M/s Paras Collins Distilleries Private Limited, Hyderabad V. ACIT, Circle-16(3), Hyderabad

ITA 728/HYD/2013

• Counselvise Citation: 72822514 RSA 2013
• Duration Of Justice: 1 year(s) 2 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P SOMASEKHAR REDDY
• Assessee Lawyers: G KALYAN DAS
• Keywords: Difference of opinion; Change of opinion
• Section: 143(3); 147; 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES A : HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.728/HYD/2013 ASSESSMENT YEAR 2006-07 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. PAN AAECP-0258-J VS. ASST. CIT 16(3) HYDERABAD (APPELLANT) (RESPONDENT) FOR ASSESSEE MR. G. KALYANDAS FOR REVENUE MR. P. SOMASEKHAR REDDY DATE OF HEARING 08.07.2014 DATE OF PRONOUNCEMENT 18.07.2014 ORDER PER B. RAMAKOTAIAH, A.M. THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT-IV, HYDERABAD PASSED UNDER SEC TION 263 OF THE I.T. ACT, 1961 DATED 12.03.2013. LD. CIT DIR ECTED THE A.O. TO DISALLOW CLAIM OF BRAND OWNERS SURPLUS O F RS.5,19,05,853/- AND PAYMENT OF ROC FEE OF RS.2,42, 719/-. ASSESSEE IS NOT CONTESTING THE JURISDICTION OF LD. CIT UNDER SECTION 263 AS IT HAS ACCEPTED THE DIRECTION WITH R EFERENCE TO PAYMENT OF ROC FEE. ASSESSEE IS CONTESTING THE DIRE CTION OF THE LD. CIT IN DISALLOWING THE BRAND OWNERS SURPLUS IN ITS GROUNDS RAISED FROM 1 TO 9. EVEN THOUGH GROUND NO.10 PERTAI NING TO DISALLOWANCE OF ROC FEE WAS RAISED, LD. COUNSEL FAI RLY ADMITTED THAT THEY ARE NOT PURSUING THIS GROUND. 2 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT ASSES SEE IS A COMPANY MANUFACTURING IMFL, ENTERED INTO AN AGREE MENT WITH M/S. SHAW WALLACE DISTILLERIES LTD WHICH INTER ALIA PERMITTED LICENSE TO MANUFACTURE IMFL. AS PER AGREE MENT, THE ASSESSEE COMPANY HAS TO MANUFACTURE IMFL OF SHAW WA LLACE BRANDS AND COLLECT SALE PROCEEDS FROM AP BEVERAGES CORPORATION LTD. OUT OF SALE PROCEEDS, AFTER DEDUCT ING MANUFACTURING AND ESTABLISHMENT EXPENSES AT A FIXED RATE, BALANCE AMOUNT HAS TO BE PAID BACK TO M/S. SHAW WAL LACE DISTILLERIES LTD., AS BRAND OWNER SURPLUS. FURTHER, IN TERMS OF THE ABOVE AGREEMENT, ASSESSEE COMPANY IS ENTITLED T O RECEIVE AND RETAIN CERTAIN AMOUNTS TOWARDS EACH CASE OF IMF L MANUFACTURED AND SOLD. FOR THE PERIOD RELATING TO A .Y 2006-07, ASSESSEE COMPANY ARRIVED AT BRAND OWNER SURPLUS OF RS.5.19 CRORES. THIS AMOUNT BEING LIABILITY WAS PROVIDED IN THE ACCOUNTS, AS ASSESSEE COMPANY FOLLOWS MERCANTILE SY STEM OF ACCOUNTS. HOWEVER, M/S. SHAW WALLACE DISTILLERIES L TD., DISPUTED THE ABOVE COMPUTATION OF BRAND OWNER SURPL US, AS ACCORDING TO THEM SUCH AMOUNT COMES TO RS.7.45 CROR ES. THE MATTER WAS TAKEN BEFORE HIGH COURT OF MUMBAI WHO RE FERRED THE MATTER TO AN ARBITRATOR JUSTICE S.P.BARUCHA, RE TIRED JUDGE OF HON'BLE SUPREME COURT. 2.1. AFTER CONSIDERING THE REPORT OF M/S. S.B. BI LMORIA AND COMPANY, CHARTERED ACCOUNTS, BEFORE ARBITRATOR BOTH ASSESSEE COMPANY AND M/S. SHAW WALLACE DISTILLERIES LTD., CAME TO AN UNDERSTANDING AND FINAL AGGREGATE AMOUNT OF LIABILITY CAME TO BE ACCEPTED WAS AT RS.5.50 CRORES . THE ARBITRATOR DIRECTED THE ASSESSEE COMPANY TO DISCHAR GE ITS LIABILITY IN INSTALMENTS. HOWEVER, ASSESSEE COMPANY FAILED TO DISCHARGE ITS LIABILITY DUE TO FINANCIAL CRUNCH. M/ S. SHAH 3 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. WALLACE DISTILLERIES LTD., MOVED THE HIGH COURT FOR LIQUIDATION OF THE COMPANY AND ASKED THE HONBLE HIGH COURT TO APPOINT A LIQUIDATOR. THE HONBLE HIGH COURT APPOINTED RECEIV ER TO DISPOSE OFF FACTORY UNIT AND PAY THE AMOUNT RAISED TO M/S. SHAW WALLACE DISTILLERIES LTD. IN RESPONSE TO THE D IRECTION OF HONBLE HIGH COURT RECEIVER HAS TAKEN THE CUSTODY O F THE FACTORY UNIT. AS ON DATE, THE UNIT CONTINUES TO REM AIN UNDER THE CUSTODY OF THE RECEIVER. 2.2. IN THE IMPUGNED YEAR, ASSESSEE HAS CLAIMED A N AMOUNT OF RS.5.59 CRORES AS AN ALLOWABLE EXPENDITUR E PAYABLE TOWARDS BRAND OWNERS SURPLUS BY VIRTUE OF ITS AGREE MENT FOR IMFL. ORIGINALLY THE RETURN FILED FOR THE A.Y. WAS NOT TAKEN-UP FOR SCRUTINY. ASSESSMENT WAS REOPENED UNDER SECTION 147 AND AN ORDER UNDER SECTION 143(3) READ WITH SECTION 147 WAS PASSED ON 29.12.2010 DETERMINING TOTAL INCOME AT RS.1,18,94,790/- AS AGAINST ORIGINAL ADMITTED INCOM E OF RS.58,19,672/-. LATER, ASSESSEE FILED REVISED TOTAL INCOME AT NIL. 2.3. LD. CIT HAS NOTICED THAT AS PER SCHEDULE-15 I N OPERATING EXPENSES FORMING PART OF P & L ACCOUNT, A SSESSEE CLAIMED AMOUNT OF RS.5,19,05,853/- TOWARDS BRAND OW NER SURPLUS. HOWEVER, AS PER ITEM-9 OF SCHEDULE-18- NOT ES TO ACCOUNT, IT WAS STATED THAT THERE IS A DISPUTE BETW EEN THE COMPANY AND M/S. SHAH WALLACE DISTILLERIES LTD., PE NDING BEFORE ARBITRATOR REGARDING BRAND OWNERS SURPLUS AN D THE LIABILITY OF THE SAME CANNOT BE ASCERTAINED. NOTICI NG THIS, LD. CIT INITIATED THE PROCEEDINGS UNDER SECTION 263 AND SHOW CAUSED THE ASSESSEE WHY THE ABOVE AMOUNT SHOWN AS CONTINGENT LIABILITY SHOULD NOT BE DISALLOWED. ASSE SSEE SUBMITTED THAT THE EXPENDITURE ON ACCOUNT OF BRAND OWNER 4 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. SURPLUS DEBITED TO P & L ACCOUNT WAS AN INTEGRAL PA RT OF PROFIT MAKING PROCESS. IT WAS FURTHER SUBMITTED THAT LIABI LITY HAS BEEN QUANTIFIED ON THE BASIS OF DATA PROVIDED IN TH E AGREEMENT. THOUGH IN THE NOTES TO THE ACCOUNT IT WAS MENTIONED THAT IT WAS A CONTINGENT LIABILITY IN THE LIGHT OF FACTS, T HIS IS AN ASCERTAINED LIABILITY WHICH WAS CLEARLY ALLOWABLE A S AN EXPENDITURE. ASSESSEE RAISED THREE PROPOSITIONS THA T INCORRECT NOMENCLATURE DOES NOT CHANGE THE INTRINSIC CHARACTE R OF NATURE OF EXPENDITURE, THE ENTRY IN BOOKS OF ACCOU NTS IS NOT A DECISIVE FACTOR FOR THE PURPOSE OF CLAIMING ACTUAL EXPENDITURE AND ALSO THE REAL INCOME CONCEPT AND RELIED ON THE PRINCIPLES LAID DOWN BY THE FOLLOWING DECISIONS : (I) UNITED COMMERCIAL BANK VS. CIT 240 ITR 355 (SC ) (II) KEDARNATH JUTE MANUFACTURING CO. LTD., VS. CIT 82 ITR 353 (SC) (III) MORVI INDUSTRIES LTD., VS. CIT 82 ITR 835. 2.4. LD. CIT HOWEVER, DID NOT AGREE. HE WAS OF THE OPINION THAT IN THE NOTES TO THE ACCOUNTS IT WAS CL EARLY STATED THAT LIABILITY IS CONTINGENT LIABILITY. HE WAS ALSO OF THE OPINION THAT A.O. HAS NOT CALLED FOR ANY DETAILS NOR MADE A NY INVESTIGATION OR VERIFICATION BEFORE ALLOWING THE C LAIM. IN VIEW OF THIS, HE DIRECTED THE A.O. TO DISALLOW THE AMOUNT I N THE ORDER. ASSESSEE IS AGGRIEVED AND RAISED THE GROUNDS. 3. REFERRING TO THE ANNUAL REPORT PLACED ON RECORD IN THE PAPER BOOK, LD. COUNSEL SUBMITTED THAT THERE LD . CIT HAS ERRED IN NOT CONSIDERING THE NOTES FORMING PART OF THE ACCOUNTS IN ITS ENTIRETY. IT WAS SUBMITTED THAT IN SIGNIFICA NT ACCOUNTING POLICIES IN PART-A, IT WAS CLEARLY STATED THAT AGAI NST THE HEAD CONTINGENT LIABILITY- NO PROVISION IS MADE FOR LIABILITIES WHICH ARE CONTINGENT IN NATURE BUT IF MATERIAL THE SAME A RE DISCLOSED 5 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. BY WAY OF NOTES TO THE ACCOUNTS . THEN IN THE NOTES TO ACCOUNTS PART-B SCHEDULE-18, IT WAS STATED THAT A DISPUTE WA S THERE BETWEEN THE COMPANY AND M/S. SHAH WALLACE DISTILLER IES LTD., PENDING BEFORE THE ARBITRATOR. LD. COUNSEL REFERRIN G TO THE AGREEMENT FOR TIE-UP OF MANUFACTURE BETWEEN ASSESSE E AND M/S. SHAH WALLACE DISTILLERIES LTD., DATED 01.07.20 05, IT WAS SUBMITTED THAT ASSESSEE WAS ENTITLED TO RATE AT RS. 27/- PER CASE AFTER EXPENDITURE FOR EACH OF THE CRATE MANUFA CTURED AND SOLD AND ACCORDINGLY, ASSESSEE WAS ENTITLED TO ONLY FOR A FIXED AMOUNT AND THE BALANCE AMOUNT WAS TERMED AS BRAND O WNER SURPLUS AS THAT AMOUNT WAS TO BE REMITTED TO THE SA ID COMPANY. IT WAS FURTHER SUBMITTED THAT AS PER THE S ALES REPORTED BY THE ASSESSEE COMPANY, IT HAS PROVIDED T HE AMOUNT OF RS.5.19 CRORES, WHEREAS THE SAID COMPANY DEMANDE D MORE. THEREFORE, THE MATTER WAS CONTESTED AND WENT FOR AR BITRATION AND AS PER THE AWARD PROCEEDINGS, ASSESSEE WAS DIRE CTED TO PAY AN AMOUNT OF RS. 5.50 CRORES WITH INTEREST THER EON AT 15% P.A. FROM 14 TH OCTOBER, 2006 TILL PAYMENT. IT WAS SUBMITTED THAT THIS AMOUNT WAS MORE THAN WHAT WAS PROVIDED IN THE BOOKS AND THEREFORE, THE ORDER OF LD. CIT ON FACTS WAS NOT CORRECT. LD. COUNSEL SUBMITTED THAT THE ALLOWABILIT Y WAS ONLY DISPUTED BUT NOT A CONTINGENT LIABILITY AND EVEN TH OUGH IT WAS ONLY CATEGORISED AS CONTINGENT LIABILITY IN THE ANN UAL ACCOUNTS WHEN THE FACTS ARE PLACED BEFORE THE LD. CIT, HE SH OULD HAVE EXAMINED THE ISSUE RATHER THAN DIRECTING THE A.O. T O DISALLOW THE AMOUNT WITHOUT GIVING ANY OPPORTUNITY TO THE AS SESSEE. HE RELIED ON VARIOUS CASE LAW ON THE ISSUE. 