ACIT Circle 16 (1), V. The Narang Industries (P) Ltd,

ITA 1112/DEL/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4280 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: F
• Next Hearing Date: 17-01-2011
• Assessment Year: 2003-2004
• Appeal Filed On: 27-03-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A D MEHROTRA
• Assessee Lawyers: MANOJ NAGRATH
• Keywords: Bad and doubtful debts; Commercial expediency
• Section: 43B; 143(3); 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL DELHI DELHI DELHI DELHI BENCH F BENCH F BENCH F BENCH F : NEW DELHI : NEW DELHI : NEW DELHI : NEW DELHI BEFORE BEFORE BEFORE BEFORE SHRI G.E.VEERABHADRAPPA, VP AND SHRI G.E.VEERABHADRAPPA, VP AND SHRI G.E.VEERABHADRAPPA, VP AND SHRI G.E.VEERABHADRAPPA, VP AND SHRI C.L.SETHI, JM SHRI C.L.SETHI, JM SHRI C.L.SETHI, JM SHRI C.L.SETHI, JM ITA NO. ITA NO. ITA NO. ITA NO.1112/DEL/2008 1112/DEL/2008 1112/DEL/2008 1112/DEL/2008 ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : ASSESSMENT YEAR : 2003 2003 2003 2003- -- -04 0404 04 ASSTT.COMMISSIONER OF ASSTT.COMMISSIONER OF ASSTT.COMMISSIONER OF ASSTT.COMMISSIONER OF INCOME TAX, INCOME TAX, INCOME TAX, INCOME TAX, CIRCLE CIRCLE CIRCLE CIRCLE- -- -16(1), 16(1), 16(1), 16(1), NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. VS. VS. VS. VS. M/S THE NARANG I M/S THE NARANG I M/S THE NARANG I M/S THE NARANG INDUSTRIES PVT.LTD., NDUSTRIES PVT.LTD., NDUSTRIES PVT.LTD., NDUSTRIES PVT.LTD., 28, SARDAR PATEL MARG, 28, SARDAR PATEL MARG, 28, SARDAR PATEL MARG, 28, SARDAR PATEL MARG, NEW DELHI. NEW DELHI. NEW DELHI. NEW DELHI. PAN NO. PAN NO. PAN NO. PAN NO.AAACT0062E. AAACT0062E. AAACT0062E. AAACT0062E. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI A.D.MEHROTRA, CIT-DR. RESPONDENT BY : SHRI MANOJ NAGRATH, CA. ORDER ORDER ORDER ORDER PER C.L.SETHI PER C.L.SETHI PER C.L.SETHI PER C.L.SETHI, J , J, J , JM : M : M : M : THE PRESENT APPEAL HAS BEEN FILED BY THE REVENUE A GAINST THE ORDER DATED 2.1.2008 PASSED BY LEARNED CIT(A) IN TH E MATTER OF AN ASSESSMENT MADE BY THE AO U/S 143(3) OF THE INCOME- TAX ACT, 1961 (THE ACT) FOR THE AY 2003-04. 2. GROUND NO.1 RAISED BY THE REVENUE IS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.1,13,05,316/- MADE BY THE A.O. ON ACCOUNT OF BAD DEBTS WRITTEN OFF. 3. THE ASSESSEE COMPANY IS A PUBLIC LIMITED COMPANY HAVING BUSINESS OF MANUFACTURING AND SALE OF POTABLE AND I NDUSTRIAL ALCOHOL WITH ITS MANUFACTURING UNIT SITUATED AT NAWAB GANJ, DISTT.GONDA, UP. DURING THE YEAR, THE ASSESSEE SOLD ITS DISTILLERY B USINESS TO ITS SUBSIDIARY COMPANY M/S NARANG DISTILLERIES LIMITED. 4. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT THE ASSESSEE COMPANY HAD DEBITED A SUM OF `3,7 2,30,826/- ON ITA-1112/DEL/2008 2 ACCOUNT OF BAD DEBTS WRITTEN OFF DURING THE YEAR AS COMPARED TO THE PRECEDING YEAR FIGURE OF `32,540/-. THE AO ASKED T HE ASSESSEE TO FURNISH PARTY-WISE DETAILS OF THE BAD DEBTS WRITTEN OFF AND ALSO TO FURNISH THE DETAIL OF THE YEAR IN WHICH THE CORRESP ONDING INCOME WAS OFFERED FOR TAXATION. IN REPLY, THE ASSESSEE SUBMI TTED A LIST OF THE PERSONS IN RESPECT OF WHOM SUCH CLAIMS WERE WRITTEN OFF. FROM THE PERUSAL OF THE DETAILS FURNISHED BY THE ASSESSEE, I T WAS SEEN THAT IT CONTAINED ADVANCES TO STAFF OF `15,34,840/-, ADVANC ES TO RETAINERS OF `8,83,317/- AND ADVANCES TO SUPPLIERS AND ADVANCES FOR CAPITAL GOODS OF `88,87,159/- AGGREGATING TO `1,13,05,316/- APART FROM BILLS RECOVERABLE. THE ASSESSEE WAS ASKED TO JUSTIFY ITS CLAIM WITH RESPECT TO THE ADVANCES WRITTEN OFF WHICH HAS BEEN CLAIMED AS BAD DEBTS IN VIEW OF PROVISION OF SECTION 36(2)(I). IN RESPONSE , THE ASSESSEE FILED ITS SUBMISSIONS DATED 30.01.06 STATING THAT OUT OF A TO TAL CLAIM OF `3.72 CRORES, A SUM OF `51,13,812/- BEING THE AMOUNT NOT DIRECTLY RELATED TO ASSESSEES BUSINESS HAD ALREADY BEEN ADDED BACK IN THE COMPUTATION OF INCOME. AS REGARDS THE BALANCE AMOUNT, THE ASSE SSEE SUBMITTED THAT THE ASSESSEES DISTILLERY BUSINESS WAS RUNNING ON LONG PERIOD OF CREDIT AND SINCE THE CREDIT WAS PENDING FOR REALIZA TION FOR YEARS, THE ASSESSEE COMPANY DECIDED TO WRITE OFF THE BALANCE W HICH IT THOUGHT COULD NOT BE RECOVERED. AS FAR AS ADVANCES TO STAF F AND ADVANCES TO SUPPLIERS ARE CONCERNED, THE ASSESSEE CONTENDED THA T THESE WERE IN RESPECT OF STAFF WHO HAD RESIGNED THEIR JOBS WITHOU T SETTLING THEIR DUES AND ADVANCES TO SUPPLIERS WERE GIVEN FOR THE SUPPLY OF RAW MATERIAL, EQUIPMENT SUPPLY AND SUPPLY OF CAPITAL GOODS. 5. THE ASSESSEES REPLY WAS CONSIDERED BY THE AO. IN THE LIGHT OF THE ADMITTED FACT THAT THE BAD DEBTS CONTAINED THE AMOUNT OF ADVANCES GIVEN FOR CAPITAL GOODS AND SUPPLY OF EQUI PMENT AND THE REASON PUT FORWARD BY THE ASSESSEE REGARDING STAFF ADVANCES WRITTEN OFF AND ADVANCES TO SUPPLIERS COULD NOT BE ALLOWED AS NO ITA-1112/DEL/2008 3 CORRESPONDING INCOME WAS OFFERED FOR TAXATION AND C ONSIDERING THE FACT THAT THE ASSESSEE WAS NOT IN THE BUSINESS OF MONEY LENDING, THE AO DISALLOWED THE ASSESSEES CLAIM TO THE EXTENT OF `1 ,13,05,316/-. 6. IN THE COURSE OF APPEAL BEFORE THE CIT(A), THE A SSESSEE SUBMITTED THAT THE AMOUNTS WRITTEN OFF AS BAD DEBTS REPRESENT ED THE PAYMENTS MADE WHICH WERE WHOLLY AND EXCLUSIVELY FOR THE PURP OSE OF CARRYING ON OF BUSINESS AND ON ACCOUNT OF COMMERCIAL EXPEDIENCY , THEY ARE FULLY ALLOWABLE AS DEDUCTIBLE EXPENDITURE UNDER THE SPECI FIC PROVISIONS OF SECTION 28 AND 37(1) OF THE ACT. THE ASSESSEES SU BMISSION HAS BEEN REPRODUCED BY THE CIT(A) IN HIS ORDER. SEVERAL DEC ISIONS WERE ALSO CITED BY THE ASSESSEE. 