The Jt. CIT., Navsari Range, Navsari V. M/s. Peass Industrial Engineers Ltd., Navsari

ITA 297/AHD/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1938 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 16-12-2009
• Assessment Year: 2002-2003
• Appeal Filed On: 17-01-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: GOVIND SINGHAL
• Assessee Lawyers: MEHUL KUMAR PATEL
• Keywords: Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, A-BENCH, AHMEDABAD. BEFORE: SHRI T K SHARMA, JUDICIAL MEMBER, AND SHRI D C AGRAWAL, ACCOUNTANT MEMBER. ITA NO.297/AHD/2007 (ASSESSMENT YEAR 2002-2003) JT. COMMISSIONER OF INCOME TAX NAVSARI RANGE, NAVSARI. VERSUS M/S. PEASS INDUSTRIAL ENGINEERS LTD. P.B. NO.128, MANEKLAL ROAD, NAVSARI. (APPELLANT) (RESPONDENT) PAN: FOR THE APPELLANT: SHRI. GOVIND SINGHAL, SR. DR FOR THE RESPONDENT MEHUL KUMAR PATEL, AD ORDER PER D C AGRAWAL (ACCOUNTANT MEMBER): THIS IS AN APPEAL FILED BY THE REVENUE, AGAINST THE ORDER OF THE LD. CIT(A). 2. THE FACTS OF THE CASE ARE THAT ASSESSMENT IN THI S CASE WAS ORIGINALLY COMPLETED UNDER SECTION 143(3) ON 22-09- 2004. IT WAS REOPENED UNDER SECTION 147. THE ASSESSING OFFICER NOTICED THAT DURING THE ACCOUNTING YEAR 2001-2002 RELEVANT TO THE ASSES SMENT YEAR 2002- 2003, THE ASSESSEE CLAIMED A SUM OF RS.3,69,400/- A S AN EXPENDITURE IN RESPECT OF ISO 9001. THIS WAS CLAIMED TO BE THE FI RST YEAR OF EXPENDITURE IN THIS FIELD. ACCORDINGLY, IT WAS CLA IMED AS REVENUE EXPENDITURE. THE ASSESSING OFFICER TREATED IT AS C APITAL EXPENDITURE AS ACCORDING TO HIM THERE IS ENDURING BENEFIT TO THE C OMPANY BY WAY OF IMPROVEMENT OF THE SKILLS OF PERSONS BY WAY OF TRAI NING. THE LD. COMMISSIONER OF INCOME TAX(APPEALS) HOWEVER, ALLOWE D THE CLAIM ON 2 ITA NO.297/AHD/2007 (ASSESSMENT YEAR 2002-2003) THE GROUND THAT NO BENEFIT OF ENDURING NATURE IS DE RIVED BY THE ASSESSEE. SUCH EXPENDITURE IS REQUIRED TO BE INCURRED EVERY Y EAR. THE ISO CERTIFICATION WAS REQUIRED AS A TRADE MARK FOR EXPO RTING MACHINES MANUFACTURED BY THE COMPANY. 3. WE HAVE HEARD THE LEARNED AR OF THE ASSESSEE AND LEARNED DR. IN OUR VIEW THERE IS NO CASE FOR INTERFERENCE IN TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS). IN OUR CONSID ERED VIEW, MERELY DRIVING LONG TERM BENEFIT FROM EXPENDITURE D OES NOT MAKE IT CAPITAL EXPENDITURE. HON'BLE SUPREME COURT IN EMPI RE JUTE COMPANY LIMITED VS. CIT [1980] 17 CTR (SC) 113; [1980] 124 ITR 1 (SC), LAID DOWN THE TEST FOR THE DETERMINATION OF NATURE OF EX PENDITURE. IT IS HELD THAT WHERE ADVANTAGE RECEIVED ON INCURRING EXPENDIT URE FACILITATES THE CARRYING ON BUSINESS MORE EFFICIENTLY AND MERE PROF ITABLY LEAVING THE FIXED CAPITAL STRUCTURE UNTOUCHED THEN EXPENDITURE SHOULD BE TREATED AS REVENUE IN NATURE. ON THE OTHER HAND WHERE EXPENDI TURE INCURRED INCREASES THE CAPITAL STRUCTURE OF THE ASSESSEE BY WAY OF INCREASING ASSETS TANGIBLE OR INTANGIBLE, IT WOULD BE TREATED AS CAPITAL EXPENDITURE. THIS CONDITION IS IN ADDITION TO DERIVING ENDURING BENEFIT TO THE BUSINESS. IN THE CASE OF EXPENDITURE INCURRED FOR OBTAINING ISO CERTIFICATION THE FIXED ASSET OF THE COMPANY DOES N OT CHANGE. IT ONLY INCREASES THE BUSINESS STRUCTURE OF THE ASSESSEE, I MPROVES THE SYSTEM, INCREASING THE EFFICIENCY OF THE PERSONAL, CUT THE COST, AND IMPROVES THE IMAGE OF THE COMPANY IN THE EYES OF THE CUSTOMERS A ND PUBLIC AT LARGE. THIS IS THEREFORE AN EXPENDITURE FOR EARNING MORE I NCOME AND IS ACCORDINGLY IN THE REVENUE FIELD. THEREFORE, THE E XPENDITURE INCURRED FOR OBTAINING ISO CERTIFICATION IS REVENUE IN NATUR E. OUR VIEW IS ALSO SUPPORTED BY THE DECISION OF THE TRIBUNAL IN ACIT V S. UPPER INDIA STEEL MANUFACTURING AND ENGINEERING COMPANY TAXMAN VOL. 150 PAGE 3 ITA NO.297/AHD/2007 (ASSESSMENT YEAR 2002-2003) 51 AND OF ITAT, CHANDIGARH BENCH IN ACIT VS. TIRUPA TI MICROTECH PRIVATE LIMITED (2007 111 TTJ JODHPUR 149. THIS GR OUND IS THEREFORE REJECTED. 4. NEXT GROUND RELATES TO ADDITION OF RS.3,00,000/- BEING INTEREST DEEMED BY THE ASSESSING OFFICER AS ACCRUED ON A SUM OF RS.20,00,000/- GIVEN BY THE ASSESSEE AS LOAN SOMEWHERE IN 1993. T HE ASSESSEE DID NOT CREDIT THE INTEREST IN THE PROFIT AND LOSS ACCOUNT IN RESPECT OF THIS LOAN ON THE GROUND THAT THE LOAN HAD BECOME BAD AND THE PARTY IS NOT TRACEABLE. IT HAD NOT CREDITED SUCH INTEREST IN TH E PAST WHICH HAS BEEN ACCEPTED BY THE REVENUE. 5. THE ASSESSING OFFICER DID NOT AGREE AND MADE THE ADDITION OF THE DEEMED INTEREST ACCRUED. 6. LD. COMMISSIONER OF INCOME TAX(APPEALS) DELETED THE ADDITION ON THE GROUND THAT THE TWO PARTIES VIZ. M/S. MANISH ORGANICS AND M/S. HEMCO MINING AND SMELTING COMPANY TO WHOM THE LOAN WAS GIVEN, DID NOT GIVE INTEREST THIS YEAR, THOUGH IT WAS RECE IVED EARLIER REGULARLY BUT SUBSEQUENTLY THOSE COMPANIES STOPPED PAYING THE INTEREST. M/S. MANISH ORGANICS WAS REFERRED TO BIFR WHEREAS ASSESS EE HAD FILED SUIT FOR RECOVERY AGAINST HEMCO MINING AND SMELTING COMP ANY. LD. COMMISSIONER OF INCOME TAX(APPEALS) HELD THAT IF TH E PRINCIPLE AMOUNT HAS BECOME IRRECOVERABLE, THUS THERE IS NO P OINT IN PROVIDING INTEREST AS ACCRUED INCOME. THERE IS NO LIABILITY OF TAX ON HYPOTHETICAL INCOME. ONCE PRINCIPLE HAS BECOME DOUBTFUL THE INT EREST CANNOT ACCRUE. FURTHER FOR THE ASSESSMENT YEAR 1996-1997 TO 1997-1998 LD. COMMISSIONER OF INCOME TAX(APPEALS) HAD DECIDED THE ISSUE IN FAVOUR 4 ITA NO.297/AHD/2007 (ASSESSMENT YEAR 2002-2003) OF THE ASSESSEE AGAINST WHICH NO APPEAL SEEMS TO HA VE BEEN FILED BY THE DEPARTMENT. 7. AFTER CONSIDERING RIVAL SUBMISSIONS, WE ARE OF T HE VIEW THAT THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS). REASONS ARE THAT ACCRUAL OF I NCOME TAKES PLACE WHEN PRINCIPLE IS INTACT AND IS IN A ZONE OF RECOVE RY. WHERE PRINCIPLE IS NOT IN A ZONE OF RECOVERY, WHERE THE DEBTOR HAS BEC OME BANKRUPT OR THERE ARE OTHER CONDITIONS PREVAILING WHICH MAKES R ECOVERY VERY DIFFICULT THEN IT CANNOT BE SAID THAT INTEREST INCO ME WOULD ACCRUE. IN SUCH CIRCUMSTANCES ACCRUAL OF INTEREST TAKES PLACE ONLY WHEN SETTLEMENT WITH THE PARTIES TAKES PLACE AND OTHER PARTY AGREES TO PAY PRINCIPLE PLUS FULL INTEREST OR PART OF INTEREST. 8. UNDER THE FACTS AND CIRCUMSTANCES, ACCRUED INTER EST INCOME WILL NOT BE REAL INCOME. THE CONCEPT OF ACCRUAL OF INCO ME IS NOT UNFETTERED PRINCIPLE. IT IS SUBJECTED TO CONCEPT OF REAL INCO ME. IT IS AN INCOME WHICH REALLY ACCRUE OR ARISES TO THE ASSESSEE WHICH IS TAXABLE. WHETHER INCOME HAS REALLY ACCRUED OR ARISEN TO THE ASSESSEE MAY BE JUDGED IN THE LIGHT OF REALITY OF THE SITUATION. THERE IS NO REAL INCOME IN THE SENSE THAT INCOME MAY HAVE ACCRUED THEORETICALLY, BUT IN THE R EALITY NO INCOME HAS RESULTED BECAUSE PRINCIPLE HAS BECOME IRRECOVERABLE . FURTHER WHEN THE DEPARTMENT HAS IN THE EARLIER YEARS ACCEPTED THAT N O INCOME REALLY ACCRUED TO THE ASSESSEE, THEN IT CANNOT BE SAID THA T IN A SUBSEQUENT YEAR WHEN CIRCUMSTANCES HAVE NOT CHANGED INCOME HAS ACCR UED AND THEREFORE IS TAXABLE. EVEN IF WE APPLY THE CONCEPT OF CONSISTENCY OF APPROACH, THE INTEREST INCOME AS PROPOSED BY THE AS SESSING OFFICER CANNOT BE TAXED. CIRCUMSTANCES HAVE NOT CHANGED AN D THERE IS NO MATERIAL ON RECORD TO SHOW THAT THIS YEAR THE PRINC IPLE HAD BECOME RECOVERABLE AND THEREFORE INTEREST INCOME SHOULD BE TAXED. AS A RESULT, 5 ITA NO.297/AHD/2007 (ASSESSMENT YEAR 2002-2003) WE UPHOLD THE ORDER OF LD. COMMISSIONER OF INCOME T AX(APPEALS) IN DELETING THE ADDITION. 9. AS A RESULT, APPEAL FILED BY THE REVENUE IS DISM ISSED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON DATED 31 ST DECEMBER, 2009. SD/- SD/- (T K SHARMA) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTAN T MEMBER AHMEDABAD; DATED: 31/12/2009 ANKIT* COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CONCERNED 4. THE CIT, 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, ASSTT. REGISTRAR/ DEPUTY REGISTRAR ITAT, AHMEDABAD BENCHES, AHMEDABAD.