M/S A.P.Bariar & sons, Ranchi V. DCIT CIRCLE-1, Ranchi

ITA 29/RAN/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 9655 (ITAT-RANCHI)
• Duration Of Justice: 2 year(s) 1 month(s) 22 day(s)
• Appeal Type: Income Tax (Transfer Pricing) Appeal
• Pronouncement Date: 05-04-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 13-02-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A K MOHANTY
• Assessee Lawyers: MANJEET KUMAR VERMA
• Keywords: Capital asset; Commercial expediency; Capital expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, RANCHI BENCH, RANCHI BEFORE SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA NO.29 /RAN/201 7 ASSESSMENT YEAR : 2012 - 2013 M/S. A.P. BARIAR & SONS, ANNAT TOWER, RATU ROAD, HEHAL, RANCHI VS. DCIT, CIRCLE - 1, RANCHI PAN/GIR NO. AADFA 5561 F (APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY: SHRI MANJEET KUMAR VERMA, ADV REVENUE BY : SHRI A.K.MOHANTY, JCIT DATE OF HEARING : 30 /05 / 201 8 DATE OF PRONOUNCEMENT : 31 /05/ 2018 O R D E R PER N.S.SAINI, AM THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) - RANCHI DATED17.10.2016 FOR THE ASSESSMENT YEAR 2012 - 13. 2. THE SOLE ISSUE INVOLVED IN THIS APPEAL IS THAT THE CIT(A) ERRED IN CONFIRMING THE DI SALLOWANCE OF RS. 53.04,968/ - ON ACCOUNT OF CONTINGENT LIABILITY. 2 ITA NO.29/RAN/2017 ASSESSMENT YEAR: 2012 - 2013 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS DEBITED RS.53,04,968/ - AS SECURITY MONEY ACCOUNT IN THE PROFIT AND LOSS ACCOUNT. THE ASSESSING O FFICER ADDED THE SAME TO THE INCOME OF THE ASSESSEE OBSERVING THAT ACCOUNTING PRACTICE CANNOT OVERRIDE ANY PROVISIONS OF INCOME TAX ACT WHEN THE QUESTION IS WHETHER A RECEIPT OF MONEY IS TAXABLE OR NOT OR WHETHER CERTAIN DEDUCTIONS FROM THAT RECEIPT ARE P ERMISSIBLE OR NOT, THE QUESTION HAS TO BE DECIDED ACCORDING TO THE PRINCIPLE OF THE LAW AND NOT IN ACCORDANCE WITH ANY ACCOUNTANCY PRACTICE. 4. ON APPEAL, THE CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER: [5.22] IN THE CASE OF THE APPELLANT IT IS NOT THAT THE APPELLANT HAS PROVIDED FOR A CERTAIN SUM (SAY 10% OF THE CONTRACT VALUE) AS A LIABILITY FOR FUTURE EXPENSES ON DEFECT LIABILITY'. (IT MUST BE REMEMBERED THAT IT IS ONLY WITH DEFECT LIABILITY THAT THE APPELLANT DOES NOT GET PAID. FOR ROUTINE MAINT ENANCE IT GETS PAID AS PER THE CONTRACT. BOTH THE PERIODS RUN FOR FIVE YEARS AFTER THE COMPLETION DATE). IF THAT WAS THE CASE, AND IT SATISFIED THE CONDITIONS LAID DOWN IN ROTORK CONTROLS (SUPRA) IT WOULD BE ALLOWED THE LIABILITY. IN THE CASE OF THE APPEL LANT IT HAS TREATED THE FD AS ALREADY BEEN FORFEITED AND HENCE, ACCORDING TO THE APPELLANT, AN EXPENSE ALLOWABLE U/S.37(1) OF THE ACT. THIS ALSO DOES NOT SATISFY THE 'MATCHING PRINCIPLES' AS STATED IN THE CASE OF ROTORK CONTROLS (SUPRA) AS 'UNDER THE MATCH ING CONCEPT, IF REVENUE IS RECOGNIZED, THE COST INCURRED TO EARN THAT REVENUE INCLUDING WARRANTY COSTS HAS TO BE FULLY PROVIDED FOR.' IN THE CASE OF THE APPELLANT THE REVENUE RECOGNISED DOES NOT MATCH WITH THE FUNDS AVAILABLE WITH THE APPELLANT OUT OF WHIC H FD WAS MADE. THE SOURCE OF REVENUE AND THE FD ARE TWO DISPARATE ITEMS, ONE ON THE REVENUE SIDE AND THE OTHER ON THE CAPITAL SIDE. [5.23] IN THE CASE OF SUTLEJ COTTON MILLS LTD. V CIT [1979] 116 I1R 1 (SC) THE RATIO WAS THAT THE WAY IN WHICH ENTRIES ARE MADE BY AN ASSESSEE IN HIS BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFER ED ANY LOSS. THE ASSESSEE MAY, BY MAKING ENTRIES WHICH ARE NOT IN CONFORMITY WITH THE 3 ITA NO.29/RAN/2017 ASSESSMENT YEAR: 2012 - 2013 PROPER ACCOUNTANCY PRINCIPLES, CONCEAL PROFIT OR SHOW LOSS AND THE ENTRIES MADE BY HIM CANNOT, THEREFORE, BE REGARDED AS CONCLUSIVE ONE WAY OR THE OTHER. IT WAS HELD THAT 'WHETHER THE LOSS SUFFERED BY THE ASSESSEE WAS A TRADING LOSS OR NOT WOULD DEPEND ON WHETHER THE LOSS WAS IN RESPECT OF A TRADING ASSET OR A CAPITAL ASSET. IN THE FORMER CASE, IT WOULD BE A TRADING LOSS BUT NOT SO IN THE LATTER.' AS HELD ABOVE THE LOSS IN THE CASE OF THE APPELLANT IS THAT OF A CAPITAL ASSET AND THEREFORE NOT ALLOWABLE. [ INCIDENTALLY THIS CASE LAW WAS CITED BY THE APPELLANT IN ITS FAVOUR]. [5.24] IT WOULD ALSO BE RELEVANT TO ANALYSE THE CASE LAWS CITED BY THE APPELLANT SO AS TO UNDERSTAND ITS POINT OF VIEW. THE FIRST CASE IS THAT OF WOODWARD GOVERNORS (SUPRA). IN THAT CASE THE HON'BLE SC HAS NOTED THAT 'IN CONCLUSION, IT MAY BE STATED THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBLE, THE FOLLOWING FACTORS HAVE TO BE TAKEN INTO AC COUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMED IATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE, - (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCE THE INCIDENCE OF TAXATION.' [5.25] THE APEX COURT IN THE ABOVE CASE HAS ALLOWED FOR LIABILITIES AS EXPENSES IF CERTAIN CONDITIONS ARE FULFILLED. HOWEVER, THE SAME HAS TO BE IN RESPECT OF 'DEDUCTIBLE EXPENSES'. THE MOOT QUESTION IS WHETHER THE BOOKING OF LOSS OF THE FD ( ITS ENCASHMENT FOR NON FULFILMENT OF THE CONDITIONS OF THE CONTRACT) CAN BE TERMED AS AN 'DEDUCTIBLE EXPENSE'? AS EXPLAINED ABOVE THE ENTRY IS NOT AN ASCERTAINED LIABILITY' THE EXPENSE OF WHICH HAD NOT ARISEN BUT WAS LIKELY TO ARISE IN THE FUTURE. IN THE CASE OF THE APPELLANT IT WAS AN ITEM OF 'ASSET' WHICH THE APPELLANT BOOKED AS 'EXPENSE'. THEREFORE, THE PRINCIPLES OF WOODWORD (SUPRA) WOULD NOT BE APPLICABLE. 4 ITA NO.29/RAN/2017 ASSESSMENT YEAR: 2012 - 2013 [ 5.26] SECOND CASE LAW RELIED UPO N BY THE APPELLANT IS THAT OF INDIAN MOLLASES CO. LTD. V CIT [ 1959] 37 ITR 66 (SC). IN THIS CASE IT WAS HELD THAT : - 'THERE ARE CERTAIN PRINCIPLES OF A FUNDAMENTAL CHARACTER. THE FIRST IS THAT CAPITAL EXPENDITURE CANNOT BE ATTRIBUTED TO REVENUE AND VICE VERSA. SECONDLY, IT IS EQUALLY CLEAR THAT A PAYMENT IN A LUMP SUM DOES NOT NECESSARILY MAKE THE PAYMENT A CAPITAL ONE. IT MAY STILL POSSESS REVENUE CHARACTER IN THE SAME WAY AS A SERIES OF PAYMENTS. THIRDLY, IF THERE IS A LUMP SUM PAYMENT BUT THERE IS NO POSSIBILITY OF A RECURRENCE, IT IS PROBABLY OF A CAPITAL NATURE, THOUGH THIS IS BY NO MEANS A DECISIVE TEST. FOURTHLY, IF THE PAYMENT OF A LUMP SUM CLOSES THE LIABILITY TO MAKE A REPEATED AND PERIODIC PAYMENTS IN THE FUTURE, IT MAY GENERALLY BE REGARDED AS A PAYMENT OF A REVENUE CHARAC TER AND LASTLY, IF THE OWNERSHIP OF THE MONEY WHETHER IN POINT OF FACT OR BY A RESULTING TRUST BE STILL IN THE TAXPAYER, THEN THERE IS ACQUISITION OF A CAPITAL ASSET AND NOT AN EXPENDITURE OF A REVENUE CHARACTER. SIDE BY SIDE WITH THESE PRINCIPLES, THERE ARE OTHERS WHICH ARE ALSO FUNDAMENTAL. THE INCOME - TAX LAW DOES NOT ALLOW AS EXPENSES ALL THE DEDUCTIONS A PRUDENT TRADER WOULD MAKE IN COMPUTING HIS PROFITS. THE MONEY MAY BE EXPENDED ON GROUNDS OF COMMERCIAL EXPEDIENCY BUT NOT OF NECESSITY. THE TEST OF NE CESSITY IS WHETHER THE INTENTION WAS TO EARN TRADING RECEIPTS OR TO AVOID FUTURE RECURRING PAYMENTS OF A REVENUE CHARACTER. EXPENDITURE IN THIS SENSE IS EQUAL TO DISBURSEMENT WHICH, TO USE A HOMELY PHRASE, MEANS SOMETHING WHICH COMES OUT OF THE TRADER'S PO CKET. THUS, IN FINDING OUT WHAT PROFITS THERE BE, THE NORMAL ACCOUNTANCY PRACTICE MAY BE TO ALLOW AS EXPENSE ANY SUM IN RESPECT OF LIABILITIES WHICH HAVE ACCRUED OVER THE ACCOUNTING PERIOD AND TO DEDUCT SUCH SUMS FROM PROFITS. BUT THE INCOME - TAX LAW DO NO T TAKE EVERY SUCH ALLOWANCE AS LEGITIMATE FOR PURPOSES OF TAX. A DISTINCTION IS MADE BETWEEN AN ACTUAL LIABILITY IN PRAESENTI AND A LIABILITY DE FUTURO WHICH, FOR THE TIME BEING, IS ONLY CONTINGENT. THE FORMER IS DEDUCTIBLE BUT NOT THE LATTER. THE RECURR ING LIABILITY OF PENSION WHICH IS COMPRESSED INTO A LUMP PAYMENT SHOULD ITSELF BE A LEGAL OBLIGATION AND THAT, IF CONTINGENT THE PRESENT VALUE OF THE FUTURE PAYMENTS SHOULD BE FAIRLY ESTIMABLE. IF THE PENSION ITSELF BE NOT PAYABLE AS AN OBLIGATION AND IF THERE BE A POSSIBILITY THAT NO SUCH PAYMENT MAY BE NECESSARY IN THE FUTURE, THE WHOLE OF THE AMOUNT CANNOT BE DEDUCTED BUT ONLY THE PRESENT VALUE OF THE FUTURE LIABILITY, IF IT CAN BE ESTIMATED 5 ITA NO.29/RAN/2017 ASSESSMENT YEAR: 2012 - 2013 AS TO THE QUESTION WHETHER THE PAYMENTS MADE TOWARDS THE POLI CY WERE 'EXPENDITURE' WITHIN SECTION 10(XV) OF THE 1922 ACT, 'EXPENDITURE' IS EQUAL TO 'EXPENSE' AND 'EXPENSE' IS MONEY LAID OUT BY CALCULATION AND INTENTION THOUGH IN MANY USES OF THE WORD THIS ELEMENT MAY NOT BE PRESENT. BUT THE IDEA OF 'SPENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MONEY IS THE PRIMARY MEANING. 'EXPENDITURE' IS THUS WHAT IS 'PAID OUT OR AWAY' AND IS SOMETHING WHICH IS GONE IRRETRIEVABLY. TO BE AN ALLOWANCE WITHIN CLAUSE (XV) OF SECTION 10(2) OF THE 1922 ACT, THE MONEY PAID OUT OR AWAY MUST BE (A) PAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND FURTHER (B) MUST NOT BE (I) CAPITAL EXPENDITURE, (II) PERSONAL EXPENSES OR (I II) AN ALLOWANCE OF THE CHARACTER DESCRIBED IN CLAUSES (Z) TO (XIV ). [5.271 IN THE ABOVE CASE THE APEX COURT HAS HELD THAT 'EXPENDITURE' IS EQUAL TO 'EXPENSE' AND 'EXPENSE' IS MONEY LAID OUT BY CALCULATION AND INTENTION THOUGH IN MANY USES OF THE WORD TH IS ELEMENT MAY NOT BE PRESENT. BUT THE IDEA OF 'SPENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MONEY IS THE PRIMARY MEANING. 'EXPENDITURE' IS THUS WHAT IS 'PAID OUT OR AWAY' AND IS SOMETHING WHICH IS GONE IRRETRIEVABLY. TO BE AN ALLOWANCE WITHIN CLAUSE (XV ) OF SECTION 10(2) OF THE 1922 ACT, THE MONEY PAID OUT OR AWAY MUST BE (A) PAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS AND FURTHER (B) MUST NOT BE (I) CAPITAL EXPENDITURE,. THE CASE OF THE APPELLANT WITH REGARD TO THE BOOKING, OF ANTIC IPATED LOSS OF MONEY OF THE FD IS NOT REVENUE IN NATURE AND THEREFORE CANNOT BE SAID TO BE AN ALLOWABLE LIABILITY. [5.281 IN THE CASE OF MP FINANCIAL CORPORATION V CIT [1987] 165 ITR 765 (MP) THE RULING WAS THAT AS REGARDS THE DEDUCTION OF THE AMOUNT OF D ISCOUNT ON THE BONDS, THE SAME PRINCIPLES AS ARE APPLICABLE IN THE CASE OF ISSUE OF DEBENTURES AT DISCOUNT, WOULD BE ATTRACTED IN THE CASE OF ISSUE OF BONDS AT A DISCOUNT. THE AMOUNT OF DISCOUNT IN EFFECT, REPRESENTS DEFERRED INTEREST. LOOKED AT AS SUCH, A PROPORTIONATE AMOUNT OF DISCOUNT CAN BE WRITTEN OFF OUT OF REVENUE EVERY YEAR, DURING THE PERIOD THE BONDS WOULD REMAIN OUTSTANDING. THEREFORE, THOUGH THE ASSESSEE WOULD NOT BE JUSTIFIED IN CLAIMING DEDUCTION OF THE ENTIRE AMOUNT OF DISCOUNT IN THE ACCOU NTING YEAR IN QUESTION, IT WOULD NEVERTHELESS BE ENTITLED TO PROPORTIONATE DEDUCTION SPREAD OVER THE PERIOD, FOR WHICH THE BONDS WOULD REMAIN OUTSTANDING.' THIS CASE HAS BEEN APPROVED BY THE APEX COURT IN THE CASE OF MADRAS INDUSTRIAL CORPORATION V CIT 225 ITR 802. 6 ITA NO.29/RAN/2017 ASSESSMENT YEAR: 2012 - 2013 [5.29] THIS CASE TOO DOES NOT HELP THE APPELLANT AS THE ALLOWABLE AMOUNT WAS 'DEFERRED INTEREST' WHICH WAS A REVENUE ITEM. [5.30] THE CASE OF UNITED COMMERCIAL BANK V CIT [1999] 240 ITR 355 (SC) TOO THE FACTS WERE VERY DIFFERENT. IN THAT CASE ' FOR REASONS, THE CENTRAL GOVERNMENT, IN EXERCISE OF THE POWERS CONFERRED BY SECTION 53 OF THE BANKING REGULATION ACT, AND ON THE RECOMMENDATION OF THE RBI, PERMITTED THE ASSESSEE NOT TO DISCLOSE THE MARKET VALUE OF ITS INVESTMENT IN THE BALANCE SHEET REQUI RED TO BE MAINTAINED AS PER THE STATUTORY FORM. BUT AS THE ASSESSEE WAS MAINTAINING ITS ACCOUNTS ON MERCANTILE SYSTEM, IT WAS ENTITLED TO SHOW ITS REAL INCOME BY TAKING INTO ACCOUNT THE MARKET VALUE OF SUCH INVESTMENTS IN ARRIVING AT THE REAL TAXABLE INCOM E. ON THAT BASIS, THEREFORE, THE ASSESSING OFFICER HAD TAXED THE ASSESSEE.' [5.31] THE APPELLANT HAS ALSO RELIED UPON THE CASE OF ROTORK CONTROLS (SUPRA). AS DISCUSSED ABOVE THE CASE LAW DOES NOT HELP THE APPELLANT. [5.32] BASED ON THE ABOVE IT IS HELD THAT THE AMOUNT OF Z53,04,968/ - CLAIMED AS EXPENSES WAS NOT AN ALLOWABLE EXPENSE AND THE SAME WAS RIGHTLY DISALLOWED BY THE LD. ASSESSING OFFICER. GROUND OF APPEAL IS DISMISSED. 5. LD A.R. ARGUED BEFORE US THAT IT WAS RETENTION MONEY KEPT BY THE CONTRACT OR TO BE PAID ON FUTURE DATE AFTER THE PROJECT WAS COMPLETED AND ANY DEFECT THEREIN WAS REMOVED AS PER THE SATISFACTION OF THE CONTRACTOR. 6. LD D.R. SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. WE FIND THAT BEFORE THE LOWER AUTHORITIES THE ASSESSEES CASE WAS THAT IT HAS PROVIDED 10% OF THE CONTRACT VALUE AS FUTURE EXPENSES ON DEFECT LIABILITY BY DEBITING TO THE PROFIT AND LOSS ACCOUNT. T HIS HAS BEEN HELD TO BE A CONTINGENT LIABILITY. IT WAS NOT THE CASE 7 ITA NO.29/RAN/2017 ASSESSMENT YEAR: 2012 - 2013 OF THE ASSESSEE BEFORE THE LOWER AUTHORITIES THAT IT WAS A RETENTION MONEY BY THE CONTRACTOR. THE ASSESSEE IS TRYING TO BUILD A NEW CASE WHICH IT COULD NOT DO SO AT THE TIME OF SECOND AP PEAL HEARING. BESIDES THIS, NO SPECIFIC ERROR COULD BE POINTED OUT BY LD LD A.R. IN THE ORDER OF THE CIT(A). THEREFORE, WE FIND NO GOOD REASON TO INTERFERE WITH THE ORDER OF THE CIT(A), WHICH IS HEREBY CONFIRMED AND GROUND OF APPEAL OF THE ASSESSEE IS DI SMISSED. 8 . IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRO NOUNCED IN THE OPEN COURT ON 3 1 /05 /201 8 S D / - S D / - (PAVAN KUMAR GADALE) (N.S SAINI) JUDICIAL MEMBER A CCOUNTANT MEMBER RANCHI; DATED 3 1 /05 /201 8 B.K.PARIDA, SPS COPY OF THE ORDER FORWARDED TO : BY ORDER, SR.PS, ITAT, CAMP AT RANCHI 1. THE APPELLANT : /S. A.P. BARIAR & SONS, ANNAT TOWER, RATU ROAD, HEHAL, RANCHI 2. THE RESPONDENT: DCIT, CIRCLE - 1, RANCHI 3. THE CIT(A), RANCHI 4. PR. CIT , RANCHI 5. DR, ITAT, RANCHI 6. GUARD FILE. //TRUE COPY//