7. AFTER CONSIDERING THE WRITTEN SUBMISSION OF THE ASSESSEE AND CASE LAWS RELIED UPON BY THE ASSESSEE, THE CIT(A) D ELETED THE ADDITION BY OBSERVING AS UNDER:- I HAVE GONE THROUGH THE ORDER OF THE AO AND THE WR ITTEN SUBMISSION OF THE APPELLANT AND CASE LAWS CITED BY THE APPELLANT. THE BASIC CONTENTION OF THE AO FOR MAKI NG A DISALLOWANCE OF RS.1,13,05,316/- OUT OF THE BAD DEB TS WRITTEN OFF IS THAT THE SAME WAS NOT SHOWN AS INCOM E IN THE EARLIER YEARS. IT IS ALSO CONTENDED BY THE AO THAT THE ASSESSEE IS NOT IN THE BUSINESS OF MONEY LENDING. THE AO, HOWEVER, HAS FAILED TO APPRECIATE THE BASIC FACTS O F THE CASE I.E. THE AMOUNTS WRITTEN OFF WERE PAYMENTS MAD E TO STAFF, RETAINERS AND ADVANCES GIVEN TO SUPPLIERS. THERE IS NO DENYING THE FACT THAT ALL SUCH PAYMENTS WERE MAD E WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF CARRYING ON THE BUSINESS OF THE APPELLANT. THE APPELLANT IS ENGAGE D IN THE BUSINESS OF LIQUOR MANUFACTURING AND SALES. KEEPIN G IN VIEW THE PECULIARITY OF THE BUSINESS, THE AMOUNTS W RITTEN OFF AS BAD DEBT, APPEAR TO BE GENUINE. IN THE FACT S AND CIRCUMSTANCES OF THE CASE, THE DISALLOWANCE MADE BY THE AO IS DELETED. IN VIEW OF THE CASE LAWS CITED ABOV E, ALL SUCH EXPENDITURE DO FALL WITHIN THE PURVIEW OF SECT ION 37(1) OF THE INCOME TAX ACT. RELIEF GRANTED TO THE TUNE OF RS.1,13,05,316/-. ITA-1112/DEL/2008 4 8. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. 9. IN THE PRESENT CASE, THE AO DISALLOWED THE SUM O F `1,13,05,316/- BY OBSERVING THAT THESE AMOUNTS WERE NOT CONSIDERED AS INCOME IN EARLIER YEARS OR IN CURRENT YEAR AND HENCE CANNOT B E ALLOWED AS BAD DEBTS WITHIN THE MEANING OF SECTION 36(2)(I). HOWE VER, THE LEARNED CIT(A) HAS ALLOWED ASSESSEES CLAIM IN THE LIGHT OF THE PROVISIONS OF SECTION 37(1) OF THE ACT. THE CIT(A) HAS STATED TH AT THERE IS NO DENYING THE FACT THAT ALL SUCH PAYMENTS WERE MADE W HOLLY AND EXCLUSIVELY FOR THE PURPOSE OF CARRYING ON THE BUSI NESS OF THE APPELLANT, BUT HE HAS FAILED TO POINT OUT THE DETAI LS AND BASIS ON WHICH THIS CONCLUSION HAS BEEN ARRIVED AT BY HIM, PARTICU LARLY IN VIEW OF THE FACT THAT THIS ISSUE WAS NOT EXAMINED BY THE AO FRO M THE POINT OF VIEW OF PROVISIONS CONTAINED IN SECTION 28/37(1) OF THE ACT. AFTER CONSIDERING THE PROVISIONS OF SECTION 36(2)(I), WE ARE OF THE CONSIDERED VIEW THAT AO HAS RIGHTLY DISALLOWED THE SAME UNDER THIS PROVISION. MOREOVER, IT IS NOT THE ASSESSEES CASE THAT THE AS SESSEES CLAIM IS TO BE ALLOWED U/S 36(2)(I) OF THE ACT. THE ASSESSEE H AS CLAIMED BEFORE THE CIT(A) THAT THE CLAIM IS TO BE ALLOWED WITHIN T HE MEANING OF SECTION 28/37(1) OF THE ACT INASMUCH AS THE AMOUNTS WHICH W ERE WRITTEN OFF WERE ADVANCES TO STAFF AND ADVANCES GIVEN TO SUPPLI ERS ETC. HOWEVER, THE AO DID NOT EXAMINE THE ISSUE FROM THE POINT OF VIEW OF THE PROVISIONS CONTAINED IN SECTION 28/37(1) OF THE ACT . THE LEARNED CIT(A) HAS ALLOWED THE ASSESSEES CLAIM MERELY BY INVOKING SECTION 37(1) OF THE ACT WITHOUT EXAMINING THE CORRECTNESS OF THE AS SESSEES SUBMISSION WHETHER THE AMOUNT OF `1,13,05,316/- ACT UALLY REPRESENTED THE ADVANCES GIVEN TO STAFF AND SUPPLIERS IN THE CO URSE OF BUSINESS ON REVENUE ACCOUNT. WHEN THESE AMOUNTS WERE ACTUALLY GIVEN, THE PURPOSE FOR WHICH THE AMOUNTS WERE GIVEN AND WHY TH E AMOUNTS HAVE ITA-1112/DEL/2008 5 NOT BEEN ABLE TO BE RECOVERED HAS NOT BEEN DELIBERA TED UPON BY THE CIT(A). IN OTHER WORDS, THE FACTS OF THE CASE HAVE NOT BEEN PROPERLY AND CORRECTLY VERIFIED BY THE LEARNED CIT(A) BEFORE DELETING THE ADDITIONS MERELY BY INVOKING PROVISIONS OF LAW AND WITHOUT CONSIDERING THE DETAILS OF THE ADVANCES. WE, THEREFORE, RESTOR E THE MATTER BACK TO THE FILE OF THE AO FOR HIS FRESH CONSIDERATION AND TO EXAMINE THE ASSESSEES CLAIM FROM THE POINT OF VIEW OF SECTION 28/37(1) OF THE ACT WHICH WAS NOT EXAMINED BY THE AO WHILE MAKING THE A SSESSMENT. THE AO SHALL PROVIDE REASONABLE OPPORTUNITY OF BEING HE ARD TO THE ASSESSEE. THE ASSESSEE SHALL PRODUCE BEFORE THE AO ALL SUCH DETAILS AND MATERIALS TO PROVE AND ESTABLISH THAT THE AMOUN T OF `1,13,05,316/- WAS MADE ON REVENUE ACCOUNT IN THE COURSE OF BUSINE SS ACTIVITIES AND AMOUNT COULD NOT BE RECOVERED SUBSEQUENTLY DURING T HE YEAR UNDER CONSIDERATION. THE MATTER SHALL REMAIN OPEN BEFORE THE AO TO DECIDE THE SAME IN THE LIGHT OF THE PROVISIONS OF SECTION 28/37(1) OF THE ACT AND IN THE LIGHT OF THE FACTS OF THE PRESENT CASE. WE ORDER ACCORDINGLY. 10. GROUND NO.2 RAISED BY THE REVENUE IS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.1,59,28,955/- MADE BY THE AO ON ACCOUNT OF THE INTEREST AND FINANCIAL CHARGES. 11. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT ASSESSEE HAD DEBITED A SUM OF `1,59,28,955/- O N ACCOUNT OF INTEREST AND FINANCIAL CHARGES AS COMPARED TO PRECE DING YEARS FIGURE OF `1,53,99,329/-. THE AO STATED THAT THE INCREASE IN THE ASSESSEES INTEREST LIABILITY WAS INDEED INTRIGUING AS THE ASS ESSEE HAD SOLD OF ITS DISTILLERY BUSINESS TO ITS SUBSIDIARY COMPANY W.E.F . 5.12.2002 AND IN THAT VIEW OF THE MATTER, THE LIABILITY TO PAY INTER EST SHOULD HAVE BEEN REDUCED CONSIDERABLY IN VIEW OF ASSESSEE EARNING A CAPITAL GAIN OF OVER `4 CRORES FROM THE TRANSFER OF ITS DISTILLERY BUSIN ESS. THE AO FURTHER ITA-1112/DEL/2008 6 NOTED THAT THE ASSESSEES INVESTMENT HAD INCREASED FROM `37,56,190/- TO `5,85,45,179/- WHICH INCLUDED 20,00,000 EQUITY S HARES OF NARANG DISTILLERY LTD., THE SAME SUBSIDIARY COMPANY TO WHO M THE ASSESSEE COMPANY HAD SOLD ITS DISTILLERY BUSINESS. THE AO F URTHER NOTED THAT THE ASSESSEE COMPANY HAD INVESTED A SUM OF `8,11,56,000 /- AS SHARE APPLICATION MONEY IN ONE OF ITS ASSOCIATE COMPANY N AMELY SOUTH AFRICAN BREWERIES (INDIA) PVT.LTD. IN THE LIGHT OF THESE FACTS, AO ASKED THE ASSESSEE TO JUSTIFY ITS CLAIM OF INTEREST AND F INANCIAL CHARGES. IN REPLY, THE ASSESSEE STATED THAT THERE WAS NO QUESTI ON OF ANY NEXUS BETWEEN THE INVESTMENT MADE BY THE ASSESSEE AND THE INTEREST BEARING LOANS AS THE INVESTMENT IN NARANG DISTILLER Y LTD. WAS IN LIEU OF THE SALES CONSIDERATION OF THE BUSINESS SOLD BY THE ASSESSEE TO THE SAID CONCERN. THE ASSESSEES REPLY WAS CONSIDERED BY TH E AO. THE AO HAD TAKEN A VIEW THAT IT WAS A COLOURABLE DEVICE BY THE ASSESSEE COMPANY TO SUBSIST ITS SUBSIDIARY COMPANY WHILE SADDLING IT SELF WITH HUGE FINANCIAL BURDEN. THE AO STATED THAT THE TRANSACTI ON OF TRANSFERRING ITS UNIT TO ITS SUBSIDIARY WAS A COLOURABLE DEVICE. HE FURTHER NOTED THAT INTEREST LIABILITY OF THE ASSESSEE COMPANY SHOULD H AVE BEEN REDUCED BUT PARADOXICALLY, IT HAS INCREASED SUBSTANTIALLY. THE AO, THEREFORE, DISALLOWED THE CLAIM OF INTEREST OF `1,59,28,955/-. 12. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPE AL BEFORE THE LEARNED CIT(A). 13. BEFORE THE LEARNED CIT(A), THE ASSESSEE SUBMITT ED THAT ASSESSEE TRANSFERRED ITS BREWERY BUSINESS DURING AY 2001-02 TO ITS SUBSIDIARY, NARANG DISTILLERY LTD., FOR `8,10,00,000/- AGAINST WHICH 1,34,400 EQUITY SHARES OF `10/- EACH FULLY PAID UP AGGREGATING TO ` 13,44,000/- WERE ALLOTTED BY NARANG DISTILLERY LTD., (LATER ON NAME CHANGED TO SOUTH AFRICAN BREWERIES INDIA PVT.LTD.) AND `7,96,56,000/ - WAS LEFT TOWARDS SHARE APPLICATION MONEY. SOUTH AFRICAN BREWERIES I NDIA PVT.LTD. WHO ITA-1112/DEL/2008 7 WANTED TO TAKE OVER NARANG BREWERIES LTD. TOOK CONT ROL OF NARANG BREWERIES LTD. BY PURCHASING ALL THE 1,34,400 EQUIT Y SHARES WERE SHOWN AS INVESTMENT WHERE NO CASH WAS REALIZED TILL AY 2003-04. HE FURTHER SUBMITTED THAT ASSESSEE HIVED OFF ITS DISTI LLERY UNIT TO NARANG DISTILLERY LTD. ON 5.12.2002 AGAINST WHICH 19,50,00 0 EQUITY SHARES OF NARANG DISTILLERY LTD. OF `10/- EACH AMOUNTING TO ` 5,58,67,500/- WERE ALLOTTED AND THE TOTAL INVESTMENT OF THE ASSESSEE I N NARANG DISTILLERY LTD. WAS THUS `5,63,67,500/-. THE ASSESSEE SOLD TH ESE SHARES FOR `6 CRORES DURING THE AY 2004-05. HE, THEREFORE, CLARI FIED THAT NO CASH WAS REALIZED ON SALE OF DISTILLERY BUSINESS TILL AY 200 3-04. HE FURTHER POINTED OUT THAT THE ASSESSEE HAD BORROWED THE MONE Y IN THE EARLIER YEARS AND INTEREST OF `1,53,99,329/- WAS CLAIMED IN THE PRECEDING YEAR AND SUM OF `1,59,28,955/- HAS BEEN CLAIMED IN THE C URRENT YEAR. HE, THEREFORE, SUBMITTED THAT THE AMOUNT BORROWED IN TH E EARLIER YEARS HAD NO NEXUS WITH THE ASSESSEES TRANSFER OF ITS UNIT T O NARANG DISTILLERY LTD. OR NARANG BREWERIES LTD. HE FURTHER SUBMITTED THAT THE INTEREST AND FINANCIAL CHARGES AMOUNTING TO `1,59,28,955/- W ERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. HE FURTHER SUBMITTED THAT THE AOS ALLEGATION THAT TRANSACTION OF SALE OF BUSINESS IS A COLOURABLE DEVICE IS NOT BASED ON ANY EVIDENCE S BUT WITHOUT ANY BASIS AND IT IS ONLY THE AOS OPINION BASED ON SURM ISES AND CONJECTURES. HE FURTHER POINTED OUT THAT ASSESSEE HIVED OFF ITS DISTILLERY UNIT ONLY ON 5.12.2002 AND THEREFORE, INTEREST FOR 8 MONTHS HAD NO NEXUS TO THE ASSESSEES TRANSFER OF DISTILLERY BUSI NESS ON 5.12.2002. 14. ALL THESE SUBMISSIONS OF THE ASSESSEE AS WELL A S AOS ORDER WERE CONSIDERED BY THE CIT(A) AND AFTER CONSIDERING THE SAME, THE CIT(A) DELETED THE ADDITION BY GIVING THE FOLLOWING FINDIN GS:- I HAVE GONE THROUGH THE ORDER OF THE AO AND THE WR ITTEN SUBMISSION OF THE APPELLANT AND CASE LAWS CITED BY THE APPELLANT. THE AO, WHILE DISALLOWING THE INTEREST AND ITA-1112/DEL/2008 8 FINANCIAL CHARGES AMOUNTING TO RS.1,59,28,955/- ALL EGED THAT