POLYCHEM LTD, MUMBAI V. JTCIT SR 16, MUMBAI

ITA 6210/MUM/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6342 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 29-09-2010
• Assessment Year: 1997-1998
• Appeal Filed On: 01-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJIT KUMAR SINHA
• Assessee Lawyers: D T SHUKLA
• Keywords: Business income; Opportunity of being heard; Revenue expenditure
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C BEFORE SHRI R.S. SYAL, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO.6210/MUM/09 (ASSESSMENT YEAR : 1997-98) M/S. POLYCHEM LTD., ORIENAL HOUSE, 7, J. TATA ROAD, MUMBAI-400 020 PAN AAACP7184M VS. JOINT COMMISSIONER OF INCOME TAX, SR-16, MUMBAI. APPELLANT. RESPONDENT. APPELLANT BY : SHRI D.T. SHUKLA. RESPONDENT BY : SHRI AJIT KUMAR SINHA. O R D E R PER V. DURGA RAO, J.M. : THIS APPEAL PREFERRED BY THE ASSESSE E IS DIRECTED AGAINST THE ORDER PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-2 FOR THE ASSESSMENT YEAR 1997- 98. 2. THE FIRST GROUND OF APPEAL RELATES TO DISALLOWAN CE OF AMOUNT OF ` .6,96,36,651. THE BRIEF FACTS IN THIS CASE RELATE TO THIS GROUND OF APPEAL ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF CHEMICAL PRODUCTS LIKE P OLYSTERENE, STYRENE BESIDES INDUSTRIAL ALCOHOL AND IMFL. THE ASSESSEE HAS CLOSE D DOWN THE GOREGAON MANUFACTURING UNIT AND PAID AN AMOUNT OF ` .6,96,36,651 UNDER THE VOLUNTARY RETIREMENT SCHEME (VRS), THE SAME AMOUNT PAID UNDER THE ABOVE SCHEME CLAIMED AS REVENUE EXPENSES. DURING THE COURSE OF ASSESSMENT P ROCEEDINGS, THE ASSESSING OFFICER ITA NO.6210/MUM/09 - 2 - HAS OBSERVED THAT THE ENTIRE PAYMENT CLAIMED BY THE ASSESSEE UNDER VRS IS IN RELATION TO EMPLOYEES OF THE GOREGAON UNIT AT MUMBAI AND THI S UNIT WAS CLOSED DOWN BY THE ASSESSEE AND THE ENTIRE PLANT AND MACHINERY WAS SOL D TO SUPREME PETROCHEM LTD. THEREFORE THE ENTIRE PAYMENT MADE TO THE EMPLOYEES IS CONSEQUENT TO THE CLOSURE OF THE BUSINESS. THE ASSESSING OFFICER OBSERVED THA T THE VRS IS NOT FOR CARRYING OUT THE BUSINESS EFFICIENTLY BUT IS CONSEQUENT TO THE CLOSU RE OF THE BUSINESS. THE ASSESSEE HAS SUBMITTED BEFORE THE ASSESSING OFFICER THAT DISCONT INUATION OF THE MANUFACTURING OF ONE CHEMICAL UNIT DOES NOT AMOUNT TO CLOSURE OF BUS INESS OF THE COMPANY AND THE OTHER UNITS WERE MANUFACTURING THE SIMILAR PRODUCTS . HOWEVER, THE ASSESSING OFFICER HAS REJECTED THE SUBMISSIONS OF THE ASSESSEE AND HE LD THAT THE PAYMENTS UNDER VRS ARE AT THE CLOSURE OF THE BUSINESS AND NOT FOR EFFICIEN TLY MANAGING THE BUSINESS OF MANUFACTURE OF POLYSTYRENE AND ACCORDINGLY THE ASS ESSING OFFICER DISALLOWED THE ENTIRE PAYMENT MADE UNDER VRS. THE ASSESSEE HAS C ARRIED THE MATTER BEFORE THE LEARNED CIT(A) AND IT WAS SUBMITTED BEFORE THE LEAR NED CIT(A) THAT THE OTHER UNITS OF THE ASSESSEE ARE MANUFACTURING SIMILAR PRODUCTS AND THE ASSESSEE IS VERY MUCH IN THE BUSINESS OF MANUFACTURING OF CHEMICALS, THEREFORE, THE PAYMENT MADE BY THE ASSESSEE UNDER VRS HAVE TO BE ALLOWED AS REVENUE EXPENSES. 3. THE LEARNED COUNSEL FOR THE ASSESSEE HAS RELIED ON THE HON'BLE BOMBAY HIGH COURT JUDGEMENT IN THE CASE OF CIT VS. BHOR INDUSTR IES (264 ITR 180). HOWEVER, THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HE HAS OBSERVED THAT ITA NO.6210/MUM/09 - 3 - THE ASSESSEE IS MANUFACTURING DIFFERENT CHEMICALS, POLYSTYRENE WHICH IS DIFFERENT CHEMICAL AND THE EXPENSES INCURRED FOR THE PAYMENT OF VRS IS NOT FOR THE PURPOSE OF BUSINESS AND HE CONFIRMED THE ORDER PASSED BY THE A SSESSING OFFICER. 4. ON BEING AGGRIEVED BY THE ORDER OF THE C IT(A), THE ASSESSEE CARRIED THE MATTER BEFORE THE TRIBUNAL. 5. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMITT ED THAT THE ASSESSEE COMPANY IS MANUFACTURING VARIOUS CHEMICALS AND HAVING DIFFEREN T UNITS AT NIRA, NEAR PUNE AND BARODA. THE ASSESSEE COMPANY DISCONTINUED PRODUCTI ON OF POLYSTYRENE AT GOREGAON PLANT AND THE COMPANY DID NOT REQUIRE SERVICES OF T HE WORKERS. AFTER DISCUSSIONS WITH THE EMPLOYEES, VRS WAS OFFERED. THE LEARNED COUNSE L FURTHER SUBMITTED THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF VA RIOUS CHEMICALS, THE GOREGAON UNIT WAS CLOSED AND THE MACHINERY WAS ALSO SOLD. THEREF ORE IT CANNOT BE SAID THAT THE ASSESSEE IS NOT IN THE BUSINESS OF MANUFACTURING OF CHEMICALS. THE LEARNED COUNSEL FURTHER SUBMITTED THAT THE ASSESSEE COMPANY IS RUN BY COMMON MANAGEMENT AND COMMON BUSINESS ORGANIZATION AND THE HEAD OFFICE IS AT MUMBAI. THEREFORE THE AUTHORITIES BELOW HAVE NOT PROPERLY CONSIDERED THE SUBMISSIONS OF THE ASSESSEE AND DISALLOWED THE CLAIM OF THE ASSESSEE. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISIONS OF BANSIDHAR PVT. LTD. VS. CIT (127 ITR 65) (GUJ), CIT VS. BHOR INDUSTRIES LTD. (264 ITR 180) (BOM) AND PI INDUSTRI ES LTD. VS. ACIT (106 ITD 401) (JODH). ITA NO.6210/MUM/09 - 4 - 6. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUPPORTED THE ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE REC ORDS AVAILABLE ON RECORD. THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF THE CHEMICALS. IT HAS CLOSED DOWN ONE OF THE GOREGAON UNIT AT MUMBAI AND THE EMPLOYEES WH O ARE WORKING WITH THE COMPANY NOT REQUIRED DUE TO CLOSURE OF THE UNIT AND AFTER CONSULTATION WITH THE EMPLOYEES, VOLUNTARY RETIREMENT SCHEME WAS ANNOUNCE D BY THE COMPANY AND ACCORDINGLY THE PAYMENT WAS MADE TO THE EMPLOYEES. THE SAME WAS CLAIMED AS REVENUE EXPENDITURE. THE AUTHORITIES BELOW HAVE NO T ALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE IS NOT RUNNING THE BUSINESS AND THEREFORE THE ASSESSEE WAS NOT ELIGIBLE FOR THE CLAIM. THE AUTHORITIES BEL OW HAVE NOT DISPUTED THE FACT THAT THE ASSESSEE IS CONTINUING IN THE BUSINESS OF CHEMICAL MANUFACTURING IN DIFFERENT UNITS, ONE IS AT BARODA AND ANOTHER IS AT NIRA, NEAR PUNE. THEREFORE IT CANNOT BE SAID THAT THE ASSESSEE IS NOT IN THE BUSINESS. IT IS ALSO AN ADMITTED FACT THAT THE ASSESSEES HEAD OFFICE IS AT BOMBAY, COMMON MANAGEMENT, COMMON BUSI NESS ACTIVITY, COMMON ADMINISTRATION. THEREFORE THE CLOSURE OF ONE UNIT DOES NOT AMOUNT TO CLOSURE OF THE ENTIRE BUSINESS OF MANUFACTURING OF CHEMICALS AND T HE PAYMENT MADE TOWARDS THE VRS IS ALLOWABLE AS A REVENUE EXPENDITURE. 8. IN THE CASE OF BANSIDHAR PVT. LTD. (SUPRA), HON BLE GUJARAT HIGH COURT HAS OBSERVED THAT WHEN THERE IS A COMMON MANAGEMENT AND COMPLETE INTER-RELATING, INTER- ITA NO.6210/MUM/09 - 5 - DEPENDENT OF DIFFERENT BUSINESS AND ALL THE ACTIVIT IES STATING SINGLE BUSINESS, RETRENCHMENT, COMPENSATION PAID IN RESPECT OF CLOSU RE OF SOME OUT OF SEVERAL BUSINESSES IS ALLOWABLE DEDUCTION. IN THE CASE OF CIT VS. BHOR INDUSTRIES LIMITED (SUPRA), THE HONBLE JURISDICTIONAL HIGH COURT HAS HELD THAT VRS EXPENSES INCURRED BY THE ASSESSEE IS A REVENUE EXPENDITURE WHICH IS INCU RRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS MUST BE ALLOWED IN ITS ENTIRETY IN THE YEARS IN WHICH IT IS INCURRED. IN THE CASE OF P.I. INDUSTRIES LTD. VS. ACIT (2007) 106 ITD 401 (JODH). IN THIS CASE, THE TRIBUNAL HAS HELD THAT THE ASSESSEE COMPANY PAI D CERTAIN SUM UNDER VRS AND CLAIMED DEDUCTION THEREAFTER UNDER SECTION 37(1). THE VRS INTRODUCED BY THE ASSESSEE TO CARRY ON ITS BUSINESS MORE EFFICIENTLY AND PROFITABLY AND DID NOT OBTAIN ANY ADVANTAGE IN CAPITAL FIELD INASMUCH AS ITS FIXED C APITAL REMAIN UNTOUCHED, ENTIRE AMOUNT OF VRS EXPENDITURE DESERVED DEDUCTION AS CLA IMED BY THE ASSESSEE. THE TRIBUNAL ALSO CONSIDERED THE APPLICATION OF 35DDA A ND HELD THAT IT APPLIED PROSPECTIVELY FROM THE A.Y. 2002-03. THE FACTS IN THE INSTANT CASE ARE SIMILAR TO THE ABOVE CASE DECIDED BY THE JODHPUR BENCH OF ITAT AND IT RELATES TO A.Y. 1997-98, SECTION 35DDA HAS NO APPLICATION, WE THEREFORE TAKI NG INTO CONSIDERATION OF THE TOTAL FACTS AND CIRCUMSTANCES OF THE CASE AND ALSO FOLLOW ING THE PRECEDENCE RELIED BY THE LEARNED COUNSEL FOR THE ASSESSEE, WE HOLD THAT THE ASSESSEE HAS INCURRED EXPENSES FOR THE VRS FOR THE PURPOSE OF BUSINESS AND COULD BE AL LOWABLE AS REVENUE EXPENSES. THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALL OWED. ITA NO.6210/MUM/09 - 6 - 9. THE SECOND GROUND OF APPEAL RELATES TO PRIOR PER IOD EXPENSES AMOUNTING TO ` .13,19,585. 10. THE FACTS OF THE ABOVE ISSUE ARE THAT THE ASSES SEE IS IMPORTING CERTAIN CHEMICALS AND THE ASSESSEE HAS BEEN UTILIZING STORAGE TERMINA L AT KESAR ENTERPRISES LTD., KANDLA. THE ASSESSEE IS NOT MAKING TIMELY PAYMENTS OF SERVI CE CHARGES TO KANDLA OF KESAR ENTERPRISES SINCE 1992 AND ULTIMATELY DURING THE PR EVIOUS YEAR ENDED ON 31.3.1997 (A.Y. 1997-98) ACCEPTED THE DEMAND OF KESAR ENTERP RISES LTD FOR INTEREST AT 22% ON DELAYED PAYMENTS FROM TIME TO TIME FROM 1992 ONWARD S. THE SAME WAS CLAIMED AS DEDUCTION IN THE YEAR UNDER CONSIDERATION. DURING T HE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER HAS OBSERVED THA T AS PER THE TAX AUDIT REPORT, THE ASSESSEE WAS CHARGED PRIOR PERIOD EXPENSES OF ` .13,19,585 TO THE PROFIT AND LOSS ACCOUNT OF THE RELEVANT ACCOUNTING YEAR AS THE ASSE SSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE SAME IS DISALLOWED. ON APPEAL, BEFORE THE LEARNED CIT(A) IT WAS EXPLAINED THAT THESE EXPENSES ARE RELATED TO KESAR ENTERPRISES LTD. WHO HAS PROVIDED SERVICE TO THE ASSESSEE TO STORE THE GOODS AT KANDL A PORT. IN EARLIER YEARS, THE PAYMENTS WERE DELAYED AND SUBSEQUENTLY IN THE YEAR UNDER CONSIDERATION THE PAYMENTS WERE MADE. THE LEARNED CIT(A) AFTER CONSIDERING TH E SUBMISSIONS MADE BY THE ASSESSEE HAS OBSERVED THAT ADMITTEDLY THE ENTIRE AM OUNT UNDER CONSIDERATION DOES NOT PERTAINING TO THE YEAR UNDER CONSIDERATION AND CANN OT BE ALLOWED DURING THE YEAR UNDER CONSIDERATION, HE HAS CONFIRMED THE ORDER BY THE AS SESSING OFFICER. ITA NO.6210/MUM/09 - 7 - 11. ON APPEAL, THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE LEARNED CIT(A) AND FURTHER SUBMITTED THA T THE EXPENSES INCURRED BY THE ASSESSEE FOR THE PURPOSE OF BUSINESS, THEREFORE, TH E CLAIM OF THE ASSESSEE CAN BE ALLOWABLE. 12. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THE EXPENSES INCURRED BY THE ASSESSEE RELATING TO EARLI ER YEARS, IT CANNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION. 13. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE OR DERS OF THE AUTHORITIES BELOW. IT IS AN ADMITTED FACT THAT THE PAYMENTS MADE BY THE A SSESSEE NOT RELATING TO THE YEAR UNDER CONSIDERATION AND ADMITTEDLY THE PAYMENTS REL ATING TO EARLIER YEAR, WE FIND THAT THERE IS NO INFIRMITY IN THE ORDER PASSED BY THE AU THORITIES BELOW. THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS DISMISSED. 14. GROUND NO.3 RELATES TO THE AMOUNT RECEIVED BY T HE ASSESSEE FOR SALE OF TRADE MARK AND SALE OF MARKETING NET WORK. 15. THE ASSESSEE HAS RECEIVED A SUM OF ` .5 LAKHS ON SALE OF ITS TRADE MARK AND ALSO RECEIVED A FURTHER SUM OF ` 5 LAKHS FOR SALE OF ITS MARKETING NET WORK. THE ASSESSEE HAS MENTIONED IN ITS RETURN OF INCOME THAT THESE TW O AMOUNTS WERE INCLUDED IN THE MISCELLANEOUS RECEIPTS. THE ASSESSING OFFICER HAS O BSERVED THAT THE ASSESSEE HAS SOLD ITS TRADE MARK FOR POLYSTYRENE FOR ` 5 LAKHS AND ITS MARKETING NET WORK HAS NEVER SHOWN SEPARATELY AS ASSETS. THUS THE INCOME GENERA TED ON THE SALE OF THESE TWO ITEMS ITA NO.6210/MUM/09 - 8 - HAS TO BE TAXED AS BUSINESS RECEIPTS. ACCORDINGLY, THE ASSESSING OFFICER MADE AN ADDITION OF ` .10 LAKHS IN THE HANDS OF THE ASSESSEE. ON APPEAL, THE LEARNED CIT(A) CONFIRMED THE ORDER PASSED BY THE ASSESSING OFFICER . 16. ON BEING AGGRIEVED, THE ASSESSEE CARRIED THE MA TTER BEFORE THE TRIBUNAL. 17. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE SALE OF TRADE MARK OF ` 5 LAKHS AND ITS MARKETING NET WORK ARE RECEIPTS IN CA PITAL NATURE. HOWEVER, HE HAS SHOWN AS MISCELLANEOUS INCOME. THE ASSESSING OFFICE R INSTEAD OF ALLOWING AS A REVENUE EXPENDITURE HE MADE AN ADDITION OF ` 10 LAKHS, THEREFORE IT IS AMOUNTING TO DOUBLE ADDITION. THE DEDUCTION CLAIMED BY THE ASSE SSEE HAS TO BE ALLOWED. 18. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE RE CORDS. WE FIND THAT TO DECIDE THE ISSUE WHICH REQUIRES VERIFICATION AND INVESTIGA TION INTO THE FACTS OF THE CASE. WE, THEREFORE, IN THE INTEREST OF JUSTICE, WE REMIT THE ISSUE BACK TO THE FILE OF ASSESSING OFFICER TO EXAMINE AFRESH AND DECIDE THE ISSUE IN A CCORDANCE WITH LAW AFTER AFFORDING A REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. THIS GROUND OF APPEAL RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS ALLOWED PARTLY. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH NOV., 2010. SD/- SD/- (R.S. SYAL) (V. DURGA RAO) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DT. 26.11.2010. * GPR ITA NO.6210/MUM/09 - 9 - TRUE COPY COPY TO : 1. THE ASSESSEE. 2. THE ASSESSING OFFICER. 3. CIT(APPEALS) 4. CIT 5. DEPARTMENTAL REPRESENTATIVE, ITAT, MUMBAI. BY ORDER DY./ASST.REGISTRAR, ITAT, MUMBAI DATE INIT IALS 1. DRAFT DICTATED ON 22.11.2010 2. DRAFT PLACED BEFORE AUTHOR 3. DRAFT PROPOSED & PLACED BEFORE SECOND MEMBER 4. DRAFT DISCUSSED & APPROVED BY SECOND MEMBER 5. APPROVED DRAFT COMES TO SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 26.11.2010 7. FILE SENT TO BENCH CLERK 26.11.2010 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER.