Amee Engineering Corporation, RAJKOT-GUJARAT V. The Assistant Commissioner of Income Tax, Circle-1, RAJKOT-GUJARAT

ITA 74/RJT/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 2289 (ITAT-RAJKOT)
• Duration Of Justice: 2 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 22-12-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 27-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C S ANJARIA
• Assessee Lawyers: MJ RANPURA
• Keywords: Capital asset; Business expenditure; Commercial expediency; Capital expenditure
• Section: 6; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BEN CH, RAJKOT [CONDUCTED THROUGH E-COURT AT AHMEDABAD] (BEFORE SHRI RAJPAL YADAV, J.M. & SHRI ANIL CHATURV EDI, A.M.) ( ) ITA NO. 74/RJT/2014 (ASSESSM ENT YEAR: 2005-06) AMEE ENGINEERING CORPORATION, 309, CITY SHOP, DR. YAGNIK ROAD, RAJKOT VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-1, RAJKOT PAN NO. AADFA3902E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI M. J. RANPURA, C. A. RESPONDENT BY : SHRI C. S. ANJARIA , D.R. DATE OF HEARING : 22 -12-201 5 DATE OF PRONOUNCEMENT : 12 -02-2016 ( )/ ORDER PER ANIL CHATURVEDI, ACCOUNTANT MEMBER THIS APPEAL FILED BY ASSESSEE IS AGAINST THE ORDER OF CIT(A)-I, RAJKOT, DATED 31.12.2013 FOR THE ASSESSMENT YEAR 2005-06 . 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERI ALS ON RECORD ARE AS UNDER: 3. THE ASSESSEE IS A PARTNERSHIP FIRM STATED TO BE ENGAGED IN THE ACTIVITY OF CARRYING OUT OF GOVERNMENT CONTRACT WORK. ASSESS EE ELECTRONICALLY FILED ITS RETURN OF INCOME FOR A.Y. 2005-06 ON 31.10.2005 WHICH WAS INITIALLY PROCESSED ITA NO.74/RJT/14 A.Y. 2005-06 (AMEE ENGINEERING CO RPORATION VS. ACIT) 2 U/S.143(1) AND SUBSEQUENTLY NOTICE U/S.148 OF THE A CT WAS ISSUED ON 25.03.2010 AND SERVED ON ASSESSEE ON 29.03.2010 AND IN RESPONS E TO WHICH, ASSESSEE SUBMITTED THAT RETURN FILED BY IT ON 31.10.2005 BE CONSIDERED TO BE A RETURN OF INCOME IN RESPONSE TO NOTICE U/S.148 OF THE ACT. SUBSEQUENTL Y, NOTICE U/S.142(1) WAS ISSUED TO ASSESSEE AND THEREAFTER ASSESSMENT WAS FRAMED U/ S.143(3) R.W.S. 148 OF THE ACT VIDE ORDER DATED 21.10.2010 AND THE TOTAL INCOME WA S DETERMINED AT RS.11,40,100/- INTER ALIA BY MAKING THE ADDITION OF RS.1,38,100/- ON ACCOUNT OF DISALLOWANCE OF AMOUNT OF FIXED DEPOSIT (FD) FORFEITED. AGGRIEVED B Y THE ORDER OF ASSESSING OFFICER, ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) WHO VIDE ORDER DATED 31.12.2013 DISMISSED THE APPEAL OF THE ASSESSEE. A GGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED FOLLOWING GROUNDS: 1.0 THE GROUNDS OF APPEAL MENTIONED HEREUNDER ARE WITHOUT PREJUDICE TO ONE ANOTHER. 2.0 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS )-I, RAJKOT, [HEREINAFTER REFERRED TO AS THE CIT(A)] ERRED ON FACTS AS ALSO IN LAW IN CONF IRMING INITIATION OF ACTION U/S.147 OF THE ACT AS VALID. INITIATION OF ACTION U/S.147 OF THE ACT BEI NG INVALID, THE ASSESSMENT DESERVES TO BE QUASHED AND MAY KINDLY BE QUASHED. 3.0 THE LEARNED CIT(A) ERRED ON FACTS AS ALSO IN LA W IN CONFIRMING DISALLOWANCE OFRS.1,38,100/- MADE ON ACCOUNT OF FORFEITURE OF FD CONSIDERING THE SAME AS CAPITAL IN NATURE. THIS DISALLOWANCE MAY KINDLY BE DELETED. 3.1 BEFORE US, LD. A.R. SUBMITTED THAT BOTH THE GRO UNDS ARE INTERCONNECTED. 3.2 A.O. ON THE BASIS OF INFORMATION AVAILABLE ON R ECORDS NOTICED THAT ASSESSEE HAD DEBITED RS.1,38,100/- WITH RESPECT TO FD FORFEI TED. A.O. WAS OF THE VIEW THAT FORFEITURE OF FD WAS A CAPITAL LOSS AND CANNOT BE D EBITED TO THE REVENUE ACCOUNT AND WAS THEREFORE NOT ALLOWABLE AS BUSINESS EXPENSE S. HE, ACCORDINGLY, RE-OPENED THE CASE U/S.148 OF THE ACT AND IN THE RE-ASSESSMEN T ORDER PASSED U/S.143(3) R.W.S. 148 OF THE ACTDISALLOWED THE LOSS OF FORFEITURE OF FIXED DEPOSITS. AGGRIEVED BY ITA NO.74/RJT/14 A.Y. 2005-06 (AMEE ENGINEERING CO RPORATION VS. ACIT) 3 THE ORDER OF ASSESSING OFFICER, ASSESSEE CARRIED TH E MATTER BEFORE THE LD. CIT(A) WHO UPHELD THE ORDER OF A.O. BY HOLDING AS UNDER: 3. THE FACTS OF THE CASE ARE THAT NOTICE U/S.148 W AS ISSUED IN THIS CASE AND REASSESSMENT WAS COMPLETED. IT WAS NOTICED BY THE A.O THAT THERE WAS A FORFEITURE OF FD BY WAY OF EMD TO THE TUNE OF RS.L,38,100/- THE SAME WAS TREATED BY THE A.O. A S CAPITAL EXPENDITURE AND ADDED TO THE TOTAL INCOME. 4. IT IS CONTENDED BY THE APPELLANT THAT THE FORFEI TURE OF FIXED DEPOSIT IS NOT A CAPITAL LOSS. IT HAD UNDERTAKEN GOVERNMENT CONTRACT FOR SUPPLY OF ENGINE ERING MATERIALS AND SERVICES. FOR THE PURPOSE OF THE TENDER, CERTAIN FDS HAD TO BE SUPPLI ED AS EMD (EARNED MONEY DEPOSIT). THE APPELLANT WAS AWARDED THE CONTRACT BIN AT A MUCH LO WER RATE. AS THE APPELLANT WAS UNDER THE APPREHENSION THAT IT WOULD INCUR A HUGE LOSS IN COM PLETION OF THE CONTRACT, THE APPELLANT HAD GIVEN AWAY THE CONTRACT. AS THE APPELLANT HAD NOT F ULFILLED THE CONTRACT, THE EARNED MONEY DEPOSIT BY WAY OF FD WAS FORFEITED BY THE CONCERNED DEPARTM ENT. THE FORFEITURE OF FD IS PURELY BUSINESS EXPENSE AND BORNE OUT OF COMMERCIAL EXPEDIENCY. THE FORFEITURE OF FD IS NOT PENALTY LEVIED BY THE TENDERING AUTHORITY. IT IS NOT A CAPITAL LOSS BUT A REVENUE LOSS AND HENCE SHOULD BE ALLOWED. THE APPELLANT HAS RELIED ON THE DECISION OF THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. NEO STRUCTO CONSTRUCTION CO. LTD. (2013) 37 TAXMANN 57. IT HAS BEEN HELD IN THIS DECISION THAT THE ENCASHED BANK GUARANTEE RECOVERED BY THE CONTRACTEE DUE TO THE APPELLANT'S DECISION NOT TO PROCEED WITH THE CONTRACT FURTHER IS AN ALLOWABLE E XPENDITURE U/S.37(1) AS IT WAS COMPENSATORY IN NATURE. THE APPELLANT HAS ALSO RELIED UPON SEVERAL OTHER DECISIONS AS UNDER:- 1. CIT VS. NEO STRUCTO CONSTRUCTION LTD. (2013) 37 TAXMANN 57 2. CIT VS. REGALIA APPARELS P. LTD. (2013) 32 TAXMA NN 237 (BOM) 3. USHA MICRO PROCESS CONTROLS LTD. (2013) 37 TAXMA N 324 (DEL) 4. NANAVATI MOTORS - ITA NO. 968/AHD/2007 (AHD TRI B.) 5. ITO VS. VISHAL BUILDERS P. LTD. 1 TTJ (DEL) 469 6. MEERA SALES CORPORATION VS. ITO 11 TTJ (CHD) 343 5. I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORDER AND THE CONTENTION OF THE APPELLANT. GROUND NO.4 IS THE MAIN GROUND OF APPEAL WHICH IS R EGARDING ADDITION OF RS.1,38,100/- ON ACCOUNT OF FD. THE FORFEITURE OF THE FD DUE TO NON- PERFORMANCE OF THE CONTRACT IS AS PER THE TERMS OF THE CONTRACT. IT CANNOT BE SAID TO BE A PE NALTY LEVIED FOR VIOLATION OF STATUTORY PROVISIONS. HOWEVER, WHAT HAS BEEN FORFEITED IS THE FD WHICH HA S BEEN KEPT BY WAY OF EMD. THIS FD MUST HAVE BEEN RE FLEETED ON THE ASSET SIDE OF THE BALAN CE SHEET. THE FORFEITURE OF THE FD THUS AMOUNTS TO THE FORFEITURE OF A CAPITAL ASSET AND SHOULD BE HELD AS A CAPITAL LOSS. IN THE EASE OF CIT VS. NEO STRUCTO CONSTRUCTION (SUPRA), THE CONTRACTEE HAD EN CASHED THE BANK GUARANTEE WHICH IS DIFFERENT FROM THE FD KEPT BY WAY OF EMD. THERE IS A BASIC DI FFERENCE BETWEEN FD AND BANK GUARANTEE AND HENCE THIS DECISION IS NOT APPLICABLE IN THE PR ESENT CASE. IT IS HELD THAT THE FORFEITURE OF THE FD HAS RESULTED IN A CAPITAL LOSS TO THE APPELLANT AND THUS IT IS NOT ALLOWABLE DEDUCTION U/S.37(1). THE ACTION OF THE A.O. IS THEREFORE CONFIRMED. THIS GROUND OF APPEAL IS DISMISSED. 4. AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE I S NOW IN APPEAL BEFORE US. ITA NO.74/RJT/14 A.Y. 2005-06 (AMEE ENGINEERING CO RPORATION VS. ACIT) 4 4.1 BEFORE US, LD. A.R. REITERATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AND CIT(A) AND FURTHER SUBMITTED THAT ASSES SMENT HAS BEEN REOPENED WITHIN A PERIOD OF FOUR YEARS FROM THE END OF ASSES SMENT YEAR AND THAT THERE IS NO FAILURE ON THE PART OF THE ASSESSEE TO DISCLOSE FUL LY AND TRULY ALL MATERIAL FACTS NECESSARY FOR THE ASSESSMENT. ON THE MERITS OF THE ADDITION, HE SUBMITTED THAT ASSESSEE BEING A GOVERNMENT CONTRACTOR IS REQUIRED TO SUBMIT THE FIXED DEPOSITS AS EARNEST MONEY DEPOSITS (EMD) TO THE VARIOUS GOVERNM ENT DEPARTMENTS IN TERMS OF CONTRACTUAL OBLIGATIONS AND THE DEPOSIT IS TOWAR DS THE DISCHARGE OF THE BUSINESS OBLIGATION. HE SUBMITTED THAT THE FDRS ARE NOT PUR CHASED FOR INVESTMENT PURPOSE. HE SUBMITTED THAT ASSESSEE HAD INITIALLY CARRIED OU T THE PROJECT UP TO A CERTAIN LEVEL. HOWEVER, LATER ON, IT WAS FELT THAT IF THE PROCESS OF COMPLETION OF THE PROJECT WOULD CONTINUE, ASSESSEE WOULD INCUR HUGE LOSS. ASSESSEE , TO AVOID FURTHER LOSSES, WITHDREW FROM THE CONTRACT, AND IN TERMS OF THE TEN DER, EARNEST MONEY THAT WAS DEPOSITED BY THE ASSESSEE WAS FORFEITED. HE, THERE FORE, SUBMITTED THAT FORFEITURE OF THE DEPOSIT OF EARNEST MONEY WAS FOR THE PURPOSE OF BUSINESS AND NOT FOR INVESTMENT AND THEREFORE, IT WAS RIGHTLY CLAIMED BY THE ASSESSEE AS BUSINESS EXPENDITURE. HE ALSO PLACED ON RECORD A COPY OF CO RRESPONDENCE ENTERED BY THE ASSESSEE WITH THE CONCERNED DEPARTMENTS WHO HAD FOR FEITED THE EARNEST MONEY DEPOSITS. HE ALSO PLACED RELIANCE ON THE DECISION OF HYDERABAD TRIBUNAL IN CASE OF M/S. SOCIAL MEDIA INDIA LTD. VS. ACIT IN ITA NO.390 /HYD/2013 ORDER DATED 28.05.2014. HE PLACED A COPY OF THE AFORESAID ORDE R. HE, THEREFORE, SUBMITTED THAT ON MERITS, NO ADDITION IS CALLED FOR. LD. D.R., ON THE OTHER HAND, SUPPORTED THE ORDERS OF A.O. AND CIT(A). 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT CASE IS WITH RESPECT TO DI SALLOWANCE OF EARNEST MONEY DEPOSITED I.E. FORFEITED BY THE CONTRACTEE WHICH IS CLAIMED BY ASSESSEE AS A REVENUE ITA NO.74/RJT/14 A.Y. 2005-06 (AMEE ENGINEERING CO RPORATION VS. ACIT) 5 EXPENDITURE. IT IS AN UNDISPUTED FACT THAT THE ASS ESSEE IS A GOVERNMENT CONTRACTOR. DURING THE COURSE OF BUSINESS AND AS PART OF THE TE NDER DOCUMENT, ASSESSEE HAD PLACED EARNEST MONEY DEPOSIT WITH THE CONTRACTEE. IT IS ASSESSEES SUBMISSION THAT TO REDUCE THE INCIDENCE OF LOSS IT HAD WITHDRAWN FR OM THE CONTRACT AND THEREFORE THE EARNEST MONEY DEPOSITED BY THE ASSESSEE WITH THE CO NTRACTEES WERE FORFEITED BY THE THEM. THE AFORESAID SUBMISSIONS HAVE NOT BEEN CONT ROVERTED BY THE REVENUE BY PLACING ANY MATERIAL ON RECORD. IT IS ALSO AN UNDI SPUTED FACT THAT THE DEPOSIT OF EARNEST MONEY WAS A PART OF THE BUSINESS OF THE ASS ESSEE. IN THE PRESENT CASE, WE ARE OF THE VIEW THAT THE EARNEST MONEY DEPOSITS DID NOT GIVE ANY ENDURING ADVANTAGE OR CAPITAL ASSET AND THE AMOUNTS WERE WRI TTEN OFF IN THE COURSE OF ASSESSEES BUSINESS AND THAT THE DEPOSIT MADE BY TH E ASSESSEE WAS NOT FOR ACQUIRING A BUSINESS NOR WAS IT A CASE THAT THE AMOUNT WAS DE POSITED AS AN INVESTMENT. THE DEPOSIT BEING IN CONFORMITY WITH THE TENDER DOCUMEN T THAT WAS FILED BY THE ASSESSEE, WE ARE OF THE VIEW THAT THE DEPOSIT WAS N ECESSARY TO CARRY ON THE BUSINESS OF THE ASSESSEE AND THUS, MAKING OF DEPOSIT WAS LIN KED TO THE BUSINESS WHICH WAS BEING CARRYING ON BY THE ASSESSEE. WE ALSO FIND TH AT HONBLE BOMBAY HIGH COURT IN CASE OF NARANDAS MATHURADAS CO. V. CIT [1959] 35 ITR 461 (BOM) ON IDENTICAL ISSUE DECIDED THE MATTER IN FAVOUR OF ASSESSEE. TH E RELEVANT HEAD NOTE READS AS UNDER: BUSINESS LOSS-FIRM RESPONDING TO TENDER FOR SUPPL Y OF COMMODITY CONSEQUENT TO ACCEPTANCE OF THE TENDER, ASSESSEE DEPOSITING MONEY BY WAY OF SECURITY ASSESSEE FAILING TO EFFECT SUPPLIES AS AGREED ACCORDINGLY SECURITY AMOUNT FORFEITED THE SECURITY DEPOSIT HAVING BEEN MADE FOR CARRYING ON THE BUSINE SS AND NOT FOR ACQUIRING ANY BUSINESS THE LOSS DUE TO FORFEITURE REPRESENTED BUSINESS LOS S. 5.1 THUS, CONSIDERING THE AFORESAID FACTS AND RELYI NG ON THE AFORESAID DECISION OF HONBLE BOMBAY HIGH COURT, WE ARE OF THE VIEW THAT THE EXPENDITURE IS ALLOWABLE. SINCE, ON MERITS, WE HAVE HELD THE EXPENDITURE BE A LLOWABLE, ISSUE OF RE-OPENING ITA NO.74/RJT/14 A.Y. 2005-06 (AMEE ENGINEERING CO RPORATION VS. ACIT) 6 U/S.148 IS NOT DECIDED AS WE ARE OF THE VIEW THAT I T IS ACADEMIC IN NATURE. THUS, THE GROUND OF ASSESSEE IS ALLOWED. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED IN OPEN COURT ON 12- 02 - 2016. SD/- SD/- ( RAJPAL YADAV) (A NIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT ME MBER AHMEDABAD: DATED 12.02.2016 TRUE COPY S K SINHA COPY OF THE ORDER FORWARDED TO:- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT, RAJKOT