Electronica Machine Tools Limited, Pune V. ACIT, Pune

ITA 632/PUN/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 3301 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-09-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2004-2005
• Appeal Filed On: 26-05-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ABHAY DAMALE
• Keywords: Business expenditure; Commercial expediency; Onus to prove; Set aside
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI I.C. SUDHIR AND SHRI D. KARUNAKARA RAO ITA NO. 632/PN/09 (ASSTT. YEAR 2004-05) ELECTRONICA MACHINE TOOLS LIMITED ELEKTRA HOUSE, 691/A PUNE-SATARA ROAD, PUNE-411037 PAN NO. AAACE4196L .... APPELLANT VS. ACIT, CIRCLE 1(2), PUNE . RESPONDENT APPELLANT BY : SHRI C.H. NANIWADEKAR RESPONDENT BY : SHRI ABHAY DAMALE ORDER PER D. KARUNAKARA RAO AM THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF TH E CIT(A)-I, PUNE DATED 21/04/2009 AND THE GROUNDS RAISED ARE AS FOLLO WS: 1. THE EARNED ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING RS. 2,83,749 BEING PRIOR PERIOD EXPENSES. HE FAILED TO APPRECIATE THAT THE LIABILITY FOR THE EXPENSES WAS CRYSTALLIZED DURING THE CURRENT YEAR AND THUS THE EXPENSES WERE ALLOWABLE A S SUCH. 2. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED ASSE SSING OFFICER OUGHT TO HAVE HELD THAT THE PRIOR PERIOD INCOME OF RS. 6, 37,622 WAS NOT CHARGEABLE TO TAX IN THE CURRENT YEAR IN VIEW OF TH E MERCANTILE METHOD OF ACCOUNTING FOLLOWED CONSISTENTLY BY THE ASSESSEE. 3. THE LEARNED ASSESSING OFFICER ERRED ON FACTS AND IN LAW IN DISALLOWING RS. 26,93,483 BEING BUSINESS PROMOTION EXPENSES ON THE GROUNDS THAT THE EXPENSES ARE NOT FULLY, EXCLUSIVE LY AND ENTIRELY FOR THE BUSINESS PURPOSES, WHEN IN FACT ALL THE DETAILS OF EXPENSES AND PURPOSE FOR THE BUSINESS WERE FURNISHED BEFORE HIM AND ADMI TTEDLY THE EXPENSES WERE INCURRED FOR ADVERTISEMENT AND EXHIBITION OF A SSESSEES PRODUCTS. HE ALSO ERRED IN DISALLOWING THE EXPENSES ON THE GROUN D THAT THESE WERE NOT WARRANTED. THE LEARNED ASSESSING OFFICER OUGHT TO H AVE APPRECIATED THAT REASONABLENESS AND COMMERCIAL EXPEDIENCY HAS TO BE JUDGED FROM THE BUSINESSMANS POINT OF VIEW. ITA NO. 632/PN/09 A.Y 2004-05 PAGE 2 OF 5 GROUND NO. 1 RELATES TO THE EXPENSES AND THE FACTS ARE GIVEN IN PARA 5 OF THE IMPUGNED ORDER WHICH READS AS FOLLOWS:- 5. EARLIER YEARS EXPENSES DEBITED TO P & L A/C. RS . 2,83,749/- FROM THE ANNEXURE XVI TO THE AUDIT REPORT IT IS SE EN THAT THE AUDITOR HAS NOT CONSIDERED THE EXPENSES OF EARLIER YEARS DEBITED TO THE P & L ACCOUNT AS DISALLOWANCE CLAIMING THAT EARLIER Y EARS INCOME OF THE ASSESSEE COMPANY AMOUNTING TO RS. 6,37,622/- HAVE B EEN ALSO CREDITED TO P & L A/C. FROM THE NATURE OF INCOME IT IS SEEN THA T THE INCOME REALIZED DURING THE PREVIOUS YEAR UNDER CONSIDERATION AND HA S TO BE CREDITED TO THE ACCOUNT AS REVENUE RECOGNIZED DURING THE YEAR. HOWE VER FROM THE NATURE OF EXPENSES. IT IS SEEN THAT ASSESSEE WOULD HAVE MA DE THE PROVISIONS FOR THE EXPENSES BEING EMPLOYING MERCANTILE SYSTEM OF A CCOUNTS. THUS THE CONTENTION THE ASSESSEE IS NOT ACCEPTABLE, HENCE I DISALLOW THE EARLIER YEARS EXPENSES AND ADD IT TO THE INCOME OF THE ASSE SSEE TO THE EXTENT OF RS. 2,83,749/-. 