DCIT, CHENNAI V. M/s. Maruwa Electronic (India) Pvt. Ltd., CHENNAI

ITA 2069/CHNY/2010

• Counselvise Citation: 206921714 RSA 2010
• Duration Of Justice: 8 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-08-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 18-08-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-12-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: T N BETGIRI J
• Assessee Lawyers: V MUTHUKARUP
• Keywords: Business income; Revenue expenditure

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 I.T.A.NOS. 2069 & 2070/MDS/2010 AND C.O.NOS. 1 & 2/MDS/2011 (ASSESSMENT YEARS : 2006-07) THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-IV(1), CHENNAI 600 034. VS. M/S. MARUWA ELECTRONIC (INDIA) PVT. LTD., 180-A, NEW NO.126, MOUNT POONAMMALLEE ROAD, PORUR, CHENNAI 600 116. PAN AAECM 2281 L (APPELLANT) (RESPONDENT/CROSS-OBJECTOR) APPELLANT BY : SHRI T.N.BETGIRI, JCIT-DR RESPONDENT BY : SHRI V. MUTHUKARUPPAN, CA DATE OF HEARING : 18 TH AUGUST, 2011 DATE OF PRONOUNCEMENT : AUGUST, 2011 O R D E R PER DR. O.K. NARAYANAN, VICE-PRESIDENT THE TWO APPEALS ARE FILED BY THE REVENUE AND THE CR OSS OBJECTIONS ARE FILED BY THE ASSESSEE. THE RELEVANT ASSESSMENT YEAR IS 2006-07. THE APPEAL IN ITA NO.2069/MDS/201 0 IS A ITA 2069, 207010 & CO 1 & 2/11 :- 2 -: QUANTUM APPEAL AND THE APPEAL IN ITA NO.2070 IS A P ENALTY APPEAL. FIRST, LET US CONSIDER THE QUANTUM APPEAL FILED BY THE REVENUE. 2. THE ASSESSEE-COMPANY IS A MANUFACTURER OF CHIP I NDUCTOR. IT FILED ITS RETURN ON A LOSS OF ` 86,71,319/-. THE ASSESSEE CLAIMED AN EXPENDITURE OF ` 1,07,11,191/- UNDER VARIOUS HEADS. THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA S NOT ACCOUNTED FOR ANY BUSINESS INCOME AND THEN HOW THE LOSS OF ` 86,71,319/- RETURNED BY THE ASSESSEE COULD BE ALLOW ED TO BE CARRIED FORWARD. THE ASSESSEE REPLIED THAT IT HAD SET UP THE FACTORY FOR MANUFACTURING OF CHIP INDUCTOR IN 2005- 06 AND COMMENCED THE PRODUCTION IN THE SUBSEQUENT FINANCIA L YEAR 2006- 07. THE ASSESSEE ALSO STATED THAT AS THE EXPENSES WERE INCURRED PRIOR TO PRODUCTION, THE ASSESSEE WOULD LIKE TO AVA IL AMORTIZATION FOR FIVE YEARS UNDER SEC.35D OF THE INCOME-TAX ACT, 1961. 3. ON THE BASIS OF THE ABOVE DETAILS AND DISCUSSION S, THE ASSESSING OFFICER CAME TO THE CONCLUSION THAT THE A SSESSEE HAD NOT STARTED ITS PRODUCTION TILL THE END OF THE PREV IOUS YEAR ON 31.3.2006. THEREFORE, HE DISALLOWED ALL THE EXPENS ES CLAIMED BY THE ASSESSEE TREATING THEM AS PRE-COMMENCEMENT EXPE NSES, AS ITA 2069, 207010 & CO 1 & 2/11 :- 3 -: A RESULT OF WHICH THE ASSESSING OFFICER HAS DISALLO WED THE DECLARED LOSS OF ` 86,71,319/- AND DETERMINED THE BUSINESS INCOME OF THE ASSESSEE AT NIL. 4. THE ASSESSEE HAD SHOWN ` 63,000/- AS MISCELLANEOUS INCOME AND THE ASSESSING OFFICER TREATED THIS INCOM E AS INCOME FROM OTHER SOURCES AND DETERMINED A TAXABLE INCOME AT ` 63.000/-. 5. IN FIRST APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT ONE OF THE MAIN OBJECTS IN THE MEMORANDUM OF ASSOCIATION OF THE ASSESSEE-COMPANY IS THAT IT IS A CTING AS A COMMISSION AGENT AND AS THE ASSESSEE HAS ACTED AS A COMMISSION AGENT IN THE PREVIOUS YEAR, THE BUSINESS HAS TO BE CONSIDERED AS COMMENCED. THEREFORE, HE HELD THAT SE C.35D IS NOT ATTRACTED AND THE ENTIRE EXPENSES INCURRED BY THE A SSESSEE SHOULD BE ALLOWED AS DEDUCTION. HE ACCORDINGLY UPH ELD THE CLAIM OF DEDUCTION MADE BY THE ASSESSEE AND DELETED THE D ISALLOWANCE OF ` 86,71,319/- AND HELD THAT THE SAID LOSS IS ENTITLE D FOR CARRY FORWARD. IN RESPECT OF TREATING THE SUM OF ` 63,000/- AS INCOME, THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT THE SAID ITA 2069, 207010 & CO 1 & 2/11 :- 4 -: INCOME COULD BE SET OFF AGAINST THE LOSS RETURNED B Y THE ASSESSEE. ACCORDINGLY, THE APPEAL WAS ALLOWED. 6. THE REVENUE IS AGGRIEVED AND THEREFORE, THE SECO ND APPEAL BEFORE US. 7. THE GROUND RAISED BY THE REVENUE IN QUANTUM APPE AL IS THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS E RRED IN DELETING THE DISALLOWANCE OF EXPENSES OF ` 86,71,319/- WHICH THE ASSESSING OFFICER HAS DISALLOWED AS PRE-COMMENCEMEN T EXPENSES. IT IS THE CASE OF THE REVENUE THAT SEC.3 5D OPERATES IN RESPECT OF EXPENDITURE IN CONNECTION WITH EXTENSION OF THE UNDERTAKING OR SETTING UP OF A NEW UNIT. IT IS ALS O THE CASE OF THE REVENUE THAT THE ASSESSEES ACTIVITY OF BEING A COM MISSION AGENT IS DISTINCT ACTIVITY FROM THE ACTIVITY OF PRODUCTIO N OF CHIP INDUCTORS AND HENCE RECEIPT OF COMMISSION SHOULD NOT BE CONST RUED AS COMMENCEMENT OF THE PRODUCTION UNIT AND EXPENSES IN CONNECTION WITH EARNING OF COMMISSION ALONE WOULD B E ALLOWABLE AS DEDUCTION. 8. AFTER CONSIDERING THE FACTS OF THE CASE IN A DET AILED MANNER, WE FIND THAT THE COMMISSIONER OF INCOME-TAX (APPEAL S) HAS ERRED ITA 2069, 207010 & CO 1 & 2/11 :- 5 -: IN HIS ORDER. THE ASSESSEE HAS CLAIMED A TOTAL EXP ENDITURE OF ` 1,07,11,191/-, RESULTING IN BUSINESS LOSS OF ` 86,71,319/-. EXCEPT NOMINAL PORTION, ALL THE EXPENSES HAVE BEEN INCURRE D BY THE ASSESSEE IN CONNECTION WITH SET UP OF THE BUSINESS OF MANUFACTURING OF CHIP INDUCTOR. ALL THOSE EXPENDI TURE CANNOT BE ALLOWED AS A REVENUE EXPENDITURE ONLY ON THE GROUND THAT THE ASSESSEE HAS COMMENCED ITS BUSINESS ONLY BECAUSE TH E ASSESSEE HAS ACCOUNTED FOR COMMISSION AGENCY INCOME . IT MIGHT BE TRUE THAT ONE OF THE OBJECTS OF THE ASSESSEE-COM PANY MAY BE ACTING AS A COMMISSION AGENT. BUT THE MAIN ACTIVIT Y FOR WHICH THE ASSESSEE HAS SET UP THE BUSINESS IS MANUFACTURER OF CHIP INDUCTOR. THEREFORE, ON THE BASIS OF MATCHING PRIN CIPLE, IT IS TO BE SEEN THAT THE EXPENSES INCURRED FOR SETTING UP OF C HIP INDUCTOR, MANUFACTURING UNIT HAD TO BE SET OFF AGAINST THE IN COME FROM MANUFACTURING OF CHIP INDUCTOR. WE ARE OF THE VIEW THAT THE COMMISSION BUSINESS AND INCOME THEREFROM IS ONLY AN EYEWASH. AS RIGHTLY POINTED BY THE ASSESSING AUTHORITY, THE MAXIMUM EXPENDITURE DEDUCTIBLE IN THE PRESENT CASE IS A REA SONABLE AMOUNT OF EXPENDITURE THAT WOULD HAVE BEEN INCURRED BY THE ASSESSEE TO EARN A MISCELLANEOUS INCOME OF ` 63,000/- AND NOTHING MORE. ITA 2069, 207010 & CO 1 & 2/11 :- 6 -: 9. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE F IND THAT THE ASSESSING AUTHORITY IS JUSTIFIED IN DISALLOWING THE LOSS RETURNED BY THE ASSESSEE-COMPANY. THE ORDER OF THE COMMISSIONE R OF INCOME-TAX (APPEALS) ON THIS POINT IS REVERSED. 10. REGARDING THE QUESTION OF SET OFF OF ` 63,000/-, WE AGREE WITH THE COMMISSIONER OF INCOME-TAX (APPEALS) THAT BEING INCOME AND LOSS OF THE SAME ASSESSMENT YEAR, THE SAID AMOU NT OF INCOME COULD BE SET OFF AGAINST THE LOSS. SINCE TH E INCOME HAS BEEN SET OFF AGAINST THE LOSS, THERE IS NO NEED OF WORKING OUT THE EXPENSES ATTRIBUTABLE TO EARNING OF INCOME OF ` 63,000/-. 11. ACCORDINGLY, WE RESTORE THE DISALLOWANCE OF LOS S MADE BY THE ASSESSING AUTHORITY SUBJECT TO THE CONDITION TH AT THE ASSESSING AUTHORITY SHALL SET OFF THE INCOME OF ` 63,000/- AGAINST THE SAID LOSS AND HE WILL WITHDRAW THE DEMAND NOTICE. 12. IN CROSS OBJECTION NO. 2/MDS/2011, THE ASSESSEE IS SUPPORTING THE ORDER OF THE COMMISSIONER OF INCOME- TAX (APPEALS). SINCE, THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS BEEN PARTLY REVERSED AND PARTLY CONFI RMED, THE ITA 2069, 207010 & CO 1 & 2/11 :- 7 -: CROSS OBJECTION OF THE ASSESSEE HAS BECOME INFRUCTU OUS. IT IS LIABLE TO BE DISMISSED. 13. NEXT, WE WILL CONSIDER THE APPEAL ARISING OUT O F THE PENALTY LEVIED UNDER SEC.271(1)(C). IT IS THE CASE OF THE REVENUE THAT THE COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN D ELETING THE PENALTY OF ` 29,18,766/- ON THE GROUND THAT THE DISALLOWANCE OF LOSS WHICH LEAD TO IMPOSITION OF PENALTY WAS DELETE D IN ANOTHER APPEAL. IT IS THE CASE OF THE REVENUE THAT THE ORD ER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN THE QUANTUM APPEAL HAS NOT BECOME FINAL AS THE MATTER HAS BEEN PLACED BEFORE THE TRIBUNAL IN SECOND APPEAL. 14. THE PENALTY HAS BEEN LEVIED BY THE ASSESSING AU THORITY ON THE BASIS OF THE DISALLOWANCE OF LOSS RETURNED BY T HE ASSESSEE AT ` 86,71,319/-. THE COMMISSIONER OF INCOME-TAX (APPE ALS) HAS DELETED THE PENALTY ON THE GROUND THAT HE HAS DELET ED THE SAID DISALLOWANCE OF LOSS MADE BY THE ASSESSING AUTHORIT Y . NOW, IT IS TO BE SEEN THAT WE HAVE REVERSED THE SAID ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IN QUANTUM APP EAL AND UPHELD THE DISALLOWANCE OF LOSS OF ` 86,71,319/- MADE BY THE ASSESSING AUTHORITY. THEREFORE, THE GROUND ON WHIC H THE ITA 2069, 207010 & CO 1 & 2/11 :- 8 -: COMMISSIONER OF INCOME-TAX (APPEALS) HAS DELETED TH E PENALTY DOES NOT SURVIVE ANY MORE. ON THAT GROUND ITSELF, THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IS LIABLE TO B E REVERSED. 15. NOW, GOING FURTHER ON THE MERIT OF THE PENALTY, WE FIND THAT THE ASSESSEE HAS MADE AN ATTEMPT TO CAMOUFLAGE, THE ACTUAL STATE OF AFFAIRS WHILE SHOWING THE INCOME OF ` 63,000/- AS MISCELLANEOUS INCOME ON WHICH GROUND THE ASSESSEE H AS RAISED AN ARGUMENT THAT THE BUSINESS OF THE ASSESSEE HAS C OMMENCED DURING THE PREVIOUS YEAR. IT IS BY SHOWING A NOMIN AL AMOUNT BY WAY OF INCOME THAT THE ASSESSEE-COMPANY HAS MADE AN ATTEMPT TO CLAIM ALL THE PRE-COMMENCEMENT EXPENSES AS REVEN UE EXPENDITURE. THIS IS A CASE OF CONCEALMENT OF INCO ME BY ITSELF. THEREFORE, WE FIND THAT THIS IS NOT A CASE OF DIFFE RENT OPINIONS BUT A CASE OF MAKING AN INELIGIBLE CLAIM FOR ACCEPTING AN D CARRY FORWARD OF THE REPORTED LOSS. 16. WE FIND THAT IT IS A FIT CASE FOR LEVY OF PENAL TY UNDER SEC.271(1)(C). THEREFORE, THE ORDER OF THE COMMISS IONER OF INCOME-TAX (APPEALS) ON THIS POINT IS REVERSED AND THE PENALTY ORDER IS CONFIRMED. ITA 2069, 207010 & CO 1 & 2/11 :- 9 -: 17. IN VIEW OF THE ABOVE, THE CORRESPONDING CROSS O BJECTION FILED BY THE ASSESSEE IS LIABLE TO BE DISMISSED. 18. IN RESULT, THE QUANTUM APPEAL IS PARTLY ALLOWED AND THE PENALTY APPEAL IS ALLOWED. THE CROSS OBJECTIONS FI LED BY THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON THURSDAY, THE 25 TH OF AUGUST, 2011 AT CHENNAI. SD/- SD/- (HARI OM MARATHA) (DR.O.K.NARAYANAN) JUDICIAL MEMBER VICE-PRESIDENT CHENNAI, DATED THE 25 TH AUGUST, 2011 MPO* COPY TO : APPELLANT/RESPONDENT/CIT/CIT(A)/DR