The ACIT,(OSD)-I, Range-4, Ahmedabad V. Kalthia Engineering & Construction Ltd., Ahmedabad

ITA 364/AHD/2012

• Counselvise Citation: 36420514 RSA 2012
• Duration Of Justice: 3 year(s) 7 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-09-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 08-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: NARENDRA SINGH
• Assessee Lawyers: M J SHAH
• Keywords: Proportionate interest
• Section: 43B

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI G.D. AGRAWAL, VICE-PRESIDENT AND SHRI RAJPAL YADAV, JUDICIAL MEMBER ./ ITA NO.364 AND 365/AHD/2012 / ASSESSMENT YEAR: 2006-2007 AND 2007-08 ACIT (OSD) - I RANGE-4, AHMEDABAD. VS KALTHIA ENGINEERING & CONSTRUCTION LTD. 28/29, RANGIN PARK OPP: RAJPATH CLUB BODAKDEV AHMEDABAD 380 015. PAN : AAACL 9044 N ! / (APPELLANT) '# ! / (RESPONDENT) REVENUE BY : SHRI NARENDRA SINGH, SR.DR ASSESSEE BY : SHRI M.J. SHAH / DATE OF HEARING : 09/09/2015 / DATE OF PRONOUNCEMENT: 11/09/2015 $%/ O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: THE PRESENT TWO APPEALS ARE DIRECTED AT THE INSTAN CE OF THE REVENUE AGAINST THE SEPARATE ORDERS OF EVEN DATE I. E. 30.11.2011 PASSED BY LD. CIT(A) FOR THE ASSTT.YEARS 2006-07 AN D 2007-08. SINCE COMMON ISSUES ARE INVOLVED, THEREFORE, WE HAVE HEAR D BOTH THE APPEALS TOGETHER AND DEEM IT APPROPRIATE TO DISPOSE OF THES E APPEALS BY THIS COMMON ORDER. 2. THE GROUND NO.2 IN THE ASSTT.YEAR 2006-07 IS COM MON WITH GROUND NO.1 IN THE ASSTT.YEAR 2007-08. IN THESE GR OUNDS, THE GRIEVANCE OF THE REVENUE IS THAT THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION OF SERVICE TAX LIABILITY AMOUNTING TO RS.1 3,32,577/- AND RS.17,10,921/- IN THE ASSTT.YEARS 2006-07 AND 2007- 08 RESPECTIVELY. ITA NO.364 AND 365/AHD/2012 2 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE HA S FILED ITS RETURN OF INCOME ON 30.12.2006 AND 31.12.2007 DECLARING TOTAL INCOME OF RS.1,24,00,750/- AND RS.1,92,90,320/- IN THE ASSTT. YEAR 2006-07 AND 2007-08 RESPECTIVELY. THE ASSESSEE-COMPANY HAD REN DERED SERVICES TO SUZLON ENERGY LTD. AND SUZLON INFRASTRUCTURE LTD. I T HAS RAISED A GROSS BILL OF RS.2,39,83,341/- IN THE CASE OF SUZLON ENER GY LTD. THE ASSESSEE HAS CREDITED AMOUNT OF RS.2,32,02,350/- TO THE TRAD ING AND PROFIT & LOSS ACCOUNT. SERVICE TAX LIABILITY OF RS.7,80,991 /- HAS NOT BEEN CREDITED TO THE ACCOUNTS IN THE CASE OF SUZLON ENER GY LTD. FOR THE ASSTT.YEAR 2006-07. SIMILARLY, IN THE CASE OF SUZL ON INFRASTRUCTURE LTD. A SERVICE TAX LIABILITY COMPONENTS OF RS.14,47,910/ - HAS NOT BEEN CREDITED TO THE PROFIT & LOSS ACCOUNT. ON SIMILAR ANALOGY THE AMOUNT OF RS.17,10,921/- REPRESENTING SERVICE TAX LIABILITY H AS NOT BEEN CREDITED IN A.Y.2007-08. THE LD.AO WAS OF THE VIEW THAT THE ASSESSEE OUGHT TO HAVE RECOGNISED THIS SERVICE TAX LIABILITY AS REVEN UE RECEIPT AS PER THE METHOD OF ACCOUNTING I.E. MERCANTILE SYSTEM, FOLLOW ED BY IT. SINCE THE ASSESSEE FAILED TO DISCHARGE THIS LIABILITY BEFORE THE CLOSE OF THE ACCOUNTING YEAR, THEREFORE, IT IS TO BE ADDED AS TH E INCOME OF THE ASSESSEE. 4. ON APPEAL, THE LD.FIRST APPELLATE AUTHORITY HAS OBSERVED THAT THE ASSESSEE HAS RENDERED SERVICES AND RAISED THE INVOI CES. BUT IT HAS NOT RECEIVED THE PAYMENT TOWARDS ALLEGED SERVICE TAX LI ABILITY, AND THEREFORE, IT COULD NOT BE RECOGNIZED AS REVENUE RE CEIPT OF THE ASSESSEE, WHICH COULD BE DISALLOWED UNDER SECTION 43B OF THE ACT ON ACCOUNT OF NON-PAYMENT. 5. THE LD.DR RELIED UPON THE ORDER OF THE AO AND SU BMITTED THAT IT IS QUITE DIFFICULT FOR THE AO TO KEEP TAB ON THE AFFAI RS OF THE ASSESSEE, AS TO WHEN IT WILL RECEIVE THE ALLEGED SERVICE TAX COMPON ENTS AND WHETHER THAT WAS PAID TO THE GOVERNMENT EXCHEQUER OR NOT. THEREFORE, THE ITA NO.364 AND 365/AHD/2012 3 MOMENT THE ASSESSEE HAS RAISED INVOICE UPON THE ENT ITY, TO WHOM SERVICES WERE PROVIDED, IT SHOULD RECOGNIZE THE SER VICE TAX LIABILITY ALSO IN THE PROFIT & LOSS ACCOUNT. 6. ON THE OTHER HAND, THE LD.COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE ISSUE IN DISPUTE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS. OVIRA LOGISTICS P. LTD., 58 TAXMANN.COM 206 (BOM). HE PL ACED ON RECORD COPY OF THE DECISION OF THE HONBLE BOMBAY HIGH COU RT. HE ALSO CONTENDED THAT THIS ISSUE WAS ALSO CONSIDERED BY TH E HONBLE DELHI HIGH COURT ALSO, AND THE DECISION OF THE HONBLE DELHI H IGH COURT IS REPORTED IN 305 ITR 324. THE LD.CIT(A) HAS FOLLOWED THE DEC ISION OF THE HONBLE DELHI HIGH COURT. ACCORDING TO THE LD,COUNSEL FOR THE ASSESSEE, THE SERVICE TAX LIABILITY IS TO BE RECOGNIZED WHEN THE ASSESSEE HAS ACTUALLY RECEIVED THOSE AMOUNTS. 7. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND GO NE THROUGH THE RECORD CAREFULLY. THE HONBLE BOMBAY HIGH COURT HA S CONSIDERED THE IDENTICAL ISSUE. THE QUESTION FRAMED BY THE HONBL E BOMBAY COURT READS AS UNDER: (A) WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN DELETING THE DIS ALLOWANCE OF UNPAID SERVICE TAX UNDER SECTION 43B OF THE ACT WIT HOUT APPRECIATING THAT THE SAID LIABILITY WAS CLEARLY DI SALLOWABLE WITHIN THE PROVISIONS OF THE SAID SECTION? (B) WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN HOLDING T HAT THE UNPAID SERVICE TAX WOULD NOT BE DISALLOWABLE UNDER SECTION 43B OF THE ACT AS THE LIABILITY TO PAY SERVICE TAX HAD NOT ARISEN WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS SHOWN T HE SAID AMOUNT AS A LIABILITY IN ITS BALANCE SHEET?' ITA NO.364 AND 365/AHD/2012 4 8. THE HONBLE BOMBAY HIGH COURT HAS ANSWERED THIS QUESTION IN FAVOUR OF THE ASSESSEE. THE OBSERVATION MADE IN PA RA-9 IS WORTH TO NOTE, WHICH READS AS UNDER: 9. HAVING PERUSED THE AFORESAID DECISIONS, WE ARE C LEARLY OF THE VIEW THAT SECTION 43B DOES NOT CONTEMPLATE LIABILIT Y TO PAY THE SERVICE TAX BEFORE ACTUAL RECEIPT OF THE FUNDS IN T HE ACCOUNT OF THE ASSESEE. IN OUR VIEW, LIABILITY TO PAY SERVICE TAX INTO THE TREASURY WILL ARISE ONLY UPON THE ASSESSEE RECEIVING THE FUN DS AND NOT OTHERWISE. ACCORDINGLY, WHEN SERVICES ARE RENDERED, THE LIABILITY TO PAY THE SERVICE TAX IN RESPECT OF THE CONSIDERAT ION PAYABLE WILL ARISE ONLY UPON THE RECEIPT OF SUCH CONSIDERATION A ND NOT OTHERWISE. THE HONBLE BOMBAY HIGH COURT HAS CATEGORICALLY OBS ERVED THAT WHEN SERVICES ARE RENDERED, THE LIABILITY TO PAY THE SER VICE TAX IN RESPECT OF CONSIDERATION PAYABLE WILL ARISE ONLY UPON THE RECE IPT OF SUCH CONSIDERATION AND NOT OTHERWISE. THE STAND OF THE AO IS THAT UNDER THE METHOD OF MERCANTILE ACCOUNTING SYSTEM, THE MOMENT SERVICES ARE RENDERED AND INVOICES ARE RAISED, THEN THE LIABILIT Y TO PAY SERVICE TAX OUGHT TO BE RECOGNIZED, IRRESPECTIVE OF FACT WHETHE R THE ASSESSEE HAS ACTUALLY RECEIVED THOSE CONSIDERATION FROM THE PERS ON TO WHOM THE SERVICES WERE RENDERED OR NOT ?. THIS LOGIC DID N OT GET APPROVAL FROM THE ORDER OF THE HONBLE BOMBAY HIGH COURT. THEREF ORE, WE ARE OF THE VIEW THAT THE LD.FIRST APPELLATE AUTHORITY HAS APPR ECIATED THE CONTROVERSY IN RIGHT PERSPECTIVE AND THE FINDING IS IN THE LINE OF HONBLE BOMBAY HIGH COURT DECISION. THE LEARNED DR DID NOT SUBMIT ANY CONTRARY DECISION FROM THE HONBLE JURISDICTIONAL H IGH COURT BEFORE US. THEREFORE, WE DO NOT FIND ANY MERIT IN ITS GROUNDS OF APPEAL. THE GROUND NO.2 IN THE ASSTT.YEAR 2006-07 AND THE GROUN D NO.1 IN THE ASSTT.YEAR 2007-08 ARE REJECTED. 9. THE GROUND NO.3 IN THE ASSTT.YEAR 2006-07 IS INT ER-CONNECTED WITH THE GROUND NO.2 IN THE ASSTT.YEAR 2007-08. IN THES E GROUNDS OF APPEAL, ITA NO.364 AND 365/AHD/2012 5 THE GRIEVANCE OF THE REVENUE IS THAT THE LD.FIRST A PPELLATE AUTHORITY HAS ERRED IN DELETING THE DISALLOWANCES OF RS.9,05,375/ - AND RS.19,93,267/- WHICH ARE ADDED BY MAKING THE DISALLOWANCE OUT OF I NTEREST EXPENDITURE. 10. BRIEF FACTS OF THE CASE IN THE ASSTT.YEAR 2006- 07 ARE THAT THE ASSESSEE COMPANYS TOTAL BORROWED FUNDS AS ON 31.3. 2006 WERE AT RS.4,68,26,488/-. THE ASSESSEE HAS PAID INTEREST O N THIS AMOUNT AMOUNTING TO RS.14,22,194/-. ACCORDING TO THE AO, THE AVERAGE RATE OF INTEREST PAID IS AT 12% PER ANNUM. ACCORDING TO TH E AO, THE ASSESSEE HAS PAID INTEREST FREE LOANS TO THE ASSOCIATED CONC ERNS OF RS.2,23,88,861/-. IT HAS ALSO MADE INVESTMENT IN T HE SHARES OF THE SURABHI MILK FOOD & BEVERAGES LTD. AMOUNTING TO RS. 74,21,050/-. THE AO HAS CONFRONTED THE ASSESSEE AS TO WHY IT SHOULD NOT BE CONSTRUED THAT THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS OUT OF THE INTEREST BEARING FUNDS. THE ASSESSEE CONTENDED THAT IT HAD INTEREST FREE FUNDS OF RS.9,23,16,361/-. THE ASSESSEE ALSO CONTENDED T HAT SIMILAR DISALLOWANCE WAS PROPOSED IN THE ASSTT.YEAR 2004-05 , WHICH WAS DELETED BY THE CIT(A). THE AO DID NOT ACCEPT THE C ONTENTIONS OF THE ASSESSEE AND OBSERVED THAT IN THE ASSTT.YEAR 2004-0 5, THE ISSUE WAS TAKEN UP BEFORE THE TRIBUNAL. HE, ACCORDINGLY, MAD E DISALLOWANCE OF RS.9,05,375/-. THE FACTS IN THE ASSTT.YEAR 2007-08 ARE ALSO SIMILAR. THE LD.FIRST APPELLATE AUTHORITY, FOLLOWING THE ORD ER OF HER PREDECESSOR, DELETED THE DISALLOWANCE. THE LD. COUNSEL FOR THE ASSESSEE, AT THE VERY OUTSET, SUBMITTED THAT THE FINDINGS OF THE CIT(A) F OR THE ASSTT.YEAR 2004-05 HAS BEEN CONFIRMED BY THE TRIBUNAL. HE PLA CED ON RECORD COPY OF THE TRIBUNALS ORDER DATED 30.4.2008 PASSED IN I TA NO.508/AHD/2008. THE LD.DR RELIED UPON THE ORDER O F THE AO. 11. WE HAVE DULY CONSIDERED RIVAL CONTENTIONS AND G ONE THROUGH THE RECORD CAREFULLY. THE FINDINGS OF THE TRIBUNAL IN THE ASSTT.YEAR 2004-05 READS AS UNDER: ITA NO.364 AND 365/AHD/2012 6 4. WE HAVE HEARD LEARNED DR AND PERUSED RECORD. BE FORE CIT(A), ASSESSEE HAS DEMONSTRATED THAT IT HAS SUFFICIENT IN TEREST FREE FUNDS TO THE EXTENT OF RS.7,95,28,7274/-, CONSISTIN G OF SHARE CAPITAL, RESERVES AND SURPLUS, INTEREST FREE FUNDS FROM DIRECTORS, INTER COMPANY FUNDS, MOBILIZATION ADVANCE, SECURITY DEPOSITS ETC. REVENUE HAS NOT ESTABLISHED ANY NEXUS BETWEEN ADVAN CE AND INVESTMENT IN SHARES WITH BORROWED FUNDS TO MAKE DI SALLOWANCE, AND THEREFORE, CIT(A) IS JUSTIFIED IN DELETING DISA LLOWANCE ON ACCOUNT OF PROPORTIONATE INTEREST MADE BY THE AO, W HICH WE, ACCORDINGLY, UPHOLD. 12. THE LD.AO HAS TOTALLY IGNORED THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IN BOTH THE YEARS. IN THE ASSTT.YEAR 2006-07, THE ASSESSEE HAS MORE THAN RS.9 CRORES ON WHICH IT WAS NOT REQUIRED TO PAY INTEREST. SIMILARLY, IN THE ASSTT.YEAR 2007-08, TH E ASSESSEE HAS CONTENDED BEFORE THE AO THAT IT HAS INTEREST FREE F UNDS OF MORE THAN RS.8.84 CRORES, WHICH CAN EASILY TAKE CARE OF INTER EST FREE LOANS. TAKING INTO CONSIDERATION THIS ASPECT AND THE ORDER OF THE ITAT IN THE ASSTT.YEAR 2004-05, WE ARE OF THE VIEW THAT THE LD. FIRST APPELLATE AUTHORITY HAS APPRECIATED THE CONTROVERSY IN RIGHT PERSPECTIVE AND NO INTERFERENCE IS CALLED FOR. BOTH THE GROUNDS ARE RE JECTED IN THE ASSTT.YEAR 2006-07 AND 2007-08. 13. IN THE ASSTT.YEAR 2006-07, THERE IS ONE MORE GR OUND WHEREBY THE REVENUE HAS PLEADED THAT THE LD.FIRST APPELLATE AUT HORITY HAS ERRED IN DELETING THE ADDITION OF RS.14,364/-. IT EMERGES O UT THAT THE ASSESSEE HAS RECEIVED EMPLOYEES CONTRIBUTION, BUT FAILED TO MAKE PAYMENT TO THE PF ACCOUNT WITHIN THE STATUTORY TIME LIMIT PRES CRIBED IN THE P.F. ACT. THE LD.AO HAS DISALLOWED THE CLAIM OF EXPENDITURE. THE LD.DR CONTENDED THAT THE ISSUE IN DISPUTE IS CLEARLY COVE RED IN FAVOUR OF THE REVENUE BY THE DECISION OF THE HONBLE GUJARAT HIGH COURT RENDERED IN THE CASE OF CIT VS. GUJARAT STATE ROAD TRANSPORT CO RPORATION, 366 ITR 170. ITA NO.364 AND 365/AHD/2012 7 14. RESPECTFULLY FOLLOWING THE DECISION OF THE HON BLE GUJARAT HIGH COURT, WE ARE OF THE VIEW THAT ONCE THE ASSESSEE FA ILED TO MAKE PAYMENT OF EMPLOYEES CONTRIBUTION WITHIN DUE DATE PRESCRIBED IN THE ACT, IT IS NOT ENTITLED TO DEDUCTION. ACCORDINGLY, WE ALLOW THIS GROUND AND CONFIRM THE DISALLOWANCE. 15. IN RESULT, THE APPEAL FOR THE ASSTT.YEAR 2006-0 7 IS PARTLY ALLOWED, WHEREAS, THE APPEAL FOR THE ASSTT.YEAR 2007-08 DISM ISSED. ORDER PRONOUNCED IN THE COURT ON 11 TH SEPTEMBER, 2015 AT AHMEDABAD. SD/- SD/- (G.D. AGRAWAL) VICE-PRESIDENT (RAJPAL YADAV) JUDICIAL MEMBER