M/s Pyoginam, New Delhi V. Addll. CIT, New Delhi

ITA 4273/DEL/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 5681 (ITAT-DELHI)
• Duration Of Justice: 3 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 06-01-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 05-11-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H K LAL
• Keywords: Capital asset; Capital receipt; Revenue expenditure; Capital expenditure
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH F DELHI ] BEFORE SHRI A. D. JAIN, JM SHRI K. D. RANJAN , AM I. T. APPEAL NO. 4273 (DEL) OF 2009. ASSESSMENT YEAR : 2006-07. M/S. PYOGINAM, ADDL. COMMISSIONER OF INCOME-TAX, 1 - B, NORTHEND ROAD, VS. R A N G E : 20, C I V I L L I N E S, N E W D E L H I. D E L H I. PAN / GIR NO. AAH FP 3828 J. ( APPELLANT ) ( RESP ONDENT ) ASSESSEE BY : SHRI PIYUSH KAUSHIK, ADV.; DEPARTMENT BY : SHRI H. K. LAL, SR. D. R.; O R D E R. PER K. D. RANJAN, AM : THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 20 06-07 ARISES OUT OF THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XXII, NEW DELHI. 2. THE GROUND OF APPEAL RAISED BY THE ASSESSEE READ S AS FOLLOWS :- ' THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN THER LAW, THE LD. CIT (APPEALS) GROSSLY ERRED IN CONFIRMING ADDITIONS OF RS.4,84,629.00 ON ACCOUNT OF EMD FORFEITURE PAID TO AEPC, MINISTRY OF TEXTILE, GOVERNMENT OF INDIA. ' 2 I. T. APPEAL NO. 4273 (DEL) OF 2009. 3. THE ONLY ISSUE FOR CONSIDERATION RELATES TO CONF IRMING THE ADDITION OF RS.4,84,629/- ON ACCOUNT OF FORFEITURE OF EARNEST MONEY DEPOSIT (EMD ) PAID TO AEPC, MINISTRY OF TEXTILE, GOVT. OF INDIA. THE FACTS OF THE CASE STATED IN BR IEF ARE THAT IN THE RELEVANT ASSESSMENT YEAR THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFAC TURING AND EXPORT OF GARMENTS. FROM THE SCRUTINY OF PROFIT AND LOSS ACCOUNT THE ASSESSING O FFICER FOUND THAT THE ASSESSEE HAD CLAIMED A SUM OF RS.4,84,629/- AS DEDUCTION ON ACCOUNT OF EMD FORFEITURE. THE ASSESSEE HAD PAID THE AMOUNT OF RS.4,84,629/- TO AEPC, MINISTRY OF TEXTIL E, GOVT. OF INDIA, FOR NON-FULFILMENT TO EXPORT QUOTA ALLOTTED TO THE ASSESSEE. THE AO TREAT ED THE PAYMENT PENAL IN NATURE AND ACCORDINGLY DISALLOWED THE SAME. 4. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED TH AT THE ASSESSEE HAD RECEIVED QUOTA FOR CERTAIN QUANTITY FOR EXPORT OF GARMENTS FROM AEPC, BUT BECAUSE OF VARIOUS REASONS LIKE NON- AVAILABILITY OF ORDER FROM FOREIGN BUYERS, RAW MATE RIAL, SHIPPING FACILITY ETC. THE ASSESSEE COULD NOT DISCHARGE THE OBLIGATION TO EXPORT THE GO ODS EQUIVALENT TO THE QUOTA ALLOTTED TO IT. THE AEPC HAD PRESCRIBED CERTAIN STIPULATIONS IN THE FORM OF EARNEST MONEY DEPOSIT. THE ASSESSEE WAS HAVING OPTION TO DEPOSIT THE EARNEST M ONEY BY WAY OF BANK GUARANTEE / POST DATED CHEQUES. THE EARNEST MONEY DEPOSIT WAS SUBJE CTED TO FORFEITURE PROPORTIONATELY TO THE EXTENT OF SHORT SHIPMENT OF GARMENTS. VIDE ORDER D ATED 2/9/2005 AEPC FORFEITED RS.4,84,629/- ON ACCOUNT OF NON-PERFORMANCE. THE A SSESSEE CLAIMED THE AMOUNT OF EMD FORFEITURE AS DEDUCTION UNDER SECTION 37 OF THE ACT . IT WAS STATED THAT THE AMOUNT WAS EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE QUOTA WAS ALLOTTED TO THE ASSESSEE ON THE BASIS OF PAST PERFORMANCE / PROJECT ED FIGURES SUBMITTED BY THE EXPORTERS. ACCORDINGLY THE ASSESSEE APPLIED FOR THE QUOTA AND THE SAME WAS ALLOTTED. HOWEVER, SINCE THE ASSESSEE COULD NOT EXPORT THE AMOUNT ALLOTTED TO IT , THE AMOUNT WAS FORFEITED. IT WAS ALSO SUBMITTED THAT FORFEITURE OF EMD IS NOT VIOLATION O F ANY FINANCIAL OR CRIMINAL LAW. THEREFORE, THE AMOUNT FORFEITED COULD NOT BE TAKEN AS PENALTY FOR VIOLATION OF ANY LAW. ACCORDINGLY, THE DISALLOWANCE COULD NOT BE MADE BY THE ASSESSING OFF ICER ON THIS GROUND. 5. THE LD. CIT (APPEALS), HOWEVER, EXAMINED THE NAT URE OF THE EXPENDITURE. HE WAS OF THE OPINION THAT ANY MONEY EXPENDED TO GET A CONTRA CT COULD NOT BE TREATED AS A REVENUE EXPENDITURE BECAUSE IT RELATED TO CREATION OF SOME RIGHT OF ENDURING NATURE. ANY ENTITLEMENT 3 I. T. APPEAL NO. 4273 (DEL) OF 2009. FOR EXPORT QUOTA GRANTED BY AEPC BASED ON PAST PERF ORMANCE AND CAPACITY OF THE MANUFACTURER IS OF CAPITAL NATURE. THIS CREATED A RIGHT FOR EXPORTER TO EXPORT GARMENTS TO VARIOUS COUNTRIES. ALLOTMENT OF QUOTA WAS IN THE N ATURE OF CAPITAL ASSET AND ANY EXPENDITURE RELATING TO ACQUISITION OR RETENTION OF SUCH RIGHT IN FUTURE SHOULD BE REGARDED AS CAPITAL EXPENDITURE. HE FURTHER NOTED THAT THE EXPENDITURE WHICH WAS INCURRED FOR RETENTION OR EXTENSION OF BUSINESS, THE SAME WAS TO BE REGARDED AS CAPITAL EXPENDITURE. HE PLACED RELIANCE ON THE DECISION OF HON'BLE SUPREME COURT IN THE CAS E OF TRAVANCORE RUBBER AND TEA CO. VS. CIT 243 ITR 158 (SC) WHEREIN IT WAS HELD THAT FORFE ITURE OF EARNEST MONEY WAS IN THE NATURE OF CAPITAL RECEIPT AND NOT CHARGEABLE TO TAX. THE LD. CIT (APPEALS) BY EXTENDING THE SAME ANALOGY HELD THAT THE EXPENDITURE NOT BEING OF NATU RE DESCRIBED IN SECTION 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSO NAL EXPENSES OF THE ASSESSEE IS ALLOWABLE UNDER SECTION 37(1) OF THE ACT. ACCORDINGLY, HE TR EATED THE EXPENDITURE CAPITAL IN NATURE AND DISALLOWED THE CLAIM OF THE ASSESSEE. 6.1 BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND, THEREFORE, THE SAME IS ALLOWABLE AS DEDUCTION. HE FURTHER SUBMITTED THAT THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF TRAVANCORE RUBBER AND TEA CO. VS. CIT (SUPRA) IS NO T APPLICABLE TO THE FACTS OF THE CASE. IN THAT CASE THE SUPREME COURT WAS DEALING WITH THE FO RFEITURE OF DEPOSIT WHICH WAS WITH RESPECT TO CAPITAL ASSET NOT WITH RESPECT TO REVENU E TRANSACTION AS IN THE CASE OF THE ASSESSEE. IN THAT CASE THE ASSESSEE WAS NOT ENGAGED IN BUSINE SS OF SELLING TREES. THE FORFEITURE OF THE DEPOSIT IN THE SAID CASE WAS WITH RESPECT TO RUBBE R TREES WHICH CONSTITUTED CAPITAL ASSET IN THE HANDS OF THE ASSESSEE WHEREAS THE CASE OF THE ASSES SEE WAS COVERED BY SEVERAL DECISIONS. HE PLACED RELIANCE ON THE FOLLOWING DECISIONS:- (I) CIT VS. TARUN COMMERCIAL CO. LTD. 107 ITR 172 (II) CIT VS. SURYA PRABHA MILLS (P) LTD. 123 ITR 65 4; (III) CIT VS. SUGAR DEALERS 100 ITR 424 (ALL.) ; (IV) THACKERS H. P. & CO. VS. CIT 134 ITR 21 ( MP); (V) NARAINDAS MATHURADAS AND CO. VS. CIT 35 IT R 461 (BOM.); & 4 I. T. APPEAL NO. 4273 (DEL) OF 2009. (VI) DHEERAJLAL RAGHAV & CO. VS. ITO 5 TTJ 557 (C UTTACK); 6.2 ON THE OTHER HAND, THE LD. SR. DEPARTMENTAL REP RESENTATIVE SUPPORTED THE ORDER OF THE LD. CIT (APPEALS). 7. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE ASSESSEE HAS MADE DEPOSIT OF EARNEST MONEY IN O RDER TO GET EXPORT QUOTA. THE ASSESSEE WAS ALLOTTED QUOTA ON THE BASIS OF PAST PERFORMANCE / PROJECTED FIGURES SUBMITTED BY THE EXPORTERS AND HAD TO GIVE EMD / GUARANTEE FOR THE P URPOSE OF EXECUTION OF ALLOTTED QUANTITY OF QUOTA TO THE EXTENT OF 90 PER CENT OF THE QUOTA ALLOTTED. FROM THESE FACTS IT IS CLEAR THAT THE QUOTA WAS ALLOTTED TO THE ASSESSEE ON THE BASIS OF PAST PERFORMANCE IN RESPECT OF EXPORTS MADE BY THE ASSESSEE. THE EARNEST MONEY DEPOSIT IN THE FORM OF DD / FIXED DEPOSIT / BANK GUARANTEE WAS IN RESPECT OF EXECUTION OF EXPORT QUO TA ALLOTTED TO THE ASSESSEE. THEREFORE, THE QUOTA WAS ALLOTTED ON THE BASIS OF PAST PERFORMANCE OF THE ASSESSEE AS AN EXPORTER AND NOT ON THE BASIS OF EARNEST MONEY DEPOSITED. THE QUOTA WA S ALLOTTED DURING THE COURSE OF EXPORT ACTIVITIES OF THE ASSESSEE AND WHEN THE ASSESSEE DI D NOT EXECUTE THE FULL QUOTA ALLOTTED, EARNEST MONEY DEPOSIT WAS FORFEITED BY AEPC. THUS THE FORF EITURE OF EARNEST MONEY DEPOSIT HAS OCCURRED DURING THE COURSE OF BUSINESS ACTIVITIES C ARRIED ON BY THE ASSESSEE. HENCE, IT IS A CASE OF BUSINESS LOSS. THE ASSESSING OFFICER HAS D ISALLOWED THE AMOUNT ON THE GROUND THAT IT WAS IN THE NATURE OF PENALTY. FORFEITURE OF EMD ON ACCOUNT OF NON-FULFILMENT OF QUOTA ALLOTTED TO THE ASSESSEE CANNOT BE TREATED PENAL IN NATURE, AS HELD BY THE ASSESSING OFFICER. IN THE CASE OF TARUN COMMERCIAL MILLS (P) LTD. (SUPRA) THE ASSESSEE EXECUTED A BOND TOWARDS SHORTFALL IN EXPORT OBLIGATIONS. UNDER THE TERMS O F BOND EXECUTED WITH THE GOVT. THE ASSESSEE HAD OPTION EITHER ACHIEVE THE TARGET OR PAY FOR THE SHORTFALL. THE TERMS OF BOND CLEARLY INDICATED THAT THE AUCTION WITH THE MANUFACTURER AS SESSEE OF PAYING FOR THE SHORTFALL COULD BE FOR VARIETY OF REASONS IN THE INTEREST OF COMMERCIA L EXPEDIENCY. HON'BLE GUJARAT HIGH COURT HAS HELD THAT THE EXERCISE OF OPTION OF THE ASSESSE E FOR PAYMENT ON ACCOUNT OF SHORTFALL WAS NOT IN THE NATURE OF PENALTY. IN THE CASE OF CIT V S. SURYA PRABHA MILLS (SUPRA) THE ASSESSEE COMPANY WAS RUNNING A TEXTILE MILL, WAS A MEMBER OF COTTON MILL ASSOCIATION, WHICH ALLOTTED QUOTA OF FOREIGN COTTON TO ITS MEMBERS. THE ALLOTM ENT WAS MADE ON THE BASIS OF NUMBER OF SPINDLES WORKING ON HIGHER COUNTS. THE ASSESSEE DI D NOT IMPORT THE ALLOTTED QUANTITY OF COTTON, BUT PAID THE AGREED GUARANTEE AMOUNT FOR TH E NON-IMPORT OF THE COTTON. HON'BLE 5 I. T. APPEAL NO. 4273 (DEL) OF 2009. MADRAS HIGH COURT HELD THAT PAYMENT MADE WAS NOT FO R PENALTY FOR INFRACTION OF ANY LAW, BUT WAS AN EXPENDITURE LAID OUT EXCLUSIVELY FOR THE PUR POSE OF BUSINESS. FROM THE ABOVE DECISIONS IT IS CLEAR THAT PAYMENT OF AMOUNT ON ACC OUNT OF NON-FULFILMENT OF QUOTA CANNOT BE TREATED AS PENALTY AS HELD BY THE ASSESSING OFFICER . THE LD. CIT (A) HAS, HOWEVER, CONFIRMED THE DISALLOWANCE ON THE GROUND THAT THE EARNEST MON EY DEPOSIT WAS IN THE NATURE OF CAPITAL EXPENDITURE AS THE ASSESSEE GOT ALLOTMENT OF QUOTA BECAUSE OF EARNEST MONEY DEPOSIT. THIS, IN OUR VIEW, IS NOT CORRECT APPRECIATION OF FACTS. AS DISCUSSED EARLIER, THE ASSESSEE GOT QUOTA ALLOTTED ON THE BASIS OF PAST PERFORMANCE OF EXPORT BUSINESS AND NOT ON THE BASIS OF THE EARNEST MONEY DEPOSITED. THE EARNEST MONEY WAS PAID ON PER CENTAGE BASIS OF QUOTA ALLOTTED. THEREFORE, THE PAYMENT OF EARNEST MONEY WAS IN THE COURSE OF BUSINESS ACTIVITIES AND HENCE, CANNOT BE TREATED AS CAPITAL IN NATURE. HON'BLE AL LAHABAD HIGH COURT IN THE CASE OF CIT VS. SUGAR DEALERS (SUPRA) HAS HELD THAT FORFEITURE OF E ARNEST MONEY DUE TO NON-PERFORMANCE OF CONTRACT TO PURCHASE RICE WAS LOSS ATTRIBUTABLE TO THE ASSESSEE AND WAS ALLOWABLE AS DEDUCTION. SIMILARLY, IN THE CASE OF THACKERS H.P. AND COMPANY VS. CIT (SUPRA) FORFEITURE OF SECURITY BY THE FOREST DEPARTMENT ON ACCOUNT OF NON-FULFILME NT OF CONTRACT OBLIGATION WAS HELD TO BE BUSINESS LOSS ALLOWABLE AS DEDUCTION BY HON'B LE MADHYA PRADESH HIGH COURT. SIMILARLY IN THE CASE OF NARAINDAS MATHURADAS & CO. (SUPRA) HON'BLE BOMBAY HIGH COURT HAS HELD THAT MAKING DEPOSIT BY WAY OF SECURITY FOR CARRYING OUT A CONTRACT OF SUPPLY OF GOODS WAS NOT FOR ACQUIRING THE BUSINESS, BUT INCID ENTAL TO CARRYING ON BUSINESS. THEREFORE, FORFEITURE OF DEPOSIT WAS HELD TO BE ALLOWABLE AS B USINESS LOSS. LIKEWISE, ITAT, CUTTACK BENCH IN THE CASE OF DHEERAJLAL RAGHAVJEE CO. (SUPR A) HAS HELD THE FORFEITURE OF EARNEST MONEY AND SECURITY DEPOSIT AS DEDUCTIBLE FROM THE I NCOME. THE AMOUNT WAS HELD TO HAVE BEEN PAID FOR SECURING RIGHT TO PURCHASE STOCK-IN-T RADE AND HENCE WAS NOT IN THE NATURE OF CAPITAL EXPENDITURE. IN THE INSTANT CASE, THE Q UOTA HAS BEEN ALLOTTED ON THE BASIS OF PAST PERFORMANCE IN THE FIELD OF EXPORT AND PAYMENT OF E ARNEST MONEY IS INCIDENTAL TO FULFILMENT OF THE QUOTA SO ALLOTTED AND, THEREFORE, IT CANNOT BE SAID TO HAVE BEEN DEPOSITED FOR ACQUISITION OF THE QUOTA. THEREFORE, FORFEITURE OF SECURITY DE POSIT IS IN THE NATURE OF BUSINESS LOSS AND HAS TO BE ALLOWED AS DEDUCTION. ACCORDINGLY, NEITHER T HE ASSESSING OFFICER WAS JUSTIFIED IN TREATING NEITHER THE FORFEITURE OF SECURITY DEPOSIT AS PENAL IN NATURE NOR THE LD. CIT (A) WAS JUSTIFIED IN HOLDING THE SECURITY DEPOSIT IN THE NA TURE OF CAPITAL EXPENDITURE. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT (A) AND DIRECT T HE ASSESSING OFFICER TO ALLOW THE CLAIM OF THE ASSESSEE. 6 I. T. APPEAL NO. 4273 (DEL) OF 2009. 8. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 11TH FEBRUARY, 2010. SD/- SD/- [ A. D. JAIN ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 11TH FEBRUARY, 2010. *MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT. 7 I. T. APPEAL NO. 4273 (DEL) OF 2009.