M/s. Karnataka Castings, CHENNAI V. ACIT, CHENNAI

ITA 1124/CHNY/2011

• Counselvise Citation: 112421714 RSA 2011
• Duration Of Justice: 1 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-06-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 25-06-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 16-06-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JR
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Cost of acquisition
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D B ENCH C HENN AI BEFORE DR.O.K.NARAYANAN, VICE PRESIDENT AND SHRI S.S.GODARA , JUDICIAL MEMBER .. ITA NO.1124 /MDS./2011 ASSESSMENT YEAR:2007 - 08 M/S.KARNATAKA CASTINGS, 348 A,MADHAVARAM RED HILLS HIGH ROA D, MADHAVARAM, CHENNAI 60 VS. ASSISTANT COMMISSIONER OF INCOME TAX, BUSINESS CIRCLE - XI CHENNAI - 6. PAN AAKFK 0529 P (APPELLANT) (RESPONDENT) ITA NO.1195 /MDS./2011 ASSESSMENT YEAR:2007 - 08 ASSISTANT COMMISSIONER OF INCOME TAX, BUSINESS C IRCLE - XI CHENNAI - 6. VS. M/S.KARNATAKA CASTINGS, 348 A,MADHAVARAM RED HILLS HIGH ROAD, MADHAVARAM, CHENNAI 60 PAN AAKFK 0529 P (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI LAKS HMICHAND NAHATA , CHARTERED ACCOUNTANT DEPARTMENT BY : SHRI K E B RENGARAJAN, JR. STANDING COUNSEL DATE OF HEARING : 25 .0 6 .12 DATE OF PRONOUNCEMENT : 25 .0 6 .12 2 O R D E R PER SHRI S.S.GODARA , JUDICIA L MEMBER : THESE CROSS APPEALS FILED BY ASSESSEE AND REVENUE ARISE OUT OF COMMON ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - IV, CHENNAI IN CASE NO.ITA NO.233/09 - 10/A - IV DATED 25.03.2011 . THESE CROSS APPEALS ARISE OUT OF THE REGULAR ASSESSMENT COMPLETED UNDER SECTION 143(3) OF THE INCOME TAX ACT, 1961. THE RELEVANT ASSESSMENT YEAR IS 2007 - 08. 2. THE ASSESSEE IS A FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING ALUMINIUM INGOTS . THE ASSESSEE HAS RETURNED A TOTAL INCOME OF ` 42,82,140/ - . I N THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING AUTHORITY MADE CERTAIN DISALLOWANCE AND ADDITION TOTAL OF ` 3,35,87,052/ - . THUS, THE A.O. HAS DETERMINED THE TOTAL INCOME OF ` 3,78,70,092/ - AS AGAINST RETURNED INCOME OF ` 42,82,140/ - . 3. THE ASSESSE E HAD PURCHASED CERTAIN MACHINERIES FROM SINGAPORE. IT HAD CLAIMED DEPRECIATION ON THESE MACHINERIES. THE A.O. FOUND THAT TH E MACHINERIES USED BY ASSESSEE IN ITS BUSINESS FOR A PERIOD OF LESS THAN 180 DAYS. THEREFORE, HE HELD THAT ASSESSEE WAS ENTITLED O NLY FOR 50% OF ACTUAL DEPRECIATION. 3 WHEREAS THE ASSESSEE HAD CLAIMED DEPRECIATION FOR THE WHOLE YEAR. THEREFORE, HE DISALLOWED 50% OF ASSESSEE S CLAIM AND MADE ADDITION OF ` 9,30,039/ - . 4. IN ITS COMPUTATION OF INCOME, THE ASSESSEE HAD CLAIMED ` 6,15, 360/ - AS EXCHANGE FLUCTUATION RELATED TO THE PAYMENTS MADE BY THE ASSESSEE AGAINST PURCHASE OF MACHINERIES FROM SINGAPORE. THE A.O. OBSERVED THAT THE ABOVE FOREIGN EXCHANGE FLUCTUATION PAYMENT RELATED TO ACQUISITION OF CAPITAL ASSET, WHICH FORM ED PART OF THE COST OF ACQUISITION OF MACHINERIES AND COULD NOT BE CLAIMED AS A DEDUCTION. ACCORDINGLY, HE DISALLOWED SAID SUM OF ` 6,15,360/ - AS WELL. 5. THE ASSESSEE HAD ALSO CLAIMED FOREIGN TRAVEL AND SALE PROMOTION EXPENSES AS DEDUCTIONS. THE A.O. OBSERVED THA T AN ELEMENT OF PERSONAL ENJOYMENT CANNOT BE EXCLUDED IN THESE ITEMS. SO, THE EXPENDITURE CLAIMED B Y ASSESSEE UNDER ABOVE HEADS COULD NOT BE ALLOWED AS EXPENDITURE . THE A.O. THEREFORE, DISALLOWED 10% OF THOSE EXPENSES WHICH AMOUNTED TO ` 3,87,908/ - . THE ASSESSING AUTHORITY ALSO DISALLOWED REMUNERATION PAID TO WORKING PARTNERS OF ` 27 LAKHS. THE DISALLOWANCE HAD BEEN MADE BY A.O. FOR THE REASON THAT THE 4 PARTNERSHIP DEED NEITHER QUANTIFIED THE REMUNERATION PAYABLE TO WORKING PARTNER NOR THE LIMIT U P TO WH ICH SUCH REMUNERATION COULD BE PAID. ALL THESE MATTERS WERE LEFT OPEN TO BE DETERMINED AT THE END OF PREVIOUS YEAR . 6. BESIDES THIS T HE ASSESSEE HAD DEBITED ` 5,03,67,445/ - TOWARDS CONVERSION CHARGES DUE TO M/S.BANGALORE CASTING AND RECYCLING AND M/S. IMAC ALLOY CASTINGS. THE A.O. NOTICED THAT THE ASSESSEE HAD DEDUCTED TAX AT SOURCE FOR AN AMOUNT OF ` 2,14,12,8 00/ - AND N O TDS WAS DEDUCTED IN RESPECT OF THE BALANCE OF ` 2,89,54,645/ - . THEREFORE, THIS CLAIM WAS DISALLOWED UNDER SECTION.40(A)(IA). 7. T HIS IS H OW THE A.O. HAS MADE A TOTAL ADDITION OF RS.3,35,87,952/ - . 8. THESE DISALLOWANCES WERE TAKEN IN APPEAL BEFORE CIT(A). THE CIT(A) CONFIRMED 50% DISALLOWANCE OF DEPRECIATION OF RS.9,30,039/ - . 9. IN RESPECT OF DISALLOWANCE UNDER SECTION.40(A)( IA), THE CI T(A) OBSERVED THAT DISALLOWANCE W OULD BE APPLICABLE ONLY IN 5 RESPECT OF AMOUNT PAYABLE BY THE ASSESSEE AS ON CLOSE OF THE PREVIOUS YEAR AND DISALLOWANCE WOULD NOT APPLY TO THE AMOUNTS ALREADY PAID BY THE ASSESSEE. WITH THIS DIRECTION, HE PA RTLY ALLOWED ASSESSEE S CLAIM. 10. THE CIT(A) FURTHER OBSERVED THAT GROUNDS RAISED BY THE ASSESSEE IN RESPECT OF LEVY OF INTEREST UNDER SECTION.24 B , C ARE ONLY CONSEQUENTIAL IN NATURE. 11. IT IS IN VIEW OF THIS BACKDROP THAT T HE ASSESSEE AS WELL AS THE REVENUE ARE AGGRIEVED IN THE ORDER OF CIT(A) AND THEREFORE THESE SECOND APPEALS BEFORE US. 12. THE GROUNDS RAISED BY THE ASSESSEE IN ITS APPEAL RELATE TO THE FOLLOWING ISSUES: - I) PARTIAL DISALLOWANCE OF DEPRECIATION II) DISALLOWANCE OF FOREIGN EXCHA NGE FLUCTUATION LOSS III) D ISALLOWANCE TOWARDS PERSONAL EXPENSES IV) D ISALLOWANCE OF PARTNER S REMUNERATION V) D ISA LLOWANCE UNDER SECTION 40(A) (IA) 6 13. IT IS THE CASE OF THE ASSES SEE THAT GENUINENESS AND DATE OF PURCHASE WAS NOT DISPUTED. ONCE THE MACHIN ERIES ARE PURCHASED, THEY FORM PART OF THE BLOCK OF ASSET . THEREFORE, THE CLAIM OF DEPRECIATION SHOULD HAVE BEEN ALLOWED IN FULL. REGARDING FOREIGN EXCHANGE LOSS, IT IS THE CASE OF THE ASSESSEE THAT LOSS WAS INCURRED FOR THE PURPOSE OF BUSINESS AND THE REFORE THE CLAIM SHOULD HAVE BEEN ALLOWED. THE ASSESSEE FURTHER CONTENDS THAT THE FOREIGN TRAVEL EXPENSES AND SALES PROMOTION EXPENSES WERE WHO LLY INCURRED FOR THE PURPOSE OF BUSINESS AND THERE IS NO JUSTIFICATION TO DISALLOW ANY PORTION OF THESE CLAIMS M ADE BY THE ASSESSEE. THE ASSESSEE FURTHER CONTENDS THAT THE REMUNERATION PAID TO THE WORKING PARTNER SHOULD ALSO HAVE BEEN ALLOWED AS PROVIDED IN THE STATUTE. IT IS THE CASE OF THE ASSESSEE THAT THE ENTIRE CONVERSION CHARGES SHOULD HAVE BEEN ALLOWED AS S EC.194 DOES NOT APPLY TO THE FACTS OF THE CASE. 14. IN THE REVENUE S CROSS APPEAL, THE ONLY ISSUE RAISED IS AGAINST THE DISALLOWANCE MADE BY ASSESSING OFFICER UNDER SECTION 40(A)(IA). IT IS THE CASE OF THE REVENUE THAT CIT(A) HAS ERRED IN RESTRICTING T HE DISALLOWANCE ONLY TO THE AMOUNT PAYABLE BY THE ASSESSEE ON THE CLOSE OF YEAR. 7 15. WE HAVE HEARD SHRI K E RENGARAJAN, LEARNED STANDING COUNSEL APPEARING FOR REVENUE AND SHRI L.C. NAHATA, LEARNED C.A., FOR ASSESSEE. 16. FIRST WE WILL CONSIDER THE Q UESTION OF DISALLOWANCE MADE UNDER SECTION.40(A)(IA) . THE SPECIAL BENCH OF ITAT VIS AKAPATNAM, IN CASE OF MERILYN SHIPPING & TRANSPORTS REPORTED IN (2012) 16 ITR (TRIB.) 1 (SB) HAS CONSIDERED THE QUESTION OF DISALLOWANCE TO BE MADE UNDER SECTION.40(A)(IA) FOR NOT DEDUCTING TAX AT SOURCE IN THE LIGHT OF EXPRESSION PAYABLE REFLECTED IN PROVISION OF STATUTE. THE SPECIAL BENCH HELD THAT THE EXPRESSION PAYABLE NEEDS TO BE LITERALLY INTERPRETED AND THEREFORE, THE DISALLOWANCE COULD BE MADE ONLY IN RESPECT OF TH E AMOUNT PAYABLE BY ASSESSEE AT THE END OF THE PREVIOUS YEAR. THERE CANNOT BE A DISALLOWANCE IN THE CASE OF AMOUNTS ALREADY PAID BY ASSESSEE BEFORE 31 ST OF MARCH OF PREVIOUS YEAR. 17. IN VIEW OF THE ABOVE SPECIAL BENCH DECISION, THE CIT(A) HAS RIG HTLY HELD THAT THE DISALLOWANCE UNDER SECTION 40(A)(IA) MAY BE LIMITED TO THE AMOUNT PAYABLE ON THE CLOSE OF PREV IOUS YEAR. THIS IS THE ONLY ISSUE RAISED IN REVENUE S APPEAL. THEREFORE, THE APPEAL FILED BY REVENUE IS DISMISSED. 8 18. NOW, IN THE ASSESSE E S APPEAL, ANOTHER ASPECT OF DISALLOWANCE UNDER SECTION 40(A)(IA) HAS TO BE CONSIDERED. IT IS LD. A.R S CASE THAT THE PAYMENTS ARE REGARDING CONVERSION CHARGES AS WELL AS PAYMENTS AGAINST SUPPLY OF MATERIAL AND LAB O U R . PER HIM, SECTION 194 DOES NO T APPLY TO PAYMENTS TO PROCURING MATERIALS AND THEREFORE, QUESTION OF TDS DOES NOT ARISE IN THAT CASE. HE ARGUED THAT TDS IS APPLICABLE ONLY TO THAT PAYME NT MADE AGAINST SERVICE OF LAB O U R. 19. IN PRINCIPLE, WE ACCEPT THIS CONTENTION OF ASSESSEE . THE P AYMENTS MADE AGAINST SUPPLY OF MATERIALS DO NOT COME UNDER TDS REGIME, WHICH APPLY ONLY TO LAB O U R S PAYMENTS. WE FIND THAT THIS ASPECT WAS NOT C ONSIDERED BY CIT()A AS WELL. SO ALSO , NECESSARY DETAILS ARE NOT AVAILABLE FROM THE RECORD PLACED BEFORE US. 20. THEREFORE, THE QUESTION OF DECIDING THE NATURE OF PAYMENTS IS REMITTED BACK TO ASSESSING OFFICER FOR AFRESH CONSIDERATION AFTER GIVING ASSESSEE ADEQUATE OPPORTUNITY OF BEING HEARD. THE A.O. IS DIRECTED TO SEGREGATE PAYMENTS RELATING TO SUPPLY OF MATE RIAL AND SUCH PAYMENTS SHALL BE EXCLUDED FROM APPLYING 9 SEC 40(A)(IA). NO DISALLOWANCE CAN BE MADE AS PAYMENTS AS PAYMENT FOR SUPPLY OF MATERIAL. THE ASSESSING OFFICER SHALL APPLY PROVISIONS OF SEC.40(A)(IA) IN RESPECT OF LABOU R PAYMENTS. IN THAT CASE ALSO, HE SHALL FOLLOW THE DECISION OF SPECIAL BENCH (SUPRA) AN D CONFIRM DISALLOWANCE TO THE AMOUNT PAYABLE BY THE END OF PREVIOUS YEAR. 21. NEXT WE CONSIDER ASSESSEE S CONTENTION AGAINST DISALLOWANCE OF DEPRECIATION. FROM THE ORDER OF LOWER AUTHOR ITIE S, THE FACTS ARE NOT CLEAR IN THE PERIOD FOR WHICH THE MACHINERY HAD BEEN USED BY THE ASSESSEE. THE DISCUSSION IN ASSESSMENT ORDER AND DATE OF ACQUISITION OF MACHINES IS NON - SPEAKING. THEREFORE, THIS ISSUE IS ALSO REMITTED BACK TO A.O. TO WORK OUT THE PE RIOD ELIGIBLE FOR DEPRECIATION. AFTER ASCERTAIN THE ELIGIBLE PERIOD, THE A.O. MAY ALLOW DEPRECATION EITHER IN FULL OR IN PART, IN ACCORDANCE WITH LAW. 22. REGARDING GROUNDS RAISED BY ASSESSEE AS LEVY OF INTEREST UNDER SECTION.234 B, 234C, THE SAME ARE ON LY CONSEQUENTIAL AND NO INDEPENDENT ADJUDICATION IS CALLED FOR. 10 23. THE REMAINING GROUNDS RAISED BY ASSESSEE IN ITS APPEAL AGAINST DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LOSS, PARTIAL DISALLOWANCE OF FOREIGN TRAVEL AND SALES PROMOTION EXPENSES, DI SALLOWANCE OF PARTNERS R EMUNERATION ARE NOT MAINTENABLE BEFORE TRIBUNAL. THIS IS BECAUSE THESE GROUNDS WERE NOT RAISED BY ASSESSEE BEFORE CIT(A). TH E GROUNDS NOT RAISED AND ADJUDICATED BEFORE CIT(A) CANNOT BE RAISED IN APPEAL BEFORE US ESPECIALLY WHEN ALL THESE GROUNDS INVOLVE QU ESTION OF FACTS. THEREFORE, THE SE GROUNDS ARE DISMISSED AS NOT MAINTAINABLE . 24 . IN THE RESULT, THE REVENUE S APPEAL IS DISMISSED, AND ASSESSEE S APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED I N THE OPEN COURT A FTER CONCLUSION OF HEARING ON MONDAY, THE 25 TH JUNE , 2012. SD/ - SD/ - ( DR .O.K.NARAYANAN) ( S.S.GODARA ) VICE PRESIDENT JUDICIAL MEMBER CHENNAI, DATED THE 25 TH JUNE , 2012 . K S SUNDARAM COPY TO: ASSESSEE / AO / CIT (A) / CIT / D.R. / GUARD FILE 11