THE WHOLE TRANSACTION OF THE SALE OF BUSINESS IS A COLOURABLE DEVICE AND A SHAM TRANSACTION. THE APPE LLANT HAS CONTENDED THAT THE AO HAS NOT SUBSTANTIATED THE SAID ALLEGATION BY ANY EVIDENCE. IN FACT, HE HAD EXAMI NED THE BOOKS OF ACCOUNTS OF THE APPELLANT COMPANY AND HAS NOT GIVEN ANY ADVERSE FINDING ON THAT. IN REALITY, ON THE SALE OF BUSINESS NO CASH TRANSACTION TOOK PLACE. NEITHER A NY SHARE APPLICATION MONEY WAS PAID. THE INTEREST WAS PAID FOR THE MONEY BORROWED RELATING TO THE BUSINESS OF THE APPE LLANT OF THE EARLIER YEARS. INTEREST HAS BEEN CLAIMED AN D HAS ALSO BEEN ALLOWED IN EARLIER YEARS. THERE HAS BEEN NO CHANGE IN THE FACTS OF THE CASE AS COMPARED TO THE EARLIER YEARS. THE AO ALSO FAILED TO APPRECIATE THE FACT T HAT THE BUSINESS OF THE APPELLANT RELATING TO DISTILLERY WA S HIVED OFF ONLY ON 5-12-2002 I.E. AFTER RUNNING THE BUSINESS F ORE MORE THAN 8 MONTHS. THEREFORE, DISALLOWING THE INTEREST EXPENDITURE INCURRED DURING THE SAID PERIOD IS NOT JUSTIFIED. THE AO TREATED THE TRANSACTION AS A COLOURABLE DEVI CE AND AT THE SAME TIME HAS ALSO ACCEPTED THE TRADING RESU LTS, BOOKS OF ACCOUNTS AND THE CAPITAL GAINS AND DEPRECI ATION SCHEDULE DECLARED BY THE APPELLANT ON ACCOUNT OF TH E SALE OF BUSINESS. THE CONCLUSION REACHED IS CONTRADICTO RY IN NATURE. IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND VARIOUS CASE LAWS CITED ABOVE, I AM OF THE OPIN ION THAT INTEREST EXPENDITURE INCURRED TILL THE DATE OF SALE OF BUSINESS I.E. 5-12-2002 SHOULD HAVE BEEN ALLOWED. THE DISALLOWANCE MADE TO THE TUNE OF RS.1,59,28,955/- I S, THEREFORE, DELETED. 15. HENCE, THE DEPARTMENT IS IN APPEAL BEFORE US. 16. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. 17. THE ASSESSEE HIVED OFF ITS DISTILLERY BUSINESS ON 5.12.2002 FOR A TOTAL CONSIDERATION OF `781.31 LAKHS. AGAINST THE SALE CONSIDERATION, THE ASSESSEE WAS ALLOTTED 19,50,000 EQUITY SHARES O F `10/- EACH AT A PRICE OF `28.65 AGGREGATING TO `558.68 LAKHS. THIS WAS SHOWN AS INVESTMENT IN THE BALANCE SHEET. THE SUM OF `189.8 5 LAKHS WERE RECEIVED BY THE ASSESSEE AND SUM OF `32.78 LAKHS WA S ADJUSTED FOR ON ITA-1112/DEL/2008 9 ACCOUNT PAYMENTS. THE ASSESSEE HAS CLAIMED THE INT EREST ON THE LOANS AND BORROWINGS TAKEN EARLIER FOR THE PURPOSE OF BUS INESS. THE INTEREST HAS BEEN CLAIMED AND ALLOWED IN THE EARLIER YEARS. THE AO HAS ALSO FAILED TO APPRECIATE THE FACT THAT THE BUSINESS OF THE ASSESSEE RELATING TO DISTILLERY WAS HIVED OFF ONLY ON 5.12.2002 I.E. AFTER RUNNING THE BUSINESS FOR MORE THAN 8 MONTHS. THEREFORE, DISALL OWING THE INTEREST EXPENDITURE INCURRED DURING THE SAID PERIOD OF 8 MO NTHS IS NOT AT ALL JUSTIFIED. IT IS NOT THE CASE OF THE AO THAT THE L OAN BORROWED FOR THE PURPOSE OF BUSINESS HAS BEEN DIVERTED FOR NON-BUSIN ESS PURPOSE DURING THE YEAR UNDER CONSIDERATION. THE REASONS GIVEN BY THE AO IN DISALLOWING THE INTEREST EXPENSES IS TOTALLY IRRELE VANT INASMUCH AS THE SALE OF ASSESSEES DISTILLERY BUSINESS HAS NOTHING TO DO WITH THE INTEREST PAID ON BORROWED MONEY TAKEN IN EARLIER YEARS. IN THIS VIEW OF THE MATTER, WE ARE THEREFORE IN FULL AGREEMENT WITH THE CIT(A) IN DELETING THE ADDITION. THUS, GROUND NO.2 RAISED BY THE REVE NUE IS REJECTED. 18. GROUND NO.3 IS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.65,62,103/- MADE BY THE AO ON ACCOUNT OF GRATUIT Y PAYABLE. 19. IN THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS FOUND BY THE AO THAT ASSESSEE IN THE COMPUTATION OF INCOME HAD CLAI MED A DEDUCTION OF `65,62,103/- ON ACCOUNT OF PROVISION FOR GRATUITY N OT CLAIMED IN THE EARLIER YEAR. THE AO STATED IN THE ASSESSMENT ORDE R THAT THE CLAIM FOR GRATUITY WAS MADE ON THE GROUND THAT BY VIRTUE OF T HE BUSINESS TRANSFER AGREEMENT OF ITS DISTILLERY UNIT, ALL ITS EMPLOYEES STOOD DEEMED RETIRED. THE ASSESSEE SUBMITTED THAT THE GRATUITY OF THE EMPLOYEES UPTO 5.12.2002 WAS ASCERTAINED AND TRANSFERRED TO N ARANG DISTILLERY LTD. TO BE ADJUSTED AGAINST THE SALE CONSIDERATION. THE ASSESSEE COMPANY FURTHER STATED THAT WHAT IS DISALLOWABLE U/ S 40A(7) IS THE ITA-1112/DEL/2008 10 PROVISION FOR GRATUITY AND NOT THE GRATUITY WHICH B ECOMES PAYABLE DURING THE YEAR WHETHER ACTUALLY PAID OR NOT. THE REPLY OF THE ASSESSEE WAS CONSIDERED BY THE AO AND IN THE LIGHT OF THE SP ECIFIC PROVISIONS CONTAINED IN SECTION 43B(B), THE AO DISALLOWED THE ASSESSEES CLAIM BY OBSERVING THAT ANY SUM PAYABLE BY THE ASSESSEE AS A N EMPLOYER BY WAY OF GRATUITY FUND OR ANY OTHER FUND FOR THE WELF ARE OF THE EMPLOYEE WAS ALLOWABLE ONLY IF IT WAS ACTUALLY PAID. 20. ON AN APPEAL, CIT(A) ALLOWED THE ASSESSEES CLA IM BY OBSERVING AS UNDER:- I HAVE GONE THROUGH THE ORDER OF THE AO AND THE WR ITTEN SUBMISSION OF THE APPELLANT AND CASE LAWS CITED BY THE APPELLANT. THE AO HAS FAILED TO APPRECIATE THAT AS FAR AS THE APPELLANT WAS CONCERNED, THE APPELLANT DISCHARG ED ITS LIABILITY TOWARDS ITS EMPLOYEES AND THAT THE AMOUNT OF GRATUITY ALSO GOT ADJUSTED FROM THE SALE CONSIDERAT ION. THE AMOUNT DISCHARGED WAS RELATING TO THE BUSINESS OF T HE APPELLANT AND WAS ALLOWABLE IN FULL AS PER THE LAW. THE ENTIRE LIABILITY TOWARDS EMPLOYEES TRANSFERRED TO N ARANG DISTILLERY LIMITED WAS TAKEN OVER BY NARANG DISTILL ERY LIMITED INCLUDING THEIR GRATUITY. IT HAS BEEN HELD IN THE CASE OF H.L.TANEJA V. ACIT 2006 7 SOT 387 THAT THE GRATUITY PAID BY THE APPELLANT TO THE EMPLOYEE ON H IS RETIREMENT COULD NOT BE DISALLOWED EVEN IF THE BUSI NESS HAD BEEN SOLD TO ANOTHER COMPANY. THEREFORE, THE G RATUITY PAID DURING THE YEAR WAS DEDUCTIBLE. IN VIEW OF THE ABOVE, THE DISALLOWANCE MADE TO THE TUNE OF RS.65,62,103/- IS DELETED. 21. WE HAVE HEARD BOTH THE PARTIES AND HAVE GONE TH ROUGH THE ORDERS OF AUTHORITIES BELOW. 22. IN THE COURSE OF HEARING, THE ASSESSEE HAS RELI ED UPON THE DECISION OF ITAT MUMBAI IN THE CASE OF J.R.DIAMONDS LTD. VS. ACIT 70 ITD 42. IN THAT CASE, IT WAS FOUND BY THE TRIBUNAL THAT THE ASSESSEE AT THE INSTANCE AND CONSENT OF THE EMPLOYEES PAID GRAT UITY AMOUNTS DUE ITA-1112/DEL/2008 11 TO THE EMPLOYEES TO THE TRANSFEREE UNIT FOR THE BEN EFIT OF THE EMPLOYEES. HOWEVER, IN THE PRESENT CASE, NO SUCH D ETAILS HAVE BEEN PRODUCED BEFORE US AND IT IS NOT CLEAR AS TO WHETHE R THE GRATUITY PAYABLE BY THE ASSESSEE TO THE EMPLOYEES WAS TRANSF ERRED TO THE TRANSFEREE AT THE CONSENT OF THE EMPLOYEES AND WHET HER THE EMPLOYEES HAD ADMITTED THE RECEIPT OF THE PAYMENT. IT IS ALSO NOT CLEAR WHETHER THE VARIOUS EMPLOYEES OF THE ASSESSEE WERE ACTUALLY STOOD RETIRED ON THE DAY WHEN THE ASSESSEE TRANSFER RED ITS UNIT TO THE TRANSFEREE OR WHETHER THE PAYMENT WAS MADE IN THE N ATURE OF RETRENCHMENT COMPENSATION. THE LEARNED CIT(A) HAS DELETED THE ADDITION BY PASSING A VERY SHORT AND SUMMARY ORDER WITHOUT BRINGING ON RECORD ALL THE FACTS OF THE CASE AND THE AGREEME NT ENTERED INTO BY THE ASSESSEE WITH THE EMPLOYEES. THE VARIOUS DECIS IONS RELIED UPON BY THE ASSESSEE WERE RENDERED IN THE CONTEXT OF FACTS OF THOSE CASES. MOREOVER, THE LEARNED CIT(A) HAS FAILED TO TAKE NOT E OF THE FACT THAT THE ISSUE IS TO BE DECIDED IN THE LIGHT OF THE PROVISIO NS CONTAINED IN SECTION 40A(7) READ WITH SECTION 43B ALSO. THE SCOPE OF DE DUCTIBILITY OF PAYMENTS TOWARDS GRATUITY HAS BEEN CONSIDERABLY ALT ERED AFTER THE FINANCE ACT, 1983 WHICH INSERTED SECTION 43B W.E.F. 1 ST APRIL, 1984. IN ORDER TO DECIDE THE DEDUCTIBILITY OF PAYMENTS TOWAR DS GRATUITY, THE PROVISIONS OF SECTION 36(1)(IV) & (V), 40A(7) AND 4 3B HAVE ALL TO BE READ TOGETHER. IT IS NOT IN DISPUTE THAT BOTH SECT IONS 40A AND 43B HAVE NON-OBSTANTE CLAUSE OVERRIDING ALL OTHER PROVISIONS OF THE ACT WITH REGARD TO ALLOWABILITY OF ANY DEDUCTION COVERED BY SECTION 40A(7) AND 43B OF THE ACT, AND, THEREFORE, DECISIONS RENDERED PRIOR TO INSERTION OF SECTION 40A(7) AND 43B WOULD HAVE NO RELEVANCE TO T HE PRESENT CASE. SINCE ALL THE FACTS HAVE NEITHER BEEN BROUGHT BY TH E AO OR BY THE CIT(A) IN THEIR RESPECTIVE ORDERS NOR ASSESSEE HAS PRODUCED BEFORE US THE UNDERSTANDING OR AGREEMENT ARRIVED AT BETWEEN T HE ASSESSEE AND ITS EMPLOYEES, WE RESTORE THIS MATTER BACK TO THE F ILE OF THE AO FOR HIS FRESH ADJUDICATION AS PER LAW AFTER PROVIDING REASO NABLE OPPORTUNITY OF ITA-1112/DEL/2008 12 BEING HEARD TO THE ASSESSEE. THE ASSESSEE SHALL BE AT LIBERTY TO PLACE ALL HIS SUBMISSIONS AND CONTENTIONS BEFORE THE AO S UPPORTED BY ANY DECISIONS THAT ASSESSEE MAY WISH TO RELY. WE ORDER ACCORDINGLY. 23. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED IN THE MANNER AS INDICATED ABOVE FOR STATISTICAL PURPO SES. DECISION PRONOUNCED IN THE OPEN COURT ON 8 TH APRIL, 2011. SD/- SD/- (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA (G.E.VEERABHADRAPPA) )) ) (C.L.SETHI (C.L.SETHI (C.L.SETHI (C.L.SETHI) )) ) VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT VICE PRESIDENT JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER DATED : 08.04.2011. VK. COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT ASSISTANT REGISTRAR ITA-1112/DEL/2008 13