Interest paid is treated as compensatory and allowed under section 37(1)

N THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCHES: “H” NEW DELHI

BEFORE SHRI J.SUDHAKAR REDDY, AM

AND

SHRI C.M. GARG, JM

ITA no. 5582/Del/2011

Assessment Year: 2008-09

ACIT, Circle 16(1)

New Delhi

(Appellant)

Vs.

M/s Thai Summit Neel Auto P.Ltd.

601, Hemkunt Chambers

89, Nehru Place

New Delhi 110 019

PAN: AABCT 9860 D

(Respondent)

AND

Cross Objection 295/Del/2012

(In ITA 5582/Del/12)

A.Y. 2008-09

Thai Summit Neel Auto P.Ltd.

New Delhi

(Appellant)

Vs.

ACIT, Circle 16(1)

New Delhi

(Respondent)

Appellant by:- Sh.R.Santhanam, Adv. & Sh. Suresh Malik, C.A.

Respondent by:- Sh. A.K.Mishra, CIT, D.R

O R D E R

PER J.SUDHAKAR REDDY, AM

This is an appeal filed by the Revenue directed against the order of the Ld.Commissioner of Income Tax (Appeals)-XIX dt. 1.9.2011 pertaining to the Assessment Year 2008-09. The Cross Objection is filed by the assessee.

2. Facts in brief:- The assessee company is engaged mainly in the business of manufacture and sale of auto parts. During the year under reference the assessee company was in the process of setting up a plant for manufacturing of various auto components i.e. fuel tanks, grip rear, step assembly, frame for two wheelers segment. The assessee company is a joint venture between JBM Group and Thai Summit Group of Thailand. The company is running three manufacturing units at Gurgaon (Haryana), Chakan (Pune) and Hosur (Tamil Nadu). During the impugned Assessment Year, the appellant had set up a new manufacturing unit at Pantnagar in Uttarakhand.

The assessee filed its return of income for the Assessment Year 2008-09 declaring a loss of Rs.21.07 crores on 30th September, 2008. Subsequently a revised return of income was filed on 12th March, 2010 declaring a loss of Rs.22,29,57,473/-. The Assessing Officer passed an order u/s 143(3) on 20.12.2010 assessing the loss at Rs.19,35,83,997/- inter alia making additions on account of disallowance of expenses on Pant Nagar Unit on the ground that these are preoperative expenses, prior period expenses etc. Aggrieved the assessee carried the matter in appeal.

3. The First Appellate Authority allowed the claim of the assessee for deduction of preoperative expenses. Further on the other issues he granted part relief. Aggrieved the Revenue is in appeal before us on the following grounds.

“1. On the facts and the circumstances of the case and in law the ld.CIT(A) has erred in directing the Assessing Officer to treat the preoperative expenditure of Rs.3,44,51,263/- as revenue expenditure as against the capital expenditure held by the Assessing Officer and withdrawing the depreciation of Rs.51,67,990/-.

2. On the facts and the circumstances of the case and in law the ld.CIT(A) has erred in deleting the disallowance of Rs.37,692/- made by the Assessing Officer out of prior period expenses as capital expenditure and allowing depreciation.”

4. The assessee filed a Cross Objection on the following grounds.

“1. On the facts and in the circumstances of the case, the authorities below had erred, both on facts and in law, in disallowing interest of Rs.50,511/- paid by the assessee to the Central Excise department on reversal of Service Tax credit taken earlier on outward freight for GTA services and the same ought to have been allowed as revenue expenditure u/s 37(1).

2. On the facts and in the circumstances of the case, the Assessing Officer made the illegal addition of Rs.50,511/- without even issue of show cause notice and effective opportunity of hearing to the appellant and the impugned addition ought to have been deleted by the CIT(A) but in view of the disallowance having been upheld by him, the orders of both the lower authorities are liable to be quashed and the deduction rightly claimed be allowed to the appellant.”

5. We have heard Mr.R.Santhanam, the Ld.Counsel on behalf of the assessee and Shri A.K.Mishra, the Ld.CIT, D.R. on behalf of the Revenue. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record and the orders of the authorities below, we hold as follows.

6. As far as ground no.1 is concerned, both parties submitted that the issuein question is covered by the decision of Hon’ble Delhi ‘H’ Bench of the ITAT inthe assessee’s own case for the Assessment Year 2006-07. In ITA 5184/Del/2010 order dt. 18.2.2013 where at para 5 it is observed as follows.

“5. We have heard rival contentions and gone through the entire material available on record. It has not been disputed that Gurgaeon plant commenced manufacturing and initial sale was effected on 24.3.20905 which is accepted by department. Thereafter, from April,2005 to February,2006 the manufacturing activities on trial production and sales continued. Though the plant may not have run on its full commercial capacity, the fact nevertheless remains that there were manufacturing activities and sales of such production. Thus, the manufacturing business of the assessee had commenced. In view thereof, we find no infirmity in the order of the CIT(A), which in turn has relied on Hon’ble Delhi High Court judgement in the case of L.G.Electronics (India) Ltd. (supra). The same is upheld.”

6.1. In the case on hand the assessee company has submitted that the Pant Nagar Unit was completed and commissioned in April, 2007 and thus the business of the assessee company had been set up. It was pointed out that the commercial production began only in October, 2007, as certain tests and experiments were necessary before commencement of commercial production. It was submitted that during the interim period test run was done. The Assessing Officer had at page 7 observed as follows.

“I have carefully considered the submissions of the assessee company. There is no denying of the fact that the assessee company has incurred revenue expenditure of Rs.54,03,67,284/- at its Pant Nagar Plant during the period 1.4.2007 to 30.9.2007 and generated sales revenue of Rs.50,59,14,021/- in this period (after considering other income and impact of increase/decrease in stock).

Further, I find that mere setting up of business and carrying on of business at Pant Nagar w.e.f. 1.4.2007 is not enough, and actual commencement of commercial production and sales are essential to claim deduction for the expenses u/s 37(1). Therefore, I disallow the aforesaid expenses amounting to Rs.3,44,53,263/- incurred and claimed by the assessee company for the period April,2007 to September,2007 prior to commencement of commercial production on 1.10.2007 at its Pant Nagar unit and treat them as pre-operative in nature, to be capitalized.”

6.2. These observations in our considered opinion are contrary to the propositions laid down by various Courts and Tribunals on this issue. Thus we uphold the finding of the First Appellate Authority on this issue. We respectfully following the Coordinate Bench order for the Assessment Year 2006-07. In the result this ground of the Revenue is dismissed.

7. Ground no.2 is on the issue of disallowance of prior period expenses. The Ld.Commissioner of Income Tax (Appeals) agreed with the contentions of the assessee that the expenditure in question crystallized during the year and under those circumstances, they have to be allowed. We find no infirmity in the same.

8. In the result the appeal of the Revenue is dismissed.

9. Coming to the Cross Objection filed by the assessee, the fact of the issue is explained by the assessee in its written submissions before the Ld.Commissioner of Income Tax (Appeals) which is extracted for ready reference.

“During the year under consideration, the appellant company has paid Rs.50,511/- as interest at the time of reversal of service tax credit wrongly taken earlier. The said interest is revenue expenditure deductible u/s 37(1) as the payment of interest represents expenditure laid out wholly or exclusively for the purpose of the business. As per prevailing practice, the AGCR Audit party visits all big assesses and if on examination of the records concerning service tax, they find any deficiency like the credit for the tax paid on any item/goods/services is not allowable then they inform the assessee to correct the deficiency. During the course of such an audit, the assessee company was informed that it had availed wrong credit of service tax.

On being informed, the appellant company reversed the service tax credit though PlA and on that service tax amount, it paid Rs.50,511/- as interest. The voucher and the calculations of the interest are enclosed at page nos. 126 to 127.”

10. The Ld.Commissioner of Income Tax (Appeals) held that the assessee was penalized and the payment was not compensatory in nature. Before us the assessee furnished documents where the transaction in question is recorded as follows:

“Being interest on GTA paid to Central Excise after reversal on 23.8.2007 to ‘PLA’.” A perusal of the details shows that this is a case of payment of interest and not penalty. Thus in our view it is compensatory in nature and has to be allowed as a deduction u/s 37(1). Thus we allow this ground of the assessee in the C.O.

11. In the result the C.O. filed by the assessee is allowed.

12. In the result the appeal filed by the Revenue is dismissed and the C.O. filed by the assessee is allowed.

Order pronounced in the Open Court on 05th July, 2013.

Sd/- Sd/-

(C.M. GARG) (J.SUDHAKAR REDDY)

JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated: the 05th July, 2013

*manga

Copy of the Order forwarded to:

1. Appellant;

2. Respondent;

3. CIT;

4. CIT(A);

5. DR;

6. Guard File

By Order

Asst. Registrar

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