DCIT Circle 8 (1), V. Sevalik Cellulose Ltd,

ITA 2906/DEL/2007

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 7004 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-04-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 09-04-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 08-06-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income

Judgement Text

IN THE INCOME TA X AP PELLA TE TRIBUNAL (DELHI BENCH B : NEW DELHI) BEFORE H ON'BLE SENIOR VICE P RESIDENT, SHRI R.P. GARG AN D HON'BLE JUDICIAL MEMBER, SHRI A.D. JAIN ITA NO.2906/DEL./2007 (ASSESSMENT YEAR : 2004-05 ) DCIT, CIRCLE 8 (1 ), VS. M/S. SIVALIK CELLULOSE L I MITED, NEW DELHI. F-5, A RJUN PALACE, B-45, GREATER KAILASH I , NEW DELHI. (P AN : AAACS1137M) (APP EL LANT ) (RES PONDENT ) ASSE SSE E BY : S HRI Y.K. SHARMA, CA REV ENUE B Y : SH RI KISHORE B., DR O R D E R GARG, SENIOR VP : T HIS APPEAL FILED BY THE REVENUE IS AGAINST THE O RDER OF THE CI T (APPEALS) FOR THE ASSES SM EN T Y EA R 2004-05. F OLLOWING TWO GROUNDS ARE RAISED IN T HIS APPEAL : 1. ON THE FACTS AND IN THE CIRCUM STANCE S OF THE CASE, THE L D. CIT (A) ER RED IN DELETING THE ADDITION M ADE B Y THE A.O. OF RS.2,50,996/- ON ACCOUNT OF MI SCELLANEOU S EXPENSES UNDE R THE HEAD COST PAID TO HINDUSTAN LEVER LIMITED FOR SALARIES OF MANAGERS AND OFFICERS ON DEPUTATION. 2. ON THE FACTS AND IN THE CIRCUM STANCE S OF THE CASE THE LD. CIT ( A) ER RED I N DELETING T HE ADDITION OF RS.24.30 CRO RES M ADE BY THE A.O ON A/C OF ADDITIONAL CLAIM M ADE BY THE ASSE SSEE TO M/S. HINDUSTAN L EVER LIMITED FOR EARL IER YEA RS. 2 ITA NO.2906/DEL./2007 2. FACTS RELATING T O BOTH THE GROUNDS A RE SIM ILAR. T HE ASSES SEE IS A PUBLIC LI MITED COMPANY, INCORPORATED IN THE YEA R 1975 FOR SETTING UP A PAPER PLANT. THE ASSE SSE E INCU RRED HUGE LOSSES AND UNDER A WINDING UP P ROCEEDINGS, A PROPOSAL TO REHABILITATE THE CO MPANY WAS FILED IN THE DELHI HIGH COURT IN WHICH FINANCIAL INSTITUTIONS, WHICH WERE HOLDING MORE THAN 63 % OF THE SHARE CAPITAL, AND HINDUSTAN LEVER L I MITED (HE REINAFTER REFERRED TO AS HL L) AGREED TO PARTICIPATE. ACCORDINGL Y, A SCHE ME WAS SANCTIONED B Y THE HIGH COURT VIDE ORDER DATED 15.2.1990 AND UNDER THE SCHEM E, THE H LL WAS TO MANAG E THE AFFAIRS OF THE COM PANY FOR 12 Y EARS WITH 9 DI RECTORS, NA MELY, 5 NO MINEES OF HL L, 1 NO MINEE OF THE PROMOTER - SH RI INDER CHOWDHARIE AND 3 NO MINEES OF FINANCIAL INSTITUTIONS. ASSESS EE CLAI MED M ISC. EXPENSES ON ACCOUNT OF COST PAID TO HL L FOR SALARIES OF THE MANAG ERS, OFFICERS ON DEPUTATION AND OTHER EXPENSES TO THE EXTENT OF RS.1,52,32,900/- WHICH WAS DISALLOWED BY T HE ASSE SSING OFFICER AS NOT INCUR RED FOR THE PURPOSES OF BUSINESS INCOME. ANOTHER ADDIT ION OF RS.24,30,000/- BEING T HE A MOUNT CLAIMED BY THE ASSE SSE E FRO M HL L AS SHORT PAYMENT OF P ROCESSING CHARGES FOR THE PE RIOD WHEN THE HL L WAS M ANAGING THE AFFAIRS OF THE COMPANY AS PER THE REHABILITATION SCHE ME , WHICH WAS R ESISTED B Y THE ERSTWHILE MANAG EM EN T ON THE G ROUND THAT WHATEVER WAS PAY ABLE WAS ALREAD Y PAID AND NO THING M ORE REMAINED TO BE PAID. THE M ATTER WAS SUB- J UDICE AND THE AM OUNT IS M ERELY A CLAI M BUT THE ASSE SSING OFFICER ADDED THE SAM E TO THE INCOME OF THE ASSESS EE. 3. CIT (APPEALS) DELETED BOTH THE ADDITIONS B Y OBSERVING IN PARAGRAPHS 5.1 TO 5.4 AS UNDER : 5.1 I HAVE CAREFULLY CONSIDERED THE SUBM IS SIONS M ADE B Y THE APPELLANT. I HAVE ALSO PERUSED THROUGH THE VARIOUS DOCU MENTS FILED. T HE R EASON WH Y BOTH THE ADDITIONS M ADE B Y THE AO WERE 3 ITA NO.2906/DEL./2007 TAKEN UP T OGETHER IS BECAUSE THE PR INCIPLE TO DECIDE BOTH THE DISPUTE IS SA ME. T HE AO HAS DISCUS SED THE WORDS ACCRUE & ARISE. THESE WORDS A RE APPLICABLE BOTH TO THE LIABILITY OF EXPENSES AS WELL AS INCO ME IN RESPECT OF WHICH ADDITIONS ARE M ADE. I AGREE WITH THE CONTENTION OF THE AO AND THE JUDICIAL DECISIONS RELIED UPON THAT INCO ME CAN BE B ROUGHT TO TAX IF IT HAS ACCRUED TO AN ASSES SEE. OR IN OTHER WORDS THE ASSE SSEE HAS OBTAINED A R IGHT T O RECEIVE SUCH INCOME. EVEN THOUGH THE INCO ME M AY NO T HAVE BEEN ACTUALLY RECEIVED B Y H I M. SI MILARLY A LIABILITY TO EXPENDITURE HAS TO BE ALLOWED AS DEDUCTION IF IT HAS ACCRUED TO THE ASSE SSEE OR IN OTHER WORDS THE LIABILIT Y HAS CRYS TALLIZED AND THE BURDEN TO PAY THE SA ME IS CAST UPON AN ASSE SSEE. HAVING DISCUSSED THESE BASIC P RINCIPLES OF MERCANTILE SYSTEM OF ACCOUNTING IT IS NOW T O BE SEEN HOW DO THE Y APPL Y TO THE TWO ISSUES UNDER DISPUTE. ONE ADDITION IS IN R ESPECT OF EXPENDITURE WHICH IS DISALLOWED AND THE OTHE R IN RESPECT OF INCO ME. F RO M THE BACKGROUND FACTS AS DISCUSSED EARLIER IT IS QUITE CLEAR THAT IN BOTH CASES THE A MOUNT PE RTAINS TO EARLIE R YEA RS AND NOT TO Y EAR UNDE R APPEAL. T HE LIABILITY PAY ABLE T O HL L PERTAINS TO THE PE RIOD FROM JAN 98 TO DEC 02 WHEREAS THE INCO ME THAT HAS BEEN ADDED IS RELEVANT TO 10 YE ARS PERIOD FRO M THE Y EAR 1994 TO 2003. T HE APPROACH OF T HE AO APPEARS TO BE QUITE CONTRADICTOR Y WHEN THE SA ME P RINCIPLES ARE APPLIED TO THE INCO ME & EXPENDITURE. HE HAS CHARGED TO TAX THE INCOM E PERTAINING TO EARLIE R YEA RS IN THE Y EAR UNDE R APPEAL ON THE GROUND THAT E ASSES SEE HAS RIGHT TO R ECEIVE SUCH I NCO ME EVEN THOUGH IT M AY BE PERTAINING TO EARLIE R Y EAR. ON THE OTHER HAND THE AO DENIES THE CLAI M OF THE APPELLANT REGARDING LIABILIT Y ON THE GROUND THAT IT PER TAINED TO EAR LIER YE ARS. I T IS OBVIOUS THAT THE APPROACH OF T HE AO TO BOTH THE ISSUES IS NOT P ROPER AND M ISCONC EIVED. AS MENTIONED IN THE BEGINNING OF THE PA RAGRAPH AN INCO ME CAN BE TAXED AND EXPENDITU RE HAS TO BE ALLOWED AS DEDUCTION IF THE R IGHT TO RECEIVE O R THE LIABILIT Y TO PA Y ACCRUES DURING THE PART ICULAR YEA R IR RESPECTIVE OF PERIOD T O WHICH I T M AY PERTAIN. LET US APPLY THESE PRINCIPLES TO BOTH T HE ITEM S UNDER DISPUTE I N THE SAM E M ANNER. 5.2 THERE IS NO DOUBT THAT T HE EXPENDITURE PE RTAINS TO EARL IER 5 YEA RS WHEN THE SERVICES OF MANAG ERS AND OFFICERS OF HL L 4 ITA NO.2906/DEL./2007 WERE PROVIDED TO THE APPELLANT CO MPANY. ACCORDINGLY THERE IS NO DOUBT THAT THE EXPENDITURE IS R ELATED TO THE BUSINESS OF THE APPELLANT. THE LIABILIT Y TO PA Y SUCH EXPENDITU RE WAS, FOR THE FIRST TIME, MADE KNOWN TO THE CO MPANY BY HL L BY ITS LETTE R DATED 27 /10/03. THE SAID LETTE R AND DEBIT NOTE WAS IN THE FOR M OF A BILL WHICH WAS R AISED BY HL L ON THE APPELLANT CO MPANY. THE RECEIPT OF BILL/DEBIT NOTE DID NEITHER FASTEN ANY LIABILITY ON THE APPELLANT COMPANY NOR DID IT GIVE AN Y RIGHT TO RECEIVE THE SAID A MOUNT TO HL L. HOWEVER SAID DEBIT NOTE ( OR THE CLAIM OF HL L) WAS CONSIDERED BY THE BOARD OF DIRECTO RS OF THE APPELLANT CO MPANY AND WAS ACCEPTED ON 4/12/03. IT WAS AFTER SUCH APPROVAL OF THE BOARD THAT HLL GOT A RIGHT TO RECEIVE THAT A MOUNT AND THE LIABILIT Y TO PA Y THE AMOUNT CRYSTALL IZED IN THE CASE OF APPELLANT. SINCE ALL THESE EVENTS TOOK PLACE DURING T HE ACCOUNTING YE AR R ELATED TO AY 04-05 THE LIABIL ITY HAS TO BE CONSIDERED AS PERTAINING TO THAT YE AR ACCORDING TO THE M ERCANTILE P RINCIPLES OF ACCOUNTING. SIMPLY BECAUSE THE LIABILIT Y WAS R ELATED TO T HE EAR LIER PERIOD, ITS DEDUCTION CAN NOT BE DISALLOWED. THE REFORE IF THE PRINCIPLE WHICH THE AO FOLLOWED IN MAKING THE ADDITION OF INCO ME OF RS 24.30 LAC IS APPLIED TO THE EXPENDITURE, IT IS OBVIOUS T HAT THE DISALLOWANCE WAS NOT COR RECT. T HE OBSERVATIONS OF T HE AO THAT DEM ANDING CHARGES BY WA Y OF DEBIT NOTE AFTER THE PERIOD OF SERVICE WAS OVER WAS NOT PROPER AND THE PAYMENT AM OUNTED TO SIPHONING OFF THE MONEY WAS ALSO THE OPINION OF THE PRESENT MAN AGEM EN T. THIS IS APPARENT FROM THE FACT THAT THE P RESENT M ANAGEM EN T FILED PETITION AGAINST H LL BEFORE THE HIGH COUR T. IN FACT IT APPEARS THAT THE AO M ADE ADDITION ON THE BASIS OF CLAI M MADE IN THE APPELLANT'S PETITION. HOWEVER MERE CLAI M TO DISPUTE THE PAYMENT TO HL L DOES NOT I N AN Y WA Y DILUTE THE LIABILITY OF THE APPELLANT WHICH WAS FASTENED ON THE CO MPANY BECAUSE OF DECISION OF BOA RD OF DI RECTORS. T HE LIABILITY CAN BE NU LLIFIED OR REMITTED ONL Y B Y A COURT O RDER IF THE ISSUE IS DECIDED IN APPELLANT'S FAVOUR. S INCE THE LIABILI TY ACCRUED DU RING THE YEA R THERE IS NO R EASON TO DEN Y IT. I N VIEW OF THIS T HE, DISALLOWANCE OF 152,32,900 IS DELETED. 5.3 NOW THE SAM E PRINCIPLES ARE TO BE APPLIED TO T HE OTHE R ITE M. T HE AMOUNT OF RS 24.30 CRORES WAS ALSO TAKEN B Y THE AO 5 ITA NO.2906/DEL./2007 FRO M THE APPELLANT'S PETITION FILED BEFORE THE HIGH COURT AGAINST HL L WHO WAS MAN AGING THE CO MPANY'S AFFAIRS FOR 12 YEA RS AS PER REHABILITATION SCHEM E. THIS CLAI M WAS THEREFORE NOT EVEN I N THE FORM OF A BILL RAISED ON HLL FOR AN Y GOODS OR SERVICES. IT WAS A CLAIM FOR ADDITIONAL PA Y MENT FOR EARLIER YEA R'S PERIOD WHICH ACCORDING TO THE P RESENT MANAG EM EN T H LL WAS SUPPOSED TO PAY . BY SIM PLY FILING A PETITION TO THE COURT THE APPELLANT DOES NOT GET ANY RIGHT TO RECEIVE THE SAID INCOME. AS IS OBVIOUS FRO M THE REPLY OF H LL AGAINST APPELLANT'S PETITION FILED BEFORE THE COURT, THE HL L HAS COMPLET ELY DENIED ANY SUCH LIABILIT Y TO PA Y ADDITIONAL AMOUNT. THE ISSUE IS UNDER DISPUTE AND IT IS WITHIN THE JURISDICTION OF T HE COU RT AND ACCORDINGLY SUB-JUDICE. ONLY WHEN THE COUR T DECIDES THE ISSUE AND DI RECTS AN Y FURTHER PA YMENT FRO M HL L T O APPELLANT CO MPANY, DOES THE APPELLANT WI LL GET A RIGHT TO RECEIVE THAT A MOUNT WHICH AGAIN OF COURSE WOULD BE SUBJECT T O FURTHER DISPUTE BY H LL BEFORE HIGHER APPELLATE AUTHORITIES. PR IOR TO THE DECISION OF COU RT ON APPELLANT'S PETITION, THERE IS NEITHER ANY LIABILIT Y ON HL L T O PA Y ( IT IS AT MO ST A CONTINGENT LIABILIT Y IN THEIR CASE) NOR IS THERE ANY RIGHT TO RECEIVE OR ACCRUAL OF INCO ME IN THE CASE OF APPELLANT. THE CASE WOULD HAVE BEEN ENTIRELY DIFFERENT IF THE APPELLANT WOULD HAVE GOT A RIGHT TO RECEIVE SO ME ADDITIONAL AMOUNT PERTAINING T O EARLIER Y EARS EITHER BECAUSE OF SO ME COU RT ORDER ( LEGAL RIGHT ) OR AGREED BY THE OTHER PART Y (CONT RACTUAL R IGHT). I N THAT CASE, BY APPLY ING THE PRINCIPLES OF ACCRUAL, THE A MOUNT WOULD HAVE BEEN TAXABLE EVEN THOUGH PE RTAINING TO EARLIER YE ARS AND EVEN IF NO T ACTUALL Y RECEIVED. BUT SINCE THE APPELLANT HAS NO T OBTAINED AN Y RIGHT TO RECEIVE AND HAS SI MPLY FILED A PETITION BEFORE THE COU RT, THE ADDITION TO ITS INCO ME IS NOT JUSTIFIED. 5.4 THERE IS ANOTHER REASON BECAUSE OF WHICH THE ADDITION IS NOT CO RRECT. E VEN WITHOUT PREJUDICE TO THE FACT THAT T HE PETITION DOES NOT GIVE AN Y RIGHT T O RECEIVE, I T IS TO BE NOTED THAT THE PETITION BEFORE DELHI HIGH COURT FILED BY THE APPELLANT I N MAY 2006. T HEREFORE THE CLAIM FOR ADDITIONAL A MOUNT FROM HLL WAS FOR THE FIRST TIME MADE IN FY 06 -07 WHICH R ELEVANT TO AY 07-08. HENCE OTHER WISE ALSO NO ACTION OF WHAT EVER NATURE COULD HAVE BEEN TAKEN IN THE YEA R UNDER APPEAL BECAUSE T HE 6 ITA NO.2906/DEL./2007 EVENTS BASED ON WHICH ADDITION HAS BEEN MA DE DID NOT TAKE PLACE IN THE RELEVANT ACCOUNTING YEA R. I N AN Y CASE SINCE IT HAS BEEN HELD THAT THE APPELLANT DOES NOT HAVE AN Y RIGHT T O RECEIVE ANY ADDITIONAL INCO ME FROM H LL MERELY B Y FILING A PETITION, THE ADDITION OF RS 24.30 CRO RES IS DELETED. 4. WE HAVE HEARD THE PARTIES AND CONSIDERED THE R IVAL SUBMI SSION S. AFTER HEARING THE PARTIES, WE DO NOT FIND ANY REASON TO IN TERFERE WITH THE O RDER OF THE CIT (APPEALS). THE FIRST ISSUE WAS A MERE CLAI M TO DISPUTE THE PA YM ENT T O HL L DOES NOT IN AN Y WAY DILUTE THE LIABILIT Y OF T HE ASSESS EE WHICH WAS FASTENED ON THE CO MPANY BECAUSE OF THE DECISION OF THE BOARD OF DIRECTO RS. I T WAS A SUBSISTING LIABILITY ACCRUED DURING THE Y EAR AND, THEREFORE, THE CIT (APPEALS) WAS JUSTIFIED IN ALLOWING THE SAM E. S I MILARLY, THE CLAIM OF RS. 24.30 CRORES WAS ONL Y A M ERE PETITION MAD E BY THE ASSES SEE WHICH DID NOT GIVE AN Y R IGHT TO RECEIVE. THE PETITION WAS FILED B Y THE ASSES SEE BEFORE THE DELHI HIGH COURT IN MAY 2006 WHEREIN FOR THE FIRST T I ME THE CLAIM WAS M ADE BY THE ASSE SSE E. TH IS PERIOD IS RELEVANT FOR ASSES SM EN T YEA R 2007-08. ON THAT GROUND ALSO, NO INCO ME COULD HAVE ACCRUED TO THE ASSE SSEE. CI T (APPEALS), IN OUR OPINION, WAS JUSTIFIED IN DELETING BOTH THE ADDITIONS AND HIS ORDER IS JUST AND PROPE R ON THE FACTS AND CIRCU MSTANC ES OF THE CASE AND DOES NOT CALL FOR ANY INTERFERENCE. T HE O RDER OF THE CI T (APPEALS) IS ACCORDINGLY UPHELD. 5. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMI SS ED. O RDER PRONOUNCED IN OPEN COURT ON THIS 9 TH DAY OF APRIL 2009. ( A.D. JAIN) ( R.P. GARG) JU DICIAL ME MB ER SENIOR VICE P RESIDENT DATED THE 9 T H DA Y OF AP RIL 2009/ TS 7 ITA NO.2906/DEL./2007 COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-X I, NEW DELHI. 5.CIT (I TAT), NEW DELHI. AR, I TA T NEW DE LHI.