Mafatlal Plywood Industries Ltd., Bangalore V. ITO, Bangalore

ITA 718/BANG/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8501 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-12-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 17-07-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: H A K RAO CHARTERED ACCOUNTANT
• Keywords: Capital asset; Date of conversion; Capital expenditure
• Section: 143(3); 154

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE DR. O.K NARAYANAN, VICE PRESIDENT AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NOS.717 & 718/BANG/20 09 (ASST. Y EAR -2005-06) M/S MAFATLAL PLYWOOD INDUSTRIES LTD., POST BOX NO.2276, TUMKUR ROAD, YASWANPUR, BANGALORE-560 022. . APPELLANT VS. THE INCOME-TAX OFFICER, WARD-12(1), BANGALORE. . RESPONDENT ITA NO.789/BANG/2009 (ASST. Y EAR -2005-06) THE INCOME-TAX OFFICER, WARD-12(1), BANGALORE. . APPELLANT VS. M/S MAFATLAL PLYWOOD INDUSTRIES LTD., POST BOX NO.2276, TUMKUR ROAD, YASWANPUR, BANGALORE-560 022. . RESPONDENT REVENUE BY : SMT. SWATI S PATIL, COMMISSIONER OF I NCOME-TAX SMT. V.S SREELEKHA, ADDL. CO MMISSIONER OF INCOME-TAX ASSESSEE BY : SHRI H.A.K RAO, CHARTERED ACCOUNTANT ITA NOS.717, 718 & 789/B/09 2 O R D E R PER DR. O.K NARAYANAN, VICE PRESIDENT THIS IS A BUNCH OF THREE APPEALS, ALL RELATING TO THE ASSESSMENT YEAR 2005-06. TWO APPEALS ARE FILED BY THE ASSESSE E AND ONE APPEAL IS FILED BY THE REVENUE. THE ASSESSEE HAS FILED ONE A PPEAL IN THE CONTEXT OF THE ASSESSMENT COMPLETED U/S 143(3) AND ONE APPE AL IN THE LIGHT OF THE ORDER PASSED U/S 154 OF THE INCOME-TAX 1961. T HE APPEAL OF THE REVENUE IS FILED IN THE CONTEXT OF ASSESSMENT COMPL ETED U/S 143(3). 2. SECTION 143(A) APPEALS ARE DIRECTED AGAINST THE ORDER OF THE CIT-V AT BANGALORE DATED 19.5.2009. SECTION 154 AP PEAL IS AGAIN DIRECTED AGAINST THE ORDER OF THE SAME AUTHORITY DA TED 19.5.2009. 3. FIRST WE WILL TAKE UP THE APPEAL OF THE ASSESSEE IN ITA NO.717/BANG/2009 FILED IN THE CONTEXT OF THE ASSESS MENT COMPLETED U/S 143(3). 4. THE RELEVANT GROUNDS RAISED BY THE ASSESSEE IN T HIS APPEAL ARE EXTRACTED BELOW : ITA NOS.717, 718 & 789/B/09 3 (I)(A) THE LEARNED APPELLATE OFFICER HAS ERRED IN CONCURRING WITH THE AO THAT AMOUNT OF RS.4,93,41,783/- AGREED TO BE PAID TO EMPLOYEES IN TERMS OF AN AGREEMENT ENTERED WITH THE EMPLOYEES UNION AMOUNT TO AN EXPENDITURE ENVISAGED IN 35DDA. (B) THE LEARNED APPELLATE OFFICER HAS FAILED TO APPRECIATE THE AMOUNT AGREED TO BE PAID TO EMPLOYEES IN TERMS OF THE SETTLEMENT DATED 19.03.19 98 IS NOTHING BUT 84% OF THE WAGES PAYABLE TO THE EMPLOYEES DURING CLOSURE PERIOD FROM DECEMBER 1989 TO TILL EFFECTIVE DATE OF RESIGNATION, OR THE DATE OF DEATH IN CASE OF EXPIRED EMPLOYEES OR DATE OF SUPERANNUATION OF EMPLOYEES WHO WOULD HAVE RETIRED EARLIER TO 01.01.1998 AND THE SAME WAS PROVIDED IN THE ACCOUNTS FOR THE YEAR ENDED 31.03.2003 WHEN THE HIGH COURT OF KARNATAKA REJECTED THE RECOMMENDATION OF THE BIFR THE APPELLANT COMPANY SHOULD BE WOUND UP CAN NEVER BE AN EXPENSES AS ENVISAGED U/S 35DDA AS THE SAME IS LESS THAN THE WAGES PAYABLE FOR THE PERIOD. (C) THE VARIOUS OTHER REASONS GIVEN IN PARA 6 OF THE ORDER THAT THE AMOUNTS ARE DISBURSED TO AN EMPLOYEES ONLY IF HE ACCEPTS THE VOLUNTARY SCHEME N OT OTHERWISE AMOUNTS TO VRS IN ACCORDANCE SECTION 10(10C) READ WITH RULE 2BA OF INCOME-TAX RULES AND HENCE SECTIONS 35DDA APPLIES AND AT BEST ONLY 1/5 TH ITA NOS.717, 718 & 789/B/09 4 OF THE EXPENDITURE CAN BE ALLOWED ARE AGAINST LAW FACTS OF THE CASE AND WEIGHT OF EVIDENCE. (II) THE LEARNED APPELLATE OFFICER HAS FAILED TO APPRECIATE THE DECISION OF THE DELHI HIGH COURT IN MODI SPINNING AND WEAVING MILLS LTD. VS. CIT AND APPROVED BY THE SUPREME COURT IS NOT APPLICABLE TO APPELLANTS CASE AND ERRED IN CONCLUDING RS.3,19,40,709/- CANNOT BE ALLOWED AS A DEDUCTION AND ONLY RS.98,68,356/- IS ALLOWABLE FOR THE YEAR UNDER APPEAL. (A) THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE AO TO RECALCULATE THE WHOLE EXPENSES U/S 35DDA AND ALLOW 1/5 TH OF THE EXPENSES CLAIMED BY APPELLANT FOR A.Y 2001-02, 2002-03, 2004-05, 2005-06 AND 2006-07 RESPECTIVELY (B) THE DIRECTION NOW GIVEN IS NOT A VALID DIRECTION. HENCE THE SAME BE SET ASIDE. (C) THE AO MAY BE DIRECTED TO ALLOW THE ENTIRE PAYMENTS MADE AS AN EXPENSES ALLOWABLE FOR THE YEAR ALTERNATIVELY PROPER DIRECTION MAY BE ISSUED ITA NOS.717, 718 & 789/B/09 5 ALLOWING 1/5 TH OF THE SAME FOR A.Y 2005-06 AND ON WARS FOR 5 YEARS. (V) THE LEARNED CIT(A) HAS ERRED IN CONCURRING WITH AO THAT COST INFLATION INDEX BENEFIT MUST BE CALCULATED UPTO THE DATE OF CONVERSION OF FIXED ASS ETS TO STOCK-IN TRADE AND NOT UP TO THE DATE OF SALE. 5. THE FIRST ISSUE AS SEEN IN THE ABOVE GROUNDS IS AGAINST THE DIRECTION OF THE ASSESSING OFFICER AS CONFIRMED BY THE CIT(A) THAT THE EXPENSES SHOULD BE ALLOWED U/S 35DDA AT THE RATE OF 1/5 TH EACH FOR THE FIVE ASSESSMENT YEARS. 6. WE HAVE HEARD BOTH SIDES AT LENGTH ON THIS ISSUE AND PERUSED THE RELEVANT RECORDS AND MATERIALS. THE GROUNDS RA ISED BY THE ASSESSEE IN THIS CONTEXT IS EXHAUSTIVE, WHICH BRING OUT THE NATURE OF THE DISPUTES RAISED BY THE ASSESSEE. THE RELIEF CLAIMED BY THE ASSESSEE IS THAT THE SUM OF RS.4,93,41,783/- PAID TO ITS EMPLOYEES IN T ERMS OF AGREEMENT SHOULD HAVE BEEN ALLOWED AS EXPENDITURE IN ITS ENTI RETY. 7. AS A LEGAL PROPOSITION, THE CONTENTION OF THE LE ARNED COUNSEL IS WELCOME THAT SUCH PAYMENTS ARE ENTITLED FOR DEDUCTI ON IN COMPUTING TAXABLE INCOME OF AN ASSESSEE. BUT, HERE IN THE PR ESENT CASE, WE ARE ITA NOS.717, 718 & 789/B/09 6 DEALING WITH ASSESSMENT YEAR 2005-06. THE PAYMENT RELATED TO THE EXPENSES INCURRED FOR PRIOR ASSESSMENT YEARS BEFORE THE CLOSURE OF THE MANUFACTURING ACTIVITY OF THE ASSESSEE COMPANY. WH ILE PREPARING THE PROFITS AND LOSS ACCOUNT FOR THOSE ASSESSMENT YEARS , WHILE THE ASSESSEE COMPANY WAS FUNCTIONING, A MAJOR PART OF THE EXPENS ES HAVE ALREADY BEEN CLAIMED BY WAY OF DEDUCTION ON ACCRUAL BASIS. THE ENHANCEMENTS TO THE EXPENSES WERE MADE THEREAFTER AS A RESULT OF NEGOTIATIONS AND SETTLEMENTS. THOSE NEGOTIATIONS A ND SETTLEMENTS WERE COMPLETED VERY MUCH PRIOR TO THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL. THE ONLY THING IS TH AT THE FINAL CULMINATION OF THESE NEGATIONS WERE CONVERTED INTO ACTUAL PAYMENTS ONLY IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMEN T YEAR UNDER APPEAL. BUT IN SPITE OF THAT, ASSESSEE HAS NOT MADE ANY PR OVISION FOR THESE EXPENSES IN ITS ACCOUNTS FOR THE EARLIER ASSESSMENT YEARS. EVEN THOUGH, IT WOULD NOT HAVE BEEN POSSIBLE FOR THE ASS ESSEE COMPANY TO FORESEE THE EXACT AMOUNT OF EXPENDITURE TO BE INCUR RED AT THE TIME OF FINAL SETTLEMENT OF THE LIABILITIES, THE LIABILITIE S COULD HAVE BEEN ESTIMATED FAIRLY WELL. THEREFORE, THE ASSESSEE WAS BOUND TO PROVIDE FOR THOSE EXPENSES IN THE ACCOUNTS OF THE RESPECTIV E EARLIER ASSESSMENT YEARS. ITA NOS.717, 718 & 789/B/09 7 8. NOW, WHAT HAPPENED IN THIS CASE IS THAT WHILE TH E ASSESSEE HAS CLAIMED THE EXPENDITURE FOR THE IMPUGNED ASSESSMENT YEAR, THE BUSINESS HAS ALREADY COME TO A STOP AND STANDSTILL SINCE LONG BACK IN THE PAST. NOW THE PAYMENTS WERE MADE BY THE ASSESS EE IN THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL FOR RELEASING ITS ASSETS AND PROPERTIES FROM ENCUMBRANC ES AND TO MAKE WAY FOR ITS UNINTERRUPTED DISPOSAL. THEREFORE, THI S EXPENDITURE NOW CLAIMED BY THE ASSESSEE INCURRED IN THE PREVIOUS YE AR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL IS NOTHING BUT A CAPIT AL EXPENDITURE INCURRED BY THE ASSESSEE. 9. BUT ANY HOW, EVEN THOUGH THE ASSESSING AUTHORITY HAS TAKEN A VIEW OF CAPITAL EXPENDITURE, THE CIT(A) HAS CHARACT ERIZED THE EXPENDITURE ELIGIBLE FOR DEDUCTION U/S 35DDA. THER E IS NO APPEAL FROM THE SIDE OF THE REVENUE AGAINST THIS FINDING. IN THE ABSENCE OF AN APPEAL OR CROSS-OBJECTION FILED BY THE REVENUE, WE ARE NOT INCLINED TO DISTURB THE FINDING OF THE CIT(A) ON THIS POINT AND CAUSE FURTHER PREJUDICE TO THE INTEREST OF THE ASSESSEE. 10. THEREFORE, IN THE FACTS AND CIRCUMSTANCES OF TH E CASE, WE DO NOT SPEAK TOO MUCH ON THE CAPITAL NATURE OF THE EXPENDI TURE CLAIMED BY ITA NOS.717, 718 & 789/B/09 8 THE ASSESEE BUT ENDORSE THE FINDING OF THE CIT(A) T HAT THE EXPENDITURE PARTOOK THE CHARACTER OF EXPENDITURE EXIGIBLE TO SE C. 35DDA. THEREFORE, THE FINDING IS UPHELD. 11. WHILE CONCLUDING THE DIRECTION, THE CIT(A) HAS MADE A MISTAKE IN RECORDING THAT 4/5 TH OF THE EXPENDITURE MAY BE ALLOWED IN THE ASSESSMENT YEAR 2005-06. ACTUALLY, IT SHOULD HAVE BEEN 1/5 TH OF THE EXPENDITURE FOR THE IMPUGNED ASSESSMENT YEAR. WE C ORRECT THE ORDER OF THE CIT(A) IN THE SAID MANNER. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE PAYMENTS AS EXPENSES FOR THE IMPUGNED ASST. YEAR 2005-06 AT 1/5 TH OF THE TOTAL SUM. THE BALANCE AMOUNT WILL BE ALLOWED AS DEDUCTIONS IN THE SUCCEEDING ASSESSME NT YEARS 2006-07, 2007-08, 2008-09 AND 2009-2010, IN EQUAL PROPORTION S. 12. THE LAST ISSUE TO BE CONSIDERED IN THIS APPEAL IS REGARDING THE BENEFIT OF INDEXATION. 13. THE LAND IN QUESTION WAS CONVERTED INTO STOCK-I N-TRADE AS ON 31.3.91. THE CIT(A), THEREFORE, HELD THAT THE COST INFLATION INDEX HAS TO BE ADOPTED FOR THE FINANCIAL YEAR 1990-91. THIS IS THE CORRECT FINDING BECAUSE THE BENEFIT OF INDEXATION IS AVAIL ABLE ONLY FOR CAPITAL ITA NOS.717, 718 & 789/B/09 9 ASSET AND NOT FOR STOCK-IN-TRADE. THE SUBJECT ASSE TS CEASED TO BE CAPITAL ASSET WITH EFFECT FROM 1.4.91. THEREFORE, THE ASSESSEE CANNOT CLAIM THE BENEFIT OF INDEXATION. THE GROUND OF THE ASSESSEE ON THIS POINT IS REJECTED. 14. THE APPEAL FILED BY THE ASSESSEE IS PARTLY SUCC ESSFUL. 15. NEXT, WE WILL TAKE UP THE CROSS-APPEAL FILED BY THE REVENUE IN ITA 789/BANG/2009. 16. THE ONLY ISSUE RAISED BY THE REVENUE IS THAT TH E CIT(A) HAS ERRED IN DIRECTING THE ASSESSING OFFICER TO DEDUCT 4/5 TH OF THE EXPENDITURE U/S 35DDA FOR THE IMPUGNED ASSESSMENT Y EAR 2005-06. WE HAVE ALREADY RECTIFIED THIS MISTAKE, WHILE DISPO SING THE APPEAL FILED BY THE ASSESSEE IN ITA NO.717/BANG/2009. THE CORRECT SHARE OF THE EXPENDITURE TO BE DEDUCTED IN THE IMPUGNED ASSE SSMENT YEAR IS 1/5 TH . THE BALANCE WILL BE ALLOWED IN THE FOLLOWING ASS ESSMENT YEARS FROM 2006-07 TO 2009-2010 IN EQUAL PROPORTIONS. TH E ASSESSING OFFICER IS DIRECTED ACCORDINGLY. ITA NOS.717, 718 & 789/B/09 10 17. THE REVENUE SUCCEEDS IN ITS APPEAL AS FOR THIS CLARIFICATION IS CONCERNED. 18. LASTLY, WE CONSIDER THE APPEAL FILED BY THE ASS ESSEE IN ITA NO.718/BANG/2009, WHICH ARISES OUT OF ORDER PASSED U/S 154. 19. THE ISSUE RAISED IN THIS APPEAL IS AGAINST THE DECISION OF THE CIT(A) IN COMPUTING LONG TERM CAPITAL GAINS ON THE BASIS OF CONVERSION DATE OF THE ASSET. THIS ISSUE HAS ALREAD Y BEEN DECIDED AGAINST THE ASSESSEE, WHILE DISPOSING ITS APPEAL IN ITA NO.717/BANG/2009. THIS APPEAL ACCORDINGLY FAILS. 20. IN RESULT, THE QUANTUM APPEAL FILED BY THE ASSE SSEE IS PARTLY ALLOWED; THE RECTIFICATION APPEAL FILED BY THE ASSE SSEE IS DISMISSED AND THE CLARIFICATION APPEAL FILED BY THE REVENUE IS AL LOWED ORDER PRONOUNCED ON WEDNESDAY , THE 31 S T DAY OF MARCH, 2010, AT BANGALORE. SD/- SD/- (GEORGE GEORGE K) (DR. O.K NARAYANAN) JUDICIAL MEMBER V ICE PRESIDENT VMS. ITA NOS.717, 718 & 789/B/09 11 COPY TO : 1. THE ASSESSEE 2. THE REVENUE 3.THE CIT CONCERNED. 4.THE CIT(A) CONCERNED. 5.DR 6.GF 7..GF, ITAT, NEW DELHI. BY ORDER ASST. REGISTRAR, ITAT, BANGALOR E.