ACIT, Gurgaon V. M/s Siemens Power Engineers Pvt. Ltd., Gurgaon

ITA 3448/DEL/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 8461 (ITAT-DELHI)
• Duration Of Justice: 8 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 18-06-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 18-11-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY SHARMA SENIOR
• Assessee Lawyers: SANDEEP GUPTA CAS
• Keywords: Depreciation; Avoidance of tax; Revenue expenditure
• Section: 143(3); 115JB; 37(1); 10B; 64

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH G : NEW DELHI) BEFORE HON'BLE SENIOR VICE PRESIDENT, SHRI R.P. GAR G AND HON'BLE JUDICIAL MEMBER, SHRI RAJPAL YADAV ITA NOS.2691 & 3448/DEL./2008 (ASSESSMENT YEAR : 2004-05) ACIT, VS. M/S. SIEMENS POWER ENGG.(P) LTD., GURGAON. PLOT NO.6 A, SECTRO 18, MARUTI INDUSTRIAL AREA, GURGAON. (PAN : AAACS5323F) CO NOS.125 & 124/DEL/2009 (IN ITA NOS.2691 & 3448/DEL./2008) (ASSESSMENT YEAR : 2004-05) M/S. SIEMENS POWER ENGG.(P) LTD., VS. ACIT, PLOT NO.6 A, SECTRO 18, GURGAON. MARUTI INDUSTRIAL AREA, GURGAON. (PAN : AAACS5323F) (APPELLANT) (RESPONDENT) ASSESSEE BY : S/SHRI RAJEEV AHUJA & SANDEEP GUPTA, CAS REVENUE BY : SHRI SANJAY SHARMA, SENIOR DR O R D E R GARG, SENIOR VP : THE APPEALS BY THE REVENUE AND THE CROSS OBJECTIONS BY THE ASSESSEE ARE FILED AGAINST THE ORDER OF ASSE SSMENT YEAR 2004-05 ARISING OUT OF THE ORIGINAL ORDER OF THE ASSESSING OFFICER UNDER SECTION 143(3) AND 154 RESPECTIVELY. 2. IN THE APPEAL AGAINST ORDER UNDER SECTION 154, T HE FOLLOWING TWO GROUNDS ARE RAISED : 2 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 1. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) E RRED ON FACTS AND IN LAW IN DELETING THE ADDITION OF RS.2,2 1,28,621/- WHILE CALCULATING THE BOOK PROFITS U/S 115JB DISREG ARDING THE FACT THAT THE ASSESSEE HAD ADMITTED IN PRINCIPAL TH AT THESE WERE UNASCERTAINED / CONTINGENT LIABILITIES WHICH WERE R EQUIRED TO BE ADDED BACK WHILE CALCULATING BOOK PROFIT U/S 115JB. 2. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) ER RED ON FACTS AND IN LAW IN RENDERING DECISION IN FAVOUR OF ASSESSEE ON THE ISSUE OF ADDITION IN BOOK PROFIT, WHILE SUCH A DDITION WAS MADE VIDE ORDER U/S 143(3) DATED 16-11-2006, WHICH ORDER WAS NOT THE SUBJECT MATTER OF PRESENT APPEAL, AS PRESEN T APPEAL WAS DIRECTED AGAINST THE ORDER U/S 154 DATED 09-01-2007 , WHEREIN NO SUCH ISSUE WAS INVOLVED. 3. FACTS ARE THAT WHILE COMPUTING THE BOOK PROFIT U NDER SECTION 115JB(2), THE ASSESSEE HIMSELF HAS ADDED BACK THE PROVISION F OR ANTICIPATED LOSS GUARANTEE OF RS.2,00,37,294/-, PROVISION FOR R & D CESS OF RS.16,23,907/- AND PROVISION FOR LEAVE ENCASHMENT OF RS.4,67,420/-. W HILE MAKING THE ASSESSMENT THE ASSESSING OFFICER ADDED THESE THREE ITEMS AGAIN WHILE COMPUTING THE PROFIT UNDER SECTION 115JB OF THE ACT . THE ASSESSEE MOVED AN APPLICATION POINTING OUT THE MISTAKE THAT THESE THR EE ITEMS ARE ALREADY ADDED BUT THE ASSESSING OFFICER HAS AGAIN ADDED THESE ITE MS RESULTING INTO DOUBLE ADDITION. IT WAS NOT ACCEPTED BY THE ASSESSING OFF ICER AND THE APPLICATION OF THE ASSESSEE WAS REJECTED. 4. CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE BY PERUSING THE STATEMENT OF COMPUTATION OF INCOME ATTACHED WITH TH E RETURN AND FINDING THAT 3 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 THE ASSESSEE HAS ALREADY ADDED THESE ITEMS WHILE CO MPUTING THE RETURN OF INCOME. THE REVENUE IS IN APPEAL. 5. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RIV AL SUBMISSIONS. FROM THE ASSESSMENT ORDER, WE FIND THAT THE COMPUTATION OF BOOK PROFIT HAS BEEN SUPPORTED AS DECLARED IN THE AUDITED REPORT WITH A FIGURE OF RS.1,11,53,320/-. THIS FIGURE IS ARRIVED AT AS UNDER : PARTICULARS AMOUNT (.RS.) NET PROFIT AS PER PROFIT AND LOSS ACCOUNT (PROFIT C ARRIED FORWARD TO THE BALANCE SHEET) 213,642,708 ADD: PROVISION FOR INCOME-TAX DEBITED TO PROFIT AN D LOSS ACCOUNT PER CLAUSE (A) OF EXPLANATION TO SUB-SECTION (2) OF SECTION 115JB. CURRENT YEAR TAX PROVISION 4,213,233 DEFERRED TAX PROVISION 284,980 4,498,213 AMOUNT CARRIED TO GENERAL RESERVE DEBITED TO PROFIT AND LOSS ACCOUNT PER CLAUSE (B) OF EXPLANATI ON TO SUB-SECTION (2) OF SECTION 115JB. 15,000,0 00 EXPENSES RELATABLE TO INCOME UNDER SECTION 10B DEBITED TO PROFIT AND LOSS ACCOUNT PER CLAUSE (F) O F EXPLANATION TO SUB-SECTION (2) OF SECTION 115JB. 234,942,017 254,440,230 NET PROFIT/(LOSS) AS PER PROFIT AND LOSS ACCOUNT AS INCREASED BY AMOUNTS REFERRED TO IN CLAUSES (A) TO (F) OF EXPLAN ATION TO SUB-SECTION (2) OF SECTION 115JB - [1]. 468,08 2,938 LESS: AMOUNT WITHDRAWN FROM RESERVE CREDITED TO PR OFIT AND LOSS ACCOUNT PER CLAUSE (I) OF EXPLANATION TO SUB- SECTION (2) OF SECTION 115JB. 77,290,054 AMOUNT OF INCOME UNDER SECTION L0B CREDITED TO PROF IT AND LOSS ACCOUNT PER CLAUSE (II) OF EXPLANATION TO SUB-SECTION (2) OF SECTION 115JB. 379,639,5 64 456,929,618 --------------- NET PROFIT AS PER [1] ABOVE AS REDUCED BY AMOUNTS R EFERRED TO IN CLAUSES (I) TO (VII) OF EXPLANATION TO SUB-SECTI ON (2) OF SECTION 115JB. B > 11,153,320 =========== 4 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 6. THE ADDITION RELATABLE TO INCOME UNDER SECTION 1 0B WHICH WAS DEBITED TO PROFIT AND LOSS ACCOUNT IS ADDED AS PER CLAUSE ( F) OF EXPLANATION TO SUB- SECTION (2) OF SECTION 115JB AT RS.23,49,42,017/-. THIS COMPRISES OF THE FOLLOWING ITEMS : PERSONNEL COSTS RS. 8,13,04,005 OPERATING AND ADMINISTRATION EXPENSES RS.13,97,57, 316 FINANCE CHARGES RS. 2,75,904/- DEPRECIATION RS. 1,36,04,792/- RS.23,49,42,017/- THE PROVISION FOR OPERATING AND ADMINISTRATIVE EXPE NSES OF RS.13,97,57,316/- IS DETAILED IN SCHEDULE 12, WHICH IS AS UNDER : SCHEDULE 12 : OPERATING AND ADMINISTRATION EXPENSES COMMUNICATION 2,933,337 2,748,482 TRAVEL AND CONVEYANCE 13,337,227 10,496,396 INFRASTRUCTURE FACILITY AND MAINTENANCE CHARGES 38 ,819,618 41,800,832 FORECLOSURE COMPENSATION FOR OFFICE PREMISES 16,40 0,000 - RENT 2,331,743 2,623,715 REPAIRS AND MAINTENANCE OTHERS 2,455,062 2, 