KAMADGRI FASHION LTD, MUMBAI V. ITO WD 4(2)(1), MUMBAI

ITA 1875/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9203 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-10-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 31-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SAURABH DESH
• Assessee Lawyers: S SRIRAM LD
• Keywords: Depreciation; Non-deduction of tax; Scheme of amalgamation
• Section: 143(3)

Judgement Text

ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI . . , , BEFORE SHRI D.T. GARASIA, JM AND SHRI MANOJ KUMAR AGGARWAL, AM ./I.T.A. NO. 1875/MUM/2015 ( / ASSESSMENT YEAR: 2010-11) KAMADGIRI FASHION LIMITED (CIN : L17120MH1987PLC042424) THE QUBE, B-104 1 ST FLOOR, M.V.ROAD MAROL, ANDHERI(E) MUMBAI 400 059 / VS. INCOME TAX OFFICER WARD 4(2)(1) R.NO.644,6 TH FLOOR, AAYKAR BHAVAN, M.K.ROAD MUMBAI -400 020 ./ ./PAN/GIR NO. AAACK-1654-P ( ' /APPELLANT ) : ( #$ ' / RESPONDENT ) ASSESSEE BY : S.SRIRAM, LD. AR REVENUE BY : SAURABH DESHPANDE, LD. DR / DATE OF HEARING : 22/08/2017 / DATE OF PRONOUNCEMENT : 04/10/2017 ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 2 / O R D E R PER MANOJ KUMAR AGGARWAL (ACCOUNTANT MEMBER) 1. THE CAPTIONED APPEAL BY ASSESSEE FOR ASSESSMENT YEAR [AY] 2010-11 ASSAILS THE ORDER OF LD. COMMISSIONER OF IN COME TAX (APPEALS)-9 [CIT(A)], MUMBAI DATED 14/01/2015. THE ASSESSEE HAS FILED REVISED GROUNDS OF APPEAL ON 28/04/2017 AND CONTEST VARIOUS ADDITIONS AS CONFIRMED BY LD. CIT(A) VIDE APPEAL NO. CIT(A)-9/CIR.4/162/2013-14 ORDER DATED 14/01/2015 . THE ASSESSMENT WAS FRAMED BY INCOME TAX OFFICER 4(2)(1), MUMBAI ON 22/03/2013. 2.1 FACTS LEADING TO SAME ARE THAT THE ASSESSEE BEI NG RESIDENT CORPORATE ASSESSEE ENGAGED IN MANUFACTURING AND TRADING OF FABRICS WAS ASSESSED FOR IMPUGNED AY U/S 143(3) AT RS.5,35, 97,480/- AFTER CERTAIN ADDITIONS / ADJUSTMENTS / DISALLOWANCES AS AGAINST RETURNED INCOME OF RS.3,95,45,621/- E-FILED BY THE ASSESSEE ON 30/09/2010. THE ADDITIONS WHICH ARE THE SUBJECT MATTER OF THIS APPE AL ARE AS FOLLOWS:- 2.2 DURING ASSESSMENT PROCEEDINGS, IT WAS NOTED THA T THE ASSESSEE PAID A RENT OF RS.3,68,560/- TO AN ENTITY NAMELY ALD AUTOMOTIVE PRIVATE LIMITED BUT DID NOT DEDUCT ANY TDS THEREUPON ON THE STRENG TH OF NO DEDUCTION CERTIFICATE ISSUED BY ACIT-TDS1(1) DATED 11/06/2009. THE LD. AO DISALLOWED AN AMOUNT OF RS.68,890/- BEING RE NT FOR THE MONTH OF NO. PARTICULARS RS. 1. RENT PAID 68,890/- 2. PROVISION FOR INCENTIVE 97,37,699/- 3. EXCESS DEPRECIATION CLAIMED 42,45,274/- TOTAL 1,40,51,863/ - ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 3 APRIL & MAY, 2009 ON THE PREMISES THAT THE CERTIFIC ATE WAS DATED 11/06/2009 AND COULD BE APPLIED ONLY FROM JUNE, 200 9. 