Mumbai, August 23: The income-tax department is understood to be considering appealing against an order passed by the Mumbai bench of the Income-Tax Appellate Tribunal (ITAT) in favour of Grasim Industries. The order, which allowed the company to claim deductions of over Rs 180 crore for assessment year 1993-94, said that a company need not have actually commenced production to claim depreciation. It was enough if it was merely ready to produce.The department is considering two options: whether to approach the High Court or file a review application against the ITAT's order. ITAT's president has the power to refer the tribunal's order to a bigger bench for review.
An ITAT bench comprising RP Garg and Vimal Gandhi recently allowed the Aditya Birla flagship company to claim Rs 77.3 crore as depreciation on its Vikram Ispat plant which manufactures hot briquetted iron. The bench ruled that the plant was `ready for' business in fiscal 1992-93, and hence eligible for claiming depreciation.
The tribunal, in its order dated June 29, 1998, observed that "the setting up of a business is a stage prior to the commencement of business.
Therefore, when machinery has been fully installed and is ready to produce and, on operation, a reasonable production is made, the business must be taken to be set up".
In coming to this view, the ITAT bench made a distinction between the setting up of a business and the commencement of business, as laid down in a case involving Western India Vegetable Products Ltd. Vs CIT (26 ITR 151). In this case, it was held that when a business is established and ready to commence business, it can be said that the business has been set up. But if it is not ready to commence business it cannot be said to be have been set up. It was also noted that there may be an interval between a business which is set up and a business which has commenced.
The test pronounced was approved by the Supreme Court in CIT Vs Ramaraju Surgical Cotton Mills (63 ITR 478). It was also observed by the tribunal that the Bombay high court had, in a case involving Industrial Solvents and Chemicals (P) Ltd (119 ITR 608), observed that though the new product obtained was not marketable, this can't be used as a ground to support the view that a business was not set up. Reliance was also placed on CIT Vs Forging and Stamping Pvt. Ltd (1979) (119 ITR 616, Bom), in which it was laid down that business should be taken as having been set up on the date on which power connection is received and not earlier, though trials might have taken place with the help of generators. The income tax department is keen to challenge the very fact that the Grasim plant had been `set up' in the relevant period. While the company claims to have started production on March 30, 1993, the department says that the plant was not set up till October 15, 1993. The department has, accordingly, even disalloweddepreciation for the first half of fiscal 1993-94.
The department feels that the ITAT order is "perverse" on three grounds. These include: wrongfully allowing depreciation (Rs 77.3 crore) on a plant which was not set up; providing disallowance of interest (around Rs 99 crore) under section 36(1)(iii); and permitting deduction (around Rs 6.9 crore) of dividend income under section 80M.
Among the conditions that must be satisfied by an assessee claiming depreciation are: the asset must be owned by him; it must be used for the purpose of business or profession; and it should be used during the relevant accounting year.
In Liquidators of Pursa Ltd. Vs CIT (251 ITR 265) the Supreme Court held that the words "used for business or profession" obviously meant "used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession". In other words, the machinery or plant must be "used" at least for a part of the accounting year concerned. If the machinery and plant have not at all been used at any time during the accounting year, no allowance can be claimed under section 32 in respect of them.
The Madras high court held in CIT Vs Sundaram Fastners Ltd (149 ITR 773, Madras) that "depreciation is allowable on the value of the specific assets used in the year, whether the assets were acquired during the previous year or prior to the previous year, but not on the value of the assets which had ceased to exist or which were not actually used during the year." Clearly, the point to be considered is whether the plant was put to use for the business during the period under consideration.
The department claims that in the case of Grasim's Vikram Ispat, the plant was not operational on March 31, 1993. It cites the following points in support:
The gas (raw material) consumption records do not show any substantial variation in consumption of gas from April 1993 to October 1993, the period when (as the department claims) the plant was allegedly idle. Sale bills, delivery orders and excise gate passes for the sale of 60 to 70 tonnes of material were produced by the company. The quantity is insignificant and this sale does not mean that the material was produced by the plant. The following are the other reasons (as stated in the order of the commissioner of income tax -- appeals) why the department feels depreciation should be disallowed: Except for the RG-I register and sales invoices, Grasim did not produce any production and technical records, including production log books or laboratory test reports, before the officers of the department who visited the plant on April 15, 1993, to substantiate its claims. A survey was conducted at the plant on September 20, 1995, when the then senior general manager (production) apparently said that a minimum of 60 burners are required to produce sponge-iron. On a perusal of the log-books, the department found that till April 28, 1993, the maximum number of burners fired in the process gas-heater was only 28. Even on the night of March 30, 1993, the number of burners was only 48, and these were later reduced to 40. The temperature figures in the log-book were allegedly changed to 860 degrees centigrade while the original temperature was between 660 to 675 degrees centigrade. The change is significant since sponge-iron production apparently cannot take place below 800 degrees centigrade.Grasim's submission before the tribunal was that "reduction reaction can take place at lower temperatures provided higher gases flow per tonne does not prove that the same was carried out on March 30 & 31," says the order of the income-tax commissioner which denied Grasim its depreciation.
The revenue department is additionally trying to establish that the plant was not ready for use on the basis of documents suggesting that it (the plant) had several problems -- leaking valves and defective sections -- which would have made it difficult to operate safely.
The CIT (appeals) order mentions a letter from Foster Wheeler to Davy Power Gas mentioning that the Vikram Ispat plant was "quite dangerous to operate" in view of the fact that it had a large number of leaking gas valves. The order asks whether a plant could be considered ready for operation when it had leaking valves.
The order also mentions another letter from MN Dastur & Co, which talks of "defective supplies and replacements of various items in the process of gas heater". A letter from Foster Wheeler to Davy Power Gas talks of the plant having had to be shut down following a leak "on the connection coil of the process gas heater."
If one leak can lead to an immediate shutdown, the tax department feels that it has good reason to question Grasim's claim that the plant was ready to operate.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
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