4. LD. D.R. HOWEVER, SUBMITTED THAT AS ON THE DATE OF SIGNING THE AUDIT REPORT, THE LIABILITY WAS UNASCER TAINED BECAUSE OF DISPUTE AND ACCORDINGLY, THE SAME CANNOT BE ALLOWED. HE RELIED ON THE ORDER OF LD. CIT. 6 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE PAPER BOOKS PLACED ON RECORD. THERE IS NO DISPUTE WITH REFERENCE TO THE FACT THAT AS PER THE AGREEMEN T ASSESSEE WAS ENTITLED TO A FIXED PRICE OF AMOUNT, EVEN THOUG H ENTIRE SALES WERE RECORDED IN THE BOOKS AS RECEIPTS OF THE COMPANY. ASSESSEE HAS PROVIDED THE AMOUNT PAYABLE TO M/S. SH AH WALLACE DISTILLERIES LTD., IN TERMS OF THE AGREEMEN T AT RS.5.19 CRORES. AS CAN BE SEEN FROM THE SUBSEQUENT DEVELOPM ENTS, THE DISPUTE WAS ONLY WITH REFERENCE TO QUANTIFICATION O F THE AMOUNT BUT THERE IS NO DISPUTE WITH REFERENCE TO BASIC LIA BILITY. EVEN THOUGH THE SUBSEQUENT AWARD DETERMINED THE AMOUNT A T RS.5.50 CRORES, IT WAS MORE THAN THE AMOUNT ACTUALL Y PROVIDED BY THE ASSESSEE IN THE BOOKS OF ACCOUNTS. ASSESSEE S CONTENTION WAS THAT THE AMOUNT OF RS.5.19 CRORES IS AN ASCERTAINED LIABILITY CANNOT BE DISPUTED. THERE ARE HOST OF JUDICIAL PRINCIPLES ON THE ISSUE WHICH STATE THAT Q UANTIFICATION OR ASCERTAINMENT OF A LIABILITY CANNOT POSTPONE ITS ACCRUAL, TO THE EXTENT OF ADMITTED LIABILITY. THE HONBLE SUPRE ME COURT IN THE CASE OF CIT VS. SWADESI COTTON AND FLOOR MILLS LTD., 53 ITR 134 (SC) WAS HELD THAT CONTRACTUAL LIABILITY ACCRUE S ON THE BASIS OF QUANTIFICATION SETTLED BY AGREEMENT OR OT HERWISE. IN THIS CASE, THERE WAS AN AGREEMENT DETERMINING THE L IABILITY. IN CASE OF CONTRACTUAL LIABILITY, DEDUCTION IS ALLOWAB LE TO THE EXTENT OF THE AMOUNT AS PER THE AGREEMENT EVEN THOU GH QUANTUM OF SUCH LIABILITY HAS NOT BEEN DETERMINED O R SUBJECT TO APPROVALS BY GOVERNMENT (TYRESOLES GOA P. LTD., VS. CIT (1992) 193 ITR 649 (BOM.). IF BUSINESS LIABILITY IS DEFINITELY ARISING IN AN ACCOUNTING YEAR, DEDUCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE BEEN ESTIMATED AND DISCHARGED AT A FUTURE DATE AS HELD BY THE HONBLE SUPREME COU RT IN THE CASE OF POONA ELECTRIC SUPPLY CO. LTD., VS. CIT (19 65) 57 ITR 7 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. 521 (SC). EVEN IN THE CASE OF KEDARNATH JUTE MANU FACTURING CO. LTD., VS. CIT 82 ITR 353 (SC), THE HONBLE SUPR EME COURT HELD THAT LIABILITY THOUGH DISPUTED IN APPEAL ETC., IS ALLOWABLE IN THE YEAR IN WHICH SUCH LIABILITY HAS ACCRUED IN LAW. CONSIDERING THE PRINCIPLES ON THE ISSUE, WE ARE OF THE OPINION THAT THOUGH THERE IS DISPUTE WITH REFERENCE TO QUAN TIFICATION OF THE AMOUNT, THERE IS NO DISPUTE WITH REFERENCE TO B ASIC LIABILITY. WHAT ASSESSEE WAS ENTITLED WAS ALREADY D ETERMINED BY WAY OF AGREEMENT AND ANY EXCESS COLLECTIONS MADE BY THE ASSESSEE ARE TO BE PAID TO M/S. SHAH WALLACE DISTIL LERIES LTD. THEREFORE, EVEN THOUGH THERE WAS A DISPUTE BETWEEN THE PARTIES WITH REFERENCE TO QUANTIFICATION OF THE AMO UNT, THE BASIC LIABILITY IS AN ASCERTAINED LIABILITY, AS IS EVIDENT FROM THE SUBSEQUENT EVENTS. THE LIABILITY IN FACT, WAS CRYST ALLIZED AT HIGHER AMOUNT OF RS.5.50 CRORES. EVEN THOUGH ASSESS EE HAS NOT CLAIMED HIGHER AMOUNT AT THE TIME OF ASSESSMENT , IT COULD HAVE REDUCED ITS TAXABLE INCOME AS THE A.O. MADE CE RTAIN ADDITIONS TO THE RETURNED INCOME. ASSESSEE HAS LIMI TED ITS CLAIM TO THE AMOUNT PROVIDED IN THE BOOKS OF ACCOUN TS. WE ARE OF THE OPINION THAT THE AMOUNT IS ASCERTAINED LIABI LITY AND NOT A CONTINGENT LIABILITY. EVEN THOUGH THE SAME WAS RE PORTED IN THE NOTES TO THE ACCOUNT AS ONE OF THE CONTINGENT L IABILITY AND DISCLOSED AS A MATERIAL FACT, THE AMOUNT IS NOT CON TINGENT LIABILITY AND THEREFORE, WE ARE OF THE OPINION THAT ORDER OF LD. CIT DIRECTING THE A.O. TO DISALLOW IS NOT CORRECT O N THE FACTS OF THE CASE. MOREOVER, AS SEEN FROM THE RECORD, THE A SSESSMENT ORDER PASSED BY THE A.O. WAS UNDER THE PROVISIONS O F SECTION 147 IN WHICH A.O. HAS EXAMINED THE BOOKS OF ACCOUNT S AND IN FACT MADE ADDITIONS WITH REFERENCE TO THE MERGER/CO NVERSION OF THE ERSTWHILE FIRM INTO A COMPANY AS ON 01.07.2005. WE ARE OF THE OPINION THAT A.O. HAS EXAMINED ALL THE ISSUES B EFORE 8 ITA.NO.728/HYD/2013 M/S. PARAS COLLINS DISTILLERIES P. LTD., HYDERABAD. COMPLETING ASSESSMENT. SIMILAR CLAIMS IN THE HANDS OF FIRM WERE ALSO MADE. THEREFORE, OPINION OF CIT IN TREATI NG THE AMOUNT ALREADY ALLOWED AS CONTINGENT LIABILITY CAN CERTAINLY BE CONSIDERED AS CHANGE OF OPINION. ON THE PRINCIPLES GOVERNING THE ISSUE OF JURISDICTION, WE CANNOT UPHOLD THE DIR ECTION OF THE LD. CIT. THEREFORE, WE MODIFY THE SAME AND DIRECT A.O. TO ALLOW THE AMOUNT AS ORIGINALLY ALLOWED IN THE ASSES SMENT ORDER. THE ORDER OF LD. CIT IS MODIFIED TO THAT EXT ENT AND ASSESSEES GROUNDS ARE ALLOWED ACCORDINGLY. 6. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 18.07.2014. SD/- SD/- (ASHA VIJAYARAGHAVAN) (B.RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 18 TH JULY, 2014 VBP/- COPY TO 1. M/S. PARAS COLLINS DISTILLERIES P. LTD., PLOT NO .67, 8-2- 608/2, ROAD NO.10, BANJARA HILLS, HYDERABAD. C/O. M/S. KALYANDAS & CO., C.A. NO.15, VENKATESHWAR A COLONY, NARAYANGUDA, HYDERABAD 500 029. 2. ASST. CIT 16(3), HYDERABAD 3. CIT-IV, HYDERABAD 4. ADDL. CIT, RANGE-16, HYDERABAD 7. D.R. A BENCH, ITAT, HYDERABAD.