M/s. Rohit Exhaust Systems P.Ltd., Pune V. ACIT, Cir.-1, Aurangabad

CO 26/PUN/2011

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 8061 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 05-10-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 11-07-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VINITA MENON
• Keywords: Business expenditure; Capital receipt; Commercial expediency
• Section: 37(1)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO. 686/PN/2011 AND ITA NO. 687/PN/2011 (ASSESSMENT YEAR 2005-06 AND 2007-08) ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, JEEVAN SUMAN, LIC BUILDING, 2 ND FLOOR, CANNOUGHT PLACE, N-5, CIDCO, AURANGABAD. .. APPELLANT VS. ROHIT EXHAUST SYSTEMS PVT. LTD., K-245, MIDC WALUJ, AURANGABAD .. RESPONDENT PAN NO. AABCR 7135D CO NO. 23/PN/2011 AND CO NO. 26/PN/2011 (ASSESSMENT YEAR 2005-06 AND 2007-08) ROHIT EXHAUST SYSTEMS PVT. LTD., K-245, MIDC WALUJ, AURANGABAD .. APPELLANT PAN NO. AABCR 7135D VS. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-1, JEEVAN SUMAN, LIC BUILDING, 2 ND FLOOR, CANNOUGHT PLACE, N-5, CIDCO, AURANGABAD. .. RESPONDENT ASSESSEE BY : SRI S.N. PURANIK DEPARTMENT BY : SMT. VINITA MENON DATE OF HEARING : 01-10-2012 DATE OF PRONOUNCEMENT : 05-10-2012 ORDER PER BENCH : THE ABOVE TWO APPEALS FILED BY THE REVENUE ARE DIRE CTED AGAINST THE SEPARATE ORDERS DATED 25-02-2011 OF THE CIT(A)-AURANGABAD, R ELATING TO ASSESSMENT YEAR 2005-06 AND 2007-08 RESPECTIVELY. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS AGAINST THE APPEALS FILED BY THE REVENUE. FOR THE SAKE OF CONVENIENCE, THESE WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CO MMON ORDER. ITA NO.686/PN/2011 (BY REVENUE) (A.Y. 2005-06) : 2. GROUNDS OF APPEAL NOS. 1, 2 AND 3 BY THE REVENUE ARE UNDER : 1. WHETHER DIFFERENCE BETWEEN THE PAYMENT OF NET P RESENT VALUE AGAINST THE FUTURE LIABILITY OF CREDITED BY THE ASSESSEE UNDER THE CAP ITAL RESERVE ACCOUNT IN ITS BOOKS OF ACCOUNT IS A CAPITAL RECEIPT OR REVENUE RECEIPT ? 2 2. WHETHER SUCH PAYMENT OF NET PRESENT VALUE OF THE FUTURE LIABILITY CAN BE CLASSIFIED AS REMISSION OR CESSATION OF THE LIABILITY SO AS TO ATTRACT THE PROVISION OF SECTION 41(1)(A) OF THE INCOME TAX ACT, 1961 OR NOT ? 3. WHETHER DIFFERENCE IN PAYMENT OF NET PRESENT VAL UE OF THE FUTURE LIABILITY CAN BE TERMED AS GAIN/BENEFIT AND ACCORDINGLY BUSINESS INC OME OR NOT ? 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE IS A PRIVATE LTD. COMPANY ENGAGED IN THE BUSINESS OF SHEET METAL PRESS PARTS AND ASSEMBLIES FOR AUTOMOBILE MANUFACTURERS, PARTICULARLY FOR BAJAJ AUTO LTD. AND ALSO WIND POWER GENERATION. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS DISCLOSED VIDE NOTE 3 TO THE RETURN OF INCOME THAT AN AMOUNT OF RS.138.78 LAKHS HAS BEEN TRANSFERRED TO CAPITAL RESERVE BEING A CAPITAL RECEIPT. THE SAME IS DIFFERENCE BETWEEN NET PRESENT VALUE AND PRINCIPAL VALUE OF SA LE TAX DEFERRAL LOAN. FOR THE SAKE OF CONVENIENCE THE SUBMISSION MADE BY THE ASSE SSEE IS REPRODUCED AS UNDER : THE COMPANY HAS AVAILED SALES TAX INCENTIVE UNDER PART I OF THE 1993-1998 PACKAGE SCHEME OF INCENTIVE OF GOVERNMENT OF MAHARASTRA BY WAY OF DEFERMENT OF SALES TAX LIABILITY VIDE ELIGIBILITY CERTIFICATE NO. DICA/PSI -1993/STI/DEFERRAL/763/3046, DATED 01-03-2002 FROM D.I.C. AURANGABAD FOR AN AMOUNT OF RS.199,99 LAKHS. TILL 31-03-2004 COMPANY COLLECTED RS. 196.61 LAKHS AS DEFERRAL LOAN . GOVERNMENT OF MAHARASTRA VIDE TRADE CIRCULAR NO. 39 T OF 2002, DATED 12-12-2002 HAS COME OUT WITH A SCHEME OF PREMATURE REPAYMENT OF TH E AMOUNT OF SALES TAX DEFERRAL LOAN BY THE ELIGIBLE UNITS AS NET PRESENT VALUE OF THE SALES TAX DEFERRAL LOAN. THE COMPANY, UNDER THE SAID SCHEME, HAS REPAID 57.83 LA KHS TOWARDS FULL AND FINAL PAYMENT OF THE SALES TAX DEFERRAL LOAN OF RS. 196.61 LAKHS IN THE FINANCIAL YEAR 2004-05. THE AMOUNT OF RS.138.78 LAKHS, THE DIFFERENCE BETWE EN THE NET PRESENT VALUE & PRINCIPAL VALUE OF SALES TAX DEFERRAL LOAN IS TRANSFERRED TO CAPITAL RESERVES, BEING A CAPITAL RECEIPT. 4. HOWEVER, THE AO WAS NOT CONVINCED WITH THE EXPLA NATION GIVEN BY THE ASSESSEE BY OBSERVING AS UNDER : 3.1 I HAVE CAREFULLY CONSIDERED THE SUBMISSION MAD E BY THE ASSESSEE. THE ASSESSEE HAS STATED THAT THE WAIVER OF SALES TAX DEFERRAL LO AN FROM GOVT. OF MAHARASTRA IS A CAPITAL RECEIPT AND HENCE, THE AMOUNT OF RS.138.78 LAKHS HA S BEEN TRANSFERRED TO CAPITAL RESERVE. THE SUBMISSION OF THE ASSESSEE IS NOT ACCEPTABLE. IT IS SEEN THAT THE ASSESSEE COMPANY VIDE ELIGIBILITY CERTIFICATE NO. DICA/PSI-1993/STI/ DEFERRAL/763/3046 DATED 01-03- 2002 HAS BECOME ELIGIBLE FOR THE SALES TAX DEFERRAL SCHEME FOR AN AMOUNT OF RS.199.99 LAKHS. IT IS DISCLOSED BY THE ASSESSEE THAT THE AS SESSEE HAS REPAID 57.83 LAKHS TOWARDS FULL AND FINAL PAYMENT OF SALES TAX DEFERRAL LOAN OF RS. 199.99 LAKHS AND THE AMOUNT OF RS.138.78 LAKHS HAS CREDITED TO THE CAPITAL RESERVE BEING CAPITAL RECEIPT. FROM THE ABOVE SAID SUBMISSION OF THE ASSESSEE, THE FOLLOWING FACT S ARE APPARENT: 1. THE ASSESSEE WAS LIABLE TO PAY 199.99 LAKHS AS SALES TAX DEFERRAL LOAN. 3 2. THE SALES TAX LOAN IS A REVENUE IN NATURE. 3. THE ASSESSEE HAS PAID 57.83 LAKHS 4. THE ASSESSEE HAS RECEIVED A BENEFIT OF RS.138.78 LAKHS AS WAIVER OF SALES TAX DEFERRAL LOAN. 5. THE AO ANALYSED PARA 5.1.B OF THE PACKAGE SCHEME OF THE INCENTIVES-1993 AND THE CONDITIONS PRESCRIBED BY THE STATE GOVERNME NT FOR AVAILING OF THE SCHEME. HE ALSO ANALYSED PROVISO 4 TO SECTION 38 OF THE BOM BAY SALES ACT, 1959 ACCORDING TO WHICH THE PREMATURE PAYMENT OF THE AMOUNT OF TAX DEFERRED BY THE ASSESSEE EQUAL TO THE NET PRESENT VALUE OF THE DEFERRED TAX IS DEEMED TO HAVE BEEN PAID AS SALES TAX LIABILITY. THEREFORE, ACCORDING TO HIM THE ASSESSEE HAS PAID NOTHING BUT THE SALES TAX LIABILITY PREMATURELY BY GETTING THE BENEFIT, NOT OF A CAPITAL RECEIPT BUT OF A TRADING RECEIPT IN THE FORM OF SALES TAX BENEF IT. ACCORDING TO HIM, THE ASSESSEE HAS MADE ADVANCE PAYMENT OF DEFERRED TAX TO GET THE BENEFIT OF THE SCHEME. THEREFORE, IT CANNOT BE CONSIDERED AS CAPITAL RECEI PT WITHIN THE MEANING OF SECTION 37(1) OF THE ACT BY DEFERRING THE SALES TAX LIABILI TY. WHAT THE ASSESSEE HAS RECEIVED, BY FOLLOWING THE SAME ANALOGY, IS A REVEN UE RECEIPT. HE NOTED THAT THE SCHEME HAS REDUCED THE LIABILITY OF THE ASSESSEE TO PAY RS.57.83 LAKHS AS FULL AND FINAL SETTLEMENT OF THE SALES TAX DEFERRAL LOAN. R ESULTANTLY THE ASSESSEE HAS GOT BENEFIT OF RS.138.78 LAKHS IN THE FORM OF WAIVER OF SALES TAX LIABILITY WHICH OTHERWISE WOULD HAVE BEEN PAYABLE BY THE ASSESSEE T O THE STATE GOVERNMENT. SALES TAX LIABILITY BEING A TRADING RECEIPT OF THE ASSESSEE CAN NEVER BE A CAPITAL RECEIPT AND HENCE THE SAME ACCORDING TO THE AO NEED S TO BE OFFERED FOR INCOME. EVEN OTHERWISE ALSO ACCORDING TO THE AO THE LIABILI TY OF THE ASSESSEE IS SEIZED TO EXIST WITHIN THE MEANING OF SECTION 41(1) OF THE IN COME TAX ACT. HE ACCORDINGLY MADE ADDITION OF RS.1,38,78,000/-. 6. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT : 4 (I) THE SALES TAX COLLECTED BY THE ASSESSEE COMPANY UNDER 1993 PACKAGE SCHEME OF GOVT. OF MAHARASTRA HAS BEEN DEEMED TO HA VE BEEN PAID IN THE PUBLIC INTEREST AS PER PROVISO TO SECTION 38(4) OF THE BOMBAY SALES TAX ACT. (II) THE CONVERSION OF DEFERRED SALES TAX INTO INTE REST FREE LOAN IS PRECONDITION FOR CLAIMING THE BENEFIT OF DEDUCTION OF EXPENSES (NON DISALLOWANCE U/S.43B) UNDER THE INCOME TAX ACT, 196 1. CBDT CIRCULAR 496 AND 674 MAKE IT CLEAR BEYOND DOUBT THAT BY VIRTUE O F AMENDMENT TO SALES TAX ACT, IN 1987 SALES TAX DEFERRAL UNDER THE PACKA GE SCHEME OF INCENTIVES IS PAYMENT TO SALES TAX DEPARTMENT. WHAT IS LIABIL ITY IN THE BOOKS OF THE COMPANY IS SALES TAX DEFERRAL LOAN, AS APPEARING IN THE AUDIT REPORT, FINAL ACCOUNTS OF THE COMPANY WITH NOTES TO ACCOUNT AND T AX AUDIT REPORT. (III) IN THE CASE UNDER APPEAL THE FIRST PRECONDITI ON FOR APPLICABILITY OF SECTION 41(1) OF THE ACT THAT AN ALLOWANCE OR DEDUC TION HAS BEEN MADE IN RESPECT OF LOSS, EXPENDITURE OR TRADING LIABILITY I NCURRED BY THE ASSESSEE IN AN ASSESSMENT YEAR HAS NOT BEEN FULFILLED. THE OUTSTA NDING AMOUNT OF LOAN CANNOT BE REGARDED AS TRADING LIABILITY. FURTHER, NO ALLOWANCE OR DEDUCTION CAN BE REGARDED AS HAVING BEEN MADE IN RESPECT OF T HE LOAN WHICH IS THE ITEM, WHICH IN FACT IS PREPAID. IN SUPPORT OF ABOV E CONTENTION THE ASSESSEE RELIED ON FOLLOWING DECISIONS : (A) CIT VS. PHOOLCHAND JEEVAN RAM 135 ITR 37 (DEL.) (B) DALCHAND CHITTAT MAL VS. CIT 75 ITR 710 (ALLA .) (IV) THE SECOND PRECONDITION FOR APPLICABILITY OF S ECTION 41(1) OF THE ACT THAT IN SUBSEQUENT YEAR THE ASSESSEE OBTAINS EITHER IN CASH OR IN ANY OTHER MANNER WHAT SO EVER ANY AMOUNT OF SUCH LOSS OR EX PENDITURE OR SOME BENEFIT IN RESPECT OF SUCH TRADING LIABILITY BY WAY OF REMISSION OR CESSATION THEREOF HAS ALSO NOT BEEN FULFILLED IN THE PRESENT CASE. THE ASSESSEE COMPANY HAS PAID THE PRESENT VALUE IN DISCHARGE OF THE LOAN TO BE REPAID IN FUTURE AND HAS NOT OBTAINED ANY BENEFIT BY WAY OF REMISSION OR CESSATION OF TRADING LIABILITY. (V) THE SAID AMOUNT OF RS.138.78 LAKHS IS NOT TAXAB LE U/S.28(IV) OF THE ACT. WHEN THE COMPANY DISCHARGES THE DEFERRED TAX OR THE LOAN LIABILITY BY PAYING THE DISCOUNTED AMOUNT AS AGREED, THERE IS NO BENEFIT TO THE COMPANY OR ANY DISADVANTAGE SUFFERED BY THE LENDER AS THE C OMPANY IS PAYING THE 5 PRESENT VALUE OF THE LIABILITY WHICH IN ITS NORMAL COURSE HAD TO BE DISCHARGED AT A FUTURE DATE. IT IS ARGUABLE THAT IF THERE IS A BENEFIT, IT IS IN MONETARY TERMS. SECTION 28(IV) OF THE ACT COVERS THE VALUE OF ANY BENEFIT WHETHER CONVERTIBLE INTO MONEY OR NOT. THIS TERM SIGNIFIE S THAT THE BENEFIT HAS TO BE IN KIND AND THAT MONETARY BENEFITS ARE NOT COVERED BY THE SAID CLAUSE [ CIT VS. INDOKEM LTD. 132 ITR 125 (BOM.), CIT VS. ALCHEM IC PVT. LTD. 130 ITR 168 (GUJ) AND RAVINDER SINGH VS. CIT 205 ITR 353 (D EL.)]