458,022 RATES AND TAXES 1,709,480 1,672,562 LEGAL AND PROFESSIONAL 14,533,290 12,967,667 DATA PROCESSING/SUPPORT SERVICES 23,939,917 20,77 8,647 RECRUITMENT AND TRAINING 254,301 448,3 67 RELOCATION 279,250 819,019 CLEARING AND FORWARDING CHARGES 148,127 199,681 INSURANCE 449,019 491,931 PRINTING AND STATIONERY 1,658,309 1,667,467 LOSS ON SALE OF FIXED ASSETS (NET) 98,620 75,966 MEMBERSHIP FEES 35,345 52,806 BANK CHARGES 257,929 243,620 MISCELLANEOUS EXPENSES 79,451 75, 089 PROVISION FOR ANTICIPATED LOSS GUARANTEE 20,037,2 94 20,319,930 139,757,316 119,940,193 5 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 THUS THE PROVISION FOR ANTICIPATED LOSS GUARANTEE O F RS.2,00,37,294/- IS ALREADY INCLUDED IN THE OPERATING AND ADMINISTRATIV E EXPENSES. THE AMOUNT OF RS.17,09,480/- INCLUDED THE PROVISIONS FOR R & D CE SS AND DETAILED IN THE GROUPING OF PROFIT & LOSS ACCOUNT AS UNDER : RATES AND TAXES RS.17,09,480/- OTHER RATES AND TAXES RS. 85,573/- PROVISIONS FOR R & D CESS RS.16,23,907/- THE PROVISION FOR LEAVE ENCASHMENT OF RS.4,67,420/- IS NOT A CONTINGENT LIABILITY IN VIEW OF THE SUPREME COURT DECISION IN THE CASE OF BHARAT EARTHMOVERS 245 ITR 428 AND, THEREFORE, WAS NOT TO BE ADDED WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF TH E ACT. IN THESE CIRCUMSTANCES, THE CIT (APPEALS) WAS JUSTIFIED IN A LLOWING THE CLAIM OF THE ASSESSEE ON ACCOUNT OF DOUBLE ADDITION. 7. IN THE NEXT APPEAL AGAINST THE ORDER UNDER SECTI ON 143(3) IS WITH REGARD TO THE DELETION OF ADDITION OF RS.1,64,00,000/- ON ACCOUNT OF COMPENSATION FOR EARLY TERMINATION OF LEASE WHICH, ACCORDING TO THE REVENUE, WAS DISREGARDING THE FACTS THAT THE EXPENDITURE WAS NOT LAID OUT WHO LLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS OR PROFESSION AND IT WAS MEREL Y A COLOURABLE DEVICE. 6 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 8. THE ASSESSING OFFICER NOTICED THAT ASSESSEE HAD CLAIMED THIS SUM OF RS.1.64 CRORES ON ACCOUNT OF FORECLOSURE COMPENSATI ON FOR OFFICE PREMISES ALTHOUGH NO SUCH EXPENDITURE WAS INCURRED AND REQUI RED THE ASSESSEE TO GIVE COMPLETE DETAILS. THE ASSESSEE SUBMITTED THAT IT H AD ENTERED INTO A LICENCE AGREEMENT FOR INFRASTRUCTURE AND SERVICE FACILITY. VIDE AGREEMENT DATED MARCH 1, 1999 UNDER WHICH THE LICENCE FEES WAS PAYA BLE ON MONTHLY BASIS. AS THE COMPANY WAS NOT BEING ABLE TO USE THE FULL F ACILITY, IT DECIDED TO TERMINATE THE RENTAL AGREEMENT VIDE AGREEMENT DATED 12.9.2003 AND IT HAD TO PAY TWO MONTHS LICENCE FEE AS TERMINATION COMPENSAT ION AS PER MUTUAL AGREEMENT AND CLAIMED THAT IT WAS A REVENUE EXPENDI TURE MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. AS BY PA YING COMPENSATION OF A SUM OF RS.1.64 CRORES FOR TERMINATION OF LICENCE AG REEMENT, THE COMPANY RELIEVED ITSELF OF RECURRING LIABILITY AND, THEREFO RE, IT WAS A REVENUE EXPENDITURE UNDER SECTION 37(1) OF THE ACT. REFERE NCE WAS INVITED IN THIS REGARD TO THE DECISION OF THE CALCUTTA HIGH COURT I N THE CASE OF CIT VS. HEATH AND CO. (CALCUTTA) PVT. LTD. 114 ITR 605 (CAL.), SU PREME COURT DECISION IN THE CASE OF CIT VS. ASHOK LEYLAND LTD. 86 ITR 549 ( SC) AND BOMBAY HIGH COURT IN THE CASE OF LIFE INSURANCE CORPORATION OF INDIA VS. CIT 119 ITR 900 (BOM.). THE ASSESSING OFFICER, HOWEVER, FOUND A D IFFICULTY TO AGREE WITH THE ASSESSEES CONTENTION. TO HIM, IT APPEARED THAT TH E TRANSACTION HAS BEEN 7 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 DESIGNED TO GIVE IT A COLOUR OF BONAFIDE BUSINESS T RANSACTION, WHEREAS IN SUBSTANCE IT WAS A TOOL OF AVOIDANCE OF TAX/DIVERSI ON OF TAX LIABILITY AND HIT BY THE DECISION OF THE SUPREME COURT IN THE CASE OF MC DOWELL & CO. VS. CTO 154 ITR 148. 9. CIT (APPEALS) HOWEVER ALLOWED THE CLAIM OF THE A SSESSEE BY OBSERVING IN PARAGRAPH 3.9 AS UNDER : 3.9 I HAVE PERUSED THE FACTS AND CAREFULLY CONSIDE RED THE RIVAL SUBMISSIONS. AS PER THE RATIO LAID DOWN IN THE JUDG MENTS QUOTED IN PARE 3.3 ABOVE, WHERE A PAYMENT HAS BEEN MADE TO REMOVE THE POSSIBILITY OF RECURRING DISADVANTAGE, IT IS AN ALLOWABLE DEDUCTION. IN THE PRESENT CASE, THE EXPENDITURE OF RS.1.64 CRORE IS A REVENUE EXPENDITURE AS IT HAS BEEN PAID TO GET RID OF THE RECURRING LIABILITY AS ALL THE WORKPLACES WERE NOT IN USE; ALSO, IT HAS NOT RESULTED IN ANY ENDURING BENEFIT. IN THE CA SE OF SASSOON J. DAVID & CO. PVT. LTD. V. CIT (1979) 118 ITR 261, THE FACTS WERE THAT MANY OF THE EMPLOYEES WERE OLD AND SUPERF LUOUS AND THE BUSINESS COULD BE CARRIED OUT WITH THE SMALLER NUMBER AND THE ONLY WAY IN WHICH THEY COULD REDUCE THE NUMBER WAS TO TERMINATE THE SERVICES OF ALL THE EMPLOYEES BY PAYI NG THEM COMPENSATION AND THEREAFTER RE-EMPLOYING SOME OF TH EM ONLY. IT WAS HELD BY THE HON'BLE SUPREME COURT OF INDIA T HAT IF THE COMPANY FELT THAT SUCH A METHOD WOULD INURE TO ITS BENEFIT IT CANNOT BE SAID THAT THE PAYMENT OF COMPENSATION WAS MADE WITH AN OBLIQUE MOTIVE AND WITHOUT REGARD TO COMMERCIAL CONSIDERATION OR EXPEDIENCY. FURTHER, I DO NOT AGR EE WITH THE AO THAT THE TRANSACTION REPRESENTS A COLOURABLE DEV ICE TO REDUCE THE TAX LIABILITY AS THE PROFIT OF THE APPELLANT IS EXEMPT U/S 10B OF THE ACT AND THE RECIPIENT OF THE COMPENSATION IS ALSO LIABLE TO TAX ON THIS AMOUNT. KEEPING IN VIEW THESE FACTS, I N MY CONSIDERED OPINION, THE APPELLANT IS ENTITLED TO DE DUCTION OF RS.1.64 CRORE. THE AO IS DIRECTED TO DELETE THE AD DITION. 8 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 10. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RI VAL SUBMISSIONS. IT IS AN ADMITTED FACT THAT THE ASSESSEE HAS ENTERED INTO A LICENCE AGREEMENT FOR INFRASTRUCTURE SERVICE FACILITY ARRANGEMENT, WHICH WAS FOR THE PURPOSE OF SMOOTH RUNNING OF THE COMPANY AND WAS A REVENUE EXP ENDITURE. AS PER THE AGREEMENT, INITIALLY 160 SOFTWARE AND ENGINEERING W ORKPLACES WERE TO BE PROVIDED TO THE ASSESSEE COMPANY ON WHICH LICENCE F EE OF RS.17,31,764/- PER MONTH WAS PAYABLE BY THE ASSESSEE COMPANY FOR USAGE OF THE WORKPLACES. THE ABOVE FEE WAS TO BE INCREASED ON PRO-RATA BASIS WITH THE INCREASE IN NUMBER OF WORKPLACES. LICENCE FEE WAS ALSO TO BE I NCREASED BY 24.2% OVER THE PREVIOUS LICENCE FEE AFTER A PERIOD OF THREE YE ARS. WITH THE INCREASE IN NUMBER OF WORKPLACES, THE LICENCE FEE ROSE TO RS.29 ,17,437/- DURING THE ASSESSMENT YEAR 2003-04. 11. AS THE COMPANY WAS UNABLE TO FULLY UTILIZE THE WORKPLACES, WHICH WERE LYING IDLE, A BUSINESS DECISION WAS TAKEN TO TERMIN ATE THE AGREEMENT TO REDUCE THE RENTAL COST WHICH IT WAS INCURRING FOR UNUTILIZ ED WORKPLACES AND AGREED TO PAY RS.1.64 CRORES INSTEAD OF RS.2.33 CRORES FOR EA RLY TERMINATION OF THE LICENCE AGREEMENT AND TO AVOID RECURRING LIABILITY FROM YEAR TO YEAR. SUCH AN EXPENDITURE, IN OUR OPINION, WOULD BE A REVENUE EXP ENDITURE IN VIEW OF THE DECISIONS RELIED UPON BY THE ASSESSEE BEFORE THE AS SESSING OFFICER. IN THE CASE OF CIT VS. HEATH AND CO. (CALCUTTA) PVT. LTD. 114 ITR 605 (CAL.), THE 9 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 CALCUTTA HIGH COURT OBSERVED THAT THE PAYMENT MADE TO REMOVE THE POSSIBILITY OF A RECURRING DISADVANTAGE CANNOT BE C ONSIDERED AS A PAYMENT MADE TO ACQUIRE AN ENDURING ADVANTAGE. IT WAS AL LOWED AS A REVENUE EXPENDITURE. SIMILARLY, IN THE CASE OF CIT VS. ASH OK LELAND LIMITED 86 ITR 549 (SC), THE SUPREME COURT HELD THAT IN A CASE OF TERMINATION OF THE SERVICES OF THE MANAGING AGENTS, THE COMPANY GOT RID OF ITS LIABILITY TO PAY OFFICE ALLOWANCE AS WELL AS COMMISSION IT WAS REQUIRED TO PAY UNDER THE MANAGING AGENCY AGREEMENT AND THE EXPENDITURE THUS SAVED UND OUBTEDLY SWELLED THE PROFITS OF THE COMPANY WAS HELD TO BE AN EXPENDITUR E OF REVENUE IN NATURE. SIMILARLY, BOMBAY HIGH COURT IN THE CASE OF LIFE IN SURANCE CORPORATION OF INDIA VS. CIT 119 ITR 900 (BOM.), HELD THAT SUCH PA YMENT BY WAY OF COMPENSATION WAS IN THE NATURE OF REVENUE EXPENDITU RE. 12. THE OBSERVATION OF THE ASSESSING OFFICER THAT I T WAS A TERMINATION OF AGREEMENT DESIGNED TO AVOID THE PAYMENT OF TAX HAS NO BASIS. IT WAS A PURE AND SIMPLE CASE OF TERMINATING THE CONTRACT WITH A VIEW TO AVOID THE RECURRING EXPENDITURE WHICH IS REVENUE IN NATURE AND CONSEQUE NTLY, THE COMPENSATION PAID FOR AVOIDING SUCH EXPENDITURE WOULD ALSO BE RE VENUE IN NATURE. THE CIT (APPEALS) WAS JUSTIFIED IN ALLOWING THE CLAIM OF TH E ASSESSEE. ACCORDINGLY, HIS ORDER IS UPHELD. 10 ITA NOS.2691 & 3448/DEL./2008) CO NOS.125 7 124/DEL/2009 13. THE CROSS OBJECTIONS FILED IN BOTH THE APPEALS BY THE ASSESSEE ARE MERELY TO SUPPORT THE ORDERS OF THE CIT (APPEALS). AS WE HAVE ALREADY DISMISSED BOTH THE REVENUES APPEALS, THE CROSS OBJ ECTIONS HAVE BECOME INFRUCTUOUS AND ARE ACCORDINGLY DISMISSED. 14. IN THE RESULT, THE APPEALS OF THE REVENUE AS W ELL AS THE CROSS OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON THIS 31 ST DAY OF JULY 2009. SD/- SD/- (RAJPAL YADAV ) (R.P. GARG) JUDICIAL MEMBER SENIOR VICE PRESIDENT DATED THE 31 ST DAY OF JULY, 2009/TS COPY FORWARDED TO: 1.APPELLANT 2.RESPONDENT 3.CIT 4.CIT (A)-XI, NEW DELHI. 5.CIT(ITAT), NEW DELHI. AR, ITAT NEW DELHI.