Western India Ceramics Pvt. Ltd., Dist. Baroda. V. The Dy. CIT., Cent. Circle-2, Dist. Baroda.

ITA 1591/AHD/2004

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8959 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 4 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 08-09-2009
• Assessment Year: 1994-1995
• Appeal Filed On: 11-05-2004
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B S SANDHU
• Assessee Lawyers: B D KARIA
• Keywords: Revenue expenditure
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD D BENCH (BEFORE S/SHRI R.V.EASWAR, VICE-PRESIDENT AND A.N. PAHUJA, ACCOUNTANT MEMBER) ITA NO.1591/AHD/2004 [ASSTT.YEAR : 1994-1995] WESTERN INDIA CERAMIC PVT. LTD. BARODA PADRA HIGHWAY ROAD CERAMIC NAGAR, PADRA DIST. BARODA. VS. DCIT, CENT.CIR.2 BARODA. ASSESSEE BY : SHRI B.D.KARIA REVENUE BY : SHRI B.S.SANDHU O R D E R PER R.V.EASWAR, VICE-PRESIDENT : THIS APPEAL BY THE ASSESSEE RELATE TO ASSESSMENT YEAR 1994-1995. THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN THE MANUFACTURE AND SALE OF TILE S. THE APPEAL ARISES OUT OF THE ASSESSMENT ORDER PASSED ON 30-3-2001 UNDER SECT ION 143(3) READ WITH SECTION 147 OF THE INCOME TAX ACT. 2. THE FIRST TWO GROUNDS ARE CONNECTED. IN THE FIR ST GROUND THE ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF THE CLAIM OF RS.1,81 ,72,261/- PERTAINING TO THE LIABILITY TO PAY GAS CHARGES TO ONGC. THE CLAIM IN THE GROUND IS THAT THE LIABILITY AROSE IN THE YEAR UNDER CONSIDERATION ON RECEIPT OF THE NOTICE DATED 1-4- 1993 SENT BY THE ADVOCATE OF ONGC AND ON THE INSTIT UTION OF THE CIVIL SUIT NO.421 OF 1993 ON 8-9-1993 BY THE ONGC AGAINST THE ASSESSEE FOR RECOVERY OF THE ABOVE CHARGES WITH THE INTEREST. IN THE SECOND GROUND THE INTEREST OF RS.3,05,07,711/- CLAIMED BY THE ONGC IN THE ABOVE S UIT IS CLAIMED AS DEDUCTION FOR THE YEAR UNDER APPEAL. 3. THE BRIEF FACTS IN RELATION TO THE AFORESAID GRO UNDS ARE THAT THE ASSESSEE USED THE GAS SUPPLIED BY ONGC IN THE PREVIOUS YEARS RELEVANT TO THE ASSESSMENT YEAR 1987-88 AND 1988-89 IN THE MANUFACT URING PROCESS. IT WOULD APPEAR THAT THERE WAS CONTRACT UNDER WHICH THE GAS WAS SUPPLIED TO THE ASSESSEE PAGE - 2 ITA NO.1591/AHD/2004 -2- WHICH INTER ALIA PROVIDED FOR THE RATE TO BE PAID BY THE ASSESSEE AS ALSO FOR ANY INCREASE THEREON. IT IS COMMON GROUND THAT IN THOS E YEARS THE ASSESSEE DID NOT CLAIM ANY DEDUCTION IN RESPECT OF THE INCREASED GAS CHARGES DEMANDED BY ONGC. THE ASSESSEE WOULD APPEAR TO HAVE PAID ONLY THE CHARGES DEMANDED AT THE OLD RATE AND THESE CHARGES WERE DEBITED TO THE PROFIT AND LOSS ACCOUNT FOR THOSE YEARS, BUT THE INCREMENTAL CHARGES FOR THOSE YEARS WERE NEITHER DEBITED IN THE PROFIT AND LOSS ACCOUNT NOR CLAIMED IN THE RETU RN OF INCOME. BE THAT AS IT MAY, THE DISPUTE BETWEEN ONGC AND THE ASSESSEE IN R ESPECT OF THE INCREMENTAL GAS CHARGES REACHED THE SUPREME COURT WHICH DISMISS ED THE SPECIAL LEAVE PETITION FILED BY THE ASSESSEE AGAINST THE ADVERSE JUDGMENT OF THE HIGH COURT ON 4-5-1990. THEREAFTER, THE ASSESSEE RECEIVED A LEGAL NOTICE FROM THE ADVOCATE OF ONGC ON 2-4-1993 (PAGES 96 TO 100). IN THIS NOTICE, THE ASSESSEE WAS CALLED UPON TO PAY RS.2,00,78,193/- ALONG WITH INTEREST AT THE RATE OF 21% PER ANNUM FROM THE DATE OF EACH INVOICE WITHIN 21 D AYS FROM THE RECEIPT OF THE NOTICE. THE ASSESSEE DID NOT PAY AS DEMANDED AND T HEREFORE ONGC FILED CIVIL SUIT NO.421 OF 1993 IN THE COURT OF CIVIL JUDGE (SD ) AT BARODA ON 8-9-1993. FROM THE COPY OF THE PLAINT PLACED AT PAGES 103 TO 112 OF THE PAPER BOOK IT IS SEEN THAT THE ONGC HAS CLAIMED RS.2,00,78,221/- AS AMOUNTS OUTSTANDING FOR THE SUPPLY OF GAS AND INTEREST OF RS.3,05,07,310/-. 4. IN THE ABOVE BACKGROUND, IN THE RETURN FILED FOR THE YEAR UNDER APPEAL, THE ASSESSEE CLAIMED DEDUCTION OF RS.1,18,17,226/- BEING ONGC GAS CHARGES UNPAID AND NOT CLAIMED IN THE RETURNS FILED FOR THE AYS.19987-88 AND 1988-89. THE CLAIM WAS SUPPORTED AND EXPLAINED IN THE EXPLAN ATORY NOTE FILED ALONG WITH RETURN OF INCOME AND PLACED AT PAGE 4 OF THE PAPER BOOK. THE INCOME TAX AUTHORITIES HAVE DISALLOWED THE CLAIM ON THE GROUND THAT THE ASSESSEE OUGHT TO HAVE CLAIMED IT IN THOSE YEARS IN WHICH THE LIABILI TY AROSE AND NOT IN THE YEAR UNDER CONSIDERATION. THIS REASONING IS QUESTIONED BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US ON THE FOOTING THAT IT IS OP EN TO THE ASSESSEE TO CLAIM THE DEDUCTION IN ANY ONE OF THE FOLLOWING YEARS: PAGE - 3 ITA NO.1591/AHD/2004 -3- A) IN THE YEAR IN WHICH THE GAS WAS CONSUMED OR ; B) IN THE YEAR IN WHICH THE SUPREME COURT DISMISSED TH E SLP OR; C) IN THE YEAR IN WHICH THE ASSESSEE RECEIVED THE DEMA ND FROM THE ADVOCATE OF ONGC OR; D) IN THE YEAR IN WHICH THE AMOUNT IS ACTUALLY PAID. IT IS ACCORDINGLY CONTENDED THAT SINCE THE YEAR UND ER APPEAL IS THE YEAR IN WHICH THE ASSESSEE RECEIVED THE NOTICE FROM THE ADVOCATE OF ONGC, THE LIABILITY TO PAY THE INCREMENTAL GAS CHARGES AND THE INTEREST CL AIMED BY ONGC BOTH ARE ALLOWABLE IN THE YEAR UNDER APPEAL. IT WAS ALSO ST ATED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE SUIT IS STILL PENDING. A S REGARDS THE INTEREST IT WAS CLARIFIED BY HIM THAT IT IS CLAIMED AS A PART OF TH E PURCHASE PRICE OF THE GAS UNDER SECTION 37(1), AND NOT UNDER SECTION 36(1)(II I), ON THE BASIS OF THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF BOMBAY STEAM NAVIGATION CO. (56 ITR 52). 5. THE LEARNED SR-DR BESIDES STRONGLY RELYING ON TH E ORDERS OF THE INCOME-TAX AUTHORITIES ALSO POINTED OUT THAT EVEN I N THE YEAR UNDER APPEAL THE ASSESSEE HAS NOT ADMITTED ITS LIABILITY AND HENCE T HE CLAIM CANNOT BE ALLOWED. 6. ON A CAREFUL CONSIDERATION OF THE MATTER, WE ARE OF THE VIEW THAT THE ACTION OF THE INCOME TAX AUTHORITIES HAS TO BE UPHE LD. THE ASSESSEE HAS DISPUTED THE LIABILITY TO PAY THE INCREASED GAS CHARGES RELA TING TO THE ASSESSMENT YEARS 1987-88 AND 1988-89. IT IS THE ADDITIONAL GAS CHA RGES PAYABLE FOR THESE YEARS THAT IS NOW CLAIMED IN THE YEAR UNDER APPEAL ON THE GROUND THAT THE LIABILITY TO PAY THEM AROSE ON RECEIPT OF THE NOTICE FROM THE AD VOCATE OF ONGC ON 2-4- 1993. WE ARE UNABLE TO GIVE EFFECT TO THE CLAIM. A PERUSAL OF THE NOTICE SHOWS THAT IN THE AGREEMENT EXECUTED BETWEEN ONGC AND THE ASSESSEE ON 28-5-1985, WHICH AMENDED THE ORIGINAL CONTRACT DATED 21-12-198 4, THE PRICE OF THE NATURAL GAS WAS FIXED EQUIVALENT TO THE EX-REFINERY PRICE O F FURNACE OIL PER KG./LITRE AND IT WAS ALSO PROVIDED TO ADJUST AND REVISE IT ON PRO -RATA BASIS FROM THE DATE OF THE EX-REFINERY PRICE OF FURNACE OIL FOR NON-FERTILISER USE, CHANGES. IT IS ALSO SEEN PAGE - 4 ITA NO.1591/AHD/2004 -4- THAT AS PER THE AMENDED CONTRACT ONGC SUPPLIED GAS TO THE ASSESSEE FROM 1985-86 TO 1989-90 AND SENT A BILL FOR PAYMENT OF R S.2,00,78,193/- WHICH THE ASSESSEE DID NOT PAY. THIS AMOUNT OBVIOUSLY INCLUD ED THE INCREMENTAL GAS CHARGES RELATING TO THE PREVIOUS YEARS RELEVANT TO THE ASSESSMENT YEARS 1987-88 AND 1988-89. IT IS NOT CLEAR FROM THE NOTICE AS TO ON WHAT DATE THE BILL WAS SENT TO THE ASSESSEE BUT OBVIOUSLY IT WAS NOT SENT IN TH E PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL BECAUSE THE ENTIRE LIT IGATION ENDED ON 4-5-1990 ITSELF WHEN THE SUPREME COURT DISMISSED THE SPECIAL LEAVE PETITION. OBVIOUSLY THEREFORE THE BILL WAS SENT TO THE ASSESS EE MUCH EARLIER TO THE ABOVE DATE AND CERTAINLY NOT IN THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR UNDER APPEAL. THE LIABILITY TO PAY THE INCREASED G AS CHARGES IN RESPECT OF GAS CONSUMED IN THE PREVIOUS YEARS RELEVANT TO THE ASSE SSMENT YEAR 1987-88 AND 1988-89 DID NOT THEREFORE ARISE IN THE YEAR UNDER A PPEAL. THE LIABILITY, ACCORDING TO US, AROSE WHEN THE CONTRACT BETWEEN TH E ONGC AND THE ASSESSEE WAS AMENDED BY A FRESH CONTRACT ON 28-5-1985 IN WHI CH THE PRICE OF THE NATURAL GAS WAS FIXED TO BE EQUIVALENT TO THE EX-REFINERY P RICE OF FURNACE OIL. THIS DATE IS MUCH BEFORE THE PREVIOUS YEARS RELEVANT TO THE A SSESSMENT YEARS 1987-88 AND 1988-89 AND THERE SHOULD HAVE BEEN NO DIFFICULTY IN THE ASSESSEE CLAIMING THE HIGHER AMOUNT PAYABLE TO ONGC AS A DEDUCTION IN THE RETURNS FILED FOR THOSE YEARS. IN FACT THE ASSESSEE HAS CLAIMED THE HIGHER AMOUNT AS A DEDUCTION IN THE RETURNS FILED FOR THE ASSESSMENT YEARS 1989-90 TO 1 993-94 AS SHOWN IN PAGE 49 OF THE PAPER BOOK. THE LEARNED COUNSEL FOR THE ASS ESSEE FRANKLY STATED BEFORE US THAT THE ASSESSEE WOULD APPEAR TO HAVE MISSED TH E BUS IN THE ASSESSMENT YEAR 1987-88 AND 1988-89 BUT CONTENDED THAT THAT CANNOT BE A BAR ON CLAIMING THE DEDUCTION ON THE BASIS OF THE LETTER OF THE ADVOCAT E OF ONGC. IN SUPPORT OF THIS CLAIM HE DREW OUR ATTENTION TO THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN ALEMBIC CHEMICAL WORKS LTD. VS. DCIT, (2004) 266 ITR 47. IN THIS CASE, IT WAS HELD THAT IN THE CASE OF AN ASSESSEE FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING A LIABILITY IS SAID TO BE PROPERLY INCUR RED WHEN THE DISPUTE BETWEEN THE PARTIES IS AMICABLY SETTLED OR FINALLY ADJUDICA TED, WHERE THE LIABILITY IN PAGE - 5 ITA NO.1591/AHD/2004 -5- QUESTION IS NOT A STATUTORY LIABILITY. WE ARE UNAB LE TO SEE HOW THIS CASE CAN HELP THE PRESENT ASSESSEE. NO DOUBT WE ARE ALSO CO NCERNED WITH THE CONTRACTUAL LIABILITY AND NOT A STATUTORY LIABILITY BUT THE LIA BILITY HAS BEEN FINALLY ADJUDICATED ON 4-5-1990 WHEN THE SLP WAS DISMISSED BY THE SUPRE ME COURT, THUS PUTTING AN END TO THE LITIGATION BETWEEN THE PARTIES. EV EN APPLYING THIS DECISION TO THE PRESENT CASE, THE LIABILITY OUGHT TO HAVE BEEN CLAI MED BY THE ASSESSEE IN THE YEAR ENDED 31-3-1991 RELEVANT TO THE ASSESSMENT YEA R 1991-92 AND NOT IN THE ASSESSMENT YEAR 1994-95. THE NOTICE ISSUED BY ONGC IS ONLY FOR RECOVERY OF THE DUES FROM THE ASSESSEE AND IT HAS NOTHING TO DO WITH THE DETERMINATION OF THE LIABILITY OF THE ASSESSEE TO PAY THE DUES. EV EN THE PRAYER IN THE CIVIL SUIT IS FOR RECOVERY OF THE DUES WITH INTEREST AND NOT FOR A DECLARATION THAT THE ASSESSEE IS LIABLE TO PAY THE AMOUNT. THE LIABILITY GOT FIN ALLY DETERMINED ON 4-5-1990 WHEN THE SLP WAS DISMISSED BY THE SUPREME COURT. I T DID NOT ARISE FOR THE FIRST TIME WHEN THE ASSESSEE RECEIVED THE NOTICE FR OM THE ADVOCATE OF ONGC. THE ORDER OF THE AHMEDABAD BENCH IN DCIT VS. JAYANT PAPER MILLS, (1992) 41 ITD 153 DOES NOT ALSO SUPPORT THE ASSESSEE BECAUSE IN THAT CASE THE ASSESSEE HAD MADE PROVISIONS IN RELATION TO THE ASSESSMENT Y EARS 1982-83 AND 1983-84 ON THE BASIS OF THE RATES PROPOSED BY THE ONGC IN T HE REVISED AGREEMENTS. THE ASSESSEE IN THAT CASE DID NOT WAIT TILL IT RECEIVED THE NOTICE FROM ONGC BUT WAS VIGILANT ENOUGH TO MAKE PROVISION IN ITS ACCOUNTS F OR THE YEARS IN WHICH THE GAS WAS SUPPLIED, ON THE BASIS OF THE REVISED AGREEMENT WITH ONGC IN WHICH ENHANCED RATES WERE PROPOSED. WHAT THE TRIBUNAL H ELD IN THAT CASE ONLY RELATED TO THE QUANTUM OF THE CLAIM FOR DEDUCTION A ND IT WAS HELD THAT THE QUANTUM OF THE DEDUCTION CAN BE MODIFIED ON THE BAS IS OF THE PRICE FIXED BY THE SUPREME COURT IN ITS ORDER DATED 4-5-1990. THIS ORD ER OF THE AHMEDABAD BENCH IS THEREFORE OF NO ASSISTANCE TO THE ASSESSEE . 7. SO FAR AS THE INTEREST IS CONCERNED, THE SAME CA NNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION SINCE THERE IS NOTHING TO SHOW THAT THE ASSESSEE ACCEPTED THE LIABILITY FOR PAYMENT OF THE INTEREST. IN THE ORDER IN THE CASE OF PAGE - 6 ITA NO.1591/AHD/2004 -6- JAYANT PAPER MILLS (SUPRA) IT WAS HELD THAT THE ALL OWABILITY OF THE INTEREST CAN BE CONSIDERED IN THE YEAR IN WHICH IT WAS DEMANDED FOR THE FIRST TIME ONLY IF THE LIABILITY WAS ACCEPTED BY THE ASSESSEE AND WAS NOT DISPUTING THE SAME. IN THE PRESENT CASE THE ASSESSEE IS RESISTING THE SUIT FIL ED BY THE ONGC IN WHICH INTEREST HAS BEEN CLAIMED. THEREFORE, THERE IS NO JUSTIFICATION FOR ALLOWING THE INTEREST AS A DEDUCTION. 8. THE LEARNED COUNSEL FOR THE ASSESSEE REFERRED TO THE JUDGMENT OF THE SUPREME COURT IN BOMBAY STEAM NAVIGATION (SUPRA) IN SUPPORT OF THE CLAIM FOR THE DEDUCTION OF INTEREST. IT WAS HELD IN THAT CASE THAT ANY EXPENDITURE INCURRED UNDER A TRANSACTION WHICH IS SO CLOSELY R ELATED TO THE BUSINESS THAT IT COULD BE VIEWED AS AN INTEGRAL PART OF THE CONDUCT OF THE ASSESSEE, MAY BE REGARDED AS REVENUE EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE QUESTION AS TO WHETHER TH E ASSESSEE FULFILLED THE TEST LAID DOWN IN THIS CASE WOULD ARISE ONLY IN THE YEAR IN WHICH THE LIABILITY TO PAY INTEREST CAN BE SAID TO ARISE. WE HAVE ALREADY HEL D THAT THE YEAR UNDER APPEAL IS NOT THE YEAR IN WHICH THE LIABILITY TO PAY INTEREST CAN BE SAID TO HAVE ARISEN. THEREFORE THE CONTENTION IS ACADEMIC. THUS, THE FI RST TWO GROUNDS ARE DISMISSED. 9. THE THIRD AND LAST GROUND IS DIRECTED AGAINST TH E DISALLOWANCE THE INTEREST OF RS.6,45,530/-. THE GROUND FOR DISALLOWANCE IS T HAT THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS OF RS.35,86,275/- TO G ROUP CONCERNS OUT OF INTEREST BEARING FUNDS AND THAT THE ADVANCES WERE NOT FOR TH E PURPOSE OF THE BUSINESS. THE CONTENTION OF THE ASSESSEE IS THAT IT HAS INTER EST FREE SHARE APPLICATION MONIES OF RS.83,61,500/- AS ON 31-3-1994 WHICH COUL D HAVE CONSTITUTED THE SOURCE FOR THE INTEREST FREE ADVANCES TO GROUP CONC ERNS. THE CLAIM IS BORNE OUT BY SCHEDULE-C TO THE BALANCE SHEET (PAGE-15 OF THE PAPER BOOK). THE ADVANCES TO THE ASSOCIATED CONCERNS IS MUCH LESS. IT IS AN ACCEPTED PRINCIPLE THAT INTEREST FREE ADVANCES MUST BE FIRST TAKEN TO HAVE COME OUT OF INTEREST FREE LOANS TAKEN PAGE - 7 ITA NO.1591/AHD/2004 -7- BY THE ASSESSEE AND ONLY IF THE INTEREST FREE ADVAN CES ARE MORE THAN THE INTEREST FREE LOANS TAKEN BY THE ASSESSEE CAN IT BE SAID THA T THE EXCESS HAS COME FROM THE INTEREST BEARING LOANS TAKEN BY THE ASSESSEE. APPL YING THIS PRINCIPLE, WE ACCEPT THE ASSESSEES CLAIM AND DELETE THE DISALLOWANCE OF RS.6,45,530/-. THE GROUND IS ALLOWED. 10. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 18 TH SEPTEMBER, 2009. SD/- SD/- (A.N. PAHUJA) ACCOUNTANT MEMBER (R.V.EASWAR) VICE-PRESIDENT PLACE : AHMEDABAD DATE : 18-09-2009 COPY OF THE ORDER FORWARDED TO: 1) : ASSESSEE 2) : RESPONDENT 3) : CIT(A) 4) : CIT CONCERNED 5) : DR, ITAT. BY ORDER DR, ITAT, AHMEDABAD