2. AGGRIEVED WITH THE ABOVE DECISION OF THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A) WITH THE ABOVE REFERRED GROUNDS 1 AND 2 OF THIS APPEAL. AT THE END OF THE FIRST APPELLATE PROCEEDINGS, THE DISALLOW ANCE WAS CONFIRMED AS PER DISCUSSION GIVEN IN PARA 2.3 OF THE IMPUGNED ORDER AND IT READS AS FOLLOWS. 2.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND PERUSED MATERIAL ON RECORD. WHENEVER EXPENDITURE OF AN EARLIER IS CLAIMED IN THE LATER ASSESSMENT YEAR, A BURDEN OF PROOF OF VERY HIGH DEGREE IS CAST UPON AN ASSESSEE TO PROVE BY PRODUCING COGENT MATERIAL THAT THE EXPENDITURE BECAME PAYABLE DURING THE ASSESSMENT YE AR UNDER APPEAL. THIS HAS NOT BEEN DONE . THE APPELLANT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING. IN VIEW OF THIS, WHETHER WRITE BACK OF PROVISION OF EARLIER YEAR IS SUFFICIENT OR NOT IS NOT A RELEV ANT CONSIDERATION . THE RELEVANT CONSIDERATION IS WHETHER THE APPELLANT HAS PROVED THAT THE EXPENDITURE CLAIMED DURING THE RELEVANT ASSESSMENT YEAR AND RELATING TO EARLIER ASSESSMENT YEARS HAVE BECOME PAYABLE DURING THE YEAR OF CLAIM OF NOR. THIS HAS NOT BEEN DONE. THEREFORE, THE DISALLOWANCE MADE BY THE LEARNED ASSESSING OFFICER OF RS. 2,83,749/- IS UPHE LD . 3. AGGRIEVED WITH THE SAME, THE ASSESSEE FILED THE P RESENT APPEAL BEFORE US AND RAISED THE GROUNDS 1 AND 2 REPRODUCED ABOVE. DURING THE PROCEEDINGS BEFORE US, LD. COUNSEL DEMONSTRATED THAT THE CIT(A) F AILED TO ADJUDICATE GROUND NO. 2 RAISED WITHOUT PREJUDICE TO GROUND NO. 1 RELATIN G TO THE TREATMENT GIVEN BY THE CIT(A) ON THE PRIOR PERIOD INCOME. FURTHER, HE MENT IONED THAT THE ASSESSEE IS READY TO OFFER THE EXCESS EXPENSES TO THE TUNE RS . 6,601/- U/S. 41(1) OF THE ACT. BUT, THE CIT(A) DID NOT PASS ANY COMMENTS IN T HIS REGARD AND HE SIMPLY CONFIRMED THE DISALLOWANCE OF RS. 2,83,749/-. REGARDI NG THE ISSUE RELATING TO ITA NO. 632/PN/09 A.Y 2004-05 PAGE 3 OF 5 INCOME OF EARLIER YEARS TO THE TUNE OF RS. 6,37,622/-, THE CIT(A) HAS MAINTAINED SILENCE IN THIS REGARD. LD. DR FOR REVENUE STATED THAT THE PRIOR PERIOD EXPENSES ARE NOT ALLOWABLE AS PER VARIOUS DECISIONS IN THIS REGA RD. 4. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS OF THE REVENUE AS WELL AS THE PAPER BOOK FILED BEFORE US. ON CONSIDERIN G THE ARGUMENTS OF THE PARTIES, WE ARE OF THE OPINION THAT CIT(A) HAS NOT PA SSED THE ORDER CONSIDERING VARIOUS ASPECTS OF BOTH PRIOR PERIOD INCOME AND THE EXP ENDITURE RAISED BY THE PARTY BY WAY OF SUBMISSION AND THE GROUNDS BEFORE HIM. IN OUR OPINION, SUCH IMPUGNED ORDER PASSED BY THE CIT(A) IS NOT IN ACCORDAN CE WITH THE PROVISIONS OF SEC. 250(6) OF THE INCOME TAX ACT. IN THE GIVEN FAC TS, IN PRINCIPLE, THE DISCUSSION GIVEN IN PARA 2.3 OF THE ORDER DOES NOT CAL L FOR ANY INTERFERENCE. BUT, AT THE SAME TIME, IN OUR OPINION, THE CIT(A) SHOULD ALSO ADJUDICATE ON THE TREATMENT TO BE GIVEN TO THE PRIOR PERIOD INCOME AS WEL L AS THE PROVISIONS EXISTING IN THE BOOKS. IN OUR OPINION, THERE IS NEED FOR DECIDING THE ISSUE AFRESH BRINGING HARMONY AMONG VARIOUS ACCOUNTING ENTRIES IN TH E BOOKS RELATING TO (I) THE PRIOR PERIOD INCOME, (II) PRIOR PERIOD EXPENDITURE AND (III) THE PROVISIONS EXISTING IN THE BOOKS. THEREFORE, WE ARE OF THE OPINIO N THAT THESE GROUNDS 1 AND 2 ARE TO BE SET ASIDE TO THE FILE OF THE CIT(A) FOR PASSING OF A SPEAKING ORDER AS PER THE PROVISIONS OF INCOME TAX ACT MEETING ALL THE ARGUMENTS MADE SUFFICIENT BY THE ASSESSEE. CIT(A) SHALL ALSO CONSIDER THE JUDG MENT OF THE HIGH COURT OF DELHI IN THE CASE OF VISHNU INDUSTRIAL GASES P LTD ( ITR NO 229/1988) AND ANOTHER JUDGMENT IN THE CASE OF NAGRI MILLS CO LTD (3 3ITR681). LD COUNSEL MAY FILE A COPIES OF THESE ORDERS BEFORE THE CIT(A) DURING THE SET ASIDE PROCEEDINGS AS THEY RELIED UPON BY THE HIM. ACCORDINGLY, GROUND NO . 1 AND 2 ARE SET ASIDE . 5. GROUND NO. 3 RELATES TO DISALLOWANCE OF RS. 26,93, 483/- BEING BUSINESS PROMOTION EXPENSES . RELEVANT FACTS OF THE CASE IS THAT THE ASSESSEE HAS AN AGREEMENT WITH M/S. ELECTRONICA, A RELATED CONCERN, FO R SALES PROMOTIONAL ACTIVITIES AND FOR CREATING AND ENHANCING MARKET BY W AY OF PARTICIPATION IN EXHIBITIONS ETC. DURING THE YEAR UNDER CONSIDERATION, A SSESSEE PAID AN AMOUNT OF RS. 26,93,483/- ADDITIONALLY TO M/S. ELECTRONICA FO R SERVICES ON ACCOUNTS OF ADVERTISEMENT AND EXHIBITION OF THE PRODUCTS. IN THE OPINION OF THE A.O, THIS EXPENDITURE IS UNWARRANTED AS THE ASSESSEE IN WAY HAS TO RECEIVE THE SERVICES FROM M/S. ELECTRONICA AS PER THE EXISTING AGREEMENT. IN THE OPINION OF THE A.O, ITA NO. 632/PN/09 A.Y 2004-05 PAGE 4 OF 5 THESE EXPENDITURE IS NOT INCURRED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND INVOKED THE PROVISIONS OF SEC. 37(1). DURING THE PROCEEDINGS BEFORE THE CIT(A) ASSESSEE MADE VARIOUS SU BMISSIONS WHICH ARE DETAILED IN PARA 4.1 OF THE IMPUGNED ORDER. IT WAS A RGUED STATING THAT THE ASSESSEE KNOWS HIS BUSINESS ACTIVITIES. FURTHER, IT W AS MENTIONED THAT SO LONG AS THE BONA FIDE OF THE EXPENDITURE IS UNDOUBTED, THE EXPENDITURE IS NOT TO BE DISALLOWED BY THE A.O. IN THIS REGARD, HE RELIED ON THE HONBLE SUPREME COURT DECISION IN THE CASE OF SASSOON J. DAVIDS 118 ITR 261 (SC). THE EXPENDITURE WHICH IS UNNECESSARILY INCURRED CANNOT CONSTITUTE NON BUSINESS EXPENDITURE SO LONG AS SAID EXPENDITURE, WHICH IS ACTUAL, IS FOR PURPOSE OF THE BUSINESS. CIT(A) CONSIDERED THE ABOVE AND REJECTED THE SAME. FI NALLY, THE CIT(A) CONFIRMED THE ADDITION MADE BY THE A.O AS PER DISCUSSION GIVE N IN PARA 4.3 OF THE IMPUGNED ORDER. 4.3 I HAVE CAREFULLY CONSIDERED THE SUBMISSION OF THE APPELLANT AND PERUSED MATERIAL ON RECORD. IT IS AN UNDISPUTED FAC T THAT THE EXPENDITURE .. IS INCURRED IN CONNECTION WITH PARTICIPATING OF EXHIBITIONS . IT IS ALSO AN UNDISPUTED FACT THAT AS PER TERMS OF CLAUSE C OF AGREEMENT ENTERED INTO BE THE APPELLANT WITH ANOTHER FIRM, NAMELY EL ECTRONICA, WHICH IS REPRODUCED BY THE LEARNED ASSESSING OFFICER IN THE ASSESSMENT ORDER, M/S. ELECTRONICA SHALL UNDERTAKE VARIOUS SALES PROMOTION AL ACTIVITIES SUCH AS ADVERTISING OF THE PRODUCTS/ PARTICIPATING IN EXHIB ITIONS, ORGANIZING TECHNICAL SEMINARS FOR THE PURPOSE OF CREATING AND ENHANCING MARKET AND ANY OTHER MEANS FOR REACHING TO THE POTENTIAL CUSTO MERS. AS A REMUNERATION , APPELLANT SHALL PAY TO M/S. ELECTRONICA 5% OF THE SALES VALUE, WHICH IS CLAIMED BY THE APPELLANT AS EXPENDI TURE IN ITS BOOKS. TAKING INTO ACCOUNT ALL THESE ASPECTS OF THE MATTER , I AM OF THE CONSIDERED VIEW THAT THERE WAS NO OBLIGATION ON THE APPELLANT TO INCUR EXPENDITURE ON EXHIBITIONS WHEN THE AGREEMENT BETWE EN APPELLANT AND M/S ELECTRONICA SPECIFICALLY PROVIDES THAT SUCH ACT IVITIES SHALL BE UNDERTAKEN BY M/S. ELECTRONICA. ACCORDINGLY, IT IS HELD THAT THE LEARNED ASSESSING OFFICER WAS JUSTIFIED ON FACTS AND IN LAW IN DISALLOWING THE CLAIM OF EXPENDITURE AMOUNTING TO RS. 26,93,483/- INCURRE D ON ACCOUNT OF PARTICIPATING IN EXHIBITION. THE DISALLOWANCE MADE IS UPHELD. 6. BEFORE US, LD COUNSEL FOR THE ASSESSEE ARGUED STAT ING THAT THERE IS NO DISPUTE ON THE BONA FIDE OF THE INCURRING OF THE EXPE NDITURE. REVENUES OBJECTION IS ON THE NECESSITY OF INCURRING SUCH EXPENDITURE WHIL E THERE IS CONTRACTUAL AGREEMENT FOR DELIVERY OF THE SERVICES IN CONNECTION WI TH PARTICIPATING OF EXHIBITIONS. IN THIS REGARD, WE HAVE PERUSED THE EXIST ING AGREEMENT DT 13.8.2003 AND FIND THAT M/S ELECTRONICA IS ENTITLED FOR REMUNERATION AS PER THE AGREEMENT AT THE RATE OF 5% OF THE SALES AND RELEVANT CLAUSE REA D AS FOLLOWS. ITA NO. 632/PN/09 A.Y 2004-05 PAGE 5 OF 5 II] ELECTRONICA SHALL BE ENTITLED TO A REMUNERATIO N AS PER FOLLOWING ACTIVITY REMUNERATION MARKET SURVEY, MARKET CREATION } NOT EXCEEDING 5% OF SALES VALUE. AND SALES PROMOTION. } HANDLING LOGISTIC ISSUES IN CONNECTION } WITH SUPPLY OF EMTL PRODUCTS TO THE } CUSTOMER; POST SALES SERVICES NOT EXCEEDING 5% OF SA LES VALUE THE ABOVE CLAUSE DOES NOT INCLUDE THE ACTIVITIES OF SERVICES IN CONNECTION WITH PARTICIPATING OF EXHIBITIONS. THUS, IN OUR OPINION, THE REMUNERATION AT THE RATE OF 5% OF THE SALES VALUE AND IMPUGNED EXPENDITURE FO R THE SAME SERVICES RELATING TO EXHIBITION SERVICES ARE FOR DIFFERENT. IN AN Y CASE THE REVENUE HAS NOT DOUBTED THE GENUINENESS OF THE PAYMENT. FURTHER, IT I S A SETTLED ISSUE THAT THE AO IS NOT THE AUTHORITY TO DECIDE THE NECESSITY ASPE CT OF BUSINESS EXPENDITURE AND IT IS FOR THE ASSESSEE TO DECIDE THE SAME. IN TH ESE CIRCUMSTANCES, THE EXPENDITURE IN QUESTION IS ALLOWABLE U/S 37 OF THE A CT. ACCORDINGLY, THE GROUND 3 RAISED BY THE ASSESSEE IS ALLOWED . 7. IN THE RESULT APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 29 TH SEPTEMBER, 2010. SD/- SD/- (I.C. SUDHIR) (D.KARUNAKARA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED THE 29 TH SEPTEMBER, 2010 R COPY OF THE ORDER IS FORWARDED TO : 1. ASSESSEE 2. ACIT, CIR 1(2), PUNE 3. CIT(A)-I, PUNE 4. CIT-I, PUNE 5. D.R. ITAT A BENCH BY ORDER ASSISTANT REGISTRAR I.T.A.T PUNE