ITO, New Delhi V. M/s. Essel Agro Pvt. Ltd., New Delhi

ITA 4538/DEL/2013

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 6450 (ITAT-DELHI)
• Duration Of Justice: 5 year(s) 5 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-01-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 20-06-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 31-07-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Date of conversion; Revenue expenditure; Capital expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI B BENCH, NEW DELHI BEFORE SHRI N.K. BILLAIYA , ACCOUNTANT MEMBER, AND MS. SUCHITRA KAMBLE , JUDICIAL MEMBER ITA NO. 2 158 /DEL/20 1 1 & ITA NO. 4538 /DEL/20 13 [A.Y 20 0 6 - 0 7 ] THE INCOME - TAX OFFICER VS. ESSEL AGRO PVT. LTD WARD 11(2) ESSEL HOUSE, B - 10, LAWRENCE ROAD, NEW DELHI INDUSTRIAL AREA, NEW DELHI PAN : A A ACE 2964 J CO NO. 19 0 /DEL/201 1 [A/O ITA NO. 2 158 /DEL/20 1 1 [A.Y 2006 - 07 ] ESSEL AGRO PVT. LTD VS. THE INCOME TAX OFFICER ESSEL HOUSE, B - 10, LAWRENCE ROAD, WARD 11(2) INDUSTRIAL AREA, NEW DELHI NEW DELHI PAN : A AACE 2964 J [APPELLANT] [RESPONDENT] DATE OF HEARING : 15 . 0 1 .201 9 DATE OF PRONOUNCEMENT : 1 8 . 0 1 .201 9 ASSESSEE BY : SHRI RAKESH GUPTA, ADV SHRI SOMIL AGARWAL, ADV SHRI SHUBNAM SOBTI REVENUE BY : MS. SHEFALI SWAROOP , CIT - DR MS. A S HIMA NEB - SR. DR 2 ORDER PER N.K. BILLAIYA , ACCOUNTANT MEMBER, TH E APPEAL BY THE REVENUE IN ITA NO. 2158/DEL/2011 AND CROSS OBJECTION BY THE ASSESSEE ARE PREFERRED AGAINST THE ORDER OF THE CIT(A) - 13 , NEW DELHI DATED 17 .0 2 . 201 1 PERTAINING TO A.Y 20 0 6 - 0 7 . THE REVENUE HAS ALSO FILED AN APPEAL AGAINST T HE ORDER OF THE CIT(A) DATED 2.5.2013 PERTAINING TO A.Y 2006 - 07. SINCE THE UNDERLYING FACTS AND ISSUES INVOLVED IN THESE APPEALS AND CROSS OBJECTION ARE IDENTICAL AND PERTAIN TO SAME ASSESSEE, THEY WERE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 2 . BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT UPTIL 31.12. 20 04 , THE ASSESSEE WAS PROVIDING THE CUSTOMER PREMISES EQUIPMENT (CPE ) WHICH CONSISTS OF SET TOP B OX , DISH ANTENNA LNB AND CABLE TO THE CONSUMERS BY WAY OF OUTRIGHT SALE OF THE EQUIPMENTS. ACCORDINGLY, T HE RESULT, AS REFLECTED IN THE ACCOUNTS OF THE ASSESSEE WAS THAT THE SALES OF CPES WERE BOOKED AS AN D WHEN THESE WERE SOLD TO THE CONSUMER /SUBSCRIBER. THE UNSOLD CPES WERE SHOWN AS CLOSING STOCK OF THE ASSESSEE AT THE END OF THE YEAR. 3 3. HOWEVER , WITH EFFECT FROM 01.01. 20 05 A NEW SCHEME WAS ANNOUNCED BY THE ASSESSEE WHEREBY THE COMPANY SHIFTED ITS PO LICY FROM SELLING CPE TO THE SUBSCRIBER TO LEASING THIS EQUIPMENT TO THE CUSTOMER ON PAYMENT OF REFUNDABLE SECURITY AND A LEASE RENT OF RS. 500/ - FOR FIVE YEARS. THE ASSESSEE ADOPTED THIS CHANGE IN POLICY IN THE BUSINESS MODEL WITH A VIEW TO BOOST THE REVENUE DUE TO COMPETITIVE PRICES IN THE ASSESSEES LINE OF BUSINESS . 4. THIS CHANGE IN METHOD OF ACCOUNTING ALSO RESULTED IN REDUCING THE RATE OF THE UNSOLD CPES LYING WITH THE DISTRIBUTORS WHICH HAD BEEN EARLIER SUPPLIED ON CONSIGNME NT BASIS FOR INSTALLATION AT CUSTOMER PREMISES ON OUTRIGHT SALE BASIS. O N THE DATE OF CONVERSION OF THE SCHEME , 2,834 SET TOP BOXES ALONGWITH ACCESSORIES WERE LYING WITH THE DISTRIBUTORS AND SINCE WITH THE CHANGE IN POLICY, THE PRICES OF THESE EQUIPMENTS W ERE REDUCED BY RS. 57, 52,391/ - . 5. IN THE INTEREST OF ITS BUSINESS, THE ASSESSEE COMPENSATED THIS FALL IN PRICES AND DEBITED THE SAME IN ITS PROFIT AND LOSS ACCOUNT AS RELATED TO EXCESS/SHORT AMOUNT RECEIVED FROM THE CONSIGNEES ON ACCOUNT OF SCHEME CONVERSION. THE ASSESSING OFFICER TREATED THIS AS A NON 4 REVENUE EXPENDITURE , WHEREAS THE FIRST APPELLATE AUTHORITY HAS DIRECTED THE ASSESSING OFFICER TO ALLOW THE SAME AS BUSINESS LOSS. 6. AS EXPLAINED ABOVE, THE CHANGE IN THE POLICY WAS ACCEPTED BY THE ASSESSING OFFICER AND NO MALAFIDE INTENTION HAS BEEN BROUGHT ON RECORD ON THE PART OF THE ASSESSEE. ANY LOSS INCURRED BY THE ASSESSEE IN RESPECT OF TRADING GOODS HAS TO BE ALLOWED AS BUSINESS LOSS. WE, THEREFORE, DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE CIT(A). THIS GROUND IS DISMISSED. 7. WITH THE NEW POLICY, THE DISTRIBUTORS WERE NOW ENGAGED FOR SERVICES RENDERED FOR LEASING OUT AND INSTALLING THE CPES AT THE CUSTOMERS PREMISES ON BEHALF OF THE ASSESSEE. IN LIEU OF SUCH SERVICES, THE ASSESSEE PAID DISTRIBUTORS COMMISSION AND DISTRIBUTOR S INCENTIVE. THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE CLAIM OF THE ASSESSEE. THE ASSESSING OFFICER WAS OF THE FIRM BELIEF THAT THESE EXPENSES HAVE BEEN INCURRED IN CONNECTION WITH SET T O P BOXES AND RELATED ACCESSORIES WHICH HAVE SINCE BEEN CAPIT ALISED AS LEASE ASSETS. THEREFORE, SUCH EXPENDITURE SHOULD ALSO BE CAPITALISED. 5 8. THE CIT(A) CONSIDERED THIS ISSUE FROM A DIFFERENT ANGLE. THE CIT(A) WAS OF THE OPINION THAT SINCE THE SET TOP BOXES ARE LEASED FOR A PERIOD OF FIVE YEARS AND ANY LEASE RE NT RECEIVED BY THE ASSESSEE SHALL BE OFFERED FOR TAXATION ON ANNUAL BA S IS ONLY, THEREFORE, 1/5 TH OF THE COMMISSION AND INCENTIVE PAYABLE TO THE DISTRIBUTORS DURING THE YEAR SHOULD BE ALLOWED. THE CIT(A) ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO ALLOW 1/5 TH EXPENDITURE AND BALANCE AMOUNT WOULD BE ALLOWED FOR THE NEXT FOUR FINANCIAL YEARS. 9. WE ARE OF THE CONSIDERED OPINION THAT ONCE THE CIT(A) HAS ACCEPTED THAT DISTRIBUTORS COMMISSION AND DISTRIBUTORS INCENTIVE ARE REVENUE EXPENDITURE, THERE IS NOTH ING LIKE DEFERRED REVENUE EXPENDITURE. MOREOVER, THE DISTRIBUTORS COMMISSION AND INCENTIVE PAID BY THE ASSESSEE WILL NOT BE RECOVERED IF THE LESSEE I.E. THE CUSTOMER CANCELS THE LEASE AFTER ONE YEAR. THEREFORE, ANY COMMISSION/INCENTIVE PAID BY THE ASSESS EE HA S TO BE CHARGED TO THE PROFIT AND LOSS ACCOUNT AS REVENUE EXPENDITURE IN THE YEAR OF INCURRING THE SAME. WE, ACCORDINGLY, MODIFY THE FINDINGS OF THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO ALLOW DISTRIBUTORS COMMISSION AND DISTRIBUTORS INCENTIVE AS REVENUE EXPENDITURE. 6 10. GROUND NOS. 1 AND 2 OF THE CROSS OBJECTIONS OF THE ASSESSEE ARE ALLOWED AND RELATED GROUNDS IN REVENUES APPEAL ARE DISMISSED. 11. THE NEXT GRIEVANCE OF THE REVENUES APPEAL RELATES TO FREIGHT AND CARTAGE OUTWARD HOLDING IT A S CAPITAL LOSS/CAPITAL EXPENDITURE IN NATURE. 12. IT APPEARS THAT THE ASSESSING OFFICER HAS MISUNDERSTOOD THE FACTS OF THE ISSUE. HE WAS CARRIED AWAY BY THE CAPITALISATION OF FREIGHT INWARD EXPENSES AND ACCORDINGLY, TREATED FREIGHT AND CARTAGE OUTWARD AS CAPITAL EXPENDITURE. AT THIS STAGE, WE WOULD LIKE TO MAKE IT CLEAR THAT FREIGHT INWARD IS PAID WHEN THE GOODS ARE UNLOADED AND TRANSFERRED TO THE GODOWN. SUCH EXPENDITURE IS DEFINITELY PART OF T HE GOODS SO UNLOADED AND THE SAM E NEED S TO BE CAPITALISED. FREIGHT OUTWARD , ON THE OTHER HAND, IS EXPENDITURE INCURRED WHEN THE GOODS ARE LOADED TO TRANSPORT TO THE DESTINATION OF THE CUSTOMER. SUCH EXPENDITURE IS DIRECTLY RELATED TO THE SALES AND HAVE TO BE ALLOWED AS REVENUE EXPENDITURE. WE, ACCORDINGLY, SET ASIDE THE FINDINGS OF THE CIT(A) AND ALLOW GROUND NO. 3 OF THE CROSS OBJECTION OF THE ASSESSEE. 7 13. NEXT ISSUE IN THE CROSS OBJECTION RELATES TO DISALLOWANCE OF HANDLING CHARGES OF RS. 14.91 LAKHS AS CAPITAL EXPENDITURE. 14. FACTS ON RECORD SHOW THAT TH ESE EXPENSES HAVE BEEN INCURRED FOR DISPATCHING SET TOP BOXES TO VARIOUS DESTINATIONS DURING THE COURSE OF NORMAL BUSINESS ACTIVITY OF THE ASSESSEE. IN OUR CONSIDERED OPINION, SUCH EXPENDITURE HAS NOT RESULTED IN ANY ACQUISITION OF ANY CAPITAL ASSET BY TH E ASSESSEE. ON THE CONTRARY, SUCH EXPENDITURE HAS BEEN INCURRED FOR DESPATCH OF TRADING STOCK OF THE ASSESSEE. WE, ACCORDINGLY, DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ADDITION. GROUND NO. 4 IS ALLOWED. 15. IN THE RESULT THE APPEAL OF THE R EVENUE IS DISMISSED WHEREAS THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. ITA NO. 4538/DEL/13 16. SUBLATO FUNDAMENTO CADIT OPUS, MEANING THEREBY, THAT IN CASE THE FOUNDATION IS REMOVED, THE SUPER STRUCTURE FALLS. SINCE THE 8 FOUNDATION [ASSESSMENT] HAS BEEN REMOVED, THE SUPER STRUCTURE I.E. PENALTY MUST FALL. ACCORDINGLY, THE PENALTY IS DIRECTED TO BE DELETED. 17. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO S . 2158/DEL/2011 & 4538 /DEL/201 3 ARE DELETED, WHEREAS THE CROSS OBJECTION OF THE ASSESSEE IN CO NO. 19 0 /DEL/201 1 IS ALLOWED . THE ORDER IS PRON OUNCED IN THE OPEN COURT ON 1 8 . 0 1 .201 9 . SD/ - SD/ - [ SUCHITRA KAMBLE ] [ N.K. BILLAIYA ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 1 8 T H JANUARY , 201 9 VL/ COPY FORWARDED TO: 1 . APPELLANT 2 . RESPONDENT 3 . CIT 4 . CIT(A) 5. DR ASST. REGISTRAR, ITAT, NEW DELHI 9 DATE OF DICTATION DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.PS/PS DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.PS/PS DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WEBSITE OF ITAT DATE ON WHICH THE FILE GOES TO THE BENCH CLERK DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER