ACIT, V. Dana India P.Ltd.,

ITA 375/PUN/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 7615 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 10 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-02-2011
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2004-2005
• Appeal Filed On: 26-03-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABHAY DAMLE
• Assessee Lawyers: R D ONKAR
• Keywords: Set aside
• Section: 43B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI I.C. SUDHIR AND SHRI D. KARUNAKARA RAO ITA NO. 375/PN/09 (ASSTT. YEAR 2004-05) ACIT, CIRCLE-8, PUNE .... APPELLANT VS. DANA INDIA PVT. LTD. 29, MILESTONE, PUNE NASIK HIGHWAY, VILLAGE KURILI, TAL. KHED PUNE-410 501 PAN NO. AABCD173A . RESPONDENT APPELLANT BY : SHRI ABHAY DAMLE RESPONDENT BY : SHRI R.D. ONKAR ORDER PER D. KARUNAKARA RAO AM THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A)-III, PUNE DATED 30/12/2008 FOR THE A.Y 2004-05 AND THE C ONCISE GROUNDS FILED BY THE REVENUE ARE AS UNDER:- 1. WHETHER ON THE FACTS AND CIRCUMSTANCE OF THE CAS E AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THAT THE ASSESSEE IS FOLLOWING ME RCANTILE SYSTEM OF ACCOUNTING AND HENCE IS LIABLE TO DEBIT INCREASE IN RAW MATERIAL ON ACCRUAL BASIS AND SIMILARLY INCOME / RECEIPT THEREFROM TO B E CREDITED ON ACCRUAL BASIS. 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE A.O HAS MADE TH E SUBJECTED ADDITION OF RS. 64,17,476/- BY PREPONING OF INCOME THAT ACCRUED IN A.Y 2005-06 WHEN THE ASSESSEE ADMITTED THAT AN AMOUNT OF RS. 64,17,476/- (53,17,206 + 43B RS. 11,00,270/-) PERTAINED TO A.Y 2 004-05. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW THE LD. CIT(A) PROVISIONS MADE TOWARDS THE RAW MATERIAL / COMPO NENT PURCHASE WHEREAS THE LD. CIT(A) HAS CO-TERMINUS POWERS WITH TH AT OF THE ASSESSING OFFICER TO ASCERTAIN THE FACTS OR CALL UPON TH E ASSESSING OFFICER TO VERIFY THE FACTS. 4. THE ORDER OF THE CIT(A) MAY BE VACATED AND THAT OF THE A.O BE RESTORED. 2. FROM THE ABOVE, IT IS EVIDENT THAT THAT THERE ARE C OUPLE ISSUES WHICH REQUIRE OUR ADJUDICATION. FIRST ISSUE RELATES TO THE ADD ITION OF RS. 64,17,476/- BY ITA NO.375/PN/09 A.Y 2004-05 PAGE 2 OF 5 PREPONING THE RECOGNITION OF INCOME EARNED BY THE ASSE SSEE TOWARDS THE PRICE RISE IN THE A.Y 2005-06 TO THE IMPUGNED A.Y 2004-05. ASSESSEE, HAVING FOLLOWED THE MERCANTILE SYSTEM OF ACCOUNTING, RECOGNIZED THE I NCOME ACCRUED TO HIM BY VIRTUE OF INCREASE IN THE STEEL PRICE BASED ON THE TIM ING OF SUCH INCREASE. THE GOT THE AMENDED PURCHASE ORDER FROM ITS CUSTOMERS IN THE A. Y 2005-06. ACCORDINGLY, DIFFERENCE IN THE PRICE RISE WAS ACCRUED IN THE A.Y 200 5-06. BUT, A.O DID NOT ACCEPT THE SAME FOR THE FOLLOWING REASONS. (I) THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HENCE THE ASSESSEE IS LIABLE TO DEBIT THE ASCERTAIN LIABILITIES ON ACCRUAL BASIS AND SIMILARLY, THE INCOME / RECEIPT IS ALSO TO BE CREDITED ON ACCRUAL BASIS. IT IS NOT OPEN TO THE AS SESSEE TO DEBIT PRICE INCREASE ON PURCHASES IN A.Y. 2004-05 AND CRE DIT PRICE RISE ON SALES IN A.Y 2005-06 AS DOING SO WILL NOT GIVE A CO RRECT PICTURE OF THE PROFIT / LOSS OF A.Y. 2004-05. (II) THE CONTENTION OF THE ASSESSEE THAT THE CUSTO MERS ACCEEDING TO THE REQUEST OF THE ASSESSEE FOR PRICE RISE IS THE TAXAB LE EVENT THAT HAS OCCURRED IN F.Y. 2004-05 IS BASELESS WHAT IS TRUE F OR PRICE RISE IN PURCHASES, THE SAME IS TRUE FOR PRICE IN SALES ALSO . (III) IF CUSTOMERS OF THE ASSESSEE HAVE RAISED BIL LS IN F.Y. 2004-05, THE PARTIES WHO HAD SUPPLIED RAW MATERIAL TO THE ASSESS EE HAD ALSO RAISED THE BILLS IN F.Y. 2004-05. (IV) WHATSOEVER ACCOUNTING STANDARDS OR ACCOUNTING PRINCIPLES, THE ASSESSEE IS FOLLOWING, THERE CANNOT BE POST PONEMEN T OF TAXABLE INCOME. THERE CANNOT BE DEBIT IN ONE YEAR AND CONSE QUENT CREDIT IN SUBSEQUENT YEAR. 3. DURING THE FIRST APPELLATE PROCEEDINGS, THE ASSESS EE MADE SUBMISSIONS STATING THAT DIFFERENCE IN PRICE RISE WAS THE RESULT OF THE RIGOROUS NEGOTIATIONS OVER A PERIOD OF TIME AND THE SAME WAS FINALLY REALIZE D ONLY IN MAY 2004 RELEVANT FOR THE A.Y 2005-06. THE CIT(A) ACCEPTED THE CONTENT ION OF THE ASSESSEE AND GRANTED A RELIEF TO THE ASSESSEE. AGGRIEVED WITH THE S AME, REVENUE IS BEFORE US. 4. AT THE OUTSET, LD. COUNSEL FOR THE ASSESSEE NARRATE D THE FACTS OF THE CASE AND STATED THAT IN THE CASE, WHERE THE AMENDED PURCHA SE ORDER WAS FINALIZED IN MAY 2004 AND THE RELEVANT INCOME WAS RIGHTLY OFFERED I N A.Y. 2005-06. TO THAT EXTENT, A.O ERRED IN HOLDING THAT THE SAID INCOME REL ATES TO THE EVENT OF SALE NOT TO THE EVENT OF ENHANCED PRICE. FURTHER, LD. COUNSEL R ELIED ON THE SUPREME COURT JUDGMENT IN THE CASE OF E.D. SASSOON & COMPANY LTD. AND OTHERS 26 ITR 27 (SC). ON THE OTHER HAND LD. DR FOR THE REVENUE RELIE D ON THE ORDER OF THE A.O 5. WE HAVE HEARD BOTH THE PARTIES AND EXAMINED THE RE LEVANT MATERIAL AVAILABLE BEFORE US. FACT OF THE CASE IS THAT THE NE GOTIATION ABOUT THE INCREASE IN STEEL PRICE WAS FINALIZED IN MAY 2004. IT IS A FACT THAT NEGOTIATIONS STARTED WAY BACK IN MAY 2003 ONWARDS. IT IS ALSO A FACT THAT ASS ESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING IN SUCH FACTUAL CIRCUMSTANCES WE ARE O F THE ITA NO.375/PN/09 A.Y 2004-05 PAGE 3 OF 5 OPINION THAT ASSESSEE HAS A CASE AGAINST THE PREPONE MENT OF THE IMPUGNED INCOME. WE HAVE ALSO PERUSED PARAS 5.5 TO 5.7 OF THE IMPUGNED ORDER FOR THE REASONING GIVEN BY THE CIT(A) AND THE SAME READS AS F OLLOWS:- 5.5 AFTER CAREFUL CONSIDERATION, I AM INCLINED TO ACCEPT THE CONTENTION OF THE APPELLANT. THERE IS MERIT IN THE APPELLANTS SUBMISSION THAT INCOME ACCOUNTS ACCURSE ONLY WHEN THE ASSESSEE GETS AN ENF ORCEABLE RIGHT TO RECEIVE THE SAME. IN THE CASE UNDER CONSIDERATION, NO ENFORCEABLE RIGHT TO RECEIVE THE INCREASED PRICES HAS ARISEN TILL THE TI ME THE CUSTOMERS OF THE ASSESSEE AGREED TO THE ENHANCED TERMS OF PAYMENT AN D REVISED THE PURCHASE ORDERS. SINCE THE AMENDED PURCHASE ORDERS WERE RAISED IN THE F.Y. 2004-05, THE ENFORCEABLE RIGHT TO RECEIVE THE ENHANCED PRICE AND THEREFORE, ACCRUAL OF CORRESPONDING INCOME ALSO ARO SE IN THE A.Y 2005-06 AND NOT IN THE YEAR UNDER CONSIDERATION. AS SUCH, T HERE IS NO QUESTION OF ASSESSING THE INCOME OF RS. 64,17,476/- IN THE A.Y. 2004-05. 5.6 I ALSO DO NOT FIND ANY FORCE IN THE ACTION OF T HE ASSESSING OFFICE IN TAXING THE INCOME OF RS. 64,17,476/- IN THIS YEAR O N THE GROUND THAT THERE CANNOT BE DEBIT IN ONE YEAR AND CONSEQUENT CREDIT I N SUBSEQUENT YEAR. IN CASE OF A CONFLICT BETWEEN THE MATCHING PRINCIPLE A ND PRINCIPLE OF ACCRUAL OF INCOME, THE LATTER SHALL PREVAIL. A MATCHING PRI NCIPLE CAN BE APPLIED ONLY BETWEEN SUCH INCOME THAT HAS ACTUALLY ACCRUED DURIN G THE YEAR AND SUCH EXPENSES FOR WHICH LIABILITY TO PAY HAS CRYSTALISED DURING THE YEAR. IN THE CASE UNDER CONSIDERATION, IT IS CLEAR FROM THE FACT S OF THE CASE THAT THE INCOME OF RS. 64,17,476/- HAD NOT ACCRUED DURING T HIS YEAR AND THEREFORE, THE SAME COULD NOT BE CONSIDERED FOR APP LYING THE MATCHING PRINCIPLE. 5.7 IN VIEW OF THE AFORESAID, I HOLD THAT THE ASSES SING OFFICER IS NOT JUSTIFIED IN MAKING ADDITION OF RS. 64,17,476/- BY PREPONING THE INCOME THAT ACCRUED IN THE A.Y. 2005-06. ACCORDINGLY, THE ADDITION OF RS. 64,17,476/- IS DIRECTED TO BE DELETED. 6. WE HAVE ALSO PERUSED THE SUPREME COURT DECISION IN THE CASE OF E.D. SASSOON & COMPANY LTD. AND OTHERS (SUPRA), RELEVANT P ARA READS AS UNDER:- THE RIGHT TO RECEIVE THE COMMISSION WOULD ARISE AN D THE INCOME, PROFITS OR GAINS WOULD ACCRUE TO THE MANAGING AGENT S ONLY AT THE END OF THE CALENDAR YEAR WHICH WAS THE TERMINUS A Q UO FOR THE MAKING UP OF THE ACCOUNTS AND ASCERTAINING THE NET PROFITS EARNED BY THE COMPANY. 7. THE ABOVE EXTRACT IS SELF EXPLANATORY AND THE REASO NING GIVEN BY THE CIT(A) IS PROPER AND DOES NOT CALL FOR ANY INTERFERENCE. ACCORDINGLY, RELEVANT GROUNDS OF THE REVENUE ARE DISMISSED . 8. THE SECOND ISSUE RELATES TO CLAIM OF THE PROVISIO NS RELATING TO PAYMENTS FOR RAW MATERIAL AND COMPONENTS PURCHASED BY THE ASSESS EE. AS PER THE A.O ASSESSEE DEBITED AN AMOUNT OF RS. 18,05,370/- BEING PROVISION FOR OPEN GRNS (GOODS RECEIPTS NOTES) ON FINDING THAT ASSESSEE MADE ACTUAL PAYMENT OF ONLY RS. 14,49,096/- AND ASSESSEE HAS NOT PAID BALANCE OF RS . 3,56,274/- . A.O DISALLOWED THE SAID AMOUNT OF RS. 3,56,274/- BEING AN EXCESS P ROVISION MADE FOR OPEN ITA NO.375/PN/09 A.Y 2004-05 PAGE 4 OF 5 GRNS. CIT(A) GAVE RELIEF TO THE ASSESSEE ON FINDING THAT THE SAID AMOUNT PERTAINED TO 3 TO 4 PARTIES IN WHOSE NAMES SUCH AMOUN TS ARE SHOWN OUTSTANDING AND THE PARTIES ARE IDENTIFIABLE. OTHER REASONING OF TH E CIT(A) IN THIS REGARD IS GIVEN IN PARA 6.5 OF THE IMPUGNED ORDER, THE SAME READS AS UNDER:- 6.5 THE SUBMISSION HAS BEEN CONSIDERED AND IS FOU ND TO HAVE MERIT. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE L IABILITY OF RS. 3,56,274/- IS FALSE OR FICTITIOUS. ON THE BASIS OF DETAILS FIL ED BY THE ASSESSEE, THE ASSESSING OFFICER HAS OBSERVED THAT THE AFORESAID AM OUNT PERTAINED TO THREE/FOUR PARTIES IN WHOSE NAMES SMALL SMALL AMOUN TS HAVE BEEN SHOWN BY THE ASSESSEE. THIS MEANS THAT THE PARTIES IN WHO SE NAMES, THE LIABILITY HAS BEEN SHOWN ARE IDENTIFIABLE. THEREFORE, BEFORE COMING TO THE CONCLUSION THAT THE AMOUNT WAS NOT PAYABLE TO THE P ARTIES AS NO INVOICES AS YET HAVE BEEN RECEIVED BY THE ASSESSEE FROM THESE PARTIES EVEN AFTER LAPSE OF CONSIDERATION TIME, THE ASSESSING OFFICER SHOULD HAVE ENQUIRED FROM SUCH PARTIES IF ANY AMOUNT WAS RECEIVABLE FROM THEM BY THE ASSESSEE OR NOT. WITHOUT MAKING SUCH VERIFICATION, THE ACTION OF THE ASSESSING OFFICER IN TREATING THE AMOUNT OF RS. 3,5 6,274/- AS INCOME ON ACCOUNT OF CESSATION OF LIABILITY CAN AT BEST BE CO NSIDERED AS ONE SIDED AND WITHOUT ANY BASIS. THE ASSESSING OFFICER HAS BROUGH T NO MATERIAL ON RECORD TO REFUTE THE CLAIM OF THE ASSESSEE THAT THE AMOUNT IN QUESTION REPRESENTED EXISTING SUBSISTING LIABILITY OF THE AS SESSEE. UNDER THESE CIRCUMSTANCES, I SEE NO JUSTIFICATION IN THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS. 3,56,274/- WHICH IS DIREC TED TO BE DELETED. 9. DURING THE PROCEEDING BEFORE US LD. COUNSEL FILED A CHART GIVING THE FOLLOWING REMARKS:- 1. THE ASSESSEE FOLLOWS MERCANTILE METHOD OF ACCOUN TING AND HAS INCURRED THE LIABILITY FOR THE RAW MATERIAL, COMPON ENTS AND CONSUMABLES PURCHASED BY IT IN THE ORDINARY COURSE OF ITS BUSINESS FROM IDENTIFIED SUPPLIERS . 2. THE SAID AMOUNT HAS NEITHER BEEN WRITTEN BACK BY THE ASSESSEE NOR WAIVED BY THE SUPPLIERS AND THEREFORE THERE IS NO R EMISSION OR CESSATION OF LIABILITY. ASSESSEE HAS NOT RECEIVED A NY BENEFIT THERE FROM. MERELY BECAUSE THE LIABILITY HAS REMAINED UNP AID IT DOES NOT CONSTITUTE INCOME IN THE HANDS OF THE ASSESSEE. RELIANCE IS PLACED ON THE FAVOURABLE DECISION OF H ONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF GP INTERNATIONAL LTD. 186 TAXMAN 229. 10. DURING THE PROCEEDINGS BEFORE US, BOTH PARTIES RELI ED ON THEIR RESPECTIVE STRANDS. EVEN AFTER HEARING THE PARTIES, FROM THE ABOVE FACTS, IT IS NOT CLEAR AS TO WHETHER RS. 3,56,274/- IS AN EXCESS PROVISION CREDITED BY MERE ASSESSMENTS ARE THE SUM OF RS. 18,05,370/- IS THE CESSATION OF THE INVOICES. IT IS ALSO NOT CLEAR WHETHER THE SUM OF RS. 3,56,274 IS CURRENT LIABILITIE S OF THE IDENTIFIABLE PARTIES. IF IT IS A CASE OF EXCESS PROVISION , IN OUR OPINION, THE MATTER HAS TO BE DECIDED IN THE LIGHT OF THE SUPREME COURT JUDGEMENT I N THE CASE OF BHARAT EARTH MOVERS 245 ITR 428 AS PER THE FOLLOWING EXTRACT FROM THE SAID JUDGEMENT :- ITA NO.375/PN/09 A.Y 2004-05 PAGE 5 OF 5 BUSINESS LIABILITY ARISING IN THE ACCOUNTING YEAR, T HE DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANT IFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCUR RING OF THE LIABILITY. IT SHOULD ALSO BE CAPABLE OF BEING ESTIMATED WITH THE REASONABLE CERTAINTY WITHOUT ACTUAL QUANTIFICATION. TILL THESE REQUIREM ENTS ARE SATISFIED THE LIABILITY IS NOT A CONTINGENT ONE. THE LIABILITY I S ONE PRESENTI THOUGH IT WILL BE DISCHARGED AT A FUTURE DATE. IT DOES NOT MAKE A NY DIFFERENCE IF THE DATE OF LIABILITY HAS TO BE DISCHARGED IT IS NOT CE RTAIN . IF IT IS THE CASE OF CESSATION OF LIABILITIES, THE A.O HAS TO DECIDE THE ISSUE AS PER THE SETTLED POSITION IN THIS REGARD BY PLETHORA OF SUPREME COURT JUDGEMENT IN THIS REGARD. THEREFORE, FOR WANT OF FACTS A ND CLARIFICATION THE MATTER, WE ARE OF THE OPINION, THIS HAS TO BE SET ASIDE TO THE FILES OF THE A.O FOR ADJUDICATING THE ISSUE AFRESH AFTER EXAMINING THE RELE VANT INVOICES AND BOOK ENTRIES IN THIS REGARD. ACCORDINGLY, THIS ISSUE IS SET ASIDE . 11. IN THE RESULT APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 09 TH FEBRUARY, 2011. SD/- SD/- (I.C. SUDHIR) (D.KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED THE 09 TH FEBRUARY, 2011 R COPY OF THE ORDER IS FORWARDED TO : 1. ACIT, CIRCLE-6, PUNE 2. ASSESSEE 3. CIT(A)-II, PUNE 4. CIT-III, PUNE 5. DR ITAT A BENCH, PUNE BY ORDER ASSISTANT REGISTRAR I.T.A.T PUNE