2.3 FROM PERUSAL OF PROFIT & LOSS ACCOUNT, IT WAS N OTED THAT THE ASSESSEE DEBITED INCENTIVE EXPENSES OF RS.99,69,850/- OUT OF WHICH AN AMOUNT OF RS.99,39,699/- WAS SHOWN AS PROVISIONS. T HE LD. AO NOTED THAT THE SAID INCENTIVE WAS CREDITED TO THE RESPECT IVE PARTIES IN THE SUBSEQUENT YEARS AND THEREFORE ALLOWABLE IN SUBSEQU ENT YEARS ONLY AND NOT IN THE IMPUGNED AY. 2.4 FURTHER, LD. AO NOTED THAT THE ASSESSEE TRANSFE RRED RS.424.53 LACS FROM AMALGAMATION RESERVE TO GENERAL RESERVE IN THE PREVIOUS YEAR RELEVANT TO AY 2009-10 WHEREIN THE COMPANY M/S STRIPES APPARELS PVT. LTD. WAS AMALGAMATED WITH THE ASSESSEE COMPANY AND THE S AME RESULTED INTO INCREASE IN GENERAL RESERVE TO RS.623.06 LACS. THE LD. AO OPINED THAT THE ASSESSEE PURCHASED ASSETS AT HIGHER COST BUT MAKE THE PAYMENT THEREOF AT LOWER RATE AND THEREFORE, AMALGAMATION RESERVE WAS REQUIRED TO BE REDUCED FROM THE COST OF THE ASSET A CQUIRED BY THE ASSESSEE FROM THE AMALGAMATING COMPANY AND PROPORTI ONATE DEPRECATION BE REDUCED ACCORDINGLY. FINALLY, THE LD . AO REDUCED THE DEPRECIATION AGAINST AMALGAMATION RESERVE OF RS.424 .53 LACS AT ESTIMATED RATE OF 10% WHICH LED TO DEPRECIATION DIS ALLOWANCE TO THE EXTENT OF RS.42.45 LACS. 3. AGGRIEVED, THE ASSESSEE CONTESTED THE SAME WITHO UT ANY SUCCESS BEFORE LD.CIT(A) VIDE IMPUGNED ORDER DATED 14/01/20 15 WHERE THE ADDITIONS AGAINST INCENTIVES WERE CONFIRMED ON THE PREMISES THAT THE EXPENSES DID NOT CRYSTALLIZED DURING IMPUGNED AY AN D THE SAME, BEING ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 4 CONTINGENT IN NATURE, WERE NOT ALLOWABLE U/S 37(1). THE STAND OF LD. AO WAS CONFIRMED QUA OTHER ADDITIONS ALSO. AGGRIEVED, THE ASSESSEE IS IN FURTHER APPEAL BEFORE US. 4. THE LD. COUNSEL FOR ASSESSEE [AR] CONTESTED THE ADDITION AGAINST RENT ON THE PREMISES THAT THE ASSESSEE DID NOT DEDU CT TDS AGAINST RENTAL PAYMENT ON THE STRENGTH OF NO DEDUCTION CERTIFICATE ISSUED U/S 197 IN PAYEES FAVOR BY THE CONCERNED ASSESSING OFF ICER (TDS). OUR ATTENTION IS DRAWN TO THE FACT THAT ALTHOUGH THE CE RTIFICATE IS DATED 11/06/2009, HOWEVER, THE SAME APPLIES TO WHOLE FINA NCIAL YEAR AS EVIDENT FROM THE ANNEXURE ATTACHED TO THE SAID CERT IFICATE. IN THE ALTERNATIVE, IT WAS CONTENDED THAT THE IMPUGNED AMO UNT WAS MUCH BELOW THRESHOLD LIMIT AS PROVIDED U/S 194-I AND THE REFORE, EVEN OTHERWISE NO TAX DEDUCTION AT SOURCE WAS REQUIRED AGAINST THE SAME. QUA ADDITION AGAINST PROVISION FOR INCENTIVES, LD. AR DREW OUR A TTENTION TO THE DETAILED DOCUMENTS PLACED AT PAGE NOS. 52 TO 101 OF THE PAPER BOOK AND CONTENDED THAT INCENTIVE WAS PAYABLE TO THE CUSTOME RS OF THE ASSESSEE AGAINST SALES TARGET ACHIEVED BY THEM DURING IMPUGN ED AY AND THE SAME HAD CRYSTALLIZED DURING IMPUGNED AY AND ALLOWA BLE TO ASSESSEE FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. THE ESTI MATED ADDITION AGAINST DEPRECIATION HAS BEEN ASSAILED ON THE GROU ND THAT THE ASSETS WERE TAKEN OVER BY THE ASSESSEE AT BOOK VALUE ONLY AND FULL DEPRECIATION AGAINST THE SAME WAS ALLOWABLE TO THE ASSESSEE IN T ERMS OF STATUTORY PROVISIONS AND LOWER AUTHORITIES ERRED IN UNDERSTAN DING THE ISSUE IN PROPER PERSPECTIVE. ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 5 5. PER CONTRA, LD. DR PLACED RELIANCE ON THE STAND OF LOWER AUTHORITIES AND CONTENDED THAT DEDUCTION AGAINST MERE PROVISION S COULD NOT BE ALLOWED TO THE ASSESSEE. 6. WE HAVE CAREFULLY HEARD THE RIVAL CONTENTIONS AN D PERUSED RELEVANT MATERIAL ON RECORD. SO FAR AS THE DISALLOWANCE OF R ENTAL EXPENSES IS CONCERNED, WE ARE INCLINED TO DELETE THE SAME FOR T HE SIMPLE REASON THAT THE IMPUGNED AMOUNT OF RS.68,890/- WAS WELL BELOW T HE THRESHOLD LIMIT OF RS.1,20,000/- AS PRESCRIBED U/S 194-I DURING IMP UGNED AY SO AS TO TRIGGER THE STATED TDS PROVISIONS. MOREOVER, THE AN NEXURE TO CERTIFICATE U/S 197 ISSUED BY CONCERNED TDS OFFICER QUANTIFIES THE ESTIMATED TOTAL BILLING FOR F.Y.2009-10 U/S 194-I WHICH LEAD US TO CONCLUDE THAT THE SAME WAS APPLICABLE FOR THE WHOLE FINANCIAL YEAR. R ESULTANTLY, THIS ADDITION STANDS DELETED AND THIS GROUND OF ASSESSEE S APPEAL SUCCEEDS. 7. THE MAIN DISPUTE REGARDING ADDITION AGAINST INCENTIVE EXPENSES IS CRYSTALLIZATION. IT IS BEYOND DOUBT THAT UNDER MERC ANTILE SYSTEM OF ACCOUNTING, EXPENSES PERTAINING TO IMPUGNED AY WERE ALLOWABLE TO THE ASSESSEE IN IMPUGNED AY ONLY PROVIDED THAT THE SAME HAS BEEN QUANTIFIED AND CRYSTALLIZED. THE ONLY BASIS ON WHIC H THE SAME HAS BEEN DISALLOWED BY LD. AO IS THAT THE SAME HAS BEEN CRED ITED TO THE ACCOUNTS OF THE RESPECTIVE PARTIES IN SUCCEEDING ASSESSMENT YEARS. HOWEVER, IN OUR OPINION, IF THE LIABILITY HAD ALREADY BEEN QUAN TIFIED AND CRYSTALLIZED AND PROVISION THEREOF WAS MADE IN THE BOOKS OF ACCO UNTS, THE SAME WAS ALLOWABLE TO THE ASSESSEE IRRESPECTIVE OF ACTUAL CR EDIT TO THE RESPECTIVE PARTIES SINCE THE ASSESSEE, FOLLOWING MERCANTILE SY STEM OF ACCOUNTING, WAS ELIGIBLE TO CLAIM THE SAME. THE LD. AR HAS PLAC ED ELABORATE ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 6 DOCUMENTS IN THE PAPER BOOK TO DEMONSTRATE THAT THE LIABILITY HAD ACTUALLY CRYSTALLIZED DURING IMPUGNED AY. THEREFORE , WITHOUT MUCH DELIBERATION, WE RESTORE THE MATTER BACK TO THE FIL E OF LD. AO TO RE- APPRECIATE THE DOCUMENTARY EVIDENCES SUBMITTED BY T HE ASSESSEE AND DECIDE AS PER LAW. THE ASSESSEE, IN TURN, IS DIRECT ED TO DEMONSTRATE THE CRYSTALLIZATION THEREOF IN THE IMPUGNED AY. THE LD. AO IS ALSO DIRECTED TO VERIFY THAT DEDUCTION FOR THESE EXPENSES IS NOT CLA IMED BY THE ASSESSEE IN SUBSEQUENT YEARS. RESULTANTLY, THIS GROUND OF AS SESSEES APPEAL STANDS ALLOWED FOR STATISTICAL PURPOSES. 8. THE LAST ISSUE PERTAINS TO DISALLOWANCE OF DEPRE CIATION FOR RS.42.45 LACS WHICH IS ESTIMATED @10% OF AMALGAMATION RESERVE ACCRUING TO THE ASSESSEE. THE FACTS GIVING RISE TO AMALGAMATION RESERVE, AS EVIDENT FROM ANNUAL REPORT OF THE ASSESSEE COMPANY, ARE THAT PURSUANT TO A SCHEME OF AMALGAMATION U/S 391 TO 394 OF THE COMPAN IES ACT, 1956, AS APPROVED BY HIGH COURT OF BOMBAY, ONE UNDERTAKING O F AN ENTITY NAMELY STRIPES APPARELS LTD. (TRANSFEROR COMPANY) WAS AMALGAMATED INTO THE ASSESSEE COMPANY WHICH BECAME EFFECTIVE FROM 29/06/ 2009. THE ENTIRE BUSINESS AND WHOLE OF UNDERTAKING OF THE TRANSFEROR COMPANY, ON GOING CONCERN BASIS, STOOD TRANSFERRED TO ASSESSEE COMPANY WITH EFFECT FROM 01/04/2008. PURSUANT TO EXCHANGE RATIO AS APPROVED UNDER THE SCHEME, THE ASSESSEE ALLOTTED SHARES VALUING AT RS.173.98 L ACS I.E. 17,39,866/- EQUITY SHARES OF RS. 10/- EACH TO THE SHAREHOLDERS OF THE TRANSFEROR COMPANY AS AGAINST NET ASSETS OF RS.598.51 LACS TAKEN OVER BY THE ASSESSEE COMPANY. THE DIFFERENTIAL OF THE TWO I.E. RS.424.52 LACS GAVE RISE TO THE AMALGAMATION RESERVE IN THE BOOKS OF ASSESSEE COMPANY . ALL ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 7 THE ASSETS AND LIABILITIES WERE TAKEN OVER BY THE A SSESSEE AT THEIR BOOK VALUES AS APPEARING IN THE BOOKS OF TRANSFEROR COMP ANY, EXCEPT MINOR ADJUSTMENTS SO AS TO ENSURE UNIFORMITY IN ACCOUNTIN G POLICY AND PRESENTATION OF FINANCIAL STATEMENTS. THE ASSESSEE HAS ACCOUNTED THE TRANSACTION ON POOLING OF INTEREST METHOD AS ENVISAGED IN ACCOUNTING STANDARD-14 ISSUED BY ICAI. THIS METHOD IS FOLLOWED IN CASE OF AMALGAMATION IN THE NATURE OF MERGER AND ACCORDING TO THIS METHOD, NO ADJUSTMENT IS INTENDED TO BE MADE IN THE BOOK VALUE OF ASSETS AND LIABILITIES TAKEN OVER EXCEPT TO ENSURE UNIFORMITY OF ACCOUNTING POLICY. THE LD. AO HAS DISALLOWED DEPRECIATION AGAINST THE SAID AMALGAMATION RESERVE AT ESTIMATED RATE OF 10% AND THE SAME IS TH E SUBJECT MATTER OF THIS APPEAL. 9. ON THE BASIS OF ABOVE, WE NOTE THAT LOWER AUTHOR ITIES HAS ERRED IN CONCLUDING THAT THE AMALGAMATION RESERVE REPRESENT LOWER PAYMENT MADE BY THE ASSESSEE TO ACQUIRE DEPRECIABLE ASSETS OF HIGHER VALUE WHEREAS WE HAVE NOTED THAT THE SAME REPRESENT DIFFE RENCE OF NET ASSETS TAKEN OVER BY THE ASSESSEE AND SHARE CAPITAL ISSUED TO TRANSFEROR COMPANY UPON AMALGAMATION. FURTHER, ALL THE ASSETS & LIABILITIES HAVE BEEN TAKEN OVER AT THE BOOK VALUES ONLY AS EVIDENT FROM THE ANNUAL REPORT OF THE COMPANY AND MOREOVER, THIS FACT IS NEVER BE EN CONTROVERTED BY THE REVENUE. 10. PRIMA FACIE, THE TRANSACTION IS IN THE NATURE OF DEMERGER AS DEFINED IN SECTION 2(19AA), THE WRITTEN DOWN VALUE OF WHICH IS GOVERNED BY EXPLANATION 2A AND 2B TO SECTION 43(6). SINCE, THE ASSESSEE IS RESULTING ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 8 COMPANY, EXPLANATION 2B IS APPLICABLE AND THE SAME IS REPRODUCED BELOW:- EXPLANATION 2B.WHERE IN A PREVIOUS YEAR, ANY ASSET FORMING PART OF A BLOCK OF ASSETS IS TRANSFERRED BY A DEMERGED COMPAN Y TO THE RESULTING COMPANY, THEN, NOTWITHSTANDING ANYTHING CONTAINED I N CLAUSE (1), THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS IN THE CA SE OF THE RESULTING COMPANY SHALL BE THE WRITTEN DOWN VALUE OF THE TRAN SFERRED ASSETS OF THE DEMERGED COMPANY IMMEDIATELY BEFORE THE DEMERGER. THEREFORE, WHILE DELETING THE IMPUGNED ADDITIONS, W E DEEM IT PROPER TO RESTORE THE MATTER BACK TO THE FILE OF LD. AO FOR L IMITED PURPOSE OF VERIFYING THE FACT THAT THE WRITTEN DOWN VALUE OF T HE ASSETS TAKEN OVER BY THE ASSESSEE AND ON WHICH DEPRECIATION IS CLAIMED B Y THE ASSESSEE UNDER INCOME TAX ACT IS THE SAME AS THEY STOOD IN T HE DEPRECIATION CHART AS PER INCOME TAX ACT, 1961 IN THE BOOKS OF T RANSFEROR COMPANY IMMEDIATELY BEFORE DEMERGER. IN OTHER WORDS, LD. AO IS DIRECTED TO VERIFY THAT THE DEPRECIATION ALLOWABLE TO THE DEMERGED ENT ITY, IN CASE DEMERGER HAD NOT TAKEN PLACE AND THE ACTUAL DEPRECIATION CLA IMED BY THE ASSESSEE UNDER INCOME TAX ACT REMAINS THE SAME. RES ULTANTLY, THIS GROUND OF ASSESSEES APPEAL STANDS ALLOWED FOR STAT ISTICAL PURPOSES. 11. IN NUTSHELL, THE ASSESSEES APPEAL STANDS PARTL Y ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 04 TH OCTOBER, 2017. SD/- SD/- (D.T. GARASIA) (MANOJ KUMAR AGGARWAL) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; DATED : 04. 10.2017 SR.PS:- THIRUMALESH ITA NO 1875/MUM/2015 KAMADGIRI FASHION LIMITED ASSESSMENT YEAR 2010-11 9 ! / COPY OF THE ORDER FORWARDED TO : 1. ' / THE APPELLANT 2. #$ ' / THE RESPONDENT 3. , ( ) / THE CIT(A) 4. , / CIT CONCERNED 5. #&. , . , / DR, ITAT, MUMBAI 6. / / GUARD FILE / BY ORDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI