DCIT, CHENNAI V. Rane Holdings Ltd., CHENNAI

ITA 242/CHNY/2015

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 90478 (ITAT-CHENNAI)
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-06-2015
• Appeal Filed By: Department
• Bench Allotted: C
• Next Hearing Date: 09-06-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 27-01-2015
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL C BENCH, CHE NNAI , . ! ! ! ! , ' ' ' ' #$ #$ #$ #$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER & SHRI V. DURGA RAO, JUDICIAL MEMBER I.T.A.NO.242/MDS/2015 ASSESSMENT YEAR : 2002-03 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 5(1), 121, UTHAMAR GANDHI SALAI, CHENNAI 600 034. VS. M/S. RANE HOLDINGS LTD., MAITHRI, NO. 132, CATHEDRAL ROAD, CHENNAI 600 086. [PAN:A ABCR5136J] ( %& %& %& %& /APPELLANT ) ( '(%& '(%& '(%& '(%& / RESPONDENT ) I.T.A.NO.33/MDS/2015 ASSESSMENT YEAR : 2002-03 M/S. RANE HOLDINGS LTD., [FORMERLY RANE (MADRAS) LIMITED] NO. 132, CATHEDRAL ROAD, CHENNAI 600 086. VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE V(3), CHENNAI 600 034. ( %& %& %& %& /APPELLANT ) ( '(%& '(%& '(%& '(%& / RESPONDENT ) DEPARTMENT BY : SHRI A.V. SREEKANTH, JCIT ASSESSEE BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE ) * / DATE OF HEARING : 09.06.2015 +,- ) * /DATE OF PRONOUNCEMENT : 19.06.2015 . . . . / O R D E R PER V. DURGA RAO, JUDICIAL MEMBER : BOTH THE CROSS APPEALS FILED BY THE REVENUE AND THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS) V, CHENNAI, DATED 07.10.2014 RELEVANT TO THE ASSESS MENT YEAR 2002-03. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .242 &33 242 &33 242 &33 242 &33/M/ /M/ /M/ /M/15 1515 15 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, M /S. RANE HOLDINGS COMPANY FOR RANE GROUP COMPANIES THAT ARE ENGAGED PRIMARILY IN THE MANUFACTURE OF COMPONENTS TO THE AUTOMOBILE AND OTH ER ALLIED INDUSTRY SEGMENTS. THE ASSESSEE IS ENGAGED IN THE BUSINESS O F PROVIDING SERVICES TO ITS GROUP COMPANIES IN THE AREAS OF MANAGEMENT, INF ORMATION TECHNOLOGY, BUSINESS DEVELOPMENT AND EMPLOYEES TRAINING. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS OBSERVED FROM THE PROFIT AND LOSS ACCOUNT OF THE ASSESSEE THAT THE ASSESSEE HAS CLAIMED .1.94 CRORES AS PAYMENT OF GRATUITY MADE TO VRS EMPLOYEES TREATED AS DEFERRED REVENUE EXPENDITURE, BUT CLAIMED 100% FOR THE PURPOSE OF INCOME TAX. AS PER SECTION 35DDA, ONLY 1/5 TH OF PAYMENT OF GRATUITY MADE TO VRS EMPLOYEES IS AL LOWABLE AND THEREFORE, THE ASSESSING OFFICER DISALLOWED 4/5 TH OF GRATUITY PAYMENT OF .1.94 CRORES AS PER SECTION 35DDA. 3. ON APPEAL, THE LD. CIT(A) HAS OBSERVED THAT THE AMOUNT OF EXPENDITURE SO PAID WILL BE ALLOWABLE IN FIVE EQUAL INSTALMENTS COMMENCING FROM THE PREVIOUS YEAR IN WHICH SUCH PAYMENT/PART P AYMENT WAS MADE. SINCE THE PROVISION OF SECTION 35DDA IS APPLICABLE WITH EFFECT FROM THE ASSESSMENT YEAR 2006-07, THE SAME IS NOT APPLICABLE TO THE YEAR UNDER CONSIDERATION AND THEREFORE, THE ASSESSING OFFICER WAS DIRECTED TO ALLOW THE CLAIM OF THE ASSESSEE. 4. ON BEING AGGRIEVED, THE REVENUE IS IN APPEAL. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .242 &33 242 &33 242 &33 242 &33/M/ /M/ /M/ /M/15 1515 15 3 5. THE LD. DR HAS SUBMITTED THAT SECTION 35DDA IS APPLICABLE TO THE ASSESSEE AND SUPPORTED THE ORDER PASSED BY THE ASSE SSING OFFICER. 6. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSE SSEE HAS SUBMITTED THAT SECTION 35DDA HAS NO APPLICATION TO THE ASSESS EE FOR THE REASON THAT THE GRATUITY PAYMENT MADE BY THE ASSESSEE IS NOT RE LATING TO THE VOLUNTARY RETIREMENT SCHEME AND IT IS ONLY GENERAL RETIREMENT . HE RELIED ON THE DECISION OF THE ITAT IN THE CASE OF INDIAN BANK V. ADDL. CIT IN I.T.A. NO.77/MDS/2011 DATED 12.10.2011. 7. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESS EE HAS CLAIMED AN AMOUNT OF . 1.94 CRORES AS PAYMENT OF GRATUITY TO VRS EMPLOYE ES AND TREATED IT AS DEFERRED REVENUE EXPENDITURE AND CLAI MED 100% FOR THE PURPOSE OF INCOME TAX. THE ASSESSING OFFICER HAS IN VOKED SECTION 35DDA AND ALLOWED 1/5 TH OF PAYMENT OF GRATUITY MADE TO VRS EMPLOYEES. HOWE VER, THE LD. CIT(A) HAS HELD THAT SECTION 35DDA HAS NO A PPLICATION SINCE THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2002-03. ACC ORDING TO THE LD. COUNSEL FOR THE ASSESSEE, SECTION 35DDA HAS NO APPL ICATION AND HE HAS SUBMITTED THAT THE PAYMENT OF GRATUITY PAID BY THE ASSESSEE NOT RELATING TO VRS SCHEME AND IT IS A GENERAL PAYMENT MADE TO THE EMPLOYEES AFTER RETIREMENT. THE ABOVE SUBMISSIONS MADE BY THE LD. C OUNSEL FOR THE ASSESSEE, THE RELEVANT MATERIAL FACTS NECESSARY TO DECIDE THE ISSUE IS I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .242 &33 242 &33 242 &33 242 &33/M/ /M/ /M/ /M/15 1515 15 4 NEITHER CLEAR FROM THE ASSESSMENT ORDER NOR FROM TH E ORDER OF THE LD. CIT(A). WE, THEREFORE, SET ASIDE THE ORDER OF THE LD. CIT(A ) ON THIS ISSUE AND REMIT THE MATTER BACK TO THE ASSESSING OFFICER TO EXAMINE THE FACTS OF THE CASE I.E., WHETHER THE PAYMENT IS MADE TOWARDS GENERAL R ETIREMENT OR VRS SCHEME, CONSIDER THE ISSUE AFRESH AND DECIDE DE NOV O IN ACCORDANCE WITH LAW KEEPING IN VIEW OF THE DECISION OF THE ITAT IN THE CASE OF INDIAN BANK V. ADDL. CIT IN I.T.A. NO.77/MDS/2011 DATED 12.10.2011 . ACCORDINGLY, THE APPEAL FILED BY THE REVENUE IS ALLOWED FOR STATISTI CAL PURPOSES. I.T.A.NO.33/MDS/2015 8. THE GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD O DISALLOWANCE OF .2.64 CORES. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER HAS OBSERVED FROM THE PROFIT AND LOSS ACCOUNT FOR T HE YEAR ENDED 31.03.2002 THAT A SUM OF .2.64 CRORES WAS DEBITED TOWARDS EXCEPTIONAL ITEMS. AS PER NOTE 1.2(A) FORMING ACCOUNTING POLICIES AND NOTES , THE SAID AMOUNT OF .2.64 CRORES REPRESENTS AS COMPENSATION AS DETAILED BELOW: PAID UP PREFERENCE SHARE CAPITAL CONSISTS OF PRIVA TELY PLACED (A) 8 MILLION 13% CUMULATIVE REDEEMABLE PREFERENC E SHARES OF RS.10 EACH FULLY PAID UP ARE REDEEMABLE AT PAR. NO DIVIDEND HAS BEEN PAID ON THESE SHARES FOR 2000-01 AND NO DIVIDE ND IS PROPOSED FOR 2001-02 DUE TO LOSS INCURRED IN BOTH Y EARS. THE COMPANY IS NEGOTIATING DEFERMENT OF REDEMPTION OF R S.40 MILLION IN FEB02 AND RS.40 MILLION DUE IN FEB03. PENDING FINAL CLEARANCE FROM THE PREFERENCE SHAREHOLDERS, T HE COMPANY HAS AGREED TO PAY RS.26.4 MILLION (PAID RS.20.8 MIL LION ON 27.3.2002) AS COMPENSATION TOWARDS CHARGE/VARIATION IN THE RIGHTS OF THE PREFERENCE SHARES BY MODIFICATIONS OF THE SUBSCRIPTION AGREEMENT. THE COMPENSATION OF 26.4 MI LLION HAS I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .242 &33 242 &33 242 &33 242 &33/M/ /M/ /M/ /M/15 1515 15 5 BEEN CHARGED OFF AS ON EXCEPTIONAL ITEM DURING THE CURRENT YEAR. CONSEQUENTLY NO LIABILITY TOWARDS PREFERENCE DIVIDE ND IS ENVISAGED. (B) 2 MILLION - 10.5% CUMULATIVE REDEEMABLE PREFER ENCE SHARES OF RS.10.5 CUMULATIVE PREFERENCE SHARES OF RS.10/- EAC H FULLY PAID UP ARE REDEEMABLE AT PAR ON 13.3.13. NO DIVIDEND HA S BEEN PAID ON THESE SHARES FOR 2000-01 AND NO DIVIDEND IS PROP OSED FOR 2001-02 DUE TO LOSS INCURRED IN BOTH YEARS. THE DIV IDEND PAYABLE WILL BE CARRIED FORWARD TO THE NEXT YEAR. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCU SSED ABOVE, THE TRANSACTION RELATE TO COMPENSATION PAID FOR FAILURE OF REDEMPTION OF PREFERENCE SHARES ON DUE DATE. AS SUCH THE COMPENSA TION PAID DOES NOT RELATE TO BUSINESS OF THE ONGOING CONCERN BUT RELAT ES TO CAPITAL LOSS OF THE COMPANY IN THE FORM OF PREFERENCE SHARES WHICH WERE PENDING REDEMPTION. THEREFORE, THE SAID COMPENSATION PAID O F RS.2,64,00,000/- IS DISALLOWED AS CAPITAL EXPENDITURE. 9. AGAINST THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) AND THE LD. CIT(A) CONFIRMED THE ORDER PASSED BY THE ASSESSING OFFICER ON THIS ISSUE. 10. ON BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE HAS SUB MITTED THAT THE ASSESSEE HAS POSTPONED THE REDEEMABLE PREFERENCE SHARES FOR A PERIOD OF TWO YEARS AND THUS, THERE IS NO CHANGE IN THE CAPITAL STRUCTU RE. HE, THEREFORE, SUBMITTED THAT IT IS REVENUE EXPENDITURE AND IT IS ALLOWABLE. 11. ON THE OTHER HAND, THE LD. DR HAS SUBMITTED TH AT THE ASSESSEE HAS STOPPED REDEMPTION OF PREFERENCE SHARES. THEREFORE, THE AMOUNT AS PAID BY THE COMPANY HAS TO BE TREATED AS CAPITAL LOSS AND N OT AS REVENUE LOSS. I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .242 &33 242 &33 242 &33 242 &33/M/ /M/ /M/ /M/15 1515 15 6 12. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIAL S ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. IN THE PRO FIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31.03.2002, THE ASSESSEE HAS DEBITED .2.64 CRORES TOWARDS EXCEPTIONAL ITEMS AND CLAIMED AS REVENUE EXPENSES. THE ASSESSING OFFICER, IN HIS ORDER, HAS OBSERVED THAT THE AMOUNT CLAIMED BY THE ASSESSEE AS BUSINESS TRANSACTION RELATING TO COMPENSATION PAID FOR FAILURE OF REDEMPTION OF PREFERENCE SHARES ON DUE DATES. AS SUCH, COMPENS ATION PAID DOES NOT RELATE TO BUSINESS OF THE ONGOING CONCERN BUT RELAT ES TO CAPITAL LOSS OF THE COMPANY IN THE FORM OF PREFERENCE SHARES WHICH WERE PENDING REDEMPTION. THE LD. CIT(A) HAS CONFIRMED THE VIEWS OF THE ASSES SING OFFICER BY OBSERVING AS UNDER: 5.1 ON VERIFYING THE ASSESSMENT ORDER, GROUND OF A PPEAL, THE ASSESSING OFFICER HAS DISALLOWED AN AMOUNT OF RS.2, 64,00,000/- ON THE GROUND THAT THE TRANSACTION RELATED TO COMPE NSATION PAID FOR FAILURE OF REDEMPTION OF PREFERENCE SHARES ON D UE DATE. THE ASSESSING OFFICER HAS TREATED THE SAME AS COMPENSAT ION PAID FOR OTHER THAN BUSINESS PURPOSES AND DOES NOT RELATE TO THE BUSINESS OF THE ONGOING CONCERN BUT RELATED TO CAPITAL LOSS OF THE COMPANY IN THE FORM OF PREFERENCES SHARES WHICH WERE PENDIN G REDEMPTION. SINCE THE APPELLANT HAS NOT OFFERED ANY DEFENCE IN HIS GROUND OF APPEAL AGAINST THE DISALLOWANCE MADE BY THE ASSESSING OFFICER, TREATING THE COMPENSATION PAID A S CAPITAL EXPENDITURE IS HEREBY CONFIRMED. THIS GROUND OF APP EAL IS DISMISSED. 13. WE FIND THAT THE ASSESSEE HAS PAID COMPENSATIO N ON ACCOUNT OF FAILURE OF REDEMPTION OF PREFERENCE SHARES ON DUE D ATES. IN THIS CASE, THE ASSESSEE COMPANY HAS ISSUED PREFERENCE SHARES IS ON E OF THE IMPORTANT SOURCE OF CAPITAL OF THE COMPANY. REDEMPTION IS THE PROCESS OF REPAYING AN I.T.A. I.T.A. I.T.A. I.T.A. NO NONO NOS SS S. .. .242 &33 242 &33 242 &33 242 &33/M/ /M/ /M/ /M/15 1515 15 7 OBLIGATION AT PREDETERMINED AMOUNTS. THE REDEEMABLE OF PREFERENCE SHARES ARE ISSUED ON THE TERMS THAT THE SHARE HOLDERS WILL AT A FUTURE DATES BE REPAID THE AMOUNTS WHICH IS PAYABLE TO THE SHARE HO LDERS AS PER THE TERMS AND CONDITIONS. THE ACT COMMITTED BY THE ASSESSEE I S RELATING TO SHARE CAPITAL OF THE COMPANY AND THEREFORE, IT IS A CAPIT AL SIDE AND IT IS A CAPITAL LOSS. THEREFORE, THE CLAIM OF THE ASSESSEE THAT IT IS A BUSINESS LOSS IS NOT SUSTAINABLE. IN VIEW OF THE ABOVE, WE FIND NO INFIR MITY IN THE ORDER PASSED BY THE LD. CIT(A). ACCORDINGLY, THE APPEAL FILED BY TH E ASSESSEE IS DISMISSED. 14. IN THE RESULT, THE APPEAL OF THE REVENUE IS AL LOWED FOR STATISTICAL PURPOSES AND THE APPEAL OF THE ASSESSEE IS DISMISSE D. ORDER PRONOUNCED ON FRIDAY, THE 19 TH OF JUNE, 2015 AT CHENNAI. SD/- SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER (V. DURGA RAO) JUDICIAL MEMBER CHENNAI, DATED, THE 19.06.2015 VM/- . ) ''*/0 10-* /COPY TO: 1. %& / APPELLANT, 2. '(%& / RESPONDENT, 3. 2 ( ) /CIT(A), 4. 2 /CIT, 5. 03 ''*' /DR & 6. 4! 5 /GF.