DCIT, CHENNAI V. M/s. Sical Logistics Ltd., CHENNAI

ITA 1628/CHNY/2009

• Counselvise Citation: 162821714 RSA 2009
• Duration Of Justice: 1 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 04-10-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 15-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M N MURTH Y NAIK IRS
• Assessee Lawyers: S SATHIYANAR AYANAN
• Keywords: Capital asset; Depreciation; Cost of acquisition; Fair market value; Bad and doubtful debts
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE DR. O.K.NARAYANAN, VICE-PRESIDENT AND SHRI HARI OM MARATHA, JUDICIAL MEMBER ITA NO.1628(MDS)/2009 & CO NO.188(MDS)/2009 ASSESSMENT YEAR: 2004-05 THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE V(1), CHENNAI. VS. M/S. SICAL LOGISTICS LTD., 73, ARMENIAN STREET, CHENNAI-600 001. PAN AAACS3789B. (APPELLANT) (R ESPONDENT/CROSS OBJECTOR) APPELLANT BY : SHRI M.N.MURTH Y NAIK, IRS, JCIT RESPONDENT BY : SHRI S.SATHIYANAR AYANAN, ADVOCATE DATE OF HEARING : 4 TH OCTOBER, 2011 DATE OF PRONOUNCEMENT : 5 TH OCTOBER, 2011. O R D E R PER DR.O.K.NARAYANAN, VICE-PRESIDENT: THIS APPEAL IS FILED BY THE REVENUE. THE CROSS O BJECTION IS FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2004-05. THE APPEAL AND THE CROSS OBJECTION ARE DI RECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS)-V - - ITA 1628 & CO 188 OF 2009 2 AT CHENNAI DATED 6-2-2009 AND ARISE OUT OF THE ASSE SSMENT COMPLETED UNDER SECTION 143(3) OF THE INCOME-TAX AC T, 1961. 2. THE FIRST GROUND RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DE LETING THE DISALLOWANCE MADE TOWARDS ENTRANCE FEES AND COST OF SERVICES PAID TO VARIOUS CLUBS. 3. WE CONSIDERED THE ISSUE. EVEN THOUGH IT IS STA TED THAT THE DISALLOWANCE INCLUDED THE ENTRANCE FEES AS WELL, THE FACT IS THAT THERE IS NO DISALLOWANCE OF ANY ENTRANCE FE ES. THE ASSESSEE HAS CLAIMED ONLY EXPENSES RELATING TO ANNU AL SUBSCRIPTION AND OTHER SERVICE CHARGES. THE REVENU E IS SEEKING TO REVERSE THE ORDER OF THE COMMISSIONER OF INCOME- TAX(APPEALS), RELYING ON THE DECISION OF THE HONBL E KERALA HIGH COURT RENDERED IN THE CASE OF FRAMATONE CONNECTOR O EN LTD. VS, DCIT, 294 ITR 559. BUT THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. SUNDARAM INDUSTRIES LTD., 240 I TR 335, HAS HELD THAT SUCH EXPENSES INCURRED IN THE COURSE OF C ARRYING ON OF BUSINESS IS DEDUCTIBLE, AS THOSE EXPENDITURE WAS IN CURRED TO PROMOTE AND FOSTER THE ASSESSEES BUSINESS RELATION SHIP. IT IS APT - - ITA 1628 & CO 188 OF 2009 3 TO FOLLOW THE DECISION OF THE HONBLE JURISDICTIONA L HIGH COURT. ACCORDINGLY WE HOLD THAT THE GROUND OF THE REVENUE FAILS. 4. THE SECOND ISSUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN RESTRICTING THE DI SALLOWANCE TOWARDS BAD DEBTS FROM ` 80.84 LAKHS TO ` 16.98 LAKHS, THUS GIVING A RELIEF OF ` 63.86 LAKHS TO THE ASSESSEE. 5. WE CONSIDERED THIS ISSUE. THE ASSESSEE HAD IN FACT CLAIMED BAD DEBTS TO THE EXTENT OF ` 80.84 LAKHS. THE ASSESSING AUTHORITY DISALLOWED THE ENTIRE CLAIM. THE COMMISS IONER OF INCOME-TAX(APPEALS) CONFIRMED THE DISALLOWANCE ONLY TO THE EXTENT OF ` 16.98 LAKHS. 6. THE BALANCE OF ` 63.86 LAKHS, IN FACT RELATED TO TRADE DEBTS. THEY WERE DEBTS TOWARDS SUPPLY OF GOODS AND SERVICES. THE ASSESSEE HAS WRITTEN OFF THOSE DEBTS IN ITS BOO KS OF ACCOUNT AS BAD DEBTS. THIS ISSUE HAS ALREADY BEEN SETTLED BY THE HONBLE SUPREME COURT IN ITS DECISIONS RENDERED IN THE CASE OF SOUTHERN TECHNOLOGIES LTD. VS. JCIT, 320 ITR 577 AN D IN THE CASE OF T.R.F. LTD. VS. CIT, 323 ITR 397. THEREFOR E, THE ARGUMENT OF THE REVENUE IS LIABLE TO BE REJECTED. - - ITA 1628 & CO 188 OF 2009 4 7. THE THIRD ISSUE RAISED BY THE REVENUE IS THAT T HE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN HO LDING THAT THE PROVISIONS OF SECTION 50 OF THE INCOME-TAX ACT CANNOT BE APPLIED TO THE FACTS OF THE CASE IN RESPECT OF THE SHIP SOLD BY THE ASSESSEE ON A SUM OF ` 18.55 CRORES. IT IS THE CASE OF THE REVENUE THAT THE SHIP IS A HIGHLY CAPITAL INTENSIVE VENTURE AND ITS OPERATIONAL EXPENSES ARE SO EXORBITANT THAT A SHIP CANNOT BE ALLOWED TO REMAIN IDLE EVEN FOR A SINGLE DAY AND, T HEREFORE, THE COMMISSIONER OF INCOME-TAX(APPEALS) OUGHT TO HAVE U PHELD THE ACTION OF THE ASSESSING OFFICER IN REDUCING THE ACQ UISITION COST OF THE SHIP BY DEDUCTING DEPRECIATION ON A DEEMED BASI S. 8. WE CONSIDERED THE ISSUE. THE ASSESSEE HAD ACQUIRED A SHIP, BUT NOT USED THE SAME FOR THE PURP OSE OF THE BUSINESS. THE SHIP WAS LATER SOLD. WHILE COMPUTIN G THE CAPITAL GAINS, THE ASSESSEE DEDUCTED THE COST OF ACQUISITIO N WITHOUT PROVIDING FOR ANY DEPRECIATION ON THE GROUND THAT T HE SHIP WAS NOT USED FOR THE PURPOSE OF THE BUSINESS AND NO CLA IM OF DEPRECIATION WAS IN FACT MADE BY THE ASSESSEE. BUT WHILE COMPUTING THE CAPITAL GAINS, THE ASSESSING AUTHORIT Y HELD THAT EVEN IF THE ASSESSEE HAD NOT CLAIMED ANY DEPRECIATI ON, - - ITA 1628 & CO 188 OF 2009 5 DEPRECIATION SHOULD BE DEDUCTED FROM THE COST OF AC QUISITION AND THE COST MUST BE REDUCED TO THAT EXTENT. THE COMMI SSIONER OF INCOME-TAX(APPEALS) HELD THAT THE ACTION OF THE ASS ESSING AUTHORITY IS NOT PROPER. 9. SIMILAR ISSUE WAS CONSIDERED BY THE MUMBAI E-BENCH OF THE TRIBUNAL IN THE CASE OF SADHURAM PAT EL & SONS VS. ITO, 120 ITD 291. IN THAT CASE THE TRIBUNAL HA S HELD THAT FOR THE PURPOSE OF SECTION 50, THE WRITTEN DOWN VALUE O F AN ASSET HAS TO BE COMPUTED ON THE BASIS OF ACTUAL DEPRECIATION ALLOWED BY THE ASSESSING OFFICER IN THE COURSE OF ASSESSMENT. THE TRIBUNAL HELD THAT ACTUAL DEPRECIATION ALLOWED BY THE ASSESS ING AUTHORITY DOES NOT IN ANY WAY MEAN DEPRECIATION DEEMED TO BE ALLOWED. 10. IT IS TRUE THAT PRIOR TO INSERTION OF EXPLANAT ION 5 TO SECTION 32(1) WITH EFFECT FROM 1 ST APRIL, 2002, IT WAS NOT MANDATORY ON THE PART OF THE ASSESSEE TO CLAIM DEPR ECIATION AND ALSO NOT INCUMBENT UPON THE ASSESSING OFFICER TO AL LOW DEPRECIATION. BUT AFTER THE AMENDMENT, IT HAS BECO ME NECESSARY FOR THE ASSESSING OFFICER TO GRANT DEPREC IATION ALLOWANCE, AS PER RULES, EVEN IF THE ASSESSEE HAS N OT MADE ANY CLAIM TOWARDS DEPRECIATION. BUT SUCH IMPOSITION OF DEPRECIATION - - ITA 1628 & CO 188 OF 2009 6 CANNOT BE MADE IN A CASE WHERE THE ASSESSEE HAS NOT USED THE ASSET FOR THE PURPOSE OF ITS BUSINESS. THE STATUT ORY CONDITION FOR ALLOWING DEPRECIATION AS A DEDUCTION, WHETHER SOUGH T FOR BY THE ASSESSEE OR IMPOSED BY THE ASSESSING AUTHORITY, IS THAT THE ASSET MUST BE USED FOR THE PURPOSE OF THE BUSINESS. IF THAT CONDITION IS NOT SATISFIED, DEPRECIATION CANNOT BE GRANTED EVEN IF IT WAS CLAIMED BY THE ASSESSEE. IN THE PRESENT CAS E THERE IS NO CASE FOR THE ASSESSING AUTHORITY THAT THE SHIP WAS USED BY THE ASSESSEE FOR ITS BUSINESS. THE ASSESSEE ACQUIRED T HE SHIP AND LATER ON SOLD THE SAME WITHOUT PUTTING IT TO USE FO R ITS BUSINESS PURPOSE. THEREFORE IN SUCH CIRCUMSTANCES THERE IS NO PROVOCATION FOR THE ASSESSING OFFICER TO DEEM DEP RECIATION ALLOWANCE AS A DEDUCTION ONLY FOR THE PURPOSE OF RE DUCING THE COST OF ACQUISITION ARTIFICIALLY. WE DO NOT FIND T HAT THE ARGUMENT OF THE REVENUE IS SUSTAINABLE IN LAW. THIS GROUND IS ALSO REJECTED. 11. THE LAST GROUND RAISED BY THE REVENUE IS THAT THE COMMISSIONER OF INCOME-TAX(APPEALS) HAS ERRED IN DI RECTING THE ASSESSING OFFICER TO DETERMINE THE FAIR MARKET VALU E AS ON - - ITA 1628 & CO 188 OF 2009 7 1-4-1981 AND TO MODIFY THE LONG TERM CAPITAL GAINS CHARGEABLE TO TAX. 12. THE ASSET WAS ACQUIRED BY THE ASSESSEE BEFORE 1-4-1981. WHERE THE CAPITAL ASSET IS ACQUIRED BEFO RE 1-4-1981, LAW PERMITS AN ASSESSEE TO OPT FOR EITHER THE COST OF ACQUISITION OR THE FAIR MARKET VALUE OF THE ASSET AS ON 1-4-198 1. THIS IS AN OPTION GRANTED BY THE STATUTE. THE ASSESSEE HAS OP TED FOR THE FAIR MARKET VALUE. THIS HAS BEEN UPHELD BY THE COM MISSIONER OF INCOME-TAX(APPEALS). THE COMMISSIONER OF INCOME-TAX (APPEALS) IS FOLLOWING THE TERMS OF THE STATUTE AND NOTHING E LSE. THIS GROUND OF THE REVENUE FAILS. 13. AS FAR AS THE CROSS OBJECTION IS CONCERNED, RU LE 8D CANNOT BE APPLIED IN ASSESSEES CASE, AS OPERATION OF THE RULE IS ONLY PROSPECTIVE. THE RULE IS OPERATIVE WITH EFFEC T FROM 1-4-2007. HERE, THE ASSESSMENT YEAR IS 2004-05. T HEREFORE, THE DIRECTION OF THE COMMISSIONER OF INCOME-TAX(APP EALS) TO APPLY RULE 8D FOR MAKING THE DISALLOWANCE IN TERMS OF SECTION 14A CANNOT BE ENDORSED. HIS DIRECTION IS ACCORDING LY VACATED. 14. AS A MATTER OF FACT, WE FIND THAT THE ASSESSIN G AUTHORITY HAS DISALLOWED 2% OF THE EXPENDITURE. WE FIND THAT THE - - ITA 1628 & CO 188 OF 2009 8 DISALLOWANCE IS REASONABLE. THEREFORE, THE ORDER O F THE ASSESSING AUTHORITY ON THIS POINT IS RESTORED. THE ASSESSEE IS SUCCESSFUL IN ITS CROSS OBJECTION TO THE ABOVE EXTE NT. 15. ALL OTHER CONTENTIONS RAISED IN THE CROSS OBJE CTION ARE SUPPORTIVE OF THE FINDINGS OF THE COMMISSIONER OF INCOME- TAX(APPEALS), RENDERED IN FAVOUR OF THE ASSESSEE. THOSE GROUNDS BECOME INFRUCTUOUS. 16. IN RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CROSS OBJECTION FILED BY THE ASSE SSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 5 TH OF OCTOBER, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR. O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 5 TH OCTOBER, 2011. V.A.P. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT (4) CIT(A) (5) D.R. (6) G.F.