. IF THE VIEW IS TAKEN THAT THE PRE-PAYMENT AT A DISCOUNTED VALUE HA S RESULTED IN A BENEFIT COVERED BY SECTION 28(IV) , THEN SECTION 41(1) WOUL D BE RENDERED TOTALLY OTIOSE AS ALL ISSUES FALLING WITHIN SECTION 41(1) W OULD BE COVERED BY SECTION 28(IV) 7. THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNA L IN THE CASE OF SULZER INDIA LTD. VIDE ITA NO.2944/2871/MUMBAI/2007 WAS BROUGHT TO THE NOTICE OF THE CIT(A). 7.1 BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND FOLLOWING THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SULZER INDIA LTD. (SUPRA) THE LEARNED CIT(A) HELD THAT THE AO IS NOT JUSTIFIED IN MAKING ADDITION OF RS.138.78 LAKHS U/S.41(1) OF THE INCOME TAX ACT ON ACCOUNT OF DIFFERENCE BETWEEN PAYMENT OF NET PRESENT VALUE OF RS.57.83 LAKHS OF THE SALES TAX DEFERRAL LOAN AGAINST THE FUTURE LIABILITY OF RS.196.61 LAKHS. HE FURTHER NO TED THAT SIMILAR ISSUE HAS BEEN DECIDED BY HIM IN THE CASE OF RUCHA ENGINEERS PVT. LTD. FOLLOWING THE SAME THE LEARNED CIT(A) DELETED THE ADDITION MADE BY THE AO. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 8. THE LEARNED DR SUPPORTED THE ORDER OF THE AO AND SUBMITTED THAT IN THE SUZLERS CASE THE LEARNED ITAT HAS FAILED TO CONSID ER THAT SALES TAX IS CHARGED ON GOODS SOLD BY AN ASSESSEE DURING THE COURSE OF ITS TRADING ACTIVITY, HENCE SALES TAX ACCRUED/COLLECTED ON THE SALE OF GOODS BY THE ASSE SSEE BECOMES A TRADING RECEIPT OF THE ASSESSEE. THIS IS THE SETTLED POSITION OF LAW IN VIEW OF THE DECISION OF HONBLE SUPREME COURT IN THE CASES OF CHOWRINGHEE SALES BUR EAU P. LTD. VS. CIT (1993) 6 87 ITR 542 (SC) AND SINCLAIR MURRAY AND CO. P. LTD. VS. CIT (1974) 97 ITR 615 (SC). THE DECISION OF THE HONBLE HIGH COURT OF GU JARAT IN THE CASE OF WOLKEM (P) LTD. VS. CIT REPORTED IN 259 ITR 430 (GUJ) 24 A LSO SUPPORTS THE ABOVE PROPOSITION. IN THE PRESENT CASE THE ASSESSEE HAS ITSELF BEEN TREATING THE SALES TAX COLLECTED AS PART OF TRADING AND NOT AS CAPITAL REC EIPTS IN ITS BOOKS OF ACCOUNT AND RETURNS OF INCOME FILED BY IT, EVEN DURING THE PERI OD WHEN IT WAS ELIGIBLE FOR THE BENEFITS OF SALES TAX DEFERRAL UNDER THE PACKAGE O F INCENTIVE SCHEMES. IN SUPPORT OF THE ABOVE HE REFERRED TO THE COPY OF AUDIT REPOR T U/S.44AB OF THE I.T. ACT, 1961 FOR THE A.YS. 2000-01, 2001-02 & 2002-03 AND SUBMIT TED THAT IN COLUMN 13(E) OF THE TAX AUDIT REPORT, IN RESPECT OF AMOUNTS NOT CR EDITED TO THE PROFIT & LOSS A/C., BEING CAPITAL RECEIPTS, IF ANY, THE AUDITOR H AS CATEGORICALLY STATED NIL. SHE ACCORDINGLY SUBMITTED THAT THE ORDER OF THE CIT(A) BE REVERSED AND THAT OF THE AO BE RESTORED. 9. THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTHE R HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 9.1 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE B Y BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER B OOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECI SIONS CITED BEFORE US. WE FIND THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSE E BY THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF RUCHA ENGINEER S PVT. LTD. VIDE ITA NO. 667/PN/2006 AND ITA NO. 1338/PN/2007 FOR A.Y. 2003- 04 ORDER DATED 19-01- 2011. FOR THE SAKE OF CONVENIENCE THE FACTS OF THA T CASE INCLUDING THE FINDING OF THE TRIBUNAL ARE REPRODUCED AS UNDER : 3. AS FAR AS GROUND NO.1 IS CONCERNED, THE RELEVAN T FACTS OF THE CASE ARE THAT THE ASSESSEE HAS COLLECTED SALES TAX FROM CUSTOMERS AND HAS CLAIMED DEDUCTION FOR THE SAID AMOUNT IN P&L ACCOUNT. THE SAID DEDUCTION WAS ALLO WED U/S.43B TAKING THE SALES TAX COLLECTED AS DEEMED PAYMENT FOR THE PURPOSE OF SECT ION 43B. THE SALES TAX COLLECTED AND USED WAS TO BE PAID TO STATE GOVERNMENT IN FIVE EQU AL INSTALMENTS. THE ASSESSEE SETTLED THE SALES TAX DEFERRAL AMOUNT OF RS.163.22 LAKHS BY PAYING RS.51.55 LAKHS AS FULL AND 7 FINAL SETTLEMENT. IN THIS PROCESS, THE ASSESSEE HA S GAINED RS.111.67 LAKHS AND CLAIMED THE SAME AS CAPITAL RECEIPT WHICH WAS NOT ACCEPTED BY T HE ASSESSING OFFICER. THE MATTE WAS CARRIED IN BEFORE THE FIRST APPELLATE AUTHORITY BUT WITHOUT ANY SUCCESS. 4. DURING THE PROCEEDINGS BEFORE US, THE LEARNED CO UNSEL FOR THE ASSESSEE SUBMITTED THAT THE ISSUE RAISED IN THIS APPEAL IS SQUARELY CO VERED BY THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SULZER INDIA LTD. VS. J CIT (2010) 42 SOT 457 (BOM.) WHICH WAS NOT DISPUTED BY THE LEARNED DR EXCEPT RELYING O N THE ORDER OF THE CIT(A). 5. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THIS GROUND IS SQUARELY COVERED IN FAVOUR OF THE AS SESSEE BY THE DECISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SULZER INDIA LTD. (S UPRA), WHEREIN THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY OBSERVING AS U NDER : FOR THE REASONS AS STATED ABOVE, WE HOLD THAT THE DEFERRED SALES TAX LIABILITY RS.4,14,87,984/- BEING THE DIFFERENCE BETWEEN THE P AYMENT OF NET PRESENT VALUE RS.3,37,13,393/- AGAINST THE FUTURE LIABILITY OF RS .7,52,01,378/- CREDITED BY THE ASSESSEE UNDER THE CAPITAL RESERVE ACCOUNT IN ITS B OOKS OF ACCOUNT IS A CAPITAL RECEIPT AND CANNOT BE TERMED AS REMISSION/CESSATION OF LIABILITY AND CONSEQUENTLY NO BENEFIT HAS ARISEN TO THE ASSESSEE IN TERMS OF S ECTION 41(1)(A) OF THE INCOME TAX ACT, 1961. ACCORDINGLY, THE MODIFIED QUESTION AS FRAMED IN PARA 5 OF THIS ORDER IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGA INST THE REVENUE. 6. SO, RESPECTFULLY FOLLOWING THE AFORESAID DECISIO N OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF SULZER INDIA LTD. (SUPRA), WE HOLD T HAT THE CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE ADDITION OF RS.1,11,66,935/- MADE BY THE ASSESSING OFFICER TREATING THE SALES TAX LOAN WAIVER AS REVENUE RECEIPT. ASSESSIN G OFFICER IS DIRECTED ACCORDINGLY. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN THE CASE OF RUCHA ENGINEERS PVT. LTD. WHICH HAS BEEN PASSED AFTER CONSIDERING T HE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE SULZER INDIA LTD. (SUPR A) AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE AGAINST THE ORDER OF THE TRIBUNAL IN THE CASE OF RUCHA ENGINEERS (P) LTD. (SUPRA) WE FIND NO INFIRMI TY IN THE ORDER OF THE CIT(A). ACCORDINGLY THE SAME IS UPHELD. THE GROUNDS RAISED BY THE REVENUE ARE ACCORDINGLY DISMISSED. 10. GROUND OF APPEAL NO.4 BY THE REVENUE READS AS U NDER : 4. WHETHER PROVISION OF WARRANTY CLAIM WITHOUT ITS QUANTIFICATION AND ITS ABSENCE OF STATISTICAL DATA RELATED TO ACTUAL WARRANTY EXPENSE IS AN ALLOWABLE EXPENDITURE U/S.37(1) OF THE ACT ? 11. FACTS OF THE CASE, IN BRIEF, ARE THAT DURING TH E COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS DEBI TED AN AMOUNT OF RS.15,86,413/- TO THE PROFIT AND LOSS ACCOUNT AS WA RRANTY CLAIMS. THE AO ASKED THE ASSESSEE TO PRODUCE THE FOLLOWING : 8 1. THE AMOUNT OF THE CLAIMS PENDING BEFORE THE ASSE SSEE AS ON 31-03-2005 ALONG WITH SUPPORTIVE DOCUMENTS. 2. THE AMOUNT ACTUALLY SPENT BY THE ASSESSEE DURING F.Y. 2004-05 ON WARRANTY CLAIMS. 3. ANY SCIENTIFIC/INDUSTRIAL DATA TO SUPPORT THE CL AIM OF THE ASSESSEE. 4. PAST HISTORY OF THE ASSESSEE REGARDING THE CLAIM S FOR WARRANTY 5. WHETHER WARRANTY CLAIMS HAS BEEN INSURED BY THE ASSESSEE OR NOT 12. REJECTING THE VARIOUS SUBMISSIONS MADE BY THE A SSESSEE AND IN ABSENCE OF CERTAINTY OF SUCH CLAIMS THE AO DISALLOWED THE WARR ANTY PROVISION MADE BY THE ASSESSEE ON THE GROUND THAT THE SAID CLAIM IS A CON TINGENT LIABILITY. HE ACCORDINGLY MADE ADDITION OF RS.15,86,413/-. THE AO SUBSEQUENT LY RESTRICTED SUCH DISALLOWANCE TO RS.9,77,000/- VIDE ORDER PASSED U/S .154 ON 05-02-2008. 13. BEFORE THE CIT(A) THE ASSESSEE MADE ELABORATE A RGUMENTS. IT WAS SUBMITTED THAT SALES AS WELL AS WARRANTY ARE INEXTRICABLY LIN KED WITH EACH OTHER AND THEREFORE IF THE SALE PROCEEDS ARE TAKEN NOTE OF IN A YEAR, T HE LIABILITY IN RESPECT OF THE WARRANTY IS ALSO TO BE TAKEN NOTE OF IN THE SAME YE AR. THE QUANTIFICATION CAN BE BASED ON ESTIMATE. THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF THERMAX BABCOCK AND WILCOX LTD. VS. JCIT REPORTED I N 79 ITR 63 WAS BROUGHT TO THE NOTICE OF THE LEARNED CIT(A). IT WAS SUBMITTED THAT AS PER PROVISIONS OF SECTION 145(1) AN ASSESSEE FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING IS REQUIRED TO PROVIDE FOR ALL KNOWN LIABILITIES EVEN THOUGH THE AMOUNT COULD NOT BE DETERMINED WITH CERTAINTY. IT WAS SUBMITTED THAT T HE CLAIM OF WARRANTY IS BASED ON REJECTION BY BAJAJ AUTO LTD. IN THE EARLIER 3 YEARS WHICH ARE AS UNDER : SR.NO. PARTICULARS A.Y. 04-05 A.Y. 03-04 A.Y. 02-03 1 SALES REJECTION 13,13,790 5,00,986 7,28,726 2 SALES 22,58,65,643 9,19,89,549 2,55,95,448 3 REJECTION AS % OF SALE 0.58 0.54 2.85 4 AVERAGE RATE OF REJECTION 1.32 THE ASSESSEE HAS FURTHER SUBMITTED STATISTICAL DETA ILS AS UNDER : PARTICULARS AVERAGE FOR F.Y.2004-05 AVERAGE FOR F.Y. 2003-04 IN PPM (%) IN PPM (%) IN PROCESS REJECTION 1,307 0.01 1,627 0.01 9 IN PROCESS REWORK 22,110 2.21 19,320 1.93 CUSTOMER RETURN 3,803 0.03 47,194 4.72 14. THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HONDA SEIL CARS INDIA LTD. VS. ACIT REPORTED IN 109 ITD 1 (DEL HI) WAS ALSO BROUGHT TO THE NOTICE OF THE LEARNED CIT(A) WHEREIN IT HAS BEEN HE LD THAT LIABILITY FOR WARRANTY CLAIMS WAS ASCERTAINED AND ACCRUED LIABILITY AND TH EREFORE THE PROVISION FOR WARRANTY CLAIMS MADE BY THE ASSESSEE ON THE BASIS O F ACTUAL EXPENSES INCURRED IN THE PAST IS AN ALLOWABLE DEDUCTION. THE DECISION O F THE HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROLS INDIA PVT. LTD VS. CIT REPORTED IN 314 ITR 62, THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. HIMALAY MACHINERY PVT. LTD. REPORTED IN 42 DTR 141 AND VARI OUS OTHER DECISIONS WERE ALSO BROUGHT TO THE NOTICE OF THE CIT(A) IN SUPPORT OF T HE ALLOWABILITY OF WARRANTY CLAIMS. 15. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON VARIOUS DECISIONS THE LEARNED CIT(A) DELETED THE ADDITION M ADE BY THE AO. WHILE DOING SO, HE NOTED THAT THE ASSESSEE HAS SOLD THE PRODUCT S MANUFACTURED BY IT WITH WARRANTY. IN THE PAST THE ASSESSEE HAS PAID WARRAN TY CLAIMS TO ITS CUSTOMERS AND CLAIMED THE EXPENDITURE ON ACTUAL BASIS. DUE TO IN TRODUCTION OF AS29 W.E.F. F.Y. 2004-05 BY THE ICAI, THE ASSESSEE COMPANY HAS CHANG ED ITS METHOD OF RECOGNISING THE EXPENDITURE ON WARRANTY CLAIMS FROM ACTUAL BASI S TO ACCRUAL BASIS. THE ASSESSEE COMPANY HAS ACCORDINGLY MADE PROVISION OF WARRANTY CLAIMS ON THE BASIS OF PAST EXPERIENCE/RECORDS. ACCORDING TO HIM THE A LLOWABILITY OF WARRANTY CLAIM ACCRUES ON THE DATE OF SALE OF PRODUCT THOUGH THE Q UANTIFICATION AND PAYMENT OF THE SAME IS MADE ON SPECIFIC DATES. THEREFORE, THE LIA BILITY IS NOT UNASCERTAINED LIABILITY DISALLOWABLE UNDER THE PROVISIONS OF INCO ME TAX ACT AS CLAIMED BY THE AO. RELYING ON THE DECISION OF THE PUNE BENCH OF TH E TRIBUNAL IN THE CASE OF 10 THERMAX SURFACE COATING LTD. VS. JCIT REPORTED IN 1 04 ITD 199, THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HOND A SEIL CARS INDIA PVT. LTD. (SUPRA), THE DECISION OF THE HONBLE GUJARAT HIGH C OURT IN THE CASE OF CIT VS. HIMALAY MACHINERY PVT. LTD. (SUPRA) REPORTED IN 62 DTR 141 AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA PVT. LTD. (SUPRA) THE LEARNED CIT(A) DELETED THE ADDITION. AGGRIEVED WIT H SUCH ORDER OF THE LEARNED CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 16. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECI SIONS CITED BEFORE US. WE FIND THE FINDING GIVEN BY THE CIT(A) THAT ASSESSEE HAS S OLD THE PRODUCTS MANUFACTURED BY IT WITH WARRANTY HAS NOT BEEN DISPUTED BY THE RE VENUE. THE FURTHER FINDING OF THE LEARNED CIT(A) THAT THE ASSESSEE HAS IN THE PAS T PAID WARRANTY CLAIM TO ITS CUSTOMERS AND CLAIMED THE SAME AS EXPENDITURE ON AC TUAL BASIS ALSO REMAINS UNCONTROVERTED. THE OBSERVATION OF THE LEARNED CIT (A) THAT BECAUSE OF THE INTRODUCTION OF AS29 THE ASSESSEE CHANGED ITS METHO D OF RECOGNISING EXPENDITURE ON WARRANTY CLAIM FROM ACTUAL BASIS TO ACCRUAL BASI S AND ACCORDINGLY MADE PROVISION OF WARRANTY CLAIMS ON THE BASIS OF PAST E XPERIENCE/RECORDS ALSO COULD NOT BE CONTROVERTED BY THE LEARNED DR. 17. WE FIND THE HONBLE SUPREME COURT IN THE CASE O F ROTORK CONTROLS INDIA PVT. LTD. HAS HELD AS UNDER (SHORT NOTES) : BUSINESS EXPENDITURE SOPHISTICATED GOODS MANUFACT URED IN LARGE QUANTITIES STATISTICAL DATA INDICATING THAT SOME OF THE GOODS WERE DEFECTIVE WARRANTY EXECUTED BY ASSESSEE ESTIMATED PROVISION FOR WARRANTY REVER SAL OF EXCESS PROVISION ALLOWABLE AS BUSINESS EXPENDITURE INCOME TAX ACT, 1961, S.3 7 ACCOUNTING PRESENT VALUE OF CONTINGENT LIABILITY LIKE WARRANTY EXPENSE. WORDS AND PHRASES PROVISION, MEANING OF THE ASSESSEE SOLD VALVE ACTUATORS. AT THE TIME OF SALE THE ASSESSEE PROVIDED A STANDARD WARRANTY WHEREBY IN THE EVENT OF ANY ACTUATOR OR PA RT THEREOF BECOMING DEFECTIVE WITHIN 11 12 MONTHS FROM THE DATE OF COMMISSIONING OR 18 MONT HS FROM THE DATE OF DISPATCH, WHICHEVER WAS EARLIER, IT UNDERTOOK TO RECTIFY OR R EPLACE THE DEFECTIVE PART FREE OF CHARGE. RIGHT FROM THE ASSESSMENT YEAR 1983-84 THE CLAIM FO R ALLOWANCE OF THIS WARRANTY HAD BEEN ALLOWED. FOR THE ASSESSMENT YEAR 1991-92, IT HAD MADE A PROVISION FOR WARRANTY OF RS.10,18,800/- AT THE RATE OF 1.5 PER CENT, OF THE TURNOVER. SINCE THIS PROVISION EXCEEDED THE ACTUAL EXPENDITURE, THE ASSESSEE REVERSED RS.5, 00,246 AS REVERSAL OF EXCESS PROVISION, AND CLAIMED DEDUCTION OF THE NET PROVISION OF RS.5, 18,554/-. BUT THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT IT WAS MERE LY A CONTINGENT LIABILITY. THE HIGH COURT ON APPEAL HELD THAT NO OBLIGATION WAS CAST ON THE DATE OF SALE AND CONSEQUENTLY THERE WAS NO ACCRUED LIABILITY. ON APPEAL TO THE S UPREME COURT : HELD, REVERSING THE DECISION OF THE HIGH COURT, THAT THE VALVE ACTUATORS, MANUFACTURED BY THE ASSESSEE, WERE SOPHISTICATED GOODS AND STATISTI CAL DATA INDICATED THAT EVERY YEAR SOME OF THESE WERE FOUND DEFECTIVE; THAT VALVE ACTUATOR BEING A SOPHISTICATED ITEM NO CUSTOMER WAS PREPARED TO BUY A VALUE ACTUATOR WITHOUT A WARR ANTY. THEREFORE, THE WARRANTY BECAME AN INTEGRAL PART OF THE SALE PRICE; IN OTHER WORDS, THE WARRANTY STOOD ATTACHED TO THE SALE PRICE OF THE PRODUCT. IN THIS CASE THE WA RRANTY PROVISIONS HAD TO BE RECOGNIZED BECAUSE THE ASSESSEE HAD A PRESENT OBLIGATION AS A RESULT OF PAST EVENTS RESULTING IN AN OUTFLOW OF RESOURCES AND A RELIABLE ESTIMATE COULD BE MADE OF THE AMOUNT OF OBLIGATION. THEREFORE, THE ASSESSEE HAD INCURRED A LIABILITY DU RING THE ASSESSMENT YEAR WHICH WAS ENTITLED TO DEDUCTION UNDER SECTION 37 OF THE INCOM E TAX ACT, 1961. THE PRESENT VALUE OF A CONTINGENT LIABILITY, LIKE T HE WARRANTY EXPENSE, IF PROPERLY ASCERTAINED AND DISCOUNTED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDUCTION UNDER SECTION 37. THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE. IT WOULD DEPEND ON THE NATURE OF THE BUSINESS, THE NATURE OF SALES, THE NATURE OF THE PRODUCT MANUFACTURED AND SOLD AND THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IT WOULD ALSO DEPEND UPON THE HISTORICAL TREND AND UPON THE NUMBER OF ARTICLES PRODUCED. A PROVISION IS A LIABILITY WHICH CAN BE MEASURED ON LY BY USING A SUBSTANTIAL DEGREE OF ESTIMATION. A PROVISION IS RECOGNIZED WHEN : (A) A N ENTERPRISE HAS A PRESENT OBLIGATION AS A RESULT OF A PAST EVENT: (B) IT IS PROBABLE THA T AN OUTFLOW OF RESOURCES WILL BE REQUIRED TO SETTLE THE OBLIGATION, AND (C) A RELIABLE ESTIMA TE CAN BE MADE OF THE AMOUNT OF THE OBLIGATION. IF THESE CONDITIONS ARE NOT MET, NO PR OVISIONS CAN BE RECOGNIZED. THE PRINCIPLE IS THAT IF THE HISTORICAL TREND INDIC ATES THAT A LARGE NUMBER OF SOPHISTICATED GOODS WERE BEING MANUFACTURED IN THE PAST AND THE F ACTS SHOW THAT DEFECTS EXISTED IN SOME OF THE ITEMS MANUFACTURED AND SOLD, THEN PROVI SION MADE FOR WARRANTY IN RESPECT OF SUCH SOPHISTICATED GOODS WOULD BE ENTITLED TO DEDUC TION FROM THE GROSS RECEIPTS UNDER SECTION 37. 18. WE FIND THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HONDA SEIL CARS INDIA PVT. LTD. HAS HELD AS UNDER (SHORT NOTES) : THERE WAS NO DISPUTE ABOUT THE FACT THAT THE CARS SOLD TO THE CUSTOMERS WERE COVERED BY WARRANTY AND AFTER SALE SERVICES FOR REPAIR AND REP LACEMENT FOR A PERIOD OF ONE YEAR. THE ASSESSEE HAD BEEN FOLLOWING THE SAME METHOD OF ACCOUNTING AND HAD BEEN MAKING PROVISION FOR THE SAME ON THE BASIS OF ACTUAL EXPEN SES INCURRED IN THE PAST. IT WAS A FACT THAT IN THE PAST SUCH EXPENSES HAD BEEN ALLOWED BY THE REVENUE. EVEN SUCH CLAIM OF THE ASSESSEE WAS ALLOWED FOR THE ASSESSMENT YEAR 2001-0 2. IT WAS NOT THE CASE OF THE REVENUE THAT THE PROVISIONS MADE FAR EXCEEDED THE ACTUAL EX PENSES INCURRED. THE VERY FACT THAT THE ASSESSEE HAD MADE PROVISION ONLY DID NOT MEAN T HAT THE LIABILITY WAS NOT ASCERTAINED AND CONTINGENT IN NATURE. THE LIABILITY WAS INCURRED ON THE DATE WHEN SALES W ERE MADE. THEREFORE, THAT WAS ASCERTAINED AND ACCRUED LIABILITY OF THE ASSESSEE, AND ACCORDINGLY, THE SAME WAS TO BE ALLOWABLE. THEREFORE, ORDER OF THE COMMISSIONER (A PPEALS) WAS TO BE SET ASIDE AND THE IMPUGNED DISALLOWANCE WAS TO BE DELETED. 12 19. WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF THERMAX SURFACE COATING LTD. (SUPRA) WHICH HAS BEEN REPRODUCED BY T HE CIT(A) IN HIS ORDER HAS HELD AS UNDER : 2.1 IN GROUND NO.1 IS AGAINST THE FINDING OF THE L EARNED CIT(A) IN WHICH DISALLOWANCE OF RS.1,33,400/- MADE BY THE AO, REPRE SENTING THE PROVISION FOR WARRANTY OBLIGATION, WAS UPHELD. IT WAS MENTIONED IN THE GR OUND THAT THE LIABILITY HAD CRYSTALLIZED IN THE YEAR AND THE PROVISION WAS MADE WITH REFEREN CE TO THE AVAILABLE DATA. ON PERUSAL OF THE ORDER IT IS FOUND THAT THE LEARNED CIT(A) CA ME TO THE CONCLUSION THAT THE LIABILITY WAS A CONTINGENT LIABILITY AND IT DID NOT ACCRUE IN THE RELEVANT PREVIOUS YEAR. BEFORE US, THE LEARNED COUNSEL OF THE ASSESSEE POINTED OUT THA T THE LIABILITY FOR WARRANTY AROSE ON ACCOUNT OF SALE OF GOODS. UNDER THE CONTRACT THE A SSESSEE WAS UNDER OBLIGATION TO SET RIGHT THE DEFECTS WITHIN THE PRESCRIBED PERIOD. TH US, THE LIABILITY WAS FASTENED TO THE EVENT OF SALE AND SINCE THE SALES WERE EFFECTED IN THIS YEAR, THE LIABILITY HAD ACCRUED. AS AGAINST THE AFORESAID, THE LEARNED DEPARTMENTAL REP RESENTATIVE DID NOT MAKE ANY SPECIFIC ARGUMENT, BUT RELIED ON THE DECISION OF THE LEARNED CIT(A). 2.2 WE HAVE CONSIDERED THE ARGUMENTS PLACED BEFORE US IN THE CONTEXT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS. CIT (2000) 162 CTR (SC) 325; (2000) 245 ITR 428 (SC); IN WHICH IT WAS INTER ALIA HELD THAT IF THE BUSINESS LIABILITY HAD DEFINITELY ARISEN IN THE ACC OUNTING YEAR, THE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANT IFIED AND DISCHARGED IN A SUBSEQUENT YEAR. THUS, THE RATIO OF THE CASE WAS THAT IF INCU RRING OF THE LIABILITY IS CERTAIN, THE SAME IS NOT A CONTINGENT LIABILITY BUT IT IS A LIABILITY IN PRAESENTI, THOUGH IT MAY HAVE TO BE DISCHARGED AT A FUTURE DATE. THE FACTUM OF DISCHAR GE AT A LATER DATE DOES NOT MAKE ANY DIFFERENCE IN COMING TO THE CONCLUSION THAT THE LIA BILITY HAS ARISEN IN THE PREVIOUS YEAR. IN THAT CASE, THE HONBLE COURT ALSO POINTED OUT TH AT IF SUCH A LIABILITY CAN BE WORKED OUT ON A SCIENTIFIC BASIS, THE AMOUNT SO DETERMINED HAS TO BE ALLOWED IN COMPUTING THE INCOME. THE ASSESSEE WAS REQUIRED TO STATE ITS CAS E REGARDING THE QUANTIFICATION OF THE LIABILITY. NO ARGUMENT WAS MADE. THEREFORE, THE MATTER IS RESTORED TO THE FILE OF THE AO TO EXAMINE WHETHER THE QUANTIFICATION OF THE LIABIL ITY WAS MADE KEEPING IN MIND THE PAST RECORD OF THE ASSESSEE AND A REASONABLE AMOUNT WORK ED OUT ON THAT BASIS MAY BE ALLOWED IN COMPUTATION OF INCOME. THUS, THIS GROUND OF APP EAL IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. (EMPHASIS SUPPLIED). 20. SINCE THE LEARNED CIT(A) HAS PASSED THE ORDER FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ROTORK CONTROL S INDIA PVT. LTD. AND THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL AND THE DELHI BENCH OF THE TRIBUNAL, THEREFORE, IN ABSENCE OF ANY CONTRARY MATERIAL BROU GHT TO OUR NOTICE AGAINST THESE DECISIONS WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) ON THIS ISSUE. ACCORDINGLY THE ORDER OF THE CIT(A) ALLOWING THE PR OVISION FOR WARRANTY CLAIM IS UPHELD AND THE GROUND RAISED BY THE REVENUE ON THIS ISSUE IS DISMISSED. 20.1 THE OTHER GROUNDS BY THE REVENUE BEING GENERAL IN NATURE ARE DISMISSED. 13 CO NO. 23/PN/2011 (BY ASSESSEE-A.Y. 2005-06) (ARISI NG OUT OF ITA NO.686/PN/2011) : 21. AFTER HEARING BOTH THE SIDES WE FIND THE CO FIL ED BY THE ASSESSEE IS MERELY IN SUPPORT OF THE ORDER OF THE LEARNED CIT(A). WE HAV E ALREADY DISMISSED THE GROUNDS RAISED BY THE REVENUE BY UPHOLDING THE ORDE R OF THE CIT(A). THEREFORE, THE GROUNDS FILED BY THE ASSESSEE IN THE CO BECOME INFRUCTUOUS. ACCORDINGLY THE SO FILED BY THE ASSESSEE IS DISMISSED. ITA NO.687/PN/2011 (BY REVENUE) (A.Y. 2007-08) : 22. THE ONLY EFFECTIVE GROUND RAISED BY THE REVENUE IN THIS APPEAL RELATES TO THE ORDER OF THE CIT(A) IN ALLOWING THE INTEREST ON SHA RE APPLICATION MONEY WHICH WAS DISALLOWED BY THE AO U/S.37(1) OF THE INCOME TAX AC T. 23. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO DU RING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE COMPANY IS A CL OSELY HELD COMPANY AND ONLY THE FAMILY MEMBERS ARE SHARE HOLDERS OF THIS COMPAN Y. THE TOTAL NUMBER OF SHARES OF THIS COMPANY IS 7,13,752 OF THE VALUE OF RS.10/- EACH. THE ASSESSEE HAS RECEIVED SHARE APPLICATION MANY FROM VAX INFRADEVEL OPER LTD. DURING A.Y. 2004- 05 AND 2005-06. HOWEVER, SHARES WERE NOT ALLOTTED AND THE SHARE APPLICATION MONEY PENDING ALLOTMENT FOR THE IMPUGNED ASSESSMENT YEAR AS ON 31-03-2007 WAS SHOWN AT RS.1,43,74,942/-. THE ASSESSEE FOR THE IM PUGNED ASSESSMENT YEAR HAS PAID INTEREST OF RS.14,59,440/- BEING INTEREST @8% PER ANNUM ON SHARE APPLICATION MONEY PENDING ALLOTMENT. THE ASSESSEE CLAIMED THE SAME AS BUSINESS EXPENDITURE TREATING IT AS BORROWED CAPITAL/LOAN ON THE GROUND THAT THE SAME IS USED FOR DAY-TO- DAY BUSINESS. FOR THE ABOVE PROPOSITION THE ASSESS EE RELIED ON THE FOLLOWING DECISIONS : 1. CIT VS. HINDUSTAN CONDUCTOR PVT. LTD. 240 ITR 76 2. 2. KEJARIWAL ENTERPRISES VS. CIT 260 ITR 341 3. INDIA CEMENTS LTD. VS. CIT 60 ITR 52 4. CHALLAPALLI SUGARD LTD. VS. CIT 98 ITR 167 14 23.1. HOWEVER, THE AO WAS NOT SATISFIED WITH THE EX PLANATION GIVEN BY THE ASSESSEE. DISTINGUISHING THE VARIOUS DECISIONS CITE D BEFORE HIM AND RELYING ON THE VARIOUS DECISIONS THE AO DISALLOWED THE INTEREST SO PAID ON SHARE APPLICATION MONEY. 24. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASS ESSEE HAS UTILISED THE SHARE APPLICATION MONEY PENDING ALLOTMENT FOR THE DAY-TO- DAY BUSINESS WHICH INCLUDES PAYMENTS TO SUPPLIERS OF MATERIALS, LABOUR ETC. THE REBY REDUCING WORKING CAPITAL EXPOSURES FROM BANKS. THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF HINDUSTAN CONDUCTORS PVT. LTD. 240 ITR 762 AND THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF WESTERN INDIA FORGING LTD. VIDE ITA NO.419/PN/2002 WERE BROUGHT TO THE NOTICE OF THE LE ARNED CIT(A). 25. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF WESTERN INDIA FORGING LTD. (SUPRA) THE LEARNED CIT(A) DELETED THE ADDITIO N BY HOLDING AS UNDER : 4.3 I HAVE CAREFULLY CONSIDERED FACTS OF THE CASE, ASSESSMENT ORDER AND THE SUBMISSION OF THE APPELLANT. THE AO HAS DISALLOWED THE INTERE ST ON SHARE APPLICATION MONEY PENDING ALLOTMENT FOR THE REASON THAT THE SAME CANNOT BE TR EATED AS A LOAN OR AMOUNT BORROWED. IN SUPPORT OF THIS PROPOSITION, THE AO HAS RELIED O N THE DECISIONS IN THE CASES OF SHIVALIK FUEL (P) LTD. VS. CIT (2005) 276 ITR 638, TRAVANCOR E TITANIUM PRODUCTS LTD. VS. CIT (1978) 114 ITR 626 AND ADDL. CIT VS. BANGALORE SOFT DRINKS (P) LTD. (1980) 126 ITR 38. ON PERUSAL OF THE DECISIONS IT HAS BEEN NOTICED THA T THE DECISION IN THE CASE OF SHIVALIK FUEL (P) LTD. VS. CIT (2005) 276 ITR 638 IS IN RESP ECT OF COMPUTATION OF CAPITAL EMPLOYED U/S.80J AND HENCE NOT RELEVANT FOR DECIDIN G THE ISSUE UNDER APPEAL. THE ISSUE DECIDED IN THE CASE OF TRAVANCORE TITANIUM PRODUCTS LTD. VS. CIT (1978) 114 ITR 626 IS WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE TRIBUNAL WAS RIGHT IN HOLDING THAT THE SUM OF RS.26.5 LAKHS IS NOT MONIES BORROWED WITHIN THE MEANING OF SUB- RULE (V) OF R.1 OF SCHEDULE II OF THE COMPANIES (PR OFITS) SURTAX ACT, 1964 ?. THE ISSUE DECIDED IN THE ABOVE DECISION IS UNDER COMPANIES (P ROFITS) SURTAX ACT, 1964 AND THE SAME IS NOT RELEVANT FOR DECIDING THE ISSUE UNDER A PPEAL. IN THE CASE OF ADDL. CIT VS. BANGALORE SOFT DRINKS (P) LTD. (1980) 126 ITR 38 TH E ISSUE DECIDED WAS IN RESPECT OF DEDUCTION U/S.80J AND COMPUTATION OF CAPITAL EMPLOY ED FOR THE SAID DEDUCTION U/S.80J AND APPLICABILITY OF RULE-19A(3) ETC. THE ISSUE DE CIDED IN THIS CASE IS ALSO NOT RELEVANT FOR DECIDING THE ISSUE UNDER APPEAL. THE IDENTICAL ISSUE HAS BEEN DECIDED BY HONBLE IT AT, PUNE IN THE CASE OF WESTERN INDIA FORGING LTD. ITA NO. 419/PN/2002 DATE D 24-07-2007 (PCAS JOURNAL FEBRUARY, 2008 PAGE NO. 49 TO 52). IT HAS BEEN HEL D THAT FOLLOWING THE PRINCIPLE OF COMMERCIAL EXPEDIENCY, INTEREST ON SHARE APPLICATIO N MONEY PENDING ALLOTMENT IS ALLOWABLE. IN THE SAID CASE ALSO, THE SHARE APPLIC ATION MONEY WAS USED AS WORKING CAPITAL OF BUSINESS. ON PERUSAL OF THE SAID CASE, IT HAS BEEN NOTICED THAT AS PER PROVISIONS OF SECTION 69(5) OF THE COMPANIES ACT, A COMPANY HAS TO PAY INTEREST @6% 15 PER ANNUM AND AS PER PROVISIONS OF SECTION 73(2) OF THE COMPANIES ACT, THE MAXIMUM INTEREST RATE PRESCRIBED IS 15% ON RETURN OF SHARE APPLICATION MONEY IN THE CIRCUMSTANCES CITED U/S.73 OF THE COMPANIES ACT. T HE APPELLANT HAS PAID INTEREST @8% PER ANNUM WHICH CANNOT BE REGARDED AS EXCESSIVE. ANOTHER REASON STATED BY THE AO FOR DISALLOWANCE O F INTEREST IS THAT IT WAS NOT OBLIGATORY FOR THE APPELLANT COMPANY TO PAY INTERES T ON SHARE APPLICATION MONEY PENDING ALLOTMENT. THE HONBLE ITAT PUNE, IN THE CASE OF W ESTERN INDIA FORGING LTD ITA NO.419/PN/2002 DATED 24-07-2007 HAS CONSIDERED THIS REASON STATED BY THE AO THAT IT WAS NOT OBLIGATORY ON THE PART OF THE APPELLANT COM PANY TO PAY THE INTEREST ON SHARE APPLICATION MONEY PENDING ALLOTMENT. THE HONBLE I TAT, PUNE HAS REJECTED THE ABOVE CONTENTION RELYING ON THE DECISION OF HONBLE BOMBA Y HIGH COURT IN THE CASE OF SALES MAGNESITE 214 ITR 1, WHEREIN IT HAS BEEN HELD THAT EVEN EXPENDITURE INCURRED VOLUNTARILY ON THE GROUND OF COMMERCIAL EXPEDIENCY TO FACILITAT E CARRYING ON OF THE BUSINESS WOULD BE DEDUCTIBLE U/S.37. IN VIEW OF THE ABOVE FACTS AND DISCUSSION AND THE RATIO LAID DOWN BY THE DECISIONS RELIED ON BY THE APPELLANT AND PARTICULARLY FOLLOWI NG THE DECISION OF HONBLE JURISDICTIONAL TRIBUNAL ON IDENTICAL ISSUE, THE ADD ITION MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF INTEREST ON SHARE APPLICATION MONEY PENDING ALLOTMENT IS DELETED. THE AO IS, THEREFORE, DIRECTED TO DELETE THE ADDITION O F RS.14,59,440/-. GROUND NO. 1&2 STANDS ALLOWED. 25.1 AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE RE VENUE IS IN APPEAL BEFORE US. 26. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS MADE B Y BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER B OOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECI SIONS CITED BY BOTH THE SIDES. THERE IS NO DISPUTE TO THE GENUINENESS OF THE SHARE APPLICATION MONEY RECEIVED BY THE COMPANY FROM VAX INFRADEVELOPER LTD. THE ONLY QUESTION IS REGARDING THE ALLOWABILITY OF INTEREST ON SUCH SHARE APPLICATION MONEY PENDING ALLOTMENT WHICH ACCORDING TO THE ASSESSEE SHOULD BE ALLOWED U/S.36( 1) (III) OF THE INCOME TAX ACT AND WHICH ACCORDING TO THE AO IS NOT AN ALLOWABLE E XPENDITURE. WE FIND IN APPEAL THE CIT(A) FOLLOWING THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF WESTERN INDIA FORGING LTD. (SUPRA) ALLOWED THE CLAI M OF THE ASSESSEE WHEREIN IT HAS BEEN HELD THAT INTEREST ON SHARE APPLICATION MO NEY IS ALLOWABLE ON THE PRINCIPLES OF COMMERCIAL EXPEDIENCY. 27. SINCE THE LEARNED CIT(A) WHILE DECIDING THE ISS UE HAS RELIED ON THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF WE STERN INDIA FORGING LTD. AND SINCE NOTHING CONTRARY WAS BROUGHT TO OUR NOTICE AG AINST THE ORDER OF THE TRIBUNAL, 16 THEREFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE. ACCORDINGLY THE GROUND RAISED BY THE REV ENUE IS DISMISSED. CO NO. 26/PN/2011 (BY ASSESSEE-A.Y. 2007-08) (ARISI NG OUT OF ITA NO.687/PN/2011 : 28. AFTER HEARING BOTH THE SIDES, WE FIND THE CO FI LED BY THE ASSESSEE IS IN SUPPORT OF THE CIT(A). SINCE WE HAVE DISMISSED THE GROUNDS RAISED BY THE REVENUE, THEREFORE, THE CO FILED BY THE ASSESSEE BE COMES INFRUCTUOUS AND ACCORDINGLY THE SAME IS DISMISSED. 29. IN THE RESULT, BOTH THE APPEALS FILED BY THE RE VENUE AND THE COS FILED BY THE ASSESSEE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 5 TH DAY OF OCTOBER 2012 SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: THE 5 TH OCTOBER 2012 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-AURANGABAD. 4. THE D.R, B PUNE BENCH 5. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE