ORIENTAL SERITECH LTD, MUMBAI V. ITO RG 2(2)-2, MUMBAI

ITA 6505/MUM/2010

• Counselvise Citation: 650519914 RSA 2010
• Duration Of Justice: 3 year(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 04-09-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 03-09-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: R MURALIDHAR IZRFKHZ DH LS
• Keywords: Revenue expenditure; Capital expenditure

Judgement Text

ORIENTAL SERITECH LIMITED - 1 - VK;DJ VIHYH; VF/KDJ.K LH U;K;IHB EQACBZ ESAA IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUM BAI JH VKJ- DS- XQIRK] U;KF;D LNL; ,OA JH JKTSUNZ FLAG YS[KK LNL; DS LE{K BEFORE SHRI R.K. GUPTA JUDICIAL MEMBER AND SHRI RAJ ENDRA SINGH ACCOUNTANT MEMBER VK;DJ VIHY LA[;K /ITA NO.6505/MUM/2010 FU/KKZJ.K O'KZ @ ASSESSMENT YEAR: - 2003-04 ORIENTAL SERITECH LIMITED DEVESH KUMAR SHAH & CO., CHARTERED ACCOUNTANTS, 106, BANAJI HOUSE, 361, DR. D.N. ROAD, FLORA FOUNTAIN, MUMBAI 400001 CUKE@ VS. COMMISSIONER OF INCOME TAX, CITY 2, AAAYAKAR BHAVAN, M.K. ROAD MUMBAI 400 020. PAN:- AAACO0596L VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT VIHYKFKHZ DH VKSJ LS @ APPELLANT BY SHRI R. MURALIDHAR. IZR;FKHZ DH VKSJ LS @ RESPONDENT BY MS. TRIPURA SUNDARI VKNS'K@ VKNS'K@ VKNS'K@ VKNS'K@ ORDER PER RAJENDRA SINGH, AM THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER DATED 28.5.2010 OF CIT(A) FOR THE ASSESSMENT YEARS 2003-0 4. THE ONLY DISPUTE RAISED BY THE ASSESSEE IN THIS APPEAL IS REGARDING DISALLOWANCE OF EXPENSES. 2. THE FACTS IN BRIEF ARE THAT THE ASSESSEE WHO WAS ENGAGED IN MANUFACTURING OF SILK AND TRADING OF TEXTILES HAD D ECLARED LOSS OF RS. 14698548/- IN ASSESSMENT YEAR 2003-04. AO NOTED THA T THE ASSESSEE HAD CLAIMED THE FOLLOWING EXPENSES IN P&L ACCOUNT. LQUOKBZ DH RKJH[K @ DATE OF HEARING 4-09-2013 ?KKS'K.KK DH RKJH[K @ DATE OF PRONOUNCEMENT 20-09-2013 ORIENTAL SERITECH LIMITED - 2 - 1. FARM EXPENSES RS. 2,02,225 2. LEGAL AND PROFESSIONAL FEES RS. 2,46,900 3. R&D CESS RS. 78,210 4. COMMUNICATION EXPENSES RS. 1,709 5. TRAVELLING AND CONVEYANCE RS. 13,005 6. TECHNOLOGY TRANSFER FEES RS. 15,81,770 7. INTEREST PAID ON CUSTOM DUTY RS. 1,23,25,000 8. SALES TAX PENALTY RS. 86,049 9. SALES TAX RS. 57,191 TOTAL RS. 1,45,92,059 2.1 THE AO FURTHER NOTED FROM THE AUDIT REPORT THAT ACCOUNTS OF THE ASSESSEE HAD BEEN PREPARED AS A NON GOING CONCERN A ND THE ASSETS HAD BEEN VALUED AT THEIR NET REALIZABLE VALUE AS ESTIMA TED BY THE MANAGEMENT OF THE COMPANY. IN THE NOTES TO ACCOUNT, IT WAS MEN TIONED THAT COMPANY CEASED TO BE A GOING CONCERN. THE