PHARMED LTD, MUMBAI V. DCIT CIR 2(2), MUMBAI

ITA 6569/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9318 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 19-12-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 29-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RA JESH DWIVEDY; GIRIJA DAYAL
• Keywords: Rule of consistency
• Section: 14A

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI . . !'# , $ %& BEFORE SHRI H.L. KARWA, PRESIDENT AND SHRI N.K. BILLAIYA, AM ./I.T.A. NO. 6569/MUM/2011 ( ' ' ' ' / ASSESSMENT YEAR : 2008-09 M/S. PHARMED LTD., 141, PHARMED HOUSE, WALCHAND HIRACHAND MARG, MUMBAI-400 001 / VS. THE DCIT (OSD), CIR.2(2), MUMBAI ./I.T.A. NO. 7005/MUM/2011 ( ' ' ' ' / ASSESSMENT YEAR : 2008-09 THE DCIT (OSD), CIR.2(2), MUMBAI / VS. M/S. PHARMED LTD., 141, PHARMED HOUSE, WALCHAND HIRACHAND MARG, MUMBAI-400 001 &( $ ./ )* ./PAN/GIR NO. AAACP 2191A ( (+ /APPELLANT ) .. ( ,-(+ / RESPONDENT ) (+ . / ASSESSEE BY: SHRI VIJAY MEHTA ,-(+ / . / RESPONDENT BY SHRI GIRIJA DAYAL & SHRI RAJESHDWIVEDY / 01$ / DATE OF HEARING : 19.12.2012 23' / 01$ /DATE OF PRONOUNCEMENT :31.12.2012 ITA NOS. 6569 & 7005/M/11 2 %4 / O R D E R PER N.K. BILLAIYA, AM: THESE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE ARE DIRECTED AGAINST THE VERY SAME ORDER OF THE LD. CIT(A)-5, MU MBAI DT. 29.7.2011 PERTAINING TO A.Y. 2008-09. AS THESE APPEALS WERE H EARD TOGETHER AND ARE DISPOSED OFF BY THIS COMMON ORDER FOR THE SAKE OF C ONVENIENCE AND BREVITY. ITA NO. 6569/MUM/2011 ASSESSEES APPEAL 2. THE ASSESSEE HAS CHALLENGED THE CORRECTNESS OF T HE ORDER OF THE LD. CIT(A) TO CONFIRM THE DISALLOWANCE OF EXPENDITURE O F RS. 10,01,113/- U/S. 14A OF THE ACT R.W. RULE 8D OF THE ACT. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT WH ILE SCRUTINIZING THE RETURN OF THE ASSESSEE DURING THE COURSE OF THE ASS ESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS A N INVESTMENT OF RS. 4.40 CRORES. THE AO SOUGHT EXPLANATION FROM THE AS SESSEE AS TO WHY EXPENSES RELATED TO INVESTMENT BE NOT DISALLOWED U/ S. 14A R.W. RULE 8D OF THE ACT. ON RECEIVING NO RESPONSE, THE AO WENT ON TO DISALLOW A SUM OF RS. 10,01,113/- U/S. 14A R.W. RULE 8D OF THE ACT . 4. THE ASSESSEE AGITATED THE MATTER BEFORE THE LD. CIT(A) BUT WITHOUT ANY SUCCESS. IT WAS EXPLAINED BEFORE THE LD. CIT(A ) THAT THE INVESTMENTS MADE BY THE ASSESSEE ARE IN MUTUAL FUNDS AND WERE C ONTINUED AS SUCH ITA NOS. 6569 & 7005/M/11 3 SINCE LONG TIME. IT WAS FURTHER EXPLAINED THAT THE ASSESSEE COMPANY HAS HUGE NET WORTH CAPITAL PLUS RESERVES AND THE INVEST MENTS HAVE BEEN MADE OUT OF OWN FUNDS. THEREFORE, IT IS NOT THE CASE FOR DISALLOWANCE OF EXPENDITURE U/S. 14A R.W. RULE 8D OF THE ACT. HOWE VER, THE LD. CIT(A) WAS NOT CONVINCED AND CONFIRMED THE DISALLOWANCE MA DE BY THE AO. 5. BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REIT ERATED WHAT HAS BEEN STATED BEFORE THE LOWER AUTHORITIES. 6. THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE FINDINGS OF THE LOWER AUTHORITIES. 7. WE HAVE PERUSED THE ORDERS OF THE LOWER AUTHORIT IES AND THE RIVAL SUBMISSIONS. WE FIND FORCE IN THE CONTENTION OF TH E LD. COUNSEL THAT THE INVESTMENTS HAVE BEEN MADE OUT OF OWN FUNDS AND NOT BORROWED FUNDS, THEREFORE, NO PART OF INTEREST SHOULD BE DISALLOWED U/S. 14A OF THE ACT. FOR THIS PROPOSITION, WE DREW SUPPORT FROM THE FIND INGS OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE U TILITIES POWER LTD. 313 ITR 340(BOM) WHEREIN THE HONBLE HIGH COURT HAS HEL D THAT WHERE THE INVESTMENTS ARE MADE FROM BOTH OWN FUNDS AND LOAN F UNDS, THE PRESUMPTION IS THAT THE INVESTMENTS ARE MADE FROM O WN FUNDS. WE THEREFORE RESTORE THIS MATTER BACK TO THE FILE OF A O. THE AO IS DIRECTED TO VERIFY FROM THE BALANCE SHEET OF THE ASSESSEE WHETH ER ASSESSEE HAS SUFFICIENT OWN FUNDS TO MAKE SUCH INVESTMENTS AND A FTER BEING SATISFIED, THE AO IS DIRECTED NOT TO MAKE ANY DISALLOWANCE SO FAR AS INTEREST IS CONCERNED AFTER GIVING REASONABLE OPPORTUNITY OF BE ING HEARD TO THE ASSESSEE. SO FAR AS ALLOCATION OF OTHER EXPENDITUR E IS CONCERNED, THE ASSESSEE IS DIRECTED TO FURNISH DETAILED ALLOCATION OF EXPENSES BEFORE THE AO. THE AO IS DIRECTED TO VERIFY THE DETAILS AS PE R PROVISIONS OF SEC. ITA NOS. 6569 & 7005/M/11 4 14A R.W. RULE 8D. THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. ITA NO. 7055/M/2011 REVENUES APPEAL 8. THE REVENUE HAS QUESTIONED THE ORDER OF THE LD. CIT(A) WHO ALLOWED THE CLAIM OF SALES INCENTIVES. 9. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS INCURRED SALES INCENTIVES AT RS. 3.30 CRORES. THE TDS WAS DEDUCTED ON THIS PAYMENT. THE AO CALLED FOR THE LEDGER ACCOUNT OF SALES INCENTIVE AND FOUND THAT AN AMOUNT OF RS. 179.44 LAKHS REMAINED OUTSTANDING AT THE END OF THE YEAR. THE AO ALSO NOT ED THAT ON THIS AMOUNT, NO TDS HAS BEEN MADE AND FURTHER THIS OUTSTANDING A MOUNT OF RS. 179.44 LAKHS WAS PAID ON THE FOLLOWING MONTHS IN THE YEARS 2008-09 AND 2009- 10. ON BEING QUESTIONED WHY TDS HAS NOT BEEN DEDUC TED IN THE LIGHT OF THE PROVISIONS OF SEC. 40(A)(IA), IT WAS EXPLAINED THAT THE SALES INCENTIVES HAVE BEEN PAID TO THE EMPLOYEE AND, THEREFORE, PROV ISIONS OF SEC. 40(A)(IA) ARE NOT APPLICABLE TO TDS ON SALARY. 