IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. I.T.A. No.515 of 2008 Date of decision: 17.12.2010 The Commissioner of Income Tax -----Appellant. Vs. The Shahbad Co-op. Sugar Mills Ltd. -----Respondent CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE AJAY KUMAR MITTAL Present:- Mr. Yogesh Putney, Sr.Standing Counsel for the appellant. Mr. S.K. Mukhi, Advocate and Ms. Jyoti, Advocate for the respondent. --- ADARSH KUMAR GOEL, J. 1. The revenue has preferred this appeal under Section 260-A of the Income Tax Act, 1961 (for short, “the Act”) against the order of the Income Tax Appellate Tribunal, New Delhi in I.T.A. No.3530/DEL/1997 for the assessment year 1994-95 claiming following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in allowing the assessee’s claim of Rs.25,000/- on account of education fund ignoring the fact that the assessee had been following the mercantile system of accounting and that the liability of the annual I.T.A. No.515 of 2008 subscription for the earlier asstt. Year of which the assessee was well aware was not allowable in the year relevant to the Asstt. Year 1994-95? 2. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in allowing the claim of Rs.6,19,637/- on account of subscription paid to Haryana State Cooperative Development Federation relating to the Asstt. Year 1992-93, ignoring the fact that the assessee had been following the mercantile system of accounting and that the liability of the annual subscription for the earlier asstt. Year of which the assessee was well aware was not allowable in the year relevant to the Asstt. Year 1994-95? 3. Whether on the facts and in the circumstances of the case, the Ld. ITAT was right in law in allowing the depreciation of Rs.18,24,187/- in respect of the machinery costing Rs.97.20 lacs reported by the auditors to have neither been used nor in usable condition, on the basis of the certificate from engineer of the assessee furnished during the course of appellate proceedings before the Ld. ITAT, whereas the reply of the assessee to the audit objection as reproduced in para 9 of the ITAT’s order was not supported by any evidence and the Audit Officer in its report dated 30.09.2004 had, after considering the assessee’s reply, not dropped the audit objection, thereby making the observation as made in para 8.2 of the audit report?” 2. The assessee is a co-operative society engaged in manufacture and sale of sugar. The Assessing Officer disallowed 2 I.T.A. No.515 of 2008 claim for deduction on amount paid towards education fund and subscription paid to the apex body of the assessee on the ground that the said payments did not relate to the year in question but to the assessment year 1992-93 and financial year 1992-93 respectively. The Assessing Officer also disallowed claim for deprecation on the machinery relying upon audit report of the auditors of the assessee that the machinery was neither used nor was in usable condition and was kept idle. The CIT(A) affirmed the view of the Assessing Officer but the Tribunal upheld the claim of the assessee as follows:- 4. Ground No.3 is that the CIT(Appeals) was not justified in upholding the disallowance of Rs.25,000/- on account of education fund and Rs.6,19,671/- on account of subscription paid to Haryana State Cooperative Development Federation. It was submitted on behalf of the assessee that this issue stands decided in favour of the assessee by the order of the Tribunal for the assessment year 1995-96 in ITA No.2519/Del/2000 dated 23/11/2004. In this order, the Tribunal has dealt with the amount of Rs.25,000/- paid as subscription to the education fund. It was noted that the amount was paid on the directions of the Registrar of the Cooperative Societies and such instructions, in the form of a letter, were received by the assessee during the relevant accounting year. In the year before us also, the assessee received the letter of the Registrar, which was dated 23/03/1994, on 31/03/1994. A perusal of this letters shows that it was in respect of the entire amount of Rs.25,000/- as well as Rs.6,19,671/- which 3 I.T.A. No.515 of 2008 was also paid as subscription to the Haryana State Cooperative Development Federation. The amount was also paid on 31/03/1994 as the journal voucher placed at page 3 of the paper book shows. Thus both the amounts are allowable as deduction as claimed by the assessee. We direct accordingly and allow the ground.” xx xx xx xx xx 9. Ground No.7 is directed against the disallowance of depreciation of Rs.18,24,187/-. The assessee claimed depreciation of Rs.62,63,946/-. The Assessing Officer however observed that machinery costing Rs.97.29 lacs was reported by the auditors to have been neither used nor in usable condition. Based on this report, the Assessing Officer negatived the claim for depreciation on this machinery. The written down value of the machinery was Rs.72,96,760/-. The depreciation on the same amounted to Rs.18,24,187/- which was disallowed. The disallowance having been confirmed by the CIT (Appeals), the assessee is in further appeal before the Tribunal. We have perused para 8.2 of the audit report which contained the audit objection as well as the assessee’s reply, these are reproduced below: “ OBJECTIPN 8.2 Some machinery items such as vapour cell of Rs.65.94 lacs, Juice Clarifier of Rs.20.45 lacs and Sugar Grader of Rs.4.17 lacs were lying idle from the last year 1992-93, and in other words above said Machinery items were installed without necessity. Besides this Fly Ash Arrestor Pad Pweitier of Rs.6.73 lacs has also not in working 4 I.T.A. No.515 of 2008 order from the last year 1992-93. If interest is calculated @ 18% PA on the amount invested for installation above said machinery items in that case less of interest of Rs.1751220/- annually. REPLY It is submitted that the machinery mentioned in this para were installed to increased the capacity of 1250 TCD Plant. All the machineries are working properly. There is no loss to the mill due to installation of referred machineries. Hence, para may be deopped.” It will be seen as in the case of machinery repairs, the Income-tax authorities merely relied upon the audit objection without taking note of the assessee’s reply which seems to have been accepted by the auditors. The objection raised by the auditors was that the vapour cell, juice clarifier and sugar grader were idle from the earlier year which means they were installed without necessity. The fly ash arrestor was found to be not in working order. The assessee has pointed out in its reply that these items of machinery were installed to increase the capacity of the plant and that they are all working properly. The reply of the assessee has not been taken note of by the Income- tax authorities. The assessee has filed the depreciation chart as per the Income Tax assessment for the year under appeal. On the plant and machinery in question, depreciation has been allowed in the earlier year. In pages 11 and 12 of the paper book, the assessee has also enclosed a certificate from the engineers justifying the installation of the 5 I.T.A. No.515 of 2008 various items of machinery mentioned by the auditors and explaining the justification for their installation. It has also been certified that these equipments which were installed in the earlier year were working smoothly in the year under appeal. In the light of the evidence adduced by the assessee, we are unable to uphold the strong argument raised by the learned CIT DR before us that though the machinery might have been installed and used in the earlier year, it may not have worked during the year under consideration. As already noted, the basic flaw in the approach of the Income-tax authorities is that they merely relied on the audit objection, without taking into consideration how the assessee met the audit objection. The facts brought out in the assessee’s reply to the objection are supported by the certificate by the engineers kept at pages 11 and 12 of the paper book. In these circumstances, we direct the Assessing Officer to allow the depreciation. The ground is allowed.” 3. We have heard learned counsel for the parties. 4. Learned counsel for the revenue submitted that the Tribunal reversed the finding of the Assessing Officer and the CIT (A) to the effect that payment towards education fund and subscription did not relate to assessment years in question by referring to a letter of the Registrar, which was neither brought on record nor contents thereof reproduced nor the revenue was given an opportunity to rebut the same. With regard to depreciation, learned counsel for the revenue submitted that the 6 I.T.A. No.515 of 2008 machinery in question having been kept idle and never used, depreciation was not admissible. 5. Learned counsel for the assessee supported the impugned finding. 6. After hearing learned counsel for the parties and perusing the record, we are of the view that questions (1) and (2) have to be answered in favour of the revenue while question (3) has to be answered in favour of the assessee. 7. As regards education fund, the Tribunal has observed that the same related to the year in question in view of letter of the Registrar. The said letter has neither been reproduced nor is shown to be on record. Moreover, the details furnished by the assessee before the Assessing Officer clearly are to the effect that the education fund related to assessment year 1992-93 and the subscription related to financial year 1992-93. The Assessing Officer noticed the said facts as follows:- “The assessee has claimed expenditure on account of subscription to the extent of Rs.1412689/-. From the details it is noticed that a sum of Rs.25000/- paid to Haryana State Coop. Development Federation for education fund relates to asstt. Year 1992-93 and an other some of Rs.619671/- paid to Haryana State Coop. Development Federation as subscription also relates to financial year 1992-93. Both these amounts are disallowed being not the financial year 1993-94, however, is allowed as deduction. Total disallowance under this head works out to Rs.644672/-. 7 I.T.A. No.515 of 2008 8. Admittedly, the assessee followed mercantile system of accounting. In such situation, the deduction claimed could not be allowed in the year of payment but in the year when the amount were due. 9. As regards question (3), no doubt the auditors of the assessee objected to machinery being kept idle, resulting in loss of interest on investment, the stand of the assessee that the said machinery was installed to increase capacity of the plant, was not taken into account by the Assessing Officer and the CIT(A). Moreover, the Tribunal relied upon certificate of the engineers justifying installation of items of machinery. 10. We also find that expression ‘used’ in Section 32 of the Act has been judicially interpreted to include machinery kept for use, even if the same was not actively used. Passive user has also been held to be user where it may be necessary for business of the assessee to keep the machinery ready for use. Reference may be made to the judgment of Delhi High Court in CIT v. Refrigeration & Allied Industries Ltd. [2001] 247 ITR 12. Therein reliance was placed on the following judgments:- “i) Machinery Manufacturers Corporation Ltd. v. CIT [1957] 31 ITR 203 (Bom); i) Machinery Manufacturers Corporation Ltd. v. CIT [1957] 31 ITR 203 (Bom); ii) CIT. v. Viswanath Bhaskar Sathe [1937] 5 ITR 62 (Bom); 8 I.T.A. No.515 of 2008 iii) CIT. v. Dalmia Cement Ltd.[1945] 13 ITR 415 (Patna); iv) Liquidators of Pursa Ltd. v. CIT [1954] 25 ITR 265 (SC); v) CIT. v. Bombay State Transport Corporation [1979] 118 ITR 399 (Bom); vi) G.R. Govindarajulu Naidu. v. CIT [1973] 90 ITR 13 (Mad); vii) CIT. v. Elecon Engineering Co. Ltd. [1974] 96 ITR 672 (Guj) and viii) CIT. v. Geo Tech Construction Corporation [2000] 244 ITR 452 (Ker); Reference was also be made to dictionary meaning of the word ‘depreciation’ as also the object of allowing depreciation. In the present case, the machinery in question is vapour cell, juice clarifier and fly ash arrester paid pweitier which according to the assessee had to be kept ready for use for its business expediency. Stand of the assessee is that it resulted in increase of capacity of the plant and that on account of technical justification for the said machinery, items of the machines were installed. Even though the auditors may not have accepted the said stand, the assessee was entitled to free play in joints in taking a decision to install the machinery if in its view the same was necessary for its business. If the assessee was to install such a machinery on its bonafide business consideration, mere 9 I.T.A. No.515 of 2008 absence of proof of actual use thereof was not enough to deny the claim for depreciation. Accordingly, we do not find any ground to interfere with the finding of the Tribunal, holding that the assessee was entitled to depreciation on the machinery, as claimed. 11. Accordingly, the appeal is partly allowed, as indicated above. (ADARSH KUMAR GOEL) JUDGE December 17, 2010 (AJAY KUMAR MITTAL) ashwani JUDGE 10