The ACIT, Circle-3(2), Ahmedabad V. M/s. Vishnu Packaging, Ahmedabad

ITA 1869/AHD/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8226 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-11-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 15-07-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Retrospective amendment; Bonafide mistake; Capital expenditure
• Section: 143(3); 37(1)

Judgement Text

ITA NO. 1869/AHD/16 ASSESSMENT YEAR: 2012-13 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, AHMEDABAD [CORAM: PRAMOD KUMAR AM AND MAHAVIR PRASAD JM] IN ITA NO. 1869/AHD/2016 ASSESSMENT YEAR: 2012-13 ACIT ..........APPELLANT CIRCLE 3 (2), AHMEDABAD VS M/S. VISHNU PACKAGING ......RESPONDENT PLOT NO. 49 & 50, BLOCK A, MAHAGUJARAT ESTATE, VILLAGE MORAIYA, TAL. SANAND, AHMEDABAD [PAN : AANFM 0975 H] APPEARANCES BY VK SINGH FOR THE APPLICANT GG PIPARA FOR THE RESPONDENT ORDER RESERVED ON : NOVEMBER 13, 2017 ORDER PRONOUNCED ON : NOVEMBER 15, 2017 O R D E R PER PRAMOD KUMAR, AM: 1. THIS APPEAL, FILED BY THE ASSESSING OFFICER, IS DIRECTED AGAINST THE ORDER DATED 12.05.2016 PASSED BY THE CIT(A)-3, AHMEDABAD IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961, FOR THE ASSESSMENT YEAR 2012-13. 2. IN GROUND NO. 1, THE APPELLANT ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS.52,74,444/- MADE ON ACCOUNT OF DISALLOWANCE OF T RADE MARK LICENSE UTILISATION EXPENSES BY TREATING THE SAME AS REVENU E EXPENDITURE INSTEAD OF CAPITAL EXPENDITURE HELD BY THE AO. ITA NO. 1869/AHD/16 ASSESSMENT YEAR: 2012-13 PAGE 2 OF 5 3. LEARNED REPRESENTATIVES FAIRLY AGREE, EVEN AS LE ARNED DEPARTMENTAL REPRESENTATIVE RELIES UPON THE STAND OF THE ASSESSI NG OFFICER, THAT THE AFORESAID ISSUE IS COVERED, IN FAVOUR OF THE ASSESSEE, BY THE ORDER DATED 6 TH APRIL 2017 PASSED BY THE COORDINATE BENCH, IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12. THERE IS NO DISPUTE THAT THE MATERIAL FACTS OF THE CASE AND REASONING, AS SET OUT IN THAT ORDER AND WHICH IS NOT REPRODUCE D HERE FOR THE SAKE OF BREVITY- THOUGH THE SAME IS DEEMED TO BE ATTACHED TO AND FOR MING PART OF THIS ORDER, EQUALLY APPLIES TO THIS ASSESSMENT YEAR AS WELL. RESPECTFUL LY FOLLOWING THE SAID ORDER, WE UPHOLD THE IMPUGNED RELIEF GRANTED BY THE CIT(A) AN D DECLINE TO INTERFERE IN THE MATTER. 4. GROUND NO. 1 IS DISMISSED. 5. IN GROUND NO. 2, THE APPELLANT ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE ADDITION OF RS.30,80,000/- MADE ON ACCOUNT OF GOODS DESTROYED A S PER COURTS ORDER. 6. SO FAR AS THIS GRIEVANCE OF THE ASSESSING OFFICE R IS CONCERNED, THE RELEVANT MATERIAL FACTS ARE AS FOLLOWS. THE ASSESSEE BEFORE US IS A MANUFACTURER OF PAN MASALA. DURING THE COURSE OF SCRUTINY ASSESSMENT PR OCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE AS CLAIMED A DEDU CTION OF RS 30,80,000 IN RESPECT OF THE GOODS PRODUCED BY THE ASSESSEE WHICH, IN TER MS OF A COURT ORDER UNDER THE PREVENTION OF FOOD ADULTERATION ACT, HAD TO BE DEST ROYED AS IT WAS FOUND THE SAID GOODS HAD MAGNESIUM CARBONATE, A KNOWN CARCINOGENIC SUBSTANCE, IN EXCESS OF PERMISSIBLE LIMITS. THE CLAIM OF THE ASSESSEE WAS T HAT SINCE THE LOSS SO INCURRED WAS IN THE COURSE OF BUSINESS INASMUCH AS THE GOODS HAD TO BE DESTROYED BY THE FDI AUTHORITIES CEASING IT, AS IS THE SCHEME OF THE PRE VENTION OF FOOD ADULTERATION LAW, THE RELATED COSTS OF PRODUCING THE SAID GOODS IS TO BE ALLOWED AS DEDUCTION. THE ASSESSING OFFICER, HOWEVER, DECLINED THIS CLAIM OF DEDUCTION BY INVOKING THE PROVISIONS OF EXPLANATION TO SECTION 37(1), WHICH, INTER ALIA, LAYS DOWN THAT ANY EXPENDITURE INCURRED BY THE ASSESSEE FOR THE PURPOS E WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS, AND, IS, ACCORDINGLY NOT ADMISSIBLE AS DE DUCTION IN COMPUTATION OF BUSINESS INCOME. AGGRIEVED, ASSESSEE CARRIED THE MA TTER IN APPEAL BEFORE THE CIT(A), AND THE CIT(A) REVERSED THE ACTION OF THE A SSESSING OFFICER AND HELD THAT THE DESTRUCTION OF STOCK CONTAINING IMPERMISSIBLE LEVEL S OF MAGNESIUM CARBONATE WAS A LOSS INCURRED DURING THE COURSE OF BONAFIDE BUSINES S AND IS NOT HIT BY EXPLANATION TO SECTION 37(1). THE DEDUCTION WAS THUS ALLOWED. THE ASSESSING OFFICER IS AGGRIEVED OF THE RELIEF SO GRANTED BY THE CIT(A) AND IS IN FU RTHER APPEAL BEFORE US. ITA NO. 1869/AHD/16 ASSESSMENT YEAR: 2012-13 PAGE 3 OF 5 7. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTS OF THE CASE IN THE LIGHT OF THE LE GAL POSITION. 8. IT IS NO DOUBT TRUE THAT UNDER SECTION 37(1) OF THE ACT, ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIO NS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPEN SES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURP OSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION ', AND, THEREFORE, AS LONG AS THE STOCK CONTAINING IMPERMISSIBLE LIMITS OF MAGNES IUM CARBONATE WAS DESTROYED IN THE COURSE OF ASSESSEES BUSINESS, WHICH ADMITTEDLY IT WAS, THE ASSESSEE IS ENTITLED TO DEDUCTION UNDER SECTION 37(1). HOWEVER, THERE IS A PARADIGM SHIFT IN THE SCHEME OF THE ACT, BY INSERTION OF EXPLANATION TO SECTION 37(1) BY FINANCE (NO. 2) ACT 1998 WITH RETROSPECTIVE EFFECT FROM 1 ST APRIL 1962, WHICH LAYS DOWN THE RIDER TO THE MANDATE OF SECTION 37(1) BY STATING THAT FOR THE REMOVAL OF DOUBTS, IT IS HEREBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESS EE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL N OT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDIT URE . THE ADDITIONAL TEST TO BE SATISFIED, IN ORDER TO ENSURE DEDUCTIBILITY OF A N EXPENDITURE, IS THAT IT MUST NOT BE INCURRED FOR ANY PURPOSE WHICH IS AN OFFENCE OR PRO HIBITED BY LAW. 9. THE REASON AS TO WHY THE STOCK HAD TO BE DESTROY ED IN THE PRESENT CASE WAS THAT IT CONTAINED IMPERMISSIBLE HIGH LEVELS OF A CA RCINOGENIC SUBSTANCE BY THE NAME OF MAGNESIUM CARBONATE. PAN MASALA IS A CONTROVERSI AL PRODUCT AND, EVEN WHEN IT IS MANUFACTURED WITHIN THE PERMISSIBLE LEGAL NORMS, IT IS CONSIDERED TO BE RESPONSIBLE FOR ORAL CANCER AND OTHER SEVERE ILL EFFECTS ON HEA LTH. IN THE PRESENT CASE, THE ASSESSEE HAS GONE EVEN FURTHER AGAINST THE PUBLIC I NTERESTS. HE HAS USED THE CARCINOGENIC SUBSTANCE, WHICH IS DIRECT CAUSE OF CA NCER, MUCH IN EXCESS OF PERMISSIBLE LIMITS, RESULTING IN MANUFACTURE OF PRO DUCT WITH SUBSTANTIAL HEALTH HAZARD SAND THAT IS THE REASON THAT THE RELATED STOCKS HAD TO DESTROYED BY THE LAW ENFORCEMENT AGENCIES. WHETHER THIS SITUATION IS DUE TO A BONAFIDE MISTAKE OF THE ASSESSEE OR A CONSCIOUS DECISION TO MAKE THE PRODUC T EVEN MORE ATTRACTIVE TO THE CUSTOMERS, IS IRRELEVANT. THE MAGNESIUM CARBONATE L EVELS IN THE PRODUCTS MANUFACTURED BY THE ASSESSEE WERE IMPERMISSIBLE IN LAW AND THUS THE EXPENDITURE, ON ACCOUNT OF MAKING THIS PRODUCT, WAS SOMETHING WH ICH IS ADMITTEDLY PROHIBITED BY LAW. THE EXPENSES ON MANUFACTURING SUCH A NOXIOUS PRODUCT, WHETHER DELIBERATELY OR INADVERTENTLY CANNOT, THEREFORE, BE ALLOWED AS D EDUCTION UNDER SECTION 37(1) ON ACCOUNT OF DISABLING PROVISIONS OF EXPLANATION 1 TO SECTION 37(1). WHAT HAS BEEN CLAIMED AS A DEDUCTION IN THE PRESENT CASE IS THE E XPENSE INCURRED ON MANUFACTURING THE PRODUCT WHICH WAS DESTROYED BY THE LAW ENFORCEM ENT AGENCIES DUE TO ITS HIGH CARCINOGENIC CONTENT LEVELS. THE ASSESSING OFFICER WAS INDEED JUSTIFIED IN DECLINING ITA NO. 1869/AHD/16 ASSESSMENT YEAR: 2012-13 PAGE 4 OF 5 THE SAID DEDUCTION. WE HAVE ALSO TAKEN NOTE OF THE STAND OF THE ASSESSEE THAT SINCE THE ASSESSEE WAS NOT IMPOSED ANY PENALTY OR ANY OTH ER PROCEEDINGS FOR MANUFACTURING THE SAID PRODUCT, IT WAS CLEARLY A CA SE OF INFERIOR QUALITY BUT THE ASSESSEE HAS NOT BEEN FAULTED FOR THE SAME. HOWEVER , WHAT THIS PLEA OVERLOOKS IS THE UNDISPUTED POSITION THAT ADMITTEDLY THE PRODUCT HAD LEVEL OF CARCINOGENIC SUBSTANCE WAS IN EXCESS OF PERMISSIBLE LEVELS AND T HE MANUFACTURING OF SUCH PRODUCT WAS PROHIBITED BY LAW, AND THAT IS ALL THAT IS NECESSARY FOR INVOKING EXPLANATION TO SECTION 37(1). WHETHER THE PENALTY W AS ACTUALLY IMPOSED, OR EVEN INITIATED FOR SUCH AN INFRACTION OF LAW, IS NOT REA LLY RELEVANT FOR THE PURPOSE OF SATISFYING THE REQUIREMENTS OF EXPLANATION 1 TO SEC TION 37(1) BECAUSE AS LONG AS THE EXPENDITURE IS INCURRED FOR A PURPOSE WHICH IS PROH IBITED BY LAW, IT IS IMMATERIAL WHETHER THE SAID ACT OF THE ASSESSEE CONSTITUTES AN OFFENCE OR NOT. THE PLEA OF THE ASSESSEE IS THUS DEVOID OF LEGALLY SUSTAINABLE MERI TS. TECHNICALITIES APART, EVEN IF MANUFACTURING PAN MASALA WITH IMPERMISSIBLE CARCINO GENIC CONTENTS, DIRECTLY RESPONSIBLE FOR PROMOTING CANCER, IS NOT TREATED AS AN OFFENCE, IT IS CERTAINLY PROHIBITED IN LAW. IT IS, OF COURSE, SAD THAT OUR L AWS SOMETIME APPEAR TO BE SO LAX AND UNRESPONSIVE THAT EVEN THOSE RESPONSIBLE, WITH OR W ITHOUT ANY ULTERIOR MOTIVES, FOR SUCH SERIOUS HEALTH HAZARDS ESCAPE THE EXEMPLARY PU NISHMENT. WHAT IS EVEN MORE DISTURBING IS THE INDIFFERENT ATTITUDE TO THE ASSES SEE TO THE POSSIBLE DAMAGE THEIR PRODUCTS COULD HAVE CAUSED, AND, WITHOUT ANY REMORS E OR REGRET IN HIS CONDUCT, CLAIM BUSINESS DEDUCTION OF EXPENSES INCURRED IN PRODUCTS WHICH COULD HAVE SERIOUSLY ENDANGERED HEALTH OF THE CONSUMERS OF HIS PRODUCT. AS WE NOTE SO, WE MAY ALSO PLACE ON RECORD THE GRACIOUS CONDUCT BY AT LEAST LE ARNED COUNSEL OF THE ASSESSEE, WHO, ON BEING TOLD ABOUT WHAT WE FEEL ABOUT THIS SI TUATION, SUBMITTED THAT WHATEVER BE THE LEGAL MERITS OF THE CLAIM FOR DEDUCTION, HE LEAVES THE MATTER TO THE BENCH. BE THAT AS IT MAY, AS WE HAVE HELD ON THE MERITS, THE EXPLANATION 1 TO SECTION 37(1) COMES INTO PLAY IN THIS CASE, AND, ACCORDINGLY, THE CLAIM IS LEGALLY INADMISSIBLE. 10. IN VIEW OF THE ABOVE DISCUSSIONS, AS ALSO BEAR ING IN MIND THE ENTIRETY OF THE CASE, WE VACATE THE ORDER OF THE CIT(A) ON THIS POI NT AND RESTORE THE DISALLOWANCE OF RS 30,80,000. 11. GROUND NO. 2 IS THUS ALLOWED. 12. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED IN THE TERMS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON THE 15 TH TH DAY OF NOVEMBER, 2017. SD/- SD/- MAHAVIR PRASAD PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBE R) AHMEDABAD, THE 15 TH DAY OF NOVEMBER, 2017 * * ITA NO. 1869/AHD/16 ASSESSMENT YEAR: 2012-13 PAGE 5 OF 5 COPIES TO: (1) THE APPELLANT (2) THE RESPOND ENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER TRUE COPY ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD 1. DATE OF DICTATION: ...ORDER/WORDS PROCESSED BY HONBLE AM ON HIS LAPTOP. 13.11.2017... 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: ..14.11.2017. 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR . P.S./P.S.: ...15.11.2017.... . 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: 15.11.2017... 5. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK : .. 15.11.2017. 6. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK : 15.11.2017. 7. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: