ACIT 9(3), MUMBAI V. REGALIA APPARELS P LTD, MUMBAI

ITA 6144/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8885 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 09-08-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 10-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N K MEHTA
• Assessee Lawyers: MUKESH B ADVANI
• Keywords: Revenue expenditure
• Section: 143(3); 37(1); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH: MUMBAI BEFORE SHRI G.E. VEERABHADRAPPA, PRESIDENT AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6144/MUM/2010 (ASSESSMENT YEAR: 2004-05) ASST. COMMISSIONER OF INCOME-TAX, CIRCLE -9(3), 2ND FLOOR, ROOM NO.229, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI -400 020 ...... APPELLANT VS M/S. REGALIA APPARELS PVT. LTD., JUHU ROAD, SANTACRUZ (W), MUMBAI -400 054 PAN: AABCR 0404 P ..... RESPONDENT APPELLANT BY: SHRI N.K. MEHTA RESPONDENT BY: SHRI MUKESH B. ADVANI DATE OF HEARING: 09.08.2012 DATE OF PRONOUNCEMENT: 05.09.2012 O R D E R PER VIVEK VARMA , JM: THE INSTANT APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF CIT (A)- 20, MUMBAI DATED 2004-05, WHEREIN THE FOLLOWING GRO UND OF APPEAL ARE RAISED: ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) ERRED IN DELETING THE ADDITION OF RS. 40,10,437/- W HICH REPRESENTS PENALTY PAID BY THE ASSESSEE TO THE APPAREL EXPORT PROMOTIO N COUNCIL AND IS CONSEQUENTLY INADMISSIBLE DEDUCTION U/S 37(1) OF TH E I.T. ACT, 1961. 2. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED . 2. THE SOLITARY GROUND IS AGAINST THE DELETION OF A DDITION OF RS. 40,10,437/- PAID BY THE ASSESSEE TO AEPC, WHICH ACC ORDING TO THE AO REPRESENTED PENALTY AND FELL WITHIN THE PARAMETERS OF EXPLANATION TO SECTION 37(1) AND HENCE INADMISSIBLE. M/S. REGALIA APPARELS PVT. LTD. ITA NO.6144/MUM/2010 2 2 3. THE FACTS, AS DISCUSSED BY THE CIT (A) IN HIS OR DER ARE, THAT THE ASSESSEE IS A MANUFACTURER OF GARMENTS AND KNIT WAR ES. IT FILED RETURN OF INCOME DECLARING LOSS OF RS. 2,14,51,520. THE ASSES SMENT WAS COMPLETED U/S 143(3) ON 30-11-2006 ACCEPTING THE LOSS RETURNE D. LATER THE AO REOPENED THE ASSESSMENT U/S 147 BY ISSUING NOTICE O N 23-03-2009. THE REASSESSMENT WAS COMPLETED DETERMINING THE LOSS AT RS. 1,74,41,080 AFTER DISALLOWING DEDUCTION CLAIMED OF RS. 40,10,437 PAID TO THE APPAREL EXPORT PROMOTION COUNCIL (AEPC), NEW DELHI UNDER THE MINIS TRY OF TEXTILES, GOVERNMENT OF INDIA. AS OBSERVED IN THE ORDERS OF T HE REVENUE AUTHORITIES, ... IN TERMS OF NOTIFICATION NO. 1/128/99 EXPORT-I , DATED 12-11-1999 OF THE MINISTRY OF TEXTILES, GOVERNMENT OF INDIA AND CIRCU LAR NO 99/20 DT.16-11- 1999 ISSUED BY THE APEC THE APPELLANT RECEIVED EXPO RT ENTITLEMENTS FOR EXPORT OF GARMENTS AND KNIT WARES. THE APPELLANT WAS REQUI RED TO DEPOSIT EARNEST MONEY OR FURNISH BANK GUARANTEE THAT IT SHALL ABIDE BY THE TERM AND CONDITIONS IN RESPECT OF THE EXPORT ENTITLEMENTS AN D PRODUCE THE PROOF OF SHIPMENT OF THE GOODS EXPORTED. IT WAS STIPULATED I N THE SAID NOTIFICATION THAT IN CASE THE APPELLANT FAILED TO UTILIZE THE ENTITLE MENTS OR IN THE EVENT IT FAILED TO SUBMIT PROOF OF SHIPMENT IT WILL FORFEIT THE EARNES T MONEY OR THE BANK GUARANTEE SHALL BE INVOKED. THE APPELLANT INCURRED LOSS IN THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. IT WAS INCURRING LOSS IN THE CURRENT YEAR AS WELL. IT APPREHENDED THAT IF IT DID NOT REALIZE THE EXPOR T VALUE AT THE COMMITTED PRICE IT WOULD INCUR FURTHER LOSS. IT, THEREFORE, DECIDED NOT TO UTILIZE THE EXPORT ENTITLEMENTS ALLOCATED BY THE APEC. AS A RESULT, TH E APEC INVOKED THE BANK GUARANTEE AND REALIZED THE IMPUGNED SUM FROM THE AP PELLANT. THE APPELLANT RECORDED THE SAID PAYMENT AS PENALTY IN THE BOOKS O F ACCOUNT AND CLAIMED DEDUCTION U/S 37(1). RELYING ON THE DECISION OF BOM BAY HIGH COURT IN RAJARAM BANDEKAR, 208 ITR 503 IT CONTENDED THAT EXP ENSES WHICH WERE INCURRED TO GET RID OF CONTRACTUAL OBLIGATIONS DIRE CTLY AFFECTING ITS BUSINESS WAS AN ADMISSIBLE REVENUE EXPENDITURE. IT ALSO RELIED O N THE CASE OF MIHIR TEXTILES LTD, 206 ITR 112 (GUJ) WHEREIN IT WAS HELD THAT PAY MENTS MADE TO THE TEXTILES COMMISSIONER ON ACCOUNT OF FAILURE TO MEET EXPORT OBLIGATION WAS NOT PENALTY AND DEDUCTIBLE EXPENDITURE. THE APPELLANT, THEREFORE, CONTENDED THAT THE NOMENCLATURE OF PENALTY WAS ERRONEOUS AS THE PA YMENT MADE TO AEPC M/S. REGALIA APPARELS PVT. LTD. ITA NO.6144/MUM/2010 3 3 WAS REPARATORY OR COMPENSATORY IN NATURE AND ALLOWA BLE AS DEDUCTION U/S 37(1) OF THE ACT. 4. ON GETTING THE EXPLANATION FROM THE ASSESSEE, AN D CONSIDERING THE CIRCUMSTANCES UNDER WHICH THE IMPUGNED AMOUNT WAS F ORFEITED BY AEPC, THE AO CAME TO THE CONCLUSION THAT THE FORFEITURE W AS IN THE NATURE OF PENALTY, WHICH FELL WITHIN THE PARAMETERS OF EXPLAN ATION TO SECTION 37(1), DISALLOWED THE EXPENSE. 5. AGGRIEVED, THE ASSESSEE APPROACHED THE CIT(A), W HO, AFTER CONSIDERING THE CIRCUMSTANCES, OBSERVED AS UNDER: 4. I HAVE CONSIDERED THE DISPUTE. IT IS SETTLED LA W THAT ANY EXPENDITURE INCURRED FOR EVADING THE PROVISIONS OF THE ACT AND ALSO THE PENALTY LEVIED FOR SUCH EVASION CANNOT BE ALLOWED AS DEDUCTION AS EVAS ION OF LAW CANNOT BE A TRADE PURSUIT. THE EXPENDITURE IN SUCH CASE CANNOT BE ALLOWED AS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE ASSESSE ES BUSINESS [SEE MADDI VENKATARAMAN & CO (P) LIMITED V CIT 229 ITR 534 (SC) AND MALWA VANASPATI AND CHEMICAL COMPANY V CIT 225 ITR 383 (SC)]. EXPLA NATION TO SECTION 37(1) SANCTIFIES THIS WHEN IT CLARIFIES THAT ANY EXPENDIT URE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PRO HIBITED BY LAW SHALL NOT BE DEEMED TO HAVE BEEN INCURRED FOR THE PURPOSE OF BUS INESS AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDIT URE. 4.2 IN THE INSTANT CASE THE APPELLANT WAS ENGAGED I N GARMENT BUSINESS AND DOING EXPORTS. IT RECEIVED QUOTA FOR EXPORT FROM AP EC WITH THE CONDITION THAT IF WAS NOT ABLE TO UTILIZE IT OR FULFIL THE EXPORT COM MITMENT IT WILL HAVE TO PAY PENALTY. THE APPELLANT TOOK BUSINESS DECISION NOT T O HONOUR THIS COMMITMENT IN VIEW OF IMPENDING HEAVY LOSS IN THE TRADE. THE AO D OES NOT DISPUTE THIS NOR DOES HE DOUBT THE GENUINENESS OF THE CLAIM OF BUSIN ESS PURPOSE. THE APPELLANT HAS NOT INDULGED IN TRANSACTIONS IN VIOLATION OF TH E PROVISIONS OF ANY STATUTE. THE APPELLANT HAS NOT INDULGED IN TRANSACTIONS IN V IOLATION OF THE PROVISIONS OF ANY STATUTE. THE APPELLANT HAS NOT CONTRAVENED ANY PROVISION OF LAW NOR HAS ANY VIOLATION BEEN POINTED OUT BY THE AO. IN THESE CIRCUMSTANCES THE NATURE OF PAYMENT TO APEC IN VIOLATION OF THE CONTRACTUAL OBL IGATION IS ONLY COMPENSATORY AND ALLOWABLE AS BUSINESS DEDUCTION U/ S.37(1) OF THE ACT. THE AO HAS ERRED IN INVOKING THE EXPLANATION TO THE SAI D SECTION IN DENYING THE DEDUCTION. I, THEREFORE, DELETE THE ADDITION MADE O N THAT SCORE OF RS. 40,10,437/-. 6. AGAINST THESE OBSERVATIONS, THE REVENUE IS IN AP PEAL BEFORE THE ITAT. 7. BEFORE US, THE DR RELIED ON THE ORDER OF THE AO, AND THE AR PLEADED THAT THE OBSERVATION OF THE CIT(A) SHOULD NOT BE DI STURBED AND THE APPEAL FILED BY THE REVENUE BE REJECTED. M/S. REGALIA APPARELS PVT. LTD. ITA NO.6144/MUM/2010 4 4 8. WE HAVE HEARD THE ARGUMENTS AND ALSO GONE THROUG H THE ORDER OF BOTH THE REVENUE AUTHORITIES AND WE FIND THAT THE AO HAD INVOKED EXPLANATION TO SECTION 37(1) TO JUSTIFY THE DISALLOWANCE. WHEN WE READ THE LANGUAGE OF EXPLANATION WE FIND THAT THE WORDING OF THE EXPLANA TION IS CLEAR WHEN IT USES THE WORDS, ..FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH I S PROHIBITED BY LAW.., WHICH CLEARLY MEANS THAT WHERE THE ASSESSEE INCURS AN EXPENDITURE WHICH IS NOT LEGAL IN THE EYES OF LA W OR FOR THE PURPOSE OF REMOVAL OF AN ILLEGALITY, I.E. A PAYMENT IN THE FOR M OF PENALTY OR A PAYMENT WHICH IS OTHERWISE PROHIBITED, I.E. IT MAY BE IN TH E NATURE OF A BRIBE OR TO BUY AND FAVOUR. BUT IN THE PRESENT SET OF CIRCUMSTA NCES, THE PAYMENT MADE BY THE ASSESSEE OR A SAY THAT THE ASSESSEE ALLOWED ITS BANK GUARANTEE TO GET FORFEITED, DID NOT FALL IN ANY THESE CATEGORIES OR TYPES OF PAYMENTS, WHICH TAKES IT OUT OF THE AMBIT OF THE EXPLANATION, I.E. FALLS IN THE PRECINCT OF SECTION 37(1), WHICH ALLOW THE EXPENDITURE OF THE A SSESSEE. WE ARE IN TOTAL AGREEMENT OF THE CIT (A), WHEN HE DESERVE, AS A FAC T THAT, THE APPELLANT HAS NOT CONTRAVENED ANY PROVISIONS OF LAW OR HAS ANY SU CH VIOLATION BEEN POINTED OUT BY THE AO. IF THAT IS THE CASE, THEN CLEARLY, EXPLANATION CAN NOT BE INVOKED. 9. IN THESE CIRCUMSTANCES, WE DO NOT INTEND TO DIST URB THE FINDINGS AND DECISION OF THE CIT (A), WHICH WE SUSTAIN. 10. IN THE RESULT, WE REJECT THE GROUND OF APPEAL A ND CONSEQUENTLY DISMISS THE APPEAL FILED BY THE REVENUE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 05/09/2012. M/S. REGALIA APPARELS PVT. LTD. ITA NO.6144/MUM/2010 5 5 SD/- (G.E. VEERABHADRAPPA) PRESIDENT SD/- (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 05/09/2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)-20, MUMBAI. 4) THE CIT-9, MUMBAI. 5) THE D.R. D BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN