1. This appeal, filed at the instance of the assessee-company,, is directed against the order dated 29-11-02 passed by the CIT(A), Guntur and it pertains to the assessment year 1995-96.
2. The facts giving rise to the dispute are stated in brief. The assessee-company originally filed a return declaring loss of Rs. 15.94 lakhs and the assessment was completed on 27-3-98 under Section 143(3) of the Act wherein the AO disallowed the claim for write off of quarry development expenses. The case of the assessee is that it is engaged in the business of mining granite and obtained licence of 5 different places in Andhra Pradesh. In respect of one quarry at Khammam the production was effected in the year under consideration. The assessee had incurred quarry development expenses of Rs. 1.14 crores during the year on 5 quarries and claimed 1/5^th of the same i.e. Rs. 22.97 lakhs as deduction during the year by taking analogy from the provisions of Section 35E of Income-tax Act. In the order dated 27-3-1998 the AO observed that there was no sanction in law for deferment of granite quarry development expenditure. However, he was of the view that the expenditure was revenue in nature and allowed development expenditure of Rs. 21.34 lakhs, pertaining to that quarry which went into production during the year. In other words, the claim of deduction of Rs. 22.97 lakhs referable to the 5 quarries was not accepted in principle on the ground that the production has not commenced.
3. The CIT, Visakhapatnam, in his order dated 31-1-2000, passed under Section 263 of the Act, directed the AO to examine whether the amount of Rs. 19.12 lakhs (development expenses referable to the quarry which went into production minus Rs. 2.21 lakhs which was held to be not established as genuine expenditure) was claimed in the books of account as revenue expenditure. The line of direction of the CIT was that the company having capitalized the entire expenditure in its books and claimed deduction for l/5^th of the development expenditure, the expenditure was capital in nature. While passing consequential order, the AO added back expenditure of Rs. 19.12 lakhs by holding it as capital expenditure.
4. Consequential order passed by the AO was appealed before the CIT(A) challenging the disallowance of Rs. 19.12 lakhs. Learned CIT(A) observed that against the consequential order the issue would be limited as to whether the AO has carried out the directions properly or not and in the instant case the assessee itself had capitalized the entire expenditure in its books and claimed only l/5^th of the development expenditure. Learned CIT further observed that though the treatment accorded in the assessee's books does not determine whether a particular item is capital or revenue in nature and had to be recognized in the terms of the provisions of Income-tax Act, such proposition can be fought out only before the Tribunal. Since there was a specific direction by the CIT the appeal filed by the assessee against the consequential order was not entertained by the learned CIT(A).
5. Aggrieved, assessee is in appeal before the Tribunal. Learned Counsel appearing on behalf of the assessee submitted that the order passed by the revisional authority does not contain any specific finding on the aspect as to whether the expenditure is revenue or capital in nature and the matter-having been merely set aside to the file of the AO the assessee is free to challenge the order passed by the AO if it is not in consonance with law. He relied upon the following case law in support of his contention that the entries in the books of account are not conclusive to determine the nature of expenditure and the correct income has to be computed by applying the concept of real income.
iii) 192 ITR 1 (Ker) CIT v. Kerala State Drugs & Pharmaceuticals Limited(All) National Handloom Development Corporation v. CIT.6. On the other hand, learned DR adverted my attention to the order passed by the revisional authority to highlight that the factual matrix was correctly appreciated by the CIT to come to the conclusion that the entries in the books of account are not contrary to the correct legal position and hence the nature of expenditure declared therein is conclusive of the matter. Placing reliance upon the decision of ITAT, Calcutta Bench in the case of JCT Limited ( 65 ITD 169) and also highlighting the observations of the revisional authority, learned DR submitted that there is a specific direction to the AO with regard to the nature of treatment of the expenditure incurred by the assessee and the AO having carried out specific directions, no appeal lies against the said order. In particular, he highlighted the following observations of the revisional authority.
In the present case also, the assessee-company was aware of the true character and nature of Quarry Development Expenses, yet, it chose to capitalize such expenses and depict them as part and parcel of the fixed assets of the company. It cannot be said that such treatment was erroneous or contrary to the accepted principles of accountancy as followed by the assessee-company. We cannot purchase the argument that such a treatment was given to hoodwinks the banks.
Having done so, the assessee company cannot be permitted to turn around and claim a deduction of a part of such expenditure (20%) from the gross total income of the year under consideration on the ground that such expenditure being essentially revenue in nature.
Further, Quarry Development Expenses to the tune of Rs. 22,97,430 were not debited to the Profit and Loss Account of the year since such expenses were capitalized and treated as an asset of the assessee-company.
The aforesaid aspect of the matter was not adequately touched upon in the show cause notice dated 4-1-2000 referred to supra nor the explanation for the assessee-company dated 4-1-2000 referred to supra nor the explanation of the assesses-company obtained on this point. Therefore, in the interest of Natural Justice and also by way of abundant caution, I set aside the present assessment with a direction to the AO to examine this aspect in detail keeping my observations and the correct legal position in sight.
7. I have carefully considered rival submissions and perused the record. It is said that the whisper of the queen is a command to the entire Nation. Though the CIT, in his capacity as a revisional authority, has not directed the AO to treat the expenditure as capital in nature few paras of discussion in the revisional order was understood to be ultimata view of the CIT and, being an authority functioning within the jurisdiction of the Commissioner, the AO appears to have taken that as a direction to disallow the expenditure as capital in nature, though an over all reading of the order shows that there is no specific direction by the Commissioner. On the contrary, the following observations of the Commissioner indicate that, in principle, the revisional authority has accepted that the quarry development expenditure was not in the nature of capital expenditure.
In the present case, from the details furnished and as referred to supra, it does not appear that the assessee-company incurred expenditure for the betterment of the Quarries or for increasing the potential value of the land covered by its Quarry. In fact, after the extraction of granite slabs, the land would be a waste-land not fit for any productive use. Further, expenditure has been incurred for hiring compressors, tippers Winches and other equipments. There is no evidence to show that the assessee incurred the present expenditure for acquiring any capital assets. In fact hiring charges of Compressors, rent for Tippers, diesel cost and the maintenance cost of other equipments are all items of expenditure but for which the operation of extracting granites cannot be carried on. In fact at the stage of assessment for the assessment year 1995-96, the AO conducted verification with regard to the genuineness of the expenses claimed under the head 'Quarry Development Expenses". He found that expenses to the extent of Rs. 2,84,760/- were not amenable to verification in the absence of any response from M/s.
Sairam Compressor Services, Bank Colony, Khammam. The bonafide character of the rest of the expenditure is not in challenge.
Therefore, it is difficult to say that Quarry Development Expenses were in the nature of capital expenditure and, therefore, the AO misdirected himself in allowing the same and thereby causing prejudice to the interest of Revenue. However, the real problem lies elsewhere.
However, the AO appears to have gone by the intention of the CIT in setting aside the matter and thus ignored the aforementioned observations of the Commissioner which ought to have been pondered over to arrive at the correct legal conclusion. It is well settled that an expenditure which is otherwise revenue in nature cannot be treated as capital expenditure merely because an entry is made in the books of accounts on an incorrect understanding of the legal position. In the case of JCT Limited (supra) the Calcutta Bench of ITAT observed that if an entry in the books of account is in consonance with the method of accounting followed by the assessee, the same would be binding upon the assessee whereas in the instant case the facts prime facie show that the entries made in the books of account are contrary to the correct legal position. The AO being a functionary working under the jurisdiction of the revisional authority, he appears to have not made an independent exercise on the issue as to whether the impugned expenditure was capital or revenue in nature and even the learned CIT(A) appears to have avoided the unpleasant job of appreciating the correct legal position, having noticed the intentions of the revisional authority and thus observed as under.
The appellant claims that the treatment accorded in the assessee's books does not determine whether a particular item is income and whether a particular item is allowable as expenditure. These had to be recognized in terms of the provisions of the IT Act. But this is a proposition that has to be fought out before the Tribunal.
In my considered opinion, the authorities subordinate to the revisional authority should read a quasi-judicial order in its proper perspective without giving unnecessary weightage to the feelings expressed by the superior authority. Surprisingly, in the instant case, even the CIT(A) has tried to pass on the issue to the Tribunal by observing that such proposition has to be fought out before the Tribunal. Suffice to say that the AO is duty bound to examine the issue as per law and merely because stray observations were made in the case of JCT Limited (supra), the facts of this/cannot be twisted to hold that the assessee having committed a mistake not debiting the expenditure to the Profit & Loss a/c it cannot be treated as revenue expenditure. Since the AO as well as the CIT(A) having not appreciated the issue in correct perspective, in the interests of substantial justice, I set aside the matter to the file of the AO who is directed to reconsider the issue in accordance with law after giving the assessee a reasonable opportunity of being heard. Needless to observe that an expenditure which, in law, cannot be treated as a capital expenditure, merely on account of the fact that the assessee has treated it in its books as capital expenditure the right to make a correct claim in the return of income is not lost to the assessee. This view is in consonance with the decision of Apex Court in the case of Kedarnath Jute Mafg. Co. Limited 82 ITR 363. With these observations, I set aside the matter to the file of the AO for reconsideration of the matter in accordance with law.
8. In the result, the appeal is treated as allowed for statistical purposes.