MIPCO SEAMLESS RINGS (GUJ), MUMBAI V. ITO WD 6(3)(3), MUMBAI

ITA 4827/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7610 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-02-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2004-2005
• Appeal Filed On: 24-07-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: H S PARIKH
• Keywords: Depreciation; Business expenditure; Opportunity of being heard; Capital expenditure
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B: MUMBAI BEFORE SHRI R.S. SYAL (AM) AND SHRI R.S. PADVEKAR (JM) ITA NO. 4827/MUM/2008 (ASSTT. YEAR : 2004-05) M/S MIPCO SEAMLESS RINGS (GUJ) APPELLANT 402-B, POONAM CHAMBERS, DR. A.B. ROAD,, WORLI, MUMBAI 400 018 PAN : AAACM8331M V/S. INCOME TAX OFFICER RESPONDENT WARD 6(3)(3) MUMBAI , ITA NO. 5054/MUM/2008 (ASSTT. YEAR : 2004-05) THE ASST. C.I.T., CIRCLE 6(3), APPELLANT AAYAKAR BHAVAN, M.K. ROAD, MUMBAI 20 V/S. M/S MIPCO SEAMLESS RINGS (GUJ) LTD., RESPONDEN T 402-B, POONAM CHAMBERS, DR. A.B. ROAD,, WORLI, MUMBAI 400 018 PAN : AAACM8331M ASSESSEE BY :MR. H.S. PARIKH DEPARTMENT BY :MS. PRABHAT JHA/S. S. RANA/ MR. PEEYUSH JAIN (D.R) : O R D E R : PER R.S. PADVEKAR, J.M THESE TWO CROSS APPEALS, ONE BY THE ASSESSEE AND AN OTHER BY THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE LD CI T(A)- XXVI, MUMBAI DATED 30.05.2008 FOR THE A.Y. 2004-05. ITA NO. 4827 & 5054/MUM/2008 2 2. WE FIRST TAKE THE ASSESSEES APPEAL BEING ITA NO . 4827/MUM/2008 FOR DISPOSAL. 3. THE FIRST ISSUE IS IN RESPECT OF THE DISALLOWANC E OF RS. 62,364/- IN RESPECT OF THE INTEREST PAID FOR LATE PAYMENT OF P PF AMOUNT. 4. THE ASSESSEE COMPANY IS IN THE MANUFACTURING OF ROLL/FORGE RINGS FOR BEARING RACES. THE RETURN FILED BY THE ASSESSEE WA S SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLETED U/S. 143(3) OF THE ACT . IT WAS NOTICED BY THE A.O THAT THE ASSESSEE COMPANY HAD DEBITED AN AMOUNT OF RS. 62,364/- WHICH WAS IN RESPECT OF THE INTEREST FOR THE DELAYED PAYM ENT OF THE PPF AMOUNT/CONTRIBUTION. THE ASSESSEE REQUIRED TO PAY T HE INTEREST UNDER THE EMPLOYEES PROVIDENT FUND AND MISCELLANEOUS PROVISI ONS ACT 1952 IF THERE IS DELAY IN DEPOSITING AMOUNT IN GOVT. ACCOUNT. THE A .O. WAS OF THE VIEW THAT THE INTEREST PAID BY THE ASSESSEE WAS IN THE PENAL NATURE AND HENCE, THE SAME WAS NOT ALLOWABLE AS A BUSINESS EXPENDITURE. THE A .O, THEREFORE, DISALLOWED AMOUNT OF INTEREST AND MADE THE ADDITION TO THE INC OME OF THE ASSESSEE. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD CIT(A), BU T WITHOUT SUCCESS. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 5. WE HAVE HEARD THE PARTIES. THE LD COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THE INTEREST PAID BY THE ASSESSEE IS ONLY COM PENSATORY IN NATURE AND IT CANNOT TREATED AS A PENAL INTEREST. THE LD COUNSEL ALSO RELIED ON THE DECISION OF THE HONBLE HIGH COURT OF CALCUTTA IN THE CASE O F HINDUSTAN MOTOR LTD., V/S. CIT, 218 ITR 450 (CAL.). PER CONTRA, THE LD D.R. S UPPORTED THE ORDER OF THE A.O. THERE IS NO DISPUTE ABOUT THE FACT THAT THE A MOUNT IN CONTROVERSY IS THE INTEREST PAYMENT AND NOT THE PENALTY. NOW THE NEXT QUESTION IS WHETHER THE INTEREST PAID BY THE ASSESSEE FOR LATE PAYMENT OF P ROVIDENT FUND DUES UNDER THE EMPLOYEES PROVIDENT FUND AND MISCELLANEOUS PR OVISIONS ACT 1952 CAN BE TREATED AS A PENAL ONE OR CAN IT PARTAKE THE CHARAC TER OF THE PENALTY ? ON THE PERUSAL OF THE RELEVANT PROVISIONS, OUR ANSWER IS N O. IN OUR OPINION, THE INTEREST PAID BY THE ASSESSEE IS ONLY COMPENSATORY IN NATURE AND IT CANNOT BE EQUATED WITH THE PENALTY. AS IT IS COMPENSATORY IN NATURE, AS PER THE WELL SETTLED PRINCIPLES OF THE DIFFERENT JUDICIAL PRECED ENTS, THE SAME IS ALLOWABLE. ITA NO. 4827 & 5054/MUM/2008 3 WE, ACCORDINGLY, ALLOW THE SAID EXPENDITURE AND DE LETE THE ADDITION. IN THE RESULT, THE RESPECTIVE GROUND TAKEN BY THE ASSESSEE IS ALLOWED. 6. THE NEXT ISSUE IS THE DISALLOWANCE OF THE EXPEND ITURE OF RS. 3,52,762/- INCURRED TOWARDS REPAIRS OF HATEBAR MACHINE TREATIN G THE SAME AS A CAPITAL IN NATURE. 7. IT WAS NOTICED BY THE A.O THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 14,57,466/- AS AN EXPENDITURE UNDER THE HEAD R EPAIR & MAINTENANCE. AFTER VERIFYING THE DETAILS, THE A.O WAS OF THE OPI NION THAT THE FOLLOWING EXPENDITURE WAS CAPITAL IN NATURE : NAME OF THE PARTY DETAILS OF ITEM AMOUONT POWERCON ENGINEERING INDUCTION BILLET HEATER COIL R S. 54000/- INDUCTO-THERM(I)PVT.LTD. HATEBUR CAPACITOR RS. 2134 40/- INDUCTO-THERM(I)PVT.LTD. HATEBUR FUSE CAPACITOR RS. 32016/- INDUSTRIAL ENTERPRISES BEARING PIN RS. 26506/- MAHALAXMI ENGINEERING SPIRAL BEVEL GEAR RS. 2680 0/- TOTAL RS. 3,52,762/- AFTER VERIFYING THE PHOTO-COPIES OF THE BILLS FOR T HE ABOVE PURCHASES IN RESPECT OF THE ABOVE ITEMS, THE A.O WAS OF THE VIEW THAT A LL THE ITEMS WERE A NEW ASSET BROUGHT BY THE ASSESSEE AND THE SAID EXPEND ITURE SHOULD HAVE BEEN CAPITALIZED BY MAKING THE ADDITION TO THE PLANT AN D MACHINERY. THE A.O, THEREFORE, HELD THAT THE EXPENDITURE OF THE ABOVE I TEM WAS CAPITAL IN NATURE WHICH WAS HAVING THE ENDURING BENEFIT. HE, THEREFO RE, TREATED THE SAME AS A CAPITAL EXPENDITURE BUT ALLOWED THE DEPRECIATION AT THE RATE OF 25%. THE ASSESSEE CARRIED THE ISSUE BEFORE THE LD CIT(A), WH O PUT HIS STAMP OF APPROVAL ON THE VIEW TAKEN BY THE A.O AND CONFIRMED THE ADDI TION. NOW THE ASSESSEE IS IN APPEAL BEFORE US. 8. WE HAVE HEARD THE PARTIES. THE LD COUNSEL FOR T HE ASSESSEE SUBMITTED THAT THE EXPENDITURE OF RS. 3,52,762/- WHICH IS TRE ATED AS A CAPITAL ITA NO. 4827 & 5054/MUM/2008 4 EXPENDITURE IS IN FACT, INCURRED FOR ROUTINE REPAI RS TO HATEBUR MACHINE. IT IS ARGUED THAT THE SAID MACHINE IS IMPORTED IN THE YEA R 95-96 AND THE SAME IS REQUIRED OVERHAULING/REGULAR MAINTENANCE BY REPLACI NG OF SPARES/TOOLING ETC., IT IS ARGUED THAT THE OBJECT OF EVERY REPAIR IS TO IMPROVE THE CONDITION OR THE EFFICIENCY WHICH HAVE BECOME LOST ON ACCOUNT OF THE USER AND ALSO THERE IS NECESSARILY BETTERMENT OF ITS PERFORMANCE. THE L D COUNSEL RELIED ON THE FOLLOWING PRECEDENT : CIT V/S. CHOWGULE & CO. PVT. LTD., 214 ITR 523 (BO M) 9. PER CONTRA, THE LD D.R. SUPPORTED THE ORDER OF T HE AUTHORITIES BELOW. IT APPEARS THAT THE ASSESSEE CLAIMED THE EXPENDITURE U /S. 31 OF THE ACT TREATING IT AS REPAIRS TO THE HATEBUR MACHINES. ON THE PERU SAL OF THE ITEMS MENTIONED HERE-IN-ABOVE, WE FIND THAT TWO ITEMS ARE CAPACITOR S WHICH, IN OUR OPINION, REQUIRES IN ORDER TO REGULATING THE CURRENT/POWER S UPPLY. MOREOVER, ONE ITEM IS HEATER COIL/THE BEARING PIN. IN OUR OPINION, TH E SAME ARE ALSO COVERED UNDER THE CURRENT REPAIRS AS THE SAME ARE REQUIRED AS CON SUMABLES. WE AGREE WITH THE LD COUNSEL THAT THE EXPENDITURE MENTIONED ABOVE WILL BE COVERED UNDER THE CURRENT REPAIRS NECESSITATED BY WEAR AND TEAR F OR THE USE OF THE SAID MACHINERY. THE CURRENT REPAIRS MUST BE UNDERSTOOD I N CONTRADICTION TO PAYMENTS FOR ADDITION OR IMPROVEMENT AS HELD BY THE IR LORDSHIPS IN THE CASE OF CHOWGULE & CO. PVT. LTD. (SUPRA). THE SINGLE TEST THAT MIGHT BE CONSTANTLY BORN IN MIND IS THAT AS A RESULT OF THE EXPENDITURE WHICH IS CLAIMED AS AN EXPENDITURE FOR REPAIRS, WHAT IS REALLY DONE TO PRE SERVE AND MAINTAIN AN ALREADY EXISTING ASSET AS HELD BY THE HONBLE HIGH COURT OF BOMBAY IN NEW SHOWRROCK SPG. AND MFG. CO. PVT. LTD., V/S. CIT , 30 ITR 338 (BOM.). WE ARE, THEREFORE, OF THE OPINION THAT THE EXPENDITURE INCURRED ABOVE IS ALLOWABLE DEDUCTION UNDER THE CURRENT REPAIRS WHICH IS INCURR ED WITH THE OBJECT TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET. W E, ACCORDINGLY, ALLOW THE EXPENDITURE INCURRED BY THE ASSESSEE AND DELETE THE ADDITION. AT THE SAME TIME, THE DEPRECIATION GRANTED BY THE A.O IS ALSO W ITHDRAWN AS THE ENTIRE EXPENDITURE IS ALLOWED. ACCORDINGLY, THE RESPECTIV E GROUNDS ARE ALLOWED. 10. NOW WE TAKE THE REVENUES APPEAL NO. 5054/MUM/2 008. ITA NO. 4827 & 5054/MUM/2008 5 11. THE REVENUE HAS TAKEN THE FOLLOWING TWO EFFECTI VE GROUNDS : 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.38,43,453 /- REPRESENTING PAYMENT OF VOLUNTARY RETIREMENT BENEFITS TO THE MEM BERS OF THE STAFF AND WORKERS. 2. WITHOUT PREJUDICE TO GROUND NO.(1), THE LD. CIT( A) ERRED IN ALLOWING ENTIRE EXPENDITURE OF RS. 38,43,453/- REPR ESENTING PAYMENT OF VOLUNTARY RETIREMENT TO STAFF AND WORKERS IGNORING THE PROVISIONS U/S. 35DDA OF THE ACT WHICH STIPULATES DEDUCTION OF ONL Y 1/5 TH OF EXPENDITURE IN ONE ASSESSMENT YEAR. 12. THE ASSESSEE HAD CLAIMED THE EXPENDITURE OF RS. 38,43,453/- AS UNDER : I) COMPENSATION TO STAFF RS.294718/- II) COMPENSATION TO WORKERS RS.3548735/- 13. THE A.O SOUGHT THE EXPLANATION OF THE ASSESSEE WHY SAID EXPENDITURE SHOULD NOT BE DISALLOWED? THE ASSESSEE VIDE HIS LE TTER DT. 7.12.2006 SUBMITTED THAT THE ABOVE REFERRED COMPENSATION TO T HE STAFF AND WORKERS WERE MADE ON VOLUNTARY RETIREMENT AS PER THE AGREEMENT A RRIVED AT BETWEEN THE ASSESSEE MANAGEMENT AND WORKERS, BUT THE SAME WAS N OT FOR A CLOSURE OF THE BUSINESS. THE A.O WAS OF THE VIEW THAT THE COMPEN SATION WAS PAID FOR THE CLOSURE OF THE BUSINESS AND THE SAME IS NOT THE REV ENUE EXPENDITURE. HE, THEREFORE, MADE THE ENTIRE DISALLOWANCE AND MADE T HE ADDITION OF RS.38,43,453/-. THE ASSESSEE CHALLENGED THE ADDI TION BEFORE THE LD CIT(A) AND THE LD CIT(A) ACCEPTED THE PLEA OF THE ASSESSEE THAT THERE WAS NO CLOSURE OF THE BUSINESS AS THE ASSESSEE HAS SHOWN THE GROSS SALES OF RS.30.20 LAKHS AND INCOME FROM LABOUR JOB WAS DECLARED AT RS.12312 .68 LAKHS FOR THE YEAR ENDING 31/3/2004. THE LD CIT(A) DELETED THE ADDIT ION. 14. WE HAVE HEARD THE PARTIES. AS PER THE FACTS ON RECORD, THE ASSESSEE COMPANY ENTERED INTO THE AGREEMENT/M.O.U. WITH THE STAFF/WORKERS IN TERMS OF SECTION 2(P) OF THE INDUSTRIAL DISPUTE ACT 1947. AS PER THE TERMS OF THE SETTLEMENT BETWEEN THE ASSESSEES MANAGEMENT AND STAFF/WORKERS, IT WAS AGREED THAT THE WORKERS WOULD VOLUNTARILY RESIGN BY ACCEPTING THE ITA NO. 4827 & 5054/MUM/2008 6 COMPENSATION OFFERED BY THE ASSESSEE COMPANY. AS PE R THE PLEA OF THE ASSESSEE, IT CANNOT BE SAID THAT IT IS THE CASE OF THE CLOSURE OR EVEN THE RETRENCHMENT BUT IT IS THE CASE OF THE VRS. NOTHI NG IS BEFORE US TO COME TO FINAL CONCLUSION AS TO WHAT WERE THE TERMS OF THE A GREEMENT BETWEEN THE WORKERS AND THE ASSESSEE MANAGEMENT. MOREOVER, IT IS SEEN THAT IN RESPECT OF EXPENDITURE INCURRED UNDER THE VOLUNTARY RETIREMENT SCHEME DECLARED BY THE EMPLOYER, THE LEGISLATURE HAS INTRODUCED SPECIFIC PROVISIONS FOR GIVING THE TREATMENT OF SAID EXPENDITURE BY WAY OF SECTION 35D DA(1) WHICH READS AS UNDER : 35DDA. (1) WHERE AN ASSESSEE INCURS ANY EXPENDITURE IN AN Y PREVIOUS YEAR BY WAY OF PAYMENT OF ANY SUM TO AN EMPLOYEE AT THE TIME OF HI S VOLUNTARY RETIREMENT, IN ACCORDANCE WITH ANY SCHEME OR SCHEMES OF VOLUNTARY RETIREMENT, ONE-FIFTH OF THE AMOUNT SO PAID SHALL BE DEDUCTED IN COMPUTING THE PROFITS AND GAINS OF T HE BUSINESS FOR THAT PREVIOUS YEAR, AND THE BALANCE SHALL BE DEDUCTED IN EQUAL INSTALMENTS FOR EACH OF THE FOUR IMMEDIATELY SUCCEEDING PREVIOUS YEARS.. 15 AS THE RELEVANT SETTLEMENT/AGREEMENT ENTERED INT O BY THE ASSESSEE COMPANY IN RESPECT OF THE VRS IS NOT PLACED BEFORE US, WE CONSIDER IT FIT TO RESTORE THIS ISSUE TO THE FILE OF THE LD CIT(A) FOR FRESH CONSIDERATION TO DECIDE THE SAME AFTER CONSIDERING THE TERMS OF SETTLEMENT BETWEEN THE ASSESSEE MANAGEMENT AND WORKER STAFF AND ALSO SECTION 35DDA( 1). IF THE COMPENSATION IS PAID UNDER THE VRS SCHEME, THEN THE SAME SHOULD BE TREATED AS PER PROVISION OF SEC. 35DDA(1). IF IT IS A MERE RETRENCHMENT COMPENSATION, THEN THE SAME IS TO BE FULLY ALLOWED. THE CIT(A) IS DIRECTED TO GIVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE A SSESSEE. ACCORDINGLY, THE GROUND TAKEN BY THE REVENUE IS ALLOWED FOR THE STAT ISTICAL PURPOSE. 16. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED AND REVENUES APPEAL IS PARTLY ALLOWED FOR THE STATISTICAL PURPOSE. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON TH DAY OF FEBRUARY,2010. SD/- SD/- (R.S. SYAL) (R.S. PADVEKA R) ACCOUNTANT MEMBER JUDICIA L MEMBER MUMBAI, ON THIS 17TH DAY OF FEBRUARY, 2010. ITA NO. 4827 & 5054/MUM/2008 7 :US COPY TO: 1. APPELLANT 2. RESPONDENT , 3.THE CIT(A)- XXVI, MUMBAI 4.THE CIT -6, MUMBAI 5.THE DR, B BENCH, MUMBAI 6.GUARD FILE BY ORDER TRUE COPY ASSTT..REGISTRAR, ITAT, MUMBAI. ITA NO. 4827 & 5054/MUM/2008 8 US DATE INITIALS 1. DRAFT DICTATED ON 8/2/10 --------------- SR.P.S. 2. DRAFT PLACED BEFORE AUTHORITY 9/2/10 --------- ----- SR.P.S. 3. DRAFT PROPOSED & PLACED ----------- ---------- --- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED ----------- ----------- -- JM/AM BY SECOND MEMBER 5. APPROVED DRAFT COMES TO ----------- ------------ - SR.P.S. THE SR. P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON --------- ----------- -- SR.P.S. 7. FILE SENT TO THE BENCH CLERK --------- --------- ---- SR.P.S. 8. DATE ON WHICH FILE GOES TO THE ------- --------- ---- 9. DATE OF DISPATCH OF ORDER --------- --------- ----