The ACIT,Vapi Circle, Vapi V. Jotun Powder Coating (India) Pvt.Ltd., Mumbai

ITA 1778/AHD/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85551 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 10-12-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 26-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MK SINGH
• Keywords: Depreciation; Unabsorbed depreciation; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

, , , , C, IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD, C BENCH . .. . . .. . , !' !' !' !', , , , #$ %&'( #$ %&'( #$ %&'( #$ %&'(, , , , )* + ) ' )* + ) ' )* + ) ' )* + ) ' BEFORE S/SHRI G.C. GUPTA, VICE-PRESIDENT AND ANIL CHATURVEDI, ACCOUNTANT MEMBER) ITA NO.1778 AND 1779/AHD/2010 [ASSTT.YEAR : 2006-2007] ACIT, VAPI CIRCLE VAPI. /VS. JOTUN POWDER COATING (INDIA) P.LTD. 204-205, ASCOT CENTRE, SAHAR ROAD ANDHERI (EAST), MUMBAI 400 099. CO NO.257/AHD/2010 IN ITA NO.1778/AHD/2010 [ASSTT.YEAR : 2006-2007] JOTUN POWDER COATING (INDIA) P.LTD. 204-205, ASCOT CENTRE, SAHAR ROAD ANDHERI (EAST), MUMBAI 400 099. /VS. ACIT, VAPI CIRCLE VAPI. ( (( ( -. -. -. -. / APPELLANT) ( (( ( /0-. /0-. /0-. /0-. / RESPONDENT) + 1 2 ) / REVENUE BY : SHRI M.K. SINGH, SR.DR 4& 1 2 ) / ASSESSEE BY : SHRI SANJAY R. SHAH 5 1 &(* / DATE OF HEARING : 10 TH DECEMBER, 2014 678 1 &(* / DATE OF PRONOUNCEMENT : 09-01-2015 )9 / O R D E R PER G.C. GUPTA, VICE-PRESIDENT: THESE APPEALS BY THE REVENUE AND THE CO BY THE ASSESSEE FOR THE ASSTT.YEAR 2006- 07 ARE DIRECTED AGAINST THE ORDER OF THE CIT(A). THESE ARE BEING DISPOSE D OF WITH THIS CONSOLIDATED ORDER. ITA NO.1778 AND 1779/AHD/2010 WITH CO -2- ITA NO.1778/AHD/2010 (REVENUES QUANTUM APPEAL) 2. THE REVISED GROUND OF THE APPEAL OF THE REVENUE IS AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD.CIT(A) HAS ERRED IN TREATING THE LOYALTY COM MISSION PAID OF RS.65,25,000/- AS CAPITAL EXPENDITURE AND DIRECTING THE AO TO ALLOW DEPRECIATION ON THAT AMOUNT SINCE THE AO HAS RIGHTL Y DISALLOWED THE SAME AS INADMISSIBLE EXPENDITURE. 3. THE LEARNED DR SUBMITTED THAT THE LOYALTY COMMIS SION OF RS.65.25 LAKHS WAS CLAIMED BY THE ASSESSEE AS PAID TO M/S.PS L CORROSION CONTROL LTD. (PSL FOR SHORT) VIDE AGREEMENT DATED 24.12.2 004 FOR NO BUSINESS PURPOSE, AND THEREFORE, WAS RIGHTLY DISALLOWED BY T HE AO. HE SUBMITTED THAT THE ASSESSEE HAS PAID HEAVY LOYALTY COMMISSION FEES BEFORE A SINGLE SALE TRANSACTION WAS ENTERED INTO BY THE ASSESSEE W ITH PSL AND IT WAS NOT CLEAR THAT WHY THE ASSESSEE HAS CLUBBED THE LOYALTY COMMISSION AND CONSIDERATION IT HAS PAID TO PSL FOR PURCHASE OF MACHINERY. HE REFERRED TO RELEVANT POTIONS OF THE ASSESSMENT ORDER IN SUPP ORT OF THE CASE OF THE REVENUE. HE SUBMITTED THAT THIS LOYALTY COMMISSION WAS PAID ONLY TO SINGLE PURCHASER PARTY I.E. PSL AND NO SUCH COMMI SSION WAS PAID BY THE ASSESSEE TO ANY OTHER PARTY. HE SUBMITTED THAT THE PURPOSE OF TRANSACTION OF PAYING LOYALTY COMMISSION WAS NOT ESTABLISHED BY THE ASSESSEE. HE RELIED ON THE ORDER OF THE AO. 4. THE LEARNED COUNSEL FOR THE ASSESSEE HAS OPPOSED THE SUBMISSION OF THE LEARNED DR. HE SUBMITTED THAT THE PSL IS NO T A RELATED PARTY TO THE ASSESSEE. HE SUBMITTED THAT THE EXPENDITURE IN QUE STION WAS INCURRED FOR OBTAINING FIRST PREFERENCE TO SUPPLY FOR PSLS REQU IREMENTS AND FOR GETTING THE STATUS OF THE MOST PREFERRED SUPPLIER, THE EXPE NDITURE WAS INCURRED FOR BUSINESS CONSIDERATION ONLY, AND THE DEPARTMENT SHO ULD NOT SIT OVER THE JUDGMENT OF THE ASSESSEE IN THIS REGARD. HE SUBMIT TED THAT IT IS NOT THE CASE ITA NO.1778 AND 1779/AHD/2010 WITH CO -3- OF THE DEPARTMENT THAT THE SAID COMMISSION WAS NOT PAID TO PSL AND THAT IT WAS AN ARMS LENGTH TRANSACTION. H SUBMITTED TH AT PSL HAS PURCHASED ABOUT 75% OF THE REQUIREMENT FROM THIS ASSESSEE, AN D THEREFORE, THE PAYMENT OF COMMISSION WAS JUSTIFIED. HE REFERRED T O THE FIGURE OF ACTUAL SALES MADE BY THE ASSESSEE TO PSL IN THE SUBSEQUE NT YEARS RUNNING IN CORES, WHICH JUSTIFIES ONE-TIME PAYMENT OF LOYALTY COMMISSION TO PSL. HE REFERRED TO SERIES OF DECISIONS OF HONBLE HIGH COURTS INCLUDING THAT OF HONBLE SUPREME COURT IN CIT VS. DHANRAJGIRJI RAJA NARASINGIRJI, 91 ITR 544 (SC) AND ITAT, AHMEDABAD BENCH IN HATHIWALA SIL K MILLS VS. ITO, 19 TTJ 284 (AHD) IN SUPPORT OF THE CASE OF THE ASSE SSEE. 5. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND ALSO RELEVANT CLAUSES OF THE AGREEMENT OF THE ASSESSEE WITH PSL DATED 24.12.2004. WE FIND THAT IN THIS CASE GENUINENESS OF THE PAYMENT CLAIMED TO HAVE BEEN MAD E TO PSL AS LOYALTY COMMISSION IS NOT DISPUTED. IT IS ALSO UND ISPUTED FACT THAT IT IS AN ARMS LENGTH TRANSACTION. ONLY DISPUTE IS REGARDIN G THE BUSINESS PURPOSE OF THE PAYMENT OF LOYALTY COMMISSION TO PSL. WE FIND THAT THE ASSESSEE HAS MADE ONE TIME LOYALTY PAYMENT TO PSL FOR ACQU IRING THE STATUS OF MOST PREFERRED SUPPLIER. THE ASSESSEES CLAIM THAT PSL HAS PURCHASED ABOUT 75% OF ITS REQUIREMENT FROM THE ASSESSEE ALON E IN THE SUBSEQUENT YEARS, HAS NOT BEEN DISPUTED BY THE REVENUE. WE FI ND THAT PSL HAS MADE PURCHASES FROM THE ASSESSEE-COMPANY TO THE TUN E OF RS.1.60 CRORES IN FINANCIAL YEAR 2005-06, RS.2.92 CRORES IN FINANC IAL YEAR 2006-07, RS.2.70 CRORES IN FINANCIAL YEAR 2007-08 AND RS.1.1 7 CRORES IN FINANCIAL YEAR 2008-09 (TILL NOVEMBER, 2008). CONSIDERING TH E HIGH VOLUME OF SUPPLIES MADE BY THE ASSESSEE-COMPANY TO PSL, IT COULD NOT BE SAID THAT THE PURPOSE OF THE SAID PAYMENT OF COMMISSION COULD NOT BE ESTABLISHED BY ITA NO.1778 AND 1779/AHD/2010 WITH CO -4- THE ASSESSEE. IT IS NOT ABNORMAL TO ENTER INTO AN AGREEMENT WITH INTENDING HEAVY-WEIGHT PURCHASER PARTY BEFORE ENTERING INTO A CTUAL SALE TRANSACTON WITH THE SAID PARTY. THE PURPOSE OF THE PAYMENT O F LOYALTY COMMISSION WAS CLEARLY FOR BUSINESS OF THE ASSESSEE, AND IT IS NOT FOR THE DEPARTMENT TO SIT OVER THE JUDGMENT OF THE ASSESSEE THAT HOW THE BUSINESS HAS TO BE CONDUCTED AND THE EXPENDITURE INCURRED COULD NOT BE DISALLOWED, TILL IT SHOWS THAT THE PAYMENT ITSELF WAS NOT GENUINE OR WA S MADE FOR SOME PURPOSE OTHER THAN THE BUSINESS PURPOSE OF THE ASSE SSEE. NO VALID REASON FOR THE SAID DISALLOWANCE COULD BE MADE OUT BY THE REVENUE. THE ARGUMENT THAT WHY THE SAID LOYALTY COMMISSION WAS P AID TO PSL ALONE, THE SAME IN OUR VIEW IS NOT SUSTAINABLE IN LAW. TH E ASSESSEE IS NOT OBLIGED TO GET DEDUCTION OF THE SAID PAYMENT ONLY BY PAYING TO ALL THE CUSTOMERS, BUT IT IS ENTITLED TO GET THE DEDUCTION FOR THE COM MISSION WHICH IT HAS PAID TO A PARTICULAR CUSTOMER, WHO HAS MADE PURCHASES IN BULK. IN THESE FACTS, WE ARE OF THE VIEW THAT THE AMOUNT OF LOYALTY COMMI SSION PAID BY THE ASSESSEE COULD NOT BE DISALLOWED. HOWEVER, WHETHER THE SAID PAYMENT MADE BY THE ASSESSEE AS LOYALTY COMMISSION TO THE P SL IS CAPITAL OR REVENUE EXPENDITURE IN THE HANDS OF THE ASSESSEE WO ULD BE ADJUDICATED SEPARATELY, AS THE SAME IS AN ISSUE IN THE CO PREFE RRED BY THE ASSESSEE. ACCORDINGLY, THE GROUND NO.1 OF THE APPEAL OF THE R EVENUE IS DISMISSED. CO NO.257/AHD/2010 (ASSESSEES CO) 6. THE GROUND NO.1 AND 2 OF THE CO ARE AS UNDER: 1. THE LD.CIT(A) ERRED IN HOLDING THAT THE LOYALTY COMMISSION OF RS.65,25,000/- IS A CAPITAL EXPENDITURE. 2. THE LD.CIT(A) OUGHT TO HAVE DIRECTED THE LD.JCI T TO ALLOW LOYALTY COMMISSION OF RS.65,25,000/- AS REVENUE EXP ENDITURE UNDER SECTION 37(1) OF THE IT ACT. ITA NO.1778 AND 1779/AHD/2010 WITH CO -5- 7. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE CIT(A) HAS ERRED IN HOLDING THAT THE LOYALTY OF RS.65.25 LAKHS WAS A CAPITAL EXPENDITURE AND HAS ALLOWED ONLY DEPRECIATION ON TH E SAME, AS AGAINST THE CLAIM OF THE SAME AS REVENUE EXPENDITURE UNDER SECT ION 37(1) OF THE ACT. HE SUBMITTED THAT ENTIRE AMOUNT IS PAID DURING THE YEAR FOR BUSINESS CONSIDERATION, AND IS CLEARLY A REVENUE EXPENDITURE . HE SUBMITTED THAT ALTHOUGH PSL HAS MADE BULK PURCHASES IN SUBSEQUENT MANY YEARS, BUT AS FAR AS THE DEDUCTION OF EXPENDITURE IS CONCERNED, T HE SAME BEING REVENUE IN NATURE, HAS TO BE ALLOWED AS A DEDUCTION UNDER S ECTION 37(1) OF THE ACT FOR THE RELEVANT ASSTT.YEAR 2006-07. THE LEARNED DR SUBMITTED THAT THE EXPENDITURE OF LOYALTY COMMISSION WAS NOT ALLOWABLE TO THE ASSESSEE. HE RELIED ON THE ORDER OF THE AO. 8. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE AO AND THE CIT(A). WE FIND THAT THE CIT(A) HAS PAS SED A WELL REASONED SPEAKING ORDER ON THIS ISSUE. THE ASSESSEE HAS DER IVED ENDURING BENEFITS BY PAYING LOYALTY COMMISSION TO PSL AND HAS EFFECTE D SALES IN CRORES IN THE SUBSEQUENT YEARS TO PSL. IT IS NOT THE CASE OF THE ASSESSEE THAT PSL HAS PROCURED THE GOODS FROM THE ASSESSEE-COMPANY ONLY F OR RELEVANT ASSTT.YEAR 2006-07. WE FIND THAT THE ASSESSEE IS W ELL AWARE OF THE FACT THAT BY PAYING LOYALTY COMMISSION, IT SHALL BE ENTI TLED TO ENDURING BENEFITS FOR SUBSEQUENT MANY YEARS, AND PSL WILL RETAIN AS I TS CUSTOMER. IN THESE FACTS OF THE CASE, WE CONFIRM THE ORDER OF THE CIT( A) IN HOLDING THAT THE ASSESSEE HAS PAID THE AMOUNT FOR ENDURING BENEFITS FOR MANY YEARS, AND THEREFORE, IT SHOULD BE TREATED AS CAPITAL EXPENDIT URE AND DEPRECIATION TO BE ALLOWED ON THIS AMOUNT. ACCORDINGLY, THE GROUND NO .1 AND 2 OF THE CO OF THE ASSESSEE ARE DISMISSED. 9. GROUND NO.3 OF THE CO IS AS UNDER: ITA NO.1778 AND 1779/AHD/2010 WITH CO -6- 3. THE LD.CIT(A) ERRED IN HOLDING THAT THE BANK IN TEREST OF RS.3,68,000/- IS CAPITAL IN NATURE. THE LD.CIT(A) OUGHT TO HAVE APPRECIATED THAT THE BORROWING WAS MADE FOR GENERAL CORPORATE USE AND THERE WAS NO SPECIFIC LOANS TAKEN FOR PURCHASE OF ASSETS. 10. WE HAVE HEARD THE PARTIES. WE FIND THAT THE CIT (A) HAS PASSED A WELL REASONED ORDER ON THIS ISSUE. WE FIND THAT T HE CIT(A) HAS RECORDED IN THE APPELLATE ORDER THAT THE INTEREST WAS PAID B Y THE ASSESSEE BEFORE THE MACHINERY WAS ACTUALLY PUT TO USE, AND THEREFORE, T HE SAME HAS TO BE CAPITALIZED, AND HAS ALLOWED THE DEPRECIATION, AS A PPLICABLE. THERE BEING NO MISTAKE IN THE ORDER OF THE CIT(A), THE SAME IS CONFIRMED AND THE GROUND NO.3 OF THE CO IS DISMISSED. 11. THE GROUND NO.4 OF THE CO IS AS UNDER: 4. THE LD.CIT(A) ERRED IN NOT DIRECTING THE LD.JCI T FOR QUANTIFYING THE AMOUNT OF UNABSORBED DEPRECIATION. 12. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE CIT(A) HAS NOT ADJUDICATED THE GROUND NO.8 BEFORE HIM RELATED TO THE ISSUE RAISED IN GROUND NO.4 OF THE CO OF THE ASSESSEE. THE LEARNED DR HAS RELIED ON THE ORDER OF THE AO. WE HAVE CONSIDERED THE RIVAL SUBM ISSIONS OF THE PARTIES. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE REST ORE THIS ISSUE TO THE FILE OF THE CIT(A) WITH DIRECTION TO DECIDE THE GROUND N O.8 BEFORE HIM ON MERITS AFTER ALLOWING DUE OPPORTUNITY OF HEARING TO THE PARTIES. WE DIRECT ACCORDINGLY. ITA NO.1779/AHD/2010 (REVENUES APPEAL PENALTY UN DER SECTION 271(1)(C) OF THE ACT. 13. THE ONLY GROUND OF THE REVENUE IN THIS APPEAL I S AS UNDER: ITA NO.1778 AND 1779/AHD/2010 WITH CO -7- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DELETING THE LEVY OF PENALTY OF RS.23,20,193/- U/S.271(1)(C) OF THE ACT ON ADDITION MADE OF RS.65, 25,000/- LOYALTY PAYMENT PAID TO PSL ON THE GROUND THAT SUCH PAYMENT WAS NOT MADE AS A PART OF NORMAL BUSINESS TRANSACTION AND INTERE ST EXPENSES INCURRED OF RS.3,68,000/- ON PURCHASE OF MACHINERY NOT PUT TO USE WERE DISALLOWED ON THE GROUND THAT SUCH EXPENDITURE FORMS CHARACTER OF REVENUE EXPENDITURE. 14. THE LEARNED DR SUBMITTED THAT THE ONLY ISSUE IN THIS APPEAL OF THE REVENUE IS REGARDING LEVY OF PENALTY UNDER SECTION 271(1)(C) OF THE ACT ON THE ASSESSEE. HE SUBMITTED THAT DISALLOWANCE OF LO YALTY COMMISSION HAS BEEN CONFIRMED BY THE LEARNED CIT(A) WITH DIRECTION THAT THE SAME SHOULD BE CONSIDERED AS CAPITAL EXPENDITURE AND DEPRECIATI ON TO BE ALLOWED THEREON. HE SUBMITTED THAT IT WAS FOR THE ASSESSEE TO FILE CORRECT RETURN OF INCOME AND HAVING FAILED TO DO SO, IT SHOULD BE MAD E LIABLE TO PENALTY UNDER SECTION 271(1)(C) OF THE ACT ALSO. HE RELIED ON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT ALL THE MATERIAL FACTS WERE DISCLOSED BY THE ASSESSEE AND THE PAYMENT OF L OYALTY COMMISSION WAS FULLY DISCLOSED BY DEBITING THE SAME IN ITS PROFIT & LOSS ACCOUNT, DULY AUDITED AND FILED BEFORE THE AO. THE ISSUE IS COVE RED IN FAVOUR OF THE ASSESSEE WITH THE DECISION OF THE HONBLE APEX COUR T IN CIT VS. RELIANCE PETROPRODUCTS PVT. LTD., 322 ITR 158 (SC). HE SUBMITTED THAT ONLY ISSUE IN THIS REGARD IS WHETHER THE EXPEN DITURE WAS CAPITAL OR REVENUE IN NATURE, AND FOR THAT NO PENALTY UNDER SE CTION 271(1)(C) OF THE ACT SHOULD BE LEVIED ON THE ASSESSEE. 15. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE AO AND THE CIT(A). WE FIND THAT ALL THE MATERIA L FACTS NECESSARY FOR THE ASSESSMENT WERE FILED BY THE ASSESSEE BEFOR E THE AO AT THE TIME OF FILING OF RETURN OF INCOME ITSELF. THE A MOUNT OF LOYALTY ITA NO.1778 AND 1779/AHD/2010 WITH CO -8- COMMISSION AMOUNTING TO RS.65.25 LAKHS WAS DEBITED TO PROFIT & LOSS ACCOUNT ENDING 31.3.2006 AND THE COPY THEREOF WAS F ILED IN THE AUDITED ACCOUNTS FILED WITH THE RETURN OF INCOME BY THE ASSESSEE, A COPY THEREOF HAS BEEN FIELD BEFORE US AT PAGE NO.68 OF THE COMPILATION. WE HAVE ALREADY HELD THAT SUCH EXPENDITURE WAS GENU INE AND THE SAME WAS CAPITAL IN NATURE, WHILE DISPOSING OF THE APPEA L OF THE REVENUE AND CO OF THE ASSESSEE PREFERRED FOR THE RELEVANT A SSESSMENT YEAR IN THE FOREGOING PARAS OF THIS ORDER. IN THIS BACKGRO UND, THE ONLY DISPUTE WAS WHETHER THE EXPENDITURE OF LOYALTY COMMISSION W AS CAPITAL OR REVENUE IN NATURE. THERE CAN ALWAYS BE AN HONEST D IFFERENCE OF OPINION ON THIS ISSUE BETWEEN THE PARTIES. MERELY BECAUSE CERTAIN EXPENDITURE WAS HELD TO BE CAPITAL IN NATURE AND AL LOWED DEPRECIATION THEREON, IT COULD NOT BE SAID THAT THE ASSESSEE IS GUILTY OF CONCEALMENT OF INCOME OR FILING OF INACCURATE PARTICULARS OF IN COME. THE RATIO OF THE HONBLE SUPREME COURT IN CIT VS. RELIANCE PETRO PRODUCTS PVT. LTD.(SUPRA) IS CLEARLY APPLICABLE TO THE FACTS OF T HE CASE OF THE ASSESSEE, AND ACCORDINGLY, THE ORDER OF THE CIT(A) ON THIS ISSUE IS CONFIRMED IN CANCELLING THE PENALTY UNDER SECTION 2 71(1)(C) OF THE ACT, AND THE GROUND NO.1 OF THE APPEAL OF THE REVEN UE BEING WITHOUT ANY MERIT, IS DISMISSED. 16. IN THE RESULT, BOTH THE APPEALS OF THE REVENUE ARE DISMISSED AND CO OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL P URPOSE. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE. ( %&'( %&'( %&'( %&'( / ANIL CHATURVEDI) )* + )* + )* + )* + /ACCOUNTANT MEMBER ( . .. . . .. . /G.C. GUPTA) !' !' !' !' /VICE-PRESIDENT