The ACIT,(OSD)-I, Range-4, Ahmedabad V. Kloeckner Desma Machinery Pvt.Ltd., Ahmedabad

ITA 334/AHD/2011

• Counselvise Citation: 33420514 RSA 2011
• Duration Of Justice: 2 year(s) 10 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 16-12-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 07-02-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P L KUREEL
• Assessee Lawyers: M J SHAH
• Keywords: Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH BEFORE: SRI D.K TYAGI, JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEM BER THE ACIT (OSD)-I, RANGE-4, AHMEDABAD (APPELLANT) VS KLOECKNER DESMA MACHINERY PVT. LTD 53, MADHUBAN, NR. MADALPUR UNDER BRIDGE, ELLISBRIDGE, AHMEDABAD PAN: AAACK 2768 N (RESPONDENT) REVENUE BY: SRI P.L. KUREEL, SR.D.R. ASSESSEE BY: SRI M.J. SHAH, A.R. DATE OF HEARING : 16-12-2013 DATE OF PRONOUNCEMENT : 20-12-20 13 / ORDER PER : D.K. TYAGI, JUDICIAL MEMBER:- THIS IS THE REVENUES APPEAL AGAINST THE ORDER OF LD. CIT(A)-VIII, AHMEDABAD DATED 09-11-2010. ITA NO.334/AHD/2011 ASSESSMENT YEAR 2007-08 I.T.A NO.334/AHD/2011 A.Y. 2007-08 PAGE N O ACIT VS. KLOECKNER DESMA MACHINERY PVT. LTD 2 2. REVENUE HAS TAKEN FOLLOWING GROUNDS OF APPEAL:- 1.1 THE LEARNED CIT(A)-VIII, AHMEDABAD HAS ERRE D IN LAW AND ON FACTS IN DELETING THE ADDITION MADE BY THE ASSESSIN G OFFICER ON ACCOUNT OF DISALLOWANCE OF WARRANTY PROVISIONS OF R S.26 , OO , OOO/-, WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER. 1.2 IN DOING SO, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN HOLDING, IN THE ABSENCE OF ANY SATISFACTORY EVIDENC E, THAT THE ASSESSEE'S CLAIM FOR WARRANTY PROVISION WAS BASED O N A HISTORICAL TREND FOR MAKING SUCH CLAIM AND THE AMOUNT CLAIMED BY THE ASSESSEE WAS BASED ON A SCIENTIFIC APPROACH AND ON PAST EXPE RIENCE. 1.3 IN DOING SO, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT THE SAID PROVISION MADE BY TH E ASSESSEE WAS IN THE NATURE OF AN UNASCERTAINED AND NON-CRYSTALLIZED LIABILITY AND THEREFORE THE SAME WAS NOT ADMISSIBLE AS DEDUCTION TO THE ASSESSEE. 2.1 THE LEARNED C1T(A) HAS ERRED IN LAW AND ON F ACTS IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOU NT OF DISALLOWANCE OF SUNDRY BALANCES WRITTEN OFF AMOUNTI NG TO RS.5 , 73,471/-- WITHOUT PROPERLY APPRECIATING THE FACTS O F THE CASE AND THE MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFF ICER. 2.2 IN DOING SO, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT DUE TO THE FAILURE OF THE ASS ESSEE TO FURNISH THE NECESSARY DETAILS BEFORE THE ASSESSING OFFICER, IT COULD NOT BE VERIFIED WHETHER THE CONDITIONS LAID DOWN IN SECTION 36(I)(V II)OF THE ACT WERE FULFILLED IN THE CASE OF THE ASSESSEE. 3.1 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FA CTS IN DELETING THE ADDITION OF RS.8,98,055/- MADE BY THE ASSESSING OFF ICER ON ACCOUNT OF DISALLOWANCE OF PROVISION OF TAX ON ROYALTY, WITHOU T PROPERLY APPRECIATING THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD BY THE ASSESSING OFFICER. 3.2 IN DOING SO, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT IN VIEW OF THE EXPLICIT PR OVISIONS OF SECTION 40(A)(II) OF THE ACT, THE CLAIM OF TDS PAYMENT WAS NOT AN ALLOWABLE DEDUCTION. I.T.A NO.334/AHD/2011 A.Y. 2007-08 PAGE N O ACIT VS. KLOECKNER DESMA MACHINERY PVT. LTD 3 4.1 THE LEARNED C1T(A) HAS ERRED IN LAW AND ON FA CTS IN DELETING THE DISALLOWANCE OF RS. 1,00,2967- MADE BY THE ASSESSIN G OFFICER OUT OF THE INTEREST EXPENSES, WITHOUT PROPERLY APPRECIATIN G THE FACTS OF THE CASE AND THE MATERIAL BROUGHT ON RECORD BY THE ASSE SSING OFFICER. 4.2 IN DOING SO, THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT NO COMMERCIAL EXPEDIENCY WAS INVOLVED IN ADVANCING LOANS AT CONCESSIONAL RATES TO ITS EMPLOY EES . 3. GROUND NO. 1 RELATES TO DISALLOWANCE OF WARRANT Y PROVISION OF RS. 26 LACS. THIS ISSUE IS COVERED IN FAVOUR OF ASSESSEE BY THE ORDER OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2006 -07 WHEREIN FOLLOWING WAS HELD. 4. WE HAVE HEARD BOTH THE SIDES. FROM THE SIDE OF THE REVENUE, MR. G.S. SOURYAVANSHI AND FROM THE SIDE OF THE ASSESSEE LD. A.R. MR. MANISH L SHAH APPEARED AND THEY HAVE RESPECTIVELY S UPPORTED THE ORDERS OF THE ASSESSING OFFICER AND LEARNED CIT(APP EALS). ONCE IT WAS AN ADMITTED FACTUAL POSITION THAT THE PROVISIO N OF WARRANTY' FOR THE YEAR UNDER CONSIDERATION WAS BASED UPON THE PAS T EXPERIENCE AND THE HISTORICAL TREND OF THE BUSINESS, THEREFORE, IN OUR CONSIDERED OPINION, THE LEARNED CIT(APPEALS) HAS RIGHTLY PLACE D RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF EA RTH MOVERS VS. CIT 245 1TR 428(SC), DECISION OF HON'BLE ITAT BANGA LORE IN THE CASE OF IBM INDIA LTD. VS. CIT REPORTED AT 105 TTJ PG-1 (BAN.) AND DECISION OF HON'BLE APEX COURT IN THE CASE OF ROTAR K CONTROLS INDIA PVT. LTD. VS. CIT REPORTED AT 23 DTR 79(SC). THE HO N'BLE COURT HAS SAID THAT A CONTINGENT LIABILITY, LIKE A WARRANTY E XPENSES, IF PROPERLY ASCERTAINED ON ACCRUAL BASIS CAN BE AN ITEM OF DEDU CTION U/S.37 OF THE IT. ACT. IT WAS ALSO OBSERVED BY THE HON'BLE COURT THAT ALTHOUGH THE PRINCIPLE OF ESTIMATION OF THE CONTINGENT LIABILITY IS NOT THE NORMAL RULE BUT IT WOULD DEPEND ON THE NATURE OF THE BUSIN ESS, THE NATURE OF THE SALES, THE NATURE OF THE PRODUCT MANUFACTURE AN D ALSO DEPENDENT UPON THE SCIENTIFIC METHOD OF ACCOUNTING ADOPTED BY THE ASSESSEE. IN THIS REGARD, THE COURT WAS OF THE VIEW THAT IT WOUL D ALSO DEPEND UPON THE HISTORICAL TREND AND THE PAST EXPERIENCE OF THE ASSESSEE. SINCE THE LEARNED CIT(APPEALS) HAS SIMPLY FOLLOWED THOSE PREC EDENTS, AFTER APPRECIATING THE FACTUAL BACKGROUND OF THE ASSESSEE , THEREFORE, WE I.T.A NO.334/AHD/2011 A.Y. 2007-08 PAGE N O ACIT VS. KLOECKNER DESMA MACHINERY PVT. LTD 4 FIND NO FALLACY IN THE SAID VIEW, HENCE AFFIRM THE SAME. THIS GROUND OF THE REVENUE IS HEREBY DISMISSED. IN VIEW OF THE ABOVE THIS GROUND OF REVENUES APPEA L IS DISMISSED. 4. GROUND NO. 2 RELATES TO DISALLOWANCE OF SUNDRY B ALANCE WRITTEN OFF OF RS. 5,73,471/-. THIS GROUND IS ALSO COVERED IN FAV OUR OF ASSESSEE BY THIS TRIBUNAL IN ASSESSEES OWN CASE WHEREIN FOLLOWING W AS HELD. 6. HAVING HEARD THE SUBMISSIONS OF BOTH THE SIDES, WE HAVE FOUND THAT THE ASSESSEE-COMPANY WAS EXPORTING THE MACHINE S AND ON THE EXPORT SALES ENTITLED TO GET THE LICENCE FOR DUTY F REE IMPORT. ON THE EXPIRY OF THE VALIDITY OF THE PERIOD, THE LICENCE H AD NO COST. THE ASSESSEE HAS RECOGNIZED THE INCOME IN THE PAST ON T HE BASIS OF THE RECEIPTS OF THE LICENCE AND, ACCORDINGLY OFFERED IN THE RESPECTIVE YEAR AS INCOME. WHILE OFFERING THE INCOME, IT WAS REFLEC TED IN THE BOOKS AS 'ADVANCE LICENCE RECEIVABLE'. HOWEVER, DUE TO CHANG E IN THE GOVERNMENT POLICY, IT WAS NOT RECEIVABLE, HENCE, WR ITTEN OFF AS BAD DEBT. FROM THE CHART REPRODUCED HEREINABOVE, IT IS EVIDENT THAT THE INCOME WAS OFFERED IN THE PAST FOR THE ASSESSMENT Y EARS NOTED THEREIN. IN OUR OPINION, BASED UPON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT REPORTED AS (2010) 323 ITR 397(SC), THE LEARNED CIT(APPEALS) HAS RIGHTLY APPRECIATED THE PR OVISIONS OF SECTION 36(1)(VII) OF THE I.T.ACT AND DIRECTED THE ASSESSING OFFICER TO VERIFY THE RECORDS AND ALLOW THE WRITE -OFF OF THE CLAIMED AMOUNT. WE FIND NO FALLACY IN THE SAID DIRECTIONS OF THE LEARN ED CLT(APPEALS), HENCE, HEREBY AFFIRM THE SAME. THIS GROUND OF THE R EVENUE IS DISMISSED. IN VIEW OF THE ABOVE THIS GROUND OF REVENUES APPE AL IS DISMISSED. 5. THIRD GROUND RELATES TO DISALLOWANCE PROVISION O F TAX ON ROYALTY AMOUNTING TO RS. 8,98,055/-. THIS GROUND IS COVERE D IN FAVOUR OF ASSESSEE BY ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2004-05 IN ITA NO. 2522/AHD/2007 WHEREIN FOLLOWING WAS HELD. I.T.A NO.334/AHD/2011 A.Y. 2007-08 PAGE N O ACIT VS. KLOECKNER DESMA MACHINERY PVT. LTD 5 7. THE NEXT GROUND RELATES TO DISALLOWANCE OF TDS ON ROYALTY OF RS ( ILLEGIBLE)...... . THE ASSESSING OFFICER CONSID ERED THIS AS TAX ON INCOME AND, HENCE NOT ALLOWABLE. THE CIT(A) FOUND T HAT THIS GROUND BEING SIMILAR IN NATURE WHICH HAS BEEN DECIDED BY H IM VIDE HIS ORDER DATED 11.1.2007, IN ASSESSEE'S OWN CASE, RELYING UP ON HIS OWN ORDER, DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSES. THIS IS AN AMOUNT OF TAX DEDUCTED AS SOURCE FROM THE ROYALTY, AN INTEREST FO R ALLOWING THE CLAIM OF ROYALTY U/S 40(A)(II) OF THE ACT. THIS BY ITSELF CANNOT BE SUBJECT TO DISALLOWANCE. IT PARTAKE THE CHARACTER OF ROYALTY I N THE HANDS OF THE ASSESSEE AND ALLOWABLE. WE UPHELD THE ORDER OF THE CIT(A). IN VIEW OF THE ABOVE THIS GROUND OF REVENUES APPEA L IS ALSO DISMISSED 6. FOURTH GROUND RELATES TO DISALLOWANCE OF RS. 1,0 0296/- FROM INTEREST EXPENSES. 7. AO WHILE MAKING THIS ADDITION HAS OBSERVED AS UN DER:- 6. INTEREST EXPENSES DISALLOWED:- THE ASSESSEE IS PAYING INTEREST EXP, OF RS. 16,71 ,604/- IN RESPECT OF VARIOUS LOAN TAKEN BY IT. THE ASSESSEE HAS SHOWN RS . 59,45,000/- AS DEPOSITS AND LOAN GIVEN TO VARIOUS PARTIES UNDER TH E HEAD LOAN AND ADVANCES BUT THE ASSESSES WAS NOT CHARGING INTEREST AT THE SAME RATE. THE MEREST CHARGED IS @ 6 %. THE ASSESSEE COMPANY HAS PAID HUGE INTEREST ON THE LOANS TAKEN BUT INTEREST HAS NOT BE EN CHARGED ON THE LOAN MENTIONED ABOVE. THUS, THE ASSESSEE ON ONE HAN D HAS INCURRED SUBSTANTIAL INTEREST EXPENSES AND ON THE OTHER HAND HAS GIVEN INTEREST FREE LOANS. THE INTEREST EXPENSES ATTRIBUTABLE TO S UCH ADVANCES ARE, THEREFORE, CONSIDERED AS NOT FOR BUSINESS PURPOSES AND REQUIRED TO BE DISALLOWED. THE ASSESSEE WAS ASKED TO SHOW CAUSE WH Y ADDITION SHOULD NOT BE MADE IN RESPECT OF INTEREST FREE LOAN . THE ASSESSEE FAILED TO OFFER ANY SATISFACTORY EXPLANATION IN THI S REGARD. CONSIDERING THE FACTS OF THE CASE, THE INTEREST EXPENSES TO THE EXTENT OF INTEREST ARE DISALLOWED. THE ASSESSEE IS PAYING INTEREST TO ITS LENDERS AT THE RATE OF 12% . ACCORDINGLY, THIS AMOUNT IS DISALLOWED OUT OF THE INTEREST EXPENSES CLAIMED AND ADDED TO THE TOTAL INCOME OF T HE ASSESSEE. I.T.A NO.334/AHD/2011 A.Y. 2007-08 PAGE N O ACIT VS. KLOECKNER DESMA MACHINERY PVT. LTD 6 PENALTY PROCEEDINGS U/S. 271(1)(C) IS INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME. THE ASSESSEE WAS ASKED TO EXPLAIN IT BUT HE FAILED TO GIVE ANY SATISFACTORY REPLY. THE INTEREST INCOME THAT SHOUL D BE CHARGED IS AS FOLLOWS:- --- INTEREST EXPENDITURE DISALLOWED @ 6% = 16,71,6 04 X 6% = 1,00,296/- 8. BEFORE LD. CIT(A) ASSESSEES CONTENTION WAS AS U NDER:- THE ASSESSEE FURTHER SUBMITS THAT IT BECOMES THE M ORAL RESPONSIBILITY OF THE EMPLOYER TO PROVIDE SOFT LOAN TO THE EMPLOYE E. IN FACT, THE ASSESSEE COMPANY HAS CHARGED SUCH INTEREST, OTHERWI SE, IT MIGHT HAVE BEEN PROVIDED AT NO COST. FURTHER, THE ASSESSEE COM PANY HAS HUGE RETAINED EARNINGS, WHICH IS INTEREST FREE WHICH CAN BE SAID TO HAVE BEEN USED FOR SUCH EMPLOYEES' LOANS. SUCH SOFT LOAN S TO THE KEY PERSONNEL ARE THE PRIMARY OBLIGATION OF THE EMPLOYE R. UNFORTUNATELY MOTIVATION AND EFFICIENCY CANNOT BE MEASURED WHICH HAS DIRECT RELEVANCE WITH SUCH APPROACH OF THE EMPLOYER. IT IS IMPORTANT FOR THE EMPLOYER TO RETAIN THE EMPLOYEES AND TO PROVIDE THE MOTIVATION AND EXTENT CO-OPERATION AND SUPPORT TO FULFILL THE PERS ONAL NEED OF THE EMPLOYEES. TAKING INTO CONSIDERATION THIS SUBMISSION OF THE AS SESSEE LD. CIT(A) DELETED THIS ADDITION. 9. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE FIND THAT THE ASSESSEE HAS GIVEN SOFT LOANS TO ITS EMPLOYEES TO T HE EXTENT OF RS. 53,39,000/- @ 6 % INTEREST. THE AO DISALLOWED THE INTEREST EXPENDITURE TO THE EXTENT OF 6% ON SUCH LOANS ON THE GROUND THAT T HE LENDERS WERE PAID INTEREST 12% BY THE ASSESSEE. THE ASSESSEES CONTE NTION BEFORE LD. CIT(A) AS WELL AS BEFORE US HAS BEEN THAT IT IS THE GENERA L PRACTICE AS WELL AS MORAL RESPONSIBILITY OF THE EMPLOYER TO PROVIDE SOFT LOAN TO THE EMPLOYEES. MOST I.T.A NO.334/AHD/2011 A.Y. 2007-08 PAGE N O ACIT VS. KLOECKNER DESMA MACHINERY PVT. LTD 7 OF THE CORPORATES PROVIDE INTEREST FREE LOANS TO IT S EMPLOYEES WHILE IN THIS CASE ASSESSEE HAS CHARGED INTEREST 6% FROM ITS EMPL OYEES. LD. CIT(A) RIGHTLY ACCEPTED THIS SUBMISSION OF THE ASSESSEE AN D DELETED THIS ADDITION AS THE LOANS WERE GIVEN TO THE EMPLOYEES BY THE ASSESS EE DUE TO COMMERCIAL EXPEDIENCY WHICH GIVES MOTIVATION TO THE STAFF AND IMPROVE THE WORKING EFFICIENCY OF THE EMPLOYEES. WE FURTHER FOUND DURI NG THE APPELLATE PROCEEDINGS THAT ASSESSEE WAS HAVING HUGE INTEREST FREE FUNDS AVAILABLE TO IT, THEREFORE WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER PASSED BY LD. CIT(A) AND THE SAME IS HEREBY UPHELD. SO THIS GROUND IS ALSO DISMISSED. 10. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE SD/- SD/- (T.R. MEENA) ( D.K. TYAGI) ACCOUNTANT MEMBER J UDICIAL MEMBER AHMEDABAD : DATED 20/12/2013 AK / COPY OF ORDER FORWARDED TO:- 1. ASSESSEE 2. REVENUE 3. CONCERNED CIT 4. CIT (A) 5. DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER/ , / ,