ACIT CEN CIR 41, MUMBAI V. KORES (INDIA) LTD, MUMBAI

ITA 5074/MUM/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 4716 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2001-2002
• Appeal Filed On: 04-09-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K PAHUWA
• Assessee Lawyers: A K GHOSH
• Keywords: Capital asset; Search and seizure; Revenue expenditure; Capital expenditure; Set aside
• Section: 143(3); 153A; 37; 132

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES, A, MUMBAI BEFORE SHRI S V MEHROTRA, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL MEMBER ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) ACIT CEN CIR 41 R NO.653,6 TH FL, AAYAKAR BHAVAN, M K ROAD, CHURCHGATE, MUMBAI-400002 APPELLANT VS KORES (INDIA) LTD KORES HOUSE, PLOT NO.10, DR E MOSES ROAD WORLI MUMBAI-400018 PAN: AAACK5069Q RESPONDENT APPELLANT BY : SHRI S K PAHUWA RESPONDENT BY : SHRI A K GHOSH O R D E R PER VIJAY PAL RAO,JM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 22.6.2009 OF CIT(A)-CENTRAL-III ARISING FROM ASSESSMENT UNDER SECTION 143(3) READ WITH SECTION 153A OF THE ACT FOR THE ASSESSMENT YEAR 2001-02. 2. THE REVENUE HAS RAISED VARIOUS GROUNDS IN THIS A PPEAL, HOWEVER, THE ONLY ISSUE ARISES FOR OUR CONSIDERATIO N AND ADJUDICATION IS WHETHER IN THE FACTS AND CIRCUMSTA NCES OF THE CASE THE LEARNED CIT (A) IS JUSTIFIED IN HOLDING T HAT PAYMENT OF ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) 2 COMPENSATION TO THE CANTEEN CONTRACTOR ON TERMINATI ON OF THE CONTRACT WAS AKIN TO THAT UNDER VOLUNTARY RETIREMEN T SCHEME TO THE EMPLOYEES, HENCE ALLOWABLE DEDUCTION AS BUSINES S EXPENDITURE. 3. WE HAVE HEARD THE LEARNED DR AS WELL AS THE LE ARNED AR AND CONSIDERED THE RELEVANT RECORD. THIS IS A C ASE REGARDING THE DISALLOWANCE OF COMPENSATION PAID TO THE CONTRACTOR. THE SEARCH AND SEIZURE ACTION U/S 132 OF THE ACT WAS CARRIED OUT AT THE BUSINESS PREMISES OF THE AS SESSEE. THE AO NOTICED THAT THE ASSESSEE HAD MADE CLAIM OF COMPENSATION OF ` .29,80,000/-. WHILE FINALIZING THE ORIGINAL ASSESSMENT UNDER SECTION 143(3) ON 16.2.2004, THE AO DISALLOWED THE ABOVE SAID CLAIM OF ` .29,80,000/-. HOWEVER, THE CIT(A) DELETED THE SAID ADDITION AND ALLOWED TH E APPEAL. 4. WHILE MAKING THE ORDER UNDER SECTION 153A R.W.S. 143(3) OF THE ACT, THE AO AGAIN REPEATED THE SAME ADDITIO N OF ` .29,80,000/- ON THE GROUND THAT THE ORDER OF THE C IT(A) ON THE POINT HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND THE SECOND APPEAL STOOD FILED BEFORE THIS TRIBUNAL. THE ASSESSEE CHALLENGED THE ADDITION MADE BY THE AO IN THE ASSE SSMENT FRAMED UNDER SECTION 143(3) R.W. SECTION 153A. ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) 3 5. ON APPEAL, THE CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER : 3.3 I HAVE CAREFULLY CONSIDERED THE FACTS AND SUBMISSIONS AND FIND MERIT IN THE ARS ARGUMENTS. SINCE THE ADDITION STOOD DELETED BY THE CIT(A) ON THE BASIS OF THE REAL ESTATE DIVISION AND EXPLANAT ION RELATING TO SEIZED AND IMPOUNDED MATERIALS ETC WERE CALLED FOR AND KEPT ON RECORD. 5. IN THE CASE OF THE COMPANY AN ORDER UNDER SECTION 143(3) OF THE IT ACT WAS PASSED ON 16.02.2004 DETERMINING TOTAL INCOME OF ` .1,17,50,168/- WHILE FINALIZING THE ASSESSMENT AN ADDITION OF ` .29,80,000/- WAS MADE TO THE TOTAL INCOME OF THE COMPANY ON AMOUNT OF CLAIM OF COMPENSATION PAID TO CANTEEN CONTRACTOR WHICH WAS DELETED BY THE CIT(A), ON APPEAL FILED BY THE ASSESSEE. HOWEVER, A SECOND APPEAL HAS BEEN PREFERRED BY THE DEPARTMENT BEFORE THE ITAT AGAINST THE ORDER OF THE CIT(A). 6. THE ASSESSEE WAS REQUESTED TO SHOW CAUSE AS TO WHY THE SAID AMOUNT OF COMPENSATION PAID TO CONTRACTOR SHOULD NOT BE ADDED TO THE TOTAL INCOME OF THE COMPANY. THE ASSESSEE VIDE ITS LETTER DATED 12.12.2008 HAS SUBMITTED AS UNDER : COMPENSATION PAID TO CONTRACTOR AMOUNTING TO ` `` ` .29,80,000/- THE SAID AMOUNT WAS ALREADY DISALLOWED WHILE PASSING THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE IT ACT, 1961 FOR THE AY 2001-02 BY THE THEN ASSESSING OFFICER. AGAINST THIS ADDITION MADE THE ASSESSEE COMPANY HAD FILED AN APPEAL BEFORE THE LD. CIT(A) AND THE SAME WAS A DECIDED IN THE FAVOUR OF THE ASSESSEE. YOUR HONOUR HAS THEN FILED AN APPEAL BEFORE ITAT AGAINST THE ORDER OF THE LD. CIT(A). HOWEVER, THE ASSESSEE COMPANY CONTENDED THAT THE COMPANY HAD A FACTORY AT THANE WHERE THEY WERE MANUFACTURING CARBON PAPERS AND SOME OTHER ALLIED PRODUCTS. DURING THE FY 2000-01, CANTEEN CONTRACTOR NAMELY MR.S D SHETTY WAS PAID AN AMOUNT OF `.29,80,000/- AS COMPENSATION FOR TERMINATION OF THE CONTRACT. IN THE BOOKS OF ACCOUNT, 20% OF COMPENSATION WAS CHARGED TO PROFIT AND LOSS ACCOUNT AND THE ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) 4 BALANCE AMOUNT WAS DEFERRED IN ITS BOOKS OF ACCOUNT. IN THE COMPUTATION OF INCOME, AN AMOUNT OF `.5,96,000/- WAS ADDED AND THE FULL CLAIM IN RESPECT OF TOTAL AMOUNT PAID WAS MADE. IT IS CONTENDED THAT THIS EXPENDITURE IS NOT A CAPITAL EXPENDITURE AS A CONTRACT EXISTED BETWEEN THE CANTEEN CONTRACTOR AND THE COMPANY FOR OPERATING CANTEEN FOR THE BENEFIT AND WELFARE OF ITS EMPLOYEES IN THE THANE FACTORY. THE ABOVE CONTRACT WAS ENTERED IN THE COURSE OF BUSINESS IN ACCORDANCE WITH THE RULES TO PROVE SUBSIDIZED AND HYGIENIC FOOD TO ITS LABOUR WORK FORCE AND IN VIEW OF CHARGED CIRCUMSTANCES, THE ABOVE CONTRACT WAS CANCELLED AND IN ACCORDANCE WITH THE SAME, THE AMOUNT OF `.29,80,000/- WAS PAID. THE ABOVE EXPENDITURE CANNOT BE CONSIDERED AS A CAPITAL EXPENDITURE AS THE COMPANY HAS OBTAINED NO ENDURING BENEFIT NOR DID ANY NEW FIXED ASSETS CAME INTO EXISTENCE BY THE PAYMENT OF COMPENSATION TO THE CANTEEN CONTRACTOR. THE ASSESSEE COMPANY ALSO RELIED ON 156 ITR 647 (CAL) AND 60 ITR 277 (SC) FOR THE PREPOSITION THAT THE COMPENSATION PAID FOR THE TERMINATION OF A CONTRACTUAL OBLIGATION IS ALLOWABLE AS REVENUE EXPENDITURE AS IT AL U/S 37 DETAILED DISCUSSION MADE IN THE APPELLATE ORDER DATED 19.1.2005 AND NO NEW FACTS OR MATERIAL HAS BEEN BROUGHT ON RECORD, THE AO WAS NOT JUSTIFIED TO MAKE THE ADDITION. THEREFORE, IN VIEW OF THE DETAI LED REASONS IN APPELLATE ORDER DATED 19.1.2005 PASSED BY MY PREDECESSOR THE ADDITION MADE AT ` .29,80,000 IS HEREBY DELETED 6. IT IS TO BE NOTED THAT THE SEARCH WAS CARRIED O N 19.9.2006 WHEREAS THE ORIGINAL ASSESSMENT UNDER SEC TION 143(3) WAS PASSED ON 16.2.2004. THUS, IT IS CLEAR THAT AT THE TIME OF SEARCH ON 19.9.2006, THE ASSESSMENT UNDER SECTION 143(3) WAS ALREADY COMPLETED IN WHICH THE AO MADE THE SAME DISALLOWANCE REGARDING THE SAID COMPEN SATION ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) 5 AMOUNT WHICH WAS DELETED BY THE CIT(A) VIDE ORDER DATED 19.1.2005 IN PARAGRAPH 3.2 AS UNDER : 3.2 I HAVE CONSIDERED THE SUBMISSION OF THE APPELLANT AND IN MY OPINION, THE ABOVE EXPENDITURE WHICH HAS BEEN PAID AT THE TIME OF CANCELLATION OF CONTRACT WITH THE CANTEEN CONTRACTOR IS REQUIRED TO BE ALLOWED U/S 37 OF THE IT ACT AS THE SAME HAS BEEN DONE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. THE AOS RELIANCE ON 63 ITR 65 (SC) FOR HOLDING THAT THE COMPENSATION PAYABLE FOR TERMINATI ON OF CONTRACT IS CAPITAL NATURE IS MISCONCEIVED AS IN THAT CASE, THE COMPANY ENTERED INTO TWO CONTRACTS FOR TH E PURCHASES OF TEXTILE MACHINERY IN ORDER TO EXPAND I TS FACTORY. HAVING REGARD TO THE ALTERED CIRCUMSTANCE S, THE COMPANY CANCELLED THE CONTRACTS AND PAID TO THE OTHER CONTRACTING PARTIES AS COMPENSATION. IN THE ABOVE CIRCUMSTANCES, IT WAS HELD BY THE SUPREME COURT THAT THE PAYMENT WAS MADE NEITHER FOR THE PURPOSES OF EARNING PROFITS NOR FOR THE PURPOSE OF FURTHERING, PROTECTING OR CONTINUING ITS BUSINESS W HICH WAS TO BE CARRIED ON FROM DAY TO DAY. THE PAYMENT WAS MADE WITH THE OBJECT OF AVOIDING AN UNNECESSARY INVESTMENT IN CAPITAL ASSETS AND WAS IN THE NATURE OF A CAPITAL EXPENDITURE. THE ABOVE FACTS ARE NOT THER E IN THE PRESENT CASE, AS THE CONTRACT HAS NOT BEEN ENTERED FOR THE PURPOSES OF ACQUISITION OF THE CA PITAL ASSET, BUT THE CONTRACT WAS WITH THE CANTEEN CONTRACTOR FOR SUPPLYING THE CANTEEN FACILITIES TO ITS WORKERS. THE AO HAS NOT GIVEN ANY OBJECTION APART FROM RELYING ON THE ABOVE CASE IN DISALLOWING THE CLAIM OF THE APPELLANT AND I HAVE POINTED OUT THAT THE ABOVE IS NOT APPLICABLE TO THE FACTS OF THE CASE. THE COMPENSATION PAID FOR TERMINATION OF CONTRACT WITH THE CANTEEN CONTRACTOR IS REQUIRED TO BE CONSIDERED AS WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS . IT MAY BE MENTIONED THAT THE ABOVE EXPENDITURE IS MORE AKIN TO THE VOLUNTARY RETIREMENT SCHEME (VRS SCHEME) TO ITS RETIRING EMPLOYEE WHICH IS DEFINITEL Y REQUIRED TO BE CONSIDERED AS REVENUE EXPENDITURE IN VIEW OF SUPREME COURT DECISION OF INDIAN CABLE COMPANY V/S WORKMAN 1972 (059) AIR (SC) 2195. ACCORDINGLY, I AM OF THE VIEW THAT THE ASSESSEE IS ENTITLED TO GET DEDUCTION OF ` .29,80,000/-. THE AO IS DIRECTED TO ALLOW THE ABOVE CLAIM OF EXPENDITURE IN RESPECT OF COMPENSATION PAID TO CANTEEN CONTRACTOR ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) 6 7. NOTHING HAS BEEN BROUGHT ON RECORD BY THE REVEN UE TO SHOW THAT THE SAID ORDER OF CIT(A) DATED 19.1.2005 WAS EITHER STAYED OR SET ASIDE OR REVERSED. EVEN OTHERWISE W HEN THE ASSESSMENT WAS COMPLETED PRIOR TO THE SEARCH TOOK P LACE THEN THE ADDITION MADE IN THE ORIGINAL ASSESSMENT CANNOT BE REPEATED IN THE ASSESSMENT U/S 153A(1). AS PER SE COND PROVISO TO SECTION 153A(1), THE ASSESSMENT OR REASS ESSMENT RELATING TO ANY ASSESSMENT FALLING WITHIN THE SIX A SSESSMENT PENDING ON THE DATE OF INITIATION OF SEARCH OR MAKI NG OF REQUISITION U/S 132A AS THE CASE MAY BE SHALL ABAT E . THEREFORE, THE ASSESSMENT COMPLETED BEFORE THE DATE OF SEARCH IN WHICH ANY ADDITION IS MADE THE SAME CANNO T BE REPEATED WHILE MAKING THE ASSESSMENT UNDER SECTION 153A. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY ER ROR OR ILLEGALITY IN THE ORDER OF THE CIT(A), THE SAME IS TO BE UPHELD. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. PRONOUNCED IN THE OPEN COURT ON 9.9.2010 SD SD (S V MEHROTRA ) (VIJAY PAL RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 9 TH SEPT 2010 SRL:7910 ITA NO. 5074/MUM/2009 (ASSESSMENT YEAR 2001-02) 7 COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT CONCERNED 4. CIT(A) CONCERNED 5. DR CONCERNED BENCH BY ORDER TRUE COPY ASSTT. REGISTRAR, ITAT, MUMBAI