M/s. Aqua alloys Pvt. Ltd., Kolhapur V. Assistant Commissioner of Income-tax,

ITA 231/PUN/2014

• Counselvise Citation: 23124514 RSA 2014
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 06-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Keywords: Business expenditure; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.231/PN/2014 (ASSESSMENT YEAR : 2009-10) M/S AQUA ALLOYS PVT. LTD., PLOT NO.122/1&2, SHINOLI (BK), TAL. CHANDGAD, DIST. KOLHAPUR. PAN : AACCA5198A . APPELLANT VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-1, KOLHAPUR. . RESPONDENT ITA NO.464/PN/2014 (ASSESSMENT YEAR : 2009-10) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-1, KOLHAPUR. . APPELLANT VS. M/S AQUA ALLOYS PVT. LTD., PLOT NO.122/1&2, SHINOLI (BK), TAL. CHANDGAD, DIST. KOLHAPUR. PAN : AACCA5198A . RESPONDENT ASSESSEE BY : MR. PRAMOD SHINGTE DEPARTMENT BY : MR. B. C. MALAKAR DATE OF HEARING : 20-01-2015 DATE OF PRONOUNCEMENT : 30-01-2015 ORDER PER G. S. PANNU, AM THE CAPTIONED ARE CROSS-APPEALS, EACH BY THE ASSESS EE AND THE REVENUE, PERTAINING TO THE ASSESSMENT YEAR 2009-10, WHICH WERE HEARD TOGETHER AND ARE BEING DISPOSED-OFF BY WAY OF A CON SOLIDATED ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2. THE CAPTIONED CROSS-APPEALS ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), KOLHAPUR DATE D 18.12.2013 WHICH, IN ITA NO.231/PN/2014 ITA NO.464/PN/2014 TURN, HAS ARISEN FROM AN ORDER DATED 12.12.2011 PAS SED BY THE ASSESSING OFFICER U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT). 3. FIRST, WE SHALL TAKE-UP THE APPEAL OF THE ASSESS EE WHEREIN THE ONLY GROUND OF APPEAL RAISED READS AS UNDER :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOW ANCE OF RS.15,18,447/- BEING GUARANTEE COMMISSION PAID TO THE DIRECTORS OF THE COMPANY BY DISREGARDING APPELLANTS CONTENTION IN THIS REGARD AND ALSO ERRED IN NOT FOLLOWING HONBLE PUNE TRIBUNALS ORDER FOR AY 2007 -08 IN APPELLANTS OWN CASE. 4. IN THIS APPEAL, THE SOLITARY ISSUE RELATES TO TH E ACTION OF THE INCOME-TAX AUTHORITIES IN DENYING ASSESSEES CLAIM FOR DEDUCTI ON OF RS.15,18,447/- REPRESENT GUARANTEE COMMISSION PAID TO THE DIRECTOR S. THE EXPENDITURE BY WAY OF GUARANTEE COMMISSION WAS INCURRED ON PAYMENT TO THE DIRECTORS FOR GIVING THEIR PERSONAL GUARANTEE TOWARDS AVAILING CR EDIT LIMITS BY THE ASSESSEE FROM THE BANKS. THE STAND OF THE ASSESSEE WAS THAT IN ORDER TO AVAIL THE CREDIT LIMITS FROM THE BANK, THE BANK INSISTED ON PERSONAL GUARANTEES OF THE DIRECTORS AS AN ADDITIONAL SECURITY IN CASE ASSETS OF THE COM PANY ARE LOST DUE TO VICISSITUDES OF BUSINESS. IT WAS CLAIMED THAT PERS ONAL GUARANTEE GIVEN BY THE DIRECTORS IN-FACT INVOLVED PLEDGE OF THE PERSONAL A SSETS AGAINST CONTINGENCY. THE AFORESAID EXPENDITURE PAID TO THE DIRECTORS AS COMMISSION WAS DISALLOWED BY THE ASSESSING OFFICER AS WELL AS BY THE CIT(A). AT THE TIME OF HEARING, THE LD. REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THA T SIMILAR EXPENDITURE WAS DISALLOWED BY THE ASSESSING OFFICER IN ASSESSMENT Y EAR 2007-08, WHICH WAS THEN ALLOWED BY THE CIT(A). THE ORDER OF THE CIT(A ) FOR ASSESSMENT YEAR 2007-08 HAS SINCE BEEN AFFIRMED BY THE TRIBUNAL VID E ITS ORDER IN ITA NO.1502/PN/2011 DATED 15.07.2013; A COPY OF THE SAI D ORDER WAS PLACED ON RECORD. THE RELEVANT DISCUSSION IN THE ORDER OF TH E TRIBUNAL DATED 15.07.2013 (SUPRA) READS AS UNDER :- ITA NO.231/PN/2014 ITA NO.464/PN/2014 6. THE NEXT ISSUE IS WITH REGARDS TO DISALLOWANCE OF RS.9,61,659/- BEING GUARANTEE COMMISSION PAID TO DIRECTORS HOLDI NG THE SAME TO BE NON- BUSINESS EXPENDITURE. THE ASSESSING OFFICER HAS DI SALLOWED A SUM OF RS.9,61,659/- BEING GUARANTEE COMMISSION PAID TO TH E DIRECTORS @ 1% OF THE CREDIT FACILITY ALLOWED. THIS AMOUNT WAS BEING PAID TO THE DIRECTORS SINCE 1993 AND HAS NEVER BEEN A SUBJECT MATTER OF DISALLOWANCE . THE ASSESSING OFFICER OBSERVED THAT IT WAS ILLOGICAL AND IRRATIONAL THAT WHENEVER A COMPANY REQUIRES FUNDS AND HAS TO RAISE THEM FROM BANKING OR FINANCI AL INSTITUTIONS, THE DIRECTORS WOULD BE GIVEN GUARANTEE COMMISSION FOR P ERSONAL GUARANTEE GIVEN BY THEM. INSPITE OF STRONG FINANCIAL POSITION, THI S MODUS OPERANDI WAS FOLLOWED. SO THE ASSESSING OFFICER HELD THAT THERE WAS NO BUSINESS EXIGENCY INVOLVED IN ALLOWING THE GUARANTEE COMMISSION. THE MATTER WAS CARRIED IN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY WHO OBS ERVED THAT THERE WERE AS MANY AS 82 SHAREHOLDERS IN THE ASSESSEE COMPANY DUR ING THE RELEVANT PERIOD. OUT OF THESE 82 SHAREHOLDERS, THERE ARE FIVE DIRECT ORS AND OUT OF THESE FIVE DIRECTORS ONLY THREE DIRECTORS HAVE GIVEN THE PERSO NAL GUARANTEE. THE PERSONAL GUARANTEE WAS GIVEN BY THE DIRECTORS EVER SINCE THE INCEPTION OF BUSINESS AND WAS ALLOWED TO THEM AS A GENUINE BUSIN ESS EXPENSES. THE CREDIT FACILITY WAS FIRST PROVIDED TO THE ASSESSEE COMPANY IN 1986. THE CREDIT LIMITS WERE SANCTIONED ON HYPOTHECATION OF INVENTOR Y, BOOK DEBTS AND OTHER CURRENT ASSETS APART FROM THE EQUITABLE MORTGAGE OF FIXED ASSETS AS COLLATERAL SECURITY AND PERSONAL GUARANTEE OF DIRECTOR. IN BA NKING BUSINESS EVERY SECURED OR EVEN UNSECURED LOAN HAS TO BE GUARANTEED BY THE PERSONS WHO INTEND TO AVAIL OF THE CREDIT FACILITY. IN CASE OF CORPORATE CLIENTS THE PERSONAL INDIVIDUAL GUARANTEE OF DIRECTORS IS NORMAL PHENOME NA. IN CASE THE DIRECTORS ARE NOT SOLVENT, THE BANKS INSIST ON THIRD PARTY CO UNTER GUARANTEES OF PERSONS WHO ARE PEOPLE OF MEANS. IF A THIRD PERSONAL GUARA NTEE WAS GIVEN THEN THE GUARANTEE COMMISSION PAID OR PAYABLE TO SUCH THIRD PARTIES WOULD BE ALLOWED AS A BUSINESS EXPENSES. IN THIS BACKGROUND, THE CI T(A) OBSERVED THAT WHY THE SAME REASON AND LOGIC CANNOT BE EXTENDED WHEN G UARANTEE COMMISSION IS PAID TO DIRECTORS. ACCORDINGLY, HE ALLOWED THE SAME. THE ABOVE REASONED FINDING OF THE CIT(A) ON THIS ISSUE. 5. THE AFORESAID FACTUAL MATRIX HAS NOT BEEN DISPUT ED BY THE LD. DEPARTMENTAL REPRESENTATIVE AND THEREFORE FOLLOWING THE AFORESAID PRECEDENT IN THE ASSESSEES OWN CASE, THE CLAIM OF THE ASSESS EE IS ALLOWED. ACCORDINGLY, IMPUGNED ORDER OF THE CIT(A) ON THIS A SPECT IS SET-ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO DELETE THE ADDITIO N OF RS.15,18,447/-. THUS, ON THIS GROUND ASSESSEE SUCCEEDS. 6. NOW, COMING TO THE APPEAL OF THE REVENUE WHEREIN THE FOLLOWING GROUNDS OF APPEAL HAVE BEEN RAISED :- 1. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CAS E AND IN LAW, THE CIT(A) ERRED IN ALLOWING THE ASSESSEES APPEAL AGAI NST THE ADDITION ON ITA NO.231/PN/2014 ITA NO.464/PN/2014 ACCOUNT OF TREATMENT OF REVENUE EXPENDITURE CLAIMED BY THE ASSESSEE COMPANY AS CAPITAL EXPENDITURE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E IN LAW, THE CIT(A) ERRED IN HOLDING THAT THE SAID EXPENSES WERE INCURRED TO ALLOW THE PLANT AND MACHINERY TO OPERATES AT MAXIMUM OPERATIONAL EF FICIENCY AND TO LIVE OUT THE LIFE OF THE MACHINERY AS AGAINST AOS FINDING T HAT THE EXPENSES RESULT IN INCREASING THE LIFE OF THE MACHINERY AND GIVE ENDUR ING BENEFIT TO THE ASSESSEE. 7. THE ASSESSEE BEFORE US IS ENGAGED IN THE BUSINES S OF MANUFACTURE AND SALE OF ALLOY, IRON AND STEEL CASTINGS. THE PRODUC TION UNIT OF THE ASSESSEE IS LOCATED AT KOLHAPUR, MAHARASHTRA. THE ASSESSEE HAD DEBITED AN EXPENDITURE OF RS.11,07,540/- UNDER THE HEAD REPAIRS AND MAINT ENANCE EXPENSES. THE DETAILS OF SUCH EXPENDITURE HAS BEEN CULLED OUT BY THE ASSESSING OFFICER IN PARA 4 OF THE ASSESSMENT ORDER. THE ASSESSING OFFI CER REQUIRED THE ASSESSEE TO SHOW-CAUSE AS TO WHY SUCH EXPENDITURE NOT BE TRE ATED AS A CAPITAL EXPENDITURE. IN RESPONSE, ASSESSEE CONTENDED THAT THE SAID AMOUNT WAS SPENT ON RE-CONDITIONING THE HEAT TREATMENT FURNACE S INSTALLED IN THE FACTORY BY REPLACING HEATING ELEMENTS, SUPPORTING HOOKS, FI BRE MODULES, PYROBLOCK ANCHORS CERAMIC TUBES AND WASHER, ETC.. THE CLAIM OF THE ASSESSEE WAS THAT THE AMOUNTS WERE SPENT ON EXISTING FURNACES WITH A VIEW TO PUT THE MACHINERY IN A WORKING CONDITION AND THAT NO NEW OR ADDITIONA L FURNACE WAS INSTALLED. HENCE, THE SAID EXPENDITURE WAS CLAIMED AS A REVEN UE EXPENDITURE. THE ASSESSING OFFICER DISAGREED WITH THE ASSESSEE AND H ELD THAT THE SAID EXPENSE WAS LIABLE TO BE TREATED AS A CAPITAL EXPENDITURE . 8. THE CIT(A) HAS DISAGREED WITH THE ASSESSING OFFI CER AS ACCORDING TO HIM THE IMPUGNED EXPENDITURE DID NOT BRING INTO EXI STENCE ANY NEW ASSET RESULTING IN ANY ENDURING BENEFIT. THE CIT(A) FOUN D THAT NO NEW MACHINERY WAS INSTALLED BUT ONLY PARTS OF AN EXISTING MACHINE , WHICH HAD BECOME NON- USABLE, WERE REPLACED IN ORDER TO MAINTAIN THE WORK ING EFFICIENCY OF THE MACHINERY AND FOLLOWING THE JUDGEMENTS OF THE HONB LE MADRAS HIGH COURT IN THE CASES OF (I) CIT VS. RANE (MADRAS) LTD. TAX C ASE (APPEAL) NOS.857 AND ITA NO.231/PN/2014 ITA NO.464/PN/2014 858 OF 2007-(2009) 41 SITC 376 (MAD); AND, (II) CIT VS. METAL POWDER CO. LTD. (2009) 40 STC 484 (MAD.), - TC(A) 171 TO 175 & 278 TO 281 OF 2007, THE EXPENDITURE WAS TO BE ALLOWED AS A REVENUE EXPENDI TURE. AGAINST SUCH A DECISION OF THE CIT(A), REVENUE IS IN APPEAL BEFORE US. 9. BEFORE US, IT WAS A COMMON POINT BETWEEN THE PAR TIES THAT TREATMENT OF SIMILAR EXPENDITURE WAS A SUBJECT-MATTER OF DISPUTE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2007-08 WHEREIN THE TRIBUNAL HAD AF FIRMED THE ORDER OF THE CIT(A) HOLDING THAT SUCH EXPENDITURE WAS A REVENUE EXPENDITURE. THE FOLLOWING DISCUSSION IN THE ORDER OF THE TRIBUNAL D ATED 15.07.2013 (SUPRA) IS RELEVANT :- 5. AFTER GOING THROUGH THE RIVAL SUBMISSIONS AND P ERUSING THE MATERIAL, WE FIND THAT THE ASSESSEE HAS CLAIMED THE FOLLOWING EXPENSES TOWARDS REPAIRS AND MAINTENANCE. 1. MELTING FURNACE I) CABLE GLAND 1,88,538 II) SWITCH 68,557 2,57,045/- 2. HEAT TREATMENT FURNACE I) FIBROTHAL INSULATION (HOOD NO. 1) UNIT 6,55 ,350 II) HEATING ELEMENTS (HOOD NO. 2) UNIT II 4,35, 443 III) FIBROTHAL INSULATION 10,58,512 21,59,305/ 3. FORK LIFT RECONDITIONING 1,25,423/- TOTAL 25,41,773/- THE ABOVE SAID EXPENSES WERE INCURRED ON DIFFERENT PLANT AND MACHINERY. THE CABLE GLAND WAS REPLACED IN RESPECT OF THE MELT ING FURNACE. FIBROTHAL INSULATION AND ELECTRICAL WERE REPLACED IN RESPECT OF HOOD NO. 1 OF 3.5 MTRS DIAMETER HEAD TREATMENT FURNACE AND IN RESPECT OF F IBROTHAL INSULATION OF HEAT TREATMENT FURNACE OF 4.8 MTRS DIAMETER. THERE FORE, THESE REPAIRS WERE NOT MADE IN RESPECT OF A SINGLE HEAT TREATMENT FURN ACE OR A MELTING FURNACE. IT WAS ESSENTIAL FOR THE ASSESSEE T CARRY OUT THESE REPAIRS TO MAINTAIN THE OPERATIONAL EFFICIENCY OF THE HEAT TREATMENT PLANTS AND TO ENSURE THAT THE MELTING FURNACE RECEIVED UNINTERRUPTED POWER SUPPLY . THE EXPENSES IN QUESTION ALSO INCLUDED THE LABOUR COST INVOLVED IN CARRYING OUT THE REPAIRS AND THE COST OF COMMISSIONING AFTER THE REPAIR IS COMPL ETED. THE ASSESSING OFFICER OBSERVED THAT THE COST OF A NEW 2 MTRS DIAM ETER HEAT TREATMENT FURNACE IS AROUND RS.20 LAKHS, THE COST OF 3.5 MTRS DIAMETER HEAT TREATMENT FURNACE WITH TWO HOODS IS ROUGHLY AROUND RS.30 LAKH S AND A 4.8 MTRS DIAMETER BOGIE FURNACE IS ROUGHLY AROUND RS.25 LAKH S. IN THIS BACKGROUND, THE ASSESSING OFFICER PRESUMED THAT RS.24,13,800/- WAS THE EXPENSE INCURRED IN RESPECT OF A SINGLE FURNACE AND HENCE HE DISALLOWED THE ENTIRE AMOUNT OF EXPENSES CLAIMED AS A REVENUE AMOUNT. IN FACT, THE ASSESSEE CLAIMED RS.25,41,773/- TOWARDS REPAIRS AND EXPENSES ACCORD ING TO THE CIT(A) THESE EXPENSES HAVE NOT BROUGHT INTO EXISTENCE ANY NEW AS SET AND HAVE NOT PROVIDED THE ASSESSEE WITH AN ADVANTAGE OF ENDURING BENEFIT. THESE ITA NO.231/PN/2014 ITA NO.464/PN/2014 EXPENSES WERE IN FACT INCURRED TO ALLOW THE PLANT A ND MACHINERY TO OPERATE AT MAXIMUM OPERATIONAL EFFICIENCY AND TO LIVE OUT OF T HE LIFE OF THE MACHINERY. HENCE, THE DISALLOWANCE WAS RIGHTLY DIRECTED TO BE DELETED BY THE CIT(A). THIS REASONED FINDING OF CIT(A) NEEDS NO INTERFERENCE FR OM OUR SIDE. WE UPHOLD THE SAME. 10. IN THE PRESENT YEAR ALSO, THE EXPENSES INCURRED BY THE ASSESSEE ARE OF THE SAME NATURE AND IT HAS BEEN POINTED OUT BY THE CIT(A) THAT NO NEW MACHINERY WAS INSTALLED. THERE IS NO CONTROVERSION TO THE FINDING OF THE CIT(A) THAT ONLY EXISTING PARTS OF A MACHINE, WHICH HAD BE COME NON-USABLE, WERE REPLACED BY NEW PARTS IN ORDER TO MAINTAIN ITS WORK ING EFFICIENCY. IN THIS BACKGROUND, IN OUR VIEW, THE CONCLUSION DRAWN BY TH E CIT(A) DOES NOT REQUIRE ANY INTERFERENCE AND IS HEREBY AFFIRMED. THUS, REV ENUE FAILS ON THIS ASPECT. 11. IN THE RESULT, WHEREAS APPEAL OF THE ASSESSEE I S ALLOWED THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED ON 30 TH JANUARY, 2015. SD/- SD /- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE, DATED: 30 TH JANUARY, 2015. SUJEET COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A), KOLHAPUR; 4) THE CIT, KOLHAPUR; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE