1. This appeal by the department and the cross objection by the assessee are directed against the order of the CIT(A)-I, Pune on dated 5-3-1987 for A.Y 1993-94. Both the appeal as well as the cross objection are being disposed off by a common order for the sake of convenience.
2. We now first take up the department's appeal. The Grounds for A.Y 1993-94 raised by the department are as under: 1. On the facts and in the circumstances of the case, the teamed CIT(A) erred in allowing depreciation when the assets were not in existence as per the findings of the A.O. 2. The learned CIT(A) also erred in directing to compute the deduction Under Section 80-I, and in not appreciating the fact that assessee company is not a manufacturing concern and the issue is covered by the decision of Supreme Court decision in the case of N.C. Budharaja & Co. and Anr. (1993(204 ITR 412 which is in favour of Revenue.
3. The facts in brief are that the assesses company is engaged in the business of laying of pipe line. The assessee belongs to Sheth and Sura group of companies and a searches conducted Under Section 132 in the cases of this group on 18-12-1992. During the search, the assessee declared additional income of Rs. 30.00 lakhs for A.Y 1993-94 as under: 4. The return of income for A.Y 1993-94 was filed on 31-12-1993. in the assessment order Under Section 143(3) dated 29-3-1996, the A.O disallowed the assessee's claim for depreciation in respect of the value of plant and machinery and furniture and fixture declared Under Section 132(4) during the search at Rs. 7.00 lakhs and Rs. 3.00 lakhs respectively, in appeal, the CIT(A) allowed the assessee's claim. The order of the CIT(A) has been challenged by the department through Ground No. 1 5. Shri M.M. Srivastava, the ld. D.R relied on the order of the A.O and contended that the CIT(A) had erred in allowing the depreciation. He argued saying that the assets did not exist and therefore, the assessee's claim for depreciation was not admissible.
6. Shri G.N. Joglekar, the ld. A.R of the assessee supported the order of the CIT(A). The submissions made by him are summarized below.
- that the declaration made by the assessee clearly stated that a sum of Rs. 7.00 lakhs offered for tax (sic) in the form of plant and machinery; - that a sum of Rs. 3.00 lakhs was offered for tax in the form of furniture and fixture.
- that the above amounts offered for tax represented part value of existing plant and machinery and (sic) & fixture.
- that it was nowhere stated by the assesses that the declared amounts represented the value of any separate identical items of plant and machinery and furniture and fixture.
- that the declaration made by the assessee was accepted by the department; - that the value of existing plant and machinery in the books of account was increased by Rs. 7.00 lakhs; - that the value of existing furniture and fixture in the books of account was increased by Rs. 3.00 lakhs; - that the A.O erred in allowing the assessee's claim for depreciation in respect of additional value of machinery and furniture & fixtures declared during the search.
7. We have considered the rival submissions and have perused the orders of the authorities below. It is seen that during the search conducted by the department Under Section 132 in December 1992 the assessee declared undisclosed income of Rs. 30.00 lakhs for A.Y 1993-94 out of which Rs. 7.00 lakhs was shown under the head 'Plant and Machinery' and Rs. 3.00 lakhs was shown under the head 'Furniture and Fixture'. In respect of these sums of Rs. 7.00 lakhs and Rs. 3.00 lakhs the assessee claimed depreciation which was disallowed by the A.O. However, the CIT(A) accepted the assessee's claim. We find that the two requisites for depreciation allowance Under Section 32(1) are as under: i) that the depreciable asset is owned [(w.e.f. 1-4-1997) wholly or partly] by the assessee; ii) that it is used for the purposes of assessee's business or profession (subject to the provisions of sec. 34) 8. During assessment proceedings, the assessee was asked by the AO to furnish necessary details about these assets and the reply given by the assessee vide its letter dated 27-12-1995 as reproduced by the A.O in his order was as under: We are unable to furnish inventory in respect of WIP, Plant and machinery and Furniture and Fixtures declared at the time of search action Under Section 132.
9. While making a claim for depreciation Under Section 32 of the Act in respect of an asset, an assessee has to furnish details with relevant evidence about the particulars of the asset, its date of acquisition and its actual cost. In this case, the assessee failed to furnish these details in respect of its claim for depreciation Under Section 32 of the Act. The amount of Rs. 7.00 lakhs and Rs.3.00 lakhs offered by the assessee for tax represented its undisclosed income and the assessee did not produce any evidence to show that these amounts represented the cost of a plant and machinery and furniture and fixture respectively qualifying for depreciation Under Section 32 of the Act. Merely because the disclosure of undisclosed income of Rs. 7.00 lakhs and Rs. 3.00 lakhs were made under the head 'Plant and Machinery' and 'Furniture and Fixture' the assessee's claim for depreciation Under Section 32 in respect of these amounts could not be allowed in the absence of any evidence to show that the requisite conditions to the facts and circumstances of the case and we are of the opinion that the order of the CIT(A) on this issue cannot be sustained. The Ground No. 1 raised by the department is accordingly allowed.
10. In Ground No. 2 the department has challenged the order of the CIT(A) partly allowing the assessee's claim Under Section 80-I.11. We nave heard the rival submissions and have perused the orders of the authorities below. The business of the assesses is of laying of pipe lines. The steel pipes used for this purpose are made from steel plates and the process involved includes bending of plates and converting them into pipes and welding them thereafter. The CIT(A) was of the view that making of steel pipes from steel plates was a manufacturing activity eligible for deduction Under Section 80-I. The laying of these pipes was however, not treated by the CIT(A) as a manufacturing activity. He therefore, restricted the assessee's claim for deduction Under Section 80-I to 70% of total turnover. The observations made by the CIT(A) in paragraphs 10, 11, 12 and 13 are reproduced below.
10. I have considered the submissions. I agree that in respect of manufacturing activities like laying pipes in the shop or cutting the steel plates, bending them and converting them into pipes would constitute the manufacturing activities and not construction activities. Thus, site fabrication, plate bending and convening it into pipes will be eligible for deduction Under Section 80-I. To ascertain the matter properly, the deduction should be based on the proportion of turnover so that in respect of construction activities, the appellant will not be eligible for deduction Under Section 80-I. 11. The appellant has given the break-up of Chandrapur work, wherein the turnover for manufacturing and processing work is shown at Rs. 39.20 lakhs and the turnover for construction activities is shown at Rs. 5.69 lakhs. The tender is stated to be for design, manufacture, shop and site fabrication, deliver to site, fabrication of various owner supplied materials, laying and commissioning of large diameter piping etc. For construction activities, the appellant has shown only civil work and 'Dewater' as extra claim. However, from the tender, I find that the tender includes the work of laying and commissioning of large diameter pipe line and in my opinion, since this work is also included in the tender, the work of design manufacture and fabrication would be about Rs. 30 lakhs on estimate basis. Hence I direct that manufacturing activities for Chandrapur work be taken at 70% of Rs. 3920 lakhs and the appellant be given deduction Under Section 80-I accordingly.
12. In respect of Sangli work, the appellant has claimed that the total manufacturing activities is of Rs. 2.12 crores and civil and other works. Rs. 37.32 lakhs. Since the scope of the work is similar as above, I direct that 70% of Rs. 2.12 crores be considered as manufacturing activities eligible foe deduction Under Section 80-I. 13 in case of Latur work, the appellant has shown Rs. 110.83 lakhs as work of manufacturing. For (he reasons giver. above, I direct that 70% of this be considered as work of manufacturing eligible for deduction Under Section 80-I.12. The principle laid down by the Hon'ble Supreme Court in the case or N.C. Budharaja & Co. and Anr. (supra) has been impliedly applied by the CIT(A) to that part of the business activity which constitutes excavation and laying of pipes. The CIT(A) has estimated this part of the activity to represent 30% of the total turnover. The ld. D.R could not give any cogent reasons to controvert these findings of the CIT(A).
We have given careful consideration to the facts and circumstances of the case and we are of the opinion that the order of the CIT(A) does not call for (sic) interference. The Ground No. 2 is accordingly rejected.
13. We now take up assessee's Cross Objection. The ground taken by the assessee is as under: The activities considered by the learned CIT(A) I Pune as construction activity are incidental to main activity of manufacturing and processing and as such 80-I deduction may be fully allowed on the net profit.
14. We have upheld the order of the CIT(A) with regard to the assessee's claim for deduction Under Section 80-I in the above paragraphs, in the circumstances, therefore, we reject the assessee's Cross Objection.
15. In the result, the departmental appeal is partly allowed and the assessee's cross objection is dismissed.H.L. Karwa Ahmad FarredJudicial Member Accountant Member 16. I have read carefully the proposed order of my teamed colleague. I agree with him on ground No 2 of [he appeal, but I do not agree with the findings given in rasped of ground No 1 of the departmental appeal.
This ground relates to the depreciation on plant and machinery and furniture fixture.
17. The facts emerging from the orders of the departmental authorities are that the assessee company is engaged in the business of pipe Sine faying on contractual basis. The Income-tax department conducted a search Under Section 132 of the income-tax Act, 1961 at the premises of the assessee's group of cases of which the present company is a member on 18.12.1992. Owing the course of search, in order to cover up the various discrepancies In different concerns of the group for various assessment years, the assessee declared Rs. One crore. But the declaration Under Section 132(4) was specifically made in the hands of two companies of the group and two individuals of the group. The present company M/s Sheth & Sura Engg. P. Ltd. was one of the companies in whose hands income of Rs. 30 lakhs was declared in the following manner for the assessment year 1993-94: 18. The assessee claimed depreciation on plant and machinery and furniture and fixtures. According to the AO, the assesses made declaration Under Section 133(4) of Rs. 7,00,000/- on account of plant and machinery and Rs. 3,00,000/- on account of furniture and fixtures.
The AO required the assesses to produce inventory of the machinery. In response to the said query, the assessee vide its Setter dt. 27.12.95 Stated as under: We are unable to furnish inventory in respect of WIP, Plant and Machinery and Furnitures and Fixtures declared at the time of search action Under Section 132.
19. The AO observed that under Section 32 of the Act, in order to claim depreciation on a business asset, the same must be owned by the assesses and it must be used for the bus9ness of the assessee.
According to the AO, the assessee was not entitled to depreciation which it had claimed in the statement of depreciation attached to the Income-tax return. The AO disallowed depreciation of Rs. 1,02,500/- claimed on non existent assets and added the same to the total income of the assessee. When the matter came up for consideration before the CIT(A), he allowed the claim of the assessee stating as under: I have considered the submissions. I agree with the appellant that since the investment was shown in plant & machinery, furniture etc.
ft is proper that depreciation thereon should be allowed. If is not the case that the value shown by the appellant for which the depreciation was made did not constitute the fair value. Hence I hold that the appellant is entitled to the depreciation as per rules and the date of search wherein the claim was made and the machinery etc. was shown and the declaration Under Section 132(4) was made, should be considered as the date of acquisition of the assets and the depreciation be worked out accordingly.
20. Shri M M Stwastava, the ld. OR strongly supported the order of the AO. He further submitted that the assesses had not fulfilled the conditions for claiming depreciation and, therefore, the AG was within his right to reject the claim of the assesses.
21. Shri G.N. Joglekar, the ld counsel for the assesses submitted that the assesses had shown the investment in plant and machinery, furniture etc, therefore, the assesses was entitled to depreciation thereon. It was also stated by the Id counsel for the assessee that the assessee made declaration Under Section 132(4) of the Act and offered a sum of Rs. 7,00,000/- for tax being the investment made in plant and machinery and a sum of Rs. 3,00,000/- was offered for tax representing the value of investment made in furniture and fixture He further submitted that the declaration made by the assessee was accepted by the department. At the same time, value of existing plant and machinery in the books of account was increased by Rs. 7,00,000-. Similarly, value of existing furniture and fixture in the books of account was increased by Rs. 3,00,000/-. It was specifically submitted by the Id counsel for the assesses that, plant and machinery as well as furniture and fixture were already in existence and immediately after declaration the assessee has increased the value of existing plan and machinery in the books of account by Rs. 7,00,000/- and also increased the value of existing furniture and fixture in the books of account by Rs. 3,00,000/-. Accordingly, it was submitted that the CIT(A) has rightly held hat the assessee is entitled to depreciation as per Rules. He accordingly submitted that the date of search wherein the claim was made and machinery etc, as shown and the declaration Under Section 132(4) was made should be considered as the date of acquisition of the assets. He further submitted that the CIT(A) has rightly directed the AO to work out the depreciation accordingly.
22. In the instant case., the assessee had declared undisclosed income of Rs. 30 lakhs for the assessment year under consideration out of which Rs. 7 lakhs was shown under the head 'plant and machinery' and Rs. 3 lakhs was shown under the head 'furniture and fixture'. The asses4see claimed depreciation on plant and machinery and furniture and fixture. It is clear that the above amount was offered for taxation and the department has accept the same. It is clear that the above amounts offered for tax represented part value of existing plant and machinery and furniture and fixture, thus, the plant and machinery and furniture and fixtures were being owned by the assessee. Immediately after the search, the assessee had increased the value of existing plant and machinery in the books of account by Rs. 7 lakhs. Similarly, value of existing furniture and fixture in the books of account was increased by Rs. 3 lakhs. In my opinion, once the department has accepted undisclosed investment in plant and machinery and furniture and fixtures and taxed the same, therefore, there was no justification in rejecting the rightful claim of the assessee. In my view, as regards depreciation on plant and machinery and furniture and fixture, the department cannot take an altogether different view stating that the assesses is neither owner of the assets nor it had used the same for the purpose of business. In other words, the department had accepted the investment made by the assessee in plant and machinery and furniture and fixtures, therefore, there was no justification in disallowing depreciation on the same having declared the investment in plant and machinery and furniture and fixture, the assessee could not be asked to prove the ownership of the assets.CIT v. Geo Tech Construction Corporation Section 32 of the income-tax Act, 1961 deals with depreciation.
There is no requirement that the asset should be used for the whole of the assessment year in question. The term used in Section 32(1) is 'owned by the assessee'. But that does not bring in the requirement that the assessee should have remained the owner of the asset in question for the entire previous year in question. The two ingredients for depreciation allowance are that the depreciable asset is owned by the assessee and that it is used for the purpose of the aasessee's business or profession.
24. While interpreting the words 'used for the purpose of business', the Hon'ble Kerala High Court held (Head Note) as under: that the words 'used for the purpose of the business' were capable of a larger and narrower interpretation. If the expression 'used' as construed strictly it could be taken as connoting or requiring the active employment or the actual working of the machinery, plant or building in the business. On the other hand, the wider meaning would include not only cases where the machinery, plant were actively employed but also cases where there was what maybe described as passive user of the same in the business. An asset could be said to be used, when it was kept ready for use. Since the Tribunal had recorded the finding that there was positive material to show the existence of the asset at the work site, and about the passive user it could not be termed to be one without any basis or illegal.
Accordingly, the claim for depreciation was allowable.
25. from the above discussion, it would be dear that depreciable assets were owned by the assesses and it was used for the purpose of the assesses's business, in view of the decision of the Hon'ble Kerala High Court in the case of Geo Tech Construction Corporation (supra), an asset could be said to be used, when it was kept ready for use. The word 'used' includes 'passive user'. Therefore, the Hon'ble Kerala High Court held that "depreciation can be allowed on depreciable assets on the principle of passive user also, in that view of the matter, the assesses is entitled to claim depreciation on the assets in question. I may add here that the CIT(A) has rightly observed that the date of declaration Under Section 132(4) should be considered as the date of acquisition of the assets.
26. In view of the above, I uphold the order of the CIT(A).
Accordingly, ground No. 1 of the appeal is dismissed.