ACIT, CC-VI, KOLKATA, Kolkata V. M/s. J. K. Tyre & Industries Ltd., Kolkata

ITA 618/KOL/2014

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 9467 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-02-2017
• Appeal Filed By: Department
• Bench Allotted: C
• Assessment Year: 2006-2007
• Appeal Filed On: 07-04-2014
• Court: TRIBUNAL
• Department Lawyers: PINAKI MUKHERJEE
• Keywords: Revenue expenditure
• Section: 143(3); 154

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : KOLKATA [BEFORE HONBLE SRI N.V.VASUDEVAN, JM & DR.ARJUN LAL SAINI, AM] I.T.A NO. 618/KOL/201 4 ASSESSMENT YEAR : 2006-0 7 A.C.I.T., CENTRAL CIRCLE-VI, -VS.- M/S. J. K.TYRE & INDUSTRIES LTD. KOLKATA KOLKATA [PAN : AAACJ 6716 F] (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SHRI PINAKI MUKHER JEE, JCIT, SR.DR FOR THE RESPONDENT : SHRI AKKAL DUDHWEWALA, FCA DATE OF HEARING : 02.02.2017. DATE OF PRONOUNCEMENT : 08.02.2017. ORDER PER N.V.VASUDEVAN, JM THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 29.11.2013 OF CIT(A)- CENTRAL-I, KOLKATA RELATING TO AY 2008-09. 2. GROUNDS OF APPEAL RAISED BY THE REVENUE READ AS FOLLOWS :- 1.THAT THE LD. CIT(A) HAS ERRED IN ALLOWING AN AMO UNT OF RS.72,53,359/- PAID BY THE ASSESSEE AS UPFRONT PREMIUM ON ZERO COUPON NON-CONV ERTIBILITY DEBENTURE. 2. THAT THE LD. CIT(A) ERRED IN ALLOWING UPFRONT PR EMIUM PAID IN ADVANCE DESPITE THE FACT THAT ASSESSEE COMPANY WAS FOLLOWING ACCRUAL METHOD OF ACCOUNTING. 3. THAT THE DEPARTMENT CRAVES LEAVE TO ADD OR MODI FY THE GROUNDS OF APPEAL BEFORE THE HEARING OF THE CASE. 3. THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF TYRES. IT FILED RETURN OF INCOME FOR A.Y.20 06-07 ON 14.11.2006. ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT BY ORDER DATED 15.1 2.2008. THE ASSESSEE HAD CLAIMED AS DEDUCTION A SUM OF RS.72,53,359/-. THE SUM SO C LAIMED AS A DEDUCTION WAS ON 2 ITA NO.618/KOL/2014 M/S. J.K.TYRE & INDUSTRIES LTD. A.YR.2006-07 2 ACCOUNT OF UPFRONT PREMIUM PERTAINING TO THE PERIOD FROM APRIL, 2006 TO MARCH, 2011. THE NATURE OF THIS UPFRONT PREMIUM PAID WAS THE ASS ESSEE HAD BORROWED FROM VARIOUS FINANCIAL INSTITUTIONS ON ZERO COUPON NON-CONVERTIB LE DEBENTURES (ZCNCD) AT PREMIUM RATE OF INTEREST FROM 13.50 - 13.75%. IT B ARGAINED WITH THOSE FINANCIAL INSTITUTIONS FOR A DISCOUNTED RATE OF 9.00%. THE F INANCIAL INSTITUTIONS AGREED TO REDUCE THE PREMIUM RATE SUBJECT TO THE CONDITION THAT THE ASSESSEE WILL PAY UPFRONT PREMIUM OF 50% OF NET PRESENT VALUE (NPV) OF DIFFERENTIAL PREM IUM I.E. DIFFERENCE OF 13.75% OR 13.50% TO DISCOUNTED RATE OF 9.00%. ACCORDINGLY, DU RING THE ASSESSMENT YEAR - 2006- 07, THE ASSESSEE HAD PAID UPFRONT PREMIUM OF RS.8,0 6,41,668/- TO VARIOUS FINANCIAL INSTITUTIONS OUT OF WHICH PROPORTIONATE PREMIUM OF RS. 72,53,359/- ATTRIBUTABLE FOR THE PERIOD FROM OCT.2005 TO MARCH, 2006 (I.E AY 2006-07 ) WAS CLAIMED IN THE RETURN OF INCOME FOR THE CURRENT YEAR. THE REMAINING UPFRON T PREMIUM OF RS.7,33,88,309/- (RS.8,06,41,668/- MINUS RS.72,53,359/-), PERTAINING TO PERIOD FROM APRIL, 2006 TO MARCH, 2011 WAS DULY REFLECTED IN FINANCIAL STATEME NT AS ON 31.03.2006 AS PREPAID EXPENSES UNDER THE MAJOR HEAD OF ADVANCES RECOVERA BLE IN CASH OR IN KIND OR FOR VALUE TO BE RECEIVED ON ASSET SIDE OF BALANCE SHEET AND W AS REGULARLY BEING CLAIMED BY ASSESSEE IN RESPECTIVE SUBSEQUENT YEARS AND WAS ALS O BEING ALLOWED BY THE REVENUE. THE DETAILS OF THE FINANCIAL INSTITUTIONS TO WHOM T HE UPFRONT PREMIUM WAS PAID IS AS FOLLOWS: SR.NO. NAME OF FINANCIAL INSTITUTION UPFRONT PREMIU M (RS.) 1. IDBI - JKIL 27637168/- 2. IDBI - VTP 47189753/- 3. LIFE INSURANCE COMPANY (LIC) 4126292/- 4. GENERAL INSURANCE COMPANY (GIC) 592845/- 5. ORIENTAL INSURANCE COMPANY (OIC) 304408/- 6. NEW INDIA ASSURANCE CO.(NIAC) 545705/- 7. NATIONAL INSURANCE COMPANY (NIC) 245497/- TOTAL 80641668/- IT WAS THE PLEA OF THE ASSESSEE THAT THE ASSESSEE I S MAINTAINING ITS ACCOUNTS ON MERCANTILE BASIS AND ACCORDINGLY ASSESSEE CLAIMED O NLY RS.72,53,359/- (BEING THE 3 ITA NO.618/KOL/2014 M/S. J.K.TYRE & INDUSTRIES LTD. A.YR.2006-07 3 PORTION OF UPFRONT PREMIUM, WHICH WAS PERTAINING TO THE PERIOD FROM OCT, 2005 TO MARCH, 2006), IN AY 2006-07. 4. THE CLAIM OF THE ASSESSEE WAS ALLOWED BY THE AO IN THE ASSESSMENT COMPLETED U/S.143(3) OF THE INCOME TAX ACT, 1961 (ACT) BY ORD ER DATED 15.12.2008. SUBSEQUENTLY THE AO ISSUED A NOTICE U/S.154 OF THE ACT FOR DISAL LOWING THE DEDUCTION OF RS.72,53,359/- ALLOWED IN THE ASSESSMENT. ACCORDIN G TO THE AO, SINCE THE ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING THEREFORE U PFRONT PREMIUM PAID IN ADVANCE CANNOT BE ALLOWED. THE AO ACCORDINGLY PASSED AN ORD ER U/S.154 OF THE ACT DISALLOWING AND ADDING TO THE TOTAL INCOME OF THE ASSESSEE A SU M OF RS.72,53,359/-. 5. IT WAS THE PLEA OF THE ASSESSEE BEFORE THE CIT( A) THAT IT WAS ONLY THAT PORTION OF UPFRONT PREMIUM OF' RS.72,53,359/- WHICH PERTAINS T O THE PERIOD FROM OCT, 2005 TO MARCH, 2006 WAS CLAIMED BY THE ASSESSEE DURING THE YEAR UNDER APPEAL AND HENCE THE ASSESSING OFFICER OUGHT NOT TO HAVE DISALLOWED THE CLAIM FOR DEDUCTION. IT WAS THE PEA OF THE ASSESSEE THAT UPFRONT PREMIUM PAID BY THE A SSESSEE WAS REVENUE EXPENDITURE AS IT WAS IN THE NATURE OF INTEREST ON LOAN. IT WAS CL ARIFIED THAT THE UPFRONT PREMIUM WAS NOT A REPAYMENT OF DEBT I E. ZCNCD BUT IT WAS PAID TO T HE VARIOUS FINANCIAL INSTITUTIONS IN ORDER TO REDUCE THE PREMIUM RATE FROM 13.50 - 13.75 % TO THE DISCOUNTED RATE OF 9.00%; AND SO, THE SAME WAS REVENUE IN NATURE. IT WAS ALSO SUBMITTED THAT THE SAME AO HAS ALLOWED THE CLAIM OF SIMILAR UPFRONT PREMIUM OF RS. 1 ,62,93,052/ - IN THE SUBSEQUENT ASSESSMENT YEAR 2007-08 IN HIS ORDER U/S 143(3) DAT ED 31-12-2009. THE ASSESSEE FILED THE COPY OF THE ASSESSMENT ORDER AND THE COMPUTATIO N OF INCOME FOR THE RELEVANT YEAR. 6. THE CIT(A) CANCELLED THE ORDER OF THE AO HOLDIN G THAT THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF UPFRONT PREMIUM WAS CORRECT AND THAT T HE SAID EXPENDITURE WAS REVENUE IN NATURE AND THE DEDUCTION CLAIMED RELATED TO THE PRE VIOUS YEAR AND WAS WELL WITHIN THE 4 ITA NO.618/KOL/2014 M/S. J.K.TYRE & INDUSTRIES LTD. A.YR.2006-07 4 MERCANTILE SYSTEM OF ACCOUNTING TO BE ALLOWED AS A DEDUCTION. THE FOLLOWING WERE THE RELEVANT OBSERVATIONS OF THE CIT(A). 5. I HAVE PERUSED THE IMPUGNED ORDER OF THE AO. I HAVE ALSO CONSIDERED THE SUBMISSIONS OF THE LD. AR AND THE MATERIAL PLACED B Y HIM ON RECORD. IT APPEARS THAT THE ASSESSEE COMPANY HAS REARRANGED ITS DEBT WITH 6 FIN ANCIAL INSTITUTIONS IN AS MUCH AS THE ZERO COUPON NON-CONVERTIBLE DEBENTURES (ZCNCD) CARRYING PREMIUM RATE OF 13.50 - 13.75% WAS CONVERTED TO DISCOUNTED RATE OF 9% WITH THE AGREEMENT THAT 50% OF THE NET PRESENT VALUE (NPV) OF DIFFERENTIAL PREMIUM FOR THE PERIOD FROM OCTOBER, 2005 TO MARCH, 2012 WILL BE PAID UPFRONT A ND THE BALANCE 50% PREMIUM SHALL BE ALLOWED AS DISCOUNT. THE ASSESSEE COMPANY ACCORDINGLY PAID UPFRONT PREMIUM OF RS.8,06,41,668/ -; AND, ON PROPO RTIONATE BASIS, UPFRONT PREMIUM OF RS.72,53,359/- PERTAINED TO THE RELEVANT ASSESSMENT YEAR 2006-07. THE ASSESSEE HAS PRODUCED LETTERS FROM THE FINANCIA L INSTITUTIONS IN SUPPORT OF ITS CONTENTIONS. I FIND THAT THE ASSESSEE HAS SEGREGATED ON PROPORTI ONATE BASIS THE UPFRONT PREMIUM OF 8,06,41,668/ - OVER 7 ASSESSMENT YEARS 2006- 07 TO 2012- 13; AND, THAT IT HAS CLAIMED SUM OF 72,53,359/- ONL Y IN THE RELEVANT ASSESSMENT YEAR 2006-07. I ALSO FIND THAT THE UPFRO NT PREMIUM IS IN THE NATURE OF INTEREST ON BORROWED FUND; AND CONSEQUENT LY, THE SAME IS ALLOWABLE AS REVENUE EXPENDITURE. I HAVE PERUSED THE ASSESSMENT ORDER FOR THE SUBSEQUENT ASSESSMENT YEAR 2007 -08 WHEREIN THE SAM E AO HAS ALLOWED THE UPFRONT PREMIUM OF RS.1,62,93,052/- PERTAINING TO T HAT YEAR. IN VIEW OF THE ABOVE, I AM OF THE OPINION THAT THE AO WAS NOT JUST IFIED IN REJECTING THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE PREMIUM PAID IN ADVANCE WAS NOT ALLOWABLE. GROUND NO 2 & 3 ARE ALLOWED. AND, IN CONSEQUENCE, G ROUND NO 4 THERE BY CHALLENGING THE LEGAL VALIDITY OF THE ORDER U/S 154 REQUIRES NO ADJUDICATION. 7. AGGRIEVED BY THE ORDER OF LD. CIT(A) THE REVENU E HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE LD. DR RELIED ON THE ORDER OF AO. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE CIT(A) AND RELIED ON THE ORDER OF CIT(A). AFTER CONSIDERING THE RIVAL SU BMISSIONS, WE ARE OF THE VIEW THAT THERE IS NO MERIT IN THIS APPEAL BY THE REVENUE. F IRSTLY THE QUESTION WHETHER THE UPFRONT PREMIUM ON ZERO COUPON NON-CONVERTIBLE DEBENTURES T O THE EXTENT OF RS.72,53,359/- WHICH WAS PERTAINING TO THE PERIOD FROM OCTOBER, 20 05 TO MARCH, 2006 CAN BE REGARDED AS REVENUE EXPENDITURE OR NOT OR WAS IN THE NATURE OF INTEREST OR WAS ADVANCE PAYMENT OF FUTURE INTEREST LIABILITY WHICH CANNOT BE ALLOWED U NDER THE MERCANTILE SYSTEM OF 5 ITA NO.618/KOL/2014 M/S. J.K.TYRE & INDUSTRIES LTD. A.YR.2006-07 5 ACCOUNTING ARE MATTERS WHICH THE AO OUGHT TO HAVE C ONSIDERED WHILE CONCLUDING THE ASSESSMENT U/S.143(3) OF THE ACT. RECOURSE TO THE PROVISIONS OF SEC.154 OF THE ACT CANNOT AND OUGHT NOT TO BE MADE FOR SUCH HIGHLY DE BATABLE ISSUES WHICH MIGHT REQUIRE DETAILED EXAMINATION OF FACTS. SECONDLY THE UPFRO NT PREMIUM PAID WAS IN THE NATURE OF INTEREST ON LOAN ON BORROWING, AS ADMITTEDLY THE LO ANS IN QUESTIONS WERE NON-CONVERTIBLE DEBENTURES. SUCH EXPENDITURE WAS IN THE NATURE OF I NTEREST EXPENSES AND HAD TO BE ALLOWED AS DEDUCTION. FURTHER THE AO HAS ERRONEOUSL Y CONSIDERED THE SUM OF RS.72,53,359/- AS NOT PERTAINING TO THE RELEVANT PR EVIOUS YEAR AND WAS A PAYMENT OF INTEREST IN ADVANCE. THE SUM CLAIMED AS DEDUCTION W AS IN RELATION TO THE PERIOD FROM OCTOBER, 2005 TO MARCH, 2006 AND THEREFORE RIGHTLY CLAIMED AS DEDUCTION IN A.Y.2006- 07 BY THE ASSESSEE. THUS THE ORDER OF CIT(A) WHICH IS IN CONFORMITY WITH THE LEGAL POSITION AS EXPLAINED ABOVE DOES NOT CALL FOR ANY I NTERFERENCE. ACCORDINGLY THE SAME IS UPHELD AND THE APPEAL BY THE REVENUE IS DISMISSED. 9. IN THE RESULT THE APPEAL BY THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE COURT ON 08.02.2017. SD/- SD/- [DR.ARJUN LAL SAINI] [ N.V.VASUDE VAN ] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 08.02.2017. [RG PS] COPY OF THE ORDER FORWARDED TO: 1. M/S. J.K.TYRE & INDUSTRIES LTD., 7, COUNCIL HOUS E STREET, KOLKATA-700001. 2.A.C.I.T., CENTRAL CIRCLE-VI, KOLKATA. 3. CIT(A)-CENTRAL-I, KOLKATA. 4. CIT-CENTR AL-I, KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER ASSTT.REGISTRAR, ITAT, KOLKATA BENCHES 6 ITA NO.618/KOL/2014 M/S. J.K.TYRE & INDUSTRIES LTD. A.YR.2006-07 6