Indian Tools Technology Centre, Jalandhar V. The Income Tax Office, Jalandhar

ITA 197/ASR/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8673 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 11 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-01-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 23-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Gift; Capital expenditure
• Section: 12AA; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH; AMRITSAR (CAMP AT JALANDH AR ) BEFORE SH. A.D.JAIN, JUDICIAL MEMBER AND SH. T.S. KAPOOR, ACCOUNTANT MEMBER I.T.A NO.197(ASR)/2015 ASSESSMENT YEAR: 2011-12 INDIAN TOOLS TECHNOLOGY CENTRE, C/O FORGING & CHEMICALS, GT ROAD, BYE PASS, JALANDHAR. PAN:AACCI-3668M VS. INCOME TAX OFFICER, WARD-II(1), JALANDHAR. (APPELLANT) (RESPONDENT) APPELLANT BY: SH. J.S.BHASIN (ADV.) RESPONDENT BY: SH. BHAWANI SHANKAR (DR.) DATE OF HEARING: 17.01.2017 DATE OF PRONOUNCEMENT: 27.03.20 17 ORDER PER T. S. KAPOOR (AM): THIS IS AN APPEAL FILED BY ASSESSEE AGAINST THE ORD ER OF LD. CIT(A), JALANDHAR, DATED 20.01.2015, FOR ASST. YEAR: 2011-1 2. 2. THE ASSESSEE HAS TAKEN THE FOLLOWING GROUNDS OF APPEAL. (I) THAT THE LD. CIT(A) HAS GROSS ERRED IN FACTS A ND ALSO ON LAW, IN SUSTAINING THE ADDITION OF RS.50,35,812/-, AS MADE BY THE LD. ITO UNDER SECTION 35D/37(1), ON HIGHLY ERRONEOUS AND IN SUFFICIENT GROUNDS. (II) THAT THE LD. CIT(A) ALSO ERRED IN REJECTING TH E ASSESSEES CLAIM THAT THE EXPENSES INCURRED WERE ALLOWABLE UNDER SEC TION 57(III) OF THE ACT, AS HELD AN IDENTICAL CASE OF DY. DIRECTOR OF INCOME TAX (EXEMPTIONS) VS. PETROLEUM SPORTS PROMOTION BOARD ( 2014) IN 111DTR (DELHI) 55. ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 2 (III) THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN REJE CTING MOST PLAUSIBLE EXPLANATION OF ASSESSEE, SUPPORTED BY JUDICIAL AUTH ORITIES, BY WAY OF A NON-SPEAKING ORDER. THE IMPUGNED ORDER, THEREF ORE, DESERVES NOT TO BE SUSTAINED. 3. AT THE OUTSET, THE LD. AR INVITED OUR ATTENTION TO THE FACT THAT THERE WAS A DELAY IN FILING OF THE APPEAL BY 22 DAYS, WHI CH HAD HAPPENED DUE TO CERTAIN DISPUTE AMONG THE MEMBERS OF THE SOCIETY . IT WAS SUBMITTED THAT ASSESSEE SOCIETY HAD RECEIVED GRANT IN AID WIT H THE PRE-CONDITION THAT IN CASE THE COMPANY FAILS TO LAUNCH THE PROPOS ED PROJECT FOR ANY REASON, THE WHOLE OF THE GRANTS IN AID WOULD BE RET URNED TO THE GOVT., WITH INTEREST THEREON WHICH WAS SUBSEQUENTLY RETURN ED BACK AS THE PROJECT COULD NOT BE IMPLEMENTED AND IT WAS ONLY AF TER THE MATTER REGARDING FINANCES AND UTILIZATION AND OTHER ISSUES WERE SETTLED THAT APPEAL COULD BE FILED AND THIS HAS RESULTED IN DELA Y IN FILING OF THE APPEAL BY 22 DAYS. THE LD. AR INVITED OUR ATTENTION TO DUL Y NOTARIZED AFFIDAVIT FILED BY ASSESSEE IN THIS RESPECT. THEREFORE, IT WA S PRAYED THAT DELAY IN FILING OF APPEAL MAY BE CONDONED. 4. THE LD. DR, DID NOT RAISE ANY OBJECTION TO THE C ONDONATION OF DELAY AND FINDING THE EXPLANATION FOR DELAY IN FILING OF APPEAL REASONABLE, WE CONDONED THE DELAY AND THE LD. AR WAS DIRECTED TO P ROCEED WITH HIS ARGUMENTS. 5. THE LD. AR, AT THE OUTSET, SUBMITTED THAT A SSESSEE COMPANY WAS ESTABLISHED AS COMMON FACILITY CENTER (CPC) FOR USE OF HAND TOOL MANUFACTURES BY PROVIDING VARIOUS FACILITIES FOR MA NUFACTURING ACTIVITIES LIKE FORGING, HEAT TREATMENT, PACKAGING, FINISHING, TESTING ETC. UNDER ONE ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 3 ROOF. THE PROPOSED PROJECT WAS APPROVED BY THE DEPA RTMENT OF INDUSTRIAL POLICY AND PROMOTION AND THE DEPARTMENT WHILE APPRO VING TOTAL CENTRAL GRANT OF RS.58.28 CRORES FOR THE PROPOSED PROJECT H AD RELEASED THE FIRST INSTALLMENT OF GRANT IN AID OF RS.17.48 CRORES TO A SSESSEE COMPANY ON 24.11.2010. IT WAS SUBMITTED THAT GRANT IN AID WAS PLACED IN THE BANK AS FDR AND THE INTEREST THEREON WAS UTILIZED FOR THE P URPOSE OF UNDERTAKING VARIOUS ACTIVITIES TOWARDS FULFILLMENT OF THE ABOVE OBJECTS OF THE COMPANY. IT WAS FURTHER SUBMITTED THAT APPLICATION FOR REGIS TRATION U/S 12AA WAS REJECTED BY THE CIT-1, JALANDHAR AND THE ASSESS ING OFFICER DISALLOWED EXPENSES OF RS.50,35,812/- BY CAPITALIZI NG THE SAME U/S 35D OF THE ACT AND ALSO BROUGHT TO TAX THE INTEREST INC OME OF RS.47,69,845/- AS INCOME FROM OTHER SOURCES. IT WAS SUBMITTED THAT THE ASSESSING OFFICER WAS OF THE VIEW THAT SINCE NO BUSINESS HAD COMMENCED DURING THE YEAR, THEREFORE, THE PRELIMINARY EXPENSES INCUR RED ON ACCOUNT OF LEGAL EXPENSES, TRAVELING EXPENSES, ADVERTISEMENT EXP. AU DIT FEE ETC. WERE TO BE CAPITALIZED U/S 35D. THE INTEREST INCOME FROM FDR W AS HOWEVER NOT ALLOWED TO BE ADJUSTED AGAINST SUCH EXPENSES BY TRE ATING IT AS INCOME FROM OTHER SOURCES. THE LD. CIT(A) ALSO CONFIRMED T HE ACTION OF ASSESSING OFFICER AND THEREFORE, THE ASSESSEE WAS IN APPEAL B EFORE THIS HONBLE TRIBUNAL. THE LD. AR SUBMITTED THAT SEC.35D WAS NOT APPLICABLE TO THE ASSESSEE AS ASSESSEE WAS NOT CARRYING OUT ANY BUSIN ESS ACTIVITY AS UNDISPUTEDLY THE EXPENSES WERE INCURRED TO ACHIEVE THE OBJECTS OF THE COMPANY AND SINCE THE ASSESSEE WAS NON PROFITABLE C OMPANY INCORPORATED U/S 25 OF THE COMPANY ACT, THERE WAS N O PERSONAL INTEREST ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 4 OR MOTIVE INVOLVED OF ANY OF THE DIRECTORS OF THE C OMPANY AS IT WAS LAUNCHED AS PROJECT TO RENDER SERVICE TO THE HAND T OOL MANUFACTURERS OF THE AREA WITHOUT ANY DISTINCTION. THE LD. AR SUBMIT TED THAT THE AUTHORITIES BELOW NOWHERE HELD THAT THE EXPENSES IN CURRED WERE EITHER NOT GENUINE OR WERE NOT INCURRED TO CARRY OUT THE O BJECTS OF THE COMPANY, THEREFORE, THE SAME WERE FULLY ALLOWABLE AS LEGITIM ATELY CLAIMED BY THE ASSESSEE. WITHOUT PREJUDICE, THE LD. AR SUBMITTED THAT SINCE THE INCOME FROM BANK INTEREST FROM FDR WAS ASSESSED U/S 56 OF THE ACT, THEREFORE, THE EXPENSES INCURRED APPROXIMATELY TO THE TUNE OF RS.50 LACS OUGHT TO HAVE BEEN ALLOWED U/S 57(III) OF THE I.T. ACT. RELI ANCE IN THIS RESPECT WAS PLACED ON THE CASE LAW OF DELHI HIGH COURT IN THE C ASE OF DDIT (E) VS. PETROLEUM SPORTS PROMOTION BOARD 111 DTR 55 (DEL.). THE LD. AR FURTHER SUBMITTED THAT SINCE PROJECT CO ULD NOT BE IMPLEMENTED THEREFORE, THE ENTIRE GRANT IN AID RECE IVED ALONG WITH INTEREST THEREON WAS RETURNED BACK TO GOVT. AND IN THIS RESPECT OUR ATTENTION WAS INVITED TO VARIOUS LETTERS PLACED AT (PB 1TO 5), EVIDENCING THE FACT THAT THE ENTIRE GRANT ALONG WITH INTEREST WAS RETURNED BACK. THE LD. AR RELIED ON THE JUDGMENT OF HONBLE SUPREME CO URT IN THE CASE OF CIT VS. SHOORJI VALLABHDAS AND CO. 46 ITR 144 (SC), FOR THE PROPOSITION THAT THE INCOME TAX IS LEVIED ON INCOME AND WHERE N O INCOME RESULTS EITHER IN ACCRUAL SYSTEM OR ON RECEIPT BASIS, NO TA X IS PAYABLE. THE LD. AR SUBMITTED THAT THE SAID DECISION WAS APPLIED BY HONBLE SUPREME COURT IN THE CASE OF VODARA ELECTRICITY CO. LTD. VS . CIT, 225 ITR 295 (SC) ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 5 WHEREIN IT WAS HELD THAT INCOME TAX CANNOT BE LEVIE D ON HYPOTHETICAL INCOME. 6. THE LD. DR, ON THE OTHER HAND, HEAVILY PLACED HI S RELIANCE ON THE ORDER OF AUTHORITIES BELOW. 7. WE HAVE HEARD THE RIVAL PARTIES AND HAVE GON E THROUGH THE MATERIAL PLACED ON RECORD. WE FIND THAT IT IS AN UNDISPUTED FACT THAT ASSESSEE COMPANY WAS INCORPORATED AS NON PROFITABLE COMPANY U/S 25 OF THE ACT AND ITS OBJECTS WERE TO PROVIDE COMMON FACILITY CEN TER (CPC) TO THE MANUFACTURES OF HAND TOOLS OF THE AREA. AS REGARDS THE FIRST CONTENTION OF ASSESSEE THAT S INCE ASSESSEE WAS NOT DOING ANY BUSINESS AND THEREFORE, SEC.35D WAS N OT APPLICABLE, WE DO AGREE WITH THE CONTENTION OF LD. AR AS THE LANGUAGE OF SEC.35D CLEARLY INDICATES THAT WHERE AN ASSESSEE INCURS ANY EXPENDI TURE BEFORE THE COMMENCEMENT OF BUSINESS THAT EXPENDITURE WILL BE A MORTIZED AND ASSESSEE WILL BE ALLOWED A DEDUCTION OF AN AMOUNT E QUAL TO ONE TENTH OF EXPENDITURE FOR EACH OF TEN SUCCESSIVE YEARS. HERE IN THE SECTION WORD BUSINESS HAS BEEN MENTIONED AGAINST WHICH EXPENDITU RE IS INCURRED. THIS ASPECT HAS NOT BEEN EXAMINED BY THE AUTHORITIE S BELOW. AS REGARDS THE ALTERNATIVE CONTENTION OF LD. AR TH AT EXPENDITURE SHOULD HAVE BEEN ALLOWED U/S 57(III) OF THE ACT, WE DO NOT AGREE WITH THE CONTENTIONS OF LD. AR AS SECTION 57(III) CLEARLY LA YS DOWN THAT DEDUCTION IS ALLOWED FOR ANY OTHER EXPENDITURE (NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE) LAID OUT OR WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 6 OR EARNING OF SUCH INCOME. IN THE PRESENT CASE THE ASSESSEE HAD NOT INCURRED SUCH EXPENDITURE FOR THE PURPOSE OF EARNIN G INCOME AND RATHER IT IS OTHER WAY ROUND AS IN THE PRESENT CASE THE EX PENDITURE HAS BEEN EARNED OUT OF INCOME AND THEREFORE, DEDUCTION CANNO T BE ALLOWED U/S 57(III) OF THE ACT. THE CASE LAW OF HONBLE DELHI H IGH COURT IN THE CASE OF DCIT VS. PETROLEUM SPORTS BOARD IS NOT APPLICABLE A ND IS DISTINGUISHABLE AS IN THAT CASE THE ASSESSEE HAD RECEIVED GRANTS FR OM VARIOUS OIL COMPANIES AND EXPENDITURE WAS INCURRED FOR COLLECTI NG SUCH GRANTS AND THEREFORE, THE HONBLE COURT HAD RIGHTLY HELD SUCH EXPENDITURE AS DEDUCTIBLE U/S 57 (III) OF THE ACT WHEREAS IN THE P RESENT CASE NO EXPENDITURE WAS INCURRED FOR EARNING INTEREST INCOM E AND RATHER EXPENDITURE WAS INCURRED OUT OF INTEREST INCOME. IT IS ALSO UNDISPUTED FACT THAT THE PROJECT COULD NOT BE IMPLEMENTED AND THE ENTIRE AMOUNT HAS BEEN RETURNED BACK TO DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION AS IS EVIDENT FORM LETTERS PLACED AT (PB 1 TO 5) AND THEREFORE, THE ASSESSEE D ID NOT EARN ANY INCOME IN THE FORM OF INTEREST AS THE ENTIRE AMOUNT ALONG WITH INTEREST HAS BEEN RETURNED BACK. THE LD. CIT(A) HAS THOUGH NOTED THIS FACT BUT HE HAS HELD THAT THE REFUND OF GRANT IN AID ALONG WITH INTEREST WILL NOT ALTER THE POSITION AS THE REFUND IF ANY HAS BEEN MADE IN SUBS EQUENT YEAR AND WILL NOT HAVE ANY EFFECT IN THE YEAR UNDER CONSIDERATION . THE LD. AR RELIED ON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE O F CIT VS. SHOORJI VALLABHDAS AND CO. (SUPRA), FOR THE PROPOSITION THA T SINCE ASSESSEE DID NOT EARN ANY INCOME AND THEREFORE, INCOME WHICH DID NOT MATERIALIZE, ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 7 CANNOT BE TAXED. THE ABOVE CASE LAW OF THE HONBLE SUPREME COURT WAS NOT PLACED BEFORE THE AUTHORITIES BELOW. THE CRUX O F THE DECISION OF HONBLE SUPREME COURT IS REPRODUCED BELOW. 8. THE CONTENTIONS BEFORE US (AS ALSO IN THE HIGH COURT) WERE THAT THE INCOME HAD ALREADY ACCRUED TO THE ASSESSEE FIRM IN THE YEAR OF ACCOUNT, AND WAS THUS ASSESSABLE, THAT THE ARRANGEMENT AMOUN TED TO A VOLUNTARY GIFT BY THE ASSESSEE FIRM TO THE SHIPPING COMPANIES , AND THAT THE BOOKS BEING KEPT ON A MERCANTILE BASIS SHOWED THE COMMISS ION AS EACH AMOUNT OF FREIGHT WAS ENTERED. IT WAS ALSO CONTENDED THAT THE MANAGED COMPANIES DEALT WITH THE ACCOUNTS ONLY IN DECEMBER,1948, LONG AFTER THE PREVIOUS YEAR WAS OVER, AND THAT WHAT HAD HAPPENED IN THE SU BSEQUENT YEAR DID NOT ALTER THE POSITION IN THE RELEVANT PREVIOUS YEA R. 9. THE BOMBAY HIGH COURT RELIED UPON AN EARLIER DEC ISION OF THE SAME COURT REPORTED AS COMMISSIONER OF INCOME-TAX V. CHA MANLAL MANGALDAS & CO. AND HELD THAT THE EVENTS DURING THE ACCOUNT YEA R WERE THEMSELVES SUFFICIENT TO SHOW THAT THE INCOME NEITHER ACCRUED TO THE ASSESSEE FIRM NOR WAS RECEIVED BY IT SO AS TO BECOME ASSESSABLE. THE DECISION OF THE BOMBAY HIGH COURT WAS APPROVED BY THIS COURT IN COM MISSIONER OF INCOME-TAX V. CHAMANLAL MANGALDAS & CO. 10. IN COMMISSIONER OF INCOME-TAX V. CHAMANLAL MANG ALDAS & CO., THE ASSESSEE WAS ALSO THE MANAGING AGENT OF A COMPANY, AND UNDER THE AGREEMENT WAS ENTITLED TO RECEIVE COMMISSION AT A C ERTAIN RATE. BY ANOTHER AGREEMENT, THE COMMISSION EARNED BY THE MANAGING AG ENT FOR THE CALENDAR YEAR 1950 WAS REDUCED BY RS. 1 LAKH. THAT AGREEMENT TOOK PLACE DURING THE PREVIOUS YEAR, AND THE RESOLUTION OF THE BOARD OF DIRECTORS OF THE MANAGED COMPANY WAS ALSO IN THE PREVIOUS YEAR. IT W AS, HOWEVER, MADE FINAL ON APRIL 8, 1951, AT A MEETING OF THE BOARD O F DIRECTORS, BUT THAT WAS BEYOND THE PREVIOUS YEAR. THE HIGH COURT OF BOMBAY HELD THAT BY REASON OF THE RESOLUTION DURING THE CURRENCY OF THE PREVIO US YEAR, THE RIGHT OF THE ASSESSEE TO COMMISSION CEASED TO BE UNDER THE ORIGI NAL AGREEMENT AND DEPENDED UPON AND AROSE ONLY AFTER THE DECISION OF THE BOARD OF DIRECTORS TO REDUCE THE COMMISSION. THE ASSESSEE WAS, THEREFO RE, NOT HELD LIABLE ON THE LARGER SUM WHICH, IT WAS HELD, WAS ONLY A HYPOT HETICAL INCOME, WHICH IT MIGHT HAVE EARNED IF THE OLD AGREEMENT HAD CONTI NUED TO SUBSIST. THE FACTS OF THE PRESENT CASE ARE ALMOST IDENTICAL, AND THE PRINCIPLE APPLIED BY THE BOMBAY HIGH COURT GOVERNS THIS CASE. THE REASON IS PLAIN. INCOME TAX IS A LEVY ON INCOME. NO DOUBT, THE INCOME-TAX ACT T AKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATT RACTED, VIZ., THE ACCRUAL OF THE INCOME OR ITS RECEIPT; BUT THE SUBSTANCE OF THE MATTER IS THE INCOME, IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TA X, EVEN TOUGH IN BOOK- KEEPING, AN ENTRY IS MADE ABOUT A ' HYPOTHETICAL IN COME ' WHICH DOES NOT MATERIALIZE. WHERE INCOME HAS, IN FACT, BEEN RECEIV ED AND IS SUBSEQUENTLY GIVEN UP IN SUCH CIRCUMSTANCES THAT IT REMAINS THE INCOME OF THE RECIPIENT, EVEN THOUGH GIVEN UP, THE TAX MAY BE PAYABLE. WHERE , HOWEVER, THE INCOME CAN BE SAID NOT TO HAVE RESULTED AT ALL, THE RE S OBVIOUSLY NEITHER ACCRUAL NOR RECEIPT OF. INCOME, EVEN THOUGH AN ENTR Y TO THAT, EFFECT MIGHT,, ITA NO.19 7(ASR)/2015 ASST. YEAR: 2011-12 8 INCINERATION CIRCUMSTANCES, HAVE BEEN MADE IN THE B OOKS OF, ACCOUNT. THIS IS EXACTLY WHAT HAS HAPPENED IN THIS CASE, AS IT HA PPENED IN THE BOMBAY CASE, WHICH WAS APPROVED BY THIS COURT. HERE TOO, T HE AGREEMENTS WITHIN THE PREVIOUS YEAR REPLACED THE EARLIER AGREEMENTS, AND ALTERED THE RATE IN SUCH A WAY AS TO MAKE THE INCOME DIFFERENT FROM WHA T HAD BEEN ENTERED IN THE BOOKS OF ACCOUNT A MERE BOOK-KEEPING ENTRY C ANNOT BE INCOME, UNLESS INCOME HAS ACTUALLY RESULTED, AND IN THE PRE SENT CASE, BY THE CHANGE OF THE TERMS THE INCOME WHICH ACCRUED AND WA S RECEIVED CONSISTED OF THE LESSER AMOUNTS AND NOT THE LARGER. THIS; WAS NOT A. GIFT BY THE ASSESSEE FIRM TO THE MANAGER COMPANIES. THE REDUCTI ON WAS A PART OF THE AGREEMENT ENTERED INTO BY THE ASSESSES FIRM TO SECU RE A LONG-TERM MANAGING AGENCY ARRANGEMENT FOR THE TWO COMPANIES W HICH IT HAD FLOATED. THEREFORE, IN VIEW OF THESE FACTS AND CIRCUMSTANCE AND JUDICIAL PRECEDENTS, WE DEEM IT APPROPRIATE TO REMIT THE ISS UE BACK TO THE OFFICE OF ASSESSING OFFICER, WHO SHOULD DECIDE AFRESH IN VIEW OF THE PECULIAR FACTS OF THE PRESENT CASE ALONG WITH JUDICIAL PRECEDENTS RELIED ON BY THE ASSESSEE. 8. IN NUTSHELL, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27.03. 2017 . SD/- SD/- (A.D. JAIN) (T. S. KAPOOR) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 27.03.2017. /PK/ PS. COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: (2) THE (3) THE CIT(A), (4) THE CIT, (5) THE SR DR, I.T.A.T., TRUE COPY BY ORDER