AUDITORS ALSO MEN TIONED THAT THE MANAGEMENT OF THE COMPANY HAD NO INTENTION TO CONTI NUE THE BUSINESS IN FORESEEABLE FUTURE. THE AO, THEREFORE, ASKED THE AS SESSEE TO EXPLAIN AS TO WHY THE EXPENSES WERE CLAIMED SHOULD NOT BE DISALLO WED. THE ASSESSEE SUBMITTED THAT THE EXPENSES INCURRED FOR THE PURPOS E OF BUSINESS ONLY AND THEREFORE, SHOULD BE ALLOWED. AO HOWEVER DID NOT AC CEPT THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT THE EXPENSES CAN BE ALLOWED ONLY FOR PURPOSE OF CARRYING ON THE BUSINESS AND IN THIS CAS E THE AUDITORS REPORT CLEARLY MENTIONED THAT THE ASSESSEE HAD DISCONTINUE D THE BUSINESS AND, THEREFORE, THE AO HELD THAT EXPENSES WERE NOT ALLOW ABLE. IN REGARD TO INTEREST OF RS. 1,23,25,000/- ON CUSTOM DUTY, AO NO TED THAT THE INTEREST WAS FOR THE PERIOD FROM 10.11997 TO 31.03.2002 AND THEREFORE DID NOT RELATE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT WAS ALSO NOTED BY HIM THAT OUT OF THE INTEREST A SUM OF RS. 1.10 CROR E HAD BEEN PAID ON 27.03.2002 AND THE BALANCE AMOUNT OF RS. 13,25,000/ - HAD BEEN PAID ON 20 TH NOVEMEBER 2003. THUS THE PAYMENT ALSO DID NOT RELA TE TO THE ASSESSMENT YEAR UNDER CONSIDERATION. IT WAS THEREFO RE HELD BY HIM THAT THE ORIENTAL SERITECH LIMITED - 3 - INTEREST WAS NOT ALLOWABLE AS DEDUCTION. SIMILARLY THE PENALTY ON DELAYED PAYMENT OF SALES TAX OF RS. 86,049/- WAS ALSO NOT A LLOWABLE IN TERMS OF EXPLANATION TO SECTION 37(I) OF THE INCOME TAX ACT. 2.2 AS REGARDS THE TECHNOLOGY TRANSFER FEES OF RS. 15,81,770/- WAS CONCERNED, THE ASSESSEE SUBMITTED THAT THE SAME HAD BEEN PAID TO MITSUBISHI CORPORATION (MC) AGAINST THE TERMINATION OF AGREEMENT DATED 25.10.1995 ENTERED INTO BY THE ASSESSEE WITH THE SA ID PARTY. THE AGREEMENT HAD BEEN TERMINATED VIDE TERMINATION AGRE EMENT DATED 23.9.2002. THE ASSESSEE POINTED OUT THAT PARA 2 AND 3 OF THE TERMINATION AGREEMENT CLEARLY MENTIONED THAT CERTAIN DISPUTES A ND DIFFERENCES HAD ARISEN BETWEEN THE PARTIES AND, THEREFORE, THE AGRE EMENT HAD BEEN TERMINATED THROUGH COMPROMISE AND SETTLEMENT. AO HO WEVER REFERRED TO PARA 9 OF THE AGREEMENT AS PER WHICH MC AND THE ASS ESSEE WERE ENTITLED TO TERMINATE THE AGREEMENT ON HAPPENING OF CERTAIN EVE NTS, SUCH AS SUBSTANTIAL BREACH OF MATERIAL TERM ETC. AO OBSERVE D THAT THERE WAS NOTHING TO SHOW THAT THERE WAS ANY BREACH OF CONTRA CT BETWEEN THE ASSESSEE AND THE MITSUBISHI CORPORATION. WHEN POINT ED OUT, THE ASSESSEE SUBMITTED THAT PARA 9 OF THE AGREEMENT DEALT WITH T ERMINATION BY ANY OF THE PARTIES. IN THIS CASE THE TERMINATION HAD BEEN DONE UNDER MUTUAL CONSENT AND COMPROMISE AND, THEREFORE, THE SAID PAR A WAS NOT APPLICABLE. THE AGREEMENT HAD BEEN TERMINATED AS THE PROJECT HA D BECOME UNVIABLE FOR VARIOUS REASONS AND NO FOR ANY BREACH OF CONTRACT F ROM EITHER SIDE. AO OBSERVED THAT IN CASE OF TERMINATION OF AGREEMENT D UE TO PROJECT BECOMING UNVIABLE, THERE WAS NO ATTENDANT LIABILITY ON ANY O F THE PARTIES. MOREOVER IT WAS ALSO POINTED OUT THAT THE TERMINATION AGREEMENT CLEARLY MENTIONED THAT THERE WERE CERTAIN DISPUTES AND DIFFERENCES BE TWEEN THE PARTIES. AO, THEREFORE, HELD THAT THE TERMINATION AGREEMENT WAS NOTHING BUT A SELF SERVING DOCUMENT AND HAD NO CONTRACTUAL VALUE. HE, THEREFORE, HELD THAT THE EXPENDITURE OF RS. 15,81,770/- WAS CAPITAL IN N ATURE AND NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND, THEREFORE, THE SAME WAS NOT ALLOWABLE. AO, THEREFORE, DISALLOWED THE EX PENSES AND ADDED A SUM OF RS. 1,45,92,059/- TO THE TOTAL INCOME. ORIENTAL SERITECH LIMITED - 4 - 3. IN APPEAL CIT(A) AGREED WITH THE FINDING OF AO T HAT THE BUSINESS OF THE ASSESSE HAD DISCONTINUED. IN REGARD TO INTEREST ON CUSTOM DUTY CIT(A) OBSERVED THAT THE SAME DID NOT RELATE TO THE ASSESS MENT YEAR UNDER REFERENCE. IT WAS ALSO OBSERVED BY HIM THAT THE EXP ENDITURE WAS NOT ALLOWABLE EVEN OTHERWISE ON THE GROUND THAT NO BUSI NESS ACTIVITY HAD BEEN CARRIED OUT BY THE ASSESSEE AND THE BUSINESS HAD CL OSED. SIMILARLY THE INTEREST PAID ON DELAYED PAYMENT OF SALES TAX WAS N OT ALLOWABLE AS DEDUCTION. AS REGARDS THE TECHNOLOGY TRANSFER FEES, THE ASSESSEE SUBMITTED THAT IN TERMS OF THE AGREEMENT, MC WAS REQUIRED TO ADVISE THE ASSESSEE IN THE PURCHASE OF CAPITAL EQUIPMENT, TRAINING OF PERS ONNEL AND FOR SUGGESTING WAYS FOR IMPROVING THE QUALITY FOR REDUCING THE COS T OF PRODUCTION. THUS THE AGREEMENT FOR TECHNICAL KNOW HOW WAS TO FACILIT ATE MANUFACTURING OF SILK YARN FOR SMOOTH CONDUCT OF BUSINESS. THERE WAS NO REFERENCE TO SETTING UP OF NEW BUSINESS. MOREOVER THE OWNERSHIP OF TECHN ICAL KNOW HOW HAD NOT BEEN TRANSFERRED TO THE ASSESSEE. IT WAS, THERE FORE, REQUESTED THAT THE CLAIM SHOULD BE ALLOWED. CIT(A) DID NOT ACCEPT THE EXPLANATION GIVEN. IT WAS OBSERVED BY HIM THAT THE PAYMENT WAS IN RESPECT OF TECHNICAL KNOW HOW FOR PURCHASE OF CAPITAL EQUIPMENT ETC. WHICH HAD NO ELE MENT OF REVENUE EXPENDITURE. MOREOVER THE ASSESSEE HAD NOT CARRIED OUT ANY BUSINESS ACTIVITY AND HAD INCURRED THE EXPENDITURE IN RELATI ON TO NEW PROJECT AND NOT THE EXISTING BUSINESS OF THE ASSESSEE. CIT(A), THEREFORE HELD THAT THE TECHNICAL KNOW HOW FEES WAS CAPITAL IN NATURE. HE A LSO AGREED WITH THE AO FOR DISALLOWANCE OF OTHER EXPENSES AS THE BUSINESS HAD DISCONTINUED. AGGRIEVED BY THE DECISION OF CIT(A) THE ASSESSEE IS IN APPEAL BEFORE TRIBUNAL. 4. BEFORE US, THE LEARNED AR FOR THE ASSESSEE SUBMI TTED THAT THE ASSESSEE HAD NOT CLOSED DOWN THE BUSINESS. THE ASSE SSEE NO DOUBT HAD DECIDED TO CLOSE DOWN THE OPERATIONS BUT DUE TO PEN DING CLAIMS OF CREDITORS AND CERTAIN OTHER CLAIMS OF GOVERNMENT, THE ASSESSE E HAD NOT BEEN ABLE TO COMMENCE THE PROCEDURE FOR WINDING UP THE BUSINESS WHICH WAS CLEAR FROM THE WRITTEN SUBMISSION MADE BEFORE CIT(A), A COPY O F WHICH WAS PLACED AT PAGE 72 OF THE PAPER BOOK. THUS THE BUSINESS HAD N OT CLOSED THIS YEAR AND THE EXPENSES WERE ALLOWABLE. IT WAS ALSO SUBMITTED THAT SIMILAR EXPENSES ORIENTAL SERITECH LIMITED - 5 - HAD BEEN ALLOWED IN THE IMMEDIATE PRECEDING YEAR I. E. ASSESSMENT YEAR 2003-04 AND ALSO IN SUBSEQUENT YEAR. IT WAS FURTHER SUBMITTED THAT INTEREST ON CUSTOM DUTY WAS NOT PENALTY AND WAS OF THE NATURE OF DUTY WHICH WAS ALLOWABLE AS DEDUCTION. SIMILARLY THE TEC HNOLOGY TRANSFER FEES HAD BEEN PAID IN CONNECTION WITH THE BUSINESS OF TH E ASSESSEE AND WAS ALLOWABLE. THEREFORE, IT WAS SUBMITTED THAT DISALLO WANCE OF ENTIRE EXPENSES BY THE AO EXCEPT THE MISCELLANEOUS EXPENSES OF RS. 5,26/-, OFFICE EXPENSES OF RS. 66/-, AND LEGAL AND PROFESSIONAL EXPENSES OF RS. 1,17,000/- WAS NOT JUSTIFIED. IT WAS ACCORDINGLY URGED THAT THE ORDER OF CIT(A) SHOULD BE SET ASIDE. THE LEARNED DR ON THE OTHER HAND SUPPORTED T HE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE CLAIM HAD BEEN RIGHTLY DISALLOWED BY THE AUTHORITIES BELOW. HE PLACED RELIANCE ON THE FINDINGS GIVEN IN THE ORDERS OF AUTHORITIES BELOW. 5. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE R IVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING THE ALLOWABILIT Y OF VARIOUS EXPENSES CLAIMED BY THE ASSESSEE. THE EXPENSES HAD BEEN DISA LLOWED ON THE GROUND THAT THE ASSESSEE HAD CLOSED DOWN THE BUSINESS. IN ADDITION IT HAS ALSO BEEN HELD THAT EXPENSES ON CUSTOM DUTY DID NOT RELA TE TO THE YEAR UNDER CONSIDERATION AS THE ASSESSEE WAS FOLLOWING THE MER CANTILE SYSTEM OF ACCOUNTING AND THE TECHNOLOGY TRANSFER FEES WAS CAP ITAL IN NATURE, SALES TAX OF RS. 86,049/- WAS NOT ALLOWABLE AS THE SAME WAS PENALT IN NATURE. WE HAVE CONSIDERED THE VARIOUS ASPECTS OF THE MATTER. THE AUDITORS HAVE PREPARED THE ACCOUNTS AS A NON GOING CONCERN AND HA VE ALSO MENTIONED THAT THE MANAGEMENT HAD NO INTENTION TO CONTINUE TH E BUSINESS IN THE UNFORESEEABLE FUTURE. THE ASSESSEE IN THE WRITTEN S UBMISSION FILED BEFORE CIT(A), PLACED AT PAGE 72 OF THE PAPER BOOK ALSO ME NTIONED THAT THE ASSESSEE HAD DECIDED TO CLOSE DOWN THE OPERATION AS THE PROJECT WAS NOT VIABLE. IT IS, THEREFORE, CLEAR THAT THE ASSESSEE H AD CLOSED DOWN THE BUSINESS AND, THEREFORE, ONLY THE EXPENSES REQUIRED FOR MAINTAINING THE CORPORATE IDENTITY OF THE COMPANY COULD BE ALLOWED. SUCH EXPENSES SUCH AS OFFICE EXPENSES OF RS. 66/-, MISCELLANEOUS EXPENSES OF RS. 5,26/- WHICH INCLUDED THE ROC FEES AND LEGAL AND PROFESSIONAL FE ES OF RS. 1,17,000/- HAVE ALREADY BEEN ALLOWED BY THE AO. OUT OF THE REM AINING EXPENSES, THE ORIENTAL SERITECH LIMITED - 6 - MAJOR EXPENSE IS INTEREST ON CUSTOM DUTY OF RS. 1,2 3,25,000/-. THIS EXPENDITURE RELATED TO THE PERIOD 10.1.1997 TO 31.3 .2002 WHICH, THEREFORE, DOES NOT RELATE TO THIS YEAR. MOREOVER THE INTEREST ON CUSTOM DUTY HAS THE SAME NATURE AS CUSTOM DUTY AND THEREFORE IT COULD B E ALLOWED ON PAYMENT BASIS, BUT THE DETAILS FILED ON RECORD SHOW THAT TH E PAYMENT HAD NOT BEEN MADE THIS YEAR. THE PAYMENT HAD BEEN MADE IN THE IM MEDIATE PRECEDING YEAR AND IN THE SUBSEQUENT YEAR. THEREFORE, THE INT EREST OF RS. 1,23,25,000/- IS NOT ALLOWABLE EVEN OTHERWISE. AS R EGARDS THE TECHNOLOGY TRANSFER FEES, THE ASSESSEE HAS ENTERED INTO THE TE CHNICAL COLLABORATION AGREEMENT WITH MC FOR PRODUCTION OF INTERNATIONAL G RADE BIVOLTINE SILK COCOONS. THE AGREEMENT DATED 25.10.1995 SHOWS THAT THE TECHNICAL COLLABORATION AGREEMENT HAD BEEN ENTERED INTO FOR S TARTING A NURSERY OF 125 ACRES AND GOING UPTO 1,000 ACRES FOR COMMERCIAL PRO DUCTION OF BIVOLTINE SILK COCOONS IN INDIA. THE PROJECT ULTIMATELY BECAM E UNVIABLE AND NEVER STARTED. THEREFORE, ANY EXPENDITURE INCURRED IN CON NECTION WITH THE PROJECT SUCH AS TECHNICAL FEES ETC, HAS BEEN RIGHTLY CONSID ERED AS CAPITAL EXPENDITURE BY CIT(A). OTHER EXPENSES WHICH ARE QUI TE INSIGNIFICANT HAVE ALSO BEEN RIGHTLY DISALLOWED AS THE BUSINESS HAS DI SCONTINUED. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE SEE NO INFIRMITY IN THE ORDER OF CIT(A) CONFIRMING THE DISALLOWANCE MADE BY AO. THE ORDER OF CITA) IS, THEREFORE, UPHELD 6. IN THE RESULT APPEAL OF THE ASSESSEE IS DISMISSE D. ORDER PRONOUNCED ON 20-9-2013 SD/- SD/- (R.K. GUPTA) (RAJENDRA SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER SKS SR. P.S, MUMBAI DATED 20.9.2013 ORIENTAL SERITECH LIMITED - 7 - COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, C BENCH, ITAT, MUMBAI BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCHES, MUMBAI