10. THE AO WAS OF THE OPINION THAT THOUGH THE ASSES SEE HAS CLAIMED EXPENDITURE IN THE IMPUGNED ASSESSMENT YEAR, THE EM PLOYEES WOULD BE PAYING TAXES IN THE FOLLOWING YEARS. THE AO FURTHE R OBSERVED THAT THE INCENTIVES HAVE NOT BEEN PAID FULLY TO THE EMPLOYEE S EVEN IN THE FINANCIAL YEAR 2008-09. THEREFORE, THE CLAIM OF THE ASSESSEE REGARDING SALES INCENTIVES BEING RELATED TO THE FINANCIAL YEAR 2007 -08 WAS NOT CORRECT. ACCORDINGLY, THE AO DISALLOWED THE SUM OF RS. 1.79 CRORES AS CONTINGENT LIABILITY. ITA NOS. 6569 & 7005/M/11 5 11. THE ASSESSEE CARRIED THIS MATTER BEFORE THE LD. CIT(A) AND VEHEMENTLY ARGUED THAT WITHOUT APPRECIATING THE NAT URE OF EXPENDITURE, THE AO ERRONEOUSLY DISALLOWED THE ENTIRE EXPENDITUR E BY HOLDING THAT THESE ARE ALL CONTINGENT LIABILITY AND, HENCE, ARE NOT ALLOWABLE TO BE DEDUCTED. IT WAS FURTHER EXPLAINED THAT THIS PRACT ICE HAS BEEN FOLLOWED BY THE ASSESSEE CONSISTENTLY OVER THE YEARS AS THE SAL ES TEAM HAS TO FULFILL CERTAIN CONDITIONS FOR EXAMPLE, NO SALES RETURN, NO EXPIRE GOODS RETURNS ETC. TO CLAIM THE INCENTIVE. THERE IS ALWAYS A CER TAIN TIME LAG BETWEEN ACTUAL DISBURSEMENTS OF THE SALES INCENTIVE. HOWEV ER, THE ASSESSEE HAS TO PREPARE ACCOUNTS ON MERCANTILE BASIS AS PER THE STA TUTE, THEREFORE, THE INCENTIVE PERTAINING TO THE SALES OF A PARTICULAR Y EAR IS PROVIDED IN THE SAME YEAR AND ONCE THE SALES TEAM FULFILLS ALL THE TERMS AND CONDITIONS OF INCENTIVE SCHEME, THE ACTUAL DISBURSEMENT OF INCENT IVE TAKE PLACE. 12. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS MADE BY THE ASSESSEE, THE LD. CIT(A) CAME TO THE FINDING THAT T HE RETURNS OF THE ASSESSEE ARE SUBJECTED TO SCRUTINY IN EARLIER ASSES SMENT YEARS ALSO I.E. A.Y. 2005-06 AND 2006-07. HOWEVER, THE AO HAS DEVI ATED FROM EARLIER ASSESSMENT ORDERS IN MAKING SUCH ADDITIONS FOR THE FIRST TIME. ACCORDING TO THE LD. CIT(A), THIS IS AGAINST THE RULE OF CON SISTENCY. THEREAFTER, THE LD. CIT(A) RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS VS CIT 245 ITR 428 (SC) AND ROTORK CONTROLS INDIA PVT. LTD. VS CIT 180 TAXMAN 422 (SC) HELD THAT THE AO WAS NOT JUSTIFIED IN MAKING DISALLOWANCES BY TREAT ING UNPAID AMOUNT OF RS. 1.79 CRORES AS CONTINGENT LIABILITY. 13. REVENUE IS AGGRIEVED BY THIS FINDING OF THE LD. CIT(A) AND IS BEFORE US. ITA NOS. 6569 & 7005/M/11 6 14. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY RE LIED UPON THE FINDINGS OF THE AO AND ALSO ON THE DECISION OF THE HONBLE HIGH COURT OF DELHI IN THE CASE OF CIT VS SHRI RAM PISTONS & RING S LTD. 174 TAXMAN 147 (DEL). 15. THE LD. COUNSEL FOR THE ASSESSEE STRONGLY RELIE D UPON THE FINDINGS OF LD. CIT(A). 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE ORDERS OF THE LOWER AUTHORITIES. WE HAVE ALSO THE BENEFIT OF GOING THROUGH THE INCENTIVE SCHEME AS EXHIBITED FROM PAGE 1 TO 6 OF T HE PAPER BOOK FILED BY THE ASSESSEE. WE FIND THAT SIMILAR INCENTIVE HAVE B EEN PAID IN EARLIER YEARS ALSO. WE ALSO FIND THAT EARLIER YEARS RETURN WERE SUBJECTED FOR SCRUTINY ASSESSMENT. HOWEVER, SUCH ADDITIONS HAVE BEEN MADE FOR THE FIRST TIME. WE AGREE WITH THE LD. CIT(A) THAT THIS IS IN GROSS VIOLATION OF THE RULE OF CONSISTENCY , WHEN NO NEW FACTS HAVE BE EN BROUGHT ON RECORD. IT IS NOT IN DISPUTE THAT THE LIABILITY HAS BEEN CR YSTALLIZED DURING THE YEAR UNDER CONSIDERATION. THE AO BASED HIS FINDING SOLEL Y ON THE BASIS THAT THE SAME HAVE BEEN PAID IN SUBSEQUENT YEARS I.E. 2008-0 9 AND 2009-10 AS THE ASSESSEE IS MAINTAINING BOOKS OF ACCOUNT ON MERCANT ILE SYSTEM OF ACCOUNTING. THE LIABILITY WHICH HAS CRYSTALISED IN THE YEAR HAS TO BE ACCOUNTED FOR IN THE BOOKS OF ACCOUNT WHICH THE ASS ESSEE HAS RIGHTLY DONE AS THE BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR. THE RATIO LAID DOWN BY THE SUPREME COURT IN THE CASE OF BHARAT EARTH MOVERS (SUPRA) SQUARELY APPLIES ON THE FACTS OF THE INSTAN T CASE. RELIANCE PLACED BY THE DR ON THE DECISION OF THE HONBLE DELHI HIGH COURT (SUPRA) IS ON DIFFERENT FACTS INASMUCH AS IN THAT CASE THE LIABIL ITY DID NOT CRYSTALISED IN THE IMPUGNED YEAR. HOWEVER, IN THE PRESENT CASE, T HE LIABILITY HAS CRYSTALLIZED DURING THE IMPUGNED YEAR, IT CANNOT BE SAID TO BE CONTINGENT ITA NOS. 6569 & 7005/M/11 7 LIABILITY. MERELY BECAUSE THE RECIPIENTS WOULD BE DISCLOSING THE RECEIPT OF SALES INCENTIVE IN SUBSEQUENT YEARS WHEN THEY WILL RECEIVE THE PAYMENT WOULD NOT IPSO FACTO ENTITLE THE AO TO DISALLOW THE SAME IN THE IMPUGNE D YEAR IN THE CASE OF THE ASSESSEE. THEREFORE, WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE FINDINGS OF THE LD. CIT(A). ACCOR DINGLY, WE CONFIRM THE ORDER OF THE LD. CIT(A) AND APPEAL FILED BY THE REV ENUE IS DISMISSED. 17. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AND THE APPEAL FILED BY THE REVENUE IS DISMISSED. 5 06 50 / 7 &80 )& / 7 $5) / )0 9' ORDER PRONOUNCED IN THE OPEN COURT ON 31.12.2012 %4 / 3' $ 7 :%6 31.12.2012 3 / ; SD/- SD/- (H.L. KARWA) (N.K. BILLAIYA) /PRESIDENT $ %& / ACCOUNTANT MEMBER MUMBAI; :% DATED 31.12.2012 . . ./ RJ , SR. PS ITA NOS. 6569 & 7005/M/11 8 %4 / ,0 < '0 / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. , -(+ / THE RESPONDENT. 3. = ( ) / THE CIT(A)- 4. = / CIT 5. >; ,0 , , / DR, ITAT, MUMBAI 6. ;? @ / GUARD FILE. %4 / BY ORDER, - 0 ,0 //TRUE COPY// A / 9 ) DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI