book there is a certificate by Shri Alliott Hadi Shahid, Chartered Accountant in which he has certified that he personally know Mr. Somendra Khosla since 2000. He has also certified that Shri Somendra Khosla is living in Dubai since the year 2000. His main business in Dubai is development of real estate. At page 30 of the paper book, there is a xerox copy of the passport issued by Government of United Arab Emirates. At page 32 of the paper book, there is a copy of trade licence issued by Government of Sharjah to “Dome Services” in which owners are Shri Somendra Khosla and Sahil Khosla. At page 35 there is a copy of telephone bill in the name of Shri Somendra Khosla. At page 36 of the paper book, there is a copy of electricity and water charges bill issued by Dubai Electricity and Water Authorities. At page 46 there is a health card issued by Ministry of Health, United Arab Emirates in the name of Shri Somendra Khosla. In view of the above evidences, identity of Shri Somendra Khosla is duly established.

7. Regarding the creditworthiness: Shri Alliott Hadi Shadid, Chartered Accountant had issued a certificate, which reads as under:-

“DB: 249:2008

23 September 2008



To Whom It May Concern

This is to confirm that we have personally known Mr Somendra Khosla since year 2000. He is living in Dubai since year 2000.

His main business in Dubai, UAE is development of real estate. Together with his son Mr Sahil Khosla, he is developing many projects in Dubai. A list of real estate assets owned in Dubai is attached.



Together with his son, Mr Sahil Khosla, he owns a commercial trading company called Domee Services FZC, PO Box 48972, Dubai, UAE. We have been auditing the accounts of the company since year 2000 onwards. Besides Domee Services FZC, he owns other commercial companies operating in Dubai.

This certificate has been issued upon the request of Mr Somendra Khosla”.

10. From the above, it is proved beyond doubt that Shri Somendra Khosla is in the business of development of real estate. He is the President of the real estate company known as ‘New World Real Estate’ (NWRE) . The turnover of the company for the year 2006 was 1.1 billion which would be more than Rs.1,300 crores approximately in Indian rupee. The value of the properties owned by Shri Somendra Khosla and his family members in the year 2008 was 46.78 million US dollars which would be more than Rs.200 crores in Indian rupee. His monthly telephone / electricity bills are approximately Rs.50,000/- per month. The amount advanced by Shri Somendra Khosla for acquisition of 99 years leasehold right in the property being developed by assessee company was Rs.4.78 crores and Rs.1.02 crores in the accounting years relevant to the assessment years 2004-05 and 2005-06 respectively. When the turnover of the company of Shri Somendra Khosla is more than Rs.1,300 crores and the value of personal assets owned by him and his family members is more than Rs. 200 crores, it can by no stretch of imagination be said that Shri Somendra Khosla is not creditworthy for investment of approximately Rs.5 crores for acquisition of a property in India.

22. Considering the totality of the above facts namely that Shri Somendra Khosla is a NRI, he is in the business of development of real estate and he is a man of substantial means, in my opinion, if he has decided to invest in the real estate in India, the genuineness cannot be doubted unless there is any evidence to the contrary. The Revenue has doubted the genuineness merely on the basis of presumption and suspicion ignoring the documentary evidences produced by the assessee, which establish the genuineness of transaction.

23. In view of the above, in my opinion, the assessee has duly established the identity of the creditor, creditworthiness of the creditor and also genuineness of the transaction. Thus, the onus of proving the cash credit which lays upon the assessee is duly discharged. Accordingly, I answer question no.1 in favour of the assessee and hold that the addition of Rs.4,78,12,403/- and Rs.1,02,91,176/- made and confirmed by the lower authorities under section 68 of the Income Tax Act are liable to be deleted.

** ** ** ** ** ** ** ** ** ** ** **


1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia

2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry

Change of Examination Centre in Mumbai - CPT December-2009 - (01-12-2009)

Sub: Change of Examination Centre in MUMBAI
This is to inform that due to unavoidable circumstances the Examination Centre for Common Proficiency Test –December-2009 is changed in respect of candidates who have been allotted Roll Nos.: 114112 to 114311 at H & GHM Institute of Management , Smt. CHM College Campus , Opp. Ulhas Nagar Railway Station , Ulhasnagar , Mumbai-421003 to:

Birla College of Arts, Science & Commerce
Birla College Road( Murbad Road)
Kalyan ( West)
Distt. THANE-421301


In view of the above , the concerned candidates are requested to kindly note the above change in the Examination Centre and the address of the new Examination Centre.

Inconvenience caused in the matter is regretted.

( G. Somasekhar)
Addl. Secretary(Exams)

1.FOLLOW US ON TWITTER CLICK HERE: http://twitter.com/taxpertindia
2.Posted www.taxpertindia.blogspot.com
3.Get Tax updates from my blog through by joining my google group
CA_taxmannindia:http://groups.google.co.in/group/ca_taxmannindia?hl=en
5.Get Free Quality SMS updates from my blog on your MOBILE:http://labs.google.co.in/smschannels/subscribe/ca_taxmannindia
OR
Send a message JOIN ca_taxmannindia to 9870807070 thru ur mobile nd receive updates

Read rest of entry