Farmson Pharmaceuticals Gujarat Ltd., Baroda V. The ACIT.,Circle-1(2), Baroda

ITA 665/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85697 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 30-01-2015
• Assessment Year: 2002-2003
• Appeal Filed On: 03-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ROOP CHAND SR DR
• Keywords: Capital asset; Business income; Bad and doubtful debts; Capital expenditure
• Section: 37; 28

Judgement Text

, B IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER ./ ITA NO.665/AHD/2011 / ASSTT. YEAR: 2002-03 FARMSON PHARMACEUTICALS GUJARAT PVT. LTD. 28-35, GIDC INDUSTRIAL ESTATE NANDESARI, BARODA. PAN : AAACF 3358 B VS ACIT 1(2) BARODA. ! / (APPELLANT) '# ! / (RESPONDENT) ASSESSEE(S) BY : SHRI MILIN MEHTA, AR REVENUE BY : SHRI ROOPCHAND, SR-DR / DATE OF HEARING : 30/01/2015 / DATE OF PRONOUNCEMENT: 05/03/2015 $%/ O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER: THIS AN APPEAL FILED BY THE ASSESSEE AGAINST ORDER OF THE CIT(A)-I, BARODA DATED 10.12.2010 FOR ASSTT.YEAR 2002-03. 2. THE GROUND NO.1 OF THE APPEAL IS DIRECTED AGAINS T THE ORDER OF THE CIT(A) IN REJECTING THE CLAIM OF THE ASSESSEE TO AL LOW DEDUCTION OF RS.4,74,407/- AS BUSINESS LOSS U/S.28 OF THE ACT. 3. BRIEF FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE ASSESSEE HAS CLAIMED BAD DEBTS OF RS.29,44,060/- WHICH REPRE SENTS SMALL BALANCES WITH VARIOUS PARTIES AND DEPOSITS WITH GOV ERNMENT DEPARTMENT AND IN THE ABSENCE OF ANY EVIDENCE AND CORRESPONDEN CE REGARDING LEGAL ACTION ETC., THE AO DISALLOWED RS.4,74,404/-. ITA NO.665/AHD/2011 2 4. BEFORE THE CIT(A), THE ASSESSEE CONTENDED THAT T HE AMOUNTS WERE ADVANCES GIVEN FOR PURCHASE OF MATERIALS OR SERVICE S. IT WAS SUBMITTED THAT THE ADVANCES WERE GIVEN FOR BUSINESS OF THE AS SESSEE. IT WAS ALSO SUBMITTED THAT NONE OF THE ADVANCES WERE MADE FOR P URCHASE OF FIXED ASSETS, AND THEREFORE, THE SAME WAS ALLOWABLE UNDER SECTION 28 AS BUSINESS LOSS. 5. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE AMOUNTS CLAIMED AS BAD DEBTS WERE NOT TRAD ING DEBTS, BUT WERE ADVANCES. NO DETAILS WERE FURNISHED TO SHOW T HAT THE LOSS IN RESPECT OF THESE DEPOSITS HAS CRYSTALLIZED DURING T HE YEAR, AND THUS, THE CLAIM OF BUSINESS LOSS OF RS.4,74,404/- WAS REJECTE D. 6. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIAL AVAILABLE ON REC ORD. IN THE INSTANT CASE, THE ASSESSEE CLAIMED RS.29,44,060/- AS BAD DE BTS IN PROFIT & LOSS ACCOUNT. THE AO DISALLOWED RS.4,74,404/- OUT OF TH E SAME ON THE GROUND THAT THESE REPRESENT SMALL BALANCES WITH VAR IOUS PARTIES AND DEPOSITS IN GOVERNMENT DEPARTMENTS AND NO EVIDENCE OF LEGAL ACTION WAS PRODUCED BEFORE US. 7. ON APPEAL, THE CIT(A) CONFIRMED THE ACTION OF TH E AO ON THE GROUND THAT NO MATERIAL WAS BROUGHT BEFORE HIM TO S HOW THAT THESE RECEIVABLES BECAME BAD DURING THE YEAR UNDER CONSID ERATION. WE FIND THAT IT IS NOT IN DISPUTE THAT THE AMOUNT IN QUESTI ON WAS ACTUALLY WRITTEN OFF AS IRRECOVERABLE BY THE ASSESSEE IN ITS BOOKS O F ACCOUNTS. THE REVENUE HAS BROUGHT NO MATERIAL TO SHOW THAT THE AM OUNTS WERE NOT IRRECOVERABLE AND THE ASSESSEE ACTUALLY RECEIVED TH E AMOUNT AT ANY TIME. WE FIND THAT THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. MYSORE SUGAR CO. LTD., (1962) 46 ITR 469 (SC) HELD THAT WHEN ADVANCE WAS GIVEN DURING THE COURSE OF BUSINESS ON REVENUE ACCOUNT, THE LOSS ON SUCH ADVANCE IS BUSINESS LOSS ON REVENUE ACCOUNT AND IS DEDUCTIBLE. THEREFORE, IN OUR CONSIDERED VIEW, THE ADVANCES WHI CH WERE GIVEN ITA NO.665/AHD/2011 3 DURING THE COURSE OF BUSINESS AND WHICH WAS NOT ON THE CAPITAL FIELD, AND IN THE ABSENCE OF ANY MATERIAL TO SHOW THAT THE AMOUNT WAS NOT BAD, SUCH AMOUNT IS ALLOWABLE AS BUSINESS LOSS TO T HE ASSESSEE IN THE YEAR IN WHICH THE SAME WAS ACTUALLY WRITTEN OFF BY THE ASSESSEE AS IRRECOVERABLE IN ITS BOOKS OF ACCOUNTS. 8. HOWEVER, IN THE INSTANT CASE, IT IS OBSERVED THA T THE AO STATED THAT THE AMOUNT OF RS.4,74,404/- CONSISTED OF ADVAN CES GIVEN TO VARIOUS PARTIES AS WELL AS DEPOSITS WITH THE GOVERN MENT DEPARTMENTS. PARTY-WISE BIFURCATION IS NOT AVAILABLE ON RECORD. IN THE ABSENCE OF THE SAME, IT IS NOT CLEAR WHETHER THERE WAS ANY DEPOSIT IN THE CAPITAL FIELD. IN OUR CONSIDERED VIEW, ADVANCES WHICH WERE ON REVE NUE FIELD, IS ALLOWABLE AS REVENUE LOSS, WHEREAS THE DEPOSITS WHI CH WERE ON CAPITAL FIELD IS NOT ALLOWABLE BEING CAPITAL LOSS. WE, THE REFORE, SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMIT THE MATTE R BACK TO THE FILE OF THE AO FOR ADJUDICATION AFRESH IN THE LIGHT OF THE DISCUSSIONS MADE HEREINABOVE AFTER VERIFICATION OF THE NATURE OF ADV ANCES AND DEPOSITS IN QUESTION. NEEDLESS TO MENTION THAT BEFORE ADJUDICA TING THE ISSUE AFRESH, THE AO SHALL ALLOW REASONABLE AND PROPER OP PORTUNITY OF HEARING TO THE ASSESSEE. THUS, THIS GROUND OF THE APPEAL O F THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 9. THE GROUND NO.2 OF THE APPEAL IS DIRECTED AGAINS T THE ORDER OF THE CIT(A) CONFIRMING THE ACTION OF THE AO IN DISALLOW ING AN AMOUNT OF RS.2,68,063/- ON THE GROUND THAT IT PERTAINS TO PEN ALTY FOR INFRINGEMENT OF LAW. 10. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND MATERIAL AVAILABLE ON REC ORD. 11. BRIEF FACTS OF THE CASE THAT THE ASSESSEE CLAIM ED DEDUCTION FOR RS.2,68,063/- UNDER THE HEAD SALES-TAX PENALTY LE VIED BY THE SALES- TAX DEPARTMENT FOR NON-PAYMENT OF SALES-TAX INTO GO VERNMENT ACCOUNT. ITA NO.665/AHD/2011 4 THE SAME WAS DISALLOWED BY THE AO ON THE GROUND THA T ANY PAYMENT MADE FOR INFRINGEMENT OF LAW ON ACCOUNT OF PENALTY, WAS NOT ALLOWABLE DEDUCTION UNDER SECTION 37 OF THE ACT. 12. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT DURING THE YEARS, 1995-96 TO 2002-03, THE ASSESSEE WAS NOT DOING WELL . IN 1998-99, THE COMPANY RECEIVED ORDER FROM THE SALES-TAX DEPARTMEN T LEVYING INTEREST AND PENALTY FOR NON-PAYMENT OF SALES-TAX. THE COMP ANY REQUESTED THE DEPARTMENT TO CONSIDER THE FINANCIAL POSITION OF TH E COMPANY, AND ALLOW PAYMENTS IN INSTALMENTS. THE SALES-TAX DEPARTMENT ALLOWED THE PLEA OF THE ASSESSEE TO PAY THE ARREARS IN INSTALMENTS. IT WAS SUBMITTED THAT NO CIVIL OR CRIMINAL PROCEEDINGS WERE INITIATED AGA INST THE ASSESSEE. IT WAS, THEREFORE, PRAYED THAT THE AMOUNT DID NOT REPR ESENT ANY PAYMENT FOR INFRINGEMENT OF LAW, AND THE SAME WAS ALLOWABLE AS DEDUCTION TO THE ASSESSEE. 13. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT THE LEVY OF SALES-TAX PENALTY WAS ON ACCOUNT O F INFRINGEMENT OF SALES-TAX PROVISIONS AND IT AMOUNTS TO OFFENCE, AND THEREFORE, WAS NOT ALLOWABLE DEDUCTION, AND CONFIRMED THE ACTION OF TH E AO. 14. BEFORE US, THE AR OF THE ASSESSEE SUBMITTED THA T IN VIEW OF THE DECISION OF THE HONBLE PUNJAB AND HARYANA HIGH COU RT IN THE CASE OF CIT VS. HOSHIARI LAL KEWAL KRISHAN, (2009) 311 ITR 336, WHEREIN IT WAS HELD THAT PENALTY AND FINE FOR BELATED PAYMENT OF E XCISE DUTY IS COMPENSATORY IN NATURE, AND DISALLOWANCE MADE IS RE QUIRED TO BE DELETED. 15. ON THE OTHER HAND, DR SUPPORTED THE ORDERS OF T HE LOWER AUTHORITIES. 16. WE FIND THAT IT IS NOT IN DISPUTE THAT THE ASSE SSEE HAD PAID SALES- TAX PENALTY OF RS.2,68,063/-. WE FIND THAT THE HON BLE PUNJAB AND ITA NO.665/AHD/2011 5 HARYANA HIGH COURT IN THE CASE OF CIT VS. HOSHIARI LAL KEWAL KRISHNAN (SUPRA) HAS HELD THAT WHERE THE PAYMENT WAS NOT IN THE NATURE OF PUNISHMENT, BUT WAS BY WAY OF COMPENSATION, THEN TH E AMOUNT WAS ALLOWABLE AS DEDUCTION TO THE ASSESSEE. THE HONBL E HIGH COURT OBSERVED THAT THE HONBLE SUPREME COURT IN THE CASE OF HAJI AZIZ AND ABDUL SHAKOOR BROTHERS VS. CIT, 41 ITR 350 HAS HELD THAT ANY AMOUNT PAID, WHICH WAS IN THE NATURE OF PENALTY FOR BREACH OF LAW, WAS NOT ALLOWABLE AS DEDUCTION WHILE COMPUTING THE INCOME O F THE ASSESSEE, AS THE PAYMENT WAS NOT TO COMPENSATE THE LOSS ON ACCOU NT OF DELAY IN MAKING THE PAYMENT, BUT WAS ON ACCOUNT OF PENALTY F OR BREACH OF LAW. NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE SAID AMOUNT WAS PAID BY THE ASSESSEE BY WAY OF COMPENSATION FOR DELAY IN MAKING THE PAYMENT OF SALES-TAX. IN ABSENCE OF SUCH MATER IAL, WE DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE ORDER OF THE CIT(A), WHICH IS HEREBY CONFIRMED AND THE GROUND OF THE APPEAL OF TH E ASSESSEE IS DISMISSED. 17. THE GROUNDS NO.3 AND 4 OF THE APPEAL ARE DIRECT ED AGAINST THE ORDER OF THE CIT(A) IN MAKING DISALLOWANCE OF RS.1, 80,293/- OUT OF TOTAL EXPORT PROMOTION EXPENSES AND DISALLOWANCE OF RS.11 ,208/- OUT OF TOTAL SALES PROMOTION EXPENSES ON THE GROUND THAT I T IS NOT INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 18. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF THE LOWER AUTHORITIES AND MATERIAL AVAILABLE ON REC ORD. 19. BRIEF FACTS OF THE CASE ARE THAT THE AO MADE DI SALLOWANCE OF RS.1,80,293/- OUT OF EXPORT PROMOTION EXPENSE ON TH E GROUND THAT THE ASSESSEE, EVEN WHEN ASKED TO FURNISH SPECIFIC DETAI LS OF EXPENSES RELATING TO VISIT OF SHRI K.K. VITHANI, FAILED TO F URNISH THE SAME. THEREFORE, HE HELD THAT THE EXPENSES WERE NOT INCUR RED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSE SSEE, AND DISALLOWED THE SAME. SIMILARLY, THE AO OBSERVED THAT THE ASSE SSEE HAS CLAIMED ITA NO.665/AHD/2011 6 RS.11,208/- INCURRED ON THE ACCOUNT OF EXPENSES FOR AIR-TICKET OF SHRI VINIT MENON, AS SALES PROMOTION EXPENSES. THE ASSE SSEE WAS ASKED TO FURNISH SPECIFIC DETAILS ESTABLISHING THAT IT WAS F OR BUSINESS OF THE ASSESSEE, AND THAT WHAT BENEFITS WERE DERIVED BY TH E ASSESSEE IN BUSINESS BY INCURRING SUCH EXPENSES. SINCE NO DETA ILS WERE FURNISHED, THE AO HELD IT TO BE NOT INCURRED WHOLLY AND EXCLUS IVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE, AND DISALLOWED THE SAM E. 20. ON APPEAL BEFORE THE CIT(A), THE ASSESSEE SUBMI TTED THAT TO COPE UP WITH TOUGH COMPETITION, IT WAS ESSENTIAL TO STAY IN CONSTANT TOUCH WITH THE CUSTOMERS, AND TRAVELING EXPENSES INCURRED BY THE ASSESSEE FOR SUCH PURPOSES. IT WAS SUBMITTED THAT THE SALES OF THE COMPANY HAS INCREASED FROM RS.5.16 CRORES TO RS.12.61 CRORES. 21. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT EXCEPT FOR FILING THE AIR-TICKETS, NO EVIDENCE , LIKE THE PURPOSE OF VISIT, TOUR REPORT ETC. WERE FURNISHED TO ESTABLISH THE BUSINESS PURPOSE OF THESE EXPENDITURE. THEREFORE, CIT(A) CONFIRMED THE ADDITION MADE BY THE AO. 22. BEFORE US, THE AR RELIED UPON THE SUBMISSIONS M ADE BEFORE THE CIT(A). 23. WE FIND THAT THE APART FROM MAKING A GENERAL SU BMISSION THAT THE TURNOVER OF THE ASSESSEE HAS INCREASED, NO SPECIFIC ERROR IN THE ORDER OF THE CIT(A) COULD BE POINTED OUT BY THE AR. THE PUR POSE OF VISIT AND THE BUSINESS CONNECTION OF THE ABOVE EXPENDITURE COULD NOT BE ESTABLISHED BY THE ASSESSEE BY PRODUCING RELEVANT MATERIAL. IN THE ABSENCE OF THE SAME, WE DO NOT FIND ANY GOOD REASON TO INTERFERE W ITH THE ORDER OF THE CIT(A), WHICH IS CONFIRMED. THE GROUND OF THE APPE AL OF THE ASSESSEE IS DISMISSED. ITA NO.665/AHD/2011 7 24. THE GROUND NO.5 OF THE APPEAL IS DIRECTED AGAIN ST THE ORDER OF THE CIT(A) IN CONFIRMING THE ACTION OF THE AO IN MAKING DISALLOWANCE OF RS.2,19,673/- ON ACCOUNT OF REPAIRING EXPENSES. 25. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. 26. BRIEF FACTS OF THE CASE ARE THAT THE AO OBSERVE D THAT THE ASSESSEE HAS INCURRED THE EXPENDITURE OF RS.2,19,673/- ON RE NOVATION OF PLANT & MACHINERY. THE AO WAS OF THE VIEW THAT ITEMS REPLA CED BY THE ASSESSEE COMPANY WERE IN THE NATURE OF CAPITAL ASSE TS, AND SUCH EXPENDITURE HAD GIVEN ENDURING BENEFIT TO THE ASSES SEE. THUS, REPAIR EXPENSES OF RS.2,19,673/- WAS DISALLOWED BY TREATIN G THE SAME AS CAPITAL EXPENDITURE. 27. ON APPEAL, THE CIT(A) OBSERVED THAT A PERUSAL O F MANUFACTURING PROCESS AND THE NATURE OF EXPENSES, SHOWS THAT THE RENOVATION EXPENSES ARE NOT IN THE NATURE OF CURRENT REPAIRS A ND ARE TO BE CAPITALIZED. THEREFORE, THE CIT(A) CONFIRMED THE D ISALLOWANCE OF RS.2,19,673/-. 28. BEFORE US, THE AR CONTENDED THAT THE EXPENSES I N QUESTION WAS INCURRED FOR PRESERVING AND RESTORING OF THE MACHIN ERY TO ITS EARLIER EFFICIENCY, AND NO NEW CAPITAL ASSETS OF ANY ENDURI NG NATURE WAS ACQUIRED BY INCURRING THE EXPENSES. 29. WE FIND THAT NO DETAILS OF THE EXPENDITURE IN Q UESTION HAS BEEN BROUGHT ON RECORD BY EITHER OF THE LOWER AUTHORIZES OR BY THE PARTIES BEFORE US. 30. IN THE ABSENCE OF ANY DETAILS OF THE EXPENDITUR E, IT IS NOT POSSIBLE ON OUR PART TO ADJUDICATE THE ISSUE COMPLETELY. IN OUR CONSIDERED VIEW, WHEN A PART OF THE MACHINE IS REPLACED, THEN THE RE SULTANT EXPENDITURE IS REVENUE IN NATURE, BUT WHEN THE PART REPLACED IT SELF CAN BE REGARDED ITA NO.665/AHD/2011 8 AS A SEPARATE AND INDEPENDENT MACHINE, THEN THE EXP ENDITURE IS CAPITAL IN NATURE. 31. BOTH THE LOWER AUTHORITIES HAVE NOT CONSIDERED THE ISSUE FROM THE ABOVE POINT OF VIEW. IN THE CIRCUMSTANCES, IN OUR CONSIDERED VIEW, IT SHALL BE IN THE INTEREST OF JUSTICE TO RESTORE THE ISSUE BACK TO THE FILE OF THE AO FOR ADJUDICATION AFRESH IN THE LIGHT OF THE OBSERVATION MADE HEREINABOVE AFTER PROPER VERIFICATION BY PASSING A SPEAKING ORDER. 32. NEEDLESS TO MENTION THAT THE AO SHALL PROVIDE R EASONABLE AND PROPER OPPORTUNITY OF HEARING TO THE ASSESSEE BEFOR E ADJUDICATING THE ISSUE AFRESH. THUS, THIS GROUND OF THE APPEAL OF T HE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. 33. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE COURT ON THURSDAY THE 5 TH MARCH, 2015 AT AHMEDABAD. SD/- SD/- ( SHAILENDRA KUMAR YADAV ) JUDICIAL MEMBER ( N.S. SAINI) ACCOUNTANT MEMBER